================================================================================
LEXINGTON
================================================================================
================================================================================
LEXINGTON
EMERGING
MARKETS
FUND, INC.
- -------------------------------------------------------------------------------
Seeks long-term growth of capital
primarily through investment in
equity securities of
companies domiciled in, or doing
business in, emerging countries
and emerging markets.
- -------------------------------------------------------------------------------
SEMI-ANNUAL REPORT
JUNE 30, 1997
The Lexington Group
of No Load
Investment Companies
================================================================================
<PAGE>
DEAR SHAREHOLDERS:
- --------------------------------------------------------------------------------
The Lexington Emerging Markets Fund appreciated 7.4%* during the second
quarter and 15.1%* for the six month period through June. According to Lipper
Analytical Services, Inc., the average emerging markets fund advanced 10.5% for
the quarter and 21.0% for the first half of the year. The unmanaged Morgan
Stanley Emerging Market Free Index** posted gains of 8.6% for the quarter and
17.7% during the first half.
Most emerging markets have been strong performers in 1997 with the
exception of Southeast Asia. Russia has been the best of the best with a first
half gain of 117.8%. The Latin American region provided the best regional
returns, advancing 40.8% through June. Brazil, with a gain of 54.1%, was the
strongest performer in the Latin region. Thailand was the worst market with a
loss of 35.7%. The Philippines and Malaysia each lost over 11% during the first
half. Despite relatively large positions in Russia and Greece, the Fund
underperformed its peers due to several factors. Asian holdings in Malaysia,
Singapore, and the Philippines hurt performance in the second quarter as
concerns over the banking and property sectors led to rising interest rates and
falling stock prices. Positions in these markets were greatly reduced but
performance did suffer. Although only slightly underweight in Latin America, the
Fund's holdings were too defensive for the region which was, and is,
experiencing an economic recovery. There were positive results as well. Russian
stocks in the Fund provided big returns as did Greek equities. Greek stocks
advanced 44% during the first half as interest rates continued to fall with
inflation. Greek equities had performed poorly in 1996 and offered excellent
value heading into 1997.
The current environment remains positive for emerging market equities with
Southeast Asia being the primary exception. Latin American equities have been
among the star performers in 1997. A combination of rising economic activity,
falling inflation and interest rates, plus economic reform has propelled
equities to sharp gains. Brazilian equities rose 54.1% during the first half.
The largest companies such as Telebras enjoyed the strongest gains as investors
bet on further economic reform in utilities. Mexican stocks lagged Brazil but
still gained 30.0%. A stronger than expected economic recovery, attractive
valuation levels, and falling interest rates were the main contributors to the
market. The outlook for the region remains positive although the sharp
outperformance of Brazil dictates that better opportunities lie in Mexico and
perhaps Argentina. While Latin stocks have advanced sharply, many Asian equities
have continued to decline. Years of heavy capital inflows and currencies tied to
the U.S. dollar have led to excesses in property, banks, and the industrial
sector. Thailand has the greatest problems in the region. The Thai market
declined 35.7% during the first half of 1997. A recent devaluation of the Thai
Baht has left the corporate sector in a precarious state as Thai companies had
borrowed $80 billion in foreign loans. The cost of these loans has now risen as
a result of the devaluation. Economic pain and adjustment will take some time to
work through the economies of these countries. The short term outlook will
likely see continued high interest rates and weak currencies, ultimately, as
investors become even more negative. Opportunities will increase in this region
if one takes a 2-3 year view.
The Lexington Emerging Markets Fund is overweight in Latin America. Mexico,
with a 13% weighting is the largest holding. We expect strong profit momentum
and continued falls in inflation. Brazilian equities have performed
exceptionally well and as a result we are taking some profits. Chilean holdings
should continue to benefit as that economy slows and interest rates fall.
Holdings in Asia, outside of Hong Kong and China remain very low. As Southeast
Asia continues to fall we have increased our focus on this region as we expect
good value to emerge. Hong Kong stocks with a heavy concentration of Chinese
business continue to perform well and valuations are still attractive.
