PROSPECTUS
April 30, 1997
LEXINGTON NATURAL RESOURCES TRUST
P.O. Box 1515 / Park 80 West Plaza Two
Saddle Brook, New Jersey 07663
201-845-7300
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Lexington Natural Resources Trust (the "Fund"), is a no load open-end
non-diversified management investment company. The Fund's investment objective
is to seek long-term growth of capital through investment primarily in common
stocks of companies which own, or develop natural resources and other basic
commodities, or supply goods and services to such companies. Current income will
not be a factor. Total return will consist primarily of capital appreciation.
For a description of the types of securities in which the Fund will invest, see
"Investment Objectives and Policies" on page 3.
Shares of the Fund may be purchased only by insurance companies for the
purpose of funding variable annuity contracts and variable life insurance
policies.
This Prospectus concisely sets forth information about the Fund that you
should know before investing. It should be read and retained for future
reference.
Lexington Management Corporation (the "Investment Adviser") is the
Investment Adviser of the Fund. Lexington Funds Distributor, Inc. (the
"Distributor") is the Distributor of shares of the Fund. Market Systems Research
Advisors, Inc. (the "Sub-Adviser") is the Sub-Adviser to the Fund.
A STATEMENT OF ADDITIONAL INFORMATION DATED APRIL 30, 1997, HAS BEEN FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION AND IS INCORPORATED HEREIN BY
REFERENCE. THE STATEMENT OF ADDITIONAL INFORMATION FURTHER DISCUSSES CERTAIN
AREAS IN THIS PROSPECTUS AND OTHER MATTERS WHICH MAY BE OF INTEREST TO SOME
INVESTORS. FOR A FREE COPY, CALL THE TELEPHONE NUMBER ABOVE OR WRITE TO THE
ADDRESS LISTED ABOVE.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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FINANCIAL HIGHLIGHTS
The following Per Share and Capital Changes Information for each of the
years in the five year period ended December 31, 1996 has been audited by KPMG
Peat Marwick LLP, Independent Auditors, whose report thereon appears in the
Statement of Additional Information. This information should be read in
conjunction with the financial statements and related notes thereto included in
the Statement of Additional Information. The Fund's annual report, which
contains additional performance information, is available upon request and
without charge.
Selected per share data for a share outstanding throughout the period:
<TABLE>
<CAPTION>
PERIOD FROM
AUGUST 1, 1989
(COMMENCEMENT
OF OPERATIONS)
TO DECEMBER 31,
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period ............................. $11.30 $ 9.71 $10.30 $ 9.30 $9.01 $9.50 $11.49 $10.00
----- ------ ------ ------ ----- ----- ------ ------
Income (loss) from investment
operations:
Net investment income (loss) ....... 0.05 0.06 0.04 -- -- 0.02 (0.01) 0.01
Net realized and unrealized gain
(loss) on investments .............. 2.99 1.58 (0.59) 1.01 0.29 (0.49) (1.70) 1.48
----- ------ ------ ------ ----- ----- ------ ------
Total income (loss) from
investment operations .............. 3.04 1.64 (0.55) 1.01 0.29 (0.47) (1.71) 1.49
----- ------ ------ ------ ----- ----- ------ ------
Less distributions:
Dividends from net
investment income ................ (0.05) (0.05) (0.04) (0.01) -- (0.02) -- --
Dividends from capital gains ......... -- -- -- -- -- -- (0.28) --
----- ------ ------ ------ ----- ----- ------ ------
Net asset value, end of period ....... $14.29 $11.30 $ 9.71 $10.30 $9.30 $9.01 $ 9.50 $11.49
====== ====== ====== ====== ===== ===== ====== ======
Total return ......................... 26.89% 16.87% (5.38%) 10.90% 3.22% (4.95%) (14.85%) 40.98%*
Ratio to average net assets:
Expenses, before
reimbursement ...................... 1.42% 1.47% 1.55% 2.26% 2.31% 2.97% 4.55% 19.76%*
Expenses, net of reimbursement ....... 1.42% 1.47% 1.55% 2.26% 2.31% 1.60% 1.54% 0.39%*
Net investment income (loss),
before reimbursement ............... 0.40% 0.56% 0.49% 0.08% 0.02% (1.10%) (3.06%) (19.16%)*
Net investment income (loss) ......... 0.40% 0.56% 0.49% 0.08% 0.02% 0.27% (0.05%) 0.22%*
Portfolio turnover ................... 102.76 149.18% 87.40% 114.44% 65.50% 100.94% 50.43% 0.00%*
Average commissions paid on
equity security transactions* ...... $0.07
Net assets, end of period (000's
omitted) ...........................$37,934 $16,955 $13,627 $5,325 $1,926 $1,393 $916 $280
</TABLE>
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*Annualized
*In accordance with recent SECdisclosure guidelines, the average commissions are
calculated for the current period but not for prior periods.
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DESCRIPTION OF THE FUND
Lexington Natural Resources Trust is a no-load open-end non-diversified
management investment company organized as a business trust under the laws of
Massachusetts. The Fund is intended to be the funding vehicle for variable
annuity contracts and variable life insurance policies to be offered by the
separate accounts of certain life insurance companies ("participating insurance
companies"). The Fund currently does not foresee any disadvantages to the
holders of variable annuity contracts and variable life insurance policies
arising from the fact that the interests of the holders of such contracts and
policies may differ. Nevertheless, the Fund's Trustees intend to monitor events
in order to identify any material irreconcilable conflicts which may possibly
arise and to determine what action, if any, should be taken in response thereto.
If a conflict were to occur, an insurance company separate account might be
required to withdraw its investments in the Fund and the Fund might be forced to
sell securities at disadvantageous prices. The variable annuity contracts and
variable life insurance policies are described in the separate prospectuses
issued by the Participating Insurance Companies. The Fund assumes no
responsibility for such prospectuses.
Individual variable annuity contract holders and variable life insurance
policy holders are not "shareholders" of the Fund. The Participating Insurance
Companies and their separate accounts are the shareholders or investors,
although such companies may pass through voting rights to their variable annuity
contract or variable life insurance policy. Shares of the Fund are not offered
directly to the general public.
INVESTMENT OBJECTIVES AND POLICIES
The Fund's investment objective is to seek long-term growth of capital
through investment primarily in common stocks of companies that own or develop
natural resources and other basic commodities, or supply goods and services to
such companies. Current income will not be a factor. Total return will consist
primarily of capital appreciation.
Management attempts to achieve the investment objective of the Fund by
seeking to identify securities of companies that, in its opinion, are
undervalued relative to the value of natural resource holdings of such companies
in light of current and anticipated economic or financial conditions. Natural
resource assets are materials derived from natural sources which have economic
value. The Fund will consider a company to have substantial natural resource
assets when, in management's opinion, the company's holdings of the assets are
of such magnitude, when compared to the capitalization, revenues or operating
profits of the company, that changes in the economic value of the assets will
affect the market price of the equity securities of such company. Generally, a
company has substantial natural resource assets when at least 50% of the
non-current assets, capitalization, gross revenues or operating profits of the
company in the most recent or current fiscal year are involved in or result
from, directly or indirectly through subsidiaries, exploring, mining, refining,
processing, fabricating, dealing in or owning natural resource assets. Examples
of natural resource assets include: companies that specialize in energy sources
(e.g., coal, geothermal power, natural gas and oil), environmental technology
(e.g., pollution control and waste recycling), forest products, agricultural
products, chemical products, ferrous and non-ferrous metals (e.g., iron,
aluminum and copper), strategic metals (e.g., uranium and titanium), precious
metals (e.g., gold, silver and platinum), and other basic commodities. The Fund
presently does not intend to invest directly in natural resource assets or
related contracts. The Fund may invest up to 25% of its total assets in
securities principally traded in markets outside the United States.
Management of the Fund believes that, based upon past performance, the
securities of specific companies that hold different types of substantial
natural resource assets may move relatively independently of one another during
different stages of inflationary cycles due to different degrees of demand for,
or market values of, their respective natural resource holdings during
particular portions of such inflationary cycles. The Fund's fully-managed
investment approach enables it to switch its emphasis among various industry
groups depending upon management's outlook with respect to prevailing trends and
developments. The investment objective and policies of the Fund described in the
first two paragraphs of this section are fundamental policies of the Fund and
may not be changed without the approval of the holders of a majority of the
Fund's outstanding voting securities, as defined in the Investment Company Act
of 1940, as amended.
Except for defensive or liquidity purposes, at least 65% of the total
assets of the Fund will be invested in companies with substantial natural
resource assets. The remaining assets to the extent not invested in the common
stocks of natural resource companies may be invested in companies other than the
natural resource companies and in debt securities of natural resource companies
as well as other companies. At any time management deems it advisable for
temporary defensive or liquidity purposes, the Fund may hold all its assets in
cash or cash equivalents and invest in, or hold unlimited amounts of, debt
obligations of the United States government or its political subdivisions, and
money market instruments including repurchase agreements with maturities of
seven days or less and Certificates of Deposit.
