<PAGE>
CGM MUTUAL FUND
CGM Mutual Fund (the "Fund") is a diversified and flexibly managed mutual
fund and a series of CGM Trust (the "Trust"), a registered, open-end, no-load
management investment company. The Fund's objective is reasonable long-term
capital appreciation with a prudent approach to protection of capital from
undue risks. Current income is a consideration in the selection of the Fund's
portfolio securities, but it is not a controlling factor. The Fund's
investment manager is Capital Growth Management Limited Partnership ("CGM" or
the "Investment Manager").
PROSPECTUS
May 1, 1996
This prospectus sets forth information you should know before investing in
the Fund. It should be retained for future reference. A Statement of
Additional Information about the Fund dated May 1, 1996 (the "Statement") has
been filed with the Securities and Exchange Commission (the "SEC") and is
available free of charge. Write to the Trust, c/o CGM Investor Services, 222
Berkeley Street, Boston, MA 02116 or call the telephone number listed below to
obtain a Statement. The Statement contains more detailed information about the
Fund and, as amended or supplemented from time to time, is incorporated into
this prospectus by reference.
- --------------------------------------------------------------------------------
For additional information about:
[] Account procedures and status [] New account procedures
[] Redemptions [] Prospectuses
[] Exchanges [] Performance
Call 800-343-5678 Call 800-345-4048
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TABLE OF CONTENTS
Page
Schedule of Fees .......................................................... 2
Financial Highlights ...................................................... 3
Investment Objective and Policies ......................................... 4
The Fund's Investment Manager ............................................. 5
The Portfolio Manager ..................................................... 5
How to Purchase Shares .................................................... 5
Shareholder Services ...................................................... 6
How to Redeem Shares ...................................................... 7
Telephone Transactions .................................................... 9
Dividends, Capital Gains and Taxes ........................................ 10
Pricing of Shares ......................................................... 11
Performance Information ................................................... 11
Additional Facts About the Fund ........................................... 12
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.
<PAGE>
CGM MUTUAL FUND
SCHEDULE OF FEES
Shareholder Transaction Expenses
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price) ............................... None
Maximum Sales Load Imposed on Reinvested Dividends
(as a percentage of offering price) ............................... None
Redemption Fees* .................................................. None
Exchange Fees ..................................................... None
Annual Fund Operating Expenses
(as a percentage of average net assets)
Management Fees ................................................... 0.68%
12b-1 Fees ........................................................ None
Other Expenses .................................................... 0.23%
----
Total Fund Operating Expenses ..................................... 0.91%
- ----------
*A wire fee (currently $5.00) will be deducted from proceeds if a shareholder
elects to transfer redemption proceeds by wire.
The purpose of this fee schedule is to assist you in understanding the
various costs and expenses that you will bear directly or indirectly if you
invest in the Fund. For additional information about the Fund's fees and
expenses, please see "The Fund's Investment Manager" and the Statement.
The following example illustrates the approximate expenses that you would
incur on a $1,000 investment over a ten-year period, assuming a 5% annual rate
of return and redemption at the end of each period.
CUMULATIVE
------------------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
$9 $29 $50 $112
Please keep in mind that the example shown above is hypothetical. The
information above should not be considered a representation of past or future
return and expenses; the actual return and expenses may be more or less.
<PAGE>
CGM MUTUAL FUND
FINANCIAL HIGHLIGHTS
(For a share of the Fund outstanding throughout the indicated years)
These financial highlights have been examined by Price Waterhouse LLP,
independent accountants. The table below should be read in conjunction with the
financial statements and the notes thereto, which, together with the Report of
Independent Accountants thereon, are included in the Fund's Annual Report and
incorporated by reference into the Statement. In addition to the highlights set
forth below, further information about the performance of the Fund is contained
in the Annual Report and the Statement, which may be obtained from the Trust
free of charge.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990* 1989 1988 1987 1986
---- ---- ---- ---- ---- ----- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of year .. $25.05 $28.88 $26.02 $26.80 $21.64 $22.34 $19.94 $20.40 $22.86 $21.53
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net investment income 0.73 1.09 0.92 0.93 0.97 0.87 0.97 1.08 0.87 0.82
Dividends from net
investment income .. (0.77) (1.04) (0.86) (0.93) (0.97) (0.88) (1.02) (1.10) (1.06) (0.94)
Net realized and
unrealized
gain (loss) on
investments ........ 5.31 (3.88) 4.73 0.64 7.80 (0.64) 3.31 (0.44) 2.25 4.20
Distributions from net
realized gain on
investments ........ (0.89) -- (1.81) (1.42) (2.64) -- (0.86) -- (4.52) (2.75)
Distributions in
excess of net
realized gain ...... -- -- (0.12) -- -- -- -- -- -- --
Distributions from
paid-in capital .... -- -- -- -- -- (0.05) -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net increase
(decrease) in net
asset value ........ 4.38 (3.83) 2.86 (0.78) 5.16 (0.70) 2.40 (0.46) (2.46) 1.33
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net asset value at end
of year ............ $29.43 $25.05 $28.88 $26.02 $26.80 $21.64 $22.34 $19.94 $20.40 $22.86
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Total Return (%) ..... 24.3 -9.7 21.8 6.1 40.9 1.1 21.7 3.2 13.7 25.1
Ratios:
Operating expenses to
average net assets(%) 0.91 0.92 0.93 0.93 0.93 0.97 0.97 1.01 0.94 0.84
Net income to average
net assets (%) ..... 2.55 4.39 3.45 3.74 3.80 4.00 4.26 5.25 3.69 3.81
Portfolio turnover (%) 291 173 97 121 201 159 218 218 197 127
Net assets at end
of year (in
thousands) ($) ..... 1,154,439 1,063,375 947,115 548,630 401,887 295,868 312,080 292,735 303,053 203,412
*On March 1, 1990, the Capital Growth Management Division of Loomis, Sayles & Company, Incorporated was reorganized into CGM, which
assumed management of the Fund.
</TABLE>
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The Fund has as its investment objective reasonable long-term capital
appreciation with a prudent approach to protection of capital from undue
risks. While consideration is given to current income in the selection of the
Fund's portfolio securities, it is not a controlling factor. There can be no
assurance that the Fund will achieve its objective.
The Fund seeks to attain its objective by investing substantially all of
the Fund's assets in equity securities and in debt or fixed-income securities.
The Fund is "flexibly managed"; it sometimes will be more heavily invested in
equity securities and at other times will be more heavily invested in debt or
fixed-income securities, depending on management's view of the economic and
investment outlook. The Fund's investments are subject to the market risks
inherent in all securities.
Equity securities are common stocks and securities convertible into common
stock. Equity securities are volatile investments, subject to price declines
as well as advances, and involve greater risks than some other investment
media. The Fund may invest up to 25% of its total assets in securities issued
by companies in any single industry, including the real estate industry.
Securities issued by companies in the real estate industry, including those
issued by real estate investment trusts, may be subject to certain risks
associated with the direct ownership of real estate as well as credit and
market risks generally associated with fixed-income securities.
Debt or fixed-income securities include notes, bonds, preferred stock and
money market instruments including repurchase agreements. Such securities are
subject to credit risk (the risk that the obligor will default in the payment
of principal and/or interest) and to market risk (the risk that the market
value of the securities will change as a result of changes in market rates of
interest).
The Fund may invest up to 35% of its total assets in debt or fixed-income
securities of a quality below investment grade at the time of investment (i.e.
securities rated lower than Baa by Moody's Investors Service, Inc. ("Moody's")
or lower than BBB by Standard and Poor's Corporation ("S&P"), or their
equivalent as determined by the investment manager), including up to 10% of
its total assets in fixed income securities rated at the time of investment
CAA by Moody's or CCC by S&P, or their equivalent as determined by the
investment manager.
Securities rated non-investment grade (lower than Baa or baa by Moody's or
lower than BBB by S&P) are sometimes referred to as "high yield" or "junk"
bonds. See Appendix A for further information about securities ratings.
Investors should consider the following risks associated with high yield
securities before investing in the Fund.
High yield securities may be regarded as predominantly speculative with
respect to the issuer's continuing ability to make principal and interest
payments. Analysis of the creditworthiness of issuers of high yield securities
may be more complex than for issuers of higher quality debt securities, and
the ability of the Fund to achieve its investment objectives may, to the
extent of its investments in high yield securities, be more dependent upon
such creditworthiness analysis than would be the case if the Fund were
investing in higher quality securities.
High yield securities may be more susceptible to real or perceived adverse
economic and competitive industry conditions than higher grade securities. The
prices of high yield securities have been found to be less sensitive to
interest-rate changes than more highly rated investments, but more sensitive
to adverse economic downturns or individual corporate developments. Yields on
a high yield security will fluctuate. If the issuer of high yield securities
defaults, the Fund may incur additional expenses to seek recovery.
