Dear Shareholders:
- --------------------------------------------------------------------------------
Silver bullion in 1997 decoupled from gold bullion in the second half of
the year. The result was that whereas gold bullion showed a decline of 21.39%
for the full year, silver bullion rose 24.69%. Relentless short selling in the
first half of 1997 obscured the strong underlying fundamentals for silver
driving the metal down from its 1996 close of $4.82 an ounce, to a yearly low of
$4.22 on July 16. Silver prices then proceeded to recover their losses through
the end of October. After a brief price pullback, silver bullion began a
powerful move in mid-November sending prices to over $6.00 an ounce by the end
of the year. The low prices in July attracted renewed investment demand in the
Middle East, India and to a lesser extent the United States. At the same time
fabrication demand, mostly for jewelry, was strongly stimulated in Italy and in
India. The surge in demand accelerated the draw down of available silver bullion
inventory reflected by a sharp fall in reported Comex holdings. A growing
realization that silver inventories were approaching a critical mass resulted in
widespread short covering together with a renewed interest in silver bullion
among new investors.
Unfortunately, silver related equities did not all share in this bonanza.
Since approximately 80% of silver is produced as a by-product or co-product of
other mining operations, pure silver mining plays are extremely rare. Most
silver is produced conjointly with zinc, lead, copper and gold. Prices for these
metals came under pressure during the year resulting in weak prices for the
associated equities. Even some of the purer plays, such as Sunshine Mining,
didn't participate as much as might be expected in the silver price rally as
investors took a wait and see attitude. Finally, exploration companies looking
for new silver mines were tarnished by the extreme skepticism engendered by the
Bre-X debacle.
The Lexington Strategic Silver Fund produced a negative return of 8.05%*
for the year. This negative return was vastly better than the negative 42.33%
average return experienced by competing precious metals funds represented by the
gold oriented funds compiled by Lipper Analytical Services, Inc. In fact, the
Lexington Strategic Silver Fund outperformed every single one of the gold
oriented funds monitored by Lipper. The Fund was helped by its significant
holdings of silver bullion. However, it's equity holdings were hurt by their
association with gold and base metal production. Especially hard hit were some
of the exploration oriented equities such as William Resources and Argosy
Mining.
Looking ahead, the fundamentals underlying future silver prices appear
attractive. The deficits since 1990 between supply and demand have reached a
level of some 22% with the result that remaining silver inventories are reaching
a level that will require significantly higher prices to coax them onto the
market. There are no Central Bank holdings
1
<PAGE>
overhanging the market and private holdings are being depleted by as much as 25%
a year according to some estimates. Although the large Cannington Mine in
Australia will add significant silver supplies as it goes into production this
year, the mine will only make up for a fraction of the silver deficit. Beyond
that, new silver mines will require higher prices and will take a number of
years to bring into production. Higher silver prices should produce handsome
profits for the mining shares held by the Fund which should be reflected in
their stock prices.
Sincerely,
/s/Robert W. Radsch /s/Robert M. DeMichele
- ------------------- ----------------------
Robert W. Radsch Robert M. DeMichele
Portfolio Manager President
February, 1998 February, 1998
*-13.37%, 10.03% and 6.15% are the one year, five year and since commencement
(1/2/92) average annual standard total returns, respectively, for the period
ended December 31, 1997. Prior to January, 1992, the Fund was managed by a
different investment adviser. Investment return and principal value of an
investment will fluctuate so that an investor's shares, when redeemed, may be
worth more or less than at their original cost. These calculations include the
maximum 5.75% initial sales charge and assume reinvestment of dividends and
capital gains at net asset value. Total return represents past performance and
is not predictive of future results.
2
<PAGE>
LEXINGTON STRATEGIC SILVER FUND, INC.
