Dear Shareholders:
- --------------------------------------------------------------------------------
The Lexington SmallCap Value Fund appreciated by 17.5%* for the year ending
December 31, 1996. The unmanaged Russell 2000 Index of domestic small
capitalization companies (the "Index") rose 16.4% for 1996. The average small
company growth fund, according to Lipper Analytical Services, Inc., rose 20.1%
during 1996.
Broad recovery in prices of existing holdings benefitted performance rather
than any major re-structuring of the portfolio in the second half of 1996. Many
of our issues had been severely impacted during the small stock correction in
the second and third quarters. In general, quarterly earnings reports provided
positive surprises for our companies and resulted in renewed investor attention.
The fourth quarter of 1996 witnessed a welcome rebound for the small
capitalization stock market segment after its severe mid-year swoon. The Index
gained over 5%. However, the "bigger is better" theme once again prevailed since
the larger cap unmanaged Standard and Poor's Stock Price Index ("S&P 500") rose
over 8%. As the year ended, many of the more popular market measures like the
unmanaged Dow Jones Industrial Average, S&P 500, and NASDAQ Indices reached
record high levels. Meanwhile, the Index proxy for smaller companies failed to
fully recover and could not match its peak set back in May.
Against this favorable-albeit tempered-backdrop, the Fund enjoyed the best
absolute and relative performance in its short, four quarter history. Our
observation from past experience is that portfolios such as this one tend to
gain ground as it seasons. As investors in severely depressed and neglected
issues, longer term patience benefits performance more than short-term oriented,
momentum stocks. We adhere strictly to the former strategy.
Outlook and Strategy
Some portfolio characteristics may be of interest. At year-end, there were
48 individual domestic holdings in the Fund. The largest economic sector of the
eleven in which we had representation was Healthcare. It also had the largest
overweighting at 13% relative to the Index. The largest underweighted sector in
the portfolio was Financial Services.
The largest single holding, a ready-to-assemble furniture company,
O'Sullivan Industries, accounted for 3.4% of the portfolio. The 10 largest
positions together accounted for 28.7% of the total. Cash reserves were slightly
higher than 2%. The median market capitalization was $344 million, slightly
below the Index median of $360 million. The average price to book value ratio
was 1.5 times compared to 2.5 times for the Index. In short, we maintained our
strategy of a fully-invested, widely-diversified portfolio comprised of cheaper
valued, domestic smallcap equities.
As 1997 unfolds, we see several factors present that could be positive for
small cap stock investors. More widely followed indices like the Dow Jones
Industrials and NASDAQ have been popular due to their liquid, large-cap, quality
stock components. The perception that their prospects will be more challenged in
a slower growth economy with a continued stronger dollar may cause a gravitation
into smaller capitalization strata. Any tax reform legislation that cuts
long-term capital gains rates would also benefit small stocks. Finally,
historical trends favor our universe since the widely chronicled small cap stock
return premiums have not been earned over the past couple of years. We continue
to regard "regression the norm" as a powerful trend.
1
<PAGE>
Whatever transpires, we understand that selectivity remains crucial since
the small cap market is relatively thinly traded and unforgiving when
disappointed. We appreciate your continued support and welcome the opportunity
to discuss any questions you may have about your investment.
Sincerely,
Robb W. Rowe, CFA Dennis J. Hamilton, CFA Robert M. DeMichele
Portfolio Manager Portfolio Manager President
February, 1997 February, 1997 February, 1997
CHART/BEGIN
Printed version of this shareholder report contains a
graphic chart indicating the comparison of change in
value of a $10,000 investment in Lexington SmallCap
Value Fund, Inc., and the unmanaged Russell 2000 Index
from 1/2/96 through 12/31/96
CHART/END
*17.50% is the since commencement (1/2/96) average annual standard total return
for the period ended December 31, 1996. Investment return and principal value of
an investment will fluctuate so that an investor's shares, when redeemed, may be
worth more or less than at their original cost. Total return represents past
performance and is not predictive of future results.
2
<PAGE>
Lexington SmallCap Value Fund, Inc.
