Dear Shareholders:
- --------------------------------------------------------------------------------
The Lexington Convertible Securities Fund's performance has lagged so far in
1996. However, performance for the twelve month period has been slightly better
than the average convertible securities fund, according to Lipper Analytical
Services, Inc.
Comparative total return performance measurements for the periods ended June
30, 1996 are:
6 Months 12 Months
-------- ---------
Lexington Convertible Securities ........................ + 2.85%* +16.03%*
Lipper Convertible Fund Average ......................... + 6.98% +15.82%
Standard & Poor's 500 Stock Price Index (unmanaged) ..... +10.09% +25.99%
Lehman Gov./Corp. Bond Index (unmanaged) ................ - 1.88% - 4.66%
Risks in the stock market remain extremely high. The U.S. economy is
relatively late in its expansion, and interest rates have been rising, creating
a weak bond market. Ignoring these negatives, the stock market has been
exhibiting intense speculation and overvaluation, creating the classic
conditions for a market correction.
Our approach relies heavily on objective measures of market risks. We
closely monitor monetary conditions, speculation, and valuation measurements. We
follow a disciplined strategy that trades off some of the gains in frenzied,
speculative markets for a higher amount of protection of capital during the
inevitable corrective market phases.
Our portfolio currently is 29% invested in risk free U.S. Treasury Bills.
Another 24% is invested in positions that have relatively little risk because
they are investment grade issues with relatively short redemption dates, and are
yield supported. The balance of the portfolio is invested in convertibles or
stocks that have been converted from original convertible positions that are
high quality niche growth companies. These companies have very predictable
earnings growth, significantly above the market's earnings growth rate overall,
but they have average price/earning ratios compared to the market.
We are opportunistically looking for bargains to present themselves in the
next market correction.
We must stress that our cautionary outlook is cyclical (several months) in
duration. We are quite optimistic that the secular bull market will reassert
itself after a corrective phase.
We appreciate your continued support. We welcome the opportunity to discuss
any questions you may have about your investment.
Sincerely,
Richard B. Russell
President and Portfolio Manager
July, 1996
*16.03%, 11.90% and 10.79% are the one and five year and since commencement
(1/20/88) average annual standard total returns, respectively, for the period
ended June 30, 1996. Investment return and principal value of an investment will
fluctuate so that an investor's shares, when redeemed, may be worth more or less
than at their original cost. Total return represents past performance.
1
<PAGE>
Lexington Convertible Securities Fund
Statement of Net Assets
(Including the Portfolio of Investments)
June 30, 1996 (unaudited)
Left Column
Number of
Shares or
Principal Value
Amount Security Description (Note 1)
- --------------------------------------------------------------------------------
CONVERTIBLE BONDS: 35.1%
Computer Software & Services: 4.3%
$ 875,000 Automatic Data Processing Services, Inc.
0.00%*, due 02/20/2012 ........................... $ 448,437
-----------
Consumer Products: 3.4%
400,000 McKesson Corporation
(Armor All Products),
4.50%, due 03/01/2004 ............................ 351,500
-----------
Diversified Company Industry: 4.4%
370,000 Thermo Electron Corporation,
4.25%, due 01/01/2003 ............................ 458,800
-----------
Financial Services Industry: 5.8%
325,000 First Financial Management Corporation,
(First Data Corporation), 5.00%,
due 12/15/1999 ................................... 597,187
-----------
Machinery: 3.9%
350,000 Raymond Corporation,
6.50%, due 12/15/2003 ............................ 398,563
-----------
Retail Stores (Specialty line): 5.0%
500,000 Pep Boys Corporation,
4.00%, due 09/09/1999 ............................ 514,375
-----------
Telecommunications Service: 4.2%
1,300,000 United States Cellular Corporation,
0.00%*, due 06/15/2015 ........................... 435,500
-----------
Toys: 4.1%
1,205,000 Time Warner, Inc. (Hasbro),
0.00%*, due 12/17/2012 ........................... 426,269
-----------
TOTAL CONVERTIBLE BONDS
(cost $3,406,736) ................................ 3,630,631
-----------
The Notes to Financial Statements are an integral part of this statement.