The secondary markets on which high yield securities are traded may be
less liquid than the market for higher grade securities. Less liquidity in the
secondary trading markets could adversely affect the price at which the Fund
could sell a particular high yield security when necessary to meet liquidity
needs or in response to a specific economic event, such as a deterioration in
the credit-worthiness of the issuer, and could adversely affect and cause
large fluctuations in the daily net asset value of the Fund's shares. Adverse
publicity and investor perceptions may decrease the value and liquidity of
high yield securities.
It is resonable to expect any recession to severely disrupt the market for
high yield securities, have an adverse impact on the value of such securities,
and adversely affect the ability of the issuers of such securities to repay
principal and pay interest thereon. New laws and proposed new laws may
adversely impact the market for high yield securities.
Although the Fund's objective is long-term capital appreciation, it
frequently sells securities to respond to changes in market, industry, or
individual company conditions or outlook, although it may only have held those
securities for a short period. This policy may result in higher securities
transactions costs.
THE FUND'S INVESTMENT MANAGER
The Fund's investment manager is Capital Growth Management Limited
Partnership, One International Place, Boston, Massachusetts 02110. CGM, an
investment advisory firm founded in 1989, manages eight mutual fund portfolios
and advisory accounts for other clients. The general partner of CGM is a
corporation controlled equally by Robert L. Kemp and G. Kenneth Heebner, who are
trustees and officers of the Fund.
In addition to selecting and reviewing the Fund's investments, CGM
provides executive and other personnel for the management of the Fund. The
Trust's Board of Trustees supervises CGM's conduct of the affairs of the Fund.
In 1995, the Fund paid 0.68% of its average annual net assets in management
fees to CGM.
THE PORTFOLIO MANAGER
G. Kenneth Heebner manages the Fund. In 1989, Mr. Heebner founded CGM with
Robert L. Kemp. Prior to establishing the new company, Mr. Heebner managed
mutual fund portfolios at Loomis, Sayles & Company, Incorporated. He currently
manages CGM Capital Development Fund, CGM Realty Fund and, with Janice H.
Saul, co-manages CGM Fixed Income Fund.
HOW TO PURCHASE SHARES
The Trust sells shares of the Fund directly to investors without any sales
load. You may make an initial purchase of Fund shares by submitting a
completed application form and payment to:
The CGM Funds
P.O. Box 449
Boston, Massachusetts 02117-0449
The minimum initial investment is $2,500 for regular accounts and $1,000
for retirement plans (see "Shareholder Services -- Retirement Plans") and
accounts set up under the Uniform Gifts to Minors Act ("UGMA") or the Uniform
Transfers to Minors Act ("UTMA"). Subsequent investments must be at least $50.
See "Shareholder Services" below for further information about minimum
investments in certain other circumstances.
All investments made by check should be in U.S. dollars and made payable to
CGM Mutual Fund. Third party checks (i.e. checks not payable to CGM Mutual Fund)
are generally not accepted and checks drawn on credit card accounts will not be
accepted. The Trust reserves the right to reject any third party checks and
checks drawn on credit card accounts.
After accepting an order, the Trust forwards the application and payment
to the CGM Shareholder Services Department ("CGM Shareholder Services") of
Boston Financial Data Services, Inc. ("BFDS"), which is the shareholder
servicing agent for State Street Bank and Trust Company ("State Street Bank").
CGM Shareholder Services then opens an account, applies the payment to the
purchase of full and fractional shares, and mails a statement of the account
confirming the transaction.
After your account has been established, you may send subsequent
investments at any time directly to the shareholder servicing agent at the
following address:
CGM Shareholder Services
c/o Boston Financial Data Services, Inc.
P.O. Box 8511
Boston, Massachusetts 02266-8511
The remittance for any subsequent investment must be accompanied by either the
Additional Investment Stub detached from a statement of account, or a note
containing sufficient information to identify the account, i.e., the Fund
name, your account number, your name and social security number.
Subsequent investments may also be made by federal funds wire. Instruct
your bank to wire federal funds to State Street Bank and Trust Company, ABA
#011000028. The text of the wire should read as follows: "DDA99046336,
$ Amount, STATE ST BOS ATTN Mutual Funds. Credit CGM Mutual Fund, Shareholder
Name, Shareholder Account Number." Your bank may charge you a fee for
transmitting funds by wire.
The Trust reserves the right to reject any purchase order, including
orders in connection with exchanges, for any reason the Trust, in its sole
discretion, deems appropriate. Although the Trust does not anticipate that it
will do so, the Trust reserves the right to suspend, change or withdraw the
offering of shares of the Fund.
The price you pay will be the per share net asset value next calculated
after a proper investment order is received by the Trust (in the case of your
initial investment) or by CGM Shareholder Services (in the case of subsequent
investments).
If you wish transactions in your account to be effected by another person
under a power of attorney from you, special rules apply. Please contact the
Trust or CGM Shareholder Services for details.
An investor will not receive any certificates for shares unless the
investor requests them in writing from CGM Shareholder Services. The Trust's
system for recording investments eliminates the problems of handling and
safekeeping certificates.
SHAREHOLDER SERVICES
The Fund offers the following shareholder services as more fully described
in the Statement. Explanations and forms are available from the Trust.
EXCHANGE PRIVILEGE
Shares may be exchanged for shares of money market funds currently
distributed by New England Funds, L.P. ("Money Market Funds"). You may also
exchange shares for shares of CGM Fixed Income Fund, CGM American Tax Free Fund
and CGM Realty Fund. Additionally, you may exchange shares for shares of CGM
Capital Development Fund, but only if you were a shareholder on September 24,
1993, and have remained a shareholder in CGM Capital Development Fund
continuously since that date. CGM Capital Development Fund shares are not
generally available to other persons except in special circumstances that have
been approved by, or under the authority of, the Board of Trustees of CGM
Capital Development Fund as described in the Statement. CGM Realty Fund shares
are not available in South Dakota as described in the prospectus for CGM Realty
Fund.
All exchanges may be made without charge. You may make an exchange by
written instruction or, if a written authorization for telephone exchanges is
on file with CGM Shareholder Services, you may call 800-343-5678. See
"Telephone Transactions." Under certain circumstances, before an exchange can
be made, additional documents may be required to verify the authority or legal
capacity of the person seeking the exchange. Exchanges must be for amounts of
at least $1,000. If you wish to make an exchange into a new account, the
exchange must satisfy the applicable minimum initial investment requirement.
Exchange requests cannot be revoked once they have been received in good
order.
Investors should not view the exchange privilege as a means for taking
advantage of short-term swings in the market, and the Fund limits the number
of exchanges each shareholder may make to four exchanges per account (or two
round trips) per calendar year. Monthly automatic exchanges from the Money
Market Funds to the Fund are exempt from this restriction. The Trust also
reserves the right to prohibit exchanges during the first ten days following
an investment in the Fund. The Trust may terminate or change the terms of the
exchange privilege. In general, shareholders will receive notice of any
material change to the exchange privilege at least 60 days prior to the
change. For federal income tax purposes, an exchange constitutes a sale of
shares, which may result in a capital gain or loss.
SYSTEMATIC WITHDRAWAL PLAN
If the value of your account is at least $10,000, you may have periodic
cash withdrawals automatically paid to you or any person you designate. If
checks are returned to the Fund as "undeliverable" or remain uncashed for more
than six months, the plan will be cancelled. Undeliverable or uncashed checks
shall be cancelled and such amounts shall be reinvested in the Fund at the per
share net asset value determined as of the date of cancellation of such
checks.
AUTOMATIC INVESTMENT PLAN ("AIP")
Once your account has been established, voluntary monthly investments of at
least $50 may be made automatically by pre-authorized withdrawals from your
checking account. Debits from savings banks and credit unions generally are not
acceptable. Additional information about this Plan is set forth in the Statement
and also in Section 9 of the Account Application.
RETIREMENT PLANS
The Fund's shares may be purchased by certain types of tax-deferred
retirement plans. CGM makes available retirement plan forms and plan documents
for IRAs, SEP-IRAs, 403(b)(7) custodial accounts, and pension and profit
sharing plans ("CGM Retirement Plans").
SHAREHOLDER REPORTS
Shareholders will receive the Fund's financial statements and a summary of
the Fund's investments at least semiannually. The Fund intends to consolidate
mailings of annual, semiannual and quarterly reports to households having
multiple accounts with the same address of record and to furnish a single copy
of each report to that address. Mailings of prospectuses and proxy statements
will not be consolidated and if a report is included in such mailings, each
shareholder will receive a separate copy. You may request additional reports
by notifying the Fund in writing, or by calling the Trust.
Shareholders will receive statements confirming all purchases, redemptions
and changes of address. You may call CGM Shareholder Services and request a
duplicate statement for the current year without charge. A fee may be charged
for any duplicate information requested for prior years.