The Fund's investment portfolio may include repurchase agreements with
banks and dealers in U.S. Government securities. A repurchase agreement involves
the purchase by the Fund of an investment contract from a bank or a dealer in
U.S. Government securities which contract is secured by debt securities whose
value is equal to or greater than the value of the repurchase agreement
including the agreed upon interest. The agreement provides that the institution
will
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repurchase the underlying securities at an agreed upon time and price. The total
amount received on repurchase would exceed the price paid by the Fund,
reflecting an agreed upon rate of interest for the period from the date of the
repurchase agreement to the settlement date, and would not be related to the
interest rate on the underlying securities. The difference between the total
amount to be received upon the repurchase of the securities and the price paid
by the Fund upon their acquisition is accrued daily as interest. If the
institution defaults on the repurchase agreement, the Fund will retain
possession of the underlying securities. In addition, if bankruptcy proceedings
are commenced with respect to the seller, realization on the collateral by the
Fund may be delayed or limited and the Fund may incur additional costs. In such
case the Fund will be subject to risks associated with changes in the market
value of collateral securities. The Fund intends to limit repurchase agreements
to transactions with institutions believed by the Investment Adviser and
Sub-Adviser to present minimal credit risk.
Although the Fund's Board of Trustees present policy prohibits
investments in speculative securities trading at extremely low prices and in
relatively illiquid markets, investments in such securities can be made when and
if the Board determines such investments to be in the best interests of the Fund
and its shareholders. The policies set forth in this paragraph are subject to
change by the Board of Trustees of the Fund, in its sole discretion (see
"Special Considerations and Risks" and "Dividend, Distribution and Reinvestment
Policy").
The Fund anticipates that its annual portfolio turnover rate will
generally not exceed 150%. A 100% turnover rate would occur if all of the Fund's
portfolio investments were sold and either repurchased or replaced within one
year. High turnover may result in increased transaction costs to the Fund;
however, the rate of turnover will not be a limiting factor when the Fund deems
it desirable to purchase or sell portfolio investments. For the fiscal year
ended December 31, 1996, the portfolio turnover rate was 102.76%.
Generally, the primary consideration in placing portfolio securities
transactions with broker-dealers for execution is to obtain, and maintain the
availability of, execution at the best net price available and in the most
effective manner possible. The Fund's brokerage allocation policy may permit the
Fund to pay a broker-dealer which furnishes research services a higher
commission than that which might be charged by another broker-dealer which does
not furnish research services, provided that such commission is deemed
reasonable in relation to the value of the services provided by such
broker-dealer. For a complete discussion of portfolio transactions and brokerage
allocation, see "Portfolio Transactions and Brokerage Commissions" in the
Statement of Additional Information.
SPECIAL CONSIDERATIONS AND RISKS
Because the Fund will invest a substantial portion of its portfolio in
the securities of companies with natural resources assets, the Fund should be
considered as a vehicle for diversification and not as a balanced investment
program. In addition, investments in foreign securities may involve risks and
considerations not present in domestic investments.
INVESTMENTS IN FOREIGN SECURITIES
A portion of the Fund's security investments will be in the securities of
foreign issuers. Investments in foreign securities may involve risks greater
than those attendant to investments in securities of U.S. issuers. Publicly
available information concerning issuers located outside the U.S. may not be
comparable in scope or depth of analysis to that generally available for
publicly held U.S. corporations. Accounting and auditing practices and financial
reporting requirements vary significantly from country to country and generally
are not comparable to those applicable to publicly held U.S. corporations.
Government supervision and regulation of foreign securities exchanges and
markets, securities listed on such exchanges or traded in such markets and
brokers, dealers, banks and other financial institutions who trade the
securities in which the Fund may invest is generally less extensive than in the
U.S., and trading customs and practices may differ substantially from those
prevailing in the U.S. The Fund may trade in certain foreign securities markets
which are less developed than comparable U.S. markets, which may result in
reduced liquidity of securities traded in such markets. Investments in foreign
securities are also subject to currency fluctuations. For example, when the
Fund's assets are invested primarily in securities denominated in foreign
currencies, an investor can expect that the Fund's net asset value per share
will tend to increase when the value of U.S. dollars is decreasing as against
such currencies. Conversely, a tendency toward decline in net asset value can be
expected when the value of U.S. dollars is increasing as against such
currencies. Changes in net asset value per share as a result of foreign exchange
rate fluctuations will be determined by the composition of the Fund's portfolio
at any given time. Further, it is not possible to avoid altogether the risks of
expropriation, burdensome or confiscatory taxation, moratoriums, exchange and
investment controls or political or diplomatic events which might adversely
affect the Fund's investments in foreign securities or restrict the Fund's
ability to dispose of such investments.
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INVESTMENT RESTRICTIONS
The Fund has adopted a number of investment restrictions which may not be
changed without shareholder approval. These are set forth under "Investment
Restrictions" in the Statement of Additional Information. Some of these
restrictions provide that the Fund shall not:
o Invest more than 5% of its total assets in the securities of any one
issuer with respect to 50% of its total assets (except securities issued
or guaranteed by the U.S. Government, or its agencies and instrument-
alities);
o Purchase any securities if such purchase would cause the Fund to own at
the time of purchase more than 10% of the outstanding voting securities
of one issuer;
o Borrow money; except that the Fund may borrow from a bank as a temporary
measure for extraordinary purposes or to meet redemptions in amounts
not exceeding 10% (taken at market value)of its total assets and pledge
its assets to secure such borrowings. The Fund may not purchase
additional securities when money borrowed exceeds 5% of the Fund's total
assets;
o Purchase any security restricted as to disposition under Federal
securities laws or securities that are not readily marketable or
purchase any securities if such a purchase would cause the Fund to own
at the time of such purchase, illiquid-securities, including repurchase
agreements with an agreed upon repurchase date in excess of seven days
from the date of acquisition by the Fund, having aggregate market value
in excess of 10% of the value of the Fund's total assets.
MANAGEMENT OF THE FUND
The business affairs of the Fund are managed under the direction of its
Board of Trustees. There are currently ten Trustees (of whom seven are
non-affiliated persons) who meet five times each year. The Statement of
Additional Information contains additional information regarding the Trustees
and officers of the Fund.
INVESTMENT ADVISER, SUB-ADVISER, DISTRIBUTOR AND ADMINISTRATOR
Lexington Management Corporation, P.O. Box 1515/Park 80 West Plaza Two,
Saddle Brook, New Jersey 07663, is the investment adviser to the Fund, and, as
such, advises and makes recommendations to the Fund with respect to its
investments and investment policies. Lexington Funds Distributor, Inc. is a
registered broker-dealer and is the distributor of shares of the Fund.
The Investment Adviser has entered into a sub-advisory management
contract with Market Systems Research Advisors, Inc., 80 Maiden Lane, New York,
New York 10038, a registered investment adviser, under which the Sub-Adviser
will provide the Fund with certain investment management and administrative
services. The Sub-Adviser serves as investment adviser to private and
institutional accounts.
The Investment Adviser is paid an investment advisory fee at the annual
rate of 1.00% of the net assets of the Fund which is higher than that paid by
most other investment companies. This fee is computed on the basis of the Fund's
average daily net assets and is payable on the last business day of each month.
For the year ended December 31, 1996, the Investment Adviser received $260,014
in investment advisory fees from the Fund and paid the Sub-Adviser $130,009.
The Investment Adviser serves as investment adviser to other investment
companies and private institutional investment accounts. Included among these
clients are persons and organizations which own significant amounts of capital
stock of the Investment Adviser's parent. The clients pay fees which the
Investment Adviser considers comparable to the fee levels for similarly served
clients.
The Investment Adviser also acts as administrator to the Fund and performs
certain administrative and internal accounting services, including but not
limited to, maintaining general ledger accounts, regulatory compliance,
preparation of financial information for semiannual and annual reports,
preparing registration statements, calculating net asset values, shareholder
communications and supervision of the custodian, transfer agent and provides
facilities for such services. The Fund shall reimburse the Administrator for its
actual cost in providing such services, facilities and expenses.
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The Investment Adviser and the Distributor 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. Lexington Global Asset
Managers, Inc., holds a controlling interest in the Sub-Adviser. 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. See "Investment Adviser and Distributor" in the
Statement of Additional Information.
PORTFOLIO MANAGERS
The Fund is managed by an investment management team. Frank A. Peluso,
Robert M. DeMichele and Robert W. Radsch are the lead managers.
FRANK A. PELUSO is a Portfolio Manager of the Fund. He has 34 years
investment experience. Mr. Peluso is President and Chief Executive Officer of
Market Systems Research Advisors, Inc. (MSR), the sub-adviser to the Fund. Mr.
