PROSPECTUS
October 27, 1995
Lexington Strategic Silver Fund, Inc.
P.O. Box 1515, Park 80 West, Plaza Two, Saddle Brook, New Jersey 07663
Toll Free: Sales-1-800-367-9160
1-201-845-7300
Service-1-800-526-0056
24 Hour Account Information 1-800-526-0052
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Lexington Strategic Silver Fund, Inc. (the "Fund") is an open-end
non-diversified management investment company. The Fund's investment
objective is to maximize total return on its assets from long-term
growth of capital and income principally through investment in a
portfolio of securities which are engaged in the exploration, mining,
processing, fabrication or distribution of silver and in silver bullion
("silver related companies").
Lexington Management Corporation ("LMC") is the Fund's investment
adviser. Lexington Funds Distributor, Inc. ("LFD") is the Fund's
distributor.
Shares of the Fund are being offered at a price equal to the net
asset value per share plus a sales charge of 5.75% of the offering price
(6.10% of the net amount invested) subject to reductions on purchases in
single transactions of $10,000 or more.
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 October 27, 1995 which
provides a further discussion of certain matters in this Prospectus and
other matters which 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.
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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.
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<PAGE>
FEE TABLE
<TABLE>
<S> <C>
Shareholder Transaction Expenses (as a percentage of the offering price)
Maximum Sales Charge Imposed on Purchases ............................................................ 5.75%
----
Annual Fund Operating Expenses (net of reimbursement) (as a percentage of average net assets):
Management fees .................................................................................. 0.89%
----
Other expenses ................................................................................... 0.93%
----
Total Fund Operating Expenses ................................................................ 1.82%
====
</TABLE>
<TABLE>
<CAPTION>
Example: 1 year 3 years 5 years 10 years
------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following on a $1,000 investment, assuming
(1) 5% annual return and (2) redemption at the end of each period $74.93 $111.46 $150.35 $258.94
</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
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 and Distributor" and "How to Purchase Shares" below.) The
Expenses and Example appearing in the table above are based on the Fund's
expenses for the period from July 1, 1994 to June 30, 1995. The Example shown in
the table above should not be considered a representation of past or future
expenses and actual expenses may be greater or less than those shown.
The Fund charges an annual fee of $25 per account for accounts of any size
without a current mailing address.
FINANCIAL HIGHLIGHTS
The Fund was originally organized as a Texas corporation on August 30, 1984
under the name Strategic Silver Fund, Inc. The Fund was re-organized as a
Maryland corporation under its present name on June 8, 1992. Lexington
Management Corporation became the Fund's investment adviser on December 13,
1991.
The table below includes certain financial highlights of the Fund's
investment results for periods prior to the Fund's re-organization during which
the Fund was managed by a different investment adviser.
The following Financial Highlights Table for the four years ended June 30,
1995 has been audited by KPMG Peat Marwick, LLP Independent Auditors, whose
report thereon appears in the Statement of Additional Information. The Financial
Highlights for the one year period ended June 30, 1991 has been audited by
Cheshier & Fuller, Inc., Independent Auditors. 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.
2
<PAGE>
<TABLE>
Selected Per Share Data for a share outstanding throughout the period:
<CAPTION>
Year ended June 30,
-------------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period ..... $3.92 $3.52 $2.78 $3.64 $4.52 $3.81 $4.52 $5.47 $3.71 $4.82
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Income (loss) from investment
operations:
Net investment loss .................... (.03) (.02) (.04) (.09) (.06) (.05) (.02) (.03) (.03) (.01)
Net realized and unrealized gain
(loss) on investments ................ .11 .42 .78 (.77) (.82) .76 (.69) (.92) 1.79 (1.10)
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total income (loss) from investment
operations ............................. .08 .40 .74 (.86) (.88) .71 (.71) (.95) 1.76 (1.11)
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Net asset value, end of period ........... $4.00 $3.92 $3.52 $2.78 $3.64 $4.52 $3.81 $4.52 $5.47 $3.71
===== ===== ===== ===== ===== ===== ===== ===== ===== =====
Total return* ............................ 2.04% 11.36% 26.62% (23.63%) (19.47%) 18.64% (15.71%) (17.37%) 47.44% (23.03%)
Ratios to average net assets:
Expenses, before reimbursement ......... 1.82% 1.84% 3.48% 2.70% 1.85% 1.67% 1.66% 1.45% 1.48% 1.54%
Expenses, net of reimbursement ......... 1.82% 1.84% 2.60% 2.50% 1.83% 1.53% 1.49% 1.45% 1.48% 1.54%
Net investment income (loss),
before reimbursement ................. (.83%) (.82%) (2.48%) (2.15%) (1.25%) (0.94%) (0.29%) 0% 0% 0%
Net investment income (loss),
including reimbursement .............. (.83%) (.82%) (1.60%) (1.95%) (1.23%) (0.80%) (0.12%) 0% 0% 0%
Portfolio turnover ....................... 4.22% 5.28% 18.58% 45.20% 0.58% 11.49% 0% 32.90% 51.91% 34.32%
Net assets at end of period
(000's omitted) ......................... $65,517 $49,499 $15,032 $10,687 $15,983 $22,186 $22,133 $31,206 $36,560 $16,287
<FN>
*Sales load is not reflected in total return.
</FN>
</TABLE>
DESCRIPTION OF THE FUND
The Fund, a Maryland corporation (formerly, Strategic Silver Fund, Inc.), is
an open-end, non-diversified management investment company.
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to seek to maximize total return from
long-term growth of capital and income principally by investing in a portfolio
at least 80% of which will be invested in the securities of established
silver-related companies throughout the world.
The Fund will seek to achieve its objective through investment in common
stocks of established silver-related companies and silver bullion which have the
potential for long-term growth of capital or income, or both. The Fund intends
to invest primarily in common stocks of silver-related companies which may or
may not be paying dividends. The Fund may also invest in other types of
securities of silver-related companies including convertible securities,
preferred stocks, bonds, notes, warrants and silver bullion. When LMC believes
that the return on debt securities will equal or exceed the return on common
stocks, the Fund may, in pursuing its objective of maximizing total return,
substantially increase its holding in debt securities.
The securities in which the Fund invests include issues of established
silver-related companies domiciled in the United States, Canada and Mexico as
well as other silver producing countries throughout the world. At least 80% of
the Fund's assets will be invested in established silver-related companies which
have been in business more than three years. The Fund will not invest more than
5% of its total assets in the securities of unseasoned silver-related companies
which have been in business less than three years. Such investments are more
speculative. At the time of investment, no more than 15% (which includes 5% in
unseasoned silver-related companies) of the value of the Fund's total assets
will be invested in the aggregate in securities with legal or contractual
restrictions on resale (restricted securities), illiquid securities, securities
on which market quotations are not readily available and repurchase agreements
which mature in more than seven days. (See "Risk Considerations").
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<PAGE>
At any time, if management deems it advisable for temporary defensive or
liquidity purposes, the Fund may hold all its assets in cash or cash
equivalents, and invest in, or hold unlimited amounts of debt obligations of the
United States government or its political subdivisions, and money market
instruments including repurchase agreements with maturities of seven days or
less and Certificates of Deposit.
The Fund's investment portfolio may include repurchase agreements ("repos")
with banks and dealers in U.S. Government securities. A repurchase agreement
involves the purchase by the Fund of an investment contract from a bank or a
dealer in U.S. Government securities which contract is secured by debt
securities whose value is equal to or greater than the value of the repurchase
agreement including the agreed rate of return and calls for resale of the
securities at a specified time and price. The total amount received on
repurchase would exceed the price paid by the Fund, reflecting an agreed upon
rate of interest for the period from the date of the repurchase agreement to the
settlement date, and would not be related to the interest rate on the underlying
securities. The difference between the total amount to be received upon the
repurchase of the securities and the price paid by the Fund upon their
acquisition is accrued daily as interest. If the institution defaults on the
repurchase agreement, the Fund will retain possession of the underlying
securities. In addition, if bankruptcy proceedings are commenced with respect to
the seller, realization on the collateral by the Fund may be delayed or limited
and the Fund may incur additional costs. In such case the Fund will be subject
to risks associated with changes in the market value of the collateral
securities. The Fund intends to limit repurchase agreements to transactions with
institutions believed by LMC to present minimal credit risk.
Portfolio Hedging-When, in the opinion of LMC, 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. Hedging against a
decline in the value of currency does not eliminate fluctuations in the prices
of portfolio securities or prevent loss if the prices of such securities
decline.
Although management will attempt to achieve the Fund's objectives, there can
be no assurance that they will be achieved.
The Fund's investment objectives and policies as discussed above are
fundamental and may not be changed without a vote of the majority of the
outstanding voting securities of the Fund, as defined in the Investment Company
Act of 1940,as amended (the "1940 Act").
The Fund's classification as a "non-diversified" investment company means
that the proportion of the Fund's assets that may be invested in the securities
of a single issuer is not limited by the 1940 Act. However, the Fund intends to
conduct its operations so as to qualify as a "regulated investment company" for
purposes of the Internal Revenue Code, which requires that, at the end of each
quarter of the taxable year, (i) at least 50% of the market value of the Fund's
assets be invested in cash, U.S. Government securities, the securities of other
regulated investment companies and other securities, with such other securities
of any one issuer counted for the purposes of this calculation only if the value
thereof is not greater than 5% of the value of the Fund's total assets, and (ii)
not more than 25% of the value of its total assets be invested in the securities
of any one issuer (other than U.S. Government securities or the securities of
other regulated investment companies). Since a relatively high percentage of the
Fund's assets may be invested in the securities of a limited number of issuers,
the Fund's portfolio securities may be more susceptible to any single economic,
political or regulatory occurrence than the portfolio securities of a
diversified investment company.
