Dear Shareholders:
- --------------------------------------------------------------------------------
The Lexington Emerging Markets Fund appreciated by 7.46%* in 1996. According
to Lipper Analytical Services, Inc. the average return during 1996 for emerging
market funds was 11.2%. The unmanaged Morgan Stanley Emerging Markets Free
Index** advanced 6.0% in 1996.
Moderate global economic activity provided a positive background for most
equity markets in 1996. Unfortunately, the strong performance of the U.S. and
many large developed markets discouraged foreign investors from venturing into
the emerging markets. As a result, returns for emerging market funds badly
trailed average returns for U.S. and European equity funds. U.S. long bonds
rallied strongly from August till year end as the economy showed signs of
slowing. Anticipating rising interest rates the Fund was widely diversified with
an emphasis on markets with low correlations to U.S. stocks and bonds. Portfolio
positions in Chile, Greece, South Korea, India, South Africa, and Thailand held
back performance as Latin America and most of Asia enjoyed strong second half
returns. Latin America and Asian markets tend to perform well as U.S. interest
rates decline and this occurred during the latter half of the year. The
unmanaged Morgan Stanley Capital International Chilean Index** fell 13.5% as a
strong economy forced interest rates higher and stocks lower. Greek equities
only gained a little over 6% on the unmanaged Morgan Stanley Capital
International Greek Index,** although valuations are very attractive and
economic restructuring is improving the long term outlook. The Fund was not
overweight in too many poor performing markets, but its diversification did
expose the portfolio to several of the poorer performing markets.
The outlook for 1997 is more favorable. Due to several years of
underperformance versus the developed markets, emerging markets offer
outstanding retail value. Latin America continues to enjoy an economic recovery
which will fuel strong profit growth. Progress continues to be made on the
economic and political front as well. Brazil experienced the lowest inflation in
over 30 years and privatization continues to move forward. Argentina has seen a
clear pick-up in economic activity and discussions are underway to reform the
labor market. Mexico has seen interest rates and inflation decline. GDP growth
is now driven by a healthy export sector. Asian markets currently favored are
Hong Kong/China, Philippines, and Malaysia. The Chinese economy has slowed down
to the 10% level while inflation has fallen to single digits. Chinese interest
rates are falling and property prices rising. This year Hong Kong reverts to
Chinese rule and with falling interest rates and accelerating profit growth, the
outlook is favorable. The Philippines has been well managed under President
Ramos. Growth is now approaching 7% per annum. Unlike the rest of Asia, export
growth is remaining strong as the Philippines has become very competitive.
Malaysia has been a success story for many years and this will continue.
Economic activity will likely slow in 1997 due to weaker exports, however,
interest rates are likely to decline which historically has benefitted stocks.
The Lexington Emerging Markets Fund currently has 30% invested in Latin
America, with heavy representation in Brazil, Chile and Mexico. Asia comprises
40% with heavy emphasis on Malaysia, Philippines, Hong Kong/China, and
Singapore. Russian equities are among the cheapest in the world and offer
tremendous upside as the Russian economy transforms to capitalism. The Fund
presently has 6% in Russian equities which trade at steep discounts to
1
<PAGE>
replacement value. Eastern Europe continues to perform well but with stock
prices experiencing strong gains over the past year the risk reward
opportunities are less attractive. Weightings in Eastern Europe have been
reduced to 7% from over 10% in 1996. Greece remains a favored market due to
prospects for falling interest rates, economic restructuring, and low
valuations. Greece represents 6% of the Fund's holdings. Finally, positions have
been reduced in South Africa, South Korea and Thailand as better opportunities
have been found elsewhere.
