PROSPECTUS
April 30, 1997
Lexington EMERGING MARKETS Fund, Inc.
P.O. Box 1515 / Park 80 West Plaza Two, Saddle Brook, New Jersey 07663
201-845-7300
A NO-LOAD MUTUAL FUND WHOSE INVESTMENT OBJECTIVE IS TO SEEK LONG-TERM GROWTH OF
CAPITAL PRIMARILY THROUGH INVESTMENT IN EQUITY SECURITIES OF COMPANIES DOMICILED
IN, OR DOING BUSINESS IN EMERGING COUNTRIES AND EMERGING MARKETS.
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Lexington Emerging Markets Fund, Inc. is a no-load open-end diversified
management investment company. The Fund's investment objective is to seek
long-term growth of capital primarily through investment in equity securities of
companies domiciled in, or doing business in emerging countries and emerging
markets.
Shares of the Fund may be purchased only by insurance companies for the
purpose of funding variable annuity contracts and variable life insurance
policies.
Lexington Management Corporation ("LMC") is the Fund's investment adviser.
Lexington Funds Distributor, Inc. ("LFD") is the distributor of Fund shares.
This Prospectus sets forth information about the Fund you should know before
investing. It should be read and retained for future reference.
A STATEMENT OF ADDITIONAL INFORMATION DATED APRIL 30, 1997 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 two
year period ended December 31, 1996 and for the period March 30, 1994
(commencement of operations) to December 31, 1994 has been audited by KPMG Peat
Marwick LLP, Independent Auditors, whose report thereon appears in the Statement
of Additional Information. This information should be read in conjunction with
the Financial Statements and related notes thereto included in the Statement of
Additional Information. The Fund's annual report, which contains additional
performance information, is available upon request and without charge.
<TABLE>
<CAPTION>
MARCH 30, 1994
(COMMENCEMENT OF
YEAR ENDED DECEMBER 31, OPERATIONS) TO
Selected per share data for a share outstanding throughout the period: 1996 1995 DECEMBER 31, 1994
---- ---- -----------------
<S> <C> <C> <C>
Net asset value, beginning of period ............................. $ 9.38 $ 9.86 $10.00
------ ------ ------
Income from investment operations:
Net investment income .......................................... 0.02 0.09 0.03
Net realized and unrealized gain (loss) on investments ......... 0.71 (0.48) 0.04
------ ------ ------
Total income (loss) from investment operations ....... 0.73 (0.39) 0.07
------ ------ ------
Less distributions:
Distributions from net realized capital gains .................. -- (0.09) (0.02)
Distributions in excess of net realized capital gains (temporary
book-tax difference) ......................................... -- -- (0.19
------ ------ ------
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 (loss), before reimbursement or waivers .. (0.39%) (1.45%) (4.29)%*
Net investment income .......................................... 0.20% 1.33% 0.70%*
Portfolio turnover ............................................... 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
*Annualized
</TABLE>
**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.
DESCRIPTION OF THE FUND
Lexington Emerging Markets Fund, Inc. is an open-end management investment
company organized as a corporation under the laws of Maryland. The Fund is
intended to be the funding vehicle for variable annuity contracts and variable
life insurance policies to be offered by the separate accounts of certain life
insurance companies ("participating insurance companies"). The Fund currently
does not foresee any disadvantages to the holders of variable annuity contracts
and variable life insurance policies arising from the fact that the interests of
the holders of such contracts and policies may differ. Nevertheless, the Fund's
Directors intend to monitor events in order to identify any material
irreconcilable conflicts which may possibly arise and to determine what action,
if any, should be taken in response thereto. If a conflict were to occur, an
insurance company separate account might be required to withdraw its investments
in the Fund and the Fund might be forced to sell securities at disadvantageous
prices. The variable annuity contracts and variable life insurance policies are
described in the separate prospectuses issued by the Participating Insurance
Companies. The Fund assumes no responsibility for such prospectuses.
Individual variable annuity contract holders and variable life insurance
policy holders are not "shareholders" of the Fund. The Participating Insurance
Companies and their separate accounts are the shareholders or investors,
although such companies may pass through voting rights to their variable annuity
contract or variable life insurance policy. Shares of the Fund are not offered
directly to the general public.
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to seek long-term growth of capital
primarily through investment in equity securities and equivalents of companies
domiciled in, or doing business in, emerging countries and emerging markets, as
defined below.
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Due to the risks inherent in international investments generally, the Fund
should be considered as a vehicle for investing a portion of an investor's
assets in foreign securities markets and not as a complete investment program.
The investment objective of the Fund is long-term growth of capital. The
Fund seeks to achieve this objective by investing primarily in emerging country
and emerging market equity securities. Equity securities will consist of all
types of common stocks and equivalents (the following constitute equivalents:
convertible debt securities and warrants). The Fund may also invest in preferred
stocks, bonds, money market instruments of foreign and domestic companies, U.S.
government, and governmental agencies. There can be no assurance that the Fund
will be able to achieve its investment objective. The Fund's investment
objective is a fundamental policy that may not be changed without the approval
of a "majority of the Fund's outstanding voting securities" which means the
lesser of (i) 67% of the shares represented at a meeting at which more than 50%
of the outstanding shares are represented, or (ii) more than 50% of the
outstanding shares.
Under normal conditions, at least 65% of the Fund's total assets will be
invested in emerging country and emerging market equity securities in at least
three countries outside of the United States. For purposes of its investment
objective, the Fund considers emerging country equity securities to be any
country whose economy and market the World Bank or United Nations considers to
be emerging or developing. The Fund may also invest in equity securities and
equivalents traded in any market, of companies that derive 50% or more of their
total revenue from either goods or services produced in such emerging countries
and emerging markets or sales made in such countries. Determinations as to
eligibility will be made by LMC based on publicly available information and
inquiries made to the companies. It is possible in the future that sufficient
numbers of emerging country or emerging market equity securities would be traded
on securities markets in industrialized countries so that a major portion, if
not all, of the Fund's assets would be invested in securities traded on such
markets, although such a situation is unlikely at present. The Fund will
maintain investments at all times in a minimum of three countries outside of the
United States.
Currently, investing in many of the emerging countries and emerging markets
is not feasible or may involve political risks. Accordingly, LMC currently
intends to consider investments only in those countries in which it believes
investing is feasible and does not involve such risks. The list of acceptable
countries will be reviewed by LMC and approved by the Board of Directors on a
periodic basis and any additions or deletions with respect to such list will be
made in accordance with changing economic and political circumstances involving
such countries. (See Appendix).
The Fund's investments in emerging country equity securities are not
subject to any maximum limit, and it is the intention of LMC to invest
substantially all of the Fund's assets in emerging country and emerging market
equity securities. However, to the extent that the Fund's assets are not
invested in emerging country and emerging market equity securities, the
remaining 35% of the assets may be invested in (i) other equity securities
without regard to whether they qualify as emerging country or emerging market
equity securities, (ii) debt securities denominated in the currency of an
emerging market or issued or guaranteed by an emerging market company or the
government of an emerging country, and (iii) short-term and medium-term debt
securities of the type described below under "Temporary Investments." The Fund's
assets may be so invested in debt securities when LMC believes that, based upon
factors such as relative interest rate levels and foreign exchange rates, such
debt securities offer opportunities for long-term growth of capital. It is
likely that many of the debt securities in which the Fund will invest will be
unrated, and whether or not rated, such securities may have speculative
characteristics. All unrated debt securities purchased by the Fund will be
comparable to, or the issuers of such unrated securities will have the capacity
to meet its debt obligations comparable to those issuers of rated securities. In
addition, for temporary defensive purposes, the Fund may invest less than 65% of
its assets in emerging country and emerging market equity securities, in which
case the Fund may invest in other equity securities or may invest in debt
securities of the sort described under "Temporary Investments" below.
