THE LEXINGTON FUNDS
P.O. Box 1515
Park 80 West Plaza Two
Saddle Brook, New Jersey 07663
Shareholder Services--1-800-526-0056
1-201-845-7300
Institutional/Financial Adviser Services--1-800-367-9160
24 Hour Account Information--1-800-526-0052
PROSPECTUS
May 1, 1997
The following eleven mutual funds (each a "Fund," and collectively the
"Funds") are offered in this Prospectus:
FUND NAME NASDAQ SYMBOL
Lexington Convertible Securities Fund CNCVX
Lexington Crosby Small Cap Asia Growth Fund, Inc. LXCAX
Lexington GNMA Income Fund, Inc. LEXNX
Lexington Goldfund, Inc. LEXMX
Lexington Growth and Income Fund, Inc. LEXRX
Lexington International Fund, Inc. LEXIX
Lexington Money Market Trust LMMXX
Lexington Ramirez Global Income Fund LEBDX
Lexington SmallCap Value Fund, Inc. LESVX
Lexington Troika Dialog Russia Fund, Inc. LETRX
Lexington Worldwide Emerging Markets Fund, Inc. LEXGX
Each Fund's shares offered in this Prospectus are sold at net asset value
with no sales load, no commissions and (except for certain redemptions of the
Lexington Troika Dialog Russia Fund) no redemption or exchange fees. The minimum
initial investment in each Fund is $1000 ($5,000 for the Lexington Troika Dialog
Russia Fund), and subsequent investments must be at least $50. See "How to
Invest in the Funds."
Each Fund is an open-end management investment company and managed by
Lexington Management Corporation (the "Manager"), an affiliate of Lexington
Funds Distributor Inc. (the "Distributor"). Each Fund has its own investment
objective and policies designed to meet different investment goals. The
Lexington Convertible Securities and Lexington Ramirez Global Income Funds may
invest without limitation in lower rated debt securities commonly referred to as
"junk bonds." Investments of this type are subject to greater risk of loss of
principal and interest. Lexington Troika Dialog Russia Fund involves speculative
investments and special risks, such as political, economic and legal
uncertainties, currency fluctuations, portfolio settlement and custody risks and
risks of loss arising out of Russia's system of share registration. The Fund may
not be appropriate for all investors. As with all mutual funds, there is no
guarantee a Fund will achieve its objective.
<PAGE>
Please read this Prospectus before investing and retain it for future
reference. A Statement of Additional Information dated May 1,1997, has been
filed with the Securities and Exchange Commission, is incorporated to this
Prospectus by reference and is available without charge by calling the
appropriate telephone number above or writing to the address listed above.
Information about the Lexington Funds is available on the Internet at
http://www.sec.gov or http://www.lexingtonfunds.com
AN INVESTMENT IN THE FUNDS IS NEITHER INSURED NOR GUARANTEED BY THE U.S.
GOVERNMENT. THERE CAN BE NO ASSURANCE THAT THE LEXINGTON MONEY MARKET TRUST WILL
BE ABLE TO MAINTAIN A STABLE NET ASSET VALUE OF $1 PER SHARE.
MUTUAL FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF (OR ENDORSED OR
GUARANTEED BY)ANY BANK, NOR ARE THEY FEDERALLY INSURED OR OTHERWISE PROTECTED BY
THE FEDERAL DEPOSIT INSURANCE CORPORATION ("FDIC"), THE FEDERAL RESERVE BOARD OR
ANY OTHER AGENCY. INVESTING IN MUTUAL FUNDS INVOLVES INVESTMENT RISKS, INCLUDING
THE POSSIBLE LOSS OF PRINCIPAL, AND THEIR VALUE AND RETURN WILL FLUCTUATE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
TABLE OF CONTENTS
The Lexington Funds ............................... 3
Fees and Expenses of the Funds .................... 5
Financial Highlights .............................. 8
The Funds' Investment Objectives
and Policies .................................... 19
Portfolio Securities .............................. 28
Other Investment Practices ........................ 32
Risk Considerations ............................... 34
Management of the Funds ........................... 41
How to Contact the Funds .......................... 52
How to Invest in the Funds ........................ 52
How to Redeem an Investment
in the Funds .................................... 55
Exchange/Telephone Redemption
Privileges and Restrictions .................... 58
How Net Asset Value is Determined ................. 59
Dividends and Distributions ....................... 61
Taxation .......................................... 62
General Information ............................... 63
Back-up Withholding ............................... 65
Glossary .......................................... 66
2
<PAGE>
THE LEXINGTON FUNDS
The Funds' investment objectives are summarized below. See "The Funds'
Investment Objectives and Policies" beginning on page 19, "Portfolio Securities"
beginning on page 28, "Other Investment Practices" beginning on page 19 and
"Risk Considerations" beginning on page 35 for more detailed information.
INTERNATIONAL FUNDS
LEXINGTON CROSBY SMALL CAP ASIA GROWTH FUND, INC.
The Lexington Crosby Small Cap Asia Growth Fund's investment objective is
to seek long-term capital appreciation through investment in common stocks and
equivalents of companies domiciled in the Asia Region with a market
capitalization of less than $1 billion.
LEXINGTON INTERNATIONAL FUND, INC.
The Lexington International Fund's investment objective is to seek
long-term growth of capital through investment in common stocks and equivalents
of companies domiciled in foreign countries.
LEXINGTON RAMIREZ GLOBAL INCOME FUND
The Lexington Ramirez Global Income Fund's investment objective is to seek
high current income. Capital appreciation is a secondary objective. The
Lexington Ramirez Global Income Fund invests in a combination of foreign and
domestic high-yield, lower rated debt securities, commonly known as "junk
bonds."
LEXINGTON TROIKA DIALOG RUSSIA FUND, INC.
The Lexington Troika Dialog Russia Fund's investment objective is to seek
long-term capital appreciation through investment primarily in the equity
securities of Russian companies.
LEXINGTON WORLDWIDE EMERGING MARKETS FUND, INC.
The Lexington Worldwide Emerging Markets Fund's investment objective is to
seek long-term growth of capital primarily through investment in equity
securities of companies domiciled in, or doing business in emerging countries
and emerging markets.
3
<PAGE>
DOMESTIC EQUITY FUNDS
LEXINGTON CONVERTIBLE SECURITIES FUND
The Lexington Convertible Securities Fund's investment objective is total
return which it seeks to achieve by providing capital appreciation, current
income and conservation of the shareholders capital.
LEXINGTON GROWTH AND INCOME FUND, INC.
The Lexington Growth and Income Fund's principal investment objective is
long term appreciation of capital. Income is a secondary objective.
LEXINGTON SMALLCAP VALUE FUND, INC.
The Lexington SmallCap Value Fund's principal investment objective is long
term capital appreciation. The Lexington SmallCap Value Fund will seek to obtain
its objective through investment in common stocks and equivalents primarily of
companies domiciled in the United States with a market capitalization of less
than $1 billion.
PRECIOUS METALS FUNDS
LEXINGTON GOLDFUND, INC.
The Lexington Goldfund's investment objective is to attain capital
appreciation and such hedge against loss of buying power as may be obtained
through investment in gold securities of companies engaged in mining or
processing gold throughout the world.
DOMESTIC FIXED-INCOME FUNDS
LEXINGTON GNMA INCOME FUND, INC.
The Lexington GNMA Income Fund's investment objective is to seek a high
level of current income, consistent with liquidity and safety of principal,
through investment primarily in mortgage-backed GNMA ("Ginnie Mae") Certificates
that are guaranteed as to the timely payment of principal and interest by the
United States Government.
MONEY MARKET FUNDS
LEXINGTON MONEY MARKET TRUST
The Lexington Money Market Trust's investment objective is to seek as high
a level of current income from short-term investments as is consistent with the
preservation of capital and liquidity. The Lexington Money Market Trust seeks to
maintain a stable net asset value of $1 per share.
4
<PAGE>
FEES AND EXPENSES OF THE FUNDS
SHAREHOLDER TRANSACTION EXPENSES
An investor would pay the following charges when buying or redeeming
shares of a Fund:
<TABLE>
<CAPTION>
MAXIMUM
MAXIMUM SALES
SALES LOAD IMPOSED DEFERRED SALES REDEMPTION
LOAD IMPOSED ON REINVESTED LOAD FEES+ EXCHANGE FEES
ON PURCHASES DIVIDENDS
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
None None None None None
- ------------------------------------------------------------------------------------------------------------
</TABLE>
+ Shareholders effecting redemptions via wire transfer may be required to pay
fees, including the wire fee and other fees, that will be directly deducted
from redemption proceeds. LEXINGTON TROIKA DIALOG RUSSIA FUND ONLY: you
will pay a redemption fee of 2% for shares you redeem within 365 days after
you have purchased them. See "How to Redeem an Investment in the Funds."
5
<PAGE>
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS):
<TABLE>
<CAPTION>
TOTAL FUND
MANAGEMENT RULE 12B-1 OTHER OPERATING
FEES FEES FEES EXPENSES
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTERNATIONAL FUNDS
Lexington Crosby Small Cap Asia
Growth Fund 1.25 1.17 2.42 *
Lexington International Fund 1.00 0.25 0.50 1.75 *
Lexington Ramirez Global Income Fund 1.00 0.25 0.25 1.50 *
Lexington Troika Dialog Russia Fund 1.25 0.25 1.65 3.35 *
Lexington Worldwide Emerging
Markets Fund 1.00 0.76 1.76
- -----------------------------------------------------------------------------------------------------------------------------------
DOMESTIC EQUITY FUNDS
Lexington Convertible Securities
Fund 1.00 0.25 1.14 2.39
Lexington Growth and Income Fund 0.68 0.25 0.20 1.13
Lexington SmallCap Value Fund 1.00 0.25 1.23 2.48 *
- -----------------------------------------------------------------------------------------------------------------------------------
PRECIOUS METALS FUNDS
Lexington Goldfund 0.84 0.25 0.51 1.60
- -----------------------------------------------------------------------------------------------------------------------------------
DOMESTIC FIXED-INCOME FUNDS
Lexington GNMA Income Fund 0.60 0.45 1.05
- -----------------------------------------------------------------------------------------------------------------------------------
MONEY MARKET FUNDS
Lexington Money Market Trust 0.50 0.50 1.00 *
* Net of reimbursement or waivers
</TABLE>
This table is intended to assist the investor in understanding the
various expenses of each Fund. Operating expenses are paid out of a Fund's
assets and are factored into the Fund's share price. Each Fund estimates that it
will have the expenses listed (expressed as a percentage of average net assets)
for the current fiscal year.
6
<PAGE>
EXAMPLE OF EXPENSES FOR THE FUNDS
Assuming, hypothetically, that each fund's annual return is 5% and that
its operating expenses are as set forth on previous page, an investor buying
$1,000 of a fund's shares would have paid the following total expenses upon
redeeming such shares:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Lexington Crosby Small Cap Asia Growth Fund 24.51 75.45 129.05 275.63
Lexington International Fund 17.78 55.11 94.89 206.24
Lexington Ramirez Global Income Fund 15.26 47.41 81.84 179.05
Lexington Troika Dialog Russia Fund 54.11 103.01 174.55 363.98
Lexington Worldwide Emerging Markets Fund 17.89 55.41 95.41 207.31
Lexington Convertible Securities Fund 24.21 74.55 127.55 272.63
Lexington Growth and Income Fund 11.52 35.91 62.23 137.46
Lexington SmallCap Value Fund 25.11 77.25 132.05 281.60
Lexington Goldfund 16.27 50.49 87.08 190.01
Lexington GNMA Income Fund 10.71 33.41 57.94 128.26
Lexington Money Market Trust 10.20 31.84 55.25 122.46
</TABLE>
This example is to show the effect of expenses. This example does not
represent past or future expenses or returns; actual expenses and returns may
vary.
7
<PAGE>
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS
The following financial information for the periods ended December 31,
1991 (or inception of Fund, if later), through December 31, 1996, was audited by
KPMG Peat Marwick LLP, whose report, dated December 31, 1996, appears in the
1996 Annual Reports of the Funds.
<TABLE>
<CAPTION>
LEXINGTON CROSBY SMALL CAP ASIA GROWTH FUND
JULY 3, 1995
(COMMENCEMENT OF OPERATIONS)
1996 TO DECEMBER 31, 1995
-------- ---------------------------
<S> <C> <C>
Net asset value, beginning of period $ 9.76 $ 10.00
Income (loss) from investment operations:
Net investment income (loss) (0.05) 0.02
Net realized and unrealized gain (loss) on investments 2.54 (0.24)
- --------------------------------------------------------------------------------------------------------------------------------
Total income (loss) from investment operations 2.49 (0.22)
Less distributions:
Distributions from net investment income -- (0.02)
Distributions in excess of net investment income (0.01) --
- --------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 12.24 $ 9.76
- --------------------------------------------------------------------------------------------------------------------------------
Total return 25.50% (4.39)%*
Ratios to average net asset of:
Expenses, before reimbursement or waiver 2.64% 3.51%*
- --------------------------------------------------------------------------------------------------------------------------------
Expenses, net of reimbursement or waiver 2.42% 1.75%*
Net investment loss, before reimbursement or waiver (0.86)% (1.24)%*
Net investment loss (0.64)% 0.52%*
Portfolio turnover 176.49% 40.22%*
Average commission paid on equity security transactions** -- --
- --------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (000's omitted) $23,796 $8,936
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Annualized
**The average commission paid on equity security transactions for the period
ended December 31, 1996 is less than $0.05 per share of securities purchased and
sold. In accordance with recent SECdisclosure guidelines, average commissions
were calculated for the current period and not for prior periods.
8
<PAGE>
LEXINGTON INTERNATIONAL FUND
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Net asset value, beginning of period $10.60 $10.37 $10.00
Income (loss) from investment operations:
Net investment loss (.02) (.01) (.08)
Net realized and unrealized gain on investments 1.45 .61 .67
- --------------------------------------------------------------------------------------------------------------------------------
Total income from investment operations 1.43 .60 .59
Less distributions:
Distributions from net investment income (.20) -- --
Dividends in excess of net investment income
(temporary book-tax difference) -- (.35) --
Distributions from net realized capital gains (.97) (.02) (.10)
Distributions in excess of net realized capital
gains (temporary book-tax difference) -- -- (.12 )
- --------------------------------------------------------------------------------------------------------------------------------
Total distributions (1.17) (.37) (.22)
Net asset value, end of period $10.86 $10.60 $10.37
Total return 13.57% 5.77% 5.87%
Ratio to average net assets:
Expenses 2.45% 2.46% 2.39%
Net investment loss (0.39%) (.12%) (.94%)
Portfolio turnover 113.55% 137.72% 100.10%
Average commission paid on equity security transactions* $0.03 -- --
- --------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (000's omitted) $18,891 $17,855 $17,843
</TABLE>
*IN ACCORDANCE WITH RECENT SECDISCLOSURE GUIDELINES, AVERAGE COMMISSIONS ARE
CALCULATED FOR THE CURRENT PERIOD AND NOT FOR PRIOR PERIODS.
9
<PAGE>
LEXINGTON RAMIREZ GLOBAL INCOME FUND
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $10.75 $ 9.80 $ 10.95 $10.39 $10.35 $10.05
Income (loss) from investment operations:
Net investment income 1.01 0.96 0.46 0.53 0.61 0.67
Net realized and unrealized gain (loss)
on investments 0.36 0.95 (1.16) 0.58 0.04 0.30
- -------------------------------------------------------------------------------------------------------------------------------
Total income (loss)
from investment operations 1.37 1.91 (0.70) 1.11 0.65 0.97
- -------------------------------------------------------------------------------------------------------------------------------
Less distributions:
Dividends from net investment income (0.86) (0.96) (0.45) (0.55) (0.61) (0.67)
Distributions from net realized gains (.04) -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
Total distributions (.90) (0.96) (0.45) (0.55) (0.61) (0.67)
- -------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $11.22 $10.75 $ 9.80 $10.95 $10.39 $10.35
- -------------------------------------------------------------------------------------------------------------------------------
Total return 13.33% 20.10% (6.52%) 10.90% 6.51% 10.03%
- -------------------------------------------------------------------------------------------------------------------------------
Ratio to average net assets:
- -------------------------------------------------------------------------------------------------------------------------------
Expenses, before reimbursement or waiver 2.33% 3.07% 1.80% 1.44% 1.54% 1.65%
- -------------------------------------------------------------------------------------------------------------------------------
Expenses, net of reimbursement or waiver 1.50% 2.75% 1.50% 1.44% 1.50% 1.12%
- -------------------------------------------------------------------------------------------------------------------------------
Net investment income, before
reimbursement or waiver 9.49% 9.48% 4.18% 4.83% 5.88% 6.11%
- -------------------------------------------------------------------------------------------------------------------------------
Net investment income 10.32% 9.80% 4.48% 4.83% 5.92% 6.64%
- -------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 71.83% 164.72% 10.20% 31.06% 31.24% 29.45%
- -------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (000's omitted) $29,110 $12,255 $10,351 $14,576 $13,085 $12,252
- -------------------------------------------------------------------------------------------------------------------------------
*Annualized
</TABLE>
<TABLE>
<CAPTION>
LEXINGTON RAMIREZ GLOBAL INCOME FUND
1990 1989 1988 1987
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net asset value, beginning of period $10.12 $10.03 $ 9.67 $10.55
Income (loss) from investment operations:
Net investment income 0.73 0.63 0.63 0.78
Net realized and unrealized gain (loss)
on investments (0.09) 0.09 0.36 (0.86)
- ----------------------------------------------------------------------------------------------------------
Total income (loss)
from investment operations 0.64 0.72 0.99 (0.08)
- ----------------------------------------------------------------------------------------------------------
Less distributions:
Dividends from net investment income (0.71) (0.63) (0.63) (0.80)
Distributions from net realized gains -- -- -- --
- ----------------------------------------------------------------------------------------------------------
Total distributions (0.71) (0.63) (0.63) (0.80)
- ----------------------------------------------------------------------------------------------------------
Net asset value, end of period $10.05 $10.12 $10.03 $ 9.67
- ----------------------------------------------------------------------------------------------------------
Total return 6.62% 7.40% 10.54% (0.21%)
- ----------------------------------------------------------------------------------------------------------
Ratio to average net assets:
- ----------------------------------------------------------------------------------------------------------
Expenses, before reimbursement or waiver 1.61% 1.72% 1.50% 1.97%
- ----------------------------------------------------------------------------------------------------------
Expenses, net of reimbursement or waiver 1.08% 1.20% 1.33% --
- ----------------------------------------------------------------------------------------------------------
Net investment income, before
reimbursement or waiver 6.67% 5.70% 6.16% 5.98%
- ----------------------------------------------------------------------------------------------------------
Net investment income 7.20% 6.22% 6.33% 7.95%
- ----------------------------------------------------------------------------------------------------------
Portfolio turnover 44.50% 46.60% 67.11% 66.77%
Net assets, end of period (000's omitted) $10,707 $12,739 $13,139 $11,049
- ----------------------------------------------------------------------------------------------------------
Annualized
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
LEXINGTON TROIKA DIALOG RUSSIA FUND
JULY 3, 1996 TO
DECEMBER 31, 1996**
-----------------
<S> <C>
Net asset value, beginning of period $12.12
- -------------------------------------------------------------------------------------
Income (loss) from investment operations:
Net investment income (loss) (0.05)
Net realized and unrealized gain (loss) on investments (0.51)
- -------------------------------------------------------------------------------------
Total income (loss) from investment operations (0.56)
- -------------------------------------------------------------------------------------
Less distributions:
Distributions from net investment income
Distributions from net realized capital gains (0.32)
- -------------------------------------------------------------------------------------
Total distributions (0.32)
- -------------------------------------------------------------------------------------
Net asset value, end of period $11.24
- -------------------------------------------------------------------------------------
Total return (9.01)%*
- -------------------------------------------------------------------------------------
Ratios to average net asset of
EXPENSES, BEFORE REIMBURSEMENT OR WAIVERS 5.07%*
- ------------------------------------------------------------------------------------
Expenses, net of reimbursement or waivers 2.65%*
- ------------------------------------------------------------------------------------
Net investment loss, before reimbursement or waivers (3.69)%*
- ------------------------------------------------------------------------------------
Net investment loss (1.27)%*
- ------------------------------------------------------------------------------------
Portfolio turnover 115.55%*
- ------------------------------------------------------------------------------------
Average commission paid on equity security transactions --***
- ------------------------------------------------------------------------------------
Net assets, end of period (000's omitted) $13,846
- ------------------------------------------------------------------------------------
*Annualized
**The Fund's commencement of operations was June 3, 1996 with the investment of
its initial capital. The Fund's registration statement with the Securities and
Exchange Commission became effective on July 3, 1996. Financial results prior to
the effective date of the Fund's registration statement are not presented in
this Financial Highlights Table.
***The average commission paid on equity security transactions for the period
ended December 31, 1996 was less than $0.005 per share of securities purchased
and sold.
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
LEXINGTON WORLDWIDE EMERGING MARKETS FUND
1996 1995 1994 1993 1992 1991 1990
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $10.70 $11.47 $13.96 $ 8.66 $ 9.03 $ 8.56 $10.79
- ------------------------------------------------------------------------------------------------------------------------------
Income (loss) from investment operations:
- ------------------------------------------------------------------------------------------------------------------------------
Net investment income -- 0.08 (0.01) 0.05 0.07 0.09 0.25
- ------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss)
on investments 0.79 (0.76) (1.92) 5.43 0.27 1.97 (1.81)
- -----------------------------------------------------------------------------------------------------------------------------
Total income (loss)
from investment operations 0.79 (0.68) (1.93) 5.48 0.34 2.06 (1.56)
- -----------------------------------------------------------------------------------------------------------------------------
Less distributions:
Dividends from net investment income -- (0.08) -- (0.01) (0.11) (0.11) (0.24)
- -----------------------------------------------------------------------------------------------------------------------------
Distributions in excess of net investment
income (temporary book-tax difference) -- (0.01) -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------
Distributions from capital gains -- -- (0.47) (0.17) (0.60) (1.48) (0.43)
- -----------------------------------------------------------------------------------------------------------------------------
Distributions in excess of capital gains
(temporary book-tax difference) -- -- (0.09) -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------
Total distributions -- (0.09) (0.56) (0.18) (0.71) (1.59) (0.67)
- -----------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $11.49 $10.70 $11.47 $13.96 $ 8.66 $ 9.03 $ 8.56
- -----------------------------------------------------------------------------------------------------------------------------
Total return 7.38% (5.93%) (13.81%) 63.37% 3.77% 24.19% (14.44%)
- -----------------------------------------------------------------------------------------------------------------------------
Ratio to average net assets:
Expenses 1.76% 1.88% 1.65% 1.64% 1.89% 1.97% 1.42%
- -------------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) (0.01)% 0.70% (0.06)% 0.21% 0.75% 0.79% 2.52%
- ------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 86.26% 92.85% 75.56% 38.35% 91.27% 112.03% 52.48%
- -----------------------------------------------------------------------------------------------------------------------------
Average commission paid on equity security
transactions* -- -- -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (000's omitted) $254,673 $265,544 $288,581 $230,473 $30,021 $25,060 $22,192
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
1989 1988 1987 1986
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net asset value, beginning of period $ 8.72 $8.01 $11.80 $ 9.96
- ---------------------------------------------------------------------------------------------
Income (loss) from investment operations:
- ---------------------------------------------------------------------------------------------
Net investment income 0.13 0.12 0.14 0.16
- ---------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss)
on investments 2.32 0.71 0.12 1.88
- ---------------------------------------------------------------------------------------------
Total income (loss)
from investment operations 2.45 0.83 0.26 2.04
- ---------------------------------------------------------------------------------------------
Less distributions:
Dividends from net investment income (0.21) (0.12) (0.38) (0.20)
- ---------------------------------------------------------------------------------------------
Distributions in excess of net investment
income (temporary book-tax difference) -- -- -- --
- ---------------------------------------------------------------------------------------------
Distributions from capital gains (0.17) -- (3.67) --
- ---------------------------------------------------------------------------------------------
Distributions in excess of capital gains
(temporary book-tax difference) -- -- -- --
- ---------------------------------------------------------------------------------------------
Total distributions (0.38) (0.12) (4.05) (0.20)
- ---------------------------------------------------------------------------------------------
Net asset value, end of period $10.79 $ 8.72 $ 8.01 $11.80
- ---------------------------------------------------------------------------------------------
Total return 28.11% 10.36% 0.35% 20.73%
- ---------------------------------------------------------------------------------------------
Ratio to average net assets:
Expenses 1.36% 1.33% 1.34% 1.32%
- ----------------------------------------------------------------------------------------------
Net investment income (loss) 1.18% 1.27% 1.26% 1.24%
- ---------------------------------------------------------------------------------------------
Portfolio turnover 59.07% 47.63% 83.21% 54.20%
- ---------------------------------------------------------------------------------------------
Average commission paid on equity security
transactions* -- -- -- --
- ----------------------------------------------------------------------------------------------
Net assets, end of period (000's omitted) $29,126 $26,389 $25,579 $29,862
- ----------------------------------------------------------------------------------------------
</TABLE>
*The average commission paid on equity security transactions for the year ended
December 31, 1996 is less than $0.005 per share of securities purchased and
sold. In accordance with recent SECdisclosure guidelines, average commissions
are calculated for the current period and not for prior periods.