Peluso utilizes a proprietary analytical system to identify securities with
performance potential which he believes to be exceptional. In addition, Mr.
Peluso's proprietary data is used by professional money managers, insurance
companies, brokerage firms, banks, mutual fund companies and pension funds.
Mr. Peluso is a graduate of Princeton University and has completed a year
of post-graduate study at Columbia University.
ROBERT M. DEMICHELE is Chairman and Chief Executive Officer of Lexington
Management Corporation. He is also the Chairman of the Investment Strategy
Group. In addition, he is President of Lexington Global Asset Managers, Inc.,
LMC's parent company. He holds similar offices in other companies owned by
Lexington Global Asset Managers, Inc., as well as, the Lexington Funds.
Prior to joining LMC in 1981, Mr. DeMichele was a Vice President at A.G.
Becker, Inc. the securities division of Warburg, Paribus, Becker, an
international investment banking firm. From 1973 to 1981, Mr. DeMichele held
several positions, the most recent managing A.G. Becker's Funds Evaluation and
Consulting Group for both the East and West coasts.
Mr. DeMichele is a graduate of Union College with a B.A. Degree in
Economics and an M.B.A. in Finance from Cornell University.
ROBERT W. RADSCH, CFA, is a Portfolio Manager of the Fund and is a Vice
President of Lexington Management Corporation. 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 14 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.
HOW TO PURCHASE AND REDEEM SHARES
With the exception of shares held in connection with initial capital of
the Fund, shares of the Fund are currently available for purchase solely by
participating insurance companies for the purpose of funding variable annuity
contracts and variable life insurance policies. Shares of the Fund are purchased
and redeemed at net asset value next calculated after a purchase or redemption
order is received by the Fund in good order. There are no minimum investment
requirements. Payment for shares redeemed will be made as soon as possible, but
in any event within three business days after the order for redemption is
received by the Fund. However, payment may be postponed under unusual
circumstances, such as when normal trading is not taking place on the New York
Stock Exchange.
SHAREHOLDER SERVICING AGENTS
The Fund may enter into Shareholder Servicing Agreements with insurance
companies or other financial institutions that provide administrative services
for the Fund or that provide to contractholders and policyholders other services
relating to the Fund. These services may include, among other things,
sub-accounting services, answering inquiries of contractholders and
policyholders regarding the Fund, transmitting, on behalf of the Fund, proxy
statements, annual reports, updated prospectuses and other communications to
contractholders and policyholders regarding the Fund, and such other related
services as the Fund or a contractholder or policyholder may request. For these
services, each Shareholder Servicing Agent may receive fees, which may be paid
periodically, provided that such fees will not exceed 0.25% of the average daily
net assets of the Fund represented by shares owned during the period for which
payment is made. LMC, at no additional cost to the Fund, 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.
DETERMINATION OF NET ASSET VALUE
The net asset value of the shares of the Fund is determined as of the
close of trading on each day the New York Stock Exchange is open, by dividing
the value of the Fund's securities plus any cash and other assets (including
accrued dividends and interest) less all liabilities (including accrued
expenses) by the number of shares outstanding, the result being adjusted to the
nearest whole cent. A security listed or traded on a recognized stock exchange
is valued at its last sale price prior to the time when assets are valued on the
principal exchange on which the security is traded. If no sale is reported at
that time, the mean between the current bid and asked price will be used.
However, when LMCdeems it appropriate, prices obtained for the day of valuation
from a third party pricing service will be used. For over-the-counter securities
the mean between the bid and asked prices is used. All other securities for
which the over-the-counter market quotations are readily available are valued at
the mean between the last current bid and asked price. Short-term securities
having maturity of 60 days or less are valued at cost when it is determined by
the Fund's Board of Trustees that amortized cost reflects the fair value of such
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securities. Securities for which market quotations are not readily available and
other assets shall be valued by Fund Management in good faith under the
direction of the Fund's Board of Trustees.
Generally, trading in foreign securities markets is substantially
completed each day at various times prior to the close of the New York Stock
Exchange. The values of foreign securities used in computing the net asset value
of the shares of the Fund are determined as of the earlier of such market close
or the closing time of the New York Stock Exchange (the "Exchange"). Foreign
currency exchange rates are also generally determined prior to the close of the
Exchange. Occasionally, events affecting the value of such securities and such
exchange rates may occur between the times at which they are determined and the
close of the Exchange, which will not be reflected in the computation of net
asset value. If during such periods, events occur which materially affect the
value of such securities, the securities will be valued at their fair market
value as determined by the investment adviser and approved in good faith by the
Trustees.
In order to determine net asset value per share, the aggregate value of
portfolio securities is added to the value of the Fund's other assets, such as
cash and receivables; the total of the assets thus obtained, less liabilities,
is then divided by the number of shares outstanding.
PERFORMANCE CALCULATION
Advertisements and communications with shareholders and others may cite
the Fund's performance calculated on a total return basis. All such
advertisements and communications will portray the value of an assumed initial
investment of $1,000 at the end of one, five and ten year periods. These values
will be calculated by multiplying the compounded average annual total return for
each time period by the amount of the assumed initial investment and will
reflect all recurring charges against Fund income.
Advertisements and communications may compare the Fund's performance to
major market indices. Quotations of historical total returns are not indicative
of future dividend income or total return, but are an indication of the return
to shareholders only for the limited historical period used. The Fund's total
return will depend on the particular investments in its portfolio, its total
operating expenses and other conditions. For further information, including the
formula and an example of the total return calculation, see the Statement of
Additional Information.
DIVIDEND, DISTRIBUTION AND REINVESTMENT POLICY
The Fund intends to declare or distribute a dividend from its net
investment income and/or net capital gain income to shareholders annually or
more frequently if necessary in order to comply with distribution requirements
of the Code to avoid the imposition of regular Federal income tax, and if
applicable, a 4% excise tax.
Any dividends and distribution payments will be reinvested at net asset
value, without sales charge, in additional full and fractional shares of the
Fund. Dividend and capital gain distributions are generally not currently
taxable to owners of variable contracts.
TAX MATTERS
THE FUND. The Fund intends to qualify as a regulated investment company by
satisfying the requirements under Subchapter M of the Internal Revenue Code of
1986, as amended (the "Code"), including the diversification of assets,
distribution of income, and sources of income. As a regulated investment company
the Fund will not be subject to federal income tax on its income distributed in
accordance with the timing requirements of the Code. If, however, for any
taxable year the Fund does not qualify as a regulated investment company, then
all of its taxable income will be subject to tax at regular corporate rates
(without any deduction for distributions to the separate accounts of the
Participating Insurance Companies (the "Accounts")), and such distributions may
be taxable to the recipients to the extent that the Fund has current and
accumulated earnings and profits.
FUND DISTRIBUTIONS. Under current tax law, an insurance company is not
subject to tax on income of a qualifying separate account that is properly
allocable to the value of eligible variable annuity contracts or variable life
insurance policies. Therefore, generally fund distributions will not be
currently taxable to either te Accounts or to the contract holders or
policyholders.
SHARE REDEMPTIONS. Redemptions of the shares held by the Accounts
generally will not result in gain or loss for the Accounts and will not result
in gain or loss for the variable annuity contract holders or variable life
insurance policy holders.
SUMMARY. The foregoing discussion of federal income tax consequences is
based on tax laws and regulations in effect on the date of this Prospectus, and
is subject to change by legislative or administrative action. The foregoing
discussion also assumes that the Accounts are the owners of the shares and that
the policies or contracts qualify as life insurance policies or annuities,
respectively, under the Code. If the foregoing requirements are not met then the
variable annuity contract holders or variable life insurance policy holders will
be treated as recognizing income (from distributions or otherwise) related to
the ownership of Fund shares. The foregoing discussion is for general
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information only; a more detailed discussion of federal income tax
considerations is contained in the Statement of Additional Information. Variable
annuity contract holders or variable life insurance policy holders must consult
the prospectuses of their respective contracts or policies for information
concerning the federal income tax consequences of owning such contracts or
policies.
GENERAL INFORMATION
The Fund was organized as a Massachusetts business trust on October 7,
1988 under the name Lexington Gold Trust. At a meeting held on September 30,
1991, the shareholders of the Fund approved a change in the Fund's fundamental
investment objective and policies. In connection with the change of investment
objective and policies, the Fund also changed its name to "Lexington Natural
Resources Trust." The capitalization of the Fund consists solely of an unlimited
number of shares of beneficial interest, no par value. When issued, shares of
the Fund are fully paid, non-assessable and freely transferable.
Unlike the stockholder of a corporation, shareholders could under certain
circumstances be held personally liable for the obligations of the Fund.
However, the Declaration of Trust disclaims liability of the shareholders,
Trustees, or officers of the Fund for acts or obligations of the Fund, which are
binding only on the assets and property of the Fund. The Declaration of Trust
provides for indemnification out of Fund property for all loss and expense of
any shareholder held personally liable for the obligations of the Fund. The risk
of a shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which the Fund itself would be unable to meet its
obligations and thus should be considered remote.