Statement of Net Assets
(Including the Portfolio of Investments)
December 31, 1996
Number
of Value
Shares Security (Note 1)
- --------------------------------------------------------------------------------
Common Stocks: 98.4%
Capital Equipment: 5.5%
9,200 Detroit Diesel Corporation1 ....................... $ 211,600
9,000 Giddings & Lewis, Inc.1 ........................... 117,000
5,000 Watts Industries, Inc. ............................ 119,375
---------
447,975
---------
Construction & Housing: 1.5%
6,000 Granite Construction, Inc. ........................ 117,000
---------
Consumer-Durable Goods: 6.8%
13,500 Ampco-Pittsburgh Corporation ...................... 162,000
3,700 Bio-Rad Laboratiories, Inc. "A"1 .................. 111,000
19,700 O'Sullivan Industries Holdings, Inc.1 ............. 275,800
---------
548,800
---------
Consumer-Non-Durable Goods: 3.9%
3,900 Canandaigua Wine Company, Inc. "A"1 ............... 110,906
6,700 Paragon Trade Brands, Inc.1 ....................... 201,000
---------
311,906
---------
Electrical and Electronics: 12.6%
26,000 American Software, Inc.1 .......................... 164,125
22,000 Asante Technologies, Inc.1 ........................ 105,875
45,000 Dataware Technologies, Inc.1 ...................... 135,000
16,500 Intergraph Corporation1 ........................... 171,187
10,700 Progress Software Corporation1 .................... 212,662
6,600 Sequent Computer Systems, Inc.1 ................... 116,737
8,700 Telxon Corporation ................................ 107,663
---------
1,013,249
---------
Energy Sources: 3.9%
24,700 Patina Oil & Gas Corporation1 ..................... 228,475
4,400 Western Gas Resources, Inc. ....................... 84,700
---------
313,175
---------
Financial Services: 6.4%
6,200 John Alden Financial Corporation .................. 114,700
16,940 National Auto Credit, Inc. ........................ 203,280
11,800 Titan Holdings, Inc. .............................. 194,700
---------
512,680
---------
3
<PAGE>
Lexington SmallCap Value Fund, Inc.
Statement of Net Assets
(Including the Portfolio of Investments)
December 31, 1996 (continued)
Number
of Value
Shares Security (Note 1)
- --------------------------------------------------------------------------------
Health & Personal Care: 8.9%
9,000 Alpharma, Inc. .................................... $ 128,250
76,300 Laboratory Corporation of America Holdings1 ....... 219,363
12,700 NBTY, Inc.1 ....................................... 240,506
55,800 Staff Builders, Inc. "A"1 129,909
---------
718,028
---------
Health Care Diversified: 1.5%
9,100 Sun Healthcare Group, Inc.1 ....................... 122,850
---------
Health Care Miscellaneous: 5.0%
14,800 Carter-Wallace, Inc. .............................. 231,250
7,000 Integrated Health Services, Inc. .................. 170,625
---------
401,875
---------
Health Equipment And Services: 5.0%
20,000 NovaCare, Inc.1 ................................... 220,000
12,200 OEC Medical Systems, Inc.1 ........................ 183,000
---------
403,000
---------
Manufacturing-Diversified Industries: 1.6%
22,400 United Industrial Corporation ..................... 131,600
---------
Materials: 8.9%
6,400 ACX Technologies, Inc.1 ........................... 127,200
9,800 Coeur D'Alene Mines Corporation ................... 148,225
15,100 Phillips-Van Heusen ............................... 217,063
12,500 Pillowtex Corporation ............................. 225,000
---------
717,488
---------
Merchandising: 3.6%
13,900 Cyrk International, Inc.1 ......................... 181,569
13,000 Handleman Company ................................. 110,500
---------
292,069
---------
Retail: 2.6%
24,500 Cash America International, Inc. .................. 208,250
---------
4
<PAGE>
Lexington SmallCap Value Fund, Inc.
