Dear Shareholders:
- --------------------------------------------------------------------------------
Lexington Crosby Small Cap Asia Growth Fund declined by 42.3%* for the one
year period ended December 31, 1997, as compared to a decline of 40.92% for the
unmanaged Morgan Stanley Capital International All Country Far East ex-Japan
Index.
The currency and stock market crises in Southeast Asia finally spread to
Hong Kong and Taiwan in October. The Taiwanese dollar depreciated 7.6% during
the month following the decision by the Taiwan Central Bank not to defend the
currency. The Taiwanese currency finished the quarter 12.5% lower and the bourse
lost 5.4%.
The Taiwanese dollar fall triggered heavy selling pressure in the Hong
Kong dollar, the only currency in Asia which has been unaffected by the region's
currency turmoil. While the Hong Kong government has maintained the currency
peg, interest rates were raised and investors' sentiment was dampened, leading
to a loss of 28.7% in the Hang Seng Index during the quarter. Chinese "B" shares
also came under selling pressure on increasing fears of an economic slowdown in
China in 1998, and rumors of an imminent Renminbi depreciation. The Shanghai and
Shenzhen "B" share markets lost 26.8% and 24.0%, respectively, during the
quarter.
Institutional selling remained rampant around the region. Bourses in
Indonesia, Singapore and Malaysia fell 26.5%, 21.7% and 27.0% respectively,
accompanied by a further depreciation in their currencies. The Indonesian Rupiah
lost 40.5%, the Malaysian Ringgit 16.5% and the Singapore dollar 9.1%. The Thai
stock market shed 31.6%, with the Baht ending 24.9% lower, as investors remained
skeptical of the impact of the country's economic rescue plan. Financial and
economic troubles in Korea took the market down 41.8% and the Korean Won
suffered a 46% decline. Philippines shares lost 9.1% and the Peso fell 13.9% on
lingering political and economic uncertainties.
During the quarter, the Fund's investments in Malaysia were completely
sold and investments in Hong Kong, China and Singapore were trimmed. Only
exposure to Taiwan was raised.
Economic Outlook and Strategy 1997-1998
Alan Greenspan has so far shown a predilection to be ahead of the interest
rate curve. However, recent events will probably mean that rates will be
unchanged for some time as the Fed seeks the middle ground between the tightest
domestic labor market in two decades and the crisis in Asia, which has triggered
turbulence in markets worldwide. Policy coordination will be necessary to enable
developed economies to ride out the current fragilities.
The Asian currency crisis which started in Thailand in July 1997 has
spread to include one of the region's biggest economies, South Korea. The
turmoil appears to be far more serious than the events which took place in
Mexico in late 1994. The current crisis is more startling because it is
occurring in some of the most dynamic economies in the world. The Asian
economies, excluding Japan, have accounted for more than 50% of world growth
since 1990, while Mexico's share was only 1%.
The Mexican currency crisis was attributable to a combination of factors,
including a high current account deficit, political instability and rising US
interest rates. The large current account deficit was partly the result of
structural factors, such as Mexico's low savings rate, import dependency and the
fact that the country was an inherently low growth economy. The low savings rate
implied that, in times of rapid cyclical growth, the country was strongly
dependent on foreign capital to support a high level of investment. Therefore,
leading up to the 1995 crisis, most of the growth in Mexico's external imbalance
was triggered by cyclical factors including excessive domestic spending, rising
global interest rates resulting from the Fed tightening, cycle
1
<PAGE>
and the gradual real appreciation in the Mexican peso. In the end, the Mexican
crisis, though severe, was essentially a problem of excess demand which could be
dealt with rapidly.
Asia's problem is one of excess supply and is the by-product of
inappropriate structural economic policies, and thus is expected to be more long
lasting than Mexico's. The countries of Southeast Asia have long pursued various
forms of direct or indirect exchange rate links to the US dollar. Over time the
stability of the dollar link encouraged many Asian companies to seek dollar
loans rather than more expensive local currency credit. The resulting excess
liquidity led to a systematic pattern of over-investment which, combined with
poorly regulated banking systems, made the Southeast Asian private sector very
vulnerable to insolvency in the event of a slowdown. The over-valuation of the
local currencies eventually brought the over investment to a head as surrounding
countries, such as China and Japan, depreciated their currencies.
The Asian turmoil has affected different groups of countries in very
different ways. Two groups have been comparatively unscathed. The first consists
of the huge, relatively closed economies of India and China. They are closed in
the sense that companies have only restricted access to international capital
markets, not closed to world trade.