Sincerely,
Richard T. Saler Robert M. DeMichele
Portfolio Manager President
February, 1997 February, 1997
CHART/BEGIN
Printed version of this shareholder report contains a
graphic chart indicating the comparison of change in
value of a $10,000 investment in Lexington Emerging
Markets Fund, Inc., and the unmanaged Morgan Stanley
Capital International (EAFE) Index from 3/30/94
through 12/31/96
CHART/END
*7.46% and 1.44% are the one year and since commencement (3/30/94) average
annual standard total returns, respectively, for the period ended December 31,
1996. 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)
December 31, 1996
Number of Value
Shares Security (Note 1)
- --------------------------------------------------------------------------------
COMMON STOCKS: 96.4%
Argentina: 2.0%
7,800 Banco Frances del Rio de la Plata S.A. .............. $ 214,500
8,000 Telefonica de Argentina S.A. (ADR) .................. 207,000
-----------
421,500
-----------
Brazil: 11.7%
34,900 Aracruz Cellulose S.A. (ADR) ........................ 287,925
687,000 Cia Tecidos Norte De Mina (Preferred shares) ........ 219,245
944,000 Companhia Cimento Portland Itau ..................... 331,570
17,200 Compania Vale Do Rio Doce (ADR) (Preferred shares) .. 331,057
1,988,000 Petroleo Brasileiro S.A. (Preferred shares) ......... 316,636
5,097,000 Telecomunicacoes Brasileiras S.A. ................... 392,419
1,646,000 Telecomunicacoes de Sao Paulo S.A. .................. 356,417
302,262,000 Usinas Siderurgicas de Minas Gerais S.A. ............ 308,343
-----------
2,543,612
-----------
Chile: 5.2%
30,100 Antofagasta Holdings Plc ............................ 175,134
17,600 Banco O'Higgins (ADR) ............................... 408,100
20,800 Banco Santander (ADR) (Preferred shares) ............ 312,000
16,400 Marderas y Sinteficos Sociedad Anonima S.A. (ADR) ... 229,600
-----------
1,124,834
-----------
Colombia: 0.7%
6,700 Banco Ganadero S.A. (ADR) ........................... 144,050
-----------
Czech Republic: 1.2%
2,090 SPT Telekon AS ...................................... 259,907
-----------
Greece: 5.3%
5,950 Delta Dairy S.A. (Preferred shares) ................. 49,441
5,900 Ergo Bank S.A. ...................................... 299,053
5,900 Hellenic Bottling Company, S.A. ..................... 189,046
10,600 Hellenic Telecommunication Organization S.A. ........ 181,099
30,200 Michaniki S.A. ...................................... 233,805
3,600 Titan Cement Company ................................ 195,752
-----------
1,148,196
-----------
Hong Kong: 6.3%
67,000 Citic Pacific, Ltd.2 ................................ 388,921
261,000 Founder Hong Kong, Ltd.2 ............................ 100,385
296,000 Guangdong Investments ............................... 285,094
584,000 Qingling Motors Company2 ............................ 322,767
55,000 Wharf (Holdings) Lts. ............................... 274,467
-----------
1,371,634
-----------
Hungary: 1.3%
8,100 MOL Mgyar Olaj-es Gazipari Rt. ...................... 101,219
2,972 Pick Szeged Rt. ..................................... 175,948
-----------
277,167
-----------
India: 2.0%
11,450 Hindalco Industries, Ltd.1,2 ........................ 281,956
9,000 State Bank of India1 ................................ 156,330
-----------
438,286
-----------
3
<PAGE>
Lexington Emerging Markets Fund, Inc.
Statement of Net Assets
(Including the Portfolio of Investments)
December 31, 1996 (continued)
Number of Value
Shares Security (Note 1)
- --------------------------------------------------------------------------------
Indonesia: 3.9%
68,627 PT Indah Kiat Pulp & Paper Corporation .............. $ 50,109
163,000 PT Ramayana Lestari Sentosa1 ........................ 351,873
68,000 PT Semen Cibinong ................................... 191,407
134,000 PT Tambang Timah .................................... 243,894
-----------
837,283
-----------
Israel: 1.5%
6,500 Teva Pharmaceutical Industries, Ltd. (ADR) .......... 325,406
-----------
Malaysia: 9.8%
3,000 Berjaya Sports Toto Bhd ............................. 14,967
27,000 Hong Leong Credit Bhd ............................... 169,986
146,000 Magnum Corporation Bhd .............................. 283,270
20,000 Malaysian Banking Bhd ............................... 221,738
106,000 MBF Capital Bhd ..................................... 172,084
19,000 O.Y.L. Industries Bhd ............................... 201,247
89,000 Public Finance Bhd .................................. 155,058
81,000 Sime Darby Bhd ...................................... 319,124
118,000 Sungei Way Holdings Bhd ............................. 350,425
58,000 Tanjong Plc ......................................... 231,954
