Dear Shareholders:
- -------------------------------------------------------------------------------
The Lexington GNMA Income Fund earned a positive return of 1.3%* in the
first half of 1996. Dividend income was 27.4 cents per share for the period.
Most mortgage oriented mutual funds reported negative total returns for the
first half of 1996.
Interest rates increased sharply in the first half of 1996. For example,
thirty-year U.S. Treasury bond yields rose from about 6% to 7.2%. Higher
interest rates produced lower bond prices and so the price of long-term U.S.
Treasury bonds fell about 12%. Mortgages tend to have shorter effective
maturities than long-term U.S. Treasury bonds and accordingly are less sensitive
to interest rate changes. Therefore, the prices of mortgage securities fell only
about 5%. The Lexington GNMA Income Fund outperformed the average GNMA mutual
fund according to Lipper Analytical Services, Inc. and the broad mortgage
securities indices because it stresses higher coupon and shorter maturity
securities than most. The Fund was ranked #1 for total return among 54 GNMA
funds tracked by Lipper for the one year period ended June 30, 1996. For the
five year period, the Fund was ranked #3 out of 29 GNMA funds.
The bond market is reacting to the sudden acceleration in economic growth
during the second quarter. Over 800,000 new jobs were created during the period
as Gross Domestic Product appears to have gained more than 4%. According to many
economists, this pace of expansion is too rapid and will lead to a higher rate
of inflation later this year. Investors are demanding higher yields to
compensate for this risk. Also, they fear that the Federal Reserve policy will
turn restrictive, pushing up money market interest rates in an attempt to slow
economic growth. This further diminishes the attractiveness of long-term fixed
income securities.
Bond market yields currently are high relative to projected inflation
levels. Near term performance, however, is more likely to be guided by the rate
of economic growth (and its inflation implications) rather than current real
rates of return. While most economists are predicting a slowdown in business
expansion during the second half of this year, we see no evidence of such
moderation. Bond prices may continue to languish in the months ahead.
The Fund's portfolio continues to stress income and capital preservation
over appreciation potential. At the close of the June quarter, the portfolio's
weighted average coupon was 8.3%. This enables the Fund to generate high current
income which can cushion the impact of declining bond prices on total
shareholder value. Also, we stress call-protected multi-family mortgages in our
investment portfolio. This has limited prepayments and re-investment risk in
periods of low interest rates.
We appreciate your continued support and welcome the opportunity to discuss
any questions you may have about your investment.
Sincerely,
Denis P. Jamison Robert M. DeMichele
Portfolio Manager President
July, 1996 July, 1996
*6.91%, 7.78% and 8.42% are the one, five and ten year average annual standard
total returns, respectively, for the period ended June 30, 1996. Investment
return and principal value of an investment will fluctuate so that an investor's
shares, when redeemed, may be worth more or less than at their original cost.
Total return represents past performance.
1
<PAGE>
Lexington GNMA Income Fund, Inc.