The Fund intends to purchase and hold securities for long-term growth of
capital and does not expect to trade for short-term gain. Accordingly, it is
anticipated that the annual portfolio turnover rate normally will not exceed
75%. A 100% turnover rate would occur if all of the Fund's portfolio investments
were sold and either repurchased or replaced in a year. A higher turnover rate
results in correspondingly greater brokerage commissions and other transactional
expenses which are borne by the Fund. The Fund's portfolio turnover rate for the
year ended December 31, 1996 was 95.18%. High portfolio turnover may result in
the realization of net short-term capital gains by the Fund which, when
distributed to shareholders, will be taxable as ordinary income. See "Tax
Matters."
The operating expenses of the Fund can be expected to be greater than that
of an investment company investing exclusively in United States securities.
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TEMPORARY INVESTMENTS
For temporary defensive purposes, the Fund may invest up to 100% of its
total assets in money market securities, denominated in dollars in the currency
of any emerging country, issued by entities organized in the U.S. or any
emerging country, such as: short-term (less than twelve months to maturity) and
medium-term (not greater than five years to maturity) obligations issued or
guaranteed by the U.S. Government or the government of an emerging country,
their agencies or instrumentalities; finance company and corporate commercial
paper, and other short-term corporate obligations, in each case rated Prime-1 by
Moody's Investors Services, Inc. or A or better by Standard & Poor's Corporation
or, if unrated, of comparable quality as determined by LMC, obligations
(including certificates of deposit, time deposits and banker's acceptances) of
banks; and repurchase agreements with banks and broker-dealers with respect to
such securities.
Repurchase agreements with respect to the securities described in the
preceding paragraph are contracts under which the Fund would acquire a security
for a relatively short period (usually not more than 7 days) subject to the
obligations of the seller to repurchase and the Fund to resell such security at
a fixed time and price (representing the Fund's cost plus interest). Although
the Fund may enter into repurchase agreements with respect to any portfolio
securities which it may acquire consistent with its investment policies and
restrictions, it is the Fund's present intention to enter into repurchase
agreements only with respect to obligations of the United States Government or
its agencies or instrumentalities to meet anticipated redemptions or pending
investments or reinvestments of Fund assets in portfolio securities. The Fund
will enter into repurchase agreements only with member banks of the Federal
Reserve System and with "primary dealers" in United States Government
securities. Repurchase agreements are considered loans which must be fully
collateralized including interest earned thereon during the entire term of the
agreement. If the institution defaults on the repurchase agreement, the Fund
will retain possession of the underlying securities. In addition if bankruptcy
proceedings are commenced with respect to the seller, realization on the
collateral by the Fund may be delayed or limited and the Fund may incur
additional costs. In such case the Fund will be subject to risks associated with
changes in market value of the collateral securities. The Fund intends to limit
repurchase agreements to institutions believed by LMC to present minimal credit
risk. The Fund will not enter into repurchase agreements maturing in more than
seven days if the aggregate of such repurchase agreements and all other illiquid
securities when taken together would exceed 10% of the total assets of the Fund.
CERTAIN INVESTMENT METHODS -- The Fund may from time to time engage in the
following investment practices:
SETTLEMENT TRANSACTIONS -- The Fund may, for a fixed amount of United States
dollars, enter into a foreign exchange contract for the purchase or sale of the
amount of foreign currency involved in the underlying securities transaction. In
so doing, the Fund will attempt to insulate itself against possible losses and
gains resulting from a change in the relationship between the United States
dollar and the foreign currency during the period between the date a security is
purchased or sold and the date on which payment is made or received. This
process is known as "transaction hedging".
To effect the translation of the amount of foreign currencies involved in
the purchase and sale of foreign securities and to effect the "transaction
hedging" described above, the Fund may purchase or sell foreign currencies on a
"spot" (I.E. cash) basis or on a forward basis whereby the Fund purchases or
sells a specific amount of foreign currency, at a price set at the time of the
contract, for receipt or delivery at a specified date which may be any fixed
number of days in the future.
Such spot and forward foreign exchange transactions may also be utilized to
reduce the risk inherent in fluctuations in the exchange rate between the United
States dollar and the relevant foreign currency when foreign securities are
purchased or sold for settlement beyond customary settlement time (as described
below). Neither type of foreign currency transaction will eliminate fluctuations
in the prices of the Fund's portfolio or securities or prevent loss if the price
of such securities should decline.
PORTFOLIO HEDGING -- When, in the opinion of LMC, it is desirable to limit or
reduce exposure in a foreign currency in order to moderate potential changes in
the United States dollar value of the portfolio, the Fund may enter into a
forward foreign currency exchange contract by which the United States dollar
value of the underlying foreign portfolio securities can be approximately
matched by an equivalent United States dollar liability. The Fund, for hedging
purposes only, may also enter into forward currency exchange contracts to
increase its exposure to a foreign currency that LMC expects to increase in
value relative to the United States dollar. The Fund will not attempt to hedge
all of its portfolio positions and will enter into such transactions only to the
extent, if any, deemed appropriate by LMC. Hedging against a decline in the
value of currency does not eliminate fluctuations in the prices of portfolio
securities or prevent losses if the prices of such securities decline. The Fund
will not enter into forward foreign currency exchange transactions for
speculative purposes. The Fund intends to limit such transactions to not more
than 70% of total Fund assets.
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FORWARD COMMITMENTS -- The Fund may make contracts to purchase securities for a
fixed price at a future date beyond customary settlement time ("forward
commitments") because new issues of securities are typically offered to
investors, such as the Fund, on that basis. Forward commitments involve a risk
of loss if the value of the security to be purchased declines prior to the
settlement date. This risk is in addition to the risk of decline in value of the
Fund's other assets. Although the Fund will enter into such contracts with the
intention of acquiring the securities, the Fund may dispose of a commitment
prior to settlement if LMC deems it appropriate to do so. The Fund may realize
short-term profits or losses upon the sale of forward commitments. When the Fund
engages in a forward commitment transaction, the custodian will set aside cash,
U.S. Government securities or other high quality debt obligations equal to the
amount of the commitment in a separate account.
Except as otherwise specifically noted, the Fund's investment objective and
its investment restrictions are fundamental and may not be changed without the
approval of a majority of the outstanding voting securities of the Fund. The
Statement of Additional Information contains a complete description of the
Fund's restrictions and additional information on policies relating to the
investment of its assets and its activities.
RISK CONSIDERATIONS
Investments in emerging market and emerging country equity securities may
involve risks and considerations not present in domestic investments. Since
foreign securities generally are denominated and pay interest or dividends in
foreign currencies, the value of the assets of the Fund as measured in United
States dollars will be affected favorably or unfavorably by changes in the
relationship of the United States dollar and other 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.
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(2) The Fund will not make loans, except that, to the extent appropriate
under its investment program, the Fund may (a) purchase bonds,
debentures or other debt securities, including short-term obligations,
(b) enter into repurchase transactions and (c) lend portfolio
securities provided that the value of such loaned securities does not
exceed one-third of the Fund's total assets.
(3) The Fund will not concentrate its investments in any one industry,
except that the Fund may invest up to 25% of its total assets in
securities issued by companies principally engaged in any one industry.
The Fund considers foreign government securities and supranational
organizations to be industries. This limitation, however, will not
apply to securities issued or guaranteed by the U.S. Government, its
agencies and instrumentalities.
(4) The Fund will not purchase securities of an issuer, if (a) more than 5%
of the Fund's total assets taken at market value would at the time be
invested in the securities of such issuer, except that such restriction
shall not apply to securities issued or guaranteed by the United States
government or its agencies or instrumentalities or, with respect to 25%
of the Fund's total assets, to securities issued or guaranteed by the
government of any country other than the United States which is a
member of the Organization for Economic Cooperation and Development
("OECD"). The member countries of OECD are at present Australia,
Austria, Belgium, Canada, Denmark, Germany, Finland, France, Greece,
Iceland, Ireland, Italy, Japan, Luxembourg, the Netherlands, New
Zealand, Norway, Portugal, Spain, Sweden, Switzerland, Turkey, the
United Kingdom and the United States; or (b) such purchases would at
the time result in more than 10% of the outstanding voting securities
of such issuer being held by the Fund.
