As filed with the Securities and Exchange Commission on March 3, 1997
Registration No. 2-48906
811-2401
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 X
Pre-Effective Amendment No.
Post-Effective Amendment No. 31 X
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 X
Amendment No. 18 X
(Check appropriate box or boxes.)
LEXINGTON GNMA INCOME FUND, INC.
--------------------------------
(Exact name of Registrant as specified in Charter)
Park 80 West Plaza Two
Saddle Brook, New Jersey 07663
--------------------------------
(Address of principal executive offices)
Registrant's Telephone Number: (201) 845-7300
Lisa Curcio, Secretary
Lexington GNMA Income Fund, Inc.
Park 80 West Plaza Two, Saddle Brook, New Jersey 07663
--------------------------------------
(Name and address of agent for service)
With a copy to:
Carl Frischling, Esq.
Kramer, Levin, Kamin & Frankel
919 Third Avenue, New York, NY 10022
--------------------------------------
It is proposed that this filing will become effective 60 days
after filing pursuant to Paragraph (a) of Rule 485.
---------------------------------------------------
The Registrant has registered an indefinite number of shares under
the Securities Act of 1933, pursuant to Section 24(f) of the Investment
Company Act of 1940. A Rule 24f-2 Notice for the Registrant's fiscal
year ended December 31, 1996 was filed on February 26, 1997.
<PAGE>
LEXINGTON GNMA INCOME FUND, INC.
REGISTRATION STATEMENT ON FORM N-1A
CROSS REFERENCE SHEET
PART A
Items in Part A Prospectus
of Form N-1A Prospectus Caption Page Number
_______________ __________________ ___________
1. Cover Page Cover Page
2. Synopsis *
3. Condensed Financial Information 18
4. General Description of Registrant 4
5. Management of the Fund 42
6. Capital Stock and Other Securities 61
7. Purchase of Securities Being Offered 51
8. Redemption or Repurchase 54
9. Legal Proceedings *
Note * Omitted since answer is negative or inapplicable
<PAGE>
LEXINGTON GNMA INCOME FUND, INC.
STATEMENT OF ADDITIONAL STATEMENT OF ADDITIONAL
PART B INFORMATION CAPTION INFORMATION PAGE NUMBER
- ----- ----------------------- ------------------------
10. Cover Page Cover Page
11. Table of Contents Cover Page
12. General Information and History 61 (Part A)
13. Investment Objectives and Policies 2
14. Management of the Registrant 11
15. Control Persons and Principal Holders 4
of Securities
16. Investment Advisory and Other Services 4
17. Brokerage Allocation and Other Practices 5
18. Capital Stock and Other Securities 61 (Part A)
19. Purchase, Redemption and Pricing of 51, 54 (Part A)
securities being offered
20. Tax Status 6
21. Underwriters 4
22. Calculation of Yield Quotations on Money *
Market Funds
23. Financial Statements 14
PART C
- ------
Information required to be included in Part C is set
forth under the appropriate Item, so numbered, in Part C
to this Registration Statement.
* Not Applicable
<PAGE>
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
___________, 1997
The following twelve 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 Global Fund, Inc. LXGLX
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 (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. 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 __________,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.
AN INVESTMENT IN THE FUNDS IN 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.
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.
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.
TABLE OF CONTENTS
The Lexington Funds ............................................. 3
Fees and Expenses of the Funds .................................. 5
Financial Highlights ............................................ 8
The Funds' Investment Objectives
and Policies .................................................. 20
Other Investment Practices ...................................... 33
Risk Considerations ............................................. 36
Management of the Funds ......................................... 42
How to Contact the Funds ........................................ 51
How to Invest in the Funds ...................................... 51
How to Redeem an Investment
in the Funds .................................................. 54
Exchange Privileges and
Restrictions .................................................. 56
How Net Asset Value is Determined
Dividends and Distributions ..................................... 57
Taxation ........................................................ 59
General Information ............................................. 61
Backup Withholding .............................................. 63
Glossary ........................................................ 64
2
<PAGE>
THE LEXINGTON FUNDS
The Funds' investment objectives are summarized below. See "The Funds'
Investment Objectives and Policies" beginning on page __, "Portfolio Securities"
beginning on page __, "Other Investment Practices" beginning on page ___ and
"Risk Considerations" beginning on page __ 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 Global Fund, Inc.
The Lexington Global Fund's investment objective is to seek 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.
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 Russian 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 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 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:
- --------------------------------------------------------------------------------
Maximum
Maximum Sales
Sales Load Imposed Deferred Sales Redemption
Load Imposed on Reinvested Load Fees+ Exchange Fees
on Purchases Dividends
- --------------------------------------------------------------------------------
None None None None None
- --------------------------------------------------------------------------------
+ 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 SmallCap Asia Growth Fund 1.25 1.17 2.42*
Lexington Global Fund 1.00 0.90 1.90
Lexington International Fund 1.00 0.25 1.20 2.45
Lexington Ramirez Global Income Fund 1.00 0.25 0.25 1.50*
Lexington Troika Dialog Russia Fund 1.25 0.25 1.50 2.65*
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*
</TABLE>
* Net of reimbursement
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 above, 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 SmallCap Asia Growth Fund 24.51 75.45 129.05 275.63
Lexington Global Fund 19.29 59.70 102.64 222.21
Lexington International Fund 24.81 76.35 130.55 278.62
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, 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
1996 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 realized capital gains (0.01) (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%
- ----------------------------------------------------------------------------------------------------------------------
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 $0.005 per share of securities purchased and
sold. In accordance with recent SEC disclosure guidelines, average commissions
were calculated for the current period and not for prior periods.
8
<PAGE>
FINANCIAL HIGHLIGHTS Lexington Global Fund
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 11.32 $ 11.17 $ 13.51 $ 11.09 $ 11.57
- ----------------------------------------------------------------------------------------------------------------
Income (loss) from investment operations:
Net investment income 0.01 0.09 0.02 0.06 0.06
Net realized and unrealized gain (loss)
on investments 1.84 1.10 0.23 3.47 (0.47)
- ----------------------------------------------------------------------------------------------------------------
Total income (loss)
from investment operations 1.85 1.19 0.25 3.53 (0.41)
- ----------------------------------------------------------------------------------------------------------------
Less distributions:
Dividends from net investment income (0.16) (0.29) -- (0.06) (0.07)
Distributions in excess of net investments
income (temporary book-tax difference) -- -- (0.13) -- --
- ----------------------------------------------------------------------------------------------------------------
Distributions from net realized capital gains (1.73) (0.62) (2.46) (1.05)
Distributions in excess of net realized capital
gains (temporary book-tax difference) -- -- (0.13) -- --
- ----------------------------------------------------------------------------------------------------------------
Total distributions (1.89) (1.04) (2.59) (1.11) (0.07)
- ----------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 11.28 $ 11.32 $ 11.17 $ 13.51 $ 11.09
- ----------------------------------------------------------------------------------------------------------------
Total return 16.43% 10.69% 1.84% 31.88% (3.55%)
- ----------------------------------------------------------------------------------------------------------------
Ratios to average net assets:
- ----------------------------------------------------------------------------------------------------------------
Expenses 1.90% 1.67% 1.61% 1.49% 1.52%
- ----------------------------------------------------------------------------------------------------------------
Net investment income 0.11% 0.48% 0.14% 0.52% 0.55%
- ----------------------------------------------------------------------------------------------------------------
Portfolio turnover 128.05% 166.35% 83.40% 84.61% 81.38%
- ----------------------------------------------------------------------------------------------------------------
Average commission paid on
equity security transactions** $ 0.03 -- -- -- --
- ----------------------------------------------------------------------------------------------------------------
Net assets, end of period (000's omitted) $ 37,223 $ 53,614 $ 67,392 $ 87,313 $ 50,298
- ----------------------------------------------------------------------------------------------------------------
<CAPTION>
1991 1990 1989 1988 1987
---- ---- ---- ---- ----
Net asset value, beginning of period $ 10.26 $ 12.83 $ 10.89 $ 9.89 $ 9.50
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Income (loss) from investment operations:
Net investment income 0.09 0.11 0.01 0.02 0.01
Net realized and unrealized gain (loss)
on investments 1.50 (2.25) 2.72 1.56 0.38
Total income (loss)
from investment operations 1.59 (2.14) 2.73 1.58 0.39
- ----------------------------------------------------------------------------------------------------------------
Less distributions:
Dividends from net investment income (0.08) (0.11) (0.02) (0.02) --
Distributions in excess of net investments
income (temporary book-tax difference) -- -- -- -- --
- ----------------------------------------------------------------------------------------------------------------
Distributions from net realized capital gains (0.20) (0.32) (0.77) (0.56) --
Distributions in excess of net realized capital
gains (temporary book-tax difference) -- -- -- -- --
- ----------------------------------------------------------------------------------------------------------------
Total distributions (0.28) (0.43) (0.79) (0.58) --
- ----------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 11.57 $ 10.26 $ 12.83 $ 10.89 $ 9.89
- ----------------------------------------------------------------------------------------------------------------
Total return 15.55% (16.75%) 25.10% 15.99% 5.47%*
- ----------------------------------------------------------------------------------------------------------------
Ratios to average net assets:
- ----------------------------------------------------------------------------------------------------------------
Expenses 1.57% 1.59% 1.64% 1.80% 1.20%*
- ----------------------------------------------------------------------------------------------------------------
Net investment income 0.79% 0.99% 0.13% 0.12% 0.19%*
- ----------------------------------------------------------------------------------------------------------------
Portfolio turnover 75.71% 81.88% 113.58% 96.90% 95.66%*
- ----------------------------------------------------------------------------------------------------------------
Net assets, end of period (000's omitted) $ 53,886 $ 50,501 $ 57,008 $ 38,150 $ 31,250
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized
** In accordance with recent SEC disclosure guidelines, average commissions
are calculated for the current period and not for prior periods.
9
<PAGE>
FINANCIAL HIGHLIGHTS 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 SEC disclosure guidelines, the average commissions
are calculated for the current period, but not for prior periods.
10
<PAGE>
FINANCIAL HIGHLIGHTS Lexington Ramirez Global Income Fund
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 10.75 $ 9.80 $ 10.95 $ 10.39 $ 10.35
Income (loss) from investment operations:
Net investment income 1.01 0.96 0.46 0.53 0.61
Net realized and unrealized gain (loss)
on investments 0.36 0.95 (1.16) (0.58) (0.04)
- -----------------------------------------------------------------------------------------------------------
Total income (loss)
from investment operations 1.37 1.91 (0.70) 1.11 0.65
- -----------------------------------------------------------------------------------------------------------
Less distributions:
Distributions from net investment income (0.86) (0.96) (0.45) (0.55) (0.61)
Distributions from net realized gains (0.04) -- -- -- --
---- ---- ---- ---- ----
Total Distributions (0.90) (0.96) (0.45) (0.55) (0.61)
- -----------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 11.22 $ 10.75 $ 9.80 $ 10.95 $ 10.39
- -----------------------------------------------------------------------------------------------------------
Total return 13.33% 20.10% (6.52%) 10.90% 6.51%
- -----------------------------------------------------------------------------------------------------------
Ratio to average net assets:
- -----------------------------------------------------------------------------------------------------------
Expenses, before reimbursement or waiver 2.33% 3.07% 1.80% 1.44% 1.54%
- -----------------------------------------------------------------------------------------------------------
Expenses, net of reimbursement or waiver 1.50% 2.75% 1.50% 1.44% 1.50%
- -----------------------------------------------------------------------------------------------------------
Net investment income, before
reimbursement or waiver 9.49% 9.48% 4.18% 4.83% 5.88%
- -----------------------------------------------------------------------------------------------------------
Net investment income 10.32% 9.80% 4.48% 4.83% 5.92%
- -----------------------------------------------------------------------------------------------------------
Portfolio turnover 71.83% 164.72% 10.20% 31.06% 31.24%
- -----------------------------------------------------------------------------------------------------------
Net assets, end of period (000's omitted) $ 29,110 $ 12,255 $ 10,351 $ 14,576 $ 13,085
- -----------------------------------------------------------------------------------------------------------
<CAPTION>
1991 1990 1989 1988 1987
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 10.05 $ 10.12 $ 10.03 $ 9.67 $ 10.55
Income (loss) from investment operations:
Net investment income 0.67 0.73 0.63 0.63 0.78
Net realized and unrealized gain (loss)
on investments 0.30 (0.09) 0.09 0.36 (0.86)
- ----------------------------------------------------------------------------------------------------------------
Total income (loss)
from investment operations 0.97 0.64 0.72 0.99 (0.08)
- ----------------------------------------------------------------------------------------------------------------
Less distributions:
Distributions from net investment income (0.67) (0.71) (0.63) (0.63) (0.80)
Distributions from net realized gains -- -- -- -- --
---- ---- ---- ---- ----
(0.67) (0.71) (0.63) (0.63) (0.80)
- ----------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 10.35 $ 10.05 $ 10.12 $ 10.03 $ 9.67
- ----------------------------------------------------------------------------------------------------------------
Total return 10.03% 6.62% 7.40% 10.54% (0.21%)
- ----------------------------------------------------------------------------------------------------------------
Ratio to average net assets:
- ----------------------------------------------------------------------------------------------------------------
Expenses, before reimbursement or waiver 1.65% 1.61% 1.72% 1.50% 1.97%
- ----------------------------------------------------------------------------------------------------------------
Expenses, net of reimbursement or waiver 1.12% 1.08% 1.20% 1.33% --
- ----------------------------------------------------------------------------------------------------------------
Net investment income, before
reimbursement or waiver 6.11% 6.67% 5.70% 6.16% 5.98%
- ----------------------------------------------------------------------------------------------------------------
Net investment income 6.64% 7.20% 6.22% 6.33% 7.95%
- ----------------------------------------------------------------------------------------------------------------
Portfolio turnover 29.45% 44.50% 46.60% 67.11% 66.77%
- ----------------------------------------------------------------------------------------------------------------
Net assets, end of period (000's omitted) $ 12,252 $ 10,707 $ 12,739 $ 13,139 $ 11,049
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized
11
<PAGE>
FINANCIAL HIGHLIGHTS Lexington Troika Dialog Russia Fund
<TABLE>
<CAPTION>
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 income, before reimbursement or waivers (3.69)%
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income (1.26%)
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 115.55%*
- ------------------------------------------------------------------------------------------------------------------------------------
Average commissions paid
on equity security transactions --***
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (000's omitted) $ 13,846
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* 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 is less than $0.005 per share of securities
purchased and sold.
