PROSPECTUS
April 29, 1996
Lexington Crosby
SMALL CAP ASIA GROWTH FUND, Inc.
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 MUTUAL FUND WHOSE INVESTMENT OBJECTIVE IS LONG-TERM CAPITAL
APPRECIATION THROUGH INVESTMENT IN COMPANIES DOMICILED IN THE ASIA REGION WITH A
MARKET CAPITALIZATION OF LESS THAN $1 BILLION.
- --------------------------------------------------------------------------------
Lexington Crosby Small Cap Asia Growth Fund (the
"Fund") is a no-load open-end diversified management
investment company. The Fund's investment objective is to
seek long-term capital appreciation through investment in
common stocks and equivalents of companies domiciled in the
Asia Region with a market capitalization of less than $1
billion.
Shareholders may invest, reinvest, or redeem shares
at any time without charge or penalty.
Lexington Management Corporation ("LMC") is the
Fund's investment adviser. Crosby Asset Management (US) Inc.
("CROSBY") is the sub-adviser of the Fund. Lexington Funds
Distributor, Inc. ("LFD") is the distributor of Fund shares.
This Prospectus sets forth information about the
Fund you should know before investing. It should be read and
retained for future reference.
A Statement of Additional Information dated April
29, 1996, which provides a further discussion of certain
matters 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.
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 ..................................................... 1.25%
Other fees .......................................................... 1.25%
----
Total Fund Operating Expenses ................................... 2.50%
====
<TABLE>
<CAPTION>
Example: 1 year 3 years 5 years 10 years
------ ------- ------- --------
<S> <C> <C> <C> <C>
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 ..... $25.31 $77.85 $133.05 $283.59
</TABLE>
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 directly
and indirectly. Shareholder Servicing Agents acting as agents for their
customers may provide administrative and recordkeeping services on behalf of the
Fund. For these services, each Shareholder Servicing Agent receives fees, which
may be paid periodically, provided that such fees will not exceed, on an annual
basis, 0.25% of the average daily net assets of the Fund represented by shares
owned during the period for which payment is made. Each Shareholder Servicing
Agent may, from time to time, voluntarily waive all or a portion of the fees
payable to it. (For more complete descriptions of the various costs and
expenses, see "Investment Adviser, Sub-Adviser & Distributor" below.) The
Expenses and Example appearing in the table above are based on the Fund's
estimated expenses for the current fiscal year. The Example shown in the table
above should not be considered a representation of the past or future expenses
and actual expenses may be greater or less than those shown.
FINANCIAL HIGHLIGHTS
The following Financial Highlights Information for the period July 3, 1995
(commencement of operations) to December 31, 1995 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.
<TABLE>
<CAPTION>
Selected Per Share Data for a share outstanding throughout the period: July 3, 1995
(commencement of
operations) to
December 31, 1995
-----------------
<S> <C>
Net asset value, beginning of period ................................................ $10.00
Income (loss) from investment operations:
Net investment income ................................................................ 0.02
Net realized and unrealized loss on investments ................................. (0.24)
Total loss from investment operations .......................................... (0.22)
Less distributions:
Distributions from net realized capital gains ........................................ (0.02)
Net asset value, end of period ......................................................... $ 9.76
======
Total return ........................................................................... (4.39)%*
Ratio to average net assets:
Expenses, before reimbursement or waiver ............................................. 3.51%*
Expenses, net of reimbursement or waiver ............................................. 1.75%*
Net investment loss, before reimbursement or waiver .................................. (1.24)%*
Net investment loss .................................................................. 0.52%*
Portfolio turnover ..................................................................... 40.22%*
Net assets at end of period (000's omitted) ............................................ $8,936
<FN>
*Annualized
</FN>
</TABLE>
2
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
Lexington Crosby Small Cap Asia Growth Fund (the "Fund"), a series of
Lexington Crosby Small Cap Asia Growth Fund, Inc. (the "Company"), is an
open-end, diversified management investment company. The Fund's investment
objective is to seek long-term capital appreciation through investment in common
stocks and equivalents of companies domiciled in the Asia Region with a market
capitalization of less than $1 billion which the investment adviser or
sub-adviser believes offer exceptional growth opportunities at attractive
relative prices. The Fund's portfolio will be invested primarily in equities
listed on stock exchanges in the Asia Region consisting of Bangladesh, China,
Hong Kong, India, Indonesia, Korea, Malaysia, Pakistan, the Philippines,
Singapore, Sri Lanka, Taiwan, Thailand, and Vietnam ("the Asia Region"). The
Fund also intends to invest in Australia and New Zealand. The Fund may also
invest in unlisted securities.
The Fund will seek to achieve its objective through investment in a
diversified portfolio of securities that will consist of all types of common
stocks and equivalents (the following constitute equivalents: convertible debt
securities, warrants and options). The Fund may also invest in preferred stocks,
bonds and other debt obligations and money market instruments, including cash
and cash deposits, which will be denominated in U.S. Dollars or currencies
related thereto. There is no assurance that the Fund will be able to achieve its
investment objective.
Under normal market conditions, the Fund will invest substantially all of
its assets in three or more countries in the Asia Region. The Fund seeks to
provide investors with the opportunity to invest in a portfolio of securities of
companies and governments located in the Asia Region. In making the allocation
of assets among the various countries the adviser and sub-adviser ordinarily
consider such factors as: prospects for relative economic growth; expected
levels of inflation and interest rates; government policies influencing business
conditions; the range of investment opportunities available to international
investors; and other pertinent financial, tax, social, political and national
factors-all in relation to the prevailing prices of the securities in the Asia
Region.
The Fund will invest at least 65% of its assets in securities of issuers
which are organized under the laws of countries located in the Asia Region, for
which the principal securities trading market is in the Asia Region and the
securities of issuers which derive at least 50% of their revenues or profits
from the Asia Region.
The Fund will invest at least 65% of its assets in small capitalization
growth companies in the Asia Region which have a market capitalization of less
than $1 billion. Approximately 13,000 companies are listed on recognized
exchanges in the Asia Region. Only some 300 companies are capitalized over $1
billion. These companies form the principal components of their respective
market indices and consequently attract the majority of foreign investment in
the region. Approximately 3,000 companies which have a market capitalization
between $100 million and $1 billion will be the primary focus for the Fund's
investments. These companies are frequently under-researched by international
investors and undervalued by their markets. The companies in which the Fund
intends to invest will generally have the following characteristics:
*have a market capitalization of less than $1 billion
*are within industry sectors with particularly strong growth prospects
*have proven management
*are under-researched by the investment community
*are undervalued
By following these criteria, the Fund intends to select securities which can
have enhanced growth prospects and may provide investment returns superior to
the market as a whole. However, the market value of these companies securities
tends to be volatile and in the past have offered greater potential for gain as
well as loss than securities of companies traded in developed countries. While
the Fund invests only in countries that it considers as having governments which
favor foreign investment, it is possible that certain Fund investments could be
subject to foreign expropriation or exchange control restrictions. See "Risk
Considerations".
3
<PAGE>
If the Fund invests in debt obligations the Fund intends to invest in debt
obligations which, on the date of investment, are within the four highest
ratings of Moody's Investors Service (Aaa, Aa, A, Baa for bonds; and within the
three highest ratings, MIG 1, MIG 2, MIG 3 for notes; P-1 for commercial paper;
VMIG 1, VMIG 2 for variable rate securities) or Standard & Poor's Corporation
(AM, M, A, BBB for bonds; A-1 for commercial paper). The Fund may invest in
bonds which are not rated if, based upon credit analysis by LMC or Crosby, it is
believed that such bonds are of comparable quality to investment grade bonds.
Bonds rated Baa or BBB while considered investment grade may have speculative
characteristics as well.
The Fund may temporarily invest up to 100% of its assets in debt
obligations, which consist of repurchase agreements, money market instruments of
foreign or domestic companies and U.S. Government and foreign governments,
governmental and international organizations when, in the judgement of the
adviser or sub-adviser, conditions in the securities market would make pursuing
the Fund's basic investment strategy inconsistent with the best interest of the
shareholders.
Portfolio Turnover:
Although the Fund does not generally intend to invest for the purpose of
seeking short-term profits, the Fund's investments may be changed when
circumstances warrant, without regard to the length of time a particular
security has been held. It is expected that the Fund will have an annual
portfolio turnover rate that will generally not exceed 150%. A 100% turnover
rate would occur if all the Fund's portfolio investments were sold and either
repurchased or replaced within a year. A high turnover rate (100% or more)
results in correspondingly greater brokerage commissions and other transactional
expenses which are borne by the Fund. For the year ended December 31, 1995, the
portfolio turnover rate for the Fund was 40.22%. High portfolio turnover may
result in the realization of net short-term capital gains by the Fund which,
when distributed to shareholders, will be taxable as ordinary income. See "Tax
Matters."
Certain Investment Methods: The Fund may from time to time engage in the
following investment practices:
Settlement Transactions-The Fund will attempt to insulate itself against
possible losses and gains resulting from a change in the relationship between
the United States dollar and the foreign currency during the period between the
date a security is purchased or sold and the date on which payment is made or
received. To do so, the Fund may, for a fixed amount of United States dollars,
enter into a forward foreign exchange contract for the purchase or sale of the
amount of foreign currency involved in the underlying securities transaction.
This process is known as "transaction hedging".
To effect the exchange of the amount of foreign currencies involved in the
purchase and sale of foreign securities and to effect the "transaction hedging"
described above, the Fund may purchase or sell foreign currencies on a "spot"
(i.e. cash) basis or on a forward basis whereby the Fund purchases or sells a
specific amount of foreign currency, at a price set at the time of the contract,
for receipt or delivery at a specified date which may be any fixed number of
days in the future.
Such spot and forward foreign exchange transactions may also be utilized to
reduce the risk inherent in fluctuations in the exchange rate between the United
States dollar and the relevant foreign currency when foreign securities are
purchased or sold for settlement beyond customary settlement time (as described
below). Neither type of foreign currency transaction will eliminate fluctuations
in the prices of the Fund's portfolio or securities or prevent loss if the price
of such securities should decline.
Portfolio Hedging-When, in the opinion of LMC or Crosby it is desirable to limit
or reduce exposure in a foreign currency in order to moderate potential changes
in the United States dollar value of the portfolio, the Fund may enter into a
forward foreign currency exchange contract by which the United States dollar
value of the underlying foreign portfolio securities can be approximately
matched by an equivalent United States dollar liability. The Fund, for hedging
purposes only, may also enter into forward currency exchange contracts to
increase its exposure to a foreign currency that LMC or
4
<PAGE>
Crosby expects to increase in value relative to the United States dollar. The
Fund will not attempt to hedge all of its portfolio positions and will enter
into such transactions only to the extent, if any, deemed appropriate by the
investment adviser or sub-adviser. Hedging against a decline in the value of
currency does not eliminate fluctuations in the prices of portfolio securities
or prevent losses if the prices of such securities decline. The Fund will not
enter into forward foreign currency exchange transactions for speculative
purposes. The Fund intends to limit such transactions as described in this
paragraph to not more than 70% of total Fund assets.
Forward Commitments-The Fund may make contracts to purchase securities for a
fixed price at a future date beyond customary settlement time ("forward
commitments") because new issues of securities are typically offered to
investors, such as the Fund, on that basis. Forward commitments involve a risk
of loss if the value of the security to be purchased declines prior to the
settlement date. This risk is in addition to the risk of decline in value of the
Fund's other assets. Although the Fund will enter into such contracts with the
intention of acquiring the securities, the Fund may dispose of a commitment
prior to settlement if the investment adviser or sub-adviser deems it
appropriate to do so. The Fund may realize short-term profits or losses upon the
sale of forward commitments.
Covered Call Options-The Fund may seek to preserve capital by writing covered
call options on securities which it owns. Such an option on an underlying
security would obligate the Fund to sell, and give the purchaser of the option
the right to buy that security at a stated exercise price at anytime until a
stated expiration date of the option. The premium paid by the purchaser of an
option will be income to the Fund. The Fund will cause its custodian to
segregate cash, U.S. Government Securities or other high grade liquid debt
obligations having a value sufficient to meet the Fund's obligations under the
call options. By writing covered call options, the Fund could lose the potential
for appreciation or gain with respect to the securities underlying the call
options.
Repurchase Agreements-A repurchase agreement is a contract under which the Fund
would acquire a security for a relatively short period (usually not more than 7
days) subject to the obligations of the seller to repurchase and the Fund to
resell such security at a fixed time and price (representing the Fund's cost
plus interest). Although the Fund may enter into repurchase agreements with
respect to any portfolio securities which it may acquire consistent with its
investment policies and restrictions, it is the Fund's present intention to
enter into repurchase agreements only with respect to obligations of the United
States government or its agencies or instrumentalities to meet anticipated
redemptions or pending investments or reinvestment of Fund assets in portfolio
securities. The Fund will enter into repurchase agreements only with member
banks of the Federal Reserve System and with "primary dealers" in United States
government securities. Repurchase agreements are considered to be loans which
must be fully collateralized including interest earned thereon during the entire
term of the agreement. 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 market value of the collateral securities. The Fund intends to
limit repurchase agreements to institutions believed by LMC or Crosby to present
minimal credit risk. The Fund will not enter into repurchase agreements maturing
in more than 7 days if the aggregate of such repurchase agreements and all other
illiquid securities when taken together would exceed 15% of the total assets of
the Fund.
Except as otherwise specifically noted, the Fund's investment objective and
its investment restrictions are fundamental and may not be changed without the
approval of a majority of the outstanding voting securities of the Fund. The
Statement of Additional Information contains a complete description of the
Fund's restrictions and additional information on policies relating to the
investment of its assets and its activities.
Portfolio Transactions
The primary consideration in placing security transactions is execution at
the most favorable prices, consistent with best execution. See the Statement of
Additional Information for a further discussion of brokerage allocation.
