PROSPECTUS
May 3, 1999
Lexington EMERGING MARKETS Fund, Inc.
P.O. Box 1515 / Park 80 West Plaza Two, Saddle Brook, New Jersey 07663
201-845-7300
- --------------------------------------------------------------------------------
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").
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.
- --------------------------------------------------------------------------------
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED NOR DISAPPROVED THE
SHARES OF LEXINGTON EMERGING MARKETS FUND, INC. THE SECURITIES AND EXCHANGE
COMMISSION ALSO HAS NOT DETERMINED WHETHER THIS PROSPECTUS IS ACCURATE OR
COMPLETE. ANY PERSON WHO TELLS YOU THAT THE SECURITIES AND EXCHANGE COMMISSION
HAS MADE SUCH AN APPROVAL OR DETERMINATION IS COMMITTING A CRIME.
- --------------------------------------------------------------------------------
<PAGE>
RISK/RETURN SUMMARY
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
The Lexington Emerging Markets Fund's investment objective is to seek
long-term growth of capital primarily through investment in equity securities
and equity equivalents of emerging market companies. The investment objective
may not be changed without shareholder approval.
INVESTMENT STRATEGY
The principal strategy of the Lexington Emerging Markets Fund (the "Fund")
is to invest at least 65% of its total assets according to its investment
objective. The Fund's definition of emerging markets includes, but is not
limited to, the following:
- AFRICA: Botswana, Egypt, Ghana, Ivory Coast, Kenya, Mauritius, Morocco,
Namibia, South Africa, Swaziland, Tunisia, Zambia and Zimbabwe;
- ASIA: Bahrain, Bangladesh, China, Hong Kong, India, Indonesia, Malaysia,
Pakistan, the Philippines, Singapore, South Korea, Sri Lanka, Taiwan and
Thailand;
- EUROPE: Croatia, Cyprus, Czech Republic, Estonia, Finland, Greece,
Hungary, Latvia, Lithuania, Poland, Portugal, Romania, Russia, Slovakia
and Slovenia;
- THE MIDDLE EAST: Israel, Jordan, Lebanon, Oman and Turkey;
- LATIN AMERICA: Argentina, Bolivia, Brazil, Chile, Colombia, Ecuador,
Mexico, Nicaragua, Peru and Venezuela.
The Manager of the Fund considers an emerging markets company to be any
company domiciled in an emerging market country, or any company that derives 50%
or more of its total revenue from either goods or services produced or sold in
countries with emerging markets.
The Fund may invest the remaining 35% of its assets in equity securities
without regard to whether the issuer qualifies as an emerging market company,
debt securities denominated in the currency of an emerging market country or
issued or guaranteed by an emerging market company or the government of an
emerging market country, short-term or medium-term debt securities or other
types of securities.
The Fund's investment approach is to focus on positive returns through
long-term capital gains. The investment strategy is based on a top-down approach
that compares macro trends, such as economics, politics, industry trends, and
commodity trends on a relative basis. Countries are grouped regionally and
globally and ranked based on their macro scores. Once specific countries are
identified as relative outperformers, specific companies are selected as
investments. The selection process for selecting individual companies is based
on fundamental research, industry themes, and identifying specific catalysts for
growth.
PRINCIPAL RISKS
Through stock investment, the Fund may expose you to common stock risks
which may cause you to lose money if there is a sharp or sudden decline in the
share price of one of the companies in the Fund's portfolio. In addition, the
risks of investing in emerging markets are considerable. Emerging stock markets
tend to be more volatile than the U.S. market due to the relative immaturity,
and occasional instability, of the countries political and economic systems. In
the past many emerging markets restricted the flow of money into or out of their
stock markets, and some continue to impose restrictions on foreign investors.
These markets tend to be less liquid and offer less regulatory protection for
investors. The economies of emerging countries may be predominately based on
only a few industries or on revenue from particular commodities, international
aid and other assistance. In addition, most of the foreign securities in which
the Fund invests are denominated in foreign currencies, whose values may decline
against the U.S. dollar.
2
<PAGE>
BAR CHART AND PERFORMANCE TABLE
The bar chart and performance table below show the risks of investing in
the Fund. The chart shows changes in the performance since inception (3/30/94)
through 12/31/98. The table shows how the average annual return compares with
the most commonly used index for its market segment for 1, 5 and 10 years (or
since inception). You should remember that past performance is not an indication
of future performance.
Fund performance figures in this bar chart do not reflect separate account
fees charged by the insurance company, otherwise performance figures would be
lower.
PAST FUND PERFORMANCE The chart at the left below shows the risk of investing
in the Fund and how the Fund's total return has varied from year-to-year. The
chart at the right compares the Fund's performance with the most commonly used
index for its market segment. Of course, past performance is no guarantee of
future results.
<TABLE>
<CAPTION>
AVERAGE ANNUAL RETURNS THROUGH 12/31/98
SINCE
INCEPTION
1 YEAR (3/30/94)
------- ------
<S> <C> <C>
Emerging Markets -27.95% -8.28%
MSCI Emerging Markets Free -25.34% -7.90%
EAFE 20.33% 8.96%
</TABLE>
During the five year period shown in the above bar graph chart, the Fund's
highest quarterly return was 15.24% for the fourth quarter in 1998 and the
fund's lowest quarterly return was -27.08% for the third quarter in 1998.
[LINE GRAPH]
<TABLE>
<S> <C>
1994 0.76
1995 -3.93
1996 7.46
1997 -11.81
1998 -27.95
</TABLE>
RISKS OF INVESTING
RISKS OF INVESTING IN MUTUAL FUNDS
The following risks are common to all mutual funds and, therefore, applies
to the Fund:
- MARKET RISK. The market value of a security may go up or down, sometimes
rapidly and unpredictably. A decline in market value may cause a security
to be worth less than it was at the time of purchase. Market risk applies
to individual securities, a particular sector or the entire economy.
- MANAGER RISK. Fund management affects Fund performance. A Fund may lose
money if the Fund manager's investment strategy does not achieve the
Fund's objective or the manager does not implement the strategy properly.
- YEAR 2000 RISK. Preparing for Year 2000 is a high priority for the
Manager. The Manager is diligently working with external partners,
suppliers, vendors and other service providers to ensure that the systems
with which it interacts will remain operational at all times. The Manager
does not anticipate that the move to Year 2000 will have a material
impact on its ability to continue to provide the Funds with service at
current levels; however, the Manager cannot make any assurances that the
steps it has taken to ensure Year 2000 compliance will be successful. In
addition, there can be no assurance that Year 2000 issues will not affect
the companies in which the Funds invest or worldwide markets and
economies.
RISKS OF INVESTING IN FOREIGN SECURITIES
The following risks apply to all mutual funds that invest in foreign
securities.
- LEGAL SYSTEM AND REGULATION RISK. Foreign countries have different legal
systems and different regulations concerning financial disclosure,
accounting and auditing standards. Corporate financial information that
would be disclosed under U.S. law may not be available. Foreign
accounting and auditing standards
3
<PAGE>
may render a foreign corporate balance sheet more difficult to understand
and interpret than one subject to U.S. law and standards. Additionally,
government oversight of foreign stock exchanges and brokerage industries
may be less stringent than in the U.S.
- CURRENCY RISK. Most foreign stocks are denominated in the currency of
the stock exchange where they are traded. The Fund's Net Asset Value is
denominated in U.S. dollars. The exchange rate between the U.S. dollar
and most foreign currencies fluctuates; therefore, the Net Asset Value of
the Fund will be affected by a change in the exchange rate between the
U.S. dollar and the currencies in which the Fund's stocks are
denominated. The Fund may also incur transaction costs associated with
exchanging foreign currencies into U.S. dollars.
