PROSPECTUS
May 1, 1995
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 May 1, 1995 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.
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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
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>
Selected Per Share Data for a share outstanding throughout the period:
January 3, 1994
(commencement of
operations) to
December 31, 1994
-----------------
<S> <C>
Net asset value, beginning of period .................................................. $10.00
------
Income from investment operations:
Net investment loss ................................................................. 0.03
Net realized and unrealized gain on investments ..................................... 0.04
------
Total income from investment operations ....................................... 0.07
------
Less distributions:
Distributions from net realized capital gains ....................................... (0.02)
Distributions in excess of net realized capital gains (Temporary book-tax difference) (0.19)
------
Total distributions ........................................................... (0.21)
------
Net asset value, end of period ........................................................ $ 9.86
======
Total return .......................................................................... 0.76%
Ratio to average net assets:
Expenses, before reimbursement ...................................................... 6.28%*
Expenses, net of reimbursement ...................................................... 1.30%*
Net investment income (loss), before reimbursement .............................. (4.29)%*
Net investment income (loss) ....................................................... 0.70%*
Portfolio turnover ................................................................... 0.70%*
Net assets at end of period (000's omitted) ........................................... $4,624
*Annualized
</TABLE>
DESCRIPTION OF THE FUND
Lexington Emerging Markets Fund 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.
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
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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, 1994 was 71.21%. 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.
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.
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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.
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.
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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 currency rates. 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.
(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. 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
govemment 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
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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 1.30% of the Fund's average net assets.
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 the Administrator 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 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 $3.8
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, Piedmont Management Company 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 Piedmont Management Company
Inc., a Delaware corporation with offices at 80 Maiden Lane, New York, New York
10038. Descendants of Lunsford Richardson, Sr., their spouses, trusts and other
related entities are the beneficial owners of a majority of the shares of
Piedmont Management Company Inc. common stock. See "Investment Adviser and
Distributor" in the Statement of Additional Information.
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Portfolio Manager
The Fund is managed by an investment management team. Richard T. Saler is
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 nine
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.
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 seven 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 computed 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
its 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. All other
securities for which the over-the-counter market quotations are readily
available are valued at the mean between the last current bid and asked price.
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 are valued at fair value
as determined by the management and approved in good faith by the 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.
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
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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, as
amended (the "Code"), concerning the diversification of assets, distribution of
income, and sources of income. When a 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 a Fund does not qualify as a
regulated investment company, then all of its taxable income will be subject to
tax at regular corporate rates (without any deduction for distributions to the
separate accounts of the Participating Insurance Companies), and the receipt of
such distributions will be taxable to the extent that the distributing Fund has
current and accumulated earnings and profits.
Fund distributions. Distributions by the Fund are taxable, if at all, to the
separate accounts of the Participating Insurance Companies, and not to variable
annuity contract holders and variable life insurance policy holders.
Distributions will be included in the taxable income of the separate accounts of
the Participating Insurance Companies in the year in which they are received
(whether paid in cash or reinvested).
Share redemptions. Redemptions of the shares held by the separate accounts of
the Participating Insurance Companies generally will not result in gain or loss
for the separate accounts of the Participating Insurance Companies and will not
result in gain or loss for the variable annuity contract holders and 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 separate accounts of the Participating
Insurance Companies are the owners of the shares and that 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 and 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 and
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.
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.
8
<PAGE>
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, 1995.
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
<PAGE>
-----------------
L E X I N G T O N
-----------------
-----------------
LEXINGTON
EMERGING
MARKETS
FUND, INC.
-----------------
P R O S P E C T U S
MAY 1, 1995
-----------
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
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 ....................... 7
Dividend, Distribution and Reinvestment Policy 8
Tax Matters ................................... 8
Organization and Description of Common Stock .. 8
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
MAY 1, 1995
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 May 1, 1995, 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. . . . . . . . . . . . . . . . . . . . . . . 5
Management of the Fund . . . . . . . . . . . . . . . . . . . . . . . 7
Investment Adviser, Distributor and Administrator . . . . . . . . . 9
Portfolio Transactions and Brokerage Commissions . . . . . . . . . .10
Determination of Net Asset Value . . . . . . . . . . . . . . . . . .11
Tax Matters. . . . . . . . . . . . . . . . . . . . . . . . . . . . .11
Performance Calculation. . . . . . . . . . . . . . . . . . . . . . .19
Other Information. . . . . . . . . . . . . . . . . . . . . . . . . .19
Financial Statements . . . . . . . . . . . . . . . . . . . . . . . .20
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<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.
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<PAGE>
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
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.
-3-
<PAGE>
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.
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.
-4-
<PAGE>
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-
<PAGE>
(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 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. 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 additional 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.
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<PAGE>
(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 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, Piedmont
Management Company, Inc.; Director, Reinsurance Corporation of New
York; Director, Unione Italiana Reinsurance; Vice Chairman of the
Board of Trustees, Union College; Director, Continental National
Corporation; 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.
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<PAGE>
+BEVERLEY C. DUER, Director, 340 East 72nd Street, New York, N.Y. 10021.
Private Investor. Formerly, Manager of Opertaions 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, General Manager and Director,
Lexington Management Corporation; Executive Vice President and
Director, Lexington Funds Distributor, 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).
+FRANCIS OLMSTED, Director. 50 Van Hooten Court, San Anselmo, CA 94960.
Private Investor. Formerly, Manager - Commercial Development (West
Coast) Essex Chemical Corporation, Clifton, New Jersey (chemical
manufacturers).
+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.
*+RICHARD T. SALER, Vice President and Portfolio Manager. P.O. Box 1515,
Saddle Brook, N.J. 07663. Senior Vice President, Director
International Investment Investment Strategy, Lexington Management
Corporation. Prior to July, 1992, Securities Analyst, Nomura
Securities, Inc. Prior to November, 1991, Vice President, Lexington
Management Corporation.
*+RICHARD 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.
*+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. Prior to September 1990, Fund Accounting Manager, Lexington Group
of Investment Companies.
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<PAGE>
*+PETER CORNIOTES, Assistant Secretary. P.O. Box 1515, Saddle Brook, N.J.
07663. 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.
+ Messrs. Corniotes, DeMichele, Duer, Hisey, Kantor, Lavery, Luehs, Miller,
Olmsted, Petruski, Preston, Saler, Smith and Sunderland and Mmes.
Carnicelli, Carr, Curcio, Evans, Gilfillan, Mosca, and Russell hold similar
officers with some or all of the other investment companies advised and/or
distributed by LMC and LFD.
Directors not employed by the Fund or its affiliates receive an
annual fee of $600 and a fee of $150 for each meeting attended plus
reimbursement of expenses for attendance at regular meetings. The Board
does not have any audit, nominating or compensation committees. For the
year ended December 31, 1994, the aggregate remuneration paid by the Fund
to seven such directors was $7,540.
