<PAGE>
[LEXINGTON LOGO]
PROSPECTUS MAY 3, 1999
THE LEXINGTON FUNDS(R)
<TABLE>
<S> <C> <C> <C>
DOMESTIC EQUITY FUNDS INTERNATIONAL AND GLOBAL FIXED-INCOME FUNDS AND PRECIOUS METALS FUNDS
FUNDS MONEY MARKET FUNDS
LEXINGTON GROWTH AND LEXINGTON GLOBAL LEXINGTON GNMA LEXINGTON GOLDFUND,
INCOME FUND, INC. CORPORATE LEADERS INCOME FUND, INC. INC.
FUND, INC.
LEXINGTON SMALLCAP LEXINGTON INTERNATIONAL LEXINGTON GLOBAL INCOME LEXINGTON SILVER FUND,
FUND, INC. FUND, INC. FUND INC.
LEXINGTON WORLDWIDE LEXINGTON MONEY MARKET
EMERGING MARKETS TRUST
FUND, INC.
LEXINGTON SMALL CAP ASIA
GROWTH FUND, INC.
LEXINGTON TROIKA DIALOG
RUSSIA FUND, INC.
</TABLE>
The Securities and Exchange Commission has not approved nor disapproved the
shares of any of the Funds. The Securities and Exchange Commission also has not
determined whether this Prospectus is accurate or complete. Any person who tells
you that the Securities and Exchange Commission has made such an approval or
determination is committing a crime.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
Domestic Equity Funds
Lexington Growth and Income Fund, Inc. ................... 4
Lexington SmallCap Fund, Inc. ............................ 6
International and Global Funds
Lexington Global Corporate Leaders Fund, Inc. ............ 8
Lexington International Fund, Inc. ....................... 10
Lexington Worldwide Emerging Markets Fund, Inc. .......... 12
Lexington Small Cap Asia Growth Fund, Inc. ............... 14
Lexington Troika Dialog Russia Fund, Inc. ................ 16
Fixed Income Funds and Money Market Funds
Lexington GNMA Income Fund, Inc. ......................... 18
Lexington Global Income Fund.............................. 20
Lexington Money Market Trust.............................. 22
Precious Metals Funds
Lexington Goldfund, Inc. ................................. 24
Lexington Silver Fund, Inc. .............................. 26
Risks of Investing
Risks of Investing in Mutual Funds........................ 28
Risks of Investing in Securities of Small Companies....... 28
Risks of Investing in Foreign Securities.................. 28
Risks of Investing in Lower Quality Debt Securities....... 29
Risks of Investing in Securities of Russian Companies..... 29
Non-diversified Portfolio................................. 29
Precious Metals........................................... 30
Temporary Defensive Position.............................. 30
Management of the Funds..................................... 31
Shareholder Information
Investment Options........................................ 37
What You Need to Know About Your Lexington Account........ 38
Becoming a Lexington Shareholder.......................... 38
Buying Additional Shares.................................. 38
Exchanging Shares......................................... 39
Minimum Account Balance................................... 39
Redeeming Your Shares..................................... 40
Redeeming by Written Instruction.......................... 40
Redeeming by Telephone.................................... 40
Redeeming by Check........................................ 41
Systematic Withdrawal Plan................................ 41
How Fund Shares are Priced................................ 41
Dividends and Capital Gain Distributions.................. 42
Taxes..................................................... 42
Distribution of Fund's Shares............................... 44
Financial Highlights........................................ 45
</TABLE>
<PAGE>
LEXINGTON GROWTH AND INCOME FUND, INC.
RISK/RETURN SUMMARY
INVESTMENT - The Lexington Growth and Income Fund's principal investment
OBJECTIVE objective is long-term capital appreciation. Income is a
secondary objective.
INVESTMENT The Lexington Growth and Income Fund, Inc. ("the Fund") will
STRATEGY invest at least 65% of its total assets in common stocks of
U.S. companies, which may include dividend paying securities
and securities convertible into shares of common stock. The
Fund seeks to invest in large, ably managed and well financed
companies. The investment approach is to identify high
quality companies with good earnings and price momentum which
sell at attractive valuations.
The Fund may invest the remaining 35% of its assets in
foreign securities and smaller capitalization companies.
PRINCIPAL Through stock investment, the Fund may expose you to common
RISKS stock risks which may cause you to lose money if there is a
sudden decline in the share price of one or more of the
companies in the Fund's portfolio. Due to the inherent
effects of the stock market, the value of the Fund will
fluctuate with the movement of the market as well as in
response to the activities of individual companies in the
Fund's portfolio.
For a more detailed risk discussion involving investments in
this Fund, please read "Risks of Investing" on page 28.
4
<PAGE>
DOMESTIC EQUITY FUNDS
BAR CHART AND PERFORMANCE TABLE
The bar chart and performance table below show the risks of investing in the
Fund. The chart shows changes in the performance from 1989 through 1998. The
table shows how the average annual return compares with the most commonly used
index for its market segment for 1, 5 and 10 years (or since inception). You
should remember that past performance is not an indication of future
performance.
PAST FUND PERFORMANCE The chart at the left below shows the risk of
investing in the Fund and how the Fund's total return has varied from
year-to-year. The chart at the right compares the Fund's performance with
the most commonly used index for its market segment. Of course, past
performance is no guarantee of future results.
----------------------------------------------------------------------------
<TABLE>
<CAPTION>
GROWTH & INCOME FUND
--------------------
<S> <C>
1989 27.56%
1990 -10.27%
1991 24.87%
1992 12.36%
1993 13.22%
1994 -3.11%
1995 22.57%
1996 26.46%
1997 30.36%
1998 21.42%
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
AVERAGE ANNUAL RETURNS THROUGH 12/31/98
Growth &
Income Fund 21.42(%) 18.90(%) 15.76(%)
S&P 500 28.72(%) 24.09(%) 19.22(%)
----------------------------------------
1 Year 5 Year 10
Year
</TABLE>
- --------------------------------------------------------------------------------
During the ten year period shown in the above bar graph chart, the fund's
highest quarterly return was 21.95% for the fourth quarter in 1998 and the
fund's lowest quarterly return was -14.87% for the third quarter in 1990.
This table describes the fees and expenses that you may pay if
you buy and hold shares of the Fund.
FEES AND
EXPENSES
<TABLE>
<S> <C>
SHAREHOLDER FEES (Paid directly from your investment)
Maximum Sales Charges (Load) Imposed on Purchases (as a %
of offering price) None
Maximum Deferred Sales Charge (Load) None
Maximum Sales Charge (Load) Imposed on Reinvested
Dividends/Distributions None
Redemption Fee (as a % of amount redeemed, if applicable) None
Exchange Fee None
30-Day Redemption/Exchange Fee None
Maximum Account Fee None
ANNUAL FUND OPERATING EXPENSES (Paid from Fund assets)
Management Fees 0.63%
Rule 12b-1 Fees 0.25%
Other Fees 0.28%
- ------------------------------------------------------------------------
TOTAL FUND OPERATING EXPENSES 1.16%
</TABLE>
Example of Expenses: This example is intended to help you
compare the cost of investing in the Fund with the cost of
investing in other mutual funds.
This example assumes that you invest $10,000 in the Fund for
the time periods indicated and then redeem all of your shares
at the end of those periods. It also assumes that your
investment has a 5% annual return each year and that the
operating expenses remain the same. Although your actual costs
may be higher or lower, based on these assumptions your costs
would be:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
- ---------------------------------------
<S> <C> <C> <C>
$118.23 $368.48 $638.31 $1,408.96
</TABLE>
See "Management of the Fund" for more complete descriptions of
such costs and expenses.
5
<PAGE>
LEXINGTON SMALLCAP FUND, INC.
RISK/RETURN SUMMARY
INVESTMENT - The Lexington SmallCap Fund's principal investment
OBJECTIVE objective is long-term capital appreciation. The Lexington
SmallCap Fund will seek to obtain its objective through
investment in equity securities and equivalents primarily
of domestic companies having market capitalizations of
less than $1 billion.
INVESTMENT The Lexington SmallCap Fund, Inc. (the "Fund") will invest at
STRATEGY least 90% of its assets in domestic companies having market
capitalizations between $20 million and $1 billion at the
time of investment. The Fund may invest the remaining 10% of
its assets in a similar manner, or in securities of companies
with market capitalizations below $20 million, above $1
billion, foreign companies with dollar denominated shares
traded in the United States, American Depository Shares or
Receipts, real estate investment trusts and cash. The Fund
will invest primarily in listed securities or those traded
over-the-counter.
In selecting investments for the Fund, Lexington Management
Corporation ("the Manager") and the sub-adviser have
established a universe of small capitalization stocks that
are screened using the sub-adviser's proprietary stock
selectivity model. The quality of each company including its
risk/reward prospects are reviewed and analyzed. This
approach takes into account both value and growth stocks.
Once the stocks are evaluated and ranked by expected future
relative price performance, the Manager and sub-adviser build
the portfolio, taking into account both sector and
diversification considerations.
PRINCIPAL Through stock investment, the Fund may expose you to common
RISKS stock risks which may cause you to lose money if there is a
sudden decline in the share price of one or more of the
companies in the Fund's portfolio. Due to the inherent
effects of the stock market, the value of the Fund will
fluctuate with the movement of the market as well as in
response to the activities of individual companies in the
Fund's portfolio. Also, the Fund's focus on small cap stocks
may expose investors to additional risks. Smaller companies
typically have more limited product lines, markets and
financial resources than larger companies, and their
securities may trade less frequently and in more limited
volume than those of larger, more mature companies. As a
result, small cap stocks, and therefore the Fund, may
fluctuate significantly more in value than larger cap stocks
and funds that focus on them.
For a more detailed risk discussion involving investments in
this Fund, please read "Risks of Investing" on page 28.
6
<PAGE>
DOMESTIC EQUITY FUNDS
BAR CHART AND PERFORMANCE TABLE
The bar chart and performance table below show the risks of investing in the
Fund. The chart shows changes in the performance since inception (01/02/96)
through 12/31/98. The table shows how the average annual returns compares with
the most commonly used index for its market segment for 1, 5 and 10 years (or
since inception). You should remember that past performance is not an indication
of future performance.
PAST FUND PERFORMANCE The chart at the left below shows the risk of
investing in the Fund and how the Fund's total return has varied from
year-to-year. The chart at the right compares the Fund's performance with
the most commonly used index for its market segment. Of course, past
performance is no guarantee of future results.
----------------------------------------------------------------------------
<TABLE>
<CAPTION>
SMALL CAP FUND
--------------
<S> <C>
1996 17.50%
1997 10.47%
1998 6.73%
</TABLE>
<TABLE>
<S> <C> <C> <C>
AVERAGE ANNUAL RETURNS THROUGH 12/31/98
SmallCap Fund 6.73(%) 11.51(%)
Russell 2000 Index -2.55(%) 11.56(%)
---------------------------------------
1 Year Since
Inception
(01/02/96)
</TABLE>
- --------------------------------------------------------------------------------
During the three year period shown in the above bar graph chart, the fund's
highest quarterly return was 15.04% for the fourth quarter in 1998 and the
fund's lowest quarterly return was -11.43% for the fourth quarter in 1997.
This table describes the fees and expenses that you may pay if
you buy and hold shares of the Fund.
FEES AND
EXPENSES
<TABLE>
<S> <C>
SHAREHOLDER FEES (Paid directly from your investment)
Maximum Sales Charges (Load) Imposed on Purchases (as a %
of offering price) None
Maximum Deferred Sales Charge (Load) None
Maximum Sales Charge (Load) Imposed on Reinvested
Dividends/Distributions None
Redemption Fee (as a % of amount redeemed, if applicable) None
Exchange Fee None
30-Day Redemption/Exchange Fee None
Maximum Account Fee None
ANNUAL FUND OPERATING EXPENSES (Paid from Fund assets)*
Management Fees 1.00%
Rule 12b-1 Fees 0.25%
Other Fees 1.67%
- ------------------------------------------------------------------------
TOTAL FUND OPERATING EXPENSES 2.92%
</TABLE>
* In 1998, 0.33% of the management fee was voluntarily waived
by the Manager, and as a result, net expenses were actually
2.59%.
Example of Expenses: This example is intended to help you
compare the cost of investing in the Fund with the cost of
investing in other mutual funds.
This example assumes that you invest $10,000 in the Fund for
the time periods indicated and then redeem all of your shares
at the end of those periods. This example also assumes that
your investment has a 5% annual return each year and that the
operating expenses remain the same. Although your actual costs
may be higher or lower, based on these assumptions your costs
would be:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
- -----------------------------------------
<S> <C> <C> <C>
$295.04 $903.65 $1,537.84 $3,242.41
</TABLE>
See "Management of the Fund" for more complete descriptions of
such costs and expenses.
7
<PAGE>
LEXINGTON GLOBAL CORPORATE LEADERS FUND, INC.
RISK/RETURN SUMMARY
INVESTMENT - The Lexington Global Corporate Leaders Fund's investment
OBJECTIVE objective is to seek long-term growth of capital through
investment in equity securities and equity equivalents of
foreign and U.S. companies.
INVESTMENT The Lexington Global Corporate Leaders Fund, Inc. (the
STRATEGY "Fund") normally invests at least 65% of its total assets in
a diversified portfolio of blue chip securities that the
Manager believes represent "corporate leaders" in their
respective industries.
The Fund may invest in the securities of companies and
governments of the following regions:
- Asia Region (including Japan);
- Europe;
- Latin America;
- Africa;
- North America (including U.S. and Canada); and,
- Other areas and countries as the Manager may decide from
time to time.
The Fund will normally invest in at least three different
countries. The Fund intends to select the countries,
currencies and companies that provide the greatest potential
for long- term growth.
The Fund may invest 35% of its total assets in:
- securities of smaller capitalization companies;
- debt securities; and
- other investments.
PRINCIPAL Through stock investment, the Fund may expose you to common
RISKS stock risks which may cause you to lose money if there is a
sudden decline in the share price of one of the companies in
the Fund's portfolio. Due to the inherent effects of stock
markets, the value of the Fund will fluctuate with the
movements as well as in response to the activities of
individual companies in the Fund's portfolio. By investing in
foreign stocks, the Fund exposes shareholders to additional
risks. Some foreign stock markets tend to be more volatile
than the U.S. market due to economic and political
instability and regulatory conditions in these countries. In
addition, most of the foreign securities in which the Fund
invests are denominated in foreign currencies, whose values
may decline against the U.S. dollar.
For a more detailed risk discussion involving investments in
this Fund, please read "Risks of Investing" on page 28.
8
<PAGE>
INTERNATIONAL FUNDS
BAR CHART AND PERFORMANCE TABLE
The bar chart and performance table below show the risks of investing in the
Fund. The chart shows changes in the performance from 1989 through 1998. The
table shows how the average annual return compares with the most commonly used
index for its market segment for 1, 5 and 10 years (or since inception). You
should remember that past performance is not an indication of future
performance.
PAST FUND PERFORMANCE The chart at the left below shows the risk of
investing in the Fund and how the Fund's total return has varied from
year-to-year. The chart at the right compares the Fund's performance with
the most commonly used index for its market segment. Of course, past
performance is no guarantee of future results.
----------------------------------------------------------------------------
<TABLE>
<CAPTION>
GLOBAL CORPORATE LEADERS FUND
-----------------------------
<S> <C>
89 25.10%
90 -16.75%
91 15.55%
92 -3.55%
93 31.88%
94 1.84%
95 10.69%
96 16.43%
97 6.90%
98 19.06%
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
AVERAGE ANNUAL RETURNS THROUGH 12/31/98
Global Corporate
Leaders Fund 19.06(%) 10.81(%) 9.84(%)
MSCI-World Index 24.80(%) 15.77(%) 10.70(%)
------------------------------------------
1 Year 5 Year 10
Year
</TABLE>
- --------------------------------------------------------------------------------
During the ten year period shown in the above bar graph chart, the fund's
highest quarterly return was 16.76% for the fourth quarter in 1998 and the
fund's lowest quarterly return was -18.32% for the third quarter in 1990.
This table describes the fees and expenses that you may pay if
you buy and hold shares of the Fund.
FEES AND
EXPENSES
<TABLE>
<S> <C>
SHAREHOLDER FEES (Paid directly from your investment)
Maximum Sales Charges (Load) Imposed on Purchases (as a %
of offering price) None
Maximum Deferred Sales Charge (Load) None
Maximum Sales Charge (Load) Imposed on Reinvested
Dividends/Distributions None
Redemption Fee (as a % of amount redeemed, if applicable) None
Exchange Fee None
30-Day Redemption/Exchange Fee None
Maximum Account Fee None
ANNUAL FUND OPERATING EXPENSES (Paid from Fund assets)
Management Fees 1.00%
Rule 12b-1 Fees None
Other Fees 1.12%
- ------------------------------------------------------------------------
TOTAL FUND OPERATING EXPENSES 2.12%
</TABLE>
Example of Expenses: This example is intended to help you
compare the cost of investing in the Fund with the cost of
investing in other mutual funds.
This example assumes that you invest $10,000 in the Fund for
the time periods indicated and then redeem all of your shares
at the end of those periods. This example also assumes that
your investment has a 5% annual return each year and that the
operating expenses remain the same. Although your actual costs
may be higher or lower, based on these assumptions your costs
would be:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
- -----------------------------------------
<S> <C> <C> <C>
$215.05 $663.92 $1,139.01 $2,451.76
</TABLE>
See "Management of the Fund" for more complete descriptions of
such costs and expenses.
9
<PAGE>
LEXINGTON INTERNATIONAL FUND, INC.
RISK/RETURN SUMMARY
INVESTMENT - The Lexington International Fund's investment objective is
OBJECTIVE to seek long-term growth of capital through investment in
equity securities and equity equivalents of companies
outside of the U.S.
INVESTMENT The Lexington International Fund, Inc. (the "Fund") will
STRATEGY invest at least 65% of its total assets in securities and
equivalents of companies outside of the U.S. The Fund
generally invests the remaining 35% of its total assets in a
similar manner, but may invest those assets in companies in
the United States, in debt securities or other investments.
The Fund intends to provide investors with the opportunity to
invest in a portfolio of securities of companies and
governments located throughout the world. In making the
allocation of assets among the various countries and
geographic regions, the Fund considers such factors as
prospects for relative economic-growth; expected levels of
inflation and interest rates; government polices influencing
business conditions; the range of investment opportunities
available to international investors; and other pertinent
financial, tax, social, political and national factors -- all
in relation to the prevailing prices of the securities in
each country or region. The Fund does not anticipate
concentrating its investments in any particular region.
PRINCIPAL Through stock investment, the Fund may expose you to common
RISKS stock risks which may cause you to lose money if there is a
sudden decline in the share price of one or more of the
companies in the Fund's portfolio. Due to the inherent
effects of stock markets, the value of the Fund will
fluctuate with the movement of the markets as well as in
response to the activities of individual companies in the
Fund's portfolio. By investing in foreign stocks, the Fund
exposes shareholders to additional risks. Foreign stock
markets tend to be more volatile than the U.S. market due to
economic and political instability and regulatory conditions
in some countries. In addition, most of the foreign
securities in which the Fund invests are denominated in
foreign currencies, whose values may decline against the U.S.
dollar.
For a more detailed risk discussion involving investments in
this Fund, please read "Risks of Investing" on page 28.
10
<PAGE>
INTERNATIONAL FUNDS
BAR CHART AND PERFORMANCE TABLE
The bar chart and performance table below show the risks of investing in the
Fund. The chart shows changes in the performance since inception (01/03/94)
through 1998. The table shows how the average annual return compares with the
most commonly used index for its market segment for 1, 5 and 10 years (or since
inception). You should remember that past performance is not an indication of
future performance.
PAST FUND PERFORMANCE The chart at the left below shows the risk of
investing in the Fund and how the Fund's total return has varied from
year-to-year. The chart at the right compares the Fund's performance with
the most commonly used index for its market segment. Of course, past
performance is no guarantee of future results.
----------------------------------------------------------------------------
<TABLE>
<CAPTION>
INTERNATIONAL FUND
------------------
<S> <C>
94 5.87%
95 5.77%
96 13.57%
97 1.61%
98 19.02%
</TABLE>
<TABLE>
<S> <C> <C> <C>
AVERAGE ANNUAL RETURNS THROUGH 12/31/98
International Fund 19.02(%) 9.00(%)
EAFE 20.33(%) 9.25(%)
----------------------------------------------
1 Year Since Inception
(01/03/94)
</TABLE>
- --------------------------------------------------------------------------------
During the five year period shown in the above bar graph chart, the fund's
highest quarterly return was 17.09% for the fourth quarter in 1998 and the
fund's lowest quarterly return was -10.65% for the fourth quarter in 1997.
This table describes the fees and expenses that you may pay if
you buy and hold shares of the Fund.
FEES AND
EXPENSES
<TABLE>
<S> <C>
SHAREHOLDER FEES (Paid directly from your investment)
Maximum Sales Charges (Load) Imposed on Purchases (as a %
of offering price) None
Maximum Deferred Sales Charge (Load) None
Maximum Sales Charge (Load) Imposed on Reinvested
Dividends/Distributions None
Redemption Fee (as a % of amount redeemed, if applicable) None
Exchange Fee None
30-Day Redemption/Exchange Fee None
Maximum Account Fee None
ANNUAL FUND OPERATING EXPENSES (Paid from Fund assets)*
Management Fees 1.00%
Rule 12b-1 Fees 0.25%
Other Fees 1.00%
- ------------------------------------------------------------------------
TOTAL FUND OPERATING EXPENSES 2.25%
</TABLE>
* In 1998, 0.50% of the management fee was voluntarily waived
by the Manager, and as a result, net expenses were actually
1.75%.
Example of Expenses: This example is intended to help you
compare the cost of investing in the Fund with the cost of
investing in other mutual funds.
This example assumes that you invest $10,000 in the Fund for
the time periods indicated and then redeem all of your shares
at the end of those periods. This example also assumes that
your investment has a 5% annual return each year and that the
operating expenses remain the same. Although your actual costs
may be higher or lower, based on these assumptions your costs
would be:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
- -----------------------------------------
<S> <C> <C> <C>
$228.09 $703.27 $1,204.94 $2,584.93
</TABLE>
See "Management of the Fund" for more complete descriptions of
such costs and expenses.
11
<PAGE>
LEXINGTON WORLDWIDE EMERGING MARKETS FUND, INC.
RISK/RETURN SUMMARY
INVESTMENT - The Lexington Worldwide Emerging Markets Fund's investment
OBJECTIVE objective is to seek long-term growth of capital primarily
through investment in equity securities and equity
equivalents of emerging market companies.
INVESTMENT The Lexington Worldwide Emerging Markets Fund, Inc. (the
STRATEGY "Fund") will invest at least 65% of its total assets
according to its investment objective. The Fund's definition
of emerging markets includes, but is not limited to, the
following:
- Africa: Botswana, Egypt, Ghana, Ivory Coast, Kenya,
Mauritius, Morocco, Namibia, South Africa, Swaziland,
Tunisia, Zambia and Zimbabwe;
- Asia: Bahrain, Bangladesh, China, Hong Kong, India,
Indonesia, Malaysia, Pakistan, the Philippines, Singapore,
South Korea, Sri Lanka, Taiwan and Thailand;
- Europe: Croatia, Cyprus, Czech Republic, Estonia, Finland,
Greece, Hungary, Latvia, Lithuania, Poland, Portugal,
Romania, Russia, Slovakia and Slovenia;
- The Middle East: Israel, Jordan, Lebanon, Oman and Turkey;
- Latin America: Argentina, Bolivia, Brazil, Chile,
Colombia, Ecuador, Mexico, Nicaragua, Peru and Venezuela.
The Manager of the Fund considers an emerging markets company
to be any company domiciled in an emerging market country, or
any company that derives 50% or more of its total revenue
from either goods or services produced or sold in countries
with emerging markets.
The Fund may invest the remaining 35% of its assets in equity
securities without regard to whether the issuer qualifies as
an emerging market company, debt securities denominated in
the currency of an emerging market country or issued or
guaranteed by an emerging market company or the government of
an emerging market country, short-term or medium-term debt
securities or other types of securities.
The Fund's investment approach is to focus on positive
returns through long-term capital gains. The investment
strategy is based on a top-down approach that compares macro
trends, such as economics, politics, industry trends, and
commodity trends on a relative basis. Countries are grouped
regionally and globally and ranked based on their macro
scores. Once specific countries are identified as relative
outperformers, specific companies are selected as
investments. The selection process for selecting individual
companies is based on fundamental research, industry themes,
and identifying specific catalysts for growth.
PRINCIPAL Through stock investment, the Fund may expose you to common
RISKS stock risks which may cause you to lose money if there is a
sudden decline in the share price of one of the companies in
the Fund's portfolio. In addition, the risks of investing in
emerging markets are considerable. Emerging stock markets
tend to be more volatile than the U.S. market due to the
relative immaturity, and occasional instability, of their
political and economic systems. In the past many emerging
markets restricted the flow of money into or out of their
stock markets, and some continue to impose restrictions on
foreign investors. These markets tend to be less liquid and
offer less regulatory protection for investors. The economies
of emerging countries may be predominately based on only a
few industries or on revenue from particular commodities,
international aid and other assistance. In addition, most of
the foreign securities in which the Fund invests are
denominated in foreign currencies, whose values may decline
against the U.S. dollar.
For a more detailed risk discussion involving investments in
this Fund, please read "Risks of Investing" on page 28.
12
<PAGE>
INTERNATIONAL FUNDS
BAR CHART AND PERFORMANCE TABLE
The bar chart and performance table below show the risks of investing in the
Fund. The chart shows changes in the performance from 1989 through 1998*. The
table shows how the average annual return compares with the most commonly used
index for its market segment for 1, 5 and 10 years (or since inception). You
should remember that past performance is not an indication of future
performance.
* Prior to June 17, 1991, the Fund operated under a different investment
objective.
PAST FUND PERFORMANCE The chart at the left below shows the risk of
investing in the Fund and how the Fund's total return has varied from
year-to-year. The chart at the right compares the Fund's performance with
the most commonly used index for its market segment. Of course, past
performance is no guarantee of future results.
