PROSPECTUS
April 29, 1996
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
Institutiona/Financial Adviser Services - 1-800-367-9160
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.
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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 April 29, 1996, 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.
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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.
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Investors Should Read and Retain this Prospectus for Future Reference
<PAGE>
FEE TABLE
Annual Fund Operating Expenses:
(as a percentage of average net assets) (net of reimbursement):
Management fees ..................................................... 1.00%
12b-1 fees .......................................................... 0.25%
Other fees .......................................................... 0.25%
-----
Total Fund Operating Expenses ....................................... 1.50%
=====
<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 ....... $15.26 $47.41 $81.84 $179.05
</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.)
LMC has agreed to voluntarily limit the total expenses of the Fund (excluding
interest, taxes, brokerage and extraordinary expenses but including management
fee and operating expenses) to an annual rate of 1.50% of the Fund's average net
assets through April 30, 1997 or such later date as may be determined by LMC.
Absent expense reimbursements, total Fund operating expenses would have been
3.07% of the Fund's average net assets. 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, 1995 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.
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Selected Per Share Data for a share outstanding throughout the period
<TABLE>
<CAPTION>
Period from
July 10, 1986
Year ended December 31, (commencement of
------------------------------------------------------------------------------ operations) to
1995 1994 1993 1992 1991 1990 1989 1988 1987 December 31, 1986
---- ---- ---- ---- ---- ---- ---- ---- ---- -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period .......... $ 9.80 $10.95 $10.39 $10.35 $10.05 $10.12 $10.03 $ 9.67 $10.55 $10.00
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Income (loss)
from investment operations:
Net investment income ........ 0.96 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 . 0.95 (1.16) 0.58 0.04 0.30 (0.09) 0.09 0.36 (0.86) 0.55
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total income (loss) from
investment operations ........ 1.91 (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 ...... (0.96) (0.45) (0.55) (0.61) (0.67) (0.71) (0.63) (0.63) (0.80) (0.32)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net asset value, end of period . $10.75 $ 9.80 $10.95 $10.39 $10.35 $10.05 $10.12 $10.03 $ 9.67 $10.55
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Total return+ .................. 20.10% (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 .... 3.07% 1.80% 1.44% 1.54% 1.65% 1.61% 1.72% 1.50% 1.97% 1.52%*
Expenses, net of
reimbursement or waiver .... 2.75% 1.50% 1.44% 1.50% 1.12% 1.08% 1.20% 1.33% - -
Net investment income, before
reimbursement or waiver .... 9.48% 4.18% 4.83% 5.88% 6.11% 6.67% 5.70% 6.16% 5.98% 5.80%*
Net investment income ........ 9.80% 4.48% 4.83% 5.92% 6.64% 7.20% 6.22% 6.33% 7.95% 7.30%*
Portfolio turnover ............. 164.72% 10.20% 31.06% 31.24% 29.45% 44.50% 46.60% 67.11% 66.77% -
Net assets, end of period
(000's omitted) .............. $12,255 $10,351 $14,576 $13,085 $12,252 $10,707 $12,739 $13,139 $11,049 $ 8,409
<FN>
*Annualized
+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.
</FN>
</TABLE>
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 OBJECTIVE
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
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<PAGE>
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 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
4
<PAGE>
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 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."
It is expected that the Fund will have an annual portfolio turnover that
generally will not exceed 100%. A 100% turnover rate would occur if all of the
Fund's portfolio investments were sold and either repurchased or replaced within
one year. High turnover may result in increased trnasaction costs to the Fund;
however, the rate of turnover will not be a limiting factor when the Fund deems
it desirable to purchase or sell portfolio investments. Therefore, depending on
market conditions, the Fund's annual portfolio turnover rate may exceed 100% in
a particular year. For the fiscal year ended December 31, 1995, the portfolio
turnover rate was 164.72%.
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 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
5
<PAGE>
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
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
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<PAGE>
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 obligation 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 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
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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 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, 1995, 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.
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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 securities
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.
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.
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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 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.
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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. Similarly, 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
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<PAGE>
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 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, especially 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 nine trustees (of whom six are
non-interested persons under the Investment Company Act of 1940) who meet five
times each year. The Statement of Additional Information contains more data
regarding the Trustees and officers of the Fund.
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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
24 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 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 $3.0 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,
Lexington Global Asset Managers, 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 Lexington Global Asset
Managers, Inc., a Delaware corporation with offices at Park 80 West Plaza Two,
Saddle Brook, New Jersey 07663. Descendants of Lunsford Richardson, Sr., their
spouses, trusts and other related entities have a majority voting control of
outstanding shares of Lexington Global Asset Managers, Inc. 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
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ending December 31, 1995, LMC earned $97,938 in management fees from the Fund.
See "Investment Adviser and Distributor" in the Statement of Additional
Information.
Lexington Management Corporation has agreed to voluntarily limit the total
operating expenses of the Fund (excluding interest, taxes, brokerage and
extraordinary expenses, but including management fee and operating expenses) to
an annual rate of 1.50% of the Fund's average net assets through April 30, 1997
or such later date to be determined by Lexington Management Corporation.
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.
Securities for which market quotations are not readily available and other
assets shall be valued by Fund management in good faith 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.
Generally, trading in foreign securities, as well as United States
Government securities, money market instruments and repurchase agreements, is
substantially completed each day at various times prior to the close of the New
York Stock Exchange. The values of such securities used in computing the net
asset value of the shares of the Fund are determined as of such times. Foreign
currency exchange rates are also generally determined prior to the close of the
Exchange. Occasionally, events affecting the value of such securities and such
exchange rates may occur between the times at which they are determined and the
close of the Exchange, which will not be reflected in the computation of net
asset value. If during such periods, events occur which materially affect the
value of such securities, the securities will be valued at their fair market
value as determined by management and approved in good faith by the Board of
Trustees.
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).
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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) 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 three business 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 $25,000 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.
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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 third 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 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 and emerging markets.
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.
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 and Missouri.
LEXINGTON CROSBY SMALL CAP ASIA GROWTH FUND, INC./Seeks long-term capital
appreciation through investment in companies domiciled in the Asia
Region with a market capitalization of less than $1 billion.
LEXINGTON TROIKA DIALOG RUSSIA FUND, INC./Seeks long-term capital appreciation
through investment primarily in the equity securities of Russian
companies. The Fund is expected to be available in June, 1996 and has
a $5,000 minimum investment.
LEXINGTON RAMIREZ GLOBAL INCOME FUND (NASDAQ Symbol: LEBOX)/Seeks high current
income. Capital appreciation is a secondary objective.
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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.
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 SMALLCAP VALUE FUND, INC./Seeks long-term capital appreciation through
investment in common stocks of companies domiciled in the United
States with a market capitalization of less than $1 billion.
LEXINGTON 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 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 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
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
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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, DISTRIBUTIONS AND REINVESTMENT POLICIES
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:
(filled box) to have all dividends and other distributions automatically
reinvested in additional shares; or
(filled box) to receive dividends (which may include short-term capital gains)
in cash and have other distributions automatically reinvested in additional
shares; or
(filled box) to receive other distributions in cash and have dividends (which
may include short-term capital gains) automatically reinvested in additional
shares; or
(filled box) 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.
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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 qualify as a regulated investment company by satisfying
the requirements under Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code"), concerning the diversification of assets, distribution of
income, and ssources of income. The Fund contemplates the distribution of all of
its net investment income and capital gains, if any, in accordance with the
timing requirements imposed by the Code, so that it will not be subject to
federal income taxes or the 4% excise tax on undistributed income.
