DEAR SHAREHOLDERS:
- --------------------------------------------------------------------------------
The Lexington Convertible Securities Fund has continued to participate in the
financial markets' gains. Listed below are some comparative total return
performance measurements for the periods ended June 30, 1998:
<TABLE>
<S> <C> <C>
6 Months 12 Months
--------- ---------
Lexington Convertible Securities Fund + 5.37%* +13.81%*
Unmanaged Standard & Poors 500 Stock +17.61% +30.05%
Price Index
Unmanaged Russell 2000 Stock Index + 4.91% +16.49%
Unmanaged Lehman Gov./Corp. Bond Index + 4.17% +11.29%
</TABLE>
Remarkably, the major trends of the last several years remain in place. Most of
the money inflows into the market continue to end up being placed in a short
list of very large, capitalized, multi-national companies that continue to drive
the performance of the unmanaged S&P 500 Index. This stock performance has far
exceeded the underlying earnings growth of the Index creating many extremely
overvalued situations.
Concurrently, there has been relative neglect of many of the medium and smaller
capitalized stocks represented by the Russell 2000 Index. We are finding many
highly attractive, undervalued growth companies whose earnings growth in recent
years has far exceeded their stock performance.
Given the fact that the economy continues to have a benign inflation and
monetary environment, the overall risks to the stock and bond markets remain
contained. The trend of unmanaged S&P 500 Index earnings growth continues to
recede, and more earnings disappointments are occurring in the huge,
multi-national companies.
It can only be a matter of time before the imbalances in valuation are corrected
between the overvalued, large companies in the unmanaged S&P 500 Index, and the
many undervalued companies in the unmanaged Russell 2000 Index.
Just as important would be a shift in investor's emphasis towards allocating
portfolios to undervalued companies that have a unique and strategic advantage
giving them superior growth potential and whose earnings grow relatively
independent of the economy overall. These companies often have one or more of
the following characteristics:
1. Pricing control that often is indicative of a dominant market share
2. A recurring revenue stream
3. A sustainable rapidly growing market for their products or services that
is not overly dependent on the growth of the general economy.
It is these types of high quality niche growth companies that we are emphasizing
in the Fund's portfolio.
Sincerely,
[GRAPHIC OMITTED] [GRAPHIC OMITTED]
Robert M. DeMichele Richard B. Russell
Chairman of the Board President and Portfolio Manager
August, 1998 August, 1998
* 13.81%, 10.64% and 10.70% are the one, five and ten year average annual
standard total returns, respectively, for the period ended June 30, 1998.
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, 1998 (unaudited)
PRINCIPAL VALUE
AMOUNT SECURITY DESCRIPTION (NOTE 1)
- -----------------------------------------------------------------------
CONVERTIBLE BONDS: 46.5%
Business Services: 4.3%
$500,000 Metamor Worldwide, Inc.,
2.94%, due 08/15/2004 .................... $ 488,750
----------
Computer Software & Services: 11.1%
875,000 Automatic Data Processing Services, Inc.,
0.00%*, due 02/20/2012 .................. 823,979
420,000 National Data Corporation,
5.00%, due 11/01/2003 .................... 433,125
----------
1,257,104
----------
Diversified Company: 4.0%
420,000 Thermo Electron Corporation,
4.25%, due 01/01/2003 .................... 449,400
----------
Medical Services: 3.0%
410,000 Phycor, Inc., 4.50%, due 02/15/2003 ...... 342,862
----------
Pharmacueticals: 4.3%
420,000 Elan Plc, 4.75%, due 11/15/2004 ......... 490,350
----------
Precision Instruments: 3.5%
400,000 Thermo Instrument Systems, Inc.,
4.50%, due 10/15/2003 .................... 401,000
----------
Retail Stores (Special line): 7.3%
450,000 Home Depot, Inc.,
3.25%, due 10/01/2001 .................... 829,125
----------
Semiconductor: 9.0%
450,000 Analog Devices, Inc.,
3.50%, due 12/01/2000 .................... 576,000
390,000 Level One Communications, Inc.,
4.00%, due 09/01/2004 .................... 450,450
----------
1,026,450
----------
TOTAL CONVERTIBLE BONDS
(cost $4,415,290) ........................ $5,285,041
----------
NUMBER OF
SHARES OR
PRINCIPAL VALUE
AMOUNT SECURITY DESCRIPTION (NOTE 1)
- --------------------------------------------------------------------------------
CONVERTIBLE PREFERRED STOCKS: 7.8%
Telecommunication Equipment
6,500 Loral Space and Commincations, Inc. ............ $ 495,625
8,000 Qualcomm, Inc. ................................. 386,000
-----------
TOTAL CONVERTIBLE PREFERRED STOCKS
(cost $873,265) ................................. 881,625
-----------
COMMON STOCKS: 32.5%
Computer Software & Services: 12.7%
16,852 Sterling Commerce, Inc. ........................ 817,322
21,164 Sterling Software, Inc. ........................ 625,661
-----------
1,442,983
-----------
Manufactured Housing: 19.8%