HOW TO REDEEM SHARES
You can redeem all or part of your shares in the Fund in three different
ways: by sending a written request for a check or wire representing the
redemption proceeds, by making a telephone request for redemption by check
(provided that the amount to be redeemed is not more than $25,000 and the
check is being sent to you at your record address, which has not changed in
the prior three months) or by making a telephone request for redemption
proceeds to be wired to a bank that you have predesignated. The redemption
price will always 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). Necessary documentation may include,
in certain circumstances, documents verifying the authority or legal capacity
of the person seeking to redeem shares. Redemption requests cannot be revoked
once they have been received in good order.
If you elect to redeem shares in writing, send your written request to:
CGM Shareholder Services
c/o Boston Financial Data Services, Inc.
P.O. Box 8511
Boston, Massachusetts 02266-8511
The written request must include the name of the Fund, your account number,
the exact name(s) in which your shares are registered, the number of shares or
the dollar amount to be redeemed and mailing or wire instructions. All owners
of shares must sign the request in the exact name(s) in which the shares are
registered (which appear(s) on your confirmation statement) and should
indicate any special capacity in which they are signing (such as trustee or
custodian or on behalf of a partnership, corporation or other entity). If you
are signing in a special capacity, you may wish to contact CGM Shareholder
Services in advance to determine whether additional documentation will be
required before you send a redemption request.
Redemptions from CGM Retirement Plans for which State Street Bank is the
trustee must contain additional information. Please contact CGM Shareholder
Services for instructions and forms. Complete information, including tax
withholding instructions, must be included in your redemption request.
If you are redeeming shares worth more than $25,000 or requesting that the
proceeds check be made out to someone other than the registered owner(s) or be
sent to an address other than your record address (or sent to your record
address if such address has been changed within the previous three months),
you must have your signature guaranteed by an "eligible guarantor institution"
as defined in the rules under the Securities Exchange Act of 1934 (including a
bank, broker, dealer, credit union, national securities exchange, registered
securities association, clearing agency or savings association, but not a
notary public).
If you hold certificates representing your investment, you must enclose
the certificates and a properly completed redemption form or stock power. You
bear the risk of loss of such certificates; consequently, you may wish to send
your certificates by registered mail.
If you elect to redeem shares by telephone, call CGM Shareholder Services
directly at 800-343-5678. See "Telephone Transactions." Telephone redemptions
are not available for CGM Retirement Plans. When you make a redemption request
by telephone, you may choose to receive redemption proceeds either by having a
check mailed to the address of record on the account, provided the address has
not changed for three months and you are redeeming $25,000 or less, or by
having a wire sent to a bank account you have previously designated.
Telephone redemptions by check are available to all shareholders of the
Fund automatically and no special application is necessary. You may select the
telephone redemption wire service when you fill out your initial application
or you may select it later by completing the Service Options Form (with a
signature guarantee), available from the Trust or CGM Shareholder Services.
A telephone redemption request must be received by CGM Shareholder
Services prior to the close of the New York Stock Exchange (the "Exchange").
If you telephone your request to CGM Shareholder Services after the Exchange
closes or on a day when the Exchange is not open for business, the Trust
cannot accept your request and a new one will be necessary.
Wire redemptions by telephone may be made only if your bank is a member of
the Federal Reserve System or has a correspondent bank that is a member of
such System. If your account is with a savings bank, it must have only one
correspondent bank that is a member of the Federal Reserve System. A wire fee
(currently $5) will be deducted from the proceeds. If you decide to change the
bank account to which proceeds are to be wired, you must send in this change
on the Service Options Form with a signature guarantee.
Proceeds resulting from a written or regular telephone redemption request
will normally be mailed to you within seven days after receipt of your request
in good order. Telephone wire redemption proceeds will normally be wired to your
bank within seven days (and generally on the first business day) 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 Trust
will generally postpone sending your redemption proceeds from such investment
until the Trust can verify that your check (or AIP investment) has been or will
be collected. There will be no such delay for redemptions following investments
paid for by federal funds wire or by bank cashier's check, certified check or
treasurer's check. 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.
The Fund may not suspend the right of redemption or postpone payment for
more than seven days except when the Exchange is closed for other than
weekends or holidays, when trading on the Exchange is restricted, during an
emergency (as determined by the SEC) which makes it impracticable for the Fund
to dispose of its securities or to determine fairly the value of its net
assets, or during any other period permitted by the SEC for the protection of
investors.
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 CGM Retirement Plans and UGMA/UTMA
accounts.
TELEPHONE TRANSACTIONS
You may initiate three types of transactions by telephone:
[] Telephone Exchanges
[] Telephone Redemptions By Wire
[] Telephone Redemptions By Check
The terms and provisions for each of these services are explained fully in the
preceding sections. Once a telephone transaction request has been placed, it
cannot be revoked.
The Telephone Exchange privilege and/or Telephone Redemptions By Wire
privilege must be elected by you when you fill out your initial application or
you may select either option later by completing the Service Options Form
(with a signature guarantee) available from the Trust or CGM Shareholder
Services. The Telephone Redemptions By Check privilege is available to
shareholders of the Fund automatically, and no special application is
necessary.
The telephone redemption privileges are not available for IRAs, SEP-IRAs,
403(b)(7) custodial accounts or for pension and profit sharing accounts under
CGM Retirement Plans (in which case State Street Bank is the trustee).
The Fund will employ reasonable procedures to confirm that instructions
received by telephone (including instructions with respect to changes in
addresses) are genuine, such as requesting personal identification information
that appears on your account application and recording the telephone
conversation. You will bear the risk of loss due to unauthorized or fraudulent
instructions regarding your account, although the Fund may be liable if
reasonable procedures are not employed.
DIVIDENDS, CAPITAL GAINS AND TAXES
The Fund intends to declare and pay quarterly dividends consisting of
substantially all of its net investment income. Any capital gains distributions
are normally made annually in December (after applying any available capital
loss carryovers) but may be made more frequently as deemed advisable by the
Board of Trustees. The Fund's dividend and capital gains distributions may be
reinvested in additional shares or received in cash. Certain restrictions may
apply to participants in CGM Retirement Plans.
If you elect to receive distributions in cash and checks are returned
"undeliverable" or remain uncashed for six months, your cash
election will be changed automatically and your future dividend and capital
gains 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 shall be
cancelled and such amounts shall be reinvested in the Fund at the per share
net asset value determined as of the date of cancellation of such checks.
The Fund intends to qualify annually as a "regulated investment company"
under the Internal Revenue Code. To qualify, the Fund must meet certain
income, distribution and diversification requirements. In any year in which
the Fund so qualifies it generally will not be subject to federal income or
excise tax to the extent that its taxable income is distributed to
shareholders.
The distributions received by the Fund from its investments may, for
federal income tax purposes, consist of ordinary income, long-term capital
gains or a return of capital. The characterization of these distributions to
the Fund may, in turn, affect the tax treatment of the Fund's distributions to
its shareholders. Dividends and distributions are taxable to shareholders in
the same manner whether received in cash or reinvested in additional shares of
the Fund.
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. 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.
Distributions that the Fund receives from a real estate investment trust,
and dividends of the Fund attributable to such distributions, will not
constitute "dividends" for purposes of the dividends-received deduction
applicable to corporate shareholders.
A distribution will be treated as paid by the Fund and received by its
shareholders on December 31 of the current calendar year if it is declared by
the Fund in October, November or December of that year with a record date in
such a month and paid by the Fund in January of the subsequent year.
Any dividends or distributions paid shortly after a purchase of shares
will have the effect of reducing the per share net asset value of the shares
by the amount of the dividends or distributions. Although in effect a return
of capital, these distributions are subject to taxes, even if their effect is
to reduce the per share net asset value below a shareholder's cost. The Fund
will notify you annually as to the tax status of dividend and capital gains
distributions paid by the Fund.
The sale or other disposition of shares of the Fund, including a
redemption of shares or an exchange of shares into another fund, is a taxable
event and may result in a capital gain or loss which will be long-term or
short-term, depending upon the shareholder's holding period for the shares.
Dividend distributions, capital gains distributions and capital gains or
losses from redemptions and exchanges may be subject to state and local taxes.
In certain states, a portion of the Fund's income derived from certain direct
U.S. Government obligations may be exempt from state and local taxes. The Fund
will indicate each year the portion of the Fund's income, if any, which is
derived from such obligations.
The Fund is required to withhold a portion of taxable dividends, capital
gains distributions, and redemptions paid to individuals and certain other
classes of shareholders if they fail to furnish the Fund with their correct
taxpayer identification number and certain certifications regarding their tax
status, or if they are otherwise subject to backup withholding. Backup
withholding is not an additional tax. Any amounts withheld may be credited
against a shareholder's normal federal income tax liability. For additional
information about withholding, please see the Statement.
BFDS, the shareholder servicing agent, will send you and the Internal
Revenue Service an annual statement detailing federal tax information,
including information about dividends and distributions paid to you during the
preceding year. If you redeem or exchange shares in any year, following the
end of the year, you will receive a statement providing the cost basis and
gain or loss of each share lot that you sold during such year. Your CGM
account cost basis will be calculated using the "single category average cost
method," which is one of the four calculation methods allowed by the IRS.