The Fund does not intend to seek short-term trading profits, although
securities may be sold whenever management believes it advisable, regardless of
the length of time any particular asset may have been held. The Fund
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<PAGE>
anticipates that its annual portfolio turnover rate will generally not exceed
100%. A 100% turnover rate would occur if all of the Fund's portfolio
investments were sold and either repurchased or replaced within one year. High
turnover may result in increased transaction costs to the Fund; however, the
rate of turnover will not be a limiting factor when the Fund deems it desirable
to purchase or sell portfolio investments. Therefore, depending on market
conditions, the Fund's annual portfolio turnover rate may exceed 100% in a
particular year. For the fiscal year ended June 30, 1993, June 30, 1994 and June
30, 1995, the portfolio turnover rate was 18.58%, 5.28% and 44.22% respectively.
Silver Market Fluctuations
The price of silver has been subject to substantial price fluctuations over
short periods of time. The price of silver may be affected by unpredictable
international monetary and political policies such as currency devaluations or
revaluations, economic and social conditions within an individual country, trade
imbalances or trade or currency restrictions between countries. Frequently, the
price of silver mining shares fluctuates even more dramatically than the price
of silver bullion itself. Silver bullion is frequently viewed by individuals as
a unit of monetary reserve such as gold and, therefore, fluctuations in the
price of gold may cause fluctuations in the price of silver. Fluctuations in the
price of silver will usually impact on the price of securities of silver-related
companies.
Silver is a major industrial metal because of its wide use in many
industries. Although the photographic industry consumes large quantities of
silver, the electrical conductive properties of silver and its noncorrosiveness
make it an important industrial metal in all electronic manufacturing. The
industrial demand for silver may exceed annual production of silver. In
addition, 75% of silver is mined as a co-product of other metals (primarily
copper, lead and zinc), therefore, demand and production of other metals may
also influence the production and supplies of silver. This can result in large
price movement of silver bullion depending upon the amount of silver recovery
activities (coin melt, silverware melt, scrap purchases) which, in turn, is a
reflection of the price of bullion. Increasing prices of silver bullion also
prompt additional mine openings resulting in more silver coming into the market
to satisfy the demand. This continually changing industrial supply and demand
ratio for silver bullion will frequently cause similar price fluctuations in the
prices of the securities of silver-related companies.
Fluctuations in the market price of silver may produce corresponding
fluctuations in the value of securities of silver-related companies and,
therefore, in the net asset value of the Fund.
Risk Considerations
Investments in foreign securities may involve risks and considerations not
present in domestic investments. Since foreign securities generally are
denominated and pay interest or dividends in foreign currencies, the value of
the assets of the Fund as measured in United States dollars will be affected
favorably or unfavorably by changes in the relationship of the United States
dollar and other currency rates. The Fund may incur costs in connection with the
conversion or transfer of foreign currencies. In addition, there may be less
publicly available information about foreign companies than in United States
companies. Foreign companies may not be subject to accounting, auditing, and
financial reporting standards, practices and requirements comparable to those
applicable to United States companies. Foreign securities markets, while growing
in volume, have for the most part substantially less volume than United States
securities markets and securities of foreign companies are generally less liquid
and at times their prices may be more volatile than securities of comparable
United States companies. Foreign stock exchanges, brokers and listed companies
are generally subject to less government supervision and regulation than in the
United States. The customary settlement time for foreign securities may be
longer than 5 day customary settlement time for United States securities.
Although the Fund will try to invest in companies and governments of countries
having stable political environments, there is the
5
<PAGE>
possibility of expropriation or confiscatory taxation, seizure or
nationalization or foreign restrictions or other adverse political, social or
diplomatic developments that could affect investment in these nations.
Unlike certain more traditional investment vehicles such as savings
deposits and stocks and bonds, which may produce interest or dividend income,
silver bullion earns no income return. Appreciation in the market price of
silver is the sole manner in which the Fund will be able to realize gains on its
investment in silver bullion. Furthermore, the Fund may encounter storage and
transaction costs in connection with its ownership of silver bullion which may
be higher than those attendant to the purchase, holding and disposition of more
traditional types of investments.
The Fund's transactions in silver may, under some circumstances, preclude
its qualifying for the special tax treatment available to investment companies
meeting the requirements of Subchapter M of the Internal Revenue Code. However,
the Fund may make investment decisions without regard to the effect on its
ability to qualify under Subchapter M of the Internal Revenue Code, if deemed
appropriate by LMC (see "Tax Matters"). In addition, changes in the tax or
currency laws of the U.S. (including, for example, reinstatement of an interest
equalization tax as was previously in effect) and of foreign countries may
inhibit the Fund's ability to pursue or may increase the cost of pursuing its
investment program.
Income from foreign securities held by the Fund may, and in some cases will
be reduced by a withholding tax at the source or other foreign taxes. A
shareholder of the Fund will, subject to certain restrictions, be entitled to
claim a credit or deduction for United States Federal income tax purposes for
the shareholder's pro rata share of such foreign taxes paid by the Fund. (See
"Dividends, Capital Gains, Distributions and Tax Matters")
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 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.
Transactions in which silver bullion is taken in payment of principal,
interest or both or a debt instrument and where the Fund disposes of the
silver bullion for cash will not be subject to this restriction.
(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 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 silver or portfolio securities or
receivables or transfer or assign or otherwise encumber them in an
amount not exceeding one-
6
<PAGE>
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 (no including Sundays and holidays), reduce
its borrowings to the extent necessary to meet the 300% test.
The foregoing 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 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.
(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.
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.
MANAGEMENT OF THE FUND
The business affairs of the Fund are managed under the direction of its
Board of Directors. There are currently ten directors (of whom seven are
non-affiliated persons) who meet four times each year. The Statement of
Additional Information contains additional information regarding the directors
and officers of the Fund.
Portfolio Manager
Robert W. Radsch, CFA, is Vice President and Portfolio Manager of the Fund.
He is also Vice President of Lexington Management Corporation. Prior to joining
Lexington in July 1994, he was Senior Vice President, Portfolio Manager and
Chief Economist for the Bull & Bear Group. He has extensive experience managing
gold, silver and platinum on an international basis having managed precious
metals and international funds for more than 13 years. Mr. Radsch is a graduate
of Yale University with a B.A. degree and holds an M.B.A. in Finance from
Columbia University.
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<PAGE>
INVESTMENT ADVISER, DISTRIBUTOR AND ADMINISTRATOR
Lexington Management Corporation, P.O. Box 1515/Park 80 West, Plaza Two,
Saddle Brook, New Jersey 07663, is the investment adviser to the Fund, and, as
such, advises and makes recommendations to the Fund with respect to its
investments and investment policies. Lexington Funds Distributor, Inc. is the
distributor of shares of the Fund.
LMC is paid an investment advisory fee at the annual rate of 1.00% of the
first $30 million of the daily net assets of the Fund and 0.75% on the daily net
assets of the Fund in excess of the first $30 million. In the fiscal year ended
June 30, 1995, LMC earned $479,211 in management fees from the Fund. This fee is
computed on the basis of the Fund's average daily net assets and is payable on
the last business day of each month.
LMC also acts as administrator to the Fund and performs certain
administrative and internal accounting services, including but not limited to,
maintaining general ledger accounts, regulatory compliance, preparation of
financial information for semiannual and annual reports, preparing registration
statements, calculating net asset values, shareholder communications and
supervision of the custodian, transfer agent and provides facilities for such
services. The Fund shall reimburse LMC for its actual cost in providing such
services, facilities and expenses.
LMC, established in 1938, currently manages over $3.5 billion in assets. LMC
serves as investment adviser to other investment companies and private and
institutional investment accounts. Included among these clients are persons and
organizations which own significant amounts of capital stock of LMC's parent.
The clients pay fees which LMC considers comparable to the fees paid by
similarly served clients.
LMC and LFD are wholly-owned subsidiaries of Piedmont Management Company
Inc., a Delaware corporation with offices at 80 Maiden Lane, New York, New York
10038. Descendants of Lunsford Richardson, Sr., their spouses, trusts and other
related entities have a majority voting control of outstanding shares of
Piedmont Management Company Inc. common stock. See "Investment Adviser and
Distributor" in the Statement of Additional Information.
HOW TO PURCHASE SHARES
The minimum initial investment for a shareholder is $1,000 and minimum
subsequent investments are $50. The public offering price of shares of the Fund
is their net asset value per share next determined after receipt and acceptance
of the purchase order at the office of LMC, plus the applicable sales charge, if
any. Lower sales charges are applicable to larger transactions as shown in the
following table:
<TABLE>
<CAPTION>
Sales Charge As Sales Charge As Dealer Concessions
Percentage of the Percentage of Net as a Percentage of
Amount Purchased Offer Amount Invested the Offering Price
- ---------------- ----------------- ----------------- -------------------
<S> <C> <C> <C>
Less than $10,000 ................................... 5.75% 6.10% 5.00%
$10,000 but less than $25,000 ....................... 5.50% 5.82% 5.00%
$25,000 but less than $100,000 ..................... 4.75% 4.99% 4.25%
$100,000 but less than $250,000 ..................... 3.75% 3.90% 3.25%
$250,000 but less than $500,000 ..................... 2.50% 2.60% 2.00%
$500,000 but less than $1,000,000 .................. 2.00% 2.04% 1.50%
Over $1,000,000 .................................... negotiable
</TABLE>
Commissions are paid to securities dealers who have selling agreements with
LFD and are members of the National Association of Securities Dealers, Inc. From
time to time, LFD may reallow the entire sales commission to selected dealers
who sell or are expected to sell significant amounts of shares during specified
time periods. During periods when 90% or more of the sales commission is
reallowed, such dealers may be deemed to be underwriters as that term is defined
in the Securities Act of 1933.
