THE LEXINGTON FUNDS
P.O. Box 1515
Park 80 West Plaza Two
Saddle Brook, New Jersey 07663
Shareholder Services--1-800-526-0056
1-201-845-7300
Institutional/Financial Adviser Services--1-800-367-9160
24 Hour Account Information--1-800-526-0052
PROSPECTUS
May 1, 1997
The following eleven mutual funds (each a "Fund," and collectively the
"Funds") are offered in this Prospectus:
FUND NAME NASDAQ SYMBOL
Lexington Convertible Securities Fund CNCVX
Lexington Crosby Small Cap Asia Growth Fund, Inc. LXCAX
Lexington GNMA Income Fund, Inc. LEXNX
Lexington Goldfund, Inc. LEXMX
Lexington Growth and Income Fund, Inc. LEXRX
Lexington International Fund, Inc. LEXIX
Lexington Money Market Trust LMMXX
Lexington Ramirez Global Income Fund LEBDX
Lexington SmallCap Value Fund, Inc. LESVX
Lexington Troika Dialog Russia Fund, Inc. LETRX
Lexington Worldwide Emerging Markets Fund, Inc. LEXGX
Each Fund's shares offered in this Prospectus are sold at net asset value
with no sales load, no commissions and (except for certain redemptions of the
Lexington Troika Dialog Russia Fund) no redemption or exchange fees. The minimum
initial investment in each Fund is $1000 ($5,000 for the Lexington Troika Dialog
Russia Fund), and subsequent investments must be at least $50. See "How to
Invest in the Funds."
Each Fund is an open-end management investment company and managed by
Lexington Management Corporation (the "Manager"), an affiliate of Lexington
Funds Distributor Inc. (the "Distributor"). Each Fund has its own investment
objective and policies designed to meet different investment goals. The
Lexington Convertible Securities and Lexington Ramirez Global Income Funds may
invest without limitation in lower rated debt securities commonly referred to as
"junk bonds." Investments of this type are subject to greater risk of loss of
principal and interest. Lexington Troika Dialog Russia Fund involves speculative
investments and special risks, such as political, economic and legal
uncertainties, currency fluctuations, portfolio settlement and custody risks and
risks of loss arising out of Russia's system of share registration. The Fund may
not be appropriate for all investors. As with all mutual funds, there is no
guarantee a Fund will achieve its objective.
<PAGE>
Please read this Prospectus before investing and retain it for future
reference. A Statement of Additional Information dated May 1,1997, has been
filed with the Securities and Exchange Commission, is incorporated to this
Prospectus by reference and is available without charge by calling the
appropriate telephone number above or writing to the address listed above.
Information about the Lexington Funds is available on the Internet at
http://www.sec.gov or http://www.lexingtonfunds.com
AN INVESTMENT IN THE FUNDS IS NEITHER INSURED NOR GUARANTEED BY THE U.S.
GOVERNMENT. THERE CAN BE NO ASSURANCE THAT THE LEXINGTON MONEY MARKET TRUST WILL
BE ABLE TO MAINTAIN A STABLE NET ASSET VALUE OF $1 PER SHARE.
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.
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.
TABLE OF CONTENTS
The Lexington Funds ............................... 3
Fees and Expenses of the Funds .................... 5
Financial Highlights .............................. 8
The Funds' Investment Objectives
and Policies .................................... 19
Portfolio Securities .............................. 28
Other Investment Practices ........................ 32
Risk Considerations ............................... 34
Management of the Funds ........................... 41
How to Contact the Funds .......................... 52
How to Invest in the Funds ........................ 52
How to Redeem an Investment
in the Funds .................................... 55
Exchange/Telephone Redemption
Privileges and Restrictions .................... 58
How Net Asset Value is Determined ................. 59
Dividends and Distributions ....................... 61
Taxation .......................................... 62
General Information ............................... 63
Back-up Withholding ............................... 65
Glossary .......................................... 66
2
<PAGE>
THE LEXINGTON FUNDS
The Funds' investment objectives are summarized below. See "The Funds'
Investment Objectives and Policies" beginning on page 19, "Portfolio Securities"
beginning on page 28, "Other Investment Practices" beginning on page 19 and
"Risk Considerations" beginning on page 35 for more detailed information.
INTERNATIONAL FUNDS
LEXINGTON CROSBY SMALL CAP ASIA GROWTH FUND, INC.
The Lexington Crosby Small Cap Asia Growth Fund's investment objective is
to seek long-term capital appreciation through investment in common stocks and
equivalents of companies domiciled in the Asia Region with a market
capitalization of less than $1 billion.
LEXINGTON INTERNATIONAL FUND, INC.
The Lexington International Fund's investment objective is to seek
long-term growth of capital through investment in common stocks and equivalents
of companies domiciled in foreign countries.
LEXINGTON RAMIREZ GLOBAL INCOME FUND
The Lexington Ramirez Global Income Fund's investment objective is to seek
high current income. Capital appreciation is a secondary objective. The
Lexington Ramirez Global Income Fund invests in a combination of foreign and
domestic high-yield, lower rated debt securities, commonly known as "junk
bonds."
LEXINGTON TROIKA DIALOG RUSSIA FUND, INC.
The Lexington Troika Dialog Russia Fund's investment objective is to seek
long-term capital appreciation through investment primarily in the equity
securities of Russian companies.
LEXINGTON WORLDWIDE EMERGING MARKETS FUND, INC.
The Lexington Worldwide Emerging Markets Fund's investment objective is to
seek long-term growth of capital primarily through investment in equity
securities of companies domiciled in, or doing business in emerging countries
and emerging markets.
3
<PAGE>
DOMESTIC EQUITY FUNDS
LEXINGTON CONVERTIBLE SECURITIES FUND
The Lexington Convertible Securities Fund's investment objective is total
return which it seeks to achieve by providing capital appreciation, current
income and conservation of the shareholders capital.
LEXINGTON GROWTH AND INCOME FUND, INC.
The Lexington Growth and Income Fund's principal investment objective is
long term appreciation of capital. Income is a secondary objective.
LEXINGTON SMALLCAP VALUE FUND, INC.
The Lexington SmallCap Value Fund's principal investment objective is long
term capital appreciation. The Lexington SmallCap Value Fund will seek to obtain
its objective through investment in common stocks and equivalents primarily of
companies domiciled in the United States with a market capitalization of less
than $1 billion.
PRECIOUS METALS FUNDS
LEXINGTON GOLDFUND, INC.
The Lexington Goldfund's investment objective is to attain capital
appreciation and such hedge against loss of buying power as may be obtained
through investment in gold securities of companies engaged in mining or
processing gold throughout the world.
DOMESTIC FIXED-INCOME FUNDS
LEXINGTON GNMA INCOME FUND, INC.
The Lexington GNMA Income 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.
MONEY MARKET FUNDS
LEXINGTON MONEY MARKET TRUST
The Lexington Money Market Trust's investment objective is to seek as high
a level of current income from short-term investments as is consistent with the
preservation of capital and liquidity. The Lexington Money Market Trust seeks to
maintain a stable net asset value of $1 per share.
4
<PAGE>
FEES AND EXPENSES OF THE FUNDS
SHAREHOLDER TRANSACTION EXPENSES
An investor would pay the following charges when buying or redeeming
shares of a Fund:
<TABLE>
<CAPTION>
MAXIMUM
MAXIMUM SALES
SALES LOAD IMPOSED DEFERRED SALES REDEMPTION
LOAD IMPOSED ON REINVESTED LOAD FEES+ EXCHANGE FEES
ON PURCHASES DIVIDENDS
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
None None None None None
- ------------------------------------------------------------------------------------------------------------
</TABLE>
+ Shareholders effecting redemptions via wire transfer may be required to pay
fees, including the wire fee and other fees, that will be directly deducted
from redemption proceeds. LEXINGTON TROIKA DIALOG RUSSIA FUND ONLY: you
will pay a redemption fee of 2% for shares you redeem within 365 days after
you have purchased them. See "How to Redeem an Investment in the Funds."
5
<PAGE>
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS):
<TABLE>
<CAPTION>
TOTAL FUND
MANAGEMENT RULE 12B-1 OTHER OPERATING
FEES FEES FEES EXPENSES
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTERNATIONAL FUNDS
Lexington Crosby Small Cap Asia
Growth Fund 1.25 1.17 2.42 *
Lexington International Fund 1.00 0.25 0.50 1.75 *
Lexington Ramirez Global Income Fund 1.00 0.25 0.25 1.50 *
Lexington Troika Dialog Russia Fund 1.25 0.25 1.65 3.35 *
Lexington Worldwide Emerging
Markets Fund 1.00 0.76 1.76
- -----------------------------------------------------------------------------------------------------------------------------------
DOMESTIC EQUITY FUNDS
Lexington Convertible Securities
Fund 1.00 0.25 1.14 2.39
Lexington Growth and Income Fund 0.68 0.25 0.20 1.13
Lexington SmallCap Value Fund 1.00 0.25 1.23 2.48 *
- -----------------------------------------------------------------------------------------------------------------------------------
PRECIOUS METALS FUNDS
Lexington Goldfund 0.84 0.25 0.51 1.60
- -----------------------------------------------------------------------------------------------------------------------------------
DOMESTIC FIXED-INCOME FUNDS
Lexington GNMA Income Fund 0.60 0.45 1.05
- -----------------------------------------------------------------------------------------------------------------------------------
MONEY MARKET FUNDS
Lexington Money Market Trust 0.50 0.50 1.00 *
* Net of reimbursement or waivers
</TABLE>
This table is intended to assist the investor in understanding the
various expenses of each Fund. Operating expenses are paid out of a Fund's
assets and are factored into the Fund's share price. Each Fund estimates that it
will have the expenses listed (expressed as a percentage of average net assets)
for the current fiscal year.
6
<PAGE>
EXAMPLE OF EXPENSES FOR THE FUNDS
Assuming, hypothetically, that each fund's annual return is 5% and that
its operating expenses are as set forth on previous page, an investor buying
$1,000 of a fund's shares would have paid the following total expenses upon
redeeming such shares:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Lexington Crosby Small Cap Asia Growth Fund 24.51 75.45 129.05 275.63
Lexington International Fund 17.78 55.11 94.89 206.24
Lexington Ramirez Global Income Fund 15.26 47.41 81.84 179.05
Lexington Troika Dialog Russia Fund 54.11 103.01 174.55 363.98
Lexington Worldwide Emerging Markets Fund 17.89 55.41 95.41 207.31
Lexington Convertible Securities Fund 24.21 74.55 127.55 272.63
Lexington Growth and Income Fund 11.52 35.91 62.23 137.46
Lexington SmallCap Value Fund 25.11 77.25 132.05 281.60
Lexington Goldfund 16.27 50.49 87.08 190.01
Lexington GNMA Income Fund 10.71 33.41 57.94 128.26
Lexington Money Market Trust 10.20 31.84 55.25 122.46
</TABLE>
This example is to show the effect of expenses. This example does not
represent past or future expenses or returns; actual expenses and returns may
vary.
7
<PAGE>
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS
The following financial information for the periods ended December 31,
1991 (or inception of Fund, if later), through December 31, 1996, was audited by
KPMG Peat Marwick LLP, whose report, dated December 31, 1996, appears in the
1996 Annual Reports of the Funds.
<TABLE>
<CAPTION>
LEXINGTON CROSBY SMALL CAP ASIA GROWTH FUND
JULY 3, 1995
(COMMENCEMENT OF OPERATIONS)
1996 TO DECEMBER 31, 1995
-------- ---------------------------
<S> <C> <C>
Net asset value, beginning of period $ 9.76 $ 10.00
Income (loss) from investment operations:
Net investment income (loss) (0.05) 0.02
Net realized and unrealized gain (loss) on investments 2.54 (0.24)
- --------------------------------------------------------------------------------------------------------------------------------
Total income (loss) from investment operations 2.49 (0.22)
Less distributions:
Distributions from net investment income -- (0.02)
Distributions in excess of net investment income (0.01) --
- --------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 12.24 $ 9.76
- --------------------------------------------------------------------------------------------------------------------------------
Total return 25.50% (4.39)%*
Ratios to average net asset of:
Expenses, before reimbursement or waiver 2.64% 3.51%*
- --------------------------------------------------------------------------------------------------------------------------------
Expenses, net of reimbursement or waiver 2.42% 1.75%*
Net investment loss, before reimbursement or waiver (0.86)% (1.24)%*
Net investment loss (0.64)% 0.52%*
Portfolio turnover 176.49% 40.22%*
Average commission paid on equity security transactions** -- --
- --------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (000's omitted) $23,796 $8,936
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Annualized
**The average commission paid on equity security transactions for the period
ended December 31, 1996 is less than $0.05 per share of securities purchased and
sold. In accordance with recent SECdisclosure guidelines, average commissions
were calculated for the current period and not for prior periods.
8
<PAGE>
LEXINGTON INTERNATIONAL FUND
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Net asset value, beginning of period $10.60 $10.37 $10.00
Income (loss) from investment operations:
Net investment loss (.02) (.01) (.08)
Net realized and unrealized gain on investments 1.45 .61 .67
- --------------------------------------------------------------------------------------------------------------------------------
Total income from investment operations 1.43 .60 .59
Less distributions:
Distributions from net investment income (.20) -- --
Dividends in excess of net investment income
(temporary book-tax difference) -- (.35) --
Distributions from net realized capital gains (.97) (.02) (.10)
Distributions in excess of net realized capital
gains (temporary book-tax difference) -- -- (.12 )
- --------------------------------------------------------------------------------------------------------------------------------
Total distributions (1.17) (.37) (.22)
Net asset value, end of period $10.86 $10.60 $10.37
Total return 13.57% 5.77% 5.87%
Ratio to average net assets:
Expenses 2.45% 2.46% 2.39%
Net investment loss (0.39%) (.12%) (.94%)
Portfolio turnover 113.55% 137.72% 100.10%
Average commission paid on equity security transactions* $0.03 -- --
- --------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (000's omitted) $18,891 $17,855 $17,843
</TABLE>
*IN ACCORDANCE WITH RECENT SECDISCLOSURE GUIDELINES, AVERAGE COMMISSIONS ARE
CALCULATED FOR THE CURRENT PERIOD AND NOT FOR PRIOR PERIODS.
9
<PAGE>
LEXINGTON RAMIREZ GLOBAL INCOME FUND
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $10.75 $ 9.80 $ 10.95 $10.39 $10.35 $10.05
Income (loss) from investment operations:
Net investment income 1.01 0.96 0.46 0.53 0.61 0.67
Net realized and unrealized gain (loss)
on investments 0.36 0.95 (1.16) 0.58 0.04 0.30
- -------------------------------------------------------------------------------------------------------------------------------
Total income (loss)
from investment operations 1.37 1.91 (0.70) 1.11 0.65 0.97
- -------------------------------------------------------------------------------------------------------------------------------
Less distributions:
Dividends from net investment income (0.86) (0.96) (0.45) (0.55) (0.61) (0.67)
Distributions from net realized gains (.04) -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
Total distributions (.90) (0.96) (0.45) (0.55) (0.61) (0.67)
- -------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $11.22 $10.75 $ 9.80 $10.95 $10.39 $10.35
- -------------------------------------------------------------------------------------------------------------------------------
Total return 13.33% 20.10% (6.52%) 10.90% 6.51% 10.03%
- -------------------------------------------------------------------------------------------------------------------------------
Ratio to average net assets:
- -------------------------------------------------------------------------------------------------------------------------------
Expenses, before reimbursement or waiver 2.33% 3.07% 1.80% 1.44% 1.54% 1.65%
- -------------------------------------------------------------------------------------------------------------------------------
Expenses, net of reimbursement or waiver 1.50% 2.75% 1.50% 1.44% 1.50% 1.12%
- -------------------------------------------------------------------------------------------------------------------------------
Net investment income, before
reimbursement or waiver 9.49% 9.48% 4.18% 4.83% 5.88% 6.11%
- -------------------------------------------------------------------------------------------------------------------------------
Net investment income 10.32% 9.80% 4.48% 4.83% 5.92% 6.64%
- -------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 71.83% 164.72% 10.20% 31.06% 31.24% 29.45%
- -------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (000's omitted) $29,110 $12,255 $10,351 $14,576 $13,085 $12,252
- -------------------------------------------------------------------------------------------------------------------------------
*Annualized
</TABLE>
<TABLE>
<CAPTION>
LEXINGTON RAMIREZ GLOBAL INCOME FUND
1990 1989 1988 1987
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net asset value, beginning of period $10.12 $10.03 $ 9.67 $10.55
Income (loss) from investment operations:
Net investment income 0.73 0.63 0.63 0.78
Net realized and unrealized gain (loss)
on investments (0.09) 0.09 0.36 (0.86)
- ----------------------------------------------------------------------------------------------------------
Total income (loss)
from investment operations 0.64 0.72 0.99 (0.08)
- ----------------------------------------------------------------------------------------------------------
Less distributions:
Dividends from net investment income (0.71) (0.63) (0.63) (0.80)
Distributions from net realized gains -- -- -- --
- ----------------------------------------------------------------------------------------------------------
Total distributions (0.71) (0.63) (0.63) (0.80)
- ----------------------------------------------------------------------------------------------------------
Net asset value, end of period $10.05 $10.12 $10.03 $ 9.67
- ----------------------------------------------------------------------------------------------------------
Total return 6.62% 7.40% 10.54% (0.21%)
- ----------------------------------------------------------------------------------------------------------
Ratio to average net assets:
- ----------------------------------------------------------------------------------------------------------
Expenses, before reimbursement or waiver 1.61% 1.72% 1.50% 1.97%
- ----------------------------------------------------------------------------------------------------------
Expenses, net of reimbursement or waiver 1.08% 1.20% 1.33% --
- ----------------------------------------------------------------------------------------------------------
Net investment income, before
reimbursement or waiver 6.67% 5.70% 6.16% 5.98%
- ----------------------------------------------------------------------------------------------------------
Net investment income 7.20% 6.22% 6.33% 7.95%
- ----------------------------------------------------------------------------------------------------------
Portfolio turnover 44.50% 46.60% 67.11% 66.77%
Net assets, end of period (000's omitted) $10,707 $12,739 $13,139 $11,049
- ----------------------------------------------------------------------------------------------------------
Annualized
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
LEXINGTON TROIKA DIALOG RUSSIA FUND
JULY 3, 1996 TO
DECEMBER 31, 1996**
-----------------
<S> <C>
Net asset value, beginning of period $12.12
- -------------------------------------------------------------------------------------
Income (loss) from investment operations:
Net investment income (loss) (0.05)
Net realized and unrealized gain (loss) on investments (0.51)
- -------------------------------------------------------------------------------------
Total income (loss) from investment operations (0.56)
- -------------------------------------------------------------------------------------
Less distributions:
Distributions from net investment income
Distributions from net realized capital gains (0.32)
- -------------------------------------------------------------------------------------
Total distributions (0.32)
- -------------------------------------------------------------------------------------
Net asset value, end of period $11.24
- -------------------------------------------------------------------------------------
Total return (9.01)%*
- -------------------------------------------------------------------------------------
Ratios to average net asset of
EXPENSES, BEFORE REIMBURSEMENT OR WAIVERS 5.07%*
- ------------------------------------------------------------------------------------
Expenses, net of reimbursement or waivers 2.65%*
- ------------------------------------------------------------------------------------
Net investment loss, before reimbursement or waivers (3.69)%*
- ------------------------------------------------------------------------------------
Net investment loss (1.27)%*
- ------------------------------------------------------------------------------------
Portfolio turnover 115.55%*
- ------------------------------------------------------------------------------------
Average commission paid on equity security transactions --***
- ------------------------------------------------------------------------------------
Net assets, end of period (000's omitted) $13,846
- ------------------------------------------------------------------------------------
*Annualized
**The Fund's commencement of operations was June 3, 1996 with the investment of
its initial capital. The Fund's registration statement with the Securities and
Exchange Commission became effective on July 3, 1996. Financial results prior to
the effective date of the Fund's registration statement are not presented in
this Financial Highlights Table.
***The average commission paid on equity security transactions for the period
ended December 31, 1996 was less than $0.005 per share of securities purchased
and sold.
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
LEXINGTON WORLDWIDE EMERGING MARKETS FUND
1996 1995 1994 1993 1992 1991 1990
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $10.70 $11.47 $13.96 $ 8.66 $ 9.03 $ 8.56 $10.79
- ------------------------------------------------------------------------------------------------------------------------------
Income (loss) from investment operations:
- ------------------------------------------------------------------------------------------------------------------------------
Net investment income -- 0.08 (0.01) 0.05 0.07 0.09 0.25
- ------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss)
on investments 0.79 (0.76) (1.92) 5.43 0.27 1.97 (1.81)
- -----------------------------------------------------------------------------------------------------------------------------
Total income (loss)
from investment operations 0.79 (0.68) (1.93) 5.48 0.34 2.06 (1.56)
- -----------------------------------------------------------------------------------------------------------------------------
Less distributions:
Dividends from net investment income -- (0.08) -- (0.01) (0.11) (0.11) (0.24)
- -----------------------------------------------------------------------------------------------------------------------------
Distributions in excess of net investment
income (temporary book-tax difference) -- (0.01) -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------
Distributions from capital gains -- -- (0.47) (0.17) (0.60) (1.48) (0.43)
- -----------------------------------------------------------------------------------------------------------------------------
Distributions in excess of capital gains
(temporary book-tax difference) -- -- (0.09) -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------
Total distributions -- (0.09) (0.56) (0.18) (0.71) (1.59) (0.67)
- -----------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $11.49 $10.70 $11.47 $13.96 $ 8.66 $ 9.03 $ 8.56
- -----------------------------------------------------------------------------------------------------------------------------
Total return 7.38% (5.93%) (13.81%) 63.37% 3.77% 24.19% (14.44%)
- -----------------------------------------------------------------------------------------------------------------------------
Ratio to average net assets:
Expenses 1.76% 1.88% 1.65% 1.64% 1.89% 1.97% 1.42%
- -------------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) (0.01)% 0.70% (0.06)% 0.21% 0.75% 0.79% 2.52%
- ------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 86.26% 92.85% 75.56% 38.35% 91.27% 112.03% 52.48%
- -----------------------------------------------------------------------------------------------------------------------------
Average commission paid on equity security
transactions* -- -- -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (000's omitted) $254,673 $265,544 $288,581 $230,473 $30,021 $25,060 $22,192
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
1989 1988 1987 1986
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net asset value, beginning of period $ 8.72 $8.01 $11.80 $ 9.96
- ---------------------------------------------------------------------------------------------
Income (loss) from investment operations:
- ---------------------------------------------------------------------------------------------
Net investment income 0.13 0.12 0.14 0.16
- ---------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss)
on investments 2.32 0.71 0.12 1.88
- ---------------------------------------------------------------------------------------------
Total income (loss)
from investment operations 2.45 0.83 0.26 2.04
- ---------------------------------------------------------------------------------------------
Less distributions:
Dividends from net investment income (0.21) (0.12) (0.38) (0.20)
- ---------------------------------------------------------------------------------------------
Distributions in excess of net investment
income (temporary book-tax difference) -- -- -- --
- ---------------------------------------------------------------------------------------------
Distributions from capital gains (0.17) -- (3.67) --
- ---------------------------------------------------------------------------------------------
Distributions in excess of capital gains
(temporary book-tax difference) -- -- -- --
- ---------------------------------------------------------------------------------------------
Total distributions (0.38) (0.12) (4.05) (0.20)
- ---------------------------------------------------------------------------------------------
Net asset value, end of period $10.79 $ 8.72 $ 8.01 $11.80
- ---------------------------------------------------------------------------------------------
Total return 28.11% 10.36% 0.35% 20.73%
- ---------------------------------------------------------------------------------------------
Ratio to average net assets:
Expenses 1.36% 1.33% 1.34% 1.32%
- ----------------------------------------------------------------------------------------------
Net investment income (loss) 1.18% 1.27% 1.26% 1.24%
- ---------------------------------------------------------------------------------------------
Portfolio turnover 59.07% 47.63% 83.21% 54.20%
- ---------------------------------------------------------------------------------------------
Average commission paid on equity security
transactions* -- -- -- --
- ----------------------------------------------------------------------------------------------
Net assets, end of period (000's omitted) $29,126 $26,389 $25,579 $29,862
- ----------------------------------------------------------------------------------------------
</TABLE>
*The average commission paid on equity security transactions for the year ended
December 31, 1996 is less than $0.005 per share of securities purchased and
sold. In accordance with recent SECdisclosure guidelines, average commissions
are calculated for the current period and not for prior periods.