----------------------------------------------------------------------------
<TABLE>
<CAPTION>
WORLDWIDE EMERGING MARKETS FUND
-------------------------------
<S> <C>
89 28.11%
90 -14.44%
91 24.19%
92 3.77%
93 63.37%
94 -13.81%
95 -5.93%
96 7.38%
97 -11.40%
98 -29.06%
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
AVERAGE ANNUAL RETURNS THROUGH 12/31/98
Worldwide
Emerging
Markets Fund -29.06(%) -11.36(%) 2.36(%)
MSCI
Emerging
Markets Free -25.34(%) -9.27(%) 10.95(%)
EAFE 20.33(%) 9.25(%) 5.86(%)
-----------------------------------------
1 Year 5 Year 10
Year
-----------------------------------------------------------------------------------------------------
During the ten year period shown in the above bar graph chart, the fund's highest quarterly return
was 31.81% for the fourth quarter in 1993 and the fund's lowest quarterly return was -26.18% for the
third quarter in 1998.
</TABLE>
This table describes the fees and expenses that you may pay if
you buy and hold shares of the Fund.
FEES AND
EXPENSES
<TABLE>
<S> <C>
SHAREHOLDER FEES (Paid directly from your investment)
Maximum Sales Charges (Load) Imposed on Purchases (as a %
of offering price) None
Maximum Deferred Sales Charge (Load) None
Maximum Sales Charge (Load) Imposed on Reinvested
Dividends/Distributions None
Redemption Fee (as a % of amount redeemed, if applicable) None
Exchange Fee None
30-Day Redemption/Exchange Fee None
Maximum Account Fee None
ANNUAL FUND OPERATING EXPENSES (Paid from Fund assets)
Management Fees 1.00%
Rule 12b-1 Fees 0.25%
Other Fees 0.60%
- ------------------------------------------------------------------------
TOTAL FUND OPERATING EXPENSES 1.85%
</TABLE>
Example of Expenses: This example is intended to help you
compare the cost of investing in the Fund with the cost of
investing in other mutual funds.
This example assumes that you invest $10,000 in the Fund for
the time periods indicated and then redeem all of your shares
at the end of those periods. This example also assumes that
your investment has a 5% annual return each year and that the
operating expenses remain the same. Although your actual costs
may be higher or lower, based on these assumptions your costs
would be:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
- -----------------------------------------
<S> <C> <C> <C>
$187.91 $581.69 $1,000.66 $2,169.16
</TABLE>
See "Management of the Fund" for more complete descriptions of
such costs and expenses.
13
<PAGE>
LEXINGTON SMALL CAP ASIA GROWTH FUND, INC.
RISK/RETURN SUMMARY
INVESTMENT - The Lexington Small Cap Asia Growth Fund's investment
OBJECTIVE objective is to seek long-term capital appreciation
primarily by investing in equity securities and equity
equivalents of companies in the Asia Region having market
capitalizations of less than $1 billion.
INVESTMENT The Lexington Small Cap Asia Growth Fund, Inc. (the "Fund")
STRATEGY will normally invest at least 65% of its total assets in
equity securities of smaller companies in the Asia Region.
The Fund will primarily invest in listed securities but may
also invest in unlisted securities.
The Fund intends to invest primarily in companies which:
- have proven management;
- are undervalued and under-researched by the investment
community;
- are within industry sectors with strong growth prospects;
and
- which have potential investment returns that are superior
to the Asian market as a whole.
The Fund may invest 35% of its total assets in:
- companies with market capitalizations of $1 billion or
more;
- companies outside the Asia Region (e.g. Australia or New
Zealand);
- debt securities; and
- other investments.
The Fund considers the following countries to be in the Asia
Region:(1)
<TABLE>
<S> <C> <C> <C> <C>
Bangladesh India Malaysia Singapore Taiwan
China Indonesia Pakistan Sri Lanka Thailand
Hong Kong Korea The Philippines Vietnam
</TABLE>
The Fund will normally invest in at least three different
countries. The Fund does not intend to invest in Japanese
securities.
PRINCIPAL Through stock investment, the Fund may expose you to common
RISKS stock risks which may cause you to lose money if there is a
sudden decline in the share price in one of the companies in
the Fund's portfolio. The Fund's volatility may be increased
by its heavy concentration in emerging Asian markets as they
tend to be much more volatile than the U.S. market due to
their relative immaturity and instability. The economies of
emerging countries may be predominately based on only a few
industries or on revenue from particular commodities,
international aid and other assistance. Some emerging Asian
countries, such as Malaysia in 1998, have restricted the flow
or money into or out of the country. Emerging markets also
tend to be less liquid and offer less regulatory protection
for investors. Since mid-1997 Asia has faced serious economic
problems and disruptions, causing substantial losses for some
investors. Also, most of the securities in which the Fund
invests are denominated in foreign currencies, whose values
may decline against the U.S. dollar.
For a more detailed risk discussion involving investments in
this Fund, please read "Risks of Investing" on page 28.
(1) The Fund considers a company to be within the Asia Region
if its principal securities' trading market is located in
the Asia Region.
14
<PAGE>
INTERNATIONAL FUNDS
BAR CHART AND PERFORMANCE TABLE
The bar chart and performance table below show the risks of investing in the
Fund. The chart shows changes in the performance since inception (07/03/95)
through 12/31/98. The table shows how the average annual return compares with
the most commonly used index for its market segment for 1, 5 and 10 years (or
since inception). You should remember that past performance is not an indication
of future performance.
PAST FUND PERFORMANCE The chart at the left below shows the risk of
investing in the Fund and how the Fund's total return has varied from
year-to-year. The chart at the right compares the Fund's performance with
the most commonly used index for its market segment. Of course, past
performance is no guarantee of future results.
----------------------------------------------------------------------------
<TABLE>
<CAPTION>
CROSBY SMALL CAP ASIA GROWTH FUND
---------------------------------
<S> <C>
95 -4.39%
96 25.50%
97 -42.32%
98 -19.41%
</TABLE>
<TABLE>
<S> <C> <C> <C>
AVERAGE ANNUAL RETURNS THROUGH 12/31/98
Crosby Small Cap
Asia Growth Fund -19.41(%) -14.82(%)
MSCI All Country
Far East ex-Japan -4.83(%) -13.21(%)
EAFE 20.33(%) 10.24(%)
---------------------------------------
1 Year Since
Inception
(07/03/95)
---------------------------------------------------------------------------------------------------
During the four year period shown in the above bar graph chart, the fund's highest quarterly return
was 23.43% for the fourth quarter in 1998 and the fund's lowest quarterly return was -41.41% for
the fourth quarter in 1997.
</TABLE>
This table describes the fees and expenses that you may pay if
you buy and hold shares of the Fund.
FEES AND
EXPENSES
<TABLE>
<S> <C>
SHAREHOLDER FEES (Paid directly from your investment)
Maximum Sales Charges (Load) Imposed on Purchases (as % of
offering price) None
Maximum Deferred Sales Charge (Load) None
Maximum Sales Charge (Load) Imposed on Reinvested
Dividends/Distributions None
Redemption Fee (as % of amount redeemed, if applicable) None
Exchange Fee None
30-Day Redemption/Exchange Fee None
Maximum Account Fee None
ANNUAL FUND OPERATING EXPENSES (Paid from Fund assets)*
Management Fees 1.25%
Rule 12b-1 Fees None
Other Fees 1.61%
- ------------------------------------------------------------------------
TOTAL FUND OPERATING EXPENSES 2.86%
</TABLE>
* In 1998, 0.36% of the management fee was voluntarily waived
by the Manager, and as a result, net expenses were actually
2.50%.
Example of Expenses: This example is intended to help you
compare the cost of investing in the Fund with the cost of
investing in other mutual funds.
This example assumes that you invest $10,000 in the Fund for
the time periods indicated and then redeem all of your shares
at the end of those periods. This example also assumes that
your investment has a 5% annual return each year and that the
operating expenses remain the same. Although your actual costs
may be higher or lower, based on these assumptions your costs
would be:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
- -----------------------------------------
<S> <C> <C> <C>
$289.06 $885.87 $1,508.50 $3,185.46
</TABLE>
See "Management of the Fund" for more complete descriptions of
such costs and expenses.
15
<PAGE>
LEXINGTON TROIKA DIALOG RUSSIA FUND, INC.
RISK/RETURN SUMMARY
INVESTMENT - The Lexington Troika Dialog Russia Fund's investment
OBJECTIVE objective is to seek long-term capital appreciation
through investment primarily in equity securities of
Russian companies.
INVESTMENT The Lexington Troika Dialog Russia Fund, Inc. (the "Fund")
STRATEGY seeks to achieve its objective by investing at least 65% of
its total assets in equity securities and equity equivalents
of Russian companies. The Fund may invest the other 35% of
its total assets in debt securities issued by Russian
companies and debt securities issued or guaranteed by the
Russian government. The Fund may also invest in the equity
securities of issuers outside of Russia which the Fund
believes will experience growth in revenue and profits from
participation in the development of the economies of the
former Soviet Union.
PRINCIPAL The Fund's investments will include investments in Russian
RISKS companies that have characteristics and business
relationships common to companies outside of Russia, and as a
result, outside economic forces may cause fluctuations in the
value of securities held by the Fund.
Additional risks associated with investing in securities of
Russian issuers include:
- The lack of available reliable financial information which
has been prepared and audited in accordance with U.S. or
Western European generally accepted accounting principles
and auditing standards;
- The extremely volatile and often illiquid nature of the
secondary market for Russian securities;
- A cumbersome share registration system for recording
ownership of Russian securities which may adversely affect
a person's ability to prove ownership.
- The potential for unfavorable action such as
expropriation, dilution, devaluation, default or excessive
taxation by the Russian government or any of its agencies
or political subdivisions with respect to investments in
Russian securities by or for the benefit of foreign
entities.
The Fund is a non-diversified investment company. There is
additional risk associated with being non-diversified, since
a greater proportion of total assets may be invested in a
single company.
For a more detailed risk discussion involving investments in
this Fund, please read "Risks of Investing" on page 28.
16
<PAGE>
INTERNATIONAL FUNDS
BAR CHART AND PERFORMANCE TABLE
The bar chart and performance table below show the risks of investing in the
Fund. The chart shows changes in the performance since inception (07/03/96)
through 12/31/98. The table shows how the average annual return compares with
the most commonly used index for its market segment for 1, 5 and 10 years (or
since inception). You should remember that past performance is not an indication
of future performance.
PAST FUND PERFORMANCE The chart at the left below shows the risk of
investing in the Fund and how the Fund's total return has varied from
year-to-year. The chart at the right compares the Fund's performance with
the most commonly used index for its market segment. Of course, past
performance is no guarantee of future results.
----------------------------------------------------------------------------
<TABLE>
<CAPTION>
TROIKA DIALOG RUSSIA FUND
-------------------------
<S> <C>
96 -9.01%
97 67.50%
98 -82.99%
</TABLE>
<TABLE>
<S> <C> <C> <C>
AVERAGE ANNUAL RETURNS THROUGH
12/31/98
Troika Dialog
Russia Fund -82.99(%) -40.63(%)
Moscow Times
Index -79.62(%) -30.08(%)
Russian Trading
System Index -85.15(%) -41.79(%)
--------------------------------------
1 Year Since
Inception
(07/03/96)
--------------------------------------------------------------------------------------------------
During the three year period shown in the above bar graph chart, the fund's highest quarterly
return was 46.00% for the first quarter in 1997 and the fund's lowest quarterly return was -64.89%
for the third quarter in 1998.
</TABLE>
This table describes the fees and expenses that you may pay if
you buy and hold shares of the Fund.
FEES AND
EXPENSES
<TABLE>
<S> <C>
SHAREHOLDER FEES (Paid directly from your investment)
Maximum Sales Charges (Load) Imposed on Purchases (as a %
of offering price) None
Maximum Deferred Sales Charge (Load) None
Maximum Sales Charge (Load) Imposed on Reinvested
Dividends/Distributions None
Redemption Fee (as a % of amount redeemed, if applicable)+ 2.00%
Exchange Fee None
30-Day Redemption/Exchange Fee None
Maximum Account Fee None
ANNUAL FUND OPERATING EXPENSES (Paid from Fund assets)*
Management Fees 1.25%
Rule 12b-1 Fees 0.25%
Other Fees 1.14%
- ------------------------------------------------------------------------
TOTAL FUND OPERATING EXPENSES 2.64%
</TABLE>
* In 1998, expenses were reduced by 0.80% as a result of
redemption fee proceeds. Net expenses were actually 1.84%.
+ The 2.00% redemption fee only applies to shares held less
than 365 days.
Example of Expenses: This example is intended to help you
compare the cost of investing in the Fund with the cost of
investing in other mutual funds.
This example assumes that you invest $10,000 in the Fund for
the time periods indicated and then redeem all of your shares
at the end of those periods. This example also assumes that
your investment has a 5% annual return each year and that the
operating expenses remain the same. Although your actual costs
may be higher or lower, based on these assumptions your costs
would be:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
- -----------------------------------------
<S> <C> <C> <C>
$471.84 $820.41 $1,400.12 $2,973.44
</TABLE>
You would pay the following expenses if you did not redeem your
shares:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
- -----------------------------------------
<S> <C> <C> <C>
$267.12 $820.41 $1,400.12 $2,973.44
</TABLE>
See "Management of the Fund" for more complete descriptions of
such costs and expenses.
17
<PAGE>
LEXINGTON GNMA INCOME FUND, INC.
RISK/RETURN SUMMARY
INVESTMENT - The Lexington GNMA Income Fund's investment objective is
OBJECTIVE to seek a high level of current income, consistent with
liquidity and safety of principal, through investment
primarily in mortgage-backed GNMA ("Ginnie Mae")
Certificates that are guaranteed as to the timely payment
of principal and interest by the United States Government.
INVESTMENT Under normal conditions, the Lexington GNMA Income Fund, Inc.
STRATEGY (the "Fund") will invest at least 80% of the value of its
total assets in Government National Mortgage Association
("GNMA") mortgage-backed securities (also known as "GNMA
Certificates").(2) The remaining assets of the Fund will be
invested in other securities issued or guaranteed by the U.S.
Government, including U.S. Treasury securities.
PRINCIPAL Through investment in GNMA securities, the Fund may expose
RISKS you to certain risks which may cause you to lose money.
Mortgage prepayments are affected by the level of interest
rates and other factors, including general economic
conditions and the underlying location and age of the
mortgage. In periods of rising interest rates, the prepayment
rate tends to decrease, lengthening the average life of a
pool of GNMA securities. In periods of falling interest
rates, the prepayment rate tends to increase, shortening the
life of a pool. Because prepayments of principal generally
occur when interest rates are declining, it is likely that
the Fund may have to reinvest the proceeds of prepayments at
lower interest rates than those of their previous
investments. If this occurs, the Fund's yields will decline
correspondingly.
For a more detailed risk discussion involving investments in
this Fund, please read "Risks of Investing" on page 28.
(2) Please refer to the statement of additional information
for a complete description of GNMA certificates and
Modified Pass through GNMA Certificates. The Fund intends
to use the proceeds from principal payments to purchase
additional GNMA Certificates or other U.S. Government
guaranteed securities.
18
<PAGE>
FIXED-INCOME FUNDS AND MONEY MARKET FUNDS
BAR CHART AND PERFORMANCE TABLE
The bar chart and performance table below show the risks of investing in the
Fund. The chart shows changes in the performance from 1989 through 1998. The
table shows how the average annual return compares with the most commonly used
index for its market segment for 1, 5 and 10 years (or since inception). You
should remember that past performance is not an indication of future
performance.
PAST FUND PERFORMANCE The chart at the left below shows the risk of
investing in the Fund and how the Fund's total return has varied from
year-to-year. The chart at the right compares the Fund's performance with
the most commonly used index for its market segment. Of course, past
performance is no guarantee of future results.
----------------------------------------------------------------------------
<TABLE>
<CAPTION>
GNMA INCOME FUND
----------------
<S> <C>
89 15.60%
90 9.23%
91 15.75%
92 5.19%
93 8.06%
94 -2.07%
95 15.91%
96 5.71%
97 10.20%
98 7.52%
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
AVERAGE ANNUAL RETURNS THROUGH 12/31/98
GNMA Income Fund 7.52(%) 7.29(%) 8.98(%)
Lehman Brothers
Mortgage-Backed
Securities Index 6.96(%) 7.23(%) 9.13(%)
----------------------------------------
1 Year 5 Year 10 Year
</TABLE>
- --------------------------------------------------------------------------------
During the ten year period shown in the above bar graph chart, the fund's
highest quarterly return was 8.88% for the second quarter in 1989 and the
fund's lowest quarterly return was -2.42% for the first quarter in 1994.
This table describes the fees and expenses that you may pay if
you buy and hold shares of the Fund.
FEES AND
EXPENSES
<TABLE>
<S> <C>
SHAREHOLDER FEES (Paid directly from your investment)
Maximum Sales Charges (Load) Imposed on Purchases (as a %
of offering price) None
Maximum Deferred Sales Charge (Load) None
Maximum Sales Charge (Load) Imposed on Reinvested
Dividends/Distributions None
Redemption Fee (as a % of amount redeemed, if applicable) None
Exchange Fee None
30-Day Redemption/Exchange Fee None
Maximum Account Fee None
ANNUAL FUND OPERATING EXPENSES (Paid from Fund assets)
Management Fees 0.57%
Rule 12b-1 Fees None
Other Fees 0.44%
- ------------------------------------------------------------------------
TOTAL FUND OPERATING EXPENSES 1.01%
</TABLE>
Example of Expenses: This example is intended to help you
compare the cost of investing in the Fund with the cost of
investing in other mutual funds.
This example assumes that you invest $10,000 in the Fund for
the time periods indicated and then redeem all of your shares
at the end of those periods. This example also assumes that
your investment has a 5% annual return each year and that the
operating expenses remain the same. Although your actual costs
may be higher or lower, based on these assumptions your costs
would be:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
- ---------------------------------------
<S> <C> <C> <C>
$103.01 $321.54 $557.85 $1,236.24
</TABLE>
See "Management of the Fund" for more complete descriptions of
such costs and expenses.
19
<PAGE>
LEXINGTON GLOBAL INCOME FUND
RISK/RETURN SUMMARY
INVESTMENT - The Lexington Global Income Fund's investment objective is
OBJECTIVE to seek high current income. Capital appreciation is a
secondary objective. The Lexington Global Income Fund
invests in a combination of foreign and domestic
high-yield, lower rated or unrated debt securities.
INVESTMENT The Lexington Global Income Fund (the "Fund") invests in a
STRATEGY variety of foreign and domestic high yield, lower rated or
unrated debt securities.
The Fund, under normal conditions, invests substantially all
of its assets in lower rated or unrated debt securities of
domestic companies, companies in developed foreign countries,
and companies in emerging markets. The credit quality of the
foreign debt securities which the Fund intends to buy is
generally equal to U.S. corporate debt securities known as
"junk bonds". The debt securities in which the Fund invests
consist of bonds, notes, debentures and other similar
instruments. The Fund may invest in debt securities issued by
foreign governments, their agencies and instrumentalities,
central banks, commercial banks and other corporate entities.
The Fund may invest up to 100% of its total assets in
domestic and foreign debt securities that are rated below
investment grade or are of comparable quality. The Fund may
also invest in securities that are in default as to payment
of principal and/or interest, and bank loan participations
and assignments.
The Fund's investment strategy stresses diversification to
help reduce the Fund's price volatility. Global fixed income
securities are divided into four categories. The categories
reflect whether the securities are U.S. dollar denominated or
not and whether borrowers are in developed markets or
emerging markets. The Fund then seeks to select the best
values in each of these four segments. The balance the Fund
maintains between these sectors attempts to limit the price
volatility.
PRINCIPAL Through investment in bonds, the Fund may expose you to
RISKS certain risks which may cause you to lose money. Junk bonds
have a higher risk of default, tend to be less liquid, and
may be more difficult to value. The Fund could lose money
because of foreign government actions, political instability,
or lack of adequate and accurate information. Currency and
investment risks tend to be higher in emerging markets.
The Fund is a non-diversified investment company. There is
additional risk associated with being non-diversified, since
a greater proportion of total assets may be invested in a
single company.
For a more detailed risk discussion involving investments in
this Fund, please read "Risks of Investing" on page 28.
20
<PAGE>
FIXED-INCOME FUNDS AND MONEY MARKET FUNDS
BAR CHART AND PERFORMANCE TABLE
The bar chart and performance table below show the risks of investing in the
Fund. The chart shows changes in the performance from 1989 through 1998.* The
table shows how the average annual return compares with the most commonly used
index for its market segment for 1, 5 and 10 years (or since inception). You
should remember that past performance is not an indication of future
performance.
* Prior to December 31, 1994, the Fund operated under a different investment
objective.
PAST FUND PERFORMANCE The chart at the left below shows the risk of
investing in the Fund and how the Fund's total return has varied from
year-to-year. The chart at the right compares the Fund's performance with
the most commonly used index for its market segment. Of course, past
performance is no guarantee of future results.
----------------------------------------------------------------------------
<TABLE>
<CAPTION>
GLOBAL INCOME FUND
------------------
<S> <C>
89 7.40%
90 6.62%
91 10.03%
92 6.51%
93 10.90%
94 -6.52%
95 20.10%
96 13.33%
97 5.00%
98 8.21%
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
AVERAGE ANNUAL RETURNS THROUGH 12/31/98
Global Income
Fund 8.21(%) 7.65(%) 7.96(%)
Lehman
Brothers
Global Bond
Index 15.33(%) 8.43(%) 9.33(%)
---------------------------------------
1 Year 5 10
Year Year
------------------------------------------------------------------------------------------
During the ten year period shown in the above bar graph chart, the fund's highest
quarterly return was 8.76% for the second quarter in 1995 and the fund's lowest quarterly
return was -6.61% for the first quarter in 1994.
</TABLE>
This table describes the fees and expenses that you may pay if
you buy and hold shares of the Fund.
FEES AND
EXPENSES
<TABLE>
<S> <C>
SHAREHOLDER FEES (Paid directly from your investment)
Maximum Sales Charges (Load) Imposed on Purchases (as % of
offering price) None
Maximum Deferred Sales Charge (Load) None
Maximum Sales Charge (Load) Imposed on Reinvested
Dividends/Distributions None
Redemption Fee (as % of amount redeemed, if applicable) None
Exchange Fee None
30-Day Redemption/Exchange Fee None
Maximum Account Fee None
ANNUAL FUND OPERATING EXPENSES (Paid from Fund assets)*
Management Fees 1.00%
Rule 12b-1 Fees 0.25%
Other Fees 0.64%
- ------------------------------------------------------------------------
TOTAL FUND OPERATING EXPENSES 1.89%
</TABLE>
* In 1998, 0.39% of the management fee was voluntarily waived
by the Manager, and as a result, net expenses were actually
1.50%.
Example of Expenses: This example is intended to help you
compare the cost of investing in the Fund with the cost of
investing in other mutual funds.
This example assumes that you invest $10,000 in the Fund for
the time periods indicated and then redeem all of your shares
at the end of those periods. This example also assumes that
your investment has a 5% annual return each year and that the
operating expenses remain the same. Although your actual costs
may be higher or lower, based on these assumptions your costs
would be:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
- -----------------------------------------
<S> <C> <C> <C>
$191.94 $593.91 $1,021.27 $2,211.54
</TABLE>
See "Management of the Fund" for more complete descriptions of
such costs and expenses.
21
<PAGE>
LEXINGTON MONEY MARKET TRUST
RISK/RETURN SUMMARY
INVESTMENT - The Lexington Money Market Trust's investment objective is
OBJECTIVE to seek as high a level of current income from short-term
investments as is consistent with the preservation of
capital and liquidity. The Lexington Money Market Trust
seeks to maintain a stable net asset value of $1 per
share.
INVESTMENT The Lexington Money Market Trust (the "Fund") will invest in
STRATEGY short-term money market instruments that have been rated in
one of the two highest rating categories by both S&P and
Moody's, both major rating agencies. The Fund invests in
short-term money market instruments (those with a remaining
maturity of 397 days or less) that offer attractive yields
and are considered to be undervalued relative to issues of
similar credit quality and interest rate sensitivity.
The Fund will also insure that its money market instruments
average weighted maturities do not exceed 90 days.
PRINCIPAL An investment in the Fund is not insured or guaranteed by the
RISKS Federal Deposit Insurance Corporation or any other government
agency. Although the Fund seeks to preserve the value of your
investment at $1.00 per share, it is possible to lose money
by investing in the Fund.
22
<PAGE>
MONEY MARKET FUNDS
For information on the Fund's 7-day yield please call the Fund at
1-800-526-0056. You should remember that past performance is not an indication
of future performance.
<TABLE>
<S> <C>
SHAREHOLDER FEES (Paid directly from your investment)
Maximum Sales Charges (Load) Imposed on Purchases (as a %
of offering price) None
Maximum Deferred Sales Charge (Load) None
Maximum Sales Charge (Load) Imposed on Reinvested
Dividends/Distributions None
Redemption Fee (as a % of amount redeemed, if applicable) None
Exchange Fee None
30-Day Redemption/Exchange Fee None
Maximum Account Fee None
ANNUAL FUND OPERATING EXPENSES (Paid from Fund assets)*
Management Fees 0.50%
Rule 12b-1 Fees None
Other Fees 0.55%
- ------------------------------------------------------------------------
TOTAL FUND OPERATING EXPENSES 1.05%
Fee Waiver and/or Expense Reimbursement 0.05%
NET EXPENSES 1.00%
</TABLE>
* Lexington Management Corporation has contractually agreed to
reduce its management fee in order to limit the Fund's annual
total operating expenses (exclusive of taxes and interest) to
1.00%. This agreement has a one-year term, renewable at the
end of each fiscal year.
Example of Expenses: This example is intended to help you
compare the cost of investing in the Fund with the cost of
investing in other mutual funds.
This example assumes that you invest $10,000 in the Fund for
the time periods indicated and then redeem all of your shares
at the end of those periods. This example also assumes that
your investment has a 5% annual return each year and that the
operating expenses remain the same. Although your actual costs
may be higher or lower, based on these assumptions your costs
would be:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
- ---------------------------------------
<S> <C> <C> <C>
$102.00 $318.40 $552.46 $1,224.62
</TABLE>
See "Management of the Fund" for more complete descriptions of
such costs and expenses.