Shareholders of the Fund will receive these cost basis statements only for
accounts opened after January 1, 1991. Be sure to keep these statements as
permanent records. A fee may be charged for any duplicate information that you
request.
The tax discussion set forth above is included for general information
only. Shareholders and prospective investors should consult their own tax
advisers concerning the tax consequences of an investment in the Fund.
PRICING OF SHARES
The share price or "net asset value" per share of the Fund is computed
daily by dividing the total value of the investments and other assets of the
Fund, less any liabilities, by the total outstanding shares of the Fund. The
net asset value per share of the Fund is determined as of the close of the
regular trading session of the Exchange on each day the Exchange is open for
trading. Portfolio securities are generally valued at their market value. In
certain cases, market value may be determined on the basis of information
provided by a pricing service approved by the Board of Trustees. 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. The valuation of portfolio securities is more fully
described in the Statement.
PERFORMANCE INFORMATION
The Fund may include yield and total return information in advertisements
or other written sales material. The Fund will show its average annual total
return for the one-, five- and ten-year periods through the end of the most
recent calendar quarter. Total return is measured by comparing the value of an
investment in the Fund at the beginning of the relevant period to the value of
the investment at the end of the period (assuming automatic reinvestment of
all dividends and capital gains distributions). The Fund may also show total
return over other periods or on an aggregate basis for the period presented.
Yield is computed in accordance with the SEC's standardized formula by
dividing the adjusted net investment income per share earned during a recent
thirty-day period by the maximum offering price of a Fund share on the last
day of the period. The Fund may also present one or more distribution rates in
its sales literature. These rates will be determined by annualizing the Fund's
distributions from net investment income and net short-term capital gains over
a recent twelve-month, three-month or thirty-day period and dividing that
amount by the net asset value on the last day of such period.
The Fund may compare its performance to that of recognized financial
indices or groups of mutual funds. It may also include its ranking among other
mutual funds or its rating as published by mutual fund ranking services or
major financial publications. All performance information is based on past
results and is not an indication of likely future performance.
ADDITIONAL FACTS ABOUT THE FUND
[] The Trust was organized in 1986 as a Massachusetts business trust and is
authorized to issue an unlimited number of full and fractional shares in
multiple series. The Trust currently has four series -- CGM Mutual Fund (a
successor to Loomis-Sayles Mutual Fund), CGM Fixed Income Fund, CGM American
Tax Free Fund and CGM Realty Fund (which commenced operations on May 13,
1994).
[] When a shareholder invests in the Fund, the shareholder acquires freely
transferable shares of beneficial interest that entitle the shareholder to
receive dividends and to cast one vote at shareholder meetings for each
share owned. On matters affecting the Fund, shares of the Fund vote
separately from shares of other series of the Trust, except as otherwise
required by law.
[] The investment objective of the Fund is fundamental and cannot be changed
without shareholder approval. Non-fundamental policies may be changed at any
time without such approval.
<PAGE>
APPENDIX A
RATINGS
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC. CORPORATE BOND RATINGS:
Aaa -- Bonds which are rated Aaa are judged to be the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge". Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group, they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A -- Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa -- Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics as
well.
Ba -- Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B -- Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Caa -- Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to
principal or interest.
Moody's applies the numerical modifiers 1, 2 and 3 to each generic rating
classification from Aa through B. The modifier 1 indicates that the security
ranks in the higher end of its generic rating category; the modifier 2
indicates a mid-range ranking; and the modifier 3 indicates that the issue
ranks in the lower end of its generic rating category.
DESCRIPTION OF STANDARD & POOR'S CORPORATION CORPORATE BOND RATINGS:
AAA -- Securities rated AAA have the highest rating assigned by S&P.
Capacity to pay interest and repay principal is extremely strong.
AA -- Securities rated AA have a very strong capacity to pay interest and
repay principal and differ from the higher rated issues only in small degree.
A -- Securities rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than securities in higher
rated categories.
BBB -- Securities rated BBB are regarded as having an adequate capacity to
pay interest and repay principal. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity to pay interest and repay
principal for securities in this category than for securities in higher rated
categories.
BB, B and CCC -- Securities rated BB, B and CCC are regarded, on balance,
as predominantly speculative with respect to capacity to pay interest and
repay principal in accordance with the terms of the obligation. BB represents
the lowest degree of speculation and CCC the highest degree of speculation.
While such securities will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
BB -- Securities rated BB have less near-term vulnerability to default
than other speculative issues. However, they face major ongoing uncertainties
or exposure to adverse business, financial, or economic conditions which could
lead to inadequate capacity to meet timely interest and principal payments.
The BB rating category is also used for debt subordinated to senior debt that
is assigned an actual or implied BBB- rating.
B -- Securities rated B have a greater vulnerability to default but
currently have the capacity to meet interest payments and principal
repayments. Adverse business, financial, or economic conditions will likely
impair capacity or willingness to pay interest and repay principal. The B
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied B or BB- rating.
CCC -- Securities rated CCC have a currently identifiable vulnerability to
default, and are dependent upon favorable business, financial and economic
conditions to meet timely payment of interest and repayment of principal. In
the event of adverse business, financial, or economic conditions, it is not
likely to have the capacity to pay interest and repay principal. The CCC
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied B or B- rating.
Plus (+) or Minus (-): The ratings from A to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
<PAGE>
INVESTMENT ADVISER CGM
Capital Growth Management MUTUAL FUND
Limited Partnership Prospectus & Application
One International Place May 1, 1996
Boston, MA 02110
A No-Load Fund
TRANSFER AND DIVIDEND PAYING AGENT
AND CUSTODIAN OF ASSETS
State Street Bank and Trust Company
Boston, MA 02102
SHAREHOLDER SERVICING AGENT FOR
STATE STREET BANK AND TRUST COMPANY
Boston Financial Data Services, Inc.
P.O. Box 8511
Boston, MA 02266
[FENCER LOGO]
MFP96
<PAGE>
CGM MUTUAL FUND
STATEMENT OF ADDITIONAL INFORMATION
May 1, 1996
This Statement of Additional Information (the "Statement") is not a
prospectus. This Statement relates to the CGM Mutual Fund Prospectus dated May
1, 1996 (the "Prospectus"), and should be read in conjunction therewith. A copy
of the Prospectus may be obtained from CGM Trust, c/o The CGM Funds Investor
Services Division, P.O. Box 449, Boston, Massachusetts 02117 (Telephone:
800-345-4048).
MSAI96
<PAGE>
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
Page
INTRODUCTION................................................................. 1
INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS.............................. 1
PORTFOLIO TURNOVER........................................................... 4
MANAGEMENT OF THE FUND....................................................... 5
INVESTMENT ADVISORY AND OTHER SERVICES....................................... 7
Advisory Agreement.................................................. 7
Custodial Arrangements.............................................. 9
Independent Accountants............................................. 9
Other Arrangements.................................................. 9
PORTFOLIO TRANSACTIONS AND BROKERAGE.........................................10
DESCRIPTION OF THE TRUST.....................................................11
Shareholder Rights..................................................11
Shareholder and Trustee Liability...................................12
HOW TO BUY SHARES............................................................13
ADVERTISING AND PERFORMANCE INFORMATION......................................13
Calculation of Total Return.........................................13
Calculation of Yield................................................14
Performance Comparisons.............................................14
NET ASSET VALUE AND PUBLIC OFFERING PRICE....................................16
SHAREHOLDER SERVICES.........................................................17
Open Accounts.......................................................17
Systematic Withdrawal Plans ("SWP").................................17
Exchange Privilege..................................................18
Automatic Investment Plans ("AIP")..................................19
Retirement Plans....................................................19
Address Changes.....................................................20
REDEMPTIONS..................................................................20
Redeeming by Telephone..............................................21
Check Sent to the Record Address....................................21
Proceeds Wired to a Predesignated Bank..............................21
All Redemptions.....................................................21
INCOME DIVIDENDS, CAPITAL GAINS DISTRIBUTIONS AND TAX STATUS.................22
FINANCIAL STATEMENTS.........................................................24
<PAGE>
- --------------------------------------------------------------------------------
INTRODUCTION
- --------------------------------------------------------------------------------
CGM Mutual Fund (the "Fund"), registered with the Securities and
Exchange Commission ("SEC") as a diversified open-end management investment
company, is organized as a separate series of shares of CGM Trust (the "Trust").
The Trust is a Massachusetts business trust established under the laws of
Massachusetts by an Agreement and Declaration of Trust (the "Declaration of
Trust") dated January 16, 1986, as amended. The Trust is a successor in interest
to Loomis-Sayles Mutual Fund. On March 1, 1990, the Trust's name was changed
from "Loomis-Sayles Mutual Fund" to "CGM Mutual Fund" to reflect the assumption
by Capital Growth Management Limited Partnership ("CGM" or the "Investment
Manager") of investment advisory responsibilities with respect to the Trust. On
December 20, 1991, the Trust's name was changed to CGM Trust and the Fund's name
was changed to CGM Mutual Fund in connection with the organization of CGM Fixed
Income Fund as a second series of the Trust.
