DEAR CONTRACTHOLDER:
- --------------------------------------------------------------------------------
The Lexington Emerging Markets Fund declined 20.5%* during the fourth
quarter and fell 11.81% for the full year of 1997. According to Lipper
Analytical Services, Inc., the average emerging market fund dropped 16.9% for
the quarter and declined 2.35% for the year. The unmanaged Morgan Stanley
Emerging Markets Free Index posted a loss of 17.5%** for the quarter and 11.6%**
for the year.
The Fund remains significantly underweight in the Asian portion of the
emerging market index; however, other emerging market funds benefited from even
lower weightings in Asia. Some of our competitors also have heavier weightings
in Latin America, which in comparison to Asia, performed much better. Latin
American markets fell 10.7% during the quarter, while Asian markets declined
33.0%. Despite the Fund's low weighting, a 57.7% drop in Indonesian stocks
negatively impacted performance. In Latin America, a 7% weighting in Chilean
stocks was negatively impacted by a 17.6% drop in the country's stock market. On
the positive side, Korean equities were mostly avoided, as that market sank
64.4%. Turkish equities, which comprise 5% of the Fund, performed strongly with
a gain of 24.4% during the fourth quarter. Finally, cash positions were
increased to 15-20% to cushion against expected volatility in emerging market
equities while providing an opportunity to selectively invest in depressed
stocks at lower prices.
The turmoil in emerging markets has affected different groups of countries
in very different ways. Asian economies have suffered sharp declines in economic
activity due to excess industrial capacity, high debt loads, bankrupt financial
institutions and property companies, and rising unemployment. This economic
reality has also led to high real interest rates as investors demand greater
compensation due to higher risks. High interest rates are now impacting many
other emerging economies as well, from Russia to Greece and most of Latin
America.
The Asian crisis has resulted in lower commodity prices for key commodities
such as oil and copper which also will result in weak economies in the
resource-based economies of Chile, Venezuela, and Brazil, to name just a few.
Governments have responded to lower expected revenues by cutting fiscal spending
which will further impede growth.
In conclusion, GDP growth in the emerging economies will be under pressure
on several fronts that make country weighting and stock selectivity key factors
in our 1998 strategy. The Fund will seek financially sound companies in
industries that are not economically sensitive. Industries such as
pharmaceuticals and foods are favored. Though news in Asia still remains
negative, opportunities are beginning to surface. There are many cheap stocks in
Asia and these stocks should provide excellent returns when adopting a
multi-year view. Export companies in the region should actually benefit with
sales revenues in U.S. dollars while costs are in depreciated local currencies.
Stocks of companies focused on Asian domestic economies are down as much as
8090%. Although the short-term economic outlook looks dire, much of the news has
been more than
1
<PAGE>
discounted in share prices. The Asian region will improve as its trade surplus
and foreign investment increase. Therefore, Asian weightings will be increased,
and cash positions reduced, to take advantage of Asian opportunities. Stock
selection will focus on companies with strong balance sheets and franchise
value, as these will offer tremendous opportunities. Emerging markets must be
viewed with a longer-term horizon. Expanding populations, a growing middle class
and an educated work force are strong contributing factors to a successful
economic recovery. Above average economic growth will resume once stability
occurs in the credit and currency markets for these regions.
Sincerely,
/s/ Richard T. Saler /s/ Robert M. DeMichele
------------------------ -------------------------
Richard T. Saler Robert M. DeMichele
Portfolio Manager President
February, 1998 February, 1998
- --------------------------------------------------------------------------------
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN
LEXINGTON EMERGING MARKETS FUND, INC.