- STOCK EXCHANGE AND MARKET RISK. Foreign stock exchanges generally have
less volume than U.S. stock exchanges. Therefore, it may be more
difficult to buy or sell shares of foreign securities, which increases
the volatility of share prices on such markets. Additionally, trading on
foreign stock markets may involve longer settlement periods and higher
transaction costs.
- EXPROPRIATION RISK. Foreign governments may expropriate the Fund's
investments either directly by restricting the Fund's ability to sell a
security or by imposing exchange controls that restrict the sale of a
currency or by taxing the Fund's investments at such high levels as to
constitute confiscation of the security. There may be limitations on the
ability of the Fund to pursue and collect a legal judgment against a
foreign government.
The Fund may trade in certain foreign securities markets which are less
developed than comparable U.S. markets. The risks associated with trading in
such markets include:
- limited product lines;
- limited markets or financial or managerial resources;
- their securities may be more susceptible to losses and risks of
bankruptcy;
- their securities may trade less frequently and with lower volume, leading
to greater price fluctuations; and,
- their securities are subject to increased volatility and reduced
liquidity due to limited market making and arbitrage activities.
TEMPORARY DEFENSIVE POSITION
When the Fund anticipates unusual market or other conditions, it may
temporarily depart from its goal and invest substantially in high-quality
short-term investments. This could help the Fund avoid losses but may mean lost
opportunities.
INTERESTS OF THE HOLDERS OF VARIABLE INSURANCE CONTRACTS AND POLICIES
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.
4
<PAGE>
MANAGEMENT OF THE FUND
INVESTMENT ADVISER
Lexington Management Corporation (LMC), a wholly-owned subsidiary of
Lexington Global Asset Managers, Inc. ("LGAM"), is the investment adviser to the
Fund. LMC and its predecessor companies, registered investment advisers under
the Investment Advisers Act of 1940, as amended, were established in 1938. LMC
is located at P.O. Box 1515, Park 80 West Plaza Two, Saddle Brook, New Jersey
07663. Descendants of Lunsford Richardson, Sr., their spouses, trusts and other
related entities have a controlling interest in Lexington Global Asset Managers,
Inc., a Delaware corporation. LMC advises private clients as well as the
Lexington Funds. LMC supervises and assists in the overall management of the
Funds, subject to the oversight by the Board of Directors. The Fund pays LMC a
monthly fee at the annual rate of 0.85% of the Fund's average daily net assets
for investment management services. For the year ended December 31, 1998, the
Fund paid an investment advisory fee of $158,794.
SUB-ADVISER
Stratos Advisors, Inc. (Stratos) is the sub-adviser of the Fund. Stratos is
located at 20 Exchange Place, 52nd Floor, New York, NY 10005. Stratos provides
investment advice and management to the Fund.
PORTFOLIO MANAGERS
ALFREDO M. VIEGAS. Mr. Viegas is Chief Executive Officer and Senior
Portfolio Manager at Stratos. In 1995, Mr. Viegas established VZB Partners LLC
("VZB"), an offshore investment manager. Mr. Viegas is responsible for corporate
analysis and bottom-up research. He has concentrated on analyzing equity
opportunities not only in emerging markets but also in newly developing or
frontier markets where the quality of public available information is scarce and
direct research is imperative. Prior to VZB, Mr. Viegas was Vice President and
Latin American Equity Strategist for emerging markets with Salomon Brothers from
1993 to 1995. From 1991 to 1993, he was a research analyst with Morgan Stanley.
Mr. Viegas is a graduate of Wesleyan University with a B.A. in Classics and
Medieval History.
MOHAMMED ZAIDI. Mr. Zaidi is a Portfolio Manager at Stratos. Mr. Zaidi is
responsible for fundamental corporate analysis with a particular focus on Asian
and Middle Eastern markets as well as the Risk Control Officer. Mr. Zaidi has
been a Portfolio Manager at VZB since 1997. Mr. Zaidi was Chief Financial
Officer and a Partner at Paradigm Software, Inc. from 1992 to 1995. Mr. Zaidi is
a graduate of the University of Pennsylvania with a B.S. in Economics from the
Wharton School. Mr. Zaidi also holds an M.B.A. in Finance from M.I.T. Sloan
School of Management.
HOW FUND SHARES ARE PRICED
How and when we calculate the Fund's price or net asset value (NAV)
determines the price at which an insurance company will buy or sell shares. The
net asset value of the Fund is determined once daily as of 4:00 p.m., New York
time, on each day that the NYSE is open for trading. Per share net asset value
is calculated by dividing the value the Fund's total net assets by the total
number of it's shares then outstanding.
As more fully described in the Statement of Additional Information,
portfolio securities are valued using current market valuations: either the last
reported sales price or, in the case of securities for which there is no
reported last sale and fixed-income securities, the mean between the closing bid
and asked price. Securities for which market quotations are not readily
available or which are illiquid are valued at their fair values as determined in
good faith under the supervision of the Fund's officers, and by the Manager and
the Board, in accordance with methods that are specifically authorized by the
Board. Short-term obligations with maturities of 60 days or less are valued at
amortized cost as reflecting fair value.
Foreign Funds. The Fund may invest in securities denominated in foreign
currencies and traded on foreign exchanges. To determine their value, we convert
their foreign-currency price into U.S. dollars by using the exchange rate last
quoted by a major bank. Exchange rates fluctuate frequently and may affect the
U.S. dollar value of foreign-
5
<PAGE>
denominated securities, even if their market prices do not change. In addition,
some foreign exchanges are open for trading when the U.S. market is closed. As a
result, the Fund's foreign securities -- and their prices may fluctuate during
periods when Fund shares cannot be bought, sold or exchanged.
The value of securities denominated in foreign currencies and traded on
foreign exchanges or in foreign markets will be translated into U.S. dollars at
the last price of their respective currency denomination against U.S. dollars
quoted by a major bank or, if no such quotation is available, at the rate of
exchange determined in accordance with policies established in good faith by the
Board. Because the value of securities denominated in foreign currencies must be
translated into U.S. dollars, fluctuations in the value of such currencies in
relation to the U.S. dollar may affect the net asset value of Fund shares even
without any change in the foreign-currency denominated values of such
securities.
Because foreign securities markets may close before the Fund determines its
net asset value, events affecting the value of portfolio securities occurring
between the time prices are determined and the time the Fund calculates its net
asset value may not be reflected unless the Manager, under supervision of the
Board, determines that a particular event would materially affect it's net asset
value.
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
The Fund distributes substantially all its net investment income and net
capital gains to shareholders each year.
- Distributions are not guaranteed.
- The Board of Directors has discretion in determining the amount and
frequency of the distributions.
- All dividends and other distributions will be reinvested automatically in
additional shares and credited to the shareholders' account.
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.
SHAREHOLDER SERVICING AGREEMENTS
The Fund may enter into Shareholder Servicing Agreements with insurance
companies or other financial institutions ("Shareholder Servicing Agents") that
provide administrative services for the Fund or that provide to contract holders
and policyholders other services relating to the Fund. These services may
include: sub-accounting services, answering inquiries of contract holders and
policyholders regarding the Fund, transmitting, on behalf of the Fund, proxy
statements, annual reports, updated prospectuses and other communications to
contract holders and policyholders regarding the Fund, and such other related
services as the Fund or a contractholder or policyholder may request. The fees
paid by the Fund for these services to use Shareholder Servicing Agents 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. A Shareholder Servicing Agent may, from time to time, choose not
to receive all of the fees payable to it.
6
<PAGE>
TAX MATTERS
The Fund intends to continue to qualify as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"), so that it will not be subject to federal income tax on its earnings
and capital gains that are distributed to its shareholders. In addition, the
Fund intends to comply with the diversification requirements of the Code and
Treasury Regulations in order to maintain the tax-deferred status of the
separate accounts of the Participating Insurance Companies.
Shares of the Fund must be purchased through variable life insurance
policies (the "Policies") or variable annuity contracts (the "Contracts"). As a
result, it is anticipated that any dividend or capital gains distribution from
the Fund and any proceeds from the redemption of the shares of the Fund will be
exempt from current taxation if left to accumulate within a Policy or Contract.
