As filed with the Securities and Exchange Commission on March 2, 1998
Registration No. 33-10543
811-4925
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 X
Pre-Effective Amendment No.
Post-Effective Amendment No. 15 X
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 X
Amendment No. 15 X
(Check appropriate box or boxes.)
LEXINGTON CONVERTIBLE SECURITIES FUND
-------------------------------------
(Exact name of Registrant as specified in Charter)
Park 80 West Plaza Two
Saddle Brook, New Jersey 07663
-------------------------------
(Address of principal executive offices)
Registrant's Telephone Number: (201) 845-7300
Lisa Curcio, Secretary
Lexington Convertible Securities Fund
Park 80 West Plaza Two, Saddle Brook, New Jersey 07663
-------------------------------------
(Name and address of agent for service)
With a copy to:
Carl Frischling, Esq.
Kramer, Levin, Naftalis & Frankel
919 Third Avenue, New York, New York 10022
------------------------------------------
It is proposed that this filing will become effective 60 days
after filing pursuant to Paragraph (a) of Rule 485.
------------------------------------------
The Registrant has registered an indefinite number of shares under the
Securities Act of 1933, pursuant to Section 24(f) of the Investment
Company Act of 1940. A Rule 24f-2 Notice for the Registrant's fiscal year
ended December 31, 1997 will be filed by March 31, 1998.
<PAGE>
LEXINGTON CONVERTIBLE SECURITIES FUND
REGISTRATION STATEMENT ON FORM N-1A
CROSS REFERENCE SHEET
PART A
Items in Part A Prospectus
of Form N-1A Prospectus Caption Page Number
- ------------ ------------------ -----------
1. Cover Page Cover Page
2. Synopsis *
3. Condensed Financial Information 14
4. General Description of Registrant 4
5. Management of the Fund 42
6. Capital Stock and Other Securities 61
7. Purchase of Securities Being Offered 51
8. Redemption or Repurchase 54
9. Legal Proceedings *
Note * Omitted since answer is negative or inapplicable
<PAGE>
LEXINGTON CONVERTIBLE SECURITIES FUND
STATEMENT OF ADDITIONAL STATEMENT OF ADDITIONAL
PART B INFORMATION CAPTION INFORMATION PAGE NUMBER
- ------ --------------------- -----------------------
10. Cover Page Cover Page
11. Table of Contents Cover Page
12. General Information and History 61 (Part A)
13. Investment Objectives and Policies 20 (Part A)
14. Management of the Registrant 11
15. Control Persons and Principal Holders 2
of Securities
16. Investment Advisory and Other Services 2
17. Brokerage Allocation and Other Practices 5
18. Capital Stock and Other Securities 61 (Part A)
19. Purchase, Redemption and Pricing of 51, 54 (Part A)
securities being offered
20. Tax Status 6
21. Underwriters 2 (Part A)
22. Calculation of Yield Quotations on Money *
Market Funds
23. Financial Statements 14
PART C
- ------
Information required to be included in Part C is set forth
under the appropriate item, so numbered, in Part C to this
Registration Statement.
* Not Applicable
<PAGE>
PROSPECTUS
May 1, 1998
Lexington Convertible Securities Fund
P.O. Box 1515/Park 80 West Plaza Two, Saddle Brook, New Jersey 07663
Toll Free: Shareholder Services--1-800-526-0056
Institutional/Financial Adviser Services:--1-800-367-9160
24 Hour Account Information:--1-800-526-0052
A NO-LOAD FUND WHOSE PRINCIPAL INVESTMENT OBJECTIVE IS TOTAL RETURN WHICH IT
SEEKS TO ACHIEVE BY PROVIDING CAPITAL APPRECIATION, CURRENT INCOME AND
CONSERVATION OF CAPITAL.
- --------------------------------------------------------------------------------
Lexington Convertible Securities Fund (the "Fund") is an open-end
diversified management investment company. Shareholders may invest, reinvest and
redeem shares at any time without charge or penalty.
The Fund invests primarily in a diversified portfolio of securities
convertible into shares of common stock. The Fund may invest without limitation
in securities rated Ba and B by Moody's Investors Service, Inc. Such lower rated
securities are commonly referred to as "junk bonds." Investments of this type
are subject to greater risk of loss of principal and interest. Purchasers should
carefully assess the risks associated with an investment in the Fund. A more
detailed discussion of securities rated Ba and B can be found in the section
"High Yield Debt Securities" in the Prospectus and Statement of Additional
Information.
This Prospectus concisely sets forth information about the Fund that you
should know before investing. It should be read and retained for future
reference.
A Statement of Additional Information dated May 1, 1998, which provides a
further discussion of certain areas in this Prospectus and other matters that
may be of interest to some investors, has been filed with the Securities and
Exchange Commission and is incorporated herein by reference. For a free copy,
call the appropriate telephone number above or write to the address listed
above.
The Distributor of Shares of the Fund is Lexington Funds Distributor, Inc.
Mutual fund shares are not deposits or obligations of (or endorsed or
guaranteed by) any bank, nor are they federally insured or otherwise protected
by the Federal Deposit Insurance Corporation ("FDIC"), the Federal Reserve Board
or any other agency. Investing in mutual funds involves investment risks,
including the possible loss of principal, and their value and return will
fluctuate.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
Investors Should Read and Retain this Prospectus for Future Reference
<PAGE>
FEE TABLE
Annual Fund Operating Expenses:
(as a percentage of average net assets)
Management fees .................................................... 1.00%
12b-1 fees ......................................................... 0.25%
Other fees ......................................................... 1.13%
-----
Total Fund Operating Expenses ................................. 2.38%
=====
Example: 1 year 3 years 5 years 10 years
------ ------- ------- --------
You would pay the following expenses on a $1,000 investment,
assuming (1) 5% annual return and (2) redemption at the end
of each period ............................ $24.11 $74.25 $127.04 $271.63
The purpose of the foregoing table is to assist an investor in understanding
the various costs and expenses that an investor in the Fund will bear
indirectly. (For more complete descriptions of the various costs and expenses,
see "How to Purchase Shares" and "Investment Adviser and Distributor" below).
The Expenses and Example (except the 12b-1 fees) appearing in the table above
are based on the Fund's expenses for the period from January 1, 1997 to December
31, 1997. The 12b-1 fees shown in the table reflect the maximum amount which may
be paid under the Distribution Plan. See "Distribution Plan." The Example shown
in the table above should not be considered a representation of past or future
expenses and actual expenses may be greater or less than those shown.
FINANCIAL HIGHLIGHTS
The following Financial Highlights Information for the five year period
ended December 31, 1997, has been audited by KPMG Peat Marwick LLP, Independent
Auditors, whose report thereon appears in the Statement of Additional
Information. This information should be read in conjunction with the financial
statements and related notes thereto included in the Statement of Additional
Information. The Fund's annual report, which contains additional performance
information, is available upon request and without charge.
Selected Per Share Data for a share outstanding throughout the period
<TABLE>
<CAPTION>
Period from
January 20, 1988
(commencement of
operations)
Year Ended December 31, to December 31,
--------------------------------------------------------------------------- ---------------
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period ........................ $13.66 $13.66 $11.84 $14.10 $13.80 $12.41 $8.74 $9.55 $9.51 $9.35
Income from investment operations:
Net investment income ......... 0.11 0.11 0.15 0.08 - 0.18 0.22 0.50 0.64 0.42
Net realized and unrealized
gain (loss) on
investments ................. 1.68 0.55 2.04 0.10 0.89 1.39 3.68 (0.81) 0.04 0.19
Total income (loss) from
operations .................... 1.79 0.66 2.19 0.18 0.89 1.57 3.90 (0.31) 0.68 0.61
Less distributions:
Distributions from net
investment income ........... (0.11) (0.11) (0.15) (0.07) - (0.18) (0.23) (0.50) (0.64) (0.42)
Distributions from net
realized capital gains ...... - (0.55) (0.22) (2.32) (0.59) - - - - (0.03)
Distributions in excess of
capital gains (temporary
book-tax difference) ........ (0.26) - - (0.05) - - - - - -
Total distributions ........... (0.37) (0.66) (0.37) (2.44) (0.59) (0.18) (0.23) (0.50) (0.64) 0.45)
Net asset value, end of period .. $15.08 $13.66 $13.66 $11.84 $14.10 $13.80 $12.41 $8.74 $9.55 $9.51
====== ====== ====== ====== ====== ====== ====== ===== ===== =====
Total return .................... 13.16% 4.89% 18.63% 1.30% 6.53% 12.82% 45.06% (3.39%) 7.16% 6.96%*
Ratio to average net assets:
Expenses, before reimbur-
sement or waiver ............ 2.38% 2.39% 2.52% 2.81% 2.76% 3.02% 3.42% 4.51% 2.64% 4.12%*
Expenses, net of reimbur-
sement or waiver ............ 2.38% 2.39% 2.52% 2.75% 2.76% 2.32% 2.50% 2.68% 2.13% 2.00%*
Net investment income
(loss), before
reimbursement or
waiver ...................... 0.79% 0.77% 1.24% 0.50% (0.04%) 0.70% 1.14% 3.09% 5.74% 3.43%*
Net investment income ......... 0.79% 0.77% 1.24% 0.56% (0.04%) 1.40% 2.06% 4.92% 6.25% 5.55%*
Portfolio turnover .............. 30.47% 18.45% 11.23% 38.14% 6.53% 12.58% 29.46% 25.58% 34.23% 39.70%*
Average commission paid on
equity security
transactions** ................ $0.04 $0.04 - - - - - - - -
Net assets, end of period
(000's omitted) ...............$10,345 $11,208 $11,641 $8,117 $8,319 $7,180 $6,599 $4,744 $5,986 $6,930
</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.
2
<PAGE>
DESCRIPTION OF THE FUND
The Fund is an open-end diversified management investment company commonly
known as a mutual fund. It was organized as a business trust under the laws of
the Commonwealth of Massachusetts on August 19, 1986. It adopted its present
name on November 10, 1992. Fund shares are continually sold to the public. The
Fund then uses the proceeds to buy securities as described under "Investment
Objectives and Policies." The Fund's Board of Trustees provides broad
supervision over the affairs of the Fund. Lexington Management Corporation
("LMC") is the Investment Advisor and Ariston Capital Management Corporation
("Ariston") is the sub-adviser to the Fund. LMC and Ariston are responsible for
the management of the Fund's assets and the officers of the Fund are responsible
for its operations. LMC and Ariston manage the Fund from day-to-day in
accordance with the Fund's investment objectives and policies.
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is total return which it seeks to achieve by
providing capital appreciation, current income and conservation of the
shareholders capital. The Fund's investment objective, which is described below,
cannot be changed without the affirmative vote of a majority (as defined in the
Investment Company Act of 1940) of the outstanding voting shares of the Fund.
It is intended that the Fund will invest at least 65% of its total assets
(except when maintaining a temporary defensive position) in a diversified
portfolio of convertible securities as described below. Common stock received
upon conversion or exchange of such securities will either be sold in an orderly
manner or held by the Fund as described below.
It is intended that not more than 35% of the Fund's total assets be invested
in other securities which, in the aggregate, are considered by LMC and Ariston
to be consistent with the Fund's investment objectives. Such other investments
may consist of dividend and non-dividend paying nonconvertible common stocks,
corporate bonds rated B or higher as described below, covered call options and
put options, stock index options, securities issued or guaranteed by the U.S.
Government, its agencies and instrumentalities, repurchase agreements and money
market securities. In addition, the Fund may invest up to 10% of its total
assets in securities which may be restricted as to resale.
The convertible securities acquired by the Fund may include, as rated by
Moody's Investors Service, Inc., Aaa, Aa, A, Baa, Ba, B and non-rated debt
securities. The Fund will not invest in any security which has lower than a B
rating (see Appendix for "Summary of Ratings"). However, the Fund may invest in
non-rated convertible securities if based upon the opinion of the adviser and
sub-adviser it is believed that such securities are of comparable quality to the
securities described above. Securities which are rated Ba (BB) or B are
considered speculative and thus pose a greater risk of default than investment
grade securities. See "High Yield Debt Securities" on page 5 for a more detailed
discussion of securities rated Ba and B. Such lower rated securities are
commonly referred to as "junk bonds." Investments of this type are subject to
greater risk of loss of principal and interest.
If in the opinion of LMC and Ariston, and market conditions indicate, the
Fund may, for temporary defensive purposes, invest without limit, in U.S.
Government securities, commercial paper (short-term debt securities of large
corporations), certificates of deposit, bankers acceptances and repurchase
agreements.
Consistent with the Rules of Fair Practice of the National Association of
Securities Dealers, Inc., and subject to seeking best price and execution, the
adviser may consider sales of shares of the Fund as a factor in the selection of
dealers to enter into portfolio transactions with the Fund.
There can be no assurance that the Fund will achieve its investment
objective. The net asset value of the Fund will fluctuate as the value of its
securities fluctuates.
3
<PAGE>
DESCRIPTION AND RISKS OF CONVERTIBLE SECURITIES
Convertible securities are securities that may be exchanged or converted
into a predetermined number of the issuer's underlying common shares, the common
shares of another company or that are indexed to an unmanaged market index at
the option of the holder during a specified time period. Convertible securities
may take the form of convertible preferred stock, convertible bonds or
debentures, stock purchase warrants, zero-coupon bonds or liquid-yield option
notes, Eurodollar convertible securities, convertible securities of foreign
issuers, stock index notes, or a combination of the features of these
securities. Convertible securities are considered by the Adviser and Sub-Adviser
to be an attractive investment vehicle for the Fund because they combine the
benefits of higher and more stable income than the common stock generally
provides with the potential of profiting from an appreciation in the value of
the underlying security. Prior to conversion, convertible securities have the
same general characteristics as non-convertible debt securities and provide a
stable stream of income with generally higher yields than those of equity
securities of the same or similar issuers. As with all debt securities, the
market value of convertible securities tends to decline as interest rates
increase and conversely, increase as interest rates decline. While convertible
securities generally offer lower interest or dividend yields than
non-convertible debt securities of similar quality, they do enable the investor
to benefit from the increase in the market price of the underlying common stock.
When the market price of a common stock underlying a convertible security
increases, the price of the convertible security increasingly reflects the value
of the underlying common stock and may rise accordingly. As the market price of
the underlying common stock declines, convertible securities tend to trade
increasingly on a yield basis and thus may not depreciate to the same extent as
the underlying common stock. Convertible securities are ranked senior to common
stock on an issuer's capital structure and they are consequently of higher
quality and entail less risk than the issuer's common stock, although the extent
to which risk is reduced depends in large measure to the degree to which
convertible securities sell above their value as fixed income securities.
Warrants
The Portfolio may invest up to 5% of its total assets at the time of
purchase in warrants (not including those acquired in units or attached to other
securities). A warrant is a right to purchase common stock at a specific price
during a specified period of time. The value of a warrant does not necessarily
change with the value of the underlying security. Warrants do not represent any
rights to the assets of the issuing company. A warrant becomes worthless unless
it is exercised or sold before expiration. Warrants have no voting rights and
pay no dividends.
Options
The Fund may sell (write) listed covered call options on stock and stock
indices in order to earn additional income and to hedge the Fund's portfolio and
reduce investment risk. By writing a covered call option, the Fund generates
additional income from securities in its portfolio, and may also give up some
control over when the securities subject to the call may be sold. The payment
received by the Fund for writing the call option (known as the option premium)
may provide partial protection from a decline in the value of the underlying
securities. Hedging strategies are defensive in nature and some capital gain
potential is forsaken in advancing markets in order to reduce risk in declining
markets. The Fund may also purchase put or call options provided that the value
of put or call options purchased will not exceed 5% of the Fund's total assets.
Purchased put or call options become worthless unless they are exercised or sold
before expiration. The Fund is restricted in using only options that are traded
on national securities exchanges.
Collateralized Short Sales
The Fund may make short sales of common stocks, provided they are "against
the box," i.e., the Fund owns an equal amount of such securities or owns
securities that are convertible or exchangeable without payment of further
consideration into an equal or greater amount of such a common stock. The Fund
may make a short sale when the Fund manager believes the price of the stock may
decline and for tax or other reasons, the Fund manager does not want to sell
4
<PAGE>
currently the stock or convertible security it owns. In such case, any decline
in the value of the Portfolio would be reduced by a gain in the short sale
transaction. Conversely, any increase in the value of the portfolio would be
reduced by a loss in the short sale transaction. The Fund may not make short
sales or maintain a short position unless at all times when a short position is
open, not more than 10% of its total assets (taken at current value) is held as
collateral for such sales at any one time. Short sales against the box are used
to defer recognition of capital gains and losses, although the short-term or
long-term nature of such gains or losses could be altered by certain provisions
of the Internal Revenue Code.
High Yield Debt Securities
High yield debt securities in which the Fund may invest (rated Ba or B) are
commonly referred to as "junk bonds." See Appendix. The economy and interest
rates affect high yield securities differently from other securities. The prices
of high yield securities have been found to be less sensitive to interest rate
changes than higher-rated investments, but more sensitive to adverse economic
changes or individual corporate developments. Also, during an economic downturn
or substantial period of rising interest rates, highly leveraged issuers may
experience financial stress which would adversely affect their ability to
service their principal and interest payment obligations to meet projected
business goals, and to obtain additional financing. If the issuer of a security
defaulted, the Fund may incur additional expenses to seek recovery. In addition,
periods of economic uncertainty and changes can be expected to result in
increased volatility of market prices of high yield securities and the Fund's
net asset value. To the extent that there is no established retail secondary
market, there may be thin trading of high yield securities, and this may have an
impact on the adviser and sub-adviser's ability to accurately value high yield
securities and on the Fund's ability to dispose of the securities. Adverse
publicity and investor perceptions, whether or not based on fundamental
analysis, may decrease the values and liquidity of high yield securities,
especially in a thinly traded market.
