As filed with the Securities and Exchange Commission on February 27, 1997
Registration No. 33-63985
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No.
Post-Effective Amendment No. 2 X
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 3 X
(Check appropriate box or boxes.)
LEXINGTON SMALLCAP VALUE FUND, INC.
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(Exact name of Registrant as specified in Charter)
Park 80 West Plaza Two
Saddle Brook, New Jersey 07663
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(Address of principal executive offices)
Registrant's Telephone Number: (201) 845-7300
Lisa Curcio, Secretary
Lexington SmallCap Value Fund, Inc.
Park 80 West Plaza Two, Saddle Brook, New Jersey 07663
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(Name and address of agent for service)
With a copy to:
Carl Frischling, Esq.
Kramer, Levin, Naftalis & Frankel
919 Third Avenue, New York, New York 10022
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It is proposed that this filing will become effective February 27, 1997
pursuant to paragraph (b) of Rule 485.
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The Registrant has registered an indefinite number of shares
pursuant to Section 24(f) of the Investment Company Act of 1940. A Rule
24(f)(2) notice for the Registrant's fiscal year ending December 31,
1996, was filed on February 25, 1997.
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LEXINGTON SMALLCAP VALUE FUND, INC.
REGISTRATION STATEMENT ON FORM N-1A
CROSS REFERENCE SHEET
PART A
Items in Part A Prospectus
of Form N-1A Prospectus Caption Page Number
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1. Cover Page Cover Page
2. Synopsis *
3. Condensed Financial Information 2
4. General Description of Registrant 2
5. Management of the Fund 4
5a. Management's Discussion of Fund Performance *
6. Capital Stock and Other Securities 10
7. Purchase of Securities Being Offered 5
8. Redemption or Repurchase 6
9. Legal Proceedings *
Note * Omitted since answer is negative or inapplicable
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LEXINGTON SMALLCAP VALUE FUND, INC.
STATEMENT OF ADDITIONAL STATEMENT OF ADDITIONAL
PART B INFORMATION CAPTION INFORMATION PAGE NUMBER
- ------ ----------------------- -----------------------
10. Cover Page Cover Page
11. Table of Contents Cover Page
12. General Information and History 11 (Part A)
13. Investment Objectives and Policies 2
14. Management of the Registrant 3
15. Control Persons and Principal Holders 6
of Securities
16. Investment Advisory and Other Services 7
17. Brokerage Allocation and Other Practices 8
18. Capital Stock and Other Securities 11 (Part A)
19. Purchase, Redemption and Pricing of 5, 6(Part A)
securities being offered
20. Tax Status 11
21. Underwriters 4 (Part A)
22. Calculation of Yield Quotations on Money *
Market Funds
23. Financial Statements 17
PART C
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Information required to be included in Part C is set forth
under the appropriate item, so numbered, in Part C to this
Registration Statement.
* Not Applicable
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PROSPECTUS
February 27, 1997
Lexington SmallCap Value Fund, Inc.
P.O. Box 1515 / Park 80 West Plaza Two, Saddle Brook, New Jersey 07663
TollFree:Service-1-800-526-0056
24 Hour Account Information-1-800-526-0052
Institutional/Financial Adviser Services-1-800-367-9160
A NO-LOAD MUTUAL FUND WHOSE INVESTMENT OBJECTIVE IS LONG-TERM CAPITAL
APPRECIATION. THE FUND WILL SEEK TO ACHIEVE ITS INVESTMENT OBJECTIVE THROUGH
INVESTMENT IN COMMON STOCKS AND EQUIVALENTS OF COMPANIES DOMICILED IN THE UNITED
STATES WITH A MARKET CAPITALIZATION OF LESS THAN $1BILLION.
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Lexington SmallCap Value Fund, Inc. (the "Fund") is a no-load
open-end diversified management investment company. The Fund's
principal investment objective is long term capital appreciation.
Shareholders may invest, reinvest or redeem shares at any time
without charge or penalty.
Lexington Management Corporation ("LMC") is the Investment Adviser
of the Fund. Capital Technology, Inc. ("CTI") is the Fund's
Sub-Adviser. Lexington Funds Distributor, Inc. ("LFD") is the
Distributor of shares of the Fund.
This Prospectus concisely sets forth information about the Fund
that you should know before investing. It should be read and retained
for future reference.
A Statement of Additional Information dated February 27, 1997,
which provides a further discussion of certain areas 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.
Mutual fund shares are not deposits or obligations of (or endorsed
or guaranteed by) any bank, nor are they federally insured or
otherwise protected by the Federal Deposit Insurance Corporation
("FDIC"), the Federal Reserve Board or any other agency. Investing in
mutual funds involves investment risks, including the possible loss of
principal, and their value and return will fluctuate.
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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
Annual Fund Operating Expenses:
(as a percentage of average net assets) (net of reimbursement):
Management fees ...................................................... 1.00%
12b-1 fees ........................................................... 0.25%
Other fees ........................................................... 1.23%
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Total Fund Operating Expenses ........................................ 2.48%
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Example: 1 year 3 years 5 years 10 years
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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 ......................... $25.11 $77.25 $132.05 $281.60
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
indirectly. (For more complete descriptions of the various costs and expenses,
see "Investment Adviser, Sub-Adviser, Distributor and Administrator" below.) The
Expenses and Example (except the 12b-1 fees) appearing in the table above are
based on the Fund's estimated expenses for the current fiscal year. The 12b-1
fees shown in the table reflect the maximum amount which may be paid under the
Distribution Plan. See "Distribution Plan." 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
January 2, 1996 (commencement of operations) to December 31, 1996
Selected per share data for a share outstanding throughout the period:
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
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Total income from investment operations 1.76
Less distributions:
Distributions from net realized gains (0.03)
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Net asset value, end of period $11.73
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Total return 17.50%
Ratio to average net assets:
Expenses, before reimbursement or waiver 3.04%
Expenses, net of reimbursement or waiver 2.48%
Net investment loss, before reimbursement or waiver (2.34%)
Net investment loss (1.78%)
Portfolio turnover 60.92%
Average commissions paid on equity security transactions $0.03
Net assets at end of period (000's omitted) $8,061
DESCRIPTION OF THE FUND
The Fund is an open-end diversified management investment company. It is
called a no-load Fund because its shares are sold without a sales charge.
INVESTMENT OBJECTIVE, POLICIES AND RISK FACTORS
Lexington SmallCap Value Fund (the "Fund") is an open-end, diversified
management investment company. The Fund's investment objective is to seek
long-term capital appreciation. The Fund will seek to obtain its objective
through investment in common stocks and equivalents of companies domiciled in
the United States with a market capitalization of less than $1 billion which the
Sub-Adviser believes offer exceptional relative value and attractive prices.
Production of income is incidental to this objective. The Fund's portfolio will
be invested primarily in equities listed on stock exchanges or traded in
over-the-counter markets in the U.S. The Fund may invest in Canadian or other
foreign domiciled companies whose shares trade in U.S. dollar denominated
markets.
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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: warrants, options
and convertible debt securities).
There is no assurance that the Fund will be able to achieve its investment
objective.
Except for defensive or liquidity purposes, the Fund will invest
substantially all (at least 90%) of its assets in small companies domiciled in
the U..S which have market capitalization (based on aggregate market value of
outstanding shares) between $20 million and $1 billion at the time of
investment. The remainder of its assets (no more than 10%) may be invested in
securities of companies with market capitalizations below $20 million; above
$1,000,000,000; domiciled outside the U.S. if its shares trade in U.S. markets
in dollar denominations; in American Depository Shares or Receipts ("ADR's" or
"ADS's"), real estate investment trusts ("REIT's) and/or in cash and equivalent
securities. The Fund does not currently intend to invest in securities which, at
the time of purchase, are not readily marketable; in securities of foreign
issuers denominated in foreign currencies; or in futures contracts. The Fund
will not engage in short-selling activities, leverage or portfolio hedging
techniques. At any time the Sub-Adviser deems it advisable for temporary
defensive or liquidity purposes, the Fund may hold all its assets in cash or
cash equivalents and invest in, or hold unlimited amounts of, debt obligations
of the United States government or its political subdivisions, and money market
instruments including repurchase agreements with maturities of seven days or
less and Certificates of Deposit.
The Fund's investment portfolio may include repurchase agreements with banks
and dealers in U.S. Government securities. A repurchase agreement involves the
purchase by the Fund of an investment contract from a bank or a dealer in U.S.