Distributions by the Fund of its net investment income and the excess, if
any, of its net short-term capital gain over its net long-term capital loss are
taxable to shareholders as ordinary income. Distributions by the Fund of the
excess, if any, of its net long-term capital gain over its net short-term
capital loss ar edesignated as capital gain dividends and are taxable to
shareholders as long-term capital gain, regardless of the length of time
shareholders have held their shares. If a shareholder disposes of shares in the
Fund at a loss before holding such shares for more than six months, the loss
will be treated as a long-term capital loss to the extent that the shareholder
has received a capital gain dividend on those shares.
Under certain circumstances, the Fund may be in a position to (in which case
it would) elect to "pass-through" to its shareholders the right to a credit or
deduction for income or other creditable taxes paid by the Fund to foreign
governments.
Distributions to shareholders of the Fund will be treated in the same manner
for federal income tax purposes whether received in cash or in additional shares
and may also be subject to state and local taxes. Distirbutions received by
shareholders of the Fund in January of a given year will be treated as received
on December 31 of the preceding year provided that such dividends were declared
to shareholders of record on a date in October, November, or December of such
preceding year. The Fund sends tax statements to its shareholders annually
showing the amounts and tax status of distributions made (or deemed made) during
the preceding calendar year, including the amount of any foreign taxes"
passed-through."
Investors are asked to provide their correct social security or taxpayer
identification number and other required certifications. If investors do not
comply with the relevant Treasury Regulations, the Fund will be required to
withhold 3% of amounts distributed to them by the Fund as dividends or in
redemption of their shares.
The information above is only a summary of some of the federal income tax
consequences generally affecting the Fund and its U.S. shareholders, and no
attempt has been made to discuss individual tax consequences. A prospective
investor should also review the more detailed discussion of federal income tax
considerations in the Statement of Additional Information. In addition to the
federal income tax, a shareholder may be subject to state or local taxes on his
or her investment in the Fund, depending on the laws in the shareholder's
jurisdiction. Investors considering an investment in the Fund shold consult
their tax advisers to determine whether the Fund is suitable to their particular
tax situation.
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
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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 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, 1996.
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
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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.
The Code of Ethics adopted by each of the Adviser, Sub-Adviser and the Fund
prohibits all affiliated personnel from engaging in personal investment
activities which compete with or attempt to take advantage of the Fund's planned
portfolio transactions. The objective of each Code of Ethics is that the
operations of the Adviser, Sub-Adviser and Fund be carried out for the exclusive
benefit of the Fund's shareholders. All organizations maintain careful
monitoring of compliance with the Code of Ethics.
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.
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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.
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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\'96" 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>
(Right Column)
L E X I N G T O N
LEXINGTON
RAMIREZ
GLOBAL
INCOME
FUND
(filled box)
(filled box) Capital appreciation
potential
(filled box) Free telephone
exchange privilege
(filled box) No sales charge
(filled box)
The Lexington Group
of
No-Load
Investment Companies
P R O S P E C T U S
APRIL 29, 1996
(Left column)
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
Lexington Funds
1004 Baltimore
Kansas City, Missouri 64105
Or call toll free:
Service: 1-800-526-0056
Institutional/Financial Adviser Services: 1-800-367-9160
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 Objective .............................. 3
Investment Policies ............................... 4
Certain Investment Methods ........................ 5
Risk Factors ...................................... 8
Management of the Fund ............................ 12
Portfolio Managers ................................ 12
Investment Adviser, Sub-Adviser, Distributor and
Administrator ................................... 13
Determination of Net Asset Value .................. 14
How to Purchase Shares ............................ 14
How to Redeem Shares .............................. 15
Shareholder Services .............................. 16
Exchange Privilege ................................ 16
Dividends, Distributions and Reinvestment Policies. 18
Taxes ............................................. 19
Distribution Plan ................................. 19
Custodian, Transfer Agent and
Dividend Disbursing Agent ....................... 20
Counsel and Independent Auditors .................. 20
Other Information ................................. 20
Appendix A ........................................ A-1
Appendix B ........................................ B-1
<PAGE>
LEXINGTON RAMIREZ GLOBAL INCOME FUND
STATEMENT OF ADDITIONAL INFORMATION
APRIL 29, 1996
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 April 29, 1996 as it may be revised from time to
time. To obtain a copy of the Fund's prospectus at no charge, please write to
the Fund at P.O. Box 1515, Park 80 West - Plaza Two, Saddle Brook, New Jersey
07663 or call the following toll-free numbers:
Shareholder Services: - 1-800-526-0056
Institutional/Financial Adviser Services: - 1-800-367-9160
24-Hour Account Information: - 1-800-526-0052
Lexington Management Corporation ("LMC") serves as the Fund's Investment
Adviser. MFR Advisors, Inc. serves as the Fund's Sub-Adviser. Lexington Funds
Distributor, Inc. ("LFD") serves as the Fund's Distributor.
TABLE OF CONTENTS
Page
Investment Objective and Policies ........................................... 2
Derivative Instruments: Options, Futures and Forward Currency Strategies .... 4
Risk Factors ................................................................ 10
Investment Restrictions ..................................................... 12
Portfolio Transactions ...................................................... 13
Valuation of Fund Shares .................................................... 14
Investment Adviser, Sub-Adviser, Distributor and Administrator .............. 15
Taxes ....................................................................... 17
Distribution Plan ........................................................... 19
Custodian, Transfer Agent and Dividend Disbursing Agent ..................... 20
Management of the Fund ...................................................... 20
Investment Return Information ............................................... 22
Financial Statements ........................................................ 25
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.
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
2
<PAGE>
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.
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
3
<PAGE>
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.
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.
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
4
<PAGE>
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.
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.
5
<PAGE>
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.
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.
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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.
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.
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
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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.
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
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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.
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
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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 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.
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
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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.
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.
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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.
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
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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;
(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 (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.
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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 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: 1993, 31.06%;
1994, 10.20% and 1995, 164.72%.
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.
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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.
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.
Investment Adviser, Sub-Adviser, Distributor, and Administrator
Lexington Management Corporation has agreed to voluntarily limit the total
operating expenses of the Fund (excluding interest, taxes, brokerage and
extraordinary expenses, but including management fee and operating expenses) to
an annual rate of 1.50% of the Fund's average net assets through April 30, 1997
or such later date to be determined by Lexington Management Corporation.
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.
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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.
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."
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
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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 1, 1996,
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 Lexington Global Asset
Managers, Inc., a Delaware corporation with offices at Park 80 West Plaza Two,
Saddle Brook, New Jersey 07663. Descendants of Lunsford Richardson, Sr., their
spouses, trusts and other related entities have a majority voting control of
outstanding shares of Lexington Global Asset Managers, Inc. common stock.
TAXES
The following is only a summary of certain additional tax considerations
generally affecting the Fund and its shareholders that are not described in the
Prospectus. No attempt is made to present a detailed explanation of the tax
treatment of the Fund or its shareholders, and the discussions here and in the
Prospectus are not intended as substitutes for careful tax planning.
