DEAR SHAREHOLDERS:
- --------------------------------------------------------------------------------
Rewards were meager for fixed income investors in 1996. Bond prices
seesawed during the year as long-term yields oscillated between 6% and 7.2%, and
finished the year at 6.6%. This was sixty basis points higher than the prior
year. While Federal Reserve monetary policy and inflation readings were quite
stable throughout the year, the stop and go nature of economic growth kept
investors on edge. The key to good performance in 1996 was lots of coupon
income.
Fortunately, the Lexington GNMA Income Fund entered 1996 with a very
defensive portfolio consisting of a heavy weighting in high coupon GNMA
securities which exhibited a high degree of price stability regardless of
interest rate volatility. Also, a market segment which we
emphasize--multi-family GNMA-guaranteed mortgages--came in vogue and
significantly outperformed single family mortgages. Accordingly, the Lexington
GNMA Income Fund returned 5.7% in 1996, about 190 basis points more than the
typically GNMA-oriented mutual fund according to Lipper Analytical Services,
Inc. This gain comes on the heels of a 15.9% total return in 1995.
The Fund's dividend income per share declined about seven cents last
year--from 58.5 cents to 52 cents. This is not a prelude of things to come.
Certain unique factors depressed income in 1996. First, the bear market in bonds
encouraged us to keep a greater percentage of the portfolio in short term
government securities which typically have a lower yield. Second, we took
advantage of the strong market for multi-family GNMA securities last year and
sold a significant portion of our holdings at a gain and temporarily invested
the cash in two to five year U.S. Treasury notes. This had a negative impact in
the November and December dividend payouts. These funds are being quickly
reinvested in mortgage securities and that should help lift dividends this year.
We anticipate better returns for mortgages and other fixed income
securities in 1997. Unlike the stock market, where value as measured by past
yardsticks seems quite strained, bonds look cheap. Over the last forty years,
long-term U.S. Treasury bond yields have exceeded inflation (as measured by the
core CPI) by 2.8%. Currently, that spread exceeds 4%. In late 1994, that
differential reached 5% and ushered in a period of excellent returns over the
following year.
The supply/demand equation looks good for bonds, too. During 1996, foreign
demand--primarily from central banks--scooped up all the bonds the U.S.
Government printed to cover its $100 billion-plus deficit. These buyers were
motivated by the need to depreciate their currencies (particularly Japanese Yen)
relative to the U.S. Dollar and thereby revive their economies. As the year grew
to a close, the central bank buyers were supplanted by private overseas
investors drawn to the high U.S. bond yields and the strength of our currency.
This flow of funds will likely be sustained through 1997 and could be augmented
by demand from domestic investors should the equity or high yield bond markets
falter.
Given our positive outlook for the bond market in 1997, we already have
increased the average maturity of the Fund's portfolio and, accordingly, the
price of the Fund's shares will be more sensitive to market fluctuations in the
months ahead. We wish to thank all our shareholders for their continued loyalty.
1
<PAGE>
RESULTS OF ANNUAL MEETING OF SHAREHOLDERS HELD NOVEMBER 5, 1996 (unaudited)
Total Outstanding Shares as of September 10, 1996: 15,635,082
1. Directors Elected: S.M.S. Chadha, Robert M.DeMichele,Beverley C. Duer,
Barbara R.Evans, Lawrence Kantor, Jerard F. Maher, Andrew M.McCosh, Donald B.
Miller, John G. Preston, Margaret W. Russell and Philip C. Smith
For All Nominees:9,034,168 Withheld Authority: 311,443
Votes Votes
Votes For Against Abstained
--------- -------- ---------
2. Selection of KPMG Peat Marwick LLP
as Independent Auditors ............. 9,112,802 57,920 174,889
Sincerely,
/s/ Denis P. Jamison /s/ Robert M. DeMichele
- --------------------- -----------------------
Denis P. Jamison Robert M. DeMichele
Portfolio Manager President
February, 1997 February, 1997
CHART/BEGIN
Printed version of this shareholder report contains a
graphic chart indicating the comparison of change in
value of a $10,000 investment in Lexington GNMA Income
Fund, Inc., and the unmanaged Lehman Brothers Mortgage-
Backed Securities Index from 12/31/86 through 12/31/96.
CHART/END
*5.71%, 6.40% and 8.03% are the one, five and ten year average annual standard
total returns, respectively, for the period ended December 31, 1996. Investment
return and principal value of an investment will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than 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)
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.
3
<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.
4
<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
5
<PAGE>
LEXINGTON GNMA FUND, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1996 and 1995 (continued)
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.
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> <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>
6
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Lexington GNMA Income Fund, Inc.:
We have audited the accompanying statements of net assets (including the
portfolio of investments) and assets and liabilities of Lexington GNMA Income
Fund, Inc. as of December 31, 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
7
<PAGE>
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
ANNUAL REPORT
DECEMBER 31, 1996
The Lexington Group
of NO LOAD
Investment Companies
- --------------------------------------------------------------------------------
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.