Elsewhere, the Fund has over 6% in Russian equities which have risen well over
100%. Russia is being further integrated into the investment community. The
Russian market is currently being fueled by a flood of western cash and hopes
1
<PAGE>
that President Yeltsin's reform minded government can succeed. Volatility in
Russia is very high; however, the long term outlook does offer substantial
upside even from current levels. Finally, Greek equities have been reduced to 3%
of the Fund as a first half rise of 44.0% has made Greek stocks less attractive.
Sincerely,
/s/Richard T. Saler /s/Robert M. DeMichele
------------------- ----------------------
Richard T. Saler Robert M. DeMichele
Portfolio Manager President
August, 1997 August, 1997
* 9.43% and 5.68% are the one year and since commencement (3/30/94) average
annual standard total returns, respectively, for the period ended June 30,
1997. Investment return and principal value of an investment will fluctuate
so that an investor's shares, when redeemed, may be worth more or less than
at their original cost. Total return represents past performance and is not
predictive of future results.
** All country and regional returns are from the corresponding Morgan Stanley
Capital International Indicies. Returns are dollar based with net dividends
reinvested.
2
<PAGE>
LEXINGTON EMERGING MARKETS FUND, INC.
STATEMENT OF NET ASSETS
(INCLUDING THE PORTFOLIO OF INVESTMENTS)
June 30, 1997 (unaudited)
<TABLE>
<CAPTION>
NUMBER OF VALUE
SHARES SECURITY (NOTE 1)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ARGENTINA:STOCKS: 94.0%
ARGENTINA: 4.9%
13,700 Banco Frances del Rio de la Plata S.A. ........................................... $ 445,250
83,206 Perez Companc S.A. ............................................................... 668,225
12,800 Telefonica de Argentina S. A. (ADR) .............................................. 443,200
----------
1,556,675
----------
BRAZIL: 11.5%
31,950 Aracruz Celulose S.A. (ADR) ...................................................... 650,981
880,000 Banco Itau S.A. (Preferred shares) ............................................... 502,718
4,960,000 CESP - Companhia Energetica de Sao Paulo (Preferred shares)2 ..................... 331,727
747,000 Cia Tecidos Norte De Mina (Preferred shares) ..................................... 291,432
510,000 Companhia Cervejaria Brahma (Preferred shares) ................................... 390,833
760,000 Light - Servicos de Electricidade S.A. ........................................... 367,099
1,098,000 Petroleo Brasileiro S.A. (Preferred shares) ...................................... 300,878
30,800 Riograndense Telecom (Preferred shares)2 ......................................... 46,634
1,097 Riograndense Telecom (Rights)2 ................................................... 251
2,711,000 Telecomunicacoes Brasileiras S.A. ................................................ 411,731
1,206,000 Telecomunicacoes de Sao Paulo S.A. ............................................... 392,087
----------
3,686,371
----------
CHILE: 7.0%
63,700 Antofagasta Holdings Plc ......................................................... 486,083
28,900 Banco Santander (ADR) ............................................................ 426,275
22,400 Empresa Nacional Electricidad S.A. (ADR) ......................................... 505,400
15,400 Enersis S.A. ..................................................................... 547,663
16,400 Maderas y Sinteticos Sociedad Anonima S.A. (ADR) ................................. 272,650
----------
2,238,071
----------
COLOMBIA: 1.0%
12,200 Banco Ganadero S.A. (ADR) ........................................................ 318,725
----------
CZECH REPUBLIC: 1.0%
3,090 SPT Telekon AS2 .................................................................. 324,239
----------
GREECE: 2.8%
5,950 Delta Dairy S.A. (Preferred shares) .............................................. 51,811
18,300 Hellenic Tellecommunication Organization S.A. .................................... 430,047
1,332 Hellenic Tellecommunication Organization S.A. (Rights)2 .......................... 2,184
33,900 Michaniki S.A. ................................................................... 256,902
2,900 Titan Cement Company ............................................................. 143,167
----------
884,111
----------
HONG KONG: 6.9%
538,800 Founder Hong Kong, Ltd. .......................................................... 365,122
690,000 Glorious Sun Enterprises ......................................................... 327,308
394,000 JCG Holdings, Ltd. ............................................................... 317,853
100,000 Jiangsu Expressway Company, Ltd.1,2 .............................................. 35,496
478,000 Moulin International Holding ..................................................... 348,600
6,700 Nu Skin Asia Pacific, Inc.2 ...................................................... 177,550
617,000 Qingling Motors Company .......................................................... 318,563
1,331,000 Tingyi (Cayman Islands) Holding Company .......................................... 331,578
----------
2,222,070
----------
</TABLE>
3
<PAGE>
LEXINGTON EMERGING MARKETS FUND, INC.