STATEMENT OF NET ASSETS
(Including the Portfolio of Investments)
December 31, 1997 (unaudited)
<TABLE>
<CAPTION>
Number of Value
Shares Security (Note 1)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
SILVER BULLION: 27.6%
2,026,308 fine ounces (cost $10,989,225)2 ........................................ $12,178,110
-----------
COMMON STOCK: 62.3%
AUSTRALIA: 5.0%
1,200,000 Aurora Gold, Ltd.2 ............................................................... 1,368,289
1,020,000 MIM Holdings, Ltd. ............................................................... 624,721
192,857 Pasminco, Ltd. ................................................................... 221,160
----------
2,214,170
----------
MEXICO: 23.6%
451,056 Corporacion Industrial San Luis S.A. ............................................. 3,709,467
534,016 Grupo Mexico S.A. de C.V. ........................................................ 1,983,895
1,045,000 Industrias Penoles S.A. .......................................................... 4,731,259
----------
10,424,621
----------
NORTH AMERICA: 31.4%
100,000 Adrian Resources, Ltd.2 .......................................................... 97,832
45,000 Apex Silver Mines, Ltd.2 ......................................................... 573,750
200,000 Argosy Mining Corporation1,2 ..................................................... 51,711
100,000 Argosy Mining Corporation (Warrants)1,2 .......................................... --
167,000 Atna Resources, Ltd.1,2 .......................................................... 171,549
83,500 Atna Resources, Ltd. (Warrants)1,2 ............................................... --
89,100 Cambior, Inc. .................................................................... 526,125
515,000 Campbell Resources, Inc.2 ........................................................ 190,738
90,000 Campbell Resources, Inc. (Warrants)1,2 ........................................... --
73,100 Coeur D'Alene Mines Corporation2 ................................................. 657,900
77,000 Eldorado Corporation, Ltd.1,2 .................................................... 40,894
25,000 Franco Nevada Mining Corporation, Ltd. ........................................... 490,909
414,400 Hecla Mining Company2 ............................................................ 2,046,100
138,000 Kinross Gold Corporation2 ........................................................ 467,709
60,000 Minefinders Corporation, Ltd. (Warrants)1,2 ...................................... 83,856
60,000 Pan American Silver Corporation2 ................................................. 599,573
285,000 Pan American Silver Corporation1,2 ............................................... 2,847,971
275,000 Prime Resource Group, Inc. ....................................................... 1,825,622
159,600 Romarco Minerals, Inc.2 .......................................................... 340,163
300,000 Silver Standard Resources, Inc.1,2 ............................................... 1,509,414
50,000 Silver Standard Resources, Inc.2 ................................................. 251,563
500,000 Sunshine Mining and Refining, Inc.2 .............................................. 500,000
</TABLE>
3
<PAGE>
LEXINGTON STRATEGIC SILVER FUND, INC.
STATEMENT OF NET ASSETS
(Including the Portfolio of Investments)
December 31, 1997 (unaudited) (continued)
<TABLE>
<CAPTION>
Number of
Shares Value
or Principal Amount Security (Note 1)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
NORTH AMERICA (continued):
350,000 Tiomin Resources, Inc.1,2 ........................................................ $ 293,497
262,500 Tiomin Resources, Inc. (Warrants)1,2 ............................................. --
50,000 TVX Gold, Inc.2 .................................................................. 168,750
280,000 William Resources, Inc.2 ......................................................... 68,483
----------
13,804,109
----------
PERU: 2.0%
117,009 Compania de Minas Buenaventura S.A. "B" .......................................... 879,940
----------
POLAND: 0.3%
21,000 KGHM Polska Miedz S.A.2 .......................................................... 151,725
----------
TOTAL COMMON STOCKS:
(cost $27,148,652) ............................................................. 27,474,565
----------
PREFERRED STOCK: 4.3%
NORTH AMERICA: 4.3%
99,000 Freeport McMoran Copper & Gold
(cost $2,081,958) .............................................................. 1,918,125
----------
SHORT-TERM INVESTMENT: 4.5%
U.S. Government Agency Obligation
$2,000,000 Federal Home Loan Mortgage Corporation, 4.75%, due 01/02/98
(cost $1,999,736) .............................................................. 1,999,736
----------
TOTAL INVESTMENTS: 98.7%
(cost $42,219,571+) ............................................................ 43,570,536
Other assets in excess of liabilities: 1.3% ...................................... 550,863
----------
TOTAL NET ASSETS: 100.0%
(equivalent to $3.88 per share on 11,362,060 shares outstanding) ............... $44,121,399