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS
- --------------------------------------------------------------------------------
The Fund's investment objective is reasonable long-term capital
appreciation with a prudent approach to protection of capital from undue risks.
Current income is a consideration in the selection of the Fund's portfolio
securities, but it is not a controlling factor. There are no assurances that the
Fund will achieve its objective.
The Fund seeks to attain its objective by investing substantially all
of its assets in equity securities and fixed-income securities. The Fund is
"flexibly managed"; it sometimes will be more heavily invested in equity or
fixed-income securities, depending on management's view of the economic and
investment outlook. The Fund will ordinarily invest its assets so that
approximately 25% (or more) of the Fund's total assets will be invested in debt
or fixed-income securities.
The Fund may invest up to 35% of its total assets in debt or
fixed-income securities of a quality below investment grade at the time of
investment (i.e. securities rated lower than Baa by Moody's Investors Service,
Inc. ("Moody's) or lower than BBB by Standard and Poor's Corporation ("S&P"), or
their equivalent as determined by the Investment Manager), including up to 10%
of its total assets in fixed income securities rated at the time of investment
CAA by Moody's or CCC by S&P, or their equivalent as determined by the
Investment Manager. Risks associated with such investments are described in the
Prospectus.
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 Trust,
and provided further that collateral arrangements with respect to
forward contracts, future 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) Act as underwriter 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. (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 a part of an issue to the
public, is considered the making of a loan);
(6) 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 or
instrumentalities;
(7) 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, except
that the Fund may purchase securities issued by a real estate
investment trust in operation for less than 3 years if the
sponsor of such real estate investment trust has been in
operation for at least 3 years;
(8) 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);
(9) Pledge, mortgage, hypothecate or otherwise encumber any of its
assets;
(10) Purchase or retain securities of an issuer if officers and
trustees of the Fund and officers and directors of its investment
adviser who individually own more than 1/2 of 1% of the shares or
securities of such issuer together own more than 5% of such
shares or securities;
(11) Purchase any securities which would cause more than 25% of the
market value of its total assets at the time of such purchase to
be invested in the securities of one or more issuers having their
principal business activities in the same industry, provided that
there is no limit with respect to investments in the U.S.
Government, its agencies or instrumentalities;
(12) 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;
(13) 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);
(14) 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
(15) 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 or 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 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, 6, 11 and 12 above
have been adopted by the Trust as fundamental policies of the Fund. 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, 7, 8, 9, 10, 13, 14 and 15 above are non-fundamental and may be changed at
any time by vote of a majority of the Fund's Board of Trustees.
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. Real estate investment
trusts may be affected by changes in underlying property values and mortgage
real estate investment trusts may also be affected by the quality of credit
extended. Other risks associated with real estate investment trusts include the
possibility of a decline in real estate values, overbuilding, increased
competition, and other risks related to local or general economic conditions;
rising operating costs and property taxes; and fluctuations in rental income.
Additionally, rising interest rates generally decrease the value of
high-yielding securities and increase the costs of obtaining financing, which
could cause the value of the Fund's investments in such securities to decline.
Although authorized to invest in restricted securities, the Fund as a
matter of policy currently does not 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.
The Fund may invest in repurchase agreements which 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, industry
or individual company 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 in 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 adviser. 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:
<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 $22,000 None None $32,000
Nicholas J. Grant 26,500 None None 38,000
G. Kenneth Heebner None None None None
Robert L. Kemp None None None None
Robert B. Kittredge 22,000 None None 32,000
Laurens Maclure 22,000 None None 32,000
James Van Dyke Quereau, Jr. 22,000 None None 32,000
J. Baur Whittlesey 22,000 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 dated September 1, 1993. 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 Trust. 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 0.75% of the first $200 million of the Fund's average daily net asset value,
0.70% of the next $300 million of such value and 0.65% of such value in excess
of $500 million. 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
$5,100,940, $7,523,197 and $7,637,552, respectively.
On December 29, 1995, the shareholders of the Fund approved a proposed
new advisory agreement between the Fund and CGM. The proposed advisory agreement
does not change the terms of the existing advisory agreement and does not change
the operations or management of the Fund. Shareholders were asked to approve the
proposed advisory agreement in connection with a change of control of CGM that
might be deemed to occur as a result of the proposed merger of New England
Mutual Life Insurance Company into Metropolitan Life Insurance Company. The
proposed advisory agreement will not be executed and will not become effective
until this merger is consummated, which the Fund understands is currently
scheduled to occur during the third quarter of 1996. The proposed advisory
agreement provides that it will continue in effect for an initial term of two
years from the date of execution unless otherwise terminated.
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 Capital Development 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 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 year 1995,
fiscal year 1994 and fiscal year 1993, CGM was reimbursed in the amounts of
$80,000, $80,000 and $34,150, respectively.
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PORTFOLIO TRANSACTIONS AND BROKERAGE
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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 $3,625,472,842
were allocated to brokers providing research services and $4,958,325 in
commissions were paid on these transactions. During 1993, 1994 and 1995, the
Fund paid total brokerage fees of approximately $8,684,220, $5,775,145 and
$5,702,810, respectively. The variation in the Fund's brokerage commissions is
substantially attributable to fluctuating portfolio activity.
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DESCRIPTION OF THE TRUST
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The Declaration of Trust of the Trust currently permits the trustees to
issue an unlimited number of shares of beneficial interest of separate series of
the Trust. Interests in the portfolio described in the Prospectus and in this
Statement are represented by shares of the Fund. Each share of the Fund
represents an interest in such series which is equal to and proportionate with
the interest represented by each other share. The shares of the Fund do not have
any preemptive rights. Upon liquidation of the portfolio, shareholders of the
Fund 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 38,017,311 shares of the Fund
outstanding. On that date State Street Bank, acting as trustee for various
retirement plans and individual retirement accounts, owned 9,274,645 shares --
about 24% 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 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 Trust 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 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 Trust'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 such 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
Trust 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.
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
Trust except (i) to change the Trust'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 Trust shares or other provisions relating to Trust shares
in response to applicable laws of regulations. The shareholders of the Fund
shall not be entitled to vote on matters exclusively affecting any other series,
such matters including, without limitation, the adoption of or change in the
investment objectives, policies or restrictions of the series and the approval
of the investment advisory contracts of the series. Similarly, no shareholders
of any other series shall be entitled to vote on any such matters exclusively
affecting the Fund. 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 Fund.
Shareholder and Trustee Liability
Under Massachusetts law, shareholders could, under certain
circumstances, be held personally liable for the obligations of the Trust;
however, the Declaration of Trust disclaims shareholder liability for acts or
obligations of the Trust and requires that notice of such disclaimer be given in
each agreement, obligation or instrument entered into or executed by the Trust
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 Trust. 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 Trust provide for indemnification by the Trust of
the trustees and officers of the Trust 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 Trust. No officer
or trustee may be indemnified against any liability to the Trust or the Trust'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.
All persons dealing with the Fund must look only to the assets of the
Fund for the enforcement of any claims against the Fund and no other series of
the Trust assumes any liability for obligations entered into on behalf of the
Fund.
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HOW TO BUY SHARES
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The procedures for purchasing shares of the Fund are summarized in the
Prospectus under "How to Purchase Shares."
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ADVERTISING AND PERFORMANCE INFORMATION
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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 24.3%, 15.4% and 13.9%, respectively. For
the one, five, ten, fifteen 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 24.3%, 104.3%, 268.7%, 720.2% and 1,308.7%, respectively. In
computing performance information for the Fund, no adjustment has been made for
a shareholder's tax liability on taxable dividends and capital gains
distributions.
Calculation of Yield.
The Fund may use yield information in advertisements or written sales
material. The Fund's yield is based on a recent 30 day period, and is determined
in accordance with the SEC's standardized formula by:
(1) calculating the aggregate dividends and adjusted interest
earned during that period, net of recurring expenses accrued for the period; and
(2) dividing that amount by the product of (A) the average
daily number of shares outstanding during the period and (B) the maximum
offering price per share on the last day of the period (less any earned income
expected to be declared as a dividend shortly thereafter).
The result is annualized, assuming a quarterly compounding, to
determine the Fund's yield. Interest earned during the period will be adjusted
to reflect amortization of any premium or discount from par on the Fund's fixed
income securities (other than obligations backed by mortgages or other assets),
using the market value for these securities on the last day of the period, or,
for securities purchased during the period, using actual cost. The Fund's yield
will vary from time to time depending upon market conditions, the composition of
the Fund's portfolio and operating expenses of the Fund.
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 1981 by G. Kenneth
Heebner.