STATEMENT OF NET ASSETS
(INCLUDING THE PORTFOLIO OF INVESTMENTS)
June 30, 1997 (unaudited) (continued)
<TABLE>
<CAPTION>
NUMBER OF VALUE
SHARES SECURITY (NOTE 1)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
HUNGARY: 1.0%
7,900 Zalakeramia Rt. .................................................................. $ 306,030
----------
INDIA: 6.1%
15,950 Hindalco Industries, Ltd.1 ....................................................... 563,833
18,300 State Bank of India1 ............................................................. 484,950
43,500 Videsh Sanchar Nigam, Ltd.1,2 .................................................... 902,625
----------
1,951,408
----------
INDONESIA: 5.0%
238,000 PT Fiskar Agung Perkasa .......................................................... 384,187
12,000 PT Ramayana Lestari .............................................................. 34,547
269,500 PT Ramayana Lestari Sentosa ...................................................... 775,858
267,000 PT Tambang Timah ................................................................. 414,528
----------
1,609,120
----------
ISRAEL: 1.4%
6,800 Teva Pharmaceutical Industries, Ltd. (ADR) ....................................... 440,725
----------
MALAYSIA: 3.7%
44,400 Hong Leong Credit Bhd ............................................................ 165,356
3,700 Hong Leong Credit Bhd (Rights)2 .................................................. 3,665
209,000 Magnum Corporation Bhd ........................................................... 314,659
38,000 Sungei Way Holdings Bhd .......................................................... 71,664
185,000 Tanjong Plc ...................................................................... 637,677
----------
1,193,021
----------
MEXICO: 10.4%
77,800 Cemex S.A. de C.V. "B" ........................................................... 378,510
207,000 Cifra S.A. de C.V. ............................................................... 330,492
21,000 Grupo Casa Autrey, S.A. de C.V. (ADR) ............................................ 426,562
211,600 Grupo Financiero Banamex ......................................................... 542,665
12,400 Grupo Imsa S.A. de C.V. .......................................................... 334,800
334,800 Grupo Industrial Maseco S.A. de C.V. ............................................. 365,335
8,300 Grupo Televisa S.A. (ADR) ........................................................ 252,113
7,500 Telefonos de Mexico S.A. ......................................................... 358,125
30,400 Vitro Sociedad Anonima (ADR) ..................................................... 342,000
----------
3,330,602
----------
PAKISTAN: 0.6%
39,700 Pakistan Investment Fund ......................................................... 208,425
----------
PERU: 1.2%
14,700 Telefonica del Peru S.A. (ADR) ................................................... 384,956
----------
PHILIPPINES: 4.0%
926,000 C & P Homes, Inc. ................................................................ 347,566
972,000 Fortune Cement Corporation ....................................................... 235,851
316,175 International Container Terminal Service, Inc. ................................... 161,827
63,410 Manila Electric Company "B" ...................................................... 312,530
630,200 Universal Robina Corporation ..................................................... 229,372
----------
1,287,146
----------
</TABLE>
4
<PAGE>
LEXINGTON EMERGING MARKETS FUND, INC.
