Dear Fellow Shareholders:
- --------------------------------------------------------------------------------
Lexington GNMA shareholders had a great year. For 1995, the Fund's total
return amounted to 15.9%*. This included dividends of 58.4 cents a share.
Despite the significant decline in long-term interest rates during 1995, the
Fund closed the year with a standardized yield in excess of 7%.
Prospects for 1996 are excellent. However, it will be difficult to match
last year's return. Currently, long term U.S. Treasury bonds yield just 6%
compared with 7.9% at the end of 1994. Another 200 basis point drop in interest
rates (and rise in bond prices) is extremely unlikely. But bear markets rarely
begin while the Federal Reserve is lowering short-term interest rates and such
action by the Fed, at least through mid-year, seems likely.
The Federal Reserve will likely cut short-term interest rates another 50
basis points by June. They nicked 25 basis points off the Federal Funds rate in
July and another 25 basis points in December, bringing this key interest rate
down to 5.5%. And it's still too high based on the historic spread between the
Federal Funds rate and the rate of inflation. A more appropriate rate would be
5% or lower. We believe the Fed will gradually move in that direction.
Be prepared for a choppy bond market. While money market interest rates may
fall in the months ahead, bond and mortgage yields are likely to be stable. The
market already assumes a number of positive developments will occur: (1) a
continued decline in Federal government budget deficits, (2) moderate economic
growth with an inflation rate well below 3%; and (3) foreign central bank
support of the U.S. Dollar and their continued purchases of U.S. Treasury bonds.
(It was demand from foreign central banks which fueled much of the price gain in
1995.) We anticipate positive and negative surprises along these three fronts
and related market fluctuations in the months ahead.
Income will be king in 1996. Fortunately, Lexington's GNMA portfolio
stresses high coupon mortgages (the average coupon of our holdings at the close
of the year was 8.1%) and flexibility. On December 31st, U.S. Treasury bills
accounted for 14% of our investment. This slice of the portfolio will be shifted
back and forth into the long end of the U.S. Treasury bond market as conditions
warrant.
Our call protected multi-family mortgage portfolio served us well in 1995.
For the full year, total prepayments amounted to just 11% of the total portfolio
despite the sharp drop in interest rates. Government-guaranteed mortgages on
apartment buildings, nursing homes, hospitals and other commercial properties
account for 90% of Lexington's mortgage portfolio and 78% of the Fund's total
assets. Prepayments on these mortgages are less sensitive to interest rate
changes than those from single family mortgages. Accordingly, the Fund isn't
deluged with prepayment cash flow at interest rate lows as is the case for many
mortgage-oriented mutual funds.
1
<PAGE>
We appreciate your continued support and welcome any questions which you may
have about your investment.
Sincerely,
Denis P. Jamison Robert M. DeMichele
Portfolio Manager President
Jaunary, 1996 January, 1996
_____________________________________________________________________________
GRAPH
Paper version of this shareholder report contains a graph comparing the
changes in value of a $10,000 investment in
Lexington GNMA Income Fund, Inc., and
the unmanaged Lehman Brothers Mortgage-Backed Securities Index
_____________________________________________________________________________
*15.91%, 8.35% and 8.66% are the one, five and ten year average annual standard
total returns, respectively, for the period ended December 31, 1995. 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.
2
<PAGE>
Lexington GNMA Income Fund, Inc.
