Dear Shareholders:
Lexington SmallCap Fund finished 1999 with a return of
1.93%* which compares to 28.43% for the average small cap
fund monitored by Lipper, Inc.
In 1999 small cap stocks had one of their better
performance years. In contrast with the larger companies
where performance was driven by big name well- established
technology companies, the small cap market was driven by
internet related initial public offerings that quickly
became large cap companies, with no earnings and little
revenue. Companies that normally would be funded by private
venture capital funds have found it very easy and profitable
to "leap frog" straight to a public offering for funding
because of the transformation of the U.S. capital markets.
Previously, a company needed an established track record
before "going public". Now, all one needs is a "concept, a
hope and a promise."
We under-performed our benchmark for the year.
Although we had our share of big winners in the technology,
financial service and health care sectors, our bias toward
value and our non-participation in the initial public
offering market caused us to lag other funds. Our focus has
been on quality small cap companies with established track
records. That was not the place to be in 1999, where growth
and new issues dominated small cap performance. We were
also impacted by an overweighting in the bank and insurance
sectors, which we bought at a big discount to fair value,
only to have the discount widen as money became more
concentrated in those sectors that were performing.
Sincerely,
Frank A. Peluso Alan H. Wapnick Robert M. DeMichele
Portfolio Manager Portfolio Manager President
February, 2000 February, 2000 February, 2000
*1.93% and 9.03% are the one year and since commencement
(01/02/96) average annual standard total returns,
respectively, for the period ended December 31, 1999.
Investment return and principal value of an investment will
fluctuate so that an investor's shares, when redeemed, may
be worth more or less then at their original cost. Total
return represents past performance and is not predictive of
future results. There is no guarantee that the Fund can
achieve its objective.
<PAGE>
Comparison of change in value of a $10,000 investment in
Lexington SmallCap Fund, Inc. and
the unmanaged Russell 2000 Index
[The following table represents a line chart in the printed report.]
Lexington Russell
Year SmallCap Fund 2000 Index
====================================
1/2/96 $10,000 $10,000
12/31/96 $11,757 $11,649
12/31/97 $12,988 $14,254
12/31/98 $13,863 $13,890
12/31/99 $14,130 $16,843
Average Annual Standard Total Returns
for the Period Ended 12/31/99
- --------------------------------------------------------------------------------
Fund/Index 1 Yr Since Inception 1/2/96
Annualized
- --------------------------------------------------------------------------------
Lexington SmallCap Fund 1.93% 9.03%
Russell 2000 21.26% 13.93%
-------------------------------------------------------------------------------
This graph, prepared in accordance with SEC regulations, compares a $10,000
investment in the Fund with a similar investment in the Russell 2000 Index.
Results for the Fund and the Russell 2000 Index include the reinvestment of all
dividend and capital gain distributions. Investment return and principal
value of an investment will fluctuate so that an investor's shares when redeemed
may be worth more or less than at their original cost. Total return represents
past performance and it is not predictive of future results.
* 1.93% and 9.03% are the one year and since commencement (1/2/96) average
annual standard total returns, respectively, for the period ended December
31, 1999. Investment return and principal value of an investment will
fluctuate so that an investor's shares, when redeemed, may be worth more or
less than at their original cost. Total return represents past performance
and is not predictive of future results.
<PAGE>
Lexington SmallCap Fund, Inc.