58,590 Clayton Homes, Inc. .............................. 1,113,210
37,994 Oakwood Homes Corporation ........................ 1,139,820
-----------
2,253,030
-----------
TOTAL COMMON STOCKS
(cost $628,380) ................................. 3,696,013
-----------
TOTAL LONG-TERM INVESTMENTS ..................... 9,862,679
-----------
SHORT-TERM INVESTMENTS: 13.0%
U.S. Government Obligations
$ 500,000 U.S. Treasury Bill,
5.17%, due 11/12/98 ............................. 490,615
1,000,000 U.S. Treasury Bill,
5.16%, due 11/19/98 ............................. 980,290
-----------
TOTAL SHORT-TERM INVESTMENTS
(cost $1,470,617) ............................. 1,470,905
-----------
TOTAL INVESTMENTS: 99.8%
(cost $7,387,552\^) (Note 1) .................... 11,333,584
Other assets in excess of liabilities: 0.2% . 17,782
-----------
TOTAL NET ASSETS: 100.0%
(equivalent to $15.89 per share
on 714,515 shares outstanding) ................. $11,351,366
===========
* 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 ASSETS AND LIABILITIES
June 30, 1998 (unaudited)
<TABLE>
<S> <C>
ASSETS
Investments, at value (cost $7,387,552) (Note1) ................................. $11,333,584
Receivable for shares sold ...................................................... 141,000
Dividends and interest receivable ................................................ 44,634
-----------
Total Assets .................................................................. 11,519,218
-----------
LIABILITIES
Due to custodian bank ............................................................ 103,412
Due to Lexington Management Corporation (Note 2) ................................. 8,834
Accrued expenses ............................................................... 55,606
-----------
Total Liabilities ............................................................ 167,852
-----------
NET ASSETS (equivalent to $15.89 per share on 714,515 shares outstanding) (Note 4) $11,351,366
===========
NET ASSETS consist of:
Capital stock-authorized 1,000,000,000 shares, $.10 par value per share. ......... $ 71,452
Paid-in capital .................................................................. 7,232,913
Undistributed net investment income ............................................. 4,286
Accumulated net realized gain on investments .................................... 96,683
Unrealized appreciation on investments .......................................... 3,946,032
-----------
TOTAL NET ASSETS ............................................................ $11,351,366
===========
</TABLE>
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, 1998 (unaudited)
INVESTMENT INCOME
Dividends ........................... $ 19,478
Interest ........................... 105,134
--------
Total investment income ............ $124,612
Expenses
Investment advisory fee
(Note 2) ........................... 54,828
Printing and mailing expenses ...... 10,085
Distribution expenses (Note 3) ...... 12,739
Registration fees .................. 8,145
Transfer agent and shareholder
servicing expenses (Note 2) ......... 10,227
Accounting expenses (Note 2) ......... 7,240
Professional fees .................. 5,702
Directors' fees and expenses ......... 6,426
Computer processing fees ............ 2,896
Custodian expenses .................. 815
Other expenses ..................... 2,986
--------
Total expenses ..................... 122,089
--------
Net investment income ............ 2,523
REALIZED AND UNREALIZED GAIN
ON INVESTMENTS (NOTE 5)
Net realized gain on
investments ........................ 76,535
Net change in unrealized
appreciation on
investments ........................ 482,402
--------
Net realized and unrealized
gain .............................. 558,937
--------
INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS ..................... $561,460
========
LEXINGTON CONVERTIBLE SECURITIES FUND
STATEMENT OF CHANGES IN NET ASSETS
Six months
ended Year
June 30, ended
1998 December 31,
(unaudited) 1997
------------- ---------------
Net investment income .................. $ 2,523 $ 80,157
Net realized gain from security
transactions ........................ 76,535 199,193
Net change in unrealized
appreciation of investments ......... 482,402 914,284
----------- ------------
Increase in net assets
resulting from operations ......... 561,460 1,193,634
Distributions to shareholders from
net investment income ............... -- (76,039)
Distributions to shareholders from
net realized gains on security
transactions ........................ -- (177,060)
Increase (decrease) from capital
share transactions (Note 4) ......... 444,716 (1,803,790)
----------- ------------
Net increase (decrease)
in net assets ..................... 1,006,176 (863,255)
NET ASSETS
Beginning of period ............... 10,345,190 11,208,445
----------- ------------
End of period (including
undistributed net investment
income of $4,286 and $1,763,
1998 and 1997, respectively) ....... $11,351,366 $ 10,345,190
=========== ============
The Notes to Financial Statements are an integral part of this statement.
