<PAGE>
PROSPECTUS
October 28, 1998
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
================================================================================
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 28, 1998
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.
- --------------------------------------------------------------------------------
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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<TABLE>
<CAPTION>
FEE TABLE
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES: (as a percentage of the offering price)
Maximum Sales Charge Imposed on Purchases ............................................................... 5.75%
-----
ANNUAL FUND OPERATING EXPENSES (as a percentage of average net assets):
Management fees ..................................................................................... 0.93%
-----
Other expenses ...................................................................................... 0.97%
-----
Total Fund Operating Expenses ................................................................... 1.90%
=====
EXAMPLE: 1 YEAR 3 YEARS 5 YEARS 10 YEARS
----- ------ ------ -------
You would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual return and (2) redemption at the end of each period $75.69 $113.76 $154.24 $266.93
</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, Distributor and Administrator" 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, 1997 to June 30,
1998. The Example shown in the table above should not be considered a
representation of past or future expenses and actual expenses may be greater or
less than those shown.
FINANCIAL HIGHLIGHTS
The 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. LMC 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 five years ended June 30,
1998 has been audited by KPMG Peat Marwick, LLP Independent Auditors, whose
report thereon appears in the Statement of Additional Information. This
information should be read in conjunction with the financial statements and
related notes thereto included in the Statement of Additional Information. The
Fund's annual report which contains additional performance information is
available upon request and without charge.
2
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<TABLE>
<CAPTION>
Selected Per Share Data for a share outstanding throughout the period:
YEAR ENDED JUNE 30,
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Net asset value,
beginning of period .......... $3.95 $4.46 $4.00 $3.92 $3.52 $2.78 $3.64 $4.52 $3.81 $4.52
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Income (loss) from investment
operations:
Net investment loss ......... (.02) (.04) (.03) (.03) (.02) (.04) (.09) (.06) (.05) (.02)
Net realized and unrealized gain
(loss) on investments and
foreign currency
transactions .............. (.66) (.43) .51 .11 .42 .78 (.77) (.82) .76 (.69)
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total income (loss) from
investment operations ........ (.68) (.47) .48 .08 .40 .74 (.86) (.88) .71 (.71)
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Less distributions:
Distributions in excess of net
investment income ......... (.01) (.04) (.02) -- -- -- -- -- -- --
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Net asset value,
end of period ................ $3.26 $3.95 $4.46 $4.00 $3.92 $3.52 $2.78 $3.64 $4.52 $3.81
===== ===== ===== ===== ===== ===== ===== ===== ===== =====
Total return* ................. (17.32)%(10.76)% 12.02% 2.04% 11.36% 26.62% (23.63)%(19.47)% 18.64% (15.71)%
Ratios to average net assets:
Expenses, before
reimbursement . ............ 1.90% 1.96% 1.73% 1.82% 1.84% 3.48% 2.70% 1.85% 1.67% 1.66%
Expenses, net of
reimbursement . ............ 1.90% 1.96% 1.73% 1.82% 1.84% 2.60% 2.50% 1.83% 1.53% 1.49%
Net investment loss, before
reimbursement ............... (0.54)% (0.78)% (0.72)% (0.83)% (0.82)% (2.48)% (2.15)% (1.25)% (0.94)% (0.29)%
Net investment loss,
including reimbursement ...... (0.54)% (0.78)% (0.72)% (0.83)% (0.82)% (1.60)% (1.95)% (1.23)% (0.80)% (0.12)%
Portfolio turnover rate ....... 28.78% 18.76% 44.30% 44.22% 5.28% 18.58% 45.20% 0.58% 11.49% 0%
Average commissions paid
on equity security
transactions** ............... $0.02 $0.03 $0.02 -- -- -- -- -- -- --
Net assets at end of period
(000's omitted) ............. $34,921 $42,035 $73,945 $65,517 $49,499 $15,032 $10,687 $15,983 $22,186 $22,133
</TABLE>
*Sales load is not reflected in total return.
**In accordance with SEC disclosure guidelines, average commissions are
calculated for the years beginning with June 1996, but not for prior periods.
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.
3
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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 net 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").
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.
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
4
<PAGE>
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 or bullion may be sold whenever management believes it advisable,
regardless of the length of time any particular asset may have been held. The
Fund 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 years ended June 30, 1996, June 30, 1997 and
June 30, 1998, the portfolio turnover rates were 44.30%, 18.76% and 28.78%,
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
5
<PAGE>
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 3 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
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 of 1986,
as amended (the "Code"). However, the Fund may make investment decisions without
regard to the effect on its ability to qualify under Sub-chapter M of the Code,
if deemed appropriate by LMC (see "Tax Matters"). In addition, changes in the
tax or currency laws of the U.S. 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 Distribution and Reinvestment Policy").
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.
6
<PAGE>
(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-third of the value of its total assets; and
(e) for purposes of leveraging, the Fund may borrow money from banks
(including its custodian bank), only if, immediately after such
borrowing, the value of the Fund's assets, including the amount
borrowed, less its liabilities, is equal to at least 300% of the amount
borrowed, plus all outstanding borrowings. If at any time, the value of
the Fund's assets fails to meet the 300% asset coverage requirement
relative only to leveraging, the Fund will, within three days (not
including Sundays and holidays), reduce its borrowings to the extent
necessary to meet the 300% test.
The 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 net 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 eleven directors (eight of whom are
non-affiliated persons) who meet five times each year. The Statement of
Additional Information contains additional information regarding the directors
and officers of the Fund.
PORTFOLIO MANAGER
James A. Vail is a Vice President and is responsible for equity analysis
and portfolio management at LMC. He is a Chartered Financial Analyst, member of
the New York Society of Security Analysts and has 24 years investment
experience. His responsibilities include securities analysis of the natural
resources sector. Prior to joining LMC in 1991, Mr. Vail held investment
research positions with Chemical Bank, Oppenheimer &Co., Robert Fleming Inc. and
most recently Beacon Trust Company where he was Senior Investment Analyst.
Mr.Vail is a graduate of St. Peter's College with a B.S. and holds an M.B.A. in
Finance fromSeton Hall University.
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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. LFD 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 average daily net assets of the Fund and 0.75% on the
average daily net assets of the Fund in excess of $30 million. In the fiscal
year ended June 30, 1998, LMC earned $388,784 in management fees from the Fund
which represents 0.93% of the average daily net assets of the Fund for that
period. 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 $3.3 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 Lexington Global Asset
Managers, Inc., a Delaware corporation with offices at Park 80 West Plaza Two,
Saddle Brook, New Jersey 07663. Descendants of Lunsford Richardson, Sr., their
spouses, trusts and other related entities have a majority voting control of
outstanding shares of Lexington Global Asset Managers, Inc. common stock. See
"Investment Adviser, Distributor and Administrator" in the Statement of
Additional Information.
LFD, P.O. Box 1515/Park 80 West, Plaza Two, Saddle Brook, New Jersey,
07663 is the distributor of the Fund. Messrs. DeMichele, Kantor, Hisey,
Lavery and Corniotes and Ms. Curcio, each a director and/or officer of the
Fund, are affiliated persons of LFD.
HOW TO PURCHASE SHARES
The minimum initial investment for a shareholder is $1,000 and minimum
subsequent investments are $50. Please make your check(s) payable to the
Lexington Strategic Silver Fund, Inc. The Fund will not accept third-party
checks, that is, checks made payable to someone other than the Fund. Third-party
checks include any checks endorsed on the back of the check by a party other
than the Fund. 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>
<S> <C> <C> <C>
SALES CHARGE AS SALES CHARGE AS DEALER CONCESSIONS
PERCENTAGE OF THE PERCENTAGE OF THE AS A PERCENTAGE OF
AMOUNT OF PURCHASE OFFERING PRICE AMOUNT INVESTED THE OFFERING PRICE
- ----------------- -------------- -------------- ----------------
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>
8
<PAGE>
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.
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 Code and the
employee benefit plans qualified under section 401 of the 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. However, when LMC deems it appropriate, prices for the day of valuation
from a third party pricing service 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
a maturity of 60 days or less are valued at amortized
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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 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.
