DEAR CONTRACTHOLDER:
- --------------------------------------------------------------------------------
Lexington Natural Resources Trust finished calendar year 1998 with a total
return of -19.62%* which compares to -23.92% for the average natural resource
mutual fund monitored by Lipper, Inc. The natural resource sector was one of the
poorer performing areas of the market, as witnessed by the unmanaged Standard &
Poor's 500 Stock Price Index return of 28.7%, which represents a broad cross
section of economic sectors.
Helping the performance of your Fund was a strategic shift to the more
defensive areas within the energy sector. For example, we reduced our exposure
to exploration and drilling companies while increasing our commitment to the
more stable pipeline and utility distribution companies. These sectors helped
the Fund perform on a relative basis. Additionally, underweighting basic metals
companies and forest products contributed to our above average results in
comparison with other funds.
A reasonable question is to ask "why did the natural resource sector
perform so poorly" in a healthy economic environment? There are many answers to
that question. We will focus on those we believe had the greatest impact.
(1) Oil prices fell dramatically as economic weakness in the oil importing
countries continues to reduce demand. Also, OPEC countries continue to
violate agreed upon production quotas, increasing oil supply in the
face of falling demand, further depressing oil prices. These two
factors create a ripple effect on other company exploration budgets
and suppliers to the oil industry. A warmer than expected winter
contributed to the fall in natural gas prices as well. The clear
winner is the consumer where gasoline prices at the pump are the
lowest in recent memory.
(2) Raw material/commodity prices continued to fall. Again, well managed
companies had no choice but to accept profit margin squeezes if they
are to maintain revenue levels. Many of the Pacific Rim countries
accelerated exports of raw materials in order to help reduce their
current account deficit. That has helped Asia to bottom out but has
put additional supply in the world marketplace.
(3) There is no inflation to speak of in the world today. Traditionally,
precious metals and raw materials respond favorably to upticks in
inflation. Global excess capacity in almost all industries and a
deflationary bias in many sectors of the world, has kept resource
prices under pressure.
Our outlook is that we believe we have seen the worst. We believe that oil
at $10 a barrel and natural gas at $1.35 a metric cubic foot won't last. We are
also starting to see upticks in the fertilizer (phosphates) and forest products
sectors. We may be a little early but natural resources could be one of the
better sectors in 1999 as prices begin to move upward for many commodities.
Sincerely,
/s/ Robert M. DeMichele /s/ Frank A. Pelusa
----------------------- -------------------
Robert M. DeMichele Frank A. Peluso
Portfolio Manager and President Portfolio Manager
February, 1999 February, 1999
1
<PAGE>
- --------------------------------------------------------------------------------
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN
LEXINGTON NATURAL RESOURCES TRUST AND
THE UNMANAGED STANDARD & POOR'S 500 STOCK PRICE INDEX
[THE FOLLOWING TABLE REPRESENTS A CHART IN THE PRINTED REPORT]
Lexington
Year Natural S&P 500
Resources
=================================================
10/14/91 $10,000.00 $10,000.00
12/31/91 $10,238.35 $10,867.85
12/31/92 $10,567.89 $11,694.89
12/31/93 $11,719.89 $12,871.40
12/31/94 $11,089.71 $13,040.01
12/31/95 $12,960.20 $17,940.45
12/31/96 $16,445.58 $22,061.37
12/31/97 $17,621.33 $29,423.26
12/31/98 $14,163.76 $37,873,61
AVERAGE ANNUAL STANDARD TOTAL RETURNS
FOR THE PERIOD ENDED 12/31/98
FUND/INDEX 1 YEAR 5 YEAR SINCE INCEPTION
10/14/91
- ---------- ------ ------ ---------------
Lexington Natural
Resources Trust (19.62%) 3.86% 4.94%
S & P 500 28.72% 24.09% 20.26%
*Prior to October 14, 1991, the Fund opeerated under a different investment
objective.
This graph, prepared in accordance with SEC regulations, compares a $10,000
investment in the Fund with a similar investment in the Standard & Poor's 500
Stock Index ("S&P 500"). Results for the Fund and the S&P 500 include the
reinvestment of all dividend and capital gain distributions. Investment return
and principal value of an investment will fluctuate so that an investor's shares
when redeemed may be worth more or less than at their original cost. Total
return represents past performance and it is not predictive of future results.
- --------------------------------------------------------------------------------
*-19.62%, 3.86% and 4.94% are the one and five year and since commencement
(8/1/89) average annual standard total returns, respectively, for the year ended
December 31, 1998. Prior to September 1991, the Fund operated under a different
name and investment objective. Investment return and principal value of an
investment will fluctuate so that an investor's shares, when redeemed, may be
worth more or less than at their original cost. Total return represents past
performance and is not predictive of future results.