Government securities which contract is secured by debt securities whose value
is equal to or greater than the value of the repurchase agreement including the
agreed upon interest. The agreement provides that the institution will
repurchase the underlying securities at an agreed upon time and price. The total
amount received on repurchase would exceed the price paid by the Fund,
reflecting an agreed upon rate of interest for the period from the date of the
repurchase agreement to the settlement date, and would not be related to the
interest rate on the underlying securities. The difference between the total
amount to be received upon the repurchase of the securities and the price paid
by the Fund upon their acquisition is accrued daily as interest. If the
institution defaults on the repurchase agreement, the Fund will retain
possession of the underlying securities. In addition, if bankruptcy proceedings
are commenced with respect to the seller, realization on the collateral by the
Fund may be delayed or limited and the Fund may incur additional costs. In such
case the Fund will be subject to risks associated with changes in the market
value of collateral securities. The Fund intends to limit repurchase agreements
to transactions with institutions believed by the Sub-Adviser to present minimal
credit risk.
The Fund's overall approach to investing in small capitalization value
stocks is based upon research performed by its Sub-Adviser which shows that
extremely undervalued companies offer potential for high returns over time and
excellent diversification versus other domestic equity investment styles. This
strategy may under-emphasize widely followed, institutional favorites and result
in holdings of stocks with little "Wall Street" or outside research coverage.
Advantages of investing in distressed and/or neglected issues based on internal,
fundamental research include:
*low valuations that offer some downside protection
*lack of institutional ownership that results in return streams not
highly correlated with market indices
*potential for upside surprises that is increased as stocks exceed
minimal expectations and are "discovered" by other investors
*low transaction costs based solely on best execution rather than
research commitments.
The companies in which the Fund intends to invest will generally have the
following characteristics:
*a market capitalization of less than $1 billion
*a high relative ratio of revenue per share to stock price
*a low relative ratio of price to book value per share
*a positive cash flow and other measures of financial stability
*a low stock price relative to historical levels.
By following these criteria, the Fund intends to select securities which can
have enhanced appreciation prospects and may provide investment returns superior
to the market as a whole. However, the market value of these companies'
securities tends to be volatile and in the past offered greater potential for
gain as well as loss than securities of larger capitalization companies.
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Special Considerations. An investor should be aware that investment in small
capitalization issuers carry more risk than issuers with market capitalization
greater than $1 billion. Generally, small companies rely on limited product
lines, financial resources, and business activities that may make them more
susceptible to setbacks or downturns. In addition, the stock of such companies
may be more thinly traded. As a result, in order to sell this type of security
the Fund may need to dispose of such securities over a long period and
accordingly, the performance of small capitalization issuers may be more
volatile.
Investments by the Fund of up to 10% of its total assets in the common stock
of foreign companies which are traded in the United States or in ADR's or ADS's
may involve considerations and risks that are different in certain respects from
an investment in securities of U.S. companies. Such risks include the effect of
currency fluctuations on the value of Fund shares, the imposition of withholding
taxes on interest or dividends, possible adoption of foreign governmental
restrictions on repatriation of income or capital investment, or other adverse
political or economic developments. Additionally, it may be more difficult to
enforce the rights of a security holder against a foreign company. There may be
delays in settling securities transactions in certain foreign markets and
information about the operations of foreign companies may be more difficult to
obtain and evaluate.
With respect to the Fund's investment in debt securities, there is no
requirement that all such securities be rated by a recognized rating agency.
However, it is the policy of the Fund that investments in debt securities,
whether rated or unrated, will be made only if they are, in the opinion of the
Sub-Adviser, of equivalent quality to "investment grade" securities. "Investment
grade" securities are those rated within the four highest quality grades as
determined by Moody's Investors Service, Inc. ("Moody's") or Standard & Poor's
Corporation ("Standard & Poor's"). Securities rated Aaa by Moody's and AAA by
Standard & Poor's are judged to be of the best quality and carry the smallest
degree of risk. Securities rated Baa by Moody's and BBB by Standard & Poor's
lack high quality investment characteristics and, in fact, have speculative
characteristics as well. Debt securities are interest-rate sensitive; therefore
their value will tend to decrease when interest rates rise and increase when
interest rates fall. Such increase or decrease in the value of longer-term debt
instruments as a result of interest rate movement will be larger than the
increase or decrease in value of shorter-term debt instruments.
The Statement of Additional Information contains a complete description of
the Fund's restrictions and any additional information on policies relating to
the investment of its assets and its activities.
PORTFOLIO TURNOVER
Although the Fund does not generally intend to invest for the purpose of
seeking short-term profits, the Fund's investments may be changed when
circumstances warrant, 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 100%. A 100% turnover
rate would occur if all the Fund's portfolio investments were sold and either
repurchased or replaced within a year. A high turnover rate (100% or more)
results in correspondingly greater brokerage commissions and other transactional
expenses which are borne by the Fund. 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." For the
year ending December 31, 1996, the Fund paid $35,953 in brokerage commissions
and the Fund's portfolio turnover rate was 60.92%.
MANAGEMENT OF THE FUND
The business affairs of the Fund are managed under the direction of its
Board of Directors. There are currently ten Directors (of whom seven are
non-affiliated persons) who meet five times each year. The Statement of
Additional Information contains additional information regarding the directors
and officers of the Fund.
PORTFOLIO MANAGERS
The Fund is managed by a portfolio management team. The lead managers are
Robb W. Rowe, CFA and Dennis J. Hamilton, CFA of Capital Technology, Inc.
("CTI"), the Sub-Advisor . Both Mr. Rowe and Mr. Hamilton are Chartered
Financial Analysts and members of the Association for Investment Management &
Research and the North Carolina Society of Financial Analysts.
Robb Rowe is President and principal shareholder of CTI. He is responsible
for the Fund's overall investment strategy. Mr. Rowe joined CTI in 1982 after
being Vice President and Regional Manager of AG Becker Co. He is a graduate of
Ripon College and has an MBA from the University of Chicago in 1971. Mr. Rowe's
investment management career began over 20 years ago.
Dennis Hamilton is Vice President and Portfolio Manager of CTI. He is
responsible for issue selection and the day to day investment activities of the
Fund. Mr. Hamilton joined CTI in 1994 after being a Principal at William M.
Mercer Asset Planning, Inc. He
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has also served as Director of Pension Investment for several multi-billion
corporate pension funds and was President and Chief Investment Officer of
Western Reserve Capital Management, Inc., an SEC registered investment advisor.
He is an Honors graduate of Colgate University and earned an MBA from Harvard
Business School in 1971. Mr. Hamilton's investment management career began over
25 years ago.
INVESTMENT ADVISER, SUB-ADVISER, DISTRIBUTOR AND ADMINISTRATOR
The Fund has entered into an investment advisory contract with Lexington
Management Corporation ("LMC"), P.O. Box 1515, Park 80 West Plaza Two, Saddle
Brook, New Jersey 07663. LMC provides investment advice and in general conducts
the management and investment program of the Fund under the supervision and
control of the Directors of the Fund. LMC has entered into a sub-advisory
contract with CTI, McMullen Creek Office Center, P.O. Box 472428, Charlotte,
North Carolina 28247, under which CTI will provide the Fund with investment
advice and management of the Fund's investment program. Lexington Funds
Distributor, Inc. ("LFD"), a registered broker dealer, is the Fund's
distributor.
LMC, established in 1938, currently manages over $3.0 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 which own significant amounts of capital stock of LMC's parent.
The clients pay fees which LMC considers comparable to the fees paid by
similarly served clients.
CTI was founded in Charlotte, North Carolina in 1977 and invests exclusively
in domestic smaller capitalization stocks. CTI currently manages assets both
small and mid cap growth and value styles for primarily institutional clients.
As compensation for its services, the Fund pays LMC a monthly management fee
at the annual rate of 1.00% of the average daily net assets. This fee 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. LMC will pay CTI an annual
sub-advisory fee of .50% of the Fund's average daily net assets. The
sub-advisory fee will be paid by LMC, not the Fund. See "Investment Adviser and
Distributor" in the Statement of Additional Information. For the year ending
December 31, 1996, the Fund paid LMC $30,331 in net advisory fees.
LMC also acts as administrator to the Fund and performs certain
administrative and internal accounting services, including but not limited to,
maintaining general ledger accounts, regulatory compliance, preparation of
financial information for semiannual and annual reports, preparing registration
statements, calculating net asset values, producing 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 and LFD are wholly-owned subsidiaries of Lexington Global Asset
Managers, Inc., a Delaware corporation with offices at Park 80 West Plaza Two,
Saddle Brook, New Jersey 07663. Descendants of Lunsford Richardson, Sr., their
spouses, trusts and other related entities have a majority voting control of
outstanding shares of Lexington Global Asset Managers, Inc. See "Investment
Adviser and Distributor" in the Statement of Additional Information.
HOW TO PURCHASE SHARES
Initial Investment-Minimum $1,000. By Mail: Send a check payable to Lexington
SmallCap Value Fund, Inc., along with a completed New Account Application to
State Street Bank and Trust Company (the "Agent"). See the back cover of this
Prospectus for the Agent's address.
