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LEXINGTON
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LEXINGTON
CONVERTIBLE
SECURITIES
FUND
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The Fund's investment
objective is total return,
which it seeks to achieve
by providing current income,
capital appreciation and
conservation of capital.
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SEMI-ANNUAL REPORT
JUNE 30, 1997
The Lexington Group of
No Load
Investment Companies
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<PAGE>
DEAR SHAREHOLDER:
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The Lexington Convertible Securities Fund had modest performance in the
first six months of 1997.
Comparative total return performance measurements for the period ended June
30, 1997 are:
6 MONTHS
--------
Lexington Convertible Securities Fund ....................... + 4.77%*
Unmanaged Standard & Poor's 500 Stock Index ................. +20.57%
Unmanaged Russell 2000 Stock Index .......................... +10.20%
Unmanaged Lehman Gov./Corp. Bond Index ...................... + 2.75%
The key to understanding our Fund's performance and its future prospects
is a review of some important divergences that have occurred within the stock
market. After a long history of outperforming large capitalized stocks, middle
and small capitalized stocks have gone through a period of severe
underperformance. To illustrate, in the twelve months ended in April, 1997, the
S&P 500 Index (large stocks) returned +25.1%, while the Russell 2000 Index (mid
and small stocks) returned 0.1%. The performance gap of 25% was unprecedented
since the Russell 2000 Index began in 1979. Further, using data on large and
small stocks since 1926 from Ibbotson Associates, we have to go back to 1937 and
1929 to find a twelve month period in which large stocks outperformed smaller
ones by more than 25%.
The last time the Russell 2000 Index lagged significantly over a twelve
month period in the year ended October, 1990 it came roaring back the next year,
outperforming the S&P 500 Index by 25%. In fact, never before have we had this
kind of underperformance without a large reversal. Keep in mind that
historically the two indices have had a very high positive correlation.
This divergent performance impacted our Fund because its portfolio is
concentrated in convertibles of middle and smaller capitalized growth companies
of the type found in the Russell 2000 Index.
At this point, these companies have very attractive valuations especially
compared to the largest companies in the S&P 500 Index. It is our belief that
they have far more attractive potential, and far less risk than do many of the
S&P 500 companies.
Also, since April, both the Russell 2000 and our Fund's performances have
been rebounding strongly. This continues even as we write this message in early
July.
It should be comforting to know that a recent study by Ibbotson Associates
shows that over the long term, January 1973 to December 1995, convertible bonds
have almost identical compound annual returns as the S&P 500 Index, but with
much lower risk as measured in standard deviations.
We appreciate your continued support. We welcome the opportunity to
discuss any questions you may have about your investment.
Sincerely,
/s/ Richard B. Russell /s/ Robert M. DeMichele
---------------------- -----------------------
Richard B. Russell Robert M. DeMichele
President and Portfolio Manager Chairman of the Board
August, 1997 August, 1997
*6.84%, 11.14% and 10.38% are the one year, five year and since commencement
(1/20/88) average annual standard total returns, respectively, for the period
ended June 30, 1997. 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.
1
<PAGE>
LEXINGTON CONVERTIBLE SECURITIES FUND
STATEMENT OF NET ASSETS
(INCLUDING THE PORTFOLIO OF INVESTMENTS)
June 30, 1997 (unaudited)
Principal Value
Amount Security Description (Note 1)
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CONVERTIBLE BONDS: 59.6%
COMPUTER HARDWARE &PERIPHERALS: 4.0%
$400,000 Adaptec, Inc., 4.75%, due 02/01/2004 ............... $ 396,000
---------
COMPUTER SOFTWARE & SERVICES: 5.5%
875,000 Automatic Data Processing Services, Inc.