Qualification as a Regulated Investment Company
The Fund has elected to be taxed as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). As a
regulated investment company, the Fund is not subject to federal income tax on
the portion of its net investment income (i.e., taxable interest, dividends, and
other taxable ordinary income, net of expenses) and capital gain net income
(i.e., the excess of capital gains over capital losses) that it distributes to
shareholders, provided that it distributes at least 90% of its investment
company taxable income (i.e., net investment income and the excess of net
short-term capital gain over net long-term capital loss) for the taxable year
(the "Distribution Requirement"), and satisfies certain other requirements of
the Code that are described below. Distributions by the Fund made during the
taxable year or, under specified circumstances, within twelve months after the
close of the taxable year, will be considered distributions of income and gains
of the taxable year and can therefore satisfy the Distribution Requirement.
If the Fund has a net capital loss (i.e., the excess of capital losses over
capital gains) for any year, the amount thereof may be carried forward up to
eight years and treated as a short-term capital loss which can be used to offset
capital gains in such years. As of December 31, 1995, the Fund has capital loss
carryforwards of approximately $99,152; $48,158; $6,712; $37,269; and $97,345,
which expire through 1996, 1998, 1999, 2001, and 2002, respectively. Under Code
Sections 382 and 383, if the Fund has an "ownership change," then the Fund's use
of its capital loss carryforwards in any year following the ownership change
will be limited to an amount equal to the net asset value of the Fund
immediately prior to the ownership change multiplied by the long-term tax-exempt
rate (which is published monthly by the Internal Revenue Service (the "ERS")) in
effect for the month in which the ownership change occurs (the rate for March,
1996 is 5.31%). The Fund will use its best efforts to avoid having an ownership
change. However, because of circumstances which may be beyond the control or
knowledge of the Fund, there can be no assurance that the Fund will not have, or
has not already had, an ownership change. If the Fund has or has had an
ownership change, then any capital gain net income for any year following the
ownership change in excess of the annual limitation on the capital loss
carryforwards will have to be distributed by the Fund and will be taxable to
shareholders as described under "Fund Distributions" below.
In addition to satisfying the Distribution Requirement, a regulated
investment company must: (1) derive at least 90% of its gross income from
dividends, interest, certain payments with respect to securities loans, gains
from the sale or other disposition of stock or securities, or foreign currencies
(to the extent such currency gains are directly related to the regulated
investment company's principal business of investing in stock or securities) and
other income (including but not limited to gains from options, futures, or
forward contracts) derived with respect to its business of investing in such
stock, securities, or currencies (the "Income Requirement"); and (2) derive less
than 30% of its gross income (exclusive of certain gains on designated hedging
transactions that are offset by realized or unrealized losses on offsetting
positions) from the sale or other disposition of stock, securities, or foreign
currencies (or options, futures, or forward contracts thereon) held for less
than three months (the "Short-Short Gain Test"). However, foreign currency
gains, including those derived from options, futures, and forwards, will not in
any event be characterized as Short-Short Gain if they are directly related to
the regulated investment company's investments in stock or securities (or
options or futures thereon). Because of the Short-Short Gain Test, the Fund may
have to limit the sale of appreciated securities that it has held for less than
three months. However, the Short-Short Gain Test will not prevent the Fund from
disposing of investments at a loss, since the recognition of a loss before the
expiration of the three-month holding period is disregarded for this purpose.
Interest (including original issue discount) received by the Fund at maturity or
upon the disposition of a security held for less than three months will not be
treated as gross income derived from the sale or other disposition of such
security within the meaning of the Short-Short Gain Test. However, income that
is attributable to
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realized market appreciation will be treated as gross income from the sale or
other disposition of securities for this purpose.
In general, gain or loss recognized by the Fund on the disposition of an
asset will be a capital gain or loss. However, gain recognized on the
disposition of a debt obligation purchased by the Fund at a market discount
(generally, at a price less than its principal amount) will be treated as
ordinary income to the extent of the portion of the market discount which
accrued during the period of time the Fund held the debt obligation. In
addition, under the rules of Code Section 988, gain or loss recognized on the
disposition of a debt obligation denominated in a foreign currency or an option
with respect thereto (but only to the extent attributable to changes in foreign
currency exchange rates), and gain or loss recognized on the disposition of a
foreign currency forward contract, futures contract, option, or similar
financial instrument, or of foreign currency itself, except for regulated
futures contracts or non-equity options subject to Code Section 1256 (unless the
Fund elects otherwise), will generally be treated as ordinary income or loss.
Further, the Code also treats as ordinary income, a portion of the capital
gain attributable to a transaction where substantially all of the return
realized is attributable to the time value of the Fund's net investment in the
transaction and: (1) the transaction consists of the acquisition of property by
the Fund and a contemporaneous contract to sell substantially identical property
in the future; (2) the transaction is a straddle within the meaning of Section
1092 of the Code; (3) the transaction is one that was marketed or sold to the
Fund on the basis that it would have the economic characteristics of a loan but
the interest-like return would be taxed as capital gain; or (4) the transaction
is described as a conversion transaction in the Treasury Regulations. The amount
of the gain recharacterized generally will not exceed the amount of the interest
that would have accrued on the net investment for the relevant period at a yield
equal to 120% of the federal long-term, mid-term, or short-term rate, depending
upon the type of instrument at issue, reduced by an amount equal to: (1) prior
inclusions of ordinary income items from the conversion transaction; and (2) the
capital interest on acquisition indebtedness under Code Section 263(g). Built-in
losses will be preserved where the Fund has a built-in loss with respect to
property that becomes a part of a conversion transaction. No authority exists
that indicates that the converted character of the income will not be passed to
the Fund's shareholders.
In general, for purposes of determining whether capital gain or loss
recognized by the Fund on the disposition of an asset is long-term or
short-term, the holding period of the asset may be affected if (1) the asset is
used to close a "short sale" (which includes for certain purposes the
acquisition of a put option) or is substantially identical to another asset so
used, or (2) the asset is otherwise held by the Fund as part of a "straddle"
(which term generally excludes a situation where the asset is stock and Fund
grants a qualified covered call option (which, among other things, must not be
deep-in-the-money) with respect thereto). However, for purposes of the
Short-Short Gain Test, the holding period of the asset disposed of may be
reduced only in the case of clause (1) above. In addition, the Fund may be
required to defer the recognition of a loss on the disposition of an asset held
as part of a straddle to the extent of any unrecognized gain on the offsetting
position.
Any gain recognized by the Fund on the lapse of, or any gain or loss
recognized by the Fund from a closing transaction with respect to, an option
written by the Fund will be treated as a short-term capital gain or loss. For
purposes of the Short-Short Gain Test, the holding period of an option written
by the Fund will commence on the date it is written and end on the date it
lapses or the date a closing transaction is entered into. Accordingly, the Fund
may be limited in its ability to write options which expire within three months
and to enter into closing transactions at a gain within three months of the
writing of options.
Transactions that may be engaged in by the Fund (such as regulated futures
contracts, certain foreign currency contracts, and options on stock indexes and
futures contracts) will be subject to special tax treatment as "Section 1256
contracts." Section 1256 contracts are treated as if they are sold for their
fair market value on the last business day of the taxable year, even though a
taxpayer's obligations (or rights) under such contracts have not terminated (by
delivery, exercise, entering into a closing transaction or otherwise) as of such
date. Any gain or loss recognized as a consequence of the year-end deemed
disposition of Section 1256 contracts is taken into account for the taxable year
together with any other gain or loss that was previously recognized upon the
termination of Section 1256 contracts during that taxable year. Any capital gain
or loss for the taxable year with respect to Section 1256 contracts (including
any capital gain or loss arising as a consequence of the year-end deemed sale of
such contracts) is generally treated as 60% long-term capital gain or loss and
40% short-term capital gain or loss. The Fund, however, may elect not to have
this special tax treatment apply to Section 1256 contracts that are part of a
"mixed straddle" with other investments of the Fund that are not Section 1256
contracts. The ERS has held in several private rulings (and Treasury Regulations
now provide) that gains arising from Section 1256 contracts will be treated for
purposes of the Short-Short Gain Test as being derived from securities held for
not less than three months if the gains arise as a result of a constructive sale
under Code Section 1256.