Statement of Net Assets
(Including the Portfolio of Investments)
June 30, 1996 (unaudited)
Stated Principal Value
Coupon Maturity Amount (Note 1)
- -------------------------------------------------------------------------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) CERTIFICATES: 95.2%
13.25% ...................... 8/2001 $ 35,083 $ 37,045
10.25 ....................... 8/2029 1,017,136 1,107,722
10.05 ....................... 6/2016 842,646 911,896
9.75 ....................... 1/2026-10/2030 8,777,659 9,394,072
9.50 ....................... 3/2023 2,010,843 2,137,144
9.25 ....................... 8/2021-8/2029 11,576,780 11,867,249
9.00 ....................... 1/2022-7/2033 8,666,756 9,035,912
8.75 ....................... 9/1998-2/2036 8,378,059 8,708,618
8.625 ...................... 6/2029 5,002,491 5,152,566
8.50 ....................... 3/2012-8/2036 3,717,106 3,762,882
8.50* ...................... 8/2036 609,610 607,318
8.25 ....................... 3/2001-7/2027 7,905,985 8,097,544
8.20 ....................... 4/2012-5/2017 11,496,016 11,783,417
8.15 ....................... 12/2011-9/2015 10,970,448 11,224,086
8.125 ...................... 4/2027 2,569,038 2,552,133
8.125* ..................... 4/2027 289,262 287,359
8.10 ....................... 6/2012-7/2012 1,931,281 1,972,321
8.00 ....................... 10/2012-1/2036 11,614,039 11,722,256
7.75 ....................... 7/2022 945,894 944,409
7.70 ....................... 8/2013 823,854 830,033
7.65 ....................... 12/2012-4/2031 3,976,134 3,946,731
7.625 ...................... 12/2029 875,969 869,400
7.50 ....................... 4/2013-12/2025 3,243,383 3,215,829
7.328 ...................... 12/2006 315,244 316,427
7.20 ....................... 6/2014 3,045,513 2,991,242
6.95 ....................... 11/2019 1,756,687 1,681,466
6.75 ....................... 6/2013-8/2017 407,355 392,203
6.70 ....................... 12/2014 386,211 371,122
6.65 ....................... 10/2014 1,519,009 1,454,924
------------
TOTAL GNMA CERTIFICATES (cost $114,424,280) ................... 117,375,326
------------
U.S. GOVERNMENT OBLIGATIONS: 5.4%
U.S. Treasury Bonds, 6.25%, due 08/15/23 ........... 5,000,000 4,532,350
U.S. Treasury Bills, 5.06%, due 10/03/96 ........... 2,200,000 2,169,750
------------
TOTAL U.S. GOVERNMENT OBLIGATIONS (cost $6,727,410) ........... 6,702,100
------------
TOTAL INVESTMENTS: 100.6% (cost $121,151,690\'86) (Note 1) .... 124,077,426
Liabilities in excess of other assets: (0.6%) ................. (808,608)
------------
TOTAL NET ASSETS: 100% (equivalent to $8.02 per share
on 15,375,278 shares outstanding) .......................... $123,268,818
============
*When-issued securities (Note 1).
(D)Aggregate cost for Federal income tax purposes is identical.
The Notes to Financial Statements are an integral part of this statement.
2
<PAGE>
(LEFT COLUMN)
Lexington GNMA Income Fund, Inc.
Statement of Assets and Liabilities
June 30, 1996 (unaudited)
Assets
Investments in securities, at value
(cost $121,151,690) (Note 1) .................... $124,077,426
Receivable for investment securities sold ......... 22,871,875
Receivable for shares sold ........................ 128,219
Dividends and interest receivable ................. 919,749
------------
Total Assets .................................. 147,997,269
------------
Liabilities
Due to custodian bank ............................. 43,139
Due to Lexington Management Corporation (Note 2) .. 60,157
Payable for investment securities purchased ....... 24,229,877
Payable for shares redeemed ....................... 124,548
Distributions payable ............................. 175,988
Accrued expenses .................................. 94,742
------------
Total Liabilities ............................. 24,728,451
------------
Net Assets (equivalent to $8.02 per share on
15,375,278 shares outstanding) (Note 3) ........ $123,268,818
============
Net Assets consist of:
Capital stock-authorized 100,000,000 shares,
$.01 par value per share ........................ $ 153,753
Additional paid-in capital ........................ 127,716,691
Undistributed net investment income ............... 22,679
Accumulated net realized loss on investments ...... (7,550,041)
Net unrealized appreciation of investments ........ 2,925,736
------------
$123,268,818
============
(RIGHT COLUMN)
Lexington GNMA Income Fund, Inc.
Statement of Operations
Six months ended June 30, 1996 (unaudited)
Investment Income
Interest income $ 4,891,289
Expenses
Investment advisory fee (Note 2) ... $ 373,136
Transfer agent and shareholder
servicing expense (Note 2) ....... 107,408
Accounting expenses (Note 2) ....... 46,544
Printing and mailing expenses ...... 32,641
Custodian fees ..................... 23,943
Professional fees .................. 15,997
Computer processing fees ........... 10,443
Registration fees .................. 10,345
Directors fees ..................... 5,804
Other expenses ..................... 33,689
----------
Total expenses ................................ 659,950
-----------
Net investment income ............................. 4,231,339
Realized and Unrealized Gain (Loss) on Investments (Note 4)
Net realized loss on investments ................ (342,272)
Net change in unrealized
appreciation .................................. (2,456,431)
-----------
Net realized and unrealized loss
on investments ............................ (2,798,703)
-----------
Increase in Net Assets Resulting
from Operations ................................. $ 1,432,636
===========
The Notes to Financial Statements are an integral part of these statements.