2
<PAGE>
LEXINGTON NATURAL RESOURCES TRUST
STATEMENT OF NET ASSETS
(INCLUDING THE PORTFOLIO OF INVESTMENTS)
December 31, 1998
NUMBER OF VALUE
SHARES SECURITY (NOTE 1)
- --------------------------------------------------------------------------------
COMMON STOCKS: 99.7%
BASIC MATERIALS: 8.1%
46,000 Martin Marietta Materials, Inc. ........ $ 2,860,625
-----------
ENERGY SOURCES: 71.3%
17,000 AES Corporation ........................ 805,375
32,000 Anadarko Petrol Corporation ............ 988,000
30,000 Aquarion Company ....................... 1,230,000
53,000 Avatar Holdings, Inc.1 ................. 834,750
20,000 Burlington Resources, Inc. ............. 716,250
12,500 Chevron Corporation .................... 1,036,719
22,000 Coastal Corporation .................... 768,625
20,000 Coflexip S.A. (ADR) .................... 650,000
23,000 Columbia Energy Group .................. 1,328,250
30,000 Diamond Offshore Drilling, Inc. ........ 710,625
18,200 Elf Aquitaine S.A. (ADR) ............... 1,030,575
14,600 Enbridge, Inc. ......................... 666,125
18,500 Enron Corporation ...................... 1,055,656
20,100 Exxon Corporation ...................... 1,469,812
40,000 Halliburton Company .................... 1,185,000
45,000 Nabors Industries, Inc. ................ 610,312
41,500 Noble Affiliates, Inc.1 ................ 1,021,937
25,000 PennzEnergy Company .................... 407,812
25,000 Pennzoil-Quaker State .................. 370,313
27,500 Piedmont Natural Gas Company, Inc....... 993,438
27,500 Schlumberger, Ltd. ..................... 1,268,438
56,500 Stolt Comex Seaway, S.A. (ADR).......... 377,844
20,000 Texaco, Inc. ........................... 1,057,500
64,000 The Williams Companies, Inc. ........... 1,996,000
20,000 Total S.A. (ADR) ....................... 995,000
30,000 USX-Marathon Group ..................... 903,750
28,000 YPF Sociedad Anonima (ADR) ............. 782,250
-----------
25,260,356
-----------
ENVIRONMENTAL TECHNOLOGY: 5.3%
47,000 Pall Corporation ....................... 1,189,688
15,000 Waste Management, Inc. ................. 699,375
-----------
1,889,063
-----------
PAPER AND FOREST PRODUCTS: 10.1%
50,000 Fort James Corporation ................. $ 2,000,000
35,000 International Paper Company ............ 1,568,438
-----------
3,568,438
-----------
PRECIOUS METALS: 4.9%
50,000 Placer Dome, Inc. ...................... 575,000
28,000 Stillwater Mining Company .............. 1,148,000
-----------
1,723,000
-----------
TOTAL INVESTMENTS: 99.7%
(cost $36,867,810+) (Note 1)............ 35,301,482
Other assets in excess of
liabilities: 0.3% ...................... 116,492
-----------
TOTAL NET ASSETS: 100.0%
(equivalent to $11.03 per
share on 3,211,597 shares
outstanding) ........................... $35,417,974
===========
- -------------------------
1 Non-income producing security.
ADR--American Depository Receipt.
+ Aggregate cost for Federal income tax is identical.
The Notes to Financial Statements are an integral part of this statement.
3
<PAGE>
LEXINGTON NATURAL RESOURCES TRUST
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1998
ASSETS
Investments, at value (cost $36,867,810) (Note 1) .............. $35,301,482
Cash ........................................................... 233,624
Receivable for shares sold ..................................... 5,466
Dividends and interest receivable .............................. 19,513
-----------
Total Assets .............................................. 35,560,085
-----------
LIABILITIES
Due to Lexington Management Corporation (Note 2) ............... 29,241
Payable for shares redeemed .................................... 76,880
Accrued expenses ............................................... 35,990
-----------
Total Liabilities ......................................... 142,111
-----------
NET ASSETS (equivalent to $11.03 per share on
3,211,597 shares outstanding) (Note 3) ........................ $35,417,974
===========
NET ASSETS consist of:
Paid-in capital-unlimited shares of beneficial
interest at no par value (Note 1) ............................ $39,213,580
Undistributed net investment income (Note 1) ................... 201,165
Accumulated net realized loss on investments (Notes 1 and 6) ... (2,430,443)
Unrealized depreciation of investments ......................... (1,566,328)
-----------
TOTAL NET ASSETS .......................................... $35,417,974
===========
The Notes to Financial Statements are an integral part of this statement.
