As filed with the Securities and Exchange Commission on April 28, 1995
Registration No. 33-5827
811-4675
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. 10 X
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 X
Amendment No. 11 X
(Check appropriate box or boxes.)
LEXINGTON RAMIREZ GLOBAL INCOME FUND
---------------------------------------------------
(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 Ramirez Global Income Fund
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, Naftalis, Nessen, Kamin & Frankel
919 Third Avenue, New York, NY 10022
---------------------------------------
It is proposed that this filing will become effective May 1, 1995
pursuant to Paragraph (b) 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, 1994 was filed on February 24, 1995.
<PAGE>
LEXINGTON RAMIREZ GLOBAL INCOME FUND
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. Financial Highlights 2
4. General Description of Registrant 3
5. Management of the Fund 11
6. Capital Stock and Other Securities 17
7. Purchase of Securities Being Offered 12
8. Redemption or Repurchase 13
9. Legal Proceedings *
Note * Omitted since answer is negative or inapplicable
<PAGE>
LEXINGTON RAMIREZ GLOBAL INCOME FUND
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 17 (Part A)
13. Investment Objectives and Policies 1
14. Management of the Registrant 19
15. Control Persons and Principal Holders 14
of Securities
16. Investment Advisory and Other Services 14
17. Brokerage Allocation and Other Practices 12
18. Capital Stock and Other Securities 17 (Part A)
19. Purchase, Redemption and Pricing of 12,13 (Part A)
securities being offered
20. Tax Status 16
21. Underwriters 11 (Part A)
22. Calculation of Yield Quotations on Money *
Market Funds
23. Financial Statements Exhibit
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>
PROSPECTUS
May 1, 1995
Lexington Ramirez Global Income Fund
P.O. Box 1515 / Park 80 West Plaza Two, Saddle Brook, New Jersey 07663
Toll Free: Service--1-800-526-0056
24 Hour Account Information--1-800-526-0052
A NO-LOAD MUTUAL FUND WHICH SEEKS TO PROVIDE HIGH CURRENT INCOME. CAPITAL
APPRECIATION IS A SECONDARY OBJECTIVE.
- --------------------------------------------------------------------------------
Lexington Ramirez Global Income Fund (the "Fund") is a no load
open-end non-diversified management investment company.
The Fund's investment objective is to seek high current income.
Capital appreciation is a secondary objective. To achieve this goal, the
Fund invests in a combination of foreign and domestic high-yield, lower
rated debt securities as described more fully under "Investment
Objectives and Policies".
This Fund invests primarily in lower rated and unrated foreign debt
securities whose credit quality is generally considered the equivalent
of U.S. corporate debt securities commonly known as "junk bonds."
Investments of this type are subject to a greater risk of loss of
principal and interest, as discussed elsewhere in this Prospectus, and
therefore should be considered speculative. Purchasers should carefully
assess the risks associated with investing in the Fund.
Shareholders may invest, reinvest, or redeem shares at any time
without charge or penalty.
Lexington Management Corporation is the Investment Adviser of the
Fund. MFR Advisors, Inc. is the Sub-Adviser of the Fund. Lexington Funds
Distributor, Inc. is the Distributor of shares of the Fund.
This Prospectus sets forth information about the Fund that you
should know before investing. It should be read and retained for future
reference.
A Statement of Additional Information dated May 1, 1995, which
provides a further discussion of certain areas in this Prospectus and
other matters that may be of interest to some investors, has been filed
with the Securities and Exchange Commission and is incorporated herein
by reference. For a free copy, call the appropriate telephone number
above or write to the address listed above.
Mutual fund shares are not deposits or obligations of (or endorsed
or guaranteed by) any bank, nor are they federally insured or otherwise
protected by the Federal Deposit Insurance Corporation ("FDIC"), the
Federal Reserve Board or any other agency. Investing in mutual funds
involves investment risks, including the possible loss of principal, and
their value and return will fluctuate.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
Investors Should Read and Retain this Prospectus for Future Reference
<PAGE>
FEE TABLE
Annual Fund Operating Expenses:
(as a percentage of average net assets):
Management fees ............................................ 1.00%
12b-1 fees ......................... ...................... 0.25%
Other fees ................................................. 1.50%
----
Total Fund Operating Expenses ...............................2.75%
====
<TABLE>
<CAPTION>
Example: 1 year 3 years 5 years 10 years
------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000
investment, assuming (1) 5% annual return and
(2) redemption at the end of each period .......... $27.81 $85.32 $145.45 $308.01
</TABLE>
The purpose of the foregoing table is to assist an investor in understanding
the various costs and expenses that an investor in the Fund will bear
indirectly. (For more complete descriptions of the various costs and expenses,
see "How to Purchase Shares" and "Investment Adviser and Distributor" below.)
The Expenses and Example (except the 12b-1 fees) appearing in the table above
are based on an estimate of Fund expenses for the current fiscal year. The 12b-1
fees shown in the table reflect the maximum amount which may be paid under the
Distribution Plan. See "Distribution Plan." The Example shown in the table above
should not be considered a representation of past or future expenses and actual
expenses may be greater or less than those shown.
FINANCIAL HIGHLIGHTS
The following Financial Highlights information for each of the years in the
five year period ended December 31, 1994 has been audited by KPMG Peat Marwick
LLP, Independent Auditors, whose report thereon appears in the Statement of
Additional Information. This information should be read in conjunction with the
financial statements and related notes thereto included in the Statement of
Additional Information. The Fund's annual report, which contains additional
performance information, is available upon request and without charge.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Selected Per Share Data for a share outstanding throughout the period Period from
July 10, 1986
(commencement of
Year ended December 31, operations) to
--------------------------------------------------------------------------- December 31,
1994 1993 1992 1991 1990 1989 1988 1987 1986
---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning
of period ....................... $10.95 $10.39 $10.35 $10.05 $10.12 $10.03 $ 9.67 $10.55 $10.00
Income from investment operations:
Net investment income ........... 0.46 0.53 0.61 0.67 0.73 0.63 0.63 0.78 0.32
Net realized and unrealized gain
(loss) on investments ......... (1.16) 0.58 0.04 0.30 (0.09) 0.09 0.36 (0.86) 0.55
Total income from investment
operations ...................... (0.70) 1.11 0.65 0.97 0.64 0.72 0.99 (0.08) 0.87
Less distributions:
Dividends from net
investment income ............. (0.45) (0.55) (0.61) (0.67) (0.71) (0.63) (0.63) (0.80) (0.32)
Net asset value, end of period .... $ 9.80 $10.95 $10.39 $10.35 $10.05 $10.12 $10.03 $ 9.67 $10.55
Total return(D) ................... (6.52%) 10.90% 6.51% 10.03% 6.62% 7.40% 10.54% (0.21%) 17.55%*
Ratio to average net assets:
Expenses, before reimbursement or
waiver ........................ 1.80% 1.44% 1.54% 1.65% 1.61% 1.72% 1.50% 1.97% 1.52%*
Expenses, net of reimbursement or
waiver ........................ 1.50% 1.44% 1.50% 1.12% 1.08% 1.20% 1.33% - -
Net investment income, before
reimbursement or waiver ....... 4.18% 4.83% 5.88% 6.11% 6.67% 5.70% 6.16% 5.98% 5.80%*
Net investment income ........... 4.48% 4.83% 5.92% 6.64% 7.20% 6.22% 6.33% 7.95% 7.30%*
Portfolio turnover ................ 10.20% 31.06% 31.24% 29.45% 44.50% 46.60% 67.11% 66.77% -
Net assets, end of period
(000's omitted) ................. $10,351 $14,576 $13,085 $12,252 $10,707 $12,739 $13,139 $11,049 $8,409
</TABLE>
*Annualized
(D) The Financial Highlights Table above represents the financial highlights of
Lexington Tax Exempt Bond Trust. It is not relevant to the current fund and
does not represent performance based upon the Fund's current investment
objective.
2
<PAGE>
DESCRIPTION OF THE FUND
The Fund is an open-end non-diversified management investment company known
as a mutual fund. It is a no-load fund because its shares are sold without a
sales charge. It was organized as a business trust under the laws of The
Commonwealth of Massachusetts on May 28, 1986. It adopted its present name and
objective on January 3, 1995. Shares of the Fund are continuously sold to the
public. The Fund invests the proceeds consistent with the investment objectives
and policies described below. The Fund's Board of Trustees provides broad
supervision over the affairs of the Fund. Lexington Management Corporation
("LMC") is the Fund's investment adviser. MFR Advisors, Inc. ("MFR") is the
Fund's sub-adviser. LMC and MFR are responsible for the management of the Fund's
assets and the officers of the Fund are responsible for its operations. LMC and
MFR manage the Fund from day to day in accordance with the Fund's investment
objectives and policies.
YIELD AND TOTAL RETURN
From time to time the Fund advertises its yield and total return. Both yield
and total return are based on historical earnings and are not intended to
indicate future performance. The "total return" of the Fund refers to the
average annual compounded rates of return over one, five and ten year periods or
over the life of the Fund (which periods will be stated in the advertisement)
that would equate an initial amount invested at the beginning of a stated period
to the ending redeemable value of the investment. The calculation assumes the
reinvestment of all dividends and distributions, including all recurring fees
that are charged to all shareholder accounts and a deduction of all nonrecurring
charges deducted at the end of each period. The "yield" of the Fund is computed
by dividing the net investment income per share earned during the period stated
in the advertisement by the maximum offering price per share on the last day of
the period (using the average number of shares entitled to receive dividends).
The calculation includes among expenses of the Fund, for the purpose of
determining net investment income, all recurring fees that are charged to all
shareholder accounts and any nonrecurring charges for the period stated. The
yield formula provides for semi-annual compounding which assumes that net
investment income is earned and reinvested at a constant rate and annualized at
the end of the six month period. The Fund may cite a 30-day yield (annualized)
as well as a 90-day yield (annualized).
COMPARATIVE PERFORMANCE INFORMATION
Advertisements and communications may compare a Fund's performance with that
of other mutual funds, as reported by Lipper Analytical Services, Inc. or
similar independent services or financial publications. Such performance may be
categorized according to the Fund's asset size as determined by the independent
service. From time to time, the performance of the Fund may be compared to
various investment indices including the Salomon Brothers Brady Bond Index.
Quotations of historical total returns and yields are not indicative of future
dividend income or total return, but are an indication of the return to
shareholders only for the limited historical period used. The Fund's yield and
total return will depend on the particular investments in its portfolio, its
total operating expenses and other conditions. Investors should be aware that as
of January 3, 1995, the investment objective of the Fund was changed from
maximum current income exempt from Federal income taxes to high current income.
For further information, including the formulas and examples of the yield and
total return calculations, see the Statement of Additional Information.
INVESTMENT OBJECTIVES AND POLICES
The Fund seeks to provide high current income. Capital appreciation is a
secondary objective. The Fund's investment objective cannot be changed without
approval by the holders of a majority (as defined in the Investment Company Act
of 1940) of the outstanding voting shares of the Fund. There is no assurance
that the Fund's investment objectives will be achieved.
To achieve its investment objective of providing a high level of current
income, the Fund under normal circumstances invests substantially all of its
assets in a portfolio of debt securities of issuers in three separate investment
areas: (i) the United States; (ii) developed foreign countries; and (iii)
emerging markets. The Fund selects particular debt securities in each sector
based on their relative investment merits. Within each area, the Fund selects
debt securities from those issued by governments, their agencies and
instrumentalities; central banks; commercial banks and other corporate entities.
Debt securities in which the Fund invests consist of bonds, notes, debentures
and other similar instruments. The Fund may invest up to 100% of its total
assets in U.S. and foreign debt securities and other fixed income securities
that, at the time of purchase, are rated below investment grade ("high yield
securities" or "junk bonds"), which involve a high degree of risk and are
predominantly speculative. The Fund may also invest in securities that are in
default as to payment of principal and/or interest. A description of certain
debt ratings is included as Appendix A to this Prospectus. Many emerging market
debt securities are not rated by United States rating agencies
3
<PAGE>
such as Moody's Investor's Service, Inc. ("Moody's") and Standard & Poor's
Rating Group ("S&P"). The 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 Fund were to invest in higher quality bonds.
"Emerging markets" will consist of all countries determined by the World
Bank or the United Nations to have developing or emerging economies and markets.
These countries are generally expected to include every country in the world
except the United States, Canada, Japan, Australia, New Zealand and most
countries in Western Europe.
Currently, investing in many of the emerging countries and emerging markets
is not feasible or may involve political risks. Accordingly, LMC currently
intends to consider investments only in those countries in which it believes
investing is feasible and does not involve such risks. The list of acceptable
countries will be reviewed by LMC and MFR and approved by the Board of Trustees
on a periodic basis and any additions or deletions with respect to such list
will be made in accordance with changing economic and political circumstances
involving such countries. (See Appendix B.)
An issuer in an emerging market is an entity: (i) for which the principal
securities trading market is an emerging market, as defined above; (ii) that
(alone or on a consolidated basis) derives 50% or more of its total revenue from
either goods produced, sales made or services performed in emerging markets; or
(iii) organized under the laws of, and with a principal office in, an emerging
market.
The Fund's investments in emerging market securities consist substantially
of high yield, lower-rated debt securities of foreign corporations, "Brady
Bonds" and other sovereign debt securities issued by emerging market
governments. "Sovereign debt securities" are those issued by emerging market
governments that are traded in the markets of developed countries or groups of
developed countries. LMC and MFR may invest in debt securities of emerging
market issuers that it determines to be suitable investments for the Fund
without regard to ratings. Currently, the substantial majority of emerging
market debt securities are considered to have a credit quality below investment
grade. The Fund may invest in bank loan participations and assignments, which
are fixed and floating rate loans arranged through private negotiations between
foreign entities.
INVESTMENT POLICIES
Temporary Investments. The Fund retains the flexibility to respond promptly
to changes in market and economic conditions. Accordingly, in the interest of
preserving shareholders' capital and consistent with the Fund's investment
objectives, LMC and MFR may employ a temporary defensive investment strategy if
they determine such a strategy to be warranted. Pursuant to such a defensive
strategy, the Fund temporarily may hold cash (U.S. dollars, foreign currencies
or multinational currency units) and/or invest up to 100% of its assets in high
quality debt securities or money market instruments of U.S. or foreign issuers,
and most or all of the Fund's investments may be made in the United States and
denominated in U.S. dollars. For debt obligations other than commercial paper,
this includes securities rated, at the time of purchase, at least AA by S&P or
Aa by Moody's, or if unrated, determined to be of comparable quality by LMC or
MFR. For commercial paper, this includes securities rated, at the time of
purchase, at least A-2 by S&P or Prime-2 by Moody's, or if unrated, determined
to be of comparable quality by LMC or MFR. It is impossible to predict whether,
when or for how long the Fund will employ defensive strategies. To the extent
the Fund adopts a temporary defensive investment posture, it will not be
invested so as to achieve directly its investment objectives.
In addition, pending investment of proceeds from new sales of Fund shares or
to meet ordinary daily cash needs, the Fund temporarily may hold cash (U.S.
dollars, foreign currencies or multinational currency units) and may invest any
portion of its assets in high quality foreign or domestic money market
instruments.
Investment Technique. The Fund invests in debt obligations allocated among
diverse markets and denominated in various currencies, including U.S. dollars,
or in multinational currency units such as European Currency Units. The Fund may
purchase securities that are issued by the government or a company or financial
institution of one country but denominated in the currency of another country
(or a multinational currency unit). The Fund is designed for investors who wish
to accept the risks entailed in such investments, which are different from those
associated with a portfolio consisting entirely of securities of U.S. issuers
denominated in U.S. dollars. See "Risk Factors."
LMC and MFR selectively will allocate the assets of the Fund in securities
of issuers in countries and in currency denominations where the combination of
fixed income market returns, the price appreciation potential of fixed income
securities and currency exchange rate movements will present opportunities
primarily for high current income and secondarily for capital appreciation. In
so doing, LMC and MFR intend to take full advantage of the different yield, risk
and return characteristics that investment in the fixed income markets of
different countries can provide for U.S. investors. Fundamental economic
strength, credit quality and currency and interest rate trends will be the
principal determinants of the emphasis given to various country, geographic and
industry sectors within the Fund. Securities held by the Fund may be invested in
without limitation as to maturity.
LMC and MFR evaluate currencies on the basis of fundamental economic
criteria (e.g., relative inflation and interest rate levels and trends, growth
rate forecasts, balance of payments status and economic policies) as well as
technical and
4
<PAGE>
political data. If the currency in which a security is denominated appreciates
against the U.S. dollar, the dollar value of the security will increase.
Conversely, if the exchange rate of the foreign currency declines, the dollar
value of the security will decrease. However, the Fund may seek to protect
itself against such negative currency movements through the use of sophisticated
investment techniques. See "Certain Investment Methods."
CERTAIN INVESTMENT METHODS
Brady Bonds. The Fund may invest in "Brady Bonds," which are debt
restructurings that provide for the exchange of cash and loans for newly issued
bonds. Brady Bonds are securities created through the exchange of existing
commercial bank loans to public and private entities in certain emerging markets
for new bonds in connection with debt restructuring under a debt restructuring
plan introduced by former U.S. Secretary of the Treasury, Nicholas F. Brady.
Brady Bonds recently have been issued by the governments of Argentina, Brazil,
Bulgaria, Costa Rica, Dominican Republic, Jordan, Mexico, Nigeria, The
Phillipines, Uruguay and Venezuela, and are expected to be issued by Ecuador and
Poland and other emerging market countries. Approximately $150 billion in
principal amount of Brady Bonds has been issued to date, the largest proportion
having been issued by Mexico and Venezuela. Brady Bonds issued by Brazil, Mexico
and Venezuela currently are rated below investment grade. Fund investors should
recognize that Brady Bonds have been issued only recently and, accordingly, do
not have a long payment history. Brady Bonds may be collateralized or
uncollateralized, are issued in various currencies (primarily the U.S. dollar)
and are actively traded in the secondary market for Latin American debt. The
Salomon Brothers Brady Bond Index provides a benchmark that can be used to
compare returns of emerging market Brady Bonds with returns in other bond
markets, e.g., the U.S. bond market.
The Fund may invest in either collateralized or uncollateralized Brady
Bonds. U.S. dollar-denominated, collateralized Brady Bonds, which may be fixed
rate par bonds or floating rate discount bonds, are collateralized in full as to
principal by U.S. Treasury zero coupon bonds having the same maturity as the
bonds. Interest payments on such bonds generally are collateralized by cash or
securities in an amount that, in the case of fixed rate bonds, is equal to at
least one year of rolling interest payments or, in the case of floating rate
bonds, initially is equal to at least one year's rolling interest payments based
on the applicable interest rate at that time and is adjusted at regular
intervals thereafter.
Loan Participations and Assignments. The Fund may invest in fixed and
floating rate loans ("Loans") arranged through private negotiations between a
foreign entity and one or more financial institutions ("Lenders"). The majority
of the Fund's investments in Loans in emerging markets is expected to be in the
form of participations in Loans ("Participations") and assignments of portions
of Loans from third parties ("Assignments"). Participations typically will
result in the the Fund having a contractual relationship only with the Lender,
not with the borrower government. The Fund will have the right to receive
payments of principal, interest and any fees to which it is entitled only from
the Lender selling the Participation and only upon receipt by the Lender of the
payments from the borrower. In connection with purchasing Participations, the
Fund generally will have no right to enforce compliance by the borrower with the
terms of the loan agreement relating to the loan ("Loan Agreement"), nor any
rights of set-off against the borrower, and the Fund may not directly benefit
from any collateral supporting the Loan in which it has purchased the
Participation. As a result, the Fund will assume the credit risk of both the
borrower and the Lender that is selling the Participation.
In the event of the insolvency of the Lender selling a Participation, the
Fund may be treated as a general creditor of the Lender and may not benefit from
any set-off between the Lender and the borrower. The Fund will acquire
Participations only if the Lender interpositioned between the Fund and the
borrower is determined by LMC and MFR to be creditworthy. When the Fund
purchases Assignments from Lenders, the Fund will acquire direct rights against
the borrower on the Loan. However, since Assignments are arranged through
private negotiations between potential assignees and assignors, the rights and
obligations acquired by the Fund as the purchaser of an Assignment may differ
from, and be more limited than, those held by the assigning Lender.
The Fund may have difficulty disposing of Assignments and Participations.
The liquidity of such securities is limited and the Fund anticipates that such
securities could be sold only to a limited number of institutional investors.
The lack of a liquid secondary market could have an adverse impact on the value
of such securities and on the Fund's ability to dispose of particular
Assignments or Participations when necessary to meet the Fund's liquidity needs
or in response to a specific economic event, such as a deterioration in the
creditworthiness of the borrower. The lack of a liquid secondary market for
Assignments and Participations also may make it more difficult for the Fund to
assign a value to those securities for purposes of valuing the Fund's portfolio
and calculating its net asset value. The investment of the Fund in illiquid
securities, including Assignments and Participations, is limited to 15% of net
assets.
When-Issued and Forward Commitment Securities. The Fund may purchase
securities on a "when-issued" basis and may purchase or sell securities on a
"forward commitment" basis in order to hedge against anticipated changes in
interest rates and prices. The price, which is generally expressed in yield
terms, 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
5
<PAGE>
commitments may be sold prior to the settlement date, but the Fund will enter
into when-issued and forward commitments only with the intention of actually
receiving or delivering the securities, as the case may be. No income accrues on
securities which have been purchased pursuant to a forward commitment or on a
when-issued basis prior to delivery of the securities. If the Fund disposes of
the right to acquire a when-issued security prior to its acquisition or disposes
of its right to deliver or receive against a forward commitment, it may incur a
gain or loss. At the time the Fund enters into a transaction on a when-issued or
forward commitment basis, a segregated account consisting of cash or high grade
liquid debt securities equal to the value of the when-issued or forward
commitment securities will be established and maintained with its custodian and
will be marked to market daily. There is a risk that the securities may not be
delivered and that the Fund may incur a loss.
Borrowing. From time to time, it may be advantageous for the Fund to borrow
money rather than sell existing portfolio positions to meet redemption requests.
Accordingly, the Fund may borrow from banks or may borrow through reverse
repurchase agreements and "roll" transactions in connection with meeting
requests for the redemption of Fund shares. The Fund may borrow up to an
aggregate of 5% of its total assets to meet redemptions or for temporary or
emergency purposes other than to meet redemptions. However, the Fund will not
borrow for leverage purposes, nor will the Fund purchase securities while
borrowings are outstanding. See "Investment Objectives and Policies" in the
Statement of Additional Information.
Repurchase Agreements, Reverse Repurchase Agreements and Roll Transactions.
The Fund may enter into repurchase agreements. Repurchase agreements are
transactions in which the purchaser buys a security from a bank or recognized
securities dealer and simultaneously commits to resell that security to the bank
or dealer at an agreed upon price, date and market rate of interest unrelated to
the coupon rate or maturity of the purchased security. Repurchase agreements are
considered to be loans which must be fully collateralized including interest
earned thereon during the entire term of the agreement. See "Investment
Objectives and Policies" in the Statement of Additional Information for more
information about the risks associated with investment in such transactions.
The Fund may also enter into reverse repurchase agreements with the same
parties with whom they may enter into repurchase agreements. Under a reverse
repurchase agreement, the Fund would sell securities and agree to repurchase
them at a particular price at a future date. Reverse repurchase agreements
involve the risk that the market value of the securities retained in lieu of
sale by the Fund may decline below the price of the securities the Fund has sold
but is obligated to repurchase. In the event the buyer of securities under a
reverse repurchase agreement files for bankruptcy or becomes insolvent, such
buyer or its trustee or receiver may receive an extension of time to determine
whether to enforce the Fund's oblgation to repurchase the securities, and the
Fund's use of the proceeds of the reverse repurchase agreement may effectively
be restricted pending such decision.
The Fund also may enter into "dollar rolls," in which the Fund sells fixed
income securities for delivery in the current month and simultaneously contracts
to repurchase substantially similar (same type, coupon and maturity) securities
on a specified future date. During the roll period, the Fund would forego
principal and interest paid on such securities. The Fund would be compensated by
the difference between the current sales price and the forward price for the
future purchase, as well as by the interest earned on the cash proceeds of the
initial sale. See "Investment Objectives and Policies" in the Statement of
Additional Information.
At the time the Fund enters into reverse repurchase agreements or dollar
rolls, it will establish and maintain a segregated account with an approved
custodian containing cash or liquid high grade debt securities having a value
not less than the repurchase price, including accrued interest. Reverse
repurchase agreements and dollar rolls will be treated as borrowings and will be
deducted from the Fund's assets for purposes of calculating compliance with the
Fund's borrowing limitation. See "Investment Limitations" in the Statement of
Additional Information.
Zero Coupon Securities. The Fund may invest in certain zero coupon
securities that are "stripped" U.S. Treasury notes and bonds. The Fund also may
invest in zero coupon and other deep discount securities issued by foreign
governments and domestic and foreign corporations, including certain Brady Bonds
and other foreign debt and payment-in-kind securities. Zero coupon securities
pay no interest to holders prior to maturity, and payment-in-kind securities pay
interest in the form of additional securities. However, a portion of the
original issue discount on zero coupon securities and the "interest" on
payment-in-kind securities will be included in the investing Fund's income.