8
<PAGE>
The sales commission, as set forth in the table above, will be applicable to
purchases made at one time by an individual or an individual and spouse and
their children under the age of 21, or a trustee or fiduciary purchasing
securities for a single trust, estate or a single fiduciary account, even though
more than one beneficiary is involved. This, however, does not include a group
of individuals whose funds are combined, directly or indirectly, for the
purchase of shares of the Fund jointly or through a trustee, agent, custodian or
other representative of such group of individuals. The sales charges will also
be applicable to purchases made at one time by employees of tax exempt
organizations enumerated in Sections 501(c)(3) or (13) of the Internal Revenue
Code and the employee benefit plans qualified under Section 401 of the Internal
Revenue Code and also to employee benefit plans not qualified under Section 401,
provided employees' contributions are made by means of periodic payroll
deductions or otherwise in such manner that the total amount to be invested by
all individuals in the group at one time is remitted in one sum to the Fund
together with a tabulation indicating the amounts to be applied to the benefit
of each such individual.
Shares of the Fund may be purchased at any time at net asset value without a
sales charge by the following: (a) Officers, Directors and employees of the
Fund, the Investment Adviser, the Distributor, broker-dealers who have currently
effective sales agreements with the Distributor and affiliates of such companies
including their spouses and children; (b) any trust, pension or profit sharing
or other benefit plan for the persons described in item (a), above; (c) any
employee benefit plan subject to minimum requirements with respect to number of
employees or amount of contribution which may be established by LFD; (d)
accounts advised or managed by LMC and its affiliates; (e) trust companies and
bank trust departments for funds over which they exercise discretionary
investment authority and which are held in a fiduciary, agency, advisory,
custodial or similar capacity; (f) registered investment advisors; (g)
organizations that provide administrative services to (e) and (f) above; (h)
broker-dealers who maintain omnibus accounts with the Fund. (Broker-dealers who
process such orders for their customers may charge a fee for these services);
and (i) persons who have redeemed their Fund shares within the previous 45 days.
The amount which may be so reinvested is limited to an amount up to, but not
exceeding, the redemption proceeds. In order to exercise this privilege, an
order for the purchase of shares must be received by the Fund or LFD within 45
days after redemption: (j) persons who have previously paid a sales charge and
exchanged their shares into another eligible Lexington Fund. The amount which
may be so reinvested is limited to an amount up to, but not exceeding, the
exchange proceeds. If the shareholder has realized a gain on the redemption or
exchanges, the transaction is taxable as a sale of Fund shares and reinvestment
will not alter any Federal tax payable. Net asset value purchases under item
(a)-(g) above are made upon the written assurance that the purchase is made for
investment purposes and the shares purchased may not be resold except through
redemption by the Fund.
Net Asset Value: The net asset value of the shares of the Fund is computed 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. All other securities for which over-the-counter market quotations are
readily available are valued at the mean between the last current bid and asked
price. Short-term securities having maturity of 60 days or less are valued at
amortized cost. 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.
Generally, trading in foreign securities, as well as United States
Government securities, money market instruments and repurchase agreements, is
substantially completed each day at various times prior to the close of the New
York
9
<PAGE>
Stock Exchange. The values of such securities used in computing the net asset
value of the shares of the Fund are determined as of such times. 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 in good faith by the 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 using the foreign exchange rates as
described above.
Letter of Intent: Any person may sign a letter indicating his intention to
invest a certain amount in shares of the Fund within a period of 13 months. All
purchases made during this period are then at the reduced sales charge
applicable to the total amount of the intended investment. A price readjustment
will be made on shares previously purchased within 90 days of signing a Letter
of Intent if requested by the shareholder. If a shareholder (including spouse
and children under the age of 21) already owns shares of the Fund, the reduced
sales charge applicable to all purchases under the Letter of Intent is the
charge which would apply to a single purchase of such amount plus the net asset
value of shares of the Fund already owned.
Dividends and distributions of capital gains paid in shares of the Fund at
net asset value will not apply towards the completion of the Letter of Intent.
The signing of a Letter of Intent does not bind the investor to purchase the
full amount indicated, but the investor must complete the intended purchase to
obtain the reduced sales charge. The Letter of Intent provides that the transfer
agent will hold in escrow, shares valued at 5% of the amount of the intended
purchase to assure payment of additional sales charges if the intended purchase
amount is not made. The shareholder is required to remit to LFD the amount of
the additional sales charges applicable to shares already purchased because of
such reduced investment. If the shareholder does not pay such difference within
20 days after receipt of a written request, the transfer agent will redeem the
number of escrowed shares necessary to realize such difference in sales charges
and the balance, if any, of the escrow shares will then be released. A form of
Letter of Intent is included in the purchase application.
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 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. Each Shareholder Servicing Agent may, from
time to time, voluntarily waive all or a portion of the fees payable to it.
10
<PAGE>
Accumulation Privilege: In determining the applicable sales charge, the amount
of a shareholder's investment will be considered as the amount of the purchase
plus the total net asset value of all shares of the Fund already owned by the
shareholder (including spouse and children under the age of 21). The reduced
sales charge applies to the total amount of money then being invested and not
just to the portion of such amount which exceeds the break point above which a
reduced sales charge applies. It is the responsibility of the shareholder to
notify the transfer agent or LFD in writing that a purchase qualifies for a
reduced sales charge.
The Open Account: By investing in the Fund, shareholders appoint State Street
Bank and Trust Company (the "Agent") as their representative, 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 and only when requested in
writing. Unless payment for shares is made by 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.
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.
Terms of Offering: 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 retirement plan programs. An order to
purchase shares is not binding on the Fund until it has been confirmed by the
Agent. If an order to purchase shares is canceled 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, and may prohibit or restrict the purchaser in placing
future orders in the Fund.
Account Statements: The Agent will send shareholders who are 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 total 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
statement for tax purposes.
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 shareholders; (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. The Agent's address can be found on the back cover of
this prospectus. 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. Shareholders who have questions regarding the requirements for
redeeming shares may call the Fund at the toll-free number on the front cover
of this prospectus prior to submitting a redemption request. The redemption
price may be more or less than the shareholder's cost depending on the market
value of the securities held by the Fund at the time of redemption.
11
<PAGE>
Checks for redemption proceeds will be mailed within seven days of receipt
of all required documents in proper form but will not be mailed until checks in
payment for the shares to be redeemed have been cleared which may take up to 15
days. (See "Redemption of Shares" in the Statement of Additional Information).
By Telephone: The telephone redemption privilege is established by checking the
box on your account application. Shareholders who have previously established
accounts and wish to have the telephone redemption privilege may call our
Shareholder Services Department at 1-800-526-0056 between 9:00 A.M. and 5:00
P.M. Eastern Time and request a Telephone Authorization Form.
Shareholders redeeming at least $1,000 worth of shares (for which
certificates have not been issued) may effect a telephone redemption by calling
our Shareholder Services Department at 1-800-526-0056 Monday-Friday between 9
A.M. and 4 P.M. Eastern Time. A telephone redemption in good order will be
processed at the net asset value of the Fund next determined. There is a maximum
telephone redemption limit of $25,000.
The redemption proceeds will be made payable to the registered
shareholder(s) and forwarded to the address of record. The Transfer Agent will
restrict the mailing of telephone redemption proceeds to a shareholder's address
of record within 30 days of such address being changed, unless the shareholder
provides a signature guaranteed letter of instruction. (See Telephone
Exchange/Redemption Provisions).
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; and (c) 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 federally or state chartered credit
union, a member firm of a domestic stock exchange, or a foreign branch of any of
the foregoing. Notary publics are not acceptable guarantors.
With respect to redemption requests submitted by mail, the signature
guarantees must appear either: (a) on the written request for redemption; (b) on
a separate instrument of assignment ("stock power") which should be completed
and specify 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.
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 period as the SEC may
by order permit for the protection of shareholders of the Fund. Due to the
proportionately high cost of maintaining smaller accounts, the Fund reserves the
right to redeem all shares in an account with a value of less than $500 other
than as a result of a change in net asset value and mail the proceeds to the
shareholder. Shareholders will be notified before these redemptions are to be
made and will have thirty (30) days to make an additional investment to bring
their accounts up to the required minimum.
The Fund charges an annual fee of $25 per account registration for accounts
of any size without current mailing addresses to defray the higher cost to the
Fund of maintaining these accounts, including the costs associated with ongoing
attempts to locate shareholders of such accounts. The fee will be charged to
each applicable account on or about December 15th.
12
<PAGE>
SHAREHOLDER SERVICES
Exchange Privilege
Shares of the Fund may be exchanged for shares of Lexington Money Market
Trust on the basis of relative net asset value per share, without sales charge,
at the time of the exchange. Shares purchased at the public offering price
(including shares purchased at net asset value) that were exchanged into
Lexington Money Market Trust may be exchanged back into the Fund at net asset
value. In the event shares of Lexington Strategic Silver Fund 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.
