PROSPECTUS
May 1, 1997
Lexington TAX FREE MONEY Fund, Inc.
P.O. Box 1515 / Park 80 West Plaza Two, Saddle Brook, New Jersey 07663
Toll Free: Service--1-800-526-0056
24 Hour Account Information--1-800-526-0052
A NO-LOAD MONEY MARKET MUTUAL FUND WITH THE PRINCIPAL INVESTMENT OBJECTIVE OF
CURRENT INCOME EXEMPT FROM FEDERAL INCOME TAXES.
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Lexington Tax Free Money Fund, Inc. (the "Fund") is a diversified
open-end management investment company, known as a money market mutual
fund.
Shareholders may invest, reinvest or redeem shares at any time
without charge or penalty.
The Fund's investment objective is to seek current income exempt
from Federal income taxes while also maintaining stability of principal,
liquidity and preservation of capital. The Fund invests in short-term
municipal securities which are described more fully on page 3.
Shares of the Fund are not insured or guaranteed by the U.S.
Government and there can be no assurance that the Fund will be able to
maintain a stable net asset value of $1.00 per share.
Shareholders may use free redemption checks provided by the Fund for
amounts of $100.00 or more.
Lexington Management Corporation ("LMC") is the Investment Adviser
of the Fund. Lexington Funds Distributor, Inc. ("LFD") is the
Distributor of Shares of the Fund.
This Prospectus concisely sets forth information about the Fund that
you should know before investing. It should be read and retained for
future reference.
A STATEMENT OF ADDITIONAL INFORMATION DATED MAY 1, 1997, WHICH
PROVIDES A FURTHER DISCUSSION OF CERTAIN AREAS IN THIS PROSPECTUS AND
OTHER MATTERS THAT MAY BE OF INTEREST TO SOME INVESTORS, HAS BEEN FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION AND IS INCORPORATED HEREIN
BY REFERENCE. FOR A FREE COPY, CALL THE APPROPRIATE TELEPHONE NUMBER
ABOVE OR WRITE TO THE ADDRESS LISTED ABOVE.
Mutual fund shares are not deposits or obligations of (or endorsed
or guaranteed by) any bank, nor are they federally insured or otherwise
protected by the Federal Deposit Insurance Corporation ("FDIC"), the
Federal Reserve Board or any other agency. Investing in mutual funds
involves investment risks, including the possible loss of principal, and
their value and return will fluctuate.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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INVESTORS SHOULD READ AND RETAIN THIS PROSPECTUS FOR FUTURE REFERENCE
<PAGE>
FEE TABLE
ANNUAL FUND OPERATING EXPENSES:
(as a percentage of average net assets) (net of reimbursement):
Management fees .................................................... 0.50%
Other fees ......................................................... 0.50%
----
Total Fund Operating Expenses ...................................... 1.00%
====
<TABLE>
<CAPTION>
Example: 1 year 3 years 5 years 10 years
----- ------ ------ -------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual return and (2) redemption at the end of each period $10.20 $31.84 $55.25 $122.46
</TABLE>
The purpose of the foregoing table is to assist an investor in understanding
the various costs and expenses that an investor in the Fund will bear
indirectly. (For more complete descriptions of the various costs and expenses,
see "How to Purchase Shares" and "Investment Adviser, Distributor and
Administrator" below.) The Expenses and Example appearing in the table above are
based on the Fund's expenses for the period from January 1, 1996 to December 31,
1996. Absent expense reimbursements, total fund operating expenses would have
been 1.09% of the Fund's average net assets. The Example shown in the table
above should not be considered a representation of past or future expenses and
actual expenses may be greater or less than those shown.
FINANCIAL HIGHLIGHTS
The following Financial Highlights information for each of the years in the
five year period ended December 31, 1996 has been audited by KPMG Peat Marwick
LLP, Independent Auditors, whose report thereon appears in the Statement of
Additional Information. This information should be read in conjunction with the
financial statements and related notes thereto included in the Statement of
Additional Information. The Fund's annual report, which contains additional
performance information, is available upon request and without charge.
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Selected Per Share Data for a share outstanding throughout the period
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period ... $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
----------- ----------- ----------- ----------- ----------- -----------
Income from investment operations:
Net investment income ................ 0.026 0.029 0.020 0.018 0.024 0.041
Less distributions:
Dividends from
net investment income .............. (0.026) (0.029) (0.020) (0.018) (0.024) (0.041)
----------- ----------- ----------- ----------- ----------- -----------
Net asset value, end of period ......... $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
=========== =========== =========== =========== =========== ===========
Total return ........................... 2.61% 2.92% 2.00% 1.78% 2.47% 4.22%
Ratio to average net assets:
Expenses, before reimbursement ....... 1.09% 1.12% 1.09% 0.92% 0.99% 0.96%
Expenses, net of reimbursement ....... 1.00% 1.00% 1.00% 0.92% 0.99% 0.96%
Net investment income,
before reimbursement ............... 2.50% 2.76% 1.88% 1.77% 2.46% 4.06%
Net investment income ................ 2.59% 2.88% 1.97% 1.77% 2.46% 4.06%
Net assets, end of period
(000's omitted) ...................... $26.516 $28,231 $37,654 $41,096 $45,844 $53,722
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1990 1989 1988 1987
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net asset value, beginning of period ... $1.00 $1.00 $1.00 $1.00
----------- ----------- ----------- -----------
Income from investment operations:
Net investment income ................ 0.053 0.056 0.047 0.041
Less distributions:
Dividends from
net investment income .............. (0.053) (0.056) (0.047) (0.041)
----------- ----------- ----------- -----------
Net asset value, end of period ......... $1.00 $1.00 $1.00 $1.00
=========== =========== =========== ===========
Total return ........................... 5.39% 5.73% 4.79% 4.21%
Ratio to average net assets:
Expenses, before reimbursement ....... 0.93% 0.88% 0.91% 0.74%
Expenses, net of reimbursement ....... 0.93% 0.88% 0.91% 0.74%
Net investment income,
before reimbursement ............... 5.26% 5.57% 4.67% 4.09%
Net investment income ................ 5.26% 5.57% 4.67% 4.09%
Net assets, end of period
(000's omitted) ...................... $57,881 $61,385 $82,755 $84,954
</TABLE>
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2
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YIELD INFORMATION
For the seven-day period ended December 31, 1996, the Fund's annualized
current yield was 2.79% and the compounded effective yield was 2.83%. This yield
is subject to market conditions and will fluctuate daily as income earned
fluctuates. The above yield quotations are not an indication or representation
by the Fund of future yields or rates of return. This Prospectus may be in use
for a full year and it can be expected that these yields will fluctuate
substantially over that time. To obtain a current yield quotation for the Fund,
call the appropriate toll free telephone number listed on the cover of this
Prospectus.
The weighted average portfolio maturity on December 31, 1996 was 42 days.
COMPARATIVE PERFORMANCE INFORMATION
Advertisements and communications may compare the Fund's performance with
that of other mutual funds, as reported by Lipper Analytical Services, Inc. or
similar independent services or financial publications. Such performance may be
categorized according to the Fund's asset size as determined by the independent
service. From time to time, the performance of the Fund may be compared to
various investment indicies, including the Dow Jones Industrial Average and
Standard & Poor's 500 Composite Stock Index. Quotations of historical yields are
not indicative of future dividend income, but are an indication of the return to
shareholders only for the limited historical period used. The Fund's yield will
depend on the particular investments in its portfolio, its total operating
expenses and other conditions. For further information, including an example of
the yield calculation, see the Statement of Additional Information.
DESCRIPTION OF THE FUND
The Fund is a diversified open-end management investment company known as a
money market mutual fund. It is called a no-load fund because its shares are
sold without a sales charge.
INVESTMENT OBJECTIVE
The Fund's investment objective is to seek current income exempt from
federal income taxes while also maintaining stability of principal, liquidity
and preservation of capital.
INVESTMENT POLICIES
The Fund will seek to achieve its goal through investment in high grade
short term municipal obligations issued by states, territories, and possessions
of the United States and by the District of Columbia, and their political
subdivisions, and duly constituted authorities and corporations. It will limit
its portfolio purchases, as well as the underlying securities of repurchase
agreements entered into by it, to those United States dollar denominated
instruments which its Board of Directors determines present minimal credit risks
and which are of "high quality" as determined by any major rating service (such
as Standard & Poor's Corporation or Moody's Investors Service, Inc.) or, in the
case of any instruments that are not rated, are of a quality comparable to such
rated instruments as determined by its Board of Directors. The Fund will enter
into repurchase agreements only with commercial banks and primary dealers in
U.S. government securities. Repurchase agreements when entered into with primary
dealers, will be fully collateralized including the interest earned thereon
during the entire term of the agreement. If the institution defaults on the
repurchase agreement, the Fund will retain possession of the underlying
securities. In addition, if bankruptcy proceedings are commenced with respect to
the seller, realization on the collateral may be delayed or limited and the Fund
may incur additional costs. In such case the Fund will be subject to risks
associated with changes in the market value of the collateral securities. The
Fund intends to limit repurchase agreements to institutions believed by its
adviser to present minimal credit risk. The Fund will maintain a dollar weighted
average portfolio maturity of not more than 90 days and will not acquire any
portfolio security with a remaining maturity of more than thirteen months (397
days).
The Fund may also hold cash and invest in obligations, the interest from
which may be subject to federal income tax, so long as at least 80% of the
Fund's net income is derived from securities, the income from which, in the
opinion of Counsel for the issuers thereof, is exempt from federal income tax;
provided, however, the Fund may invest in instruments yielding taxable income
such as short term money market instruments equal to or exceeding 20% of the
Fund's net income in extraordinary circumstances when adverse market conditions
dictate a defensive position. Any net income earned from taxable instruments
will be taxable to shareholders of the Fund as ordinary income. The investment
policies set forth in the preceding paragraph are fundamental policies and may
not be changed without approval of the shareholders.
3
<PAGE>
The Fund restricts its purchases of municipal securities to those rated not
lower than AA or Aa or MIG-2 (see "Appendix" in the Statement of Additional
Information), or municipal securities which have been issued by an issuer having
outstanding debt securities rated not lower than AA or Aa or MIG-2 or are
specifically determined by the Fund's Board of Directors to be of high quality
and represent minimal credit risks. Any municipal security which depends on the
credit of the Federal government will be regarded as having a rating of AAA or
Aaa. Purchases of tax exempt instruments such as municipal commercial paper
(which are also known as short term discount notes) will be limited to those
obligations rated A-1 or Prime-1 (see "Appendix" in the Statement of Additional
Information) or unrated obligations of equivalent quality, as determined by the
Board of Directors. Municipal commercial paper or short term discount notes are
short term obligations of municipalities which are likely to be used to meet
seasonal working capital needs of municipalities or interim construction
financing and to be paid from general revenues of the municipalities or
refinanced with long term debt. In most cases, such obligations are backed by
letters of credit, not repurchase agreements or other credit facility agreements
offered by banks or other institutions.
MANAGEMENT OF THE FUND
The business affairs of the Fund are managed under the direction of its
Board of Directors. There are currently ten directors (of whom seven are
non-affiliated persons) who meet five times each year. The Statement of
Additional Information contains additional information regarding the directors
and officers of the Fund.
PORTFOLIO MANAGER
Denis P. Jamison, C.F.A. Senior Vice President, Director of Fixed Income
Strategy is responsible for fixed-income portfolio management at LMC. He is a
member of the New York Society of Security Analysts. Mr. Jamison has 25 years
investment experience.
Prior to joining LMC in 1981, Mr. Jamison had 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 is a graduate of the City
College of New York with a B.A. in Economics. Mr. Jamison has been the portfolio
manager of the Fund since July of 1981.
INVESTMENT ADVISER, DISTRIBUTOR AND ADMINISTRATOR
Lexington Management Corporation, ("LMC") P.O. Box 1515/Park 80 West Plaza
Two, Saddle Brook, New Jersey 07663, is the investment adviser of the Fund.
Lexington Funds Distributor Inc. ("LFD") is the distributor of shares of the
Fund. LMC, established in 1938, currently manages over $3.3 billion in assets.
LMC serves as investment adviser to other investment companies and private
and institutional investment accounts. Included among these clients are persons
and organizations which own significant amounts of capital stock of LMC's
parent. The clients pay fees which LMC considers comparable to the fees paid by
similarly served clients.
LMC also acts as administrator to the Fund and performs certain
administrative and internal accounting services, including but not limited to,
maintaining general ledger accounts, regulatory compliance, preparation of
financial information for semiannual and annual reports, preparing registration
statements, calculating net asset values, shareholder communications and
supervision of the custodian, transfer agent and provides facilities for such
services. The Fund shall reimburse LMC for its actual cost in providing such
services, facilities and expenses.
LMC and LFD are wholly-owned subsidiaries of Lexington Global Asset
Managers, Inc., a Delaware corporation with offices at Park 80 West Plaza Two,
Saddle Brook, N.J. 07663. Descendants of Lunsford Richardson, Sr., their
spouses, trusts and other related entities have a majority voting control of
outstanding shares of Lexington Global Asset Managers, Inc.
For the fiscal year ended December 31, 1996, the Fund paid LMC a monthly
management fee at the annual rate of 1/2 of 1% of the average daily net assets.
For the year ending December 31, 1996, LMC earned $113,774 in net management
fees from the Fund. See "Investment Adviser, Distributor and Administrator" in
the Statement of Additional Information.
HOW TO PURCHASE SHARES
INITIAL INVESTMENTS: MINIMUM $1,000. BY WIRE: (1) Telephone the Fund toll
free at 1-800-526-0056 and provide the account registration, address, and social
security or tax identification number, the amount being wired, the name of the
wiring bank, and the name and telephone number of the person to be contacted in
4
<PAGE>
connection with the order. You will then be provided with an account number. (2)
Instruct your bank to wire the specified amount, along with the account number
and registration to: State Street Bank and Trust Company, Attn: Mutual Funds
Dept., re: Lexington Tax Free Money Fund, Account No. 99043713. (3) A completed
New Account Application must then be forwarded to the Fund at the address on the
Application.