There are risks involved in applying credit ratings as a method for
evaluating high yield securities. For example, credit ratings evaluate the
safety of principal and interest payments, not market value of high yield
securities. Also, since credit rating agencies may fail to timely change the
credit ratings to reflect subsequent events, the Fund (in conjunction with its
investment adviser and sub-adviser) will continuously monitor the issuer of high
yield securities in the Fund to determine if the issuer will have sufficient
cash flow and profits to meet required principal and interest payments, and to
assure the securities' liquidity.
U.S. Government Securities
The Fund may invest in securities issued or guaranteed by the U.S.
Government, its agencies and instrumentalities. United States Government agency
and instrumentality obligations are debt securities issued by United States
Government-sponsored enterprises and Federal agencies. Some obligations of
agencies and instrumentalities of the United States Government are supported by
the full faith and credit of the United States or United States Treasury
guarantees, such as securities of the Government National Mortgage Association
and the Federal Housing Authority; others, by the right of the issuer to borrow
from the United States Treasury, such as securities of the Federal Home Loan
Mortgage Corporation and others, only by the credit of the agency or
instrumentality issuing the obligation, such as securities of the Federal
National Mortgage Association and the Federal Home Loan Banks.
Repurchase Agreements
The Fund may enter into repurchase agreements with commercial banks and
dealers in U.S. Government securities. A repurchase agreement involves the
acquisition by a Fund of an investment contract from a bank or a dealer in U.S.
Government securities which contract is secured by U.S. Government obligations
whose value at all times is equal to or greater than the value of the repurchase
agreement including the agreed upon interest. The agreement provides that the
institution will repurchase the underlying securities at an agreed upon time and
price. The total amount received on repurchase would exceed the price paid by
the Fund, reflecting an agreed upon rate of interest for the period from the
date of the repurchase agreement to the settlement date, and would not be
related to the interest rate on the
5
<PAGE>
underlying securities. The difference between the total amount to be received
upon the repurchase of the securities and the price paid by the Fund upon their
acquisition is accrued daily as interest. If the institution defaults on the
repurchase agreement, the Fund will retain possession of the underlying
securities. In addition, if bankruptcy proceedings are commenced with respect to
the seller, realization on the collateral by the Fund may be delayed or limited
and the Fund may incur additional costs. In such case, the Fund will be subject
to risks associated with changes in the market value of the collateral
securities. The Fund intends to limit repurchase agreements to transactions
believed by LMC and Ariston to present minimal credit risk. LMC and Ariston will
monitor the collateral on an ongoing basis to ensure that the value of the
collateral will at all times equal or exceed the repurchase price and will also
monitor the credit worthiness of banks and dealers that the Fund enters into
repurchase agreements with. The above criteria may be altered by the Board of
Trustees of the Fund. Repurchase agreements are considered collateralized loans
by the Fund under the Investment Company Act of 1940.
PORTFOLIO TURNOVER
Portfolio changes will be made without regard to the length of time
particular investments may have been held. The Fund is expected to incur
brokerage costs. The Fund anticipates that its annual turnover rate will
generally not exceed 100%.
For the years ended December 31, 1997, 1996, and 1995, the portfolio
turnover rate for the Fund was 30.47%, 18.45% and 11.23%, respectively.
INVESTMENT RESTRICTIONS
The Fund has adopted a number of investment restrictions which may not be
changed without shareholder approval. These are set forth under "Investment
Restrictions" in the Statement of Additional Information. Some of these
restrictions provide that the Fund shall not:
* concentrate its investments in a particular industry to an extent greater
than 25% of the value of its total assets at the time of purchase provided that
such limitations shall not apply to securities issued or guaranteed by the U.S.
Government, or its agencies and instrumentalities;
* invest more than 5% of its total assets in the securities of any one
issuer (except securities issued or guaranteed by the U.S. Government, or its
agencies and instrumentalities) except that such restriction will not apply with
respect to 25% of the Fund's assets;
* purchase any securities if such purchase would cause the Fund to own at
the time of purchase more than 10% of the outstanding voting securities of one
issuer;
* borrow money; except that the Fund may borrow from a bank as a temporary
measure for extraordinary purposes or to meet redemptions in amounts not
exceeding 10% (taken at market value) of its total assets and pledge its assets
to secure such borrowings. The Fund may not purchase additional securities when
money borrowed exceeds 5% of the Fund's total assets;
* purchase any security restricted as to disposition under Federal
securities laws or securities that are not readily marketable or purchase any
securities if such purchase would cause the Fund to own at the time such
purchase, illiquid securities, including repurchase agreements with an agreed
upon repurchase date in excess of seven days from the date of acquisition by the
Fund, having an aggregate market value in excess of 10% of the value of the
Fund's total assets.
YIELD AND TOTAL RETURN
From time to time the Fund advertises its yield and total return. Both yield
and total return are based on historical earning and are not intended to
indicate future performance. The "total return" of the Fund refers to the
average annual
6
<PAGE>
compounded rates of return over one, five and ten year periods or over the life
of the Fund (which periods will be stated in the advertisement) that would
equate an initial amount invested at the beginning of a stated period to the
ending redeemable value of the investment. The calculation assumes the
reinvestment of all dividend and distributions, including all recurring fees
that are charged to all shareholder accounts and a deduction of all nonrecurring
charges deducted at the end of each period. The "yield" of the Fund is computed
by dividing the net investment income per share earned during the period stated
in the advertisement by the maximum offering price per share on the last day of
the period (using the average number of shares entitled to receive dividends).
The calculation includes among expenses of the Fund, for the purpose of
determining net investment income, all recurring fees that are charged to all
shareholder accounts and any nonrecurring charges for the period stated. The
yield formula provides for semi-annual compounding which assumes that net
investment income is earned and reinvested at a constant rate and annualized at
the end of the six month period. The Fund may cite a 30-day yield (annualized)
as well as a 90-day yield (annualized) in advertisements and sales materials.
Advertisements and communications may compare the Fund's performance with
that of other mutual funds, as reported by Lipper Analytical Services, Inc. or
similar independent services or financial publications. From time to time, the
performance of the Fund may be compared to various investment indices.
Quotations of historical total returns and yields are not indicative of future
dividend income or total return, but are an indication of the return to
shareholders only for the limited historical period used. The Fund's yield and
total return will depend on the particular investments in its portfolio, its
total operating expenses and other conditions. For further information,
including the formula and examples of the yield and total return calculations,
see the Statement of Additional Information.
MANAGEMENT OF THE FUND
The Trustees of the Fund are responsible under the terms of its Declaration
of Trust, which is governed by Massachusetts law for overseeing the conduct of
the Fund's business. There are currently five trustees (of whom three are
non-interested persons under the Investment Company Act of 1940) who meet five
times each year. The Statement of Additional Information contains more data
regarding the trustees and officers of the Fund.
PORTFOLIO MANAGER
Richard B. Russell is President of Ariston Capital Management Corporation,
the Fund's sub-adviser, located in Bellevue, Washington. He is a graduate of the
School of Business at the University of Washington and has completed additional
training at the New York Institute of Finance. He is a recognized authority on
portfolio management, particularly through the use of convertible securities and
market forecasting. He has spent his entire professional career as an
independent money manager, dating from 1972. Before founding Ariston in 1977, he
was a full-time manager of private family assets. Mr. Russell has conducted
extensive research on investment topics.
INVESTMENT ADVISER, SUB-ADVISER, DISTRIBUTOR AND ADMINISTRATOR
Lexington Management Corporation ("LMC"), Park 80 West, Plaza Two, Saddle
Brook, New Jersey 07663 is the investment adviser to the Fund and provides
investment advice and in general conducts the management and investment program
of the Fund under the supervision and control of the trustees of the Fund. LMC
has entered into a sub-advisory contract with Ariston Capital Management
Corporation ("Ariston"), 40 Lake Bellevue Drive, Suite 220, Bellevue, Washington
98005 under which Ariston will provide the Fund with certain investment
management and administrative services. Ariston also serves as investment
adviser to private and institutional investment accounts. Such accounts own a
significant number of shares of the Fund as part of their investment program.
Lexington Funds Distributor, Inc. is the Fund's distributor.
LMC, established in 1938, currently manages over $3.5 billion in assets. LMC
serves as investment adviser to other investment companies and private and
institutional investment accounts. Included among these clients are persons and
organizations which own significant amounts of capital stock of LMC's parent.
The clients pay fees which LMC considers comparable to the fees paid by
similarly served clients.
7
<PAGE>
LMC also acts as administrator to the Fund and performs certain
administrative and internal accounting services, including but not limited to,
maintaining general ledger accounts, regulatory compliance, preparation of
financial information for semiannual and annual reports, preparing registration
statements, calculating net asset values, shareholder communications and
supervision of the custodian, transfer agent and provides facilities for such
services. The Fund shall reimburse LMC for its actual cost in providing such
services, facilities and expenses.
LMC and LFD are wholly-owned subsidiaries of Lexington Global Asset Managers
Inc., a Delaware corporation with offices at Park 80 West Plaza Two, Saddle
Brook, New Jersey 07663. Descendants of Lunsford Richardson, Sr., their spouses,
trusts and other related entities have a majority voting control of outstanding
shares of Lexington Global Asset Managers Inc. See "Investment Adviser and
Distributor" in the Statement of Additional Information.
Ariston was founded in 1977 and provides investment management to client
portfolios that include individuals, corporations, pension and profit sharing
plans and other qualified retirement plan accounts. Ariston is recognized for
its expertise in portfolio management, specializing in convertible securities
and market forecasting.
LMC as owner of the registered service mark "Lexington" will sublicense the
Fund to include the word "Lexington" as part of its name subject to revocation
by LMC in the event that the Fund ceases to engage LMC or its affiliate as
investment advisor or distributor. In that event the Fund will be required upon
demand of LMC to change its name to delete the word "Lexington" therefrom.
As compensation for its services, the Fund pays LMC a monthly management fee
at the annual rate of 1.00% of the average daily net assets which is higher than
that paid by most other investment companies. In connection with providing
investment management services, LMC has entered into a sub-advisory agreement
with Ariston under which Ariston will provide the Fund with certain investment
management and administrative services. Pursuant to the terms of the
sub-advisory agreement between LMC and Ariston, LMC will pay Ariston a monthly
sub-advisory fee at the annual rate of 0.75% of the average daily net assets of
Fund up to $7 million and 0.50% of such assets in excess of $7 million. For the
year ending December 31, 1997, the Fund paid net advisory fees to LMC of
$101,661 of which LMC paid $68,330 to Ariston pursuant to the sub-advisory
agreement.
HOW TO PURCHASE SHARES
Initial investment-Minimum $1,000. By Mail: Send a check payable to Lexington
Convertible Securities Fund, along with a completed New Account Application to
State Street Bank and Trust Company (the "Agent"). See the back cover of this
prospectus for the agent's address.
Subsequent Investments-Minimum $50. By Mail: Send a check payable to the Agent,
accompanied by either the detachable form which is part of the confirmation of a
prior transaction or a letter indicating the dollar amount of the investment and
identifying the Fund, account number and registration.
Broker-dealers: You may invest in shares of the Fund through broker-dealers who
are members of the National Association of Securities Dealers, Inc., and other
financial institutions and who have selling agreements with LFD. Broker-dealers
and financial institutions who process such purchase and sale transactions for
their customers may charge a transaction fee for these services. The fee may be
avoided by purchasing shares directly from the Fund.
The Open Account: By investing in the Fund, a shareholder appoints the Agent, as
his agent, to establish an open account to which all shares purchased will be
credited, together with any dividends and capital gain distributions which are
paid in additional shares (see "Dividend, Distribution and Reinvestment
Policy"). Stock certificates will be issued for full shares only when requested
in writing. Unless payment for shares is made by certified or cashier's check or
federal funds wire, certificates will not be issued for 30 days. In order to
facilitate redemptions and transfers, most shareholders elect not to receive
certificates.
After an Open Account is established, payments can be provided for by
"Lex-O-Matic" or other authorized automatic bank check program accounts (checks
drawn on the investor's bank periodically for investment in the Fund).
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<PAGE>
Automatic Investing Plan with "Lex-O-Matic". A shareholder may arrange to make
additional purchases of shares automatically on a monthly or quarterly basis.
The investments of $50 or more are automatically deducted from a checking
account on or about the 15th day of each month. The institution must be an
Automated Clearing House (ACH) member. Should an order to purchase shares of a
fund be cancelled because your automated transfer does not clear, you will be
responsible for any resulting loss incurred by that fund. The shareholder
reserves the right to discontinue the Lex-O-Matic program provided written
notice is given ten days prior to the scheduled investment date. Further
information regarding this service can be obtained from Lexington by calling
1-800-526-0056.
On payroll deduction accounts administered by an employer and on payments
into qualified pension or profit sharing plans and other continuing purchase
programs, there are no minimum purchase requirements.
Determination of Net Asset Value: The net asset value of the Fund for the
purposes of pricing orders is determined daily at the close of regular trading
on the New York Stock Exchange on each Fund "business day" (which is any day on
which the New York Stock Exchange is open for business). It is expected that the
Exchange will be closed on Saturdays, Sundays, New Year's day, President's Day,
Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day.
The net asset value of the Fund is determined by dividing the total value of
the investments and other assets of the Fund, less any liabilities, by the total
outstanding shares of the Fund.
Debt securities are normally valued at the mean between the current bid and
asked price for those securities. 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. In determining net asset
value, equity portfolio 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. However, when LMC
deems it appropriate, prices obtained for the day of valuation from a third
party pricing service will be used. For over-the-counter securities the mean of
the latest bid and asked prices is used. Short term securities having a maturity
of 60 days or less are valued at cost, which approximates market value.
Securities for which market quotations are not readily available and other
securities shall be valued by management in good faith under the direction of
the Fund's Board of Trustees.
Terms of Offering: If an order to purchase shares is cancelled because the
investor's check does not clear, the purchaser will be responsible for any loss
incurred by the Fund. To recover any such loss the Fund reserves the right to
redeem shares owned by the purchaser, seek reimbursement directly from the
purchaser and may prohibit or restrict the purchaser in placing future orders in
any of the Lexington Funds.
The Fund reserves the right to reject any order, and to waive or lower the
investment minimums with respect to any person or class of persons, including
shareholders of the Fund's special investment programs. An order to purchase
shares is not binding on the Fund until it has been confirmed by the Agent.
Account Statements: The Agent will send shareholders either purchasing or
redeeming shares of the Fund, a confirmation of the transaction indicating the
date the purchase or redemption was accepted, the number of shares purchased or
redeemed, the purchase or redemption price per share, and the amount purchased
or redemption proceeds. A statement is also sent to shareholders whenever a
distribution is paid, or when a change in the registration, address, or dividend
option occurs. Shareholders are urged to retain their account statements for tax
purposes.
HOW TO REDEEM SHARES
By Mail: Send to the Agent (see the back cover of this prospectus for the
Agent's address): (1) a written request for redemption, signed by each
registered owner exactly as the shares are registered including the name of the
Fund, account number and exact registration; (2) stock certificates for any
shares to be redeemed which are held by the shareholder; (3) signature
guarantees, when required, and (4) the additional documents required for
redemptions by corporations, executors, administrators, trustees, and guardians.
Redemptions by mail will not become effective until all documents in proper form
have been received by the Agent. If a shareholder has any questions regarding
the requirements for redeeming shares, he should call the Fund at the toll free
number on the back cover prior to
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<PAGE>
submitting a redemption request. If a redemption request is sent to the Fund in
New Jersey, it will be forwarded to the Agent and the effective date of
redemption will be the date when received by the Agent.
Checks for redemption proceeds will normally be mailed within three business
days, but will not be mailed until all checks in payment for the shares to be
redeemed have been cleared.
Signature Guarantee: Signature guarantees are required in connection with (a)
redemptions by mail involving $25,000 or more; (b) all redemptions by mail,
regardless of the amount involved, when the proceeds are to be paid to someone
other than the registered owners; (c) changes in instructions as to where the
proceeds of redemptions are to be sent, and (d) share transfer requests.
The Agent requires that the guarantor be either a commercial bank which is a
member of the Federal Deposit Insurance Corporation, a trust company, a savings
and loan association, a savings bank, a credit union, a member firm of a
domestic stock exchange, or a foreign branch of any of the foregoing. Notary
publics are not acceptable guarantors.
With respect to redemption requests submitted by mail, the signature
guarantees must appear either: (a) on the written request for redemption, (b) on
a separate instrument of assignment ("stock power") specifying the total number
of shares to be redeemed, or (c) on all stock certificates tendered for
redemption and, if shares held by the Agent are also being redeemed, on the
letter or stock power.
Redemption Price: The redemption price will be the net asset value per share of
the Fund next determined after receipt by the Agent of a redemption request in
proper form (see "Determination of Net Asset Value" in the Statement of
Additional Information).
The right of redemption may be suspended (a) for any period during which the
New York Stock Exchange is closed or the Securities and Exchange Commission
("SEC") determines that trading on the Exchange is restricted, (b) when there is
an emergency as determined by the SEC as a result of which it is not reasonably
practicable for the Fund to dispose of securities owned by it or to determine
fairly the value of its net assets, or (c) for such other periods as the SEC may
by order permit for the protection of shareholders of the Fund. Due to the
proportionately high cost of maintaining smaller accounts, the Fund reserves the
right to redeem all shares in an account with a value of less than $500 (except
retirement plan accounts) and mail the proceeds to the shareholder. Shareholders
will be notified before these redemptions are to be made and will have 30 days
to make an additional investment to bring their account up to the required
minimum.
SHAREHOLDER SERVICES
Transfer: Shares of the Fund may be transferred to another owner. A signature
guarantee of the registered owner is required on the letter of instruction or
accompanying stock power.
