PROSPECTUS
April 29, 1996
Lexington Emerging Markets Fund, Inc.
P.O. Box 1515 / Park 80 West Plaza Two, Saddle Brook, New Jersey 07663
(201) 845-7300
A NO-LOAD MUTUAL FUND WHOSE INVESTMENT OBJECTIVE IS TO SEEK LONG-TERM
GROWTH OF CAPITAL PRIMARILY THROUGH INVESTMENT IN EQUITY SECURITIES OF
COMPANIES DOMICILED IN, OR DOING BUSINESS IN EMERGING COUNTRIES AND
EMERGING MARKETS.
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Lexington Emerging Markets Fund, Inc. is a no-load open-end
diversified management investment company. The Fund's investment
objective is to seek long-term growth of capital primarily through
investment in equity securities of companies domiciled in, or doing
business in emerging countries and emerging markets.
Shares of the Fund may be purchased only by insurance companies
for the purpose of funding variable annuity contracts and variable
life insurance policies.
Lexington Management Corporation ("LMC") is the Fund's investment
adviser. Lexington Funds Distributor, Inc. ("LFD") is the distributor
of Fund shares.
This Prospectus sets forth information about the Fund you should
know before investing. It should be read and retained for future
reference.
A Statement of Additional Information dated April 29, 1996 which
provides a further discussion of certain matters in this Prospectus
and other matters that may be of interest to some investors, has been
filed with the Securities and Exchange Commission and is incorporated
herein by reference. For a free copy, call the telephone number above
or write to the address listed above.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Investors Should Read and Retain this Prospectus for Future Reference
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FINANCIAL HIGHLIGHTS
The following Per Share Income and Capital Changes Information for the year
ended December 31, 1995 and for the period March 30, 1994 (commencement of
operations) to December 31, 1994 has been audited by KPMG Peat Marwick LLP,
Independent Auditors, whose report thereon appears in the Statement of
Additional Information. This information should be read in conjunction with the
Financial Statements and related notes thereto included in the Statement of
Additional Information. The Fund's annual report, which contains additional
performance information, is available upon request and without charge.
<TABLE>
<CAPTION>
March 30, 1994
(commencement of
Year Ended operations) to
December 31, 1995 December 31, 1994
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<S> <C> <C>
Selected Per Share Data for a share outstanding throughout the period:
Net asset value, beginning of period ................................................. $ 9.86 $10.00
------ ------
Income from investment operations:
Net investment income ................................................................. 0.09 0.03
Net realized and unrealized gain (loss) on investments ................................ (0.48) 0.04
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Total income (loss) from investment operations .................................. (0.39) 0.07
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Less distributions:
Distributions from net realized capital gains ......................................... (0.09) (0.02)
Distributions in excess of net realized capital gains (Temporary book-tax difference) . - (0.19)
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Total distributions ............................................................. (0.09) (0.21)
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Net asset value, end of period .......................................................... $ 9.38 $ 9.86
====== ======
Total return ............................................................................ (3.93%) 0.76%*
Ratio to average net assets:
Expenses, before reimbursement ........................................................ 4.09% 6.28%*
Expenses, net of reimbursement ........................................................ 1.32% 1.30%*
Net investment income (loss), before reimbursement .................................... (1.45%) (4.29)%*
Net investment income ................................................................. 1.33% 0.70%*
Portfolio turnover ...................................................................... 88.92% 71.21
Net assets at end of period (000's omitted) ............................................. $7,815 $4,624
*Annualized
</TABLE>
DESCRIPTION OF THE FUND
Lexington Emerging Markets Fund, Inc. is an open-end management investment
company organized as a corporation under the laws of Maryland. The Fund is
intended to be the funding vehicle for variable annuity contracts and variable
life insurance policies to be offered by the separate accounts of certain life
insurance companies ("participating insurance companies"). The Fund currently
does not foresee any disadvantages to the holders of variable annuity contracts
and variable life insurance policies arising from the fact that the interests of
the holders of such contracts and policies may differ. Nevertheless, the Fund's
Directors intend to monitor events in order to identify any material
irreconcilable conflicts which may possibly arise and to determine what action,
if any, should be taken in response thereto. If a conflict were to occur, an
insurance company separate account might be required to withdraw its investments
in the Fund and the Fund might be forced to sell securities at disadvantageous
prices. The variable annuity contracts and variable life insurance policies are
described in the separate prospectuses issued by the Participating Insurance
Companies. The Fund assumes no responsibility for such prospectuses.
Individual variable annuity contract holders and variable life insurance
policy holders are not "shareholders" of the Fund. The Participating Insurance
Companies and their separate accounts are the shareholders or investors,
although such companies may pass through voting rights to their variable annuity
contract or variable life insurance policy. Shares of the Fund are not offered
directly to the general public.
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to seek long-term growth of capital
primarily through investment in equity securities and equivalents of companies
domiciled in, or doing business in, emerging countries and emerging markets, as
defined below.
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Due to the risks inherent in international investments generally, the Fund
should be considered as a vehicle for investing a portion of an investor's
assets in foreign securities markets and not as a complete investment program.
The investment objective of the Fund is long-term growth of capital. The
Fund seeks to achieve this objective by investing primarily in emerging country
and emerging market equity securities. Equity securities will consist of all
types of common stocks and equivalents (the following constitute equivalents:
convertible debt securities and warrants.) The Fund may also invest in preferred
stocks, bonds, money market instruments of foreign and domestic companies, U.S.
government, and governmental agencies. There can be no assurance that the Fund
will be able to achieve its investment objective. The Fund's investment
objective is a fundamental policy that may not be changed without the approval
of a "majority of the Fund's outstanding voting securities" which means the
lesser of (i) 67% of the shares represented at a meeting at which more than 50%
of the outstanding shares are represented, or (ii) more than 50% of the
outstanding shares.
Under normal conditions, at least 65% of the Fund's total assets will be
invested in emerging country and emerging market equity securities in at least
three countries outside of the United States. For purposes of its investment
objective, the Fund considers emerging country equity securities to be any
country whose economy and market the World Bank or United Nations considers to
be emerging or developing. The Fund may also invest in equity securities and
equivalents traded in any market, of companies that derive 50% or more of their
total revenue from either goods or services produced in such emerging countries
and emerging markets or sales made in such countries. Determinations as to
eligibility will be made by LMC based on publicly available information and
inquiries made to the companies. It is possible in the future that sufficient
numbers of emerging country or emerging market equity securities would be traded
on securities markets in industrialized countries so that a major portion, if
not all, of the Fund's assets would be invested in securities traded on such
markets, although such a situation is unlikely at present. The Fund will
maintain investments at all times in a minimum of three countries outside of the
United States.
Currently, investing in many of the emerging countries and emerging markets
is not feasible or may involve political risks. Accordingly, LMC currently
intends to consider investments only in those countries in which it believes
investing is feasible and does not involve such risks. The list of acceptable
countries will be reviewed by LMC and approved by the Board of Directors on a
periodic basis and any additions or deletions with respect to such list will be
made in accordance with changing economic and political circumstances involving
such countries. (See Appendix).
The Fund's investments in emerging country equity securities are not subject
to any maximum limit, and it is the intention of LMC to invest substantially all
of the Fund's assets in emerging country and emerging market equity securities.
However, to the extent that the Fund's assets are not invested in emerging
country and emerging market equity securities, the remaining 35% of the assets
may be invested in (i) other equity securities without regard to whether they
qualify as emerging country or emerging market equity securities, (ii) debt
securities denominated in the currency of an emerging market or issued or
guaranteed by an emerging market company or the government of an emerging
country, and (iii) short-term and medium-term debt securities of the type
described below under "Temporary Investments." The Fund's assets may be so
invested in debt securities when LMC believes that, based upon factors such as
relative interest rate levels and foreign exchange rates, such debt securities
offer opportunities for long-term growth of capital. It is likely that many of
the debt securities in which the Fund will invest will be unrated, and whether
or not rated, such securities may have speculative characteristics. All unrated
debt securities purchased by the Fund will be comparable to, or the issuers of
such unrated securities will have the capacity to meet its debt obligations
comparable to those issuers of rated securities. In addition, for temporary
defensive purposes, the Fund may invest less than 65% of its assets in emerging
country and emerging market equity securities, in which case the Fund may invest
in other equity securities or may invest in debt securities of the sort
described under "Temporary Investments" below.
The Fund intends to purchase and hold securities for long-term growth of
capital and does not expect to trade for short-term gain. Accordingly, it is
anticipated that the annual portfolio turnover rate normally will not exceed
75%. A 100% turnover rate would occur if all of the Fund's portfolio investments
were sold and either repurchased or replaced in a year. A higher turnover rate
results in correspondingly greater brokerage commissions and other transactional
expenses which are borne by the Fund. The Fund's portfolio turnover rate for the
year ended December 31, 1995 was 88.92%. High portfolio turnover may result in
the realization of net short-term capital gains by the Fund which, when
distributed to shareholders, will be taxable as ordinary income. See "Tax
Matters."
The operating expenses of the Fund can be expected to be greater than that
of an investment company investing exclusively in United States securities.
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Temporary Investments
For temporary defensive purposes, the Fund may invest up to 100% of its
total assets in money market securities, denominated in dollars in the currency
of any emerging country, issued by entities organized in the U.S. or any
emerging country, such as: short-term (less than twelve months to maturity) and
medium-term (not greater than five years to maturity) obligations issued or
guaranteed by the U.S. Government or the government of an emerging country,
their agencies or instrumentalities; finance company and corporate commercial
paper, and other short-term corporate obligations, in each case rated Prime-1 by
Moody's Investors Services, Inc. or A or better by Standard & Poor's Corporation
or, if unrated, of comparable quality as determined by LMC, obligations
(including certificates of deposit, time deposits and banker's acceptances) of
banks; and repurchase agreements with banks and broker-dealers with respect to
such securities.
Repurchase agreements with respect to the securities described in the
preceding paragraph are contracts under which the Fund would acquire a security
for a relatively short period (usually not more than 7 days) subject to the
obligations of the seller to repurchase and the Fund to resell such security at
a fixed time and price (representing the Fund's cost plus interest). Although
the Fund may enter into repurchase agreements with respect to any portfolio
securities which it may acquire consistent with its investment policies and
restrictions, it is the Fund's present intention to enter into repurchase
agreements only with respect to obligations of the United States Government or
its agencies or instrumentalities to meet anticipated redemptions or pending
investments or reinvestments of Fund assets in portfolio securities. The Fund
will enter into repurchase agreements only with member banks of the Federal
Reserve System and with "primary dealers" in United States Government
securities. Repurchase agreements are considered loans which must be fully
collateralized including interest earned thereon during the entire term of the
agreement. If the institution defaults on the repurchase agreement, the Fund
will retain possession of the underlying securities. In addition if bankruptcy
proceedings are commenced with respect to the seller, realization on the
collateral by the Fund may be delayed or limited and the Fund may incur
additional costs. In such case the Fund will be subject to risks associated with
changes in market value of the collateral securities. The Fund intends to limit
repurchase agreements to institutions believed by LMC to present minimal credit
risk. The Fund will not enter into repurchase agreements maturing in more than
seven days if the aggregate of such repurchase agreements and all other illiquid
securities when taken together would exceed 10% of the total assets of the Fund.
Certain Investment Methods-The Fund may from time to time engage in the
following investment practices:
Settlement Transactions-The Fund may, for a fixed amount of United States
dollars, enter into a foreign exchange contract for the purchase or sale of the
amount of foreign currency involved in the underlying securities transaction. In
so doing, the Fund will attempt to insulate itself against possible losses and
gains resulting from a change in the relationship between the United States
dollar and the foreign currency during the period between the date a security is
purchased or sold and the date on which payment is made or received. This
process is known as "transaction hedging".
To effect the translation of the amount of foreign currencies involved in
the purchase and sale of foreign securities and to effect the "transaction
hedging" described above, the Fund may purchase or sell foreign currencies on a
"spot" (i.e. cash) basis or on a forward basis whereby the Fund purchases or
sells a specific amount of foreign currency, at a price set at the time of the
contract, for receipt or delivery at a specified date which may be any fixed
number of days in the future.
Such spot and forward foreign exchange transactions may also be utilized to
reduce the risk inherent in fluctuations in the exchange rate between the United
States dollar and the relevant foreign currency when foreign securities are
purchased or sold for settlement beyond customary settlement time (as described
below). Neither type of foreign currency transaction will eliminate fluctuations
in the prices of the Fund's portfolio or securities or prevent loss if the price
of such securities should decline.
