PROSPECTUS
January 3, 1997
Lexington Troika Dialog
RUSSIA FUND, Inc.
P.O. Box 1515 / Park 80 West Plaza Two, Saddle Brook, New Jersey 07663
Service: Toll Free-1-800-526-0056
201-845-7300
Institutional/Financial Adviser Services-1-800-367-9160
24 Hour Account Information-1-800-526-0052
A NO-LOAD MUTUAL FUND WHOSE INVESTMENT OBJECTIVE IS LONG-TERM CAPITAL
APPRECIATION THROUGH INVESTMENT PRIMARILY IN THE EQUITY SECURITIES OF RUSSIAN
COMPANIES.
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Lexington Troika Dialog Russia Fund (the "Fund") is a no-load open-end
non-diversified management investment company. The Fund's investment objective
is to seek long-term capital appreciation through investment primarily in the
equity securities of Russian companies. The Fund involves speculative
investments and special risks, such as political, economic and legal
uncertainties, currency fluctuations, portfolio settlement and custody risks and
risks of loss arising out of Russia's system of share registration. The Fund may
not be appropriate for all investors (See "Risk Factors and Special
Considerations"-see page 4).
Shareholders may invest or reinvest shares at any time without sales charge
or penalty. Redemption on shares held less than 365 days are subject to a
redemption fee of 2% of the redemption proceeds (see "How to Redeem Shares").
Lexington Management Corporation ("LMC") is the Fund's investment adviser.
Troika Dialog Asset Management, ("TDAM") is the sub-adviser of the Fund.
Lexington Funds Distributor, Inc. ("LFD") is the Distributor of Fund shares.
This Prospectus sets forth information about the Fund that you should know
before investing. It should be read and retained for future reference.
A Statement of Additional Information dated January 3, 1997, which provides
a further discussion of certain matters in this Prospectus and other matters
that may be of interest to some investors, has been filed with the Securities
and Exchange Commission and is incorporated herein by reference. For a free
copy, call the appropriate telephone number above or write to the address listed
above.
Mutual fund shares are not deposits or obligations of (or endorsed or
guaranteed by) any bank, nor are they federally insured or otherwise protected
by the Federal Deposit Insurance Corporation ("FDIC"), the Federal Reserve Board
or any other agency. Investing in mutual funds involves investment risks,
including the possible loss of principal, and their value and return will
fluctuate.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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Investors Should Read and Retain this Prospectus for Future Reference
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FEE TABLE
Estimated Annual Fund Operating Expenses:
(as a percentage of average net assets)
Management fees .................................................... 1.25%
12b-1 fees ......................................................... 0.25%
Other fees ......................................................... 1.85%
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Total Fund Operating Expenses ...................................... 3.35%
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<TABLE>
<CAPTION>
Example: 1 year 3 years
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<S> <C> <C>
You would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual return and (2) redemption at the end of each period $54 $103
</TABLE>
The purpose of the foregoing table is to assist an investor in understanding
the various costs and expenses that an investor in the Fund will bear
indirectly. For more complete descriptions of the various costs and expenses,
see "Investment Adviser, Sub-Adviser, Distributor and Administrator" below. LMC
has agreed to voluntarily limit the total expenses of the Fund (excluding
interest, taxes, brokerage and extraordinary expenses but including management
fee and operating expenses) to an annual rate of 3.35% of the Fund's average net
assets through April 30, 1997 or such later date as may be determined by LMC.
The Expenses and Example (except the 12b-1 fees) appearing in the table above
are based on the Fund's estimated expenses for the reporting period from July 3,
1996 through November 30, 1996. The Fund's management fee is higher than that
paid by most other investment companies. The 12b-1 fees shown in the table
reflect the maximum amount which may be paid under the Distribution Plan. See
"Distribution Plan." Shares held less than 365 days are subject to a redemption
fee of 2% of the redemption proceeds. See "How to Redeem Shares."
The Example shown in the table above should not be considered a
representation of past or future expenses and actual expenses may be greater or
less than those shown.
DESCRIPTION OF THE FUND
The Fund is an open-end non-diversified management investment company. It is
called a no-load Fund because its shares are sold without a sales charge.
INVESTMENT OBJECTIVE AND POLICIES
Lexington Troika Dialog Russia Fund, a series of Lexington Troika Dialog
Russia Fund, Inc. is an open-end non-diversified management investment company.
The Fund's investment objective is to seek long-term capital appreciation
through investment primarily in the equity securities of Russian Companies.
As used in this Prospectus, the term "Russian Company" means a legal entity
(i) that is organized under the laws of, or with a principal office and domicile
in, Russia, (ii) for which the principal equity securities trading market is in
Russia, or (iii) that derives at least 50% of its revenues or profits from goods
produced or sold, investments made, or services performed, in Russia or that has
at least 50% of its assets situated in Russia. Under normal market conditions,
the Fund will invest at least 65% of its total assets in equity securities of
Russian Companies. Under current conditions, the Sub-Adviser expects to maintain
at least 15% in very liquid investments to maintain liquidity and provide more
stability; as the Russian equity markets develop and grow and liquidity becomes
less of an issue the Sub-Adviser expects to increase equity exposure.
As used in this Prospectus, "Russia" refers to the Russian Federation, which
does not include other countries that formerly comprised the Soviet Union.
Investments in Russian Companies involve a high degree of risk and special
considerations not typically associated with investments in other more
established economies or securities markets, such as political, economic and
legal uncertainties, currency fluctuations, delays in settling portfolio
transactions and risks of loss arising out of Russia's system of share
registration. Additionally, the securities markets in Russia are in the early
stages of development and are characterized by a relatively small number of
equity issues and relatively little trading volume, resulting in substantially
less liquidity and greater price volatility.
Russia's system of share registration and custody creates certain risks of
loss that are not normally associated with investments in other securities
markets. These risks are discussed more fully on page 4 of this Prospectus, and
investors should read this section in detail.
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To achieve its objective, the Fund intends to invest primarily in equity
securities of Russian Companies. As used in this Prospectus, equity securities
means common or preferred stock (including convertible preferred stock), bonds,
notes or debentures convertible into common or preferred stock; direct
investments in Russian companies; stock purchase warrants or rights and American
Depository Receipts ("ADRs") or Global Depository Receipts ("GDRs").
The Fund intends to invest its assets over a broad economic spectrum of
Russian Companies including, as conditions warrant from time to time issuers
from the following sectors: oil and gas, energy generation and distribution,
communications, mineral extraction, trade, financial and business services,
transportation, manufacturing, real estate, textiles, food processing and
construction. The Fund is not permitted to invest more than 25% of its assets in
any one industry. However, this restriction will not apply to investments in oil
and gas related securities.
The Sub-Adviser's approach to selecting investments emphasizes fundamental
company-by-company analysis in conjunction with broader analysis of specific
sectors. Although when relevant the Sub-Adviser may consider historical value
measures, such as price/earnings ratios, operating profit margins and
liquidation values, the primary factor in selecting securities for investment by
the Fund will be the company's current price relative to its long-term earnings
potential, or intrinsic value as determined using discounted cash flow analysis
and other valuation techniques. In addition, the Sub-Adviser will consider
overall growth prospects, competitive positions in export markets, technologies,
research and development, productivity, labor costs, raw material costs and
sources, profit margins, returns on investment, capital resources, state
regulation, management and other factors in comparison to other companies around
the world which the Sub-Adviser believes are comparable. The Sub-Adviser in
selecting investments will also consider macroeconomic factors such as
inflation, GDP growth, unemployment, foreign trade, government spending and the
government's support of particular industries.
The Fund's investments will include investments in companies which, while
falling within the definition of Russian Companies, as stated above, have
characteristics and business relationships common to companies in a country or
countries other than Russia. As a result, the value of the securities of such
companies may reflect economic market forces applicable to other countries, as
well as to Russia. For example, the Fund may invest in companies organized and
located in countries other than Russia, including companies having their entire
production facilities outside of Russia, when securities of such companies meet
one or more elements of the Fund's definition of a Russian Company.
The Fund is permitted to invest indirectly in securities through sponsored
or unsponsored American Depository Receipts, Global Depository Receipts and
other types of Depository Receipts (which, together with ADRs and GDRs, are
hereinafter collectively referred to as "Depository Receipts"), to the extent
such Depository Receipts become available. ADRs are Depository Receipts
typically issued by a U.S. bank or trust company which evidence ownership of
underlying securities issued by a foreign corporation. GDRs and other types of
Depository Receipts are typically issued by foreign banks or trust companies,
although they also may be issued by U.S. banks or trust companies, and evidence
ownership of underlying securities issued by either a foreign or a United States
corporation. Generally, Depository Receipts in registered form are designed for
use in the U.S. securities market and Depository Receipts in bearer form are
designed for use in securities markets outside the United States. Depository
Receipts may not necessarily be denominated in the same currency as the
underlying securities into which they may be converted. In addition, the issuers
of the securities underlying unsponsored Depository Receipts are not obligated
to disclose material information in the United States and, therefore, there may
be less information available regarding such issuers and there may not be a
correlation between such information and the market value of the Depository
Receipts. For purposes of the Fund's investment policies, the Fund's investments
in Depository Receipts will be deemed to be investments in the underlying
securities.
To the extent that the Fund's assets are not invested in Russian equity
securities, the remaining 35% of the Fund's assets will be invested in: (i) debt
securities issued by Russian Companies or issued or guaranteed by the Russian
Government or a Russian governmental entity, as well as debt securities of
corporate and governmental issuers outside Russia, (ii) equity securities of
issuers outside Russia which the Sub-Adviser believes will experience growth in
revenue and profits from participation in the development of the economies of
the Commonwealth of Independent States ("CIS"), and (iii) short-term and
medium-term debt securities of the type described below under "Investment
Objective and Policies-Temporary Investments." The Fund may invest in debt
securities that the Sub-Adviser believes, based upon factors such as relative
interest rate levels and foreign exchange rates, offer opportunities for
long-term capital appreciation. It is likely that many of the debt securities in
which the Fund will invest will be unrated and, whether or not rated, the debt
securities may have speculative characteristics (See "Risk Factors and Special
Considerations").
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Although the Fund does not generally intend to invest for the purpose of
seeking short-term profits, the Fund's investments may be changed when
circumstances warrant, without regard to the length of time a particular
security has been held. As more companies in Russia are privatized and as more
companies increase their capitalization and float, the Sub-Adviser expects
turnover to increase in order to capitalize on these new opportunities. It is
expected that the Fund will have an annual portfolio turnover rate that will
generally not exceed 150%. A 100% turnover rate would occur if all the Fund's
portfolio investments were sold and either repurchased or replaced within a
year. A high turnover rate (100% or more) results in correspondingly greater
brokerage commissions and other transactional expenses which are borne by the
Fund. High portfolio turnover may result in the realization of net short-term
capital gains by the Fund which, when distributed to shareholders, will be
taxable as ordinary income. See "Tax Matters."
Temporary Investments
During periods in which the Sub-Adviser believes changes in economic,
financial or political conditions make it advisable, the Fund may, for temporary
defensive purposes, reduce its holdings in equity securities and invest without
limit in certain short-term (less than twelve months to maturity) and
medium-term (not greater than five years to maturity) debt securities or hold
cash. The short-term and medium-term debt securities in which the Fund may
invest consist of (a) obligations of the U.S. or Russian governments, and their
respective agencies or instrumentalities; (b) bank deposits and bank obligations
(including certificates of deposit, time deposits and bankers' acceptances) of
U.S. or foreign banks denominated in any currency; (c) floating rate securities
and other instruments denominated in any currency issued by various governments
or international development agencies; (d) finance company and corporate
commercial paper and other short-term corporate debt obligations of U.S. or
Russian corporations; and (e) repurchase agreements with banks and
broker-dealers with respect to such securities. The Fund intends to invest for
temporary defensive purposes only in short-term and medium-term debt securities
rated, at the time of investment, A or higher by Moody's Investors Service, Inc.
("Moody's") or Standard & Poor's Corporation ("S&P") or, if unrated by either
rating agency, of equivalent credit quality to securities so rated as determined
by the Sub-Adviser. For purposes of the Fund's investment restriction
prohibiting the investment of 25% or more of the total value of its assets in a
particular industry (excluding oil and gas related securities), a foreign
government (but not the United States government) is deemed to be an "industry,"
and therefore investments in the obligations of any one foreign government may
not equal or exceed 25% of the Fund's assets. In addition, supranational
organizations are deemed to comprise an industry, and therefore investments in
the obligations of such organizations may not, in the aggregate, equal or exceed
25% of the Fund's assets. See "Investment Restrictions."
Repurchase agreements with respect to the securities described in the
preceding paragraph are contracts under which a buyer of a security
simultaneously commits to resell the security to the seller at an agreed price
and date. Under a repurchase agreement, the seller is required to maintain the
value of the securities subject to the repurchase agreement at not less than
their repurchase price. The Sub-Adviser will monitor the value of such
securities daily to determine that the value equals or exceeds the repurchase
price including accrued interest. Repurchase agreements may involve risks in the
event of default or insolvency of the seller, including possible delays or
restrictions upon the Fund's ability to dispose of the underlying securities.
The investment restrictions set forth below under "Investment Restrictions"
are fundamental and may not be changed without the approval of a majority of the
Fund's outstanding voting securities. All other investment policies and
practices described in this Prospectus are not fundamental, meaning that the
Board of Directors may change them without the approval of shareholders. As used
herein, a "majority of the Fund's outstanding voting securities" means the
lesser of (i) 67% of the shares represented at a meeting at which more than 50%
of the outstanding shares are represented and (ii) more than 50% of the
outstanding shares. There is no assurance the Fund will be able to achieve its
investment objective.
RISK FACTORS AND SPECIAL CONSIDERATIONS
Investors should recognize that investing in securities of Russian Companies
involves significant risks and special considerations, including those set forth
below, which are not typically associated with investing in United States
securities markets. The specific nature of such risks may vary according to the
country in which investments are made. The Fund is authorized to engage in
certain transactions involving derivative instruments which may involve special
risks. See "Hedging Transactions and Use of Derivative Instruments" and "Debt
Securities-High Yield, High Risk Securities" below.
4
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Political and Economic Factors
Since the breakup of the Soviet Union at the end of 1991, Russia has
experienced dramatic political and social change. The political system in Russia
is emerging from a long history of extensive state involvement in economic
affairs. The country is undergoing a rapid transition from a
centrally-controlled command system to a market-oriented, democratic model. The
Fund may be affected unfavorably by political or diplomatic developments, social
instability, changes in government policies, taxation and interest rates,
currency repatriation restrictions and other political and economic developments
in the law or regulations in Russia. In particular, the Fund may be exposed to
the risks of expropriation, nationalization and confiscation of assets and
changes in legislation relating to foreign ownership.
The political environment in Russia in 1997 is more stable than in 1993 and
earlier when clashes between reformers and reactionaries were continuous,
setting the stage for an attempted coup d'etat in October 1993. Nevertheless,
there is still a great deal of uncertainty surrounding the political future of
the country. The risk exists that armed conflict in Chechnya will continue,
which could deter foreign investment and international aid and further weaken
the reformist government's control. The risk also exists that the political
tensions associated with the war in Chechnya will lead to attempts for
independence in other regions within the Russian Federation. The war in Chechnya
and other inflammatory issues may also lead to greater tensions and divisions
between the President and the Duma.
The military could have a negative impact on Russia's political and economic
future. The declining stature of Russia as a world power has led to a widespread
sentiment among Russians for a return to Russia's status as a superpower.
Demobilization of troops, cuts in the military budget, the growth of significant
gaps in living standards between the military and civilian sectors, and the
perception of an external threat from NATO could lead to further political
unrest.
Moreover, it is uncertain whether Russia's privatization process will
continue although government officials have publicly pledged their continued
support for the reform process. It is also unclear whether the reforms intended
to liberalize prevailing economic structures based on free market principles
will be successful, particularly in terms of foreign ownership of Russian
companies.
The planned economy of the former Soviet Union was run with qualitatively
different objectives and assumptions from those prevalent in a market system and
Russian businesses do not have any recent history of operating within a
market-oriented economy. In general, relative to companies operating in Western
economies, companies in Russia are characterized by a lack of: (i) management
with experience of operating in a market economy; (ii) modern technology; and,
(iii) a sufficient capital base with which to develop and expand their
operations. It is therefore unclear how successful Russian companies will be in
competing in a market-oriented global economy.
Russia's economy has experienced severe economic recession, if not
depression, since 1990 during which time the economy has been characterized by
high rates of inflation, high rates of unemployment, declining gross domestic
product, deficit government spending, and a devaluing currency. The economic
reform program has involved major disruptions and dislocations in various
sectors of the economy. Although Russia's economy has been improving and is
expected to continue to improve, it is still subject to periodic reversions to
high inflation, high government spending, and the like. The taxation system has
had numerous attempts at reform, but a failure to collect taxes is an ongoing
major problem.
The 1997 budget is expected to be adopted by the government after
parliamentary approval in early 1997. The budget calls for a continued reduction
in the inflation rate, the government deficit, positive GDP growth, and greater
employment. The budget also calls for continued non-inflationary means of
financing the deficit including continued installments of a $10.2 billion loan
granted by the International Monetary Fund ("IMF") in 1996. There are continued
calls by incumbents and challengers for greatly increased government spending
and, in fact, government spending increased significantly in 1996 to fulfill
campaign promises made by President Yeltsin. Although major macroeconomic
indicators are showing strong signs of improvement, there can be no assurance
that the severe economic problems of the recent past will not return. Further,
Russia presently receives significant financial assistance from a number of
countries through various programs. To the extent these programs are reduced or
eliminated in the future, Russian economic development may be adversely
impacted.
5
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Market Characteristics
The Russian securities markets are substantially smaller, less liquid and
significantly more volatile than the securities markets in the United States. In
addition, there is little historical data on these securities markets because
they are of recent origin. A substantial proportion of securities transactions
in Russia are privately negotiated outside of stock exchanges and
over-the-counter markets. A limited number of issuers represent a
disproportionately large percentage of market capitalization and trading volume.
Some issuers may be exposed to center-regional conflicts in jurisdiction in the
areas of taxation and overall corporate governance which could put the Fund's
investments at risk. In addition, because the Russian securities markets are
smaller and less liquid than in the United States, obtaining prices on portfolio
securities from independent sources may be more difficult than in other markets.
Although evolving rapidly, even the largest of Russia's stock exchanges are
not well developed compared to Western stock exchanges. The actual volume of
exchange-based trading in Russia is low and active on-market trading generally
occurs only in the shares of a few private companies. Most secondary market
trading of equity securities occurs through over-the-counter trading facilitated
by a growing number of licensed brokers. Shares are traded on the
over-the-counter market primarily by the management of enterprises, investment
funds, short-term speculators and foreign and domestic investors.
As of November 30, 1996, the ten largest companies on the Moscow Times Index
had a total market capitalization of approximately $28.5 billion. The market
capitalization of the fifty stocks which comprise the Moscow Times Index is
approximately $33.1 billion. A majority of securities transactions are conducted
in the over-the-counter market. The monthly trading volume of the Russian
Trading System (RTS) Index, which represents the most actively traded issues in
the Moscow Times Index for the one month period ending November 30, 1996, was
$340 million. Trading is primarily conducted on a dealer to dealer basis.
Settlement and Custody Risk
Because of the recent formation of the securities markets as well as the
underdeveloped state of the banking and telecommunications systems, settlement,
clearing and registration of securities transactions are subject to significant
risks not normally associated with investments in the United States and other
more developed markets. Ownership of shares (except where shares are held
through depositories that meet the requirements of the 1940 Act) is defined
according to entries in the company's share register and normally evidenced by
extracts from the register or in certain limited cases by formal share
certificates. However, there is no central registration system and these
services are carried out by the companies themselves or by registrars located
throughout Russia. These registrars are not necessarily subject to effective
state supervision and it is possible for the Fund to lose its registration
through fraud, negligence or even mere oversight. The Fund will endeavor to
ensure that its interest continues to be appropriately recorded, either by
itself or through a custodian or other agent inspecting the share register and
by obtaining extracts of share registers through regular audits. However, these
extracts have no legal enforceability and it is possible that subsequent illegal
amendment or other fraudulent act may deprive the Fund of its ownership rights.