Systematic Withdrawal Plan: Shareholders may elect cash in fixed amounts from
their accounts at regular intervals. The minimum investment to establish a
Systematic Withdrawal Plan is $10,000. If the proceeds are to be mailed to
someone other than the registered owner, a signature guarantee is required.
Group Sub-Accounting: To minimize recordkeeping by fiduciaries, corporations,
and certain other investors, the minimum initial investment may be waived.
EXCHANGE PRIVILEGE
Shares of the Fund may be exchanged for shares of the following Lexington
Funds on the basis of relative net asset value per share, without sales charge,
at the time of the exchange. In the event shares of one or more of these funds
being exchanged by a single investor have a value in excess of $500,000, the
shares of the Fund will not be purchased until the third business day following
the redemption of the shares being exchanged in order to enable the redeeming
fund to utilize normal securities settlement procedures in transferring the
proceeds of the redemption to the Fund. Exchanges may not be made until all
checks in payment for the shares to be exchanged have been cleared.
The Lexington Funds currently available for exchange are:
LEXINGTON WORLDWIDE EMERGING MARKETS FUND, INC. (NASDAQ Symbol: LEXGX)
10
<PAGE>
LEXINGTON GLOBAL CORPORATE LEADERS FUND, INC. (NASDAQ Symbol: LXGLX)
LEXINGTON INTERNATIONAL FUND, INC. (NASDAQ Symbol: LEXIX)
LEXINGTON CROSBY SMALL CAP ASIA GROWTH FUND, INC.
LEXINGTON TROIKA DIALOG RUSSIA FUND, INC.
LEXINGTON RAMIREZ GLOBAL INCOME FUND (NASDAQ Symbol: LEBDX)
LEXINGTON GOLDFUND, INC. (NASDAQ Symbol: LEXMX)
LEXINGTON SMALLCAP FUND, INC. (NASDAQ Symbol: LESVX)
LEXINGTON CORPORATE LEADERS TRUST FUND (NASDAQ Symbol: LEXCX)
LEXINGTON GROWTH AND INCOME FUND, INC. (NASDAQ Symbol: LEXRX)
LEXINGTON GNMA INCOME FUND, INC. (NASDAQ Symbol: LEXNX)
LEXINGTON MONEY MARKET TRUST (NASDAQ Symbol: LMMXX)
Shareholders in any of these funds may exchange all or part of their shares
for shares of one or more of the other funds, subject to the conditions
described herein. The Exchange Privilege enables a shareholder in any of these
funds to acquire shares in a fund with a different investment objective when the
shareholder believes that a shift between funds is an appropriate investment
decision. Shareholders contemplating an exchange should obtain and review the
prospectus of the fund to be acquired.
If an exchange involves investing in a Lexington Fund not already owned and
a new account has to be established, the dollar amount exchanged must meet the
minimum initial investment of the fund being purchased. If, however, an account
already exists in the fund being bought, there is a $500 minimum exchange
required. Shareholders must provide the account number of the existing account.
Any exchange between funds is, in effect, a redemption of shares in one fund and
a purchase in the other fund. Shareholders should consider the possible tax
effects of an exchange.
TELEPHONE EXCHANGE PROVISIONS-Exchange instructions may be given in writing or
by telephone. Telephone exchanges may only be made if a Telephone Authorization
form has been previously executed and filed with LFD. Telephone exchanges are
permitted only after a minimum of 7 days have elapsed from the date of a
previous exchange. Exchanges may not be made until all checks in payment for the
shares to be exchanged have been cleared.
Telephonic exchanges can only involve shares held on deposit at the Agent;
shares held in certificate form by the shareholder cannot be included. However,
outstanding certificates can be returned to the Agent and qualify for these
services. Any new account established with the same registration will also have
the privilege of exchange by telephone in the Lexington Funds. All accounts
involved in a telephonic exchange must have the same registration and dividend
option as the account from which the shares were transferred and will also have
the privilege of exchange by telephone in the Lexington Funds in which these
services are available.
By checking the box on the New Account Application authorizing telephone
exchange services, a shareholder constitutes and appoints LFD, distributor of
the Lexington Group of Mutual Funds, as the true and lawful attorney to
surrender for redemption or exchange any and all non-certificate shares held by
the Agent in account(s) designated, or in any other account with the Lexington
Funds, present or future which has the identical registration, authorizes and
directs LFD to act upon and instruction from any person by telephone for
exchange of shares held in any of these accounts, to purchase shares of any
other Lexington Fund that is available, provided the registration and mailing
address of the shares to be purchased are identical to the registration of the
shares being redeemed, and agrees that neither LFD, the Agent, or the Fund(s)
will be liable for any loss, expense or cost arising out of any requests
effected in accordance with this authorization which would include requests
effected by impostors or persons otherwise unauthorized to act on behalf of the
account. LFD, the Agent and the Fund, will employ reasonable procedures to
confirm that instructions communicated by telephone are genuine and if they do
not employ reasonable procedures they may be liable for any losses due to
unauthorized or fraudulent instructions. The following identification procedures
may include, but are not limited to, the following: account number, registration
and address, taxpayer identification number and other information particular to
the account. In addition, all exchange transactions will take place on recorded
telephone lines and each transaction will be confirmed in writing by the Fund.
LFD reserves the right to cease to act as agent subject to
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<PAGE>
the above appointment upon thirty (30) days written notice to the address of
record. If the shareholder is an entity other than an individual, such entity
may be required to certify that certain persons have been duly elected and are
now legally holding the titles given and that the said corporation, trust,
unincorporated association, etc. is duly organized and existing and has the
power to take action called for by this continuing authorization.
Exchange Authorization forms, Telephone Authorization forms and prospectus
of the other funds may be obtained from LFD.
The Distributor has made arrangements with certain dealers to accept
instructions by telephone to exchange shares of the Fund or shares of one of the
other Lexington Funds at net asset value as described above. Under this
procedure, the dealer must agree to indemnify LFD and the funds from any loss or
liability that any of them might incur as a result of the acceptance of such
telephone exchange orders. A properly signed Exchange Authorization must be
received by LFD within 5 days of the exchange request. LFD reserves the right to
reject any telephone exchange request. Any telephone exchange orders so rejected
may be processed by mail.
This exchange offer is available only in states where shares of the Fund
being acquired may legally be sold and may be modified or terminated at any time
by the Fund. Broker-dealers who process exchange orders on behalf of their
customers may charge a fee for their services. Such fee may be avoided by making
requests for exchange directly to the Fund or Agent.
TAX-SHELTERED RETIREMENT PLANS
The Fund offers a Prototype Pension and Profit Sharing Plan, including a
Keogh Plan, IRA's, SEP-IRA's and IRA Rollover Accounts, 401(k) Salary Reduction
Plans, Section 457 Deferred Compensation Plans and 403(b)(7) Plans. Plan support
services are available through the Shareholder Services Department of LMC. For
further information call 1-800-526-0056.
DIVIDEND, DISTRIBUTION AND REINVESTMENT POLICY
The Fund intends to pay quarterly dividends from investment income after the
close of each quarter, if earned and as declared by its Board of Trustees.
Distributions of net capital gains, if any, realized on sales of investments
will be paid annually.
Any dividends and distribution payments will be reinvested at net asset
value, without sales charge, in additional full and fractional shares of the
Fund unless and until the shareholder notifies the Agent in writing requesting
payments in cash. This request must be received by the Agent at least seven days
before the dividend record date. Upon receipt by the Agent of such written
notice, all further payments will be made in cash until written notice to the
contrary is received. An account of such shares owned by each shareholder will
be maintained by the agent. Shareholders whose accounts are maintained by the
Agent will have the same rights as other shareholders with respect to shares so
registered (see "How to Purchase Shares-The Open Account").
DISTRIBUTION PLAN
The Board of Trustees of the Fund has adopted a Distribution Plan (the
"Plan") in accordance with Rule 12b-1 under the Investment Company Act of 1940,
after having concluded that there is a reasonable likelihood that the Plan will
benefit the Fund and its shareholders. The Plan provides that the Fund may pay
distribution fees, including payments to the Distributor, at an annual rate not
to exceed 0.25% of its average daily net assets for distribution services.
Distribution payments will be made as follows: The Fund either directly or
through the adviser, may make payments periodically (i) to the Distributor or to
any broker-dealer (a "Broker") who is registered under the Securities Exchange
Act of 1934 and a member in good standing of the National Association of
Securities Dealers, Inc. and who has entered into a Selected Dealer Agreement
with the Distributor, (ii) to other persons or organizations ("Servicing
Agents") who have entered into shareholder processing and service agreements
with the Adviser or with the Distributor, with respect to Fund shares owned by
shareholders for which such Broker is the dealer or holder of record or such
servicing agent has a servicing relationship, or (iii) for expenses associated
with distribution of Fund shares, including the
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<PAGE>
compensation of the sales personnel of the Distributor; payments of no more than
an effective annual rate of 0.25%, or such lesser amounts as the Distributor
determines appropriate. Payments may also be made for any advertising and
promotional expenses relating to selling efforts, including but not limited to
the incremental costs of printing, prospectuses, statements of additional
information, annual reports and other periodic reports for distribution to
persons who are not shareholders of the Fund; the costs of preparing and
distributing any other supplemental sales literature; costs of radio,
television, newspaper and other advertising; telecommunications expenses,
including the cost of telephones, telephone lines and other communications
equipment, incurred by or for the Distributor in carrying out its obligations
under the Distribution Agreement. LMC, at no additional cost to the Fund, may
pay to Shareholder Servicing Agents, additional amounts from past profits for
administrative services.
TAX MATTERS
The Fund intends to qualify as a regulated investment company by satisfying
the requirements under Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code"), including requirements with respect to diversification of
assets, distribution of income and sources of income. It is the Fund's policy to
distribute to shareholders all of its investment income (net of expenses) and
any capital gains (net of capital losses) so that, in addition to satisfying the
distribution requirement of Subchapter M, the Fund will not be subject to
federal income tax or the 4% excise tax.
Distributions by the Fund of its net investment income and the excess, if
any, of its net short-term capital gain over its net long-term capital loss are
taxable to shareholders as ordinary income. These distributions are treated as
dividends for federal income tax purposes, but in any year only a portion
thereof (which cannot exceed the aggregate amount of qualifying dividends from
domestic corporations received by the Fund during the year) should qualify for
the 70% dividends-received deduction for corporate shareholders. Because the
Fund's investment income may include interest and dividends from foreign
corporations and the Fund may have short-term capital gains, less than 100% of
the ordinary income dividends paid by the Fund may qualify for the
dividends-received deduction. Distributions by the Fund of the excess, if any,
of its net long-term capital gain over its net short-term capital loss are
designated as capital gain dividends and are taxable to shareholders as
long-term capital gains, regardless of the length of time the shareholder held
his shares.
Distributions to shareholders will be treated in the same manner for federal
income tax purposes whether received in cash or reinvested in additional shares
of the Fund. In general, distributions by the Fund are taken into account by the
shareholders in the year in which they are made. However, certain distributions
made during January will be treated as having been paid by the Fund and received
by the shareholders on December 31 of the preceding year. A statement setting
forth the federal income tax status of all distributions made (or deemed made)
during the fiscal year will be sent to shareholders promptly after the end of
each year.
Shareholders purchasing shares of the Fund just prior to the ex-dividend
date will be taxed on the entire amount of the dividend received, even though
the net asset value per share on the date of such purchase reflected the amount
of such dividend.
Any loss realized upon a taxable disposition of shares within six months
from the date of their purchase will be treated as a long-term capital loss to
the extent of any capital gain dividends received on such shares. All or a
portion of any loss realized upon a taxable disposition of shares of the Fund
may be disallowed if other shares of the Fund are purchased within 30 days
before or after such disposition.
Under the back-up withholding rules of the Code, certain shareholders may be
subject to 31% withholding of federal income tax on distributions and redemption
payments made by the Fund. In order to avoid this back-up withholding, a
shareholder must provide the Fund with a correct taxpayer identification number
(which for most individuals is their Social Security number) and certify that it
is a corporation or otherwise exempt from or not subject to back-up withholding.
The new account application included with this Prospectus provides for
shareholder compliance with these certification requirements.
The foregoing discussion of federal income tax consequences is based on tax
laws and regulations in effect on the date of this Prospectus, and is subject to
change by legislative or administrative action. As the foregoing discussion is
for
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<PAGE>
general information only, a prospective shareholder should also review the more
detailed discussion of federal income tax considerations relevant to the Fund
that is contained in the Statement of Additional Information. In addition, each
prospective shareholder should consult with his own tax adviser as to the tax
consequences of investments in the Fund, including the application of state and
local taxes which may differ from the federal income tax consequences described
above.
CUSTODIAN, TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
Chase Manhattan Bank, N.A., 1211 Avenue of the Americas, New York, New York
10036, has been retained to act as the Custodian for the Funds' portfolio
securities including those to be held by foreign banks and foreign securities
depositories which qualify as eligible foreign custodians under the rules
adopted by the SEC and for the Fund's domestic securities and other assets.
State Street Bank and Trust Company, 225 Franklin Street, Boston, Massachusetts
02110, is the transfer agent and dividend disbursing agent for the Fund. Neither
Chase Manhattan Bank, N.A. nor State Street Bank and Trust Company have any part
in determining the investment policies of the Fund or in determining which
portfolio securities are to be purchased or sold by the Fund or in the
declaration of dividends and distributions.
COUNSEL AND INDEPENDENT AUDITORS
Kramer, Levin, Naftalis & Frankel, 919 Third Avenue, New York, New York
10022 will pass upon legal matters for the Fund in connection with the shares
offered by this Prospectus.
KPMG Peat Marwick LLP, 345 Park Avenue, New York, New York 10154, has been
selected as independent auditors for the Fund for the fiscal year ending
December 31, 1998.
OTHER INFORMATION
The Fund was organized as a business trust under the laws of the
Commonwealth of Massachusetts on August 19, 1986 under the name Concord Income
Trust. It adopted its present name on November 11, 1992.
The Fund has an unlimited number of authorized shares, entitled Shares of
Beneficial Interest (.10 par value). The Fund presently has one series of shares
and has reserved the right to create and issue additional series of shares, in
which case the shares of each series would participate equally in the earnings,
dividends and assets of the particular series. Shareholders are entitled to one
vote for each share held to approve investment advisory agreements or changes in
investment policy, in the election or selection of Trustees, principal
underwriters and accountants and on any material amendment to the Trust's
Declaration of Trust. The Fund does not intend to hold annual shareholder
meetings. Instead, meetings of shareholders will be held only: (1) for the
election of trustees; (2) for the approval of any new or amended advisory
agreements; (3) ratification of the selection of independent public accountants
or (4) approval of the distribution agreement. Meetings of the shareholders may
be called at any time by any Trustee upon the written request of shareholders
holding in the aggregate not less than 10% of the outstanding shares, such
request specifying the purposes for which such meeting is to be called, which
may include a proposal to remove some or all of the trustees. The Fund will
assist shareholders in any such communication between shareholders and Trustees.
each share of the Fund represents an equal proportionate interest in the
Portfolio with each other share. Shares have no preemptive or conversion rights.
Shares are fully paid and non-assessable, except as set forth below. Upon
liquidation of the Fund, its shareholders are entitled to share pro rata in its
net assets available for distribution to shareholders. Shares will remain on
deposit with the Agent and certificates will not be issued unless requested.
Certificates for fractional shares are not issued in any case.
The Code of Ethics adopted by each of the Adviser, Sub-Adviser and the Fund
prohibits all affiliated personnel from engaging in personal investment
activities which compete with or attempt to take advantage of the Fund's planned
portfolio transactions. The objective of each Code of Ethics is that the
operations of the Adviser, Sub-Adviser and Fund be carried out for the exclusive
benefit of the Fund's shareholders. All organizations maintain careful
monitoring of compliance with the Code of Ethics.
The Trust is an entity of the type commonly known as a "Massachusetts
Business Trust". Under Massachusetts law, shareholders of such a trust may,
under certain circumstances be held personally liable for its obligations.
However,
14
<PAGE>
the risk of a shareholder incurring financial loss on account of shareholder
liability is limited to circumstances in which the Trust itself is unable to
meet its obligations.
A Registration Statement (herein called the "Registration Statement"), of
which this Prospectus is a part, has been filed with the Securities and Exchange
Commission (herein called the "Commission"), Washington, D.C. under the
Securities Act of 1933, as amended. A "Statement of Additional Information," to
which reference is made in this Prospectus, provides a further discussion of
certain matters in the Prospectus and other matters which may be of interest to
some investors and is available by request without cost as indicated herein. The
Prospectus and Statement of Additional Information omit certain information
contained in the Registration Statement which has been filed with the
Commission. Items which are thus omitted, including contracts and other
documents referred to or summarized herein and therein, may be obtained from the
Commission upon payment of the prescribed fees.
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus and in the Fund's
official sales literature in connection with the offer of the Fund's shares,
and, if given or made, such other information or representations must not be
relied upon as having been authorized by the Fund. This Prospectus does not
constitute an offer in any State in which, or to any person to whom, such
offering may not lawfully be made.