Portfolio Hedging-When, in the opinion of LMC, it is desirable to limit or
reduce exposure in a foreign currency in order to moderate potential changes in
the United States dollar value of the portfolio, the Fund may enter into a
forward foreign currency exchange contract by which the United States dollar
value of the underlying foreign portfolio securities can be approximately
matched by an equivalent United States dollar liability. The Fund, for hedging
purposes only, may also enter into forward currency exchange contracts to
increase its exposure to a foreign currency that LMC expects to increase in
value relative to the United States dollar. The Fund will not attempt to hedge
all of its portfolio positions and will enter into such transactions only to the
extent, if any, deemed appropriate by LMC. Hedging against a decline in the
value of currency does not eliminate fluctuations in the prices of portfolio
securities or prevent losses if the prices of such securities decline. The Fund
will not enter into forward foreign currency exchange transactions for
speculative purposes. The Fund intends to limit such transactions to not more
than 70% of total Fund assets.
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Forward Commitments-The Fund may make contracts to purchase securities for a
fixed price at a future date beyond customary settlement time ("forward
commitments") because new issues of securities are typically offered to
investors, such as the Fund, on that basis. Forward commitments involve a risk
of loss if the value of the security to be purchased declines prior to the
settlement date. This risk is in addition to the risk of decline in value of the
Fund's other assets. Although the Fund will enter into such contracts with the
intention of acquiring the securities, the Fund may dispose of a commitment
prior to settlement if LMC deems it appropriate to do so. The Fund may realize
short-term profits or losses upon the sale of forward commitments. When the Fund
engages in a forward commitment transaction, the custodian will set aside cash,
U.S. Government securities or other high quality debt obligations equal to the
amount of the commitment in a separate account.
Except as otherwise specifically noted, the Fund's investment objective and
its investment restrictions are fundamental and may not be changed without the
approval of a majority of the outstanding voting securities of the Fund. The
Statement of Additional Information contains a complete description of the
Fund's restrictions and additional information on policies relating to the
investment of its assets and its activities.
Risk Considerations
Investments in emerging market and emerging country equity securities may
involve risks and considerations not present in domestic investments. Since
foreign securities generally are denominated and pay interest or dividends in
foreign currencies, the value of the assets of the Fund as measured in United
States dollars will be affected favorably or unfavorably by changes in the
relationship of the United States dollar and other currencies. The Fund may
incur costs in connection with the conversion or transfer of foreign currencies.
In addition, there may be less publicly available information about foreign
companies than United States companies. Foreign companies may not be subject to
accounting, auditing, and financial reporting standards, practices and
requirements comparable to those applicable to United States companies. Foreign
securities markets, while growing in volume, have for the most part
substantially less volume than United States securities markets and securities
of foreign companies are generally less liquid and at times their prices may be
more volatile than securities of comparable United States companies. Foreign
stock exchanges, brokers and listed companies are generally subject to less
government supervision and regulation than in the United States. The customary
settlement time for foreign securities may be longer than the 5 day customary
settlement time for United States securities. Although the Fund will try to
invest in companies and governments of countries having stable political
environments, there is the possibility of expropriation or confiscatory
taxation, seizure or nationalization or foreign government restrictions or other
adverse political, social or diplomatic developments that could affect
investment in these nations. (See "Risk Considerations" in the Statement of
Additional Information for further information.)
Income from foreign securities held by the Fund may, and in some cases will
be reduced by a withholding tax at the source or other foreign taxes. A
shareholder of the Fund will, subject to certain restrictions, be entitled to
claim a credit or deduction for United States Federal income tax purposes for
the shareholder's pro rata share of such foreign taxes paid by the Fund. (See
"Tax Matters.")
INVESTMENT RESTRICTIONS
The Fund's investment program is subject to a number of investment
restrictions which reflect self imposed standards as well as federal and state
regulatory limitations. These restrictions are designed to minimize certain
risks associated with investing in certain types of securities or engaging in
certain transactions. The most significant of these restrictions provide that:
(1) The Fund will not borrow money, except that (a) the Fund may enter into
certain futures contracts and options related thereto; (b) the Fund may
enter into commitments to purchase securities in accordance with the
Fund's investment program, including delayed delivery and when-issued
securities and reverse repurchase agreements; (c) for temporary
emergency purposes, the Fund may borrow money in amounts not exceeding
5% of the value of its total assets at the time when the loan is made;
(d) The Fund may pledge its portfolio securities or receivables or
transfer or assign or otherwise encumber them in an amount not exceeding
one-third of the value of its total assets; and (e) for purposes of
leveraging, the Fund may borrow money from banks (including its
custodian bank), only if, immediately after such borrowing, the value of
the Fund's assets, including the amount borrowed, less its liabilities,
is equal to at least 300% of the amount borrowed, plus all outstanding
borrowings. If at any time, the value of the Fund's assets fails to meet
the 300% asset coverage requirement relative only to leveraging, the
Fund will, within three days (not including Sundays and holidays),
reduce its borrowings to the extent necessary to meet the 300% test. The
Fund will only invest up to 5% of its total assets in reverse repurchase
agreements.
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(2) The Fund will not make loans, except that, to the extent appropriate
under its investment program, the Fund may (a) purchase bonds,
debentures or other debt securities, including short-term obligations,
(b) enter into repurchase transactions and (c) lend portfolio securities
provided that the value of such loaned securities does not exceed
one-third of the Fund's total assets.
(3) The Fund will not concentrate its investments in any one industry,
except that the Fund may invest up to 25% of its total assets in
securities issued by companies principally engaged in any one industry.
The Fund considers foreign government securities and supranational
organizations to be industries for the purposes of this restriction.
This limitation, however, will not apply to securities issued or
guaranteed by the U.S. Government, its agencies and instrumentalities.
(4) The Fund will not purchase securities of an issuer, if (a) more than 5%
of the Fund's total assets taken at market value would at the time be
invested in the securities of such issuer, except that such restriction
shall not apply to securities issued or guaranteed by the United States
government or its agencies or instrumentalities or, with respect to 25%
of the Fund's total assets, to securities issued or guaranteed by the
government of any country other than the United States which is a member
of the Organization for Economic Cooperation and Development ("OECD").
The member countries of OECD are at present: Australia, Austria,
Belgium, Canada, Denmark, Germany, Finland, France, Greece, Iceland,
Ireland, Italy, Japan, Luxembourg, the Netherlands, New Zealand, Norway,
Portugal, Spain, Sweden, Switzerland, Turkey, the United Kingdom and the
United States; or (b) such purchases would at the time result in more
than 10% of the outstanding voting securities of such issuer being held
by the Fund.
The forgoing investment restrictions (as well as certain others set forth in
the Statement of Additional Information) are matters of fundamental policy which
may not be changed without the affirmative vote of the majority of the
shareholders of the Fund.
The investment policies described below are non-fundamental, therefore,
changes to such policies may be made in the future by the Board of Directors
without the approval of the shareholders of the Fund:
(1) The Fund may purchase and sell futures contracts and related options
under the following conditions: (a) the then-current aggregate futures
market prices of financial instruments required to be delivered and
purchased under open futures contracts shall not exceed 30% of the
Fund's total assets, at market value; and (b) no more than 5% of the
assets, at market value at the time of entering into a contract, shall
be committed to margin deposits in relation to futures contracts.
(2) The Fund will not invest more than 15% of its total assets in illiquid
securities. Illiquid securities are securities that are not readily
marketable or cannot be disposed of promptly within seven days and in
the usual course of business without taking a materially reduced price.
Such securities include, but are not limited to, time deposits and
repurchase agreements with maturities longer than seven days. Securities
that may be resold under Rule 144A or securities offered pursuant to
Section 4(2) of the Securities Act of 1933, as amended, shall not be
deemed illiquid solely by reason of being unregistered. The Investment
Adviser shall determine whether a particular security is deemed to be
liquid based on the trading markets for the specific security and other
factors.
MANAGEMENT OF THE FUND
The Fund has a Board of Directors which establishes the Fund's policies and
supervises and reviews the operations and management of the Fund. Lexington
Management Corporation ("LMC"), P.O. Box 1515, Park 80 West Plaza Two, Saddle
Brook, New Jersey 07663, is the investment adviser of the Fund. For its
investment management services to the Fund, under its investment advisory
agreement, LMC will receive a monthly fee at the annual rate of 0.85% of the
Fund's average daily net assets. LMC has agreed to voluntarily limit the total
expenses of the Fund (excluding interest, taxes, brokerage, and extraordinary
expenses but including management fee and operating expenses) to an annual rate
of 1.75% of the Fund's average net assets through April 30, 1997.
Lexington Funds Distributor, Inc. ("LFD"), a registered broker-dealer, is
the Fund's distributor. LMC also acts as administrator to the Fund and performs
certain administrative and accounting services, including but not limited to,
maintaining general ledger accounts, regulatory compliance, preparation of
financial information for semiannual and annual reports, preparing registration
statements, calculating net asset values, shareholder communications and
supervision of the custodian, transfer agent and provides facilities for such
services. The Fund shall reimburse LMC for its actual cost in providing such
services, facilities and expenses.
From time to time, LMC may pay amounts from its past profits to
participating insurance companies or insurance companies or other financial
institutions that provide administrative services for the Fund or that provide
to contract
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holders other services relating to the Fund. These services may include, among
other things, sub-accounting services, answering inquiries of contract holders
regarding the Fund, transmitting, on behalf of the Fund, proxy statements,
annual reports, updated prospectus and other communications to contract holders
regarding the Fund, and such other related services as the Fund or a contract
holder may request. LMC will not pay more than 0.25% of the average daily net
assets of the Fund represented by shares of the Fund held in the separate
account of any participating insurance company. Payment of such amounts by LMC
will not increase the fees paid by the Fund or its shareholders.
LMC was established in 1938 and currently manages and administers over $3.0
billion in assets. LMC serves as investment adviser to other investment
companies and private and institutional investment accounts. Included among
these clients are persons and organizations that own significant amounts of
capital stock of LMC's parent, Lexington Global Asset Managers, Inc. The clients
pay fees that LMC considers comparable to the fees paid by similarly served
clients.
LMC and LFD are wholly-owned subsidiaries of Lexington Global Asset
Managers, Inc., a Delaware corporation with offices at Park 80 West Plaza Two,
Saddle Brook, New Jersey 07663. Descendants of Lunsford Richardson, Sr., their
spouses, trusts and other related entities are the beneficial owners of a
majority of the shares of Lexington Global Asset Managers, Inc. common stock.
See "Investment Adviser and Distributor" in the Statement of Additional
Information.
Portfolio Manager
The Fund is managed by an investment management team. Richard T. Saler is
the lead manager. Richard T. Saler is Senior Vice President, Director of
International Investment Strategy of LMC. Mr. Saler is responsible for
international investment analysis and portfolio management at LMC. He has ten
years of investment experience. Mr. Saler has focused on international markets
since first joining Lexington in 1986. In 1991 he was an investment strategist
with Nomura Securities and rejoined Lexington in 1992. Mr. Saler is a graduate
of New York University with a B.S. Degree in Marketing and an M.B.A. in Finance
from New York University's Graduate School of Business Administration.
HOW TO PURCHASE AND REDEEM SHARES
With the exception of shares held in connection with initial capital of the
Fund, shares of the Fund are currently available for purchase solely by
insurance companies for the purpose of funding variable annuity contracts and
variable life policies. Shares of the Fund are purchased and redeemed at net
asset value next calculated after a purchase or redemption order is received by
the Fund in good order. There are no minimum investment requirements. Payment
for shares redeemed will be made as soon as possible, but in any event within
three business days after the order for redemption is received by the Fund.
However, payment may be postponed under unusual circumstances, such as when
normal trading is not taking place on the New York Stock Exchange.
DETERMINATION OF NET ASSET VALUE
The net asset value of the shares of the Fund is determined as of the close
of trading on each day the New York Stock Exchange is open, by dividing the
value of the Fund's securities plus any cash and other assets (including accrued
dividends and interest) less all liabilities (including accrued expenses) by the
number of shares outstanding, the result being adjusted to the nearest whole
cent. A security listed or traded on a recognized stock exchange is valued at
the last sale price prior to the time when assets are valued on the principal
exchange on which the security is traded. If no sale is reported at that time,
the mean between the current bid and asked price will be used. However, when LMC
deems it appropriate, prices obtained for the day of valuation from a third
party pricing service will be used. For over the counter securities the mean
between the bid and asked prices is used. Short-term securities having maturity
of 60 days or less are valued at amortized cost when it is determined by the
Fund's Board of Directors that amortized cost reflects the fair value of such
securities. Securities for which market quotations are not readily available and
other assets shall be valued by Fund in good faith Board of Directors.