Withdrawals from Policies or Contracts may be subject to ordinary income tax
plus a 10% penalty tax if made before age 59 1/2.
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, administrative or judicial action. As the foregoing
discussion is for general information only, a prospective investor also should
review the more detailed discussion of federal income tax considerations that is
contained in the Statement of Additional Information. In addition, each
prospective investor should consult with his own tax adviser as to the tax
consequences of investments in the Fund, including the application of state and
local taxes which may differ from the federal income tax consequences described
above.
THE TAX STATUS OF YOUR INVESTMENT IN THE FUND DEPENDS UPON THE FEATURES OF
YOUR POLICY OR CONTRACT. FOR FURTHER INFORMATION, PLEASE REFER TO THE POLICY OR
CONTRACT PROSPECTUS.
STATEMENT OF ADDITIONAL INFORMATION. The Statement of Additional Information
("SAI") provides a more complete discussion about the Fund and is incorporated
by reference into this prospectus, which means that it is considered a part of
this prospectus.
ANNUAL AND SEMI-ANNUAL REPORTS. The annual and semi-annual reports to
shareholders contain additional information about the Fund's investments,
including a discussion of the market conditions and investment strategies that
significantly affected the Fund's performance during its last fiscal year.
TO REVIEW OR OBTAIN THIS INFORMATION: You may obtain a copy of the SAI and the
annual and semi-annual reports (free of charge) by calling Lexington Emerging
Markets Fund, Inc. at (800) 526-0056 or (201) 845-7300. You may also obtain a
copy of the SAI and the annual and semi-annual reports (for a fee) by contacting
the Public Reference Room of the Securities and Exchange Commission, 450 Fifth
Street, N.W., Washington, D.C., telephone 800-SEC-0330. You may also obtain this
information by visiting the SEC's Worldwide Website at http://www.sec.gov.
Investment Company Act File No. 811-8250.
7
<PAGE>
FINANCIAL HIGHLIGHTS
The following financial highlights table is intended to help you understand
the Fund's financial performance for the past 5 years. Certain information
reflects financial highlights for a single share. The total returns in the table
represent the rate that an investor would have earned (or lost) on an investment
in the Fund (assuming reinvestment of all dividends and distributions). This
information has been audited by KPMG LLP whose report, along with the Fund's
financial statements, are included in the annual report, which is available upon
request.
<TABLE>
<CAPTION>
MARCH 30, 1994
(COMMENCEMENT
YEAR ENDED DECEMBER 31, OF OPERATIONS) TO
--------------------------------------- DECEMBER 31,
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of
period............................ $8.91 $10.11 $ 9.38 $9.86 $10.00
---- ------ ------ ----- ------
Income (loss) from investment
operations:
Net investment income............. 0.06 0.03 0.02 0.09 0.03
Net realized and unrealized gain
(loss) on investments and
foreign currency
transactions................... (2.64) (1.22) 0.71 (0.48) 0.04
---- ------ ------ ----- ------
Total income (loss) from
investment operations... (2.58) (1.19) 0.73 (0.39) 0.07
---- ------ ------ ----- ------
Less distributions:
Distributions from net investment
income......................... (0.04) (0.01) -- (0.09) (0.02)
Distributions from net realized
gains.......................... (0.62) -- -- -- --
Distributions in excess of net
realized gains (temporary
book-tax difference)........... -- -- -- -- (0.19)
---- ------ ------ ----- ------
Total distributions....... (0.66) (0.01) -- (0.09) (0.21)
---- ------ ------ ----- ------
Net asset value, end of period...... $5.67 $ 8.91 $10.11 $9.38 $ 9.86
==== ====== ====== ===== ======
Total return.............. (27.95)% (11.81)% 7.46% (3.93)% 0.76%*
Net assets, end of period (000's
omitted).......................... $15,391 $24,052 $21,678 $7,815 $4,624
Ratio to average net assets:
Expenses, before reimbursement or
waivers........................ 2.08% 1.91% 2.23% 4.09% 6.28%*
Expenses, net of reimbursement or
waivers........................ 2.08% 1.84% 1.64% 1.32% 1.30%*
Net investment income (loss),
before reimbursement or
waivers........................ 0.84% 0.18% (0.39)% (1.45)% (4.29)%*
Net investment income............. 0.84% 0.26% 0.20% 1.33% 0.70%*
Portfolio turnover rate............. 121.31% 157.52% 95.18% 88.92% 71.21%*
</TABLE>
- ------------
* Annualized.
8
<PAGE>
Investment Adviser
- ------------------------------------------------------
LEXINGTON MANAGEMENT CORPORATION
P.O. Box 1515/Park 80 West Plaza Two
Saddle Brook, New Jersey 07663
Sub-Adviser
- ------------------------------------------------------
STRATOS ADVISORS, INC.
Wall Street Tower, 20 Exchange Place, 52nd Floor
New York, N.Y. 10004
Distributor
- ------------------------------------------------------
LEXINGTON FUNDS DISTRIBUTOR, INC.
P.O. Box 1515/Park 80 West Plaza Two
Saddle Brook, New Jersey 07663
Transfer Agent
- ------------------------------------------------------
STATE STREET BANK AND TRUST COMPANY
c/o National Financial Data Services
Lexington Funds
P.O. Box 419648
Kansas City, Missouri 64141-6648
<TABLE>
<CAPTION>
Table of Contents Page
- -------------------------------------------------
<S> <C>
Investment Objective........................ 2
Investment Strategy......................... 2
Principal Risks............................. 2
Bar Chart and Performance Table............. 3
Risks of Investing.......................... 3
Interests of the Holders of Variable
Insurance Contracts and Policies.......... 4
Management of the Fund...................... 5
Portfolio Managers.......................... 5
How Fund Shares are Priced.................. 5
Dividends and Capital Gain Distributions.... 6
How to Purchase and Redeem Shares........... 6
Shareholder Servicing Agreements............ 6
Tax Matters................................. 7
Financial Highlights........................ 8
</TABLE>
[LEXINGTON GRAPHIC]
LEXINGTON
EMERGING
MARKETS
FUND, INC.
---------------------------
PROSPECTUS
MAY 3, 1999
------------------
------------------
LEXINGTON
LEXINGTON EMERGING MARKETS FUND, INC.
May 3, 1999
This Statement of Additional Information is not a prospectus. You
should read it in conjunction with the current prospectus of Lexington
Emerging Markets Fund, Inc. (the "Fund"), dated May 3, 1999 and any
revisions to the prospectus which might occur 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
Page
History of the Fund. . . . . . . . . . . . . . . . . . . . 1
Investment Objective and Policies. . . . . . . . . . . . . 1
Certain Investment Methods . . . . . . . . . . . . . . . . 1
Risk Considerations. . . . . . . . . . . . . . . . . . . . 2
Investment Restrictions . . . . . . . . . . . . . . . . . 4
Management of the Fund . . . . . . . . . . . . . . . . . . 6
Portfolio Transactions and Brokerage Commissions . . . . . 13
Determination of Net Asset Value . . . . . . . . . . . . . 14
Capital Stock Structure. . . . . . . . . . . . . . . . . . 14
Tax Matters. . . . . . . . . . . . . . . . . . . . . . . . 14
Performance Calculation. . . . . . . . . . . . . . . . . . 15
Other Information. . . . . . . . . . . . . . . . . . . . . 16
Transfer Agent . . . . . . . . . . . . . . . . . . . . . . 16
Custodian. . . . . . . . . . . . . . . . . . . . . . . . . 16
Counsel and Independent Auditors . . . . . . . . . . . . . 16
Financial Statements . . . . . . . . . . . . . . . . . . .17
HISTORY OF THE FUND
Lexington Emerging Markets Fund, Inc. (the "Fund") is a diversified,
open-end management investment company organized on December 27, 1993 as
a corporation under the laws of the State of Maryland.