Subsequent Investments-Minimum $50. By Mail: Send a check payable to Lexington
SmallCap Value Fund, Inc., 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.
All checks for investment should be in U.S. dollars and made payable to the
Lexington SmallCap Value Fund. The Fund will not accept third-party checks, that
is, any check made payable to someone other than Lexington SmallCap Value Fund
or State Street Bank & Trust Company (the Fund's Transfer Agent).
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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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 (see "Dividend, Distribution and Reinvestment
Policy"). 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). A
shareholder may arrange to make additional purchases of shares automatically on
a monthly or quarterly basis with the Automatic Investing Plan, "Lex-O-Matic".
The investments of $50 or more are automatically deducted from a checking
account on or about the 15th day of each month. The institution must be an
Automated Clearing House (ACH) member. Should an order to purchase shares of a
fund be cancelled because your automated transfer does not clear, you will be
responsible for any resulting loss incurred by that fund. The shareholder
reserves the right to discontinue the Lex-O-Matic program provided written
notice is given ten days prior to the scheduled investment date. Further
information regarding this service can be obtained from Lexington by calling
1-800-526-0056.
On payroll deduction accounts administered by a employer and on payments
into qualified pension or profit sharing plans and other continuing purchase
programs, there are no minimum purchase requirements.
Purchase Price: The purchase price will be the net asset value per share of the
Fund next determined after receipt by the Agent of a completed New Account
Application in proper form.
Determination of Net Asset Value: The net asset value of Fund shares is
determined at the official closing time of the New York Stock Exchange each day
that such Exchange is open for trading. In determining net asset value,
portfolio securities listed on a national securities exchange are valued at
their sales price on such exchange as of such time; if no sales price is
reported, the mean of the last bid and asked price is used. However, when LMC
deems it appropriate, prices for the day of valuation from a third party pricing
service will be used. For over-the-counter securities the mean between the bid
and asked prices is used. Securities for which market quotations are not readily
available and other assets shall be valued by Fund management in good faith
under the direction of the Fund's Board of Directors. Short-term securities
having a 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. In order to determine net asset value per share, the aggregate
value of portfolio securities is added to the value of the Fund's other assets,
such as cash and receivables; the total of the assets thus obtained, less
liabilities, is then divided by the number of shares outstanding.
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.
HOW TO REDEEM SHARES
By Mail: Send to the Agent (see the back cover of this Prospectus for the
address): (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
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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 three business
days. However, the Fund will only mail redemption checks upon clearance of the
purchase payment.
Signature Guarantee: Signature guarantees are required in connection with (a)
redemptions by mail involving $25,000 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 redeem all shares in an account with a value of less than $500 (except
retirement plan accounts) and mail the proceeds to the shareholder. Such right
reserved by the Fund pertains to circumstances in which the value of shares
falls below the stated threshold due to redemptions, and not due to market
fluctuations. 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.
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 third 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:
LEXINGTONGLOBAL FUND, INC. (NASDAQ Symbol: LXGLX)
LEXINGTONWORLDWIDE EMERGING MARKETS FUND, INC. (NASDAQ Symbol: LEXGX)
LEXINGTONINTERNATIONAL FUND, INC. (NASDAQ Symbol: LEXIX).
7
<PAGE>
LEXINGTONCROSBY SMALL CAP ASIA GROWTH FUND, INC. (NASDDAQ Syymbol: LXCAX)
LEXINGTONTROIKA DIALOG RUSSIA FUND, INC. (NASSDAQ Symbol: LETRX)
LEXINGTONCORPORATE LEADERS TRUST FUND (NASDAAQ Symbol: LEXCX)
LEXINGTONGROWTH AND INCOME FUND, INC. (NASDAQ Symbol: LEXRX)
LEXINGTONSMALLCAP VALUE FUND, INC. (NASDAQ Symbol: LESVX)
LEXINGTONGOLDFUND, INC. (NASDAQ Symbol: LEXMX)
LEXINGTONCONVERTIBLE SECURITIES FUND. (NASDAQ Symbol: CNCVX)
LEXINGTONGNMA INCOME FUND, INC. (NASDAQ Symbol: LEXNX)
LEXINGTONRAMIREZ GLOBAL INCOME FUND (NASDAQ Symbol: LEBDX)
LEXINGTONMONEY MARKET TRUST (NASDAQ Symbol: LMMXX)
LEXINGTONTAX FREE MONEY FUND, INC. (NASDAQ Symbol: LTFXX)
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
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.
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-certificated 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, nor 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
8
<PAGE>
be confirmed in writing by the Fund. LFD reserves the right to cease to act as
attorney subject to the above appointment upon thirty (30) days' written notice
to the address of record. If other than an individual, it is certified 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 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. For further information
concerning Telephone Exchange Provisions, please see the Statement of Additional
Information.
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) Plans, Section
457 Deferred Compensation Plans and 403(b)(7) Plans. Plan support services are
available through the Shareholder Services Department of LMC at 1-800-526-0056.
(See "Tax-Sheltered Retirement Plans" in the Statement of Additional
Information.)
DIVIDEND, DISTRIBUTION AND REINVESTMENT POLICY
The Fund intends to declare or distribute a dividend from its net investment
income and/or net capital gain income to shareholders annually or more
frequently if necessary in order to comply with distribution requirements of the
Code to avoid the imposition of regular Federal income tax, and if applicable, a
4% excise tax.
Any dividends and distribution payments will be reinvested at net asset
value, without sales charge, in additional full and fractional shares of the
Fund 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").
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 reasonable 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, incurred by or for the Distributor in
carrying out its obligations under the Distribution Agreement. LMC, at no
additional cost to the Fund, may pay to Shareholder Service Agents, additional
amounts from past profits for administrative services.
9
<PAGE>
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, 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 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 may include interest and dividends from foreign corporations
and the Fund may have short-term capital gains, less than 100% of the ordinary
income dividends paid by the Fund may 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.
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 will be sent to shareholders promptly after the end of each
year. Shareholders purchasing shares of the Fund just prior to the ex-dividend
date 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.
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 distributions 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.
ORGANIZATION AND DESCRIPTION OF COMMON STOCK
The Fund is an open-end, diversified management investment company organized
as a corporation under the laws of the State of Maryland on August 29, 1995 and
has authorized capital of 1,000,000,000 shares of common stock, par value $.001
of which 500,000,000 have been designated the Lexington SmallCap Value Fund
Series. Each share of common stock has one vote and shares equally with other
shares of the same series in dividends and distributions when and if declared by
the Fund and in the Fund's net assets belonging to such series upon liquidation.
All shares, when issued, are fully paid and nonassessable. 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.
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<PAGE>
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.
PERFORMANCE CALCULATION
The Fund will calculate performance on a total return basis for various
periods. The total return basis combines principal and dividend income changes
for the periods shown. Principal changes are based on the difference between the
beginning and closing net asset values for the period and assume reinvestment of
dividends paid by the Fund. Dividends are comprised of net realized capital
gains and net investment income.
Performance will vary from time to time and past results are not necessarily
representative of future results. It should be remembered 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, Russell 2000, Standard & Poor's 500 Composite Stock
Price Index. Such comparative performance information will be stated in the same
terms in which the comparative data and indices are stated.
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 the Custodian for the Funds' portfolio
securities and other assets. State Street Bank and Trust Company, 225 Franklin
Street, Boston, Massachusetts 02110, is the transfer agent and dividend
disbursing agent for the Fund. Neither Chase Manhattan Bank, N.A. nor State
Street Bank and Trust Company have any part in determining the investment
policies of the Fund or in determining which portfolio securities are to be
purchased or sold by the Fund or in the declaration of dividends and
distributions.
COUNSEL AND INDEPENDENT AUDITORS
Kramer, Levin, Naftalis & 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, 1997.
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 Code of Ethics adopted by each of the Adviser, Sub-Adviser and the Fund
prohibits all affiliated personnel from engaging in personal investment
activities which compete with or attempt to take advantage of the Fund's planned
portfolio transactions. The objective of each Code of Ethics is that the
operations of the Adviser, Sub-Adviser and Fund be carried out for the exclusive
benefit of the Fund's shareholders. All organizations maintain careful
monitoring of compliance with the Code of Ethics.
Additional portfolios may be created from time to time with investment
objectives and policies different from those of the Fund. In addition, the
Directors may, subject to any necessary regulatory approvals, create more than
one class of shares in the Fund, with the classes being subject to different
charges and expenses and having such other different rights as the Directors may
prescribe.
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.
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<PAGE>
L E X I N G T O N
LEXINGTON
SMALLCAP
VALUE
FUND, INC.
