Dear Shareholders:
- --------------------------------------------------------------------------------
We are pleased to submit our annual report for the year ended December 31,
1996.
The Lexington Convertible Securities Fund's performance has been
disappointing during the last year. It has lagged the unmanaged Standard &
Poor's 500 Stock Price Index ("S&P 500").
Comparative total return performance measurements for the period ended
December 31, 1996 are:
1 Year 3 Years
------ -------
Lexington Convertible Securities Fund ........... + 4.89%* +26.05%
S & P 500 ....................................... +22.97% +71.33%
Lehman Gov./Corp. Bond Index .................... + 2.90% +18.39%
The Fund's performance has been constrained because its portfolio has been
defensively invested in deference to an extremely high level of stock market
risk. The market, on the other hand, has punished caution and rewarded investors
for taking on ever increasing amounts of risk.
Stock price movements are increasingly driven by investor psychology instead
of the underlying fundamentals of the companies or the overall economy. The key
issue in 1997 is when will the frothy, speculative atmosphere recognize the much
more mundane fundamental realities? The market's profit growth rate is receding.
According to First Call, a corporate information source, the S&P 500 aggregate
operating profit growth is expected to be only +6.5% in 1997. In 1996 it was
estimated to be +7.9%, and it was +18.7% in 1995.
We believe the market will suffer its inevitable correction sooner rather
than later. Our Fund's portfolio is defensively positioned to weather this
correction, and to capitalize on the bargains that will present themselves
during a market sell-off. We also believe the secular bull market will reassert
itself after a corrective phase.
We appreciate your continued support, and we welcome the opportunity to
discuss any questions you may have about your investment.
Sincerely,
Richard B. Russell Robert M. DeMichele
President and Portfolio Manager Chairman of the Board
February, 1997 February, 1997
1
<PAGE>
CHART/BEGIN
Printed version of this shareholder report contains a
graphic chart indicating the comparison of change in
value of a $10,000 investment in Lexington Convertible
Securities Fund, the unmanaged Standard & Poor's 500
Stock Price Index and the unmanaged Lehmand Brothers
Government/Corporate Bond Index from 1/20/88 through
12/31/96
CHART/END
*4.89%, 8.66% and 10.39% are the one and five year and since commencement
(1/20/88) average annual standard total returns, respectively, for the period
ended December 31, 1996. Investment return and principal value of an investment
will fluctuate so that an investor's shares, when redeemed, may be worth more or
less than at their original cost. Total return represents past performance and
is not predictive of future results.
2
<PAGE>
Lexington Convertible Securities Fund
Statement of Net Assets
(Including the Portfolio of Investments)
December 31, 1996
(left column)
Principal Value
Amount Security Description (Note 1)
- -------------------------------------------------------------------------------
CONVERTIBLE BONDS: 42.4%
Computer Software & Services: 4.3%
$ 875,000 Automatic Data Processing Services, Inc.