12
<PAGE>
<TABLE>
<CAPTION>
LEXINGTON CONVERTIBLE SECURITIES FUND
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $13.66 $11.84 $14.10 $13.80 $12.41
- -----------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) 0.11 0.15 0.08 -- 0.18
Net realized and unrealized gain (loss)
on investments 0.55 2.04 0.10 0.89 1.39
- -----------------------------------------------------------------------------------------------------------------------------
Total income (loss) from operations 0.66 2.19 0.18 0.89 1.57
- -----------------------------------------------------------------------------------------------------------------------------
Less distributions:
Dividends from net investment income (0.11) (0.15) (0.07) -- (0.18)
Dividends from net realized capital gains (0.55) (0.22) (2.32) (0.59) --
Distribution in excess of capital gains
(temporary book-tax difference) -- -- (0.05) -- --
- -----------------------------------------------------------------------------------------------------------------------------
Total distributions (0.66) (0.37) (2.44) (0.59) (0.18)
- ------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $13.66 $13.66 $11.84 $14.10 $13.80
- ------------------------------------------------------------------------------------------------------------------------------
Total return 4.89% 18.63% 1.30% 6.53% 12.82%
- -------------------------------------------------------------------------------------------------------------------------------
Ratio to average net assets:
Expenses, before reimbursement of waiver 2.39% 2.52% 2.81% 2.76% 3.02%
- -------------------------------------------------------------------------------------------------------------------------------
Expenses, net of reimbursement or waiver 2.39% 2.52% 2.75% 2.76% 2.32%
- -------------------------------------------------------------------------------------------------------------------------------
Net investment income (loss), before
reimbursement or waiver 0.77% 1.24% 0.50% (0.04%) 0.70%
- -------------------------------------------------------------------------------------------------------------------------------
Net investment income 0.77% 1.24% 0.56% (0.04%) 1.40%
- -------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 18.45% 11.23% 38.14% 6.53% 12.58%
- -------------------------------------------------------------------------------------------------------------------------------
Average commission paid on equity security transactions* 0.04 -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (000's omitted) $11,208 $11,641 $8,117 $8,319 $7,180
- -------------------------------------------------------------------------------------------------------------------------------
1991 1990 1989 1988
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net asset value, beginning of period $ 8.74 $ 9.55 $ 9.51 $ 9.35
- -------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) 0.22 0.50 0.64 0.42
Net realized and unrealized gain (loss)
on investments 3.68 (0.81) 0.04 0.19
- -------------------------------------------------------------------------------------------------------------------
Total income (loss) from operations 3.90 (0.31) 0.68 0.61
- -------------------------------------------------------------------------------------------------------------------
Less distributions:
Dividends from net investment income (0.23) (0.50) (0.64) (0.42)
Dividends from net realized capital gains -- -- -- (0.03)
Distribution in excess of capital gains
(temporary book-tax difference) -- -- -- --
- -------------------------------------------------------------------------------------------------------------------
Total distributions (0.23) (0.50) (0.64) (0.45)
- -------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $12.41 $8.74 $9.55 $9.51
- -------------------------------------------------------------------------------------------------------------------
Total return 45.06% (3.39%) 7.16% 6.96%
- --------------------------------------------------------------------------------------------------------------------
Ratio to average net assets:
Expenses, before reimbursement of waiver 3.42% 4.51% 2.64% 4.12%
- --------------------------------------------------------------------------------------------------------------------
Expenses, net of reimbursement or waiver 2.50% 2.68% 2.13% 2.00%
- --------------------------------------------------------------------------------------------------------------------
Net investment income (loss), before
reimbursement or waiver 1.14% 3.09% 5.74% 3.43%
- --------------------------------------------------------------------------------------------------------------------
Net investment income 2.06% 4.92% 6.25% 5.55%
- --------------------------------------------------------------------------------------------------------------------
Portfolio turnover 29.46% 25.58% 34.23% 39.70%
- --------------------------------------------------------------------------------------------------------------------
Average commission paid on equity security transactions* -- -- -- --
- --------------------------------------------------------------------------------------------------------------------
Net assets, end of period (000's omitted) $6,599 $4,744 $5,986 $6,930
- --------------------------------------------------------------------------------------------------------------------
*In accordance with recent SEC disclosure guidelines, the average commission is
calculated for the current period, but not for prior periods.
13
<PAGE>
LEXINGTON GROWTH AND INCOME FUND
1996 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $15.71 $14.36 $16.16 $16.25 $16.39 $14.24
Income from investment operations:
Net investment income 0.07 0.22 0.17 0.21 0.23 0.35
Net realized and unrealized gain (loss)
on investments 4.08 3.00 (0.68) 1.94 1.79 3.17
- -----------------------------------------------------------------------------------------------------------------------------
Total income (loss)
from investment operations 4.15 3.22 (0.51) 2.15 2.02 3.52
- -----------------------------------------------------------------------------------------------------------------------------
Less distributions:
Dividends from net investment income (0.13) (0.22) (0.16) (0.21) (0.32) (0.35)
Distributions from net realized capital gains (1.17) (1.65) (0.91) (2.03) (1.84) (1.02)
Distributions in excess of net realized
gains (temporary book-tax difference) -- -- (0.22) -- -- --
- -----------------------------------------------------------------------------------------------------------------------------
Total distributions (1.30) (1.87) (1.29) (2.24) (2.16) (1.37)
- -----------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $18.56 $15.71 $14.36 $16.16 $16.25 $16.39
- -----------------------------------------------------------------------------------------------------------------------------
Total return 26.46% 22.57% (3.11%) 13.22% 12.36% 24.87%
- -----------------------------------------------------------------------------------------------------------------------------
Ratios to average net asset of:
- -----------------------------------------------------------------------------------------------------------------------------
Expenses 1.13% 1.09% 1.15% 1.29% 1.20% 1.13%
- -----------------------------------------------------------------------------------------------------------------------------
Net investment income 0.43% 1.38% 1.06% 1.20% 2.57% 2.19%
- -----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 101.12% 159.94% 63.04% 93.90% 88.13% 80.33%
- -----------------------------------------------------------------------------------------------------------------------------
Average commissions paid on equity security transactions* $0.07 -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (000's omitted) $200,309 $138,901 $124,289 $134,508 $126,241 $121,263
- -----------------------------------------------------------------------------------------------------------------------------
1990 1989 1988 1987
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net asset value, beginning of period $16.19 $14.39 $13.58 $19.16
Income from investment operations:
Net investment income 0.60 0.50 0.46 0.43
Net realized and unrealized gain (loss)
on investments (2.25) 3.44 0.80 0.02
- ---------------------------------------------------------------------------------------------------------
Total income (loss)
from investment operations (1.65) 3.94 1.26 0.45
- ---------------------------------------------------------------------------------------------------------
Less distributions:
Dividends from net investment income (0.30) (0.60) (0.45) (0.51)
Distributions from net realized capital gains -- (1.54) -- (5.52)
Distributions in excess of net realized
gains (temporary book-tax difference) -- -- -- --
- ---------------------------------------------------------------------------------------------------------
Total distributions (0.30) (2.14) (0.45) (6.03)
- ---------------------------------------------------------------------------------------------------------
Net asset value, end of period $14.24 $16.19 $14.39 $13.58
- ---------------------------------------------------------------------------------------------------------
Total return (10.27%) 27.56% 9.38% 0.15%
- ---------------------------------------------------------------------------------------------------------
Ratios to average net asset of:
- ---------------------------------------------------------------------------------------------------------
Expenses 1.04% 1.02% 1.10% 0.96%
- ---------------------------------------------------------------------------------------------------------
Net investment income 3.91% 2.82% 3.20% 2.37%
- ---------------------------------------------------------------------------------------------------------
Portfolio turnover 67.39% 64.00% 81.10% 95.28%
- ---------------------------------------------------------------------------------------------------------
Average commissions paid on equity security transactions* -- -- -- --
- ---------------------------------------------------------------------------------------------------------
Net assets, end of period (000's omitted) $104,664 $128,329 $111,117 $112,780
- ---------------------------------------------------------------------------------------------------------
*In accordance with recent SECdisclosure guidelines, the average commission is
calculated for the current period, but not for prior periods.
14
<PAGE>
LEXINGTON SMALLCAP VALUE FUND
JANUARY 2, 1996
(COMMENCEMENT OF OPERATIONS)
DECEMBER 31, 1996
---------------------------
Net asset value, beginning of period $ 10.00
Income (loss) from investment operations:
Net investment income (loss) (0.18)
Net realized and unrealized gain (loss) on investments 1.94
- ----------------------------------------------------------------------------------------------------
Total income (loss) from investment operations 1.76
- ----------------------------------------------------------------------------------------------------
Less distributions:
Distributions from net realized capital gains (0.03)
- ----------------------------------------------------------------------------------------------------
Net asset value, end of period $11.73
- ----------------------------------------------------------------------------------------------------
Total return 17.50%
- ----------------------------------------------------------------------------------------------------
Ratios to average net asset of:
- ----------------------------------------------------------------------------------------------------
Expenses, before reimbursement or waiver 3.04%
- ----------------------------------------------------------------------------------------------------
Expenses, net of reimbursement or waiver 2.48%
- ----------------------------------------------------------------------------------------------------
Net investment loss, before reimbursement or waiver (2.34)%
- ----------------------------------------------------------------------------------------------------
Net investment loss (1.78)%
- ----------------------------------------------------------------------------------------------------
Portfolio turnover 60.92%
- ----------------------------------------------------------------------------------------------------
Average commissions paid on equity security transactions 0.03
- ----------------------------------------------------------------------------------------------------
Net assets, end of period (000's omitted) $8,061
- ----------------------------------------------------------------------------------------------------
*Annualized
15
<PAGE>
LEXINGTON GOLDFUND
1996 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $6.24 $ 6.37 $ 6.90 $ 3.70 $ 4.68 $ 5.03
- -----------------------------------------------------------------------------------------------------------------------------
Income (loss) from investment operations:
Net investment income 0.02 -- 0.03 0.01 0.02 0.04
Net realized and unrealized gain (loss)
on investments 0.50 (0.12) (0.53) 3.21 (0.98) (0.35)
- ------------------------------------------------------------------------------------------------------------------------------
Total income (loss)
from investment operations 0.52 (0.12) (0.50) 3.22 (0.96) (0.31)
- ------------------------------------------------------------------------------------------------------------------------------
Less distributions:
Dividends from net investment income (0.79) (0.01) (0.03) (0.02) (0.02) (0.04)
Distributions from net realized capital gains -- -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
Total distributions (0.79) (0.01) (0.03) (0.02) (0.02) (0.04)
- ------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 5.97 $ 6.24 $ 6.37 $ 6.90 $ 3.70 $ 4.68
- ------------------------------------------------------------------------------------------------------------------------------
Total return 7.84% (1.89%) (7.28%) 89.96% (20.51%) (6.14%)
- -------------------------------------------------------------------------------------------------------------------------------
Ratios to average net assets:
- -------------------------------------------------------------------------------------------------------------------------------
Expenses 1.60% 1.70% 1.54% 1.63% 1.69% 1.43%
- -------------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) (0.32)% 0.07% 0.50% 0.25% 0.58% 0.81%
- -------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 31.04% 40.41% 23.77% 28.41% 13.18% 22.14%
- -------------------------------------------------------------------------------------------------------------------------------
Average commission paid on equity security transactions* .02 -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (000's omitted) $109,287 $135,779 $159,435 $159,479 $71,856 $96,3164
- --------------------------------------------------------------------------------------------------------------------------------
1990 1989 1988 1987
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net asset value, beginning of period $ 6.39 $ 5.21 $ 6.20 $ 4.49
- ----------------------------------------------------------------------------------------------------------
Income (loss) from investment operations:
Net investment income 0.04 0.05 0.04 0.01
Net realized and unrealized gain (loss)
on investments (1.36) 1.18 (0.98) 2.07
- ----------------------------------------------------------------------------------------------------------
Total income (loss)
from investment operations (1.32) 1.23 (0.94) 2.08
- ----------------------------------------------------------------------------------------------------------
Less distributions:
Dividends from net investment income (0.04) (0.05) (0.05) (0.05)
Distributions from net realized capital gains -- -- -- (0.32)
- ----------------------------------------------------------------------------------------------------------
Total distributions (0.04) (0.05) (0.05) (0.37)
- ----------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 5.03 $ 6.39 $ 5.21 $ 6.20
- ----------------------------------------------------------------------------------------------------------
Total return (20.35%) 23.62% (15.18%) 46.56%
- ----------------------------------------------------------------------------------------------------------
Ratios to average net assets:
- ----------------------------------------------------------------------------------------------------------
Expenses 1.36% 1.42% 1.61% 1.29%
- ----------------------------------------------------------------------------------------------------------
Net investment income (loss) 0.69% 1.14% 0.78% 0.57%
- ----------------------------------------------------------------------------------------------------------
Portfolio turnover 12.43% 15.98% 20.45% 13.78%
- ----------------------------------------------------------------------------------------------------------
Average commission paid on equity security transactions* -- -- -- --
- ----------------------------------------------------------------------------------------------------------
Net assets, end of period (000's omitted) $106,074 $154,484 $92,782 $104,842
- ----------------------------------------------------------------------------------------------------------
*In accordance with recent SEC disclosure guidelines, the average commission is
calculated for the current period, but not for prior periods.
16
<PAGE>
LEXINGTON GNMA INCOME FUND
1996 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $8.19 $7.60 $8.32 $8.26 $8.45 $7.90
- ------------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.53 0.58 0.55 0.59 0.61 0.64
Net realized and unrealized gain (loss)
on investments (0.08) 0.59 (0.72) 0.06 (0.19) 0.55
- -----------------------------------------------------------------------------------------------------------------------------
Total income (loss)
from investment operations 0.45 1.17 (0.17) 0.65 0.42 1.19
Less distributions:
Dividends from net investment income (0.52) (0.58) (0.55) (0.59) (0.61) (0.64)
- ------------------------------------------------------------------------------------------------------------------------------
Distributions from net realized capital gains -- -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
Total distributions (0.52) (0.58) (0.55) (0.59) (0.61) (0.64)
- ------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $8.12 $8.19 $7.60 $8.32 $8.26 $8.45
- ------------------------------------------------------------------------------------------------------------------------------
Total return 5.71% 15.91% (2.07%) 8.06% 5.19% 15.75%
- ------------------------------------------------------------------------------------------------------------------------------
Ratios to average net asset of:
- ------------------------------------------------------------------------------------------------------------------------------
Expenses 1.05% 1.01% 0.98% 1.02% 1.01% 1.02%
- ------------------------------------------------------------------------------------------------------------------------------
Net investment income 6.56% 7.10% 6.90% 6.96% 7.31% 7.97%
- -------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 128.76% 30.69% 37.15% 52.34% 180.11% 138.71%
- --------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (000's omitted) $133,777 $130,681 $132,108 $149,961 $132,048 $122,191
- --------------------------------------------------------------------------------------------------------------------------------
1990 1989 1988 1987
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net asset value, beginning of period $7.88 $7.45 $7.58 $8.22
- --------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.65 0.69 0.64 0.71
Net realized and unrealized gain (loss)
on investments 0.03 0.42 (0.13) (0.59)
- --------------------------------------------------------------------------------------------------------
Total income (loss)
from investment operations 0.68 1.11 0.51 0.12
Less distributions:
Dividends from net investment income (0.66) (0.68) (0.61) (0.76)
- --------------------------------------------------------------------------------------------------------
Distributions from net realized capital gains -- -- (0.03) --
- --------------------------------------------------------------------------------------------------------
Total distributions (0.66) (0.68) (0.64) (0.76)
- --------------------------------------------------------------------------------------------------------
Net asset value, end of period $7.90 $7.88 $7.45 $7.58
- --------------------------------------------------------------------------------------------------------
Total return 9.23% 15.60% 6.90% 1.62%
- --------------------------------------------------------------------------------------------------------
Ratios to average net asset of:
- --------------------------------------------------------------------------------------------------------
Expenses 1.04% 1.03% 1.07% 0.98%
- --------------------------------------------------------------------------------------------------------
Net investment income 8.43% 8.88% 8.31% 8.49%
- --------------------------------------------------------------------------------------------------------
Portfolio turnover 112.55% 102.66% 233.48% 89.40%
- --------------------------------------------------------------------------------------------------------
Net assets, end of period (000's omitted) $98,011 $96,465 $97,185 $109,793
- --------------------------------------------------------------------------------------------------------
17
<PAGE>
LEXINGTON MONEY MARKET TRUST
1996 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
- --------------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.0441 0.0495 0.0330 0.0230 0.0299 0.0532
- --------------------------------------------------------------------------------------------------------------------------------
Less distributions:
Dividends from net investment income (0.0441) (0.0495) (0.0330) (0.0230) (0.0299) (0.0532)
- --------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
- --------------------------------------------------------------------------------------------------------------------------------
Total return 4.50% 5.06% 3.35% 2.32% 3.03% 5.45%
- --------------------------------------------------------------------------------------------------------------------------------
Ratio to average net assets:
- --------------------------------------------------------------------------------------------------------------------------------
Expenses, before reimbursement 1.04% 1.08% 1.02% 1.00% 1.03% 1.02%
- --------------------------------------------------------------------------------------------------------------------------------
Expenses, net of reimbursement 1.00% 1.00% 1.00% 1.00% 1.00% 1.00%
- --------------------------------------------------------------------------------------------------------------------------------
Net investment income, before
reimbursement 4.37% 4.87% 3.30% 2.30% 2.99% 5.35%
- --------------------------------------------------------------------------------------------------------------------------------
Net investment income, net of
reimbursement 4.41% 4.95% 3.32% 2.30% 3.02% 5.37%
- --------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (000's omitted) $97,526 $88,786 $111,805 $94,718 $111,453 $143,137
- --------------------------------------------------------------------------------------------------------------------------------
1990 1989 1988 1987
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net asset value, beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00
- ----------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.0732 0.0828 0.0678 0.0610
- -----------------------------------------------------------------------------------------------------------
Less distributions:
Dividends from net investment income (0.0732) (0.0828) (0.0678) (0.0610)
- ----------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00
- -----------------------------------------------------------------------------------------------------------
Total return 7.56% 8.60% 7.00% 6.29%
- -----------------------------------------------------------------------------------------------------------
Ratio to average net assets:
- -----------------------------------------------------------------------------------------------------------
Expenses, before reimbursement 0.97% 0.99% 0.97% 0.80%
- -----------------------------------------------------------------------------------------------------------
Expenses, net of reimbursement 0.97% 0.99% 0.97% 0.80%
- -----------------------------------------------------------------------------------------------------------
Net investment income, before
reimbursement 7.32% 8.29% 6.74% 6.13%
- -----------------------------------------------------------------------------------------------------------
Net investment income, net of
reimbursement 7.32% 8.29% 6.74% 6.13%
- -----------------------------------------------------------------------------------------------------------
Net assets, end of period (000's omitted) $176,127 $182,703 $192,079 $212,487
- -----------------------------------------------------------------------------------------------------------
</TABLE>
18
<PAGE>
THE FUNDS' INVESTMENT OBJECTIVES AND POLICIES
The investment objective and general investment policies of each Fund are
described below. Specific portfolio securities that may be purchased by the
Funds are described in "Portfolio Securities" beginning on page 28. Specific
investment practices that may be employed by the Funds are described in "Other
Investment Practices" beginning on page 32. Certain risks associated with
investments in the Funds are described in those sections as well as in "Risk
Considerations" beginning on page 34. CERTAIN TERMS USED IN THE PROSPECTUS ARE
DEFINED IN THE GLOSSARY BEGINNING ON PAGE 66.
SUMMARY COMPARISON OF FUNDS
Under normal market conditions, the Funds will invest their assets as follows:
<TABLE>
<CAPTION>
TYPICAL MARKET
ANTICIPATED ANTICIPATED CAPITALIZATION
EQUITY DEBT OF PORTFOLIO
FUND NAME EXPOSURE EXPOSURE FOCUS COMPANIES
==============================================================================================================
<S> <C> <C> <C> <C>
INTERNATIONAL FUNDS
Lexington Crosby 100% 0% Asia Small-Cap Less than
Small Cap Asia $1 billion
Growth Fund
- --------------------------------------------------------------------------------------------------------------
Lexington 100% 0% Foreign Growth Any size
International Fund
- --------------------------------------------------------------------------------------------------------------
Lexington Ramirez 0% 100% Global Income Any size
Global Income Fund
- --------------------------------------------------------------------------------------------------------------
Lexington Troika 85% 15% Russian Growth Any size
Dialog Russia Fund
- --------------------------------------------------------------------------------------------------------------
Lexington Worldwide 100% 0% Foreign Emerging Any size
Emerging Markets Growth
Fund
==============================================================================================================
DOMESTIC EQUITY FUNDS
Lexington Convertible 0-35% 65-100% Convertible Any size
Securities Fund Securities
- --------------------------------------------------------------------------------------------------------------
Lexington Growth 100% 0% Capital Appreciation Any size
and Income Fund and Income
Lexington SmallCap 100% 0% U.S. Small-Cap Between
Value Fund $20 million
and $1 billion
==============================================================================================================
PRECIOUS METALS
Lexington Goldfund 100% 0% Gold and Gold Any size
Companies
==============================================================================================================
DOMESTIC FIXED-INCOME FUNDS
Lexington GNMA 0% 100% Income N/A
Income Fund
==============================================================================================================
MONEY MARKET FUNDS
Lexington Money 0% 100% Income N/A
Market Trust
==============================================================================================================
</TABLE>
See each Fund's investment objective and policies on the following pages, and
the section titled "Portfolio Securities" for more information.
19
<PAGE>
LEXINGTON CROSBY SMALL CAP ASIA GROWTH FUND, INC.
The investment objective of the Lexington Crosby Small Cap Asia Growth
Fund is long-term capital appreciation through investment in common stocks and
equivalents of companies domiciled in the Asia Region with a market
capitalization of less than $1 billion.
The Lexington Crosby Small Cap Asia Growth Fund will invest principally in
companies listed on stock exchanges in the Asia Region consisting of Bangladesh,
China, Hong Kong, India, Indonesia, Korea, Malaysia, Pakistan, The Philippines,
Singapore, Sri Lanka, Taiwan, Thailand, and Vietnam ("the Asia Region"). The
Lexington Crosby Small Cap Asia Growth Fund will invest at least 65% of its
total assets in securities of companies (1) that are organized under the laws of
the above countries, (2) whose principal securities trading market is located in
those countries, and (3) that derive at least 50% of their revenues or profits
from those countries. The Lexington Crosby Small Cap Asia Growth Fund also
intends to invest in Australia and New Zealand. The Fund does not intend to
invest in Japan. The Lexington Crosby Small Cap Asia Growth Fund may also invest
in unlisted securities. Under normal market conditions, the Lexington Crosby
Small Cap Asia Growth Fund will invest substantially all of its assets in three
or more countries in the Asia Region.
The Lexington Crosby Small Cap Asia Growth Fund will invest at least 65%
of its total assets in growth companies in the Asia Region which have market
capitalizations of less than $1 billion. Approximately 13,000 companies are
listed on recognized exchanges in the Asia Region. Approximately 300 companies
in the Asia Region are capitalized over $1 billion. These companies form the
principal components of their respective market indices and consequently attract
the majority of foreign investment in the region. Approximately 3,000 companies,
which are considered small capitalization companies, will be the primary focus
for the Lexington Crosby Small Cap Asia Growth Fund's investments. These
companies are frequently under-researched by international investors and
undervalued by their markets. The companies in which the Lexington Crosby Small
Cap Asia Growth Fund intends to invest will generally have the following
characteristics: a market capitalization of less than $1 billion; are within
industry sectors with particularly strong growth prospects; part of a strong
growth industry; proven management; under-researched by the investment
community; and undervalued.