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NET ASSET VALUE AND PUBLIC OFFERING PRICE
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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.
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SHAREHOLDER SERVICES
- --------------------------------------------------------------------------------
Open Accounts
A shareholder's investment in the Fund 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 canceled, such undeliverable or uncashed checks will be
canceled 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 Trust 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 Fixed
Income Fund, CGM American Tax Free Fund, CGM Realty Fund, New England Cash
Management Trust, New England Tax Exempt Money Market Trust or CGM Capital
Development Fund; however, shares of CGM Capital Development Fund may only be
exchanged for if you were a shareholder on September 24, 1993, and have remained
a shareholder in the CGM Capital Development Fund. CGM Capital Development Fund
shares are not generally available to other persons except in special
circumstances that have been approved by, or under the authority of, the Board
of Trustees of CGM Capital Development Fund. The special circumstances currently
approved by the Board of Trustees of CGM Capital Development Fund are limited to
the offer and sale of shares of such fund to the following additional persons:
trustees of CGM Capital Development Fund, employees of the Investment Manager
and counsel to such fund and the Investment Manager. CGM Realty Fund shares are
not available in South Dakota as described in the prospectus for CGM Realty
Fund. 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 Trust 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.
Exchanges may be effected by (i) a telephone request to CGM Shareholder
Services at 800-343-5678, provided that 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 Trust
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 debit from a shareholder's bank account will appear on the
shareholder's monthly bank statement. If a shareholder elects to redeem shares
of either Fund 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 Trust by writing or calling the
Trust 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 policies and procedures of the Trust. 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 in address may be mailed to: CGM Shareholder
Services, c/o BFDS, P.O. Box 8511, Boston, MA 02266-8511.
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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 Trust 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 canceled 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 Trust. 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 be made only 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 Trust will process your
redemption request upon receipt of a request in good order. However, the Trust
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 Trust can not verify collection of
individual checks (or AIP investments) and may therefore automatically holds
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 Trust may in any case
postpone payment of redemption proceeds for up to seven days.
The Trust will normally redeem shares for cash; however, the Trust
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 Trust 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
Trust has elected to be governed by Rule 18f-1 under the 1940 Act pursuant to
which the Trust 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 Trust 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 Trust'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 quarterly, 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 canceled 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.
The distributions received by the Fund from its investments may, for
federal income tax purposes, consist of ordinary income, long-term capital gains
or a return of capital. The characterization of these distributions to the Fund
may, in turn, affect the tax treatment of the Fund's distributions to its
shareholders. Dividends and distributions are taxable to shareholders in the
same manner whether received in cash or reinvested in additional shares of the
Fund.
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. 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.
Distributions that the Fund receives from a REIT, and dividends of the
Fund attributable to such distributions, will not constitute "dividends" for
purposes of the dividends-received deduction applicable to corporate
shareholders. 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.
167857.c6
<PAGE>
CGM AMERICAN TAX FREE FUND
CGM FIXED INCOME FUND
STATEMENT OF ADDITIONAL INFORMATION
May 1, 1996
This Statement of Additional Information (the "Statement") is not a
prospectus. This Statement relates to the CGM American Tax Free Fund and CGM
Fixed Income Fund Prospectus dated May 1, 1996 (the "Prospectus"), and should be
read in conjunction therewith. A copy of the Prospectus may be obtained from CGM
Trust, c/o The CGM Funds Investor Services Division, P.O. Box 449, Boston,
Massachusetts 02117 (Telephone: 800-345-4048).
CGM AMERICAN TAX FREE FUND MAY NOT BE AN APPROPRIATE INVESTMENT FOR
RETIREMENT PLAN AND SIMILAR ACCOUNTS.
AFSAI 96
<PAGE>
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
Page
INTRODUCTION................................................................ 1
INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS
OF CGM AMERICAN TAX FREE FUND ..................................... 1
INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS
OF CGM FIXED INCOME FUND........................................... 6
PORTFOLIO TURNOVER.......................................................... 10
MANAGEMENT OF THE FUND...................................................... 11
INVESTMENT ADVISORY AND OTHER SERVICES...................................... 13
Advisory Agreement................................................. 13
Custodial Arrangements............................................. 15
Independent Accountants............................................ 15
Other Arrangements................................................. 16
PORTFOLIO TRANSACTIONS AND BROKERAGE........................................ 16
DESCRIPTION OF THE TRUST.................................................... 17
Shareholder Rights................................................. 18
Shareholder and Trustee Liability.................................. 19
HOW TO BUY SHARES........................................................... 19
ADVERTISING AND PERFORMANCE INFORMATION..................................... 20
Calculation of Total Return........................................ 20
Calculation of Yield............................................... 21
Performance Comparisons............................................ 21
NET ASSET VALUE AND PUBLIC OFFERING PRICE................................... 23
SHAREHOLDER SERVICES........................................................ 24
Open Accounts...................................................... 24
Systematic Withdrawal Plans ("SWP")................................ 25
Exchange Privilege................................................. 25
Automatic Investment Plans ("AIP")................................. 26
Retirement Plans................................................... 27
Address Changes.................................................... 27
REDEMPTIONS................................................................. 27
Redeeming by Telephone............................................. 28
Check Sent to the Record Address................................... 28
Proceeds Wired to a Predesignated Bank............................. 28
All Redemptions.................................................... 29
INCOME DIVIDENDS, CAPITAL GAINS DISTRIBUTIONS AND TAX STATUS................ 29
FINANCIAL STATEMENTS ....................................................... 32
<PAGE>
- --------------------------------------------------------------------------------
INTRODUCTION
- --------------------------------------------------------------------------------
CGM American Tax Free Fund and CGM Fixed Income Fund (each the "Fund"
and, collectively, the "Funds") are each organized as separate series of shares
of CGM Trust (the "Trust"). The Trust is a Massachusetts business trust
established under the laws of Massachusetts by an Agreement and Declaration of
Trust (the "Declaration of Trust") dated January 16, 1986, as amended. The Trust
is a successor in interest to Loomis-Sayles Mutual Fund. On March 1, 1990 the
Trust's name was changed from "Loomis-Sayles Mutual Fund" to "CGM Mutual Fund"
to reflect the assumption by Capital Growth Management Limited Partnership
("CGM" or the "Investment Manager") of investment advisory responsibilities with
respect to the Trust. On December 20, 1991, the Trust's name was changed to CGM
Trust.
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS
OF CGM AMERICAN TAX FREE FUND
- --------------------------------------------------------------------------------
CGM American Tax Free Fund's primary investment objective is to provide
high current income exempt from federal income tax. The Fund's secondary
objective is capital appreciation. There are no assurances that CGM American Tax
Free Fund will achieve its objectives.
At least 75% of CGM American Tax Free Fund's assets will be invested in
securities rated at the time of purchase Baa, MIG-2, Prime-2 or higher by
Moody's Investors Service, Inc. ("Moody's"); or BBB, SP-2, A-2 or better by
Standard and Poor's Corporation ("Standard and Poor's"); or, if not rated by
Moody's or Standard and Poor's, determined to be of comparable quality by the
Investment Manager. Up to 25% of the Fund's assets may be invested in lower
quality securities, which have speculative characteristics and are subject to
special risks described in the Prospectus.
As a fundamental policy, under normal market conditions, CGM American
Tax Free Fund will invest at least 80% of its net assets in securities, the
interest from which is, in the opinion of counsel to the issuer, exempt from
federal income tax and excluded from the calculation of the federal alternative
minimum tax for individuals.
CGM American Tax Free Fund may not:
(1) Borrow money, except that it may borrow from banks in an amount
not to exceed 1/3 of the value of its total assets and may borrow for temporary
purposes from entities other than banks in an amount not to exceed 5% of the
value of its total assets;
(2) Issue any senior securities, except as 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 Trust, 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 purposes of this restriction;
(3) Act as an underwriter of securities issued by other persons,
except insofar as the Fund may be deemed an underwriter in connection with the
disposition of securities;
(4) Purchase any securities which would cause more than 25% of the
market value of its total assets at the time of such purchase to be invested in
the securities of one or more issuers having their principal business activities
in the same industry, provided that there is no limit with respect to
investments in securities issued by the U.S. Government, its agencies and
instrumentalities;
(5) Purchase or sell real estate, except that the Fund may invest in
securities of companies that deal in real estate and securities secured by real
estate or interests therein and the Fund may hold and sell real estate acquired
as a result of the Fund's ownership of such securities;
(6) Purchase or sell commodities or commodity futures contracts,
except that the Fund may invest in financial futures contracts, options thereon
and similar instruments;
(7) Make loans to other persons except (a) through the lending of
securities held by it, (b) through the use of repurchase agreements, and (c) by
the purchase of debt securities in accordance with its investment policies;
(8) With respect to 75% of its total assets, purchase more than 10% of
the outstanding voting securities of one issuer or invest more than 5% of the
value of its total assets in securities of any one issuer, except the U.S.
