PROSPECTUS
May 1, 1995
Lexington International Fund, Inc.
P.O. Box 1515 / Park 80 West Plaza Two, Saddle Brook, New Jersey 07663
Toll Free: Service--1-800-526-0056
24 Hour Account Information--1-800-526-0052
A NO-LOAD MUTUAL FUND WHOSE INVESTMENT OBJECTIVE IS LONG-TERM GROWTH OF
CAPITAL THROUGH INVESTMENT IN COMPANIES DOMICILED IN FOREIGN COUNTRIES.
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Lexington International Fund (the "Fund") is a no-load open-end
diversified management investment company. The Fund's investment
objective is to seek long-term growth of capital through investment in
common stocks and equivalents of companies domiciled in foreign
countries.
Lexington Management Corporation ("LMC") is the Fund's investment
adviser. Lexington Funds Distributor, Inc. ("LFD") is the distributor of
Fund shares.
This Prospectus sets forth information about the Fund you should
know before investing. It should be read and retained for future
reference.
A Statement of Additional Information dated May 1, 1995, which
provides a further discussion of certain matters in this Prospectus and
other matters that may be of interest to some investors, has been filed
with the Securities and Exchange Commission and is incorporated herein
by reference. For a free copy, call the appropriate telephone number
above or write to the address listed above.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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Investors Should Read and Retain this Prospectus for Future Reference
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FEE TABLE
<TABLE>
Annual Fund Operating Expenses: (as a percentage of average net assets):
<S> <C>
Management fees .......................................................................................... 1.00%
12b-1 fees ............................................................................................... 0.25%
Other fees ............................................................................................... 1.14%
----
Total Fund Operating Expenses ............................................................................ 2.39%
====
</TABLE>
<TABLE>
<CAPTION>
Example: 1 year 3 years 5 years 10 years
------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000
investment, assuming (1) 5% annual return and
(2) redemption at the end of each period .................................... $24.21 $74.55 $127.55 $272.63
</TABLE>
*These expenses may not exceed 0.25% of the Fund's average net assets annually.
(See "Distribution Plan"). After a substantial period, these expenses may total
more than the maximum sales expense that would have been permissible if imposed
entirely as an initial sales charge.
The purpose of the foregoing table is to assist an investor in understanding
the various costs and expenses that an investor in the Fund will bear directly
and indirectly. (For more complete descriptions of the various costs and
expenses, see "Management of the Fund" below.) The Expenses and Example
appearing in the table above are based on the Fund's expenses for the period
from January 3, 1994 to December 31, 1994. The Example shown in the table above
should not be considered a representation of past or future expenses and actual
expenses may be greater or less than those shown.
FINANCIAL HIGHLIGHTS
The following Per Share Income and Capital Changes Information for the
period January 3, 1994 (commencement of operations) to December 31, 1994 has
been audited by KPMG Peat Marwick LLP, Independent Auditors, whose report
thereon appears in the Statement of Additional Information. This information
should be read in conjunction with the Financial Statements and related notes
thereto included in the Statement of Additional Information. The Fund's annual
report, which contains additional performance information, is available upon
request and without charge.
Selected Per Share Data for a share outstanding throughout the period:
<TABLE>
<CAPTION>
January 3, 1994
(commencement of
operations) to
December 31, 1994
-----------------
<S> <C>
Net asset value, beginning of period ....................................................... $10.00
------
Income (loss) from investment operations:
Net investment loss ...................................................................... (.08)
Net realized and unrealized gain on investments .......................................... .67
------
Total income from investment operations ............................................. .59
------
Less distributions:
Distributions from net realized capital gains ............................................ (.10)
Distributions in excess of net realized capital gains (Temporary book-tax difference) .... (.12)
------
Total distributions ................................................................. (.22)
------
Net asset value, end of period ............................................................. $10.37
======
Total return ............................................................................... 5.87%
Ratio to average net assets:
Expenses 2.39%
Net investment loss ...................................................................... (.94%)
Portfolio turnover ......................................................................... 100.10%
Net assets at end of period (000's omitted) ................................................ $17,843
</TABLE>
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INVESTMENT OBJECTIVE AND POLICIES
Lexington International Fund (the "Fund"), a series of Lexington
International Fund, Inc. (the "Company"), is an open-end, diversified management
investment company. The Fund's investment objective is to seek long-term growth
of capital through investment in common stocks and equivalents of companies
domiciled in foreign countries.
The Fund will seek to achieve its objective through investment in a
diversified portfolio of securities that will consist of all types of common
stocks and equivalents (the following constitute equivalents: convertible debt
securities, warrants and options). The Fund may also invest in preferred stocks,
bonds and other debt obligations, which consist of money market instruments of
foreign and domestic companies and U.S. government and foreign governments,
governmental agencies and international organizations. There can be no assurance
that the Fund will be able to achieve its investment objective.
The Fund will at all times invest at least 65% or more of its assets in at
least three countries outside of the United States. The Fund is not required to
maintain any particular geographic or currency mix of its investments, nor is it
required to maintain any particular proportion of stocks, bonds or other
securities in its portfolio. The Fund may, however, invest substantially or
primarily in foreign debt securities when it appears that the capital
appreciation available from investments in such securities will equal or exceed
the capital appreciation available from investments in equity securities.
Because the market value of debt obligations can be expected to vary inversely
to changes in prevailing interest rates, investing in debt obligations may
provide an opportunity for capital appreciation when interest rates are expected
to decline. The Fund intends to invest in debt securities which on the date of
investment are within the four highest ratings of Moody's Investors Service
(Aaa, Aa, A, Baa for bonds; and within the three highest ratings, MIG 1, MIG 2,
MIG 3 for notes; P-1 for commercial paper; VMIG 1, VMIG 2 for variable rate
securities) or Standard & Poor's Corporation (AAA, AA, A, BBB for bonds; A-1 for
commercial paper). The Fund may invest in bonds which are not rated if, based
upon credit analysis by LMC, it is believed that such bonds are of comparable
quality to investment grade bonds. Bonds rated Baa or BBB while considered
investment grade may have speculative characteristics as well. A defensive
position would exist when in the judgment of LMC conditions in the securities
market would make pursuing the Fund's basic investment strategy inconsistent
with the best interests of the shareholders. At such time, the Fund may
temporarily invest up to 100% of its assets in debt obligations, which consist
of repurchase agreements, money market instruments of foreign or domestic
companies and U.S. Government and foreign governments, governmental and
international organizations.
The Fund intends to provide investors with the opportunity to invest in a
portfolio of securities of companies and governments located throughout the
world. In making the allocation of assets among the various countries and
geographic regions, LMC ordinarily considers such factors as prospects for
relative economic growth; expected levels of inflation and interest rates;
government policies influencing business conditions; the range of investment
opportunities available to international investors; and other pertinent
financial, tax, social, political and national factors-all in relation to the
prevailing prices of the securities in each country or region.
Investments may be made in companies based in (or governments of or within)
the Pacific Basin (mainly Japan, Australia, Singapore, Malaysia and Hong Kong)
and Western Europe (mainly the United Kingdom, Germany, Switzerland, the
Netherlands, France, Sweden, Spain, Italy, Belgium, Norway and Denmark), as well
as such other areas and countries as LMC may determine from time to time. The
Fund may invest in companies located in developing countries without limitation.
Such countries may have relatively unstable governments, economies based on only
a few industries, and securities markets which trade a small number of
companies. Prices on these exchanges tend to be volatile and in the past these
exchanges have offered greater potential for gain, as well as loss, than
exchanges in developed countries. While the Fund invests only in countries that
it considers as having relatively stable and friendly governments it is possible
that certain Fund investments could be subject to foreign expropriation or
exchange control restrictions. See "Risk Considerations" on Page 5.
Although the Fund does not intend to invest for the purpose of seeking
short-term profits, the Fund's investments may be changed whenever the adviser
deems it appropriate to do so, without regard to the length of time a particular
security has been held. It is expected that the Fund will have an annual
portfolio turnover rate that will generally not exceed 75%. A 100% turnover rate
would occur if all the Fund's portfolio investments were sold and either
repurchased or replaced within a year. A higher
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<PAGE>
turnover rate results in correspondingly greater brokerage commissions and other
transactional expenses which are borne by the Fund. The Fund's portfolio
turnover rate for the year ended December 31, 1994 was 100.10%. High portfolio
turnover may result in the realization of net short-term capital gains by the
Fund which, when distributed to shareholders, will be taxable as ordinary
income. See "Tax Matters."
Certain Investment Methods: The Fund may from time to time engage in the
following investment practices:
Settlement Transactions-The Fund may, for a fixed amount of United States
dollars, enter into a forward foreign exchange contract for the purchase or sale
of the amount of foreign currency involved in the underlying securities
transaction. In so doing, the Fund will attempt to insulate itself against
possible losses and gains resulting from a change in the relationship between
the United States dollar and the foreign currency during the period between the
date a security is purchased or sold and the date on which payment is made or
received. This process is known as "transaction hedging".
To effect the translation of the amount of foreign currencies involved in
the purchase and sale of foreign securities and to effect the "transaction
hedging" described above, the Fund may purchase or sell foreign currencies on a
"spot" (i.e. cash) basis or on a forward basis whereby the Fund purchases or
sells a specific amount of foreign currency, at a price set at the time of the
contract, for receipt of delivery at a specified date which may be any fixed
number of days in the future.
Such spot and forward foreign exchange transactions may also be utilized to
reduce the risk inherent in fluctuations in the exchange rate between the United
States dollar and the relevant foreign currency when foreign securities are
purchased or sold for settlement beyond customary settlement time (as described
below). Neither type of foreign currency transaction will eliminate fluctuations
in the prices of the Fund's portfolio or securities or prevent loss if the price
of such securities should decline.
Portfolio Hedging-When, in the opinion of LMC, it is desirable to limit or
reduce exposure in a foreign currency in order to moderate potential changes in
the United States dollar value of the portfolio, the Fund may enter into a
forward foreign currency exchange contract by which the United States dollar
value of the underlying foreign portfolio securities can be approximately
matched by an equivalent United States dollar liability. The Fund, for hedging
purposes only, may also enter into forward currency exchange contracts to
increase its exposure to a foreign currency that LMC expects to increase in
value relative to the United States dollar. The Fund will not attempt to hedge
all of its portfolio positions and will enter into such transactions only to the
extent, if any, deemed appropriate by the investment adviser. Hedging against a
decline in the value of currency does not eliminate fluctuations in the prices
of portfolio securities or prevent losses if the prices of such securities
decline. The Fund will not enter into forward foreign currency exchange
transactions for speculative purposes. The Fund intends to limit such
transactions to not more than 70% of total Fund assets.
Forward Commitments-The Fund may make contracts to purchase securities for a
fixed price at a future date beyond customary settlement time ("forward
commitments") because new issues of securities are typically offered to
investors, such as the Fund, on that basis. Forward commitments involve a risk
of loss if the value of the security to be purchased declines prior to the
settlement date. This risk is in addition to the risk of decline in value of the
Fund's other assets. Although the Fund will enter into such contracts with the
intention of acquiring the securities, the Fund may dispose of a commitment
prior to settlement if the investment adviser deems it appropriate to do so. The
Fund may realize short-term profits or losses upon the sale of forward
commitments.
Covered Call Options-The Fund may seek to preserve capital by writing covered
call options on securities which it owns. Such an option on an underlying
security would obligate the Fund to sell, and give the purchaser of the option
the right to buy that security at a stated exercise price at any time until a
stated expiration date of the option. The premium paid by the purchaser of an
option will be income to the Fund.
Repurchase Agreements-A repurchase agreement is a contract under which the Fund
would acquire a security for a relatively short period (usually not more than 7
days) subject to the obligations of the seller to repurchase and the Fund to
resell such security at a fixed time and price (representing the Fund's cost
plus interest). Although the Fund may enter into repurchase agreements with
respect to any portfolio securities which it may acquire consistent with its
investment policies and restrictions, it is the Fund's present intention to
enter into repurchase agreements only with respect to obligations of the United
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<PAGE>
States government or its agencies or instrumentalities to meet anticipated
redemptions or pending investments or reinvestment of Fund assets in portfolio
securities. The Fund will enter into repurchase agreements only with member
banks of the Federal Reserve System and with "primary dealers" in United States
government securities. Repurchase agreements are considered to be loans which
must be fully collateralized including interest earned thereon during the entire
term of the agreement. 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 market value of the collateral securities. The Fund intends to limit
repurchase agreements to institutions believed by LMC to present minimal credit
risk. The Fund will not enter into repurchase agreements maturing in more than
seven days if the aggregate of such repurchase agreements and all other illiquid
securities when taken together would exceed 10% of the total assets of the Fund.
Except as otherwise specifically noted, the Fund's investment objective and
its investment restrictions are fundamental and may not be changed without the
approval of a majority of the outstanding voting securities of the Fund. The
Statement of Additional Information contains a complete description of the
Fund's restrictions and additional information on policies relating to the
investment of its assets and its activities.
Portfolio Transactions
The primary consideration in placing security transactions is execution at
the most favorable prices, consistent with best execution. See the Statement of
Additional Information for a further discussion of brokerage allocation.
RISK CONSIDERATIONS
Investors should recognize that investing in securities of foreign companies
and in particular securities of companies domiciled in or doing business in
emerging markets and emerging countries involves certain risk considerations,
including those set forth below, which are not typically associated with
investing in securities of U.S. companies.
Foreign Currency Considerations
The Fund's assets will be invested in securities of foreign companies and
substantially all income will be received by the Fund in foreign currencies.
However, the Fund will compute and distribute its income in dollars, and the
computation of income will be made on the date of its receipt by the Fund at the
foreign exchange rate in effect on that date. Therefore, if the value of the
foreign currencies in which the Fund receives its income falls relative to the
dollar between receipt of the income and the making of Fund distributions, the
Fund will be required to liquidate securities in order to make distributions if
the Fund has insufficient cash in dollars to meet distribution requirements.
The value of the assets of the Fund as measured in dollars also may be
affected favorably or unfavorably by fluctuations in currency rates and exchange
control regulations. Further, the Fund may incur costs in connection with
conversions between various currencies. Foreign exchange dealers realize a
profit based on the difference between the prices at which they are buying and
selling various currencies. Thus, a dealer normally will offer to sell a foreign
currency to the Fund at one rate, while offering a lesser rate of exchange
should the Fund desire inmmediately to resell that currency to the dealer. The
Fund will conduct its foreign currency exchange transactions either on a spot
(i.e., cash) basis at the spot rate prevailing in the foreign currency exchange
market, or through entering into forward or futures contracts to purchase or
sell foreign currencies.
Investment and Repatriation Restrictions
Some foreign countries have laws and regulations which currently preclude
direct foreign investment in the securities of their companies. However,
indirect foreign investment in the securities of companies listed and traded on
the stock exchanges in these countries is permitted by certain foreign countries
through investment funds which have been specifically authorized. The Fund may
invest in these investment funds subject to the provisions of the 1940 Act as
discussed under "Investment
5
<PAGE>
Restrictions" in the Statement of Additional Information. If the Fund invests in
such investment funds, the Fund's shareholders will bear not only their
proportionate share of the expenses of the Fund (including operating expenses
and the fees of the Investment Manager), but also will bear indirectly similar
expenses of the underlying investment funds.
In addition to the foregoing investment restrictions, prior governmental
approval for foreign investments may be required under certain circumstances in
some foreign countries, while the extent of foreign investment in domestic
companies may be subject to limitation in other foreign countries. Foreign
ownership limitations also may be imposed by the charters of individual
companies in foreign countries to prevent, among other concerns, violation of
foreign investment limitations.
Repatriation of investment income, capital and the proceeds of sales by
foreign investors may require governmental registration and/or approval in some
foreign countries. The Fund could be adversely affected by delays in or a
refusal to grant any required governmental approval for such repatriation.
Foreign Securities Markets
Trading volume on foreign stock exchanges is substantially less than that on
the New York Stock Exchange. Further, securities of some foreign companies are
less liquid and more volatile than securities of comparable U.S. companies.
Similarly, volume and liquidity in most foreign bond markets is substantially
less than in the U.S. and, consequently, volatility of price can be greater than
in the U.S. Fixed commissions on foreign stock exchanges are generally higher
than negotiated commissions on U.S. exchanges, although the Fund endeavors to
achieve the most favorable net results on its portfolio transactions and may be
able to purchase the securities in which the Fund may invest on other stock
exchanges where commissions are negotiable.
Companies in foreign countries are not generally subject to uniform
accounting, auditing and financial reporting standards, practices and disclosure
requirements comparable to those applicable to U.S. companies. Consequently,
there may be less publicly available information about a foreign company than
about a U.S. company. Further, there is generally less governmental supervision
and regulation of foreign stock exchanges, brokers and listed companies than in
the U.S. Further, these Funds may encounter difficulties or be unable to pursue
legal remedies and obtain judgments in foreign courts. Further risk factors,
including use of domestic and foreign custodian banks and depositories, are
described elsewhere in the Prospectus and in the Statement of Additional
Information.
Economic and Political Risks
The economies of individual foreign countries may differ favorably or
unfavorably from the U.S. economy in such respects as growth of gross domestic
product, rate of inflation, capital reinvestment, resource self-sufficiency and
balance of payments position. Further, the economies of developing countries
generally are heavily dependent upon international trade and, accordingly, have
been and may continue to be adversely affected by trade barriers, managed
adjustments in relative currency values and other protectionist measures imposed
or negotiated by the countries with which they trade. These economies also have
been and may continue to be adversely affected by economic conditions in the
countries with which they trade.
With respect to any foreign country, there is the possibility of
nationalization, expropriation or confiscatory taxation, political changes,
government regulation, social instability or diplomatic developments (including
war) which could affect adversely the economies of such countries or the Fund's
investments in those countries. In addition, it may be more difficult to obtain
a judgement in a court outside of the United States.