0.00%*, due 02/20/2012 ........................... 537,031
---------
CONSUMER PRODUCTS: 3.5%
400,000 McKesson Corporation (Armor
All Products), 4.50%,
due 03/01/2004 ................................... 346,000
---------
DIVERSIFIED COMPANY: 4.7%
420,000 Thermo Electron Corporation,
4.25%, due 01/01/2003 ............................ 458,850
---------
FINANCIAL SERVICES: 6.8%
325,000 First Financial Management Corporation,
(First Data Corporation), 5.00%,
due 12/15/1999 ................................... 660,969
---------
MEDICAL SERVICES: 8.4%
350,000 FPA Medical Management
6.50%, due 12/15/2001 ............................ 403,375
430,000 Rotech Medical Corporation
5.25%, due 06/01/2003 ............................ 421,400
---------
824,775
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RETAIL STORES (SPECIAL LINE): 10.6%
450,000 Home Depot, Inc.,
3.25%, due 10/01/2001 ............................ 516,375
500,000 Pep Boys Company,
4.00%, due 09/09/1999 ............................ 516,250
---------
1,032,625
---------
SEMICONDUCTOR: 6.6%
450,000 Analog Devices, Inc.,
3.50%, due 12/01/2000 ............................ 648,563
---------
TELECOMMUNICATIONS SERVICE: 4.7%
1,300,000 United States Cellular Corporation,
0.00%*, due 06/15/2015 ........................... 455,000
---------
TOYS: 4.8%
1,205,000 Time Warner, Inc. (Hasbro),
0.00%*, due 12/17/2012 ........................... 472,962
----------
TOTAL CONVERTIBLE BONDS
(cost $5,126,758) ................................ 5,832,775
----------
COMMON STOCKS: 26.9%
COMPUTER SOFTWARE & SERVICES: 9.0%
16,852 Sterling Commerce, Inc. ............................ 554,009
10,582 Sterling Software, Inc. ............................ 330,688
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884,697
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MANUFACTURED HOUSING: 17.9%
58,590 Clayton Homes, Inc. ................................ 834,908
37,994 Oakwood Homes Corporation .......................... 911,856
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1,746,764
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TOTAL COMMON STOCKS
(cost $628,381) .................................. 2,631,461
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TOTAL LONG-TERM INVESTMENTS ........................ 8,464,236
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SHORT-TERM INVESTMENTS: 13.2%
U.S. GOVERNMENT OBLIGATIONS
$1,300,000 U.S. Treasury Bills
5.36%, due 08/21/97
(cost $1,290,644) ................................ 1,290,458
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TOTAL INVESTMENTS: 99.7%
(cost $7,045,783+) (Note 1) ...................... 9,754,694
Other assets in excess of liabilities: 0.3% ........ 32,308
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TOTAL NET ASSETS: 100.0%
(equivalent to $14.28 per share
on 685,321 shares outstanding) ................. $9,787,002
==========
*Zero Coupon Bond.
+Aggregate cost for Federal income tax purposes is identical.
The Notes to Financial Statements are an integral part of this statement.
2
<PAGE>
LEXINGTON CONVERTIBLE SECURITIES FUND
STATEMENT OF NET ASSETS AND LIABILITIES
June 30, 1997 (unaudited)
ASSETS
Investments, at value (cost $7,045,783) (Note 1) ............. $9,754,694
Cash ......................................................... 53,307
Receivable for shares sold ................................... 786
Dividends and interest receivable ............................ 39,253
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Total Assets ....................................... 9,848,040
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LIABILITIES
Due to Lexington Management Corporation (Note 2) ............. 8,028
Accrued expenses ............................................. 53,010
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Total Liabilities .................................. 61,038
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NET ASSETS (equivalent to $14.28 per share on
685,321 shares outstanding) (Note 4) ...................... $9,787,002
==========
NET ASSETS consist of:
Capital stock--authorized 1,000,000,000 shares,
$.10 par value per share ................................... $ 68,532
Paid in capital--unlimited authorized shares of
beneficial interest at no par value (Note 1 ) .............. 6,769,082
Undistributed net investment income (Note 1) ................. 14,818
Accumulated net realized gain on investments (Note 1) ........ 225,659
Unrealized appreciation on investments ....................... 2,708,911
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TOTAL NET ASSETS ................................... $9,787,002
==========
The Notes to Financial Statements are an integral part of this statement.