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.
In these transactions, 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.
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 those securities 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 the 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 those 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. 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.
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 call options on securities it owns or has the right
to acquire. 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. 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. 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 five day customary settlement
time for United States securities.
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.
EMERGING MARKET DEBT SECURITIES
Emerging market debt securities or other debt securities in which the
Fund may invest may consist of debt obligations rated below investment
grade or non-rated securities comparable to below investment grade
securities. Such lower-rated debt securities are considered highly
speculative and changes in economic conditions or other circumstances are
more likely to lead to a weakened capacity to make principal and interest
payments than with higher-grade debt securities. The investment in
emerging market debt securities is not a principal investment strategy for
the Fund.
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 of
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.
(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.
(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
INVESTMENT ADVISER, SUB-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
and were last approved by the Board of Directors on November 30, 1998. 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 reimburses LMC for its
actual cost in providing such services, facilities and expenses.
For its investment management services to the Fund, under its
Advisory Agreement, LMC will receive a monthly fee at the annual rate of
0.85% of the Fund's average daily net assets. Advisory fees paid to LMC and
expense reimbursements paid to the Fund are as follows:
PERIOD ADVISORY FEE EXPENSE REIMBURSEMENT
------ ------------ --------------------
1/1/96 to 12/31/96 $ 146,299 $ 101,886
1/1/97 to 12/31/97 238,449 21,212
1/1/98 to 12/31/98 158,794 0
LMC has agreed to reduce its management fee if necessary to keep
total operating expenses at or below 2.50% of the Fund's average daily net
assets. LMC may terminate this voluntary reduction at any time. 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.
LMC has entered into a Sub-Advisory Agreement with Stratos Advisors,
Inc. ("Stratos"). Stratos will provide the Fund with investment advice and
assist in the management of the Fund's investment program. Stratos
specializes in managing assets in emerging markets. Any investment program
undertaken by Stratos as well as any other activities undertaken by Stratos
on behalf of the Fund is as all times subject to the directives of the
Board of Directors of the Fund.
Stratos will receive, from LMC, monthly compensation equal to an
annual rate of 35% of the management fee paid by the Fund, net of
reimbursement and net of No Transaction Fee ("NTF") program fees not
assumed by the Fund for the services and facilities furnished pursuant to
its Sub-Advisory Agreement. For the year ended December 31, 1998, Stratos
received $ 19,917.
The Advisory Agreement, the Sub-Advisory Agreement and the
Distribution Agreement are subject to annual approval by affirmative vote
of the Fund's Board of Directors cast in person at a meeting called for
such purpose, and a majority of the Directors who are not parties either
to the Advisory Agreement, the Sub-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 on 60 days
written notice without penalty. Also, either the Fund or Stratos may
terminate the Sub-Advisory Agreement and the Fund or LFD may terminate the
Distribution Agreement on 60 days' written notice without penalty. In
addition, both the Advisory Agreement and the Sub-Advisory Agreement may
be terminated by vote of a majority of the outstanding voting securities
of the Fund on not more than 60 days notice. All of the agreements
mentioned above will terminate automatically in the event of assignment,
as defined in the Investment Company Act of 1940.
LMC is not 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
and Lavery, and Mmes. Carnicelli, Carr-Waldron, Curcio, DiFalco, Gilfillan,
Lederer 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.
DIRECTORS AND OFFICERS OF THE FUND
As of March 1, 1999, 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.
The Fund's Directors and executive officers, their ages as of the
Fund's most recent fiscal year-end, their principal occupations and former
affiliations are set forth below:
+ S.M.S. CHADHA (61), 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 (54), 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.
*+ BEVERLEY C. DUER, P.E. (69), DIRECTOR. 340 East 72nd Street, New York, N.Y.
10021. Private Investor. Formerly Manager, Operations Research Department,
CPC International Inc.
*+ BARBARA R. EVANS (38),DIRECTOR. 5 Fernwood Road, Summit, N.J. 07901. Private
Investor, formerly, Assistant Vice President and Securities Analyst,
Lexington Management Corporation.
*+ RICHARD M. HISEY (40), DIRECTOR and VICE PRESIDENT. P.O. Box 1515, Saddle
Brook, N.J. 07663. Managing Director, Chief Financial Officer and
Director, Lexington Management Corporation; Chief Financial Officer, Vice
President and Director, Lexington Funds Distributor, Inc; Chief Financial
Officer, Market Systems Research Advisers, Inc.; Executive Vice President,
Chief Financial Officer and General Manager - Mutual Funds, Lexington Global
Asset Managers, Inc.
*+ LAWRENCE KANTOR (51), 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, Lexington
Global Asset Managers, Inc.,
+ JERARD F. MAHER (53), DIRECTOR. 300 Raritan Center Parkway, Edison, N.J.
08818. General Counsel, Federal Business Center; Counsel, Ribis, Graham
&Curtin.
+ ANDREW M. MCCOSH (58),DIRECTOR. 12 Wyvern Park, Edinburgh EH92 JY, Scotland,
U.K. Professor of the Organisation of Industry and Commerce, Department of
Business Studies, The University of Edinburgh, Scotland..
*+ DONALD B. MILLER (72), DIRECTOR. 10725 Quail Covey Drive, Boynton Beach,
Florida 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.
*+ JOHN G. PRESTON (66), DIRECTOR. 3 Woodfield Road, Wellesley, Massachusetts
02181. Associate Professor of Finance, Boston College, Boston, Massachusetts.
*+ ALLEN H. STOWE (61),DIRECTOR. 3674 Fifth and Ocean Avenues, Normandy Beach,
New Jersey 08739. President, Dartmouth Co-operative Society Co., Inc.
* ALFREDO VIEGAS (30), VICE PRESIDENT AND PORTFOLIO MANAGER. Stratos Advisors,
Inc., Wall Street Tower, 20 Exchange Place, 52nd Fl., New York, NY 10005.
Chief Executive Officer and Senior Portfolio Manager, Stratos Advisors, Inc.
Senior Portfolio Manager and Partner, VZB Partners LLC. Prior to 1995, V.P.
and Latin American Equity Strategist for emerging markets, Salomon Brothers.
+ MOHAMMED ZAIDI (29), VICE PRESIDENT AND PORTFOLIO MANAGER. Stratos Advisors,
Inc., Wall Street Tower, 20 Exchange Place, 52nd Fl., New York, NY 10005.
Portfolio Manager, Stratos Advisors, Inc. Portfolio Manager, VZB Partners
LLC. Prior to 1995, Chief Financial Officer and Partner, Paradigm Software,
Inc.
*+ LISA CURCIO (39), 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 J. LAVERY, CLU, CHFC (45), VICE PRESIDENT. P. O. Box 1515, Saddle
Brook, N.J. 07663. Senior Vice President, Lexington Management Corporation;
Vice President, Lexington Funds Distributor, Inc.
*+ JANICE A. CARNICELLI (39), VICE PRESIDENT. P. O. Box 1515, Saddle Brook, N.J.
07663.
*+ CHRISTIE CARR-WALDRON (31), ASSISTANT TREASURER, P.O. Box 1515, Saddle Brook,
N.J. 07663. Prior to October 1992, Senior Accountant, KPMG Peat Marwick LLP.
*+ CATHERINE DIFALCO (29), ASSISTANT TREASURER. P.O. Box 1515, Saddle Brook, New
Jersey 07663. Prior to October 1997, Manager, Fund Accounting.
*+ SIOBHAN GILFILLAN (35), ASSISTANT TREASURER. P.O. Box 1515, Saddle Brook,
N.J. 07663.
*+ JOAN K. LEDERER (32), ASSISTANT TREASURER. P.O. Box 1515, Saddle Brook, N.J.