Aggregate Total Compensation Number of
Name of Director Compensation From From Fund Directorships
Fund and Fund Complex In Fund Complex
- ---------------- ----------------- ------------------ ----------------
Robert M. DeMichele 0 0 15
Beverley C. Duer $1350 $20,250 15
Barbara R. Evans 0 0 14
Lawrence Kantor 0 0 15
Donald B. Miller $1350 $20,250 14
Francis Olmsted $1350 $18,900 13
John G. Preston $1350 $20,250 14
Margaret Russell $1350 $18,900 13
Philip C. Smith $1350 $20,250 14
Francis A. Sunderland $1200 $16,800 13
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.
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<PAGE>
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.
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 1.30% of the Fund's average net
assets. 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 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, 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 Piedmont Management
Company 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 Piedmont Management
Company 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
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<PAGE>
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 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%.
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 generally affecting the Fund and its shareholders that are
not described in the Prospectus. 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.
Qualification as a Regulated Investment Company
The Fund has elected to be taxed as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). As a regulated investment company, the Fund is not subject to
federal income tax on the portion of its net investment income (i.e.,
taxable interest, dividends and other taxable ordinary income, net of
expenses) and capital gain net income (i.e., the excess of capital gains
over capital losses) that it distributes to shareholders, provided that it
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<PAGE>
distributes at least 90% of its investment company taxable income (i.e.,
net investment income and the excess of net short-term capital gain over
net long-term capital loss) for the taxable year (the "Distribution
Requirement"), and satisfies certain other requirements of the Code that
are described below. Distributions by the Fund made during the taxable
year or, under specified circumstances, within twelve months after the
close of the taxable year, will be considered distributions of income and
gains of the taxable year and can therefore satisfy the Distribution
Requirement.
In addition to satisfying the Distribution Requirement, a regulated
investment company must: (1) derive at least 90% of its gross income from
dividends, interest, certain payments with respect to securities loans,
gains from the sale or other disposition of stock or securities or foreign
currencies (to the extent such currency gains are directly related to the
regulated investment company's principal business of investing in stock or
securities) and other income (including but not limited to gains from
options, futures or forward contracts) derived with respect to its business
of investing in such stock, securities or currencies (the "Income
Requirement"); and (2) derive less than 30% of its gross income (exclusive
of certain gains on designated hedging transactions that are offset by
realized or unrealized losses on offsetting positions) from the sale or
other disposition of stock, securities or foreign currencies (or options,
futures or forward contracts thereon) held for less than three months (the
"Short-Short Gain Test"). However, foreign currency gains, including those
derived from options, futures and forwards, will not in any event be
characterized as Short-Short Gain if they are directly related to the
regulated investment company's investments in stock or securities (or
options or futures thereon). Because of the Short-Short Gain Test, the
Fund may have to limit the sale of appreciated securities that it has held
for less than three months. However, the Short-Short Gain Test will not
prevent the Fund from disposing of investments at a loss, since the
recognition of a loss before the expiration of the three-month holding
period is disregarded for this purpose. Interest (including original issue
discount) received by the Fund at maturity or upon the disposition of a
security held for less than three months will not be treated as gross
income derived from the sale or other disposition of such security within
the meaning of the Short-Short Gain Test. However, income that is
attributable to realized market appreciation will be treated as gross
income from the sale or other disposition of securities for this purpose.
In general, gain or loss recognized by the Fund on the disposition
of an asset will be a capital gain or loss. However, gain recognized on
the disposition of a debt obligation purchased by the Fund at a market
discount (generally, at a price less than its principal amount) will be
treated as ordinary income to the extent of the portion of the market
discount which accrued during the period of time the Fund held the debt
obligation. In addition, under the rules of Code Section 988, gain or loss
recognized on the disposition of a debt obligation denominated in a foreign
currency or an option with respect thereto (but only to the extent
attributable to changes in foreign currency exchange rates), and gain or
loss recognized on the disposition of a foreign currency forward contract,
futures contract, option or similar financial instrument, or of foreign
currency itself, except for regulated futures contracts or non-equity
options subject to Code Section 1256 (unless the Fund elects otherwise),
will generally be treated as ordinary income or loss.
Further, the Code also treats as ordinary income, a portion of the
capital gain attributable to a transaction where substantially all of the
return realized is attributable to the time value of the Fund's net
investment in the transaction and: (1) the transaction consists of the
acquisition of property by the Fund and a contemporaneous contract to sell
substantially identical property in the future; (2) the transaction is a
straddle within the meaning of Section 1092 of the Code; (3) the
transaction is one that was marketed or sold to the Fund on the basis that
it would have the economic characteristics of a loan but the interest-like
return would be taxed as capital gain; or (4) the transaction is described
as a conversion transaction in the Treasury Regulations. The amount of the
gain recharacterized generally will not exceed the amount of the interest
that would have accrued on the net investment for the relevant period at
a yield equal to 120% of the federal long-term, mid-term, or short-term
rate, depending upon the type of instrument at issue, reduced by an amount
equal to: (1) prior inclusions of ordinary income items from the
conversion transaction; and (2) the capitalized interest on acquisition
indebtedness under Code Section 263(g). Built-in losses will be preserved
where the Fund has a built-in loss with respect to property that becomes
a part of a conversion transaction. No authority exists that indicates
that the converted character of the income will not be passed to the Fund's
shareholders.
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<PAGE>
In general, for purposes of determining whether capital gain or loss
recognized by the Fund on the disposition of an asset is long-term or
short-term, the holding period of the asset may be affected if (1) the
asset is used to close a "short sale" (which includes for certain purposes
the acquisition of a put option) or is substantially identical to another
asset so used, (2) the asset is otherwise held by the Fund as part of a
"straddle" (which term generally excludes a situation where the asset is
stock and the Fund grants a qualified covered call option (which, among
other things, must not be deep-in-the-money) with respect thereto) or (3)
the asset is stock and the Fund grants an in-the-money qualified covered
call option with respect thereto. However, for purposes of the Short-Short
Gain Test, the holding period of the asset disposed of may be reduced only
in the case of clause (1) above. In addition, the Fund may be required to
defer the recognition of a loss on the disposition of an asset held as part
of a straddle to the extent of any unrecognized gain on the offsetting
position.
Any gain recognized by the Fund on the lapse of, or any gain or loss
recognized by the Fund from a closing transaction with respect to, an
option written by the Fund will be treated as a short-term capital gain or
loss. For purposes of the Short-Short Gain Test, the holding period of an
option written by the Fund will commence on the date it is written and end
on the date it lapses or the date a closing transaction is entered into.
Accordingly, the Fund may be limited in its ability to write options which
expire within three months and to enter into closing transactions at a gain
within three months of the writing of options.