INVESTMENT RESTRICTIONS
The Fund's investment program is subject to a number of investment
restrictions which reflect self imposed standards as well as federal and state
regulatory limitations. These restrictions are designed to minimize certain
risks associated with investing in certain types of securities or engaging in
certain transactions. The most significant of these restrictions provide that:
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<PAGE>
(1) The Fund will not borrow money, except that (a) the Fund may enter into
certain futures contracts and options related thereto; (b) the Fund may
enter into commitments to purchase securities in accordance with the
Fund's investment program, including delayed delivery and when-issued
securities and reverse repurchase agreements; (c) for temporary
emergency purposes, the Fund may borrow money in amounts not exceeding
5% of the value of its total assets at the time when the loan is made;
(d) The Fund may pledge its portfolio securities or receivables or
transfer or assign or otherwise encumber them in an amount not exceeding
one-third of the value of its total assets; and (e) for purposes of
leveraging, the Fund may borrow money from banks (including its
custodian bank), only if, immediately after such borrowing, the value of
the Fund's assets, including the amount borrowed, less its liabilities,
is equal to at least 300% of the amount borrowed, plus all outstanding
borrowings. If at any time, the value of the Fund's assets fails to meet
the 300% asset coverage requirement relative only to leveraging, the
Fund will, within three days (not including Sundays and holidays),
reduce its borrowings to the extent necessary to meet the 300% test. The
Fund only will invest up to 5% of its total assets in reverse repurchase
agreements.
(2) The Fund will not make loans, except that, to the extent appropriate
under its investment program, the Fund may (a) purchase bonds,
debentures or other debt securities, including short-term obligations,
(b) enter into repurchase transactions and (c) lend portfolio securities
provided that the value of such loaned securities does not exceed
one-third of the Fund's total assets.
(3) The Fund will not concentrate its investments in any one industry,
except that the Fund may invest up to 25% of its total assets in
securities issued by companies principally engaged in any one industry.
The Fund considers foreign government securities and supranational
organizations to be industries. This limitation, however, will not apply
to securities issued or guaranteed by the U.S. Government, its agencies
and instrumentalities.
(4) The Fund will not purchase securities of an issuer, if (a) more than 5%
of the Fund's total assets taken at market value would at the time be
invested in the securities of such issuer, except that such restriction
shall not apply to securities issued or guaranteed by the United States
government or its agencies or instrumentalities or, with respect to 25%
of the Fund's total assets, to securities issued or guaranteed by the
government of any country other than the United States which is a member
of the Organization for Economic Cooperation and Development ("OECD").
The member countries of OECD are at present: Australia, Austria,
Belgium, Canada, Denmark, Germany, Finland, France, Greece, Iceland,
Ireland, Italy, Japan, Luxembourg, the Netherlands, New Zealand, Norway,
Portugal, Spain, Sweden, Switzerland, Turkey, the United Kingdom and the
United States; or (b) such purchases would at the time result in more
than 10% of the outstanding voting securities of such issuer being held
by the Fund.
The forgoing investment restrictions (as well as certain others set forth in
the Statement of Additional Information) are matters of fundamental policy which
may not be changed without the affirmative vote of the majority of the
shareholders of the Fund.
The investment policies described below are non-fundamental, therefore,
changes to such policies may be made in the future by the Board of Directors
without the approval of the shareholders of the Fund:
(1) The Fund may purchase and sell futures contracts and related options
under the following conditions: (a) the then-current aggregate futures
market prices of financial instruments required to be delivered and
purchased under open futures contracts shall not exceed 30% of the
Fund's total assets, at market value; and (b) no more than 5% of the
assets, at market value at the time of entering into a contract, shall
be committed to margin deposits in relation to futures contracts.
(2) The Fund will not invest more than 15% of its total assets in illiquid
securities. Illiquid securities are securities that are not readily
marketable or cannot be disposed of promptly within seven days and in
the usual course of business without taking a materially reduced price.
Such securities include, but are not limited to, time deposits and
repurchase agreements with maturities longer than seven days. Securities
that may be resold under Rule 144A or securities offered pursuant to
Section 4(2) of the Securities Act of 1933, as amended, shall not be
deemed illiquid solely by reason of being unregistered. The Investment
Adviser shall determine whether a particular security is deemed to be
liquid based on the trading markets for the specific security and other
factors.
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The Statement of Additional Information contains a complete description of
the Fund's restrictions and additional information on policies relating to the
investment of its assets and its activities.
MANAGEMENT OF THE FUND
The Company has a Board of Directors which establishes the Fund's policies
and supervises and reviews the operations and management of the Fund. Lexington
Management Corporation ("LMC"), P.O. Box 1515 Park 80 West Plaza Two, Saddle
Brook, New Jersey 07663, is the investment adviser of shares of the Fund. For
its investment management services to the Fund, LMC will receive a monthly fee
at the annual rate of 1% of the Fund's average daily net assets which is higher
than that paid by most other investment companies. However, it is not
necessarily greater than the management fee of other investment companies with
objectives and policies similar to this Fund. Lexington Funds Distributor, Inc.
("LFD"), a registered broker-dealer, is the Fund's distributor. LMC also acts as
administrator to the Fund and performs certain administrative and accounting
services, including but not limited to, maintaining general ledger accounts,
regulatory compliance, preparation of financial information for semiannual and
annual reports, preparing registration statements, calculating net asset values,
shareholder communications and supervision of the custodian, transfer agent and
provides facilities for such services. The Fund shall reimburse LMC for its
actual cost in providing such services, facilities and expenses. The operating
expenses of the Fund can be expected to be higher than that of an investment
company investing exclusively in United States securities.
LMC was established in 1938 and currently manages and administers over $3.8
billion in assets. LMC serves as investment adviser to other investment
companies and private and institutional investment accounts. Included among
these clients are persons and organizations that own significant amounts of
capital stock of LMC's parent, Piedmont Management Company Inc. The clients pay
fees that LMC considers comparable to the fees paid by similarly served clients.
LMC and LFD are wholly-owned subsidiaries of Piedmont Management Company
Inc., a Delaware corporation with offices at 80 Maiden Lane, New York, New York
10038. Descendants of Lunsford Richardson, Sr., their spouses, trusts and other
related entities are the beneficial owners of a majority of the shares of
Piedmont Management Company Inc. common stock. See "Investment Adviser and
Distributor" in the Statement of Additional Information.
PORTFOLIO MANAGER
The Fund is managed by an investment management team. Richard T. Saler is
the lead manager.
Richard T. Saler, Senior Vice President, Director of International
Investment Strategy of LMC is responsible for international investment analysis
and portfolio management at LMC. He has nine years of investment experience. Mr.
Saler has focused on international markets since first joining LMC in 1986. In
1991 he was a strategist with Nomura Securities and rejoined LMC in 1992. Mr.
Saler is a graduate of New York University with a B.S. Degree in Marketing and
an M.B.A. in Finance from New York University's Graduate School of Business
Administration.
HOW TO PURCHASE SHARES
Initial Investment-Minimum $1,000. By Mail: Send a check payable to Lexington
International Fund along with a completed New Account Application to State
Street Bank and Trust Company (the "Agent").
Subsequent Investments-Minimum $50. By Mail: Send a check payable to Lexington
International Fund to the Agent, accompanied by either the detachable form which
is part of the confirmation of a prior transaction or a letter indicating the
dollar amount of the investment and identifying the Fund, account number and
registration.
Broker-Dealers: You may invest in shares of the Fund through broker-dealers who
are members of the National Association of Securities Dealers, Inc., and other
financial institutions and who have selling agreements with LFD. Broker-dealers
and financial institutions who process such purchase and sale transactions for
their customers may charge a transaction fee for these services. The fee may be
avoided by purchasing shares directly from the Fund.
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<PAGE>
The Open Account: By investing in the Fund, a shareholder appoints the Agent, as
his agent, to establish an open account to which all shares purchased will be
credited, together with any dividends and capital gain distributions which are
paid in additional shares. Stock certificates will be issued for full shares
only when requested in writing. Unless payment for shares is made by certified
or cashier's check or federal funds wire, certificates will not be issued for 30
days. In order to facilitate redemptions and transfers, most shareholders elect
not to receive certificates.
After an Open Account is established, payments can be provided for by
"Lex-O-Matic" or other authorized automatic bank check program accounts (checks
drawn on the investor's bank periodically for investment in the Fund).
On payroll deduction accounts administered by an employer and on payments
into qualified pension or profit sharing plans and other continuing purchase
programs, there are no minimum purchase requirements.
Determination of Net Asset Value: The net asset value of the shares of the Fund
is computed 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. 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 Directors that amortized cost reflects the fair value of such
securities. Securities for which market quotations are not readily available and
other assets are valued at fair value as determined by the management and
approved in good faith by the Board of Directors.
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 LMC and approved in good faith by the Directors.
For purposes of determining the net asset value per share of the Fund all
assets and liabilities initially expressed in foreign currencies will be
converted into United States dollars at the mean between the bid and offer
prices of such currencies against United States dollars quoted by any major
bank.
Terms of Offering: If an order to purchase shares is cancelled because the
investor's check does not clear, the purchaser will be responsible for any loss
incurred by the Fund. To recover any such loss the Fund reserves the right to
redeem shares owned by the purchaser, seek reimbursement directly from the
purchaser and may prohibit or restrict the purchaser in placing future orders in
any of the Lexington Funds.
The Fund reserves the right to reject any order, and to waive or lower the
investment minimums with respect to any person or class of persons, including
shareholders of the Fund's special investment programs. An order to purchase
shares is not binding on the Fund until it has been confirmed by the Agent.
Account Statements: The Agent will send shareholders either purchasing or
redeeming shares of the Fund, a confirmation of the transaction indicating the
date the purchase or redemption was accepted, the number of shares purchased or
redeemed, the purchase or redemption price per share, and the amount purchased
or redemption proceeds. A statement is also sent to shareholders whenever a
distribution is paid, or when a change in the registration, address, or dividend
option occurs. Shareholders are urged to retain their account statements for tax
purposes.
9
<PAGE>
HOW TO REDEEM SHARES
By Mail: Send to the Agent: (1) a written request for redemption, signed by each
registered owner exactly as the shares are registered including the name of the
Fund, account number and exact registration; (2) stock certificates for any
shares to be redeemed which are held by the shareholder; (3) signature
guarantees, when required, and (4) the additional documents required for
redemptions by corporations, executors, administrators, trustees, and guardians.
Redemptions by mail will not become effective until all documents in proper form
have been received by the Agent. If a shareholder has any questions regarding
the requirements for redeeming shares, he should call the Fund at the toll free
number on the back cover prior to submitting a redemption request. If a
redemption request is sent to the Fund in New Jersey, it will be forwarded to
the Agent and the effective date of redemption will be the date received by the
Agent.
Checks for redemption proceeds will normally be mailed within seven days,
but will not be mailed until all checks in payment for the shares to be redeemed
have been cleared.
Signature Guarantee: Signature guarantees are required in connection with (a)
redemptions by mail involving $10,000 or more; (b) all redemptions by mail,
regardless of the amount involved, when the proceeds are to be paid to someone
other than the registered owners; (c) changes in instructions as to where the
proceeds of redemptions are to be sent, and (d) share transfer requests.
The Agent requires that the guarantor be either a commercial bank which is a
member of the Federal Deposit Insurance Corporation, a trust company, a savings
and loan association, a savings bank, a credit union, a member firm of a
domestic stock exchange, or a foreign branch of any of the foregoing. A notary
public is not an acceptable guarantor.
With respect to redemption requests submitted by mail, the signature
guarantees must appear either: (a) on the written request for redemption, (b) on
a separate instrument of assignment ("stock power") specifying the total number
of shares to be redeemed, or (c) on all stock certificates tendered for
redemption and, if shares held by the Agent are also being redeemed, on the
letter or stock power.
Redemption Price: The redemption price will be the net asset value per share of
the Fund next determined after receipt by the Agent of a redemption request in
proper form (see "Determination of Net Asset Value" in the Statement of
Additional Information).
The right of redemption may be suspended (a) for any period during which the
New York Stock Exchange is closed or the Securities and Exchange Commission
("SEC") determines that trading on the Exchange is restricted, (b) when there is
an emergency as determined by the SEC as a result of which it is not reasonably
practicable for the Fund to dispose of securities owned by it or to determine
fairly the value of its net assets, or (c) for such other periods as the SEC may
by order permit for the protection of shareholders of the Fund. Due to the
proportionately high cost of maintaining smaller accounts, the Fund reserves the
right to involuntarily redeem all shares in an account with a value of less than
$500 (except retirement plan accounts) for reasons other than market
fluctuations and mail the proceeds to the shareholder. Shareholders will be
notified before these redemptions are to be made and will have 30 days to make
an additional investment to bring their accounts up to the required minimum.
SHAREHOLDER SERVICES
Transfer: Shares of the Fund may be transferred to another owner. A signature
guarantee of the registered owner is required on the letter of instruction or
accompanying stock power.
Systematic Withdrawal Plan: Shareholders may elect to withdraw cash in fixed
amounts from their accounts at regular intervals. The minimum investment to
establish a Systematic Withdrawal Plan is $10,000. If the proceeds are to be
mailed to someone other than the registered owner, a signature guarantee is
required.
Group Sub-Accounting: To minimize recordkeeping by fiduciaries, corporations and
certain other investors, the minimum initial investment may be waived.
10
<PAGE>
EXCHANGE PRIVILEGE
Shares of the Fund may be exchanged for shares of the following Lexington
Funds on the basis of relative net asset value per share, next determined at the
time of the exchange. In the event shares of one or more of these funds being
exchanged by a single investor have a value in excess of $500,000, the shares of
the Fund will not be purchased until the fifth business day following the
redemption of the shares being exchanged in order to enable the redeeming fund
to utilize normal securities settlement procedures in transferring the proceeds
of the redemption to the Fund. Exchanges may not be made until all checks in
payment for the shares to be exchanged have been cleared.
The Lexington Funds currently available for exchange are:
LEXINGTON GLOBAL FUND, INC. (NASDAQ Symbol: LXGLX)/Seeks long-term growth of
capital primarily through investment in common stocks of companies domiciled in
foreign countries and the United States.
LEXINGTON WORLDWIDE EMERGING MARKETS FUND, INC. (NASDAQ Symbol: LEXGX)/Seeks
long-term growth of capital primarily through investment in equity securities of
companies domiciled in, or doing business in, emerging countries.
LEXINGTON RAMIREZ GLOBAL INCOME FUND (NASDAQ Symbol: LEBDX)/Seeks high current
income. Capital appreciation is a secondary objective.
LEXINGTON CORPORATE LEADERS TRUST FUND (NASDAQ Symbol: LEXCX)/Seeks long-term
capital growth and income through investment in an equal number of shares of the
common stocks of a fixed list of American blue chip corporations.
LEXINGTON GROWTH AND INCOME FUND, INC. (NASDAQ Symbol: LEXRX)/Seeks long-term
capital appreciation through investments in stocks of large, ably managed and
well financed companies. Income is a secondary objective.
LEXINGTON GOLDFUND, INC. (NASDAQ Symbol: LEXMX)/Seeks capital appreciation and
such hedge against loss of buying power as may be obtained through investment in
gold bullion and equity securities of companies engaged in mining or processing
gold throughout the world. Shares are not presently available for sale in
Wisconsin.
LEXINGTON CONVERTIBLE SECURITIES FUND (NASDAQ Symbol: CNCVX)/Seeks total return
by providing capital appreciation, current income and conservation of capital
through investments in a diversified portfolio of securities convertible into
shares of common stock. Shares are not presently available for sale in Vermont.
LEXINGTON GNMA INCOME FUND, INC. (NASDAQ Symbol: LEXNX)/Seeks a high level of
current income, consistent with liquidity and safety of principal, through
investment primarily in mortgage-backed GNMA Certificates.
LEXINGTON SHORT-INTERMEDIATE GOVERNMENT SECURITIES FUND, INC. (NASDAQ Symbol:
LSGXX)/Seeks current income as is consistent with preservation of capital by
investing in a portfolio of U.S. Government Securities.
LEXINGTON MONEY MARKET TRUST (NASDAQ Symbol: LMMXX)/Seeks a high level of
current income consistent with preservation of capital and liquidity through
investments in interest bearing short term money market instruments.
LEXINGTON TAX FREE MONEY FUND, INC. (NASDAQ Symbol: LTFXX)/Seeks current income
exempt from Federal income taxes while maintaining liquidity and stability of
principal through investment in short term municipal securities.
Shareholders in any of these funds may exchange all or part of their shares
for shares of one or more of the other funds, subject to the conditions
described herein. The Exchange Privilege enables a shareholder in any of these
funds to acquire shares in a fund with a different investment objective when the
shareholder believes that a shift between funds is an appropriate investment
decision. Shareholders contemplating an exchange should obtain and review the
prospectus of the fund to be acquired. If an exchange involves investing in a
Lexington Fund not already owned and a new account has to be established, the
dollar amount exchanged must meet the minimum initial investment of the fund
being purchased. If, however, an account already exists in the fund being
bought, there is a $500 minimum exchange required. Shareholders must provide the
account number of the existing account. Any exchange between mutual funds is, in
effect, a redemption of shares in one fund and a purchase in the other fund.
Shareholders should consider the possible tax effects of an exchange.
11
<PAGE>
TELEPHONE EXCHANGE PROVISIONS-Exchange instructions may be given in writing or
by telephone. Telephone exchanges may only be made if a Telephone Authorization
form has been previously executed and filed with LFD. Telephone exchanges are
permitted only after a minimum of 7 days have elapsed from the date of a
previous exchange. Exchanges may not be made until all checks in payment for the
shares to be exchanged have been cleared.
Telephonic exchanges can only involve shares held on deposit at the Agent;
shares held in certificate form by the shareholder cannot be included. However,
outstanding certificates can be returned to the Agent and qualify for these
services. Any new account established with the same registration will also have
the privilege of exchange by telephone in the Lexington Funds. All accounts
involved in a telephonic exchange must have the same registration and dividend
option as the account from which the shares were transferred and will also have
the privilege of exchange by telephone in the Lexington Funds in which these
services are available.