The Lexington Crosby Small Cap Asia Growth Fund intends to select
securities which can have enhanced growth prospects and may provide investment
returns superior to the Asian market as a whole. The market value of small
capitalization companies in the Asia Region tends to be volatile, and in the
20
<PAGE>
past has offered greater potential for gain as well as loss than securities of
companies traded in developed countries. It is possible that certain Lexington
Crosby Small Cap Asia Growth Fund investments could be subject to foreign
expropriation or exchange control restrictions. See "Risk Considerations."
The Lexington Crosby Small Cap Asia Growth Fund may invest in all types of
common stocks and equivalents (the following constitute equivalents: convertible
debt securities, warrants and options). The Lexington Crosby Small Cap Asia
Growth Fund may also invest in preferred stocks, bonds and other debt
obligations and money market instruments, including cash and cash deposits,
which will be denominated in U.S. Dollars or currencies related thereto.
-------------------------------
LEXINGTON INTERNATIONAL FUND, INC.
The investment objective of the Lexington International Fund is to seek
long-term growth of capital through investment in common stocks and equivalents
of companies domiciled in foreign countries. The Lexington International Fund
will invest at least 65% of its total assets in at least three foreign
countries. The Lexington International Fund will invest primarily in common
stocks and common stock equivalents. The following constitute common stock
equivalents: convertible debt securities, warrants and options. The Lexington
International Fund may also invest in preferred stocks, bonds and other debt
obligations, including money market instruments of foreign and domestic
companies and foreign and domestic government securities. The Lexington
International Fund is not required to maintain any particular geographic or
currency mix of its investments. The Lexington International Fund is not
required to maintain any particular proportion of stocks, bonds or other
securities in its portfolio.
The Lexington International Fund may invest primarily in foreign debt
securities when it appears that the capital appreciation available from
investments in such securities will equal or exceed the capital appreciation
available from investments in equity securities. The market value of debt
securities varies inversely to changes in prevailing interest rates. Investing
in debt obligations may provide an opportunity for capital appreciation when
interest rates are expected to decline. The Lexington International Fund will
invest in investment grade obligations and non-rated obligations of comparable
quality.
The Lexington International Fund may invest in securities of companies in
the following regions and the governments of those regions: the Asia Region,
including Japan; Africa; North America; Europe; Latin America; and such other
areas and countries as the Manager may determine from time to time. The
21
<PAGE>
Lexington International Fund may invest in companies located in developing
countries without limitation. Developing countries may have relatively unstable
governments, economies based on only a few industries, and securities markets
which trade a small number of companies. Prices on these exchanges tend to be
volatile and in the past these exchanges have offered greater potential for
gain, as well as loss, than exchanges in developed countries. While the
Lexington International Fund invests only in countries that it considers as
having relatively stable and friendly governments it is possible that certain
Lexington International Fund investments could be subject to foreign
expropriation or exchange control restrictions. See "Risk Considerations."
----------------------------------------
LEXINGTON RAMIREZ GLOBAL INCOME FUND
The investment objective of the Lexington Ramirez Global Income Fund is to
seek high current income. Capital appreciation is a secondary objective. The
Lexington Ramirez Global Income Fund invests primarily in lower rated and
unrated foreign debt securities whose credit quality is generally considered
equal to U.S. corporate debt securities known as "junk bonds." Junk bonds and
similarly rated foreign debt securities involve a high degree of risk and are
predominantly speculative. See "Portfolio Securities" and "Risk Considerations."
The Lexington Ramirez Global Income Fund, under normal conditions, invests
substantially all of its assets in debt securities of domestic companies,
companies of developed foreign countries, companies in emerging markets, and
debt securities issued by the U.S. and foreign governments. The debt securities
in which the Lexington Ramirez Global Income Fund invests consist of bonds,
notes, debentures and other similar instruments. The Lexington Ramirez Global
Income Fund may invest in debt securities issued by government agencies and
instrumentalities, central banks, commercial banks and other corporate entities.
The Lexington Ramirez Global Income Fund may invest up to 100% of its total
assets in domestic and foreign debt securities that are rated below investment
grade. The Lexington Ramirez Global Income Fund may also invest in securities
that are in default as to payment of principal and/or interest, and bank loan
participations and assignments.
The Lexington Ramirez Global Income Fund's investments in emerging markets
will primarily consist of the following: foreign "junk bonds," "Brady Bonds,"
and sovereign debt securities issued by emerging market governments. The
Lexington Ramirez Global Income Fund may invest in debt securities of emerging
market issuers without regard to ratings. Many emerging market debt securities
are not rated by United States rating agencies. The Lexington Ramirez Global
22
<PAGE>
Income Fund's ability to achieve its investment objectives is thus more
dependent on the Manager's credit analysis than would be the case if the
Lexington Ramirez Global Income Fund were to invest in higher quality bonds.
Currently, most emerging market debt securities are considered to have a credit
quality below investment grade.
-----------------------------
LEXINGTON TROIKA DIALOG RUSSIA FUND, INC.
The investment objective of the Lexington Troika Dialog Russia Fund is to
seek long-term capital appreciation through investment primarily in the equity
securities of Russian Companies. Under normal conditions, the Lexington Troika
Dialog Russia Fund seeks to achieve its objective by investing at least 65% of
its total assets in the securities of Russian Companies. The securities in which
the Lexington Troika Dialog Russia Fund may invest are common stock, preferred
stock, convertible preferred stock, bonds, notes or debentures convertible into
common or preferred stock, direct investments in Russian Companies, stock
purchase warrants or rights, and American Depository Receipts or Global
Depository Receipts. The Lexington Troika Dialog Russia Fund may invest the
remaining 35% of its total assets in debt securities issued by Russian
Companies, debt securities issued or guaranteed by the Russian Government or a
Russian governmental entity, debt securities of corporate and government issuers
outside Russia, equity securities of issuers outside Russia which the Fund
believes will experience growth in revenue and profits from participation in the
development of the economies of the Commonwealth of Independent States, and
Short-Term and Medium-Term Debt Securities.
The Lexington Troika Dialog Russia Fund intends to invest its assets in
Russian Companies in a broad array of industries, including the following: oil
and gas, energy generation and distribution, communications, mineral extraction,
trade, financial and business services, transportation, manufacturing, real
estate, textiles, food processing and construction. The Lexington Troika Dialog
Russia Fund is not permitted to invest more than 25% of the value of its total
assets in any one industry. It may, however, invest an unrestricted amount of
its assets in the oil and gas industry. The Lexington Troika Dialog Russia
Fund's investments will include investments in Russian Companies that have
characteristics and business relationships common to companies outside of
Russia. As a result, outside economic forces may cause fluctuations in the value
of securities held by the Lexington Troika Dialog Russia Fund.
Under current conditions, the Lexington Troika Dialog Russia Fund expects
to invest at least 15% of its total assets in very liquid assets to maintain
liquidity and provide stability. As the Russian equity markets develop, however,
23
<PAGE>
and the liquidity of Russian securities becomes less of a concern, the Lexington
Troika Dialog Russia Fund will invest a greater percentage of its assets in
Russian equity securities.
-------------------------------
LEXINGTON WORLDWIDE EMERGING MARKETS FUND, INC.
The investment objective of the Lexington Worldwide Emerging Markets Fund
is to seek long-term growth of capital primarily through investment in equity
securities and equivalents of companies domiciled in, or doing business in,
emerging countries and emerging markets. Under normal conditions, the Lexington
Worldwide Emerging Markets Fund seeks to achieve its objective by investing at
least 65% of its total assets in the equity securities and equivalents of
emerging market companies. Under normal conditions, the Lexington Worldwide
Emerging Markets Fund invests in emerging country and emerging market securities
of at least three countries outside of the United States. In the opinion of the
Manager, emerging market countries include, but are not limited to, the
following: Algeria, Argentina, Bahrain, Bangladesh, Bolivia, Botswana, Brazil,
Chile, China, Colombia, Costa Rica, Cyprus, Czech Republic, Dominican Republic,
Ecuador, Egypt Estonia, Finland, Ghana, Greece, Hong Kong, Hungary, India,
Indonesia, Israel, Ivory Coast, Jamaica, Jordan, Kenya, Lebanon, Malaysia,
Mauritius, Mexico, Morocco, Namibia, Nicaragua, Nigeria, Oman, Pakistan, Panama,
Peru, Philippines, Poland, Portugal, Russia, Singapore, Slovakia, South Africa,
South Korea, Sri Lanka Swaziland, Taiwan, Thailand, Trinidad & Tobago, Tunisia,
Turkey, Uruguay, Venezuela, Zambia, Zimbabwe. The Lexington Worldwide Emerging
Markets Fund may also invest in equity securities and equivalents of companies
that derive 50% or more of their total revenue from either goods or services
produced in emerging market countries or sales made in those countries.
The Lexington Worldwide Emerging Markets Fund's investments in emerging
country equity securities are not subject to any maximum limit, and the
Lexington Worldwide Emerging Markets Fund intends to invest substantially all of
its assets in emerging country and emerging market equity securities. The
Lexington Worldwide Emerging Markets Fund may invest the remaining 35% of its
total assets in equity securities without regard to whether they qualify as
emerging country or emerging market equity securities, debt securities
denominated in the currency of an emerging market or issued or guaranteed by an
emerging market company or the government of an emerging country, and Short-Term
and Medium-Term Debt Securities.
------------------------------------
LEXINGTON CONVERTIBLE SECURITIES FUND
The investment objective of the Lexington Convertible Securities Fund is
total return which it seeks to achieve by providing capital appreciation,
current income and conservation of shareholders capital. Under normal
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<PAGE>
conditions, the Lexington Convertible Securities Fund seeks to achieve its
objective by investing at least 65% of its total assets in debt securities
convertible into shares of common stock ("convertible securities"). The
Lexington Convertible Securities Fund may invest without limitation in
high-yield debt securities rated below investment grade. Such lower rated
securities are commonly referred to as "junk bonds." Junk bonds are considered
speculative and pose a greater risk of loss of principal and interest than
investment grade securities. See "Portfolio Securities" and "Risk
Considerations." Common stock received upon the conversion or sale of
convertible securities held by the Lexington Convertible Securities Fund will
either continue to be held by the Lexington Convertible Securities Fund or be
sold.
The convertible securities held by the Lexington Convertible Securities
Fund may consist of securities rated in the six highest rating categories by a
major rating service and non-rated debt securities. The Lexington Convertible
Securities Fund will not invest in any security which has been rated lower than
"B" by S&P or Moody's, which are both major rating services, or non-rated
securities of comparable quality.
The remaining assets of the Lexington Convertible Securities Fund may be
invested in securities other than convertible securities. The Lexington
Convertible Securities Fund may invest in dividend and non-dividend paying
non-convertible common stocks, corporate bonds, covered call options and put
options, stock index options, U.S. Government securities, repurchase agreements
and money market securities.
---------------------
LEXINGTON GROWTH AND INCOME FUND, INC.
The Lexington Growth and Income Fund's principal investment objective is
long term capital appreciation. Income is a secondary objective. The Fund seeks
to achieve its objective over the long term through investment in the stocks of
large, ably managed and well financed companies. Generally, the Lexington Growth
and Income Fund invests its assets in publicly traded common stocks and senior
securities convertible into common stocks of domestic and foreign companies.
--------------------
LEXINGTON SMALLCAP VALUE FUND, INC.
The investment objective of the Lexington SmallCap Value Fund is to seek
long term capital appreciation. Under normal conditions, the Lexington SmallCap
Value Fund seeks its objective by investing in common stocks and equivalents of
domestic companies with a market capitalization under $1 billion. Warrants and
convertible debt securities are common stock equivalents in which the Lexington
SmallCap Value Fund may invest. The Lexington SmallCap Value Fund will invest at
25
<PAGE>
least 90% of its assets in domestic companies which have market capitalizations
between $20 million and $1 billion at the time of investment. The remainder of
its assets may be invested in securities of companies with market
capitalizations below $20 million, above $1 billion, foreign companies with
dollar denominated shares traded in the United States, American Depository
Shares or Receipts, real estate investment trusts, and cash.
The Lexington SmallCap Value Fund will invest it assets primarily in the
equity securities of domestic companies listed on stock exchanges or traded
over-the-counter. The Lexington SmallCap Value Fund may invest in foreign
companies whose shares are traded in U.S. dollar denominated markets.
The companies in which the Lexington SmallCap Value Fund intends to invest
will generally have the following characteristics: a market capitalization of
less than $1 billion; a high relative ratio of revenue per share to stock price;
a low relative ratio of price to book value per share; a positive cash flow and
other measures of financial stability; and a low stock price relative to
historical levels.
-------------------
LEXINGTON GOLDFUND, INC.
The Lexington Goldfund's principal investment objective is to attain
capital appreciation and such hedge against loss of buying power as may be
obtained through investment in gold and equity securities of companies engaged
in mining or processing gold throughout the world. Under normal conditions, at
least 65% of the value of the total assets of the Lexington Goldfund will be
invested in gold and the securities of companies engaged in mining or processing
gold ("gold-related securities"). The Lexington Goldfund may also invest in
other precious metals, including platinum, palladium and silver. The Lexington
Goldfund intends to invest less than half of the value of its assets in gold and
other precious metals and more than half of the value of its assets in
gold-related securities, including securities of foreign issuers.
The Lexington Goldfund is designed to provide investors with a means to
protect against declines in the value of the U.S. dollar against world
currencies. To the extent that the Lexington Goldfund's investments in
gold-related securities appreciate in value relative to the U.S. dollar, the
Lexington Goldfund's investments may serve to offset declines in the buying
power of the U.S. dollar. Management believes that, over the long term,
investing in gold will protect capital from adverse monetary and political
developments. Investments in gold may provide more of a hedge against a decline
in the buying power of the dollar, devaluation and inflation than other types of
investments. The value of gold-related debt securities, however, will generally
not react to fluctuations in the price of gold. The market value of debt
securities of companies engaged in mining or processing gold can be expected to
fluctuate inversely with prevailing interest rates.
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<PAGE>
LEXINGTON GNMA INCOME FUND, INC.
The investment objective of the Lexington GNMA Income Fund is to seek a
high level of current income, consistent with liquidity and safety of principal.
Under normal market conditions, the Lexington GNMA Income Fund will invest at
least 80% of the value of its total assets in Government National Mortgage
Association ("GNMA") mortgage-backed securities (also known as "GNMA
Certificates"). Lexington GNMA Certificates represent part ownership of a pool
of mortgage loans. The timely payment of interest and principal on each
certificate is guaranteed by the full faith and credit of the United States
Government. The principal on Lexington GNMA Certificates is scheduled to be paid
back by the borrower over the length of the loan. The remaining assets of the
Lexington GNMAIncome Fund will be invested in other securities issued or
guaranteed by the U.S. Government, including U.S. Treasury securities.
The Lexington GNMA Income Fund will purchase "modified pass through" type
GNMA Certificates. "Modified pass through" GNMA Certificates entitle the holder
to receive all interest and principal payments owed by the borrower even if the
borrower has not made payment. The Lexington GNMA Income Fund intends to use the
proceeds from principal payments to purchase additional GNMA Certificates or
other U.S. Government guaranteed securities.
------------------------
LEXINGTON MONEY MARKET TRUST
The investment objective of the Lexington Money Market Trust is to seek as
high a level of current income as is consistent with the preservation of capital
and liquidity by investing in short-term money market instruments. The following
are the money market instruments in which the Lexington Money Market Trust will
invest: U.S. Government securities, time deposits, certificates of deposit,
bankers' acceptances, commercial paper, repurchase agreements and other money
market instruments.The Lexington Money Market Trust seeks to maintain a stable
net asset value of $1 per share.
The Lexington Money Market Trust will invest in money market instruments
that have been rated in one of the two highest rating categories by both S&P and
Moody's, both major rating agencies. A "Tier 1" security is one that has been
rated by either S&P or Moody's in the highest rating category, or, if unrated,
is of comparable quality. A "Tier 2" security is one that has been rated in the
second highest category by either S&P or Moody's, or, if unrated, is of
comparable quality. Up to 5% of the total assets of the Lexington Money Market
Trust may be invested in a single Tier 1 security (other than U.S. Government
securities). In addition, the Lexington Money Market Trust may not invest more
than 5% of its total assets in Tier 2 securities, and may not invest more than
1% of its total assets in any single Tier 2 security.
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<PAGE>
The Lexington Money Market Trust may only invest in money market
instruments with a remaining maturity of 397 days or less, provided that the
Fund's average weighted maturity does not exceed 90 days.
PORTFOLIO SECURITIES
EQUITY SECURITIES
The Lexington Convertible Securities Fund, Lexington Goldfund, Lexington
Growth and Income Fund, Lexington Crosby Small Cap Asia Growth Fund, Lexington
International Fund, Lexington SmallCap Value Fund, Lexington Troika Dialog
Russia Fund and Lexington Worldwide Emerging Markets Fund invest in common
stocks and some of the funds may invest in common stock equivalents (see chart).
The following constitute common stock equivalents: warrants, options and
convertible debt securities, ADRs, GDRs and EDRs. Common stock equivalents may
be converted into or provide the holder with the right to common stock. These
funds may also invest in other types of equity securities, including preferred
stocks, and equity derivative securities.
DEBT SECURITIES
The Lexington Ramirez Global Income Fund and the Lexington Convertible
Securities Fund will invest primarily in debt securities and the Lexington GNMA
Income Fund will have substantially all of its assets invested in GNMA
Certificates and U.S. Government securities.
The Lexington Goldfund, Lexington International Fund, Lexington Troika
Dialog Russia Fund and Lexington Worldwide Emerging Markets Fund may invest
primarily in debt securities when the Manager believes that debt securities will
provide capital appreciation through favorable changes in relative foreign
exchange rates, in relative interest rate levels or in the creditworthiness of
issuers.
The Lexington Troika Dialog Russia Fund and Lexington Worldwide Emerging
Markets Fund may, under normal conditions, invest up to 35% of their total
assets in Short-Term and Medium-Term Debt Securities. The Short-Term and
Medium-Term Debt Securities in which the Funds may invest are foreign and
domestic debt securities, including short-term (less than twelve months to
maturity) and medium-term (not greater than five years to maturity) obligations
issued by the U.S. Government, foreign governments, foreign and domestic
corporations and banks, and repurchase agreements.
JUNK BONDS. The Lexington Ramirez Global Income Fund, Lexington
Convertible Securities Fund and Lexington Troika Dialog Russia Fund may invest
in high yield, lower rated debt securities known as "junk bonds." Junk bonds are
debt obligations rated below investment grade and non-rated securities of
28
<PAGE>
comparable quality. Junk bonds are considered speculative and thus pose a
greater risk of default than investment grade securities. Investments of this
type are subject to greater risk of loss of principal and interest, but in
general provide higher yields than higher rated debt obligations. Bonds issued
by companies domiciled in emerging markets are usually rated below investment
grade. The Lexington Ramirez Global Income Fund may invest in securities that
are in default as to payment of principal and/or interest. Debt securities
purchased by Lexington Crosby Small Cap Asia Growth Fund, Lexington
International Fund and Lexington Worldwide Emerging Markets Fund must be of
investment grade quality or comparable thereto.
ZERO COUPON BONDS. The Lexington Ramirez Global Income Fund may invest in
zero coupon bonds. Zero coupon bond prices are highly sensitive to changes in
market interest rates. The original issue discount on the zero coupon bonds must
be included ratably in the income of the Lexington Ramirez Global Income Fund as
the income accrues even though payment has not been received. The Lexington
Ramirez Global Income Fund nevertheless intends to distribute an amount of cash
equal to the currently accrued original issue discount, and this may require
liquidating securities at times they might not otherwise do so and may result in
capital loss. See "Tax Information" in the Statement of Additional Information.
LOAN PARTICIPATION AND ASSIGNMENTS. The Lexington Ramirez Global Income
Fund may invest in loans arranged through private negotiations between a foreign
entity and one or more lenders. The majority of the Lexington Ramirez Global
Income Fund's investments in loans in emerging markets is expected to be in the
form of participation in loans ("Participations") and assignments of portions of
loans from third parties ("Assignments"). Participations typically will result
in the Lexington Ramirez Global Income Fund having a contractual relationship
only with the Lender, not with the borrower. The Lexington Ramirez Global Income
Fund will have the right to receive payments of principal, interest and any fees
to which it is entitled only from the Lender selling the Participation and only
upon receipt by the Lender of the payments from the borrower. As a result, the
Lexington Ramirez Global Income Fund will assume the credit risk of both the
borrower and the Lender that is selling the Participation. When the Lexington
Ramirez Global Income Fund purchases Assignments from Lenders, the Lexington
Ramirez Global Income Fund will acquire direct rights against the borrower on
the Loan. The Lexington Ramirez Global Income Fund may have difficulty disposing
of Assignments and Participations. The liquidity of such securities is limited
and the Lexington Ramirez Global Income 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.
BRADY BONDS. The Lexington Ramirez Global Income Fund may invest in "Brady
Bonds". Brady Bonds are securities created through the exchange of existing
29
<PAGE>
commercial bank loans to public and private entities in certain emerging markets
for new bonds in connection with a debt restructuring plan introduced by former
U.S. Secretary of the Treasury, Nicholas F. Brady. Fund investors should
recognize that BradyBonds have been issued only recently and, accordingly, do
not have a long payment history. DEPOSITORY RECEIPTS
DEPOSITORY RECEIPTS
Each Lexington Fund (except Lexington Money Market Trust and Lexington
GNMAIncome Fund) may invest in American Depository Receipts ("ADRs") and similar
securities. ADRs are securities traded in the U.S. that are backed by securities
of foreign issuers.
INVESTMENT COMPANIES
Each Lexington Fund (except the Lexington Money Market Trust) may invest up
to 10% of its total assets in shares of other investment companies that invest
in securities which the Funds may otherwise invest.
U.S. GOVERNMENT SECURITIES
All Lexington Funds may invest in fixed-rate and floating- or
variable-rate U.S. government securities. The U.S. Government guarantees
payments of interest and principal of U.S. Treasury bills, notes and bonds,
mortgage-related securities of the GNMA, and other securities issued by the U.S.
government. Other securities issued by U.S. government agencies or
instrumentalities are supported only by the credit of the agency or
instrumentality, for example those issued by the Federal Home Loan Bank, whereas
others, such as those issued by the FNMA, Farm Credit System and Student Loan
Marketing Association, have an additional line of credit with the U.S. Treasury.
Short-term U.S. government securities generally are considered to be among
the safest short-term investments. However, the U.S. government does not
guarantee the net asset value of the Funds' shares. With respect to U.S.
government securities supported only by the credit of the issuing agency or
instrumentality or by an additional line of credit with the U.S. Treasury, there
is no guarantee that the U.S. government will provide support to such agencies
or instrumentalities. Accordingly, such U.S. government securities may involve
risk of loss of principal and interest.
The following table illustrates investments that the Funds primarily
invest in or are permitted to invest in, as indicated in dark shade. The light
shade indicates that the Fund's policy may permit such investments within
limits.
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<PAGE>
- --------------------------------------------------------------------------------
PORTFOLIO SECURITIES
DARK SHADE:
Fund invests primarily in these types of investments, or Fund's policy permits
such investments.
LIGHT SHADE: Within limits, Fund's policy may permit such investments.
TYPE OF PORTFOLIO SECURITY
<TABLE>
<CAPTION>
Lexington Crosby Lexington Lexington Lexington Lexington Worldwide Lexington
Small Cap Asia International Ramirez Global Troika Dialog Emerging Convertible
Growth Fund Fund Income Fund Russia Fund Markets Fund Securities Fund
<S> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
Common Stock
- ------------------------------------------------------------------------------------------------------------------------------------
Common Stock Equivalents (Warrants)
- ------------------------------------------------------------------------------------------------------------------------------------
Common Stock Equivalents (Options) *
- ------------------------------------------------------------------------------------------------------------------------------------
Common Stock Equivalents
(Convertible Debt Securities)
- ------------------------------------------------------------------------------------------------------------------------------------
Common Stock Equivalents
(Depository Receipts)
- ------------------------------------------------------------------------------------------------------------------------------------
Preferred Stocks
- ------------------------------------------------------------------------------------------------------------------------------------
Equity Derivative Securities *
- ------------------------------------------------------------------------------------------------------------------------------------
Debt Securities (Below Investment
Grade) or (Junk Bonds)
- ------------------------------------------------------------------------------------------------------------------------------------
Debt Securities (Brady Bonds)
- ------------------------------------------------------------------------------------------------------------------------------------
Debt Securities (Zero Coupon)
- ------------------------------------------------------------------------------------------------------------------------------------
Debt Securities
(Loan Participation and Assignments)
- ------------------------------------------------------------------------------------------------------------------------------------
Debt Securities (GNMA Certificates)
- ------------------------------------------------------------------------------------------------------------------------------------
Debt Securities (Guaranteed by the U.S.