The forgoing investment restrictions (as well as certain others set forth
in the Statement of Additional Information) are matters of fundamental policy
which may not be changed without the affirmative vote of the majority of the
shareholders of the Fund.
The investment policies described below are non-fundamental, therefore,
changes to such policies may be made in the future by the Board of Directors
without the approval of the shareholders of the Fund:
(1) The Fund may purchase and sell futures contracts and related options
under the following conditions: (a) the then-current aggregate futures
market prices of financial instruments required to be delivered and
purchased under open futures contracts shall not exceed 30% of the
Fund's total assets, at market value; and (b) no more than 5% of the
assets, at market value at the time of entering into a contract, shall
be committed to margin deposits in relation to futures contracts.
(2) The Fund will not invest more than 15% of its total assets in illiquid
securities. Illiquid securities are securities that are not readily
marketable or cannot be disposed of promptly within seven days and in
the usual course of business without taking a materially reduced price.
Such securities include, but are not limited to, time deposits and
repurchase agreements with maturities longer than seven days.
Securities that may be resold under Rule 144A or securities offered
pursuant to Section 4(2) of the Securities Act of 1933, as amended,
shall not be deemed illiquid solely by reason of being unregistered.
The Investment Adviser shall determine whether a particular security is
deemed to be liquid based on the trading markets for the specific
security and other factors.
MANAGEMENT OF THE FUND
The Fund has a Board of Directors which establishes the Fund's policies and
supervises and reviews the operations and management of the Fund. Lexington
Management Corporation ("LMC"), P.O. Box 1515, Park 80 West Plaza Two, Saddle
Brook, New Jersey 07663, is the investment adviser of the Fund. For its
investment management services to the Fund, under its investment advisory
agreement, LMC will receive a monthly fee at the annual rate of 0.85% of the
Fund's average daily net assets.
Lexington Funds Distributor, Inc. ("LFD"), a registered broker-dealer, is
the Fund's distributor. LMC also acts as administrator to the Fund and performs
certain administrative and accounting services, including but not limited to,
maintaining general ledger accounts, regulatory compliance, preparation of
financial information for semiannual and annual reports, preparing registration
statements, calculating net asset values, shareholder communications and
supervision of the custodian, transfer agent and provides facilities for such
services. The Fund shall reimburse LMC for its actual cost in providing such
services, facilities and expenses.
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Shareholder Servicing Agents:
The Fund may enter into Shareholder Servicing Agreements with insurance
companies or other financial institutions that provide administrative services
for the Fund or that provide to contractholders and policyholders other services
relating to the Fund. These services may include, among other things,
sub-accounting services, answering inquiries of contractholders and
policyholders regarding the Fund, transmitting, on behalf of the Fund, proxy
statements, annual reports, updated prospectuses and other communications to
contractholders and policyholders regarding the Fund, and such other related
services as the Fund or a contractholder or policyholder may request. For these
services, each Shareholder Servicing Agent may receive fees, which may be paid
periodically, provided that such fees will not exceed 0.25% of the average daily
net assets of the Fund represented by shares owned during the period for which
payment is made. LMC, at no additional cost to the Fund, may pay to Shareholder
Servicing Agents additional amounts from its past profits. Each Shareholder
Servicing Agent may, from time to time, voluntarily waive all or a portion of
the fees payable to it.
LMC was established in 1938 and currently manages and administers over $3.3
billion in assets. LMC serves as investment adviser to other investment
companies and private and institutional investment accounts. Included among
these clients are persons and organizations that own significant amounts of
capital stock of LMC's parent, Lexington Global Asset Managers, Inc. The clients
pay fees that LMC considers comparable to the fees paid by similarly served
clients.
LMC and LFD are wholly-owned subsidiaries of Lexington Global Asset
Managers, Inc., a Delaware corporation with offices at Park 80 West Plaza Two,
Saddle Brook, New Jersey 07663. Descendants of Lunsford Richardson, Sr., their
spouses, trusts and other related entities are the beneficial owners of a
majority of the shares of Lexington Global Asset Managers, Inc. common stock.
See "Investment Adviser and Distributor" in the Statement of Additional
Information.
PORTFOLIO MANAGER
The Fund is managed by an investment management team. Richard T. Saler is
the lead manager. Richard T. Saler is Senior Vice President, Director of
International Investment Strategy of LMC. Mr. Saler is responsible for
international investment analysis and portfolio management at LMC. He has eleven
years of investment experience. Mr. Saler has focused on international markets
since first joining Lexington in 1986. In 1991 he was an investment strategist
with Nomura Securities and rejoined Lexington in 1992. Mr. Saler is a graduate
of New York University with a B.S. Degree in Marketing and an M.B.A. in Finance
from New York University's Graduate School of Business Administration.
HOW TO PURCHASE AND REDEEM SHARES
With the exception of shares held in connection with initial capital of the
Fund, shares of the Fund are currently available for purchase solely by
insurance companies for the purpose of funding variable annuity contracts and
variable life insurance policies. Shares of the Fund are purchased and redeemed
at net asset value next calculated after a purchase or redemption order is
received by the Fund in good order. There are no minimum investment
requirements. Payment for shares redeemed will be made as soon as possible, but
in any event within three business days after the order for redemption is
received by the Fund. However, payment may be postponed under unusual
circumstances, such as when normal trading is not taking place on the New York
Stock Exchange.
DETERMINATION OF NET ASSET VALUE
The net asset value of the shares of the Fund is 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.
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In order to determine net asset value per share, the aggregate value of
portfolio securities is added to the value of the Fund's other assets, such as
cash and receivables; the total of the assets thus obtained, less liabilities,
is then divided by the number of shares outstanding.
PERFORMANCE CALCULATION
The Fund will calculate performance on a total return basis for various
periods. The total return basis combines changes in principal and dividends for
the periods shown. Principal changes are based on the difference between the
beginning and closing net asset value for the period and assumes reinvestment of
dividends paid by the Fund. Dividends are comprised of net investment income and
net realized capital gains, respectively.
Performance will vary from time to time and past results are not
necessarily representative of future results. A shareholder should remember that
performance is a function of portfolio management in selecting the type and
quality of portfolio securities and is affected by operating expenses.
Comparative performance information may be used from time to time in
advertising or marketing of the Fund's shares, including data from Lipper
Analytical Services, Inc. or major market indices such as the Dow Jones
Industrial Average Index, Standard & Poor's 500 Composite Stock Price Index and
Morgan Stanley Capital international World Index. Such comparative performance
information will be stated in the same terms in which the comparative data and
indices are stated. Further information about the Fund's performance is
contained in the annual report, which may be obtained without charge.
DIVIDEND, DISTRIBUTION AND REINVESTMENT POLICY
The Fund intends to declare or distribute a dividend from its net
investment income and/or net capital gain income to shareholders annually or
more frequently if necessary in order to comply with distribution requirements
of the Code to avoid the imposition of regular Federal income tax and, if
applicable, a 4% excise tax.
Any dividends and distribution payments will be reinvested at net asset
value, without sales charge, in additional full and fractional shares of the
Fund.
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"), including the diversification of assets, distribution of
income, and sources of income. As a regulated investment company the Fund will
not be subject to Federal income tax on its income distributed in accordance
with the timing requirements of the Code. 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 such distributions may be taxable to the recipients to the
extent that the distributing Fund has current and accumulated earnings and
profits.