By checking the box on the New Account Application authorizing telephone
exchange services, a shareholder constitutes and appoints LFD, distributor of
the Lexington Group of Mutual Funds, as the true and lawful attorney to
surrender for redemption or exchange any and all non-certificate shares held by
the Agent in account(s) designated, or in any other account with the Lexington
Funds, present or future which has the identical registration, with full power
of substitution in the premises, authorizes and directs LFD to act upon any
instruction from any person by telephone for exchange of shares held in any of
these accounts, to purchase shares of any other Lexington Fund that is
available, provided the registration and mailing address of the shares to be
purchased are identical to the registration of the shares being redeemed, and
agrees that neither LFD, the Agent, or the Fund(s) will be liable for any loss,
expense or cost arising out of any requests effected in accordance with this
authorization which would include requests effected by imposters or persons
otherwise unauthorized to act on behalf of the account. LFD, the Agent and the
Fund, will employ reasonable procedures to confirm that instructions
communicated by telephone are genuine and if they do not employ reasonable
procedures they may be liable for any losses due to unauthorized or fraudulent
instructions. The following identification procedures may include, but are not
limited to, the following: account number, registration and address, taxpayer
identification number and other information particular to the account. In
addition, all exchange transactions will take place on recorded telephone lines
and each transaction will be confirmed in writing by the Fund. LFD reserves the
right to cease to act as agent subject to the above appointment upon thirty (30)
days written notice to the address of record. If the shareholder is an entity
other than an individual, such entity may be required to certify that certain
persons have been duly elected and are now legally holding the titles given and
that the said corporation, trust, unincorporated association, etc. is duly
organized and existing and has the power to take action called for by this
continuing authorization.
Exchange Authorization forms, Telephone Authorization forms and prospectuses
of the other funds may be obtained from LFD.
This exchange offer is available only in states where shares of the Fund
being acquired may legally be sold and may be modified or terminated at any time
by the Fund. Broker-dealers who process exchange orders on behalf of their
customers may charge a fee for their services. Such fee may be avoided by making
requests for exchange directly to the Fund or Agent.
TAX-SHELTERED RETIREMENT PLANS
The Fund offers a Prototype Pension and Profit Sharing Plan, including a
Keogh Plan, IRA's, SEP-IRA's and IRA Rollover Accounts, 401(k) Salary Reduction
Plans, Section 457 Deferred Compensation Plans and 403(b)(7) Plans. Plan support
services are available through the Shareholder Services Department of LMC. For
further information call 1-800-526-0056. (See "Tax Sheltered Retirement Plans"
in the Statement of Additional Information.)
PERFORMANCE CALCULATION
The Fund will calculate performance on a total return basis for various
periods. The total return basis combines changes in principal and dividends for
the periods shown. Principal changes are based on the difference between the
beginning and closing net asset value for the period and assumes reinvestment of
dividends paid by the Fund. Dividends are comprised of net investment income and
net realized capital gains, respectively.
12
<PAGE>
Performance will vary from time to time and past results are not necessarily
representative of future results. A shareholder should remember that performance
is a function of portfolio management in selecting the type and quality of
portfolio securities and is affected by operating expenses.
Comparative performance information may be used from time to time in
advertising or marketing of the Fund's shares, including data from Lipper
Analytical Services, Inc. or major market indices such as the Dow Jones
Industrial Average Index, Standard & Poor's 500 Composite Stock Price Index and
Morgan Stanley Capital International World Index. Such comparative performance
information will be stated in the same terms in which the comparative data and
indices are stated. Further information about the Fund's performance is
contained in the annual report, which may be obtained without charge.
DISTRIBUTION PLAN
The Board of Directors of the Fund has adopted a Distribution Plan (the
"Plan") in accordance with Rule 12b-1 under the Investment Company Act of 1940,
after having concluded that there is a resonable likelihood that the Plan will
benefit the Fund and its shareholders. The Plan provides that the Fund may pay
distribution fees, including payments to the Distributor, at an annual rate not
to exceed 0.25% of its average daily net assets for distribution services.
Distribution payments will be made as follows: The Fund either directly or
through the Adviser, may make payments periodically (i) to the Distributor or to
any broker-dealer (a "Broker") who is registered under the Securities Exchange
Act of 1934 and a member in good standing of the National Association of
Securities Dealers, Inc. and who has entered into a Selected Dealer Agreement
with the Distributor, (ii) to other persons or organizations ("Servicing
Agents") who have entered into shareholder processing and service agreements
with the Adviser or with the Distributor, with respect to Fund shares owned by
shareholders for which such Broker is the dealer or holder of record or such
servicing agent has a servicing relationship, or (iii) for expenses associated
with distribution of Fund shares, including the compensation of the sales
personnel of the Distributor; payments of no more than an effective annual rate
of 0.25%, or such lesser amounts as the Distributor determines appropriate.
Payments may also be made for any advertising and promotional expenses relating
to selling efforts, including but not limited to the incremental costs of
printing, prospectuses, statements of additional information, annual reports and
other periodic reports for distribution to persons who are not shareholders of
the Fund: the costs of preparing and distributing any other supplemental sales
literature; costs of radio, television, newspaper and other advertising;
telecommunications expenses, including the cost of telephones, telephone lines
and other communications equipment, (LMC and LFD may also pay, from their own
past profits, additional amounts to third parties for distribution-related
expenses) incurred by or for the Distributor in carrying out its obligations
under the Distribution Agreement.
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 unless and until the shareholder notifies the Agent in writing that he
wants to receive his payments in cash. This request must be received by the
Agent at least seven days before the dividend record date. Upon receipt by the
Agent of such written notice, all further payments will be made in cash until
written notice to the contrary is received. An account of such shares owned by
each shareholder will be maintained by the Agent. Shareholders whose accounts
are maintained by the Agent will have the same rights as other shareholders with
respect to shares so registered (see "How to Purchase Shares-The Open Account").
TAX MATTERS
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 requirements with respect to diversification of
assets,
13
<PAGE>
distribution of income and sources of income. It is the Fund's policy to
distribute to shareholders all of its investment income (net of expenses) and
any capital gains (net of capital losses) so that, in addition to satisfying the
distribution requirement of Subchapter M, the Fund will not be subject to
federal income tax or the 4% excise tax.
Distributions by the Fund of its net investment income (which includes
certain foreign currency gains and losses) and the excess, if any, of its net
short-term capital gain over its net long-term capital loss are taxable to
shareholders as ordinary income. These distributions are treated as dividends
for federal income tax purposes, but in any year only a portion thereof (which
cannot exceed the aggregate amount of qualifying dividends from domestic
corporations received by the Fund during the year) may qualify for the 70%
dividends-received deduction for corporate shareholders. Because the Fund's
investment income will include almost entirely dividends from foreign
corporations and the Fund may have interest income and short-term capital gains,
substantially all of the ordinary income dividends paid by the Fund should not
qualify for the dividends-received deduction. Distributions by the Fund of the
excess, if any, of its net long-term capital gain over its net short-term
capital loss are designated as capital gain dividends and are taxable to
shareholders as long-term capital gains, regardless of the length of time the
shareholder held his shares.
A portion of the income earned by the Fund may be subject to foreign
withholding taxes. The economic effect of such withholding taxes upon the return
earned by the Fund cannot be predicted. Under certain circumstances, the Fund
may elect to "pass-through" to its shareholders the income or other taxes paid
by the Fund to foreign governments during a year. Each shareholder will be
required to include his pro rata portion of these foreign taxes in his gross
income, but will be able to deduct or (subject to various limitations) claim a
foreign tax credit for such amount.
Distributions to shareholders will be treated in the same manner for federal
income tax purposes whether received in cash or reinvested in additional shares
of the Fund. In general, distributions by the Fund are taken into account by the
shareholders in the year in which they are made. However, certain distributions
made during January will be treated as having been paid by the Fund and received
by the shareholders on December 31 of the preceding year. A statement setting
forth the federal income tax status of all distributions made or deemed made
during the year, including any amount of foreign taxes "passed-through", will be
sent to shareholders promptly after the end of each year.
Investors should be careful to consider the tax implications of purchasing
shares just prior to the record date of any ordinary income dividend or capital
gain dividend. Those investors purchasing shares just prior to an ordinary
income or capital gain dividend will be taxed on the entire amount of the
dividend received, even though the net asset value per share on the date of such
purchase reflected the amount of such dividend.
A shareholder will recognize gain or loss upon the sale or redemption of
shares of the Fund in an amount equal to the difference between the proceeds of
the sale or redemption and the shareholder's adjusted tax basis in the shares.
Any loss realized upon a taxable disposition of shares within six months from
the date of their purchase will be treated as a long-term capital loss to the
extent of any capital gain dividends received on such shares. All or a portion
of any loss realized upon a taxable disposition of shares of the Fund may be
disallowed if other shares of the Fund are purchased within 30 days before or
after such disposition.
Under the back-up withholding rules of the Code, certain shareholders may be
subject to 31% withholding of federal income tax on ordinary income dividends,
capital gain dividends and redemption payments made by the Fund. In order to
avoid this back-up withholding, a shareholder must provide the Fund with a
correct taxpayer identification number (which for most individuals is their
Social Security number) or certify that it is a corporation or otherwise exempt
from or not subject to back-up withholding. The new account application included
with this Prospectus provides for shareholder compliance with these
certification requirements.
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. As the foregoing discussion is
for general information only, a prospective shareholder should also review the
more detailed discussion of federal income tax considerations relevant to the
Fund that is contained in the Statement of Additional Information. In addition,
each prospective shareholder should consult with his own tax adviser as to the
tax consequences of investments in the Fund, including the application of state
and local taxes which may differ from the federal income tax consequences
described above.
14
<PAGE>
ORGANIZATION AND DESCRIPTION OF COMMON STOCK
The Company is an open-end, diversified management investment company
organized as a corporation under the laws of the State of Maryland on November
24, 1993, and has authorized capital of 1,000,000,000 shares of common stock,
par value $.001 of which 500,000,000 have been designated to the Lexington
International Fund Series. Each share of common stock has one vote and shares
equally in dividends and distributions when and if declared by the Company and
in the Company's net assets upon liquidation. All shares, when issued, are fully
paid and non-assessable. There are no preemptive, conversion or exchange rights.
Fund shares do not have cumulative voting rights and, as such, holders of at
least 50% of the shares voting for Directors can elect all Directors and the
remaining shareholders would not be able to elect any Directors.
The Company will not normally hold annual shareholder meetings except as
required by Maryland General Corporation Law or the Investment Company Act of
1940. However, meetings of shareholders may be called at any time by the
Secretary upon the written request of shareholders holding in the aggregate not
less than 25% of the outstanding shares, such request specifying the purposes
for which such meeting is to be called. In addition, the Directors will promptly
call a meeting of shareholders for the purpose of voting upon the question of
removal of any Director when requested to do so in writing by the recordholders
of not less than 10% of the Fund's outstanding shares. The Fund will assist
shareholders in any such communication between shareholders and Directors.
CUSTODIAN, TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
Chase Manhattan Bank, N.A., 1211 Avenue of the Americas, New York, New York
10036 has been retained to act as custodian for the Fund's portfolio securities
including those to be held by foreign banks and foreign securities depositories
that qualify as eligible foreign custodians under the rules adopted by the SEC
and for the Fund's domestic securities and other assets. State Street Bank and
Trust Company, 225 Franklin Street, Boston, Massachusetts 02110, has been
retained to act as the transfer agent and dividend disbursing agent for the
Fund. Neither Chase Manhattan, N.A. nor State Street Bank and Trust Company have
any part in determining the investment policies of the Fund or in determining
which portfolio securities are to be purchased or sold by the Fund or in the
declaration of dividends and distributions.
COUNSEL AND INDEPENDENT AUDITORS
Kramer, Levin, Naftalis, Nessen, Kamin & Frankel, 919 Third Avenue, New
York, New York 10022 will pass upon legal matters for the Fund in connection
with the shares offered by this Prospectus. KPMG Peat Marwick LLP, 345 Park
Avenue, New York, New York 10154, has been selected as independent auditors for
the Fund for the fiscal year ending December 31, 1995.
OTHER INFORMATION
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.
The Fund will not normally hold annual shareholder meetings except as
required by Maryland General Corporation Law or the Investment Company Act of
1940. However, meetings of shareholders may be called at any time by the
Secretary upon the written request of shareholders holding in the aggregate not
less than 25% of the outstanding shares. Such request specifying the purposes
for which such meeting is to be called. In addition, the Directors will promptly
call a meeting of shareholders for the purpose of voting upon the question of
removal of any Director when requested to do so in writing by the recordholders
of not less than 10% of the Fund's outstanding shares. The Fund will assist
shareholders in any such communication between shareholders and Directors.
No person has been authorized to give any information or to make any
representation other than those contained in this Prospectus, and information or
representations not herein contained, 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.
15
<PAGE>
-----------------
L E X I N G T O N
-----------------
-----------------
LEXINGTON
INTERNATIONAL
FUND, INC.
-----------------
International
diversification
Free telephone
exchange privilege
No sales charge
No redemption fee
-----------------
The Lexington Group
of
No-Load
Investment Companies
-----------------
P R O S P E C T U S
MAY 1, 1995
-----------
Investment Adviser
- -------------------------------------------------
LEXINGTON MANAGEMENT CORPORATION
P.O. Box 1515/Park 80 West Plaza Two
Saddle Brook, N.J. 07663
Distributor
- -------------------------------------------------
LEXINGTON FUNDS DISTRIBUTOR, INC.
P.O. Box 1515/Park 80 West Plaza Two
Saddle Brook, N.J. 07663
All shareholder requests for services of any
kind should be sent to:
Transfer Agent
- -------------------------------------------------
STATE STREET BANK AND TRUST COMPANY
c/o National Financial Data Services
1004 Baltimore
Kansas City, Missouri 64105
or call toll free:
Service: 1-800-526-0056
24 Hour Account Information: 1-800-526-0052
Table of Contents Page
- -------------------------------------------------
Fee Table .................................... 2
Financial Highlights ......................... 2
Investment Objective and Policies ............ 3
Risk Considerations .......................... 5
Investment Restrictions ...................... 6
Management of the Fund ....................... 8
Portfolio Manager ............................ 8
How to Purchase Shares ....................... 8
How to Redeem Shares ......................... 10
Shareholder Services ......................... 10
Exchange Privilege ........................... 11
Tax-Sheltered Retirement Plans ............... 12
Performance Calculation ...................... 12
Distribution Plan ............................ 13
Dividend, Distibution and Reinvestment Policy 13
Tax Matters .................................. 13
Organization and Description of Common Stock . 15
Custodian, Transfer Agent and
Dividend Disbursing Agent .................. 15
Counsel and Independent Auditors ............. 15
Other Information ............................ 15
<PAGE>
LEXINGTON INTERNATIONAL FUND, INC.
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 1995
This Statement of Additional Information which is not a prospectus,
should be read in conjunction with the current prospectus of Lexington
International Fund, Inc. (the "Fund"), dated May 1, 1995, and as it may be
revised from time to time. To obtain a copy of the Fund's prospectus at no
charge, please write to the Fund at P.O. Box 1515/Park 80 West - Plaza Two,
Saddle Brook, New Jersey 07663 or call the following toll-free numbers:
Shareholder Services Information: 1-800-526-0056
24 Hour Account Information: 1-800-526-0052
Lexington Management Corporation is the Fund's investment adviser.
Lexington Funds Distributor, Inc. is the Fund's distributor.
TABLE OF CONTENTS
Investment Objective and Policies . . . . . . . . . . . . . . . . . 2
Risk Considerations. . . . . . . . . . . . . . . . . . . . . . . . . 3
Investment Restrictions. . . . . . . . . . . . . . . . . . . . . . . 5
Management of the Fund . . . . . . . . . . . . . . . . . . . . . . . 8
Investment Adviser, Distributor and Administrator . . . . . . . . 10
Portfolio Transactions and Brokerage Commissions . . . . . . . . . .11
Determination of Net Asset Value . . . . . . . . . . . . . . . . . .12
Distribution Plan. . . . . . . . . . . . . . . . . . . . . . . . . .12
Telephone Exchange Provisions. . . . . . . . . . . . . . . . . . . .13
Tax Sheltered Retirement Plans . . . . . . . . . . . . . . . . . . .14
Tax Matters. . . . . . . . . . . . . . . . . . . . . . . . . . . . .15
Performance Calculation. . . . . . . . . . . . . . . . . . . . . . .21
Shareholder Reports. . . . . . . . . . . . . . . . . . . . . . . . .22
Other Information. . . . . . . . . . . . . . . . . . . . . . . . . .22
Financial Statements . . . . . . . . . . . . . . . . . . . . . . . .23
-1-
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
For a full description of the Fund's investment objective and
policies, see the Prospectus under "Investment Objective and Policies".
CERTAIN INVESTMENT METHODS
Settlement Transactions - When the Fund enters into contracts for purchase
or sale of a portfolio security denominated in a foreign currency, it may
be required to settle a purchase transaction in the relevant foreign
currency or receive the proceeds of a sale in that currency. In either
event, the Fund will be obligated to acquire or dispose of such foreign
currency as is represented by the transaction by selling or buying an
equivalent amount of United States dollars. Furthermore, the Fund may wish
to "lock in" the United States dollar value of the transaction at or near
the time of a purchase or sale of portfolio securities at the exchange rate
or rates the prevailing between the United States dollar and the currency
in which the foreign security is denominated. Therefore, the Fund may, for
a fixed amount of United States dollars, enter into a forward foreign
exchange contract for the purchase or sale of the amount of foreign
currency involved in the underlying securities transaction. In so doing,
the Fund will attempt to insulate itself against possible losses and gains
resulting from a change in the relationship between the United States
dollar and the foreign currency during the period between the date a
security is purchased or sold and the date on which payment is made or
received. This process is known as "transaction hedging".