Government, its agencies or instrumentalities;
(9) 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;
(10) Purchase securities issued by companies which, including their
predecessors, have been in operation for less than 3 years, if, as a result,
more than 5% of the Fund's total assets would then be invested in such
securities;
(11) 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 1/2 of 1% of the securities of such issuer together own beneficially
more than 5% of such securities;
(12) Acquire or retain securities of any investment company, except
that the Fund may (a) acquire securities of closed-end investment companies up
to the limits permitted by applicable law, provided such acquisitions are in the
open market and there is no commission or profit to a dealer or sponsor other
than the customary broker's commission, and (b) acquire securities of any
investment company as part of a merger, consolidation or similar transaction;
(13) Sell securities short or maintain a short position unless, at all
times that a short position is open, the Fund owns an equal amount of such
securities or securities convertible into or exchangeable for, without payment
of any further consideration, securities of the same issue as, and equal in
amount to, the securities sold short (which sales are commonly referred to as
"short sales against the box");
(14) Invest in puts, calls, straddles, spreads or any combination
thereof, except that the Fund may (a) purchase put and call options on
securities and securities indexes, and (b) write covered put and call options on
securities and securities indexes, provided that the aggregate value of the
securities underlying the calls or obligations underlying the puts determined as
of the date the options are sold shall not exceed 25% of the Fund's net assets
and, provided further that (i) the securities underlying such options are within
the investment policies of the Fund and (ii) at the time of such investment, the
value of the Fund's aggregate investment in such securities does not exceed 5%
of the Fund's total assets;
(15) Invest in oil, gas or other mineral exploration programs,
development programs or leases, except that the Fund may purchase publicly
traded securities of companies engaging in whole or in part in such activities;
(16) Invest in real estate limited partnerships, except that the Fund
may purchase publicly traded securities issued by real estate investment trusts;
(17) Pledge, mortgage or hypothecate its assets in excess, together
with permitted borrowings, of 1/3 of its total assets;
(18) Purchase securities on margin, except short-term credits as are
necessary for the purchase and sale of securities, provided that the deposit or
payment of initial or variation margin in connection with futures contracts or
related options will not be deemed to be a purchase on margin;
(19) Invest in warrants, if at the time of such investment (a) more
than 5% of the value of the Fund's net assets would be invested in warrants or
(b) more than 2% of the value of the Fund's net assets would be invested in
warrants that are not listed on the New York Stock Exchange or the American
Stock Exchange (for this purpose, warrants attached to securities will be deemed
to have no value); and
(20) Invest more than 10% of its total assets in securities which the
Fund is restricted from selling to the public without registration under the
Securities Act of 1933, as amended.
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 1 through 8 have been adopted by
the Trust as fundamental policies of CGM American Tax Free Fund. Under the
Investment Company Act of 1940 as amended (the "1940 Act"), a fundamental policy
may not be changed without the vote of a majority of the outstanding voting
securities of CGM American Tax Free 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
9 through 20 above are non-fundamental and may be changed at any time by vote of
a majority of the Trust's Board of Trustees.
Although CGM American Tax Free Fund has the ability to invest in
financial futures contracts and options thereon, to invest in puts, calls and
warrants, to acquire securities of closed-end investment companies, to sell
securities short against the box, to purchase publicly traded securities issued
by real estate investment trusts and to loan portfolio securities, the Fund has
no current intention of doing so without first notifying its shareholders and
supplying further information in the Prospectus.
Restricted securities eligible for resale to "qualified institutional
buyers" pursuant to Rule 144A under the Securities Act of 1933, as amended, may
be determined to be liquid by the Investment Manager under guidelines approved
by the Board of Trustees. In its determination of liquidity with respect to such
securities, the Investment Manager will consider the following factors, among
others: (1) the frequency of trades and quotes for the security, (2) the number
of dealers willing to purchase or sell the security and the number of other
potential purchasers, (3) dealer undertakings to make a market in the security,
and (4) the nature of the security and the nature of the marketplace trades
(e.g., the time needed to dispose of the security, the method of soliciting
offers, and the mechanics of transfer). The foregoing investment practice could
have the effect of increasing the level of illiquidity in CGM American Tax Free
Fund to the extent that qualified institutional buyers become uninterested in
purchasing the securities.
CGM American Tax Free Fund may invest up to 5% of its total assets in
repurchase agreements. A repurchase agreement is an instrument under which the
purchaser acquires ownership of 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 CGM American Tax Free 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, CGM
American Tax Free 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.
CGM American Tax Free Fund may enter into reverse repurchase agreements
with banks or broker-dealers. Reverse repurchase agreements involve the sale of
a security held by the Fund and its agreement to repurchase the instrument at a
stated price, date and interest payment. Reverse repurchase agreements may be
considered to be borrowings by the Fund and entail additional risks such as the
occurrence of interest expenses and fluctuations in the Fund's net asset value.
In connection with entering into reverse repurchase agreements, a segregated
account of the Fund consisting of cash, cash equivalents, U.S. Government
securities or other high quality liquid debt securities with an aggregate value
at all times sufficient to repurchase the securities, or equal to the proceeds
received upon the sale plus accrued interest, will be established with the
Fund's custodian bank.
CGM American Tax Free Fund may purchase municipal lease obligations. In
determining the liquidity of municipal lease obligations, the Board of Trustees
will consider the following factors: (1) the frequency of trades and quotes; (2)
the number of dealers willing to purchase or sell the security; (3) the
willingness of dealers to undertake to make a market; (4) the nature of the
marketplace trades; and (5) the likelihood that the obligation will continue to
be marketable based on the credit quality of the municipality or relevant
obligor.
While CGM American Tax Free Fund may not invest more than 25% of its
total assets in any one industry, the Fund may invest more than 25% of its total
assets in a broader segment of the tax-exempt market, such as revenue
obligations of hospitals and other healthcare facilities, housing agency revenue
obligations or airport revenue obligations. The Fund may also invest more than
25% of its total assets in securities relating to any one or more states
(including the District of Columbia), territories or United States possessions
or any of their political subdivisions.
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS
OF CGM FIXED INCOME FUND
- --------------------------------------------------------------------------------
CGM Fixed Income Fund's investment objective is to maximize total
return by investing in debt securities and preferred stocks that provide current
income, capital appreciation or a combination of both income and appreciation.
Under normal circumstances, CGM Fixed Income Fund will invest at least 65% of
its total assets in fixed-income securities. There are no assurances that the
Fund will achieve its objective and the Fund may change its objective without
shareholder approval
CGM Fixed Income Fund may invest up to 35% of its assets in securities
with ratings lower than Baa (baa in the case of preferred stocks) by Moody's or
BBB by Standard and Poor's. The Fund may invest up to 10% of its total assets in
securities rated at the time of purchase CAA by Moody's (caa in the case of
preferred stocks) or CCC by Standard and Poor's if, in the opinion of the
Investment Manager, the financial condition of the issuer or the protection
afforded to the particular security is stronger than would otherwise be
indicated by the rating. Risks associated with such investments are described in
the Prospectus.
CGM Fixed Income Fund may invest up to 20% of its net assets at the
time of purchase in debt securities and preferred stocks of foreign issuers.
Risks associated with such investments are described in the Prospectus.
At any time that CGM Fixed Income Fund's borrowings (including
obligations under reverse repurchase agreements) exceed 5% of the value of its
total assets, the Fund will not purchase or acquire any additional investment
securities.