Transactions that may be engaged in by the Fund (such as regulated
futures contracts, certain foreign currency contracts, and options on stock
indexes and futures contracts) will be subject to special tax treatment as
"Section 1256 contracts." Section 1256 contracts are treated as if they
are sold for their fair market value on the last business day of the
taxable year, even though a taxpayer's obligations (or rights) under such
contracts have not terminated (by delivery, exercise, entering into a
closing transaction or otherwise) as of such date. Any gain or loss
recognized as a consequence of the year-end deemed disposition of Section
1256 contracts is taken into account for the taxable year together with any
other gain or loss that was previously recognized upon the termination of
Section 1256 contracts during that taxable year. Any capital gain or loss
for the taxable year with respect to Section 1256 contracts (including any
capital gain or loss arising as a consequence of the year-end deemed sale
of such contracts) is generally treated as 60% long-term capital gain or
loss and 40% short-term capital gain or loss. The Fund, however, may elect
not to have this special tax treatment apply to Section 1256 contracts that
are part of a "mixed straddle" with other investments of the Fund that are
not Section 1256 contracts. The IRS has held in several private rulings
(and Treasury Regulations now provide) that gains arising from Section 1256
contracts will be treated for purposes of the Short-Short Gain Test as
being derived from securities held for not less than three months if the
gains arise as a result of a constructive sale under Code Section 1256.
The Fund may purchase securities of certain foreign investment funds
or trusts which constitute passive foreign investment companies ("PFICs")
for federal income tax purposes. If the Fund invests in a PFIC, it may
elect to treat the PFIC as a qualifying electing fund (a "QEF") in which
event the Fund will each year have ordinary income equal to its pro rata
share of the PFIC's ordinary earnings for the year and long-term capital
gain equal to its pro rata share of the PFIC's net capital gain for the
year, regardless of whether the Fund receives distributions of any such
ordinary earning or capital gain from the PFIC. If the Fund does not
(because it is unable to, chooses not to or otherwise) elect to treat the
PFIC as a QEF, then in general (1) any gain recognized by the Fund upon
sale or other disposition of its interest in the PFIC or any excess
distribution received by the Fund from the PFIC will be allocated ratably
over the Fund's holding period of its interest in the PFIC, (2) the portion
of such gain or excess distribution so allocated to the year in which the
gain is recognized or the excess distribution is received shall be included
in the Fund's gross income for such year as ordinary income (and the
distribution of such portion by the Fund to shareholders will be taxable
as an ordinary income dividend, but such portion will not be subject to tax
at the Fund level), (3) the Fund shall be liable for tax on the portions
of such gain or excess distribution so allocated to prior years in an
amount equal to, for each such prior year, (i) the amount of gain or excess
distribution allocated to such prior year multiplied by the highest tax
rate (individual or corporate) in effect for such prior year plus (ii)
interest on the amount determined under clause (i) for the period from the
due date for filing a return for such prior year until the date for filing
a return for the year in which the gain is recognized or the excess
distribution is received at the rates and methods applicable to
underpayments of tax for such period, and (4) the distribution by the Fund
to shareholders of the portions of such gain or excess distribution so
allocated to prior years (net of the tax payable by the Fund thereon) will
again be taxable to the shareholders as an ordinary income dividend.
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Under recently proposed Treasury Regulations the Fund can elect to
recognize as gain the excess, as of the last day of its taxable year, of
the fair market value of each share of PFIC stock over the Fund's adjusted
tax basis in that share ("marked to market gain"). Such marked to market
gain will be included by the Fund as ordinary income, such gain will not
be subject to the Short-Short Gain Test, and the Fund's holding period with
respect to such PFIC stock commences on the first day of the next taxable
year. If the Fund makes such election in the first taxable year it holds
PFIC stock, the Fund will include ordinary income from any marked to market
gain, if any, and will not incur the tax described in the previous
paragraph.
Treasury Regulations permit a regulated investment company, in
determining its investment company taxable income and net capital gain
(i.e., the excess of net long-term capital gain over net short-term capital
loss) for any taxable year, to elect (unless it has made a taxable year
election for excise tax purposes as discussed below) to treat all or any
part of any net capital loss, any net long-term capital loss or any net
foreign currency loss incurred after October 31 as if it had been incurred
in the succeeding year.
In addition to satisfying the requirements described above, the Fund
must satisfy an asset diversification test in order to qualify as a
regulated investment company. Under this test, at the close of each
quarter of the Fund's taxable year, at least 50% of the value of the Fund's
assets must consist of cash and cash items, U.S. Government securities,
securities of other regulated investment companies, and securities of other
issuers (as to which the Fund has not invested more than 5% of the value
of the Fund's total assets in securities of such issuer and as to which the
Fund does not hold more than 10% of the outstanding voting securities of
such issuer), and no more than 25% of the value of its total assets may be
invested in the securities of any one issuer (other than U.S. Government
securities and securities of other regulated investment companies), or in
two or more issuers which the Fund controls and which are engaged in the
same or similar trades or businesses. Generally, an option (call or put)
with respect to a security is treated as issued by the issuer of the
security not the issuer of the option.
If for any taxable year the Fund does not qualify as a regulated
investment company, all of its taxable income (including its net capital
gain) will be subject to tax at regular corporate rates without any
deduction for distributions to shareholders, and such distributions will
be taxable to the shareholders as ordinary dividends to the extent of the
Fund's current and accumulated earnings and profits. Such distributions
generally will be eligible for the dividends-received deduction in the case
of corporate shareholders.
Qualification of Segregated Asset Accounts
Under Code section 817(h), a segregated asset account upon which a
variable annuity contract or variable life insurance policy is based must
be "adequately diversified." A segregated asset account will be adequately
diversified if it satisfies one of two alternative tests set forth in the
Treasury Regulations. Specifically, the Treasury Regulations provide, that
except as permitted by the "safe harbor" discussed below, as of the end of
each calendar quarter (or within 30 days thereafter) no more than 55% of
a series' total assets may be represented by any one investment, no more
than 70% by any two investments, no more than 80% by any three investments
and no more than 90% by any four investments. For this purpose, all
securities of the same issuer are considered a single investment, and while
each U.S. Government agency and instrumentality is considered a separate
issuer, a particular foreign government and its agencies, instrumentalities
and political subdivisions are considered the same issuer. As a safe
harbor, a separate account will be treated as being adequately diversified
if the diversification requirements under Subchapter M are satisfied and
no more than 55% of the value of the account's total assets are cash and
cash items, government securities and securities of other regulated
investment companies.
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For purposes of these alternative diversifications tests, a
segregated asset account investing in shares of a regulated investment
company will be entitled to "look-through" the regulated investment company
to its pro rata portion of the regulated investment company's assets,
provided the regulated investment company satisfies certain conditions
relating to the ownership of the shares.
