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Lazard
Retirement Series
Annual Report
December 31, 1997
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LAZARD RETIREMENT SERIES, INC.
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BOARD OF DIRECTORS
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JOHN J. BURKE RETIRED VICE CHAIRMAN, MONTANA POWER COMPANY
KENNETH S. DAVIDSON PRIVATE INVESTOR
NORMAN EIG VICE CHAIRMAN, LAZARD FRERES & CO. LLC
CARL FRISCHLING PARTNER, KRAMER, LEVIN, NAFTALIS, NESSEN,
KAMIN & FRANKEL
HERBERT W. GULLQUIST VICE CHAIRMAN, LAZARD FRERES & CO. LLC
WILLIAM KATZ PRESIDENT, BBDO NEW YORK
LESTER Z. LIEBERMAN PRIVATE INVESTOR
RICHARD REISS CHAIRMAN, GEORGICA ADVISORS
JOHN RUTLEDGE PRESIDENT, RUTLEDGE AND COMPANY
OFFICERS
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NORMAN EIG CHAIRMAN OF THE BOARD
HERBERT W. GULLQUIST PRESIDENT
WILLIAM G. BUTTERLY, III VICE PRESIDENT AND SECRETARY
GUS COUTSOUROS TREASURER
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LAZARD RETIREMENT SERIES, INC.
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TABLE OF CONTENTS
Overview ............................................. 2
Growth Charts ....................................... 8
Performance Table .................................... 9
Portfolio of Investments
Lazard Retirement Small Cap Portfolio ............ 10
Lazard Retirement Emerging Markets Portfolio ...... 13
Notes to Portfolios of Investments ............... 16
Statements of
Assets and Liabilities ........................... 17
Operations ....................................... 18
Changes in Net Assets .............................. 19
Financial Highlights ................................. 20
Notes to Financial Highlights ........................ 22
Notes to Financial Statements ........................ 23
Report of Independent Auditors ........................ 27
1
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LAZARD RETIREMENT SERIES, INC.
OVERVIEW
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World markets in the fourth quarter of 1997 were overshadowed by the unfolding
drama of currency devaluations, corporate bankruptcies and subsequent market
plunges across Asia during the fourth quarter. The degree to which this
snowballing financial crisis unsettled world markets illustrates just how
integrated markets have become. Just as in the 1920's, when a wave of currency
crises and devaluations surprised investors and damaged world financial systems
before the Great Depression, few expected the devaluation of the Thai baht last
July to trigger a chain reaction of market corrections around the world.
Will these events lead to a global economic crisis, as they did in both the
1920's and in the mid 1970's after the oil shock? Or will they amount, as they
did after the 1987 crash, to little more than a temporary set-back? No one
knows for sure. However, three key factors will play a significant role in
determining the vigor of world markets over the next few years: the extent to
which free market reforms are embraced by Asian markets; the success of the
European Monetary Union; and the degree to which global consolidation can
maintain top-line growth, particularly in the U.S.
FREE MARKET REFORM--SILVER LINING FOR ASIA
Southeast Asian currency devaluations spread last summer from Thailand to
Malaysia, Singapore, Indonesia and the Philippines, unnerving investors. But
world markets were not shaken dramatically until Hong Kong's Hang Seng Index,
regarded as relatively immune to the mounting turmoil, plunged in October over
fears the territory would be forced to suspend its currency's longtime peg to
the U.S. dollar.
The subsequent impact across other parts of Asia was dramatic: South Korea, a
late victim of the turmoil, has since fallen into an economic collapse from its
enviable position as the 11th largest world economy. Massive devaluation of the
won is blamed. Sweeping changes that the IMF seeks to impose on South Korea in
return for its record $57 billion bailout require painful restructuring. These
include providing tougher supervision and accountability in its financial
sector, allowing greater foreign ownership of its companies and banks,
eliminating restrictions on foreign borrowing by Korean companies and reducing
government subsidization of mammoth industrial conglomerates called CHAEBOLS.
These debt-laden, low profit oligopolies have relied for decades on government
protection and assistance, not on the competitive forces of a free economy. Not
surprisingly, such reforms are politically unpopular, threatening massive job
losses, further bankruptcies, and a possible recession.
Equally harsh financial reforms are also being prescribed by the IMF and by
western investors as necessary medicine to cure some of Japan's recent ills.
These range from severe devaluation of the yen to a credit crunch and a crisis
at banks, plagued by bad loans and shrunken asset values. Corrective steps
would include the use of public money to bail out depositors in failed
financial institutions; an unforgiving govern-
2
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LAZARD RETIREMENT SERIES, INC.
OVERVIEW (CONTINUED)
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ment policy of letting managements and shareholders pay the price for their
mistakes; and immediate disclosure about each institution's financial
condition. While the government has verbally embraced a "Big Bang" plan to
liberalize financial markets, some of its actions lately have appeared to
contradict these principles. Over the short-term, harsh reforms might
destabilize weak banks and, indeed, the entire economy.
Even corporate Japan has responded inconsistently to accelerating global
competition. Over the past two years, the Japanese equity market has become
polarized: exporters, forced to change to compete with global peers, have
prospered, while most domestic companies in regulated industries have
languished.
As the impact of Southeast Asian turmoil unfolds, true financial reform and
market-savvy corporations will become even more critical in protecting Japan's
fledgling recovery. In addition to its financial crisis, this export-dependent
nation now faces intense competition from neighboring countries where
currencies have plunged and demand has slackened. Waves of Japanese investment
in Southeast Asia over this decade may lead to additional defaults.
The unprecedented loss of wealth in Asia over the past six months, combined
with indiscriminate selling, afforded investors an unusual opportunity to buy
companies for a fraction of their true value. On a price to cash flow basis,
Emerging Markets, as defined by MSCI's Emerging Markets Free Index, are now
valued at just 70% of average world valuation. According to MSCI and Lazard
Asset Management, Japanese equities, which were valued at twice the average
world valuation in 1990, have plunged to around 80%. However, while these
valuations overall are now more attractive, identifying those companies that
will emerge winners and avoiding value traps will require intense scrutiny of
corporate balance sheets, replacement values and currency exposure. Because
economic reforms and corporate restructuring are proceeding at very different
paces across Asia, bottom-up stock picking in these markets will become more
critical.
SUCCESSFUL MONETARY UNION--AMONG EUROPE'S HIGHEST HOPES
Europe is well ahead of much of Asia in embracing free market standards of
minimal government intervention, shareholder activism and stringent financial
and accounting standards. Additionally, aggressive consolidation is becoming
more common there. On one October day alone, a handful of takeovers, heavily
concentrated in the financial services sector, was announced across Europe.
Last year's Thyssen-Krupp Hoesch merger (steel), the Grand Metropolitan-Guinness
combination (spirits) and the B.A.T. Industries Zurich Insurance alliance
(finance) were driven, to a large degree, by a quest for pan-European clout as
global competition intensifies. Why is this trend quickening now? The imminent
launch of the European Monetary Union (EMU) and its common currency, booming
stock prices to fund takeovers, Europe's discovery of
3
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LAZARD RETIREMENT SERIES, INC.
OVERVIEW (CONTINUED)
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shareholder value and low interest rates are among the key reasons.
If EMU succeeds, Europe will gain real economic clout. It will become a
highly-integrated market of almost 300 million consumers where business will be
carried out in one currency as easily as between California and New York.
However, to achieve this lofty end, individual countries will have to surrender
control to an independent European Central Bank over issues like foreign trade,
expansion of the money supply and even government spending.