In addition, while applicable Russian regulations impose liability on registrars
for losses resulting from their errors, it may be difficult for the Fund to
enforce any rights it may have against the registrar or issuer of the securities
in the event of loss of share registration. Furthermore, while a Russian public
enterprise with more than 1,000 shareholders is required by law to contract out
the maintenance of its shareholder register to an independent entity that meets
certain criteria, in practice this regulation has not always been followed by
these enterprises. Because of this lack of independence of registrars,
management of a company may be able to exert considerable influence over who can
purchase and sell the company's shares by illegally instructing the registrar to
refuse to record transactions on the share register. This practice may prevent
the Fund from investing in the securities of certain Russian Companies otherwise
deemed suitable by the Sub-Adviser. Further, this also could cause a delay in
the sale of Russian company securities by the Fund if a potential purchaser is
deemed unsuitable, which may expose the Fund to potential loss on the
investment. Moreover, since the local postal and banking systems may not meet
the same standards as those of Western countries, no guarantee can be given that
all entitlements attaching to securities acquired by the Fund, including those
relating to dividends, can be realized. There is the risk that payments of
dividends or other distributions by bank wire could be delayed or lost. In
addition, there is the risk of loss in connection with the insolvency of an
issuer's bank or registrar, particularly because these institutions are not
guaranteed by the state.
In light of the risks described above, the Board of Directors of the Fund
has approved certain procedures concerning the Fund's investments. Among these
procedures is a requirement that the Fund will not invest in the securities of a
Russian Company unless
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that issuer's registrar has entered into a contract with the Fund's
sub-custodian containing certain protective conditions, including, among other
things, the sub-custodian's right to conduct regular share confirmations on
behalf of the Fund. This requirement will likely have the effect of precluding
investments in certain Russian Companies that the Fund would otherwise make. In
accordance with procedures adopted by the Fund, the Fund's Russian sub-custodian
has undertaken to provide certain information on a periodic basis to the Board
of Directors concerning the share registration and custody arrangements in
Russia. If the Board of Directors determines that, over the long term,
investment in the securities of Russian Companies is no longer consistent with
the best interests of the Fund's shareholders, the Fund intends to call a
shareholder meeting for the purposes of considering whether to modify the Fund's
investment policies or to liquidate the Fund's assets and distribute the
proceeds to shareholders.
Foreign Currency and Exchange Rates
The Fund's assets will be invested in securities denominated in rubles,
which are not yet freely convertible into other currencies outside Russia (The
Russian government plans to achieve full convertibility of the ruble into hard
currencies by the year 2000.) The value of the assets of the Fund and its
income, as measured in U.S. dollars, may suffer significant declines due to
disruptions in the ruble market, or be otherwise adversely affected by exchange
control regulations. In the past, the ruble has experienced significant
devaluations relative to the U.S. dollar. In July, 1995 however, the Central
Bank of Russia ("CBR") announced that it would maintain the ruble-dollar
exchange rate within preset boundaries of R4300-4900/$1. Given its success, the
CBR continued this policy through 1996 although with a "crawling" corridor which
lets the exchange rate creep in line with domestic inflation. A band of
R5,500-6,100/$1 was envisaged in December 1996. The CBR has committed to
continuing this policy through 1997. However, there can be no guarantee that the
government will continue this policy or that this policy will continue to be
successful. Although the ruble is internally convertible within Russia, there
can be no guarantee of the liquidity or availability of such markets.
Accordingly, the Fund may experience significant delays in converting currency
in connection with its portfolio transactions. The Fund, as a non-resident of
Russia, is restricted in the operations in which it may engage involving rubles
since it may only hold rubles in an "I-type" investment account or a "T-type"
trading account within Russia which can only be used for certain defined
operations connected with investment management.
Currency devaluations may occur without warning and are beyond the control
of the Advisor and/or Sub-Adviser. To the extent such instruments are available
on terms acceptable to the Fund, the Fund may attempt to mitigate the risks
associated with currency fluctuations at times by entering into forward, futures
or options contracts to purchase or sell the ruble. Currently, such instruments
are generally not available.
Investment and Repatriation Restrictions
The laws and regulations in Russia affecting Western investment business
continue to evolve in an unpredictable manner. Russian laws and regulations,
particularly those involving taxation, foreign investment and trade, title to
property or securities, and transfer of title, applicable to the Fund's
activities are relatively new and can change quickly and unpredictably in a
manner far more volatile than in the United States or other developed market
economies. Although basic commercial laws are in place, they are often unclear
or contradictory and subject to varying interpretation, and may at any time be
amended, modified, repealed or replaced in a manner adverse to the interest of
the Fund. There is still lacking a cohesive body of law and precedents normally
encountered in business environments. Foreign investment in Russian companies
is, in certain cases, legally restricted. Sometimes these restrictions are
contained in constitutional documents of an enterprise which are not publicly
available. The Sub-Adviser does not believe that such investment restrictions
currently impose a material constraint on the Fund's ability to realize gains
through investments in Russian Companies. Russian foreign investment legislation
currently guarantees the right of foreign investors to transfer abroad income
received on investments such as profits, dividends and interest payments. This
right is subject to settlement of all applicable taxes and duties. However, more
recent legislation governing currency regulation and control guarantees the
right to export interest, dividends and other income on investments, but does
not expressly permit the repatriation of capital from the realization of
investments. Current practice is to recognize the right to repatriation of
capital. Authorities currently do not attempt to restrict repatriation beyond
the extent of the earlier law. No guarantee can be made, however, that amounts
representing realization of capital or income will be capable of being remitted.
If, for any reason, the Fund were unable to distribute an amount equal to
substantially all of its investment company taxable income (as defined for U.S.
tax purposes) within applicable time periods, the Fund
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<PAGE>
would not qualify for the favorable U.S. federal income tax treatment afforded
to regulated investment companies, or, even if it did so qualify, it might
become liable for income and excise taxes on undistributed income. In addition,
the ability of the Fund to obtain timely and accurate information relating to
its investments is a significant factor in complying with the requirements
applicable to regulated investment companies and in making tax-related
computations. Thus, if the Fund were unable to obtain accurate information on a
timely basis, it might be unable to qualify as a regulated investment company or
its tax computations might be subject to revision (which could result in the
imposition of taxes, interest and penalties). See "Tax Matters."
Tax System
Economic commentators have noted the significant need for structural reform
of the Russian Tax System. The domestic tax burden is high and the discretion of
local authorities to create new forms of taxation has resulted in a
proliferation of taxes, in some cases imposed or interpreted retroactively. Due
to taxes paid in advance in the context of high inflation, effective tax rates
are significantly higher than statutory rates. High tax rates have led to tax
evasion and corruption and therefore tax revenues have been significantly below
the government's budget. High tax rates and the unpredictability of the tax laws
have also deterred foreign investment and the repatriation to Russia of flight
capital, depriving the government of important sources of revenue. The risk
exists that the Fund may be exposed to higher levels of taxation. Although tax
reform is a high priority for the government, it is uncertain when such reform
will take place.
Hedging Transactions and Use of Derivative Instruments
The Fund is authorized to engage in certain transactions involving the use
of derivative instruments, including forward foreign currency exchange
contracts, currency futures contracts and options thereon, put and call options
on securities, indices and foreign currencies, stock index futures contracts and
options thereon and interest rate futures contracts and options thereon.
The Fund may seek to protect the value of some or all of its portfolio
holdings against currency risks by engaging in hedging transactions. The Fund is
authorized to enter into forward currency exchange contracts and currency
futures contracts and options on such futures contracts, as well as to purchase
put or call options on foreign currencies, in U.S. or foreign markets, to the
extent available. In order to hedge against adverse market shifts, the Fund is
permitted to purchase put and call options on stocks, write covered call options
on stocks and enter into stock index futures contracts and related options. The
Fund also is authorized to hedge against interest rate fluctuations affecting
portfolio securities by entering into interest rate futures contracts and
options thereon. For a description of such hedging strategies, see "Additional
Investment Practices". Currently, there is no market in which the Fund may
engage in many of these hedging transactions; therefore, there can be no
assurance that instruments suitable for hedging currency or market or interest
rate shifts will be available at the time the Fund wishes to use them.
Reporting Standards
Accounting, auditing and financial reporting standards and requirements in
Russia are less stringent and less consistent than those applicable in many
major Western countries. Such accounts and reports are not always publicly
available. Historically, accounting and auditing has been carried out solely as
a function of compliance with tax legislation and need not be carried out by
independent auditors. Less information is available to investors investing in
such securities than to investors investing in securities of companies in many
major Western countries and the historic information which is available is not
necessarily comparable or relevant. The items appearing in the financial
statements of a Russian Company, even if prepared in accordance with
international accounting standards, may not reflect its financial position or
the results of operations in the way that they would be reflected had such
financial statements been prepared in accordance with generally accepted
accounting principles in the United States or other developed countries. The
Fund's financial statements will be prepared in accordance with U.S. generally
accepted accounting principles.
Privatization and Restructuring
The purchase of securities of recently privatized companies involves special
risks. Many recently privatized companies have gone through an internal
reorganization of management in an attempt to improve their competitive position
in the private sector.
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However, certain reorganizations could result in a management team that does not
function as well as the enterprise's prior management and may have a negative
effect on such enterprise. Moreover, the loss of government support and
protection in connection with privatization and sudden subjection to market
competition from which an enterprise was previously protected, could have a
negative effect on such enterprise. Further, unreliable reporting standards, as
discussed above, make the valuation of recently privatized companies difficult.
The Sub-Adviser will seek to assess the long-term earnings potential and/or fair
market value of recently privatized companies in light of historical value
measures such as price/earnings ratios, operating profit margins and liquidation
values. However, there can be no assurance that accurate data in support of such
assessment will be available. Errors in valuing recently privatized companies,
whether or not the result of inaccurate or unavailable data, could result in the
Fund overpaying for an interest in such companies.
The transformation of medium and large-scale state enterprises into open
joint stock companies (i.e., corporatization) and their subsequent privatization
has been carried out by the Russian State Property Committee and Federal
Property Fund and their local organs at an unprecedented rate. In doing this,
much of the responsibility for preparation of enterprises for privatization and
compliance with much of the privatization legislation was delegated to
individuals at the enterprise concerned, rather than being strictly controlled
by state authorities. This enhances the risk that there may be illegalities in
the privatization that may lead to full or partial invalidity of the
privatization of the enterprise concerned or the imposition of sanctions on that
enterprise or individuals within its administration. In addition an enterprise
may not have valid or full title to all of the assets shown on its balance sheet
and may be subject to obligations arising from a period prior to its
privatization. As an investor, the Fund may consequently lose all or a part of
its investments in such privatized enterprises.
The privatization process has also resulted in certain disputes between
management and shareholders, particularly foreign shareholders, of recently
privatized companies. For example, management of certain companies has resisted
recognizing purchases of equity interests by foreign investors. In addition,
incidents have been reported where foreign shareholders' ownership interests
have been diluted by management through the issuance of new securities to
limited groups of existing shareholders.
Liability of Investors in Joint Stock Companies
The new Russian Civil Code generally provides that shareholders in a Russian
joint stock company are not liable for the obligations of the joint stock
company, and only bear the risk of loss of their investment. However, the Civil
Code provides that where one company has the opportunity to determine decisions
taken by another company (a "subsidiary"), whether as a result of its ownership
interest, under the terms of a contract between the companies, or in any other
way, then, if the first company gives obligatory directions to the second
company, it bears joint responsibility for transactions concluded by the latter
in fulfilling such directions. In addition, where a subsidiary becomes insolvent
or bankrupt as a result of the fault of the parent company then the parent
company is liable for the subsidiary's debts in so far as the subsidiary does
not have enough funds to cover the debts.
Difficulties in Protecting and Enforcing Rights
Russian courts lack experience in commercial dispute resolution and many of
the procedural remedies for enforcement and protection of legal rights typically
found in Western jurisdictions are not available in Russia. There remains
uncertainty as to the extent to which local parties and entities, including
Russian state authorities, will recognize the contractual and other rights of
the parties with which they deal. Accordingly, there will be difficulty and
uncertainty in the Fund's ability to protect and enforce its rights against
Russian state and private entities. There is also no assurance that the Russian
courts will recognize or acknowledge that the Fund has acquired title to any
property or securities in which the Fund invests, or that the Fund is the owner
of any property or security held in the name of a nominee which has acquired
such property or security on behalf of the Fund, because there is at present in
Russia no reliable system or legal framework regarding the registration of
titles. There can be no assurance that this difficulty in protecting and
enforcing rights in Russia will not have a material adverse effect on the Fund
and its operations. Difficulties are likely to be encountered enforcing
judgments of foreign courts within Russia or of Russian courts in foreign
jurisdictions due to the limited number of countries which have signed treaties
for mutual recognition of court judgments with Russia.
Rights apparently granted to the Fund by legislation may be subject to
retroactive change or may be undermined by conflicting legislation, the failure
by a legislator to comply with the proper procedure for passing such legislation
or by changes or uncertainties
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in the relative priority of legislation passed by different legislative bodies.
For example, certain regulations of the State Property Management Committee
concerning depositories and shareholder registers, which are generally applied
as a matter of practice in Russia, were not properly registered with the
Ministry of Justice which as a matter of law should render them invalid.
Legislation in Russia is in a state of development and is subject to
frequent amendment.
Environmental Risks
The lack of environmental controls in Russia has led to widespread pollution
of the air, ground and water resources. Also contributing to environmental
pollution are industrial infrastructure problems, particularly oil and gas
pipeline leaks. In addition, there are concerns related to the availability of
equipment and funding for the disposal of nuclear waste. Russian environmental
legislation envisages the possibility of stringent sanctions on companies that
commit serious or persistent breaches, including closure of the enterprise
concerned. The extent of the cost, if any, for the abatement of environmental
hazards by an issuer generally will not be determinable at the time the Fund is
considering an investment.
Corruption and Crime
The Russian economic system suffers from pervasive corruption, a state of
affairs that to a large extent has been carried over from the Communist era.
Many businesses, particularly in the large cities, are subject to the influence
of criminal elements although there is not a single group or confederation of
criminals that can be characterized as "organized" crime, as that term is
understood in Western Europe and North America. In an effort to root out crime,
the President has issued a series of decrees giving the security forces extreme
powers to carry out a crackdown on crime. The President has acknowledged that
many provisions of its anti-crime decrees violate the Russian constitution as
well as the criminal code and these decrees have been viewed by many as a threat
to civil rights. The social and economic difficulties resulting from the problem
of corruption and crime in Russia can adversely affect the value of the Fund's
investments.
Direct Investments
Direct investments in Russian Companies will involve a high degree of
business and financial risk that can result in substantial losses. Because of
the absence of any public trading market for these investments, the Fund may
take longer to liquidate these positions than would be the case for publicly
traded securities and the prices on these sales could be less than those
originally paid by the Fund. Under certain circumstances, this lack of liquidity
may impede the Fund's ability to achieve its investment objective of long-term
capital appreciation. Further, issuers whose securities are not publicly traded
may not be subject to disclosure and other investor protection requirements
applicable to publicly traded securities. Certain of the Fund's direct
investments may include investments in smaller Iess-seasoned companies, which
may involve greater risks. These companies may have limited product lines,
markets or financial resources, or they may be dependent on a limited management
group. The Fund's investments in illiquid securities is limited to 15% of the
Fund's total assets.
Russian Securities Markets
The securities of Russian Companies are mostly traded over-the-counter and,
despite the large number of stock exchanges, there is still no organized public
market for such securities. This may increase the difficulty of valuing the
Fund's investments. No established secondary markets may exist for some of the
securities in which the Fund may invest. Reduced secondary market liquidity may
have an adverse effect on market price and the Fund's ability to dispose of
particular instruments when necessary to meet its liquidity requirements or in
response to specific economic events such as a deterioration in the
creditworthiness of the issuer. Reduced secondary market liquidity for
securities may also make it more difficult for the Fund to obtain accurate
market quotations for purposes of valuing its portfolio and calculating its net
asset value. Market quotations are generally available on many emerging country
securities only from a limited number of dealers and may not necessarily
represent firm bids of those dealers or prices for actual sales.
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Non-Diversification
The Fund is classified as a non-diversified investment company under the
1940 Act, which means that the Fund is not limited by the 1940 Act in the
proportion of its assets that may be invested in the securities of a single
issuer. Thus, the Fund may invest a greater portion of its assets in the
securities of a smaller number of issuers and, as a result, will be subject to
greater risk of loss with respect to its portfolio securities. The Fund,
however, intends to comply with the diversification requirements imposed by the
Internal Revenue Code for qualification as a regulated investment company. This
intention should not be regarded as assurance that the diversification
requirements will, in fact, be met. See "Tax Matters" and "Investment
Restrictions."
Debt Securities-High Yield, High Risk Securities
The Fund may invest in debt securities of Russian Companies which may be
unrated or low-rated. It is likely that many of the debt securities in which the
Fund will invest will be unrated, and whether or not rated, the debt securities
may have speculative characteristics. The market value of debt securities
generally varies in response to changes in interest rates and the financial
conditions of the issuer. During periods of declining interest rates, the value
of debt securities generally increases. Conversely, during periods of rising
interest rates, the value of such securities generally declines. These changes
in market value will be reflected in the Fund's net asset value.
The Fund may invest in debt securities rated below BBB by Standard and Poors
("S&P") and Baa by Moody's Investor Services ("Moody"). Such low-rated debt
securities may involve greater risks of loss of income and principal than
higher-rated securities, are speculative in nature, and are commonly known as
"high yield" securities or "junk bonds." The unrated debt securities in which
the Fund may invest will generally involve risks equivalent to those of
low-rated debt securities. Although high risk, low-rated debt securities and
comparable unrated debt securities may offer higher yields than do higher rated
securities, they generally involve greater volatility of price and risk of
principal and income. Securities having the lowest rating for nonsubordinated
debt instruments assigned by S&P and Moody's (i.e., rated CCC by S&P or C by
Moody's) are considered to have extremely poor prospects of ever attaining any
real investment standing; to be unlikely to have the capacity to pay interest or
repay principal when due in the event of adverse business, financial or economic
conditions; and/or to be in default or not current in the payment of interest or
principal. In addition, the markets in which unrated and low-rated debt
securities are traded are more limited than those in which higher-rated
securities are traded. Adverse publicity and investors' perceptions, whether or
not based on fundamental analysis, may decrease the values and liquidity of
unrated or low-rated debt securities, especially in a thinly traded market.
Analysis of the creditworthiness of issuers of unrated or low-rated debt
securities may be more complex than for issuers of higher-rated securities, and
the ability of the Fund to achieve its investment objective may, to the extent
of investment in unrated or low-rated debt securities, be more dependent upon
such creditworthiness analysis than would be the case if the Fund were investing
in higher-rated securities. A debt security rated "D" by S&P means that the
issuer is in payment default.
Low-rated debt securities and comparable unrated debt securities may be more
susceptible to real or perceived adverse economic and competitive industry
conditions than investment grade securities. The prices of low-rated and unrated
debt securities have been found to be less sensitive to interest rate changes
than higher-rated investments, but more sensitive to adverse economic downturns
or individual corporate developments. A projection of an economic downturn or of
a period of rising interest rates, for example, could cause a decline in
low-rated or unrated debt securities prices because the advent of a recession
could lessen the ability of a highly leveraged company to make principal and
interest payments on its debt securities. If the issuer of low-rated or unrated
debt securities defaults, the Fund may incur additional expenses in seeking
recovery.