STATEMENT OF NET ASSETS
(INCLUDING THE PORTFOLIO OF INVESTMENTS)
June 30, 1997 (unaudited) (continued)
<TABLE>
<CAPTION>
NUMBER OF VALUE
SHARES SECURITY (NOTE 1)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
POLAND: 3.1%
8,947 Debica S.A. ...................................................................... $ 183,773
51,562 Elektrim Towarzystwo Handlowe S.A. ............................................... 448,741
41,900 Polifarb Cieszyn Wroclaw S.A. .................................................... 212,927
17,200 Stomil Olsztyn S.A.2 ............................................................. 164,869
----------
1,010,310
----------
PORTUGAL: 1.1%
9,064 Portugal Telecom S.A. ............................................................ 366,087
----------
RUSSIA: 6.6%
25,900 LUKoil Holdings of Russia2 ....................................................... 508,417
1,500 LUKoil Holdings of Russia (ADR) .................................................. 116,625
151,600 Rostelekom2 ...................................................................... 588,208
2,549,400 Unified Energy System2 ........................................................... 917,784
----------
2,131,034
----------
SINGAPORE: 3.2%
96,000 Jardine Strategic Holdings, Ltd. ................................................. 362,880
3,400 Jardine Strategic Holdings, Ltd. (Warrants)2 ..................................... 153
201,400 Want Want Holdings2 .............................................................. 668,648
----------
1,031,681
----------
SOUTH AFRICA: 1.4%
2,400 Liberty Life Association of Africa, Ltd. (GDR) ................................... 65,107
14,500 Liberty Life Association of Africa, Ltd. ......................................... 393,228
----------
458,335
----------
SOUTH KOREA: 1.0%
3,820 Samsung Electronics .............................................................. 303,277
46 Samsung Electronics Company (Rights)2 ............................................ 1,243
500 Suheung Capsule .................................................................. 32,320
----------
336,840
----------
TAIWAN: 2.9%
36,537 Taiwan Fund, Inc. ................................................................ 922,559
----------
THAILAND: 1.2%
42,000 BEC World Public Company ......................................................... 359,930
6,000 Matichon Public Company, Ltd. .................................................... 13,897
----------
373,827
----------
TURKEY: 3.3%
4,006,009 Akbank T.A.S. .................................................................... 344,517
2,689,500 ArcelikA.S. ...................................................................... 363,082
726,000 Eregli Demir Ve Celik Fabrikalari T.A.S. ......................................... 121,242
227,000 Petkim Petrokimya Holding ........................................................ 78,088
857,202 Petrol Ofisi A.S. ................................................................ 162,011
----------
1,068,940
----------
VENEZUELA: 1.7%
12,400 Compania Anonima Nacional Telefonos de Venezuela (ADR) ........................... 534,750
----------
TOTAL COMMON STOCKS (cost $27,816,883) ........................................... 30,176,058
----------
</TABLE>
5
<PAGE>
LEXINGTON EMERGING MARKETS FUND, INC.
STATEMENT OF NET ASSETS
(INCLUDING THE PORTFOLIO OF INVESTMENTS)
June 30, 1997 (unaudited) (continued)
<TABLE>
<CAPTION>
PRINCIPAL VALUE
AMOUNT SECURITY (NOTE 1)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
SHORT-TERM INVESTMENTS: 0.6%
$100,000 U.S. Treasury Bill, 5.175%, due 12/11/1997 ....................................... $ 97,657
100,000 U.S. Treasury Bill, 5.325%, due 01/08/1998 ....................................... 97,253
-----------
TOTAL SHORT-TERM INVESTMENTS (cost $194,832) ..................................... 194,910
-----------
TOTAL INVESTMENTS: 94.6% (cost $28,011,715+) (Note 1) ............................ 30,370,968
Other assets in excess of liabilities: 5.4% ...................................... 1,740,430
-----------
TOTAL NET ASSETS: 100.0%
(equivalent to $11.60 per share on 2,768,608 shares outstanding) ............... $32,111,398
===========
</TABLE>
1Restricted security (Note 6).
2Non-income producing security.
ADR--American Depository Receipt.