12
<PAGE>
<TABLE>
<CAPTION>
LEXINGTON CONVERTIBLE SECURITIES FUND
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $13.66 $11.84 $14.10 $13.80 $12.41
- -----------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) 0.11 0.15 0.08 -- 0.18
Net realized and unrealized gain (loss)
on investments 0.55 2.04 0.10 0.89 1.39
- -----------------------------------------------------------------------------------------------------------------------------
Total income (loss) from operations 0.66 2.19 0.18 0.89 1.57
- -----------------------------------------------------------------------------------------------------------------------------
Less distributions:
Dividends from net investment income (0.11) (0.15) (0.07) -- (0.18)
Dividends from net realized capital gains (0.55) (0.22) (2.32) (0.59) --
Distribution in excess of capital gains
(temporary book-tax difference) -- -- (0.05) -- --
- -----------------------------------------------------------------------------------------------------------------------------
Total distributions (0.66) (0.37) (2.44) (0.59) (0.18)
- ------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $13.66 $13.66 $11.84 $14.10 $13.80
- ------------------------------------------------------------------------------------------------------------------------------
Total return 4.89% 18.63% 1.30% 6.53% 12.82%
- -------------------------------------------------------------------------------------------------------------------------------
Ratio to average net assets:
Expenses, before reimbursement of waiver 2.39% 2.52% 2.81% 2.76% 3.02%
- -------------------------------------------------------------------------------------------------------------------------------
Expenses, net of reimbursement or waiver 2.39% 2.52% 2.75% 2.76% 2.32%
- -------------------------------------------------------------------------------------------------------------------------------
Net investment income (loss), before
reimbursement or waiver 0.77% 1.24% 0.50% (0.04%) 0.70%
- -------------------------------------------------------------------------------------------------------------------------------
Net investment income 0.77% 1.24% 0.56% (0.04%) 1.40%
- -------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 18.45% 11.23% 38.14% 6.53% 12.58%
- -------------------------------------------------------------------------------------------------------------------------------
Average commission paid on equity security transactions* 0.04 -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (000's omitted) $11,208 $11,641 $8,117 $8,319 $7,180
- -------------------------------------------------------------------------------------------------------------------------------
1991 1990 1989 1988
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net asset value, beginning of period $ 8.74 $ 9.55 $ 9.51 $ 9.35
- -------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) 0.22 0.50 0.64 0.42
Net realized and unrealized gain (loss)
on investments 3.68 (0.81) 0.04 0.19
- -------------------------------------------------------------------------------------------------------------------
Total income (loss) from operations 3.90 (0.31) 0.68 0.61
- -------------------------------------------------------------------------------------------------------------------
Less distributions:
Dividends from net investment income (0.23) (0.50) (0.64) (0.42)
Dividends from net realized capital gains -- -- -- (0.03)
Distribution in excess of capital gains
(temporary book-tax difference) -- -- -- --
- -------------------------------------------------------------------------------------------------------------------
Total distributions (0.23) (0.50) (0.64) (0.45)
- -------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $12.41 $8.74 $9.55 $9.51
- -------------------------------------------------------------------------------------------------------------------
Total return 45.06% (3.39%) 7.16% 6.96%
- --------------------------------------------------------------------------------------------------------------------
Ratio to average net assets:
Expenses, before reimbursement of waiver 3.42% 4.51% 2.64% 4.12%
- --------------------------------------------------------------------------------------------------------------------
Expenses, net of reimbursement or waiver 2.50% 2.68% 2.13% 2.00%
- --------------------------------------------------------------------------------------------------------------------
Net investment income (loss), before
reimbursement or waiver 1.14% 3.09% 5.74% 3.43%
- --------------------------------------------------------------------------------------------------------------------
Net investment income 2.06% 4.92% 6.25% 5.55%
- --------------------------------------------------------------------------------------------------------------------
Portfolio turnover 29.46% 25.58% 34.23% 39.70%
- --------------------------------------------------------------------------------------------------------------------
Average commission paid on equity security transactions* -- -- -- --
- --------------------------------------------------------------------------------------------------------------------
Net assets, end of period (000's omitted) $6,599 $4,744 $5,986 $6,930
- --------------------------------------------------------------------------------------------------------------------
*In accordance with recent SEC disclosure guidelines, the average commission is
calculated for the current period, but not for prior periods.
13
<PAGE>
LEXINGTON GROWTH AND INCOME FUND
1996 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $15.71 $14.36 $16.16 $16.25 $16.39 $14.24
Income from investment operations:
Net investment income 0.07 0.22 0.17 0.21 0.23 0.35
Net realized and unrealized gain (loss)
on investments 4.08 3.00 (0.68) 1.94 1.79 3.17
- -----------------------------------------------------------------------------------------------------------------------------
Total income (loss)
from investment operations 4.15 3.22 (0.51) 2.15 2.02 3.52
- -----------------------------------------------------------------------------------------------------------------------------
Less distributions:
Dividends from net investment income (0.13) (0.22) (0.16) (0.21) (0.32) (0.35)
Distributions from net realized capital gains (1.17) (1.65) (0.91) (2.03) (1.84) (1.02)
Distributions in excess of net realized
gains (temporary book-tax difference) -- -- (0.22) -- -- --
- -----------------------------------------------------------------------------------------------------------------------------
Total distributions (1.30) (1.87) (1.29) (2.24) (2.16) (1.37)
- -----------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $18.56 $15.71 $14.36 $16.16 $16.25 $16.39
- -----------------------------------------------------------------------------------------------------------------------------
Total return 26.46% 22.57% (3.11%) 13.22% 12.36% 24.87%
- -----------------------------------------------------------------------------------------------------------------------------
Ratios to average net asset of:
- -----------------------------------------------------------------------------------------------------------------------------
Expenses 1.13% 1.09% 1.15% 1.29% 1.20% 1.13%
- -----------------------------------------------------------------------------------------------------------------------------
Net investment income 0.43% 1.38% 1.06% 1.20% 2.57% 2.19%
- -----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 101.12% 159.94% 63.04% 93.90% 88.13% 80.33%
- -----------------------------------------------------------------------------------------------------------------------------
Average commissions paid on equity security transactions* $0.07 -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (000's omitted) $200,309 $138,901 $124,289 $134,508 $126,241 $121,263
- -----------------------------------------------------------------------------------------------------------------------------
1990 1989 1988 1987
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net asset value, beginning of period $16.19 $14.39 $13.58 $19.16
Income from investment operations:
Net investment income 0.60 0.50 0.46 0.43
Net realized and unrealized gain (loss)
on investments (2.25) 3.44 0.80 0.02
- ---------------------------------------------------------------------------------------------------------
Total income (loss)
from investment operations (1.65) 3.94 1.26 0.45
- ---------------------------------------------------------------------------------------------------------
Less distributions:
Dividends from net investment income (0.30) (0.60) (0.45) (0.51)
Distributions from net realized capital gains -- (1.54) -- (5.52)
Distributions in excess of net realized
gains (temporary book-tax difference) -- -- -- --
- ---------------------------------------------------------------------------------------------------------
Total distributions (0.30) (2.14) (0.45) (6.03)
- ---------------------------------------------------------------------------------------------------------
Net asset value, end of period $14.24 $16.19 $14.39 $13.58
- ---------------------------------------------------------------------------------------------------------
Total return (10.27%) 27.56% 9.38% 0.15%
- ---------------------------------------------------------------------------------------------------------
Ratios to average net asset of:
- ---------------------------------------------------------------------------------------------------------
Expenses 1.04% 1.02% 1.10% 0.96%
- ---------------------------------------------------------------------------------------------------------
Net investment income 3.91% 2.82% 3.20% 2.37%
- ---------------------------------------------------------------------------------------------------------
Portfolio turnover 67.39% 64.00% 81.10% 95.28%
- ---------------------------------------------------------------------------------------------------------
Average commissions paid on equity security transactions* -- -- -- --
- ---------------------------------------------------------------------------------------------------------
Net assets, end of period (000's omitted) $104,664 $128,329 $111,117 $112,780
- ---------------------------------------------------------------------------------------------------------
*In accordance with recent SECdisclosure guidelines, the average commission is
calculated for the current period, but not for prior periods.
14
<PAGE>
LEXINGTON SMALLCAP VALUE FUND
JANUARY 2, 1996
(COMMENCEMENT OF OPERATIONS)
DECEMBER 31, 1996
---------------------------
Net asset value, beginning of period $ 10.00
Income (loss) from investment operations:
Net investment income (loss) (0.18)
Net realized and unrealized gain (loss) on investments 1.94
- ----------------------------------------------------------------------------------------------------
Total income (loss) from investment operations 1.76
- ----------------------------------------------------------------------------------------------------
Less distributions:
Distributions from net realized capital gains (0.03)
- ----------------------------------------------------------------------------------------------------
Net asset value, end of period $11.73
- ----------------------------------------------------------------------------------------------------
Total return 17.50%
- ----------------------------------------------------------------------------------------------------
Ratios to average net asset of:
- ----------------------------------------------------------------------------------------------------
Expenses, before reimbursement or waiver 3.04%
- ----------------------------------------------------------------------------------------------------
Expenses, net of reimbursement or waiver 2.48%
- ----------------------------------------------------------------------------------------------------
Net investment loss, before reimbursement or waiver (2.34)%
- ----------------------------------------------------------------------------------------------------
Net investment loss (1.78)%
- ----------------------------------------------------------------------------------------------------
Portfolio turnover 60.92%
- ----------------------------------------------------------------------------------------------------
Average commissions paid on equity security transactions 0.03
- ----------------------------------------------------------------------------------------------------
Net assets, end of period (000's omitted) $8,061
- ----------------------------------------------------------------------------------------------------
*Annualized
15
<PAGE>
LEXINGTON GOLDFUND
1996 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $6.24 $ 6.37 $ 6.90 $ 3.70 $ 4.68 $ 5.03
- -----------------------------------------------------------------------------------------------------------------------------
Income (loss) from investment operations:
Net investment income 0.02 -- 0.03 0.01 0.02 0.04
Net realized and unrealized gain (loss)
on investments 0.50 (0.12) (0.53) 3.21 (0.98) (0.35)
- ------------------------------------------------------------------------------------------------------------------------------
Total income (loss)
from investment operations 0.52 (0.12) (0.50) 3.22 (0.96) (0.31)
- ------------------------------------------------------------------------------------------------------------------------------
Less distributions:
Dividends from net investment income (0.79) (0.01) (0.03) (0.02) (0.02) (0.04)
Distributions from net realized capital gains -- -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
Total distributions (0.79) (0.01) (0.03) (0.02) (0.02) (0.04)
- ------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 5.97 $ 6.24 $ 6.37 $ 6.90 $ 3.70 $ 4.68
- ------------------------------------------------------------------------------------------------------------------------------
Total return 7.84% (1.89%) (7.28%) 89.96% (20.51%) (6.14%)
- -------------------------------------------------------------------------------------------------------------------------------
Ratios to average net assets:
- -------------------------------------------------------------------------------------------------------------------------------
Expenses 1.60% 1.70% 1.54% 1.63% 1.69% 1.43%
- -------------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) (0.32)% 0.07% 0.50% 0.25% 0.58% 0.81%
- -------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 31.04% 40.41% 23.77% 28.41% 13.18% 22.14%
- -------------------------------------------------------------------------------------------------------------------------------
Average commission paid on equity security transactions* .02 -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (000's omitted) $109,287 $135,779 $159,435 $159,479 $71,856 $96,3164
- --------------------------------------------------------------------------------------------------------------------------------
1990 1989 1988 1987
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net asset value, beginning of period $ 6.39 $ 5.21 $ 6.20 $ 4.49
- ----------------------------------------------------------------------------------------------------------
Income (loss) from investment operations:
Net investment income 0.04 0.05 0.04 0.01
Net realized and unrealized gain (loss)
on investments (1.36) 1.18 (0.98) 2.07
- ----------------------------------------------------------------------------------------------------------
Total income (loss)
from investment operations (1.32) 1.23 (0.94) 2.08
- ----------------------------------------------------------------------------------------------------------
Less distributions:
Dividends from net investment income (0.04) (0.05) (0.05) (0.05)
Distributions from net realized capital gains -- -- -- (0.32)
- ----------------------------------------------------------------------------------------------------------
Total distributions (0.04) (0.05) (0.05) (0.37)
- ----------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 5.03 $ 6.39 $ 5.21 $ 6.20
- ----------------------------------------------------------------------------------------------------------
Total return (20.35%) 23.62% (15.18%) 46.56%
- ----------------------------------------------------------------------------------------------------------
Ratios to average net assets:
- ----------------------------------------------------------------------------------------------------------
Expenses 1.36% 1.42% 1.61% 1.29%
- ----------------------------------------------------------------------------------------------------------
Net investment income (loss) 0.69% 1.14% 0.78% 0.57%
- ----------------------------------------------------------------------------------------------------------
Portfolio turnover 12.43% 15.98% 20.45% 13.78%
- ----------------------------------------------------------------------------------------------------------
Average commission paid on equity security transactions* -- -- -- --
- ----------------------------------------------------------------------------------------------------------
Net assets, end of period (000's omitted) $106,074 $154,484 $92,782 $104,842
- ----------------------------------------------------------------------------------------------------------
*In accordance with recent SEC disclosure guidelines, the average commission is
calculated for the current period, but not for prior periods.
16
<PAGE>
LEXINGTON GNMA INCOME FUND
1996 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $8.19 $7.60 $8.32 $8.26 $8.45 $7.90
- ------------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.53 0.58 0.55 0.59 0.61 0.64
Net realized and unrealized gain (loss)
on investments (0.08) 0.59 (0.72) 0.06 (0.19) 0.55
- -----------------------------------------------------------------------------------------------------------------------------
Total income (loss)
from investment operations 0.45 1.17 (0.17) 0.65 0.42 1.19
Less distributions:
Dividends from net investment income (0.52) (0.58) (0.55) (0.59) (0.61) (0.64)
- ------------------------------------------------------------------------------------------------------------------------------
Distributions from net realized capital gains -- -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
Total distributions (0.52) (0.58) (0.55) (0.59) (0.61) (0.64)
- ------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $8.12 $8.19 $7.60 $8.32 $8.26 $8.45
- ------------------------------------------------------------------------------------------------------------------------------
Total return 5.71% 15.91% (2.07%) 8.06% 5.19% 15.75%
- ------------------------------------------------------------------------------------------------------------------------------
Ratios to average net asset of:
- ------------------------------------------------------------------------------------------------------------------------------
Expenses 1.05% 1.01% 0.98% 1.02% 1.01% 1.02%
- ------------------------------------------------------------------------------------------------------------------------------
Net investment income 6.56% 7.10% 6.90% 6.96% 7.31% 7.97%
- -------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 128.76% 30.69% 37.15% 52.34% 180.11% 138.71%
- --------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (000's omitted) $133,777 $130,681 $132,108 $149,961 $132,048 $122,191
- --------------------------------------------------------------------------------------------------------------------------------
1990 1989 1988 1987
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net asset value, beginning of period $7.88 $7.45 $7.58 $8.22
- --------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.65 0.69 0.64 0.71
Net realized and unrealized gain (loss)
on investments 0.03 0.42 (0.13) (0.59)
- --------------------------------------------------------------------------------------------------------
Total income (loss)
from investment operations 0.68 1.11 0.51 0.12
Less distributions:
Dividends from net investment income (0.66) (0.68) (0.61) (0.76)
- --------------------------------------------------------------------------------------------------------
Distributions from net realized capital gains -- -- (0.03) --
- --------------------------------------------------------------------------------------------------------
Total distributions (0.66) (0.68) (0.64) (0.76)
- --------------------------------------------------------------------------------------------------------
Net asset value, end of period $7.90 $7.88 $7.45 $7.58
- --------------------------------------------------------------------------------------------------------
Total return 9.23% 15.60% 6.90% 1.62%
- --------------------------------------------------------------------------------------------------------
Ratios to average net asset of:
- --------------------------------------------------------------------------------------------------------
Expenses 1.04% 1.03% 1.07% 0.98%
- --------------------------------------------------------------------------------------------------------
Net investment income 8.43% 8.88% 8.31% 8.49%
- --------------------------------------------------------------------------------------------------------
Portfolio turnover 112.55% 102.66% 233.48% 89.40%
- --------------------------------------------------------------------------------------------------------
Net assets, end of period (000's omitted) $98,011 $96,465 $97,185 $109,793
- --------------------------------------------------------------------------------------------------------
17
<PAGE>
LEXINGTON MONEY MARKET TRUST
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 0.0441 0.0495 0.0330 0.0230 0.0299 0.0532
- --------------------------------------------------------------------------------------------------------------------------------
Less distributions:
Dividends from net investment income (0.0441) (0.0495) (0.0330) (0.0230) (0.0299) (0.0532)
- --------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
- --------------------------------------------------------------------------------------------------------------------------------
Total return 4.50% 5.06% 3.35% 2.32% 3.03% 5.45%
- --------------------------------------------------------------------------------------------------------------------------------
Ratio to average net assets:
- --------------------------------------------------------------------------------------------------------------------------------
Expenses, before reimbursement 1.04% 1.08% 1.02% 1.00% 1.03% 1.02%
- --------------------------------------------------------------------------------------------------------------------------------
Expenses, net of reimbursement 1.00% 1.00% 1.00% 1.00% 1.00% 1.00%
- --------------------------------------------------------------------------------------------------------------------------------
Net investment income, before
reimbursement 4.37% 4.87% 3.30% 2.30% 2.99% 5.35%
- --------------------------------------------------------------------------------------------------------------------------------
Net investment income, net of
reimbursement 4.41% 4.95% 3.32% 2.30% 3.02% 5.37%
- --------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (000's omitted) $97,526 $88,786 $111,805 $94,718 $111,453 $143,137
- --------------------------------------------------------------------------------------------------------------------------------
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 0.0732 0.0828 0.0678 0.0610
- -----------------------------------------------------------------------------------------------------------
Less distributions:
Dividends from net investment income (0.0732) (0.0828) (0.0678) (0.0610)
- ----------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00
- -----------------------------------------------------------------------------------------------------------
Total return 7.56% 8.60% 7.00% 6.29%
- -----------------------------------------------------------------------------------------------------------
Ratio to average net assets:
- -----------------------------------------------------------------------------------------------------------
Expenses, before reimbursement 0.97% 0.99% 0.97% 0.80%
- -----------------------------------------------------------------------------------------------------------
Expenses, net of reimbursement 0.97% 0.99% 0.97% 0.80%
- -----------------------------------------------------------------------------------------------------------
Net investment income, before
reimbursement 7.32% 8.29% 6.74% 6.13%
- -----------------------------------------------------------------------------------------------------------
Net investment income, net of
reimbursement 7.32% 8.29% 6.74% 6.13%
- -----------------------------------------------------------------------------------------------------------
Net assets, end of period (000's omitted) $176,127 $182,703 $192,079 $212,487
- -----------------------------------------------------------------------------------------------------------
</TABLE>
18
<PAGE>
THE FUNDS' INVESTMENT OBJECTIVES AND POLICIES
The investment objective and general investment policies of each Fund are
described below. Specific portfolio securities that may be purchased by the
Funds are described in "Portfolio Securities" beginning on page 28. Specific
investment practices that may be employed by the Funds are described in "Other
Investment Practices" beginning on page 32. Certain risks associated with
investments in the Funds are described in those sections as well as in "Risk
Considerations" beginning on page 34. CERTAIN TERMS USED IN THE PROSPECTUS ARE
DEFINED IN THE GLOSSARY BEGINNING ON PAGE 66.
SUMMARY COMPARISON OF FUNDS
Under normal market conditions, the Funds will invest their assets as follows:
<TABLE>
<CAPTION>
TYPICAL MARKET
ANTICIPATED ANTICIPATED CAPITALIZATION
EQUITY DEBT OF PORTFOLIO
FUND NAME EXPOSURE EXPOSURE FOCUS COMPANIES
==============================================================================================================
<S> <C> <C> <C> <C>
INTERNATIONAL FUNDS
Lexington Crosby 100% 0% Asia Small-Cap Less than
Small Cap Asia $1 billion
Growth Fund
- --------------------------------------------------------------------------------------------------------------
Lexington 100% 0% Foreign Growth Any size
International Fund
- --------------------------------------------------------------------------------------------------------------
Lexington Ramirez 0% 100% Global Income Any size
Global Income Fund
- --------------------------------------------------------------------------------------------------------------
Lexington Troika 85% 15% Russian Growth Any size
Dialog Russia Fund
- --------------------------------------------------------------------------------------------------------------
Lexington Worldwide 100% 0% Foreign Emerging Any size
Emerging Markets Growth
Fund
==============================================================================================================
DOMESTIC EQUITY FUNDS
Lexington Convertible 0-35% 65-100% Convertible Any size
Securities Fund Securities
- --------------------------------------------------------------------------------------------------------------
Lexington Growth 100% 0% Capital Appreciation Any size
and Income Fund and Income
Lexington SmallCap 100% 0% U.S. Small-Cap Between
Value Fund $20 million
and $1 billion
==============================================================================================================
PRECIOUS METALS
Lexington Goldfund 100% 0% Gold and Gold Any size
Companies
==============================================================================================================
DOMESTIC FIXED-INCOME FUNDS
Lexington GNMA 0% 100% Income N/A
Income Fund
==============================================================================================================
MONEY MARKET FUNDS
Lexington Money 0% 100% Income N/A
Market Trust
==============================================================================================================
</TABLE>
See each Fund's investment objective and policies on the following pages, and
the section titled "Portfolio Securities" for more information.
19
<PAGE>
LEXINGTON CROSBY SMALL CAP ASIA GROWTH FUND, INC.
The investment objective of the Lexington Crosby Small Cap Asia Growth
Fund is long-term capital appreciation through investment in common stocks and
equivalents of companies domiciled in the Asia Region with a market
capitalization of less than $1 billion.
The Lexington Crosby Small Cap Asia Growth Fund will invest principally in
companies listed on stock exchanges in the Asia Region consisting of Bangladesh,
China, Hong Kong, India, Indonesia, Korea, Malaysia, Pakistan, The Philippines,
Singapore, Sri Lanka, Taiwan, Thailand, and Vietnam ("the Asia Region"). The
Lexington Crosby Small Cap Asia Growth Fund will invest at least 65% of its
total assets in securities of companies (1) that are organized under the laws of
the above countries, (2) whose principal securities trading market is located in
those countries, and (3) that derive at least 50% of their revenues or profits
from those countries. The Lexington Crosby Small Cap Asia Growth Fund also
intends to invest in Australia and New Zealand. The Fund does not intend to
invest in Japan. The Lexington Crosby Small Cap Asia Growth Fund may also invest
in unlisted securities. Under normal market conditions, the Lexington Crosby
Small Cap Asia Growth Fund will invest substantially all of its assets in three
or more countries in the Asia Region.
The Lexington Crosby Small Cap Asia Growth Fund will invest at least 65%
of its total assets in growth companies in the Asia Region which have market
capitalizations of less than $1 billion. Approximately 13,000 companies are
listed on recognized exchanges in the Asia Region. Approximately 300 companies
in the Asia Region are capitalized over $1 billion. These companies form the
principal components of their respective market indices and consequently attract
the majority of foreign investment in the region. Approximately 3,000 companies,
which are considered small capitalization companies, will be the primary focus
for the Lexington Crosby Small Cap Asia Growth Fund's investments. These
companies are frequently under-researched by international investors and
undervalued by their markets. The companies in which the Lexington Crosby Small
Cap Asia Growth Fund intends to invest will generally have the following
characteristics: a market capitalization of less than $1 billion; are within
industry sectors with particularly strong growth prospects; part of a strong
growth industry; proven management; under-researched by the investment
community; and undervalued.
The Lexington Crosby Small Cap Asia Growth Fund intends to select
securities which can have enhanced growth prospects and may provide investment
returns superior to the Asian market as a whole. The market value of small
capitalization companies in the Asia Region tends to be volatile, and in the
20
<PAGE>
past has offered greater potential for gain as well as loss than securities of
companies traded in developed countries. It is possible that certain Lexington
Crosby Small Cap Asia Growth Fund investments could be subject to foreign
expropriation or exchange control restrictions. See "Risk Considerations."
The Lexington Crosby Small Cap Asia Growth Fund may invest in all types of
common stocks and equivalents (the following constitute equivalents: convertible
debt securities, warrants and options). The Lexington Crosby Small Cap Asia
Growth Fund may also invest in preferred stocks, bonds and other debt
obligations and money market instruments, including cash and cash deposits,
which will be denominated in U.S. Dollars or currencies related thereto.
-------------------------------
LEXINGTON INTERNATIONAL FUND, INC.
The investment objective of the Lexington International Fund is to seek
long-term growth of capital through investment in common stocks and equivalents
of companies domiciled in foreign countries. The Lexington International Fund
will invest at least 65% of its total assets in at least three foreign
countries. The Lexington International Fund will invest primarily in common
stocks and common stock equivalents. The following constitute common stock
equivalents: convertible debt securities, warrants and options. The Lexington
International Fund may also invest in preferred stocks, bonds and other debt
obligations, including money market instruments of foreign and domestic
companies and foreign and domestic government securities. The Lexington
International Fund is not required to maintain any particular geographic or
currency mix of its investments. The Lexington International Fund is not
required to maintain any particular proportion of stocks, bonds or other
securities in its portfolio.
The Lexington International Fund may invest primarily in foreign debt
securities when it appears that the capital appreciation available from
investments in such securities will equal or exceed the capital appreciation
available from investments in equity securities. The market value of debt
securities varies inversely to changes in prevailing interest rates. Investing
in debt obligations may provide an opportunity for capital appreciation when
interest rates are expected to decline. The Lexington International Fund will
invest in investment grade obligations and non-rated obligations of comparable
quality.
The Lexington International Fund may invest in securities of companies in
the following regions and the governments of those regions: the Asia Region,
including Japan; Africa; North America; Europe; Latin America; and such other
areas and countries as the Manager may determine from time to time. The
21
<PAGE>
Lexington International Fund may invest in companies located in developing
countries without limitation. Developing countries may have relatively unstable
governments, economies based on only a few industries, and securities markets
which trade a small number of companies. Prices on these exchanges tend to be
volatile and in the past these exchanges have offered greater potential for
gain, as well as loss, than exchanges in developed countries. While the
Lexington International Fund invests only in countries that it considers as
having relatively stable and friendly governments it is possible that certain
Lexington International Fund investments could be subject to foreign
expropriation or exchange control restrictions. See "Risk Considerations."
----------------------------------------
LEXINGTON RAMIREZ GLOBAL INCOME FUND
The investment objective of the Lexington Ramirez Global Income Fund is to
seek high current income. Capital appreciation is a secondary objective. The
Lexington Ramirez Global Income Fund invests primarily in lower rated and
unrated foreign debt securities whose credit quality is generally considered
equal to U.S. corporate debt securities known as "junk bonds." Junk bonds and
similarly rated foreign debt securities involve a high degree of risk and are
predominantly speculative. See "Portfolio Securities" and "Risk Considerations."
The Lexington Ramirez Global Income Fund, under normal conditions, invests
substantially all of its assets in debt securities of domestic companies,
companies of developed foreign countries, companies in emerging markets, and
debt securities issued by the U.S. and foreign governments. The debt securities
in which the Lexington Ramirez Global Income Fund invests consist of bonds,
notes, debentures and other similar instruments. The Lexington Ramirez Global
Income Fund may invest in debt securities issued by government agencies and
instrumentalities, central banks, commercial banks and other corporate entities.