Accordingly, for the Fund to qualify and to continue to qualify for tax
treatment as a regulated investment company and to avoid certain excise taxes
(see "Taxes" in the Statement of Additional Information), the Fund may be
required to distribute an amount that is greater than the total amount of cash
it actually receives. These distributions must be made from the Fund's cash
assets or, if necessary, from the proceeds of sales of portfolio securities. The
Fund will not be able to purchase additional income-producing securities with
cash used to make such distributions and its current income ultimately may be
reduced as a result. Zero coupon and payment-in-kind securities usually trade at
a deep discount from their face or par value and will be subject to greater
fluctuations of market value in response to changing interest rates
6
<PAGE>
than debt obligations of comparable maturities that make current distributions
of interest in cash. The Fund will not invest more than 5% of its total assets
in zero coupon securities.
Derivative Instruments
Options, Futures and Forward Currency Transactions. In seeking to protect
against currency exchange rate or interest rate changes that are adverse to
their present or prospective positions, the Fund may employ certain risk
management practices involving the use of forward currency contracts and options
contracts, futures contracts and options on futures contracts on U.S. and
foreign government securities and currencies. The Fund also may enter into
interest rate, currency and index swaps and purchase or sell related caps,
floors and collars and other derivatives. The Fund may enter into derivative
securities transactions without limit. See "Swaps, Caps, Floors and Collars"
below. There can be no assurance that the Fund's risk management practices will
succeed. Only a limited market, if any, currently exists for forward currency
contracts and options and futures instruments relating to currencies of most
emerging markets, to securities denominated in such currencies or to securities
of issuers domiciled or principally engaged in business in such emerging
markets. To the extent that such a market does not exist, LMC or MFR may not be
able to effectively hedge its investment in such emerging markets.
To attempt to hedge against adverse movements in exchange rates between
currencies, the Fund may enter into forward currency contracts for the purchase
or sale of a specified currency at a specified future date. Such contracts may
involve the purchase or sale of a foreign currency against the U.S. dollar or
may involve two foreign currencies. The Fund may enter into forward currency
contracts either with respect to specific transactions or with respect to the
respective Fund's portfolio positions. For example, when the Fund anticipates
making a purchase or sale of a security, it may enter into a forward currency
contract in order to set the rate (either relative to the U.S. dollar or another
currency) at which a currency exchange transaction related to the purchase or
sale will be made. Further, when LMC or MFR believes that a particular currency
may decline compared to the U.S. dollar or another currency, the Fund may enter
into a forward contract to sell the currency LMC or MFR expects to decline in an
amount up to the value of the portfolio securities held by the Fund denominated
in a foreign currency.
In addition, the Fund may write and purchase put and call options on
securities that are traded on recognized securities exchanges and
over-the-counter ("OTC") markets. The Fund will cause its custodian to segregate
cash, U.S. Government securities or other high grade liquid debt obligations
having a value sufficient to meet the Fund's obligations under the call option.
They also may enter into interest rate futures contracts and purchase and write
options to buy and sell such futures contracts, to the extent permitted under
regulations of the Commodities Futures Trading Commission ("CFTC"). The Fund
will not employ these practices for speculation; however, these practices may
result in the loss of principal under certain conditions. In addition, certain
provisions of the Internal Revenue Code of 1986, as amended ("Code"), limit the
extent to which the Fund may enter into forward contracts or futures contracts
or engage in options transactions. See "Taxes" in the Statement of Additional
Information. The Fund also may purchase put or call options or futures contracts
on currencies for the same purposes as it may use forward currency contracts.
The Fund's use of forward currency contracts or options and futures
transactions would involve certain investment risks and transaction costs to
which it might not otherwise be subject. These risks include: dependence on LMC
and MFR's ability to predict movements in exchange rates; imperfect correlation
between movements in exchange rates and movements in the currency hedged; and
the fact that the skills needed to effectively hedge against the Fund's currency
risks are different from those needed to select the securities in which a Fund
invests. The Fund also may conduct its foreign currency exchange transactions on
a spot (i.e., cash) basis at the spot rate prevailing in the foreign currency
exchange market.
Swaps, Caps, Floors and Collars. The Fund may enter into interest rate,
currency and index swaps, the purchase or sale of related caps, floors and
collars and other derivative instruments. The Fund expects to enter into these
transactions primarily to preserve a return or spread on a particular investment
or portion of its portfolio, to protect against currency fluctuations, as a
technique for managing the portfolio's duration (i.e., the price sensitivity to
changes in interest rates) or to protect against any increase in the price of
securities the Fund anticipates purchasing at a later date. The Fund intends to
use these transactions as hedges and not as speculative investments, and will
not sell interest rate caps or floors if it does not own securities or other
instruments providing the income the Fund may be obligated to pay.
Interest rate swaps involve the exchange by the Fund with another party of
their respective commitments to pay or receive interest (for example, an
exchange of floating rate payments for fixed rate payments) with respect to a
notional amount of principal. A currency swap is an agreement to exchange cash
flows on a notional amount based on changes in the values of the reference
indices.
The purchase of a cap entitles the purchaser to receive payments on a
notional principal amount from the party selling the cap to the extent that a
specified index exceeds a predetermined interest rate. The purchase of an
interest rate
7
<PAGE>
floor entitles the purchaser to receive payments on a notional principal amount
from the party selling the floor to the extent that a specified index falls
below a predetermined interest rate or amount. A collar is a combination of a
cap and a floor that preserves a certain return within a predetermined range of
interest rates or values.
RISK FACTORS
General. The Fund's net asset value will fluctuate, reflecting fluctuations
in the market value of its portfolio positions and its net currency exposure.
The value of fixed income securities held by the Fund generally fluctuates
inversely with interest rate movements. Longer term bonds held by the Fund are
subject to greater interest rate risk. There is no assurance that any Fund will
achieve its investment objectives.
According to LMC and MFR, as of December 31, 1994, over half of the value of
all outstanding government debt obligations throughout the world was represented
by obligations denominated in currencies other than the U.S. dollar. Moreover,
from time to time, the debt securities of issuers located outside the United
States have substantially outperformed the debt obligations of U.S. issuers.
Accordingly, LMC and MFR believe that the Fund policy of investing in debt
securities throughout the world may enable the achievement of results superior
to those produced by mutual funds, with similar objectives to those of the fund,
that invest solely in debt securities of U.S. issuers.
Nonetheless, foreign investing does entail certain risks. Foreign companies
generally are not subject to uniform accounting, auditing and financial
reporting standards, practices and requirements comparable to those applicable
to U.S. companies. The securities of non-U.S. issuers generally are not
registered with the SEC, nor are the issuers thereof usually subject to the
SEC's reporting requirements. Accordingly, there may be less publicly available
information about foreign securities and issuers than is available with respect
to U.S. securities and issuers. The Fund's net investment income from foreign
issuers may be subject to non-U.S. withholding taxes, thereby reducing their net
investment income.
In addition, with respect to some foreign countries, there is the increased
possibility of expropriation or confiscatory taxation, limitations on the
removal of funds or other assets of the Fund, political or social instability,
or diplomatic developments which could affect the investments of the Fund in
those countries. Moreover, individual foreign economies may differ favorably or
unfavorably from the U.S. economy in such respects as growth of gross national
product, rate of inflation, rate of savings and capital reinvestment, resource
self-sufficiency and balance of payments positions. LMC and MFR will rely on its
worldwide financial and investment expertise to attempt to limit these risks.
The Fund has registered under the 1940 Act as a "non-diversified" fund;
therefore, the Fund will be able, with respect to 50% of its total assets, to
invest more than 5% of its total assets in obligations of one issuer. However,
the Fund, to maintain its status as a regulated investment company under the
Internal Revenue Code (the "Code") intends to meet the quarterly diversification
tests that are required under the Code. Because the Fund is permitted to invest
a greater proportion of its assets in the securities of a smaller number of
issuers, the Fund may be subject to greater investment and credit risk with
respect to its portfolio than mutual funds which are required to be more broadly
diversified.
Currency Risk. Since the Fund normally invests substantially in securiites
denominated in currencies other than the U.S. dollar, and since they may hold
foreign currencies, they will be affected favorably or unfavorably by exchange
control regulations or changes in the exchange rates between such currencies and
the U.S. dollar. Changes in currency exchange rates will influence the value of
the Fund's shares, and also may affect the value of dividends and interest
earned by the Fund and gains and losses realized by the Fund. Currencies
generally are evaluated on the basis of fundamental economic criteria (e.g.,
relative inflation and interest rate levels and trends, growth rate forecasts,
balance of payments status and economic policies) as well as technical and
political data. The exchange rates between the U.S. dollar and other currencies
are determined by supply and demand in the currency exchange markets, the
international balance of payments, governmental intervention, speculation and
other economic and political conditions. If the currency in which a security is
denominated appreciates against the U.S. dollar, the dollar value of the
security will increase. Conversely, a decline in the exchange rate of the
currency would adversely affect the value of the security expressed in U.S.
dollars.
Risks Associated with Investment in Emerging Markets. Because of the
special risks associated with investing in emerging markets, an investment in
the Fund should be considered speculative. Investors are strongly advised to
consider carefully the special risks involved in emerging markets, which are in
addition to the usual risks of investing in developed foreign markets around the
world.
Investing in emerging markets involves risks relating to potential political
and economic instability within such markets and the risks of expropriation,
nationalization, confiscation of assets and property or the imposition of
restrictions on foreign investment and on repatriation of capital invested. In
the event of such expropriation, nationalization or other confiscation in any
emerging market, the Fund could lose its entire investment in that market.
8
<PAGE>
Many emerging market countries have experienced substantial, and in some
periods extremely high, rates of inflation for many years. Inflation and rapid
fluctuations in inflation rates have had and may continue to have negative
effects on the economies and securities markets of certain emerging market
countries.
Economies in emerging markets generally are dependent heavily upon
international trade and, accordingly, have been and may continue to be affected
adversely by trade barriers, exchange controls, managed adjustments in relative
currency values and other protectionist measures imposed or negotiated by the
countries with which they trade. These economies also have been and may continue
to be affected adversely by economic conditions in the countries with which they
trade.
The securities markets of emerging countries are substantially smaller, less
developed, less liquid and more volatile than the securities markets of the
United States and other more developed countries. Disclosure and regulatory
standards in many respects are less stringent than in the United States and
other major markets. There also may be a lower level of monitoring and
regulation of emerging securities markets and the activities of investors in
such markets, and enforcement of existing regulations has been extremely
limited. The Fund may invest in former communist countries. There is a
possibility that these countries may revert back to communism.
In addition, brokerage commissions, custodial services and other costs
relating to investment in foreign markets generally are more expensive than in
the United States, particularly with respect to emerging markets. Such markets
have different settlement and clearance procedures. In certain markets there
have been times when settlements have been unable to keep pace with the volume
of securities transactions, making it difficult to conduct such transactions.
The inability of the Fund to make intended securities purchases due to
settlement problems could cause the Fund to forego attractive investment
opportunities. Inability to dispose of a portfolio security caused by settlement
problems could result either in losses to the Fund due to subsequent declines in
value of the portfolio security or, if the Fund has entered into a contract to
sell the security, could result in possible liability to the purchaser.
The risk also exists that an emergency situation may arise in one or more
emerging markets as a result of which trading of securities may cease or may be
substantially curtailed and prices for the Fund's portfolio securities in such
markets may not be readily available. Section 22(e) of the 1940 Act permits a
registered investment company to suspend redemption of its shares for any period
during which an emergency exists, as determined by the SEC. Accordingly, when
the Fund believes that appropriate circumstances warrant, it will promptly apply
to the SEC for a determination that an emergency exists within the meaning of
Section 22(e) of the 1940 Act. During the period commencing from the Fund's
identification of such conditions until the date of SEC action, the portfolio
securities of the Fund in the affected markets will be valued at fair value as
determined in good faith by or under the direction of the Fund's Board of
Trustees.
Sovereign Debt. The Fund may invest in sovereign debt securities of emerging
market governments, including Brady Bonds. Investments in such securities
involve special risks. The issuer of the debt or the governmental authorities
that control the repayment of the debt may be unable or unwilling to repay
principal or interest when due in accordance with the terms of such debt.
Periods of economic uncertainty may result in the volatility of market prices of
sovereign debt, and in turn the Fund's net asset value, to a greater extent than
the volatility inherent in domestic fixed income securities.
A sovereign debtor's willingness or ability to repay principal and pay
interest in a timely manner may be affected by, among other factors, its cash
flow situation, the extent of its foreign reserves, the availability of
sufficient foreign exchange on the date a payment is due, the relative size of
the debt service burden to the economy as a whole, the sovereign debtor's policy
toward principal international lenders and the political constraints to which a
sovereign debtor may be subject. Emerging market governments could default on
their sovereign debt. Such sovereign debtors also may be dependent on expected
disbursements from foreign governments, multilateral agencies and other entities
abroad to reduce principal and interest arrearages on their debt. The commitment
on the part of these governments, agencies and others to make such disbursements
may be conditioned on a sovereign debtor's implementation of economic reforms
and/or economic performance and the timely service of such debtor's obligations.
Failure to implement such reforms, achieve such levels of economic performance
or repay principal or interest when due, may result in the cancellation of such
third parties' commitments to lend funds to the sovereign debtor, which may
further impair such debtor's ability or willingness to timely service its debts.
The occurrence of political, social or diplomatic changes in one or more of
the countries issuing sovereign debt could adversely affect the Fund's
investments. Emerging markets are faced with social and political issues and
some of them have experienced high rates of inflation in recent years and have
extensive internal debt. Among other effects, high inflation and internal debt
service requirements may adversely affect the cost and availability of future
domestic sovereign borrowing to finance governmental programs, and may have
other adverse social, political and economic consequences. Political changes or
a deterioration of a country's domestic economy or balance of trade may affect
the
9
<PAGE>
willingness of countries to service their sovereign debt. Although LMC and MFR
intend to manage the Fund in a manner that will minimize the exposure to such
risks, there can be no assurance that adverse political changes will not cause
the Fund to suffer a loss of interest or principal on any of its holdings.
In recent years, some of the emerging market countries in which the Fund
expects to invest have encountered difficulties in servicing their sovereign
debt obligations. Some of these countries have withheld payments of interest
and/or principal of sovereign debt. These difficulties have also led to
agreements to restructure external debt obligations-in particular, commercial
bank loans, typically by rescheduling principal payments, reducing interest
rates and extending new credits to finance interest payments on existing debt.
In the future, holders of emerging market sovereign debt securities may be
requested to participate in similar rescheduling of such debt. Certain emerging
market countries are among the largest debtors to commercial banks and foreign
governments. Currently, Brazil, Mexico and Argentina are the largest debtors
among developing countries. At times certain emerging market countries have
declared a moratorium on the payment of principal and interest on external debt;
such a moratorium is currently in effect in certain emerging market countries.
There is no bankruptcy proceeding by which a creditor may collect in whole or in
part sovereign debt on which an emerging market government has defaulted.
The ability of emerging market governments to make timely payments on their
sovereign debt securities is likely to be influenced strongly by a country's
balance of trade and its access to trade and other international credits. A
country whose exports are concentrated in a few commodities could be vulnerable
to a decline in the international prices of one or more of such commodities.
Increased protectionism on the part of a country's trading partners could also
adversely affect its exports. Such events could diminish a country's trade
account surplus, if any. To the extent that a country receives payment for its
exports in currencies other than hard currencies, its ability to make hard
currency payments could be affected.
Investors should also be aware that certain sovereign debt instruments in
which the Fund may invest involve great risk. As noted above, sovereign debt
obligations issued by emerging market governments generally are deemed to be the
equivalent in terms of quality to securities rated below investment grade by
Moody's and S&P. Such securities are regarded as predominantly speculative with
respect to the issuer's capacity to pay interest and repay principal in
accordance with the terms of the obligations and involve major risk exposure to
adverse conditions. Some of such securities, with respect to which the issuer
currently may not be paying interest or may be in payment default, may be
comparable to securities rated D by S&P or C by Moody's. The Fund may have
difficulty disposing of and valuing certain sovereign debt obligations because
there may be a limited trading market for such securities. Because there is no
liquid secondary market for many of these securities, the Fund anticipates that
such securities could be sold only to a limited number of dealers or
institutional investors.
Risks Associated with Investments in Lower-Rated Debt Securities. As
discussed above, it is expected that under normal market conditions the Fund may
invest up to 100% of its total assets in debt securities rated below investment
grade, and substantially all the Fund's assets will be so invested. Such
investments involve a high degree of risk.
Debt rated BB, B, CCC, CC and C and debt rated Ba, B, Caa, Ca and C is
regarded by S&P and Moody's, respectively, on balance, as predominantly
speculative with respect to the issuer's capacity to pay interest and repay
principal in accordance with the terms of the obligation. For S&P, BB indicates
the lowest degree of speculation and C the highest degree of speculation. For
Moody's, Ba indicates the lowest degree of speculation and C the highest degree
of speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions. Similarily, debt rated Ba or BB and below is
regarded by the relevant rating agency as speculative. Debt rated C by Moody's
or S&P is the lowest quality debt that is not in default as to principal or
interest and such issues so rated can be regarded as having extremely poor
prospects of ever attaining any real investment standing. Such securities are
also generally considered to be subject to greater risk than higher quality
securities with regard to a deterioration of general economic conditions. These
securities are the equivalent of high yield, high risk bonds. As noted above,
the Fund may invest in debt securities rated below C, which are in default as to
principal and/or interest.
Ratings of debt securities represent the rating agency's opinion regarding
their quality and are not a guarantee of quality. Rating agencies attempt to
evaluate the safety of principal and interest payments and do not evaluate the
risks of fluctuations in market value. Also, rating agencies may fail to make
timely changes in credit quality in response to subsequent events, so that an
issuer's current financial condition may be better or worse than a rating
indicates.
The market values of lower quality debt securities tend to reflect
individual developments of the issuer to a greater extent than do higher quality
securities, which react primarily to fluctuations in the general level of
interest rates. In addition, lower quality debt securities tend to be more
sensitive to economic conditions and generally have more volatile prices than
higher quality securities. Issuers of lower quality securities are often highly
leveraged and may not have
10
<PAGE>
available to them more traditional methods of financing. For example, during an
economic downturn or a sustained period of rising interest rates, highly
leveraged issuers of lower quality securities may experience financial stress.
During such periods, such issuers may not have sufficient revenues to meet their
interest payment obligations. The issuer's ability to service its debt
obligations may also be adversely affected by specific developments affecting
the issuer, such as the issuer's inability to meet specific projected business
forecasts or the unavailability of additional financing. Similarly, certain
emerging market governments that issue lower quality debt securities are among
the largest debtors to commercial banks, foreign governments and supranational
organizations such as the World Bank and may not be able or willing to make
principal and/or interest repayments as they come due. The risk of loss due to
default by the issuer is significantly greater for the holders of lower quality
securities because such securities are generally unsecured and are often
subordinated to other creditors of the issuer.
Lower quality debt securities of corporate issuers frequently have call or
buy-back features which would permit an issuer to call or repurchase the
security from the Fund. If an issuer exercises these provisions in a declining
interest rate market, the Fund may have to replace the security with a lower
yielding security, resulting in a decreased return for investors. In addition,
the Fund may have difficulty disposing of lower quality securities because there
may be a thin trading market for such securities. There may be no established
retail secondary market for many of these securities, and the Fund anticipates
that such securities could be sold only to a limited number of dealers or
institutional investors. The lack of a liquid secondary market also may have an
adverse impact on market prices of such instruments and may make it more
difficult for the Fund to obtain accurate market quotations for purposes of
valuing the securities in the portfolio of the Fund.
Adverse publicity and investor perceptions, whether or not based on
fundamental analysis, may also decrease the values and liquidity of lower
quality securities, expecially in a thinly traded market. The Fund also may
acquire lower quality debt securities during an initial underwriting or may
acquire lower quality debt securities which are sold without registration under
applicable securities laws. Such securities involve special considerations and
risks.
Factors having an adverse effect on the market value of lower rated
securities or their equivalents purchased by the Fund will adversely impact net
asset value of the Fund. See "Risk Factors" in the Statement of Additional
Information. In addition to the foregoing, such factors may include: (i)
potential adverse publicity; (ii) heightened sensitivity to general economic or
political conditions; and (iii) the likely adverse impact of a major economic
recession. The Fund also may incur additional expenses to the extent it is
required to seek recovery upon a default in the payment of principal or interest
on its portfolio holdings, and the Fund may have limited legal recourse in the
event of a default. Debt securities issued by governments in emerging markets
can differ from debt obligations issued by private entities in that remedies
from defaults generally must be pursued in the courts of the defaulting
government, and legal recourse is therefore somewhat diminished. Political
conditions, in terms of a government's willingness to meet the terms of its debt
obligations, also are of considerable significance. There can be no assurance
that the holders of commercial bank debt may not contest payments to the holders
of debt securities issued by governments in emerging markets in the event of
default by the governments under commercial bank loan agreements.
LMC and MFR will attempt to minimize the speculative risks associated with
investments in lower quality securities through credit analysis and by carefully
monitoring current trends in interest rates, political developments and other
factors. Nonetheless, investors should carefully review the investment
objectives and policies of the Fund and consider their ability to assume the
investment risks involved before making an investment in the Fund.
MANAGEMENT OF THE FUND
The Trustees of the Fund are responsible under the terms of its Declaration
of Trust, which is governed by Massachusetts law, for overseeing the conduct of
the Fund's business. There are currently ten trustees (of whom seven are
non-interested persons under the Investment Company Act of 1940) who meet four
times each year. The Statement of Additional Information contains more data
regarding the Trustees and officers of the Fund.
PORTFOLIO MANAGERS
Denis P. Jamison, C.F.A., Senior Vice President, Director Fixed Income
Strategy is responsible for fixed-income portfolio management at LMC. He is a
member of the New York Society of Security Analysts. Mr. Jamison has more than
23 years investment experience. Prior to joining LMC in 1981, Mr. Jamison had
spent nine years at Arnold Bernhard & Company, an investment counseling and
financial services organization. At Bernhard, he was a Vice President
supervising the security analyst staff and managing investment portfolios. He is
a specialist in government, corporate and municipal bonds. Mr. Jamison is a
graduate of the City College of New York with a B.A. in Economics.
Maria Fiorini Ramirez, President and Chief Executive Officer of MFR Advisors
Inc., began her career as a credit analyst with American Express International
Banking Corporation in 1968. In 1972, she moved to Banco Nazionale De
11
<PAGE>
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 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, where she is known in international financial,
banking and economic circles for her assessment of the interaction between
global economic policy and political trends and their effect on investments. Ms.
Ramirez holds a B.A. in Business Administration/Economics from Pace University.
INVESTMENT ADVISER, SUB-ADVISER, DISTRIBUTOR AND ADMINISTRATOR
The Fund has entered into an investment advisory contract with LMC, P.O. Box
1515/Park 80 West Plaza Two, Saddle Brook, New Jersey 07663. LMC provides
investment advice and in general conducts the management and investment program
of the Fund under the supervision and control of the Trustees of the Fund. LMC
has entered into a sub-advisory contract with MFR Advisors, Inc., ("MFR") One
World Financial Center, 200 Liberty Street, New York, New York 10281, under
which MFR will provide the Fund with investment and economic research services.
MFR does not manage any assets for investment companies but is an institutional
manager for private clients. Lexington Funds Distributor, Inc. ("LFD") is the
fund's distributor.
LMC, established in 1938, currently manages over $3.8 billion in assets. LMC
serves as investment adviser to other investment companies and private and
institutional investment accounts. Included among these clients are persons and
organizations which own significant amounts of capital stock of LMC's parent,
Piedmont Management Company Inc. The clients pay fees which LMC considers
comparable to the fees paid by similarly served clients.
MFR is a subsidiary of Maria Fiorini Ramirez, Inc. ("Ramirez"), which was
established in August of 1992 to provide global economic consulting, investment
advisory and broker-dealer services. Ramirez is the successor firm to Maria
Ramirez Capital Consultants, Inc. ("MRCC"). MRCC was formed in April 1990 as a
subsidiary of John Hancock Freedom Securities Corporation and offered in-depth
economic consulting services to clients.
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 and LFD are wholly-owned subsidiaries of Piedmont Management Company
Inc., a Delaware corporation with offices at 80 Maiden Lane, New York, New York
10038. Descendants of Lunsford Richardson, Sr., their spouses, trusts and other
related entities have a majority voting control of outstanding shares of
Piedmont Management Company Inc. common stock.
As compensation for its services, the Fund pays LMC a monthly management fee
at the annual rate of 1.00% of the average daily net assets. This fee is higher
than that charged by most other investment companies. LMC will pay MFR an annual
sub-advisory fee of 0.50% of the Fund's average net assets in excess of $15
million. The sub-advisory fee will be paid by LMC, not the Fund. For the year
ending December 31, 1994, LMC earned $80,873 in management fees from the Fund.