VOTING RIGHTS
Shareholders of the Fund are given certain voting rights. Each share of the
Fund will be given one vote, unless a different allocation of voting rights is
required under applicable law for a mutual fund that is an investment medium for
variable life insurance policies or annuity contracts. Participating insurance
companies provide variable annuity contract holders and variable life insurance
policyholders the right to direct the voting of Fund shares at shareholder
meetings to the extent required by law. See the Separate Account Prospectus for
the Variable Annuity Contract or Variable Life Insurance Policy section for more
information regarding the pass-through of these voting rights.
Massachusetts business trust law does not require the Fund to hold annual
shareholder meetings, although special meetings may be called for the Fund, for
purposes such as electing or removing Trustees, changing fundamental policies or
approving an investment management contract. A shareholders' meeting will be
held after the Fund begins operations for the purpose of electing the initial
Board of Trustees. In addition, the Fund will be required to hold a meeting to
elect Trustees to fill any existing vacancies on the Board if, at any time,
fewer than a majority of the Trustees have been elected by the shareholders of
the Fund. In addition, the holders of not less than two-thirds of the
outstanding shares or other voting interests of the Fund may remove a person
serving as Trustee either by declaration in writing or at a meeting called for
such purpose. The Trustees are required to call a meeting for the purpose of
considering the removal of a person serving as trustee, if requested in writing
to do so by the holders of not less than 10% of the outstanding shares of other
voting interests of the Fund. The Fund is required to assist in shareholders'
communications. In accordance with current laws, an insurance company issuing a
variable life insurance or annuity contract that participates in the Fund will
request voting instructions from Contract Holders and will vote shares or other
voting interests in the Separate Account in proportion to the voting
instructions received.
COUNSEL AND INDEPENDENT AUDITORS
Kramer, Levin, Naftalis, & Frankel will pass upon legal matters for the
Fund in connection with the shares offered by this Prospectus.
KPMG Peat Marwick LLP, New York, New York has been selected as independent
auditors for the Fund for the fiscal year ending December 31, 1997.
CUSTODIANS, TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
Chase Manhattan Bank, N.A., 1211 Avenue of the Americas, New York, New
York, 10036 has been retained to act as the Custodian for the Fund's investments
and assets. In addition, Chase Manhattan Bank, N.A. may appoint foreign banks
and securities depositories to act as sub-custodians for the Fund's portfolio
securities subject to their qualification as eligible foreign custodians under
the rules adopted by the SEC. State Street Bank & 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.
OTHER INFORMATION
This prospectus omits certain information contained in the registration
statement filed with the SEC. Copies of the registration statement, including
items omitted herein, may be obtained from the SEC by paying the charges
prescribed under its rules and regulations. The Statement of Additional
Information included in such registration statement may be obtained without
charge from the Fund.
NO PERSON HAS BEEN AUTHORIZED TO GAIN ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND INFORMATION OR
REPRESENTATIONS NOT HEREIN CONTANED, IF GIVEN OR MADE, MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE FUND. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER OR SOLICITATION IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT
LAWFULLY BE MADE.
8
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<PAGE>
Investment Adviser
- --------------------------------------------------------------------------------
LEXINGTON MANAGEMENT CORPORATION
P.O. Box 1515/Park 80 West Plaza Two
Saddle Brook, N.J. 07663
Sub-Adviser
- --------------------------------------------------------------------------------
MARKET SYSTEMS RESEARCH ADVISORS, INC.
80 Maiden Lane
New York, N.Y. 10038
Distributor
- --------------------------------------------------------------------------------
LEXINGTON FUNDS DISTRIBUTOR, INC.
P.O. Box 1515/Park 80 West Plaza Two
Saddle Brook, N.J. 07663
Transfer Agent
- --------------------------------------------------------------------------------
STATE STREET BANK AND TRUST COMPANY c/o National Financial Data Services 1004
Baltimore Kansas City, Missouri 64105
Table of Contents Page
- --------------------------------------------------------------------------------
Financial Highlights .................................................... 2
Description of the Fund ................................................. 3
Investment Objective and Policies ....................................... 3
Special Considerations and Risks ........................................ 4
Investment Restrictions ................................................. 5
Management of the Fund .................................................. 5
Investment Adviser, Sub-Adviser, Distributor
and Administrator .................................................... 5
Portfolio Managers ...................................................... 6
How to Purchase and Redeem Shares ....................................... 6
Shareholder Servicing Agents ............................................ 6
Determination of Net Asset Value ........................................ 6
Performance Calculation ................................................. 7
Dividend, Distribution and Reinvestment Policy .......................... 7
Tax Matters ............................................................. 7
General Information ..................................................... 8
Other Information ....................................................... 9
LEXINGTON
- --------------------------------------------------------------------------------
LEXINGTON
NATURAL
RESOURCES
TRUST
- --------------------------------------------------------------------------------
PROSPECTUS
APRIL 30, 1997
<PAGE>
LEXINGTON NATURAL RESOURCES TRUST
STATEMENT OF ADDITIONAL INFORMATION
APRIL 30, 1997
This Statement of Additional Information, which is not a prospectus,
should be read in conjunction with the current prospectus of Lexington Natural
Resources Trust (the "Fund"), dated April 30, 1997, as it may be revised from
time to time. To obtain a copy of the Fund's prospectus at no charge, please
write to the Fund at P.O. Box 1515/Park 80 West - Plaza Two, Saddle Brook, New
Jersey 07663 or call the following number:
201-845-7300
TABLE OF CONTENTS
Page
General Information and History ............................................ 2
Investment Objectives and Policies ......................................... 2
Investment Restrictions .................................................... 2
Investment Adviser, Sub-Adviser, Distributor and
Administrator ............................................................. 3
Portfolio Transactions and Brokerage Commissions ........................... 4
Performance Calculation .................................................... 5
Dividend, Distribution and Reinvestment Policy ............................. 6
Tax Matters ................................................................ 6
Custodians, Transfer Agent and Dividend Disbursing
Agent ..................................................................... 6
Management of the Fund ..................................................... 7
Other Information .......................................................... 9
Financial Statements ....................................................... 10
1
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GENERAL INFORMATION AND HISTORY
The Fund was formerly named "Lexington Gold Trust". At a meeting held on
September 30, 1991, the shareholders of the Fund approved a change in the Fund's
fundamental investment objective and policies. In connection with the change of
investment objective and policies, the Fund also changed its name to "Lexington
Natural Resources Trust."
INVESTMENT OBJECTIVES AND POLICIES
The Fund's investment objective is to seek long-term growth of capital
through investment primarily in common stocks of companies which own, or develop
natural resources and other basic commodities, or supply goods and services to
such companies. Current income will not be a factor. Total return will consist
primarily of capital appreciation.
Management attempts to achieve the investment objective of the Fund by
seeking to identify securities of companies that, in its opinion, are
undervalued relative to the value of natural resource holdings of such companies
in light of current and anticipated economic or financial conditions. Natural
resource assets are materials derived from natural sources which have economic
value. The Fund will consider a company to have substantial natural resource
assets when, in management's opinion, the company's holdings of the assets are
of such magnitude, when compared to the capitalization, revenues or operating
profits of the company, that changes in the economic value of the assets will
affect the market price of the equity securities of such company. Generally, a
company has substantial natural resource assets when at least 50% of the
non-current assets, capitalization, gross revenues or operating profits of the
company in the most recent or current fiscal year are involved in or result
from, directly or indirectly through subsidiaries, exploring, mining, refining,
processing, fabricating, dealing in or owning natural resource assets. Examples
of natural resource assets include: companies that specialize in energy sources
(e.g. coal, geothermal power, natural gas and oil), environmental technology
(e.g. pollution control and waste recycling), forest products, agricultural
products, chemical products, ferrous and non-ferrous metals (e.g. iron, aluminum
and copper), strategic metals (e.g. uranium and titanium), precious metals (e.g.
gold, silver and platinum), and other basic commodities. The Fund presently does
not intend to invest directly in natural resource assets or related contracts.
The Fund may invest up to 25% of its total assets in securities principally
traded in markets outside the United States.
Management of the Fund believes that, based upon past performance, the
securities of specific companies that hold different types of substantial
natural resource assets may move relatively independently of one another during
different stages of inflationary cycles due to different degrees of demand for,
or market values of, their respective natural resource holdings during
particular portions of such inflationary cycles. The Fund's fully managed
investment approach enables it to switch its emphasis among various industry
groups depending upon management's outlook with respect to prevailing trends and
developments. The investment objective and policies of the Fund described in the
first two paragraphs of this section are fundamental policies of the Fund and
may not be changed without the approval of the holders of a majority of the
Fund's outstanding voting securities, as defined in the Investment Company Act
of 1940, as amended.