Gov't, its agencies or instrumentalities)
- ------------------------------------------------------------------------------------------------------------------------------------
Gold Bullion
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Lexington Lexington Lexington *Lexingtonn
Growth and SmallCap Value Lexington GNMA Income Money Market
Income Fund Fund Goldfund Fund Trust Fund
- ------------------------------------------------------------------------------------------------------------------------------------
Common Stock
- ------------------------------------------------------------------------------------------------------------------------------------
Common Stock Equivalents (Warrants)
- ------------------------------------------------------------------------------------------------------------------------------------
Common Stock Equivalents (Options)
- ------------------------------------------------------------------------------------------------------------------------------------
Common Stock Equivalents
(Convertible Debt Securities)
- ------------------------------------------------------------------------------------------------------------------------------------
Common Stock Equivalents
(Depository Receipts)
- ------------------------------------------------------------------------------------------------------------------------------------
Preferred Stocks
- ------------------------------------------------------------------------------------------------------------------------------------
Equity Derivative Securities
- ------------------------------------------------------------------------------------------------------------------------------------
Debt Securities (Below Investment
Grade) or (Junk Bonds)
- ------------------------------------------------------------------------------------------------------------------------------------
Debt Securities (Brady Bonds)
- ------------------------------------------------------------------------------------------------------------------------------------
Debt Securities (Zero Coupon)
- ------------------------------------------------------------------------------------------------------------------------------------
Debt Securities
(Loan Participation and Assignments)
- ------------------------------------------------------------------------------------------------------------------------------------
Debt Securities (GNMA Certificates)
- ------------------------------------------------------------------------------------------------------------------------------------
Debt Securities (Guaranteed by the U.S.
Gov't, its agencies or instrumentalities)
- ------------------------------------------------------------------------------------------------------------------------------------
Gold Bullion
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Notes: Lexington Ramirez Global Income Fund may invest in options and
derivatives with respect to debt securities, not equity securities. Lexington
Money Market Trust is not permitted to purchase any of the portfolio securities
identified in this table, and may only invest in short-term securities such as
commercial paper, short-term government securities, banker's acceptances or
other money market instruments.
31
<PAGE>
Other Investment Practices
The following table and sections summarize certain investment practices that the
Funds are permitted to engage in. These practices may involve risks. The
Glossary section at the end of this Prospectus briefly describes each of the
investment techniques summarized below. The Statement of Additional Information,
under the heading "Investment Objectives and Policies of the Funds," contains
more detailed information about certain of these practices.
<TABLE>
<CAPTION>
Lexington Crosby Lexington Lexington Lexington Lexington Worldwide Lexington
Small Cap Asia International Ramirez Global Troika Dialog Emerging Convertible
Growth Fund Fund Income Fund Russia Fund Markets Fun Securities Fund
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Repurchase agreements(1) x x x x x x
- ------------------------------------------------------------------------------------------------------------------------------------
Reverse dollar roll
transactions1
- ------------------------------------------------------------------------------------------------------------------------------------
Borrowing not to exceed x x x x
one-third of total fund assets
for leveraging purposes
- ------------------------------------------------------------------------------------------------------------------------------------
Reverse repurchase agreement x x x x x
- ------------------------------------------------------------------------------------------------------------------------------------
Dollar roll transactions x
- ------------------------------------------------------------------------------------------------------------------------------------
Securities lending not to exceed
10% of total fund assets
- ------------------------------------------------------------------------------------------------------------------------------------
Securities lending not to exceed
one-third of total fund assets x x x x
- ------------------------------------------------------------------------------------------------------------------------------------
When-issued and forward x x x x x
commitment securities
- ------------------------------------------------------------------------------------------------------------------------------------
Forward currency contracts(2) x x x x x
- ------------------------------------------------------------------------------------------------------------------------------------
Purchase options on securities
and currencies(3) x x x
- ------------------------------------------------------------------------------------------------------------------------------------
Purchase options on securities x x x
and indices3
- ------------------------------------------------------------------------------------------------------------------------------------
Write covered call options(3) x x x x x
- ------------------------------------------------------------------------------------------------------------------------------------
Write covered put options(3) x x x
- ------------------------------------------------------------------------------------------------------------------------------------
Interest rate futures contracts x x
- ------------------------------------------------------------------------------------------------------------------------------------
Futures and swaps and options
on futures(4) x x x x x
- ------------------------------------------------------------------------------------------------------------------------------------
Equity swap
- ------------------------------------------------------------------------------------------------------------------------------------
Illiquid securities limited to
5% of fund's net assets
- ------------------------------------------------------------------------------------------------------------------------------------
Illiquid securities limited to x
10% of fund's net assets
- ------------------------------------------------------------------------------------------------------------------------------------
Illiquid securities limited to
15% of fund's net assets x x x x x
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Lexington Lexington Lexington *Lexingtonn
Growth and SmallCap Value Lexington GNMA Income Money Market
Income Fund Fund Goldfund Fund Trust
- ------------------------------------------------------------------------------------------------------------------------------------
Repurchase agreements(1) x x x x x
- ------------------------------------------------------------------------------------------------------------------------------------
Reverse dollar roll
transactions1
- ------------------------------------------------------------------------------------------------------------------------------------
Borrowing not to exceed x
one-third of total fund assets
for leveraging purposes
- ------------------------------------------------------------------------------------------------------------------------------------
Reverse repurchase agreement x x
- ------------------------------------------------------------------------------------------------------------------------------------
Dollar roll transactions x
- ------------------------------------------------------------------------------------------------------------------------------------
Securities lending not to exceed
10% of total fund assets
- ------------------------------------------------------------------------------------------------------------------------------------
Securities lending not to exceed
one-third of total fund assets x
- ------------------------------------------------------------------------------------------------------------------------------------
When-issued and forward x x
commitment securities
- ------------------------------------------------------------------------------------------------------------------------------------
Forward currency contracts(2) x
- ------------------------------------------------------------------------------------------------------------------------------------
Purchase options on securities
and currencies(3)
- ------------------------------------------------------------------------------------------------------------------------------------
Purchase options on securities
and indices3
- ------------------------------------------------------------------------------------------------------------------------------------
Write covered call options(3)
- ------------------------------------------------------------------------------------------------------------------------------------
Write covered put options(3)
- ------------------------------------------------------------------------------------------------------------------------------------
Interest rate futures contracts
- ------------------------------------------------------------------------------------------------------------------------------------
Futures and swaps and options
on futures(4) x
- ------------------------------------------------------------------------------------------------------------------------------------
Equity swap
- ------------------------------------------------------------------------------------------------------------------------------------
Illiquid securities limited to
5% of fund's net assets
- ------------------------------------------------------------------------------------------------------------------------------------
Illiquid securities limited to x
10% of fund's net assets
- ------------------------------------------------------------------------------------------------------------------------------------
Illiquid securities limited to
15% of fund's net assets x
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
32
<PAGE>
-----------
1 Under the Investment Company Act, repurchase agreements and reverse dollar
roll transactions are considered to be loans by a fund and must be fully
collateralized by collateral assets. If the seller defaults on its
obligations to repurchase the underlying security, a fund may experience
delay or difficulty in exercising it rights to realize upon the security,
may incur a loss if the value of the security declines and may incur
disposition costs in liquidating the security.
2 A fund that may enter into in forward currency contracts may not do so with
respect to more than 70% of its total assets.
3 A FUND WILL NOT ENTER INTO OPTIONS ON SECURITIES, SECURITIES INDICES OR
CURRENCIES OR RELATED OPTIONS (INCLUDING OPTIONS ON FUTURES) IF THE SUM OF
INITIAL MARGIN DEPOSITS AND PREMIUMS PAID FOR ANY SUCH OPTION OR OPTIONS
WOULD EXCEED 5% OF ITS TOTAL ASSETS, AND IT WILL NOT ENTER INTO OPTIONS
WITH RESPECT TO MORE THAN 25% OF ITS TOTAL ASSETS.
4 A Fund may purchase and sell futures contracts and related options under
the following conditions: (a) the then-current aggregate futures market
prices of financial instruments required to be delivered and purchased
under open futures contracts shall not exceed 30% of the Fund's total
assets, at market value; and (b) no more than 5% of the assets, at market
value at the time of entering into a contract, shall be committed to margin
deposits in relation to futures contracts.
BORROWING FOR TEMPORARY OR EMERGENCY PURPOSES
For temporary or emergency purposes, Lexington Convertible Securities Fund
and Lexington Growth and Income Fund may borrow up to 10% of their total assets.
Lexington Money Market Trust may borrow up to one-third of its total assets;
Lexington GNMAIncome Fund may not borrow money, and the remaining Lexington
Funds may borrow up to 5% of their total assets. For leveraging purposes, some
Lexington Funds (see Chart)may borrow up to one-third of their total assets.
DEFENSIVE INVESTMENTS AND PORTFOLIO TURNOVER
Each Lexington Fund may invest up to 100% of its total assets in cash or
high-quality debt obligations for temporary defensive purposes.
The "portfolio turnover rate" is the frequency a Fund buys and sells
securities. Frequent transactions involve added expense. All Funds except
Lexington Convertible Securities Fund, Lexington Goldfund and Lexington SmallCap
Value Fund expect a portfolio turnover rate of greater than 100%.
HEDGING AND RISK MANAGEMENT PRACTICES
The Lexington Funds (other than the Lexington Money Market Trust) may
"hedge" against changes in financial markets, currency rates and interest rates.
A typical hedge is designed to offset a decline that could hurt the value of the
Fund's securities. The Lexington Funds may hedge with "derivatives." Derivatives
are instruments whose value is linked to, or derived from, another instrument,
like an index or a commodity. Some Lexington Funds (see chart) may invest in
options and futures contracts.
33
<PAGE>
Hedging transactions involve certain risks. Although a Fund may benefit
from hedging, unanticipated changes in interest rates or securities prices may
result in greater losses for a Fund than if it did not hedge. If a Fund does not
correctly predict a hedge, it may lose money. In addition, a Fund pays
commissions and other costs in connection with such investments. Hedging
transactions may not exist is some countries.
INVESTMENT RESTRICTIONS
The investment objective of each Lexington Fund is fundamental and may not
be changed without shareholder approval but, unless otherwise stated, each
Fund's other investment policies may be changed by its Board. If a Fund changes
its investment objective or policies, you should consider whether that Fund is
right for you. The Lexington Funds are subject to additional investment policies
and restrictions described in the Statement of Additional Information, some of
which are fundamental.
RISK CONSIDERATIONS
SMALL COMPANIES
The Lexington Crosby Small Cap Asia Growth Fund and Lexington SmallCap
Value Fund emphasize investments in smaller companies that may benefit from the
development of new products and services. Such smaller companies may present
greater opportunities for capital appreciation but may involve greater risk than
larger, more mature issuers. Such smaller companies may have limited product
lines, markets or financial resources, and their securities may trade less
frequently and in more limited volume than those of larger, more mature
companies. As a result, the prices of their securities may fluctuate more than
those of larger issuers.
Many companies traded on securities markets in many foreign countries are
smaller, newer and less seasoned than companies whose securities are traded on
securities markets in the United States. Investments in smaller companies
involve greater risk than is customarily associated with investing in larger
companies. Smaller companies may have limited product lines, markets or
financial or managerial resources and may be more susceptible to losses and
risks of bankruptcy. Additionally, market making and arbitrage activities are
generally less extensive in such markets and with respect to such companies,
which may contribute to increased volatility and reduced liquidity of such
markets or such securities. Accordingly, each of these markets and companies may
be subject to greater influence by adverse events generally affecting the
market, and by large investors trading significant blocks of securities, than is
usual in the United States. To the extent that any of these countries
34
<PAGE>
experiences rapid increases in its money supply and investment in equity
securities for speculative purposes, the equity securities traded in any such
country may trade at price-earning multiples higher than those of comparable
companies trading on securities markets in the United States, which may not be
sustainable. In addition, risks due to the lack of modern technology, the lack
of a sufficient capital base to expand business operations, the possibility of
permanent or temporary termination of trading, and greater spreads between bid
and ask prices may exist in such markets.
FOREIGN SECURITIES
The Lexington Crosby Small Cap Asia Growth Fund, Lexington Goldfund,
Lexington Growth and Income Fund, Lexington International Fund, Lexington
Ramirez Global Income Fund, Lexington Troika Dialog Russia Fund and Lexington
Worldwide Emerging Markets Fund have the right to purchase securities in foreign
countries. Accordingly, shareholders should consider carefully the substantial
risks involved in investing in securities issued by companies and governments of
foreign nations, which are in addition to the usual risks of loss inherent in
domestic investments. The Lexington Crosby Small Cap Asia Growth Fund, Lexington
International Fund, Lexington Ramirez Global Income Fund, Lexington Troika
Dialog Russia Fund and Lexington Worldwide Emerging Markets Fund, may invest in
securities of companies domiciled in, and in markets of, so-called emerging
market countries. These investments may be subject to higher risks than
investments in more developed countries.
Foreign investments involve the possibility of expropriation,
nationalization or confiscatory taxation, taxation of income earned in foreign
nations (including, for example, withholding taxes on interest and dividends) or
other taxes imposed with respect to investments in foreign nations, foreign
exchange controls (which may include suspension of the ability to transfer
currency from a given country and repatriation of investments), default in
foreign government securities, and political or social instability or diplomatic
developments that could adversely affect investments. In addition, there is
often less publicly available information about foreign issuers than those in
the U.S. Foreign companies are often not subject to uniform accounting, auditing
and financial reporting standards. Further, these funds may encounter
difficulties in pursuing legal remedies or in obtaining judgments in foreign
courts. Additional risk factors, including use of domestic and foreign custodian
banks and depositories, are described elsewhere in this Prospectus and in the
Statement of Additional Information.
Brokerage commissions, fees for custodial services and other costs
relating to investments in other countries are generally greater than in the
U.S. Foreign markets have different clearance and settlement procedures from
35
<PAGE>
those in the U.S., and certain markets have experienced times when settlements
did not keep pace with the volume of securities transactions. The inability of a
fund to make intended security purchases due to settlement difficulties could
cause it to miss attractive investment opportunities. Inability to sell a
portfolio security due to settlement problems could result in loss to the fund
if the value of the portfolio security declined or result in claims against the
fund. In certain countries, there is less government supervision and regulation
of business and industry practices, stock exchanges, brokers, and listed
companies than in the U.S. The securities markets of many of the countries in
which these funds may invest may also be smaller, less liquid, and subject to
greater price volatility than those in the U.S.
Because certain foreign securities may be denominated in foreign
currencies, the value of such securities will be affected by changes in currency
exchange rates and in exchange control regulations, and costs will be incurred
in connection with conversions between currencies. A change in the value of a
foreign currency against the U.S. dollar results in a corresponding change in
the U.S. dollar value of a fund's securities denominated in the currency. Such
changes also affect the fund's income and distributions to shareholders. A fund
may be affected either favorably or unfavorably by changes in the relative rates
of exchange between the currencies of different nations, and a fund may
therefore engage in foreign currency hedging strategies. Such strategies,
however, involve certain transaction costs and investment risks, including
dependence upon the Manager's ability to predict movements in exchange rates.
Some countries in which one of these funds may invest also may have fixed
or managed currencies that are not freely convertible at market rates into the
U.S. dollar. Certain currencies may not be internationally traded. A number of
these currencies have experienced steady devaluation relative to the U.S.
dollar, and such devaluations in the currencies may have a detrimental impact on
the fund. Many countries in which a fund may invest have experienced
substantial, and in some periods extremely high, rates of inflation for many
years. Inflation and rapid fluctuation in inflation rates may have negative
effects on certain economies and securities markets. Moreover, the economies of
some countries may differ favorably or unfavorably from the U.S. economy in such
respects as the rate of growth of gross domestic product, rate of inflation,
capital reinvestment, resource self-sufficiency and balance of payments. Certain
countries also limit the amount of foreign capital that can be invested in their
markets and local companies, creating a "foreign premium" on capital investments
available to foreign investors such as the fund. The fund may pay a "foreign
premium" to establish an investment position which it cannot later recoup
because of changes in that country's foreign investment laws.
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LOWER-QUALITY DEBT
The Lexington Convertible Securities Fund, Lexington Troika Dialog Russia
Fund, Lexington Goldfund, Inc. and Lexington Ramirez Global Income Fund are
authorized to invest high-yield, lower-rated debt securities commonly referred
to as "junk bonds." Lower-rated debt securities are considered highly
speculative and changes in economic conditions or other circumstances are more
likely to lead to a weakened capacity to make principal and interest payments
than with higher-grade debt securities.
CONCENTRATION IN SECURITIES OF RUSSIAN COMPANIES
The Lexington Troika Dialog Russia Fund concentrates its investment in
companies that have their principal activities in Russia. Consequently, the
Lexington Troika Dialog Russia Fund's share value may be more volatile than that
of investment companies not sharing this geographic concentration. Since the
breakup of the Soviet Union at the end of 1991, Russia has experienced dramatic
political and social change. The political system in Russia is emerging from a
long history of extensive state involvement in economic affairs. The country is
undergoing a rapid transition from a centrally-controlled command system to a
market-oriented, democratic model. The Lexington Troika Dialog Russia Fund may
be affected unfavorably by political or diplomatic developments, social
instability, changes in government policies, taxation and interest rates,
currency repatriation restrictions and other political and economic developments
in the law or regulations in Russia and, in particular, the risks of
expropriation, nationalization and confiscation of assets and changes in
legislation relating to foreign ownership. See "Russia" and "Russian Company" in
the Glossary.
The Russian securities markets are substantially smaller, less liquid and
significantly more volatile than the securities markets in the United States. In
addition, there is little historical data on these securities markets because
they are of recent origin. A substantial proportion of securities transactions
in Russia are privately negotiated outside of stock exchanges and
over-the-counter markets. A limited number of issuers represent a
disproportionately large percentage of market capitalization and trading volume.
Some issuers may be exposed to center-regional conflicts in jurisdiction in the
areas of taxation and overall corporate governance which could put the Fund's
investments at risk. In addition, because the Russian securities markets are
smaller and less liquid than in the United States, obtaining prices on portfolio
securities from independent sources may be more difficult than in other markets.
The political environment in Russia in 1997 is more stable than in 1993
and earlier when clashes between reformers and reactionaries were continuous,
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<PAGE>
setting the stage for an attempted coup d'etat in October 1993. Nevertheless,
there is still a great deal of uncertainty surrounding the political future of
the country. The civil war in Chechnya has highlighted the political tensions
that exist between the central government in Moscow and some of the regions
within the Russian Federation and has contributed to political instability by
weakening confidence domestically and internationally in the government. The
risk exists that armed conflict in Chechnya will continue, which could deter
foreign investment and international aid and further weaken the reformist
government's control. A continuing trend away from reformers toward
conservatives could further deter foreign investment if foreign policy
initiatives contrary to western interests (Iran, Iraq) lead to a deterioration
in relations between the Russian Federation and the West. The risk also exists
that the political tensions associated with the war in Chechnya will lead to
attempts for independence in other regions within the Russian Federation. The
war in Chechnya and other inflammatory issues may also lead to greater tensions
and divisions between the President and the legislature.
The military could have a negative impact on Russia's political and
economic future. The declining stature of Russia as a world power has led to a
widespread sentiment among Russians for a return to Russia's status as a
superpower. Demobilization of troops, cuts in the military budget, the growth of
significant gaps in living standards between the military and civilian sectors,
and the perception of an external threat from NATO could lead to further
political unrest.
Moreover, it is uncertain whether Russia's privatization process will
continue. Although government officials have publicly pledged their continued
support for the reform process. It is also unclear whether the reforms intended
to liberalize prevailing economic structures based on free market principles
will be successful, particularly in terms of foreign ownership of Russian
companies.
The planned economy of the former Soviet Union was run with qualitatively
different objectives and assumptions from those prevalent in a market system and
Russian businesses do not have any recent history of operating within a
market-oriented economy. In general, relative to companies operating in Western
economies, companies in Russia are characterized by a lack of: (i) management
with experience of operating in a market economy; (ii) modern technology; and,
(iii) a sufficient capital base with which to develop and expand their
operations. It is unclear what will be the future effect on Russian companies,
if any, of Russia's continued attempts to move toward a more market-oriented
economy.
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Russia's economy has experienced severe economic recession, if not
depression, since 1990 during which time the economy has been characterized by
high rates of inflation, high rates of unemployment, declining gross domestic
product, deficit government spending, and a devaluing currency. The economic
reform program has involved major disruptions and dislocations in various
sectors of the economy. The economic problems have been exacerbated by a growing
liquidity crisis which culminated in a bank liquidity crisis in August 1995. The
taxation system has had numerous attempts at reform, but a failure to collect
taxes is an ongoing major problem.
Russia presently receives significant financial assistance from a number
of countries through various programs. To the extent these programs are reduced
or eliminated in the future, Russian economic development may be adversely
impacted.
Although evolving rapidly, even the largest of Russia's stock exchanges
are not well developed compared to Western stock exchanges. The actual volume of
exchange-based trading in Russia is low and active on-market trading generally
occurs only in the shares of a few private companies. Most secondary market
trading of equity securities occurs through over-the-counter trading facilitated
by a growing number of licensed brokers. Shares are traded on the
over-the-counter market primarily by the management of enterprises, investment
funds, short-term speculators and foreign investors.
INTEREST RATES
The market value of debt securities that are interest rate sensitive is
inversely related to changes in interest rates. That is, an interest rate
decline produces an increase in a security's market value, and an interest rate
increase produces a decrease in value. The longer the remaining maturity of a
security, the more sensitive that security is to changes in interest rates.
Changes in the ability of an issuer to make payments of interest and principal
and in the market's perception of the issuer's creditworthiness also affect the
market value of that issuer's debt securities.
Prepayments of principal of mortgage-related securities by mortgagors or
mortgage foreclosures affect the average life of the mortgage-related securities
in a fund's portfolio. Mortgage prepayments are affected by the level of
interest rates and other factors, including general economic conditions and the
underlying location and age of the mortgage. In periods of rising interest
rates, the prepayment rate tends to decrease, lengthening the average life of a
pool of mortgage-related securities. In periods of falling interest rates, the
prepayment rate tends to increase, shortening the average life of a pool.
Because prepayments of principal generally occur when interest rates are
declining, it is likely that the Lexington GNMA Income Fund may have to reinvest
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the proceeds of prepayments at lower interest rates than those of their previous
investments. If this occurs, a fund's yield will decline correspondingly. Thus,
mortgage-related securities may have less potential for capital appreciation in
periods of falling interest rates than other fixed-income securities of
comparable duration, although they have a comparable risk of decline in market
value in periods of rising interest rates. To the extent that the Lexington GNMA
Income Fund purchases mortgage-related securities at a premium, unscheduled
prepayments, which are made at par, result in a loss equal to any unamortized
premium. Duration is one of the fundamental tools used by the Manager in
managing interest rate risks including prepayment risks. See "Duration" in the
Glossary.
NON-DIVERSIFIED PORTFOLIO. The Lexington Goldfund and Lexington Troika
Dialog Russia Fund are "non-diversified" investment companies under the
Investment Company Act. This means that the Lexington Goldfund and Lexington
Troika Dialog Russia Fund are not limited in the proportion of their total
assets that may be invested in a single company. The Lexington Goldfund and
Lexington Troika Dialog Russia Fund may invest a greater portion of their assets
in fewer companies than "diversified" funds, and thus may be subject to greater
risk. The Lexington Goldfund and Lexington Troika Dialog Russia Fund, however,
intend to comply with the diversification requirements of federal tax laws to
qualify as a regulated investment company.
PRECIOUS METALS
The Lexington Goldfund may invest in gold bullion and other precious
metals. These precious metals investments earn no income return, unlike savings
deposits, bonds or even stocks which may produce interest or dividend income.
Transaction and storage costs may be higher than costs relating to the buying,
holding and selling of more traditional types of investments. An increase in the
market price of precious metals is the only way the Fund will be able to realize
a gain on these investments.
SETTLEMENT AND CUSTODY
The Funds that invest in foreign securities, especially the Lexington
Troika Dialog Russia Fund could be subject to risks not normally associated with
U.S. investments because of newly developed securities markets and the
underdeveloped state of banking and telecommunications systems. Russia does not
have a central registration system, therefore ownership of shares is recorded by
the companies themselves and by registrars located throughout Russia. Although
these registrars may be inspected, it is possible that the Fund's ownership
rights could be lost through fraud, negligence or even mere oversight on behalf
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<PAGE>
the registrars, and the Fund could experience difficulty enforcing any rights
against the registrar or issuer in the event of loss of share registration. Due
to local postal and banking standards, there are risks that the payment of
dividends or other distributions could be delayed or lost. Russian banking
institutitons and registrars are not guaranteed by the state.
