Dear Shareholders:
- --------------------------------------------------------------------------------
The Lexington GNMA Income Fund ended the first half of 1997 as it began the
year-with its net asset value per share at $8.12. However, the first six months
of this year were anything but stable. In January and early February, the bond
market basked in the glow of a rising U.S. dollar, slowing inflation, and
seemingly moderate economic growth. The Fund's price edged higher, reaching
$8.24 a share on February 18th. Then, news of strong business expansion
circulated-first quarter GDP growth eventually was reported at a stunning 5.8%
annual rate-and the Federal Reserve raised short term interest rates by
one-quarter of a percent. Bond prices plummetted as did the value of the Fund.
Our net asset value slumped to $7.96 a share by April 14th. We've spent the last
three months gradually edging higher in price as investors are beginning to
believe that strong economic growth and low inflation are not necessarily
incompatible.
While the Fund's share price bounced around during the first half of 1997,
the dividends were quite stable. The payout totalled 26.3 cents per share,
including 4.5 cents per share in each of the last four months. The dividend per
share increased versus the second half of 1996 as the proceeds from the sale of
certain GNMA-guaranteed project loans in October were reinvested in both single
family GNMA mortgages and long-term U.S. Treasury bonds. We think the current
dividend payout will be sustained in the second half of this year.
The Fund is running under full sail. It is fully invested in GNMA
pass-through securities and long-term U.S. Treasury bonds. Also, we have
commitments to fund a number of GNMA-guaranteed construction loans with mortgage
rates ranging from 7.7% to 8.25%, levels well above current market rates. In
all, we are positioned to perform well in a declining interest rate environment.
Bond bulls will find the Lexington GNMA Income Fund an investment compatible
with their outlook.
We look for lower interest rates and higher bond prices by year end.
Despite a fifty basis point drop in yields since April, bonds still offer
historically high income returns, adjusted for inflation. So far, the blazing
rise in the stock market has blinded domestic investors to the excellent value
offered by bonds. Traditional buyers of U.S. government bonds were sellers in
the first half of 1997. To pull in foreign buyers, U.S. bonds were priced
cheaply compared to those of other developed countries. Once a more normal
pattern of investment flows returns, we look for U.S. interest rates to converge
with those of other developed countries. Currently, U.S. government securities
have a composite yield to maturity of 6.4%. This compares with an average 4.8%
yield for the other G-7 nations.
1
<PAGE>
Given our positive outlook for the bond market in 1997, we are maintaining
the long average maturity of the Fund's portfolio and, accordingly, the price of
the Fund's shares will be quite sensitive to market fluctuations in the months
ahead.
Sincerely,
/s/ Denis P. Jamison /s/ Robert M. DeMichele
---------------------- ---------------------------
Denis P. Jamison Robert M. DeMichele
Portfolio Manager President
August, 1997 August, 1997
* 7.82%, 6.66% and 8.32% are the one, five and ten year average annual standard
total returns, respectively, for the period ended June 30, 1997. Investment
return and principal value of an investment will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than at their
original cost. Total return represents past performance and is not predictive
of future results.
2
<PAGE>
LEXINGTON GNMA INCOME FUND, INC.