Shareholders may exchange all or part of their shares subject to the
conditions described herein. The Exchange Privilege enables a shareholder to
acquire shares in a fund with a different investment objective when the
shareholder believes that a shift between funds is an appropriate investment
decision. Shareholders contemplating an exchange should obtain and review the
prospectus of the fund to be acquired. If an exchange involves investing in a
Lexington Fund not already owned, and a new account has to be established, the
dollar amount exchanged must meet the minimum initial investment of the fund
being purchased. If, however, an account already exists in the fund being
bought, there is a $500 minimum exchange requirement. Shareholders must provide
the account number of the existing account. Any exchange between funds is, in
effect, a redemption of shares in one fund and a purchase in the other fund.
Shareholders should consider the possible tax effects of an exchange. The
transfer agent currently imposes a $10 charge for exchange transactions.
Telephone Exchange/Redemption Provisions-Exchange or redemption instructions may
be given in writing or by telephone. Telephone exchanges/redemptions may only be
made if a Telephone Authorization form has been previously executed and filed
with LFD. This privilege is not available on retirement accounts. Telephone
exchanges/redemptions are permitted only after a minimum of 7 days have elapsed
from the date of a previous telephone exchange/redemption. However, written
redemption requests are not subject to this restriction. (See "How to redeem by
mail").
Telephonic exchanges/redemptions 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/redemption by telephone in
the Lexington Funds. All accounts involved in a telephone 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 accepting the telephone exchange and telephone redemption privilege as
signed for on the new account application you appoint 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, authorize and direct LFD
to act upon any instructions from any person by telephone for exchange or
redemption 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 agree 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 subject to the procedures outlined below. 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
13
<PAGE>
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 telephone exchange and redemption 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 attorney 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.
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 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 executed Telephone Authorization form must be received by LFD
within 5 days of the exchange request. LFD reserves the right to reject any
telephone exchange request. Any telephone exchange orders so rejected may be
processed by mail.
This exchange offer is available only in states where shares of the Fund
being acquired may legally be sold and may be modified or terminated at any time
of 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.
Transfer: Shares of the Fund may be transferred to another owner. A signature
guarantee is required on the letter of instruction or accompanying completed
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.
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) Plans and
403(b)(7) Plans. Plan support services are available through the Shareholder
Services Department of LMC. For further information call 1-800-526-0056.
DIVIDEND, DISTRIBUTION AND REINVESTMENT POLICY
The Fund intends to pay dividends semi-annually from net investment income
and net capital gain income annually (December) if earned and as declared by its
Board of Directors.
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.
14
<PAGE>
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 on any of its income.
Distributions by the Fund of its net investment income and the excess, if
any, of its net short-term capital gain over its net long-term capital loss are
taxable to shareholders as ordinary income. These distributions are treated as
dividends for federal income tax purposes, but in any year only a portion
thereof (which cannot exceed the aggregate amount of qualifying dividends from
domestic corporations received by the Fund during the year) may qualify for the
70% dividends-received deduction for corporate shareholders. Dividends from
foreign corporations, interest income, and short-term capital gains, do 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 a
shareholder has held his shares.
Under certain circumstances, the Fund may elect to "pass-through" to its
shareholders income taxes or any other creditable taxes paid by the Fund to
foreign governments during the 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 certain 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 in December 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 creditable foreign taxes "passed through",
will be sent to shareholders promptly after the end of each year.
Under the back-up withholding rules of the Code, certain shareholders do
not address the treatment of foreign shareholders, and 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 in the Statement of Additional Information of federal
income tax considerations relevant to an investment in the Fund. In addition,
each
15
<PAGE>
prospective shareholder should consult with his own tax adviser as to the tax
consequences of his investment in the Fund, including any state and local taxes
which may apply to him.
PERFORMANCE CALCULATION
The Fund will calculate performance on a total return basis for various
periods. The total return basis combines principal and dividend income changes
for the periods shown. Principal changes are based on the difference between the
beginning and closing net asset values for the period and assume reinvestment of
dividends paid by the Fund. Dividends are comprised of net realized capital
gains and net investment income.
Performance will vary from time to time and past results are not necessarily
representative of future results. It should be remembered 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 and Standard & Poor's 500 Composite Stock Price 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.
CUSTODIANS, TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
Chase Manhattan Bank, N.A., 1211 Avenue of the Americas, New York, New York
10036, has been retained to act as the Custodian for the Fund's investments and
assets. In addition, Chase Manhattan Bank, N.A. may appoint foreign banks and
securities depositories to act as sub-custodians for the Fund's portfolio
securities subject to their qualification as eligible foreign custodians under
the rules adopted by the SEC.
State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110 is the transfer agent and dividend disbursing agent for the
Fund.
Neither Chase Manhattan Bank, N.A. nor State Street Bank and Trust Company
have any part in determining the investment policies of the Fund or in
determining which portfolio securities are to be purchased or sold by the Fund
or in the declaration of dividends and distributions.
COUNSEL AND INDEPENDENT AUDITORS
Kramer, Levin, Naftalis, 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 year ending June
30, 1996.
OTHER INFORMATION
The Fund is an open-end non-diversified management investment company. The
Fund was originally incorporated as a Texas corporation under the name of
Strategic Silver Fund, Inc. on August 30, 1984 with 100,000,000 no par value
shares authorized. The Fund was re-organized as a corporation under the laws of
the State of Maryland on June 8, 1992. The Fund has authorized capital of
1,000,000,000 shares of common stock $.001 par value.
16
<PAGE>
Each share of common stock has one vote and shares equally in dividends and
distributions when if declared by the Fund and in the Fund's net assets 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 Code of Ethics adopted by the 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 and Fund be carried out for the exclusive benefit of the Fund's
shareholders. Both the Adviser and the Fund maintain careful monitoring of
compliance with the Code of Ethics.
The Fund 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.
A Registration Statement (the "Registration Statement"), of which this
Prospectus is a part, has been filed with the Securities and Exchange Commission
(the "Commission"), Washington, D.C. under the Securities Act of 1933, as
amended.
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus and in the Fund's
official sales literature in connection with the offer of the Fund's shares,
and, if given or made, such other information or representations must not be
relied upon as having been authorized by the Fund. This Prospectus does not
constitute an offer in any State in which, or to any person to whom, such
offering may not lawfully be made. "A Statement of Additional Information", to
which reference is made in this Prospectus, provides further discussion of
certain areas in the prospectus and other matters which may be of interest to
some investors and is available by request without cost as indicated herein. The
Prospectus and the Statement of Additional Information omit certain information
contained in the Registration Statement, to which reference is made, filed with
the Commission. Items which are thus omitted, including contracts and other
documents referred to or summarized herein and therein, may be obtained from the
Commission upon payment of the prescribed fees.
17
<PAGE>
Right Column
L E X I N G T O N
-----------------------------
LEXINGTON
STRATEGIC
SILVER
FUND, INC.
(filled box)
(filled box)Silver Related
Companies
(filled box)Silver Bullion
(filled box)International
diversification
(filled box)No redemption charge
(filled box)
The Lexington Strategic Group
of
Investment Companies
-----------------------------
P R O S P E C T U S
OCTOBER 27, 1995
Left Column
Investment Adviser
- -------------------------------------------------------------
LEXINGTON MANAGEMENT CORPORATION
P.O. Box 1515/Park 80 West Plaza Two
Saddle Brook, N.J. 07663
Distributor
- -------------------------------------------------------------
LEXINGTON FUNDS DISTRIBUTOR, INC.
P.O. Box 1515/Park 80 West Plaza Two
Saddle Brook, N.J. 07663
Transfer Agent
- -------------------------------------------------------------
STATE STREET BANK AND TRUST COMPANY
c/o National Financial Data Services
P.O. Box 419648
Kansas City, Missouri 64141-6648
----------------------------------------------
All shareholder requests for services of any
kind should be sent to:
----------------------------------------------
Transfer Agent
STATE STREET BANK AND
TRUST COMPANY
c/o National Financial Data Services
1004 Baltimore
Kansas City, Missouri 84105
or call toll free:
Service and Sales: 1-800-526-0056
24 Hour Account Information:
1-800-526-0052
----------------------------------------------
Table of Contents Page
- -------------------------------------------------------------
Fee Table ............................................... 2
Financial Highlights .................................... 2
Description of the Fund ................................. 3
Investment Objective and Policies ....................... 3
Silver Market Fluctuations ............................ 5
Risk Considerations ................................... 5
Investment Restrictions ................................. 6
Management of the Fund .................................. 7
Portfolio Manager ..................................... 7
Investment Adviser, Distributor and Administrator ....... 8
How to Purchase Shares .................................. 8
How to Redeem Shares .................................... 11
Shareholder Services .................................... 13
Exchange Privilege .................................... 13
Tax-Sheltered Retirement Plans .......................... 14
Dividend, Distribution and Reinvestment Policy .......... 14
Tax Matters ............................................. 15
Performance Calculation ................................. 16
Custodians, Transfer Agent and
Dividend Disbursing Agent ............................. 16
Counsel and Independent Auditors ........................ 16
Other Information ....................................... 16
<PAGE>
LEXINGTON STRATEGIC SILVER FUND, INC.
STATEMENT OF ADDITIONAL INFORMATION
OCTOBER 27, 1995
This Statement of Additional Information which is not a prospectus,
should be read in conjunction with the current prospectus of Lexington
Strategic Silver Fund, Inc. (the "Fund"), dated October 27, 1995, 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
Sales Information: 1-800-367-9160
24-Hour Account Information: 1-800-526-0052
Lexington Management Corporation ("LMC") is the Fund's investment adviser.