See "Investment Adviser and Distributor" in the Statement of Additional
Information.
DETERMINATION OF NET ASSET VALUE
The Fund calculates net asset value as of the close of normal trading on the
NYSE (currently 4:00 p.m., Eastern Time, unless weather, equipment failure or
other factors contribute to an earlier closing time) each Business Day. The
Fund's net asset value per share is computed by determining the value of its
total assets (the securities it holds plus any cash or other assets, including
interest accrued but not yet received) subtracting all the Fund's liabilities
(including accrued expenses), and dividing the result by the total number of
shares outstanding at such time.
Long-term debt obligations held by the Fund are valued at the mean of
representative quoted bid and asked prices for such securities or, if such
prices are not available, at prices for securities of comparable maturity,
quality and type; however, when LMC deems it appropriate, prices obtained for
the day of valuation from a bond pricing service will be used. Short-term debt
investments are amortized to maturity based on their cost, adjusted for foreign
exchange translation and market fluctuations. Equity securities are valued at
the last sale price on the exchange or in the principal OTC market in which such
securities are traded, as of the close of business on the day the securities are
being valued, or, lacking any sales, at the last available bid price.
12
<PAGE>
Securities for which market quotations are not readily available are valued
at fair value determined in good faith by or under the direction of the Fund's
Board of Trustees. Securities quoted in foreign currencies will be valued in
U.S. dollars based on the prevailing exchange rates on that day.
The Fund's portfolio securities, from time to time, may be listed primarily
on foreign exchanges or OTC dealer markets which may trade on days when the NYSE
is closed (such as Saturday). As a result, the net asset value of the Fund may
be significantly affected by such trading on days when shareholders cannot
purchase or redeem shares of the Fund.
HOW TO PURCHASE SHARES
Initial Investment-Minimum $1,000. By Mail: Send a check payable to Lexington
Ramirez Global Income Fund, along with a completed New Account Application, to
the State Street Bank and Trust Company (the "Agent") at the address on the
application.
Subsequent Investments-Minimum $50. By Mail: Send a check payable to Lexington
Ramirez Global Income Fund, to the Agent accompanied by either the detachable
form which accompanies the confirmation of a prior transaction or a letter
indicating the dollar amount of shares to be purchased and identifying the Fund,
account number, and registration.
Broker-Dealers: You may invest in shares of the Fund through broker-dealers who
are members of the National Association of Securities Dealers, Inc., and other
financial institutions and who have selling agreements with LFD. Banks and other
financial institutions may be required to register as dealers pursuant to state
law. Broker-dealers and financial institutions who process such orders for their
customers may charge a fee for these services. The fee may be avoided by
purchasing shares directly from the Fund.
The Open Account: By investing in the Fund, shareholders appoint the Agent as
their representative, to establish an Open Account to which all shares purchased
will be credited, together with any dividends and capital gain distributions
which are paid in additional shares (see "Dividend, Distribution and
Reinvestment Policy"). Stock certificates will be issued for full shares only
when requested in writing. Unless payment for shares is made by certified or
cashier's check or federal funds wire, certificates will not be issued for 30
days. In order to facilitate redemptions and transfers, most shareholders elect
not to receive certificates.
After an Open Account is established, payment can be provided for by
"Lex-O-Matic" or other authorized automatic bank check program accounts (by
which a bank is authorized to draw checks on the investor's account periodically
for investment in the Fund). Automatic Investing Plan with "Lex-O-Matic". A
shareholder may arrange to make additional purchases of shares automatically on
a monthly or quarterly basis. The investments of $50 or more are automatically
deducted from a checking account on or about the 15th day of each month. The
institution must be an Automated Clearing House (ACH) member. Should an order to
purchase shares of a fund be cancelled because your automated transfer does not
clear, you will be responsible for any resulting loss incurred by that fund. The
shareholder reserves the right to discontinue the Lex-O-Matic program provided
written notice is given ten days prior to the scheduled investment date. Further
information regarding this service can be obtained from Lexington by calling
1-800-526-0056. Additional information may be obtained directly from the Fund.
On payroll deduction accounts administered by an employer and on other
continuing purchase programs, there are no minimum purchase requirements.
Terms of Offering: The Fund reserves the right to reject any order, and to waive
or lower the investment minimums with respect to any person or class of persons,
including shareholders of the Fund's special investment programs. An order to
purchase shares is not binding on the Fund until it has been confirmed by the
Agent. If an order to purchase shares is cancelled because the investor's check
does not clear, the purchaser will be responsible for any loss incurred by the
Fund. To recover any such loss, the Fund reserves the right to redeem shares
owned by the purchaser, seek reimbursement directly from the purchaser and may
prohibit or restrict the purchaser in placing future orders in any of the
Lexington Funds.
Account Statements: The Agent will send shareholders who are either purchasing
or redeeming shares of the Fund a confirmation of the transaction indicating the
date the purchase or redemption was accepted, the number of shares purchased or
redeemed, the purchase or redemption price per share and the total amount
purchased or redemption proceeds. A statement is also sent to shareholders
whenever a distribution is paid, or when a change in the registration, address
or dividend option occurs. Shareholders are urged to retain their account
statements for tax purposes.
HOW TO REDEEM SHARES
By Mail: Send to the Agent (see the back cover of this Prospectus for the
address): (1) a written request for redemption, signed by each registered owner
exactly as the shares are registered including the name of the Fund, account
number and exact registration; (2) stock certificates for any shares to be
redeemed which are held by the shareholder; (3)
13
<PAGE>
signature guarantees, when required; and (4) the additional documents required
for redemptions by a corporation, executors, administrators, trustees, and
guardians. Redemptions by mail will not become effective until all documents in
proper form have been received by the Agent. If a shareholder has any questions
regarding the requirements for redeeming shares, he should call the Fund at the
toll free number on the back cover prior to submitting a redemption request. The
redemption price may be more or less than the shareholder's cost depending on
the market value of the Fund at the time of redemption. If a redemption request
is sent to the Fund, it will be forwarded to the Agent and the effective date of
redemption will be the date received by the Agent.
Checks for redemption proceeds will be mailed within seven days, but will
not be mailed until all checks in payment for the shares to be redeemed have
been cleared which may take fifteen days or more.
Signature Guarantee: Signature guarantees are required in connection with (a)
redemptions by mail involving $10,000 or more; (b) all redemptions by mail,
regardless of the amount involved, when the proceeds are to be paid to someone
other than the registered owners; (c) changes in instructions as to where the
proceeds of redemptions are to be sent; and (d) share transfer requests.
The Agent requires that the guarantor be either a commercial bank which is a
member of the Federal Deposit Insurance Corporation, a savings and loan
association, a savings bank, a credit union, a trust company, a member firm of a
domestic stock exchange, or a foreign branch of any of the foregoing. A notary
public is not an acceptable guarantor.
With respect to redemption requests submitted by mail, the signature
guarantees must appear either: (a) on the written request for redemption, (b) on
a separate instrument of assignment ("stock power") which should specify the
total number of shares to be redeemed, or (c) on all stock certificates tendered
for redemption and, if shares held by the Agent are also being redeemed, on the
letter or stock power.
Redemption Price: The redemption price will be the net asset value per share of
the Fund next determined after receipt by the Agent of a redemption request in
proper form. See "Determination of Net Asset Value" in the Statement of
Additional Information.
The right of redemption may be suspended (a) for any period during which the
New York Stock Exchange is closed or the Securities and Exchange Commission
("SEC") determines that trading on the Exchange is restricted, (b) when there is
an emergency as determined by the SEC as a result of which it is not reasonably
practicable for the Fund to dispose of securities owned by it or to determine
fairly the value of its net assets, or (c) for such other periods as the SEC may
by order permit for the protection of shareholders of the Fund. Due to the
proportionately high cost of maintaining smaller accounts, the Fund reserves the
right to redeem all shares in an account with a value of less than $500 and mail
the proceeds to the shareholder. Shareholders will be notified before these
redemptions are to be made and will have 30 days to make an additional
investment to bring their accounts up to the required minimum.
SHAREHOLDER SERVICES
Transfer: Shares of the Fund may be transferred to another owner. A signature
guarantee of the original owner is required on the letter of instruction or
accompanying stock power.
Systematic Withdrawal Plan: Shareholders may elect to withdraw cash in fixed
amounts from their accounts at regular intervals. The minimum investment to
establish a Systematic Withdrawal Plan is $10,000. If the proceeds are to be
mailed to someone other than the registered owner, a signature guarantee is
required.
Group Sub-Accounting: To minimize recordkeeping by fiduciaries, corporations,
and certain other investors, the minimum initial investment may be waived.
EXCHANGE PRIVILEGE
Shares of the Fund may be exchanged for shares of the following Lexington
Funds on the basis of relative net asset value per share, next determined at the
time of the exchange. In the event shares of one or more of these Funds being
exchanged by a single investor have a value in excess of $500,000, the shares of
the Fund will not be purchased until, the fifth business day following the
redemption of the shares being exchanged in order to enable the redeeming Fund
to utilize normal securities settlement procedures in transferring the proceeds
of the redemption to the Fund. Exchanges may not be made until all checks in
payment for the shares to be exchanged have been cleared.
The Lexington Funds currently available for exchange are:
LEXINGTON GLOBAL FUND, INC. (NASDAQ Symbol: LXGLX)/Seeks long-term growth of
capital primarily through investment in common stocks of companies
domiciled in foreign countries and the United States.
14
<PAGE>
LEXINGTON WORLDWIDE EMERGING MARKETS FUND, INC. (NASDAQ Symbol: LEXGX)/Seeks
long-term growth of capital primarily through investment in equity
securities of companies domiciled in, or doing business in, emerging
countries.
LEXINGTON INTERNATIONAL FUND, INC. (NASDAQ Symbol: LEXIX)/Seeks long term growth
of capital through investment in common stocks of companies domiciled
in foreign countries. Shares of the Fund are not presently available
for sale in Vermont, Missouri and Wisconsin.
LEXINGTON CORPORATE LEADERS TRUST FUND (NASDAQ Symbol: LEXCX)/Seeks long-term
capital growth and income through investment in an equal number of
shares of the common stocks of a fixed list of American blue chip
corporations.
LEXINGTON GROWTH AND INCOME FUND, INC. (NASDAQ Symbol: LEXRX)/Seeks long-term
capital appreciation through investments in stocks of large, ably
managed and well financed companies. Income is a secondary objective.
LEXINGTON GOLDFUND, INC. (NASDAQ Symbol: LEXMX)/Seeks capital appreciation and
such hedge against loss of buying power as may be obtained through
investment in gold bullion and equity securities of companies engaged
in mining or processing gold throughout the world. Shares are not
presently available for sale in Wisconsin.
LEXINGTON CONVERTIBLE SECURITIES FUND (NASDAQ Symbol: CNCVX)/Seeks total return
by providing capital appreciation, current income and conservation of
capital through investments in a diversified portfolio of securities
convertible into shares of common stock. Shares of the Fund are not
presently available for sale in Vermont.
LEXINGTON GNMA INCOME FUND, INC. (NASDAQ Symbol: LEXNX)/Seeks a high level of
current income, consistent with liquidity and safety of principal,
through investment primarily in mortgage-backed GNMA Certificates.
LEXINGTON RAMIREZ GLOBAL INCOME FUND (NASDAQ Symbol: LEBOX)/Seeks high current
income. Capital appreciation is a secondary objective.
LEXINGTON SHORT-INTERMEDIATE GOVERNMENT SECURITIES FUND, INC. (NASDAQ Symbol:
LSGXX)/Seeks current income as is consistent with preservation of
capital by investing in a portfolio of U.S. Government securities.
LEXINGTON MONEY MARKET TRUST (NASDAQ Symbol: LMMXX)/Seeks a high level of
current income consistent with preservation of capital and liquidity
through investments in interest bearing short term money market
instruments.
LEXINGTON TAX FREE MONEY FUND, INC. (NASDAQ Symbol: LTFXX)/Seeks current income
exempt from Federal income taxes while maintaining liquidity and
stability of principal through investment in short-term municipal
securities.
Shareholders in any of these Funds may exchange all or part of their shares
of one or more of the other Funds, subject to the conditions described herein.
The Exchange Privilege enables a shareholder in any of these Funds to acquire
shares in a Fund with different investment objectives when the shareholder
believes that a shift between Funds is an appropriate investment decision.
Shareholders contemplating an exchange should obtain and review the prospectus
of the Fund to be acquired. If an exchange involves investing in a Lexington
Fund not already owned and a new account has to be established, the dollar
amount exchanged must meet the minimum initial investment of the Fund being
purchased. If, however, an account already exists in the Fund being bought,
there is a $500 minimum exchange required. Shareholders must provide the account
number of the existing account. Any exchange between Funds is in effect, a
redemption of shares in one Fund and a purchase in the other Fund. Shareholders
may recognize gain or loss for Federal income tax purposes upon an exchange
between funds.
Telephone Exchange Provisions-Exchange instructions may be given in writing or
by telephone. Telephone exchanges may only be made if a Telephone Authorization
form has been previously executed and filed with LFD. Telephone exchanges are
permitted only after a minimum of 7 days have elapsed from the date of a
previous exchange. Exchanges may not be made until all checks in payment for the
shares to be exchanged have been cleared.
Telephonic exchanges can only involve shares held on deposit at the Agent;
shares held in certificate form by the shareholder cannot be included. However,
outstanding certificates can be returned to the Agent and qualify for these
services. Any new account established with the same registration will also have
the privilege of exchange by telephone in the Lexington Funds. All accounts
involved in a telephonic exchange must have the same registration and dividend
15
<PAGE>
option as the account from which the shares were transferred and will also have
the privilege of exchange by telephone in the Lexington Funds in which these
services are available.
By checking the box on the New Account Application authorizing telephone
exchange services, a shareholder constitutes and appoints LFD distributor of the
Lexington Group of Mutual Funds as the true and lawful attorney to surrender for
redemption or exchange any and all non-certificated shares held by the Agent in
account(s) designated, or in any other account with the Lexington Funds, present
or future, which has the identical registration with full power of substitution
in any of these accounts, to purchase shares of any other Lexington Fund that is
available, provided the registration and mailing address of the shares to be
purchased are identical to the registration of the shares being redeemed, and
agrees that neither LFD, the Agent, nor the Fund(s) will be liable for any loss,
expense or cost arising out of any requests effected in accordance with this
authorization which would include requests effected by imposters or persons
otherwise unauthorized to act on behalf of the account. LFD, the Agent and the
Fund, will employ reasonable procedures to confirm that instructions
communicated by telephone are genuine and if they do not employ reasonable
procedures they may be liable for any losses due to unauthorized or fraudulent
instructions. The following identification procedures may include, but are not
limited to, the following: account number, registration and address, taxpayer
identification number and other information particular to the account. In
addition, all exchange transactions will take place on recorded telephone lines
and each transaction will be confirmed in writing by the Fund. LFD reserves the
right to cease to act as agent subject to the above appointment upon thirty
days' written notice to the address of record. If other than an individual, it
is certified that certain persons have been duly elected and are now legally
holding the titles given and that the said corporation, trust, unincorporated
association, etc. is duly organized and existing and has power to take action
called for by this continuing authorization.
Exchange Authorization forms, Telephone Authorization forms and prospectuses
of the other Funds may be obtained from LFD.
LFD has made arrangements with certain dealers to accept instructions by
telephone to exchange shares of the Fund for shares of one of the other
Lexington Funds at net asset value as described above. Under this procedure, the
dealer must agree to indemnify LMC and the funds from any loss or liability that
any of them might incur as a result of the acceptance of such telephone exchange
orders. A properly signed Exchange Authorization must be received by LFD within
five days of the exchange request. In each such exchange, the registration of
the shares of the fund being acquired must be identical to the registration of
the shares of the fund exchanged. Shares in certificate form are not eligible
for this type of exchange. LFD reserves the right to reject any telephone
exchange request. Any telephone exchange orders so rejected may be processed by
mail.
This exchange offer is available only in states where shares of the fund
being acquired may legally be sold and may be modified or terminated at any time
by the Fund. Broker-dealers who process exchange orders on behalf of their
customers may charge a fee for their services. Such fee may be avoided by making
requests for exchange directly to the Fund or Agent.
DIVIDENDS, OTHER DISTRIBUTIONS AND FEDERAL INCOME TAXATION
Dividends and Other Distributions: The Fund pays quarterly dividends from
substantially all of its net investment income, which includes the Fund's net
realized short-term capital gains. Realized net capital gain (the excess of net
long-term capital gain over net short-term capital loss) and net realized gains
from foreign currency transactions, if any, are distributed annually after the
end of each Fund's fiscal year which is December 31.
Shareholders may elect:
* to have all dividends and other distributions automatically reinvested in
additional shares; or
* to receive dividends (which may include short-term capital gains) in cash and
have other distributions automatically reinvested in additional shares; or
* to receive other distributions in cash and have dividends (which may include
short-term capital gains) automatically reinvested in additional shares; or
* to receive dividends and other distributions in cash.
Automatic reinvestments in additional shares are made at net asset value
without imposition of a sales charge. If no election is made by a shareholder,
all dividends and other distributions will be automatically reinvested in
additional Fund shares. These elections may be changed by a shareholder at any
time. To be effective with respect to a distribution, the shareholder must
contact the Transfer Agent by mail or telephone at least 15 Business Days prior
to the payment date. The federal income tax status of dividends and other
distributions is the same whether they are received in cash or reinvested in
additional Fund shares.
16
<PAGE>
Any dividend or other distribution paid by the Fund has the effect of
reducing the net asset value per share on the record date by the amount thereof.
Therefore, a dividend or other distribution paid shortly after a purchase of
shares would represent, in substance, a return of capital to the shareholder (to
the extent it is paid on the shares so purchased), even though subject to income
taxes, as discussed below.
Taxes. The Fund intends to continue to qualify for treatment as a regulated
investment company under the Code. In each taxable year that the Fund so
qualifies, the Fund (but not its shareholders) will be relieved of federal
income tax on that part of its investment company taxable income (consisting
generally of net investment income, net gains from certain foreign currency
transactions and net short-term capital gain) and net capital gain that is
distributed to its shareholders. The Fund expects that it also will not be
liable for any federal excise tax.
Dividends from the Fund's investment company taxable income (whether paid
in cash or reinvested in additional Fund shares) are taxable to its shareholders
as ordinary income to the extent of the Fund's earnings and profits.
Distributions of the Fund's net capital gain (whether paid in cash or reinvested
in additional Fund shares), when designated as such, are taxable to its
shareholders as long-term capital gain, regardless of how long they have held
their Fund shares. Under Internal Revenue Code Sections 988 and 1256, gains
(losses) from certain foreign currency positions are treated as ordinary income
(loss) at year end. Due to the uncertainty during the taxable year surrounding
the amount that might ultimately be treated as a net ordinary loss under these
rules, dividends made during the year may have to be reclassified as returns of
capital at the end of the year.
The Fund provides federal tax information to its shareholders annually,
including information about dividends and other distributions paid during the
preceding year and, under certain circumstances, each shareholder's respective
share of any foreign taxes paid by the Fund, in which event each shareholder
would be required to include in his or her gross income his or her pro rata
share of those taxes, but might be entitled to claim a credit or deduction for
them.
The Fund must withhold 31% from distributions and redemption proceeds
payable to any individuals and certain other noncorporate shareholders who have
not furnished to the Fund a correct taxpayer identification number or a properly
completed claim for exemption on Form W-8 or W-9. Withholding at that rate from
dividends and capital gain distributions is also required for shareholders who
are otherwise subject to backup withholding. Fund accounts opened via a bank
wire purchase (see "How to Purchases Shares") are considered to have uncertified
taxpayer identification numbers unless a completed Form W-8 or W-9 or Account
Application is received by the Transfer Agent within seven days after the
purchase. You should contact the Transfer Agent if you are uncertain whether a
proper taxpayer identification number is on file with the Fund.
A redemption of Fund shares may result in taxable gain or loss to the
redeeming shareholder, depending upon whether the redemption proceeds are more
or less than the shareholder's adjusted basis for the redeemed shares. An
exchange of Fund shares for shares of another Lexington Mutual Fund generally
will have similar tax consequences.
The foregoing is only a summary of some of the important federal tax
considerations generally affecting the Fund and its shareholders. See "Taxes" in
the Statement of Additional Information for a further discussion. There may be
other federal, state, local or foreign tax considerations applicable to a
particular investor. Prospective investors are therefore urged to consult their
tax advisers.
DISTRIBUTION PLAN
The Board of Trustees of the Fund has adopted a Distribution Plan (the
"Plan") in accordance with Rule 12b-1 under the Investment Company Act of 1940,
after having concluded that there is a reasonable likelihood that the Plan will
benefit the Fund and its shareholders. The Plan provides that the Fund may pay
distribution fees, including payments to the Distributor, at an annual rate not
to exceed 0.25% of its average daily net assets for distribution services.
Distribution payments will be made as follows: The Fund either directly or
through the Adviser, may make payments periodically (i) to the Distributor or to
any broker-dealer (a "Broker") who is registered under the Securities Exchange
Act of 1934 and a member in good standing of the National Association of
Securities Dealers, Inc. and who has entered into a Selected Dealer Agreement
with the Distributor, (ii) to other persons or organizations ("Servicing
Agents") who have entered into shareholder processing and service agreements
with the Adviser or with the Distributor, with respect to Fund shares owned by
shareholders for which such Broker is the dealer or holder of record or such
servicing agent has a servicing relationship, or (iii) for expenses associated
with distribution of Fund shares, including the compensation of the sales
personnel of the Distributor; payments of no more than an effective annual rate
of 0.25%, or such lesser amounts as the Distributor determines appropriate.
Payments may also be made for any advertising and promotional expenses relating
to selling efforts, including but not limited to the incremental costs of
printing prospectuses, statements of additional information, annual reports and
other periodic reports for distribution to persons who are not shareholders of
the Fund; the costs of preparing and distributing any other supplemental sales
literature; costs of radio, television, newspaper and other advertising;
telecommunications expenses, including the cost
17
<PAGE>
of telephones, telephone lines and other communications equipment,
(LMC and LFD may also pay, from their own past profits, additional amounts to
third parties for distribution-related expenses) incurred by or for the
Distributor in carrying out its obligations under the Distribution Agreement.
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 is 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.
COUNSEL AND INDEPENDENT AUDITORS
Kramer, Levin, Naftalis, Nessen, Kamin & Frankel, 919 Third Avenue, New
York, New York 10022 will pass upon legal matters for the Fund in connection
with the shares offered by this Prospectus.
KPMG Peat Marwick LLP, 345 Park Avenue, New York, New York 10154, has been
selected as independent auditors for the Fund for the fiscal year ending
December 31, 1995.
OTHER INFORMATION
The Fund adopted its present name and objective on January 3, 1995. Prior to
that date it was organized under the name "Lexington Tax Exempt Bond Trust." The
Fund has an unlimited number of authorized shares, entitled Shares of Beneficial
Interest (without par value). The Fund presently has only one series of shares
but has reserved the right to create and issue additional series of shares, in
which case the shares of each series would participate equally in the earnings,
dividends and assets of the particular series. Shareholders are entitled to one
vote for each share held and shares of each series would vote separately to
approve investment advisory agreements or changes in investment policy, but
shares of all series would vote together in the election of Trustees, principal
underwriters and accountants and on any material amendment to the Fund's
Declaration of Trust. Each share of the Fund represents an equal proportionate
interest in the Fund with each other share. Shares have no preemptive or
conversion rights. Shares are fully paid and non-assessable, except as set forth
below. Upon liquidation of the Fund, its shareholders are entitled to share pro
rata in its net assets available for distribution to shareholders. Shares will
remain on deposit with the Shareholder Servicing Agent and certificates will not
be issued unless requested. Certificates for fractional shares are not issued in
any case.
The Fund is an entity of the type commonly known as a "Massachusetts
Business Trust". Under Massachusetts law, shareholders of such a trust may,
under certain circumstances be held personably liable as partners for its
obligations. However, the risk of a shareholder incurring financial loss on
account of shareholder liability is limited to circumstances in which both
inadequate insurance existed and the Fund itself was unable to meet its
obligations.
The Fund does not intend to hold annual shareholder meetings. Instead
meetings of shareholders will be held only: (1) for the election of trustees;
(2) for the appointment of any new or amended advisory agreement; (3)
ratification of the selection of independent auditors; or (4) approval of the
distribution agreement. Meetings of shareholders may be called at any time by
any Trustee upon the written request of shareholders holding in the aggregate
not less than 10% of the outstanding shares, such request specifying the
purposes for which such meeting is to be called, which may include a proposal to
remove some or all of the Trustees. The Fund will assist shareholders in any
such communication between shareholders and Trustees.
A Registration Statement (herein called the "Registration Statement"), of
which this Prospectus is a part, has been filed with the SEC, Washington, D.C.
under the Securities Act of 1933, as amended.