INVESTMENT RESTRICTIONS
The Fund's investment objective, as described under "Investment Policy,"
and the following investment restrictions are matters of fundamental policy
which may not be changed without the affirmative vote of the lesser of (a) 67%
or more of the shares of the Fund present at a shareholder's meeting at which
more than 50% of the outstanding shares are present or represented by proxy or
(b) more than 50% of the outstanding shares. The Fund is a non-diversified
management investment company and
1. with respect to 50% of its assets, the Fund will not at the time of
purchase invest more than 5% of its total assets, at market value, in the
securities of one issuer (except the securities of the United States
Government);
2. with respect to the other 50% of its assets, the Fund will not invest at
the time of purchase more than 25% of the market value of its total assets
in any single issuer.
These two restrictions, hypothetically, could give rise to a portfolio
with as few as fourteen issues. In addition, the Fund will not:
1. Purchase more than 10% of the voting securities or more than 10% of any
class of securities of any issuer. (For this purpose all outstanding debt
securities of an issuer are considered as one class, and all preferred
stocks of an issuer are considered as one class.)
2. Purchase any security restricted as to disposition under Federal Securities
laws or securities that are not readily marketable or purchase any
securities if such a purchase would cause the Fund to own at the time of
such purchase, illiquid securities, including repurchase agreements with an
agreed upon repurchase date in excess of seven days from the date of
2
<PAGE>
acquisition by the Fund, having aggregate market value in excess of 10% of
the value of the Fund's total assets.
3. Make short sales of securities or purchase any securities on margin, except
for such short term credits as are necessary for the clearance of
transactions.
4. Write, purchase or sell puts, calls or combinations thereof. However, the
Fund may invest up to 15% of the value of its assets in warrants. The
holder of a warrant has the right to purchase a given number of shares of a
particular company at a specified price until expiration. Such investments
generally can provide a greater potential for profit - or loss - than
investment of an equivalent amount in the underlying common stock. The
prices of warrants do not necessarily move parallel to the prices of the
underlying securities. If the holder does not sell the warrant, he risks
the loss of his entire investment if the market price of the underlying
stock does not, before the expiration date, exceed the exercise price of
the warrant plus the cost thereof. It should be understood that investment
in warrants is a speculative activity. Warrants pay no dividends and confer
no rights (other than the right to purchase the underlying stock) with
respect to the assets of the corporation issuing them. In addition, the
sale of warrants held more than one year generally results in a long term
capital gain or loss to the holder, and the sale of warrants held for less
than such period generally results in a short term capital gain or loss.
The holding period for securities acquired upon exercise of warrants,
however, begins on the day after the date of exercise, regardless of how
long the warrant was held. This restriction on the purchase of warrants
does not apply to warrants attached to, or otherwise included in, a unit
with other securities.
5. Invest in any commodities or commodities futures contracts, including
futures contracts relating to gold.
6. Invest in real estate.
7. Invest more than 5% of the value of its total assets in securities of
issuers which, with their predecessors, have a record of less than three
years continuous operation.
8. Purchase or retain the securities of any issuer if the officers or Trustees
of the Fund, or its Investment Adviser, or Sub-Adviser who own individually
more than 1/2 of 1% of the securities of such issuer together own more than
5% of the securities of such issuer.
9. Lend money or securities, provided that the making of time or demand
deposits with domestic banks and the purchase of debt securities such as
bonds, debentures, commercial paper, repurchase agreements and short term
obligations in accordance with the Fund's objective and policies, are not
prohibited.
10. Borrow money, except for temporary emergency purposes, and in no event more
than 5% of its net assets at value or cost, whichever is less; or pledge
its gold or portfolio securities or receivables or transfer or assign or
otherwise encumber them in an amount exceeding 10% of the value of its
total assets.
11. Underwrite securities issued by others.
12. Purchase securities of other investment companies, except in connection
with a merger, consolidation, reorganization or acquisition of assets.
13. Invest for the purpose of exercising control or management of another
company.
14. Participate on a joint or a joint and several basis in any trading account
in securities.
The percentage restrictions referred to above are to be adhered to at the
time of investment, and are not applicable to a later increase or decrease in
percentage beyond the specified limit resulting from a change in values or net
assets.
INVESTMENT ADVISER, SUB-ADVISER, DISTRIBUTOR AND ADMINISTRATOR
Lexington Management Corporation ("LMC"), P.O. Box 1515/Park 80 West
Plaza Two, Saddle Brook, New Jersey 07663, is the investment adviser to the
Fund, and, as such, advises and makes recommendations to the Fund with respect
to its investments and investment policies.
LMC has entered into a sub-advisory management contract with Market
Systems Research Advisors, Inc. ("MSR"), 80 Maiden Lane, New York, New York
10038, a registered investment advisor, under which the MSR will provide the
Fund with certain investment management and administrative services.
Under the terms of the investment management agreement, LMC also pays the
Fund's expenses for office rent, utilities, telephone, furniture and supplies
utilized for the Fund's principal office and the salaries and payroll expense of
officers and Trustees of the Fund who are employees of LMC or its affiliates in
carrying out its duties under the investment management agreement. The Fund pays
all its other expenses, including custodian and transfer agent fees, legal and
registration fees, audit fees, printing of prospectuses, shareholder reports and
3
<PAGE>
communications required for regulatory purposes or for distribution to existing
shareholders, computation of net asset value, mailing of shareholder reports and
communications, portfolio brokerage, taxes and independent Trustees' fees.
LMC shall reimburse the Fund in any fiscal year for the amount by which
the Fund's aggregate expenses exceed the most restrictive expense limits imposed
by any statute or regulatory authority of any jurisdiction in which shares of
the Fund are offered for sale during such year. Brokerage fees and commissions,
taxes, interest and extraordinary expenses are not deemed to be expenses of the
Fund for such reimbursement.
LMC's services are provided and its investment advisory fee is paid
pursuant to an investment management agreement, dated August 20, 1991 which will
automatically terminate if assigned and which may be terminated by either party
upon 60 days' notice. The terms of the agreement and any renewal thereof must be
approved 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. For the year ended December 31, 1996 LMC received
$260,014 in investment advisory fees from the Fund and paid MSR $130,009.
LMC serves as investment adviser to other investment companies and
private and institutional investment accounts. Included among these clients are
persons and organizations which own significant amounts of capital stock of
LMC's parent. 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 the 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 a
fund, 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,
LMC believes that the ability of the Fund to participate in combined
transactions may generally produce better execution overall.
MSR, the Sub-Adviser serves as investment adviser to private and
institutional accounts.
LMC also acts as administrator to the Fund pursuant to an Administration
Services Agreement dated February 28, 1995 and performs certain administrative
and internal accounting services, including but not limited to, maintaining
general ledger accounts, regulatory compliance, preparation of financial
information for semiannual and annual reports, preparing registration
statements, calculating net asset values, shareholder communications and
supervision of the custodian, transfer agent and provides facilities for such
services. The Fund shall reimburse LMC for its actual cost in providing such
services, facilities and expenses.
Lexington Funds Distributor, Inc. ("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 of Trustees who
are not "interested persons."
LMC and LFD are wholly owned subsidiaries of Lexington Global Asset
Managers, Inc., a publicly traded corporation. Lexington Global Asset Managers,
Inc., holds a controlling interest in MSR. 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.,
Of the Trustees, officers or employees ("affiliated persons") of the Fund,
Messrs. Corniotes, DeMichele, Faust, Hisey, Kantor and Lavery and Mmes.
Carnicelli, Carr, Curcio, Gilfillan and Mosca (see "Management of the Fund"),
may also be deemed affiliates of LMC by virtue of being officers, trustees or
employees thereof. As of March 31, 1997, all officers and trustees of the Fund
as a group owned of record and beneficially less than 1% of the outstanding
shares of the Fund.
PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
As a general matter, purchases and sales of portfolio securities by the
Fund are placed by LMC or MSR with brokers and dealers who in their opinion will
provide the Fund with the best combination of price (inclusive of brokerage
commissions) and execution for its orders. However, pursuant to the Fund's
investment management agreement, management consideration may be given in the
selection of broker-dealers to research provided and payment may be made at a
fee higher than that charged by another broker-dealer which does not furnish
research services or which furnishes research services deemed to be of lesser
value, so long as the criteria of Section 28(e) of the Securities Exchange Act
of 1934, as amended are met. Section 28(e) was adopted in 1975 and specifies
that a person with investment discretion shall not be "deemed to have acted
unlawfully or to have breached a fiduciary duty" solely because such person has
caused the account to pay a higher commission than the lowest available under
certain circumstances, provided that the person so exercising investment
discretion makes a good faith determination that the commissions paid are
"reasonable in relation to the value of the brokerage and research services
provided . . . viewed in terms of either that particular transaction or his
overall responsibilities with respect to the accounts as to which he exercises
investment discretion."