0.00%*, due 02/20/2012 ............................. $ 487,812
----------
Consumer Products: 3.2%
400,000 McKesson Corporation
(Armor All Products),
4.50%, due 03/01/2004 ............................... 354,500
----------
Diversified Company: 4.6%
420,000 Thermo Electron Corporation,
4.25%, due 01/01/2003 .............................. 516,600
----------
Financial Services: 5.0%
325,000 First Financial Management Corporation,
(First Data Corporation), 5.00%,
due 12/15/1999 ................................... 560,625
----------
Machinery: 3.4%
350,000 Raymond Corporation,
6.50%, due 12/15/2003 .............................. 379,313
----------
Retail Stores (Specialty line): 8.4%
450,000 Home Depot, Inc.,
3.25%, due 10/01/2001 .............................. 440,437
----------
500,000 Pep Boys Corporation,
4.00%, due 09/09/1999 .............................. 506,250
----------
946,687
----------
Semiconductor: 5.6%
450,000 Analog Devices, Inc.,
3.50%, due 12/01/2000 .............................. 625,500
----------
Telecommunications Service: 3.9%
1,300,000 United States Cellular Corporation,
0.00%*, due 06/15/2015 ............................. 432,250
----------
Toys: 4.0%
1,205,000 Time Warner, Inc. (Hasbro),
0.00%*, due 12/17/2012 ............................. 451,875
----------
TOTAL CONVERTIBLE BONDS
(cost $4,383,105) .................................. 4,755,162
----------
(right column)
Number of
Shares or
Principal Value
Amount Security Description (Note 1)
- -------------------------------------------------------------------------------
COMMON STOCKS: 26.1%
Computer Software & Services: 8.3%
16,852 Sterling Commerce, Inc. .............................. $ 594,033
10,582 Sterling Software, Inc. .............................. 334,656
-----------
928,689
-----------
Manufactured Housing: 14.8%
58,590 Clayton Homes, Inc. .................................. 790,965
37,994 Oakwood Homes Corporation ............................ 869,113
-----------
1,660,078
-----------
Medical Services: 3.0%
8,392 Salick Health Care, Inc. ............................. 334,631
-----------
TOTAL COMMON STOCKS
(cost $745,610) .................................... 2,923,398
-----------
TOTAL LONG-TERM INVESTMENTS .......................... 7,678,560
-----------
SHORT-TERM INVESTMENTS: 31.8%
U.S. Government Obligations
$2,100,000 U.S. Treasury Bills
5.13%, due 02/06/97 ................................ 2,089,143
300,000 U.S. Treasury Bills
5.03% due 02/20/97 ................................. 297,870
900,000 U.S. Treasury Bills
5.07% due 05/15/97 ................................. 882,846
300,000 U.S. Treasury Bills
5.36% due 08/21/97 ................................. 290,076
-----------
TOTAL SHORT-TERM INVESTMENTS
(cost $3,560,434) .................................. 3,559,935
-----------
TOTAL INVESTMENTS: 100.3%
(cost $8,689,149+) (Note 1) ........................ 11,238,495
Liabilities in excess of other assets: (0.3%) ........ (30,050)
-----------
TOTAL NET ASSETS: 100.0%
(equivalent to $13.66 per share
on 820,660 shares outstanding) ..................... $11,208,445
===========
*Zero Coupon Bonds.
+Aggregate cost for Federal income tax purposes is identical.
The Notes to Financial Statements are an integral part of this statement.
3
<PAGE>
Lexington Convertible Securities Fund
Statement of Assets and Liabilities
December 31, 1996
<TABLE>
Assets
<S> <C>
Investments, at value (cost $8,689,149) (Note 1) .......................................... $11,238,495
Cash ...................................................................................... 13,118
Receivable for shares sold ................................................................ 5,000
Dividends and interest receivable ......................................................... 28,532
-----------
Total Assets .................................................................... 11,285,145
-----------
Liabilities
Due to Lexington Management Corporation (Note 2) .......................................... 9,218
Distributions payable ..................................................................... 18,613
Accrued expenses .......................................................................... 48,869
-----------
Total Liabilities 76,700
-----------
Net Assets (equivalent to $13.66 per share on 820,660 shares outstanding) (Note 4) ........ $11,208,445
===========
Net Assets consist of:
Capital stock-authorized 1,000,000,000 shares, $.10 par value per share ................... $ 82,066
Additional paid-in capital (Note 1) ....................................................... 8,581,372
Distribution in excess of net investment income (Note 1) .................................. (2,355)
Accumulated net realized loss on investments (Note 1) ..................................... (1,984)
Unrealized appreciation on investments .................................................... 2,549,346
-----------
NET ASSETS ...................................................................... $11,208,445
===========
</TABLE>
The Notes to Financial Statements are an integral part of this statement.