==========
</TABLE>
1 Restricted Security (Note 6).
2 Non-income producing securities
ADR -- American Depository Receipt.
+ Aggregate cost for Federal income tax purposes is identical.
The Notes to Financial Statements are an integral part of this statement.
4
<PAGE>
LEXINGTON STRATEGIC SILVER FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1997 (unaudited)
<TABLE>
<CAPTION>
Assets
<S> <C>
Investments, at value (cost $42,219,571) (Note1) ................................................... $43,570,536
Cash ............................................................................................... 202,923
Receivable for shares sold ......................................................................... 732,473
Dividends and interest receivable .................................................................. 10,807
----------
Total Assets ................................................................................... 44,516,739
----------
Liabilities
Due to Lexington Management Corporation (Note 2) ................................................... 32,960
Payable for shares redeemed ........................................................................ 243,943
Distributions payable .............................................................................. 8,304
Accrued expenses ................................................................................... 110,133
----------
Total Liabilities .............................................................................. 395,340
----------
Net Assets: (equivalent to $3.88 per share on
11,362,060 shares outstanding) (Note 3) ........................................................ $44,121,399
==========
Net Assets consist of:
Capital stock-- authorized 1,000,000,000 shares, $.001 par value per share ......................... $11,362
Additional paid-in capital (Note 1) ................................................................ 55,084,686
Distributions in excess of net investment income ................................................... (313,628)
Accumulated net realized loss on investments and foreign currency holdings
(Note 1) ......................................................................................... (12,011,944)
Unrealized appreciation on investments and foreign currency holdings ............................... 1,350,923
----------
Total Net Assets ................................................................................... $44,121,399
==========
Net Asset Value, redemption price per share ........................................................ $3.88
=====
Offering price per share (100/94.25 of $3.88 adjusted to the nearest cent) ......................... $4.12
=====
</TABLE>
The Notes to Financial Statements are an integral part of this statement.
5
<PAGE>
LEXINGTON STRATEGIC SILVER FUND, INC.
STATEMENT OF OPERATIONS
Six Months Ended December 31, 1997 (unaudited)
Investment Income
Dividends ...................... $ 108,403
Interest ....................... 101,410
---------
209,813
Less: foreign tax expense ...... 3,702
---------
Total investment income .... $ 206,111
Expenses
Investment advisory fee
(Note 2) ................... 198,049
Transfer agent and shareholder
servicing expense (Note 2) . 80,677
Custodian expense ............ 49,001
Printing and mailing expenses. 33,370
Accounting expenses (Note 2) . 23,589
Registration fees ............ 12,950
Professional fees ............ 9,534
Directors' fees and expenses . 7,544
Computer processing fees ..... 5,848
Other expenses ............... 15,456
---------
Total expenses ............. 436,018
---------
Net investment loss ...... (229,907)
Realized and Unrealized Gain (Loss)
on Investments (Note 4)
Net realized gain (loss) on:
Investments ................ (607,861)
Foreign currency transactions 1,998
---------
Net realized loss ...... (605,863)
Net change in unrealized
appreciation on:
Investments ................ (157,058)
Foreign currency translation
of other assets and
liabilities .............. (59)
---------
Net change in unrealized
appreciation ............. (157,117)
---------
Net realized and
unrealized loss ........ (762,980)
---------
Decrease in Net Assets Resulting
from Operations .............. $(992,887)
=========
LEXINGTON STRATEGIC SILVER FUND, INC.