In light of these risks, the Board of Directors of the Lexington Troika
Dialog Russia Fund has approved procedures whereby the Fund will not invest in
the securities of a Russian company unless that company's registrar has entered
into a contract with the Fund's Sub-Custodian Bank. This protective contract
gives the Sub-Custodian Bank the right to conduct regular share confirmations on
behalf of the Fund. These procedures also require the Sub-Custodian Bank to
provide certain information on a periodic basis to the Board of Directors
concerning the registration of shares and custody arrangements in Russia.
MANAGEMENT OF THE FUNDS
BOARD OF DIRECTORS/TRUSTEES
Each Lexington Fund has either a Board of Directors or a Board of Trustees
that establishes its policies and supervises and reviews its management.
Day-to-day operations of the Lexington Funds are administered by the officers of
the Lexington Funds and by the Manager and Sub-Advisers pursuant to the terms of
an investment management agreement with each fund and investment sub-advisory
agreements between the Manager and the Sub-Advisers.
BOARD OF ADVISERS
The Lexington Troika Dialog Russia Fund's Board of Directors will receive
oversight assistance from a Board of Advisers which will be composed of experts
in Russian political and economic affairs. The Board of Advisers will be
responsible for providing the Board of Directors with periodic updates on
political and macroeconomic conditions and trends in Russia, and their potential
implication for the overall investment environment in Russia. This will enhance
the Board of Directors' ability to oversee and safeguard the assets of the
Lexington Troika Dialog Russia Fund.
The members of the Board of Advisers currently are:Keith Bush, Senior
Associate-Russian and Eurasian Studies at the Center for Strategic and
International Studies:Richard M. Hisey, Executive Vice President and Chief
Financial Officer of Lexington Global Asset Managers, Inc. and Marin J.
Strmecki, Ph.D., Director of Programs for the Smith Richardson Foundation. See
Statement of Additional Information for further information on the Board of
Advisers.
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INVESTMENT ADVISER
Lexington Management Corporation is the Manager of the Lexington Funds.
The Manager was established in 1938 and is an investment adviser registered as
such with the Securities and Exchange Commission under the Investment Advisers
Act of 1940, as amended. The Manager advises private clients as well as the
Lexington Funds. The Manager is a wholly-owned subsidiary of Lexington Global
Asset Managers, Inc., a Delaware corporation. Descendants of Lunsford
Richardson, Sr., their spouses, trusts and other related entities have a
controlling interest in Lexington Global Asset Managers, Inc.
(NASDAQSymbol:LGAM).
THE SUB-ADVISERS
LEXINGTON CONVERTIBLE SECURITIES FUND
The Manager has entered into a Sub-Advisory Agreement with Ariston Capital
Management Corporation ("Ariston"). Under the Sub-Advisory Agreement, Ariston
will provide the Lexington Convertible Securities Fund with investment
management and administrative services. Ariston also serves as investment
adviser to private and institutional investment accounts. Such accounts own a
significant number of shares of the Lexington Convertible Securities Fund as
part of their investment program. Ariston was founded in 1977 and provides
investment management to individuals, corporations, pension and profit sharing
plans, and other qualified retirement plan accounts. Ariston is recognized for
its expertise in portfolio management, specializing in convertible securities
and market forecasting.
LEXINGTON CROSBY SMALL CAP ASIA GROWTH FUND
The Manager has entered into a Sub-Advisory Agreement with Crosby Asset
Management (US) Inc. ("Crosby"). Under the Sub-Advisory Agreement, Crosby will
provide the Lexington Crosby Small Cap Asia Growth Fund with investment
management services. Crosby was established on October 4, 1990 in the British
Virgin Islands. Crosby manages assets and provides investment advice for
investment company and institutional private accounts around the world. It is a
subsidiary of the Crosby Group, Hong Kong.
LEXINGTON RAMIREZ GLOBAL INCOME FUND
The Manager has entered into a Sub-Advisory Agreement with MFR Advisors,
Inc. ("MFR"). Under the Sub-Advisory Agreement, MFR will provide the Lexington
Ramirez Global Income Fund with investment and economic research services. MFR
manages assets for both investment companies and institutions. MFR is a
subsidiary of Maria Fiorini Ramirez, Inc.
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LEXINGTON SMALLCAP VALUE FUND
The Manager has entered into a Sub-Advisory Agreement with Capital
Technology Inc. ("CTI"). Under the Sub-Advisory Agreement, CTI will provide the
Lexington SmallCap Value Fund with investment advice and management of the
Fund's investment program. CTI was founded in Charlotte, North Carolina in 1977
and invests exclusively in domestic smaller capitalization stocks. CTI currently
manages assets both small and mid cap growth and value styles for primarily
institutional clients.
LEXINGTON TROIKA DIALOG RUSSIA FUND
The Manager has entered into a Sub-Advisory Agreement with Troika Dialog
Asset Management ("TDAM"). Under the Sub-Advisory Agreement, TDAM will provide
the Lexington Troika Dialog Russia Fund with investment advice and management of
the Fund's investment program. TDAM is a wholly owned subsidiary of Troika
Dialog which was founded in Moscow, Russia in 1991 by Dialog Bank and Troika
Capital Corporation.
REGISTERED SERVICE MARK
The Manager as owner of the registered service mark "Lexington" will
sublicense the Funds to include the word "Lexington" as part of their names
subject to revocation by the Manager in the event that the Funds cease to engage
the Manager or its affiliates as investment manager or distributor. Crosby has
authorized the Lexington Crosby Small Cap Asia Growth Fund to include the word
"Crosby" as part of its corporate name subject to revocation by Crosby in the
event the Lexington Crosby Small Cap Asia Growth Fund ceases to engage Crosby as
Sub-Adviser. In that event the Funds will be required upon demand of the Manager
(or with regard to the Lexington Crosby Small Cap Asia Growth Fund, Crosby) to
change their respective names to delete the word "Lexington" (or with regard to
the Lexington Crosby Small Cap Asia Growth Fund, "Crosby") therefrom.
PORTFOLIO MANAGERS
LEXINGTON CONVERTIBLE SECURITIES FUND
Richard B. Russell manages the Lexington Convertible Securities Fund. Mr.
Russell is President of Ariston Capital Management Corporation, the Lexington
Convertible Securities Fund's Sub-Adviser. He is a graduate of the School of
Business at the University of Washington and has completed additional training
at the New York Institute of Finance. He is a recognized authority on portfolio
management, particularly through the use of convertible securities and market
forecasting. He has spent his entire professional career as an independent money
manager, dating from 1972. Before founding Ariston in 1977, he was a full-time
manager of private family assets. Mr. Russell has conducted extensive research
on investment topics.
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LEXINGTON CROSBY SMALL CAP ASIA GROWTH FUND
CHRISTINA LAM is a lead manager (Nigel Webber is the other lead manager)
on a portfolio management team that manages the Lexington Crosby Small Cap Asia
Growth Fund. Ms. Lam is Vice President and Portfolio Manager of the Lexington
Crosby Small Cap Asia Growth Fund. Ms. Lam joined Crosby Asset Management in
1991. She is responsible for the investment management of the listed equity
portfolios under the management of Crosby Asset Management which include a major
Asian small capitalization account. After graduating with a Law Degree with
Honors from Warwick University, she qualified as a Barrister from Lincoln's Inn
in London. She moved to Hong Kong in 1987 where she joined Schroder Securities
Limited in Hong Kong as an investment analyst, where her coverage included the
utilities, industrials and retail sectors and conglomerates.
NIGEL WEBBER is a lead manager (Ms. Lam is the other lead manager) on a
portfolio management team that manages the Lexington Crosby Small Cap Asia
Growth Fund. Mr. Webber is Vice President and Portfolio Manager of the Lexington
Crosby Small Cap Asia Growth Fund. Mr. Webber is responsible for the Fund's
overall investment strategy. Mr. Webber was appointed a Managing Director of
Crosby Asset Management in October 1993 with primary responsibility for business
development. He joined Crosby Asset Management after being a partner in Causeway
Capital Limited, a leading independent U.K. investment management firm
specializing in private equity investment and smaller listed companies. He
started his career at KPMG Peat Marwick, followed by five years at Citicorp
International Bank Limited in London and New York and three years with
Mercantile House Holdings PLC a leading financial services group. In 1987, he
joined as Managing Director, an investment company specializing in the financial
sector where he first became associated with the Crosby Group. He was a Director
and member of the investment committee of The Thai Development Capital Fund
Limited and The China Investment Company Ltd., two funds managed by Crosby Asset
Management from their launch until September 1993.
LEXINGTON GOLDFUND
Robert W. Radsch, CFA, is portfolio manager of the Lexington Goldfund. Mr.
Radsch is a Vice President of the Manager. Prior to joining Lexington in July
1994, he was Senior Vice President, Portfolio Manager and Chief Economist for
the Bull & Bear Group. He has extensive experience managing gold, silver and
platinum on an international basis having managed precious metals and
international funds for more than 13 years. Mr. Radsch is a graduate of Yale
University with a B.A. degree and holds an M.B.A. in Finance from Columbia
University.
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LEXINGTON GROWTH AND INCOME FUND
Alan Wapnick is portfolio manager of the Lexington Growth and Income Fund.
Mr. Wapnick is Senior Vice President, Director of Domestic Investment Equity
Strategy of the Manager. Mr. Wapnick is responsible for domestic investment
analysis and portfolio management at LMC. He has 26 years investment experience.
Prior to joining the Manager in 1986, Mr. Wapnick was an equity analyst with
Merrill Lynch, J.&W. Seligman, Dean Witter and most recently Union Carbide
Corporation. Mr. Wapnick is a graduate of Dartmouth College and received a
Master's Degree in Business Administration from Columbia University.
LEXINGTON GNMA INCOME FUND
Denis P. Jamison manages the Lexington GNMA Income Fund. Mr. Jamison is
Senior Vice President and Director Fixed Income Strategy of the Manager. Mr.
Jamison is responsible for fixed-income portfolio management. He is a member of
the New York Society of Security Analysts. Prior to joining the Manager in 1981,
Mr. Jamison had spent nine years at Arnold Bernhard & Company, an investment
counseling and financial services organization. At Bernhard, he was a Vice
President supervising the security analyst staff and managing investment
portfolios. He is a specialist in government, corporate and municipal bonds. Mr.
Jamison is a graduate of the City College of New York with a B.A. in Economics.
LEXINGTON INTERNATIONAL FUND
Richard T. Saler is the lead manager on an investment management team that
manages the Lexington International Fund. Mr. Saler is Senior Vice President,
Director of International Investment Strategy of the Manager. Mr. Saler is
responsible for international investment analysis and portfolio management at
the Manager. He has ten years of investment experience. Mr. Saler has focused on
international markets since first joining the Manager in 1986. In 1991 he was a
strategist with Nomura Securities and rejoined the Manager in 1992. Mr. Saler is
a graduate of New York University with a B.S. Degree in Marketing and an M.B.A.
in Finance from New York University's Graduate School of Business
Administration.
PHILLIP A. SCHWARTZ is a co-manager on an investment management team that
manages the Lexington International Fund. Mr. Schwartz is a Vice President of
the Manager, Chartered Financial Analyst and member of the New York Security
Analysts Association. He is responsible for international investment analysis
and portfolio management at the Manager, and has eight years investment
experience. Prior to joining Lexington in 1993, Mr. Schwartz was Vice President
of European Research Sales with Cheuvreux De Virieu in Paris and New York,
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serving the institutional market. Prior to Cheuvreux, he was affiliated with
Olde and Co. and Kidder, Peabody as a stockbroker. Mr. Schwartz earned his B.A.
and M.A. degrees from Boston University.
LEXINGTON MONEY MARKET TRUST
DENIS P. JAMISON is portfolio manager of the Lexington Money Market Trust.
Mr. Jamison also manages the Lexington GNMA Income Fund and the Lexington
Ramirez GlobalIncome Fund. Mr. Jamison is Senior Vice President and Director
Fixed Income Strategy of Lexington Management Corporation. Mr. Jamison is
responsible for fixed-income portfolio management. He is a member of the New
York Society of Security Analysts. Prior to joining the Manager in 1981, Mr.
Jamison had spent nine years at Arnold Bernhard & Company, an investment
counseling and financial services organization. At Bernhard, he was a Vice
President supervising the security analyst staff and managing investment
portfolios. He is a specialist in government, corporate and municipal bonds. Mr.
Jamison is a graduate of the City College of New York with a B.A. in Economics.
LEXINGTON RAMIREZ GLOBAL INCOME FUND
Denis P. Jamison manages the Lexington Ramirez Global Income Fund. Mr.
Jamison is Senior Vice President and Director Fixed Income Strategy of Lexington
Management Corporation. Mr. Jamison is responsible for fixed-income portfolio
management. He is a member of the New York Society of Security Analysts. Prior
to joining the Manager in 1981, Mr. Jamison had spent nine years at Arnold
Bernhard & Company, an investment counseling and financial services
organization. At Bernhard, he was a Vice President supervising the security
analyst staff and managing investment portfolios. He is a specialist in
government, corporate and municipal bonds. Mr. Jamison is a graduate of the City
College of New York with a B.A. in Economics.
MARIA FIORINI RAMIREZ, President and Chief Executive Officer of MFR
Advisors Inc. In 1973 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, MFR
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is Sub-Adviser to the Lexington Ramirez Global Income Fund. Ms. Ramirez holds a
B.A. in Business Administration and Economics from Pace University.
LEXINGTON SMALLCAP VALUE FUND
DENNIS HAMILTON is one of two lead managers (Robb W. Rowe is the other
lead manager) of a portfolio management team that manages the Lexington SmallCap
Value Fund. Mr. Hamilton is Vice President and Portfolio Manager of Capital
Technology, Inc. ("CTI"). He is responsible for issue selection and the day to
day investment activities of the Lexington SmallCap Value Fund. Mr. Hamilton
joined CTI in 1994 after being a principal at Mercer Investment Consulting, Inc.
He has also served as Director of Pension Investment for several multi-billion
dollar corporate pension funds and was President and Chief Investment Officer of
Western Reserve Capital Management, Inc., an SEC registered investment advisor.
He is an Honors graduate of Colgate University and earned an MBA from Harvard
Business School in 1971.
ROBB W. ROWE is one of two lead managers (Mr. Hamilton is the other lead
manager) of a portfolio management team that manages the Lexington SmallCap
Value Fund. Mr. Rowe is President and principal shareholder of CTI. He is
responsible for the Lexington SmallCap Value Fund's overall investment strategy.
Mr. Rowe joined CTI in 1982 after being Vice President and Regional Manager of
AG Becker Co. He is a graduate of Ripon College and received an MBA from the
University of Chicago in 1971.
LEXINGTON TROIKA DIALOG RUSSIA FUND
PETER DERBY is a manager on a portfolio management team that manages the
Lexington Troika Dialog Russia Fund. Mr. Derby is the Chairman of the Board of
TDAM and is the President, Chief Executive Officer and founder of Troika Dialog
and is the President and Chief Executive Officer of Dialog Bank, a position he
has held since 1991. Mr. Derby participated in the drafting of corporate,
banking and securities legislation in Russia and is currently a member of the
Expert Council of Russia's Federal Securities Exchange Commission. Mr. Derby
holds numerous director positions in Russian enterprises and charities; he is a
founding and current Member of the Board of the Moscow International Currency
Exchange, and is a Member of the Board of Directors of the American Chamber of
Commerce in Russia. Mr. Derby is Treasurer and Member of the Board of Junior
Achievement in Russia. He is a founding Member of the Russian-American
Professional Club in New York City.
NANCY HERRING is a lead manager of a portfolio management team that manages
the Lexington Troika Dialog Russia Fund. Ms. Herring manages the Russian
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domestic mutual funds of Troika Dialog. She was appointed Managing Director in
1996. Before joining TDAM, Ms. Herring, a U.S. citizen, was a portfolio manager
of a U.S. equity fund for Dean Witter Intercapital. In all, she has over twelve
years of security industry experience. Her Master's Degree in Business
Administration was earned in International Business and Finance at Columbia
University Graduate School of Business.
GAVIN RANKIN is a lead manager of a portfolio management team that manages
the Lexington Troika Dialog Russia Fund. Mr. Rankin is Head of Research for TDAM
and Troika Dialog. He is responsible, along with other members of the portfolio
management team, for the Fund's overall investment strategy. Before joining
Troika Dialog, he was the Founder and Chief Executive Officer of Lonpra A.S., an
investment banking firm in Czechoslovakia in 1991. Mr. Rankin received a degree
in law (L.L.B.) from the University of Buckingham in England and also qualified
as a Chartered Accountant with Price Waterhouse. Mr. Rankin has extensive
experience in East European equity research and management.
RUBEN VARDANIAN is a manager on a portfolio management team that manages
the Lexington Troika Dialog Russia Fund. Mr. Vardanian is President of TDAM and
Executive Director of Troika Dialog. Mr. Vardanian, a Russian national, is a
sitting member of the Moscow Times Index Composition Committee. He is a Director
and former Chairman of the Board of Directors of the Depository Clearing
Company. He is also Chairman of the Board of Directors of the Russian capital
markets self-regulatory organization (PAUFOR). Mr. Vardanian received a Masters
Degree with Distinction from the Finance Department of Moscow State University.
He received post-graduate training with Banca CRT in Italy and the Emerging
Markets Division of Merrill Lynch in New York.
LEXINGTON WORLDWIDE EMERGING MARKETS FUND
Richard T. Saler is the lead manager on an investment management team that
manages the Lexington Worldwide Emerging Markets Fund. Mr. Saler is Senior Vice
President, Director of International Investment Strategy of the Manager. Mr.
Saler is responsible for international investment analysis and portfolio
management at the Manager. He has ten years of investment experience. Mr. Saler
has focused on international markets since first joining the Manager in 1986. In
1991 he was a strategist with Nomura Securities and rejoined the Manager in
1992. Mr. Saler is a graduate of New York University with a B.S. Degree in
Marketing and an M.B.A. in Finance from New York University's Graduate School of
Business Administration.
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MANAGEMENT FEES AND OTHER EXPENSES
The Manager provides the Funds with advice on buying and selling
securities, manages the Funds' Investments, including the placement of orders
for portfolio transactions, furnishes the Funds with office space and certain
administrative services and provides personnel needed by the Funds with respect
to the Manager's responsibilities under the Manager's Investment Management
Agreement with each fund. The Manager also compensates the members of the Funds'
Board of Directors or Trustees who are interested persons of the Manager, and
assumes the cost of printing prospectuses and shareholder reports for
dissemination to prospective investors.
The management fees for all the Funds except Lexington Growth and Income
Fund, Lexington GNMA Income Fund and Lexington Money Market Trust are higher
than for most mutual funds.
As compensation, each Lexington Fund pays the Manager a management fee
(accrued daily but paid when requested by the Manager) based upon the value of
the average daily net assets of that fund, according to the following table.
<TABLE>
<CAPTION>
MANAGEMENT FEE AVERAGE DAILY NET
(ANNUAL RATE) ASSETS (IF APPLICABLE)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Lexington Crosby Small Cap
Asia Growth Fund 1.25% *
- ------------------------------------------------------------------------------------------------------
Lexington International Fund 1.00% *
- ------------------------------------------------------------------------------------------------------
Lexington Ramirez Global
Income Fund 1.00% *
- ------------------------------------------------------------------------------------------------------
Lexington Troika Dialog Russia Fund 1.25% *
- ------------------------------------------------------------------------------------------------------
Lexington Worldwide Emerging
Markets Fund 1.00% *
- ------------------------------------------------------------------------------------------------------
Lexington Convertible
Securities Fund 1.00% *
- -----------------------------------------------------------------------------------------------------
Lexington Growth and 0.75% First $100 million
Income fund 0.60% Next $50 million
0.50% Next $100 million
0.40% Over $250 million
- ------------------------------------------------------------------------------------------------------
Lexington SmallCap Value Fund 1.00% *
- ------------------------------------------------------------------------------------------------------
Lexington Goldfund 1.00% First $50 million
0.75% Over $50 million
- -------------------------------------------------------------------------------------------------------
Lexington GNMA Income Fund 0.60% *
- -------------------------------------------------------------------------------------------------------
Lexington Money Market Trust 0.50% *
- -------------------------------------------------------------------------------------------------------
</TABLE>
*One rate applies to the Fund's average daily net assets
49
<PAGE>
The Manager also serves as the Funds' Administrator (the "Administrator").
The Administrator performs services with regard to various aspects of each
fund's administrative operations at cost.
Each fund is responsible for its own operating expenses including, but not
limited to: the Manager's fees; taxes, if any; brokerage and commission
expenses, if any; interest charges on any borrowings; transfer agent,
administrator, custodian, legal and auditing fees; shareholder servicing fees
including fees to third-party servicing agents; fees and expenses of Director or
Trustees who are not interested persons of the Manager; salaries of certain
personnel; costs and expenses of calculating its daily net asset value; costs
and expenses of accounting, bookkeeping and record keeping required under the
Investment Company Act of 1940; insurance premiums; trade association dues; fees
and expenses of registering and maintaining registration of its shares for sale
under federal and applicable state securities laws; all costs associated with
shareholders meetings and the preparation and dissemination of proxy materials,
except for meetings called solely for the benefit of the Manager or its
affiliates; printing and mailing prospectuses, statements of additional
information and reports to shareholders; and other expenses relating to that
fund's operations, plus any extraordinary and nonrecurring expenses that are not
expressly assumed by the Manager.
For certain funds, the Manager has agreed to reduce its management fee if
necessary to keep total annual operating expenses at or below the following
percentages of each fund's average daily net assets. Lexington International
Fund, one and three-quarters percent (1.75%); Lexington Ramirez Global Income
Fund, one and one-half percent (1.50%); Lexington Troika Dialog Russia Fund,
three and thirty-five one-hundredths of one percent (3.35%); and Lexington Money
Market Trust, one percent (1.00%). The Manager also may reduce additional
amounts in these or other of the Funds to increase the return to a fund's
investors. The Manager may terminate these voluntary reductions at any time.
In addition, the Manager may elect to absorb operating expenses that a
fund is obligated to pay to increase the return to that fund's investors. If the
Manager performs a service or assumes an operating expense for which a fund is
obligated to pay and the performance of such service or payment of such expense
is not an obligation of the Manager under the Investment Management Agreement,
the Manager is entitled to seek reimbursement from that fund for the Manager's
costs incurred in rendering such service or assuming such expense. The Manager
also may compensate broker-dealers and other intermediaries that distribute a
fund's shares as well as other service providers of shareholder and
administrative services. The Manager may also sponsor seminars and educational
programs on the Funds for financial intermediaries and shareholders.
50
<PAGE>
The Manager considers a number of factors in determining which brokers or
dealers to use for each fund's portfolio transactions. Although these factors
are more fully discussed in the Statement of Additional Information, they
include, but are not limited to, reasonableness of commissions, quality of
services, and execution and availability of research that the Manager may
lawfully and appropriately use in its investment management and advisory
capacities. Provided the Funds receive prompt execution at competitive prices,
the Manager also may consider the sale of a fund's shares as a factor in
selecting broker-dealers for that fund's portfolio transactions.
It is anticipated that Troika Dialog or SocGen-Crosby Securities (HK)
Limited may act as two of the Fund's brokers in the purchase and sale of
portfolio securities and, in that capacity, will receive brokerage commissions
from the Funds. The Funds will use Troika Dialog or SocGen-Crosby Securities
(HK) Limited as its broker only when, in the judgement of the Manager and
pursuant to review by the Boards of Directors, Troika Dialog or SocGen-Crosby
Securities (HK) Limited will obtain a price and execution at least as favorable
as that available from other qualified brokers. See "Portfolio Transactions and
Brokerage Commissions" in the Statement of Additional Information.
51
<PAGE>
HOW TO CONTACT THE FUNDS
Call a Lexington shareholder service representative Monday-Friday between
9-5 ET for information on the Funds or your account, at:
(800) 526-0056 OR (201) 845-7300 FOR SERVICE
(800) 526-0052 FOR 24 HOUR ACCOUNT INFORMATION
Mail your completed application, any checks, investment or redemption
instructions and correspondence to the Transfer Agent:
TRANSFER AGENT:
State Street Bank and Trust Company
c/o National Financial Data Services
Lexington Funds
1004 Baltimore
Kansas City, Missouri 64105
HOW TO INVEST IN THE FUNDS
The Funds' shares are offered directly to the public, with no sales load,
at their next determined net asset value after receipt of an order with payment.
The Funds' shares are offered for sale by State Street Bank and Trust Company
(the "Transfer Agent") and through selected securities brokers and dealers.