3
<PAGE>
(LEFT COLUMN)
Lexington GNMA Income Fund, Inc.
Statements of Changes in Net Assets
Six months
ended Year ended
June 30, 1996 December 31,
(unaudited) 1995
------------- ------------
Net investment income ...................... $ 4,231,339 $ 9,011,431
Net realized loss from security
transactions ............................. (342,272) (1,220,453)
Change in unrealized
appreciation (depreciation) of
investments .............................. (2,456,431) 11,066,357
------------ ------------
Net increase in net assets
resulting from operations ................ 1,432,636 18,857,335
Distributions to shareholders from net
investment income ........................ (4,205,593) (9,280,142)
Decrease in net assets from capital
share transactions (Note 3) .............. (4,639,656) (11,003,421)
------------ ------------
Decrease in net assets ..................... (7,412,613) (1,426,228)
Net Assets:
Beginning of period ...................... 130,681,431 132,107,659
------------ ------------
End of period (including
undistributed net investment
income of $22,679 and
distributions in excess of net
investment income of $3,067,
respectively) .......................... $123,268,818 $130,681,431
============ ============
The Notes to Financial Statements are an integral part of these statements.
(RIGHT COLUMN)
Lexington GNMA Income Fund, Inc.
Notes to Financial Statements
June 30, 1996 (unaudited) and December 31, 1995
1. Significant Accounting Policies
Lexington GNMA Income 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 a high level of
current income, consistent with liquidity and safety of principal, through
investment primarily in mortgage backed GNMA ("Ginnie Mae") certificates that
are guaranteed as to the timely payment of principal and interest by the United
States Government. The following is a summary of significant accounting policies
followed by the Fund in the preparation of its financial statements:
Investments Security transactions are accounted for on a trade date basis.
Realized gains and losses from investment transactions are reported on the
identified cost basis. Securities are valued at the last reported bid price as
of the last business day of the period or, if no current bid price is available,
by the valuation as determined by the Fund's management and approved in good
faith by the Board of Directors. Short-term securities having a maturity of 60
days or less are stated at amortized cost, which approximates market value.
Dividends and distributions to shareholders are recorded on the ex-dividend
date. Interest income, adjusted for amortization of premiums and accretion of
discounts, is accrued as earned.
When-lssued Securities The Fund, at times, may purchase GNMA certificates on a
delayed delivery, forward or when-issued basis with payment and delivery often
taking place a month or more after the initiation of the transaction. It is the
Fund's policy to record when-issued GNMA certificates (and the corresponding
obligation to pay for the securities) at the time the purchase commitment
becomes fixed-generally on the trade date. It is also the Fund's policy to
segregate assets to cover its commitments for when-issued securities on trade
date.
Federal Income Taxes It is the Fund's policy to comply with the requirements
of the Internal Revenue Code applicable to "regulated investment companies" and
to distribute all of its taxable income to its shareholders. Therefore, no
provision for Federal income taxes is required.
Distributions The character of income and gains to be distributed are
determined in accordance with income tax regulations which may differ from
generally accepted accounting principles. At December 31, 1995 reclassifications
were made to the Fund's capital accounts to reflect permanent book/tax
differences and income and gains available for distributions under income tax
regulations. Net investment income, net realized gains and net assets were not
affected by this change.
4
<PAGE>
(LEFT COLUMN)
Lexington GNMA Income Fund, Inc.
Notes to Financial Statements
June 30, 1996 (unaudited) and December 31, 1995 (continued)
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 0.60% of the Fund's average daily net assets up to
$150 million and in decreasing stages to 0.40% of average daily net assets in
excess of $800 million. LMC is required to reimburse the Fund for any expenses,
excluding interest, taxes and extraordinary expenses which exceed 1.50% of the
first $30 million of the Fund's average daily net assets and 1.00% thereafter.