Right Column
Number of
Shares or
Principal Value
Amount Security Description (Note 1)
- --------------------------------------------------------------------------------
COMMON STOCKS: 35.6%
Computer Software & Services: 7.9%
10,582 Sterling Software, Inc. ............................ $ 814,814
-----------
Electronics: 3.5%
8,604 Avnet, Inc. ........................................ 362,444
-----------
Industrial Services: 4.5%
15,731 Olsten Corporation ................................. 462,113
-----------
Medical Services: 3.1%
8,392 Salick Health Care, Inc. ........................... 322,043
-----------
Mobile Homes: 16.6%
46,872 Clayton Homes, Inc. ................................ 937,440
37,994 Oakwood Homes Corporation .......................... 783,626
-----------
1,721,066
-----------
TOTAL COMMON STOCKS
(cost $1,469,744) ................................ 3,682,480
-----------
TOTAL LONG-TERM INVESTMENTS ........................ 7,313,111
-----------
SHORT-TERM INVESTMENTS: 28.9%
U.S. Government Obligations
$1,800,000 U.S. Treasury Bills
5.07%, due 07/05/96 .............................. $ 1,798,308
500,000 U.S. Treasury Bills
5.02% due 08/08/96 ............................... 497,255
700,000 U.S. Treasury Bills
4.75% due 08/22/96 ............................... 694,694
-----------
TOTAL SHORT-TERM INVESTMENTS
(cost $2,991,378) ................................ 2,990,257
-----------
TOTAL INVESTMENTS: 99.6%
(cost $7,867,858+) (Note 1) ...................... 10,303,368
Assets in excess of other liabilities: 0.4% ........ 35,869
-----------
TOTAL NET ASSETS: 100.0%
(equivalent to $14.01 per share
on 738,019 shares outstanding) ................. $10,339,237
===========
*Zero Coupon Bonds.
+Aggregate cost for Federal income tax purposes is identical.
2
<PAGE>
Lexington Convertible Securities Fund
Statement of Assets and Liabilities
June 30, 1996 (unaudited)
Assets
Investments, at value (cost $7,867,858) (Note 1) ................. $10,303,368
Cash ............................................................. 59,438
Receivable for shares sold ....................................... 3,900
Dividends and interest receivable ................................ 24,594
-----------
Total Assets ............................................ 10,391,300
-----------
Liabilities
Due to Lexington Management Corporation (Note 2) ................. 8,322
Payable for shares redeemed ...................................... 265
Accrued expenses ................................................. 43,476
Total Liabilities ....................................... 52,063
-----------
Net Assets (equivalent to $14.01 per share on
738,019 shares outstanding) (Note 5) ........................... $10,339,237
===========
Net Assets consist of:
Capital stock-unlimited number of shares of beneficial
interest; $.10 par value per share ............................. $ 73,802
Additional paid-in capital ....................................... 7,433,417
Undistributed net investment income .............................. 9,116
Accumulated net realized gain on investments ..................... 387,392
-----------
Net unrealized appreciation of investments ....................... 2,435,510
-----------
NET ASSETS ............................................ $10,339,237
===========
The Notes to Financial Statements are an integral part of this statement.
3
<PAGE>
Left Column
Lexington Convertible Securities Fund
Statement of Operations
Six months ended June 30, 1996 (unaudited)
Investment Income
Income
Dividends ......................................... $ 10,461
Interest 157,280
---------
Total investment income ......................... $ 167,741
Expenses
Investment advisory fee
(Note 2) ........................................ 53,534
Distribution fees (Note 3) ........................ 13,383
Printing and mailing expenses ..................... 13,335
Transfer agent and shareholder
servicing expenses (Note 2) ................... 11,412
Registration fees ................................. 9,610
Professional fees ................................. 7,636
Directors' fees and expenses ...................... 6,255
Accounting expenses (Note 2) ...................... 6,205
Custodian fees .................................... 630
Other expenses .................................... 11,022
---------
Total expenses .................................. 133,022
---------
Net investment income ......................... $ 34,719
Realized and Unrealized Gain
on Investments (Note 4)
Net realized gain on
investments ..................................... 387,392
Net change in unrealized
appreciation on
investments ..................................... (143,344)
----------
Net realized and unrealized
gain on investments ............................. 244,048
----------
Increase in Net Assets Resulting
from Operations ................................... $ 278,767
==========
The Notes to Financial Statements are an integral part of these statements.