Currently, it is not possible to determine the extent to which
commissions that reflect an element of value for research services ("soft
dollars") might exceed commissions that would be payable for execution services
4
<PAGE>
alone. Nor generally can the value of research services to the Fund be measured.
Research services furnished might be useful and of value to LMC or MSR and its
affiliates, in serving other clients as well as the Fund. On the other hand, any
research services obtained by LMC or MSR or its affiliates from the placement of
portfolio brokerage of other clients might be useful and of value to LMC or MSR
in carrying out its obligations to the Fund.
As a general matter, it is the Fund's policy to execute in the U.S. all
transactions with respect to securities traded in the U.S. except when better
price and execution can, in the judgment of management of the Fund, be obtained
elsewhere. Over-the-counter purchases and sales are normally made with principal
market makers, except where, in the opinion of management, the best executions
are available elsewhere.
In addition, the Fund may from time to time allocate brokerage
commissions to firms which furnish research and statistical information to LMC
or MSR or which render to the Fund services which LMC or MSR is not required to
provide. The supplementary research supplied by such firms is useful in varying
degrees and is of indeterminable value. No formula has been established for the
allocation of business to such brokers. For the fiscal year ended December 31,
1994, the portfolio turnover rate for the Fund was 87.40%, and the Fund paid
$66,168 in brokerage commissions. For the fiscal year ended December 31, 1995
the portfolio turnover rate for the Fund was 149.18%, and the Fund paid $100,622
in brokerage commissions. For the fiscal year ended December 31, 1996, the
portfolio turnover rate for the Fund was 102.76% and the Fund paid $118,713 in
brokerage commissions and of that amount, $40,567 was paid for with soft
dollars.
Advisory fees paid to LMC and expense reimbursements paid to the Fund are
as follows:
EXPENSE
PERIOD ADVISORY FEE SUB ADVISORY FEE REIMBURSEMENT
------ ---------- --------------- --------------
1/1/94 to 12/31/94 $107,760 $53,880 $0
1/1/95 to 12/31/95 148,634 74,304 0
1/1/96 to 12/31/96 260,014 130,009 0
PERFORMANCE CALCULATION
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, rules promulgated by the Securities and Exchange
Commission ("SEC"), a fund's advertising performance must include total return
quotations calculated according to the following formula: P(1 + T)n = ERV Where:
P = a hypothetical initial payment of $1,000,
T = average annual total return,
n = number of years (1, 5 or 10)
ERV = ending redeemable value of a hypothetical $1,000 payment,
made at the beginning of the 1, 5 or 10 year period, at the
end of such period (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
1,5 and 10 year periods of the Fund's existence or such shorter period dating
from the effectiveness of the Fund's Registration Statement. In calculating the
ending redeemable value, the maximum sales load is deducted from the initial
$1,000 payment and all dividends and distributions by the Fund are assumed to
have been reinvested at net asset value as described in the Prospectus on the
reinvestment dates during the period. Total return, or "T" in the formula above,
is computed by finding the average annual compounded rates of return over the 1,
5 and 10 year periods (or fractional portion thereof) that would equate the
initial amount invested to the ending redeemable value. Any recurring account
charges that might in the future be imposed by the 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 the Fund's total return, 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 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 advertising than the information prescribed under Item 21 of Form
N-1A.
5
<PAGE>
The Fund's performance may be compared in advertising to the performance
of other mutual funds in general, or of particular types of mutual funds,
especially those with similar objectives. Such performance data may be prepared
by Lipper Analytical Services, Inc. and other independent services which monitor
the performance of mutual funds. The Fund may also advertise mutual fund
performance rankings which have been assigned to it by such monitoring services.
Pursuant to the SEC calculation, the Fund's average total rate of return
for the one and five year and since commencement (8/1/89) period ended December
31, 1996 was 26.89%, 9.94% and 5.63%.
DIVIDEND, DISTRIBUTION AND REINVESTMENT POLICY
The Fund intends to declare or distribute a dividend from its net
investment income and/or net capital gain income to shareholders annually or
more frequently if necessary in order to comply with distribution requirements
of the Internal Revenue Code of 1986, as amended (the "Code"), and to avoid the
imposition of regular Federal income tax and, if applicable, a 4% excise tax.
Any dividends and distribution payments will be reinvested at net asset
value, in additional full and fractional shares of the Fund.
TAX MATTERS
The following is only a summary of certain additional tax considerations
that are not described in the Prospectus and generally affect each Fund and its
shareholders. 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 intends to qualify to be treated as a "regulated investment
company" ("RIC") under the Internal Revenue Code of 1986, as amended (the
"Code"). As a RIC, the Fund will not itself be subject to federal income tax on
its investment company taxable income and net capital gains to the extent that
such investment company taxable income and net capital gains are distributed in
each taxable year to the separate accounts of the Participating Insurance
Companies. In addition, if the Fund distributes annually to the separate
accounts its ordinary income and capital gain net income, in the manner
prescribed in the Code, it will not be subject to the 4% federal excise tax
otherwise applicable to the undistributed income or gain of a RIC. Distributions
of net investment income and net short-term capital gains will be treated as
ordinary income and distributions of net long-term capital gains will be treated
as long-term capital gain in the hands of the Participating Insurance Companies.
Under existing tax law, capital gains or dividends from the Fund are not
currently taxable when left to accumulate within a variable annuity or variable
life insurance contract.
Segregated Asset Accounts. Shares in the Fund are offered only to
segregated asset accounts, which are insurance company separate accounts that
fund variable annuity or variable life insurance contracts. Section 817(h) of
the Code requires that investments of a segregated asset account of an insurance
company be "adequately diversified," in accordance with Treasury Regulations
promulgated thereunder, in order for the holders of the variable annuity
contracts or variable life insurance policies investing in the account to
receive the tax-deferred or tax-free treatment generally afforded holders of
annuities or life insurance policies under the Code. The Department of the
Treasury has issued Regulations under section 817(h) which, among other things,
provide the manner in which a segregated asset account will treat investments in
a RIC for purposes of the applicable diversification requirements. Under the
Regulations, if a RIC satisfies certain conditions, such RIC will not be treated
as a single investment for these purposes, but rather the segregated asset
account will be treated as owning its proportionate share of each of the assets
of the RIC. The Fund plans to satisfy these conditions at all times so that each
segregated asset account of a Participating Insurance Company investing in the
Fund will be treated as adequately diversified under the Code and Regulations.
For information concerning the federal income tax consequences to the
holders of variable annuity contracts and variable rate insurance policies, such
holders should consult the prospectuses used in connection with the issuance of
their particular contracts or policies.
CUSTODIANS, TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
Chase Manhattan Bank, N.A., 1211 Avenue of the Americas, New York, New
York 10036 has been retained to act as the Custodian for the Fund. In addition,
the Fund and Chase Manhattan Bank, N.A., may appoint foreign banks and foreign
securities depositories which qualify as eligible foreign sub-custodians under
rules adopted by the Securities and Exchange Commission. State Street Bank and
Trust Company, N.A., 225 Franklin Street, Boston, Massachusetts 02110 has been
retained to act as the Transfer Agent and Dividend Disbursing Agent for the
Fund.
The custodians and transfer agent have no 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.
6
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MANAGEMENT OF THE FUND
The Fund's Trustees and executive officers and their principal
occupations and former affiliations are:
+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.E. (67), TRUSTEE. 340 East 72nd Street, New York, N.Y.
10021. Private Investor. Formerly Manager, 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 (50), VICE PRESIDENT AND TRUSTEE. P.O. Box 1515, Saddle Brook,
N.J. 07663. Managing Director, Executive Vice President and 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.,
+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 EH92 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 Drive, Boynton Beach,
Florida 33436. Chairman, Horizon Media, Inc.; Trustee, Galaxy Funds;
Director, Maguire Group of Connecticut; prior to January 1989, President,
Director and C.E.O., Media General Broadcast Services.
*+JOHN G. PRESTON (64), TRUSTEE. 3 Woodfield Road, Wellesley, Massachusetts
02181. Associate Professor of Finance, Boston College, Boston,
Massachusetts.
+MARGARET W. RUSSELL (76), TRUSTEE. 55 North Mountain Avenue, Montclair, N.J.
07042. Private Investor, formerly Community Affairs Director, Union Camp
Corporation.
*+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. Managing Director, Chief Financial Officer and Director,
Lexington Management Corporation; Chief Financial Officer, Vice President
and Director, Lexington Funds Distributor, Inc; Chief Financial Officer,
Market Systems Research Advisers, Inc.; Executive Vice President and Chief
Financial Officer, Lexington Global Asset Managers, Inc.
*+RICHARD J. LAVERY, CLU, CHFC (42), 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.
*+THOMAS LUEHS (34), 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.
7
<PAGE>
*+PETER CORNIOTES (35), 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 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" as defined in the Investment
Company Act of 1940, as amended.
