<PAGE>
Rule 497(e)
1933 Act File No. 2-16252
1940 Act File No. 811-933
CGM CAPITAL DEVELOPMENT FUND
STATEMENT OF ADDITIONAL INFORMATION
May 1, 1996,
as supplemented on February 3, 1997
This Statement of Additional Information (the "Statement") is not a
prospectus. This Statement relates to the CGM Capital Development Fund
Prospectus dated May 1, 1996, as supplemented (the "Prospectus"), and should be
read in conjunction therewith. A copy of the Prospectus may be obtained from CGM
Capital Development Fund, c/o The CGM Funds Investor Services Division, P.O. Box
449, Boston, Massachusetts 02117 (Telephone: 800-345-4048).
CSAI96B
<PAGE>
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
Page
INTRODUCTION...................................................................1
INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS................................1
PORTFOLIO TURNOVER.............................................................4
MANAGEMENT OF THE FUND.........................................................4
INVESTMENT ADVISORY AND OTHER SERVICES.........................................6
Advisory Agreement....................................................6
Custodial Arrangements................................................8
Independent Accountants...............................................8
Other Arrangements....................................................8
PORTFOLIO TRANSACTIONS AND BROKERAGE...........................................9
DESCRIPTION OF THE FUND.......................................................10
Shareholder Rights...................................................10
Shareholder and Trustee Liability....................................11
HOW TO BUY SHARES.............................................................12
ADVERTISING AND PERFORMANCE INFORMATION.......................................12
Calculation of Total Return..........................................12
Performance Comparisons..............................................13
NET ASSET VALUE AND PUBLIC OFFERING PRICE.....................................14
SHAREHOLDER SERVICES..........................................................15
Open Accounts........................................................15
Systematic Withdrawal Plans ("SWP")..................................16
Exchange Privilege...................................................17
Automatic Investment Plans ("AIP")...................................18
Retirement Plans.....................................................18
Address Changes......................................................19
REDEMPTIONS...................................................................19
Redeeming by Telephone...............................................19
Check Sent to the Record Address.....................................20
Proceeds Wired to a Predesignated Bank...............................20
All Redemptions......................................................20
INCOME DIVIDENDS, CAPITAL GAINS DISTRIBUTIONS AND TAX STATUS..................21
FINANCIAL STATEMENTS..........................................................23
<PAGE>
- --------------------------------------------------------------------------------
INTRODUCTION
- --------------------------------------------------------------------------------
CGM Capital Development Fund (the "Fund"), registered with the
Securities and Exchange Commission ("SEC") as a diversified open-end management
investment company, is organized as a Massachusetts business trust under the
laws of Massachusetts by an Agreement and Declaration of Trust (the "Declaration
of Trust") dated January 16, 1986. The Fund is a successor in interest to
Loomis-Sayles Capital Development Fund, which was organized in 1960. On March 1,
1990, the Fund's name was changed from "Loomis-Sayles Capital Development Fund"
to "CGM Capital Development Fund" to reflect the assumption by Capital Growth
Management Limited Partnership ("CGM" or the "Investment Manager") of investment
advisory responsibilities with respect to the Fund.
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS
- --------------------------------------------------------------------------------
The Fund's investment objective is long-term capital appreciation. The
Fund seeks to attain its objective by investing substantially all of its assets
in common stocks and securities convertible into common stocks. Under some
market conditions, however, the Fund may, for temporary defensive purposes, hold
a substantial portion of its assets in cash or investment grade fixed-income
investments. There are no assurances that the Fund will attain its objective.
The Fund may not:
(1) Invest in companies for the purpose of exercising control or
management;
(2) Issue any senior securities, except as it may be permitted by
the terms of any exemptive order or similar rule issued by the
Securities and Exchange Commission (the "SEC") relating to
multiple classes of shares of beneficial interest of the Fund,
and provided further that collateral arrangements with respect
to forward contracts, futures contracts, short sales or
options, including deposits of initial and variation margin,
shall not be considered to be the issuance of a senior
security for the purposes of this restriction;
(3) Underwrite the distribution of securities issued by others;
(4) Invest in oil, gas or other mineral leases, rights or royalty
contracts or in real estate, commodities or commodity
contracts;
(5) Make loans to other persons, except by the purchase of bonds
or other obligations constituting part of an issue and short
term obligations which are well protected (i.e., creditworthy)
in the opinion of management. (For purposes of this investment
restriction, neither (i) entering into repurchase agreements
nor (ii) the purchase of bonds, debentures, commercial paper,
corporate notes and similar evidences of indebtedness, which
are part of an issue to the public, is considered the making
of a loan. See the next-to-last paragraph under this heading
regarding the Fund's present policy with respect to the
purchase of restricted securities);
(6) Pledge, mortgage, hypothecate or otherwise encumber any of its
assets;
(7) With respect to 75% of its total assets, purchase more than
10% of the outstanding voting securities of any one issuer or
invest more than 5% of the value of its total assets in the
securities of one issuer, except the U.S. Government, its
agencies and instrumentalities;
(8) Invest more than 5% of its assets (taken at current value) in
securities of companies which (with predecessor companies)
have a record of less than three years of continuous
operation;
(9) Purchase or retain securities of any issuer if the officers,
directors, or trustees of the Fund and the adviser thereof who
individually own more than 1/2of 1% of the shares or
securities of such issuer together own more than 5% of such
shares or securities;
(10) Invest in the securities of other investment companies, except
by purchases in the open market involving only customary
brokers' commissions, or in connection with a merger,
consolidation or similar transaction. (Under the Investment
Company Act of 1940, as amended (the "1940 Act"), the Fund
generally may not: (a) invest more than 10% of its total
assets (taken at current value) in such securities; (b) own
securities of any one investment company having a value in
excess of 5% of the Fund's total assets (taken at current
value); or (c) own more than 3% of the outstanding voting
stock of any one investment company);
(11) Borrow money in excess of 10% of its total assets (taken at
cost) or 5% of its total assets (taken at current value),
whichever is lower, nor borrow any money except as a temporary
measure for extraordinary or emergency purposes;
(12) Purchase securities on margin (except such short-term credits
as are necessary for clearance of transactions); or make short
sales (except where, by virtue of ownership of other
securities, it has the right to obtain, without payment of
additional consideration, securities equivalent in kind and
amount to those sold);
(13) Purchase "illiquid" securities, including repurchase
agreements maturing in more than seven days and options traded
"over the counter," if, as a result, more than 10% of the
Fund's total net assets would then be invested in such
securities; and
(14) Write or purchase puts, calls or combinations of both, except
that it may acquire warrants or rights to subscribe to
securities of companies issuing such warrants or rights, or of
parents or subsidiaries of such companies. The Fund has no
present intention to acquire any such warrants and rights, but
may do so at any time without shareholder approval.