If an order, together with payment in proper form, is received by the
Transfer Agent by 4:00 p.m., New York time, on any day that the New York Stock
Exchange ("NYSE") is open for trading, fund shares will be purchased at the
fund's next-determined net asset value. Orders for fund shares received after
the Funds' cutoff times will be purchased at the next-determined net asset value
after receipt of the order.
The minimum investment in each fund is described in this section. The
Manager or the Distributor, in its discretion, may waive these minimums. The
Funds do not accept third-party checks or cash investments. Third party checks
are defined as checks made payable to someone other than the Fund. Checks must
be in U.S. dollars and, to avoid fees and delays, drawn only on banks located in
the U.S. See the Statement of Additional Information for further details.
52
<PAGE>
INITIAL INVESTMENTS
Minimum Initial Investment (except Lexington
Troika Dialog Russia Fund):$1,000
MINIMUM INITIAL INVESTMENT FOR THE LEXINGTON TROIKA
DIALOG RUSSIA FUND:$5,000
INITIAL INVESTMENTS BY CHECK
o Complete the New Account Application. Tell us in which fund(s) you
want to invest and make your check payable to THE LEXINGTON FUNDS.
o Mail the New Account Application and check to the Transfer Agent at
the address given above.
o A charge may be imposed on checks that do not clear.
o The Funds and the Distributor each reserve the right to reject any
purchase order in whole or in part.
INITIAL INVESTMENTS BY WIRE
o Shares of the Funds may be purchased by wire if a prospectus has been
received and read prior to investing. The purchase will be made at the
net asset value on the day received if the wire is received prior to 4
pm ET.
o Telephone the Funds toll-free at 1-800-526-0056. Provide the Fund with
your name, dollar amount to be invested and fund(s) in which you want
to invest. They will provide you with further instructions to complete
your purchase. Complete information regarding your account must be
included in all wire instructions to ensure accurate handling of your
investment.
o Request your bank to transmit immediately available funds by wire for
purchase of shares in your name to the following:
State Street Bank and Trust Company
Account No. 99043713
Re: Lexington Fund you are
investing in
Account of (your Registration)
Account # (of new account)
ABARouting Number 011000028
O A COMPLETED NEW ACCOUNT APPLICATION MUST THEN BE FORWARDED TO THE FUND
AT THE ADDRESS ON THE APPLICATION.
o Your bank may charge a fee for any wire transfers.
53
<PAGE>
o The Funds and the Distributor each reserve the right to reject any
purchase order in whole or in part.
MINIMUM SUBSEQUENT INVESTMENT: $50
SUBSEQUENT INVESTMENTS BY CHECK
o Make your check payable to The Lexington Funds. Enclose the detachable
form which accompanies the Transfer Agent's confirmation of a prior
transaction with your check. If you do not have the detachable form,
mail your check with written instructions indicating the fund name and
account number to which your investment should be credited.
o A charge may be imposed on checks that do not clear.
SUBSEQUENT INVESTMENTS BY WIRE
o You do not need to contact the Transfer Agent prior to making
subsequent investments by wire. Instruct your bank to wire funds to
the Transfer Agent using the bank wire information under "Initial
Investments by Wire" above.
"LEX-O-MATIC" THE AUTOMATIC INVESTMENT PLAN
o A shareholder may make additional purchases of shares automatically on
a monthly or quarterly basis with the automatic investing plan,
"Lex-O-Matic."
o "Lex-O-Matic" will be established on existing accounts only. You may
not use a "Lex-O-Matic" investment to open a new account. The minimum
automatic investment amount is $50.
o Your bank must be a member of the Automated Clearing House.
o To establish Lex-O-Matic, attach a voided check (checking account) or
preprinted deposit slip (savings account) from your bank account to
your Lexington Account Application or your letter of instruction.
o Investments will automatically be transferred into your Lexington
Account from your checking or savings account. The institution must be
an Automated Clearing House (ACH) member.
o Investments may be transferred either monthly or quarterly on or about
the 15th day of the month.
o You should allow 20 business days for this service to become
effective.
o You may cancel your Lex-O-Matic at any time provided that a letter is
sent to the Transfer Agent ten days prior to the scheduled investment
date. Your request will be processed upon receipt.
54
<PAGE>
By investing in the Lexington Funds, you appoint the Transfer Agent as
your agent to establish an open account to which all shares purchased will be
credited, along with any dividends and capital gain distributions which are paid
in additional shares (see "Dividends and Distributions"). Stock certificates
will be issued, upon written request, for full shares of Lexington Funds.
Certificates will not be issued for 30 days unless payment is made by certified
check, cashier's check or federal funds wire. In order to facilitate redemptions
and transfers, most shareholders elect not to receive certificates.
You may purchase shares of the Lexington Funds through broker-dealers or
financial institutions that have selling agreements with LFD. Broker-dealers and
financial institutions that process such orders for customers may charge a fee
for their services. The fee may be avoided by purchasing shares directly from
the Lexington Funds.
HOW TO REDEEM AN INVESTMENT IN THE FUNDS
The Funds will redeem all or any portion of an investors outstanding
shares upon request. Redemptions can be made on any day that the NYSE is open
for trading. The redemption price is the net asset value per share next
determined after the shares are validly tendered for redemption and such request
is received by the Transfer Agent. Payment of redemption proceeds is made
promptly regardless of when redemption occurs and normally within three days
after receipt of all documents in proper form, including a written redemption
order with appropriate signature guarantee. Redemption proceeds will be mailed
or wired in accordance with the shareholders instructions. The Funds may suspend
the right of redemption under certain extraordinary circumstances in accordance
with the rules of the SEC. In the case of shares purchased by check and redeemed
shortly after the purchase, the Transfer Agent will not mail redemption proceeds
until it has been notified that the monies used for the purchase have been
collected, which may take up to 15 days from the purchase date. You may redeem
shares of the Lexington Funds through broker-dealers or financial institutions
that have selling agreements with LFD. Broker-dealers and financial institutions
that process such orders for customers may charge a fee for their services. The
fee may be avoided by redeeming shares directly from the Lexington Funds.
A 2% redemption fee will be charged on the redemption of shares of the
Lexington Troika Dialog Russia Fund held less than 365 days. The redemption fee
will not apply to shares representing the reinvestment of dividends and capital
gains distributions. The redemption fee will be applied on a share by share
basis using the "first shares in, first shares out" (FIFO) method. Therefore,
the oldest shares are considered to have been sold first.
55
<PAGE>
REDEEMING BY WRITTEN INSTRUCTION
o Write a letter giving your name, account number, the name of the fund
from which you wish to redeem and the dollar amount or number of
shares you wish to redeem.
o Signature guarantee your letter if you want the redemption proceeds to
go to a party other than the account owner(s), your predesignated bank
account or if the dollar amount of the redemption exceeds $25,000. The
Transfer Agent requires that the guarantor be either a commercial bank
which is a member of the FederalDeposit Insurance Corporation, a trust
company, a savings and loan association, a savings bank, a credit
union, 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. CONTACT THE FUND FOR MORE INFORMATION.
o If a redemption request is sent to the Fund in New Jersey, it will be
forwarded to the Transfer Agent and the effective date of redemption
will be the date received by the Transfer Agent.
o Checks for redemption proceeds will normally be mailed within three
business days, but will not be mailed until all checks in payment for
the shares to be redeemed have been cleared. Shareholders who redeem
all their shares will receive a check representing the value of the
shares redeemed plus the accrued dividends through the date of
redemption. Where shareholders redeem only a portion of their shares,
all dividends declared but unpaid will be distribute on the next
dividend payment date. The Transfer Agent will restrict the mailing of
redemption proceeds to a shareholder address of record within 30 days
of such address being changed, unless the shareholder provides a
signature guaranteed letter of instruction.
REDEEMING BY TELEPHONE
o Shares of the Funds may redeemed by telephone. A telephone redemption
in good order will be processed at the net asset value of the Fund
next determined. There is a maximum telephone redemption limit of
$100,000. Call the Fund between 9 a.m. and 4 p.m. ET toll free at
1-800-526-0056.
o A redemption authorization and signature guarantee must be given
before a shareholder may redeem by telephone. A redemption
authorization form is contained in the New Account Application and
authorization forms may be obtained by calling the Funds.
o Shareholders may elect on the redemption authorization form to have
redemption proceeds, in any amount of $200 or more, mailed to the
registered address or to any other designated person. There is a
minimum of $1,000 to have your Redemption proceeds wired to a bank
account. A new form must be completed whenever these instructions are
revised.
56
<PAGE>
o Telephone redemption privileges may be canceled by instructing the
Transfer Agent in writing. Your request will be processed upon
receipt.
o Telephone Exchanges may only involve shares held on deposit by the
Transfer Agent, not shares held in certificate form by the
shareholder.
o Exchange/Redemption by telephone, see below "Exchange/Telephone
Privileges and Restrictions."
REDEEMING BY CHECK
o Checkwriting is available on the Lexington Money Market Trust.
o The minimum amount per check is $100 or more up to $500,000 at no
charge. Checks for less than $100 or over $500,000 will not be
honored.
o All checks require only one signature unless otherwise indicated.
o Checks will be returned to you at the end of each month.
o Redemption checks are free, but a charge of $15.00 may be imposed for
any stop payments requested.
o Redemption checks should not be used to close your account.
o Procedures for redemptions by telephone, at no charge, or check may
only be used for shares for which share certificates have not been
issued, and may not be used to redeem shares purchased by check which
have been on the books of the Fund for less than 15 days.
SYSTEMATIC WITHDRAWAL PLAN
Under a Systematic Withdrawal Plan, a shareholder with an account value of
$10,000 or more in a fund may receive (or have sent to a third party) periodic
payments (by check or wire). If the proceeds are to be mailed to a third party a
signature guarantee is required. The minimum payment amount is $100 from each
fund account. Payments may be made monthly, quarterly, semi-annually or
annually. Systematic withdrawals occur on the 28th of each month. If the 28th
falls on a weekend or holiday, the withdrawal will occur on the preceding
business day. Depending on the form of payment requested, shares may be redeemed
up to five business days before the redemption proceeds are scheduled to be
received by the shareholder. The redemption may result in the recognition of
gain or loss for income tax purposes.
57
<PAGE>
EXCHANGE/TELEPHONE REDEMPTION PRIVILEGES AND RESTRICTIONS
Shares of the Lexington Funds may be exchanged for shares of equivalent
value of any Lexington Fund. If an exchange involves investing in a Lexington
Fund not already owned, the dollar amount of the exchange must meet the minimum
initial investment amount. An exchange may result, in a recognized gain or loss
for income tax purposes. Exchanges over $500,000 may take up to three business
days to complete. See the discussion of fund telephone procedures and
limitations of liability under "Telephone Transactions" above.
PURCHASING AND REDEEMING SHARES BY EXCHANGE
o You may make exchange/redemption requests in writing or by telephone.
Telephone exchanges may only be made if you have completed a Telephone
Authorization form. Telephone exchanges may not be made within 7 days
of a previous exchange.
o The minimum exchange required is $500, unless a new account is being
established.
o Telephone exchanges/redemptions may only involve shares held on
deposit by the Transfer Agent, not shares held in certificate form by
the shareholder.
o Any new account established by a shareholder will also have the
privilege of exchange by telephone in the Lexington Funds. All
accounts involved in a telephonic exchange must have the same dividend
option as the account from which the shares are transferred.
o Telephone redemption privileges are not available on retirement plan
accounts.
TELEPHONE EXCHANGE/TELEPHONE REDEMPTION IDENTIFICATION PROCEDURES
You agree that neither LFD, the Transfer Agent, or 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. The
above provision is subject to the procedures outlined below. LFD, the Transfer
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 telephone exchange and telephone redemption transactions will
take place on recorded telephone lines and each transaction will be confirmed in
58
<PAGE>
writing by the Fund. If the Shareholder is an entity other than an individual,
such entity may be required to certify 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 the power to take action called for by this continuing
authorization.
HOW NET ASSET VALUE IS DETERMINED
The net asset value of each Fund is determined once daily as of 4:00 p.m.,
New York time, on each day that the NYSE is open for trading. Per share net
asset value is calculated by dividing the value of each fund's total net assets
by the total number of that fund's shares then outstanding.
As more fully described in the Statement of Additional Information,
portfolio securities are valued using current market valuations: either the last
reported sales price or, in the case of securities for which there is no
reported last sale and fixed-income securities, the mean between the closing bid
and asked price. Securities traded over-the-counter are valued at the mean
between the last current bid and asked price. Securities for which market
quotations are not readily available or which are illiquid are valued at their
fair values as determined in good faith under the supervision of the Funds'
officers, and by the Manager and the Boards, in accordance with methods that are
specifically authorized by the Boards. Short-term obligations with maturities of
60 days or less are valued at amortized cost as reflecting fair value. When Fund
management deems it appropriate prices obtained for the day of valuation from a
third party pricing service will be used to value portfolio securities.
The value of securities denominated in foreign currencies and traded on
foreign exchanges or in foreign markets will be translated into U.S. dollars at
the last price of their respective currency denomination against U.S. dollars
quoted by a major bank or, if no such quotation is available, at the rate of
exchange determined in accordance with policies established in good faith by the
Boards. Because the value of securities denominated in foreign currencies must
be translated into U.S. dollars, fluctuations in the value of such currencies in
relation to the U.S. dollar may affect the net asset value of fund shares even
without any change in the foreign-currency denominated values of such
securities.
Because foreign securities markets may close before the Funds determine
their net asset values, events affecting the value of portfolio securities
occurring between the time prices are determined and the time the Funds
calculate their net asset values may not be reflected unless the Manager, under
supervision of the Board, determines that a particular event would materially
affect a fund's net asset value.
59
<PAGE>
DISTRIBUTION PLAN
The Lexington Convertible Securities Fund, Lexington Goldfund, Lexington
Growth and Income Fund, Lexington International Fund, Lexington Ramirez Global
Income Fund, Lexington SmallCap Value Fund and Lexington Troika Dialog Russia
Fund have each adopted a Distribution Plan. The Distribution Plan provides that
the Funds may pay distribution fees up to 0.25% of their average daily net
assets for distribution services.
SHAREHOLDER SERVICE AGREEMENTS
The Lexington Crosby Small Cap Asia Growth Fund, Lexington GNMA Income
Fund and Lexington Worldwide Emerging Markets Fund may enter into Shareholder
Servicing Agreements with one or more Shareholder Servicing Agents. The
Shareholder Servicing Agents provide various services to shareholders. For these
services, each Shareholder Servicing Agent receives fees up to 0.25% of the
average daily net assets of the Fund represented by shares owned during the
period for which payment is made. The Manager, at no additional cost to the
Funds, may pay to Shareholder Servicing Agents additional amounts from its past
profits. Each Shareholder Servicing Agent may, from time to time, voluntarily
waive all or a portion of the fees payable to it.
TAX-SHELTERED RETIREMENT PLANS
The Funds offers a Prototype Pension and Profit Sharing Plan, including a
Keogh Plan, IRA's, SEP-IRA's and IRA Rollover Accounts, 401(k) Plans and
403(b)(7) Plans. Plan support services are available through the Shareholder
Services Department of LMC. For further information call 1-800-526-0056.
60
<PAGE>
DIVIDENDS AND DISTRIBUTIONS
Each fund distributes substantially all of its net investment income and
net capital gains to shareholders each year. The amount and frequency of fund
distributions are not guaranteed and are at the discretion of the Board.
Currently, the Lexington Funds intend to distribute according to the following
schedule:
<TABLE>
<CAPTION>
INCOME DIVIDENDS CAPITAL GAINS
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
LEXINGTON CONVERTIBLE Declared and paid quarterly Declared and paid annually
SECURITIES FUND
LEXINGTON GROWTH AND INCOME FUND
LEXINGTON RAMIREZ GLOBAL
INCOME FUND
- ---------------------------------------------------------------------------------------------------
LEXINGTON GNMA INCOME FUND Declared and paid monthly Declared and paid annually
- ---------------------------------------------------------------------------------------------------
LEXINGTON CROSBY SMALL CAP Declared and paid annually Declared and paid annually
ASIA GROWTH FUND
LEXINGTON INTERNATIONAL FUND
LEXINGTON SMALLCAP VALUE FUND
LEXINGTON TROIKA DIALOG
RUSSIA FUND
LEXINGTON WORLDWIDE
EMERGING MARKETS FUND
- ---------------------------------------------------------------------------------------------------
LEXINGTON GOLDFUND Declared and paid Declared and paid
semi-annually semi-annually
- ---------------------------------------------------------------------------------------------------
LEXINGTON MONEYMARKET Declared daily Not expected
TRUST and paid monthly
- ---------------------------------------------------------------------------------------------------
</TABLE>
Unless investors request cash distributions in writing, all dividends and
other distributions will be reinvested automatically in additional shares of the
applicable fund and credited to the shareholders account at the closing net
asset value on the reinvestment date.
DISTRIBUTIONS AFFECT A FUND'S NET ASSET VALUE
Distributions are paid to you as of the record date of a distribution of a
fund, regardless of how long you have held the shares. Dividends and capital
gains awaiting distribution are included in each fund's daily net asset value.
The share price of a fund drops on the ex-dividend date by the amount of the
distribution, net of any subsequent market fluctuations. For example, assume
that on December 31, the Lexington Growth and Income Fund declared a dividend in
the amount of $0.50 per share. If the Lexington Growth and Income Fund's share
price was $10.00 on December 30, the Fund's share price on December 31 would be
$9.50, barring market fluctuations.
61
<PAGE>
"BUYING A DIVIDEND"
If you buy shares of a fund just before a distribution, you will pay the
full price for the shares and receive a portion of the purchase price back as a
taxable distribution. This is called "buying a dividend." In the example above,
if you bought shares on December 30, you would have paid $10.00 per share. On
December 31, the Fund would pay you $0.50 per share as a dividend and your
shares would now be worth $9.50 per share. Unless your account is a tax-deferred
account, dividends paid to you would be included in your gross income for tax
purposes even though you may not have participated in the increase of net asset
value of the Fund, regardless of whether you reinvested the dividends.
TAXATION
Each of the funds has elected and intends to continue to qualify to be
treated as a regulated investment company under Subchapter M of the Code, by
distributing substantially all of its net investment income and net capital
gains to its shareholders and meeting other requirements of the Code relating to
the sources of its income and diversification of assets. Accordingly, the Funds
generally will not be liable for federal income tax or excise tax based on net
income except to the extent their earnings are not distributed or are
distributed in a manner that does not satisfy the requirements of the Code. If a
fund is unable to meet certain Code requirements, it may be subject to taxation
as a corporation. Funds investing in foreign securities also may incur tax
liability to the extent they invest in "passive foreign investment companies."
See "Portfolio Securities" and the Statement of Additional Information.
For federal income tax purposes, any dividends derived from net investment
income and any excess of net short-term capital gain over net long-term capital
loss that investors (other than certain tax-exempt organizations that have not
borrowed to purchase fund shares) receive from the Funds are considered ordinary
income. Part of the distributions paid by the Funds may be eligible for the
dividends-received deduction allowed to corporate shareholders under the Code.
Distributions of the excess of net long-term capital gain over net short-term
capital loss from transactions of a fund are treated by shareholders as
long-term capital gains regardless of the length of time the fund's shares have
been owned. Distributions of income and capital gains are taxed in the manner
described above, whether they are taken in cash or are reinvested in additional
shares of the Funds.
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<PAGE>
Each fund will inform its investors of the source of their dividends and
distributions at the time they are paid, and will promptly after the close of
each calendar year advise investors of the tax status of those distributions and
dividends. Investors (including tax exempt and foreign investors) are advised to
consult their own tax advisers regarding the particular tax consequences to them
of an investment in shares of the Funds. Additional information on tax matters
relating to the Funds and their shareholders is included in the Statement of
Additional Information.
GENERAL INFORMATION
THE FUNDS
The Lexington Convertible Securities Fund, Lexington Money Market Trust
and Lexington Ramirez Global Income Fund are business trusts organized under the
laws of Massachusetts. The Lexington Crosby Small Cap Asia Growth Fund,
Lexington Goldfund, Lexington GNMA Income Fund, Lexington Growth and Income
Fund, Lexington International Fund, Lexington SmallCap Value Fund, Lexington
Troika Dialog Russia Fund and Lexington Worldwide Emerging Markets Fund are
Maryland corporations. The assets and liabilities of each business trust and
corporation are separate and distinct from each other business trust or
corporation.
The Funds may offer other classes of shares to eligible investors and may
in the future designate other classes of shares for specific purposes.
SHAREHOLDER RIGHTS
Shares issued by the Funds have no preemptive, conversion or subscription
rights. Each whole share is entitled to one vote as to any matter on which it is
entitled to vote and each fractional share is entitled to a proportionate
fractional vote. Shareholders have equal and exclusive rights as to dividends
and distributions as declared by each fund and to the net assets of each fund
upon liquidation or dissolution. Each fund votes separately on matters affecting
only that fund (e.g., approval of the Investment Management Agreement). Voting
rights are not cumulative, so the holders of more than 50% of the shares voting
in any election of Trustees or Directors can, if they so choose, elect all of
the Trustees or Directors of that Fund. Although the Funds are not required, and
do not intend, to hold annual meetings of shareholders, such meetings may be
called by each Fund's Board at its discretion, or upon demand by the holders of
10% or more of the outstanding shares of the Fund for the purpose of electing or
removing Trustees or Directors. Shareholders may receive assistance in
communicating with other shareholders in connection with the election or removal
of Trustees or Directors pursuant to the provisions of Section 16(c) of the
Investment Company Act.
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<PAGE>
PERFORMANCE INFORMATION
From time to time, the Funds may publish their total return, and, in the
case of certain funds, current yield and tax equivalent yield in advertisements
and communications to investors. Total return information generally will include
a fund's average annual compounded rate of return over the most recent four
calendar quarters and over the period from the fund's inception of operations. A
fund may also advertise aggregate and average total return information over
different periods of time. Each fund's average annual compounded rate of return
is determined by reference to a hypothetical $1,000 investment that includes
capital appreciation and depreciation for the stated period according to a
specific formula. Aggregate total return is calculated in a similar manner,
except that the results are not annualized. Total return figures will reflect
all recurring charges against each fund's income.
Current yield as prescribed by the SEC is an annualized percentage rate
that reflects the change in value of a hypothetical account based on the income
received from the fund during a 30-day period. It is computed by determining the
net change, excluding capital changes, in the value of a hypothetical
preexisting account having a balance of one share at the beginning of the
period. A hypothetical charge reflecting deductions from shareholder accounts
for management fees or shareholder services fees, for example, is subtracted
from the value of the account at the end of the period, and the difference is
divided by the value of the account at the beginning of the base period to
obtain the base period return. The result is then annualized. See "Performance
Information" in the Statement of Additional Information.
Comparative performance information may be used from time to time in
advertising and marketing a Fund's shares. The performance information may
include data from sources such as Lipper Analytical Services, Inc. or major
market indices. Such comparative performance information will be stated in the
same terms in which the comparative data and indices are stated.
Investment results of the Funds will fluctuate over time, and any
representation of the Funds' total return or current yield for any prior period
should not be considered as a representation of what an investors total return
or current yield may be in any future period. The Funds' Annual Report contains
additional performance information and is available upon request and without
charge by calling (800) 526-0056.
CODE OF ETHICS
The Code of Ethics adopted by the Lexington Funds and the Manager
prohibits affiliated personnel from engaging in personal investment activities
which compete with or attempt to take advantage of the Funds' planned portfolio
transactions. The objective of the Funds' and the Manager's Code of Ethics is
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that the operations of the Funds and the Manager be carried out for the
exclusive benefit of the Fund's shareholders. The Funds and the Manager maintain
careful monitoring of compliance with the Code of Ethics.
LEGAL OPINION
The validity of shares offered by this Prospectus will be passed on by
Kramer, Levin, Naftalis & Frankel, 919 Third Avenue, New York, New York 10022.
SHAREHOLDER REPORTS AND INQUIRIES
During the year, the Funds will send you the following information:
o Confirmation statements are mailed after every transaction that affects
your account balance, including preauthorized automatic investment,
exchange and redemption transactions. Lexington Money Market Trust,
Lexington GNMA Income Fund and Lexington Ramirez Global Income Fund
provide quarterly confirmation statements annually. All other Funds
will provide confirmation statements annually, unless the account
balance is affected by any daily transactions. Shareholders are urged
to retain their account statements for tax purposes.
o Annual and semi-annual reports are mailed approximately 60
days after December 31 and June 30.
o 1099 TAX FORM(S) ARE MAILED BY JANUARY 31.
Unless otherwise requested, only one copy of each shareholder report or
other material sent to shareholders will be mailed to each household with
accounts under common ownership and the same address regardless of the number of
shareholders or accounts at that household or address. Any questions should be
directed to The Lexington Funds at (800) 526-0056.