--------(filled box)----------
(filled box)Small cap stocks
(filled box)No sales charge
(filled box)No redemption fee
(filled box)Free telephone
exchange privilege
--------(filled box)----------
The Lexington Group
of
No-Load
Investment Companies
P R O S P E C T U S
FEBRUARY 27, 1997
-----------------
Investment Adviser
- -----------------------------------------------------------
LEXINGTON MANAGEMENT CORPORATION
P.O. Box 1515/Park 80 West Plaza Two
Saddle Brook, N.J. 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, 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
Lexington Funds
1004 Baltimore
Kansas City, Missouri 64105
or call toll free:
Service: 1-800-526-0056
24 Hour Account Information:1-800-526-0052
Institutional/Financial Adviser Services: 1-800-367-9160
Table of Contents Page
- -----------------------------------------------------------
Fee Table ............................................. 2
Financial Highlights .................................. 2
Description of the Fund ............................... 2
Investment Objective, Policies and Risk Factors ....... 2
Portfolio Turnover .................................... 4
Management of the Fund ................................ 4
Portfolio Managers .................................... 4
Investment Adviser, Sub-Adviser,
Distributor and Administrator ....................... 5
How to Purchase Shares ................................ 5
How to Redeem Shares .................................. 6
Shareholder Services .................................. 7
Exchange Privilege .................................... 7
Tax-Sheltered Retirement Plans ........................ 9
Dividend, Distribution and Reinvestment Policy ........ 9
Distribution Plan ..................................... 9
Tax Matters ........................................... 10
Organization and Description of Common Stock .......... 10
Performance Calculation ............................... 11
Custodian, Transfer Agent and
Dividend Disbursing Agent ........................... 11
Counsel and Independent Auditors ...................... 11
Other Information ..................................... 11
<PAGE>
LEXINGTON SMALLCAP VALUE FUND, INC.
STATEMENT OF ADDITIONAL INFORMATION
FEBRUARY 27, 1997
This Statement of Additional Information, which is not a prospectus, should
be read in conjunction with the current prospectus of Lexington SmallCap Value
Fund (the "Fund"), dated February 27, 1997, 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
Institutional/Financial Adviser Services:-1-800-367-9160
Lexington Management Corporation ("LMC") is the Fund's Investment Adviser.
Capital Technology, Inc. ("CTI") is the Fund's Sub-Adviser. Lexington Funds
Distributor, Inc. is the Fund's Distributor.
TABLE OF CONTENTS
Page
Investment Objective and Policies ......................................... 2
Portfolio Turnover ........................................................ 3
Management of the Fund .................................................... 3
Investment Restrictions ................................................... 5
Investment Adviser, Sub-Adviser, Distributor and Administrator ............ 7
Portfolio Transactions and Brokerage Commissions .......................... 8
Determination of Net Asset Value .......................................... 8
Distribution Plan ......................................................... 9
Telephone Exchange Provisions ............................................. 9
Tax-Sheltered Retirement Plans ............................................ 10
Tax Matters ............................................................... 11
Performance Calculation ................................................... 16
Shareholder Reports ....................................................... 16
Financial Statements ...................................................... 17
1
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
Lexington SmalICap Value Fund (the "Fund") is an open-end, diversified
management investment company. The Fund's investment objective is to seek
long-term capital appreciation. The Fund will seek to achieve its investment
objective through investment in common stocks and equivalents primarily of
companies domiciled in the United States with a market capitalization of less
than $1 billion which the Sub-Adviser believes offers exceptional relative value
and attractive prices. Production of income is incidental to this objective. The
Fund's portfolio will be invested primarily in equities listed on stock
exchanges or traded in over-the-counter markets in the U.S. The fund may invest
in Canadian or other foreign domiciled companies whose shares trade in U.S.
dollar denominated markets.
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: warrants, options,
and convertible debt securities).
There is no assurance that the Fund will be able to achieve its investment
objective.
Under normal market conditions, the Fund will invest substantially all (at
least 90%) of its assets in small companies domiciled in the U.S. which have
market capitalization (based on aggregate market value of outstanding shares)
between $20 million and $1 billion at the time of investment. The remainder of
its assets (no more than 10%) may be invested in securities of companies with
market capitalizations below $20 million; above $1,000,000,000.; domiciled
outside the U.S. if its shares trade in U.S. markets in dollar denominations; in
American Depository Shares or Receipts ("ADR's" or "ADS's"), real estate
investment trusts ("REIT's") and/or in cash and equivalent securities. The Fund
does not intend to invest in securities which, at the time of purchase, are not
readily marketable; in securities of foreign issuers denominated in foreign
currencies; or in futures contracts. The Fund will not engage in short-selling
activities, leveraging or portfolio hedging techniques.
The Fund's overall approach to investing in small capitalization value
stocks is based on research performed by its Sub-Adviser which shows that
extremely undervalued companies offer potential for high returns over time and
excellent diversification versus other domestic equity investment styles. This
strategy may under-emphasize widely followed, institutional favorites and result
in holdings of stocks with little "Wall Street" or outside research coverage.
Advantages of investing in distressed and/or neglected issues based on internal,
fundamental research include:
*low valuations that offer some downside protection
*lack of institutional ownership that results in return streams not
highly correlated with market indices
*potential for upside surprises that is increased as stocks exceed
minimal expectations and are "discovered" by other investors
*low transaction costs based solely on best execution rather than
research commitments.
The companies in which the Fund intends to invest will generally have the
following characteristics:
*a market capitalization of less that $1 billion
*a high relative ratio of revenue per share to stock price
*a low relative ratio of price to book value per share
*a positive cash flow and other measures of financial stability
*a low stock price relative to historical levels.
By following these criteria, the Fund intends to select securities which can
have enhanced appreciation prospects and may provide investment returns superior
to the market as a whole. However, the market value of these companies'
securities tends to be volatile and in the past offered greater potential for
gain as well as loss than securities of larger capitalization companies.
Special Considerations. An investor should be aware that investment in small
capitalization issuers carry more risk than issuers with market capitalization
greater than $1 billion. Generally, small companies rely on limited product
lines, financial resources, and business activities that may make them more
susceptible to setbacks or downturns. In addition, the stock of such companies
may be more thinly traded. Accordingly, the performance of small capitalization
issuers may be more volatile.
Investments by the Fund of up to 10% of its total assets in the common stock
of foreign companies which are traded in the United States or in ADR's may
involve considerations and risks that are different in certain respects from an
investment in securities of U.S. companies. Such risks include the effect of
currency fluctuations on the value of Fund shares, the imposition of withholding
taxes on interest or dividends, possible adoption of foreign governmental
restrictions on repatriation of income or capital investment, or other adverse
political or economic developments.
2
<PAGE>
Additionally, it may be more difficult to enforce the rights of a security
holder against a foreign company. There may be delays in settling securities
transactions in certain foreign markets and information about the operations of
foreign companies may be more difficult to obtain and evaluate.
With respect to the Fund's investment in debt securities, there is no
requirement that all such securities be rated by a recognized rating agency.
However, it is the policy of the Fund that investments in debt securities,
whether rated or unrated, will be made only if they are, in the opinion of the
Sub-Adviser, of equivalent quality to "investment grade" securities. "Investment
grade" securities are those rated within the four highest quality grades as
determined by Moody's Investors Service, Inc. ("Moody's") or Standard & Poor's
Corporation ("Standard & Poor's"). Securities rated Aaa by Moody's and AAA by
Standard & Poor's are judged to be of the best quality and carry the smallest
degree of risk. Securities rated Baa by Moody's and BBB by Standard & Poor's
lack high quality investment characteristics and, in fact, have speculative
characteristics as well. Debt securities are interest-rate sensitive; therefore
their value will tend to decrease when interest rates rise and increase when
interest rates fall. Such increase or decrease in the value of longer-term debt
instruments as a result of interest rate movement will be larger than the
increase or decrease in the value of shorter-term debt instruments.
PORTFOLIO TURNOVER
Although the Fund does not generally intend to invest for the purpose of
seeking short-term profits, the Fund's investments may be changed when
circumstances warrant, 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 100%. A 100% turnover
rate would occur if all the Fund's portfolio investments were sold and either
repurchased or replaced within a year. A high turnover rate (100% or more)
results in correspondingly greater brokerage commissions and other transactional
expenses which are borne by the Fund. 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." For the
year ended December 31, 1996, the Fund paid $35,953 in brokerage commissions and
the portfolio turnover rate for the Fund was 60.92%.
MANAGEMENT OF THE FUND
The Directors and executive officers of the Fund and their principal
occupations are set forth below:
+S.M.S. CHADHA (59), Director. 3/16 Shanti Niketan, New Delhi 21, India.