Statement of Net Assets
(Including the Portfolio of Investments)
December 31, 1995
<TABLE>
<CAPTION>
Stated Principal Value
Coupon Maturity Amount (Note 1)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) CERTIFICATES: 87.2%
13.25% ................................................ 8/2001 $ 37,278 $ 40,820
10.25 ................................................. 8/2029 1,018,804 1,106,035
10.05 ................................................. 6/2016 848,698 917,655
10.00 ................................................. 12/2015-10/2023 2,651,993 2,864,975
9.75 ................................................. 1/2026-10/2030 8,795,257 9,399,932
9.50 ................................................. 3/2023 2,018,509 2,133,928
9.25 ................................................. 12/2021-8/2029 4,655,003 4,906,653
9.00 ................................................. 5/2016-07/2033 11,421,614 12,027,181
8.75 ................................................. 3/2005-2/2036 7,945,775 8,253,537
8.75* 2/2036 157,391 157,391
8.625 ................................................ 6/2029 5,014,756 5,257,621
8.50 ................................................. 8/2008-8/2036 8,189,159 8,566,169
8.50* ................................................ 8/2036 1,778,414 1,789,422
8.25 ................................................. 3/2001-7/2027 7,996,147 8,348,458
8.20 ................................................. 4/2012-5/2017 8,234,408 8,592,029
8.15 ................................................. 12/2011-9/2015 9,790,839 10,209,984
8.125 ................................................ 4/2027 2,051,539 2,080,342
8.125* ............................................... 4/2027 806,762 818,089
8.10 ................................................. 6/2012-7/2012 1,958,960 2,040,981
8.00 ................................................. 10/2012-1/2036 12,885,060 13,410,172
7.75 ................................................. 7/2022 951,174 984,160
7.70 ................................................. 8/2013 840,944 869,056
7.65 ................................................. 12/2012 131,009 135,225
7.625 ................................................ 12/2029 878,590 906,318
7.55 ................................................. 02/2001 169,352 174,432
7.50 ................................................. 6/2007-12/2025 3,542,554 3,644,401
7.328 12/2006 324,781 328,940
6.95 ................................................. 11/2019 1,770,794 1,789,051
6.75 ................................................. 6/2013-8/2017 184,266 184,726
6.70 12/2014 391,235 391,477
6.65 ................................................. 10/2014 1,414,231 1,412,463
6.55 ................................................. 11/2013 229,896 228,673
------------
TOTAL GNMA CERTIFICATES (cost $108,588,129) .............................................. 113,970,296
------------
U.S. GOVERNMENT OBLIGATIONS: 14.6%
U.S. Treasury Bills, 4.92%, due 03/14/96 ...................................... 6,400,000 6,336,149
U.S. Treasury Bills, 5.00%, due 03/21/96 ...................................... 1,000,000 988,889
U.S. Treasury Bills, 5.20%, due 01/14/96 ...................................... 900,000 899,610
U.S. Treasury Bills, 5.25%, due 01/18/96 ...................................... 400,000 399,008
U.S. Treasury Bills, 5.26%, due 03/07/96 ...................................... 5,200,000 5,149,855
U.S. Treasury Bills, 5.295%, due 05/09/96 ..................................... 500,000 490,513
U.S. Treasury Bills, 5.31%, due 03/07/96 ...................................... 4,900,000 4,852,298
------------
TOTAL U.S. GOVERNMENT OBLIGATIONS (cost $19,116,322) ..................................... 19,116,322
------------
TOTAL INVESTMENTS: 101.8% (cost $127,704,451+) (Note 1) .................................. 133,086,618
Liabilities in excess of other assets: (1.8%) ............................................ (2,405,187)
------------
TOTAL NET ASSETS: 100% (equivalent to $8.19 per share on 15,946,912 shares outstanding) .. $130,681,431
============
<FN>
*When-issued securities (Note 1).
+Aggregate cost for Federal income tax purposes is identical.
</FN>
</TABLE>
The Notes to Financial Statements are an integral part of this statement.
3
<PAGE>
(left column)
Lexington GNMA Income Fund, Inc.
Statement of Assets and Liabilities
December 31, 1995
Assets
Investments in securities, at value
(cost $127,704,451) (Note 1) .................................. $133,086,618
Cash ............................................................ 357,622
Receivable for shares sold ...................................... 56,380
Interest receivable ............................................. 752,093
------------
Total Assets .............................................. 134,252,713
------------
Liabilities
Due to Lexington Management Corporation (Note 2) ................ 61,861
Payable for investment securities purchased ..................... 3,066,236
Payable for shares redeemed ..................................... 140,549
Accrued expenses ................................................ 105,832
Distributions payable ........................................... 196,804
------------
Total Liabilities ......................................... 3,571,282
------------
Net Assets (equivalent to $8.19 per share on
15,946,912 shares outstanding) (Note 3) ....................... $130,681,431
============
Net Assets consist of:
Capital stock-authorized 100,000,000 shares,
$.01 par value per share ...................................... $ 159,469
Additional paid-in capital (Note 1) ............................. 132,350,631
Distributions in excess of net investment income
(Note 1) ...................................................... (3,067)
Accumulated net realized loss on investments
(Notes 1 and 5) ............................................... (7,207,769)
Net unrealized appreciation of investments ...................... 5,382,167
------------
$130,681,431
============
(right column)
Lexington GNMA Income Fund, Inc.