BY MAIL: Send a check payable to Lexington Tax Free Money Fund, along with a
completed New Account Application, to State Street Bank & Trust Company (the
"Agent") at the address on the Application.
SUBSEQUENT INVESTMENTS--BY WIRE: Instruct your bank to wire the specified
amount and appropriate information to the Agent (see "Initial Investments--By
Wire"--(2), above).
BY MAIL--MINIMUM $50: Send a check payable to Lexington Tax Free Money Fund
to the Agent, (see back cover of this prospectus for address) accompanied by
either the detachable form which accompanies the Agent's confirmation of a prior
transaction, or a letter indicating the dollar value of the shares to be
purchased and identifying the Fund, the account number, and registration.
BROKER-DEALERS: You may invest in shares of the Fund through broker-dealers
who are members of the National Association of Securities Dealers, Inc., and
other financial institutions and who have selling agreements with LFD. Banks and
other financial institutions may be required to register as dealers pursuant to
state law. Broker-dealers and financial institutions who process such purchase
and sale transactions for their customers may charge a transaction fee for these
services. The fee may be avoided by purchasing shares directly from the Fund.
PURCHASE PRICE AND EFFECTIVE DATE: Shares of the Fund are offered
continuously at net asset value which will normally be constant at $1.00 per
share. Net asset value is determined as of the close of the New York Stock
Exchange (currently 4:00 p.m. New York time) and on such other times or days as
there is a sufficient degree of trading in the portfolio securities of the Fund
to materially affect its net asset value. The price at which a purchase is
effected is based on the next calculation of net asset value per share after the
order is placed. Investments for which market quotations are not readily
available shall be valued by management in good faith under the direction of the
Fund's Board of Directors. Fund assets are valued based upon the amortized cost
method. No sales charge is imposed on purchases of shares. There is no assurance
that the Fund will maintain a net asset value per share of $1.00. Orders will
become effective when an investor's wire order or check is converted into
federal funds (monies credited to a bank's account with its registered Federal
Reserve Bank). If payment is transmitted by federal funds wire, the order will
become effective upon receipt. Payments transmitted by bank wire may take longer
to be converted into federal funds. Money transmitted by check will normally be
considered to have been converted into federal funds on the first business day
following receipt by the Agent.
AN OPEN ACCOUNT: By investing in the Fund, a shareholder appoints the Agent,
as his agent, to establish an Open Account to which all shares purchased will be
credited, together with any dividends and capital gain distributions which are
paid in additional shares. (See "Dividend, Distribution and Reinvestment
Policy"). Share certificates will be issued, for full shares only when requested
in writing. Unless payment for shares is made by certified or cashier's check or
federal funds wire, certificates will not be issued for 30 days. In order to
facilitate redemptions and transfers, most shareholders elect not to receive
certificates.
After an Open Account is established, payments can be provided for by
"Lex-O-Matic" or other authorized automatic bank check program accounts (checks
drawn on the investor's bank periodically for investment in the Fund).
AUTOMATIC INVESTING PLAN WITH "LEX-O-MATIC". A shareholder may arrange to
make additional purchases of shares automatically on a monthly or quarterly
basis. The investments of $50 or more are automatically deducted from a checking
account on or about the 15th day of each month. The institution must be an
Automated Clearing House (ACH) member. Should an order to purchase shares of a
fund be cancelled because your automated transfer does not clear, you will be
responsible for any resulting loss incurred by that fund. The shareholder
reserves the right to discontinue the Lex-O-Matic program provided written
notice is given ten days prior to the scheduled investment date. Further
information regarding this service can be obtained from Lexington by calling
1-800-526-0056. On payroll deduction accounts administered by an employer and on
payments into qualified pension or profit sharing plans and other continuing
purchases programs, there are no minimum purchase requirements.
TERMS OF OFFERING: If an order to purchase shares is cancelled because the
investor's check does not clear, the purchaser will be responsible for any loss
incurred by the Fund. To recover any such loss, the Fund reserves the right to
redeem shares owned by the purchaser, seek reimbursement directly from the
5
<PAGE>
purchaser and may prohibit or restrict the purchaser in placing future orders in
any of the Lexington Funds.
The Fund reserves the right to reject any order, and to waive or lower the
investment minimums with respect to any person or class of persons, including
shareholders of the Fund's special investment programs. An order to purchase
shares is not binding on the Fund until it has been confirmed by the Agent.
ACCOUNT STATEMENTS: The Agent will send shareholders a confirmation of each
transaction indicating the date of the transaction, the number of shares
purchased or redeemed, the price per share and the total amount of the purchase
or redemption proceeds. A statement is also sent to shareholders quarterly or
when a change in the registration, address, or dividend option occurs.
SHAREHOLDERS ARE URGED TO RETAIN THEIR ACCOUNT STATEMENTS FOR TAX PURPOSES.
HOW TO REDEEM SHARES
BY TELEPHONE: Shares may be redeemed by telephone. Call the Fund toll free
1-800-526-0056. A REDEMPTION AUTHORIZATION WHICH IS CONTAINED IN THE NEW ACCOUNT
APPLICATION, OR A SEPARATE AUTHORIZATION FORM MUST BE ON FILE WITH LFD BEFORE A
SHAREHOLDER MAY REDEEM IN THIS MANNER. Shareholders may elect on the redemption
authorization form to have checks for redemption proceeds in any amount of $200
or more mailed either to the registered address, to the shareholder's bank
account, or to any other designated person, and a new form must be completed
whenever these instructions are revised.
Shareholders may request that redemption proceeds of $1,000 or more be wired
directly to a COMMERCIAL BANK ACCOUNT. The signatures on such a request must be
guaranteed, unless an authorization for redemption by telephone form has been
previously filed with LFD. The Agent presently imposes a $5.00 wire charge.
BY CHECK: Shareholders may effect redemptions by writing checks drawn on the
Fund, payable to the order of any person in any amount of $100 or more up to
$500,000 at no charge. Checks in amounts over $500,000 will not be honored. The
special forms and instructions may be obtained from the Fund or the agent.
Redemption checks should not be used to close your account. Redemption checks
are free, but the Agent will impose a fee (currently $15.00) for stopping
payment of a redemption check upon your request or if the Agent cannot honor the
redemption check due to insufficient funds, uncollected funds or other valid
reason.
PROCEDURES FOR REDEMPTIONS BY TELEPHONE OR CHECK MAY ONLY BE USED 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.
BY MAIL: Send to the Agent (see back cover of this prospectus for address):
(1) a written request for redemption, signed by each registered owner exactly as
the shares are registered including the name of the Fund, account number and
exact registration; (2) share certificates for any shares to be redeemed which
are held by the shareholder; (3) signature guarantees, when required; and (4)
the additional documents required for redemptions by corporations, executors,
administrators, trustees and guardians. REDEMPTIONS BY MAIL WILL NOT BECOME
EFFECTIVE UNTIL ALL DOCUMENTS IN PROPER FORM HAVE BEEN RECEIVED BY THE AGENT. IF
A SHAREHOLDER HAS ANY QUESTIONS REGARDING THE REQUIREMENTS FOR REDEEMING SHARES,
HE SHOULD CALL THE FUND AT THE TOLL FREE NUMBER ON THE BACK COVER PRIOR TO
SUBMITTING A REDEMPTION REQUEST.
Checks for redemption proceeds will be mailed within three business days,
but will not be mailed until all checks in payment for the shares to be redeemed
have been cleared. Shares redeemed will earn dividends through the date of
redemption. Shareholders who redeem all of their shares will receive a check
representing the value of the shares redeemed plus the accrued dividends 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.
SIGNATURE GUARANTEE: Signature guarantees are required in connection with
(a) redemptions by mail involving $25,000 or more; (b) all redemptions by mail,
regardless of the amount involved, when the proceeds are to be paid to someone
other than the registered owners; (c) authorizations to effect redemptions by
telephone, telegram, or check; (d) changes in instructions as to where the
proceeds of redemptions are to be sent; and (e) share transfer requests.
The Agent requires that the guarantor be either a commercial bank which is a
member of the Federal Deposit Insurance Corporation, a trust company, a savings
and loan association, a savings bank, a credit union, a member firm of a
domestic stock exchange, or a foreign branch of any of the foregoing. A NOTARY
PUBLIC IS NOT AN ACCEPTABLE GUARANTOR.
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With respect to redemption requests submitted by mail, the signature
guarantees must appear either: (a) on the written request for redemption, (b) on
a separate instrument of assignment ("stock power") which should specify the
total number of shares to be redeemed or (c) on all share certificates tendered
for redemption and, if shares held by the Agent are also being redeemed, on the
letter or stock power. Signature guarantees in connection with redemptions by
telephone, telegram, or check must appear on the appropriate authorization form.
REDEMPTION PRICE: The redemption price will be the net asset value per share
of the Fund next determined after receipt by the Agent of a redemption request
in proper form (see "Determination of Net Asset Value" in the Statement of
Additional Information). The right of redemption may be suspended (a) for any
period during which the New York Stock Exchange is closed or the Securities and
Exchange Commission ("SEC") determines that trading on the Exchange is
restricted, (b) when there is an emergency as determined by the SEC as a result
of which it is not reasonably practicable for the Fund to dispose of securities
owned by it or to determine fairly the value of its net assets, or (c) for such
other periods as the SEC may by order permit for the protection of shareholders
of the Fund. Due to the proportionately high cost of maintaining smaller
accounts, the Fund reserves the right to redeem all shares in an account with a
value of less than $500 (except retirement plan accounts) and mail the proceeds
to the shareholder. Shareholders will be notified before these redemptions are
to be made and will have 30 days to make an additional investment to bring their
accounts up to the required minimum.
SHAREHOLDER SERVICES
TRANSFER: Shares of the Fund may be transferred to another owner. A
signature guarantee of the registered owner is required on the letter of
instruction or accompanying stock power.
SYSTEMATIC WITHDRAWAL PLAN: Shareholders may elect to withdraw cash in fixed
amounts from their accounts at regular intervals. The minimum investment to
establish a Systematic Withdrawal Plan is $10,000. If the proceeds are to be
mailed to someone other than the registered owner, a signature guarantee is
required.
GROUP SUB-ACCOUNTING: To minimize recordkeeping by fiduciaries,
corporations, and certain other investors, the minimum initial investment may be
waived.
EXCHANGE PRIVILEGE
Shares of the Fund may be exchanged for shares of the following Lexington
Funds on the basis of relative net asset value per share, next determined at the
time of the exchange. In the event shares of one or more of these Funds being
exchanged by a single investor have a value in excess of $500,000, the shares of
the Fund will not be purchased until the third business day following the
redemption of the shares being exchanged in order to enable the redeeming fund
to utilize normal securities settlement procedures in transferring the proceeds
of the redemption to the Fund. EXCHANGES MAY NOT BE MADE UNTIL ALL CHECKS IN
PAYMENT FOR THE SHARES TO BE EXCHANGED HAVE BEEN CLEARED.
Lexington Funds currently available for exchange are:
LEXINGTON WORLDWIDE EMERGING MARKETS FUND, INC. (NASDAQ SYMBOL: LEXGX)/Seeks
long-term growth of capital primarily through investment in equity
securities of companies domiciled in, or doing business in, emerging
countries and emerging markets.
LEXINGTON INTERNATIONAL FUND, INC. (NASDAQ SYMBOL: LEXIX)/Seeks long term growth
of capital through investment in common stocks of companies domiciled
in foreign countries.
LEXINGTON CROSBY SMALL CAP ASIA GROWTH FUND, INC. (NASDAQ SYMBOL: LXCAX)/Seeks
long-term capital appreciation through investment in companies
domiciled in the Asia Region with a market capitalization of less than
$1 billion.
LEXINGTON TROIKA DIALOG RUSSIA FUND, INC. (NASDAQ SYMBOL: LETRX)/Seeks long-term
capital appreciation through investment primarily in the equity
securities of Russian companies. The Fund has a $5,000 MINIMUM
INVESTMENT.
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LEXINGTON RAMIREZ GLOBAL INCOME FUND (NASDAQ SYMBOL: LEBDX)/Seeks high current
income by investing in a combination of foreign and domestic
high-yield, lower rated debt securities. Capital appreciation is a
secondary objective.
LEXINGTON SMALLCAP VALUE FUND, INC. (NASDAQ SYMBOL: LESVX)/Seeks long-term
capital appreciation through investment in common stocks of companies
domiciled in the United States with a market capitalization of less
than $1 billion.
LEXINGTON GOLDFUND, INC. (NASDAQ SYMBOL: LEXMX)/Seeks capital appreciation and
such hedge against loss of buying power as may be obtained through
investment in gold bullion and equity securities of companies engaged
in mining or processing gold throughout the world.
LEXINGTON CORPORATE LEADERS TRUST FUND (NASDAQ SYMBOL: LEXCX)/Seeks long-term
capital growth and income through investment in an equal number of
shares of the common stocks of a fixed list of American blue chip
corporations.
LEXINGTON GROWTH AND INCOME FUND, INC. (NASDAQ SYMBOL: LEXRX)/Seeks long-term
capital appreciation through investments in stocks of large, ably
managed and well financed companies. Income is a secondary objective.
LEXINGTON CONVERTIBLE SECURITIES FUND (NASDAQ SYMBOL: CNCVX)/Seeks total return
by providing capital appreciation, current income and conservation of
capital through investments in a diversified portfolio of securities
convertible into shares of common stock.
LEXINGTON GNMA INCOME FUND, INC. (NASDAQ SYMBOL: LEXNX)/Seeks a high level of
current income, consistent with liquidity and safety of principal,
through investment primarily in mortgage-backed GNMA Certificates.