Excise Tax on Regulated Investment Companies
A 4% non-deductible excise tax is imposed on a regulated investment
company that fails to distribute in each calendar year an amount equal to
98% of ordinary taxable income for the calendar year and 98% of capital
gain net income for the one-year period ended on October 31 of such
calendar year (or, at the election of a regulated investment company having
a taxable year ending November 30 or December 31, for its taxable year (a
"taxable year election")). The balance of such income must be distributed
during the next calendar year. For the foregoing purposes, a regulated
investment company is treated as having distributed any amount on which it
is subject to income tax for any taxable year ending in such calendar year.
For purposes of the excise tax, a regulated investment company shall:
(1) reduce its capital gain net income (but not below its net capital gain)
by the amount of any net ordinary loss for the calendar year; and (2)
exclude foreign currency gains and losses incurred after October 31 of any
year (or after the end of its taxable year if it has made a taxable year
election) in determining the amount of ordinary taxable income for the
current calendar year (and, instead, include such gains and losses in
determining ordinary taxable income for the succeeding calendar year).
The Fund intends to make sufficient distributions or deemed
distributions of its ordinary taxable income and capital gain net income
prior to the end of each calendar year to avoid liability for the excise
tax. However, investors should note that the Fund may in certain
circumstances be required to liquidate portfolio investments to make
sufficient distributions to avoid excise tax liability.
Fund Distributions
The Fund anticipates distributing substantially all of its investment
company taxable income for each taxable year. Such distributions will be
taxable to shareholders as ordinary income and treated as dividends for
federal income tax purposes, but they generally should not qualify for the
70% dividends-received deduction for corporate shareholders.
The Fund may either retain or distribute to shareholders its net
capital gain for each taxable year. The Fund currently intends to
distribute any such amounts. If net capital gain is distributed and
designated as a capital gain dividend, it will be taxable to shareholders
as long-term capital gain, regardless of the length of time the shareholder
has held his shares or whether such gain was recognized by the Fund prior
to the date on which the shareholder acquired his shares.
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<PAGE>
Conversely, if the Fund elects to retain its net capital gain, the
Fund will be taxed thereon (except to the extent of any available capital
loss carryovers) at the 35% corporate tax rate. If the Fund elects to
retain its net capital gain, it is expected that the Fund also will elect
to have shareholders of record on the last day of its taxable year treated
as if each received a distribution of his pro rata share of such gain, with
the result that each shareholder will be required to report his pro rata
share of such gain on his tax return as long-term capital gain, will
receive a refundable tax credit for his pro rata share of tax paid by the
Fund on the gain, and will increase the tax basis for his shares by an
amount equal to the deemed distribution less the tax credit.
Ordinary income dividends paid by the Fund with respect to a taxable
year will qualify for the 70% dividends-received deduction generally
available to corporations (other than corporations, such as S corporations,
which are not eligible for the deduction because of their special
characteristics and other than for purposes of special taxes such as the
accumulated earnings tax and the personal holding company tax) to the
extent of the amount of qualifying dividends received by the Fund from
domestic corporations for the taxable year. A dividend received by the
Fund will not be treated as a qualifying dividend (1) if it has been
received with respect to any share of stock that the Fund has held for less
than 46 days (91 days in the case of certain preferred stock), excluding
for this purpose under the rules of Code Section 246(c)(3) and (4): (i)
any day more than 45 days (or 90 days in the case of certain preferred
stock) after the date on which the stock becomes ex-dividend and (ii) any
period during which the Fund has an option to sell, is under a contractual
obligation to sell, has made and not closed a short sale of, is the grantor
of a deep-in-the-money or otherwise nonqualified option to buy, or has
otherwise diminished its risk of loss by holding other positions with
respect to, such (or substantially identical) stock; (2) to the extent that
the Fund is under an obligation (pursuant to a short sale or otherwise) to
make related payments with respect to positions in substantially similar
or related property; or (3) to the extent the stock on which the dividend
is paid is treated as debt-financed under the rules of Code Section 246A.
Moreover, the dividends-received deduction for a corporate shareholder may
be disallowed or reduced (1) if the corporate shareholder fails to satisfy
the foregoing requirements with respect to its shares of the Fund or (2)
by application of Code Section 246(b) which in general limits the
dividends-received deduction to 70% of the shareholder's taxable income
(determined without regard to the dividends-received deduction and certain
other items). Since an insignificant portion of the Fund will be invested
in stock of domestic corporations, the ordinary dividends distributed by
the Fund will not qualify for the dividends-received deduction for
corporate shareholders.
Alternative minimum tax ("AMT") is imposed in addition to, but only
to the extent it exceeds, the regular tax and is computed at a maximum
marginal rate of 28% for noncorporate taxpayers and 20% for corporate
taxpayers on the excess of the taxpayer's alternative minimum taxable
income ("AMTI") over an exemption amount. In addition, under the Superfund
Amendments and Reauthorization Act of 1986, a tax is imposed for taxable
years beginning after 1986 and before 1996 at the rate of 0.12% on the
excess of a corporate taxpayer's AMTI (determined without regard to the
deduction for this tax and the AMT net operating loss deduction) over $2
million. For purposes of the corporate AMT and the environmental superfund
tax (which are discussed above), the corporate dividends-received deduction
is not itself an item of tax preference that must be added back to taxable
income or is otherwise disallowed in determining a corporation's AMTI.
However, corporate shareholders will generally be required to take the full
amount of any dividend received from the Fund into account (without a
dividends-received deduction) in determining its adjusted current earnings,
which are used in computing an additional corporate preference item (i.e.,
75% of the excess of a corporate taxpayer's adjusted current earnings over
its AMTI (determined without regard to this item and the AMT net operating
loss deduction)) includable in AMTI.
Investment income that may be received by the Fund from sources
within foreign countries may be subject to foreign taxes withheld at the
source. The United States has entered into tax treaties with many foreign
countries which entitle the Fund to a reduced rate of, or exemption from,
taxes on such income. It is impossible to determine the effective rate of
foreign tax in advance since the amount of the Fund's assets to be invested
in various countries is not known. If more than 50% of the value of the
Fund's total assets at the close of its taxable year consist of the stock
or securities of foreign corporations, the Fund may elect to "pass through"
to the Fund's shareholders the amount of foreign taxes paid by the Fund.
If the Fund so elects, each shareholder would be required to include in
gross income, even though not actually received, his pro rata share of the
foreign taxes paid by the Fund, but would be treated as having paid his pro
rata share of such foreign taxes and would therefore be allowed to either
deduct such amount in computing taxable income or use such amount (subject
to various Code limitations) as a foreign tax credit against federal income
tax (but not both). For purposes of the foreign tax credit limitation
rules of the Code, each shareholder would treat as foreign source income
his pro rata share of such foreign taxes plus the portion of dividends
received from the Fund representing income derived from foreign sources.