APPENDIX
SUMMARY OF RATINGS
Corporate and Municipal Debt Securities Ratings
Moody's Standard & Poor's
Investor Service Corporation
Aaa AAA Highest quality
Aa AA High quality
A A Upper medium grade
Baa BBB Medium grade
Ba BB Speculative
B B More speculative
- CCC, CC, C Highly speculative
- CI Income bond, no
interest paid currently
Caa, Ca, C - Probably in default
- D In default
Not rated Not rated
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<PAGE>
(left column)
Investment Adviser
- ----------------------------------------------------------
LEXINGTON MANAGEMENT CORPORATION
P.O. Box 1515/Park 80 West Plaza Two
Saddle Brook, N.J. 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, N.J. 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
Lexington Funds
1004 Baltimore
Kansas City, Missouri 64105
Or call toll free:
Shareholder Services: 1-800-526-0056
Institutional/Financial Adviser Services: 1-800-367-9160
24 Hour Account Information: 1-800-526-0056
Table of Contents Page
- ----------------------------------------------------------
Fee Table ............................................. 2
Financial Highlights .................................. 2
Description of the Fund ............................... 3
Investment Objective and Policies ..................... 3
Description and Risks of Convertible Securities ....... 4
Portfolio Turnover .................................... 6
Investment Restrictions ............................... 6
Yield and Total Return ................................ 6
Management of the Fund ................................ 7
Portfolio Manager ..................................... 7
Investment Adviser, Sub-Adviser,
Distributor and Administrator ....................... 7
How to Purchase Shares ................................ 8
How to Redeem Shares .................................. 9
Shareholder Services .................................. 10
Exchange Privilege .................................... 10
Tax-Sheltered Retirement Plans ........................ 12
Dividend, Distribution and Reinvestment Policy ........ 12
Distribution Plan ..................................... 12
Tax Matters ........................................... 13
Custodian, Transfer Agent and Dividend Disbursing Agent 14
Counsel and Independent Auditors ...................... 14
Other Information ..................................... 14
Appendix .............................................. 15
(right column)
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L E X I N G T O N
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LEXINGTON
CONVERTIBLE
SECURITIES
FUND
(filled box)
(filled box)No Sales Charge
(filled box)No Redemption Fee
(filled box)Free Telephone
Exchange Privilege
(filled box)
The Lexington Group
of No Load
Investment Companies
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P R O S P E C T U S
MAY 1, 1998
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LEXINGTON CONVERTIBLE SECURITIES FUND
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 1998
This statement of additional information which is not a prospectus, should
be read in conjunction with the current prospectus of Lexington Convertible
Securities Fund (the "Fund") dated May 1, 1998, as it may be revised from time
to time. To obtain a copy of the Fund's prospectus at no charge, please write to
the Fund at P.O. Box 1515/Park 80 West - Plaza Two, Saddle Brook, New Jersey
07663 or call the following toll-free numbers:
Shareholder Services:--1-800-526-0056
Institutional/Financial Adviser Services:--1-800-367-9160
24 Hour Account Information:--1-800-526-0052
Lexington Management Corporation ("LMC") serves as the Fund's investment
adviser and Ariston Capital Management Corporation ("ACMC") act as sub-adviser.
Lexington Funds Distributor, Inc. ("LFD") is the Fund's distributor.
TABLE OF CONTENTS
Page
Investment Restrictions ................................................... 2
Investment Adviser, Sub-Adviser, Distributor and Administrator ............ 2
Tax-Sheltered Retirement Plans ............................................ 4
Portfolio Transactions and Brokerage Commissions .......................... 4
Distribution Plan ......................................................... 5
Tax Matters ............................................................... 6
Performance Calculation ................................................... 10
Custodian, Transfer Agent and Dividend Disbursing Agent ................... 10
Management of the Fund .................................................... 11
High Yield Debt Securities ................................................ 12
Shareholder Reports ....................................................... 13
Other Information ......................................................... 13
Appendix .................................................................. 13
Financial Statements ...................................................... 14
1
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INVESTMENT RESTRICTIONS
The Fund's investment objectives, and the investment restrictions set forth
below, may not be changed without the affirmative vote (defined as the lesser
of: 67% of the shares represented at a meeting at which 50% of the outstanding
shares are present or 50% of the outstanding shares) of the Fund's shareholders.
These restrictions may be summarized as follows:
The Fund may not: (i) issue senior securities; (ii) borrow money, except
that the Fund may borrow from a bank as a temporary measure for extraordinary or
emergency purposes or to meet redemptions in amounts not exceeding 10% (taken at
market value) of its total assets and pledge its assets to secure such
borrowings; the Fund may not purchase additional securities when money borrowed
exceeds 5% of the Fund's assets; (iii) underwrite securities of other issuers;
(iv) concentrate its investments in a particular industry to an extent greater
than 25% of the value of its total assets, provided that such limitation shall
not apply to securities issued or guaranteed by the U.S. Government or its
agencies or instrumentalities; (v) purchase or sell real estate, real estate
limited partnerships, commodity contracts or commodities (however, the Fund may
purchase municipal bonds secured by real estate or interest therein and may
purchase interests in mortgage-backed securities); (vi) make loans to other
persons except (a) through the purchase of a portion or portions of an issue or
issues of securities issued or guaranteed by the U.S. Government or its agencies
or (b) through investments in illiquid securities including "repurchase
agreements" (which are arrangements under which the Fund acquires a debt
security subject to an obligation of the seller to repurchase it at a fixed
price within a short period) provided that no more than 10% of the Fund's assets
may be invested in such securities which mature in more than seven days; (vii)
purchase the securities of another investment company or investment trust except
in the open market where no profit results to a sponsor or dealer, other than
the customary broker's commission or by merger or other reorganization; (viii)
purchase any security on margin (except that the Fund may obtain such short-term
credit as may be necessary for the clearance of purchase and sales of portfolio
securities) or effect a non-collateralized short sale of a security; (ix) buy
securities from or sell securities (other than securities issued by the Fund) to
any of its officers, Trustees or LMC, or ACMC as principal; (x) contract to sell
any security or evidence of interest therein, except to the extent that the same
shall be owned by the Fund; (xi) purchase or retain securities of an issuer when
one or more of the officers and Trustees of the Fund or of the officers and
Directors of the LMC or ACMC or a person owning more than 10% of the stock of
either, owning more than 1/2 of 1% of such securities together own beneficially
more than 5% of the securities of such issuer; (xii) invest more than 5% of its
total assets in the securities of any one issuer (except securities issued or
guaranteed by the U.S. Government or its agencies or instrumentalities), except
that such restriction shall not apply to 25% of the Fund's assets; (xiii)
purchase any securities if such purchase would cause the Fund to own at the time
of purchase more than 10% of the outstanding voting securities of any one
issuer; (xiv) purchase any security restricted as to disposition under Federal
securities laws; or securities that are not readily marketable; or purchase any
securities if such purchase would cause the Fund to own at the time of purchase,
illiquid securities, including repurchase agreements with an agreed upon
repurchase date in excess of seven days from the date of acquisition by the
Fund, having an aggregate market value in excess of 10% of the value of the
Fund's total assets; (xv) invest in interests in oil, gas, mineral leases or
other mineral exploration or development programs and (xvi) invest more than 5%
of the value of its total assets in warrants. Warrants which are not listed on
the New York Stock Exchange or on the American Stock Exchange shall not exceed
2% of the Fund's total assets. This restriction on the purchase of warrants does
not apply to warrants attached to or otherwise included in a unit with other
securities. Although the Fund has the right to pledge, mortgage or hypothecate
its assets, the Fund will not, as a matter of operating policy, pledge, mortgage
or hypothecate its portfolio securities to the extent that at any time the
percentage of pledged securities will exceed 10% of the Fund's net assets.
INVESTMENT ADVISER, SUB-ADVISER, DISTRIBUTOR AND ADMINISTRATOR
Lexington Management Corporation, P.O. Box 1515/Park 80 West Plaza Two,
Saddle Brook, N.J. 07663, is the investment adviser to the Fund and provides
investment advise and in general conducts the management and investment program
of the Fund under the general supervision and control of the Trustees of the
Fund. LMC has entered into a sub-advisory contract with Ariston Capital
Management Corporation, a registered investment adviser under which Ariston will
provide the Fund with certain investment management and administrative services.
Lexington Funds Distributor, Inc. is the Fund's distributor.
Lexington Global Asset Managers, Inc. is a publicly traded financial
services company. LMC and LFD are wholly-owned subsidiaries of Lexington Global
Asset Managers, Inc. Descendants of Lunsford Richardson, Sr., their spouses,
trusts and related entities have a majority voting control of outstanding shares
of Lexington Global Asset Managers, Inc.
As compensation for its services, the Fund pays LMC a monthly management fee
at the annual rate of 1.00% of the average daily net assets. In connection with
providing investment advisory services, LMC has entered into a sub-
2
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advisory agreement between LMC and ACMC. LMC will pay ACMC a monthly
sub-advisory fee at the annual rate of 0.75% of the average daily net assets of
the Fund up to $7 million or 0.50% above $7 million.
LMC serves as investment adviser to other investment companies and private
and institutional investment accounts. LMC from time to time may voluntarily
waive the management fee to which it would otherwise be entitled and may
voluntarily assume certain expenses while retaining the ability to be reimbursed
by the Fund for such amounts prior to the end of the fiscal year.
Ariston was founded in 1977 and provides investment management to client
portfolios that include individuals, corporations, pension and profit sharing
plans and other qualified retirement plan accounts. Ariston is recognized for
its expertise in portfolio management, specializing in convertible securities
and market forecasting.
LMC, as owner of the registered service mark "Lexington", will sublicense
the Fund to include the word "Lexington" as part of its corporate name, subject
to revocation by LMC in the event that the Fund ceases to engage LMC or its
affiliates as investment adviser, sub-adviser or distributor. In that event, the
Fund will be required upon demand of LMC to change its corporate name to delete
the word "Lexington" therefrom.
LMC has agreed to reduce its management fee if necessary to keep total
operating expenses at or below 2.50% of the Fund's average daily net assets.
Total annual operating expenses may also be subject to state blue sky
regulations. LMC may terminate this voluntary reduction at any time. Any expense
reduction will be estimated and accrued daily and will be subject to
readjustment during the year. The amount of any such reduction shall be deducted
from the monthly advisory fee, or if such amount exceeds the monthly fee
otherwise payable, LMC will repay such excess promptly.
Under the terms of the Investment Advisory Agreement, LMC pays the Fund's
expenses for office rent, utilities, telephone, furniture and supplies utilized
for the Fund's principal office and the salaries and payroll expense of officers
and Trustees of the Fund who are employees of LMC or its affiliates in carrying
out its duties under the investment advisory agreement. The Fund pays all its
other expenses including custodian and transfer agent fees, legal fees and other
expenses for registration of the Fund's shares in accordance with Federal or
state securities laws, audit fees, printing of prospectuses, shareholder reports
and communications required for regulatory purposes or for distribution to
existing shareholders, computation of net asset value, mailing of shareholder
reports and communications, portfolio brokerage, taxes and non-interested
Trustees' fees and expenses.
LMC serves as investment adviser to other investment companies and private
and institutional investment accounts. Included among these clients are persons
and organizations which own significant amounts of capital stock of LMC's
parent. LMC's accounts are managed independently with reference to the
applicable investment objectives and current security holdings, but on occasion
more than one fund or counsel account may seek to engage in transactions in the
same security at the same time. To the extent practicable, such transactions
will be effected on a pro-rata basis in proportion to the respective amounts of
securities to be bought and sold for each portfolio, and the allocated
transactions will be averaged as to price. While this procedure may adversely
affect the price or volume of a given Fund transaction, LMC believes that the
ability of the Fund to participate in combined transactions may generally
produce better executions overall.
LMC also acts as administrator to the Fund and performs certain
administrative and internal accounting services, including but not limited to,
maintaining general ledger accounts, regulatory compliance, preparation of
financial information for semiannual and annual reports, preparing registration
statements, calculating net asset values, shareholder communications and
supervision of the custodian, transfer agent and provides facilities for such
services. The Fund shall reimburse LMC for its actual cost in providing such
services, facilities and expenses.
LFD serves as distributor for Fund shares under a Distribution Agreement
between the Fund and LFD pursuant to which LFD acts as the principal selling
representative for the Fund. LFD pays the advertising and sales expenses of the
continuous offering of Fund shares, including the cost of printing prospectuses,
proxies and shareholder reports for persons other than existing shareholders.
The Fund furnishes LFD, at printer's overrun cost paid by LFD, such copies of
its prospectus and annual, semi-annual and other reports and shareholder
communications as may reasonably be required for sales purposes.
The Advisory Agreement, Sub-Advisory Agreement, the Distribution Agreement
and the Administrative Services Agreement are subject to annual approval by the
Fund's Board of Trustees and by the affirmative vote, cast in person at a
meeting called for such purpose, of a majority of the Trustees who are not
parties either to the Advisory Agreement, Sub-Advisory Agreement or the
Distribution Agreement, as the case may be, or "interested persons" of any such
party. Either the Fund, LMC, ACMC, or LFD may terminate either the Advisory
agreement, Sub-Advisory Agreement or the Distribution Agreement on 60 days'
written notice without penalty. The Advisory Agreement terminates automatically
in the event of assignment, as defined in the Investment Company Act of 1940.
Of the Trustees, executive officers and employees ("affiliated persons") of
the Trust, Messrs. Corniotes, DeMichele, Faust, Hisey, Kantor and Lavery and
Mmes. Carnicelli, Carr-Waldron, Curcio, Dubis, Gilfillan, Lederer and
3
<PAGE>
Mosca (see "Management of the Fund") may also be deemed affiliates of LMC by
virtue of being officers, Trustees or employees thereof. As of February 20,
1998, all officers and Trustees of the Fund as a group, were beneficial owners
of less than 5% of the shares of the Fund.
Neither LMC, ACMC, nor LFD shall not be liable to the Fund or its
shareholders for any act or omission by LMC, ACMC, nor LFD its officers,
shareholders except in the case of willful misfeasance, bad faith, gross
negligence or reckless disregard of duty.
Fund Advisory Fee Paid to LMC and the amount paid by LMC to ACMC pursuant to
the Sub-Advisory Agreement:
Fiscal Year
Ended ARISTON LMC
----------- ------- ---
1995 $66,777 $31,777
1996 71,818 36,818
1997 68,330 33,331
TAX SHELTERED RETIREMENT PLANS
The Fund makes available a variety of Prototype Pension and Profit Sharing
Plans including a 401(k) Salary Reduction Plan and a 403(b)(7) Plan. Plan
services are available by contacting the Shareholder Services Department of the
Distributor at 1-800-526-0056.
INDIVIDUAL RETIREMENT ACCOUNT (IRA): Individuals may make tax deductible
contributions to their own Individual Retirement Accounts established under
Section 408 of the Internal Revenue Code (the "Code"). Married investors filing
a joint return neither of whom is an active participant in an employer sponsored
retirement plan, or who have an adjusted gross income of $40,000 or less
($25,000 or less for single taxpayers) may make a $2,000 annual deductible IRA
contribution. For adjusted gross incomes over $40,000 ($25,000 for single
taxpayers), the IRA deduction limit is generally phased out ratably over the
next $10,000 of adjusted gross income, subject to a minimum $200 deductible
contribution. Investors who are not able to deduct a full $2,000 IRA
contribution because of the limitations may make a non-deductible contribution
to their IRA to the extent a deductible contribution is not allowed. Federal
income tax on accumulations earned on non-deductible contributions is deferred
until such time as these amounts are deemed distributed to an investor.
Rollovers are also permitted under the Plan. The Disclosure statement required
by the Internal Revenue Service ("IRS") is provided by the Fund.
The minimum initial investment to establish a tax-sheltered plan through the
Fund is $250 for both Keogh Plans and IRA Plans. Subsequent investments are
subject to a minimum of $50 for each account.
SELF-EMPLOYED RETIREMENT PLAN (HR-10): Self-employed individuals may make
tax deductible contributions to a prototype defined contribution pension plan or
profit sharing plan. There are, however, a number of special rules which apply
when self-employed individuals participate in such plans. Currently purchase
payments under a self-employed plan are deductible only to the extent of the
lesser of (i) $30,000 or (ii) 25% of the individual's earned annual income (as
defined in the Code) and in applying these limitations not more than $150,000 of
"earned income" may be taken into account.
CORPORATE PENSION AND PROFIT SHARING PLANS: The Fund makes available a
Prototype Defined Contribution Pension Plan and a Prototype Profit Sharing Plan.
All purchases and redemptions of Fund shares pursuant to any one of the
Fund's tax sheltered plans must be carried out in accordance with the provisions
of the Plan. Accordingly, all plan documents should be reviewed carefully before
adopting or enrolling in the plan. Investors should especially note that a
penalty tax of 10% may be imposed by the IRS on early withdrawals under
corporate, Keogh or IRA Plans. It is recommended by the IRS that an investor
consult a tax adviser before investing in the Fund through any of these plans.
An investor participating in any of the Fund's special plans has no
obligation to continue to invest in the Fund and may terminate the Plan with the
Fund at any time. Except for expenses of sales and promotion, executive and
administrative personnel, and certain services which are furnished by LMC, the
cost of the plans generally is borne by the Fund; however, each IRA Plan is
subject to an annual maintenance fee of $12.00 charged by the Agent.
PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
The Fund's transactions in convertible securities and most other types of
securities in which it may invest occur primarily with issuers, underwriters or
major dealers acting as principals. Such transactions are normally on a net
basis which do not involve payment of brokerage commissions. Premiums are paid
with respect to options purchased by the
4
<PAGE>
Fund. The cost of securities purchased from an underwriter usually includes a
commission paid by the issuer to the underwriters; transactions with dealers
normally reflect the spread between bid and asked prices. The Fund may also
execute transactions through broker-dealers on a commission basis.
The Fund's primary policy is to execute all purchases and sales of portfolio
instruments at the most favorable prices consistent with best execution,
considering all of the costs of the transaction including brokerage commissions.