LEXINGTON MONEY MARKET TRUST (NASDAQ SYMBOL: LMMXX)/Seeks a high level of
current income consistent with preservation of capital and liquidity
through investments in interest bearing short term money market
instruments.
LEXINGTON TAX FREE MONEY FUND, INC. (NASDAQ SYMBOL: LTFXX)/Seeks current income
exempt from Federal income taxes while maintaining liquidity and
stability of principal through investment in short term municipal
securities.
Shareholders in any of these funds may exchange all or part of their shares
for shares of one or more of the other funds, subject to the conditions
described herein. The Exchange Privilege enables a shareholder in any of these
funds to acquire shares in a fund with a different investment objective when the
shareholder believes that a shift between funds is an appropriate investment
decision. Shareholders contemplating an exchange should obtain and review the
prospectus of the fund to be acquired.
If an exchange involves investing in a Lexington Fund not already owned and
a new account has to be established, the dollar amount exchanged must meet the
initial investment of the Fund being purchased. IF, HOWEVER, AN ACCOUNT ALREADY
EXISTS IN THE FUND BEING BOUGHT, THERE IS A $500 MINIMUM EXCHANGE REQUIRED.
SHAREHOLDERS MUST PROVIDE THE ACCOUNT NUMBER OF THE EXISTING ACCOUNT.
Any exchange between mutual funds is, in effect, a redemption of shares in
one Fund and a purchase in the other Fund. Shareholders should consider the
possible tax effects of an exchange.
TELEPHONE EXCHANGE PROVISIONS--Exchange instructions may be given in writing
or by telephone. TELEPHONE EXCHANGES MAY ONLY BE MADE IF A TELEPHONE
AUTHORIZATION FORM HAS BEEN PREVIOUSLY EXECUTED AND FILED WITH LFD. TELEPHONE
EXCHANGES ARE PERMITTED ONLY AFTER A MINIMUM OF 7 DAYS HAVE ELAPSED FROM THE
DATE OF A PREVIOUS EXCHANGE. EXCHANGES MAY NOT BE MADE UNTIL ALL CHECKS IN
PAYMENT FOR THE SHARES TO BE EXCHANGED HAVE BEEN CLEARED. Telephonic exchanges
can only involve shares held on deposit at the Agent; shares held in certificate
form by the shareholder cannot be included. However, outstanding certificates
can be returned to the Agent and qualify for these services. Any new account
established with the same registration will also have the privilege of exchange
by telephone in the Lexington Funds. All accounts involved in a telephonic
exchange MUST have the same registration and dividend option as the account from
which the shares were transferred and will also have the privilege of exchange
by telephone in the Lexington Funds in which these services are available.
By checking the box on the New Account Application authorizing telephone
exchange services, a shareholder constitutes and appoints LFD distributor of the
Lexington Group of Mutual Funds as the true and lawful attorney to surrender for
redemption or exchange any and all non-certificated shares held by the Agent in
account(s) designated, or in any other account with the Lexington Funds, present
or future, which has the identical registration with full power or substitution
in the premises, authorizes and directs LFD to act upon any instruction from any
person by telephone for exchange of shares held in any of these accounts, to
purchase shares of any other Lexington Fund that is available, provided the
registration and mailing address of the shares to be purchased are identical to
8
<PAGE>
the registration of the shares being redeemed, and agrees that neither LFD, the
Agent, nor the Fund(s) will be liable for any loss, expense or cost arising out
of any requests effected in accordance with this authorization which would
include requests effected by imposters or persons otherwise unauthorized to act
on behalf of the account. LFD, the Agent and the Fund, will employ reasonable
procedures to confirm that instructions communicated by telephone are genuine
and if they do not employ reasonable procedures they may be liable for any
losses due to unauthorized or fraudulent instructions. The following
identification procedures may include, but are not limited to, the following:
account number, registration and address, taxpayer identification number and
other information particular to the account. In addition, all exchange
transactions will take place on recorded telephone lines and each transaction
will be confirmed in writing by the Fund. LFD reserves the right to cease to act
as agent subject to the above appointment upon thirty (30) days' written notice
to the address of record. If other than an individual, it is certified that
certain persons have been duly elected and are now legally holding the titles
given and that the said corporation, trust, unincorporated association, etc. is
duly organized and existing and has power to take action called for by this
continuing Authorization.
Exchange authorization forms, Telephone authorization forms and prospectuses
of the other funds may be obtained from LFD.
LFD has made arrangements with certain dealers to accept instructions by
telephone to exchange shares of the Fund for shares of one of the other
Lexington investment companies at net asset value as described above. Under this
procedure, the dealer must agree to indemnify the Distributor 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 application must
be received by the Distributor within five days of the 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 exchanged. Shares in
certificate form are not eligible for this type of exchange. LFD reserves the
right to reject any telephone exchange request. Any telephone exchange orders so
rejected may be processed by mail.
A capital gain or loss for federal tax purposes may be realized upon the
exchange, depending upon the cost or other basis of the shares redeemed. This
exchange offer is available only in states where shares of the fund being
acquired may legally be sold and may be modified or terminated at any time by
the Fund. Broker-dealers who process exchange orders on behalf of their
customers may charge a fee for their services. Such fee may be avoided by making
requests for exchange directly to the Fund or Agent.
DIVIDEND, DISTRIBUTION AND REINVESTMENT POLICY
The Fund declares and reinvests daily, dividends from its net investment
income and distributes such dividends on the last day of each month. Dividends
or distribution payments will be reinvested at net asset value in additional
full and fractional shares of the Fund unless and until the shareholder notifies
the Agent in writing that he wants to receive his payments in cash. This request
must be received by the Agent at least seven days before the payment 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--An Open Account").
Since substantially all of the net income will be declared as a dividend
each time the net asset value of the Fund is determined, the net asset value per
share will normally remain at one dollar per share immediately after such
dividend declaration and determination.
TAX MATTERS
The Fund intends to qualify as a regulated investment company by satisfying
the requirements under Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code"), including requirements with respect to diversification of
assets, distribution of income and sources of income. It is the Fund's policy to
distribute to shareholders all of its investment income (net of expenses) and
any capital gains (net of capital losses) so that, in addition to satisfying the
distribution requirement of Subchapter M, the Fund will not be subject to
federal income tax or the 4% excise tax.
The Fund intends to invest principally in tax-exempt municipal obligations
so that distributions by the Fund of its net tax-exempt interest income can be
designated as exempt-interest dividends, which are excludable from gross income
for federal income tax purposes. However, shareholders are required to report
the receipt of exempt-interest dividends, together with other tax-exempt
9
<PAGE>
interest, on their federal income tax returns. In addition, these
exempt-interest dividends may be subject to the federal alternative minimum tax
and to state and local income tax, and will be taken into account in determining
the portion, if any, of Social Security benefits received which must be included
in gross income for federal income tax purposes. Finally, interest or
indebtedness incurred or continued to purchase or carry shares of the Fund
(which indebtedness likely need not be directly traceable to the purchase or
carrying of such shares) will not be deductible for federal income tax purposes.
Distributions by the Fund of any taxable net investment income and any net
short-term capital gain are taxable to shareholders as ordinary income. These
distributions are treated as dividends for federal income tax purposes but do
not qualify for the 70% dividends-received deduction for corporate shareholders.
The Fund is managed so that it will not have any long-term capital gains or
losses. The percentage of the Fund's net investment income (taxable and
tax-exempt) which constitutes tax-exempt interest will be determined annually
and will be applied uniformly to all distributions of such income made during
the year for purposes of designating a portion of such distributions as
exempt-interest dividends. This percentage may differ from the actual tax-exempt
percentage for any particular day or period during the year.
Distributions to shareholders will be treated in the same manner for federal
income tax purposes whether received in cash or reinvested in additional shares
of the Fund. In general, distributions by the Fund are taken into account by the
shareholders in the year in which they are made. However, certain distributions
made during January will be treated as having been paid by the Fund and received
by the shareholders on December 31 of the preceding year. A statement setting
forth the federal income tax status of all distributions made or deemed made
during the year will be sent to shareholders promptly after the end of each
year. Shareholders purchasing shares of the Fund just prior to the ex-dividend
date will be taxed on the entire amount of the dividend received, even though
the net asset value per share on the date of such purchase reflected the amount
of such dividend.
All or a portion of any loss realized upon a taxable disposition of shares
of the Fund may be disallowed if other shares of the Fund are purchased within
30 days before or after such disposition.
Under the back-up withholding rules of the Code, certain shareholders may be
subject to 31% withholding of federal income tax on ordinary income dividends
paid by the Fund. In order to avoid this back-up withholding, a shareholder must
provide the Fund with a correct taxpayer identification number (which for most
individuals is their Social Security number) or certify that it is a corporation
or otherwise exempt from or not subject to back-up withholding. The new account
application included with this Prospectus provides for shareholder compliance
with these certification requirements.
The foregoing discussion of federal income tax consequences is based on tax
laws and regulations in effect on the date of this Prospectus, and is subject to
change by legislative or administrative action. As the foregoing discussion is
for general information only, a prospective shareholder should also review the
more detailed discussion of federal income tax considerations relevant to the
Fund that is contained in the Statement of Additional Information. In addition,
each prospective shareholder should consult with his own tax adviser as to the
tax consequences of investments in the Fund, including the application of state
and local taxes which may differ from the federal income tax consequences
described above.
CUSTODIAN, TRANSFER AGENT, AND DIVIDEND DISBURSING AGENT
Chase Manhattan Bank, N.A. 1211 Avenue of the Americas New York, New York
10022, has been retained to act as the Custodian for the Fund's investments and
assets. State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110 is the transfer agent and dividend disbursing agent for the
Fund. Neither Chase Manhattan Bank, N.A. nor State Street Bank and Trust Company
have any part in determining the investment policies of the Fund or in
determining which portfolio securities are to be purchased or sold by the Fund
or in the declaration of dividends and distributions.
COUNSEL AND INDEPENDENT AUDITORS
Kramer, Levin, Naftalis, & Frankel, 919 Third Avenue, New York, New York
10022 will pass upon legal matters for the Fund in connection with the shares
offered by this Prospectus.
KPMG Peat Marwick LLP, 345 Park Avenue New York, New York 10154, has been
selected as independent auditors for the Fund for the fiscal year ending
December 31, 1997.
10
<PAGE>
OTHER INFORMATION
The Fund was organized as a Maryland corporation on November 18, 1976. Prior
to April 29, 1980, its corporate name was "Lexington Tax Free Daily Income Fund,
Inc." On April 26, 1983, the name of the Fund was changed from "Lexington Tax
Free Daily Income Fund, Inc." to Lexington Tax Free Money Fund, Inc. The Fund
has authorized 1,000,000,000 shares of capital stock, $0.01 par value. All
shares are of the same class, with like rights and privileges. Each share is
entitled to one vote and to participate equally in distributions declared by the
Fund and in its net assets on liquidation. The shares have non-cumulative voting
rights, which means that the holders of more than 50% of the shares voting for
the election of directors can elect 100% of the Directors if they choose to do
so, and, in such event, the holders of the remaining less than 50% of the shares
voting for the election of directors will not be able to elect any person or
persons to the Board of Directors. The shares are fully paid and non-assessable
when issued and have no preference, preemptive, or conversion rights. There are
no options or other special rights outstanding relating to any Fund shares.
The Fund will not normally hold annual shareholder meetings except as
required by Maryland General Corporation Law or the Investment Company Act of
1940. However, meetings of shareholders may be called at any time by the
Secretary upon the written request of shareholders holding in the aggregate not
less than 25% of the outstanding shares, such request specifying the purposes
for which such meeting is to be called. In addition, the Directors will promptly
call a meeting of shareholders for the purpose of voting upon the question of
removal of any Director when requested to do so in writing by the recordholders
of not less than 10% of the Fund's outstanding shares. The Fund will assist
shareholders in any such communication between shareholders and Directors.
The Code of Ethics adopted by each of the Adviser and the Fund prohibits all
affiliated personnel from engaging in personal investment activities which
compete with or attempt to take advantage of the Fund's planned portfolio
transactions. The objective of each Code of Ethics is that the operations of the
Adviser and Fund be carried out for the exclusive benefit of the Fund's
shareholders. All organizations maintain careful monitoring of compliance with
the Code of Ethics.
A Registration Statement (herein called the "Registration Statement"), of
which this Prospectus is a part, has been filed with the SEC, Washington, D.C.
under the Securities Act of 1933, as amended.
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus and in the Fund's
official sales literature in connection with the offer of the Fund's shares,
and, if given or made, such other information or representations must not be
relied upon as having been authorized by the Fund. This Prospectus does not
constitute an offer in any State in which, or to any person to whom, such
offering may not lawfully be made. A "Statement of Additional Information", to
which reference is made in this Prospectus, provides a further discussion of
certain areas in the Prospectus and other matters which may be of interest to
some investors and is available by request without cost as indicated herein. The
Prospectus and the Statement of Additional Information omit certain information
contained in the Registration Statement, to which reference is made, filed with
the Commission. Items which are thus omitted, including contracts and other
documents referred to or summarized herein and therein, may be obtained from the
Commission upon payment of the prescribed fees.
11
<PAGE>
INVESTMENT ADVISER
- --------------------------------------------------------------------------------
LEXINGTON MANAGEMENT CORPORATION
P.O. Box 1515/Park 80 West Plaza Two
Saddle Brook, New Jersey 07663
DISTRIBUTOR
- --------------------------------------------------------------------------------
LEXINGTON FUNDS DISTRIBUTOR, INC.