FUND DISTRIBUTIONS. Under current tax law, an insurance company is not subject
to tax on income of a qualifying separate account that is properly allocable to
the value of eligible variable annuity contracts or variable life insurance
policies. Therefore, generally fund distributions will not be currently taxable
to either the Accounts or the contract holders or policyholders.
SHARE REDEMPTIONS. Redemptions of the shares held by the Accounts generally will
not result in gain or loss for the Accounts and will not result in gain or loss
for the variable annuity contract holders 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 Accounts 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.
8
<PAGE>
ORGANIZATION AND DESCRIPTION OF COMMON STOCK
The Company is an open-end, diversified management investment company
organized as a corporation under the laws of the State of Maryland on December
27,1993, and has authorized capital of 1,000,000,000 shares of common stock, par
value $.001 of which 500,000,000 have been designated Lexington Emerging Markets
Fund Series. Each share of common stock has one vote and shares equally in
dividends and distributions when and if declared by the Company and in the
Company's net assets upon liquidation. All shares, when issued, are fully paid
and non-assessable. There are no preemptive, conversion or exchange rights. Fund
shares do not have cumulative voting rights and, as such, holders of at least
50% of the shares voting for Directors can elect all Directors and the remaining
shareholders would not be able to elect any Directors.
VOTING RIGHTS
Shareholders of the Fund are given certain voting rights. Each share of the
Fund will be given one vote. Participating insurance companies provide variable
annuity contract holders and variable life insurance policy holders the right to
direct the voting of Fund shares at shareholder meetings to the extent required
by law. See the Separate Account Prospectus for the Variable Annuity Contract or
Variable Life Insurance Policy section for more information regarding the pass
through of these voting rights.
The Fund will not normally hold annual shareholder meetings except as
required by Maryland General Corporation Law or the Investment Company Act of
1940. However, meetings of shareholders may be called at any time by the
Secretary upon the written request of shareholders holding in the aggregate not
less than 10% of the outstanding shares, such request specifying the purposes
for which such meeting is to be called. In addition, the Directors will promptly
call a meeting of shareholders for the purpose of voting upon the question of
removal of any Director when requested to do so in writing by the recordholders
of not less than 10% of the Fund's outstanding shares. The Fund will assist
shareholders in any such communication between shareholders and Directors.
CUSTODIAN, TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
Chase Manhattan Bank, N.A.,1211 Avenue of the Americas, New York, New York
10036 has been retained to act as custodian for the Fund's portfolio securities
including those to be held by foreign banks and foreign securities depositories
that qualify as eligible foreign custodians under the rules adopted by the SEC
and for the Fund's domestic securities and other assets. State Street Bank and
Trust Company, c/o National Financial Data Services, 1004 Baltimore, Kansas
City, Missouri 64105, has been retained to act as the transfer agent and
dividend disbursing agent for the Fund. Neither Chase Manhattan Bank, N.A. nor
State Street Bank and Trust Company have any part in determining the investment
policies of the Fund or in determining which portfolio securities are to be
purchased or sold by the Fund or in the declaration of dividends and
distributions.
COUNSEL AND INDEPENDENT AUDITORS
Kramer, Levin, Naftalis & 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, 1997.
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 GAIN 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>
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<PAGE>
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 ............................................... 8
Dividend, Distribution and Reinvestment Policy ........................ 8
Tax Matters ........................................................... 8
Organization and Description of Common Stock .......................... 9
Custodian, Transfer Agent and Dividend Disbursing Agent ............... 9
Counsel and Independent Auditors ...................................... 9
Other Information ..................................................... 9
LEXINGTON
- --------------------------------------------------------------------------------
LEXINGTON
EMERGING
MARKETS
FUND, INC.
- --------------------------------------------------------------------------------
PROSPECTUS
APRIL 30, 1997
<PAGE>
LEXINGTON EMERGING MARKETS FUND, INC.
STATEMENT OF ADDITIONAL INFORMATION
APRIL 30, 1997
This Statement of Additional Information which is not a prospectus, should
be read in conjunction with the current prospectus of Lexington Emerging Markets
Fund, Inc. (the "Fund"), dated April 30, 1997 and as it may be revised from time
to time. To obtain a copy of the Fund's prospectus at no charge, please write to
the Fund at P.O. Box 1515/Park 80 West- Plaza Two, Saddle Brook, New Jersey
07663 or call the following number: 201-845-7300.
Lexington Management Corporation is the Fund's investment adviser.
Lexington Funds Distributor, Inc. is the Fund's distributor.
TABLE OF CONTENTS
Investment Objective and Policies ...................................... 2
Risk Considerations .................................................... 3
Investment Restrictions ................................................ 4
Management of the Fund ................................................. 6
Investment Adviser, Distributor and Administrator ...................... 8
Portfolio Transactions and Brokerage Commissions ....................... 9
Determination of Net Asset Value ....................................... 10
Tax Matters ............................................................ 10
Performance Calculation ................................................ 10
Other Information ...................................................... 11
Financial Statements ................................................... 12
1
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
For a full description of the Fund's investment objective and policies, see
the Prospectus under "Investment Objective and Policies".
CERTAIN INVESTMENT METHODS
SETTLEMENT TRANSACTIONS--When the Fund enters into contracts for purchase or
sale of a portfolio security denominated in a foreign currency, it may be
required to settle a purchase transaction in the relevant foreign currency or
receive the proceeds of a sale in that currency. In either event, the Fund will
be obligated to acquire or dispose of such foreign currency as is represented by
the transaction by selling or buying an equivalent amount of United States
dollars. Furthermore, the Fund may wish to "lock in" the United States dollar
value of the transaction at or near the time of a purchase or sale of portfolio
securities at the exchange rate or rates then prevailing between the United
States dollar and the currency in which the foreign security is denominated.
Therefore, the Fund may, for a fixed amount of United States dollars, enter into
a forward foreign exchange contract for the purchase or sale of the amount of
foreign currency involved in the underlying securities transaction. In so doing,
the Fund will attempt to insulate itself against possible losses and gains
resulting from a change in the relationship between the United States dollar and
the foreign currency during the period between the date a security is purchased
or sold and the date on which payment is made or received. This process is known
as "transaction hedging".
To effect the translation of the amount of foreign currencies involved in
the purchase and sale of foreign securities and to effect the "transaction
hedging" described above, the Fund may purchase or sell foreign currencies on a
"spot" (I.E. cash) basis or on a forward basis whereby the Fund purchases or
sells a specific amount of foreign currency, at a price set at the time of the
contract, for receipt of delivery at a specified date which may be any fixed
number of days in the future.
Such spot and forward foreign exchange transactions may also be utilized to
reduce the risk inherent in fluctuations in the exchange rate between the United
States dollar and the relevant foreign dollar and the relevant foreign currency
when foreign securities are purchased or sold for settlement beyond customary
settlement time (as described below). Neither type of foreign currency
transaction will eliminate fluctuations in the prices of the Fund's portfolio or
securities or prevent loss if the price of such securities should decline.
PORTFOLIO HEDGING--Some or all of the Fund's portfolio will be denominated in
foreign currencies. As a result, in addition to the risk of change in the market
value of portfolio securities, the value of the portfolio in United States
dollars is subject to fluctuations in the exchange rate between such foreign
currencies and the United States dollar. When, in the opinion of LMC, it is
desirable to limit or reduce exposure in a foreign currency in order to moderate
potential changes in the United States dollar value of the portfolio, the Fund
may enter into a forward foreign currency exchange contract by which the United
States dollar value of the underlying foreign portfolio securities can be
approximately matched by an equivalent United States dollar liability. This
technique is known as "portfolio hedging" and moderates or reduces the risk of
change in the United States dollar value of the Fund's portfolio only during the
period before the maturity of the forward contract (which will not be in excess
of one year). The Fund, for hedging purposes only, may also enter into forward
foreign currency exchange contracts to increase its exposure to a foreign
currency that the Fund's investment adviser expects to increase in value
relative to the United States dollar. The Fund will not attempt to hedge all of
its foreign portfolio positions and will enter into such transactions only to
the extent, if any, deemed appropriate by the investment adviser. Hedging
against a decline in the value of currency does not eliminate fluctuations in
the prices of portfolio securities or prevent losses if the prices of such
securities decline. The Fund will not enter into forward foreign currency
exchange transactions for speculative purposes. The Fund intends to limit
transactions as described in this paragraph to not more than 70% of the total
Fund assets.