FEES AND EXPENSES 23
<PAGE>
LEXINGTON GOLDFUND, INC.
RISK/RETURN SUMMARY
INVESTMENT - The Lexington Goldfund's investment objective is to attain
OBJECTIVE capital appreciation and such hedge against the loss of
buying power of the U.S. Dollar as may be obtained through
investment in gold and securities of companies engaged in
mining or processing gold throughout the world.
INVESTMENT Under normal conditions the Lexington Goldfund, Inc. (the
STRATEGY "Fund") will invest at least 65% of the value of its total
assets in gold and the equity securities of companies engaged
in mining or processing gold ("gold-related securities"). The
Fund may also invest in other precious metals, including
platinum, palladium and silver. The Fund intends to invest
less than half of the value of its assets in gold and other
precious metals.
The Fund's performance and ability to meet its objective will
be largely dependent on the market value of gold. The
portfolio manager seeks to maximize on advances and minimize
on declines by monitoring and anticipating shifts in the
relative values of gold related companies throughout the
world. A substantial portion of the Fund's investments will
be in the securities of foreign issuers.
PRINCIPAL Through stock investment, the Fund may expose you to common
RISKS stock risks which may cause you to lose money if there is a
sudden decline in the share price in one of the companies in
the Fund's portfolio. Due to the inherent effects of the
stock market, the value of the Fund will fluctuate with the
movement of the market as well as in response to the
activities of individual companies in the Fund's portfolio.
In addition, the Fund's focus on precious metals and precious
metal stocks may expose the investor to additional risks. The
market for gold or other precious metals is concentrated in
countries that have the potential for instability and the
market for gold and other precious metals is widely
unregulated. As a result, the price of precious gold and
precious metal stocks, and therefore the Fund, may fluctuate
significantly.
The Fund is a non-diversified investment company. There is
additional risk associated with being non-diversified, since
a greater proportion of total assets may be invested in a
single company.
For a more detailed risk discussion involving investments in
this Fund, please read "Risks of Investing" on page 28.
24
<PAGE>
PRECIOUS METAL FUNDS
BAR CHART AND PERFORMANCE TABLE
The bar chart and performance table below show the risks of investing in the
Fund. The chart shows changes in the performance from 1989 through 1998. The
table shows how the average annual return compares with the most commonly used
index for its market segment for 1, 5 and 10 years (or since inception). You
should remember that past performance is not an indication of future
performance.
PAST FUND PERFORMANCE The chart at the left below shows the risk of
investing in the Fund and how the Fund's total return has varied from
year-to-year. The chart at the right compares the Fund's performance with
the most commonly used index for its market segment. Of course, past
performance is no guarantee of future results.
----------------------------------------------------------------------------
<TABLE>
<S> <C>
1989 23.62%
1990 -20.65%
1991 -6.14%
1992 -20.51%
1993 86.96%
1994 -7.28%
1995 -1/89%
1996 7.84%
1997 -42.98%
1998 -6.39%
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
AVERAGE ANNUAL RETURNS THROUGH 12/31/98
Goldfund -6.39(%) -12.14(%) -3.28(%)
Gold Bullion -0.83(%) -6.02(%) -3.50(%)
S&P 500 28.72(%) 24.09(%) 19.22(%)
----------------------------------------
1 Year 5 Year 10 Year
</TABLE>
- --------------------------------------------------------------------------------
During the ten year period shown in the above bar graph chart, the fund's
highest quarterly return was 34.36% for the second quarter in 1993 and the
fund's lowest quarterly return was -29.07% for the fourth quarter in 1997.
This table describes the fees and expenses that you may pay if
you buy and hold shares of the Fund.
FEES AND
EXPENSES
<TABLE>
<S> <C>
SHAREHOLDER FEES (Paid directly from your investment)
Maximum Sales Charges (Load) Imposed on Purchases (as a %
of offering price) None
Maximum Deferred Sales Charge (Load) None
Maximum Sales Charge (Load) Imposed on Reinvested
Dividends/Distributions None
Redemption Fee (as a % of amount redeemed, if applicable) None
Exchange Fee None
30-Day Redemption/Exchange Fee None
Maximum Account Fee None
ANNUAL FUND OPERATING EXPENSES (Paid from Fund assets)
Management Fees 0.92%
Rule 12b-1 Fees 0.25%
Other Fees 0.57%
- ------------------------------------------------------------------------
TOTAL FUND OPERATING EXPENSES 1.74%
</TABLE>
Example of Expenses: This example is intended to help you
compare the cost of investing in the Fund with the cost of
investing in other mutual funds.
This example assumes that you invest $10,000 in the Fund for
the time periods indicated and then redeem all of your shares
at the end of those periods. This example also assumes that
your investment has a 5% annual return each year and that the
operating expenses remain the same. Although your actual costs
may be higher or lower, based on these assumptions your costs
would be:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
- ---------------------------------------
<S> <C> <C> <C>
$176.84 $547.99 $943.74 $2,051.67
</TABLE>
See "Management of the Fund" for more complete descriptions of
such costs and expenses.
25
<PAGE>
LEXINGTON SILVER FUND, INC.
RISK/RETURN SUMMARY
INVESTMENT - The Lexington Silver Fund's investment objective is to
OBJECTIVE maximize total return on its assets from long-term growth
of capital and income principally through investment in a
portfolio of securities which are engaged in the
exploration, mining, processing, fabrication or
distribution of silver ("silver-related companies") and in
silver bullion.
INVESTMENT Lexington Silver Fund, Inc. (the "Fund") will seek to achieve
STRATEGY its objective through investment in common stocks of
established silver-related companies and in silver bullion
which have the potential for long-term growth of capital or
income, or both. The common stocks of silver-related
companies in which the Fund intends to invest may or may not
pay dividends. The Fund may also invest in other types of
securities of silver-related companies including convertible
securities, preferred stocks, bonds, notes and warrants. When
the Manager believes that the return on debt securities will
equal or exceed the return on common stocks, the Fund may, in
pursuing its objective of maximizing growth and income,
substantially increase its holding in debt securities.
The securities in which the Fund invests include issues of
established silver-related companies domiciled in the United
States, Canada and Mexico as well as other silver producing
countries throughout the world. At least 80% of the Fund's
assets will be invested in established silver-related
companies which have been in business more than three years.
Approximately 80% of silver is provided as a by-product or
co-product of other mining operations, such as gold mining.
The Fund has the ability to significantly increase its
exposure to silver by increasing its holding of silver
bullion.
PRINCIPAL Through stock investment, the Fund may expose you to common
RISKS stock risks which may cause you to lose money if there is a
sudden decline in the share price in one of the companies in
the Fund's portfolio. Due to the inherent effects of the
stock market, the value of the Fund will fluctuate with the
movement of the market as well as in response to the
activities of individual companies in the Fund's portfolio.
In addition, the Fund's focus on precious metals and precious
metal stocks may expose the investor to additional risks. The
market for silver is relatively limited, the sources of
silver are concentrated in countries that have the potential
for instability and the market for silver is widely
unregulated. As a result, the price of silver, and therefore
the Fund, may fluctuate significantly.
The Fund is a non-diversified investment company. There is
additional risk associated with being non-diversified, since
a greater proportion of total assets may be invested in a
single company.
For a more detailed risk discussion involving investments in
this Fund, please read "Risks of Investing" on page 28.
26
<PAGE>
PRECIOUS METAL FUNDS
BAR CHART AND PERFORMANCE TABLE
The bar chart and performance table below show the risks of investing in the
Fund. The chart shows changes in the performance since inception (01/02/92)
through 12/31/98. The table shows how the average annual returns compares with
the most commonly used index for its market segment for 1, 5 and 10 years (or
since inception). You should remember that past performance is not an indication
of future performance.
PAST FUND PERFORMANCE The chart at the left below shows the risk of
investing in the Fund and how the Fund's total return has varied from
year-to-year. The chart at the right compares the Fund's performance with
the most commonly used index for its market segment. Of course, past
performance is no guarantee of future results.
----------------------------------------------------------------------------
<TABLE>
<CAPTION>
SILVER FUND
-----------
<S> <C>
92 -19.01%
93 76.52%
94 -8.37%
95 12.37%
96 2.38%
97 -8.05%
98 -29.64%
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
AVERAGE ANNUAL RETURNS THROUGH 12/31/98
Silver Fund
S&P 500 -29.64(%) - 7.37(%) 0.96(%)
Silver 28.72(%) 24.09(%) 19.51(%)
Bullion -16.51(%) -0.43(%) 3.39(%)
----------------------------------------
1 Year 5 Year Since
Inception
(01/02/92)
</TABLE>
- --------------------------------------------------------------------------------
During the seven year period shown in the above bar graph chart, the fund's
highest quarterly return was 28.47% for the second quarter in 1993 and the
fund's lowest quarterly return was -18.60% for the fourth quarter in 1994.
This table describes the fees and expenses that you may pay if
you buy and hold shares of the Fund.
FEES AND
EXPENSES
<TABLE>
<S> <C>
SHAREHOLDER FEES (Paid directly from your investment)
Maximum Sales Charges (Load) Imposed on Purchases (as a %
of offering price) None
Maximum Deferred Sales Charge (Load) None
Maximum Sales Charge (Load) Imposed on Reinvested
Dividends/Distributions None
Redemption Fee (as a % of amount redeemed, if applicable) None
Exchange Fee None
30-Day Redemption/Exchange Fee None
Maximum Account Fee None
ANNUAL FUND OPERATING EXPENSES (Paid from Fund assets)
Management Fees 1.00%
Rule 12b-1 Fees None
Other Fees 1.37%
- ------------------------------------------------------------------------
TOTAL FUND OPERATING EXPENSES 2.37%
</TABLE>
Example of Expenses: This example is intended to help you
compare the cost of investing in the Fund with the cost of
investing in other mutual funds.
This example assumes that you invest $10,000 in the Fund for
the time periods indicated and then redeem all of your shares
at the end of those periods. This example also assumes that
your investment has a 5% annual return each year and that the
operating expenses remain the same. Although your actual costs
may be higher or lower, based on these assumptions your costs
would be:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
- -----------------------------------------
<S> <C> <C> <C>
$240.12 $739.46 $1,265.42 $2,706.22
</TABLE>
See "Management of the Fund" for more complete descriptions of
such costs and expenses.
27
<PAGE>
RISKS OF INVESTING
RISKS OF INVESTING IN MUTUAL FUNDS
The following risks are common to all mutual funds and, therefore, apply to the
Funds:
- - Market Risk. The market value of a security may go up or down, sometimes
rapidly and unpredictably. A decline in market value may cause a security to
be worth less than it was at the time of purchase. Market risk applies to
individual securities, a particular sector or the entire economy.
- - Manager Risk. Fund management affects Fund performance. A Fund may lose money
if the Fund manager's investment strategy does not achieve the Fund's
objective or the manager does not implement the strategy properly.
- - Year 2000 Risk. Preparing for Year 2000 is a high priority for the Manager.
The Manager is diligently working with external partners, suppliers, vendors
and other service providers to ensure that the systems with which it
interacts will remain operational at all times. The Manager does not
anticipate that the move to Year 2000 will have a material impact on its
ability to continue to provide the Funds with service at current levels;
however, the Manager cannot make any assurances that the steps it has taken
to ensure Year 2000 compliance will be successful. In addition, there can be
no assurance that Year 2000 issues will not affect the companies in which the
Funds invest or worldwide markets and economies.
RISKS OF INVESTING IN SECURITIES OF SMALL COMPANIES
The following risks apply to all mutual funds that invest in securities of small
companies (market value of less than U.S. $1 billion) including Lexington
SmallCap Fund, Lexington Small Cap Asia Growth Fund and Lexington Troika Dialog
Russia Fund.
Investing in small companies generally involve greater risk than investing in
larger companies for the following reasons, among others:
- - limited product lines;
- - limited markets or financial or managerial resources;
- - their securities may be more susceptible to losses and risks of bankruptcy;
- - their securities may trade less frequently and with lower volume, leading to
greater price fluctuations; and,
- - their securities are subject to increased volatility and reduced liquidity
due to limited market making and arbitrage activities.
RISKS OF INVESTING IN FOREIGN SECURITIES
The following risks apply to all mutual funds that invest in foreign securities
including Lexington Small Cap Asia Growth Fund, Lexington Global Corporate
Leaders Fund, Lexington Goldfund, Lexington Growth and Income Fund, Lexington
International Fund, Lexington Global Income Fund, Lexington Silver Fund,
Lexington Troika Dialog Russia Fund and Lexington Worldwide Emerging Markets
Fund.
- - Legal System and Regulation Risk. Foreign countries have different legal
systems and different regulations concerning financial disclosure, accounting
and auditing standards. Corporate financial information that would be
disclosed under U.S. law may not be available. Foreign accounting and
auditing standards may render a foreign corporate balance sheet more
difficult to understand and interpret than one subject to U.S. law and
standards. Additionally, government oversight of foreign stock exchanges and
brokerage industries may be less stringent than in the U.S.
28
<PAGE>
RISKS OF INVESTING
- - Currency Risk. Most foreign stocks are denominated in the currency of the
stock exchange where they are traded. The Fund's Net Asset Value is
denominated in U.S. dollars. The exchange rate between the U.S. dollar and
most foreign currencies fluctuates; therefore, the Net Asset Value of the
Fund will be affected by a change in the exchange rate between the U.S.
dollar and the currencies in which the Fund's stocks are denominated. The
Fund may also incur transaction costs associated with exchanging foreign
currencies into U.S. dollars.
- - Stock Exchange and Market Risk. Foreign stock exchanges generally have less
volume than U.S. stock exchanges. Therefore, it may be more difficult to buy
or sell shares of foreign securities, which increases the volatility of share
prices on such markets. Additionally, trading on foreign stock markets may
involve longer settlement periods and higher transaction costs.
- - Expropriation Risk. Foreign governments may expropriate the Fund's
investments either directly by restricting the Fund's ability to sell a
security or by imposing exchange controls that restrict the sale of a
currency or by taxing the Fund's investments at such high levels as to
constitute confiscation of the security. There may be limitations on the
ability of the Fund to pursue and collect a legal judgment against a foreign
government.
RISKS OF INVESTING IN LOWER-QUALITY DEBT SECURITIES
The following risks apply to all mutual funds that invest in lower-quality debt
securities commonly referred to as "junk bonds" including Lexington Global
Income Fund and Lexington Troika Dialog Russia Fund.
Junk bonds are highly speculative. Changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity of issuers of their
securities to make principal and interest payments than with higher-grade debt
securities.
RISKS OF INVESTING IN SECURITIES OF RUSSIAN COMPANIES
The following risks apply to all mutual funds that invest in securities of
Russian companies including Lexington Troika Dialog Russia Fund.
- - Political Risk. Since the breakup of the Soviet Union in 1991, Russia has
experienced and continues to experience dramatic political and social change.
Russia is undergoing a rapid transition from a centrally-controlled command
system to a more market-oriented democratic model. The Funds may be affected
unfavorably by political developments, social instability, changes in
government policies, and other political and economic developments.
- - Market Concentration and Liquidity Risk. The Russian securities markets are
substantially smaller, less liquid and more volatile than the securities
markets in the United States. A few issuers represent a large percentage of
market capitalization and trading volume. Due to these factors and despite
the Funds' policies on liquidity, it may be difficult for the Funds to buy or
sell some securities because of the poor liquidity.
- - Settlement and Custody Risk. Ownership of shares in Russian companies is
recorded by the companies themselves and by registrars instead of through a
central registration system. It is possible that the Funds' ownership rights
could be lost through fraud or negligence. Since the Russian banking
institutions and registrars are not guaranteed by the state, the Funds may
not be able to pursue claims on behalf of the Funds' shareholders.
NON-DIVERSIFIED PORTFOLIO
The following risks apply to all mutual funds that are non-diversified
investment companies including Lexington Goldfund, Lexington Silver Fund,
Lexington Global Income Fund and Lexington Troika Dialog Russia Fund.
29
<PAGE>
These Funds may invest a greater proportion of their total assets in a single
company, which increases risk. However, these Funds intend to comply with
diversification requirements of the federal tax law to qualify as regulated
investment companies. For more detailed information on the federal tax law
diversification requirement, see the tax section of the Fund's Statement of
Additional Information.
PRECIOUS METALS
The following risks apply to all mutual funds that invest in precious metals
including Lexington Goldfund and Lexington Silver Fund.
Precious metal investments have the following characteristics:
- - earn no income;
- - transaction and storage costs may be higher; and
- - the Fund will realize gain only with an increase in the market price.
TEMPORARY DEFENSIVE POSITION
When the Funds anticipate unusual market or other conditions, they may
temporarily depart from their goal and invest substantially in high-quality
short-term investments. This could help the Fund avoid losses but may mean lost
opportunities.
30
<PAGE>
MANAGEMENT OF THE FUNDS
INVESTMENT ADVISER
Lexington Management Corporation (LMC), a wholly-owned subsidiary of Lexington
Global Asset Managers, Inc. ("LGAM"), is the investment adviser to the Lexington
Funds. LMC and its predecessor companies, registered investment advisers under
the Investment Advisers Act of 1940, as amended, were established in 1938. LMC
is located at P.O. Box 1515, Park 80 West Plaza Two, Saddle Brook, New Jersey
07663. Descendants of Lunsford Richardson, Sr., their spouses, trusts and other
related entities have a controlling interest in LGAM. LMC advises private
clients as well as the Lexington Funds. LMC supervises and assists in the
overall management of the Funds, subject to the oversight by the Board of
Directors or Trustees.
SUB-ADVISERS
Lexington SmallCap Fund. Market Systems Research Advisors, Inc. ("MSR Advisors")
is the sub-adviser of Lexington SmallCap Fund. MSR Advisors is located at 80
Maiden Lane, New York, NY 10038. MSR Advisors provides investment advice and
management to Lexington SmallCap Fund. MSR is 65% owned by LGAM and 35% owned by
Frank A. Peluso, the President and C.E.O. of MSR Advisors.
Lexington Small Cap Asia Growth Fund. Crosby Asset Management (US) Inc. (Crosby)
is the sub-adviser of the Lexington Small Cap Asia Growth Fund. Crosby is
located at 32/F Asia Pacific Finance Tower, Citibank Plaza, 3 Garden Road,
Central, Hong Kong. Crosby is a subsidiary of Crosby Group, Hong Kong. Crosby
provides investment advice and management to Lexington Small Cap Asia Growth
Fund.
Lexington Troika Dialog Russia Fund. Troika Dialog Asset Management (TDAM) is
the sub-adviser of Lexington Troika Dialog Russia Fund. TDAM is located at
Romanov Pereulok #4, 103875 Moscow, Russia. TDAM provides investment advice and
management to Lexington Troika Dialog Russia Fund. TDAM is a majority owned
subsidiary of The Bank of Moscow.
Lexington Worldwide Emerging Markets Fund. Stratos Advisors, Inc. (Stratos) is
the sub-adviser of Lexington Worldwide Emerging Markets Fund. Stratos is located
at 20 Exchange Place, 52nd Floor, New York, NY 10005. Stratos provides
investment advice and management to Lexington Worldwide Emerging Markets Fund.
31
<PAGE>
PORTFOLIO MANAGERS
LEXINGTON SMALLCAP FUND
[DEMICHELE PHOTO]
ROBERT M. DEMICHELE. Mr. DeMichele is one of three lead managers of a
portfolio management team that manages the Lexington SmallCap Fund.
Mr. DeMichele is Chairman and Chief Executive Officer of LMC. He is
also the Chairman of the Investment Strategy Group. In addition, he
is President of Lexington Global Asset Managers, Inc., LMC's parent
company. He holds similar offices in other companies owned by
Lexington Global Asset Managers, Inc., as well as the Lexington
Funds. Prior to joining LMC in 1981, Mr. DeMichele was a Vice President at A.G.
Becker, Inc., the securities division of Warburg, Paribus, Becker, an
international investment banking firm. From 1973 to 1981, Mr. DeMichele held
several positions, the most recent managing A.G. Becker's Funds Evaluation and
Consulting Group for both the East and West Coasts. Mr. DeMichele graduated from
Union College with a B.A. Degree in Economics and from Cornell University with
an M.B.A. in Finance.
ALAN H. WAPNICK. Please see biography under Lexington Growth and
Income Fund.
[PELUSO PHOTO]
FRANK A. PELUSO. Mr. Peluso is one of three lead managers of a
portfolio management team that manages the Lexington SmallCap Fund.
He has 36 years investment experience. Mr. Peluso is President and
Chief Executive Officer of MSR, the sub-adviser to the Fund. Mr.
Peluso utilizes a proprietary analytical system to identify
securities with performance potential which he believes to be
exceptional. In addition, Mr. Peluso's proprietary data is used by
professional money managers, insurance companies, brokerage firms,
banks, mutual fund companies and pension funds. In 1976, he established
Marketiming Inc. (currently named Market Systems Research, Inc., a fully-owned
subsidiary of MSR). He was with MSR since its inception in 1986. Mr. Peluso
graduated from Princeton University and completed a year of post-graduate study
at Columbia University, and two years of post-graduate study at Princeton
University with a Fellowship in Mathematics.
LEXINGTON GROWTH AND INCOME FUND
[WAPNICK PHOTO]
ALAN H. WAPNICK. Mr. Wapnick is a member of an investment management
team that manages the Lexington Global Corporate Leaders Fund and
Lexington SmallCap Fund. Mr. Wapnick is the lead manager for
Lexington Growth and Income Fund. Mr. Wapnick is Senior Vice
President, Director of Domestic Investment Equity Strategy of LMC.
Prior to joining LMC in 1986, Mr. Wapnick was an equity analyst with
Merrill Lynch, J.&W. Seligman, Dean Witter and most recently Union
Carbide Corporation. Mr. Wapnick graduated from Dartmouth College and
received an M.B.A. from Columbia University.
LEXINGTON GLOBAL CORPORATE LEADERS FUND
[SALER PHOTO]
RICHARD T. SALER. Mr. Saler is a member of an investment management
team that manages the Lexington Global Corporate Leaders Fund. He is
the lead manager of an investment management team for Lexington
International Fund. Mr. Saler is Senior Vice President, Director of
International Investment Strategy of LMC. Mr. Saler is responsible
for international investment analysis and portfolio management at
LMC. He has thirteen years of investment experience. Mr. Saler has
focused on international markets since first joining LMC in 1986. In 1991 he was
a strategist with Nomura Securities and rejoined LMC in 1992. Mr. Saler
graduated from New York University with a B.S. Degree in Marketing and from New
York University's Graduate School of Business Administration with an M.B.A. in
Finance.
32
<PAGE>
PORTFOLIO MANAGERS
[SCHWARTZ PHOTO]
PHILIP A. SCHWARTZ, CFA. Mr. Schwartz is also a member of an
investment management team that manages the Lexington Global
Corporate Leaders Fund and Lexington International Fund. Mr. Schwartz
is a Vice President at LMC, a Chartered Financial Analyst and a
member of the New York Society of Security Analysts. He is
responsible for international investment analysis and portfolio
management at LMC, and has twelve years of investment experience.
Prior to joining LMC in 1993, Mr. Schwartz was Vice President of
European Research Sales with Cheuvreux De Virieu in Paris and New York, serving
the institutional market. Prior to Cheuvreux, he was affiliated with Olde and
Co. and Kidder, Peabody as a stockbroker. Mr. Schwartz earned his B.A. and M.A.
Degrees from Boston University.
ALAN H. WAPNICK. Please see biography under Lexington Growth and Income Fund.
LEXINGTON INTERNATIONAL FUND
RICHARD T. SALER. Please see biography under Lexington Global
Corporate Leaders Fund.
PHILLIP A. SCHWARTZ, CFA. Please see biography under Lexington Global
Corporate Leaders Fund.
LEXINGTON WORLDWIDE EMERGING MARKETS FUND
[VIEGAS PHOTO]
ALFREDO M. VIEGAS. Mr. Viegas is a member of the portfolio management
team for Lexington Worldwide Emerging Markets Fund. Mr. Viegas is
Chief Executive Officer and Senior Portfolio Manager of Stratos. In
1995, Mr. Viegas established VZB Partners LLC ("VZB"), an offshore
investment manager. Mr. Viegas is responsible for corporate analysis
and bottom-up research. He has concentrated on analyzing equity
opportunities not only in emerging markets but also in newly
developing or frontier markets where the quality of public available information
is scarce and direct research is imperative. Prior to VZB, Mr. Viegas was Vice
President and Latin American Equity Strategist for emerging markets with Salomon
Brothers from 1993 to 1995. From 1991 to 1993, he was a research analyst with
Morgan Stanley. Mr. Viegas is a graduate of Wesleyan University with a B.A. in
Classics and Medieval History.
[ZAIDI PHOTO]
MOHAMMED ZAIDI. Mr. Zaidi is a member of the Portfolio Management
team for the Lexington Worldwide Emerging Markets Fund. Mr. Zaidi is
a Portfolio Manager at Stratos. Mr. Zaidi is responsible for
fundamental corporate analysis with a particular focus on Asian and
Middle Eastern markets as well as the Risk Control Officer. Mr. Zaidi
has been a Portfolio Manager at VZB since 1997. Mr. Zaidi was Chief
Financial Officer and a Partner at Paradigm Software, Inc. from 1992
to 1995. Mr. Zaidi is a graduate of the University of Pennsylvania
with a B.S. in Economics from the Wharton School. Mr. Zaidi also holds an M.B.A.
in Finance from M.I.T. Sloan School of Management.
LEXINGTON SMALL CAP ASIA GROWTH FUND
[LAM PHOTO]
CHRISTINA LAM. Ms. Lam is the lead manager on a portfolio management
team that manages the Lexington Small Cap Asia Growth Fund. Ms. Lam
is Vice President and Portfolio Manager of the Lexington Small Cap
Asia Growth Fund. Ms. Lam joined Crosby Asset Management in 1991. She
is responsible for the investment management of the listed equity
portfolios under the management of Crosby Asset Management. After
graduating with a Law Degree with Honors from Warwick University, she
qualified as a Barrister from Lincoln's Inn in London. In 1987 she joined
Schroder Securities Limited in Hong Kong as an investment analyst, where her
coverage included the utilities, industrials and retail sectors and
conglomerates.