Right Column
Lexington Convertible Securities Fund
Statements of Changes in Net Assets
Years ended December 31, 1995 and 1994
Six months
ended Year ended
June 30, 1996 December 31,
(unaudited) 1995
------------- ------------
Net investment income ....................... $ 34,719 $ 122,192
Net realized gain from investment
transactions ................................ 387,392 214,468
Increase (decrease) in unrealized
appreciation of investments ................ (143,344) 1,367,719
----------- ----------
Increase in net assets
resulting from operations ............. 278,767 1,704,379
Distributions to shareholders
from net investment income ................ (29,899) (122,375)
Distributions to shareholders
from net realized gains on
security transactions ..................... - (187,645)
Increase (decrease) in net assets
from capital share transactions
(Note 5) .................................. (1,550,192) 2,128,812
----------- ----------
Net increase (decrease)
in net assets ......................... (1,301,324) 3,523,171
Net Assets
Beginning of period ....................... 11,640,561 8,117,390
----------- ----------
End of period (including
undistributed net investment
income of $9,116 and
$4,296, respectively) ..................... $10,339,237 $11,640,561
=========== ===========
4
<PAGE>
Lexington Convertible Securities Fund
Notes to Financial Statements
June 30, 1996 (unaudited) and December 31, 1995
1. Significant Accounting Policies
Lexington Convertible Securities Fund (the "Fund") is an open end diversified
management investment company registered under the Investment Company Act of
1940, as amended. The Fund's investment objective is total return which it seeks
to achieve by providing capital appreciation, current income and conservation of
the shareholder's capital. The following is a summary of significant accounting
policies followed by the Fund in the preparation of its financial statements:
Investments As authorized by the Trustees, securities are valued on the
basis of valuations furnished by a pricing service which determines valuations
based upon market transactions for normal institutional-size trading units of
such securities. Debt securities are valued at the mean between the current bid
and asked price. Equity securities listed on a national securities exchange are
valued at the last reported sales price; if no sales price is reported for that
day the mean between the current bid and asked price is used. Over-the-counter
securities are valued at the mean of the latest bid and asked prices. Securities
for which market quotations are not readily available and other securities are
valued at fair value as determined by management and approved in good faith by
the Board of Trustees. Short-term securities having a maturity of 60 days or
less are valued at amortized cost, which approximates market value.
Security transactions are accounted for on the trade date. The Fund records
interest income on the accrual basis. In computing net investment income, the
Fund amortizes premiums and does not accrue discounts on convertible fixed
income securities in the portfolio. Dividend income and distributions to
shareholders are recorded on the ex-dividend date.
Federal Income Taxes It is the Fund's intention to qualify as a regulated
investment company and distribute all of its taxable income. Accordingly, no
provision for Federal income taxes has been made.
Distributions The character of income and gains to be distributed are
determined in accordance with income tax regulations which may differ from
generally accepted accounting principles. At December 31, 1995,
reclassifications were made to the Fund's capital accounts to reflect permanent
book/tax differences and income and gains available for distributions under
income tax regulations. Net investment income, net realized gains and net assets
were not affected by this change.
2. Investment Advisory Fee and Other Transactions with Affiliate
The Fund pays an investment advisory fee to Lexington Management Corporation
("LMC") at an 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 the Fund's former advisor, Ariston Capital Management
Corporation ("Ariston"), under which Ariston provides the Fund with investment
management services. Pursuant to the terms of the sub-advisory contract between
LMC and Ariston, LMC pays Ariston a monthly sub-advisory fee at the annual rate
of 0.75% of the Fund's average daily net assets up to $7 million and 0.50% of
the Fund's average daily net assets in excess of $7 million.
5
<PAGE>
Lexington Convertible Securities Fund
Notes to Financial Statements
June 30, 1996 (unaudited) and December 31, 1995 (continued)
2. Investment Advisory Fee and Other Transactions with Affiliate (continued)
The investment advisory contract provides that the total annual expenses of the
Fund (including management fees, but excluding interest, taxes, brokerage
commissions and extraordinary expenses) will not exceed the level of expenses
which the Fund is permitted to bear under the most restrictive expense
limitation imposed by any state in which shares of the Fund are offered for
sale. No reimbursement was required for the six months ended June 30, 1996.
The Fund also reimburses LMC for certain expenses, including accounting and
shareholder servicing costs of $11,865, 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 six months ended June 30,
1996 were $13,383 and are set forth in the statement of operations.
4. Purchases and Sales of Investments
The cost of purchases and proceeds from sales of investments for the six months
ended June 30, 1996, excluding short-term securities, were $444,666 and
$665,280, respectively.
At June 30, 1996, aggregate gross unrealized appreciation for all investments in
which there is an excess of value over tax cost amounted to $2,584,638 and
aggregate gross unrealized depreciation for all investments in which there is an
excess of tax cost over value amounted to $149,128.