-----------
2,119,853
-----------
Mexico: 6.7%
136,100 Cemex S.A. de C.V. "B" .............................. 530,774
8,600 Grupo Casa Autrey, S.A. de C.V. (ADR) ............... 167,700
208,200 Grupo Industrial Maseco S.A. de C.V. ................ 263,952
5,500 Grupo Televisa S.A. (ADR) ........................... 140,938
21,700 Tubos De Acero De Mexico S.A. (ADR)2 ................ 344,487
-----------
1,447,851
-----------
Pakistan: 0.5%
21,200 Pakistan Investment Fund, Inc. ...................... 108,650
-----------
Philippines: 5.5%
381,375 Filinvest Land, Inc.2 ............................... 118,908
271,000 Fortune Cement Corporation2 ......................... 136,530
700,525 International Container Terminal Service, Inc.2 ..... 366,244
34,700 Manila Electric Company "B" ......................... 283,669
504,200 Universal Robina Corporation ........................ 282,774
-----------
1,188,125
-----------
Poland: 6.0%
9,000 Debica S.A.2 ........................................ 201,362
40,862 Elektrim Towarzystwo Handlowe S.A. .................. 371,406
1,417 Gorazdze S.A. ....................................... 35,419
81,600 Mostostal-Export S.A. ............................... 193,979
35,100 Polifarb Cieszyn Wroclaw S.A. ....................... 195,101
12,600 Stomil Olsztyn S.A. ................................. 162,978
2,916 Zaklady Piwowarski w Zywcu S.A. ..................... 135,580
-----------
1,295,825
-----------
Portugal: 1.0%
7,864 Portugal Telecom S.A. ............................... 223,890
-----------
Russia: 5.0%
2,778 Lexington Troika Dialog Russia Fund, Inc. ........... 31,221
4,000 LUKoil Holdings of Russia ........................... 245,200
8,500 LUKoil Holdings of Russia (ADR) ..................... 395,930
115,200 Rostelekom2 ......................................... 278,784
3,705,400 Unified Energy System2 .............................. 337,191
-----------
1,088,326
-----------
4
<PAGE>
Lexington Emerging Markets Fund, Inc.
Statement of Net Assets
(Including the Portfolio of Investments)
December 31, 1996 (continued)
Number of Value
Shares Security (Note 1)
- --------------------------------------------------------------------------------
Singapore: 5.4%
26,000 City Developments Ltd.2 ............................. $ 234,197
56,000 DBS Land, Ltd.2 ..................................... 206,174
65,000 Far East Levingston Shipbuilding, Ltd. .............. 339,215
68,000 Jardine Strategic Holdings, Ltd. .................... 246,160
55,000 Want Want Holdings2 ................................. 144,650
-----------
1,170,396
-----------
South Africa: 3.5%
2,400 Anglo American Corporation of South Africa, Ltd. .... 132,122
24,500 Driefontein Consolidated, Ltd. ...................... 257,964
2,400 Liberty Life Association of Africa, Ltd. ............ 60,292
3,100 Liberty Life Association of Africa, Ltd. ............ 77,707
7,000 Rustenburg Platinum Holdings, Ltd ................... 95,778
2,227 Rustenburg Platinum Holdings, Ltd. (ADR) ............ 30,468
1,400 South African Breweries, Ltd. ....................... 35,468
1,451 South African Breweries, Ltd. (ADR) ................. 36,754
500 Vaal Reefs Exploration & Mining Company, Ltd. ....... 32,068
-----------
758,621
-----------
South Korea: 2.6%
3,850 Hyundai Motor Company, Ltd. ......................... 91,070
5,700 Korea Electric Power Corporation .................... 165,843
4,060 Pohang Iron & Steel Company, Ltd. ................... 175,269
400 Pohang Iron & Steel Company, Ltd. (ADR) ............. 8,100
2,320 Samsung Electronics Company ......................... 124,849
-----------
565,131
-----------
Taiwan: 2.1%
20,737 Taiwan Fund, Inc. ................................... 461,398
-----------
Thailand: 3.0%
21,000 Advanced Info Service Plc ........................... 180,187
18,000 BEC World Public Company, Ltd.2 ..................... 162,870
49,000 Krung Thai Bank Public Company, Ltd. ................ 94,598
6,000 Matichon Public Company, Ltd. ....................... 16,966
15,500 Shinawatra Computer Company, Plc .................... 187,402
-----------
642,023
-----------
Turkey: 1.0%
872,000 Akbank T.A.S.2 ...................................... 118,592
1,035,000 Arcelik A.S.2 ....................................... 105,570
-----------
224,162
-----------
Venezuela: 3.2%
9,100 Compania Anonima Nacional Telefonos de Venezuela (ADR) 255,938
45,380 Mantex S.A. (ADR)2 .................................. 197,716
36,842 Mavesa S.A. (ADR)2 .................................. 246,690
-----------
700,344
-----------
TOTAL COMMON STOCK (cost $20,469,177) ............. 20,886,470
-----------
5
<PAGE>
Lexington Emerging Markets Fund, Inc.