STATEMENTS OF CHANGES IN NET ASSETS
Six months
ended Year
December 31, ended
1997 June 30,
(unaudited) 1997
---------- ----------
Net investment loss .......... $ (229,907) $ (404,378)
Net realized loss from
investment and foreign
currency transactions ..... (605,863) (989,734)
Net change in unrealized
appreciation of
investments and foreign
currency translation ...... (157,117) (4,550,358)
---------- ----------
Decrease in net assets
resulting from operations (992,887) (5,944,470)
Distributions to shareholders
in excess of net investment
income (Note 1) ........... (73,691) (373,424)
Increase (decrease) in net assets
from capital share
transactions (Note 3) ..... 3,161,000 (25,591,713)
---------- ----------
Net increase (decrease) in
net assets ............ 2,086,184 (31,909,607)
Net Assets:
Beginning of period ........ 42,035,215 73,944,822
---------- ----------
End of period (including
distributions in excess of
net investment income of
$313,628 and $1,792,
respectively) ........... $44,121,399 $42,035,215
========== ==========
The Notes to Financial Statements are an integral part of this statement.
6
<PAGE>
LEXINGTON STRATEGIC SILVER FUND, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997 (unaudited) and June 30, 1997
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 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
following is a summary of significant accounting policies followed by the Fund
in the preparation of its financial statements:
INVESTMENTS Security transactions are accounted for on a trade date basis.
Realized gains and losses from investment transactions are reported on the
identified cost basis. Securities traded on a recognized stock exchange are
valued at the last sales price reported by the exchange on which the securities
are traded. If no sales price is recorded, the mean between the last bid and
asked prices is used. Securities traded on the over-the-counter market and
silver bullion are valued at the mean between the last current bid and asked
price. Short-term securities having a maturity of 60 days or less are stated at
amortized cost, which approximates market value. Securities for which market
quotations are not readily available and other assets are valued by Fund
management in good faith under the direction of the Fund's Board of Directors.
All investments quoted in foreign currencies are valued in U.S. dollars on the
basis of the foreign currency exchange rates prevailing at the close of
business. Dividend income and distributions to shareholders are recorded on the
ex-dividend date. Interest income, adjusted for amortization of premiums and
accretion of discounts, is accrued as earned.
FOREIGN CURRENCY TRANSACTIONS Foreign currencies (and receivables and
payables denominated in foreign currencies) are translated into U.S. dollar
amounts at current exchange rates. Translation gains or losses resulting from
changes in exchange rates and realized gains and losses on the settlement of
foreign currency transactions are reported in the statement of operations. In
addition, the Fund may enter into forward foreign exchange contracts in order to
hedge against foreign currency risk in the purchase or sale of securities
denominated in foreign currency. The Fund may also enter into such contracts to
hedge against changes in foreign currency exchange rates on portfolio positions.
These contracts are marked to market daily, by recognizing the difference
between the contract exchange rate and the current market rate as unrealized
gains or losses. Realized gains or losses are recognized when contracts are
closed and are reported in the statement of operations. There were no forward
foreign currency exchange contracts outstanding at December 31, 1997.
FEDERAL INCOME TAXES It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to "regulated investment
companies" and to distribute all of its taxable income to its shareholders.
Therefore, no provision for Federal income taxes is required.
DISTRIBUTIONS Dividends from net investment income and net realized capital
gains are normally declared and paid annually, but the Fund may make
distributions on a more frequent basis to comply with the distribution
requirements of the Internal Revenue Code. The character of income and gains to
be distributed are determined in accordance with income tax regulations which
may differ from generally accepted accounting principles. At June 30, 1997,
reclassifications were made to the Fund's capital accounts to reflect permanent
book/tax differences and income and gains available for distribution under
income tax regulations. Net investment income, net realized gains and net assets
were not affected by this change.