4
<PAGE>
(left column)
Lexington Convertible Securities Fund
Statement of Operations
Year ended December 31, 1996
Investment Income
Income
Dividends ......................... $ 13,260
Interest .......................... 329,361
---------
Total investment income ......... $ 342,621
Expenses
Investment advisory fee
(Note 2) ........................ 108,636
Printing and mailing expenses ..... 31,225
Distribution fees (Note 3) ........ 27,159
Transfer agent and shareholder
servicing expense (Note 2) ...... 19,952
Registration fees ................. 17,877
Professional fees ................. 14,178
Accounting expenses (Note 2) ...... 12,685
Directors' fees and expenses ...... 10,615
Computer processing fees .......... 5,807
Custodian expense ................. 1,070
Other expenses .................... 10,065
---------
Total expenses .................. 259,269
----------
Net investment income ......... 83,352
Realized and Unrealized Gain
(Loss) on Investments (Note 5)
Net realized gain on
investments ..................... 433,015
Net change in unrealized
appreciation on
investments ..................... (29,508)
----------
Net realized and unrealized
gain .......................... 403,507
----------
Increase in Net Assets Resulting
from Operations ................... $ 486,859
==========
(right column)
Lexington Convertible Securities Fund
Statements of Changes in Net Assets
Years ended December 31, 1996 and 1995
1996 1995
---- ----
Net investment income ..................... $ 83,352 $ 122,192
Net realized gain from security
transactions ............................ 433,015 214,468
Net change in unrealized
appreciation on
investments ............................. (29,508) 1,367,719
----------- -----------
Increase in net assets
resulting from operations ........... 486,859 1,704,379
Distributions to shareholders
from net investment income .............. (87,725) (122,375)
Distributions to shareholders
from net realized gains from
security transactions ................... (432,556) (187,645)
Increase (decrease) in net assets
from capital share transactions
(Note 4) ................................ (398,694) 2,128,812
----------- -----------
Net increase (decrease)
in net assets ....................... (432,116) 3,523,171
Net Assets
Beginning of period ..................... 11,640,561 8,117,390
----------- -----------
End of period (including
distributions in excess of net
investment income of $2,355
and undistributed net
investment income of
$4,296, respectively) ................. $11,208,445 $11,640,561
=========== ===========
The Notes to Financial Statements are an integral part of these statements.
5
<PAGE>
Lexington Convertible Securities Fund
Notes to Financial Statements
December 31, 1996 and 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. Securities traded
on the over-the-counter market are valued at the mean of the last current bid
and asked price. Short-term securities having a maturity of 60 days or less are
valued at amortized cost, which approximates market value. Securities for which
market quotations are not readily available and other securities are valued by
Fund management in good faith under the direction of the Fund's Board of
Trustees.
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 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 are normally declared and
paid quarterly and dividends from net realized capital gains are normally
declared and paid annually. However, 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 principles. 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 distributions under income tax regulations.
Net investment income, net realized gains and net assets were not affected by
this change.
Use of Estimates The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of increases and
decreases in net assets from operations during the reporting period. Actual
results could differ from those estimates.
2. Investment Advisory Fee and Other Transactions with Affiliate
The Fund pays an investment advisory fee to Lexington Management Corporation
("LMC") at 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
6
<PAGE>
Lexington Convertible Securities Fund
Notes to Financial Statements
December 31, 1996 and 1995 (continued)
2. Investment Advisory Fee and Other Transactions with Affiliate (continued)
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.
The investment advisory contract provides that the total annual expenses of the
Fund (including management fees, but excluding interest, taxes, brokerage
commissions and extraordinary expenses) will not exceed the level of expenses
which the Fund is permitted to bear under the most restrictive expense
limitation imposed by any state in which shares of the Fund are offered for
sale. No reimbursement was required for the year ended December 31, 1996.
The Fund also reimbursed LMC for certain expenses, including accounting and
shareholder servicing costs of $22,125, which were incurred by the Fund but paid
by LMC. 3. Distribution Plan
The Fund has a Distribution Plan (the "Plan") which allows payments to finance
activities associated with the distribution of the Fund's shares. The Plan
provides that the Fund may pay distribution fees on a reimbursement basis,
including payments to Lexington Funds Distributor, Inc. ("LFD"), the Fund's
distributor, in amounts not exceeding 0.25% per annum of the Fund's average
daily net assets. Total distribution expenses for the year ended December 31,
1996 were $27,159 and are set forth in the statement of operations.