4
<PAGE>
LEXINGTON NATURAL RESOURCES TRUST
STATEMENT OF OPERATIONS
Year ended December 31, 1998
<TABLE>
<CAPTION>
<S> <C> <C>
INVESTMENT INCOME
Dividends ....................................................... $ 780,422
Interest ........................................................ 62,665
------------
843,087
Less: foreign tax expense ....................................... 19,887
------------
Total investment income .................................... $ 823,200
EXPENSES
Investment advisory fee (Note 2) ............................. 480,891
Accounting expenses (Note 2) ................................. 46,348
Professional fees ............................................ 26,287
Printing and mailing expenses ................................ 24,721
Directors' fees and expenses ................................. 14,077
Computer processing fees ..................................... 13,508
Custodian expenses ........................................... 7,792
Registration fees ............................................ 1,061
Other expenses ............................................... 6,782
------------
Total expenses ............................................. 621,467
------------
Net investment income ...................................... 201,733
REALIZED AND UNREALIZED LOSS ON INVESTMENTS (NOTE 4)
Net realized loss on investments ............................. (2,286,879)
Net change in unrealized depreciation of investments ......... (8,067,438)
------------
Net realized and unrealized loss ........................... (10,354,317)
------------
DECREASE IN NET ASSETS RESULTING FROM OPERATIONS ................ $(10,152,584)
============
</TABLE>
The Notes to Financial Statements are an integral part of this statement.
5
<PAGE>
LEXINGTON NATURAL RESOURCES TRUST
STATEMENTS OF CHANGES IN NET ASSETS
Years ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Net investment income ................................................... $ 201,733 $ 245,932
Net realized gain (loss) from investment transactions ................... (2,286,879) 2,699,440
Net change in unrealized appreciation (depreciation) of investments ..... (8,067,438) 768,667
----------- -----------
Increase (decrease) in net assets resulting from operations .......... (10,152,584) 3,714,039
Distributions to shareholders from net investment income ................ (246,500) --
Distributions to shareholders from net realized gains from security
transactions ......................................................... (2,842,852) (1,902,822)
Increase (decrease) from capital share transactions (Note 3) ............ (16,602,952) 25,517,709
----------- -----------
Net increase (decrease) in net assets ................................ (29,844,888) 27,328,926
NET ASSETS:
Beginning of period ................................................... 65,262,862 37,933,936
----------- -----------
End of period (including undistributed net investment income of
$201,165 and $245,932 in 1998 and 1997, respectively) ............... $35,417,974 $65,262,862
=========== ===========
</TABLE>
The Notes to Financial Statements are an integral part of these statements.
6
<PAGE>
LEXINGTON NATURAL RESOURCES TRUST
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1997
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 Securities 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 prices is used. Securities traded on the over-the-counter market are
valued at the mean between the last current bid and asked prices. 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, 1998,
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 and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of increases and decreases in net assets
from operatons during the reporting period. Actual results could differ from
those estimates.
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 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. For 1998, the investment advisor has
voluntarily agreed to reimburse the Trust if total annual expenses (including
management fees, but excluding interest, taxes, brokerage commission and
extraordinary expenses) exceed 2.50% of the Trust's average net assets. No
reimbursement was required for the year ended December 31, 1998.
The Trust also reimburses LMC for certain expenses, including accounting
costs of $46,348, which are incurred by the Trust, but paid by LMC.
7
<PAGE>
LEXINGTON NATURAL RESOURCES TRUST
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1997 (continued)
3. CAPITAL STOCK
Transactions in capital stock were as follows:
<TABLE>
<CAPTION>
Year ended
December 31, 1998 December 31, 1997
------------------------------- ----------------------------
Shares Amount Shares Amount
------------- -------------- ------------ ------------
<S> <C> <C> <C> <C>
Shares sold ....................... 588,215 $ 8,218,783 3,601,366 $ 53,536,615
Shares issued on
reinvestment of dividends ....... 274,122 3,089,351 116,969 1,902,821
----------- ------------ ---------- ------------
862,337 11,308,134 3,718,335 55,439,436
Shares redeemed ................... (2,026,593) (27,911,086) (1,996,391) (29,921,727)
----------- ------------ ---------- ------------
Net increase (decrease) ........... (1,164,256) $(16,602,952) 1,721,944 $ 25,517,709
=========== ============ ========== ============
</TABLE>
4. PURCHASES AND SALES OF INVESTMENT SECURITIES
The cost of purchases and proceeds from sales of investments for the year
ended December 31, 1998, excluding short-term securities, were $34,664,638 and
$51,209,864, respectively.