Precious metals held by the Fund are valued daily at fair market value,
based upon price quotations in common use, in such manner as the Board of
Directors from time to time (not less frequently than quarterly) determines in
good faith to reflect most accurately its fair market value. In accordance with
current Board of Directors' policy, management of the Fund employs the mean
between the closing bid and asked quotations for precious metals as supplied by
one or more Toronto or New York broker dealers or banks in its computation of
the net asset value of Fund shares; the Board retains the ultimate
responsibility in this matter. Securities for which (i) market quotations are
not readily available, or (ii) readily available quotations are deemed, by the
Board of Directors, in good faith, not to be representative of the value of
securities held by the Fund, as well as any other assets held in the Fund's
portfolio, are valued at fair value as determined in good faith by, or under the
supervision of, the Fund's officers in a manner specifically authorized by the
Board of Directors; the Board retains the ultimate responsibility in this
matter. Each foreign security held in the Fund's portfolio is valued as of the
close of the New York Stock Exchange in U.S. dollars. Repurchase agreements and
certificates of deposit of maturities of less than 60 days are stated at cost.
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:
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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.
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.
Please make your check(s) payable to the Lexington Strategic Silver Fund, Inc.
The Fund will not accept third-party checks, that is, checks made payable to
someone other than the Fund. Third-party checks include any checks endorsed on
the back of the check by a party other than the Fund. 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.
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HOW TO REDEEM SHARES
BY MAIL: Send to the Agent (1) a written request for redemption, signed by each
registered owner exactly as the shares are registered including the name of the
Fund, account number and exact registration; (2) stock certificates for any
shares to be redeemed which are held by 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.
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.
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 $100,000 per day.
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" or "Commission") 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
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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.
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, Inc. 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 Shares 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
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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 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. Systematic withdrawals occur on the 28th of each month. If the 28th
falls on a weekend or a holiday, the withdrawal will occur on the preceding
business day.
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.
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Any dividends and distribution payments will be reinvested at net asset
value, without sales charge, in additional full and fractional shares of the
Fund unless and until the shareholder notifies the Agent in writing that he
wants to receive his payments in cash. This request must be received by the
Agent at least seven days before the dividend record date. Upon receipt by the
Agent of such written notice, all further payments will be made in cash until
written notice to the contrary is received. An account of such shares owned by
each shareholder will be maintained by the Agent. Shareholders whose accounts
are maintained by the Agent will have the same rights as other shareholders with
respect to shares so registered (see "How to Purchase Shares--The Open
Account").
TAX MATTERS
The Fund intends to qualify as a regulated investment company for federal
income tax purposes by satisfying the requirements under Subchapter M of the
Code, including the 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) in accordance with the timing
requirements imposed by the Code, so that the Fund will satisfy the distribution
requirement of Subchapter M and not be subject to federal income taxes or the 4%
excise tax.
If the Fund fails to satisfy any of the Code requirements for
qualification as a regulated investment company, it will be taxed at regular
corporate tax rates on all its taxable income (including capital gains) without
any deduction for distributions to shareholders, and distributions to
shareholders will be taxable as ordinary dividends (even if derived from the
Fund's net long-term capital gains) to the extent of the Fund's current and
accumulated earnings and profits.
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. Such 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
shareholders have held their 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 shareholders elect to receive them in cash
or reinvest them in additional shares of the Fund. In general, shareholders take
distributions into account in the year in which they are made. However,
shareholders are required to treat certain distributions made during January as
having been paid by the Fund and received by shareholders on December 31 of the
preceding year. A statement setting forth the federal income tax status of all
distributions made (or deemed made) during the year, and any foreign taxes
"passed-through" to shareholders, will be sent to shareholders promptly after
the end of each year.
Investors should carefully consider the tax implications of purchasing
shares just prior to the record date of any ordinary income dividend or capital
gain dividend. Those investors purchasing shares just prior to an ordinary
income or capital gain dividend will be taxed on the entire amount of the
dividend received, even though the net asset value per
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<PAGE>
share on the date of such purchase reflected the amount of such dividend and
such dividend economically constitutes a return of capital to such investors.
A shareholder will recognize gain or loss upon the sale or redemption of
shares of the Fund in an amount equal to the difference between the proceeds of
the sale or redemption and the shareholder's adjusted tax basis in the shares.
Any loss realized upon a taxable disposition of shares within six months from
the date of their purchase will be treated as a long-term capital loss to the
extent of any capital gain dividends received on such shares. All or a portion
of any loss realized upon a taxable disposition of shares of the Fund may be
disallowed if other shares of the Fund are purchased within 30 days before or
after such disposition.
If a shareholder is a non-resident alien or foreign entity shareholder,
ordinary income dividends paid to such shareholder generally will be subject to
United States withholding tax at a rate of 30% (or lower rate under an
applicable treaty). We urge non-United States shareholders to consult their own
tax adviser concerning the applicability of the United States withholding tax.
Under the backup withholding rules of the Code, shareholders may be
subject to 31% withholding of federal income tax on ordinary income dividends,
capital gain dividends and redemption payments made by the Fund. In order to
avoid backup withholding, shareholders must provide the Fund with a correct
taxpayer identification number (which for an individual is usually his Social
Security number) or certify that the shareholder is a corporation or otherwise
exempt from or not subject to backup withholding.
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, administrative or judicial action. As the
foregoing discussion is for general information only, shareholders should also
review the more detailed discussion of federal income tax considerations
relevant to the Fund that is contained in the Statement of Additional
Information. In addition, shareholders should consult with their own tax adviser
as to the tax consequences of investments in the Fund, including the application
of state and local taxes which may differ from the federal income tax
consequences described above.
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.
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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 & Frankel, LLP 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, 1999.
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.
Each share of common stock has one vote and shares equally in dividends
and distributions when and 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 1940 Act. 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.
17
<PAGE>
A Registration Statement (the "Registration Statement"), of which this
Prospectus is a part, has been filed with 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.
18
<PAGE>
INVESTMENT ADVISER
- ----------------------------------------------------------
LEXINGTON MANAGEMENT CORPORATION
P.O. Box 1515/Park 80 West Plaza Two
Saddle Brook, New Jersey 07663
DISTRIBUTOR
- ----------------------------------------------------------
LEXINGTON FUNDS DISTRIBUTOR, INC.
P.O. Box 1515/Park 80 West Plaza Two
Saddle Brook, New Jersey 07663
ALL SHAREHOLDER REQUESTS FOR SERVICES OF
ANY KIND SHOULD BE SENT TO:
- ----------------------------------------------------------
TRANSFER AGENT
STATE STREET BANK AND
TRUST COMPANY
c/o National Financial Data Services
1004 Baltimore
Lexington Funds
Kansas City, Missouri 64105
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 Trust ............................. 7
Portfolio Manager ................................. 7
Investment Adviser, Distributor and Administrator ... 8
How to Purchase Shares .............................. 8
How to Redeem Shares ................................ 12
Shareholder Services ................................ 13
Exchange Privilege ................................ 13
Tax-Sheltered Retirement Plans ...................... 14
Dividend, Distribution and Reinvestment Policy ...... 14
Tax Matters ......................................... 15
Performance Calculation ............................. 16
Custodian, Transfer Agent and
Dividend Disbursing Agent ......................... 17
Counsel and Independent Auditors .................... 17
Other Information ................................... 16
LEXINGTON
=====================================
LEXINGTON
STRATEGIC
SILVER
FUND, INC.
-------------------------------------
n Silver-Related Companies
n Silver Bullion
n International diversification
n No redemption charge
-------------------------------------
The Lexington Group
of
Investment Companies
=====================================
PROSPECTUS
OCTOBER 28, 1998
----------------
19
<PAGE>
LEXINGTON STRATEGIC SILVER FUND, INC.
STATEMENT OF ADDITIONAL INFORMATION
OCTOBER 28, 1998
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 28, 1998, 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
PAGE
Investment Restrictions .................................................. 2
Investment Adviser, Distributor and Administrator ........................ 3
Portfolio Turnover and Brokerage Commissions ............................. 4
Tax Sheltered Retirement Plans ........................................... 5
Dividends, Distribution and Reinvestment Policy .......................... 5
Tax Matters .............................................................. 5
Performance Calculation .................................................. 10
Independent Auditors ..................................................... 11
Custodians, Transfer Agent and Dividend Disbursing Agent ................. 11
Management of the Fund ................................................... 11
Independent Auditors' Report ............................................. 15
Financial Statements ..................................................... 16
1
<PAGE>
INVESTMENT RESTRICTIONS
The Fund's investment objective, as described under "Investment Objective
and Policies" in the Fund's prospectus, 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 in securities 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 (not
including Sundays and holidays), reduce its borrowings to the extent
necessary to meet the 300% test.