Generally, trading in foreign securities markets is substantially completed
each day at various times prior to the close of the New York Stock Exchange. The
values of foreign securities used in computing the net asset value of the shares
of the Fund are determined as of the earlier of such market close or the closing
time of the New York Stock Exchange (the "Exchange"). Foreign currency exchange
rates are also generally determined prior to the close of the Exchange.
Occasionally, events affecting the value of such securities and such exchange
rates may occur between the times at which they are determined and the close of
the Exchange, which will not be reflected in the computation of net asset value.
If, during such periods, events occur which materially affect the value of such
securities, the securities will be valued at their fair market value as
determined by the investment adviser and approved in good faith by the
Directors.
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In order to determine net asset value per share, the aggregate value of
portfolio securities is added to the value of the Fund's other assets, such as
cash and receivables; the total of the assets thus obtained, less liabilities,
is then divided by the number of shares outstanding.
PERFORMANCE CALCULATION
The Fund will calculate performance on a total return basis for various
periods. The total return basis combines changes in principal and dividends for
the periods shown. Principal changes are based on the difference between the
beginning and closing net asset value for the period and assumes reinvestment of
dividends paid by the Fund. Dividends are comprised of net investment income and
net realized capital gains, respectively.
Performance will vary from time to time and past results are not necessarily
representative of future results. A shareholder should remember that performance
is a function of portfolio management in selecting the type and quality of
portfolio securities and is affected by operating expenses.
Comparative performance information may be used from time to time in
advertising or marketing of the Fund's shares, including data from Lipper
Analytical Services, Inc. or major market indices such as the Dow Jones
Industrial Average Index, Standard & Poor's 500 Composite Stock Price Index and
Morgan Stanley Capital International World Index. Such comparative performance
information will be stated in the same terms in which the comparative data and
indices are stated. Further information about the Fund's performance is
contained in the annual report, which may be obtained without charge.
DIVIDEND, DISTRIBUTION AND REINVESTMENT POLICY
The Fund intends to declare or distribute a dividend from its net investment
income and/or net capital gain income to shareholders annually or more
frequently if necessary in order to comply with distribution requirements of the
Code to avoid the imposition of regular Federal income tax, and if applicable, a
4% excise tax.
Any dividends and distribution payments will be reinvested at net asset
value, without sales charge, in additional full and fractional shares of the
Fund. Dividend and capital gain distributions are generally not currently
taxable to owners of variable contracts.
TAX MATTERS
The Fund. The Fund intends to qualify as a regulated investment company by
satisfying the requirements under Subchapter M of the Internal Revenue Code of
1986, as amended (the "Code"), concerning the diversification of assets,
distribution of income, and sources of income. When the Fund qualifies as a
regulated investment company and all of its taxable income is distributed in
accordance with the timing requirements imposed by the Code, the Fund will not
be subject to federal income tax. If, however, for any taxable year the Fund
does not qualify as a regulated investment company, then all of its income will
be subject to tax at regular corporate rates (without any deduction for
distributions to the separate accounts of the Participating Insurance Companies
(the "Accounts")), and the receipt of such distributions will be taxable to the
extent that the Fund has current and accumulated earnings and profits.
Fund distributions. Distributions by the Fund are taxable, if at all, to the
Accounts, and not to variable annuity contract holders or variable life
insurance policy holders. An Account will include distributions in its taxable
income in the year in which they are received (whether paid in cash or
reinvested).
Share redemptions. Redemptions of the shares held by the Accounts generally will
not result in gain or loss for the Accounts and will not result in gain or loss
for the variable annuity contract holders or variable life insurance policy
holders.
Summary. The foregoing discussion of federal income tax consequences is based on
tax laws and regulations in effect on the date of this Prospectus, and is
subject to change by legislative or administrative action. The foregoing
discussion also assumes that the Accounts are the owners of the shares and that
the policies or contracts qualify as life insurance policies or annuities,
respectively, under the Code. If the foregoing requirements are not met then the
variable annuity contract holders or variable life insurance policy holders will
be treated as recognizing income (from distributions or otherwise) related to
the ownership of Fund shares. The foregoing discussion is for general
information only; a more detailed discussion of federal income tax
considerations is contained in the Statement of Additional Information. Variable
annuity contract holders or variable life insurance policy holders must consult
the prospectuses of their respective contracts or policies for information
concerning the federal income tax consequences of owning such contracts or
policies.
8
<PAGE>
ORGANIZATION AND DESCRIPTION OF COMMON STOCK
The Company is an open-end, diversified management investment company
organized as a corporation under the laws of the State of Maryland on December
27, 1993, and has authorized capital of 1,000,000,000 shares of common stock,
par value $.001 of which 500,000,000 have been designated Lexington Emerging
Markets Fund Series. Each share of common stock has one vote and shares equally
in dividends and distributions when and if declared by the Company and in the
Company's net assets upon liquidation. All shares, when issued, are fully paid
and non-assessable. There are no preemptive, conversion or exchange rights. Fund
shares do not have cumulative voting rights and, as such, holders of at least
50% of the shares voting for Directors can elect all Directors and the remaining
shareholders would not be able to elect any Directors.
Voting Rights
Shareholders of the Fund are given certain voting rights. Each share of the
Fund will be given one vote. Participating insurance companies provide variable
annuity contracts holders and variable life insurance policy holders the right
to direct the voting of Fund shares at shareholder meetings to the extent
required by law. See the Separate Account Prospectus for the Variable Annuity
Contract or Variable Life Insurance Policy Section for more information
regarding the pass through of these voting rights.
The Fund will not normally hold annual shareholder meetings except as
required by Maryland General Corporation Law or the Investment Company Act of
1940. However, meetings of shareholders may be called at any time by the
Secretary upon the written request of shareholders holding in the aggregate not
less than 10% of the outstanding shares, such request specifying the purposes
for which such meeting is to be called. In addition, the Directors will promptly
call a meeting of shareholders for the purpose of voting upon the question of
removal of any Director when requested to do so in writing by the recordholders
of not less than 10% of the Fund's outstanding shares. The Fund will assist
shareholders in any such communication between shareholders and Directors.
CUSTODIAN, TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
Chase Manhattan Bank, N.A., 1211 Avenue of the Americas, New York, New York
10036 has been retained to act as custodian for the Fund's portfolio securities
including those to be held by foreign banks and foreign securities depositories
that qualify as eligible foreign custodians under the rules adopted by the SEC
and for the Fund's domestic securities and other assets. State Street Bank and
Trust Company, c/o National Financial Data Services, 1004 Baltimore, Kansas
City, Missouri 64105, has been retained to act as the transfer agent and
dividend disbursing agent for the Fund. Neither Chase Manhattan Bank, N.A. nor
State Street Bank and Trust Company have any part in determining the investment
policies of the Fund or in determining which portfolio securities are to be
purchased or sold by the Fund or in the declaration of dividends and
distributions.
COUNSEL AND INDEPENDENT AUDITORS
Kramer, Levin, Naftalis, Nessen, Kamin & Frankel, 919 Third Avenue, New
York, New York 10022 will pass upon legal matters for the Fund in connection
with the shares offered by this Prospectus. KPMG Peat Marwick LLP, 345 Park
Avenue, New York, New York 10154, has been selected as independent auditors for
the Fund for the fiscal year ending December 31, 1996.
OTHER INFORMATION
This prospectus omits certain information contained in the registration
statement filed with the SEC. Copies of the registration statement, including
items omitted herein, may be obtained from the SEC by paying the charges
prescribed under its rules and regulations. The Statement of Additional
Information included in such registration statement may be obtained without
charge from the Fund.
No person has been authorized to give any information or to make any
representation other than those contained in this Prospectus, and information or
representations not herein contained, if given or made, must not be relied upon
as having been authorized by the Fund. This Prospectus does not constitute an
offer or solicitation in any jurisdiction in which such offering may not
lawfully be made.
9
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(Right column)
L E X I N G T O N
LEXINGTON
EMERGING
MARKETS
FUND, INC.
(filled box)
P R O S P E C T U S
APRIL 29, 1996
--------------
(Left column)
Investment Adviser
- ----------------------------------------------------
LEXINGTON MANAGEMENT CORPORATION
P.O. Box 1515/Park 80 West Plaza Two
Saddle Brook, N.J. 07663
Distributor
- ----------------------------------------------------
LEXINGTON FUNDS DISTRIBUTOR, INC.
P.O. Box 1515/Park 80 West Plaza Two
Saddle Brook, N.J. 07663
Transfer Agent
- ----------------------------------------------------
STATE STREET BANK AND TRUST COMPANY
c/o National Financial Data Services
Lexington Funds
1004 Baltimore
Kansas City, Missouri 64105
Table of Contents Page
- ----------------------------------------------------
Financial Highlights ............................ 2
Description of the Fund ......................... 2
Investment Objective and Policies ............... 2
Investment Restrictions ......................... 5
Management of the Fund .......................... 6
Portfolio Manager ............................. 7
How to Purchase and Redeem Shares ............... 7
Determination of Net Asset Value ................ 7
Performance Calculation ......................... 8
Dividend, Distribution and Reinvestment Policy .. 8
Tax Matters ..................................... 8
Organization and Description of Common Stock .... 9
Custodian, Transfer Agent and
Dividend Disbursing Agent ..................... 9
Counsel and Independent Auditors ................ 9
Other Information ............................... 9
<PAGE>
LEXINGTON EMERGING MARKETS FUND, INC.
STATEMENT OF ADDITIONAL INFORMATION
April 29, 1996
This Statement of Additional Information which is not a prospectus, should
be read in conjunction with the current prospectus of Lexington Emerging Markets
Fund, Inc. (the "Fund"), dated April 29, 1996 and as it may be revised from time
to time. To obtain a copy of the Fund's prospectus at no charge, please write to
the Fund at P.O. Box 1515/Park 80 West - Plaza Two, Saddle Brook, New Jersey
07663 or call the following number: 201-845-7300.
Lexington Management Corporation is the Fund's investment adviser. Lexington
Funds Distributor, Inc. is the Fund's distributor.
TABLE OF CONTENTS
Investment Objective and Policies ......................................... 2
Risk Considerations ....................................................... 3
Investment Restrictions ................................................... 4
Management of the Fund .................................................... 6
Investment Adviser, Distributor and Administrator ......................... 8
Portfolio Transactions and Brokerage Commissions .......................... 9
Determination of Net Asset Value .......................................... 10
Tax Matters ............................................................... 10
Performance Calculation ................................................... 10
Other Information ......................................................... 11
Financial Statements ...................................................... 12
1
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
For a full description of the Fund's investment objective and policies, see
the Prospectus under "Investment Objective and Policies".
CERTAIN INVESTMENT METHODS
Settlement Transactions-When the Fund enters into contracts for purchase or sale
of a portfolio security denominated in a foreign currency, it may be required to
settle a purchase transaction in the relevant foreign currency or receive the
proceeds of a sale in that currency. In either event, the Fund will be obligated
to acquire or dispose of such foreign currency as is represented by the
transaction by selling or buying an equivalent amount of United States dollars.
Furthermore, the Fund may wish to "lock in" the United States dollar value of
the transaction at or near the time of a purchase or sale of portfolio
securities at the exchange rate or rates then prevailing between the United
States dollar and the currency in which the foreign security is denominated.
Therefore, the Fund may, for a fixed amount of United States dollars, enter into
a forward foreign exchange contract for the purchase or sale of the amount of
foreign currency involved in the underlying securities transaction. In so doing,
the Fund will attempt to insulate itself against possible losses and gains
resulting from a change in the relationship between the United States dollar and
the foreign currency during the period between the date a security is purchased
or sold and the date on which payment is made or received. This process is known
as "transaction hedging".
To effect the translation of the amount of foreign currencies involved in
the purchase and sale of foreign securities and to effect the "transaction
hedging" described above, the Fund may purchase or sell foreign currencies on a
"spot" (i.e. cash) basis or on a forward basis whereby the Fund purchases or
sells a specific amount of foreign currency, at a price set at the time of the
contract, for receipt of delivery at a specified date which may be any fixed
number of days in the future.
Such spot and forward foreign exchange transactions may also be utilized to
reduce the risk inherent in fluctuations in the exchange rate between the United
States dollar and the relevant foreign dollar and the relevant foreign currency
when foreign securities are purchased or sold for settlement beyond customary
settlement time (as described below). Neither type of foreign currency
transaction will eliminate fluctuations in the prices of the Fund's portfolio or
securities or prevent loss if the price of such securities should decline.