This policy governs the selection of brokers and dealers and the market in which
a transaction is executed. Consistent with this policy, the Rules of Fair
Practice of the National Association of Securities Dealers, Inc., and such other
policies as the Trustees may determine, LMC or ACMC may consider sales of shares
of the Fund and of the other Lexington Funds as a factor in the selection of
broker-dealers to execute the Fund's portfolio transactions. However, pursuant
to the Fund's investment management agreement, management consideration may be
given in the selection of broker-dealers to research provided and payment may be
made of a commission higher than that charged by another broker-dealer which
does not furnish research services or which furnishes research services deemed
to be of a lesser value, so long as the criteria of Section 28(e) of the
Securities Exchange Act of 1934 are met. Section 28(e) of the Securities
Exchange Act of 1934 was adopted in 1975 and specifies that a person with
investment discretion shall not be "deemed to have acted unlawfully or to have
breached a fiduciary duty" solely because such person has caused the account to
pay a higher commission than the lowest available under certain circumstances,
provided that the person so exercising investment discretion makes a good faith
determination that the commissions paid are "reasonable in the relation to the
value of the brokerage and research services provided...viewed in terms of
either that particular transaction or his overall responsibilities with respect
to the accounts as to which he exercises investment discretion."
Currently, it is not possible to determine the extent to which commissions
that reflect an element of value for research services might exceed commissions
that would be payable for execution services alone. Nor generally can the value
of research services to the Fund be measured. Research services furnished might
be useful and of value to LMC or ACMC and its affiliates in serving other
clients as well as the Fund. On the other hand, any research services obtained
by LMC or ACMC or its affiliates from the placement of portfolio brokerage of
other clients might be useful and of value to LMC or ACMC in carrying out its
obligations to the Fund.
For fiscal year ended December 31, 1995, 1996 and 1997, the Fund paid
brokerage commissions of $-0-, $1,029 and $320, respectively. The Fund's
portfolio turnover rate for the fiscal years ending December 31, 1995, 1996 and
1997 were respectively, 11.23%, 18.45% and 30.47%.
DISTRIBUTION PLAN
The Fund has adopted a Distribution Plan (the "Plan") in accordance with
Rule 12b-1 under the Investment Company Act of 1940, which provides that the
Fund may pay distribution fees including payments to the Distributor, at an
annual rate not to exceed 0.25% of its average daily net assets for distribution
services.
Distribution payments will be made as follows: The Fund either directly or
through the LMC may make payments periodically (i) to LFD or to any
broker-dealer (a "Broker") who is registered under the Securities Exchange Act
of 1934 and a member in good standing of the National Association of Securities
Dealers, Inc. and who has entered into a Selected Dealer Agreement with the
Distributor, (ii) to other persons or organizations ("Servicing Agents") who
have entered into shareholder processing and service agreements with LMC or with
LFD with respect to Fund shares owned by shareholders for which such Broker is
the dealer or holder of record or such servicing agent has a servicing
relationship, or (iii) for expenses associated with distribution of Fund shares,
including the compensation of the sales personnel of the LFD; payments of no
more than an effective annual rate of 0.25%, or such lesser amounts as LFD
determines appropriate. Payments may also be made for any advertising and
promotional expenses relating to selling efforts, including but not limited to
the incremental costs of printing prospectuses, statements of additional
information, annual reports and other periodic reports for distribution to
persons who are not shareholders of the Fund; the costs of preparing and
distributing any other supplemental sales literature; costs of radio,
television, newspaper and other advertising; telecommunications expenses,
including the cost of telephones, telephone lines and other communications
equipment, incurred by or for LFD in carrying out its obligations under the
Distribution Agreement.
Quarterly, in each year that this Plan remains in effect, the Fund's
Treasurer shall prepare and furnish to the Trustees of the Fund a written
report, complying with the requirements of Rule 12b-1, setting forth the amounts
expended by the Fund under the Plan and purposes for which such expenditures
were made.
The Plan shall remain in effect for one year from its adoption date and may
be continued thereafter if this Plan and all related agreements are approved at
least annually a majority vote of the Trustees of the Fund, including a majority
of the Qualified Trustees cast in person at a meeting called for the purpose of
voting on such Plan and agreements. This Plan may not be amended in order to
increase materially the amount to be spent for distribution assistance without
5
<PAGE>
shareholder approval. All material amendments to this Plan must be approved by a
vote of the Trustees of the Fund, and of the Qualified Trustees (as hereinafter
defined), cast in person at a meeting called for the purpose of voting thereon.
The Plan may be terminated at any time by a majority vote of the Trustees
who are not interested persons (as defined in Section 2(a)(19) of the 1940 Act)
of the Fund and have no direct or indirect financial interest in the operation
of the Plan or in any agreements related to the Plan (the "Qualified Trustees")
or by vote of a majority of the outstanding voting securities of the Fund, as
defined in Section 2(a)(42) of the 1940 Act.
While this Plan shall be in effect, the selection and nomination of the
"non-interested" Trustees of the Fund shall be committed to the discretion of
the Qualified Trustees then in office.
TAX MATTERS
The following is only a summary of certain additional tax considerations
generally affecting the Fund and its shareholders that are not described in the
Prospectus. No attempt is made to present a detailed explanation of the tax
treatment of the Fund or its shareholders, and the discussions here and in the
Prospectus are not intended as substitutes for careful tax planning.
Qualification as a Regulated Investment Company
The Fund has elected to be taxed as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). As a
regulated investment company, the Fund is not subject to federal income tax on
the portion of its net investment income (i.e., taxable interest, dividends and
other taxable ordinary income, net of expenses) and capital gain net income
(i.e., the excess of capital gains over capital losses) that it distributes to
shareholders, provided that it distributes at least 90% of its investment
company taxable income (i.e., net investment income and the excess of net
short-term capital gain over net long-term capital loss) for the taxable year
(the "Distribution Requirement"), and satisfies certain other requirements of
the Code that are described below. Distributions by the Fund made during the
taxable year or, under specified circumstances, within twelve months after the
close of the taxable year, will be considered distributions of income and gains
of the taxable year and will therefore satisfy the Distribution Requirement.
In addition to satisfying the Distribution Requirement, a regulated
investment company must: (1) derive at least 90% of its gross income from
dividends, interest, certain payments with respect to securities loans, gains
from the sale or other disposition of stock or securities or foreign currencies
(to the extent such currency gains are directly related to the regulated
investment company's principal business of investing in stock or securities) and
other income (including but not limited to gains from options, futures or
forward contracts) derived with respect to its business of investing in such
stock, securities or currencies (the "Income Requirement"); and (2) derive less
than 30% of its gross income (exclusive of certain gains on designated hedging
transactions that are offset by realized or unrealized losses on offsetting
positions) from the sale or other disposition of stock, securities or foreign
currencies (or options, futures or forward contracts thereon) held for less than
three months (the "Short-Short Gain Test"). However, foreign currency gains,
including those derived from options, futures and forwards, will not in any
event be characterized as Short-Short Gain if they are directly related to the
regulated investment company's investments in stock or securities (or options or
futures thereon). Because of the Short-Short Gain Test, the Fund may have to
limit the sale of appreciated securities that it has held for less than three
months. However, the Short-Short Gain Test will not prevent the Fund from
disposing of investments at a loss, since the recognition of a loss before the
expiration of the three-month holding period is disregarded for this purpose.
Interest (including original issue discount) received by the Fund at maturity or
upon the disposition of a security held for less than three months will not be
treated as gross income derived from the sale or other disposition of such
security within the meaning of the Short-Short Gain Test. However, income that
is attributable to realized market appreciation will be treated as gross income
from such sale or other disposition of securities for this purpose.
In general, gain or loss recognized by the Fund on the disposition of an
asset will be a capital gain or loss. However, gain recognized on the
disposition of a debt obligation purchased by the Fund at a market discount
(generally, at a price less than its principal amount) will be treated as
ordinary income to the extent of the portion of the market discount which
accrued during the period of time the Fund held the debt obligation. In
addition, under the rules of Code Section 988, gain or loss recognized on the
disposition of a debt obligation denominated in a foreign currency or an option
with respect thereto (but only to the extent attributable to changes in foreign
currency exchange rates), and gain or loss recognized on the disposition of a
foreign currency forward contract, futures contract, option or similar financial
instrument, or of foreign currency itself, except for regulated futures
contracts or non-equity options subject to Code Section 1256 (unless the Fund
elects otherwise), will generally be treated as ordinary income or loss.
In general, for purposes of determining whether capital gain or loss
recognized by the Fund on the disposition of an asset is long-term or
short-term, the holding period of the asset may be affected if (1) the asset is
used to close a "short
6
<PAGE>
sale" (which includes for certain purposes the acquisition of a put option) or
is substantially identical to another asset so used, (2) the asset is otherwise
held by the Fund as part of a "straddle" (which term generally excludes a
situation where the asset is stock and the Fund grants a qualified covered call
option (which, among other things, must not be deep-in-the-money) with respect
thereto) or (3) the asset is stock and the Fund grants an in-the-money qualified
covered call option with respect thereto. However, for purposes of the
Short-Short Gain Test, the holding period of the asset disposed of may be
reduced only in the case of clause (1) above. In addition, the Fund may be
required to defer the recognition of a loss on the disposition of an asset held
as part of a straddle to the extent of any unrecognized gain on the offsetting
position.
Any gain recognized by the Fund on the lapse of, or any gain or loss
recognized by the Fund from a closing transaction with respect to, an option
written by the Fund will be treated as a short-term capital gain or loss. For
purposes of the Short-Short Gain Test, the holding period of an option written
by the Fund will commence on the date it is written and end on the date it
lapses or the date a closing transaction is entered into. Accordingly, the Fund
may be limited in its ability to write options which expire within three months
and to enter into closing transactions at a gain within three months of the
writing of options.
Certain transactions that may be engaged in by the Fund (such as regulated
futures contracts, certain foreign currency contracts, and options on stock
indexes and futures contracts) will be subject to special tax treatment as
"Section 1256 contracts." Section 1256 contracts are treated as if they are sold
for their fair market value on the last business day of the taxable year, even
though a taxpayer's obligations (or rights) under such contracts have not
terminated (by delivery, exercise, entering into a closing transaction or
otherwise) as of such date. Any gain or loss recognized as a consequence of the
year-end deemed disposition of Section 1256 contracts is taken into account for
that year together with any other gain or loss that was previously recognized
upon the termination of Section 1256 contracts during the year. Any capital gain
or loss for the taxable year with respect to Section 1256 contracts (including
any capital gain or loss arising as a consequence of the year-end deemed sale of
such contracts) is generally treated as 60% long-term capital gain or loss and
40% short-term capital gain or loss. The Fund, however, may elect not to have
this special tax treatment apply to Section 1256 contracts that are part of a
"mixed straddle" with other investments of the Fund that are not Section 1256
contracts. Under Treasury Regulations, gains arising from Section 1256 contracts
as a result of a constructive sale under Code Section 1256 will be treated for
purposes of the Short-Short Gain Test as being derived from securities held for
not less than three months.
Treasury Regulations permit a regulated investment company, in determining
its investment company taxable income and net capital gain (i.e., the excess of
net long-term capital gain over net short-term capital loss) for any taxable
year, to elect (unless it has made a taxable year election for excise tax
purposes as discussed below) to treat all or any part of any net capital loss,
any net long-term capital loss or any net foreign currency loss incurred after
October 31 as if it had been incurred in the succeeding year.
In addition to satisfying the requirements described above, the Fund must
satisfy an asset diversification test in order to qualify as a regulated
investment company. Under this test, at the close of each quarter of the Fund's
taxable year, at least 50% of the value of the Fund's assets must consist of
cash and cash items, U.S. Government securities, securities of other regulated
investment companies, and securities of other issuers (as to each of which the
Fund has not invested more than 5% of the value of its total assets in
securities of such issuer and does not hold more than 10% of the outstanding
voting securities of such issuer), and no more than 25% of the value of its
total assets may be invested in the securities of any one issuer (other than
U.S. Government securities and securities of other regulated investment
companies), or in two or more issuers which the Fund controls and which are
engaged in the same or similar trades or businesses. Generally, an option (a
call or a put) with respect to a security is treated as issued by the issuer of
the security not the issuer of the option.
If for any taxable year the Fund does not qualify as a regulated investment
company, all of its taxable income (including its net capital gain) will be
subject to tax at regular corporate rates without any deduction for
distributions to shareholders, and such distributions will be taxable to the
shareholders as ordinary dividends to the extent of the Fund's current and
accumulated earnings and profits. Such distributions generally will be eligible
for the dividends-received deduction in the case of corporate shareholders.
Excise Tax on Regulated Investment Companies
A 4% non-deductible excise tax is imposed on a regulated investment company
that fails to distribute in each calendar year an amount equal to 98% of
ordinary taxable income for the calendar year and 98% of capital gain net income
for the one-year period ended on October 31 of such calendar year (or, at the
election of a regulated investment company having a taxable year ending November
30 or December 31, for its taxable year (a "taxable year election")). The
balance of such income must be distributed during the next calendar year. For
the foregoing purposes, a regulated
7
<PAGE>
investment company is treated as having distributed any amount on which it is
subject to income tax for any taxable year ending in such calendar year.
For purposes of the excise tax, a regulated investment company shall: (1)
reduce its capital gain net income (but not below its net capital gain) by the
amount of any net ordinary loss for the calendar year; and (2) exclude foreign
currency gains and losses incurred after October 31 of any year (or after the
end of its taxable year if it has made a taxable year election) in determining
the amount of ordinary taxable income for the current calendar year (and,
instead, include such gains and losses in determining ordinary taxable income
for the succeeding calendar year).
The Fund intends to make sufficient distributions or deemed distributions of
its ordinary taxable income and capital gain net income prior to the end of each
calendar year to avoid liability for the excise tax. However, investors should
note that the Fund may in certain circumstances be required to liquidate
portfolio investments to make sufficient distributions to avoid excise tax
liability.
Fund Distributions
The Fund anticipates distributing substantially all of its investment
company taxable income for each taxable year. Such distributions will be taxable
to shareholders as ordinary income and treated as dividends for federal income
tax purposes, but they will qualify for the 70% dividends-received deduction for
corporate shareholders only to the extent discussed below.
The Fund may either retain or distribute to shareholders its net capital
gain for each taxable year. The Fund currently intends to distribute any such
amounts. Net capital gain that is distributed and designated as a capital gain
dividend will be taxable to shareholders as long-term capital gain, regardless
of the length of time the shareholder has held his shares or whether such gain
was recognized by the Fund prior to the date on which the shareholder acquired
his shares.
Conversely, if the Fund elects to retain its net capital gain, the Fund will
be taxed thereon (except to the extent of any available capital loss carryovers)
at the 35% corporate tax rate. If the Fund elects to retain its net capital
gain, it is expected that the Fund also will elect to have shareholders of
record on the last day of its taxable year treated as if each received a
distribution of his pro rata share of such gain, with the result that each
shareholder will be required to report his pro rata share of such gain on his
tax return as long-term capital gain, will receive a refundable tax credit for
his pro rata share of tax paid by the Fund on the gain, and will increase the
tax basis for his shares by an amount equal to the deemed distribution less the
tax credit.
Ordinary income dividends paid by the Fund with respect to a taxable year
will qualify for the 70% dividends-received deduction generally available to
corporations (other than corporations, such as S corporations, which are not
eligible for the deduction) to the extent of the amount of qualifying dividends
received by the Fund from domestic corporations for the taxable year. The
dividends-received deduction for a corporate shareholder may be disallowed or
reduced pursuant to the limitations of section 246 of the Code.
Alternative minimum tax ("AMT") is imposed in addition to, but only to the
extent it exceeds, the regular tax and is computed at a maximum marginal rate of
28% for noncorporate taxpayers and 20% for corporate taxpayers on the excess of
the taxpayer's alternative minimum taxable income ("AMTI") over an exemption
amount. For purposes of the corporate AMT, the corporate dividends-received
deduction is not itself an item of tax preference that must be added back to
taxable income or is otherwise disallowed in determining a corporation's AMTI.
However, corporate shareholders generally will be required to take the full
amount of any dividend received from the Fund into account (without a
dividends-received deduction) in determining their adjusted current earnings,
which are used in computing an additional corporate preference item (i.e., 75%
of the excess of a corporate taxpayer's adjusted current earnings over its AMTI
(determined without regard to this item and the AMT net operating loss
deduction)) includable in AMTI.
Investment income that may be received by the Fund from sources within
foreign countries may be subject to foreign taxes withheld at the source. The
United States has entered into tax treaties with many foreign countries which
entitle the Fund to a reduced rate of, or exemption from, taxes on such income.
It is impossible to determine the effective rate of foreign tax in advance since
the amount of the Fund's assets to be invested in various countries is not
known.
Distributions by the Fund that do not constitute ordinary income dividends
or capital gain dividends will be treated as a return of capital to the extent
of (and in reduction of) the shareholder's tax basis in his shares; any excess
will be treated as gain realized from a sale of the shares, as discussed below.
Distributions by the Fund will be treated in the manner described above
regardless of whether such distributions are paid in cash or reinvested in
additional shares of the Fund (or of another fund). Shareholders receiving a
distribution in the form of additional shares will be treated as receiving a
distribution in an amount equal to the fair market value of the shares received,
determined as of the reinvestment date. In addition, if the net asset value at
the time a shareholder
8
<PAGE>
purchases shares of the Fund reflects realized but undistributed income or gain,
or unrealized appreciation in the value of assets held be the Fund,
distributions of such amounts to the shareholder will be taxable in the manner
described above, although economically they constitute a return of capital to
the shareholder.
Ordinarily, shareholders are required to take distributions by the Fund into
account in the year in which they are made. However, dividends declared in
October, November or December of any year and payable to shareholders of record
on a specified date in such a month will be deemed to have been received by the
shareholders (and made by the Fund) on December 31 of such calendar year
provided such dividends are actually paid in January of the following year.
Shareholders will be advised annually as to the U.S. federal income tax
consequences of distributions made (or deemed made) during the year.