(7) The Fund will not issue any senior security (as defined in the
Investment Company Act of 1940, as amended (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 Securities Act of 1933, as amended (the "1933 Act").
In addition to the above fundamental restrictions, the Fund has undertaken
the following nonfundamental restrictions, which may be changed in the future by
the Board of Directors, without a vote of the shareholders of the Fund:
2
<PAGE>
(1) The Fund will not invest more than 15% of its total net assets at
market value 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 1933 Act 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 will not invest for the purpose of exercising control
over management of any company.
(3) 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 Fund's total
assets, at market value at the time of entering into a contract, shall be
committed to margin deposits in relation to futures contracts.
(4) 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.
(5) The Fund will not purchase the securities of any other investment
company, except as permitted under the 1940 Act.
(6) 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.
(7) The Fund will not write, purchase or sell puts, calls on
underlying securities. However, the Fund may invest up to 15% of the value
of its total 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.
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 is paid an investment advisory fee at the annual rate of 1.00% of the
first $30 million of the average daily net assets of the Fund and 0.75% of the
average daily net assets of the Fund in excess of $30 million. LMC has agreed to
reduce its management fee, if necessary, to keep total operating expenses at or
below 2.50% of the Fund's average daily net assets. Total annual operating
expenses may also be subject to state blue sky regulations. LMC may terminate
this voluntary reduction at any time. Brokerage fees and commissions, taxes,
interest and extraordinary expenses are not deemed to be expenses of the Fund
for such reimbursement. No reimbursement was required for the year ended June
30, 1998.
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 1940 Act.
3
<PAGE>
For the fiscal years ended June 30, 1998, 1997 and 1996, LMC earned
investment advisory fees of $388,784, $462,896, and $630,181, respectively, and
there were no fee reductions.
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 semi-annual 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."
For the Fund's fiscal years ended June 30, 1998, 1997, and 1996, LFD collected
front-end sales loads from the Fund in the amount of (in thousands) $119.3, $57
and $1,213.9, respectively, in underwriting commissions, and retained (in
thousands) $49.4, $24 and $188.7, respectively. During the fiscal year ended
June 30, 1998, LFD received no other commissions or compensation from the Fund
either directly or indirectly.
LMC is a wholly owned subsidiary of Lexington Global Asset Managers, Inc.,
a publicly traded corporation. Descendants of Lunsford Richardson, Sr., their
spouses, trusts and other related entities have a majority voting control of
outstanding shares of Lexington Global Asset Managers, Inc.
Of the directors, officers or employees ("affiliated persons") of the Fund,
Messrs. Corniotes, DeMichele, Faust, Hisey, Kantor, Lavery, and Vail and Mmes.
Carnicelli, Carr-Waldron, Curcio, DiFalco, Gilfillan, Lederer, 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 30, 1998, 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.
The brokerage commissions paid and portfolio turnover rates are as follows:
FISCAL YEAR ENDED TOTAL BROKERAGE PORTFOLIO TURNOVER
JUNE 30 COMMISSION PAID RATE
-------------- -------------- --------------
1996 $145,681 44.30%
1997 111,983 18.76%
1998 62,713 28.78%
4
<PAGE>
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 (15% in the case of a profit-sharing plan) and in applying
these limitations not more than $160,000 of "earned income" may be taken into
account generally determined after deductions of the contributions to the plan
and one half of the SECA tax for the year.
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").
DIVIDENDS, DISTRIBUTION AND REINVESTMENT POLICY
The Fund intends to pay dividends semi-annually from investment income 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 avoid the
imposition of a 4% federal 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 federal income 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.
5
<PAGE>
QUALIFICATION AS A REGULATED INVESTMENT COMPANY
The Fund has elected to be taxed as a regulated investment company under
Subchapter M of the Code. As a regulated investment company, the Fund is not
subject to federal income tax on the portion of its net investment income (i.e.,
taxable interest, dividends and other taxable ordinary income, net of expenses)
and capital gain net income (i.e., the excess of capital gains over capital
losses) that it distributes to shareholders, provided that it distributes at
least 90% of its investment company taxable income (i.e., net investment income
and the excess of net short-term capital gain over net long-term capital loss)
for the taxable year (the "Distribution Requirement"), and satisfies certain
other requirements of the Code that are described below. Distributions by the
Fund made during the taxable year or, under specified circumstances, within
twelve months after the close of the taxable year, will be considered
distributions of income and gains of the taxable year and will therefore count
toward satisfaction of the Distribution Requirement.
If the Fund has a net capital loss (i.e., an 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 future years. As of June 30, 1998, the Fund had capital
loss carryforwards of approximately $1,254,382, $3,106,844, $954,860,
$1,911,797, $1,327,486, $1,756,775 and $479,351, which expire in 1999, 2000,
2001, 2002, 2003, 2005, and 2006, respectively. Under Code Sections 382 and 383,
if the Fund has an "ownership change," then the Fund's use of its capital loss
carryforwards in any year 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, 1998 is 5.02%). 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 it 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.
In addition to satisfying the Distribution Requirement, a regulated
investment company must 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").
In general, gain or loss recognized by the Fund on the disposition of an
asset will be a capital gain or loss. In addition, gain will be recognized as a
result of certain constructive sales, including short sales "against the box."
However, gain recognized on the disposition of a debt obligation purchased by
the Fund at a market discount (generally, at a price less than its principal
amount) will be treated as ordinary income to the extent of the portion of the
market discount which accrued during the period of time the Fund held the debt
obligation. In addition, under the rules of Code section 988, gain or loss
recognized on the disposition of a debt obligation denominated in a foreign
currency or an option with respect thereto (but only to the extent attributable
to changes in foreign currency exchange rates), and gain or loss recognized on
the disposition of a foreign currency forward contract, futures contract, option
or similar financial instrument, or of foreign currency itself, except for
regulated futures contracts or non-equity options subject to Code Section 1256
(unless the Fund elects otherwise), will generally be treated as ordinary income
or loss.
In general, for purposes of determining whether capital gain or loss
recognized by the Fund on the disposition of an asset is long-term or
short-term, the holding period of the asset may be affected if (1) the asset is
used to close a "short sale" (which includes for certain purposes the
acquisition of a put option) or is substantially identical to another asset so
used, (2) the asset is otherwise held by the Fund as part of a "straddle" (which
term generally excludes a situation where the asset is stock and the Fund grants
a qualified covered call option (which, among other things, must not be
deep-in-the-money) with respect thereto) or (3) the asset is stock and the Fund
grants an in-the-money qualified covered call option with respect thereto. In
addition, the Fund may be required to defer the recognition of a loss on the
disposition of an asset held as part of a straddle to the extent of any
unrecognized gain on the offsetting position. Any gain recognized by the Fund on
the lapse of, or any gain or loss recognized by the Fund from a closing
transaction with respect to, an option written by the Fund will be treated as a
short-term capital gain or loss.
Certain transactions that may be engaged in by the Fund (such as regulated
futures contracts, certain foreign currency contracts, and options on stock
indexes and futures contracts) will be subject to special tax treatment as
"Section 1256 contracts." Section 1256 contracts are treated as if they are sold
for their fair market value on the last business day of the taxable year, even
though a taxpayer's obligations (or rights) under such contracts have not
terminated (by delivery, exercise, entering into a closing transaction or
otherwise) as of such date. Any gain or loss recognized as a consequence of the
year-end deemed disposition of Section 1256 contracts is taken into account for
that
6
<PAGE>
year together with any other gain or loss that was previously recognized upon
the termination of Section 1256 contracts during the year. Any capital gain or
loss for the taxable year with respect to Section 1256 contracts (including any
capital gain or loss arising as a consequence of the year-end deemed sale of
such contracts) is generally treated as 60% long-term capital gain or loss and
40% short-term capital gain or loss. The Fund, however, may elect not to have
this special tax treatment apply to Section 1256 contracts that are part of a
"mixed straddle" with other investments of the Fund that are not Section 1256
contracts.