STATEMENT OF NET ASSETS
(INCLUDING THE PORTFOLIO OF INVESTMENTS)
June 30, 1997 (unaudited)
<TABLE>
<CAPTION>
Stated Principal Value
Coupon Maturity Amount (Note 1)
- -------------------------------------------------------------------------------------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) CERTIFICATES: 90.9%
<S> <C> <C> <C>
10.25% ...................... 8/2029 $ 1,013,526 $ 1,103,791
9.50 ........................ 3/2023 1,994,347 2,133,952
9.25 ........................ 12/2021-8/2029 11,982,428 12,313,501
8.75 ........................ 9/1998-10/2023 4,146,701 4,355,120
8.50 ........................ 10/2012 778,791 812,372
8.25 ........................ 3/2001-10/2038 8,263,138 8,566,039
8.25* ....................... 5/2038-10/2038 1,681,200 1,696,875
8.20 ........................ 4/2012-5/2017 11,084,951 11,501,667
8.15 ........................ 12/2011-9/2015 10,584,390 10,967,201
8.125 ....................... 5/1/2026-6/2039 8,180,601 8,310,012
8.125* ...................... 3/2036-6/2039 5,765,442 5,781,490
8.10 ........................ 6/2012-7/2012 1,872,281 1,937,211
8.00 ........................ 10/2012-3/2038 5,801,183 5,924,675
8.00* ....................... 11/2030-3/2038 1,809,980 1,804,958
7.875 ....................... 11/2030-7/2038 836,750 861,361
7.875* ...................... 6/2038-7/2038 2,725,723 2,713,332
7.75 ........................ 3/2032 1,008,050 1,016,871
7.70 ........................ 8/2013-5/2038 3,246,647 3,252,089
7.70* ....................... 5/2038 11,163,022 11,110,667
7.65 ........................ 12/2012-4/2031 3,938,359 3,961,926
7.50 ........................ 4/2013 1,275,600 1,289,950
7.25 ........................ 8/2022 2,152,097 2,149,407
7.20 ........................ 6/2014 2,962,299 2,957,648
7.00 ........................ 1/2027 20,085,925 19,734,421
6.75 ........................ 6/2013-8/2017 649,669 639,217
6.70 ........................ 12/2014 375,625 368,815
6.65 ........................ 10/2014 1,494,049 1,462,764
5.65 ........................ 7/2029 484,272 409,936
-------------
TOTAL GNMA CERTIFICATES (cost $126,441,675) .............................. 129,137,268
-------------
U.S. GOVERNMENT OBLIGATIONS: 24.5%
U.S. Treasury Bills, 5.16%, due 12/11/97 ............. 4,900,000 4,785,242
U.S. Treasury Bonds, 6.25%, due 08/15/23 ............. 25,000,000 23,140,750
U.S. Treasury Notes, 5.875%, due 11/30/01 ............ 7,000,000 6,860,980
-------------
TOTAL U.S. GOVERNMENT OBLIGATIONS (cost $35,280,647) .................... 34,786,972
-------------
TOTAL INVESTMENTS: 115.4% (cost $161,722,322t)(Note 1) .................. 163,924,240
-------------
Liabilities in excess of other assets: (15.4%) .......................... (21,839,438)
-------------
TOTAL NET ASSETS: 100.0% (equivalent to $8.12 per share on
17,491,744 shares outstanding) ....................................... $ 142,084,802
=============
</TABLE>
* When-issued securities (Note 1)
t Aggregate cost for Federal income tax purposes is identical.
The Notes to Financial Statements are an integral part of this statement.
3
<PAGE>
LEXINGTON GNMA INCOME FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
June 30, 1997 (unaudited)
ASSETS
Investments, at value
(cost $161,722,322) (Note 1) ............................ $ 163,924,240
Cash ....................................................... 1,128,480
Receivable for shares sold ................................. 241,773
Dividends and interest receivable .......................... 1,316,969
-------------
Total Assets .......................................... 166,611,462
-------------
LIABILITIES
Due to Lexington Management Corporation (Note 2) ........... 69,743
Payable for investment securities purchased ................ 24,050,588
Payable for shares redeemed ................................ 179,903
Distributions payable ...................................... 117,021
Accrued expenses ........................................... 109,405
-------------
Total Liabilities ..................................... 24,526,660
-------------
NET ASSETS (equivalent to $8.12 per share on
17,491,744 shares outstanding) (Note 3) ................. $ 142,084,802
=============
NET ASSETS consist of:
Capital stock-authorized 100,000,000 shares,
$.01 par value per share ................................ $ 174,917
Additional paid-in capital (Note 1) ........................ 143,254,754
Distributions in excess of net investment income
(Note 1) ................................................ (88,930)
Accumulated net realized loss on investments
(Note 1) ................................................ (3,457,857)
Net unrealized appreciation of investments ................. 2,201,918
-------------
$ 142,084,802
=============
LEXINGTON GNMA INCOME FUND, INC.