At December 31, 1998, the aggregate gross unrealized appreciation for all
securities in which there is an excess of value over tax cost amounted to
$2,879,567 and aggregate gross unrealized depreciation for all securities in
which there is an excess of tax cost over value amounted to $4,445,895.
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 could affect the market and/or
credit risk of the investments.
6. FEDERAL INCOME TAXES-CAPITAL LOSS CARRYFORWARDS
Capital loss carryforwards available for Federal income tax purposes as of
December 31, 1998 are $2,430,444 expiring in 2006.
To the extent any future capital gains are offset by these losses, such
gains would not be distributed to contractholders.
7. TAX INFORMATION (UNAUDITED)
The Trust designates $2,809,529, whether take in shares or in cash, as 20%
long-term capital gain distributions.
8
<PAGE>
LEXINGTON NATURAL RESOURCES TRUST
FINANCIAL HIGHLIGHTS
Selected per share data for a share outstanding throughout the period:
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------------------------------------------------
1998 1997 1996 1995 1994
--------------- ------------ ------------ ---------- -----------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period ...... $ 14.91 $ 14.29 $ 11.30 $ 9.71 $ 10.30
-------- ------- ------- ------- -------
Income (loss) from investment operations:
Net investment income .................... 0.08 0.06 0.05 0.06 0.04
Net realized and unrealized gain
(loss) on investments and foreign
currency transactions .................. (2.98) 1.00 2.99 1.58 (0.59)
-------- ------- ------- ------- -------
Total income (loss) from investment
operations ............................... (2.90) 1.06 3.04 1.64 (0.55)
-------- ------- ------- ------- -------
Less distributions:
Distributions from net investment
income ................................... (0.08) -- (0.05) (0.05) (0.04)
Distributions from net realized gains ..... (0.90) (0.44) -- -- --
-------- ------- -------- -------- -------
Total distributions ....................... (0.98) (0.44) (0.05) (0.05) (0.04)
-------- ------- -------- -------- -------
Net asset value, end of period ............ $ 11.03 $ 14.91 $ 14.29 $ 11.30 $ 9.71
======== ======= ======== ======== =======
Total return .............................. (19.62)% 7.15% 26.89% 16.87% (5.38)%
Ratio to average net assets:
Expenses ................................. 1.29% 1.25% 1.42% 1.47% 1.55%
Net investment income .................... 0.42% 0.39% 0.40% 0.56% 0.49%
Portfolio turnover rate ................... 74.36% 114.16% 102.76% 149.18% 87.40%
Net assets, end of period (000's
omitted) ................................. $ 35,418 $ 65,263 $ 37,934 $ 16,955 $13,627
</TABLE>
9
<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, 1998, the related statement of operations for
the year then ended, the statements of changes in net assets for each of the
years in the two-year period then ended, and the financial highlights for each
of the years in the five-year period then ended. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights. Our procedures included confirmation of
securities owned as of December 31, 1998 by correspondence with the custodian
and brokers. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
Lexington Natural Resources Trust as of December 31, 1998, 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 LLP
New York, New York
February 8, 1999
10
<PAGE>
LEXINGTON
LEXINGTON
NATURAL RESOURCES TRUST [LOGO]
INVESTMENT ADVISER
- ----------------------------------------
LEXINGTON MANAGEMENT CORPORATION
P.O. Box 1515
Park 80 West Plaza Two LEXINGTON
Saddle Brook, New Jersey 07663 NATURAL
RESOURCES
TRUST
SUB-ADVISER -------------
- ----------------------------------------
MARKET SYSTEMS RESEARCH ADVISORS, INC. ANNUAL REPORT
80 Maiden Lane DECEMBER 31, 1998
New York, New York 10038
The Lexington Group
DISTRIBUTOR of NO LOAD
- ---------------------------------------- Investment Companies
LEXINGTON FUNDS DISTRIBUTOR, INC.
P.O. Box 1515
Park 80 West Plaza Two
Saddle Brook, New Jersey 07663
This report has been prepared for the information of the shareholders of
Lexington Natural Resources Trust and is authorized for distribution to the
public only if it is accompanied or preceded by a currently effective prospectus
which sets forth expenses and other material information.