Portfolio Hedging-Some or all of the Fund's portfolio will be denominated in
foreign currencies. As a result, in addition to the risk of change in the market
value of portfolio securities, the value of the portfolio in United States
dollars is subject to fluctuations in the exchange rate between such foreign
currencies and the United States dollar. When, in the opinion of LMC, it is
desirable to limit or reduce exposure in a foreign currency in order to moderate
potential changes in the United States dollar value of the portfolio, the Fund
may enter into a forward foreign currency exchange contract by which the United
States dollar value of the underlying foreign portfolio securities can be
approximately matched by an equivalent United States dollar liability. This
technique is known as "portfolio hedging" and moderates or reduces the risk of
change in the United States dollar value of the Fund's portfolio only during the
period before the maturity of the forward contract (which will not be in excess
of one year). The Fund, for hedging purposes only, may also enter into forward
foreign currency exchange contracts to increase its exposure to a foreign
currency that the Fund's investment adviser expects to increase in value
relative to the United States dollar. The Fund will not attempt to hedge all of
its foreign portfolio positions and will enter into such transactions only to
the extent, if any, deemed appropriate by the investment adviser. Hedging
against a decline in the value of currency does not eliminate fluctuations in
the prices of portfolio securities or prevent losses if the prices of such
securities decline. The Fund will not enter into forward foreign currency
exchange transactions for speculative purposes. The Fund intends to limit
transactions as described in this paragraph to not more than 70% of the total
Fund assets.
Forward Commitments-The Fund may make contracts to purchase securities for a
fixed price at a future date beyond customary settlement time ("forward
commitments") because new issues of securities are typically offered to
investors, such as the Fund, on that basis. Forward commitments involve a risk
of loss if the value of the security to be purchased declines prior to the
settlement date. This risk is in addition to the risk of decline in value of the
Fund's other assets. Although the Fund will enter into such contracts with the
intention of acquiring the securities, the Fund may dispose of a commitment
prior to settlement if the investment adviser deems it appropriate to do so. The
Fund may realize short-term profits or losses upon the sale of forward
commitments.
Covered Call Options-Call options may also be used as a means of participating
in an anticipated price increase of a security on a more limited basis than
would be possible if the security itself were purchased. The Fund may write only
covered call options. Since it can be expected that a call option will be
exercised if the market value of the underlying
2
<PAGE>
security increases to a level greater than the exercise price, this strategy
will generally be used when the investment adviser believes that the call
premium received by the Fund plus anticipated appreciation in the price of the
underlying security, up to the exercise price of the call, will be greater than
the appreciation in the price of the security. The Fund intends to limit
transactions as described in this paragraph to less than 5% of total Fund
assets. The Fund will not purchase put and call options written by others. Also,
the Fund will not write any put options.
RISK CONSIDERATIONS
Investors should recognize that investing in securities of companies in
emerging markets and emerging countries involves certain risk considerations,
including those set forth below, which are not typically associated with
investing in securities of U.S.
companies.
Foreign Currency Considerations
The Fund's assets will be invested in securities of companies in emerging
markets and emerging countries and substantially all income will be received by
the Fund in foreign currencies. However, the Fund will compute and distribute
its income in dollars, and the computation of income will be made on the date of
its receipt by the Fund at the foreign exchange rate in effect on that date.
Therefore, if the value of the foreign currencies in which the Fund receives its
income falls relative to the dollar between receipt of the income and the making
of Fund distributions, the Fund will be required to liquidate securities in
order to make distributions if the Fund has insufficient cash in dollars to meet
distribution requirements.
The value of the assets of the Fund as measured in dollars also may be
affected favorably or unfavorably by fluctuations in currency rates and exchange
control regulations. Further, the Fund may incur costs in connection with
conversions between various currencies. Foreign exchange dealers realize a
profit based on the difference between the prices at which they are buying and
selling various currencies. Thus, a dealer normally will offer to sell a foreign
currency to the Fund at one rate, while offering a lesser rate of exchange
should the Fund desire immediately to resell that currency to the dealer. The
Fund will conduct its foreign currency exchange transactions either on a spot
(i.e., cash) basis at the spot rate prevailing in the foreign currency exchange
market, or through entering into forward or futures contracts to purchase or
sell foreign currencies.
Investment and Repatriation Restrictions
Some emerging countries have laws and regulations which currently preclude
direct foreign investment in the securities of their companies. However,
indirect foreign investment in the securities of companies listed and traded on
the stock exchanges in these countries is permitted by certain emerging
countries through investment funds which have been specifically authorized. The
Fund may invest in these investment funds subject to the provisions of the 1940
Act as discussed below under "Investment Restrictions". If the Fund invests in
such investment funds, the Fund's shareholders will bear not only their
proportionate share of the expenses of the Fund (including operating expenses
and the fees of the Investment Manager), but also will bear indirectly similar
expenses of the underlying investment funds.
In addition to the foregoing investment restrictions, prior governmental
approval for foreign investments may be required under certain circumstances in
some emerging countries, while the extent of foreign investment in domestic
companies may be subject to limitation in other emerging countries. Foreign
ownership limitations also may be imposed by the charters of individual
companies in emerging countries to prevent, among other concerns, violation of
foreign investment limitations.
Repatriation of investment income, capital and the proceeds of sales by
foreign investors may require governmental registration and/or approval in some
emerging countries. The Fund could be adversely affected by delays in or a
refusal to grant any required governmental approval for such repatriation.
Emerging Country and Emerging Market Securities Markets
Trading volume on emerging country stock exchanges is substantially less
than that on the New York Stock Exchange. Further, securities of some emerging
country or emerging market companies are less liquid and more volatile than
securities of comparable U.S. companies. Similarly, volume and liquidity in most
emerging country bond markets is substantially less than in the U.S. and,
consequently, volatility of price can be greater than in the U.S. Fixed
commissions on emerging country stock or emerging market exchanges are generally
higher than negotiated commissions on U.S. exchanges, although the Fund
endeavors to achieve the most favorable net results on its portfolio
transactions and may be able to purchase the securities in which the Fund may
invest on other stock exchanges where commissions are negotiable.
3
<PAGE>
Companies in emerging countries are not generally subject to uniform
accounting, auditing and financial reporting standards, practices and disclosure
requirements comparable to those applicable to U.S. companies. Consequently,
there may be less publicly available information about an emerging country
company than about a U.S. company. Further, there is generally less governmental
supervision and regulation of foreign stock exchanges, brokers and listed
companies than in the U.S.
Economic and Political Risks
The economies of individual emerging countries may differ favorably or
unfavorably from the U.S. economy in such respects as growth of gross domestic
product, rate of inflation, capital reinvestment, resource self-sufficiency and
balance of payments position. Further, the economies of developing countries
generally are heavily dependent upon international trade and, accordingly, have
been and may continue to be adversely affected by trade barriers, managed
adjustments in relative currency values and other protectionist measures imposed
or negotiated by the countries with which they trade. These economies also have
been and may continue to be adversely affected by economic conditions in the
countries with which they trade.
With respect to any emerging country, there is the possibility of
nationalization, expropriation or confiscatory taxation, political changes,
government regulation, social instability or diplomatic developments (including
war) which could affect adversely the economies of such countries or the Fund's
investments in those countries. In addition, it may be more difficult to obtain
a judgement in a court outside of the United States.
INVESTMENT RESTRICTIONS
The Fund's investment objective, as described under "investment policy" and
the following investment restrictions are matters or fundamental policy which
may not be changed without the affirmative vote of the lesser of (a) 67% or more
of the shares of the Fund present at a shareholders' meeting at which more than
50% of the outstanding shares are present or represented by proxy or (b) more
than 50% of the outstanding shares. Under these investment restrictions:
(1) The Fund will not issue any senior security (as defined in the 1940
Act), except that (a) the Fund may enter into commitments to purchase
securities in accordance with the Fund's investment program, including
reverse repurchase agreements, foreign exchange contracts, delayed
delivery and when-issued securities, which may be considered the
issuance of senior securities; (b) the Fund may engage in transactions
that may result in the issuance of a senior security to the extent
permitted under applicable regulations, interpretation of the 1940 Act
or an exemptive order; (c) the Fund may engage in short sales of
securities to the extent permitted in its investment program and other
restrictions; (d) the purchase or sale of futures contracts and related
options shall not be considered to involve the issuance of senior
securities; and (e) subject to fundamental restrictions, the Fund may
borrow money as authorized by the 1940 Act.
(2) The Fund will not borrow money, except that (a) the Fund may enter into
certain futures contracts and options related thereto; (b) the Fund may
enter into commitments to purchase securities in accordance with the
Fund's investment program, including delayed delivery and when-issued
securities and reverse repurchase agreements; (c) for temporary
emergency purposes, the Fund may borrow money in amounts not exceeding
5% of the value of its total assets at the time when the loan is made;
(d) The Fund may pledge its portfolio securities or receivables or
transfer or assign or otherwise encumber them in an amount not exceeding
one-third of the value of its total assets; and (e) for purposes of
leveraging, the Fund may borrow money from banks (including its
custodian bank), only if, immediately after such borrowing, the value of
the Fund's assets, including the amount borrowed, less its liabilities,
is equal to at least 300% of the amount borrowed, plus all outstanding
borrowings. If at any time, the value of the Fund's assets fails to meet
the 300% asset coverage requirement relative only to leveraging, the
Fund will, within three days (not including Sundays and holidays),
reduce its borrowings to the extent necessary to meet the 300% test. The
Fund will only invest up to 5% of its total assets in reverse repurchase
agreements.
(3) The Fund will not act as an underwriter of securities except to the
extent that, in connection with the disposition of portfolio securities
by the Fund, the Fund may be deemed to be an underwriter under the
provisions of the 1933 Act.
(4) The Fund will not purchase real estate, interests in real estate or real
estate limited partnership interests except that, to the extent
appropriate under its investment program, the Fund may invest in
securities secured by real estate or interests therein or issued by
companies, including real estate investment trusts, which deal in real
estate or interests therein.
(5) The Fund will not make loans, except that, to the extent appropriate
under its investment program, the Fund may (a) purchase bonds,
debentures or other debt securities, including short-term obligations,
(b) enter into
4
<PAGE>
repurchase transactions and (c) lend portfolio securities provided that
the value of such loaned securities does not exceed one-third of the
Fund's total assets.
(6) The Fund will not invest in commodity contracts, except that the Fund
may, to the extent appropriate under its investment program, purchase
securities of companies engaged in such activities, may enter into
transactions in financial and index futures contracts and related
options, may engage in transactions on a when-issued or forward
commitment basis, and may enter into forward currency contracts.
(7) The Fund will not concentrate its investments in any one industry,
except that the Fund may invest up to 25% of its total assets in
securities issued by companies principally engaged in any one industry.
The Fund considers foreign government securities and supranational
organizations to be industries for the purposes of this restriction.
This limitation, however, will not apply to securities issued or
guaranteed by the U.S. Government, its agencies and instrumentalities.
(8) The Fund will not purchase securities of an issuer, if (a) more than 5%
of the Fund's total assets taken at market value would at the time be
invested in the securities of such issuer, except that such restriction
shall not apply to securities issued or guaranteed by the United States
government or its agencies or instrumentalities or, with respect to 25%
of the Fund's total assets, to securities issued or guaranteed by the
government of any country other than the United States which is a member
of the Organization for Economic Cooperation and Development ("OECD").
The member countries of OECD are at present: Australia, Austria,
Belgium, Canada, Denmark, Germany, Finland, France, Greece, Iceland,
Ireland, Italy, Japan, Luxembourg, the Netherlands, New Zealand, Norway,
Portugal, Spain, Sweden, Switzerland, Turkey, the United Kingdom and the
United States; or (b) such purchases would at the time result in more
than 10% of the outstanding voting securities of such issuer being held
by the Fund.
In addition to the above fundamental restrictions, the Fund has undertaken
the following non fundamental restrictions, which may be changed in the future
by the Board of Directors, without a vote of the shareholders of the Fund:
(1) The Fund will not participate on a joint or joint-and-several basis in
any securities trading account. The "bunching" of orders for the sale or
purchase of marketable portfolio securities with other accounts under
the management of the investment adviser to save commissions or to
average prices among them is not deemed to result in a securities
trading account.
(2) The Fund may purchase and sell futures contracts and related options
under the following conditions: (a) the then-current aggregate futures
market prices of financial instruments required to be delivered and
purchased under open futures contracts shall not exceed 30% of the
Fund's total assets, at market value; and (b) no more than 5% of the
assets, at market value at the time of entering into a contract, shall
be committed to margin deposits in relation to futures contracts.