STATEMENT OF OPERATIONS
Six months ended June 30, 1997 (unaudited)
INVESTMENT INCOME
Interest income ................................ $ 5,128,844
EXPENSES
Investment advisory fee (Note 2) ............ $ 411,866
Transfer agent and shareholder
servicing expense (Note 2) ................ 127,785
Accounting expenses (Note 2) ................ 47,555
Printing and mailing expenses ............... 42,744
Professional fees ........................... 19,228
Custodian expense ........................... 13,828
Registration fees ........................... 13,545
Computer processing fees .................... 7,800
Directors' fees and expenses ................ 7,404
Other expenses .............................. 24,143
----------
Total expenses ............................ 715,898
----------
Net investment income ................... 4,412,946
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS (NOTE 4)
Net realized gain on investments ............ 216,693
Net change in unrealized
appreciation .............................. (145,078)
----------
Net realized and
unrealized gain ....................... 71,615
----------
INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS ............................. $ 4,484,561
============
The Notes to Financial Statements are an integral part of these statements.
4
<PAGE>
LEXINGTON GNMA INCOME FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
Six months
ended Year ended
June 30, 1997 December 31,
(unaudited) 1996
-------------- --------------
Net investment income .................. $ 4,412,946 $ 8,297,434
Net realized gain from security
transactions ........................ 216,693 1,733,533
Net change in unrealized appreciation
of investments ...................... (145,078) (3,035,171)
----------- -----------
Increase in net assets
resulting from operations ....... 4,484,561 6,995,796
Distributions to shareholders from
net investment income ............... (4,511,166) (8,115,172)
Increase in net assets from capital
share transactions (Note 3) ........ 8,334,283 4,215,069
----------- -----------
Net increase in net assets .......... 8,307,678 3,095,693
Net Assets:
Beginning of period ................. 133,777,124 130,681,431
----------- -----------
End of period (including
distributions in excess of net
investment income of
$88,930 and undistributed
net investment income of
$9,290, respectively) ............. $142,084,802 $133,777,124
============ ============
The Notes to Financial Statements are an integral part of these statements.
LEXINGTON GNMA INCOME FUND, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1997 (unaudited) and December 31, 1996
1. SIGNIFICANT ACCOUNTING POLICIES
Lexington GNMA Income Fund, Inc. (the "Fund") is an open-end diversified
management investment company registered under the Investment Company Act of
1940, as amended. The Fund's investment objective is to seek a high level of
current income, consistent with liquidity and safety of principal, through
investment primarily in mortgage backed GNMA ("Ginnie Mae") certificates that
are guaranteed as to the timely payment of principal and interest by the United
States Government. The following is a summary of significant accounting policies
followed by the Fund in the preparation of its financial statements:
INVESTMENTS Security transactions are accounted for on a trade date basis.
Realized gains and losses from investment transactions are reported on the
identified cost basis. Securities are valued at the last reported bid price as
of the last business day of the period or, if no current bid price is available,
by the valuation as determined by the Fund' 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. 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 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.
5
<PAGE>
LEXINGTON GNMA INCOME FUND, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1997 (unaudited) and December 31, 1996 (continued)
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 six months ended June 30, 1997.
The Fund reimbursed LMC for certain expenses, including accounting and
shareholder servicing costs of $105,410, which are incurred by the Fund, but
paid by LMC.
3. Capital Stock
Transactions in capital stock were as follows:
<TABLE>
<CAPTION>
Six months ended
June 30, 1997 Year ended
(unaudited) December 31, 1996
---------------------- -------------------------
Shares Amount Shares Amount
------- ------ ------ ------
<S> <C> <C> <C> <C>
Shares sold .......... 2,421,631 $ 19,654,933 4,079,533 $ 33,104,861
Shares issued on
reinvestment
of dividends ...... 441,137 3,562,764 753,267 6,088,504
------------ ------------ ------------ ------------
2,862,768 23,217,697 4,832,800 39,193,365
Shares redeemed ...... (1,838,421) (14,883,414) (4,312,315) (34,978,296)
------------ ------------ ------------ ------------
Net increase ......... 1,024,347 $ 8,334,283 520,485 $ 4,215,069
</TABLE>
4. PURCHASES AND SALES OF INVESTMENT SECURITIES
The cost of purchases and proceeds from sales of securities for the six months
ended June 30, 1997, excluding short-term securities, were $84,025,993 and
$68,163,138, respectively.