GDR--Global Depository Receipt.
+Aggregate cost for Federal income tax purposes is $28,047,825.
----------
At June 30, 1997, the composition of the Fund's net assets by industry
concentration was as follows:
Banking ........................................ 9.2%
Capital Equipment .............................. 1.2
Construction & Housing ......................... 1.9
Consumer Durable ............................... 4.3
Consumer Non-durable ........................... 7.6
Electrical & Electronics ....................... 0.9
Energy Sources ................................. 6.4
Financial Services ............................. 3.7
Health &PersonalCare ........................... 3.4
Materials ...................................... 14.2
Merchandising .................................. 4.6
Multi-Industry ................................. 8.2
Services ....................................... 4.9
Telecommunications ............................. 14.9
Trade .......................................... 1.4
Transportation ................................. 0.1
Utilities ...................................... 7.1
U.S. Treasury Bills ............................ 0.6
Other Assets ................................... 5.4
-----
Total Net Assets ...........................100.0%
=====
The Notes to Financial Statements are an integral part of this statement.
6
<PAGE>
LEXINGTON EMERGING MARKETS FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
June 30, 1997 (unaudited)
ASSETS
Investments at value (cost $28,011,715) (Note 1) .................. $30,370,968
Cash .............................................................. 2,219,968
Receivable for investment securities sold ......................... 340,726
Receivable for shares sold ........................................ 148,805
Dividends and interest receivable ................................. 78,248
Foreign taxes recoverable ......................................... 719
Deferred organization expenses, net (Note 1) ...................... 6,932
-----------
Total Assets ....................................... 33,166,366
-----------
LIABILITIES
Due to Lexington Management Corporation (Note 2) .................. 21,699
Payable for investment securities purchased ....................... 936,026
Payable for shares redeemed ....................................... 51,775
Accrued expenses .................................................. 45,468
-----------
Total Liabilities .................................. 1,054,968
-----------
NET ASSETS (equivalent to $11.60 per share
on 2,768,608 shares outstanding) (Note 4) ....................... $32,111,398
===========
NET ASSETS consist of:
Capital stock--authorized 1,000,000,000 shares, $.001 par
value per share ................................................. $ 2,769
Additional paid-in capital (Note 1) ............................... 28,794,728
Undistributed net investment income (Note 1) ...................... 137,919
Accumulated net realized gains on investments and foreign
currency holdings (Note 1) ...................................... 817,851
Unrealized appreciation of investments and foreign
currency holdings ............................................... 2,358,131
-----------
Total Net Assets ................................... $32,111,398
===========
The Notes to Financial Statements are an integral part of this statement.
7
<PAGE>
LEXINGTON EMERGING MARKETS FUND, INC.
STATEMENT OF OPERATIONS
Six months ended June 30, 1997 (unaudited)
<TABLE>
<CAPTION>
<S> <C> <C>
INVESTMENT INCOME
Dividends ...................................................................... $ 327,368
Interest ....................................................................... 68,691
---------
................................................................................... 396,059
Less: Foreign tax expense .......................................................... 30,416
---------
Total investment income ................................................ $ 365,643
EXPENSES
Investment advisory fee (Note 2) ............................................. 115,605
Custody expense .............................................................. 89,541
Printing and mailing expenses ................................................ 15,716
Accounting expenses (Note 2) ................................................. 13,878
Professional fees ............................................................ 7,540
Directors' fees and expenses ................................................. 6,593
Computer processing fees ..................................................... 5,068
Amortization of organization costs ........................................... 3,077
Registration fees ............................................................ 2,534
Transfer agent and shareholder services expense (Note 2) ..................... 1,991
Other expenses ............................................................... 1,482
---------
Total expenses .......................................................... 263,025
Less: expenses recovered under contract with
investment adviser (Note 2) ........................................... 21,212 241,813
--------- ---------
Net investment income .............................................. 123,830
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS (NOTE 4)
Net realized gain (loss) on:
Investments ............................................................. 1,459,651
Foreign currency transactions ........................................... (8,336)
---------
Net realized gain .................................................. 1,451,315
Net change in unrealized appreciation on:
Investments ............................................................. 1,941,972
Foreign currency translation of other assets and liabilities ............ (1,122)
---------
Net change in unrealized appreciation .............................. 1,940,850
----------
Net realized and unrealized gain ................................... 3,392,165
----------
INCREASE IN NET ASSETS RESULTING FROM OPERATIONS ................................... $3,515,995
==========
</TABLE>
The Notes to Financial Statements are an integral part of this statement.