The Fund will be required in certain cases to withhold and remit to the U.S.
Treasury 31% of distributions and the proceeds of redemption of shares, paid to
any shareholder (1) who has provided either an incorrect tax identification
number or no number at all, (2) who is subject to backup withholding by the IRS
for failure to report the receipt of interest or dividend income properly, or
(3) who has failed to certify to the Fund that it is not subject to backup
withholding or that it is an "exempt recipient" (such as a corporation).
Sale or Redemption of Shares
A shareholder will recognize gain or loss on a sale or redemption of shares
of the Fund in an amount equal to the difference between the proceeds of the
sale or redemption and the shareholder's adjusted tax basis in the shares. All
or a portion of any loss so recognized may be disallowed if the shareholder
purchases other shares of the Fund within 30 days before or after the sale or
redemption. In general, any gain or loss arising from (or treated as arising
from) the sale or redemption of shares of the Fund will be considered capital
gain or loss and will be long-term capital gain or loss if the shares were held
for longer than one year. However, any capital loss arising from the sale or
redemption of shares held for six months or less will be treated as a long-term
capital loss to the extent of the amount of capital gain dividends received on
such shares. For this purpose, the special holding period rules of Code Section
246(c)(3) and (4) generally will apply in determining the holding period of
shares. Long-term capital gains of noncorporate taxpayers are currently taxed at
a maximum rate 11.6% lower than the maximum rate applicable to ordinary income.
Capital losses in any year are deductible only to the extent of capital gains
plus, in the case of a noncorporate taxpayer, $3,000 of ordinary income.
Foreign Shareholders
Taxation of a shareholder who, as to the United States, is a nonresident
alien individual, foreign trust or estate, foreign corporation, or foreign
partnership ("foreign shareholder"), depends on whether the income from the Fund
is "effectively connected" with a U.S. trade or business carried on by such
shareholder.
If the income from the Fund is not effectively connected with a U.S. trade
or business carried on by a foreign shareholder, ordinary income dividends paid
to a foreign shareholder will be subject to U.S. withholding tax at the rate of
30% (or lower treaty rate) upon the gross amount of the dividend. A foreign
shareholder would generally be exempt from U.S. federal income tax on gains
realized on a sale of shares of the Fund, capital gain dividends and amounts
retained by the Fund that are designated as undistributed capital gains.
If the income from the Fund is effectively connected with a U.S. trade or
business carried on by a foreign shareholder, then ordinary income and capital
gain dividends, and any gains realized upon a sale of shares of the Fund will be
subject to U.S. federal income tax at the rates applicable to U.S. citizens or
domestic corporations.
In the case of a foreign noncorporate shareholder, the Fund may be required
to withhold U.S. federal income tax at a rate of 31% on distributions that are
otherwise exempt from withholding tax (or taxable at a reduced treaty rate)
unless the shareholder furnishes the Fund with proper notification of its
foreign status.
The tax consequences to a foreign shareholder entitled to claim the benefits
of an applicable tax treaty may be different from those described herein.
Foreign shareholders are urged to consult their own tax advisers with respect to
the particular tax consequences to them of an investment in the Fund, including
the applicability of foreign taxes.
Effect of Future Legislation; Local Tax Considerations
The foregoing general discussion of U.S. federal income tax consequences is
based on the Code and the Treasury Regulations issued thereunder as in effect on
the date of this Statement of Additional Information. Future legislative or
administrative changes or court decisions may significantly change the
conclusions expressed herein, and any such changes or decisions may have a
retroactive effect with respect to the transactions contemplated herein.
Rules of state and local taxation of ordinary income and capital gain
dividends from regulated investment companies often differ from the rules for
U.S. federal income taxation described above. Shareholders are urged to
9
<PAGE>
consult their tax advisers as to the consequences of these and other state and
local tax rules affecting an investment in the Fund.
PERFORMANCE CALCULATION
For purposes of quoting and comparing the performance of the Fund to that of
other mutual funds and to other relevant market indices in advertisements or in
reports to shareholders, performance may be stated in terms of total return.
Under the rules of the Securities and Exchange Commission ("SEC rules"), funds
advertising performance must include total return quotes calculated according to
the following formula:
P(1 + T)n = ERV
Where: P = a hypothetical initial payment of $1000
T = average annual total return
n = number of years (1, 5 or 10)
ERV = ending redeemable value of a hypothetical $1,000 payment made at
the beginning of the 1, 5 or 10 year periods at the end of the
1, 5 and 10 year periods (or fractional portion thereof).
Under the foregoing formula, the time periods used in advertising will be
based on rolling calendar quarters, updated to the last day of the most recent
quarter prior to submission of the advertising for publication, and will cover
one, five, and ten year periods or a shorter period dating from the
effectiveness of the Fund's Registration Statement. In calculating the ending
redeemable value, all dividends and distributions by the Fund are assumed to
have been reinvested at the net asset value as described in the Prospectus on
the reinvestment dates during the period. The total return, or "T" in the
formula above, is computed by finding the average annual compounded rates of
return over the 1, 5 and 10 year periods (or fractional portion thereof) that
would equate the initial amount invested to the ending redeemable value. Any
recurring account charges that might in the future be imposed by the Fund would
be included at that time. Lexington Convertible Securities Fund's total return
for the one and five year and since inception (1/20/88) December 31, 1997 is a
follows:
Average Annual
Period Total Return
------ ------------
1 year ended December 31, 1997 .................. 13.16%
5 years ended December 31, 1997 ................. 8.73%
Since inception period ended December 31, 1997 .. 10.68%
The Fund may also, from time to time, include in such advertising a total
return figure that is not calculated according to the formula set forth above in
order to compare more accurately the performance of the Fund with other measures
of investment return. For example, in comparing the Fund's total return with
data published by Lipper Analytical Services, Inc., or with the performance of
the Standard & Poor's 500 Composite Stock Price Index or the Dow Jones
Industrial Average, the Fund calculates its aggregate total return for the
specified periods of time by assuming the reinvestment of each dividend or other
distribution at net asset value on the reinvestment date. Percentage increases
are determined by subtracting the initial value of the investment from the
ending value and by dividing the remainder by the beginning value.
CUSTODIAN, TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
Chase Manhattan Bank, N.A., 1211 Avenue of the Americas, New York, New York
10036 has been retained to act as the Custodian for the Fund's portfolio
securities. State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02181 has been retained to act as the transfer agent and dividend
disbursing agent. Neither Chase Manhattan Bank, N.A. nor State Street Bank and
Trust Company have any part in determining the investment policies of the Fund
or in determining which portfolio securities are to be purchased or sold by the
Fund or in the declaration of dividends and distributions.
10
<PAGE>
MANAGEMENT OF THE FUND
The Fund's trustees and executive officers and their principal occupations
are:
*+ROBERT M. DEMICHELE (53), President and Chairman. P.O. Box 1515, Saddle Brook,
N.J. 07663. Chairman and Chief Executive Officer, Lexington Management
Corporation; President and Director, Lexington Global Asset Managers, Inc.;
Chairman and Chief Executive Officer, Lexington Funds Distributor, Inc.;
Chairman of the Board, Market Systems Research, Inc. and Market Systems
Research Advisors, Inc.; Director, Chartwell Re Corporation, Claredon
National Insurance Company, The Navigator's Group, Inc., Unione Italiana
Reinsurance, Vanguard Cellular Systems, Inc. and Weeden & Co.; Vice Chairman
of the Board of Trustees, Union College and Trustee, Smith Richardson
Foundation.
+BEVERLEY C. DUER (68), Trustee, 340 East 72nd Street, New York, N.Y. 10021.
Private Investor. Formerly, Manager of Operations Research Department, CPC
International, Inc.
+JERARD F. MAHER (53), Trustee. 300 Raritan Center Parkway, Edison, New Jersey
08818. General Counsel, Federal Business Center.
*RICHARD B. RUSSELL (48), Trustee and President. 40 Lake Bellevue Drive, Suite
220, Bellevue, Washington 98005. President, ACMC Capital Management
Corporation (investment adviser).
+ALLEN H. STOWE (60), Trustee. 3674 Fifth and Ocean Avenues, Normandy Beach, New
Jersey 08739. President, Shelter Service Company, Inc.; President, Dartmouth
Co-operative Society Co., Inc.
*+LAWRENCE KANTOR (50), Vice President. P.O. Box 1515, Saddle Brook, N.J. 07663.
Executive Vice President, Managing Director and Director, Lexington
Management Corporation; Executive Vice President and Director, Lexington
Funds Distributor, Inc.; Executive Vice President and General Manager-Mutual
Funds, Lexington Global Asset Managers, Inc.
*+LISA CURCIO (38), Vice President and Secretary. P.O. Box 1515, Saddle Brook,
New Jersey 07663. Senior Vice President and Secretary, Lexington Management
Corporation; Secretary, Lexington Group of Investment Companies; Vice
President and Secretary, Lexington Funds Distributor, Inc.; Secretary,
Lexington Global Asset Managers, Inc.
*+RICHARD M. HISEY (39), Vice President and Chief Financial Officer. P.O. Box
1515, Saddle Brook, N.J. 07663. Chief Financial Officer, Managing Director
and Director, Lexington Management Corporation; Chief Financial Officer,
Vice President and Director, Lexington Funds Distributor, Inc.; Chief
Financial Officer, Market Systems Research Advisors, Inc.; Executive Vice
President and Chief Financial Officer, Lexington Global Asset Managers, Inc.
*+RICHARD J. LAVERY, CLU ChFC (44), Vice President, P.O. Box 1515, Saddle Brook,
N.J. 07663. Senior Vice President, Lexington Management Corporation; Vice
President, Lexington Funds Distributor, Inc.
*+JANICE A. CARNICELLI (38), Vice President. P.O. Box 1515, Saddle Brook, N.J.
07663.
*+CHRISTIE CARR-WALDRON (30), Assistant Treasurer. P.O. Box 1515, Saddle Brook,
N.J. 07663. Prior to October 1992, Senior Accountant, KPMG Peat Marwick LLP.
*+CATHERINE DUBIS (29), Assistant Treasurer. P.O. Box 1515, Saddle Brook, New
Jersey 07663. Prior to October 1997, Manager, Fund Accounting.
*+SIOBHAN GILFILLAN (34), Assistant Treasurer. P.O. Box 1515, Saddle Brook, N.J.
07663.
*+JOAN K. LEDERER (31), Assistant Treasurer. P.O. Box 1515, Saddle Brook, N.J.
07663. Prior to April 1997, Director of Investment Accounting, Diversified
Investment Advisors, Inc. Prior to April 1996, Assistant Vice President,
PIMCO.
*+SHERI MOSCA (34), Assistant Treasurer. P.O. Box 1515, Saddle Brook, N.J.
07663.
*+PETER CORNIOTES (36), Assistant Secretary, P.O. Box 1515, Saddle Brook, N.J.
07663. Assistant Secretary, Lexington Management Corporation. Assistant
Secretary, Lexington Funds Distributor, Inc.
*+ENRIQUE J. FAUST (37), Assistant Secretary. P.O. Box 1515, Saddle Brook, N.J.
07663. Prior to March 1994, Blue Sky Compliance Coordinator, Lexington Group
of Investment Companies.
- ----------
*"Interested person" and/or "Affiliated person" of LMC or ACMC as defined in the
Investment Company Act of 1940, as amended.
+Messrs. Corniotes, DeMichele, Duer, Faust, Hisey, Kantor, Lavery, Maher and
Stowe and Mmes. Carnicelli, Carr, Curcio, Dubis, Gilfillan, Lederer and Mosca
hold similar offices with some or all of the other registered investment
companies advised and/or distributed by LMC and LFD.
Trustees of the Fund not employed by the Fund or its affiliates receive an
annual fee of $600 and a fee of $150 for each meeting attended plus
reimbursement of expenses for attendance at regular meetings. During the fiscal
year ended
11
<PAGE>
December 31, 1997, the aggregate remuneration paid by the Fund to three such
Trustees not employed by the Fund's affiliates was $7,695.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
Aggregate Total Compensation From Number of
Name of Director Compensation from Fund and Fund Complex Directorships in Fund
Fund Complex
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Robert M. DeMichele $0 $0 16
- -----------------------------------------------------------------------------------------------------
Beverley C. Duer 2,700 29,521 16
- -----------------------------------------------------------------------------------------------------
Jerard F. Maher 2,700 29,521 16
- -----------------------------------------------------------------------------------------------------
Margaret W. Russell 0 0 1
- -----------------------------------------------------------------------------------------------------
Allen Stowe 2,350 2,574 2
- -----------------------------------------------------------------------------------------------------
</TABLE>
HIGH YIELD DEBT SECURITIES
Additional Risks
The widespread expansion of government, consumer and corporate debt within
our economy has made the corporate sector, especially cyclically sensitive
industries, more vulnerable to economic downturns or increased interest rates.
An economic downturn could severely disrupt the market for high yield securities
and adversely affect the value of outstanding securities and the ability of the
issuers to repay principal and interest.
The prices of high yield securities have been found to be less sensitive to
interest rate changes than higher-rated investments, but more sensitive to
adverse economic changes or individual corporate developments. Also, during an
economic downturn or substantial period of rising interest rates, highly
leveraged issuers may experience financial stress which would adversely affect
their ability to service their principal and interest payment obligations, to
meet projected business goals, and to obtain additional financing. If the issuer
of a security owned by the Fund defaulted, the Fund could incur additional
expenses to seek recovery. In addition, periods of economic uncertainty and
changes can be expected to result in increased volatility of market prices of
high yield securities and the Fund's net asset value. Furthermore, in the case
of high yield securities structured as zero coupon or pay-in-kind securities,
their market prices are affected to a greater extent by interest rate changes
and thereby tend to be more volatile than securities which pay interest
periodically and in cash. High yield securities also present risks based on
payment expectations. For example, high yield securities may contain redemption
of call provisions. If an issuer exercises these provisions in a declining
interest rate market, the Fund would have to replace the security with a lower
yielding security, resulting in a decreased return for investors. Conversely, a
high yield securities value will decrease in a rising interest rate market, as
will the value of the Fund's assets. If the Fund experiences unexpected net
redemption, this may force it to sell its high yield securities without regard
to their investment merits, thereby decreasing the asset based upon which the
Fund's expenses can be spread and possibly reducing the Fund's rate of return.
In addition, to the extent that there is no established retail secondary
market, there may be thin trading of high yield securities, and this may have an
impact on LMC's and ACMC's ability to accurately value high yield securities and
the Fund's assets and on the Fund's ability to dispose of the securities.
Adverse publicity and investor perception, whether or not based on fundamental
analysis, may decrease the values and liquidity of high yield securities
especially in a thinly traded market.
New laws and proposed new laws may have an impact on the market for high
yield securities. For example, new legislation requiring federally-insured
savings and loan associations to divest their investments in high yield
securities and pending proposals designed to limit the use, or tax and other
advantages of high yield securities which, if enacted, could have a material
effect on the Fund's net asset value and investment practices.
There are also special tax considerations associated with investing in high
yield securities structured as zero coupon or pay-in-kind securities. For
example, the Fund reports the interest on these securities as income even though
it receives no cash interest until the security's maturity or payment date.
Also, the shareholders are taxed on this interest event if the Fund does not
distribute cash to them. Therefore, in order to pay taxes on this interest,
shareholders may have to redeem some of their shares to pay the tax or the Fund
may sell some of its assets to distribute cash to shareholders. These actions
are likely to reduce the Fund's assets and may thereby increase its expense
ratio and decrease its rate of return.
Finally, there are risks involved in applying credit ratings as a method for
evaluating high yield securities. For example, credit ratings evaluate the
safety of principal and interest payments, not market value risk of high yield
securities. Also, since credit rating agencies may fail to timely change the
credit ratings to reflect subsequent events, the
12
<PAGE>
Fund (in conjunction with its investment adviser) will continuously monitor the
issuers of high yield securities to determine if the issuers will have
sufficient cash flow and profits to meet required principal and interest
payments, and to assure the securities liquidity so the Fund can meet redemption
requests.
SHAREHOLDER REPORTS
Shareholders will receive reports at least semi-annually showing the Fund's
holding and other information. In addition, shareholder reports received on an
annual basis will include financial statements audited by KPMG Peat Marwick LLP
Fund's independent auditors.
OTHER INFORMATION
As of February 19, 1998, the following persons were known by the Fund
management to have owned beneficially, directly or indirectly, five percent or
more of the outstanding shares of the Lexington Convertible Securities Fund:
Louis Baroh, 2200 6th Avenue, Seattle, WA 98121, 11% and Joseph B. Mohr, 2157 La
Paz Way, Palm Springs, CA 92264, 9%.
APPENDIX
SUMMARY OF RATINGS
Corporate Debt Securities Ratings
Standard & Poor's
Corporation
-----------------
AAA Highest quality
AA High quality
A Upper medium grade
BBB Medium grade
BB Speculative
B More speculative
CCC, CC, C Highly speculative
Cl Income bond, no interest paid currently
- Probably in default
D In default
Not rated
13
<PAGE>
LEXINGTON CONVERTIBLE SECURITIES FUND
STATEMENT OF NET ASSETS
(INCLUDING THE PORTFOLIO OF INVESTMENTS)
December 31, 1997
PRINCIPAL VALUE
AMOUNT OR SHARES SECURITY DESCRIPTION (NOTE 1)
- --------------------------------------------------------------------------------
CONVERTIBLE BONDS: 47.6%
BUSINESS SERVICES: 4.0%
$ 500,000 Corestaff, Inc., 2.94%, due 08/15/2004 ...... $ 418,125
-----------
COMPUTER HARDWARE & PERIPHERALS: 4.0 %
400,000 Adaptec, Inc., 4.75%, due 02/01/2004 ........ 412,000
-----------
COMPUTER SOFTWARE & SERVICES: 10.6%
875,000 Automatic Data Processing Services, Inc.