5
<PAGE>
RISK CONSIDERATIONS
Investors should recognize that investing in securities of foreign companies
and in particular securities of companies domiciled in or doing business in
Asian markets and countries involves certain risk considerations, including
those set forth below, which are not typically associated with investing in
securities of U.S. companies.
Foreign Small Cap Securities
Many companies traded on securities markets in many foreign countries are
smaller, newer and less seasoned than companies whose securities are traded on
securities markets in the United States. Investments in smaller companies
involve greater risk than is customarily associated with investing in larger
companies. Smaller companies may have limited product lines, markets or
financial or managerial resources and may be more susceptible to losses and
risks of bankruptcy. Additionally, market making and arbitrage activities are
generally less extensive in such markets and with respect to such companies,
which may contribute to increased volatility and reduced liquidity of such
markets or such securities. Accordingly, each of these markets and companies may
be subject to greater influence by adverse events generally affecting the
market, and by large investors trading significant blocks of securities, than is
usual in the United States. To the extent that any of these countries
experiences rapid increases in its money supply and investment in equity
securities for speculative purposes, the equity securities traded in any such
country may trade at price-earning multiples higher than those of comparable
companies trading on securities markets in the United States, which may not be
sustainable. In addition, risks due to the lack of modern technology, the lack
of a sufficient capital base to expand business operations, the possibility of
permanent or temporary termination of trading, and greater spreads between bid
and ask prices may exist in such markets.
Foreign Currency Considerations
The Fund's assets will be invested in securities of foreign companies and
substantially all income will be received by the Fund in foreign currencies.
However, the Fund will compute and distribute its income in U.S. dollars, and
the computation of income will be made on the date of its receipt by the Fund at
the foreign exchange rate in effect on that date. Therefore, if the value of the
foreign currencies in which the Fund receives its income falls relative to the
dollar between receipt of the income and the making of Fund distributions, the
Fund will be required to liquidate securities in order to make distributions if
the Fund has insufficient cash in dollars to meet distribution requirements.
The value of the assets of the Fund as measured in dollars also may be
affected favorably or unfavorably by fluctuations in currency rates and exchange
control regulations. Further, the Fund may incur costs in connection with
conversions between various currencies. Foreign exchange dealers realize a
profit based on the difference between the prices at which they are buying and
selling various currencies. Thus, a dealer normally will offer to sell a foreign
currency to the Fund at one rate, while offering a lesser rate of exchange
should the Fund desire immediately to resell that currency to the dealer. The
Fund will conduct its foreign currency exchange transactions either on a spot
(i.e., cash) basis at the spot rate prevailing in the foreign currency exchange
market, or through entering into forward or futures contracts to purchase or
sell foreign currencies.
Risks Associated With Hedging Transactions
Hedging transactions have special risks associated with them, including
possible default by the Counterparty to the transaction, illiquidity and, to the
extent LMC's or Crosby's view as to certain market movements is incorrect, the
risk that the use of a hedging transaction could result in losses greater than
if it had not been used. Use of call options could result in losses to the Fund,
force the sale or purchase of portfolio securities at inopportune times or for
prices lower than current market values, or cause the Fund to hold a security it
might otherwise sell.
Currency hedging involves some of the same risks and considerations as other
transactions with similar instruments. Currency transactions can result in
losses to the Fund if the currency being hedged fluctuates in value to a
6
<PAGE>
degree or in a direction that is not anticipated. Further, the risk exists that
the perceived linkage between various currencies may not be present or may not
be present during the particular time that the Fund is engaging in portfolio
hedging. Currency transactions are also subject to risks different from those of
other portfolio transactions. Because currency control is of great importance to
the issuing governments and influences economic planning and policy, purchases
and sales of currency and related instruments can be adversely affected by
government exchange controls, limitations or restrictions on repatriation of
currency, and manipulations or exchange restrictions imposed by governments.
These forms of governmental actions can result in losses to the Fund if it is
unable to deliver or receive currency or monies in settlement of obligations and
could also cause hedges it has entered into to be rendered useless, resulting in
full currency exposure as well as incurring transaction costs.
Losses resulting from the use of hedging transactions will reduce the Fund's
net asset value, and possibly income, and the losses can be greater than if
hedging transactions had not been used.
Investment and Repatriation Restrictions
Some foreign countries have laws and regulations which currently preclude
direct foreign investment in the securities of their companies. However,
indirect foreign investment in the securities of companies listed and traded on
the stock exchanges in these countries is permitted by certain foreign countries
through investment funds which have been specifically authorized. The Fund may
invest in these investment funds subject to the provisions of the Investment
Company Act of 1940, as amended (the "1940 Act") as discussed under "Investment
Restrictions" in the Statement of Additional Information. If the Fund invests in
such investment funds, the Fund's shareholders will bear not only their
proportionate share of the expenses of the Fund (including operating expenses
and the advisory fees), but also will bear indirectly similar expenses of the
underlying investment funds.
In addition to the foregoing investment restrictions, prior governmental
approval for foreign investments may be required under certain circumstances in
some foreign countries, while the extent of foreign investment in domestic
companies may be subject to limitation in other foreign countries. Foreign
ownership limitations also may be imposed by the charters of individual
companies in foreign countries to prevent, among other concerns, violation of
foreign investment limitations.
Repatriation of investment income, capital and the proceeds of sales by
foreign investors may require governmental registration and/or approval in some
foreign countries. The Fund could be adversely affected by delays in or a
refusal to grant any required governmental approval for such repatriation.
Foreign Securities Markets
Trading volume on foreign stock exchanges is substantially less than that on
the New York Stock Exchange. Further, securities of some foreign companies are
less liquid and more volatile than securities of comparable U.S. companies.
Similarly, volume and liquidity in most foreign bond markets is substantially
less than in the U.S. and, consequently, volatility of price can be greater than
in the U.S. Fixed commissions on foreign stock exchanges are generally higher
than negotiated commissions on U.S. exchanges, although the Fund endeavors to
achieve the most favorable net results on its portfolio transactions and may be
able to purchase the securities in which the Fund may invest on other stock
exchanges where commissions are negotiable.
Trading practices in certain foreign securities markets are also
significantly different from those in the U.S. Brokerage commissions and other
transaction costs on the securities exchanges in many countries are generally
higher than in the United States. In addition, securities settlements and
clearance procedures in certain countries, and, in particular, in emerging
market countries, are less developed and less reliable than those in the United
States and the Fund may be subject to delays or other material difficulties and
could experience a loss if a counterparty defaults. Delays in settlement could
result in temporary periods when assets of the Fund are uninvested and no return
is earned thereon.
7
<PAGE>
The inability of the Fund to make intended security purchases due to settlement
problems could cause the Fund to miss attractive investment opportunities. The
inability to dispose of a portfolio security due to settlement problems could
result either in losses to the Fund due to subsequent declines in the value of
such portfolio security or, if the Fund has entered into a contract to sell the
security, could result in possible liability to the purchaser.
Companies in foreign countries are not generally subject to uniform
accounting, auditing and financial reporting standards, practices and disclosure
requirements comparable to those applicable to U.S. companies. Consequently,
there may be less publicly available information about a foreign company than
about a U.S. company. Further, there is generally less governmental supervision
and regulation of foreign stock exchanges, brokers and listed companies than in
the U.S. Brokers in some countries may not be as well capitalized as those in
the U.S., so that they may be more susceptible to financial failure in times of
market, political, or economic stress, exposing the Fund to a risk of loss.
Further, the Fund may encounter difficulties or be unable to pursue legal
remedies and obtain judgments in foreign courts.
Economic and Political Risks
The economies of individual foreign countries in which the Fund invests may
differ favorably or unfavorably from the U.S. economy in such respects as growth
of gross domestic product, rate of inflation, capital reinvestment, resource
self sufficiency and balance of payments position. Further, the economies of
developing countries generally are heavily dependent upon international trade
and, accordingly, have been and may continue to be adversely affected by trade
barriers, managed adjustments in relative currency values and other
protectionist measures imposed or negotiated by the countries with which they
trade. These economies also have been and may continue to be adversely affected
by economic conditions in the countries with which they trade. The export-driven
nature of Asian economies is often dependent on the strength of their trading
partners in the United States and Europe, although growing intra-regional trade
may mitigate some of this external dependence.
With respect to any foreign country, there is the possibility of
nationalization, expropriation or confiscatory taxation, political changes,
government regulation, social instability or diplomatic developments (including
war) which could affect adversely the economies of such countries or the Fund's
investments in those countries. In addition, it may be more difficult to obtain
a judgement in a court outside of the United States.
Inflation
Many countries have experienced substantial, and in some periods extremely
high and volatile, rates of inflation. Inflation and rapid fluctuations in
inflation rates have had and may continue to have very negative effects on the
economies and securities markets of these countries and emerging market
countries in particular. In an attempt to control inflation, wage and price
controls have been imposed at times in certain countries.
INVESTMENT RESTRICTIONS
The Fund's investment program is subject to a number of investment
restrictions which reflect self-imposed standards as well as federal and state
regulatory limitations. These restrictions are designed to minimize certain
risks associated with investing in certain types of securities or engaging in
certain transactions. The most significant of these restrictions provide that:
(1) The Fund will not borrow money, except that (a) the Fund may enter into
certain futures contracts and options related thereto; (b) the Fund may
enter into commitments to purchase securities in accordance with the
Fund's investment program, including delayed delivery and when-issued
securities and reverse repurchase agreements; (c) for temporary
emergency purposes, the Fund may borrow money in amounts not exceeding
5% of
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<PAGE>
the value of its total assets at the time when the loan is made; (d) The
Fund may pledge its portfolio securities or receivables or transfer or
assign or otherwise encumber them in an amount not exceeding one-third
of the value of its total assets; and (e) for purposes of leveraging,
the Fund may borrow money from banks (including its custodian bank),
only if, immediately after such borrowing, the value of the Fund's
assets, including the amount borrowed, less its liabilities, is equal to
at least 300% of the amount borrowed, plus all outstanding borrowings.
If at any time, the value of the Fund's assets fails to meet the 300%
asset coverage requirement relative only to leveraging, the Fund will,
within three days (not including Sundays and holidays), reduce its
borrowings to the extent necessary to meet the 300% test. The Fund only
will invest up to 5% of its total assets in reverse repurchase
agreements.
(2) The Fund will not make loans, except that, to the extent appropriate
under its investment program, the Fund may (a) purchase bonds,
debentures or other debt securities, including short-term obligations,
(b) enter into repurchase transactions and (c) lend portfolio securities
provided that the value of such loaned securities does not exceed
one-third of the Fund's total assets.
(3) The Fund will not concentrate its investments in any one industry,
except that the Fund may invest up to 25% of its total assets in
securities issued by companies principally engaged in any one industry.
The Fund considers foreign government securities and supra national
organizations to be industries. This limitation, however, will not apply
to securities issued or guaranteed by the U.S. Government, its agencies
and instrumentalities.
(4) The Fund will not purchase securities of an issuer, if (a) more than 5%
of the Fund's total assets taken at market value would at the time be
invested in the securities of such issuer, except that such restriction
shall not apply to securities issued or guaranteed by the United States
government or its agencies or instrumentalities or, with respect to 25%
of the Fund's total assets, to securities issued or guaranteed by the
government of any country other than the United States which is a member
of the Organization for Economic Cooperation and Development ("OECD").
The member countries of OECD are at present: Australia, Austria,
Belgium, Canada, Denmark, Germany, Finland, France, Greece, Iceland,
Ireland, Italy, Japan, Luxembourg, the Netherlands, New Zealand, Norway,
Portugal, Spain, Sweden, Switzerland, Turkey, the United Kingdom and the
United States; or (b) such purchases would at the time result in more
than 10% of the outstanding voting securities of such issuer being held
by the Fund.
The forgoing investment restrictions (as well as certain others set forth in
the Statement of Additional Information) are matters of fundamental policy which
may not be changed without the affirmative vote of the majority of the
shareholders of the Fund.
The investment policies described below are non-fundamental, therefore,
changes to such policies may be made in the future by the Board of Directors
without the approval of the shareholders of the Fund:
(1) The Fund may purchase and sell futures contracts and related options
under the following conditions: (a) the then current aggregate futures
market prices of financial instruments required to be delivered and
purchased under open futures contracts shall not exceed 30% of the
Fund's total assets, at market value; and (b) no more than 5% of the
assets, at market value at the time of entering into a contract, shall
be committed to margin deposits in relation to futures contracts.
(2) The Fund will not invest more than 15% of its total assets in illiquid
securities. Illiquid securities are securities that are not readily
marketable or cannot be disposed of promptly within seven days and in
the usual course of business without taking a materially reduced price.
Such securities include, but are not limited to, time deposits and
repurchase agreements with maturities longer than 7 days. Securities
that may be resold under Rule 144A or securities offered pursuant to
Section 4(2) of the Securities Act of 1933, as amended, shall not be
deemed illiquid solely by reason of being unregistered. The Investment
Adviser or Sub-Adviser shall determine whether
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a particular security is deemed to be liquid based on the trading
markets for the specific security and other factors.
The Statement Information contains a complete description of the Fund's
restrictions and any additional information on policies relating to the
investment of its assets and its activities.
MANAGEMENT OF THE FUND
The Fund has a Board of Directors which establishes the Fund's policies and
supervises and reviews the operations and management of the Fund. There are
currently nine directors (of whom six are non-interested persons as defined
under the Investment Company Act of 1940) who meet five times each year. The
Statement of Additional Information contains more data regarding the Directors
and Officers of the Fund.
PORTFOLIO MANAGERS
The Fund is managed by a portfolio management team. The lead managers are
Christina Lam and Nigel Webber of Crosby Asset Management (US) Inc.
Nigel Webber is Vice President and Portfolio Manager of the Fund. Mr. Webber
is responsible for the Fund's overall investment strategy. Mr. Webber was
appointed a Managing Director of Crosby Asset Management in October 1993 with
primary responsibility for business development. He joined Crosby Asset
Management after being a partner in Causeway Capital Limited, a leading
independent U.K. investment management firm specializing in private equity
investment and smaller listed companies.