The Fund may purchase securities of certain foreign investment funds or
trusts which constitute passive foreign investment companies ("PFICs") for
federal income tax purposes. If the Fund invests in a PFIC, it has three
separate options. First, it may elect to treat the PFIC as a qualifying electing
fund (a "QEF"), in which case it will each year have ordinary income equal to
its pro rata share of the PFIC's ordinary earnings for the year and long-term
capital gain equal to its pro rata share of the PFIC's net capital gain for the
year, regardless of whether the Fund receives distributions of any such ordinary
earnings or capital gains from the PFIC. Second, for tax years beginning after
December 31, 1997, the Fund may make a mark-to-market election with respect to
its PFIC stock. Pursuant to such an election, the Fund will include as ordinary
income any excess of the fair market value of such stock at the close of any
taxable year over its adjusted tax basis in the stock. If the adjusted tax basis
of the PFIC stock exceeds the fair market value of such stock at the end of a
given taxable year, such excess will be deductible as ordinary loss in the
amount equal to the lesser of the amount of such excess or the net
mark-to-market gains on the stock that the Fund included in income in previous
years. The Fund's holding period with respect to its PFIC stock subject to the
election will commence on the first day of the following taxable year. If the
Fund makes the mark-to-market election in the first taxable year it holds PFIC
stock, it will not incur the tax described below under the third option.
Finally, if the Fund does not elect to treat the PFIC as a QEF and does not
make a mark-to-market election, then, in general, (1) any gain recognized by the
Fund upon a sale or other disposition of its interest in the PFIC or any "excess
distribution" (as defined) received by the Fund from the PFIC will be allocated
ratably over the Fund's holding period in the PFIC stock, (2) the portion of
such gain or excess distribution so allocated to the year in which the gain is
recognized or the excess distribution is received shall be included in the
Fund's gross income for such year as ordinary income (and the distribution of
such portion by the Fund to shareholders will be taxable as an ordinary income
dividend, but such portion will not be subject to tax at the Fund level), (3)
the Fund shall be liable for tax on the portions of such gain or excess
distribution so allocated to prior years in an amount equal to, for each such
prior year, (i) the amount of gain or excess distribution allocated to such
prior year multiplied by the highest tax rate (individual or corporate, as the
case may be) in effect for such prior year, plus (ii) interest on the amount
determined under clause (i) for the period from the due date for filing a return
for such prior year until the date for filing a return for the year in which the
gain is recognized or the excess distribution is received, at the rates and
methods applicable to underpayments of tax for such period, and (4) the
distribution by the Fund to shareholders of the portions of such gain or excess
distribution so allocated to prior years (net of the tax payable by the Fund
thereon) will again be taxable to the shareholders as an ordinary income
dividend.
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 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 (including, to the
extent provided in Treasury Regulations, losses recognized pursuant to the PFIC
mark-to-market election) incurred after October 31 as if it had been incurred in
the succeeding year.
In addition to satisfying the requirements described above, the Fund must
satisfy an asset diversification test in order to qualify as a regulated
investment company. Under this test, at the close of each quarter of the Fund's
taxable year, at least 50% of the value of the Fund's assets must consist of
cash and cash items, U.S. Government securities, securities of other regulated
investment companies, and securities of other issuers (as to each of which the
Fund has not invested more than 5% of the value of its total assets in
securities of such issuer and does not hold more than 10% of the outstanding
voting securities of such issuer), and no more than 25% of the value of its
total assets may be invested in the securities of any one issuer (other than
U.S. Government securities and securities of other regulated investment
companies), or in two or more issuers which the Fund controls and which are
engaged in the same or similar trades or businesses. Generally, an option (a
call or a put) with respect to a security is treated as issued by the issuer of
the security not the issuer of the option.
If for any taxable year the Fund does not qualify as a regulated investment
company, all of its taxable income (including its net capital gain) will be
subject to tax at regular corporate rates without any deduction for
distributions to shareholders, and such distributions will be taxable to the
shareholders as ordinary dividends to the extent of the Fund's current and
accumulated earnings and profits. Such distributions generally will be eligible
for the dividends-received deduction in the case of corporate shareholders.
7
<PAGE>
EXCISE TAX ON REGULATED INVESTMENT COMPANIES
A 4% non-deductible excise tax is imposed on a regulated investment company
that fails to distribute in each calendar year an amount equal to 98% of
ordinary taxable income for the calendar year and 98% of capital gain net income
for the one-year period ended on October 31 of such calendar year (or, at the
election of a regulated investment company having a taxable year ending November
30 or December 31, for its taxable year (a "taxable year election")). The
balance of such income must be distributed during the next calendar year. For
the foregoing purposes, a regulated investment company is treated as having
distributed any amount on which it is subject to income tax for any taxable year
ending in such calendar year.
For purposes of the excise tax, a regulated investment company shall: (1)
reduce its capital gain net income (but not below its net capital gain) by the
amount of any net ordinary loss for the calendar year; and (2) exclude foreign
currency gains and losses and ordinary gains or losses arising as a result of a
PFIC mark-to-market election (or upon an actual disposition of the PFIC stock
subject to such election) incurred after October 31 of any year (or after the
end of its taxable year if it has made a taxable year election) in determining
the amount of ordinary taxable income for the current calendar year (and,
instead, include such gains and losses in determining ordinary taxable income
for the succeeding calendar year).
The Fund intends to make sufficient distributions or deemed distributions
of its ordinary taxable income and capital gain net income prior to the end of
each calendar year to avoid liability for the excise tax. However, investors
should note that the Fund may in certain circumstances be required to liquidate
portfolio investments to make sufficient distributions to avoid excise tax
liability.
FUND DISTRIBUTIONS
The Fund anticipates distributing substantially all of its investment
company taxable income for each taxable year. Such distributions will be taxable
to shareholders as ordinary income and treated as dividends for federal income
tax purposes, but they will qualify for the 70% dividends-received deduction for
corporate shareholders only to the extent discussed below.
The Fund may either retain or distribute to shareholders its net capital
gain for each taxable year. The Fund currently intends to distribute any such
amounts. Net capital gain that is distributed and designated as a capital gain
dividend will be taxable to shareholders as long-term capital gain, regardless
of the length of time a shareholder has held his shares or whether such gain was
recognized by the Fund prior to the date on which the shareholder acquired his
shares. The Code provides, however, that under certain conditions only 50% (58%
for alternative minimum tax purposes) of the capital gain recognized upon the
Fund's disposition of domestic "small business" stock will be subject to tax.
Conversely, if the Fund elects to retain its net capital gain, the Fund
will be taxed thereon (except to the extent of any available capital loss
carryovers) at the 35% corporate tax rate. If the Fund elects to retain its net
capital gain, it is expected that the Fund also will elect to have shareholders
of record on the last day of its taxable year treated as if each such
shareholder received a distribution of his pro rata share of such gain, with the
result that each shareholder will be required to report his pro rata share of
such gain on his tax return as long-term capital gain, will receive a refundable
tax credit for his pro rata share of tax paid by the Fund on the gain, and will
increase the tax basis for his shares by an amount equal to the deemed
distribution less the tax credit.
Ordinary income dividends paid by the Fund with respect to a taxable year
will qualify for the 70% dividends-received deduction generally available to
corporations (other than corporations, such as S corporations, which are not
eligible for the deduction because of their special characteristics and other
than for purposes of special taxes such as the accumulated earnings tax and the
personal holding company tax) to the extent of the amount of qualifying
dividends received by the Fund from domestic corporations for the taxable year.