If a percentage restriction is adhered to at the time of an investment,
a later increase or decrease in such percentage resulting from a change in the
values of assets will not constitute a violation of such restriction.
The investment restrictions numbered 2, 3, 4, 5, 7 and 11 above have
been adopted by the Fund as fundamental policies. Under the 1940 Act, a
fundamental policy may not be changed without the vote of a majority of the
outstanding voting securities of the Fund, as defined under the 1940 Act.
"Majority" means the lesser of (1) 67% or more of the shares present at a
meeting of shareholders of the Fund, if the holders of more than 50% of the
outstanding shares of the Fund are present or represented by proxy, or (2) more
than 50% of the outstanding shares of the Fund. Investment restrictions numbered
1, 6, 8, 9, 10, 12, 13 and 14 above are non-fundamental and may be changed at
any time by vote of a majority of the Fund's Board of Trustees.
In addition to the fundamental restrictions set forth above, it is the
fundamental policy of the Fund not to purchase any security (other than U.S.
Government obligations) if, as a result, more than 25% of the Fund's total
assets (taken at current value) would then be invested in any one industry. It
is also a non fundamental policy of the Fund not to invest in real estate
limited partnerships, except that the Fund may purchase publicly traded
securities issued by real estate investment trusts.
Although authorized to invest in restricted securities, the Fund as a
matter of policy does not currently intend to invest in such securities. Also,
the Fund has given undertakings to a state regulatory authority in connection
with the qualification of Fund shares for sale in such state that its
investments in warrants will not exceed 5% of the value of its net assets and
that not more than 2% of its net assets will be invested in warrants which are
not listed on the New York or American Stock Exchanges. Such policy and
undertakings can be changed without shareholder approval, but shareholders will
be advised if any such changes are made.
Repurchase agreements in which the Fund may invest are agreements by
which the Fund purchases a security and obtains a simultaneous commitment from
the seller (a bank or, to the extent permitted by the 1940 Act, a recognized
securities dealer) to repurchase the security at an agreed-upon price and date
(usually seven days or less from the date of original purchase). The resale
price is in excess of the purchase price and reflects an agreed upon market rate
unrelated to the coupon rate on the purchased security. Such transactions afford
the Fund the opportunity to earn a return on temporarily available cash at
minimal market risk. While the underlying security may be a bill, certificate of
indebtedness, note or bond issued by an agency, authority or instrumentality of
the U. S. Government, the obligation of the seller is not guaranteed by the U.S.
Government and there is a risk that the seller may fail to repurchase the
underlying security. In such event, the Fund would attempt to exercise rights
with respect to the underlying security, including possible disposition in the
market. However, the Fund may be subject to various delays and risks of loss,
including (1) possible declines in the value of the underlying security during
the period while the Fund seeks to enforce its rights thereto, (2) possible
reduced levels of income and lack of access to income during this period, and
(3) inability to enforce rights and the expenses involved in attempted
enforcement.
- --------------------------------------------------------------------------------
PORTFOLIO TURNOVER
- --------------------------------------------------------------------------------
Although the Fund's objective is long-term capital appreciation, it
frequently sells portfolio securities in response to changes in market
conditions or outlook, even though those securities may only have been held for
short periods of time. This policy may result in higher securities transaction
costs. To the extent that this policy results in gains on investments, the Fund
will make distributions to shareholders, which may accelerate the shareholders'
tax liabilities for realized gains and may result in the distribution of
short-term capital gains taxable as ordinary income. See "Income Dividends,
Capital Gains Distributions and Tax Status."
The Fund's portfolio turnover rate for each of the last ten years is
set forth in the Prospectus under the table entitled "Financial Highlights." The
Fund's portfolio turnover rate has varied significantly from year to year in the
recent past due to the volatility of economic and market conditions, and the
Fund anticipates similar variations in the future.
- --------------------------------------------------------------------------------
MANAGEMENT OF THE FUND
- --------------------------------------------------------------------------------
PETER O. BROWN -- Trustee;
30 Douglas Road, Rochester, NY; Partner, Harter, Secrest &
Emery; formerly Executive Vice President and Chief Operating
Officer, The Glenmede Trust Company; formerly Senior Vice
President, Chase Lincoln First Bank, N.A.
NICHOLAS J. GRANT -- Trustee;
77 Massachusetts Avenue, Cambridge, MA; Professor of
Metallurgy and Materials Science, Massachusetts Institute of
Technology.
G. KENNETH HEEBNER* -- Trustee and Vice President;
Employee, CGM; formerly Vice President and Director, Loomis,
Sayles and Company, Incorporated ("Loomis Sayles").
ROBERT L. KEMP* -- Trustee and President;
Employee, CGM; formerly President and Director, Loomis Sayles.
ROBERT B. KITTREDGE -- Trustee;
21 Sturdivant Street, Cumberland Foreside, ME; Retired;
formerly Vice President, General Counsel and Director, Loomis
Sayles.
LAURENS MACLURE -- Trustee;
183 Sohier Street, Cohasset, MA; Retired; formerly President
and Chief Executive Officer, New England Deaconess Hospital.
JAMES VAN DYKE QUEREAU, JR. -- Trustee;
59 Annewood Lane, Wayne, PA; Managing Partner, Stratton
Management Company; formerly Institutional Managing Partner,
Loomis Sayles.
J. BAUR WHITTLESEY -- Trustee;
1521 Locust Street, Philadelphia, PA; Attorney.
KATHLEEN S. HAUGHTON -- Vice President;
222 Berkeley Street, Boston, MA 02116; Employee -- Investor
Services Division, CGM; formerly Vice President, Boston
Financial Data Services, Inc.
LESLIE A. LAKE -- Vice President and Secretary;
Employee -- Office Administrator, CGM; formerly Office
Administrator, Capital Growth Management Division of Loomis
Sayles.
MARTHA I. MAGUIRE -- Vice President;
Employee -- Funds Marketing, CGM; formerly marketing
communications consultant (self-employed); formerly Sales
Promotion Consultant, The New England.
MARY L. STONE -- Assistant Vice President;
Employee -- Coordinator, Mutual Fund Recordkeeping, CGM;
formerly Coordinator, Mutual Fund Recordkeeping, Loomis Sayles
FRANK N. STRAUSS -- Treasurer;
222 Berkeley Street, Boston, MA 02116; Employee -- Chief
Financial Officer, CGM; formerly Vice President of Fund
Accounting, Freedom Capital Management Corporation and
Assistant Vice President, The Boston Company, Inc.