Foreign Sub-custodians and Securities Depositories
Rules adopted under the 1940 Act permit the Fund to maintain its foreign
securities and cash in the custody of certain eligible non-U.S. banks and
securities depositories. Pursuant to those rules, the Fund's portfolio of
securities and cash, when invested in foreign countries, will be held by its
sub-custodians who will be approved by the Board of Directors of the Fund as and
when appropriate in accordance with the rules of the Securities and Exchange
Commission. Selection of the sub-custodians will be made by the Board of
Directors following the consideration of a number of factors, including, but not
limited to, the reliability and financial
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stability of the institution, the ability of the institution to capably perform
custodial services for the Fund, the reputation of the institution in its
national market, the political and economic stability of the countries in which
the sub-custodians will be located, and risks of potential nationalization or
expropriation of Fund assets. In addition, the 1940 Act requires that foreign
sub-custodians, unless otherwise exempted, must generally, among other things,
have shareholder equity in excess of $200,000,000, have no lien on the Fund's
assets and maintain adequate and accessible records. Certain banks in foreign
countries may not be eligible sub-custodians for the Fund, in which event the
Fund may be precluded from purchasing securities in which it would otherwise
invest, and other banks that are eligible foreign sub-custodians may be recently
organized or otherwise lack extensive operating experience.
ADDITIONAL INVESTMENT PRACTICES
The Fund is authorized to use the various investment strategies described
below, some or all of which may be classified as derivatives, to hedge various
market risks (such as interest rates, currency exchange rates and broad or
specific market movements) and to enhance total return, which may be deemed a
form of speculation. Subject to the requirements of the 1940 Act, the Fund may
hedge up to 100% of its assets when deemed appropriate by the Sub-Adviser. The
Fund is also authorized to use investment strategies to manage the effective
maturity or duration of debt securities or instruments held by the Fund, or to
enhance the Fund's income or gain. Although these strategies are regularly used
by some investment companies and other institutional investors in various
markets, most of these strategies are currently unavailable in Russia and may
not become available in the future. Techniques and instruments may change over
time, however, as new instruments and strategies are developed or regulatory
changes occur.
Forward Foreign Currency Contracts and Options on Foreign Currencies
The Fund will normally conduct 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 contracts to purchase or sell
foreign currencies. The Fund will generally not enter into forward contracts
with terms of greater than one year. A forward contract is an obligation to
purchase or sell a specific currency for an agreed price at a future date which
is individually negotiated and privately traded by currency traders and their
customers.
The Fund will generally enter into forward contracts only under two
circumstances. First, when the Fund enters into a contract for the purchase or
sale of a security denominated in a foreign currency, it may desire to "lock" in
the U.S. dollar price of the security in relation to another currency by
entering into a forward contract to buy the amount of foreign currency needed to
settle the transaction. Second, when the Investment Manager believes that the
currency of a particular foreign country may suffer or enjoy a substantial
movement against another currency, it may enter into a forward contract to sell
or buy the former foreign currency (or another currency which acts as a proxy
for that currency) approximating the value of some or all of the Fund's
portfolio securities denominated in such foreign currency. This second
investment practice is generally referred to as "cross-hedging." Cross-hedging
involving the use of rubles involves special risks. The ruble has a limited
trading history and is particularly volatile, making any anticipation of its
movement difficult and increasing the risk of loss. See "Risk Factors and
Special Considerations-Foreign Currency and Exchange Rates." The Fund's forward
transactions may call for the delivery of one foreign currency in exchange for
another foreign currency and may at times not involve currencies in which its
portfolio securities are then denominated. The Fund has no specific limitation
on the percentage of assets it may commit to forward contracts, subject to its
stated investment objective and policies, except that the Fund will not enter
into a forward contract if the amount of assets set aside to cover the contract
would impede portfolio management. Although forward contracts will be used
primarily to protect the Fund from adverse currency movements, they also involve
the risk of loss in the event that anticipated currency movements are not
accurately predicted.
The Fund may purchase and write put and call options on foreign currencies
for the purpose of protecting against declines in the U.S. dollar value of
foreign currency-denominated portfolio securities and against increases in the
U.S. dollar cost of such securities to be acquired. As in the case of other
kinds of options, however, the writing of an option on a foreign currency
constitutes only a partial hedge, up to the amount of the premium received, and
the Fund could be required to purchase or sell foreign currencies at
disadvantageous exchange rates, thereby incurring losses. The purchase of an
option on a foreign currency may constitute an effective hedge against
fluctuations in exchange rates although, in the event of rate movements adverse
to the Fund's position, it may
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<PAGE>
forfeit the entire amount of the premium plus related transaction costs. Options
on foreign currencies to be written or purchased by the Fund are traded on U.S.
and foreign exchanges or over-the-counter.
Futures Contracts
For hedging purposes only, the Fund may buy and sell financial futures
contracts, index futures contracts, foreign currency futures contracts and
options on any of the foregoing. A financial futures contract is an agreement
between two parties to buy or sell a specified debt security at a set price on a
future date. An index futures contract is an agreement to take or make delivery
of an amount of cash based on the difference between the value of the index at
the beginning and at the end of the contract period. A futures contract on a
foreign currency is an agreement to buy or sell a specified amount of a currency
for a set price on a future date.
When the Fund enters into a futures contract, it must make an initial
deposit, known as "initial margin," as a partial guarantee of its performance
under the contract. As the value of the security, index or currency fluctuates,
either party to the contract is required to make additional margin payments,
known as "variation margin," to cover any additional obligation it may have
under the contract. In addition, when the Fund enters into a futures contract,
it will segregate assets or "cover" its position in accordance with the 1940
Act.
Options on Securities or Indices
The Fund may write (i.e., sell) covered put and call options and purchase
put and call options on securities or securities indices that are traded on
United States and foreign exchanges or in the over-the-counter markets. An
option on a security is a contract that gives the purchaser of the option, in
return for the premium paid, the right to buy a specified security (in the case
of a call option) or to sell a specified security (in the case of a put option)
from or to the writer of the option at a designated price during the term of the
option. An option on a securities index gives the purchaser of the option, in
return for the premium paid, the right to receive from the seller cash equal to
the difference between the closing price of the index and the exercise price of
the option. The Fund may write a call or put option only if the option is
"covered." This means that as long as the Fund is obligated as the writer of a
call option, it will own the underlying securities subject to the call, or hold
a call at the same exercise price, for the same exercise period, and on the same
securities as the written call. A put is covered if the Fund maintains liquid
assets with a value equal to the exercise price in a segregated account, or
holds a put on the same underlying securities at an equal or greater exercise
price. The value of the underlying securities on which options may be written at
any one time will not exceed 25% of the total assets of the Fund. The Fund will
not purchase put or call options if the aggregate premium paid for such options
would exceed 5% of its total assets at the time of purchase.
When-Issued and Delayed Delivery Securities
The Fund may purchase equity and debt securities on a when-issued or delayed
delivery basis. Securities purchased on a when-issued or delayed delivery basis
are purchased for delivery beyond the normal settlement date at a stated price
and yield. No income accrues to the purchaser of a security on a when-issued or
delayed delivery basis prior to delivery. Such securities are recorded as an
asset, and in the case of debt securities, are subject to changes in value based
upon changes in the general level of interest rates. Purchasing a security on a
when-issued or delayed delivery basis can involve a risk that the market price
at the time of delivery may be lower than the agreed-upon purchase price, in
which case there could be an unrealized loss at the time of delivery. Due to
their higher volatility, this risk may be greater in the case of equity
securities purchased on a when-issued or delayed delivery basis. The Fund will
only make commitments to purchase securities on a when-issued or delayed
delivery basis with the intention of actually acquiring the securities, but may
sell them before the settlement date if it is deemed advisable. The Fund will
establish a segregated account in which it will maintain liquid assets in an
amount at least equal in value to the Fund's commitments to purchase securities
on a when-issued or delayed delivery basis. If the value of these assets
declines, the Fund will place additional liquid assets in the account on a daily
basis so that the value of the assets in the account is equal to the amount of
such commitments.
INVESTMENT RESTRICTIONS
The Fund's investment program is subject to a number of investment
restrictions which reflect self imposed standards as well as federal and state
regulatory limitations. These restrictions are designed to minimize certain
risks associated with investing in certain types of securities or engaging in
certain transactions. The most significant of these restrictions provide that:
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(1) The Fund will not concentrate its investments by investing more than 25%
of its assets in the securities of issuers in any one industry. This
limit will not apply to oil and gas related securities and to securities
issued or guaranteed by the U.S. Government, its agencies and
instrumentalities.
(2) 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, and may enter into forward currency contracts.
(3) The Fund will not make loans, except that, to the extent appropriate
under its investment program, the Fund may (a) purchase bonds,
debentures or other debt securities, including short-term obligations,
(b) enter into repurchase transactions and (c) lend portfolio securities
provided that the value of such loaned securities does not exceed
one-third of the Fund's total assets.
(4) 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 in reverse repurchase agreements up to 5% of its
total assets.
The foregoing investment restrictions (as well as certain others set forth
in the Statement of Additional Information) are matters of fundamental policy
which may not be changed without the affirmative vote of the majority of the
shareholders of the Fund.
The investment policies described below are non-fundamental; therefore,
changes to such policies may be made in the future by the Board of Directors
without the approval of the shareholders of the Fund:
(1) The Fund 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 Sub-Adviser
shall determine whether a particular security is deemed to be liquid
based on the trading markets for the specific security and other
factors.
(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.
The Statement of Additional Information contains a complete description of
the Fund's restrictions and any additional information on policies relating to
the investment of its assets and its activities.
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MANAGEMENT OF THE FUND
The Fund has a Board of Directors which establishes the Fund's policies and
supervises and reviews the operations and management of the Fund. There are
currently nine directors (of whom five are non-interested persons as defined
under the 1940 Act) who meet four times each year. The Statement of Additional
Information contains more data regarding the Directors and Officers of the Fund.
INVESTMENT ADVISER, SUB-ADVISER, DISTRIBUTOR AND ADMINISTRATOR
The Fund has entered into an investment advisory contract with Lexington
Management Corporation ("LMC"), P. O. Box 1515 Park 80 West Plaza Two, Saddle
Brook, New Jersey 07663. LMC provides investment advice and in general conducts
the management and investment program of the Fund under the supervision and
control of the Directors of the Fund. LMC has entered into a sub-advisery
contract with Troika Dialog Asset Management, ("TDAM") 6/3 1st Kolobovsky Per,
Moscow, 103051 Russia under which TDAM will provide the Fund with investment
advice and management of the Fund's investment program.
TDAM is a wholly owned subsidiary of Troika Dialog which was founded in
Moscow, Russia in 1991 by Dialog Bank and Troika Capital Corporation. TDAM
provides investment advice and management to a number of mutual funds
distributed in Russia. In 1992, Troika Dialog received its operating license
from the Russian Ministry of Finance and began trading in Russian GKOs (Russian
government bonds) the following year. In 1994, Troika Dialog was a co-founder of
the Russian Professional Association of Securities Market Participants (PAUFOR)
as well as the Depository Clearing Company (DCC). Troika Dialog is an active
trader in Russian government and corporate securities, conducts in-depth
research on Russian securities markets and Russian companies, and acts as an
advisor to a number of multinational and Russian companies in the area of
corporate finance. Troika Dialog is based in Moscow with extensive broker
contacts throughout Russia. Troika Dialog employs approximately 160 employees.
TDAM will provide the Fund with investment advice and management of the Fund's
investment program.
Lexington Funds Distributor, Inc. ("LFD"), a registered broker dealer, is
the Fund's distributor. LMC, established in 1938, currently manages over $3.0
billion in assets. LMC serves as investment adviser to other investment
companies and private and institutional investment accounts. Included among
these clients are persons and organizations which own significant amounts of
capital stock of LMC's parent. The clients pay fees which LMC considers
comparable to the fees paid by similarly served clients.
As compensation for its services, the Fund pays LMC a monthly management fee
at the annual rate of 1.25% of the average daily net assets. This fee is higher
than that paid by most other investment companies. However, it is not
necessarily greater than the management fee of other investment companies with
objectives and policies similar to this Fund. LMC will pay the Sub-adviser an
annual sub-advisory fee of 0.625% of the Fund's average daily net assets. The
sub-advisory fee will be paid by LMC, not the Fund. See "Investment Adviser,
Sub-Adviser, Distributor and Administrator" in the Statement of Additional
Information.
LMC also acts as administrator to the Fund and performs certain
administrative and internal accounting services, including but not limited to,
maintaining general ledger accounts, regulatory compliance, preparation of
financial information for semiannual and annual reports, preparing registration
statements, calculating net asset values, producing shareholder communications
and supervision of the custodian, transfer agent and provides facilities for
such services. The Fund shall reimburse LMC for its actual cost in providing
such services, facilities and expenses.
LMC and LFD are wholly-owned subsidiaries of Lexington Global Asset
Managers, Inc., a Delaware corporation with offices at Park 80 West Plaza Two,
Saddle Brook, New Jersey 07663. Descendants of Lunsford Richardson, Sr., their
spouses, trusts and other related entities have a majority voting control of
outstanding shares of Lexington Global Asset Managers, Inc. See "Investment
Adviser and Distributor" in the Statement of Additional Information.
PORTFOLIO MANAGERS
The Fund is managed by a portfolio management team. The lead co-managers are
Nancy Herring and Gavin Rankin. Nancy Herring is Managing Director and Chief
Investment Officer of TDAM. Gavin Rankin is Director of Research for TDAM and
Troika
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Dialog. They are responsible, along with other members of the portfolio
management team, for the Fund's overall investment strategy. In addition to the
Fund, Nancy Herring manages the Russian domestic mutual funds of Troika Dialog.
She was appointed Managing Director in 1996. Before joining TDAM, Ms. Herring, a
U.S. citizen, was a portfolio manager of a U.S. equity fund for Dean Witter
Intercapital. In all she has over twelve years of security industry experience.
Her Master's Degree in Business Administration was earned in International
Business and Finance at Columbia University Graduate School of Business. Mr.
Rankin was appointed Director of Research for Troika Dialog in November of 1995.
Before joining Troika Dialog, he was the Founder and Chief Executive Officer for
five years of Lonpra A.S., an investment banking firm based in the Czech
Republic. Mr. Rankin received a degree in law (L.L.B.) from the University of
Buckingham in England and also qualified as a Chartered Accountant with Price
Waterhouse. Mr. Rankin has extensive experience in East European equity research
and management.
The other members of the portfolio management team include Peter Derby and
Ruben Vardanian.
Peter Derby is the Chairman of the Board of TDAM, the Chairman and founder
of Troika Dialog and is the President and Chief Executive Officer of Dialog
Bank. He has held this position since 1991. Mr. Derby participated in the
drafting of corporate, banking and securities legislation in Russia and is
currently a member of the Expert Council of Russia's Federal Securities Exchange
Commission. Mr. Derby holds numerous director positions in Russian enterprises
and charities. Mr Derby, a U.S. citizen is a Member of the Board of Directors of
the American Chamber of Commerce in Russia. He is a founding Member of the
Russian-American Professional Club in New York City.
Ruben Vardanian is President of TDAM, and President and Chief Executive
Officer of Troika Dialog. Mr. Vardanian, a Russian citizen, is a member of the
Board of Directors of the Russian capital markets self-regulatory organisations
(NAUFOR and PAUFOR), and the Depository Clearing Company (DCC). Mr. Vardanian
received a Masters Degree with Distinction from the Finance Department of Moscow
State University. He trained with Banka CRT in Italy and Merrill Lynch in New
York.
BOARD OF ADVISERS
The Fund's Board of Directors will receive oversight assistance from a Board
of Advisers which will be composed of experts in Russian political and economic
affairs. The Committee will be responsible for providing to the Board of
Directors periodic updates on political and macroeconomic conditions and trends
in Russia and their potential implication for the overall investment environment
in Russia. This will enhance the Board of Directors' ability to oversee and
safeguard the assets of the Fund's shareholders.
The Board of Advisors is composed of Keith Bush, Richard M. Hisey and Marin
J. Strmecki,.
Keith Bush
Keith Bush is a Senior Associate-Russian and Eurasian Studies at the Center for
Strategic and International Studies in Washington, D.C. Prior to 1994, Mr. Bush
was the Director of Radio Free Europe's Radio Liberty Research area. Mr. Bush
has published more than 1,000 analyses on developments in the former Soviet
Union.
Richard M. Hisey, CFA
Richard Hisey is Executive Vice President and Chief Financial Officer of
Lexington Global Asset Managers, Inc. He also serves as Treasurer for the
Lexington Group of Mutual Funds and is a Director of the Fund. Mr. Hisey
attended Leningrad State University and is fluent in Russian. Mr. Hisey is
responsible for integrating information produced by the Board of Advisors with
that produced by TDAM in formulating the Fund's overall investment strategy and
in producing regular updates to the Board of Directors.
Marin J. Strmecki, Ph.D.
Marin J. Strmecki is the Director of Programs for the Smith Richardson
Foundation. Prior to 1994, Dr. Strmecki served as a Legislative Assistant to
U.S. Senator Orrin Hatch. Prior to 1993, Dr. Strmecki served as a Special
Assistant for Public Policy on the Policy Planning Staff of the U.S. Office of
the Secretary, Department of Defense. Prior to 1992, Dr. Strmecki served as a
Professional
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Staff Member of the Foreign Relations Committee of the U.S. Senate. Dr. Strmecki
also served as a Foreign Policy Consultant to former U.S. President Richard M.
Nixon from 1990 to 1994.
HOW TO PURCHASE SHARES
Initial Investment-Minimum $5,000. By Mail: Send a check payable to Lexington
Troika Dialog Russia Fund, Inc., along with a completed New Account Application
to State Street Bank and Trust Company (the "Agent"). See the back cover of this
Prospectus for the Agent's address.
Subsequent Investments-Minimum $50. By Mail: Send a check payable to Lexington
Troika Dialog Russia Fund, Inc., to the Agent, accompanied by either the
detachable form which is part of the confirmation of a prior transaction or a
letter indicating the dollar amount of the investment and identifying the Fund,
account number and registration.
Broker-Dealers: You may invest in shares of the Fund through broker-dealers who
are members of the National Association of Securities Dealers, Inc., and other
financial institutions who have selling agreements with LFD. Broker-dealers and
financial institutions who process such purchase and sale transactions for their
customers may charge a transaction fee for these services. The fee may be
avoided by purchasing shares directly from the Fund.
The Open Account: By investing in the Fund, a shareholder appoints the Agent,as
his agent, to establish an open account to which all shares purchased will be
credited, together with any dividends and capital gain distributions which are
paid in additional shares (see "Dividend, Distribution and Reinvestment
Policy"). Stock certificates will be issued for full shares only when requested
in writing. Unless payment for shares is made by certified or cashier's check or
federal funds wire, certificates will not be issued for 30 days. In order to
facilitate redemptions and transfers, most shareholders elect not to receive
certificates.
After an Open Account is established, payments can be provided for by
"Lex-O-Matic" or other authorized automatic bank check program accounts (checks
drawn on the investor's bank periodically for investment in the Fund) . A
shareholder may arrange to make additional purchases of shares automatically on
a monthly or quarterly basis with the Automatic Investing Plan, "Lex-O-Matic".
The investments of $50 or more are automatically deducted from a checking
account on or about the 15th day of each month. The institution must be an
Automated Clearing House (ACH) member. Should an order to purchase shares of a
fund be cancelled because your automated transfer does not clear, you will be
responsible for any resulting loss incurred by the Fund. The shareholder
reserves the right to discontinue the Lex-O-Matic program provided written
notice is given ten days prior to the scheduled investment date. Further
information regarding this service can be obtained from Lexington by calling
1-800-526-0056.
On payroll deduction accounts administered by an employer and on payments
into qualified pension or profit sharing plans and other continuing purchase
programs, there are no minimum purchase requirements.
Purchase Price: The purchase price will be the net asset value per share of the
Fund next determined after receipt by the Agent of a completed New Account
Application in proper form.