No reimbursement was required for the six months ended June 30, 1996.
The Fund also reimbursed LMC for certain expenses, including accounting and
shareholder servicing costs of $99,562, which are incurred by the Fund, but paid
by LMC.
3. Capital Stock
Transactions in capital stock were as follows:
Six months ended
June 30, 1996 Year ended
(unaudited) December 31, 1995
------------------- -------------------
Shares Amount Shares Amount
------ ------ ------ ------
Shares sold ............... 1,795,714 $14,598,526 2,456,267 $19,640,687
Shares issued on
reinvestment
of dividends ............ 387,264 3,130,461 859,479 6,916,746
---------- ----------- ---------- ------------
2,182,978 7,728,987 3,315,746 26,557,433
---------- ----------- ---------- ------------
Shares redeemed ........... (2,754,612) (22,368,643) (4,745,973) (37,560,854)
---------- ----------- ---------- ------------
Net decrease ............ (571,634) $(4,639,656) (1,430,227) $(11,003,421)
========== =========== ========== ============
(RIGHT COLUMN)
4. Purchases and Sales of Investment Securities
The cost of purchases and proceeds from sales of securities for the six months
ended June 30, 1996, excluding short-term securities, were $70,538,841 and
$59,735,601, respectively. At June 30, 1996, the aggregate gross unrealized
appreciation for all securities in which there is an excess of value over tax
cost amounted to $3,155,381 and aggregate gross unrealized depreciation for all
securities in which there is an excess of tax cost over value amounted to
$229,645.
(FULL COLUMN)
- --------------------------------------------------------------------------------
Financial Highlights
Selected per share data for a share outstanding throughout the period:
<TABLE>
<CAPTION>
Six months
ended Year ended December 31,
June 30, 1996 -----------------------------------------
(unaudited) 1995 1994 1993 1992
------------- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period ................... $8.19 $7.60 $8.32 $8.26 $8.45
----- ----- ----- ----- -----
Income from investment operations:
Net investment income ................................ .28 .58 .55 .59 .61
Net realized and unrealized gain (loss) on investments (.18) .59 (.72) .06 (.19)
----- ----- ----- ----- -----
Total income (loss) from investment operations ......... .10 1.17 (.17) .65 .42
----- ----- ----- ----- -----
Less distributions:
Dividends from net investment income ................. (.27) (.58) (.55) (.59) (.61)
----- ----- ----- ----- -----
Net asset value, end of period ......................... $8.02 $8.19 $7.60 $8.32 $8.26
===== ===== ===== ===== =====
Total return ........................................... 2.61%* 15.91% (2.07%) 8.06% 5.19%
Ratio to average net assets:
Expenses ............................................. 1.06%* 1.01% 0.98% 1.02% 1.01%
Net investment income ................................ 6.80%* 7.10% 6.90% 6.96% 7.31%
Portfolio turnover ..................................... 97.30%* 30.69% 37.15% 52.34% 180.11%
Net assets at end of period (000's omitted) ............ $123,269 $130,681 $132,108 $149,961 $132,048
<FN>
*Annualized.
</FN>
</TABLE>
5
<PAGE>
(LEFT COLUMN)
LEXINGTON
INVESTOR SERVICES
- --------------------------------------------------------------------------------
As a Lexington shareholder, you should be aware of the many services available
to you.
No Load-The Lexington Funds are no load funds. That is, investments and
redemptions are made without any sales charges, commissions or redemption fees.
----------
Free Telephone Exchange-Investments in the Lexington Funds may be exchanged for
shares of a different Lexington Fund at any time.
----------
Check Writing Privileges-Lexington Money Market Trust and Lexington Tax Free
Money Fund permit investors immediate access to their funds with check writing
for withdrawals from their account.
----------
Tax Sheltered Plans-IRA, Keogh, Pension, and Profit Sharing Prototype Plans are
available to qualified individuals. These plans offer investment flexibility
through the Share Exchange Service, simplified record keeping, convenience and
investment supervision.