FORWARD COMMITMENTS--The Fund may make contracts to purchase securities for a
fixed price at a future date beyond customary settlement time ("forward
commitments") because new issues of securities are typically offered to
investors, such as the Fund, on that basis. Forward commitments involve a risk
of loss if the value of the security to be purchased declines prior to the
settlement date. This risk is in addition to the risk of decline in value of the
Fund's other assets. Although the Fund will enter into such contracts with the
intention of acquiring the securities, the Fund may dispose of a commitment
prior to settlement if the investment adviser deems it appropriate to do so. The
Fund may realize short-term profits or losses upon the sale of forward
commitments.
2
<PAGE>
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.
INVESTMENT AND REPATRIATION RESTRICTIONS
Some emerging countries have laws and regulations which currently preclude
direct foreign investment in the securities of their companies. However,
indirect foreign investment in the securities of companies listed and traded on
the stock exchanges in these countries is permitted by certain emerging
countries through investment funds which have been specifically authorized. The
Fund may invest in these investment funds subject to the provisions of the 1940
Act as discussed below under "Investment Restrictions". If the Fund invests in
such investment funds, the Fund's shareholders will bear not only their
proportionate share of the expenses of the Fund (including operating expenses
and the fees of the Investment Manager), but also will bear indirectly similar
expenses of the underlying investment funds.
In addition to the foregoing investment restrictions, prior governmental
approval for foreign investments may be required under certain circumstances in
some emerging countries, while the extent of foreign investment in domestic
companies may be subject to limitation in other emerging countries. Foreign
ownership limitations also may be imposed by the charters of individual
companies in emerging countries to prevent, among other concerns, violation of
foreign investment limitations.
Repatriation of investment income, capital and the proceeds of sales by
foreign investors may require governmental registration and/or approval in some
emerging countries. The Fund could be adversely affected by delays in or a
refusal to grant any required governmental approval for such repatriation.
EMERGING COUNTRY AND EMERGING MARKET SECURITIES MARKETS
Trading volume on emerging country stock exchanges is substantially less
than that on the New York Stock Exchange. Further, securities of some emerging
country or emerging market companies are less liquid and more volatile than
securities of comparable U.S. companies. Similarly, volume and liquidity in most
emerging country bond markets is substantially less than in the U.S. and,
consequently, volatility of price can be greater than in the U.S. Fixed
commissions on emerging country stock or emerging market exchanges are generally
higher than negotiated commissions on U.S. exchanges, although the Fund
endeavors to achieve the most favorable net results on its portfolio
transactions and may be able to purchase the securities in which the Fund may
invest on other stock exchanges where commissions are negotiable.
3
<PAGE>
Companies in emerging countries are not generally subject to uniform
accounting, auditing and financial reporting standards, practices and disclosure
requirements comparable to those applicable to U.S. companies. Consequently,
there may be less publicly available information about an emerging country
company than about a U.S. company. Further, there is generally less governmental
supervision and regulation of foreign stock exchanges, brokers and listed
companies than in the U.S.
ECONOMIC AND POLITICAL RISKS
The economies of individual emerging countries may differ favorably or
unfavorably from the U.S. economy in such respects as growth of gross domestic
product, rate of inflation, capital reinvestment, resource self-sufficiency and
balance of payments position. Further, the economies of developing countries
generally are heavily dependent upon international trade and, accordingly, have
been and may continue to be adversely affected by trade barriers, managed
adjustments in relative currency values and other protectionist measures imposed
or negotiated by the countries with which they trade. These economies also have
been and may continue to be adversely affected by economic conditions in the
countries with which they trade.
With respect to any emerging country, there is the possibility of
nationalization, expropriation or confiscatory taxation, political changes,
government regulation, social instability or diplomatic developments (including
war) which could affect adversely the economies of such countries or the Fund's
investments in those countries. In addition, it may be more difficult to obtain
a judgment in a court outside of the United States.
INVESTMENT RESTRICTIONS
The Fund's investment objective, as described under "investment policy" and
the following investment restrictions are matters or fundamental policy which
may not be changed without the affirmative vote of the lesser of (a) 67% or more
of the shares of the Fund present at a shareholders' meeting at which more than
50% of the outstanding shares are present or represented by proxy or (b) more
than 50% of the outstanding shares. Under these investment restrictions:
(1) The Fund will not issue any senior security (as defined in the 1940
Act), except that (a) the Fund may enter into commitments to purchase
securities in accordance with the Fund's investment program, including
reverse repurchase agreements, foreign exchange contracts, delayed
delivery and when-issued securities, which may be considered the
issuance of senior securities; (b) the Fund may engage in transactions
that may result in the issuance of a senior security to the extent
permitted under applicable regulations, interpretation of the 1940 Act
or an exemptive order; (c) the Fund may engage in short sales of
securities to the extent permitted in its investment program and other
restrictions; (d) the purchase or sale of futures contracts and related
options shall not be considered to involve the issuance of senior
securities; and (e) subject to fundamental restrictions, the Fund may
borrow money as authorized by the 1940 Act.
(2) The Fund will not borrow money, except that (a) the Fund may enter into
certain futures contracts and options related thereto; (b) the Fund may
enter into commitments to purchase securities in accordance with the
Fund's investment program, including delayed delivery and when-issued
securities and reverse repurchase agreements; (c) for temporary
emergency purposes, the Fund may borrow money in amounts not exceeding
5% of the value of its total assets at the time when the loan is made;
(d) the Fund may pledge its portfolio securities or receivables or
transfer or assign or otherwise encumber them in an amount not
exceeding one-third of the value of its total assets; and (e) for
purposes of leveraging, the Fund may borrow money from banks (including
its custodian bank), only if, immediately after such borrowing, the
value of the Fund's assets, including the amount borrowed, less its
liabilities, is equal to at least 300% of the amount borrowed, plus all
outstanding borrowings. If at any time, the value of the Fund's assets
fails to meet the 300% asset coverage requirement relative only to
leveraging, the Fund will, within three days (not including Sundays and
holidays), reduce its borrowings to the extent necessary to meet the
300% test. The Fund will only invest up to 5% of its total assets in
reverse repurchase agreements.
(3) The Fund will not act as an underwriter of securities except to the
extent that, in connection with the disposition of portfolio securities
by the Fund, the Fund may be deemed to be an underwriter under the
provisions of the 1933 Act.
(4) The Fund will not purchase real estate, interests in real estate or
real estate limited partnership interests except that, to the extent
appropriate under its investment program, the Fund may invest in
securities secured by real estate or interests therein or issued by
companies, including real estate investment trusts, which deal in real
estate or interests therein.
(5) The Fund will not make loans, except that, to the extent appropriate
under its investment program, the Fund may (a) purchase bonds,
debentures or other debt securities, including short-term obligations,
(b) enter into 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.
4
<PAGE>
(6) The Fund will not invest in commodity contracts, except that the Fund
may, to the extent appropriate under its investment program, purchase
securities of companies engaged in such activities, may enter into
transactions in financial and index futures contracts and related
options, may engage in transactions on a when-issued or forward
commitment basis, and may enter into forward currency contracts.
(7) The Fund will not concentrate its investments in any one industry,
except that the Fund may invest up to 25% of its total assets in
securities issued by companies principally engaged in any one industry.
The Fund considers foreign government securities and supranational
organizations to be industries for the purposes of this restriction.