THE UNMANAGED MORGAN STANLEY CAPITAL INTERNATIONAO (EAFE) INDEX
AND THE UNMANAGED MORGAN STANLEY EMERGING MARKETS FREE INDEX
[THE FOLLOWING TABLE REPRESENTS A CHART IN THE PRINTED MATERIAL]
Lexington
Year Emerging EAFE MSCI EMF
Mkts
==============================================
3/30/94 $10,000 $10,000 $10,000
12/31/94 $10,076 $10,414 $10,190
12/31/95 $9,679 $11,581 $9,659
12/31/96 $10,433 $12,281 $10,241
12/31/97 $9,200 $12,500 $9,055
AVERAGE ANNUAL STANDARD TOTAL RETURNS
FOR THE PERIOD ENDED 12/31/97
FUND/INDEX 1 YEAR SINCE INCEPTION
3/30/94
- ---------- ------ ---------------
LEXINGTON EMERGING
MARKET FUND (11.81) (2.19)%
MORGAN STANLEY CAPITAL
INTERNATIONAL (EAFE) INDEX 1.78% 6.12%
MORGAN STANLEY EMERGING
MARKETS FREE INDEX (11.59)% (2.61)%
This graph, prepared in accordance with SEC regulations, compares a $10,000
investment in the Fund with a similar investment in the Morgan Stanley Capital
International (EAFE) Index and the Morgan Stanley Emerging Markets Free Index.
Results for the Fund, the Morgan Stanley Capital International (EAFE) Index and
the Morgan Stanley Emerging markets Free Index include the reinvestment of all
dividend and capital gain distributions. The Fund's inception date was 3/30/94.
Investment return and principal value of an investment will fluctuate so that an
investor's shares when redeemed may be worth more or less than at their original
cost. Total return represents past performance and it is not predictive of
future results.
- --------------------------------------------------------------------------------
*-11.81% and -2.19% are the one year and since commencement (3/30/94) average
annual standard total returns, respectively, for the period ended December 31,
1997. Investment return and principal value of an investment will fluctuate so
that an investor's shares, when redeemed, may be worth more or less than at
their original cost. Total return represents past performance and is not
predictive of future results.
** All country and regional returns are from the corresponding Morgan Stanley
Capital International Indices. Returns are dollar based with all dividends
reinvested.
2
<PAGE>
LEXINGTON EMERGING MARKETS FUND, INC.
STATEMENT OF NET ASSETS
(INCLUDING THE PORTFOLIO OF INVESTMENTS)
December 31, 1997
<TABLE>
<CAPTION>
Number of Value
Shares Security (Note 1)
- ---------------------------------------------------------------------------------------------------------------------------
COMMON STOCK: 80.2%
ARGENTINA: 3.3%
<S> <C> <C>
109,806 Perez Companc S.A. ............................................................ $ 784,158
------------
BRAZIL: 6.6%
747,000 Cia Tecidos Norte De Mina (Preferred shares) .................................. 267,737
747,000 Empresa Nacional de Comercio Redito2 .......................................... 556
992,000 Light - Servicos de Electricidade S.A. ........................................ 413,308
1,968,000 Petroleo Brasileiro S.A. (Preferred shares) ................................... 460,250
5,000 Souza Cruz S.A. ............................................................... 40,322
1,566,000 Telecomunicacoes de Sao Paulo S.A. ............................................ 416,737
------------
1,598,910
------------
CANADA: 0.6%
10,000 Bell Canada International, Inc.2 .............................................. 154,375
------------
CHILE: 6.3%
43,400 Banco Santander (ADR) ......................................................... 613,025
22,400 Empresa Nacional Electricidad S.A. (ADR) ...................................... 396,200
9,200 Enersis S.A. (ADR) ............................................................ 266,800
9,200 Vina Concha y Toro S.A. (ADR) ................................................. 232,300
------------
1,508,325
------------
COLOMBIA: 1.6%
16,500 Banco Ganadero S.A. (ADR) ..................................................... 396,000
------------
CZECH REPUBLIC: 1.9%
4,290 SPT Telekom AS2 ............................................................... 457,798
------------
GREECE: 2.9%
28,620 Delta Dairy S.A. (Preferred shares) ........................................... 257,246
9,200 Hellenic Tellecommunication Organization S.A. ................................. 188,734
49,180 Michaniki S.A. ................................................................ 252,226
------------
698,206
------------
HONG KONG: 2.8%
35,000 Cheung Kong (Holdings), Ltd. .................................................. 229,245
519,000 JCG Holdings, Ltd. ............................................................ 222,718
1,265,000 Moulin International Holding, Ltd. ............................................ 151,834
119,416 Moulin International Holding, Ltd. (Warrants)2 ................................ 1,788
481,000 Tingyi (Cayman Islands) Holding Company ....................................... 62,699
------------
668,284
------------
HUNGARY: 2.1%
10,800 Zalakeramia Rt. ............................................................... 501,344
------------
INDIA: 4.0%
11,650 Hindalco Industries, Ltd. (GDR)1 .............................................. 233,000
52,600 Videsh Sanchar Nigam, Ltd. (GDR)1,2 ........................................... 737,715
------------
970,715
------------
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
LEXINGTON EMERGING MARKETS FUND, INC.