Determination of Net Asset Value: The net asset value of Fund shares is
determined at the official closing time of the New York Stock Exchange each day
that such Exchange is open for trading. In determining net asset value,
portfolio securities listed on a national securities exchange are valued at
their sales price on such exchange as of such time; if no sales price is
reported, the mean of the last bid and asked price is used. However, when LMC
deems it appropriate, prices obtained for the day of valuation from a third
party pricing service will be used. For over-the-counter securities the mean of
the latest bid and asked prices is used. Securities for which there are no
current prices, and any other assets of the Fund for which there is no readily
available market value, shall be valued by Fund management in good faith under
the direction of the Fund's Board of Directors. Good faith valuation will
involve the use of a management valuation committee which includes members of
accounting, compliance, and portfolio management. Specific criteria will be used
in making good faith determination of fair value. The calculation of net asset
value may not take place contemporaneously with the determination of the prices
of portfolio securities used in such calculations. Events affecting the values
of portfolio securities that occur between the time their prices are determined
and the close of the New York Stock Exchange will not be reflected in the Fund's
calculation of net asset value unless the Fund's Board of Directors deems that
the particular event would materially affect the net asset value, in which case
an adjustment will be made. Repurchase agreements and certificates of deposit
are stated at amortized
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<PAGE>
cost. In order to determine net asset value per share, the aggregate value of
portfolio securities is added to the value of the Fund's other assets, such as
cash and receivables; the total of the assets thus obtained, less liabilities,
is then divided by the number of shares outstanding. Terms of Offering: If an
order to purchase shares is cancelled because the investor's check does not
clear, the purchaser will be responsible for any loss incurred by the Fund. To
recover any such loss the Fund reserves the right to redeem shares owned by the
purchaser, seek reimbursement directly from the purchaser and may prohibit or
restrict the purchaser in placing future orders in any of the Lexington Funds.
The Fund reserves the right to reject any order, and to waive or lower the
investment minimums with respect to any person or class of persons, including
shareholders of the Fund's special investment programs. An order to purchase
shares is not binding on the Fund until it has been confirmed by the Agent.
Account Statements: The Agent will send shareholders either purchasing or
redeeming shares of the Fund, a confirmation of the transaction indicating the
date the purchase or redemption was accepted, the number of shares purchased or
redeemed, the purchase or redemption price per share, and the amount purchased
or redemption proceeds. A statement is also sent to shareholders whenever a
distribution is paid, or when a change in the registration, address, or dividend
option occurs. Shareholders are urged to retain their account statements for tax
purposes.
HOW TO REDEEM SHARES
By Mail: Send to the Agent (see the back cover of this Prospectus for the
address): (1) a written request for redemption, signed by each registered owner
exactly as the shares are registered including the name of the Fund, account
number and exact registration; (2) stock certificates for any shares to be
redeemed which are held by the shareholder; (3) signature guarantees, when
required and (4) the additional documents required for redemptions by
corporations, executors, administrators, trustees, and guardians. Redemptions by
mail will not become effective until all documents in proper form have been
received by the Agent. If a shareholder has any questions regarding the
requirements for redeeming shares, he should call the Fund at the toll free
number on the back cover prior to submitting a redemption request. If a
redemption request is sent to the Fund in New Jersey, it will be forwarded to
the Agent and the effective date of redemption will be the date received by the
Agent.
Redemption Fee: A fee will be charged on the redemption of shares equal to 2% of
the redemption price of shares of the Fund held less than 365 days that are
being redeemed. The redemption fee will not apply to shares representing the
reinvestment of dividends and capital gains distributions. Reinvested
distributions will be sold first without a fee. The redemption fee will be
applied on a share by share basis using the "first shares in, first shares out"
(FIFO) method. Therefore, the oldest shares are considered to have been sold
first. Redemption fee proceeds will be applied to the Fund's aggregate expenses
allocable to providing custody, redemption services, including transfer agent
fees, postage, printing, telephone costs and employment costs relating to the
handling and processing of redemptions. Any excess fee proceeds will be added to
the Fund's capital.
Checks for redemption proceeds will normally be mailed within three business
days. However, the Fund will only mail redemption checks upon clearance of the
purchase payment.
Signature Guarantee: Signature guarantees are required in connection with (a)
redemptions by mail involving $25,000 or more, (b) all redemptions by mail,
regardless of the amount involved, when the proceeds are to be paid to someone
other than the registered owners; (c) changes in instructions as to where the
proceeds of redemptions are to be sent, and (d) share transfer requests.
The Agent requires that the guarantor be either a commercial bank which is a
member of the Federal Deposit Insurance Corporation, a trust company, a savings
and loan association, a savings bank, a credit union, a member firm of a
domestic stock exchange, or a foreign branch of any of the foregoing. A notary
public is not an acceptable guarantor.
With respect to redemption requests submitted by mail, the signature
guarantees must appear either: (a) on the written request for redemption, (b) on
a separate instrument of assignment ("stock power") specifying the total number
of shares to be redeemed, or (c) on all stock certificates tendered for
redemption and, if shares held by the Agent are also being redeemed, on the
letter or stock power.
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<PAGE>
Redemption Price: The redemption price will be the net asset value per share of
the Fund next determined after receipt by the Agent of a redemption request in
proper form (see "Determination of Net Asset Value" in the Statement of
Additional Information).
The right of redemption may be suspended (a) for any period during which the
New York Stock Exchange is closed or the Securities and Exchange Commission
("SEC") determines that trading on the Exchange is restricted, (b) when there is
an emergency as determined by the SEC as a result of which it is not reasonably
practicable for the Fund to dispose of securities owned by it or to determine
fairly the value of its net assets, or (c) for such other periods as the SEC may
by order permit for the protection of shareholders of the Fund. Due to the
proportionately high cost of maintaining smaller accounts, the Fund reserves the
right to redeem all shares in an account with a value of less than $500 (except
retirement plan accounts) and mail the proceeds to the shareholder. Such right
reserved by the Fund pertains to circumstances in which the value of shares
falls below the stated threshold due to redemptions, and not due to market
fluctuations. Shareholders will be notified before these redemptions are to be
made and will have 30 days to make an additional investment to bring their
accounts up to the required minimum.
SHAREHOLDER SERVICES
Transfer: Shares of the Fund may be transferred to another owner. A signature
guarantee of the registered owner is required on the letter of instruction or
accompanying stock power.
Systematic Withdrawal Plan: Shareholders may elect to withdraw cash in fixed
amounts from their accounts at regular intervals. The minimum investment to
establish a Systematic Withdrawal Plan is $10,000. If the proceeds are to be
mailed to someone other than the registered owner, a signature guarantee is
required.
Group Sub-Accounting: To minimize recordkeeping by fiduciaries, corporations,
and certain other investors, the minimum initial investment may be waived.
EXCHANGE PRIVILEGE
Shares of the Fund may be exchanged for shares of the following Lexington
Funds on the basis of relative net asset value per share next determined at the
time of the exchange. In the event shares of one or more of these funds being
exchanged by a single investor have a value in excess of $500,000, the shares of
the Fund will not be purchased until the third business day following the
redemption of the shares being exchanged in order to enable the redeeming fund
to utilize normal securities settlement procedures in transferring the proceeds
of the redemption to the Fund. Exchanges may not be made until all checks in
payment for the shares to be exchanged have been cleared.
The Lexington Funds currently available for exchange are:
LEXINGTON TROIKA DIALOG RUSSIA FUND, INC. (NASDAQ Symbol: LETRX)
LEXINGTON GLOBAL FUND, INC. (NASDAQ Symbol: LXGLX)
LEXINGTON WORLDWIDE EMERGING MARKETS FUND, INC. (NASDAQ Symbol: LEXGX)
LEXINGTON INTERNATIONAL FUND, INC. (NASDAQ Symbol: LEXIX)
LEXINGTON CROSBY SMALL CAP ASIA GROWTH FUND, INC. (NASDAQ Symbol: LXCAX)
LEXINGTON RAMIREZ GLOBAL INCOME FUND (NASDAQ Symbol: LEBDX)
LEXINGTON CORPORATE LEADERS TRUST FUND (NASDAQ Symbol: LEXCX)
LEXINGTON GROWTH AND INCOME FUND, INC. (NASDAQ Symbol: LEXRX)
LEXINGTON SMALLCAP VALUE FUND, INC. (NASDAQ Symbol: LESVX)
LEXINGTON GOLDFUND, INC. (NASDAQ Symbol: LEXMX)
LEXINGTON CONVERTIBLE SECURITIES FUND (NASDAQ Symbol: CNCVX)
LEXINGTON GNMA INCOME FUND, INC. (NASDAQ Symbol: LEXNX)
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<PAGE>
LEXINGTON MONEY MARKET TRUST (NASDAQ Symbol: LMMXX)
LEXINGTON TAX FREE MONEY FUND, INC. (NASDAQ Symbol: LTFXX)
Shareholders in any of these funds may exchange all or part of their shares
for shares of one or more of the other funds, subject to the conditions
described herein. The Exchange Privilege enables a shareholder in any of these
funds to acquire shares in a fund with a different investment objective when the
shareholder believes that a shift between funds is an appropriate investment
decision. Shareholders contemplating an exchange should obtain and review the
prospectus of the fund to be acquired.
If an exchange involves investing in a Lexington Fund not already owned and
a new account has to be established, the dollar amount exchanged must meet the
initial investment of the Fund being purchased. If, however, an account already
exists in the Fund being bought, there is a $500 minimum exchange required.
Shareholders must provide the account number of the existing account.
Any exchange between mutual funds is, in effect, a redemption of shares in
one Fund and a purchase in the other Fund. Shareholders should consider the
possible tax effects of an exchange.
TELEPHONE EXCHANGE PROVISIONS-Exchange instructions may be given in writing or
by telephone. Telephone exchanges may only be made if a Telephone Authorization
form has been previously executed and filed with LFD. Telephone exchanges are
permitted only after a minimum of 7 days have elapsed from the date of a
previous exchange. Exchanges may not be made until all checks in payment for the
shares to be exchanged have been cleared.
Telephonic exchanges can only involve shares held on deposit at the Agent;
shares held in certificate form by the shareholder cannot be included. However,
outstanding certificates can be returned to the Agent and qualify for these
services. Any new account established with the same registration will also have
the privilege of exchange by telephone in the Lexington Funds.
All accounts involved in a telephonic exchange must have the same
registration and dividend option as the account from which the shares were
transferred and will also have the privilege of exchange by telephone in the
Lexington Funds in which these services are available.
By checking the box on the New Account Application authorizing telephone
exchange services, a shareholder constitutes and appoints LFD, distributor of
the Lexington Group of Mutual Funds as the true and lawful attorney to surrender
for redemption or exchange any and all non-certificated shares held by the Agent
in account(s) designated, or in any other account with the Lexington Funds,
present or future, which has the identical registration with full power of
substitution in the premises, authorizes and directs LFD to act upon any
instruction from any person by telephone for exchange of shares held in any of
these accounts, to purchase shares of any other Lexington Fund that is
available, provided the registration and mailing address of the shares to be
purchased are identical to the registration of the shares being redeemed, and
agrees that neither LFD, the Agent, nor the Fund(s) will be liable for any loss,
expense or cost arising out of any requests effected in accordance with this
authorization which would include requests effected by imposters or persons
otherwise unauthorized to act on behalf of the account. LFD, the Agent and the
Fund, will employ reasonable procedures to confirm that instructions
communicated by telephone are genuine and if they do not employ reasonable
procedures they may be liable for any losses due to unauthorized or fraudulent
instructions. The following identification procedures may include, but are not
limited to, the following: account number, registration and address, taxpayer
identification number and other information particular to the account. In
addition, all exchange transactions will take place on recorded telephone lines
and each transaction will be confirmed in writing by the Fund. LFD reserves the
right to cease to act as attorney subject to the above appointment upon thirty
(30) days' written notice to the address of record. If other than an individual,
it is certified that certain persons have been duly elected and are now legally
holding the titles given and that the said corporation, trust, unincorporated
association, etc. is duly organized and existing and has power to take action
called for by this continuing Authorization.
Exchange Authorization forms, Telephone Authorization forms and prospectuses
of the other funds may be obtained from LFD.
This exchange offer is available only in states where shares of the fund
being acquired may legally be sold and may be modified or terminated at any time
by the Fund. Broker-dealers who process exchange orders on behalf of their
customers may charge a fee for their services. Such fee may be avoided by making
requests for exchange directly to the Fund or Agent. For further information
concerning Telephone Exchange Provisions, please see the Statement of Additional
Information.
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<PAGE>
TAX-SHELTERED RETIREMENT PLANS
The Fund offers a Prototype Pension and Profit Sharing Plan, including a
Keogh Plan, lRA's, SEP-IRA's and IRA Rollover Accounts, 401(k) Plans, Section
457 Deferred Compensation Plans and 403(b)(7) Plans. Plan support services are
available through the Shareholder Services Department of LMC at 1-800-526-0056.
(See "Tax-Sheltered Retirement Plans" in the Statement of Additional
Information.)
DIVIDEND, DISTRIBUTION AND REINVESTMENT POLICY
The Fund intends to declare or distribute a dividend from its net investment
income and/or net capital gain income to shareholders annually or more
frequently if necessary in order to comply with distribution requirements of the
Code to avoid the imposition of regular Federal income tax, and if applicable, a
4% excise tax.
Any dividends and distribution payments will be reinvested at net asset
value in additional full and fractional shares of the Fund unless and until the
shareholder notifies the Agent in writing that he wants to receive his payments
in cash. This request must be received by the Agent at least seven days before
the dividend record date. Upon receipt by the Agent of such written notice, all
further payments will be made in cash until written notice to the contrary is
received. An account of such shares owned by each shareholder will be maintained
by the Agent. Shareholders whose accounts are maintained by the Agent will have
the same rights as other shareholders with respect to shares so registered (see
"How to Purchase Shares-The Open Account").
DISTRIBUTION PLAN
The Board of Directors of the Fund has adopted a Distribution Plan (the
"Plan") in accordance with Rule 12b-1 under the Investment Company Act of 1940,
after having concluded that there is a reasonable likelihood that the Plan will
benefit the Fund and its shareholders. The Plan provides that the Fund may pay
distribution fees, including payments to the Distributor, at an annual rate not
to exceed 0.25% of its average daily net assets for distribution services.
Distribution payments will be made as follows: The Fund either directly or
through the Adviser, may make payments periodically (i) to the Distributor or to
any broker-dealer (a "Broker") who is registered under the Securities Exchange
Act of 1934 and a member in good standing of the National Association of
Securities Dealers, Inc. and who has entered into a Selected Dealer Agreement
with the Distributor, (ii) to other persons or organizations ("Servicing
Agents") who have entered into shareholder processing and service agreements
with the Adviser or with the Distributor, with respect to Fund shares owned by
shareholders for which such Broker is the dealer or holder of record or such
servicing agent has a servicing relationship, or (iii) for expenses associated
with distribution of Fund shares, including the compensation of the sales
personnel of the Distributor, payments of no more than an effective annual rate
of 0.25%, or such lesser amounts as the Distributor determines appropriate.
Payments may also be made for any advertising and promotional expenses relating
to selling efforts, including but not limited to the incremental costs of
printing prospectuses, statements of additional information, annual reports and
other periodic reports for distribution to persons who are not shareholders of
the Fund; the costs of preparing and distributing any other supplemental sales
literature; costs of radio, television, newspaper and other advertising;
telecommunications expenses, including the cost of telephones, telephone lines
and other communications equipment, incurred by or for the Distributor in
carrying out its obligations under the Distribution Agreement. LMC, at no
additional cost to the Fund, may pay to Shareholder Service Agents, additional
amounts from past profits for administrative services.
TAX MATTERS
The Fund intends to qualify as a regulated investment company by satisfying
the requirements under Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code"). The Fund contemplates the distribution of all of its net
investment income and capital gains, if any, in accordance with the timing
requirements imposed by the Code, so that it will not be subject to federal
income taxes or the 4% excise tax on undistributed income.
Distributions by the Fund of its net investment income and the excess, if
any, of its net short-term capital gain over its net long-term capital loss are
taxable to shareholders as ordinary income. These distributions are treated as
dividends for federal income tax purposes, but only a portion thereof may
qualify for the 70% dividends-received deduction for corporate shareholders
(which
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portion may not exceed the aggregate amount of qualifying dividends from
domestic corporations received by the Fund and must be designated by the Fund as
so qualifying). Distributions by the Fund of the excess, if any, of its net
long-term capital gain over its net short-term capital loss are designated as
capital gain dividends and are taxable to shareholders as long-term capital
gain, regardless of the length of time shareholders have held their shares. Such
distributions are not eligible for the dividends-received deduction. If a
shareholder disposes of shares in the Fund at a loss before holding such shares
for more than six months, the loss will be treated as a long-term capital loss
to the extent that the shareholder has received a capital gain dividend on those
shares.
Under certain circumstances, the Fund may be in a position to (in which case
it would) elect to "pass-through" to its shareholders the right to a credit or
deduction for income or other creditable taxes paid by the Fund to foreign
governments.
Distributions to shareholders of the Fund will be treated in the same manner
for federal income tax purposes whether received in cash or in additional shares
and may also be subject to state and local taxes. Distributions received by
shareholders of the Fund in January of a given year will be treated as received
on December 31 of the preceding year provided that such dividends were declared
to shareholders of record on a date in October, November, or December of such
preceding year. A statement setting forth the federal income tax status of all
distributions made or deemed made during the year will be sent to shareholders
promptly after the end of each year.
The information above is only a summary of some of the federal income tax
consequences generally affecting the Fund and its U.S. shareholders, and no
attempt has been made to discuss individual tax consequences. A prospective
investor should also review the more detailed discussion of federal income tax
considerations in the Statement of Additional Information. In addition to the
federal income tax, a shareholder may be subject to state or local taxes on his
or her investment in the Fund, depending on the laws in the shareholder's
jurisdiction. Investors considering an investment in the Fund should consult
their tax advisers to determine whether the Fund is suitable to their particular
tax situation.
Under the backup withholding rules of the Code, certain shareholders may be
subject to 31% withholding of federal income tax on distributions and redemption
payments made by the Fund. In order to avoid this backup withholding, a
shareholder must provide the Fund with a correct taxpayer identification number
(which for most individuals is their Social Security number) or certify that it
is a corporation or otherwise exempt from or not subject to backup withholding.
The new account application included with this Prospectus provides for
shareholder compliance with these certification requirements.
ORGANIZATION AND DESCRIPTION OF COMMON STOCK
Lexington Troika Dialog Russia Fund, Inc. ("the Company") is an open-end,
management investment company organized as a corporation under the laws of the
State of Maryland on November 22, 1995 and has authorized capital of
1,000,000,000 shares of common stock, par value $.001 of which 500,000,000 have
been designated the Lexington Troika Dialog Russia Fund. Each share of common
stock has one vote and shares equally with other shares of the same series in
dividends and distributions when and if declared by the Fund and in the Fund's
net assets belonging to such series upon liquidation. All shares, when issued,
are fully paid and nonassessable. 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.
The Company 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 25% of the outstanding shares, such request specifying the purposes
for which such meeting is to be called. In addition, the Directors will promptly
call a meeting of shareholders for the purpose of voting upon the question of
removal of any Director when requested to do so in writing by the record holders
of not less than 10% of the Fund's outstanding shares. The Fund will assist
shareholders in any such communication between shareholders and Directors.
PERFORMANCE CALCULATION
The Fund will calculate performance on a total return basis for various
periods. The total return basis combines principal and dividend income changes
for the periods shown. Principal changes are based on the difference between the
beginning and closing
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net asset values for the period and assume reinvestment of dividends paid by the
Fund. Dividends are comprised of net realized capital gains and net investment
income.
Performance will vary from time to time and past results are not necessarily
representative of future results. It should be remembered that performance is a
function of portfolio management in selecting the type and quality of portfolio
securities and is affected by operating expenses.
Comparative performance information may be used from time to time in
advertising or marketing of the Fund's shares, including data from Lipper
Analytical Services, Inc. or major market indices such as the Dow Jones
Industrial Average Index, Moscow Times Index, Russian Trading System Index,
Morgan Stanley Capital International (EAFE) Index or Standard & Poor's 500
Composite Stock Price Index. Such comparative performance information will be
stated in the same terms in which the comparative data and indices are stated.