The Lexington Ramirez Global Income Fund may invest up to 100% of its total
assets in domestic and foreign debt securities that are rated below investment
grade. The Lexington Ramirez Global Income Fund may also invest in securities
that are in default as to payment of principal and/or interest, and bank loan
participations and assignments.
The Lexington Ramirez Global Income Fund's investments in emerging markets
will primarily consist of the following: foreign "junk bonds," "Brady Bonds,"
and sovereign debt securities issued by emerging market governments. The
Lexington Ramirez Global Income Fund may invest in debt securities of emerging
market issuers without regard to ratings. Many emerging market debt securities
are not rated by United States rating agencies. The Lexington Ramirez Global
22
<PAGE>
Income Fund's ability to achieve its investment objectives is thus more
dependent on the Manager's credit analysis than would be the case if the
Lexington Ramirez Global Income Fund were to invest in higher quality bonds.
Currently, most emerging market debt securities are considered to have a credit
quality below investment grade.
-----------------------------
LEXINGTON TROIKA DIALOG RUSSIA FUND, INC.
The investment objective of the Lexington Troika Dialog Russia Fund is to
seek long-term capital appreciation through investment primarily in the equity
securities of Russian Companies. Under normal conditions, the Lexington Troika
Dialog Russia Fund seeks to achieve its objective by investing at least 65% of
its total assets in the securities of Russian Companies. The securities in which
the Lexington Troika Dialog Russia Fund may invest are common stock, preferred
stock, convertible preferred stock, bonds, notes or debentures convertible into
common or preferred stock, direct investments in Russian Companies, stock
purchase warrants or rights, and American Depository Receipts or Global
Depository Receipts. The Lexington Troika Dialog Russia Fund may invest the
remaining 35% of its total assets in debt securities issued by Russian
Companies, debt securities issued or guaranteed by the Russian Government or a
Russian governmental entity, debt securities of corporate and government issuers
outside Russia, equity securities of issuers outside Russia which the Fund
believes will experience growth in revenue and profits from participation in the
development of the economies of the Commonwealth of Independent States, and
Short-Term and Medium-Term Debt Securities.
The Lexington Troika Dialog Russia Fund intends to invest its assets in
Russian Companies in a broad array of industries, including the following: oil
and gas, energy generation and distribution, communications, mineral extraction,
trade, financial and business services, transportation, manufacturing, real
estate, textiles, food processing and construction. The Lexington Troika Dialog
Russia Fund is not permitted to invest more than 25% of the value of its total
assets in any one industry. It may, however, invest an unrestricted amount of
its assets in the oil and gas industry. The Lexington Troika Dialog Russia
Fund's investments will include investments in Russian Companies that have
characteristics and business relationships common to companies outside of
Russia. As a result, outside economic forces may cause fluctuations in the value
of securities held by the Lexington Troika Dialog Russia Fund.
Under current conditions, the Lexington Troika Dialog Russia Fund expects
to invest at least 15% of its total assets in very liquid assets to maintain
liquidity and provide stability. As the Russian equity markets develop, however,
23
<PAGE>
and the liquidity of Russian securities becomes less of a concern, the Lexington
Troika Dialog Russia Fund will invest a greater percentage of its assets in
Russian equity securities.
-------------------------------
LEXINGTON WORLDWIDE EMERGING MARKETS FUND, INC.
The investment objective of the Lexington Worldwide Emerging Markets Fund
is to seek long-term growth of capital primarily through investment in equity
securities and equivalents of companies domiciled in, or doing business in,
emerging countries and emerging markets. Under normal conditions, the Lexington
Worldwide Emerging Markets Fund seeks to achieve its objective by investing at
least 65% of its total assets in the equity securities and equivalents of
emerging market companies. Under normal conditions, the Lexington Worldwide
Emerging Markets Fund invests in emerging country and emerging market securities
of at least three countries outside of the United States. In the opinion of the
Manager, emerging market countries include, but are not limited to, the
following: Algeria, Argentina, Bahrain, Bangladesh, Bolivia, Botswana, Brazil,
Chile, China, Colombia, Costa Rica, Cyprus, Czech Republic, Dominican Republic,
Ecuador, Egypt Estonia, Finland, Ghana, Greece, Hong Kong, Hungary, India,
Indonesia, Israel, Ivory Coast, Jamaica, Jordan, Kenya, Lebanon, Malaysia,
Mauritius, Mexico, Morocco, Namibia, Nicaragua, Nigeria, Oman, Pakistan, Panama,
Peru, Philippines, Poland, Portugal, Russia, Singapore, Slovakia, South Africa,
South Korea, Sri Lanka Swaziland, Taiwan, Thailand, Trinidad & Tobago, Tunisia,
Turkey, Uruguay, Venezuela, Zambia, Zimbabwe. The Lexington Worldwide Emerging
Markets Fund may also invest in equity securities and equivalents of companies
that derive 50% or more of their total revenue from either goods or services
produced in emerging market countries or sales made in those countries.
The Lexington Worldwide Emerging Markets Fund's investments in emerging
country equity securities are not subject to any maximum limit, and the
Lexington Worldwide Emerging Markets Fund intends to invest substantially all of
its assets in emerging country and emerging market equity securities. The
Lexington Worldwide Emerging Markets Fund may invest the remaining 35% of its
total assets in equity securities without regard to whether they qualify as
emerging country or emerging market equity securities, debt securities
denominated in the currency of an emerging market or issued or guaranteed by an
emerging market company or the government of an emerging country, and Short-Term
and Medium-Term Debt Securities.
------------------------------------
LEXINGTON CONVERTIBLE SECURITIES FUND
The investment objective of the Lexington Convertible Securities Fund is
total return which it seeks to achieve by providing capital appreciation,
current income and conservation of shareholders capital. Under normal
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<PAGE>
conditions, the Lexington Convertible Securities Fund seeks to achieve its
objective by investing at least 65% of its total assets in debt securities
convertible into shares of common stock ("convertible securities"). The
Lexington Convertible Securities Fund may invest without limitation in
high-yield debt securities rated below investment grade. Such lower rated
securities are commonly referred to as "junk bonds." Junk bonds are considered
speculative and pose a greater risk of loss of principal and interest than
investment grade securities. See "Portfolio Securities" and "Risk
Considerations." Common stock received upon the conversion or sale of
convertible securities held by the Lexington Convertible Securities Fund will
either continue to be held by the Lexington Convertible Securities Fund or be
sold.
The convertible securities held by the Lexington Convertible Securities
Fund may consist of securities rated in the six highest rating categories by a
major rating service and non-rated debt securities. The Lexington Convertible
Securities Fund will not invest in any security which has been rated lower than
"B" by S&P or Moody's, which are both major rating services, or non-rated
securities of comparable quality.
The remaining assets of the Lexington Convertible Securities Fund may be
invested in securities other than convertible securities. The Lexington
Convertible Securities Fund may invest in dividend and non-dividend paying
non-convertible common stocks, corporate bonds, covered call options and put
options, stock index options, U.S. Government securities, repurchase agreements
and money market securities.
---------------------
LEXINGTON GROWTH AND INCOME FUND, INC.
The Lexington Growth and Income Fund's principal investment objective is
long term capital appreciation. Income is a secondary objective. The Fund seeks
to achieve its objective over the long term through investment in the stocks of
large, ably managed and well financed companies. Generally, the Lexington Growth
and Income Fund invests its assets in publicly traded common stocks and senior
securities convertible into common stocks of domestic and foreign companies.
--------------------
LEXINGTON SMALLCAP VALUE FUND, INC.
The investment objective of the Lexington SmallCap Value Fund is to seek
long term capital appreciation. Under normal conditions, the Lexington SmallCap
Value Fund seeks its objective by investing in common stocks and equivalents of
domestic companies with a market capitalization under $1 billion. Warrants and
convertible debt securities are common stock equivalents in which the Lexington
SmallCap Value Fund may invest. The Lexington SmallCap Value Fund will invest at
25
<PAGE>
least 90% of its assets in domestic companies which have market capitalizations
between $20 million and $1 billion at the time of investment. The remainder of
its assets may be invested in securities of companies with market
capitalizations below $20 million, above $1 billion, foreign companies with
dollar denominated shares traded in the United States, American Depository
Shares or Receipts, real estate investment trusts, and cash.
The Lexington SmallCap Value Fund will invest it assets primarily in the
equity securities of domestic companies listed on stock exchanges or traded
over-the-counter. The Lexington SmallCap Value Fund may invest in foreign
companies whose shares are traded in U.S. dollar denominated markets.
The companies in which the Lexington SmallCap Value Fund intends to invest
will generally have the following characteristics: a market capitalization of
less than $1 billion; a high relative ratio of revenue per share to stock price;
a low relative ratio of price to book value per share; a positive cash flow and
other measures of financial stability; and a low stock price relative to
historical levels.
-------------------
LEXINGTON GOLDFUND, INC.
The Lexington Goldfund's principal investment objective is to attain
capital appreciation and such hedge against loss of buying power as may be
obtained through investment in gold and equity securities of companies engaged
in mining or processing gold throughout the world. Under normal conditions, at
least 65% of the value of the total assets of the Lexington Goldfund will be
invested in gold and the securities of companies engaged in mining or processing
gold ("gold-related securities"). The Lexington Goldfund may also invest in
other precious metals, including platinum, palladium and silver. The Lexington
Goldfund intends to invest less than half of the value of its assets in gold and
other precious metals and more than half of the value of its assets in
gold-related securities, including securities of foreign issuers.
The Lexington Goldfund is designed to provide investors with a means to
protect against declines in the value of the U.S. dollar against world
currencies. To the extent that the Lexington Goldfund's investments in
gold-related securities appreciate in value relative to the U.S. dollar, the
Lexington Goldfund's investments may serve to offset declines in the buying
power of the U.S. dollar. Management believes that, over the long term,
investing in gold will protect capital from adverse monetary and political
developments. Investments in gold may provide more of a hedge against a decline
in the buying power of the dollar, devaluation and inflation than other types of
investments. The value of gold-related debt securities, however, will generally
not react to fluctuations in the price of gold. The market value of debt
securities of companies engaged in mining or processing gold can be expected to
fluctuate inversely with prevailing interest rates.
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<PAGE>
LEXINGTON GNMA INCOME FUND, INC.
The investment objective of the Lexington GNMA Income Fund is to seek a
high level of current income, consistent with liquidity and safety of principal.
Under normal market conditions, the Lexington GNMA Income Fund will invest at
least 80% of the value of its total assets in Government National Mortgage
Association ("GNMA") mortgage-backed securities (also known as "GNMA
Certificates"). Lexington GNMA Certificates represent part ownership of a pool
of mortgage loans. The timely payment of interest and principal on each
certificate is guaranteed by the full faith and credit of the United States
Government. The principal on Lexington GNMA Certificates is scheduled to be paid
back by the borrower over the length of the loan. The remaining assets of the
Lexington GNMAIncome Fund will be invested in other securities issued or
guaranteed by the U.S. Government, including U.S. Treasury securities.
The Lexington GNMA Income Fund will purchase "modified pass through" type
GNMA Certificates. "Modified pass through" GNMA Certificates entitle the holder
to receive all interest and principal payments owed by the borrower even if the
borrower has not made payment. The Lexington GNMA Income Fund intends to use the
proceeds from principal payments to purchase additional GNMA Certificates or
other U.S. Government guaranteed securities.
------------------------
LEXINGTON MONEY MARKET TRUST
The investment objective of the Lexington Money Market Trust is to seek as
high a level of current income as is consistent with the preservation of capital
and liquidity by investing in short-term money market instruments. The following
are the money market instruments in which the Lexington Money Market Trust will
invest: U.S. Government securities, time deposits, certificates of deposit,
bankers' acceptances, commercial paper, repurchase agreements and other money
market instruments.The Lexington Money Market Trust seeks to maintain a stable
net asset value of $1 per share.
The Lexington Money Market Trust will invest in money market instruments
that have been rated in one of the two highest rating categories by both S&P and
Moody's, both major rating agencies. A "Tier 1" security is one that has been
rated by either S&P or Moody's in the highest rating category, or, if unrated,
is of comparable quality. A "Tier 2" security is one that has been rated in the
second highest category by either S&P or Moody's, or, if unrated, is of
comparable quality. Up to 5% of the total assets of the Lexington Money Market
Trust may be invested in a single Tier 1 security (other than U.S. Government
securities). In addition, the Lexington Money Market Trust may not invest more
than 5% of its total assets in Tier 2 securities, and may not invest more than
1% of its total assets in any single Tier 2 security.
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<PAGE>
The Lexington Money Market Trust may only invest in money market
instruments with a remaining maturity of 397 days or less, provided that the
Fund's average weighted maturity does not exceed 90 days.
PORTFOLIO SECURITIES
EQUITY SECURITIES
The Lexington Convertible Securities Fund, Lexington Goldfund, Lexington
Growth and Income Fund, Lexington Crosby Small Cap Asia Growth Fund, Lexington
International Fund, Lexington SmallCap Value Fund, Lexington Troika Dialog
Russia Fund and Lexington Worldwide Emerging Markets Fund invest in common
stocks and some of the funds may invest in common stock equivalents (see chart).
The following constitute common stock equivalents: warrants, options and
convertible debt securities, ADRs, GDRs and EDRs. Common stock equivalents may
be converted into or provide the holder with the right to common stock. These
funds may also invest in other types of equity securities, including preferred
stocks, and equity derivative securities.
DEBT SECURITIES
The Lexington Ramirez Global Income Fund and the Lexington Convertible
Securities Fund will invest primarily in debt securities and the Lexington GNMA
Income Fund will have substantially all of its assets invested in GNMA
Certificates and U.S. Government securities.
The Lexington Goldfund, Lexington International Fund, Lexington Troika
Dialog Russia Fund and Lexington Worldwide Emerging Markets Fund may invest
primarily in debt securities when the Manager believes that debt securities will
provide capital appreciation through favorable changes in relative foreign
exchange rates, in relative interest rate levels or in the creditworthiness of
issuers.
The Lexington Troika Dialog Russia Fund and Lexington Worldwide Emerging
Markets Fund may, under normal conditions, invest up to 35% of their total
assets in Short-Term and Medium-Term Debt Securities. The Short-Term and
Medium-Term Debt Securities in which the Funds may invest are foreign and
domestic debt securities, including short-term (less than twelve months to
maturity) and medium-term (not greater than five years to maturity) obligations
issued by the U.S. Government, foreign governments, foreign and domestic
corporations and banks, and repurchase agreements.
JUNK BONDS. The Lexington Ramirez Global Income Fund, Lexington
Convertible Securities Fund and Lexington Troika Dialog Russia Fund may invest
in high yield, lower rated debt securities known as "junk bonds." Junk bonds are
debt obligations rated below investment grade and non-rated securities of
28
<PAGE>
comparable quality. Junk bonds are considered speculative and thus pose a
greater risk of default than investment grade securities. Investments of this
type are subject to greater risk of loss of principal and interest, but in
general provide higher yields than higher rated debt obligations. Bonds issued
by companies domiciled in emerging markets are usually rated below investment
grade. The Lexington Ramirez Global Income Fund may invest in securities that
are in default as to payment of principal and/or interest. Debt securities
purchased by Lexington Crosby Small Cap Asia Growth Fund, Lexington
International Fund and Lexington Worldwide Emerging Markets Fund must be of
investment grade quality or comparable thereto.
ZERO COUPON BONDS. The Lexington Ramirez Global Income Fund may invest in
zero coupon bonds. Zero coupon bond prices are highly sensitive to changes in
market interest rates. The original issue discount on the zero coupon bonds must
be included ratably in the income of the Lexington Ramirez Global Income Fund as
the income accrues even though payment has not been received. The Lexington
Ramirez Global Income Fund nevertheless intends to distribute an amount of cash
equal to the currently accrued original issue discount, and this may require
liquidating securities at times they might not otherwise do so and may result in
capital loss. See "Tax Information" in the Statement of Additional Information.
LOAN PARTICIPATION AND ASSIGNMENTS. The Lexington Ramirez Global Income
Fund may invest in loans arranged through private negotiations between a foreign
entity and one or more lenders. The majority of the Lexington Ramirez Global
Income Fund's investments in loans in emerging markets is expected to be in the
form of participation in loans ("Participations") and assignments of portions of
loans from third parties ("Assignments"). Participations typically will result
in the Lexington Ramirez Global Income Fund having a contractual relationship
only with the Lender, not with the borrower. The Lexington Ramirez Global Income
Fund will have the right to receive payments of principal, interest and any fees
to which it is entitled only from the Lender selling the Participation and only
upon receipt by the Lender of the payments from the borrower. As a result, the
Lexington Ramirez Global Income Fund will assume the credit risk of both the
borrower and the Lender that is selling the Participation. When the Lexington
Ramirez Global Income Fund purchases Assignments from Lenders, the Lexington
Ramirez Global Income Fund will acquire direct rights against the borrower on
the Loan. The Lexington Ramirez Global Income Fund may have difficulty disposing
of Assignments and Participations. The liquidity of such securities is limited
and the Lexington Ramirez Global Income Fund anticipates that such securities
could be sold only to a limited number of institutional investors. The lack of a
liquid secondary market could have an adverse impact on the value of such
securities.
BRADY BONDS. The Lexington Ramirez Global Income Fund may invest in "Brady
Bonds". Brady Bonds are securities created through the exchange of existing
29
<PAGE>
commercial bank loans to public and private entities in certain emerging markets
for new bonds in connection with a debt restructuring plan introduced by former
U.S. Secretary of the Treasury, Nicholas F. Brady. Fund investors should
recognize that BradyBonds have been issued only recently and, accordingly, do
not have a long payment history. DEPOSITORY RECEIPTS
DEPOSITORY RECEIPTS
Each Lexington Fund (except Lexington Money Market Trust and Lexington
GNMAIncome Fund) may invest in American Depository Receipts ("ADRs") and similar
securities. ADRs are securities traded in the U.S. that are backed by securities
of foreign issuers.
INVESTMENT COMPANIES
Each Lexington Fund (except the Lexington Money Market Trust) may invest up
to 10% of its total assets in shares of other investment companies that invest
in securities which the Funds may otherwise invest.
U.S. GOVERNMENT SECURITIES
All Lexington Funds may invest in fixed-rate and floating- or
variable-rate U.S. government securities. The U.S. Government guarantees
payments of interest and principal of U.S. Treasury bills, notes and bonds,
mortgage-related securities of the GNMA, and other securities issued by the U.S.
government. Other securities issued by U.S. government agencies or
instrumentalities are supported only by the credit of the agency or
instrumentality, for example those issued by the Federal Home Loan Bank, whereas
others, such as those issued by the FNMA, Farm Credit System and Student Loan
Marketing Association, have an additional line of credit with the U.S. Treasury.
Short-term U.S. government securities generally are considered to be among
the safest short-term investments. However, the U.S. government does not
guarantee the net asset value of the Funds' shares. With respect to U.S.
government securities supported only by the credit of the issuing agency or
instrumentality or by an additional line of credit with the U.S. Treasury, there
is no guarantee that the U.S. government will provide support to such agencies
or instrumentalities. Accordingly, such U.S. government securities may involve
risk of loss of principal and interest.
The following table illustrates investments that the Funds primarily
invest in or are permitted to invest in, as indicated in dark shade. The light
shade indicates that the Fund's policy may permit such investments within
limits.
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<PAGE>
- --------------------------------------------------------------------------------
PORTFOLIO SECURITIES
DARK SHADE:
Fund invests primarily in these types of investments, or Fund's policy permits
such investments.
LIGHT SHADE: Within limits, Fund's policy may permit such investments.
TYPE OF PORTFOLIO SECURITY
<TABLE>
<CAPTION>
Lexington Crosby Lexington Lexington Lexington Lexington Worldwide Lexington
Small Cap Asia International Ramirez Global Troika Dialog Emerging Convertible
Growth Fund Fund Income Fund Russia Fund Markets Fund Securities Fund
<S> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
Common Stock
- ------------------------------------------------------------------------------------------------------------------------------------
Common Stock Equivalents (Warrants)
- ------------------------------------------------------------------------------------------------------------------------------------
Common Stock Equivalents (Options) *
- ------------------------------------------------------------------------------------------------------------------------------------
Common Stock Equivalents
(Convertible Debt Securities)
- ------------------------------------------------------------------------------------------------------------------------------------
Common Stock Equivalents
(Depository Receipts)
- ------------------------------------------------------------------------------------------------------------------------------------
Preferred Stocks
- ------------------------------------------------------------------------------------------------------------------------------------
Equity Derivative Securities *
- ------------------------------------------------------------------------------------------------------------------------------------
Debt Securities (Below Investment
Grade) or (Junk Bonds)
- ------------------------------------------------------------------------------------------------------------------------------------
Debt Securities (Brady Bonds)
- ------------------------------------------------------------------------------------------------------------------------------------
Debt Securities (Zero Coupon)
- ------------------------------------------------------------------------------------------------------------------------------------
Debt Securities
(Loan Participation and Assignments)
- ------------------------------------------------------------------------------------------------------------------------------------
Debt Securities (GNMA Certificates)
- ------------------------------------------------------------------------------------------------------------------------------------
Debt Securities (Guaranteed by the U.S.
Gov't, its agencies or instrumentalities)
- ------------------------------------------------------------------------------------------------------------------------------------
Gold Bullion
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Lexington Lexington Lexington *Lexingtonn
Growth and SmallCap Value Lexington GNMA Income Money Market
Income Fund Fund Goldfund Fund Trust Fund
- ------------------------------------------------------------------------------------------------------------------------------------
Common Stock
- ------------------------------------------------------------------------------------------------------------------------------------
Common Stock Equivalents (Warrants)
- ------------------------------------------------------------------------------------------------------------------------------------
Common Stock Equivalents (Options)
- ------------------------------------------------------------------------------------------------------------------------------------
Common Stock Equivalents
(Convertible Debt Securities)
- ------------------------------------------------------------------------------------------------------------------------------------
Common Stock Equivalents
(Depository Receipts)
- ------------------------------------------------------------------------------------------------------------------------------------
Preferred Stocks
- ------------------------------------------------------------------------------------------------------------------------------------
Equity Derivative Securities
- ------------------------------------------------------------------------------------------------------------------------------------
Debt Securities (Below Investment
Grade) or (Junk Bonds)
- ------------------------------------------------------------------------------------------------------------------------------------
Debt Securities (Brady Bonds)
- ------------------------------------------------------------------------------------------------------------------------------------
Debt Securities (Zero Coupon)
- ------------------------------------------------------------------------------------------------------------------------------------
Debt Securities
(Loan Participation and Assignments)
- ------------------------------------------------------------------------------------------------------------------------------------
Debt Securities (GNMA Certificates)
- ------------------------------------------------------------------------------------------------------------------------------------
Debt Securities (Guaranteed by the U.S.
Gov't, its agencies or instrumentalities)
- ------------------------------------------------------------------------------------------------------------------------------------
Gold Bullion
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Notes: Lexington Ramirez Global Income Fund may invest in options and
derivatives with respect to debt securities, not equity securities. Lexington
Money Market Trust is not permitted to purchase any of the portfolio securities
identified in this table, and may only invest in short-term securities such as
commercial paper, short-term government securities, banker's acceptances or
other money market instruments.
31
<PAGE>
Other Investment Practices
The following table and sections summarize certain investment practices that the
Funds are permitted to engage in. These practices may involve risks. The
Glossary section at the end of this Prospectus briefly describes each of the
investment techniques summarized below. The Statement of Additional Information,
under the heading "Investment Objectives and Policies of the Funds," contains
more detailed information about certain of these practices.