<PAGE>
FINANCIAL HIGHLIGHTS Lexington Worldwide Emerging Markets Fund
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 10.70 $ 11.47 $ 13.96 $ 8.66 $ 9.03
- ------------------------------------------------------------------------------------------------------------------
Income (loss) from investment operations:
- ------------------------------------------------------------------------------------------------------------------
Net investment income -- 0.08 (0.01) 0.05 0.07
- ------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss)
- ------------------------------------------------------------------------------------------------------------------
on investments 0.79 (0.76) (1.92) 5.43 0.27
- ------------------------------------------------------------------------------------------------------------------
Total income (loss)
- ------------------------------------------------------------------------------------------------------------------
from investment operations 0.79 (0.68) (1.93) 5.48 0.34
- ------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------
Dividends from net investment income -- (0.08) -- (0.01) (0.11)
- ------------------------------------------------------------------------------------------------------------------
Distributions in excess of net investment
- ------------------------------------------------------------------------------------------------------------------
income (temporary book-tax difference) -- (0.01) -- -- --
- ------------------------------------------------------------------------------------------------------------------
Distributions from capital gains -- -- (0.47) (0.17) (0.60)
- ------------------------------------------------------------------------------------------------------------------
Distributions in excess of capital gains
- ------------------------------------------------------------------------------------------------------------------
(temporary book-tax difference) -- -- (0.09) -- --
- ------------------------------------------------------------------------------------------------------------------
Total distributions -- (0.09) (0.56) (0.18) (0.71)
- ------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 11.49 $ 10.70 $ 11.47 $ 13.96 $ 8.66
- ------------------------------------------------------------------------------------------------------------------
Total return 7.38% (5.93%) (13.81%) 63.37% 3.77%
- ------------------------------------------------------------------------------------------------------------------
Ratio to average net assets:
Expenses 1.76% 1.88% 1.65% 1.64% 1.89%
- ------------------------------------------------------------------------------------------------------------------
Net investment income (loss) (0.01)% 0.70% (0.06)% 0.21% 0.75%
- ------------------------------------------------------------------------------------------------------------------
Portfolio turnover 86.26% 92.85% 75.56% 38.35% 91.27%
- ------------------------------------------------------------------------------------------------------------------
Average commission paid
equity security transactions* -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------
Net assets, end of period (000's omitted) $ 254,673 $ 265,544 $ 288,581 $ 230,473 $ 30,021
- ------------------------------------------------------------------------------------------------------------------
<CAPTION>
1991 1990 1989 1988 1987 1986
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 8.56 $ 10.79 $ 8.72 $ 8.01 $ 11.80 $ 9.96
- ---------------------------------------------------------------------------------------------------------------------------------
Income (loss) from investment operations:
- ---------------------------------------------------------------------------------------------------------------------------------
Net investment income 0.09 0.25 0.13 0.12 0.14 0.16
- ---------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss)
- ---------------------------------------------------------------------------------------------------------------------------------
on investments 1.97 (1.891) 2.32 0.71 0.12 1.88
- ---------------------------------------------------------------------------------------------------------------------------------
Total income (loss)
- ---------------------------------------------------------------------------------------------------------------------------------
from investment operations 2.06 (1.56) 2.45 0.83 0.26 2.04
- ---------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ---------------------------------------------------------------------------------------------------------------------------------
Dividends from net investment income (0.11) (0.24) (0.21) (0.12) (0.38) (0.20)
- ---------------------------------------------------------------------------------------------------------------------------------
Distributions in excess of net investment
- ---------------------------------------------------------------------------------------------------------------------------------
income (temporary book-tax difference) -- -- -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Distributions from capital gains (1.48) 0.43) (0.17) -- (3.67) --
- ---------------------------------------------------------------------------------------------------------------------------------
Distributions in excess of capital gains
- ---------------------------------------------------------------------------------------------------------------------------------
(temporary book-tax difference) -- -- -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Total distributions (1.59) (0.67) (0.38) (0.12) (4.05) (0.20)
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 9.03 $ 8.56 $ 10.79 $ 8.72 $ 8.01 $ 11.80
- ---------------------------------------------------------------------------------------------------------------------------------
Total return 24.19% (14.44%) 28.11% 10.36% 0.35% 20.73%
- ---------------------------------------------------------------------------------------------------------------------------------
Ratio to average net assets:
Expenses 1.97% 1.42% 1.36% 1.33% 1.34% 1.32%
- ---------------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) 0.79% 2.52% 1.18% 1.27% 1.26% 1.24%
- ---------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 112.03% 52.48% 59.07% 47.63% 83.21% 54.20%
- ---------------------------------------------------------------------------------------------------------------------------------
Average commission paid
on equity security transactions* -- -- -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (000's omitted) $ 25,060 $ 22,192 $ 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 SEC disclosure guidelines, average commissions
are calculated for the current period and not for prior periods.
13
<PAGE>
FINANCIAL HIGHLIGHTS Lexington Convertible Securities Fund
<TABLE>
<CAPTION>
1996 1995 1994 1993
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $ 13.66 $ 11.84 $ 14.10 $ 13.80
- ---------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) 0.11 0.15 0.08 --
Net realized and unrealized gain (loss)
on investments 0.55 2.04 0.10 0.89
- ---------------------------------------------------------------------------------------------------
Total income (loss) from operations 0.66 2.19 0.18 0.89
- ---------------------------------------------------------------------------------------------------
Less distributions:
Dividends from net investment income (0.11) (0.15) (0.07) --
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)
- ---------------------------------------------------------------------------------------------------
Net asset value, end of period $ 13.66 $ 13.66 $ 11.84 $ 14.10
- ---------------------------------------------------------------------------------------------------
Total return 4.89% 18.63% 1.30% 6.53%
- ---------------------------------------------------------------------------------------------------
Ratio to average net assets:
- ---------------------------------------------------------------------------------------------------
Expenses, before reimbursement of waiver 2.39% 2.52% 2.81% 2.76%
- ---------------------------------------------------------------------------------------------------
Expenses, net of reimbursement or waiver 2.39% 2.52% 2.75% 2.76%
- ---------------------------------------------------------------------------------------------------
Net investment income (loss), before
- ---------------------------------------------------------------------------------------------------
reimbursement or waiver 0.77% 1.24% 0.50% (0.04%)
- ---------------------------------------------------------------------------------------------------
Net investment income 0.77% 1.24% 0.56% (0.04%)
- ---------------------------------------------------------------------------------------------------
Portfolio turnover 18.45% 11.23% 38.14% 6.53%
- ---------------------------------------------------------------------------------------------------
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
- ---------------------------------------------------------------------------------------------------
<CAPTION>
1992 1991 1990 1989 1988
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 12.41 $ 8.74 $ 9.55 $ 9.51 $ 9.35
- ---------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) 0.18 0.22 0.50 0.64 0.42
Net realized and unrealized gain (loss)
on investments 1.39 3.68 (0.81) 0.04 0.19
- ---------------------------------------------------------------------------------------------------------------
Total income (loss) from operations 1.57 3.90 (0.31) 0.68 0.61
- ---------------------------------------------------------------------------------------------------------------
Less distributions:
Dividends from net investment income (0.18) (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 (0.18) (0.23) (0.50) (0.64) (0.45)
- ---------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 13.80 $ 12.41 $ 8.74 $ 9.55 $ 9.51
- ---------------------------------------------------------------------------------------------------------------
Total return 12.82% 45.06% (3.39%) 7.16% 6.96%
- ---------------------------------------------------------------------------------------------------------------
Ratio to average net assets:
- ---------------------------------------------------------------------------------------------------------------
Expenses, before reimbursement of waiver 3.02% 3.42% 4.51% 2.64% 4.12%
- ---------------------------------------------------------------------------------------------------------------
Expenses, net of reimbursement or waiver 2.32% 2.50% 2.68% 2.13% 2.00%
- ---------------------------------------------------------------------------------------------------------------
Net investment income (loss), before
- ---------------------------------------------------------------------------------------------------------------
reimbursement or waiver 0.70% 1.14% 3.09% 5.74% 3.43%
- ---------------------------------------------------------------------------------------------------------------
Net investment income 1.40% 2.06% 4.92% 6.25% 5.55%
- ---------------------------------------------------------------------------------------------------------------
Portfolio turnover 12.58% 29.46% 25.58% 34.23% 39.70%
- ---------------------------------------------------------------------------------------------------------------
Average commission paid on
equity security transactions* -- -- -- -- --
- ---------------------------------------------------------------------------------------------------------------
Net assets, end of period (000's omitted) $ 7,180 $ 6,599 $ 4,744 $ 5,986 $ 6,930
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
* In accordance with recent SEC disclosure guidelines, the average commissions
are calculated for the current period, but not for prior periods.
14
<PAGE>
FINANCIAL HIGHLIGHTS Lexington Growth and Income Fund
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 15.71 $ 14.36 $ 16.16 $ 16.25 $ 16.39
Income from investment operations:
Net investment income 0.07 0.22 0.17 0.21 0.23
Net realized and unrealized gain (loss)
on investments 4.08 3.00 (0.68) 1.94 1.79
- ---------------------------------------------------------------------------------------------------------------------
Total income (loss)
from investment operations 4.15 3.22 (0.51) 2.15 2.02
- ---------------------------------------------------------------------------------------------------------------------
Less distributions:
Dividends from net investment income (0.13) (0.22) (0.16) (0.21) (0.32)
Distributions from net realized capital gains (1.17) (1.65) (0.91) (2.03) (1.84)
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)
- ---------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 18.56 $ 15.71 $ 14.36 $ 16.16 $ 16.25
- ---------------------------------------------------------------------------------------------------------------------
Total return 26.46% 22.57% (3.11%) 13.22% 12.36%
- ---------------------------------------------------------------------------------------------------------------------
Ratios to average net asset of:
- ---------------------------------------------------------------------------------------------------------------------
Expenses 1.13% 1.09% 1.15% 1.29% 1.20%
- ---------------------------------------------------------------------------------------------------------------------
Net investment income 0.43% 1.38% 1.06% 1.20% 2.57%
- ---------------------------------------------------------------------------------------------------------------------
Portfolio turnover 101.12% 159.94% 63.04% 93.90% 88.13%
- ---------------------------------------------------------------------------------------------------------------------
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
- ---------------------------------------------------------------------------------------------------------------------
<CAPTION>
1991 1990 1989 1988 1987
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 14.24 $ 16.19 $ 14.39 $ 13.58 $ 19.16
Income from investment operations:
Net investment income 0.35 0.60 0.50 0.46 0.43
Net realized and unrealized gain (loss)
on investments 3.17 (2.25) 3.44 0.80 0.02
- ---------------------------------------------------------------------------------------------------------------------
Total income (loss)
from investment operations 3.52 (1.65) 3.94 1.26 0.45
- ---------------------------------------------------------------------------------------------------------------------
Less distributions:
Dividends from net investment income (0.35) (0.30) (0.60) (0.45) (0.51)
Distributions from net realized capital gains (1.02) -- (1.54) -- (5.52)
Distributions in excess of net realized
gains (temporary book-tax difference) -- -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------
Total distributions (1.37) (0.30) (2.14) (0.45) (6.03)
- ---------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 16.39 $ 14.24 $ 16.19 $ 14.39 $ 13.58
- ---------------------------------------------------------------------------------------------------------------------
Total return 24.87% (10.27%) 27.56% 9.38% 0.15%
- ---------------------------------------------------------------------------------------------------------------------
Ratios to average net asset of:
- ---------------------------------------------------------------------------------------------------------------------
Expenses 1.13% 1.04% 1.02% 1.10% 0.96%
- ---------------------------------------------------------------------------------------------------------------------
Net investment income 2.19% 3.91% 2.82% 3.20% 2.37%
- ---------------------------------------------------------------------------------------------------------------------
Portfolio turnover 80.33% 67.39% 64.00% 81.10% 95.28%
- ---------------------------------------------------------------------------------------------------------------------
Average commission paid on
equity security transactions -- -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------
Net assets, end of period (000's omitted) $ 121,263 $ 104,664 $ 128,329 $ 111,117 $ 112,780
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
* In accordance with recent SEC disclosure guidelines, the average commissions
are calculated for the current period, but not for prior periods.