Lexington Funds Distributor, Inc. ("LFD") is the Fund's distributor.
TABLE OF CONTENTS
Investment Restrictions.....................................2
Investment Adviser, Distributor and Administrator...........4
Portfolio Turnover and Brokerage Commissions................5
Tax Sheltered Retirement Plans..............................6
Dividends, Distribution and Reinvestment Policy.............7
Tax Matters.................................................7
Performance Calculation....................................12
Custodians, Transfer Agent and Dividend Disbursing Agent...13
Management of the Fund.....................................13
Financial Statements.......................................16
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INVESTMENT RESTRICTIONS
The Fund's investment objective, as described under "investment policy" and
the following investment restrictions are matters or 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) At least 80% of the Fund s assets will be invested in established
silver-related companies which have been in business for more than
three years.
(2) At the end of each quarter of the taxable year, (i) at least 50% of
the market value of the Fund s assets be invested in cash, U.S.
Government securities, the securities of other regulated investment
companies and other securities, with such other securities of any
one issuer counted for the purposes of this calculation only if the
value of thereof is not greater than 5% of the value of the Fund s
total assets, and (ii) not more than 25% of its total assets be
invested insecurities of any one issuer (other than U.S. Government
securities or the securities of other regulated investment
companies).
(3) 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.
(4) 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. Transactions in which silver bullion is taken in
payment of principal, interest or both or a debt instrument and
where the Fund disposes of the silver bullion for cash will not be
subject to this restriction.
(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 or bullion provided that the value of such
loaned securities does not exceed one-third of the Fund's total
assets.
(6) 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 silver or 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 (no
including Sundays and holidays), reduce its borrowings to the
extent necessary to meet the 300% test.
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<PAGE>
(7) 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,
interpretations 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.
(8) 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.
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, 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.
(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 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.
(3) The Fund will not invest for the purpose of exercising control over
management of any company.
(4) 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.
(5) The Fund will not issue its securities for any considerations other
than cash or securities except as a dividend or distribution in
connection with a reorganization.
(6) The Fund will not purchase the securities of any other investment
company, except as permitted under the 1940 Act.
(7) 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.
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<PAGE>
(8) 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. The Fund will not
write, purchase or sell puts, calls or combinations thereof.
However, the Fund may invest up to 15% of the value of its assets
in warrants. This restriction on the purchase of warrants does not
apply to warrants attached to, or otherwise included in, a unit
with other securities.
(9) 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, DISTRIBUTOR AND ADMINISTRATOR
LMC, P.O. Box 1515/Park 80 West, Plaza Two, Saddle Brook, New Jersey
07663, is the investment adviser to the Fund, and, as such, advises and makes
recommendations to the Fund with respect to its investments and investment
policies.
Under the terms of the investment advisory agreement, LMC also pays the
Fund's expenses for office rent, utilities, telephone, furniture and supplies
utilized for the Fund's principal office and the salaries and payroll expenses
of officers and directors of the Fund who are employees of LMC or its
affiliates in carrying out its duties under the investment advisory agreement.
The Fund pays all its other expenses, including custodian and transfer agent
fees, legal and registration fees, audit fees, printing of prospectuses,
shareholder reports and communications required for regulatory purposes or for
distribution to existing shareholders, computation of net asset value, mailing
of shareholder reports and communications, portfolio brokerage, taxes and
independent directors' fees, and furnishes LFD at printers overrun cost, such
copies of its prospectus, annual, semi-annual and other reports and
shareholder communications as may be reasonably required for sales purposes.
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. Brokerage fees and commissions, taxes, interest and extraordinary
expenses are not deemed to be expenses of the Fund for such reimbursement.
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's services are provided and its fee is paid pursuant to an
investment advisory agreement, dated December 13, 1991 which will
automatically terminate if assigned and which may be terminated by either
party upon 60 days notice. The terms of the agreement and any renewal thereof
must be approved annually by a majority of the Fund's Board of Directors,
including a majority of directors who are not parties to the agreement or
"interested persons" of such parties, as such term is defined under the
Investment Company Act of 1940, as amended ("1940 Act").
For the year ended June 30, 1995, LMC received $479,211 from the Fund
in investment advisory fees. For the year ended June 30, 1994, LMC received
$341,696 from the Fund. For the year ended June 30, 1993, LMC received
$100,358 from the Fund and paid the Fund $88,341 in expense reimbursements.
-4-
<PAGE>
LMC also acts as administrator to the Fund and performs certain
administrative and internal accounting services, including but not limited to,
maintaining general ledger accounts, regulatory compliance, preparation of
financial information for semiannual and annual reports, preparing
registration statements, calculating net asset values, shareholder
communications and supervision of the custodian, transfer agent and provides
facilities for such services. The Fund shall reimburse LMC for its actual
cost in providing such services, facilities and expenses.
LFD serves as distributor for Fund shares under a distribution agreement
which is subject to annual approval by a majority of the Fund's Board of
Directors, including a majority of directors who are not "interested persons."
LMC is a wholly owned subsidiary of Piedmont Management Company 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 Piedmont Management Company Inc.
Of the directors, officers or employees ("affiliates persons") of the
Fund, Messrs. Corniotes, DeMichele, Faust, Hisey, Kantor, Lavery, Luehs,
Petruski and Radsch and Mmes. Carnicelli, Carr, Curcio, Gilfillan and Mosca
(see "Management of the Fund"), may also be deemed affiliates of LMC by virtue
of being officers, directors or employees thereof. As of September 29, 1995,
all officers and directors of the Fund as a group owned of record and
beneficially less than 1% of the outstanding shares of the Fund.
PORTFOLIO TURNOVER AND BROKERAGE COMMISSIONS
As a general matter, purchases and sales of portfolio securities by the
Fund are placed by LMC with brokers and dealers who in its opinion will
provide the Fund with the best combination of price (inclusive of brokerage
commissions) and execution for its orders. However, pursuant to the Fund's
investment advisory agreement, management consideration may be given in the
selection of broker-dealers to research provided and payment may be made of
a commission higher than that charged by another broker-dealer which does not
furnish research services or which furnishes research services deemed to be
of lesser value, so long as the criteria of Section 28(e) of the Securities
and Exchange Act of 1934 are met. Section 28(e) of the Securities and
Exchange Act of 1934 was adopted in 1975 and specifies that a person with
investment discretion shall not be "deemed to have acted unlawfully or to have
breached a fiduciary duty" solely because such person has caused the account
to pay a higher commission than the lowest available under certain
circumstances, provided that the person so exercising investment discretion
makes a good faith determination that the commissions paid are "reasonable in
relation to the value of the brokerage and research services provided
...viewed in terms of either that particular transaction or his overall
responsibilities with respect to the accounts as to which he exercises
investment discretion."
Currently, it is not possible to determine the extent to which
commissions that reflect an element of value for research services might
exceed commissions that would be payable for execution services alone. Nor
generally can the value of research services to the Fund be measured.
Research services furnished might be useful and of value to LMC and its
affiliates, in serving other clients as well as the Fund. On the other hand,
any research services obtained by LMC or its affiliates from the placement of
portfolio brokerage of other clients might be useful and of value to LMC in
carrying out its obligations to the Fund.
As a general matter, it is the Fund's policy to execute in the U.S. all
transactions with respect to securities traded in the U.S. Over-the-counter
purchases and sales are normally made with principal market makers, except
where, in the opinion of management, the best executions are available
elsewhere.
In addition, the Fund may from time to time allocate brokerage
commissions to firms which furnish research and statistical information to LMC
or which render to the Fund services which LMC is not required to provide.
The supplementary research supplied by such firms is useful in varying degrees
and is of indeterminable value. No formula has been established for the
allocation of business to such brokers.
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<PAGE>
The brokerage commissions paid and portfolio turnover rates are as
follows:
Fiscal Year Ended Total Brokerage Portfolio Turnover
June 30 Commission Paid Rate
- ----------------- ---------------- ------------------
1993 $ 21,228 18.58%
1994 152,133 5.28%
1995 212,407 44.22%
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 support services are available by contacting the Shareholder Services
Department of LMC at 1-800-526-0056.
INDIVIDUAL RETIREMENT ACCOUNT (IRA): Individuals who have earned income
may make tax deductible contributions to their own Individual Retirement
Accounts established under Section 408 of the Internal Revenue 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 ($2,250 for spousal IRAs) annual deductible IRA contribution. For
adjusted gross income 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 to be furnished to individuals who
are considering adopting an IRA may be obtained from the Fund.
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 State
Street Bank and Trust Company (the "Agent").
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DIVIDENDS, DISTRIBUTION AND REINVESTMENT POLICY
The Fund intends to pay dividends semi-annually from investment income
also if earned and as declared by its Board of Directors. The Fund intends
to declare or distribute a dividend from capital gain income if any, in
December in order to comply with distribution requirements of the 1986 Tax
Reform Act to avoid the imposition of 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 requesting
payments in cash. This request must be received by the Agent at least seven
days before the dividend record date. Upon receipt by the Agent of such
written notice, all further payments will be made in cash until written notice
to the contrary is received. A record of shares owned by each shareholder
will be maintained by the Agent. These accounts will have the rights of other
shareholders with respect to shares so registered (see "How to Purchase Shares
- - The Open Account" in the Prospectus).
TAX MATTERS
The following is only a summary of certain additional tax considerations
generally affecting the Fund and its shareholders that are not described in
the Prospectus. No attempt is made to present a detailed explanation of the
tax treatment of the Fund or its shareholders, and the discussions here and
in the Prospectus are not intended as substitutes for careful tax planning.