Statement of Net Assets
(Including the Portfolio of Investments)
December 31, 1996 (continued)
Number
of Value
Shares Security (Note 1)
- --------------------------------------------------------------------------------
Services: 7.6%
41,200 Interface Systems, Inc.1 .......................... $ 185,400
11,500 International Technology1 ......................... 97,750
14,800 Spelling Entertainment Group, Inc.1 ............... 109,150
22,500 Transitional Hospital Corporation1 ................ 216,563
----------
608,863
----------
Telecommunications: 2.3%
12,600 California Microwave, Inc.1 ....................... 185,850
----------
Transportation: 5.8%
8,500 Alaska Air Group, Inc.1 ........................... 178,500
14,000 America West Airlines, Inc.1 ...................... 222,250
4,800 Yellow Corporation1 ............................... 69,600
----------
470,350
----------
Utilities: 5.0%
13,500 Forest Oil Corporation1 ........................... 236,250
52,000 Kaneb Services, Inc.1 ............................. 169,000
----------
405,250
----------
Total Investments: 98.4%
(cost $6,942,240+) (Note 1) ....................... 7,930,258
Other assets in excess of liabilities: 1.6% ....... 130,966
----------
Total Net Assets: 100.0%
(equivalent to $11.73 per share on 687,232
shares outstanding) ............................. $8,061,224
==========
1Non-income producing security.
+Aggregate cost for Federal income tax purposes is $6,942,509.
The Notes to Financial Statements are an integral part of this statement.
5
<PAGE>
Lexington SmallCap Value Fund, Inc.
Statement of Assets and Liabilities
December 31, 1996
Assets
Investments, at value (cost $6,942,240) (Note 1) .................. $7,930,258
Cash .............................................................. 186,935
Receivable for shares sold ........................................ 7,250
Dividends and interest receivable ................................. 2,358
Deferred organization expense, net (Note 1) ....................... 42,270
----------
Total Assets ................................................. 8,169,071
----------
Liabilities
Due to Lexington Management Corporation (Note 2) .................. 6,538
Payable for investment securities purchased ....................... 20,374
Payable for shares redeemed ....................................... 2,355
Distributions payable ............................................. 91
Accrued expenses 28,655
Other liabilities ................................................. 49,834
----------
Total Liabilities ............................................ 107,847
----------
Net Assets (equivalent to $11.73 per share
on 687,232 shares outstanding) (Note 4) ........................... $8,061,224
==========
Net Assets consist of:
Capital stock-authorized 1,000,000,000 shares, $.001
par value per share ............................................. $ 687
Additional paid-in capital ........................................ 6,972,282
Accumulated deficit (Note 1) ...................................... (9,044)
Accumulated net realized gain on investments (Note 1) ............. 109,281
Unrealized appreciation on investments ............................ 988,018
----------
Total Net Assets ............................................. $8,061,224
==========
The Notes to Financial Statements are an integral part of this statement.
6
<PAGE>
Lexington SmallCap Value Fund, Inc.
Statement of Operations
January 2, 1996 (commencement of operations) to December 31, 1996
Investment Income
Income
Dividends $ 31,435
Interest 17,020
--------
Total investment income $ 48,455
Expenses
Investment advisory fee (Note 2) ........................ 68,948
Printing and mailing expenses ........................... 39,996
Distribution expenses (Note 3) .......................... 17,237
Transfer agent and shareholder servicing expense (Note 2) 15,596
Directors' fees and expenses ............................ 15,504
Professional fees ....................................... 14,299
Amortization of deferred organizational costs (Note 1) .. 10,567
Registration fees ....................................... 8,993
Computer processing fees ................................ 5,502
Accounting expenses (Note 2) ............................ 4,696
Custodian fees .......................................... 1,800
Other expenses .......................................... 6,352
--------
Total expenses ......................................209,490
Less: expenses recovered under contract with
investment adviser (Note 2) ..................... 38,617 170,873
-------- ----------
Net investment loss ............................ (122,418)
Realized and Unrealized Gain on Investments (Note 5)
Net realized gain on investments ........................ 241,416
Net change in unrealized appreciation on investments .... 988,018
----------
Net realized and unrealized gain ................. 1,229,434
----------
Increase in Net Assets Resulting from Operations ............ $1,107,016
==========
Statement of Changes in Net Assets
January 2, 1996 (commencement of operations) to December 31, 1996
Net investment loss ................................................ $ (122,418)
Net realized gain on investments ................................... 241,416
Net change in unrealized appreciation of investments ............... 988,018
----------
Net increase in net assets resulting from operations ........... 1,107,016
Distributions to shareholders from net realized gains on investments (18,761)
Increase in net assets from capital share transactions (Note 4) .... 6,972,969
----------
Net increase in net assets ..................................... 8,061,224
Net Assets
Beginning of period ................................................ -
End of period (including accumulated deficit of $9,044) ........... $8,061,224
==========
The Notes to Financial Statements are an integral part of these statements.