Secretary, Ministry of External Affairs, New Delhi, India; Head of Foreign
Service Institute, New Delhi, India; Special Envoy of the Government of
India; Director, Special Unit for Technical Cooperation among Developing
Countries, United Nations Development Program, New York.
*+ROBERT M. DEMICHELE (52), President and Chairman. P.O. Box 1515, Saddle Brook,
N.J. 07663. Chairman and Chief Executive Officer, Lexington Management
Corporation; President and Director, Lexington Global Asset Managers, Inc.;
Chairman and Chief Executive Officer, Lexington Funds Distributor, Inc.;
Chairman of the Board, Market Systems Research, Inc. and Market Systems
Research Advisors, Inc.; Director, Chartwell Re Corporation, Claredon
National Insurance Company, The Navigator's Group, Inc., Unione Italiana
Reinsurance, Vanguard Cellular Systems, Inc. and Weeden & Co.; Vice Chairman
of the Board of Trustees, Union College and Trustee, Smith Richardson
Foundation.
+BEVERLEY C. DUER (67), Director, 340 East 72nd Street, New York, N.Y. 10021.
Private Investor. Formerly, Manager of Operations Research Department-CPC
International, Inc.
*+BARBARA R. EVANS (36), Director, 5 Fernwood Road, Summit, N.J. 07901. Private
Investor. Prior to May, 1989, Assistant Vice President and Securities
Analyst, Lexington Management Corporation.
*+LAWRENCE KANTOR (49), Vice President and 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.; Executive Vice President and General
Manager-Mutual Funds, Lexington Global Asset Managers, Inc.
+JERARD F. MAHER (50), Director. 300 Raritan Center Parkway, Edison, New Jersey
08818-7815. General Counsel, Federal Business Centers; Counsel, Ribis,
Graham & Curtis.
+ANDREW M. McCOSH (56), Director. Wyvern Park, Edingburgh EH 92 JY, Scotland,
U.K. Professor of the Organisation of Industry and Commerce, Department of
Business Studies, The University of Edingburgh, Scotland.
3
<PAGE>
+DONALD B. MILLER (70), Director. 10725 Quail Covey Road, Boynton Beach, FL
33436. Chairman, Horizon Media, Inc.; Trustee, Galaxy Funds; Director,
Maguire Group of Connecticut; prior to January 1989, President, Director and
C.E.O., Media General Broadcast Services (advertising firm).
+JOHN G. PRESTON (64), Director. 3 Woodfield Road, Wellesley, Massachusetts
02181. Associate Professor of Finance, Boston College, Boston,
Massachusetts.
+MARGARET W. RUSSELL (76), Director. 55 North Mountain Avenue, Montclair, N.J.
07042. Private Investor. Formerly, Community Affairs Director, Union Camp
Corporation.
*ROBB W. ROWE (57), CFA, Vice President and Portfolio Manager. P.O. Box 472428,
Charlotte, N.C. 28247. President, Capital Technology, Inc.
*DENNIS J. HAMILTON (51), CFA, Vice President and Portfolio Manager. P.O. Box
472428, Charlotte, N.C. 28247. Vice President, Capital Technology, Inc.
Prior to October, 1994, Principal, William M. Mercer Asset Planning, Inc.
*+LISA CURCIO (37), Vice President and Secretary. P.O. Box 1515, Saddle Brook,
N.J. 07663. Senior Vice President and Secretary, Lexington Management
Corporation; Vice President and Secretary, Lexington Funds Distributor,
Inc.; Secretary, Lexington Global Asset Managers, Inc.
*+RICHARD M. HISEY, CFA (38), 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.; Executive Vice President &
Chief Financial Officer, Lexington Global Asset Managers, Inc.
*+RICHARD LAVERY (42), CLU ChFC, Vice President. P.O. Box 1515, Saddle Brook,
N.J. 07663. Senior Vice President, Lexington Management Corporation; Vice
President, Lexington Funds Distributor, Inc.
*+JANICE CARNICELLI (37), Vice President Mutual Fund Operations. P.O. Box 1515,
Saddle Brook, N.J. 07663.
*+CHRISTIE CARR (29), Assistant Treasurer P.O. Box 1515, Saddle Brook, N.J.
07663. Prior to October 1992, Senior Accountant. KPMG Peat Marwick LLP.
*+SIOBHAN GILFILLAN (33), Assistant Treasurer. P.O. Box 1515, Saddle Brook, N.J.
07663.
*+THOMAS LUEHS (34), Assistant Treasurer. P.O. Box 1515, Saddle Brook, N.J.
07663. Prior to November 1993, Supervisor of Investment Accounting, Alliance
Capital Management.
*+SHERI MOSCA (33), Assistant Treasurer. P.O. Box 1515, Saddle Brook, N.J. 07663
*+PETER CORNIOTES (35), Assistant Secretary. P.O. Box 1515, Saddle Brook, N.J.
07663. Assistant Vice President, Lexington Management Corporation. Assistant
Secretary, Lexington Funds Distributor, Inc.
*+ENRIQUE J. FAUST (36), Assistant Secretary. P.O. Box 1515, Saddle Brook, N.J.
07663. Prior to March 1994, Blue Sky Compliance Coordinator, Lexington
Management Corporation.
*"Interested person" and/or "Affiliated person" of LMC or CT as defined in the
Investment Company Act of 1940, as amended.
+Messrs. Chadha, Corniotes, DeMichele, Duer, Faust, Hisey, Kantor, Lavery,
Luehs, Maher, McCosh, Miller, Preston and Mmes. Carnicelli, Carr, Curcio,
Evans, Gilfillan, Mosca and Russell hold similar offices with some or all of
the other investment companies advised and/or distributed by LMC and LFD.
Remuneration of Directors and Certain Executive Officers
Each Director is reimbursed for expenses incurred in attending each meeting
of the Board of Directors or any committee thereof. Each Director who is not an
affiliate of the advisor is compensated for his or her services according to a
fee schedule which recognizes the fact that each Director also serves as a
Director of other investment companies advised by LMC. Each Director receives a
fee, allocated among all investment companies for which the Director serves.
Effective September 12, 1995 each Director receives annual compensation of
$24,000. Prior to September 12, 1995, the Directors who were not employed by the
Fund or its affiliates received annual compensation of $16,000.
Set forth below is information regarding compensation paid or accrued during
the period January 1, 1996 to December 31, 1996 for each Director:
4
<PAGE>
- --------------------------------------------------------------------------------
Aggregate Total Compensation From Number of
Name of Director Compensation from Fund and Fund Complex Directorships
Fund in Fund Complex
- --------------------------------------------------------------------------------
S.M.S. Chadha $856 $13,696 16
- --------------------------------------------------------------------------------
Robert M. DeMichele 0 $0 17
- --------------------------------------------------------------------------------
Beverley C. Duer $1,712 $29,110 17
- --------------------------------------------------------------------------------
Barbara R. Evans 0 0 16
- --------------------------------------------------------------------------------
Lawrence Kantor 0 0 16
- --------------------------------------------------------------------------------
Jerard F. Maher $856 $16,046 17
- --------------------------------------------------------------------------------
Andrew M. McCosh $856 $13,696 16
- --------------------------------------------------------------------------------
Donald B. Miller $1,712 $26,760 16
- --------------------------------------------------------------------------------
Francis Olmsted* $1,068 $16,800 N/A
- --------------------------------------------------------------------------------
John G. Preston $1,712 $26,760 16
- --------------------------------------------------------------------------------
Margaret W. Russell $1,712 $25,048 16
- --------------------------------------------------------------------------------
Philip Smith $1,600 $25,080 16
- --------------------------------------------------------------------------------
Francis A. Sunderland* $744 $10,528 N/A
- --------------------------------------------------------------------------------
*Retired
Retirement Plan for Eligible Directors/Trustees
Effective September 12, 1995, the Directors instituted a Retirement Plan for
Eligible Directors/Trustees (the "Plan") pursuant to which each Director/Trustee
(who is not an employee of any of the Funds, the Advisor, Administrator or
Distributor or any of their affiliates) may be entitled to certain benefits upon
retirement from the Board. Pursuant to the Plan, the normal retirement date is
the date on which the eligible Director/Trustee has attained age 65 and has
completed at least ten years of continuous and non-forfeited service with one or
more of the investment companies advised by LMC (or its affiliates)
(collectively, the "Covered Funds"). Each eligible Director/Trustee is entitled
to receive from the Covered Fund an annual benefit commencing on the first day
of the calendar quarter coincident with or next following his date of retirement
equal to 5% of his compensation multiplied by the number of such
Director/Trustee's years of service (not in excess of 15 years) completed with
respect to any of the Covered Portfolios. Such benefit is payable to each
eligible Director in quarterly installments for ten years following the date of
retirement or the life of the Director/Trustee. The Plan establishes age 72 as a
mandatory retirement age for Directors/Trustees; however, Director/Trustees
serving the Funds as of September 12, 1995 are not subject to such mandatory
retirement. Directors/Trustees serving the Funds as of September 12, 1995 who
elect retirement under the Plan prior to September 12, 1996 will receive an
annual retirement benefit at any increased compensation level if compensation is
increased prior to September 12, 1997 and receive spousal benefits (i.e., in the
event the Director/Trustee dies prior to receiving full benefits under the Plan,
the Director/Trustee's spouse (if any) will be entitled to receive the
retirement benefit within the 10 year period.)