W. DUGAL THOMAS -- Vice President;
Employee -- Director of Marketing, CGM; formerly Director of
Marketing, Loomis Sayles.
- --------
* Trustee deemed to be an "interested person" of the Fund, as defined by the
1940 Act.
Each of the Fund's trustees is also a trustee of one or more other
investment companies for which CGM acts as investment manager. Except as
indicated above, the address of each trustee and officer of the Fund affiliated
with CGM is One International Place, Boston, Massachusetts 02110.
As of March 31, 1996, the officers and trustees of the Fund owned
beneficially less than 1% of the outstanding shares of the Fund.
The Fund pays no compensation to its officers or to the trustees listed
above who are interested persons of the Fund. Officers and trustees receive no
pension or retirement benefits paid from Fund expenses. The following table sets
forth the compensation paid by the Trust to its trustees for the year ended
December 31, 1995:
<PAGE>
<TABLE>
<CAPTION>
Pension Total
or Retirement Estimated Compensation From
Aggregate Benefits Accrued Annual Registrant and
Name of Compensation as Part of Fund Benefit Upon Fund Complex
Trustee From Trust Expenses Retirement Paid to Trustees(a)
- ------- ------------ ---------------- ------------ -------------------
<S> <C> <C> <C> <C>
Peter O. Brown $10,000 None None $32,000
Nicholas J. Grant 11,500 None None 38,000
G. Kenneth Heebner None None None None
Robert L. Kemp None None None None
Robert B. Kittredge 10,000 None None 32,000
Laurens Maclure 10,000 None None 32,000
James Van Dyke Quereau, Jr. 10,000 None None 32,000
J. Baur Whittlesey 10,000 None None 32,000
- --------------------
(a) The Fund Complex is comprised of two Trusts with a total of five funds.
</TABLE>
- --------------------------------------------------------------------------------
INVESTMENT ADVISORY AND OTHER SERVICES
- --------------------------------------------------------------------------------
Advisory Agreement CGM serves as investment manager of the Fund under
an advisory agreement approved by the shareholders of the Fund at a special
meeting held on December 12, 1996 and effective as of December 13, 1996. CGM has
served as investment manager of the Fund since March 1, 1990. Prior to March 1,
1990, the Fund was managed by Loomis Sayles, whose Capital Growth Management
Division was reorganized into CGM on that date.
Under the advisory agreement, CGM manages the investment and
reinvestment of assets of the Fund and generally administers its affairs,
subject to supervision by the Board of Trustees of the Fund. CGM furnishes, at
its own expense, all necessary office supplies, facilities and equipment,
services of executive and other personnel of the Fund and certain administrative
services. For these services, CGM is compensated at the annual percentage rate
of 1.00% of the first $500 million of the Fund's average daily net asset value,
0.95% of the next $500 million of such value and 0.80% of such value in excess
of $1 billion. While this rate is higher than that paid by most other investment
companies, it is comparable to the fees paid by many investment companies having
investment objectives and policies similar to those of the Fund. For the fiscal
years ended December 31, 1993, 1994 and 1995, the advisory fee paid to CGM in
respect of services rendered to the Fund amounted to $3,275,578, $3,539,323, and
$3,323,791, respectively.
The Fund pays the compensation of its trustees who are not partners,
directors, officers or employees of CGM or its affiliates (other than registered
investment companies); registration, filing, and other fees in connection with
requirements of regulatory authorities; all charges and expenses of its
custodian and transfer agent; the charges and expenses of its independent
accountants; all brokerage commissions and transfer taxes in connection with
portfolio transactions; all taxes and fees payable to governmental agencies; the
cost of any certificates representing shares of the Fund; the expenses of
meetings of the shareholders and trustees of the Fund; the charges and expenses
of the Fund's legal counsel; interest, including on any borrowings by the Fund;
the cost of services, including services of counsel, required in connection with
the preparation of, and the costs of printing registration statements and
prospectuses relating to the Fund, including amendments and revisions thereto,
annual, semiannual, and other periodic reports of the Fund, and notices and
proxy solicitation material furnished to shareholders of the Fund or regulatory
authorities, to the extent that any such materials relate to the Fund or its
shareholders; and the Fund's expenses of bookkeeping, accounting, auditing and
financial reporting, including related clerical expenses. Under the advisory
agreement, if the total of all ordinary business expenses of the Fund for any
fiscal year exceeds the lowest applicable limitation (based on percentage of
average net assets or income) prescribed by any state in which shares of the
Fund are qualified for sale, the total fee otherwise due CGM is reduced by the
amount of such excess, and if after giving effect to such reduction such total
continues to exceed such limitation, CGM pays such excess, unless such reduction
of payment would result in the inability of the Fund to qualify as a regulated
investment company under applicable tax law. At the date of this Statement, the
lowest applicable net asset percentage limitation on the Fund's total ordinary
expenses (including investment advisory fees, but excluding taxes, portfolio
brokerage commissions and interest) was 2.5% of the first $30 million of average
annual net assets, 2% of the next $70 million of such assets and 1.5% of such
assets in excess of $100 million.
CGM also acts as investment adviser to CGM Mutual Fund, CGM Fixed
Income Fund, CGM American Tax Free Fund and CGM Realty Fund and three other
mutual fund portfolios. CGM also provides investment advice to other
institutional clients.
Certain officers and trustees of the Fund also serve as officers,
directors or trustees of other investment companies advised by CGM. The other
investment companies and clients served by CGM sometimes invest in securities in
which the Fund also invests. If the Fund and such other investment companies or
clients advised by CGM desire to buy or sell the same portfolio securities at
the same time, purchases and sales will be allocated to the extent practicable
on a pro rata basis in proportion to the amounts desired to be purchased or sold
for each. It is recognized that in some cases the practices described in this
paragraph could have a detrimental effect on the price or amount of the
securities which the Fund purchases or sells. In other cases, however, it is
believed that these practices may benefit the Fund. It is the opinion of the
trustees that the desirability of retaining CGM as adviser for the Fund
outweighs the disadvantages, if any, which might result from these practices.