8
<PAGE>
LEXINGTON EMERGING MARKETS FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED
JUNE 30, 1997 DECEMBER 31,
(UNAUDITED) 1996
----------- -----------
<S> <C> <C>
Net investment income ........................................................... $ 123,830 $ 34,825
Net realized gain (loss) from investment and foreign currency
transactions .................................................................. 1,451,315 (157,362)
Net change in unrealized appreciation on investments and
foreign currency transactions ................................................. 1,940,850 483,796
----------- -----------
Increase in net assets resulting from operations ......................... 3,515,995 361,259
Increase from capital share transactions (Note 3) ............................... 6,917,413 13,502,070
----------- -----------
Net increase in net assets ....................................... 10,433,408 13,863,329
NET ASSETS
Beginning of period ............................................................. 21,677,990 7,814,661
----------- -----------
End of period (including undistributed net investment income
of $137,919 and $14,089 respectively) ......................................... $32,111,398 $21,677,990
=========== ===========
</TABLE>
The Notes to Financial Statements are an integral part of this statement.
9
<PAGE>
LEXINGTON EMERGING MARKETS FUND, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1997 (unaudited) and December 31, 1996
1 -- SIGNIFICANT ACCOUNTING POLICIES
Lexington Emerging Markets Fund, Inc. (the "Fund") is an open-end diversified
management investment company registered under the Investment Company Act of
1940, as amended. The Fund's investment objective is to seek long-term growth of
capital primarily through investment in equity securities of companies domiciled
in, or doing business in, emerging countries and emerging markets. With the
exception of shares held in connection with initial capital of the Fund, shares
of the Fund are currently being offered only to participating insurance
companies for allocation to certain of their separate accounts established for
the purpose of funding variable annuity contracts and variable life insurance
policies issued by the participating insurance companies. The following is a
summary of significant accounting policies followed by the Fund in the
preparation of its financial statements:
INVESTMENTS Security transactions are accounted for on a trade date basis.
Realized gains and losses from investment transactions are reported on the
identified cost basis. Securities traded on a recognized stock exchange are
valued at the last sales price reported by the exchange on which the securities
are traded. If no sales price is recorded, the mean between the last bid and
asked prices is used. Securities traded on the over-the-counter market are
valued at the mean between the last current bid and asked price. Short-term
securities having a maturity of 60 days or less are stated at amortized cost,
which approximates market value. Securities for which market quotations are not
readily available and other assets are valued by Fund management in good faith
under the direction of the Fund's Board of Directors. All investments quoted in
foreign currencies are valued in U.S. dollars on the basis of the foreign
currency exchange rates prevailing at the close of business. Dividend income and
distributions to shareholders are recorded on the ex-dividend date. Interest
income, adjusted for amortization of premiums and accretion of discounts, 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 in the purchase or sale of securities
denominated in foreign currency. The Fund may also enter into such contracts to
hedge against changes in foreign currency exchange rates on portfolio positions.
These contracts are marked to market daily, by recognizing the difference
between the contract exchange rate and the current market rate as unrealized
gains or losses. Realized gains or losses are recognized when contracts are
closed and are reported in the statement of operations. There were no forward
foreign currency exchange contracts outstanding at June 30, 1997.
FEDERAL INCOME TAXES It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to "regulated investment
companies" and to distribute all of its taxable income to its shareholders.
Therefore, no provision for Federal income taxes is required.