7
<PAGE>
Lexington SmallCap Value Fund, Inc.
Notes to Financial Statements
December 31, 1996
1. Significant Accounting Policies
Lexington SmallCap Value 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 2, 1996. The Fund's
investment objective is to seek long-term capital appreciation. The following is
a summary of significant accounting policies followed by the Fund in the
preparation of its financial statements:
Investments Security transactions are accounted for on a trade date basis.
Realized gains and losses from investment transactions are reported on the
identified cost basis. Securities traded on a recognized stock exchange are
valued at the last sales price reported by the exchange on which the securities
are traded. If no sales price is recorded, the mean between the last bid and
asked price is used. Securities traded on the over-the-counter market are valued
at the mean between the last current bid and asked price. Short-term securities
having a maturity of 60 days or less are stated at amortized cost, which
approximates market value. Securities for which market quotations are not
readily available and other assets are valued by Fund management in good faith
under the direction of the Fund's Board of Directors. Dividend income and
distributions to shareholders are recorded on the ex-dividend date. Interest
income, adjusted for amortization of premiums and accretion of discounts, is
accrued as earned.
Federal Income Taxes It is the Fund's policy to comply with the requirements
of the Internal Revenue Code applicable to "regulated investment companies" and
to distribute all of its taxable income to its shareholders. Therefore, no
provision for Federal income taxes is required.
Distributions Dividends from net investment income and net realized capital
gains are normally declared and paid annually, but the Fund may make
distributions on a more frequent basis to comply with the distribution
requirements of the Internal Revenue Code. The character of income and gains to
be distributed are determined in accordance with income tax regulations which
may differ from generally accepted accounting principals. At December 31, 1996,
reclassifications were made to the Fund's capital accounts to reflect permanent
book/tax differences and income and gains available for distribution under
income tax regulations. Net investment income, net realized gains and net assets
were not affected by this change.
Deferred Organization Expenses Organization expenses aggregating $52,837
have been deferred and are being amortized on a straight line basis over five
years.
Use of Estimates The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of increases and
decreases in net assets from operations during the reporting period. Actual
results could differ from those estimates.
2. Investment Advisory Fee and Other Transactions with Affiliate
The Fund pays an investment advisory fee to Lexington Management Corporation
("LMC") at the annual rate of 1.00% of the Fund's average daily net assets. In
connection with providing investment advisory services, LMC has entered into a
sub-advisory contract with Capital Technology Inc. ("CTI") under which CTI
provides the Fund with investment management services. Pursuant to the terms of
the sub-advisory contract between LMC and CTI, LMC pays CTI a monthly
sub-advisory fee at the annual rate of 0.50% of the Fund's average daily net
assets. The sub-advisory fee will be paid by LMC, not the Fund. LMC agreed to
voluntarily limit the total expenses
8
<PAGE>
Lexington SmallCap Value Fund, Inc.
Notes to Financial Statements
December 31, 1996 (continued)
2. Investment Advisory Fee and Other Transactions with Affiliate (continued)
of the Fund (excluding interest, taxes, brokerage, and extraordinary expenses
but including the management fee and operating expenses) to an annual rate of
1.75% of the Fund's average daily net assets through April 30, 1996. Effective
May 1, 1996 the total annual expenses of the Fund (excluding interest, taxes,
brokerage, and extraordinary expenses but including the management fee and
operating 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. Reimbursement for the
year ended December 31, 1996 amounted to $38,617 and is set forth in the
statement of operations.
The Fund also reimbursed LMC for certain expenses, including accounting and
shareholder servicing costs of $10,096, which were 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 Funds Distributor, Inc. ("LFD"), the Fund's
distributor, in amounts not exceeding 0.25% per annum of the Fund's average
daily net assets. Total distribution expenses for the year ended December 31,
1996 were $17,237 and are set forth in the statement of operations.