Generally, a dividend received by the Fund will not be treated as a qualifying
dividend (1) if it has been received with respect to any share of stock that the
Fund has held for less than 46 days (91 days in the case of certain preferred
stock), excluding for this purpose under the rules of Code section 246(c)(3) and
(4) any period during which the Fund has an option to sell, is under a
contractual obligation to sell, has made and not closed a short sale of, is the
grantor of a deep-in-the-money or otherwise nonqualified option to buy, or has
otherwise diminished its risk of loss by holding other positions with respect
to, such (or substantially identical) stock; (2) to the extent that the Fund is
under an obligation (pursuant to a short sale or otherwise) to make related
payments with respect to positions in substantially similar or related property;
or (3) to the extent that the stock on which the dividend is paid is treated as
debt-financed under the rules of Code section 246A. The 46-day holding period
must be satisfied during the 90-day period beginning 45 days prior to each
applicable ex-dividend date; the 91-day holding period must be satisfied during
the 180-day period beginning 90 days before each applicable ex-dividend date.
Moreover, the dividends-received deduction for a corporate shareholder may be
disallowed or reduced (1) if the corporate shareholder fails to satisfy the
foregoing requirements with respect to its shares of the Fund or (2) by
application of Code section 246(b) which in general limits the
dividends-received deduction to 70% of the shareholder's taxable income
(determined without regard to the dividends-received deduction and certain other
items).
8
<PAGE>
Alternative minimum tax ("AMT") is imposed in addition to, but only to the
extent it exceeds, the regular tax and is computed at a maximum marginal rate of
28% for noncorporate taxpayers and 20% for corporate taxpayers on the excess of
the taxpayer's alternative minimum taxable income ("AMTI") over an exemption
amount. For purposes of the corporate AMT, the corporate dividends-received
deduction is not itself an item of tax preference that must be added back to
taxable income or is otherwise disallowed in determining a corporation's AMTI.
However, corporate shareholders generally will be required to take the full
amount of any dividend received from the Fund into account (without a
dividends-received deduction) in determining their adjusted current earnings,
which are used in computing an additional corporate preference item (i.e., 75%
of the excess of a corporate taxpayer's adjusted current earnings over its AMTI
(determined without regard to this item and the AMT net operating loss
deduction)) includable in AMTI.
Investment income that may be received by the Fund from sources within
foreign countries may be subject to foreign taxes withheld at the source. The
United States has entered into tax treaties with many foreign countries which
entitle the Fund to a reduced rate of, or exemption from, taxes on such income.
It is impossible to determine the effective rate of foreign tax in advance since
the amount of the Fund's assets to be invested in various countries is not
known. If more than 50% of the value of the Fund's total assets at the close of
its taxable year consist of the stock or securities of foreign corporations, the
Fund may elect to "pass through" to the Fund's shareholders the amount of
foreign taxes paid by the Fund. If the Fund so elects, each shareholder would be
required to include in gross income, even though not actually received, his pro
rata share of the foreign taxes paid by the Fund, but would be treated as having
paid his pro rata share of such foreign taxes and would therefore be allowed to
either deduct such amount in computing taxable income or use such amount
(subject to various Code limitations) as a foreign tax credit against federal
income tax (but not both). For purposes of the foreign tax credit limitation
rules of the Code, each shareholder would treat as foreign source income his pro
rata share of such foreign taxes plus the portion of dividends received from the
Fund representing income derived from foreign sources. No deduction for foreign
taxes could be claimed by an individual shareholder who does not itemize
deductions. Each shareholder should consult his own tax adviser regarding the
potential application of foreign tax credits.
Distributions by the Fund that do not constitute ordinary income dividends
or capital gain dividends will be treated as a return of capital to the extent
of (and in reduction of) the shareholder's tax basis in his shares; any excess
will be treated as gain realized from a sale of the shares, as discussed below.
Distributions by the Fund will be treated in the manner described above
regardless of whether such distributions are paid in cash or reinvested in
additional shares of the Fund (or of another fund). Shareholders receiving a
distribution in the form of additional shares will be treated as receiving a
distribution in an amount equal to the fair market value of the shares received,
determined as of the reinvestment date. In addition, if the net asset value at
the time a shareholder purchases shares of the Fund reflects realized but
undistributed income or gain or unrealized appreciation in the value of assets
held by the Fund distributions of such amounts to the shareholder will be
taxable in the manner described above, although economically they constitute a
return of capital to the shareholder.
Ordinarily, shareholders are required to take distributions by the Fund
into account in the year in which they are made. However, dividends declared in
October, November or December of any year and payable to shareholders of record
on a specified date in such month will be deemed to have been received by the
shareholders (and made by the Fund) on December 31 of such calendar year
provided such dividends are actually paid in January of the following year.
Shareholders will be advised annually as to the U.S. federal income tax
consequences of distributions made (or deemed made) during the year.
The Fund will be required in certain cases to withhold and remit to the
U.S. Treasury 31% of distributions and the proceeds of redemption of shares,
paid to any shareholder who (1) has failed to provide a correct taxpayer
identification number, (2) is subject to backup withholding for failure properly
to report the receipt of interest or dividend income, or (3) failed to certify
to the Fund that it is not subject to backup withholding or that it is an
"exempt recipient" (such as a corporation).
SALE OR REDEMPTION OF SHARES
A shareholder will recognize gain or loss on a sale or redemption of shares
of the Fund in an amount equal to the difference between the proceeds of the
sale or redemption and the shareholder's adjusted tax basis in the shares. All
or a portion of any loss so recognized may be disallowed if the shareholder
purchases other shares of the Fund within 30 days before or after the sale or
redemption. In general, any gain or loss arising from (or treated as arising
from) the sale or redemption of shares of the Fund will be considered capital
gain or loss and will be long-term capital gain or loss if the shares were held
for longer than one year. However, any capital loss arising from the sale or
redemption of shares held for six months or less will be treated as a long-term
capital loss to the extent of the amount of capital gain dividends received on
such shares. For this purpose, the special holding period rules of Code Section
246(c)(3) and (4) generally
9
<PAGE>
will apply in determining the holding period of shares. 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.
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 paid
to a foreign shareholder will be subject to U.S. withholding tax at the rate of
30% (or lower applicable treaty rate) upon the gross amount of the dividend.
Furthermore, such foreign shareholder may be subject to U.S. withholding tax at
the rate of 30% (or lower applicable treaty rate) on the gross income resulting
from a Fund's election to treat any foreign taxes paid by it as paid by its
shareholders, but may not be allowed a deduction against this gross income or a
credit against this U.S. withholding tax for the foreign shareholder's pro rata
share of such foreign taxes which it is treated as having paid. Such a foreign
shareholder would generally be exempt from U.S. federal income tax on gains
realized on the sale of shares of a Fund, capital gain dividends and amounts
retained by the Fund that are designated as undistributed capital gains.
If the income from the Fund is effectively connected with a U.S. trade or
business carried on by a foreign shareholder, then ordinary income and capital
gain dividends, and any gains realized upon a sale of shares of the Fund will be
subject to U.S. federal income tax at the rates applicable to U.S. 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 the Treasury Regulations issued thereunder as in effect on
the date of this Statement of Additional Information. Future legislative or
administrative changes or court decisions may significantly change the
conclusions expressed herein, and any such changes or decisions may have a
retroactive effect.
Rules of state and local taxation of ordinary income and capital gain
dividends from regulated investment companies may differ from the rules for U.S.
federal income taxation described above. Shareholders are urged to consult their
tax advisers as to the consequences of these and other state and local tax rules
affecting an investment in the Fund.
PERFORMANCE CALCULATION
For the purpose of quoting and comparing the performance of the Fund to
that of other mutual funds and to other relevant market indices in
advertisements or in reports to shareholders, performance may be stated in terms
of total return. Under the rules of the Securities and Exchange Commission ("SEC
rules"), funds advertising performance must include total return quotes
calculated according to the following formula:
(1T)n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years (1, 5 or 10)
ERV= ending redeemable value of a hypothetical $1,000 payment made at the
beginning of the 1, 5 or 10 year periods or at the end of the 1, 5 or
10 year periods (or fractional portion thereof).
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
10
<PAGE>
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 which includes the maximum sales charge of 5.75% for
the one year, five year and since commencement (1/2/92) period ended June 30,
1998 is as follows:
AVERAGE ANNUAL
PERIOD TOTAL RETURN
------ -------------
1 year ended June 30, 1998 ........................... -22.05%
5 years ended June 30, 1998 .......................... -2.38%
Since commencement (1/2/92) period June 30, 1998 ..... 2.88%
INDEPENDENT AUDITORS
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, 1999.