To effect the translation of the amount of foreign currencies
involved in the purchase and sale of foreign securities and to effect the
"transaction hedging" described above, the Fund may purchase or sell
foreign currencies on a "spot" (i.e. cash) basis or on a forward basis
whereby the Fund purchases or sells a specific amount of foreign currency,
at a price set at the time of the contract, for receipt of delivery at a
specified date which may be any fixed number of days in the future.
Such spot and forward foreign exchange transactions may also be
utilized to reduce the risk inherent in fluctuations in the exchange rate
between the United States dollar and the relevant foreign dollar and the
relevant foreign currency when foreign securities are purchased or sold for
settlement beyond customary settlement time (as described below). Neither
type of foreign currency transaction will eliminate fluctuations in the
prices of the Fund's portfolio or securities or prevent loss if the price
of such securities should decline.
Portfolio Hedging - Some or all of the Fund's portfolio will be denominated
in foreign currencies. As a result, in addition to the risk of change in
the market value of portfolio securities, the value of the portfolio in
United States dollars is subject to fluctuations in the exchange rate
between such foreign currencies and the United States dollar. When, in the
opinion of LMC, it is desirable to limit or reduce exposure in a foreign
currency in order to moderate potential changes in the United States dollar
value of the portfolio, the Fund may enter into a forward foreign currency
exchange contract by which the United States dollar value of the underlying
foreign portfolio securities can be approximately matched by an equivalent
United States dollar liability. This technique is known as "portfolio
hedging" and moderates or reduces the risk of change in the United States
dollar value of the Fund's portfolio only during the period before the
maturity of the forward contract (which will not be in excess of one year).
The Fund, for hedging purposes only, may also enter into forward foreign
currency exchange contracts to increase its exposure to a foreign currency
that the Fund's investment adviser expects to increase in value relative
to the United States dollar. The Fund will not attempt to hedge all of its
foreign portfolio positions and will enter into such transactions only to
the extent, if any, deemed appropriate by the investment adviser. Hedging
against a decline in the value of currency does not eliminate fluctuations
in the prices of portfolio securities or prevent losses if the prices of
such securities decline. The Fund will not enter into forward foreign
currency exchange transactions for speculative purposes. The Fund intends
to limit transactions as described in this paragraph to not more than 70%
of the total Fund assets.
-2-
<PAGE>
Forward Commitments - The Fund may make contracts to purchase securities
for a fixed price at a future date beyond customary settlement time
("forward commitments") because new issues of securities are typically
offered to investors, such as the Fund, on that basis. Forward commitments
involve a risk of loss if the value of the security to be purchased
declines prior to the settlement date. This risk is in addition to the risk
of decline in value of the Fund's other assets. Although the Fund will
enter into such contracts with the intention of acquiring the securities,
the Fund may dispose of a commitment prior to settlement if the investment
adviser deems it appropriate to do so. The Fund may realize short-term
profits or losses upon the sale of forward commitments.
Covered Call Options - Call options may also be used as a means of
participating in an anticipated price increase of a security on a more
limited basis than would be possible if the security itself were purchased.
The Fund may write only covered call options. Since it can be expected that
a call option will be exercised if the market value of the underlying
security increases to a level greater than the exercise price, this
strategy will generally be used when the investment adviser believes that
the call premium received by the Fund plus anticipated appreciation in the
price of the underlying security, up to the exercise price of the call,
will be greater than the appreciation in the price of the security. The
Fund intends to limit transactions as described in this paragraph to less
than 5% of total Fund assets. The Fund will not purchase put and call
options written by others. Also, the Fund will not write any put options.
Repurchase Agreements - A repurchase agreement is a contract under which
the Fund would acquire a security for a relatively short period (usually
not more than 7 days) subject to the obligations of the seller to
repurchase and the Fund to resell such security at a fixed time and price
(representing the Fund's cost plus interest). Although the Fund may enter
into repurchase agreements with respect to any portfolio securities which
it may acquire consistent with its investment policies and restrictions,
it is the Fund's present intention to enter into repurchase agreements only
with respect to obligations of the United States government or its agencies
or instrumentalities to meet anticipated redemptions or pending investments
or reinvestment of Fund assets in portfolio securities. The Fund will
enter into repurchase agreements only with member banks of the Federal
Reserve System and with "primary dealers" in United States government
securities. In addition if bankruptcy proceedings are commenced with
respect to the seller,be subject to risks associated with changes in market
value of the collateral securities. The Fund intends to limit repurchase
agreements to institutions believed by LMC to present minimal credit risk.
The Fund will not enter into repurchase agreements maturing in more than
seven days if the aggregate of such repurchase agreements and all other
illiquid securities when taken together would exceed 15% of the total
assets of the Fund.
Except as otherwise specifically noted, the Fund's investment
objective and its investment restrictions are fundamental and may not be
changed without the approval of a majority of the outstanding voting
securities of the Fund. The Statement of Additional Information contains
a complete description of the Fund's restrictions and additional
information on policies relating to the investment of its assets and its
activities.
RISK CONSIDERATIONS
Investors should recognize that investing in securities of foreign
companies and in particular securities of companies domiciled in or doing
business in emerging markets and emerging countries involves certain risk
considerations, including those set forth below, which are not typically
associated with investing in securities of U.S. companies.
-3-
<PAGE>
Foreign Currency Considerations
The Fund's assets will be invested in securities of foreign companies
and substantially all income will be received by the Fund in foreign
currencies. However, the Fund will compute and distribute its income in
dollars, and the computation of income will be made on the date of its
receipt by the Fund at the foreign exchange rate in effect on that date.
Therefore, if the value of the foreign currencies in which the Fund
receives its income falls relative to the dollar between receipt of the
income and the making of Fund distributions, the Fund will be required to
liquidate securities in order to make distributions if the Fund has
insufficient cash in dollars to meet distribution requirements.
The value of the assets of the Fund as measured in dollars also may
be affected favorably or unfavorably by fluctuations in currency rates and
exchange control regulations. Further, the Fund may incur costs in
connection with conversions between various currencies. Foreign exchange
dealers realize a profit based on the difference between the prices at
which they are buying and selling various currencies. Thus, a dealer
normally will offer to sell a foreign currency to the Fund at one rate,
while offering a lesser rate of exchange should the Fund desire immediately
to resell that currency to the dealer. The Fund will conduct its foreign
currency exchange transactions either on a spot (i.e., cash) basis at the
spot rate prevailing in the foreign currency exchange market, or through
entering into forward or futures contracts to purchase or sell foreign
currencies.
Investment and Repatriation Restrictions
Some foreign countries may have laws and regulations which currently
preclude direct foreign investment in the securities of their companies.
However, indirect foreign investment in the securities of companies listed
and traded on the stock exchanges in these countries is permitted by
certain foreign countries through investment funds which have been
specifically authorized. The Fund may invest in these investment funds
subject to the provisions of the 1940 Act as discussed below under
"Investment Restrictions". If the Fund invests in such investment funds,
the Fund's shareholders will bear not only their proportionate share of the
expenses of the Fund (including operating expenses and the fees of the
Investment Manager), but also will bear indirectly similar expenses of the
underlying investment funds.
In addition to the foregoing investment restrictions, prior
governmental approval for foreign investments may be required under certain
circumstances in some foreign countries, while the extent of foreign
investment in domestic companies may be subject to limitation in other
foreign countries. Foreign ownership limitations also may be imposed by
the charters of individual companies in foreign countries to prevent, among
other concerns, violation of foreign investment limitations.
Repatriation of investment income, capital and the proceeds of sales
by foreign investors may require governmental registration and/or approval
in some foreign countries. The Fund could be adversely affected by delays
in or a refusal to grant any required governmental approval for such
repatriation.
Foreign Securities Markets
Trading volume on foreign country stock exchanges is substantially
less than that on the New York Stock Exchange. Further, securities of some
foreign companies are less liquid and more volatile than securities of
comparable U.S. companies. Similarly, volume and liquidity in most foreign
bond markets is substantially less than in the U.S. and, consequently,
volatility of price can be greater than in the U.S. Fixed commissions on
foreign exchanges are generally higher than negotiated commissions on U.S.
exchanges, although the Fund endeavors to achieve the most favorable net
results on its portfolio transactions and may be able to purchase the
securities in which the Fund may invest on other stock exchanges where
commissions are negotiable.
-4-
<PAGE>
Companies in foreign countries are not generally subject to uniform
accounting, auditing and financial reporting standards, practices and
disclosure requirements comparable to those applicable to U.S. companies.
Consequently, there may be less publicly available information about a
foreign company than about a U.S. company. Further, there is generally
less governmental supervision and regulation of foreign stock exchanges,
brokers and listed companies than in the U.S. Further, these Funds may
encounter difficulties or be unable to pursue legal remedies and obtain
judgments in foreign courts.
Economic and Political Risks
The economies of individual foreign countries may differ favorably
or unfavorably from the U.S. economy in such respects as growth of gross
domestic product, rate of inflation, capital reinvestment, resource self-
sufficiency and balance of payments position. Further, the economies of
foreign countries generally are heavily dependent upon international trade
and, accordingly, have been and may continue to be adversely affected by
trade barriers, managed adjustments in relative currency values and other
protectionist measures imposed or negotiated by the countries with which
they trade. These economies also have been and may continue to be
adversely affected by economic conditions in the countries with which they
trade.
With respect to any foreign country, there is the possibility of
nationalization, expropriation or confiscatory taxation, political changes,
government regulation, social instability or diplomatic developments
(including war) which could affect adversely the economies of such
countries or the Fund's investments in those countries. In addition, it
may be more difficult to obtain a judgement in a court outside of the
United States.
INVESTMENT RESTRICTIONS
The Fund's investment objective, as described under "investment
policy" and the following investment restrictions are matters or
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
shareholders' 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. Under these investment restrictions:
(1) the Fund will not issue any senior security (as defined in the
1940 Act), except that (a) the Fund may enter into commitments
to purchase securities in accordance with the Fund's investment
program, including reverse repurchase agreements, foreign
exchange contracts, delayed delivery and when-issued
securities, which may be considered the issuance of senior
securities; (b) the Fund may engage in transactions that may
result in the issuance of a senior security to the extent
permitted under applicable regulations, interpretation of the
1940 Act or an exemptive order; (c) the Fund may engage in
short sales of securities to the extent permitted in its
investment program and other restrictions; (d) the purchase or
sale of futures contracts and related options shall not be
considered to involve the issuance of senior securities; and
(e) subject to fundamental restrictions, the Fund may borrow
money as authorized by the 1940 Act.
(2) The Fund will not borrow money, except that (a) the Fund may
enter into certain futures contracts and options related
thereto; (b) the Fund may enter into commitments to purchase
securities in accordance with the Fund's investment program,
including delayed delivery and when-issued securities and
reverse repurchase agreements; (c) for temporary emergency
purposes, the Fund may borrow money in amounts not exceeding
5% of the value of its total assets at the time when the loan
is made; (d) The Fund may pledge its portfolio securities or
receivables or transfer or assign or otherwise encumber them
in an amount not exceeding one-third of the value of its total
assets; and (e) for purposes of leveraging, the Fund may borrow
money from banks (including its custodian bank), only if,
immediately after such borrowing, the value of the Fund's
assets, including the amount borrowed, less its liabilities,
is equal to at least 300% of the amount borrowed, plus all
outstanding borrowings. If at any time, the value of the
Fund's assets fails to meet the 300% asset coverage requirement
relative only to leveraging, the Fund will, within three days
(not including Sundays and holidays), reduce its borrowings to
the extent necessary to meet the 300% test.
-5-
<PAGE>
(3) The Fund will not act as an underwriter of securities except
to the extent that, in connection with the disposition of
portfolio securities by the Fund, the Fund may be deemed to be
an underwriter under the provisions of the 1933 Act.
(4) The Fund will not purchase real estate, interests in real
estate or real estate limited partnership interests except
that, to the extent appropriate under its investment program,
the Fund may invest in securities secured by real estate or
interests therein or issued by companies, including real estate
investment trusts, which deal in real estate or interests
therein.
(5) The Fund will not make loans, except that, to the extent
appropriate under its investment program, the Fund may (a)
purchase bonds, debentures or other debt securities, including
short-term obligations, (b) enter into repurchase transactions
and (c) lend portfolio securities provided that the value of
such loaned securities does not exceed one-third of the Fund's
total assets.
(6) The Fund will not invest in commodity contracts, except that
the Fund may, to the extent appropriate under its investment
program, purchase securities of companies engaged in such
activities, may enter into transactions in financial and index
futures contracts and related options, may engage in
transactions on a when-issued or forward commitment basis, and
may enter into forward currency contracts.
(7) The Fund will not concentrate its investments in any one
industry, except that the Fund may invest up to 25% of its
total assets in securities issued by companies principally
engaged in any one industry. The Fund considers foreign
government securities and supranational organizations to be
industries. This limitation, however, will not apply to
securities issued or guaranteed by the U.S. Government, its
agencies and instrumentalities.
(8) The Fund will not purchase securities of an issuer, if (a)
more than 5% of the Fund's total assets taken at market value
would at the time be invested in the securities of such issuer,
except that such restriction shall not apply to securities
issued or guaranteed by the United States government or its
agencies or instrumentalities or, with respect to 25% of the
Fund's total assets, to securities issued or guaranteed by the
government of any country other than the United States which
is a member of the Organization for Economic Cooperation and
Development ("OECD"). The member countries of OECD are at
present: Australia, Austria, Belgium, Canada, Denmark,
Germany, Finland, France, Greece, Iceland, Ireland, Italy,
Japan, Luxembourg, the Netherlands, New Zealand, Norway,
Portugal, Spain, Sweden, Switzerland, Turkey, the United
Kingdom and the United States; or (b) such purchases would at
the time result in more than 10% of the outstanding voting
securities of such issuer being held by the Fund.
-6-
<PAGE>
In addition to the above fundamental restrictions, the Fund has undertaken
the following non fundamental restrictions, which may be changed in the
future by the Board of Directors, without a vote of the shareholders of the
Fund:
(1) The Fund will not participate on a joint or joint-and-several
basis in any securities trading account. The "bunching" of
orders for the sale or purchase of marketable portfolio
securities with other accounts under the management of the
investment adviser to save commissions or to average prices
among them is not deemed to result in a securities trading
account.
(2) The Fund may purchase and sell futures contracts and related
options under the following conditions: (a) the then-current
aggregate futures market prices of financial instruments
required to be delivered and purchased under open futures
contracts shall not exceed 30% of the Fund's total assets, at
market value; and (b) no more than 5% of the assets, at market
value at the time of entering into a contract, shall be
committed to margin deposits in relation to futures contracts.
(3) The Fund will not make short sales of securities, other than
short sales "against the box," or purchase securities on margin
except for short-term credits necessary for clearance of
portfolio transactions, provided that this restriction will not
be applied to limit the use of options, futures contracts and
related options, in the manner otherwise permitted by the
investment restrictions, policies and investment programs of
the Fund.
(4) The Fund will not purchase securities of an issuer if to the
Fund's knowledge, one or more of the Directors or officers of
the Fund or LMC individually owns beneficially more than 0.5%
and together own beneficially more than 5% of the securities
of such issuer nor will the Fund hold the securities of such
issuer.
(5) The Fund will not purchase the securities of any other
investment company, except as permitted under the 1940 Act.
(6) The Fund will not, except for investments which, in the
aggregate, do not exceed 5% of the Fund's total assets taken
at market value, purchase securities unless the issuer thereof
or any company on whose credit the purchase was based has a
record of at least three years continuous operations prior to
the purchase.
(7) The Fund will not invest for the purpose of exercising control
over or management of any company.
(8) The Fund will not purchase warrants except in units with other
securities in original issuance thereof or attached to other
securities, if at the time of the purchase, the Fund's
investment in warrants, valued at the lower of cost or market,
would exceed 5% of the Fund's total assets. Warrants which are
not listed on a United States securities exchange shall not
exceed 2% of the Fund's net assets. For these purposes,
warrants attached to units or other securities shall be deemed
to be without value.
(9) The Fund will not invest more than 15% of its total assets in
illiquid securities. Illiquid securities are securities that
are not readily marketable or cannot be disposed of promptly
within seven days and in the usual course of business without
taking a materially reduced price. Such securities include,
but are not limited to, time deposits and repurchase agreements
with maturities longer than seven days. Securities that may
be resold under Rule 144A or securities offered pursuant to
Section 4(2) of the Securities Act of 1933, as amended, shall
not be deemed illiquid solely by reason of being unregistered.
The Investment Adviser shall determine whether a particular
security is deemed to be liquid based on the trading markets
for the specific security and other factors.
-7-
<PAGE>
(10) The Fund will not purchase interests in oil, gas, mineral
leases or other exploration programs; however, this policy will
not prohibit the acquisition of securities of companies engaged
in the production or transmission of oil, gas or other
materials.
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 change in values
or net assets.
MANAGEMENT OF THE FUND
The Directors and executive officers of the Fund and their principal
occupations are set forth below:
*+ROBERT M. DEMICHELE, President and Director. P.O. Box 1515, Saddle Brook,
N.J. 07663. Chairman and Chief Executive Officer, Lexington
Management Corporation; Chairman and Chief Executive Officer,
Lexington Funds Distributor, Inc.; President and Director, Piedmont
Management Company, Inc.; Director, Reinsurance Corporation of New
York; Director, Unione Italiana Reinsurance; Vice Chairman of the
Board of Trustees, Union College; Director, Continental National
Corporation; Director, The Navigator's Group, Inc.; Chairman,
Lexington Capital Management, Inc.; Chairman, LCM Financial Services,
Inc.; Director, Vanguard Cellular Systems, Inc.; Chairman of the
Board, Market System Research, Inc. and Market Systems Research
Advisors, Inc. (registered investment advisers); Trustee, Smith
Richardson Foundation.
+BEVERLEY C. DUER, Director, 340 East 72nd Street, New York, N.Y. 10021.
Private Investor. Formerly, Manager of Operations Research
Department - CPC International, Inc.