BACK-UP WITHHOLDING
TAXPAYER IDENTIFICATION NUMBER (TIN)
Be sure to complete the Taxpayer Identification Number section of the
fund's application when you open an account. Federal tax law requires the fund
to withhold 31% of taxable dividends, capital gains distributions and redemption
and exchange proceeds from accounts (other than those of certain exempt payees)
without a certified Social Security or taxpayer identification number and
certain other certified information or upon notification from the IRS or a
broker that withholding is required.
A shareholder who does not have a TIN should apply for one immediately by
contacting the local office of the Social Security Administration or the IRS.
Back-up withholding could apply to payments made to a shareholders account while
awaiting receipt of a TIN. Special rules apply for certain entities. For
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example, for an account established under the Uniform Gifts to Minors Act, the
TIN of the minor should be furnished. If a shareholder has been notified by the
IRS that he or she is subject to back-up withholding because he or she failed to
report all interest and dividend income on his or her tax return and the
shareholder has not been notified by the IRS that such withholding will cease,
the shareholder should cross out the appropriate item in the Account
Application. Dividends paid to a foreign shareholder's account by a fund may be
subject to up to 30% withholding instead of back-up withholding.
A shareholder who is an exempt recipient should furnish a TIN and check
the appropriate box. Exempt recipients include certain corporations, certain
tax-exempt entities, tax-exempt pension plans and IRAs, governmental agencies,
financial institutions, registered securities and commodities dealers and
others. For further information, see Section 3406 of the Code and consult a tax
adviser.
--------------------------
THIS PROSPECTUS IS NOT AN OFFERING OF THE SECURITIES HEREIN DESCRIBED IN
ANY STATE IN WHICH THE OFFERING IS UNAUTHORIZED. NO SALESPERSON, DEALER OR OTHER
PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTATION OTHER
THAN THOSE CONTAINED IN THIS PROSPECTUS, THE STATEMENT OF ADDITIONAL
INFORMATION, OR IN THE FUNDS' OFFICIAL SALES LITERATURE.
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GLOSSARY
O CASH EQUIVALENTS. Cash equivalents are short-term, interest-bearing
instruments or deposits and may include, for example, commercial paper,
certificates of deposit, repurchase agreements, bankers' acceptances, U.S.
Treasury Bills, bank money market deposit accounts, master demand notes and
money market mutual funds. These consist of high-quality debt obligations,
certificates of deposit and bankers' acceptances rated at least A-1 by S&P or
Prime1 by Moody's, or the issuer has an outstanding issue of debt securities
rated at least A by S&P or Moody's, or are of comparable quality in the
opinion of the Manager.
O COLLATERAL ASSETS. Collateral assets include cash, letters of credit, U.S.
government securities or other high-grade liquid debt or equity securities
(except that instruments collateralizing loans by the Money Market Funds must
be debt securities rated in the highest grade). Collateral assets are
separately identified and rendered unavailable for investment or sale.
O CONVERTIBLE SECURITY. A convertible security is a fixed-income security (a
bond or preferred stock) that may be converted at a stated price within a
specified period of time into a certain quantity of the common stock of the
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same or a different issuer. Convertible securities are senior to common stock
in a corporation's capital structure but are usually subordinated to similar
non-convertible securities. The price of a convertible security is influenced
by the market value of the underlying common stock.
O COVERED CALL OPTION. A call option is "covered" if the fund owns the
underlying securities, has the right to acquire such securities without
additional consideration, has collateral assets sufficient to meet its
obligations under the option or owns an off setting call option.
O COVERED PUT OPTION. A put option is "covered" if the fund has collateral
assets with a value not less than the exercise price of the option or holds
a put option on the underlying security.
O DEPOSITORY RECEIPTS. Depository receipts include American depository receipts
("ADRs"), European depository receipts ("EDRs"), global depository receipts
("GDRs") and other similar instruments. Depository receipts are receipts
typically issued in connection with a U.S. or foreign bank or trust company
and evidence ownership of underlying securities issued by a foreign
corporation.
O DERIVATIVES. Derivatives include forward currency exchange contracts, stock
options, currency options, stock and stock index options, futures contracts
and swaps and options on futures contracts on U.S. government and foreign
government securities and currencies.
O DOLLAR ROLL TRANSACTION. A dollar roll transaction is similar to a reverse
repurchase agreement except it requires a fund to repurchase a similar rather
than the same security.
O DURATION. A time measure of a bond's interest-rate sensitivity, based on the
weighted average of the time periods over which a bond's cash flows accrue to
the bondholder. Time periods are weighted by multiplying by the present value
of its cash flow divided by the bond's price. (A bonds cash flows consist of
coupon payments and repayment of capital). A bond's duration will almost
always be shorter than its maturity, with the exception of zero-coupon bonds,
for which maturity and duration are equal.
O EMERGING MARKET COMPANIES. A company is considered to be an emerging market
company if its securities are principally traded in the capital market of an
emerging market country; it derives at least 50% of its total revenue from
either goods produced or services rendered in emerging market countries or
from sales made in such emerging market countries, regardless of where the
securities of such companies are principally traded; or it is organized under
the laws of, and with a principal office in, an emerging market country. An
emerging market country is one having an economy and market that are or would
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be considered by the World Bank or the United Nations to be emerging or
developing.
O EQUITY DERIVATIVE SECURITIES. These include, among other things, options on
equity securities, warrants and future contracts on equity securities.
O EQUITY SWAPS. Equity swaps allow the parties to exchange the dividend income
or other components of return on an equity investment (e.g., a group of equity
securities or an index) for a component of return on another non-equity or
equity investment. Equity swaps transitions may be volatile and may present
the fund with counterparty risks.
O FHLMC. The Federal Home Loan Mortgage Corporation.
O FNMA. The Federal National Mortgage Association.
O FORWARD CURRENCY CONTRACTS. A forward currency contract is a contract
individually negotiated and privately traded by currency traders and their
customers and creates an obligation to purchase or sell a specific currency
for an agreed-upon price at a future date. The Funds generally do not enter
into forward contracts with terms greater than one year. A fund generally
enters into forward contracts only under two circumstances. First, if a fund
enters into a contract for the purchase or sale of a security denominated in a
foreign currency, it may desire to "lock in" the U.S. dollar price of the
security by entering into a forward contract to buy the amount of a foreign
currency needed to settle the transaction. Second, if the Manager believes
that the currency of a particular foreign country will substantially rise or
fall against the U.S. dollar, it may enter into a forward contract to buy or
sell the currency approximating the value of some or all of a fund's portfolio
securities denominated in such currency. A fund will not enter into a forward
contract if, as a result, it would have more than one-third of total assets
committed to such contracts (unless it owns the currency that it is obligated
to deliver or has caused its custodian to segregate segregable assets having a
value sufficient to cover its obligations). Although forward contracts are
used primarily to protect a fund from adverse currency movements, they involve
the risk that currency movements will not be accurately predicted.
O FUTURES AND OPTIONS ON FUTURES. An interest rate futures contract is an
agreement to purchase or sell debt securities, usually U.S. government
securities, at a specified date and price. For example, a fund may sell
interest rate futures contracts (i.e., enter into a futures contract to sell
the underlying debt security) in an attempt to hedge against an anticipated
increase in interest rates and a corresponding decline in debt securities it
owns. Each fund will have collateral assets equal to the purchase price of the
portfolio securities represented by the underlying interest rate futures
contracts it has an obligation to purchase.
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O GNMA. The Government National Mortgage Association.
O HIGHLY RATED DEBT SECURITIES. Debt securities rated within the three highest
grades by Standard & Poor's Corporation ("S&P") (AAA to A), Moodys Investors
Services, Inc. ("Moody's") (Aaa to A) or Fitch Investor Services, Inc.
("Fitch") (AAA to A), or in unrated debt securities deemed to be of comparable
quality by the Manager using guidelines approved by the Board of Trustees. See
the Appendix to the Statement of Additional Information for a description of
these ratings.
O ILLIQUID SECURITIES. The Funds treat any securities subject to restrictions on
repatriation for more than seven days, and securities issued in connection
with foreign debt conversion programs that are restricted as to remittance of
invested capital or profit, as illiquid. The Funds also treat repurchase
agreements with maturities in excess of seven days as illiquid. Illiquid
securities do not include securities that are restricted from trading on
formal markets for some period of time but for which an active informal market
exists, or securities that meet the requirements of Rule 144A under the
Securities Act of 1933 and that, subject to the review by the Funds' Board and
guidelines adopted by the Funds' Board, the Manager has determined to be
liquid.
O INVESTMENT GRADE. Investment grade debt securities are those rated within the
four highest grades by S&P (at least BBB), Moody's (at least Baa) or Fitch (at
least Baa) or in unrated debt securities deemed to be of comparable quality by
the Manager using guidelines approved by the Board of Trustees.
O LEVERAGE. Some funds may use leverage in an effort to increase return.
Although leverage creates an opportunity for increased income and gain, it
also creates special risk considerations. Leveraging also creates interest
expenses that can exceed the income from the assets retained.
O OPTIONS ON SECURITIES, SECURITIES INDICES AND CURRENCIES. A fund may purchase
call options on securities that it intends to purchase (or on currencies in
which those securities are denominated) in order to limit the risk of a
substantial increase in the market price of such security (or an adverse
movement in the applicable currency). A fund may purchase put options on
particular securities (or on currencies in which those securities are
denominated) in order to protect against a decline in the market value of the
underlying security below the exercise price less the premium paid for the
option (or an adverse movement in the applicable currency relative to the U.S.
dollar). Prior to expiration, most options are expected to be sold in a
closing sale transaction. Profit or loss from the sale depends upon whether
the amount received is more or less than the premium paid plus transaction
costs. A fund may purchase put and call options on stock indices in order to
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hedge against risks of stock market or industry wide stock price fluctuations.
O PARTICIPATION INTERESTS. Participation interests are issued by financial
institutions and represent undivided interests in municipal securities.
Participation interests may have fixed, floating or variable rates of
interest. Some participation interests are subject to a "nonappropriation" or
"abatement" feature by which, under certain conditions, the issuer of the
underlying municipal security, without penalty, may terminate its payment
obligation. In such event, the Funds must look to the underlying collateral.
O REPURCHASE AGREEMENT. With a repurchase agreement, a fund acquires a U.S.
government security or other high-grade liquid debt instrument (for the Money
Market Funds, the instrument must be rated in the highest grade) from a
financial institution that simultaneously agrees to repurchase the same
security at a specified time and price.
O REVERSE DOLLAR ROLL TRANSACTIONS. When a fund engages in a reverse dollar
roll, it purchases a security from a financial institution and concurrently
agrees to resell a similar security to that institution at a later date at an
agreed-upon price.
O REVERSE REPURCHASE AGREEMENT. In a reverse repurchase agreement, a fund sells
to a financial institution a security that it holds and agrees to repurchase
the same security at an agreed-upon price and date.
O RUSSIA. "Russia" refers to the Russian Federation, which does not include
other countries that formerly comprised the Soviet Union.
O RUSSIAN COMPANY. "Russian Company" means a legal entity (i) that is organized
under the laws of, or with a principal office and domicile in, Russia, (ii)
for which the principal equity securities trading market is in Russia, or
(iii) that derives at least 50% of its revenues or profits from goods produced
or sold, investments made, or services performed, in Russia or that has at
least 50% of its assets situated in Russia.
O SECURITIES LENDING. A fund may lend securities to brokers, dealers and other
financial organizations. Each securities loan is collateralized with
collateral assets in an amount at least equal to the current market value of
the loaned securities, plus accrued interest. There is a risk of delay in
receiving collateral or in recovering the securities loaned or even a loss of
rights in collateral should the borrower fail financially.
O S&P 500. Standard & Poor's 500 Composite Stock Price Index.
O U.S. GOVERNMENT SECURITIES. These include U.S. Treasury bills, notes, bonds
and other obligations issued or guaranteed by the U.S. government, its
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agencies or instrumentalities.
O WARRANT. A warrant typically is a long-term option that permits the holder to
buy a specified number of shares of the issuer's underlying common stock at a
specified exercise price by a particular expiration date. A warrant not
exercised or disposed of by its expiration date expires worthless.
O WHEN-ISSUED AND FORWARD COMMITMENT SECURITIES. The Funds may purchase U.S.
government or other securities on a "when-issued" basis and may purchase or
sell securities on a "forward commitment" or "delayed delivery" basis. The
price is fixed at the time the commitment is made, but delivery and payment
for the securities take place at a later date. When-issued securities and
forward commitments may be sold prior to the settlement date, but a fund will
enter into when-issued and forward commitments only with the intention of
actually receiving or delivering the securities. No income accrues on
securities that have been purchased pursuant to a forward commitment or on a
when-issued basis prior to delivery to a fund. At the time a fund enters into
a transaction on a when-issued or forward commitment basis, it supports its
obligation with collateral assets equal to the value of the when-issued or
forward commitment securities and causes the collateral assets to be marked to
market daily. There is a risk that the securities may not be delivered and
that the fund may incur a loss.
O ZERO COUPON BONDS. Zero coupon bonds are debt obligations that do not pay
current interest and are consequently issued at a significant discount from
face value. The discount approximates the total interest the bonds will accrue
and compound over the period to maturity or the first interest-payment date at
a rate of interest reflecting the market rate of interest at the time of
issuance.
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INVESTMENT MANAGER
Lexington Management Corporation
P.O. Box 1515
Park 80 West Plaza Two
Saddle Brook, N.J. 07663
DISTRIBUTOR
Lexington Funds Distributor, Inc.
P.O. Box 1515
Park 80 West Plaza Two
Saddle Brook, N.J. 07663
All shareholder requests for services
of any kind shall be sent to:
TRANSFER AGENT
State Street Bank and Trust Company
c/o National Financial Data Services
Lexington Funds
1004 Baltimore
Kansas City, Missouri 64105
CUSTODIAN
Chase Manhattan Bank, N.A.
1211 Avenue of the Americas
New York, New York 10022
LEGAL COUNSEL
Kramer, Levin, Naftalis & Frankel
919 Third Avenue
New York, New York 10022
AUDITORS
KMPG Peat Marwick LLP
345 Park Avenue
New York, New York 10154
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LEXINGTON RAMIREZ GLOBAL INCOME FUND
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 1997
This statement of additional information which is not a prospectus, should
be read in conjunction with the current prospectus of Lexington Ramirez Global
Income Fund (the "Fund"), dated May 1, 1997 as it may be revised from time to
time. To obtain a copy of the Fund's prospectus at no charge, please write to
the Fund at P.O. Box 1515, Park 80 West - Plaza Two, Saddle Brook, New Jersey
07663 or call the following toll-free numbers:
Shareholder Services:-1-800-526-0056
Institutional/Financial Adviser Services:-1-800-367-9160
24-Hour Account Information:-1-800-526-0052
Lexington Management Corporation ("LMC") serves as the Fund's Investment
Adviser. 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 .......................................................... 21
Custodian, Transfer Agent and Dividend Disbursing Agent .................... 22
Management of the Fund ..................................................... 22
Investment Return Information .............................................. 25
Other Information .......................................................... 26
Appendix A ................................................................. A-1
Appendix B ................................................................. B-1
Financial Statements ....................................................... 27
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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
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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
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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
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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.
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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: 1994, 10.20%,
1995, 164.72% and 1996, 71.83%.
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.
For the fiscal years ended December 31, 1994, 1995 and 1996, the Fund paid
$41,599, $97,938 and $30,004, respectively, in net investment advisory fees to
LMC.
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, 1998
or such later date to be determined by Lexington Management Corporation.
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<PAGE>
Under the terms of the investment advisory agreement, LMC also pays the
Fund's expenses for a trading function to place orders for the purchase and sale
of portfolio securities for the Fund; office rent, utilities, telephone,
furniture and supplies utilized at the Fund's principal office; salaries and
payroll expenses of persons serving as officers or Trustees of the Fund who are
also employees of LMC or any of its affiliates.
Any of the other expenses incurred in the operation of the Fund shall be
borne by the Fund, including, among other things, fees of its custodian,
transfer and shareholder servicing agent; cost of pricing and calculating its
daily net asset value and of maintaining its books and accounts required by the
Investment Company Act of 1940; expenditures in connection with meetings of the
Fund's Trustees and shareholders, except those called to accommodate LMC; fees
and expenses of Trustees who are not affiliated with or interested persons of
LMC; in maintaining registration of its shares under state securities laws or in
providing shareholder and dealer services; insurance premiums on property or
personnel of the Fund which inure to its benefit; costs of preparing and
printing reports, proxy statements and prospectuses of the Fund for distribution
to its shareholders; legal, auditing and accounting fees; fees and expenses of
registering and maintaining registration of its shares for sales under Federal
and applicable state securities laws; and all other expenses in connection with
issuance, registration and transfer of its shares.
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
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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 and Mmes. Carnicelli, Carr, Curcio, Gilfillan, Lederer and Mosca (see
"Management of the Trust") may also be deemed affiliates of LMC by virtue of
being officers, Trustees or employees thereof. As of February 28, 1997, 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 will therefore satisfy the Distribution Requirement.
In addition to satisfying the Distribution Requirement, a regulated
investment company must: (1) derive at least 90% of its gross income from
dividends, interest, certain payments with respect to securities loans, gains
from the sale or other disposition of stock or securities, or foreign currencies
(to the extent such currency gains are directly related to the regulated
investment company's principal business of investing in stock or securities) and
other income (including but not limited to gains from options, futures, or
forward contracts) derived with respect to its business of investing in such
stock, securities, or currencies (the "Income Requirement"); and (2) derive less
than 30% of its gross income (exclusive of certain gains on designated hedging
transactions that are offset by realized or unrealized losses on offsetting
positions) from the sale or other disposition of stock, securities, or foreign
currencies (or options, futures, or forward contracts thereon) held for less
than three months (the "Short-Short Gain Test"). However, foreign currency
gains, including those derived from options, futures, and forwards, will not in
any event be characterized as Short-Short Gain if they are directly related to
the regulated investment company's investments in stock or securities (or
options or futures thereon). Because of the Short-Short Gain Test, the Fund may
have to limit the sale of appreciated securities that it has held for less than
three months. However, the Short-Short Gain Test will not prevent the Fund from
disposing of investments at a loss, since the recognition of a loss before the
expiration of the three-month holding period is disregarded for this purpose.
Interest (including original issue discount) received by the Fund at maturity or
upon the disposition of a security held for less than three months will not be
treated as gross income derived from the sale or other disposition of such
security within the meaning of the Short-Short Gain Test. However, income that
is attributable to realized market appreciation will be treated as gross income
from such 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
17
<PAGE>
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.
Certain 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. Under Treasury Regulations, 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 Treasury Regulations, in general,
the net income or deduction from a notional principal contract for a taxable
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
18
<PAGE>
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 swaps and certain caps
and floors, under an alternative method contained in the regulations).
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 each of which the
Fund has not invested more than 5% of the value of the Fund's total assets in
securities of such issuer and 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 generally should not qualify for the 70%
dividends-received deduction for corporate shareholders.
The Fund may either retain or distribute to shareholders its net capital
gain for each taxable year. The Fund currently intends to distribute any such
amounts. Net capital gain that is distributed and designated as a capital gain
dividend 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.
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<PAGE>
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 they 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 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 an "exempt recipient" (such
as a corporation).
Sale or Redemption of Shares
A shareholder will recognize gain or loss on the sale or redemption of
shares of the Fund in an amount equal to the difference between the proceeds of
the sale or redemption and the shareholder's adjusted tax basis in the shares.
All or a portion of any loss so recognized may be disallowed if the shareholder
purchases other shares of the Fund within 30 days before or after the sale or
redemption. In general, any gain or loss arising from (or treated as arising
from) the sale or redemption of shares of the Fund will be considered capital
gain or loss and will be long-term capital gain or loss if the shares were held
for longer than one year. However, any capital loss arising from the sale or
redemption of shares held for six months or less will be treated as a long-term
capital loss to the extent of the amount of capital gain dividends received on
such shares. For this purpose, the special holding period rules of Code Section
246(c)(3) and (4) generally will apply in determining the holding period of
shares. Long-term capital gains of noncorporate taxpayers are currently
20
<PAGE>
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 applicable treaty rate) upon the gross amount of the dividend.
Futhermore, such a foreign shareholder may be subject to U.S. withholding tax at
the rate of 30% (or lower applicable treaty rate) on the gross income resulting
from the Fund's election to treat any foreign taxes paid by it as paid by its
shareholders, but may not be allowed a deduction against his gross income or a
credit against this U.S. withholding tax for the foreign shareholder's pro rata
share of such foreign taxes which it is treated as having paid. 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 their
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.
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<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:
+S.M.S. CHADHA (59), Trustee. 3/16 Shanti Niketan, New Delhi 21, India.
Secretary, Ministry of External Affairs, New Delhi, India; Head of Foreign
Service Institute, New Delhi, India; Special Envoy of the Government of
India; Director, Special Unit for Technical Cooperation among Developing
Countries, United Nations Development Program, New York.
*+ROBERT M. DEMICHELE (52), President and Chairman. P.O. Box 1515, Saddle Brook,
N.J. 07663. Chairman and Chief Executive Officer, Lexington Management
Corporation; President and Director, Lexington Global Asset Managers, Inc.;
Chairman and Chief Executive Officer, Lexington Funds Distributor, Inc.,
Chairman of the Board, Market Systems Research, Inc. and Market Systems
Research Advisors, Inc.; Director, Chartwell Re Corporation, Claredon
National Insurance Company, The Navigator's Group, Inc., Unione Italiana
Reinsurance, Vanguard Cellular Systems, Inc. and Weeden & Co.; Vice Chairman
of the Board of Trustees, Union College and Trustee, Smith Richardson
Foundation.
+BEVERLEY C. DUER P.C., (67), Trustee. 340 East 72nd Street, New York, New York,
10021. Private Investor; formerly Manager of Operations Research Department,
CPC International, Inc.
*+BARBARA R. EVANS (36), Trustee. 5 Fernwood Road, Summit, N.J. 07901. Private
investor. Prior to May 1989, Assistant Vice President and Securities
Analyst, Lexington Management Corporation.
*+LAWRENCE KANTOR (49), 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.
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<PAGE>
+JERARD F. MAHER (50), Trustee. 300 Raritan Center Parkway, Edison, N.J. 08818.
General Counsel, Federal Business Center; Counsel, Ribis, Graham & Curtin.
+ANDREW M. McCOSH (56), Trustee. 12 Wyvern Park, Edinburgh EH 92 JY, Scotland,
U.K. Professor of the Organisation of Industry and Commerce, Department of
Business Studies, The University of Edinburgh, Scotland.
+DONALD B. MILLER (70), 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 (64), Trustee. 3 Woodfield Road, Wellesley, Massachusetts.
Associate Professor of Finance, Boston College, Boston, Massachusetts 02181.
+MARGARET W. RUSSELL (76), Trustee. 55 North Mountain Avenue, Montclair, N.J.
07042. Private Investor; formerly Community Affairs Director, Union Camp
Corporation.
*+DENIS P. JAMISON (49), 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 (49), 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 (37), 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 (38), 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 (42), 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 (37), Vice President. P.O. Box 1515, Saddle Brook, N.J.
07663.
*+CHRISTIE CARR (29), Assistant Treasurer. P.O. Box 1515, Saddle Brook, N.J.
07663. Prior to October 1992, Senior Accountant, KPMG Peat Marwick LLP.
*+SIOBHAN GILFILLAN (33), Assistant Treasurer, P.O. Box 1515, Saddle Brook, N.J.
07663.
*+JOAN K. LEDERER (30), Assistant Treasurer. P.O. Box 1515 Saddle Brook, N.J.
07663. Prior to April 1997, Director of Investment Accounting, Diversified
Investment Advisors, Inc. Prior to April 1996, Assistant Vice President,
PIMCO.
*+THOMAS LUEHS (35), Assistant Treasurer, P.O. Box 1515, Saddle Brook, N.J.
07663. Prior to November, 1993, Supervisor Investment Accounting, Alliance
Capital Management, Inc.
*+SHERI MOSCA (33), Assistant Treasurer, P.O. Box 1515, Saddle Brook, N.J.
07663.
*+PETER CORNIOTES (34), 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 (36), 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. Chadha, Corniotes, DeMichele, Duer, Faust, Hisey, Jamison, Kantor,
Lavery, Luehs, Maher, McCosh, Miller and Preston and Mmes. Carnicelli, Carr,
Curcio, Evans, Gilfillan, Lederer, 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, 1996, and each of the Trustees attended at least 75% of those meetings.
23
<PAGE>
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.