Qualification as a Regulated Investment Company
The Fund has elected to be taxed as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code").
As a regulated investment company, the Fund is not subject to federal income
tax on the portion of its net investment income (i.e., taxable interest,
dividends and other taxable ordinary income, net of expenses) and capital gain
net income (i.e., the excess of capital gains over capital losses) that it
distributes to shareholders, provided that it distributes at least 90% of its
investment company taxable income (i.e., net investment income and the excess
of net short-term capital gain over net long-term capital loss) for the
taxable year (the "Distribution Requirement"), and satisfies certain other
requirements of the Code that are described below. Distributions by the Fund
made during the taxable year or, under specified circumstances, within twelve
months after the close of the taxable year, will be considered distributions
of income and gains of the taxable year that satisfy the Distribution
Requirement.
If the Fund has a net capital loss (i.e., the excess of capital losses
over capital gains) for any year, the amount thereof may be carried forward
up to eight years and treated as a short-term capital loss which can be used
to offset capital gains in such later years. As of June 30, 1995, the Fund
has capital loss carryforwards of approximately $13,086,556 which expire
through 2003. Under Code Sections 382 and 383, if the Fund has an "ownership
change" (as defined), then the Fund's use of its capital loss carryforwards
in any years following the ownership change will be limited to an amount equal
to the net asset value of the Fund immediately prior to the ownership change
multiplied by the long-term tax-exempt rate (which is published monthly by the
Internal Revenue Service (the "IRS")) in effect for the month in which the
ownership change occurs (the rate for October 1995 is 5.75 percent). The Fund
will use its best efforts to avoid having an ownership change. However,
because of circumstances which may be beyond the control or knowledge of the
Fund, there can be no assurance that the Fund will not have, or has not
already had, an ownership change. If the Fund has or has had an ownership
change, then any capital gain net income for any year following the ownership
change in excess of the annual limitation on the capital loss carryforwards
will have to be distributed by the Fund and will be taxable to shareholders
as described under "Fund Distributions" below.
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<PAGE>
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 netted against 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, are not in any event characterized as Short-
Short Gains 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.) 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 Short-Short Gain. However, income
that is attributable to realized market appreciation will be treated as gross
income from the sale or other disposition of securities for purposes of the
Short-Short Gain Test.
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 while 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, will generally be treated as
ordinary income or loss.
Certain transactions in which the Fund may engage (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 marked-to-market and
treated as if they were sold for their fair market value on the last business
day of the taxable year, even if they have not been in fact terminated (by
delivery, exercise, entering into a closing transaction or otherwise) as of
such date. Any gain or loss recognized as a consequence of this year-end
marking-to-market is taken into account together with any other gain or loss
actually realized upon the termination of Section 1256 contracts during the
taxable year. Gain or loss with respect to Section 1256 contracts (including
gain or loss arising as a consequence of the year-end deemed sale of such
contracts) is generally treated as 60% long-term and 40% short-term capital
gain or loss. The Fund, however, may elect not to have this special tax
treatment apply to Section 1256 contracts that are part of a "mixed straddle"
with other investments of the Fund that are not Section 1256 contracts. Gains
arising from Section 1256 contracts are not taken into account for purposes
of the Short-Short Gain Test under the constructive sale rule of Section 1256.
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 its 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.
-8-
<PAGE>
If the Fund failed to qualify as a regulated investment company for any
taxable, all of its taxable income (including its net capital gain) would be
subject to tax at regular corporate income tax rates without any deduction for
distributions to shareholders, and such distributions would be taxable to the
shareholders as ordinary dividends to the extent of the Fund's current and
accumulated earnings and profits. Such distributions would generally be
eligible for the dividends-received deduction in the case of corporate
shareholders.
Excise Tax on Regulated Investment Companies
A 4% non-deductible excise tax is imposed on a regulated investment
company that fails to distribute in each calendar year an amount equal to 98%
of its ordinary taxable income for the calendar year and 98% of its capital
gain net income for the one-year period ended on October 31 of such 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 following 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. The
Fund may in certain circumstances have to liquidate portfolio investments to
make sufficient distributions to avoid excise tax liability.
Fund Distributions
The Fund intends to distribute substantially all of its investment
company taxable income for each taxable year. Such distributions will be
taxable to shareholders as ordinary income and treated as dividends for
federal income tax purposes, but they will qualify for the 70% dividends-
received deduction for corporate shareholders only to the extent discussed
below.
The Fund also intends to distribute to shareholders its net capital gain
for each taxable year. When distributed and designated as a capital gain
dividend, such gain will be taxable to shareholders as long-term capital gain,
regardless of the length of time the shareholder has held his shares and
including any such gain recognized by the Fund before the shareholder acquired
his shares.
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 S corporations, which are not eligible for the
deduction, and other than for purposes of 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. A dividend
received by the Fund will not be treated as a qualifying dividend (1) if it
was received with respect to stock that the Fund held for less than 46 days
(91 days in the case of certain preferred stock), excluding for this purpose
certain holding periods under the rules of Code Sections 246(c) (3) and (4);
(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 that 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 (i) if the corporate shareholder
fails to satisfy the foregoing requirements with respect to its shares of the
Fund, or (ii) 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). The Fund will notify its shareholders for each taxable year what
portion of the ordinary income dividends for that year are qualifying
dividends.
-9-
<PAGE>
Investment income that may be received by the Fund from sources outside
the U.S. may be subject to foreign taxes withheld at 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 stock or securities of foreign corporations,
the Fund may elect to "pass through" to its shareholders the amount of foreign
taxes paid by the Fund. If the Fund so elects, each shareholder will be
required to include in gross income, his pro rata share of the foreign taxes
paid by the Fund, but will be treated as having paid his pro rate share of
such foreign taxes and will therefore be allowed either to deduct such amount
in computing his taxable income or use it (subject to certain limitations) as
a foreign tax credit against federal income tax (but not both). A deduction
for foreign taxes may not 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 in his particular
circumstances.
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
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 realized or unrealized
undistributed income or gain, subsequent distributions of such amounts will
be taxable to the shareholder in the manner described above, although
economically they constitute a return of capital to him.
Ordinarily, shareholders are required to take distributions by the Fund
into account in the year in which they are made. However, dividends declared
in October, November or December of any calendar 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 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, capital gain dividends, and
the proceeds of redemption of shares paid to any shareholder who (1) has
provided either an incorrect tax identification number or no number at all,
(2) 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 a capital gain or loss and will be long-term capital gain or loss
if the shares were held for longer than one year. However, any capital loss
arising from the sale or redemption of shares held for six months or less will
be treated as a long-term capital loss to the extent of any capital gain
dividends received on such shares. For this purpose, the special holding
period rules of Code Section 246(c)(3) and (4) (referred to above in
connection with the dividends-received deduction for corporations) will
generally 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.
-10-
<PAGE>
If a shareholder (i) incurs a sales load in acquiring shares of the
Fund, (ii) disposes of such shares less than 91 days after they are acquired,
and (iii) subsequently acquires shares of the Fund or another fund at a
reduced sales load on account of the shares disposed of, then the original
sales load (to the extent of the reduction in the sales load on the shares
subsequently acquired) shall not be taken into account in determining gain or
loss on the shares disposed of but shall be treated as incurred on the
acquisition of the shares subsequently acquired.
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 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 the U.S.
withholding tax, for its 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 a sale or redemption of
shares of the Fund or on capital gain dividends.
If the income from the Fund is effectively connected with a U.S. trade
or business carried on by a foreign shareholder, then ordinary income and
capital gain dividends, and any gains realized upon the sale of shares of the
Fund will be subject to U.S. federal income tax at the rates applicable to
U.S. taxpayers.
In the case of a noncorporate foreign shareholder, the Fund may be
required to withhold U.S. federal income tax at a rate of 31% on distributions
that are otherwise exempt from withholding (or subject to withholding at a
reduced treaty rate) unless the shareholder furnishes the Fund with proper
notification of its foreign status.
The tax consequences to a foreign shareholder entitled to claim the
benefits of an applicable tax treaty may be different from those described
herein. Foreign shareholders are urged to consult their own tax advisers with
respect to the particular tax consequences to them of an investment in the
Fund, including the applicability of foreign taxes.
Effect of Future Legislation; Local Tax Considerations
The foregoing general discussion of U.S. federal income tax consequences
is based on the Code and 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, local, and foreign tax rules affecting their investment in the Fund.
-11-
<PAGE>
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:
n
P(1+T) = 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).
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 or 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 by 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.
Prior to January 1992, the Fund was managed by a different investment
adviser. The total return for the one year and since commencement (1/2/92)
period ended June 30, 1995 is as follows:
Average Annual
Period Total Return
------ ------------
1 year ended June 30, 1995 -3.85%
42 month period ended June 30, 1995 11.31%
-12-
<PAGE>
CUSTODIANS, 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 investments and
assets. In addition, the Fund and Chase Manhattan Bank, N.A. may appoint
foreign banks and foreign securities depositories which qualify as eligible
foreign sub-custodians under the rules adopted by the Securities and Exchange
Commission.
State Street Bank and Trust Company 225 Franklin Street, Boston,
Massachusetts 02110 has also 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.