*+BARBARA R. EVANS, Director. 5 Fernwood Road, Summit, N.J. 07901. Private
Investor. Prior to May,1989, Assistant Vice President and Securities
Analyst, Lexington Management Corporation; prior to March 1987, Vice
President - Institutional Equity Sales, L.F. Rothschild, Unterberg,
Towbin.
*+LAWRENCE KANTOR, Vice President and Director. P.O. Box 1515, Saddle
Brook, N.J. 07663. Managing Director, General Manager and Director,
Lexington Management Corporation; Executive Vice President and
Director, Lexington Funds Distributor, Inc.
+DONALD B. MILLER, Director. 10725 Quail Covey Road, Boynton Beach, FL
33436. Chairman, Horizon Media, Inc.; Trustee, Galaxy Funds;
Director, Maquire Group of Connecticut; prior to January 1989,
President, Director and C.E.O., Media General Broadcast Services
(advertising firm).
+FRANCIS OLMSTED, Director. 50 Van Hooten Court, San Anselmo, CA 94960.
Private Investor. Formerly, Manager - Commercial Development (West
Coast) Essex Chemical Corporation, Clifton, New Jersey (chemical
manufacturers).
+JOHN G. PRESTON, Director. 3 Woodfield Road, Wellesley, Massachusetts
02181. Associate Professor of Finance, Boston College, Boston,
Massachusetts.
+MARGARET RUSSELL. Director. 55 North Mountain Avenue, Montclair, N.J.
07042. Private Investor. Formerly, Community Affairs Director, Union
Camp Corporation.
+PHILIP C. SMITH, Director. 87 Lord's Highway, Weston, Connecticut 06883.
Private Investor; Director, Southwest Investors Income Fund, Inc.,
Government Income Fund, Inc., U.S. Trend Fund, Inc., Investors Cash
Reserve and Plimony Fund, Inc.
+FRANCIS A. SUNDERLAND, Director. 309 Quito Place, Castle Pines, Castle
Rock, Colorado 80104. Private Investor.
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<PAGE>
*+RICHARD T. SALER, Vice President and Portfolio Manager. P.O. Box 1515,
Saddle Brook, NJ 07663. Senior Vice President, Director of
International Investment Strategy. Lexington Management Corporation.
Prior to July 1992, Securities Analyst, Nomura Securities, Inc. Prior
to November 1991, Vice President, Lexington Management Corporation.
*+LISA CURCIO, Vice President and Secretary. P.O. Box 1515, Saddle Brook,
N.J. 07663. Senior Vice President and Secretary, Lexington Management
Corporation; Vice President and Secretary, Lexington Funds
Distributor, Inc.
*+RICHARD M. HISEY, Vice President and Treasurer. P.O. Box 1515, Saddle
Brook, N.J. 07663. Managing Director, Director and Chief Financial
Officer, Lexington Management Corporation; Chief Financial Officer,
Vice President and Director, Lexington Funds Distributor, Inc.; Chief
Financial Officer, Market Systems Research Advisors, Inc.
*+RICHARD LAVERY, CLU ChFC, Vice President. P.O. Box 1515, Saddle Brook,
N.J. 07663. Senior Vice President, Lexington Management Corporation;
Vice President, Lexington Funds Distributor, Inc.
*+JANICE CARNICELLI, Vice President. P.O. Box 1515, Saddle Brook, N.J.
07663.
*+CHRISTIE CARR, Assistant Treasurer. P.O. Box 1515, Saddle Brook, N.J.
07663. Prior to October 1992, Senior Accountant, KPMG Peat Marwick LLP.
*+SIOBHAN GILFILLAN, Assistant Treasurer. P.O. Box 1515, Saddle Brook, N.J.
07663.
*+THOMAS LUEHS, Assistant Treasurer. P.O. Box 1515, Saddle Brook, N.J.
07663. Prior to November 1993, Supervisor of Investment Accounting,
Alliance Capital Management.
*+SHERI MOSCA, Assistant Treasurer. P.O. Box 1515, Saddle Brook, N.J.
07663. Prior to September 1990, Fund Accounting Manager, Lexington
Group of Investment Companies.
*+ANDREW PETRUSKI, Assistant Treasurer. P.O. Box 1515, Saddle Brook, N.J.
07663. Prior to May 1994, Supervising Senior Accountant, NY Life
Securities. Prior to December 1990, Senior Accountant, Dreyfus
Corporation.
*+PETER CORNIOTES, Assistant Secretary. P.O. Box 1515, Saddle Brook, N.J.
07663. Assistant Secretary, Lexington Management Corporation.
Assistant Secretary, Lexington Funds Distributor, Inc.
*+ENRIQUE J. FAUST, Assistant Secretary. P.O. Box 1515, Saddle Brook, N.J.
07663. Prior to March 1994, Blue Sky Compliance Coordinator, Lexington
Management Corporation.
* "Interested person" and/or "Affiliated person" of LMC as defined in the
Investment Company Act of 1940, as amended.
+ Messrs. Corniotes, DeMichele, Duer, Faust, Hisey, Kantor, Lavery, Luehs,
Miller, Olmsted, Petruski, Preston, Saler, Smith and Sunderland and Mmes.
Carnicelli, Carr, Curcio, Evans, Gilfillan, Mosca, and Russell hold similar
officers with some or all of the other investment companies advised and/or
distributed by LMC and LFD.
Directors not employed by the Fund or its affiliates receive an
annual fee of $600 and a fee of $150 for each meeting attended plus
reimbursement of expenses for attendance at regular meetings. The Board
does not have any audit, nominating or compensation committees. During the
year ended December 31, 1994, the aggregate remuneration paid by the Fund
to seven such directors was $12,009.
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<PAGE>
Aggregate Total Compensation Number of
Name of Director Compensation From From Fund Directorships in
Fund and Fund Complex Fund Complex
- --------------- ----------------- ------------------ ----------------
Robert M. DeMichele 0 0 15
Beverley C. Duer $1350 $20,250 15
Barbara R. Evans 0 0 14
Lawrence Kantor 0 0 15
Donald B. Miller $1350 $20,250 14
Francis Olmsted $1350 $18,900 13
John G. Preston $1350 $20,250 14
Margaret Russell $1350 $18,900 13
Philip C. Smith $1350 $20,250 14
Francis A. Sunderland $1200 $16,800 13
INVESTMENT ADVISER, DISTRIBUTOR AND ADMINISTRATOR
Lexington Management Corporation ("LMC"), P.O. Box 1515, Saddle
Brook, New Jersey 07663 is the investment adviser to the Fund pursuant to
an Investment Management Agreement dated December 7, 1993, (the "Advisory
Agreement"). Lexington Funds Distributor, Inc. ("LFD") is the distributor
of Fund shares pursuant to a Distribution Agreement dated December 7, 1993,
(the "Distribution Agreement"). Both of these agreements were approved by
the Fund's Board of Directors (including a majority of the Directors who
were not parties to either the Advisory Agreement or the Distribution
Agreement or "interested persons" of any such party) on December 6, 1994.
LMC makes recommendations to the Fund with respect to its investments and
investment policies.
LMC also acts as administrator to the Fund and performs certain
administrative and accounting services, including but not limited to,
maintaining general ledger accounts, regulatory compliance, preparation of
financial information for semiannual and annual reports, preparing
registration statements, calculating net asset values, shareholder
communications and supervision of the custodian, transfer agent and
provides facilities for such services. The Fund shall reimburse LMC for
its actual cost in providing such services, facilities and expenses.
LMC's investment advisory fee will be reduced for any fiscal year by
any amount necessary to prevent Fund expenses from exceeding the most
restrictive expense limitations imposed by the securities laws or
regulations of those states or jurisdictions in which the Fund's shares are
registered or qualified for sale. Currently, the most restrictive of such
expense limitation would require LMC to reduce its fee so that ordinary
expenses (excluding interest, taxes, brokerage commissions and
extraordinary expenses) for any fiscal year do not exceed 2.5% of the first
$30 million of the Fund's average daily net assets, plus 2.0% of the next
$70 million, plus 1.5% of the Fund's average daily net assets in excess of
$100 million. LFD pays the advertising and sales expenses of the continuous
offering of Fund shares, including the cost of printing prospectuses,
proxies and shareholder reports for persons other than existing
shareholders. The Fund furnishes LFD, at printer's overrun cost paid by
LFD, such copies of its prospectus and annual, semi-annual and other
reports and shareholder communications as may reasonably be required for
sales purposes.
-10-
<PAGE>
The Advisory Agreement, the Distribution Agreement and the
Administrative Services Agreement are subject to annual approval by the
Fund's Board of Directors and by the affirmative vote, cast in person at
a meeting called for such purpose, of a majority of the Directors who are
not parties either to the Advisory Agreement or the Distribution Agreement,
as the case may be, or "interested persons" of any such party. Either the
Fund or LMC may terminate the Advisory Agreement and the Fund or LFD may
terminate the Distribution Agreement on 60 days' written notice without
penalty. The Advisory Agreement terminates automatically in the event of
assignment, as defined in the Investment Company Act of 1940. LMC is paid
an investment advisory fee at the annual rate of 1.00% of the Fund's
average daily net assets. For the year ended December 31, 1994, the Fund
paid LMC $152,230 in investment advisory fees.
LMC shall not be liable to the Fund or its shareholders for any act
or omission by LMC, its officers, directors or employees or any loss
sustained by the Fund or its shareholders except in the case of willful
misfeasance, bad faith, gross negligence or reckless disregard of duty.
LMC and LFD are wholly owned subsidiaries of Piedmont Management
Company Inc., a publicly traded corporation. Descendants of Lunsford
Richardson, Sr., their spouses, trusts and other related entities have a
majority voting control of outstanding shares of Piedmont Management
Company Inc.
Of the directors, officers or employees ("affiliated persons") of the
Fund, Messrs. Corniotes, DeMichele, Faust, Hisey, Kantor, Lavery, Luehs,
Petruski and Saler and Mmes. Carnicelli, Carr, Curcio, Gilfillan and Mosca
(see "Management of the Fund"), may also be deemed affiliates of LMC and
LFD by virtue of being officers, directors or employees thereof.
PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
The Fund's primary policy is to execute all purchases and sales of
portfolio instruments at the most favorable prices consistent with best
execution, considering all of the costs of the transaction including
brokerage commissions. This policy governs the selection of brokers and
dealers and the market in which a transaction is executed. Consistent with
this policy, the Rules of Fair Practice of the National Association of
Securities Dealers, Inc., and such other policies as the Directors may
determine, LMC may consider sales of shares of the Fund and of the other
Lexington Funds as a factor in the selection of brokers and dealers and the
market in which a transaction is executed. Consistent with this policy, the
Rules of Fair Practice of the National Association of Securities Dealers,
Inc., and such other policies as the Directors may determine, LMC may
consider sales of shares of the Fund and of the other Lexington Funds as
a factor in the selection of broker-dealers to execute the Fund's portfolio
transactions. 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 of a commission
higher than that charged by another broker-dealer which does not furnish
research services or which furnishes research services deemed to be a
lesser value, so long as the criteria of Section 28(e) of the Securities
Exchange Act of 1934 are met. Section 28(e) of the Securities Exchange Act
of 1934 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 higher commission than the lowest available under certain
circumstances, provided that the person so exercising investment discretion
makes a good faith determination that the person so commissions paid are
"reasonable in the 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 might
exceed commissions that would be payable for executions services 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 and its
affiliates, in serving other clients as well as the Fund. On the other
hand, any research services obtained by LMC or its affiliates from the
placement of portfolio brokerage of other clients might be useful and of
value to LMC in carrying out its obligations to the Fund.
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The Fund anticipates that its brokerage transactions involving
securities of companies domiciled in countries other than the United States
will normally be conducted on the principal stock exchanges of those
countries. Fixed commissions of foreign stock exchange transactions are
generally higher than the negotiated commission rates available in the
United States. There is generally less government supervision and
regulation of foreign stock exchanges and broker-dealers than in the United
States.
DETERMINATION OF NET ASSET VALUE
The Fund calcultes net asset value as of the close of normal trading
on the New York Stock Exchange (currently 4:00 p.m., Eastern time, unless
weather, equipment failure or other factors contribute to an earlier
closing time) each business day. It is expected that the New York Stock
Exchange will be closed on Saturdays and Sundays and on New Year's Day,
President's Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day. See the Prospectus for the further
discussion of net asset value.
DISTRIBUTION PLAN
The Fund has adopted a Distribution Plan (the "Plan") in accordance
with Rule 12b-1 under the Investment Company Act of 1940, which provides
that the Fund may pay distribution fees including payments to the
Distributor, at an annual rate not to exceed 0.25% of its average daily net
assets for distribution services.
Distribution payments will be made as follows: The Fund either
directly or through the adviser, may make payments periodically (i) to the
Distributor or to any broker-dealer (a "Broker") who is registered under
the Securities Exchange Act of 1934 and a member in good standing of the
National Association of Securities Dealers, Inc. and who has entered into
a Selected Dealer Agreement with the Distributor, (ii) to other persons or
organizations ("Servicing Agents") who have entered into shareholder
processing and service agreements with the Adviser or with the Distributor,
with respect to Fund shares owned by shareholders for which such Broker is
the dealer or holder of record or such servicing agent has a servicing
relationship, or (iii) for expenses associated with distribution of Fund
shares, including but not limited to the incremental costs of printing
prospectuses, statements of additional information, annual reports and
other periodic reports for distribution to persons who are not shareholders
of the Fund; the costs of preparing and distributing any other supplemental
sales literature; costs of radio, television, newspaper and other
advertising; telecommunications expenses, including the cost of telephones,
telephone lines and other communications equipment, incurred by or for the
Distributor in carrying out its obligations under the Distribution
Agreement.
Quarterly, in each year that this Plan remains in effect, the Fund's
Treasurer shall prepare and furnish to the Directors of the Fund a written
report, complying with the requirements of Rule 12b-1, setting forth the
amounts expended by the Fund under the Plan and purposes for which such
expenditures were made.
The Plan shall become effective upon approval of the Plan, the form
of Selected Dealer Agreement and the form of Shareholder Service Agreement,
by the majority votes of both (a) the Fund's Directors and the Qualified
Directors (as defined below), cast in person at a meeting called for the
purpose of voting on the Plan and (b) the outstanding voting securities of
the Fund, as defined in Section 2(a)(42) of the 1940 Act.
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The Plan shall remain in effect for one year from its adoption date
and may be continued thereafter if this Plan and all related agreements are
approved at least annually a majority vote of the Directors of the Fund,
including a majority of the Qualified Directors cast in person at a meeting
called for the purpose of voting on such Plan and agreements. This Plan
may not be amended in order to increase materially the amount to be spent
for distribution assistance without shareholder approval. All material
amendments to this Plan must be approved by a vote of the Directors of the
Fund, and of the Qualified Directors (as hereinafter defined), cast in
person at a meeting called for the purpose of voting thereon.
The Plan may be terminated at any time by a majority vote of the
Directors who are not interested persons (as defined in Section 2(a)(19)
of the 1940 Act) of the Fund and have no direct or indirect financial
interest in the operation of the Plan or in any agreements related to the
Plan (the "Qualified Directors") or by vote of an majority of the
outstanding voting securities of the Fund, as defined in Section 2(a)(42)
of the 1940 Act.
While this Plan shall be in effect, the selection and nomination of
the"non-interested" Directors of the Fund shall be committed to the
discretion of the Qualified Directors then in office.
TELEPHONE EXCHANGE PROVISIONS
Exchange instructions may be given in writing or by telephone.
Telephone exchanges may only be made if a Telephone Authorization form has
been previously executed and filed with LFD. Telephone exchanges are
permitted only after a minimum of seven (7) days have elapsed from the date
of a previous exchange. Exchanges may not be made until all checks in
payment for the shares to be exchanged have been cleared.
Telephonic exchanges can only involve shares held on deposit at State
Street Bank and Trust Company (the "Agent"); shares held in certificate
form by the shareholder cannot be included. However, outstanding
certificates can be returned to the Agent and qualify for these services.
Any new account established with the same registration will also have the
privilege of exchange by telephone in the Lexington Funds. All accounts
involved in a telephonic exchange must have the same registration and
dividend option as the account from which the shares were transferred and
will also have the privilege of exchange by telephone in the Lexington
Funds in which these services are available.
By checking the box on the New Account Application authorizing
telephone exchange services, a shareholder constitutes and appoints LFD,
distributor of the Lexington Group of Mutual Funds, as the true and lawful
attorney to surrender for redemption or exchange any and all non-
certificate shares held by the Agent in account(s) designated, or in any
other account with the Lexington Funds, present or future which has the
identical registration, with full power of substitution in the premises,
authorizes and directs LFD to act upon any instruction from any person by
telephone for exchange of shares held in any of these accounts, to purchase
shares of any other Lexington Fund that is available, provided the
registration and mailing address of the shares to be purchased are
identical to the registration of the shares being redeemed, and agrees that
neither LFD, the Agent, or the Fund(s) will be liable for any loss, expense
or cost arising out of any requests effected in accordance with this
authorization which would include requests effected by impostors or persons
otherwise unauthorized to act on behalf of the account. LFD reserves the
right to cease to act as agent subject to the above appointment upon thirty
(30) days written notice to the address of record. If the shareholder is
an entity other than an individual, such entity may be required to certify
that certain persons have been duly elected and are now legally holding the
titles given and that the said corporation, trust, unincorporated
association, etc. is duly organized and existing and has the power to take
action called for by this continuing authorization.
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Exchange Authorizations forms, Telephone Authorization forms and
prospectuses of the other funds may be obtained from LFD.
LFD has made arrangements with certain dealers to accept instructions
by telephone to exchange shares of the Fund or shares of one of the other
Lexington Funds at net asset value as described above. Under this
procedure, the dealer must agree to indemnify LFD and the funds from any
loss or liability that any of them might incur as a result of the
acceptance of such telephone exchange orders. A properly signed Exchange
Authorization must be received by LFD within 5 days of the exchange
request. LFD reserves the right to reject any telephone exchange request.
In each such exchange, the registration of the shares of the Fund being
acquired must be identical to the registration of the shares of the Fund
being exchanged. Any telephone exchange orders so rejected may be
processed by mail.