<TABLE>
<CAPTION>
Lexington Crosby Lexington Lexington Lexington Lexington Worldwide Lexington
Small Cap Asia International Ramirez Global Troika Dialog Emerging Convertible
Growth Fund Fund Income Fund Russia Fund Markets Fun Securities Fund
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Repurchase agreements(1) x x x x x x
- ------------------------------------------------------------------------------------------------------------------------------------
Reverse dollar roll
transactions1
- ------------------------------------------------------------------------------------------------------------------------------------
Borrowing not to exceed x x x x
one-third of total fund assets
for leveraging purposes
- ------------------------------------------------------------------------------------------------------------------------------------
Reverse repurchase agreement x x x x x
- ------------------------------------------------------------------------------------------------------------------------------------
Dollar roll transactions x
- ------------------------------------------------------------------------------------------------------------------------------------
Securities lending not to exceed
10% of total fund assets
- ------------------------------------------------------------------------------------------------------------------------------------
Securities lending not to exceed
one-third of total fund assets x x x x
- ------------------------------------------------------------------------------------------------------------------------------------
When-issued and forward x x x x x
commitment securities
- ------------------------------------------------------------------------------------------------------------------------------------
Forward currency contracts(2) x x x x x
- ------------------------------------------------------------------------------------------------------------------------------------
Purchase options on securities
and currencies(3) x x x
- ------------------------------------------------------------------------------------------------------------------------------------
Purchase options on securities x x x
and indices3
- ------------------------------------------------------------------------------------------------------------------------------------
Write covered call options(3) x x x x x
- ------------------------------------------------------------------------------------------------------------------------------------
Write covered put options(3) x x x
- ------------------------------------------------------------------------------------------------------------------------------------
Interest rate futures contracts x x
- ------------------------------------------------------------------------------------------------------------------------------------
Futures and swaps and options
on futures(4) x x x x x
- ------------------------------------------------------------------------------------------------------------------------------------
Equity swap
- ------------------------------------------------------------------------------------------------------------------------------------
Illiquid securities limited to
5% of fund's net assets
- ------------------------------------------------------------------------------------------------------------------------------------
Illiquid securities limited to x
10% of fund's net assets
- ------------------------------------------------------------------------------------------------------------------------------------
Illiquid securities limited to
15% of fund's net assets x x x x x
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Lexington Lexington Lexington *Lexingtonn
Growth and SmallCap Value Lexington GNMA Income Money Market
Income Fund Fund Goldfund Fund Trust
- ------------------------------------------------------------------------------------------------------------------------------------
Repurchase agreements(1) x x x x x
- ------------------------------------------------------------------------------------------------------------------------------------
Reverse dollar roll
transactions1
- ------------------------------------------------------------------------------------------------------------------------------------
Borrowing not to exceed x
one-third of total fund assets
for leveraging purposes
- ------------------------------------------------------------------------------------------------------------------------------------
Reverse repurchase agreement x x
- ------------------------------------------------------------------------------------------------------------------------------------
Dollar roll transactions x
- ------------------------------------------------------------------------------------------------------------------------------------
Securities lending not to exceed
10% of total fund assets
- ------------------------------------------------------------------------------------------------------------------------------------
Securities lending not to exceed
one-third of total fund assets x
- ------------------------------------------------------------------------------------------------------------------------------------
When-issued and forward x x
commitment securities
- ------------------------------------------------------------------------------------------------------------------------------------
Forward currency contracts(2) x
- ------------------------------------------------------------------------------------------------------------------------------------
Purchase options on securities
and currencies(3)
- ------------------------------------------------------------------------------------------------------------------------------------
Purchase options on securities
and indices3
- ------------------------------------------------------------------------------------------------------------------------------------
Write covered call options(3)
- ------------------------------------------------------------------------------------------------------------------------------------
Write covered put options(3)
- ------------------------------------------------------------------------------------------------------------------------------------
Interest rate futures contracts
- ------------------------------------------------------------------------------------------------------------------------------------
Futures and swaps and options
on futures(4) x
- ------------------------------------------------------------------------------------------------------------------------------------
Equity swap
- ------------------------------------------------------------------------------------------------------------------------------------
Illiquid securities limited to
5% of fund's net assets
- ------------------------------------------------------------------------------------------------------------------------------------
Illiquid securities limited to x
10% of fund's net assets
- ------------------------------------------------------------------------------------------------------------------------------------
Illiquid securities limited to
15% of fund's net assets x
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
32
<PAGE>
-----------
1 Under the Investment Company Act, repurchase agreements and reverse dollar
roll transactions are considered to be loans by a fund and must be fully
collateralized by collateral assets. If the seller defaults on its
obligations to repurchase the underlying security, a fund may experience
delay or difficulty in exercising it rights to realize upon the security,
may incur a loss if the value of the security declines and may incur
disposition costs in liquidating the security.
2 A fund that may enter into in forward currency contracts may not do so with
respect to more than 70% of its total assets.
3 A FUND WILL NOT ENTER INTO OPTIONS ON SECURITIES, SECURITIES INDICES OR
CURRENCIES OR RELATED OPTIONS (INCLUDING OPTIONS ON FUTURES) IF THE SUM OF
INITIAL MARGIN DEPOSITS AND PREMIUMS PAID FOR ANY SUCH OPTION OR OPTIONS
WOULD EXCEED 5% OF ITS TOTAL ASSETS, AND IT WILL NOT ENTER INTO OPTIONS
WITH RESPECT TO MORE THAN 25% OF ITS TOTAL ASSETS.
4 A Fund may purchase and sell futures contracts and related options under
the following conditions: (a) the then-current aggregate futures market
prices of financial instruments required to be delivered and purchased
under open futures contracts shall not exceed 30% of the Fund's total
assets, at market value; and (b) no more than 5% of the assets, at market
value at the time of entering into a contract, shall be committed to margin
deposits in relation to futures contracts.
BORROWING FOR TEMPORARY OR EMERGENCY PURPOSES
For temporary or emergency purposes, Lexington Convertible Securities Fund
and Lexington Growth and Income Fund may borrow up to 10% of their total assets.
Lexington Money Market Trust may borrow up to one-third of its total assets;
Lexington GNMAIncome Fund may not borrow money, and the remaining Lexington
Funds may borrow up to 5% of their total assets. For leveraging purposes, some
Lexington Funds (see Chart)may borrow up to one-third of their total assets.
DEFENSIVE INVESTMENTS AND PORTFOLIO TURNOVER
Each Lexington Fund may invest up to 100% of its total assets in cash or
high-quality debt obligations for temporary defensive purposes.
The "portfolio turnover rate" is the frequency a Fund buys and sells
securities. Frequent transactions involve added expense. All Funds except
Lexington Convertible Securities Fund, Lexington Goldfund and Lexington SmallCap
Value Fund expect a portfolio turnover rate of greater than 100%.
HEDGING AND RISK MANAGEMENT PRACTICES
The Lexington Funds (other than the Lexington Money Market Trust) may
"hedge" against changes in financial markets, currency rates and interest rates.
A typical hedge is designed to offset a decline that could hurt the value of the
Fund's securities. The Lexington Funds may hedge with "derivatives." Derivatives
are instruments whose value is linked to, or derived from, another instrument,
like an index or a commodity. Some Lexington Funds (see chart) may invest in
options and futures contracts.
33
<PAGE>
Hedging transactions involve certain risks. Although a Fund may benefit
from hedging, unanticipated changes in interest rates or securities prices may
result in greater losses for a Fund than if it did not hedge. If a Fund does not
correctly predict a hedge, it may lose money. In addition, a Fund pays
commissions and other costs in connection with such investments. Hedging
transactions may not exist is some countries.
INVESTMENT RESTRICTIONS
The investment objective of each Lexington Fund is fundamental and may not
be changed without shareholder approval but, unless otherwise stated, each
Fund's other investment policies may be changed by its Board. If a Fund changes
its investment objective or policies, you should consider whether that Fund is
right for you. The Lexington Funds are subject to additional investment policies
and restrictions described in the Statement of Additional Information, some of
which are fundamental.
RISK CONSIDERATIONS
SMALL COMPANIES
The Lexington Crosby Small Cap Asia Growth Fund and Lexington SmallCap
Value Fund emphasize investments in smaller companies that may benefit from the
development of new products and services. Such smaller companies may present
greater opportunities for capital appreciation but may involve greater risk than
larger, more mature issuers. Such smaller companies may have limited product
lines, markets or financial resources, and their securities may trade less
frequently and in more limited volume than those of larger, more mature
companies. As a result, the prices of their securities may fluctuate more than
those of larger issuers.
Many companies traded on securities markets in many foreign countries are
smaller, newer and less seasoned than companies whose securities are traded on
securities markets in the United States. Investments in smaller companies
involve greater risk than is customarily associated with investing in larger
companies. Smaller companies may have limited product lines, markets or
financial or managerial resources and may be more susceptible to losses and
risks of bankruptcy. Additionally, market making and arbitrage activities are
generally less extensive in such markets and with respect to such companies,
which may contribute to increased volatility and reduced liquidity of such
markets or such securities. Accordingly, each of these markets and companies may
be subject to greater influence by adverse events generally affecting the
market, and by large investors trading significant blocks of securities, than is
usual in the United States. To the extent that any of these countries
34
<PAGE>
experiences rapid increases in its money supply and investment in equity
securities for speculative purposes, the equity securities traded in any such
country may trade at price-earning multiples higher than those of comparable
companies trading on securities markets in the United States, which may not be
sustainable. In addition, risks due to the lack of modern technology, the lack
of a sufficient capital base to expand business operations, the possibility of
permanent or temporary termination of trading, and greater spreads between bid
and ask prices may exist in such markets.
FOREIGN SECURITIES
The Lexington Crosby Small Cap Asia Growth Fund, Lexington Goldfund,
Lexington Growth and Income Fund, Lexington International Fund, Lexington
Ramirez Global Income Fund, Lexington Troika Dialog Russia Fund and Lexington
Worldwide Emerging Markets Fund have the right to purchase securities in foreign
countries. Accordingly, shareholders should consider carefully the substantial
risks involved in investing in securities issued by companies and governments of
foreign nations, which are in addition to the usual risks of loss inherent in
domestic investments. The Lexington Crosby Small Cap Asia Growth Fund, Lexington
International Fund, Lexington Ramirez Global Income Fund, Lexington Troika
Dialog Russia Fund and Lexington Worldwide Emerging Markets Fund, may invest in
securities of companies domiciled in, and in markets of, so-called emerging
market countries. These investments may be subject to higher risks than
investments in more developed countries.
Foreign investments involve the possibility of expropriation,
nationalization or confiscatory taxation, taxation of income earned in foreign
nations (including, for example, withholding taxes on interest and dividends) or
other taxes imposed with respect to investments in foreign nations, foreign
exchange controls (which may include suspension of the ability to transfer
currency from a given country and repatriation of investments), default in
foreign government securities, and political or social instability or diplomatic
developments that could adversely affect investments. In addition, there is
often less publicly available information about foreign issuers than those in
the U.S. Foreign companies are often not subject to uniform accounting, auditing
and financial reporting standards. Further, these funds may encounter
difficulties in pursuing legal remedies or in obtaining judgments in foreign
courts. Additional risk factors, including use of domestic and foreign custodian
banks and depositories, are described elsewhere in this Prospectus and in the
Statement of Additional Information.
Brokerage commissions, fees for custodial services and other costs
relating to investments in other countries are generally greater than in the
U.S. Foreign markets have different clearance and settlement procedures from
35
<PAGE>
those in the U.S., and certain markets have experienced times when settlements
did not keep pace with the volume of securities transactions. The inability of a
fund to make intended security purchases due to settlement difficulties could
cause it to miss attractive investment opportunities. Inability to sell a
portfolio security due to settlement problems could result in loss to the fund
if the value of the portfolio security declined or result in claims against the
fund. In certain countries, there is less government supervision and regulation
of business and industry practices, stock exchanges, brokers, and listed
companies than in the U.S. The securities markets of many of the countries in
which these funds may invest may also be smaller, less liquid, and subject to
greater price volatility than those in the U.S.
Because certain foreign securities may be denominated in foreign
currencies, the value of such securities will be affected by changes in currency
exchange rates and in exchange control regulations, and costs will be incurred
in connection with conversions between currencies. A change in the value of a
foreign currency against the U.S. dollar results in a corresponding change in
the U.S. dollar value of a fund's securities denominated in the currency. Such
changes also affect the fund's income and distributions to shareholders. A fund
may be affected either favorably or unfavorably by changes in the relative rates
of exchange between the currencies of different nations, and a fund may
therefore engage in foreign currency hedging strategies. Such strategies,
however, involve certain transaction costs and investment risks, including
dependence upon the Manager's ability to predict movements in exchange rates.
Some countries in which one of these funds may invest also may have fixed
or managed currencies that are not freely convertible at market rates into the
U.S. dollar. Certain currencies may not be internationally traded. A number of
these currencies have experienced steady devaluation relative to the U.S.
dollar, and such devaluations in the currencies may have a detrimental impact on
the fund. Many countries in which a fund may invest have experienced
substantial, and in some periods extremely high, rates of inflation for many
years. Inflation and rapid fluctuation in inflation rates may have negative
effects on certain economies and securities markets. Moreover, the economies of
some countries may differ favorably or unfavorably from the U.S. economy in such
respects as the rate of growth of gross domestic product, rate of inflation,
capital reinvestment, resource self-sufficiency and balance of payments. Certain
countries also limit the amount of foreign capital that can be invested in their
markets and local companies, creating a "foreign premium" on capital investments
available to foreign investors such as the fund. The fund may pay a "foreign
premium" to establish an investment position which it cannot later recoup
because of changes in that country's foreign investment laws.
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LOWER-QUALITY DEBT
The Lexington Convertible Securities Fund, Lexington Troika Dialog Russia
Fund, Lexington Goldfund, Inc. and Lexington Ramirez Global Income Fund are
authorized to invest high-yield, lower-rated debt securities commonly referred
to as "junk bonds." Lower-rated debt securities are considered highly
speculative and changes in economic conditions or other circumstances are more
likely to lead to a weakened capacity to make principal and interest payments
than with higher-grade debt securities.
CONCENTRATION IN SECURITIES OF RUSSIAN COMPANIES
The Lexington Troika Dialog Russia Fund concentrates its investment in
companies that have their principal activities in Russia. Consequently, the
Lexington Troika Dialog Russia Fund's share value may be more volatile than that
of investment companies not sharing this geographic concentration. Since the
breakup of the Soviet Union at the end of 1991, Russia has experienced dramatic
political and social change. The political system in Russia is emerging from a
long history of extensive state involvement in economic affairs. The country is
undergoing a rapid transition from a centrally-controlled command system to a
market-oriented, democratic model. The Lexington Troika Dialog Russia Fund may
be affected unfavorably by political or diplomatic developments, social
instability, changes in government policies, taxation and interest rates,
currency repatriation restrictions and other political and economic developments
in the law or regulations in Russia and, in particular, the risks of
expropriation, nationalization and confiscation of assets and changes in
legislation relating to foreign ownership. See "Russia" and "Russian Company" in
the Glossary.
The Russian securities markets are substantially smaller, less liquid and
significantly more volatile than the securities markets in the United States. In
addition, there is little historical data on these securities markets because
they are of recent origin. A substantial proportion of securities transactions
in Russia are privately negotiated outside of stock exchanges and
over-the-counter markets. A limited number of issuers represent a
disproportionately large percentage of market capitalization and trading volume.
Some issuers may be exposed to center-regional conflicts in jurisdiction in the
areas of taxation and overall corporate governance which could put the Fund's
investments at risk. In addition, because the Russian securities markets are
smaller and less liquid than in the United States, obtaining prices on portfolio
securities from independent sources may be more difficult than in other markets.
The political environment in Russia in 1997 is more stable than in 1993
and earlier when clashes between reformers and reactionaries were continuous,
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<PAGE>
setting the stage for an attempted coup d'etat in October 1993. Nevertheless,
there is still a great deal of uncertainty surrounding the political future of
the country. The civil war in Chechnya has highlighted the political tensions
that exist between the central government in Moscow and some of the regions
within the Russian Federation and has contributed to political instability by
weakening confidence domestically and internationally in the government. The
risk exists that armed conflict in Chechnya will continue, which could deter
foreign investment and international aid and further weaken the reformist
government's control. A continuing trend away from reformers toward
conservatives could further deter foreign investment if foreign policy
initiatives contrary to western interests (Iran, Iraq) lead to a deterioration
in relations between the Russian Federation and the West. The risk also exists
that the political tensions associated with the war in Chechnya will lead to
attempts for independence in other regions within the Russian Federation. The
war in Chechnya and other inflammatory issues may also lead to greater tensions
and divisions between the President and the legislature.
The military could have a negative impact on Russia's political and
economic future. The declining stature of Russia as a world power has led to a
widespread sentiment among Russians for a return to Russia's status as a
superpower. Demobilization of troops, cuts in the military budget, the growth of
significant gaps in living standards between the military and civilian sectors,
and the perception of an external threat from NATO could lead to further
political unrest.
Moreover, it is uncertain whether Russia's privatization process will
continue. Although government officials have publicly pledged their continued
support for the reform process. It is also unclear whether the reforms intended
to liberalize prevailing economic structures based on free market principles
will be successful, particularly in terms of foreign ownership of Russian
companies.
The planned economy of the former Soviet Union was run with qualitatively
different objectives and assumptions from those prevalent in a market system and
Russian businesses do not have any recent history of operating within a
market-oriented economy. In general, relative to companies operating in Western
economies, companies in Russia are characterized by a lack of: (i) management
with experience of operating in a market economy; (ii) modern technology; and,
(iii) a sufficient capital base with which to develop and expand their
operations. It is unclear what will be the future effect on Russian companies,
if any, of Russia's continued attempts to move toward a more market-oriented
economy.
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Russia's economy has experienced severe economic recession, if not
depression, since 1990 during which time the economy has been characterized by
high rates of inflation, high rates of unemployment, declining gross domestic
product, deficit government spending, and a devaluing currency. The economic
reform program has involved major disruptions and dislocations in various
sectors of the economy. The economic problems have been exacerbated by a growing
liquidity crisis which culminated in a bank liquidity crisis in August 1995. The
taxation system has had numerous attempts at reform, but a failure to collect
taxes is an ongoing major problem.
Russia presently receives significant financial assistance from a number
of countries through various programs. To the extent these programs are reduced
or eliminated in the future, Russian economic development may be adversely
impacted.
Although evolving rapidly, even the largest of Russia's stock exchanges
are not well developed compared to Western stock exchanges. The actual volume of
exchange-based trading in Russia is low and active on-market trading generally
occurs only in the shares of a few private companies. Most secondary market
trading of equity securities occurs through over-the-counter trading facilitated
by a growing number of licensed brokers. Shares are traded on the
over-the-counter market primarily by the management of enterprises, investment
funds, short-term speculators and foreign investors.
INTEREST RATES
The market value of debt securities that are interest rate sensitive is
inversely related to changes in interest rates. That is, an interest rate
decline produces an increase in a security's market value, and an interest rate
increase produces a decrease in value. The longer the remaining maturity of a
security, the more sensitive that security is to changes in interest rates.
Changes in the ability of an issuer to make payments of interest and principal
and in the market's perception of the issuer's creditworthiness also affect the
market value of that issuer's debt securities.
Prepayments of principal of mortgage-related securities by mortgagors or
mortgage foreclosures affect the average life of the mortgage-related securities
in a fund's portfolio. Mortgage prepayments are affected by the level of
interest rates and other factors, including general economic conditions and the
underlying location and age of the mortgage. In periods of rising interest
rates, the prepayment rate tends to decrease, lengthening the average life of a
pool of mortgage-related securities. In periods of falling interest rates, the
prepayment rate tends to increase, shortening the average life of a pool.
Because prepayments of principal generally occur when interest rates are
declining, it is likely that the Lexington GNMA Income Fund may have to reinvest
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the proceeds of prepayments at lower interest rates than those of their previous
investments. If this occurs, a fund's yield will decline correspondingly. Thus,
mortgage-related securities may have less potential for capital appreciation in
periods of falling interest rates than other fixed-income securities of
comparable duration, although they have a comparable risk of decline in market
value in periods of rising interest rates. To the extent that the Lexington GNMA
Income Fund purchases mortgage-related securities at a premium, unscheduled
prepayments, which are made at par, result in a loss equal to any unamortized
premium. Duration is one of the fundamental tools used by the Manager in
managing interest rate risks including prepayment risks. See "Duration" in the
Glossary.
NON-DIVERSIFIED PORTFOLIO. The Lexington Goldfund and Lexington Troika
Dialog Russia Fund are "non-diversified" investment companies under the
Investment Company Act. This means that the Lexington Goldfund and Lexington
Troika Dialog Russia Fund are not limited in the proportion of their total
assets that may be invested in a single company. The Lexington Goldfund and
Lexington Troika Dialog Russia Fund may invest a greater portion of their assets
in fewer companies than "diversified" funds, and thus may be subject to greater
risk. The Lexington Goldfund and Lexington Troika Dialog Russia Fund, however,
intend to comply with the diversification requirements of federal tax laws to
qualify as a regulated investment company.
PRECIOUS METALS
The Lexington Goldfund may invest in gold bullion and other precious
metals. These precious metals investments earn no income return, unlike savings
deposits, bonds or even stocks which may produce interest or dividend income.
Transaction and storage costs may be higher than costs relating to the buying,
holding and selling of more traditional types of investments. An increase in the
market price of precious metals is the only way the Fund will be able to realize
a gain on these investments.
SETTLEMENT AND CUSTODY
The Funds that invest in foreign securities, especially the Lexington
Troika Dialog Russia Fund could be subject to risks not normally associated with
U.S. investments because of newly developed securities markets and the
underdeveloped state of banking and telecommunications systems. Russia does not
have a central registration system, therefore ownership of shares is recorded by
the companies themselves and by registrars located throughout Russia. Although
these registrars may be inspected, it is possible that the Fund's ownership
rights could be lost through fraud, negligence or even mere oversight on behalf
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<PAGE>
the registrars, and the Fund could experience difficulty enforcing any rights
against the registrar or issuer in the event of loss of share registration. Due
to local postal and banking standards, there are risks that the payment of
dividends or other distributions could be delayed or lost. Russian banking
institutitons and registrars are not guaranteed by the state.
In light of these risks, the Board of Directors of the Lexington Troika
Dialog Russia Fund has approved procedures whereby the Fund will not invest in
the securities of a Russian company unless that company's registrar has entered
into a contract with the Fund's Sub-Custodian Bank. This protective contract
gives the Sub-Custodian Bank the right to conduct regular share confirmations on
behalf of the Fund. These procedures also require the Sub-Custodian Bank to
provide certain information on a periodic basis to the Board of Directors
concerning the registration of shares and custody arrangements in Russia.
MANAGEMENT OF THE FUNDS
BOARD OF DIRECTORS/TRUSTEES
Each Lexington Fund has either a Board of Directors or a Board of Trustees
that establishes its policies and supervises and reviews its management.
Day-to-day operations of the Lexington Funds are administered by the officers of
the Lexington Funds and by the Manager and Sub-Advisers pursuant to the terms of
an investment management agreement with each fund and investment sub-advisory
agreements between the Manager and the Sub-Advisers.
BOARD OF ADVISERS
The Lexington Troika Dialog Russia Fund's Board of Directors will receive
oversight assistance from a Board of Advisers which will be composed of experts
in Russian political and economic affairs. The Board of Advisers will be
responsible for providing the Board of Directors with periodic updates on
political and macroeconomic conditions and trends in Russia, and their potential
implication for the overall investment environment in Russia. This will enhance
the Board of Directors' ability to oversee and safeguard the assets of the
Lexington Troika Dialog Russia Fund.
The members of the Board of Advisers currently are:Keith Bush, Senior
Associate-Russian and Eurasian Studies at the Center for Strategic and
International Studies:Richard M. Hisey, Executive Vice President and Chief
Financial Officer of Lexington Global Asset Managers, Inc. and Marin J.
Strmecki, Ph.D., Director of Programs for the Smith Richardson Foundation. See
Statement of Additional Information for further information on the Board of
Advisers.
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INVESTMENT ADVISER
Lexington Management Corporation is the Manager of the Lexington Funds.
The Manager was established in 1938 and is an investment adviser registered as
such with the Securities and Exchange Commission under the Investment Advisers
Act of 1940, as amended. The Manager advises private clients as well as the
Lexington Funds. The Manager is a wholly-owned subsidiary of Lexington Global
Asset Managers, Inc., a Delaware corporation. Descendants of Lunsford
Richardson, Sr., their spouses, trusts and other related entities have a
controlling interest in Lexington Global Asset Managers, Inc.
(NASDAQSymbol:LGAM).
THE SUB-ADVISERS
LEXINGTON CONVERTIBLE SECURITIES FUND
The Manager has entered into a Sub-Advisory Agreement with Ariston Capital
Management Corporation ("Ariston"). Under the Sub-Advisory Agreement, Ariston
will provide the Lexington Convertible Securities Fund with investment
management and administrative services. Ariston also serves as investment
adviser to private and institutional investment accounts. Such accounts own a
significant number of shares of the Lexington Convertible Securities Fund as
part of their investment program. Ariston was founded in 1977 and provides
investment management to individuals, corporations, pension and profit sharing
plans, and other qualified retirement plan accounts. Ariston is recognized for
its expertise in portfolio management, specializing in convertible securities
and market forecasting.
LEXINGTON CROSBY SMALL CAP ASIA GROWTH FUND
The Manager has entered into a Sub-Advisory Agreement with Crosby Asset
Management (US) Inc. ("Crosby"). Under the Sub-Advisory Agreement, Crosby will
provide the Lexington Crosby Small Cap Asia Growth Fund with investment
management services. Crosby was established on October 4, 1990 in the British
Virgin Islands. Crosby manages assets and provides investment advice for
investment company and institutional private accounts around the world. It is a
subsidiary of the Crosby Group, Hong Kong.
LEXINGTON RAMIREZ GLOBAL INCOME FUND
The Manager has entered into a Sub-Advisory Agreement with MFR Advisors,
Inc. ("MFR"). Under the Sub-Advisory Agreement, MFR will provide the Lexington
Ramirez Global Income Fund with investment and economic research services. MFR
manages assets for both investment companies and institutions. MFR is a
subsidiary of Maria Fiorini Ramirez, Inc.
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LEXINGTON SMALLCAP VALUE FUND
The Manager has entered into a Sub-Advisory Agreement with Capital
Technology Inc. ("CTI"). Under the Sub-Advisory Agreement, CTI will provide the
Lexington SmallCap Value Fund with investment advice and management of the
Fund's investment program. CTI was founded in Charlotte, North Carolina in 1977
and invests exclusively in domestic smaller capitalization stocks. CTI currently
manages assets both small and mid cap growth and value styles for primarily
institutional clients.
LEXINGTON TROIKA DIALOG RUSSIA FUND
The Manager has entered into a Sub-Advisory Agreement with Troika Dialog
Asset Management ("TDAM"). Under the Sub-Advisory Agreement, TDAM will provide
the Lexington Troika Dialog Russia Fund with investment advice and management of
the Fund's investment program. TDAM is a wholly owned subsidiary of Troika
Dialog which was founded in Moscow, Russia in 1991 by Dialog Bank and Troika
Capital Corporation.
REGISTERED SERVICE MARK
The Manager as owner of the registered service mark "Lexington" will
sublicense the Funds to include the word "Lexington" as part of their names
subject to revocation by the Manager in the event that the Funds cease to engage
the Manager or its affiliates as investment manager or distributor. Crosby has
authorized the Lexington Crosby Small Cap Asia Growth Fund to include the word
"Crosby" as part of its corporate name subject to revocation by Crosby in the
event the Lexington Crosby Small Cap Asia Growth Fund ceases to engage Crosby as
Sub-Adviser. In that event the Funds will be required upon demand of the Manager
(or with regard to the Lexington Crosby Small Cap Asia Growth Fund, Crosby) to
change their respective names to delete the word "Lexington" (or with regard to
the Lexington Crosby Small Cap Asia Growth Fund, "Crosby") therefrom.
PORTFOLIO MANAGERS
LEXINGTON CONVERTIBLE SECURITIES FUND
Richard B. Russell manages the Lexington Convertible Securities Fund. Mr.