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 Chairman of the Board. 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, Piedmont Management
Company Inc.; Director, Reinsurance Corporation of New York; Director,
Unione Italiana Reinsurance; Vice Chairman of the Board of Trustees, Union
College; Director, Continental National Corporation; Director, The
Navigator's Insurance Group, Inc.; Chairman, Lexington Capital Management,
Inc.; Chairman LCM Financial Services, Inc.; Director, Vanguard Cellular
Systems, Inc.; Chairman of the Board, Market Systems Research, Inc. and
Market Systems Research Advisors, Inc. (registered investment advisers);
Trustee, Smith Richardson Foundation.
+BEVERLEY C. DUER, Director. 340 East 72nd Street, New 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. Rothchild, Unterberg, Towbin.
*+LAWRENCE KANTOR, Vice President and Director. P.O. Box 1515, Saddle Brook,
N.J. 07663. Executive Vice President, Managing Director and Director,
Lexington Management Corporation; Executive Vice President and Director,
Lexington Funds Distributor, Inc.
+DONALD B. MILLER, Director. 10725 Quail Covey Road, Boynton Beach, Florida
33436. Chairman, Horizon Media, Inc.; Trustee Galaxy Funds; Director,
Maguire Group of Connecticut; prior to January 1989, President, Director
and C.E.O., Media General Broadcast Services (advertising firm).
+FRANCIS OLMSTED, Director. 50 Van Hooten Court, San Anselmo, CA 94960.
Private Investor. Formerly, Manager - Commercial Development (West Coast)
Essex Chemical Corporation, Clifton, New Jersey (chemical manufacturers).
+JOHN G. PRESTON, Director. 3 Woodfield Road, Wellesley, Massachusetts 02181.
Associate Professor of Finance, Boston College, Boston, Massachusetts.
+MARGARET 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. (registered in investment companies).
+FRANCIS A. SUNDERLAND, Director. 309 Quito Place, Castle Pines, Castle Rock,
CO 80104. Private Investor.
*+ROBERT W. RADSCH, C.F.A., Vice President and Portfolio Manager. P.O. Box
1515, Saddle Brook, N.J. 07663. Vice President, Lexington Management
Corporation. Prior to July 1994, Senior Vice President, Portfolio Manager
and Chief Economist, Bull & Bear Group.
-13-
<PAGE>
*+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.
*+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.; Chief Financial Officer,
Market Systems Research Advisors, Inc.
*+RICHARD J. 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 A. CARNICELLI, Vice President. P.O. Box 1515, Saddle Brook, N.J.
07663.
*+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 Investment Accounting, Alliance Capital
Management, Inc.
*+SHERI MOSCA, Assistant Treasurer. P.O. Box 1515, Saddle Brook, N.J. 07663.
Prior to September 1990, Fund Accounting Manager, Lexington Group of
Investment Companies.
*+ANDREW PETRUSKI, Assistant Treasurer. P.O. Box 1515, Saddle Brook, N.J.
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 Secretary, 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 as defined in the
1940 Act.
+ Messrs. Corniotes, DeMichele, Duer, Faust, Hisey, Kantor, Lavery, Luehs,
Miller, Olmsted, Petruski, Preston, Radsch, Smith and Sunderland and Mmes.
Carnicelli, Carr, Curcio, Evans, Gilfillan, Mosca and Russell hold similar
offices with some or all of the other investment companies advised and/or
distributed by LMC and LFD.
Directors not employed by the Fund or its affiliates receive an annual fee
of 800 and a fee of $160 for each meeting attended plus reimbursement of
expenses for attendance at regular meetings. During the fiscal year ended June
30, 1995, the aggregate remuneration paid by the Fund to such directors was
$12,262.
-14-
<PAGE>
Aggregate Total Compensation Number of
Name of Director Compensation From Fund and Directorships
From Fund Fund Complex in Fund Complex
- ---------------- ------------ ------------------- ---------------
Robert M. DeMichele 0 $0 17
Beverley C. Duer $1350 $19,400 17
Barbara R. Evans 0 0 16
Lawrence Kantor 0 0 17
Donald B. Miller $1350 $18,050 16
Francis Olmsted $1350 $17,550 15
John G. Preston $1350 $18,050 16
Margaret Russell $1350 $17,550 15
Philip C. Smith $1350 $18,050 16
Francis A. Sunderland $1350 $17,550 15
-15-
<PAGE>
Independent Auditors' Report
The Board of Directors and Shareholders
Lexington Strategic Silver Fund, Inc.
We have audited the accompanying statements of net assets (including the
portfolio of investments) and assets and liabilities of Lexington Strategic
Silver Fund, Inc. as of June 30, 1995, the related statement of operations for
the year then ended, the statements of changes in net assets for each of the
years in the two-year period then ended, and the financial highlights for each
of the years in the four-year period then ended. The financial highlights for
the year ended June 30, 1991 was audited by other auditors whose report was
dated August 13, 1991. 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 June
30, 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 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 Strategic Silver Fund, Inc. as of June 30, 1995 and the results of its
operations for the year then ended, changes in its net assets for each of the
years in the two-year period then ended, and financial highlights for each of
the years in the four-year period then ended, in conformity with generally
accepted accounting principles.
KPMG Peat Marwick LLP
New York, New York
July 31, 1995
16
<PAGE>
Lexington Strategic Silver Fund, Inc.
Statement of Net Assets
(Including the Portfolio of Investments)
June 30, 1995
<TABLE>
<CAPTION>
Number of
Shares or
Principal Value
Amount Security (Note 1)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
SILVER BULLION: 14.3%
1,849,069 fine ounces*
(Cost $10,039,298) ................................................. $ 9,356,288
-----------
COMMON STOCKS: 81.0%
AUSTRALIA: 2.7%
750,000 Aurora Gold Ltd.* .................................................... 889,400
242,000 MIM Holdings Ltd. (ADR) .............................................. 602,580
300,000 Pasminco Ltd.* ....................................................... 289,721
-----------
1,781,701
-----------
MEXICO: 15.7%
834,016 Grupo Mexico S.A. De C.V. ............................................ 4,006,482
1,145,000 Industrias Penoles S.A. .............................................. 3,439,584
130,176 San Luis CPO ......................................................... 2,876,587
-----------
10,322,653
-----------
NORTH AMERICA: 62.1%
100,000 Adrian Resources Ltd.* ................................................ 331,512
142,100 Agnico-Eagle Mines, Ltd. ............................................. 1,902,432
87,800 ASARCO, Inc. ......................................................... 2,677,900
89,420 Barrick Gold Corporation ............................................. 2,257,855
150,000 Battle Mountain Gold Company ......................................... 1,443,750
149,100 Cambior, Inc. ........................................................ 1,846,776
140,000 Carson Gold Corporation1 ............................................. 183,606
175,000 Carson Gold Corporation (Warrants)1* ................................. 1,750
118,100 Coeur D'Alene Mines Corporation ...................................... 2,051,987
328,000 Dayton Mining Corporation* ........................................... 1,123,206
50,000 Eldorado Corporation Ltd.* ........................................... 218,579
74,000 Euro Nevada Mining Corporation Ltd. .................................. 2,264,481
50,000 Falconbridge Ltd. .................................................... 892,532
20,000 Franco Nevada Mining Corporation Ltd. ................................ 1,041,894
99,000 Freeport McMoran Copper & Gold (Preferred Shares) .................... 1,930,500
34,700 Golden Knight Resources* ............................................. 221,220
135,000 Golden Star Resources Ltd. ........................................... 945,000
30,000 Golden Star Resources Ltd.1 .......................................... 210,000
30,000 Golden Star Resources Ltd. (Warrants)1* .............................. 300
33,000 Guyanor Resources S.A.* .............................................. 74,536
184,400 Hecla Mining Company ................................................. 1,913,150
450,000 International Gold Resources Corporation ............................. 1,573,770
473,000 Kinross Gold Corporation ............................................. 3,532,423
</TABLE>
17
<PAGE>
Lexington Strategic Silver Fund, Inc.
Statement of Net Assets
(Including the Portfolio of Investments)
June 30, 1995 (continued)
<TABLE>
<CAPTION>
Number of
Shares or
Principal Value
Amount Security (Note 1)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
NORTH AMERICA: 62.1% (continued)
52,281 Newmont Mining Corporation ........................................... $ 2,189,267
125,000 Pan American Minerals Corporation* .................................... 671,676
90,000 Pegasus Gold, Inc. ................................................... 911,250
70,000 Placer Dome, Inc. .................................................... 1,828,750
350,000 Prime Resources Group, Inc. .......................................... 2,422,587
350,000 Santa Elina Gold Corporation1* ....................................... 484,517
50,000 Teck Corporation "B" ................................................. 988,160
350,000 TVX Gold Inc. ........................................................ 2,537,500
-----------
40,672,866
-----------
PERU: 0.5%
56,473 Cia De Minas Buenaventura "C" ........................................ 325,317
-----------
TOTAL COMMON STOCKS (Cost $47,885,490) ............................... 53,102,537
-----------
SHORT-TERM INVESTMENTS: 0.6%
$400,000 U.S. Treasury Bills 5.71%, due 7/20/95 (Cost $398,795) ............... 398,795
-----------
TOTAL INVESTMENTS: 95.9% (Cost $58,323,583\'86) (Note 1) ............. 62,857,620
Other assets in excess of liabilities: 4.1% .......................... 2,659,491
-----------
TOTAL NET ASSETS: 100.0%
(equivalent to $4.00 per share on 16,390,573 shares outstanding) ... $65,517,111
===========
<FN>
ADR-American Depository Receipt.
*Non-income producing securities.
1Restricted security.
(D)Aggregate cost for Federal income tax purposes is identical.