This limitation, however, will not apply to securities issued or
guaranteed by the U.S. Government, its agencies and instrumentalities.
(8) The Fund will not purchase securities of an issuer, if (a) more than 5%
of the Fund's total assets taken at market value would at the time be
invested in the securities of such issuer, except that such restriction
shall not apply to securities issued or guaranteed by the United States
government or its agencies or instrumentalities or, with respect to 25%
of the Fund's total assets, to securities issued or guaranteed by the
government of any country other than the United States which is a
member of the Organization for Economic Cooperation and Development
("OECD"). The member countries of OECD are at present: Australia,
Austria, Belgium, Canada, Denmark, Germany, Finland, France, Greece,
Iceland, Ireland, Italy, Japan, Luxembourg, the Netherlands, New
Zealand, Norway, Portugal, Spain, Sweden, Switzerland, Turkey, the
United Kingdom and the United States; or (b) such purchases would at
the time result in more than 10% of the outstanding voting securities
of such issuer being held by the Fund.
In addition to the above fundamental restrictions, the Fund has undertaken
the following non-fundamental restrictions, which may be changed in the future
by the Board of Directors, without a vote of the shareholders of the Fund:
(1) The Fund will not participate on a joint or joint-and-several basis in
any securities trading account. The "bunching" of orders for the sale
or purchase of marketable portfolio securities with other accounts
under the management of the investment adviser to save commissions or
to average prices among them is not deemed to result in a securities
trading account.
(2) The Fund may purchase and sell futures contracts and related options
under the following conditions: (a) the then-current aggregate futures
market prices of financial instruments required to be delivered and
purchased under open futures contracts shall not exceed 30% of the
Fund's total assets, at market value; and (b) no more than 5% of the
assets, at market value at the time of entering into a contract, shall
be committed to margin deposits in relation to futures contracts.
(3) The Fund will not make short sales of securities, other than short
sales "against the box," or purchase securities on margin except for
short-term credits necessary for clearance of portfolio transactions,
provided that this restriction will not be applied to limit the use of
options, futures contracts and related options, in the manner otherwise
permitted by the investment restrictions, policies and investment
programs of the Fund.
(4) The Fund will not purchase the securities of any other investment
company, except as permitted under the 1940 Act.
(5) The Fund will not invest for the purpose of exercising control over or
management of any company.
(6) 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. For these purposes, warrants attached to
units or other securities shall be deemed to be without value.
5
<PAGE>
(7) 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.
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:
+S.M.S. CHADHA (59), DIRECTOR. 3/16 Shanti Niketan, New Delhi 21, India.
Secretary, Ministry of External Affairs, New Delhi, India; Head of Foreign
Service Institute, New Delhi, India; Special Envoy of the Government of India;
Director, Special Unit for Technical Cooperation among Developing Countries,
United Nations Development Program, New York.
*+ROBERT M. DEMICHELE (52), PRESIDENT AND CHAIRMAN. P.O. Box 1515, Saddle Brook,
N.J. 07663. Chairman and Chief Executive Officer, Lexington Management
Corporation; President and Director, Lexington Global Asset Managers, Inc.;
Chairman and Chief Executive Officer, Lexington Funds Distributor, Inc.;
Chairman of the Board, Market Systems Research, Inc. and Market Systems
Research Advisors, Inc.; Director, Chartwell Re Corporation, Claredon National
Insurance Company, The Navigator's Group, Inc., Unione Italiana Reinsurance,
Vanguard Cellular Systems, Inc. and Weeden & Co.; Vice Chairman of the Board
of Trustees, Union College and Trustee, Smith Richardson Foundation.
+BEVERLY C. DUER (67), DIRECTOR. 340 East 72nd Street, New York, N.Y. 10021.
Private Investor. Formerly, Manager of Operations Research Department--CPC
International, Inc.
*+BARBARA R. EVANS (36), DIRECTOR. 5 Fernwood Road, Summit, N.J. 07901. Private
Investor. Prior to May, 1989, Assistant Vice President and Securities Analyst,
Lexington Management Corporation.
*+LAWRENCE KANTOR (50), VICE PRESIDENT AND DIRECTOR. P.O. Box 1515, Saddle
Brook, N.J. 07663. Managing Director, Executive Vice President and Director,
Lexington Management Corporation; Executive Vice President and Director,
Lexington Funds Distributor, Inc.; Executive Vice President and General
Manager--Mutual Funds, Lexington Global Asset Managers, Inc.
+JERARD F. MAHER (50), DIRECTOR. 300 Raritan Center Parkway,Edison, N.J. 08818.
General Counsel, Federal Business Center; Counsel, Ribis, Graham & Curtin.
+ANDREW M. MCCOSH (56), DIRECTOR. 12 Wyvern Park, Edinburgh EH 92 JY, Scotland,
U.K. Professor of the Organisation of Industry and Commerce, Department of
Business Studies, The University of Edinburgh, Scotland.
+DONALD B. MILLER (70), DIRECTOR. 10725 Quail Covey Road, Boynton Beach, FL
33436. Chairman, Horizon Media, Inc.; Trustee, Galaxy Funds; Director, Maguire
Group of Connecticut; prior to January 1989, President, Director and C.E.O.,
Media General Broadcast Services (advertising firm).
+JOHN G. PRESTON (64), DIRECTOR. 3 Woodfield Road, Wellesley, Massachusetts
02181. Associate Professor of Finance, Boston College, Boston, Massachusetts.
+MARGARET RUSSELL (76), DIRECTOR. 55 North Mountain Avenue, Montclair, N.J.
07042. Private Investor. Formerly, Community Affairs Director, Union Camp
Corporation.
*+LISA CURCIO (37), VICE PRESIDENT AND SECRETARY. P.O. Box 1515, Saddle Brook,
N.J. 07663. Senior Vice President and Secretary, Lexington Management
Corporation; Vice President and Secretary, Lexington Funds Distributor, Inc.;
Secretary, Lexington Global Asset Managers, Inc.
*+RICHARD T. SALER (35), VICE PRESIDENT AND PORTFOLIO MANAGER. P.O. Box 1515,
Saddle Brook, N.J. 07663. Senior Vice President, Director International
Investment Strategy, Lexington Management Corporation. Prior to July, 1992,
Securities Analyst, Nomura Securities, Inc. Prior to November, 1991, Vice
President, Lexington Management Corporation.
6
<PAGE>
*+RICHARD M. HISEY (38), VICE PRESIDENT AND TREASURER. P.O. Box 1515, Saddle
Brook, N.J. 07663. Managing Director, Director and Chief Financial Officer,
Lexington Management Corporation; Chief Financial Officer, Vice President and
Director, Lexington Funds Distributor, Inc.; Chief Financial Officer, Market
Systems Research Advisors, Inc.; Executive Vice President and Chief Financial
Officer, Lexington Global Asset Managers, Inc.
*+RICHARD LAVERY, CLU CHFC (42), 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 (37), VICE PRESIDENT. P.O. Box 1515, Saddle Brook, N.J.
07663.
*+CHRISTIE CARR (29), ASSISTANT TREASURER. P.O. Box 1515, Saddle Brook, N.J.
07663. Prior to October 1992, Senior Accountant, KPMG Peat Marwick LLP.
*+SIOBHAN GILFILLAN (33), ASSISTANT TREASURER. P.O. Box 1515, Saddle Brook, N.J.
07663.
*+THOMAS LUEHS (34), ASSISTANT TREASURER. P.O. Box 1515, Saddle Brook, N.J.
07663. Prior to November 1993, Supervisor of Investment Accounting, Alliance
Capital Management.
*+SHERI MOSCA (33), ASSISTANT TREASURER. P.O. Box 1515, Saddle Brook, N.J.
07663.
*+PETER CORNIOTES (35), ASSISTANT SECRETARY. P.O. Box 1515, Saddle Brook, N.J.