(3) The Fund will not make short sales of securities, other than short sales
"against the box," or purchase securities on margin except for
short-term credits necessary for clearance of portfolio transactions,
provided that this restriction will not be applied to limit the use of
options, futures contracts and related options, in the manner otherwise
permitted by the investment restrictions, policies and investment
programs of the Fund.
(4) The Fund will not purchase securities of an issuer if to the Fund's
knowledge, one or more of the Directors or officers of the Fund or LMC
individually owns beneficially more than 0.5% and together own
beneficially more than 5% of the securities of such issuer nor will the
Fund hold the securities of such issuer.
(5) The Fund will not purchase the securities of any other investment
company, except as permitted under the 1940 Act.
(6) The Fund will not, except for investments which, in the aggregate, do
not exceed 5% of the Fund's total assets taken at market value, purchase
securities unless the issuer thereof or any company on whose credit the
purchase was based has a record of at least three years continuous
operations prior to the purchase.
(7) The Fund will not invest for the purpose of exercising control over or
management of any company.
(8) The Fund will not purchase warrants except in units with other
securities in original issuance thereof or attached to other securities,
if at the time of the purchase, the Fund's investment in warrants,
valued at the lower of cost or market, would exceed 5% of the Fund's
total assets. Warrants which are not listed on a United States
securities exchange shall not exceed 2% of the Fund's net assets. For
these purposes, warrants attached to units or other securities shall be
deemed to be without value.
(9) The Fund will not invest more than 15% of its total assets in illiquid
securities. Illiquid securities are securities that are not readily
marketable or cannot be disposed of promptly within seven days and in
the usual course of
5
<PAGE>
business without taking a materially reduced price. Such securities
include, but are not limited to, time deposits and repurchase agreements
with maturities longer than seven days. Securities that may be resold
under Rule 144A or securities offered pursuant to Section 4(2) of the
Securities Act of 1933, as amended, shall not be deemed illiquid solely
by reason of being unregistered. The Investment Adviser shall determine
whether a particular security is deemed to be liquid based on the
trading markets for the specific security and other factors.
(10) The Fund will not purchase interests in oil, gas, mineral leases or
other exploration programs; however, this policy will not prohibit the
acquisition of securities of companies engaged in the production or
transmission of oil, gas or other materials.
The percentage restrictions referred to above are to be adhered to at the
time of investment and are not applicable to a later increase or decrease in
percentage beyond the specified limit resulting from change in values or net
assets.
MANAGEMENT OF THE FUND
The Directors and executive officers of the Fund and their principal
occupations are set forth below:
*+ROBERT M. DEMICHELE, President and Director. P.O. Box 1515, Saddle Brook, N.J.
07663. Chairman and Chief Executive Officer, Lexington Management Corporation;
Chairman and Chief Executive Officer, Lexington Funds Distributor, Inc.;
President and Director, Lexington Global Asset Managers, Inc.; Director,
Unione Italiana Reinsurance; Vice Chairman of the Board of Trustees, Union
College; Director, The Navigator's Group, Inc.; Chairman, Lexington Capital
Management, Inc.; Chairman, LCM Financial Services, Inc.; Director, Vanguard
Cellular Systems, Inc.; Chairman of the Board, Market System Research, Inc.
and Market Systems Research Advisors, Inc. (registered investment advisers);
Trustee, Smith Richardson Foundation.
+BEVERLEY C. DUER, Director. 340 East 72nd Street, New York, N.Y. 10021.
Private Investor. Formerly, Manager of Operations Research Department-CPC
International, Inc.
*+BARBARA R. EVANS, Director. 5 Fernwood Road, Summit, N.J. 07901. Private
Investor. Prior to May, 1989, Assistant Vice President and Securities Analyst,
Lexington Management Corporation; prior to March 1987, Vice
President-Institutional Equity Sales, L.F. Rothschild, Unterberg, Towbin.
*+LAWRENCE KANTOR, Vice President and Director. P.O. Box 1515, Saddle Brook,
N.J. 07663. Managing Director, Executive Vice President and Director,
Lexington Management Corporation; Executive Vice President and Director,
Lexington Funds Distributor, Inc.; Executive Vice President and General
Manager-Mutual Funds, Lexington Global Asset Managers, Inc.
+DONALD B. MILLER, Director. 10725 Quail Covey Road, Boynton Beach, FL 33436.
Chairman, Horizon Media, Inc.; Trustee, Galaxy Funds; Director, Maguire Group
of Connecticut; prior to January 1989, President, Director and C.E.O., Media
General Broadcast Services (advertising firm).
+JOHN G. PRESTON, Director. 3 Woodfield Road, Wellesley, Massachusetts 02181.
Associate Professor of Finance, Boston College, Boston, Massachusetts.
+MARGARET RUSSELL, Director. 55 North Mountain Avenue, Montclair, N.J. 07042.
Private Investor. Formerly, Community Affairs Director, Union Camp
Corporation.
+PHILIP C. SMITH, Director. 87 Lord's Highway, Weston, Connecticut 06883.
Private Investor; Director, Southwest Investors Income Fund, Inc., Government
Income Fund, Inc., U.S. Trend Fund, Inc., Investors Cash Reserve and Plimony
Fund, Inc. (registered investment companies).
+FRANCIS A. SUNDERLAND, Director. 309 Quito Place, Castle Pines, Castle Rock,
Colorado. 80104. Private Investor.
*+LISA CURCIO, Vice President and Secretary. P.O. Box 1515, Saddle Brook, N.J.
07663. Senior Vice President and Secretary, Lexington Management Corporation;
Vice President and Secretary, Lexington Funds Distributor, Inc.; Secretary,
Lexington Global Asset Managers, Inc.
*+RICHARD T. SALER, Vice President and Portfolio Manager. P.O. Box 1515, Saddle
Brook, N.J. 07663. Senior Vice President, Director International Investment
Strategy, Lexington Management Corporation. Prior to July, 1992, Securities
Analyst, Nomura Securities, Inc. Prior to November, 1991, Vice President,
Lexington Management Corporation.
*+RICHARD M. HISEY, Vice President and Treasurer. P.O. Box 1515, Saddle Brook,
N.J. 07663. Managing Director, Director and Chief Financial Officer, Lexington
Management Corporation; Chief Financial Officer, Vice President and Director,
Lexington Funds Distributor, Inc.; Chief Financial Officer, Market Systems
Research Advisors, Inc.; Executive Vice President and Chief Financial Officer,
Lexington Global Asset Managers, Inc.
6
<PAGE>
*+RICHARD LAVERY, CLU ChFC, Vice President. P.O. Box 1515, Saddle Brook, N.J.
07663. Senior Vice President, Lexington Management Corporation; Vice
President, Lexington Funds Distributor, Inc.
*+JANICE CARNICELLI, Vice President. P.O. Box 1515, Saddle Brook, N.J. 07663.
*+CHRISTIE CARR, Assistant Treasurer. P.O. Box 1515, Saddle Brook, N.J. 07663.
Prior to October 1992, Senior Accountant, KPMG Peat Marwick LLP.
*+SIOBHAN GILFILLAN, Assistant Treasurer. P.O. Box 1515, Saddle Brook, N.J.
07663.
*+THOMAS LUEHS, Assistant Treasurer. P.O. Box 1515, Saddle Brook, N.J. 07663.
Prior to November 1993, Supervisor of Investment Accounting, Alliance Capital
Management.
*+ANDREW PETRUSKI, Assistant Treasurer. P.O. Box 1515, Saddle Brook, N.J. 07663.
Prior to May 1994, Supervising Senior Accountant, NY Life Securities. Prior to
December 1990, Senior Accountant, Dreyfus Corporation.
*+SHERI MOSCA, Assistant Treasurer. P.O. Box 1515, Saddle Brook, N.J. 07663.
*+PETER CORNIOTES, Assistant Secretary. P.O. Box 1515, Saddle Brook, N.J. 07663,
Assistant Vice President and Assistant Secretary, Lexington Management
Corporation. Assistant Secretary, Lexington Funds Distributor, Inc.
*+ENRIQUE J. FAUST, Assistant Secretary. P.O. Box 1515, Saddle Brook, N.J.
07663. Prior to March 1994, Blue Sky Compliance Coordinator, Lexington Group
of Investment Companies.
*"Interested person" and/or "Affiliated person" of LMC as defined in the
Investment Company Act of 1940, as amended.
The Board of Directors met 5 times during the twelve months ended December
31, 1995, and each of the Directors attended at least 75% of those meetings.
Remuneration of Directors and Certain Executive Officers:
Each Director is reimbursed for expenses incurred in attending each meeting
of the Board of Director or any committee thereof. Each Director who is not an
affiliate of the advisor is compensated for his or her services according to a
fee schedule which recognizes the fact that each Director also serves as a
Director of other investment companies advised by LMC. Each Director receives a
fee, allocated among all investment companies for which the Director serves.
Effective September 12, 1995 each Director receives annual compensation of
$24,000. Prior to September 12, 1995, the director who were not employed by the
Fund or its affiliates received annual compensation of $16,000.
Set forth below is information regarding compensation paid or accrued during
the period January 1, 1995 to December 31, 1995 for each Director:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
Aggregate Total Compensation Number of
Name of Director Compensation from From Fund and Directorships in
Fund Fund Complex Fund Complex
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Robert M. DeMichele 0 0 15
- -----------------------------------------------------------------------------------------
Beverely C. Duer $1,456 $22,616 15
- -----------------------------------------------------------------------------------------
Barbara R. Evans 0 0 14
- -----------------------------------------------------------------------------------------
Lawrence Kantor 0 0 15
- -----------------------------------------------------------------------------------------
Donald B. Miller $1,456 $20,616 14
- -----------------------------------------------------------------------------------------
John G. Preston $1,456 $20,616 14
- -----------------------------------------------------------------------------------------
Margaret Russell $1,456 $19,560 13
- -----------------------------------------------------------------------------------------
Philip C. Smith $1,456 $20,616 14
- -----------------------------------------------------------------------------------------
Francis A. Sunderland $1,456 $19,560 13
- -----------------------------------------------------------------------------------------
</TABLE>
Retirement Plan for Eligible Directors/Trustees
Effective September 12, 1995, the Directors instituted a Retirement Plan for
Eligible Directors/Trustees (the "Plan") pursuant to which each Director/Trustee
(who is not an employee of any of the Funds, the Advisor, Administrator or
7
<PAGE>
Distributor or any of their affiliates) may be entitled to certain benefits upon
retirement from the Board. Pursuant to the Plan, the normal retirement date is
the date on which the eligible Director/Trustee has attained age 65 and has
completed at least ten years of continuous and non-forfeited service with one or
more of the investment companies advised by LMC (or its affiliates)
(collectively, the "Covered Funds"). Each eligible Director/Trustee is entitled
to receive from the Covered Fund an annual benefit commencing on the first day
of the calendar quarter coincident with or next following his date of retirement
equal to 5% of his compensation multiplied by the number of such
Director/Trustee's years of service (not in excess of 15 years) completed with
respect to any of the Covered Portfolios. Such benefit is payable to each
eligible Director in quarterly installments for ten years following the date of
retirement or the life of the Director/Trustee. The Plan establishes age 72 as a
mandatory retirement age for Directors/Trustees; however, Director/Trustees
serving the Funds as of September 12, 1995 are not subject to such mandatory
retirement. Directors/Trustees serving the Funds as of September 12, 1995 who
elect retirement under the Plan prior to September 12, 1996 will receive an
annual retirement benefit at any increased compensation level if compensation is
increased prior to September 12, 1997 and receive spousal benefits (i.e., in the
event the Director/Trustee dies prior to receiving full benefits under the Plan,
the Director/Trustee's spouse (if any) will be entitled to receive the
retirement benefit within the 10 year period.)
Retiring Directors will be eligible to serve as Honorary Directors for one
year after retirement and will be entitled to be reimbursed for travel expenses
to attend a maximum of two meetings.
Set forth in the table below are the estimated annual benefits payable to an
eligible Director upon retirement assuming various compensation and years of
service classifications. As of December 31, 1995, the estimated credited years
of service for Messrs. Duer, Miller, Preston, Russell, Smith and Sunderland are
18, 22, 18, 15, 26 and 36, respectively.