15
<PAGE>
FINANCIAL HIGHLIGHTS Lexington Small Cap
Value Fund
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
- --------------------------------------------------------------------------------
16
<PAGE>
FINANCIAL HIGHLIGHTS Lexington Goldfund
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 6.24 $ 6.37 $ 6.90 $ 3.70 $ 4.68
- ---------------------------------------------------------------------------------------------------------------------
Income (loss) from investment operations:
Net investment income 0.02 -- 0.03 0.01 0.02
Net realized and unrealized gain (loss)
on investments 0.50 (0.12) (0.53) 3.21 (0.98)
- ---------------------------------------------------------------------------------------------------------------------
Total income (loss)
from investment operations 0.52 (0.12) (0.50) 3.22 (0.96)
- ---------------------------------------------------------------------------------------------------------------------
Less distributions:
Dividends from net investment income (0.79) (0.01) (0.03) (0.02) (0.02)
Distributions from net realized
capital gains -- -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------
Total distributions (0.79) (0.01) (0.03) (0.02) (0.02)
- ---------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 5.97 $ 6.24 $ 6.37 $ 6.90 $ 3.70
- ---------------------------------------------------------------------------------------------------------------------
Total return 7.84% (1.89%) (7.28%) 89.96% (20.51%
- ---------------------------------------------------------------------------------------------------------------------
Ratios to average net assets:
- ---------------------------------------------------------------------------------------------------------------------
Expenses 1.60% 1.70% 1.54% 1.63% 1.69%
- ---------------------------------------------------------------------------------------------------------------------
Net investment income (loss) (0.32)% 0.07% 0.50% 0.25% 0.58%
- ---------------------------------------------------------------------------------------------------------------------
Portfolio turnover 31.04% 40.41% 23.77% 28.41% 13.18%
- ---------------------------------------------------------------------------------------------------------------------
Average commissions paid on equity
security transactions* $ 0.02 -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------
Net assets, end of period (000's omitted) $ 109,287 $ 135,779 $ 159,435 $ 159,479 $ 71,856
- ---------------------------------------------------------------------------------------------------------------------
<CAPTION>
1991 1990 1989 1988 1987
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 5.03 $ 6.39 $ 5.21 $ 6.20 $ 4.49
- ---------------------------------------------------------------------------------------------------------------------
Income (loss) from investment operations:
Net investment income 0.04 0.04 0.05 0.04 0.01
Net realized and unrealized gain (loss)
on investments (0.35) (1.36) 1.18 (0.98) 2.07
- ---------------------------------------------------------------------------------------------------------------------
Total income (loss)
from investment operations (0.31) (1.32) 1.23 (0.94) 2.08
- ---------------------------------------------------------------------------------------------------------------------
Less distributions:
Dividends from net investment income (0.04) (0.04) (0.05) (0.05) (0.05)
Distributions from net realized
capital gains -- -- -- -- (0.32)
- ---------------------------------------------------------------------------------------------------------------------
Total distributions (0.04) (0.04) (0.05) (0.05) (0.37)
- ---------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 4.68 $ 5.03 $ 6.39 $ 5.21 $ 6.20
- ---------------------------------------------------------------------------------------------------------------------
Total return (6.14%) (20.35%) 23.62% (15.18%) 46.56%
- ---------------------------------------------------------------------------------------------------------------------
Ratios to average net assets:
- ---------------------------------------------------------------------------------------------------------------------
Expenses 1.43% 1.36% 1.42% 1.61% 1.29%
- ---------------------------------------------------------------------------------------------------------------------
Net investment income 0.81% 0.69% 1.14% 0.78% 0.57%
- ---------------------------------------------------------------------------------------------------------------------
Portfolio turnover 22.14% 12.43% 15.98% 20.45% 13.78%
- ---------------------------------------------------------------------------------------------------------------------
Average commissions paid on equity
security transactions* -- -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------
Net assets, end of period (000's omitted) $ 96,316 $ 106,074 $ 154,484 $ 92,782 $ 104,842
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
* In accordance with recent SEC disclosure guidelines, the average commissions
are calculated for the current period, but not for prior periods.
17
<PAGE>
FINANCIAL HIGHLIGHTS Lexington GNMA Income Fund
<TABLE>
<CAPTION>
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:
Dividends from net investment income (0.52) (0.58) (0.55) (0.59) (0.61)
Distributions from net realized
capital gains -- -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------
Total distributions (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%
- ----------------------------------------------------------------------------------------------------------------------
Ratios to average net asset of:
- ----------------------------------------------------------------------------------------------------------------------
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, end of period (000's omitted) $ 133,777 $ 130,681 $ 132,108 $ 149,961 $ 132,048
- ----------------------------------------------------------------------------------------------------------------------
<CAPTION>
1991 1990 1989 1988 1987
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 7.90 $ 7.88 $ 7.45 $ 7.58 $ 8.22
- ----------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.64 0.65 0.69 0.64 0.71
Net realized and unrealized gain (loss)
on investments 0.55 0.03 0.42 (0.13) (0.59)
- ----------------------------------------------------------------------------------------------------------------------
Total income (loss)
from investment operations 1.19 0.68 1.11 0.51 0.12
- ----------------------------------------------------------------------------------------------------------------------
Less distributions:
Dividends from net investment income (0.64) (0.66) (0.68) (0.64) (0.73)
Distributions from net realized
capital gains -- -- -- (0.03) --
- ----------------------------------------------------------------------------------------------------------------------
Total distributions (0.64) (0.66) (0.68) (0.64) (0.76)
- ----------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 8.45 $ 7.90 $ 7.88 $ 7.45 $ 7.58
- ----------------------------------------------------------------------------------------------------------------------
Total return 15.75% 9.23% 15.60% 6.90% 1.62%
- ----------------------------------------------------------------------------------------------------------------------
Ratios to average net asset of:
- ----------------------------------------------------------------------------------------------------------------------
Expenses 1.02% 1.04% 1.03% 1.07% 0.98%
- ----------------------------------------------------------------------------------------------------------------------
Net investment income 7.97% 8.43% 8.88% 8.31% 8.49%
- ----------------------------------------------------------------------------------------------------------------------
Portfolio turnover 138.71% 112.55% 102.66% 233.48% 89.40%
- ----------------------------------------------------------------------------------------------------------------------
Net assets, end of period (000's omitted) $ 122,191 $ 98,011 $ 96,465 $ 97,185 $ 109,793
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
18
<PAGE>
FINANCIAL HIGHLIGHTS Lexington Money Market Trust
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 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
- ---------------------------------------------------------------------------------------------------------------------
Less distributions:
Dividends from net investment income (0.0441) (0.0495) (0.0330) (0.0230) (0.0299)
- ---------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
- ---------------------------------------------------------------------------------------------------------------------
Total return 4.50% 5.06% 3.35% 2.32% 3.03%
- ---------------------------------------------------------------------------------------------------------------------
Ratio to average net assets:
- ---------------------------------------------------------------------------------------------------------------------
Expenses, before reimbursement 1.04% 1.08% 1.02% 1.00% 1.03%
- ---------------------------------------------------------------------------------------------------------------------
Expenses, net of reimbursement 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%
---------------------------------------------------------------------------------------------------------------------
Net investment income, net of
---------------------------------------------------------------------------------------------------------------------
reimbursement 4.41% 4.95% 3.32% 2.30% 3.02%
N---------------------------------------------------------------------------------------------------------------------
et assets, end of period (000's omitted) $ 97,526 $ 88,786 $ 111,805 $ 94,718 $ 111,453
- ---------------------------------------------------------------------------------------------------------------------
<CAPTION>
1991 1990 1989 1988 1987
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
- ---------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.0532 0.0732 0.0828 0.0678 0.0610
- ---------------------------------------------------------------------------------------------------------------------
Less distributions:
Dividends from net investment income (0.0532) (0.0732) (0.0828) (0.0678) (0.0610)
- ---------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
- ---------------------------------------------------------------------------------------------------------------------
Total return 5.45% 7.56% 8.60% 7.00% 6.29%
- ---------------------------------------------------------------------------------------------------------------------
Ratio to average net assets:
- ---------------------------------------------------------------------------------------------------------------------
Expenses, before reimbursement 1.02% 0.97% 0.99% 0.97% 0.80%
- ---------------------------------------------------------------------------------------------------------------------
Expenses, net of reimbursement 1.00% 0.97% 0.99% 0.97% 0.80%
- ---------------------------------------------------------------------------------------------------------------------
Net investment income, before
- ---------------------------------------------------------------------------------------------------------------------
reimbursement 5.35% 7.32% 8.29% 6.74% 6.13%
- ---------------------------------------------------------------------------------------------------------------------
Net investment income, net of
- ---------------------------------------------------------------------------------------------------------------------
reimbursement 5.37% 7.32% 8.29% 6.74% 6.13%
- ---------------------------------------------------------------------------------------------------------------------
Net assets, end of period (000's omitted) $ 143,137 $ 176,127 $ 182,703 $ 192,079 $ 212,487
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
19
<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 __. Specific
investment practices that may be employed by the Funds are described in "Other
Investment Practices" beginning on page __. Certain risks associated with
investments in the Funds are described in those sections as well as in "Risk
Considerations" beginning on page __. CERTAIN TERMS USED IN THE PROSPECTUS ARE
DEFINED IN THE GLOSSARY BEGINNING ON PAGE __.
Summary Comparison of Funds
Under normal market conditions, the Funds will invest their assets as follows:
<TABLE>
<CAPTION>
Typical Market
Anticipated Anticipated Capitalizatioin
Equity Debt of Portfolio
Fund Name Exposure Exposure Focus Campanies
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
International Lexington Crosby 100% 0% Asia Small-Cap Less than
Funds Small Cap Asia $1 billion
Growth Fund
----------------------------------------------------------------------------------------------------------------------
Lexington Global 100% 0% Foreign Growth Any size
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
Emer0ging Markets Growth
Fund
====================================================================================================================================
Domestic Lexington Convertible 0-35% 100% Convertible Any size
Equity Securities Fund Securities
Funds ----------------------------------------------------------------------------------------------------------------------
Lexington Growth 0-100% 0-100% Capital and Income Any size
and Income Fund
----------------------------------------------------------------------------------------------------------------------
Lexington SmallCap 100% 0% U.S. Small-Cap Between
Value Fund $20 million
and $1 billion
====================================================================================================================================
Precious Lexington Goldfund 100% 0% Gold and Gold Any size
Metals Companies
====================================================================================================================================
Domestic Lexington GNMA 0% 100% Income N/A
Fixed- Income Fund
Income
Funds
====================================================================================================================================
Money Lexington Money 0% 100% Income N/A
Market Market Trust
Funds
====================================================================================================================================
</TABLE>
20
<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 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; part of a
strong growth industry; proven management; under-researched; 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
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
21
<PAGE>
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 Global Fund, Inc.
The investment objective of the Lexington Global Fund is to seek long-term
growth of capital primarily through investment in common stocks of companies
domiciled in foreign countries and the United States. The Lexington Global Fund
will invest at least 65% of its total assets in at least three countries, one of
which may be the United States. The Lexington Global Fund will invest primarily
in the common stocks and common stock equivalents. The following constitute
common stock equivalents: convertible debt securities, warrants and options. The
Lexington Global 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 Global
Fund is not required to maintain any particular geographic or currency mix of
its investments. The Lexington Global Fund is not required to maintain any
particular proportion of stocks, bonds or other securities in its portfolio.
The Lexington Global 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 Global Fund may invest in securities of companies in the
following regions and the governments of those regions: the Pacific Basin,
Africa; Western Europe and North America; and such other areas and countries as
the Manager may determine from time to time. The Lexington Global 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
22
<PAGE>
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 Global Fund invests only in countries that it
considers as having relatively stable and friendly governments it is possible
that certain Lexington Global Fund investments could be subject to foreign
expropriation or exchange control restrictions. See "Risk Considerations."
----------
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 Pacific Basin;
Africa; North America; Western Europe; and such other areas and countries as the
Manager may determine from time to time. The 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
23
<PAGE>
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, and companies in emerging markets. 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 governments,
their 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
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.
----------
24
<PAGE>
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 Lexington
Troika Dialog 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 20% of its total assets in very liquid assets to maintain
liquidity and provide stability. As the Russian equity markets develop, however,
and the liquidity of Russian securities becomes less problematic, the Lexington
Troika Dialog Russia Fund will invest a greater percentage of its assets in
Russian equity securities.
----------
25
<PAGE>
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, Bangladesh, Bolivia, Botswana, Brazil, Chile,
China, Colombia, Costa Rica, Cyprus, Czech Republic, Dominican Republic,
Ecuador, Egypt, Finland, Ghana, Greece, Hong Kong, Hungary, India, Indonesia,
Israel, Ivory Coast, Jamaica, Jordan, Kenya, Malaysia, Mauritius, Mexico,
Morocco, Nicaragua, Nigeria, Pakistan, Panama, Peru, Philippines, Poland,
Portugal, Russia, Singapore, Slovakia, South Africa, South Korea, Sri Lanka,
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
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
26
<PAGE>
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.
No more than 35% of the Lexington Convertible Securities Fund's total
assets will 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
The Lexington Growth and Income Fund's principal investment objective is
long-term capital appreciation. Income is a secondary objective. 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
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,
options 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 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
27
<PAGE>
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; 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
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.
----------
28
<PAGE>
Lexington GNMA Income Fund
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 Lexington GNMA Income Fund
will invest the remaining 20% of its total assets 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.
29
<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 and Lexington
Growth and Income Fund may purchase common stocks. The Lexington Crosby SmallCap
Asia Growth Fund, Lexington Global Fund, Lexington International Fund, Lexington
SmallCap Value Fund, Lexington Troika Dialog Russia Fund and Lexington Worldwide
Emerging Markets Fund emphasize investments in common stock and common stock
equivalents. The following constitute common stock equivalents: warrants,
options and convertible debt securities. 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. The Lexington Troika Dialog Russia Fund may
invest directly in Russian companies.
Debt Securities
Debt securities will constitute at least 65% of the Lexington Convertible
Securities Fund's and up to 100% of the Lexington Ramirez Global Income Fund's
total assets, and the GNMA Income Fund will have substantially all of its assets
invested in GNMA Certificates and U.S. Government securities. The debt
securities in which the Lexington Funds may invest include bond, notes,
debentures and other similar instruments. The debt securities acquired by the
Lexington Convertible Securities Fund may include high yield, lower-rated debt
securities known as "junk bonds," and the Lexington Ramirez Global Income Fund
may invest 100% of its total assets in junk bonds. The Lexington Ramirez Global
Income Fund may invest in securities that are in default as to payment of
principal and/or interest. The Lexington Ramirez Global Income Fund may also
invest in "Brady Bonds" and sovereign debt securities issued by emerging market
governments.
The Lexington Global Fund, 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.
30
<PAGE>
It is likely that many of the debt securities in which the Lexington Troika
Dialog Russia Fund and Lexington Worldwide Emerging Markets Fund invest will be
unrated and may have speculative characteristics. The Lexington Crosby Small Cap
Asia Growth Fund and Lexington International Fund will only invest in investment
grade debt obligations.
Junk Bonds. The Lexington Convertible Securities Fund and Lexington Ramirez
Global Income 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 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.
Zero Coupon Bonds. The Lexington Ramirez Global Fixed 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
Fixed Income Fund as the income accrues even though payment has not been
received. The Lexington Ramirez Global Fixed Income Fund nevertheless intend 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
Fixed Income'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 Fixed Income having a contractual relationship
only with the Lender, not with the borrower. The Lexington Ramirez Global Fixed
Income 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 Fixed Income will assume the credit risk of both
the borrower and the Lender that is selling the Participation. When the
Lexington Ramirez Global Fixed Income purchases Assignments from Lenders, the
Lexington Ramirez Global Fixed Income will acquire direct rights against the
borrower
31
<PAGE>
on the Loan. The Lexington Ramirez Global Fixed Income may have difficulty
disposing of Assignments and Participation. The liquidity of such securities is
limited and the Lexington Ramirez Global Fixed Income 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.