CUSTODIAN, TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
Chase Manhattan Bank, N A., 1211 Avenue of the Americas, New York, New York
10036 has been retained to act as the custodian for the Funds' portfolio
securities and other assets. State Street Bank and Trust Company, 225 Franklin
Street, Boston, Massachusetts 02110, is the transfer agent and dividend
disbursing agent for the Fund. Neither Chase Manhattan Bank, N.A. nor State
Street Bank and Trust Company have any part in determining the investment
policies of the Fund or in determining which portfolio securities are to be
purchased or sold by the Fund or in the declaration of dividends and
distributions.
COUNSEL AND INDEPENDENT AUDITORS
Kramer, Levin, Naftalis & Frankel, 919 Third Avenue, New York, New York
10022 will pass upon legal matters for the Fund in connection with the shares
offered by this Prospectus.
KPMG Peat Marwick LLP, 345 Park Avenue, New York, New York 10154, has been
selected as independent auditors for the Fund for the fiscal year ending
December 31, 1997.
OTHER INFORMATION
This prospectus omits certain information contained in the registration
statement filed with the SEC. Copies of the registration statement, including
items omitted herein, may be obtained from the SEC by paying the charges
prescribed under its rules and regulations. The Statement of Additional
Information included in such registration statement may be obtained without
charge from the Fund.
The Code of Ethics adopted by each of the Adviser, Sub-Adviser and the Fund
prohibits all affiliated personnel from engaging in personal investment
activities which compete with or attempt to take advantage of the Fund's planned
portfolio transactions. The objective of each Code of Ethics is that the
operations of the Adviser, Sub-Adviser and Fund be carried out for the exclusive
benefit of the Fund's shareholders. All organizations maintain careful
monitoring of compliance with the Code of Ethics.
Additional portfolios may be created from time to time with investment
objectives and policies different from those of the Fund. In addition, the
Directors may, subject to any necessary regulatory approvals, create more than
one class of shares in the Fund, with the classes being subject to different
charges and expenses and having such other different rights as the Directors may
prescribe.
No person has been authorized to give any information or to make any
representation other than those contained in this Prospectus, and information or
representations not herein contained, if given or made, must not be relied upon
as having been authorized by the Fund. This Prospectus does not constitute an
offer or solicitation in any jurisdiction in which such offering may not
lawfully be made.
23
<PAGE>
(left column)
Investment Adviser
- -----------------------------------------------------------
LEXINGTON MANAGEMENT CORPORATION
P.O. Box 1515/Park 80 West Plaza Two
Saddle Brook, N.J. 07663
Sub-Adviser
- -----------------------------------------------------------
TROIKA DIALOG ASSET MANAGEMENT
6/3 1st Kolobovsky Per
Moscow, 103051 Russia
Distributor
- -----------------------------------------------------------
LEXINGTON FUNDS DISTRIBUTOR, INC.
P.O. Box 1515/Park 80 West Plaza Two
Saddle Brook, N.J. 07663
All shareholder requests for services of any kind should be
sent to:
Transfer Agent
- -----------------------------------------------------------
STATE STREET BANK AND TRUST COMPANY
c/o National Financial Data Services
Lexington Funds
1004 Baltimore
Kansas City, Missouri 64105
or call toll free:
Service: 1-800-526-0056 (or 201-845-7300)
24 Hour Account Information:1-800-526-0052
Institutional/Financial Adviser Services: 1-800-367-9160
Table of Contents Page
- -----------------------------------------------------------
Fee Table ........................................... 2
Description of the Fund ............................. 2
Investment Objective and Policies ................... 2
Risk Factors and Special Considerations ............. 4
Additional Investment Practices ..................... 12
Investment Restrictions ............................. 13
Management of the Fund .............................. 15
Investment Adviser, Sub-Adviser,
Distributor and Administrator ..................... 15
Portfolio Managers .................................. 15
Board of Advisers ................................... 16
How to Purchase Shares .............................. 16
How to Redeem Shares ................................ 18
Shareholder Services ................................ 19
Exchange Privilege .................................. 19
Tax-Sheltered Retirement Plans ...................... 21
Dividend, Distribution and Reinvestment Policy ...... 21
Distribution Plan ................................... 21
Tax Matters ......................................... 21
Organization and Description of Common Stock ........ 22
Performance Calculation ............................. 22
Custodian, Transfer Agent and
Dividend Disbursing Agent ......................... 23
Counsel and Independent Auditors .................... 23
Other Information ................................... 23
(right column)
------------------------
L E X I N G T O N
------------------------
------------------------
LEXINGTON
TROIKA DIALOG
RUSSIA
FUND, INC.
The Lexington Group
of No-Load
Investment Companies
------------------------
P R O S P E C T U S
JANUARY 3, 1997
===============
<PAGE>
LEXINGTON TROIKA DIALOG RUSSIA FUND, INC.
STATEMENT OF ADDITIONAL INFORMATION
JANUARY 3, 1997
This Statement of Additional Information, which is not a prospectus, should
be read in conjunction with the current prospectus of Lexington Troika Dialog
Russia Fund (the "Fund"), dated January 3, 1997, and as it may be revised from
time to time. To obtain a copy of the Fund's prospectus at no charge, please
write to the Fund at P.O. Box 1515/Park 80 West - Plaza Two, Saddle Brook, New
Jersey 07663 or call the following toll-free numbers:
Shareholder Services Information:-1-800-526-0056 (or 201-845-7300)
Institutional/Financial Adviser Services:-1-800-367-9160
24 Hour Account Information:-1-800-526-0052
Lexington Management Corporation ("LMC") is the Fund's investment adviser.
Troika Dialog Asset Management ("TDAM") is the Fund's sub-adviser. Lexington
Funds Distributor, Inc. is the Fund's distributor.
TABLE OF CONTENTS
Page
Additional Investment Practices ........................................... 2
Management of the Fund .................................................... 2
Investment Restrictions ................................................... 5
Investment Adviser, Sub-Adviser, Distributor and Administrator ............ 6
Portfolio Transactions and Brokerage Commissions .......................... 7
Redemption of Shares ...................................................... 8
Determination of Net Asset Value .......................................... 8
Telephone Exchange Provisions ............................................. 8
Tax-Sheltered Retirement Plans ............................................ 9
Tax Matters ............................................................... 9
Performance Calculation ................................................... 14
Shareholder Reports ....................................................... 15
Financial Statements ...................................................... 16
1
<PAGE>
ADDITIONAL INVESTMENT PRACTICES
The Fund is authorized to use various investment strategies, some or all of
which may be classified as derivatives, to hedge various market risks (such as
interest rates, currency exchange rates and broad or specific market movements)
and to enhance total return, which may be deemed a form of speculation. Subject
to the requirements of the 1940 Act, the Fund may hedge up to 100% of its assets
when deemed appropriate by the Sub-Adviser. The Fund is also authorized to use
investment strategies to manage the effective maturity or duration of debt
securities or instruments held by the Fund, or to enhance the Fund's income or
gain. Although these strategies are regularly used by some investment companies
and other institutional investors in various markets, most of these strategies
are currently unavailable in Russia and may not become available in the future.
Techniques and instruments may change over time, however, as new instruments and
strategies are developed or regulatory changes occur. For a full description of
the Fund's investment practices, see the prospectus under "Additional Investment
Practices."
MANAGEMENT OF THE FUND
The Directors and executive officers of the Fund and their principal
occupations are set forth below:
+S.M.S. CHADHA (59), Director. 3/16 Shanti Niketan, New Delhi 21, India.
Secretary, Ministry of External Affairs, New Delhi, India; Head of Foreign
Service Institute, New Delhi, India; Special Envoy of the Government of
India; Director, Special Unit for Technical Cooperation among Developing
Countries, United Nations Development Program, New York.
*+ROBERT M. DEMICHELE (52), President and Director. P.O. Box 1515, Saddle Brook,
N.J. 07663. Chairman and Chief Executive Officer, Lexington Management
Corporation; Chairman and Chief Executive Officer, Lexington Funds
Distributor, Inc.; President and Director, Lexington Global Asset Managers,
Inc.; Director, Unione Italiana Reinsurance; Vice Chairman of the Board of
Trustees, Union College; Director, The Navigator's Group, Inc.; Director,
Vanguard Cellular Systems Inc.; Chairman of the Board, Market Systems
Research, Inc. and Market Systems Research Advisors, Inc. (registered
investment advisers): Trustee, Smith Richardson Foundation.
+BEVERLEY C. DUER (67), Director, 340 East 72nd Street, News York, N.Y. 10021.
Private Investor. Formerly, Manager of Operations Research Department-CPC
International, Inc.
*+BARBARA R. EVANS (36), Director, 5 Fernwood Road, Summit, N.J. 07901. Private
Investor. Prior to May, 1989, Assistant Vice President and Securities
Analyst, Lexington Management Corporation.
*+RICHARD M. HISEY (38), Vice President, Treasurer and Director. P. O. Box 1515,
Saddle Brook, N.J. 07663. Managing Director, Director and Chief Financial
Officer, Lexington Management Corporation; Chief Financial Officer, Vice
President and Director, Lexington Funds Distributor, Inc.; Director,
Lexington Capital Management, Inc.; Director, LCM Financial Services, Inc.;
Chief Financial Officer, Market Systems Research Advisors, Inc.; Executive
Vice President and Chief Financial Officer, Lexington Global Asset Managers,
Inc.
*+LAWRENCE KANTOR (49), Vice President and Director. P.O. Box 1515, Saddle
Brook, N.J 07663. Managing Director, General Manager and Director, Lexington
Management Corporation; Executive Vice President and Director, Lexington
Funds Distributor, Inc.; Executive Vice President and General Manager-Mutual
Funds, Lexington Global Asset Managers, Inc.
+JERARD F. MAHER (50), Director. 300 Raritan Center Parkway, Edison, New Jersey
08818-7815. General Counsel, Federal Business Centers; Counsel, Ribis,
Graham & Curtin; Trustee, Lexington Convertible Services Fund since 1986.
+ANDREW M. McCOSH (56), Director. 12 Wyvern Park, Edinburgh EH 92 JY, Scotland,
U.K. Professor of the Organisation of Industry and Commerce, Department of
Business Studies, The University of Edinburgh, Scotland.
+DONALD B. MILLER (70), Director. 10725 Quail Covey Road, Boynton Beach, FL
33436. Chairman, Horizon Media, Inc.; Trustee, Galaxy Funds; Director,
Maquire Group of Connecticut; prior to January 1989, President, Director and
C.E.O., Media General Broadcast Services (advertising firm).
+JOHN G. PRESTON (64), Director. 3 Woodfield Road, Wellesley, Massachusetts
02181. Associate Professor of Finance, Boston College, Boston,
Massachusetts.
+MARGARET W. RUSSELL (76). Director. 55 North Mountain Avenue, Montclair, N.J.
07042. Private Investor. Formerly, Community Affairs Director, Union Camp
Corporation.
*+LISA CURCIO (37), Vice President and Secretary. P.O. Box 1515, Saddle Brook,
N.J. 07663. Senior Vice President and Secretary, Lexington Management
Corporation; Vice President and Secretary, Lexington Funds Distributor,
Inc.; Secretary, Lexington Global Asset Managers, Inc.
2
<PAGE>
*+RICHARD LAVERY (42), CLU ChFC, Vice President. P.O. Box 1515, Saddle Brook,
N.J. 07663. Senior Vice President, Lexington Management Corporation; Vice
President, Lexington Funds Distributor, Inc.
*+JANICE CARNICELLI (37), Vice President. P.O. Box 1515, Saddle Brook, N.J.
07663.
*PETER DERBY (36), Vice President. 6/3 1st Kolobovsky per, Moscow, 103051,
Russia. Chairman of the Board of Troika Dialog Asset Management. President
and Chief Executive Officer of Troika Dialog. President and Chief Executive
Officer of Dialog Bank since 1991. Director, Moscow International Currency
Exchange (MICEX). Director, American Chamber of Commerce, Moscow. Treasurer
and Director, Junior Achievement, Moscow; Founding member, Russian-American
Professional Club, New York.
*NANCY HERRING (44), Vice President and Portfolio Manager. 6/3 1st Kolobovsky
per, Moscow, 103051, Russia. Managing Director and Chief Investment Officer,
Troika Dialog Asset Management. Prior to September 1996, Portfolio Manager,
Dean Witter Intercapital.
*GAVIN RANKIN (34), Vice President and Portfolio Manager. 6/3 1st Kolobovsky
per, Moscow, 103051, Russia. Director of Research, Troika Dialog Asset
Management and Troika Dialog. Prior to November, 1995, Founder and Chief
Executive Officer, Lonpra A.S. (investment bankers-Czechoslovakia). Received
a degree in law (L.L.B.) from the University of Buckingham. Qualified as a
Chartered Accountant with Price Waterhouse.
*RUBEN VARDANIAN (29), Vice President, 6/3 1st Kolobovsky per, Moscow, 103051,
Russia. President, Troika Dialog Asset Management. Executive Director,
Troika Dialog.
*+CHRISTIE CARR (29), Assistant Treasurer P.O. Box 1515, Saddle Brook, N.J.
07663. Prior to October 1992, Senior Accountant. KPMG Peat Marwick LLP.
*+SIOBHAN GILFILLAN (33), Assistant Treasurer. P.O. Box 1515, Saddle Brook, N.J.
07663.
*+THOMAS LUEHS (34), Assistant Treasurer. P.O. Box 1515, Saddle Brook, N.J.
07663. Prior to November 1993, Supervisor of Investment Accounting, Alliance
Capital Management.
*+SHERI MOSCA (33), Assistant Treasurer. P.O. Box 1515, Saddle Brook, N.J.
07663.
*+PETER CORNIOTES (34), Assistant Secretary. P.O. Box 1515, Saddle Brook, N.J.
07663. Assistant Vice President, Lexington Management Corporation. Assistant
Secretary, Lexington Funds Distributor, Inc.
*+ENRIQUE J. FAUST (36), Assistant Secretary. P.O. Box 1515, Saddle Brook, N.J.
07663. Prior to March 1994, Blue Sky Compliance Coordinator, Lexington
Management Corporation.
*"Interested person" and/or "Affiliated person" of LMC or Troika Dialog as
defined in the Investment Company Act of 1940, as amended.
+Messrs. Chada,Corniotes, DeMichele, Duer, Faust, Hisey, Kantor, Lavery, Luehs,
Miller, Maher, McCosh, Preston and Mmes. Carnicelli, Carr, Curcio, Evans,
Gilfillan, Mosca. and Russell hold similar offices with some or all of the
other investment companies advised and/or distributed by LMC and LFD.
All officers and directors of the Fund are U.S. residents except for the
following three (3) individuals: Peter Derby, Ruben Vardanian and Gavin Rankin.
The primary residence for Mr. Derby, Mr. Vardanian and Mr. Rankin is in Russia.
Mr. Derby is a U.S. citizen. These three Fund officers are also executive
officers of Troika Dialog Asset Management ("TDAM"). TDAM is registered with the
U.S. Securities and Exchange Commission ("SEC") as a non-resident registered
investment adviser. TDAM has filed with the SEC an Irrevocable Appointment of
Agent for Service of Process, which designates and appoints the SEC as its agent
upon whom may be served all process, pleadings, and other papers in any civil
suit or action brought against it. This irrevocable appointment shall continue
in effect notwithstanding the subsequent withdrawal or admission of any
executive officer if such withdrawal or admission does not as a matter of law
create a new closed joint stock company. In the event of dissolution of the
closed joint stock company this irrevocable agreement shall nevertheless
continue in effect for any action against the former executive officers or the
closed joint stock company in dissolution.
Set forth below is information regarding compensation to be paid during the
current fiscal year. Since the Fund has not completed its first full year, this
information is an estimate of future payments that would be made pursuant to
existing compensation arrangements. The Board does not have any audit or
compensation committees.
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 $5,000 a
year. 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. Each Director receives annualized compensation of
$25,600.
3
<PAGE>
Set forth below is information regarding compensation paid or accrued for
the fiscal year ended December 31, 1996 for each director.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Aggregate Pension or Retirement Number of
Compensation Benefits Accrued as Total Compensation From Directorships
Name of Director from Fund Part of Fund Expenses Fund and Fund Complex in Fund Complex
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
S.M.S. Chadha 856 0 $13,696 16
- ---------------------------------------------------------------------------------------------------------------
Robert M. DeMichele 0 0 0 17
- ---------------------------------------------------------------------------------------------------------------
Beverely C. Duer $1080 0 $29,110 17
- ---------------------------------------------------------------------------------------------------------------
Barbara R. Evans 0 0 0 16
- ---------------------------------------------------------------------------------------------------------------
Richard M. Hisey 0 0 0 1
- ---------------------------------------------------------------------------------------------------------------
Lawrence Kantor 0 0 0 16
- ---------------------------------------------------------------------------------------------------------------
Jerard Maher $ 224 0 $ 5,934 17
- ---------------------------------------------------------------------------------------------------------------
Andrew M. McCosh $ 856 0 $13,696 16
- ---------------------------------------------------------------------------------------------------------------
Donald B. Miller $1080 $840 $26,760 16
- ---------------------------------------------------------------------------------------------------------------
Francis Olmsted* $ 840 0 $16,800 16
- ---------------------------------------------------------------------------------------------------------------
John G. Preston $1080 0 $26,760 16
- ---------------------------------------------------------------------------------------------------------------
Margaret Russell $1080 0 $25,048 16
- ---------------------------------------------------------------------------------------------------------------
Philip C. Smith* $1080 0 $26,760 16
- ---------------------------------------------------------------------------------------------------------------
Francis A. Sunderland* $ 672 $560 $18,928 16
- ---------------------------------------------------------------------------------------------------------------
*Retired
</TABLE>
Retirement Plan for Eligible Directors/Trustees
Effective September 12, 1995, the Directors instituted a Retirement Plan for
Eligible Directors/Trustees (the "Plan") pursuant to which each Director/Trustee
(who is not an employee of any of the Funds, the Advisor, Administrator or
Distributor or any of their affiliates) may be entitled to certain benefits upon
retirement from the Board. Pursuant to the Plan, the normal retirement date is
the date on which the eligible Director/Trustee has attained age 65 and has
completed at least ten years of continuous and non-forfeited service with one or
more of the investment companies advised by LMC (or its affiliates)
(collectively, the "Covered Funds"). Each eligible Director/Trustee is entitled
to receive from the Covered Fund an annual benefit commencing on the first day
of the calendar quarter coincident with or next following his date of retirement
equal to 5% of his compensation multiplied by the number of such
Director/Trustee's years of service (not in excess of 15 years) completed with
respect to any of the Covered Portfolios. Such benefit is payable to each
eligible Director in quarterly installments for ten years following the date of
retirement or the life of the Director/Trustee. The Plan establishes age 72 as a
mandatory retirement age for Directors/Trustees; however, Director/Trustees
serving the Funds as of September 12, 1995 are not subject to such mandatory
retirement. Directors/Trustees serving the Funds as of September 12, 1995 who
elect retirement under the Plan prior to September 12, 1996 will receive an
annual retirement benefit at any increased compensation level if compensation is
increased prior to September 12, 1997 and receive spousal benefits (i.e., in the
event the Director/Trustee dies prior to receiving full benefits under the Plan,
the Director/Trustee's spouse (if any) will be entitled to receive the
retirement benefit within the 10 year period.)
Retiring Directors will be eligible to serve as Honorary Directors for one
year after retirement and will be entitled to be reimbursed for travel expenses
to attend a maximum of two meetings.
Set forth in the table below are the estimated annual benefits payable to an
eligible Director upon retirement assuming various compensation and years of
service classifications. As of December 31, 1996, the estimated credited years
of service for Messrs. Chadha, Duer, Maher, McCosh, Miller, Olmsted, Preston,
Russell, Smith and Sunderland are 1,19, 1, 1, 23, 37, 19, 16, 27 and 37,
respectively.