Highest Annual Compensation Paid by All Funds
20,000 25,000 30,000 35,000
Years of
Service Estimated Annual Benefit Upon Retirement
------- ----------------------------------------
15 15,000 18,750 22,500 26,250
14 14,000 17,500 21,000 24,500
13 13,000 16,250 19,500 22,750
12 12,000 15,000 18,000 21,000
11 11,000 13,750 16,500 19,250
10 10,000 12,500 15,000 17,500
INVESTMENT ADVISER, DISTRIBUTOR AND ADMINISTRATOR
Lexington Management Corporation ("LMC"), P.O. Box 1515, Saddle Brook, New
Jersey 07663 is the investment adviser to the Fund pursuant to an Investment
Advisory Agreement dated January 25, 1994, (the "Advisory Agreement"). Lexington
Funds Distributor, Inc. ("LFD") is the distributor of Fund shares pursuant to a
Distribution Agreement dated December 5, 1994 (the "Distribution Agreement").
Both of these agreements were approved by the Fund's Board of Directors
(including a majority of the Directors who were not parties to either the
Advisory Agreement or the Distribution Agreement or "interested persons" of any
such party) on December 6, 1994. LMC makes recommendations to the Fund with
respect to its investments and investment policies.
LMC also acts as administrator to the Fund and performs certain
administrative and accounting services, including but not limited to,
maintaining general ledger accounts, regulatory compliance, preparation of
financial information for semi-annual and annual reports, preparing registration
statements, calculating net asset values, shareholder communications and
supervision of the custodian, transfer agent and provides facilities for such
services. The Fund shall reimburse LMC for its actual cost in providing such
services, facilities and expenses.
For its investment management services to the Fund, under its Advisory
Agreement, LMC will receive a monthly fee at the annual rate of 0.85% of the
Fund's average daily net assets. LMC has voluntarily agreed to limit the total
expenses of the Fund (excluding interest, taxes, brokerage, and extraordinary
expenses but including management fee and operating expenses) to an annual rate
of 1.75% of the Fund's average net assets through April 30, 1997. Currently, the
most restrictive of expense limitations imposed by the securities laws or
regulations of those states or other jurisdictions in which the Fund's shares
are registered or qualified for sale would require LMC to reduce its fee so that
ordinary expenses (excluding interest, taxes, brokerage commissions and
extraordinary expenses) for any fiscal year
8
<PAGE>
do not exceed 2.5% of the first $30 million of the Fund's average daily net
assets, plus 2.0% of the next $70 million, plus 1.5% of the Fund's average daily
net assets in excess of $100 million. LFD pays the advertising and sales
expenses of the continuous offering of Fund shares, including the cost of
printing prospectuses, proxies and shareholder reports for persons other than
existing shareholders. The Fund furnishes LFD, at printer's overrun cost paid by
LFD, such copies of its prospectus and annual, semi-annual and other reports and
shareholder communications as may reasonably be required for sales purposes. For
the year ended December 31, 1995, the Fund paid LMC $53,143 in investment
advisory fees and LMC reimbursed the Fund $173,670. For the year ended December
31, 1994, the Fund paid LMC $17,532 in investment advisory fees and LMC
reimbursed the Fund $102,954.
The Advisory Agreement, the Distribution Agreement and the Administrative
Services Agreement are subject to annual approval by the Fund's Board of
Directors and by the affirmative vote, cast in person at a meeting called for
such purpose, of a majority of the Directors who are not parties either to the
Advisory Agreement or the Distribution Agreement, as the case may be, or
"interested persons" of any such party. Either the Fund or LMC may terminate the
Advisory Agreement and the Fund or LFD may terminate the Distribution Agreement
on 60 days' written notice without penalty. The Advisory Agreement terminates
automatically in the event of assignment, as defined in the Investment Company
Act of 1940.
LMC shall not be liable to the Fund or its shareholders for any act or
omission by LMC, its officers, directors or employees or any loss sustained by
the Fund or its shareholders except in the case of willful misfeasance, bad
faith, gross negligence or reckless disregard of duty.
LMC and LFD are wholly owned subsidiaries of Lexington Global Asset
Managers, Inc., a publicly traded corporation. Descendants of Lunsford
Richardson, Sr., their spouses, trusts and other related entities have a
majority voting control of outstanding shares of Lexington Global Asset
Managers, Inc.
Of the directors, officers or employees ("affiliated persons") of the Fund,
Messrs. Corniotes, DeMichele, Faust, Hisey, Kantor, Lavery, Luehs, Petruski and
Saler and Mmes. Carnicelli, Carr, Curcio, Gilfillan and Mosca (see "Management
of the Fund"), may also be deemed affiliates of LMC and LFD by virtue of being
officers, directors or employees thereof.
PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
The Fund's primary policy is to execute all purchases and sales of portfolio
instruments at the most favorable prices consistent with best execution,
considering all of the costs of the transaction including brokerage commissions.
This policy governs the selection of brokers and dealers and the market in which
a transaction is executed. Consistent with this policy, the Rules of Fair
Practice of the National Association of Securities Dealers, Inc., and such other
policies as the Directors may determine, LMC may consider sales of shares of the
Fund and of the other Lexington Funds as a factor in the selection of
broker-dealers to execute the Fund's portfolio transactions. However, pursuant
to the Fund's investment management agreement, management consideration may be
given in the selection of broker-dealers to research provided and payment may be
made of a commission higher than that charged by another broker-dealer which
does not furnish research services or which furnishes research services deemed
to be a lesser value, so long as the criteria of Section 28(e) of the Securities
Exchange Act of 1934 are met. Section 28 (e) of the Securities Exchange Act of
1934 was adopted in 1975 and specifies that a person with investment discretion
shall not be "deemed to have acted unlawfully or to have breached a fiduciary
duty" solely because such person has caused the account to pay higher commission
than the lowest available under certain circumstances, provided that the person
so exercising investment discretion makes a good faith determination that the
commissions paid are "reasonable in the relation to the value of the brokerage
and research services provided...viewed in terms of either that particular
transaction or his overall responsibilities with respect to the accounts as to
which he exercises investment discretion."
Currently, it is not possible to determine the extent to which
commissions that reflect an element of value for research services might exceed
commissions that would be payable for executions services alone, nor generally
can the value of research services to the Fund be measured. Research services
furnished might be useful and of value to LMC and its affiliates, in serving
other clients as well as the Fund. On the other hand, any research services
obtained by LMC or its affiliates from the placement of portfolio brokerage of
other clients might be useful and of value to LMC in carrying out its
obligations to the Fund.
The Fund anticipates that its brokerage transactions involving securities of
companies domiciled in countries other than the United States will normally be
conducted on the principal stock exchanges of those countries. Fixed commissions
of foreign stock exchange transactions are generally higher than the negotiated
commission rates available in the United States. There is generally less
government supervision and regulation of foreign stock exchanges
9
<PAGE>
and broker-dealers than in the United States. For the year ended December 31,
1994, the Fund paid $34,699 in brokerage commissions. For the year ended
December 31, 1994 the Fund's portfolio turnover rate was 71.21%. For the year
ended December 31, 1995, the Fund paid $86,090 in brokerage commisions. For the
year ended December 31, 1995, the Fund's portfolio turnover rate was 88.92%.
DETERMINATION OF NET ASSET VALUE
The Fund calculates net asset value as of the close of normal trading on the
New York Stock Exchange (currently 4:00 p.m. Eastern time, unless weather,
equipment failure or other factors contribute to an earlier closing time) on
each business day. It is expected that the New York Stock Exchange will be
closed on Saturdays and Sundays and on New Year's day, President's Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day. See the Prospectus for the further discussion of net asset value.
TAX MATTERS
The following is only a summary of certain additional tax considerations
that are not described in the Prospectus and generally affect each Fund and its
shareholders. No attempt is made to present a detailed explanation of the tax
treatment of the Fund or its shareholders, and the discussions here and in the
Prospectus are not intended as substitutes for careful tax planning.
Qualifications as a Regulated Investment Company. The Fund intends to qualify to
be treated as a "regulated investment company" ("RIC") under the Internal
Revenue Code of 1986, as amended (the "Code"). If so qualified, the Fund will
not be subject to federal income tax on its investment company taxable income
and net capital gains to the extent that such investment company taxable income
and net capital gains are distributed in each taxable year to the separate
accounts of the Participating Insurance Companies. In addition, if the Fund
distributes annually to the separate accounts its ordinary income and capital
gain net income, in the manner prescribed in the Code, it will also not be
subject to the 4% federal excise tax otherwise applicable to the undistributed
income or gain of a RIC. Distributions of net investment income and net
short-term capital gains will be treated as ordinary income and distributions of
net long-term capital gains will be treated as long-term capital gain in the
hands of the Participating Insurance Companies. Under current tax law, capital
gains or dividends from the Fund are not currently taxable when left to
accumulate within a variable annuity or variable life insurance contract.
Section 817(h) of the Code requires that investments of a segregated asset
account of an insurance company be "adequately diversified," in accordance with
Treasury Regulations promulgated thereunder, in order for the holders of the
variable annuity contracts or variable life insurance policies investing in the
account to receive the tax-deferred or tax-free treatment generally afforded
holders of annuities or life insurance policies under the Code. The Department
of the Treasury has issued Regulations under section 817(h) which, among other
things, provide the manner in which a segregated asset account will treat
investments in a RIC for purposes of the applicable diversification
requirements. Under the Regulations, if a RIC satisfies certain conditions, that
RIC will not be treated as a single investment for these purposes, but rather
the segregated asset account will be treated as owning its proportionate share
of each of the assets of the RIC. The Fund plans to satisfy these conditions at
all times so that each segregated asset account of a Participating Insurance
Company investing in the Fund will be treated as adequately diversified under
the Code and Regulations.
For information concerning the federal income tax consequences to the
holders of variable annuity contracts and variable rate insurance policies, such
holders should consult the prospectuses used in connection with the issuance of
their particular contracts or policies.
PERFORMANCE CALCULATION
For the purpose of quoting and comparing the performance of the Fund to that
of other mutual funds and to other relevant market indices in advertisements or
in reports to shareholders, performance may be stated in terms of total return.
Under the rules of the Securities and Exchange Commission ("SEC rules"), funds
advertising performance must include total return quotes calculated according to
the following formula:
P(l+T)n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years (1, 5 or 10)
ERV = ending redeemable value of a hypothetical $1,000 payment
made at the beginning of the 1, 5 or 10 year periods
or at the end of the 1, 5 or 10 year periods
(or fractional portion thereof).
10
<PAGE>
Under the foregoing formula, the time periods used in advertising will be
based on rolling calendar quarters, updated to the last day of the most recent
quarter prior to submission of the advertising for publication, and will cover
one, five and ten year periods or a shorter period dating from the effectiveness
of the Fund's Registration Statement. In calculating the ending redeemable
value, all dividends and distributions by the Fund are assumed to have been
reinvested at net asset value as described in the prospectus on the reinvestment
dates during the period. Total return, or "T" in the formula above, is computed
by finding the average annual compounded rates of return over the 1, 5 and 10
year periods (or fractional portion thereof) that would equate the initial
amount invested to the ending redeemable value. Any recurring account charges
that might in the future be imposed by the Fund would be included at that time.
The Fund may also from time to time include in such advertising a total
return figure that is not calculated according to the formula set forth above in
order to compare more accurately the performance of the Fund with other measures
of investment return. For example, in comparing the Fund's total return with
data published by Lipper Analytical Services, Inc., or with the performance of
the Standard and Poor's 500 Stock Index, the Dow Jones Industrial Average or the
Morgan Stanley Capital International World Index, the Fund calculates its
aggregate total return for the specified periods of time assuming the investment
of $10,000 in Fund shares and assuming the reinvestment of each dividend or
other distribution at net asset value on the reinvestment date. Percentage
increases are determined by subtracting the initial value of the investment from
the ending value and by dividing the remainder by the beginning value. The
Fund's total return for the one year and since commencement (3/30/94) period as
of December 31, 1995 was -3.93% and -1.85%.
OTHER INFORMATION
As of March 8, 1996, Lexington Management Corporation, Park 80 West Plaza
Two, Saddle Brook, N.J. 07663 owned benefically 10,319 shares of the Fund. The
balance of the outstanding shares of the Fund are owned by Transamerica
Occidental Life Insurance Company (37%); Aetna Life Insurance and Annuity
Company (38%) and Kemper Investors Life Insurance Company (18%) and are
allocated to separate accounts which are used for funding variable annuity
contracts. Independent Auditors' Report The Board of Directors and Shareholders
11
<PAGE>
Independent Auditors' Report
The Board of Directors and Sahreholders
Lexington Emerging Markets Fund, Inc.:
We have audited the accompanying statements of net assets (including the
portfolio of investments) and assets and liabilities of Lexington Emerging
Markets Fund, Inc. as of December 31, 1995, the related statements of operations
for the year then ended, and the statement of changes in net assets, and the
financial highlights for the year then ended and for the period from March 30,
1994 (commencement of operations) to December 31, 1994. 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 audits 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, 1995 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 audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
Lexington Emerging Markets Fund, Inc. as of December 31, 1995, the results of
its operations for the year then ended and the changes in its net assets and the
financial highlights for the year then ended and for the period from March 30,
1994 to December 31, 1994, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
New York, New York
January 29, 1996
12
<PAGE>
Lexington Emerging Markets Fund, Inc.