33
<PAGE>
LEXINGTON TROIKA DIALOG RUSSIA FUND
[MC CARTHY PHOTO]
TIMOTHY D. MCCARTHY is a member of the portfolio management team that
manages the Lexington Troika Dialog Russia Fund. Mr. McCarthy has a
B.S. degree in Economics from the State University of New York at
Oneonta and an M.B.A. from the State University of New York at
Binghamton. He joined Troika Dialog, Moscow in July, 1998. Prior to
May, 1998 he was an Executive Director with Alfa Asset Management,
Moscow. From January, 1995 to March, 1997 he was co-founder and
director of Capital Regent Securities, a Moscow based investment and advisory
firm. From June, 1990 to December, 1994 he was a consultant and senior
consultant with Deloitte & Touche Management Consulting in New York.
[HISEY PHOTO]
RICHARD M. HISEY, C.F.A. Mr. Hisey is a member of the portfolio
management team and investment strategist for the Lexington Troika
Dialog Russia Fund. Mr. Hisey is Managing Director and Chief
Financial Officer of LMC. He is also a Vice President and a member of
the Board of Directors of the Lexington Family of Mutual Funds. Mr.
Hisey is Executive Vice President and Chief Financial Officer of
Lexington Global Assets Managers, Inc., the parent company of LMC. He
sits on the Investment Company Institute's Accounting/Treasurers,
International and Tax Committees. He is a Chartered Financial Analyst and is a
member of the New York Society of Security Analysts. Prior to joining LMC in
1986, Mr. Hisey was a Senior Financial Analyst for Richardson Vicks, Inc. Mr.
Hisey is a graduate with Distinction of the University of Connecticut with a
Bachelor of Arts in Soviet and Eastern European Studies. His undergraduate work
included studies at Middlebury College and at Leningrad State University in the
former Soviet Union. He also holds an M.B.A. from the University of Connecticut.
[VARDANIAN PHOTO]
RUBEN VARDANIAN is a member of the portfolio management team that
manages the Lexington Troika Dialog Russia Fund. Mr. Vardanian is
Chairman of the Board of Troika Dialog Asset Management. He is Vice
Chairman of the Board of Directors of the Depository Clearing
Company, Moscow. He is a member of the expert council of the Federal
Securities Commission of Russia and a Director of the Russian Trading
System (RTS). He is also Chairman of the Board of Directors of the
Russian Capital markets self-regulatory organization (NAUFOR). Mr. Vardanian
received a Masters Degree with Distinction from the Finance Department of Moscow
State University. He received post-graduate training with Banca CRT in Italy and
with the Emerging Markets Division of Merrill Lynch in New York.
[TEPLUKHIN PHOTO]
PAVEL TEPLUKHIN. Dr. Teplukhin is a member of the portfolio
management team that manages the Lexington Troika Dialog Russia Fund.
He is the President of Troika Dialog Asset Management. Dr. Teplukhin
received a diploma in Economics and a Doctorate in Economic Analysis
and Statistics from Moscow State University. He also received a
Master of Science in Economics/ Macroeconomics from the London School
of Economics. From 1993 to 1996, Dr. Teplukhin was Economic Adviser
to the First Deputy Prime Minister at the Ministry of Finance of the Russian
Federation.
[LARICHEV PHOTO]
OLEG LARICHEV is a member of the portfolio management team that
manages the Lexington Troika Dialog Russia Fund. Mr. Larichev
received a Master of Arts in Economics from the New Economic School,
Moscow and a Diploma in Computer Graphics from Moscow State
University. He has been associated with Troika Dialog, Moscow since
September, 1996. Prior to September, 1996 he was an economics expert
with the Russian European Center for Economic Policy. Prior to April,
1995 he held part-time positions with the World Bank and the Moscow
office of the London School of Economics.
34
<PAGE>
PORTFOLIO MANAGERS
BOARD OF ADVISERS. The Board of Advisers to the Lexington Troika Dialog Russia
Fund is composed of experts in Russian political and economic affairs. The Board
of Advisers provides LMC and the Board of Directors with periodic updates on
political and macroeconomic conditions and trends in Russia, and their political
implication for the overall investment environment in Russia. As a result, LMC
and the Board of Directors will be better able to oversee and safeguard the
assets of Lexington Troika Dialog Russia Fund. The members of the Board of
Advisers are:
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.
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 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.
LEXINGTON GNMA INCOME FUND
[JAMISON PHOTO]
DENIS P. JAMISON, CFA. Mr. Jamison manages the Lexington GNMA Income
Fund, Lexington Money Market Trust and Lexington Global Income Fund.
Mr. Jamison is Senior Vice President and Director of Fixed Income
Strategy of LMC. Mr. Jamison is responsible for fixed-income
portfolio management. He is a Chartered Financial Analyst and a
member of the New York Society of Security Analysts. Prior to joining
LMC in 1981, Mr. Jamison spent nine years at Arnold Bernhard &
Company, an investment counseling and financial services organization. At
Bernhard, he was a Vice President supervising the security analyst staff and
managing investment portfolios. He is a specialist in government, corporate and
municipal bonds. Mr. Jamison graduated from the City College of New York with a
B.A. in Economics.
[MC CARTHY PHOTO]
ROSEANN G. MCCARTHY. Ms. McCarthy is a co-manager of the Lexington
GNMA Income Fund and the Lexington Money Market Trust. Ms. McCarthy
is an Assistant Vice President of LMC. Prior to joining the Fixed
Income Department in 1997, she was Mutual Fund Marketing and Research
Coordinator. Prior to 1995, Ms. McCarthy was Fund Statistician and a
Shareholder Service Representative for the Lexington Funds. Ms.
McCarthy is a graduate of Hofstra University with a B.B.A. in
Marketing and has an M.B.A. in Finance from Seton Hall University.
LEXINGTON GLOBAL INCOME FUND
DENIS P. JAMISON, CFA. Please see biography under Lexington GNMA
Income Fund.
35
<PAGE>
LEXINGTON MONEY MARKET TRUST
DENIS P. JAMISON, CFA. Please see biography under Lexington GNMA
Income Fund.
ROSEANN G. MCCARTHY. Please see biography under Lexington GNMA Income
Fund.
LEXINGTON GOLDFUND
[VAIL PHOTO]
JAMES A. VAIL, CFA. Mr. Vail manages the Lexington Goldfund and the
Lexington Silver Fund. Mr. Vail is a Vice President of LMC and is
responsible for precious metals analysis and portfolio management at
LMC. He is a Chartered Financial Analyst, a member of the New York
Society of Security Analysts and has 25 years of investment
experience. Prior to joining LMC in 1991, Mr. Vail held investment
research positions with Chemical Bank, Oppenheimer & Co., Robert
Fleming Inc. and most recently, Beacon Trust Company, where he was a
Senior Investment Analyst. Mr. Vail is a graduate of St. Peter's College with a
B.S. and holds an M.B.A. in Finance from Seton Hall University.
LEXINGTON SILVER FUND
JAMES A. VAIL, CFA. Please see biography under Lexington Goldfund.
MANAGEMENT FEES AND EXPENSE LIMITS
Each Fund pays a management fee at an annual rate based on its average daily net
assets, to LMC as follows: Growth and Income Fund pays 0.75% on the first $100
million of average daily net assets, 0.60% on the next $50 million, 0.50% on the
next $100 million and 0.40% thereafter. SmallCap Fund pays 1.00%. Global
Corporate Leaders Fund pays 1.00%. International Fund pays 1.00%. Worldwide
Emerging Markets Fund pays 1.00%. Small Cap Asia Growth Fund pays 1.25%. Russia
Fund pays 1.25%. GNMA Income Fund pays 0.60% on the first $150 million, 0.50% on
the next $250 million, 0.45% on the next $400 million, and 0.40% thereafter.
Global Income Fund pays 1.00%. Money Market Trust pays 0.50%. Goldfund pays
1.00% on the first $50 million and 0.75% thereafter. Silver Fund pays 1.00% on
the first $30 million and 0.75% thereafter.
GNMA Income Fund and Money Market Trust have contractual expense limitations
with LMC. The agreements have a one-year term, renewable at the end of each
fiscal year. GNMA Income Fund's annual expenses are limited to 1.50% of average
daily net assets up to $30 million, and 1.00% thereafter. Money Market Trust's
annual expenses are limited to 1.00%. LMC has voluntarily agreed to limit annual
expenses to 2.50% of average daily net assets for each of the Funds except for
Russia Fund, GNMA Income Fund and Money Market Trust. This limit is exclusive of
12b-1 fees. With respect to Russia Fund, LMC has voluntarily agreed to limit
annual expenses to 3.35% of average daily net assets, inclusive of 12b-1 fees.
These voluntary limits became effective January 1, 1999, and may be terminated
at any time.
36
<PAGE>
INVESTMENT OPTIONS
TO OPEN A NEW ACCOUNT, COMPLETE AND MAIL THE NEW ACCOUNT APPLICATION
INCLUDED WITH THIS PROSPECTUS.
- --------------------------------------------------------------------------------
Mail your completed application, any checks and correspondence to the
Transfer Agent:
TRANSFER AGENT
State Street Bank and Trust Company
c/o National Financial Data Services
Lexington Funds
P.O. Box 419648
Kansas City, Missouri 64141-6648
OVERNIGHT MAIL
State Street Bank and Trust Company
c/o National Financial Data Services
Lexington Funds
330 W. 9th Street
Kansas City, MO 64105
Checks should be made payable to: The Lexington Funds
Call a Lexington shareholder service representative Monday through
Friday between 9:00 A.M. and 5:00 P.M. Eastern time for information on the
Funds or your account, at:
(800) 526-0056 OR (201) 845-7300 FOR SERVICE M-F 9 A.M.- 5 P.M. EASTERN
TIME
(800) 526-0052 FOR 24 HOUR ACCOUNT INFORMATION "LEXLINE"
(800) 526-0057 FOR 24 HOUR PROSPECTUS INFORMATION
Trade requests received after 4 P.M. Eastern time (1 P.M. Pacific time)
will be executed at the following business day's closing price.
Once an account is established you can:
- SELL OR EXCHANGE SHARES BY PHONE.
Contact the Lexington Funds at 800-526-0056.
- BUY OR EXCHANGE SHARES ONLINE.
Go to WWW.LEXINGTONFUNDS.COM. and follow our online instructions to
enable this service.
- BUY, SELL OR EXCHANGE SHARES BY MAIL.
Mail buy/sell order(s), investment or redemption instructions and any
required payment by check:
State Street Bank and Trust Company
c/o National Financial Data Services
Lexington Funds
P.O. Box 419648
Kansas City, Missouri 64141-6648
- BUY SHARES BY WIRING FUNDS.
To: State Street Bank and Trust Company DDA Account #99043713;
[Lexington Fund you are investing in]
For credit to: [shareholder(s) name]
Account number:
ABA Routing #011000028
37
<PAGE>
SHAREHOLDER INFORMATION
WHAT YOU NEED TO KNOW ABOUT YOUR LEXINGTON ACCOUNT
You pay no sales charges to invest in The Lexington Funds. The minimum initial
investment for the Funds (except Lexington Troika Dialog Russia Fund) is $1,000,
and the minimum subsequent investment is $50. The minimum initial investment for
Lexington Troika Dialog Russia Fund is $5,000. The minimum initial investment
for IRAs is $250. Under certain conditions we may waive these minimums for
qualified plan accounts. If you buy shares through a broker or investment
advisor, they may apply different requirements. All investments must be made in
U.S. dollars. In addition, we reserve the right to reject any purchase.
BECOMING A LEXINGTON SHAREHOLDER
To open a new account:
- - BY MAIL. Send your completed application, with a check payable to The
Lexington Funds, to the appropriate address. Your check must be in U.S.
dollars and drawn only on a bank located in the United States. We do not
accept third-party checks, "starter" checks, credit-card checks, traveler's
checks, instant-loan checks or cash investments. We may impose a charge on
checks that do not clear.
- - BY WIRE. Call us at 800-526-0056 to let us know that you intend to make your
initial investment by wire. Tell us your name and the amount you want to
invest. We will give you further instructions and a fax number to which you
should send your completed New Account application. To ensure that we handle
your investment accurately, include complete account information in all wire
instructions.
Then request your bank to wire money from your account to the attention of:
State Street Bank and Trust Company
DDA account #99043713
[Lexington Fund you are investing in]
For credit to: [shareholder(s) name]
Shareholder(s) account #
ABA Routing #011000028
Please note that your bank may charge a wire transfer fee.
BUYING ADDITIONAL SHARES
- - BY MAIL. Complete the form at the bottom of any Lexington statement and mail
it with your check payable to The Lexington Funds. Or mail the check with a
signed letter noting the name of the Fund in which you want to invest, your
account number and telephone number.
- - "LEX-O-MATIC" THE AUTOMATIC INVESTMENT PLAN:
- A shareholder may make additional purchases of shares automatically on a
monthly or quarterly basis with the automatic investing plan,
"Lex-O-Matic."
- You may not use a "Lex-O-Matic" investment to open a new account. The
minimum investment amount must still be made into the Fund. The minimum
Lex-O-Matic investment amount is $50.
- Your bank must be a member of the Automated Clearing House.
- To establish "Lex-O-Matic," attach a voided check (checking account) or
preprinted deposit slip (savings account) from your bank account to your
Lexington Account Application or a "Lex-O-Matic" Application.
38
<PAGE>
SHAREHOLDER INFORMATION
- Investments will automatically be transferred into your Lexington Account
from your checking or savings account.
- Investments may be transferred either monthly or quarterly on or about the
15th day of the month.
- You should allow 20 business days for this service to become effective.
- You may cancel or change the amount of your Lex-O-Matic at any time
provided that a letter is sent to the Transfer Agent ten days prior to the
scheduled investment date. Your request will be processed upon receipt.
By investing in the Lexington Funds, you appoint the Transfer Agent as your
agent to establish an open account to which all shares purchased will be
credited, along with any dividends and capital gain distributions which are paid
in additional shares (see "Dividends and Distributions"). Stock certificates
will be issued, upon written request, for full shares of Lexington Funds.
Certificates will not be issued for 30 days after payment is received. In order
to facilitate redemptions and transfers, most shareholders elect not to receive
certificates.
You may purchase shares of the Lexington Funds through broker-dealers or
financial institutions that have selling agreements with LFD. Broker-dealers and
financial institutions that process such orders for customers may charge a fee
for their services. The fee may be avoided by purchasing shares directly from
the Lexington Funds.
EXCHANGING SHARES
Shares of the Lexington Funds may be exchanged for shares of equivalent value of
any Lexington Fund. If an exchange involves investing in a Lexington Fund not
already owned, the dollar amount of the exchange must meet the minimum initial
investment amount of the new Fund. An exchange will result in a recognized gain
or loss for income tax purposes. Exchanges of over $500,000 may take three days
to complete.
You may make exchange requests in writing or by telephone. Telephone exchanges
may only be made if you have completed a Telephone Authorization form which is
included on your new account application, or you can request it separately by
calling shareholder services at 800-526-0056. Telephone exchanges may not be
made within 7 calendar days of a previous exchange.
If not a new account, the minimum exchange required is $500; $250 for Individual
Retirement Accounts.
Telephone exchanges may only involve shares held on deposit by the Transfer
Agent, not shares held in certificate form by the shareholder.
Any new account established by a shareholder will also have the privilege of
exchange by telephone in the Lexington Funds unless you decline this privilege
on the application or the transfer agent is notified by the shareholder in
writing to remove the privilege. All accounts involved in a telephonic exchange
must have the same dividend option, registration and social security number as
the account from which the shares are transferred.
MINIMUM ACCOUNT BALANCES
Due to the costs of maintaining small accounts, we require a minimum combined
account balance of $1,000. If your account balance falls below that amount for
any reason other than market fluctuations, we will ask you to add to your
account. If your account balance is not brought up to the minimum or you do not
send us other instructions, we will redeem your shares and send you the
proceeds. We believe that this policy is in the best interests of all our
shareholders.
39
<PAGE>
REDEEMING YOUR SHARES
The Funds will redeem all or any portion of your outstanding shares upon
request. Redemptions can be made on any day that the NYSE is open for trading.
The redemption price is the net asset value per share next determined after the
shares are validly tendered for redemption and such request is received by the
Transfer Agent. Payment of redemption proceeds is made promptly regardless of
when redemption occurs and normally within three business days after receipt of
all documents in proper form by our transfer agent, including a written
redemption order with appropriate signature guarantee. Redemption proceeds will
be mailed or wired in accordance with the shareholder's instructions. The Funds
may suspend the right of redemption under certain extraordinary circumstances in
accordance with the rules of the SEC. In the case of shares purchased by check
and redeemed shortly after the purchase, the Transfer Agent will not mail
redemption proceeds until it has been notified that the monies used for the
purchase have been collected, which may take up to 15 days from the purchase
date. Shares tendered for redemptions through brokers or dealers (other than the
Distributor) may be subject to a service charge by such brokers or dealers.
Procedures for requesting a redemption are set forth below.
A 2% redemption fee will be charged on the redemption of shares of the Lexington
Troika Dialog Russia Fund held less than 365 days. The redemption fee will not
apply to shares representing the reinvestment of dividends and capital gains
distributions. 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 sold first.
The transfer agent will restrict the mailing of redemption proceeds to a
shareholder address of record within 30 days of such address being changed,
unless the shareholder provides a signature guaranteed letter of instruction.
REDEEMING BY WRITTEN INSTRUCTION
Write a letter giving your name, account number, the name of the fund from which
you wish to redeem and the dollar amount or number of shares you wish to redeem.
Signature-guarantee your letter if you want the redemption proceeds to be made
payable and/or mailed to a party other than the account owner(s) as registered
in our records, your predesignated bank account or if the dollar amount of the
redemption exceeds $25,000. Signature guarantees may be provided by an eligible
guarantor institution such as a commercial bank, an NASD member firm such as a
stockbroker, a savings association or national securities exchange. Notary
Publics are not acceptable Guarantors. Contact the Transfer Agent for more
information.
If a redemption request is sent to the Fund in New Jersey, it will be forwarded
to the Transfer Agent and the effective date of redemption will be the date
received by the Transfer Agent. Checks for redemption proceeds will normally be
mailed within three business days. Shareholders who redeem all their shares will
receive a check representing the value of the shares redeemed plus the accrued
dividends if applicable through the date of redemption. Where shareholders
redeem only a portion of their shares, all dividends declared but unpaid will be
distributed on the next dividend payment date.
REDEEMING BY TELEPHONE
- - Shares of the Fund may be redeemed by telephone. Call the Fund toll free at
1-800-526-0056. New applicants may decline this privilege by checking the
appropriate box on the application.
40
<PAGE>
SHAREHOLDER INFORMATION
- - For shareholders who have not previously authorized the redemption privilege
a redemption authorization and signature guarantee must be given before a
shareholder may redeem by telephone. Authorization forms may be obtained by
calling the Fund at 800-526-0056.
- - Telephone redemption privileges may be cancelled by instructing the Transfer
Agent in writing. Your request will be processed upon receipt.
- - Exchange by telephone. (See "Exchanging Shares")
REDEEMING BY CHECK
- - Check writing is available on the Money Market Trust at no charge.
- - The minimum amount per check is $100 or more up to $500,000. Checks for less
than $100 or over $500,000 will not be honored.
- - All checks require only one signature unless otherwise indicated. Checks will
be returned to you at the end of each month.
- - Redemption checks are free, but a charge of $15.00 may be imposed for any
stop payments requested.
- - Redemption checks should not be used to close your account.
- - Redemptions by check are available for shares for which share certificates
have not been issued, and may not be used to redeem shares purchased by check
which have been on the books of the Fund for less than 15 days.
SYSTEMATIC WITHDRAWAL PLAN
Under a Systematic Withdrawal Plan, a shareholder with an account value of
$10,000 or more in a fund may receive (or have sent to a third party) periodic
payments (by check or electronic funds). If the proceeds are to be mailed to a
third party a signature guarantee is required. The minimum payment amount is
$100 from each Fund account. Payments may be made either monthly, quarterly,
semi-annually or annually on the 28th of each month. If the 28th falls on a
weekend or a holiday, the withdrawal will occur on the preceding business day.
The redemption will result in the recognition of a gain or loss for income tax
purposes.
HOW FUND SHARES ARE PRICED
How and when we calculate the Funds' price or net asset value (NAV) determines
the price at which you will buy or sell shares. The net asset value of each fund
is determined once daily as of 4:00 p.m., New York time, on each day that the
NYSE is open for trading. Per share net asset value is calculated by dividing
the value of each fund's total net assets by the total number of that fund's
shares then outstanding.
As more fully described in the Statement of Additional Information, portfolio
securities are valued using current market valuations: either the last reported
sales price or, in the case of securities for which there is no reported last
sale and fixed-income securities, the mean between the closing bid and asked
prices. Securities traded over-the-counter are valued at the mean between the
last current bid and asked prices. Securities for which market quotations are
not readily available or which are illiquid are valued at their fair values as
determined in good faith under the supervision of the Funds' officers, and by
the Manager and the Boards, in accordance with methods that are specifically
authorized by the Boards. Short-term obligations with maturities of 60 days or
less are valued at amortized cost as reflecting fair value. When Fund management
deems it appropriate, prices obtained for the day of valuation from a third
party pricing service will be used to value portfolio securities.
41
<PAGE>
The value of securities denominated in foreign currencies and traded on foreign
exchanges or in foreign markets will be translated into U.S. dollars at the last
price of their respective currency denomination against U.S. dollars quoted by a
major bank or, if no such quotation is available, at the rate of exchange
determined in accordance with policies established in good faith by the Boards.
Because the value of securities denominated in foreign currencies must be
translated into U.S. dollars, fluctuations in the value of such currencies in
relation to the U.S. dollar may affect the net asset value of fund shares even
without any change in the foreign-currency denominated values of such
securities.
Because foreign securities markets may close before the Funds determine their
net asset values, events affecting the value of portfolio securities occurring
between the time prices are determined and the time the Funds calculate their
net asset values may not be reflected unless the Manager, under supervision of
the Board, determines that a particular event would materially affect a fund's
net asset value.
- - Foreign Funds. Several of our Funds invest in securities denominated in
foreign currencies and traded on foreign exchanges. To determine their value, we
convert their foreign-currency price into U.S. dollars by using the exchange
rate last quoted by a major bank. Exchange rates fluctuate frequently and may
affect the U.S. dollar value of foreign-denominated securities, even if their
market prices do not change. In addition, some foreign exchanges are open for
trading when the U.S. market is closed. As a result, a Fund's foreign
securities -- and its price -- may fluctuate during periods when you can't buy,
sell or exchange shares in the Fund.
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
Each Fund distributes substantially all its net investment income and net
capital gains to shareholders each year.
- - You are not guaranteed any distributions.
- - The Board of Directors has discretion in determining the amount and frequency
of the distributions.
- - Unless you request cash distributions in writing, all dividends and other
distributions will be reinvested automatically in additional shares and
credited to the shareholders' account.
Distributions Affect NAV.
- - The Funds will pay distributions as of the record date.
- - Dividends and capital gains waiting distribution are included in each Fund's
daily NAV.
Buying a Dividend. If you buy shares of a Fund just before a distribution, you
will pay the full price for the shares and receive a portion of the purchase
price back as a taxable distribution when the distribution is made.
TAXES
Each Fund intends to qualify as a regulated investment company, which means that
it pays no federal income tax on the earnings or capital gains it distributes to
its shareholders. The following statements apply with respect to each Fund:
- - Ordinary dividends from the Fund are taxable as ordinary income and dividends
from the Fund's long-term capital gains are taxable as capital gain.
- - Dividends are treated in the same manner for federal income tax purposes
whether you receive them in the form of cash or additional shares. They may
also be subject to state and local taxes.
42
<PAGE>
SHAREHOLDER INFORMATION
- - Dividends from the Lexington GNMA Income Fund, Inc. that are attributable to
interest on certain U.S. Government obligations may be exempt from certain
state and local income taxes. The extent to which ordinary dividends are
attributable to U.S. Government obligations will be provided from the Fund.
- - Certain dividends paid to you in January will be taxable as if they had been
paid the previous December.
- - We will mail you tax statements annually showing the amounts and tax status
of the distributions you received.
- - When you sell (redeem) or exchange shares of a Fund, you must recognize any
gain or loss. However, as long as Lexington Money Market Trust's NAV per
share does not deviate from $1.00, there will be no gain or loss.
- - Under certain circumstances, a Fund may be in a position to "pass-through" to
you the right to a credit or deduction for foreign taxes paid by the Fund.
- - Because your tax treatment depends on your purchase price and tax position,
you should keep your regular account statements for use in determining your
tax.
- - You should review the more detailed discussion of federal income tax
considerations in the Statement of Additional Information, which is available
for free by calling 1-800-526-0056.
***We provide this tax information for your general information. You should
consult your own tax adviser about the tax consequences of investing in a
Fund.***
43
<PAGE>
DISTRIBUTION OF FUND'S SHARES
DISTRIBUTION PLAN. The following Funds have adopted a plan under Rule 12b-1 for
the sale and distribution of shares:
- - Lexington Goldfund;
- - Lexington Global Income Fund;
- - Lexington Growth and Income Fund;
- - Lexington International Fund;
- - Lexington SmallCap Fund;
- - Lexington Troika Dialog Russia Fund; and
- - Lexington Worldwide Emerging Markets Fund.
Under the distribution plan, the Funds may pay fees up to 0.25% of their average
daily net assets for distribution services.
SHAREHOLDER SERVICING AGREEMENTS. The Funds may enter into Shareholder Servicing
Agreements with one or more Shareholder Servicing Agents to provide various
services to shareholders as follows:
- - Each Agent receives fees up to 0.25% of the average daily net assets of the
Fund.
- - LMC may pay additional fees from its past profits, at no additional costs to
the Funds.
- - Each Agent may waive all or a portion of the fees.
- - If a Fund has a distribution plan, the Agents will receive fees of up to
0.25% of the average daily assets from the distribution plan.
44
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights table on the following pages are intended to help you
understand the Fund's financial performance for the past 5 years. Certain
information reflects financial highlights for a single share. The total returns
in the table represent the rate that an investor would have earned (or lost) on
an investment in the Fund (assuming reinvestment of all dividends and
distributions). This information has been audited by KPMG LLP, whose report,
along with the Fund's financial statements, are included in the annual report,
which is available upon request.