The opportunities-and risks-for investors loom large. Since a single currency
will make costs easier to compare, manufacturers will have to smooth out
current pricing disparities between goods in different countries. Countries
with lower tax rates may gain business, while those with higher rates may lose.
Interest rates will converge across Europe, creating winners and losers. In
addition, consolidation is likely to accelerate, as economic borders melt away.
True to the tenets of the free market, not all companies will survive this huge
transition. And even the "winners" may not succeed immediately.
To compound these risks, as most of Western Europe struggles to meet the
stringent standards demanded for inclusion in the EMU next year, any reduction
in exports to Asia, limited though they currently are, could destabilize more
delicate companies. As in the unstable markets of Asia these days, the imminent
transformation of Europe will demand that investors pay particular attention to
corporate accounting, cash flow, emerging competition and other details often
ignored in top-down investing.
MOST U.S. FUNDAMENTALS REMAIN VIGOROUS
While the long-term consequences of the Asian turmoil on the U.S. are
uncertain, the impact last year was limited. Despite sharp market drops and
heightened volatility last quarter, the S&P 500 still generated a total return
of over 33% last year, its 11th best in the S&P's 72-year history. In fact,
never before the thirty-six months through December 1997 has the S&P recorded a
125% return over three years. Strong corporate profits over this period
contributed heavily to this stellar performance.
Another reason has been the accelerating decline in nominal long-term interest
rates: the yield on a 30-year Treasury bond, is currently well below 6%. As
fixed-income investors know well, a 100 basis point decline in rates from 7%
represents a significantly bigger percentage decline than 100 basis point drop
from 8%.
Rates falling off a low base disproportionately benefit share prices, which are
often calculated based on the discounted present value of future cash flows has
recently reached the lowest rate for long-term government bonds since 1977.
Lower rates prompt consumers and companies to refinance, saving millions of
dollars of interest expense annually. Equally as important, they bring U.S.
stock valuations down to more reasonable levels.
4
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LAZARD RETIREMENT SERIES, INC.
OVERVIEW (CONTINUED)
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Fed Chairman Alan Greenspan suggested that the late October market sell-off
might prove to be a "salutary event" for the U.S. economy, adding that "the
existing economic expansion . . . is about as solid as any I have seen."
Indeed, productivity, a measure of America's standard of living, rose to a 4.5%
annual rate in the third quarter after remaining dormant at just over 1% for
the last 20 years. Consumer prices posted their slowest growth rate in nearly
12 years in November, even while the jobless rate fell to its lowest level in
24 years and consumer confidence hit a 28-year high in December.
Inflation-adjusted U.S. GDP is forecast by many economists at 2.5% for this
year, with 0.5% having been shaved off due to the Asian crisis. But had the
Asian predicament not occurred, there is little doubt that the Fed may have
raised interest rates to prevent over-heating in the economy, which has been
expanding now for 7 years, the third-longest stretch in history. The rate
increase could have had a more significant economic impact than repercussions
from troubled Asian nations: only 11% of U.S. GDP comes from exports and only
about a tenth of U.S. exports
go to these countries.
CONSOLIDATION--DRIVER OF THE TOP LINE
Despite these seemingly rosy economic underpinnings, warning signs are mounting
that the U.S. economy and the growth of corporate profits may slow down in
1998. Flagging Asian demand may penalize corporate earnings and depress price
flexibility even further. However, Lazard does not believe that the U.S. will
be flooded by cheap Asian imports, as inflation will rapidly negate the
cost-competitiveness of falling currencies and many Asian countries' exports
depend, in turn, on the import of components from countries with stronger
currencies. U.S. lenders to Asia, exporters of heavy capital goods and many
high tech companies are expected to suffer, some have cut earnings estimates.
Ford recently announced it was considering building its vehicles in Japan both
for sale and for export, reflecting a dramatic reversal in its ability to
compete against Japan's weakened yen.
But Asia and the strong dollar cannot be blamed, as they often are lately, for
the majority of corporate setbacks. Equally damaging is pricing power
paralysis, caused by low inflation and global overcapacity in many industries.
Indeed, the bond rally early in the new year followed recent comments by Alan
Greenspan that heightened fears of deflationary pressures in the U.S. Slowing
demand by debt-burdened Americans, mounting wage pressures and the maturing of
the corporate restructuring process are other economic soft spots.
The benefits of corporate restructuring broadly encompasses cost-cutting,
corporate downsizing, the sale of weak or non-core assets, and outsourcing have
been largely absorbed in the U.S. Some companies, including R.J.R. Nabisco and
General Motors, continue to pursue significant restructuring in their overseas
operations. The sustained health of American corporations will depend
increasingly on revitalized initiatives to stimulate top-line growth. To this
end, U.S. merger & acquisition activity is currently sweeping across
5
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LAZARD RETIREMENT SERIES, INC.
OVERVIEW (CONTINUED)
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industries as varied as financial services, energy refining and marketing,
specialty chemicals and utilities. Focused consolidation, in such companies as
Knight Ridder, Compaq Computer and Fleet Financial Group, is being pursued to
help companies secure market leadership in core competencies and expand their
revenue streams.
Top-line growth from consolidation can also help alleviate declining
commissions and underwriting fees in investment banking. It can determine who
wins or loses in the competitive world of utility deregulation. It can raise
new revenues and reduce volatility in current ones. And it can provide econo-
mies of scale, as margin pressure intensifies throughout Corporate America.
SHORT-TERM PAIN FOR LONG-TERM GAIN
The United States is in the forefront of the current global wave of
consolidation; it is also unusual in the extent to which it relies for capital
on unforgiving financial markets, rather than banks. According to a recent
World Bank study, total bank loans in the U.S. represent about half of the
country's GDP, compared to 150% in Japan and 170% in Germany. The U.S. bond
market, by contrast, totals 110% of annual U.S. output, compared to only 75% in
Japan and half of Korea's GDP. The rigorous standards imposed by financial
markets may have helped propel the longest bull run in U.S. history. It is
likely that outside the U.S., global financial markets will increasingly
dictate who gets capital funding-and survives-and who doesn't. In order to get
this capital funding, Asians may have to swallow politically unpopular but
therapeutic medicine to cure years of lax financial standards.
The current financial crisis could ultimately leave Asian economies in better
shape. To survive, they will be forced to dismantle elements of dysfunctional
and non-competitive systems. Given the integration of global markets these
days, such reforms, if combined with top-line invigoration across corporate
America and the success of the monetary union across a restructured Europe,
would bode well for world markets in the long-term. However, over the shorter
term, investor uncertainty and continued market volatility are likely to
dominate.
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LAZARD RETIREMENT SERIES, INC.
GROWTH CHARTS
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LAZARD RETIREMENT SMALL CAP PORTFOLIO
The Lazard Retirement Small Cap Portfolio seeks capital appreciation through
investing primarily in equity securities of companies with market
capitalizations in the range of companies represented in the Russell 2000 Index
that the Investment Manager considers to be inexpensively priced relative to
the return on total capital or equity.
COMPARISON OF $10,000 INVESTMENT IN LAZARD RETIREMENT
SMALL CAP PORTFOLIO AND THE RUSSELL 2000 STOCK INDEX
[The following table represents a line graph in the printed report]
LRSCP Russell 2000
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11-4-97 10000 10000
Nov-97 9720 9935
Dec-97 9856.08 10108.86
LAZARD RETIREMENT EMERGING MARKETS PORTFOLIO
The Lazard Retirement Emerging Markets Portfolio seeks long-term capital
appreciation through investing primarily in equity securities of non-United
States issuers who are located, or doing significant business, in emerging
market countries. Emerging market countries include countries where political
and economic trends have recently produced, or are producing, a more stable
economy, or countries that have recently developed, or are developing,
financial markets and investment liquidity. The Lazard Retirement Emerging
Markets Portfolio seeks securities of issuers whose potential is significantly
enhanced by their relationship to the emerging markets country that the
Investment Manager considers to be inexpensively priced relative to the return
on total capital or equity.