He started his career at KPMG Peat Marwick, followed by five years at
Citicorp International Bank Limited in London and New York and three years with
Mercantile House Holdings PLC a leading financial services group. In 1987, he
joined as Managing Director, an investment company specializing in the financial
sector where he first became associated with the Crosby Group. He was a Director
and member of the investment committee of The Thai Development Capital Fund
Limited and The China Investment Company Ltd., two funds managed by Crosby Asset
Management from their launch until September 1993.
Christina Lam is Vice President and Portfolio Manager of the Fund. Ms. Lam
joined Crosby Asset Management in 1991. She is responsible for the investment
management of the listed equity portfolios under the management of Crosby Asset
Management which include a major Asian small capitalization account.
After graduating with a Law Degree with Honors from Warwick University, she
qualified as a Barrister from Lincoln's Inn in London. She moved to Hong Kong in
1987 where she joined Schroder Securities Limited in Hong Kong as an investment
analyst, where her coverage included the utilities, industrials and retail
sectors and conglomerates.
INVESTMENT ADVISER, SUB-ADVISER, DISTRIBUTOR AND ADMINISTRATOR
The Fund has entered into an investment advisory contract with Lexington
Management Corporation (LMC), P.O. Box 1515/Park 80 West Plaza Two, Saddle
Brook, New Jersey 07663. LMC provides investment advice and in general conducts
the management and investment program of the Fund under the supervision and
control of the Directors of the Fund. LMC has entered into a sub-advisory
contract with Crosby Asset Management (US) Inc. ("Crosby"), 25/F Inchcape
Insurance Tower, 3 Lockhart Road, Wan Chai, Hong Kong, under which Crosby will
provide the Fund with investment advice and management of the Fund's investment
program.
Lexington Funds Distributor, Inc. ("LFD"), a registered broker dealer, is
the Fund's distributor.
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LMC, established in 1938, currently manages over $3.0 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.
LMC also acts as administrator to the Fund and performs certain
administrative and 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 reimburses 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. and
their spouses, trusts and other related entities have a majority voting control
of outstanding shares of Lexington Global Asset Managers, Inc. common stock.
Crosby Asset Management (US) Inc. was established on October 4, 1990 in the
British Virgin Islands. Crosby manages assets and provides investment advice for
investment company and institutional private accounts around the world including
the United States. It is a subsidiary of the Crosby group.
The Crosby group was founded in 1984 and is a leading independent merchant
bank in Asia, providing services including investment management, research and
stockbrokerage and corporate finance. The Crosby group is headquartered in Hong
Kong with 18 offices located in 11 countries throughout the region, and in
London and New York.
The Crosby group employs over 500 people worldwide, over 400 of whom are
resident in the Asia region. Research is undertaken by over 65 professionals the
majority of whom are nationals of the countries in which they are located. The
Crosby group provides services to its international investment clients from
offices in New York and London, as well as its Asian locations. The Crosby group
conducts regular business with over 300 institutions worldwide and had a
transaction volume in excess of US $12 billion in the 12 months to March 31,
1995. Crosby Securities was one of the first international securities firm to
have research offices in all of the major stockmarkets in the region (namely
Thailand, Malaysia, Singapore, Indonesia and Hong Kong) and also to establish an
office in China where it has seats on the Shanghai and Shenzhen Stock Exchanges.
LMC, as owner of the registered service mark "Lexington," will sublicense to
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
affiliate as investment advisor or distributor. Crosby Asset Management (US)
Inc. has authorized the Fund to include the word "Crosby" as part of its
corporate name subject to revocation by Crosby in the event the Fund ceases to
engage Crosby as sub-adviser. In that event the Fund will be required upon the
demand of LMC or Crosby to change its name to delete the word "Lexington" or
"Crosby" therefrom.
As compensation for its services, the Fund pays LMC a monthly management fee
at the annual rate of 1.25% of the average daily net assets. This fee is higher
than that paid by most other investment companies. However, it is not
necessarily greater than the management fee of other investment companies with
objectives and policies similar to this Fund. LMC will pay Crosby an annual
sub-advisory fee of 0.625% of the Fund's average daily net assets. The
sub-advisory fee will be paid by LMC, not the Fund. For the year ended December
31, 1995, the Fund paid LMC $35,576 and LMC reimbursed the Fund $50,163 in
expense reimbursement. See "Investment Adviser and Distributor" in the Statement
of Additional Information.
HOW TO PURCHASE SHARES
Initial Investments: Minimum $1,000. By Wire: (1) Telephone the Fund at the
applicable toll free telephone number on the front cover and provide the account
registration, address, and social security or tax identification number, the
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amount being wired, the name of the wiring bank, and the name and telephone
number of the person to be contacted in connection with the order. You will then
be provided with an account number. (2) Instruct your bank to wire the specified
amount, along with the account number and registration to State Street Bank and
Trust Company ("Agent") Attn: Mutual Funds Depart., (re: Lexington Crosby Small
Cap Asia Growth Fund, Account No. 99043713. (3) A completed New Account
Application must then be forwarded to the Fund at the address on the
Application.
By Mail: Send a check payable to Lexington Crosby Small Cap Asia Growth Fund,
Inc. along with a completed New Account Application, to the Agent at the address
on the Application.
Subsequent Investments - By Wire: Instruct your bank to wire the specified
amount and appropriate information to State Street Bank and Trust Company (see
"Initial Investments - By Wire"-(2), above).
By Mail - Minimum $50: Send a check payable to Lexington Crosby Small Cap Asia
Growth Fund, Inc. to the Agent (see back cover of this prospectus for address),
accompanied by either (a) the detachable form which accompanies the Agent's
confirmation of a prior transaction, or (b) a letter indicating the dollar
amount of the shares to be purchased and identifying the Fund, the account
number and registration.
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. 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.
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. Banks and other
financial institutions may be required to register as dealers pursuant to state
law. Broker-dealers and financial institutions who process such orders for their
customers may charge a fee for these services. The fee may be avoided by
purchasing shares directly from the Fund.
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.
Purchase Price: The purchase price will be the net asset value per share of the
Fund next determined after receipt by the Agent of a completed New Account
Application in proper form.
Determination of Net Asset Value: The net asset value of the shares of the Fund
is determined as of the close of trading on each day the New York Stock Exchange
is open, by dividing the value of the Fund's securities plus any cash and other
assets (including accrued dividends and interest) less all liabilities
(including accrued expenses) by the number of shares outstanding, the result
being adjusted to the nearest whole cent. A security listed or traded on a
recognized stock exchange is valued at its last sale price prior to the time
when assets are valued on the principal exchange on which the security is
traded. If no sale is reported at that time, the mean between the current bid
and asked price will be 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 between the bid and asked prices
is used. Short-term securities
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<PAGE>
having maturity of 60 days or less are valued at cost when it is determined by
the Fund's Board of Directors that amortized cost reflects the fair value of
such securities. Securities for which market quotations are not readily
available and other assets shall be valued by Fund management in good faith
under the direction of the Fund's Board of Directors.
Generally, trading in foreign securities markets is substantially completed
each day at various times prior to the close of the New York Stock Exchange. The
values of foreign securities used in computing the net asset value of the shares
of the Fund are determined as of the earlier of such market close or the closing
time of the New York Stock Exchange (the "Exchange"). Foreign currency exchange
rates are also generally determined prior to the close of the Exchange.
Occasionally, events affecting the value of such securities and such exchange
rates may occur between the times at which they are determined and the close of
the Exchange, which will not be reflected in the computation of net asset value.
If during such periods, events occur which materially affect the value of such
securities, the securities will be valued at their fair market value as
determined by LMC and approved in good faith by the Board of Directors.
For purposes of determining the net asset value per share of the Fund all
assets and liabilities initially expressed in foreign currencies will be
converted into United States dollars at the mean between the bid and offer
prices of such currencies against United States dollars quoted by any major
bank.
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.
Shareholder Servicing Agents: The Fund may enter into Shareholder Servicing
Agreements with one or more Shareholder Servicing Agents. The Shareholder
Servicing Agent may, as agent for its customers, among other things: answer
customer inquiries regarding account status, account history and purchase and
redemption procedures; assist shareholders in designating and changing dividend
options, account designations and addresses; provide necessary personnel and
facilities to establish and maintain shareholder accounts and records; assist in
processing purchase and redemption transactions; arrange for the wiring of
funds; transmit and receive funds in connection with customer orders to purchase
or redeem shares; verify and guarantee shareholder signatures in connection with
redemption orders and transfers and changes in shareholder-designated accounts;
furnish monthly and year-end statements and confirmations of purchases and
redemptions; transmit, on behalf of the Fund, proxy statements, annual reports,
updated prospectuses and other communications to shareholders of the Fund;
receive, tabulate and transmit to the Fund proxies executed by shareholders with
respect to meetings of shareholders of the Fund; and provide such other related
services as the Fund or a shareholder may request. For these services, each
Shareholder Servicing Agent receives fees, which may be paid periodically,
provided that such fees will not exceed, on an annual basis, 0.25% of the
average daily net assets of the Fund represented by shares owned during the
period for which payment is made. LMC, at no additional cost to the Fund may pay
to Shareholder Servicing Agents additional amounts from its past profits. Each
Shareholder Servicing Agent may, from time to time, voluntarily waive all or a
portion of the fees payable to it.
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.
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HOW TO REDEEM SHARES
By Mail: Send to the Agent: (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 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 received by the
Agent.
Checks for redemption proceeds will normally be mailed within three business
days. However, the Fund will only mail redemption checks upon clearance of the
purchase payment.
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. A notary
public is not an acceptable guarantor.
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 involuntarily redeem all shares in an account with a value of less than
$500 (except retirement plan accounts) for reasons other than market
fluctuations 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 accounts 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 to withdraw 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.
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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, next determined 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)/Seeks
long-term growth of capital/primarily through investment in equity securities of
companies domiciled in, or doing business in, emerging countries.
LEXINGTON GLOBAL FUND, INC. (NASDAQ Symbol: LXGLX)/Seeks long-term growth of
capital primarily through investment in common stocks of companies domiciled in
foreign countries and the United States and emerging markets.
LEXINGTON INTERNATIONAL FUND, INC. (NASDAQ Symbol: LEXIX)/Seeks long-term growth
of capital through investment in common stocks and equivalents of companies
domiciled in foreign countries. Share of the Fund are not presently available
for sale in Missouri and Vermont.
LEXINGTON CROSBY SMALL CAP ASIA GROWTH FUND, INC. /Seeks long-term capital
appreciation through investment in companies domiciled in the Asia Region with a
market capitalization of less than $1 billion.
LEXINGTON TROIKA DIALOG RUSSIA FUND, INC./Seeks long-term capital appreciation
through investment primarily in the equity securities of Russian companies. The
Fund is expected to be available in June, 1996 and has a $5,000 minimum
investment.
LEXINGTON RAMIREZ GLOBAL INCOME FUND (NASDAQ Symbol: LEBDX)/Seeks high current
income by investing in a combination of foreign and domestic high-yield, lower
rated debt securities. Capital appreciation is a secondary objective.
LEXINGTON CORPORATE LEADERS TRUST FUND (NASDAQ Symbol: LEXCX)/Seeks long-term
capital growth and income through investment in an equal number of shares of the
common stocks of a fixed list of American blue chip corporations.
LEXINGTON GROWTH AND INCOME FUND, INC. (NASDAQ Symbol: LEXRX)/Seeks long-term
capital appreciation through investments in stocks of large, ably managed and
well financed companies. Income is a secondary objective.
LEXINGTON SMALLCAP VALUE FUND, INC./Seeks long-term capital appreciation through
investment in common stocks and equivalents primarily of companies domiciled in
the United States with a marked capitalization of less than $1 billion.
LEXINGTON GOLDFUND, INC. (NASDAQ Symbol: LEXMX)/Seeks capital appreciation and
such hedge against loss of buying power as may be obtained through investment in
gold bullion and equity securities of companies engaged in mining or processing
gold throughout the world.
LEXINGTON CONVERTIBLE SECURITIES FUND (NASDAQ Symbol: CNCVX)/Seeks total return
by providing capital appreciation, current income and conservation of capital
through investments in a diversified portfolio of securities convertible into
shares of common stock. Shares are not presently available for sale in Vermont.
LEXINGTON GNMA INCOME FUND, INC. (NASDAQ Symbol: LEXNX)/Seeks a high level of
current income, consistent with liquidity and safety of principal, through
investment primarily in mortgage-backed GNMA Certificates.
LEXINGTON MONEY MARKET TRUST (NASDAQ Symbol: LMMXX)/Seeks a high level of
current income consistent with preservation of capital and liquidity through
investments in interest bearing short term money market instruments.
LEXINGTON TAX FREE MONEY FUND, INC. (NASDAQ Symbol: LTFXX)/Seeks current income
exempt from Federal income taxes while maintaining liquidity and stability of
principal through investment in short term municipal securities.
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
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<PAGE>
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 mutual 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 telephone exchange must have the same registration and dividend 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, with full power
of substitution in the premises, authorizes and directs LFD to act upon any
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 imposters 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 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 prospectuses
of the other funds may be obtained from LFD.
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.
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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. (See "Tax Sheltered Retirement Plans"
in the Statement of Additional Information.)
PERFORMANCE CALCULATION
The Fund will calculate performance on a total return basis for various
periods. The total return basis combines changes in principal and dividends for
the periods shown. Principal changes are based on the difference between the
beginning and closing net asset value for the period and assumes reinvestment of
dividends paid by the Fund. Dividends are comprised of net investment income and
net realized capital gains, respectively.
Performance will vary from time to time and past results are not necessarily
representative of future results. A shareholder should remember that performance
is a function of portfolio management in selecting the type and quality of
portfolio securities and is affected by operating expenses.