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:
+S.M.S. CHADHA (61), Director. 3/16 Shanti Niketan, New Delhi 21, India.
Secretary, Ministry of External Affairs, New Delhi, India; Head of Foreign
Service Institute, New Delhi, India; Special Envoy of the Government of
India; Director, Special Unit for Technical Cooperation among Developing
Countries, United Nations Development Program, New York.
*+ROBERT M. DEMICHELE (53), 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, Lexington Global Asset
Managers, Inc.; Director, Chartwell Re Corporation; Director, Unione
Italiana Reinsurance; Vice Chairman of the Board of Trustees, Union
College; 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.
11
<PAGE>
+BEVERLEY C. DUER (69), Director. 340 East 72nd Street, New York, N.Y. 10021.
Private Investor. Formerly, Manager of
Operations Research Department, CPC International, Inc.
*+BARBARA R. EVANS (38), Director. 5 Fernwood Road Summit, N.J. 07901. Private
Investor. Prior to May 1989, Assistant Vice President and Securities
Analyst, Lexington Management Corporation.
*+LAWRENCE KANTOR (51), 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.; Executive Vice
President--Mutual Funds.
+JERARD F. MAHER (52), Director. 300 Raritan Center Parkway, Edison, NJ
08818-7815. General Counsel, Federal Business Centers; Counsel, Ribis,
Graham & Curtin; Trustee, Lexington Convertible Fund since 1986.
+ANDREW M. McCOSH (57), Director. 12 Wyvern Park, Edinburgh EH 92 JY, Scotland,
U.K. Professor of the Organisation of Industry and Commerce, Department of
Business Studies, The University of Edinburgh, Scotland.
+DONALD B. MILLER (72), 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).
+JOHN G. PRESTON (66), Director. 3 Woodfield Road, Wellesley, Massachusetts
02181. Associate Professor of Finance, Boston College, Boston,
Massachusetts.
*+JAMES A. VAIL, C.F.A. (53), Vice President and Portfolio Manager. P.O. Box
1515, Saddle Brook, N.J. 07663. Vice President, Lexington Management
Corporation. Prior to April 1991, Senior Investment Analyst, Beacon Trust
Company.
*+LISA CURCIO (38), Vice President and Secretary. P.O. Box 1515, Saddle Brook,
N.J. 07663. Senior Vice President and Secretary, Lexington Management
Corporation; Vice President and Secretary, Lexington Funds Distributor,
Inc.; Secretary, Lexington Global Asset Managers, Inc.
*+RICHARD M. HISEY (39), 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.; Executive Vice President and Chief
Financial Officer, Lexington Global Asset Managers, Inc.
*+RICHARD J. LAVERY (44), 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 (39), Vice President. P.O. Box 1515, Saddle Brook, N.J.
07663.
*+CHRISTIE CARR-WALDRON (31), Assistant Treasurer. P.O. Box 1515, Saddle Brook,
N.J. 07663. Treasurer, Lexington Troika Dialog Russia Fund, Inc. Prior to
October 1992, Senior Accountant, KPMG Peat Marwick LLP.
*+CATHERINE R. DiFALCO (29), Assistant Treasurer. P.O. Box 1515, Saddle Brook,
N.J. 07663. Prior to October 1997, Manager of Fund Accounting, Lexington
Group of Investment Companies.
*+SIOBHAN GILFILLAN (35), Assistant Treasurer. P.O. Box 1515, Saddle Brook, N.J.
07663.
*+JOAN K. LEDERER (32), Assistant Treasurer. P.O. Box 1515, Saddle Brook, N.J.
07663. Prior to April 1997, Director of Investment Accounting, Diversified
Investment Advisors,Inc. Prior toApril 1996, Assistant Vice President,
PIMCO.
*+SHERI MOSCA (34), Assistant Treasurer. P.O. Box 1515, Saddle Brook, N.J.
07663. Prior to September 1990, Fund Accounting Manager, Lexington Group of
Investment Companies.
*+PETER CORNIOTES (36), Assistant Secretary. P.O. Box 1515, Saddle Brook, N.J.
07663. Vice President and Assistant Secretary, Lexington Management
Corporation. Assistant Secretary, Lexington Funds Distributor, Inc.
*+ENRIQUE J. FAUST (38), 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. Chadha, Corniotes, DeMichele, Duer, Faust, Hisey, Kantor, Lavery,
Maher, McCosh, Miller, Preston and Vail and Mmes. Carnicelli, Carr-Waldron,
Curcio, DiFalco, Evans, Gilfillan, Lederer and Mosca hold similar offices with
some or all of the other investment companies advised and/or distributed by LMC
and LFD.
12
<PAGE>
REMUNERATION OF DIRECTORS AND CERTAIN EXECUTIVE OFFICERS
Each Director is reimbursed for expenses incurred in attending each meeting
of the Board of Directors or any committee thereof. Each Director who is not an
affiliate of LMC is compensated for his or her services according to a fee
schedule which recognizes the fact that each Director also serves as a Director
(or Trustee) of other investment companies advised by LMC. Each Director
receives a fee, allocated among all investment companies for which the Director
serves. Effective September 12, 1995 each Director receives annual compensation
of $24,000. Prior to September 12, 1995, the Directors who were not employed by
the Fund or its affiliates received annual compensation of $16,000.
Set forth below is information regarding compensation paid or accrued
for the fiscal year ended June 30, 1998 for each Director.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
AGGREGATE PENSION OR RETIREMENT NUMBER OF
COMPENSATION BENEFITS ACCRUED AS TOTAL COMPENSATION FROM DIRECTORSHIPS
NAME OF DIRECTOR FROM FUND PART OF FUND EXPENSES FUND AND FUND COMPLEXES IN FUND COMPLEX
<S> <C> <C> <C> <C>
S.M.S. Chadha $1,712 0 $27,353 15
Robert M DeMichele 0 0 0 16
Beverly C. Duer $1,712 0 $30,803 16
Barbara R. Evans 0 0 0 15
Lawrence Kantor 0 0 0 15
Jerard F.Maher $1,712 0 $30,803 16
Andrew M.McCosh $1,712 0 $28,103 15
Donald B. Miller $1,712 0 $28,103 15
Francis Olmsted* $1,373 $16,800 $16,800 N/A
John G. Preston $1,712 0 $28,103 15
Margaret Russell $1,712 0 $27,353 15
Philip C. Smith* $1,260 $19,200 $19,200 N/A
Francis A. Sunderland* $1,180 $16,800 $16,800 N/A
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
*Retired
RETIREMENT PLAN FOR ELIGIBLE DIRECTORS
Effective September 12, 1995, the Directors instituted a Retirement Plan
for Eligible Directors (the "Plan") pursuant to which each Director (who is not
an employee of any of the funds managed by LMC, LMC, the administrator or LFD or
any of their affiliates) may be entitled to certain benefits upon retirement
from the Board. Pursuant to the Plan, the normal retirement date is the date on
which the eligible Director has attained age 65 and has completed at least ten
years of continuous and non-forfeited service with one or more of the investment
companies advised by LMC (or its affiliates) (collectively, the "Covered
Funds"). Each eligible Director is entitled to receive from the Covered Fund an
annual benefit commencing on the first day of the calendar quarter coincident
with or next following his date of retirement equal to 5% of his compensation
multiplied by the number of such Director's years of service (not in excess of
15 years) completed with respect to any of the Covered Funds. Such benefit is
payable to each eligible Director in quarterly installments for ten years
following the date of retirement or the life of the Director. The Plan
establishes age 72 as a mandatory retirement age for Directors; however,
Directors serving the Covered Funds as of September 12, 1995 are not subject to
such mandatory retirement. Directors serving the Covered Funds as of September
12, 1995 who elect retirement under the Plan prior to September 12, 1996 will
receive an annual retirement benefit at any increased compensation level if
compensation is increased prior to September 12, 1997 and receive spousal
benefits (i.e., in the event the Director dies prior to receiving full benefits
under the Plan, the Director's spouse (if any) will be entitled to receive the
retirement benefit within the 10 year period.)
13
<PAGE>
Retiring Directors will be eligible to serve as Honorary Directors for one
year after retirement and will be entitled to be reimbursed for travel expenses
to attend a maximum of two meetings.