[The following table represents a line graph in the printed report]
COMPARISON OF $10,000 INVESTMENT IN LAZARD RETIREMENT EMERGING
MARKETS PORTFOLIO AND INTERNATIONAL FINANCE CORP. INVESTABLE TOTAL RETURN INDEX
LREMP IFCI
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11-4-97 10000 10000
Nov-97 9360 9525
Dec-97 9529 9648
8
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LAZARD RETIREMENT SERIES, INC.
PERFORMANCE TABLE
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CUMULATIVE
TOTAL RETURNS
FOR
PERIOD ENDED
DECEMBER 31, 1997*
-------------------
Lazard Retirement Small Cap Portfolio (1.44%)
Russell 2000 Stock Index 1.09%
Lazard Retirement Emerging Markets Portfolio (4.71%)
IFC Investable Total Return Index (3.52%)
NOTES TO PERFORMANCE TABLE
* Performance is measured from November 4, 1997 for Lazard Retirement Small
Cap Portfolio and Lazard Retirement Emerging Markets Portfolio.
The performance for the relevant index is for the comparable period. Portfolio
returns are net of fees and assume reinvestment of dividends and capital gain
distributions, if any. Certain expenses of a Portfolio may have been reimbursed
by the Investment Manager. Without such reimbursement of expenses the
Portfolio's total return would have been lower. Since shares were only first
offered in 1997, YTD and Since Inception Cumulative Total Returns are, by
definition, identical during the period ended December 31, 1997.
Past performance is not indicative, nor a guarantee, of future results; the
investment return and principal value of each Portfolio of Lazard Retirement
Series, Inc. will fluctuate so that an investor's shares in a Portfolio, when
redeemed, may be more or less than their original cost.
The performance data of the indices have been prepared from sources and data
that the Investment Manager believes to be reliable, but no representation is
made as to their accuracy. These indices are unmanaged and have no fees or
costs. The Russell 2000 Stock Index is an index of common stocks and is a
registered trademark of the Frank Russell Company. The IFC Investable Total
Return Index is an index of emerging markets securities that represent 65% of
market capital compiled by the International Finance Corporation.
This performance data is not authorized for distribution to prospective
investors in the Fund unless preceded or accompanied by an effective
prospectus.
9
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LAZARD RETIREMENT SERIES, INC.
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1997
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DESCRIPTION SHARES VALUE
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LAZARD RETIREMENT SMALL CAP PORTFOLIO
COMMON STOCKS--84.8%
AEROSPACE & DEFENSE--1.3%
AAR Corp. ........................... 200 $ 7,750
-------
AUTO PARTS--3.2%
Borg-Warner Automotive, Inc.......... 200 10,400
Tower Automotive, Inc. (a) .......... 200 8,412
-------
18,812
-------
BANKING--1.0%
AMRESCO, Inc. (a) ................... 200 6,050
-------
CHEMICALS & PLASTICS--1.9%
Ferro Corp. ......................... 300 7,294
Rock-Tenn Co. Class A ............... 200 4,100
-------
11,394
-------
COMMERCIAL SERVICES--0.9%
Metromail Corp. (a) ................. 300 5,363
-------
COMPUTERS & BUSINESS
EQUIPMENT--3.2%
Bell & Howell Co. (a) ............... 200 4,838
Stratus Computer, Inc. (a) .......... 200 7,562
Wang Laboratories, Inc. (a) ......... 300 6,637
-------
19,037
-------
CONSTRUCTION MATERIALS--1.2%
Martin Marietta Materials, Inc. ..... 200 7,313
-------
CONTAINERS: PAPER &
PLASTIC--1.4%
First Brands Corp. .................. 300 8,081
-------
DRUGS & HEALTH CARE--7.7%
Apria Healthcare Group, Inc.
(a) ................................ 300 4,031
Integrated Health Services, Inc. .... 300 9,356
Magellan Health Services, Inc.
(a) ................................ 400 8,600
Perrigo Co. (a) ..................... 500 6,688
Sierra Health Services, Inc. (a) .... 200 6,725
Sun Healthcare Group, Inc. (a) ...... 200 3,875
Sunrise Medical, Inc. (a) ........... 400 6,175
-------
45,450
-------
ELECTRICAL EQUIPMENT--2.0%
Anixter International, Inc. (a) ..... 400 6,600
Belden, Inc. 150 5,287
-------
11,887
-------
ELECTRONICS--1.2%
International Rectifier Corp. (a) ... 600 7,088
-------
GAS EXPLORATION--1.0%
Barrett Resources Corp. (a) ......... 200 6,050
-------
HOMEBUILDERS--1.1%
Kaufman & Broad Home Corp. .......... 300 6,731
-------
HOUSEHOLD APPLIANCES &
HOME FURNISHINGS--3.3%
Bassett Furniture Industries,
Inc. ............................... 100 3,000
Furniture Brands International,
Inc. (a) ........................... 400 8,200
Harman International
Industries, Inc. ................... 200 8,487
-------
19,687
-------
INDUSTRIAL & MACHINER--7.8%
Albany International Corp.
Class A ........................... 300 6,900
Briggs & Stratton Corp. ............ 100 4,856
Roper Industries, Inc. ............. 300 8,475
Scotsman Industries, Inc. .......... 100 2,444
Stewart & Stevenson Services,
Inc. .. ........................... 300 7,650
United Dominion Industries,
Ltd. .............................. 300 7,594
-------
Watts Industries, Inc. Class A ..... 300 8,493
-------
46,412
-------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
10
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LAZARD RETIREMENT SERIES, INC.
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1997
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DESCRIPTION SHARES VALUE
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LAZARD RETIREMENT SMALL CAP PORTFOLIO
(CONTINUED)
INSURANCE--6.3%
American Bankers Insurance
Group, Inc. ...................... 200 $ 9,187
Amerin Corp. (a) .................. 200 5,600
E.W. Blanch Holdings, Inc. ........ 200 6,888
Horace Mann Educators Corp. ....... 200 5,688
NAC Re Corp. ...................... 200 9,762
-------
37,125
-------
INVESTMENT COMPANIES--1.0%
CMAC Investment Corp. ............. 100 6,038
-------
LEISURE TIME--2.0%
Polaris Industries, Inc. .......... 200 6,112
Regal Cinemas, Inc. (a) ........... 200 5,575
-------
11,687
-------
MACHINERY--1.6%
JLG Industries, Inc. .............. 200 2,825
McDermott International, Inc. ..... 100 3,663
Regal-Beloit Corp. ................ 100 2,956
-------
9,444
-------
MANUFACTURING--1.9%
Mark IV Industries, Inc. .......... 500 10,938
-------
MEDICAL SUPPLIES--1.3%
The West Company, Inc. ............ 250 7,438
-------
OIL & GAS--2.5%
Devon Energy Corp. ................ 150 5,775
Helmerich & Payne, Inc. ........... 50 3,394
Vintage Petroleum, Inc. ........... 300 5,700
-------
14,869
-------
PAPER PRODUCTS--1.6%
Gibson Greetings, Inc. (a) ........ 150 3,281
Wausau-Mosinee Paper Corp. ........ 300 6,038
-------
9,319
-------
PRINTING--1.3%
Bowne & Company, Inc. ............. 200 $ 7,975
-------
PUBLISHING--1.4%
Banta Corp. ....................... 300 8,100
-------
REAL ESTATE--2.6%
Chateau Properties, Inc. .......... 200 6,300
Glenborough Realty Trust, Inc. .... 300 8,887
-------
15,187
-------
RESTAURANTS, LODGING &
ENTERTAINMENT--1.0%
Ryan's Family Steak Houses,
Inc. (a) ......................... 700 5,994
-------
RETAIL--1.4%
Ann Taylor Stores Corp. (a) ....... 400 5,350
The Wet Seal Inc., Class A (a) .... 100 2,950
-------
8,300
-------
RETAIL TRADE--1.9%
Footstar, Inc. (a) ................ 300 8,062
Global DirectMail Corp. (a) ....... 200 3,463
-------
11,525
-------
SAVINGS & LOAN--1.7%
Long Island Bancorp, Inc. ......... 200 9,925
-------
SERVICES--1.4%
Pittston Brink's Group ............ 200 8,050
-------
STEEL--2.0%
Lukens, Inc. ...................... 200 5,713
Reliance Steel & Aluminum
Co. .............................. 200 5,950
-------
11,663
-------
TECHNOLOGY--0.8%
VLSI Technology, Inc. (a) ......... 200 4,725
-------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
11
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LAZARD RETIREMENT SERIES, INC.