4. Capital Stock
Transactions in capital stock were as follows:
January 2, 1996
(commencement of operations)
to December 31, 1996
----------------------------
Shares Amount
------ ----------
Shares sold ....................................... 806,989 $8,267,408
Shares issued on reinvestment of dividends ........ 1,594 18,670
------- ----------
808,583 8,286,078
Shares redeemed ................................... (121,351) (1,313,109)
------- ----------
Net increase .................................... 687,232 $6,972,969
======= ==========
5. Purchases and Sales of Investment Securities
The cost of purchases and proceeds from sales of securities for the year ended
December 31, 1996, excluding short-term securities, were $10,586,945 and
$298,250 respectively.
At December 31, 1996, the aggregate gross unrealized appreciation for all
securities in which there is an excess of value over tax cost amounted to
$1,249,495 and aggregate gross unrealized depreciation for all securities in
which there is an excess of tax cost over value amounted to $261,746.
9
<PAGE>
Lexington SmallCap Value Fund, Inc.
Financial Highlights
Selected per share data for a share outstanding throughout the period:
January 2, 1996 (commencement of operations) to December 31, 1996
Net asset value, beginning of period ................................ $10.00
------
Income (loss) from investment operations:
Net investment loss ............................................... (0.18)
Net realized and unrealized gain on investments ................... 1.94
------
Total income from investment operations ............................. 1.76
Less distributions:
Distributions from net realized gains ............................. (0.03)
------
Net asset value, end of period ...................................... $11.73
======
Total return ........................................................ 17.50%
Ratio to average net assets:
Expenses, before reimbursement or waivers ......................... 3.04%
Expenses, net of reimbursement or waivers ......................... 2.48%
Net investment loss, before reimbursement or waivers .............. (2.34%)
Net investment loss ............................................... (1.78%)
Portfolio turnover rate ............................................. 60.92%
Average commissions paid on equity security transactions ............ $ 0.03
Net assets at end of period (000's omitted) ......................... $8,061
10
<PAGE>
Independent Auditors' Report
The Board of Directors and Shareholders
Lexington SmallCap Value Fund, Inc.:
We have audited the accompanying statements of net assets (including the
portfolio of investments) and assets and liabilities of Lexington SmallCap Value
Fund, Inc. as of December 31, 1996, and the related statements of operations,
changes in net assets, and the financial highlights for the period from January
2, 1996 (commencement of operations) to December 31, 1996. 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1996 by correspondence with the custodian. As to securities bought
but not received, we performed other appropriate auditing procedures. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our 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 SmallCap Value Fund, Inc. as of December 31, 1996, and the results of
operations, changes in net assets and the financial highlights for the period
from January 2, 1996 (commencement of operations) to December 31, 1996, in
conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
New York, New York
February 10, 1997
11
<PAGE>
(left column)
Lexington
SmallCap Value Fund, Inc.
Investment Adviser
- --------------------------------------------------------------
LEXINGTON MANAGEMENT CORPORATION
P.O. Box 1515
Park 80 West Plaza Two
Saddle Brook, New Jersey 07663
Sub-Adviser
Capital Technology, Inc.
McMullen Creek Office Center
P.O. Box 472428
Charlotte, North Carolina 28247
Distributor
- --------------------------------------------------------------
LEXINGTON FUNDS DISTRIBUTOR, INC.
P.O. Box 1515
Park 80 West Plaza Two
Saddle Brook, New Jersey 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 and Sales: 1-800-526-0056
24 Hour Account Information:
1-800-526-0052
------------------------------------------
- --------------------------------------------------------------
(800) 526-0052
"LEXLINE"
24 hour toll-free telephone access to your
Lexington Fund account
Price/Yield * Account Balances * Exchanges *
Last Transactions * Total Return * Duplicate Statements
- --------------------------------------------------------------
This report has been prepared for the information of the
shareholders of Lexington SmallCap Value Fund, Inc. and is
authorized for distribution to the public only if it is
accompanied or preceded by a currently effective prospectus
which sets forth expenses and other material information.
(right column)
-------------------------------------
LEXINGTON
-------------------------------------
-------------------------------------
LEXINGTON
SMALLCAP
VALUE
FUND, INC.
(filled box)
Seeks long-term capital
appreciation through investment in
common stocks or companies
domiciled in the United States
with a market capitalization
of less than $1 billion.
(filled box)
ANNUAL REPORT
DECEMBER 31, 1996
The Lexington Group
of No Load
Investment Companies
-------------------------------------