Government intervention in these economies is widespread.
The second group is at the opposite extreme: small, extremely open
countries, in which companies are free to borrow abroad and where the government
plays only a small role in the economy: Taiwan, Singapore and Hong Kong. Though
affected, they have not suffered to the same extent as a third group: Thailand,
Indonesia, South Korea and Malaysia. This group combines features of the other
two. Companies are free to borrow abroad, as in group two, but the government
retains a considerable influence on the economy, as in group one. It is this
structure that many economists believe is to blame for the Asian crisis.
The Asian region is currently undergoing a pronounced economic slowdown to
correct the earlier excesses of too rapid growth, current account imbalances and
excessive reliance on short term capital inflows, especially where those inflows
were unhedged or used unproductively. Regional growth in 1998 will be
characterized by sharply weaker domestic demand which will be sufficient to
produce a region-wide contraction in current account deficits and begin the
process of restoring investor confidence, which will be necessary to reverse the
recent negative portfolio flows and slowdown in foreign direct investment.
Within Asia Pacific, Australia is probably the best positioned to weather
the slowdown in Asian growth, as the country continues to enjoy low interest
rates, mainly due to concerns about growth in Asia, and uncertainty about
earnings in the resource sector. The record of a bumper Christmas season is
another encouraging sign. While the recent improvement in export competitiveness
of the Asian countries has been primarily driven by currency devaluation, with
labor costs in local currencies still rising, the sustained improvement in
Australia's international competitiveness has been achieved through an
improvement in unit labor costs. This fundamental gain in productivity, along
with a boost from the domestic inventory cycle, will provide the Australian
economy with some resilience to the Asian downturn. We will be looking to
provide the Fund with exposure to stocks in Australia within the next quarter.
With the continued falls in the Asian currencies, the immediate assumption
is that the Hong Kong dollar and the Chinese Renminbi are becoming increasingly
over-valued, and investors are concerned about higher interest rates resulting
in collapsing asset prices and a growing current account deficit in Hong Kong.
Credit Lyonnais is of the view that the currency markets have already priced in
the likelihood of a debt moratorium in certain Southeast Asian countries, as a
precursor to an attempt to inflate away debt problems. Should this become a
reality, then the impact on the defaulting country would be extremely severe in
that: 1) high inflation will erode some of the advantages of the currency
depreciation, 2) foreign direct investments would suffer, and 3) a default and a
focus on export-oriented growth should produce trade sanctions against the
offending nation.
The Southeast Asian countries in question thus have two options. First,
the default or hyper-inflationary scenario and second, a move towards full
liberalization under the IMF program. We expect and hope that the
2
<PAGE>
latter will ultimately be the preferred option in view of the ineffectiveness of
the former. Adoption of the former may not mean that inroads will be made into
global market trading share, as discussed above, while the latter would result
in significant upside for the regional currencies concerned. Either of these
scenarios means that it is unlikely that China and Hong Kong would lose
competitiveness from current levels. Indeed, such uncertainties are probably
already, to an extent, reflected in the current equity prices.
On a macro basis, we maintain our view that the stronger Asian countries
will enjoy a more rapid recovery. The bulk of the Fund's investments will
continue to be concentrated in Greater China, Singapore and Australia. Singapore
is expected to be further significantly affected in the short term by
depreciating currencies, a regress in offshore loans to its neighbors, a
retrenchment in its financial services industry and a slowing electronics
sector.
However, we are convinced that a disciplined, research based, pro-active
investment strategy such as ours will be the key to capitalizing on the recovery
in the Asian stock markets in the future. On-the-ground presence is required for
greater "stress" testing of companies, and we continue to believe that the
potential investment returns in Asia in the long term will be more attractive
than in the past as the result of the various uncertainties presently prevailing
in the region.
The significant falls in both the currencies and share prices is beginning
to reveal potential buying opportunities, both for the long term and on a
trading basis. Our strategy is to continue monitoring these situations and start
accumulating positions at an appropriate time. We are targeting fundamentally
attractive, well-managed companies in Asia with low debt levels and established
franchises, which we believe will be able to survive into the future.