Statement of Net Assets
(Including the Portfolio of Investments)
December 31, 1995
<TABLE>
<CAPTION>
Number of Value
Shares Security (Note 1)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS: 95.8%
Brazil: 7.3%
310,000 Coteminas ............................................................. $ 103,685
13,894,500 Cia Acos Especiais Itabir (Preferred shares) .......................... 80,790
3,100 Compania Vale Do Rio Doce (ADR) (Preferred shares) .................... 127,100
1,787,000 Telecomunicacoes Brasileiras S.A. ..................................... 86,067
500,000 Telecomunicacoes de Sao Paulo S.A. .................................... 73,582
120,365,000 Usinas Siderurgicas de Minas Gerais S.A. .............................. 97,858
----------
569,082
----------
Chile: 5.0%
5,000 Banco O'Higgins (ADR) ................................................. 115,000
7,500 Banco Osorno y La Union (ADR) ......................................... 104,063
2,000 Chile Fund, Inc. ...................................................... 52,000
4,550 Madeco, S.A. (ADR) .................................................... 122,850
----------
393,913
----------
Greece: 3.8%
3,400 AEGEK ................................................................. 29,225
4,950 Delta Dairy S.A. (Preferred shares) ................................... 73,000
5,300 Michaniki S.A. ........................................................ 68,112
3,100 Titan Cement Company .................................................. 129,967
----------
300,304
----------
Hong Kong: 4.6%
33,000 Dao Heng Bank Group, Ltd. ............................................. 118,650
13,000 Henderson Land Development Company, Ltd. .............................. 78,350
10,800 HSBC Holdings Plc ..................................................... 163,425
----------
360,425
----------
Hungary: 1.1%
2,220 Pick Szeged ........................................................... 84,522
India: 3.3%
14,000 India Fund, Inc. ...................................................... 124,250
2,500 Bajaj Auto, Ltd.2 ..................................................... 65,300
2,100 Hindalco Industries, Ltd.2 ............................................ 71,400
----------
260,950
----------
Indonesia: 7.0%
500 PT Bank Bali .......................................................... 985
9,500 PT Hanjaya Mandala Sampoerna .......................................... 98,993
28,000 PT Hero Supermarket ................................................... 60,070
56,234 PT Indah Kiat Pulp & Paper Corporation ................................ 41,240
1,000 PT Indosat (ADR) ...................................................... 36,500
12,000 PT Modern Photo Film Company .......................................... 69,615
53,000 PT Semen Cibinong ..................................................... 132,268
27,000 PT Semen Gresik ....................................................... 75,657
54,000 PT Sinar Mas Agro Resources Agricultural Production and
Technology Corporation .............................................. 30,144
----------
545,472
----------
Israel: 6.3%
10 Africa-Israel Investments, Ltd.2 ...................................... 12,058
54,936 Bank Hapoalim, Ltd. ................................................... 90,682
400 First International Bank of Israel .................................... 46,782
8,200 First Israel Fund, Inc. ............................................... 95,325
1,060 Koor Industries, Ltd. ................................................. 105,244
8,832 Osem Investment, Ltd. ................................................. 52,816
1,300 Teva Pharmaceutical Industries, Ltd. (ADR) ............................ 60,206
9,000 The Israel Land Developement Company .................................. 26,036
----------
489,149
----------
</TABLE>
13
<PAGE>
Lexington Emerging Markets Fund, Inc.
Statement of Net Assets
(Including the Portfolio of Investments)
December 31, 1995 (continued)
<TABLE>
<CAPTION>
Number of Value
Shares Security (Note 1)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Malaysia: 8.4%
6,000 Arab Malaysian Merchant Bank Holdings Bhd ............................. $ 68,544
----------
16,000 Berjaya Singer Bhd .................................................... 19,917
25,000 Cement Industries of Malaysia Bhd ..................................... 81,003
5,000 Genting Bhd ........................................................... 41,757
20,000 IOI Properties Bhd .................................................... 50,030
8,000 Malayan Banking Bhd ................................................... 67,441
32,000 New Straits Times Press Bhd ........................................... 107,150
25,000 Sime Darby Bhd ........................................................ 66,476
31,000 Sungei Way Holdings Bhd ............................................... 111,739
9,000 Tanjong Plc ........................................................... 26,236
3,000 Tenaga Nasional Bhd ................................................... 11,818
----------
652,111
----------
Mexico: 8.2%
22,020 Corporacion Industrial San Luis S.A. .................................. 113,254
6,000 Grupo Casa Autrey, S.A. de C.V. (ADR) ................................. 80,250
171,000 Grupo Industrial Maseco S.A. de C.V. .................................. 104,648
6,700 Grupo Televisa S.A. (ADR) ............................................. 150,750
9,000 Transportacion Maritima Mexicana S.A. de C.V. "L" (ADR) ............... 75,375
16,800 Tubos De Acero De Mexico S.A. (ADR)2 .................................. 117,600
----------
641,877
----------
Pakistan: 0.5%
7,700 Pakistan Investment Fund, Inc. ........................................ 40,425
----------
Philippines: 6.4%
120,750 Ayala Land, Inc. "B" .................................................. 147,425
444,250 Filinvest Land Inc.2 .................................................. 142,377
92,750 International Container Terminal Service, Inc. ........................ 48,657
3,000 Manila Electric Company ............................................... 24,495
4,800 Philippine Commercial International Bank1 ............................. 44,319
6,500 San Miguel Corporation "B" ............................................ 22,196
140,200 Universal Robina Corporation .......................................... 69,538
----------
499,007
----------
Poland: 6.7%
7,400 Bank Rozwoju Eksportu S.A. ............................................ 112,622
500 Bank Slaski S.A. ...................................................... 29,119
2,900 Debica S.A. ........................................................... 43,782
32,300 Elektrim Towarzystwo Handlowe S.A. .................................... 109,458
14,400 Polifarb Cieszyn Wroclaw S.A. ......................................... 54,643
8,900 Stomil Olsztyn S.A. ................................................... 83,076
2,500 Universal S.A. ........................................................ 7,102
520 Wedel S.A. ............................................................ 17,200
920 Zaklady Piwowarski W Zylocu S.A. ...................................... 63,475
----------
520,477
----------
Portugal: 1.9%
7,464 Portugal Telecom S.A. (ADR)2 .......................................... 140,261
600 Unicer - Uniao Cervejeira S.A. ........................................ 10,013
----------
150,274
----------
Singapore: 7.0%
9,000 Development Bank of Singapore, Ltd. ................................... 112,038
6,000 Fraser & Neave, Ltd. .................................................. 76,390
5,000 Jurong Engineering, Ltd. .............................................. 29,177
9,000 Keppel Corporation, Ltd. .............................................. 80,209
11,000 Oversea-Chinese Banking Corporation, Ltd. ............................. 137,714
16,000 Overseas Union Bank, Ltd. ............................................. 110,341
----------
545,869
----------
</TABLE>
14
<PAGE>
Lexington Emerging Markets Fund, Inc.
Statement of Net Assets
(Including the Portfolio of Investments)
December 31, 1995 (continued)
<TABLE>
<CAPTION>
Number of
Shares
or Principal Value
Amount Security (Note 1)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
South Africa: 7.4%
300 Anglo American Corporation of South Africa, Ltd. (ADR) ................ $ 18,169
4,442 Anglo American Platinum (ADR)2 ........................................ 25,284
7,500 Barlow, Ltd. (ADR) .................................................... 106,415
1,500 Liberty Life Association of Africa, Ltd. .............................. 46,508
3,100 Liberty Life Association of Africa, Ltd. (ADR) ........................ 95,499
5,300 Malbak, Ltd.1 ......................................................... 36,720
5,400 Malbak, Ltd. .......................................................... 37,413
6,710 Rustenburg Platinum Holdings, Ltd. (ADR) .............................. 110,439
1,400 South African Breweries, Ltd. ......................................... 51,283
1,422 South African Breweries, Ltd. (ADR) ................................... 52,081
----------
579,811
----------
South Korea: 1.1%
1,200 Pohang Iron & Steel Company, Ltd. ..................................... 78,432
400 Pohang Iron & Steel Company, Ltd. (ADR) ............................... 8,750
----------
87,182
----------
Taiwan: 1.2%
4,537 Taiwan Fund, Inc. ..................................................... 93,009
----------
Thailand: 6.7%
4,600 Advanced Information Service Plc ...................................... 81,478
8,000 Bangkok Bank, Ltd. .................................................... 97,220
6,000 Matichon Public Company, Ltd. ......................................... 35,980
5,500 Phatra Thanakit Company, Ltd. ......................................... 47,180
1,900 Saha Pathanapibul Company, Ltd. ....................................... 3,545
4,600 Siam City Cement Company, Ltd. ........................................ 71,978
8,000 Thai Farmers Bank Public Company, Ltd. ................................ 80,699
1,300 The Siam Cement Company, Ltd. ......................................... 72,072
5,400 Total Access Communication Plc1 ....................................... 35,100
----------
525,252
----------
United Kingdom: 1.2%
21,300 Antofagasta Holdings Plc .............................................. 96,569
----------
United States: 0.1%
300 Freeport McMoran Copper & Gold (Preferred shares) ..................... 8,400
----------
Venezuela: 0.6%
3,240 Ceramanic Carobobo ADR ................................................ 3,467
5,520 Mantex S.A.C.A. (ADR)2 ................................................ 26,220
1,845 Mavesa S.A. (ADR)1,2 .................................................. 6,919
2,050 Mavesa, S.A. (ADR)2 ................................................... 7,688
----------
44,294
----------
TOTAL COMMON STOCKS (cost $7,554,923) ................................. 7,488,374
----------
SHORT-TERM INVESTMENTS:
U.S. Government Obligations: 11.4%
$400,000 U.S. Treasury Bill 4.92%, due 03/14/96 ................................ 396,009
100,000 U.S. Treasury Bill 5.30%, due 01/04/96 ................................ 99,956
300,000 U.S. Treasury Bill 5.25%, due 01/18/96 ................................ 299,256
100,000 U.S. Treasury Bill 5.295%, due 05/09/96 ............................... 98,103
----------
TOTAL SHORT-TERM INVESTMENTS (cost $893,324) .......................... 893,324
----------
TOTAL INVESTMENTS: 107.2% (cost $8,448,247+)(Note 1) .................. 8,381,698
Liabilities in excess of other assets: (7.2%) ......................... (567,037)
----------
TOTAL NET ASSETS: 100.0%
(equivalent to $9.38 per share on 832,893 shares outstanding) ....... $7,814,661
==========
</TABLE>
15
<PAGE>
Lexington Emerging Markets Fund, Inc.
Statement of Net Assets
(Including the Portfolio of Investments)
December 31, 1995 (continued)
Notes to Statement of Net Assets
1The following securities were purchased under Rule 144A of the Securities Act
of 1933 and, unless registered under the Act or exempted from registration, may
be sold only to qualified institutional investors.
<TABLE>
<CAPTION>
Acquisition Average Cost Percent of
Issuer Date Per Share Market Value Net Assets
- ------------------------------ ----------- ------------- ------------ ----------
<S> <C> <C> <C> <C>
Malbak, Ltd. ................. 07/25/95 $5.75 $ 36,720 .47%
Mavesa S.A. (ADR) ............ 03/30/95 8.86 6,919 .09%
Philippine Commercial
International Bank ......... 08/04/95 8.47 44,319 .57%
Total Access Communication Plc 09/19/95 6.31 35,100 .45%
-------- ----
$123,058 1.58%
-------- ----
</TABLE>
Pursuant to guidelines adopted by the Fund's Board of Directors, these
unregistered 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.
2Non-income producing securities.
ADR-American Depository Receipt.
+Aggregate cost for Federal income tax purposes is identical.