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus and in the Fund's
official sales literature in connection with the offer of the Fund's shares,
and, if given or made, such other information or representations must not be
relied upon as having been authorized by the Fund. This Prospectus does not
constitute an offer in any State in which, or to any person to whom, such
offering may not lawfully be made. A "Statement of Additional Information," to
which reference is made in the Prospectus, provides a further discussion of
certain areas in the Prospectus and other matters which may be of interest to
some investors and is available by request without cost as indicated herein. The
Prospectus and Statement of Additional Information (Part B) omit certain
information contained in the Registration Statement which has been filed with
the Commission. Items which are thus omitted, including contracts and other
documents referred to summarized herein and therein, may be obtained from the
Commission upon payment of the prescribed fees.
18
<PAGE>
APPENDIX A
DESCRIPTION OF DEBT RATINGS
DESCRIPTION OF BOND RATINGS
Moody's Investors Service, Inc. ("Moody's") rates the debt securities issued
by various entities from "Aaa" to "C". Investment grade ratings are the first
four categories:
Aaa-Best quality. These securities carry the smallest degree of
investment risk and are generally referred to as "gilt edge." Interest
payments are protected by a large or exceptionally stable margin, and
principal is secure. While the various protective elements are likely to
change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa-High quality by all standards. They are rated lower than the best
bond because margins of protection may not be as large as in Aaa securities,
fluctuation of protective elements may be of greater amplitude, or there may
be other elements present which make the long-term risks appear somewhat
greater.
A-Upper medium grade obligations. These bonds possess many favorable
investment attributes. Factors giving security to principal and interest are
considered adequate, but elements may be present which suggest a
susceptibility to impairment sometime in the future.
Baa-Medium grade obligations. Interest payments and principal security
appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of
time. Such bonds lack outstanding investment characteristics and, in fact,
have speculative characteristics as well.
Ba-Have speculative elements and their future cannot be considered to be
well assured. Often the protection of interest and principal payments may be
very moderate and thereby not well safeguarded during other good and bad
times over the future. Uncertainty of position characterizes bonds in this
class.
B-Generally lack characteristics of the desirable investment. Assurance
of interest and principal payments or of maintenance of other terms of the
contract over any long period of time may be small.
Caa-Poor standing. Such issues may be in default or there may be present
elements of danger with respect to principal or interest.
Ca-Speculative in a high degree. Such issues are often in default or
have other marked shortcomings.
C-Lowest rated class of bonds. Issues so rated can be regarded as having
extremely poor prospects of ever attaining any real investment standing.
Absence of Rating
Where no rating has been assigned or where a rating has been suspended or
withdrawn, it may be for reasons unrelated to the quality of the issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities that are not rated
as a matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issue was privately placed, in which case the rating is not published
in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise,
the effects of which preclude satisfactory analysis; if there is no longer
available reasonable up-to-date data to permit a judgement to be formed; if a
bond is called for redemption; or for other reasons.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic ratings
classification from Aa through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
A-1
<PAGE>
Standard & Poor's Rating Group ("S&P") rates the securities debt of various
entities in categories ranging from "AAA" to "D" according to quality.
Investment grade ratings are the first four categories:
AAA-Highest rating. Capacity to pay interest and repay principal is
extremely strong.
AA-High grade. Very strong capacity to pay interest and repay principal.
Generally, these bonds differ from AAA issues only in a small degree.
A-Have a strong capacity to pay interest and repay principal although
they are somewhat more susceptible to the adverse effects of change in
circumstances and economic conditions than debt in higher rated categories.
BBB-Regarded as having adequate capacity to pay interest and repay
principal. These bonds normally exhibit adequate protection parameters, but
adverse economic conditions or changing circumstances are more likely to
lead to a weakened capacity to pay interest and repay principal than for
debt in higher rated categories.
BB, B, CCC, CC, C-Debt rated "BB," "B," "CCC," "CC," and "C" are
regarded, on balance, as predominantly speculative with respect to capacity
to pay interest and repay principal in accordance with the terms of this
obligation. "BB" indicates the lowest degree of speculation and "C" the
highest degree of speculation. While such debt will likely have some quality
and protective characteristics, these are outweighed by large uncertainties
or major risk exposures to adverse conditions.
BB-Has less near-term vulnerability to default than other speculative
issues; however, it faces major ongoing uncertainties or exposure to adverse
business, financial or economic conditions, which could lead to inadequate
capacity to meet timely interest and principal payments. The "BB" rating
category is also used for debt subordinated to senior debt that is assigned
an actual or implied "BBB-" rating.
B-Has a greater vulnerability to default but currently has the capacity
to meet interest payments and principal repayments. Adverse business,
financial or economic conditions will likely impair capacity or willingness
to pay interest and repay principal. The "B" rating category is also used
for debt subordinated to senior debt that is assigned an actual or implied
"BB" or "BB-" rating.
CCC-Has a currently indefinable vulnerability to default, and is
dependent upon favorable business, financial and economic conditions to meet
timely payment of interest and repayment of principal. In the event of
adverse business, financial or economic conditions, it is not likely to have
the capacity to pay interest and repay principal. The "CCC" rating category
is also used for debt subordinated to senior debt that is assigned an actual
or implied "B" or "B-" rating.
CC-Typically applied to debt subordinated to senior debt that is
assigned an actual or implied "CCC" rating.
C-Typically applied to debt subordinated to senior debt which is
assigned an actual or implied "CCC-" debt rating. The "C" rating may be used
to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.
C-Reserved for income bonds on which no interest is being paid.
D-In payment default. The "D" rating is used when interest payments are
not made on the date due even if the applicable grace period has not
expired, unless S&P believes that such payments will be made during such
grace period. The "D" rating also will be used upon the filing of a
bankruptcy petition if debt service payments are jeopardized.
Plus (+) or Minus (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
NR: Indicates that no rating has been requested, that there is insufficient
information on which to base a rating, or that S&P does not rate a particular
type of obligation as a matter of policy.
A-2
<PAGE>
DESCRIPTION OF COMMERCIAL PAPER RATINGS
Moody's employs the designations "Prime-1" and "Prime-2" to indicate
commercial paper having the highest capacity for timely repayment. Issuers rated
Prime-1 have a superior capacity for repayment of short-term promissory
obligations. Prime-1 repayment capacity normally will be evidenced by the
following characteristics: leading market positions in well-established
industries; high rates of return on funds employed; conservative capitalization
structures with moderate reliance on debt and ample asset protections; broad
margins in earnings coverage of fixed financial charges and high internal cash
generation; and well-established access to a range of financial markets and
assured sources of alternate liquidity. Issues rated Prime-2 have a strong
capacity for repayment of short-term promissory obligations. This normally will
be evidenced by many of the characteristics cited above, but to a lesser degree.
Earnings trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
S&P ratings of commercial paper are graded into four categories ranging from
"A" for the highest quality obligations to "D" for the lowest. A-Issues assigned
its highest rating are regarded as having the greatest capacity for timely
payment. Issues in this category are delineated with numbers 1, 2 and 3 to
indicate the relative degree of safety. A-1--This designation indicates that the
degree of safety regarding timely payment is either overwhelming or very strong.
Those issues determined to possess overwhelming safety characteristics will be
denoted with a plus (++) sign designation. A-2--Capacity for timely payments on
issues with this designation is strong; however, the relative degree of safety
is not as high as for issues designated "A-1."
A-3
<PAGE>
APPENDIX B
The countries which the Fund considers to represent emerging countries or
countries with emerging markets are set forth below. Each country in which the
Fund invests is subject to prior approval of the Fund's Board of Trustees. The
Fund may also invest in debt securities and equivalents traded in any market of
companies that derive 50% or more of their total revenue from either goods or
services produced in such emerging countries and emerging markets or sales made
in such countries.
ALGERIA CYPRUS INDONESIA NIGERIA SOUTH KOREA
ARGENTINA CZECH REPUBLIC ISRAEL PAKISTAN SRI LANKA
BANGLADESH DOMINICAN REPUBLIC IVORY COAST PANAMA TAIWAN
BOLIVIA ECUADOR JAMAICA PERU THAILAND
BOTSWANA EGYPT JORDAN PHILIPPINES TRINIDAD & TOBAGO
BRAZIL FINLAND KENYA POLAND TUNISIA
BULGARIA GHANA MALAYSIA PORTUGAL TURKEY
CHILE GREECE MAURITIUS RUSSIA URUGUAY
CHINA HONG KONG MEXICO SLOVAKIA VENEZUELA
COLOMBIA HUNGARY MOROCCO SINGAPORE ZAMBIA
COSTA RICA INDIA NICARAGUA SOUTH AFRICA ZIMBABWE
B-1
<PAGE>
-----------------
L E X I N G T O N
-----------------
-------------------
LEXINGTON
RAMIREZ
GLOBAL
INCOME
FUND
-------------------
Capital appreciation
potential
Free telephone
exchange privilege
No sales charge
-------------------
The Lexington Group
of
No-Load
Investment Companies
-------------------
P R O S P E C T U S
MAY 1, 1995
-----------
Investment Adviser
- -----------------------------------------------------------
LEXINGTON MANAGEMENT CORPORATION
P.O. Box 1515/Park 80 West Plaza Two
Saddle Brook, N.J. 07663
Sub-Adviser
- -----------------------------------------------------------
MFR ADVISORS, INC.
One World Financial Center
200 Liberty Street
New York, N.Y. 10281
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 should be
sent to:
Transfer Agent
- -----------------------------------------------------------
STATE STREET BANK AND TRUST COMPANY
c/o National Financial Data Services
1004 Baltimore
Kansas City, Missouri 64105
Or call toll free:
Service: 1-800-526-0056
24 Hour Account Information: 1-800-526-0052
Table of Contents Page
- -----------------------------------------------------------
Fee Table ............................................. 2
Financial Highlights .................................. 2
Description of the Fund ............................... 3
Yield and Total Return ................................ 3
Comparative Performance Information ................... 3
Investment Objectives and Policies .................... 3
Investment Policies ................................... 4
Certain Investment Methods ............................ 5
Risk Factors .......................................... 8
Management of the Fund ................................ 11
Portfolio Managers .................................... 11
Investment Adviser, Sub-Adviser, Distributor and
Administrator ....................................... 12
Determination of Net Asset Value ...................... 12
How to Purchase Shares ................................ 13
How to Redeem Shares .................................. 13
Shareholder Services .................................. 14
Exchange Privilege .................................... 14
Dividends, Other Distributions and
Federal Income Taxation ............................. 16
Distribution Plan ..................................... 17
Custodian, Transfer Agent and
Dividend Disbursing Agent ........................... 17
Counsel and Independent Auditors ...................... 17
Other Information ..................................... 17
<PAGE>
LEXINGTON RAMIREZ GLOBAL INCOME FUND
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 1995
This statement of additional information which is not a prospectus,
should be read in conjunction with the current prospectus of Lexington
Ramirez Global Income Fund (the "Fund"), dated May 1, 1995 as it may be
revised from time to time. Prior to this date the Fund was known as
"Lexington Tax Exempt Bond Trust" and operated under a different investment
objective. 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
24-Hour Account Information: 1-800-526-0052
Lexington Management Corporation ("LMC") serves as the Fund's
Investment Adviser. MFR Advisors, Inc. serves as the Fund's Sub-Adviser.
Lexington Funds Distributor, Inc. ("LFD") serves as the Fund's Distributor.
TABLE OF CONTENTS
Investment Objective and Policies. . . . . . . . . . . . . . . . . . . 2
Derivative Instruments: Options, Futures and Forward Currency Strategies5
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13
Investment Restrictions. . . . . . . . . . . . . . . . . . . . . . . .16
Portfolio Transactions . . . . . . . . . . . . . . . . . . . . . . . .17
Valuation of Fund Shares . . . . . . . . . . . . . . . . . . . . . . .19
Investment Adviser, Sub-Adviser, Distributor and Administrator. . . .20
Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22
Distribution Plan. . . . . . . . . . . . . . . . . . . . . . . . . . .25
Custodian, Transfer Agent and Dividend Disbursing Agent. . . . . . . .26
Management of the Fund . . . . . . . . . . . . . . . . . . . . . . . .26
Investment Return Information. . . . . . . . . . . . . . . . . . . . .29
1
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The Fund seeks high current income. Capital appreciation is a
secondary objective. The Fund is a non-diversified open-end management
investment company. The Fund, under normal circumstances, invests
substantially all of its assets in debt securities of issuers in the United
States, developed foreign countries and emerging markets. For purposes of
its investment objective, the Fund considers an emerging country to be any
country whose economy and market the World Bank or United Nations considers
to be emerging or developing. The Fund may also invest in debt securities
traded in any market, of companies that derive 50% or more of their total
revenue from either goods or services produced in such emerging countries
and emerging markets or sales made in such countries. Determinations as to
eligibility will be made by LMC and MFR based on publicly available
information and inquiries made to the companies. It is possible in the
future that sufficient numbers of emerging country or emerging market debt
securities would be traded on securities markets in industrialized countries
so that a major portion, if not all, of the Fund's assets would be invested
in securities traded on such markets, although such a situation is unlikely
at present.
Currently, investing in many of the emerging countries and emerging
markets is not feasible or may involve political risks. Accordingly, LMC
currently intends to consider investments only in those countries in which
it believes investing is feasible and does not involve such risks. The list
of acceptable countries will be reviewed by LMC and MFR and approved by the
Board of Trustees on a periodic basis and any additions or deletions with
respect to such list will be made in accordance with changing economic and
political circumstances involving such countries. (See Appendix B in the
Prospectus.)
Selection of Debt Investments
LMC is the investment manager and MFR is the sub-adviser of the Fund.
In determining the appropriate distribution of investments among various
countries and geographic regions for the Fund, LMC and MFR ordinarily
consider the following factors: prospects for relative economic growth among
the different countries in which the Fund may invest; expected levels of
inflation; government policies influencing business conditions; the outlook
for currency relationships; and the range of the individual investment
opportunities available to international investors.
Although the Fund values assets daily in terms of U.S. dollars, the
Fund does not intend to convert holdings of foreign currencies into U.S.
dollars on a daily basis. The Fund will do so from time to time, and
investors should be aware of the costs of currency conversion. Although
foreign exchange dealers do not charge a fee for conversion, they do realize
a profit based on the difference ("spread") between the prices at which they
are buying and selling various currencies. Thus, a dealer may offer to sell
a foreign currency to the Fund at one rate, while offering a lesser rate of
exchange should the Fund desire to sell that currency to the dealer.
The Fund may invest in the following types of money market instruments
(i.e., debt instruments with less than 12 months remaining until maturity)
denominated in U.S. dollars or other currencies: (a) obligations issued or
guaranteed by the U.S. or foreign governments, their agencies,
instrumentalities or municipalities; (b) obligations of international
organizations designed or supported by multiple foreign governmental
entities to promote economic reconstruction or development; (c) finance
company obligations, corporate commercial paper and other short-term
commercial obligations; (d) bank obligations (including certificates of
deposit, time deposits, demand deposits and bankers' acceptances), subject
to the restriction that the Fund may not invest more than 25% of its total
assets in bank securities; (e) repurchase agreements with respect to the
foregoing; and (f) other substantially similar short-term debt securities
with comparable characteristics.
2
<PAGE>
Samurai and Yankee Bonds
Subject to its respective fundamental investment restrictions, the
Fund may invest in yen-denominated bonds sold in Japan by non-Japanese
issuers ("Samurai bonds"), and may invest in dollar-denominated bonds sold
in the United States by non-U.S. issuers ("Yankee bonds"). It is the policy
of the Fund to invest in Samurai or Yankee bond issues only after taking
into account considerations of quality and liquidity, as well as yield.
Commercial Bank Obligations
For the purposes of the Fund's investment policies with respect to
bank obligations, obligations of foreign branches of U.S. banks and of
foreign banks are obligations of the issuing bank and may be general
obligations of the parent bank. Such obligations, however, may be limited
by the terms of a specific obligation and by government regulation. As with
investment in non-U.S. securities in general, investments in the obligations
of foreign branches of U.S. banks and of foreign banks may subject the Fund
to investment risks that are different in some respect from those of
investments in obligations of domestic issuers. Although the Fund typically
will acquire obligations issued and supported by the credit of U.S. or
foreign banks having total assets at the time of purchase in excess of $1
billion, this $1 billion figure is not a fundamental investment policy or
restriction of the Fund. For the purposes of calculation with respect to the
$1 billion figure, the assets of a bank will be deemed to include the assets
of its U.S. and non-U.S. branches.
Repurchase Agreements, Reverse Repurchase Agreements and Roll Transactions
Although repurchase agreements carry certain risks not associated with
direct investments in securities, the Fund intends to enter into repurchase
agreements only with banks and broker/dealers believed by LMC and MFR to
present minimal credit risks in accordance with guidelines approved by the
Company's Board of Trustees. LMC and MFR will review and monitor the
creditworthiness of such institutions, and will consider the capitalization
of the institution, LMC and MFR's prior dealings with the institution, any
rating of the institution's senior long-term debt by independent rating
agencies and other relevant factors.
The Fund will invest only in repurchase agreements collateralized at
all times in an amount at least equal to the repurchase price plus accrued
interest. To the extent that the proceeds from any sale of such collateral
upon a default in the obligation to repurchase were less than the repurchase
price, the Fund would suffer a loss. If the financial institution which is
party to the repurchase agreement petitions for bankruptcy or otherwise
becomes subject to bankruptcy or other liquidation proceedings there may be
restrictions on the Fund's ability to sell the collateral and the Fund could
suffer a loss. However, with respect to financial institutions whose
bankruptcy or liquidation proceedings are subject to the U.S. Bankruptcy
Code, the Fund intends to comply with provisions under such Code that would
allow the immediate resale of such collateral. The Fund will not enter into
a repurchase agreement with a maturity of more than seven days if, as a
result, more than 15% of the value of its net assets would be invested in
such repurchase agreements and other illiquid investments and securities for
which no readily available market exists.
The Fund may enter into reverse repurchase agreements. A reverse
repurchase agreement is a borrowing transaction in which the Fund transfers
possession of a security to another party, such as a bank or broker/dealer,
in return for cash, and agrees to repurchase the security in the future at
an agreed upon price, which includes an interest component. The Fund also
may engage in "roll" borrowing transactions which involve the Fund's sale
of fixed income securities together with a commitment (for which the Fund
may receive a fee) to purchase similar, but not identical, securities at a
future date. The Fund will maintain, in a segregated account with a
custodian, cash, U.S. government securities or other liquid, high grade debt
securities in an amount sufficient to cover its obligation under "roll"
transactions and reverse repurchase agreements.
3
<PAGE>
Borrowing
The Fund is prohibited from borrowing money in order to purchase
securities. The Fund may borrow up to 5% of its total assets for temporary
or emergency purposes other than to meet redemptions. Any borrowing by the
Fund may cause greater fluctuation in the value of its shares than would be
the case if the Fund did not borrow.
Short Sales
The Fund is authorized to make short sales of securities, although it
has no current intention of doing so. A short sale is a transaction in which
the Fund sells a security in anticipation that the market price of that
security will decline. The Fund may make short sales as a form of hedging
to offset potential declines in long positions in securities it owns and in
order to maintain portfolio flexibility. The Fund only may make short sales
"against the box." In this type of short sale, at the time of the sale, the
Fund owns the security it has sold short or has the immediate and
unconditional right to acquire the identical security at no additional cost.
In a short sale, the seller does not immediately deliver the
securities sold and does not receive the proceeds from the sale. To make
delivery to the purchaser, the executing broker borrows the securities being
sold short on behalf of the seller. The seller is said to have a short
position in the securities sold until it delivers the securities sold, at
which time it receives the proceeds of the sale. To secure its obligation
to deliver securities sold short, the Fund will deposit in a separate
account with its custodian an equal amount of the securities sold short or
securities convertible into or exchangeable for such securities at no cost.
The Fund could close out a short position by purchasing and delivering an
equal amount of the securities sold short, rather than by delivering
securities already held by the Fund, because the Fund might want to continue
to receive interest and dividend payments on securities in its portfolio
that are convertible into the securities sold short.
The Fund might make a short sale "against the box" in order to hedge
against market risks when LMC and MFR believes that the price of a security
may decline, causing a decline in the value of a security owned by the Fund
or a security convertible into or exchangeable for such security, or when
LMC and MFR want to sell the security the Fund owns at a current attractive
price, but also wishes to defer recognition or gain or loss for federal
income tax purposes and for purposes of satisfying certain tests applicable
to regulated investment companies under the Internal Revenue Code of 1986,
as amended (the "Code"). In such case, any future losses in the Fund's long
position should be reduced by a gain in the short position. Conversely, any
gain in the long position should be reduced by a loss in the short position.
The extent to which such gains or losses in the long position are reduced
will depend upon the amount of the securities sold short relative to the
amount of the securities the Fund owns, either directly or indirectly, and,
in the case where a Fund owns convertible securities, changes in the
investment values or conversion premiums of such securities. There will be
certain additional transaction costs associated with short sales "against
the box," but the Fund will endeavor to offset these costs with income from
the investment of the cash proceeds of short sales.
Illiquid Securities
The Fund may invest up to 15% of net assets in illiquid securities.
Securities may be considered illiquid if the Fund cannot reasonably expect
to receive approximately the amount at which the Fund values such securities
within seven days. The sale of illiquid securities, if they can be sold at
all, generally will require more time and result in higher brokerage charges
or dealer discounts and other selling expenses than will the sale of liquid
securities, such as securities eligible for trading on U.S. securities
exchanges or in the over-the-counter markets. Moreover, restricted
securities, which may be illiquid for purposes of this limitation often
sell, if at all, at a price lower than similar securities that are not
subject to restrictions on resale.
4
<PAGE>
With respect to liquidity determinations generally, the Company's
Board of Trustees has the ultimate responsibility for determining whether
specific securities, including restricted securities pursuant to Rule 144A
under the Securities Act of 1933, are liquid or illiquid. The Board has
delegated the function of making day-to-day determinations of liquidity to
LMC and MFR in accordance with procedures approved by the Fund's Board of
Trustees. LMC and MFR take into account a number of factors in reaching
liquidity decisions, including, but not limited to: (i) the frequency of
trading in the security; (ii) the number of dealers that make quotes for the
security; (iii) the number of dealers that have undertaken to make a market
in the security; (iv) the number of other potential purchasers; and (v) the
nature of the security and how trading is effected (e.g., the time needed
to sell the security, how offers are solicited and the mechanics of
transfer). LMC and MFR will monitor the liquidity of securities held by the
Fund and report periodically on such decisions to the Board of Trustees.
DERIVATIVE INSTRUMENTS: OPTIONS, FUTURES AND FORWARD CURRENCY STRATEGIES
Writing Covered Call Options
The Fund may write (sell) covered call options. Covered call options
generally will be written on securities and currencies which, in the opinion
of LMC and MFR are not expected to make any major price moves in the near
future but which, over the long term, are deemed to be attractive
investments for the Fund.
A call option gives the holder (buyer) the right to purchase a
security or currency at a specified price (the exercise price) at any time
until a certain date (the expiration date). So long as the obligation of the
writer of a call option continues, he may be assigned an exercise notice by
the broker/dealer through whom such option was sold, requiring him to
deliver the underlying security or currency against payment of the exercise
price. This obligation terminates upon the expiration of the call option,
or such earlier time at which the writer effects a closing purchase
transaction by purchasing an option identical to that previously sold. LMC,
MFR and the Fund believe that writing of covered call options is less risky
than writing uncovered or "naked" options, which the Fund will not do.
Portfolio securities or currencies on which call options may be
written will be purchased solely on the basis of investment considerations
consistent with the Fund's investment objectives. When writing a covered
call option, the Fund in return for the premium gives up the opportunity for
profit from a price increase in the underlying security or currency above
the exercise price, and retains the risk of loss should the price of the
security or currency decline. Unlike one who owns securities or currencies
not subject to an option, the Fund has no control over when it may be
required to sell the underlying securities or currencies, since the option
may be exercised at any time prior to the option's expiration. If a call
option which the Fund has written expires, the Fund will realize a gain in
the amount of the premium; however, such gain may be offset by a decline in
the market value of the underlying security or currency during the option
period. If the call option is exercised, the Fund will realize a gain or
loss from the sale of the underlying security or currency. The Fund does not
consider a security or currency covered by a call option to be "pledged" as
that term is used in the Fund's fundamental investment policy which limits
the pledging or mortgaging of its assets.
5
<PAGE>
The premium which the Fund receives for writing a call option is
deemed to constitute the market value of an option. The premium the Fund
will receive from writing a call option will reflect, among other things,
the current market price of the underlying security or currency, the
relationship of the exercise price to such market price, the historical
price volatility of the underlying security or currency, and the length of
the option period. In determining whether a particular call option should
be written on a particular security or currency, LMC and MFR will consider
the reasonableness of the anticipated premium and the likelihood that a
liquid secondary market will exist for those options. The premium received
by the Fund for writing covered call options will be recorded as a liability
in the Fund's statement of assets and liabilities. This liability will be
adjusted daily to the option's current market value, which will be the
latest sales price at the time which the net asset value per share of the
Fund is computed at the close of regular trading on the NYSE (currently,
4:00 Eastern time, unless weather, equipment failure or other factors
contribute to an earlier closing time), or, in the absence of such sale, the
latest asked price. The liability will be extinguished upon expiration of
the option, the purchase of an identical option in a closing transaction,
or delivery of the underlying security or currency upon the exercise of the
option.