China
Given the country's problems of excess capital stock and non-performing
loans in the banking sector, China's economic growth is bound to slow in the
next two years. After the investment and consumption cycles in the past five to
seven years, it may be difficult to reflate the economy, irrespective of how
much interest rates are lowered. However, the risk of recession is also low,
since consumers are not-over burdened by debt, and the state-owned enterprise
reforms are already in progress, with some proven success. Moderate growth,
rather than an early and sharp surge in domestic demand, may be the best option
to maintain the liquidity in China's banking system, while supporting the
Renminbi at its current exchange rate. Although the immediate pressure is to
appreciate, we expect the Renminbi to depreciate in the longer term, as the
People's Bank of China continues to supply liquidity to recapitalize the
country's banks.
Singapore
Despite the problems it is currently facing, Singapore has the least
structural problems in Asia, and is the economy most likely to adapt quickly to
the challenges posed by regional shakeout. The country will be looking to
accelerate the liberalization and privatization of Singapore corporations and
confront the issue of competitiveness and productivity growth. In addition,
Singapore is expected to accelerate its move up the value-added curve, which
will mean relocating more operations to the region. This will increase
Singapore's leverage on the export recovery of its neighbors, whose currencies
have devalued more significantly. With a current account surplus accounting for
15% of 1996 GDP and a budget surplus of 8%, Singapore can take advantage of
renewed opportunities in the region as debt-burdened companies seek partners and
capital.
3
<PAGE>
Taiwan
While the recent regional currency turmoil has resulted in a 17.5%
depreciation in the NT dollar against its US counterpart, we believe the impact
will be both moderate and positive. The weaker NT dollar is expected to help
improve Taiwan's export competitiveness, although it should not lead to
significant inflationary pressures. Although the currency's strength against the
Korean Won will certainly hurt the country's cyclical industries to an extent,
we still expect moderate corporate EPS growth in 1998, mainly due to the still
strong performance from selected electronics companies. In addition, we expect a
gradual bottoming in the local economy, underpinned by a recovery in the
property sector, which together with domestic demand, is anticipated to provide
Taiwan's economic growth with an added boost this year.
Sincerely,
/s/Christina Lam /s/Simon C.N. Thompson /s/Robert M. DeMichele
- ----------------- ----------------------- ---------------------
Christina Lam Simon C.N. Thompson Robert M. DeMichele
Portfolio Manager Portfolio Manager President
February, 1998 February, 1998 February, 1998
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN
LEXINGTON CROSBY SMALL CAP ASIA GROWTH FUND,
THE UNMANAGED MORGAN STANLEY CAPITAL INTERNATIONAL (EAFE) INDEX AND
THE UNMANAGED MORGAN STANLEY CAPITAL INTERNATIONAL ALL COUNTRY
FAR EAST EX-JAPAN INDEX
[The following table represents a chart in the printed report]
Year Lexington Crosby Small Cap
Asia Growth Fund MSCI EAFE
- ---- ---------------- ---- ----
6/30/95 $10,000 $10,000 $10,000
12/31/95 $9,781 $9,838 $10,839
6/30/96 $11,264 $10,884 $11,328
12/31/96 $12,274 $10,819 $11,494
6/30/97 $14,220 $11,270 $12,782
12/31/97 $7,080 $6,392 $11,698
AVERAGE ANNUAL STANDARD TOTAL RETURNS
FOR THE PERIOD ENDED 12/31/97
Fund/Index 1 Year Since Inception
(6/30/95)
Lexington Crosby Small Cap Asia Growth (42.32%) (12.91%)
Fund
MSCI All Country Far East ex-Japan Index (40.92%) (16.39%)
Morgan Stanley Capital International
(EAFE) Index 1.78% 6.48%
The graph, prepared in accordance with SEC regulations, compares a $10,000
investment in the Fund with a similar investment in the Morgan Stanley Capital
International (EAFE) Index and the Morgan Stanley Capital International All
Country Far East ex-Japan Index. Results for the Fund, the Morgan Stanley
Capital International (EAFE) Index and the Morgan Stanley Capital International
All Country Far East ex-Japan Index include the reinvestment of all dividend and
capital gain distributions. Investment return and principal value of an
investment will fluctuate so that an investor's shares when redeemed may be
worth more or less than at their original cost. Total return represents past
performance and is not predictive of future results.
*-42.32% and -12.91% are the one year and since commencement (7/3/95) average
annual standard total returns, respectively, for the period ended December 31,
1997. Investment return and principal value of an investment will fluctuate so
that an investor' s shares, when redeemed, may be worth more or less than at
their original cost. Total return represents past performance and is not
predictive of future results.
4
<PAGE>
Lexington Crosby Small Cap Asia Growth Fund, Inc.