Statement of Net Assets
(Including the Portfolio of Investments)
December 31, 1996 (continued)
Number of
Shares or
Principal Value
Amount Security (Note 1)
- --------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS: 5.4%
U.S. Government Obligations
$900,000 Treasury Bills, 5.00%, due 02/20/97 ................. $ 893,750
300,000 Treasury Bills, 5.175%, due 12/11/97 ................ 285,165
-----------
TOTAL SHORT-TERM INVESTMENTS (cost $1,178,915) ...... 1,178,915
-----------
TOTAL INVESTMENTS: 101.8%
(cost $21,648,092(d))(Note 1) ..................... 22,065,385
Liabilities in excess of other assets: (1.8%) ....... (387,395)
-----------
TOTAL NET ASSETS: 100.0%
(equivalent to $10.11 per share on 2,144,069
shares outstanding) ............................... $21,677,990
===========
Notes to Statement of Net Assets
1Restricted security (Note 6).
2Non-income producing security.
ADR-American Depository Receipt.
(d)Aggregate cost for Federal income tax purposes is $21,684,202.
-------------------
At December 31, 1996, the composition of the Fund's net assets by industry
concentration was as follows:
Left Column
Banking ....................... 8.4%
Capital Equipment ............. 5.5
Construction & Housing ........ 1.0
Consumer durable .............. 4.1
Consumer non durable .......... 7.2
Electric & Electronics ........ 1.4
Energy Sources ............... 4.0
Financial Services ........... 5.1
Gold .......................... 1.3
Health & Personal Care ........ 2.3
Materials ..................... 20.2
Right Column
Merchandising ................. 1.6%
Metals & Mining ............... 1.1
Multi-industry ................ 9.1
Real Estate ................... 3.9
Services ...................... 5.2
Telecommunications ............ 9.9
Trade 1.7% Utilities .......... 3.7
U.S. Treasury Bills .......... 5.4
Other Liabilities ............. (2.1)
-----
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
December 31, 1996
Assets
Investments, at value (cost $21,648,092) (Note 1) ..................$22,065,385
Cash ............................................................... 214,384
Receivable for investment securities sold .......................... 227,271
Receivable for shares sold ......................................... 114,234
Due from Lexington Management Corporation (Note 2) ................. 43,237
Dividends and interest receivable .................................. 21,476
Foreign taxes recoverable .......................................... 213
Deferred organization expense, net (Note 1) ........................ 10,009
-----------
Total Assets ............................................... 22,696,209
-----------
Liabilities
Payable for investment securities purchased ........................ 945,914
Payable for shares redeemed ........................................ 20,009
Accrued expenses ................................................... 52,296
-----------
Total Liabilities .......................................... 1,018,219
-----------
Net Assets (equivalent to $10.11 per share
on 2,144,069 shares outstanding) (Note 3) ........................$21,677,990
===========
Net Assets consist of:
Capital stock-authorized 1,000,000,000 shares,
$.001 par value per share ........................................$ 2,144
Additional paid in capital (Note 1) ................................ 21,877,940
Undistributed net investment income (Note 1) ....................... 14,089
Accumulated net realized losses on investments and
foreign currency transactions (Notes 1 and 7) .................... (633,464)
Net unrealized appreciation on investments and
foreign currency transactions .................................... 417,281
-----------
Total Net Assets ...........................................$21,677,990
===========
The Notes to Financial Statements are an integral part of this statement.
7
<PAGE>
Lexington Emerging Markets Fund, Inc.