STATEMENT OF NET ASSETS
(INCLUDING THE PORTFOLIO OF INVESTMENTS)
December 31, 1997 (continued)
Number of Value
Shares Security (Note 1)
- ---------------------------------------------------------------------------------------------------------------------------
INDONESIA: 4.0%
<S> <C> <C>
309,400 PT Fiskar Agung Perkasa ....................................................... $ 42,230
414,000 PT Hanjaya Mandala Sampoerna .................................................. 312,675
745,000 PT Indah Kiat Pulp and Paper Corporation Tbk .................................. 132,192
442,000 PT Tambang Timah .............................................................. 474,591
------------
961,688
------------
ISRAEL: 2.6%
13,000 Teva Pharmaceutical Industries, Ltd. (ADR) .................................... 615,062
------------
MALAYSIA: 4.6%
198,000 Austral Enterprises Bhd ....................................................... 207,545
89,000 Berjaya Sports Toto Bhd ....................................................... 227,509
123,000 Hap Seng Consolidated Bhd ..................................................... 151,682
128,000 Highlands and Lowlands Bhd .................................................... 130,882
2,600 Hong Leong Credit Bhd (Warrants)2 ............................................. --
156,000 Kuala Lumpur Kepong Bhd ....................................................... 334,655
106,000 Magnum Corporation Bhd ........................................................ 63,725
------------
1,115,998
------------
MEXICO: 7.8%
139,000 Cintra S.A.2 .................................................................. 128,969
33,000 Corporacion Interamericana de Entreteniniento S.A.2 ........................... 256,245
24,300 Grupo Casa Autrey, S.A. de C.V. (ADR) ......................................... 496,631
117,600 Grupo Financiero Banamex Accival, S.A. de C.V2. ............................... 352,283
2,400 Grupo Imsa S.A. de C.V. (ADR) ................................................. 56,550
457,800 Grupo Industrial Maseco S.A. de C.V. .......................................... 473,597
25,000 Grupo Industrial Saltillo, S.A de C.V. "B" .................................... 102,334
------------
1,866,609
------------
PAKISTAN: 1.0%
49,900 Pakistan Investment Fund, Inc. ................................................ 243,263
------------
PERU: 1.7%
18,100 Telefonica del Peru S.A. (ADR) ................................................ 421,956
------------
PHILIPPINES: 2.4%
2,916,000 C & P Homes, Inc. ............................................................. 172,480
856,000 Fortune Cement Corporation .................................................... 85,817
474,262 International Container Terminal Service, Inc.2 ............................... 59,433
486,000 Ionics Circuit, Inc. .......................................................... 200,983
544,200 Universal Robina Corporation .................................................. 67,516
------------
586,229
------------
POLAND: 4.4%
70,162 Elektrim Towarzystwo Handlowe S.A. ............................................ 678,746
41,900 Polifarb Cieszyn Wroclaw S.A.2 ................................................ 198,510
13,966 Polifarb Cieszyn Wroclaw S.A. (Rights)2 ....................................... 43,583
17,200 Stomil Olsztyn S.A. ........................................................... 131,748
------------
1,052,587
------------
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
LEXINGTON EMERGING MARKETS FUND, INC.