------------------
At December 31, 1995, the composition of the Fund's net assets by industry
concentration was as follows:
Banking ..................... 18.6%
Capital Equipment .......... 4.1
Construction & Housing ..... 1.7
Consumer Durable ............ 3.7
Consumer NonDurable ........ 11.1
Financial Services .......... 3.3
Health Care ................. 1.8
Materials ................... 19.5
Merchandising ............... 0.8
Multi-Industry .............. 11.8%
Real Estate ................ 5.6
Services .................... 7.7
Telecommunications .......... 4.2
Trade ....................... 1.6
U.S.Government obligations .. 11.4
Utilities ................... 0.3
Other liabilities .......... (7.2)
----
Total Net Assets ....... 100.0%
=====
The Notes to Financial Statements are an integral part of this statement.
16
<PAGE>
Lexington Emerging Markets Fund, Inc.
Statement of Assets and Liabilities
December 31, 1995
<TABLE>
<S> <C>
Assets
Investments, at value (cost $8,448,247) (Note 1) ............................................ $8,381,698
Cash ........................................................................................ 70,001
Receivable for shares sold .................................................................. 44,538
Dividends and interest receivable ........................................................... 12,289
Foreign taxes recoverable ................................................................... 12
Deferred organization expenses, net (Note 1) ................................................ 14,502
Due from Lexington Management Corporation (Note 2) .......................................... 8,927
----------
Total Assets ........................................................................ 8,531,967
----------
Liabilities
Payable for shares redeemed ................................................................. 45,410
Payable for investment securities purchased ................................................. 596,373
Accrued expenses ............................................................................ 75,523
----------
Total Liabilities ................................................................... 717,306
----------
Net Assets (equivalent to $9.38 per share
on 832,893 shares outstanding) (Note 3) ................................................... $7,814,661
==========
Net Assets consist of:
Capital stock-authorized 500,000,000 shares, $.001 par value per share ...................... $ 833
Additional paid-in capital .................................................................. 8,390,026
Undistributed net investment income (Note 1) ................................................ 1,876
Accumulated net realized loss on investments and foreign currency holdings (Notes 1 and 6) .. (511,559)
Net unrealized depreciation of investments and foreign currency holdings .................... (66,515)
Net Assets .......................................................................... $7,814,661
==========
</TABLE>
The Notes to Financial Statements are an integral part of this statement.
17
<PAGE>
Lexington Emerging Markets Fund, Inc.
Statement of Operations
December 31, 1995
<TABLE>
<S> <C> <C>
Investment Income
Interest Income ........................................................ $ 57,145
Dividend Income ........................................................ 123,399
---------
180,544
Less: Foreign tax expense .............................................. 15,380
---------
Total investment income ........................................ $ 165,164
Expenses
Investment advisory fee (Note 2) ....................................... 53,143
Accounting and shareholder services fees (Note 2) ...................... 13,314
Custodian and transfer agent fees ...................................... 81,142
Printing and mailing ................................................... 41,370
Registration fees ...................................................... 7,088
Directors' fees ........................................................ 13,220
Amortization of deferred organization expenses (Note 1) ................ 4,440
Audit and legal fees ................................................... 22,100
Computer processing fees ............................................... 14,165
Other expenses ......................................................... 5,936
---------
Total expenses ..................................................... 255,918
Less: expenses recovered under contract with investment
adviser (Note 2) ................................................. 173,670 82,248
--------- ---------
Net investment income .......................................... 82,916
Realized and Unrealized Loss on Investments (Note 4)
Realized loss on:
Investments ........................................................ (425,641)
Foreign currency transactions ...................................... (4,821)
---------
Net realized loss .............................................. (430,462)
Net change in unrealized depreciation on:
Investments ........................................................ (161,277
Foreign currency translations of other assets and liabilities ...... 63
---------
Net unrealized change in depreciation 161,340
---------
Net realized and unrealized loss ............................... (269,122)
---------
Decrease in Net Assets Resulting from Operations ........................... $(186,206)
=========
</TABLE>
The Notes to Financial Statements are an integral part of this statement.
18
<PAGE>
Lexington Emerging Markets Fund, Inc.
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
March 30, 1994
(Commencement
Year Ended of Operations) to
December 31, 1995 December 31, 1994
----------------- -----------------
<S> <C> <C>
Net investment income ........................................... $ 82,916 $ 14,482
Net realized loss from investment transactions .................. (430,462) (2,132)
Unrealized appreciation (depreciation) of investments ........... 161,340 (227,855)
---------- ----------
Net decrease in net assets resulting from operations ........ (186,206) (215,505)
Distributions to shareholders from net investment income ........ (76,219) (10,100)
Distributions to shareholders in excess of net realized
gain on investments (Note 1) .................................. - (88,168)
Increase in net assets from capital share transactions (Note 3) . 3,453,270 4,937,589
---------- ----------
Net increase in net assets .............................. 3,190,845 4,623,816
Net Assets
Beginning of period ............................................. 4,623,816 -
---------- ----------
End of period (including undistributed net investment income of
$1,876 and $346, respectively) ................................ $7,814,661 $4,623,816
========== ==========
</TABLE>
The Notes to Financial Statements are an integral part of these statements.
Notes to Financial Statements
December 31, 1995 and 1994
Note 1-Significant Accounting Policies
Lexington Emerging Markets Fund, Inc. (the "Fund") is an open-end diversified
management investment company registered under the Investment Company Act of
1940, as amended. The Fund's investment objective is to seek long-term growth of
capital primarily through investment in equity securities of companies domiciled
in, or doing business in emerging countries and emerging markets. With the
exception of shares held in connection with initial capital of the Fund, shares
of the Fund are currently being offered to participating insurance companies for
allocation to certain accounts for the purpose of funding variable annuity
contracts issued by the participating insurance companies. The Fund commenced
operations on March 30, 1994. The following is a summary of the significant
accounting policies followed by the Fund in the preparation of its financial
statements:
Securities: Security transactions are accounted for on a trade date basis.
Realized gains and losses from investment transactions are reported on the
identified cost basis. Investments are stated at market value based on closing
prices reported by the exchange on which the securities are traded, on the last
business day of the period or, for over-the-counter securities, at the average
between bid and asked prices. Securities for which market quotations are not
readily available and other assets are valued at fair value as determined by the
management and approved in good faith by the Board of Directors. Short-term
securities are stated at amortized cost, which approximates market value. All
investments quoted in foreign currency are valued in U.S. dollars on the basis
of the foreign currency exchange rate prevailing at the close of business.
Dividends and distributions to shareholders are recorded on the ex-dividend
date. Interest income is accrued as earned.
Foreign Currency Transactions: Foreign currencies (and receivables and
payables denominated in foreign currencies) are translated into U.S. dollar
amounts at current exchange rates. Translation gains or losses resulting from
changes in exchange rates and realized gains and losses on the settlement of
foreign currency transactions are reported in the statement of operations. In
addition, the Fund may enter into forward foreign exchange contracts in order to
hedge against foreign currency risk. 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.
Distributions: In accordance with Statement of Position 93-2: Determination,
Disclosure and Financial Statement Presentation of Income, Capital Gain and
Return of Capital Distributions by Investment Companies, as of December 31,1995
and 1994, book and tax basis differences amounting to $5,167 and $4,036
respectively, have been reclassified from accumulated net realized loss on
investments to undistributed net investment income. Accumulated net realized
loss on investments reflects temporary book-tax differences arising from losses
resulting from wash sales and Internal Revenue Code Excise Tax distribution
requirements and associated post-October loss deferral provisions, which
effectively allow the deferral of net realized capital losses to the next tax
year.
Federal income Taxes: It is the Fund's intention 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 has been made.
19
<PAGE>
Lexington Emerging Markets Fund, Inc.
Notes to Financial Statements
December 31, 1995 and 1994 (continued)
Note 1-Significant Accounting Policies (continued)
Deferred Organization Expenses: Organization expenses aggregating $22,290
have been deferred and are being amortized on a straight-line basis over five
years.
Note 2-Investment Advisory Fee and Other Transactions with Affiliate
The Fund pays an investment advisory fee to Lexington Management Corporation
("LMC") at the rate of .85% of average daily net assets. LMC has agreed to
voluntarily limit the total expenses of the Fund (excluding interest, taxes,
brokerage commissions and extraordinary expenses but including management fee
and operating expenses) to an annual rate of 1.30% of the Fund's average net
assets. For the year ended December 31, 1995 expense reimbursement amounted to
$173,670 and is set forth in the statement of operations.
The Fund also reimburses LMC for certain expenses, including accounting and
shareholder servicing costs, which are incurred by the Fund, but paid by LMC.
Note 3-Capital Stock
Transactions in capital stock were as follows:
<TABLE>
<CAPTION>
March 30, 1994
(commencement of
Year ended operations) to
December 31, 1995 December 31, 1994
---------------------- ---------------------
Shares Amount Shares Amount
------ ------ ------ ------
<S> <C> <C> <C> <C>
Shares sold ..................................... 845,934 $7,996,657 497,613 $5,246,882
Shares issued on reinvestment of dividends ...... 8,108 76,218 9,946 98,265
-------- ---------- ------- --------
854,042 8,072,875 507,559 5,345,147
Shares redeemed ................................. (490,164) (4,619,605) (38,544) (407,558)
-------- ---------- ------- --------
Net increase ............................ 363,878 $3,453,270 469,015 $4,937,589
======== ========== ======= ==========
</TABLE>
Note 4-Purchases and Sales of Investment Securities
The cost of purchases and proceeds from sales of securities for the year ended
December 31,1995, excluding short-term securities, were $10,411,784 and
$4,689,910, respectively.
At December 31, 1995, aggregate gross unrealized appreciation for all
securities and foreign currency holdings (including foreign currency receivables
and payables) in which there is an excess of value over tax cost amounted to
$474,489 and aggregate gross unrealized depreciation for which there is an
excess of tax cost over value amounted to $541,004.
Note 5-Investment and Concentration Risks
The Fund's investment in foreign securities may involve risks not present in
domestic investments. Since foreign securities may be denominated in a foreign
currency and involve settlement and pay interest or dividends in foreign
currencies, changes in the relationship of these foreign currencies to the U.S.
dollar can significantly affect the value of the investments and earnings of the
Fund. Foreign investments may also subject the Fund to foreign government
exchange restrictions, expropriation, taxation or other political, social or
economic developments, all of which could affect the market and/or credit risk
of the investments.
In addition to the risks described above, risks may arise from forward
foreign currency contracts from the potential inability of counterparties to
meet the terms of their contracts.
Note 6-Federal Income Taxes-Capital Loss Carryforwards
Capital loss carryforwards available for federal income tax purposes as of
December 31, 1995 are approximately $447,839 expiring in 2003.
To the extent any future capital gains are offset by these losses, such
gains would not be distributed to shareholders.
Treasury regulations were issued in early 1990 which provide that capital
losses incurred after October 31 of a Fund's taxable year can be deemed to have
occurred on the first day of the following taxable year (i.e., January 1). The
regulations indicate that a fund may elect to retroactively apply these rules
for purposes of computing taxable income. Accordingly, the 1995 post-October
losses of $63,720 has been deemed to have occurred in 1996 for federal income
tax purposes.
20
<PAGE>
Lexington Emerging Markets Fund, Inc.
Financial Highlights
Selected per share data for a share outstanding throughout the period:
<TABLE>
<CAPTION>
March 30, 1994
(commencement
Year Ended of operations) to
December 31, 1995 December 31, 1994
----------------- -----------------
<S> <C> <C>
Net asset value, beginning of period ............................. $ 9.86 $10.00
------ ------
Income (loss) from investment operations:
Net investment income ........................................ 0.09 0.03
Net realized and unrealized gain (loss) on investments ....... (0.48) 0.04
------ ------
Total income (loss) from investment operations ........... (0.39) 0.07
------ ------
Less distributions:
Dividend from net investment income .......................... (0.09) (0.02)
Distributions in excess of net realized capital gains
(temporary book-tax difference) ............................ - (0.19)
------ ------
Total distributions ...................................... (0.09) (0.21)
------ ------
Net asset value, end of period ................................... $ 9.38 $ 9.86
====== ======
Total return ............................................. (3.93%) 0.76%
Ratio to average net assets:
Expenses, before reimbursement ............................... 4.09% 6.28%*
Expenses, net of reimbursement ............................... 1.32% 1.30%*
Net investment loss, before reimbursement .................... (1.45%) (4.29%)*
Net investment income ........................................ 1.33% 0.70%*
Portfolio turnover ............................................... 88.92% 71.21%*
Net assets at end of period (000's omitted) ...................... $7,815 $4,624
</TABLE>
- ----------
*Annualized
21