Custodial Arrangements State Street Bank and Trust Company ("State
Street Bank"), Boston, Massachusetts 02102, is the Fund's custodian. As such,
State Street Bank holds in safekeeping certificated securities and cash
belonging to the Fund and, in such capacity, is the registered owner of
securities held in book entry form belonging to the Fund. Upon instruction,
State Street Bank receives and delivers cash and securities of the Fund in
connection with Fund transactions and collects all dividends and other
distributions made with respect to Fund portfolio securities. State Street Bank
also maintains certain accounts and records of the Fund and calculates the total
net asset value, total net income, and net asset value per share of the Fund on
each business day.
Independent Accountants The Fund's independent accountants are Price
Waterhouse LLP, 160 Federal Street, Boston, Massachusetts 02110. Price
Waterhouse LLP conducts an annual audit of the Fund's financial statements,
assists in the preparation of the Fund's federal and state income tax returns
and consults with the Fund as to matters of accounting and federal and state
income taxation. The information concerning financial highlights in the
Prospectus, and the financial statements incorporated by reference into this
Statement, have been so included in reliance on the reports of Price Waterhouse
LLP, independent accountants, given on the authority of said firm as experts in
auditing and accounting.
Other Arrangements Certain office space, facilities, equipment and
administrative services for the Fund and other mutual funds under the investment
management of the CGM organization are furnished by CGM. In addition, CGM
provides bookkeeping, accounting, auditing, financial recordkeeping and related
clerical services for which it is reimbursed by the Fund based on the cost of
providing these services. For the services rendered to the Fund for the fiscal
years ended 1995, 1994 and 1993, CGM was reimbursed in the amounts of $55,000,
$55,000 and $33,800, respectively.
- --------------------------------------------------------------------------------
PORTFOLIO TRANSACTIONS AND BROKERAGE
- --------------------------------------------------------------------------------
In placing orders for the purchase and sale of portfolio securities for
the Fund, CGM always seeks the best price and execution. Transactions in
unlisted securities will be carried out through broker-dealers who make the
primary market for such securities unless, in the judgment of CGM, a more
favorable price can be obtained by carrying out such transactions through other
brokers.
CGM selects only brokers it believes are financially responsible, will
provide efficient and effective services in executing, clearing and settling an
order and will charge commission rates which, when combined with the quality of
the foregoing services, will produce the best price and execution for the
transaction. This does not necessarily mean that the lowest available brokerage
commission will be paid. However, the commissions are believed to be competitive
with generally prevailing rates. CGM will use its best efforts to obtain
information as to the general level of commission rates being charged by the
brokerage community from time to time and will evaluate the overall
reasonableness of brokerage commissions paid on transactions by reference to
such data. In making such evaluation, all factors affecting liquidity and
execution of the order, as well as the amount of the capital commitment by the
broker in connection with the order, are taken into account. The Fund will not
pay a broker a commission at a higher rate than is otherwise available for the
same transaction in recognition of the value of research services provided by
the broker or in recognition of the value of any other services provided by the
broker which do not contribute to the best price and execution of the
transaction.
Receipt of research services from brokers may sometimes be a factor in
selecting a broker which CGM believes will provide the best price and execution
for a transaction. These research services include not only a wide variety of
reports on such matters as economic and political developments, industries,
companies, securities, portfolio strategy, account performance, daily prices of
securities, stock and bond market conditions and projections, asset allocation
and portfolio structure, but also meetings with management representatives of
issuers and with other analysts and specialists. Although it is not possible to
assign an exact dollar value to these services, they may, to the extent used,
tend to reduce CGM's expenses. Such services may be used by CGM in servicing
other client accounts and in some cases may not be used with respect to the
Fund. Receipt of services or products other than research from brokers is not a
factor in the selection of brokers.
In 1995, brokerage transactions of the Fund aggregating $2,035,963,608
were allocated to brokers providing research services and $3,633,593 in
commissions were paid on these transactions. During 1993, 1994 and 1995, the
Fund paid total brokerage fees of $2,207,688, $2,366,201 and $3,854,028,
respectively. The variation in the Fund's brokerage commissions is substantially
attributable to fluctuating portfolio activity.
- --------------------------------------------------------------------------------
DESCRIPTION OF THE FUND
- --------------------------------------------------------------------------------
The Declaration of Trust of the Fund currently permits the trustees to
issue an unlimited number of shares of beneficial interest of separate series
thereof. Interests in the portfolio described in the Prospectus and in this
Statement are represented by shares of a single series, which is the only series
authorized as of the date of this Statement (the "Original Series"). Each share
of the Original Series represents an interest in such series which is equal to
and proportionate with the interest represented by each other share. The shares
of the Original Series do not have any preemptive rights. Upon liquidation of
the portfolio, shareholders of the Original Series are entitled to share pro
rata in the net assets of such portfolio available for distribution to
shareholders. The Declaration of Trust also permits the trustees to charge
shareholders directly for custodial, transfer agency and servicing expenses. The
trustees have no present intention of making such direct charges.
The Declaration of Trust also permits the trustees, without shareholder
approval, to create one or more additional series or classes of shares or to
reclassify any or all outstanding shares as shares of particular series or
classes, with such preferences and rights and eligibility requirements as the
trustees may designate. While the trustees have no current intention to exercise
the power to establish separate classes of the existing series of the Fund, it
is intended to allow them to provide for an equitable allocation of the impact
of any future regulatory requirements, which might affect various classes of
shareholders differently. The trustees may also, without shareholder approval,
merge two or more existing series.
Shareholder Rights
On March 31, 1996, there were 18,948,429 shares of the Fund
outstanding. On that date State Street Bank, acting as trustee for various
retirement plans and individual retirement accounts, owned 5,704,794 shares --
about 30% of the total. In almost all cases, State Street Bank does not have the
power to vote or to dispose of the shares except at the direction of the
beneficial owner.
Shareholders are entitled to one vote for each full share held (with
fractional votes for fractional shares held) and may vote (to the extent
provided herein) in the election of trustees of the Fund and the termination of
the Fund and on other matters submitted to the vote of shareholders. There will
normally be no meetings of shareholders for the purpose of electing trustees,
except that in accordance with the 1940 Act (i) the Fund will hold a
shareholders' meeting for the election of trustees at such time as less than a
majority of the trustees holding office have been elected by shareholders, and
(ii) if the appointment of a trustee to fill a vacancy in the Board of Trustees
would result in less than two-thirds of the trustees having been elected by the
shareholders, that vacancy may only be filled by a vote of the shareholders. In
addition, trustees may be removed from office by a written consent signed by the
holders of two-thirds of the outstanding shares and filed with the Fund's
custodian or by a vote of the holders of two-thirds of the outstanding shares at
a meeting duly called for the purpose, which meeting shall be held upon the
written request of the holders of not less than 10% of the outstanding shares.