0.00%*, due 02/20/2012 .................... 693,954
-----------
420,000 National Data Corporation,
5.00%, due 11/01/2003 ....................... 405,300
-----------
1,099,254
-----------
DIVERSIFIED COMPANY: 5.1%
420,000 Thermo Electron Corporation,
4.25%, due 01/01/2003 ..................... 527,100
-----------
MEDICAL SERVICES: 7.3%
350,000 FPA Medical Management,
6.50%, due 12/15/2001 ..................... 357,000
410,000 Phycor, Inc.,
4.50%, due 02/15/2003 ..................... 393,600
-----------
750,600
-----------
RETAIL STORES (SPECIAL LINE): 5.9%
450,000 Home Depot, Inc.,
3.25%, due 10/01/2001 ..................... 612,000
-----------
SEMICONDUCTOR: 6.1%
450,000 Analog Devices, Inc.,
3.50%, due 12/01/2000 .................... 631,688
-----------
TELECOMMUNICATIONS SERVICE: 4.6 %
1,300,000 United States Cellular Corporation,
0.00%*, due 06/15/2015 ................... 473,693
-----------
TOTAL CONVERTIBLE BONDS
(cost $4,316,545) ......................... 4,924,460
-----------
CONVERTIBLE PREFERRED STOCK: 3.7%
TELECOMMUNICATION EQUIPMENT
8,000 Qualcomm, Inc. (cost $408,320) .............. 386,000
-----------
COMMON STOCKS: 37.1%
COMPUTER SOFTWARE & SERVICES: 10.5%
16,852 Sterling Commerce, Inc. ..................... 647,749
10,582 Sterling Software, Inc. ..................... 433,862
-----------
1,081,611
-----------
FINANCIAL SERVICES: 4.2%
14,939 First Data Corporation ...................... 436,965
-----------
MANUFACTURED HOUSING: 22.4%
58,590 Clayton Homes, Inc. ......................... 1,054,620
37,994 Oakwood Homes Corporation ................... 1,260,926
-----------
2,315,546
-----------
TOTAL COMMON STOCKS
(cost $956,087) ........................... 3,834,122
-----------
TOTAL LONG-TERM INVESTMENTS ................. 9,144,582
-----------
SHORT-TERM INVESTMENT: 9.7%
U.S. GOVERNMENT AGENCY OBLIGATION
$1,000,000 Federal National Mortgage Association
5.66%, due 01/07/98
(cost $999,057) ........................... 999,057
-----------
TOTAL INVESTMENTS: 98.1%
(cost $6,680,009+) (Note 1) ............... 10,143,639
Other assets in excess of liabilities: 1.9%. 201,551
-----------
TOTAL NET ASSETS: 100.0%
(equivalent to $15.08 per share
on 686,124 shares outstanding) ......... $10,345,190
===========
*Zero Coupon Bond.
+Aggregate cost for Federal income tax purposes is identical.
The Notes to Financial Statements are an integral part of this statement.
<PAGE>
LEXINGTON CONVERTIBLE SECURITIES FUND
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1997
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Investments, at value (cost $6,680,009) (Note 1) ................................. $10,143,639
Cash ............................................................................. 239,320
Receivable for shares sold ....................................................... 735
Dividends and interest receivable ................................................ 42,521
-----------
Total Assets ........................................................... 10,426,215
-----------
LIABILITIES
Due to Lexington Management Corporation (Note 2) ................................. 8,689
Payable for shares redeemed ...................................................... 5,317
Distributions payable ............................................................ 2,590
Accrued expenses ................................................................. 64,429
-----------
Total Liabilities ...................................................... 81,025
-----------
NET ASSETS (equivalent to $15.08 per share on 686,124 shares outstanding) (Note 4) $10,345,190
===========
NET ASSETS consist of:
Capital stock--authorized 1,000,000,000 shares, $.10 par value per share ......... $ 68,612
Additional paid in capital (Note 1) .............................................. 6,791,036
Undistributed net investment income .............................................. 1,763
Accumulated net realized gain on investments ..................................... 20,149
Unrealized appreciation on investments ........................................... 3,463,630
-----------
TOTAL NET ASSETS ....................................................... $10,345,190
===========
The Notes to Financial Statements are an integral part of this statement.
</TABLE>
<PAGE>
LEXINGTON CONVERTIBLE SECURITIES FUND
STATEMENT OF OPERATIONS
Year ended December 31, 1997
INVESTMENT INCOME
Dividends ..................... $ 13,428
Interest ...................... 308,722
-------
Total investment income ..... $322,150
Expenses
Investment advisory fee
(Note 2) .................... 101,661
Printing and mailing expenses . 28,090
Distribution expense (Note 3) . 25,415
Registration fees ............. 19,637
Transfer agent and shareholder
servicing expense (Note 2) .. 19,805
Accounting expenses (Note 2) .. 14,910
Professional fees .............. 11,342
Directors' fees and expenses ... 7,695
Computer processing fees ....... 5,288
Custodian expense .............. 1,735
Other expenses ................. 6,415
-------
Total expenses ................ 241,993
--------
Net investment income ...... 80,157
REALIZED AND UNREALIZED GAIN
ON INVESTMENTS (NOTE 5)
Net realized gain on
investments .................. 199,193
Net change in unrealized
appreciation on
investments .................. 914,284
----------
Net realized and unrealized
gain ....................... 1,113,477
----------
INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS ................ $1,193,634
==========
LEXINGTON CONVERTIBLE SECURITIES FUND
STATEMENTS OF CHANGES IN NET ASSETS
Years ended December 31, 1997 and 1996
1997 1996
-------- ---------
Net investment income ............ $ 80,157 $ 83,352
Net realized gain from security
transactions .................. 199,193 433,015
Net change in unrealized
appreciation (depreciation)
of investments ................ 914,284 (29,508)
---------- ----------
Increase in net assets
resulting from operations . 1,193,634 486,859
Distributions to shareholders
from net investment income .... (76,039) (87,725)
Distributions to shareholders
from net realized gains on
security transactions ......... (177,060) (432,556)
Decrease in net assets from capital
share transactions (Note 4) ... (1,803,790) (398,694)
---------- ----------
Net decrease
in net assets ............. (863,255) (432,116)
NET ASSETS
Beginning of period ........... 11,208,445 11,640,561
---------- ----------
End of period (including
undistributed net investment
income of $1,763 and
distributions in excess of
net investment income of $2,355,
1997 and 1996, respectively) $10,345,190 $11,208,445
========== ==========
The Notes to Financial Statements are an integral part of this statement.
<PAGE>
LEXINGTON CONVERTIBLE SECURITIES FUND
NOTES TO FINANCIAL STATEMENTS
December 31, 1997 and 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 securites 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 at the date of the financial statements and the reported amounts of
increases and decreases in net assets from operatons 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,
<PAGE>
LEXINGTON CONVERTIBLE SECURITIES FUND
NOTES TO FINANCIAL STATEMENTS
December 31, 1997 and 1996 (continued)
2. INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATE (CONTINUED)
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.
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 year
ended December 31, 1997.
The Fund reimbursed LMC for certain expenses, including accounting and
shareholder servicing costs of $24,400 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 year ended December 31,
1997 were $25,415 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, 1997 DECEMBER 31, 1996
-------------------------- --------------------------
Shares Amount Shares Amount
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Shares sold .................................... 77,731 $ 1,138,145 171,179 $ 2,414,604
Shares issued on reinvestment of dividends ..... 16,820 247,886 36,510 497,981
----------- ----------- ----------- -----------
94,551 1,386,031 207,689 2,912,585
Shares redeemed ................................ (229,087) (3,189,821) (239,163) (3,311,279)
----------- ----------- ----------- -----------
Net decrease ................................... (134,536) $(1,803,790) (31,474) $ (398,694)
=========== =========== =========== ===========
</TABLE>
5. PURCHASES AND SALES OF INVESTMENT SECURITIES
The cost of purchases and proceeds from sales of securities for the year ended
December 31, 1997, excluding short-term securities, were $2,819,408 and
$2,536,266, respectively.
At December 31, 1997, the aggregate gross unrealized appreciation for all
securities in which there is an excess of value over tax cost amounted to
$3,584,208 and aggregate gross unrealized depreciation for all securities in
which there is an excess of tax cost over value amounted to $120,578.
<PAGE>
LEXINGTON CONVERTIBLE SECURITIES FUND
NOTES TO FINANCIAL STATEMENTS
December 31, 1997 and 1996 (continued)
6. TAX INFORMATION (UNAUDITED)
The percentage of investment company taxable income eligible for the dividend
received deduction available to certain corporate shareholders with respect to
the year ended December 31, 1997, is 13.6%. Capital gain distributions paid to
shareholders by the Fund during the year ended December 31, 1997, whether taken
in shares or cash:
$177,060 are designated as 28 percent long-term capital gains.
<TABLE>
<CAPTION>
LEXINGTON CONVERTIBLE SECURITIES FUND
FINANCIAL HIGHLIGHTS
Selected per share data for a share outstanding throughout the period:
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1997 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 0.11 0.11 0.15 0.08 --
Net realized and unrealized gain on
investments 1.68 0.55 2.04 0.10 0.89
--------- -------- --------- ------- -------
Total income from investment operations 1.79 0.66 2.19 0.18 0.89
--------- -------- --------- ------- -------
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) (0.59)
--------- -------- --------- ------- -------
Total distributions (0.37) (0.66) (0.37) (2.44) (0.59)
--------- -------- --------- ------- -------
Net asset value, end of period $ 15.08 $ 13.66 $ 13.66 $ 11.84 $ 14.10
--------- -------- --------- ------- -------
Total return 13.16% 4.89% 18.63% 1.30% 6.53%
Ratio to average net assets:
Expenses, before reimbursement or waivers 2.38% 2.39% 2.52% 2.81% 2.76%
Expenses, net of reimbursement or waivers 2.38% 2.39% 2.52% 2.75% 2.76%
Net investment income (loss), before
reimbursement or waivers 0.79% 0.77% 1.24% 0.50% (0.04%)
Net investment income (loss) 0.79% 0.77% 1.24% 0.56% (0.04%)
Portfolio turnover rate 30.47% 18.45% 11.23% 38.14% 6.53%
Average commission paid on equity
security transactions** $ 0.04 $ 0.04 -- -- --
Net assets, end of period (000's omitted) $ 10,345 $ 11,208 $ 11,641 $ 8,117 $ 8,319
</TABLE>
** 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.
<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, 1997, the related statements of operations
for the year then ended, the statements of changes in net assets for each of the
years in the two-year period then ended, and the financial highlights for each
of the years in the five-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.
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, 1997 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, 1997, 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
each of the years the five-year period then ended in conformity with generally
accepted accounting principles.
KPMG Peat Marwick LLP
New York, New York
February 12, 1998
<PAGE>
PART C. OTHER INFORMATION
- ------- -----------------
Item 24. Financial Statements and Exhibits - List
The Annual Report for the year ending December 31, 1997 was filed
electronically on February 27, 1998 (as form type N-30D). Financial
Statements from this 1997 Annual Report have been included in the
Statement of Additional Information.
Page in the Statement
Financial statements: of Additional Information
--------------------- -------------------------
Report of Independent Auditors 20
dated February 4, 1998
Statement of Net Assets (Including
the Portfolio of Investments) at
December 31, 1997 (1) 13-14
Statement of Assets and Liabilities
at December 31, 1997 15
Statement of Operations for the year the
ended December 31, 1997 (2) 16
Statements of Changes in Net Assets for
years ended December 31, 1997
and 1996 16
Notes to Financial Statements 17-19
Schedules II-VII and other Financial Statements, for which
provisions are made in the applicable accounting regulations of
the Securities and Exchange Commission, are omitted because they
are not required under the related instructions, they are
inapplicable, or the required information is presented in the
financial statements or notes thereto.
(1) Includes the information required by Schedule I.
(2) Includes the information required by the Statement of
Realized Gain or Loss on Investments
<PAGE>
ITEM 24. Financial Statements and Exhibits - List
----------------------------------------
(b) Exhibits:
1. Declaration of Trust - Filed electronically 3/3/97 -
Incorporated by reference
2. By-Laws - Filed electronically 3/3/97 -
Incorporated by reference
3. Not Applicable
4. Rights of Holders Filed electronically
5a. Investment Advisory Agreement between Registrant
and Lexington Management Corporation -
Incorporated by reference - Filed electronically 4/29/96
5b. Sub-Advisory Investment Management Agreement between
Registrant and Ariston Capital Management, Inc. -
Incorporated by reference - Filed electronically 4/29/96
6. Distribution Agreement between Registrant
and Lexington Funds Distributor, Inc. - Filed
electronically 3/3/97 - Incorporated by reference
7. Retirement Plan for Eligible Trustees Filed electronically
8a. Form of Custodian Agreement between Registrant
and Chase Manhattan Bank, N.A.- Filed electronically
4/28/95 - Incorporated by reference
8b. Transfer Agency Agreements between Registrant
and State Street Bank and Trust Company -
Incorporated by reference - Filed electronically 4/29/96
9. Form of Administrative Services Agreement between
Registrant and Lexington Management Corporation - Filed
electronically 4/28/95 - Incorporated by reference
10. Opinion of Counsel as to Legality of Securities being
registered Filed electronically
11. Consents
(a) Consent of Counsel Filed electronically
(b) Consent of Independent Auditors Filed electronically
12. Not Applicable
13. Not Applicable
14. Retirement Plans - Filed electronically 4/29/96
15. Form of Distribution Plan under Rule 12b-1 and
related agreements - Filed electronically 3/3/97 -
Incorporated by reference
16. Performance Calculation Filed electronically
17. Financial Data Schedule Filed electronically
<PAGE>
Item 25. Persons Controlled by or under Common Control with Registrant
-------------------------------------------------------------
Furnish a list or diagram of all persons directly or indirectly
controlled by or under common control with the Registrant and as to each
such person indicate (1) if a company, the state or other sovereign
power under the laws of which it is organized, (2) the percentage of
voting securities owned or other basis of control by the person, if any,
immediately controlling it.
None.
Item 26. Number of Holders of Securities
-------------------------------
State in substantially the tabular form indicated, as of a
specified date within 90 days prior to the date of filing, the number of
record holders of each class of securities of the Registrant.
The following information is given as of February 13, 1998:
Title of Class Number of Record Holders
-------------- ------------------------
Shares of beneficial interest 238
($0.10 par value)
Item 27. Indemnification
---------------
State the general effect of any contract, arrangements or statute
under which any director, officer, underwriter or affiliated person of
the Registrant is insured or indemnified in any manner against any
liability which may be incurred in such capacity, other than insurance
provided by any director, officer, affiliated person or underwriter for
their own protection.
Under the terms of the General Laws of the State of Massachusetts
and the Trust's Restated Declaration of Trust, the Trust shall indemnify
each of its Trustees to receive such indemnification (including those
who serve at its request as directors, officers or trustees of another
organization in which it has any interest as a shareholder, creditor or
otherwise), against all liabilities and expenses, including amounts paid
in satisfaction of judgements, in compromise of fines and penalties, and
counsel fees, reasonably incurred by him in connection with the defense
or disposition of any action, suit or other proceeding by the Trust or
any other person, whether civil or criminal, in which he may be involved
or with which he may be threatened, while in office or thereafter, by
reason of this being or having been such a Trustee, officer, employee or
agent, except with respect to any matter as to which he shall have been
adjudicated to have acted in bad faith or with willful misfeasance or
reckless disregard of duties or gross negligence; provided, however,
that as to any matter disposed of by a compromise payment by such
Trustee, officer, employee or agent, pursuant to a consent, decree or
otherwise, no indemnification either for said payment or for any other
expenses shall be provided unless the Trust shall have received a
written opinion from independent counsel approved by the Trustee to the
effect that if the foregoing matter had been adjudicated they would
likely have been adjudicated in favor of such Trustee, officer, employee
or agent. The rights accruing to any Trustee, officer, employee or
agent under these provisions shall not exclude any other right to which
he may lawfully be titled; provided, however, that no Trustee, officer,
employee or agent may satisfy any right of indemnity or reimbursement
granted herein or to which he may otherwise be entitled except out of
Trust Property, and no Shareholder shall be personally liable to any
Person with respect to any claim for indemnity or reimbursement or
otherwise. The Trustees may make advance payments in connection with
indemnification under the Declaration of Trust, provided that the
indemnified Trustee, officer, employee or agent shall have given a
written undertaking to reimburse the Trust in the event it is
subsequently determined that he is entitled to such indemnification.
Item 28. Business and Other Connections of Investment Adviser
----------------------------------------------------
Describe any other business, profession, vocation or employment of
a substantial nature in which the investment adviser of the Registrant,
and each director, officer or partner of any such investment adviser, is
or has been, at any time during the past two fiscal years, engaged for
his own account or in the capacity of director, officer, employee,
partner or trustee.
See Prospectus Part A and Statement of Additional Information Part
B ("Management of the Fund").
Item 29. Principal Underwriters
----------------------
(a) Lexington Money Market Trust
Lexington Growth and Income Fund, Inc.
Lexington GNMA Income Fund, Inc.
Lexington Ramirez Global Income Fund
Lexington Worldwide Emerging Markets Fund, Inc.
Lexington Goldfund, Inc.
Lexington Global Fund, Inc.
Lexington Natural Resources Trust
Lexington Corporate Leaders Trust Fund
Lexington Convertible Securities Fund
Lexington Strategic Investments Fund, Inc.
Lexington Strategic Silver Fund, Inc.
Lexington International Fund, Inc.
Lexington Emerging Markets Fund, Inc.