USE OF ESTIMATES The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of increases and
decreases in net assets from operations during the reporting period. Actual
results could differ from those estimates.
7
<PAGE>
LEXINGTON STRATEGIC SILVER FUND, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997 (unaudited) and June 30, 1997
(continued)
2. INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATE
The Fund pays an investment advisory fee to Lexington Management Corporation
("LMC") at an annual rate of 1.00% of the Fund's average daily net assets up to
$30 million and at an annual rate of 0.75% thereafter. For 1997, LMC has agreed
to voluntarily limit the total expenses of the Fund (including management fees,
but excluding interest, taxes, brokerage commissions and extraordinary expenses)
to an annual rate of 2.50% of the Fund's average daily net assets. No
reimbursement was required for the six months ended December 31, 1997.
The Fund reimbursed LMC for certain expenses, including accounting and
shareholder servicing costs of $45,860, which are incurred by the Fund, but paid
by LMC.
3. CAPITAL STOCK
Transactions in capital stock were as follows:
<TABLE>
<CAPTION>
Six months ended
December 31, 1997 Year ended
(unaudited) June 30, 1997
---------------------- -----------------------
Shares Amount Shares Amount
--------- --------- ---------- -----------
<S> <C> <C> <C> <C>
Shares sold .......................................... 4,804,345 $18,785,102 6,348,384 $ 27,981,547
Shares issued on reinvestment of dividends ............ 18,656 73,691 74,245 313,964
--------- ---------- ---------- -----------
4,823,001 18,858,793 6,422,629 28,295,511
Shares redeemed ....................................... (4,111,385) (15,697,793) (12,351,927) (53,887,224)
--------- ---------- ---------- -----------
Net increase (decrease) ............................... 711,616 $ 3,161,000 (5,929,298) $(25,591,713)
========= ========== ========== ===========
</TABLE>
4. PURCHASES AND SALES OF INVESTMENT SECURITIES
The cost of purchases and proceeds from sales of securities for the six months
ended December 31, 1997, excluding short-term securities, were $7,786,258 and
$6,605,724, respectively.
At December 31, 1997, the aggregate gross unrealized appreciation for all
securities in which there is an excess of value over tax cost amounted to
$9,528,901 and aggregate gross unrealized depreciation for all securities in
which there is an excess of tax cost over value amounted to $8,177,936.
5. INVESTMENT AND CONCENTRATION RISKS
The Fund makes significant investments in foreign securities and has an
investment objective of investing in 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, all of
which could affect the market and/or credit risk of the investments.
In addition to the risks described above, risks may arise from forward foreign
currency contracts as a result of the inability of counterparties to meet the
terms of their contracts.
8
<PAGE>
LEXINGTON STRATEGIC SILVER FUND, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997 (unaudited) and June 30, 1997 (continued)
6. RESTRICTED SECURITIES
The following securities were purchased under Rule 144A of the Securities Act of
1933 or issued in private placements and, unless registered under the Act or
exempted from registration, may be sold only to qualified institutional
investors.
<TABLE>
<CAPTION>
Average
Aquisition Cost Per Market % of Net
Security Date Shares Share Value Assets
------- -------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C>
Argosy Mining Corporation 05/24/96 200,000 $1.82 $ 51,711 0.12 %
Argosy Mining Corporation (Warrants) 05/14/96 100,000 0.00 -- 0.00
Atna Resources, Ltd. 10/14/96 167,000 4.80 171,549 0.39
Atna Resources, Ltd. (Warrants) 04/15/96 83,500 0.00 -- 0.00
Campbell Resources, Inc. (Warrants) 10/25/96 90,000 0.00 -- 0.00
Eldorado Corporation 02/22/96 77,000 5.37 40,894 0.09
Minefinders Corporation, Ltd. (Warrants) 03/11/97 60,000 3.66 83,856 0.19
Pan American Silver Corporation 07/17/95 285,000 5.44 2,847,971 6.45
Silver Standard Resources, Inc. 09/06/95 300,000 3.14 1,509,414 3.42
Tiomin Resources, Inc. 09/28/95 350,000 1.44 293,497 0.67
Tiomin Resources, Inc. (Warrants) 09/28/95 262,500 0.00 -- 0.00
--------- ------
$4,998,892 11.33%
========= ======
</TABLE>
Pursuant to guidelines adopted by the Fund's Board of Directors, these
unregistered securities have been deemed to be illiquid. The Fund currently
limits investment in illiquid securities to 15% of the Fund's net assets, at
market value.