Comparative performance information may be used from time to time in
advertising or marketing of the Fund's shares, including data from Lipper
Analytical Services, Inc. or major market indices such as the Dow Jones
Industrial Average Index, Standard & Poor's 500 Composite Stock Price Index and
Morgan Stanley Capital International World Index. Such comparative performance
information will be stated in the same terms in which the comparative data and
indices are stated. Further information about the Fund's performance is
contained in the annual report, which may be obtained without charge.
DIVIDEND, DISTRIBUTION AND REINVESTMENT POLICY
The Fund intends to declare or distribute a dividend from its net investment
income and/or net capital gain income to shareholders annually or more
frequently if necessary in order to comply with distribution requirements of the
Code to avoid the imposition of regular Federal income tax, and if applicable, a
4% excise tax.
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 that he
wants to receive his 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").
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 (which includes
certain foreign currency gains and losses) 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) may qualify for the 70%
dividends-received deduction for corporate shareholders.
17
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Because the Fund's investment income will include almost entirely dividends from
foreign corporations and the Fund may have interest income and short-term
capital gains, substantially all of the ordinary income dividends paid by the
Fund should not 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.
A portion of the income earned by the Fund may be subject to foreign
withholding taxes. The economic effect of such withholding taxes upon the return
earned by the Fund cannot be predicted. Under certain circumstances, the Fund
may elect to "pass-through" to its shareholders the income or other taxes paid
by the Fund to foreign governments during a year. Each shareholder will be
required to include his pro rata portion of these foreign taxes in his gross
income, but will be able to deduct or (subject to various limitations) claim a
foreign tax credit for such amount.
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 year, including any amount of foreign taxes "passed-through", will be
sent to shareholders promptly after the end of each year.
Investors should be careful to consider the tax implications of purchasing
shares just prior to the record date of any ordinary income dividend or capital
gain dividend. Those investors purchasing shares just prior to an ordinary
income or capital gain dividend 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.
A shareholder will recognize gain or loss upon the 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.
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 ordinary income dividends,
capital gain dividends 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) or 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 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.
ORGANIZATION AND DESCRIPTION OF COMMON STOCK
The Company is an open-end, diversified management investment company
organized as a corporation under the laws of the State of Maryland on April 19,
1995, and has authorized capital of 1,000,000,000 shares of common stock, par
value $.001 of which 500,000,000 have been designated the Lexington Crosby Small
Cap Asia Growth Fund Series. Each share of common stock has one vote and shares
equally with other shares of the same series in dividends and
18
<PAGE>
distributions when and if declared by the Company and in the Company's net
assets belonging to such series upon liquidation. All shares, when issued, are
fully paid and non-assessable. There are no preemptive, conversion or exchange
rights. Fund shares do not have cumulative voting rights and, as such, holders
of at least 50% of the shares voting for Directors can elect all Directors and
the remaining shareholders would not be able to elect any Directors.
The Company will not normally hold annual shareholder meetings except as
required by Maryland General Corporation Law or the Investment Company Act of
1940. However, meetings of shareholders may be called at any time by the
Secretary upon the written request of shareholders holding in the aggregate not
less than 25% of the outstanding shares, such request specifying the purposes
for which such meeting is to be called. In addition, the Directors will promptly
call a meeting of shareholders for the purpose of voting upon the question of
removal of any Director when requested to do so in writing by the recordholders
of not less than 10% of the Fund's outstanding shares. The Fund will assist
shareholders in any such communication between shareholders and Directors.
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 custodian for the Fund's portfolio securities
including those to be held by foreign banks and foreign securities depositories
that 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, has been
retained to act as 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, Nessen, Kamin & 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 period ending December 31, 1996.
OTHER INFORMATION
This prospectus omits certain information contained in the registration
statement filed with the SEC. Copies of the registration statement, including
items omitted herein, may be obtained from the SEC by paying the charges
prescribed under its rules and regulations. The Statement of Additional
Information included in such registration statement may be obtained without
charge from the Fund.
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.
Additional portfolios may be created from time to time with investment
objectives and policies different from those of the Fund. In addition, the
Directors may, subject to any necessary regulatory approvals, create more than
one class of shares in the Fund, with the classes being subject to different
charges and expenses and having such other different rights as the Directors may
prescribe.
No person has been authorized to give any information or to make any
representation other than those contained in this Prospectus, and information or
representations not herein contained, if given or made, must not be relied upon
as having been authorized by the Fund . This Prospectus does not constitute an
offer or solicitation in any jurisdiction in which such offering may not
lawfully be made.
19
<PAGE>
Right Col.
-----------------------------------------
L E X I N G T O N
-----------------------------------------
-----------------------------------------
LEXINGTON
CROSBY
SMALL CAP ASIA
GROWTH FUND, INC.
(filled box)
(filled box)Asian Growth
Companies
(filled box)Free telephone
exchange privilege
(filled box)No sales charge
(filled box)No redemption fee
(filled box)
The Lexington Group
of No Load
Investment Companies
-----------------------------------------
P R O S P E C T U S
April 29, 1996
==============
Left Col.
Investment Adviser
- --------------------------------------------------------------------------------
LEXINGTON MANAGEMENT CORPORATION
P.O. Box 1515/Park 80 West Plaza Two
Saddle Brook, N.J. 07663
Sub-Adviser
- --------------------------------------------------------------------------------
CROSBY ASSET MANAGEMENT (US) INC.
c/o Crosby Asset Management (Hong Kong) Limited
25/F Inchcape Insurance Tower
3 Lockhart Road
Wan Chai, Hong Kong
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: 1-800-526-0052
Table of Contents Page
- --------------------------------------------------------------------------------
Fee Table ................................................................. 2
Financial Highlights ...................................................... 2
Investment Objective and Policies ......................................... 3
Risk Considerations ....................................................... 6
Investment Restrictions ................................................... 8
Management of the Fund .................................................... 10
Portfolio Managers ........................................................ 10
Investment Adviser, Sub-Adviser, Distributor
and Administrator ....................................................... 10
How to Purchase Shares .................................................... 12
How to Redeem Shares ...................................................... 14
Shareholder Services ...................................................... 14
Exchange Privilege ........................................................ 15
Tax-Sheltered Retirement Plans ............................................ 17
Performance Calculation ................................................... 17
Dividend, Distribution and Reinvestment Policy ............................ 17
Tax Matters ............................................................... 17
Organization and Description of Common Stock .............................. 18
Custodian, Transfer Agent and Dividend Disbursing Agent ................... 19
Counsel and Independent Auditors .......................................... 19
Other Information ......................................................... 19
<PAGE>
LEXINGTON CROSBY SMALL CAP ASIA GROWTH FUND, INC.
STATEMENT OF ADDITIONAL INFORMATION
APRIL 29, 1996
This Statement of Additional Information, which is not a prospectus, should
be read in conjunction with the current prospectus of Lexington Crosby Small Cap
Asia Growth Fund (the "Fund"), dated April 29, 1996, and 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 Information:-1-800-526-0056
Institutional/Financial Adviser Services:-1-800-367-9160
24 Hour Account Information:-1-800-526-0052
Lexington Management Corporation ("LMC") is the Fund's investment adviser.
Crosby Asset Management (US) Inc. ("Crosby") is the Fund's sub-adviser.
Lexington Funds Distributor, Inc. is the Fund's distributor.
TABLE OF CONTENTS
Page
Investment Objective and Policies ......................................... 2
Risk Considerations ....................................................... 3
Management of the Fund .................................................... 5
Investment Restrictions ................................................... 7
Investment Adviser, Sub-Adviser, Distributor and Administrator ............ 9
Portfolio Transactions and Brokerage Commissions .......................... 10
Determination of Net Asset Value .......................................... 11
Telephone Exchange Provisions ............................................. 11
Tax-Sheltered Retirement Plans ............................................ 12
Tax Matters ............................................................... 12
Performance Calculation ................................................... 17
Shareholder Reports ....................................................... 18
Financial Statements ...................................................... 19
1
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INVESTMENT OBJECTIVE AND POLICIES
For a full description of the Fund's investment objective and policies, see
the Prospectus under "Investment Objective and Policies".
CERTAIN INVESTMENT METHODS
Settlement Transactions- When the Fund enters into contracts for purchase or
sale of a portfolio security denominated in a foreign currency, it may be
required to settle a purchase transaction in the relevant foreign currency or
receive the proceeds of a sale in that currency. In either event, the Fund will
be obligated to acquire or dispose of such foreign currency as is represented by
the transaction by selling or buying an equivalent amount of United States
dollars. Furthermore, the Fund may wish to "lock in" the United States dollar
value of the transaction at or near the time of a purchase or sale of portfolio
securities at the exchange rate or rates then prevailing between the United
States dollar and the currency in which the foreign security is denominated.
Therefore, the Fund may, for a fixed amount of United States dollars, enter into
a forward foreign exchange contract for the purchase or sale of the amount of
foreign currency involved in the underlying securities transaction. In so doing,
the Fund will attempt to insulate itself against possible losses and gains
resulting from a change in the relationship between the United States dollar and
the foreign currency during the period between the date a security is purchased
or sold and the date on which payment is made or received. This process is known
as "transaction hedging".
To effect the translation of the amount of foreign currencies involved in
the purchase and sale of foreign securities and to effect the "transaction
hedging" described above, the Fund may purchase or sell foreign currencies on a
"spot" (i.e. cash) basis or on a forward basis whereby the Fund purchases or
sells a specific amount of foreign currency, at a price set at the time of the
contract, for receipt of delivery at a specified date which may be any fixed
number of days in the future.
Such spot and forward foreign exchange transactions may also be utilized to
reduce the risk inherent in fluctuations in the exchange rate between the United
States dollar and the relevant foreign dollar and the relevant foreign currency
when foreign securities are purchased or sold for settlement beyond customary
settlement time (as described below). Neither type of foreign currency
transaction will eliminate fluctuations in the prices of the Fund's portfolio or
securities or prevent loss if the price of such securities should decline.
Portfolio Hedging- Some or all of the Fund's portfolio will be denominated in
foreign currencies. As a result, in addition to the risk of change in the market
value of portfolio securities, the value of the portfolio in United States
dollars is subject to fluctuations in the exchange rate between such foreign
currencies and the United States dollar. When, in the opinion of LMC or Crosby
it is desirable to limit or reduce exposure in a foreign currency in order to
moderate potential changes in the United States dollar value of the portfolio,
the Fund may enter into a forward foreign currency exchange contract by which
the United States dollar value of the underlying foreign portfolio securities
can be approximately matched by an equivalent United States dollar liability.
This technique is known as "portfolio hedging" and moderates or reduces the risk
of change in the United States dollar value of the Fund's portfolio only during
the period before the maturity of the forward contract (which will not be in
excess of one year). The Fund, for hedging purposes only, may also enter into
forward foreign currency exchange contracts to increase its exposure to a
foreign currency that the Fund's investment adviser or sub-adviser expects to
increase in value relative to the United States dollar. The Fund will not
attempt to hedge all of its foreign portfolio positions and will enter into such
transactions only to the extent, if any deemed appropriate by the investment
adviser or sub-adviser. Hedging against a decline in the value of currency does
not eliminate fluctuations in the prices of portfolio securities or prevent
losses if the prices of such securities decline. The Fund will not enter into
forward foreign currency exchange transactions for speculative purposes. The
Fund intends to limit transactions as described in this paragraph to not more
than 70% of the total Fund assets.
Forward Commitments-The Fund may make contracts to purchase securities for a
fixed price at a future date beyond customary settlement time ("forward
commitments") because new issues of securities are typically offered to
investors, such as the Fund, on that basis. Forward commitments involve a risk
of loss if the value of the security to be purchased declines prior to the
settlement date. This risk is in addition to the risk of decline in value of the
Fund's other assets. Although the Fund will enter into such contracts with the
intention of acquiring the securities, the Fund may dispose of a commitment
prior to settlement if the investment adviser deems it appropriate to do so. The
Fund may realize short-term profits or losses upon the sale of forward
commitments.
Covered Call Options-Call options may also be used as a means of participating
in an anticipated price increase of a security on a more limited basis than
would be possible if the security itself were purchased. The Fund may write only
covered call options. Since it can be expected that a call option will be
exercised if the market value of the underlying security increases to a level
greater than the exercise price, this strategy will generally be used when the
investment adviser believes that the call premium received by the Fund plus
anticipated appreciation in the price of the underlying
2
<PAGE>
security, up to the exercise price of the call, will be greater than the
appreciation in the price of the security. The Fund intends to limit
transactions as described in this paragraph to less than 5% of total Fund
assets. The Fund will not purchase put and call options written by others. Also,
the Fund will not write any put options. The Fund will cause its custodian to
segregate cash, U.S. Government Securities or other high grade liquid debt
obligations having a value sufficient to meet the Fund's obligations under the
call options.
Repurchase Agreements-A repurchase agreement is a contract under which the Fund
would acquire a security for a relatively short period (usually not more than 7
days) subject to the obligations of the seller to repurchase and the Fund to
resell such security at a fixed time and price (representing the Fund's cost
plus interest). Although the Fund may enter into repurchase agreements with
respect to any portfolio securities which it may acquire consistent with its
investment policies and restrictions, it is the Fund's present intention to
enter into repurchase agreements only with respect to obligations of the United
States government or its agencies or instrumentalities to meet anticipated
redemptions or pending investments or reinvestment of Fund assets in portfolio
securities. The Fund will enter into repurchase agreements only with member
banks of the Federal Reserve System and with "primary dealers" in United States
government securities. In addition if bankruptcy proceedings are commenced with
respect to the seller, be subject to risks associated with changes in market
value of the collateral securities. The Fund intends to limit repurchase
agreements to institutions believed by LMC or Crosby to present minimal credit
risk. The Fund will not enter into repurchase agreements maturing in more than
seven days if the aggregate of such repurchase agreements and all other illiquid
securities when taken together would exceed 15% of the total assets of the Fund.
Except as otherwise specifically noted, the Fund's investment objective and
its investment restrictions are fundamental and may not be changed without the
approval of a majority of the outstanding voting securities of the Fund.