Russell is President of Ariston Capital Management Corporation, the Lexington
Convertible Securities Fund's Sub-Adviser. He is a graduate of the School of
Business at the University of Washington and has completed additional training
at the New York Institute of Finance. He is a recognized authority on portfolio
management, particularly through the use of convertible securities and market
forecasting. He has spent his entire professional career as an independent money
manager, dating from 1972. Before founding Ariston in 1977, he was a full-time
manager of private family assets. Mr. Russell has conducted extensive research
on investment topics.
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LEXINGTON CROSBY SMALL CAP ASIA GROWTH FUND
CHRISTINA LAM is a lead manager (Nigel Webber is the other lead manager)
on a portfolio management team that manages the Lexington Crosby Small Cap Asia
Growth Fund. Ms. Lam is Vice President and Portfolio Manager of the Lexington
Crosby Small Cap Asia Growth Fund. Ms. Lam joined Crosby Asset Management in
1991. She is responsible for the investment management of the listed equity
portfolios under the management of Crosby Asset Management which include a major
Asian small capitalization account. After graduating with a Law Degree with
Honors from Warwick University, she qualified as a Barrister from Lincoln's Inn
in London. She moved to Hong Kong in 1987 where she joined Schroder Securities
Limited in Hong Kong as an investment analyst, where her coverage included the
utilities, industrials and retail sectors and conglomerates.
NIGEL WEBBER is a lead manager (Ms. Lam is the other lead manager) on a
portfolio management team that manages the Lexington Crosby Small Cap Asia
Growth Fund. Mr. Webber is Vice President and Portfolio Manager of the Lexington
Crosby Small Cap Asia Growth Fund. Mr. Webber is responsible for the Fund's
overall investment strategy. Mr. Webber was appointed a Managing Director of
Crosby Asset Management in October 1993 with primary responsibility for business
development. He joined Crosby Asset Management after being a partner in Causeway
Capital Limited, a leading independent U.K. investment management firm
specializing in private equity investment and smaller listed companies. He
started his career at KPMG Peat Marwick, followed by five years at Citicorp
International Bank Limited in London and New York and three years with
Mercantile House Holdings PLC a leading financial services group. In 1987, he
joined as Managing Director, an investment company specializing in the financial
sector where he first became associated with the Crosby Group. He was a Director
and member of the investment committee of The Thai Development Capital Fund
Limited and The China Investment Company Ltd., two funds managed by Crosby Asset
Management from their launch until September 1993.
LEXINGTON GOLDFUND
Robert W. Radsch, CFA, is portfolio manager of the Lexington Goldfund. Mr.
Radsch is a Vice President of the Manager. Prior to joining Lexington in July
1994, he was Senior Vice President, Portfolio Manager and Chief Economist for
the Bull & Bear Group. He has extensive experience managing gold, silver and
platinum on an international basis having managed precious metals and
international funds for more than 13 years. Mr. Radsch is a graduate of Yale
University with a B.A. degree and holds an M.B.A. in Finance from Columbia
University.
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LEXINGTON GROWTH AND INCOME FUND
Alan Wapnick is portfolio manager of the Lexington Growth and Income Fund.
Mr. Wapnick is Senior Vice President, Director of Domestic Investment Equity
Strategy of the Manager. Mr. Wapnick is responsible for domestic investment
analysis and portfolio management at LMC. He has 26 years investment experience.
Prior to joining the Manager in 1986, Mr. Wapnick was an equity analyst with
Merrill Lynch, J.&W. Seligman, Dean Witter and most recently Union Carbide
Corporation. Mr. Wapnick is a graduate of Dartmouth College and received a
Master's Degree in Business Administration from Columbia University.
LEXINGTON GNMA INCOME FUND
Denis P. Jamison manages the Lexington GNMA Income Fund. Mr. Jamison is
Senior Vice President and Director Fixed Income Strategy of the Manager. Mr.
Jamison is responsible for fixed-income portfolio management. He is a member of
the New York Society of Security Analysts. Prior to joining the Manager 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.
LEXINGTON INTERNATIONAL FUND
Richard T. Saler is the lead manager on an investment management team that
manages the Lexington International Fund. Mr. Saler is Senior Vice President,
Director of International Investment Strategy of the Manager. Mr. Saler is
responsible for international investment analysis and portfolio management at
the Manager. He has ten years of investment experience. Mr. Saler has focused on
international markets since first joining the Manager in 1986. In 1991 he was a
strategist with Nomura Securities and rejoined the Manager in 1992. Mr. Saler is
a graduate of New York University with a B.S. Degree in Marketing and an M.B.A.
in Finance from New York University's Graduate School of Business
Administration.
PHILLIP A. SCHWARTZ is a co-manager on an investment management team that
manages the Lexington International Fund. Mr. Schwartz is a Vice President of
the Manager, Chartered Financial Analyst and member of the New York Security
Analysts Association. He is responsible for international investment analysis
and portfolio management at the Manager, and has eight years investment
experience. Prior to joining Lexington in 1993, Mr. Schwartz was Vice President
of European Research Sales with Cheuvreux De Virieu in Paris and New York,
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serving the institutional market. Prior to Cheuvreux, he was affiliated with
Olde and Co. and Kidder, Peabody as a stockbroker. Mr. Schwartz earned his B.A.
and M.A. degrees from Boston University.
LEXINGTON MONEY MARKET TRUST
DENIS P. JAMISON is portfolio manager of the Lexington Money Market Trust.
Mr. Jamison also manages the Lexington GNMA Income Fund and the Lexington
Ramirez GlobalIncome Fund. Mr. Jamison is Senior Vice President and Director
Fixed Income Strategy of Lexington Management Corporation. Mr. Jamison is
responsible for fixed-income portfolio management. He is a member of the New
York Society of Security Analysts. Prior to joining the Manager 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.
LEXINGTON RAMIREZ GLOBAL INCOME FUND
Denis P. Jamison manages the Lexington Ramirez Global Income Fund. Mr.
Jamison is Senior Vice President and Director Fixed Income Strategy of Lexington
Management Corporation. Mr. Jamison is responsible for fixed-income portfolio
management. He is a member of the New York Society of Security Analysts. Prior
to joining the Manager 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.
MARIA FIORINI RAMIREZ, President and Chief Executive Officer of MFR
Advisors Inc. In 1973 she started a ten year association with Merrill Lynch,
serving as Vice President and Senior Money Market Economist. She joined Becker
Paribas in 1984 as Vice President and Senior Money Market Economist before
joining Drexel Burnham Lambert that same year as First Vice President and Money
Market Economist. She was promoted to Managing Director of Drexel in 1986. From
April, 1990 to August 1992, Ms. Ramirez was the President and Chief Executive
Officer of Maria Ramirez Capital Consultants, Inc., a subsidiary of John Hancock
Freedom Securities Corporation. Ms. Ramirez established MFR in August, 1992, MFR
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is Sub-Adviser to the Lexington Ramirez Global Income Fund. Ms. Ramirez holds a
B.A. in Business Administration and Economics from Pace University.
LEXINGTON SMALLCAP VALUE FUND
DENNIS HAMILTON is one of two lead managers (Robb W. Rowe is the other
lead manager) of a portfolio management team that manages the Lexington SmallCap
Value Fund. Mr. Hamilton is Vice President and Portfolio Manager of Capital
Technology, Inc. ("CTI"). He is responsible for issue selection and the day to
day investment activities of the Lexington SmallCap Value Fund. Mr. Hamilton
joined CTI in 1994 after being a principal at Mercer Investment Consulting, Inc.
He has also served as Director of Pension Investment for several multi-billion
dollar corporate pension funds and was President and Chief Investment Officer of
Western Reserve Capital Management, Inc., an SEC registered investment advisor.
He is an Honors graduate of Colgate University and earned an MBA from Harvard
Business School in 1971.
ROBB W. ROWE is one of two lead managers (Mr. Hamilton is the other lead
manager) of a portfolio management team that manages the Lexington SmallCap
Value Fund. Mr. Rowe is President and principal shareholder of CTI. He is
responsible for the Lexington SmallCap Value Fund's overall investment strategy.
Mr. Rowe joined CTI in 1982 after being Vice President and Regional Manager of
AG Becker Co. He is a graduate of Ripon College and received an MBA from the
University of Chicago in 1971.
LEXINGTON TROIKA DIALOG RUSSIA FUND
PETER DERBY is a manager on a portfolio management team that manages the
Lexington Troika Dialog Russia Fund. Mr. Derby is the Chairman of the Board of
TDAM and is the President, Chief Executive Officer and founder of Troika Dialog
and is the President and Chief Executive Officer of Dialog Bank, a position he
has held since 1991. Mr. Derby participated in the drafting of corporate,
banking and securities legislation in Russia and is currently a member of the
Expert Council of Russia's Federal Securities Exchange Commission. Mr. Derby
holds numerous director positions in Russian enterprises and charities; he is a
founding and current Member of the Board of the Moscow International Currency
Exchange, and is a Member of the Board of Directors of the American Chamber of
Commerce in Russia. Mr. Derby is Treasurer and Member of the Board of Junior
Achievement in Russia. He is a founding Member of the Russian-American
Professional Club in New York City.
NANCY HERRING is a lead manager of a portfolio management team that manages
the Lexington Troika Dialog Russia Fund. Ms. Herring manages the Russian
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domestic mutual funds of Troika Dialog. She was appointed Managing Director in
1996. Before joining TDAM, Ms. Herring, a U.S. citizen, was a portfolio manager
of a U.S. equity fund for Dean Witter Intercapital. In all, she has over twelve
years of security industry experience. Her Master's Degree in Business
Administration was earned in International Business and Finance at Columbia
University Graduate School of Business.
GAVIN RANKIN is a lead manager of a portfolio management team that manages
the Lexington Troika Dialog Russia Fund. Mr. Rankin is Head of Research for TDAM
and Troika Dialog. He is responsible, along with other members of the portfolio
management team, for the Fund's overall investment strategy. Before joining
Troika Dialog, he was the Founder and Chief Executive Officer of Lonpra A.S., an
investment banking firm in Czechoslovakia in 1991. Mr. Rankin received a degree
in law (L.L.B.) from the University of Buckingham in England and also qualified
as a Chartered Accountant with Price Waterhouse. Mr. Rankin has extensive
experience in East European equity research and management.
RUBEN VARDANIAN is a manager on a portfolio management team that manages
the Lexington Troika Dialog Russia Fund. Mr. Vardanian is President of TDAM and
Executive Director of Troika Dialog. Mr. Vardanian, a Russian national, is a
sitting member of the Moscow Times Index Composition Committee. He is a Director
and former Chairman of the Board of Directors of the Depository Clearing
Company. He is also Chairman of the Board of Directors of the Russian capital
markets self-regulatory organization (PAUFOR). Mr. Vardanian received a Masters
Degree with Distinction from the Finance Department of Moscow State University.
He received post-graduate training with Banca CRT in Italy and the Emerging
Markets Division of Merrill Lynch in New York.
LEXINGTON WORLDWIDE EMERGING MARKETS FUND
Richard T. Saler is the lead manager on an investment management team that
manages the Lexington Worldwide Emerging Markets Fund. Mr. Saler is Senior Vice
President, Director of International Investment Strategy of the Manager. Mr.
Saler is responsible for international investment analysis and portfolio
management at the Manager. He has ten years of investment experience. Mr. Saler
has focused on international markets since first joining the Manager in 1986. In
1991 he was a strategist with Nomura Securities and rejoined the Manager in
1992. Mr. Saler is a graduate of New York University with a B.S. Degree in
Marketing and an M.B.A. in Finance from New York University's Graduate School of
Business Administration.
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MANAGEMENT FEES AND OTHER EXPENSES
The Manager provides the Funds with advice on buying and selling
securities, manages the Funds' Investments, including the placement of orders
for portfolio transactions, furnishes the Funds with office space and certain
administrative services and provides personnel needed by the Funds with respect
to the Manager's responsibilities under the Manager's Investment Management
Agreement with each fund. The Manager also compensates the members of the Funds'
Board of Directors or Trustees who are interested persons of the Manager, and
assumes the cost of printing prospectuses and shareholder reports for
dissemination to prospective investors.
The management fees for all the Funds except Lexington Growth and Income
Fund, Lexington GNMA Income Fund and Lexington Money Market Trust are higher
than for most mutual funds.
As compensation, each Lexington Fund pays the Manager a management fee
(accrued daily but paid when requested by the Manager) based upon the value of
the average daily net assets of that fund, according to the following table.
<TABLE>
<CAPTION>
MANAGEMENT FEE AVERAGE DAILY NET
(ANNUAL RATE) ASSETS (IF APPLICABLE)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Lexington Crosby Small Cap
Asia Growth Fund 1.25% *
- ------------------------------------------------------------------------------------------------------
Lexington International Fund 1.00% *
- ------------------------------------------------------------------------------------------------------
Lexington Ramirez Global
Income Fund 1.00% *
- ------------------------------------------------------------------------------------------------------
Lexington Troika Dialog Russia Fund 1.25% *
- ------------------------------------------------------------------------------------------------------
Lexington Worldwide Emerging
Markets Fund 1.00% *
- ------------------------------------------------------------------------------------------------------
Lexington Convertible
Securities Fund 1.00% *
- -----------------------------------------------------------------------------------------------------
Lexington Growth and 0.75% First $100 million
Income fund 0.60% Next $50 million
0.50% Next $100 million
0.40% Over $250 million
- ------------------------------------------------------------------------------------------------------
Lexington SmallCap Value Fund 1.00% *
- ------------------------------------------------------------------------------------------------------
Lexington Goldfund 1.00% First $50 million
0.75% Over $50 million
- -------------------------------------------------------------------------------------------------------
Lexington GNMA Income Fund 0.60% *
- -------------------------------------------------------------------------------------------------------
Lexington Money Market Trust 0.50% *
- -------------------------------------------------------------------------------------------------------
</TABLE>
*One rate applies to the Fund's average daily net assets
49
<PAGE>
The Manager also serves as the Funds' Administrator (the "Administrator").
The Administrator performs services with regard to various aspects of each
fund's administrative operations at cost.
Each fund is responsible for its own operating expenses including, but not
limited to: the Manager's fees; taxes, if any; brokerage and commission
expenses, if any; interest charges on any borrowings; transfer agent,
administrator, custodian, legal and auditing fees; shareholder servicing fees
including fees to third-party servicing agents; fees and expenses of Director or
Trustees who are not interested persons of the Manager; salaries of certain
personnel; costs and expenses of calculating its daily net asset value; costs
and expenses of accounting, bookkeeping and record keeping required under the
Investment Company Act of 1940; insurance premiums; trade association dues; fees
and expenses of registering and maintaining registration of its shares for sale
under federal and applicable state securities laws; all costs associated with
shareholders meetings and the preparation and dissemination of proxy materials,
except for meetings called solely for the benefit of the Manager or its
affiliates; printing and mailing prospectuses, statements of additional
information and reports to shareholders; and other expenses relating to that
fund's operations, plus any extraordinary and nonrecurring expenses that are not
expressly assumed by the Manager.
For certain funds, the Manager has agreed to reduce its management fee if
necessary to keep total annual operating expenses at or below the following
percentages of each fund's average daily net assets. Lexington International
Fund, one and three-quarters percent (1.75%); Lexington Ramirez Global Income
Fund, one and one-half percent (1.50%); Lexington Troika Dialog Russia Fund,
three and thirty-five one-hundredths of one percent (3.35%); and Lexington Money
Market Trust, one percent (1.00%). The Manager also may reduce additional
amounts in these or other of the Funds to increase the return to a fund's
investors. The Manager may terminate these voluntary reductions at any time.
In addition, the Manager may elect to absorb operating expenses that a
fund is obligated to pay to increase the return to that fund's investors. If the
Manager performs a service or assumes an operating expense for which a fund is
obligated to pay and the performance of such service or payment of such expense
is not an obligation of the Manager under the Investment Management Agreement,
the Manager is entitled to seek reimbursement from that fund for the Manager's
costs incurred in rendering such service or assuming such expense. The Manager
also may compensate broker-dealers and other intermediaries that distribute a
fund's shares as well as other service providers of shareholder and
administrative services. The Manager may also sponsor seminars and educational
programs on the Funds for financial intermediaries and shareholders.
50
<PAGE>
The Manager considers a number of factors in determining which brokers or
dealers to use for each fund's portfolio transactions. Although these factors
are more fully discussed in the Statement of Additional Information, they
include, but are not limited to, reasonableness of commissions, quality of
services, and execution and availability of research that the Manager may
lawfully and appropriately use in its investment management and advisory
capacities. Provided the Funds receive prompt execution at competitive prices,
the Manager also may consider the sale of a fund's shares as a factor in
selecting broker-dealers for that fund's portfolio transactions.
It is anticipated that Troika Dialog or SocGen-Crosby Securities (HK)
Limited may act as two of the Fund's brokers in the purchase and sale of
portfolio securities and, in that capacity, will receive brokerage commissions
from the Funds. The Funds will use Troika Dialog or SocGen-Crosby Securities
(HK) Limited as its broker only when, in the judgement of the Manager and
pursuant to review by the Boards of Directors, Troika Dialog or SocGen-Crosby
Securities (HK) Limited will obtain a price and execution at least as favorable
as that available from other qualified brokers. See "Portfolio Transactions and
Brokerage Commissions" in the Statement of Additional Information.
51
<PAGE>
HOW TO CONTACT THE FUNDS
Call a Lexington shareholder service representative Monday-Friday between
9-5 ET for information on the Funds or your account, at:
(800) 526-0056 OR (201) 845-7300 FOR SERVICE
(800) 526-0052 FOR 24 HOUR ACCOUNT INFORMATION
Mail your completed application, any checks, investment or redemption
instructions and correspondence to the Transfer Agent:
TRANSFER AGENT:
State Street Bank and Trust Company
c/o National Financial Data Services
Lexington Funds
1004 Baltimore
Kansas City, Missouri 64105
HOW TO INVEST IN THE FUNDS
The Funds' shares are offered directly to the public, with no sales load,
at their next determined net asset value after receipt of an order with payment.
The Funds' shares are offered for sale by State Street Bank and Trust Company
(the "Transfer Agent") and through selected securities brokers and dealers.
If an order, together with payment in proper form, is received by the
Transfer Agent by 4:00 p.m., New York time, on any day that the New York Stock
Exchange ("NYSE") is open for trading, fund shares will be purchased at the
fund's next-determined net asset value. Orders for fund shares received after
the Funds' cutoff times will be purchased at the next-determined net asset value
after receipt of the order.
The minimum investment in each fund is described in this section. The
Manager or the Distributor, in its discretion, may waive these minimums. The
Funds do not accept third-party checks or cash investments. Third party checks
are defined as checks made payable to someone other than the Fund. Checks must
be in U.S. dollars and, to avoid fees and delays, drawn only on banks located in
the U.S. See the Statement of Additional Information for further details.
52
<PAGE>
INITIAL INVESTMENTS
Minimum Initial Investment (except Lexington
Troika Dialog Russia Fund):$1,000
MINIMUM INITIAL INVESTMENT FOR THE LEXINGTON TROIKA
DIALOG RUSSIA FUND:$5,000
INITIAL INVESTMENTS BY CHECK
o Complete the New Account Application. Tell us in which fund(s) you
want to invest and make your check payable to THE LEXINGTON FUNDS.
o Mail the New Account Application and check to the Transfer Agent at
the address given above.
o A charge may be imposed on checks that do not clear.
o The Funds and the Distributor each reserve the right to reject any
purchase order in whole or in part.
INITIAL INVESTMENTS BY WIRE
o Shares of the Funds may be purchased by wire if a prospectus has been
received and read prior to investing. The purchase will be made at the
net asset value on the day received if the wire is received prior to 4
pm ET.
o Telephone the Funds toll-free at 1-800-526-0056. Provide the Fund with
your name, dollar amount to be invested and fund(s) in which you want
to invest. They will provide you with further instructions to complete
your purchase. Complete information regarding your account must be
included in all wire instructions to ensure accurate handling of your
investment.
o Request your bank to transmit immediately available funds by wire for
purchase of shares in your name to the following:
State Street Bank and Trust Company
Account No. 99043713
Re: Lexington Fund you are
investing in
Account of (your Registration)
Account # (of new account)
ABARouting Number 011000028
O A COMPLETED NEW ACCOUNT APPLICATION MUST THEN BE FORWARDED TO THE FUND
AT THE ADDRESS ON THE APPLICATION.
o Your bank may charge a fee for any wire transfers.
53
<PAGE>
o The Funds and the Distributor each reserve the right to reject any
purchase order in whole or in part.
MINIMUM SUBSEQUENT INVESTMENT: $50
SUBSEQUENT INVESTMENTS BY CHECK
o Make your check payable to The Lexington Funds. Enclose the detachable
form which accompanies the Transfer Agent's confirmation of a prior
transaction with your check. If you do not have the detachable form,
mail your check with written instructions indicating the fund name and
account number to which your investment should be credited.
o A charge may be imposed on checks that do not clear.
SUBSEQUENT INVESTMENTS BY WIRE
o You do not need to contact the Transfer Agent prior to making
subsequent investments by wire. Instruct your bank to wire funds to
the Transfer Agent using the bank wire information under "Initial
Investments by Wire" above.
"LEX-O-MATIC" THE AUTOMATIC INVESTMENT PLAN
o A shareholder may make additional purchases of shares automatically on
a monthly or quarterly basis with the automatic investing plan,
"Lex-O-Matic."
o "Lex-O-Matic" will be established on existing accounts only. You may
not use a "Lex-O-Matic" investment to open a new account. The minimum
automatic investment amount is $50.
o Your bank must be a member of the Automated Clearing House.
o To establish Lex-O-Matic, attach a voided check (checking account) or
preprinted deposit slip (savings account) from your bank account to
your Lexington Account Application or your letter of instruction.
o Investments will automatically be transferred into your Lexington
Account from your checking or savings account. The institution must be
an Automated Clearing House (ACH) member.
o Investments may be transferred either monthly or quarterly on or about
the 15th day of the month.
o You should allow 20 business days for this service to become
effective.
o You may cancel your Lex-O-Matic at any time provided that a letter is
sent to the Transfer Agent ten days prior to the scheduled investment
date. Your request will be processed upon receipt.
54
<PAGE>
By investing in the Lexington Funds, you appoint the Transfer Agent as
your agent to establish an open account to which all shares purchased will be
credited, along with any dividends and capital gain distributions which are paid
in additional shares (see "Dividends and Distributions"). Stock certificates
will be issued, upon written request, for full shares of Lexington Funds.
Certificates will not be issued for 30 days unless payment is made by certified
check, cashier's check or federal funds wire. In order to facilitate redemptions
and transfers, most shareholders elect not to receive certificates.
You may purchase shares of the Lexington Funds through broker-dealers or
financial institutions that have selling agreements with LFD. Broker-dealers and
financial institutions that process such orders for customers may charge a fee
for their services. The fee may be avoided by purchasing shares directly from
the Lexington Funds.
HOW TO REDEEM AN INVESTMENT IN THE FUNDS
The Funds will redeem all or any portion of an investors outstanding
shares upon request. Redemptions can be made on any day that the NYSE is open
for trading. The redemption price is the net asset value per share next
determined after the shares are validly tendered for redemption and such request
is received by the Transfer Agent. Payment of redemption proceeds is made
promptly regardless of when redemption occurs and normally within three days
after receipt of all documents in proper form, including a written redemption
order with appropriate signature guarantee. Redemption proceeds will be mailed
or wired in accordance with the shareholders instructions. The Funds may suspend
the right of redemption under certain extraordinary circumstances in accordance
with the rules of the SEC. In the case of shares purchased by check and redeemed
shortly after the purchase, the Transfer Agent will not mail redemption proceeds
until it has been notified that the monies used for the purchase have been
collected, which may take up to 15 days from the purchase date. You may redeem
shares of the Lexington Funds through broker-dealers or financial institutions
that have selling agreements with LFD. Broker-dealers and financial institutions
that process such orders for customers may charge a fee for their services. The
fee may be avoided by redeeming shares directly from the Lexington Funds.
A 2% redemption fee will be charged on the redemption of shares of the
Lexington Troika Dialog Russia Fund held less than 365 days. The redemption fee
will not apply to shares representing the reinvestment of dividends and capital
gains distributions. The redemption fee will be applied on a share by share
basis using the "first shares in, first shares out" (FIFO) method. Therefore,
the oldest shares are considered to have been sold first.
55
<PAGE>
REDEEMING BY WRITTEN INSTRUCTION
o Write a letter giving your name, account number, the name of the fund
from which you wish to redeem and the dollar amount or number of
shares you wish to redeem.
o Signature guarantee your letter if you want the redemption proceeds to
go to a party other than the account owner(s), your predesignated bank
account or if the dollar amount of the redemption exceeds $25,000. The
Transfer Agent requires that the guarantor be either a commercial bank
which is a member of the FederalDeposit 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. CONTACT THE FUND FOR MORE INFORMATION.
o If a redemption request is sent to the Fund in New Jersey, it will be
forwarded to the Transfer Agent and the effective date of redemption
will be the date received by the Transfer Agent.
o Checks for redemption proceeds will normally 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. Shareholders who redeem
all 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 distribute on the next
dividend payment date. The Transfer Agent will restrict the mailing of
redemption proceeds to a shareholder address of record within 30 days
of such address being changed, unless the shareholder provides a
signature guaranteed letter of instruction.
REDEEMING BY TELEPHONE
o Shares of the Funds may redeemed by telephone. A telephone redemption
in good order will be processed at the net asset value of the Fund
next determined. There is a maximum telephone redemption limit of
$100,000. Call the Fund between 9 a.m. and 4 p.m. ET toll free at
1-800-526-0056.
o A redemption authorization and signature guarantee must be given
before a shareholder may redeem by telephone. A redemption
authorization form is contained in the New Account Application and
authorization forms may be obtained by calling the Funds.
o Shareholders may elect on the redemption authorization form to have
redemption proceeds, in any amount of $200 or more, mailed to the
registered address or to any other designated person. There is a
minimum of $1,000 to have your Redemption proceeds wired to a bank
account. A new form must be completed whenever these instructions are
revised.