Statement of Operations
Year ended December 31, 1995
Investment Income
Interest income ..................................... $10,293,800
Expenses
Investment advisory fee (Note 2) .................. $ 761,888
Accounting and shareholder services
expense (Note 2) ................................ 198,410
Custodian and transfer agent
expenses ........................................ 117,457
Printing and mailing .............................. 63,744
Directors' fees and expenses ...................... 12,089
Audit and legal ................................... 29,160
Registration fees ................................. 21,442
Computer processing fees .......................... 20,420
Other expenses .................................... 57,759
-----------
Total expenses 1,282,369
-----------
Net investment income ....................... 9,011,431
Realized and Unrealized Gain (Loss) on Investments (Note 4)
Net realized loss on investments .................. (1,220,453)
Net change in unrealized
appreciation .................................... 11,066,357
-----------
Net realized and unrealized gain
on investments ............................ 9,845,904
-----------
Increase in Net Assets Resulting
from Operations ................................... $18,857,335
===========
The Notes to Financial Statements are an integral part of these statements.
4
<PAGE>
(left column)
Lexington GNMA Income Fund, Inc.
Statements of Changes in Net Assets
Years ended December 31, 1995 and 1994
1995 1994
------------ ------------
Net investment income .......................... $ 9,011,431 $ 10,248,302
Net realized loss from security
transactions ................................. (1,220,453) (2,551,181)
Increase (decrease) in unrealized
appreciation (depreciation) of
investments .................................. 11,066,357 (11,308,000)
------------ ------------
Net increase (decrease) in net assets
resulting from operations .................... 18,857,335 (3,610,879)
Distributions to shareholders from net
investment income ............................ (9,280,142) (10,190,529)
Decrease in net assets from capital
share transactions (Note 3) .................. (11,003,421) (4,051,452)
------------ ------------
Net decrease in net assets ..................... (1,426,228) (17,852,860)
Net Assets:
Beginning of period .......................... 132,107,659 149,960,519
------------ ------------
End of period (including
distributions in excess of net
investment income of $3,067
and undistributed net investment
income of $3,665, respectively) ............ $130,681,431 $132,107,659
============ ============
The Notes to Financial Statements are an integral part of these statements.
(right column)
Lexington GNMA Income Fund, Inc.
Notes to Financial Statements
December 31, 1995 and 1994
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 the significant accounting
policies followed by the Fund in the preparation of its financial statements:
Securities Security transactions are accounted for on a trade date basis.
Realized gains and losses from security transactions are reported on the
identified cost basis. Investments 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 are stated at amortized
cost, which approximates market value. Dividends and distributions to
shareholders are recorded on the ex-dividend date. Interest income is accrued as
earned.
Distributions In accordance with Statement of Position 93-2: Determination,
Disclosure and Financial Statement Presentation of Income, Capital Gain and
Return of Capital Distributions by Investment Companies, as of December 31,
1995, GNMA paydown gains of $261,979 were reclassified from accumulated net
realized loss on investments to distributions in excess of net investment
income. As of December 31, 1994, book and tax basis differences amounting to
$96,382 were reclassified from undistributed net investment income to additional
paid-in capital. In addition, GNMA paydown gains of $117,809 were reclassified
from accumulated net realized loss on investments to undistributed net
investment income.
When-Issued 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 intention 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 has been made.
5
<PAGE>
Lexington GNMA Income Fund, Inc.
Notes to Financial Statements
December 31, 1995 and 1994 (continued)
(left column)
2. Investment Advisory Fee and Other Transactions with Affiliate
The Fund pays an investment advisory fee to Lexington Management Corporation
("LMC") at the rate of 0.6% of its average daily net assets up to $150 million
and in decreasing stages to 0.4% 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 1-1/2% of the first $30
million of the Fund's average daily net assets and 1% thereafter. No
reimbursement was required for the year ended December 31, 1995.