At June 30, 1997, the aggregate gross unrealized appreciation for all securities
in which there is an excess of value over tax cost amounted to $2,744,011 and
aggregate gross unrealized depreciation for all securities in which there is an
excess of tax cost over value amounted to $542,093.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
Selected per share data for a share outstanding throughout the period:
<TABLE>
<CAPTION>
Six months
ended
June 30, 1997 Year ended December 31,
------------- ------------------------------------------------------
(unaudited) 1996 1995 1994 1993
----------- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period ......... $ 8.12 $ 8.19 $ 7.60 $ 8.32 $ 8.26
------- ------ ------ ------ ------
Income from investment operations:
Net investment income ..................... 0.26 0.53 0.58 0.55 0.59
Net realized and unrealized gain
(loss) on investments ................. -- (0.08) 0.59 (0.72) 0.06
------- ------ ------ ------ ------
Total income (loss) from investment operations 0.26 0.45 1.17 (0.17) 0.65
------- ------ ------ ------ ------
Less distributions:
Distributions from net investment income .. (0.26) (0.52) (0.58) (0.55) (0.59)
------- ------ ------ ------ ------
Net asset value, end of period ............... $ 8.12 $ 8.12 $ 8.19 $ 7.60 $ 8.32
====== ====== ====== ====== ======
Total return ................................. 6.77%* 5.71% 15.91% (2.07%) 8.06%
Ratio to average net assets:
Expenses .................................. 1.04%* 1.05% 1.01% 0.98% 1.02%
Net investment income ..................... 6.43%* 6.56% 7.10% 6.90% 6.96%
Portfolio turnover ........................... 86.44%* 128.76% 30.69% 37.15% 52.34%
Net assets at end of period (000's omitted) .. $ 142,085 $ 133,777 $ 130,681 $ 132,108 $ 149,961
</TABLE>
*Annualized
6
<PAGE>
LEXINGTON
INVESTOR SERVICES
As a Lexington shareholder, you should be aware of the many services available
to you.
NO LOAD--The Lexington Funds are no load funds. That is, investments and
redemptions are made without any sales charges, commissions or redemption fees.
------------------
FREE TELEPHONE EXCHANGE -- Investments in the Lexington Funds may be exchanged
for shares of a different Lexington Fund at any time.
CHECK WRITING PRIVILEGES--Lexington Money Market Trust permits investors
immediate access to their funds with check writing for withdrawals from their
account.
------------------
TAX SHELTERED PLANS--IRA, Keogh, Pension, and Profit Sharing Prototype Plans are
available to qualified individuals. These plans offer investment flexibility
through the Share Exchange Service, simplified record keeping, convenience and
investment supervision.
------------------
CUSTODIAL ACCOUNTS FOR MINORS--Investments may be made on behalf of minors under
the Uniform Gifts to Minors Act currently in effect in all states.
------------------
SYSTEMATIC WITHDRAWAL PLAN--An investor may elect to receive a fixed amount from
his or her account each month or quarter, subject to certain minimums.
------------------
COMPLETE RECORD KEEPING--A statement is provided for every transaction in
addition to a year-end statement with tax information.
THE LEXINGTON GROUP OF
NO LOAD INVESTMENT COMPANIES
LEXINGTON WORLDWIDE EMERGING MARKETS FUND, INC.--Seeks long-term growth of
capital primarily through investment in equity securities of companies domiciled
in, or doing business in, emerging countries and emerging markets. Lexington
Global Fund, Inc.- Seeks long-term growth of capital primarily through
investment in common stocks of companies domiciled in foreign countries and the
United States. Lexington International Fund, Inc. - Seeks long-term growth of
capital through investment in companies domiciled in foreign countries.