56
<PAGE>
o Telephone redemption privileges may be canceled by instructing the
Transfer Agent in writing. Your request will be processed upon
receipt.
o Telephone Exchanges may only involve shares held on deposit by the
Transfer Agent, not shares held in certificate form by the
shareholder.
o Exchange/Redemption by telephone, see below "Exchange/Telephone
Privileges and Restrictions."
REDEEMING BY CHECK
o Checkwriting is available on the Lexington Money Market Trust.
o The minimum amount per check is $100 or more up to $500,000 at no
charge. Checks for less than $100 or over $500,000 will not be
honored.
o All checks require only one signature unless otherwise indicated.
o Checks will be returned to you at the end of each month.
o Redemption checks are free, but a charge of $15.00 may be imposed for
any stop payments requested.
o Redemption checks should not be used to close your account.
o Procedures for redemptions by telephone, at no charge, 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.
SYSTEMATIC WITHDRAWAL PLAN
Under a Systematic Withdrawal Plan, a shareholder with an account value of
$10,000 or more in a fund may receive (or have sent to a third party) periodic
payments (by check or wire). If the proceeds are to be mailed to a third party a
signature guarantee is required. The minimum payment amount is $100 from each
fund account. Payments may be made monthly, quarterly, semi-annually or
annually. Systematic withdrawals occur on the 28th of each month. If the 28th
falls on a weekend or holiday, the withdrawal will occur on the preceding
business day. Depending on the form of payment requested, shares may be redeemed
up to five business days before the redemption proceeds are scheduled to be
received by the shareholder. The redemption may result in the recognition of
gain or loss for income tax purposes.
57
<PAGE>
EXCHANGE/TELEPHONE REDEMPTION PRIVILEGES AND RESTRICTIONS
Shares of the Lexington Funds may be exchanged for shares of equivalent
value of any Lexington Fund. If an exchange involves investing in a Lexington
Fund not already owned, the dollar amount of the exchange must meet the minimum
initial investment amount. An exchange may result, in a recognized gain or loss
for income tax purposes. Exchanges over $500,000 may take up to three business
days to complete. See the discussion of fund telephone procedures and
limitations of liability under "Telephone Transactions" above.
PURCHASING AND REDEEMING SHARES BY EXCHANGE
o You may make exchange/redemption requests in writing or by telephone.
Telephone exchanges may only be made if you have completed a Telephone
Authorization form. Telephone exchanges may not be made within 7 days
of a previous exchange.
o The minimum exchange required is $500, unless a new account is being
established.
o Telephone exchanges/redemptions may only involve shares held on
deposit by the Transfer Agent, not shares held in certificate form by
the shareholder.
o Any new account established by a shareholder will also have the
privilege of exchange by telephone in the Lexington Funds. All
accounts involved in a telephonic exchange must have the same dividend
option as the account from which the shares are transferred.
o Telephone redemption privileges are not available on retirement plan
accounts.
TELEPHONE EXCHANGE/TELEPHONE REDEMPTION IDENTIFICATION PROCEDURES
You agree that neither LFD, the Transfer Agent, or the Fund(s) will be
liable for any loss, expense or cost arising out of any requests effected in
accordance with this authorization which would include requests effected by
imposters or persons otherwise unauthorized to act on behalf of the account. The
above provision is subject to the procedures outlined below. LFD, the Transfer
Agent and the Fund, will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine and if they do not employ
reasonable procedures they may be liable for any losses due to unauthorized or
fraudulent instructions. The following identification procedures may include,
but are not limited to, the following: account number, registration and address,
taxpayer identification number and other information particular to the account.
In addition, all telephone exchange and telephone redemption transactions will
take place on recorded telephone lines and each transaction will be confirmed in
58
<PAGE>
writing by the Fund. If the Shareholder is an entity other than an individual,
such entity may be required to certify that certain persons have been duly
elected and are now legally holding the titles given and that the said
corporation, trust, unincorporated association, etc. is duly organized and
existing and has the power to take action called for by this continuing
authorization.
HOW NET ASSET VALUE IS DETERMINED
The net asset value of each Fund is determined once daily as of 4:00 p.m.,
New York time, on each day that the NYSE is open for trading. Per share net
asset value is calculated by dividing the value of each fund's total net assets
by the total number of that fund's shares then outstanding.
As more fully described in the Statement of Additional Information,
portfolio securities are valued using current market valuations: either the last
reported sales price or, in the case of securities for which there is no
reported last sale and fixed-income securities, the mean between the closing bid
and asked price. Securities traded over-the-counter are valued at the mean
between the last current bid and asked price. Securities for which market
quotations are not readily available or which are illiquid are valued at their
fair values as determined in good faith under the supervision of the Funds'
officers, and by the Manager and the Boards, in accordance with methods that are
specifically authorized by the Boards. Short-term obligations with maturities of
60 days or less are valued at amortized cost as reflecting fair value. When Fund
management deems it appropriate prices obtained for the day of valuation from a
third party pricing service will be used to value portfolio securities.
The value of securities denominated in foreign currencies and traded on
foreign exchanges or in foreign markets will be translated into U.S. dollars at
the last price of their respective currency denomination against U.S. dollars
quoted by a major bank or, if no such quotation is available, at the rate of
exchange determined in accordance with policies established in good faith by the
Boards. Because the value of securities denominated in foreign currencies must
be translated into U.S. dollars, fluctuations in the value of such currencies in
relation to the U.S. dollar may affect the net asset value of fund shares even
without any change in the foreign-currency denominated values of such
securities.
Because foreign securities markets may close before the Funds determine
their net asset values, events affecting the value of portfolio securities
occurring between the time prices are determined and the time the Funds
calculate their net asset values may not be reflected unless the Manager, under
supervision of the Board, determines that a particular event would materially
affect a fund's net asset value.
59
<PAGE>
DISTRIBUTION PLAN
The Lexington Convertible Securities Fund, Lexington Goldfund, Lexington
Growth and Income Fund, Lexington International Fund, Lexington Ramirez Global
Income Fund, Lexington SmallCap Value Fund and Lexington Troika Dialog Russia
Fund have each adopted a Distribution Plan. The Distribution Plan provides that
the Funds may pay distribution fees up to 0.25% of their average daily net
assets for distribution services.
SHAREHOLDER SERVICE AGREEMENTS
The Lexington Crosby Small Cap Asia Growth Fund, Lexington GNMA Income
Fund and Lexington Worldwide Emerging Markets Fund may enter into Shareholder
Servicing Agreements with one or more Shareholder Servicing Agents. The
Shareholder Servicing Agents provide various services to shareholders. For these
services, each Shareholder Servicing Agent receives fees up to 0.25% of the
average daily net assets of the Fund represented by shares owned during the
period for which payment is made. The Manager, at no additional cost to the
Funds, may pay to Shareholder Servicing Agents additional amounts from its past
profits. Each Shareholder Servicing Agent may, from time to time, voluntarily
waive all or a portion of the fees payable to it.
TAX-SHELTERED RETIREMENT PLANS
The Funds offers a Prototype Pension and Profit Sharing Plan, including a
Keogh Plan, IRA's, SEP-IRA's and IRA Rollover Accounts, 401(k) Plans and
403(b)(7) Plans. Plan support services are available through the Shareholder
Services Department of LMC. For further information call 1-800-526-0056.
60
<PAGE>
DIVIDENDS AND DISTRIBUTIONS
Each fund distributes substantially all of its net investment income and
net capital gains to shareholders each year. The amount and frequency of fund
distributions are not guaranteed and are at the discretion of the Board.
Currently, the Lexington Funds intend to distribute according to the following
schedule:
<TABLE>
<CAPTION>
INCOME DIVIDENDS CAPITAL GAINS
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
LEXINGTON CONVERTIBLE Declared and paid quarterly Declared and paid annually
SECURITIES FUND
LEXINGTON GROWTH AND INCOME FUND
LEXINGTON RAMIREZ GLOBAL
INCOME FUND
- ---------------------------------------------------------------------------------------------------
LEXINGTON GNMA INCOME FUND Declared and paid monthly Declared and paid annually
- ---------------------------------------------------------------------------------------------------
LEXINGTON CROSBY SMALL CAP Declared and paid annually Declared and paid annually
ASIA GROWTH FUND
LEXINGTON INTERNATIONAL FUND
LEXINGTON SMALLCAP VALUE FUND
LEXINGTON TROIKA DIALOG
RUSSIA FUND
LEXINGTON WORLDWIDE
EMERGING MARKETS FUND
- ---------------------------------------------------------------------------------------------------
LEXINGTON GOLDFUND Declared and paid Declared and paid
semi-annually semi-annually
- ---------------------------------------------------------------------------------------------------
LEXINGTON MONEYMARKET Declared daily Not expected
TRUST and paid monthly
- ---------------------------------------------------------------------------------------------------
</TABLE>
Unless investors request cash distributions in writing, all dividends and
other distributions will be reinvested automatically in additional shares of the
applicable fund and credited to the shareholders account at the closing net
asset value on the reinvestment date.
DISTRIBUTIONS AFFECT A FUND'S NET ASSET VALUE
Distributions are paid to you as of the record date of a distribution of a
fund, regardless of how long you have held the shares. Dividends and capital
gains awaiting distribution are included in each fund's daily net asset value.
The share price of a fund drops on the ex-dividend date by the amount of the
distribution, net of any subsequent market fluctuations. For example, assume
that on December 31, the Lexington Growth and Income Fund declared a dividend in
the amount of $0.50 per share. If the Lexington Growth and Income Fund's share
price was $10.00 on December 30, the Fund's share price on December 31 would be
$9.50, barring market fluctuations.
61
<PAGE>
"BUYING A DIVIDEND"
If you buy shares of a fund just before a distribution, you will pay the
full price for the shares and receive a portion of the purchase price back as a
taxable distribution. This is called "buying a dividend." In the example above,
if you bought shares on December 30, you would have paid $10.00 per share. On
December 31, the Fund would pay you $0.50 per share as a dividend and your
shares would now be worth $9.50 per share. Unless your account is a tax-deferred
account, dividends paid to you would be included in your gross income for tax
purposes even though you may not have participated in the increase of net asset
value of the Fund, regardless of whether you reinvested the dividends.
TAXATION
Each of the funds has elected and intends to continue to qualify to be
treated as a regulated investment company under Subchapter M of the Code, by
distributing substantially all of its net investment income and net capital
gains to its shareholders and meeting other requirements of the Code relating to
the sources of its income and diversification of assets. Accordingly, the Funds
generally will not be liable for federal income tax or excise tax based on net
income except to the extent their earnings are not distributed or are
distributed in a manner that does not satisfy the requirements of the Code. If a
fund is unable to meet certain Code requirements, it may be subject to taxation
as a corporation. Funds investing in foreign securities also may incur tax
liability to the extent they invest in "passive foreign investment companies."
See "Portfolio Securities" and the Statement of Additional Information.
For federal income tax purposes, any dividends derived from net investment
income and any excess of net short-term capital gain over net long-term capital
loss that investors (other than certain tax-exempt organizations that have not
borrowed to purchase fund shares) receive from the Funds are considered ordinary
income. Part of the distributions paid by the Funds may be eligible for the
dividends-received deduction allowed to corporate shareholders under the Code.
Distributions of the excess of net long-term capital gain over net short-term
capital loss from transactions of a fund are treated by shareholders as
long-term capital gains regardless of the length of time the fund's shares have
been owned. Distributions of income and capital gains are taxed in the manner
described above, whether they are taken in cash or are reinvested in additional
shares of the Funds.
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<PAGE>
Each fund will inform its investors of the source of their dividends and
distributions at the time they are paid, and will promptly after the close of
each calendar year advise investors of the tax status of those distributions and
dividends. Investors (including tax exempt and foreign investors) are advised to
consult their own tax advisers regarding the particular tax consequences to them
of an investment in shares of the Funds. Additional information on tax matters
relating to the Funds and their shareholders is included in the Statement of
Additional Information.
GENERAL INFORMATION
THE FUNDS
The Lexington Convertible Securities Fund, Lexington Money Market Trust
and Lexington Ramirez Global Income Fund are business trusts organized under the
laws of Massachusetts. The Lexington Crosby Small Cap Asia Growth Fund,
Lexington Goldfund, Lexington GNMA Income Fund, Lexington Growth and Income
Fund, Lexington International Fund, Lexington SmallCap Value Fund, Lexington
Troika Dialog Russia Fund and Lexington Worldwide Emerging Markets Fund are
Maryland corporations. The assets and liabilities of each business trust and
corporation are separate and distinct from each other business trust or
corporation.
The Funds may offer other classes of shares to eligible investors and may
in the future designate other classes of shares for specific purposes.
SHAREHOLDER RIGHTS
Shares issued by the Funds have no preemptive, conversion or subscription
rights. Each whole share is entitled to one vote as to any matter on which it is
entitled to vote and each fractional share is entitled to a proportionate
fractional vote. Shareholders have equal and exclusive rights as to dividends
and distributions as declared by each fund and to the net assets of each fund
upon liquidation or dissolution. Each fund votes separately on matters affecting
only that fund (e.g., approval of the Investment Management Agreement). Voting
rights are not cumulative, so the holders of more than 50% of the shares voting
in any election of Trustees or Directors can, if they so choose, elect all of
the Trustees or Directors of that Fund. Although the Funds are not required, and
do not intend, to hold annual meetings of shareholders, such meetings may be
called by each Fund's Board at its discretion, or upon demand by the holders of
10% or more of the outstanding shares of the Fund for the purpose of electing or
removing Trustees or Directors. Shareholders may receive assistance in
communicating with other shareholders in connection with the election or removal
of Trustees or Directors pursuant to the provisions of Section 16(c) of the
Investment Company Act.
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<PAGE>
PERFORMANCE INFORMATION
From time to time, the Funds may publish their total return, and, in the
case of certain funds, current yield and tax equivalent yield in advertisements
and communications to investors. Total return information generally will include
a fund's average annual compounded rate of return over the most recent four
calendar quarters and over the period from the fund's inception of operations. A
fund may also advertise aggregate and average total return information over
different periods of time. Each fund's average annual compounded rate of return
is determined by reference to a hypothetical $1,000 investment that includes
capital appreciation and depreciation for the stated period according to a
specific formula. Aggregate total return is calculated in a similar manner,
except that the results are not annualized. Total return figures will reflect
all recurring charges against each fund's income.
Current yield as prescribed by the SEC is an annualized percentage rate
that reflects the change in value of a hypothetical account based on the income
received from the fund during a 30-day period. It is computed by determining the
net change, excluding capital changes, in the value of a hypothetical
preexisting account having a balance of one share at the beginning of the
period. A hypothetical charge reflecting deductions from shareholder accounts
for management fees or shareholder services fees, for example, is subtracted
from the value of the account at the end of the period, and the difference is
divided by the value of the account at the beginning of the base period to
obtain the base period return. The result is then annualized. See "Performance
Information" in the Statement of Additional Information.
Comparative performance information may be used from time to time in
advertising and marketing a Fund's shares. The performance information may
include data from sources such as Lipper Analytical Services, Inc. or major
market indices. Such comparative performance information will be stated in the
same terms in which the comparative data and indices are stated.
Investment results of the Funds will fluctuate over time, and any
representation of the Funds' total return or current yield for any prior period
should not be considered as a representation of what an investors total return
or current yield may be in any future period. The Funds' Annual Report contains
additional performance information and is available upon request and without
charge by calling (800) 526-0056.
CODE OF ETHICS
The Code of Ethics adopted by the Lexington Funds and the Manager
prohibits affiliated personnel from engaging in personal investment activities
which compete with or attempt to take advantage of the Funds' planned portfolio
transactions. The objective of the Funds' and the Manager's Code of Ethics is
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that the operations of the Funds and the Manager be carried out for the
exclusive benefit of the Fund's shareholders. The Funds and the Manager maintain
careful monitoring of compliance with the Code of Ethics.
LEGAL OPINION
The validity of shares offered by this Prospectus will be passed on by
Kramer, Levin, Naftalis & Frankel, 919 Third Avenue, New York, New York 10022.
SHAREHOLDER REPORTS AND INQUIRIES
During the year, the Funds will send you the following information:
o Confirmation statements are mailed after every transaction that affects
your account balance, including preauthorized automatic investment,
exchange and redemption transactions. Lexington Money Market Trust,
Lexington GNMA Income Fund and Lexington Ramirez Global Income Fund
provide quarterly confirmation statements annually. All other Funds
will provide confirmation statements annually, unless the account
balance is affected by any daily transactions. Shareholders are urged
to retain their account statements for tax purposes.
o Annual and semi-annual reports are mailed approximately 60
days after December 31 and June 30.
o 1099 TAX FORM(S) ARE MAILED BY JANUARY 31.
Unless otherwise requested, only one copy of each shareholder report or
other material sent to shareholders will be mailed to each household with
accounts under common ownership and the same address regardless of the number of
shareholders or accounts at that household or address. Any questions should be
directed to The Lexington Funds at (800) 526-0056.
BACK-UP WITHHOLDING
TAXPAYER IDENTIFICATION NUMBER (TIN)
Be sure to complete the Taxpayer Identification Number section of the
fund's application when you open an account. Federal tax law requires the fund
to withhold 31% of taxable dividends, capital gains distributions and redemption
and exchange proceeds from accounts (other than those of certain exempt payees)
without a certified Social Security or taxpayer identification number and
certain other certified information or upon notification from the IRS or a
broker that withholding is required.
A shareholder who does not have a TIN should apply for one immediately by
contacting the local office of the Social Security Administration or the IRS.
Back-up withholding could apply to payments made to a shareholders account while
awaiting receipt of a TIN. Special rules apply for certain entities. For
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example, for an account established under the Uniform Gifts to Minors Act, the
TIN of the minor should be furnished. If a shareholder has been notified by the
IRS that he or she is subject to back-up withholding because he or she failed to
report all interest and dividend income on his or her tax return and the
shareholder has not been notified by the IRS that such withholding will cease,
the shareholder should cross out the appropriate item in the Account
Application. Dividends paid to a foreign shareholder's account by a fund may be
subject to up to 30% withholding instead of back-up withholding.
A shareholder who is an exempt recipient should furnish a TIN and check
the appropriate box. Exempt recipients include certain corporations, certain
tax-exempt entities, tax-exempt pension plans and IRAs, governmental agencies,
financial institutions, registered securities and commodities dealers and
others. For further information, see Section 3406 of the Code and consult a tax
adviser.
--------------------------
THIS PROSPECTUS IS NOT AN OFFERING OF THE SECURITIES HEREIN DESCRIBED IN
ANY STATE IN WHICH THE OFFERING IS UNAUTHORIZED. NO SALESPERSON, DEALER OR OTHER
PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTATION OTHER
THAN THOSE CONTAINED IN THIS PROSPECTUS, THE STATEMENT OF ADDITIONAL
INFORMATION, OR IN THE FUNDS' OFFICIAL SALES LITERATURE.
--------------------------
GLOSSARY
O CASH EQUIVALENTS. Cash equivalents are short-term, interest-bearing
instruments or deposits and may include, for example, commercial paper,
certificates of deposit, repurchase agreements, bankers' acceptances, U.S.
Treasury Bills, bank money market deposit accounts, master demand notes and
money market mutual funds. These consist of high-quality debt obligations,
certificates of deposit and bankers' acceptances rated at least A-1 by S&P or
Prime1 by Moody's, or the issuer has an outstanding issue of debt securities
rated at least A by S&P or Moody's, or are of comparable quality in the
opinion of the Manager.
O COLLATERAL ASSETS. Collateral assets include cash, letters of credit, U.S.
government securities or other high-grade liquid debt or equity securities
(except that instruments collateralizing loans by the Money Market Funds must
be debt securities rated in the highest grade). Collateral assets are
separately identified and rendered unavailable for investment or sale.
O CONVERTIBLE SECURITY. A convertible security is a fixed-income security (a
bond or preferred stock) that may be converted at a stated price within a
specified period of time into a certain quantity of the common stock of the
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same or a different issuer. Convertible securities are senior to common stock
in a corporation's capital structure but are usually subordinated to similar
non-convertible securities. The price of a convertible security is influenced
by the market value of the underlying common stock.
O COVERED CALL OPTION. A call option is "covered" if the fund owns the
underlying securities, has the right to acquire such securities without
additional consideration, has collateral assets sufficient to meet its
obligations under the option or owns an off setting call option.
O COVERED PUT OPTION. A put option is "covered" if the fund has collateral
assets with a value not less than the exercise price of the option or holds
a put option on the underlying security.
O DEPOSITORY RECEIPTS. Depository receipts include American depository receipts
("ADRs"), European depository receipts ("EDRs"), global depository receipts
("GDRs") and other similar instruments. Depository receipts are receipts
typically issued in connection with a U.S. or foreign bank or trust company
and evidence ownership of underlying securities issued by a foreign
corporation.
O DERIVATIVES. Derivatives include forward currency exchange contracts, stock
options, currency options, stock and stock index options, futures contracts
and swaps and options on futures contracts on U.S. government and foreign
government securities and currencies.
O DOLLAR ROLL TRANSACTION. A dollar roll transaction is similar to a reverse
repurchase agreement except it requires a fund to repurchase a similar rather
than the same security.
O DURATION. A time measure of a bond's interest-rate sensitivity, based on the
weighted average of the time periods over which a bond's cash flows accrue to
the bondholder. Time periods are weighted by multiplying by the present value
of its cash flow divided by the bond's price. (A bonds cash flows consist of
coupon payments and repayment of capital). A bond's duration will almost
always be shorter than its maturity, with the exception of zero-coupon bonds,
for which maturity and duration are equal.
O EMERGING MARKET COMPANIES. A company is considered to be an emerging market
company if its securities are principally traded in the capital market of an
emerging market country; it derives at least 50% of its total revenue from
either goods produced or services rendered in emerging market countries or
from sales made in such emerging market countries, regardless of where the
securities of such companies are principally traded; or it is organized under
the laws of, and with a principal office in, an emerging market country. An
emerging market country is one having an economy and market that are or would
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be considered by the World Bank or the United Nations to be emerging or
developing.
O EQUITY DERIVATIVE SECURITIES. These include, among other things, options on
equity securities, warrants and future contracts on equity securities.
O EQUITY SWAPS. Equity swaps allow the parties to exchange the dividend income
or other components of return on an equity investment (e.g., a group of equity
securities or an index) for a component of return on another non-equity or
equity investment. Equity swaps transitions may be volatile and may present
the fund with counterparty risks.
O FHLMC. The Federal Home Loan Mortgage Corporation.
O FNMA. The Federal National Mortgage Association.
O FORWARD CURRENCY CONTRACTS. A forward currency contract is a contract
individually negotiated and privately traded by currency traders and their
customers and creates an obligation to purchase or sell a specific currency
for an agreed-upon price at a future date. The Funds generally do not enter
into forward contracts with terms greater than one year. A fund generally
enters into forward contracts only under two circumstances. First, if a fund
enters into a contract for the purchase or sale of a security denominated in a
foreign currency, it may desire to "lock in" the U.S. dollar price of the
security by entering into a forward contract to buy the amount of a foreign
currency needed to settle the transaction. Second, if the Manager believes
that the currency of a particular foreign country will substantially rise or
fall against the U.S. dollar, it may enter into a forward contract to buy or
sell the currency approximating the value of some or all of a fund's portfolio
securities denominated in such currency. A fund will not enter into a forward
contract if, as a result, it would have more than one-third of total assets
committed to such contracts (unless it owns the currency that it is obligated
to deliver or has caused its custodian to segregate segregable assets having a
value sufficient to cover its obligations). Although forward contracts are
used primarily to protect a fund from adverse currency movements, they involve
the risk that currency movements will not be accurately predicted.
O FUTURES AND OPTIONS ON FUTURES. An interest rate futures contract is an
agreement to purchase or sell debt securities, usually U.S. government
securities, at a specified date and price. For example, a fund may sell
interest rate futures contracts (i.e., enter into a futures contract to sell
the underlying debt security) in an attempt to hedge against an anticipated
increase in interest rates and a corresponding decline in debt securities it
owns. Each fund will have collateral assets equal to the purchase price of the
portfolio securities represented by the underlying interest rate futures
contracts it has an obligation to purchase.
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O GNMA. The Government National Mortgage Association.
O HIGHLY RATED DEBT SECURITIES. Debt securities rated within the three highest
grades by Standard & Poor's Corporation ("S&P") (AAA to A), Moodys Investors
Services, Inc. ("Moody's") (Aaa to A) or Fitch Investor Services, Inc.
("Fitch") (AAA to A), or in unrated debt securities deemed to be of comparable
quality by the Manager using guidelines approved by the Board of Trustees. See
the Appendix to the Statement of Additional Information for a description of
these ratings.
O ILLIQUID SECURITIES. The Funds treat any securities subject to restrictions on
repatriation for more than seven days, and securities issued in connection
with foreign debt conversion programs that are restricted as to remittance of
invested capital or profit, as illiquid. The Funds also treat repurchase
agreements with maturities in excess of seven days as illiquid. Illiquid
securities do not include securities that are restricted from trading on
formal markets for some period of time but for which an active informal market
exists, or securities that meet the requirements of Rule 144A under the
Securities Act of 1933 and that, subject to the review by the Funds' Board and
guidelines adopted by the Funds' Board, the Manager has determined to be
liquid.
O INVESTMENT GRADE. Investment grade debt securities are those rated within the
four highest grades by S&P (at least BBB), Moody's (at least Baa) or Fitch (at
least Baa) or in unrated debt securities deemed to be of comparable quality by
the Manager using guidelines approved by the Board of Trustees.
O LEVERAGE. Some funds may use leverage in an effort to increase return.
Although leverage creates an opportunity for increased income and gain, it
also creates special risk considerations. Leveraging also creates interest
expenses that can exceed the income from the assets retained.