Highest Annual Compensation Paid by All Funds
$20,000 $25,000 $30,000 $35,000
Years of
Service Estimated Annual Benefit Upon Retirement
-------
15 $15,000 $18,750 $22,500 $26,250
14 14,000 17,500 21,000 24,500
13 13,000 16,250 19,500 22,750
12 12,000 15,000 18,000 21,000
11 11,000 13,750 16,500 19,250
10 10,000 12,500 15,000 17,500
4
<PAGE>
INVESTMENT RESTRICTIONS
The Fund's investment objective, as described under "investment policy" and
the following investment restrictions are matters or fundamental policy which
may not be changed without the affirmative vote of the lesser of (a) 67% or more
of the shares of the Fund present at a shareholders' meeting at which more than
50% of the outstanding shares are present or represented by proxy or (b) more
than 50% of the outstanding shares. Under these investment restrictions:
(1) the Fund will not issue any senior security (as defined in the 1940
Act), except that (a) the Fund may enter into commitments to purchase
securities in accordance with the Fund's investment program, including
reverse repurchase agreements, foreign exchange contracts, delayed
delivery and when-issued securities, which may be considered the
issuance of senior securities; (b) the Fund may engage in transactions
that may result in the issuance of a senior security to the extent
permitted under applicable regulations, interpretation of the 1940 Act
or an exemptive order; (c} the Fund may engage in short sales of
securities to the extent permitted in its investment program and other
restrictions; (d) the purchase or sale of futures contracts and related
options shall not be considered to involve the issuance of senior
securities; and (e) subject to fundamental restrictions, the Fund may
borrow money as authorized by the 1940 Act.
(2) at the end of each quarter of the taxable year, (i) with respect to at
least 50% of the market value of the Fund's assets, the Fund may invest
in cash, U.S. Government securities, the securities of other regulated
investment companies and other securities, with such other securities of
any one issuer limited for the purchases of this calculation to an
amount not greater than 5% of the value of the Fund's total assets, and
(ii) not more than 25% of the value of its total assets be invested in
the securities of any one issuer (other than U.S. Government securities
or the securities of other regulated investment companies).
(3) the Fund will not concentrate its investments by investing more than 25%
of its assets in the securities of issuers in any one industry. This
limit will not apply to oil and gas related securities and to securities
issued or guaranteed by the U.S. Government, its agencies and
instrumentalities.
(4) 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, and may enter into forward currency contracts.
(5) the Fund will not purchase real estate, interests in real estate or real
estate limited partnership interest 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.
(6) 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.
(7) 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 then 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 in reverse repurchase agreements up to 5% of the
Fund's total assets.
(8) the Fund will not act as 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.
In additional 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:
5
<PAGE>
(1) 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.
(2) 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.
(3) The Fund may invest up to 15% of the value of its assets in warrants.
This restriction on the purchase of warrants does not apply to warrants
attached to, or otherwise included in, a unit with other securities.
(4) 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.
(5) The Fund will not purchase securities of an issuer if to the Fund's
knowledge, one or more of the Directors or officers of the Fund or LMC
individually owns beneficially more than 0.5% and together own
beneficially more than 5% of the securities of such issuer nor will the
Fund hold the securities of such issuer.
(6) The Fund will not purchase the securities of any other investment
company, except as permitted under the 1940 Act.
(7) The Fund will not invest for the purpose of exercising control over or
management of any company.
(8) 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.
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.
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
Management Agreement dated February 27, 1996 (the "Advisory Agreement").
Lexington Funds Distributor, Inc. ("LFD") is the distributor of Fund shares
pursuant to a Distribution Agreement dated Feburary 27, 1996 (the "Distribution
Agreement"). LMC has entered into a sub-adviser contract with Troika Dialog
Asset Management under which TDAM will provide the Fund with investment advice
and management of the Fund's investment program. LMC makes recommendations to
the Fund with respect to its investments and investment policies. 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,
Sub-Advisory Agreement or the Distribution Agreement or "interested persons" of
any such party) on February 27, 1996.
LMC also acts as administrator to the Fund and performs certain
administrative and accounting services, including but not limited to,
maintaining general ledger accounts, regulatory compliance, preparation of
financial information for semiannual and annual reports, preparing registration
statements, calculating net asset values, shareholder communications and
supervision of the custodian, transfer agent and provides facilities for such
services. The Fund shall reimburse LMC for its actual cost in providing such
services, facilities and expenses.
LMC's investment advisory fee will be reduced for any fiscal year by any
amount necessary to prevent Fund expenses from exceeding the most restrictive
expense limitations imposed by the securities laws or regulations of those
states or jurisdictions in which the Fund's shares are registered or qualified
for sale. LFD pays the advertising and sales expenses related to 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 agreed to voluntarily limit the total expenses of the Fund
(excluding interest, taxes, brokerage and extraordinary expenses but including
management fee and operating expenses) to an annual rate of 3.35% of the Fund's
average net assets through April 30, 1997 or such later date as may be
determined by LMC.
6
<PAGE>
The Advisory Agreement, Sub-Advisory Agreement, the Distribution Agreement
and the Administrative Services Agreement are subject to annual approval by the
Fund's Board of Directors and by the affirmative vote, cast in person at a
meeting called for such purpose, of a majority of the Directors who are not
parties either to the Advisory Agreement, 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 and the Fund
or LFD may terminate the Distribution Agreement on 60 days' written notice
without penalty. The Advisory Agreement terminates automatically in the event of
assignment, as defined in the Investment Company Act of 1940. As compensation
for its services, the Fund pays LMC a monthly management fee at the annual rate
of 1.25% of the average daily net assets. This fee is higher than that paid by
most other investment companies. However, it is not necessarily greater than the
management fee of other investment companies with objectives and policies
similar to this Fund. LMC will pay TDAM an annual sub-advisory fee of 0.625% of
the Fund's average daily net assets. The sub-advisory fee will be paid by LMC,
not the Fund.
LMC as owner of the registered service mark "Lexington" will sublicense to
the Fund to include the word "Lexington" as part of its corporate name subject
to revocation by LMC in the event that the Fund ceases to engage LMC or its
affiliate as investment adviser or distributor. TDAM has authorized the Fund to
include the word "Troika Dialog" as part of it's corporate name subject to
revocation by TDAM in the event the Fund ceases to engage TDAM as Sub-Adviser.
In that event the Fund will be required upon demand of LMC or TDAM to change its
name to delete the word "Lexington" or "Troika Dialog" therefrom.
LMC shall not be liable to the Fund or its shareholders for any act or
omission by LMC, its officers, directors or employees or any loss sustained by
the Fund or its shareholders except in the case of willful misfeasance, bad
faith, gross negligence or reckless disregard of duty.
LMC and LFD are wholly owned subsidiaries of Lexington Global Asset
Managers, Inc., a publicly traded corporation. Descendants of Lunsford
Richardson, Sr., their spouses, trusts and other related entities have a
majority voting control of outstanding shares of Lexington Global Asset
Managers, Inc.
Of the directors, officers or employees ("affiliated persons") of the Fund,
Messrs. Corniotes, DeMichele, Faust, Hisey, Kantor and Luehs and Mmes.
Carnicelli, Carr, Curcio, Gilfillan and Mosca (see "Management of the Fund"),
may also be deemed affiliates of LMC and LFD by virtue of being officers,
directors or employees thereof.
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 and Troika Dialog may consider
sales of shares of the Fund and of the other Lexington Funds as a factor in the
selection of brokers and dealers and the market in which a transaction is
executed. 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 commission than the lowest available
under certain circumstances, provided that the person so exercising investment
discretion makes a good faith determination that the person so 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 might exceed commissions
that would be payable for executions services alone. Nor generally can the value
of research services to the Fund be measured. Research services furnished might
be useful and of value to LMC and Troika Dialog and its affiliates, in serving
other clients as well as the Fund. On the other hand, any research services
obtained by LMC and TDAM or its affiliates from the placement of portfolio
brokerage of other clients might be useful and of value to LMC and TDAM in
carrying out its obligations to the Fund. 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.
The Directors have adopted certain procedures incorporating the standards of
Rule 17e-1 under the Investment Company Act of 1940, as amended, which require
that the commissions paid to LFD or to broker-dealers affiliated with
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LFD must be "reasonable and fair compared to the commission, fee or other
remuneration comparable transactions involving similar transactions and similar
securities . . . being purchased or sold on a securities . . . exchange during a
comparable period of time". Rule 17e-1 and the procedures require the Directors
to periodically review the transactions with affiliated broker-dealers and the
procedures themselves. The procedures also require LMC and Troika Dialog to
furnish reports to the Directors and to maintain records in connection with
commissions paid to affiliated broker-dealers.
REDEMPTION OF SHARES
The Fund has elected, pursuant to Rule 18F-1 of the Investment Company Act
of 1940, to pay in cash all requests for redemption by any shareholder of
record, limited in amount, however, during any 90-day period to the lesser of
$250,000 or 1% of the value of the Fund's net assets at the beginning of such
period. Such commitment is irrevocable without the prior approval of the
Securities and Exchange Commission. In the case of request for redemptions in
excess of such amounts, the Board of Directors reserves the right to make
payments in whole or in part in securities or other assets of the Fund in case
of an emergency, or if the payments of such redemption in cash would be
detrimental to the existing shareholders of the Fund. In such circumstances the
securities distributed would be valued at the price used to compute the Fund's
net assets. Should the Fund do so, a shareholder may incur brokerage fees in
converting the securities to cash.
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) each
business day. It is expected that the New York Stock Exchange will be closed on
Saturdays and Sundays and on New Year's Day, President's Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
See the Prospectus for the further discussion of net asset value.
TELEPHONE EXCHANGE PROVISIONS
Exchange instructions may be given in writing or by telephone. Telephone
exchanges may only be made if a Telephone Authorization form has been previously
executed and filed with LFD. Telephone exchanges are permitted only after a
minimum of seven (7) days have elapsed from the date of a previous exchange.
Exchanges may not be made until all checks in payment for the shares to be
exchanged have been cleared.
Telephonic exchanges can only involve shares held on deposit at State Street
Bank and Trust Company (the "Agent"); shares held in certificate form by the
shareholder cannot be included. However, outstanding certificates can be
returned to the Agent and qualify for these services. Any new account
established with the same registration will also have the privilege of exchange
by telephone in the Lexington Funds. All accounts involved in a telephonic
exchange must have the same registration and dividend option as the account from
which the shares were transferred and will also have the privilege of exchange
by telephone in the Lexington Funds in which these services are available.
By checking the box on the New Account Application authorizing telephone
exchange services, a shareholder constitutes and appoints LFD, distributor of
the Lexington Group of Mutual Funds, as the true and lawful attorney to
surrender for redemption or exchange any and all non-certificate shares held by
the Agent in account(s) designated, or in any other account with the Lexington
Funds, present or future which has the identical registration, with full power
of substitution in the premises, authorizes and directs LFD to act upon any
instruction from any person by telephone for exchange of shares held in any of
these accounts, to purchase shares of any other Lexington Fund that is
available, provided the registration and mailing address of the shares to be
purchased are identical to the registration of the shares being redeemed, and
agrees that neither LFD, the Agent, or the Fund(s) will be liable for any loss,
expense or cost arising out of any requests effected in accordance with this
authorization which would include requests effected by impostors or persons
otherwise unauthorized to act on behalf of the account. LFD reserves the right
to cease to act as agent subject to the above appointment upon thirty (30) days
written notice to the address of record. If the shareholder is an entity other
than an individual, such entity may be required to certify that certain persons
have been duly elected and are now legally holding the titles given and that the
said corporation, trust, unincorporated association, etc. is duly organized and
existing and has the power to take action called for by this continuing
authorization.
Exchange Authorizations forms, Telephone Authorization forms and
prospectuses of the other funds may be obtained from LFD.
LFD has made arrangements with certain dealers to accept instructions by
telephone to exchange shares of the Fund or shares of one of the other Lexington
Funds at net asset value as described above. Under this procedure, the
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dealer must agree to indemnify LFD and the funds from any loss or liability that
any of them might incur as a result of the acceptance of such telephone exchange
orders. A properly signed Exchange Authorization must be received by LFD within
5 days of the exchange request. LFD reserves the right to reject any telephone
exchange request. In each such exchange, the registration of the shares of the
Fund being acquired must be identical to the registration of the shares of the
Fund being exchanged. Any telephone exchange orders so rejected may be processed
by mail.
This exchange offer is available only in states where shares of the Fund
being acquired may legally be sold and may be modified or terminated at any time
by the Fund. Broker-dealers who process exchange orders on behalf of their
customers may charge a fee for their services. Such fee may be avoided by making
requests for exchange directly to the Fund or Agent.
TAX-SHELTERED RETIREMENT PLANS
The Fund makes available a variety of Prototype Pension and Profit Sharing
plans including a 401(k) Salary Reduction Plan and a 403(b)(7} Plan. Plan
services are available by contacting the Shareholder Services Department of the
Distributor at 1-800-526-0056.
INDIVIDUAL RETIREMENT ACCOUNT ("IRA"): Individuals may make tax deductible
contributions to their own Individual Retirement Accounts established under
Section 408 of the Internal Revenue Code (the "Code"). Married investors filing
a joint return neither of whom is an active participant in an employer sponsored
retirement plan, or who have an adjusted gross income of $40,000 or less
($25,000 or less for single taxpayers) may continue to make a $2,000 ($2,500 for
spousal IRAs) annual deductible IRA contribution. For adjusted gross incomes
above $40,000 ($25,000 for single taxpayers, the IRA deduction limit is
generally phased out ratably over the next $10,000 of adjusted gross income,
subject to a minimum $200 deductible contribution. Investors who are not able to
deduct a full $2,000 ($2,250 spousal) IRA contribution because of the
limitations may make a nondeductible contribution to their IRA to the extent a
deductible contribution is not allowed. Federal income tax on accumulations
earned on nondeductible contributions is deferred until such time as these
amounts are deemed distributed to an investor. Rollovers are also permitted
under the Plan. The disclosure statement required by the Internal Revenue
Service ("IRS") is provided by the Fund.
The minimum initial investment to establish a tax-sheltered plan is $250.
Subsequent investments are subject to a minimum of $50 for each account.
SELF-EMPLOYED RETIREMENT PLAN (HR-10): Self-employed individuals may make
tax deductible contributions to a prototype defined contribution pension plan or
profit sharing plan. There are, however, a number of special rules which apply
when self-employed individuals participate in such plans. Currently purchase
payments under a self-employed plan are deductible only to the extent of the
lesser of (i) $30,000 or (ii) 25% of the individuals earned annual income (as
defined in the Code) and in applying these limitations not more than $200,000 of
"earned income" may be taken into account.
CORPORATE PENSION AND PROFIT SHARING PLANS: The Fund makes available a
Prototype Defined Contribution Pension Plan and a Prototype Profit Sharing Plan.
All purchases and redemptions of Fund shares pursuant to any one of the
Fund's tax sheltered plans must be carried out in accordance with the provisions
of the Plan. Accordingly, all plan documents should be reviewed carefully before
adopting or enrolling in the Plan. Investors should especially note that a
penalty tax of 10% may be imposed by the IRS on early withdrawals under
corporate, Keogh or IRA plans. It is recommended by the IRS that an investor
consult a tax adviser before investing in the Fund through any of these plans.
An investor participating in any of the Fund's special plans has no
obligation to continue to invest in the Fund and may terminate the Plan with the
Fund at any time. Except for expenses of sales and promotion, executive and
administrative personnel, and certain services which are furnished by LMC, the
cost of the plans generally is borne by the Fund; however, each IRA Plan account
is subject to an annual maintenance fee of $12.00 charged by the Agent.
TAX MATTERS
The following is only a summary of certain additional tax considerations
generally affecting the Fund and its shareholders that are not described in the
Prospectus. 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.
Qualification as a Regulated Investment Company
The Fund has elected to be taxed as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). As a
regulated investment company, the Fund is not subject to federal income
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tax on the portion of its net investment income (i.e., taxable interest,
dividends and other taxable ordinary income, net of expenses) and capital gain
net income (i.e., the excess of capital gains over capital losses) that it
distributes to shareholders, provided that it distributes at least 90% of its
investment company taxable income (i.e., net investment income and the excess of
net short-term capital gain over net long-term capital loss) for the taxable
year (the "Distribution Requirement"), and satisfies certain other requirements
of the Code that are described below. Distributions by the Fund made during the
taxable year or, under specified circumstances, within twelve months after the
close of the taxable year, will be considered distributions of income and gains
of the taxable year and can therefore satisfy the Distribution Requirement.
In addition to satisfying the Distribution Requirement, a regulated
investment company must: (1) derive at least 90% of its gross income from
dividends, interest, certain payments with respect to securities loans, gains
from the sale or other disposition of stock or securities or foreign currencies
(to the extent such currency gains are directly related to the regulated
investment company's principal business of investing in stock or securities) and
other income (including but not limited to gains from options, futures or
forward contracts) derived with respect to its business of investing in such
stock, securities or currencies the "Income Requirement"); and (2) derive less
than 30% of its gross income (exclusive of certain gains on designated hedging
transactions that are offset by realized or unrealized losses on offsetting
positions) from the sale or other disposition of stock, securities or foreign
currencies (or options, futures or forward contracts thereon) held for less than
three months the "Short-Short Gain Test"). However, foreign currency gains,
including those derived from options, futures and forwards, will not in any
event be characterized as Short-Short Gain if they are directly related to the
regulated investment company's investments in stock or securities (or options or
futures thereon). Because of the Short-Short Gain Test, the Fund may have to
limit the sale of appreciated securities that it has held for less than three
months. However, the Short-Short Gain Test will not prevent the Fund from
disposing of investments at a loss, since the recognition of a loss before the
expiration of the three-month holding period is disregarded for this purpose.
Interest (including original issue discount) received by the Fund at maturity or
upon the disposition of a security held for less than three months will not be
treated as gross income derived from the sale or other disposition of such
security within the meaning of the Short-Short Gain Test. However, income that
is attributable to realized market appreciation will be treated as gross income
from the sale or other disposition of securities for this purpose.
In general, gain or loss recognized by the Fund on the disposition of an
asset will be a capital gain or loss. However, gain recognized on the
disposition of a debt obligation purchased by the Fund at a market discount
(generally, at a price less than its principal amount) will be treated as
ordinary income to the extent of the portion of the market discount which
accrued during the period of time the Fund held the debt obligation. In
addition, under the rules of Code Section 988, gain or loss recognized on the
disposition of a debt obligation denominated in a foreign currency or an option
with respect thereto (but only to the extent attributable to changes in foreign
currency exchange rates), and gain or loss recognized on the disposition of a
foreign currency forward contract, futures contract, option or similar financial
instrument, or of foreign currency itself, except for regulated futures
contracts or non-equity options subject to Code Section 1256 (unless the Fund
elects otherwise), will generally be treated as ordinary income or loss.
In general, for purposes of determining whether capital gain or loss
recognized by the Fund on the disposition of an asset is long-term or
short-term, the holding period of the asset may be affected if (1) the asset is
used to close a "short sale" (which includes for certain purposes the
acquisition of a put option) or is substantially identical to another asset so
used, (2) the asset is otherwise held by the Fund as part of a "straddle" (which
term generally excludes a situation where the asset is stock and Fund grants a
qualified covered call option (which, among other things, must not be
deep-in-the-money) with respect thereto) or (3) the asset is stock and Fund
grants an in-the-money qualified covered call option with respect thereto.
However, for purposes of the Short-Short Gain Test, the holding period of the
asset disposed of may be reduced only in the case of clause (1) above. In
addition, the Fund may be required to defer the recognition of a loss on the
disposition of an asset held as part of a straddle to the extent of any
unrecognized gain on the offsetting position.
Any gain recognized by the Fund on the lapse of, or any gain or loss
recognized by the Fund from a closing transaction with respect to, an option
written by the Fund will be treated as a short-term capital gain or loss. For
purposes of the Short-Short Gain Test, the holding period of an option written
by the Fund will commence on the date it is written and end on the date it
lapses or the date a closing transaction is entered into. Accordingly, the Fund
may be limited in its ability to write options which expire within three months
and to enter into closing transactions at a gain within three months of the
writing of options.