07663, Assistant Vice President and Assistant Secretary, Lexington Management
Corporation. Assistant Secretary, Lexington Funds Distributor, Inc.
*+ENRIQUE J. FAUST (36), 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. Chadha, Corniotes, DeMichele, Duer, Hisey,Faust, Kantor, Lavery,
Luehs, Maher, McCosh, Miller, and Preston and Mmes. Carnicelli, Carr, Curcio,
Evans, Gilfillan, Mosca and Russell hold similar offices with some or all of
the other registered investment companies advised and/or distributed by
Lexington Management Corporation or Lexington Funds Distributor, Inc. or
Market Systems Research Advisers,Inc.
The Board of Directors met 5 times during the twelve months ended December
31, 1996, and each of the Directors attended at least 75% of those meetings.
REMUNERATION OF DIRECTORS AND CERTAIN EXECUTIVE OFFICERS:
Each Director is reimbursed for expenses incurred in attending each meeting
of the Board of Directors or any committee thereof. Each Director who is not an
affiliate of the advisor is compensated for his or her services according to a
fee schedule which recognizes the fact that each Director also serves as a
Director of other investment companies advised by LMC. Each Director receives a
fee, allocated among all investment companies for which the Director serves.
Effective September 12, 1995 each Director receives annual compensation of
$24,000. Prior to September 12, 1995, the Directors who were not employed by the
Fund or its affiliates received annual compensation of $16,000.
Set forth below is information regarding compensation paid or accrued
during the period January 1, 1996 to December 31, 1996 for each Director:
AGGREGATE TOTAL COMPENSATION NUMBER OF
NAME OF DIRECTOR COMPENSATION FROM FROM FUND AND DIRECTORSHIPS IN
FUND FUND COMPLEX FUND COMPLEX
S.M.S. Chadha $ 856 $13,696 16
Robert M. DeMichele 0 0 17
Beverley C. Duer $ 1,712 $29,110 17
Barbara R. Evans 0 0 16
Lawrence Kantor 0 0 16
Jerard F. Maher $ 856 $16,046 17
Andrew M. McCosh $ 856 $13,696 16
Donald B. Miller $ 1,712 $26,760 16
Francis Olmsted* $ 1,068 $16,800 N/A
John G. Preston $ 1,712 $26,760 16
Margaret W. Russell $ 1,712 $25,048 16
Philip Smith* $ 1,600 $25,080 16
Francis A. Sunderland* $ 744 $10,528 N/A
*Retired
7
<PAGE>
RETIREMENT PLAN FOR ELIGIBLE DIRECTORS/TRUSTEES
Effective September 12, 1995, the Directors instituted a Retirement Plan
for Eligible Directors/Trustees (the "Plan") pursuant to which each
Director/Trustee (who is not an employee of any of the Funds, the Advisor,
Administrator or Distributor or any of their affiliates) may be entitled to
certain benefits upon retirement from the Board. Pursuant to the Plan, the
normal retirement date is the date on which the eligible Director/Trustee has
attained age 65 and has completed at least ten years of continuous and
non-forfeited service with one or more of the investment companies advised by
LMC (or its affiliates) (collectively, the "Covered Funds"). Each eligible
Director/Trustee is entitled to receive from the Covered Fund an annual benefit
commencing on the first day of the calendar quarter coincident with or next
following his date of retirement equal to 5% of his compensation multiplied by
the number of such Director/Trustee's years of service (not in excess of 15
years) completed with respect to any of the Covered Portfolios. Such benefit is
payable to each eligible Director in quarterly installments for ten years
following the date of retirement or the life of the Director/Trustee. The Plan
establishes age 72 as a mandatory retirement age for Directors/Trustees;
however, Director/Trustees serving the Funds as of September 12, 1995 are not
subject to such mandatory retirement. Directors/Trustees serving the Funds as of
September 12, 1995 who elect retirement under the Plan prior to September 12,
1996 will receive an annual retirement benefit at any increased compensation
level if compensation is increased prior to September 12, 1997 and receive
spousal benefits (I.E., in the event the Director/Trustee dies prior to
receiving full benefits under the Plan, the Director/Trustee's spouse (if any)
will be entitled to receive the retirement benefit within the 10 year period.)
Retiring Directors will be eligible to serve as Honorary Directors for one
year after retirement and will be entitled to be reimbursed for travel expenses
to attend a maximum of two meetings.
Set forth in the table below are the estimated annual benefits payable to
an eligible Director upon retirement assuming various compensation and years of
service classifications. As of December 31, 1996, the estimated credited years
of service for Directors,Chadha, Duer, Maher, McCosh, Miller, Preston and
Russell, and are 1, 18, 1, 1, 22, 18 and 15, respectively.
HIGHEST ANNUAL COMPENSATION PAID BY ALL FUNDS
20,000 25,000 30,000 35,000
YEARS OF
SERVICE ESTIMATED ANNUAL BENEFIT UPON RETIREMENT
--------
15 15,000 18,750 22,500 26,250
14 14,000 17,500 21,000 24,500
13 13,000 16,250 19,500 22,750
12 12,000 15,000 18,000 21,000
11 11,000 13,750 16,500 19,250
10 10,000 12,500 15,000 17,500
INVESTMENT ADVISER, DISTRIBUTOR AND ADMINISTRATOR
Lexington Management Corporation ("LMC"), P.O. Box 1515, Saddle Brook, New
Jersey 07663 is the investment adviser to the Fund pursuant to an Investment
Advisory Agreement dated January 25, 1994, (the "Advisory Agreement"). Lexington
Funds Distributor, Inc. ("LFD") is the distributor of Fund shares pursuant to a
Distribution Agreement dated December 5, 1994 (the "Distribution Agreement").
Both of these agreements were approved by the Fund's Board of Directors
(including a majority of the Directors who were not parties to either the
Advisory Agreement or the Distribution Agreement or "interested persons" of any
such party) on December 6, 1994. LMC makes recommendations to the Fund with
respect to its investments and investment policies.
LMC also acts as administrator to the Fund and performs certain
administrative and accounting services, including but not limited to,
maintaining general ledger accounts, regulatory compliance, preparation of
financial information for semi-annual and annual reports, preparing registration
statements, calculating net asset values, shareholder communications and
supervision of the custodian, transfer agent and provides facilities for such
services. The Fund shall reimburse LMC for its actual cost in providing such
services, facilities and expenses.
8
<PAGE>
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 shall reimburse the Fund in any fiscal year
for the amount by which the Fund's aggregate expenses exceed the most
restrictive expense limits imposed by any statute or regulatory authority of any
jurisdiction in which shares of the Fund are offered for sale during such year.
Brokerage fees and commissions, taxes, interest and extraordinary expenses are
not deemed to be expenses of the Fund for such reimbursement. 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, 1996, the Fund paid LMC
$146,299 in investment advisory fees and reimbursed the Fund $101,886. For the
year ended December 31, 1995, the Fund paid LMC $53,143 in investment advisory
fees and LMC reimbursed the Fund $173,670. For the year ended December 31, 1994,
the Fund paid LMC $17,532 in investment advisory fees and LMC reimbursed the
Fund $102,954.
The Advisory Agreement, the Distribution Agreement and the Administrative
Services Agreement are subject to annual approval by the Fund's Board of
Directors and by the affirmative vote, cast in person at a meeting called for
such purpose, of a majority of the Directors who are not parties either to the
Advisory Agreement or the Distribution Agreement, as the case may be, or
"interested persons" of any such party. Either the Fund or LMC may terminate the
Advisory Agreement and the Fund or LFD may terminate the Distribution Agreement
on 60 days' written notice without penalty. The Advisory Agreement terminates
automatically in the event of assignment, as defined in the Investment Company
Act of 1940.
LMC shall not be liable to the Fund or its shareholders for any act or
omission by LMC, its officers, directors or employees or any loss sustained by
the Fund or its shareholders except in the case of willful misfeasance, bad
faith, gross negligence or reckless disregard of duty.