O OPTIONS ON SECURITIES, SECURITIES INDICES AND CURRENCIES. A fund may purchase
call options on securities that it intends to purchase (or on currencies in
which those securities are denominated) in order to limit the risk of a
substantial increase in the market price of such security (or an adverse
movement in the applicable currency). A fund may purchase put options on
particular securities (or on currencies in which those securities are
denominated) in order to protect against a decline in the market value of the
underlying security below the exercise price less the premium paid for the
option (or an adverse movement in the applicable currency relative to the U.S.
dollar). Prior to expiration, most options are expected to be sold in a
closing sale transaction. Profit or loss from the sale depends upon whether
the amount received is more or less than the premium paid plus transaction
costs. A fund may purchase put and call options on stock indices in order to
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hedge against risks of stock market or industry wide stock price fluctuations.
O PARTICIPATION INTERESTS. Participation interests are issued by financial
institutions and represent undivided interests in municipal securities.
Participation interests may have fixed, floating or variable rates of
interest. Some participation interests are subject to a "nonappropriation" or
"abatement" feature by which, under certain conditions, the issuer of the
underlying municipal security, without penalty, may terminate its payment
obligation. In such event, the Funds must look to the underlying collateral.
O REPURCHASE AGREEMENT. With a repurchase agreement, a fund acquires a U.S.
government security or other high-grade liquid debt instrument (for the Money
Market Funds, the instrument must be rated in the highest grade) from a
financial institution that simultaneously agrees to repurchase the same
security at a specified time and price.
O REVERSE DOLLAR ROLL TRANSACTIONS. When a fund engages in a reverse dollar
roll, it purchases a security from a financial institution and concurrently
agrees to resell a similar security to that institution at a later date at an
agreed-upon price.
O REVERSE REPURCHASE AGREEMENT. In a reverse repurchase agreement, a fund sells
to a financial institution a security that it holds and agrees to repurchase
the same security at an agreed-upon price and date.
O RUSSIA. "Russia" refers to the Russian Federation, which does not include
other countries that formerly comprised the Soviet Union.
O RUSSIAN COMPANY. "Russian Company" means a legal entity (i) that is organized
under the laws of, or with a principal office and domicile in, Russia, (ii)
for which the principal equity securities trading market is in Russia, or
(iii) that derives at least 50% of its revenues or profits from goods produced
or sold, investments made, or services performed, in Russia or that has at
least 50% of its assets situated in Russia.
O SECURITIES LENDING. A fund may lend securities to brokers, dealers and other
financial organizations. Each securities loan is collateralized with
collateral assets in an amount at least equal to the current market value of
the loaned securities, plus accrued interest. There is a risk of delay in
receiving collateral or in recovering the securities loaned or even a loss of
rights in collateral should the borrower fail financially.
O S&P 500. Standard & Poor's 500 Composite Stock Price Index.
O U.S. GOVERNMENT SECURITIES. These include U.S. Treasury bills, notes, bonds
and other obligations issued or guaranteed by the U.S. government, its
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agencies or instrumentalities.
O WARRANT. A warrant typically is a long-term option that permits the holder to
buy a specified number of shares of the issuer's underlying common stock at a
specified exercise price by a particular expiration date. A warrant not
exercised or disposed of by its expiration date expires worthless.
O WHEN-ISSUED AND FORWARD COMMITMENT SECURITIES. The Funds may purchase U.S.
government or other securities on a "when-issued" basis and may purchase or
sell securities on a "forward commitment" or "delayed delivery" basis. The
price is fixed at the time the commitment is made, but delivery and payment
for the securities take place at a later date. When-issued securities and
forward commitments may be sold prior to the settlement date, but a fund will
enter into when-issued and forward commitments only with the intention of
actually receiving or delivering the securities. No income accrues on
securities that have been purchased pursuant to a forward commitment or on a
when-issued basis prior to delivery to a fund. At the time a fund enters into
a transaction on a when-issued or forward commitment basis, it supports its
obligation with collateral assets equal to the value of the when-issued or
forward commitment securities and causes the collateral assets to be marked to
market daily. There is a risk that the securities may not be delivered and
that the fund may incur a loss.
O ZERO COUPON BONDS. Zero coupon bonds are debt obligations that do not pay
current interest and are consequently issued at a significant discount from
face value. The discount approximates the total interest the bonds will accrue
and compound over the period to maturity or the first interest-payment date at
a rate of interest reflecting the market rate of interest at the time of
issuance.
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INVESTMENT MANAGER
Lexington Management Corporation
P.O. Box 1515
Park 80 West Plaza Two
Saddle Brook, N.J. 07663
DISTRIBUTOR
Lexington Funds Distributor, Inc.
P.O. Box 1515
Park 80 West Plaza Two
Saddle Brook, N.J. 07663
All shareholder requests for services
of any kind shall be sent to:
TRANSFER AGENT
State Street Bank and Trust Company
c/o National Financial Data Services
Lexington Funds
1004 Baltimore
Kansas City, Missouri 64105
CUSTODIAN
Chase Manhattan Bank, N.A.
1211 Avenue of the Americas
New York, New York 10022
LEGAL COUNSEL
Kramer, Levin, Naftalis & Frankel
919 Third Avenue
New York, New York 10022
AUDITORS
KMPG Peat Marwick LLP
345 Park Avenue
New York, New York 10154
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LEXINGTON GNMA INCOME 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 GNMA Income
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:-1-800-526-0056
Institutional/Financial Adviser Services:-1-800-367-9160
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 Objective ........................................................ 2
What Are GNMA Certificates? ................................................. 2
Investment Policy and Restrictions .......................................... 3
Investment Adviser, Distributor and Administrator ........................... 4
Portfolio Transactions ...................................................... 5
Tax-Sheltered Retirement Plans .............................................. 6
Dividend, Distribution and Reinvestment Policy .............................. 6
Tax Matters ................................................................. 6
Investment Return Information ............................................... 10
Custodian, Transfer Agent and Dividend Disbursing Agent ..................... 11
Management of the Fund ...................................................... 11
Financial Statements ........................................................ 14
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INVESTMENT OBJECTIVE
The Fund's investment objective is to seek a high level of current income,
consistent with liquidity and safety of principal. At least 80% of the assets of
the Fund will be invested in "GNMA Certificates" (popularly called "Ginnie
Maes") which are Government National Mortgage Association ("GNMA")
mortgage-backed securities representing part ownership of a pool of mortgage
loans. GNMA is a U.S. Government corporation within the Department of Housing
and Urban Development. Such loans are initially made by lenders such as mortgage
bankers, commercial banks and savings and loan associations and are either
insured by the Federal Housing Administration (FHA) or Farmers' Home
Administration (FmHA) or guaranteed by the Veterans Administration (VA). A GNMA
Certificate represents an interest in a specific pool of such mortgages which,
after being approved by GNMA, is offered to investors through securities
dealers. Once approved by GNMA, the timely payment of interest and principal on
each certificate is guaranteed by the full faith and credit of the United States
Government.
GNMA Certificates differ from bonds in that principal is scheduled to be
paid back by the borrower over the length of the loan rather than returned in a
lump sum at maturity. The Fund will purchase "modified pass through" type GNMA
Certificates, which entitle the holder to receive all interest and principal
payments owed on the mortgages in the pool (net of issuers' and GNMA fees),
regardless of whether or not the mortgagor has made such payment. The Fund will
use principal payments to purchase additional GNMA Certificates or other
government guaranteed securities. The balance of the Fund's assets will be
invested in other securities issued or guaranteed by the U.S. Government,
including U.S. Treasury bills, notes or bonds. The Fund may also invest in
repurchase agreements (see "Investment Policy and Restrictions") secured by such
U.S. Government securities or GNMA Certificates.
WHAT ARE GNMA CERTIFICATES?
GNMA Certificates are created by an "issuer", which is an FHA approved
mortgage banker who also meets criteria imposed by GNMA. The issuer assembles a
pool of FHA, FmHA, or VA insured or guaranteed mortgages which are homogeneous
as to interest rate, maturity and type of dwelling. Upon application by the
issuer, and after approval by GNMA of the pool, GNMA provides its commitment to
guarantee timely payment of principal and interest on the GNMA Certificates
backed by the mortgages included in the pool. The GNMA Certificates, endorsed by
GNMA, are then sold by the issuer through securities dealers.
GNMA is authorized under the Federal National Housing Act to guarantee
timely payment of principal and interest on GNMA Certificates. This guarantee is
backed by the full faith and credit of the United States. GNMA may borrow U.S.
Treasury funds to the extent needed to make payments under its guarantee. When
mortgages in the pool underlying a GNMA Certificates are prepaid by mortgagors
or by result of foreclosure, such principal payments are passed through to the
certificate holders. Accordingly, the life of the GNMA Certificate is likely to
be substantially shorter than the stated maturity of the mortgages in the
underlying pool. Because of such variation in prepayment rates, it is not
possible to predict the life of a particular GNMA certificate but FHA statistics
indicate that 25 to 30 year single family dwelling mortgages have an average
life of approximately 12 years. The majority of GNMA certificates are backed by
mortgages of this type, and accordingly the generally accepted practice has
developed to treat GNMA certificates as 30 year securities which prepay fully in
the 12th year.
GNMA certificates bear a nominal "coupon rate" which represents the
effective FHA-VA mortgage rate at the time of issuance, less 0.5% which
constitutes the GNMA and issuer's fees. For providing its guarantees, GNMA
receives an annual fee of 0.06% of the outstanding principal on certificates
backed by single family dwelling mortgages, and the issuer receives an annual
fee of 0.44% for assembling the pool and for passing through monthly payments of
interest and principal.
Payments to holders of GNMA certificates consist of the monthly
distributions of interest and principal less the GNMA and issuer's fees. The
actual yield to be earned by a holder of a GNMA certificate is calculated by
dividing such payments by the purchase price paid for the GNMA certificate
(which may be at a premium or a discount from the face value of the
certificate). Monthly distributions of interest, as contrasted to semi-annual
distributions which are common for other fixed interest investments, have the
effect of compounding and thereby raising the effective annual yield earned on
GNMA certificates. Because of the variation in the life of the pools of
mortgages which back various GNMA certificates, and because it is impossible to
anticipate the rate of interest at which future principal payments may be
reinvested, the actual yield earned from a portfolio of GNMA certificates, such
as that in which the Fund is invested, will differ significantly from the yield
estimated by using an assumption of a 12 year life for each GNMA certificate
included in such a portfolio as described.
The actual rate of prepayment for any GNMA certificate does not lend itself
to advance determination, although regional and other characteristics of a given
mortgage pool may provide some guidance for investment analysis. Also, secondary
market trading of outstanding GNMA certificates tends to be concentrated in
issues bearing the current coupon rate.
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INVESTMENT POLICY AND RESTRICTIONS
The Fund's fundamental investment policy is to seek high current income
consistent with liquidity and safety of principal through investment of at least
80% of its assets in GNMA certificates, with other investments limited to
securities issued or guaranteed by the U.S. Government or its agencies, or in
repurchase agreements secured by such instruments. This policy, and the
investment restrictions set forth below, may not be changed without the
affirmative vote (defined as the lesser of: 67% of the shares represented at a
meeting at which 50% of the outstanding shares are present, or 50% of the
outstanding shares) of the Fund's shareholders. These restrictions may be
summarized as follows:
The Fund will not (i) issue senior securities; (ii) borrow money; (iii)
underwrite securities of other issuers; (iv) concentrate its investments in a
particular industry to an extent greater than 25% of its total assets, provided
that such limitation shall not apply to securities issued or guaranteed by the
U.S. Government or its agencies; (v) purchase or sell real estate, commodity
contracts or commodities (however, the Fund may purchase interests in GNMA
mortgage-backed certificates); (vi) make loans to other persons except: (a)
through the purchase of a portion or portions of an issue or issues of
securities issued or guaranteed by the U.S. Government or its agencies, 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 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; (vii) 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; (viii) purchase any security on
margin or effect a short sale of a security; (ix) 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; (x) contract to sell any
security or evidence of interest therein, except to the extent that the same
shall be owned by the Fund; (xi) purchase or retain securities of an issuer when
one or more of the officers and directors of the Fund or of the LMC, 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; (xii) invest more than 5% of its total assets in the securities of
any one issuer (except securities issued or guaranteed by the U.S. Government or
its agencies), except that such restriction shall not apply to 25% of the Fund's
portfolio so long as the net asset value of the portfolio does not exceed
$2,000,000; (xiii) purchase any securities if such purchase would cause the Fund
to own at the time of purchase more than 10% of the outstanding voting
securities of any one issuer; (xiv) purchase any security restricted as to
disposition under Federal securities laws; (xv) invest in interests in oil, gas
or other mineral exploration or development programs; or (xvi) buy or sell puts,
calls or other options.
GNMA Certificates may at times be purchased or sold on a delayed delivery
basis or on a when-issued basis. These transactions arise when GNMA Certificates
are purchased or sold by the Fund with payment and delivery taking place in the
future, in order to secure what is considered to be an advantageous price and
yield to the Fund. No payment is made until delivery is due, often a month or
more after the purchase. The Settlement date on such transactions will take
place no more than 120 days from the trade date. When the Fund engages in
when-issued and delayed delivery transactions, the Fund relies on the buyer or
seller, as the case may be, to consummate the sale. Failure of the buyer or
seller to do so may result in the Fund missing the opportunity of obtaining a
price considered to be advantageous. While when-issued GNMA Certificates may be
sold prior to the settlement date, the Fund intends to purchase such securities
with the purpose of actually acquiring them unless a sale appears desirable for
investment reasons. At the time the Fund makes the commitment to purchase a GNMA
Certificate on a when-issued basis, it will record the transaction and reflect
the value of the security in determining its net asset value. The Fund does not
believe that its net asset value or income will be adversely affected by its
purchase of GNMA Certificates on a when-issued basis. The Fund may invest in
when-issued securities without other conditions. Such securities either will
mature or be sold on or about the settlement date. The Fund may earn interest on
such account or securities for the benefit of shareholders.
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 U.S.
Government obligations or GNMA Certificates 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
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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 the adviser to present
minimal credit risk. 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
Lexington Management Corporation ("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.
Pursuant to an investment advisory agreement the Fund pays LMC an investment
advisory fee at the annual rate of 0.60% of its average daily net assets up to
$150 million; 0.50% of such value in excess of $150 million up to $400 million;
0.45% of such value in excess of $400 million up to $800 million; and 0.40% 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.
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 agent 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 director's fees, and
furnishes LFD, at printer's overrun cost paid by LFD, such copies of its
prospectus and annual, semi-annual and other reports and shareholder
communications as may reasonably be required for sales purposes.
LMC must also reimburse the Fund to the extent that all of the Fund's other
expenses (including the investment advisory fee) exclusive of interest and taxes
exceed 1.5% of the Fund's net assets up to $30 million and 1% of the net assets
in excess of $30 million during any fiscal year calculated by averaging such net
assets daily. In the event that the Fund's expenses exceed such limitation at
any month end, the investment advisory fee paid by the Fund for such month is
reduced accordingly. In addition to the provisions of the advisory agreement, in
order to comply with the securities regulations of certain states the adviser
has agreed to remit to the Fund the amount that the ordinary business expenses
of the Fund, including the advisory fee but excluding interest, taxes, brokerage
commissions and extraordinary expenses such as litigation exceed, for any fiscal
year, 1.5% of the average net assets of the Fund.
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 (see
"Exchange Privilege" in the Prospectus) as well as private and institutional
investment clients. Included among these clients are persons and organizations
which own significant amounts of capital stock of LMC's parent company (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 applicable
investment objectives and current security holdings, but on occasion more than
one fund 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
effected 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, the ability of the Fund
to participate in combined transactions may generally produce better overall
executions.
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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 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".
Fund Advisory Fee Paid to LMC:
Fiscal Year Ended Management Fee
December 31, 1994 $891,433
December 31, 1995 761,888
December 31, 1996 758,779
Of the directors, executive officers, employees ("affiliated persons") of
the Fund, Messrs. Corniotes, DeMichele, Faust, Hisey, Jamison, Kantor, Lavery
and Luehs and Mmes. Carnicelli, Carr, Curcio, Gilfillan, Lederer 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 February 28, 1997, all
officers and directors of the Fund as a group owned of record and beneficially
less than 1% of the capital stock of the Fund.
LMC is a wholly-owned subsidiary 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.
PORTFOLIO TRANSACTIONS
Portfolio securities are purchased directly from dealers acting as principal
underwriters or market makers for GNMA certificates or government securities.
Such transactions are usually conducted on a net basis and accordingly no
brokerage commissions are paid by the Fund. The Fund may also execute
transactions through broker-dealers on a commission basis.
The Fund's primary policy is to execute all purchases and sales of portfolio
instruments at the most favorable prices consistent with best execution,
considering all of the costs of the transaction including brokerage commissions.
This policy governs the selection of brokers and dealers and the market in which
a transaction is executed. Consistent with this policy, the Rules of Fair
Practice of the National Association of Securities Dealers, Inc., and such other
policies as the Directors may determine, LMC may consider sales of shares of the
Fund and of the other Lexington Funds as a factor in the selection of
broker-dealers to execute the Fund's portfolio transactions. However, pursuant
to the Fund's investment management agreement, management consideration may be
given in the selection of broker-dealers to research provided and payment may be
made of a commission higher than that charged by another broker-dealer which
does not furnish research services or which furnishes research services deemed
to be of a lesser value, so long as the criteria of Section 28(e) of the
Securities Exchange Act of 1934 are met. Section 28(e) of the Securities
Exchange Act of 1934 was adopted in 1975 and specifies that a person with
investment discretion shall not be "deemed to have acted unlawfully or to have
breached a fiduciary duty" solely because such person has caused the account to
pay a higher commission than the lowest available under certain circumstances,
provided that the person so exercising investment discretion makes a good faith
determination that the commissions paid are "reasonable in the relation to the
value of the brokerage and research services provided ... viewed in terms of
either that particular transaction or his overall responsibilities with respect
to the accounts as to which he exercises investment discretion."
Currently, it is not possible to determine the extent to which commissions
that reflect an element of value for research services might exceed commissions
that would be payable for execution services alone. Nor generally can the value
of research services to the Fund be measured. Research services furnished might
be useful and of value to LMC and its affiliates in serving other clients as
well as the Fund. On the other hand, any research services obtained by LMC or
its affiliates from the placement of portfolio brokerage of other clients might
be useful and of value to LMC in carrying out its obligations to the Fund.
For the fiscal years ended December 31, 1994, 1995 and 1996 the Fund paid
brokerage commissions of $14,178, $30,151 and $57,767, respectively. The Fund's
portfolio turnover rate for the fiscal years ending December 31, 1994, 1995 and
1996 were respectively, 37.15%, 30.69% and 128.76%.
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TAX-SHELTERED RETIREMENT PLANS
The Fund makes available a variety of Prototype Pension and Profit Sharing
Plans including a 401(k) Salary Reduction Plan, Section 457 Deferred
Compensation Plan and a 403(b)(7) Plan. Plan services are available by
contacting the Shareholder Services Department of the Distributor at
1-800-526-0056.
INDIVIDUAL RETIREMENT ACCOUNT (IRA): Individuals may make tax deductible
contributions to their own Individual Retirement Accounts established under
Section 408 of the Internal Revenue Code (the "Code"). Married investors filing
a joint return neither of whom is an active participant in an employer sponsored
retirement plan, or who have an adjusted gross income of $40,000 or less
($25,000 or less for single taxpayers) may make a $2,000 annual deductible IRA
contribution. For adjusted gross incomes above $40,000 ($25,000 for single
taxpayers), the IRA deduction limit is generally phased out ratably over the
next $10,000 of adjusted gross income, subject to a minimum $200 deductible
contribution. Investors who are not able to deduct a full $2,000 IRA
contribution because of the limitations may make a nondeductible contribution to
their IRA to the extent a deductible contribution is not allowed. Federal income
tax on accumulations earned on nondeductible contributions is deferred until
such time as these amounts are deemed distributed to an investor. Rollovers are
also permitted under the Plan. The disclosure statement required by the Internal
Revenue Service ("IRS") is provided by the Fund.
The minimum initial investment to establish a tax-sheltered plan is $250.
Subsequent investments are subject to a minimum of $50 for each account.
SELF-EMPLOYED RETIREMENT PLAN (HR-10): Self-employed individuals may make
tax deductible contributions to a prototype defined contribution pension plan or
profit sharing plan. There are, however, a number of special rules which apply
when self-employed individuals participate in such plans. Currently purchase
payments under a self-employed plan are deductible only to the extent of the
lesser of (i) $30,000 or (ii) 25% of the individual's earned annual income (as
defined in the Code) and in applying these limitations not more than $150,000 of
"earned income" may be taken into account.
CORPORATE PENSION AND PROFIT SHARING PLANS: The Fund makes available a
Prototype Defined Contribution Pension Plan and a Prototype Profit Sharing Plan.
All purchases and redemptions of Fund shares pursuant to any one of the
Fund's tax sheltered plans must be carried out in accordance with the provisions
of the plan. Accordingly, all plan documents should be reviewed carefully before
adopting or enrolling in the plan. Investors should especially note that a
penalty tax of 10% may be imposed by the IRS on early withdrawals under
corporate, Keogh or IRA Plans. It is recommended by the IRS that an investor
consult a tax adviser before investing in the Fund through any of these plans.
An investor participating in any of the Fund's special plans has no obligation
to continue to invest in the Fund and may terminate the plan with the Fund at
any time. Except for expenses of sales and promotion, executive and
administrative personnel, and certain services which are furnished by the LMC,
the cost of the plans generally is borne by the Fund; however, each IRA Plan
account is subject to an annual maintenance fee of $12.00 charged by the Agent.
DIVIDEND, DISTRIBUTION AND REINVESTMENT POLICY
The Fund intends to pay monthly dividends from investment income after the
close of each month, if earned and as declared by its Board of Directors. The
Fund intends to declare or distribute a dividend from capital gain income if
any, in December in order to comply with distribution requirements of the 1986
Tax Reform Act to avoid the imposition of a 4% excise tax. The Fund adopted a
fiscal year ending on December 31.
Any dividends and distribution payments will be reinvested at net asset
value, without sales charge, in additional full and fractional shares of the
Fund unless and until the shareholder notifies the Agent in writing requesting
payments in cash. This request must be received by the Agent at least seven days
before the dividend record date. Upon receipt by the Agent of such written
notice, all further payments will be made in cash until written notice to the
contrary is received. A record of shares owned by each shareholder will be
maintained by the Agent. These accounts will have the rights of other
shareholders with respect to shares so registered (see "How to Purchase Shares -
The Open Account" in the Prospectus).
Reference is made to the Notes to Financial Statements regarding the amount
and age of any capital loss carryforward at the end of the Fund's last fiscal
year. It is the Fund's policy to offset realized capital gains against its
capital loss carryforwards and not to distribute any offset gains.
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
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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) for the taxable year
(the "Distribution Requirement"), and satisfies certain other requirements of
the Code that are described below. Distributions by the Fund made during the
taxable year or, under specified circumstances, within twelve months after the
close of the taxable year, will be considered distributions of income and gains
of the taxable year and will therefore satisfy the Distribution Requirement.
If the Fund has a net capital loss (i.e., the excess of capital losses over
capital gains) for any year, the amount thereof may be carried forward up to
eight years and treated as a short-term capital loss which can be used to offset
capital gains in such years. As of December 31, 1996, the Fund has capital loss
carryforwards of approximately $2,130,253 and $1,544,296 which expire in 2002
and 2003, respectively. Under Code sections 382 and 383, if the Fund has an
"ownership change," then the Fund's use of its capital loss carryforwards in any
year following the ownership change will be limited to an amount equal to the
net asset value of the Fund immediately prior to the ownership change multiplied
by the highest adjusted long-term tax-exempt rate (which is published monthly by
the Internal Revenue Service (the "IRS")) in effect for any month in the
3-calendar-month period ending with the calendar month in which the ownership
change occurs (the highest rate for the 3-month period ending in April 1997 is
5.50%). The Fund will use its best efforts to avoid having an ownership change.
However, because of circumstances which may be beyond the control or knowledge
of the Fund, there can be no assurance that the Fund will not have, or has not
already had, an ownership change. If the Fund has or has had an ownership
change, then any capital gain net income for any year following the ownership
change in excess of the annual limitation on the capital loss carryforwards will
have to be distributed by the Fund and will be taxable to shareholders as
described under "Fund Distributions" below.
In addition to satisfying the Distribution Requirement, a regulated
investment company must: (1) derive at least 90% of its gross income from
dividends, interest, certain payments with respect to securities loans, gains
from the sale or other disposition of stock or securities or foreign currencies
(to the extent such currency gains are directly related to the regulated
investment company's principal business of investing in stock or securities) and
other income (including but not limited to gains from options, futures or
forward contracts) derived with respect to its business of investing in such
stock, securities or currencies (the "Income Requirement"); and (2) derive less
than 30% of its gross income (exclusive of certain gains on designated hedging
transactions that are offset by realized or unrealized losses on offsetting
positions) from the sale or other disposition of stock, securities or foreign
currencies (or options, futures or forward contracts thereon) held for less than
three months (the "Short-Short Gain Test"). However, foreign currency gains,
including those derived from options, futures and forwards, will not in any
event be characterized as Short-Short Gain if they are directly related to the
regulated investment company's investments in stock or securities (or options or
futures thereon). Because of the Short-Short Gain Test, the Fund may have to
limit the sale of appreciated securities that it has held for less than three
months. However, the Short-Short Gain Test will not prevent the Fund from
disposing of investments at a loss, since the recognition of a loss before the
expiration of the three-month holding period is disregarded for this purpose.
Interest (including original issue discount) received by the Fund at maturity or
upon the disposition of a security held for less than three months will not be
treated as gross income derived from the sale or other disposition of such
security within the meaning of the Short-Short Gain Test. However, income that
is attributable to realized market appreciation will be treated as gross income
from such sale or other disposition of securities for this purpose.