3
<PAGE>
LEXINGTON CONVERTIBLE SECURITIES FUND
STATEMENT OF OPERATIONS
Six months ended June 30, 1997 (unaudited)
INVESTMENT INCOME
Dividends ............................................. $ 4,275
Interest .............................................. 156,891
--------
Total investment income ............................. $161,166
Expenses
Investment advisory fee
(Note 2) ............................................ 49,215
Registration fees ..................................... 12,869
Printing and mailing expenses ......................... 12,842
Distribution expense (Note 3) ......................... 12,304
Transfer agent and shareholder
servicing expense (Note 2) .......................... 9,955
Professional fees ..................................... 7,078
Accounting expenses (Note 2) .......................... 6,154
Directors' fees and expenses .......................... 4,135
Computer processing fees .............................. 2,896
Custodian expense ..................................... 905
Other expenses ........................................ 4,887
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Total expenses ....................................... 123,240
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Net investment income ............................. 37,926
REALIZED AND UNREALIZED GAIN
ON INVESTMENTS (NOTE 5)
Net realized gain on
investments ......................................... 227,644
Net change in unrealized
appreciation on
investments ......................................... 159,565
--------
Net realized and unrealized
gain .............................................. 387,209
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INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS ....................................... $425,135
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LEXINGTON CONVERTIBLE SECURITIES FUND
STATEMENT OF CHANGES IN NET ASSETS
Six months
ended Year ended
June 30,1997 December 31,
(unaudited) 1996
----------- -----------
Net investment income .................. $ 37,926 $ 83,352
Net realized gain from security
transactions ........................ 227,644 433,015
Net change in unrealized
appreciation/(depreciation)
of investments ...................... 159,565 (29,508)
----------- -----------
Increase in net assets
resulting from operations ....... 425,135 486,859
Distributions to shareholders
from net investment income .......... (20,753) (87,725)
Distributions to shareholders
from net realized gains on
security transactions ............... -- (432,556)
Decrease in net assets from capital
share transactions (Note 4) ......... (1,825,825) (398,694)
----------- -----------
Net decrease
in net assets ................... (1,421,443) (432,116)
NET ASSETS
Beginning of period ................. 11,208,445 11,640,561
----------- -----------
End of period (including undistributed
net investment income of $14,818
and distributions in excess of
net investment income of $2,355,
respectively.) ................... $ 9,787,002 $11,208,445
` =========== ===========
The Notes to Financial Statements are an integral part of this statement.
4
<PAGE>
LEXINGTON CONVERTIBLE SECURITIES FUND
NOTES TO FINANCIAL STATEMENTS
June 30, 1997 (unaudited) and December 31, 1996
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 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 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
5
<PAGE>
LEXINGTON CONVERTIBLE SECURITIES FUND
NOTES TO FINANCIAL STATEMENTS
June 30, 1997 (unaudited) and December 31, 1996 (continued)
2. INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATE (continued)
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.
For 1997, LMC has agreed to voluntarily limit the total expenses of the Fund
(including management fees, but excluding interest, taxes, brokerage commissions
and extraordinary expenses) to an annual rate of 2.50% of the Fund's average
daily net assets. No reimbursement was required for the six months ended June
30, 1997.
The Fund reimbursed LMC for certain expenses, including accounting and
shareholder servicing costs of $10,860 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,
1997 were $12,304 and are set forth in the statement of operations.
4. CAPITAL STOCK
Transactions in capital stock were as follows:
<TABLE>
<CAPTION>
Six
months ended
June 30, 1997 Year ended
(unaudited) December 31, 1996
-------------------------- ---------------------------
Shares Amount Shares Amount
-------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Shares sold .............................. 24,665 $ 333,161 171,179 $ 2,414,604
Shares issued on reinvestment of dividends 1,402 19,368 36,510 497,981
-------- ----------- -------- -----------
26,067 352,529 207,689 2,912,585
Shares redeemed .......................... (161,406) (2,178,354) (239,163) (3,311,279)
-------- ----------- -------- -----------
Net decrease ............................. (135,339) $(1,825,825) (31,474) $ (398,694)
======== =========== ======== ===========
</TABLE>
5. PURCHASES AND SALES OF INVESTMENT SECURITIES
The cost of purchases and proceeds from sales of securities for the six months
ended June 30, 1997, excluding short-term securities, were $1,149,675 and
$785,556, respectively.