Short-Term and Medium-Term Debt Securities. 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 money market securities, including
short-term (less than twelve months to maturity) and medium-term (not greater
than five years to maturity) high-quality obligations issued by the U.S.
Government, foreign governments, foreign and domestic corporations and banks,
and repurchase agreements.
Brady Bonds. The Lexington Ramirez Global Income Fund may invest in "Brady
Bonds." Brady Bonds are securities created through the exchange of existing
commercial bank loans for new bonds in developing countries. Brady Bonds issued
by Brazil, Mexico and Venezuela currently are rated below investment grade.
Brady Bonds have been issued only recently and do not have a long payment
history.
Depositary Receipts
The Lexington SmallCap Value and Lexington Troika Dialog Russia Funds may
invest in American Depositary 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 in which it 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,
32
<PAGE>
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.
OTHER INVESTMENT PRACTICES
The following table and sections summarize certain investment practices of
the Funds. 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.
33
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Lexington Lexington Lexington Lexington
Crosby Ramirez Troika Worldwide Lexington
Small Cap Lexington Lexington Global Dialog Emerging Convertible
Asia Growth Global International Income Russia Markets Securities
Fund Fund Fund Fund Fund Fund Fund
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Repurchase agreements1 X X X X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Reverse dollar roll
transactions2
- ------------------------------------------------------------------------------------------------------------------------------------
Borrowing not to exceed X
10% of total fund assets
- ------------------------------------------------------------------------------------------------------------------------------------
Borrowing not to exceed X X X X X
one-third of total fund assets
- ------------------------------------------------------------------------------------------------------------------------------------
Reverse repurchase agreement X X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Dollar roll transactions X
- ------------------------------------------------------------------------------------------------------------------------------------
Leverage X X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Securities lending not to exceed
10% of total fund assets
- ------------------------------------------------------------------------------------------------------------------------------------
Securities lending not to exceed X X X X X
one-third of total fund assets
- ------------------------------------------------------------------------------------------------------------------------------------
When-issued and forward X X X X X X
commitment securities
- ------------------------------------------------------------------------------------------------------------------------------------
Forward currency contracts2 X X X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Purchase options on securities
and currencies3 X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Purchase options on securities X X X
and indices3
- ------------------------------------------------------------------------------------------------------------------------------------
Write covered call options3 X X X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Write covered put options3 X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Interest rate futures contracts4 X
- ------------------------------------------------------------------------------------------------------------------------------------
Futures and swaps and options X X X X X X
on futures4
- ------------------------------------------------------------------------------------------------------------------------------------
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 X X X X X X
15% of fund's net assets
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
Lexington Lexington Lexington
Growth and SmallCap Lexington Money
Income Value Lexington GNMA Income Market
Fund Fund Goldfund Fund Trust
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Repurchase agreements1 X X X X X
- ------------------------------------------------------------------------------------------------------------------
Reverse dollar roll
transactions2
- ------------------------------------------------------------------------------------------------------------------
Borrowing not to exceed X
10% of total fund assets
- ------------------------------------------------------------------------------------------------------------------
Borrowing not to exceed X X
one-third of total fund assets
- ------------------------------------------------------------------------------------------------------------------
Reverse repurchase agreement X X
- ------------------------------------------------------------------------------------------------------------------
Dollar roll transactions
- ------------------------------------------------------------------------------------------------------------------
Leverage X
- ------------------------------------------------------------------------------------------------------------------
Securities lending not to exceed
10% of total fund assets
- ------------------------------------------------------------------------------------------------------------------
Securities lending not to exceed X X
one-third of total fund assets
- ------------------------------------------------------------------------------------------------------------------
When-issued and forward X X X
commitment securities
- ------------------------------------------------------------------------------------------------------------------
Forward currency contracts2 X
- ------------------------------------------------------------------------------------------------------------------
Purchase options on securities
and currencies3
- ------------------------------------------------------------------------------------------------------------------
Purchase options on securities
and indices3
- ------------------------------------------------------------------------------------------------------------------
Write covered call options3 X
- ------------------------------------------------------------------------------------------------------------------
Write covered put options3
- ------------------------------------------------------------------------------------------------------------------
Interest rate futures contracts4
- ------------------------------------------------------------------------------------------------------------------
Futures and swaps and options X
on futures4
- ------------------------------------------------------------------------------------------------------------------
Equity swap
- ------------------------------------------------------------------------------------------------------------------
Illiquid securities limited to X
5% of fund's net assets
- ------------------------------------------------------------------------------------------------------------------
Illiquid securities limited to
10% of fund's net assets
- ------------------------------------------------------------------------------------------------------------------
Illiquid securities limited to X X
15% of fund's net assets
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
34
<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 invest in forward currency contracts may not invest more
than 70% of its assets in such contracts.
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
Funds may borrow up to 5% of their total assets for temporary or emergency
purposes.
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. The following funds
expect a portfolio turnover rate of greater than 100%:
Hedging and Risk Management Practices
The Lexington Funds (other than the 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.
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
35
<PAGE>
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 Small Cap
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
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
36
<PAGE>
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 Global 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 and Lexington Global Fund, and particularly the 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 those in the
U.S., and certain markets have experienced times when
37
<PAGE>
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.
38
<PAGE>
Lower-Quality Debt
The Lexington Convertible Securities, Lexington Troika Dialog Russia and
Lexington Ramirez Global Income Funds are authorized to invest high-yield,
lower-rated debt securities. 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 Russian 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 political environment in Russia in 1997 is more stable than in 1993 and
earlier when clashes between reformers and reactionaries were continuous,
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
39
<PAGE>
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.
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.
40
<PAGE>
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.
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
the proceeds of prepayments at lower interest rates
41
<PAGE>
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.
MANAGEMENT OF THE FUNDS
Board of Directors/Trustee
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
42
<PAGE>
Russia. This will enhance the Board of Directors' ability to oversee and
safeguard the assets of the Lexington Troika Dialog Russia Fund.
Investment Adviser
Lexington Management Corporation is the Manager of the Lexington Funds. The
Manager was formed 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.
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.
43
<PAGE>
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
does not manage any assets for investment companies, but is an institutional
manager for private clients. MFR is a subsidiary of Maria Fiorini Ramirez, Inc.
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.
The Manager as owner of the registered service mark "Lexington" will
sublicense the Sub-Advised 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.
44
<PAGE>
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.
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
45
<PAGE>
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 Global Fund
Richard Saler is part of an investment management team that manages the
Lexington Global 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 part of an investment management team that manages
the Lexington Global 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 Devirieu in Paris and New York, 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.
Alan Wapnick is part of an investment management team that manages the
Lexington Global Fund. Mr. Wapnick is Senior Vice President, Director of
Domestic Investment Equity Strategy at 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 Lexington Management
Corporation. Mr. Jamison is responsible for fixed-
46
<PAGE>
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 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.
Lexington Growth and Income Fund
Mr. Wapnick is portfolio manager of the Lexington Growth and Income Fund.
Lexington International Fund
Mr. Saler and Mr. Schwartz manage the Lexington International Fund as an
investment management team. Mr. Saler is the lead manager and Mr. Schwartz is
the co-manager.
Lexington Money Market Trust
Mr. Jamison is portfolio manager of the Lexington Money Market Trust.
Lexington Ramirez Global Income Fund
Maria Fiorini Ramirez, President and Chief Executive Officer of MFR
Advisors Inc., began her career as a credit analyst with American Express
International Banking Corporation in 1968. In 1972, she moved to Banco Nazionale
De Lavoro in New York. The following year, 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
47
<PAGE>
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 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 Small Cap 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 CTI. He is
responsible for issue selection and the day to day investment activities of the
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 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 receive an MBA from the University of
Chicago in 1971.
Lexington Troika Dialog Russia Fund
Peter Derby is a manager on a portfolio management team (the other members
of the portfolio management team include Gavin Rankin and Ruben Vardanian) 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.
48
<PAGE>
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.
Gavin Rankin is is the lead manager of a portfolio management team (the
other members of the portfolio management team include Mr. Peter Derby and Mr.
Ruben Vardanian) that manages the Lexington Troika Dialog Russia Fund. Mr.
Rankin 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 (the other
members of the portfolio management team include Mr. Peter Derby and Mr. Gavin
Rankin) 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
Mr. Saler is the lead manager of an investment management team that manages
the Lexington Worldwide Emerging Markets Fund.
49
<PAGE>
HOW TO DO BUSINESS WITH THE FUNDS
How to Contact the Funds .................................................... 51
How to Invest in the Funds .................................................. 51
How to Redeem an Investment in the Funds .................................... 54
Exchange Privileges and Restrictions ........................................ 56
FUND INFORMATION
How Net Asset Value Is Determined ........................................... 57
Dividends and Distributions ................................................. 58
Taxation .................................................................... 60
General Information ......................................................... 61
Backup Withholding .......................................................... 63
Glossary .................................................................... 64
50
<PAGE>
HOW TO CONTACT THE FUNDS
Call a Lexington shareholder service representative 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 nextdetermined 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. 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.
51
<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 following Funds may be purchased by wire: Lexington
Crosby SmallCap Asia Growth Fund and Lexington Money Market Trust.
o Telephone the Funds toll-free at 1-800-526-0056. Provide the Transfer
Agent 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
Attention: Mutual Funds Dept.
Account # 99043713
For Credit to: (shareholder(s) name)
Shareholder Account Number: (shareholder(s) account number)
Name of Fund: (Lexington Fund name)
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.
52
<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 an "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.
Investments will automatically be transferred into your Lexington
Account from your checking or savings account.
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.
53
<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. Shares tendered
for redemptions through brokers or dealers (other than the Distributor) may be
subject to a service charge by such brokers or dealers. Procedures for
requesting a redemption are set forth below.
A 2% redemption fee will be charged on the redemption of shares of the
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.
54
<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.
Signature guarantees may be provided by an eligible guarantor
institution such as a commercial bank, an NASD member firm such as a
stock broker, a savings association or national securities exchange.
Contact the Transfer Agent 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.
Redeeming by Telephone
o Shares of the Money Market Trust may redeemed by telephone. Call the
Fund 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, either mailed to
the registered address, wired to a bank account or mailed to any other
designated person. A new form must be completed whenever these
instructions are revised.
o Telephone redemption privileges may be cancelled by instructing the
Transfer Agent in writing. Your request will be processed upon
receipt.
55
<PAGE>
o Exchange by telephone, see below "Exchange Privileges and Restrictions."
Redeeming by Check
o Checkwriting is available on the 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 either monthly or quarterly on the 1st of
each month. Depending on the form of payment requested, shares will 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.
EXCHANGE 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 of over $500,000 will take three days to
complete. See the discussion of fund telephone procedures and limitations of
liability under "Telephone Transactions" above.
56
<PAGE>
Purchasing and Redeeming Shares by Exchange
o You may make exchange 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.
o Telephone exchanges 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.
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 for the Lexington
Troika Dialog Russia Fund.
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.
57
<PAGE>
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.
DISTRIBUTION PLAN
The Lexington Convertible Securities Fund, Lexington Goldfund, Lexington
Growth and Lexington 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 Global 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.
58
<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
Lexington Growth and Income
Lexington Ramirez Global
Income
- ---------------------------------------------------------------------------------------------------------------------------
Lexington GNMA Income Declared and paid monthly Declared and paid annually
- ---------------------------------------------------------------------------------------------------------------------------
Lexington Crosby SmallCap Declared and paid annually Declared and paid annually
Asia Growth
Lexington International
Lexington SmallCap Value
Lexington Troika Dialog
Russia
Lexington Global
Lexington Worldwide
Emerging Markets
- ---------------------------------------------------------------------------------------------------------------------------
Lexington Goldfund Declared daily and paid Declared and paid in
semi-annually annually
- ---------------------------------------------------------------------------------------------------------------------------
</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 by the amount of the distribution, net of any
subsequent market fluctuations. For example, assume that on December 31, the
Growth and Income Fund declared a dividend in the amount of $0.50 per share. If
the 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.
59
<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.
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
60
<PAGE>
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 Global Fund, Lexington GNMA Income Fund, Lexington Growth and
Lexington 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 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.
61
<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. Investment results of
the Funds will fluctuate over time, and any presentation 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.
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, except for most money market
transactions
62
<PAGE>
(monthly) and preauthorized automatic investment, exchange and
redemption services (quarterly).
o Annual and semiannual 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.
BACKUP WITHHOLDING
Tax-payer identification number (TIN)
Be sure to complete the Tax-Payer 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 tax-payer 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.
Backup withholding could apply to payments made to a shareholders account while
awaiting receipt of a TIN. Special rules apply for certain entities. For
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 backup 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 shareholders account by a fund may be
subject to up to 30% withholding instead of backup 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.
63
<PAGE>
----------
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
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
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 Depositary receipts. Depositary receipts include American depositary
receipts ("ADRs"), European depositary receipts ("EDRs"), global depositary
receipts ("GDRs") and other similar instruments. Depositary receipts
64
<PAGE>
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. Traditionally, a debt security's "term to maturity" characterizes
a security's sensitivity to changes in interest rates. "Term to maturity,"
however, measures only the time until a debt security provides its final
payment, taking no account of prematurity payments. Most debt securities
provide interest ("coupon") payments in addition to a final ("par") payment
at maturity, and some securities have call provisions allowing the issuer
to repay the instrument in full before maturity date, each of which affect
the security's response to interest rate changes. "Duration" is considered
a more precise measure of interest rate risk than "term to maturity."
Determining duration may involve the Manager's estimates of future economic
parameters, which may vary from actual future values. Fixed income
securities with effective durations of three years are more responsive to
interest rate fluctuations than those with effective durations of one year.
For example, if interest rates rise by 1%, the value of securities having
an effective duration of three years will generally decrease by
approximately 3%.
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 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
65
<PAGE>
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.