P.O. Box 1515/Park 80 West Plaza Two
Saddle Brook, New Jersey 07663
ALL SHAREHOLDER REQUESTS FOR SERVICES OF ANY KIND SHOULD BE
SENT TO:
TRANSFER AGENT
- --------------------------------------------------------------------------------
STATE STREET BANK AND TRUST COMPANY c/o National Financial Data Services 1004
Baltimore Kansas City, Missouri 64105
OR CALL TOLL FREE:
SERVICE: 1-800-526-0056
24 HOUR ACCOUNT INFORMATION: 1-800-526-0052
TABLE OF CONTENTS PAGE
- -----------------------------------------------------------------------------
Fee Table ............................................................. 2
Financial Highlights .................................................. 2
Yield Information ..................................................... 3
Comparative Performance Information ................................... 3
Description of the Fund ............................................... 3
Investment Objective .................................................. 3
Investment Policies ................................................... 3
Management of the Fund ................................................ 4
Portfolio Manager ..................................................... 4
Investment Adviser, Distributor and Administrator ..................... 4
How to Purchase Shares ................................................ 4
How to Redeem Shares .................................................. 6
Shareholder Services .................................................. 7
Exchange Privilege .................................................... 7
Dividend, Distribution and Reinvestment Policy ........................ 9
Tax Matters ........................................................... 9
Custodian, Transfer Agent and
Dividend Disbursing Agent ........................................... 10
Counsel and Independent Auditors ...................................... 10
Other Information ..................................................... 11
LEXINGTON
LEXINGTON
TAX
FREE
MONEY
FUND, INC.
----------------------------------o---------------------------------
o No sales charge
o No redemption fee
o Free check writing service
o Free telephone exchange privilege
----------------------------------o---------------------------------
The Lexington Group
of
NO LOAD
Investment Companies
PROSPECTUS
MAY 1, 1997
============
<PAGE>
LEXINGTON TAX FREE MONEY FUND, INC.
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 1997
This statement of additional information which is not a prospectus, should
be read in conjunction with the current prospectus of Lexington Tax Free Money
Fund, Inc.(the "Fund"), dated May 1, 1997, 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
24 Hour Account Information:-- 1-800-526-0052
Lexington Management Corporation ("LMC") serves as the Fund's investment
adviser. Lexington Funds Distributor, Inc. ("LFD") is the Fund's distributor.
TABLE OF CONTENTS
Page
Investment Policy ..................................................... 2
Yield Calculation ..................................................... 2
Investment Restrictions ............................................... 3
Investment Adviser, Distributor and Administrator ..................... 4
Portfolio Transactions ................................................ 6
Determination of Net Asset Value ...................................... 6
Dividend, Distribution and Reinvestment Policy ........................ 6
Tax Matters ........................................................... 7
Custodian, Transfer Agent and Dividend Disbursing Agent ............... 10
Management of the Fund ................................................ 10
Appendix .............................................................. 13
Financial Statements .................................................. 15
1
<PAGE>
INVESTMENT POLICY
The fundamental investment objective of the Fund is to seek current income
exempt from Federal income taxes while also maintaining stability of principal,
liquidity and preservation of capital.
The Fund will seek to achieve its goal through investment in short term
municipal securities issued by states, territories, and possessions of the
United States and by The District of Columbia, and their political subdivisions,
and duly constituted authorities and corporations. It will limit its portfolio
purchases, as well as the underlying securities of repurchase agreements entered
into by it, to those United States dollar denominated instruments which its
Board of Directors determines present minimal credit risks and which are of
"high quality" as determined by any major rating service (such as Standard &
Poor's Corporation or Moody's Investors Service, Inc.) or, in the case of any
instruments that are not rated, are of a quality comparable to such rated
instruments as determined by its Board of Directors. The Fund will enter into
repurchase agreements only with commercial banks and dealers in U.S. Government
securities. Repurchase agreements when entered into with dealers, will be fully
collateralized including the interest earned thereon during the entire term of
the agreement. If the institution defaults on the repurchase agreement, the Fund
will retain possession of the underlying securities. In addition, if bankruptcy
proceedings are commenced with respect to the seller, realization on the
collateral may be delayed or limited and the Fund may incur additional costs. In
such case the Fund will be subject to risks associated with changes in the
market value of the collateral securities. The Fund intends to limit repurchase
agreements to institutions believed by LMC to present minimal credit risks. The
Fund will maintain a dollar weighted average portfolio maturity of not more than
90 days and will not acquire any portfolio security with a remaining maturity of
more than thirteen months (397 days).
The Fund may also hold cash and invest in obligations, the interest from
which may be subject to Federal income tax, so long as at least 80% of the
Fund's net income is derived from securities, the income from which, in the
opinion of Counsel for the issuers thereof, is exempt from Federal income tax;
provided, however, the Fund may invest in instruments yielding taxable income
equal to or exceeding 20% of the Fund's net income in extraordinary
circumstances when adverse market conditions dictate a defensive position. Any
net income earned from taxable instruments will be taxable to shareholders of
the Fund as ordinary income, except to the extent that individual taxpayers may
exclude such income pursuant to the combined dividend and interest received
exclusion (see "Federal Income Taxation"). The investment policies set forth in
the three preceding paragraphs are fundamental policies and may not be changed
without approval of the shareholders.
The Fund restricts its purchases of municipal securities to those rated not
lower than AA or Aa or MIG-2 (see "Appendix"), or municipal securities which
either have been issued by an issuer having outstanding debt securities rated
not lower than AA or Aa or MIG-2 or are specifically determined by the Fund's
Board of Directors to be of high quality and represent minimal credit risks. Any
municipal security which depends on the credit of the Federal government will be
regarded as having a rating of AAA or Aaa. Purchases of tax exempt instruments
such as municipal commercial paper (which are also known as short term discount
notes) will be limited to those obligations rated A-l or Prime-l (see
"Appendix") or unrated obligations of equivalent quality, as determined by the
Board of Directors. Municipal commercial paper or short term discount notes are
short term obligations of municipalities which are likely to be used to meet
seasonal working capital needs of municipalities or interim construction
financing and to be paid from general revenues of the municipalities or
refinanced with long term debt. In most cases, such obligations are backed by
letters of credit, not repurchase agreements or other credit facility agreements
offered by banks or other institutions.
YIELD CALCULATION
The Fund provides current yield and effective yield quotations, which are
calculated in accordance with the regulations of the Securities and Exchange
Commission, based upon changes in account value during a recent seven-day base
period.
Current yield quotations are computed by annualizing (on a 365-day basis)
the "base period return". The "base period return" is computed by determining
the net change exclusive of capital changes in the value of the account, divided
by the value of the account at the beginning of the base period. Effective yield
is computed by compounding the "base period return". Based upon dividends
actually credited to the shareholders' accounts (I.E.: based upon net investment
income), the current yield to an investor in the Fund during the last seven
calendar days of its fiscal year ended December 31, 1996 was at an annual rate
of 2.79% and the effective yield was at an annual rate of 2.83%. The average
weighted maturity of investments was 42 days. The current and effective yield
are affected by market conditions, portfolio quality, portfolio maturity, type
of instruments held and operating expenses. The Fund attempts to keep its net
asset value per share at $1.00, but attainment of this objective is not
guaranteed. This Statement of Additional Information may be in use for a full
year and it can be expected that these yields will fluctuate substantially from
the example shown above.
2
<PAGE>
The current and effective yield figures are not a representation of future
yield as the Fund's net income and expenses will vary based on many factors,
including changes in short term money market yields generally and the types of
instruments in the Fund's portfolio. The stated yield of the Fund may be useful
in reviewing the Fund's performance and in providing a basis for comparison with
other investment alternatives. However, unlike bank deposits and other
investments which pay fixed yields for stated periods of time, the yield of the
Fund fluctuates. In addition, other investment companies may calculate yield on
a different basis and may purchase securities for their portfolios which have
different qualities and maturities than those of the Fund's portfolio
securities.
EQUIVALENT YIELDS: TAX EXEMPT VERSUS TAXABLE SECURITIES
The following table shows the effect of the tax status of municipal bonds,
notes and commercial paper on the effective yield received by their holders
under the Federal income tax laws. It gives the approximate yield a taxable
security must earn at various income brackets to produce after tax yields
equivalent to those of tax exempt municipal bonds, notes and commercial paper.
The table, which is based on tax rates in effect on the date of this
Prospectus, provides separate computations for taxpayers who file joint or
individual returns. Of course, no assurance can be given that the Fund will
achieve any specific tax exempt yield. While it is expected that the Fund will
invest principally in obligations the interest from which is exempt from Federal
income tax, other income received by the Fund may be taxable. The table does not
take into account state or local taxes, if any, payable on Fund distributions.
<TABLE>
<CAPTION>
COMPARISON OF TAXABLE AND TAX-FREE YIELDS
MARGINAL
TAXABLE INCOME FEDERAL TAX-EXEMPT YIELD
JOINT RETURNS SINGLE RETURNS TAX RATE 1.5% 2% 3% 4% 5% 6% 7%
- -------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1997
$0 - $41,199 $0 - $24,649 15% 1.8 2.4 3.5 4.7 5.9 7.1 8.2
$41,200-$99,599 $24,650-$59,749 28% 2.1 2.8 4.2 5.6 6.9 8.3 9.7
$99,600-$151,749 $59,750-$124,649 31% 2.2 2.9 4.3 5.8 7.2 8.7 10.1
$151,750-$271,049 $124,650-$271,049 36% 2.3 3.1 4.7 6.3 7.8 9.4 10.9
$271,050+ $271,050+ 39.6% 2.5 3.3 5.0 6.6 8.3 9.9 11.6
</TABLE>
INVESTMENT RESTRICTIONS
The Fund's investment program is subject to a number of investment
restrictions which reflect self-imposed standards as well as Federal and state
regulatory limitations. The investment restrictions are matters of fundamental
policy and may not be changed without the affirmative vote of the lesser of (a)
50% of the outstanding shares of the Fund or (b) 67% or more of the shares
present at a meeting if more than 50% of the outstanding shares of the Fund are
represented at the meeting in person or by proxy.
The Fund shall not: (l) issue senior securities; (2) borrow money, except
from banks as a temporary measure for extraordinary or emergency purposes and
not for investment purposes or through "reverse repurchase agreements"; no
borrowing shall be made if such borrowing, combined with any then outstanding
borrowings, shall exceed 5% of the Fund's total assets; (3) underwrite
securities of other issuers; (4) concentrate its investments to an extent
greater than 25% of the value of its total assets in either (a) securities of
issuers located in a single state or (b) revenue bonds which derive revenue from
projects of a similar type or class of facilities; these limitations not being
applicable to securities issued or guaranteed by the U.S. Government or any of
its agencies or instrumentalities, or to certificates of deposit or banker's
acceptances; (5) purchase or sell real estate, commodity contracts or
commodities or invest in interests in oil, gas or other mineral exploration or
development programs (however, the Fund may purchase municipal bonds secured by
real estate or interests herein); (6) make loans to other persons except (a)
through the purchase of a portion or portions of an issue or issues of municipal
bonds or notes or other publicly distributed bonds, notes, debentures and
evidences of indebtedness authorized by its investment policy, or (b) through
investments in "repurchase agreements" (which are arrangements under which the
Fund acquires a debt security subject to an obligation of the seller to
repurchase it at a fixed price within a short fixed period), provided that no
more than 10% of the Fund's assets may be invested in repurchase agreements
which mature in more than seven days; or (c) through loans of securities held in
the Fund's portfolio to responsible borrowers and subject to 100% collateral
requirements in accordance with guidelines established by the Fund's directors
and applicable federal regulations; (7) purchase the securities of another
investment company or investment trust, except in the open market and then only
if no profit, other than the customary broker's commission, results to a sponsor
or dealer, or by merger or other reorganization; (8) purchase any security on
margin or effect a short sale of a security; (9) buy securities from or sell
securities (other than securities issued by the Fund) to any of its officers,
directors or its investment adviser, as principal; (10) contract to sell any
security or evidence of interest therein, except to the extent that the same
3
<PAGE>
shall be owned by the Fund; (11) purchase or retain securities of an issuer when
one or more of the officers and directors of the Fund or of the investment
adviser, or a person owning more than 10% of the stock of either, own
beneficially more than 1/2 of 1% of the securities of such issuer and such
persons owning more than 1/2 of 1% of such securities together own beneficially
more than 5% of the securities of such issuer; (12) invest more than 5% of its
total assets in the securities of any one issuer (except securities issued or
guaranteed by the United States Government or any of its agencies or
instrumentalities), except that such restriction shall not apply to 25% of the
Fund's portfolio; (13) purchase an industrial revenue bond if as a result of
such purchase more than 5% of total Fund assets would be invested in industrial
revenue bonds where the payment of principal and interest are the responsibility
of a company with less than three years' operating history; (14) purchase any
security restricted as to disposition under Federal securities laws; or (15) buy
or sell puts, calls or other options.
For the purposes of these limitations, each government subdivision, (county,
city) and any subdivision, agency or instrumentality thereof (school district,
authority) shall be considered as a separate issuer. If a security is guaranteed
as to principal and interest the guarantor may be considered as the issuer. If
the security is backed only by the assets or revenues of a specific entity, that
entity shall be deemed the issuer.
With regard to restriction (6) (b) above, the Fund will enter into
repurchase agreements only with commercial banks and primary dealers in U.S.
government securities.
The Fund's investment portfolio may include repurchase agreements ("repos")
with banks and dealers in U.S. Government securities. A repurchase agreement
involves the purchase by the Fund of an investment contract from a bank or a
dealer in U.S. Government securities which contract is secured by debt
securities whose value is equal to or greater than the value of the repurchase
agreement including the agreed upon interest. The agreement provides that the
institution will repurchase the underlying securities at an agreed upon time and
price. The total amount received on repurchase would exceed the price paid by
the Fund, reflecting an agreed upon rate of interest for the period from the
date of the repurchase agreement to the settlement date, and would not be
related to the interest rate on the underlying securities. The difference
between the total amount to be received upon the repurchase of the securities
and the price paid by the Fund upon their acquisition is accrued daily as
interest. If the institution defaults on the repurchase agreement, the Fund will
retain possession of the underlying securities. In addition, if bankruptcy
proceedings are commenced with respect to the seller, realization on the
collateral by the Fund may be delayed or limited and the Fund may incur
additional costs. In such case the Fund will be subject to risks associated with
changes in the market value of the collateral securities. The Fund intends to
limit repurchase agreements to transactions with institutions believed by LMC to
present minimal credit risk.