Retiring Directors will be eligible to serve as Honorary Directors for one
year after retirement and will be entitled to be reimbursed for travel expenses
to attend a maximum of two meetings.
Set forth in the table below are the estimated annual benefits payable to an
eligible Director upon retirement assuming various compensation and years of
service classifications. As of December 31, 1996, the estimated credited years
of service for Directors Chadha, Duer, Maher, McCosh, Miller, Preston and
Russell are 1, 18, 1, 1, 22, 18 and 15, respectively.
Highest Annual Compensation Paid by All Funds
-----------------------------------------------
$20,000 $25,000 $30,000 $35,000
Years of
Service Estimated Annual Benefit Upon Retirement
-------- ------------------------------------------
15 $15,000 $18,750 $22,500 $26,250
14 14,000 17,500 21,000 24,500
13 13,000 16,250 19,500 22,750
12 12,000 15,000 18,000 21,000
11 11,000 13,750 16,500 19,250
10 10,000 12,500 15,000 17,500
5
<PAGE>
INVESTMENT RESTRICTIONS
The Fund's investment objective, as described under "Investment Objective
and Policies" and the following investment restrictions are matters of
fundamental policy which may not be changed without the affirmative vote of the
lesser of (a) 67% or more of the shares of the Fund present at a 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. The Fund has no intention at
this time of engaging in these activities or investing in the securities.
(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 (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 or sub-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. The Fund has no
intention at this time of engaging in these activities or investing in
the securities.
(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.
The Fund has no intention at this time of engaging in these activities or
investing in the securities.
(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. The Fund
has no intention at this time of engaging in these activities or
investing in the securities.
(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. Pursuant to an undertaking made to a state administrator, loans of
portfolio securities (as stated under fundamental investment restriction #5)
must be fully collateralized at no less than 100% and marked to market daily.
INVESTMENT ADVISER, SUB-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 September 14, 1995, (the "Advisory
7
<PAGE>
Agreement"). Lexington Funds Distributor, Inc. ("LFD") is the distributor of
Fund shares pursuant to a Distribution Agreement dated May 16, 1995, (the
"Distribution Agreement"). LMC has entered into a Sub-Advisory contract with
Capital Technology, Inc. under which CTI will provide the Fund with investment
advice and management of the Fund's investment program. LMC makes
recommendations to the Fund with respect to its investments and investment
policies. 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, Sub-Advisory Agreement or the Distribution Agreement or
"interested persons" of any such party) on September 14, 1995.
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.LFD pays the advertising and sales expenses related to 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.
The Advisory Agreement, Sub-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, Sub-Advisory Agreement of 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. As compensation
for its services, the Fund pays LMC a monthly management fee at the annual rate
of 1.00% of the average daily net assets. This fee 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. LMC will pay CTI an annual sub-advisory fee of 0.50% of
the Fund's average daily net assets. The sub-advisory fee will be paid by LMC,
not the Fund. For the year ending December 31, 1996, the Fund paid LMC $30,331
in net advisory fees.
LMC as owner of the registered service mark "Lexington" will sublicense to
the Fund to include the word "Lexington" as part of its corporate name subject
to revocation by LMC in the event that the Fund ceases to engage LMC or its
affiliate as investment adviser or distributor. In that event the Fund will be
required upon demand of LMC to change its name to delete the word "Lexington"
therefrom.
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 Lexington Global Asset
Managers, 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 Lexington Global Asset
Managers, Inc.
CTI was founded in Charlotte, North Carolina in 1977 and has invested
exclusively in domestic smaller capitalization stocks since then. CTI currently
manages assets both small and mid cap growth and value styles for primarily
institutional clients.
Of the directors, officers or employees ("affiliated persons") of the Fund,
Messrs. Corniotes, DeMichele, Faust, Hisey, Kantor, Lavery and Luehs 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
8
<PAGE>
Directors may determine, LMC and CTI 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. For the year ending December 31,
1996, the Fund paid $35,953 in brokerage commissions.
The research that is used for security selection is 100% internal. CTI
evaluates publicly available data and generates original research. CTI believes
that by generating original research, CTI can maintain its objectivity and avoid
the tendency to move in tandem with the prevailing sentiment of the investment
community.
DETERMINATION OF NET ASSET VALUE
The Fund calculates 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 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, 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.
The Plan shall remain in effect for one year from its adoption date and may
be continued thereafter if this Plan and all related agreements are approved at
least annually by a majority vote of the 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 a majority of the outstanding voting securities of the Fund, as
defined in Section 2(a)(42) of the 1940 Act.
While this Plan shall be in effect, the selection and nomination of the
"non-interested" 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
9
<PAGE>
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 attorney 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 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) 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 or 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
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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.
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.
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
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<PAGE>
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 the 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.
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.
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<PAGE>
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.
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.
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<PAGE>
Conversely, if the Fund elects to retain its net capital gain, the Fund will
be taxed thereon (except to the extent of any available capital loss carryovers)
at the 35% corporate tax rate. If the Fund elects to retain its net capital
gain, it is expected that the Fund also will elect to have shareholders of
record on the last day of its taxable year treated as if each received a
distribution of his pro rata share of such gain, with the result that each
shareholder will be required to report his pro rata share of such gain on his
tax return as long-term capital gain, will receive a refundable tax credit for
his pro rata share of tax paid by the Fund on the gain, and will increase the
tax basis for his shares by an amount equal to the deemed distribution less the
tax credit.
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.
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.
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<PAGE>
Distributions by the Fund that do not constitute ordinary income dividends
or capital gain dividends will be treated as a return of capital to the extent
of (and in reduction of) the shareholder's tax basis in his shares; any excess
will be treated as gain from the sale of his shares, as discussed below.
Distributions by the Fund will be treated in the manner described above
regardless of whether such distributions are paid in cash or reinvested in
additional shares of the Fund (or of another fund). Shareholders receiving a
distribution in the form of additional shares will be treated as receiving a
distribution in an amount equal to the fair market value of the shares received,
determined as of the reinvestment date. In addition, if the net asset value at
the time a shareholder purchases shares of the Fund reflects undistributed net
investment income or recognized capital gain net income, or unrealized
appreciation in the value of the assets of the Fund, distributions of such
amounts will be taxable to the shareholder in the manner described above,
although 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.
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.
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<PAGE>
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:
P(l + T)n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years (1, 5 or 10)
ERV = ending redeemable value of a hypothetical $1,000 payment
made at the beginning of the 1, 5 or 10 year periods or at
the end of the 1, 5 or 10 year periods (or fractional portion
thereof).
Under the foregoing formula, the time periods used in advertising will be
based on rolling calendar quarters, updated to the last day of the most recent
quarter prior to submission of the advertising for publication, and will cover
one, five and ten year periods or a shorter period dating from the effectiveness
of the 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 Russell 2000, the Fund calculates
its aggregate total return for the specified periods of time 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. For the one year period ended December 31, 1996, the Fund's average
annual standard total return was 17.50%.
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.
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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
-----------
17
<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 Equipment And Services: 5.0%
20,000 NovaCare, Inc.1 ......................................... 220,000
12,200 OEC Medical Systems, Inc.1 .............................. 183,000
-----------
403,000
-----------
Healthcare Miscellaneous: 5.0%
14,800 Carter-Wallace, Inc. .................................... 231,250
7,000 Integrated Health Services, Inc. ........................ 170,625
-----------
401,875
-----------
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
-----------
18
<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.
19
<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 (Note 1) ............................... 6,972,282
Distributions in excess of net investment income (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.
20
<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 distributions in excess of net
investment income of $9,044) .................................... $8,061,224
===========
The Notes to Financial Statements are an integral part of this statement.
21
<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 operatons 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
22
<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. The investment advisory
fee and expense reimbursement are set forth in the statement of operations.
The Fund also reimbursed LMC for certain expenses, including accounting and
shareholder servicing costs of $10,096, 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 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.