STATEMENT OF NET ASSETS
(INCLUDING THE PORTFOLIO OF INVESTMENTS)
December 31, 1997 (continued)
Number of Value
Shares Security (Note 1)
- ---------------------------------------------------------------------------------------------------------------------------
PORTUGAL: 2.5%
<S> <C> <C>
12,864 Portugal Telecom S.A. ......................................................... $ 597,563
------------
RUSSIA: 3.5%
2,900 Lukoil Holdings of Russia (ADR) ............................................... 267,525
89,100 Rostelecom2 ................................................................... 316,305
825,400 Unified Energy Systems2 ....................................................... 249,601
------------
833,431
------------
SINGAPORE: 4.7%
16,500 Asia Pulp & Paper Company, Ltd. (ADR) ......................................... 166,031
286,000 DBS Land, Ltd. ................................................................ 437,927
69,000 Keppel Fels, Ltd. ............................................................. 192,470
211,000 Want Want Holdings2 ........................................................... 291,180
30,400 Want Want Holdings "A"2 ....................................................... 40,128
------------
1,127,736
------------
SOUTH AFRICA: 2.1%
2,400 Liberty Life Association of Africa, Ltd. ...................................... 62,394
16,800 Liberty Life Association of Africa, Ltd. ...................................... 431,535
------------
493,929
------------
SOUTH KOREA: 0.1%
500 Suheung Capsule ............................................................... 21,033
------------
TAIWAN: 0.8%
12,037 Taiwan Fund, Inc. ............................................................. 198,610
------------
THAILAND: 0.6%
185,000 Advance Agro Public Company, Ltd.2 ............................................ 154,651
------------
TURKEY: 4.5%
4,043,009 Akbank T.A.S. ................................................................. 355,785
3,489,500 Arcelik A.S. .................................................................. 328,013
1,191,100 Eregli Demir Ve Celik Fabrikalari T.A.S. ...................................... 184,621
857,202 Petrol Ofisi A.S. ............................................................. 204,871
------------
1,073,290
------------
VENEZUELA: 0.8%
4,600 Compania Anonima Nacional Telefonos de Venezuela (ADR) ........................ 191,475
------------
TOTAL COMMON STOCK (cost $24,004,598) ......................................... 19,293,225
------------
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
LEXINGTON EMERGING MARKETS FUND, INC.
STATEMENT OF NET ASSETS
(INCLUDING THE PORTFOLIO OF INVESTMENTS)
December 31, 1997 (continued)
Principal Value
Amount Security (Note 1)
- ---------------------------------------------------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS: 20.1%
U.S. GOVERNMENT AGENCY OBLIGATION: 14.6%
<S> <C> <C>
$3,500,000 Federal Home Loan Mortgage Corporation, 4.75%, due 01/02/98 ................... $ 3,499,538
-----------
U.S. GOVERNMENT OBLIGATIONS: 5.5%
100,000 U.S. Treasury Bills, 5.325%, due 01/08/98 ..................................... 99,925
1,190,000 U.S. Treasury Bond, 6.125%, due 11/15/2027 .................................... 1,223,879
-----------
1,323,804
-----------
TOTAL SHORT-TERM INVESTMENTS (cost $4,787,577) ................................ 4,823,342
-----------
TOTAL INVESTMENTS: 100.3% (cost $28,792,175+) (Note 1) ........................ 24,116,567
Liabilities in excess of other assets: (0.3%) ................................. (64,106)
-----------
TOTAL NET ASSETS: 100.0%
(equivalent to $8.91 per share on 2,700,743 shares outstanding) ............... $24,052,461
===========
</TABLE>
1Restricted security (Note 6).
2 Non-income producing security.
ADR- American Depository Receipt.
GDR- Global Depository Receipt.
+Aggregate cost for Federal income tax purposes is $28,847,323.
------------------------
At December 31, 1997, the composition of the Fund's net assets by industry
concentration was as follows:
Banking ............................................... 8.9%
CapitalEquipment ...................................... 0.8
Construction & Housing ................................ 1.8
Consumer Durable ...................................... 3.2
Consumer Non-durable .................................. 7.6
Electrical & Electronics .............................. 0.8
Energy Sources ........................................ 4.7
Financial Services .................................... 3.0
Health &PersonalCare .................................. 4.7
Materials ............................................. 16.0
Multi-Industry ........................................ 3.0
Real Estate ........................................... 2.8
Services .............................................. 3.1
Telecommunications .................................... 12.7
Trade ................................................. 2.8
Transportation ........................................ 0.5
U.S. Government Obligations ........................... 20.1
Utilities ............................................. 3.8
Other Liabilities ..................................... (0.3)
-----
Total Net Assets .................................. 100.0%
=====
The Notes to Financial Statements are an integral part of this statement.