RISK CONSIDERATIONS
Investors should recognize that investing in securities of foreign companies
and in particular securities of companies domiciled in or doing business in
emerging markets and emerging countries involves certain risk considerations,
including those set forth below, which are not typically associated with
investing in securities of U.S. companies.
Foreign Currency Considerations
The Fund's assets will be invested in securities of foreign companies and
substantially all income will be received by the Fund in foreign currencies.
However, the Fund will compute and distribute its income in dollars, and the
computation of income will be made on the date of its receipt by the Fund at the
foreign exchange rate in effect on that date. Therefore, if the value of the
foreign currencies in which the Fund receives its income falls relative to the
dollar between receipt of the income and the making of Fund distributions, the
Fund will be required to liquidate securities in order to make distributions if
the Fund has insufficient cash in dollars to meet distribution requirements.
The value of the assets of the Fund as measured in dollars also may be
affected favorably or unfavorably by fluctuations in currency rates and exchange
control regulations. Further, the Fund may incur costs in connection with
conversions between various currencies. Foreign exchange dealers realize a
profit based on the difference between the prices at which they are buying and
selling various currencies. Thus, a dealer normally will offer to sell a foreign
currency to the Fund at one rate, while offering a lesser rate of exchange
should the Fund desire immediately to resell that currency to the dealer. The
Fund will conduct its foreign currency exchange transactions either on a spot
(i.e., cash) basis at the spot rate prevailing in the foreign currency exchange
market, or through entering into forward or futures contracts to purchase or
sell foreign currencies.
Risks Associated With Hedging Transactions
Hedging transactions have special risks associated with them, including
possible default by the Counterparty to the transaction, illiquidity and, to the
extent the Adviser's view as to certain market movements is incorrect, the risk
that the use of a hedging transaction could result in losses greater than if it
had not been used. Use of call options could result in losses to the Fund, force
the sale or purchase of portfolio securities at inopportune times or for prices
lower than current market values, or cause the Fund to hold a security it might
otherwise sell.
Currency hedging involves some of the same risks and considerations as other
transactions with similar instruments. Currency transactions can result in
losses to the Fund if the currency being hedged fluctuates in value to a degree
or in a direction that is not anticipated. Further, the risk exists that the
perceived linkage between various currencies may not be present or may not be
present during the particular time that the Fund is engaging in portfolio
hedging. Currency transactions are also subject to risks different from those of
other portfolio transactions. Because currency control is of great importance to
the issuing governments and influences economic planning and policy, purchases
and sales of currency and related instruments can be adversely affected by
government exchange controls,
3
<PAGE>
limitations or restrictions on repatriation of currency, and manipulations or
exchange restrictions imposed by governments. These forms of governmental
actions can result in losses to the Fund if it is unable to deliver or receive
currency or monies in settlement of obligations and could also cause hedges it
has entered into to be rendered useless, resulting in full currency exposure as
well as incurring transaction costs.
Losses resulting from the use of hedging transactions will reduce the Fund's
net asset value, and possibly income, and the losses can be greater than if
hedging transactions had not been used.
Risks of Hedging Transactions Outside the United States
When conducted outside the U.S., hedging transactions may not be regulated
as rigorously as in the U.S., may not involve a clearing mechanism and related
guarantees, and will be subject to the risk of government actions affecting
trading in, or the price of, foreign securities, currencies and other
instruments. The value of positions taken as part of non-U.S. hedging
transactions also could be adversely affected by: (1) other complex foreign
political, legal and economic factors, (2) lesser availability of data on which
to make trading decisions than in the U.S., (3) delays in the Fund's ability to
act upon economic events occurring in foreign markets during non-business hours
in the U.S., (4) the imposition of different exercise and settlement terms and
procedures and margin requirements than in the U.S. and (5) lower trading volume
and liquidity.
Investment and Repatriation Restrictions
Some foreign countries may have laws and regulations which currently
preclude direct foreign investment in the securities of their companies.
However, indirect foreign investment in the securities of companies listed and
traded on the stock exchanges in these countries is permitted by certain foreign
countries through investment funds which have been specifically authorized. The
Fund may invest in these investment funds subject to the provisions of the 1940
Act as discussed below under "Investment Restrictions". If the Fund invests in
such investment funds, the Fund's shareholders will bear not only their
proportionate share of the expenses of the Fund (including operating expenses
and the fees of the Investment Manager), but also will bear indirectly similar
expenses of the underlying investment funds.
In addition to the foregoing investment restrictions, prior governmental
approval for foreign investments may be required under certain circumstances in
some foreign countries, while the extent of foreign investment in domestic
companies may be subject to limitation in other foreign countries. Foreign
ownership limitations also may be imposed by the charters of individual
companies in foreign countries to prevent, among other concerns, violation of
foreign investment limitations.
Repatriation of investment income, capital and the proceeds of sales by
foreign investors may require governmental registration and/or approval in some
foreign countries. The Fund could be adversely affected by delays in or a
refusal to grant any required governmental approval for such repatriation.
Foreign Securities Markets
Trading volume on foreign country stock exchanges is substantially less than
that on the New York Stock Exchange. Further, securities of some foreign
companies are less liquid and more volatile than securities of comparable U.S.
companies. Similarly, volume and liquidity in most foreign bond markets is
substantially less than in the U.S. and, consequently, volatility of price can
be greater than in the U.S. Fixed commissions on foreign exchanges are generally
higher than negotiated commissions on U.S. exchanges, although the Fund
endeavors to achieve the most favorable net results on its portfolio
transactions and may be able to purchase the securities in which the Fund may
invest on other stock exchanges where commissions are negotiable.
Companies in foreign countries are not generally subject to uniform
accounting, auditing and financial reporting standards, practices and disclosure
requirements comparable to those applicable to U.S. companies. Consequently,
there may be less publicly available information about a foreign company than
about a U.S. company. Further, there is generally less governmental supervision
and regulation of foreign stock exchanges, brokers and listed companies than in
the U.S. Further, these Funds may encounter difficulties or be unable to pursue
legal remedies and obtain judgments in foreign courts.
Economic and Political Risks
The economies of individual foreign countries in which the Fund invests may
differ favorably or unfavorably from the U.S. economy in such respects as growth
of gross domestic product, rate of inflation, capital reinvestment, resource
self-sufficiency and balance of payments position. Further, the economies of
foreign countries generally are heavily dependent upon international trade and,
accordingly, have been and may continue to be adversely affected by trade
barriers, managed adjustments in relative currency values and other
protectionist measures imposed or negotiated by
4
<PAGE>
the countries with which they trade. These economies also have been and may
continue to be adversely affected by economic conditions in the countries with
which they trade. The export driven nature of Asian economies is often dependent
on the strength of their trading partners in the United States and Europe,
although growing intra-regional trade is seen mitigating some of this external
dependence.
With respect to any foreign country, there is the possibility of
nationalization, expropriation or confiscatory taxation, political changes,
government regulation, social instability or diplomatic developments (including
war) which could affect adversely the economies of such countries or the Fund's
investments in those countries. In addition, it may be more difficult to obtain
a judgement in a court outside of the United States.
MANAGEMENT OF THE FUND
The Directors and executive officers of the Fund and their principal
occupations are set forth below:
*+ROBERT M. DEMICHELE, President and Director. P.O. Box 1515, Saddle Brook, N.J.
07663. Chairman and Chief Executive Officer, Lexington Management
Corporation; Chairman and Chief Executive Officer, Lexington Funds
Distributor, Inc.; President and Director, Lexington Global Asset Managers,
Inc.; Director, Unione Italiana Reinsurance; Vice Chairman of the Board of
Trustees, Union College; Director, The Navigator's Group, Inc.; Chairman,
Lexington Capital Management, Inc.; Chairman, LCM Financial Services, Inc.;
Director, Vanguard Cellular Systems Inc.; Chairman of the Board, Market
System Research, Inc. and Market Systems Research Advisors, Inc. (registered
investment advisers): Trustee, Smith Richardson Foundation.
+BEVERLEY C. DUER, Director, 340 East 72nd Street, News York, N.Y. 10021.
Private Investor. Formerly, Manager of Operations Research Department-CPC
International, Inc.
*+BARBARA R. EVANS, Director, 5 Fernwood Road, Summit, N.J. 07901. Private
Investor. Prior to May, 1989, Assistant Vice President and Securities
Analyst, Lexington Management Corporation; prior to March 1987, Vice
President-Institutional Equity Sales, L.F. Rothschild, Unterberg, Towbin.
*+LAWRENCE KANTOR, Vice President and Director. P.O. Box 1515, Saddle Brook, N.J
07663. Managing Director, General Manager 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.
+DONALD B. MILLER, Director. 10725 Quail Covey Road, Boynton Beach, FL 33436.
Chairman, Horizon Media, Inc.; Trustee, Galaxy Funds; Director, Maquire
Group of Connecticut; prior to January 1989, President, Director and C.E.O.,
Media General Broadcast Services (advertising firm).
+JOHN G. PRESTON, Director. 3 Woodfield Road, Wellesley, Massachusetts 02181.
Associate Professor of Finance, Boston College, Boston, Massachusetts.
+MARGARET W. RUSSELL. Director. 55 North Mountain Avenue, Montclair, N.J. 07042.
Private Investor. Formerly, Community Affairs Director, Union Camp
Corporation.
+PHILIP C. SMITH, Director. 87 Lord's Highway, Weston, Connecticut 06883.
Private Investor; Director, Southwest Investors Income Fund, Inc.,
Government Income Fund, Inc., U.S. Trend Fund, Inc., Investors Cash Reserve
and Plimony Fund, Inc.
+FRANCIS A. SUNDERLAND, Director. 309 Quito Place, Castle Pines, Castle Rock,
Colorado 80104. Private Investor. *CHRISTINA LAM, Vice President and
Portfolio Manager. 25/F 3 Lockhart Road, Wan Chai, Hong Kong. Vice
President, Crosby Asset Management.
*NIGEL WEBBER, Vice President and Portfolio Manager. 25/F 3 Lockhart Road, Wan
Chai, Hong Kong. Managing Director, Crosby Asset Management.
*+LISA CURCIO, Vice President and Secretary. P.O. Box 1515, Saddle Brook, N.J.
07663. Senior Vice President and Secretary, Lexington Management
Corporation; Vice President and Secretary, Lexington Funds Distributor,
Inc.; Secretary, Lexington Global Asset Managers, Inc.
*+RICHARD M. HISEY, Vice President and Treasurer. P. O. Box 1515, Saddle Brook,
N.J. 07663. Managing Director, Director and Chief Financial Officer,
Lexington Management Corporation; Chief Financial Officer, Vice President
and Director, Lexington Funds Distributor, Inc.; Director, Lexington Capital
Management, Inc.; Director, LCM Financial Services, Inc.; Chief Financial
Officer, Market Systems Research Advisors, Inc.; Executive Vice President
and Chief Financial Officer, Lexington Global Asset Managers, Inc.
*+RICHARD LAVERY, CLU ChFC, Vice President. P.O. Box 1515, Saddle Brook, N.J.
07663. Senior Vice President, Lexington Management Corporation; Vice
President, Lexington Funds Distributor, Inc.
*+JANICE CARNICELLI, Vice President. P.O. Box 1515, Saddle Brook, N.J. 07663.
5
<PAGE>
*+CHRISTIE CARR, Assistant Treasurer P.O. Box 1515, Saddle Brook, N.J. 07663.
Prior to October 1992, Senior Accountant. KPMG Peat Marwick LLP.
*+SIOBHAN GILFILLAN, Assistant Treasurer. P.O. Box 1515, Saddle Brook, N.J.
07663.
*+THOMAS LUEHS, Assistant Treasurer. P.O. Box 1515, Saddle Brook, N.J. 07663.
Prior to November 1993, Supervisor of Investment Accounting, Alliance
Capital Management.
*+SHERI MOSCA, Assistant Treasurer. P.O. Box 1515, Saddle Brook, N.J. 07663.
*+ANDREW PETRUSKI, Assistant Treasurer. P.O. Box 1515, Saddle Brook, 07663.
Prior to May 1994, Supervising Senior Accountant, NY Life Securities. Prior
to December 1990, Senior Accountant Dreyfus Corporation.
*+PETER CORNIOTES, Assistant Secretary. P.O. Box 1515, Saddle Brook, N.J. 07663.
Assistant Vice President, Lexington Management Corporation. Assistant
Secretary, Lexington Funds Distributor, Inc.
*+ENRIQUE J. FAUST, Assistant Secretary. P.O. Box 1515, Saddle Brook, N.J.
07663. Prior to March 1994, Blue Sky Compliance Coordinator, Lexington
Management Corporation.
* "Interested person" and/or "Affiliated person" of LMC or Crosby as defined in
the Investment Company Act of 1940, as amended.
+Messrs. Corniotes, DeMichele, Duer, Faust, Hisey, Kantor, Lavery, Luehs,
Miller, Petruski, Preston, Smith and Sunderland and Mmes. Carnicelli, Carr,
Curcio, Evans, Gilfillan, Mosca. and Russell hold similar officers with some or
all of the other investment companies advised and/or distributed by LMC and LFD.
The Board of Directors met 5 times during the twelve months ended December
31, 1995, and each of the Trustees attended at least 75% of those meetings.
Remuneration of Directors and Certain Executive Officers:
Each Director is reimbursed for expenses incurred in attending each meeting
of the Board of Directors or any committee thereof. Each Director who is not an
affiliate of the advisor is compensated for his or her services according to a
fee schedule which recognizes the fact that each Director also serves as a
Director of other investment companies advised by LMC. Each Director receives a
fee, allocated among all investment companies for which the Director serves.
Effective September 12, 1995 each Director receives annual compensation of
$24,000. Prior to September 12, 1995, the Directors who were not employed by the
Fund or its affiliates received annual compensation of $16,000.