23
<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
24
<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
25
<PAGE>
<PAGE>
PART C. OTHER INFORMATION
- ------ -----------------
Item 24. Financial Statements and Exhibits - List
----------------------------------------
Page in the Statement of
(a) Financial statements: Additional Information
-------------------- ----------------------
Report of Independent Auditors
dated February 10, 1997 25
Report of Net Assets at
December 31, 1996 17-19
Statement of Assets and Liabilities
at December 31, 1996 20
Statement of Operation for the period
December 31, 1996 21
Statement of Changes in Net Assets from
the Commencement of Operations
at December 31, 1996 21
Notes to Financial Statements 22-24
<PAGE>
ITEM 24. Financial Statements and Exhibits - List
----------------------------------------
(b) Exhibits:
1. Articles of Incorporation - Filed electronically
11/3/95 - Incorporated by Reference
2. By-Laws - Filed electronically 11/3/95 -
Incorporated by Reference
3. Not Applicable
4. Stock Certificate Specimen - Filed electronically
11/3/95 - Incorporated by Reference
5a. Form of Investment Advisory Agreement between
Registrant and Lexington Management Corporation -
Filed electronically 11/3/95 - Incorporated by
Reference
5b. Form of Sub-Advisory Investment Management
Agreement between Lexington Management Corporation
and Capital Technology, Inc. - Filed electronically
11/3/95 - Incorporated by Reference
6. Form of Distribution Agreement between Registrant
and Lexington Funds Distributor, Inc. - Filed
electronically 11/3/95 - Incorporated by Reference
7. Not Applicable
8. Form of Custodian Agreement between
Registrant and Chase Manhattan Bank, N.A. - Filed
electronically 11/3/95 - Incorporated by Reference
9a. Form of Transfer Agency Agreement between
Registrant and State Street Bank and Trust Company -
Filed electronically 11/3/95 - Incorporated by
Reference
9b. Form of Administrative Services Agreement between
Registrant and Lexington Management Corporation - Filed
electronically 11/3/95 - Incorporated by Reference
10. Opinion of Counsel as to Legality of Securities
being registered - Filed electronically 11/3/95 -
Incorporated by Reference
11. Consents
(a) Consent of Counsel Filed electronically
(b) Consent of Independent Auditors Filed electronically
12. Not Applicable
13. Not Applicable
14. Retirement Plans - Filed electronically 11/3/95 -
Incorporated by Reference
15. Form of Distribution Plan under Rule 12b-1
and Related Agreements - Filed electronically
11/3/95 - Incorporated by Reference
16. Performance Calculation - Filed electronically
17. Financial Data Schedule Filed electronically
<PAGE>
Item 25. Persons Controlled by or under Common Control with Registrant
-------------------------------------------------------------
Furnish a list or diagram of all persons directly or indirectly
controlled by or under common control with the Registrant and as to each
such person indicate (1) if a company, the state or other sovereign
power under the laws of which it is organized, (2) the percentage of
voting securities owned or other basis of control by the person, if any,
immediately controlling it.
See "Management of the Fund" in the Prospectus and Statement of
Additional Information.
Item 26. Number of Holders of Securities
-------------------------------
State in substantially the tabular form indicated, as of a
specified date within 90 days prior to the date of filing, the number of
record holders of each class of securities of the Registrant.
The following information is given as of February 14, 1997:
Title of Class Number of Record Holders
-------------- ------------------------
Capital Stock 163
($0.001 par value)
Item 27. Indemnification
---------------
State the general effect of any contract, arrangements or statute
under which any director, officer, underwriter or affiliated person of
the Registrant is insured or indemnified in any manner against any
liability which may be incurred in such capacity, other than insurance
provided by any director, officer, affiliated person or underwriter for
their own protection.
Under the terms of the Maryland General Corporation Law and the
Company's By-Laws, the Company may indemnify any person who was or is a
director, officer or employee of the Company to the maximum extent
permitted by the Maryland General Corporation Law; provided, however,
that Company only as authorized in the specific case upon a
determination that indemnification of such persons is proper in the
circumstances. Such determination shall be made (I) by the Board of
Directors, by a majority vote of a quorum which consists of directors
who are neither "interested persons" of Company as defined in Section
2(a)(19) of the 1940 Act, nor parties to the proceeding, or (ii) if the
required quorum is not obtainable or if a quorum of such directors so
directs by independent legal counsel in a written opinion. No
indemnification will be provided by the Company to any director or
officer of the Company for any liability to the Company or Shareholders
to which he would otherwise be subject by reason of willful misfeasance,
bad faith, gross negligence or reckless disregard of duty.
<PAGE>
Item 28. Business and Other Connections of Investment Adviser
----------------------------------------------------
Describe any other business, profession, vocation or employment of
a substantial nature in which the investment adviser of the Registrant,
and each director, officer or partner of any such investment adviser, is
or has been, at any time during the past two fiscal years, engaged for
his own account or in the capacity of director, officer, employee,
partner or trustee.
See Prospectus Part A and Statement of Additional Information Part
B ("Management of the Fund").
Item 29. Principal Underwriters
----------------------
(a) Lexington Money Market Trust
Lexington Tax Free Money Fund, Inc.
Lexington Growth and Income Fund, Inc..
Lexington GNMA Income Fund, Inc.
Lexington Ramirez Global Income Fund
Lexington Worldwide Emerging Markets Fund, Inc.
Lexington Goldfund, Inc.
Lexington Global Fund, Inc.
Lexington Natural Resources Trust
Lexington Corporate Leaders Trust Fund
Lexington Convertible Securities Fund
Lexington Strategic Investments Fund, Inc.
Lexington Strategic Silver Fund, Inc.
Lexington International Fund, Inc.
Lexington Emerging Markets Fund, Inc.
Lexington Crosby Small Cap Asia Growth Fund, Inc.
Lexington Troika Dialog Russia Fund, Inc.
<PAGE>
29 (b)
Position and Offices Position and
Name and Principal with Principal Offices with
Business Address Underwriter With Registrant
- ------------------ -------------------- ---------------
Peter Corniotes* Assistant Secretary Asst. Secretary
Lisa Curcio* Vice President and Vice President and
Secretary Secretary
Robert M. DeMichele* Chief Executive Officer Chairman of the
and Chairman Board and President
Richard M. Hisey* Chief Financial Officer Chief Financial
and Director Officer and Vice Pres.
Lawrence Kantor* Executive Vice President Director and Vice Pres.
and Director
Richard Lavery* Vice President Vice President
Janice Violette* Assistant Treasurer None
(c)
Not Applicable.
*P.O. Box 1515
Saddle Brook, New Jersey 07663
<PAGE>
Item 30. Location of Accounts and Records
--------------------------------
With respect to each account, book or other document
required to be maintained by Section 31(a) of the 1940 Act and the Rules
(17 CFR 270, 31a-1 to 31a-3) promulgated thereunder, furnish the name
and address of each person maintaining physical possession of each such
account, book or other document.
The Registrant, Lexington SmallCap Value Fund, Inc., Park 80
West - Plaza Two, Saddle Brook, New Jersey 07663 will maintain physical
possession of each such account, book or other document of the Company,
except for those maintained by the Registrant's Custodian, Chase
Manhattan Bank, N.A., 1211 Avenue of the Americas, New York New York
10036, or Transfer Agent, State Street Bank and Trust Company, c/o
National Financial Data Services, 1004 Baltimore, Kansas City, Missouri
64105.
Item 31. Management Services
-------------------
Furnish a summary of the substantive provisions of any
management-related service contract not discussed in Part A or B of this
Form (because the contract was not believed to be material to a
purchaser of securities of the Registrant) under which services are
provided to the Registrant, indicating the parties to the contract, the
total dollars paid and by whom for the last three fiscal years.
None.
Item 32. Undertakings -
--------------
The Registrant, Lexington SmallCap Value Fund, Inc.,
undertakes to furnish a copy of the Fund's latest annual
report, upon request and without charge, to every person to
whom a prospectus is delivered.
The Registrant will hold a meeting of its public shareholders, if
requested to do so by the holders of at least 10 percent of the
Registrant's outstanding shares, to call a meeting of shareholders for
the purpose of voting upon the question of removal of a director or
directors and to assist in communications with other shareholders.
<PAGE>
Registration No. 33-63985
Securities and Exchange Commission
Washington, D.C. 20549
Exhibits
Filed With
Form N-1A
LEXINGTON SMALLCAP VALUE FUND, INC.
<PAGE>
EXHIBIT INDEX
The following documents are being filed electronically as exhibits to
this filing:
11a. Consent of Kramer, Levin, Kamin & Frankel
11b. Consent of KPMG Peat Marwick LLP
16. Performance Calculation
17. Financial Data Schedule
Cover Letter
<PAGE> SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940 the Registrant certifies that it meets all
of the requirements for effectiveness of this amendment to the registration
statement pursuant to Rule 485(b) under the Securities Act of 1933 and has
caused this amendment to the Registration Statement to be signed on its
behalf by the Undersigned, thereunto duly authorized, in the City of Saddle
Brook and State of New Jersey, on the 27th day of February, 1997.