Statement of Net Assets
(Including the Portfolio of Investments)
December 31, 1999
Number
of Value
Shares Security (Note 1)
- -----------------------------------------------------------
Common Stock: 85.9%
Banking: 7.6%
23,500 PBOC Holdings, Inc. 1 $222,516
11,200 TrustCo Bank Corporation NY 148,750
4,000 Zions Bancorporation 236,750
-------
608,016
-------
Capital Equipment: 14.4%
10,100 Cymer, Inc. 1 465,231
5,500 Dionex Corporation 1 226,359
8,700 Fisher Scientific
International, Inc. 1 314,288
4,200 The Manitowoc Company, Inc. 142,800
-------
1,148,678
-------
Computers: 3.7%
7,800 National Computer Systems, Inc. 292,988
Construction & Housing: 4.5%
5,500 Granite Construction, Inc. 101,406
9,300 Insituform Technologies 1 260,981
-------
362,387
-------
Consumer Durable Goods: 3.4%
7,600 La-Z-Boy, Inc. 127,775
7,200 Winnebago Industries, Inc. 144,450
-------
272,225
-------
Energy Sources: 2.4%
6,150 Nabors Industries, Inc. 1 190,266
-------
Financial Services: 12.6%
3,800 E.W. Blanch Holdings, Inc. 232,750
13,000 Foremost Corporation of America 368,875
4,000 Gallagher (Arthur J.) & Company 259,000
900 Markel Corporation 1 139,500
-------
1,000,125
-------
Health & Personal Care: 11.3%
4,000 Celgene Corporation 1 281,000
10,400 Cerus Corporation 279,500
10,400 KeraVision, Inc. 63,863
5,100 Syncor International Corporation 146,625
2,500 VISX, Inc. 129,453
-------
900,441
-------
Machinery & Machine Tools: 1.7%
7,000 Astec Industries, Inc. 1 131,906
-------
Medical Products & Supplies: 6.3%
3,000 MedImmune, Inc. 1 497,438
-------
<PAGE>
Lexington SmallCap Fund, Inc.
Statement of Net Assets
(Including the Portfolio of Investments)
December 31, 1999
Number
of Value
Shares Security (Note 1)
- -----------------------------------------------------------
Merchandising: 1.7%
5,800 Shopko Stores, Inc. 1 $133,400
-------
Retail: 2.2%
8,000 O'Reilly Automotive, Inc. 1 174,250
-------
Services: 9.9%
5,600 Applebee's International, Inc. 165,025
6,000 Jack in the Box, Inc. 1 124,125
3,600 Landstar System, Inc. 1 151,087
7,800 Oceaneering International, Inc. 1 116,512
3,500 The Bisys Group, Inc. 1 228,156
-------
784,905
-------
Technology: 0.0%
8,700 ProcureNet 1,2 1,305
-------
Telecommunications: 4.2%
4,400 WinStar Communications, Inc. 1 330,825
-------
Total Investments: 85.9% 6,829,155
(cost $5,650,946+)(Note 1)
Other assets in excess of
liabilities: 14.1% 1,123,218
-------
Total Net Assets: 100.0%
(equivalent to $11.48 per share
on 692,460 shares outstanding)
$7,952,373
=========
1 Non-income producing security.
2 Restricted and illiquid security (Note 6).
+ Aggregate cost for Federal income tax purposes is identical.
The Notes to Financial Statements are an integral part of this statement.
<PAGE>
Lexington SmallCap Fund, Inc.
Statement of Assets and Liabilities
December 31, 1999
Assets
Investments, at value (cost $5,650,946) (Note 1) $6,829,155
Cash 1,145,231
Dividends and interest receivable 9,481
Deferred organization expenses, net (Note1) 13,504
------------
Total Assets 7,997,371
------------
Liabilities
Due to Lexington Management Corporation (Note 2) 4,608
Payable for fund shares redeemed 13,413
Distributions payable 1,918
Accrued expenses 25,059
------------
Total Liabilities 44,998
------------
Net Assets (equivalent to $11.48 per share on
692,460 shares outstanding) (Note 4) $7,952,373
==========
Net Assets consist of:
Capital stock -- authorized 1,000,000,000 shares,
$.001 par value per share $ 692
Additional paid-in-capital (Note 1) 6,861,723
Accumulated net realized loss on investments (Note 1) (88,251)
Unrealized appreciation of investments 1,178,209
------------
Total Net Assets $7,952,373
============
The Notes to Financial Statements are an integral part of this statement.
<PAGE>
Lexington SmallCap Fund, Inc.
Statement of Operations
Year ended December 31, 1999
Investment Income
Dividends $ 39,877
Interest 20,807
-----------
60,684
Less: foreign tax expense 209
-----------
Total investment income $ 60,475
Expenses
Investment advisory fee (Note 2) 78,975
Professional fees 25,647
Printing and mailing expenses 20,706
Transfer agent and shareholder
servicing expenses (Note 2) 16,962
Directors' fees and expenses 16,139
Amortization of deferred
organization costs (Note 1) 9,089
Registration fees 8,313
Computer processing fees 6,974
Accounting expenses (Note 2) 6,330
Distribution expenses (Note 3) 6,144
Custodian expenses 1,668
Other expenses 8,612
-----------
Total expenses 205,559
Less: expenses recovered
under contract with investment
advisor (Note 2) 1,976 $ 203,583
----------- -----------
Net investment loss (143,108)
Realized and Unrealized Gain (Loss)
on Investments (Note 5)
Net realized gain on investments 351,930
Net change in unrealized appreciation
of investments (59,735)
-----------
Net realized and unrealized gain 292,195
---------
Increase in Net Assets Resulting from Operations $ 149,087
=========
The Notes to Financial Statements are an integral part of this statement.