Statement of Net Assets
(Including the Portfolio of Investments)
December 31, 1997
Number of Value
Shares Security (Note 1)
- -------------------------------------------------------------------------------
Common Stock: 97.8%
China: 32.0%
1,600,000 Hubei Sanonda Company, Ltd.1 .. $ 644,273
1,100,000 Inner Mongolia Erdos
Cashmere Products Company,
Ltd.1 ....................... 376,200
750,000 Shandong Chenming Paper
Holdings, Ltd.1 ............. 529,473
1,799,680 Shanghai Diesel Engine
Company, Ltd. ............... 226,760
2,700,000 Shanghai Petrochemical
Company, Ltd. ............... 421,643
1,863,090 Shanghai Tyre & Rubber
Company, Ltd. ............... 465,772
450,000 Shenzhen Fangda Company,
Ltd. ........................ 516,890
1,119,000 Tientsin Marine Shipping
Company, Ltd.1 .............. 529,287
2,000,000 Yizheng Chemical Fibre
Company, Ltd. ............... 361,371
1,150,000 Zhejiang Southeast Electric
Power Company, Ltd. "B"1 .... 369,150
----------
4,440,819
----------
Hong Kong: 35.7%
1,100,000 Beijing Datang Power
Generation Company, Ltd.1 ... 503,984
252,000 China Resources Enterprise .... 562,655
2,000,000 Dongfang Electrical Machinery
Company, Ltd. ............... 291,678
860,000 Founder Hong Kong, Ltd. ....... 532,764
500,000 Guangdong Kelon Electrical
Holdings Company, Ltd. ...... 513,018
57,000 Hang Seng Bank, Ltd. .......... 549,897
393,000 Ka Wah Bank ................... 344,903
163,000 New World Development
Company, Ltd. ............... 563,791
3,016,000 Semi-Tech (Global), Ltd. ...... 494,345
158,000 Shanghai Industrial
Holdings, Ltd. .............. 587,280
----------
4,944,315
----------
Indonesia: 0.1%
199,000 PT Bank Danamon Indonesia ... 12,675
-----------
Philippines: 1.5%
3,354,000 Asian Terminals, Inc. ... 210,157
-----------
Singapore: 22.5%
296,000 Advanced Systems
Automation, Ltd. .......... 238,917
1,773,000 Datapulse Technology, Ltd.1 . 384,076
567,000 Delifrance Asia, Ltd. ....... 595,624
1,286,000 Informatics Holdings, Ltd. .. 572,424
508,000 Lindeteves-Jacoberg, Ltd. ... 385,913
556,000 Osprey Maritime, Ltd. ....... 445,476
364,000 Want Want Holdings1 ......... 502,320
-----------
3,124,750
-----------
Taiwan: 6.0%
330,000 Delpha Construction
Company, Ltd. ............. 492,974
100,000 Taiwan Semiconductor
Manufacturing Company ..... 342,854
-----------
835,828
-----------
TOTAL INVESTMENTS: 97.8%
(cost $20,914,674 )
(Note 1) ................ 13,568,544
-----------
Other assets in excess
of liabilities: 2.2% .... 298,318
-----------
TOTAL NET ASSETS: 100.0%
(equivalent to $7.06 per
share on 1,965,248 shares
outstanding) .............. $13,866,862
===========
1 Non-income producing security.
+ Aggregate cost for Federal income tax purposes is $20,943,194.
- --------------------------------------------------------------------------------
At December 31, 1997, the composition of the Fund's net assets by industry
concentration was as follows:
Banking .................................. 6.5%
Capital Equipment ........................ 12.1
Consumer Durable ......................... 13.3
Consumer Nondurable ...................... 12.2
Electrical & Electronics ................. 5.2
Materials ................................ 17.9
Real Estate .............................. 11.7
Services ................................. 5.6
Transportation ........................... 7.0
Utilities ................................ 6.3
Other assets ............................. 2.2
-----
Total Net Assets ....................... 100.0%
=====
The Notes to Financial Statements are an integral part of this statement.
5
<PAGE>
Lexington Crosby Small Cap Asia Growth Fund, Inc.