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1997
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DESCRIPTION SHARES VALUE
- ----------------------------------- -------- ---------
LAZARD RETIREMENT SMALL CAP PORTFOLIO
(CONTINUED)
TELECOMMUNICATIONS--2.1%
NTL, Inc. (a) .................... 300 $ 8,362
Vanguard Cellular Systems,
Inc. (a) ........................ 300 3,825
--------
12,187
--------
TELECOMMUNICATIONS
EQUIPMENT--3.8%
Allen Group, Inc. ................ 400 7,375
Dynatech Corp. (a) ............... 200 9,375
Oak Industries, Inc. (a) ......... 200 5,937
--------
22,687
--------
TEXTILES, SHOES AND
APPAREL--1.2%
Mohawk Industries, Inc. (a) ...... 150 3,291
Oakley, Inc. (a) ................. 400 3,625
--------
6,916
--------
TOBACCO--0.6%
Swisher International Group,
Inc. (a) ........................ 200 3,400
TRANSPORTATION-2.1%
Circle International Group, Inc. . 200 4,587
Pittston Burlington Group ........ 300 7,875
--------
12,462
--------
TRUCKING & FREIGHT
FORWARDING--1.5%
Rollins Truck Leasing Co. ........ 500 8,938
--------
UTILITIES--1.6%
Calpine Corp. (a) ................ 400 5,950
Sierra Pacific Resources ......... 100 3,750
--------
9,700
--------
PRINCIPAL
AMOUNT
(000)
---------
TOTAL COMMON STOCKS
(Identified cost $510,901) ...... 501,697
--------
REPURCHASE AGREEMENT--14.9%
State Street Bank and Trust
Company, 5.65%, 01/02/98
(Dated 12/31/97, collateral-
ized by $90,000 United States
Treasury Notes, 6.25%,
07/31/98, with a value of
$92,648) (Identified cost
$88,000) ........................ $ 88 88,000
--------
TOTAL INVESTMENTS
(Identified cost $598,901) (d) .. 99.7% $589,697
CASH AND OTHER ASSETS IN
EXCESS OF LIABILITIES ........... 0.3 1,777
------- --------
NET ASSETS ....................... 100.0% $591,474
======= ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
12
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LAZARD RETIREMENT SERIES, INC.
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1997
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DESCRIPTION SHARES VALUE
- --------------------------------------- --------- ----------
(000)
LAZARD RETIREMENT EMERGING MARKETS
PORTFOLIO*
COMMON STOCKS--77.8%
ARGENTINA--4.0%
Quilmes Industrial Quinsasa
(b) ................................. 1,900 $ 26,006
YPF Sociedad Anonima, Class
D (b) ............................... 900 30,769
--------
TOTAL ARGENTINA ...................... 56,775
--------
BRAZIL--12.7%
Companhia Brasileira de
Distribuicao Grupo Pao de
Acucar (c) .......................... 1,400 27,125
Companhia Cerveja RIA
Brahma (b) .......................... 2,100 29,794
Companhia Energetica de
Minas (b) ........................... 750 33,000
Companhia Paranaense de
Energia-Copel (b) ................... 2,400 32,850
Telecomunicacoes Brasileiras
SA (b) .............................. 500 58,219
--------
TOTAL BRAZIL ......................... 180,988
--------
CANADA--0.9%
Bell Canada International, Inc.
(a), (b) ............................ 800 12,200
--------
CHILE--3.6%
AFP Provida SA (b) ................... 1,400 23,888
Banco BHIF (b) ....................... 1,000 16,000
Santa Isabel SA (b) .................. 700 12,250
--------
TOTAL CHILE .......................... 52,138
--------
COLOMBIA--1.5%
Banco Ganadero SA (b) ................ 900 21,600
--------
CZECH REPUBLIC--0.8%
Ceske Energeticke Zavody AS
(a) ................................. 350 11,090
--------
GREECE--2.4%
Hellenic Telecommunication
Organization SA ..................... 1,700 34,831
--------
HONG KONG--6.3%
Giordano International, Ltd. ......... 48,000 16,570
Guangshen Railway Company,
Ltd. (a), (b) ....................... 1,500 20,156
Peregrine Investment Holdings,
Ltd. ................................ 14,000 9,937
Shenzhen Expressway (a) .............. 112,000 21,680
Yue Yuen Industrial Holdings ......... 10,000 21,164
--------
TOTAL HONG KONG ...................... 89,507
--------
INDIA--3.8%
Larsen & Toubro, Ltd. (c), (e) ....... 2,300 24,725
State Bank of India (a), (c), (e) .... 1,600 29,120
--------
TOTAL INDIA .......................... 53,845
--------
INDONESIA--4.0%
Asia Pulp & Paper Co., Ltd. (a)
(b) ................................. 2,300 23,144
PT Astra International, Inc. ......... 13,000 3,368
PT Indah Kiat Pulp & Paper
Corp. ............................... 15,000 2,659
PT Indofoods Sukses Makmur ........... 15,500 5,073
PT Kalbe Farma ....................... 26,500 4,698
PT Semen Gresik ...................... 31,000 18,177
--------
TOTAL INDONESIA ...................... 57,119
--------
ISRAEL--3.6%
ECI Telecom, Ltd. (b) ................ 900 22,950
Supersol, Ltd. (b) ................... 2,000 28,125
--------
TOTAL ISRAEL ......................... 51,075
--------
KOREA--3.1%
SK Telecom, Ltd. (b) ................. 6,798 44,187
--------
MALAYSIA--1.0%
Jaya Tiasa Holdings Berhad ........... 8,000 14,706
--------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
13
<PAGE>
- --------------------------------------------------------------------------------
LAZARD RETIREMENT SERIES, INC.