07663. Prior to April 1997, Director of Investment Accounting, Diversified
Investment Advisors, Inc. Prior to April 1996, Assistant Vice President,
PIMCO.
*+ SHERI MOSCA (35), ASSISTANT TREASURER. P. O. Box 1515, Saddle Brook, N.J.
07663.
*+ PETER CORNIOTES (36), ASSISTANT SECRETARY. P. O. Box 1515, Saddle Brook, N.J.
07663. Vice President and Assistant Secretary, Lexington Management
Corporation. Assistant Secretary, Lexington Funds Distributor, Inc.
*+ ENRIQUE FAUST (38), ASSISTANT SECRETARY, P.O. Box 1515, Saddle Brook, N.J.
07663. Assistant Vice President, Lexington Management Corporation. Prior to
March 1994, Blue Sky Compliance Coordinator, Lexington Group of Investment
Companies.
* "Interested person" and/or "affiliated person" as defined in the
Investment Company Act of 1940, as amended.
+ Messrs. Chada, Corniotes, DeMichele, Duer, Faust, Hisey, Kantor,
Lavery, Maher, McCosh, Miller, Preston and Stowe, and Mmes.
Carnicelli, Carr-Waldron, Curcio, DiFalco, Evans, Gilfillan, Lederer
and Mosca 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.
The Board of Directors met 5 times during the twelve months ended
December 31, 1998, 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 up to a maximum
of $9,000 per year for Directors living outside the U.S. and $6,000 per
year for Directors living within the U.S. 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.
Set forth below is information regarding compensation paid or
accrued during the period January 1, 1998 to December 31, 1998 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 $2,087 $27,068 15
- --------------------------------------------------------------------------------
Robert M. DeMichele 0 0 16
- --------------------------------------------------------------------------------
Beverley C. Duer $2,420 $35,518 16
- --------------------------------------------------------------------------------
Barbara R. Evans 0 0 15
- --------------------------------------------------------------------------------
Richard M. Hisey 0 0 7
- --------------------------------------------------------------------------------
Lawrence Kantor 0 0 15
- --------------------------------------------------------------------------------
Jerard F. Maher $2,087 $30,518 16
- --------------------------------------------------------------------------------
Andrew M. McCosh $2,087 $27,818 15
- --------------------------------------------------------------------------------
Donald B. Miller $2,087 $27,818 15
- --------------------------------------------------------------------------------
Frances Olmsted* $1,400 $16,800 N/A
- --------------------------------------------------------------------------------
John G. Preston $2,087 $27,818 15
- --------------------------------------------------------------------------------
Margaret W. Russell* $1,456 $23,228 N/A
- --------------------------------------------------------------------------------
Philip C. Smith* $1,280 $19,200 N/A
- --------------------------------------------------------------------------------
Allen H. Stowe $856 $12,340 8
- --------------------------------------------------------------------------------
Frances A. Sunderland* $1,200 $16,800 N/A
- --------------------------------------------------------------------------------
*Retired
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, 1998,
the estimated credited years of service for Directors Chadha, Duer, Maher,
McCosh, Miller, Preston and Stowe are 3, 20, 3, 3, 24, 20 and 1,
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 4,000 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
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 execution
services alone, nor generally can the value of research services to the
Fund be measured. Research services furnished might be useful and of value
to LMC and its affiliates, in serving other clients as well as the Fund.
On the other hand, any research services obtained by LMC or its affiliates
from the placement of portfolio brokerage of other clients might be useful
and of value to LMC in carrying out its obligations to the Fund.
The Fund anticipates that its brokerage transactions involving
securities of companies domiciled in countries other than the United States
will normally be conducted on the principal stock exchanges of those
countries. Fixed commissions of foreign stock exchange transactions are
generally higher than the negotiated commission rates available in the
United States. There is generally less government supervision and
regulation of foreign stock exchanges and broker-dealers than in the United
States. For the year ended December 31, 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. For the year ended
December 31, 1997, the Fund's portfolio turnover rate was 157.52% and the
Fund paid $389,807 in brokerage commissions and of that amount, $27,606 was
paid for with soft dollars. For the year ended December 31, 1998, the
Fund's portfolio turnover rate was 121.31% and the Fund paid $184,623 in
brokerage commissions and of that amount, $6,715 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,
Martin Luther King Jr., 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.
CAPITAL STOCK STRUCTURE
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.
Dividend and Distributions
The Fund's shareholders are entitled to such dividends or
distributions as may declared from time to time by the Board of Directors.
In the event of liquidation or dissolution of the Fund, the shareholders
are entitled to receive the assets of the Fund less the liabilities
allocated to the Fund.
Voting, Preemptive and Redemption Rights
Each share of common stock has one vote and shares equally in
dividends and distributions when and if declared by the Fund and in the
Fund'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.
Shareholders 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 the Fund shares at shareholder meetings to
the extent required by law.
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 Fund's 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 such shareholders in
any such communication between shareholders and Directors.
TAX MATTERS
The following is only a summary of certain additional federal income
tax considerations that are not described in the Prospectus and generally
affect the 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.
The Fund intends to qualify as a regulated investment company ("RIC")
under the Internal Revenue Code of 1986, as amended (the "Code"). If so
qualified, the Fund will not 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 segregated asset accounts
("Accounts") of certain life insurance companies ("Participating
Companies") that hold its shares. In addition, if the Fund distributes
annually to the Accounts its ordinary income and capital gain net income,
in the manner prescribed in the Code, it also will not be subject to the
4% federal excise tax otherwise applicable to a RIC on any of its
undistributed income or gains. 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 insurance companies. Under current tax
law, capital gains or dividends from the Fund are not currently taxable to
a holder of a variable annuity contract (a "Contract") or variable life
insurance policy (a "Policy") when left to accumulate within such Contract
or Policy.
Section 817(h) of the Code requires that investments of an Account
of an insurance company be "adequately diversified," in accordance with
Treasury Regulations promulgated thereunder, in order for the holders of
the Contracts or Policies based on such 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 an Account will treat investments in a RIC for purposes
of the applicable diversification requirements. Under the Regulations, if
a RIC satisfies certain conditions, the RIC will not be treated as a single
investment of the Account for these purposes, but rather the 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
Account of a Participating 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 a Contract or Policy, such holders should consult the
prospectuses for their particular Contract or Policy.
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, 1998 were -27.95% and -8.28%.
OTHER INFORMATION
As of February 12, 1999, Lexington Management Corporation, Park 80
West Plaza Two, Saddle Brook, N.J. 07663 owned beneficially 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 Aetna Life Insurance
and Annuity Company, Great-West Life & Annuity Insurance Company, Kemper
Investors Life Insurance Company, Safeco Life and Annuity Company and
Transamerica Occidental Life Insurance Company and are allocated to
separate accounts which are used for funding variable annuity contracts and
variable life insurance policies.
TRANSFER AGENT
State Street Bank and Trust Company, c\o National Financial Data
Services (the "Transfer Agent") acts as the transfer agent and dividend
disbursing agent for the Fund. The Transfer Agent may be reached by
sending any correspondence to 1004 Baltimore, Kansas City, Missouri 64105.
CUSTODIAN
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 and other assets, including those to be held by foreign banks
and foreign securities depositories that qualify as eligible foreign
custodians under the rules adopted by the Securities and Exchange
Commission.
COUNSEL AND INDEPENDENT AUDITORS
Kramer Levin Naftalis & Frankel LLP, 919 Third Avenue, New York, New
York 10022 will pass upon legal matters for the Fund in connection with the
offering of its shares. KPMG 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, 1999.
<PAGE>
LEXINGTON EMERGING MARKETS FUND, INC.