45
<PAGE>
DOMESTIC EQUITY FUNDS
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS GROWTH AND INCOME FUND SMALLCAP FUND
PER SHARE OPERATING PERFORMANCE 1998 1997 1996 1995 1994 1998 1997 1996(a)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $20.27 $18.56 $15.71 $14.36 $16.16 $11.39 $11.73 $10.00
Net investment income (loss) -- 0.05 0.07 0.22 0.17 (0.02) (0.19) (0.18)
Net realized and unrealized gain (loss)
from investment operations 4.30 5.46 4.08 3.00 (0.68) 0.75 1.41 1.94
Total income (loss) from investment
operations 4.30 5.51 4.15 3.22 (0.51) 0.73 1.22 1.76
Less distributions:
Distributions from net investment
income -- (0.07) (0.13) (0.22) (0.16) -- -- --
Distributions in excess of net
investment income -- -- -- -- -- -- -- --
Distributions from net realized gains (2.66) (3.73) (1.17) (1.65) (0.91) (0.22) -- --
Distributions in excess of net
realized gains -- -- -- -- (0.22) -- (1.56) (0.03)
Total distributions (2.66) (3.80) (1.30) (1.87) (1.29) (0.22) (1.56) (0.03)
Net asset value, end of period $21.91 $20.27 $18.56 $15.71 $14.36 $11.90 $11.39 $11.73
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN 21.42% 30.36% 26.46% 22.57% (3.11)% 6.73% 10.47% 17.50%
RATIOS/SUPPLEMENTAL DATA
Net asset, end of period (thousands) $245,790 $228,037 $200,309 $138,901 $124,829 $8,172 $9,565 $8,061
Ratio of expenses to average net
assets, before reimbursement or waiver 1.16% 1.17% 1.13% 1.09% 1.15% 2.92% 2.57% 3.04%
Ratio of expenses to average net
assets, net of reimbursement or waiver 1.16% 1.17% 1.13% 1.09% 1.15% 2.59% 2.57% 2.48%
Ratio of net investment income (loss)
to average net assets, before
reimbursement or waiver 0.06% 0.21% 0.43% 1.38% 1.06% (2.00)% (1.78)% (2.34)%
Ratio of net investment income (loss)
to average net assets, net of
reimbursement or waiver 0.06% 0.21% 0.43% 1.38% 1.06% (1.67)% (1.78)% (1.78)%
Portfolio Turnover Rate 63.20% 88.15% 101.12% 159.94% 63.04% 145.94% 39.09% 60.92%
</TABLE>
<TABLE>
<S> <C>
* Annualized.
(a) SmallCap Fund commenced operations on January 2, 1996.
(b) Small Cap Asia Growth Fund commenced operations on July 3,
1995.
</TABLE>
46
<PAGE>
GLOBAL AND INTERNATIONAL FUNDS
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
SMALL CAP ASIA GROWTH FUND GLOBAL CORPORATE LEADERS FUND
1998 1997 1996 1995(b) 1998 1997 1996 1995 1994
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$7.06 $12.24 $9.76 $10.00 $10.59 $11.28 $11.32 $11.17 $13.51
-- (0.05) (0.05) 0.02 0.99 0.03 0.01 0.09 0.02
(1.37) (5.13) 2.54 (0.24) 1.02 0.73 1.84 1.10 0.23
(1.37) (5.18) 2.49 (0.22) 2.01 0.76 1.85 1.19 0.25
-- -- -- (0.02) (0.80) (0.09) (0.16) (0.29) --
-- -- (0.01) -- -- -- -- (0.13) --
-- -- -- -- (2.34) (1.36) (1.73) (0.62) (2.46)
-- -- -- -- -- -- -- -- (0.13)
-- -- (0.01) (0.02) (3.14) (1.45) (1.89) (1.04) (2.59)
$5.69 $7.06 $12.24 $9.76 $9.46 $10.59 $11.28 $11.32 $11.17
---------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------
(19.41)% (42.32)% 25.50% (4.39)%* 19.06% 6.90% 16.43% 10.69% 1.84%
$18,278 $13,867 $23,796 $8,936 $17,803 $35,085 $37,223 $53,614 $67,392
2.86% 2.30% 2.64% 3.51%* 2.12% 1.75% 1.90% 1.67% 1.61%
2.50% 2.30% 2.42% 1.75%* 2.12% 1.75% 1.90% 1.67% 1.61%
(0.57)% (0.32)% (0.86)% (1.24)%* (0.06)% 0.23% 0.11% 0.48% 0.14%
(0.21)% (0.32)% (0.64)% 0.52%* (0.06)% 0.23% 0.11% 0.48% 0.14%
193.48% 187.41% 176.49% 40.22%* 137.33% 177.48% 128.05% 166.35% 83.40%
</TABLE>
47
<PAGE>
<TABLE>
<CAPTION>
INTERNATIONAL FUND
PER SHARE OPERATING PERFORMANCE 1998 1997 1996 1995 1994(c)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.10 $10.86 $10.60 $10.37 $10.00
Net investment income (loss) 0.17 0.07 (0.02) (0.01) (0.08)
Net realized and unrealized gain (loss) from
investment operations 1.74 0.10 1.45 0.61 0.67
Total income (loss) from investment operations 1.91 0.17 1.43 0.60 0.59
Less distributions:
Distributions from net investment income (0.06) (0.13) (0.20) -- --
Distributions in excess of net investment income -- -- -- (0.35) --
Distributions from net realized gains (0.34) (0.80) (0.97) (0.02) (0.10)
Distributions in excess of net realized gains -- -- -- -- (0.12)
Total distributions (0.40) (0.93) (1.17) (0.37) (0.22)
Net asset value, end of period $11.61 $10.10 $10.86 $10.60 $10.37
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
TOTAL RETURN 19.02% 1.61% 13.57% 5.77% 5.87%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (thousands) $24,000 $19,949 $18,891 $17,855 $17,843
Ratio of expenses to average net assets, before
reimbursement or waiver 2.25% 2.15% 2.45% 2.46% 2.39%
Ratio of expenses to average net assets, net of
reimbursement or waiver 1.75% 1.75% 2.45% 2.46% 2.39%
Ratio of net investment income (loss) to average
net assets, before reimbursement or waiver (0.16)% 0.13% (0.39)% (0.12)% (0.94)%
Ratio of net investment income (loss) to average
net assets, net of reimbursement or waiver 0.35% 0.53% (0.39)% (0.12)% (0.94)%
Portfolio Turnover Rate 143.67% 122.56% 113.55% 137.72% 100.10%
</TABLE>
<TABLE>
<S> <C>
* Annualized.
# (before, or net of) reimbursement or waiver or redemption
fee proceeds.
(c) International Fund commenced operations on January 3, 1994.
(d) The Fund's commencement of operations was June 3, 1996 with
the investment of its initial capital. The Fund's
registration statement 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.
</TABLE>
48
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
GLOBAL INCOME FUND RUSSIA FUND WORLDWIDE EMERGING MARKETS FUND
1998 1997 1996 1995 1994 1998 1997 1996(d) 1998 1997 1996 1995
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$10.58 $11.22 $10.75 $9.80 $10.95 $17.50 $11.24 $12.12 $10.18 $11.49 $10.70 $11.47
0.90 1.04 1.01 0.96 0.46 0.15 (0.01) (0.05) 0.12 0.01 -- 0.08
(0.07) (0.50) 0.36 0.95 (1.16) (14.70) 7.57 (0.51) (3.08) (1.32) 0.79 (0.76)
0.83 0.54 1.37 1.91 (0.70) (14.55) 7.56 (0.56) (2.96) (1.31) 0.79 (0.68)
(0.87) (0.91) (0.86) (0.96) (0.45) (0.07) -- -- (0.09) -- -- (0.08)
-- -- -- -- -- -- -- -- -- -- -- (0.01)
(0.18) (0.27) (0.04) -- -- (0.24) (1.30) (0.32) -- -- -- --
-- -- -- -- -- -- -- -- -- -- -- --
(1.05) (1.18) (0.90) (0.96) (0.45) (0.31) (1.30) (0.32) (0.09) -- -- (0.09)
$10.36 $10.58 $11.22 $10.75 $9.80 $2.64 $17.50 $11.24 $7.13 $10.18 $11.49 $10.70
---------------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------------------
8.21% 5.00% 13.33% 20.10% (6.52)% (82.99)% 67.50% (9.01)%* (29.06)% (11.40)% 7.38% (5.93)%
$36,407 $23,668 $29,110 $12,255 $10,351 $19,147 $137,873 $13,846 $65,323 $137,686 $254,673 $265,544
1.89% 2.17% 2.33% 3.07% 1.80% 2.64% 2.89%# 5.07%*# 1.85% 1.82% 1.76% 1.88%
1.50% 1.50% 1.50% 2.75% 1.50% 1.84% 1.85%# 2.65%*# 1.85% 1.82% 1.76% 1.88%
10.99% 8.99% 9.49% 9.48% 4.18% 0.57% (1.14)%# (3.69)%*# 1.14% 0.09% (0.01)% 0.70%
11.38% 9.66% 10.32% 9.80% 4.48% 1.36% (0.11)%# (1.27)%*# 1.14% 0.09% (0.01)% 0.70%
45.25% 117.94% 71.83% 164.72% 10.20% 65.76% 66.84% 115.55% 107.19% 112.05% 86.26% 92.85%
1994
<S> <C>
$13.96
(0.01)
(1.92)
(1.93)
--
--
(0.47)
(0.09)
(0.56)
$11.47
- -------------------------------
- -------------------------------
<S> <C>
(13.81)%
$288,581
1.65%
1.65%
(0.06)%
(0.06)%
79.56%
</TABLE>
49
<PAGE>
PRECIOUS METALS FUNDS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
GOLDFUND
<CAPTION>
PER SHARE OPERATING PERFORMANCE 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $3.24 $5.97 $6.24 $6.37 $6.90
Net investment income (loss) -- -- 0.02 -- 0.03
Net realized and unrealized gain (loss) from
investment operations (0.21) (2.52) 0.50 (0.12) (0.53)
Total income (loss) from investment operations (0.21) (2.52) 0.52 (0.12) (0.50)
Less distributions:
Distributions from net investment income -- (0.21) (0.79) (0.01) (0.03)
Distributions in excess of net investment income -- -- -- -- --
Distributions from net realized gains -- -- -- -- --
Distributions in excess of net realized gains -- -- -- -- --
Total distributions -- (0.21) (0.79) (0.01) (0.03)
Net asset value, end of period $3.03 $3.24 $5.97 $6.24 $6.37
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (6.39)% (42.98)% 7.84% (1.89)% 7.28%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (thousands) $50,841 $53,707 $109,287 $135,779 $159,435
Ratio of expenses to average net assets, before
reimbursement or waiver 1.74% 1.65% 1.60% 1.70% 1.54%
Ratio of expenses to average net assets, net of
reimbursement or waiver 1.74% 1.65% 1.60% 1.70% 1.54%
Ratio of net investment income (loss) to average net
assets, before reimbursement or waiver 0.08% 0.17% (0.32)% 0.07% 0.50%
Ratio of net investment income (loss) to average net
assets, net of reimbursement or waiver 0.08% 0.17% (0.32)% 0.07% 0.50%
Portfolio Turnover Rate 28.93% 38.32% 31.04% 40.41% 23.77%
</TABLE>
<TABLE>
<S> <C>
* Annualized.
(e) Six month period ended December 31, 1998. The Fund changed
its fiscal year-end from June 30th to December 31st.
(f) Fiscal year-end June 30th.
</TABLE>
50
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
SILVER FUND
1998(e) 1998(f) 1997(f) 1996(f) 1995(f) 1994(f)
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$3.26 $3.95 $4.46 $4.00 $3.92 $3.52
(0.01) (0.02) (0.04) (0.03) (0.03) (0.02)
)
(0.52 (0.66) (0.43) 0.51 0.11 0.42
(0.53) (0.68) (0.47) 0.48 0.08 0.40
-- -- -- -- -- --
-- (0.01) (0.04) (0.02)
-- -- -- -- -- --
-- -- -- -- -- --
-- (0.01) (0.04) (0.02) -- --
$2.73 $3.26 $3.95 $4.46 $4.00 $3.92
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(16.26)% (17.32)% (10.76)% 12.02% 2.04% 11.36%
$25,560 $34,921 $42,035 $73,945 $65,517 $49,499
2.37%* 1.90% 1.96% 1.73% 1.82% 1.84%
2.37%* 1.90% 1.96% 1.73% 1.82% 1.84%
(0.61)%* (0.54)% (0.78)% (0.72)% (0.83)% (0.82)%
(0.61)%* (0.54)% (0.78)% (0.72)% (0.83)% (0.82)%
5.68% 28.78% 18.76% 44.30% 44.22% 5.28%
</TABLE>
51
<PAGE>
FIXED-INCOME FUNDS AND MONEY MARKET FUNDS
<TABLE>
<CAPTION>
GNMA INCOME FUND
PER SHARE OPERATING PERFORMANCE 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $8.40 $8.12 $8.19 $7.60 $8.32
Net investment income (loss) 0.48 0.51 0.53 0.58 0.55
Net realized and unrealized gain (loss)
from investment operations 0.13 0.29 (0.08) 0.59 (0.72)
Total income (loss) from investment
operations 0.61 0.80 0.45 1.17 (0.17)
Less distributions:
Distributions from net investment
income (0.48) (0.52) (0.52) (0.58) (0.55)
Distributions in excess of net
investment income -- -- -- -- --
Distributions from net realized gains -- -- -- -- --
Distributions in excess of net
realized gains -- -- -- -- --
Total distributions (0.48) (0.52) (0.52) (0.58) (0.55)
Net asset value, end of period $8.53 $8.40 $8.12 $8.19 $7.60
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
TOTAL RETURN 7.52% 10.20% 5.71% 15.91% (2.07)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (thousands) $273,591 $158,071 $133,777 $130,681 $132,108
Ratio of expenses to average net
assets, before reimbursement or waiver 1.01% 1.01% 1.05% 1.01% 0.98%
Ratio of expenses to average net
assets, net of reimbursement or waiver 1.01% 1.01% 1.05% 1.01% 0.98%
Ratio of net investment income (loss)
to average net assets, before
reimbursement or waiver 5.85% 6.28% 6.56% 7.10% 6.90%
Ratio of net investment income (loss)
to average net assets, net of
reimbursement or waiver 5.85% 6.28% 6.56% 7.10% 6.90%
Portfolio Turnover Rate 54.47% 134.28% 128.76% 30.69% 37.15%
</TABLE>
52
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
MONEY MARKET TRUST
1998 1997 1996 1995 1994
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
$1.00 $1.00 $1.00 $1.00 $1.00
0.0455 0.0458 0.0441 0.0495 0.0330
-- -- -- -- --
0.0455 0.0458 0.0441 0.0495 0.0330
(0.0455) (0.0458) (0.0441) (0.0495) (0.0330)
-- -- -- -- --
-- -- -- -- --
-- -- -- -- --
(0.0455) (0.0458) (0.0441) (0.0495) (0.0330)
$1.00 $1.00 $1.00 $1.00 $1.00
---------------------------------------------------------------------
---------------------------------------------------------------------
4.64% 4.68% 4.50% 5.06% 3.35%
$87,488 $95,149 $97,526 $88,786 $111,805
1.05% 1.04% 1.04% 1.08% 1.02%
1.00% 1.00% 1.00% 1.00% 1.00%
4.51% 4.55% 4.37% 4.87% 3.30%
4.56% 4.58% 4.41% 4.95% 3.32%
-- -- -- -- --
</TABLE>
53
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
The Statement of Additional Information (SAI) provides a more
complete discussion about the Lexington Funds and is
incorporated by reference, which means that it is considered a
part of this prospectus.
ANNUAL AND SEMI-ANNUAL REPORTS
The annual and semi-annual reports to shareholders have more
information about each Lexington Fund's investments, including
a discussion about the market conditions and investment
strategies that significantly affected the Fund's performance
during its last fiscal year.
TRADEMARKS
Lexington(R) and Global Corporate Leaders(R) are registered
trademarks of Lexington Management Corporation.
REVIEWING OR OBTAINING ADDITIONAL INFORMATION
You may obtain a copy of the SAI and the annual and semi-annual
reports (free of charge) by contacting a broker-dealer or other
financial intermediaries that sell the Fund's shares or by
writing or calling:
THE LEXINGTON FUNDS(R)
P.O. Box 1515
Park 80 West Plaza Two
Saddle Brook, New Jersey 07663
Attn: Shareholder Services
Tel: (800) 526-0056 or (201) 845-7300
----------------------------------------------------------------
www.lexingtonfunds.com
[LOGO]
You may also obtain a copy of the SAI and the annual and
semi-annual reports (for a fee) by contacting the Public
Reference Room of the Securities and Exchange Commission, 450
Fifth Street, N.W., Washington, D.C., telephone 800-SEC-0330.
You may also obtain this information by visiting the SEC's
Worldwide Website at http://www.sec.gov.
Investment Company Act File No. 811-0865 (Growth and Income);
811-7413 (SmallCap); 811-5113 (Global Corporate Leaders);
811-8172 (International); 811-1838 (Worldwide); 811-7287 (Small
Cap Asia Growth); 811-7587 (Russia); 811-2401 (GNMA Income);
811-4675 (Global Income); 811-2701 (Money Market); 811-2881
(Goldfund); 811-4111 (Silver).
50
<PAGE>
<PAGE>
LEXINGTON TROIKA DIALOG RUSSIA FUND, INC.
STATEMENT OF ADDITIONAL INFORMATION
May 3, 1999
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 May 3, 1999, 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
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. ("LFD") is the Fund's distributor.
TABLE OF CONTENTS
Page
History of the Fund. . . . . . . . . . . . . . . . . . . . . 3
Investment Strategies and Risks of the Fund. . . . . . . . . 3
Investment Restrictions. . . . . . . . . . . . . . . . . . 10
Portfolio Transactions and Turnover. . . . . . . . . . . . 13
Redemption of Shares . . . . . . . . . . . . . . . . . . . .14
Management of the Fund . . . . . . . . . . . . . . . . . . 14
Control Persons and Principal Holders of Securities. . . . 19
Investment Adviser, Administrator and Distributor. . . . . 19
Determination of Net Asset Value . . . . . . . . . . . . . 21
Distribution Plan. . . . . . . . . . . . . . . . . . . . . 22
Telephone Exchange Provisions. . . . . . . . . . . . . . . 23
Tax Sheltered Retirement Plans . . . . . . . . . . . . . . .24
Capital Stock of the Fund. . . . . . . . . . . . . . . . . .25
Dividend Distribution and Reinvestment Policy. . . . . . . .25
Tax Matters. . . . . . . . . . . . . . . . . . . . . . . . .26
Calculation of Performance Data. . . . . . . . . . . . . . .33
Custodian, Transfer Agent and Dividend Disbursing Agent. . .34
Counsel and Independent Auditors . . . . . . . . . . . . . .34
Financial Statements . . . . . . . . . . . . . . . . . . . .35
History of the Fund
- -------------------
Lexington Troika Dialog Russia Fund, Inc. (the "Fund") is a
corporation organized under the laws of the State of Maryland on November
20, 1995. The Fund's articles of incorporation were amended on April 2,
1996 to reflect a change in the Fund's name from "Lexington Russia Fund,
Inc." to "Lexington Troika Dialog Russia Fund, Inc." The Fund is a non-
diversified open-end management investment company.
Investment Strategies and Risks of the Fund
- --------------------------------------------
For the purposes of the prospectus and this statement of additional
information, 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.
The Fund intends to invest its assets in Russian companies in a broad
array of industries, including the following: 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 the value of its total assets in any one industry.
It may, however, invest an unrestricted amount of its assets in the oil and
gas industry. The Fund's investments will include investments in Russian
companies that have characteristics and business relationships common to
companies outside of Russia. As a result, outside economic forces may cause
fluctuations in the value of securities held by the Fund.
Under current conditions, the Fund expects to invest at least 20% of
its total assets in very liquid assets to maintain liquidity and provide
stability. As the Russian equity markets develop, however, and the
liquidity of Russian securities becomes less problematic, the Fund will
invest a greater percentage of its assets in Russian equity securities.
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 Investment
Company Act of 1940, as amended, the Fund may hedge up to 100% of its assets
when deemed appropriate by the TDAM. 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.
The Fund may purchase stock equivalents including warrants, option,
convertible debt securities and depository receipts. The common stock
equivalents may be converted into or provide the holder with the right to
common stock. These investments are made in order to limit the risk of a
substantial increase in the market price of a security (or an adverse
movement in its applicable currency).
A warrant typically is a long-term option that permits the holder
to buy a specified number of shares of the issuer's underlying common stock
at a specified exercise price by a particular expiration date. A warrant
not exercised or disposed of by its expiration date expires worthless.
Options on securities, securities indices and currencies - The Fund
may purchase call options on securities that it intends to purchase (or on
currencies in which those securities are denominated) in order to limit the
risk of a substantial increase in the market price of such security (or an
adverse movement in the applicable currency). The Fund may purchase put
options on particular securities (or on currencies in which those securities
are denominated) in order to protect against a decline in the market value
of the underlying security below the exercise price less the premium paid
for the option (or an adverse movement in the applicable currency relative
to the U.S. dollar). Prior to expiration, most options are expected to be
sold in a closing sale transaction. Profit or loss from the sale depends
upon whether the amount received is more or less than the premium paid plus
transaction costs. The Fund may purchase put and call options on stock
indices in order to hedge against risks of stock market or industry wide
stock price fluctuations. The Fund will not purchase options on securities,
securities indices or currencies or related options (including options on
futures) if the sum of initial margin deposits and premiums paid for any
such option or options would exceed 5% of its total assets, and it will not
enter into options with respect to more than 25% of its total assets.
A convertible security is a fixed-income security (a bond or preferred
stock) that may be converted at a stated price within a specified period of
time into a certain quantity of the common stock of the same or a different
issuer. Convertible securities are senior to common stock in a
corporation's capital structure but are usually subordinated to similar
non-convertible securities. The price of a convertible security is influenced
by the market value of the underlying common stock.
Depositary receipts include American depositary receipts ("ADRs"),
European depositary receipts ("EDRs"), global depositary receipts ("GDRs")
and other similar instruments. Depositary receipts are receipts typically
issued in connection with a U.S. or foreign bank or trust company and
evidence ownership of underlying securities issued by a foreign corporation.
The Fund may also invest in other types of equity securities including
preferred stocks. A preferred stock is a class of capital stock that pays
dividends at a specified rate and that has preference over common stock in
the payment of dividends and the liquidation of assets. Preferred stock
does not normally carry voting rights.
The Fund may invest up o 35% of its total assets in Short-Term and
Medium-Term Debt Securities. The Short-Term and Medium-Term Debt Securities
in which the Fund may invest are foreign and domestic debt securities,
including short-term (less than twelve months to maturity) and medium-term
(not greater than five years to maturity) obligations issued by the U.S.
Government, foreign governments, foreign and domestic corporations and
banks, and repurchase agreements.
The Fund may invest up to 10% of its total assets in shares of other
investment companies that invest in securities in which it may otherwise
invest.
The Fund may invest in fixed-rate and floating- or variable-rate U.S.
government securities. The U.S. Government guarantees payments of interest
and principal of U.S. Treasury bills, notes and bonds, mortgage-related
securities and other securities issued by the U.S. government. Other
securities issued by U.S. government agencies or instrumentalities are
supported only by the credit of the agency or instrumentality, for example
those issued by the Federal Home Loan Bank, whereas others, such as those
issued by the FNMA, Farm Credit System and Student Loan Marketing
Association, have an additional line of credit with the U.S. Treasury.
Short-term U.S. government securities generally are considered to be
among the safest short-term investments. However, the U.S. government does
not guarantee the net asset value of the Funds' shares. With respect to
U.S. government securities supported only by the credit of the issuing
agency or instrumentality or by an additional line of credit with the U.S.
Treasury, there is no guarantee that the U.S. government will provide
support to such agencies or instrumentalities. Accordingly, such U.S.
government securities may involve risk of loss of principal and interest.
Settlement Transactions- When the Fund enters into contracts for
purchase or sale of a portfolio security denominated in a foreign currency,
it may be required to settle a purchase transaction in the relevant foreign
currency or receive the proceeds of a sale in that currency. In either
event, the Fund will be obligated to acquire or dispose of such foreign
currency as is represented by the transaction by selling or buying an
equivalent amount of United States dollars. Furthermore, the Fund may wish
to "lock in" the United States dollar value of the transaction at or near
the time of a purchase or sale of portfolio securities at the exchange rate
or rates then prevailing between the United States dollar and the currency
in which the foreign security is denominated. Therefore, the Fund may, for
a fixed amount of United States dollars, enter into a forward foreign
exchange contract for the purchase or sale of the amount of foreign currency
involved in the underlying securities transaction. In so doing, the Fund
will attempt to insulate itself against possible losses and gains resulting
from a change in the relationship between the United States dollar and the
foreign currency during the period between the date a security is purchased
or sold and the date on which payment is made or received. This process is
known as "transaction hedging".
To effect the translation of the amount of foreign currencies involved
in the purchase and sale of foreign securities and to effect the
"transaction hedging" described above, the Fund may purchase or sell foreign
currencies on a "spot" (i.e. cash) basis or on a forward basis whereby the
Fund purchases or sells a specific amount of foreign currency, at a price
set at the time of the contract, for receipt of delivery at a specified date
which may be any fixed number of days in the future.
Such spot and forward foreign exchange transactions may also be
utilized to reduce the risk inherent in fluctuations in the exchange rate
between the United States dollar and the relevant foreign dollar and the
relevant foreign currency when foreign securities are purchased or sold for
settlement beyond customary settlement time (as described below). Neither
type of foreign currency transaction will eliminate fluctuations in the
prices of the Fund's portfolio or securities or prevent loss if the price
of such securities should decline.
Portfolio Hedging- Some or all of the Fund's portfolio will be
denominated in foreign currencies. As a result, in addition to the risk of
change in the market value of portfolio securities, the value of the
portfolio in United States dollars is subject to fluctuations in the
exchange rate between such foreign currencies and the United States dollar.