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
DESCRIPTION SHARES VALUE
- ---------------------------------- -------- -----------
LAZARD RETIREMENT EMERGING MARKETS
PORTFOLIO* (CONTINUED)
MEXICO--9.4%
Cemex SA de CV ................... 5,000 $ 22,644
Fomento Economico Mexicano
SA de CV, Series B .............. 3,000 23,976
Grupo Financiero Banamex
Accival SA de CV (a) ............ 12,000 35,909
Panamerican Beverages, Inc.,
Class A (b) ..................... 900 29,362
Pepsi-Gemex SA de CV (c) ......... 1,600 23,100
----------
TOTAL MEXICO ..................... 134,991
----------
PERU--3.7%
Cerveceria Backus & Johnson
SA .............................. 25,100 23,028
Telefonica del Peru SA (b) ....... 1,300 30,306
----------
TOTAL PERU ....................... 53,334
----------
PHILIPPINES--0.7%
Fil-Estate Land, Inc. ............ 73,500 2,141
Philippine National Bank (a) ..... 3,700 8,131
----------
TOTAL PHILIPPINES ................ 10,272
----------
POLAND--1.8%
Bank Handlowy W. Warszawie
(a), (c), (e) ................... 1,900 25,175
----------
PORTUGAL--3.6%
Banco Totta & Acores SA .......... 1,400 27,490
Portugal Telecom SA (b) .......... 500 23,500
----------
TOTAL PORTUGAL ................... 50,990
----------
SOUTH AFRICA--6.0%
Amalgamated Banks of South
Africa, Ltd. .................... 4,700 27,042
Barlow, Ltd. ..................... 2,900 24,611
JD Group, Ltd. ................... 3,900 23,841
Rembrandt Group, Ltd. ............ 1,400 10,213
----------
TOTAL SOUTH AFRICA ............... 85,707
----------
SOUTH KOREA--0.5%
Samsung Electronics, Co. (c),
(e) ............................. 500 7,875
----------
THAILAND--1.1%
Bangkok Expressway Public
Company, Ltd. (a) ............... 23,000 11,942
Industrial Finance Corporation
of Thailand ..................... 20,100 3,089
----------
TOTAL THAILAND ................... 15,031
----------
VENEZUELA--3.3%
Compania Anonima Nacional
Telefonos de Venezuela (b) ...... 700 29,137
Mavesa SA (b) .................... 2,900 18,488
----------
TOTAL VENEZUELA .................. 47,625
----------
TOTAL COMMON STOCKS
(Identified cost $1,194,811) .... 1,111,061
----------
PREFERRED STOCKS--3.1%
BRAZIL--3.1%
Banco Bradesco SA (b)
(Identified cost $36,563) ....... 4,500 44,955
----------
PRINCIPAL
AMOUNT
(000)
---------
REPURCHASE AGREEMENT--20.4%
State Street Bank and Trust
Company, 5.65%, 01/02/98
(Dated 12/31/97, collateral-
ized by $290,000 United
States Treasury Notes, 6.25%,
07/31/98, with a value of
$298,533) (Identified cost
$291,000) ..................... $ 291 291,000
-------
TOTAL INVESTMENTS
(Identified cost $1,522,374)
(d) .. ........................ 101.3% $1,447,016
LIABILITIES IN EXCESS OF CASH
AND OTHER ASSETS ............. ( 1.3) (18,001)
-------- ----------
NET ASSETS ..................... 100.0% $1,429,015
======== ==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
14
<PAGE>
- --------------------------------------------------------------------------------
LAZARD RETIREMENT SERIES, INC.
PORTFOLIOS OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
LAZARD RETIREMENT EMERGING MARKETS PORTFOLIO* (CONTINUED)
* Percentages of common stocks and preferred stocks are presented in the
portfolio by country.
Percentages by industry are as follows:
Automotive 0.2%, Auto Parts 1.8%, Banks & Financial Services 16.0%,
Biotechnology 11.4%, Building Materials 3.9%, Conglomerates 2.4%, Electronics
0.5%, Energy 2.3%, Food & Beverages 4.5%, Household Appliances & Home
Furnishings 1.7%, Investment Bank/Broker 0.7%, Machinery 1.7%, Medical
Supplies 0.3%, Oil & Gas 2.1%, Paper Products 1.8%, Real Estate 0.2%, Retail
3.1%, Shoes 1.5%, Telecommunications 17.9%, Transportation 3.8%, Utilities
3.1%.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
15
<PAGE>
- --------------------------------------------------------------------------------
LAZARD RETIREMENT SERIES, INC.
NOTES TO PORTFOLIOS OF INVESTMENTS
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
(a) Non-income producing security.
(b) American Depositary Receipts.
(c) Global Depositary Receipts.
(d) For federal income tax purposes, the aggregate cost, aggregate gross
unrealized appreciation, aggregate gross unrealized depreciation and the
net unrealized appreciation (depreciation) is as follows:
<TABLE>
<CAPTION>
AGGREGATE AGGREGATE
GROSS GROSS NET
AGGREGATE UNREALIZED UNREALIZED UNREALIZED
PORTFOLIO COST APPRECIATION DEPRECIATION DEPRECIATION
- ------------------------------- ------------ -------------- -------------- -------------
<S> <C> <C> <C> <C>
Retirement Small Cap $ 598,901 $18,974 $ 28,178 $ (9,204)
Retirement Emerging Markets 1,522,374 39,919 115,277 (75,358)
</TABLE>
(e) Pursuant to Rule 144A of the Securities Act of 1933, these securities may
only be resold in transactions exempt from registration, normally to
qualified institutional buyers. At December 31, 1997, these securities
amounted to $86,895 or 6.1% of net assets for the Lazard Retirement
Emerging Markets Portfolio.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
16
<PAGE>
- --------------------------------------------------------------------------------
LAZARD RETIREMENT SERIES, INC.
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
LAZARD
LAZARD RETIREMENT
RETIREMENT EMERGING
SMALL CAP MARKETS
PORTFOLIO PORTFOLIO
------------ --------------
<S> <C> <C>
ASSETS
Investments in securities, at value (cost $510,901 and
$1,231,374, respectively) .................................... $501,697 $1,156,016
Repurchase Agreements, at value .............................. 88,000 291,000
Cash ......................................................... 754 567
Foreign currency (cost $0 and $12,623, respectively)............ - 12,509
Dividends and interest receivable .............................. 305 2,259
Due from Manager ............................................. 23,028 21,926
Deferred organizational expenses .............................. 15,975 15,975
-------- ----------
Total assets ................................................... 629,759 1,500,252
-------- ----------
LIABILITIES
Payable for investments purchased .............................. - 31,526
Directors' fees payable ....................................... 503 503
Accrued expenses and other payables ........................... 37,782 39,208
-------- ----------
Total liabilities ............................................. 38,285 71,237
-------- ----------
Net assets ................................................... 591,474 1,429,015
======== ==========
NET ASSETS
Paid in capital ................................................ 600,408 1,504,381
Undistributed (distributions in excess of) Investment income-
net ......................................................... 270 (68)
Unrealized appreciation (depreciation) on:
Investments-net ............................................. (9,204) (75,358)
Foreign currency- net ....................................... - 60
-------- ----------
Net assets ................................................... $591,474 $1,429,015
======== ==========
Shares of capital stock outstanding* ........................... 60,099 150,628
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE ...... $ 9.84 $ 9.49
</TABLE>
* $0.001 par value, 500,000,000 shares authorized for the Portfolios in total.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
17
<PAGE>
- --------------------------------------------------------------------------------
LAZARD RETIREMENT SERIES, INC.