STATEMENT OF NET ASSETS
(INCLUDING THE PORTFOLIO OF INVESTMENTS)
December 31, 1998
NUMBER OF VALUE
SHARES SECURITY (NOTE 1)
================================================================================
COMMON STOCKS: 75.9%
ARGENTINA: 5.7%
159,806 Perez Companc S.A. ....................................$ 676,590
7,100 YPF Sociedad Anonima (ADR) ............................ 198,356
-----------
874,946
-----------
BRAZIL: 0.7%
7,000 Tele Norte Leste Participacoes S.A. (ADR)1 ............ 87,063
700 Tele Sudeste Celular Participacoes S.A. (ADR) ......... 14,481
-----------
101,544
-----------
CZECH REPUBLIC: 1.7%
16,800 SPT Telekom a.s.1 ..................................... 256,670
-----------
EGYPT: 0.6%
15,000 Savola Sime Egypt1 .................................... 100,076
-----------
GREECE: 8.7%
7,690 Anek Lines S.A.1 ...................................... 82,381
1,200 Commercial Bank of Greece, S.A.1 ...................... 118,011
2,300 Ergo Bank S.A. ........................................ 266,103
3,000 Hellenic Bottling Company, S.A.1 ...................... 92,611
12,000 Hellenic Petroleum S.A.1 .............................. 98,557
4,178 Hellenic Telecommunication Organization S.A. .......... 111,146
1,500 Intracom S.A.1 ........................................ 68,293
7,500 Intrasoft S.A.1 ....................................... 172,742
4,100 Macedonia Thrace Bank S.A.1 ........................... 172,760
4,000 STET Hellas Telecommunications S.A. (ADR)1 ............ 127,750
3,230 X.K. Tegopoulos Editions S.A.1 ........................ 35,352
-----------
1,345,706
-----------
HONG KONG: 3.0%
550,000 Guangnan Holdings ..................................... 126,371
1,720,000 Guangzhou Investment Company, Ltd. .................... 170,956
960,000 Qingling Motors Company ............................... 168,529
-----------
465,856
-----------
HUNGARY: 1.4%
2,000 Magyar Tavkozlesi Rt. (ADR) ........................... 59,625
500 Pick Szeged Rt. ....................................... 21,251
10,500 Zalakeramia Rt. ....................................... 127,294
-----------
208,170
-----------
INDIA: 0.9%
11,650 Hindalco Industries, Ltd. (GDR) ....................... 136,596
-----------
MALAYSIA: 5.7%
65,500 Austral Enterprises Bhd ............................... 67,683
326,000 Hap Seng Consolidated Bhd ............................. 190,167
50,000 IOI Corporation Bhd ................................... 25,952
156,000 Kuala Lumpur Kepong Bhd ............................... 241,429
22,000 Rothmans of Pall Mall Bhd ............................. 117,333
60,000 Telekom Malaysia Bhd .................................. 142,857
75,000 YTL Corporation Bhd ................................... 88,214
-----------
873,635
-----------
<PAGE>
LEXINGTON EMERGING MARKETS FUND, INC.
STATEMENT OF NET ASSETS
(INCLUDING THE PORTFOLIO OF INVESTMENTS)
December 31, 1998 (continued)
NUMBER OF VALUE
SHARES SECURITY (NOTE 1)
================================================================================
COMMON STOCKS (CONTINUED):
MEXICO: 4.2%
128,500 Consorcio Hogar S.A. de C.V.1 .........................$ 70,424
35,000 Corporacion GEO, S.A. de C.V. "B"1 .................... 97,323
12,713 Corporacion Interamericana de Entretenimiento S.A. "L"1 26,352
8,550 Empresas ICA Sociedad Controladora S.A. de C.V. (ADR) . 38,475
6,100 Grupo Casa Autrey, S.A. de C.V. (ADR) ................. 41,556
170,000 Grupo Financiero Banamex Accival, S.A. de C.V. "B"1 ... 223,121
377,000 Grupo Financiero Bancomer, S.A. de C.V. "B" ........... 80,815
25,000 Grupo Industrial Saltillo, S.A. de C.V. "B" ........... 62,439
-----------
640,505
-----------
OMAN: 0.7%
8,000 Bank Muscat Al-Ahli Al-Omani .......................... 68,576
10,500 Commercial Bank of Oman1 .............................. 42,819
-----------
111,395
-----------
PANAMA: 0.7%
6,500 Banco Latinoamericano de Exportaciones, S.A. (ADR) .... 108,063
-----------
PERU: 0.3%
3,000 Compania de Minas Buenaventura S.A. (ADR) ............. 39,000
-----------
PHILIPPINES: 2.6%
592,900 Ayala Corporation ..................................... 209,579
1,070,000 Fortune Cement Corporation ............................ 44,562
281,516 International Container Terminal Service, Inc.1 ....... 23,521
459,000 Ionics Circuit, Inc. .................................. 112,098
167,200 Universal Robina Corporation .......................... 18,698
-----------
408,458
-----------
POLAND: 1.7%
25,000 Big Bank Gdanski S.A. ................................. 22,436
22,562 Elektrim Spolka Akcyjna S.A. .......................... 244,267
-----------
266,703
-----------
PORTUGAL: 2.4%
2,500 Brisa-Auto Estradas de Portugal S.A. .................. 147,165
2,700 Semapa-Sociedade de Investimento e Gestao, ISGPS, S.A. 53,454
9,800 SIVA-SGPA S.A.1 ....................................... 163,480
-----------
364,099
-----------
RUSSIA: 2.0%
504 Aeroflot .............................................. 10,584
1,500,000 Irkutskenergo ......................................... 62,250
11,800 Lukoil Holdings of Russia ............................. 47,790
2,900 Lukoil Holdings of Russia (ADR) ....................... 45,675
750 Moscow Telephone Systems .............................. 37,500
73,500 Rostelecom1 ........................................... 53,655
9,300 Surgutneftegaz (ADR) .................................. 31,388
771,400 Unified Energy Systems ................................ 23,682
-----------
312,524
-----------
<PAGE>
LEXINGTON EMERGING MARKETS FUND, INC.
STATEMENT OF NET ASSETS
(INCLUDING THE PORTFOLIO OF INVESTMENTS)
December 31, 1998 (continued)
NUMBER OF VALUE
SHARES SECURITY (NOTE 1)
================================================================================
COMMON STOCKS: (CONTINUED)
SINGAPORE: 3.2%
13,000 Creative Technology, Ltd. .............................$ 183,580
87,000 Keppel Fels, Ltd. ..................................... 167,677
217,160 Keppel Telecommunications and Transportation, Ltd. .... 143,461
-----------
494,718
-----------
SOUTH AFRICA: 4.8%
11,700 Adcock Ingram, Ltd. "N" ............................... 31,823
217,000 Comair, Ltd.1 ......................................... 37,073
40,000 Dimension Data Holdings, Ltd. ......................... 169,992
151,500 Grintek Ltd. .......................................... 25,754
2,400 Liberty Life Association of Africa, Ltd. .............. 32,464
23,200 Liberty Life Association of Africa, Ltd. .............. 319,450
9,700 Sasol, Ltd. (ADR) ..................................... 38,194
75,600 The Education Investment Corporation, Ltd. 87,390
-----------
742,140
-----------
SOUTH KOREA: 15.7%
18,450 Dacom Corporation ..................................... 744,159
15,600 Dongwon Securities .................................... 238,710
89,830 Kumho Tire Company, Ltd.1 ............................. 522,934
25,190 L.G. Securities1 ...................................... 330,989
11,340 Samsung Securities Company, Ltd. ...................... 311,211
7,500 Shinsegae Department Store Company .................... 164,662
6,050 Suheung Capsule ....................................... 104,903
-----------
2,417,568
-----------
THAILAND: 3.2%
3,708 Advance Agro Public Company, Ltd. ..................... 2,041
70,380 Bangkok Bank Public Company, Ltd. ..................... 145,277
256,030 K.R. Precision Public Company, Ltd. ................... 125,077
250,000 Krung Thai Bank Public Company, Ltd. .................. 135,892
39,320 Lanna Lignite Public Company, Ltd. .................... 46,128
80,000 Securities One Public Company, Ltd. ................... 17,394
96,800 Thai Engine Manufacturing Public Company, Ltd. ........ 24,244
-----------
496,053
-----------
TURKEY: 5.4%
9,390,000 Akbank T.A.S. ......................................... 187,800
4,383,000 Arcelik A.S. .......................................... 127,107
2,168,500 Eregli Demir Ve Celik Fabrikalari T.A.S. .............. 88,909
16,204,500 Haci Omer Sabanci Holding A.S. ........................ 243,068
558,202 Petrol Ofisi A.S. ..................................... 75,357
1,308,125 Tupras-Turkiye Petrol Rafinerileri A.S. ............... 57,558
15,880 Usas Ucak Servisi A.S. ................................ 22,677
389,750 Vestel Elektronik Sanayi ve Ticaret A.S. .............. 32,349
-----------
834,825
-----------
UNITED STATES: 0.6%
13,300 Central European Media Enterprises, Ltd.1 ............. 87,281
-----------
TOTAL COMMON STOCKS (cost $14,968,816) ................ 11,686,531
-----------
<PAGE>
LEXINGTON EMERGING MARKETS FUND, INC.