DISTRIBUTIONS Dividends from net investment income and net realized capital
gains are normally declared and paid annually, but the Fund may make
distributions on a more frequent basis to comply with the distribution
requirements of the Internal Revenue Code. The character of income and gains to
be distributed are determined in accordance with income tax regulations which
may differ from generally accepted accounting principles. At December 31, 1996
reclassifications were made to the Fund's capital accounts to reflect permanent
book/tax differences and income and gains available for distributions under
income tax regulations. Net investment income, net realized gains and net assets
were not affected by this change.
DEFERRED ORGANIZATION EXPENSES Organization expenses aggregating $22,290
have been deferred and are being amortized on a straight-line basis over five
years.
10
<PAGE>
LEXINGTON EMERGING MARKETS FUND, INC
NOTES TO FINANCIAL STATEMENTS
June 30, 1997 (unaudited) and December 31, 1996 (continued)
1 -- SIGNIFICANT ACCOUNTING POLICIES (continued)
USE OF ESTIMATES The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of increases and
decreases in net assets from operations during the reporting period. Actual
results could differ from those estimates.
2 -- INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATE
The Fund pays an investment advisory fee to Lexington Management Corporation
("LMC") at an annual rate of 0.85% of the Fund's average daily net assets. For
1997, LMC has voluntarily agreed to 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 1.75% of
the Fund's average net assets through April 30, 1997 and to 2.50% of the Fund's
average net assets for the remainder of 1997. For the six months ended June 30,
1997 expense reimbursement amounted to $21,212 and is set forth in the statement
of operations.
The Fund reimbursed LMC for certain expenses, including accounting costs of
$13,878 which are incurred by the Fund, but paid by LMC.
3 -- CAPITAL STOCK
Transactions in capital stock were as follows:
Six months ended
June 30, 1997 Year ended
(unaudited) December 31, 1996
--------------------------- -------------------------
Shares Amount Shares Amount
------- ------- ------- -------
Shares sold ......... 1,954,213 $21,545,431 2,264,743 $23,256,170
Shares redeemed ..... (1,329,674) (14,628,018) (953,567) (9,754,100)
--------- ---------- -------- ----------
Net increase ...... 624,539 $ 6,917,413 1,311,176 $13,502,070
========= =========== ========= ===========
4 -- PURCHASES AND SALES OF INVESTMENT SECURITIES
The cost of purchases and proceeds from sales of securities for the six months
ended June 30, 1997, excluding short-term securities, were $26,289,416 and
$20,031,134, respectively.
At June 30, 1997, the aggregate gross unrealized appreciation for all
securities in which there is excess of value over tax cost amounted to
$3,484,280 and aggregate gross unrealized depreciation for all securities in
which there is an excess of tax cost over value amounted to $1,126,149.
5 -- INVESTMENT AND CONCENTRATION RISKS
The Fund's investments in foreign securities may involve risks not present in
domestic investments. Since foreign securities may be denominated in a foreign
currency and involve settlement and pay interest or dividends in foreign
currencies, changes in the relationship of these foreign currencies to the U.S.
dollar can significantly affect the value of the investments and earnings of the
Fund. Foreign investments may also subject the Fund to foreign government
exchange restrictions, expropriation, taxation or other political, social or
economic developments, all of which could affect the market and/or credit risk
of the investments.
In addition to the risks described above, risks may arise from forward
foreign currency contracts as a result of the potential inability of
counterparties to meet the terms of their contracts.
11
<PAGE>
LEXINGTON EMERGING MARKETS FUND, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1997 (unaudited) and December 31, 1996 (continued)
6 -- RESTRICTED SECURITIES
The following securities were purchased under Rule 144A of the Securities Act of
1933 and, unless registered under the Act or exempted from registration, may be
sold only to qualified institutional investors.