Upon written request by ten or more shareholders of record who have been such
for at least six months and who hold in the aggregate shares equal to at least
the lesser of (i) $25,000 in net asset value or (ii) 1% of the outstanding
shares, stating that shareholders wish to communicate with the other
shareholders for the purpose of obtaining the signatures necessary to demand a
meeting to consider removal of a trustee, the Fund will either provide access to
a list of shareholders or disseminate appropriate materials (at the expense of
the requesting shareholders). Except as set forth above, the trustees shall
continue to hold office and may appoint successor trustees. Voting rights are
not cumulative.
Shares of the Fund are freely transferable to new owners. However, new
owners will not be permitted to purchase additional shares.
No amendment may be made to the Declaration of Trust without the
affirmative vote of a majority of the holders of the outstanding shares of the
Fund except (i) to change the Fund's name or to cure technical problems in the
Declaration of Trust and (ii) to establish, designate or modify new and existing
series or subseries of Fund shares or other provisions relating to Fund shares
in response to applicable laws or regulations. If one or more new series is
established and designated by the trustees, the shareholders of the Original
Series shall not be entitled to vote on matters exclusively affecting such new
series, such matters including, without limitation, the adoption of or change in
the investment objectives, policies or restrictions of the new series and the
approval of the investment advisory contracts of the new series. Similarly, the
shareholders of the new series shall not be entitled to vote on any such matters
exclusively affecting the Original Series. In particular, the phrase "majority
of the outstanding voting securities of the Fund" as used in this Statement
shall refer only to the shares of the Original Series.
Shareholder and Trustee Liability
Under Massachusetts law, shareholders could, under certain
circumstances, be held personally liable for the obligations of the Fund;
however, the Declaration of Trust disclaims shareholder liability for acts or
obligations of the Fund and requires that notice of such disclaimer be given in
each agreement, obligation or instrument entered into or executed by the Fund or
trustees. The Declaration of Trust provides for indemnification out of Fund
property for all losses and expenses of any shareholder held personally liable
for the obligations of the Fund. Thus, the risk of a shareholder incurring
financial loss on account of shareholder liability is considered remote since it
is limited to circumstances in which the disclaimer is inoperative and the Fund
itself would be unable to meet its obligations.
The Declaration of Trust further provides that the trustees will not be
liable for errors of judgment or mistakes of fact or law. However, nothing in
the Declaration of Trust protects a trustee against any liability to which the
trustee would otherwise be subject by reason of willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in the conduct of
his office. The By-Laws of the Fund provide for indemnification by the Fund of
the trustees and officers of the Fund except with respect to any matter as to
which any such person did not act in good faith in the reasonable belief that
such action was in or not opposed to the best interests of the Fund. No officer
or trustee may be indemnified against any liability to the Fund or the Fund's
shareholders to which such person would otherwise be subject by reason of
willful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his or her office.
- --------------------------------------------------------------------------------
HOW TO BUY SHARES
- --------------------------------------------------------------------------------
The eligibility requirements and procedures for purchasing shares of
the Fund are summarized in the Prospectus under "Who Can Purchase Shares" and
"How to Purchase Shares."
- --------------------------------------------------------------------------------
ADVERTISING AND PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
Calculation of Total Return
The Fund may include total return information in advertisements or
written sales material. Total return is a measure of the change in value of an
investment in the Fund over the period covered, which assumes that any dividends
or capital gains distributions are automatically reinvested in the Fund rather
than paid to the investor in cash. The formula for total return used by the Fund
includes three steps:
(1) adding to the total number of shares purchased by a hypothetical
$1,000 investment in the Fund all additional shares that would have been
purchased if all dividends and distributions paid or distributed during the
period had been automatically reinvested;
(2) calculating the value of the hypothetical initial investment as of
the end of the period by multiplying the total number of shares owned at the end
of the period by the net asset value per share on the last trading day of the
period; and
(3) dividing this account value for the hypothetical investor by the
amount of the initial investment, and annualizing the result for periods of less
than one year.
For the one, five and ten year periods ended December 31, 1995, the
Fund's average annual total return was 41.1%, 26.8% and 19.2%, respectively. For
the one, five, ten and twenty-five year periods ended December 31, 1995, the
total return on a hypothetical $1,000 investment in the Fund on an aggregate
basis was 41.1%, 227.5%, 481.0% and 4,347.5%, respectively.
In computing performance information for the Fund, no adjustment will
be made for a shareholder's tax liability on taxable dividends and capital gains
distributions.
Performance Comparisons
Total return may be used to compare the performance of the Fund against
certain widely acknowledged standards or indices for stock and bond market
performance or against the U.S. Bureau of Labor Statistics' Consumer Price
Index.
The Standard & Poor's 500 Composite Index (the "S&P 500") is a market
value-weighted and unmanaged index showing the changes in the aggregate market
value of 500 stocks relative to the base period 1941-43. The S&P 500 is composed
almost entirely of common stocks of companies listed on the New York Stock
Exchange, although the common stocks of a few companies listed on the American
Stock Exchange or traded over-the-counter are included. The 500 companies
represented include 400 industrial, 60 transportation and 40 financial services
concerns.
The Dow Jones Industrial Average is a market value-weighted and
unmanaged index of 30 large industrial stocks traded on the New York Stock
Exchange.
No brokerage commissions or other fees are factored into the values of
the S&P 500 and the Dow Jones Industrial Average.
The Consumer Price Index, published by the U.S. Bureau of Labor
Statistics, is a statistical measure of change, over time, in the prices of
goods and services in major expenditure groups.
Lipper Analytical Services, Inc., an independent service that monitors
the performance of over 4,700 mutual funds, calculates total return for those
funds grouped by investment objective. From time to time, the Fund may include
its ranking among mutual funds tracked by Lipper in advertisements or sales
literature.
Morningstar, Inc. ("Morningstar") is an independent mutual fund ranking
service. Morningstar proprietary ratings reflect historical risk-adjusted
performance and are subject to change every month. Funds with at least three
years of performance history are assigned ratings from one star (lowest) to five
stars (highest). Morningstar ratings are calculated from the funds' three-,
five-, and ten-year average annual returns (when available) and a risk factor
that reflects the fund performance relative to three-month Treasury bill monthly
returns. Funds' returns are adjusted for fees and sales loads. Ten percent of
the funds in an investment category receive five stars, 22.5% receive four
stars, 35% receive three stars, 22.5% receive two stars, and the bottom 10%
receive one star. From time to time, the Fund may include its ranking among
mutual funds tracked by Morningstar in advertisements or sales literature.