Set forth below is information regarding compensation paid or accrued during
the period January 1, 1995 to December 31, 1995 for each Director:
As of December 31, 1995, the aggregate remuneration paid to the directors
was as follows:
- --------------------------------------------------------------------------------
Aggretate Total Compensation Number of
Compensation from From Fund and Directorships in
Name of Director Fund Fund Complex Fund Complex
- --------------------------------------------------------------------------------
Robert M. DeMichele $0 $ 0 15
- --------------------------------------------------------------------------------
Beverley C. Duer 856 $22,616 15
- --------------------------------------------------------------------------------
Barbara R. Evans 0 0 14
- --------------------------------------------------------------------------------
Lawrence Kantor 0 0 14
- --------------------------------------------------------------------------------
Donald B. Miller 856 $20,616 14
- --------------------------------------------------------------------------------
John G. Preston 856 $20,616 14
- --------------------------------------------------------------------------------
Margaret Russell 856 $19,560 13
- --------------------------------------------------------------------------------
Philip C. Smith 856 $20,616 14
- --------------------------------------------------------------------------------
Francis A. Sunderland 856 $19,560 13
- --------------------------------------------------------------------------------
Retirement Plan for Eligible Directors/Trustees
Effective September 12, 1995, the Directors instituted a Retirement Plan for
Eligible Directors/Trustees (the "Plan") pursuant to which 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
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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 will be eligible to serve as Honorary Directors for one
year after retirement and will be entitled to be reimbursed for travel expenses
to attend a maximum of two meetings.
Set forth in the table below are the estimated annual benefits payable to an
eligible Director upon retirement assuming various compensation and years of
service classifications. As of December 31, 1995, the estimated credited years
of service for Directors Duer, Miller, Preston, Russell, Smith and Sunderland
are 18, 22, 18, 15, 26 and 36, respectively.
Highest Annual Compensation Paid by All Funds
---------------------------------------------
$20,000 $25,000 $30,000 $35,000
Years of
Service Estimated Annual Benefit Upon Retirement
- -------- ----------------------------------------
15 $15,000 $18,750 $22,500 $26,250
14 14,000 17,500 21,000 24,500
13 13,000 16,250 19,500 22,750
12 12,000 15,000 18,000 21,000
11 11,000 13,750 16,500 19,250
10 10,000 12,500 15,000 17,500
INVESTMENT RESTRICTIONS
The Fund's investment objective, as described under "Investment Objective
and Policies" and the following investment restrictions are matters of
fundamental policy which may not be changed without the affirmative vote of the
lesser of (a) 67% or more of the shares of the Fund present at a shareholders'
meeting at which more than 50% of the outstanding shares are present or
represented by proxy or (b) more than 50% of the outstanding shares. Under these
investment restrictions:
(1) the Fund will not issue any senior security (as defined in the 1940
Act), except that (a) the Fund may enter into commitments to purchase
securities in accordance with the Fund's investment program, including
reverse repurchase agreements, foreign exchange contracts, delayed
delivery and when-issued securities, which may be considered the
issuance of senior securities; (b) the Fund may engage in transactions
that may result in the issuance of a senior security to the extent
permitted under applicable regulations, interpretation of the 1940 Act
or an exemptive order; (c) the Fund may engage in short sales of
securities to the extent permitted in its investment program and other
restrictions; (d) the purchase or sale of futures contracts and related
options shall not be considered to involve the issuance of senior
securities; and (e) subject to fundamental restrictions, the Fund may
borrow money as authorized by the 1940 Act.
(2) The Fund will not borrow money, except that (a) the Fund may enter into
certain futures contracts and options related thereto; (b) the Fund may
enter into commitments to purchase securities in accordance with the
Fund's investment program, including delayed delivery and when-issued
securities and reverse repurchase agreements; (c) for temporary
emergency purposes, the Fund may borrow money in amounts not exceeding
5% of the value of its total assets at the time when the loan is made;
(d) The Fund may pledge its portfolio securities or receivables or
transfer or assign or otherwise encumber them in an amount not exceeding
one-third of the value of its total assets; and (e) for purposes of
leveraging, the Fund may borrow money from banks (including its
custodian bank), only if, immediately after such borrowing, the value of
the Fund's assets, including the amount borrowed, less its liabilities,
is equal to at least 300% of the amount borrowed, plus all outstanding
7
<PAGE>
borrowings. If at any time, the value of the Fund's assets fails to meet
the 300% asset coverage requirement relative only to leveraging, the
Fund will, within three days (not including Sundays and holidays),
reduce its borrowings to the extent necessary to meet the 300% test.
(3) The Fund will not act as an underwriter of securities except to the
extent that, in connection with the disposition of portfolio securities
by the Fund, the Fund may be deemed to be an underwriter under the
provisions of the 1933 Act.
(4) The Fund will not purchase real estate, interests in real estate or real
estate limited partnership interests except that, to the extent
appropriate under its investment program, the Fund may invest in
securities secured by real estate or interests therein or issued by
companies, including real estate investment trusts, which deal in real
estate or interests therein.
(5) The Fund will not make loans, except that, to the extent appropriate
under its investment program, the Fund may (a) purchase bonds,
debentures or other debt securities, including short-term obligations,
(b) enter into repurchase transactions and (c) lend portfolio securities
provided that the value of such loaned securities does not exceed
one-third of the Fund's total assets.
(6) The Fund will not invest in commodity contracts, except that the Fund
may, to the extent appropriate under its investment program, purchase
securities of companies engaged in such activities, may enter into
transactions in financial and index futures contracts and related
options, may engage in transactions on a when-issued or forward
commitment basis, and may enter into forward currency contracts.
(7) The Fund will not concentrate its investments in any one industry,
except that the Fund may invest up to 25% of its total assets in
securities issued by companies principally engaged in any one industry.
The Fund considers foreign government securities and supranational
organizations to be industries. This limitation, however, will not apply
to securities issued or guaranteed by the U.S. Government, its agencies
and instrumentalities.
(8) The Fund will not purchase securities of an issuer, if (a) more than 5%
of the Fund's total assets taken at market value would at the time be
invested in the securities of such issuer, except that such restriction
shall not apply to securities issued or guaranteed by the United States
government or its agencies or instrumentalities or, with respect to 25%
of the Fund's total assets, to securities issued or guaranteed by the
government of any country other than the United States which is a member
of the Organization for Economic Cooperation and Development ("OECD").
The member countries of OECD are at present: Australia, Austria,
Belgium, Canada, Denmark, Germany, Finland, France, Greece, Iceland,
Ireland, Italy, Japan, Luxembourg, the Netherlands, New Zealand, Norway,
Portugal, Spain, Sweden, Switzerland, Turkey, the United Kingdom and the
United States; or (b) such purchases would at the time result in more
than 10% of the outstanding voting securities of such issuer being held
by the Fund .
In addition to the above fundamental restrictions, the Fund has undertaken
the following non-fundamental restrictions, which may be changed in the future
by the Board of Directors, without a vote of the shareholders of the Fund:
(1) The Fund will not participate on a joint or joint-and-several basis in
any securities trading account. The "bunching" of orders for the sale or
purchase of marketable portfolio securities with other accounts under
the management of the investment adviser or sub-adviser to save
commissions or to average prices among them is not deemed to result in a
securities trading account.
(2) The Fund may purchase and sell futures contracts and related options
under the following conditions: (a) the then-current aggregate futures
market prices of financial instruments required to be delivered and
purchased under open futures contracts shall not exceed 30% of the
Fund's total assets, at market value; and (b) no more than 5% of the
assets, at market value at the time of entering into a contract, shall
be committed to margin deposits in relation to futures contracts.
(3) The Fund will not make short sales of securities, other than short sales
"against the box," or purchase securities on margin except for
short-term credits necessary for clearance of portfolio transactions,
provided that this restriction will not be applied to limit the use of
options, futures contracts and related options, in the manner otherwise
permitted by the investment restrictions, policies and investment
programs of the Fund.
(4) The Fund will not purchase securities of an issuer if to the Fund's
knowledge, one or more of the Directors or officers of the Fund or LMC
individually owns beneficially more than 0.5% and together own
beneficially more than 5% of the securities of such issuer nor will the
Fund hold the securities of such issuer.
(5) The Fund will not purchase the securities of any other investment
company, except as permitted under the 1940 Act.
8
<PAGE>
(6) The Fund will not, except for investments which, in the aggregate, do
not exceed 5% of the Fund's total assets taken at market value, purchase
securities unless the issuer thereof or any company on whose credit the
purchase was based has a record of at least three years continuous
operations prior to the purchase.
(7) The Fund will not invest for the purpose of exercising control over or
management of any company.
(8 )The Fund will not purchase warrants except in units with other
securities in original issuance thereof or attached to other securities,
if at the time of the purchase, the Fund's investment in warrants,
valued at the lower of cost or market, would exceed 5% of the Fund's
total assets. Warrants which are not listed on a United States
securities exchange shall not exceed 2% of the Fund's net assets. For
these purposes, warrants attached to units or other securities shall be
deemed to be without value.
(9) The Fund will not invest more than 15% of its total assets in illiquid
securities. Illiquid securities are securities that are not readily
marketable or cannot be disposed of promptly within seven days and in
the usual course of business without taking a materially reduced price.
Such securities include, but are not limited to, time deposits and
repurchase agreements with maturities longer than seven days. Securities
that may be resold under Rule 144A or securities offered pursuant to
Section 4(2) of the Securities Act of 1933, as amended, shall not be
deemed illiquid solely by reason of being unregistered. The Investment
Adviser shall determine whether a particular security is deemed to be
liquid based on the trading markets for the specific security and other
factors.
(10)The Fund will not purchase interests in oil, gas, mineral leases or
other exploration programs; however, this policy will not prohibit the
acquisition of securities of companies engaged in the production or
transmission of oil, gas or other materials.
The percentage restrictions referred to above are to be adhered to at the
time of investment and are not applicable to a later increase or decrease in
percentage beyond the specified limit resulting from change in values or net
assets.
INVESTMENT ADVISER, SUB-ADVISER, DISTRIBUTOR AND ADMINISTRATOR
Lexington Management Corporation ("LMC"), P.O. Box 1515, Saddle Brook, New
Jersey 07663 is the investment adviser to the Fund pursuant to an Investment
Management Agreement dated May 16, 1995, (the "Advisory Agreement"). Lexington
Funds Distributor, Inc. ("LFD") is the distributor of Fund shares pursuant to a
Distribution Agreement dated May 16, 1995, (the "Distribution Agreement"). LMC
has entered into a sub-adviser contract with Crosby Asset Management (US) Inc.
under which Crosby will provide the Fund with investment advice and management
of the Fund's investment program. LMC makes recommendations to the Fund with
respect to its investments and investment policies. These agreements were
approved by the Fund's Board of Directors (including a majority of the Directors
who were not parties to either the Advisory Agreement, Sub-Advisory Agreement or
the Distribution Agreement or "interested persons" of any such party) on May 16,
1995.
LMC also acts as administrator to the Fund and performs certain
administrative and 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's investment advisory fee will be reduced for any fiscal year by any
amount necessary to prevent Fund expenses from exceeding the most restrictive
expense limitations imposed by the securities laws or regulations of those
states or jurisdictions in which the Fund's shares are registered or qualified
for sale. Currently, the most restrictive of such expense limitation would
require LMC to reduce its fee so that ordinary expenses (excluding interest,
taxes, brokerage commissions and extraordinary expenses) for any fiscal year do
not exceed 2.5% of the first $30 million of the Fund's average daily net assets,
plus 2.0% of the next $70 million, plus 1.5% of the Fund's average daily net
assets in excess of $100 million. LMC has agreed to voluntarily limit the total
expenses of the Fund (excluding interest, taxes, brokerage, and extraordinary
expenses but including management fee and operating expenses) to an annual rate
of 1.75% of the Fund's average net assets through April 30, 1996 or such later
date to be determined by LMC. LFD pays the advertising and sales expenses
related to 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.
9
<PAGE>
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 Directors and by the affirmative vote, cast in person at a
meeting called for such purpose, of a majority of the Directors who are not
parties either to the Advisory Agreement, Sub-Advisory Agreement of the
Distribution Agreement, as the case may be, or "interested persons" of any such
party. Either the Fund or LMC may terminate the Advisory Agreement and the Fund
or LFD may terminate 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. As compensation
for its services, the Fund pays LMC a monthly management fee at the annual rate
of 1.25% of the average daily net assets. This fee is higher than that paid by
most other investment companies. However, it is not necessarily greater than the
management fee of other investment companies with objectives and policies
similar to this Fund. LMC will pay Crosby an annual sub-advisory fee of 0.625%
of the Fund's average daily net assets. The sub-advisory fee will be paid by
LMC, not the Fund. See "Investment Adviser and Distributor" in the Statement of
Additional Information.
LMC as owner of the registered service mark "Lexington" will sublicense to
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
affiliate as investment adviser or distributor. Crosby Asset Management (US)
Inc. has authorized the Fund to include the word "Crosby" as part of it's
corporate name subject to revocation by Crosby in the event the Fund ceases to
engage Crosby as Sub-adviser. In that event the Fund will be required upon
demand of LMC or Crosby to change its name to delete the word "Lexington" or
"Crosby" therefrom.
LMC shall not be liable to the Fund or its shareholders for any act or
omission by LMC, its officers, directors or employees or any loss sustained by
the Fund or its shareholders except in the case of willful misfeasance, bad
faith, gross negligence or reckless disregard of duty.
LMC and LFD are wholly owned subsidiaries of Lexington Global Asset
Managers, Inc., a publicly traded corporation. 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.
Crosby Asset Management (US) Inc. (25/F 3 Lockhart Road, Wan Chai, Hong
Kong) was established on October 4, 1990 in the British Virgin Islands. Crosby
manages assets and provides investment advice for investment companies and
institutional private accounts around the world including the United States. It
is a wholly owned subsidiary of the Crosby Group and its holding company, Crosby
group.
The Crosby group was founded in 1984 and is a leading independent merchant
bank in Asia, providing services including investment management, stockbrokerage
and research and corporate finance. The Crosby group is headquartered in Hong
Kong with 18 offices located in 11 countries throughout the region, and in
London and New York.