The Fund may enter into notional principal contracts, including interest
rate swaps, caps, floors, and collars. Under proposed Treasury Regulations, in
general, the net income or deduction from a notional principal contract for a
taxable
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year is included in or deducted from gross income for that taxable year. The net
income or deduction from a notional principal contract for a taxable year equals
the total of all of the periodic payments (generally, payments that are payable
or receivable at fixed periodic intervals of one year or less during the entire
term of the contract) that are recognized from that contract for the taxable
year and all of the non-periodic payments (including premiums for caps, floors
and collars) that are recognized from that contract for the taxable year. No
portion of a payment by a party to a notional principal contract is recognized
prior to the first year to which any portion of a payment by the counterparty
relates. A periodic payment is recognized ratably over the period to which it
relates. In general, a non-periodic payment must be recognized over the term of
the notional principal contract in a manner that reflects the economic substance
of the contract. A non-periodic payment that relates to an interest rate swap,
cap, floor or collar shall be recognized over the term of the contract by
allocating it in accordance with the values of a series of cash-settled forward
or option contracts that reflect the specified index and notional principal
amount upon which the notional principal contract is based (or, in the case of a
swap, under an alternative method contained in the proposed regulations and, in
the case of a cap or floor, under an alternative method which the ERS may
provide in a revenue procedure).
Treasury Regulations permit a regulated investment company, in determining
its investment company taxable income and net capital gain (i.e., the excess of
net long-term capital gain over net short-term capital loss) for any taxable
year, to elect (unless it has made a taxable year election for excise tax
purposes as discussed below) to treat all or any part of any net capital loss,
any net long-term capital loss or any net foreign currency loss incurred after
October 31 as if it had been incurred in the succeeding year.
In addition to satisfying the requirements described above, the Fund's must
satisfy an asset diversification test in order to qualify as a regulated
investment company. Under this test, at the close of each quarter of the Fund's
taxable year, at least 50% of the value of the Fund's assets must consist of
cash and cash items, U.S. Government securities, securities of other regulated
investment companies, and securities of other issuers (as to which the Fund has
not invested more than 5% of the value of the Fund's total assets in securities
of such issuer and as to which the Fund does not hold more than 10% of the
outstanding voting securities of such issuer), and no more than 25% of the value
of its total assets may be invested in the securities of any one issuer (other
than U.S. Government securities and securities of other regulated investment
companies), or in two or more issuers which the Fund controls and which are
engaged in the same or similar trades or businesses. Generally, an option (call
or put) with respect to a security is treated as issued by the issuer of the
security not the issuer of the option.
If for any taxable year the Fund does not qualify as a regulated investment
company, all of its taxable income (including its net capital gain) will be
subject to tax at regular corporate rates without any deduction for
distributions to shareholders, and such distributions will be taxable to the
shareholders as ordinary dividends to the extent of the Fund's current and
accumulated earnings and profits. Such distributions generally will be eligible
for the dividends-received deduction in the case of corporate shareholders.
Excise Tax on Regulated Investment Companies
A 4% non-deductible excise tax is imposed on a regulated investment company
that fails to distribute in each calendar year an amount equal to 98% of
ordinary taxable income for the calendar year and 98% of capital gain net income
for the one-year period ended on October 31 of such calendar year (or, at the
election of a regulated investment company having a taxable year ending November
30 or December 31, for its taxable year (a "taxable year election")). The
balance of such income must be distributed during the next calendar year. For
the foregoing purposes, a regulated investment company is treated as having
distributed any amount on which it is subject to income tax for any taxable year
ending in such calendar year.
For purposes of the excise tax, a regulated investment company shall: (1)
reduce its capital gain net income (but not below its net capital gain) by the
amount of any net ordinary loss for the calendar year; and (2) exclude foreign
currency gains and losses incurred after October 31 of any year (or after the
end of its taxable year if it has made a taxable year election) in determining
the amount of ordinary taxable income for the current calendar year (and,
instead, include such gains and losses in determining ordinary taxable income
for the succeeding calendar year).
The Fund intends to make sufficient distributions or deemed distributions of
its ordinary taxable income and capital gain net income prior to the end of each
calendar year to avoid liability for the excise tax. However, investors should
note that the Fund may in certain circumstances be required to liquidate
portfolio investments to make sufficient distributions to avoid excise tax
liability.
Fund Distributions
The Fund anticipates distributing substantially all of its investment
company taxable income for each taxable year. Such distributions will be taxable
to shareholders as ordinary income and treated as dividends for federal income
tax purposes, but they will qualify for the 70% dividends-received deduction for
corporate shareholders.
19
<PAGE>
The Fund may either retain or distribute to shareholders its net capital
gain for each taxable year. The Fund currently intends to distribute any such
amounts. If net capital gain is distributed and designated as a capital gain
dividend, it will be taxable to shareholders as long-term capital gain,
regardless of the length of time the shareholder has held his shares or whether
such gain was recognized by the Fund prior to the date on which the shareholder
acquired his shares.
Conversely, if the Fund elects to retain its net capital gain, the Fund will
be taxed thereon (except to the extent of any available capital loss carryovers)
at the 35% corporate tax rate. If the Fund elects to retain its net capital
gain, it is expected that the Fund also will elect to have shareholders of
record on the last day of its taxable year treated as if each received a
distribution of his pro rata share of such gain, with the result that each
shareholder will be required to report his pro rata share of such gain on his
tax return as long-term capital gain, will receive a refundable tax credit for
his pro rata share of tax paid by the Fund on the gain, and will increase the
tax basis for his shares by an amount equal to the deemed distribution less the
tax credit.
Investment income that may be received by the Fund from sources within
foreign countries may be subject to foreign taxes withheld at the source. The
United States has entered into tax treaties with many foreign countries which
entitle the Fund to a reduced rate of, or exemption from, taxes on such income.
It is impossible to determine the effective rate of foreign tax in advance since
the amount of the Fund's assets to be invested in various countries is not
known. If more than 50% of the value of the Fund's total assets at the close of
its taxable year consist of the stock or securities of foreign corporations, the
Fund may elect to "pass through" to the Fund's shareholders the amount of
foreign taxes paid by the Fund. If the Fund so elects, each shareholder would be
required to include in gross income, even though not actually received, his pro
rata share of the foreign taxes paid by the Fund, but would be treated as having
paid his pro rata share of such foreign taxes and would therefore be allowed to
either deduct such amount in computing taxable income or use such amount
(subject to various Code limitations) as a foreign tax credit against federal
income tax (but not both). For purposes of the foreign tax credit limitation
rules of the Code, each shareholder would treat as foreign source income his pro
rata share of such foreign taxes plus the portion of dividends received from the
Fund representing income derived from foreign sources. No deduction for foreign
taxes could be claimed by an individual shareholder who does not itemize
deductions. Each shareholder should consult his own tax adviser regarding the
potential application of foreign tax credits.