Value Line, Inc. ("Value Line"), an independent mutual fund ranking
service reviews the performance of 2,000 mutual funds. In ranking mutual funds,
Value Line uses two indicators: a Risk Rank to show the total level of risk a
fund has assumed and an Overall Rank measuring various performance criteria
taking risk into account. Funds are ranked from 1 to 5, with 1 the highest
Overall Rank (the best risk-adjusted performance) and the best Risk Rank (the
least risky). From time to time, the Fund may include ranking information
provided by Value Line in advertisements and sales literature.
From time to time, articles about the Fund regarding performance,
rankings and other characteristics of the Fund and information about persons
responsible for its portfolio management may appear in national publications and
major metropolitan newspapers including, but not limited to, The Wall Street
Journal, The Boston Globe and Forbes, Fortune, and Money magazines. In
particular, some or all of these publications may publish their own rankings or
performance reviews of mutual funds, including the Fund. References to or
reprints of such articles may be used in the Fund's promotional literature.
The Fund has been continuously managed since 1976 by G. Kenneth
Heebner.
- --------------------------------------------------------------------------------
NET ASSET VALUE AND PUBLIC OFFERING PRICE
- --------------------------------------------------------------------------------
The method for determining the public offering price and net asset
value per share is summarized in the Prospectus under "Pricing of Shares."
The net asset value of a share of the Fund is determined by dividing
the Fund's total net assets (the excess of its assets over its liabilities) by
the total number of shares outstanding and rounding to the nearest cent. Such
determination is made as of the close of normal trading on the New York Stock
Exchange on each day on which the Exchange is open for unrestricted trading, and
no less frequently than once daily on each day during which there is sufficient
trading in the Fund's portfolio securities that the value of the Fund's shares
might be materially affected. During the 12 months following the date of this
Statement, the New York Stock Exchange is expected to be closed on the following
holidays: Memorial Day, Independence Day, Labor Day, Thanksgiving Day, Christmas
Day, New Year's Day, Presidents' Day and Good Friday.
Securities which are traded over-the-counter or on a stock exchange
will be valued according to the broadest and most representative market based on
the last reported sale price for securities listed on a national securities
exchange (or on the NASDAQ National Market System) or, if no sale was reported
and in the case of over-the-counter securities not so listed, the last reported
bid price. U.S. government securities are valued at the most recent quoted price
on the date of valuation.
For equity securities, it is expected that the broadest and most
representative market will ordinarily be either (i) a national securities
exchange, such as the New York Stock Exchange or American Stock Exchange, or
(ii) the NASDAQ National Market System. For corporate bonds, notes, debentures
and other fixed-income securities, it is expected that the broadest and most
representative market will ordinarily be the over-the-counter market.
Fixed-income securities may, however, be valued on the basis of prices provided
by a pricing service approved by the Board of Trustees when such prices are
believed to reflect the fair market value of such securities. The prices
provided by the pricing service may be determined based on valuations for
normal, institutional-size trading units of such securities using market
information, transactions for comparable securities and various relationships
between securities which are generally recognized by institutional traders.
Instruments with maturities of sixty days or less are valued at amortized cost,
which approximates market value. Other assets and securities which are not
readily marketable will be valued in good faith at fair value using methods
determined by the Board of Trustees.
- --------------------------------------------------------------------------------
SHAREHOLDER SERVICES
- --------------------------------------------------------------------------------
Open Accounts
A shareholder's investment is credited to an open account maintained
for the shareholder by the CGM Shareholder Services Department ("CGM Shareholder
Services") of Boston Financial Data Services, Inc. ("BFDS"), the shareholder
servicing agent for State Street Bank. The address is: CGM Shareholder Services,
c/o BFDS, P.O. Box 8511, Boston, MA 02266-8511.
Certificates representing shares are issued only upon written request
to CGM Shareholder Services but are not issued for fractional shares. Following
each transaction in the account, a shareholder will receive an account statement
disclosing the current balance of shares owned and the details of recent
transactions that have taken place during the year. After the close of each
fiscal year, CGM Shareholder Services will send each shareholder a statement
providing federal tax information on dividends and distributions paid to the
shareholder during the year. The year-end statement should be retained as a
permanent record. Shareholders will be charged a fee for duplicate information.
The open account system permits the purchase of full and fractional
shares and, by making the issuance and delivery of certificates representing
shares unnecessary, eliminates problems of handling and safekeeping, and the
cost and inconvenience of replacing lost, stolen, mutilated or destroyed
certificates.
The costs of maintaining the open account system are borne by the Fund,
and no direct charges are made to shareholders. Although the Fund has no present
intention of making such direct charges to shareholders, it reserves the right
to do so. Shareholders will receive prior notice before any such charges are
made.
Systematic Withdrawal Plans ("SWP")
A Systematic Withdrawal Plan, referred to in the Prospectus under
"Shareholder Services--Systematic Withdrawal Plan," provides for monthly,
quarterly, semiannual or annual withdrawal payments of $50 or more from the
account of a shareholder provided that the account has a value of at least
$10,000 at the time the plan is established.
Payments will be made either to the shareholder or to any other person
or entity designated by the shareholder. If payments are issued to an individual
other than the registered owner(s) and/or mailed to an address other than the
address of record, a signature guarantee will be required on the SWP
application. Shares to be included in a Systematic Withdrawal Plan must be held
in an Open Account rather than certificated form. Income dividends and capital
gain distributions will be reinvested at the net asset value determined as of
the close of the New York Stock Exchange on the record date for the dividend or
distribution. If withdrawal checks are returned to the Fund as "undeliverable"
or remain uncashed for more than six months the shareholder's Systematic
Withdrawal Plan will be cancelled, such undeliverable or uncashed checks will be
cancelled and such amounts reinvested in the Fund at the per share net asset
value determined as of the date of cancellation of the checks.
Since withdrawal payments represent in whole or in part proceeds from
the liquidation of shares, the shareholder should recognize that withdrawals may
reduce and possibly exhaust the value of the account, particularly in the event
of a decline in net asset value. Accordingly, the shareholder should consider
whether a Systematic Withdrawal Plan and the specified amounts to be withdrawn
are appropriate in the circumstances. The Fund makes no recommendations or
representations in this regard. It may be appropriate for the shareholder to
consult a tax adviser before establishing such a plan. See "Redemptions" and
"Income Dividends, Capital Gain Distributions and Tax Status" below for certain
information as to federal income taxes.