No deduction for foreign taxes could be claimed by an individual
shareholder who does not itemize deductions. Each shareholder should
consult his own tax adviser regarding the potential application of foreign
tax credits.
-16-
<PAGE>
Distributions by the Fund that do not constitute ordinary income
dividends or capital gain dividends will be treated as a return of capital
to the extent of (and in reduction of) the shareholder's tax basis in his
shares; any excess will be treated as gain from the sale of his shares, as
discussed below.
Distributions by the Fund will be treated in the manner described
above regardless of whether such distributions are paid in cash or
reinvested in additional shares of the Fund (or of another fund).
Shareholders receiving a distribution in the form of additional shares will
be treated as receiving a distribution in an amount equal to the fair
market value of the shares received, determined as of the reinvestment
date. In addition, if the net asset value at the time a shareholder
purchases shares of the Fund reflects undistributed net investment income
or recognized capital gain net income, or unrealized appreciation in the
value of the assets of the Fund, distributions of such amounts will be
taxable to the shareholder in the manner described above, although such
distributions economically constitute a return of capital to the
shareholder.
Ordinarily, shareholders are required to take distributions by the
Fund into account in the year in which the distributions are made.
However, dividends declared in October, November or December of any year
and payable to shareholders of record on a specified date in such a month
will be deemed to have been received by the shareholders (and made by the
Fund) on December 31 of such calendar year if such dividends are actually
paid in January of the following year. Shareholders will be advised
annually as to the U.S. federal income tax consequences of distributions
made (or deemed made) during the year.
The Fund will be required in certain cases to withhold and remit to
the U.S. Treasury 31% of ordinary income dividends and capital gain
dividends, and the proceeds of redemption of shares, paid to any
shareholder (1) who has provided either an incorrect tax identification
number or no number at all, (2) who is subject to backup withholding by the
IRS for failure to report the receipt of interest or dividend income
properly, or (3) who has failed to certify to the Fund that it is not
subject to backup withholding or that it is a corporation or other "exempt
recipient."
Sale or Redemption of Shares
A shareholder will recognize gain or loss on the sale or redemption
of shares of the Fund in an amount equal to the difference between the
proceeds of the sale or redemption and the shareholder's adjusted tax basis
in the shares. All or a portion of any loss so recognized may be
disallowed if the shareholder purchases other shares of the Fund within 30
days before or after the sale or redemption. In general, any gain or loss
arising from (or treated as arising from) the sale or redemption of shares
of the Fund will be considered capital gain or loss and will be long-term
capital gain or loss if the shares were held for longer than one year.
However, any capital loss arising from the sale or redemption of shares
held for six months or less will be treated as a long-term capital loss to
the extent of the amount of capital gain dividends received on such shares.
For this purpose, the special holding period rules of Code Section
246(c)(3) and (4) generally will apply in determining the holding period
of shares. Long-term capital gains of noncorporate taxpayers are currently
taxed at a maximum rate 11.6% lower than the maximum rate applicable to
ordinary income. Capital losses in any year are deductible only to the
extent of capital gains plus, in the case of a noncorporate taxpayer,
$3,000 of ordinary income.
-17-
<PAGE>
Foreign Shareholders
Taxation of a shareholder who, as to the United States, is a
nonresident alien individual, foreign trust or estate, foreign
corporation, or foreign partnership ("foreign shareholder"), depends on
whether the income from the Fund is "effectively connected" with a U.S.
trade or business carried on by such shareholder.
If the income from the Fund is not effectively connected with a U.S.
trade or business carried on by a foreign shareholder, ordinary income
dividends paid to a foreign shareholder will be subject to U.S. withholding
tax at the rate of 30% (or lower treaty rate) upon the gross amount of the
dividend. Furthermore, such a foreign shareholder may be subject to U.S.
withholding tax at the rate of 30% (or lower treaty rate) on the gross
income resulting from the Fund's election to treat any foreign taxes paid
by it as paid by its shareholders, but may not be allowed a deduction
against this gross income or a credit against this U.S. withholding tax for
the foreign shareholder's pro rata share of such foreign taxes which it is
treated as having paid. Such a foreign shareholder would generally be
exempt from U.S. federal income tax on gains realized on the sale of shares
of the Fund, capital gain dividends and amounts retained by the Fund that
are designated as undistributed capital gains.
If the income from the Fund is effectively connected with a U.S.
trade or business carried on by a foreign shareholder, then ordinary income
dividends, capital gain dividends, and any gains realized upon the sale of
shares of the Fund will be subject to U.S. federal income tax at the rates
applicable to U.S. citizens or domestic corporations.
In the case of foreign noncorporate shareholders, the Fund may be
required to withhold U.S. federal income tax at a rate of 31% on
distributions that are otherwise exempt from withholding tax (or taxable
at a reduced treaty rate) unless such shareholders furnish the Fund with
proper notification of its foreign status.
The tax consequences to a foreign shareholder entitled to claim the
benefits of an applicable tax treaty may be different from those described
herein. Foreign shareholders are urged to consult their own tax advisers
with respect to the particular tax consequences to them of an investment
in the Fund, including the applicability of foreign taxes.
Effect of Future Legislation; Local Tax Considerations
The foregoing general discussion of U.S. federal income tax
consequences is based on the Code and the Treasury Regulations issued
thereunder as in effect on the date of this Statement of Additional
Information. Future legislative or administrative changes or court
decisions may significantly change the conclusions expressed herein, and
any such changes or decisions may have a retroactive effect with respect
to the transactions contemplated herein.
Rules of state and local taxation of ordinary income dividends and
capital gain dividends from regulated investment companies often differ
from the rules for U.S. federal income taxation described above.
Shareholders are urged to consult their tax advisers as to the consequences
of these and other state and local tax rules affecting investment in the
Fund.
-18-
<PAGE>
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:
n
P(l+T) = 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).
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
or the Dow Jones Industrial Average, 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 period March 30, 1994 (commencement of
operations) to December 31, 1994 was 1.01%.
OTHER INFORMATION
As of February 23, 1995, Reinsurance Corporation of New York, (an
affiliate of Lexington Management Corporation, the Fund s investment
adviser), 80 Maiden Lane, New York, N.Y., 10038 owned beneficially 204,372
shares of the Fund (38% of the Fund s outstanding shares). The balance of
the outstanding shares of the Fund are owned by Transamerica Occidental
Life Insurance Company and Aetna Life Insurance and Annuity Company and are
allocated to separate accounts which are used for funding variable annuity
contracts.
-19-
<PAGE>
Independent Auditors' Report
The Board of Directors and Shareholders
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, 1994, the related
statement of operations, changes in net assets and the financial
highlights for the period 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, 1994, 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, 1994, the results of its operations for the year then
ended, changes in its net assets for each of the years in the two-year
period then ended, and financial highlights for each of the years in the
four-year period then ended, in conformity with generally accepted
accounting principles.