Statement of Assets and Liabilities
December 31, 1997
<TABLE>
<CAPTION>
<S> <C>
Assets
Investments, at value (cost $20,914,674) (Note 1) .................. $13,568,544
Cash ............................................................... 167,702
Foreign currency (cost $6,908) ..................................... 6,546
Receivable for investment securities sold .......................... 263,117
Receivable for shares sold ......................................... 182,231
Dividends and interest receivable .................................. 54,905
Deferred organization expense, net (Note 1) ........................ 34,945
-----------
Total Assets 14,277,990
-----------
Liabilities
Due to Lexington Management Corporation (Note 2) ................... 17,596
Payable for shares redeemed ........................................ 352,283
Accrued expenses ................................................... 41,249
-----------
Total Liabilities ....................................... 411,128
-----------
Net Assets (equivalent to $7.06 per share on 1,965,248 shares
outstanding) (Note 3) .............................................. $13,866,862
===========
Net Assets consist of:
Capital stock--authorized 1,000,000,000 shares,
$.001 par value per share ........................................ $ 1,965
Additional paid in capital (Note 1) ................................ 23,866,929
Accumulated deficit (Note 1) ....................................... (57,394)
Accumulated net realized loss on investments and foreign currency
holdings (Notes 1 and 6) ......................................... (2,598,140)
Unrealized depreciation on investments and foreign
currency holdings ................................................. (7,346,498)
-----------
Total Net Assets $13,866,862
===========
The Notes to Financial Statements are an integral part of this statement.
6
<PAGE>
Lexington Crosby Small Cap
Asia Growth Fund, Inc.
Statement of Operations
Year ended December 31, 1997
Investment Income
Dividends .................... $ 561,213
Interest ..................... 120,630
---------
681,843
Less: foreign tax expense .... 34,767
---------
Total investment income $ 647,076
Expenses
Investment advisory fee (Note 2) 407,615
Transfer agent and shareholder
servicing expense (Note 2) ... 93,432
Custodian expense ................. 79,952
Printing and mailing expenses .. 41,470
Registration fees .............. 30,116
Accounting expenses (Note 2) ... 27,227
Professional fees .............. 17,519
Directors' fees and expenses ... 16,683
Amortization of organization
costs (Note 1) ............... 13,501
Computer processing fees ....... 8,361
Other expenses ................. 14,505
---------
Total expenses ............... 750,381
-----------
Net investment loss ........ (103,305)
Realized and Unrealized Loss
on Investments (Note 4)
Net realized loss on:
Investments ...............(2,080,649)
Foreign currency
transactions ............ (179,845)
---------
Net realized loss ....... (2,260,494)
Net change in unrealized
appreciation on:
Investments .............. (11,521,341)
Foreign currency translation
of other assets and
liabilities .............. (150)
---------
Net change in unrealized
appreciation ............. (11,521,491)
------------
Net realized and
unrealized loss .......... (13,781,985)
-----------
Decrease in Net Assets
Resulting from Operations ...... $(13,885,290)
===========
Lexington Crosby Small Cap
Asia Growth Fund, Inc.
Statements of Changes in Net Assets
Years ended December 31, 1997 and 1996
1997 1996
---------- ---------
Net investment loss ..................... $(103,305) $(106,176)
Net realized loss from investments
and foreign currency transaction ..... (2,260,494) (334,704)
Net change in unrealized
appreciation of investments and
foreign currency translation ......... (11,521,491) 4,045,291
------------
Increase (decrease) in net
assets resulting from
operations ..................... (13,885,290) 3,604,411
Distributions to shareholders in
excess of net investment income
(Note 1) ............................. -- (14,172)
Increase in net assets from capital
share transactions (Note 3) ..........3,955,680 11,270,269
------------
Net increase (decrease)
in net assets ................ (9,929,610) 14,860,508
Net Assets:
Beginning of period ................ 23,796,472 8,935,964
------------
End of period (including
accumulated deficit of $57,394
and distributions in
excess of net investment
income of $22,305, 1997 and 1996,
respectively) .................. $13,866,862 $23,796,472
========== ==========
The Notes to Financial Statements are an integral part of these statements.
7
<PAGE>
LEXINGTON CROSBY SMALL CAP ASIA GROWTH FUND, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997 and 1996
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 investment transactions are reported on the
identified cost basis. Securities traded on a recognized stock exchange are
valued at the last sales price reported by the exchange on which the securities
are traded. If no sales price is recorded, the mean between the last bid and
asked price is used. Securities traded on the over-the-counter market are valued
at the mean between the last current bid and asked price. Short-term securities
having a maturity of 60 days or less are stated at amortized cost, which
approximates market value. Securities for which market quotations are not
readily available and other assets are valued by Fund management in good faith
under the direction of the Fund's 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. Dividend income and
distributions to shareholders are recorded on the ex-dividend date. Interest
income, adjusted for amortization of premiums and accretion of discounts, 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
closed and are reported in the statement of operations. There were no forward
foreign exchange contracts outstanding at December 31, 1997.