STATEMENT OF NET ASSETS
(INCLUDING THE PORTFOLIO OF INVESTMENTS)
December 31, 1998 (continued)
NUMBER OF VALUE
SHARES SECURITY (NOTE 1)
================================================================================
PREFERRED STOCKS: 5.3%
BRAZIL: 4.5%
637,000 Companhia de Tecidos Norte de Minas ...................$ 68,540
400,000 Companhia Riograndense de Telecomunicacoes ............ 144,016
1,124,000 Petroleo Brasileiro S.A. .............................. 127,453
1,566,000 Telecomunicacoes de Sao Paulo S.A. .................... 213,475
534,000 Telecomunicacoes do Rio de Janeiro S.A. ............... 14,585
2,220,000 Telerj Celular S.A. "B" ............................... 52,367
1,566,000 Telesp Celular S.A. "B" ............................... 68,825
-----------
689,261
-----------
COLUMBIA: 0.3%
5,700 Banco Ganadero S.A. (ADR) ............................. 51,656
-----------
GREECE: 0.5%
2,000 Intracom S.A. ......................................... 82,166
-----------
TOTAL PREFERRED STOCKS (cost $1,552,839) .............. 823,083
-----------
U.S. GOVERNMENT OBLIGATION: 6.0%
$4,101,000 U.S. Strip Bond, 0.00%, due 02/15/2027 (cost $790,181) 919,362
-----------
SHORT-TERM INVESTMENT: 9.8%
U.S. GOVERNMENT AGENCY OBLIGATION
1,500,000 Federal Home Loan Mortgage Corporation, 4.25%,
due 01/04/99 (cost $1,499,469) ...................... 1,499,469
-----------
TOTAL INVESTMENTS: 97.0% (cost $18,811,305+) (Note 1) 14,928,445
Other assets in excess of liabilities: 3.0% ........... 462,394
-----------
TOTAL NET ASSETS: 100.0%
(equivalent to $5.67 per share on 2,714,718
shares outstanding) .................................$15,390,839
===========
1 Non-income producing security.
ADR- American Depository Receipt.
GDR- Global Depository Receipt.
+ Aggregate cost for Federal income tax purposes is $18,894,969.
--------------------
At December 31, 1998, the composition of the Fund's net assets by industry
concentration was as follows:
Banking ................... 11.2% Multi-Industry ................ 5.8%
Capital Equipment ......... 1.5 Oil & Gas Holding Companies ... 0.5
Construction & Housing .... 0.5 Real Estate ................... 1.9
Consumer Durable .......... 6.5 Services ...................... 1.9
Consumer Non-durable ...... 1.8 Telecommunications ............ 15.7
Electrical & Electronics .. 5.3 Trade ......................... 2.4
Energy Sources ............ 4.2 Transportation ................ 1.8
Financial Services ........ 10.3 U.S. Government Obligations ... 15.8
Health & Personal Care .... 1.2 Utilities ..................... 0.4
Materials ................. 7.2 Other Assets .................. 3.0
Merchandising ............. 1.1
Total Net Assets ......... 100.0%
=====
The Notes to Financial Statements are an integral part of this statement.
<PAGE>
LEXINGTON EMERGING MARKETS FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1998
ASSETS
Investments, at value (cost $18,811,305) (Note 1) ................ $14,928,445
Cash ............................................................. 482,322
Foreign currency, at value (cost $60,480) (Note 1) ............... 65,771
Receivable for investment securities sold ........................ 82,979
Receivable for shares sold ....................................... 44,658
Dividends and interest receivable ................................ 20,425
Foreign taxes recoverable ........................................ 205
Deferred organization costs, net (Note 1) ........................ 1,098
-----------
Total Assets ................................................ 15,625,903
-----------
LIABILITIES
Due to Lexington Management Corporation (Note 2) ................. 9,503
Payable for investment securities purchased ...................... 67,019
Payable for shares redeemed ...................................... 106,918
Accrued expenses ................................................. 51,624
-----------
Total Liabilities ........................................... 235,064
-----------
NET ASSETS (equivalent to $5.67 per share
on 2,714,718 shares outstanding) (Note 3) ....................... $15,390,839
===========
NET ASSETS consist of:
Capital stock-authorized 500,000,000 shares,
$.001 par value per share ...................................... $ 2,715
Additional paid-in capital ....................................... 26,844,252
Undistributed net investment income (Note 1) ..................... 114,759
Accumulated net realized loss on investments and
foreign currency transactions (Notes 1 and 6) .................. (7,693,512)
Unrealized depreciation of investments and
foreign currency translation of other assets and liabilities ... (3,877,375)
-----------
TOTAL NET ASSETS ............................................ $15,390,839
===========
The Notes to Financial Statements are an integral part of this statement.
<PAGE>
LEXINGTON EMERGING MARKETS FUND, INC.
STATEMENT OF OPERATIONS
Year ended December 31, 1998
<TABLE>
<CAPTION>
<S> <C> <C>
INVESTMENT INCOME
Dividends $ 424,064
Interest 156,687
-----------
580,751
Less: foreign tax expense 35,000
-----------
Total investment income $ 545,751
EXPENSES
Investment advisory fee (Note 2) 158,794
Custodian expenses 101,679
Professional fees 32,495
Printing and mailing expenses 30,618
Accounting expenses (Note 2) 21,313
Directors' fees and expenses 15,039
Computer processing fees 6,752
Transfer agent expenses 5,329
Amortization of deferred organization costs 4,453
Registration fees 4,171
Other expenses 8,517
-----------
Total expenses 389,160
---------
Net investment income 156,591
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS (NOTE 4)
Net realized loss on:
Investments (6,966,656)
Foreign currency transactions (12,012)
-----------
Net realized loss (6,978,668)
Net change in unrealized appreciation (depreciation) of:
Investments 793,332
Foreign currency translation of other assets and liabilities 5,199
-----------
Net change in unrealized depreciation 798,531
-----------
Net realized and unrealized loss (6,180,137)
-----------
DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(6,023,546)
===========
</TABLE>
The Notes to Financial Statements are an integral part of this statement.
<PAGE>
LEXINGTON EMERGING MARKETS FUND, INC.