Exchange Privilege
A shareholder may exchange shares of the Fund for shares of CGM Mutual
Fund, CGM Fixed Income Fund, CGM American Tax Free Fund, CGM Realty Fund, New
England Cash Management Trust or New England Tax Exempt Money Market Trust. The
value of shares exchanged must be at least $1,000 and all exchanges are subject
to the minimum investment requirements of the fund into which the exchange is
being made. This option is summarized in the Prospectus under "Shareholder
Services--Exchange Privilege." The Fund reserves the right to terminate or limit
the privilege of a shareholder who makes more than four exchanges (or two round
trips) per year and to prohibit exchanges during the first 15 days following an
investment in the Fund. A shareholder may exercise the exchange privilege only
when the fund into which shares will be exchanged is registered or qualified in
the state in which such shareholder resides. If a shareholder exchanges all
shares from the Fund, he will be unable to reopen an account in the Fund (unless
he is currently the registered owner of another account in the Fund).
Exchanges may be effected by (i) a telephone request to CGM Shareholder
Services at 800-343-5678, provided a special authorization form is on file with
the Trust, or (ii) a written exchange request to CGM Shareholder Services
accompanied by an account application for the appropriate fund. Exchange
requests cannot be revoked once they have been received in good order. The Fund
reserves the right to modify this exchange privilege without prior notice,
except as otherwise required by law or regulation.
For federal income tax purposes, an exchange constitutes a sale of
shares, which may result in a capital gain or loss.
Automatic Investment Plans ("AIP")
Once initial investment minimums have been satisfied (see "How to
Purchase Shares" in the Prospectus), a shareholder may participate in an
Automatic Investment Plan, pursuant to which the Fund debits $50.00 or more on
or about the same date each month from a shareholder's checking account and
transfers the proceeds into the shareholder's Fund account. To participate, a
shareholder must authorize the Fund and its agents to initiate Automated
Clearing House ("ACH") debits against the shareholder's designated account at a
bank or other financial institution. Debits from savings banks and credit unions
generally are not acceptable. Debits from savings accounts will not be accepted
under any circumstances. Shareholders receive a confirmation of each purchase of
Fund shares, and each deduction from a shareholder's bank account will appear on
the shareholder's monthly bank statement. If a shareholder elects to redeem Fund
shares purchased under the AIP within 15 days of such purchase, the shareholder
may experience delays in receiving redemption proceeds. See "All Redemptions."
Once a shareholder enrolls in the AIP, the Fund and its agents are
authorized to initiate ACH debits against the shareholder's account payable to
the order of The CGM Funds. Such authority remains in effect until revoked by
the shareholder, and, until the Fund actually receives such notice of
revocation, the Fund is fully protected in initiating such debits. Participation
in the AIP may be terminated by sending written notice to CGM Shareholder
Services, c/o BFDS, P.O. Box 8511, Boston, MA 02266-8511, or by calling
800-343-5678 more than 14 days prior to the next scheduled debit date. The Fund
may immediately terminate a shareholder's participation in the AIP in the event
that any item is unpaid by the shareholder's financial institution. The Fund may
terminate or modify the AIP at any time.
Retirement Plans
Under "Shareholder Services--Retirement Plans" the Prospectus refers to
several retirement plans. These include tax deferred money purchase pension or
profit sharing plans, as well as SEP-IRAs, IRAs and 403(b)(7) custodial accounts
established under retirement plans sponsored by CGM. These plans may be funded
with shares of the Fund.
For participants under age 59 1/2, all income dividends and capital
gain distributions of plan participants must be reinvested. Plan documents and
further information can be obtained from the Fund by writing or calling the Fund
as indicated on the cover of this Statement.
Check with your financial or tax adviser as to the suitability of Fund
shares for your retirement plan.
Address Changes
Shareholders can request to change their record address either by
telephone or in writing (by mail or delivery service, but not by facsimile) in
accordance with the policies and procedures of the Fund. After an address change
is made, no telephone or written redemption requests will be honored for three
months unless the registered owner's signature is guaranteed on the request.
Written requests for a change of address may be mailed to: CGM Shareholder
Services, c/o BFDS, P.O. Box 8511, Boston, MA 02266-8511.
- --------------------------------------------------------------------------------
REDEMPTIONS
- --------------------------------------------------------------------------------
The procedures for redemption of Fund shares are summarized in the
Prospectus under "How to Redeem Shares."
Except as noted below, signatures on redemption requests must be
guaranteed by an eligible guarantor institution in accordance with procedures
established by the Trust. Signature guarantees by notaries public are not
acceptable.
The procedures established by the Fund provide that an "eligible
guarantor institution" means any of the following: banks (as defined in ss. 3(a)
of the Federal Deposit Insurance Act (the "FDIA") [12 U.S.C. ss. 1813(a)]);
brokers, dealers, municipal securities brokers, government securities dealers
and government securities brokers, as those terms are defined under the
Securities Exchange Act of 1934 (the "Act"); credit unions (as defined in ss.
19(b)(1)(A) of the Federal Reserve Act [12 U.S.C. ss. 461(b)]); national
securities exchanges, registered securities associations and clearing agencies,
as those terms are defined under the Act and savings associations (as defined in
ss. 3(b) of the FDIA [12 U.S.C. ss. 1813(b)]). However, as noted in the
Prospectus, a signature guarantee will not be required if the proceeds of the
redemption do not exceed $25,000, and the proceeds check is made payable to the
registered owner(s) and mailed to the record address, which has not changed in
the prior three months. If the record address has changed within the prior three
months, a signature guarantee will be required. This policy applies to both
written and telephone redemption requests.
Redeeming by Telephone
There are two ways to redeem by telephone. In either case, a
shareholder should call 800-343-5678 prior to 4:00 p.m. (Eastern time). Requests
made after that time or on a day when the New York Stock Exchange is not open
for business cannot be accepted. Telephone redemptions are not available for
IRAs, SEP-IRAs, 403(b)(7) custodial accounts or money purchase pension and
profit sharing plans under a CGM retirement plan where State Street Bank is the
trustee.
Check Sent to the Record Address
A shareholder may request that a check be sent to the record address on
the account, provided that the address has not changed for the last three months
and the shareholder is redeeming $25,000 or less. The check will be made payable
to the registered owner(s) of the account.
If checks representing redemption proceeds are returned "undeliverable"
or remain uncashed for six months, such checks shall be cancelled and such
proceeds shall be reinvested in the Fund at the per share net asset value
determined as of the date of cancellation of such checks.