5. Capital Stock
Transactions in capital stock were as follows:
For the six
months ended
June 30, 1996 Year ended
(unaudited) December 31, 1995
--------------------- ---------------------
Shares Amount Shares Amount
--------- ----------- -------- ----------
Shares sold 67,836 $ 953,680 343,017 $4,367,587
Shares issued on reinvestment
of dividends 1,927 27,564 20,620 276,053
------- ---------- ------- ----------
69,763 981,244 363,637 4,643,640
Shares redeemed (183,878) (2,531,436) (197,366) (2,514,828)
------- ---------- ------- ----------
Net increase (decrease) (114,115) ($1,550,192) 166,271 $2,128,812
======= ========== ======= ==========
6
<PAGE>
Lexington Convertible Securities Fund
Financial Highlights
Selected per share data for a share outstanding throughout the period:
Six months
ended
June 30, Year Ended December 31,
1996 --------------------------------
(unaudited) 1995 1994 1993 1992
--------- ---- ---- ---- ----
Net asset value, beginning
of period .................... $13.66 $11.84 $14.10 $13.80 $12.41
------ ------ ------ ------ ------
Income from investment operations:
Net investment income 0.05 0.15 0.08 - 0.18
Net realized and unrealized gain
on investment ............... 0.34 2.04 0.10 0.89 1.39
------ ------ ------ ------ ------
Total income from investment
operations .................... 0.39 2.19 0.18 0.89 1.57
------ ------ ------ ------ ------
Less distributions:
Dividends from net investment
income ...................... (0.04) (0.15) (0.07) - (0.18)
Distributions from capital
gains ....................... - (0.22) (2.32) (0.59) -
Distributions in excess of
capital gains
(Temporary book-tax
difference) ................. - - (.05) - -
------ ------ ------ ------ ------
Total distributions ............. (0.04) (0.37) (2.44) (0.59) (0.18)
------ ------ ------ ------ ------
Net asset value, end of period .. $14.01 $13.66 $11.84 $14.10 $13.80
====== ====== ====== ====== ======
Total return .................... 5.83%* 18.63% 1.30% 6.53% 12.82%
Ratio to average net assets:
Expenses, before
reimbursement ............... 2.48%* 2.52% 2.81% 2.76% 3.02%
Expenses, net of
reimbursement ............... 2.48%* 2.52% 2.75% 2.76% 2.32%
Net investment income (loss),
before reimbursement ........ 0.65%* 1.24% 0.50% (0.04%) 0.70%
Net investment income (loss) .. 0.65%* 1.24% 0.56% (0.04%) 1.40%
Portfolio turnover 11.91%* 11.23% 38.14% 6.53% 12.58%
Net assets at end of period
(000's omitted) ............... $10,339 $11,641 $8,117 $8,319 $7,180
*Annualized
7
<PAGE>
Left Column
Lexington Convertible Securities Fund
Investment Adviser
- --------------------------------------
LEXINGTON MANAGEMENT CORPORATION
P.O. Box 1515
Park 80 West Plaza Two
Saddle Brook, New Jersey 07663
Sub-Adviser
- --------------------------------------
ARISTON CAPITAL MANAGEMENT CORPORATION
40 Lake Bellevue Drive-Suite 220
Bellevue, Washington 98005
Distributor
- -------------------------------------
LEXINGTON FUNDS DISTRIBUTOR, INC.
P.O. Box 1515
Park 80 West Plaza Two
Saddle Brook, New Jersey 07663
- ----------------------------------------
All shareholder requests for services of
any kind should be sent to:
Transfer Agent
- ----------------------------------------
STATE STREET BANK AND
TRUST COMPANY
c/o National Financial Data Services
1004 Baltimore
Kansas City, Missouri 64105
Or call toll free:
Service and Sales: 1-800-526-0056
24 Hour Account Information:
1-800-526-0052
- -----------------------------------------
----------------------------------------------------
(800) 526-0052
"LEXLINE"
24 hour toll-free telephone access to your
Lexington Fund account
Price/Yield*Account Balances*Exchanges*
Last Transactions*Total Return*Duplicate Statements
----------------------------------------------------
This report has been prepared for the information of the shareholders of
Lexington Convertible Securities Fund and is authorized for distribution to the
public only if it is accompanied or preceded by a currently effective prospectus
which sets forth expenses and other material information.
Right Column
------------
LEXINGTON
------------
-----------------------
LEXINGTON
CONVERTIBLE
SECURITIES
FUND
(filled box)
The Fund's investment
objective is total return,
which it seeks to achieve
by providing current income,
capital appreciation and
conservation of capital.
(filled box)
SEMI-ANNUAL REPORT
JUNE 30, 1996
The Lexington Group of
No Load
Investment Companies
-----------------------