<PAGE>
Lexington SmallCap Fund, Inc.
Statements of Changes in Net Assets
Years ended December 31, 1999 and 1998
1999 1998
Operations:
Net investment loss $ (143,108) $(137,688)
Net realized gain from investment transactions 351,930 147,548
Net change in unrealized appreciation of investments (59,735) 579,945
------- -------
Net increase in net assets resulting from operations 149,087 589,805
------- -------
Distributions to Shareholders: (Note 1)
Distributions to shareholders from net realized gains
from security transactions (429,455) (150,156)
------- -------
Capital Share Transactions: (Note 4)
Proceeds from sale of shares 681,016 946,635
Reinvested dividends 426,954 149,458
Cost of shares redeemded (1,047,717) (2,928,027)
------- -------
Net increase (decrease) in net assets from
capital share transactions 60,253 (1,831,934)
------- -------
Net decrease in net assets (220,115) (1,392,285)
Net Assets:
Beginning of period 8,172,488 9,564,773
------- -------
"End of period (including accumulated net investment
loss of $168,785 and $25,677, in 1999 and 1998,
respectively)(Note 1) $ 7,952,373 $ 8,172,488
=========== ===========
The Notes to Financial Statements are an integral part of these statements.
<PAGE>
Lexington SmallCap Fund, Inc.
Notes to Financial Statements
December 31, 1999 and 1998
1. Significant Accounting Policies
Lexington SmallCap 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 Securities transactions are accounted for on a
trade date basis. Realized gains and losses from investment
transactions are reported on the identified cost basis. Securities
traded on a recognized stock exchange are valued at the last sales
price reported by the exchange on which the securities are traded. If
no sales price is recorded, the mean between the last bid and asked
prices is used. Securities traded on the over-the-counter market are
valued at the mean between the last current bid and asked prices.
Short-term securities having a maturity of 60 days or less are stated
at amortized cost, which approximates market value. Securities for
which market quotations are not readily available and other assets are
valued by 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, 1999,
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. At December 31, 1999, the amount remaining to be amortized was
$13,504.
Use of Estimates The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of increases and decreases in net assets from
operations during the reporting period. Actual results could differ
from those estimates.
<PAGE>
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 an
affiliate, Market Systems Research Advisors, Inc. ("MSR"), under which
MSR provides the Fund with investment management services. Pursuant
to the terms of the sub-advisory contract between LMC and MSR, LMC
pays MSR 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. For 1999, LMC has agreed to voluntarily limit the
total expenses of the Fund (excluding interest, taxes, brokerage, and
extraordinary expenses but including the management fee and operating
expenses) to an annual rate of 2.50% of the Fund's average daily net
assets. Total reimbursement was $ 1,976 for the year ended December
31, 1999, and is set forth in the statement of operations.
The Fund also reimburses LMC for certain expenses, including
accounting and shareholder servicing costs of $12,885 which were
incurred by the Fund, but paid by LMC.
3. Distribution Plan
The Fund has a Distribution Plan (the "Plan") which allows payments to
finance activities associated with the distribution of the Fund's
shares. The Plan provides that the Fund may pay distribution fees on
a reimbursement basis, including payments to Lexington Funds
Distributor, Inc. ("LFD"), the Fund's distributor, in amounts not
exceeding 0.25% per annum of the Fund's average daily net assets.
Total distribution expenses for the year ended December 31, 1999 were
$6,144 and are set forth in the statement of operations.