Statement of Operations
Year ended December 31, 1996
Investment Income
Dividends ............................................... $269,160
Interest ................................................ 78,745
--------
347,905
Less: Foreign tax expense ............................... 30,766
--------
Total investment income ......................... $317,139
Expenses
Investment advisory fee (Note 2) ........................ 146,299
Custodian expense ....................................... 110,400
Transfer agent and shareholder servicing expense (Note 2) 4,280
Printing and mailing expenses ........................... 50,959
Accounting expenses (Note 2) ............................ 12,969
Professional fees ....................................... 15,355
Registration fees ....................................... 4,461
Amortization of organization costs ...................... 4,493
Directors' fees and expenses ............................ 19,390
Computer processing fees ................................ 10,814
Other expenses .......................................... 4,780
--------
Total expenses ....................................... 384,200
Less: expenses recovered under contract with
investment adviser (Note 2) ......................... 101,886 282,314
-------- --------
Net investment income .............................. 34,825
Realized and Unrealized Gain/(Loss) on Investments (Note 4)
Net realized loss on:
Investments ............................................ (132,755)
Foreign currency transactions .......................... (24,607)
--------
Net realized loss .................................. (157,362)
Net change in unrealized appreciation on:
Investments ............................................ 483,808
Foreign currency translations of other
assets and liabilities ................................ (12)
--------
Net change in unrealized appreciation .............. 483,796
--------
Net realized and unrealized gain ................... 326,434
--------
Increase in Net Assets Resulting from Operations ......... $361,259
========
The Notes to Financial Statements are an integral part of this statement.
8
<PAGE>
Lexington Emerging Markets Fund, Inc.
Statements of Changes in Net Assets
Years ended December 31, 1996 and 1995
1996 1995
----------- ----------
Net investment income .............................. $ 34,825 $ 82,916
Net realized loss from investments and foreign
currency transactions ............................. (157,362) (430,462)
Net change in unrealized appreciation on investments
and foreign currency translations ................. 483,796 161,340
----------- -----------
Increase/(decrease) in net assets resulting
from operations .................................. 361,259 (186,206)
Distributions to shareholders from net
investment income ................................. - (76,219)
Increase in net assets from capital share
transactions (Note 3) ............................. 13,502,070 3,453,270
----------- -----------
Net increase in net assets .................. 13,863,329 3,190,845
Net Assets
Beginning of period ................................ 7,814,661 4,623,816
----------- -----------
End of period (including undistributed net
investment income of $14,089 and $1,876,
respectively) ..................................... $21,677,990 $7,814,661
=========== ==========
The Notes to Financial Statements are an integral part of these statements.
9
<PAGE>
Lexington Emerging Markets Fund, Inc.
Notes to Financial Statements
December 31, 1996 and 1995
Note 1-Significant Accounting Policies
Lexington Emerging Markets Fund, Inc. (the "Fund") is an open-end diversified
management investment company registered under the Investment Company Act of
1940, as amended. The Fund's investment objective is to seek long-term growth of
capital primarily through investment in equity securities of companies domiciled
in, or doing business in, emerging countries and emerging markets. With the
exception of shares held in connection with initial capital of the Fund, shares
of the Fund are currently being offered 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 price 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 December 31, 1996.
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.
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
10
<PAGE>
Lexington Emerging Markets Fund, Inc.
Notes to Financial Statements
December 31, 1996 and 1995 (continued)
Note 1-Significant Accounting Policies (continued)
amounts of increases and decreases in net assets from operations during the
reporting period. Actual results could differ from those estimates.
Note 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. 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 1.30% of the Fund's
average net assets through April 30, 1996 and to 1.75% of the Fund's average net
assets from May 1, 1996 through April 30, 1997. For the year ended December 31,
1996 expense reimbursement amounted to $101,886 and is set forth in the
statement of operations.
The Fund also reimburses LMC for certain expenses, including accounting
costs of $12,969 which are incurred by the Fund, but paid by LMC.
Note 3-Capital Stock
Transactions in capital stock were as follows:
<TABLE>
<CAPTION>
Year ended Year ended
December 31, 1996 December 31, 1995
------------------------ ----------------------
Shares Amount Shares Amount
------ ------ ------ ------
<S> <C> <C> <C> <C>
Shares sold ...................................... 2,264,743 $23,256,170 845,934 $7,996,657
Shares issued on reinvestment of dividends ....... - - 8,108 76,218
--------- ----------- -------- ----------
2,264,743 23,256,170 854,042 8,072,875
Shares redeemed .................................. (953,567) (9,754,100) (490,164) (4,619,605)
--------- ----------- -------- ----------
Net increase ................................. 1,311,176 $13,502,070 363,878 $3,453,270
========= =========== ======== ==========
</TABLE>
Note 4-Purchases and Sales of Investment Securities
The cost of purchases and proceeds from sales of securities for the year ended
December 31, 1996, excluding short-term securities, were $ 30,010,249 and $
14,966,386, respectively.