Of the directors, officers or employees ("affiliated persons") of the Fund,
Messrs. Corniotes, DeMichele, Faust, Hisey, Kantor, Lavery, Luehs, and Petruski
and Mmes. Carnicelli, Carr, Curcio, Gilfillan and Mosca (see "Management of the
Fund"), may also be deemed affiliates of LMC and LFD by virtue of being
officers, directors or employees thereof.
PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
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 Directors may determine, LMC and Crosby may consider sales of
shares of the Fund and of the other Lexington Funds as a factor in 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
Directors may determine, LMC and Crosby 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 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 higher commission
than the lowest available under certain circumstances, provided that the person
so exercising investment discretion makes a good faith determination that the
person so 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."
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<PAGE>
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 executions 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 and Crosby and its affiliates, in serving other
clients as well as the Fund. On the other hand, any research services obtained
by LMC and Crosby or its affiliates from the placement of portfolio brokerage of
other clients might be useful and of value to LMC and Crosby in carrying out its
obligations to the Fund.
The Fund anticipates that its brokerage transactions involving securities of
companies domiciled in countries other than the United States will normally be
conducted on the principal stock exchanges of those countries. Fixed commissions
of foreign stock exchange transactions are generally higher than the negotiated
commission rates available in the United States. There is generally less
government supervision and regulation of foreign stock exchanges and
broker-dealers than in the United States.
The Directors have adopted certain procedures incorporating the standards of
Rule 17e-1 under the Investment Company Act of 1940, as amended, which require
that the commissions paid to LFD or to broker-dealers affiliated with LFD must
be "reasonable and fair compared to the commission, fee or other remuneration
comparable transactions involving similar transactions and similar securities
. . . being purchased or sold on a securities . . . exchange during a comparable
period of time". Rule 17e-1 and the procedures require the Directors to
periodically review the transactions with affiliated broker-dealers and the
procedures themselves. The procedures also require LMC and Crosby to furnish
reports to the Directors and to maintain records in connection with commissions
paid to affiliated broker-dealers.
DETERMINATION OF NET ASSET VALUE
The Fund calculates net asset value as of the close of normal trading on the
New York Stock Exchange (currently 4:00 p.m., Eastern time, unless weather,
equipment failure or other factors contribute to an earlier closing time) each
business day. It is expected that the New York Stock Exchange will be closed on
Saturdays and Sundays and on New Year's Day, President's Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
See the Prospectus for the further discussion of net asset value.
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 seven (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 State Street
Bank and Trust Company (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, with full power
of substitution in the premises, authorizes and directs LFD to act upon any
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 reserves the right
to cease to act as agent subject to 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 Authorizations forms, Telephone Authorization forms and
prospectuses of the other funds may be obtained from LFD.
LFD 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
11
<PAGE>
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. In each such exchange, the registration of the shares of the
Fund being acquired must be identical to the registration of the shares of the
Fund being exchanged. 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 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 continue to make a $2,000 ($2,500 for
spousal IRAs) annual deductible IRA contribution. For adjusted gross incomes
above $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 ($2,250 spousal) IRA contribution because of the
limitations may make a nondeductible contribution to their IRA to the extent a
deductible contribution is not allowed. Federal income tax on accumulations
earned on nondeductible 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 is $250.
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 individuals earned annual income (as
defined in the Code) and in applying these limitations not more than $200,000 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 account
is subject to an annual maintenance fee of $12.00 charged by the Agent.
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
12
<PAGE>
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 can 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 the 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 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 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 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.
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
13
<PAGE>
of the year-end deemed disposition of Section 1256 contracts is taken into
account for the taxable year together with any other gain or loss that was
previously recognized upon the termination of Section 1256 contracts during that
taxable 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. A
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. The IRS has held in several private
rulings (and Treasury Regulations now provide) that gains arising from Section
1256 contracts will be treated for purposes of the Short-Short Gain Test as
being derived from securities held for not less than three months if the gains
arise as a result of a constructive sale under Code Section 1256.
The Fund may purchase securities of certain foreign investment funds or
trusts which constitute passive foreign investment companies ("PFICs") for
federal income tax purposes. If the Fund invests in a PFIC, it may elect to
treat the PFIC as a qualifying electing fund (a "QEF") in which event the Fund
will each year have ordinary income equal to its pro rata share of the PFIC's
ordinary earnings for the year and long-term capital gain equal to its pro rata
share of the PFIC's net capital gain for the year, regardless of whether the
Fund receives distributions of any such ordinary earning or capital gain from
the PFIC. If the Fund does not (because it is unable to, chooses not to or
otherwise) elect to treat the PFIC as a QEF, then in general (1) any gain
recognized by the Fund upon sale or other disposition of its interest in the
PFIC or any excess distribution received by the Fund from the PFIC will be
allocated ratably over the Fund's holding period of its interest in the PFIC,
(2) the portion of such gain or excess distribution so allocated to the year in
which the gain is recognized or the excess distribution is received shall be
included in the Fund's gross income for such year as ordinary income (and the
distribution of such portion by the Fund to shareholders will be taxable as an
ordinary income dividend, but such portion will not be subject to tax at the
Fund level), (3) the Fund shall be liable for tax on the portions of such gain
or excess distribution so allocated to prior years in an amount equal to, for
each such prior year, (i) the amount of gain or excess distribution allocated to
such prior year multiplied by the highest tax rate (individual or corporate) in
effect for such prior year plus (ii) interest on the amount determined under
clause (i) for the period from the due date for filing a return for such prior
year until the date for filing a return for the year in which the gain is
recognized or the excess distribution is received at the rates and methods
applicable to underpayments of tax for such period, and (4) the distribution by
the Fund to shareholders of the portions of such gain or excess distribution so
allocated to prior years (net of the tax payable by the Fund thereon) will again
be taxable to the shareholders as an ordinary income dividend.
Under recently proposed Treasury Regulations the Fund can elect to recognize
as gain the excess, as of the last day of its taxable year, of the fair market
value of each share of PFIC stock over the Fund's adjusted tax basis in that
share ("mark to market gain"). Such mark to market gain will be included by the
Fund as ordinary income, such gain will not be subject to the Short-Short Gain
Test, and the Fund's holding period with respect to such PFIC stock commences on
the first day of the next taxable year. If the Fund makes such election in the
first taxable year it holds PFIC stock, the Fund will include ordinary income
from any mark to market gain, if any, and will not incur the tax described in
the previous paragraph.
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 which the Fund has
not invested more than 5% of the value of the Fund's total assets in securities
of such issuer and as to which the Fund 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 (call
or 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.
14
<PAGE>
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 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 generally should not qualify for the 70%
dividends-received deduction for corporate shareholders.
A 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. If net capital gain is distributed and designated as a capital gain
dividend, it 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 because of their special characteristics and other
than for purposes of special taxes such as the accumulated earnings tax and the
personal holding company tax) to the extent of the amount of qualifying
dividends received by the Fund from domestic corporations for the taxable year.
A dividend received by the Fund will not be treated as a qualifying dividend (1)
if it has been received with respect to any share of stock that the Fund has
held for less than 46 days (91 days in the case of certain preferred stock),
excluding for this purpose under the rules of Code Section 246(c)(3) and (4):
(i) any day more than 45 days (or 90 days in the case of certain preferred
stock) after the date on which the stock becomes ex-dividend and (ii) any period
during which the Fund has an option to sell, is under a contractual obligation
to sell, has made and not closed a short sale of, is the grantor of a
deep-in-the-money or otherwise nonqualified option to buy, or has otherwise
diminished its risk of loss by holding other positions with respect to, such (or
substantially identical) stock; (2) to the extent that the Fund is under an
obligation (pursuant to a short sale or otherwise) to make related payments with
respect to positions in substantially similar or related property; or (3) to the
extent the stock on which the dividend is paid is treated as debt-financed under
the rules of Code Section 246A. Moreover, the dividends-received deduction for a
corporate shareholder may be disallowed or reduced (1) if the corporate
shareholder fails to satisfy the foregoing requirements with respect to its
shares of the Fund or (2) by application of Code Section 246(b) which in general
limits the dividends-received deduction to 70% of the shareholder's taxable
income (determined without regard to the dividends-received deduction and
certain other items). Since an insignificant portion of the Fund will be
invested in stock of domestic corporations, the ordinary dividends distributed
by the Fund will not qualify for the dividends-received deduction for corporate
shareholders.
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
15
<PAGE>
excess of the taxpayer's alternative minimum taxable income ("AMTI") over an
exemption amount. In addition, under the Superfund Amendments and
Reauthorization Act of 1986, a tax is imposed for taxable years beginning after
1986 and before 1996 at the rate of 0.12% on the excess of a corporate
taxpayer's AMTI (determined without regard to the deduction for this tax and the
AMT net operating loss deduction) over $2 million. For purposes of the corporate
AMT and the environmental superfund tax (which are discussed above), 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 will generally
be required to take the full amount of any dividend received from the Fund into
account (without a dividends-received deduction) in determining its 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. If more than 50% of the value of the Fund's total assets at the close of
its taxable year consist of the stock or securities of foreign corporations, the
Fund may elect to "pass through" to the Fund's shareholders the amount of
foreign taxes paid by the Fund. If the Fund so elects, each shareholder would be
required to include in gross income, even though not actually received, his pro
rata share of the foreign taxes paid by the Fund, but would be treated as having
paid his pro rata share of such foreign taxes and would therefore be allowed to
either deduct such amount in computing taxable income or use such amount
(subject to various Code limitations) as a foreign tax credit against federal
income tax (but not both). For purposes of the foreign tax credit limitation
rules of the Code, each shareholder would treat as foreign source income his pro
rata share of such foreign taxes plus the portion of dividends received from the
Fund representing income derived from foreign sources. No deduction for foreign
taxes could be claimed by an individual shareholder who does not itemize
deductions. Each shareholder should consult his own tax adviser regarding the
potential application of foreign tax credits.
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 from the sale of his 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 purchases shares of the Fund reflects undistributed net
investment income or recognized capital gain net income, or unrealized
appreciation in the value of the assets of the Fund, distributions of such
amounts will be taxable to the shareholder in the manner described above,
although such distributions economically 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 the distributions 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 if 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 ordinary income dividends and capital gain dividends, 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 a corporation or
other "exempt recipient."
Sale or Redemption of Shares
A shareholder will recognize gain or loss on the 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
16
<PAGE>
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) (discussed above in connection with the
dividends-received deduction for corporations) 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. Furthermore,
such a foreign shareholder may be subject to U.S. withholding tax at the rate of
30% (or lower treaty rate) on the gross income resulting from the Fund's
election to treat any foreign taxes paid by it as paid by its shareholders, but
may not be allowed a deduction against this gross income or a credit against
this U.S. withholding tax for the foreign shareholder's pro rata share of such
foreign taxes which it is treated as having paid. Such a foreign shareholder
would generally be exempt from U.S. federal income tax on gains realized on the
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 dividends,
capital gain dividends, and any gains realized upon the 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 foreign noncorporate shareholders, 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 such shareholders furnish 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 dividends 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
consult their tax advisers as to the consequences of these and other state and
local tax rules affecting investment in the Fund.
PERFORMANCE CALCULATION
For the purpose 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(l + T)n = ERV
Where: P = a hypothetical initial payment of $1,000
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 or at the end of the 1, 5 or 10 year
periods (or fractional portion thereof).
17
<PAGE>
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 net asset value as described in the prospectus on the reinvestment
dates during the period. 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.
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 and Poor's 500 Stock Index or the Dow Jones Industrial Average, the
Fund calculates its aggregate total return for the specified periods of time
assuming the investment of $10,000 in Fund shares and 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. The average annual standard total return for the period from
(7/3/95) to December 31, 1995 was -4.39%.
SHAREHOLDER REPORTS
Shareholders will receive reports at least semi-annually showing the Fund's
holdings and other information. In addition, shareholders will receive annual
financial statements audited by KPMG Peat Marwick LLP, the Fund's independent
auditors.
18
<PAGE>
Independent Auditors' Report
The Board of Directors and Shareholders
Lexington Crosby Small Cap Asia Growth Fund, Inc.:
We have audited the accompanying statements of net assets (including the
portfolio of investments) and assets and liabilities of Lexington Crosby Small
Cap Asia Growth Fund, Inc. as of December 31, 1995, and the related statements
of operations, changes in net assets, and the financial highlights for the
period from July 3, 1995 (commencement of operations) to December 31, 1995.
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 audit.
We conducted our audit 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, 1995 by correspondence with the custodian and brokers. 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 audit provides 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 Crosby Small Cap Asia Growth Fund, Inc. as of December 31, 1995, and
the results of its operations, its changes in its net assets and the financial
highlights for the period from July 3, 1995 to December 31, 1995, in conformity
with generally accepted accounting principles.
KPMG Peat Marwick LLP
New York, New York
January 29, 1996
19
<PAGE>
Lexington Crosby Small Cap Asia Growth Fund, Inc.
Statement of Net Assets
(Including the Portfolio of Investments)
December 31, 1995
Left Col.
Number of Value
Shares Security (Note 1)
- --------------------------------------------------------------------------------
Australia: 6.7%
11,500 Broken Hill Proprietary Company, Ltd. .......... $ 162,236
90,000 Delta Gold NL1 ................................. 217,850
250,000 SGIO Insurance, Ltd. ........................... 217,181
----------
597,267
----------
Hong Kong: 29.2%
192,000 ASM Pacific Technology ......................... 166,374
810,000 Chaifa Holdings, Ltd. .......................... 212,138
380,000 China Hong Kong Photo Productions .............. 215,016
394,000 Espirit Asia Holdings, Ltd. .................... 135,036
800,000 Founder Hong Kong, Ltd.1 ....................... 183,135
784,000 Golden Harvest Entertainment, Ltd. ............. 207,863
490,000 Harbin Power Equipment
Company, Ltd. ................................. 72,245
20,000 Henderson Land Development
company, Ltd. ................................. 120,538
17,600 HSBC Holdings Plc .............................. 266,322
31,000 Hutchinson Whampoa, Ltd. ....................... 188,839
44,000 New World Development
Company, Ltd. ................................. 191,774
700,000 Northeast Electrical Transmission and
Transformation Machinery
Manufacturing1 ................................ 114,071
387,000 Sinocan Holdings, Ltd. ......................... 137,642
86,000 Varitronix International, Ltd. ................. 159,609
1,500,000 Wong's International Holdings, Ltd. ............ 240,559
----------
2,611,161
----------
Indonesia: 11.1%
80,000 PT Astra International ......................... 166,375
390,000 PT Gajah Tunggal ............................... 217,710
91,000 PT Mulia Industrindo ........................... 256,983
88,000 PT Semen Gresik ................................ 246,585
115,500 PT Sekar Bumi1 ................................. 101,138
----------
988,791
----------
Right Col.