When, in the opinion of LMC or TDAM it is desirable to limit or reduce
exposure in a foreign currency in order to moderate potential changes in the
United States dollar value of the portfolio, the Fund may enter into a
forward foreign currency exchange contract by which the United States dollar
value of the underlying foreign portfolio securities can be approximately
matched by an equivalent United States dollar liability. This technique is
known as "portfolio hedging" and moderates or reduces the risk of change in
the United States dollar value of the Fund's portfolio only during the
period before the maturity of the forward contract (which will not be in
excess of one year).
The Fund may hedge against changes in financial markets, currency
rates and interest rates. The Fund may hedge with "derivatives."
Derivatives are instruments whose value is linked to, or derived from,
another instrument, like an index or a commodity. The Fund, for hedging
purposes only, may also enter into forward foreign currency exchange
contracts to increase its exposure to a foreign currency that LMC or TDAM
expects to increase in value relative to the United States dollar. The Fund
will not attempt to hedge all of its foreign portfolio positions and will
enter into such transactions only to the extent, if any deemed appropriate
by the investment adviser or sub-adviser. Hedging against a decline in the
value of currency does not eliminate fluctuations in the prices of portfolio
securities or prevent losses if the prices of such securities decline. The
Fund will not enter into forward foreign currency exchange transactions for
speculative purposes. The Fund intends to limit transactions as described
in this paragraph to not more than 70% of the total Fund assets.
Covered Put and Call Options - Options may be used as a means of
participating in an anticipated price change of a security on a more limited
basis than would be possible if the security itself were purchased. The
Fund may write put options. The Fund would write put options only on a
covered basis, which means that the Fund would either (i) set aside cash,
U.S. government securities or other liquid, high-grade debt securities in
an amount not less than the exercise price at all times while the put option
is outstanding (the rules of the Options Clearing Corporation currently
require that such assets be deposited in escrow to secure payment of the
exercise price), (ii) sell short the security or currency underlying the put
option at the same or higher price than the exercise price of the put
option, or (iii) purchase a put option, if the exercise price of the
purchased put option is the same or higher than the exercise price of the
put option sold by the Fund. The Fund generally would write covered put
options in circumstances where LMC and TDAM wish to purchase the underlying
security or currency for the Fund's portfolio at a price lower than the
current market price of the security or currency. In such event, the Fund
would write a put option at an exercise price which, reduced by the premium
received on the option, reflects the lower price it is willing to pay.
Since the Fund also would receive interest on debt securities or currencies
maintained to cover the exercise price of the option, this technique could
be used to enhance current return during periods of market uncertainty. The
risk in such a transaction would be that the market price of the underlying
security or currency would decline below the exercise price less the
premiums received. The Fund may write call options only on securities owned
by the Fund or securities which the Fund has the right to acquire without
additional consideration. Since it can be expected that a call option will
be exercised if the market value of the underlying security increases to a
level greater than the exercise price, this strategy will generally be used
when the investment adviser believes that the call premium received by the
Fund plus anticipated appreciation in the price of the underlying security,
up to the exercise price of the call, will be greater than the appreciation
in the price of the security. The Fund intends to limit transactions as
described in this paragraph to those where the sum of initial margin
deposits and premiums paid does not exceed 5% of its total assets. The Fund
will not write options in excess of 25% of its total assets. The Fund will
cause its custodian to segregate cash, U.S. Government Securities or other
high grade liquid debt obligations having a value sufficient to meet the
Fund's obligations under the call options.
Futures, Swaps and Options on Futures - An interest rate futures
contract is an agreement to purchase or sell debt securities, usually U.S.
government securities, at a specified date and price. For example, the fund
may sell interest rate futures contracts (i.e., enter into a futures
contract to sell the underlying debt security) in an attempt to hedge
against an anticipated increase in interest rates and a corresponding
decline in debt securities it owns. The Fund will have collateral assets
equal to the purchase price of the portfolio securities represented by the
underlying interest rate futures contracts it has an obligation to purchase.
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.
Equity swaps allow the parties to exchange the dividend income or
other components of return on an equity investment (e.g., a group of equity
securities or an index) for a component of return on another non-equity or
equity investment Equity swaps transitions may be volatile and may present
the fund with counterparty risks.
Repurchase Agreements - A repurchase agreement is a contract under
which the Fund would acquire a security for a relatively short period
(usually not more than 7 days) subject to the obligations of the seller to
repurchase and the Fund to resell such security at a fixed time and price
(representing the Fund's cost plus interest). Under the Investment Company
Act, repurchase agreements are considered to be loans by the Fund and must
be fully collateralized by collateral assets. If the seller defaults on its
obligations to repurchase the underlying security, the Fund may experience
delay or difficulty in exercising its rights to realize upon the security,
may incur a loss if the value of the security declines and may incur
disposition costs in liquidating the security. The Fund intends to limit
repurchase agreements to transactions with institutions believed by LMC to
present minimal credit risk. Although the Fund may enter into repurchase
agreements with respect to any portfolio securities which it may acquire
consistent with its investment policies and restrictions, it is the Fund's
present intention to enter into repurchase agreements only with respect to
obligations of the United States government or its agencies or
instrumentalities to meet anticipated redemptions or pending investments or
reinvestment of Fund assets in portfolio securities. The Fund will enter
into repurchase agreements only with member banks of the Federal Reserve
System and with "primary dealers" in United States government securities.
In addition if bankruptcy proceedings are commenced with respect to the
seller, be subject to risks associated with changes in market value of the
collateral securities. The Fund intends to limit repurchase agreements to
institutions believed by LMC to present minimal credit risk. The Fund will
not enter into repurchase agreements maturing in more than seven days if the
aggregate of such repurchase agreements and all other illiquid securities
when taken together would exceed 15% of the total assets of the Fund. The
Fund treats any securities subject to restrictions on repatriation for more
than seven days, and securities issued in connection with foreign debt
conversion programs that are restricted as to remittance of invested capital
or profit, as illiquid. The Fund also treats repurchase agreements with
maturities in excess of seven days as illiquid. Illiquid securities do not
include securities that are restricted from trading on formal markets for
some period of time but for which an active informal market exists, or
securities that meet the requirements of Rule 144A under the Securities Act
of 1933 and that, subject to the review by the Board of Directors and
guidelines adopted by the Board of Directors, LMC has determined to be
liquid. The Fund intends to limit repurchase agreements to transactions
with institutions believed by LMC or TDAM to present minimal credit risk.
Reverse Repurchase Agreements - The Fund may purchase reverse
repurchase agreements. In a reverse repurchase agreement, the Fund sells
to a financial institution a security that it holds and agrees to repurchase
the same security at an agreed-upon price and date.
When Issued and Forward Commitment Securities - The Fund may make
contracts to purchase securities for a fixed price at a future date beyond
customary settlement time ("forward commitments") because new issues of
securities are typically offered to investors, such as the Fund, on that
basis. Forward commitments involve a risk of loss if the value of the
security to be purchased declines prior to the settlement date. This risk
is in addition to the risk of decline in value of the Fund's other assets.
Although the Fund will enter into such contracts with the intention of
acquiring the securities, the Fund may dispose of a commitment prior to
settlement if the investment adviser deems it appropriate to do so. The
Fund may realize short-term profits or losses upon the sale of forward
commitments. The Fund may purchase U.S. government or other securities on
a "when-issued" basis and may purchase or sell securities on a "delayed
delivery" basis. The price is fixed at the time the commitment is made, but
delivery and payment for the securities take place at a later date. When-
issued securities and forward commitments may be sold prior to the
settlement date, but the Fund will enter into when-issued and forward
commitments only with the intention of actually receiving or delivering the
securities. No income accrues on securities that have been purchased
pursuant to a forward commitment or on a when-issued basis prior to delivery
to a fund. At the time the Fund enters into a transaction on a when-issued
or forward commitment basis, it supports its obligation with collateral
assets equal to the value of the when-issued or forward commitment
securities and causes the collateral assets to be marked to market daily.
There is a risk that the securities may not be delivered and that the fund
may incur a loss.
Forward Currency Contracts - A forward currency contract is a contract
individually negotiated and privately traded by currency traders and their
customers and creates an obligation to purchase or sell a specific currency
for an agreed-upon price at a future date. The Fund generally does not
enter into forward contracts with terms greater than one year. The Fund
generally enters into forward contracts only under two circumstances.
First, if 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 by entering into a forward contract to buy
the amount of a foreign currency needed to settle the transaction. Second,
if LMC believes that the currency of a particular foreign country will
substantially rise or fall against the U.S. dollar, it may enter into a
forward contract to buy or sell the currency approximating the value of some
or all of a fund's portfolio securities denominated in such currency. The
Fund will not enter into a forward contract if, as a result, it would have
more than one-third of total assets committed to such contracts (unless it
owns the currency that it is obligated to deliver or has caused its
custodian to segregate segregable assets having a value sufficient to cover
its obligations). Although forward contracts are used primarily to protect
the Fund from adverse currency movements, they involve the risk that
currency movements will not be accurately predicted.
Investors should recognize that investing in securities of foreign
companies and in particular securities of companies domiciled in or doing
business in emerging markets and emerging countries involves certain risk
considerations, including those set forth below, which are not typically
associated with investing in securities of U.S. companies.
Foreign Currency Considerations
The Fund's assets will be invested in securities of foreign companies
and substantially all income will be received by the Fund in foreign
currencies. However, the Fund will compute and distribute its income in
dollars, and the computation of income will be made on the date of its
receipt by the Fund at the foreign exchange rate in effect on that date.
Therefore, if the value of the foreign currencies in which the Fund receives
its income falls relative to the dollar between receipt of the income and
the making of Fund distributions, the Fund will be required to liquidate
securities in order to make distributions if the Fund has insufficient cash
in dollars to meet distribution requirements.
The value of the assets of the Fund as measured in dollars also may
be affected favorably or unfavorably by fluctuations in currency rates and
exchange control regulations. Further, the Fund may incur costs in
connection with conversions between various currencies. Foreign exchange
dealers realize a profit based on the difference between the prices at which
they are buying and selling various currencies. Thus, a dealer normally will
offer to sell a foreign currency to the Fund at one rate, while offering a
lesser rate of exchange should the Fund desire immediately to resell that
currency to the dealer. The Fund will conduct its foreign currency exchange
transactions either on a spot (i.e., cash) basis at the spot rate prevailing
in the foreign currency exchange market, or through entering into forward
or futures contracts to purchase or sell foreign currencies.
Risks Associated With Hedging Transactions
Hedging transactions have special risks associated with them,
including possible default by the Counterparty to the transaction,
illiquidity and, to the extent the Adviser's view as to certain market
movements is incorrect, the risk that the use of a hedging transaction could
result in losses greater than if it had not been used. Use of call options
could result in losses to the Fund, force the sale or purchase of portfolio
securities at inopportune times or for prices lower than current market
values, or cause the Fund to hold a security it might otherwise sell.
Currency hedging involves some of the same risks and considerations
as other transactions with similar instruments. Currency transactions can
result in losses to the Fund if the currency being hedged fluctuates in
value to a degree or in a direction that is not anticipated. Further, the
risk exists that the perceived linkage between various currencies may not
be present or may not be present during the particular time that the Fund
is engaging in portfolio hedging. Currency transactions are also subject to
risks different from those of other portfolio transactions. Because currency
control is of great importance to the issuing governments and influences
economic planning and policy, purchases and sales of currency and related
instruments can be adversely affected by government exchange controls,
limitations or restrictions on repatriation of currency, and manipulations
or exchange restrictions imposed by governments. These forms of governmental
actions can result in losses to the Fund if it is unable to deliver or
receive currency or monies in settlement of obligations and could also cause
hedges it has entered into to be rendered useless, resulting in full
currency exposure as well as incurring transaction costs.
In addition, the Fund pays commissions and other costs in connection
with such investments. Losses resulting from the use of hedging
transactions will reduce the Fund's net asset value, and possibly income,
and the losses can be greater than if hedging transactions had not been
used.
Risks of Hedging Transactions Outside the United States
When conducted outside the U.S., hedging transactions may not be
regulated as rigorously as in the U.S., may not involve a clearing mechanism
and related guarantees, and will be subject to the risk of government
actions affecting trading in, or the price of, foreign securities,
currencies and other instruments. The value of positions taken as part of
non-U.S. hedging transactions also could be adversely affected by: (1) other
complex foreign political, legal and economic factors; (2) lesser
availability of data on which to make trading decisions than in the U.S.;
(3) delays in the Fund's ability to act upon economic events occurring in
foreign markets during non-business hours in the U.S.; (4) the imposition
of different exercise and settlement terms and procedures and margin
requirements than in the U.S.; and (5) lower trading volume and liquidity.
Investment and Repatriation Restrictions
Some foreign countries may have laws and regulations which currently
preclude direct foreign investment in the securities of their companies.
However, indirect foreign investment in the securities of companies listed
and traded on the stock exchanges in these countries is permitted by certain
foreign countries through investment funds which have been specifically
authorized. The Fund may invest in these investment funds subject to the
provisions of the 1940 Act as discussed below under "Investment
Restrictions". If the Fund invests in such investment funds, the Fund's
shareholders will bear not only their proportionate share of the expenses
of the Fund (including operating expenses and the fees of the Investment
Manager), but also will bear indirectly similar expenses of the underlying
investment funds.
In addition, prior governmental approval for foreign investments may
be required under certain circumstances in some foreign countries, while the
extent of foreign investment in domestic companies may be subject to
limitation in other foreign countries. Foreign ownership limitations also
may be imposed by the charters of individual companies in foreign countries
to prevent, among other concerns, violation of foreign investment
limitations.
Repatriation of investment income, capital and the proceeds of sales
by foreign investors may require governmental registration and/or approval
in some foreign countries. The Fund could be adversely affected by delays
in or a refusal to grant any required governmental approval for such
repatriation.
Foreign Securities Markets
Trading volume on foreign country stock exchanges is substantially
less than that on the New York Stock Exchange. Further, securities of some
foreign companies are less liquid and more volatile than securities of
comparable U.S. companies. Similarly, volume and liquidity in most foreign
bond markets is substantially less than in the U.S. and, consequently,
volatility of price can be greater than in the U.S. Fixed commissions on
foreign exchanges are generally higher than negotiated commissions on U.S.
exchanges, although the Fund endeavors to achieve the most favorable net
results on its portfolio transactions and may be able to purchase the
securities in which the Fund may invest on other stock exchanges where
commissions are negotiable.
Companies in foreign countries are not generally subject to uniform
accounting, auditing and financial reporting standards, practices and
disclosure requirements comparable to those applicable to U.S. companies.
Consequently, there may be less publicly available information about a
foreign company than about a U.S. company. Further, there is generally less
governmental supervision and regulation of foreign stock exchanges, brokers
and listed companies than in the U.S. Further, these Funds may encounter
difficulties or be unable to pursue legal remedies and obtain judgments in
foreign courts.
Economic and Political Risks
The economies of individual foreign countries in which the Fund
invests may differ favorably or unfavorably from the U.S. economy in such
respects as growth of gross domestic product, rate of inflation, capital
reinvestment, resource self-sufficiency and balance of payments position.
Further, the economies of foreign countries generally are heavily dependent
upon international trade and, accordingly, have been and may continue to be
adversely affected by trade barriers, managed adjustments in relative
currency values and other protectionist measures imposed or negotiated by
the countries with which they trade. These economies also have been and may
continue to be adversely affected by economic conditions in the countries
with which they trade. The export driven nature of Asian economies is often
dependent on the strength of their trading partners in the United States and
Europe, although growing intra-regional trade is seen mitigating some of
this external dependence.
With respect to any foreign country, there is the possibility of
nationalization, expropriation or confiscatory taxation, political changes,
government regulation, social instability or diplomatic developments
(including war) which could affect adversely the economies of such countries
or the Fund's investments in those countries. In addition, it may be more
difficult to obtain a judgement in a court outside of the United States.
Investment Restrictions
- -----------------------
The Fund's investment objective, as described under "investment
policy" and the following investment restrictions are matters or fundamental
policy which may not be changed without the affirmative vote of the lesser
of (a) 67% or more of the shares of the Fund present at a shareholders'
meeting at which more than 50% of the outstanding shares are present or
represented by proxy or (b) more than 50% of the outstanding shares. Under
these investment restrictions:
(1) the Fund will not issue any senior security (as defined in
the 1940 Act), except that (a) the Fund may enter into
commitments to purchase securities in accordance with the
Fund's investment program, including reverse repurchase
agreements, foreign exchange contracts, delayed delivery and
when-issued securities, which may be considered the
issuance of senior securities; (b) the Fund may engage in
transactions that may result in the issuance of a senior
security to the extent permitted under applicable regulations,
interpretation of the 1940 Act or an exemptive order; (c} the
Fund may engage in short sales of securities to the extent
permitted in its investment program and other restrictions; (d)
the purchase or sale of futures contracts and related options
shall not be considered to involve the issuance of senior
securities; and (e) subject to fundamental restrictions, the
Fund may borrow money as authorized by the 1940 Act.
(2) 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:
(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 the securities of any other
investment company, except as permitted under the 1940 Act.
(6) The Fund will not invest for the purpose of exercising control
over or management of any company.
(7) 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.
Portfolio Transactions and Turnover
- -----------------------------------
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 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.
It is anticipated that Troika Dialog may act as the Fund's broker in
the purchase and sale of portfolio securities and, in that capacity, will
receive brokerage commissions from the Fund. The Fund will use Troika
Dialog as its broker only when, in the judgement of LMC and pursuant to
review by the Board of Directors, Troika Dialog will obtain a price and
execution at least as favorable as that available from other qualified
brokers. The Fund paid brokerage commissions and portfolio turnover rates
are as follows:
Total Brokerage Soft Dollar Portfolio
Commission Paid Commissions Paid Turnover Rate
--------------- ---------------- -------------
1996 $ 0. $ 0 115.55%
1997 5,475. $ 0 66.84%
1998 47,806. $ 0 65.76%
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.
Management of the Fund
- ----------------------
The Fund's Directors and executive officers, their ages as of the
Fund's most recent fiscal year-end, their principal occupations and former
affiliations are set forth below:
+ S.M.S. CHADHA (61), DIRECTOR. 3/16 Shanti Niketan, New Delhi 21, India.
Secretary, Ministry of External Affairs, New Delhi, India; Head of Foreign
Service Institute, New Delhi, India; Special Envoy of the Government of
India; Director, Special Unit for Technical Cooperation among Developing
Countries, United Nations Development Program, New York.
*+ ROBERT M. DEMICHELE (54), PRESIDENT AND CHAIRMAN. P.O. Box 1515, Saddle
Brook, N.J. 07663. Chairman and Chief Executive Officer, Lexington Management
Corporation; President and Director, Lexington Global Asset Managers, Inc.;
Chairman and Chief Executive Officer, Lexington Funds Distributor, Inc.;
Chairman of the Board, Market Systems Research, Inc. and Market Systems
Research Advisors, Inc.; Director, Chartwell Re Corporation, Claredon
National Insurance Company, The Navigator's Group, Inc., Unione Italiana
Reinsurance, Vanguard Cellular Systems, Inc. and Weeden &Co.; Vice Chairman
of the Board of Trustees, Union College and Trustee, Smith Richardson
Foundation.
+ BEVERLEY C. DUER (69), DIRECTOR. 340 East 72nd Street, New York, N.Y. 10021
Private Investor. Formerly Manager, Operations Research Department, CPC
International Inc.
*+ BARBARA R. EVANS (38),DIRECTOR. 5 Fernwood Road, Summit, N.J. 07901. Private
Investor, formerly, Assistant Vice President and Securities Analyst,
Lexington Management Corporation.
*+ RICHARD M. HISEY (40), DIRECTOR and VICE PRESIDENT. P.O. Box 1515, Saddle
Brook, N.J. 07663. Managing Director, Chief Financial Officer and
Director, Lexington Management Corporation; Chief Financial Officer, Vice
President and Director, Lexington Funds Distributor, Inc; Chief Financial
Officer, Market Systems Research Advisers, Inc.; Executive Vice President,
Chief Financial Officer and General Manager - Mutual Funds, Lexington Global
Asset Managers, Inc.
*+ LAWRENCE KANTOR (51), VICE PRESIDENT AND DIRECTOR. P.O. Box 1515, Saddle
Brook, N.J. 07663. Managing Director, Executive Vice President and Director,
Lexington Management Corporation; Executive Vice President and Director,
Lexington Funds Distributor, Inc.; Executive Vice President, Lexington
Global Asset Managers, Inc.,
+ JERARD F. MAHER (53), DIRECTOR. 300 Raritan Center Parkway, Edison, N.J.
08818. General Counsel, Federal Business Center; Counsel, Ribis, Graham
&Curtin.
+ ANDREW M. MCCOSH (58),DIRECTOR. 12 Wyvern Park, Edinburgh EH92 JY, Scotland,
U.K. Professor of the Organisation of Industry and Commerce, Department of
Business Studies, The University of Edinburgh, Scotland..
+ DONALD B. MILLER (72), DIRECTOR. 10725 Quail Covey Drive, Boynton Beach,
Florida 33436. Chairman, Horizon Media, Inc.; Trustee, Galaxy Funds;
Director, Maguire Group of Connecticut; prior to January 1989, President,
Director and C.E.O., Media General Broadcast Services.
+ JOHN G. PRESTON (66), DIRECTOR. 3 Woodfield Road, Wellesley, Massachusetts
02181. Associate Professor of Finance, Boston College, Boston, Massachusetts.
+ ALLEN H. STOWE (61),DIRECTOR. 3674 Fifth and Ocean Avenues, Normandy Beach,
New Jersey 08739. President, Dartmouth Co-operative Society Co., Inc.
* TIMOTHY MCCARTHY (31), VICE PRESIDENT. 4, Romanov Pereulok, 103875, Moscow,
Russia. Portfolio Manager, Troika Dialog Asset Management. Prior to 1999,
Executive Director, Alfa Asset Management. Prior to 1998, Co-founder and
Director, Capital Regent Securities. Prior to 1995, Consultant, Deloitte
& Touche Management Consulting, Inc.
* PAVEL TEPLUKHIN (34), VICE PRESIDENT. 4, Romanov Pereulok, 103875, Moscow,
Russia. President, Troika Dialog Asset Management. Executive Vice President
and Chief Economist, Troika Dialog. Prior to 1996, Dr. Teplukin was Economic
Adviser to the First Deputy Prime Minister at the Ministry of Finance of the
Russian Federation.
* RUBEN VARDANIAN (30), VICE PRESIDENT. 4, Romanov Pereulok, 103875, Moscow,
Russia. Chairman, Troika Dialog Asset Management. President and Chief
Operating Officer, Troika Dialog.
* OLEG LARICHEV (26), VICE PRESIDENT. 4, Romanov Pereulok, 103875, Moscow,
Russia. Portfolio Manager, Troika Dialog Asset Management. Prior to 1997,
Economist, Russian European Center for Economic Policy.
*+ LISA CURCIO (39), VICE PRESIDENT AND SECRETARY. P.O. Box 1515, Saddle Brook,
N.J. 07663. Senior Vice President and Secretary, Lexington Management
Corporation; Vice President and Secretary, Lexington Funds Distributor, Inc.;
Secretary, Lexington Global Asset Managers, Inc.
*+ RICHARD J. LAVERY, CLU, CHFC (45), VICE PRESIDENT. P. O. Box 1515, Saddle
Brook, N.J. 07663. Senior Vice President, Lexington Management Corporation;
Vice President, Lexington Funds Distributor, Inc.
*+ JANICE A. CARNICELLI (39), VICE PRESIDENT. P. O. Box 1515, Saddle Brook, N.J.
07663.
*+ CHRISTIE CARR-WALDRON (31),TREASURER, P.O. Box 1515, Saddle Brook, N.J.07663.
Prior to October 1992, Senior Accountant, KPMG Peat Marwick LLP.
*+ CATHERINE DIFALCO (29), ASSISTANT TREASURER. P.O. Box 1515, Saddle Brook, New
Jersey 07663. Prior to October 1997, Manager, Fund Accounting.
*+ SIOBHAN GILFILLAN (35), ASSISTANT TREASURER. P.O. Box 1515, Saddle Brook,
N.J. 07663.
*+ JOAN K. LEDERER (32), ASSISTANT TREASURER. P.O. Box 1515, Saddle Brook, N.J.
07663. Prior to April 1997, Director of Investment Accounting, Diversified
Investment Advisors, Inc. Prior to April 1996, Assistant Vice President,
PIMCO.
*+ SHERI MOSCA (35), ASSISTANT TREASURER. P. O. Box 1515, Saddle Brook, N.J.
07663.
*+ PETER CORNIOTES (36), ASSISTANT SECRETARY. P. O. Box 1515, Saddle Brook, N.J.
07663. Vice President and Assistant Secretary, Lexington Management
Corporation. Assistant Secretary, Lexington Funds Distributor, Inc.
*+ ENRIQUE FAUST (38), ASSISTANT SECRETARY, P.O. Box 1515, Saddle Brook, N.J.
07663. Assistant Vice President, Lexington Management Corporation. Prior to
March 1994, Blue Sky Compliance Coordinator, Lexington Group of Investment
Companies.
* "Interested person" and/or "affiliated person" as defined in the
Investment Company Act of 1940, as amended.
+ Messrs. Chada, Corniotes, DeMichele, Duer, Faust, Hisey, Kantor,
Lavery, Maher, McCosh, Miller, Preston and Stowe, and Mmes.
Carnicelli, Carr-Waldron, Curcio, DiFalco, Evans, Gilfillan, Lederer
and Mosca hold similar offices with some or all of the other
registered investment companies advised and/or distributed by
Lexington Management Corporation or Lexington Funds Distributor, Inc.
The Board of Directors met 5 times during the twelve months ended
December 31, 1998, and each of the Directors attended at least 75% of
those meetings.
REMUNERATION OF DIRECTORS AND CERTAIN EXECUTIVE OFFICERS:
Each Director is reimbursed for expenses incurred in attending each
meeting of the Board of Directors or any committee thereof up to a maximum
of $9,000 per year for Directors living outside the U.S. and $6,000 per year
for Directors living within the U.S. Each Director who is not an affiliate
of the advisor is compensated for his or her services according to a fee
schedule which recognizes the fact that each Director also serves as a
Director of other investment companies advised by LMC. Each Director
receives a fee, allocated among all investment companies for which the
Director serves.
