DEAR CONTRACTHOLDER:
- --------------------------------------------------------------------------------
Lexington Emerging Markets Fund increased by 15.24% during the fourth
quarter and fell 27.95% for the full year of 1998. According to Lipper, Inc. the
average emerging markets fund increased 13.29% for the quarter and declined
26.83% for the year. The unmanaged Morgan Stanley Emerging Markets Free Index
posted a gain of 17.99% for the quarter and declined 25.34% for the year. The
Fund performed in line with the average emerging markets fund in 1998. The
following is a discussion of the major factors impacting the performance of
emerging markets in 1998.
INVESTMENT APPROACH
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.
On an asset allocation basis, the objective of the investment manager is to
be fully allocated (up to 98%) given the correct mix of investment
opportunities. Or, in times of uncertainty the Fund can invest up to 100% in
cash. At the regional and country level, the investment manager will use the
MSCI Emerging Markets Free Index as a benchmark to underweight and overweight
its positions.
WHAT HAPPENED IN 1998?
In emerging markets, 1998 can be summarized as the year of de-leveraging,
restructuring, and deflating. Starting in the third quarter of 1997, the Asian
"Tiger" economies suffered a severe credit crunch caused primarily by slowing
growth, a strong currency and industrial over-capacity. With their currencies
pegged to the dollar, the "Asian Tigers" had enjoyed the export benefits of a
strong dollar and an extremely low cost of borrowing, both domestically and
abroad. As long as their economies were growing at 5-7% per annum the "Tigers"
were able to finance their growth by borrowing in U.S. dollars and were able to
offset large current account deficits by large capital inflows. Once the
economic growth stalled, and the dollar strengthened, the "Tiger" currencies
came under severe pressure and buckled, devaluing, in some instances, over 50%.
As a result, the heavily indebted governments and corporations could no longer
finance large foreign loans and were forced into technical bankruptcy, i.e.,
they had to restructure their loans. The over-indebtedness problems arose in
other countries (Russia, Ukraine, Brazil), and each time caused severe havoc in
financial markets, with Brazil being the latest to succumb to a large and
unsustainable debt burden.
The results were a short-term but severe collapse in asset valuations.
However, international institutions like the IMF and developed countries like
Japan, were quick in responding to this crisis. Restructuring plans were
negotiated and funds were loaned to the governments to allow governments the
means to facilitate a whole-sale corporate restructuring. In some cases, like
South Korea, the restructuring programs have proven to be extremely successful,
and in other cases, like Russia, there has been utter failure.
OUTLOOK FOR 1999
The Federal Reserve, with the first cut in interest rates, set in motion
the reflationary trend for 1999: lower global interest rates. With global
interest rates trending lower and governments actively participating in
reflating local economies, 1999 may be a very rewarding year for foreign
investors in emerging markets. Thus far, it has been domestic, not foreign
investors who have participated in the interest rate led rally in the most
recent quarter. Asian equity markets relative to other emerging markets will
take a leading role in early 1999 in this domestic redirection of capital. Asia
has made solid economic progress, adhered to IMF programs, and has managed to
reverse some of its economic and foreign currency concerns. Additionally, we
expect ratings agencies to upgrade certain Asian countries back to investment
grade in early 1999, due to improved economic conditions and the possible
lifting of controls. We are also positive on developing European markets in 1999
as EMU integration creates greater demand for equities in next wave EMU
convergence countries. Latin America will be a laggard in the first half of 1999
as economic recession looms and local interest rates remain stubbornly high.
Nonetheless, we believe that extremely low current valuations and strong
earnings trends for certain Latin shares will ultimately reward patient
investors. Systemic risk in emerging markets is at a low due to the withdrawal
of global capital from these markets over the last two years. Hence, the
relative risk of a sustained outflow of foreign capital is low, whereas the
argument of net new additions to the asset class is compelling and could be a
strong catalyst to propel shares in early 1999.
Sincerely,
<TABLE>
<S> <C> <C> <C>
/s/ Alfredo M. Viegas /s/ Mohammed Zaidi /s/ Richard T. Saler /s/ Robert M. DeMichele
- --------------------- ------------------ -------------------- -----------------------
Alfredo M. Viegas Mohammed Zaidi Richard T. Saler Robert M. DeMichele
Portfolio Manager Portfolio Manager Portfolio Manager President
February, 1999 February, 1999 February, 1999 February, 1999
</TABLE>
1
<PAGE>
RESULTS OF THE SPECIAL MEETING OF SHAREHOLDERS HELD AUGUST 12, 1998 (UNAUDITED)
Total Outstanding Shares as of June 15, 1998: 2,449,253
1. Directors Elected: S.M.S. Chadha, Robert M. DeMichele, Beverley C. Duer,
Barbara R. Evans, Richard M. Hisey, Lawrence Kantor, Jerard F. Maher,
Andrew M. McCosh, Donald B. Miller, John G. Preston and Allen H. Stowe.
For All Nominees: 2,199,440 Withheld Authority: 244,992
<TABLE>
<CAPTION>
VOTES VOTES VOTES
FOR AGAINST ABSTAINED
----------- --------- ----------
<S> <C> <C> <C>
2. Approval of an investment sub-advisory agreement 2,156,456 208,118 79,857
between Lexington Management Corporation and
Stratos Advisors, Inc. with respect to the Fund.