LMC and LFD are wholly owned subsidiaries of Lexington Global Asset
Managers, Inc., a publicly traded corporation. Descendants of Lunsford
Richardson, Sr., their spouses, trusts and other related entities have a
majority voting control of outstanding shares of Lexington Global Asset
Managers, Inc.
Of the directors, officers or employees ("affiliated persons") of the Fund,
Messrs. Corniotes, DeMichele, Faust, Hisey, Kantor, Lavery, Luehs 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. As of March 31 1997, all officers and
directors of the Fund as a group owned of record and beneficially less than 1%
of the outstanding shares of the Fund.
PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
The Fund's primary policy is to execute all purchases and sales of
portfolio instruments at the most favorable prices consistent with best
execution, considering all of the costs of the transaction including brokerage
commissions. This policy governs the selection of brokers and dealers and the
market in which a transaction is executed. Consistent with this policy, the
Rules of Fair Practice of the National Association of Securities Dealers, Inc.,
and such other policies as the Directors may determine, LMC may consider sales
of shares of the Fund and of the other Lexington Funds as a factor in the
selection of broker-dealers to execute the Fund's portfolio transactions.
However, pursuant to the Fund's investment management agreement, management
consideration may be given in the selection of broker-dealers to research
provided and payment may be made of a commission higher than that charged by
another broker-dealer which does not furnish research services or which
furnishes research services deemed to be a lesser value, so long as the criteria
of Section 28(e) of the Securities Exchange Act of 1934 are met. Section 28 (e)
of the Securities Exchange Act of 1934 was adopted in 1975 and specifies that a
person with investment discretion shall not be "deemed to have acted unlawfully
or to have breached a fiduciary duty" solely because such person has caused the
account to pay higher commissions 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 ("soft dollars") 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.
9
<PAGE>
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 and the Fund's portfolio turnover
rate was 71.21%. For the year ended December 31, 1995, the Fund paid $86,090 in
brokerage commisions the Fund's portfolio turnover rate was 88.92%. For the year
ended December 31, 1996, the Fund's portfolio turnover rate was 95.18% and the
Fund paid $228,649 in brokerage commissions and of that amount, $16,695 was paid
for with soft dollars.
DETERMINATION OF NET ASSET VALUE
The Fund calculates net asset value as of the close of normal trading on
the New York Stock Exchange (currently 4:00 p.m. Eastern time, unless weather,
equipment failure or other factors contribute to an earlier closing time) on
each business day. It is expected that the New York Stock Exchange will be
closed on Saturdays and Sundays and on New Year's day, President's Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day. See the Prospectus for the further discussion of net asset value.
TAX MATTERS
The following is only a summary of certain additional tax considerations
that are not described in the Prospectus and generally affect each Fund and its
shareholders. No attempt is made to present a detailed explanation of the tax
treatment of the Fund or its shareholders, and the discussions here and in the
Prospectus are not intended as substitutes for careful tax planning.
QUALIFICATIONS AS A REGULATED INVESTMENT COMPANY. The Fund intends to
qualify to be treated as a "regulated investment company" ("RIC") under the
Internal Revenue Code of 1986, as amended (the "Code"). As a RIC, the Fund will
not itself be subject to federal income tax on its investment company taxable
income and net capital gains to the extent that such investment company taxable
income and net capital gains are distributed in each taxable year to the
separate accounts of the Participating Insurance Companies. In addition, if the
Fund distributes annually to the separate accounts its ordinary income and
capital gain net income, in the manner prescribed in the Code, it will not be
subject to the 4% federal excise tax otherwise applicable to the undistributed
income or gain of a RIC. Distributions of net investment income and net
short-term capital gains will be treated as ordinary income and distributions of
net long-term capital gains will be treated as long-term capital gain in the
hands of the Participating Insurance Companies. Under existing tax law, capital
gains or dividends from the Fund are not currently taxable when left to
accumulate within a variable annuity or variable life insurance contract.
SEGREGATED ASSET ACCOUNTS. Shares in the Fund are offered only to
segregated asset accounts, which are insurance company separate accounts that
fund variable annuity or variable life insurance contracts. Section 817(h) of
the Code requires that investments of a segregated asset account of an insurance
company be "adequately diversified," in accordance with Treasury Regulations
promulgated thereunder, in order for the holders of the variable annuity
contracts or variable life insurance policies investing in the account to
receive the tax-deferred or tax-free treatment generally afforded holders of
annuities or life insurance policies under the Code. The Department of the
Treasury has issued Regulations under section 817(h) which, among other things,
provide the manner in which a segregated asset account will treat investments in
a RIC for purposes of the applicable diversification requirements. Under the
Regulations, if a RIC satisfies certain conditions, such RIC will not be treated
as a single investment for these purposes, but rather the segregated asset
account will be treated as owning its proportionate share of each of the assets
of the RIC. The Fund plans to satisfy these conditions at all times so that each
segregated asset account of a Participating Insurance Company investing in the
Fund will be treated as adequately diversified under the Code and Regulations.
For information concerning the federal income tax consequences to the
holders of variable annuity contracts and variable rate insurance policies, such
holders should consult the prospectuses used in connection with the issuance of
their particular contracts or policies.
10
<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:
P(l+T)n = ERV
Where: P=a hypothetical initial payment of $1,000
T=average annual total return
n=number of years (1, 5 or 10)
ERV=ending redeemable value of a hypothetical
$1,000 payment made at the beginning of the 1,
5 or 10 year periods or at the end of the 1, 5
or 10 year periods (or fractional portion
thereof).
Under the foregoing formula, the time periods used in advertising will be
based on rolling calendar quarters, updated to the last day of the most recent
quarter prior to submission of the advertising for publication, and will cover
one, five and ten year periods or a shorter period dating from the effectiveness
of the Fund's Registration Statement. In calculating the ending redeemable
value, all dividends and distributions by the Fund are assumed to have been
reinvested at net asset value as described in the prospectus on the reinvestment
dates during the period. Total return, or "T" in the formula above, is computed
by finding the average annual compounded rates of return over the 1, 5 and 10
year periods (or fractional portion thereof) that would equate the initial
amount invested to the ending redeemable value. Any recurring account charges
that might in the future be imposed by the Fund would be included at that time.
The Fund may also from time to time include in such advertising a total
return figure that is not calculated according to the formula set forth above in
order to compare more accurately the performance of the Fund with other measures
of investment return. For example, in comparing the Fund's total return with
data published by Lipper Analytical Services, Inc., or with the performance of
the Standard and Poor's 500 Stock Index, the Dow Jones Industrial Average or the
Morgan Stanley Capital International World Index, the Fund calculates its
aggregate total return for the specified periods of time assuming the investment
of $10,000 in Fund shares and assuming the reinvestment of each dividend or
other distribution at net asset value on the reinvestment date. Percentage
increases are determined by subtracting the initial value of the investment from
the ending value and by dividing the remainder by the beginning value. The
Fund's total return for the one year and since commencement (3/30/94) periods as
of December 31, 1996 were 7.46% and 1.44%.
OTHER INFORMATION
As of March 31, 1997, Lexington Management Corporation, Park 80 West Plaza
Two, Saddle Brook, N.J. 07663 owned benefically 10,319 shares of the Fund (0.4%
of the Fund's outstanding shares). The balance of the outstanding shares of the
Fund (99.6%) are owned by Transamerica Occidental Life Insurance Company; Aetna
Life Insurance and Annuity Company and Kemper Investors Life Insurance Company
and are allocated to separate accounts which are used for funding variable
annuity contracts and variable life insurance policies.
11
<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
-----------
12
<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
-----------
13
<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
-----------
14
<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.
15
<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.
16
<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.
17
<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.
18
<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
19
<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.
20
<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.
21
<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.
22
<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
23