At June 30, 1997, the aggregate gross unrealized appreciation for all securities
in which there is an excess of value over tax cost amounted to $ 2,837,294 and
aggregate gross unrealized depreciation for all securities in which there is an
excess of tax cost over value amounted to $128,383.
6
<PAGE>
LEXINGTON CONVERTIBLE SECURITIES FUND
FINANCIAL HIGHLIGHTS
Selected per share data for a share outstanding throughout the period:
<TABLE>
<CAPTION>
Six months
ended
June 30, Year Ended December 31,
1997 ------------------------------------------
(unaudited) 1996 1995 1994 1993
--------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period ...... $13.66 $13.66 $11.84 $14.10 $13.80
------ ------ ------ ------ ------
Income from investment operations:
Net investment income ................... 0.05 0.11 0.15 0.08 --
Net realized and unrealized gain on
investments ........................... 0.60 0.55 2.04 0.10 0.89
------ ------ ------ ------ ------
Total income from investment operations ... 0.65 0.66 2.19 0.18 0.89
------ ------ ------ ------ ------
Less distributions:
Distributions from net investment income (0.03) (0.11) (0.15) (0.07) --
Distributions in excess of net investment
income (temporary book-tax difference) -- -- -- (0.05) --
Distributions from net realized gains ... -- (0.55) (0.22) (2.32) (0.59)
------ ------ ------ ------ ------
Total distributions ....................... (0.03) (0.66) (0.37) (2.44) (0.59)
------ ------ ------ ------ ------
Net asset value, end of period ............ $14.28 $13.66 $13.66 $11.84 $14.10
====== ====== ====== ====== ======
Total return .............................. 9.84%* 4.89% 18.63% 1.30% 6.53%
Ratio to average net assets:
Expenses, before reimbursement or waivers 2.50%* 2.39% 2.52% 2.81% 2.76%
Expenses, net of reimbursement or waivers 2.50%* 2.39% 2.52% 2.75% 2.76%
Net investment income, before
reimbursement or waivers .............. 0.77%* 0.77% 1.24% 0.50% (0.04%)
Net investment income ................... 0.77%* 0.77% 1.24% 0.56% (0.04%)
Portfolio turnover rate ................... 20.43%* 18.45% 11.23% 38.14% 6.53%
Average commission paid on equity
security transactions** ................. $ 0.00 $ 0.04 -- -- --
Net assets, end of period (000's omitted) $9,787 $11,208 $11,641 $8,117 $8,319
</TABLE>
** Annualized
** In accordance with SEC disclosure guidelines, the average commissions are
calculated for periods beginning with the year ended December 31, 1996, but not
for prior periods.
7
<PAGE>
LEXINGTON
CONVERTIBLE SECURITIES FUND
INVESTMENT ADVISER
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LEXINGTON MANAGEMENT CORPORATION
P.O. Box 1515
Park 80 West Plaza Two
Saddle Brook, New Jersey 07663
SUB-ADVISER
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ARISTON CAPITAL MANAGEMENT CORPORATION
40 Lake Bellevue Drive--Suite 220
Bellevue, Washington 98005
DISTRIBUTOR
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LEXINGTON FUNDS DISTRIBUTOR, INC.
P.O. Box 1515
Park 80 West Plaza Two
Saddle Brook, New Jersey 07663
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ALL SHAREHOLDER REQUESTS FOR SERVICES OF
ANY KIND SHOULD BE SENT TO:
TRANSFER AGENT
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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
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(800) 526-0052
"LEXLINE"
24 hour toll-free telephone access to your
Lexington Fund account
Price/Yield o Account Balances o Exchanges o
Last Transactions o Total Return o Duplicate Statements
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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.