Distributions by the Fund that do not constitute ordinary income dividends
or capital gain dividends will be treated as a return of capital to the extent
of (and in reduction of) the shareholder's tax basis in his shares; any excess
will be treated as gain from the sale of his shares, as discussed below.
Distributions by the Fund will be treated in the manner described above
regardless of whether such distributions are paid in cash or reinvested in
additional shares of the Fund (or of another fund). Shareholders receiving a
distribution in the form of additional shares will be treated as receiving a
distribution in an amount equal to the fair market value of the shares received,
determined as of the reinvestment date. In addition, if the net asset value at
the time a shareholder purchases shares of the Fund reflects undistributed net
investment income or recognized capital gain net income, or unrealized
appreciation in the value of the assets of the Fund, distributions of such
amounts will be taxable to the shareholder in the manner described above,
although such distributions economically constitute a return of capital to the
shareholder.
Ordinarily, shareholders are required to take distributions by the Fund into
account in the year in which the distributions are made. However, dividends
declared in October, November or December of any year and payable to
shareholders of record on a specified date in such a month will be deemed to
have been received by the shareholders (and made by the Fund) on December 31 of
such calendar year if such dividends are actually paid in January of the
following year. Shareholders will be advised annually as to the U.S. federal
income tax consequences of distributions made (or deemed made) during the year.
The Fund will be required in certain cases to withhold and remit to the U.S.
Treasury 31 % of ordinary income dividends and capital gain dividends, and the
proceeds of redemption of shares, paid to any shareholder (1) who has provided
either an incorrect tax identification number or no number at all, (2) who is
subject to backup withholding by the ERS for failure to report the receipt of
interest or dividend income properly, or (3) who has failed to certify to the
Fund that it is not subject to backup withholding or that it is a corporation or
other "exempt recipient."
Sale or Redemption of Shares
A shareholder will recognize gain or loss on the sale or redemption of
shares of the Fund in an amount equal to the difference between the proceeds of
the sale or redemption and the shareholder's adjusted tax basis in the shares.
All or a portion of any loss so recognized may be disallowed if the shareholder
purchases other shares of the Fund within 30 days before or after the sale or
redemption. In general, any gain or loss arising from (or treated as arising
from) the sale or redemption of shares of the Fund will be considered capital
gain or loss and will be long-term capital gain or loss if the
20
<PAGE>
shares were held for longer than one year. However, any capital loss arising
from the sale or redemption of shares held for six months or less will be
treated as a long-term capital loss to the extent of the amount of capital gain
dividends received on such shares. For this purpose, the special holding period
rules of Code Section 246(c)(3) and (4) generally will apply in determining the
holding period of shares. Long-term capital gains of noncorporate taxpayers are
currently taxed at a maximum rate 11.6% lower than the maximum rate applicable
to ordinary income. Capital losses in any year are deductible only to the extent
of capital gains plus, in the case of a noncorporate taxpayer, $3,000 of
ordinary income.
Foreign Shareholders
Taxation of a shareholder who, as to the United States, is a nonresident
alien individual, foreign trust or estate, foreign corporation, or foreign
partnership ("foreign shareholder"), depends on whether the income from the Fund
is "effectively connected" with a U.S. trade or business carried on by such
shareholder.
If the income from the Fund is not effectively connected with a U.S. trade
or business carried on by a foreign shareholder, ordinary income dividends paid
to a foreign shareholder will be subject to U.S. withholding tax at the rate of
30% (or lower treaty rate) upon the gross amount of the dividend. Such a foreign
shareholder would generally be exempt from U.S. federal income tax on gains
realized on the sale of shares of the Fund, capital gain dividends and amounts
retained by the Fund that are designated as undistributed capital gains.
If the income from the Fund is effectively connected with a U.S. trade or
business carried on by a foreign shareholder, then ordinary income dividends,
capital gain dividends, and any gains realized upon the sale of shares of the
Fund will be subject to U.S. federal income tax at the rates applicable to U.S.
citizens or domestic corporations.
In the case of foreign noncorporate shareholders, the Fund may be required
to withhold U.S. federal income tax at a rate of 31 % on distributions that are
otherwise exempt from withholding tax (or taxable at a reduced treaty rate)
unless such shareholders furnish the Fund with proper notification of its
foreign status.
The tax consequences to a foreign shareholder entitled to claim the benefits
of an applicable tax treaty may be different from those described herein.
Foreign shareholders are urged to consult their own tax advisers with respect to
the particular tax consequences to them of an investment in the Fund, including
the applicability of foreign taxes.
Effect of Future Legislation, Local Tax Considerations
The foregoing general discussion of U.S. federal income tax consequences is
based on the Code and the Treasury Regulations issued thereunder as in effect on
the date of this Statement of Additional Information. Future legislative or
administrative changes or court decisions may significantly change the
conclusions expressed herein, and any such changes or decisions may have a
retroactive effect with respect to the transactions contemplated herein.
Rules of state and local taxation of ordinary income dividends and capital
gain dividends from regulated investment companies often differ from the rules
for U.S. federal income taxation described above. Shareholders are urged to
consult their tax advisers as to the consequences of these and other state and
local tax rules affecting investment in the Fund.
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.
21
<PAGE>
Quarterly, in each year that this Plan remains in effect, the Fund's
Treasurer shall prepare and furnish to the Trustees 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.
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, Lexington Global Asset Managers,
Inc.; 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.
Private Investor; formerly Manager of Operations Research Department, CPC
International, Inc.
*+BARBARA R. EVANS, Trustee. 5 Fernwood Road, Summit, N.J. 07901. Private
investor. Prior to May 1989, Assistant Vice President and Securities
Analyst, Lexington Management Corporation; prior to March 1987, Vice
President\'97Institutional 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.; Executive Vice President and General Manager-Mutual
Funds, Lexington Global Asset Managers, 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).
+JOHN G. PRESTON, Trustee. 3 Woodfield Road, Wellesley, Massachusetts.
Associate Professor of Finance, Boston College, Boston, Massachusetts 02181.
22
<PAGE>
+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 CURCIO, Vice President and Secretary. P.O. Box 1515, Saddle Brook, N.J.
07663. Senior Vice President and Secretary, Lexington Management
Corporation; Vice President and Secretary, Lexington Funds Distributor,
Inc.; Secretary, Lexington Global Asset Managers, Inc.
*+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.; Executive Vice President and Chief
Financial Officer, Lexington Global Asset Managers, 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.
*+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.
*+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 Vice President and 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, 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.
The Board of Trustees met 5 times during the twelve months ended December
31, 1995, and each of the Trustees attended at least 75% of those meetings.
Remuneration of Trustees and Certain Executive Officers
Each Trustee is reimbursed for expenses incurred in attending each meeting
of the Board of Trustees or any committee thereof. Each Trustee who is not an
affiliate of the advisor is compensated for his or her services according to a
fee schedule which recognizes the fact that each Trustee also serves as a
Trustee of other investment companies advised by LMC. Each Trustee receives a
fee, allocated among all investment companies for which the Trustee serves.
Effective September 12, 1995 each Trustee receives annual compensation of
$24,000. Prior to September 12, 1995, the trustees who were not employed by the
Fund or its affiliates received annual compensation of $16,000.