Transactions that may be engaged in by the Fund (such as regulated futures
contracts, certain foreign currency contracts, and options on stock indexes and
futures contracts) will be subject to special tax treatment as "Section 1256
contracts." Section 1256 contracts are treated as if they are sold for their
fair market value on the last business day of the taxable year, even though a
taxpayer's obligations (or rights) under such contracts have not terminated (by
delivery, exercise, entering into a closing transaction or otherwise) as of such
date. Any gain or loss recognized as a consequence
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of the year-end deemed disposition of Section 1256 contracts is taken into
account for the taxable year together with any other gain or loss that was
previously recognized upon the termination of Section 1256 contracts during that
taxable year. Any capital gain or loss for the taxable year with respect to
Section 1256 contracts (including any capital gain or loss arising as a
consequence of the year-end deemed sale of such contracts) is generally treated
as 60% long-term capital gain or loss and 40% short-term capital gain or loss. A
Fund, however, may elect not to have this special tax treatment apply to Section
1256 contracts that are part of a "mixed straddle" with other investments of the
Fund that are not Section 1256 contracts. The IRS has held in several private
rulings (and Treasury Regulations now provide) that gains arising from Section
1256 contracts will be treated for purposes of the Short-Short Gain Test as
being derived from securities held for not less than three months if the gains
arise as a result of a constructive sale under Code Section 1256.
The Fund may purchase securities of certain foreign investment funds or
trusts which constitute passive foreign investment companies ("PFICs") for
federal income tax purposes. If the Fund invests in a PFIC, it may elect to
treat the PFIC as a qualifying electing fund (a "QEF") in which event the Fund
will each year have ordinary income equal to its pro rata share of the PFIC's
ordinary earnings for the year and long-term capital gain equal to its pro rata
share of the PFIC's net capital gain for the year, regardless of whether the
Fund receives distributions of any such ordinary earning or capital gain from
the PFIC. If the Fund does not (because it is unable to, chooses not to or
otherwise) elect to treat the PFIC as a QEF, then in general (1) any gain
recognized by the Fund upon sale or other disposition of its interest in the
PFIC or any excess distribution received by the Fund from the PFIC will be
allocated ratably over the Fund's holding period of its interest in the PFIC,
(2) the portion of such gain or excess distribution so allocated to the year in
which the gain is recognized or the excess distribution is received shall be
included in the Fund's gross income for such year as ordinary income (and the
distribution of such portion by the Fund to shareholders will be taxable as an
ordinary income dividend, but such portion will not be subject to tax at the
Fund level), (3) the Fund shall be liable for tax on the portions of such gain
or excess distribution so allocated to prior years in an amount equal to, for
each such prior year, (i) the amount of gain or excess distribution allocated to
such prior year multiplied by the highest tax rate (individual or corporate) in
effect for such prior year plus (ii) interest on the amount determined under
clause (i) for the period from the due date for filing a return for such prior
year until the date for filing a return for the year in which the gain is
recognized or the excess distribution is received at the rates and methods
applicable to underpayments of tax for such period, and (4) the distribution by
the Fund to shareholders of the portions of such gain or excess distribution so
allocated to prior years (net of the tax payable by the Fund thereon) will again
be taxable to the shareholders as an ordinary income dividend.
Under recently proposed Treasury Regulations the Fund can elect to recognize
as gain the excess, as of the last day of its taxable year, of the fair market
value of each share of PFIC stock over the Fund's adjusted tax basis in that
share ("mark to market gain"). Such mark to market gain will be included by the
Fund as ordinary income, such gain will not be subject to the Short-Short Gain
Test, and the Fund's holding period with respect to such PFIC stock commences on
the first day of the next taxable year. If the Fund makes such election in the
first taxable year it holds PFIC stock, the Fund will include ordinary income
from any mark to market gain, if any, and will not incur the tax described in
the previous paragraph.
Treasury Regulations permit a regulated investment company, in determining
its investment company taxable income and net capital gain (i.e., the excess of
net long-term capital gain over net short-term capital loss) for any taxable
year, to elect (unless it has made a taxable year election for excise tax
purposes as discussed below) to treat all or any part of any net capital loss,
any net long-term capital loss or any net foreign currency loss incurred after
October 31 as if it had been incurred in the succeeding year.
In addition to satisfying the requirements described above, the Fund must
satisfy an asset diversification test in order to qualify as a regulated
investment company. Under this test, at the close of each quarter of the Fund's
taxable year, at least 50% of the value of the Fund's assets must consist of
cash and cash items, U.S. Government securities, securities of other regulated
investment companies, and securities of other issuers (as to which the Fund has
not invested more than 5% of the value of the Fund's total assets in securities
of such issuer and as to which the Fund does not hold more than 10% of the
outstanding voting securities of such issuer), and no more than 25% of the value
of its total assets may be invested in the securities of any one issuer (other
than U.S. Government securities and securities of other regulated investment
companies), or in two or more issuers which the Fund controls and which are
engaged in the same or similar trades or businesses. Generally, an option (call
or put) with respect to a security is treated as issued by the issuer of the
security not the issuer of the option.
If for any taxable year the Fund does not qualify as a regulated investment
company, all of its taxable income (including its net capital gain) will be
subject to tax at regular corporate rates without any deduction for
distributions to shareholders, and such distributions will be taxable to the
shareholders as ordinary dividends to the extent of the Fund's current and
accumulated earnings and profits. Such distributions generally will be eligible
for the dividends-received deduction in the case of corporate shareholders.
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Excise Tax on Regulated Investment Companies
A 4% non-deductible excise tax is imposed on a regulated investment company
that fails to distribute in each calendar year an amount equal to 98% of
ordinary taxable income for the calendar year and 98% of capital gain net income
for the one-year period ended on October 31 of such calendar year (or, at the
election of a regulated investment company having a taxable year ending November
30 or December 31, for its taxable year (a "taxable year election")). The
balance of such income must be distributed during the next calendar year. For
the foregoing purposes, a regulated investment company is treated as having
distributed any amount on which it is subject to income tax for any taxable year
ending in such calendar year.
For purposes of the excise tax, a regulated investment company shall: (1)
reduce its capital gain net income (but not below its net capital gain) by the
amount of any net ordinary loss for the calendar year; and (2) exclude foreign
currency gains and losses incurred after October 31 of any year (or after the
end of its taxable year if it has made a taxable year election) in determining
the amount of ordinary taxable income for the current calendar year (and,
instead, include such gains and losses in determining ordinary taxable income
for the succeeding calendar year).
The Fund intends to make sufficient distributions or deemed distributions of
its ordinary taxable income and capital gain net income prior to the end of each
calendar year to avoid liability for the excise tax. However, investors should
note that the Fund may in certain circumstances be required to liquidate
portfolio investments to make sufficient distributions to avoid excise tax
liability.
Fund Distributions
The Fund anticipates distributing substantially all of its investment
company taxable income for each taxable year. Such distributions will be taxable
to shareholders as ordinary income and treated as dividends for federal income
tax purposes, but they generally should not qualify for the 70%
dividends-received deduction for corporate shareholders.
A Fund may either retain or distribute to shareholders its net capital gain
for each taxable year. The Fund currently intends to distribute any such
amounts. If net capital gain is distributed and designated as a capital gain
dividend, it will be taxable to shareholders as long-term capital gain,
regardless of the length of time the shareholder has held his shares or whether
such gain was recognized by the Fund prior to the date on which the shareholder
acquired his shares.
Conversely, if the Fund elects to retain its net capital gain, the Fund will
be taxed thereon (except to the extent of any available capital loss carryovers)
at the 35% corporate tax rate. If the Fund elects to retain its net capital
gain, it is expected that the Fund also will elect to have shareholders of
record on the last day of its taxable year treated as if each received a
distribution of his pro rata share of such gain, with the result that each
shareholder will be required to report his pro rata share of such gain on his
tax return as long-term capital gain, will receive a refundable tax credit for
his pro rata share of tax paid by the Fund on the gain, and will increase the
tax basis for his shares by an amount equal to the deemed distribution less the
tax credit.
Ordinary income dividends paid by the Fund with respect to a taxable year
will qualify for the 70% dividends-received deduction generally available to
corporations (other than corporations, such as S corporations, which are not
eligible for the deduction because of their special characteristics and other
than for purposes of special taxes such as the accumulated earnings tax and the
personal holding company tax) to the extent of the amount of qualifying
dividends received by the Fund from domestic corporations for the taxable year.
A dividend received by the Fund will not be treated as a qualifying dividend (1)
if it has been received with respect to any share of stock that the Fund has
held for less than 46 days (91 days in the case of certain preferred stock),
excluding for this purpose under the rules of Code Section 246(c)(3) and (4):
(i) any day more than 45 days (or 90 days in the case of certain preferred
stock) after the date on which the stock becomes ex-dividend and (ii) any period
during which the Fund has an option to sell, is under a contractual obligation
to sell, has made and not closed a short sale of, is the grantor of a
deep-in-the-money or otherwise nonqualified option to buy, or has otherwise
diminished its risk of loss by holding other positions with respect to, such (or
substantially identical) stock; (2) to the extent that the Fund is under an
obligation (pursuant to a short sale or otherwise) to make related payments with
respect to positions in substantially similar or related property; or (3) to the
extent the stock on which the dividend is paid is treated as debt-financed under
the rules of Code Section 246A. Moreover, the dividends-received deduction for a
corporate shareholder may be disallowed or reduced (1) if the corporate
shareholder fails to satisfy the foregoing requirements with respect to its
shares of the Fund or (2) by application of Code Section 246(b) which in general
limits the dividends-received deduction to 70% of the shareholder's taxable
income (determined without regard to the dividends-received deduction and
certain other items). Since an insignificant portion of the Fund will be
invested in stock of domestic corporations, the ordinary dividends distributed
by the Fund will not qualify for the dividends-received deduction for corporate
shareholders.
Alternative minimum tax ("AMT") is imposed in addition to, but only to the
extent it exceeds, the regular tax and is computed at a maximum marginal rate of
28% for noncorporate taxpayers and 20% for corporate taxpayers on the
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excess of the taxpayer's alternative minimum taxable income ("AMTI") over an
exemption amount. In addition, under the Superfund Amendments and
Reauthorization Act of 1986, a tax is imposed for taxable years beginning after
1986 and before 1996 at the rate of 0.12% on the excess of a corporate
taxpayer's AMTI (determined without regard to the deduction for this tax and the
AMT net operating loss deduction) over $2 million. For purposes of the corporate
AMT and the environmental superfund tax (which are discussed above), the
corporate dividends-received deduction is not itself an item of tax preference
that must be added back to taxable income or is otherwise disallowed in
determining a corporation's AMTI. However, corporate shareholders will generally
be required to take the full amount of any dividend received from the Fund into
account (without a dividends-received deduction) in determining its adjusted
current earnings, which are used in computing an additional corporate preference
item (i.e., 75% of the excess of a corporate taxpayer's adjusted current
earnings over its AMTI (determined without regard to this item and the AMT net
operating loss deduction)) includable in AMTI.
Investment income that may be received by the Fund from sources within
foreign countries may be subject to foreign taxes withheld at the source. The
United States has entered into tax treaties with many foreign countries which
entitle the Fund to a reduced rate of, or exemption from, taxes on such income.
It is impossible to determine the effective rate of foreign tax in advance since
the amount of the Fund's assets to be invested in various countries is not
known. If more than 50% of the value of the Fund's total assets at the close of
its taxable year consist of the stock or securities of foreign corporations, the
Fund may elect to "pass through" to the Fund's shareholders the amount of
foreign taxes paid by the Fund. If the Fund so elects, each shareholder would be
required to include in gross income, even though not actually received, his pro
rata share of the foreign taxes paid by the Fund, but would be treated as having
paid his pro rata share of such foreign taxes and would therefore be allowed to
either deduct such amount in computing taxable income or use such amount
(subject to various Code limitations) as a foreign tax credit against federal
income tax (but not both). For purposes of the foreign tax credit limitation
rules of the Code, each shareholder would treat as foreign source income his pro
rata share of such foreign taxes plus the portion of dividends received from the
Fund representing income derived from foreign sources. No deduction for foreign
taxes could be claimed by an individual shareholder who does not itemize
deductions. Each shareholder should consult his own tax adviser regarding the
potential application of foreign tax credits.
Distributions by the Fund that do not constitute ordinary income dividends
or capital gain dividends will be treated as a return of capital to the extent
of (and in reduction of) the shareholder's tax basis in his shares; any excess
will be treated as gain from the sale of his shares, as discussed below.
Distributions by the Fund will be treated in the manner described above
regardless of whether such distributions are paid in cash or reinvested in
additional shares of the Fund (or of another fund). Shareholders receiving a
distribution in the form of additional shares will be treated as receiving a
distribution in an amount equal to the fair market value of the shares received,
determined as of the reinvestment date. In addition, if the net asset value at
the time a shareholder purchases shares of the Fund reflects undistributed net
investment income or recognized capital gain net income, or unrealized
appreciation in the value of the assets of the Fund, distributions of such
amounts will be taxable to the shareholder in the manner described above,
although such distributions economically constitute a return of capital to the
shareholder.
Ordinarily, shareholders are required to take distributions by the Fund into
account in the year in which the distributions are made. However, dividends
declared in October, November or December of any year and payable to
shareholders of record on a specified date in such a month will be deemed to
have been received by the shareholders (and made by the Fund) on December 31 of
such calendar year if such dividends are actually paid in January of the
following year. Shareholders will be advised annually as to the U.S. federal
income tax consequences of distributions made (or deemed made) during the year.
The Fund will be required in certain cases to withhold and remit to the U.S.
Treasury 31% of ordinary income dividends and capital gain dividends, and the
proceeds of redemption of shares, paid to any shareholder (1) who has provided
either an incorrect tax identification number or no number at all, (2) who is
subject to backup withholding by the IRS for failure to report the receipt of
interest or dividend income properly, or (3) who has failed to certify to the
Fund that it is not subject to backup withholding or that it is a corporation or
other "exempt recipient."
Sale or Redemption of Shares
A shareholder will recognize gain or loss on the sale or redemption of
shares of the Fund in an amount equal to the difference between the proceeds of
the sale or redemption and the shareholder's adjusted tax basis in the shares.
All or a portion of any loss so recognized may be disallowed if the shareholder
purchases other shares of the Fund within 30 days before or after the sale or
redemption. In general, any gain or loss arising from (or treated as arising
from) the sale or redemption of shares of the Fund will be considered capital
gain or loss and will be long-term capital gain or loss if the
13
<PAGE>
shares were held for longer than one year. However, any capital loss arising
from the sale or redemption of shares held for six months or less will be
treated as a long-term capital loss to the extent of the amount of capital gain
dividends received on such shares. For this purpose, the special holding period
rules of Code Section 246(c)(3) and (4) (discussed above in connection with the
dividends-received deduction for corporations) generally will apply in
determining the holding period of shares. Long-term capital gains of
noncorporate taxpayers are currently taxed at a maximum rate 11.6% lower than
the maximum rate applicable to ordinary income. Capital losses in any year are
deductible only to the extent of capital gains plus, in the case of a
noncorporate taxpayer, $3,000 of ordinary income.
Foreign Shareholders
Taxation of a shareholder who, as to the United States, is a nonresident
alien individual, foreign trust or estate, foreign corporation, or foreign
partnership ("foreign shareholder"), depends on whether the income from the Fund
is "effectively connected" with a U.S. trade or business carried on by such
shareholder.
If the income from the Fund is not effectively connected with a U.S. trade
or business carried on by a foreign shareholder, ordinary income dividends paid
to a foreign shareholder will be subject to U.S. withholding tax at the rate of
30% (or lower treaty rate) upon the gross amount of the dividend. Furthermore,
such a foreign shareholder may be subject to U.S. withholding tax at the rate of
30% (or lower treaty rate) on the gross income resulting from the Fund's
election to treat any foreign taxes paid by it as paid by its shareholders, but
may not be allowed a deduction against this gross income or a credit against
this U.S. withholding tax for the foreign shareholder's pro rata share of such
foreign taxes which it is treated as having paid. Such a foreign shareholder
would generally be exempt from U.S. federal income tax on gains realized on the
sale of shares of the Fund, capital gain dividends and amounts retained by the
Fund that are designated as undistributed capital gains.
If the income from the Fund is effectively connected with a U.S. trade or
business carried on by a foreign shareholder, then ordinary income dividends,
capital gain dividends, and any gains realized upon the sale of shares of the
Fund will be subject to U.S. federal income tax at the rates applicable to U.S.
citizens or domestic corporations.
In the case of foreign noncorporate shareholders, the Fund may be required
to withhold U.S. federal income tax at a rate of 31% on distributions that are
otherwise exempt from withholding tax (or taxable at a reduced treaty rate)
unless such shareholders furnish the Fund with proper notification of its
foreign status.
The tax consequences to a foreign shareholder entitled to claim the benefits
of an applicable tax treaty may be different from those described herein.
Foreign shareholders are urged to consult their own tax advisers with respect to
the particular tax consequences to them of an investment in the Fund, including
the applicability of foreign taxes.
Effect of Future Legislation; Local Tax Considerations
The foregoing general discussion of U.S. federal income tax consequences is
based on the Code and the Treasury Regulations issued thereunder as in effect on
the date of this Statement of Additional Information. Future legislative or
administrative changes or court decisions may significantly change the
conclusions expressed herein, and any such changes or decisions may have a
retroactive effect with respect to the transactions contemplated herein.
Rules of state and local taxation of ordinary income dividends and capital
gain dividends from regulated investment companies often differ from the rules
for U.S. federal income taxation described above. Shareholders are urged to
consult their tax advisers as to the consequences of these and other state and
local tax rules affecting investment in the Fund.
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).
14
<PAGE>
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 Price Index, Dow Jones Industrial Average
Index, Morgan Stanley Capital International (EAFE) Index or, Russian Trading
System Index, Moscow Times 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.
SHAREHOLDER REPORTS
Shareholders will receive reports at least semi-annually showing the Fund's
holdings and other information. In addition, shareholders will receive annual
financial statements audited by KPMG Peat Marwick LLP, the Fund's independent
auditors.
15
<PAGE>
Independent Auditors' Report
To The Shareholders and Directors of
Lexington Troika Dialog Russia Fund, Inc.:
We have audited the accompanying statement of assets and liabilities of
Lexington Troika Dialog Russia Fund, Inc. (the "Fund") as of March 27, 1996.
This financial statement is the responsibility of the Fund's management. Our
responsibility is to express an opinion on this financial statement based on our
audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statement of assets and liabilities is free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the statement of assets and
liabilities. 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 audit provides a
reasonable basis for our opinion.
In our opinion, the statement of assets and liabilities referred to above
present fairly, in all material respects, the financial position of Lexington
Troika Dialog Russia Fund, Inc. as of March 27, 1996 in conformity with
generally accepted accounting principles.
KPMG Peat Marwick L.L.P.
New York, New York
March 27, 1996
16
<PAGE>
LEXINGTON TROIKA DIALOG RUSSIA FUND, INC.
Statement of Assets and Liabilities
March 27, 1996
<TABLE>
<S> <C>
ASSETS
Cash ........................................................................... $100,000
Deferred organization and registration expenses (Note 2) ....................... 75,000
--------
Total Assets ................................................................. $175,000
--------
LIABILITIES
Payable to Lexington Management Corporation (Note 2) ........................... $ 75,000
--------
Total Liabilities ............................................................ $ 75,000
--------
NET ASSETS applicable to 10,000 outstanding shares of common stock,
$.001 par value per share, respectively ........................................ $100,000
========
NET ASSETS consist of:
Common stock - at par value, $.001 per share, authorized 1,000,000,000 shares;
issued and outstanding 10,000 (Note 1) ......................................... $ 10
Additional Paid in Capital ..................................................... 99,990
--------
$100,000
========
NET ASSET VALUE offering and redemption price per share
($100,000/10,000 shares) ....................................................... $10.00
======
</TABLE>
NOTES:
(1) The Lexington Troika Dialog Russia Fund, Inc. (the "Fund") was formed on
November 22, 1995 as a Maryland Corporation and has had no operations
through March 27, 1996 other than matters relating to its organization and
registration as a diversified, open-end investment company under the
Investment Company Act of 1940 and the sale and issuance of 10,000 shares of
its common stock to the Lexington Management Corporation at an aggregate
purchase price of $100,000 to provide the initial capital of the Fund.