Number of Value
Shares Security (Note 1)
- --------------------------------------------------------------------------------
Malaysia: 10.9%
36,000 ACP Industries Bhd ............................. $ 148,198
40,000 Arab Malaysian Corporation Bhd ................. 144,968
108,000 Ekran Bhd ...................................... 263,778
25,000 Gadek Malaysian Bhd ............................ 128,028
40,000 Road Builder (M) Holdings Bhd .................. 138,665
106,000 Tiong Nam Transport Holdings
Bhd ........................................... 154,501
----------
978,138
----------
Philippines: 6.5%
1,025,000 Aboitiz Equity Ventures, Inc. .................. 195,536
4,400 Philippine Long Distance ....................... 239,222
911,000 Steniel Manufacturing Corporation .............. 145,982
----------
580,740
----------
Singapore: 9.7%
60,000 DBS Land, Ltd. ................................. 202,858
17,000 Fraser & Neave, Ltd. ........................... 216,438
270,000 Seksun Precision Engineering ................... 255,906
20,000 United Overseas Bank, Ltd. ..................... 192,389
----------
867,591
----------
Thailand: 8.6%
16,000 Italian Thai Development Plc ................... 163,940
26,000 K.R. Precision Public Company, Ltd. ............ 181,732
48,000 Krung Thai Bank Public
Company, Ltd. ................................. 196,346
29,500 Sanyo Universal Electric
Company, Ltd. ................................. 128,872
34,000 Thai Stanley Electric Public
Company, Ltd. ................................. 94,519
----------
765,409
----------
TOTAL INVESTMENTS: 82.7%
(cost $7,259,146+) (Note 1) ................... 7,389,097
Other assets in excess
of liabilities: 17.3% ......................... 1,546,867
----------
TOTAL NET ASSETS: 100%
(equivalent to $9.76 per share on
915,788 shares outstanding) ................... $8,935,964
==========
1Non-income producing securities.
+Aggregate cost for Federal income tax purposes is identical.
20
<PAGE>
Lexington Crosby Small Cap Asia Growth Fund, Inc.
Statement of Net Assets
(Including the Portfolio of Investments)
December 31, 1995 (continued)
- --------------------------------------------------------------------------------
The composition of the Fund's net assets by industry concentration was as
follows:
Banking ................. 7.3%
Capital Equipment ....... 6.2
Construction & Housing .. 2.9
Consumer Durable ........ 4.0
Consumer Nondurable .... 3.6
Electric & Electronics .. 12.3
Financial Services ...... 8.4%
Gold .................... 2.4
Materials ............... 10.8
Multi-Industry .......... 5.6
Real Estate ............. 5.8
Services ................ 7.7
Transportation .......... 1.7%
Utilities ............... 4.0
Other assets ............ 17.3
-----
Total Net Assets 100.0%
=====
----------------
Lexington Crosby Small Cap Asia Growth Fund, Inc.
Statements of Assets and Liabilities
December 31, 1995
<TABLE>
<S> <C>
Assets
Investments in securities, at value (cost $7,259,146) (Note 1) ........................... $ 7,389,097
Cash ..................................................................................... 2,546,142
Receivable for shares sold ............................................................... 38,520
Dividends and interest receivable ........................................................ 13,738
Due from Lexington Management Corporation (Note 2) ....................................... 2,698
Deferred organization expenses, net (Note 1) ............................................. 61,892
-----------
Total Assets 10,052,087
-----------
Liabilities
Payable for investment securities purchased .............................................. 1,003,349
Payable for shares redeemed .............................................................. 3,591
Accrued expenses ......................................................................... 103,922
Distributions payable .................................................................... 5,261
-----------
Total Liabilities .................................................................... 1,116,123
-----------
Net Assets (equivalent to $9.76 per share on 915,788 shares outstanding) (Note 3) ........ $ 8,935,964
===========
Net Assets consist of:
Capital stock-authorized 1,000,000,000 shares,
$.001 par value per share .............................................................. $ 916
Additional paid-in capital ............................................................... 9,031,688
Distributions in excess of net investment income (Note 1) (1,869)
Accumulated net realized loss on investments and foreign currency holdings (Note 1) (224,473)
Net unrealized appreciation of investments and foreign currency holdings ................. 129,702
-----------
$ 8,935,964
===========
</TABLE>
The Notes to Financial Statements are an integral part of these statements.
21
<PAGE>
Left Col.
Lexington Crosby Small Cap
Asia Growth Fund, Inc.
Statement of Operations
July 3, 1995 (commencement of operations) to
December 31, 1995
Investment Income
Dividends ........................... $ 47,137
Interest ............................ 21,223
---------
68,360
Less: foreign tax expense ........... 3,799
---------
Investment income ............. $ 64,561
Expenses
Investment advisory fee (Note 2) ... 35,576
Accounting and shareholder
services expenses (Note 2) ........ 4,337
Custodian and transfer agent
expenses .......................... 17,840
Printing and mailing ............... 9,247
Directors' fees and expenses ....... 4,886
Audit and legal .................... 14,148
Registration fees .................. 1,845
Computer expense ................... 1,871
Other expenses ..................... 3,485
Amortization of deferred
organization expenses (Note 1) .... 6,735
---------
Total expenses .................... 99,970
Less: expenses recovered
under contract with
investment advisor
(Note 2) .................... 50,163 49,807
--------- ---------
Net investment income 14,754
Realized and Unrealized Gain
(Loss) on Investments (Note 4)
Net realized gain (loss) on:
Investments .................... (224,473)
Foreign currency
transactions .................. 1,958
---------
Net realized loss (222,515)
Net change in unrealized
appreciation (depreciation) on:
Investments ....................... 129,951
Foreign currency translations
of other assets and liabilities .. (249)
---------
Net change in unrealized
appreciation ................. 129,702
---------
Net realized and unrealized
loss on investments .......... (92,813)
---------
Decrease in Net Assets
Resulting from Operations .......... $ (78,059)
=========
Right Col.
Lexington Crosby Small Cap
Asia Growth Fund, Inc.
Statement of Changes in
Net Assets
July 3, 1995 (commencement of
operations) to December 31, 1995
Net investment income ............................... $ 14,754
Net realized loss from investments and
foreign currency transactions ........................ (222,515)
Increase in unrealized appreciation of
investments and foreign currency
holdings ............................................. 129,702
----------
Net decrease in net assets resulting
from operations ................................. (78,059)
Distribution to shareholders from net
investment income ................................... (18,581)
Increase in net assets from capital share
transactions (Note 3) ................................ 9,032,604
----------
Net increase in net assets ........................ 8,935,964
Net Assets:
Beginning of period ----
----------
End of period (including distributions
in excess of net investment income
of $1,869) .......................................... $8,935,964
==========
The Notes to Financial Statements are an integral part of these statements.
22
<PAGE>
Lexington Crosby Small Cap Asia Growth Fund, Inc.
Notes to Financial Statements
December 31, 1995
1. Significant Accounting Policies
Lexington Crosby Small Cap Asia Growth Fund, Inc. (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 to seek
long-term capital appreciation through investment in common stocks and
equivalents of companies domiciled in the Asia region with a market
capitalization of less than $1 billion. The Fund commenced operations on July 3,
1995. The following is a summary of significant accounting policies followed by
the Fund in the preparation of its financial statements:
Investments Security transactions are accounted for on a trade date basis.
Realized gains and losses from security transactions are reported on the
identified cost basis. Investments are stated at market value based on closing
prices reported by the exchange on which the securities are traded on the last
business day of the period or, for over-the-counter securities, at the average
between bid and asked prices, except for short-term securities which are stated
at amortized cost, which approximates market value. Securities for which market
quotations are not readily available and other assets are valued at fair value
as determined by management and approved in good faith by the Board of
Directors. All investments quoted in foreign currencies are valued in U.S.
dollars on the basis of the foreign currency exchange rates prevailing at the
close of business. Dividends and distributions to shareholders are recorded on
the ex-dividend date. Interest income is accrued as earned.
Foreign Currency Transactions Foreign currencies (and receivables and
payables denominated in foreign currencies) are translated into U.S. dollar
amounts at current exchange rates. Translation gains or losses resulting from
changes in exchange rates and realized gains and losses on the settlement of
foreign currency transactions are reported in the statement of operations. In
addition, the Fund may enter into forward foreign exchange contracts in order to
hedge against foreign currency risk in the purchase or sale of securities
denominated in foreign currency. The Fund may also enter into such contracts to
hedge against changes in foreign currency exchange rates on portfolio positions.
These contracts are marked to market daily, by recognizing the difference
between the contract exchange rate and the current market rate as unrealized
gains or losses. Realized gains or losses are recognized when contracts are
settled and are reported in the statement of operations.
Distributions In accordance with Statement of Position 93-2: Determination,
Disclosure and Financial Statement Presentation of Income, Capital Gain and
Return of Capital Distributions by Investment Companies, as of December 31, 1995
book and tax basis differences amounting to $1,958 have been reclassified from
accumulated net realized loss on investments and foreign currency holdings to
distributions in excess of net investment income.
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 has been made.
Deferred Organization Expenses Organization expenses aggregating $67,351
have been deferred and are being amortized on a straight-line basis over five
years.
2. Investment Advisory Fee and Other Transactions with Affiliate
The Fund pays an investment advisory fee to Lexington Management Corporation
("LMC") at the rate of 1.25% of average daily net assets. In connection with
providing investment advisory services, LMC has entered into a sub-advisory
contract with Crosby Asset Management (U.S.), Ltd. ("Crosby") under which Crosby
provides the Fund with investment management services. Pursuant to the terms of
the sub-advisory contract between LMC and Crosby, LMC pays Crosby a monthly
sub-advisory fee at the annual rate of 0.625% of the Fund's average daily net
assets. LMC has agreed to voluntarily limit the total expenses of the Fund
(excluding interest, taxes, brokerage commissions and extraordinary expenses but
23
<PAGE>
Lexington Crosby Small Cap Asia Growth Fund, Inc.
Notes to Financial Statements
December 31, 1995 (continued)
2. Investment Advisory Fee and Other Transactions with Affiliate (continued)
including management fee and operating expenses) to an annual rate of 1.75% of
the Fund's average net assets, through April 30, 1996 or such later date as to
be determined by LMC. The investment advisory fee and expense reimbursement are
set forth in the statement of operations.
The Fund also reimburses LMC for certain expenses, including accounting and
shareholder servicing costs, which are incurred by the Fund, but paid by LMC.
3. Capital Stock
Transactions in capital stock were as follows:
July 3, 1995
(commencement of operations)
to December 31, 1995
----------------------------
Shares Amount
--------- ----------
Shares sold ........................ 1,003,607 $9,916,274
Shares issued to shareholders on
reinvestment of dividends ........ 1,372 13,320
--------- ----------
1,004,979 9,929,594
Shares redeemed .................... (89,191) (896,990)
--------- ----------
Net increase ....................... 915,788 $9,032,604
========= ==========
4. Purchases and Sales of Investment Securities
The cost of purchases and proceeds from sales of securities for the six months
ended December 31, 1995, excluding short-term securities, were $8,584,767 and
$1,101,149, respectively.
At December 31, 1995, aggregate gross unrealized appreciation for all
securities and foreign currency holdings (including foreign currency receivables
and payables) in which there is an excess of value over tax cost amounted to
$512,351 and aggregate gross unrealized depreciation for all securities and
foreign currency holdings in which there is an excess of tax cost over value
amounted to $382,649.
5. Investment Risks
The Fund's investments in foreign securities may involve risks not present in
domestic investments. Since foreign securities may be denominated in a foreign
currency and involve settlement and pay interest or dividends in foreign
currencies, changes in the relationship of these foreign currencies to the U.S.
dollar can significantly affect the value of the investments and earnings of the
Fund. Foreign investments may also subject the Fund to foreign government
exchange restrictions, expropriation, taxation or other political, social or
economic developments, all of which could affect the market and/or credit risk
of the investments.
In addition to the risks described above, risks may arise from forward
foreign currency contracts as the result of the potential inability of
counterparties to meet the terms of their contracts.
24
<PAGE>
Lexington Crosby Small Cap Asia Growth Fund, Inc.
Financial Highlights
July 3, 1995 (commencement of operations) to December 31, 1995
<TABLE>
Selected per share data for a share outstanding throughout the period:
<S> <C>
Net asset value, beginning of period ....................................... $10.00
------
Income (loss) from investment operations:
Net investment income .................................................... 0.02
Net realized and unrealized loss on investments .......................... (0.24)
------
Total loss from investment operations .................................... (0.22)
------
Less distributions:
Dividends from net investment income ..................................... (0.02)
Net asset value, end of period ............................................. $ 9.76
======
Total return ............................................................... (4.39)%*
Ratio to average net assets:
Expenses, before reimbursement or waiver ................................. 3.51%*
Expenses, net of reimbursement or waiver ................................. 1.75%*
Net investment loss, before reimbursement or waiver ...................... (1.24)%*
Net investment income .................................................... 0.52%*
Portfolio turnover ......................................................... 40.22%*
Net assets at end of period (000's omitted) ................................ $8,936
======
*Annualized
</TABLE>
25