KPMG PEAT MARWICK LLP
New York, New York
January 30, 1995
LEXINGTON EMERGING MARKETS FUND, INC.
STATEMENT OF NET ASSETS (Including the Portfolio of Investments)
(In U.S. Dollars)-December 31, 1994
Number or
Shares or
Principal
Amount Security Value
COMMON STOCKS: 57.8%
ARGENTINA: 2.2%
2,500 Banco Comercial S.A. GRD * $35,000
5,000 Commercial Del Plata 12,750
2,500 YPF Sociedad Anonima (ADR) 53,438
101,188
AUSTRIA: 0.4%
200 Bank Austria Staemme 16,323
16,323
BRAZIL: 5.9%
175,000 Acesita (Preferred shares) 14,893
2,200 Aracruz Celulose (ADR) 28,050
1,200 Companhia Vale (ADR) (Preferred shares) 57,150
503,000 Compania Energetica de Minas Gerais 45,781
552,000 Compania Siderurgica Nacional 18,824
60,000 Coteminas (Preferred shares) 20,567
23,000 Electrobras (Preferred shares) 8,128
18,500 Iochpe Maxion SA (Preferred shares) 12,902
59,000 Petrol Brazileiros (Preferred shares) 7,461
175,914 Telebras (Preferred shares) 7,881
300,000 Telesp (Preferred shares) 42,730
6,171,000 Usiminas (Preferred shares) 8,388
272,755
CHILE: 3.2%
1,400 Banco O'Higgins (ADR) 23,975
700 Compania Cervecerias Unidas (ADR) 17,500
200 Compania de Telefonos de Chile (ADR) 15,750
950 Madeco S.A. (ADR) 25,175
1,600 Maderas y Sinteticos (ADR) 40,800
1,600 Vina Concha y Toro (ADR) 26,400
149,600
CZECH REPUBLIC: 0.2%
23 Fatra 2,096
90 IPS Praha 6,149
8,245
GREECE: 1.2%
300 A.E.G.E.K. 5,627
310 ETVA Leasing S.A. 6,267
1,500 Michaniki 23,103
700 Titan Cement 20,571
55,568
HUNGARY: 0.3%
1,000 Fotex Rt (ADR) * 15,750
15,750
INDONESIA: 4.4%
15,500 Argha Karya Prima Industries 16,227
18,000 Astra International 34,411
500 Bank Bali 1,092
4,000 Bank International Indonesia 12,745
26,600 Indah Kiat Paper & Pulp 30,269
6,000 Lippo Bank 9,285
1,000 Perusahaan Indosat (ADR) 35,750
12,500 Sampoerna 61,447
201,226
ISRAEL: 2.1%
3,100 **First Israel Fund, Inc. 31,000
420 Koor 32,167
1,400 Teva Pharmaceutical Industries (ADR) 33,950
97,117
MALAYSIA: 6.9%
1,400 Aokam Perdana Bhd 8,667
9,000 Berjaya Singer Bhd 9,875
6,000 Commerce Assets Holdings 24,216
3,000 Cycle & Carriage Bhd 10,874
2,000 Genting Berhad 17,163
5,000 Perusahaan Otomobl 18,221
11,000 Resorts World Bhd 64,655
25,200 Sime Darby Bhd 57,766
10,000 Sungei Way Holdings 39,969
8,000 Telekom Malaysia 54,232
3,000 Tenage National 11,873
317,511
MEXICO: 7.3%
1,200 Consorcio G Grupo Dina (ADR) 11,400
6,000 Desc Sociedad de Fomento
Industrial, S.A. de C.V. "B" 29,702
490 Empresas ICA Sociedad Company (ADR) 7,595
8,600 Grupo Finanaciero Banamex "C" 24,352
37,500 Grupo Financiero Bancomer "C" 21,683
1,100 Grupo Mexicano "B" (ADR) 8,388
6,500 Grupo Sidek S.A. de C.V. "B2" 14,029
500 Grupo Simec S.A. de C.V. (ADR) 7,563
2,200 Hylsamex, S.A. de C.V. (ADR) * 36,025
1,600 Telefonos de Mexico S.A. de C.V. (ADR) 65,600
4,300 Tolmex, S.A. de C.V. "B2" 35,762
2,800 Transportacion Maritima S.A. "L" (ADR) 21,350
1,100 Tubos de Acero de Mexico S.A. (ADR) 5,156
3,400 Vitro Sociedad Anonima (ADR) 47,600
336,205
PHILIPPINES: 3.3%
21,000 Ayala Land Inc. "B" 32,975
4,000 Bacnotan Cement 5,455
32,000 International Container
Terminal Service 26,446
40,000 J.G. Summit "B" 14,711
2,000 Manila Electric Company "B" 27,686
5,000 San Miguel Corporation "B" 26,445
26,000 Universal Robina Corporation 18,802
152,520
POLAND: 2.9%
400 Bank Slaski 18,555
400 Elektrim 17,898
5,800 Polifarb S.A. 26,190
2,500 Universal S.A. 11,820
420 Wedel S.A. 27,240
500 Zywiec 32,943
134,646
PORTUGAL: 0.5%
800 Banco Portugues Do Atlantico 10,123
200 Radio Marconi (P Shares) 6,843
600 Unicer 8,302
25,268
SINGAPORE: 5.3%
2,000 Cerebos Pacific Ltd. 10,980
7,000 Hitachi Zosen Ltd. 6,198
3,000 Inchcape Bhd 11,325
18,000 Jurong Cement Ltd. 57,075
2,000 Jurong Engineering Ltd. 13,727
5,000 Keppel Corporation Ltd. 42,553
18,000 Neptune Orient Lines Ltd. 24,708
2,000 Overseas Union Bank 11,668
10,000 Pacific Carriers Ltd. 9,677
5,000 Sembawang Corporation Ltd. 37,405
2,000 Singapore Airlines Ltd. 18,394
243,710
SOUTH AFRICA: 6.3%
600 Anglo American Corporation (ADR) 34,538
2,400 Barlow Rand (ADR) 21,450
1,100 Engen Ltd. 10,290
2,300 Johannesburg Consolidated Investments Ltd., (ADR) 58,980
1,600 Liberty Life (ADR) 38,800
2,000 Rustenburg Platinum Ltd. (ADR) 54,969
2,800 Samancor Ltd. (ADR) 39,165
1,400 South African Breweries (ADR) 33,250
291,442
TAIWAN: 0.6%
950 **Taiwan Fund Inc. 27,430
27,430
THAILAND: 2.8%
600 Advanced Info Service Company, Ltd. $8,320
900 Nation Publishing Group Company, Ltd. 1,614
900 Saha Pathanapibul Company 2,366
1,200 Siam Cement Company, Ltd. 71,919
2,600 Siam City Cement Company, Ltd. 44,342
128,561
UNITED KINGDOM: 0.8%
7,400 Antofagasta Holdings Plc 36,503
36,503