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
66
<PAGE>
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 Board and guidelines adopted by the 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 Municipal securities. Municipal securities are obligations issued by, or on
behalf of, states, territories and possessions of the U.S. and the District
of Columbia, and their political subdivisions, agencies, authorities and
instrumentalities, including It industrial development bonds, as well as
obligations of certain agencies and instrumentalities of the U.S.
government. Municipal securities eve classified as general obligation
bonds, revenue bonds and notes. General obligation bonds are secured by the
issuer's pledge of its faith, credit and taxing power for the payment of
principal and interest. Revenue bonds are payable from revenue derived from
a particular facility, class of facilities or the proceeds of a special
excise or other specific revenue source, but not from the issuer's general
taxing power. Private activity bonds and industrial revenue bonds, in most
cases, are revenue bonds that do not carry the pledge of the credit of the
issuing municipality but generally are guaranteed by the corporate entity
on whose behalf they are issued. Notes short-term instruments that are
obligations of the issuing municipalities or agencies sold in anticipation
of a bond sale, collection of taxes or other receipt of revenues.
o Options on securities, securities indices and currencies. A fund may
purchase call options on securities that it intends to purchase (or on
currencies
67
<PAGE>
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 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.
68
<PAGE>
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
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.
69
<PAGE>
----------
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
----------
<PAGE>
LEXINGTON GNMA INCOME FUND, INC.
STATEMENT OF ADDITIONAL INFORMATION
APRIL 30, 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 April 30, 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
1
<PAGE>
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.
2
<PAGE>
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.
Although the Fund has the right to pledge, mortgage or hypothecate its
assets in order to comply with a state statute, the Fund will not, as a matter
of operating policy while offering shares in such state, pledge, mortgage or
hypothecate its portfolio securities to the extent that at any time the
percentage of pledged securities will exceed 10% of the Fund's net assets.
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
3
<PAGE>
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.
4
<PAGE>
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 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%.
5
<PAGE>
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 continue to make a $2,000 ($2,250 for
spousal IRAs) 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 ($2,250 spousal) 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 individuals earned annual income (as
defined in the Code) and in applying these limitations not more than $200,000 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
6
<PAGE>
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 can 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, 1995, the Fund has capital loss
carryforwards of approximately $3,533,220, $2,130,253 and $1,544,296 which
expire in 1996, 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 long-term tax-exempt rate (which is published
monthly by the Internal Revenue Service (the "IRS")) in effect for the month in
which the ownership change occurs (the rate for March 1996 is 5.31%). 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 the 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.
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
7
<PAGE>
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 which the Fund has not
invested more than 5% of the value of the Fund's total assets in securities of
such issuer and as to which the Fund 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. If net capital gain is distributed and designated as a capital gain
dividend, it 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.
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
8
<PAGE>
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 such distributions
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 by the IRS 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 a corporation or
other "exempt recipient."
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 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 its
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
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.
9
<PAGE>
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(1+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 and 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 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)
10
<PAGE>
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.
(d)BEVERLEY C. DUER, Director. 340 East 72nd Street, New York, N.Y. 10021.
Private Investor; formerly, Manager of Operations Research Department, CPC
International, Inc.
*(d)BARBARA R. EVANS, Director. 5 Fernwood Road, Summit, N.J. 07901 Private
Investor. Prior to May 1989, Assistant Vice President and Securities
Analyst, Lexington Management Corporation.
*(d)LAWRENCE KANTOR, 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.
(d)DONALD B. MILLER, 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).
11
<PAGE>
(d)JOHN G. PRESTON, Director. 3 Woodfield Road, Wellesley, Massachusetts 02181.
Associate Professor of Finance, Boston College, Boston, Massachusetts 02181.
(d)MARGARET W. RUSSELL, Director. 55 North Mountain Avenue, Montclair, N.J.
07042. Private Investor, formerly Community Affairs Director, Union Camp
Corporation.
*(d)DENIS P. JAMISON, 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.
*(d)LISA CURCIO, 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.
*(d)RICHARD M. HISEY, 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.
*(d)RICHARD J. LAVERY, 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.
*(d)JANICE A. CARNICELLI, Vice President. P.O. Box 1515, Saddle Brook, N.J.
07663.
*(d)CHRISTIE CARR, Assistant Treasurer. P.O. Box 1515, Saddle Brook, N.J. 07663.
Prior to October 1992, Senior Accountant, KPMG Peat Marwick LLP.
*(d)SIOBHAN GILFILLAN, Assistant Treasurer. P.O. Box 1515, Saddle Brook, N.J.
07663.
*(d)THOMAS LUEHS, Assistant Treasurer. P.O. Box 1515, Saddle Brook, N.J. 07663.
Prior to November, 1993, Supervisor Investment Accounting, Alliance Capital
Management, Inc.
*(d)SHERI MOSCA, Assistant Treasurer. P.O. Box 1515, Saddle Brook, N.J. 07663.
*(d)PETER CORNIOTES, 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.
*(d)ENRIQUE J. FAUST, 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.
(d) Messrs. Chadha, Corniotes, DeMichele, Duer, Faust, Hisey, Jamison, Kantor,
Lavery, Luehs, Maher, McCash, Miller and Preston and Mmes. Carnicelli, Carr,
Curcio, Evans, Gilfillan, 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.
Set forth below is information regarding compensation paid or accrued during
the period January 1, 1996 to December 31, 1996 for each Director:
12
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
Aggregate Total Compensation From Number of
Name of Director Compensation from Fund and Fund Complex Directorships in Fund
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
16
<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>
17
<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
18
<PAGE>
PART C. OTHER INFORMATION
- ------ -----------------
Item 24. Financial Statements and Exhibits - List
----------------------------------------
The Annual Report for the year ending December 31, 1996 was filed
electronically on February 27, 1997 (as form type N-30D). Financial
statements from this 1996 Annual Report have been included in the
Statement of Additional Information.
Page in the Statement
(a) Financial statements: of Additional Information
- ------------------------- -----------------------------
Report of Independent Auditors 18
dated February 14, 1997
Statement of Net Assets (Including 14
the Portfolio of Investments) at
December 31, 1996 (1)
Statement of Assets and Liabilities 15
at December 31, 1996
Statement of Operations for the year 15
ended December 31, 1996 (2)
Statements of Changes in Net Assets for 16
the years ended December 31, 1996 and 1995
Notes to Financial Statements 16-17
Schedules II-VII and other Financial Statements, for which provisions are
made in the applicable accounting regulations of the Securities and
Exchange Commission, are omitted because they are not required under the
related instructions, they are inapplicable, or the required information is
presented in the financial statements or notes thereto.
(1) Includes the information required by Schedule I.
(2) Includes the information required by the Statement of
Realized Gain or Loss on Investments
<PAGE>
ITEM 24. Financial Statements and Exhibits - List
- --------------------------------------------------
(b) Exhibits:
1. Articles of Incorporation - Filed electronically 4/29/96 -
Incorporated by reference
2. By-Laws - Filed electronically
3. Not Applicable
4. Stock Certificate Specimen - Filed 9/24/73 -
Incorporated by reference
5. Investment Advisory Agreement between
Registrant and Lexington Management Corporation -
Filed electronically 4/29/96 - Incorporated by reference
6. Distribution Agreement between Registrant and
Lexington Funds Distributor, Inc. - Filed electronically
7. Not Applicable
8a. Form of Custodian Agreement between
Registrant and Chase Manhattan Bank, N.A. - Filed
electronically 4/28/95 - Incorporated by reference
8b. Transfer Agency Agreement between
Registrant and State Street Bank and Trust
Company - Filed electronically 4/29/96 -
Incorporated by reference
9. Form of Administrative Services Agreement
between Registrant and Lexington Management
Corporation - Filed electronically 4/28/95 -
Incorporated by reference
10. Opinion of Counsel as to Legality of Securities being
registered - Filed 9/24/73 - Incorporated by reference
11. Consents
(a) Consent of Counsel Filed electronically
(b) Consent of Independent Auditors Filed electronically
12. Not Applicable
13. Not Applicable
14. Retirement Plans - Filed electronically 4/29/96 -
Incorporated by reference
15. Not Applicable
16. Performance Calculation - Filed 5/2/88 -
Incorporated by reference
17. Financial Data Schedule Filed electronically
<PAGE>
Item 25. Persons Controlled by or under Common Control with Registrant
-------------------------------------------------------------
Furnish a list or diagram of all persons directly or indirectly
controlled by or under common control with the Registrant and as to each
such person indicate (1) if a company, the state or other sovereign power
under the laws of which it is organized, (2) the percentage of voting
securities owned or other basis of control by the person, if any,
immediately controlling it.
None.
Item 26. Number of Holders of Securities
-------------------------------
State in substantially the tabular form indicated, as of a specified
date within 90 days prior to the date of filing, the number of record
holders of each class of securities of the Registrant.
The following information is given as of February 14, 1997:
Title of Class Number of Record Holders
-------------- ------------------------
Capital Stock 5,362
($0.01 par value)
Item 27. Indemnification
---------------
State the general effect of any contract, arrangements or statute
under which any director, officer, underwriter or affiliated person of the
Registrant is insured or indemnified in any manner against any liability
which may be incurred in such capacity, other than insurance provided by
any director, officer, affiliated person or underwriter for their own
protection.
Under the terms of the Maryland General Corporation Law and the
Company's By-Laws, the Company may indemnify any person who was or is a
director, officer or employee of the Company to the maximum extent
permitted by the Maryland General Corporation Law; provided, however, that
Company only as authorized in the specific case upon a determination that
indemnification of such persons is proper in the circumstances. Such
determination shall be made (i) by the Board of Directors, by a majority
vote of a quorum which consists of directors who are neither "interested
persons" of Company as defined in Section 2(a)(19) of the 1940 Act, nor
parties to the proceeding, or (ii) if the required quorum is not
obtainable or if a quorum of such directors so directs by independent
legal counsel in a written opinion. No indemnification will be provided
by the Company to any director or officer of the Company of any liability
to the Company or Shareholders to which he would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence or reckless
disregard of duty.
<PAGE>
Item 28. Business and Other Connections of Investment Adviser
----------------------------------------------------
Describe any other business, profession, vocation or employment of
a substantial nature in which the investment adviser of the Registrant,
and each director, officer or partner of any such investment adviser, is
or has been, at any time during the past two fiscal years, engaged for his
own account or in the capacity of director, officer, employee, partner or
trustee.
See Prospectus Part A and Statement of Additional Information Part B
("Management of the Fund").
Item 29. Principal Underwriters
----------------------
(a) Lexington Money Market Trust
Lexington Tax Free Money Fund, Inc.
Lexington Growth and Income Fund, Inc.
Lexington GNMA Income Fund, Inc.
Lexington Worldwide Emerging Markets Fund, Inc.
Lexington Ramirez Global Income Fund
Lexington Goldfund, Inc.
Lexington Global Fund, Inc.
Lexington Corporate Leaders Trust Fund
Lexington Natural Resources Trust
Lexington Strategic Investments Fund, Inc.
Lexington Strategic Silver Fund, Inc.
Lexington Convertible Securities Fund
Lexington International Fund, Inc.
Lexington Emerging Markets Fund, Inc.
Lexington Crosby Small Cap Asia Growth Fund, Inc.
Lexington SmallCap Value Fund, Inc.
Lexington Troika Dialog Russia Fund, Inc.
<PAGE>
29 (b)
Position and Offices Position and
Name and Principal with Principal Offices with
Business Address Underwriter Registrant
- ----------------- ------------------ --------------
Peter Corniotes* Assistant Secretary Asst. Secretary
Lisa Curcio* Vice President and Secretary
Secretary
Robert M. DeMichele* Chief Executive Officer Chairman of the
and Chairman Board and
President
Richard M. Hisey* Chief Financial Officer, Vice President and
Vice President & Director Treasurer
Lawrence Kantor* Executive Vice President Director & Vice
and Director President
Richard Lavery* Vice President Vice President
Janice Violette* Assistant Treasurer None
(c)
Not Applicable.
*P.O. Box 1515
Saddle Brook, New Jersey 07663
<PAGE>
Item 30. Location of Accounts and Records
--------------------------------
With respect to each account, book or other document required
to be maintained by Section 31(a) of the 1940 Act and the Rules (17 CFR
270, 31a-1 to 31a-3) promulgated thereunder, furnish the name and address
of each person maintaining physical possession of each such account, book
or other document.
The Registrant, Lexington GNMA Income Fund, Inc., Park 80 West
- - Plaza Two, Saddle Brook, New Jersey 07663 will maintain physical
possession of each such account, book or other document of the Company,
except for those maintained by the Registrant's Custodian, Chase Manhattan
Bank, N.A., 1211 Avenue of the Americas, New York, New York 10036, or
Transfer Agent, State Street Bank and Trust Company, c/o National
Financial Data Services, 1004 Baltimore, Kansas City, Missouri 64105.
Item 31. Management Services
------------------
Furnish a summary of the substantive provisions of any
management-related service contract not discussed in Part A or B of this
Form (because the contract was not believed to be material to a purchaser
of securities of the Registrant) under which services are provided to the
Registrant, indicating the parties to the contract, the total dollars paid
and by whom for the last three fiscal years.
None.
Item 32. Undertakings
------------
The Registrant, Lexington GNMA Income Fund, Inc. undertakes to
furnish a copy of the Fund's latest annual report, upon
request and without charge to every person to whom a
prospectus is delivered.
The Registrant will hold a meeting of its public shareholders,
if requested to do so by the holders of at least 10 percent of
the Registrant's outstanding shares, to call a meeting of
shareholders for the purpose of voting upon the question of
removal of a director or directors and to assist in
communications with other shareholders.
<PAGE>
Registration No. 2-48906
Securities and Exchange Commission
Washington, D.C. 20549
Exhibits
Filed With
Form N-1A
LEXINGTON GNMA INCOME FUND, INC.
<PAGE>
EXHIBIT INDEX
The following documents are being filed electronically as exhibits to
this filing:
Form of By-Laws
Form of Distribution Agreement
Consent of Kramer, Levin, Kamin & Frankel
Consent of independent auditors for the inclusion of their report herein
Article 6 Financial Data Schedule
Cover
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and
the Investment Company Act of 1940 the Registrant has duly caused this
Registratiion statement to be signed on its behalf by the Undersigned,
thereunto duly authorized, in the City of Saddle Brook and State of New
Jersey, on the 28th day of February, 1997.
LEXINGTON GNMA INCOME FUND, INC.
/s/ Robert M. Demichele
________________________________________
By: Robert M. DeMichele
Chairman of the Board
Pursuant to the requirements of the Securities Act of 1933,
this Registration Statement has been signed below by the following persons
in the capacities and on the dates indicated.