This exchange offer is available only in states where shares of the
Fund being acquired may legally be sold and may be modified or terminated
at any time by the Fund. Broker-dealers who process exchange orders on
behalf of their customers may charge a fee for their services. Such fee
may be avoided by making requests for exchange directly to the Fund or
Agent.
TAX-SHELTERED RETIREMENT PLANS
The Fund makes available a variety of Prototype Pension and Profit
Sharing plans including a 401(k) Salary Reduction Plan and a 403(b)(7)
Plan. Plan services are available by contacting the Shareholder Services
Department of the Distributor at 1-800-526-0056.
INDIVIDUAL RETIREMENT ACCOUNT ("IRA"): Individuals may make tax
deductible contributions to their own Individual Retirement Accounts
established under Section 408 of the Internal Revenue Code (the "Code").
Married investors filing a joint return neither of whom is an active
participant in an employer sponsored retirement plan, or who have an
adjusted gross income of $40,000 of less ($25,000 or less for single
taxpayers) may continue to make a $2,000 ($2,500 for spousal IRAs) annual
deductible IRA contribution. For adjusted gross incomes above $40,000
($25,000 for single taxpayers, the IRA deduction limit is generally phased
out ratably over the next $10,000 of adjusted gross income, subject to a
minimum $200 deductible contribution. Investors who are not able to deduct
a full $2,000 ($2,250 spousal) IRA contribution because of the limitations
may make a nondeductible contribution to their IRA to the extent a
deductible contribution is not allowed. Federal income tax on accumulations
earned on nondeductible contributions is deferred until such time as these
amounts are deemed distributed to an investor. Rollovers are also permitted
under the Plan. The disclosure statement required by the Internal Revenue
Service ("IRS") is provided by the Fund.
The minimum initial investment to establish a tax-sheltered plan is
$250. Subsequent investments are subject to a minimum of $50 for each
account.
SELF-EMPLOYED RETIREMENT PLAN (HR-10): Self-employed individuals may
make tax deductible contributions to a prototype defined contribution
pension plan or profit sharing plan. There are, however, a number of
special rules which apply when self-employed individuals participate in
such plans. Currently purchase payments under a self-employed plan are
deductible only to the extent of the lesser of (i) $30,000 or (ii) 25% of
the individuals earned annual income (as defined in the Code) and in
applying these limitations not more than $200,000 of "earned income" may
be taken into account.
CORPORATE PENSION AND PROFIT SHARING PLANS: The Fund makes available
a Prototype Defined Contribution Pension Plan and a Prototype Profit
Sharing Plan.
All purchases and redemptions of Fund shares pursuant to any one of
the Fund's tax sheltered plans must be carried out in accordance with the
provisions of the Plan. Accordingly, all plan documents should be reviewed
carefully before adopting or enrolling in the Plan. Investors should
especially note that a penalty tax of 10% may be imposed by the IRS on
early withdrawals under corporate, Keogh or IRA plans. It is recommended
by the IRS that an investor consult a tax adviser before investing in the
Fund through any of these plans.
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An investor participating in any of the Fund's special plans has no
obligation to continue to invest in the Fund and may terminate the Plan
with the Fund at any time. Except for expenses of sales and promotion,
executive and administrative personnel, and certain services which are
furnished by LMC, the cost of the plans generally is borne by the Fund;
however, each IRA Plan account is subject to an annual maintenance fee of
$12.00 charged by the Agent.
TAX MATTERS
The following is only a summary of certain additional tax
considerations generally affecting the Fund and its shareholders that are
not described in the Prospectus. No attempt is made to present a detailed
explanation of the tax treatment of the Fund or its shareholders, and the
discussions here and in the Prospectus are not intended as substitutes for
careful tax planning.
Qualification as a Regulated Investment Company
The Fund has elected to be taxed as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). As a regulated investment company, the Fund is not subject to
federal income tax on the portion of its net investment income (i.e.,
taxable interest, dividends and other taxable ordinary income, net of
expenses) and capital gain net income (i.e., the excess of capital gains
over capital losses) that it distributes to shareholders, provided that it
distributes at least 90% of its investment company taxable income (i.e.,
net investment income and the excess of net short-term capital gain over
net long-term capital loss) for the taxable year (the "Distribution
Requirement"), and satisfies certain other requirements of the Code that
are described below. Distributions by the Fund made during the taxable
year or, under specified circumstances, within twelve months after the
close of the taxable year, will be considered distributions of income and
gains of the taxable year and can therefore satisfy the Distribution
Requirement.
In addition to satisfying the Distribution Requirement, a regulated
investment company must: (1) derive at least 90% of its gross income from
dividends, interest, certain payments with respect to securities loans,
gains from the sale or other disposition of stock or securities or foreign
currencies (to the extent such currency gains are directly related to the
regulated investment company's principal business of investing in stock or
securities) and other income (including but not limited to gains from
options, futures or forward contracts) derived with respect to its business
of investing in such stock, securities or currencies (the "Income
Requirement"); and (2) derive less than 30% of its gross income (exclusive
of certain gains on designated hedging transactions that are offset by
realized or unrealized losses on offsetting positions) from the sale or
other disposition of stock, securities or foreign currencies (or options,
futures or forward contracts thereon) held for less than three months (the
"Short-Short Gain Test"). However, foreign currency gains, including those
derived from options, futures and forwards, will not in any event be
characterized as Short-Short Gain if they are directly related to the
regulated investment company's investments in stock or securities (or
options or futures thereon). Because of the Short-Short Gain Test, the
Fund may have to limit the sale of appreciated securities that it has held
for less than three months. However, the Short-Short Gain Test will not
prevent the Fund from disposing of investments at a loss, since the
recognition of a loss before the expiration of the three-month holding
period is disregarded for this purpose. Interest (including original issue
discount) received by the Fund at maturity or upon the disposition of a
security held for less than three months will not be treated as gross
income derived from the sale or other disposition of such security within
the meaning of the Short-Short Gain Test. However, income that is
attributable to realized market appreciation will be treated as gross
income from the sale or other disposition of securities for this purpose.
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In general, gain or loss recognized by the Fund on the disposition
of an asset will be a capital gain or loss. However, gain recognized on
the disposition of a debt obligation purchased by the Fund at a market
discount (generally, at a price less than its principal amount) will be
treated as ordinary income to the extent of the portion of the market
discount which accrued during the period of time the Fund held the debt
obligation. In addition, under the rules of Code Section 988, gain or loss
recognized on the disposition of a debt obligation denominated in a foreign
currency or an option with respect thereto (but only to the extent
attributable to changes in foreign currency exchange rates), and gain or
loss recognized on the disposition of a foreign currency forward contract,
futures contract, option or similar financial instrument, or of foreign
currency itself, except for regulated futures contracts or non-equity
options subject to Code Section 1256 (unless the Fund elects otherwise),
will generally be treated as ordinary income or loss.
In general, for purposes of determining whether capital gain or loss
recognized by the Fund on the disposition of an asset is long-term or
short-term, the holding period of the asset may be affected if (1) the
asset is used to close a "short sale" (which includes for certain purposes
the acquisition of a put option) or is substantially identical to another
asset so used, (2) the asset is otherwise held by the Fund as part of a
"straddle" (which term generally excludes a situation where the asset is
stock and Fund grants a qualified covered call option (which, among other
things, must not be deep-in-the-money) with respect thereto) or (3) the
asset is stock and Fund grants an in-the-money qualified covered call
option with respect thereto. However, for purposes of the Short-Short Gain
Test, the holding period of the asset disposed of may be reduced only in
the case of clause (1) above. In addition, the Fund may be required to
defer the recognition of a loss on the disposition of an asset held as part
of a straddle to the extent of any unrecognized gain on the offsetting
position.
Any gain recognized by the Fund on the lapse of, or any gain or loss
recognized by the Fund from a closing transaction with respect to, an
option written by the Fund will be treated as a short-term capital gain or
loss. For purposes of the Short-Short Gain Test, the holding period of an
option written by the Fund will commence on the date it is written and end
on the date it lapses or the date a closing transaction is entered into.
Accordingly, the Fund may be limited in its ability to write options which
expire within three months and to enter into closing transactions at a gain
within three months of the writing of options.
Transactions that may be engaged in by the Fund (such as regulated
futures contracts, certain foreign currency contracts, and options on stock
indexes and futures contracts) will be subject to special tax treatment as
"Section 1256 contracts." Section 1256 contracts are treated as if they
are sold for their fair market value on the last business day of the
taxable year, even though a taxpayer's obligations (or rights) under such
contracts have not terminated (by delivery, exercise, entering into a
closing transaction or otherwise) as of such date. Any gain or loss
recognized as a consequence of the year-end deemed disposition of Section
1256 contracts is taken into account for the taxable year together with any
other gain or loss that was previously recognized upon the termination of
Section 1256 contracts during that taxable year. Any capital gain or loss
for the taxable year with respect to Section 1256 contracts (including any
capital gain or loss arising as a consequence of the year-end deemed sale
of such contracts) is generally treated as 60% long-term capital gain or
loss and 40% short-term capital gain or loss. A Fund, however, may elect
not to have this special tax treatment apply to Section 1256 contracts that
are part of a "mixed straddle" with other investments of the Fund that are
not Section 1256 contracts. The IRS has held in several private rulings
(and Treasury Regulations now provide) that gains arising from Section 1256
contracts will be treated for purposes of the Short-Short Gain Test as
being derived from securities held for not less than three months if the
gains arise as a result of a constructive sale under Code Section 1256.
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The Fund may purchase securities of certain foreign investment funds
or trusts which constitute passive foreign investment companies ("PFICs")
for federal income tax purposes. If the Fund invests in a PFIC, it may
elect to treat the PFIC as a qualifying electing fund (a "QEF") in which
event the Fund will each year have ordinary income equal to its pro rata
share of the PFIC's ordinary earnings for the year and long-term capital
gain equal to its pro rata share of the PFIC's net capital gain for the
year, regardless of whether the Fund receives distributions of any such
ordinary earning or capital gain from the PFIC. If the Fund does not
(because it is unable to, chooses not to or otherwise) elect to treat the
PFIC as a QEF, then in general (1) any gain recognized by the Fund upon
sale or other disposition of its interest in the PFIC or any excess
distribution received by the Fund from the PFIC will be allocated ratably
over the Fund's holding period of its interest in the PFIC, (2) the portion
of such gain or excess distribution so allocated to the year in which the
gain is recognized or the excess distribution is received shall be included
in the Fund's gross income for such year as ordinary income (and the
distribution of such portion by the Fund to shareholders will be taxable
as an ordinary income dividend, but such portion will not be subject to tax
at the Fund level), (3) the Fund shall be liable for tax on the portions
of such gain or excess distribution so allocated to prior years in an
amount equal to, for each such prior year, (i) the amount of gain or excess
distribution allocated to such prior year multiplied by the highest tax
rate (individual or corporate) in effect for such prior year plus (ii)
interest on the amount determined under clause (i) for the period from the
due date for filing a return for such prior year until the date for filing
a return for the year in which the gain is recognized or the excess
distribution is received at the rates and methods applicable to
underpayments of tax for such period, and (4) the distribution by the Fund
to shareholders of the portions of such gain or excess distribution so
allocated to prior years (net of the tax payable by the Fund thereon) will
again be taxable to the shareholders as an ordinary income dividend.
Under recently proposed Treasury Regulations the Fund can elect to
recognize as gain the excess, as of the last day of its taxable year, of
the fair market value of each share of PFIC stock over the Fund's adjusted
tax basis in that share ("mark to market gain"). Such mark to market gain
will be included by the Fund as ordinary income, such gain will not be
subject to the Short-Short Gain Test, and the Fund's holding period with
respect to such PFIC stock commences on the first day of the next taxable
year. If the Fund makes such election in the first taxable year it holds
PFIC stock, the Fund will include ordinary income from any mark to market
gain, if any, and will not incur the tax described in the previous
paragraph.
Treasury Regulations permit a regulated investment company, in
determining its investment company taxable income and net capital gain
(i.e., the excess of net long-term capital gain over net short-term capital
loss) for any taxable year, to elect (unless it has made a taxable year
election for excise tax purposes as discussed below) to treat all or any
part of any net capital loss, any net long-term capital loss or any net
foreign currency loss incurred after October 31 as if it had been incurred
in the succeeding year.
In addition to satisfying the requirements described above, the Fund
must satisfy an asset diversification test in order to qualify as a
regulated investment company. Under this test, at the close of each
quarter of the Fund's taxable year, at least 50% of the value of the Fund's
assets must consist of cash and cash items, U.S. Government securities,
securities of other regulated investment companies, and securities of other
issuers (as to which the Fund has not invested more than 5% of the value
of the Fund's total assets in securities of such issuer and as to which the
Fund does not hold more than 10% of the outstanding voting securities of
such issuer), and no more than 25% of the value of its total assets may be
invested in the securities of any one issuer (other than U.S. Government
securities and securities of other regulated investment companies), or in
two or more issuers which the Fund controls and which are engaged in the
same or similar trades or businesses. Generally, an option (call or put)
with respect to a security is treated as issued by the issuer of the
security not the issuer of the option.
If for any taxable year the Fund does not qualify as a regulated
investment company, all of its taxable income (including its net capital
gain) will be subject to tax at regular corporate rates without any
deduction for distributions to shareholders, and such distributions will
be taxable to the shareholders as ordinary dividends to the extent of the
Fund's current and accumulated earnings and profits. Such distributions
generally will be eligible for the dividends-received deduction in the case
of corporate shareholders.
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Excise Tax on Regulated Investment Companies
A 4% non-deductible excise tax is imposed on a regulated investment
company that fails to distribute in each calendar year an amount equal to
98% of ordinary taxable income for the calendar year and 98% of capital
gain net income for the one-year period ended on October 31 of such
calendar year (or, at the election of a regulated investment company having
a taxable year ending November 30 or December 31, for its taxable year (a
"taxable year election")). The balance of such income must be distributed
during the next calendar year. For the foregoing purposes, a regulated
investment company is treated as having distributed any amount on which it
is subject to income tax for any taxable year ending in such calendar year.
For purposes of the excise tax, a regulated investment company shall:
(1) reduce its capital gain net income (but not below its net capital gain)
by the amount of any net ordinary loss for the calendar year; and (2)
exclude foreign currency gains and losses incurred after October 31 of any
year (or after the end of its taxable year if it has made a taxable year
election) in determining the amount of ordinary taxable income for the
current calendar year (and, instead, include such gains and losses in
determining ordinary taxable income for the succeeding calendar year).
The Fund intends to make sufficient distributions or deemed
distributions of its ordinary taxable income and capital gain net income
prior to the end of each calendar year to avoid liability for the excise
tax. However, investors should note that the Fund may in certain
circumstances be required to liquidate portfolio investments to make
sufficient distributions to avoid excise tax liability.
Fund Distributions
The Fund anticipates distributing substantially all of its investment
company taxable income for each taxable year. Such distributions will be
taxable to shareholders as ordinary income and treated as dividends for
federal income tax purposes, but they generally should not qualify for the
70% dividends-received deduction for corporate shareholders.
A Fund may either retain or distribute to shareholders its net
capital gain for each taxable year. The Fund currently intends to
distribute any such amounts. If net capital gain is distributed and
designated as a capital gain dividend, it will be taxable to shareholders
as long-term capital gain, regardless of the length of time the shareholder
has held his shares or whether such gain was recognized by the Fund prior
to the date on which the shareholder acquired his shares.
Conversely, if the Fund elects to retain its net capital gain, the
Fund will be taxed thereon (except to the extent of any available capital
loss carryovers) at the 35% corporate tax rate. If the Fund elects to
retain its net capital gain, it is expected that the Fund also will elect
to have shareholders of record on the last day of its taxable year treated
as if each received a distribution of his pro rata share of such gain, with
the result that each shareholder will be required to report his pro rata
share of such gain on his tax return as long-term capital gain, will
receive a refundable tax credit for his pro rata share of tax paid by the
Fund on the gain, and will increase the tax basis for his shares by an
amount equal to the deemed distribution less the tax credit.
Ordinary income dividends paid by the Fund with respect to a taxable
year will qualify for the 70% dividends-received deduction generally
available to corporations (other than corporations, such as S corporations,
which are not eligible for the deduction because of their special
characteristics and other than for purposes of special taxes such as the
accumulated earnings tax and the personal holding company tax) to the
extent of the amount of qualifying dividends received by the Fund from
domestic corporations for the taxable year. A dividend received by the
Fund will not be treated as a qualifying dividend (1) if it has been
received with respect to any share of stock that the Fund has held for less
than 46 days (91 days in the case of certain preferred stock), excluding
for this purpose under the rules of Code Section 246(c)(3) and (4): (i)
any day more than 45 days (or 90 days in the case of certain preferred
stock) after the date on which the stock becomes ex-dividend and (ii) any
period during which the Fund has an option to sell, is under a contractual
obligation to sell, has made and not closed a short sale of, is the grantor
of a deep-in-the-money or otherwise nonqualified option to buy, or has
otherwise diminished its risk of loss by holding other positions with
respect to, such (or substantially identical) stock; (2) to the extent that
the Fund is under an obligation (pursuant to a short sale or otherwise) to
make related payments with respect to positions in substantially similar
or related property; or (3) to the extent the stock on which the dividend
is paid is treated as debt-financed under the rules of Code Section 246A.
Moreover, the dividends-received deduction for a corporate shareholder may
be disallowed or reduced (1) if the corporate shareholder fails to satisfy
the foregoing requirements with respect to its shares of the Fund or (2)
by application of Code Section 246(b) which in general limits the
dividends-received deduction to 70% of the shareholder's taxable income
(determined without regard to the dividends-received deduction and certain
other items). Since an insignificant portion of the Fund will be invested
in stock of domestic corporations, the ordinary dividends distributed by
the Fund will not qualify for the dividends-received deduction for
corporate shareholders.