UNITED STATES: 0.1%
300 Freeport McMoran Copper & Gold 5,888
5,888
VENEZUELA: 1.1%
2,700 **Cermanic Carobobo (ADR) 3,375
4,600 **Mantex (ADR) 33,350
2,000 **Mavesa (ADR) 8,500
1,800 **Mavesa (ADR) * 7,650
52,875
TOTAL COMMON STOCKS (cost $2,897,032) 2,670,331
CONVERTIBLE DEBENTURES: 0.4%
10,000 Formosa Chemicals, 1.75%, due 07/19/01 * 9,625
10,000 Nan Ya Plastics, 1.75%, due 07/19/01 * 9,250
TOTAL CONVERTIBLE DEBENTURES (cost $20,000) 18,875
SHORT-TERM INVESTMENTS: 36.4%
U.S. Government Obligations
$200,000 U.S. Treasury Bills
4.80%, due 01/05/95 199,894
300,000 U.S. Treasury Bills
4.99%, due 01/26/95 298,961
300,000 U.S. Treasury Bills
5.33%, due 02/02/95 298,578
200,000 U.S. Treasury Bills
5.61%, due 03/02/95 198,130
500,000 U.S. Treasury Bills
5.37%, due 03/23/95 493,959
200,000 U.S. Treasury Bills
5.50%, due 03/30/95 197,311
TOTAL SHORT-TERM INVESTMENTS (cost $1,686,833) 1,686,833
TOTAL INVESTMENTS: 94.6% (cost $4,603,865+) $4,376,039
Other Assets in Excess of Liabilities: 5.4% 247,777
TOTAL NET ASSETS: 100.0%
(equivalent to $9.86 per share
on 469,015 shares outstanding) $4,623,816
At December 31, 1994, the composition of the Fund's net assets by
industry concentration was as follows:
Banking 4.9%
Capital Equipment 1.6
Consumer Durable 1.5
Consumer Nondurable 5.2
Energy 0.9
Energy Sources 2.4
Financial Services 0.9
Health Care 0.7
Materials 17.4
Merchandising 1.1
Multi-Industry 8.1
Real Estate 0.7
Services 6.8
Telecommunications 4.2
Utilities 1.8
U.S. Government Obligations 36.4
Other net assets 5.4
Total Net Assets 100.0%
ADR-American Depository Receipt
*-Restricted Security
** Non-income securities.
+ Aggregate cost for Federal income tax purposes is identical.
The Notes to Financial Statements are an integral part of this statement.
<TABLE>
<CAPTION>
Lexington Emerging Markets Fund. Inc.
Portfolio Changes
For the six months ended December 31,1994
(unaudited)
<S> <C> <C>
ADDITIONS INCREASES IN HOLDINGS DELETIONS
Acesita (Preferred shares) Antofagasta Holdings Plc Banco Galicia
Advanced Info Service Company, Ltd. Aracruz Cellulose (ADR) BCO Comercial Portuguese
Anglo American Corporation (ADR) Cerebos Pacific Ltd. Cemex "B"
Ayala Land Inc. "B" Commerce Asset Holding Chilectra S.A. 144A
Bacnotan Cement Compania Vale (ADR) (Preferred shares) Delta Dairy (Preferred shares)
Banco Comercial S.A. GRD Consorcio G Grupo Dina (ADR) Ege Seramik
Banco O'Higgins (ADR) Grupo Financiero Banamex "C" Fraser & Neave Ltd.
Bank Slaski Grupo Financiero Bancomer "C" India Fund
Compania Energetica de Minas Gerais Grupo Mexicano "B" (ADR) Izmir Demir Celi
Compania Siderurgica Nacional International Container Terminal Service Land & Houses
Coteminas (Preferred shares) Johanesburg Consolidated Investments, Ltd. (ADR) Nestle Malaysia
Cycle & Carriage Bhd Jurong Cement Ltd. Perez Companc
Electrobras (Preferred shares) Keppel Corporation, Ltd. Standard Chartered Bank
Elektrim Manila Electric Company Ltd. TAT Konservecili
Engen Ltd. Resorts World Bhd Tjiwi Kimia
Formosa Chemicals, 1.75%, due 07/19/01 Rustenburg Platinum Ltd. (ADR) USAS
Genting Berhad Sampoerna
Grupo Simec S.A. de C.V. (ADR) Sembawang Corporation Ltd. DECREASES IN HOLDINGS
Hitachi Zosen Ltd. Siam Cement Company, Ltd. Aokam Perdana Bhd
Hylsamex, S.A. de C.V. (ADR) Sime Darby Bhd Berjaya Singer Bhd
Inchcape Bhd Sungei Way Holdings Comercial del Plata
Iochpe Maxion S.A. (Preferred shares) Telefonos de Mexico S.A. de C.V. (ADR) Compania Cervecerias Unidas (ADR)
Jurong Engineering Ltd. Telekom Malaysia Compania Telefonos de Chile (ADR)
J.G. Summit "B" Tolmex, S.A. de C.V. "B2" Desc Sociedad de Fomento Industrial
Koor Universal Robina Corporation S.A. de C.V. "B"
Nan Ya Plastics, 1.75%, due 07/19/01 Vitro Sociedad Anonima (ADR) Empresas ICA Sociedad Company (ADR)
Neptune Orient Lines "B" Grupo Sidek S.A. de C.V. "B2"
Overseas Union Bank Liberty Life (ADR)
Pacific Carrier Ltd. Madeco S.A. (ADR)
Perusahaan Indosat (ADR) Perusahaan Otomobl
Petrol Brazileiros (Preferred shares) Samancor Ltd. (ADR)
Polifarb S.A. Singapore Airlines Ltd.
San Miguel Corporation "B" Taiwan Fund Inc.
Siam City Cement Company, Ltd. Unicer
Telebras (Preferred shares)
Telesp (Preferred shares) PURCHASED AND SOLD DURING PERIOD
Tenage National Buenos Aires Embotellado
Teva Pharmaceutical Industries (ADR) Grupo Casa Autry (ADR)
Tubos de Acero de Mexico S.A. (ADR) Grupo Sidek S.A. de C.V. "L"
Universal S.A. Sungei Way Holdings Rights
Usiminas (Preferred shares) Sungei Way Holdings Rights Warrants
Vina Concha y Toro (ADR) Technology Resources Industries
Wedel S.A. Telefonica Argentina
Zywiec Van der Horst
</TABLE>
Lexington Emerging Markets Fund, Inc.