Closing transactions will be effected in order to realize a profit on
an outstanding call option, to prevent an underlying security or currency
from being called, or to permit the sale of the underlying security or
currency. Furthermore, effecting a closing transaction will permit the Fund
to write another call option on the underlying security or currency with
either a different exercise price, expiration date or both. If the Fund
desires to sell a particular security or currency from its portfolio on
which it has written a call option, or purchased a put option, it will seek
to effect a closing transaction prior to, or concurrently with, the sale of
the security or currency. There is no assurance that the Fund will be able
to effect such closing transactions at favorable prices. If the Fund cannot
enter into such a transaction, it may be required to hold a security or
currency that it might otherwise have sold, in which case it would continue
to be at market risk with respect to the security or currency.
The Fund will pay transaction costs in connection with the writing of
options and in entering into closing purchase contracts. Transaction costs
relating to options activity normally are higher than those applicable to
purchases and sales of portfolio securities.
Call options written by the Fund normally will have expiration dates
of less than nine months from the date written. The exercise price of the
options may be below, equal to or above the current market values of the
underlying securities or currencies at the time the options are written.
From time to time, the Fund may purchase an underlying security or currency
for delivery in accordance with the exercise of an option, rather than
delivering such security or currency from its portfolio. In such cases,
additional costs will be incurred.
The Fund will realize a profit or loss from a closing purchase
transaction if the cost of the transaction is less or more, respectively,
than the premium received from the writing of the option. Because increases
in the market price of a call option generally will reflect increases in the
market price of the underlying security or currency, any loss resulting from
the repurchase of a call option is likely to be offset in whole or in part
by appreciation of the underlying security or currency owned by the Fund.
Writing Covered Put Options
The Fund may write covered put options. A put option gives the
purchaser of the option the right to sell, and the writer (seller) the
obligation to buy, the underlying security or currency at the exercise price
during the option period. The option may be exercised at any time prior to
its expiration date. The operation of put options in other respects,
including their related risks and rewards, is substantially identical to
that of call options.
6
<PAGE>
The Fund would write put options only on a covered basis, which means
that the Fund would either (i) set aside cash, U.S. government securities
or other liquid, high-grade debt securities in an amount not less than the
exercise price at all times while the put option is outstanding (the rules
of the Options Clearing Corporation currently require that such assets be
deposited in escrow to secure payment of the exercise price), (ii) sell
short the security or currency underlying the put option at the same or
higher price than the exercise price of the put option, or (iii) purchase
a put option, if the exercise price of the purchased put option is the same
or higher than the exercise price of the put option sold by the Fund. The
Fund generally would write covered put options in circumstances where LMC
and MFR wish to purchase the underlying security or currency for the Fund's
portfolio at a price lower than the current market price of the security or
currency. In such event, the Fund would write a put option at an exercise
price which, reduced by the premium received on the option, reflects the
lower price it is willing to pay. Since the Fund also would receive interest
on debt securities or currencies maintained to cover the exercise price of
the option, this technique could be used to enhance current return during
periods of market uncertainty. The risk in such a transaction would be that
the market price of the underlying security or currency would decline below
the exercise price less the premiums received.
Purchasing Put Options
The Fund may purchase put options. As the holder of a put option, the
Fund would have the right to sell the underlying security or currency at the
exercise price at any time during the option period. The Fund may enter into
closing sale transactions with respect to such options, exercise them or
permit them to expire.
The Fund may purchase a put option on an underlying security or
currency ("protective put") owned by the Fund as a hedging technique in
order to protect against an anticipated decline in the value of the security
or currency. Such hedge protection is provided only during the life of the
put option when the Fund, as the holder of the put option, is able to sell
the underlying security or currency at the put exercise price regardless of
any decline in the underlying security's market price or currency's exchange
value. For example, a put option may be purchased in order to protect
unrealized appreciation of a security or currency when LMC and MFR deem it
desirable to continue to hold the security or currency because of tax
considerations. The premium paid for the put option and any transaction
costs would reduce any capital gain otherwise available for distribution
when the security or currency eventually is sold.
The Fund also may purchase put options at a time when the Fund does
not own the underlying security or currency. By purchasing put options on
a security or currency it does not own, the Fund seeks to benefit from a
decline in the market price of the underlying security or currency. If the
put option is not sold when it has remaining value, and if the market price
of the underlying security or currency remains equal to or greater than the
exercise price during the life of the put option, the Fund will lose its
entire investment in the put option. In order for the purchase of a put
option to be profitable, the market price of the underlying security or
currency must decline sufficiently below the exercise price to cover the
premium and transaction cost, unless the put option is sold in a closing
sale transaction.
The premium paid by the Fund when purchasing a put option will be
recorded as an asset in the Fund's statement of assets and liabilities. This
asset will be adjusted daily to the option's current market value, which
will be the latest sale price at the time at which the net asset value per
share of the Fund is computed (at the close of regular trading on the NYSE),
or, in the absence of such sale, the latest bid price. The asset will be
extinguished upon expiration of the option, the writing of an identical
option in a closing transaction, or the delivery of the underlying security
or currency upon the exercise of the option.
7
<PAGE>
Purchasing Call Options
The Fund may purchase call options. As the holder of a call option,
the Fund would have the right to purchase the underlying security or
currency at the exercise price at any time during the option period. The
Fund may enter into closing sale transactions with respect to such options,
exercise them or permit them to expire. Call options may be purchased by the
Fund for the purpose of acquiring the underlying security or currency for
its portfolio. Utilized in this fashion, the purchase of call options would
enable the Fund to acquire the security or currency at the exercise price
of the call option plus the premium paid. At times, the net cost of
acquiring the security or currency in this manner may be less than the cost
of acquiring the security or currency directly. This technique also may be
useful to the Fund in purchasing a large block of securities that would be
more difficult to acquire by direct market purchases. So long as it holds
such a call option rather than the underlying security or currency itself,
the Fund is partially protected from any unexpected decline in the market
price of the underlying security or currency and in such event could allow
the call option to expire, incurring a loss only to the extent of the
premium paid for the option.
The Fund also may purchase call options on underlying securities or
currencies it owns in order to protect unrealized gains on call options
previously written by it. A call option would be purchased for this purpose
where tax considerations make it inadvisable to realize such gains through
a closing purchase transaction. Call options also may be purchased at times
to avoid realizing losses that would result in a reduction of the Fund's
current return. For example, where the Fund has written a call option on an
underlying security or currency having a current market value below the
price at which such security or currency was purchased by the Fund, an
increase in the market price could result in the exercise of the call option
written by the Fund and the realization of a loss on the underlying security
or currency with the same exercise price and expiration date as the option
previously written.
Aggregate premiums paid for put and call options will not exceed 5%
of the Fund's total assets at the time of purchase.
The Fund may attempt to accomplish objectives similar to those
involved in using Forward Contracts (defined below), as described in the
Prospectus, by purchasing put or call options on currencies. A put option
gives the Fund as purchaser the right (but not the obligation) to sell a
specified amount of currency at the exercise price until the expiration of
the option. A call option gives the Fund as purchaser the right (but not the
obligation) to purchase a specified amount of currency at the exercise price
until its expiration. The Fund might purchase a currency put option, for
example, to protect itself during the contract period against a decline in
the dollar value of a currency in which it holds or anticipates holding
securities. If the currency's value should decline against the dollar, the
loss in currency value should be offset, in whole or in part, by an increase
in the value of the put. If the value of the currency instead should rise
against the dollar, any gain to the Fund would be reduced by the premium it
had paid for the put option. A currency call option might be purchased, for
example, in anticipation of, or to protect against, a rise in the value
against the dollar of a currency in which the Fund anticipates purchasing
securities.
Currency options may be either listed on an exchange or traded
over-the-counter ("OTC options"). Listed options are third-party contracts
(i.e., performance of the obligations of the purchaser and seller is
guaranteed by the exchange or clearing corporation), and have standardized
strike prices and expiration dates. OTC options are two-party contracts with
negotiated strike prices and expiration dates. The Securities and Exchange
Commission ("SEC") staff considers OTC options to be illiquid securities.
The Fund will not purchase an OTC option unless the Fund believes that daily
valuations for such options are readily obtainable. OTC options differ from
exchange-traded options in that OTC options are transacted with dealers
directly and not through a clearing corporation (which guarantees
performance). Consequently, there is a risk of non-performance by the
dealer. Since no exchange is involved, OTC options are valued on the basis
of a quote provided by the dealer. In the case of OTC options, there can be
no assurance that a liquid secondary market will exist for any particular
option at any specific time.
8
<PAGE>
Interest Rate and Currency Futures Contracts
The Fund may enter into interest rate or currency futures contracts
("Futures" or "Futures Contracts") as a hedge against changes in prevailing
levels of interest rates or currency exchange rates in order to establish
more definitely the effective return on securities or currencies held or
intended to be acquired by the Fund. The Fund's hedging may include sales
of Futures as an offset against the effect of expected increases in interest
rates or currency exchange rates, and purchases of Futures as an offset
against the effect of expected declines in interest rates or currency
exchange rates.
The Fund will not enter into Futures Contracts for speculation and the
Fund only will enter into Futures Contracts which are traded on national
futures exchanges and are standardized as to maturity date and underlying
financial instrument. The principal interest rate and currency Futures
exchanges in the United States are the Board of Trade of the City of Chicago
and the Chicago Mercantile Exchange. Futures exchanges and trading are
regulated under the Commodity Exchange Act by the Commodity Futures Trading
Commission ("CFTC"). Futures are exchanged in London at the London
International Financial Futures Exchange.
Although techniques other than sales and purchases of Futures
Contracts could be used to reduce the Fund's exposure to interest rate and
currency exchange rate fluctuations, the Fund may be able to hedge exposure
more effectively and at a lower cost through using Futures Contracts.
The Fund will not enter into a Futures Contract if, as a result
thereof, more than 5% of the Fund's total assets (taken at market value at
the time of entering into the contract) would be committed to "margin" (down
payment) deposits on such Futures Contracts.
An interest rate Futures Contract provides for the future sale by one
party and purchase by another party of a specified amount of a specific
financial instrument (debt security or currency) for a specified price at
a designated date, time and place. Brokerage fees are incurred when a
Futures Contract is bought or sold, and margin deposits must be maintained
at all times the Futures Contract is outstanding.
Although Futures Contracts typically require future delivery of and
payment for financial instruments or currencies, Futures Contracts usually
are closed out before the delivery date. Closing out an open Futures
Contract sale or purchase is effected by entering into an offsetting Futures
Contract purchase or sale, respectively, for the same aggregate amount of
the identical financial instrument or currency and the same delivery date.
If the offsetting purchase price is less than the original sale price, the
Fund realizes a gain; if it is more, the Fund realizes a loss. Conversely,
if the offsetting sale price is more than the original purchase price, the
Fund realizes a gain; if it is less, the Fund realizes a loss. The
transaction costs also must be included in these calculations. There can be
no assurance, however, that the Fund will be able to enter into an
offsetting transaction with respect to a particular Futures Contract at a
particular time. If the Fund is not able to enter into an offsetting
transaction, the Fund will continue to be required to maintain the margin
deposits on the Futures Contract.
As an example of an offsetting transaction, the contractual
obligations arising from the sale of one Futures Contract of October
Deutschemarks on an exchange may be fulfilled at any time before delivery
under the Futures Contract is required (i.e., on a specified date in
October, the "delivery month") by the purchase of another Futures Contract
of October Deutschemarks on the same exchange. In such instance, the
difference between the price at which the Futures Contract was sold and the
price paid for the offsetting purchase, after allowance for transaction
costs, represents the profit or loss to the Fund.
9
<PAGE>
Persons who trade in Futures Contracts may be broadly classified as
"hedgers" and "speculators." Hedgers, such as the Fund, whose business
activity involves investment or other commitment in securities or other
obligations, use the Futures markets primarily to offset unfavorable changes
in value that may occur because of fluctuations in the value of the
securities and obligations held or expected to be acquired by them or
fluctuations in the value of the currency in which the securities or
obligations are denominated. Debtors and other obligors also may hedge the
interest cost of their obligations. The speculator, like the hedger,
generally expects neither to deliver nor to receive the financial instrument
underlying the Futures Contract, but, unlike the hedger, hopes to profit
from fluctuations in prevailing interest rates or currency exchange rates.
The Fund's Futures transactions will be entered into for traditional
hedging purposes; that is, Futures Contracts will be sold to protect against
a decline in the price of securities or currencies that the Fund owns, or
Futures Contracts will be purchased to protect the Fund against an increase
in the price of securities or currencies it has committed to purchase or
expects to purchase.
"Margin" with respect to Futures Contracts is the amount of funds that
must be deposited by the Fund, in a segregated account with the Fund's
custodian, in order to initiate Futures trading and to maintain the Fund's
open positions in Futures Contracts. A margin deposit made when the Futures
Contract is entered into ("initial margin") is intended to assure the Fund's
performance of the Futures Contract. The margin required for a particular
Futures Contract is set by the exchange on which the Futures Contract is
traded, and may be modified significantly from time to time by the exchange
during the term of the Futures Contract. Futures Contracts customarily are
purchased and sold on margins that may range upward from less than 5% of the
value of the Futures Contract being traded.
If the price of an open Futures Contract changes (by increase in the
case of a sale or by decrease in the case of a purchase) so that the loss
on the Futures Contract reaches a point at which the margin on deposit does
not satisfy margin requirements, the broker will require an increase in the
margin deposit ("margin variation"). If the value of a position increases
because of favorable price changes in the Futures Contract so that the
margin deposit exceeds the required margin, however, the broker will pay the
excess to the Fund. In computing daily net asset values, the Fund will mark
to market the current value of its open Futures Contracts. The Fund expects
to earn interest income on its margin deposits.
Risks of Using Futures Contracts.
The prices of Futures Contracts are volatile and are influenced, among
other things, by actual and anticipated changes in interest rates, which in
turn are affected by fiscal and monetary policies and national and
international political and economic events.
There is a risk of imperfect correlation between changes in prices of
Futures Contracts and prices of the securities or currencies in the Fund's
portfolio being hedged. The degree of imperfection of correlation depends
upon circumstances such as: variations in speculative market demand for
Futures and for debt securities or currencies, including technical
influences in Futures trading; and differences between the financial
instruments being hedged and the instruments underlying the standard Futures
Contracts available for trading, with respect to interest rate levels,
maturities, and creditworthiness of issuers. A decision of whether, when,
and how to hedge involves skill and judgment, and even a well-conceived
hedge may be unsuccessful to some degree because of unexpected market
behavior or interest rate trends.
10
<PAGE>
Because of the low margin deposits required, Futures trading involves
an extremely high degree of leverage. As a result, a relatively small price
movement in a Futures Contract may result in immediate and substantial loss,
as well as gain, to the investor. For example, if at the time of purchase,
10% of the value of the Futures Contract is deposited as margin, a
subsequent 10% decrease in the value of the Futures Contract would result
in a total loss of the margin deposit, before any deduction for the
transaction costs, if the account were then closed out. A 15% decrease would
result in a loss of 150% of the original margin deposit, if the Contract
were closed out. Thus, a purchase or sale of a Futures Contract may result
in losses in excess of the amount invested in the Futures Contract. However,
the Fund presumably would have sustained comparable losses if, instead of
the Futures Contract, it had invested in the underlying financial instrument
and sold it after the decline.
Furthermore, in the case of a Futures Contract purchase, in order to
be certain that the Fund has sufficient assets to satisfy its obligations
under a Futures Contract, the Fund sets aside and commits to back the
Futures Contract an amount of cash, U.S. government securities and other
liquid, high grade debt securities equal in value to the current value of
the underlying instrument less margin deposit.
In the case of a Futures contract sale, the Fund either will set aside
amounts, as in the case of a Futures Contract purchase, own the security
underlying the contract or hold a call option permitting the Fund to
purchase the same Futures Contract at a price no higher than the contract
price. Assets used as cover cannot be sold while the position in the
corresponding Futures Contract is open, unless they are replaced with
similar assets. As a result, the commitment of a significant portion of the
Fund's assets to cover could impede portfolio management or the Fund's
ability to meet redemption requests or other current obligations.
Most U.S. Futures exchanges limit the amount of fluctuation permitted
in Futures Contract prices during a single trading day. The daily limit
establishes the maximum amount that the price of a Futures Contract may vary
either up or down from the previous day's settlement price at the end of a
trading session. Once the daily limit has been reached in a particular type
of Futures Contract, no trades may be made on that day at a price beyond
that limit. The daily limit governs only price movement during a particular
trading day and therefore does not limit potential losses, because the limit
may prevent the liquidation of unfavorable positions. Futures Contract
prices occasionally have moved to the daily limit for several consecutive
trading days with little or no trading, thereby preventing prompt
liquidation of Futures positions and subjecting some Futures traders to
substantial losses.
Options on Futures Contracts
Options on Futures Contracts are similar to options on securities or
currencies except that options on Futures Contracts give the purchaser the
right, in return for the premium paid, to assume a position in a Futures
Contract (a long position if the option is a call and a short position if
the option is a put), rather than to purchase or sell the Futures Contract,
at a specified exercise price at any time during the period of the option.
Upon exercise of the option, the delivery of the Futures position by the
writer of the option to the holder of the option will be accompanied by
delivery of the accumulated balance in the writer's Futures margin account
which represents the amount by which the market price of the Futures
Contract, at exercise, exceeds (in the case of a call) or is less than (in
the case of a put) the exercise price of the option on the Futures Contract.
If an option is exercised on the last trading day prior to the expiration
date of the option, the settlement will be made entirely in cash equal to
the difference between the exercise price of the option and the closing
level of the securities, currencies or index upon which the Futures
Contracts are based on the expiration date. Purchasers of options who fail
to exercise their options prior to the exercise date suffer a loss of the
premium paid.
11
<PAGE>
As an alternative to purchasing call and put options on Futures, the Fund
may purchase call and put options on the underlying securities or currencies
themselves. Such options would be used in a manner identical to the use of
options on Futures Contracts.
To reduce or eliminate the leverage then employed by the Fund, or to
reduce or eliminate the hedge position then currently held by the Fund, the
Fund may seek to close out an option position by selling an option covering
the same securities or contract and having the same exercise price and
expiration date. Trading in options on Futures Contracts began relatively
recently. The ability to establish and close out positions on such options
will be subject to the development and maintenance of a liquid secondary
market. It is not certain that this market will develop.
Forward Currency Contracts and Options on Currency
A forward currency contract ("Forward Contract") is an obligation,
generally arranged with a commercial bank or other currency dealer, to
purchase or sell a currency against another currency at a future date and
price as agreed upon by the parties. The Fund may accept or make delivery
of the currency at the maturity of the Forward Contract or, prior to
maturity, enter into a closing transaction involving the purchase or sale
of an offsetting contract. The Fund will utilize Forward Contracts only on
a covered basis. The Fund engages in forward currency transactions in
anticipation of, or to protect itself against, fluctuations in exchange
rates. The Fund might sell a particular foreign currency forward, for
example, when it holds bonds denominated in a foreign currency but
anticipates, and seeks to be protected against, a decline in the currency
against the U.S. dollar. Similarly, the Fund might sell the U.S. dollar
forward when it holds bonds denominated in U.S. dollars but anticipates, and
seeks to be protected against, a decline in the U.S dollar relative to other
currencies. Further, the Fund might purchase a currency forward to "lock in"
the price of securities denominated in that currency which it anticipates
purchasing.
Forward Contracts are transferable in the interbank market conducted
directly between currency traders (usually large commercial banks) and their
customers. A Forward Contract generally has no deposit requirement, and no
commissions are charged at any stage for trades. The Fund will enter into
such Forward Contracts with major U.S. or foreign banks and securities or
currency dealers in accordance with guidelines approved by the Fund's Board
of Trustees.
The Fund may enter into Forward Contracts either with respect to
specific transactions or with respect to the Fund's portfolio positions. The
precise matching of the Forward Contract amounts and the value of specific
securities generally will not be possible because the future value of such
securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date the Forward
Contract is entered into and the date it matures. Accordingly, it may be
necessary for the Fund to purchase additional foreign currency on the spot
(i.e., cash) market (and bear the expense of such purchase) if the market
value of the security is less than the amount of foreign currency the Fund
is obligated to deliver and if a decision is made to sell the security and
make delivery of the foreign currency. Conversely, it may be necessary to
sell on the spot market some of the foreign currency the Fund is obligated
to deliver. The projection of short-term currency market movements is
extremely difficult, and the successful execution of a short-term hedging
strategy is highly uncertain. Forward Contracts involve the risk that
anticipated currency movements will not be predicted accurately, causing the
Fund to sustain losses on these Contracts and transaction costs.
At or before the maturity of a Forward Contract requiring the Fund to
sell a currency, the Fund either may sell a portfolio security and use the
sale proceeds to make delivery of the currency or retain the security and
offset its contractual obligation to deliver the currency by purchasing a
second contract pursuant to which the Fund will obtain, on the same maturity
date, the same amount of the currency which it is obligated to deliver.
Similarly, the Fund may close out a Forward Contract requiring it to
12
<PAGE>
purchase a specified currency by entering into a second Contract entitling
it to sell the same amount of the same currency on the maturity date of the
first Contract. The Fund would realize a gain or loss as a result of
entering into such an offsetting Forward Contract under either circumstance
to the extent the exchange rate or rates between the currencies involved
moved between the execution dates of the first Contract and the offsetting
Contract.
The cost to the Fund of engaging in Forward Contracts varies with
factors such as the currencies involved, the length of the contract period
and the market conditions then prevailing. Because Forward Contracts usually
are entered into on a principal basis, no fees or commissions are involved.
The use of Forward Contracts does not eliminate fluctuations in the prices
of the underlying securities the Fund owns or intends to acquire, but it
does establish a rate of exchange in advance. In addition, while Forward
Contracts limit the risk of loss due to a decline in the value of the hedged
currencies, they also limit any potential gain that might result should the
value of the currencies increase. Although Forward Contracts presently are
not regulated by the CFTC, the CFTC, in the future, may assert authority to
regulate Forward Contracts. In that event, the Fund's ability to utilize
Forward Contracts in the manner set forth above may be restricted.
Interest Rate and Currency Swaps
The Fund usually will enter into interest rate swaps on a net basis,
that is, the two payment streams are netted out in a cash settlement on the
payment date or dates specified in the instrument, with the Fund receiving
or paying, as the case may be, only the net amount of the two payments.
Inasmuch as swaps, caps, floors, collars and other derivative transactions
are entered into for good faith hedging purposes, LMC, MFR and the Fund
believe that they do not constitute senior securities under the 1940 Act
and, thus, will not treat them as being subject to the Fund's borrowing
restrictions. The Fund will not enter into any swap, cap, floor, collar or
other derivative transaction unless, at the time of entering into the
transaction, the unsecured long-term debt rating of the counterparty
combined with any credit enhancements is rated at least A by Moody's
Investors Service, Inc. ("Moody's") or Standard & Poor's Ratings Group
("S&P") or has an equivalent rating from a nationally recognized statistical
rating organization or is determined to be of equivalent credit quality by
LMC and MFR. If a counterparty defaults, the Fund may have contractual
remedies pursuant to the agreements related to the transactions. The swap
market has grown substantially in recent years, with a large number of banks
and investment banking firms acting both as principals and as agents
utilizing standardized swap documentation. As a result, the swap market has
become relatively liquid. Caps, floors and collars are more recent
innovations for which standardized documentation has not yet been fully
developed and, for that reason, they are less liquid than swaps.
RISK FACTORS
Emerging Countries
The Fund may invest in debt securities in emerging markets. Investing
in securities in emerging countries may entail greater risks than investing
in debt securities in developed countries. These risks include (i) less
social, political and economic stability; (ii) the small current size of the
markets for such securities and the currently low or nonexistent volume of
trading, which result in a lack of liquidity and in greater price
volatility; (iii) certain national policies which may restrict the Fund's
investment opportunities, including restrictions on investment in issuers
or industries deemed sensitive to national interests; (iv) foreign taxation;
and (v) the absence of developed structures governing private or foreign
investment or allowing for judicial redress for injury to private property.
13
<PAGE>
Political and Economic Risks
Investing in securities of non-U.S. companies may entail additional
risks due to the potential political and economic instability of certain
countries and the risks of expropriation, nationalization, confiscation or
the imposition of restrictions on foreign investment and on repatriation of
capital invested. In the event of such expropriation, nationalization or
other confiscation by any country, the Fund could lose its entire investment
in any such country.
An investment in the Fund is subject to the political and economic
risks associated with investments in emerging markets. Even though
opportunities for investment may exist in emerging markets, any change in
the leadership or policies of the governments of those countries or in the
leadership or policies of any other government which exercises a significant
influence over those countries, may halt the expansion of or reverse the
liberalization of foreign investment policies now occurring and thereby
eliminate any investment opportunities which may currently exist.