FEDERAL INCOME TAXES It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to "regulated investment
companies" and to distribute all of its taxable income to its shareholders.
Therefore, no provision for Federal income taxes is required.
DISTRIBUTIONS Dividends from net investment income and net realized capital
gains are normally declared and paid annually, but the Fund may make
distributions on a more frequent basis to comply with the distribution
requirements of the Internal Revenue Code. The character of income and gains to
be distributed are determined in accordance with income tax regulations which
may differ from generally accepted accounting principles. At December 31, 1997,
reclassifications were made to the Fund's capital accounts to reflect permanent
book/tax differences and income and gains available for distribution under
income tax regulations. Net investment income, net realized gains and net assets
were not affected by this change.
DEFERRED ORGANIZATION EXPENSES Organization expenses aggregating $67,351
have been deferred and are being amortized on a straight-line basis over five
years.
8
<PAGE>
LEXINGTON CROSBY SMALL CAP ASIA GROWTH FUND, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997 and 1996 (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (continued)
USE OF ESTIMATES The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of increases and
decreases in net assets from operations during the reporting period. Actual
results could differ from those estimates.
2. INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATE
The Fund pays an investment advisory fee to Lexington Management Corporation
("LMC") at 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.), Inc. ("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. For 1997, LMC has agreed to voluntarily limit the total expenses of the
Fund (excluding interest, taxes, brokerage commissions and extraordinary
expenses but including management fee and operating expenses) to an annual rate
of 2.50% of the Fund's average net assets. No reimbursement was required for the
year ended December 31, 1997.
The Fund reimbursed LMC for certain expenses, including accounting and
shareholder servicing costs of $56,400 which are incurred by the Fund, but paid
by LMC.
3. CAPITAL STOCK
Transactions in capital stock were as follows:
</TABLE>
<TABLE>
<CAPTION>
Year ended
December 31, 1997 December 31, 1996
-------------------------------- ------------------------------
Shares Amount Shares Amount
------ ------- ------ -------
<S> <C> <C> <C> <C>
Shares sold .................... 6,779,615 $83,723,229 2,376,604 $26,361,583
Shares issued on reinvestment
of dividends ................ -- -- 1,043 11,526
--------- ---------- --------- ----------
6,779,615 83,723,229 2,377,647 26,373,109
Shares redeemed ................ (6,757,851) (79,767,549) (1,349,951) (15,102,840)
--------- ---------- --------- ----------
Net increase ................... 21,764 $3,955,680 1,027,696 $11,270,269
========= ========== ========= ==========
</TABLE>
4. PURCHASES AND SALES OF INVESTMENT SECURITIES
The cost of purchases and proceeds from sales of securities for the year ended
December 31, 1997, excluding short-term securities, were $59,279,828 and
$55,799,577, respectively.
At December 31, 1997, the aggregate gross unrealized appreciation for all
securities in which there is an excess of value over tax cost amounted to
$855,420 and aggregate gross unrealized depreciation for all securities in which
there is an excess of tax cost over value amounted to $8,230,070.
9
<PAGE>
LEXINGTON CROSBY SMALL CAP ASIA GROWTH FUND, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997 and 1996 (continued)
5. INVESTMENT AND CONCENTRATION 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.
6. FEDERAL INCOME TAXES--CAPITAL LOSS CARRYFORWARDS
Capital loss carryforwards available for Federal income tax purposes as of
December 31, 1997 are:
$74,006 expiring in 2003; and
$1,553,376 expiring in 2005.
To the extent any future capital gains are offset by these losses, such gains
may not be distributed to shareholders.
7. OPTION CONTRACTS
Premiums paid when call options are purchased by the Fund represent investments,
which are marked-to-market daily. When a purchased option expires, the Fund will
realize a loss in the amount of the premium paid. When the Fund enters into a
closing sales transaction, the Fund will realize a gain or loss depending on
whether the proceeds from the closing sales transactions are greater or less
than the premiums paid for the option. When the Fund exercises a call option,
the cost of the security which the Fund purchases upon exercise will be
increased by the premium originally paid.