4. Capital Stock
Transactions in capital stock were as follows:
<TABLE>
<CAPTION>
Year ended
December 31, 1999 December 31, 1998
------------------------------- -------------------------------
Shares Amount Shares Amount
------------- --------------- ------------- ---------------
<S> <C> <C> <C> <C>
Shares sold ........... 58,324 $ 681,016 85,447 $ 946,635
Shares issued on
reinvestment
of dividends ........ 37,201 426,954 14,369 149,958
----------- ------------ ------- ------------
95,525 1,107,970 99,816 1,096,093
Shares redeemed ....... (89,903) (1,047,717) (252,697) (2,928,027)
----------- ------------ ------- ------------
Net increase
(decrease) ......... 5,622 $ 60,253 (152,881) $ (1,831,934)
=========== ============ ======= ============
</TABLE>
<PAGE>
5. Investment Transactions
The cost of purchases and proceeds from sales of securities for the
year ended December 31, 1999, excluding short-term securities, were
$5,155,997 and $6,452,274, respectively.
At December 31, 1999, the aggregate gross unrealized appreciation for
all securities in which there
is an excess of value over tax cost amounted to $1,860,542 and
aggregate gross unrealized depreciation for all securities in which
there is an excess of tax cost over value amounted to $682,333.
6. Restricted and Illiquid Securities
Pursuant to the guidelines adopted by the Fund's Board of Directors,
the following security has been deemed to be restricted and illiquid.
The Fund currently limits investment in restricted and illiquid
securities to 15% of the Fund's net assets, at market value, at the
time of purchase.
Initial Acquisition Market Percent of
Security Date Shares Value Net Assets
ProcureNet 3/30/99 8,700 $1,305 0.02%
7. Tax Information (unaudited)
None of the distributions made by the Fund are eligible for the
corporate dividends received deduction.
The Fund designates $429,455 whether taken in shares or cash, as
20% long-term capital gain distributions.
<TABLE>
<CAPTION>
January 2, 1996
(commencement
Year ended December 31, of operations) to
----------------------------------- December 31,
1999 1998 1997 1996
----------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Net asset value, beginning of period .......................... $ 11.90 $ 11.39 $ 11.73 $ 10.00
------- ------- ------- -------
Income (loss) from investment operations: .....................
Net investment loss .......................................... (0.21) (0.02) (0.19) (0.18)
Net realized and unrealized gain on investments .............. 0.43 0.75 1.41 1.94
------- ------- ------- -------
Total income from investment operations ....................... 0.22 0.73 1.22 1.76
------- ------- ------- -------
Distributions from net realized gains ........................ (0.64) (0.22) (1.56) (0.03)
------- ------- ------- -------
Net asset value, end of period ................................ $ 11.48 $ 11.90 $ 11.39 $ 11.73
======= ======= ======= =======
Total return .................................................. 1.93% 6.73% 10.47% 17.50%
Ratio to average net assets:
Expenses, before reimbursement ............................... 2.60% 2.92% 2.57% 3.04%
Expenses, net of reimbursement ............................... 2.58% 2.59% 2.57% 2.48%
Net investment loss, before reimbursement .................... (1.84%) (2.00)% (1.78)% (2.34)%
Net investment loss .......................................... (1.81%) (1.67)% (1.78)% (1.78)%
Portfolio turnover rate ....................................... 70.44% 145.94% 39.09% 60.92%
Net assets, end of period (000's omitted) ..................... $ 7,952 $ 8,172 $ 9,565 $ 8,061
</TABLE>
Independent Auditors' Report
The Board of Directors and Shareholders
Lexington SmallCap Fund, Inc.:
We have audited the accompanying statement of net assets
(including the portfolio of investments) and assets and liabilities of
Lexington SmallCap Fund, Inc. as of December 31, 1999, the related
statement of operations for the year then ended, the statements of
changes in net assets for each of the years in the two-year period
then ended, and the financial highlights for each of the years in the
three-year period then ended, and 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
audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements and financial
highlights. Our procedures included confirmation of securities owned
as of December 31, 1999 by correspondence with the custodian. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights
referred to above present fairly, in all material respects, the
financial position of Lexington SmallCap Fund, Inc. as of December 31,
1999, the results of its operations for the year then ended, and
changes in its net assets for each of the years in the two-year period
then ended, and the financial highlights for the three-year period
then ended and for the period from January 2, 1996 (commencement of
operations) to December 31, 1996, in conformity with generally
accepted accounting principles.
KPMG LLP
New York, New York
February 7, 2000