Investors should note that upon the accession to power of
authoritarian regimes, the governments of a number of emerging market
countries previously expropriated large quantities of real and personal
property similar to the property which will be represented by the securities
purchased by the Fund. The claims of property owners against those
governments were never finally settled. There can be no assurance that any
property represented by securities purchased by the Fund will not also be
expropriated, nationalized, or otherwise confiscated. If such confiscation
were to occur, the Fund could lose a substantial portion of its investments
in such countries. The Fund's investments would similarly be adversely
affected by exchange control regulation in any of those countries.
Religious and Ethnic Instability
Certain countries in which the Fund may invest may have vocal
minorities that advocate radical religious or revolutionary philosophies or
support ethnic independence. Any disturbance on the part of such individuals
could carry the potential for wide-spread destruction or confiscation of
property owned by individuals and entities foreign to such country and could
cause the loss of the Fund's investment in those countries.
Foreign Investment Restrictions
Certain countries prohibit or impose substantial restrictions on
investments in their capital markets, particularly their equity markets, by
foreign entities such as the Fund. As illustrations, certain countries
require governmental approval prior to investments by foreign persons, or
limit the amount of investment by foreign persons in a particular company,
or limit the investments by foreign persons to only a specific class of
securities of a company that may have less advantageous terms than
securities of the company available for purchase by nationals. Moreover, the
national policies of certain countries may restrict investment opportunities
in issuers or industries deemed sensitive to national interests. In
addition, some countries require governmental approval for the repatriation
of investment income, capital or the proceeds of securities sales by foreign
investors. The Fund could be adversely affected by delays in, or a refusal
to grant, any required governmental approval for repatriation, as well as
by the application to it of other restrictions on investments.
14
<PAGE>
Non-Uniform Corporate Disclosure Standards and Governmental Regulation
Foreign companies are subject to accounting, auditing and financial
standards and requirements that differ, in some cases significantly, from
those applicable to U.S. companies. In particular, the assets, liabilities
and profits appearing on the financial statements of such a company may not
reflect its financial position or results of operations in the way they
would be reflected had such financial statements been prepared in accordance
with U.S. generally accepted accounting principles. Most of the securities
held by the Fund will not be registered with the SEC or regulators of any
foreign country, nor will the issuers thereof be subject to the SEC's
reporting requirements. Thus, there will be less available information
concerning foreign issuers of securities held by the Fund than is available
concerning U.S. issuers. In instances where the financial statements of an
issuer are not deemed to reflect accurately the financial situation of the
issuer, LMC and MFR will take appropriate steps to evaluate the proposed
investment, which may include on-site inspection of the issuer, interviews
with its management and consultations with accountants, bankers and other
specialists. There is substantially less publicly available information
about foreign companies than there are reports and ratings published about
U.S. companies and the U.S. Government. In addition, where public
information is available, it may be less reliable than such information
regarding U.S. issuers.
Currency Fluctuations
Because the Fund, under normal circumstances, may invest substantial
portions of its total assets in the securities of foreign issuers which are
denominated in foreign currencies, the strength or weakness of the U.S.
dollar against such foreign currencies will account for part of the Fund's
investment performance. A decline in the value of any particular currency
against the U.S. dollar will cause a decline in the U.S. dollar value of the
Fund's holdings of securities denominated in such currency and, therefore,
will cause an overall decline in the Fund's net asset value and any net
investment income and capital gains to be distributed in U.S. dollars to
shareholders of the Fund.
The rate of exchange between the U.S. dollar and other currencies is
determined by several factors including the supply and demand for particular
currencies, central bank efforts to support particular currencies, the
movement of interest rates, the pace of business activity in certain other
countries and the U.S., and other economic and financial conditions
affecting the world economy.
Although the Fund values its assets daily in terms of U.S. dollars,
the Fund does not intend to convert holdings of foreign currencies into U.S.
dollars on a daily basis. The Fund will do so from time to time, and
investors should be aware of the costs of currency conversion. Although
foreign exchange dealers do not charge a fee for conversion, they do realize
a profit based on the difference ("spread") between the prices at which they
are buying and selling various currencies. Thus, a dealer may offer to sell
a foreign currency to the Fund at one rate, while offering a lesser rate of
exchange should the Fund desire to sell that currency to the dealer.
Adverse Market Characteristics
Securities of many foreign issuers may be less liquid and their prices
more volatile than securities of comparable U.S. issuers. In addition,
foreign securities exchanges and brokers generally are subject to less
governmental supervision and regulation than in the U.S. and foreign
securities exchange transactions usually are subject to fixed commissions,
which generally are higher than negotiated commissions on U.S. transactions.
In addition, foreign securities exchange transactions may be subject to
difficulties associated with the settlement of such transactions. Delays in
settlement could result in temporary periods when assets of the Fund are
uninvested and no return is earned thereon. The inability of the Fund to
make intended security purchases due to settlement problems could cause it
to miss attractive opportunities. Inability to dispose of a portfolio
security due to settlement problems either could result in losses to the
Fund due to subsequent declines in value of the portfolio security or, if
the Fund has entered into a contract to sell the security, could result in
possible liability to the purchaser. LMC and MFR will consider such
difficulties when determining the allocation of the Fund's assets, although
LMC and MFR do not believe that such difficulties will have a material
adverse effect on the Fund's portfolio trading activities.
15
<PAGE>
Non-U.S. Withholding Taxes
The Fund's net investment income from foreign issuers may be subject
to non-U.S. withholding taxes, thereby reducing the Fund's net investment
income. See "Taxes."
INVESTMENT RESTRICTIONS
The Fund's investment 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 shall not:
(1) issue any senior security (as defined in the 1940 Act), except
that (a) the Fund may enter into commitments to purchase securities in
accordance with the Fund's investment program, including reverse repurchase
agreements, delayed delivery and when-issued securities, which may be
considered the issuance of senior securities to the extent permitted under
applicable regulations; (b) the Fund may engage in transactions that may
result in the issuance of a senior security to the extent permitted under
applicable regulations, the interpretation of the 1940 Act or an exemptive
order; (c) the Fund may engage in short sales of securities to the extent
permitted in its investment program and other restrictions; (d) the purchase
or sale of futures contracts and related options shall not be considered to
involve the issuance of senior securities; and (e) subject to fundamental
restrictions, the Fund may borrow money as authorized by the 1940 Act;
(2) borrow money, except that (a) the Fund may enter into certain
futures contracts and options related thereto; (b) the Fund may enter into
commitments to purchase securities in accordance with the Fund's investment
program, including delayed delivery and when-issued securities and reverse
repurchase agreements, and (c) for temporary emergency purposes, the Fund
may borrow money in amounts not exceeding 5% of the value of its total
assets at the time when the loan is made.
(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 securities issued or guaranteed by the U.S.
Government or its agencies;
(5) invest in commodity contracts, except that the Fund may, to the
extent appropriate under its investment program, purchase securities of
companies engaged in such activities, may enter into transactions in
financial and index futures contracts and related options for hedging
purposes, may engage in transactions on a when-issued or forward commitment
basis and may enter into forward currency contracts. The Fund will not
purchase real estate, interests in real estate or real estate limited
partnership interests except that, to the extent appropriate under its
investment program, the Fund may invest in securities secured by real estate
or interests therein issued by companies, including real estate investment
trusts, which deal in real estate or interests therein.
(6) 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 5% of the Fund's assets may be invested in repurchase agreements;
16
<PAGE>
(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) buy securities from or sell securities (other than securities
issued by the Fund) to any of its officers, Trustees or LMC as principal;
(9) contract to sell any security or evidence of interest therein,
except to the extent that the same shall be owned by the Fund;
(10) purchase or retain securities of an issuer when one or more of
the officers and Trustees of the Fund or of the investment adviser, or a
person owning more that 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;
(11) 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)
except that such restriction shall not apply to 50% of the Fund's portfolio;
(12) purchase any security 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;
(13) invest more than 15% of its net assets in illiquid securities.
Illiquid securities are securities that are not readily marketable or cannot
be disposed of promptly within seven days and in the usual course of
business without taking a materially reduced price. Such securities include,
but are not limited to, time deposits and repurchase agreements with
maturities longer than seven days. Securities that may be resold under Rule
144A or securities offered pursuant to Section 4(2) of the Securities Act
of 1933, as amended, shall not be deemed illiquid solely by reason of being
unregistered. LMC shall determine whether a particular security is deemed
to be liquid based on the trading markets for the specific security and
other factors; and
(14) invest in interest in oil, gas or other mineral exploration or
development programs.
The following investment policy of the Fund is not a fundamental
policy and may be changed by a vote of a majority of the Fund's Board of
Trustees without shareholder approval. The 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 Fund's total assets, at market value at the time of entering
into a contract, shall be committed to margin deposits in relation to
futures contracts.
PORTFOLIO TRANSACTIONS
Subject to policies established by the Fund's Board of Trustees, LMC
is responsible for the execution of the Fund's portfolio transactions and
the selection of broker/dealers that execute such transactions on behalf of
the Fund. In executing portfolio transactions, LMC seeks the best net
results for the Fund, taking into account such factors as the price
17
<PAGE>
(including the applicable brokerage commission or dealer spread), size of
the order, difficulty of execution and operational facilities of the firm
involved. Although LMC generally seeks reasonably competitive commission
rates and spreads, payment of the lowest commission or spread is not
necessarily consistent with the best net results. While the Fund may engage
in soft dollar arrangements for research services, as described below, the
Fund has no obligation to deal with any broker/dealer or group of
broker/dealers in the execution of portfolio transactions.
Debt securities generally are traded on a "net" basis with a dealer
acting as principal for its own account without a stated commission,
although the price of the security usually includes a profit to the dealer.
U.S. and foreign government securities and money market instruments
generally are traded in the OTC markets. In underwritten offerings,
securities usually are purchased at a fixed price which includes an amount
of compensation to the underwriter. On occasion, securities may be purchased
directly from an issuer, in which case no commissions or discounts are paid.
Broker/dealers may receive commissions on futures, currency and options
transactions.
Consistent with the interests of the Fund, LMC may select brokers to
execute the Fund's portfolio transactions on the basis of the research and
brokerage services they provide to LMC for its use in managing the Fund and
its other advisory accounts. Such services may include furnishing analyses,
reports and information concerning issuers, industries, securities,
geographic regions, economic factors and trends, portfolio strategy, and
performance of accounts; and effecting securities transactions and
performing functions incidental thereto (such as clearance and settlement).
Research and brokerage services received from such brokers are in addition
to, and not in lieu of, the services required to be performed by LMC under
the Advisory Agreement (defined below). A commission paid to such brokers
may be higher than that which another qualified broker would have charged
for effecting the same transaction, provided that LMC determines in good
faith that such commission is reasonable in terms either of that particular
transaction or the overall responsibility of LMC to the Fund and its other
clients and that the total commissions paid by the Fund will be reasonable
in relation to the benefits received by the Fund over the long term.
Research services may also be received from dealers who execute Fund
transactions.
Investment decisions for the Fund and for other investment accounts
managed by LMC are made independently of each other in light of differing
conditions. However, the same investment decision occasionally may be made
for two or more of such accounts. In such cases, simultaneous transactions
may occur. Purchases or sales are then allocated as to price or amount in
a manner deemed fair and equitable to all accounts involved. While in some
cases this practice could have a detrimental effect upon the price or value
of the security as far as the Fund is concerned, in other cases LMC believes
that coordination and the ability to participate in volume transactions will
be beneficial to the Fund.
Portfolio Trading and Turnover
The Fund engages in portfolio trading when LMC concludes that the sale
of a security owned by the Fund and/or the purchase of another security of
better value can enhance principal and/or increase income. A security may
be sold to avoid any prospective decline in market value, or a security may
be purchased in anticipation of a market rise. Consistent with the Fund's
investment objectives, a security also may be sold and a comparable security
purchased coincidentally in order to take advantage of what is believed to
be a disparity in the normal yield and price relationship between the two
securities. Although the Fund generally does not intend to trade for
short-term profits, the securities in the Fund's portfolio will be sold
whenever LMC believes it is appropriate to do so, without regard to the
length of time a particular security may have been held (except to the
extent necessary to avoid non-compliance with the "Short-Short Limitation"
described below in "Taxes General"). The Fund anticipates that its portfolio
turnover rate will exceed 100%. A 100% portfolio turnover rate would occur
18
<PAGE>
if the lesser of the value of purchases or sales of portfolio securities for
the Fund for a year (excluding purchases of U.S. Treasury and other
securities with a maturity at the date of purchase of one year or less) were
equal to 100% of the average monthly value of the securities, excluding
short-term investments, held by the Fund during such year. Higher portfolio
turnover involves correspondingly greater brokerage commissions and other
transaction costs that the Fund will bear directly. The portfolio turnover
rates for the Fund for the last three fiscal years were as follows: 1992,
31.24%; 1993, 31.06% and 1994, 10.20%.
VALUATION OF FUND SHARES
As described in the Prospectus, the Fund's net asset value per share
for each class of shares is determined at the close of regular trading on
the New York Stock Exchange ("NYSE") (currently, 4:00 Eastern time, unless
weather, equipment failure or other factors contribute to an earlier closing
business time) on each business day the NYSE is open for business.
Currently, the NYSE is closed on weekends and on certain days relating to
the following holidays: New Year's Day, President's Day, Good Friday,
Memorial Day, July 4th, Labor Day, Thanksgiving Day and Christmas Day.
The Fund's portfolio securities and other assets are valued as
follows:
Long-term debt obligations are valued at the mean of representative
quoted bid or asked prices for such securities or, if such prices are not
available, at prices for securities of comparable maturity, quality and
type; however, when LMC deems it appropriate, prices obtained for the day
of valuation from a bond pricing service will be used. Short-term debt
investments are amortized to maturity based on their cost, adjusted for
foreign exchange translation, provided such valuation represents fair value.
Options on currencies purchased by the Fund are valued at their last
bid price in the case of listed options or at the average of the last bid
prices obtained from dealers in the case of OTC options. The value of each
security denominated in a currency other than U.S. dollars will be
translated into U.S. dollars at the prevailing market rate as determined by
LMC on that day.
Securities and assets for which market quotations are not readily
available (including restricted securities which are subject to limitations
as to their sale) are valued at fair value as determined in good faith by
or under the direction of the Fund's Board of Trustees. The valuation
procedures applied in any specific instance are likely to vary from case to
case. However, consideration is generally given to the financial position
of the issuer and other fundamental analytical data relating to the
investment and to the nature of the restrictions on disposition of the
securities (including any registration expenses that might be borne by the
Fund in connection with such disposition). In addition, specific factors
also are generally considered, such as the cost of the investment, the
market value of any unrestricted securities of the same class (both at the
time of purchase and at the time of valuation), the size of the holding, the
prices of any recent transactions or offers with respect to such securities
and any available analysts' reports regarding the issuer.
The fair value of any other assets is added to the value of all
securities positions to arrive at the value of the Fund's total assets. The
Fund's liabilities, including accruals for expenses, are deducted from its
total assets. Once the total value of the Fund's net assets is so
determined, that value is then divided by the total number of shares
outstanding (excluding treasury shares), and the result, rounded to the
nearest cent, is the net asset value per share.
19
<PAGE>
Any assets or liabilities initially denominated in terms of foreign
currencies are translated into U.S. dollars at the official exchange rate
or at the mean of the current bid and asked prices of such currencies
against the U.S. dollar last quoted by a major bank that is a regular
participant in the foreign exchange market or on the basis of a pricing
service that takes into account the quotes provided by a number of such
major banks. If none of these alternatives are available or none are deemed
to provide a suitable methodology for converting a foreign currency into
U.S. dollars, management at the direction of the Board of Trustees, in good
faith, will establish a conversion rate for such currency.
European, Far Eastern or Latin American securities trading may not
take place on all days on which the NYSE is open. Further, trading takes
place in Japanese markets on certain Saturdays and in various foreign
markets on days on which the NYSE is not open. Consequently, the calculation
of the Fund's respective net asset values therefore may not take place
contemporaneously with the determination of the prices of securities held
by the Fund. Events affecting the values of portfolio securities that occur
between the time their prices are determined and the close of regular
trading on the NYSE will not be reflected in the Fund's net asset value
unless LMC, under the supervision of the Fund's Board of Trustees,
determines that the particular event would materially affect net asset
value. As a result, the Fund's net asset value may be significantly affected
by such trading on days when a shareholder cannot purchase or redeem shares
of the Fund.
INVESTMENT ADVISER, SUB-ADVISER, DISTRIBUTOR AND ADMINISTRATOR
The Fund has entered into an investment advisory contract with LMC,
P.O. Box 1515, Park 80 West Plaza Two, Saddle Brook, New Jersey 07663. LMC,
as such provides investment advice and in general conducts the management
and investment program of the Fund under the supervision and control of the
Trustees of the Fund. LMC has entered into a sub-advisory contract with MFR
Advisors, Inc., ("MFR"), One World Financial Center, 200 Liberty Street, New
York, New York 10281, under which MFR will provide the Fund with economic
and research services.
Pursuant to an investment advisory agreement, the Fund pays LMC an
investment advisory fee of 1% of the Fund's average net asset value, after
deduction of Fund expenses, if any, in excess of the expense limitations set
forth below. Of this amount, LMC will pay MFR an annual sub-advisory fee of
0.50% of the Fund's average net assets, net of reimbursement, that exceed
$15 million. The sub-advisory fee will be paid by LMC not by the Fund. The
fees are 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 investment advisory agreement, LMC also pays
the Fund's expenses for a trading function to place orders for the purchase
and sale of portfolio securities for the Fund; office rent, utilities,
telephone, furniture and supplies utilized at the Fund's principal office;
salaries and payroll expenses of persons serving as officers or Trustees of
the Fund who are also employees of LMC or any of its affiliates.
Any of the other expenses incurred in the operation of the Fund shall
be borne by the Fund, including, among other things, fees of its custodian,
transfer and shareholder servicing agent; cost of pricing and calculating
its daily net asset value and of maintaining its books and accounts required
by the Investment Company Act of 1940; expenditures in connection with
meetings of the Fund's Trustees and shareholders, except those called to
accommodate LMC; fees and expenses of Trustees who are not affiliated with
or interested persons of LMC; in maintaining registration of its shares
under state securities laws or in providing shareholder and dealer services;
insurance premiums on property or personnel of the Fund which inure to its
benefit; costs of preparing and printing reports, proxy statements and
prospectuses of the Fund for distribution to its shareholders; legal,
auditing and accounting fees; fees and expenses of registering and
maintaining registration of its shares for sales under Federal and
applicable state securities laws; and all other expenses in connection with
issuance, registration and transfer of its shares.
20
<PAGE>
If, for any fiscal year, the total of all ordinary business expenses
of the Fund, including all investment advisory fees but excluding brokerage
commissions and fees, taxes, interest and extraordinary expenses such as
litigation, would exceed the most restrictive expense limits imposed by any
statute or regulatory authority of any jurisdiction in which the Fund's
securities are offered as determined in the manner described above as of the
close of business on each business day during such fiscal year, the
aggregate of all such investment management fees shall be reduced by the
amount of such excess but will not be required to reimburse the Fund for any
ordinary business expenses which exceed the amount of its advisory fee for
such fiscal year. The amount of any such reduction to be borne by LMC shall
be deducted from the monthly investment advisory fee otherwise payable to
LMC during such fiscal year; and if such amount should exceed such monthly
fee, LMC agrees to repay to the Fund such amount of its investment
management fee previously received with respect to such fiscal year as may
be required to make up the deficiency no later than the last day of the
first month of the next succeeding fiscal year. For purposes of this
paragraph, the term "fiscal year" shall exclude the portion of the current
fiscal year which shall have elapsed prior to the date hereof and shall
include the portion of the then current fiscal year which shall have elapsed
at the date of termination of the Advisory Agreement.
LMC also acts as administrator to the Fund and performs certain
administrative and 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's services are provided and investment advisory its 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 must be approved by shareholders of the Fund at the first
annual meeting, and any renewal thereof as to the Agreement must be approved
at least annually by a majority of the Fund's Board of Trustees, including
a majority of Trustees 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") 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 Piedmont
Management Company Inc. 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.
LFD 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 Trustees, including a majority who are not "interested persons."
21
<PAGE>
MFR is a subsidiary of Maria Fiorini Ramirez, Inc. ("Ramirez"), which
was established in August of 1992 to provide global economic consulting,
investment advisory and broker-dealer services. Ramirez is the successor
firm to Maria Ramirez Capital Consultants, Inc. ("MRCC"). MRCC was formed
in April 1990 as a subsidiary of John Hancock Freedom Securities Corporation
and offered in-depth economic consulting services to clients. MFR currently
does not manage any assets for investment companies but is an institutional
manager for private clients. Under the terms of the Sub-Advisory Agreement,
MFR will provide economic and investment research.
Of the Trustees, executive officers and employees ("affiliated
persons") of the Fund, Messrs. Corniotes, DeMichele, Faust, Hisey, Jamison,
Kantor, Lavery, Luehs, Petruski and Mmes. Carnicelli, Carr, Curcio,
Gilfillan and Mosca (see "Management of the Trust") may also be deemed
affiliates of LMC by virtue of being officers, Trustees or employees
thereof. As of April 3, 1995, all officers and Trustees of the Fund as a
group, were beneficial owners of less than 1% of the shares of the Fund.
LMC and LFD are wholly-owned subsidiaries of Piedmont Management
Company Inc., a Delaware corporation with offices at 80 Maiden Lane, New
York, New York 10038. Descendants of Lunsford Richardson, Sr., their
spouses, trusts and other related entities have a majority voting control
of outstanding shares of Piedmont Management Company Inc. common stock.
TAXES
General
In order to continue to qualify for treatment as a regulated
investment company ("RIC") under the Code, the Fund must distribute to its
shareholders for each taxable year at least 90% of its investment company
taxable income (consisting generally of net investment income, net
short-term capital gain and net gains from certain foreign currency
transactions) ("Distribution Requirement") and must meet several additional
requirements. These requirements include the following: (1) the Fund must
derive at least 90% of its gross income each taxable year from dividends,
interest, payments with respect to securities loans, and gains from the sale
or other disposition of securities or foreign currencies, or other income
(including gains from options, Futures or Forward Contracts) derived with
respect to its business of investing in securities or those currencies
("Income Requirement"); (2) the Fund must derive less than 30% of its gross
income each taxable year from the sale or other disposition of securities,
or any of the following, that were held for less than three months: options,
Futures or Forward Contracts (other than those on foreign currencies), or
foreign currencies (or options, Futures or Forward Contracts thereon) that
are not directly related to the Fund's principal business of investing in
such securities (or options and Futures with respect to securities)
("Short-Short Limitation"); (3) at the close of each quarter of the Fund's
taxable year, at least 50% of the value of its total assets must be
represented by cash and cash items, U.S. government securities, securities
of other RICs, and other securities, with these other securities limited,
in respect of any one issuer, to an amount that does not exceed 5% of the
value of the Fund's total assets and that does not represent more than 10%
of the outstanding voting securities of the issuer; and (4) at the close of
each quarter of the Fund's taxable year, not more than 25% of the value of
its total assets may be invested in securities (other than U.S. government
securities or the securities of other RICs) of any one issuer.
Dividends and other distributions declared by the Fund in, and payable
to shareholders of record as of a date in, October, November or December of
any year will be deemed to have been paid by the Fund and received by the
shareholders on December 31 of that year if the distributions are paid by
the Fund during the following January.
22
<PAGE>
A portion of the dividends from the Fund's investment company taxable
income (whether paid in cash or reinvested in additional Fund shares) may
be eligible for the dividends received deduction allowed to corporations.
The eligible portion may not exceed the aggregate dividends received by the
Fund from U.S. corporations. However, dividends received by a corporate
shareholder and deducted by it pursuant to the dividends received deduction
are subject indirectly to the alternative minimum tax.
If Fund shares are sold at a loss after being held for six months or
less, the loss will be treated as a long-term, rather than a short-term,
capital loss to the extent of any capital gain distributions received on
those shares. Investors also should be aware that if shares are purchased
shortly before the record date for a dividend distribution, the purchasing
shareholder will pay full price for the shares and receive a portion of the
purchase price back as a taxable ordinary income or capital gain.
The Fund will be subject to a nondeductible 4% excise tax to the
extent it fails to distribute by the end of any calendar year substantially
all of its ordinary income for that year and net capital gains for the
one-year period ending on October 31 of that year; plus any amounts not yet
distributed from the prior year.
Foreign Taxes
Dividends and interest received by the Fund may be subject to income,
withholding, or other taxes imposed by foreign countries and U.S.
possessions that would reduce the yield on its investments. Tax conventions
between certain countries and the United States may reduce or eliminate
these foreign taxes, however, and many foreign countries do not impose taxes
on capital gains in respect of investments by foreign investors. If more
than 50% of the value of the Fund's total assets at the close of its taxable
year consists of securities of foreign corporations, the Fund will be
eligible to, and may, file an election with the Internal Revenue Service
that will enable its shareholders, in effect, to receive the benefit of the
foreign tax credit with respect to any foreign income taxes paid by it.