The Fund also reimburses LMC for certain expenses, including accounting and
shareholder servicing costs, which are incurred by the Fund, but paid by LMC.
3. Capital Stock
Transactions in capital stock were as follows:
Year ended Year ended
December 31, 1995 December 31, 1994
----------------- -----------------
Shares Amount Shares Amount
------ ------ ------ ------
Shares sold ....... 2,456,267 $19,640,687 4,931,556 $40,062,384
Shares issued on
investment
of dividends .... 859,479 6,916,746 1,017,841 7,977,604
--------- ----------- --------- -----------
3,315,746 26,557,433 5,949,397 48,039,988
Shares redeemed ... (4,745,973) (37,560,854) (6,591,822) (52,091,440)
--------- ----------- --------- -----------
Net decrease .... (1,430,227) $(11,003,421) (642,425) (4,051,452)
========= =========== ========= ===========
(right column)
4. Purchases and Sales of Investment Securities
The cost of purchases and proceeds from sales of securities for the year ended
December 31, 1995, excluding short- term securities, were $37,684,722 and
$64,014,842, respectively.
At December 31, 1995, aggregate gross unrealized appreciation for all securities
in which there is an excess of value over tax cost amounted to $5,414,239, and
aggregate gross unrealized depreciation for all securities in which there is an
excess of tax cost over value amounted to $32,072. 5. Federal Income
Taxes-Capital Loss Carryforwards
Capital loss carryforwards available for Federal income tax purposes as of
December 31, 1995 are approximately:
$3,533,220 expiring in 1996;
$2,130,253 expiring in 2002; and,
$1,544,296 expiring in 2003.
To the extent any future capital gains are offset by these losses, such gains
would not be distributed to shareholders.
Treasury regulations were issued in early 1990 which provide that capital losses
incurred after October 31 of a fund's taxable year should be deemed to have
occurred on the first day of the following taxable year (i.e., January 1). The
regulations indicate that a fund may elect to retroactively apply these rules
for purposes of computing taxable income. Accordingly, the capital loss
carryforwards for Lexington GNMA Income Fund, Inc. have been adjusted to reflect
prior years' post-October losses in the next fiscal year.
- --------------------------------------------------------------------------------
Financial Highlights
Selected per share data for a share outstanding throughout the period:
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------------------------
1995 1994 1993 1992 1991
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period ................................ $7.60 $8.32 $8.26 $8.45 $7.90
----- ----- ----- ----- -----
Income from investment operations:
Net investment income ............................................. .58 .55 .59 .61 .64
Net realized and unrealized gain (loss) on investments ............ .59 (.72) .06 (.19) .55
----- ----- ----- ----- -----
Total income (loss) from investment operations ...................... 1.17 (.17) .65 .42 1.19
----- ----- ----- ----- -----
Less distributions:
Dividends from net investment income .............................. (.58) (.55) (.59) (.61) (.64)
----- ----- ----- ----- -----
Net asset value, end of period ...................................... $8.19 $7.60 $8.32 $8.26 $8.45
===== ===== ===== ===== =====
Total return ........................................................ 15.91% (2.07%) 8.06% 5.19% 15.75%
Ratio to average net assets:
Expenses .......................................................... 1.01% 0.98% 1.02% 1.01% 1.02%
Net investment income ............................................. 7.10% 6.90% 6.96% 7.31% 7.97%
Portfolio turnover .................................................. 30.69% 37.15% 52.34% 180.11% 138.71%
Net assets at end of period (000's omitted) ......................... $130,681 $132,108 $149,961 $132,048 $122,191
</TABLE>
6
<PAGE>
Independent Auditors' Report
The Board of Directors and Shareholders
Lexington GNMA Income Fund, Inc.:
We have audited the accompanying statements of net assets (including the
portfolio of investments) and assets and liabilities of Lexington GNMA Income
Fund, Inc. as of December 31, 1995, 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, 1995 by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
Lexington GNMA Income Fund, Inc. as of December 31, 1995, 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
January 29, 1996
7
<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)
ANNUAL REPORT
DECEMBER 31, 1995
The Lexington Group
of No Load
Investment Companies
- ---------------------------------------