In general, gain or loss recognized by the Fund on the disposition of an
asset will be a capital gain or loss. However, gain recognized on the
disposition of a debt obligation purchased by the Fund at a market discount
(generally, at a price less than its principal amount) will be treated as
ordinary income to the extent of the portion of the market discount which
accrued during the period of time the Fund held the debt obligation.
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.
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In addition to satisfying the requirements described above, the Fund must
satisfy an asset diversification test in order to qualify as a regulated
investment company. Under this test, at the close of each quarter of the Fund's
taxable year, at least 50% of the value of the Fund's assets must consist of
cash and cash items, U.S. Government securities, securities of other regulated
investment companies, and securities of other issuers (as to each of which the
Fund has not invested more than 5% of the value of the Fund's total assets in
securities of such issuer and does not hold more than 10% of the outstanding
voting securities of such issuer), and no more than 25% of the value of its
total assets may be invested in the securities of any one issuer (other than
U.S. Government securities and securities of other regulated investment
companies), or in two or more issuers which the Fund controls and which are
engaged in the same or similar trades or businesses. For purposes of asset
diversification testing, obligations issued or guaranteed by agencies or
instrumentalities of the U.S. Government such as the Federal Agricultural
Mortgage Corporation, the Farm Credit System Financial Assistance Corporation, a
Federal Home Loan Bank, the Federal Home Loan Mortgage Corporation, the Federal
National Mortgage Association, the Government National Mortgage Corporation, and
the Student Loan Marketing Association are treated as U.S. Government
securities.
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")). 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 may either retain or distribute to shareholders its net capital
gain for each taxable year. The Fund currently intends to distribute any such
amounts. Net capital gain that is distributed and designated as a capital gain
dividend will be taxable to shareholders as long-term capital gain, regardless
of the length of time the shareholder has held his shares or whether such gain
was recognized by the Fund prior to the date on which the shareholder acquired
his shares.
Conversely, if the Fund elects to retain its net capital gain, the Fund will
be taxed thereon (except to the extent of any available capital loss carryovers)
at the 35% corporate tax rate. If the Fund elects to retain its net capital
gain, it is expected that the Fund also will elect to have shareholders of
record on the last day of its taxable year treated as if each received a
distribution of his pro rata share of such gain, with the result that each
shareholder will be required to report his pro rata share of such gain on his
tax return as long-term capital gain, will receive a refundable tax credit for
his pro rata share of tax paid by the Fund on the gain, and will increase the
tax basis for his shares by an amount equal to the deemed distribution less the
tax credit.
Distributions by the Fund that do not constitute ordinary income dividends
or capital gain dividends will be treated as a return of capital to the extent
of (and in reduction of) the shareholder's tax basis in his shares; any excess
will be treated as gain from the sale of his shares, as discussed below.
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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 they economically constitute a return of capital to the shareholder.
Ordinarily, shareholders are required to take distributions by the Fund into
account in the year in which the distributions are made. However, dividends
declared in October, November or December of any year and payable to
shareholders of record on a specified date in such 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 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 an "exempt recipient" (such
as a corporation).
Sale or Redemption of Shares
A shareholder will recognize gain or loss on the sale or redemption of
shares of the Fund in an amount equal to the difference between the proceeds of
the sale or redemption and the shareholder's adjusted tax basis in the shares.
All or a portion of any loss so recognized may be disallowed if the shareholder
purchases other shares of the Fund within 30 days before or after the sale or
redemption. In general, any gain or loss arising from (or treated as arising
from) the sale or redemption of shares of the Fund will be considered capital
gain or loss and will be long-term capital gain or loss if the shares were held
for longer than one year. However, any capital loss arising from the sale or
redemption of shares held for six months or less will be treated as a long-term
capital loss to the extent of the amount of capital gain dividends received on
such shares. For this purpose, the special holding period rules of Code Section
246(c)(3) and (4) generally will apply in determining the holding period of
shares. Long-term capital gains of noncorporate taxpayers are currently taxed at
a maximum rate 11.6% lower than the maximum rate applicable to ordinary income.
Capital losses in any year are deductible only to the extent of capital gains
plus, in the case of a noncorporate taxpayer, $3,000 of ordinary income.
Foreign Shareholders
Taxation of a shareholder who, as to the United States, is a nonresident
alien individual, foreign trust or estate, foreign corporation, or foreign
partnership ("foreign shareholder"), depends on whether the income from the Fund
is "effectively connected" with a U.S. trade or business carried on by such
shareholder.
If the income from the Fund is not effectively connected with a U.S. trade
or business carried on by a foreign shareholder, ordinary income dividends paid
to a foreign shareholder will be subject to U.S. withholding tax at the rate of
30% (or lower applicable 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, capital gain dividends
and amounts retained by the Fund that are designated as undistributed capital
gains.
If the income from the Fund is effectively connected with a U.S. trade or
business carried on by a foreign shareholder, then ordinary income dividends,
capital gain dividends, and any gains realized upon the sale of shares of the
Fund will be subject to U.S. federal income tax at the rates applicable to U.S.
citizens or domestic corporations.
In the case of foreign noncorporate shareholders, the Fund may be required
to withhold U.S. federal income tax at a rate of 31% on distributions that are
otherwise exempt from withholding tax (or taxable at a reduced treaty rate)
unless such shareholders furnish the Fund with proper notification of their
foreign status.
The tax consequences to a foreign shareholder entitled to claim the benefits
of an applicable tax treaty may be different from those described herein.
Foreign shareholders are urged to consult their own tax advisers with respect to
the particular tax consequences to them of an investment in the Fund, including
the applicability of foreign taxes.
Effect of Future Legislation; 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
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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 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.
INVESTMENT RETURN INFORMATION
For purposes of quoting and comparing the performance of the Fund to that of
other mutual funds and to other relevant market indices in advertisements or in
reports to shareholders, performance may be stated in terms of total return and
yield. Under the rules of the Securities and Exchange Commission ("SEC rules"),
funds advertising performance must include total return quotes calculated
according to the following formula:
P(l + T)n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years (1, 5 or 10)
ERV = ending redeemable value of a hypothetical $1,000 payment made at
the beginning of the 1, 5 or 10 year periods at the end of the 1, 5 or 10 year
periods (or fractional portion thereof).
Under the foregoing formula, the time period used in advertising will be
based on rolling calendar quarters, updated to the last day of the most recent
quarter prior to submission of the advertising for publication, and will cover
one, five and ten year periods or a shorter period dating from the effectiveness
of the Fund's Registration Statement. In calculating the ending redeemable
value, the maximum sales load is deducted from the initial $1,000 payment and
all dividends and distributions by the Funds are assumed to have been reinvested
at net asset value as described in the Prospectus on the reinvestment dates
during the period. Total return, or "T" in the formula above, is computed by
finding the average annual compounded rates of return over the 1, 5 and 10 year
periods (or fractional portion thereof) that would equate the initial amount
invested to the ending redeemable value. Any recurring account charges that
might in the future be imposed by the Funds would be included at that time.
The Fund may also from time to time include in such advertising a total
return figure that is not calculated according to the formula set forth above in
order to compare more accurately the performance of the Fund with other measures
of investment return. For example, in comparing a Fund's total return with data
published by Lipper Analytical Services, Inc., or with the performance of the
Standard & Poor's 500 Stock Index or the Dow Jones Industrial Average, the Fund
calculates its aggregate total return for the specified periods of time by
assuming the investment of $10,000 in Fund shares and assuming the reinvestment
of each dividend or other distribution at net asset value on the reinvestment
date. Percentage increases are determined by subtracting the initial value of
the investment from the ending value and by dividing the remainder by the
beginning value. Such alternative total return information will be given no
greater prominence in such advertising than the information prescribed under SEC
rules. Lexington GNMA Income Fund, Inc.'s average annual total return for the 1,
5 and 10 years ended December 31, 1996 are set forth in the table below:
Average Annual
Period Total Return
1 year ended December 31, 1996 5.71%
5 years ended December 31, 1996 6.40%
10 years ended December 31, 1996 8.03%
In addition to the total return quotations discussed above, the Fund may
advertise its yield based on a 30-day (or one month) period ended on the date of
the most recent balance sheet included in the Fund's Registration Statement,
computed by dividing the net investment income per share earned during the
period by the maximum offering price per share on the last day of the period,
according to the following formula:
a-b
YIELD = 2[(cd + 1)6-1]
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursement).
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends.
d = the maximum offering price per share on the last day of the period.
Under this formula, interest earned on debt obligations for the purposes of
"a" above, is calculated by (l) computing
10
<PAGE>
the yield to maturity of each obligation (including actual accrued interest) at
the close of business on the last day of each month, or, with respect to
obligations purchased during the month, the purchase price (plus actual accrued
interest), (2) dividing that figure by 360 and multiplying the quotient by the
market value of the obligation (including actual accrued interest as referred to
above) to determine the interest income on the obligation for each day of the
subsequent month that the obligation is in the Fund's portfolio (assuming a
month of 30 days) and (3) computing the total of the interest earned on all debt
obligations and all dividends accrued on all equity securities during the 30-day
or one month period. For mortgage or other receivables backed security subject
to regular paydowns (e.g. GNMA's), interest is calculated using the coupon rate
and the outstanding participant amount for one monthly paydown. For these types
of securities, interest income is also adjusted for the gain or loss or the
monthly paydown. In computing dividends accrued, dividend income is recognized
by accruing 1/360 of the stated dividend rate of a security each day that the
security is in a Fund's portfolio.
The Fund may also from time to time advertise its yield based on a 90-day
period ended on the date of the most recent balance sheet included with the
Funds' Registration Statement, computed in accordance with the yield formula
described above, as adjusted to conform with the differing period for which the
yield computation is based.
Any quotation of performance stated in terms of yield (whether based on a
30-day or 90-day period) will be given no greater prominence than the
information prescribed under SEC rules. In addition, all advertisements
containing performance data of any kind will include a legend disclosing that
such performance data represents past performance and that the 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 their original cost.
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, has also been retained to act as 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.
*+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, General
Manager-Mutual Funds, Lexington Global Asset Managers, Inc.; Executive Vice
President and Director, Lexington Funds Distributor, 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 EH 92 JY, Scotland,
U.K. Professor of the Organisation of Industry and Commerce, Department of
Business Studies, The University of Edinburgh, Scotland.
11
<PAGE>
+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, Director and
C.E.O., Media General Broadcast Services (advertising firm).
+JOHN G. PRESTON (64), Director. 3 Woodfield Road, Wellesley, Massachusetts
02181. Associate Professor of Finance, Boston College, Boston, Massachusetts
02181.
+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 Fixed Income
Strategy, Lexington Management Corporation. Mr. Jamison is a Chartered
Financial Analyst and a member of the New York Society of Security Analysts.
*+LISA CURCIO (37), Vice President and Secretary. P.O. Box 1515, Saddle Brook,
N.J. 07663. Senior Vice President and Secretary, Lexington Management
Corporation; Vice President and Secretary, Lexington Funds Distributor,
Inc.; Secretary, Lexington Global Asset Managers, Inc.
*+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, Senior Vice
President and Director, Lexington Funds Distributor, Inc. Chief Financial
Officer, Market Systems Research Advisors, Inc.
*+RICHARD J. LAVERY (42), CLU ChFC, Vice President. P.O. Box 1515, Saddle Brook,
N.J. 07663. Senior Vice President, Lexington Management Corporation; Vice
President, Lexington Funds Distributor, Inc.
*+JANICE 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 LLP.
*+SIOBHAN GILFILLAN (33), Assistant Treasurer. P.O. Box 1515, Saddle Brook, N.J.
07663.
*+JOAN K. LEDERER (30), Assistant Treasurer. P.O. Box 1515, Saddle Brook, N.J.
07663. Prior to April 1997, Director of Investment Accounting, Diversified
Investment Advisors, Inc. Prior to April 1996, Assistant Vice President,
PIMCO.
*+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, McCash, Miller and Preston and Mmes. Carnicelli, Carr,
Curcio, Evans, Gilfillan, Lederer, 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.
12
<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 Directorships
Name of Director Compensation from Fund Fund and Fund Complex 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 W. Russell $1,712 $25,048 16
- -----------------------------------------------------------------------------------------------------------------
Philip C. Smith $1,600 $25,080 16
- -----------------------------------------------------------------------------------------------------------------
Francis A. Sunderland* $744 $10,528 N/A
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
*Retired
Retirement Plan for Eligible Directors/Trustees
Effective September 12, 1995, the Directors instituted a Retirement Plan for
Eligible Directors/Trustees (the "Plan") pursuant to which each Director/Trustee
(who is not an employee of any of the Funds, the Advisor, Administrator or
Distributor or any of their affiliates) may be entitled to certain benefits upon
retirement from the Board. Pursuant to the Plan, the normal retirement date is
the date on which the eligible Director/Trustee has attained age 65 and has
completed at least ten years of continuous and non-forfeited service with one or
more of the investment companies advised by LMC (or its affiliates)
(collectively, the "Covered Funds"). Each eligible Director/Trustee is entitled
to receive from the Covered Fund an annual benefit commencing on the first day
of the calendar quarter coincident with or next following his date of retirement
equal to 5% of his compensation multiplied by the number of such
Director/Trustee's years of service (not in excess of 15 years) completed with
respect to any of the Covered Portfolios. Such benefit is payable to each
eligible Director in quarterly installments for ten years following the date of
retirement or the life of the Director/Trustee. The Plan establishes age 72 as a
mandatory retirement age for Directors/Trustees; however, Director/Trustees
serving the Funds as of September 12, 1995 are not subject to such mandatory
retirement. Directors/Trustees serving the Funds as of September 12, 1995 who
elect retirement under the Plan prior to September 12, 1996 will receive an
annual retirement benefit at any increased compensation level if compensation is
increased prior to September 12, 1997 and receive spousal benefits (i.e., in the
event the Director/Trustee dies prior to receiving full benefits under the Plan,
the Director/Trustee's spouse (if any) will be entitled to receive the
retirement benefit within the 10 year period.)
Retiring Directors will be eligible to serve as Honorary Directors for one
year after retirement and will be entitled to be reimbursed for travel expenses
to attend a maximum of two meetings.
Set forth in the table below are the estimated annual benefits payable to an
eligible Director upon retirement assuming various compensation and years of
service classifications. As of December 31, 1996, the estimated credited years
of service for Directors Chadha, Duer, Maher, McCash, Miller, Preston and
Russell are 1, 18, 1, 1, 22, 18 and 15, respectively.
Highest Annual Compensation Paid by All Funds
---------------------------------------------
$20,000 $25,000 $30,000 $35,000
Years of
Service Estimated Annual Benefit Upon Retirement
-------- ----------------------------------------
15 $15,000 $18,750 $22,500 $26,250
14 14,000 17,500 21,000 24,500
13 13,000 16,250 19,500 22,750
12 12,000 15,000 18,000 21,000
11 11,000 13,750 16,500 19,250
10 10,000 12,500 15,000 17,500
SHAREHOLDER REPORTS
Shareholders will receive reports at least semi-annually showing the Fund's
holdings and other information. In addition, shareholders will receive annual
financial statements audited by KPMG Peat Marwick LLP, the Fund's independent
auditors.
13
<PAGE>
LEXINGTON GNMA INCOME FUND, INC.
STATEMENT OF NET ASSETS
(INCLUDING THE PORTFOLIO OF INVESTMENTS)
December 31, 1996
<TABLE>
<CAPTION>
Stated Principal Value
Coupon Maturity Amount (Note 1)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) CERTIFICATES: 70.1%
13.25% ............................................... 8/2001 $ 32,700 $ 34,560
10.25 ................................................ 8/2029 1,015,378 1,107,392
9.50 ................................................. 3/2023 2,002,795 2,145,495
9.25 ................................................. 12/2021-8/2029 12,023,778 12,338,725
9.00 ................................................. 1/2022 3,067,793 3,248,026
8.75 ................................................. 9/1998-10/2023 5,455,099 5,702,025
8.50 ................................................. 3/2012-8/2036 2,785,826 2,819,623
8.50* ................................................ 8/2036 117,601 117,601
8.25 ................................................. 3/2001-4/2022 7,452,292 7,715,585
8.20 ................................................. 4/2012-5/2017 11,262,784 11,614,746
8.15 ................................................. 12/2011-9/2015 10,807,028 11,127,781
8.125 ................................................ 4/2027-6/2039 4,124,195 4,184,382
8.125* ............................................... 4/2027-6/2039 8,098,105 8,162,833
8.10 ................................................. 6/2012-7/2012 1,902,405 1,956,491
8.00 ................................................. 10/2012-3/2038 5,088,083 5,196,778
8.00* ................................................ 11/2030-3/2038 2,563,705 2,573,003
7.70 ................................................. 8/2013 806,070 819,419
7.65 ................................................. 12/2012-4/2031 3,957,618 3,967,788
7.50 ................................................. 4/2013 1,295,941 1,306,866
7.25 ................................................. 8/2022 2,095,849 2,086,020
7.20 ................................................. 6/2014 3,004,683 2,988,699
6.75 ................................................. 6/2013-8/2017 402,178 393,877
6.70 ................................................. 12/2014 381,010 372,674
6.65 ................................................. 10/2014 1,495,781 1,458,850
5.65 ................................................. 7/2029 486,773 400,662
------------
TOTAL GNMA CERTIFICATES (cost $91,390,140) .................................................... 93,839,901
------------
U.S. GOVERNMENT OBLIGATIONS: 37.2%
U.S. Treasury Bills, 5.34%, due 10/16/97 ....................................... 300,000 287,691
U.S. Treasury Notes, 6.00%, due 08/15/99 ....................................... 23,800,000 23,792,146
U.S. Treasury Notes, 5.875%, due 10/31/98 ...................................... 1,000,000 999,980
U.S. Treasury Notes, 5.875%, due 11/30/01 ...................................... 25,000,000 24,632,250
------------
TOTAL U.S. GOVERNMENT OBLIGATIONS (COST $49,814,832) .......................................... 49,712,067
------------
TOTAL INVESTMENTS: 107.3% (COST $141,204,972+)(NOTE 1) ........................................ 143,551,968
Liabilities in excess of other assets: (7.3%) ................................................. (9,774,844)
------------
TOTAL NET ASSETS:100% (equivalent to $8.12 per share on 16,467,397 shares outstanding) ........ $133,777,124
============
</TABLE>
* When-issued securities (Note 1)
+ Aggregate cost for Federal income tax purposes is identical.
The Notes to Financial Statements are an integral part of this statement.
14
<PAGE>
LEXINGTON GNMA INCOME FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1996
ASSETS
Investments, at value
(cost $141,204,972) (Note 1) ............... $143,551,968
Cash .......................................... 790,815
Receivable for shares sold .................... 220,203
Dividends and interest receivable ............. 1,231,459
-------------
Total Assets ............................. 145,794,445
-------------
LIABILITIES
Due to Lexington Management Corporation (Note 2) 67,775
Payable for investment securities purchased ... 11,579,728
Payable for shares redeemed ................... 90,829
Distributions payable ......................... 165,817
Accrued expenses .............................. 113,172
-------------
Total Liabilities ........................ 12,017,321
-------------
NET ASSETS (equivalent to $8.12 per share on
16,467,397 shares outstanding) (Note 3) .... $ 133,777,124
=============
NET ASSETS consist of:
Capital stock--authorized 100,000,000 shares,
$.01 par value per share ................... $ 164,674
Additional paid-in capital (Note 1) ........... 134,930,714
Undistributed net investment income (Note 1) .. 9,290
Accumulated net realized loss on investments
(Notes 1 and 5) ............................ (3,674,550)
Net unrealized appreciation of investments .... 2,346,996
-------------
$ 133,777,124
=============
LEXINGTON GNMA INCOME FUND, INC.
STATEMENT OF OPERATIONS
Year ended December 31, 1996
INVESTMENT INCOME
Interest income ............................... $ 9,621,445
Expenses
Investment advisory fee (Note 2) . $ 758,779
Transfer agent and shareholder
servicing expense (Note 2) ..... 211,840
Accounting expenses (Note 2) ..... 92,728
Printing and mailing expenses .... 90,761
Custodian expense ................ 42,343
Professional fees ................ 30,808
Registration fees ................ 20,833
Computer processing fees ......... 20,011
Directors' fees and expenses ..... 16,192
Other expenses ................... 39,716
---------
Total expenses 1,324,011
-------------
Net investment income 8,297,434
-------------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS (NOTE 4)
Net realized gain on investments ........... 1,733,533
Net change in unrealized
appreciation ............................. (3,035,171)
-------------
Net realized and
unrealized loss ...................... (1,301,638)
-------------
INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS ............................ $ 6,995,796
=============
The Notes to Financial Statements are an integral part of this statement.
15
<PAGE>
LEXINGTON GNMA INCOME FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
Years ended December 31, 1996 and 1995
1996 1995
------------- -------------
Net investment income .................. $ 8,297,434 $ 9,011,431
Net realized gain (loss) from security
transactions ........................ 1,733,533 (1,220,453)
Net change in unrealized appreciation
of investments ...................... (3,035,171) 11,066,357
------------- -------------
Increase in net assets
resulting from operations 6,995,796 18,857,335
Distributions to shareholders from
net investment income ............... (8,115,172) (9,280,142)
Increase (decrease) in net assets from
capital share transactions
(Note 3) ............................ 4,215,069 (11,003,421)
------------- -------------
Net increase (decrease)
in net assets ..................... 3,095,693 (1,426,228)
Net Assets:
Beginning of period ................. 130,681,431 132,107,659
------------- -------------
End of period (including
undistributed net investment
income of $9,290 and
distributions in excess of net
investment income of $3,067,
respectively) ....................... $ 133,777,124 $ 130,681,431
============= =============
The Notes to Financial Statements are an integral part of these statements.
LEXINGTON GNMA FUND, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1996 and 1995
1. SIGNIFICANT ACCOUNTING POLICIES
Lexington GNMA 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 in good faith under the
direction of the Fund's Board of Directors. Short-term securities having a
maturity of 60 days or less are stated at amortized cost, which approximates
market value. Dividend income 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-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. These transactions are
subject to market fluctuations and their current value is determined in the same
manner as other securities in the portfolio. 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 Dividends from net investment income are normally declared
and paid monthly and dividends from net realized capital gains are normally
declared and paid annually. However, the Fund may make distributions on a more
frequent basis to comply with the distribution requirements of the Internal
Revenue Code. The character of income and gains to be distributed are determined
in accordance with income tax regulations which may differ from generally
accepted accounting
16
<PAGE>
LEXINGTON GNMA FUND, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1996 and 1995 (continued)
principles. At December 31, 1996, 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.
USE OF ESTIMATES The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
increases and decreases in net assets from operations during the reporting
period. Actual results could differ from those estimates.
2. INVESTMENT ADVISORY FEE AND OTHER
TRANSACTIONS WITH AFFILIATE
The Fund pays an investment advisory fee to Lexington Management Corporation
("LMC") at an annual rate of 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. In accordance with the investment advisory agreement,
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 year ended December 31, 1996.
The Fund also reimbursed LMC for certain expenses, including accounting and
shareholder servicing costs of $193,498, which were incurred by the Fund, but
paid by LMC.
3. CAPITAL STOCK
Transactions in capital stock were as follows:
Year ended Year ended
December 31, 1996 December 31, 1995
--------------------------- ---------------------------
Shares Amount Shares Amount
---------- ----------- ---------- -----------
Shares sold .... 4,079,533 $ 33,104,861 2,456,267 $ 19,640,687
Shares issued on
reinvestment
of dividends .. 753,267 6,088,504 859,479 6,916,746
---------- ----------- ---------- -----------
4,832,800 39,193,365 3,315,746 26,557,433
Shares redeemed .. (4,312,315) (34,978,296) (4,745,973) (37,560,854)
---------- ----------- ---------- -----------
Net increase
(decrease) ..... 520,485 $ 4,215,069 (1,430,227) $(11,003,421)
========== =========== ========== ===========
4. PURCHASES AND SALES OF INVESTMENT SECURITIES
The cost of purchases and proceeds from sales of securities for the year ended
December 31, 1996, excluding short-term securities, were $197,017,595 and
$166,184,972, respectively. At December 31, 1996, the aggregate gross unrealized
appreciation for all securities in which there is an excess of value over tax
cost amounted to $2,490,582 and aggregate gross unrealized depreciation for all
securities in which there is an excess of tax cost over value amounted to
$143,586.
5. FEDERAL INCOME TAXES - CAPITAL LOSS CARRYFORWARDS
Capital loss carryforwards available for Federal income tax purposes as of
December 31, 1996 are approximately: $2,130,253 expiring in 2002; and $1,544,296
expiring in 2003. To the extent any future gains are offset by these losses,
such gains may not be distributed to shareholders.
- --------------------------------------------------------------------------------
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 .................... $8.19 $7.60 $8.32 $8.26 $8.45
Income from investment operations:
Net investment income ................................ 0.53 0.58 0.55 0.59 0.61
Net realized and unrealized gain (loss) on investments (0.08) 0.59 (0.72) 0.06 (0.19)
---- ---- ---- ---- ----
Total income (loss) from investment operations .......... 0.45 1.17 (0.17) 0.65 0.42
Less distributions:
Distributions from net investment income ............. (0.52) (0.58) (0.55) (0.59) (0.61)
---- ---- ---- ---- ----
Net asset value, end of period .......................... $8.12 $8.19 $7.60 $8.32 $8.26
---- ---- ---- ---- ----
Total return ............................................ 5.71% 15.91% (2.07%) 8.06% 5.19%
Ratio to average net assets:
Expenses ............................................. 1.05% 1.01% 0.98% 1.02% 1.01%
Net investment income ................................ 6.56% 7.10% 6.90% 6.96% 7.31%
Portfolio turnover ...................................... 128.76% 30.69% 37.15% 52.34% 180.11%
Net assets at end of period (000's omitted) ............. $133,777 $130,681 $132,108 $149,961 $132,048
</TABLE>
17
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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, 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 sold
but not delivered, 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 GNMA Income 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
18