+Messrs. Chaana Corniotes, DeMichele, Duer, Hisey, Faust, Kantor, Lavery, Luehs,
Maner, McCosh Miller, and Preston and Mmes. Carnicelli, Carr, Curcio, Evans,
Gilfillan Mosca and Russell hold similar offices with some or all of the other
registered investment companies advised and/or distributed by Lexington
Management Corporation or Lexington Funds Distributor, Inc. or Market Systems
Research Advisers, 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.
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 TOTAL COMPENSATION NUMBER OF
NAME OF DIRECTOR COMPENSATION FROM FROM FUND AND DIRECTORSHIPS IN
FUND FUND COMPLEX FUND COMPLEX
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
S.M.S. Chadha $856 $13,696 16
Robert M. DeMichele 0 0 17
Beverley C. Duer $1,712 $29,110 17
Barbara R. Evans 0 0 16
Lawrence Kantor 0 0 16
Jerard F. Maher $856 $16,046 17
Andrew M. McCosh $856 $13,696 16
Donald B. Miller $1,712 $26,760 16
John G. Preston $1,712 $26,760 16
Margaret W. Russell $856 $25,048 16
Philip Smith* $1,600 $25,080 16
- ------------------------------------------------------------------------------------------------
*Retired
</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
8
<PAGE>
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 Trustees Chadha, Duer, Maher, McCosh, Miller, Preston and Russell
are 1, 18, 1, 1, 22, 18 and 15, respectively.
HIGHEST ANNUAL COMPENSATION PAID BY ALL FUNDS
---------------------------------------------
$20,000 $25,000 $30,000 $35,000
YEARS OF
SERVICE ESTIMATED ANNUAL BENEFIT UPON RETIREMENT
------- ----------------------------------------
15 $15,000 $18,750 $22,500 $26,250
14 14,000 17,500 21,000 24,500
13 13,000 16,250 19,500 22,750
12 12,000 15,000 18,000 21,000
11 11,000 13,750 16,500 19,250
10 10,000 12,500 15,000 17,500
OTHER INFORMATION
As of March 31, 1997, Lexington Management Corporation, P. O. Box
1515/Park 80 West Plaza Two, Saddle Brook, New Jersey 07663 owned beneficially
10,454 shares of the Fund (0.2% of the Fund's outstanding shares). The balance
of the outstanding shares of the Fund (99.8%) are owned by Aetna Life Insurance
and Annuity Company, Kemper Investors Life Insurance Company and Safeco Life and
Annuity Company and allocated to a separate account used for funding variable
annuity contracts and variable life insurance policies.
9
<PAGE>
Lexington Natural Resources Trust
Statement of Net Asssets
(Including the Portfolio of Investments)
December 31, 1996
(left column)
Number of Value
Shares Security (Note 1)
- ------------------------------------------------------------
COMMON STOCKS: 93.4%
AGRICULTURE: 5.0%
24,000 Dekalb Genetics Corporation ....... $ 1,221,000
10,000 Pioneer Hi-Bred International, Inc. 700,000
-----------
1,921,000
-----------
CHEMICAL PRODUCTS: 6.2%
21,000 Avery-Dennison Corporation ........ 742,875
23,500 Monsanto Company .................. 913,562
15,000 Praxair, Inc. ..................... 691,875
-----------
2,348,312
-----------
ENERGY SOURCES: 69.7%
11,000 Anadarko Petroleum Corporation .... 712,250
21,000 Apache Corporation ................ 742,875
14,500 B.J. Services Company1 ............ 739,500
5,600 British Petroleum Company Plc ..... 791,700
15,000 Burlington Resources, Inc. ........ 755,625
9,000 Chevron Corporation ............... 585,000
15,400 Coastal Corporation ............... 752,675
13,800 Columbia Gas System, Inc. ......... 878,025
12,000 Consolidated Natural Gas Company .. 663,000
26,000 Cross Timbers Oil Company ......... 653,250
11,000 Diamond Offshore Drilling, Inc.1 .. 627,000
16,200 Elf Aquitaine S.A. (ADR) .......... 733,050
7,500 Exxon Corporation ................. 735,000
6,000 Halliburton Company ............... 361,500
18,400 Noble Affiliates, Inc. ............ 880,900
17,000 Nuevo Energy Company1 ............. 884,000
35,000 Oryx Energy Company ............... 866,250
16,000 Parker & Parsley Petroleum Company. 588,000
12,500 Pennzoil Company .................. 706,250
16,500 Pogo Producing Company ............ 779,625
4,300 Royal Dutch Petroleum Company ..... 734,225
10,000 Schlumberger, Ltd. ................ 998,750
10,000 Seacor Holdings1 .................. 630,000
42,000 Snyder Oil Corporation ............ 729,750
8,600 Texaco, Inc. ...................... 843,875
16,000 Tidewater, Inc. ................... 724,000
9,200 Tosco Corporation ................. 727,950
12,000 Transocean Offshore, Inc. ......... 751,500
37,500 Trizec Hahn Corporation ........... 825,000
20,500 Ultramar Diamond Shamrock
Corporation ..................... 648,312
23,000 Union Pacific Resources Group, Inc. 672,750
25,000 Union Texas Petroleum Holdings,Inc. 559,375
18,500 United Meridian Corporation1 ...... 957,375
17,000 Unocal Corporation ................ 690,625
20,400 Williams Companies, Inc. .......... 765,000
30,000 YPF Sociedad Anonima (ADR) ........ 757,500
-----------
26,451,462
-----------
(right column)
Number of Value
Shares Security (Note 1)
- --------------------------------------------------------------
ENVIRONMENTAL TECHNOLOGY: 3.5%
14,000 Ionics, Inc.1 ................... $ 672,000
20,400 USA Waste Services, Inc.1 ......... 650,250
-----------
1,322,250
-----------
FERROUS METALS: 1.8%
10,600 Aluminum Company of America ....... 675,750
-----------
PRECIOUS METALS: 7.2%
78,000 Battle Mountain Gold Company ...... 536,250
47,000 Cambior, Inc. ..................... 687,375
23,500 Freeport McMoran Copper &
Gold "A" ........................ 660,938
19,200 Newmont Gold Company .............. 840,000
-----------
2,724,563
-----------
TOTAL COMMON STOCKS:
(cost $29,710,894) .............. 35,443,337
-----------
SHORT-TERM INVESTMENTS: 6.2%
Other U.S. Government Obligations: 3.4%
$1,300,000 Federal Home Mortgage,
5.40%, due 01/02/97 ............. 1,299,805
-----------
U.S. Government Obligations: 2.8%
100,000 Treasury Bills,
5.00%, due 02/06/97 ............. 99,500
800,000 Treasury Bills,
5.175%, due 12/11/97 ............ 760,440
100,000 Treasury Bills,
5.20%, due 12/11/97 ............. 95,031
100,000 Treasury Bills,
5.585%, due 08/21/97 ............ 96,401
-----------
1,051,372
-----------
TOTAL SHORT-TERM INVESTMENTS:
(cost $2,351,177) ............... 2,351,177
-----------
TOTAL INVESTMENTS: 99.6%
(cost $32,062,071+) ............. 37,794,514
Other assets in excess of liabilities:
0.4% ............................ 139,422
-----------
TOTAL NET ASSETS: 100.0%
(equivalent to $14.29 per share
on 2,653,910 shares outstanding). $37,933,936
===========
1Non-income producing security.
ADR-American Depository Receipt.
+Aggregate cost for Federal income tax purposes is identical.
The Notes to Financial Statements are an integral part of this statement.
10
<PAGE>
Lexington Natural Resources Trust
Statement of Assets and Liabilities
December 31, 1996
Assets
Investments, at value (cost $32,062,071) (Note 1) .................. $37,794,514
Cash ............................................................... 61,958
Receivable for shares sold ......................................... 117,560
Dividends and interest receivable .................................. 26,210
-----------
Total Assets .................................................. 38,000,242
-----------
Liabilities
Due to Lexington Management Corporation (Note 2) ................... 30,233
Payable for shares redeemed ........................................ 484
Accrued expenses ................................................... 35,589
-----------
Total Liabilities ............................................. 66,306
-----------
Net Assets (equivalent to $14.29 per share on
2,653,910 shares outstanding) (Note 3) ........................... $37,933,936
===========
Net Assets consist of:
Paid-in capital-unlimited authorized shares of beneficial interest
at no par value .................................................. $30,298,823
Accumulated net realized gain on investments (Note 1) .............. 1,902,670
Net unrealized appreciation of investments ......................... 5,732,443
-----------
Total Net Assets .............................................. $37,933,936
===========
The Notes to Financial Statements are an integral part of this statement.