Signature Title Date
/s/ Robert M. Demichele Chairman of the Board February 28, 1997
_______________________ Principal Executive
Robert M. DeMichele Officer
/s/Richard M. Hisey Principal Financial February 28, 1997
______________________ and Accounting Officer
Richard M. Hisey
/s/ Lisa Curcio Principal Compliance February 28, 1997
______________________ Officer
Lisa Curcio
*SMS Chadha Director February 28, 1997
______________________
SMS Chadha
*Beverley C. Duer, P.E. Director February 28, 1997
______________________
Beverly C. Duer, P.E.
*Barbara M. Evans Director February 28, 1997
_______________________
Barbara M. Evans
<PAGE>
Signature Title Date
*Lawrence Kantor Director February 28, 1997
______________________
Lawrence Kantor
*Jerard F. Maher Director February 28, 1997
______________________
Jerard F. Maher
*Andrew M. McCosh Director February 28, 1997
______________________
Andrew M. McCosh
*Donald B. Miller Director February 28, 1997
______________________
Donald B. Miller
*John G. Preston Director February 28, 1997
______________________
John G. Preston
*Margaret W. Russell Director February 28, 1997
_______________________
Margaret W. Russell
*By: /s/ Lisa Curcio
______________________
Lisa Curcio
Attorney-in-Fact
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and
appoints Lawrence Kantor, Lisa Curcio or Jay Baris, and each of them, his
or her true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his or her name, place and
stead, in any and all his or her capacities as a director of LEXINGTON
GNMA INCOME FUND, INC., a Maryland corporation, to sign on his or her or
its behalf any and all Registration Statements (including any post-
effective amendments to Registration Statements) under the Securities Act
of 1933, the Investment Company Act of 1940 and any amendments and
supplements thereto, and other documents in connection thereunder, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority
to do and perform each and every act and this requisite and necessary to
be done in and about the premises, as fully as to all intents and purposes
as he might or could do in person, hereby ratifying and confirming all that
said attorneys-in-fact and agents, and each of them, may lawfully do or
cause to be done by virtue hereof.
DATED this 27th day of February, 1997.
/s/ S.M.S. Chadha
_____________________________
S.M.S. Chadha
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and
appoints Lawrence Kantor, Lisa Curcio or Jay Baris, and each of them, his
or her true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his or her name, place and
stead, in any and all his or her capacities as a director of LEXINGTON
GNMA INCOME FUND, INC., a Maryland corporation, to sign on his or her or
its behalf any and all Registration Statements (including any post-
effective amendments to Registration Statements) under the Securities Act
of 1933, the Investment Company Act of 1940 and any amendments and
supplements thereto, and other documents in connection thereunder, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority
to do and perform each and every act and this requisite and necessary to
be done in and about the premises, as fully as to all intents and purposes
as he might or could do in person, hereby ratifying and confirming all that
said attorneys-in-fact and agents, and each of them, may lawfully do or
cause to be done by virtue hereof.
DATED this 27th day of February, 1997.
/s/ Jerard F. Maher
_____________________________
Jerard F. Maher
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and
appoints Lawrence Kantor, Lisa Curcio or Jay Baris, and each of them, his
or her true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his or her name, place and
stead, in any and all his or her capacities as a director of LEXINGTON
GNMA INCOME FUND, INC., a Maryland corporation, to sign on his or her or
its behalf any and all Registration Statements (including any post-
effective amendments to Registration Statements) under the Securities Act
of 1933, the Investment Company Act of 1940 and any amendments and
supplements thereto, and other documents in connection thereunder, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority
to do and perform each and every act and this requisite and necessary to
be done in and about the premises, as fully as to all intents and purposes
as he might or could do in person, hereby ratifying and confirming all that
said attorneys-in-fact and agents, and each of them, may lawfully do or
cause to be done by virtue hereof.
DATED this 27th day of February, 1997.
/s/ Andrew M. McCosh
_____________________________
Andrew M. McCosh
BY - LAWS
of
LEXINGTON GNMA INCOME FUND, INC.
(hereinafter the "Corporation")
As Amended through December 22, 1980
BY-LAW ONE: LOCATION OF OFFICES
Section 1.1: The post office address of the principal office of the
Corporation in the State of Maryland is 1300 Mercantile Bank & Trust Building,
Baltimore, Maryland 21201, and the Corporation's resident agent at such office
is United States Corporation Company.
Section 1.2: The Corporation may have other offices, either within
or without the State of Maryland at such place or places as the Board of
Directors may from time to time appoint or the business of the Corporation may
require.
BY-LAW TWO: STOCKHOLDERS
Section 2.1: Annual meetings of stockholders for the election of
directors and for such other business as may be stated in the notice of the
meeting, shall be held at such place, either within or without the State of
Maryland and at such time and date as the Board of Directors, by resolution,
shall determine and as set forth in the notice of the meeting. In the event
the Board of Directors fails to so determine the time, date and place of
meeting, the annual meeting of stockholders shall be held at the registered
office of the Corporation in Maryland on the last Wednesday in May.
If the date of the annual meeting shall fall upon a legal holiday, the
meeting shall be held on the next succeeding business day. At each annual
meeting, the stockholders entitled to vote shall elect a Board of Directors
and they may transact such other corporate business as shall be stated in the
notice of meeting.
Section 2.2: Special Meetings. Special Meetings of the
stockholders shall be called by the President, Secretary or an Assistant
Secretary of the Corporation when so authorized by the President or the Board
of Directors, or when so requested in writing by stockholders owning a
majority in amount of the outstanding capital stock, which requests shall
state the purpose or purposes of the proposed meeting.
Section 2.3 Quorum. The holders of a majority of the stock issued
and outstanding and entitled to vote thereat present in person or represented
by proxy shall constitute a quorum at all meetings of the stockholders, except
as otherwise provided by statute. If a quorum shall not be present or
represented, the stockholders entitled to vote thereat present in person or
represented by proxy, shall have the power to adjourn the meeting from time to
time, without notice other than announcement at the meeting, until a quorum
shall be present or represented. At such adjourned meeting at which a quorum
shall be present or represented, any business may be transacted which might
have been transacted at the meeting as originally notified. This Section 2.3
can be altered or repealed only by vote of the stockholders as provided in
Section 2.4.
Section 2.4 Voting. The vote of the holders of a majority of the
stock having voting power present in person or represented by proxy at any
meeting at which a quorum is present, shall decide any question brought before
such meeting, unless the question is one upon which by express provision of
law, of the Articles of Incorporation or of the By-Laws a different vote is
required, in which case such express provision shall govern and control the
decision of such question. However, no proxy shall be voted after three years
from its date unless such proxy provides for a longer period. Wherever a vote
of stockholders is required to alter or repeal any By-Law, the vote, at the
annual or a special meeting of the stockholders of the Company duly called,
(A) of 67 per centum or more of the voting securities present at such meeting,
if the holders or more than 50 per centum of the outstanding voting securities
of such company are present or represented by proxy; or (B) of more than 50
per centum of the outstanding voting securities of such company, whichever is
the less, shall be required. This Section 2.4 can be altered or repealed only
by vote of the stockholders as provided herein.
A complete list of the stockholders entitled to vote at the ensuing
election, arranged in alphabetical order, with the address of each, and the
number of shares held by each, shall be open to the examination of any
stockholder, for any purpose germane to the meeting, during ordinary business
hours, for a period of at least ten days prior to the meeting, either at a
place within the city where the meeting is to be held, which place shall be
specified in the notice of the meeting, or, if not so specified, at the place
where the meeting is to be held. The list shall also be produced and kept at
the time and place of the meeting during the whole time thereof, and may be
inspected by any stockholder who is present.
Section 2.5: Notice of Meetings. Written notice, stating the
place, date and time of the meeting, and the general nature of the business to
be considered, shall be given to each stockholder entitled to vote thereat at
his address as it appears on the records of the corporation, not less than ten
nor more than sixty days before the date of the meeting.
No notice of the time, place or purpose of the meeting of stockholders,
whether prescribed by law or by the By-Laws, need be given to any stockholders
who attend in person or by proxy or to any stockholder who, in writing or by
telegraph or cable filed with the records of the meeting, either before or
after the holding thereof, waives such notice.
Irregularities in the notice or in the giving thereof as well as the
accidental omission to give notice of any meeting to, or the non-receipt of
any such notice by, any of the stockholders shall not invalidate any action
taken by or at any such meeting.
BY-LAW THREE: BOARD OF DIRECTORS
Section 3.1: Number and Term. The number of directors shall be not
less than three (3) nor more than fifteen (15). The directors shall be
elected at the annual meeting of the stockholders and each director shall be
elected to serve until his successor shall be elected and shall qualify.
Directors need not be stockholders.
Section 3.2 Resignations. Any director, member of a committee or
other officer may resign at any time. Such resignation shall be made in
writing, and shall take effect at the time specified therein, and if no time
be specified, at the time of its receipt by the President or Secretary. The
acceptance of a resignation shall not be necessary to make it effective.
Section 3.3: Vacancies. If the office of any director or directors
becomes vacant, the remaining directors in office, though less than a quorum,
by a majority vote, may appoint any qualified person to fill such vacancy, who
shall hold office for the unexpired term and until his successor shall be duly
chosen, subject, however to Section 3.6.
Section 3.4: Removal. Any director or directors may be removed either
for or without cause at any time by the affirmative vote of the holders of a
majority of all the shares of stock outstanding and entitled to vote, at a
special meeting of the stockholders called for the purpose and the vacancies
thus created may be filled, at the meeting held for the purpose of removal, by
the affirmative vote of a majority in interest of the stockholders entitled to
vote.
Section 3.5: Increase or Reduction of Number. Within the limits
specified in Section 3.1 the number of Directors shall be determined by
resolution of the Board of Directors. Any newly created places on the Board
of Directors shall be filled by vote of the stockholders of the Corporation.
Section 3.6: New Board of Directors to be Elected by Stockholders if a
Majority has been Elected by Directors. If at any time, less than a majority
of the Directors in office shall consist of Directors elected by stockholders,
or if a majority of the Directors holding office at the beginning of any
twelve-month period shall have died, resigned, or been removed, a meeting of
the stockholders shall be called within sixty (60) days for the purpose of
electing an entire new Board of Directors, and the terms of office of the
Directors then in office shall terminate upon the election and qualification
of such new Board of Directors. This Section 3.6 can be altered or repealed
only by vote of the stockholders as provided in Section 2.4.
Section 3.7 Committees. The Board of Directors may, by resolution
or resolutions passed by a majority of the whole board, designate one or more
executive committees, each committee to consist of two or more of the
directors of the Corporation. The board may designate one or more directors
and alternate members of any committee, who may replace any absent or
disqualified member at any meeting of the committee. In the absence or
disqualification of any member of such committee or committees, the member or
members thereof present at any meeting and not disqualified from voting,
whether or not he or they constitute a quorum, may unanimously appoint another
member of the Board of Directors to act at the meeting in the place of any
such absent or disqualified member.
Any such committee, to the extent provided in the resolution of the
Board of Directors, or in these By-Laws, shall have and may exercise all the
powers and authority of the Board of Directors in the management of the
business and affairs of the Corporation, and may authorize the seal of the
Corporation to be affixed to all papers which may require it; but no such
committee shall have the power or authority in reference to amending the
Articles of Incorporation, adopting an agreement of merger or consolidation,
recommending to the stockholders the sale, lease or exchange of all or
substantially all of the Corporation's property and assets, recommending to
the stockholders a dissolution of the corporation or a revocation of a
dissolution, or amending the By-Laws of the Corporation; and, unless the
resolution, these By-Laws, or the Articles of Incorporation expressly so
provide, no such committee shall have the power or authority to declare a
dividend or to authorize the issuance of stock.
Section 3.8 Powers. The Board of Directors shall exercise all of
the powers of the Corporation except such as are by law, or by the Articles of
Incorporation of the Corporation or by these By-Laws conferred upon or
reserved to the stockholders.
Section 3.9: Meetings. Regular meeting of the directors shall be
held as soon as practicable after the annual meeting of the stockholders and
at such other times as shall be determined from time to time by resolution of
the directors.
Special meetings of the board may be called by the President or a Vice
President at any time and shall be called by the Secretary on the written
request of any two directors on at least two days' notice to each director and
shall be held at such place or places as may be determined by the directors,
or as shall be stated in the call of the meeting.
Section 3.10: Quorum. The presence of one-third (1/3) of the total
number of Directors in office but in no event less than two (2) Directors
shall be necessary to constitute a quorum at any meeting of the Board. If a
quorum shall not be present at any meeting of directors, the Directors present
thereat may adjourn the meeting from time to time, without notice other than
announcement at the meeting, until a quorum shall be present.
Section 3.11: Voting. At all meetings of the Board of Directors,
each Director is to have one (1) vote. Any act of a majority of the Directors
present at a meeting at which there is a quorum shall be the act of the Board
of Directors, except as may be otherwise specifically provided by statute or
by the Articles of Incorporation or by these By-Laws.
Section 3.12: Remuneration. Each of the Directors shall receive
such remuneration as the Board of Directors of the Corporation shall, from
time to time, fix by resolution.
Section 3.13: Action Without Meeting. Unless otherwise provided by
statute, the Articles of Incorporation or these By-Laws, any action required
or permitted to be taken at any meeting of the Board of Directors, or of any
committee thereof, may be taken without a meeting, if a written consent
thereto is signed by all members of the board, or of such committee as the
case may be, and such written consent is filed with the minutes of proceedings
of the board or committee.
BY-LAW FOUR: WAIVER OF NOTICE
Section 4.1: Whenever by statute, the provisions of the Articles of
Incorporation or these By-Laws, the stockholders or the Board of Directors or
an Executive Committee of the Board of Directors are authorized to take any
action after notice, such notice may be waived in writing before or after the
holding of the meeting by the person or persons entitled to such notice or, in
the case of a stockholder, by his attorney thereunto authorized.
BY-LAW FIVE: OFFICERS
Section 5.1: Officers. The officers of the Corporation shall be a
President, a Vice-President, a Treasurer, and a Secretary, all of whom shall
be elected by the Board of Directors and who shall hold office until their
successors are elected and qualified. In addition, the Board of Directors may
elect a Chairman, additional Vice-Presidents and such Assistant Secretaries,
Assistant Vice-Presidents, Assistant Treasurers and Transfer Clerks as they
may deem proper. The President shall but none of the other officers of the
Corporation need be directors. The officers shall be elected at the first
meeting of the Board of Directors after each annual meting. More than two
offices may be held by the same person.