STATEMENTS OF OPERATIONS
FOR THE PERIOD ENDED DECEMBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
LAZARD
LAZARD RETIREMENT
RETIREMENT EMERGING
SMALL CAP MARKETS
PORTFOLIO** PORTFOLIO**
------------- ------------
<S> <C> <C>
INVESTMENT INCOME
INCOME:
Interest ...................................................... $ 1,518 $ 4,353
Dividends ...................................................... 497 3,927
--------- ---------
Total investment income* ....................................... 2,015 8,280
--------- ---------
EXPENSES:
Management fees ................................................ 684 2,199
Administration fees .......................................... 6,268 6,294
Distribution fees ............................................. 228 550
Custodian fees ................................................ 8,045 9,230
Professional services .......................................... 26,425 26,425
Shareholders' services ....................................... 3,420 3,420
Directors' fees and expenses ................................. 503 503
Shareholders' reports .......................................... 1,710 1,710
Amortization of organizational expenses ........................ 540 540
Other ......................................................... 86 88
--------- ---------
Total expenses before fees waived and expenses reimbursed ...... 47,909 50,959
Management fees waived and expenses reimbursed ............... (40,227) (40,640)
Administration fees waived .................................... (6,250) (6,250)
Expense Reductions ............................................. (65) (110)
--------- ---------
Expenses- net ................................................... 1,367 3,959
--------- ---------
INVESTMENT INCOME-NET .......................................... 648 4,321
--------- ---------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS AND FOREIGN CURRENCY-NET
Realized loss on Foreign currency-net ........................ - (68)
Net unrealized appreciation (depreciation) on: ...............
Investments- net ............................................. (9,204) (75,358)
Foreign currency- net ....................................... - 60
--------- ---------
Realized and unrealized loss on investments and foreign
currency- net ................................................ (9,204) (75,366)
--------- ---------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS ............ $ (8,556) $ (71,045)
========= =========
*Net of foreign withholding taxes of: ........................... $ 3 $ 51
========= =========
</TABLE>
** Portfolio commenced operations on November 4, 1997.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
18
<PAGE>
- --------------------------------------------------------------------------------
LAZARD RETIREMENT SERIES, INC.
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
LAZARD
LAZARD RETIREMENT
RETIREMENT EMERGING
SMALL CAP MARKETS
PORTFOLIO PORTFOLIO
-------------- -------------
PERIOD ENDED PERIOD ENDED
DECEMBER 31, DECEMBER 31,
1997** 1997**
-------------- -------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Investment income- net .......................................... $ 648 $ 4,321
Realized loss on foreign currency- net ........................ - (68)
Unrealized depreciation- net .................................... (9,204) (75,298)
-------- ----------
Net decrease in net assets resulting from operations ............ (8,556) (71,045)
-------- ----------
DISTRIBUTIONS TO SHAREHOLDERS:
From investment income- net .................................... (648) (4,321)
In excess of investment income- net ........................... (283) (874)
From capital ................................................... - (582)
-------- ----------
Net decrease in net assets resulting from distributions ......... (931) (5,777)
-------- ----------
CAPITAL STOCK TRANSACTIONS:
Net proceeds from sales ....................................... 600,030 1,500,060
Net proceeds from reinvestment of distributions ............... 931 5,777
-------- ----------
Net increase in net assets from capital stock transactions ...... 600,961 1,505,837
-------- ----------
Total increase in net assets .................................... 591,474 1,429,015
Net assets at beginning of period .............................. - -
-------- ----------
Net assets at end of period* .................................... $591,474 $1,429,015
======== ==========
SHARES ISSUED AND REPURCHASED:
Shares outstanding at beginning of period ..................... - -
Shares sold ................................................... 60,003 150,006
Shares issued to shareholders from reinvestment of
distributions ................................................ 96 622
-------- ----------
Net increase ................................................... 60,099 150,628
-------- ----------
Shares outstanding at end of period ........................... 60,099 150,628
======== ==========
*Includes undistributed (distributions in excess of) investment
Income- net ................................................... $ 270 $ (68)
======== ==========
</TABLE>
** Portfolio commenced operations on November 4, 1997.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
19
<PAGE>
- --------------------------------------------------------------------------------
LAZARD RETIREMENT SERIES, INC.
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT THE PERIOD:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INCOME (LOSS) FROM INVESTMENT LESS DISTRIBUTIONS FROM
OPERATIONS: AND IN EXCESS OF:
----------------------------------------------- --------------------------
REALIZED AND
NET ASSET VALUE INVESTMENT UNREALIZED TOTAL FROM
BEGINNING INCOME- LOSS ON INVESTMENT INVESTMENT
PERIOD OF PERIOD NET INVESTMENTS-NET OPERATIONS INCOME-NET CAPITAL
- ----------------------------- ----------------- ------------ ----------------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
LAZARD RETIREMENT SMALL CAP PORTFOLIO
Period from
11/4/97* to 12/31/97 ...... $10.00 $0.020 $(0.164) $(0.144) $(0.016) $0.000
- ------------------------------ ------ ------ ------- ------- ------- ------
LAZARD RETIREMENT EMERGING MARKETS PORTFOLIO
Period from
11/4/97* to 12/31/97 ...... 10.00 0.038 ( 0.509) ( 0.471) ( 0.035) (0.004)
- ------------------------------ ------ ------ ------- ------- ------- ------
</TABLE>
See Notes to Financial Highlights on page 22.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
20
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
RATIOS TO AVERAGE
NET ASSETS
----------------------------------------
NET ASSETS,
NET ASSET PORTFOLIO AVERAGE END OF
VALUE, END TOTAL INVESTMENT TURNOVER COMMISSION PERIOD
OF PERIOD RETURN\^\^ EXPENSES-NET\^ INCOME-NET\^ RATE RATE** (000'S)
- ------------ ------------ ----------------------- -------------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
$9.84 (1.4)% 1.50%(a),(b) 0.71% 0.00% $0.0471 $ 591
- ----- ---- ---- ---- ---- ------- ------
9.49 (4.7) 1.80(a),(b) 1.96 0.00 0.0080 1,429
- ----- ---- ---- ---- ---- ------- ------
</TABLE>
See Notes to Financial Highlights on page 22.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
21
<PAGE>
- --------------------------------------------------------------------------------
LAZARD RETIREMENT SERIES, INC.
NOTES TO FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
* Commencement of operations.
** The average commission rate paid is applicable for Portfolios that invest
greater than 10% of average assets in equity security transactions on which
commissions are charged.
+ Annualized for periods of less than one year.
++ Total return represents aggregate total return for the period indicated.
(a) If the Investment Manager and Administrator had not waived certain fees
and reimbursed certain expenses and the Portfolios had not paid fees
indirectly, the ratio of expenses to average net assets (and net investment
income per share) would have been 52.55% annualized ($-1.417) for Retirement
Small Cap Portfolio and 23.17% annualized ($-0.376) for Retirement Emerging
Markets Portfolio.
(b) Includes expense reductions. Excluding expense reductions, the ratio of
expenses to average net assets would have been 1.57% annualized for
Retirement Small Cap Portfolio and 1.85% annualized for Retirement Emerging
Markets Portfolio.
22
<PAGE>
- --------------------------------------------------------------------------------
LAZARD RETIREMENT SERIES, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. ORGANIZATION
Lazard Retirement Series, Inc. (the "Fund") was incorporated in Maryland on
February 13, 1997 and is registered under the Investment Company Act of 1940
(the "Act"), as amended, as a no-load, open-end management investment company.