23
<PAGE>
Set forth below is information regarding compensation paid or accrued during
the period January 1, 1995 to December 31, 1995 for each Trustee:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
Aggregate Total Compensation Number of
Name of Trustee Compensation from From Fund and Directorships in Fund
Fund Fund Complex Complex
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Robert M. DeMichele 0 0 15
- -------------------------------------------------------------------------------------------
Beverley C. Duer $1,456 $22,616 15
- -------------------------------------------------------------------------------------------
Barbara R. Evans 0 0 14
- -------------------------------------------------------------------------------------------
Lawrence Kantor 0 0 14
- -------------------------------------------------------------------------------------------
Donald B. Miller $1,456 $20,616 14
- -------------------------------------------------------------------------------------------
John G. Preston $1,456 $20,616 14
- -------------------------------------------------------------------------------------------
Margaret Russell $1,456 $19,560 13
- -------------------------------------------------------------------------------------------
Philip C. Smith $1,456 $20,616 14
- -------------------------------------------------------------------------------------------
Francis A. Sunderland $1,456 $19,560 13
- -------------------------------------------------------------------------------------------
</TABLE>
Retirement Plan for Eligible Directors/Trustees
Effective September 12, 1995, the Trustees instituted a Retirement Plan for
Eligible Directors/Trustees (the "Plan") pursuant to which each Director/Trustee
(who is not an employee of any of the Funds, the Advisor, Administrator or
Distributor or any of their affiliates) may be entitled to certain benefits upon
retirement from the Board. Pursuant to the Plan, the normal retirement date is
the date on which the eligible Director/Trustee has attained age 65 and has
completed at least ten years of continuous and non-forfeited service with one or
more of the investment companies advised by LMC (or its affiliates)
(collectively, the "Covered Funds"). Each eligible Director/Trustee is entitled
to receive from the Covered Fund an annual benefit commencing on the first day
of the calendar quarter coincident with or next following his date of retirement
equal to 5% of his compensation multiplied by the number of such
Director/Trustee's years of service (not in excess of 15 years) completed with
respect to any of the Covered Portfolios. Such benefit is payable to each
eligible Trustee in quarterly installments for ten years following the date of
retirement or the life of the Director/Trustee. The Plan establishes age 72 as a
mandatory retirement age for Directors/Trustees; however, Director/Trustees
serving the Funds as of September 12, 1995 are not subject to such mandatory
retirement. Directors/Trustees serving the Funds as of September 12, 1995 who
elect retirement under the Plan prior to September 12, 1996 will receive an
annual retirement benefit at any increased compensation level if compensation is
increased prior to September 12, 1997 and receive spousal benefits (i.e., in the
event the Director/Trustee dies prior to receiving full benefits under the Plan,
the Director/Trustee's spouse (if any) will be entitled to receive the
retirement benefit within the 10 year period.)
Retiring Trustees will be eligible to serve as Honorary Trustees for one
year after retirement and will be entitled to be reimbursed for travel expenses
to attend a maximum of two meetings.
Set forth in the table below are the estimated annual benefits payable to an
eligible Trustee upon retirement assuming various compensation and years of
service classifications. As of December 31, 1995, the estimated credited years
of service for Messrs. Duer, Miller, Preston, Smith and Sunderland are 18, 22,
18, 26 and 36, respectively.
Highest Annual Compensation Paid by All Funds
$20,000 $25,000 $30,000 $35,000
Years of
Service Estimated Annual Benefit Upon Retirement
15 $15,000 $18,750 $22,500 $26,250
14 14,000 17,500 21,000 24,500
13 13,000 16,250 19,500 22,750
12 12,000 15,000 18,000 21,000
11 11,000 13,750 16,500 19,250
10 10,000 12,500 15,000 17,500
24
<PAGE>
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:
P(l+T)n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years (1, 5 or 10)
ERV = ending redeemable value of a hypothetical $1,000 payment made
at the beginning of the 1, 5 or 10 year periods 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.
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 7/10/86, period ended December 31, 1995 are set forth in the
table below:
Average Annual
Period Total Return
------ ------------
1 year ended December 31, 1995 .............. -20.16%
5 years ended December 31, 1995 ............. 7.85%
113 month period ended December 31, 1995 .... 7.54%
In addition to the total return quotations discussed above, the Fund may
advertise its yield based on a 30-day (or one month) period ended on the date of
the most recent balance sheet included in the Fund's Registration Statement,
computed by dividing the net investment income per share earned during the
period by the maximum offering price per share on the last day of the period,
according to the following formula:
a-b
YIELD = 2[--------6-1]
(cd + 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
25
<PAGE>
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.
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.
26
<PAGE>
Independent Auditors' Report
The Board of Directors and Shareholders
Lexington Ramirez Global Income Fund:
We have audited the accompanying statements of net assets (including the
portfolio of investments) and assets and liabilities of Lexington Ramirez Global
Income Fund, as of December 31, 1995, the related statement of operations for
the year then ended, the statements of changes in net assets for each of the
years in the two-year period then ended, and the financial highlights for each
of the years in the five-year period then ended. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1995 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 Ramirez Global Income Fund as of December 31, 1995, 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 29, 1996
27
<PAGE>
Lexington Ramirez Global Income Fund
Statement of Net Assets
(Including the Portfolio of Investments)
December 31, 1995
Left Col.
Principal Value
Amount* Security (Note 1)
- --------------------------------------------------------------------------------
LONG-TERM DEBENTURES: 79.0%
Government Obligations: 52.9%
Argentina: 4.7%
1,000,000 Republic of Argentina
5.00%, due 03/31/23 .......................... $ 571,875
---------
700,000 Treasury Corporation of Victoria
10.25%, due 11/15/06 ......................... 582,931
---------
Brazil: 5.0%
1,000,000 Republic of Brazil
7.25%, due 04/15/24 .......................... 615,000
---------
Canada: 4.5%
700,000 Stelco, Inc.
10.40%, due 11/30/09 ......................... 551,888
---------
Ecuador: 3.7%
1,250,000 Republic of Ecuador
3.00%, due 02/28/25 .......................... 454,688
---------
Germany: 4.1%
700,000 Bundesrepublic Deutschland
6.50%, due 10/14/05 .......................... 503,269
---------
Italy: 4.5%
900,000,000 Buoni Poliennali Del Tes
8.50%, due 01/01/99 .......................... 545,953
---------
Philippines: 3.0%
500,000 Central Bank of Philippines
5.75%, due 12/01/17 .......................... 372,500
---------
Spain: 2.5%
40,000,000 Bonos Y Oblig Del Estado
7.40%, due 07/30/99 .......................... 310,837
---------
Portugal: 8.5%
100,000,000 Obrig Do Tes Medio Prazo
8.875%, due 01/23/97 ......................... 667,423
50,000,000 Obrig Do Tes Medio Prazo
11.875%, due 02/23/05 ........................ 373,932
---------
1,041,355
---------
South Africa: 7.6%
2,000,000 Electricity Supply Commission
11.00%, due 06/01/08 ......................... 447,191
----------
2,000,000 Republic of South Africa
12.00%, due 02/28/05 ......................... 487,364
----------
934,555
----------
Total Government Obligations
(cost $6,005,328) ............................ 6,484,851
----------
Corporate Bonds: 26.1%
Brazil: 3.9%
500,000 Aracruz Celulose S.A.
10.375%, due 01/31/02 ........................ 478,750
---------
Czech Republic: 3.8%
12,500,000 CEZ, a.s.
11.30%, due 06/06/05 ......................... 468,850
---------
Right Col.