LEXINGTON TROIKA DIALOG RUSSIA FUND, INC.--Seeks long-term capital appreciation
through investments primarily in the equity securities of Russian companies.
LEXINGTON CROSBY SMALL CAP ASIA GROWTH FUND, INC. --Seeks long-term capital
appreciation through investment in companies domiciled in the Asia Region with a
market capitalization of less than $1 billion.
LEXINGTON RAMIREZ GLOBAL INCOME FUND--Seeks high current income. Capital
appreciation is a secondary objective. The Fund invests in a combination of
foreign and domestic high-yield, lower rated debt securities.
LEXINGTON GOLDFUND, INC.--Seeks capital appreciation through investment in gold
bullion and shares of gold mining companies.
LEXINGTON GROWTH AND INCOME FUND, INC.--Seeks capital appreciation over the
long-term through investments in the stocks of large, ably managed and well
financed companies.
LEXINGTON CORPORATE LEADERS TRUST FUND--Seeks capital growth and reasonable
income through investment in an equal number of shares of an established list of
American blue chip corporations.
LEXINGTON SMALLCAP VALUE FUND, INC.--Seeks long-term capital appreciation
through investment in common stocks of companies domiciled in the United States
with a market capitalization of less than $1 billion.
LEXINGTON CONVERTIBLE SECURITIES FUND--Seeks total return by providing capital
appreciation, current income and conservation of capital through investments in
a diversified portfolio of securities convertible into shares of common stock.
LEXINGTON GNMA INCOME FUND, INC.--Seeks to achieve a high level of current
income, consistent with liquidity and safety of principal, through investment
primarily in mortgage-backed GNMA ("Ginnie Mae") certificates that are
guaranteed as to the timely payment of principal and interest by the United
States Government.
LEXINGTON MONEY MARKET TRUST--Seeks a high level of current income consistent
with preservation of capital and liquidity through investments in interest
bearing short-term money market instruments.
For more complete information about any of the Lexington Funds and a prospectus
which includes management fee and expenses call the distributor toll-free at
1-800-526-0057. Read the prospectus carefully before you invest or send money.
<PAGE>
LEXINGTON
GNMA INCOME FUND, INC.
INVESTMENT ADVISER
- --------------------------------------------------------------------------------
LEXINGTON MANAGEMENT CORPORATION
P.O. Box 1515
Park 80 West Plaza Two
Saddle Brook, New Jersey 07663
DISTRIBUTOR
- --------------------------------------------------------------------------------
LEXINGTON FUNDS DISTRIBUTOR, INC.
P.O. Box 1515
Park 80 West Plaza Two
Saddle Brook, New Jersey 07663
- --------------------------------------------------------------------------------
ALL SHAREHOLDER REQUESTS FOR SERVICES OF
ANY KIND SHOULD BE SENT TO:
TRANSFER AGENT
- ----------------------------------------
STATE STREET BANK AND
TRUST COMPANY
c/o National Financial Data Services
1004 Baltimore
Kansas City, Missouri 64105
OR CALL TOLL FREE:
SERVICE AND SALES: 1-800-526-0056
24 HOUR ACCOUNT INFORMATION:
1-800-526-0052
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(800) 526-0052
"LEXLINE"
24 hour toll-free telephone access to your
Lexington Fund account
Price/Yield o Account Balances o Exchanges o
Last Transactions o Total Return o Duplicate Statements
- --------------------------------------------------------------------------------
This report has been prepared for the information of the shareholders of
Lexington GNMA Income Fund, Inc. and is authorized for distribution to the
public only if it is accompanied or preceded by a currently effective prospectus
which sets forth expenses and other material information.
- --------------------------------------------------------------------------------
LEXINGTON
- --------------------------------------------------------------------------------
================================================================================
LEXINGTON
GNMA
INCOME
FUND, INC.
-------------------------
An investment primarily in
mortgage-backed GNMA
Certificates that are guaranteed
as to the timely payment of
principal and interest by the
United States Government.
-------------------------
SEMI-ANNUAL REPORT
JUNE 30, 1997
The Lexington Group
of No Load
Investment Companies
================================================================================