11
<PAGE>
Lexington Natural Resources Trust
Statement of Operations
Year ended December 31, 1996
Investment Income
Dividends .............................................. $ 406,922
Interest ............................................... 75,232
---------
482,154
Less: Foreign tax expense .............................. 9,421
---------
Total investment income ................................ $ 472,733
Expenses
Investment advisory fee (Note 2) ..................... 260,014
Printing and mailing expenses ........................ 48,200
Accounting expense (Note 2) .......................... 21,645
Directors' fees and expenses ......................... 11,816
Professional fees .................................... 10,315
Computer processing fees ............................. 7,420
Custodian expense .................................... 5,560
Registration fees .................................... 1,738
Other expenses ....................................... 3,040
---------
Total expenses ..................................... 369,748
----------
Net investment income .......................... 102,985
Realized and Unrealized Gain on Investments (Note 4)
Net realized gain on investments ..................... 2,033,892
Net change in unrealized appreciation on investments . 4,072,007
---------
Net realized and unrealized gain on investments 6,105,899
----------
Increase in Net Assets Resulting from Operations ....... $6,208,884
==========
The Notes to Financial Statements are an integral part of this statement.
12
<PAGE>
Lexington Natural Resources Trust
Statements of Changes in Net Assets
Years ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Net investment income ............................................. $ 102,985 $ 82,852
Net realized gain from investments ................................ 2,033,892 513,678
Net change in unrealized appreciation on investments .............. 4,072,007 1,735,936
----------- -----------
Increase in net assets resulting from operations ............ 6,208,884 2,332,466
Distribution to shareholders from net investment income ........... (125,875) (71,225)
Increase in net assets from capital share transactions (Note 3) ... 14,895,680 1,067,096
----------- -----------
Net increase in net assets ................................... 20,987,689 3,328,337
Net Assets:
Beginning of period ............................................. 16,955,247 13,626,910
----------- -----------
End of period (including undistributed net investment income of
$0 and $11,627, respectively) ................................. $37,933,936 $16,955,247
=========== ===========
</TABLE>
The Notes to Financial Statements are an integral part of these statements.
13
<PAGE>
Lexington Natural Resources Trust
Notes to Financial Statements
December 31, 1996 and 1995
Note 1-Significant Accounting Policies
Lexington Natural Resources Trust (the "Trust") is an open-end diversified
management investment company registered under the Investment Company Act of
1940, as amended. The Trust's investment objective is to seek long-term growth
of capital through investment primarily in common stock of companies which own,
or develop natural resources and other basic commodities, or supply goods and
services to such companies. With the exception of shares held in connection with
initial capital of the Trust, shares of the Trust are currently being offered
only to participating insurance companies for allocation to certain of their
separate accounts established for the purpose of funding variable annuity
contracts and variable life insurance policies issued by the participating
insurance companies. The following is a summary of significant accounting
policies followed by the Trust in the preparation of its financial statements:
Investments Security transactions are accounted for on a trade date basis.
Realized gains and losses from investment transactions are reported on the
identified cost basis. Securities traded on a recognized stock exchange are
valued at the last sales price reported by the exchange on which the securities
are traded. If no sales price is recorded, the mean between the last bid and
asked price is used. Securities traded on the over-the-counter market are valued
at the mean between the last current bid and asked price. Short-term securities
having a maturity of 60 days or less are stated at amortized cost, which
approximates market value. Securities for which market quotations are not
readily available and other assets are valued by management in good faith under
the direction of the Trust's Board of Trustees. 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.
Federal Income Taxes It is the Trust'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 and net realized capital
gains are normally declared and paid annually, but the Trust 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 Trust's capital accounts to reflect permanent
book/tax differences and income and gains available for distributions under
income tax regulations. Net investment income, net realized gains and net assets
were not affected by this change.
Use of Estimates The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of increases and
decreases in net assets from operations during the reporting period. Actual
results may differ from those estimates.
Note 2-Investment Advisory Fee and Other Transactions with Affiliate
The Trust pays an investment advisory fee to Lexington Management
Corporation ("LMC") at an annual rate of 1.00% of the Trust's average daily net
assets. LMC has entered into a sub-advisory management contract with Market
Systems Research Advisors, Inc. ("MSR"), a registered investment advisor, under
which MSR will provide the Trust with certain investment management and
administrative services. Pursuant to the terms
14
<PAGE>
Lexington Natural Resources Trust
Notes to Financial Statements
December 31, 1996 and 1995 (continued)
Note 2-Investment Advisory Fee and Other Transactions with Affiliate (continued)
of the sub-advisory contract between LMC and MSR, LMC pays MSR a monthly
sub-advisory fee of 0.50% of the Trust's average daily net assets. The
investment advisory contract provides that the total annual expenses of the
Trust (including management fees, but excluding interest, taxes, brokerage
commission and extraordinary expenses) will not exceed the level of expenses
which the Trust is permitted to bear under the most restrictive expense
limitation imposed by any state in which shares of the Trust are offered for
sale. No reimbursement was required for the year ended December 31, 1996.
The Trust also reimbursed LMC for certain expenses, including accounting
costs of $21,645, which are incurred by the Trust, but paid by LMC.
Note 3-Capital Stock
Transactions in capital stock were as follows:
<TABLE>
<CAPTION>
Year ended Year ended
December 31, 1996 December 31, 1995
------------------------ ----------------------
Shares Amount Shares Amount
------ ------ ------ ------
<S> <C> <C> <C> <C>
Shares sold ...................................... 1,945,915 $25,001,397 559,893 $5,848,911
Shares issued on reinvestment
of dividends ................................... 8,844 125,875 6,325 71,225
--------- ----------- -------- ----------
1,954,759 25,127,272 566,218 5,920,136
Shares redeemed .................................. (801,456) (10,231,592) (468,861) (4,853,040)
--------- ----------- -------- ----------
Net increase ..................................... 1,153,303 $14,895,680 97,357 $1,067,096
========= =========== ======== ==========
</TABLE>
Note 4-Purchases and Sales of Investments
The cost of purchases and proceeds from sales of investments for the year
ended December 31, 1996, excluding short-term securities, were $43,123,114 and
$25,472,156, respectively.
At December 31, 1996, aggregate gross unrealized appreciation for all
securities in which there is an excess of value over tax cost amounted to
$5,951,309 and aggregate gross unrealized depreciation for all investments in
which there is an excess of tax cost over value amounted to $218,866.
Note 5-Investment and Concentration Risks
The Trust makes significant investments in foreign securities and has a
policy of investing in the securities of companies that own or develop natural
resources and other basic commodities, or supply goods and services to such
companies. There are certain risks involved in investing in foreign securities
or concentrating in specific industries such as natural resources that are in
addition to the usual risks inherent in domestic investments. These risks
include those resulting from future adverse political and economic developments,
as well as the possible imposition of foreign exchange or other foreign
governmental restrictions or laws, all of which may affect the market and/or
credit risk of the investments.
15
<PAGE>
Lexington Natural Resources Trust
Financial Highlights
Selected per share data for a share outstanding throughout the period:
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------------
1996 1995 1994 1993 1992
------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period ............ $11.30 $ 9.71 $10.30 $ 9.30 $9.01
------ ------ ------ ------ -----
Income (loss) from investment operations:
Net investment income ......................... 0.05 0.06 0.04 - -
Net realized and unrealized gain (loss)
on investments .............................. 2.99 1.58 (0.59) 1.01 0.29
------ ------ ------ ------ -----
Total income (loss) from investment
operations .................................... 3.04 1.64 (0.55) 1.01 0.29
------ ------ ------ ------ -----
Less distributions:
Dividends from net investment income .......... (0.05) (0.05) (0.04) (0.01) -
------ ------ ------ ------ -----
Net asset value, end of period .................. $14.29 $11.30 $ 9.71 $10.30 $9.30
====== ====== ====== ====== =====
Total return .................................... 26.89% 16.87% (5.38%) 10.90% 3.22%
Ratios to average net assets:
Expenses ...................................... 1.42% 1.47% 1.55% 2.26% 2.31%
Net investment income ......................... 0.40% 0.56% 0.49% 0.08% 0.02%
Portfolio turnover rate ......................... 102.76% 149.18% 87.40% 114.44% 65.50%
Average commissions paid on equity secu-
rity transactions* ......................... $ 0.07 - - - -
Net assets at end of period (000's omitted) ..... $37,934 $16,955 $13,627 $5,325 $1,926
<FN>
*In accordance with recent SEC disclosure guidelines, the average commissions are calculated for the current period but not
for prior periods.
</FN>
</TABLE>
16
<PAGE>
Independent Auditors' Report
The Board of Trustees and Shareholders
Lexington Natural Resources Trust:
We have audited the accompanying statements of net assets (including the
portfolio of investments) and assets and liabilities of Lexington Natural
Resources Trust as of December 31, 1996, the related statements of operations
for the year then ended, the statements of changes in net assets for each of the
years in the two-year period then ended, and the financial highlights for each
of the years in the five-year period then ended. These financial statements and
financial highlights are the responsibility of the Trust's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1996 by correspondence with the custodian. 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 Natural Resources Trust 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 10, 1997
17