Set forth below is information regarding compensation paid or accrued during
the period January 1, 1996 to December 31, 1996 for each Trustee:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
Aggregate Number of
Name of Director Compensation From Total Compensation From Directorships in Fund
Fund Fund and Fund Complex Complex
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
S.M.S. Chadha $856 $13,696 16
- -------------------------------------------------------------------------------------------------------
Robert M. DeMichele 0 $0 17
- -------------------------------------------------------------------------------------------------------
Beverley C. Duer $1,712 $29,110 17
- -------------------------------------------------------------------------------------------------------
Barbara R. Evans 0 0 16
- -------------------------------------------------------------------------------------------------------
Lawrence Kantor 0 0 16
- -------------------------------------------------------------------------------------------------------
Jerard F. Maher $856 $16,046 17
- -------------------------------------------------------------------------------------------------------
Andrew M. McCosh $856 $13,696 16
- -------------------------------------------------------------------------------------------------------
Donald B. Miller $1,712 $26,760 16
- -------------------------------------------------------------------------------------------------------
Francis Olmsted* $1,068 $16,800 N/A
- -------------------------------------------------------------------------------------------------------
John G. Preston $1,712 $26,760 16
- -------------------------------------------------------------------------------------------------------
Margaret W. Russell $1,712 $25,048 16
- -------------------------------------------------------------------------------------------------------
Philip C. Smith $1,600 $25,080 16
- -------------------------------------------------------------------------------------------------------
Francis A. Sunderland* $744 $10,528 N/A
- -------------------------------------------------------------------------------------------------------
</TABLE>
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, 1996, the estimated credited years
of service for Messrs. Chadha, Duer, Maher, McCosh, Miller, Preston and Russell
are 1, 18, 1, 1, 22, 18 and 15, respectively.
24
<PAGE>
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
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:
25
<PAGE>
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 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.
SHAREHOLDER REPORTS
Shareholders will receive reports at least semi-annually showing the Fund's
holdings and other information. In addition, shareholders will receive annual
financial statements audited by KPMG Peat Marwick LLP, the Fund's independent
auditors.
OTHER INFORMATION
As of February 20, 1997, the following persons are known by fund management
to have owned beneficially, directly or indirectly, five percent or more of the
outstanding shares of the Lexington Ramirez Global Income Fund: Smith Richardson
Foundation, 60 Jesup Road, Westport, Ct 06880, 8% and Bernard and Barbara Ponte,
943 W. Williams Ave., Fallon, NV 89406, 5%.
26
<PAGE>
Lexington Ramirez Global Income Fund
Statement of Net Assets
(Including the Portfolio of Investments)
December 31, 1996 (unaudited)
Principal Value
Amount Security (Note 1)
- --------------------------------------------------------------------------------
LONG-TERM DEBENTURES: 77.5%
Government Obligations: 54.4%
Argentina: 5.8%
750,000 Republic of Argentina
9.25%, due 2/23/01 ........................... $ 764,062
1,500,000 Republic of Argentina
5.25%, due 3/31/23 ........................... 946,875
-----------
1,710,937
-----------
Australia: 5.2%
930,000 *Commonwealth of Australia
9.00%, due 09/15/04 .......................... 811,982
940,000 *New South Wales
Treasury Corporation
6.50%, due 05/01/06 .......................... 691,537
-----------
1,503,519
-----------
Costa Rica: 2.5%
900,000 Banco Costa Rica
6.25%, due 05/21/10 .......................... 715,500
-----------
Dominican Republic: 3.1%
1,200,000 Central Bank of Dominican
Republic
6.375%, due 08/30/24 ......................... 915,000
-----------
Greece: 4.7%
330,000,000 *Hellenic Republic
14.00%, due 10/23/03 ......................... 1,356,462
-----------
Hungary: 4.3%
200,000,000 *Government of Hungary
21.00%, due 10/24/99 ......................... 1,262,480
-----------
Ireland: 5.9%
1,000,000 *Government of Ireland
6.50%, due 10/18/01 .......................... 1,720,439
-----------
Jordan: 3.6%
1,750,000 Kingdom of Jordan
4.00%, due 12/23/23 .......................... 1,036,875
-----------
Kazakhstan: 3.4%
1,000,000 Republic of Kazakhstan
9.25%, due 12/20/99 .......................... 1,000,001
-----------
New Zealand: 2.8%
1,150,000 *New Zealand Government
6.50%, due 02/15/00 .......................... 800,893
-----------
Poland: 3.0%
2,680,000 *Government of Poland
16.00%, due 10/12/98 ......................... 883,022
-----------
Portugal: 5.7%
110,000,000 *Obrig Do Tes Medio Prazo
11.875%, due 02/23/00 ........................ 844,416
-----------
100,000,000 *Obrig Do Tes Medio Prazo
11.875%, due 02/23/05 ........................ 824,420
-----------
1,668,836
-----------
(right column)
Principal Value
Amount Security (Note 1)
- --------------------------------------------------------------------------------
South Africa: 1.8%
1,100,000 *Electricity Supply Commission
11.00%, due 06/01/08 ......................... $ 172,173
2,000,000 *Republic of South Africa
12.00%, due 02/28/05 ......................... 349,692
-----------
521,865
-----------
Spain: 2.6%
80,000,000 *Bonos Y Oblig
Del Estado
10.15%, due 01/31/06 .......................... 750,643
-----------
Total Government Obligations
(Cost $15,249,770) ............................ 15,846,472
-----------
Corporate Bonds: 23.1%
Canada: 6.9%
1,000,000 CHC Helicopter
11.50%, due 07/15/02 .......................... 1,025,000
500,000 *Roger's Communication, Inc.
10.50%, due 02/14/06 .......................... 380,803
700,000 *Stelco, Inc.
10.40%, due 11/30/09 .......................... 603,628
-----------
2,009,431
-----------
Czech Republic: 3.5%
12,500,000 *CEZ, A.S.
11.30%, due 06/06/05 .......................... 464,044
14,800,000 *Skofin S.R.O., A.S.
11.625%, due 02/09/98 ......................... 546,275
-----------
1,010,319
-----------
Denmark: 6.0%
5,500,000 *Nykredit
7.00%, due 10/01/26 ........................... 877,832
5,500,000 *Realkredit Danmark
7.00%, due 10/01/26 ........................... 873,916
-----------
1,751,748
-----------
Thailand: 2.5%
17,500,000 *Italian-Thai Development
Company
12.50%, due 10/11/05 .......................... 734,912
-----------
United States: 4.2%
750,000 Chiquita Brands International, Inc.
10.25%, due 11/01/06 .......................... 802,500
250,000 Clark Material Handling Company
10.75%, due 11/15/06 .......................... 261,250
204,288 DLJ Mortgage Acceptance
7.25%, due 9/25/11** .......................... 148,804
-----------
1,212,554
-----------
Total Corporate Bonds
(Cost $6,513,554) ............................. 6,718,964
-----------
TOTAL LONG-TERM DEBENTURES
(Cost $21,763,324) ............................ 22,565,436
-----------
27
<PAGE>
Lexington Ramirez Global Income Fund
Statement of Net Assets
(Including the Portfolio of Investments)
December 31, 1996 (continued)(unaudited)
Principal Value
Amount Security (Note 1)
- --------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS: 20.0%
Greece: 3.7%
175,000,000 *Hellenic Treasury Bills
0%, due 01/31/97 .............................. $ 702,390
100,000,000 *Hellenic Treasury Bills
0%, due 05/31/97 .............................. 385,909
-----------
1,088,299
-----------
Indonesia: 3.2%
1,600,000,000 *Asia Pulp & Paper
0%, due 04/29/97 .............................. 645,108
700,000,000 *Chase Manhattan Bank
IDR Time Deposit
14.00%, due 1/16/97 ........................... 296,296
-----------
941,404
-----------
Mexico: 3.4%
8,000,000 *Cetes
0%, due 2/20/97 ............................... 978,965
-----------
New Zealand: 3.4%
1,400,000 *New Zealand Government
Treasury Bills
0%, due 1/15/97 ............................... 985,914
-----------
Slovakia: 2.7%
25,000,000 *European Bank for Research
& Development
12.50%, due 08/19/97 .......................... 782,567
-----------
(right column)
Principal Value
Amount Security (Note 1)
- --------------------------------------------------------------------------------
Turkey: 1.3%
50,000,000,000 *Government of Turkey
Treasury Bills
0%, due 4/09/97 ............................... $ 381,332
-----------
United States: 2.3%
700,000 U.S. Treasury Bills
5.155%, due 12/11/97 .......................... 665,518
-----------
Total Short-Term Investments
(cost $5,924,865) ............................. 5,823,999
-----------
Call Options in Currency:
1,400,000 *Written Call Option on New
Zealand Dollar strike price
.713 NZD expires 1/13/97
(premium $5,530) (Note 8) ..................... (1,610)
-----------
Total Investments: 97.5%
(cost $27,688,189+) (Note 1) ............... 28,387,825
Other assets in excess of
liabilities: 2.5% ............................. 721,995
-----------
Total Net Assets: 100%
(equivalent to $11.22 per share
on 2,594,444 shares outstanding) .............. $29,109,820
===========
*Principal amount represents local currency.
**Restricted Security (Note 9).
+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, 1996
Assets
<TABLE>
<S> <C>
Investments, at value (cost $27,688,189) (Note 1) ............................................ $28,387,825
Cash ......................................................................................... 72,570
Receivable for investment securities sold .................................................... 89,375
Receivable for shares sold ................................................................... 233,960
Dividends and interest receivable ............................................................ 713,512
Unrealized gain on open forward contracts (Note 7) ........................................... 19,668
-----------
Total Assets ......................................................................... $29,516,910
-----------
Liabilities
Due to Lexington Management Corporation (Note 2) ............................................. 22,500
Payable for shares redeemed .................................................................. 232,128
Distributions payable ........................................................................ 107,377
Accrued expenses ............................................................................. 45,085
-----------
Total Liabilities .................................................................... 407,090
-----------
Net Assets (equivalent to $11.22 per share on 2,594,444 shares outstanding) (Note 4) ......... $29,109,820
===========
Net Assets consist of:
Additional paid-in capital (Note 1) .......................................................... 28,286,038
Distributions in excess of net investment income (Note 1) .................................... (86,311)
Accumulated net realized gain on investments and foreign currency transactions (Note 1) ...... 192,017
Unrealized appreciation on investments and foreign currency transactions ..................... 718,076
-----------
Total Net Assets ..................................................................... $29,109,820
===========
</TABLE>
The Notes to Financial Statements are an integral part of this statement.
29
<PAGE>
Lexington Ramirez Global Income Fund
Statement of Operations
Years ended December 31, 1996
<TABLE>
Investment Income
<S> <C> <C>
Interest ................................................................. $2,106,538
Less: foreign tax expense ................................................ 25,200
----------
Total investment income .......................................... $2,081,338
Expenses
Investment advisory fee (Note 2) ......................................... 175,988
Printing and mailing expenses ............................................ 55,988
Distribution expense (Note 3) ............................................ 43,997
Registration fees ........................................................ 25,558
Custodian fees ........................................................... 23,158
Professional fees ........................................................ 21,556
Transfer agent and shareholder services expense (Note 2) ................. 20,870
Directors' fees and expenses ............................................. 15,488
Accounting expenses (Note 2) ............................................. 12,686
Computer processing fees ................................................. 5,922
Other expenses ........................................................... 9,446
----------
Total expenses ................................................... 410,657
Less: expenses recovered under contract
with investment adviser (Note 2) ............................... (145,984) 264,673
---------- ----------
Net investment income ............................................ 1,816,665
Realized and Unrealized Gain (Loss) on Investments (Note 5)
Net realized gain (loss) on:
Investments .......................................................... 583,537
Foreign currency transactions ........................................ (389,687)
----------
Net realized gain ................................................ 193,850
Net change in unrealized appreciation/depreciation on:
Investments .......................................................... 207,852
Foreign currency translation of other assets and liabilities ......... 14,433
----------
Net change in unrealized appreciation ............................ 222,285
----------
Net realized and unrealized gain ............................. 416,135
----------
Increase in Net Assets Resulting from Operations ............................. $2,232,800
==========
</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
Years ended December 31, 1996 and 1995
1996 1995
----------- -----------
Net investment income ............................... $ 1,816,665 $ 959,352
Net realized gain on investments and
foreign currency transactions ................... 193,850 331,370
Net change in unrealized appreciation of
investments and foreign currency translations ..... 222,285 492,391
----------- -----------
Increase in net assets resulting from operations .... 2,232,800 1,783,113
Distributions to shareholders from net
investment income ................................. (1,529,914) (901,633)
Distributions to shareholders from net realized
gains from security transactions .................. (92,247) -
Increase in net assets from capital share
transactions (Note 4) ............................. 16,244,449 1,022,692
----------- -----------
Net increase in net assets .......................... 16,855,088 1,904,172
Net Assets
Beginning of period ................................. 12,254,732 10,350,560
----------- -----------
End of period (including distributions in excess
of net investment income of $86,311 and
undistributed net investment income of
$16,186, respectively) ............................ $29,109,820 $12,254,732
=========== ===========
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, 1996 and 1995
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 investment 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, 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
in good faith and approved by the Board of Directors. 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. Dividend income and
distributions to shareholders are recorded on the ex-dividend date. Interest
income, adjusted for amortization of premiums and accretion of discounts, is
accrued as earned.
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.
Federal Income Taxes It is the Fund's policy to comply with the requirements
of the Internal Revenue Code applicable to "regulated investment companies" and
to distribute all of its taxable income to its shareholders. Therefore, no
provision for Federal income taxes is required.
Distributions Dividends from net investment income are normally declared and
paid quarterly and dividends from net realized capital gains are normally
declared and paid annually. However, the Fund may make distributions on a more
frequent basis to comply with the distribution requirements of the Internal
Revenue Code. The character of income and gains to be distributed are determined
in accordance with income tax regulations which may differ from generally
accepted accounting principles. At December 31, 1996, reclassifications were
made to the Fund's capital accounts to reflect permanent book/tax differences
and income and gains available for distributions under income tax regulations.
Net investment income, net realized gains and net assets were not affected by
this change.
32
<PAGE>
Lexington Ramirez Global Income Fund
Notes to Financial Statements
December 31, 1996 and 1995 (continued)
Use of Estimates The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of increases and
decreases in net assets from operations during the reporting period. Actual
results could differ from those estimates.
2. Investment Advisory Fee and Other Transactions with Affiliate
The Fund pays an investment advisory fee to Lexington Management Corporation
("LMC") at an annual rate of 1.00% of the Fund's 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 over $15
million. LMC has agreed to voluntarily limit the total expenses of the Fund
(excluding interest, taxes, brokerage commissions 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 December 31, 1997 or such later date as
may be determined by LMC. The investment advisory fee and expense reimbursement
are set forth in the statement of operations.
The Fund also reimbursed LMC for certain expenses, including accounting and
shareholder servicing costs of $22,160, which were 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 Funds Distributor, 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,
1996 were $43,997 and are set forth in the statement of operations.
4. Capital Stock
Transactions in capital stock were as follows:
Year ended Year ended
December 31, 1996 December 31, 1995
---------------------- ----------------------
Shares Amount Shares Amount
------ ------ ------ ------
Shares sold ................... 2,090,482 $23,291,607 356,354 $3,788,187
Shares issued on reinvestment
of dividends ................ 119,710 1,308,206 72,344 755,680
--------- ----------- ------- ----------
2,210,192 24,599,813 428,698 4,543,867
Shares redeemed ............... (755,281) (8,355,364) (345,326) (3,521,175)
--------- ----------- ------- ----------
Net increase .................. 1,454,911 $16,244,449 83,372 $1,022,692
========= =========== ======= ==========
33
<PAGE>
Lexington Ramirez Global Income Fund
Notes to Financial Statements
December 31, 1996 and 1995 (continued)
5. Purchases and Sales of Investment Securities
The cost of purchases and proceeds from sales of securities for the year ended
December 31, 1996, excluding short-term securities, were $21,471,435 and
$9,717,270, respectively.
At December 31, 1996, the aggregate gross unrealized appreciation for all
securities in which there is an excess of value over tax cost amounted to
$1,172,971 and aggregate gross unrealized depreciation for all securities in
which there is an excess of tax cost over value amounted to $454,895.
6. Investment and Concentration 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
exchange contracts as the result of the potential inability of counterparties to
meet the terms of their contracts.
7. Forward Foreign Exchange Contracts
At December 31, 1996, the Fund was committed to sell foreign currencies under
the following forward foreign exchange contracts:
Unrealized
Settlement Contract Contract Current Gain at
Security Date Amount Rate Rate 12/31/96
-------- ---------- -------- -------- ------- ----------
Canadian Dollar ........... 1/31/97 $ 896,861 1.3380 1.3680 $19,668
=======
8. Option Contracts
When the Fund writes a call option, an amount equal to the premium received by
the Fund is recorded as a liability, the value of which is marked-to-market
daily. When a written option expires, the Fund realizes a gain equal to the
amount of the premium received. When the Fund enters into a closing purchase
transaction, the Fund realizes a gain (or loss if the cost of the closing
purchase transaction exceeds the premium received when the option was sold)
without regard to any unrealized gain or loss on the underlying security, and
the liability related to such option is eliminated. When a written call option
is exercised the cost of the security sold will be decreased by the premium
originally received. The risk in writing a covered call option is that the Fund
gives up the opportunity to participate in any increase in the price of the
underlying security beyond the exercise price.
34
<PAGE>
Lexington Ramirez Global Income Fund
Notes to Financial Statements
December 31, 1996 and 1995 (continued)
8. Option Contracts (continued)
The following written call option transactions occurred during the period ended
December 31, 1996:
Number of
Premiums Contracts
------------ ----------
Options written outstanding at December 31, 1995 ....... $ - 0
Options written during the period ended
December 31, 1996 .................................... 78,629 12
Options cancelled in closing purchase transactions ..... (26,458) (6)
Options expired ........................................ (46,641) (5)
------- ---
Options written, outstanding at December 31, 1996 ...... $ 5,530 1
======= ===
9. Restricted Securities
The following securities were purchased under Rule 144A of the Securities
Act of 1933 and, unless registered under the Act or exempted from registration,
may be sold only to qualified institutional investors.
Acquisition Principal Market % of Net
Security Date Amount Average Cost Value Assets
- -------- ----------- --------- ------------ ------ --------
DLJ Mortgage Acceptance .. 10/25/96 204,288 $0.74 $ 148,804 0.51%
Pursuant to guidelines adopted by the Fund's Board of Directors, these
unregistered securities have been deemed to be illiquid. The Fund currently
limits investment in illiquid securities to 15% of the Fund's net assets, at
market value, at the time of purchase.
35
<PAGE>
Lexington Ramirez Global Income Fund
Financial Highlights
Selected per share data for a share outstanding throughout the period:
Year ended December 31,
------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Net asset value, beginning
of period $10.75 $ 9.80 $10.95 $10.39 $10.35
------ ------ ------ ------ ------
Income (loss) from investment
operations:
Net investment income 1.01 .96 .46 .53 .61
Net realized and unrealized gain
(loss) from investments and
foreign currency transactions .36 .95 (1.16) .58 .04
------ ------ ------ ------ ------
Total income (loss) from investment
operations 1.37 1.91 (.70) 1.11 .65
------ ------ ------ ------ ------
Less distributions:
Distributions from net investment
income (.86) (.96) (.45) (.55) (.61)
Distributions from net realized
gains (.04) - - - -
------ ------ ------ ------ ------
Total distributions (.90) (.96) (.45) (.55) (.61)
------ ------ ------ ------ ------
Net asset value, end of period $11.22 $10.75 $ 9.80 $10.95 $10.39
====== ====== ====== ====== ======
Total return 13.33% 20.10% (6.52%) 10.90% 6.51%
Ratios to average net assets:
Expenses, before reimbursement
or waiver 2.33% 3.07% 1.80% 1.44% 1.54%
Expenses, net of reimbursement
or waiver 1.50% 2.75% 1.50% 1.44% 1.50%
Net investment income, before
reimbursement or waiver 9.49% 9.48% 4.18% 4.83% 5.88%
Net investment income 10.32% 9.80% 4.48% 4.83% 5.92%
Portfolio turnover 71.83% 164.72% 10.20% 31.06% 31.24%
Net assets, end of period
(000's omitted) $29,110 $12,255 $10,351 $14,576 $13,085
36
<PAGE>
Independent Auditors' Report
The Board of Trustees 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, 1996, the related statement of operations for the
year then ended, the statements of changes in net assets for each of the years
in the two-year period then ended, and the financial highlights for each of the
years in the five-year period then ended. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1996 by correspondence with the custodian. As to securities sold
but not delivered, we performed other appropriate auditing procedures. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
Lexington Ramirez Global Income Fund as of December 31, 1996, the results of its
operations for the year then ended, the changes in its net assets for each of
the years in the two-year period then ended, and the financial highlights for
each of the years in the five-year period then ended, in conformity with
generally accepted accounting principles.
KPMG Peat Marwick LLP
New York, New York
February 14, 1997
37
<PAGE>
APPENDIX A
DESCRIPTION OF DEBT RATINGS
DESCRIPTION OF BOND RATINGS
Moody's Investors Service, Inc. ("Moody's") rates the debt securities issued
by various entities from "Aaa" to "C". Investment grade ratings are the first
four categories:
Aaa-Best quality. These securities carry the smallest degree of
investment risk and are generally referred to as "gilt edge." Interest
payments are protected by a large or exceptionally stable margin, and
principal is secure. While the various protective elements are likely to
change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa-High quality by all standards. They are rated lower than the best
bond because margins of protection may not be as large as in Aaa securities,
fluctuation of protective elements may be of greater amplitude, or there may
be other elements present which make the long-term risks appear somewhat
greater.
A-Upper medium grade obligations. These bonds possess many favorable
investment attributes. Factors giving security to principal and interest are
considered adequate, but elements may be present which suggest a
susceptibility to impairment sometime in the future.
Baa-Medium grade obligations. Interest payments and principal security
appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of
time. Such bonds lack outstanding investment characteristics and, in fact,
have speculative characteristics as well.
Ba-Have speculative elements and their future cannot be considered to be
well assured. Often the protection of interest and principal payments may be
very moderate and thereby not well safeguarded during other good and bad
times over the future. Uncertainty of position characterizes bonds in this
class.
B-Generally lack characteristics of the desirable investment. Assurance
of interest and principal payments or of maintenance of other terms of the
contract over any long period of time may be small.
Caa-Poor standing. Such issues may be in default or there may be present
elements of danger with respect to principal or interest.
Ca-Speculative in a high degree. Such issues are often in default or
have other marked shortcomings.
C-Lowest rated class of bonds. Issues so rated can be regarded as having
extremely poor prospects of ever attaining any real investment standing.
Absence of Rating
Where no rating has been assigned or where a rating has been suspended or
withdrawn, it may be for reasons unrelated to the quality of the issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities that are not rated
as a matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issue was privately placed, in which case the rating is not published
in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise,
the effects of which preclude satisfactory analysis; if there is no longer
available reasonable up-to-date data to permit a judgement to be formed; if a
bond is called for redemption; or for other reasons.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic ratings
classification from Aa through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
A-1
<PAGE>
Standard & Poor's Rating Group ("S&P") rates the securities debt of various
entities in categories ranging from "AAA" to "D" according to quality.
Investment grade ratings are the first four categories:
AAA-Highest rating. Capacity to pay interest and repay principal is
extremely strong.
AA-High grade. Very strong capacity to pay interest and repay principal.
Generally, these bonds differ from AAA issues only in a small degree.
A-Have a strong capacity to pay interest and repay principal although
they are somewhat more susceptible to the adverse effects of change in
circumstances and economic conditions than debt in higher rated categories.
BBB-Regarded as having adequate capacity to pay interest and repay
principal. These bonds normally exhibit adequate protection parameters, but
adverse economic conditions or changing circumstances are more likely to
lead to a weakened capacity to pay interest and repay principal than for
debt in higher rated categories.
BB, B, CCC, CC, C-Debt rated "BB," "B," "CCC," "CC," and "C" are
regarded, on balance, as predominantly speculative with respect to capacity
to pay interest and repay principal in accordance with the terms of this
obligation. "BB" indicates the lowest degree of speculation and "C" the
highest degree of speculation. While such debt will likely have some quality
and protective characteristics, these are outweighed by large uncertainties
or major risk exposures to adverse conditions.
BB-Has less near-term vulnerability to default than other speculative
issues; however, it faces major ongoing uncertainties or exposure to adverse
business, financial or economic conditions, which could lead to inadequate
capacity to meet timely interest and principal payments. The "BB" rating
category is also used for debt subordinated to senior debt that is assigned
an actual or implied "BBB\'96" 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\'96" 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\'96" 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 (\'96): 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