Principal Value
Amount* Security (Note 1)
=------------------------------------------------------------------------------
Costa Rica: 4.5%
900,000 Banco Costa Rica
6.25%, due 05/21/10 .......................... $ 551,250
----------
Denmark: 6.6%
2,992,000 Nykredit
8.00%, due 10/01/26 .......................... 521,785
----------
1,900,000 Realkredit Danmark
6.00%, due 10/01/26 .......................... 284,403
----------
806,188
----------
Mexico: 3.9%
500,000 Cemex S.A.
8.875%, due 06/10/98 ......................... 481,250
----------
United States: 3.4%
400,000 Chiquita Brands International, Inc.
11.50%, due 06/01/01 ......................... 418,000
----------
Total Corporate Bonds
(cost $3,114,868) ............................ 3,204,288
----------
TOTAL LONG-TERM DEBENTURES
(cost $9,120,196) ............................ 9,689,139
----------
SHORT-TERM INVESTMENTS: 20.2%
Greece: 4.8%
120,000,000 Hellenic Treasury Bills
0%, due 05/31/96 ............................. 476,476
----------
30,000,000 Hellenic Treasury Bills
0%, due 12/18/96 ............................. 111,428
----------
587,904
----------
Hungary: 3.7%
80,000,000 Government of Hungary Treasury
Bills 0%, due 12/20/96 ....................... 452,138
----------
Mexico: 2.2%
2,100,000 Cetes
0%, due 01/25/96 ............................. 267,780
----------
Poland: 7.1%
1,100,000 Government of Poland Treasury
Bills 0%, due 02/28/96 ....................... 430,909
1,300,000 Government of Poland Treasury
Bills 0%, due 11/15/96 ....................... 435,370
----------
866,279
----------
United States: 2.4%
300,000 U.S. Treasury Bill
4.91%, due 03/07/96 .......................... 297,300
----------
TOTAL SHORT-TERM INVESTMENTS
(cost $2,543,030) ............................ 2,471,401
----------
TOTAL INVESTMENTS: 99.2%
(cost $11,663,226+) (Note 1) .............. 12,160,540
Other assets in excess of
liabilities: 0.8% ............................ 94,192
----------
TOTAL NET ASSETS: 100%
(equivalent to $10.75 per share
on 1,139,533 shares outstanding) ............. $12,254,732
===========
*Principal amount represents local currency.
+Aggregate cost for Federal income tax purposes is identical.
The Notes to Financial Statements are an integral part of this statement.
28
<PAGE>
Lexington Ramirez Global Income Fund
Statement of Assets and Liabilities
December 31, 1995
<TABLE>
<S> <C>
Assets
Investments in securities, at value (cost $11,663,226) (Note 1) ....................... $12,160,540
Receivable for investment securities sold ............................................. 2,383,236
Receivable for shares sold ............................................................ 1,526,300
Interest receivable ................................................................... 270,239
-----------
Total Assets ................................................................... 16,340,315
-----------
Liabilities
Due to custodian bank ................................................................. 1,482,447
Due to Lexington Management Corporation (Note 2) ...................................... 2,849
Payable for investment securities purchased ........................................... 2,504,406
Payable for shares redeemed ........................................................... 13,120
Accrued expenses ...................................................................... 40,101
Distributions payable ................................................................. 42,660
-----------
Total Liabilities .............................................................. 4,085,583
-----------
Net Assets (equivalent to $10.75 per share on 1,139,533 shares outstanding) (Note 4) .. $12,254,732
===========
Net Assets consist of:
Additional paid-in capital (Note 1) ................................................... 12,031,391
Undistributed net investment income (Note 1) .......................................... 16,186
Accumulated net realized loss on investments and foreign currency holdings (Note 7) ... (288,636)
Net unrealized appreciation of investments and foreign currency holdings .............. 495,791
-----------
$12,254,732
===========
</TABLE>
The Notes to Financial Statements are an integral part of this statement.
29
<PAGE>
Lexington Ramirez Global Income Fund
Statement of Operations
Year ended December 31, 1995
<TABLE>
<S> <C> <C>
Investment Income
Interest income ................................................ $1,243,253
Less: foreign tax expense ...................................... 14,253
----------
Investment income $1,229,000
Expenses
Investment advisory fee (Note 2) ............................... 97,938
Accounting and shareholder services expense (Note 2) ........... 20,445
Custodian and transfer agent expenses .......................... 21,942
Directors' fees and expenses ................................... 13,447
Audit and legal ................................................ 25,038
Printing and mailing ........................................... 57,852
Registration fees .............................................. 21,322
Distribution expense (Note 3) .................................. 24,484
Computer processing fees ....................................... 6,502
Other expenses ................................................. 11,249
----------
Total expenses ......................................... 300,219
Less: expenses recovered under contract with
investment adviser (Note 2) .......................... 30,571 269,648
---------- ----------
Net investment income 959,352
Realized and Unrealized Gain (Loss) on Investments (Note 5)
Net realized gain (loss) on:
Investments ................................................ 427,257
Foreign currency ........................................... (95,887)
----------
Net realized gain 331,370
Net change in unrealized appreciation (depreciation) on:
Investments ................................................ 493,914
Foreign currency translation of other assets and liabilities (1,523)
----------
Net change in unrealized appreciation ................... 492,391
----------
Net realized and unrealized gain ................... 823,761
----------
Increase in Net Assets Resulting from Operations ................... $1,783,113
==========
</TABLE>
The Notes to Financial Statements are an integral part of this statement.
30
<PAGE>
Lexington Ramirez Global Income Fund
Statements of Changes in Net Assets
Year ended December 31, 1995 and 1994
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Net investment income ..................................................... $ 959,352 $ 579,593
Net realized gain (loss) from security transactions ....................... 331,370 (305,265)
Increase (decrease) in unrealized appreciation of investments ............. 492,391 (1,173,108)
----------- -----------
Net increase (decrease) in net assets resulting from operations ........... 1,783,113 (898,780)
Distributions to shareholders from net investment income .................. (901,633) (563,046)
Increase (decrease) in net assets from capital share transactions
(Note 4) ................................................................ 1,022,692 (2,763,453)
----------- -----------
Net increase (decrease) in net assets ..................................... 1,904,172 (4,225,279)
Net Assets
Beginning of period ....................................................... 10,350,560 14,575,839
----------- -----------
End of period ............................................................. $12,254,732 $10,350,560
=========== ===========
</TABLE>
The Notes to Financial Statements are an integral part of these statements.
31
<PAGE>
Lexington Ramirez Global Income Fund
Notes to Financial Statements
December 31, 1995 and 1994
1. Significant Accounting Policies
Lexington Ramirez Global Income Fund, Inc. (the "Fund") is an open end
diversified management investment company registered under the Investment
Company Act of 1940, as amended. The Fund's investment objective is to seek high
current income. Capital appreciation is a secondary objective. The following is
a summary of significant accounting policies followed by the Fund in the
preparation of its financial statements:
Investments Security transactions are accounted for on a trade date basis.
Realized gains and losses from security transactions are reported on the
identified cost basis. 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. 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. All investments quoted in
foreign currencies are valued in U.S. dollars on the basis of the foreign
currency exchange rates prevailing at the close of business. Dividends and
distributions to shareholders are recorded on the ex-dividend date. Interest
income is accrued as earned.