Statement of Assets and Liabilities
December 31, 1994
ASSETS
Investments, at value (cost $4,603,865)(Note 1) ...... $4,376,039
Cash ................................................. 62,447
Receivable for shares sold ........................... 45,729
Receivable for securities sold ....................... 148,152
Dividends and interest receivable .................... 4,146
Deferred organization expenses, net (Note 1).......... 18,942
Due from Lexington Management Corporation (Note 2).... 21,817
---------------
Total Assets........... 4,677,272
---------------
LIABILITIES
Payable for shares redeemed .......................... 4,974
Payable for investment securities purchased .......... 5,027
Accrued expenses ..................................... 43,455
---------------
Total Liabilities ..... 53,456
---------------
NET ASSETS (equivalent to $9.86 per share on
469,015 shares outstanding) (Note 3) ................. $4,623,816
===============
NET ASSETS consist of:
Capital stock- Authorized 500,000,000 shares,
$.001 par value per share ........................... $469
Additional paid-in capital ........................... 4,937,120
Undistributed net investment income (Note 1) ......... 346
Distributions in excess of net realized gains on
investments and foreign currency (Note 1)............ (86,264)
Net unrealized depreciation of investments
and foreign currency ................................ (227,855)
---------------
NET ASSETS ............ $4,623,816
===============
The Notes to Financial Statements are an integral part of this statement
<TABLE>
<CAPTION>
Lexington Emerging Markets Fund, Inc.
Statement of Operations
March 30, 1994 (commencement of operations) to December 31, 1994
<S>
INVESTMENT INCOME <C> <C>
Interest income ............................................... $14,028
Dividend income ............................................... 33,915
---------------
47,943
Less: Foreign tax expense ..................................... 6,807
---------------
Total investment income .................................... $41,136
EXPENSES
Investment advisory fee (Note 2)............................... 17,532
Accounting and shareholder service fees (Note 2) .............. 3,785
Custodian and transfer agent fees ............................. 57,635
Printing and mailing .......................................... 17,534
Directors' fees ............................................... 7,549
Amortization of deferred organization expenses (Note 1) ....... 3,348
Legal and audit fees .......................................... 16,791
Computer processing fees ...................................... 3,750
Other expenses ................................................ 1,684
---------------
Total expenses ............................................. 129,608
Less: expenses recovered under contract with investment
adviser (Note 2) .......................................... 102,954 26,654
--------------- ---------------
Net investment income ................. 14,482
REALIZED AND UNREALIZED LOSS
ON INVESTMENTS (Note 4)
Realized loss on investments (excluding short-term securities):
Proceeds from sales ......................................... $1,323,665
Cost of securities sold ..................................... 1,325,797
---------------
Net realized loss ......................................... (2,132)
Unrealized depreciation of investments:
End of period ............................................... ($227,855)
Beginning of period ......................................... ___
---------------
Change during period ...................................... (227,855)
---------------
Net realized and unrealized loss on investments ........... (229,987)
---------------
DECREASE IN NET ASSETS RESULTING FROM OPERATIONS ................ ($215,505)
===============
The Notes to Financial Statements are an integral part of this statement.
</TABLE>
<TABLE>
<CAPTION>
Lexington Emerging Markets Fund, Inc.
Statement of Changes in Net Assets
March 30,1994 (commencement of operations) to December 31, 1994
<S> <C>
1994
---------------
Net investment income ........................................... $14,482
Net realized loss from investment transactions .................. (2,132)
Unrealized depreciation of investments .......................... (227,855)
---------------
Net decrease in net assets resulting from operations ............ (215,505)
Distributions to shareholders from net investment income ........ (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).. 4,937,589
---------------
Net increase in net assets .............................. 4,623,816
NET ASSETS:
Beginning of period ........................................... 0
---------------
End of period (including undistributed net investment
income of $346) ............................................... $4,623,816
===============
The Notes to Financial Statements are an integral part of this statement.
</TABLE>
<TABLE>
<CAPTION>
Lexington Emerging Markets Fund, Inc.
Notes to Financial Statements
December 31, 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. 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 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 settled.
Distributions: During the current year, the Fund adopted Statement of Position 93-2: Determination, Disclosure and
Financial Statement Presentation of Income, Capital Gain and Return of Capital Distributions by Investment Companies.
Accordingly, as of December 31, 1994, book and tax basis differences amounting to $4,036 have been reclassified from
distributions in excess of net realized gains to undistributed net investment income. Net investment income, net
realized gains, and net assets were not affected by this change. Distribution in excess of net realized gains reflect
temporary book-tax differences arising from Internal Revenue Code ("IRC") Excise Tax distribution requirements, associated
post-October Loss deferral provisions, which effectively allow the deferral of net realized capital losses to the next
year, and gains resulting from wash sales.
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.
Deferred Organization Expenses: Organization expenses aggregating $22,290 have been deferred and are being amortized
on a straight-line basis over five years.
Lexington Emerging Markets Fund, Inc.
Notes to Financial Statements
December 31, 1994 (continued)
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 period from March 30, 1994
to December 31, 1994 expense reimbursement amounted to $102,954 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:
March 30, 1994
(Commencement of
Operations) to
December 31, 1994
<S> <C> <C>
Shares Amount
------ ------
Shares sold ..................................................... 497,613 $5,246,882
Shares issued on reinvestment of dividends ...................... 9,946 98,265
-------- ---------
507,559 5,345,147
Shares redeemed ................................................. (38,544) (407,558)
-------- ----------
Net increase ............................................... 469,015 $4,937,589
======== ==========
Note 4- Purchases and Sales of Investment Securities:
The cost of purchases and proceeds from sales of securities from March 30, 1994 (commencement of operations)
to December 31, 1994, excluding short-term securities, were $4,242,835 and $1,323,665, respectively.
At December 31, 1994, 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 $174,156 and aggregate gross unrealized depreciation for which there is an excess of tax cost over
value amounted to $402,011.
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 develop-
ments, 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.
</TABLE>
<TABLE>
<CAPTION>
Lexington Emerging Markets Fund, Inc.
Financial Highlights
Selected per share data for a share outstanding throughout the period:
March 30,1994
(Commencement of
Operations) to
December 31,1994
----------------
<S> <C>
Net asset value, beginning of period ............................ $10.00
-----
Income from investment operations:
Net investment income ......................................... 0.03
Net realized and unrealized gain on investments ............... 0.04
-----
Total income from investment operations ......................... 0.07
-----
Less distributions:
Dividend from net investment income ........................... (0.02)
Distributions in excess of net realized capital gains ......... (0.19)
-----
Total distributions ............................................. (0.21)
-----
Net asset value, end of period .................................. $9.86
=====
Total return .................................................... 0.76%
Ratios to average net assets:
Expenses, before reimbursement ................................ 6.28%*
Expenses, net of reimbursement ................................ 1.30%*
Net investment income (loss), before reimbursement ............ (4.29)%*
Net investment income (loss) .................................. 0.70%*
Portfolio turnover .............................................. 71.21%*
Net assets at end of period (000's omitted) ..................... $4,624
* Annualized
</TABLE>