(2) Organization and initial offering expenses will be borne by the Fund and
will be advanced by Lexington Management Corporation, (LMC). It is estimated
that such expenses will not exceed $75,000 and will be amortized from the
date operations commence over a period which it is expected that a benefit
will be realized, not to exceed five years. The Fund will reimburse LMC for
such expenses when the Fund's assets exceed $20 million or when the Fund has
completed one year of operations, whichever occurs first. Lexington
Management Corporation has agreed that in the event that any of the initial
10,000 shares are redeemed during the period of amortization of the Fund's
organizational expenses, the redemption proceeds will be reduced by any such
unamortized organizational expenses in the same proportion as the number of
initial shares being redeemed bears to the number of initial shares (10,000)
outstanding at the time of redemption.
(3) The Fund intends to comply in its initial year and thereafter with the
requirements of the Internal Revenue Code necessary to qualify as a
regulated investment company and as such will not be subject to federal
income taxes on otherwise taxable income (including net realized capital
gains) which is distributed to shareholders.
17
<PAGE>
LEXINGTON TROIKA DIALOG RUSSIA FUND, INC.
STATEMENT OF NET ASSETS
(Including the Portfolio of Investments)
November 30, 1996
(unaudited)
Number of
Shares or Market
Principal Value
Amount Security (Note 1)
- --------------------------------------------------------------------------------
COMMON STOCKS: 77.2%
ENERGY SOURCES: 5.3%
35,000 Lukoil Holdings ........................................ $ 371,000
7,000 Lukoil Holdings (ADR) .................................. 296,940
----------
667,940
----------
FOOD WHOLESALERS: 2.5%
16,360 Krasny Oktyabr ......................................... 307,568
----------
MERCHANDISING: 1.8%
9,000 Trade House Gum ........................................ 227,700
----------
OIL & GAS DRILLING: 14.1%
5,000 Gazprom (ADR) .......................................... 90,400
130,000 Kondpetroleum .......................................... 185,250
135,000 Megionneftegaz ......................................... 459,000
40,000 *Megionneftegaz (Preferred shares) ...................... 88,000
10,000 *Nizhnevartovskneftegaz (Preferred shares) .............. 25,000
79,000 Noyabrskneftegaz ....................................... 448,325
30,000 *Noyabrskneftegaz (Preferred shares) .................... 112,500
150,000 Orenburgneft ........................................... 352,500
----------
1,760,975
----------
OIL & GAS EXPLORATION: 13.5%
25,000 Chernogorneft .......................................... 275,000
25,000 Chernogorneft (ADR) .................................... 306,250
2,000 Permneft ............................................... 101,000
200,000 Purneftegaz ............................................ 450,000
6,000 Tatneft (ADR) .......................................... 228,000
65,000 Tomskneft .............................................. 297,700
10,000 *Tomskneft (Preferred shares) ........................... 33,500
----------
1,691,450
----------
METALS & MINING: 2.8%
60,000 Norilsk Nickel ......................................... 347,400
----------
SHIPPING: 0.1%
10,000 Primorsk Sea Shipping .................................. 17,500
----------
TELECOMMUNICATIONS: 19.4%
6,110 Chelyabinskvyazinform .................................. 93,972
2,600 *Chelyabinskvyazinform (Preferred shares) ............... 28,002
2,100 Irkutskelektrosviaz .................................... 123,900
1,022 Moscow Telephone Systems ............................... 725,620
400 *Moscow Telephone Systems (Preferred shares) ............ 160,000
126,000 Nizhnovsviyazinform .................................... 233,100
100,000 *Nizhnovsviyazinform (Preferred shares) ................. 105,000
18
<PAGE>
LEXINGTON TROIKA DIALOG RUSSIA FUND, INC.
STATEMENT OF NET ASSETS
(Including the Portfolio of Investments)
November 30, 1996
(unaudited)
Number of
Shares or Market
Principal Value
Amount Security (Note 1)
- --------------------------------------------------------------------------------
TELECOMMUNICATIONS: 19.4% (cont.)
215,000 Rostelekom ............................................. $ 507,400
3,000 *Samarasvyazinform (Preferred shares) ................... 90,000
300,000 St. Petersburg Telecommunications ...................... 364,500
----------
2,431,494
UTILITIES: 17.7%
2,500,000 Irkutskenergo .......................................... 311,250
250,000 *Lenenergo (Preferred shares) ........................... 70,000
350,000 Mosenergo .............................................. 344,750
3,000 Mosenergo (ADR) ........................................ 88,626
12,200 Permenergo ............................................. 216,550
800,000 Samaraenergo ........................................... 326,000
624,000 *Sverdlovskenergo (Preferred shares) .................... 124,800
9,000,000 Unified Energy Systems ................................. 738,000
----------
2,219,976
TOTAL COMMON STOCKS (cost $9,198,413) .................. 9,672,003
----------
GOVERNMENT OBLIGATIONS: 11.9%
Russian Ministry of Finance Note
$1,500,000 9.25%, due 11/27/01 (cost $1,493,426) .................. 1,496,907
----------
SHORT-TERM INVESTMENTS: 3.2%
United States Treasury Bill
400,000 5.13%, due 02/06/97 (cost $396,286) .................... 396,140
----------
TOTAL INVESTMENTS: 92.3%
(cost $11,088,125+) (Note 1) ........................... 11,565,050
----------
Other assets in excess of liabilities: 7.7% ............ 960,851
----------
TOTAL NET ASSETS: 100.0%
(equivalent to $11.30 per share on 1,108,323
shares outstanding) .................................... $12,525,901
===========
ADR - American Depository Receipt.
* Restricted Securities (Note 8).
+ Aggregate cost for Federal income tax purposes is identical.
The Notes to Financial Statements are an integral part of this statement.
19
<PAGE>
LEXINGTON TROIKA DIALOG RUSSIA FUND, INC.
STATEMENT OF ASSETS & LIABILITIES
November 30, 1996
(unaudited)
ASSETS
Investments in securities, at value (cost $11,088,125) (Note 1) .. $11,565,050
Cash ............................................................. 970,334
Receivable due from Lexington Management Corporation (Note 2) .... 35,759
Receivable for investment securities sold ........................ 1,191,475
Receivable for shares sold ....................................... 60,220
Interest receivable .............................................. 4,093
Deferred organization expenses, net (Note 1) ..................... 99,488
-----------
Total Assets ............................................... 13,926,419
-----------
LIABILITIES
Payable for investment securities purchased ...................... 1,201,685
Payable for shares redeemed ...................................... 2,500
Accrued expenses ................................................. 89,315
Other liabilities ................................................ 107,018
-----------
Total Liabilities .......................................... 1,400,518
-----------
NET ASSETS (equivalent to $11.30 per share
on 1,108,323 shares outstanding) (Note 4) ...................... $12,525,901
===========
Net Assets consist of:
Capital stock - authorized 1,000,000,000 shares,
$.001 par value per share ...................................... $ 1,108
Additional paid-in capital ....................................... 11,516,076
Accumulated deficit .............................................. (45,046)
Accumulated net realized gain on investments ..................... 576,838
Net unrealized appreciation of investments ....................... 476,925
-----------
$12,525,901
===========
The Notes to Financial Statements are an integral part of this statement.
20
<PAGE>
LEXINGTON TROIKA DIALOG RUSSIA FUND, INC.
STATEMENT OF OPERATIONS
June 3, 1996 (commencement of
operations) to November 30, 1996
(unaudited)
INVESTMENT INCOME
Interest ......................................................... $ 79,101
---------
EXPENSES
Investment advisory fee (Note 2) ................................. 52,344
Custodian fees ................................................... 65,454
Directors' fees and expenses ..................................... 21,849
Professional fees ................................................ 15,094
Printing and mailing expenses .................................... 14,760
Distribution expenses (Note 3) ................................... 10,342
Transfer agent and shareholder servicing expense (Note 2) ........ 8,780
Amortization of deferred expenses (Note 1) ....................... 7,530
Accounting expenses (Note 2) ..................................... 6,577
Registration fees ................................................ 548
Other expenses ................................................... 6,623
----------
Total expenses ............................................... 209,901
----------
Less: Expenses recovered under contract with investment
advisor (Note 2) ....................................... 85,754
----------
Net Expenses ................................................. 124,147
----------
Net Investment Loss ...................................... ($ 45,046)
==========
Realized and Unrealized Gain on Investments (Note 5)
Net realized gain on investments ................................. $ 576,838
Net change in unrealized appreciation on investments ............. 476,925
----------
Net realized and unrealized gain ................................. 1,053,763
----------
Increase in Net Assets Resulting from Operations ................. $1,008,717
==========
The Notes to Financial Statements are an integral part of this statement.
21
<PAGE>
LEXINGTON TROIKA DIALOG RUSSIA FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
June 3, 1996 (commencement of
operations) to November 30, 1996
(unaudited)
Net investment loss .............................................. ($ 45,046)
Net realized gain from investments ............................... 576,838
Net change in unrealized appreciation of investments ............. 476,925
-----------
Net increase in net assets resulting from operations ............. 1,008,717
Increase in net assets from capital share transactions (Note 4) .. 11,517,184
-----------
Net increase in net assets ....................................... 12,525,901
NET ASSETS
Beginning of period .............................................. -
-----------
End of period (including accumulated deficit of $45,046) ......... $12,525,901
===========
The Notes to Financial Statements are an integral part of this statement.
22
<PAGE>
LEXINGTON TROIKA DIALOG RUSSIA FUND, INC.
NOTES TO FINANCIAL STATEMENTS
November 30, 1996 (unaudited)
1. Significant Accounting Policies
Lexington Troika Dialog Russia Fund, Inc. (the "Fund") is an open-end
non-diversified management investment company registered under the Investment
Company Act of 1940, as amended. The Fund's investment objective is to seek
long-term capital appreciation through investments primarily in the equity
securities of Russian companies. The Fund commenced operations on June 3, 1996.
The following is a summary of significant accounting policies followed by the
Fund in the preparation of its financial statements:
Investments Security transactions are accounted for on a trade date basis.
Realized gains and losses from investment transactions are reported on the
identified cost basis. Securities traded on a recognized stock exchange are
valued at the last sales price reported by the exchange on which the securities
are traded. If no sales price is recorded, the mean between the last bid and
asked price is used. However, when Fund management deems it appropriate, prices
obtained for the day of valuation from a third party pricing service will be
used. Securities traded on the over-the-counter market are valued at the mean
between the last current bid and asked price. 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 is recorded on the ex-dividend date. Occasionally
dividend information on foreign securities is received after the ex-dividend
date and the income is recorded as soon as the information is available to the
Fund. Interest income, adjusted for amortization of premiums and accretion of
discounts, is accrued on a straight line basis 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 a foreign currency. The Fund may also enter into such contracts
to hedge against changes in foreign currency exchange rates on portfolio
positions. These contracts are marked to market daily, by recognizing the
difference between the contract exchange rate and the current market rate as
unrealized gains or losses. Realized gains or losses are recognized when
contracts are closed and are reported in the statement of operations. There were
no foreign currency exchange contracts outstanding at November 30, 1996.
Federal Income Taxes It is the Fund's policy to comply with the requirements
of the Internal Revenue Code applicable to "regulated investment companies" and
to distribute all of its taxable income to its shareholders. Therefore, no
provision for Federal income taxes is required.
Distributions It is the Fund's intention to declare and pay dividends from
net income and distributions from capital gains annually. However, the Fund may
make distributions on a more frequent basis to comply with the distribution
requirements of the Internal Revenue Code.
Deferred Organization Expenses Organization expenses aggregating $107,018
have been deferred and are being amortized on a straight-line basis over five
years.
Use of Estimates The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of increases and
decreases in net assets from operations during the reporting period. Actual
results could differ from those estimates.
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 1.25% of the Fund's average daily net assets. In
connection with providing investment advisory services, LMC has entered into a
sub-advisory contract with Troika Dialog Asset Management, ZAO ("TDAM") under
which TDAM provides the Fund with investment management services. Pursuant to
the terms of the sub-advisory contract between LMC and TDAM, LMC pays TDAM a
monthly sub-advisory fee at the annual rate of 0.625% of the Fund's average
daily net assets. The investment advisory contract provides that the total
annual expenses of the Fund (including management fees, but excluding interest,
taxes, brokerage commissions and extraordinary expenses) will not exceed the
level of expenses which the Fund is permitted to bear under the most restrictive
expense limitation imposed by any state in which shares of
23
<PAGE>
the Fund are offered for sale. LMC has agreed to voluntarily limit the total
expenses of the Fund to an annual rate of 3.00% of the Fund's average net assets
through December 31, 1996. The investment advisory fee and expense reimbursement
are set forth in the statement of operations.
The Fund also reimbursed LMC for certain expenses, including accounting and
shareholder servicing costs of $ 10,766 which are incurred by the Fund, but paid
by LMC.
3. Distribution Plan
The Fund has a distribution Plan (the "Plan") which allows payments to finance
activities associated with the distribution of the Fund's shares. The Plan
provides that the Fund may pay distribution fees on a reimbursement basis,
including payments to Lexington Funds Distributor, Inc. ("LFD"), the Fund's
distributor, in amounts not exceeding 0.25% per annum of the Fund's average
daily net assets. Total distribution expenses for the period ended November 30,
1996 were $10,342 and are set forth in the statement of operations.
4. Capital Stock
Transactions in capital stock were as follows:
June 3, 1996
(commencement of operations)
to November 30, 1996
-----------------------------
Shares Amount
------ ------
Shares sold 1,120,989 $11,647,364
Shares redeemed (12,666) (130,180)
--------- -----------
Net increase 1,108,323 $11,517,184
--------- -----------
5. Purchases and Sales of Investment Securities
The cost of purchases and proceeds from sales of securities for the period ended
November 30, 1996, excluding short-term securities, were $ 15,148,156 and
$5,035,900, respectively.
At November 30, 1996, the aggregate gross unrealized appreciation for all
securities in which there is an excess of value over tax cost amounted to
$944,076 and aggregate gross unrealized depreciation for all securities in which
there is an excess of tax cost over value amounted to $467,151.
6. Investment and Concentration Risks
The Fund's investments are concentrated in Russian securities and are therefore
exposed to the risks associated with that country. These risks which may not be
present in domestic investments or in other developed countries, include:
Market, Concentration, and Liquidity Risks The Russian securities markets
are substantially smaller, less liquid, and significantly more volatile than the
securities markets in the United States. A limited number of issuers represent a
disproportionately large percentage of market capitalization and trading volume.
Due to these factors, obtaining prices on portfolio securities from independent
sources may be more difficult than in other markets. In addition, despite the
Fund's policies and procedures addressing liquidity, it may be difficult for the
Fund to obtain or dispose of some investment securities because of poor
liquidity.
Settlement and Custody Risks Because of the recent formation of the
securities markets as well as the underdeveloped state of the banking and
telecommunications systems, settlement, clearing, and registration are subject
to significant risks not normally associated with investments in the United
States and more developed markets. Ownership of shares is defined according to
entries in the issuer's share register (maintained by third party registrars)
and normally evidenced by extracts from the register. These registrars are not
necessarily subject to effective state supervision, and it is possible for the
Fund to lose its registration through fraud, negligence, or even mere oversight.
In addition, the extracts have no legal enforceability, and it is possible that
subsequent illegal amendment or other fraudulent acts may deprive the fund of
its ownership rights. Uncertainty in settlement results from the time necessary
for buyers and sellers to physically deliver documents to the registrars which
may be located in remote areas. In the case of purchases, payment is not made
until the custodian has physically received the extract. For sales, the Fund may
be forced to remit securities before payment is received.
24
<PAGE>
Foreign Currency and Exchange Risk The Fund's assets are invested in
securities denominated in rubles, which are not yet freely convertible into
other currencies outside Russia. The value of the assets of the Fund and its
income, as measured in U.S. dollars, may suffer significant declines due to
disruptions in the ruble market, or be otherwise adversely affected by exchange
control regulations.
Political and Economic Risk Since the breakup of the Soviet Union at the end
of 1991, Russia has experienced dramatic political and social change. The
political system in Russia is emerging from a long history of extensive state
involvement in economic affairs. The country is undergoing a rapid transition
from a centrally-controlled command system to a market-oriented, democratic
model. The Fund may be affected unfavorably by political or diplomatic
developments, social instability, changes in government policies, taxation and
interest rates, currency repatriation restrictions and other political and
economic developments in the law or regulations in Russia. In particular, the
Fund may be exposed to the risk of expropriation, nationalization and
confiscation of assets and changes in legislation relating to foreign ownership.
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.
8. Restricted Securities
Pursuant to guidelines adopted by the Fund's Board of Directors, the following
securities have been deemed to be illiquid. The Fund currently limits investment
in illiquid securities to 15% of the Fund's net assets, at market value, at the
time of purchase.
Average
Acquisition Cost Per Market % of Net
Security Shares Date Share Value Assets
-------- ------ ---- ----- ----- ------
Chelyabinskvyazinform
(Preferred shares) ... 2,600 11/19/96 $16.92 $ 28,002 0.22%
Lenenergo
(Preferred shares) ... 250,000 6/19/96 0.13 70,000 0.56%
Megionneftegaz
(Preferred shares) ... 40,000 8/15/96 1.65 88,000 0.70%
Moscow Telephone Systems
(Preferred shares) ... 400 8/16/96 2.00 160,000 1.28%
Nizhnevartovskneftegaz
(Preferred shares) ... 10,000 11/1/96 3.30 25,000 0.20%
Noyabrskneftegaz
(Preferred shares) ... 30,000 9/4/96 2.73 112,500 0.90%
Nizhnovsviyazinform
(Preferred shares) ... 100,000 11/20/96 1.60 105,000 0.84%
Samarasvyazinform
(Preferred shares) ... 3,000 11/19/96 36.50 90,000 0.72%
Tomskneft
(Preferred shares) ... 10,000 6/26/96 3.50 33,500 0.27%
Sverdlovskenergo
(Preferred shares) ... 624,000 9/4/06 0.14 124,800 0.96%
-------- -----
$836,802 6.65%
======== =====
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LEXINGTON TROIKA DIALOG RUSSIA FUND, INC.
FINANCIAL HIGHLIGHTS
(unaudited)
Selected per share data for a share outstanding throughout the period:
July 3, 1996
Effective Date--
Fund SEC Registration
to November 30, 1996
(unaudited)1
-----------------
Net asset value, beginning of period ............................. $12.12
------
Loss from investment operations:
Net investment loss .......................................... (0.04)
Net realized and unrealized loss on investments .............. (0.78)
------
Total loss from investment operations ........................ (0.82)
------
Net asset value, end of period ................................... $11.30
------
Total return ..................................................... (15.53)%*
Ratio to average net assets:
Expenses, before reimbursement or waiver ..................... 5.07%*
Expenses, net of reimbursement or waiver ..................... 3.00%*
Net investment loss, before reimbursement or waiver .......... (3.16)%*
Net investment loss .......................................... (1.09)%*
Portfolio turnover ............................................... 148.40%*
Average commission paid on equity security transactions .......... 0.00
Net assets at end of period (000's omitted) ......................$12,526
=======
* Annualized
1 The Fund's commencement of operations was on June 3, 1996 with the
investment of its initial capital. The Fund's registration with the Securities
and Exchange Commission became effective on July 3, 1996. Financial results
prior to the effective date of the Fund's registration statement are not
presented in this Financial Highlights Table.
26