Pursuant to the election, the Fund will treat those taxes as dividends paid
to its shareholders and each shareholder will be required to (1) include in
gross income, and treat as paid by him, his proportionate share of those
taxes, (2) treat his share of those taxes and of any dividend paid by the
Fund that represents income from foreign sources as his own income from
those sources, and (3) either deduct the taxes deemed paid by him in
computing his taxable income or, alternatively, use the foregoing
information in calculating the foreign tax credit against his federal income
tax. The Fund will report to its shareholders shortly after each taxable
year their respective shares of the Fund's income from sources within, and
taxes paid to, foreign countries if it makes this election.
Passive Foreign Investment Companies
The Fund may invest in the stock of "passive foreign investment
companies" ("PFICs"). In general, a PFIC is a foreign corporation that meets
either of the following tests: (1) at least 75% of its gross income is
passive, or (2) an average of at least 50% of its assets produce, or are
held for the production of, passive income. Under certain circumstances, the
Fund would be subject to federal income tax on a portion of any "excess
distribution" received on the stock of a PFIC or on any gain from
disposition of such stock (collectively "PFIC income"), plus interest
thereon, even if the Fund distributed the PFIC income as a taxable dividend
to its shareholders. The balance of the PFIC income would be included in the
Fund's investment company taxable income and, accordingly, would not be
taxable to the Fund to the extent that income is distributed to its
shareholders.
If the Fund does invest in a PFIC and elects to treat the PFIC as a
"qualified electing fund" ("QEF"), then in lieu of the foregoing tax and
interest obligation, the Fund would be required to include in income each
taxable year its pro rata share of the QEF's ordinary earnings and net
capital gain (the excess of net long-term capital gain over net short-term
capital loss) which most likely would have to be distributed to satisfy the
Distribution Requirements and to avoid imposition of the excise tax
described above even if those earnings and gain were not received by the
Fund. It may not always be possible for the Fund to make this election
because of certain requirements that must be satisfied.
23
<PAGE>
Pursuant to proposed regulations not yet in effect, open-end RICs, such
as the Fund, whose net asset value is determined and published in a
publication
of general circulation at least weekly would be entitled to elect to
"mark-to-market" their stock in certain PFICs. "Marking-to-market," in this
context, means recognizing as gain for each taxable year the excess, as of
the end of that year, of the fair market value of such PFIC's stock over its
adjusted basis (including mark-to-market gain realized in respect of prior
years).
Non-U.S. Shareholders
Distributions of net investment income by the Fund to a shareholder
who, as to the United States, is a nonresident alien individual, nonresident
alien fiduciary of a trust or estate, foreign corporation, or foreign
partnership ("foreign shareholder") will be subject to U.S. withholding tax
(at the rate of 30% or an applicable lower treaty rate). Withholding will
not apply if a dividend paid by the Fund to a foreign shareholder is
"effectively connected" with the conduct by the shareholder of a U.S. trade
or business, in which case the reporting and withholding requirements
applicable to domestic taxpayers will apply. Distributions of net capital
gain are not subject to withholding, but in the case of a foreign
shareholder who is a nonresident alien individual, those distributions
ordinarily will be subject to U.S. income tax at a rate of 30% (or lower
treaty rate) if the individual is physically present in the United States
for more than 182 days during the taxable year and the distributions are
attributable to a fixed place of business maintained by the individual in
the United States.
Options, Futures and Forward Currency Transactions
The use of options and futures transactions, such as selling (writing)
and purchasing options and Futures Contracts and entering into Forward
Contracts, involves complex rules that will determine, for federal income
tax purposes, the character and timing of recognition of gains and losses
the Fund realizes in connection therewith. Income from foreign currencies
(except certain gains therefrom that may be excluded by future regulations),
and income from transactions in options, Futures and Forward Contracts
derived by the Fund with respect to its business of investing in securities
or foreign currencies will qualify as permissible income under the Income
Requirement. Income from a disposition by the Fund of options and Futures
(other than those on foreign currencies) will be subject to the Short-Short
Limitation if they are held for less than three months. Income from the
disposition by the Fund of foreign currencies, and options, Futures and
Forward Contracts on foreign currencies will be subject to the Short-Short
Limitation if they are held for less than three months only to the extent
that they are not directly related to the Fund's principal business of
investing in securities. If the Fund so elects, any increase in value of a
position that is part of a "designated hedge" will be offset by any decrease
in value (whether realized or not) of the offsetting hedging position during
the period of the hedge for purposes of determining whether the Fund
satisfies the Short-Short Limitation. Thus, only the net gain (if any) from
the designated hedge will be included in gross income for purposes of that
limitation. The Fund intends that, when it engages in options and futures
transactions, it will qualify for this treatment, but at the present time
it is not clear whether this treatment will be available for all of the
Fund's options and futures transactions. To the extent this treatment is not
available, the Fund may be forced to defer the closing out of certain
options, Futures and Forward Contracts beyond the time when it would
otherwise be advantageous to do so, in order for the Fund to continue to
qualify as a RIC.
24
<PAGE>
Futures and Forward Contracts that are subject to Section 1256 of the
Code (other than those that are part of a "mixed straddle") ("Section 1256
Contracts") and that are held by the Fund at the end of its taxable year
generally will be required to be "marked to market" for federal income tax
purposes, that is, deemed to have been sold at market value on the last day
of the year. Sixty percent of any net gain or loss recognized on these
deemed sales, and 60% of any net gain or loss realized from any actual sales
of Section 1256 Contracts, will be treated as long-term capital gain or
loss, and the balance will be treated as short-term capital gain or loss.
Section 988 of the Code also may apply to foreign-currency denominated debt
securities, Forward Contracts and options on foreign currencies. Under
Section 988, each foreign currency gain or loss generally is computed
separately and treated as ordinary income or loss. In the case of overlap
between Sections 1256 and 988, special provisions determine the character
and timing of any income, gain or loss. The Fund attempts to monitor Section
988 transactions to minimize any adverse tax impact.
The foregoing is a general and abbreviated summary of certain U.S.
federal income tax considerations affecting the Fund and its shareholders.
Investors are urged to consult their own tax advisers for more detailed
information and for information regarding any foreign, state and local taxes
applicable to distributions received from the Fund.
DISTRIBUTION PLAN
The Fund has adopted a Distribution Plan (the "Plan") in accordance
with Rule 12b-1 under the Investment Company Act of 1940, which provides
that the Fund may pay distribution fees including payments to the
Distributor, at an annual rate not to exceed 0.25% of its average daily net
assets for distribution services.
Distribution payments will be made as follows: The Fund either
directly or through the adviser, may make payments periodically (i) to the
Distributor or to any broker-dealer (a "Broker") who is registered under the
Securities Exchange Act of 1934 and a member in good standing of the
National Association of Securities Dealers, Inc. and who has entered into
a Selected Dealer Agreement with the Distributor, (ii) to other persons or
organizations ("Servicing Agents") who have entered into shareholder
processing and service agreements with the Adviser or with the Distributor,
with respect to Fund shares owned by shareholders for which such Broker is
the dealer or holder of record or such servicing agent has a servicing
relationship, or (iii) for expenses associated with distribution of Fund
shares, including but not limited to the incremental costs of printing
prospectuses, statements of additional information, annual reports and other
periodic reports for distribution to persons who are not shareholders of the
Fund; the costs of preparing and distributing any other supplemental sales
literature; costs of radio, television, newspaper and other advertising;
telecommunications expenses, including the cost of telephones, telephone
lines and other communications equipment, incurred by or for the Distributor
in carrying out its obligations under the Distribution Agreement.
Quarterly, in each year that this Plan remains in effect, the Fund's
Treasurer shall prepare and furnish to the Directors of the Fund a written
report, complying with the requirements of Rule 12b-1, setting forth the
amounts expended by the Fund under the Plan and purposes for which such
expenditures were made.
The Plan shall become effective upon approval of the Plan, the form
of Selected Dealer Agreement and the form of Shareholder Service Agreement,
by the majority votes of both (a) the Fund's Trustees and the Qualified
Trustees (as defined below), cast in person at a meeting called for the
purposes of voting on the Plan and (b) the outstanding voting securities of
the Fund, as defined in Section 2(a)(42) of the 1940 Act.
25
<PAGE>
The Plan shall remain in effect for one year from its adoption date
and may be continued thereafter if this Plan and all related agreements are
approved at least annually by a majority vote of the Trustees of the Fund,
including a majority of the Qualified Trustees cast in person at a meeting
called for the purpose of voting such Plan and agreements. This Plan may not
be amended in order to increase materially the amount to be spent for
distribution assistance without shareholder approval. All material
amendments to this Plan must be approved by a vote of the Trustees of the
Fund, and of the Qualified Trustees (as hereinafter defined), cast in person
at a meeting called for the purpose of voting thereon.
The Plan may be terminated at any time by a majority vote of the
Trustees who are not interested persons (as defined in Section 2(a)(19) of
the 1940 Act) of the Fund and have no direct or indirect financial interest
in the operation of the Plan or in any agreements related to the Plan (the
"Qualified Trustees") or by vote of a majority of the outstanding voting
securities of the Fund, as defined in Section 2(a)(42) of the 1940 Act.
While this Plan shall be in effect, the selection and nomination of
the "non-interested" Trustees of the Fund shall be committed to the
discretion of the Qualified Trustees then in office.
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 custodian for the Fund's portfolio
securities including those to be held by foreign banks and foreign
securities depositories that qualify as eligible foreign custodians under
the rules adopted by the SEC and for the Fund's domestic securities and
other assets. State Street Bank and Trust Company, 225 Franklin Street,
Boston, Massachusetts 02110, has 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 Trustees and executive officers of the Fund and their principal
occupations are set forth below:
*+ROBERT M. DeMICHELE, President and Chairman. P.O. Box 1515, Saddle Brook,
N.J. 07663. Chairman and Chief Executive Officer, Lexington Management
Corporation; Chairman and Chief Executive Officer, Lexington Funds
Distributor, Inc.; President and Director, Piedmont Management Company
Inc.; Director, Reinsurance Corporation of New York; Director, Unione
Italiana Reinsurance; Vice Chairman of Board of Trustees, Union
College; Director, Continental National Corporation; Director, The
Navigator's Group, Inc.; Chairman, Lexington Capital Management, Inc.;
Chairman, LCM Financial Services, Inc.; Director, Vanguard Cellular
Systems, Inc.; Chairman of the Board, Market Systems Research, Inc.
and Market Systems Research Advisors, Inc. (registered investment
advisors); Trustee, Smith Richardson Foundation.
+BEVERLEY C. DUER, Trustee. 340 East 72nd Street, New York, New York,
10021. Investments/Engineering Economics Consultant; formerly Manager
of Operations Research Department, CPC International, Inc.
26
<PAGE>
*+BARBARA M. EVANS, Trustee. 5 Fernwood Drive, Summit, N.J. 07901. Private
investor. Prior to May1989, Assistant Vice President and Securities
Analyst, Lexington Management Corporation; prior to March 1987, Vice
President\Institutional Equity Sales, L.F. Rothschild, Unterberg,
Towbin.
*+LAWRENCE KANTOR, Vice President and Trustee. P.O. Box 1515, Saddle Brook,
N.J. 07663. Executive Vice President, Managing Director, Lexington
Management Corporation; Executive Vice President and Director,
Lexington Funds Distributor, Inc.
+DONALD B. MILLER, Trustee. 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, C.E.O.
and Director, Media General Broadcast Services (advertising firm).
+FRANCIS OLMSTED, Trustee. 50 Van Hooten Court, San Anselmo, California
94960. Private Investor; formerly Manager/Commercial Development (West
Coast), Essex Chemical Corporation, Clifton, New Jersey (chemical
manufacturers).
+JOHN G. PRESTON, Trustee. 3 Woodfield Road, Wellesley, Massachusetts.
Associate Professor of Finance, Boston College, Boston, Massachusetts
02181.
+MARGARET W. RUSSELL, Trustee. 55 North Mountain Avenue, Montclair, N.J.
07042. Private Investor; formerly Community Affairs Director, Union
Camp Corporation.
+PHILIP C. SMITH, Trustee. 87 Lord's Highway, Weston, Connecticut 06883.
Private Investor; Director, Southwest Investors Income Fund, Inc.,
Government Income Fund, Inc., U.S. Trend Fund, Inc., Investors Cash
Reserve, and Plimony Fund, Inc., (registered investment companies).
+FRANCIS A. SUNDERLAND, Trustee. 309 Quito Place, Castle Pines Castle
Rock, Colorado 80104. Private Investor.
*+DENIS P. JAMISON, Vice President and Portfolio Manager. P.O. Box 1515,
Saddle Brook, N.J. 07663. Senior Vice President, Director of Fixed
Income Investment Strategy, Lexington Management Corporation. Mr.
Jamison is a Chartered Financial Analyst and a member of the New York
Society of Securities Analysts.
* MARIA FIORINI RAMIREZ, Vice President and Portfolio Manager. One World
Financial Center, 200 Liberty Street, New York, N.Y. 10281. President
and Chief Executive Officer, MFR Advisors, Inc. Prior to 1992,
Managing Director, Drexel Burnham Lambert.
*+LISA A. 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.
*+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,
Vice President and Director, Lexington Funds Distributor, Inc.; Chief
Financial Officer, Market Systems Research Advisors, Inc.
*+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.
27
<PAGE>
*+JANICE A. CARNICELLI, Vice President. P.O. Box 1515, Saddle Brook, N.J.
07663.
*+CHRISTIE CARR, Assistant Treasurer. P.O. Box 1515, Saddle Brook, N.J.
07663. Prior to October 1992, Senior Accountant, KPMG Peat Marwick LLP.
*+SIOBHAN GILFILLAN, Assistant Treasurer, P.O. Box 1515, Saddle Brook, N.J.
07663.
*+THOMAS LUEHS, Assistant Treasurer, P.O. Box 1515, Saddle Brook, N.J.
07663. Prior to November, 1993, Supervisor Investment Accounting,
Alliance Capital Management, Inc.
*+SHERI MOSCA, Assistant Treasurer, P.O. Box 1515, Saddle Brook, N.J. 07663.
Prior to September 1990, Fund Accounting Manager, Lexington Group of
Investment Companies.
*+ANDREW PETRUSKI, Assistant Treasurer, P.O. Box 1515, Saddle Brook, N.J.
07663. Prior to May 1994, Supervising Senior Accountant, NY Life
Securities. Prior to December 1990, Senior Accountant, Dreyfus
Corporation.
*+PETER CORNIOTES, Assistant Secretary, P.O. Box 1515, Saddle Brook, N.J.
07663. Assistant Secretary, Lexington Management Corporation.
Assistant Secretary, Lexington Funds Distributor, Inc.
*+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.
+Messrs. Corniotes, DeMichele, Duer, Faust, Hisey, Jamison, Kantor, Lavery,
Luehs, Miller, Olmsted, Petruski, Preston, Smith and Sunderland 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.
Trustees not employed by the Fund or its affiliates receive an annual
fee of $600 and a fee of $150 for each meeting attended plus reimbursement
of expenses for attendance at regular meetings. For the fiscal year ended
December 31, 1994, an aggregate of $12,126 in fees and expenses was paid to
eight Trustees not employed by the Fund's affiliates. The Board of Trustees
held four meetings in the past fiscal year. The Board does not have any
audit, nominating or compensation committees.
28
<PAGE>
Aggregate Total Compensation Number of
Compensation From Fund and Directorships in
Name of Director From Fund Fund Complex Fund Complex
- ---------------- ------------ ------------------ ----------------
Robert M. DeMichele 0 0 15
Beverley C. Duer $1350 $20,250 15
Barbara R. Evans 0 0 14
Lawrence Kantor 0 0 15
Donald B. Miller $1350 $20,250 14
Francis Olmsted $1350 $18,900 13
John G. Preston $1350 $20,250 14
Margaret Russell $1350 $18,900 13
Philip C. Smith $1350 $20,250 14
Francis A. Sunderland $1200 $16,800 13
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 returns 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:
n
P(l+T) = 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 or at the
end of the 1, 5 or 10 year periods (or fractional portion
thereof).
Under the foregoing formula, the time periods 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 Funds' Registration Statement. 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 Fund would be included at that time.
29
<PAGE>
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 the SEC rules.
Prior to January, 1995, the Fund was managed under a different
investment objective. The Fund's average annual total return for the one
year, five year and since inception July 10, 1986, period ended December 31,
1994 are set forth in the table below:
Average Annual
Period Total Return
------ --------------
1 year ended December 31, 1994 -6.52%
5 years ended December 31, 1994 5.31%
101 month period ended December 31, 1994 6.14%
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
--- 6
YIELD=2[(cd + 1) - 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 purposes
of "a" above, is calculated by (1) computing the yield to maturity of each
obligation held by a Fund based on the market value of the obligation
(including actual accrued interest) at the close of business on the last day
of each month, or, with respect to obligations purchased during the month,
the purchase price (plus actual accrued interest), (2) dividing that figure
by 360 and multiplying the quotient by the market value of the obligation
(including actual accrued interest as referred to above) to determine the
interest income on the obligation for each day of the subsequent month that
the obligation is held by the Fund (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 period. 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 held
by the Fund. Undeclared earned income, computed in accordance with generally
accepted accounting principles, may be subtracted from the maximum offering
price calculation required pursuant to "d" above.
30
<PAGE>
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
in the Fund's 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.
31
<PAGE>
PART C. OTHER INFORMATION
- -----------------------------
Item 24. Financial Statements and Exhibits - List
----------------------------------------
Page in the Financial
(a) Financial statements: Statements Exhibit
---------------------
Report of Independent Auditors 1
dated January 30, 1995
Statement of Net Assets (Including 2
the Portfolio of Investments) at
December 31, 1994 (1)
Statement of Assets and Liabilities 3
at December 31, 1994
Statement of Operations for the year 4
ended December 31, 1994 (2)
Statements of Changes in Net Assets for 5
the years ended December 31, 1994
and 1993
Notes to Financial Statements 6
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. Declaration of Trust - Filed 5/20/86 - Incorporated
by reference
2. By-Laws - Filed 5/20/86 - Incorporated by reference
3. Not Applicable
4. Stock Certificate Specimen - Filed 11/4/94 -
Incorporated by reference
5. Investment Advisory Agreement between Registrant and
Lexington Management Corporation - Filed 11/4/94 -
Incorporated by reference
5a. Sub-advisory Agreement between Lexington Management
Corporation and MFR Advisors, Inc. - Filed 11/4/94 -
Incorporated by reference
6. Distribution Agreement between Registrant and Lexington
Funds Distributor, Inc. - Filed 11/4/94 - Incorporated
by reference
7. Not Applicable
8a. Custodian Agreement between Registrant and
Chase Manhattan Bank, N.A. - Filed 11/4/94 -
Incorporated by reference
8b. Transfer Agency Agreement between Registrant
and State Street Bank and Trust Company -
Filed 4/30/90 - Incorporated by reference
9. Form of Administrative Services Agreement between Filed electronically
Registrant and Lexington Management Corporation
10. Opinion of Counsel as to Legality of Securities being
registered - Filed 5/20/86 - 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. Not Applicable
15. Distribution Plan under Rule 12b-1 and Related Agreements -
Filed 11/4/94 - Incorporated by reference
16. Performance Calculation - Filed 5/2/88 - Incorporated
by reference
<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 April 3, 1995:
Title of Class Number of Record Holders
Shares of beneficial interest 455
(no 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 General Laws of the State of Massachusetts and
the Trust's Restated Declaration of Trust, the Trust shall indemnify each of
its Trustees to receive such indemnification (including those who serve at
its request as directors, officers or trustees of another organization in
which it has any interest as a shareholder, creditor or otherwise), against
all liabilities and expenses, including amounts paid in satisfaction of
judgements, in compromise of fines and penalties, and counsel fees, reasonably
incurred by him in connection with the defense or disposition of any action,
suit or other proceeding by the Trust or any other person, whether civil or
criminal, in which he may be involved or with which he may be threatened,
while in office or thereafter, by reason of this being or having been such a
Trustee, officer, employee or agent, except with respect to any matter as to
which he shall have been adjudicated to have acted in bad faith or with
willful misfeasance or reckless disregard of duties or gross negligence;
provided, however, that as to any matter disposed of by a compromise payment
by such Trustee, officer, employee or agent, pursuant to a consent, decree or
otherwise, no indemnification either for said payment or for any other
expenses shall be provided unless the Trust shall have received a written
opinion from independent counsel approved by the Trustee to the effect that if
the foregoing matter had been adjudicated they would likely have been
adjudicated in favor of such Trustee, officer, employee or agent. The rights
accruing to any Trustee, officer, employee or agent under these provisions
shall not exclude any other right to which he may lawfully be titled;
provided, however, that no Trustee, officer, employee or agent may satisfy
any right of indemnity or reimbursement granted herein or to which he may
otherwise be entitled except out of Trust Property, and no Shareholder shall
be personally liable to any Person with respect to any claim for indemnity or
reimbursement or otherwise. The Trustees may make advance payments in
connection with indemnification under the Declaration of Trust, provided that
the indemnified Trustee, officer, employee or agent shall have given a written
undertaking to reimburse the Trust in the event it is subsequently determined
that he is entitled to such indemnification.
<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 Short-Intermediate Government Securities Fund, Inc.
Lexington GNMA Income Fund, Inc.
Lexington Ramirez Global Income Fund
Lexington Worldwide Emerging Markets Fund, Inc.
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.
<PAGE>
(b)
Position and Offices Position and
Name and Principal with Principal Offices with
Business Address Underwriter Registrant
- ----------------- -------------------- ------------
Peter Corniotes* Assistant Secretary Asst. Secretary
Lisa A. Curcio* Vice President and Vice President
Secretary and 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, Trustee & Vice
General Manager & 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 Ramirez Global Income Fund, Park 80 West
- -Plaza Two, Saddle Brook, New Jersey 07663 will maintain physical possession
of such 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, City Center Square, 1100 Main, 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 Ramirez Global Income Fund, 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.
<PAGE>
Registration No. 33-5827
Securities and Exchange Commission
Washington, D.C. 20549
Exhibits
Filed With
Form N-1A
LEXINGTON RAMIREZ GLOBAL INCOME FUND
EXHIBIT INDEX
The following documents are being filed electronically as exhibits to this
filing:
Financial Statements for the period ending December 31, 1994
Form of Administrative Services Agreement
Consent of Kramer, Levin, Naftalis, Nessen, 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 certifies that it meets all of
the requirements for effectiveness of this amendment to the Registration
Statement pursuant to Rule 485(b) under the Securities Act of 1933 and has
duly caused this amendment 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 25th day of April, 1995.
LEXINGTON RAMIREZ GLOBAL INCOME FUND
Robert M. DeMichele
___________________________________
By: Robert M. DeMichele
Chairman of the Board
Pursuant to the requirements of the Securities Act of 1933, this
amendment to the Registration Statement has been signed below by the
following persons in the capacities and on the dates indicated.
Signature Title Date
Robert M. DeMichele
__________________________ Chairman of the Board April 25, 1995
Robert M. DeMichele Principal Executive
Officer
Richar M. Hisey
__________________________ Principal Financial April 25, 1995
Richard M. Hisey and Accounting Officer
Lisa Curcio
__________________________ Principal Compliance April 25, 1995
Lisa Curcio Officer
*Beverley C. Duer, P.E. Trustee April 25, 1995
- --------------------------
Beverley C. Duer, P.E.
*Barbara M. Evans Trustee April 25, 1995
- --------------------------
Barbara M. Evans
<PAGE>
Signature Title Date
*Lawrence Kantor Trustee April 25, 1995
- --------------------------
Lawrence Kantor
*Donald B. Miller Trustee April 25, 1995
- --------------------------
Donald B. Miller
*Francis Olmsted Trustee April 25, 1995
- --------------------------
Francis Olmsted
*John G. Preston Trustee April 25, 1995
- --------------------------
John G. Preston
*Margaret W. Russell Trustee April 25, 1995
- --------------------------
Margaret W. Russell
*Philip C. Smith Trustee April 25, 1995
- --------------------------
Philip C. Smith
*Francis A. Sunderland Trustee April 25, 1995
- --------------------------
Francis A. Sunderland
Lisa Curico
*By: ______________________
Lisa Curcio
Attorney-in-Fact
Independent Auditors' Report
The Board of Trustees and Shareholders
Lexington Tax Exempt Bond Trust:
We have audited the accompanying statements of net assets (including the
portfolio of investments) and assets and liabilities of Lexington Tax Exempt
Bond Trust as of December 31, 1994, 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 Trust'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, 1994 by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
Lexington Tax Exempt Bond Trust as of December 31, 1994, the results of its
operations for the year then ended, the changes in its net assets for each of
the years in the two-year period then ended, and the financial highlights for
each of the years in the five-year period then ended, in conformity with
generally accepted accounting principles.