Payment of interest expense by the Fund in connection with borrowing
permitted under its investment restrictions would have the effect of reducing
the Fund's yield to its shareholders. Although the Fund has the right to pledge,
mortgage or hypothecate its assets, in order to comply with a state statute the
Fund will not, as a matter of operating policy while offering shares in such
state, pledge, mortgage or hypothecate its portfolio securities to the extent
that at any time the percentage of pledged securities will exceed 10% of the
total net assets of the Fund.
Lending of portfolio securities: As stated in number (6) above, subject to
guidelines established by the directors and by the Securities and Exchange
Commission, the Fund from time-to-time, may lend portfolio securities to
brokers, dealers, corporations or financial institutions and receive collateral
which will be maintained at all times in an amount equal to at least 100% of the
current market value of the loaned securities. Such collateral will be either
cash or fully negotiable U.S. Treasury or agency issues. If cash, such
collateral will be invested in short term securities, the income from which will
increase the return to the Fund. However, a portion of such incremental return
may be shared with the borrower. If securities, the usual procedure will be for
the borrower to pay a fixed fee to the Fund for such time as the loan is
outstanding. The Fund will retain substantially all rights of beneficial
ownership as to the loaned portfolio securities including rights to interest or
other distributions and will have the right to regain record ownership of loaned
securities in order to exercise such beneficial rights. Such loans will be
terminable at any time. The Fund may pay reasonable fees to persons unaffiliated
with it in connection with the arranging of such loans. Also, the Fund has
undertaken not to invest in real estate limited partnership interests, oil, gas
or mineral leases, as well as exploration or development programs. The Fund will
not purchase warrants except in units with other securities in original issuance
thereof or attached to other securities, if at the time of purchase, the Fund's
investment in warrants, valued at the lower of cost or market, would exceed 5%
of the Fund's total assets. Warrants which are not listed on the New York or
American Stock Exchanges shall not exceed 2% of the Fund's net assets. Shares of
the Fund will not be issued for consideration other than cash.
INVESTMENT ADVISER, DISTRIBUTOR AND ADMINISTRATOR
LMC, P.O. Box 1515/Park 80 West Plaza Two, Saddle Brook, New Jersey 07663,
is the investment adviser to the Fund and, as such, advises and makes
recommendations to the Fund with respect to its investments and investment
policies.
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Pursuant to an investment advisory agreement the Fund will pay LMC an annual
investment advisory fee equal to 0.5% of its average daily net assets up to $150
million, 0.4% of such value in excess of $150 million up to $400 million; 0.35%
of such value in excess of $400 million up to $800 million; and 0.3% of such
value in excess of $800 million, after deduction of Fund expenses, if any, in
excess of the expense limitations set forth below. The fee is computed on the
basis of current net assets at the end of each business day and is payable at
the end of each month. The investment advisory agreement provides that LMC must
also pay the Fund monthly the amount by which all of the Fund's other expenses
(including the investment advisory fee) exclusive of interest and taxes exceed
1% of the Fund's net assets during any fiscal year, calculated by averaging such
net assets daily.
Under the terms of the advisory agreement LMC also pays the Fund's expenses
for office rent, utilities, telephone, furniture and supplies utilized for the
Fund's principal office and the salaries and payroll expense of officers and
directors of the Fund who are also employees of LMC or its affiliates in
carrying out its duties under the investment advisory agreement. The Fund pays
all its other expenses, including custodian and transfer fees, legal and
registration fees, audit fees, printing of prospectuses, shareholder reports and
communications required for regulatory purposes or for distribution to existing
shareholders, computation of net asset value, mailing of shareholder reports and
communications, portfolio brokerage, taxes and independent directors' fees, and
furnishes the Distributor, at printer's overrun cost paid by the Distributor,
such copies of its prospectus, annual, semiannual and other reports and
shareholder communications as may reasonably be required for sales purposes. In
addition, the Fund will bear any costs associated with the securities loan
program (any such loans will increase the return to shareholders).
LMC's services are provided and its investment advisory fee is paid pursuant
to an agreement which will automatically terminate if assigned and which may be
terminated by either party upon 60 days' notice. The terms of the agreement and
any renewal thereof must be approved at least annually by a majority of the
Fund's Board of Directors, including a majority of directors who are not parties
to the agreement or "interested persons" of such parties, as such term is
defined under the Investment Company Act of 1940, as amended.
LMC serves as investment adviser to other investment companies and to
private and institutional investment accounts. Included among these clients are
persons and organizations which own significant amounts of capital stock of
LMC's parent (see below). These clients pay fees which LMC considers comparable
to the fee levels for similarly served clients.
LMC's accounts are managed independently with reference to the applicable
investment objectives and current security holdings, but on occasion more than
one investment company or counsel account may seek to engage in transactions in
the same security at the same time. To the extent practicable, such transactions
will be made on a pro rata basis in proportion to the respective amounts of
securities to be bought and sold for each portfolio, and the allocated
transactions will be averaged as to price. While this procedure may adversely
affect the price or volume of a given Fund transaction, LMC believes that the
ability of the Fund to participate in combined transactions may generally
produce better executions overall. LMC received from the Fund under the advisory
agreement the following net fees as of the fiscal year ended December 31, 1994,
$199,643; December 31, 1995, $168,718 and December 31, 1996, $113,774.
LMC also acts as administrator to the Fund and performs certain
administrative and internal accounting services, including but not limited to,
maintaining general ledger accounts, regulatory compliance, preparation of
financial information for semiannual and annual reports, preparing registration
statements, calculating net asset values, shareholder communications and
supervision of the custodian of, transfer agent and provides facilities for such
services. The Fund pays LMC a fee, payable monthly, equal to the pro-rata
portion of LMC\AIs actual cost in providing such services and facilities.
LFD also serves as Distributor for Fund shares under a Distribution
Agreement which is subject to annual approval by a majority of the Fund's Board
of Directors, including a majority who are not "interested persons". Of the
Directors, executive officers, and employees ("affiliated persons") of the Fund,
Messrs. Corniotes, DeMichele, Faust, Hisey, Jamison, Kantor, Lavery, and Luehs,
and Mmes. Carnicelli, Carr, Curcio, Gilfillan and Mosca (see "Management of the
Fund") may also be deemed affiliates of LMC by virtue of being officers,
directors or employees thereof. As of March 1, 1997, all officers and Directors
of the Fund as a group owned less than 1% of record capital shares of the Fund.
LMC and LFD are wholly-owned subsidiaries of Lexington Global Asset
Managers, Inc., a Delaware corporation with offices at Park 80 West Plaza Two,
Saddle Brook, New Jersey 07663. Descendants of Lunsford Richardson, Sr., their
spouses, trusts and other related entities have a majority voting control of
outstanding shares of Lexington Global Asset Managers, Inc.
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PORTFOLIO TRANSACTIONS
Portfolio securities are normally purchased directly from an underwriter or
dealer in municipal securities. Therefore, usually no brokerage commissions are
paid by the Fund. Transactions are allocated to various dealers by the Fund and
LMC in their best judgment. Dealers are selected primarily on the basis of
prompt execution of orders at the most favorable prices. The Fund has no
obligation to deal with any dealer or group of dealers. Particular dealers may
be selected for research or statistical and other services to enable LMC to
supplement its own research and analysis with that of such firms. Information so
received will be in addition to an not in lieu of the services required to be
performed by LMC under the investment advisory agreement and the expenses of LMC
will not necessarily be reduced as a result of the receipt of such supplemental
information. For the fiscal years ended December 31, 1994, 1995 and 1996 all
portfolio transactions were effected on a net basis through dealers acting as
principal and, accordingly, no brokerage commissions were payable.
DETERMINATION OF NET ASSET VALUE
The net asset value of the Fund is determined as of the close of trading on
the New York Stock Exchange each day the Exchange is open for business and at
such other times and/or such other days as there is sufficient trading in short
term municipal securities to affect materially the Fund's net asset value per
share. Substantially all of the Fund's net income calculated from the
immediately preceding determination of net income, is declared daily as
dividends (see "Dividend, Distribution and Reinvestment Policy").
For the purpose of determining the price at which shares are issued and
redeemed, the net asset value per share is calculated immediately after the
daily dividend declaration by: (a) valuing all securities and instruments as set
forth below; (b) deducting the Fund's liabilities; and (c) dividing the
resulting amount by the number of shares outstanding. As discussed below, it is
the intention of the Fund to maintain a net asset value per share of $1.00. The
Fund's portfolio instruments are valued on the basis of amortized cost. This
involves valuing an instrument at its cost and thereafter assuming a constant
amortization to maturity of any discount or premium, regardless of the impact of
fluctuating interest rates on the market value of the security. While this
method provides certainty in valuation, it may result in periods during which
the value, as determined by amortized cost, is higher or lower than the price
the Fund would receive if it sold its portfolio. During periods of declining
interest rates, the daily yield on shares of the Fund computed as described
above may be higher than a like computation made by a fund with identical
investments utilizing a method of valuation based upon market prices and
estimates of market prices for all of its portfolio instruments. Thus, if the
use of amortized cost by the Fund results in a lower aggregate portfolio value
on a particular day, a prospective investor in the Fund would be able to obtain
a somewhat higher yield than would result from an investment in a fund utilizing
solely market values, and existing investors in the Fund would receive less
investment income. The converse would apply in a period of rising interest
rates.
The Fund's use of amortized cost and the maintenance of the Fund's per share
net value at $1.00 is based on its election to operate under the provisions of
Rule 2a-7 under the Investment Company Act of 1940. As a condition of operating
under that rule, the Fund must maintain a dollar-weighted average portfolio
maturity of 90 days or less, purchase only instruments having remaining
maturities of 13 months (397 days) or less, and invest only in securities which
are determined by the Board of Directors to present minimal credit risks and
which are of high quality as determined by any major rating service, or in the
case of any instrument not so rated, considered by the Board of Directors to be
of comparable quality.
The Board of Directors has also agreed, as a particular responsibility
within the overall duty of care owed to its shareholders, to establish
procedures reasonably designed, taking into account current market conditions
and the Fund's investment objective, to stabilize the net asset value per share
as computed for the purposes of sales and redemptions at $1.00. These procedures
include periodic review, as the Board deems appropriate and at such intervals as
are reasonable in light of current market conditions, of the relationship
between the amortized cost value per share and a net asset value per share based
upon available indications of market value. In such review, investments for
which market quotations are readily available are valued at the most recent bid
price or quoted yield equivalent for such securities or for securities of
comparable maturity, quality and type as obtained from one or more of the major
market makers for the securities to be valued. Other investments and assets are
valued at fair value, as determined in good faith by the Board of Directors.
DIVIDEND, DISTRIBUTION AND REINVESTMENT POLICY
The Fund declares and reinvests daily, dividends from its net investment
income and distributes such dividends on the last day of each month. Dividends
or distribution payments will be reinvested at net asset value in additional
full and fractional shares of the Fund unless and until the shareholder notifies
State Street Bank and Trust Company, N.A., (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 payment date. Upon receipt by the Agent of
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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 - An Open Account"
in the Prospectus).
Since substantially all of the net income will be declared as dividends each
time the net asset value of the Fund is determined, the net asset value per
share will normally remain at one dollar per share immediately after such
dividend declaration and determination (see "Investment Policy").
TAX MATTERS
The following is only a summary of certain additional tax considerations
generally affecting the Fund and its shareholders that are not described in the
Prospectus. No attempt is made to present a detailed explanation of the tax
treatment of the Fund or its shareholders, and the discussions here and in the
Prospectus are not intended as substitutes for careful tax planning.
QUALIFICATION AS A REGULATED INVESTMENT COMPANY
The Fund has elected to be taxed as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). As a
regulated investment company, the Fund is not subject to federal income 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) and at least 90% of its
tax-exempt income (net of expenses allocable thereto) for the taxable year (the
"Distribution Requirement"), and satisfies certain other requirements of the
Code that are described below. Distributions by the Fund made during the taxable
year or, under specified circumstances, within twelve months after the close of
the taxable year, will be considered distributions of income and gains of the
taxable year and can therefore satisfy the Distribution Requirement.
In addition to satisfying the Distribution Requirement, a regulated
investment company must: (1) derive at least 90% of its gross income from
dividends, interest, certain payments with respect to securities loans, gains
from the sale or other disposition of stock or securities or foreign currencies
(to the extent such currency gains are directly related to the regulated
investment company's principal business of investing in stock or securities) and
other income (including but not limited to gains from options, futures or
forward contracts) derived with respect to its business of investing in such
stock, securities or currencies (the "Income Requirement"); and (2) derive less
than 30% of its gross income (exclusive of certain gains on designated hedging
transactions that are offset by realized or unrealized losses on offsetting
positions) from the sale or other disposition of stock, securities or foreign
currencies (or options, futures or forward contracts thereon) held for less than
three months (the "Short-Short Gain Test"). For purposes of these calculations,
gross income includes tax-exempt income. However, foreign currency gains,
including those derived from options, futures and forwards, will not in any
event be characterized as Short-Short Gain if they are directly related to the
regulated investment company's investments in stock or securities (or options or
futures thereon). Because of the Short-Short Gain Test, the Fund may have to
limit the sale of appreciated securities that it has held for less than three
months. However, the Short-Short Gain Test will not prevent the Fund from
disposing of investments at a loss, since the recognition of a loss before the
expiration of the three-month holding period is disregarded for this purpose.
Interest (including original issue discount) received by the Fund at maturity or
upon the disposition of a security held for less than three months will not be
treated as gross income derived from the sale or other disposition of such
security within the meaning of the Short-Short Gain Test. However, income that
is attributable to realized market appreciation will be treated as gross income
from the sale or other disposition of securities for this purpose.