----------
Custodial Accounts for Minors-Investments may be made on behalf of minors under
the Uniform Gifts to Minors Act currently in effect in all states.
----------
Systematic Withdrawal Plan-An investor may elect to receive a fixed amount from
his or her account each month or quarter, subject to certain minimums.
----------
Complete Record Keeping-A statement is provided for every transaction in
addition to a year-end statement with tax information.
(RIGHT COLUMN)
The Lexington Group of
No Load Investment Companies
Lexington Worldwide Emerging Markets Fund, Inc.-Seeks long-term growth of
capital primarily through investment in equity securities of companies domiciled
in, or doing business in, emerging countries and emerging markets.
Lexington Troika Dialog Russia Fund, Inc.-Seeks long term capital appreciation
through investments primarily in equity securities of Russian companies.
Lexington Global Fund, Inc.-Seeks long-term growth of capital primarily through
investment in common stocks of companies domiciled in foreign countries and the
United States.
Lexington International Fund, Inc.-Seeks long-term growth of capital through
investment in companies domiciled in foreign countries.
Lexington Crosby Small Cap Asia Growth Fund, Inc.-Seeks long-term capital
appreciation through investment in companies domiciled in the Asia Region with a
market capitalization of less than $1 billion.
Lexington Ramirez Global Income Fund-Seeks high current income. Capital
appreciation is a secondary objective. The Fund invests in a combination of
foreign and domestic high-yield, lower rated debt securities.
Lexington Goldfund, Inc.-Seeks capital appreciation through investment in gold
bullion and shares of gold mining companies.
Lexington Growth and Income Fund, Inc.-Seeks capital appreciation over the
long-term through investments in the stocks of large, ably managed and well
financed companies.
Lexington Corporate Leaders Trust Fund-Seeks capital growth and reasonable
income through investment in an equal number of shares of an established list of
American blue chip corporations.
Lexington SmallCap Value Fund, Inc.-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 Convertible Securities Fund-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.-Seeks to achieve a high level of current
income, consistent with liquidity and safety of principal, through investment
primarily in mortgage-backed GNMA ("Ginnie Mae") certificates that are
guaranteed as to the timely payment of principal and interest by the United
States Government.
Lexington Money Market Trust-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.-Seeks current income exempt from Federal
income taxes while maintaining stability of principal, liquidity and
preservation of capital.
For more complete information about any of the Lexington Funds and a prospectus
which includes management fee and expenses call the distributor toll-free at
1-800-526-0056. Read the prospectus carefully before you invest or send money.
6
<PAGE>
(LEFT COLUMN)
Lexington
GNMA Income Fund, Inc.
Investment Adviser
- ---------------------------------------------------------
LEXINGTON MANAGEMENT CORPORATION
P.O. Box 1515
Park 80 West Plaza Two
Saddle Brook, New Jersey 07663
Distributor
- ---------------------------------------------------------
LEXINGTON FUNDS DISTRIBUTOR, INC.
P.O. Box 1515
Park 80 West Plaza Two
Saddle Brook, New Jersey 07663
------------------------------------------
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 and Sales: 1-800-526-0056
24 Hour Account Information:
1-800-526-0052
------------------------------------------
- ---------------------------------------------------------
(800) 526-0052
"LEXLINE"
24 hour toll-free telephone access to your
Lexington Fund account
Price/Yield * Account Balances * Exchanges *
Last Transactions * Total Return * Duplicate Statements
- ---------------------------------------------------------
This report has been prepared for the information of the
shareholders of Lexington GNMA Income Fund, Inc. and is
authorized for distribution to the public only if it is
accompanied or preceded by a currently effective
prospectus which sets forth expenses and other material
information.
(RIGHT COLUMN)
--------------------------------
LEXINGTON
--------------------------------
--------------------------------
LEXINGTON
GNMA
INCOME
FUND, INC.
(filled box)
An investment primarily in
mortgage-backed GNMA
Certificates that are guaranteed
as to the timely payment of
principal and interest by the
United States Government.
(filled box)
SEMI-ANNUAL REPORT
JUNE 30, 1996
The Lexington Group
of No Load
Investment Companies
--------------------------------