Foreign Currency Transactions Foreign currencies (and receivables and
payables denominated in foreign currencies) are translated into U.S. dollar
amounts at current exchange rates. Translation gains or losses resulting from
changes in exchange rates and realized gains and losses on the settlement of
foreign currency transactions are reported in the statement of operations. In
addition, the Fund may enter into forward foreign exchange contracts in order to
hedge against foreign currency risk in the purchase or sale of securities
denominated in foreign currency. The Fund may also enter into such contracts to
hedge against changes in foreign currency exchange rates on portfolio positions.
These contracts are marked to market daily, by recognizing the difference
between the contract exchange rate and the current market rate as unrealized
gains or losses. Realized gains or losses are recognized when contracts are
closed and are reported in the statement of operations.
Distributions In accordance with 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,
1995, book and tax basis differences amounting to $14,434 have been reclassified
from additional paid-in-capital to undistributed net investment income. In
addition $43,646 was reclassified from undistributed net investment income to
accumulated net realized loss on investments and foreign currency holdings. 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 Fund's intention to comply with the
requirements of the Internal Revenue Code applicable to "regulated investment
companies" and to distribute all of its taxable income to its shareholders.
Therefore, no provision for Federal income taxes has been made.
Other Matters The Board of Trustees approved a change in the Fund's name and
objective on November 30, 1994. Effective January 3, 1995 the Fund's name was
changed to Lexington Ramirez Global Income Fund and its objective was changed 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 Fund pays an investment advisory fee to Lexington Management Corporation
("LMC") at the rate of 1% of average daily net assets. In connection with
providing investment advisory services, LMC has entered into a sub-advisory
contract with MFR Advisors Inc. ("MFR") under which MFR provides the Fund with
investment management services. Pursuant to the terms of the sub-advisory
contract between LMC and MFR, LMC pays MFR a monthly sub-advisory fee at the
annual rate of .50% of the Fund's average daily net assets. The investment
advisory contract provides that the total annual expenses of the Fund (including
management fees, but excluding interest, taxes, brokerage commissions and
extraordinary expenses) will not exceed the level of expenses which the Fund is
permitted to bear under the most restrictive expense limitation imposed by any
state in which shares of the Fund are offered for sale. The investment advisory
fee and expense reimbursement are set forth in the statement of operations.
32
<PAGE>
Lexington Ramirez Global Income Fund
Notes to Financial Statements
December 31, 1995 and 1994 (continued)
2. Investment Advisory Fee and Other Transactions with Affiliate (continued)
The Fund also reimburses LMC for certain expenses, including accounting and
shareholder servicing costs, which are incurred by the Fund, but paid by LMC.
3. Distribution Plan
The Fund has adopted a Distribution Plan (the "Plan") which allows payments to
finance activities associated with the distribution of the Fund's shares. The
Plan provides that the Fund may pay distribution fees on a reimbursement basis,
including payments to Lexington Fund Distributors, Inc. ("LFD"), the Fund's
distributor, in amounts not exceeding 0.25% per annum of the Fund's average
daily net assets. Total distribution expenses for the year ended December 31,
1995 were $24,484 and are set forth in the statement of operations.
4. Shares of Beneficial Interest
The Fund is authorized to issue an unlimited number of no par value shares in
beneficial interest. Transactions of capital stock were as follows:
<TABLE>
<CAPTION>
Year ended Year ended
December 31, 1995 December 31, 1994
Shares Amount Shares Amount
-------- ---------- -------- -----------
<S> <C> <C> <C> <C>
Shares sold ................................... 356,354 $3,788,187 165,124 $ 1,718,766
Shares issued on reinvestment of dividends .... 72,344 755,680 44,829 458,077
-------- ---------- -------- -----------
428,698 4,543,867 209,953 2,176,843
Shares redeemed ............................... (345,326) (3,521,175) (484,897) (4,940,296)
-------- ---------- -------- -----------
Net increase (decrease) ....................... 83,372 $1,022,692 (274,944) $(2,763,453)
======== ========== ======== ===========
</TABLE>
5. Purchases and Sales of Investment Securities
The cost of purchases and proceeds from sales of securities for the year ended
December 31, 1995, excluding short-term securities, were $18,414,156 and
$10,238,456, respectively.
At December 31, 1995, aggregate gross unrealized appreciation for all securities
and foreign currency holdings (including foreign currency receivables and
payables) in which there is an excess of value over tax cost amounted to
$599,537 and aggregate gross unrealized depreciation for all securities and
foreign currency holdings in which there is an excess of tax cost over value
amounted to $103,746.
6. Investment Risks
The Fund's investments in foreign securities may involve risks not present in
domestic investments. Since foreign securities may be denominated in a foreign
currency and involve settlement and pay interest or dividends in foreign
currencies, changes in the relationship of these foreign currencies to the U.S.
dollar can significantly affect the value of the investments and earnings of the
Fund. Foreign investments may also subject the Fund to foreign government
exchange restrictions, expropriation, taxation or other political, social or
economic developments, all of which could affect the market and/or credit risk
of the investments.
In addition to the risks described above, risks may arise from forward foreign
currency contracts as the result of the potential inability of counterparties to
meet the terms of their contracts.
7. Federal Income Taxes-Capital Loss Carryforwards
As of December 31, 1995, $137,019 of capital loss carryforwards have expired and
been reclassified to additional paid-in capital. Capital loss carryforwards
available for Federal income tax purposes as of December 31, 1995 are
approximately:
$ 99,152 expiring in 1996;
$ 48,158 expiring in 1998;
$ 6,712 expiring in 1999;
$ 37,269 expiring in 2001; and,
$ 97,345 expiring in 2002.
33
<PAGE>
Lexington Ramirez Global Income Fund
Notes to Financial Statements
December 31, 1995 and 1994 (continued)
7. Federal Income Taxes-Capital Loss Carryforwards (continued)
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 Fund's taxable year can 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 Fund have been adjusted to reflect prior years'
post-October losses in the next fiscal year.
34
<PAGE>
Lexington Ramirez Global Income Fund
Financial Highlights
<TABLE>
<CAPTION>
Selected per share data for a share outstanding throughout the period:
Year ended December 31,
---------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period ............. $ 9.80 $10.95 $10.39 $10.35 $10.05
------ ------ ------ ------ ------
Income (loss) from investment operations:
Net investment income .......................... .96 .46 .53 .61 .67
Net realized and unrealized gain (loss) on
investments .................................. .95 (1.16) .58 .04 .30
------ ------ ------ ------ ------
Total income (loss) from investment operations ... 1.91 (.70) 1.11 .65 .97
------ ------ ------ ------ ------
Less distributions:
Dividends from net investment income ........... (.96) (.45) (.55) (.61) (.67)
------ ------ ------ ------ ------
Net asset value, end of period ................... $10.75 $ 9.80 $10.95 $10.39 $10.35
====== ====== ====== ====== ======
Total return ..................................... 20.10% (6.52%) 10.90% 6.51% 10.03%
Ratio to average net assets:
Expenses, before reimbursement or waiver ..... 3.07% 1.80% 1.44% 1.54% 1.65%
Expenses, net of reimbursement or waiver ..... 2.75% 1.50% 1.44% 1.50% 1.12%
Net investment income, before reimbursement
or waiver .................................. 9.48% 4.18% 4.83% 5.88% 6.11%
Net investment income ........................ 9.80% 4.48% 4.83% 5.92% 6.64%
Portfolio turnover ........................... 164.72% 10.20% 31.06% 31.24% 29.45%
Net assets, end of period (000's omitted) ........ $12,255 $10,351 $14,576 $13,085 $12,252
</TABLE>
35