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Alternative minimum tax ("AMT") is imposed in addition to, but only
to the extent it exceeds, the regular tax and is computed at a maximum
marginal rate of 28% for noncorporate taxpayers and 20% for corporate
taxpayers on the excess of the taxpayer's alternative minimum taxable
income ("AMTI") over an exemption amount. In addition, under the Superfund
Amendments and Reauthorization Act of 1986, a tax is imposed for taxable
years beginning after 1986 and before 1996 at the rate of 0.12% on the
excess of a corporate taxpayer's AMTI (determined without regard to the
deduction for this tax and the AMT net operating loss deduction) over $2
million. For purposes of the corporate AMT and the environmental superfund
tax (which are discussed above), the corporate dividends-received deduction
is not itself an item of tax preference that must be added back to taxable
income or is otherwise disallowed in determining a corporation's AMTI.
However, corporate shareholders will generally be required to take the full
amount of any dividend received from the Fund into account (without a
dividends-received deduction) in determining its adjusted current earnings,
which are used in computing an additional corporate preference item (i.e.,
75% of the excess of a corporate taxpayer's adjusted current earnings over
its AMTI (determined without regard to this item and the AMT net operating
loss deduction)) includable in AMTI.
Investment income that may be received by the Fund from sources
within foreign countries may be subject to foreign taxes withheld at the
source. The United States has entered into tax treaties with many foreign
countries which entitle the Fund to a reduced rate of, or exemption from,
taxes on such income. It is impossible to determine the effective rate of
foreign tax in advance since the amount of the Fund's assets to be invested
in various countries is not known. If more than 50% of the value of the
Fund's total assets at the close of its taxable year consist of the stock
or securities of foreign corporations, the Fund may elect to "pass through"
to the Fund's shareholders the amount of foreign taxes paid by the Fund.
If the Fund so elects, each shareholder would be required to include in
gross income, even though not actually received, his pro rata share of the
foreign taxes paid by the Fund, but would be treated as having paid his pro
rata share of such foreign taxes and would therefore be allowed to either
deduct such amount in computing taxable income or use such amount (subject
to various Code limitations) as a foreign tax credit against federal income
tax (but not both). For purposes of the foreign tax credit limitation
rules of the Code, each shareholder would treat as foreign source income
his pro rata share of such foreign taxes plus the portion of dividends
received from the Fund representing income derived from foreign sources.
No deduction for foreign taxes could be claimed by an individual
shareholder who does not itemize deductions. Each shareholder should
consult his own tax adviser regarding the potential application of foreign
tax credits.
Distributions by the Fund that do not constitute ordinary income
dividends or capital gain dividends will be treated as a return of capital
to the extent of (and in reduction of) the shareholder's tax basis in his
shares; any excess will be treated as gain from the sale of his shares, as
discussed below.
-19-
<PAGE>
Distributions by the Fund will be treated in the manner described
above regardless of whether such distributions are paid in cash or
reinvested in additional shares of the Fund (or of another fund).
Shareholders receiving a distribution in the form of additional shares will
be treated as receiving a distribution in an amount equal to the fair
market value of the shares received, determined as of the reinvestment
date. In addition, if the net asset value at the time a shareholder
purchases shares of the Fund reflects undistributed net investment income
or recognized capital gain net income, or unrealized appreciation in the
value of the assets of the Fund, distributions of such amounts will be
taxable to the shareholder in the manner described above, although such
distributions economically constitute a return of capital to the
shareholder.
Ordinarily, shareholders are required to take distributions by the
Fund into account in the year in which the distributions are made.
However, dividends declared in October, November or December of any year
and payable to shareholders of record on a specified date in such a month
will be deemed to have been received by the shareholders (and made by the
Fund) on December 31 of such calendar year if such dividends are actually
paid in January of the following year. Shareholders will be advised
annually as to the U.S. federal income tax consequences of distributions
made (or deemed made) during the year.
The Fund will be required in certain cases to withhold and remit to
the U.S. Treasury 31% of ordinary income dividends and capital gain
dividends, and the proceeds of redemption of shares, paid to any
shareholder (1) who has provided either an incorrect tax identification
number or no number at all, (2) who is subject to backup withholding by the
IRS for failure to report the receipt of interest or dividend income
properly, or (3) who has failed to certify to the Fund that it is not
subject to backup withholding or that it is a corporation or other "exempt
recipient."
Sale or Redemption of Shares
A shareholder will recognize gain or loss on the sale or redemption
of shares of the Fund in an amount equal to the difference between the
proceeds of the sale or redemption and the shareholder's adjusted tax basis
in the shares. All or a portion of any loss so recognized may be
disallowed if the shareholder purchases other shares of the Fund within 30
days before or after the sale or redemption. In general, any gain or loss
arising from (or treated as arising from) the sale or redemption of shares
of the Fund will be considered capital gain or loss and will be long-term
capital gain or loss if the shares were held for longer than one year.
However, any capital loss arising from the sale or redemption of shares
held for six months or less will be treated as a long-term capital loss to
the extent of the amount of capital gain dividends received on such shares.
For this purpose, the special holding period rules of Code Section
246(c)(3) and (4) (discussed above in connection with the dividends-
received deduction for corporations) generally will apply in determining
the holding period of shares. Long-term capital gains of noncorporate
taxpayers are currently taxed at a maximum rate 11.6% lower than the
maximum rate applicable to ordinary income. Capital losses in any year are
deductible only to the extent of capital gains plus, in the case of a
noncorporate taxpayer, $3,000 of ordinary income.
Foreign Shareholders
Taxation of a shareholder who, as to the United States, is a
nonresident alien individual, foreign trust or estate, foreign
corporation, or foreign partnership ("foreign shareholder"), depends on
whether the income from the Fund is "effectively connected" with a U.S.
trade or business carried on by such shareholder.
-20-
<PAGE>
If the income from the Fund is not effectively connected with a U.S.
trade or business carried on by a foreign shareholder, ordinary income
dividends paid to a foreign shareholder will be subject to U.S. withholding
tax at the rate of 30% (or lower treaty rate) upon the gross amount of the
dividend. Furthermore, such a foreign shareholder may be subject to U.S.
withholding tax at the rate of 30% (or lower treaty rate) on the gross
income resulting from the Fund's election to treat any foreign taxes paid
by it as paid by its shareholders, but may not be allowed a deduction
against this gross income or a credit against this U.S. withholding tax for
the foreign shareholder's pro rata share of such foreign taxes which it is
treated as having paid. Such a foreign shareholder would generally be
exempt from U.S. federal income tax on gains realized on the sale of shares
of the Fund, capital gain dividends and amounts retained by the Fund that
are designated as undistributed capital gains.
If the income from the Fund is effectively connected with a U.S.
trade or business carried on by a foreign shareholder, then ordinary income
dividends, capital gain dividends, and any gains realized upon the sale of
shares of the Fund will be subject to U.S. federal income tax at the rates
applicable to U.S. citizens or domestic corporations.
In the case of foreign noncorporate shareholders, the Fund may be
required to withhold U.S. federal income tax at a rate of 31% on
distributions that are otherwise exempt from withholding tax (or taxable
at a reduced treaty rate) unless such shareholders furnish the Fund with
proper notification of its foreign status.
The tax consequences to a foreign shareholder entitled to claim the
benefits of an applicable tax treaty may be different from those described
herein. Foreign shareholders are urged to consult their own tax advisers
with respect to the particular tax consequences to them of an investment
in the Fund, including the applicability of foreign taxes.
Effect of Future Legislation; Local Tax Considerations
The foregoing general discussion of U.S. federal income tax
consequences is based on the Code and the Treasury Regulations issued
thereunder as in effect on the date of this Statement of Additional
Information. Future legislative or administrative changes or court
decisions may significantly change the conclusions expressed herein, and
any such changes or decisions may have a retroactive effect with respect
to the transactions contemplated herein.
Rules of state and local taxation of ordinary income dividends and
capital gain dividends from regulated investment companies often differ
from the rules for U.S. federal income taxation described above.
Shareholders are urged to consult their tax advisers as to the consequences
of these and other state and local tax rules affecting investment in the
Fund.
PERFORMANCE CALCULATION
For the purpose of quoting and comparing the performance of the Fund
to that of other mutual funds and to other relevant market indices in
advertisements or in reports to shareholders, performance may be stated in
terms of total return. Under the rules of the Securities and Exchange
Commission ("SEC rules"), funds advertising performance must include total
return quotes calculated according to the following formula:
n
P(l+T) = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years (1, 5 or 10)
ERV = ending redeemable value of a hypothetical $1,000 payment
made at the beginning of the 1, 5 or 10 year periods or at
the end of the 1, 5 or 10 year periods (or fractional
portion thereof).
-21-
<PAGE>
Under the foregoing formula, the time periods used in advertising
will be based on rolling calendar quarters, updated to the last day of the
most recent quarter prior to submission of the advertising for publication,
and will cover one, five and ten year periods or a shorter period dating
from the effectiveness of the Fund's Registration Statement. In calculating
the ending redeemable value, 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 with data published by Lipper Analytical Services,
Inc., or with the performance of the Standard and Poor's 500 Stock Index
or the Dow Jones Industrial Average, the Fund calculates its aggregate
total return for the specified periods of timely assuming the investment
of $10,000 in Fund shares and assuming the reinvestment of each dividend
or other distribution at net asset value on the reinvestment date.
Percentage increases are determined by subtracting the initial value of the
investment from the ending value and by dividing the remainder by the
beginning value. The Fund s total return for the one year period ending
December 31, 1994 was 5.87%.
SHAREHOLDER REPORTS
Shareholders will receive reports at least semi-annually showing the
Fund's holdings and other information. In addition, shareholders will
receive annual financial statements audited by KPMG Peat Marwick LLP, the
Fund's independent auditors.
OTHER INFORMATION
As of February 23, 1995, the following persons are known by Fund
management to have owned beneficially, directly or indirectly, 5% or more
of the outstanding shares of Lexington International Fund, Inc.: Piedmont
Associates, Ltd., P.O. Box 20124, Greensboro, N.C. 27420, 29% and Hillsdale
Fund, c/o Piedmont Financial Company, P.O. Box 20124, Greensboro, N.C.
27420, 13%.
-22-
<PAGE>
Independent Auditors' Report
The Board of Directors and Shareholders
Lexington International Fund, Inc.:
We have audited the accompanying statements of net assets (including the
portfolio of investments) and assets and liabilities of Lexington International
Fund, Inc. as of December 31, 1994, and the related statements of operations,
changes in net assets, and the financial highlights for the period from January
3, 1994 (commencement of operations) to December 31, 1994. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1994 by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides 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 International Fund, Inc. as of December 31, 1994, and the results of
its operations, its changes in its net assets and the financial highlights for
the period from January 3, 1994 (commencement of operations) to December 31,
1994, in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
New York, New York
February 6, 1995
23
<PAGE>
Lexington International Fund, Inc.
Statement of Net Assets
(Including the Portfolio of Investments)
December 31, 1994
(Left Column)
Number of Value
Shares Security (Note 1)
- --------------------------------------------------------------------------------
Argentina: 0.8%
7,000 *YPF Sociedad Anonima (ADR) ............................ $ 149,625
-----------
Australia: 3.8%
55,500 Mayne Nickless, Ltd. .................................. 283,882
76,400 *TabCorp Holdings, Ltd. ................................ 139,144
14,000 *TabCorp Holdings, Ltd. (ADR)1 ......................... 255,500
-----------
678,526
-----------
Belgium: 1.2%
2,800 *Union Miniere ......................................... 217,347
-----------
Canada: 1.6%
6,800 Inco, Ltd. ............................................ 194,650
60,200 *Markborough Properties, Inc. .......................... 92,352
-----------
287,002
-----------
Chile: 0.4%
7,000 Banco Osorno (ADR) .................................... 75,250
-----------
France: 5.9%
3,600 Assurances Generale de France ......................... 143,028
5,380 Banque Nationale de Paribas ........................... 247,525
885 Cetelem ............................................... 158,391
3,040 Compagnie de Suez ..................................... 139,580
600 Elf Aquitaine ......................................... 42,267
2,100 Societe Generale ...................................... 220,784
4,200 Union De Assurance de Paris ........................... 108,463
-----------
1,060,038
-----------
Germany: 1.4%
180 Deutsche Bank AG ...................................... 83,639
1,520 *Pfaff GM AG ........................................... 168,725
-----------
252,364
-----------
Hong Kong: 1.2%
127,000 Semi-Tech Global Company, Ltd. ........................ 214,210
-----------
Hungary: 0.2%
2,000 *Fotex RT (ADR)1 ....................................... 31,500
-----------
Indonesia: 0.6%
100,000 Argha Karya Prima Industries .......................... 104,688
-----------
Ireland: 3.3%
31,000 Jefferson Smurfit Group ............................... 179,449
462,500 *Waterford Glass/Wedgewood
Holdings Plc ........................................ 410,289
-----------
589,738
-----------
(Right Column)
Number of Value
Shares Security (Note 1)
- --------------------------------------------------------------------------------
Israel: 0.5%
8,800 *First Israel Fund, Inc. ............................... $ 88,000
-----------
Italy: 0.7%
36,000 *Finanza & Futuro Holdings SPA ......................... 126,725
-----------
Japan: 41.9%
3,000 Chubu Steel Plate Company, Ltd. ....................... 19,740
72,000 Chuetsu Pulp & Paper Company, Ltd. .................... 397,191
31,000 Daicel Chemical Industries, Ltd. ...................... 174,745
22,000 *Denki Kagaku Kogyo K.K. ............................... 90,912
14,000 Honda Motor Company, Ltd. ............................. 248,545
46,000 Ichikoh Industries, Ltd. .............................. 209,930
34,000 Japan Vilene Company, Ltd. ............................ 238,375
20,000 Joshin Denki Company, Ltd. ............................ 282,848
25,000 Kankaku Securities, Ltd. .............................. 124,875
4,000 Kanto Auto Works, Ltd. ................................ 28,886
20,000 *Kobe Steel Company, Ltd. .............................. 62,388
4,000 Koito Manufacturing Company, Ltd. ..................... 32,096
23,000 Komatsu Forklift Company, Ltd. ........................ 179,939
19,000 *Makino Milling Company, Ltd. .......................... 171,134
10,000 Matsushita Electric Industrial
Company, Ltd. ....................................... 164,494
32,000 Matsushita Refrigeration Company,
Ltd. ................................................ 282,768
12,000 Matsuzakaya Company, Ltd. ............................. 156,470
21,000 Minebea Company, Ltd. ................................. 176,930
47,300 Mitsubishi Chemical Corporation ....................... 259,984
2,000 Mori Seiki Company, Ltd. .............................. 47,944
44,000 Nippon Chemi-Con Corporation .......................... 280,240
13,000 Nippon Steel Chemical Company, Ltd. ................... 49,548
39,000 Nippon Steel Corporation .............................. 146,690
35,000 *Nippon Yakin Kogyo Company, Ltd. ...................... 207,122
1,000 Nissan Diesel Motor Company, Ltd. ..................... 5,577
49,000 NKK Corporation ....................................... 135,646
23,000 NOK Corporation ....................................... 219,158
8,000 Nomura Securities Company, Ltd. ....................... 166,098
25,000 NTN Toyo Bearing Company, Ltd. ........................ 187,312
14,000 Okasan Securities, Ltd. ............................... 92,678
16,000 Royal Company, Ltd. ................................... 245,537
14,000 Sakai Chemical Industry Company,
Ltd. ................................................ 101,665
29,000 Sansui Electric Company, Ltd. ......................... 81,445
16,000 Seino Transportation Company, Ltd. .................... 292,077
36,000 Settsu Corporation .................................... 145,517
6,000 Shinobu Foods Product Company, Ltd. ................... 68,605
37,000 Showa Denko Corporation ............................... 129,519
6,300 Sony Corporation ...................................... 357,021
23,000 Stanley Electric Company, Ltd. ........................ 173,480
7,000 Tokai Pulp Company, Ltd. .............................. 67,262
24
<PAGE>
Lexington International Fund, Inc.
Statement of Net Assets
(Including the Portfolio of Investments)
December 31, 1994 (continued)
(Left Column)
Number of Value
Shares Security (Note 1)
- --------------------------------------------------------------------------------
Japan (continued)
90,000 *Tosoh Corporation ..................................... $ 362,888
22,000 Ube Industries, Ltd. .................................. 84,955
31,000 Yamaichi Securities Company, Ltd. ..................... 234,444
6,000 Yamanouchi Pharmaceutical
Company, Ltd. ....................................... 123,370
16,000 Yamato Kogyo Company, Ltd. ............................ 163,692
-----------
7,471,740
-----------
Malaysia: 0.6%
17,000 Resorts World Bhd ..................................... 99,922
-----------
Mexico: 0.5%
16,000 *Grupo Financiero Banamex "C" .......................... 45,306
58,000 Grupo Financiero Bancomer "C" ......................... 33,537
3,100 Tubos de Acero de Mexico, S.A. (ADR) .................. 14,532
-----------
93,375
-----------
Netherlands: 3.0%
6,560 Boskalis Westminster Certificates ..................... 133,901
13,800 Elsevier N.V. ......................................... 144,023
2,340 Royal Dutch Petroleum Company ......................... 255,008
-----------
532,932
-----------
New Zealand: 5.0%
375,100 Brierley Investments, Ltd. ............................ 271,187
30,900 Ceramco Corporation ................................... 67,217
111,100 Fisher & Paykel Industries, Ltd. ...................... 323,422
68,900 Independent Newspaper, Ltd. ........................... 231,432
-----------
893,258
-----------
Norway: 0.4%
3,700 *Petroleum Geo Services (ADR) .......................... 68,913
-----------
(Right Column)
Number of Value
Shares Security (Note 1)
- --------------------------------------------------------------------------------
South Africa: 3.6%
7,400 Johannesburg Consolidated
Investments, Ltd. (ADR) ............................. $ 189,766
9,600 Rustenberg Platinum Holdings,
Ltd. (ADR) .......................................... 263,851
13,800 Samancor, Ltd. (ADR) .................................. 193,029
-----------
646,646
-----------
Spain: 3.4%
3,260 Corporacion Mapfre .................................... 136,194
2,160 *Corporacion Mapfre Vida ............................... 93,192
18,400 Iberdrola Nuevas ...................................... 113,488
9,400 Repsol S.A. ........................................... 254,903
-----------
597,777
-----------
Switzerland: 1.3%
119 Bobst A.G. (Bearer) ................................... 137,325
120 Union Bank of Switzerland ............................. 99,595
-----------
236,920
-----------
United Kingdom: 5.9%
48,250 Antofagasta Holdings Plc .............................. 238,013
60,900 Body Shop International Plc ........................... 184,063
11,860 Rio Tinto Zinc Corporation Plc ........................ 153,596
61,540 Takare Plc ............................................ 212,017
73,300 Tomkins Plc ........................................... 252,533
-----------
1,040,222
-----------
TOTAL INVESTMENTS: 87.2%
(cost $14,968,006(D)) (Note 1) ..................... 15,556,718
-----------
Other assets in excess
of liabilities: 12.8% ............................... 2,286,639
-----------
TOTAL NET ASSETS: 100%
(equivalent to $10.37 per share on
1,721,220 shares outstanding) ....................... $17,843,357
===========
At December 31, 1994, the composition of the Fund's net assets by industry
concentration was as follows:
(Left Column)
Banking ............................ 5.3%
Capital Equipment .................. 10.4
Consumer Durable ................... 12.2
Consumer Nondurable ............... 2.2
Electric & Electronics ............. 0.5
Energy Sources .................... 5.4
(Middle Column)
Financial Services ................ 7.8%
Health Care ........................ 0.7
Materials .......................... 22.9
Merchandising ...................... 2.6
Multi-Industry ..................... 6.7
Services ........................... 8.3
(Right Column)
Transportation ..................... 1.6%
Utilities .......................... 0.6
Other assets in excess
of liabilities ................... 12.8
-----
Total Net Assets 100.0%
=====
ADR-American Depository Receipt.