4. Capital Stock
Transactions in capital stock were as follows:
<TABLE>
<CAPTION>
Year ended Year ended
December 31, 1996 December 31, 1995
------------------- -------------------
Shares Amount Shares Amount
------ ------ ------ ------
<S> <C> <C> <C> <C>
Shares sold .................................... 171,179 $2,414,604 343,017 $4,367,587
Shares issued on reinvestment of dividends ..... 36,510 497,981 20,620 276,053
-------- ---------- ------- ----------
207,689 2,912,585 363,637 4,643,640
Shares redeemed ................................ (239,163) (3,311,279) (197,366) (2,514,828)
-------- ---------- ------- ----------
Net increase (decrease) ........................ (31,474) ($ 398,694) 166,271 $2,128,812
======== ========== ======= ==========
</TABLE>
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 $1,393,677 and
$1,435,002, respectively.
At December 31, 1996, aggregate gross unrealized appreciation for all securities
in which there is an excess of value over tax cost amounted to $2,731,924 and
aggregate gross unrealized depreciation for all securities in which there is an
excess of tax cost over value amounted to $182,578.
7
<PAGE>
Lexington Convertible Securities Fund
Financial Highlights
Selected per share data for a share outstanding throughout the period:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period .............. $13.66 $11.84 $14.10 $13.80 $12.41
------ ------ ------ ------ ------
Income from investment operations:
Net investment income ........................... 0.11 0.15 0.08 - 0.18
Net realized and unrealized gain on
investments ................................... 0.55 2.04 0.10 0.89 1.39
------ ------ ------ ------ ------
Total income from investment operations ........... 0.66 2.19 0.18 0.89 1.57
------ ------ ------ ------ ------
Less distributions:
Distributions from net investment income ........ (0.11) (0.15) (0.07) - (0.18)
Distributions in excess of net investment
income (temporary book-tax difference) ........ - - (.05) - -
Distributions from net realized gains ........... (0.55) (0.22) (2.32) (0.59) -
------ ------ ------ ------ ------
Total distributions ............................... (0.66) (0.37) (2.44) (0.59) (0.18)
====== ====== ====== ====== ======
Net asset value, end of period .................... $13.66 $13.66 $11.84 $14.10 $13.80
Total return ...................................... 4.89% 18.63% 1.30% 6.53% 12.82%
Ratio to average net assets:
Expenses, before reimbursement or waivers ....... 2.39% 2.52% 2.81% 2.76% 3.02%
Expenses, net of reimbursement or waivers ....... 2.39% 2.52% 2.75% 2.76% 2.32%
Net investment income, before
reimbursement or waivers ...................... 0.77% 1.24% 0.50% (0.04%) 0.70%
Net investment income ........................... 0.77% 1.24% 0.56% (0.04%) 1.40%
Portfolio turnover rate ........................... 18.45% 11.23% 38.14% 6.53% 12.58%
Average commission paid on equity
security transactions* .......................... 0.04 - - - -
Net assets at end of period (000's omitted) ...... $11,208 $11,641 $8,117 $8,319 $7,180
</TABLE>
*In accordance with recent SEC disclosure guidelines, the average commission
is calculated for the current period, but not for prior periods.
8
<PAGE>
Independent Auditors' Report
The Board of Trustees and Shareholders
Lexington Convertible Securities Fund:
We have audited the accompanying statements of net assets (including the
portfolio of investments) and assets and liabilities of Lexington Convertible
Securities Fund as of December 31, 1996, 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 the
four-year period then ended. 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. The financial highlights for the year ended December 31, 1991
were audited by other auditors whose reports thereon, dated January 18, 1992,
expressed an unqualified opinion.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1996, 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 Convertible Securities Fund as of December 31, 1996, the results of
its operations for the year then ended, the changes in its net assets for each
of the years in the two-year period then ended, and the financial highlights for
the four-year period ended December 31, 1995, in conformity with generally
accepted accounting principles.