4
<PAGE>
LEXINGTON CONVERTIBLE SECURITIES FUND
NOTES TO FINANCIAL STATEMENTS
June 30, 1998 (unaudited) and December 31, 1997
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 prices. 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 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 securities are
valued by Fund management in good faith under the direction of the Fund's Board
of Trustees.
Securities 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, 1997, 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.
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.
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 adviser, Ariston Capital Management
Corporation
5
<PAGE>
LEXINGTON CONVERTIBLE SECURITIES FUND
NOTES TO FINANCIAL STATEMENTS
June 30, 1998 (unaudited) and December 31, 1997 (continued)
2. INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATE (CONTINUED)
("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 1998, 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, 1998.
The Fund reimburses LMC for certain expenses, including accounting and
shareholder servicing costs of $7,240 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,
1998 were $12,739 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, 1998 Year ended
(unaudited) December 31, 1997
-------------------------- -------------------------
Shares Amount Shares Amount
------- ------------ ------ ------------
<S> <C> <C> <C> <C>
Shares sold .................................... 102,999 $ 1,645,682 77,731 $ 1,138,145
Shares issued on reinvestment of dividends ...... - - 16,820 247,886
------- ------------ ------ ------------
102,999 1,645,682 94,551 1,386,031
Shares redeemed ................................. (74,608) (1,200,966) (229,087) (3,189,821)
------- ------------ -------- ------------
Net increase (decrease) ........................ 28,391 $ 444,716 (134,536) $ (1,803,790)
======= ============ ======== ============
</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, 1998, excluding short-term securities, were $1,831,208 and
$1,686,483, respectively.
At June 30,1998, the aggregate gross unrealized appreciation for all securities
in which there is an excess of value over tax cost amounted to $4,111,939 and
aggregate gross unrealized depreciation for all securities in which there is an
excess of tax cost over value amounted to $165,907.
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,
1998 -----------------------------------------------------
(unaudited) 1997 1996 1995 1994
--------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period ............ $ 15.08 $ 13.66 $ 13.66 $ 11.84 $ 14.10
--------- -------- -------- -------- --------
Income from investment operations:
Net investment income ........................... 0.01 0.11 0.11 0.15 0.08
Net realized and unrealized gain on
investments .................................... 0.80 1.68 0.55 2.04 0.10
--------- -------- -------- -------- --------
Total income from investment operations ......... 0.81 1.79 0.66 2.19 0.18
--------- -------- -------- -------- --------
Less distributions: ..............................
Distributions from net investment income ...... -- ( 0.11) ( 0.11) ( 0.15) ( 0.07)
Distributions in excess of net investment
income (temporary book-tax difference) ......... -- -- -- -- ( 0.05)
Distributions from net realized gains ......... -- (0.26) (0.55) (0.22) (2.32)
--------- -------- -------- -------- --------
Total distributions .............................. -- (0.37) (0.66) (0.37) (2.44)
--------- -------- -------- -------- --------
Net asset value, end of period .................. $ 15.89 $ 15.08 $ 13.66 $ 13.66 $ 11.84
========= ======== ======== ======== ========
Total return .................................... 11.13%* 13.16% 4.89% 18.63% 1.30%
Ratio to average net assets:
Expenses, before reimbursement or waivers ...... 2.23%* 2.38% 2.39% 2.52% 2.81%
Expenses, net of reimbursement or waivers ...... 2.23%* 2.38% 2.39% 2.52% 2.75%
Net investment income, before reimbursement
or waivers .................................... 0.05%* 0.79% 0.77% 1.24% 0.50%
Net investment income ........................... 0.05%* 0.79% 0.77% 1.24% 0.56%
Portfolio turnover rate ........................ 34.88%* 30.47% 18.45% 11.23% 38.14%
Average commissions paid on equity
security transactions** ........................ $ 0.03 $ 0.04 $ 0.04 -- --
Net assets, end of period (000's omitted) ...... $ 11,351 $ 10,345 $ 11,208 $ 11,641 $ 8,117
</TABLE>
* Annualized.
** In accordance with recent SEC disclosure guidelines, the average commissions
are calculated for the period beginning with December 1996, but not for prior
periods.
7
<PAGE>
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 o Account Balances o Exchanges o
Last Transactions o Total Return o 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.
-----------------
LEXINGTON
-----------------
LEXINGTON
CONVERTIBLE
SECURITIES
FUND
-----------------
The Fund's investment
objective is total return,
which it seeks to achieve
by providing current income,
capital appreciation and
conservation of capital.
-----------------
SEMI-ANNUAL REPORT
JUNE 30, 1998
The Lexington Group of
NO LOAD
Investment Companies