In general, gain or loss recognized by the Fund on the disposition of an
asset will be a capital gain or loss. However, gain recognized on the
disposition of a debt obligation (including municipal obligations) 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.
Treasury Regulations permit a regulated investment company, in determining
its investment company taxable income and net capital gain (i.e., the excess of
net long-term capital gain over net short-term capital loss) for any taxable
year, to elect (unless it has made a taxable year election for excise tax
purposes as discussed below) to treat all or any part of any net capital loss,
any net long-term capital loss or any net foreign currency loss incurred after
October 31 as if it had been incurred in the succeeding year.
In addition to satisfying the requirements described above, the Fund must
satisfy an asset diversification test in order to qualify as a regulated
investment company. Under this test, at the close of each quarter of the Fund's
taxable year, at least 50% of the value of the Fund's assets must consist of
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cash and cash items, U.S. Government securities, securities of other regulated
investment companies, and securities of other issuers (as to which the Fund has
not invested more than 5% of the value of the Fund's total assets in securities
of such issuer and as to which the Fund does not hold more than 10% of the
outstanding voting securities of such issuer), and no more than 25% of the value
of its total assets may be invested in the securities of any one issuer (other
than U.S. Government securities and securities of other regulated investment
companies), or in two or more issuers which the Fund controls and which are
engaged in the same or similar trades or businesses.
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
ordinary taxable income for the calendar year and 98% of capital gain net income
for the one-year period ended on October 31 of such calendar year (or, at the
election of a regulated investment company having a taxable year ending November
30 or December 31, for its taxable year (a "taxable year election")).
(Tax-exempt interest on municipal obligations is not subject to the excise tax.)
The balance of such income must be distributed during the next calendar year.
For the foregoing purposes, a regulated investment company is treated as having
distributed any amount on which it is subject to income tax for any taxable year
ending in such calendar year.
For purposes of the excise tax, a regulated investment company shall: (1)
reduce its capital gain net income (but not below its net capital gain) by the
amount of any net ordinary loss for the calendar year; and (2) exclude foreign
currency gains and losses incurred after October 31 of any year (or after the
end of its taxable year if it has made a taxable year election) in determining
the amount of ordinary taxable income for the current calendar year (and,
instead, include such gains and losses in determining ordinary taxable income
for the succeeding calendar year).
The Fund intends to make sufficient distributions or deemed distributions of
its ordinary taxable income and capital gain net income prior to the end of each
calendar year to avoid liability for the excise tax. However, investors should
note that the Fund may in certain circumstances be required to liquidate
portfolio investments to make sufficient distributions to avoid excise tax
liability.
FUND DISTRIBUTIONS
The Fund anticipates distributing substantially all of its investment
company taxable income for each taxable year. Such distributions will be taxable
to shareholders as ordinary income and treated as dividends for federal income
tax purposes, but they will not qualify for the 70% dividends-received deduction
for corporate shareholders.
The Fund does not expect to realize any long-term capital gains or losses.
The Fund intends to qualify to pay exempt-interest dividends by satisfying
the requirement that at the close of each quarter of the Fund's taxable year at
least 50% of the Fund's total assets consists of tax-exempt municipal
obligations. Distributions from the Fund will constitute exempt-interest
dividends to the extent of the Fund's tax-exempt interest income (net of
expenses and amortized bond premium). Exempt-interest dividends distributed to
shareholders of the Fund are excluded from gross income for federal income tax
purposes. However, shareholders required to file a federal income tax return
will be required to report the receipt of exempt-interest dividends on their
returns. Moreover, while exempt-interest dividends are excluded from gross
income for federal income tax purposes, they may be subject to alternative
minimum tax ("AMT") in certain circumstances and may have other collateral tax
consequences as discussed below. Distributions by the Fund of any investment
company taxable income will be taxable to shareholders as discussed above.
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. In
addition, under the Superfund Amendments and Reauthorization Act of 1986, a tax
is imposed for taxable years beginning after 1986 and before 1996 at the rate of
0.12% on the excess of a corporate taxpayer's AMTI (determined without regard to
the deduction for this tax and the AMT net operating loss deduction) over $2
million. Exempt-interest dividends derived from certain "private activity"
municipal obligations issued after August 7, 1986 will generally constitute an
item of tax preference includable in AMTI for both corporate and noncorporate
taxpayers. In addition, exempt-interest dividends derived from all municipal
obligations, regardless of the date of issue, must be included in 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.
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<PAGE>
Exempt-interest dividends must be taken into account in computing the
portion, if any, of social security or railroad retirement benefits that must be
included in an individual shareholder's gross income and subject to federal
income tax. Further, a shareholder of the Fund is denied a deduction for
interest on indebtedness incurred or continued to purchase or carry shares of
the Fund. Moreover, a shareholder who is (or is related to) a "substantial user"
of a facility financed by industrial development bonds held by the Fund will
likely be subject to tax on dividends paid by the Fund which are derived from
interest on such bonds. Receipt of exempt-interest dividends may result in other
collateral federal income tax consequences to certain taxpayers, including
financial institutions, property and casualty insurance companies and foreign
corporations engaged in a trade or business in the United States. Prospective
investors should consult their own tax advisers as to such consequences.
Distributions by the Fund that do not constitute ordinary income dividends,
exempt-interest dividends or capital gain dividends will be treated as a return
of capital to the extent of (and in reduction of) the shareholder's tax basis in
his shares; any excess will be treated as gain from the sale of his shares, as
discussed below.
Distributions by the Fund will be treated in the manner described above
regardless of whether such distributions are paid in cash or reinvested in
additional shares of the Fund (or of another fund). Shareholders receiving a
distribution in the form of additional shares will be treated as receiving a
distribution in an amount equal to the fair market value of the shares received,
determined as of the reinvestment date. In addition, if the net asset value at
the time a shareholder purchases shares of the Fund reflects undistributed net
investment income or recognized capital gain net income, or unrealized
appreciation in the value of the assets of the Fund, distributions of such
amounts will be taxable to the shareholder in the manner described above,
although such distributions economically constitute a return of capital to the
shareholder.
Ordinarily, shareholders are required to take distributions by the Fund into
account in the year in which the distributions are made. However, dividends
declared in October, November or December of any year and payable to
shareholders of record on a specified date in such a month will be deemed to
have been received by the shareholders (and made by the Fund) on December 31 of
such calendar year if such dividends are actually paid in January of the
following year. Shareholders will be advised annually as to the U.S. federal
income tax consequences of distributions made (or deemed made) during the year.
The Fund will be required in certain cases to withhold and remit to the U.S.
Treasury 31% of ordinary income dividends and capital gain dividends, and the
proceeds of redemption of shares, paid to any shareholder (1) who has provided
either an incorrect tax identification number or no number at all, (2) who is
subject to backup withholding by the IRS for failure to report the receipt of
interest or dividend income properly, or (3) who has failed to certify to the
Fund that it is not subject to backup withholding or that it is a corporation or
other "exempt recipient."
SALE OR REDEMPTION OF SHARES
The Fund seeks to maintain a stable net asset value of $1.00 per share;
however, there can be no assurance that the Fund will do this. In such a case, 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 disallowed to the extent of the
amount of exempt-interest dividends received on such shares.
FOREIGN SHAREHOLDERS
Taxation of a shareholder who, as to the United States, is a nonresident
alien individual, foreign trust or estate, foreign corporation, or foreign
partnership ("foreign shareholder"), depends on whether the income from the Fund
is "effectively connected" with a U.S. trade or business carried on by such
shareholder.
If the income from the Fund is not effectively connected with a U.S. trade
or business carried on by a foreign shareholder, ordinary income dividends paid
to a foreign shareholder will be subject to U.S. withholding tax at the rate of
30% (or lower treaty rate) upon the gross amount of the dividend. Such a foreign
shareholder would generally be exempt from U.S. federal income tax on gains
realized on the sale of shares of the Fund and exempt-interest dividends.
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 and
any gains realized upon the sale of shares of the Fund will be subject to U.S.
federal income tax at the rates applicable to U.S. citizens or domestic
corporations.
In the case of foreign noncorporate shareholders, the Fund may be required
to withhold U.S. federal income tax at a rate of 31% on distributions that are
otherwise exempt from withholding tax (or taxable at a reduced treaty rate)
unless such shareholders furnish the Fund with proper notification of its
foreign status.
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The tax consequences to a foreign shareholder entitled to claim the benefits
of an applicable tax treaty may be different from those described herein.
Foreign shareholders are urged to consult their own tax advisers with respect to
the particular tax consequences to them of an investment in the Fund, including
the applicability of foreign taxes.
EFFECT OF FUTURE LEGISLATION; LOCAL TAX CONSIDERATIONS
The foregoing general discussion of U.S. federal income tax consequences is
based on the Code and the Treasury Regulations issued thereunder as in effect on
the date of this Statement of Additional Information. Future legislative or
administrative changes or court decisions may significantly change the
conclusions expressed herein, and any such changes or decisions may have a
retroactive effect with respect to the transactions contemplated herein.
Rules of state and local taxation of ordinary income and exempt-interest
dividends from regulated investment companies often differ from the rules for
U.S. federal income taxation described above. Shareholders are urged to consult
their tax advisers as to the consequences of these and other state and local tax
rules affecting investment in the Fund.
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 investments and
assets. State Street Bank and Trust company, 225 Franklin Street, Boston,
Massachusetts 02110 is the transfer agent and dividend disbursing agent for the
Fund. Neither Chase Manhattan Bank, N.A. nor State Street Bank and Trust Company
have any part in determining the investment policies of the Fund or in
determining which portfolio securities are to be purchased or sold by the Fund
or in the declaration of dividends and distributions.
MANAGEMENT OF THE FUND
The Directors and executive officers of the Fund and their principal
occupations are set forth below:
+S.M.S. CHADHA(59), Director. 3/16 Shanti Niketan, New Delhi 21, India.
Secretary, Ministry of External Affairs, New Delhi, India; Head of Foreign
Service Institute, New Delhi, India; Special Envoy of the Government of
India; Director, Special Unit for Technical Cooperation among Developing
Countries, United Nations Development Program, New York.
*+ROBERT M. DeMICHELE(52), President and 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 (67), Director. 340 East 72nd Street, New York, N.Y. 10021.
Private Investor; formerly Manager of Operations Research Department, CPC
International, Inc.
*+BARBARA R. EVANS (36), Director. 5 Fernwood Road, Summit, N.J. 07901. Private
Investor. Prior to May 1989, Assistant Vice President and Securities
Analyst, Lexington Management Corporation. Prior to March 1987, V.P.
Institutional Equity Sales - L.F. Rothschild, Unterberg, Towbin.
*+LAWRENCE KANTOR (49), Vice President and Director. P.O. Box 1515, Saddle
Brook, N.J. 07663. Executive Vice President, Managing Director and Director,
Lexington Management Corporation; Executive Vice President and Director,
Lexington Funds Distributor, Inc.; Executive Vice President and General
Manager -- Mutual Funds, Lexington Global Asset Managers, Inc.
+JERARD F. MAHER (50), Director. 300 Raritan Center Parkway, Edison, N.J. 08818.
General Counsel, Federal Business Center; Counsel, Ribis, Graham &Curtin.
+ANDREW M. McCOSH (56), 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 (70), Director. 10725 Quail Covey Road, Boynton Beach, Florida
33436. Chairman, Horizon Media, Inc.; Trustee, Galaxy Funds; Director,
Maguire Group of Connecticut; prior to January 1989, President, C.E.O. and
Director, Media General Broadcast Services (advertising firm).
+JOHN G. PRESTON (64), Director. 3 Woodfield Road, Wellesley, Massachusetts
02181. Associate Professor of Finance, Boston College, Boston,
Massachusetts.
+MARGARET W. RUSSELL (76), Director. 55 North Mountain Avenue, Montclair, N.J.
07042. Private Investor, formerly Community Affairs Director, Union Camp
Corporation.
*+DENIS P. JAMISON (49), Vice President and Portfolio Manager. P.O. Box 1515,
Saddle Brook, N.J. 07663. Senior Vice President, Director of Fixed Income
Investment Strategy, Lexington Management Corporation. Mr. Jamison is a
Chartered Financial Analyst and a member of the New York Society of Security
Analysts.
10
<PAGE>
*+LISA A. CURCIO (37), Vice President and Secretary. P.O. Box 1515, Saddle
Brook, N.J. 07663. Senior Vice President and Secretary, Lexington Management
Corporation; Vice President and Secretary, Lexington Funds Distributor, Inc.
*+RICHARD M. HISEY (38), Vice President and Treasurer. P.O. Box 1515, Saddle
Brook, N.J. 07663. Chief Financial Officer, Managing Director and Director,
Lexington Management Corporation; Chief Financial Officer, Vice President
and Director, Lexington Funds Distributor, Inc; Chief Financial Officer,
Market Systems Research Advisors, Inc..
*+RICHARD J. LAVERY, CLU ChFC (42), 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 (37), Vice President. P.O. Box 1515, Saddle Brook, N.J.
07663.
*+CHRISTIE CARR (29), Assistant Treasurer. P.O. Box 1515, Saddle Brook, N.J.
07663. Prior to October 1992, Senior Accountant, KPMG Peat Marwick.
*+SIOBHAN GILFILLAN (33), Assistant Treasurer. P.O. Box 1515, Saddle Brook, N.J.
07663.
*+THOMAS LUEHS (35), Assistant Treasurer. P.O. Box 1515, Saddle Brook, N.J.
07663. Prior to November, 1993, Supervisor Investment Accounting, Alliance
Capital Management, Inc.
*+SHERI MOSCA (33), Assistant Treasurer. P.O. Box 1515, Saddle Brook, N.J.
07663.
*+PETER CORNIOTES (34), Assistant Secretary. P.O. Box 1515, Saddle Brook, N.J.
07663. Assistant Vice President and Assistant Secretary, Lexington
Management Corporation. Assistant Secretary, Lexington Funds Distributor,
Inc.