<TABLE>
<CAPTION>
Acquisition Average Cost Market Percent of
Security Date Shares Per Share Value Net Assets
- -------- --------- -------- ---------- ------ --------
<S> <C> <C> <C> <C> <C>
Hindalco Industries, Inc. ................ 5/24/96 15,950 $27.25 $ 563,833 1.76%
Jiangsu Expressway Company, Ltd. ......... 6/24/97 100,000 0.41 35,496 0.11%
State Bank of India ...................... 12/18/96 18,300 20.85 484,950 1.51%
Videsh Sanchar Nigam, Ltd. (GDR) ......... 3/24/97 43,500 17.32 902,625 2.81%
---------- -----
$1,986,904 6.19%
========== =====
</TABLE>
Pursuant to guidelines adopted by the Fund's Board of Directors, these
unregistered securities have been deemed to be illiquid. The Fund currently
limits investment in illiquid securities to 15% of the Fund's net assets, at
market value, at the time of purchase.
12
<PAGE>
LEXINGTON EMERGING MARKETS FUND, INC.
FINANCIAL HIGHLIGHTS
Selected per share data for a share outstanding throughout the period:
<TABLE>
<CAPTION>
MARCH 30, 1994
SIX MONTHS (COMMENCEMENT
ENDED YEAR ENDED DECEMBER 31, OF OPERATIONS) TO
JUNE 30, 1997 ---------------------- DECEMBER 31,
(UNAUDITED) 1996 1995 1994
------------ ----- ----- ---------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period ................... $ 10.11 $ 9.38 $ 9.86 $10.00
------- ------- ------ ------
Income (loss) from investment operations:
Net investment income ................................ 0.04 0.02 0.09 0.03
Net realized and unrealized gain
(loss) on investments and foreign
currency transactions .............................. 1.45 0.71 (0.48) 0.04
------- ------- ------ ------
Total income (loss) from investment
operations ..................................... 1.49 0.73 (0.39) 0.07
------- ------- ------ ------
Less distributions:
Distributions from net investment income ............. -- -- (0.09) (0.02)
Distributions in excess of net realized gains
(temporary book-tax difference) .................... -- -- -- (0.19)
------- ------- ------ ------
Total distributions .............................. -- -- (0.09) (0.21)
------- ------- ------ ------
Net asset value, end of period ......................... $ 11.60 $ 10.11 $ 9.38 $ 9.86
======= ======= ====== ======
Total return ..................................... 32.74%* 7.46% (3.93%) 0.76%*
Ratio to average net assets:
Expenses, before reimbursement or waivers ............ 1.93%* 2.23% 4.09% 6.28%*
Expenses, net of reimbursement or waivers ............ 1.78%* 1.64% 1.32% 1.30%*
Net investment income (loss), before
reimbursement or waivers ........................... 0.75%* (0.39%) (1.45%) (4.29%)*
Net investment income ................................ 0.91%* 0.20% 1.33% 0.70%*
Portfolio turnover rate ................................ 159.66%* 95.18% 88.92% 71.21%*
Average commission paid on equity security
transactions** ....................................... -- -- -- --
Net assets, end of period (000's omitted) .............. $32,111 $21,678 $7,815 $4,624
</TABLE>
- ----------
*Annualized
**The average commission paid on equity security transactions for the six months
ended June 30, 1997 and the year ended December 31, 1996 is less than $0.005
per share of securities purchased and sold. In accordance with SEC disclosure
guidelines, the average commissions are calculated for the period beginning
with December 31, 1996, but not for prior periods.
13
<PAGE>
================================================================================
LEXINGTON
EMERGING MARKETS FUND,INC.
Investment Adviser
- --------------------------------------------------------------------------------
LEXINGTON MANAGEMENT CORPORATION
P.O. Box 1515
Park 80 West Plaza Two
Saddle Brook, New Jersey 07663
Distributor
- --------------------------------------------------------------------------------
LEXINGTON FUNDS DISTRIBUTOR, INC.
P.O. Box 1515
Park 80 West Plaza Two
Saddle Brook, New Jersey 07663
This report has been prepared for the information of the shareholders of
Lexington Emerging Markets Fund, Inc. and is authorized for distribution to the
public only if it is accompanied or preceded by a currently effective prospectus
which sets forth expenses and other material information.
================================================================================