9
<PAGE>
LEXINGTON STRATEGIC SILVER FUND, INC.
FINANCIAL HIGHLIGHTS
Selected per share data for a share outstanding throughout the period:
<TABLE>
<CAPTION>
Six months
ended
December 31, Year ended June 30,
1997 -------------------------------------------
(unaudited) 1997 1996 1995 1994
-------- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period .................. $3.95 $4.46 $4.00 $3.92 $3.52
----- ----- ----- ----- -----
Income (loss) from investment operations:
Net investment loss ................................. (0.02) (0.04) (0.03) (0.03) (0.02)
Net realized and unrealized gain (loss) on
investments and foreign currency transactions ..... (0.04) (0.43) 0.51 0.11 0.42
----- ----- ----- ----- -----
Total income (loss) from investment operations ........ (0.06) (0.47) 0.48 0.08 0.40
----- ----- ----- ----- -----
Less distributions:
Distributions in excess of net investment income .... (0.01) (0.04) (0.02) -- --
----- ----- ----- ----- -----
Net asset value, end of period ........................ $3.88 $3.95 $4.46 $4.00 $3.92
===== ===== ===== ===== =====
Total return*** ....................................... (3.00%)* (10.76%) 12.02% 2.04% 11.36%
Ratio to average net assets:
Expenses ............................................ 2.04%* 1.96% 1.73% 1.82% 1.84%
Net investment loss ................................. (1.08%)* (0.78%) (0.72%) (0.83%) (0.82%)
Portfolio turnover rate ............................... 32.58%* 18.76% 44.30% 44.22% 5.28%
Average commission paid on equity
security transactions** ............................. $0.03 $0.03 $0.02 -- --
Net assets, end of period (000's omitted) ............. $44,121 $42,035 $73,945 $65,517 $49,499
</TABLE>
* Annualized.
** In accordance with SEC disclosure guidelines, the average commissions are
calculated for the years beginning with June 1996, but not for prior periods.
*** Sales load is not reflected in total return.
10
<PAGE>
LEXINGTON
LEXINGTON
STRATEGIC SILVER FUND, INC. [Logo]
Investment Adviser
- ----------------------------------
LEXINGTON
LEXINGTON MANAGEMENT CORPORATION STRATEGIC
P.O. Box 1515 SILVER
Park 80 West Plaza Two FUND, INC.
Saddle Brook, New Jersey 07663
-------------------------
Distributor
- ---------------------------------- Seeks long-term
growth of capital
LEXINGTON FUNDS DISTRIBUTOR, INC. through investment
P.O. Box 1515 in established silver
Park 80 West Plaza Two related companies.
Saddle Brook, New Jersey 07663
-------------------------
SEMI-ANNUAL REPORT
DECEMBER 31, 1997
All Shareholders requests for services of
any kind should be sent to:
Transfer Agent
- -----------------------------------------
STATE STREET BANK AND
TRUST COMPANY
c/o National Financial Data Services
1004 Baltimore
Kansas City, Missouri 64105
Or call toll free:
Service and Sales: 1-800-526-0056
24 Hour Account Information:
1-800-526-0052
This report has been prepared for the information of the shareholders of
Lexington Strategic Silver Fund, Inc. and is authorized for distribution to the
public only if it is accompanied or preceded by a currently effective prospectus
which sets forth expenses and other material information.