Lexington Crosby Small Cap Asia Growth Fund, Inc.
Lexington SmallCap Value Fund, Inc.
Lexington Troika Dialog Russia Fund, Inc.
<PAGE>
29(b)
Position and Offices Position and
Name and Principal with Principal Offices with
Business Address Underwriter Registrant
- ------------------ -------------------- ------------
Peter Corniotes* Assistant Secretary Asst. Secretary
Lisa Curcio* Vice President and Secretary
Secretary
Robert M. DeMichele* Chief Executive Officer Chairman of the
and Chairman Board and President
Richard M. Hisey* Chief Financial Officer Chief Financial
and Director Officer & Vice President
Lawrence Kantor* Executive Vice President Trustee & Vice President
and Director
Richard Lavery* Vice President Vice President
Janice Violette* Assistant Treasurer None
(c)
Not Applicable.
*P.O. Box 1515
Saddle Brook, New Jersey 07663
<PAGE>
Item 30. Location of Accounts and Records
--------------------------------
With respect to each account, book or other document
required to be maintained by Section 31(a) of the 1940 Act and the Rules
(17 CFR 270, 31a-1 to 31a-3) promulgated thereunder, furnish the name
and address of each person maintaining physical possession of each such
account, book or other document.
The Registrant, Lexington Convertible Securities Fund, Park
80 West - Plaza Two, Saddle Brook, New Jersey 07663 will maintain
physical possession of each such account, book or other document of the
Company, except for those maintained by the Registrant's Custodian,
Chase Manhattan Bank, N.A., 1211 Avenue of the Americas, New York New
York 10036, or Transfer Agent, State Street Bank and Trust Company, c/o
National Financial Data Services, 1004 Baltimore, Kansas City, Missouri
64105.
Item 31. Management Services
-------------------
Furnish a summary of the substantive provisions of any
management-related service contract not discussed in Part A or B of this
Form (because the contract was not believed to be material to a
purchaser of securities of the Registrant) under which services are
provided to the Registrant, indicating the parties to the contract, the
total dollars paid and by whom for the last three fiscal years.
None.
Item 32. Undertakings -
------------
The Registrant, Lexington Convertible Securities Fund,
undertakes to furnish a copy of the Fund's latest annual
report, upon request and without charge, to every person to
whom a prospectus is delivered.
The Registrant will hold a meeting of its public
shareholders, if requested to do so by the holders of at
least 10 percent of the Registrant's outstanding shares, to
call a meeting of shareholders for the purpose of voting
upon the question of removal of a director or directors and
to assist in communications with other shareholders.
<PAGE>
Registration No. 33-10543
Securities and Exchange Commission
Washington, D.C. 20549
Exhibits
Filed With
Form N-1A
LEXINGTON CONVERTIBLE SECURITIES FUND
<PAGE>
EXHIBIT INDEX
The following documents are being filed electronically as exhibits to
this filing:
Rights of Holders
Retirement Plan for Eligible Directors
Opinion of Counsel as to Legality of Securities being registered
Consent of Counsel
Consent of Independent Auditors
Performance Calculation
Financial Data Schedule
Cover
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933
and the Investment Company Act of 1940 the Registrant has duly caused
this Registration statement to be signed on its behalf by the
Undersigned, thereunto duly authorized, in the City of Saddle Brook and
State of New Jersey, on the 2nd day of March, 1998.
LEXINGTON CONVERTIBLE SECURITIES FUND
/s/ Robert M. DeMichele
________________________________
By Robert M. DeMichele
Chairman of the Board
Pursuant to the requirements of the Securities Act of 1933,
this Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated.
Signature Title Date
/s/ Robert M. DeMichele
________________________ Chairman of the Board March 2, 1998
Robert M. DeMichele Principal Executive
Officer
/s/ Richard M. Hisey
________________________ Principal Financial March 2, 1998
Richard M. Hisey and Accounting Officer
/s/ Lisa Curcio
________________________ Principal Compliance March 2, 1998
Lisa Curcio Officer
*Beverley C. Duer, P.E. Trustee March 2, 1998
________________________
Beverley C. Duer, P.E.
*Jerard Maher Trustee March 2, 1998
________________________
Jerard Maher
<PAGE>
Signature Title Date
*Richard B. Russell Trustee March 2, 1998
________________________
Richard B. Russell
*Allen H. Stowe Trustee March 2, 1998
________________________
Allen H. Stowe
/s/ Lisa Curcio
*By:____________________
Lisa Curcio
Attorney-in-Fact
Shareholder Rights
Shares issued by the Funds have no preemptive, conversion or subscription
rights. Each whole share is entitled to one vote as to any matter on which it is
entitled to vote and each fractional share is entitled to a proportionate
fractional vote. Shareholders have equal and exclusive rights as to dividends
and distributions as declared by each fund and to the net assets of each fund
upon liquidation or dissolution. Each fund votes separately on matters affecting
only that fund (e.g., approval of the Investment Management Agreement). Voting
rights are not cumulative, so the holders of more than 50% of the shares voting
in any election of Trustees or Directors can, if they so choose, elect all of
the Trustees or Directors of that Fund. Although the Funds are not required, and
do not intend, to hold annual meetings of shareholders, such meetings may be
called by each Fund's Board at its discretion, or upon demand by the holders of
10% or more of the outstanding shares of the Fund for the purpose of electing or
removing Trustees or Directors. Shareholders may receive assistance in
communicating with other shareholders in connection with the election or removal
of Trustees or Directors pursuant to the provisions of Section 16(c) of the
Investment Company Act.
Retirement Plan for Eligible Directors/Trustees
Each Director/Trustee (who is not an employee of any of the Funds, the
Advisor, Administrator or Distributor or any of their affiliates) may be
entitled to certain benefits upon retirement from the Board. Pursuant to the
Plan, the normal retirement date is the date on which the eligible
Director/Trustee has attained age 65 and has completed at least ten years of
continuous and non-forfeited service with one or more of the investment
companies advised by LMC (or its affiliates) (collectively, the "Covered
Funds"). Each eligible Director/Trustee is entitled to receive from the
Covered Fund an annual benefit commencing on the first day of the calendar
quarter coincident with or next following his date of retirement equal to 5%
of his compensation multiplied by the number of such Director/Trustee's years
of service (not in excess of 15 years) completed with respect to any of the
Covered Portfolios. Such benefit is payable to each eligible Director in
quarterly installments for ten years following the date of retirement or the
life of the Director/Trustee. The Plan establishes age 72 as a mandatory
retirement age for Directors/Trustees; however, Director/Trustees serving the
Funds as of September 12, 1995 are not subject to such mandatory retirement.
Directors/Trustees serving the Funds as of September 12, 1995 who elect
retirement under the Plan prior to September 12, 1996 will receive an annual
retirement benefit at any increased compensation level if compensation is
increased prior to September 12, 1997 and receive spousal benefits (i.e., in
the event the Director/Trustee dies prior to receiving full benefits under the
Plan, the Director/Trustee's spouse (if any) will be entitled to receive the
retirement benefit within the 10 year period.)
Retiring Directors/Trustees will be eligible to serve as Honorary
Directors/Trustees for one year after retirement and will be entitled to be
reimbursed for travel expenses to attend a maximum of two meetings.
For more information regarding these benefits, refer to the Statement of
Additional Information to the section titled "Management of the Fund".
ROGERS & WELLS
TWO HUNDRED PARK AVENUE
NEW YORK, NY 10166
Telephone (212) 878-8000
Telecopier (212) 878-8160
(212) 878-8375
Telex 234493 RKWUR
January 12, 1987
Concord Income Trust
Park 80 West, Plaza Two
Saddle Brook, New Jersey 07662
Gentlemen:
We have acted as counsel for Concord Income Trust, a trust organized
under the laws of the Commonwealth of Massachusetts (the "Trust"), in
connection with the organization of the Trust, its registration as an open-end
investment company under the Investment Company Act of 1940 and the
registration of an indefinite number of its shares of beneficial interest, par
value $.10 per share (the "Shares"), under the Securities Act of 1933 to be
effected pursuant to a registration statement on Form N-1A (File No. 33-10543),
as amended (the "Registration Statement").
As counsel for the Trust, we are familiar with the proceedings taken
by it in connection with the authorization, issuance and sale of the Shares.
In addition, we have examined and are familiar with the Declaration of Trust of
the Trust, the By-Laws of the Trust and such other documents as we have deemed
relevant to the matters referred to in this opinion. As to matters governed
by the laws of Massachusetts, we have relied upon an opinion of Hale & Dorr,
dated January 12, 1987.
Based upon the foregoing and such examination of law as we have
deemed necessary, we are of the opinion that the Shares, upon issuance and
sale in the manner referred to in the Registration Statement for consideration
of not less than the par value thereof, will be legally issued, fully paid and
non-assessable shares of beneficial interest of the Trust.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name in the prospectus
constituting a part thereof.
Very truly yours,
/s/ Rogers & Wells
Kramer, Levin, Naftalis & Frankel
9 1 9 T H I R D A V E N U E
NEW YORK, N.Y. 10022 3852
(212) 715 9100
FAX
(212) 715-8000
______
WRITER'S DIRECT NUMBER
(212) 715-9100
March 2, 1998
Lexington Convertible Securities Fund
Park 80 West Plaza Two
Saddle Brook, New Jersey 07663
Gentlemen:
We hereby consent to the reference of this Firm as counsel in the
Registration Statement on Form N-1A of the Lexington Convertible Securities
Fund.
Very truly yours,
/s/ Kramer, Levin, Naftalis & Frankel
Independent Auditors' Consent
To the Board of Trustees and Shareholders
Lexington Convertible Securities Fund:
We consent to the use of our report dated February 12, 1998 included in
this Registration Statement on Form N-1A of the Lexington Convertible
Securities Fund dated March 2, 1998 and to the references to our firm
under the headings "Financial Highlights" and "Counsel and Independent
Auditors" in the Prospectus and "Shareholder Reports" in the Statement
of Additional Information.
KPMG Peat Marwick LLP
New York, New York
March 2, 1998
LEXINGTON CONVERTIBLE SECURITIES FUND
SCHEDULE OF PERFORMANCE QUOTATIONS
ENDING REDEEMABLE VALUE PURSUANT TO SEC RULES
N
P (1+T) = ERV
Where P = Initital payment of $1,000
T = Average annual total return
N = Number of years
FROM COMMENCEMENT THROUGH 12/31/97
9.948 Years:
REINV. TOTAL
DATE INVESTMENT DIV. SHARES SHARES NAV VALUE
- -------------------------------------------------------------------------
01/20/88 $1,000.00 - 106.952 106.952 9.35 1,000.00
07/18/88 14.97 1.558 108.510 9.61 1,042.78
10/18/88 13.02 1.371 109.880 9.50 1,043.86
12/29/88 20.88 2.205 112.085 9.47 1,061.45
05/01/89 15.69 1.571 113.656 9.99 1,135.42
07/10/89 17.05 1.745 115.401 9.77 1,127.47
10/11/89 16.16 1.610 117.010 10.04 1,174.78
12/20/89 24.57 2.597 119.608 9.46 1,131.49
03/21/90 15.55 1.625 121.232 9.57 1,160.19
06/21/90 14.55 1.467 122.699 9.92 1,217.18
09/21/90 14.72 1.706 124.405 8.63 1,073.61
12/21/90 16.17 1.863 126.268 8.68 1,096.00
03/21/91 10.10 1.011 127.279 9.99 1,271.51
06/21/91 6.36 0.592 127.870 10.75 1,374.61
09/21/91 6.39 0.563 128.434 11.34 1,456.44
12/20/91 6.42 0.561 128.995 11.45 1,476.99
03/21/92 5.16 0.416 129.411 12.40 1,604.69
06/22/92 5.18 0.455 129.865 11.39 1,479.17
09/04/92 5.19 0.437 130.303 11.87 1,546.69
12/30/92 7.82 0.575 130.878 13.60 1,779.94
03/31/93 3.93 0.276 131.154 14.24 1,867.63
06/30/93 1.31 0.099 131.252 13.29 1,744.34
12/29/93 72.37 5.203 136.455 13.91 1,898.09
09/30/94 3.78 0.273 136.728 13.87 1,896.41
12/29/94 329.08 27.888 164.616 11.80 1,942.46
03/31/95 4.94 0.404 165.020 12.22 2,016.54
05/18/95 4.95 0.406 165.426 12.19 2,016.54
09/29/95 6.62 0.497 165.923 13.33 2,211.75
12/28/95 45.79 3.347 169.270 13.68 2,315.61
05/15/96 6.77 0.473 169.743 14.31 2,429.02
09/11/96 4.84 0.343 170.086 14.12 2,401.61
12/27/96 101.24 7.455 177.541 13.58 2,411.00
05/14/97 5.33 0.386 177.927 13.81 2,457.17
09/10/97 7.12 0.465 178.392 15.31 2,731.18
12/29/97 53.00 3.591 181.983 14.76 2,686.06
12/31/97 181.983 15.08 2,744.30
1/n 0.1005
(erv) 2744.30
T = ------- - 1 = -------- - 1 = 10.68%
(P) 1,000.00
10
ERV = 1,000 (1 + 0.1068 ) = $2,744.30
<PAGE>
LEXINGTON CONVERTIBLE SECURITIES FUND
SCHEDULE OF PERFORMANCE QUOTATIONS
ENDING REDEEMABLE VALUE PURSUANT TO SEC RULES
N
P (1+T) = ERV
Where P = Initital payment of $1,000
T = Average annual total return
N = Number of years
5 Year:
REINV. TOTAL
DATE INVESTMENT DIV. SHARES SHARES NAV VALUE
- -------------------------------------------------------------------------
12/31/92 $1,000.00 - 72.464 72.464 13.80 1,000.00
03/31/93 2.17 0.152 72.616 14.24 1,034.05
06/30/93 0.73 0.055 72.671 13.29 965.80
12/29/93 40.07 2.881 75.552 13.91 1,050.92
09/30/94 2.09 0.151 75.702 13.87 1,049.99
12/29/94 182.20 15.441 91.143 11.80 1,075.49
03/31/95 2.73 0.223 91.367 12.22 1,116.50
05/18/95 2.74 0.225 91.591 12.19 1,116.50
09/29/95 3.66 0.275 91.866 13.33 1,224.57
12/28/95 25.36 1.854 93.720 13.68 1,282.08
05/15/96 3.75 0.262 93.982 14.31 1,344.88
09/11/96 2.68 0.190 94.172 14.12 1,329.70
12/27/96 56.05 4.127 98.299 13.58 1,334.90
05/14/97 2.95 0.214 98.513 13.81 1,360.46
09/10/97 3.94 0.257 98.770 15.31 1,512.17
12/29/97 29.34 1.988 100.758 14.76 1,487.18
12/31/97 100.758 15.08 1,519.43
0.2000
(erv) 1519.43
T = ------- - 1 = -------- - 1 = 8.73%
(P) 1000.00
5
ERV = 1,000 (1 + 0.0873 ) = $1,519.43
<PAGE>
LEXINGTON CONVERTIBLE SECURITIES FUND
SCHEDULE OF PERFORMANCE QUOTATIONS
ENDING REDEEMABLE VALUE PURSUANT TO SEC RULES
N
P (1+T) = ERV
Where P = Initital payment of $1,000
T = Average annual total return
N = Number of years
1 Year:
REINV. TOTAL
DATE INVESTMENT DIV. SHARES SHARES NAV VALUE
- -------------------------------------------------------------------------
12/31/96 $1,000.00 - 73.206 73.206 13.66 1,000.00
05/14/97 2.20 0.159 73.366 13.81
09/10/97 2.93 0.191 73.557 15.31
12/29/97 21.85 1.480 75.037 14.76
12/31/97 75.037 15.08 1,131.57
1/n 1.0000
(erv) 1131.57
T = ------- - 1 = -------- - 1 = 13.16%
(P) 1,000.00
1
ERV = 1,000 (1 + 0.1316 ) = $1,131.57
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
The Schedule contains summary financial information extracted from annual
audited financial statements dated December 31, 1997 and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 6,680,009
<INVESTMENTS-AT-VALUE> 10,143,639
<RECEIVABLES> 43,256
<ASSETS-OTHER> 239,230
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 10,426,125
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> (81,025)
<TOTAL-LIABILITIES> (81,025)
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 6,859,649
<SHARES-COMMON-STOCK> 686,124
<SHARES-COMMON-PRIOR> 820,660
<ACCUMULATED-NII-CURRENT> 1,763
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 20,148
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 3,463,630
<NET-ASSETS> 10,345,190
<DIVIDEND-INCOME> 13,428
<INTEREST-INCOME> 308,722
<OTHER-INCOME> 0
<EXPENSES-NET> (241,993)
<NET-INVESTMENT-INCOME> 80,157
<REALIZED-GAINS-CURRENT> 199,193
<APPREC-INCREASE-CURRENT> 914,284
<NET-CHANGE-FROM-OPS> 1,193,634
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (76,039)
<DISTRIBUTIONS-OF-GAINS> (177,060)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 77,731
<NUMBER-OF-SHARES-REDEEMED> (229,087)
<SHARES-REINVESTED> 16,820
<NET-CHANGE-IN-ASSETS> (1,803,790)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> (2,355)
<OVERDIST-NET-GAINS-PRIOR> (1,984)
<GROSS-ADVISORY-FEES> (101,661)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (241,993)
<AVERAGE-NET-ASSETS> 10,166,244
<PER-SHARE-NAV-BEGIN> 13.66
<PER-SHARE-NII> 0.11
<PER-SHARE-GAIN-APPREC> 1.68
<PER-SHARE-DIVIDEND> (0.11)
<PER-SHARE-DISTRIBUTIONS> (0.26)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 15.08
<EXPENSE-RATIO> 2.38
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