Section 5.2: Other Officers, Agents, Vacancies. The Board of
Directors may appoint such other officers and agents as it may deem advisable,
who shall hold their offices for such terms and shall exercise such powers and
perform such duties as shall be determined from time to time by the Board of
Directors. Any vacancy occurring in any office of the Corporation by death,
resignation, removal, or otherwise may be filled by the Board of Directors at
any regular or special meeting.
Section 5.3: Chairman. The Chairman of the Board of Directors, if
one be elected, shall preside at all meetings of the Board of Directors and he
shall have and perform such other duties as form time to time may be assigned
to him by the Board of Directors.
Section 5.4. President. The President shall be the chief executive
officer of the Corporation and shall have the general powers and duties of
supervision and management usually vested in the office of President of a
Corporation. He shall preside at all meetings of the stockholders if present
thereat, and in the absence or non-election of the Chairman of the Board of
Directors, at all meetings of the Board of Directors, and shall have general
supervision, direction and control of the business of the Corporation. Except
as the Board of Directors shall authorize the execution thereof in some other
manner, he shall execute contracts in behalf of the Corporation, and shall
cause the seal to be affixed to any instrument requiring it and when so
affixed the seal shall be attested by the signature of the Secretary or the
Treasurer or an Assistant Secretary or an Assistant Treasurer.
Section 5.5: Vice-President and Assistant Vice-Presidents. Each
Vice-President shall have such powers and perform such duties as may be
assigned to him by the Board of Directors. In the case of absence or
disability of the President, any Vice-President may exercise the powers and
perform the duties of the President.
The Assistant Vice-Presidents in the absence or disability of any
Vice-President shall perform the duties and exercise the powers of such
Vice-President. They shall perform such other duties and have such other
powers as the Board of Directors may from time to time prescribe.
Section 5.6: Treasurer and Assistant Treasurers. The Treasurer
shall have general charge of the finances of the Corporation. He shall render
to the Board of Directors, whenever directed by the Board, an account of the
financial condition of the Corporation, and as soon as possible after the
close of each financial year he shall make and submit to the Board of
Directors a like report for such financial year. He shall have charge and
custody of and be responsible for keeping the books of account of the
Corporation.
The Assistant Treasurers in the absence or disability of the Treasurer
shall perform the duties and exercise the powers of the Treasurer. They shall
perform such other duties and have such other powers as the Board of Directors
may from time to time prescribe.
Section 5.7: Secretary and Assistant Secretaries. The Secretary
shall attend to the giving and service of all notices of the Corporation and
shall keep the minutes of all meetings of the stockholders and of the Board of
Directors. He shall keep in safe custody the seal of the Corporation. He
shall perform such other duties as pertain to this office as may be required
by the Board of Directors.
Assistant Secretaries shall in the absence or disability of the
Secretary perform the duties and exercise the powers of the Secretary. They
shall perform such other duties and have such other powers as the Board of
Directors may from time to time prescribe.
Section 5.8 Transfer Clerks. The Board of Directors may appoint
one or more Transfer Clerks who shall, subject to the discretion of the Board
of Directors and upon proper evidence, transfer the shares of the Corporation
and record such transactions upon its books.
Section 5.9: Removal. The Board of Directors may remove any
officer by a majority vote at any time with or without cause.
BY-LAW SIX: CERTIFICATES OF STOCK
Section 6.1: The certificates of stock of the Corporation shall be
numbered and entered in the books of the Corporation as they are issued. They
shall exhibit the holder's name and the number of shares and shall be signed
by the President or a Vice-President, and the Treasurer or an Assistant
Treasurer, or the Secretary or an Assistant Secretary and shall bear the
corporate seal. Such seal may be a facsimile, engraved or printed. Where any
such certificate is signed by a Transfer Clerk, transfer agent or by a
registrar, the signatures of any such officers may be by facsimile, engraved
or printed.
Section 6.2: Lost Certificates. The Board of Directors or the
President and the Treasurer may direct a new certificate or certificates to be
issued in place of any certificate or certificates theretofore issued by the
Corporation alleged to have been lost or destroyed, upon the making of an
affidavit of that fact by the person claiming the certificate of stock to be
lost or destroyed. When authorizing such issue of a new certificate or
certificates, the Board of Directors or the President and the Treasurer may,
in their discretion and as a condition precedent to the issuance thereof,
require the owner of such lost or destroyed certificate or certificates, or
his legal representative, to advertise the same in such manner as it shall
require and/or to give the Corporation a bond in such sum as it may direct as
indemnity against any claim that may be made against the Corporation with
respect to the Certificate alleged to have been lost or destroyed.
Section 6.3: Transfer of Stock. Upon surrender to the Corporation
or the transfer agent of the Corporation of a certificate for shares duly
endorsed, or accompanied by proper evidence of succession, assignment or
authority of transfer, it shall be the duty of the Corporation to issue a new
certificate for the person entitled thereto, cancel the old certificate and
record the transaction upon its books.
Section 6.4: Bookkeeping Arrangements. The Corporation may
establish procedures whereby it will not issue certificates representing
shares of its capital stock except upon specific request of a stockholder and
whereunder the Corporation or the transfer agent of the Corporation shall, at
least annually or upon the occasion of any change in the holdings of any
stockholder, issue to each stockholder or to each stockholder affected by such
change a written statement of his holdings at the time such statement is
issued. The Board of Directors may authorize the execution of any agreement,
contract or other document necessary or desirable in order to carry out the
intent of this provision of the By-Laws.
BY-LAW SEVEN: REGISTERED STOCKHOLDERS
Section 7.1: The Corporation shall be entitled to recognize the
exclusive right of a person registered on its books as the owner of shares to
receive dividends, and to vote as such owner, and shall not be bound to
recognize any equitable or other claim to or interest in such share or shares
on the part of any other person, whether or not it shall have express or other
notice thereof, except as otherwise provided by the laws of Maryland.
BY-LAW EIGHT: GENERAL PROVISIONS
Section 8.1: Dividends. The Board of Directors shall by vote
declare dividends from any fund legally available therefore of the Corporation
whenever, in their opinion, the condition of the Corporation's affairs will
render it expedient for such dividends to be declared. The Board of Directors
may make such arrangements with its stockholders as it may deem desirable
whereby dividends may be reinvested in additional shares of stock of the
Corporation instead of being paid in cash to the stockholders, unless and
until such stockholders inform the Corporation in writing to the contrary.
Section 8.2: Reports to Stockholders. The Corporation shall
transmit to stockholder reports containing information and financial
statements derived from the books of account of the Corporation and as
required by applicable statutes, the Articles of Incorporation or the By-laws,
as of the close of each annual and semi-annual fiscal period of the
Corporation. Reports made as of the close of the Corporation's fiscal year
shall relate to the whole of such fiscal year and shall be accompanied by a
certificate of an independent public accountant.
Section 8.3: Negotiable Instruments. All checks or demands for
money and notes of the Corporation shall be signed by such officers or officer
or such other person or persons as the Board of Directors may from time to
time designate.
Section 8.4: Fiscal Year. The fiscal year of the Corporation shall
be fixed by resolution of the Board of Directors.
Section 8.5: Seal. The corporate seal shall have inscribed thereon
the name of the Corporation, the year of its organization and the words
"Corporate Seal, Maryland". The seal may be used by causing it or a facsimile
thereof to be impressed or affixed or reproduced or otherwise.
Section 8.6: Indemnity of Directors and Officers. The Corporation
shall, to the full extent permitted by the general laws of the State of
Maryland, as amended from time to time, indemnify all persons whom it may or
must indemnify pursuant thereto.
Such right of indemnification, and such indemnification payments, shall
not be deemed exclusive of any other rights to which those persons indemnified
hereby may be entitled according to the Articles of Incorporation, By-Law,
agreement, vote of stockholders or otherwise provided, however, that no
provision of the Articles of Incorporation or By-Laws of the Corporation shall
be deemed to protect or indemnify any officer or director of the Corporation
against any liability to the Corporation or to its security holders to which
he would otherwise be subject by reason of willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in the conduct
of his office. This Section 8.6 can be altered or repealed only by vote of
the stockholders as provided in Section 2.4.
Section 8.7: Amendments. These By-Laws may be altered, amended or
repealed at any regular meeting of the stockholders or of the Board of
Directors or at any special meeting of the stockholders or of the Board of
Directors if notice of such alteration or amendment or repeal be contained in
the notice of such special meeting, except as otherwise provided in any By-Law
or Section thereof.
BY-LAW NINE: INVESTMENT POLICY
Section 9.1: All Articles of By-Law Nine, including this Section
9.1, can be altered or repealed only by vote of the stockholders as provided
in Section 2.4.
Section 9.2: The Corporation will be classified under the
Investment Company Act of 1940 as a diversified, open-end investment company
of the management type. The Corporation is subject to the restrictions of the
Investment Company Act of 1940 enacted by the Congress of the United States.
Section 9.3 (a) The Corporation's principal investment objective
is to seek high current income consistent with liquidity and safety of
principal.
The Corporation attempts to achieve its investment objective principally
by investing in mortgage-backed GNMA certificates endorsed by the Government
National Mortgage Association. At least 80% of the assets of the Corporation
will be invested in GNMA certificates. The Corporation may also invest in
other securities issued or guaranteed by the United States government or its
agencies or in repurchase agreements secured by GNMA certificates or such
other U.S. government securities.
(b) The Corporation shall not
(1) issue senior securities;
(2) borrow money;
(3) underwrite securities of other issuers;
(4) concentrate its investments in a particular industry to an
extent greater than 25% of the value of its total assets;
provided that such limitation shall not apply to U.S.
Government or U.S. Government agency issued or guaranteed
securities;
(5) purchase or sell real estate, commodity contracts or
commodities (however the Corporation may purchase interests
in GNMA mortgage-backed certificates);
(6) make loans to other persons except (a) through the purchase
of a portion or portions of an issue or issues of U.S.
Government or U.S. Government agency issued or guaranteed
securities, or publicly distributed bonds, notes, debentures
and evidences of indebtedness authorized by its investment
policy, or (b) through investments in "repurchase
agreements: (which are arrangements under which the
Corporation 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 Corporation's assets may be invested in repurchase
agreements which mature in more than seven days;
(7) 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;
(8) purchase any security on margin or effect a short sale of a
security;
(9) 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;
(10) contract to sell any security or evidence of interest
therein, except to the extent that the same shall be owned
by the Fund;
(11) purchase or retain securities of an issuer when one or more
of the officers and directors of the Corporation or of its
investment adviser, 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;
(12) invest more than 5% of its total assets in the securities of
any one issuer (except U.S. Government or U.S. Government
agency issued or guaranteed securities), 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;
(13) purchase any securities if such purchase would cause the
Corporation to own at the time of purchase more than 10% of
the outstanding voting securities of any one issuer;
(14) purchase any security restricted as to disposition under
Federal securities laws;
(15) invest in interests in oil, gas or other mineral exploration
or development programs;
(16) buy or sell puts, calls or other options.
The Corporation shall be deemed to have complied with the provisions of
subparagraph (11) of this Section 9.3(b) if within ten (10) days after the end
of each quarter-annual period each officer and director of the Corporation,
each person or organization furnishing investment advisory services to the
Corporation and each officer, director, partner or trustee of, or person
owning of record more than ten (10) percent of the stock of, any such
organization, is furnished with a complete list of the securities or evidences
of interest in securities held by the Corporation as of the end of such
quarter, and is requested to advise the Corporation promptly in the event that
he or its owns beneficially more than one-half (1/2) of one (1) percent of the
outstanding securities, or evidences of interest in more than one-half (1/2) of
one (1) percent of the outstanding securities, of any issuer whose securities,
or evidences of interest therein appear on such list, as to the number or
principal amount of securities, or evidences of interest therein so owned by
him and if the Corporation thereafter disposes of all securities, and
evidences of interest therein, of any issuer which, on the basis of
information so received, the Corporation is prohibited from retaining by the
provisions of this subdivision, such disposal to take place as soon as may be
practical in view of market conditions and the possibility of loss which might
result from immediate disposal, but in any event not more than thirty (30)
days after the existence of such holdings in excess of five (5) percent has
been so ascertained by the Corporation.
BY-LAW TEN: MANAGEMENT CONTRACTS
Section 10.1: All Sections of By-Law TEN, including this Section
10.1, can be altered or repealed only by vote of the stockholders as provided
in Section 2.4.
Section 10.2: Any management contract to which the Corporation shall
be a party whereby, subject to the control of the Board of Directors of the
Corporation, the investment portfolio of the Corporation shall be managed or
supervised by the other party to such contract, shall provide, among other
things, that such management contract shall be automatically terminated in the
event it is assigned by such other party. Such management contract shall
prohibit the other party and its officers and directors from making short
sales of shares of capital stock of the Corporation and from taking long or
short positions in the shares of the Corporation or purchasing shares
otherwise than for investment.
BY-LAW ELEVEN: CUSTODIAN
Section 11.1: All Sections of By-Law Eleven, including this Section
11.1, can be altered or repealed only by vote of the stockholders as provided
in Section 2.4.
Section 11.2: All securities owned by the Corporation and all cash
representing the proceeds from the sales of securities owned by the
Corporation and from the issuance of shares of the capital stock of the
Corpus, payments of principal upon securities owned by the Corporation and
distributions in respect of securities owned by the Corporation which at the
time of payment are represented by the distributing corporation to be capital
distribution shall be held by a custodian which shall be a trust company or a
national bank of good standing, having a capital surplus and undivided profits
aggregating not less than Five Hundred Thousand Dollars ($500,000) provided
such a custodian can be found ready and willing to act. The custodian shall
be appointed from time to time by the Board of Directors, which shall fix its
remuneration and the terms under which it shall act and hold in custody such
securities and cash. Upon the resignation or inability to serve of any such
custodian, the Corporation shall (a) use its best efforts to obtain a
successor custodian, (b) require the cash and securities of the Corporation
held by the custodian to be delivered to the successor custodian and (c) in
the event that no successor custodian can be found, submit to the stockholders
of the Corporation, before permitting delivery of such cash and securities to
anyone other than a successor custodian, the question whether the Corporation
shall be dissolved or shall function without a custodian; provided, however,
that nothing herein contained shall prevent the termination at any time on not
more than ninety (90) days' notice of any agreement between the Corporation
and any such custodian by the Board of Directors of the Corporation or by the
affirmative vote of the holders of a majority of all the shares of the capital
stock of the Corporation at the time outstanding and entitled to vote. Upon
its resignation or inability to serve, the custodian may deliver any assets of
the Corporation held by it to a qualified bank or trust company in the City of
New York or Boston selected by it, such assets to be held subject to the terms
of custody which governed such retiring custodian, pending action by the
Corporation as set forth in this Section 11.2.