LEXINGTON SMALLCAP VALUE FUND, INC.
/s/Robert M. DeMichele
__________________________
By Robert M. DeMichele
Chairman of the Board
Pursuant to the requirements of the Securities Act of 1933, this
amendment to the Registration Statement has been signed below by the
following persons in the capacities and on the dates indicated.
Signature Title Date
/s/Robert M. DeMichele Chairman of the Board February 27, 1997
______________________ Principal Executive Officer
Robert M. DeMichele
/s/Richard M. Hisey
______________________ Principal Financial February 27, 1997
Richard M. Hisey and Accounting Officer
/s/Lisa Curcio
______________________ Principal Compliance February 27, 1997
Lisa Curcio Officer
*S.M.S. Chadha
_____________________ Director February 27, 1997
S.M.S. Chadha
*Beverley C. Duer, P.E. Director February 27, 1997
______________________
Beverley C. Duer, P.E.
*Barbara M. Evans Director February 27, 1997
______________________
Barbara M. Evans
<PAGE>
Signature Title Date
*Lawrence Kantor Director February 27, 1997
_______________________
Lawrence Kantor
*Jerard F. Maher Director February 27, 1997
_______________________
Jerard F. Maher
*Andrew M. McCosh Director February 27, 1997
_______________________
Andrew M. McCosh
*Donald B. Miller Director February 27, 1997
_______________________
Donald B. Miller
*John G. Preston Director February 27, 1997
_______________________
John G. Preston
*Margaret W. Russell Director February 27, 1997
_______________________
Margaret W. Russell
/s/Lisa Curcio
*By: -------------------
Lisa Curcio
Attorney-in-Fact
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and
appoints Lawrence Kantor, Lisa Curcio or Jay Baris, and each of them, his
or her true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his or her name, place and
stead, in any and all his or her capacities as a director of LEXINGTON
SMALLCAP VALUE FUND, INC., a Maryland corporation, to sign on his or
her or its behalf any and all Registration Statements (including any post-
effective amendments to Registration Statements) under the Securities Act
of 1933, the Investment Company Act of 1940 and any amendments and
supplements thereto, and other documents in connection thereunder, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority
to do and perform each and every act and this requisite and necessary to
be done in and about the premises, as fully as to all intents and purposes
as he might or could do in person, hereby ratifying and confirming all that
said attorneys-in-fact and agents, and each of them, may lawfully do or
cause to be done by virtue hereof.
DATED this 27th day of February, 1997.
/s/ S.M.S. Chadha
_____________________________
S.M.S. Chadha
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and
appoints Lawrence Kantor, Lisa Curcio or Jay Baris, and each of them, his
or her true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his or her name, place and
stead, in any and all his or her capacities as a director of LEXINGTON
SMALLCAP VALUE FUND, INC., a Maryland corporation, to sign on his or
her or its behalf any and all Registration Statements (including any post-
effective amendments to Registration Statements) under the Securities Act
of 1933, the Investment Company Act of 1940 and any amendments and
supplements thereto, and other documents in connection thereunder, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority
to do and perform each and every act and this requisite and necessary to
be done in and about the premises, as fully as to all intents and purposes
as he might or could do in person, hereby ratifying and confirming all that
said attorneys-in-fact and agents, and each of them, may lawfully do or
cause to be done by virtue hereof.
DATED this 27th day of February, 1997.
/s/ Jerard F. Maher
_____________________________
Jerard F. Maher
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and
appoints Lawrence Kantor, Lisa Curcio or Jay Baris, and each of them, his
or her true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his or her name, place and
stead, in any and all his or her capacities as a director of LEXINGTON
SMALLCAP VALUE FUND, INC., a Maryland corporation, to sign on his or
her or its behalf any and all Registration Statements (including any post-
effective amendments to Registration Statements) under the Securities Act
of 1933, the Investment Company Act of 1940 and any amendments and
supplements thereto, and other documents in connection thereunder, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority
to do and perform each and every act and this requisite and necessary to
be done in and about the premises, as fully as to all intents and purposes
as he might or could do in person, hereby ratifying and confirming all that
said attorneys-in-fact and agents, and each of them, may lawfully do or
cause to be done by virtue hereof.
DATED this 27th day of February, 1997.
/s/ Andrew M. McCosh
_____________________________
Andrew M. McCosh
Kramer, Levin, Naftalis & Frankel
9 1 9 T H I R D A V E N U E
NEW YORK, N.Y. 10022 3852
(212) 715 9100
FAX
(212) 715-8000
______
WRITER'S DIRECT
NUMBER
(212) 715-9100
February 25, 1997
Lexington SmallCap Value Fund, Inc.
Park 80 West Plaza Two
Saddle Brook, New Jersey 07662
Re: Lexington SmallCap Value Fund, Inc.
Park 80 West Plaza Two
Saddle Brook, New Jersey 07662
Gentlemen:
We hereby consent to the reference to our firm as counsel in Post-
Effective Amendment No. 2 to the Registration Statement on Form N-1A.
Very truly yours,
/s/Kramer, Levin, Naftalis & Frankel
KPMG Peat Marwick LLP
345 Park Avenue
New York, NY 10154
Independent Auditors' Consent
The Board of Directors and Shareholders
Lexington SmallCap Value Fund, Inc.:
We consent to the use of our report dated February 10, 1997 included in the
Registration Statement on form N-1A and to the references to our firm under
the headings "Financial Highlights" and "Counsel and Independent Auditors"
in the Prospectus and "Shareholder Reports" in the Statement of Additional
Information.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
New York, New York
February 27, 1997
SCHEDULE OF PERFORMANCE QUOTATIONS
ENDING REDEEMABLE VALUE PURSUANT TO SEC RULES
N
P = (1+T) = ERV
Where P = Initial payment of $1,000
T = Average annual total return
N = Number of years
From Commencement
Reinvest- Net
ment Total Asset
Date Investment Dividend Shares Shares Value Value
---- ---------- ------------ ------ ------ ----- -----
01/02/96 $1,000 100.000 100.000 $10.00 $1,000.00
12/27/96 $2.73 0.233 100.233
12/31/96 (ending value) 100.233 11.73 1,175.73
1/254/253
T = 1175.73 -1 = .1750
-------
1000.00
254/253
ERV (From Commencement) = $1,000 (1+.1750) = $1,175.73
1
ERV (Annualized) = $1,000 (1+.1750) = $1,175.00
SCHEDULE OF PERFORMANCE QUOTATIONS
TOTAL RETURN PURSUANT TO NONSTANDARDIZED COMPUTATION
N
P = (1+T) = Total Return
Where P = Initial payment of $10,000
T = Average annual return
N = Number of years
From Commencement
Reinvest- Net
ment Total Asset
Date Investment Dividend Shares Shares Value Value
---- ---------- -------- ------ ------ ----- -----
01/02/96 $10,000 1,000.000 1,000.000 $10.00 $10,000.00
12/27/96 $27.30 2.331 1,002.331
12/31/96 (ending value) 1,002.331 11.73 11,757.34
1/254/253
T = (11,757.34) -1 = .1750
---------
10,000.00
254/253
Total Return From Commencement = $10,000 (1+.1750) = $11,757.34
1
Total Return (Annualized) = $10,000 (1+.1750) = $11,750
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
The Schedule contains summary financial information extracted from year-end
audited financial statements dated December 31, 1996 and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 6,942,240
<INVESTMENTS-AT-VALUE> 7,930,258
<RECEIVABLES> 9,608
<ASSETS-OTHER> 229,205
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 8,169,071
<PAYABLE-FOR-SECURITIES> 20,374
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 87,473
<TOTAL-LIABILITIES> 107,847
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 6,972,969
<SHARES-COMMON-STOCK> 687,232
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 9,044
<ACCUMULATED-NET-GAINS> 109,281
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 988,018
<NET-ASSETS> 8,061,224
<DIVIDEND-INCOME> 31,435
<INTEREST-INCOME> 17,020
<OTHER-INCOME> 0
<EXPENSES-NET> 170,873
<NET-INVESTMENT-INCOME> (122,418)
<REALIZED-GAINS-CURRENT> 241,416
<APPREC-INCREASE-CURRENT> 988,018
<NET-CHANGE-FROM-OPS> 1,107,016
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 18,761
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 806,989
<NUMBER-OF-SHARES-REDEEMED> 121,351
<SHARES-REINVESTED> 1,594
<NET-CHANGE-IN-ASSETS> 6,972,969
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 68,948
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 209,490
<AVERAGE-NET-ASSETS> 6,894,800
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> (.18)
<PER-SHARE-GAIN-APPREC> 1.94
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> (.03)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.73
<EXPENSE-RATIO> 2.48
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