</FN>
</TABLE>
The Notes to Financial Statements are an integral part of this statement.
18
<PAGE>
Lexington Strategic Silver Fund, Inc.
Statement of Assets and Liabilities
June 30, 1995
Assets
<TABLE>
<S> <C>
Investments, at value (cost $58,323,583) (Note 1) ........................................... $62,857,620
Cash ........................................................................................ 2,907,032
Receivable for shares sold .................................................................. 86,616
Interest receivable ......................................................................... 5,461
Deferred reorganization expenses, net (Note 1) .............................................. 19,626
-----------
Total Assets ........................................................................ 65,876,355
-----------
Liabilities
Due to Lexington Management Corporation (Note 2) ............................................ 48,260
Payable for shares redeemed ................................................................. 220,420
Accrued expenses ............................................................................ 90,564
-----------
Total Liabilities ................................................................... 359,244
-----------
Net Assets (equivalent to $4.00 per share on 16,390,573 shares outstanding) (Note 3) ........ $65,517,111
===========
Net Assets consist of:
Capital stock-authorized 1,000,000,000 shares, $.001 par value per share .................... 16,391
Additional paid-in capital (Note 1) ......................................................... 74,053,239
Accumulated net realized loss on investments (Note 6) ....................................... (13,086,556)
Net unrealized appreciation of investments .................................................. 4,534,037
-----------
$65,517,111
===========
Net Asset Value,
Redemption price per share ................................................................ $4.00
=====
Offering price per share (100/94.25 of $4.00 adjusted to nearest cent) ...................... $4.24
=====
</TABLE>
The Notes to Financial Statements are an integral part of this statement.
19
<PAGE>
(Left column)
Lexington Strategic Silver Fund, Inc.
Statement of Operations
Year ended June 30, 1995
Investment Income
Income
Dividends........................................ $ 402,493
Interest......................................... 163,394
-----------
565,887
Less: Foreign tax expense........................ 30,861
-----------
Total investment income....................... $ 535,026
Expenses
Investment advisory fee
(Note 2)....................................... 479,211
Accounting and shareholder
services expense (Note 2)...................... 85,112
Custodian and transfer agent
expenses....................................... 169,652
Printing and mailing............................. 98,791
Directors' fees and expenses..................... 12,262
Legal............................................ 12,833
Audit............................................ 8,821
Registration fees................................ 60,065
Computer processing fees......................... 11,992
Amortization of deferred
reorganization expenses
(Note 1)....................................... 13,103
Other expenses................................... 31,723
-----------
Total expenses................................. 983,565
---------
Net investment loss.......................... (448,539)
Realized and Unrealized Gain (Loss) on
Investments (Note 4)
Realized loss on investments
(excluding short-term securities):
Proceeds from sales.............................. 22,634,495
Cost of securities sold.......................... 23,961,854
-----------
Net realized loss.............................. (1,327,359)
Unrealized appreciation of investments:
End of period.................................... 4,534,037
Beginning of period.............................. 2,094,623
-----------
Change during period........................... 2,439,414
---------
Net realized and unrealized
gain on investments.......................... 1,112,055
---------
Increase in Net Assets Resulting
from Operations.................................. $ 663,516
=========
(Right column)
Lexington Strategic Silver Fund, Inc.
Statements of Changes in Net Assets
Years ended June 30, 1995 and 1994
1995 1994
---- ----
Net investment loss.......................... $ (448,539) $ (291,199)
Net realized gain (loss) from
security transactions...................... (1,327,359) 336,123
Increase in unrealized
appreciation of investments................ 2,439,414 380,039
----------- -----------
Net increase in
net assets resulting
from operations........................ 663,516 424,963
Increase in net assets from
capital share transactions
(Note 3)................................... 15,354,704 34,041,995
----------- -----------
Net increase in net assets............... 16,018,220 34,466,958
Net Assets
Beginning of period........................ 49,498,891 15,031,933
----------- -----------
End of period.............................. $65,517,111 $49,498,891
=========== ===========
The Notes to Financial Statements are an integral part of these statements.
20
<PAGE>
Lexington Strategic Silver Fund, Inc.
Notes to Financial Statements
June 30, 1995 and 1994
1. Significant Accounting Policies
Lexington Strategic Silver Fund, Inc. (the "Fund") is an open end
non-diversified management investment company registered under the Investment
Company Act of 1940, as amended. 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 national securities exchange are
valued at the closing price or, in the absence of a recorded sale, at the mean
between the last reported bid and asked price. Securities traded on the
over-the-counter market and silver bullion are valued at the mean between the
last reported bid and asked price. Short-term securities 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. Dividend income 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. There were no foreign
currency exchange contracts outstanding at June 30, 1995.
Distributions Effective January 1, 1993, the Fund adopted 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 June 30, 1995, book and tax basis differences amounting to
$448,413 have been reclassified from undistributed net investment income to
additional paid-in capital. In addition, foreign exchange gains of $126 were
reclassified from accumulated net realized losses to undistributed net
investment income.
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.
Deferred Reorganization Expenses Reorganization expenses aggregating $65,512
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 an annual rate of 1% of the Fund's average daily net assets up to $30
million and at an annual rate of .75% thereafter. The investment advisory
contract provides that the total annual expenses of the Fund (including
management fees, but excluding interest, taxes, brokerage commission and
extraordinary expenses) will not exceed the level of
21
<PAGE>
Lexington Strategic Silver Fund, Inc.
Notes to Financial Statements
June 30, 1995 and 1994 (continued)
expenses which the Fund is permitted to bear under the most restrictive expense
limitation imposed by any state in which shares of the Fund are offered for
sale. No reimbursement was required for the year ended June 30, 1995. The
investment advisory fee is set forth in the accompanying 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:
Year ended Year ended
June 30, 1995 June 30, 1994
------------------------- -------------------------
Shares Amount Shares Amount
---------- ----------- ---------- -----------
Shares sold........... 17,944,367 $70,752,502 21,646,208 $86,690,545
Shares redeemed....... (14,196,839) (55,397,798) (13,271,533) (52,648,550)
---------- ----------- ---------- -----------
Net increase.......... 3,747,528 $15,354,704 8,374,675 $34,041,995
========== =========== ========== ===========
4. Purchases and Sales of Investment Securities
The cost of purchases and proceeds from sales of securities for the year ended
June 30, 1995, excluding short term securities, were $38,658,450 and
$22,634,495, respectively.
At June 30, 1995, the aggregate gross unrealized appreciation for all securities
in which there is an excess of value over tax cost amounted to $9,459,453 and
aggregate gross unrealized depreciation for all securities in which there is an
excess of tax cost over value amounted to $4,925,416.
5. Investment and Concentration Risks
The Fund makes significant investments in foreign securities and has an
investment objective of investing in silver bullion and the securities of
companies engaged in the exploration, mining, processing, fabrication and
distribution of silver. There are certain risks involved in investing in foreign
securities or concentrating in specific industries that are in addition to the
usual risks inherent in domestic investments. These risks include those
resulting from potentially adverse political and economic developments as well
as the possible imposition of foreign exchange or other foreign governmental
restrictions or laws.
6. Federal Income Taxes-Capital Loss Carryforwards
As of June 30, 1995, $316,337 of capital loss carryforwards have expired and
have been reclassified to additional paid-in capital. Capital loss carryforwards
available for Federal income tax purposes as of June 30, 1995 are approximately:
927,101 expiring in 1996;
1,610,302 expiring in 1997;
1,993,784 expiring in 1998;
1,254,382 expiring in 1999;
3,106,844 expiring in 2000;
954,861 expiring in 2001;
1,911,797 expiring in 2002; and,
1,327,485 expiring in 2003.
To the extent any future capital gains are offset by these losses, such gains
would not be distributed to shareholders.
22
<PAGE>
Lexington Strategic Silver Fund, Inc.
Financial Highlights
Selected per share data for a share outstanding throughout the period:
<TABLE>
<CAPTION>
Year ended June 30,
---------------------------------------------------------
1995 1994 1993 1992 1991
----- ----- ----- ----- -----
S> <C> <C> <C> <C> <C>
Net asset value, beginning of period........... $3.92 $3.52 $2.78 $3.64 $4.52
----- ----- ----- ----- -----
Income (loss) from investment operations:
Net investment loss.......................... (.03) (.02) (.04) (.09) (.06)
Net realized and unrealized gain (loss)
on investments............................. .11 .42 .78 (.77) (.82)
----- ----- ----- ----- -----
Total income (loss) from investment operations. .08 .40 .74 (.86) (.88)
----- ----- ----- ----- -----
Net asset value, end of period................. $4.00 $3.92 $3.52 $2.78 $3.64
===== ===== ===== ===== =====
Total return*.................................. 2.04% 11.36% 26.62% (23.63%) (19.47%)
Ratios to average net assets:
Expenses, before reimbursement............... 1.82% 1.84% 3.48% 2.70% 1.85%
Expenses, net of reimbursement............... 1.82% 1.84% 2.60% 2.50% 1.83%
Net investment loss, before reimbursement.... (.83%) (.82%) (2.48%) (2.15%) (1.25%)
Net investment loss, including reimbursement. (.83%) (.82%) (1.60%) (1.95%) (1.23%)
Portfolio turnover............................. 44.22% 5.28% 18.58% 45.20% 0.58%
Net assets at end of period (000's omitted).... $65,517 $49,499 $15,032 $10,687 $15,983
<FN>
*Sales load is not reflected in total return.
</FN>
</TABLE>
23