3. Selection of KPMG LLP as Independent Auditors. 2,335,634 43,030 65,768
</TABLE>
- --------------------------------------------------------------------------------
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN
LEXINGTON EMERGING MARKETS FUND, INC.
THE UNMANAGED MORGAN STANLEY CAPITAL INTERNATIONAO (EAFE) INDEX
AND THE UNMANAGED MORGAN STANLEY EMERGING MARKETS FREE INDEX
[THE FOLLOWING TABLE REPRESENTS A CHART IN THE PRINTED MATERIAL]
Lexington
Year Emerging EAFE MSCI EMF
Mkts
==============================================
3/30/94 $10,000 $10,000 $10,000
12/31/94 $10,076 $10,414 $10,190
12/31/95 $9,679 $11,581 $9,659
12/31/96 $10,433 $12,281 $10,241
12/31/97 $9,200 $12,500 $9,055
12/31/98 $6,629 $15,041 $6,760
AVERAGE ANNUAL STANDARD TOTAL RETURNS
FOR THE PERIOD ENDED 12/31/98
FUND/INDEX 1 YEAR SINCE INCEPTION
3/30/94
- ---------- ------ ---------------
LEXINGTON EMERGING
MARKET FUND (27.95%) (8.28%)
MORGAN STANLEY CAPITAL
INTERNATIONAL (EAFE) INDEX 20.33% 8.96%
MORGAN STANLEY EMERGING
MARKETS FREE INDEX (25.34)% (7.90%)
This graph, prepared in accordance with SEC regulations, compares a $10,000
investment in the Fund with a similar investment in the Morgan Stanley Capital
International (EAFE) Index and the Morgan Stanley Emerging Markets Free Index.
Results for the Fund, the Morgan Stanley Capital International (EAFE) Index and
the Morgan Stanley Emerging markets Free Index include the reinvestment of all
dividend and capital gain distributions. The Fund's inception date was 3/30/94.
Investment return and principal value of an investment will fluctuate so that an
investor's shares when redeemed may be worth more or less than at their original
cost. Total return represents past performance and it is not predictive of
future results.
- --------------------------------------------------------------------------------
* -27.95% and -8.28% are the one year and since commencement (3/30/94) average
annual standard total returns, respectively, for the period ended December
31, 1998. Investment return and principal value of an investment will
fluctuate so that an investor's shares, when redeemed, may be worth more or
less than at their original cost. Total return represents past performance
and is not predictive of future results.
** All country and regional returns are from the corresponding Morgan Stanley
Capital International Indices. Returns are dollar based with all dividends
reinvested.
2
<PAGE>
LEXINGTON EMERGING MARKETS FUND, INC.
STATEMENT OF NET ASSETS
(INCLUDING THE PORTFOLIO OF INVESTMENTS)
December 31, 1998
NUMBER OF VALUE
SHARES SECURITY (NOTE 1)
================================================================================
COMMON STOCKS: 75.9%
ARGENTINA: 5.7%
159,806 Perez Companc S.A. ....................................$ 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
-----------
3
<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
-----------
4
<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 $14,968,816) ................ 11,686,531
-----------
5
<PAGE>
LEXINGTON EMERGING MARKETS FUND, INC.
STATEMENT OF NET ASSETS
(INCLUDING THE PORTFOLIO OF INVESTMENTS)
December 31, 1998 (continued)
NUMBER OF VALUE
SHARES SECURITY (NOTE 1)
================================================================================
PREFERRED STOCKS: 5.3%
BRAZIL: 4.5%
637,000 Companhia de Tecidos Norte de Minas ...................$ 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.
6
<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.
7
<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.
8
<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.
9
<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.
10
<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.
11
<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.
12
<PAGE>
LEXINGTON EMERGING MARKETS FUND, INC.
FINANCIAL HIGHLIGHTS
Selected per share data for a share outstanding throughout the period:
<TABLE>
<CAPTION>
MARCH 30, 1994
(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.
13
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Lexington Emerging Markets Fund, Inc.:
We have audited the accompanying statements of net assets (including the
portfolio of investments) and assets and liabilities of Lexington Emerging
Markets Fund, Inc. as of December 31, 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
14
<PAGE>
LEXINGTON
LEXINGTON [LOGO]
EMERGING MARKETS FUND, INC.
INVESTMENT ADVISER
- ---------------------------------------
LEXINGTON MANAGEMENT CORPORATION
P.O. Box 1515
Park 80 West Plaza Two
Saddle Brook, New Jersey 07663
DISTRIBUTOR
- ---------------------------------------
LEXINGTON FUNDS DISTRIBUTOR, INC.
P.O. Box 1515
Park 80 West Plaza Two
Saddle Brook, New Jersey 07663
LEXINGTON
EMERGING
MARKETS
FUNDS, INC.
-------------
Seeks long-term growth of capital
primarily through investment in
equity securities of
companies domiciled in, or doing
business in, emerging countries
and emerging markets.
-------------
ANNUAL REPORT
DECEMBER 31, 1998
The Lexington Group
of NO LOAD
Investment Companies
This report has been prepared for the information of the shareholders of
Lexington Emerging Markets Fund, Inc. and is authorized for distribution to the
public only if it is accompanied or preceded by a currently effective prospectus
which sets forth expenses and other material information.