6
<PAGE>
LEXINGTON EMERGING MARKETS FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1997
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Investments, at value (cost $28,792,175) (Note1) ................................... $ 24,116,567
Cash ............................................................................... 277,719
Receivable for investment securities sold .......................................... 89,344
Receivable for shares sold ......................................................... 52,610
Dividends and interest receivable .................................................. 88,106
Foreign taxes recoverable .......................................................... 749
Deferred organization expense, net (Note 1) ........................................ 5,551
------------
Total Assets ........................................................ $ 24,630,646
------------
LIABILITIES
Due to Lexington Management Corporation (Note 2) ................................... 16,987
Payable for investment securities purchased ........................................ 476,679
Payable for shares redeemed ........................................................ 40,769
Accrued expenses ................................................................... 43,750
------------
Total Liabilities ................................................... 578,185
------------
NET ASSETS (equivalent to $8.91 per share
on 2,700,743 shares outstanding) (Note 3) ........................................ $ 24,052,461
============
NET ASSETS consist of:
Capital stock--authorized 500,000,000 shares, $.001 par value per share ............ $ 2,701
Additional paid-in capital (Note 1) ................................................ 27,920,983
Undistributed net investment income (Note 1) ....................................... 59,076
Accumulated net realized gains on investments and foreign currency holdings (Note 1) 745,607
Unrealized depreciation on investments and foreign currency holdings ............... (4,675,906)
------------
Total Net Assets .................................................... $ 24,052,461
============
</TABLE>
The Notes to Financial Statements are an integral part of this statement.
7
<PAGE>
<TABLE>
<CAPTION>
LEXINGTON EMERGING MARKETS FUND, INC.
STATEMENT OF OPERATIONS
Year ended December 31, 1997
INVESTMENT INCOME
<S> <C> <C>
Dividends ............................................................ $ 487,089
Interest . ....................................................... 154,797
---------
641,886
Less: foreign tax expense ................................................ 55,012
---------
Total investment income ...................................... $ 586,874
EXPENSES
Investment advisory fee (Note 2) ..................................... 238,449
Custodian expense .................................................... 173,921
Printing and mailing expenses ........................................ 40,556
Accounting expenses (Note 2) ......................................... 21,914
Directors' fees and expenses ......................................... 19,009
Professional fees .................................................... 13,850
Computer processing fees ............................................. 10,070
Registration fees .................................................... 5,110
Amortization of organization costs ................................... 4,458
Transfer agent expense (Note 2) ...................................... 4,015
Other expenses ....................................................... 5,150
---------
Total expenses ................................................ 536,502
Less: expenses recovered under contract with
investment adviser (Note 2) ................................. 21,212 515,290
--------- ---------
Net investment income .................................... 71,584
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS (NOTE 4)
Net realized gain (loss) on:
Investments ................................................... 1,407,639
Foreign currency transactions ................................. (35,132)
---------
Net realized gain ........................................ 1,372,507
Net change in unrealized appreciation (depreciation) on:
Investments ................................................... (5,093,485)
Foreign currency translation of other assets and liabilities .. 298
---------
Net change in unrealized appreciation (depreciation) ..... (5,093,187)
----------
Net realized and unrealized loss ......................... (3,720,680)
----------
DECREASE IN NET ASSETS RESULTING FROM OPERATIONS ......................... $(3,649,096)
===========
</TABLE>
The Notes to Financial Statements are an integral part of this statement.
8
<PAGE>
LEXINGTON EMERGING MARKETS FUND, INC.