Set forth in the table below are the estimated annual benefits payable to
an eligible Director upon retirement assuming various compensation and years of
service classifications. As of December 31, 1997, the estimated credited years
of service for Directors Chadha, Duer, Maher, McCosh, Miller and Preston are 2,
19, 2, 2, 23, and 19, respectively. The following table refers to retirement
compensation for the trustees and directors of the entire Lexington fund complex
(the investment companies managed by LMC):
HIGHEST ANNUAL COMPENSATION PAID BY ALL FUNDS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
$20,000 $25,000 $30,000 $35,000
YEARS OF
SERVICE ESTIMATED ANNUAL BENEFIT UPON RETIREMENT
15 $15,000 $18,750 $22,500 $26,250
14 14,000 17,500 21,000 24,500
13 13,000 16,250 19,500 22,750
12 12,000 15,000 18,000 21,000
11 11,000 13,750 16,500 19,250
10 10,000 12,500 15,000 17,500
</TABLE>
14
<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, 1998, and the related statements of operations
for the year then ended, changes in net assets for each of the years in the
two-year period then ended and the financial highlights for each of the years
in the five-year period then ended. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of June
30, 1998 by correspondence with the custodian. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
Lexington Strategic Silver Fund, Inc. as of June 30, 1998, the results of its
operations for the year then ended, the changes in its net assets for each of
the years in the two-year period then ended, and the financial highlights for
each of the years in the five-year period then ended, in conformity with
generally accepted accounting principles.
KPMG Peat Marwick LLP
New York, New York
August 3, 1998
15
<PAGE>
LEXINGTON STRATEGIC SILVER FUND, INC.
STATEMENT OF NET ASSETS
(INCLUDING THE PORTFOLIO OF INVESTMENTS)
June 30, 1998
<TABLE>
<CAPTION>
NUMBER OF VALUE
SHARES SECURITY (NOTE 1)
=========== =================================================== ==============
<S> <C> <C>
SILVER BULLION: 32.9%
2,073,857 fine ounces (cost $11,557,282)2.......... $11,478,796
-----------
COMMON STOCKS: 51.7%
AUSTRALIA: 4.0%
1,000,000 Aurora Gold, Ltd.2 ................................ 749,289
1,020,000 MIM Holdings, Ltd. ................................ 492,673
192,857 Pasminco, Ltd. .................................... 146,894
-----------
1,388,856
-----------
MEXICO: 16.0%
290,056 Corporacion Industrial San Luis S.A. .............. 1,129,749
534,016 Grupo Mexico S.A. de C.V. ......................... 1,458,941
945,000 Industrias Penoles S.A. ........................... 2,997,151
-----------
5,585,841
-----------
NORTH AMERICA: 28.3%
100,000 Adrian Resources, Ltd.2 ........................... 27,201
45,000 Apex Silver Mines, Ltd.2 .......................... 435,938
167,000 Atna Resources, Ltd.2 ............................. 107,885
83,500 Atna Resources, Ltd. (Warrants)1,2 ................ -
90,000 Campbell Resources, Inc. (Warrants)1,2 ............ -
108,100 Coeur D'Alene Mines Corporation2 .................. 729,675
77,000 Eldorado Corporation, Ltd.1,2 ..................... 44,507
239,400 Hecla Mining Company2 ............................. 1,271,812
60,000 Minefinders Corporation, Ltd.1,2 .................. 70,178
285,000 Pan American Silver Corporation1,2 ................ 2,577,621
60,000 Pan American Silver Corporation 2 ................. 542,657
275,000 Prime Resource Group, Inc. ........................ 1,926,161
159,600 Romarco Minerals, Inc.2 ........................... 206,210
50,000 Silver Standard Resources, Inc.2 .................. 126,563
300,000 Silver Standard Resources, Inc.1,2 ................ 765,024
525,000 Sunshine Mining and Refining, Inc.2 ............... 492,187
350,000 Tiomin Resources, Inc.1,2 ......................... 142,804
262,500 Tiomin Resources, Inc. (Warrants)1,2 .............. -
50,000 TVX Gold, Inc.2 ................................... 153,125
75,000 Western Copper Holdings, Ltd.2 .................... 260,108
-----------
9,879,656
-----------
PERU: 2.9%
157,009 Compania de Minas Buenaventura S.A. "B" ........... 1,028,201
-----------
</TABLE>
16
<PAGE>
LEXINGTON STRATEGIC SILVER FUND, INC.
STATEMENT OF NET ASSETS
(INCLUDING THE PORTFOLIO OF INVESTMENTS)
June 30, 1998 (continued)
<TABLE>
<CAPTION>
Number of
Shares or Value
Principal Amount Security (Note 1)
================== =========================================================================== =============
<S> <C> <C>
POLAND: 0.5%
21,000 KGHM Polska Miedz S.A. (GDR) .............................................. $ 169,575
-----------
TOTAL COMMON STOCKS:
(cost $21,447,288)........................................................ 18,052,129
-----------
PREFERRED STOCK: 4.7%
NORTH AMERICA: 4.7%
99,000 Freeport McMoran Copper & Gold
(cost $2,081,958)......................................................... 1,670,625
-----------
SHORT-TERM INVESTMENT: 8.6%
U.S. GOVERNMENT AGENCY OBLIGATION
$3,000,000 Federal Home Loan Bank, 5.40%, due 07/01/98
(cost $3,000,000)......................................................... 3,000,000
-----------
TOTAL INVESTMENTS: 97.9%
(cost $38,086,528+) (Note 1).............................................. 34,201,550
Other assets in excess of liabilities: 2.1% ............................... 719,376
-----------
TOTAL NET ASSETS: 100.0%
(equivalent to $3.26 per share on 10,720,535 shares outstanding).......... $34,920,926
===========
</TABLE>
1 Restricted security (Note 6).
2 Non-income producing security.
GDR-Global Depository Receipt.
+ Aggregate cost for Federal income tax purposes is $38,278,333.
The Notes to Financial Statements are an integral part of this statement.
17
<PAGE>
LEXINGTON STRATEGIC SILVER FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
June 30, 1998
<TABLE>
<S> <C>
ASSETS
Investments, at value (cost $38,086,528) (Note 1)......................... $ 34,201,550
Cash ..................................................................... 765,852
Receivable for shares sold ............................................... 16,429
Dividends and interest receivable ........................................ 24,821
-------------
Total Assets .......................................................... 35,008,652
-------------
LIABILITIES
Due to Lexington Management Corporation (Note 2) ......................... 27,925
Payable for shares redeemed .............................................. 6,852
Accrued expenses ......................................................... 52,949
-------------
Total Liabilities ..................................................... 87,726
-------------
NET ASSETS: (equivalent to $3.26 per share on
10,720,535 shares outstanding) (Note 3) ................................. $ 34,920,926
=============
NET ASSETS consist of:
Capital stock - authorized 1,000,000,000 shares, $.001 par value per share $ 10,721
Additional paid-in capital (Notes 1 and 7) ............................... 51,891,810
Distributions in excess of net investment income (Note 1) ................ (191,805)
Accumulated net realized loss on investments and foreign currency
transactions (Notes 1 and 7) ............................................ (12,904,829)
Unrealized depreciation on investments and foreign currency transactions . (3,884,971)
-------------
TOTAL NET ASSETS ...................................................... $ 34,920,926
=============
NET ASSET VALUE, REDEMPTION PRICE PER SHARE .............................. $ 3.26
=============
OFFERING PRICE PER SHARE (100/94.25 of $3.26 adjusted to the nearest cent) $ 3.46
=============
</TABLE>
The Notes to Financial Statements are an integral part of this statement.
18
<PAGE>
LEXINGTON STRATEGIC SILVER FUND, INC.