*+ENRIQUE J. FAUST (36), Assistant Secretary. P.O. Box 1515, Saddle Brook, N.J.
07663. Prior to March 1994, Blue Sky Compliance Coordinator, Lexington Group
of Investment Companies.
- ---------------
*"Interested person" and/or "affiliated person" of LMC as defined in the
Investment Company Act of 1940, as amended.
+Messrs. Chadha Corniotes, DeMichele, Duer, Faust, Hisey, Jamison, Kantor,
Lavery, Luehs, Maher, McCosh, Miller, Preston, and Mmes. Carnicelli, Carr,
Curcio, Evans, Gilfillan, Mosca and Russell hold similar offices with some
or all of the other registered investment companies advised and/or
distributed by Lexington Management Corporation and Lexington Funds
Distributor, Inc.
The Board of Directors met 5 times during the twelve months ended December
31, 1996, 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. 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.
Effective September 12, 1995 each Director receives annual compensation of
$24,000. Prior to September 12, 1995, the Directors who were not employed by the
Fund or its affiliates received annual compensation of $16,000.
<PAGE>
Set forth below is information regarding compensation paid or accrued during
the period January 1, 1996 to December 31, 1996 for each Director:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
AGGREGATE TOTAL COMPENSATION FROM NUMBER OF
NAME OF DIRECTOR COMPENSATION FROM FUND FUND AND FUND COMPLEX DIRECTORSHIPS IN FUND COMPLEX
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
S.M.S. Chadha $856 $13,696 16
- ----------------------------------------------------------------------------------------------------
Robert M. DeMichele 0 0 17
- ----------------------------------------------------------------------------------------------------
Beverley C. Duer $1,712 $29,110 17
- ----------------------------------------------------------------------------------------------------
Barbara R. Evans 0 0 16
- ----------------------------------------------------------------------------------------------------
Lawrence Kantor 0 0 16
- ----------------------------------------------------------------------------------------------------
Jerard F. Maher $856 $16,046 17
- ----------------------------------------------------------------------------------------------------
Andrew M. McCosh $856 $13,696 16
- ----------------------------------------------------------------------------------------------------
Donald B. Miller $1,712 $26,760 16
- ----------------------------------------------------------------------------------------------------
Francis Olmsted* $1,068 $16,800 N/A
- ----------------------------------------------------------------------------------------------------
John G. Preston $1,712 $26,760 16
- ----------------------------------------------------------------------------------------------------
Margaret Russell $1,712 $25,048 16
- ----------------------------------------------------------------------------------------------------
Philip C. Smith $1,600 $25,080 16
- ----------------------------------------------------------------------------------------------------
Francis A. Sunderland* $744 $10,528 N/A
- ----------------------------------------------------------------------------------------------------
</TABLE>
*Retired
11
<PAGE>
RETIREMENT PLAN FOR ELIGIBLE DIRECTORS/TRUSTEES
Effective September 12, 1995, the Directors instituted a Retirement Plan for
Eligible Directors/Trustees (the "Plan") pursuant to which each Director/Trustee
(who is not an employee of any of the Funds, the Advisor, Administrator or
Distributor or any of their affiliates) may be entitled to certain benefits upon
retirement from the Board. Pursuant to the Plan, the normal retirement date is
the date on which the eligible Director/Trustee has attained age 65 and has
completed at least ten years of continuous and non-forfeited service with one or
more of the investment companies advised by LMC (or its affiliates)
(collectively, the "Covered Funds"). Each eligible Director/Trustee is entitled
to receive from the Covered Fund an annual benefit commencing on the first day
of the calendar quarter coincident with or next following his date of retirement
equal to 5% of his compensation multiplied by the number of such
Director/Trustee's years of service (not in excess of 15 years) completed with
respect to any of the Covered Portfolios. Such benefit is payable to each
eligible Director in quarterly installments for ten years following the date of
retirement or the life of the Director/Trustee. The Plan establishes age 72 as a
mandatory retirement age for Directors/Trustees; however, Director/Trustees
serving the Funds as of September 12, 1995 are not subject to such mandatory
retirement. Directors/Trustees serving the Funds as of September 12, 1995 who
elect retirement under the Plan prior to September 12, 1996 will receive an
annual retirement benefit at any increased compensation level if compensation is
increased prior to September 12, 1997 and receive spousal benefits (i.e., in the
event the Director/Trustee dies prior to receiving full benefits under the Plan,
the Director/Trustee's spouse (if any) will be entitled to receive the
retirement benefit within the 10 year period.)
Retiring Directors will be eligible to serve as Honorary Directors for one
year after retirement and will be entitled to be reimbursed for travel expenses
to attend a maximum of two meetings.
Set forth in the table below are the estimated annual benefits payable to an
eligible Director upon retirement assuming various compensation and years of
service classifications. As of December 31, 1996, the estimated credited years
of service for Director Chadha, Duer, Maher, McCosh, Miller, Preston, and
Russell are 1, 18, 1, 1, 22, 18, and 15, respectively.
<TABLE>
<CAPTION>
HIGHEST ANNUAL COMPENSATION PAID BY ALL FUNDS
-------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$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
</TABLE>
12
<PAGE>
APPENDIX
MUNICIPAL SECURITIES AND OTHER INVESTMENTS: Municipal bonds include debt
obligations issued to obtain funds for various public purposes, including the
construction of a wide range of public facilities such as airports, bridges,
highways, housing, hospitals, mass transportation, schools, streets, water and
sewer works, and gas and electric utilities. Municipal bonds may also be issued
in connection with the refunding of outstanding obligations, and obtaining funds
to lend to other public institutions and facilities or for general operating
expenses. In addition, certain types of industrial development bonds are issued
by or on behalf of public authorities to obtain funds to provide various
privately operated facilities for business and manufacturing, housing, sports,
conventions or trade shows, pollution control, and airport, mass transit, port
and parking facilities. Such obligations are included within the term municipal
securities if the interest paid thereon is exempt from federal income tax .
The two principal classifications of municipal bonds are "general
obligation" and "revenue" bonds. General obligation bonds are secured by the
issuer's pledge of its full faith, credit and taxing power for the payment of
principal and interest. In some instances, the taxes that can be levied for the
payment of debt service may be limited as to rate, amount or special
assessments. Revenue bonds are payable only from the revenue derived from a
particular facility or class of facilities, or, in some cases, from the proceeds
of a special excise tax or other specific revenue source. Although industrial
development bonds are issued by municipal authorities, they are generally not
secured by the taxing power of the municipality but are secured by the revenues
derived from payments from specific projects by the industrial user.
There are, in addition to the two principal classifications described above,
a variety of hybrid and special types of municipal obligations as well as
numerous differences in the security of municipal bonds.
Municipal notes include tax, revenue and bond anticipation notes of short
maturity, generally less than three years, which are issued to obtain funds for
various public purposes.
Project notes are issued by local public agencies created under the laws of
a state, territory or U. S. possession and have maturities of up to one year.
They generally relate to financing of housing, redevelopment or urban renewal
programs and are backed by agreements between the issuing agencies and the U. S.
Department of Housing and Urban Development . Thus, while the local agency
issuing project notes is the primary obligor, such notes are secured by the full
faith and credit of the U. S. Government. Ratings of Municipal Bonds: The four
highest ratings of Moody's for municipal bonds are Aaa, Aa, A and Baa. Municipal
bonds rated Aaa are judged to be of the "best quality". The rating of Aa is
assigned to municipal bonds which are of "high quality by all standards",
together with the Aaa group they comprise what are generally known as "high
grade bonds". They are rated lower than Aaa bonds because margins of protection
may not be as large or fluctuation of protective elements may be of greater
amplitude or there may be other elements present which make the long-term risks
appear somewhat larger than Aaa securities. Municipal bonds rated A possess many
favorable investment attributes and are considered "upper medium grade
obligations". Factors giving security to principal and interest are considered
adequate, but elements may be present which suggest a susceptibility to
impairment sometime in the future. Municipal bonds rated Baa are considered
"medium grade" obligations. They are neither highly protected nor poorly
secured. Interest payments and principal security appear adequate for the
present but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time.
The four highest ratings of Standard & Poor's for municipal bonds are AAA
(Prime), AA (High Grade), A (Good Grade) and BBB (Medium Grade). Municipal bonds
rated AAA are "obligations of the highest quality". The rating of AA is accorded
issues with investment characteristics "only slightly less marked than those of
the prime quality issues". The category of A describes "the third strongest
capacity for payment of debt service". Principal and interest payments on bonds
in this category are regarded as safe. It differs from the two higher ratings
because, with respect to general obligation bonds, there is some weakness,
either in the local economic base, in debt burden, in the balance between
revenues and expenditures, or in quality of management. Under certain adverse
circumstances, any one such weakness might impair the ability of the issuer to
meet debt obligations at some future date. With respect to revenue bonds, debt
service coverage is good, but not exceptional. Stability of the pledged revenues
could show some variations because of increased competition or economic
influences on revenues. Basic security provisions, while satisfactory, are less
stringent. Management performance appears adequate. The BBB rating is the lowest
"investment grade" security rating. The difference between A and BBB ratings is
that the latter shows more than one fundamental weakness, or one very
substantial fundamental weakness, whereas the former shows only one deficiency
among the factors considered. With respect to revenue bonds, debt coverage is
only fair. Stability of the pledged revenues could show substantial variations,
with the revenue flow possibly being subject to erosion over time. Basic
security provisions are no more than adequate and management performance could
be stronger.
MOODY'S RATING OF MUNICIPAL NOTES:
MIG 1: the best quality, enjoying strong protection from established cash
flows of funds for their servicing or from established and broad-based access to
the market for refinancing, or both.
13
<PAGE>
MIG 2: high quality, with margins of protection ample although not so large
as in the preceding group.
MIG 3: favorable quality, with all security elements accounted for but
lacking the undeniable strength of the preceding grades. Market access for
refinancing, in particular, is likely to be less well established.
MUNICIPAL COMMERCIAL PAPER RATINGS: Commercial paper rated A-l by Standard &
Poor's has the following characteristics: Liquidity ratios are adequate to meet
cash requirements. Long term senior debt is rated "A" or better, although in
some cases "BBB" credits may be allowed. The issuer has access to at least two
channels of borrowing. Basic earnings and cash flow have an upward trend with an
allowance made for unusual circumstances. Typically, the issuer's industry is
well established and the issuer has a strong position within the industry. The
reliability and quality of management are questioned. Relative strength or
weakness of the above factors determines whether the issuer's commercial paper
is rated A-l, A-2 or A-3.
The rating Prime-l is the highest commercial paper rating assigned by
Moody's. Among the factors considered by Moody's in assigning ratings are the
following: (l) evaluation of the management of the issuer; (2) economic
evaluation of the issuer's industry or industries and an appraisal of
speculative-type risks which may be inherent in certain areas; (3) evaluation of
the issuer's products in relation to the competition and customer acceptance;
(4) liquidity; (5) amount and quality of long term debt; (6) trend of earnings
over a period of ten years; (7) financial strength of a parent company and the
relationships which exist with the issuer; and (8) recognition by the management
of obligations which may be present or which may arise as a result of public
interest questions and preparations to meet such obligations.
14
<PAGE>
LEXINGTON TAX FREE MONEY FUND, INC.
STATEMENT OF NET ASSETS
(INCLUDING THE PORTFOLIO OF INVESTMENTS)
December 31, 1996
<TABLE>
<CAPTION>
Principal Maturity Coupon Yield to Value
Amount Security Rating Date Rate Maturity (Note 1)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ALABAMA: 5.4%
$ 640,000 Alaska Industrial Development & Export
Authority (Lot 11)* ................... A-1 7/1/07 4.20% 4.20% $ 640,000
800,000 Columbia IndustrialDevelopment Board
(Alabama Power)* ...................... VMig 1/A-1 10/1/22 4.65 4.65 800,000
---------
1,440,000
---------
CALIFORNIA: 13.6%
1,200,000 California Pollution ControlFinance Authority
(Southdown Project)* .................. A-1+ 2/15/98 3.50 3.50 1,200,000
900,000 California Pollution Control Finance Authority
(Southern California Project)* Mig .... 1/A-1+ 2/28/08 4.70 4.70 900,000
500,000 SouthCoast Local Education Agencies
Series 1996 A ......................... SP-1+ 6/30/97 4.75 4.07 501,609
1,000,000 State Of California Revenue Anticipation
Notes Mig ............................ 1/SP1+ 6/30/97 4.50 3.97 1,002,513
---------
3,604,122
---------
FLORIDA: 5.3%
1,400,000 Indian River County Hospital District*.. VMig1/A-1 10/1/15 4.15 4.15 1,400,000
---------
GEORGIA: 9.7%
1,000,000 Fulton County I.D.A. (ADP Project)* .... P-1/Aa2 9/1/12 3.70 3.70 1,000,000
800,000 Georgia Technical Foundation Facilities Inc.* A-1+ 2/1/12 3.55 3.55 800,000
780,000 Municipal Electric Authority Of Georgia
Series B** ............................ VMig 1/A-1+ 4/1/97 3.55 3.55 780,000
---------
2,580,000
---------
HAWAII: 8.1%
1,250,000 City &County Of Honolulu** ............. A-1+/P-1 2/7/97 3.55 3.55 1,250,000
900,000 Hawaii State Department Budget & Finance
(Kuakini Medical Center)* .............. Vmig 1 7/1/05 4.10 4.10 900,000
---------
2,150,000
---------
ILLINOIS: 0.6%
100,000 City Of Chicago Pre-Refunded G.O. Bonds AAA/Aaa 1/1/11 8.00 3.83 102,010
50,000 State Of Illinois Pre-Refunded
Revenue Bonds ......................... AAA 6/1/03 7.50 3.95 51,684
---------
153,694
---------
INDIANA: 1.5%
400,000 Gary Industrial Environmental Improvement
Authority (U.S. Steel)* ............... P-1/A-1+ 7/15/02 3.70 3.70 400,000
---------
KANSAS: 3.0%
800,000 Burlington Pollution Control (Kansas City
Power and Light) Series B** ........... P-1 3/3/97 3.50 3.50 800,000
---------
KENTUCKY: 3.8%
1,000,000 PendletonCounty Leasing Program** ....... A-1+ 1/2/97 3.55 3.55 1,000,000
---------
LOUISIANA: 5.5%
700,000 Caddo ParishI.D.B. (Pennzoil Project)* . A1 12/1/12 4.40 4.40 700,000
500,000 New Orleans G.O.Bonds .................. AAA/Aaa 12/1/97 5.63 3.73 507,820
105,000 State Of Louisiana Series A G.O.Bonds .. AAA/Aaa 8/1/97 4.50 3.98 105,294
150,000 State Of Louisiana Pre-Refunded Revenue
Bonds ................................. AAA/Aaa 8/1/02 7.00 3.95 155,446
---------
1,468,560
---------
</TABLE>
15
<PAGE>
LEXINGTON TAX FREE MONEY FUND, INC.