KPMG Peat Marwick LLP
New York, New York
January 30, 1995
1
<PAGE>
Lexington Tax Exempt Bond Trust
Statement of Net Assets
(Including the Portfolio of Investments)
December 31, 1994
<TABLE>
<CAPTION>
Principal Maturity Stated Value
Amount Security Date Rate (Note 1)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
GEORGIA: 4.8%
$ 500,000 Municipal Electric Authority of Georgia .................... 01/05/95 5.10% $ 500,000
-----------
INDIANA: 3.9%
400,000 Gary Indiana Environmental Authority ....................... 07/15/02 3.65* 400,000
-----------
MISSISSIPPI: 1.9%
200,000 Clairborne County (South Mississippi Electric Project) ..... 01/04/95 3.45 200,000
-----------
NEW JERSEY: 4.8%
500,000 New Jersey State Turnpike Authority ........................ 01/01/95 5.30 500,000
-----------
NEW YORK: 3.3%
340,000 Dutchess County Industrial Development Authority ........... 11/01/05 6.700 343,400
-----------
NORTH CAROLINA: 5.0%
500,000 North Carolina Eastern Municipal Power
(Prerefunded Bond) ......................................... 01/01/15 10.625 515,000
-----------
VIRGINIA: 3.9%
400,000 Louisa Industrial Development Authority (VEPCO) ............ 01/06/95 5.10 400,000
-----------
TOTAL INVESTMENTS: 27.6% (cost $2,855,000(D))
(Note 1) ................................................. 2,858,400
Other assets in excess of liabilities: 72.4% ............... 7,492,160
-----------
TOTAL NET ASSETS: 100.0% (equivalent to $9.80 per
share on 1,056,161 shares outstanding) ................... $10,350,560
===========
<FN>
**Variable Rate Demand Notes.
(D)Aggregate cost for Federal income tax purposes is identical.
</FN>
</TABLE>
The Notes to Financial Statements are an integral part of this statement.
2
<PAGE>
Lexington Tax Exempt Bond Trust
Statement of Assets and Liabilities
December 31, 1994
<TABLE>
<CAPTION>
<S> <C>
Assets
Investments in securities, at value (cost $2,855,000) (Note 1) ........................ $2,858,400
Cash .................................................................................. 7,696,431
Due from Lexington Management Corporation (Note 2) .................................... 14,667
Interest receivable ................................................................... 47,413
-----------
Total Assets .......................................................................... 10,616,911
-----------
Liabilities
Payable for shares redeemed ........................................................... 227,712
Accrued expenses ...................................................................... 35,749
Distributions payable ................................................................. 2,890
-----------
Total Liabilities ..................................................................... 266,351
-----------
Net Assets (equivalent to $9.80 per share on 1,056,161 shares outstanding) (Note 3) ... $10,350,560
===========
Net Assets consist of:
Additional paid-in capital (Note 1) ................................................... 11,131,283
Undistributed net investment income (Note 1) .......................................... 16,547
Accumulated net realized loss on investments (Note 5) ................................. (800,670)
Net unrealized appreciation of investments ............................................ 3,400
-----------
$10,350,560
===========
</TABLE>
The Notes to Financial Statements are an integral part of this statement.
3
<PAGE>
Lexington Tax Exempt Bond Trust
Statement of Operations
Year ended December 31, 1994
<TABLE>
<CAPTION>
<S> <C> <C>
Investment Income
Interest income ................................................ $ 773,696
Expenses
Investment advisory fee (Note 2) ............................... $ 80,873
Accounting and shareholder services expense (Note 2) ........... 22,487
Custodian and transfer agent expenses .......................... 24,507
Directors' fees and expenses ................................... 12,126
Audit and legal ................................................ 34,839
Printing and mailing ........................................... 16,259
Registration fees .............................................. 20,990
Computer processing fees ....................................... 2,857
Other expenses ................................................. 18,439
----------
Total expenses ......................................... 233,377
Less: expenses recovered under contract with
investment adviser (Note 2) .......................... 39,274 194,103
---------- ----------
Net investment income 579,593
Realized and Unrealized Gain (Loss) on Investments (Note 4)
Realized loss from security transactions (excluding short-term
securities):
Proceeds from sales ........................................ 12,294,702
Cost of securities sold .................................... 12,599,967
----------
Net realized loss ...................................... (305,265)
Unrealized appreciation of investments:
End of period .............................................. 3,400
Beginning of period ........................................ 1,176,508
----------
Change during period ................................... (1,173,108)
----------
Net realized and unrealized loss on investments .... (1,478,373)
----------
Decrease in Net Assets Resulting from Operations ................... $ (898,780)
==========
</TABLE>
The Notes to Financial Statements are an integral part of this statement.
4
<PAGE>
Lexington Tax Exempt Bond Trust
Statements of Changes in Net Assets
Years ended December 31, 1994 and 1993
<TABLE>
<CAPTION>
1994 1993
----------- -----------
<S> <C> <C>
Net investment income ...................................................... $ 579,593 $ 691,127
Net realized loss from security transactions ............................... (305,265) (48,350)
Increase (decrease) in unrealized appreciation of investments .............. (1,173,108) 802,597
----------- -----------
Net increase (decrease) in net assets resulting from operations ............ (898,780) 1,445,374
Distributions to shareholders from net investment income ................... (563,046) (726,724)
Increase (decrease) in net assets from capital share transactions
(Note 3) ................................................................. (2,763,453) 772,616
----------- -----------
Net increase (decrease) in net assets ...................................... (4,225,279) 1,491,266
Net Assets
Beginning of period ........................................................ 14,575,839 13,084,573
----------- -----------
End of period (including undistributed net investment income of $16,547
and $0, respectively) (Note 1) ........................................... $10,350,560 $14,575,839
=========== ===========
</TABLE>
The Notes to Financial Statements are an integral part of these statements.
5
<PAGE>
Lexington Tax Exempt Bond Trust
Notes to Financial Statements
December 31, 1994 and 1993
1. Significant Accounting Policies
Lexington Tax Exempt Bond Trust (the "Trust") is an open end diversified
management investment company registered under the Investment Company Act of
1940, as amended. The following is a summary of significant accounting policies
followed by the Trust in the preparation of its financial statements:
Security Transactions Security transactions are recorded on a trade date
basis. Realized gains and losses from security transactions are reported on the
identified cost basis. Investments are stated at market value based on the last
reported bid price as of the last business day of the period for those
securities for which the over-the-counter market is the primary market. As
authorized by the trustees, securities may be valued on the basis of valuations
furnished by a pricing service. Short-term securities are stated at amortized
cost, which approximates market value. Securities for which market quotations
are not readily available and other assets are valued at fair value as
determined by management and approved in good faith by the Board of Trustees.
Dividends and distributions to shareholders are recorded on the ex-dividend
date. Interest income is accrued as earned.
Distributions Effective January 1, 1993, the Fund adopted Statement of
Position 93-2: Determination, Disclosure and Financial Statement Presentation of
Income, Capital Gain and Return of Capital Distributions by Investment
Companies. As of December 31, 1994, book and tax basis differences amounting to
$14,483 have been reclassified from undistributed net investment income to
additional paid-in-capital.
Federal Income Taxes It is the Trust's intention to comply with the
requirements of the Internal Revenue Code applicable to "regulated investment
companies" and to distribute all of its taxable and tax exempt income to its
shareholders. Therefore, no provision for Federal income taxes has been made.
Other Matters The Board of Directors approved a change in the Fund's name
and objective on November 30, 1994. Effective January 3, 1995 the Fund's name
will be the Lexington Ramirez Global Income Fund and its objective will be to
seek high current income and capital appreciation by investing in foreign and
domestic high-yield lower rated debt securities.
2. Investment Advisory Fee and Other Transactions with Affiliate
The Trust pays an investment advisory fee to Lexington Management Corporation
("LMC") at the rate of 0.625% of the Trust's average daily net assets up to $150
million and in decreasing stages to 0.4% of the average daily net assets in
excess of $800 million. LMC is required to reimburse the Trust for any expenses,
excluding interest, taxes, brokerage commissions and extraordinary expenses,
which exceed 1.5% of the Trust's average daily net assets. The investment
advisory fee and expense reimbursement are set forth in the statement of
operations.
The Trust also reimburses LMC for certain expenses, including accounting and
shareholder servicing costs, which are incurred by the Trust but paid by LMC.
3. Shares of Beneficial Interest
The Trust is authorized to issue an unlimited number of no par value shares of
beneficial interest. Transactions in shares of beneficial interest were as
follows:
<TABLE>
<CAPTION>
Year ended Year ended
December 31, 1994 December 31, 1993
--------------------- -------------------
Shares Amount Shares Amount
------- ---------- ------- ----------
<S> <C> <C> <C> <C>
Shares sold ..................................... 165,124 (1,718,766 409,727 $4,456,082
Shares issued on reinvestment of dividends ...... 44,829 458,077 53,671 580,309
------- ---------- ------- ----------
209,953 2,176,843 463,398 5,036,391
Shares redeemed ................................. (484,897) (4,940,296) (391,977) (4,263,775)
------- ---------- ------- ----------
Net increase (decrease) ......................... (274,944) 2,763,453) 71,421 $ 772,616
======== ========= ======= =========
</TABLE>
6
<PAGE>
Lexington Tax Exempt Bond Trust
Notes to Financial Statements
December 31, 1994 and 1993 (continued)
4. Purchases and Sales of Investment Securities
The cost of purchases and proceeds from sales of securities for the year ended
December 31, 1994, excluding short-term securities, were $1,065,509 and
$12,294,702 respectively.
At December 31, 1994, aggregate gross unrealized appreciation for all securities
in which there is an excess of value over tax cost amounted to $3,400.
5. Federal Income Taxes-Capital Loss Carryforwards
Capital loss carryforwards available for Federal income tax purposes as of
December 31, 1994 are approximately:
$293,033 expiring in 1995,
$ 99,152 expiring in 1996,
$ 48,158 expiring in 1998,
$ 6,712 expiring in 1999,
$ 37,269 expiring in 2001,
$ 97,345 expiring in 2002; and,
$219,001 expiring in 2003.
To the extent any future capital gains are offset by these losses, such gains
would not be distributed to shareholders. Treasury regulations were issued in
early 1990 which provide that capital losses incurred after October 31 of a
trust's taxable year should be deemed to have occurred on the first day of the
following year (i.e., January 1). The regulations indicate that a trust may
elect to retroactively apply these rules for purposes of computing taxable
income. Accordingly, the capital loss carryforwards for the Trust have been
adjusted to reflect prior years' post-October losses in the next fiscal year.
7
<PAGE>
Lexington Tax Exempt Bond Trust
Financial Highlights
December 31, 1993
Selected per share data for a share outstanding throughout the period:
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------------------
1994 1993 1992 1991 1990
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period ............ $10.95 $10.39 $10.35 $10.05 $10.12
------ ------ ------ ------ ------
Income (loss) from investment operations:
Net investment income .......................... 46 .53 .61 .67 .73
Net realized and unrealized gain (loss) on
investments .............................. ... (1.16) .58 .04 .30 (.09)
------ ------ ------ ------ ------
Total income (loss) from investment operations ... (.70) 1.11 .65 .97 .64
------ ------ ------ ------ ------
Less distributions:
Dividends from net investment income .......... (.45) (.55) (.61) (.67) (.71)
------ ------ ------ ------ ------
Net asset value, end of period .................. $ 9.80 $10.95 $10.39 $10.35 $10.05
====== ====== ====== ====== ======
Total return .................................... (6.52%) 10.90% 6.51% 10.03% 6.62%
Ratio to average net assets:
Expenses, before reimbursement or waiver .... 1.80% 1.44% 1.54% 1.65% 1.61%
Expenses, net of reimbursement or waiver .... 1.50% 1.44% 1.50% .12% 1.08%
Net investment income, before reimbursement
or waiver ................................. 4.18% 4.83% 5.88% 6.11% 6.67%
Net investment income ....................... 4.48% 4.83% 5.92% 6.64% 7.20%
Portfolio turnover .......................... 10.20% 31.06% 31.24% 29.45% 44.50%
Net assets, end of period (000's omitted) ....... $10,351 $14,576 $13,085 $12,252 $10,707
<FN>
*Annualized
</FN>
</TABLE>
8
FORM OF
ADMINISTRATIVE SERVICES AGREEMENT
THIS AGREEMENT is made by and between LEXINGTON RAMIREZ GLOBAL INCOME
FUND, a Massachusetts Business Trust (the Fund ), and LEXINGTON
MANAGEMENT CORPORATION, A Delaware corporation (the Administrator ), with
respect to the following recital of facts:
RECITAL
WHEREAS, the Fund is registered as an open-end non-diversified
management investment company under the Investment Company Act of 1940, as
amended (the 1940 Act ), and the rules and regulations promulgated
thereunder;
WHEREAS, the Administrator is registered as an investment adviser
under the Investment Advisers Act of 1940, as amended (the Advisers Act ),
and engages in the business of acting as an investment adviser and an
administrator of investment companies;
WHEREAS, the Fund, and the Administrator desire to enter into an
agreement to provide for administrative services for the Fund on the terms
and conditions hereinafter set forth.
NOW THEREFORE, in consideration of the mutual covenants herein
contained and other good and valuable considerations, the receipt of which
is hereby acknowledged, the parties hereto agree as follows:
I. APPOINTMENT AND OBLIGATIONS OF THE ADMINISTRATOR
The Administrator is hereby appointed to serve as the Administrator
to the Fund, to provide the administrative services described herein and
assume the obligations set forth in Section II, subject to the terms of
this Agreement and the control of the Fund s Board of [Directors/Trustees]
(the Board ). The administrator shall, for all purposes herein, be deemed
an independent contractor and shall have, unless otherwise expressly
provided or authorized, no authority to act for or represent the Fund in
any way or otherwise be deemed an agent of the Fund.
II. DUTIES OF THE ADMINISTRATOR
In carrying out the terms of this Agreement, the Administrator shall:
A. provide office space, equipment and facilities (which may be
the Administrator s or its affiliates ) for maintaining the
Fund s organization, for meetings of the Board and the
shareholders, and for performing administrative services
hereunder;
B. supervise and manage all aspects of the Fund s operations
(other than investment advisory activities), and supervise
relations with, and monitor the performance of, custodians,
depositories, transfer and pricing agents, accountants,
attorneys, underwriters, brokers and dealers, insurers and
other persons in any capacity deemed to be necessary and
desirable by the Board;
C. determine and arrange for the publication of the net asset
value of the Fund;
D. provide non-investment related statistical and research data
and such other reports, evaluations and information as the Fund
may request from time to time;
E. provide internal clerical, accounting and legal services, and
stationery and office supplies;
F. prepare, to the extent requested by the Fund, the Fund s
prospectus, statement of additional information, proxy
statements and annual and semi-annual reports to shareholders;
G. arrange for the printing and mailing (at the Fund s expense)
of proxy statements and other reports or other materials
provided to the Fund s shareholders;
H. prepare for execution and file all the Fund s federal and state
tax returns and required tax filings other than those required
to be made by the Fund s custodian and transfer agent;
I. prepare periodic reports to and filings with the Securities and
Exchange Commission (the SEC ) and state Blue Sky authorities
with the advice of the Fund s counsel;
J. maintain the Fund s existence, and during such times as the
shares of the Fund are publicly offered, maintain the
registration and qualification of the Fund s shares under the
federal and state law;
K. keep and maintain the financial accounts and records of the
Fund;
L. develop and implement, if appropriate, management and
shareholder services designed to enhance the value or
convenience of the Fund as an investment vehicle;
M. provide the Board on a regular basis with reports and analyses
of the Fund s operations and the operations of comparable
investment companies;
N. respond to inquiries from shareholders or participants of
employee benefit plans (for which the administrator or any
affiliate provides recordkeeping) relating to the Fund,
concerning, among other things, exchanges among Funds, or refer
any such inquiries to the Fund s officers or the Fund s
transfer agent;
O. provide participant recordkeeping services for participants in
employee benefit plans for which the Administrator or any
affiliate provides recordkeeping services; and
P. provide such information as may be reasonably requested by a
shareholder representative of or a participant in an employee
benefit plan to comply with applicable federal or state laws.
III. REPRESENTATIONS AND WARRANTIES
A. REPRESENTATIONS AND WARRANTIES OF THE ADMINISTRATOR
The Administrator hereby represents and warrants to the Fund
as follows:
1. Due Incorporation and Organization. The Administrator is
duly organized and is in good standing under the laws of the
State of Delaware and is fully authorized to enter into this
Agreement and carry out its duties and obligations hereunder.
2. Best Efforts. The Administrator at all times shall provide
its best judgment and effort to the Fund in carrying out its
obligations hereunder.
B. REPRESENTATIONS AND WARRANTIES OF THE FUND AND THE FUND
The Fund hereby represents and warrants to the Administrator
as follows:
1. Organization. The Fund has been duly organized as a
business trust under the laws of the State of Massachusetts and
it is authorized to enter into this Agreement and carry out its
terms.
2. Registration. The Fund is registered as an investment
company with the SEC under the 1940 Act and shares of the Fund
are registered or qualified for offer and sale to the public
under the Securities Act of 1933, as amended (the 1933 Act ),
and all applicable state securities laws. Such registrations
or qualifications will be kept in effect during the term of
this Agreement.
IV. CONTROL BY THE BOARD
Any activities undertaken by the administrator pursuant to this
Agreement on behalf of the Fund shall at all times be subject to any
directives of the Board.
V. COMPLIANCE WITH APPLICABLE REQUIREMENTS
In carrying out its obligations under this Agreement, the
Administrator shall at all times conform to:
A. all applicable provisions of the 1940 Act;
B. the provisions of the registration statement of the Fund under
the 1933 Act and the 1940 Act;
C. the provisions of the Fund s chartering documents, as amended;
D. the provisions of the By-Laws of the Fund, as amended; and
E. any other applicable provisions of state and federal law.
VI. DELEGATION OF RESPONSIBILITIES
All services to be provided by the Administrator under this Agreement
may be furnished by any directors, officers or employees of the
Administrator or by any affiliates of the Administrator under the
Administrator s supervision.
VII. COMPENSATION
For the services to be rendered, the facilities furnished and the
expenses assumed by the administrator, the Fund shall pay to the
Administrator an annual fee, payable monthly, equal to the pro-rata portion
of the Administrator s actual cost in providing such services, facilities
and expenses.
VIII. NON-EXCLUSIVITY
The services of the Administrator to the Fund are not to be deemed
to be exclusive, and the Administrator shall be free to render
administrative or other services to others (including other investment
companies) and to engage in other activities, so long as its services under
this agreement are not impaired thereby. It is understood and agreed that
officers and directors of the Administrator may serve as officers or
[directors/trustees] of the Fund, and that officers of [directors/trustees]
of the Fund may serve as officers or directors of the Administrator to the
extent permitted by law; and that the officers and directors of the
Administrator are not prohibited from engaging in any other business
activity or from rendering services to any other person, or from serving
as partners, officers, directors or trustees of any other firm or trust,
including other investment companies.
IX. TERM
This Agreement shall become effective at the close of business on the
date hereof and shall continue automatically for successive annual periods,
provided such continuance is specifically approved at least annually by the
Fund s [directors/trustees] who are not parties to this Agreement or
interested persons (as defined in the 1940 Act) of any such party, or by
the vote of the holders of a majority (as so defined) of the outstanding
voting securities of the Fund and by such vote of the [directors/trustees].
X. TERMINATION
This Agreement may be terminated at any time, without the payment of
any penalty, by vote of the Fund s [directors/trustees] or by vote of a
majority of the Fund s outstanding voting securities (as defined in Section
2(a)(42) of the 1940 Act), or by the Administrator, on sixty (60) days
written notice to the other party.
XI. LIABILITY OF ADMINISTRATOR AND INDEMNIFICATION
A. LIABILITY
In the absence of willful misfeasance, bad faith or gross
negligence on the part of the Administrator or its officers,
directors or employees, or reckless disregard by the Administrator
of its duties under this Agreement, the Administrator shall not be
liable to the Fund or to any shareholder of the Fund for any act or
omission in the course of, or connected with, rendering services
hereunder or for any looses that may be sustained in the purchase,
holding or sale of any security.
B. INDEMNIFICATION
In the absence of willful misfeasance, bad faith, gross
negligence or reckless disregard of obligations or duties hereunder
on the part of the Administrator or any officer, director or employee
of the Administrator, to the extent permitted by applicable law, the
Fund hereby agrees to indemnify and hold the Administrator harmless
from and against all claims, actions, suits and proceedings at law
or in equity, whether brought or asserted by a private party or a
governmental agency, instrumentality or entity of any kind, relating
to the sale, purchase, pledge of, advertisement of, or solicitation
of sales or purchases of any security (whether of the Fund or
otherwise) by the Fund, its officers, directors, employees or agents
in alleged violation of applicable federal, state or foreign laws,
rules or regulations.
XII. MATERIALS FOR DISTRIBUTION TO SHAREHOLDERS
During the term of this Agreement, the Fund shall furnish to the
Administrator at its principal office copies of all prospectuses, proxy
statements, reports to shareholders, sales literature and other material
referring to the Administrator that were prepared for distribution to
shareholders of the Fund and to participants in employee benefit plans
owning interests in the Fund (prior to the public distribution of such
materials). The Fund shall not use any such materials that refer to the
Administrator if the Administrator reasonably objects in writing within
five business days (or such other time as the parties may agree) after
receipt thereof, unless prior to such use the material is modified in a
manner that is satisfactory to the Administrator. Subsequent to the
termination of this Agreement, the Fund will continue to furnish to the
Administrator copies of such materials. The Fund shall also furnish or
otherwise make available to the Administrator other information relating
to the business affairs of the Fund as the Administrator reasonably
requests from time to time.
XIII. NOTICES
Any notices 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 notice. Until further
notice to the other party, it is agreed that the address of the
Administrator and that of the Fund for this purpose shall be Park 80 West,
Plaza Two, Saddle Brook, New Jersey, 07663.
XIV. QUESTIONS OF INTERPRETATIONS
This Agreement shall be governed by the laws of the State of New
Jersey. Any question of interpretation of any term or provision of this
Agreement having a counterpart in or otherwise derived from a term or
provision of the 1940 Act shall be resolved by reference to such term or
provision of the 1940 Act and to interpretations thereof, if any, by the
United States Courts or in the absence of any controlling decision of any
such court, by rules, regulations or orders of the SEC issued pursuant to
said Act. In addition, where the effect of a requirement of the 1940 Act
reflected in the provisions of this Agreement is revised by rule,
regulation or order of the SEC, such provisions shall be deemed to
incorporate the effect of such rule, regulation or order.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed in duplicate by their respective officers on the ____ day of
_________________, 199__.
LEXINGTON RAMIREZ GLOBAL INCOME FUND
Attest: By: _______________________________
Name Title
________________________
LEXINGTON MANAGEMENT CORPORATION
Attest: By: ______________________________
Name Title
________________________
Kramer, Levin, Naftalis, Nessen, Kamin & 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
April 21, 1995
Lexington Ramirez Global Income Fund
Park 80 West Plaza Two
Saddle Brook, New Jersey 07663
Re: Lexington Ramirez Global Income Fund
Registration No. 33-5827
Post-Effective Amendment to Registration
Statement on Form N-1A
Gentlemen:
We hereby consent to the reference of our firm as Counsel in the
Post-Effective Amendment No. 10 to the Registration Statement on Form N-1A of
Lexington Ramirez Global Income Fund.
Very truly yours,
Consent of Independent Auditors
The Board of Directors
Lexington Tax Exempt Bond Trust:
We consent to the use of our report dated January 30, 1995, included in the
Registration Statement on Form N-1A and to the reference to our firm under
the heading "Financial Highlights" in the Prospectus.
KPMG PEAT MARWICK LLP
New York, New York
April 26, 1995
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
The Schedule contains summary financial information extracted from year-
end audited financial statements dated December 31, 1994 and is qualified
in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> DEC-31-1994
<INVESTMENTS-AT-COST> 2,855,000
<INVESTMENTS-AT-VALUE> 2,858,400
<RECEIVABLES> 62,080
<ASSETS-OTHER> 7,696,431
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 10,616,911
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 266,351
<TOTAL-LIABILITIES> 266,351
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 11,131,283
<SHARES-COMMON-STOCK> 1,056,161
<SHARES-COMMON-PRIOR> 1,331,105
<ACCUMULATED-NII-CURRENT> 16,547
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (800,670)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 3,400
<NET-ASSETS> 10,350,560
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 773,696
<OTHER-INCOME> 0
<EXPENSES-NET> 194,103
<NET-INVESTMENT-INCOME> 579,593
<REALIZED-GAINS-CURRENT> (305,265)
<APPREC-INCREASE-CURRENT> (1,173,108)
<NET-CHANGE-FROM-OPS> (898,780)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 563,046
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 165,124
<NUMBER-OF-SHARES-REDEEMED> 484,897
<SHARES-REINVESTED> 44,829
<NET-CHANGE-IN-ASSETS> (4,225,279)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (495,405)
<OVERDISTRIB-NII-PRIOR> 14,483
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 80,873
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 233,377
<AVERAGE-NET-ASSETS> 12,940,250
<PER-SHARE-NAV-BEGIN> 10.95
<PER-SHARE-NII> 0.46
<PER-SHARE-GAIN-APPREC> (1.16)
<PER-SHARE-DIVIDEND> 0.45
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.80
<EXPENSE-RATIO> 1.50
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