STATEMENT OF OPERATIONS
Year ended June 30, 1998
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Dividends ............................ $ 413,939
Interest ............................. 163,819
----------
577,758
Less: foreign tax expense ............ 6,902
----------
Total investment income ........... $ 570,856
EXPENSES
Investment advisory fee
(Note 2) ........................ 388,784
Transfer agent and shareholder
servicing expenses (Note 2)...... 141,868
Custodian expenses ................ 91,984
Printing and mailing expenses ..... 65,680
Accounting expenses (Note 2) ...... 43,054
Professional fees ................. 22,738
Directors' fees and expenses ...... 18,532
Registration fees ................. 14,347
Computer processing fees .......... 9,172
Other expenses .................... 603
----------
Total expenses ................... 796,762
-----------
Net investment loss ............. (225,906)
REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS (NOTE 4)
Net realized gain (loss) on:
Investments ...................... (2,592,685)
Foreign currency
transactions ................... 2,010
----------
Net realized loss .............. (2,590,675)
Net change in unrealized
appreciation on:
Investments ..................... (5,393,001)
Foreign currency translation
of other assets and
liabilities ................... (10)
----------
Net change in unrealized
appreciation ................... (5,393,011)
-----------
Net realized and
unrealized loss ............. (7,983,686)
-----------
DECREASE IN NET ASSETS RESULTING
FROM OPERATIONS ..................... $(8,209,592)
===========
</TABLE>
LEXINGTON STRATEGIC SILVER FUND, INC.
STATEMENTS OF CHANGES IN NET ASSETS
Years ended June 30, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
-------------- ----------------
<S> <C> <C>
Net investment loss ................ $ (225,906) $ (404,378)
Net realized loss from
investment and foreign
currency transactions ........... (2,590,675) (989,734)
Net change in unrealized
appreciation of
investments and foreign
currency translation ............ (5,393,011) (4,550,358)
----------- -----------
Decrease in net assets
resulting from operations...... (8,209,592) (5,944,470)
Distributions to shareholders
in excess of net investment
income (Note 1) ................. (81,929) (373,424)
Increase (decrease) in net assets
from capital share
transactions (Note 3) ........... 1,177,232 (25,591,713)
----------- -----------
Net decrease in net assets ....... (7,114,289) (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
$191,805 and $1,792, 1998
and 1997, respectively) ........ $34,920,926 $42,035,215
=========== ===========
</TABLE>
The Notes to Financial Statements are an integral part of these statements.
19
<PAGE>
LEXINGTON STRATEGIC SILVER FUND, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1998 and 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. The Fund
will seek to achieve its objective by investing at least 80% of its portfolio
in securities of established silver-related companies and silver bullion. The
following is a summary of significant accounting policies followed by the Fund
in the preparation of its financial statements:
INVESTMENTS Securities 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
prices. 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 foreign currency exchange contracts outstanding at June 30, 1998.
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, 1998,
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.
20
<PAGE>
LEXINGTON STRATEGIC SILVER FUND, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1998 and 1997 (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (continued)
USE OF ESTIMATES The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of increases and decreases in
net assets from operations during the reporting period. Actual results could
differ from those estimates.
2. INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATE
The Fund pays an investment advisory fee to Lexington Management Corporation
("LMC") at 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 1998, LMC has agreed
to voluntarily limit the total expenses of the Fund (including management fees,
but excluding interest, taxes, brokerage commissions and extraordinary
expenses) to an annual rate of 2.50% of the Fund's average daily net assets. No
reimbursement was required for the year ended June 30, 1998.
The Fund reimburses LMC for certain expenses, including accounting and
shareholder servicing costs of $83,046, which are incurred by the Fund, but
paid by LMC.
3. CAPITAL STOCK
Transactions in capital stock were as follows:
<TABLE>
<CAPTION>
Year ended Year ended
June 30, 1998 June 30, 1997
---------------------------------- ------------------------------------
Shares Amount Shares Amount
--------------- ---------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Shares sold ........................................ 8,598,402 $ 33,307,344 6,348,384 $ 27,981,547
Shares issued on reinvestment of dividends ......... 18,656 73,693 74,245 313,964
--------- ------------- --------- -------------
8,617,058 33,381,037 6,422,629 28,295,511
Shares redeemed .................................... (8,546,967) (32,203,805) (12,351,927) (53,887,224)
---------- ------------- ----------- -------------
Net increase (decrease) ............................ 70,091 $ 1,177,232 (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 year ended
June 30, 1998, excluding short-term securities, were $11,146,223 and
$13,114,171, respectively.
At June 30, 1998, the aggregate gross unrealized appreciation for all
securities in which there is an excess of value over tax cost amounted to
$2,514,707 and aggregate gross unrealized depreciation for all securities in
which there is an excess of tax cost over value amounted to $6,591,490.
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
21
<PAGE>
LEXINGTON STRATEGIC SILVER FUND, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1998 and 1997 (continued)
5. INVESTMENT AND CONCENTRATION RISKS (continued)
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.
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
Acquisition Cost Per Market Percent of
Security Date Shares Share Value Net Assets
- ------------------------------------- ------------- ---------- ---------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Atna Resources, Ltd. (Warrants) 10/14/96 83,500 $ 0.00 $ - 0.00%
Campbell Resources, Inc. (Warrants) 10/25/96 90,000 0.00 - 0.00
Eldorado Corporation, Ltd. 02/22/96 77,000 5.37 44,507 0.13
Minefinders Corporation, Ltd. 03/11/97 60,000 3.66 70,178 0.20
Pan American Silver Corporation 07/17/95 285,000 5.44 2,577,621 7.38
Silver Standard Resources, Inc. 09/06/95 300,000 3.14 765,024 2.19
Tiomin Resources, Inc. 09/28/95 350,000 1.44 142,804 0.41
Tiomin Resources, Inc. (Warrants) 10/31/96 262,500 0.00 - 0.00
---------- -----
$3,600,134 10.31%
========== =====
</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.
7. FEDERAL INCOME TAXES - CAPITAL LOSS CARRYFORWARDS
As of June 30, 1998, $1,093,937 of capital loss carryforwards have expired and
have been reclassified to additional paid-in capital. Capital loss
carryforwards1 available for Federal income tax purposes as of June 30, 1998
are:
$1,254,382 expiring in 1999;
3,106,844 expiring in 2000;
954,860 expiring in 2001;
1,911,797 expiring in 2002;
1,327,486 expiring in 2003;
1,756,775 expiring in 2005; and,
479,351 expiring in 2006.
To the extent any future capital gains are offset by these losses, such gains
would not be distributed to shareholders.
1Temporary book-tax differences of $2,113,334 are the result of deferred post
October losses.
22
<PAGE>
LEXINGTON STRATEGIC SILVER FUND, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1998 and 1997 (continued)
8. TAX INFORMATION (UNAUDITED)
The percentage of investment company taxable income eligible for the dividends
received deduction available to certain corporate shareholders with respect to
the fiscal year ended June 30, 1998 is 6.88%.
For the fiscal year ended June 30, 1998, 3.81% of the Fund's dividends paid
from net investment income were derived from interest on obligations of the
United States government.
The above figures may differ from those cited elsewhere in this report due to
differences in the calculations of income and capital gains for Securities and
Exchange Commission (financial reporting) purposes and Internal Revenue Service
(tax) purposes.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
Selected per share data for a share outstanding throughout the period:
<TABLE>
<CAPTION>
Year ended June 30,
------------------------------------------------------------------
1998 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 ........... (0.66) (0.43) 0.51 0.11 0.42
-------- -------- ------- ------- -------
Total income (loss) from investment operations ............ (0.68) (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 ............................ $ 3.26 $ 3.95 $ 4.46 $ 4.00 $ 3.92
======== ======== ======= ======= =======
Total return* ............................................. (17.32)% (10.76)% 12.02% 2.04% 11.36%
Ratio to average net assets:
Expenses ................................................. 1.90% 1.96% 1.73% 1.82% 1.84%
Net investment loss ...................................... (0.54)% (0.78)% (0.72)% (0.83)% (0.82)%
Portfolio turnover rate ................................... 28.78% 18.76% 44.30% 44.22% 5.28%
Average commission paid on equity
security transactions** ................................. $ 0.02 $ 0.03 $ 0.02 - -
Net assets, end of period (000's omitted) ................. $ 34,921 $ 42,035 $73,945 $65,517 $49,499
</TABLE>
* Sales load is not reflected in total return.
** In accordance with SEC disclosure guidelines, the average commissions are
calculated for the years beginning with June 1996, but not for prior
periods.
23