KPMG Peat Marwick LLP
New York, New York
February 14, 1997
9
<PAGE>
(left column)
LEXINGTON
INVESTOR SERVICES
- -------------------------------------------
As a Lexington shareholder, you should be
aware of the many services available to you.
No Load-The Lexington Funds are no load
funds. That is, investments and redemptions
are made without any sales charges,
commissions or redemption fees.
----------
Free Telephone Exchange-Investments in the
Lexington Funds may be exchanged for shares
of a different Lexington Fund at any time.
----------
Check Writing Privileges-Lexington Money
Market Trust and Lexington Tax Free Money
Fund permit investors immediate access to
their funds with check writing for
withdrawals from their account.
----------
Tax Sheltered Plans-IRA, Keogh, Pension,
and Profit Sharing Prototype Plans are
available to qualified individuals. These
plans offer investment flexibility through
the Share Exchange Service, simplified
record keeping, convenience and investment
supervision.
----------
Custodial Accounts for Minors-Investments
may be made on behalf of minors under the
Uniform Gifts to Minors Act currently in
effect in all states.
----------
Systematic Withdrawal Plan-An investor may
elect to receive a fixed amount from his or
her account each month or quarter, subject
to certain minimums.
----------
Complete Record Keeping-A statement is
provided for every transaction in addition
to a year-end statement with tax
information.
(right column)
The Lexington Group of
No Load Investment Companies
Lexington Worldwide Emerging Markets Fund, Inc.
- -Seeks long-term growth of capital primarily through invest-
ment in equity securities of companies domiciled in, or doing
business in, emerging countries and emerging markets.
Lexington Global Fund, Inc.-Seeks long-term growth of capital
primarily through investment in common stocks of companies
domiciled in foreign countries and the United States.
Lexington International Fund, Inc.-Seeks long-term growth of
capital through investment in companies domiciled in foreign
countries.
Lexington Troika Dialog Russia Fund, Inc.-Seeks long-term
capital appreciation through investments primarily in the
equity securities of Russian companies.
Lexington Crosby Small Cap Asia Growth Fund, Inc.-Seeks
long-term capital appreciation through investment in
companies domiciled in the Asia Region with a market
capitalization of less than $1 billion.
Lexington Ramirez Global Income Fund-Seeks high current
income. Capital appreciation is a secondary objective. The
Fund invests in a combination of foreign and domestic
high-yield, lower rated debt securities.
Lexington Goldfund, Inc.-Seeks capital appreciation through
investment in gold bullion and shares of gold mining
companies.
Lexington Growth and Income Fund, Inc.-Seeks capital
appreciation over the long-term through investments in the
stocks of large, ably managed and well financed companies.
Lexington Corporate Leaders Trust Fund-Seeks capital growth
and reasonable income through investment in an equal number
of shares of an established list of American blue chip
corporations.
Lexington SmallCap Value Fund, Inc.-Seeks long-term capital
appreciation through investment in common stocks of companies
domiciled in the United States with a market capitalization
of less than $1 billion.
Lexington Convertible Securities Fund-Seeks total return by
providing capital appreciation, current income and
conservation of capital through investments in a diversified
portfolio of securities convertible into shares of common
stock.
Lexington GNMA Income Fund, Inc.-Seeks to achieve a high
level of current income, consistent with liquidity and safety
of principal, through investment primarily in mortgage-backed
GNMA ("Ginnie Mae") certificates that are guaranteed as to
the timely payment of principal and interest by the United
States Government.
Lexington Money Market Trust-Seeks a high level of current
income consistent with preservation of capital and liquidity
through investments in interest bearing short-term money
market instruments.
Lexington Tax Free Money Fund, Inc.-Seeks current income
exempt from Federal income taxes while maintaining stability
of principal, liquidity and preservation of capital.
For more complete information about any of the Lexington Funds and a prospectus
which includes management fee and expenses call the distributor toll-free at
1-800-526-0056. Read the prospectus carefully before you invest or send money.
10
<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 accom-
panied 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)
ANNUAL REPORT
DECEMBER 31, 1996
The Lexington Group of
No Load
Investment Companies
-----------------------------