STATEMENT OF NET ASSETS
(INCLUDING THE PORTFOLIO OF INVESTMENTS)
December 31, 1996 (continued)
<TABLE>
<CAPTION>
Principal Maturity Coupon Yield to Value
Amount Security Rating Date Rate Maturity (Note 1)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
MAINE: 0.8%
$ 200,000 Maine Health &Higher Education Facilities
Revenue Bonds ......................... AAA/Aaa 7/1/97 5.60% 3.97%$ 201,537
---------
NEW JERSEY: 1.7%
300,000 Fort Lee G.O. Bonds .................... Aa 2/1/97 4.85 3.63 300,297
145,000 Stafford Township G.O.Bonds ............ AAA 9/1/97 5.50 4.01 146,372
---------
446,669
---------
NEW YORK: 14.1%
555,000 Cattaraugus County G.O.Bonds ........... AAA 6/1/97 5.20 3.99 557,665
600,000 City Of New York Series B* ............. VMig1/A-1+ 8/15/18 4.50 4.50 600,000
200,000 City Of New York Subseries B-2* ........ VMig1/A-1+ 8/15/19 4.75 4.75 200,000
400,000 City Of New York Subseries B-2* ........ VMig1/A-1+ 10/1/20 4.50 4.50 400,000
400,000 New YorkCity Municipal Water Authority
Series A* ............................. VMig1/A-1+ 6/15/25 4.70 4.70 400,000
1,200,000 State Of New York (G.O. Bond Anticipation
Notes) Series S** ..................... A-1/P-1 2/3/97 3.45 3.45 1,200,000
250,000 Suffolk County New York G.O. Bonds ..... AAA/Aaa 7/15/97 3.70 3.69 250,000
125,000 Triborough Bridge &Tunnel Authority Series
A Revenue Bonds ....................... AAA/Aaa 1/1/97 5.80 3.96 125,000
---------
3,732,665
---------
OKLAHOMA: 1.0%
150,000 Grand River DamAuthority Pre-Refunded
Revenue Bonds ......................... AAA/Aaa 6/1/98 6.45 4.06 154,360
105,000 Grand River Dam Authority Pre-Refunded
Revenue Bonds ......................... AAA/Aaa 6/1/06 7.00 4.06 108,276
---------
262,636
---------
OHIO: 5.7%
1,000,000 Ohio State Air Quality Development
Authority** ........................... VMig1/A-1+ 2/6/97 3.55 3.55 1,000,000
500,000 Ohio State Air Quality Development
Authority** ........................... VMig1/A-1+ 2/7/97 3.50 3.50 500,000
---------
1,500,000
---------
PENNSYLVANIA: 2.3%
500,000 VENANGO I.D.A. (PENNZOIL PROJECT)
SERIES 1982A* ......................... A-1 12/1/12 4.40 4.40 500,000
100,000 Bethel ParkSchool District Pre-Refunded
Revenue Bonds ......................... AAA/Aaa 2/1/01 6.85 3.99 100,231
---------
600,231
---------
SOUTH CAROLINA: 2.6%
400,000 York County Pollution Control Authority
(Project NRU 84 N-1)* ................. Mig1/A-1+ 9/15/14 4.15 4.15 400,000
300,000 York County PollutionControlAuthority
(Project NRU 84 N-2)* ................. Mig1/A-1+ 9/15/14 4.15 4.15 300,000
---------
700,000
---------
</TABLE>
16
<PAGE>
LEXINGTON TAX FREE MONEY FUND, INC.
STATEMENT OF NET ASSETS
(INCLUDING THE PORTFOLIO OF INVESTMENTS)
December 31, 1996 (continued)
<TABLE>
<CAPTION>
Principal Maturity Coupon Yield to Value
Amount Security Rating Date Rate Maturity (Note 1)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
TEXAS: 11.2%
$ 330,000 Coppell I.D.C. Series 1984
(Minyard Properties)* ................. A-1 12/1/01 3.70% 3.70% $ 330,000
800,000 Garland I.D.A.* ........................ A-1 12/1/05 4.35 4.35 800,000
1,000,000 Harris County HealthFacilities Development
Corporation (Texas MedicalCenter)* ....VMig1/A-1+ 2/5/22 4.70 4.70 1,000,000
100,000 North Harris & Montgomery Community
College District Series B G.O. Bonds .. AAA/Aaa 8/15/97 4.25 3.57 100,390
745,000 Texas Higher Education Authority Inc.
Series B* ............................. VMig1 12/1/25 4.10 4.10 745,000
----------
2,975,390
----------
VERMONT: 1.5%
400,000 Vermont Student Assistance Corporation* VMig1 1/1/04 3.65 3.65 400,000
----------
WYOMING 3.7%
1,000,000 Gillette County (Pacificorp)** ......... A-1+/P-1 1/3/97 3.45 3.45 1,000,000
----------
TOTAL INVESTMENTS: 101.1%
(cost $26,815,504 ) (Note 1) ...................... 26,815,504
Liabilities in excess of other assets: (1.1%) ...... (299,964)
----------
TOTAL NET ASSETS: 100.0%
(equivalent to $1.00 per share on
26,515,540 shares outstanding) .................... $26,515,540
===========
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
* Seven-day Floating Rate Note backed by Letter of Credit.
**Municipal Commercial Paper. I.D.A.-- Industrial Development Authority
Aggregate cost for Federal income tax purposes is identical. I.D.B.--Industrial Development Bonds
I.D.C.-- Industrial Development Corporation
G.O.-- General Obligation
</TABLE>
---------------------------------------------
LEXINGTON TAX FREE MONEY FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1996
ASSETS
Investments, at value (cost $26,815,504) (Note 1) ......... $26,815,504
Cash (Note 4) ............................................. 123,465
Receivable for shares sold ................................ 6,560
Dividends and interest receivable ......................... 158,284
-----------
Total Assets .................................. 27,103,813
-----------
LIABILITIES
Due to Lexington Management Corporation (Note 2) .......... 11,493
Payable for investment securities purchased ............... 509,461
Payable for shares redeemed ............................... 21,530
Accrued expenses .......................................... 45,789
-----------
Total Liabilities ............................. 588,273
-----------
NET ASSETS (equivalent to $1.00 per share on
26,515,540 shares outstanding) (Note 3) ................. $26,515,540
===========
NET ASSETS consist of:
Capital stock--authorized 1,000,000,000 shares,
$.01 par value per share ............................... $265,155
Additional paid-in capital ................................ 26,250,385
-----------
$26,515,540
===========
The Notes to Financial Statements are an integral part of these statements.
17
<PAGE>
LEXINGTON TAX FREE MONEY FUND, INC.
STATEMENT OF OPERATIONS
Year ended December 31, 1996
<TABLE>
<CAPTION>
INVESTMENT INCOME
<S> <C> <C>
Interest income ..................................................... $979,752
EXPENSES
Investment advisory fee (Note 2) ................................ $136,524
Transfer agent and shareholder servicing expense (Note 2) ....... 31,599
Printing and mailing expenses ................................... 31,022
Professional fees ............................................... 22,823
Accounting expenses (Note 2) .................................... 19,848
Registration fees ............................................... 17,654
Directors' fees and expenses .................................... 15,577
Custodian expense ............................................... 4,826
Computer processing fees ........................................ 4,080
Other expenses .................................................. 12,575
-------
Total expenses ........................................... 296,528
Less: expenses recovered under contract with the
investment adviser (Note 2) ............................ 22,750 273,778
------- ----------
Net investment income .................................... 705,974
----------
INCREASE IN NET ASSETS RESULTING FROM OPERATIONS .................... $ 705,974
==========
LEXINGTON TAX FREE MONEY FUND, INC.
STATEMENTS OF CHANGES INNET ASSETS
Years ended December 31, 1996 and 1995
1996 1995
---------- ----------
Net investment income ............................................... $ 705,974 $ 970,838
Distributions to shareholders from net investment income ............ (705,974) (970,838)
Decrease in net assets from capital share transactions
(Note 3) .......................................................... (1,715,724) (9,422,578)
---------- ----------
Net decrease in net assets .......................................... (1,715,724) (9,422,578)
NET ASSETS
Beginning of period ............................................. 28,231,264 37,653,842
---------- ----------
End of period ................................................... $26,515,540 $28,231,264
========== ==========
</TABLE>
The Notes to Financial Statements are an integral part of these statements.
18
<PAGE>
LEXINGTON TAX FREE MONEY FUND, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1996 and 1995
1. SIGNIFICANT ACCOUNTING POLICIES
Lexington Tax Free Money Fund, Inc. (the "Fund") is an open end diversified
management investment company registered under the Investment Company Act of
1940, as amended. The Fund's investment objective is to seek current income
exempt from Federal income taxes while also maintaining stability of principal,
liquidity and preservation of capital. The following is a summary of significant
accounting policies followed by the Fund in the preparation of its financial
statements:
INVESTMENTS Security transactions are accounted for on a trade date basis.
Investments are carried at amortized cost, which approximates market value.
Under this valuation method, a portfolio instrument is carried at cost and any
discount or premium is amortized on a constant basis to the maturity of the
instrument. Interest income is accrued as earned.
FEDERAL INCOME TAXES It is the Fund's intention to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute all of its taxable and tax exempt income to its
shareholders. Therefore, no provision for Federal income taxes has been made.
DIVIDENDS Dividends are declared daily from the total of net investment
income and net realized gain (loss) on investments.
USE OF ESTIMATES The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of increases and
decreases in net assets from operations during the reporting period.
Actual results may differ from those estimates.
2. INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATE
The Fund pays an investment advisory fee to Lexington Management Corporation
("LMC") at an annual rate of 0.5% of the Fund's average daily net assets up to
$150 million and in decreasing stages to 0.3% of average daily net assets in
excess of $800 million. LMC is required to reimburse the Fund for any expenses,
including the investment adviser's fee but excluding interest and taxes, in
excess of 1% of the Fund's average daily net assets. Reimbursement for the year
ended December 31, 1996 amounted to $22,750 and is set forth in the statement of
operations.
The Fund also reimbursed LMC for certain expenses, including accounting and
shareholder servicing costs, of $35,754 which were incurred by the Fund, but
paid by LMC.
3. CAPITAL STOCK
Transactions (at $1.00 per share) in capital stock were as follows:
Year ended Year ended
December 31, December 31,
1996 1995
----------- ------------
Shares sold 19,634,926 17,149,761
Shares issued on reinvestment of dividends 634,447 850,185
---------- ----------
20,269,373 17,999,946
Shares redeemed (21,985,087) (27,422,524)
---------- ----------
Net decrease (1,715,724) (9,422,578)
========== ==========
4. CASH
In order to facilitate the clearing process for redemptions by check, the Fund
maintains a compensating balance with its transfer agent. At December 31, 1996,
this compensating balance amounted to $48,600 and is included in cash in the
statement of assets and liabilities.
5. TAX DISTRIBUTION INFORMATION (unaudited)
99.46% of the dividends paid by the Fund for the year ended December 31, 1996
are tax-exempt for regular Federal income tax purposes.
19
<PAGE>
LEXINGTON TAX FREE MONEY FUND, INC.
FINANCIAL HIGHLIGHTS
Selected per share data for a share outstanding throughout the period:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $1.00 $1.00 $1.00 $1.00 $1.00
Income from investment operations:
Net investment income 0.026 0.029 0.020 0.018 0.024
Less distributions:
Distributions from net investment income (0.026) (0.029) (0.020) (0.018) (0.024
)
----- ----- ----- ----- -----
Net asset value, end of period $1.00 $1.00 $1.00 $1.00 $1.00
===== ===== ===== ===== =====
Total Return 2.61% 2.92% 2.00% 1.78% 2.47%
Ratio to average net assets:
Expenses, before reimbursement 1.09% 1.12% 1.09% 0.92% 0.99%
Expenses, net of reimbursement 1.00% 1.00% 1.00% 0.92% 0.99%
Net investment income, before
reimbursement 2.50% 2.76% 1.88% 1.77% 2.46%
Net investment income 2.59% 2.88% 1.97% 1.77% 2.46%
Net assets, end of period (000's omitted) $26,516 $28,231 $37,654 $41,096 $45,844
</TABLE>
------------------
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Lexington Tax Free Money Fund, Inc.:
We have audited the accompanying statements of net assets (including the
portfolio of investments) and assets and liabilities of Lexington Tax Free Money
Fund, Inc. as of December 31, 1996, 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 five-year period then ended. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1996 by correspondence with the custodian. As to securities
purchased but not received, we performed other appropriate auditing procedures.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
Lexington Tax Free Money Fund, Inc. as of December 31, 1996, the results of its
operations for the year then ended, the changes in its net assets for each of
the years in the two-year period then ended, and the financial highlights for
each of the years in the five-year period then ended, in conformity with
generally accepted accounting principles.
KPMG Peat Marwick LLP
New York, New York
February 14, 1997
20