Set forth below is information regarding compensation paid or
accrued during the period January 1, 1998 to December 31, 1998 for each
Director:
- --------------------------------------------------------------------------------
AGGREGATE TOTAL COMPENSATION NUMBER OF
NAME OF DIRECTOR COMPENSATION FROM FROM FUND AND DIRECTORSHIPS IN
FUND FUND COMPLEX FUND COMPLEX
- --------------------------------------------------------------------------------
S.M.S. Chadha $2,350 $27,068 15
- --------------------------------------------------------------------------------
Robert M. DeMichele 0 0 16
- --------------------------------------------------------------------------------
Beverley C. Duer $2,683 $35,518 16
- --------------------------------------------------------------------------------
Barbara R. Evans 0 0 15
- --------------------------------------------------------------------------------
Richard M. Hisey 0 0 7
- --------------------------------------------------------------------------------
Lawrence Kantor 0 0 15
- --------------------------------------------------------------------------------
Jerard F. Maher $2,350 $30,518 16
- --------------------------------------------------------------------------------
Andrew M. McCosh $2,350 $27,818 15
- --------------------------------------------------------------------------------
Donald B. Miller $2,350 $27,818 15
- --------------------------------------------------------------------------------
John G. Preston $2,350 $27,818 15
- --------------------------------------------------------------------------------
Margaret W. Russell* $2,094 $23,228 N/A
- --------------------------------------------------------------------------------
Philip C. Smith* $1,280 $19,200 N/A
- --------------------------------------------------------------------------------
Allen H. Stowe @1,712 $12,340 8
- --------------------------------------------------------------------------------
Frances A. Sunderland* $1,200 $16,800 N/A
- --------------------------------------------------------------------------------
*Retired
RETIREMENT PLAN FOR ELIGIBLE DIRECTORS/TRUSTEES
Effective September 12, 1995, the Directors instituted a Retirement
Plan for Eligible Directors/Trustees (the "Plan") pursuant to which
each Director/Trustee (who is not an employee of any of the Funds, the
Advisor, Administrator or Distributor or any of their affiliates) may be
entitled to certain benefits upon retirement from the Board. Pursuant to the
Plan, the normal retirement date is the date on which the eligible
Director/Trustee has attained age 65 and has completed at least ten years
of continuous and non-forfeited service with one or more of the investment
companies advised by LMC (or its affiliates) (collectively, the "Covered
Funds"). Each eligible Director/Trustee is entitled to receive from the
Covered Fund an annual benefit commencing on the first day of the calendar
quarter coincident with or next following his date of retirement equal to
5% of his compensation multiplied by the number of such Director/Trustee's
years of service (not in excess of 15 years) completed with respect to any
of the Covered Portfolios. Such benefit is payable to each eligible Director
in quarterly installments for ten years following the date of retirement or
the life of the Director/Trustee. The Plan establishes age 72 as a mandatory
retirement age for Directors/Trustees; however, Director/Trustees serving
the Funds as of September 12, 1995 are not subject to such mandatory
retirement. Directors/Trustees serving the Funds as of September 12, 1995
who elect retirement under the Plan prior to September 12, 1996 will receive
an annual retirement benefit at any increased compensation level if
compensation is increased prior to September 12, 1997 and receive spousal
benefits (I.E., in the event the Director/Trustee dies prior to receiving
full benefits under the Plan, the Director/Trustee's spouse (if any) will
be entitled to receive the retirement benefit within the 10 year period.)
Retiring Directors will be eligible to serve as Honorary Directors for
one year after retirement and will be entitled to be reimbursed for travel
expenses to attend a maximum of two meetings.
Set forth in the table below are the estimated annual benefits payable
to an eligible Director upon retirement assuming various compensation and
years of service classifications. As of December 31, 1998, the estimated
credited years of service for Directors Chadha, Duer, Maher, McCosh, Miller,
Preston and Stowe are 3, 20, 3, 3, 24, 20 and 3, 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
Control Persons and Principal Holders of Securities
- ---------------------------------------------------
As of February 19, 1999, the following persons are known by fund
management to have owned beneficially, directly or indirectly, 5% or more
of the outstanding shares of Lexington Troika Dialog Russia Fund, Inc.:
Smith Richardson Foundation, 60 Jesup Road, Westport, CT 06880, 6%; and
Robert Craddock Norwood Clinic, Box C-230, Birmingham, AL 35283, 6%.
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 February 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
and were last approved by the Board of Directors on November 30, 1998.
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'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. LMC had 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, 2000 and may continue to do so to a date as may be determined by LMC.
Advisory fees paid to LMC and expense reimbursements paid to the Fund are
as follows:
PERIOD ADVISORY FEE EXPENSE REIMBURSEMENT
------ ------------ --------------------
1/1/96 to 12/31/96 $ 105,882 $ 145,137
1/1/97 to 12/31/97 1,307,946 0
1/1/98 to 12/31/98 796.381 0
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 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.
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.
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 and Kantor and Mmes.
Carnicelli, Carr-Waldron, Curcio, DiFalco, Gilfillan, Lederer and Mosca
(see "Management of the Fund"), may also be deemed affiliates of LMC and
LFD by virtue of being officers, directors or employees thereof.
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. Per share net asset value is calculated by dividing
the value of the Fund's total net assets by the total number of the Fund's
shares then outstanding.
Portfolio securities are valued using current market valuations:
either the last reported sales price or, in the case of securities for which
there is no reported last sale and fixed-income securities, the mean between
the closing bid and asked price. Securities for which market quotations are
not readily available or which are illiquid are valued at their fair values
as determined in good faith under the supervision of the Fund's officers,
and by the Manager and the Boards, in accordance with methods that are
specifically authorized by the Boards. Short-term obligations with
maturities of 60 days or less are valued at amortized cost as reflecting
fair value. Options are valued at the mean of the last bid and asked price
on the exchange where the option is primarily traded.
The value of securities denominated in foreign currencies and traded
on foreign exchanges or in foreign markets will be translated into U.S.
dollars at the last price of their respective currency denomination against
U.S. dollars quoted by a major bank or, if no such quotation is available,
at the rate of exchange determined in accordance with policies established
in good faith by the Boards. Because the value of securities denominated
in foreign currencies must be translated into U.S. dollars, fluctuations in
the value of such currencies in relation to the U.S. dollar may affect the
net asset value of Fund shares even without any change in the foreign-currency
denominated values of such securities.
Because foreign securities markets may close before the Funds
determine their net asset values, events affecting the value of portfolio
securities occurring between the time prices are determined and the time the
Funds calculate their net asset values may not be reflected unless the
Manager, under supervision of the Board, determines that a particular event
would materially affect a fund's net asset value.
Distribution Plan
- -----------------
The Fund has adopted a Distribution Plan (the "Plan") in accordance
with Rule 12b-1 under the Investment Company Act of 1940, which 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.
Quarterly, in each year that this Plan remains in effect, the
Fund's Treasurer shall prepare and furnish to the Directors of the
Fund a written report, complying with the requirements of Rule 12b-1,
setting forth the amounts expended by the Fund under the Plan and purposes
for which such expenditures were made.
The Plan shall become effective upon approval of the Plan, the
form of Selected Dealer Agreement and the form of Shareholder Service
Agreement, by the majority votes of both (a) the Fund's Directors and the
Directors who are not interested persons (as defined in Section 2(a)(19)
of the 1940 Act) of the Fund and have no direct or indirect financial
interest in the operation of the Plan or in any agreements related to the
Plan (the "Qualified Directors"), cast in person at a meeting called for
the purpose of voting on the Plan and (b) the outstanding voting
securities of the Fund, as defined in Section 2(a)(42) of the 1940 Act.
The Plan shall remain in effect for one year from its adoption date
and may be continued thereafter if the Plan and all related agreements are
approved at least annually a majority vote of the Directors of the
Fund, including a majority of the Qualified Directors cast in person at
a meeting called for the purpose of voting on such Plan and agreements.
This Plan may not be amended in order to increase materially the amount to
be spent for distribution assistance without shareholder approval. All
material amendments to this Plan must be approved by a vote of the
Directors of the Fund, and of the Qualified Directors, cast in person at
a meeting called for the purpose of voting thereon.
The Plan may be terminated at any time by a majority vote of the
Qualified Directors who have no direct or indirect financial interest in
the operation of the Plan or in any agreements related to the Plan or by
vote of a majority of the outstanding voting securities of the Fund, as
defined in Section 2(a)(42) of the 1940 Act.
While the Plan is in effect, the selection and nomination of
the"non-interested" Directors of the Fund will be committed to the
discretion of the Qualified Directors then in office.
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 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.
This selection also authorizes and directs LFD to act upon any instruction
from any person by telephone for exchange of shares held in any of these
accounts. In acting on a request to exchange, LFD is authorized 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. The shareholder also
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, 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 telephone exchange and telephone
redemption transactions will take place on recorded telephone lines and each
transaction will be confirmed in writing by the Fund. If the shareholder
is an entity other than an individual, it 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. 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.
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 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 he 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
("IRA") established under Section 408 of the Internal Revenue Code of 1986,
as amended (the "Code"). Married investors filing a joint return (i)
neither of whom is an active participant in an employer sponsored retirement
plan, or (ii) for 1999 who have an adjusted gross income of $51,000
or less ($31,000 or less for single taxpayers) may each make a $2,000
annual deductible IRA contribution. For adjusted gross incomes over
$51,000 ($31,000 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 IRA contribution because
of the limitations may make a non-deductible contribution to their IRA to
the extent a deductible contribution is not allowed. Federal income tax
on accumulations earned on deductible or non-deductible contributions
is deferred until such time as these amounts are deemed distributed to
an investor. Rollovers are also permitted. The Disclosure statement
required by the Internal Revenue Service ("IRS") is provided by the Fund.
Roth IRA: Individuals may make non-deductible contributions to their
own Roth Individual Retirement Accounts ("Roth IRAs") under Section 408A of
the Code. Generally, Roth IRAs are subject to many of the same rules as
Traditional IRAs. Most important with a Roth IRA: there is no income tax
on qualified withdrawals. In addition, unlike a Traditional IRA, there is
no prohibition on making contributions to a Roth IRA after an individual
reaches age 70 1/2, and there are no required minimum withdrawals beginning
at that age. Total contributions to all of an individual's Traditional and
Roth IRAs may not exceed $2,000 per year (other limitations may apply). The
$2,000 maximum contribution amount is reduced by any amounts contributed in
the same year to a Traditional IRA or another Roth IRA. Married investors
filing a joint return may not make a Roth IRA contribution for a year in
which his or her joint adjusted gross income is $160,000 or greater (for
unmarried investors, $110,000 or greater), and the amount allowed as a
contribution is phased out ratably for married investors with an adjusted
gross income of more than $150,000, but less than $160,000 (for unmarried
investors, more than $95,000, but less than $110,000). Married investors
filing separate returns may not contribute to a Roth IRA in a year in which
his or her adjusted gross income is $10,000 or more (the allowed
contribution amount is phased out ratably over the first $10,000 of this
investor's adjusted gross income). The Disclosure statement required by the
IRS is provided by the Fund upon opening a Roth IRA.
The minimum initial investment to establish a tax-sheltered plan
through the Fund is $250 for both Keogh Plans and IRA Plans. 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 individual's earned annual income (as defined in the Code) and in
applying these limitations not more than $150,000 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.
Capital Stock of the Fund
- -------------------------
The Fund has one class of stock which has no preemptive rights.
Dividend Distribution and Reinvestment Policy
- ---------------------------------------------
The Fund intends to pay semi-annual dividends from investment
income, if earned and as declared by its Board of Directors. The Board of
Directors may, at its discretion, elect to retain or declare and pay
distributions from any realized security profits.
Any dividends and distribution payments will be reinvested at net
asset value, without sales charge, in additional full and fractional
shares of the Fund unless and until the shareholder notifies State
Street Bank and Trust Company (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" in the Prospectus).
Tax Matters
- -----------
Information set forth in the Prospectus and this SAI is only a summary
of certain key tax considerations generally affecting purchasers of shares
of the Fund. 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 has been made to present a
complete explanation of the federal, state and local tax treatment of the
Fund or the implications to shareholders, and the discussions here and in
the Fund's Prospectus are not intended as substitutes for careful tax
planning. Accordingly, potential purchasers of shares of the Fund are urged
to consult their tax advisers with specific reference to their own tax
circumstances. In addition, the tax discussion in the Prospectus and this
SAI is based on tax law in effect on the date of the Prospectus and this
SAI; such laws and regulations may be changed by legislative, judicial or
administrative action, sometimes with retroactive effect.
Qualification as a Regulated Investment Company. The Fund has elected
to be taxed as a regulated investment company under Subchapter M of the
Code. As a regulated investment company, the Fund is not subject to federal
income 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
will, therefore, count toward satisfaction of the Distribution Requirement.
If the Fund has a net capital loss (i.e., an excess of capital losses
over capital gains) for any year, the amount thereof may be carried forward
up to eight years and treated as a short-term capital loss which can be used
to offset capital gains in such future years. As of December 31, 1998, the
Fund had capital loss carryforwards of approximately $48,815,385, which
expire in 2006. Under Code Sections 382 and 383, if the Fund has an
"ownership change," then the Fund's use of its capital loss carryforwards
in any year following the ownership change will be limited to an amount
equal to the net asset value of the Fund immediately prior to the ownership
change multiplied by the long-term tax-exempt rate (which is published
monthly by the Internal Revenue Service (the "IRS")) in effect for the month
in which the ownership change occurs (the rate for May, 1999 is 4.82%). The
Fund will use its best efforts to avoid having an ownership change.
However, because of circumstances which may be beyond the control or
knowledge of the Fund, there can be no assurance that it will not have, or
has not already had, an ownership change. If the Fund has or has had an
ownership change, then any capital gain net income for any year following
the ownership change in excess of the annual limitation on the capital loss
carryforwards will have to be distributed by the Fund and will be taxable
to shareholders as described under "Fund Distributions" below.
In addition to satisfying the Distribution Requirement, a regulated
investment company must 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").
In general, gain or loss recognized by the Fund on the disposition of
an asset will be a capital gain or loss. In addition, gain will be
recognized as a result of certain constructive sales, including short sales
"against the box." 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.
Further, the Code also treats as ordinary income a portion of the
capital gain attributable to a transaction where substantially all of the
return realized is attributable to the time value of the Fund's net
investment in the transaction and: (1) the transaction consists of the
acquisition of property by the Fund and a contemporaneous contract to sell
substantially identical property in the future; (2) the transaction is a
straddle within the meaning of section 1092 of the Code; (3) the transaction
is one that was marketed or sold to the Fund on the basis that it would have
the economic characteristics of a loan but the interest-like return would
be taxed as capital gain; or (4) the transaction is described as a
conversion transaction in the Treasury Regulations. The amount of the gain
recharacterized generally will not exceed the amount of the interest that
would have accrued on the net investment for the relevant period at a yield
equal to 120% of the federal long-term, mid-term, or short-term rate,
depending upon the type of instrument at issue, reduced by an amount equal
to: (1) prior inclusions of ordinary income items from the conversion
transaction and (2) the capital interest on acquisition indebtedness under
Code section 263(g). Built-in losses will be preserved where the Fund has
a built-in loss with respect to property that becomes a part of a conversion
transaction. No authority exists that indicates that the converted
character of the income will not be passed through to the Fund's
shareholders.
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 the
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 the Fund grants an in-the-money qualified covered call option with
respect thereto. 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.
Certain 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 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. The 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 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 has
three separate options. First, it may elect to treat the PFIC as a
qualified 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 earnings or capital gains from
the PFIC. Second, the Fund that invests in stock of a PFIC may make a mark-to-
market election with respect to such stock. Pursuant to such election,
the Fund will include as ordinary income any excess of the fair market value
of such stock at the close of any taxable year over the Fund's adjusted tax
basis in the stock. If the adjusted tax basis of the PFIC stock exceeds the
fair market value of the stock at the end of a given taxable year, such
excess will be deductible as ordinary loss in an amount equal to the lesser
of the amount of such excess or the net mark-to-market gains on the stock
that the Fund included in income in previous years. The Fund's holding
period with respect to its PFIC stock subject to the election will commence
on the first day of the next taxable year. If the Fund makes the mark-to-market
election in the first taxable year it holds PFIC stock, it will not
incur the tax described below under the third option.
Finally, if the Fund does not elect to treat the PFIC as a QEF and
does not make a mark-to-market election, then, in general, (1) any gain
recognized by the Fund upon the sale or other disposition of its interest
in the PFIC or any "excess distribution" (as defined) received by the Fund
from the PFIC will be allocated ratably over the Fund's holding period of
its interest in the PFIC stock, (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 its 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.
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 (including, to the extent provided in Treasury
Regulations, losses recognized pursuant to the PFIC mark-to-market election)
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 each of which the Fund has not invested more than 5% of the value of the
Fund's total assets in securities of such issuer and 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.
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 its ordinary
income for such 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 and ordinary gains or losses arising as
a result of a PFIC mark-to-market election (or upon the actual disposition
of the PFIC stock subject to such election) 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. Distributions attributable
to dividends received by the Fund from domestic corporations will qualify
for the 70% dividends-received deduction for corporate shareholders only to
the extent discussed below. Distributions attributable to interest received
by the Fund will not, and distributions attributable to dividends paid by
a foreign corporation generally should not, qualify for the dividend-received
deduction.
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).
The 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. Net capital gain that is distributed and
designated as a capital gain dividend 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. The Code provides,
however, that under certain conditions only 50% (58% for alternative minimum
tax purposes) of the capital gain recognized upon the Fund's disposition of
domestic "small business" stock will be subject to tax.
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.
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 excess of the taxpayer's alternative minimum taxable income
("AMTI") over an exemption amount. For purposes of the corporate AMT, 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, a corporate
shareholder 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
its 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 Fund shares or shares of another portfolio (or
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 they 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 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 failed to provide a correct taxpayer identification number, (2)
who is subject to backup withholding for failure to properly report the
receipt of interest or dividend income, or (3) who has failed to certify to
the Fund that it is not subject to backup withholding or that it is an
exempt recipient (such as a corporation).
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 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. 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 applicable treaty rate) upon the gross
amount of the dividend. Furthermore, such foreign shareholder may be
subject to U.S. withholding tax at the rate of 30% (or lower applicable
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 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 the 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 their 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; State and 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.
Rules of state and local taxation of ordinary income dividends and
capital gain dividends from regulated investment companies may 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 at the
end of the 1, 5 or 10 year periods (or fractional portion
thereof).
Under the foregoing formula, the time periods used in advertising will
be based on rolling calendar quarters, updated to the last day of the most
recent quarter prior to submission of the advertising for publication, and
will cover one, five and ten year periods or a shorter period dating from
the effectiveness of the Fund's Registration Statement. In calculating the
ending redeemable value, all dividends and distributions by the Fund are
assumed to have been reinvested at net asset value as described in the
prospectus on the reinvestment dates during the period. Total return, or "T"
in the formula above, is computed by finding the average annual compounded
rates of return over the 1, 5 and 10 year periods (or fractional portion
thereof) that would equate the initial amount invested to the ending
redeemable value. Any recurring account charges that might in the future be
imposed by the Fund would be included at that time.
The Fund may also from time to time include in such advertising a
total return figure that is not calculated according to the formula set
forth above in order to compare more accurately the performance of the Fund
with other measures of investment return. For example, in comparing the
Fund's total return with data published by Lipper Analytical Services, Inc.,
or with the performance of the Standard and Poor's 500 Stock 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. The average annual standard total
return for the one year period and since commencement (7/3/96) to December
31, 1998 was -82.99% and -40.63%, respectively.
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
Fund's portfolio securities including those to be held by foreign banks
and foreign securities depositories which qualify as eligible foreign
custodians under the rules adopted by the S.E.C. and for the Fund's
domestic securities and other assets. State Street Bank and Trust Company,
225 Franklin Street, Boston, Massachusetts 02181, has been retained to act
as the transfer agent and dividend disbursing agent. 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 LLP, 919 Third Avenue, New York, New
York 10022 will pass upon legal matters for the Fund in connection with the
offering of its shares. KPMG LLP, 345 Park Avenue, New York, New York
10154, has been selected as independent auditors for the Fund for the fiscal
year ending December 31, 1999.
<PAGE>
LEXINGTON TROIKA DIALOG RUSSIA FUND, INC.
STATEMENT OF NET ASSETS
(INCLUDING THE PORTFOLIO OF INVESTMENTS)
December 31, 1998
<TABLE>
<CAPTION>
NUMBER
OF VALUE
SHARES SECURITY (NOTE 1)
- ------------ ------------------------------------- ----------
<S> <C> <C>
COMMON & PREFERRED STOCKS: 61.9%
AEROSPACE & DEFENSE: 0.2%
32,500,000 Aviastar1,2 ......................... $ 42,250
--------
AIRLINES: 0.9%
7,700 Aeroflot2 ........................... 161,700
--------
AUTO PARTS: 0.0%
2,500 Bor Glass1,2 ........................ 5,000
--------
AUTO TRUCKS & PARTS: 1.8%
21,700 Gorkovsky Auto Plant2 ............... 336,350
--------
BREWERS: 2.9%
200 Baltika Brewery1,2 .................. 36,000
209,700 Sun Brewing (GDR)1,2 ................ 513,765
--------
549,765
--------
BUILDING MATERIALS: 0.1%
38,000 Alfa Cement1,2 ...................... 20,710
--------
FOODS: 0.0%
23,800 Samson1,2 ........................... 4,522
--------
MACHINERY: 0.3%
850,000 Krasny Kotelschik1,2 ................ 9,775
50,000 Zvezda1,2 ........................... 41,300
--------
51,075
--------
MEDICAL EQUIPMENT: 0.1%
21,900 Medpolimer1,2 ....................... 15,746
--------
MERCHANDISING: 0.6%
7,000 Gostiny Dvor1,2 ..................... 17,570
235,000 Trade House GUM ..................... 98,700
--------
116,270
--------
METALS: 0.1%
4,700 Salikamsk Magnesium1,2 .............. 23,500
--------
NATURAL GAS: 1.6%
COMMON STOCK
35,000 Gazprom (ADR) ....................... 294,000
--------
PREFERRED STOCK
1,800 Transneft1,2 ........................ 6,354
--------
TOTAL NATURAL GAS .................. 300,354
--------
OIL & GAS HOLDING COMPANIES: 24.7%
COMMON STOCK
125,000 AO Tatneft (ADR) .................... 234,375
170,000 Lukoil Holdings of Russia2 .......... 688,500
</TABLE>
<PAGE>
LEXINGTON TROIKA DIALOG RUSSIA FUND, INC.
STATEMENT OF NET ASSETS
(INCLUDING THE PORTFOLIO OF INVESTMENTS)
December 31, 1998 (continued)
<TABLE>
<CAPTION>
NUMBER
OF VALUE
SHARES SECURITY (NOTE 1)
- ------------ ---------------------------------------------------- ------------
<S> <C> <C>
OIL & GAS HOLDING COMPANIES (continued):
50,000 Lukoil Holdings of Russia (ADR) .................... $ 787,500
7,000,000 Sibneft1,2 ......................................... 119,000
4,235,000 Slavneft1 .......................................... 22,446
690,000 Surgutneftegaz (ADR) ............................... 2,328,750
----------
4,180,571
----------
PREFERRED STOCK
75,000 Lukoil Holdings of Russia (ADR) .................... 253,125
185,000 Lukoil Holdings of Russia2 ......................... 305,250
----------
558,375
----------
TOTAL OIL & GAS HOLDING COMPANIES ................. 4,738,946
----------
OIL & GAS PRODUCING COMPANIES: 0.1%
COMMON STOCK
165,000 Orenburgneft1,2 .................................... 24,750
----------
PREFERRED STOCK
4,000 Samaraneftegaz1,2 .................................. 40
4,000 Udmurtneftegaz1,2 .................................. 3,000
----------
3,040
----------
TOTAL OIL & GAS PRODUCING COMPANIES ............... 27,790
----------
OIL DRILLING & SERVICES: 0.3%
530,000 Komitek Oil Company1,2 ............................. 53,000
----------
STEEL & IRON: 0.1%
1,002,000 Chelyabinsky Trubny Zavod1,2 ....................... 7,916
17,354 Seversky Tube Works1,2 ............................. 764
46,000 Sinarsky Trubny1,2 ................................. 6,992
4,450,000 Taganrogaky Metallurgical1,2 ....................... 4,450
----------
20,122
----------
TELECOMMUNICATIONS: 16.0%
COMMON STOCK
996,900 Bashinformsvyaz1,2 ................................. 246,234
14,110 Chelyabinskvyazinform1,2 ........................... 94,537
250,000 Irkutskelectrosvyaz1,2 ............................. 33,250
41,000 Krasnoyarskelectrosvyaz1,2 ......................... 23,411
9,500 Lensvyaz1,2 ........................................ 29,545
34,400 Moscow Intercity International Telephone1 .......... 14,551
243,890 Murmanskelectrosvyaz1 .............................. 10,243
501,000 Nizhnovsvyazinform1,2 .............................. 150,300
20,383 Novosbirskaya Telephone1 ........................... 90,704
30,000 Novosibirskelectrosvyaz1 ........................... 6,000
723,000 Rostelecom ......................................... 527,790
35,000 Rostelecom (ADR) ................................... 142,188
26,000 Samarasvyazinform1,2 ............................... 247,520
</TABLE>
<PAGE>
LEXINGTON TROIKA DIALOG RUSSIA FUND, INC.