DISTRIBUTION AGREEMENT
between
LEXINGTON GNMA INCOME FUND, INC.
and
LEXINGTON FUNDS DISTRIBUTOR, INC.
THIS AGREEMENT made this 21st day of August, 1990 by and between
LEXINGTON GNMA INCOME FUND, INC., a Maryland Corporation (hereinafter
referred to as the "Fund"), and LEXINGTON FUNDS DISTRIBUTOR, INC., a
Delaware Corporation (hereinafter referred to as the "Distributor").
W I T N E S S E T H:
In consideration of the mutual covenants herein contained and other
good and valuable consideration, the receipt whereof is hereby acknowledged,
the parties hereto agree as follows:
FIRST: The Fund hereby appoints the Distributor as its exclusive
underwriter to promote the sale and to arrange for the sale of shares of
common stock of the Fund in jurisdictions wherein shares may legally be
offered for sale.
The Fund agrees to sell and deliver its unissued shares, as from time
to time shall be effectively registered under the Securities Act of 1933,
upon the terms hereinafter set forth.
SECOND: The Fund hereby authorizes the Distributor, subject to law
and the Articles of Incorporation of the Fund, to accept, for the account
of the Fund, orders for the purchase of its shares, satisfactory to the
Distributor, as of the time of receipt of such orders or as otherwise
described in the then current prospectus of the Fund.
THIRD: The public offering price of such shares shall be based on the
net asset value per share (as determined by the Fund) of the outstanding
shares of the Fund. The net asset value shall be regularly determined on
every business day as of the time of closing of the New York Stock Exchange.
It is expected that the New York Stock Exchange will be closed on Saturdays
and Sundays and on New Year's Day, President's Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving Day and Christmas. The
public offering price shall become effective as set forth from time to time
in the Fund's current prospectus; such net asset value shall also be
regularly determined, and the public offering price based thereon shall
become effective, as of such other times for the regular determination of
net asset value as may be required or permitted by rules of the National
Association of Securities Dealers, Inc. or of the Securities and Exchange
Commission. The Fund shall furnish the Distributor, with all possible
promptness, a statement of each computation of net asset value, and of the
details entering into such computation.
The Distributor may, and when requested by the Fund shall, suspend its
efforts to effectuate sales of the shares of common stock at any time when
in the opinion of the Distributor or of the Fund no sales should be made
because of market or other economic considerations or abnormal circumstances
of any kind.
The Fund may withdraw the offering of its common stock (i) at any time
with the consent of the Distributor, or (ii) without such consent when so
required by the provisions of any statute or of any order, rule or
regulation of any governmental body or securities exchange having
jurisdiction. It is mutually understood and agreed that the Distributor
does not undertake to sell all or any specific portion of the shares of
common stock of the Fund.
FOURTH: The Distributor agrees that it will use its best efforts with
reasonable promptness to promote and sell shares of the Fund; but so long
as it does so, nothing herein contained shall prevent the Distributor from
entering into similar arrangements with other funds and to engage in other
activities. The Fund reserves the right to issue shares in connection with
any merger or consolidation of the Fund with any other investment company
or any personal holding company or in connection with offers of exchange
exempted from Section 11(a) of the Investment Company Act of 1940.
FIFTH: Upon a receipt by the Fund at its principal place of business
or other place designated by the Fund of an order from the Distributor,
together with delivery instructions, the Fund shall, as promptly as
practicable, cause the shareholder's account or certificates for the shares
called for in such order to be credited or delivered in such amount and in
such names as shall be specified by the Distributor, against payment
therefor in such manner as may be acceptable to the Fund.
SIXTH: All sales literature and advertisements used by the
Distributor in connection with sales of the shares of the Fund shall be
subject to the approval of the Fund. The Fund authorizes the Distributor
in connection with the sale or arranging for the sales of its shares to give
only such information and to make only such statements or representations
as are contained in the current prospectus and statement of additional
information or in sales literature or advertisements approved by the Fund
or in such financial statements and reports as are furnished to the
Distributor pursuant to this Agreement. The Fund shall not be responsible
in any way for any information, statements or representatives given or made
by the Distributor or its representatives or agents other than such
information, statements or representations contained in the then current
prospectus and statement of additional information or other financial
statements of the Fund.
SEVENTH: The Distributor as agent of the Fund is authorized, subject
to the direction of the Fund, to accept shares for redemption at their net
asset value, determined as prescribed in the then current prospectus of the
Fund. The Fund shall reimburse the Distributor monthly for its out-of-
pocket expenses reasonably incurred for carrying out the foregoing
authorization, but the Distributor shall not be entitled to any commissions
or other compensation in respect to such redemptions.
EIGHTH: The Fund shall bear:
(A) the expenses of qualification of the shares for sale in connection
with such public offerings in such states as shall be selected by the
Distributor and of continuing the qualification continued; and
(B) all legal expenses in connection with the foregoing.
NINTH: The Distributor shall bear:
(A) the expenses of printing and distributing prospectuses and
statements of additional information (other than those prospectuses and
statements of additional information required by applicable laws and
regulations to be distributed to the Fund's shareholders by the Fund) and
any other promotional or sales literature which are used by the Distributor
or furnished by the Distributor to purchasers or dealers in connection with
the Distributor's activities pursuant to this Agreement;
(B) expenses of any advertising used by the Distributor in connection
with such public offering; and
(C) all legal expenses in connection with the foregoing.
TENTH: The Distributor will accept orders for shares of the Fund only
to the extent of purchase orders actually received and not in excess of such
orders, and it will not avail itself of any opportunity of making a profit
by expediting or withholding orders.
ELEVENTH: The Fund shall keep the Distributor fully informed with
regard to its affairs, shall furnish the Distributor with a certified copy
of all financial statements, and a signed copy of each report, prepared by
independent public accountants, and with such reasonable number of printed
copies of each semi-annual and annual report of the Fund as the Distributor
may request, and shall cooperate fully in the efforts of the Distributor to
sell and arrange for the sale of its shares and in the performance by the
Distributor of all its duties under the Agreement.
TWELFTH: The Fund agrees to register, from time to time as necessary,
additional shares with the Securities and Exchange Commission, state and
other regulatory bodies and to pay the related filing fees therefor and to
file such amendments, reports and other documents as may be necessary in
order that there may be no untrue statement of a material fact in the
Registration Statement or prospectus or necessary in order that there may
be no omission to state a material fact therein necessary in order to make
the statements therein, in light of the circumstances under which they were
made, not misleading. As used in this Agreement, the term "Registration
Statement" shall mean from time to time the Registration Statement most
recently filed by the Fund with the Securities and Exchange Commission and
effective under the Securities Act of 1933, as amended, as such Registration
Statement is amended at such time, and the terms "Prospectus" shall mean for
the purposes of this Agreement from time to time the form of prospectus and
statement of additional information authorized by the Fund for use by
Distributor and by dealers.
THIRTEENTH:
(A) The Fund and Distributor shall each comply with all applicable
provisions of the Investment Company Act of 1940, the Securities Act of
1933, and the rules and regulations of the National Association of
Securities Dealers, Inc. and of all other Federal and State laws, rules and
regulations governing the issuance and sale of shares of the Fund.
(B) In the absence of willful misfeasance, bad faith, gross negligence
or reckless disregard of obligations or duties hereunder on the part of the
Distributor, the Fund agrees to indemnify the Distributor and any
controlling person of the Distributor against any and all claims, demands,
liabilities and expenses including reasonable costs of any alleged
litigation which the Distributor may incur under the Securities Act of 1933,
or common law on otherwise, arising out of or based upon any alleged untrue
statement of a material fact contained in any registration statement,
statement of additional information or prospectus of the Fund, or any
omission to state a material fact therein, the omission of which makes any
statement contained therein misleading, unless such statement or omission
was made in reliance upon, and in conformity with written information
furnished to the Fund in connection with written information furnished to
the Fund in connection therewith by or on behalf of the Distributor. The
Distributor agrees to indemnify the Fund against any and all claims,
demands, liabilities and expenses which the Fund may incur arising out of
or based upon any act or deed of sales representatives of the Distributor
which is outside the scope of their authority under this Agreement.
(C) The Distributor agrees to indemnify the Fund against any and all
claims, demands, liabilities and expenses which the Fund may incur under the
Securities Act of 1933, or common law or otherwise, arising out of or based
upon any alleged untrue statement of material fact contained in any
registration statement, statement of additional information or prospectus
of the Fund, relating to the Fund, or any omission to state a material fact
therein if such statement or omission was made in reliance upon, and in
conformity with, written information furnished to the Fund in connection
therewith by or on behalf of the Distributor.
FOURTEENTH: Nothing herein contained shall require the Fund to take
any action contrary to any provision of its Declaration of Trust or to any
applicable statute or regulation.
FIFTEENTH: This Agreement has been approved by the Directors of the
Fund and shall become effective at the close of business on the date hereof.
This Agreement shall continue in force and effect for successive annual
periods, provided that such continuance is specifically approved at least
annually (a) (i) by the Board of Directors of the Fund, or (ii) by vote of
a majority of the Fund's outstanding voting securities (as defined in
Section 2 (a) (42) of the Investment Company Act of 1940), and (b) by vote
of majority of the Fund's Directors who are not interested persons (as
defined in Section 2 (a) (19) of the Investment Company Act of 1940) of the
Distributor by votes cast in person at a meeting called for such purposes.
SIXTEENTH: The Distributor, as the owner of the registered service
mark "Lexington" (registration number 836-088), hereby sublicenses and
authorizes the Fund to include the word "Lexington" as part of its corporate
name, subject, however, to revocation by the Distributor in the event that
the Fund ceases to engage the Distributor or affiliates of the Distributor
as investment advisor or distributor. The Fund agrees upon demand of the
Distributor to change its corporate name to delete the word "Lexington"
therefrom.
SEVENTEENTH
(A) This Agreement may be terminated at any time, without the payment
of any penalty, by vote of the Board of Directors of the Fund or by vote of
a majority of the outstanding voting securities of the Fund, or by the
Distributor, on sixty (60) days written notice of the other party.
(B) This Agreement shall automatically terminate in the event of its
assignment, the term "assignment" for this purpose having the meaning
defined in Section 2(a)(4) of the Investment Company Act of 1940.
EIGHTEENTH: Any notice under this Agreement shall be in writing,
addressed and delivered, or mailed, postage paid, to the other party at such
address as such other party may designate for the receipt of such notices.
Until further notice to the other party, it is agreed that the address of
the Fund shall be Park 80 West, Plaza Two, Saddle Brook, New Jersey and
Distributor shall be Park 80 West, Plaza Two, Saddle Brook, New Jersey.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed in duplicate on the day and year first above written.
LEXINGTON GNMA INCOME FUND, INC.
Attest: By:
__________________________________
LEXINGTON FUNDS DISTRIBUTOR, INC.
Attest: By:
___________________________________
Kramer, Levin, Naftalis & Frankel
9 1 9 T H I R D A V E N U E
NEW YORK, N.Y. 10022 3852
(212) 715 9100
FAX
(212) 715-8000
______
WRITER'S DIRECT NUMBER
(212) 715-9100
February 26, 1997
Lexington GNMA Income Fund, Inc.
Park 80 West Plaza Two
Saddle Brook, New Jersey 07662
Re: Lexington GNMA Income Fund, Inc.
Park 80 West Plaza Two
Saddle Brook, New Jersey 07662
Gentlemen:
We hereby consent to the reference to our firm as counsel in the
Post-Effective Amendment to the Registration Statement on Form N-1A.
Very truly yours,
/s/ Kramer, Levin, Naftalis & Frankel
KPMG Peat Marwick LLP
345 Park Avenue
New York, NY 10154
Independent Auditors' Consent
To the Board of Directors and Shareholders
Lexington GNMA Income Fund, Inc.
We consent to the use of our report dated February 14, 1997 included in
the Registration Statement on Form N-1A and to the references to our firm
under the headings "Financial Highlights" and "Auditors" in the Prospectus
and "Shareholder Reports" in the Statement of Additional Information.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
New York, New York
February 28, 1997
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
The Schedule contains summary financial information extracted form year-end
audited financial statements dated December 31, 1996 and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 141,204,972
<INVESTMENTS-AT-VALUE> 143,551,968
<RECEIVABLES> 1,451,662
<ASSETS-OTHER> 790,815
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 145,794,445
<PAYABLE-FOR-SECURITIES> 11,579,728
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 437,593
<TOTAL-LIABILITIES> 12,017,321
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 135,095,388
<SHARES-COMMON-STOCK> 16,467,397
<SHARES-COMMON-PRIOR> 15,946,912
<ACCUMULATED-NII-CURRENT> 9,290
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (3,674,550)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 2,346,996
<NET-ASSETS> 133,777,124
<DIVIDEND-INCOME> 9,621,445
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 1,324,011
<NET-INVESTMENT-INCOME> 8,297,434
<REALIZED-GAINS-CURRENT> 1,733,533
<APPREC-INCREASE-CURRENT> (3,035,171)
<NET-CHANGE-FROM-OPS> 6,995,796
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (8,115,172)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 4,024,470
<NUMBER-OF-SHARES-REDEEMED> (4,312,315)
<SHARES-REINVESTED> 808,330
<NET-CHANGE-IN-ASSETS> 4,215,069
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (7,207,769)
<OVERDISTRIB-NII-PRIOR> (3,067)
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 758,779
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,324,011
<AVERAGE-NET-ASSETS> 126,463,083
<PER-SHARE-NAV-BEGIN> 8.19
<PER-SHARE-NII> .53
<PER-SHARE-GAIN-APPREC> (.08)
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> (.52)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 8.12
<EXPENSE-RATIO> 1.05
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