The following call option transactions occurred during the year ended December
31, 1997:
<TABLE>
<CAPTION>
Call Options
-----------------------------------
Number of
Cost Shares Optioned
---------- ----------------
<S> <C> <C> <C> <C>
Outstanding at December 31, 1996 $ 206,830 43,000
Options purchased -- --
Options closed (206,830) (43,000)
--------- -------
Outstanding at December 31, 1997 $ -- --
========= =======
</TABLE>
10
<PAGE>
LEXINGTON CROSBY SMALL CAP ASIA GROWTH FUND, INC.
FINANCIAL HIGHLIGHTS
Selected per share data for a share outstanding throughout the period:
<TABLE>
<CAPTION>
July 3, 1995
(commencement
of operations) to
December 31,
1997 1996 1995
---------- -------- ---------
<S> <C> <C> <C>
Net asset value, beginning of period ......................... $ 12.24 $ 9.76 $ 10.00
-------- -------- -------
Income (loss) from investment operations:
Net investment income (loss) ............................. (0.05) (0.05) 0.02
Net realized and unrealized gain (loss) on investments and
foreign currency transactions ........................ (5.13) 2.54 (0.24)
-------- -------- -------
Total income (loss) from investment operations ........... (5.18) 2.49 (0.22)
-------- -------- -------
Less distributions:
Distributions from net investment income ................. -- -- (0.02)
Distributions in excess of net investment income
(temporary book-tax difference) ...................... -- (0.01) --
-------- -------- -------
Net asset value, end of period ............................... $ 7.06 $ 12.24 $ 9.76
======== ======== =======
Total return ................................................. (42.32%) 25.50% (4.39)%*
Ratio to average net assets:
Expenses, before reimbursement or waivers ................ 2.30% 2.64% 3.51%*
Expenses, net of reimbursement or waivers ................ 2.30% 2.42% 1.75%*
Net investment loss, before reimbursement
or waivers ............................................. (0.32%) (0.86%) (1.24)%*
Net investment income (loss) ............................. (0.32%) (0.64%) 0.52%*
Portfolio turnover rate ...................................... 187.41% 176.49% 40.22%*
Average commission paid on equity security transactions** .... $ 0.005 -- --
Net assets, end of period (000's omitted) .................... $ 13,867 $23,796 $ 8,936
======== ======== ========
</TABLE>
* Annualized
** The average commission paid on equity security transactions for the year
ended December 31, 1996 was less than $0.005 per share of securities
purchased and sold. In accordance with SEC disclosure guidelines, the average
commissions paid on equity security transactions are calculated for the
periods beginning with the year ended December 31, 1996, but not for prior
periods.
11
<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, 1997, the related statements of
operations for the year then ended, the statement of changes in net assets for
the two-year ended and the financial highlights for the two-year period then
ended and 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
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1997 by correspondence with the custodian. As to securities sold
but not yet delivered, we performed other appropriate auditing procedures. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
Lexington Crosby Small Cap Asia Growth Fund, Inc. as of December 31, 1997, the
results of its operations for the year then ended, and changes in its net assets
for the two-year period then ended and the financial highlights for the two-year
period then ended and 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
February 4, 1998
12
<PAGE>
LEXINGTON
INVESTOR SERVICES
- --------------------------------------------------------------------------------
AS A LEXINGTON SHAREHOLDER, YOU SHOULD BE AWARE OF THE MANY SERVICES AVAILABLE
TO YOU.
NO LOAD--The Lexington Funds are no load funds. That is, investments and
redemptions are made without any sales charges, commissions or redemption fees.*
------------
FREE TELEPHONE EXCHANGE--Investments in the Lexington Funds may be exchanged for
shares of a different Lexington Fund at any time.
CHECK WRITING PRIVILEGES--Lexington Money Market Trust permits investors
immediate access to their funds with check writing for withdrawals from their
account.
------------
TAX SHELTERED PLANS--IRA, Keogh, Pension, and Profit Sharing Prototype Plans are
available to qualified individuals. These plans offer investment flexibility
through the Share Exchange Service, simplified record keeping, convenience and
investment supervision.
------------
CUSTODIAL ACCOUNTS FOR MINORS--Investments may be made on behalf of minors under
the Uniform Gifts to Minors Act currently in effect in all states.
------------
SYSTEMATIC WITHDRAWAL PLAN--An investor may elect to receive a fixed amount from
his or her account each month or quarter, subject to certain minimums.
------------
COMPLETE RECORD KEEPING--A statement is provided for every transaction in
addition to a year-end statement with tax information.
THE LEXINGTON GROUP OF
NO LOAD INVESTMENT COMPANIES
LEXINGTON WORLDWIDE EMERGING MARKETS FUND, INC.--Seeks long-term growth of
capital primarily through investment in equity securities of companies domiciled
in, or doing business in, emerging countries and emerging markets.