STATEMENT OF NET ASSETS
(INCLUDING THE PORTFOLIO OF INVESTMENTS)
December 31, 1998 (continued)
<TABLE>
<CAPTION>
NUMBER OF
SHARES OR VALUE
PRINCIPAL AMOUNT SECURITY (NOTE 1)
- ------------------ ----------------------------------------------------------------------- -------------
<S> <C> <C>
TELECOMMUNICATIONS (continued)
50,000 Smolensksvyazinfrom1 .................................................. $ 500
500,000 St. Petersburg Telecommunication1 ..................................... 100,000
160,000 Tyumentelecom1 ........................................................ 57,600
10,000,000 Uralsvyazinform1 ...................................................... 50,000
70,400 Vimpel-Communications (ADR) ........................................... 902,000
80,020 Volgogradelectrosvyaz1,2 .............................................. 8,002
-----------
2,734,375
-----------
PREFERRED STOCK
1,450 Moscow Telephone Systems1 ............................................. 38,686
175,000 Murmanskelectrosvyaz1 ................................................. 4,375
360,000 Nizhnovsvyazinform1,2 ................................................. 21,600
731,000 Rostelecom ............................................................ 204,680
8,300 Samarasvyazinform1,2 .................................................. 25,813
100,000 Smolensksvyazinform1 .................................................. 500
110,000 St. Petersburg Telecommunication1 ..................................... 12,980
279,099 Tyumentelecom1 ........................................................ 24,840
-----------
333,474
-----------
TOTAL TELECOMMUNICATIONS ............................................. 3,067,849
-----------
UTILITIES: 12.1%
COMMON STOCK
1,700,000 Chelyabenergo1,2 ...................................................... 15,810
5,500,000 Komienergo1,2 ......................................................... 1,540
56,000,000 Mosenergo2 ............................................................ 1,092,000
115,000 Mosenergo (ADR)2 ...................................................... 215,625
1,335,000 Sverdlovskenergo1,2 ................................................... 11,481
17,000,000 Unified Energy Systems2 ............................................... 521,900
145,000 Unified Energy Systems (GDR)2 ......................................... 453,125
-----------
2,311,481
-----------
PREFERRED STOCK
450,000 Chelyabenergo1,2 ...................................................... 1,260
24,600 Permenergo 1,2 ........................................................ 1,697
-----------
2,957
-----------
TOTAL UTILITIES ...................................................... 2,314,438
-----------
TOTAL COMMON & PREFERRED STOCKS (cost $ 80,299,810) 11,849,387
-----------
GOVERNMENT OBLIGATIONS: 3.0%
10,000,000* GKO (Russian Government Treasury Bill), 0.00%, due 11/18/981 .......... 88,230
2,000,000* GKO (Russian Government Treasury Bill), 0.00%, due 01/20/991 .......... 14,700
4,480,000* GKO (Russian Government Treasury Bill), 0.00%, due 01/27/991 .......... 30,866
7,568,000* GKO (Russian Government Treasury Bill), 0.00%, due 02/24/991 .......... 53,332
4,041,000* GKO (Russian Government Treasury Bill), 0.00%, due 03/10/991 .......... 26,911
40,951,000* GKO (Russian Government Treasury Bill), 0.00%, due 03/24/991 .......... 249,908
3,300,000* GKO (Russian Government Treasury Bill), 0.00%, due 04/07/991 .......... 20,618
15,000,000* GKO (Russian Government Treasury Bill), 0.00%, due 04/21/991 .......... 84,819
-----------
TOTAL GOVERNMENT OBLIGATIONS (cost $ 11,151,576) 569,384
-----------
</TABLE>
<PAGE>
LEXINGTON TROIKA DIALOG RUSSIA FUND, INC.
STATEMENT OF NET ASSETS
(INCLUDING THE PORTFOLIO OF INVESTMENTS)
December 31, 1998 (continued)
<TABLE>
<CAPTION>
PRINCIPAL VALUE
AMOUNT SECURITY (NOTE 1)
- ------------- ---------------------------------------------------------- ---------------
<S> <C> <C>
SHORT-TERM INVESTMENTS: 35.5%
U.S. GOVERNMENT AGENCY OBLIGATION: 34.5%
Federal Home Loan Mortgage Corporation,
$6,600,000 4.5%, due 01/04/99 ....................................... $ 6,597,663
U.S. GOVERNMENT OBLIGATION: 1.0%
United States Treasury Bill,
200,000 3.85%, due 01/21/99 ...................................... 199,582
-----------
TOTAL SHORT-TERM INVESTMENTS
(cost $6,797,191)....................................... 6,797,245
-----------
TOTAL INVESTMENTS: 100.4%
(cost $98,248,577+)(Note 1)............................. 19,216,016
Liabilities in excess of other assets: (0.4%) .......... (68,756)
-----------
TOTAL NET ASSETS: 100.0%
(equivalent to $2.64 per share on
7,262,538 shares outstanding) .......................... $19,147,260
===========
</TABLE>
* Principal amount represents local currency.
1 Illiquid security (Note 9).
2 Non-income producing security.
ADR-American Depository Receipt.
GDR-Global Depository Receipt.
+ Aggregate cost for Federal income tax purposes is $101,667,634.
The Notes to Financial Statements are an integral part of this statement.
<PAGE>
LEXINGTON TROIKA DIALOG RUSSIA FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1998
<TABLE>
<S> <C>
ASSETS
Investments, at value (cost $98,248,577) (Note 1) ................................ $ 19,216,016
Cash ............................................................................. 220,318
Foreign currency (cost $19,134)................................................... 5,358
Receivable for shares sold ....................................................... 110,434
Dividends and interest receivable ................................................ 47,236
Other receivable ................................................................. 12,162
Deferred organization costs, net (Note 1) ........................................ 51,509
-------------
Total Assets ............................................................. 19,663,033
-------------
LIABILITIES
Due to Lexington Management Corporation (Note 2) ................................. 12,318
Payable for investment securities purchased ...................................... 148,900
Payable for shares redeemed ...................................................... 239,529
Distributions payable ............................................................ 22,957
Accrued expenses ................................................................. 92,069
-------------
Total Liabilities ........................................................ 515,773
-------------
NET ASSETS (equivalent to $2.64 per share on
7,262,538 shares outstanding) (Note 5) .......................................... $ 19,147,260
=============
NET ASSETS consist of:
Capital stock - authorized 1,000,000,000 shares,
$.001 par value per share ........................................................ $ 7,263
Additional paid-in capital (Note 1) .............................................. 147,499,708
Accumulated net investment loss (Note 1) ......................................... (67,185)
Accumulated net realized loss on investments and foreign currency transactions
(Notes 1 and 8) .................................................................. (49,246,184)
Unrealized depreciation of investments and foreign currency translation of other
assets and liabilities ........................................................... (79,046,342)
-------------
TOTAL NET ASSETS ......................................................... $ 19,147,260
=============
</TABLE>
The Notes to Financial Statements are an integral part of this statement.
<PAGE>
LEXINGTON TROIKA DIALOG RUSSIA FUND, INC.
STATEMENT OF OPERATIONS
Year ended December 31, 1998
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Dividends ............................................................. $ 366,517
Interest .............................................................. 2,195,403
-------------
2,561,920
Less: foreign tax expense ............................................. 54,598
-------------
Total investment income ............................................. $ 2,507,322
EXPENSES
Investment advisory fee (Note 2) ...................................... 796,381
Custodian expenses .................................................... 450,948
Transfer agent and shareholder servicing expenses (Note 2) ............ 173,239
Distribution expenses (Note 3) ........................................ 159,146
Printing and mailing expenses ......................................... 110,128
Professional fees ..................................................... 81,823
Registration fees ..................................................... 78,405
Accounting expenses (Note 2) .......................................... 77,132
Directors' fees and expenses .......................................... 47,526
Amortization of deferred organization costs (Note 1) .................. 21,561
Computer processing fees .............................................. 13,156
Other expenses ........................................................ 54,270
-------------
Total expenses ...................................................... 2,063,715
Less: Redemption fee proceeds (Note 4) .............................. 624,187 1,439,528
------------- --------------
Net investment income ............................................... 1,067,794
--------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS (NOTE 6)
Net realized gain (loss) on:
Investments .......................................................... (48,990,439)
Futures contracts .................................................... 175,054
Foreign currency transactions ........................................ (26,393)
-------------
Net realized loss ................................................... (48,841,778)
Net change in unrealized depreciation of:
Investments .......................................................... (55,933,363)
Foreign currency translation of other assets and liabilities ......... (13,781)
-------------
Net change in unrealized depreciation .............................. (55,947,144)
--------------
Net realized and unrealized loss .................................. (104,788,922)
--------------
DECREASE IN NET ASSETS RESULTING FROM OPERATIONS ......................... $ (103,721,128)
==============
</TABLE>
The Notes to Financial Statements are an integral part of this statement.
<PAGE>
LEXINGTON TROIKA DIALOG RUSSIA FUND, INC.
STATEMENTS OF CHANGES IN NET ASSETS
Years ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
---------------- ----------------
<S> <C> <C>
Net investment income (loss) .............................................. $ 1,067,794 $ (110,162)
Net realized gain (loss) from investments and foreign currency
transactions ............................................................ (48,841,778) 11,101,736
Net change in unrealized depreciation of investments and foreign
currency translation .................................................... (55,947,144) (24,013,755)
------------ -------------
Net decrease in net assets resulting from operations .................... (103,721,128) (13,022,181)
Distributions to shareholders from net investment income .................. (472,886) -
Distributions to shareholders from net realized gains
from security transactions .............................................. (1,834,702) (9,633,271)
Increase (decrease) in net assets from capital share transactions (Note 5) (12,697,306) 146,682,278
------------ -------------
Net increase (decrease) in net assets ................................... (118,726,022) 124,026,826
NET ASSETS:
Beginning of period ..................................................... 137,873,282 13,846,456
------------ -------------
End of period (including accumulated net investment loss of $67,185
and $27,179 in 1998 and 1997, respectively) (Note 1).................... $ 19,147,260 $ 137,873,282
============ =============
</TABLE>
The Notes to Financial Statements are an integral part of these statements.
<PAGE>
LEXINGTON TROIKA DIALOG RUSSIA FUND, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1997
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 Securities transactions are accounted for on a trade date
basis. Realized gains and losses from investment transactions are reported on
the identified cost basis. Securities traded on a recognized stock exchange are
valued at the last sales price reported by the exchange on which the securities
are traded. If no sales price is recorded, the mean between the last bid and
asked prices is used. 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 prices. Short-term securities
having a maturity of 60 days or less are stated at amortized cost, which
approximates market value. Securities for which market quotations are not
readily available and other assets are valued by Fund management in good faith
under the direction of the Fund's Board of Directors. All investments quoted in
foreign currencies are valued in U.S. dollars on the basis of the foreign
currency exchange rates prevailing at the close of business. Dividend income 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 currency 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.
The Fund authorizes its custodian to place and maintain equity securities in a
segregated account of the Fund having a value equal to the aggregate amount of
the Fund's commitments under forward foreign currency contracts entered into
with respect to position hedges. There were no forward foreign currency
contracts outstanding at December 31, 1998.
FINANCIAL FUTURES The Fund may invest in financial futures contracts in
order to gain exposure to, or protect against market fluctuation. The Fund is
exposed to market risk as a result of changes in the value of the underlying
financial instruments. Investments in financial futures require the fund to
"mark to market" on a daily basis, which reflects the change in the market
value of the contract at the close of each day's trading. Typically, variation
margin payments are received or made to reflect daily unrealized gains or
loses. Realized gains or losses are recognized when contracts are closed and
are reported in the statement of operations.
<PAGE>
LEXINGTON TROIKA DIALOG RUSSIA FUND, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1997
1. SIGNIFICANT ACCOUNTING POLICIES (continued)
FINANCIAL FUTURES (CONTINUED) These investments require initial margin
deposits with a broker, which consist of cash or cash equivalents. The amount
of these deposits is determined by the exchange or Board of Trade on which the
contract is traded and is subject to change. At December 31, 1998, there were
no financial futures contracts outstanding.
FEDERAL INCOME TAXES It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to "regulated investment
companies" and to distribute all of its taxable income to its shareholders.
Therefore, no provision for Federal income taxes is required.
DISTRIBUTIONS Dividends from net investment income and net realized
capital gains are normally declared and paid annually, but the Fund may make
distributions on a more frequent basis to comply with the distribution
requirements of the Internal Revenue Code. The character of income and gains to
be distributed are determined in accordance with income tax regulations which
may differ from generally accepted accounting principals. At December 31, 1998,
reclassifications were made the Fund's capital accounts to reflect permanent
book/tax differences and income and gains available for distribution under
income tax regulations. Net investment income, net realized gains and net
assets were not affected by this change.
DEFERRED ORGANIZATION COSTS Organization costs aggregating $107,018 have
been deferred and are being amortized on a straight-line basis over five years.
At December 31, 1998, the amount remaining to be amortized was $51,509.
USE OF ESTIMATES The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of increases and decreases in
net assets from operations during the reporting period. Actual results could
differ from those estimates.
2. INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATE
The Fund pays an investment advisory fee to Lexington Management Corporation
("LMC") at an annual rate of 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. For 1998, LMC has agreed to voluntarily limit the total
expenses of the Fund (excluding interest, taxes, brokerage commissions and
extraordinary expenses but including management fee, 12B-1 fees and operating
expenses) to an annual rate of 3.35% of the Fund's average net assets. No
reimbursement was required for the year ended December 31, 1998.
The Fund also reimburses LMC for certain expenses, including accounting and
shareholder servicing costs of $173,493 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 year ended December 31,
1998 were $159,146 and are set forth in the statement of operations.
<PAGE>
LEXINGTON TROIKA DIALOG RUSSIA FUND, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1997
4. REDEMPTION FEE
A fee is 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.
Redemption fee proceeds will be applied to the Fund's aggregate expenses
allocable to providing custody and 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. Total redemption fee proceeds for the year ended
December 31, 1998 were $991,650. The amount available for offset against Fund
expenses was $624,187 and is set forth in the statement of operations. Excess
fee proceeds of $367,463 were added to the Fund's capital.
5. CAPITAL STOCK
Transactions in capital stock were as follows:
<TABLE>
<CAPTION>
Year ended
December 31, 1998 December 31, 1997
-------------------------------- ---------------------------------
Shares Amount Shares Amount
--------------- ---------------- --------------- -----------------
<S> <C> <C> <C> <C>
Shares sold ........................................ 6,682,804 $ 46,991,263 11,666,846 $ 250,987,395
Shares issued on reinvestment of dividends ......... 893,025 2,202,785 537,246 9,215,535
Redemption fee proceeds ............................ - 367,463 - 1,088,338
--------- ------------- ---------- --------------
7,575,829 49,561,511 12,204,092 261,291,268
Shares redeemed .................................... (8,192,746) (62,258,817) (5,556,760) (114,608,990)
---------- ------------- ---------- --------------
Net increase (decrease) ............................ (616,917) $ (12,697,306) 6,647,332 $ 146,682,278
---------- ------------- ---------- --------------
</TABLE>
6. INVESTMENT TRANSACTIONS
The cost of purchases and proceeds from sales of securities for the year ended
December 31, 1998, excluding short-term securities, were $40,957,689 and
$33,277,990, respectively.
At December 31, 1998, the aggregate gross unrealized appreciation for all
securities in which there is an excess of value over tax cost amounted to $54
and aggregate gross unrealized depreciation for all securities in which there
is an excess of tax cost over value amounted to $82,465,453.
7. 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.
<PAGE>
LEXINGTON TROIKA DIALOG RUSSIA FUND, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1997
7. INVESTMENT AND CONCENTRATION RISKS (continued)
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 company'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 client may be forced to remit securities before payment is
received.
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 and, in particular,
the risk of expropriation, nationalization and confiscation of assets and
changes in legislation relating to foreign ownership.
YEAR 2000 COMPLIANCE RISK The Fund seeks to ensure that the operating and
processing systems of the companies in which it invests will continue to
function when the Year 2000 arrives. However, the risk exists that one or more
of these companies may not be adequately prepared for the Year 2000 which could
have a material impact on the company itself and on the Fund's investment in
that company.
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. FEDERAL INCOME TAXES-CAPITAL LOSS CARRYFORWARDS
Capital loss carryforwards1 available for Federal income tax purposes as of
December 31, 1998 are approximately $48,815,385, expiring in 2006. To the
extent any future capital gains are offset by these losses, such gains may not
be distributed to shareholders.
1Temporary book-tax differences of $4,780,969 are the result of deferred
post-October losses and wash sales.
<PAGE>
LEXINGTON TROIKA DIALOG RUSSIA FUND, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1997
9. ILLIQUID 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.
<TABLE>
<CAPTION>
Initial Average Percent
Acquisition Cost Per Market of Net
Security Shares Date Share Value Assets
- ---------------------------------------------------- ------------- ------------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Alfa Cement ........................................ 38,000 3/25/97 $ 18.20 $ 20,710 0.11%
Aviastar ........................................... 32,500,000 6/25/97 0.04 42,250 0.22
Baltika Brewery .................................... 200 2/25/98 599.00 36,000 0.19
Bashinformsvyaz .................................... 996,900 6/9/97 1.95 246,234 1.29
Bor Glass .......................................... 2,500 5/8/98 21.50 5,000 0.03
Chelyabenergo ...................................... 1,700,000 1/31/97 0.71 15,810 0.08
Chelyabenergo (Preferred Stock) .................... 450,000 2/26/97 0.30 1,260 0.01
Chelyabinskvyazinform .............................. 14,110 12/9/96 45.11 94,537 0.50
Chelyabinsky Trubny Zavod .......................... 1,002,000 8/5/97 0.36 7,916 0.04
Gostinny Dvor ...................................... 7,000 10/6/97 42.50 17,570 0.09
Irkutskelectrosvyaz ................................ 250,000 2/17/97 1.09 33,250 0.18
Komienergo ......................................... 5,500,000 8/5/97 0.05 1,540 0.01
Komitek ............................................ 530,000 7/9/97 5.55 53,000 0.28
Krasnoyarskelectrosvyaz ............................ 41,000 7/2/97 17.05 23,411 0.12
Krasny Kotelschik .................................. 850,000 9/23/97 0.38 9,775 0.05
Lensvyaz ........................................... 9,500 2/14/97 48.95 29,545 0.15
Medpolimer ......................................... 21,900 8/6/97 10.50 15,746 0.08
Moscow Intercity International Telephone ........... 34,400 5/27/97 18.36 14,551 0.08
Moscow Telephone Systems (Preferred Stock) ......... 1,450 8/16/97 816.21 38,686 0.20
Murmanskelectrosvyaz ............................... 243,890 2/14/97 3.29 10,243 0.05
Murmanskelectrosvyaz (Preferred Stock) ............. 175,000 4/9/97 1.41 4,375 0.02
Nizhnovsvyazinform ................................. 501,000 8/1/96 4.15 150,300 0.79
Nizhnovsvyazinform (Preferred Stock) ............... 360,000 11/20/96 2.35 21,600 0.11
Novosbirskaya Telephone ............................ 20,383 7/17/97 93.86 90,704 0.47
Novosbirskelectrosvyaz ............................. 30,000 4/29/97 5.23 6,000 0.03
Orenburgneft ....................................... 165,000 7/4/96 8.58 24,750 0.14
Permenergo (Preferred Stock) ....................... 24,600 8/15/97 5.75 1,697 0.01
Salikamsk Magnesium ................................ 4,700 9/30/97 87.19 23,500 0.12
Samaraneftegaz (Preferred Stock) ................... 4,000 7/31/97 7.00 40 0.00
Samarasvyazinform .................................. 26,000 11/20/96 84.35 247,520 1.29
Samarasvyazinform (Preferred Stock) ................ 8,300 1/9/97 49.11 25,813 0.13
Samson ............................................. 23,800 7/9/97 50.82 4,522 0.02
Seversky Tube Works ................................ 17,354 3/21/97 2.17 764 0.00
Sibneft ............................................ 7,000,000 4/18/97 0.60 119,000 0.62
Sinarsky Trubny .................................... 46,000 4/9/97 10.63 6,992 0.04
Slavneft ........................................... 4,235,000 5/6/97 0.77 22,446 0.12
Smolensksvyazinform ................................ 50,000 6/20/97 6.40 500 0.00
Smolensksvyazinform (Preferred Stock) .............. 100,000 8/6/97 5.00 500 0.00
St. Petersburg Telecommunication ................... 500,000 6/18/96 1.93 100,000 0.52
St. Petersburg Telecommunication (Preferred Stock) 110,000 12/5/96 1.05 12,980 0.07
Sun Brewing (GDR) .................................. 209,700 7/30/97 13.06 513,765 2.68
Sverdloskenergo .................................... 1,335,000 6/18/96 0.82 11,481 0.06
Taganrogaky Metallurgical Plant .................... 4,450,000 4/24/97 0.22 4,450 0.02
Transneft (Preferred Stock) ........................ 1,800 7/27/97 1053.06 6,354 0.03
Tyumentelecom ...................................... 160,000 3/5/97 4.72 57,600 0.30
Tyumentelecom (Preferred Stock) .................... 279,099 2/6/97 1.71 24,840 0.13
</TABLE>
<PAGE>
LEXINGTON TROIKA DIALOG RUSSIA FUND, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1997
9. ILLIQUID SECURITIES (continued)
<TABLE>
<CAPTION>
Shares
or Foreign Initial Average Percent
Principal Acquisition Cost Per Market of Net
Security Amount* Date Share Value Assets
- ------------------------------------------ ---------------- ------------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Udmurtneftegaz (Preferred Stock) ......... 4,000 1/20/97 $ 57.00 $ 3,000 0.02%
Uralsvyazinform .......................... 10,000,000 1/24/97 0.06 50,000 0.26
Volgogradelectrosviaz .................... 80,020 2/28/97 3.91 8,002 0.04
Zvezda ................................... 50,000 8/21/97 29.90 41,300 0.22
GKO (Russian Government Treasury Bill),
0.00%, due 11/18/98 ..................... 10,000,000* 7/24/98 14.88 88,230 0.46
GKO (Russian Government Treasury Bill),
0.00%, due 01/20/99 ..................... 2,000,000* 7/16/98 13.91 14,700 0.08
GKO (Russian Government Treasury Bill),
0.00%, due 01/27/99 ..................... 4,480,000* 7/24/98 13.47 30,866 0.16
GKO (Russian Government Treasury Bill),
0.00%, due 02/24/99 ..................... 7,568,000* 7/17/98 12.97 53,332 0.28
GKO (Russian Government Treasury Bill),
0.00%, due 03/10/99 ..................... 4,041,000* 7/24/98 12.45 26,911 0.14
GKO (Russian Government Treasury Bill),
0.00%, due 03/24/99 ..................... 40,951,000* 7/16/98 12.44 249,908 1.31
GKO (Russian Government Treasury Bill),
0.00%, due 04/07/99 ..................... 3,300,000* 7/28/98 11.75 20,618 0.11
GKO (Russian Government Treasury Bill),
0.00%, due 04/21/99 ..................... 15,000,000* 7/17/98 12.09 84,819 0.44
---------- -----
$2,871,213 15.00%
========== =====
</TABLE>
10. TAXATION INFORMATION (UNAUDITED)
The following tax information represents the designation of various tax
benefits relating to the year ended
December 31, 1998:
The percentage of ordinary income distributions paid by the Fund derived from
agency and direct obligations of the United States government were as follows:
<TABLE>
<S> <C>
U.S. Treasury .................................. 0.66%
Federal Home Loan Bank ......................... 11.24
Federal Home Loan Mortgage Corporation ......... 10.49
Federal National Mortgage Association .......... 1.57
</TABLE>
The Fund designates $1,835,406, whether taken in shares or cash, as 20%
long-term capital gain distributions.
<PAGE>
LEXINGTON TROIKA DIALOG RUSSIA FUND, INC.
FINANCIAL HIGHLIGHTS
Selected per share data for a share outstanding throughout the period:
<TABLE>
<CAPTION>
July 3, 1996
(effective SEC
Year ended December 31, registration date)
----------------------------- to December 31,
1998 1997 1996**
------------- ------------- -------------------
<S> <C> <C> <C>
Net asset value, beginning of period ............................ $ 17.50 $ 11.24 $ 12.12
-------- ------- -------
Income (loss) from investment operations:
Net investment income (loss) ................................... 0.15 (0.01) (0.05)
Net realized and unrealized gain (loss) on investments ......... (14.70) 7.57 (0.51)
-------- ------- --------
Total income (loss) from investment operations .................. (14.55) 7.56 (0.56)
-------- ------- --------
Less distributions:
Distributions from net investment income ....................... (0.07) - -
Distributions from net realized gains .......................... (0.24) (1.30) (0.32)
-------- ------- --------
Total distributions ............................................. (0.31) (1.30) (0.32)
-------- ------- --------
Net asset value, end of period .................................. $ 2.64 $ 17.50 $ 11.24
======== ======= ========
Total return .................................................... (82.99)% 67.50% (9.01)%*
Ratio to average net assets:
Expenses, before reimbursement or redemption fee
proceeds ...................................................... 2.64% 2.89% 5.07%*
Expenses, net of reimbursement or redemption fee
proceeds ...................................................... 1.84% 1.85% 2.65%*
Net investment income (loss), before reimbursement or
redemption fee proceeds ....................................... 0.57% (1.14)% (3.69)%*
Net investment income (loss) ................................... 1.36% (0.11)% (1.27)%*
Portfolio turnover rate ......................................... 65.76% 66.84% 115.55%*
Net assets, end of period (000's omitted) ....................... $ 19,147 $137,873 $ 13,846
</TABLE>
* Annualized.
** The Fund's commencement of operations was June 3, 1996 with the investment
of its initial capital. The Fund's registration statement 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.
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Lexington Troika Dialog Russia Fund, Inc.:
We have audited the accompanying statement of net assets (including the
portfolio of investments) and assets and liabilities of Lexington Troika Dialog
Russia Fund, Inc. as of December 31, 1998, the related statement of operations
for the year then ended, the statements of changes in net assets for each of
the years in the two-year period then ended, and the financial highlights for
each of the years in the two-year period then ended, and for the period from
July 3, 1996 (effective SEC registration date) to December 31, 1996. These
financial statements and financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our 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 financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights. Our procedures included confirmation of
securities owned as of December 31, 1998 by correspondence with the custodian
and brokers. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
Lexington Troika Dialog Russia Fund, Inc. as of December 31, 1998, the results
of its operations for the year then ended, and changes in its net assets for
each of the years in the two-year period then ended and the financial
highlights for the years in the two-year period then ended and for the period
from July 3, 1996 (effective SEC registration date) to December 31, 1996, in
conformity with generally accepted accounting principles.
KPMG LLP
New York, New York
February 19, 1999