The Fund is comprised of nine portfolios (each referred to as a "Portfolio"),
which are offered only to qualified pension and retirement plans and variable
annuity and variable life insurance separate accounts established by insurance
companies to fund variable annuity contracts and variable life insurance
policies. Currently, only two portfolios, each of which is "non-diversified" as
defined in the Act, are being offered, Lazard Retirement Small Cap Portfolio
("Small Cap Portfolio") and Lazard Retirement Emerging Markets Portfolio
("Emerging Markets Portfolio"). Small Cap Portfolio and Emerging Markets
Portfolio commenced operations on November 4, 1997. The other seven portfolios
have issued 20,001 shares at $10 per share, but had not commenced operations at
December 31, 1997. The seven portfolios are as follows: Lazard Retirement
Bantam Value Portfolio, Lazard Retirement Equity Portfolio, Lazard Retirement
Global Equity Portfolio, Lazard Retirement International Equity Portfolio,
Lazard Retirement International Fixed-Income Portfolio, Lazard Retirement
International Small Cap Portfolio and Lazard Retirement Strategic Yield
Portfolio.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies:
(A) VALUATION OF INVESTMENTS--Market values for equity securities listed on the
New York Stock Exchange ("NYSE"), other U.S. exchanges or NASDAQ are based on
the last quoted sales prices on the principal exchange on which the security is
traded as of the close of regular trading on the NYSE (normally 4:00 p.m.
Eastern Time) on each valuation date; securities not traded on the valuation
date are valued at the closing bid price. Any securities not listed for which
current over-the-counter market quotations or bids are readily available are
valued at the last quoted bid price, or, if available, the mean of two such
prices. Securities listed on foreign exchanges are valued at the last quoted
sales price; securities not traded on the valuation date are valued at the
closing bid price. Bonds and other fixed-income securities are valued on the
basis of prices provided by a pricing service which are based primarily on
institutional size trading in similar groups of securities, or using brokers'
quotations. Mortgage-backed securities issued by certain government-related
organizations are valued using pricing services or brokers' quotations based on
a matrix system which considers such factors as other security prices, yields
and maturities. Debt securities maturing in sixty days or less are valued at
amortized cost except where to do so would not accurately reflect their fair
value, in which case such securities are valued at fair value as determined in
good faith in accordance with procedures adopted by the Board of Directors.
Options on stocks and stock indices traded on national securities exchanges are
valued as of the close of options trading on such exchanges (which is currently
4:10 p.m. Eastern Time). Securities for which market quotations are not readily
available are valued at fair value as determined in good faith using methods
approved by the Board of Directors. The securities of any of the Portfolios may
also be valued on the basis of prices provided by a pricing service when such
prices are believed by the Investment Manager to reflect the fair market value
of such securities.
(B) SECURITIES TRANSACTIONS AND INVESTMENT INCOME--Security transactions are
accounted for on the trade date. Realized gains and losses on sales of
investments are recorded on a specific identification basis. Dividend income is
recorded on the ex-dividend date. Interest income is accrued daily. The
Portfolios amortize premiums and accrete discounts on fixed-income securities.
23
<PAGE>
- --------------------------------------------------------------------------------
LAZARD RETIREMENT SERIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
(C) FOREIGN CURRENCY TRANSLATION AND FORWARD FOREIGN CURRENCY CONTRACTS--The
books and records of the Portfolios are maintained in U.S. dollars. Foreign
currency transactions are translated into U.S. dollars at the rates of exchange
prevailing on the respective dates of such transactions. Assets and liabilities
stated in foreign currency are translated at the exchange rate at the end of
the period. The Portfolios do not isolate the portion of the results of
operations resulting from changes in foreign exchange rates on investments from
the fluctuations arising from changes in their market prices. Such fluctuations
are included in net realized and unrealized gain or loss from investments. Net
realized exchange gains (losses) from foreign currency transactions represent
net foreign exchange gains (losses) from forward foreign currency contracts,
disposition of foreign currencies, currency gains or losses realized between
the trade and settlement dates on securities transactions, and the difference
between the amount of investment income accrued on the Portfolio's books and
the U.S. dollar equivalent amounts actually received. Net unrealized foreign
exchange gains (losses) arise from changes in the value of assets and
liabilities, other than investments in securities, as a result of changes in
exchanges rates.
A forward foreign currency contract is an agreement between two parties to buy
or sell currency at a set price on a future date. Emerging Markets Portfolio (
the "Eligible Portfolio" ) may enter into forward foreign currency contracts
for risk management. Risk management includes hedging strategies which serve to
reduce an Eligible Portfolio's exposure to foreign currency fluctuations. Such
exposure may exist during the period that a foreign denominated investment is
held, or during the period between the trade date and settlement date of an
investment which is purchased or sold. Risks may arise upon entering into these
contracts from the potential inability of counterparties to meet the terms of
their contracts and from unanticipated movements in the value of the foreign
currency relative to the U.S. dollar.
The U.S. dollar value of forward currency contracts is determined using forward
exchange rates provided by a quotation service. Daily fluctuations in the value
of such contracts are recorded as unrealized gains or losses. When the contract
is closed, the Eligible Portfolio records a realized gain or loss equal to the
difference between the value at the time it was opened and the value at the
time it was closed. Such gains and losses are disclosed in the realized or
unrealized gain (loss) on foreign currency in the accompanying Statements of
Operations.
(D) FEDERAL INCOME TAXES--The Fund's policy is to continue to have each
Portfolio qualify as a regulated investment company under the Internal Revenue
Code and to distribute all of its taxable income, including any realized net
capital gains, to shareholders. Therefore, no federal income tax provision is
required.
Under current tax law, certain capital and net foreign currency losses realized
after October 31 within the taxable year may be deferred and treated as
occurring on the first day of the following tax year. For the tax period ended
December 31, 1997, the Emerging Markets Portfolio has elected to defer $68 of
net capital and currency losses arising between November 4, 1997 and December
31, 1997.
(E) DIVIDENDS AND DISTRIBUTIONS--The Fund intends to declare and pay dividends
annually from net investment income on shares of Small Cap Portfolio and
Emerging Markets Portfolio. During any particular year, net realized gains from
investment transactions in excess of available capital loss carryforwards would
be taxable to the Portfolio if not distributed. The Portfolios intend to
declare and distribute these amounts annually to shareholders; however, to
avoid taxation, a second distribution may be required. Income dividends and
capital gains distributions are determined in accordance with federal
24
<PAGE>
- --------------------------------------------------------------------------------
LAZARD RETIREMENT SERIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
income tax regulations which may differ from generally accepted accounting
principles. These differences, which may result in distribution
reclassifications, are primarily due to differing treatments of foreign
currency transactions. Book and tax differences relating to shareholder
distributions will result in reclassifications and may affect the allocation
between investment income-net, realized gains-net and paid in capital.
As a result of these book-tax differences, the Portfolios made the following
reclassifications to the capital accounts for the period ended December 31,
1997:
<TABLE>
<CAPTION>
INCREASE (DECREASE)
----------------------------------------------
UNDISTRIBUTED ACCUMULATED
INVESTMENT REALIZED
PORTFOLIO PAID IN CAPITAL INCOME-NET GAIN-NET
- ------------------ ----------------- --------------- ------------
<S> <C> <C> <C>
Small Cap $ (553) $ 553 -
Emerging Markets (1,456) 1,388 $68
</TABLE>
(F) ORGANIZATIONAL EXPENSES--Costs incurred by the Fund in connection with its
organization have been deferred and are being amortized on a straight line
basis over a five-year period from the date of commencement of operations of
each Portfolio. In the event that any of the initial shares of any of the
Portfolios during such period are redeemed, the appropriate Portfolio will be
reimbursed by such holder for any unamortized organizational expenses in the
same proportion as the number of shares redeemed bears to the number of initial
shares held at the time of redemption. During the formation of the Fund, the
Fund intended to allocate organizational expenses among the Portfolios in
proportion to the amounts received for the initial shares issued. Subsequently,
the Fund determined to allocate the expenses among the Portfolios pro rata.
(G) ALLOCATION OF EXPENSES--Expenses not directly chargeable to a specific
Portfolio are allocated primarily on the basis of relative net assets.