LEXINGTON GLOBAL FUND, INC.--Seeks long-term growth of capital primarily through
investment in common stocks of companies domiciled in foreign countries and the
United States.
LEXINGTON INTERNATIONAL FUND, INC.--Seeks long-term growth of capital through
investment in companies domiciled in foreign countries.
LEXINGTON TROIKA DIALOG RUSSIA FUND, INC.--Seeks long-term capital appreciation
through investments primarily in the equity securities of Russian companies.
LEXINGTON CROSBY SMALL CAP ASIA GROWTH FUND, INC. --Seeks long-term capital
appreciation through investment in companies domiciled in the Asia Region with a
market capitalization of less than $1 billion.
LEXINGTON RAMIREZ GLOBAL INCOME FUND--Seeks high current income. Capital
appreciation is a secondary objective. The Fund invests in a combination of
foreign and domestic high-yield, lower rated debt securities.
LEXINGTON GOLDFUND, INC.--Seeks capital appreciation through investment in gold
bullion and shares of gold mining companies.
LEXINGTON GROWTH AND INCOME FUND, INC.--Seeks capital appreciation over the
long-term through investments in the stocks of large, ably managed and well
financed companies.
LEXINGTON CORPORATE LEADERS TRUST FUND--Seeks capital growth and reasonable
income through investment in an equal number of shares of an established list of
American blue chip corporations.
LEXINGTON SMALLCAP VALUE FUND, INC.--Seeks long-term capital appreciation
through investment in common stocks of companies domiciled in the United States
with a market capitalization of less than $1 billion.
LEXINGTON CONVERTIBLE SECURITIES FUND--Seeks total return by providing capital
appreciation, current income and conservation of capital through investments in
a diversified portfolio of securities convertible into shares of common stock.
LEXINGTON GNMA INCOME FUND, INC.--Seeks to achieve a high level of current
income, consistent with liquidity and safety of principal, through investment
primarily in mortgage-backed GNMA ("Ginnie Mae") certificates that are
guaranteed as to the timely payment of principal and interest by the United
States Government.
LEXINGTON MONEY MARKET TRUST--Seeks a high level of current income consistent
with preservation of capital and liquidity through investments in interest
bearing short-term money market instruments.
For more complete information about any of the Lexington Funds and a prospectus
which includes management fee and expenses call the distributor toll-free at
1-800-526-0057. Read the prospectus carefully before you invest or send money.
*Redemptions on shares of Lexington Troika Dialog Russia Fund, Inc. held less
than 365 days are subject to a redemption fee of 2% of the redemption proceeds.
13
<PAGE>
For more complete information about any of the Lexington Funds and a prospectus
which includes management fee and expenses call the distributor toll-free at
1-800-526-0056. Read the prospectus carefully before you invest or send money.
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
LEXINGTON
CROSBY SMALL CAP ASIA GROWTH FUND, INC.
INVESTMENT ADVISER
- -------------------------------------------------------------------------------
LEXINGTON MANAGEMENT CORPORATION
P.O. Box 1515
Park 80 West Plaza Two
Saddle Brook, New Jersey 07663
SUB-ADVISER
- --------------------------------------------------------------------------------
CROSBY ASSET MANAGEMENT (US), INC.
c/o Crosby Asset Management (Hong Kong) Limited
32/F Asia Pacific Finance Tower
Citibank Plaza
3 Garden Road, Central
Hong Kong
DISTRIBUTOR
- --------------------------------------------------------------------------------
LEXINGTON FUNDS DISTRIBUTOR, INC.
P.O. Box 1515
Park 80 West Plaza Two
Saddle Brook, New Jersey 07663
- --------------------------------------------------------------------------------
(800) 526-0052
"LEXLINE"
24 hour toll-free telephone access to your
Lexington Fund account
Price/Yield o Account Balances o Exchanges o
Last Transactions o Total Return o Duplicate Statements
- --------------------------------------------------------------------------------
This report has been prepared for the information of the shareholders of
Lexington Crosby Small Cap Asia Growth Fund, Inc. and is authorized for
distribution to the public only if it is accompanied or preceded by a currently
effective prospectus which sets forth expenses and other material information.
LEXINGTON
[LOGO]
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.
---------[]----------
ANNUAL REPORT
DECEMBER 31, 1997
The Lexington Group
of No Load
Investment Companies