STATEMENTS OF CHANGES IN NET ASSETS
Years ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Net investment income ............................................. $ 71,584 $ 34,825
Net realized gain (loss) from investment and foreign currency
transactions .................................................... 1,372,507 (157,362)
Net change in unrealized appreciation (depreciation) of investments
and foreign currency translation ................................ (5,093,187) 483,796
------------ ------------
Increase (decrease) in net assets resulting from operations (3,649,096) 361,259
Distributions to shareholders from net investment income .......... (19,143) --
Increase in net assets from capital share transactions (Note 3) ... 6,042,710 13,502,070
------------ ------------
Net increase in net assets ......................... 2,374,471 13,863,329
NET ASSETS:
Beginning of period ............................................... 21,677,990 7,814,661
------------ ------------
End of period (including undistributed net investment income
of $59,076 and $14,089, 1997 and 1996, respectively) ............. $ 24,052,461 $ 21,677,990
============ ============
</TABLE>
The Notes to Financial Statements are an integral part of these statements.
LEXINGTON EMERGING MARKETS FUND, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997 and 1996
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.
9
<PAGE>
LEXINGTON EMERGING MARKETS FUND, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997 and 1996 (continued)
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (continued)
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, 1997.
FEDERAL INCOME TAXES It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to "regulated investment
companies" and to distribute all of its taxable income to its shareholders.
Therefore, no provision for Federal income taxes is required.
DISTRIBUTIONS Dividends from net investment income and net realized capital
gains are normally declared and paid annually, but the Fund may make
distributions on a more frequent basis to comply with the distribution
requirements of the Internal Revenue Code. The character of income and gains to
be distributed are determined in accordance with income tax regulations which
may differ from generally accepted accounting principles. At December 31, 1997,
reclassifications were made to the Fund's capital accounts to reflect permanent
book/tax differences and income and gains available for distribution 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 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. For
1997, LMC has voluntarily agreed to limit the total expenses of the Fund
(excluding interest, taxes, brokerage commissions and extraordinary expenses but
including management fee and operating expenses) to an annual rate of 1.75% of
the Fund's average net assets through April 30, 1997 and to 2.50% of the Fund's
average net assets from May 1, 1997 through December 31, 1997. For the year
ended December 31, 1997, expense reimbursement amounted to $21,212 and is set
forth in the statement of operations.
The Fund reimbursed LMC for certain expenses, including accounting costs of
$21,914 which are incurred by the Fund, but paid by LMC.
10
<PAGE>
LEXINGTON EMERGING MARKETS FUND, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997 and 1996 (continued)
NOTE 3. CAPITAL STOCK
Transactions in capital stock were as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996
-------------------------- ------------------------
SHARES AMOUNT SHARES AMOUNT
--------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Shares sold ........................................ 3,296,604 $35,635,710 2,264,743 $23,256,170
Shares issued on reinvestment of dividends ......... 1,696 19,143 -- --
--------- ----------- --------- -----------
3,298,300 35,654,853 2,264,743 23,256,170
Shares redeemed .................................... (2,741,626) (29,612,143) (953,567) (9,754,100)
--------- ----------- --------- -----------
Net increase ..................................... 556,674 $ 6,042,710 1,311,176 $13,502,070
========= =========== ========= ===========
</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, 1997, excluding short-term securities, were $ 42,836,035 and $
39,092,118, respectively.
At December 31, 1997, the aggregate gross unrealized appreciation for all
securities in which there is an excess of value over tax cost amounted to
$671,399 and aggregate gross unrealized depreciation for all securities in which
there is an excess of tax cost over value amounted to $5,402,155.
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.
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 Market Percent of
SECURITY Date Shares Per Share Value Net Assets
----------- -------- ------------ ------ --------
<S> <C> <C> <C> <C> <C>
Hindalco Industries,Inc. (GDR) 2/27/97 11,650 $32.58 $233,000 0.97%
Videsh Sanchar Nigam, Ltd. (GDR) 3/24/97 52,600 17.15 737,715 3.07
-------- ----
$970,715 4.04%
======== ====
</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 investments in illiquid securities to 15% of the Fund's net assets, at
market value.
11
<PAGE>
LEXINGTON EMERGING MARKETS FUND, INC.