Proceeds Wired to a Predesignated Bank
A shareholder may request that the redemption proceeds be wired to the
bank selected on the Fund application or subsequently on the Service Options
Form available from the Fund. A nominal wire fee, currently $5.00, is deducted
from the proceeds. When selecting the service, a shareholder must designate a
bank account to which the redemption proceeds should be wired. Any change in the
bank account so designated may be made by furnishing CGM Shareholder Services a
completed Service Options Form with a signature guarantee. Whenever the Service
Options Form is used, the shareholder's signature must be guaranteed as
described above. Telephone redemptions may only be made if an investor's bank is
a member of the Federal Reserve System or has a correspondent bank that is a
member of the System. If the account is with a savings bank, it must have only
one correspondent bank that is a member of the System.
All Redemptions
The redemption price will be the net asset value per share next
determined after the redemption request is received by CGM Shareholder Services
in good order (including any necessary documentation). Redemption requests
cannot be revoked once they have been received in good order. Proceeds resulting
from a written redemption request will normally be mailed to you within seven
days after receipt of your request in good order. Telephone redemption proceeds
will normally be mailed or wired within seven days following receipt of a proper
redemption request. If you purchased your Fund shares by check (or through your
AIP) and elect to redeem shares within 15 days of such purchase, you may
experience delays in receiving redemption proceeds. The Fund will process your
redemption request upon receipt of a request in good order. However, the Fund
will generally postpone sending your redemption proceeds from such investment
until it can verify that your check (or AIP investment) has been or will be
collected. Under ordinary circumstances, the Fund cannot verify collection of
individual checks (or AIP investments) and may therefore automatically hold
proceeds from redemptions requested during the 15 day period following such
investment for a total of up to seven days. There will be no such automatic
delay following investments paid for by federal funds wire or by bank cashier's
check, certified check or treasurer's check although the Fund may in any case
postpone payment of redemption proceeds for up to seven days.
The Fund will normally redeem shares for cash; however, the Fund
reserves the right to pay the redemption price wholly in kind or partly in kind
and partly in cash if the Board of Trustees of the Fund determines it to be
advisable in the interest of the remaining shareholders. If portfolio securities
are distributed in lieu of cash, the shareholder will normally incur brokerage
commissions upon subsequent disposition of any such securities. However, the
Fund has elected to be governed by Rule 18f-1 under the 1940 Act pursuant to
which the Fund is obligated to redeem shares solely in cash for any shareholder
during any 90-day period up to the lesser of $250,000 or 1% of the total net
asset value of the Fund at the beginning of such period.
A redemption constitutes a sale of the shares for federal income tax
purposes on which the investor may realize a long- or short-term capital gain or
loss. See "Income Dividends, Capital Gains Distributions and Tax Status."
Because the expense of maintaining small accounts is disproportionately
high, the Fund may close accounts with 20 shares or less and mail the proceeds
to the shareholder. Shareholders who are affected by this policy will be
notified of the Fund's intention to close the account, and will have 60 days
immediately following the notice in which to acquire the requisite number of
shares. The minimum does not apply to retirement and Uniform Gifts to Minors Act
or Uniform Transfers to Minors Act accounts.
- --------------------------------------------------------------------------------
INCOME DIVIDENDS, CAPITAL GAINS DISTRIBUTIONS AND TAX STATUS
- --------------------------------------------------------------------------------
As described in the Prospectus under "Dividends, Capital Gains
Distributions and Taxes" it is the policy of the Fund to pay annually, as
dividends, substantially all net investment income and to distribute annually
all net realized capital gains, if any, after offsetting any capital loss
carryovers.
Income dividends and capital gain distributions are payable in full and
fractional shares of the Fund based upon the net asset value determined as of
the close of the New York Stock Exchange on the record date for such dividend or
distribution. Shareholders, however, may elect to receive their income dividends
or capital gain distributions, or both, in cash. (However, if you elect to
receive capital gains in cash, your income dividends must also be received in
cash.) The election, made at the time the account is opened, may be changed by
the shareholder at any time by submitting a written request directly to CGM
Shareholder Services. In order for a change to be in effect for any dividend or
distribution, it must be received by CGM Shareholder Services on or before the
record date for such dividend or distribution. If you elect to receive
distributions in cash, and checks are returned "undeliverable" to the Fund or
remain uncashed for six months, your cash election will be automatically changed
and your future distributions will be reinvested in the Fund at the per share
net asset value determined as of the date of payment of the distribution. In
addition, following such six month period, any undeliverable or uncashed checks
will be cancelled and such amounts reinvested in the Fund at the per share net
asset value determined as of the date of cancellation of such checks.
The Fund has met, and intends to continue to meet, the requirements of
the Internal Revenue Code with respect to regulated investment companies.
Dividends paid by the Fund from net investment income, including
dividends, interest and net short-term capital gains, will be taxable to
shareholders as ordinary income. Distributions of net capital gains (the excess
of net long-term capital gains over net short-term capital losses) which are
designated by the Fund as capital gains distributions are taxable as long-term
capital gains, regardless of the length of time shareholders have owned shares
in the Fund. Dividends and distributions are taxable to shareholders in the same
manner whether received in cash or reinvested in additional Fund shares. To the
extent that the Fund makes a distribution in excess of its current and
accumulated earnings and profits, the distribution will be treated first as a
tax-free return of capital, reducing the tax basis in a shareholder's shares,
and then, to the extent the distribution exceeds such basis, as a taxable gain
to be realized upon sale of such shares.
Dividends and distributions on Fund shares received shortly after their
purchase, although in effect a return of capital, are subject to federal income
taxes.
The Fund is required to withhold and remit to the U.S. Treasury 31% of
all dividends from net investment income and capital gains distributions,
whether distributed in cash or reinvested in shares of the Fund, paid or
credited to any shareholder account for which an incorrect or no taxpayer
identification number has been provided or where the Fund is notified that the
shareholder has underreported income in the past (or the shareholder fails to
certify that he is not subject to withholding). In addition, the Fund will be
required to withhold and remit to the U.S. Treasury 31% of the amount of the
proceeds of any redemption of Fund shares from a shareholder account for which
an incorrect or no taxpayer identification number has been provided or where the
Fund is notified that the shareholder has underreported income in the past (or
the shareholder fails to certify that he is not subject to such withholding).
As required by federal law, detailed federal tax information is
furnished to each shareholder for each calendar year on or before January 31 of
the succeeding year.
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The financial statements and Report of Independent Accountants for the
year ended December 31, 1995, included in the Fund's Annual Report to
Shareholders for the year ended December 31, 1995, are incorporated herein by
reference.