At December 31, 1996, the aggregate gross unrealized appreciation for all
securities in which there is an excess of value over tax cost amounted to
$1,956,788 and aggregate gross unrealized depreciation for all securities in
which there is an excess of tax cost over value amounted to $1,575,617.
Note 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
December 31, 1996 and 1995 (continued)
Note 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 Percent of
Security Date Shares Per Share Market Value Net Assets
-------- ----------- ------ ------------ ------------ ----------
<S> <C> <C> <C> <C> <C>
Hindalco Industries, Ltd. ............. 10/31/96 11,450 $24.34 $281,956 1.30%
PT Ramayana Lestari Sentosa ........... 7/11/96 163,000 1.40 351,873 1.62
State Bank of India ................... 12/18/96 9,000 9.29 156,330 0.72
-------- ----
$790,159 3.64%
-------- ----
</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.
Note 7-Federal Income Taxes-Capital Loss Carryforwards
Capital loss carryforwards available for federal income tax purposes as of
December 31, 1996 are approximately $246,969 expiring in 2003.
To the extent any future capital gains are offset by these losses, such
gains would not be distributed to shareholders.
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
Year ended December 31, (commencement
----------------------- of operations) to
1996 1995 December 31, 1994
---- ---- -----------------
<S> <C> <C> <C>
Net asset value, beginning of period ................ $ 9.38 $ 9.86 $10.00
------ ------ ------
Income (loss) from investment operations:
Net investment income .............................. 0.02 0.09 0.03
Net realized and unrealized gain (loss)
on investments and foreign
currency transactions ............................. 0.71 (0.48) 0.04
------ ------ ------
Total income (loss) from investment
operations ...................................... 0.73 (0.39) 0.07
------ ------ ------
Less distributions:
Dividend from net investment income - (0.09) (0.02)
Distributions in excess of net realized capital
gains (temporary book-tax difference) - - (0.19)
------ ------ ------
Total distributions - (0.09) (0.21)
------ ------ ------
Net asset value, end of period $10.11 $ 9.38 $ 9.86
====== ====== ======
Total return 7.46% (3.93%) 0.76%*
Ratio to average net assets:
Expenses, before reimbursement or waivers ........... 2.23% 4.09% 6.28%*
Expenses, net of reimbursement or waivers ........... 1.64% 1.32% 1.30%*
Net investment income, before reimbursement
of waivers .........................................(0.39%) (1.45%) (4.29%)*
Net investment income ............................... 0.20% 1.33% 0.70%*
Portfolio turnover rate ..............................95.18% 88.92% 71.21%*
Average commissions paid on equity security
transactions** ...................................... - - -
Net assets at end of period (000's omitted) .........$21,678 $7,815 $4,624
</TABLE>
- ------------
*Annualized
**The average commission paid on equity security transactions for the year ended
December 31, 1996 is less than $0.005 per share of securities purchased and
sold. In accordance with recent SEC disclosure guidelines, the average
commissions are calculated for the current period, but not for prior periods.
13
<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, 1996, the related statements of operations
for the year then ended, and the statements of changes in net assets for each of
the years in the two-year period then ended, and the financial highlights each
of the years in the two-year period then ended and for the period from March 30,
1994 (commencement of operations) to December 31, 1994. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1996 by correspondence with the custodian. As to securities bought
and sold, but not delivered or received, we performed other appropriate auditing
procedures. 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, 1996, the results of
its operations for the year then ended, changes in net assets for each of the
years in the two-year period then ended, and the financial highlights for each
of the years in the two-year period then ended and for the period from March 30,
1994 to December 31, 1994, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
New York, New York
February 10, 1997
14
<PAGE>
Left Column
- -------------------------------------------------------
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.
- -------------------------------------------------------
Right Column
-------------------------
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.
ANNUAL REPORT
DECEMBER 31, 1996
The Lexington Group
of No Load
Investment Companies