FINANCIAL HIGHLIGHTS
Selected per share data for a share outstanding throughout the period:
<TABLE>
<CAPTION>
MARCH 30, 1994
(COMMENCEMENT
OF OPERATIONS) TO
YEAR ENDED DECEMBER 31, DECEMBER 31,
--------------------------------------- -----------------
1997 1996 1995 1994
-------- ------- ------ ------
<S> <C> <C> <C> <C>
Net asset value, beginning of period .................. $ 10.11 $ 9.38 $ 9.86 $10.00
-------- ------- ------ ------
Income (loss) from investment operations:
Net investment income ............................... 0.03 0.02 0.09 0.03
Net realized and unrealized gain
(loss) on investments and foreign
currency transactions ............................. (1.22) 0.71 (0.48) 0.04
-------- ------- ------ ------
Total income (loss) from investment
operations .................................... (1.19) 0.73 (0.39) 0.07
-------- ------- ------ ------
Less distributions:
Distributions from net investment income ............ (0.01) -- (0.09) (0.02)
Distributions in excess of net realized gains
(temporary book-tax difference) ................... -- -- -- (0.19)
-------- ------- ------ ------
Total distributions ............................. (0.01) -- (0.09) (0.21)
-------- ------- ------ ------
Net asset value, end of period ........................ $ 8.91 $ 10.11 $ 9.38 $ 9.86
======== ======= ====== ======
Total return .................................... (11.81%) 7.46% (3.93%) 0.76%*
Ratio to average net assets:
Expenses, before reimbursement or waivers ........... 1.91% 2.23% 4.09% 6.28%*
Expenses, net of reimbursement or waivers ........... 1.84% 1.64% 1.32% 1.30%*
Net investment income (loss), before
reimbursement or waivers .......................... 0.18% (0.39%) (1.45%) (4.29%)*
Net investment income ............................... 0.26% 0.20% 1.33% 0.70%*
Portfolio turnover rate ............................... 157.52% 95.18% 88.92% 71.21%*
Average commission paid on equity security
transactions** $ 0.00 $ 0.00 -- --
Net assets, end of period (000's omitted) ............. $24,052 $21,678 $7,815 $4,624
</TABLE>
- ----------
* Annualized
** The average commission paid on equity security transactions for the years
ended December 31, 1997 and 1996 is less than $0.005 per share of securities
purchased and sold. In accordance with SEC disclosure guidelines, the
average commissions are calculated for the period beginning with December
31, 1996, but not for prior periods.
12
<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, 1997, the related state-ments 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 for each of the years in the three-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, 1997 by correspondence with the custodian. As to securities
purchased or sold, but not yet received or delivered, 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, 1997, the results of
its operations for the year then ended, changes in its net assets for each of
the years in the two- year period then ended, and the financial highlights for
each of the years in the three-year period then ended and for the period from
March 30, 1994 toDecember 31, 1994, in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
New York, New York
February 4, 1998
13
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
- --------------------------------------------------------------------------------
LEXINGTON
EMERGING MARKETS FUND,INC.
INVESTMENT ADVISER
- --------------------------------------------------------------------------------
LEXINGTON MANAGEMENT CORPORATION
P.O. Box 1515
Park 80 West Plaza Two
Saddle Brook, New Jersey 07663
DISTRIBUTOR
- --------------------------------------------------------------------------------
LEXINGTON FUNDS DISTRIBUTOR, INC.
P.O. Box 1515
Park 80 West Plaza Two
Saddle Brook, New Jersey 07663
This report has been prepared for the information of the shareholders of
Lexington Emerging Markets Fund, Inc. and is authorized for distribution to the
public only if it is accompanied or preceded by a currently effective prospectus
which sets forth expenses and other material information.
- --------------------------------------------------------------------------------
LEXINGTON
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
================================================================================
LEXINGTON
EMERGING
MARKETS
FUND, INC.
- --------------------------------------------------------------------------------
Seeks long-term growth of capital
primarily through investment in
equity securities of
companies domiciled in, or doing
business in, emerging countries
and emerging markets.
- --------------------------------------------------------------------------------
ANNUAL REPORT
DECEMBER 31, 1997
The Lexington Group
of No Load
Investment Companies
- --------------------------------------------------------------------------------
================================================================================