(H) EXPENSE REDUCTIONS--Portfolios leaving excess cash in demand deposit
accounts may receive credits which are available to offset custody expenses.
The Statements of Operations report gross custody expenses and reflect the
amount of such credits as a reduction in total expenses.
(I) STRUCTURED INVESTMENTS--Certain Portfolios may invest in structured
investments whose values are linked either directly or inversely to changes in
foreign currencies, interest rates, commodities, indices or other underlying
instruments. A Portfolio uses these securities to increase or decrease its
exposure to different underlying instruments and to gain exposure to markets
that might be difficult to invest in through conventional securities.
Structured investments may be more volatile than their underlying instruments,
but any loss is limited to the amount of the original investment.
(J) DELAYED DELIVERY COMMITMENTS--Each Portfolio may purchase or sell securities
on a when-issued or forward commitment basis. Payment and delivery may take
place a month or more after the date of the transaction. The price of the
underlying securities and the date when the securities will be delivered and
paid for are fixed at the time the transaction is negotiated. Collateral
consisting of liquid securities or cash is maintained in an amount at least
equal to these commitments.
(K) ESTIMATES--The preparation of financial statements in conformity with
generally accepted accounting principles requires the Fund 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 income and
expense during the reporting period. Actual results could differ from those
estimates.
3. INVESTMENT MANAGEMENT AGREEMENTS AND OTHER TRANSACTIONS WITH AFFILIATES
The Fund has entered into investment management agreements (the "Management
Agreements") with Lazard Asset Management (the "Manager"), a division of Lazard
Freres
25
<PAGE>
- --------------------------------------------------------------------------------
LAZARD RETIREMENT SERIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
& Co. LLC, on behalf of each Portfolio. Pursuant to the Management Agreements,
the Manager will regularly provide the Portfolios with investment research,
advice and supervision and furnish continuously an investment program for each
Portfolio consistent with its investment objectives and policies, including the
purchase, retention and disposition of securities. Each of the Portfolios pays
the Manager an investment management fee, at the annual rate set forth below,
as a percentage of the average daily net assets of the relevant Portfolio:
Small Cap Portfolio, 0.75% and Emerging Markets Portfolio, 1.00%. The
investment management fees are accrued daily and payable monthly.
The Manager has voluntarily agreed to reduce its fees and, if necessary,
reimburse the following Portfolios if annualized operating expenses exceed the
following percentages of average daily net assets:
<TABLE>
<CAPTION>
ANNUAL
OPERATING
PORTFOLIO EXPENSES
- ------------------ ----------
<S> <C>
Small Cap 1.50%
Emerging Markets 1.80
</TABLE>
For the period ended December 31, 1997, the Manager did not impose all or part
of its management fee amounting to $684 for Small Cap Portfolio and $2,199 for
Emerging Markets Portfolio. For the same period, the Manager has agreed to
reimburse expenses amounting to $39,543 for Small Cap and $38,441 for Emerging
Markets Portfolio.
Effective June 20, 1997, the Fund has engaged State Street Bank and Trust
Company ("State Street") to provide certain administrative services. Each
Portfolio will bear the cost of such expenses at the annual rate of $37,500 and
0.02% of average assets up to $1 billion plus 0.01% of average assets over $1
billion. State Street has agreed to waive the $37,500 fee for the Small Cap and
Emerging Markets Portfolios for one year or until each Portfolio reaches net
assets of $50 million.
The Fund has a distribution agreement with Lazard Freres & Co. LLC ( the
"Distributor" ). As the distributor, Lazard Freres & Co. LLC acts as
distributor for shares of each of the Portfolios and bears the cost of printing
and mailing prospectuses to potential investors and of any advertising expenses
incurred in connection with distribution of shares.
The Distributor provides each Portfolio with distribution services pursuant to
a separate Distribution Plan ( the "Plan") in accordance with Rule 12b-1 under
the Act. Under the Plan, the Distributor is entitled to distribution fees from
each Portfolio. The distribution fee is an asset-based fee to support
distribution efforts and/or servicing of accounts. Each Portfolio will pay a
monthly distribution fee at an annual rate of 0.25% of the average daily net
assets of each Portfolio for such services under the 12b-1 plan adopted by the
Fund. The distribution fee may be retained by the Distributor if a shareholder
invests directly through the Distributor. Usually the fees are paid to external
organizations such as 401(k) alliance sponsors, discount brokers and bank trust
departments who distribute the Fund to the public.
Certain Directors of the Fund are Managing Directors of the Manager. The Fund
pays each director who is not an officer of the Manager or an interested
Director its allocable share of a fixed fee of $20,000 per year, plus $1,000
per meeting attended for the Fund and The Lazard Funds, Inc., a related party,
and reimburses them for travel and out of pocket expenses.
4. SECURITIES TRANSACTIONS AND TRANSACTIONS WITH AFFILIATES
Purchases and sales of portfolio securities (excluding short-term securities),
for the period ended December 31, 1997 were as follows:
<TABLE>
<CAPTION>
PORTFOLIO PURCHASES SALES
- ------------------ ------------ ------
<S> <C> <C>
Small Cap $ 510,932 -
Emerging Markets 1,231,374 -
</TABLE>
26
<PAGE>
- --------------------------------------------------------------------------------
LAZARD RETIREMENT SERIES, INC.
REPORT OF INDEPENDENT AUDITORS
- --------------------------------------------------------------------------------
The Board of Directors and Shareholders
Lazard Retirement Series, Inc.
We have audited the accompanying statements of assets and liabilities,
including the schedules of portfolio investments, of Lazard Retirement Series,
Inc. (comprised of Lazard Retirement Small Cap Portfolio and Lazard Retirement
Emerging Markets Portfolio) as of December 31, 1997 and the related statements
of operations, the statements of changes in net assets and the financial
highlights for the period from commencement of operations (November 4, 1997) to
December 31, 1997. 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
audit.
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 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 as stated
above, present fairly, in all material respects, the financial position of each
of the respective portfolios constituting Lazard Retirement Series, Inc. as of
December 31, 1997, the results of their operations, changes in their net assets
and the financial highlights for the period from commencement of operations
(November 4, 1997) to December 31, 1997 in conformity with generally accepted
accounting principles.
ANCHIN, BLOCK & ANCHIN LLP
New York, New York
January 31, 1998
27
<PAGE>
LAZARD RETIREMENT SERIES, INC.
30 Rockefeller Plaza
New York, New York 10112
TELEPHONE
(800) 823-6300
INVESTMENT MANAGER
Lazard Asset Management
30 Rockefeller Plaza
New York, New York 10112
Telephone: (212) 632-6400
DISTRIBUTOR
Lazard Freres & Co. LLC
30 Rockefeller Plaza
New York, New York 10112
CUSTODIAN
State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02110
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
Boston Financial Data Services, Inc.
2 Heritage Drive
North Quincy, Massachusetts 02171
Telephone: 1-800-986-3455
INDEPENDENT PUBLIC ACCOUNTANTS
Anchin, Block & Anchin LLP
1375 Broadway
New York, New York 10018
LEGAL COUNSEL
Stroock & Stroock & Lavan LLP
180 Maiden Lane
New York, New York 10038
<PAGE>
LAZARD
RETIREMENT SERIES
30 Rockefeller Plaza
58th Floor
New York, New York 10112
Telephone (800) 823-6300
This report is for the information of the
stockholders of Lazard Retirement Series, Inc.
Its use in connection with any offering of the
Fund's shares is authorized only in the
case of a concurrent or prior delivery of the
Fund's current prospectus.