STATEMENTS OF CHANGES IN NET ASSETS
Years ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
------------ -----------
<S> <C> <C>
Net investment income ................................................... $ 156,591 $ 71,584
Net realized gain (loss) from investment and foreign currency
transactions .......................................................... (6,978,668) 1,372,507
Net change in unrealized appreciation (depreciation) of investments
and foreign currency translation ...................................... 798,531 (5,093,187)
------------ ------------
Decrease in net assets resulting from operations ................... (6,023,546) (3,649,096)
Distributions to shareholders from net investment income (Note 1) ....... (91,329) (19,143)
Distributions to shareholders from net realized gains from security
transactions (Note 1) ................................................. (1,470,030) --
Increase (decrease) in net assets from capital
share transactions (Note 3) ........................................... (1,076,717) 6,042,710
------------ -----------
Net increase (decrease) in net assets ......................... (8,661,622) 2,374,471
NET ASSETS:
Beginning of period ..................................................... 24,052,461 21,677,990
------------ -----------
End of period (including undistributed net investment income of
$114,759 and $59,076 in 1998 and 1997, respectively) .................. $ 15,390,839 $24,052,461
============ ===========
</TABLE>
The Notes to Financial Statements are an integral part of these statements.
<PAGE>
LEXINGTON EMERGING MARKETS FUND, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1997
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 Securities transactions are accounted for on a trade date
basis. Realized gains and losses from investment transactions are reported on
the identified cost basis. Securities traded on a recognized stock exchange are
valued at the last sales price reported by the exchange on which the securities
are traded. If no sales price is recorded, the mean between the last bid and
asked prices is used. Securities traded on the over-the-counter market are
valued at the mean between the last current bid and asked prices. 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.
The Fund authorizes its custodian to place and maintain equity securities in a
segregated account of the Fund having a value equal to the aggregate amount of
the Fund's commitments under forward foreign currency contracts entered into
with respect to position hedges. There are no forward foreign currency contracts
outstanding at December 31, 1998.
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, 1998,
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 COSTS Organization costs aggregating $22,290 have
been deferred and are being amortized on a straight-line basis over five years.
At December 31, 1998, the amount remaining to be amortized is $1,098.
<PAGE>
LEXINGTON EMERGING MARKETS FUND, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1997 (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (continued)
USE OF ESTIMATES The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of increases and decreases in net assets
from operations during the reporting period. Actual results could differ from
those estimates.
2. INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATE
The Fund pays an investment advisory fee to Lexington Management Corporation
("LMC") at an annual rate of 0.85% of the Fund's average daily net assets. In
connection with providing investment advisory services, LMC has entered into a
sub-advisory contract effective October 1, 1998 with Stratos Advisors, Inc.
("Stratos") under which Stratos provides the Fund with investment management
services. Pursuant to the terms of the sub-advisory contract between LMC and
Stratos, LMC pays Stratos a monthly sub-advisory fee at an annual rate of 0.35%
of the Fund's average daily net assets. For 1998, 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 2.50% of the Fund's average daily net
assets. No reimbursement was required for the year ended December 31, 1998.
The Fund reimburses LMC for certain expenses, including accounting costs of
$21,313 which are incurred by the Fund, but paid by LMC.
3. CAPITAL STOCK
Transactions in capital stock were as follows:
<TABLE>
<CAPTION>
Year ended
December 31, 1998 December 31, 1997
------------------------- --------------------------
Shares Amount Shares Amount
---------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
Shares sold ........................................ 1,576,623 $ 10,869,701 3,296,604 $ 35,635,710
Shares issued on reinvestment of dividends ......... 314,789 1,561,356 1,696 19,143
---------- ------------ ---------- ------------
1,891,412 12,431,057 3,298,300 35,654,853
Shares redeemed .................................... (1,877,437) (13,507,774) (2,741,626) (29,612,143)
---------- ------------ ---------- ------------
Net increase (decrease) ........................... 13,975 $ (1,076,717) 556,674 $ 6,042,710
========== ============ ========== ============
</TABLE>
4. INVESTMENT TRANSACTIONS
The cost of purchases and proceeds from sales of securities for the year ended
December 31, 1998, excluding short-term securities, were $20,484,031 and
$21,449,113, respectively.
At December 31, 1998, the aggregate gross unrealized appreciation for all
securities in which there is an excess of value over tax cost amounted to
$1,125,759 and aggregate gross unrealized depreciation for all securities in
which there is an excess of tax cost over value amounted to $5,092,289.
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.
<PAGE>
LEXINGTON EMERGING MARKETS FUND, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1997 (continued)
6. FEDERAL INCOME TAXES-CAPITAL LOSS CARRYFORWARDS
Capital loss carryforwards1 available for federal income tax purposes as of
December 31, 1998 are approximately $7,609,848 expiring in 2006.
To the extent any future capital gains are offset by these losses, such gains
would not be distributed to shareholders.
1 Temporary book-tax differences of $83,664 are the result of losses generated
from wash sales.
7. TAX INFORMATION (UNAUDITED)
The following tax information represents the designation of various tax benefits
relating to year ended December 31, 1998:
The percentage of ordinary income dividends paid by the Fund derived from agency
and direct obligations of the United States government were as follows:
U.S. Treasury 0.47%
Federal Home Loan Bank 1.32
Federal Home Loan Mortgage Corporation 1.11
Federal National Mortgage Association 0.18
The Fund designates $934,481, whether taken in shares or in cash, as 20%
long-term capital gain distributions.
<PAGE>
LEXINGTON EMERGING MARKETS FUND, INC.
FINANCIAL HIGHLIGHTS
Selected per share data for a share outstanding throughout the period:
<TABLE>
<CAPTION>
MARCH 30, 1994
(COMMENCMENT
YEAR ENDED DECEMBER 31, OF OPERATIONS) TO
------------------------------------------------ DECEMBER 31,
1998 1997 1996 1995 1994
-------- -------- ------- ------- ---------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period ........... $ 8.91 $ 10.11 $ 9.38 $ 9.86 $ 10.00
-------- -------- ------- ------- --------
Income (loss) from investment operations:
Net investment income ......................... 0.06 0.03 0.02 0.09 0.03
Net realized and unrealized gain
(loss) on investments and foreign
currency transactions ....................... ( 2.64) ( 1.22) 0.71 (0.48) 0.04
-------- -------- ------- ------- --------
Total income (loss) from investment
operations ................................ ( 2.58) ( 1.19) 0.73 (0.39) 0.07
-------- -------- ------- ------- --------
Less distributions:
Distributions from net investment income ...... ( 0.04) ( 0.01) -- (0.09) (0.02)
Distributions from net realized gains ......... ( 0.62) -- -- -- --
Distributions in excess of net realized gains
(temporary book-tax difference) ............. -- -- -- -- (0.19)
-------- -------- ------- ------- --------
Total distributions ......................... ( 0.66) ( 0.01) -- (0.09) (0.21)
-------- -------- ------- ------- --------
Net asset value, end of period ................. $ 5.67 $ 8.91 $ 10.11 $ 9.38 $ 9.86
======== ======== ======= ======= ========
Total return ................................ (27.95)% (11.81)% 7.46% (3.93)% 0.76%*
Ratio to average net assets:
Expenses, before reimbursement or
waivers ..................................... 2.08% 1.91% 2.23% 4.09% 6.28%*
Expenses, net of reimbursement or waivers...... 2.08% 1.84% 1.64% 1.32% 1.30%*
Net investment income (loss), before
reimbursement or waivers .................... 0.84% 0.18% ( 0.39)% (1.45)% (4.29)%*
Net investment income ......................... 0.84% 0.26% 0.20% 1.33% 0.70%*
Portfolio turnover rate ........................ 121.31% 157.52% 95.18% 88.92% 71.21%*
Net assets, end of period (000's omitted) ...... $ 15,391 $ 24,052 $21,678 $7,815 $ 4,624
</TABLE>
- ------------------------
* Annualized.
<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, 1998, the related statement 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 four-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 and financial highlights. Our procedures included confirmation of
securities owned as of December 31, 1998 by correspondence with the custodian
and brokers. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
Lexington Emerging Markets Fund, Inc. as of December 31, 1998, 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 four-year period then ended and for the period from
March 30, 1994 (commencement of operations) to December 31, 1994, in conformity
with generally accepted accounting principles.
KPMG LLP
New York, New York
February 8, 1999