*Non-income producing securities.
1Restricted security.
(d)Aggregate cost for Federal income tax purposes is identical.
The Notes to Financial Statements are an integral part of this statement.
25
<PAGE>
Lexington International Fund, Inc.
Portfolio Changes
Six months ended December 31, 1994
(unaudited)
Additions
Assurances Generale de France
Banco Osorno (ADR)
Bobst A.G. (Bearer)
Body Shop International Plc
Ceramco Corporation
Chubu Steel Plate Company, Ltd.
Corporacion Mapfre Vida
Daicel Chemical Industries, Ltd.
Denki Kagaku Kogyo K.K.
Finanza & Futuro Holdings SPA
Kobe Steel Company, Ltd.
Markborough Properties, Inc.
Mitsubishi Chemical Company
Nippon Steel Chemical Company
Nippon Steel Corporation
Nissan Diesel Motor Company, Ltd.
NKK Corporation
Okasan Securities, Ltd.
Sakai Chemical Industry Company, Ltd.
Sansui Electric Company, Ltd.
Semi-Tech Global Company, Ltd.
Showa Denko Corporation
Tabcorp Holdings, Ltd.
Tabcorp Holdings, Ltd. (ADR)
Tokai Pulp Company, Ltd.
Tomkins Plc
Tubos de Acero de Mexico, S.A. (ADR)
Ube Industries, Ltd.
Union de Assurance de Paris
Yamaichi Securites Company, Ltd.
Yamanouchi Pharmaceutical Company, Ltd.
Deletions
Aokam Perdana Bhd
Bilspedition "B" Free
Cimentas
Comercial Del Plata (ADR)
CRH Plc Grand Magasins Jelmoli (Bearer)
(Middle Column)
Grand Magasins Jelmoli (Warants)
Grupo Casa Autrey, S.A. de C.V. (ADR)
Hino Motors Company, Ltd.
Izmir Demir Celik
Kingfisher Plc
Nippon Paint Corporation
Saint Gobain
Sampoerna
Standard Chartered Bank Plc
Telefonos de Mexico, S.A. (ADR)
Tjiwi Kimia
Tolmex, S.A. de C.V.
Western Mining Corporation
Wilson & Horton, Ltd.
Increases in Holdings
Argha Karya Prima Industries
Banque Nationale de Paribas
Boskalis Westminster Certificates
Brierley Investments, Ltd.
Cetelem
Chuetsu Pulp & Paper Company, Ltd.
Compagnie de Suez
Corporacion Mapfre
Elf Aquitaine
Elsevier N.V.
First Israel Fund, Inc
Fisher & Paykel Industries, Ltd.
Honda Motor Company, Ltd.
Iberdrola Nuevas
Ichikoh Industries, Ltd.
Inco, Ltd.
Japan Vilene Company, Ltd.
Jefferson Smurfit Group
Joshin Denki Company, Ltd.
Kankaku Securities, Ltd.
Komatsu Forklift Company, Ltd.
Matsushita Refrigeration Company, Ltd.
(Right Column)
Matsuzakaya Company, Ltd.
Mayne Nickless, Ltd.
Nippon Chemi-Con Corporation
Nippon Yakin Kogyo Company, Ltd.
Nomura Securities Company, Ltd.
Petroleum Geo Services (ADR)
Pfaff GM AG
Repsol S.A.
Royal Company, Ltd.
Royal Dutch Petroleum Company
Samancor, Ltd. (ADR)
Seino Transportation Company, Ltd.
Settsu Corporation
Societe Generale
Sony Corporation
Takare Plc
Tosho Corporation
Union Miniere
Waterford Glass/Wedgewood Holdings Plc
Decreases in Holdings
Antofagasta Holdings Plc
Grupo Financiero Banamex "C"
Grupo Financiero Bancomer "C"
Johannesburg Consolidated Investments,
Ltd. (ADR)
Makino Milling Company, Ltd.
Matsushita Electric Industrial Company, Ltd.
Minebea Company, Ltd.
Mori Seiki Company, Ltd.
NOK Corporation
NTN Toyo Bearing Company, Ltd.
Rio Tinto Zinc Corporation Plc
Rustenburg Platinum Holdings, Ltd. (ADR)
Stanley Electric Company, Ltd.
Yamato Kogyo Company, Ltd.
Purchased and Sold Same Period
Telewest Communications
26
<PAGE>
Lexington International Fund, Inc.
Statement of Assets and Liabilities
December 31, 1994
<TABLE>
<S> <C>
Assets
Investments in securities, at value (cost $14,968,006) (Note 1) ................................ $15,556,718
Cash ........................................................................................... 2,186,839
Receivable for investment securities sold ...................................................... 137,431
Receivable for shares sold ..................................................................... 37,045
Dividends and interest receivable .............................................................. 26,813
Foreign taxes recoverable ...................................................................... 15,837
Deferred organization expenses (Note 1) ........................................................ 31,412
Unrealized gain on open forward contracts (Note 7) ............................................. 72,394
-----------
Total Assets ........................................................................... 18,064,489
-----------
Liabilities
Due to Lexington Management Corporation (Note 2) ............................................... 1,252
Payable for investment securities purchased .................................................... 85,559
Payable for shares redeemed .................................................................... 22,120
Accrued expenses ............................................................................... 108,736
Distributions payable .......................................................................... 3,465
-----------
Total Liabilities ...................................................................... 221,132
-----------
Net Assets (equivalent to $10.37 per share on 1,721,220 shares outstanding) (Note 4) ........... $17,843,357
===========
Net Assets consist of:
Capital stock-authorized 1,000,000,000 shares,
$.001 par value per share .................................................................... $ 1,721
Additional paid-in capital ..................................................................... 17,518,058
Distributions in excess of net realized gains on investments and foreign currency holdings
(Note 1) ..................................................................................... (338,043)
Net unrealized appreciation of investments and foreign currency holdings ....................... 661,621
-----------
$17,843,357
===========
</TABLE>
The Notes to Financial Statements are an integral part of this statement.
27
<PAGE>
(Left Column)
Lexington International Fund, Inc.
Statement of Operations
January 3, 1994 (commencement of operations)
to December 31, 1994
Investment Income
Dividends ............................................. $ 226,711
Interest .............................................. 26,630
-----------
253,341
Less: foreign tax expense ............................. 31,819
-----------
Investment income ............................. 221,522
--------
Expenses
Investment advisory fee (Note 2) .................... 152,230
Accounting and shareholder services
expenses (Note 2) ................................. 17,599
Custodian and transfer agent expenses ............... 74,514
Printing and mailing ................................ 21,910
Directors' fees and expenses ........................ 12,009
Audit and legal ..................................... 21,501
Registration fees ................................... 4,505
Distribution expenses (Note 3) ...................... 37,569
Computer expense .................................... 6,395
Other expenses ...................................... 9,245
Amortization of deferred organization
expenses (Note 1) ................................. 6,992
-----------
Total expenses .................................... 364,469
--------
Net investment loss ........................... (142,947)
Realized and Unrealized Gain on Investments (Note 5)
Realized gain on investments and foreign currency
transactions (excluding short-term securities):
Proceeds from sales ............................. 14,486,848
Cost of securities sold ......................... 14,318,146
-----------
Net realized gain ............................. 168,702
Unrealized appreciation of investments
and foreign currency holdings:
End of period ..................................... 661,621
Beginning of period ............................... -
-----------
Change during period ............................ 661,621
--------
Net realized and unrealized gain
on investments and foreign
currency holdings ........................... 830,323
--------
Increase in Net Assets Resulting
from Operations ................................... $687,376
========
(Right Column)
Lexington International Fund, Inc.
Statement of Changes in Net Assets
January 3, 1994 (commencement of operations)
to December 31, 1994
Net investment loss ............................................... $ (142,947)
Net realized gain from investments and foreign currency
transactions .................................................... 168,702
Increase in unrealized appreciation of investments and
foreign currency holdings ....................................... 661,621
-----------
Net increase in net assets resulting
from operations ........................................... 687,376
Distribution to shareholders from net realized gains from
security transactions (Note 1) .................................. (168,702)
Distributions to shareholders in excess of net realized
gains from security transactions (Note 1) ....................... (195,096)
Increase in net assets from capital share transactions
(Note 4) ........................................................ 17,519,779
-----------
Net increase in net assets .................................. 17,843,357
Net Assets:
Beginning of period ............................................. -
-----------
End of period ................................................... $17,843,357
===========
The Notes to Financial Statements are an integral part of these statements.
28
<PAGE>
Lexington International Fund, Inc.
Notes to Financial Statements
January 3, 1994 (commencement of operations) to December 31, 1994
1. Significant Accounting Policies
Lexington International Fund, Inc. (the "Fund") is an open end diversified
management investment company registered under the Investment Company Act of
1940, as amended. The Fund commenced operations on January 3, 1994. The
following is a summary of significant accounting policies followed by the Fund
in the preparation of its financial statements:
Investments Security transactions are accounted for on a trade date basis.
Realized gains and losses from security transactions are reported on the
identified cost basis. Investments are stated at market value based on closing
prices reported by the exchange on which the securities are traded on the last
business day of the period or, for over-the-counter securities, at the average
between bid and asked prices, except for short-term securities which are stated
at amortized cost, which approximates market value. Securities for which market
quotations are not readily available and other assets are valued at fair value
as determined by management and approved in good faith by the Board of
Directors. All investments quoted in foreign currencies are valued in U.S.
dollars on the basis of the foreign currency exchange rates prevailing at the
close of business. Dividends and distributions to shareholders are recorded on
the ex-dividend date. Interest income is accrued as earned.
Foreign Currency Transactions Foreign currencies (and receivables and
payables denominated in foreign currencies) are translated into U.S. dollar
amounts at current exchange rates. Translation gains or losses resulting from
changes in exchange rates and realized gains and losses on the settlement of
foreign currency transactions are reported in the statement of operations. In
addition, the Fund may enter into forward foreign exchange contracts in order to
hedge against foreign currency risk in the purchase or sale of securities
denominated in foreign currency. The Fund may also enter into such contracts to
hedge against changes in foreign currency exchange rates on portfolio positions.
These contracts are marked to market daily, by recognizing the difference
between the contract exchange rate and the current market rate as unrealized
gains or losses. Realized gains or losses are recognized when contracts are
settled and are reported in the statement of operations.
Distributions In accordance with Statement of Position 93-2: Determination,
Disclosure and Financial Statement Presentation of Income, Capital Gain and
Return of Capital Distributions by Investment Companies, as of December 31,
1994, book and tax basis differences amounting to $142,947 have been
reclassified from undistributed net investment income to distributions in excess
of net realized gains on investments. Distributions in excess of net realized
gains reflect temporary book-tax differences arising from losses resulting from
wash sales and Internal Revenue Code ("IRC") Excise Tax distribution
requirements and associated post-October loss deferral provisions, which
effectively allow the deferral of net realized capital losses to the next tax
year.
Federal Income Taxes It is the Fund's intention to comply with the
requirements of the Internal Revenue Code applicable to "regulated investment
companies" and to distribute all of its taxable income to its shareholders.
Therefore, no provision for Federal income taxes has been made.
Deferred Organization Expenses Organization expenses aggregating $38,404
have been deferred and are being amortized on a straight-line basis over five
years.
29
<PAGE>
Lexington International Fund, Inc.
Notes to Financial Statements
January 3, 1994 (commencement of operations) to December 31, 1994 (continued)
2. Investment Advisory Fee and Other Transactions with Affiliate
The Fund pays an investment advisory fee to Lexington Management Corporation
("LMC") at the rate of 1% of average daily net assets. The investment advisory
contract provides that the total annual expenses of the Fund (including
management fees, but excluding interest, taxes, brokerage commissions and
extraordinary expenses) will not exceed the level of expenses which the Fund is
permitted to bear under the most restrictive expense limitation imposed by any
state in which shares of the Fund are offered for sale. No reimbursement was
required for the year ended December 31, 1994.
The Fund also reimburses LMC for certain expenses, including accounting and
shareholder servicing costs, which are incurred by the Fund, but paid by LMC.
3. Distribution Plan
The Fund has a Distribution Plan (the "Plan") which allows payments to finance
activities associated with the distribution of the Fund's shares. The Plan
provides that the Fund may pay distribution fees on a reimbursement basis,
including payments to Lexington Fund Distributors, Inc. ("LFD"), the Fund's
distributor, in amounts not exceeding .25% per annum of the Fund's average daily
net assets. Total distribution expenses for the year ended December 31, 1994
were $37,569 and are set forth in the statement of operations.
4. Capital Stock
Transactions in capital stock were as follows:
<TABLE>
<CAPTION>
Year Ended
December 31, 1994
----------------------------
Shares Amount
------ ------
<S> <C> <C>
Shares sold ..................................................... 2,131,458 $21,962,295
Shares issued to shareholders on reinvestment of dividends ...... 34,849 360,333
--------- -----------
2,166,307 22,322,628
Shares redeemed ................................................. (445,087) (4,802,849)
--------- -----------
Net increase .................................................... 1,721,220 $17,519,779
========= ===========
</TABLE>
5. Purchases and Sales of Investment Securities
The cost of purchases and proceeds from sales of securities for the year ended
December 31, 1994, excluding short term securities, were $29,286,152 and
$14,486,848, respectively.
At December 31, 1994, aggregate gross unrealized appreciation for all securities
and foreign currency holdings (including foreign currency receivables and
payables) in which there is an excess of value over tax cost amounted to
$1,582,794 and aggregate gross unrealized depreciation for all securities and
foreign currency holdings in which there is an excess of tax cost over value
amounted to $921,173.
6. Investment Risks
The Fund's investments in foreign securities may involve risks not present in
domestic investments. Since foreign securities may be denominated in a foreign
currency and involve settlement and pay interest or dividends in foreign
currencies, changes in the relationship of these foreign currencies to the U.S.
dollar can
30
<PAGE>
Lexington International Fund, Inc.
Notes to Financial Statements
January 3, 1994 (commencement of operations) to December 31, 1994 (continued)
significantly affect the value of the investments and earnings of the Fund.
Foreign investments may also subject the Fund to foreign government exchange
restrictions, expropriation, taxation or other political, social or economic
developments, all of which could affect the market and/or credit risk of the
investments.
In addition to the risks described above, risks may arise from forward foreign
currency contracts as the result of the potential inability of counterparties to
meet the terms of their contracts.
7. Forward Foreign Exchange Contracts
At December 31, 1994, the Fund was committed to sell foreign currencies under
the following forward foreign exchange contracts:
<TABLE>
<CAPTION>
Unrealized
Gain at
Settlement Contract Contract Current December 31,
Currency Date Amount Rate Rate 1994
-------- ---------- -------- -------- ------- ------------
<S> <C> <C> <C> <C> <C>
Japanese Yen ........ 2/21/95 $ 394,059 98.97 99.70 $ 2,885
Japanese Yen ........ 5/15/95 744,000 96.00 99.70 27,611
Japanese Yen ........ 5/25/95 775,715 96.69 99.70 23,458
Japanese Yen ........ 6/06/95 1,372,000 98.36 99.70 18,440
---------- -------
$3,285,774 $72,394
========== =======
</TABLE>
Lexington International Fund, Inc.
Financial Highlights
Selected per share data for a share outstanding throughout the period:
January 3, 1994
(commencement of
operations) to
December 31, 1994
-----------------
Net asset value, beginning of period .............................. $10.00
------
Income (loss) from investment operations:
Net investment loss ............................................. (.08)
Net realized and unrealized gain on investments ................. .67
------
Total income from investment operations ......................... .59
------
Less distributions:
Distributions from net realized capital gains ................... (.10)
Distributions in excess of net realized capital gains
(Temporary book-tax difference) .............................. (.12)
------
Total distributions ............................................. (.22)
------
Net asset value, end of period .................................... $10.37
======
Total return ...................................................... 5.87%
Ratio to average net assets:
Expenses ........................................................ 2.39%
Net investment loss ............................................. (.94%)
Portfolio turnover ................................................ 100.10%
Net assets at end of period (000's omitted) ....................... $17,843
31