CGM Fixed Income Fund may not:
(1) Borrow money, except that it may borrow from banks in an amount
not to exceed 1/3 of the value of its total assets and may borrow for temporary
purposes from entities other than banks in an amount not to exceed 5% of the
value of its total assets;
(2) Issue any senior securities, except as it may be permitted by the
terms of any exemptive order or similar rule issued by the SEC relating to
multiple classes of shares of beneficial interest of the Trust, 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) Act as an underwriter of securities issued by other persons,
except insofar as the Fund may be deemed an underwriter in connection with the
disposition of securities;
(4) Purchase any securities which would cause more than 25% of the
market value of its total assets at the time of such purchase to be invested in
the securities of one or more issuers having their principal business activities
in the same industry, provided that there is no limit with respect to
investments in the U.S. Government, its agencies and instrumentalities;
(5) Purchase or sell real estate, except that the Fund may invest in
securities of companies that deal in real estate and securities secured by real
estate or interests therein and the Fund may hold and sell real estate acquired
as a result of the Fund's ownership of such securities;
(6) Purchase or sell commodities or commodity futures contracts,
except that the Fund may invest in financial futures contracts, options thereon
and similar instruments;
(7) Make loans to other persons except (a) through the lending of
securities held by it, (b) through the use of repurchase agreements, and (c) by
the purchase of debt securities in accordance with its investment policies;
(8) 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 any one issuer, except the
U.S. Government, its agencies or instrumentalities;
(9) 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;
(10) Purchase securities issued by companies which, including their
predecessors, have been in operation for less than 3 years, if, as a result,
more than 5% of the Fund's total assets would then be invested in such
securities, except that the Fund may purchase securities issued by a real estate
investment trust in operation for less than 3 years if the sponsor of such real
estate investment trust has been in operation for at least 3 years;
(11) 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 1/2 of 1% of the securities of such issuer together own beneficially
more than 5% of such securities;
(12) Acquire or retain securities of any investment company, except
that the Fund may (a) acquire securities of closed-end investment companies up
to the limits permitted by applicable law, provided such acquisitions are in the
open market and there is no commission or profit to a dealer or sponsor other
than the customary broker's commission, and (b) acquire securities of any
investment company as part of a merger, consolidation or similar transaction;
(13) Sell securities short or maintain a short position unless, at all
times that a short position is open, the Fund owns an equal amount of such
securities or securities convertible into or exchangeable for, without payment
of any further consideration, securities of the same issue as, and equal in
amount to, the securities sold short (which sales are commonly referred to as
"short sales against the box");
(14) Invest in puts, calls, straddles, spreads or any combination
thereof, except that the Fund may (a) purchase put and call options on
securities and securities indexes, and (b) write covered put and call options on
securities and securities indexes, provided that the aggregate value of the
securities underlying the calls or obligations underlying the puts determined as
of the date the options are sold shall not exceed 25% of the Fund's net assets
and, provided further that (I) the securities underlying such options are within
the investment policies of the Fund and (ii) at the time of such investment, the
value of the Fund's aggregate investment in such securities does not exceed 5%
of the Fund's total assets;
(15) Invest in oil, gas or other mineral exploration programs,
development programs or leases, except that the Fund may purchase publicly
traded securities of companies engaging in whole or in part in such activities;
(16) Invest in real estate limited partnerships, except that the Fund
may purchase publicly traded securities issued by real estate investment trusts;
(17) Pledge, mortgage or hypothecate its assets in excess, together
with permitted borrowings, of 1/3 of its total assets;
(18) Purchase securities on margin, except short-term credits as are
necessary for the purchase and sale of securities, provided that the deposit or
payment of initial or variation margin in connection with futures contracts or
related options will not be deemed to be a purchase on margin; and
(19) Invest in warrants, if at the time of such investment (a) more
than 5% of the value of the Fund's net assets would be invested in warrants or
(b) more than 2% of the value of the Fund's net assets would be invested in
warrants that are not listed on the New York Stock Exchange or the American
Stock Exchange (and for this purpose, warrants attached to securities will be
deemed to have no value).
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 1 through 8 have been adopted by
the Trust as fundamental policies of CGM Fixed Income Fund. 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
9 through 19 above are non-fundamental and may be changed at any time by vote of
a majority of the Trust's Board of Trustees.
Although CGM Fixed Income Fund has the ability to invest in financial
futures contracts and options thereon, to acquire securities of closed-end
investment companies, to sell securities short against the box, to purchase
publicly traded securities issued by real estate investment trusts and to loan
portfolio securities, the Fund has no current intention of doing so without
first notifying its shareholders and supplying further information in the
Prospectus.
Restricted securities eligible for resale to "qualified institutional
buyers" pursuant to Rule 144A under the Securities Act of 1933, as amended, and
IO and PO securities issued by the U.S. Government and its agencies and
instrumentalities and backed by fixed-rate mortgages may be determined to be
liquid by the Investment Manager under guidelines approved by the Board of
Trustees. In its determination of liquidity with respect to such securities, the
Investment Manager will consider the following factors, among others: (1) the
frequency of trades and quotes for the security, (2) the number of dealers
willing to purchase or sell the security and the number of other potential
purchasers, (3) dealer undertakings to make a market in the security, and (4)
the nature of the security and the nature of the marketplace trades (e.g., the
time needed to dispose of the security, the method of soliciting offers, and the
mechanics of transfer). The foregoing investment practice could have the effect
of increasing the level of illiquidity in CGM Fixed Income Fund to the extent
that qualified institutional buyers become uninterested in purchasing the
securities.
CGM Fixed Income Fund may invest up to 5% of its total assets in
repurchase agreements. A repurchase agreement is an instrument under which the
purchaser acquires ownership of 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 CGM Fixed Income 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, CGM Fixed
Income 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.
CGM Fixed Income Fund may enter into reverse repurchase agreements with
banks or broker-dealers. Reverse repurchase agreements involve the sale of a
security held by the Fund and its agreement to repurchase the instrument at a
stated price, date and interest payment. Reverse repurchase agreements may be
considered to be borrowings by the Fund and entail additional risks such as the
occurrence of interest expenses and fluctuations in the Fund's net asset value.
In connection with entering into reverse repurchase agreements, a segregated
account of the Fund consisting of cash, cash equivalents, U.S. Government
securities or other high quality liquid debt securities with an aggregate value
at all times sufficient to repurchase the securities, or equal to the proceeds
received upon the sale plus accrued interest, will be established with the
Fund's custodian bank.
- --------------------------------------------------------------------------------
PORTFOLIO TURNOVER
- --------------------------------------------------------------------------------
Although CGM American Tax Free Fund's objective is to provide high
current income exempt from federal income tax and the Fund does not purchase
securities with the intention of engaging in short term trading, the Fund will
sell any particular security and reinvest proceeds when it is deemed prudent by
the Investment Manager, regardless of the length of the holding period. CGM
American Tax Free Fund's portfolio turnover rate for each full or partial year
of its operation is set forth in the Prospectus in the table entitled "Financial
Highlights."
Although CGM Fixed Income Fund's objective is total return and the Fund
does not purchase securities with the intention of engaging in short term
trading, the Fund will sell any particular security and reinvest proceeds when
it is deemed prudent by the Investment Manager, regardless of the length of the
holding period. CGM Fixed Income Fund's portfolio turnover rate for each full or
partial year of its operation is set forth in the Prospectus in the table
entitled "Financial Highlights."
The policies described above may result in higher securities
transaction costs. To the extent that such policies result in gains on
investments, the Funds will make distributions to their 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."
<PAGE>
- --------------------------------------------------------------------------------
MANAGEMENT OF THE FUNDS
- --------------------------------------------------------------------------------
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.
- --------
* Trustees deemed "interested persons" of the Funds, as defined under the
1940 Act.
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.
JANICE H. SAUL -- Vice President;
Employee -- Senior Portfolio Manager, CGM; formerly Senior Portfolio
Manager, Loomis Sayles.
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.
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 CGM American Tax
Free Fund owned beneficially approximately 6.1% of the outstanding shares of the
Fund, and the officers and trustees of CGM Fixed Income Fund owned beneficially
approximately 1.0% of the outstanding shares of the Fund.
The Funds pay no compensation to their officers or to the trustees
listed above who are interested persons of the Funds. Officers and trustees of
the Funds receive no pension or retirement benefits paid from expenses of the
respective Funds. The following table sets forth the compensation paid by the
Trust to its trustees for the year ended December 31, 1995:
<TABLE>
<CAPTION>
Pension Total
or Retirement Estimated Compensation From
Aggregate Benefits Accrued Annual Registrant and
Name of Compensation as Part of Fund's Benefit Upon Fund Complex
Trustee From Trust Expenses Retirement Paid to Trustees(a)
- -------- ------------ ----------------- ------------ -------------------
<S> <C> <C> <C> <C>
Peter O. Brown $22,000 None None $32,000
Nicholas J. Grant 26,500 None None 38,000
G. Kenneth Heebner None None None None
Robert L. Kemp None None None None
Robert B. Kittredge 22,000 None None 32,000
Laurens Maclure 22,000 None None 32,000
James Van Dyke Quereau, Jr. 22,000 None None 32,000
J. Baur Whittlesey 22,000 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 CGM American
Tax Free Fund and CGM Fixed Income Fund under advisory agreements dated November
8, 1993, and September 1, 1993, respectively. Under each advisory agreement, CGM
manages the investment and reinvestment of assets of the Funds and generally
administers their affairs, subject to supervision by the Board of Trustees of
the Trust. CGM furnishes, at its own expense, all necessary office supplies,
facilities and equipment, services of executive and other personnel of the Funds
and certain administrative services. For these services, CGM American Tax Free
Fund compensates CGM at the annual percentage rate of 0.60% of the first $500
million of the Fund's average daily net asset value, 0.55% of the next $500
million of such value and 0.45% of such value in excess of $1 billion, and CGM
Fixed Income Fund compensates CGM at the annual percentage rate of 0.55% of the
first $200 million of the Fund's average daily net asset value, 0.45% of the
next $300 million of such value and 0.35% of such value in excess of $500
million.
CGM has voluntarily agreed, until December 31, 1996, and thereafter
until further notice to CGM American Tax Free Fund, to waive its management fees
and bear all of the expenses of the Fund. For the period from the inception of
the Fund through December 31, 1993, and the fiscal years ended December 31, 1994
and 1995, the investment advisory fees that would have been payable to CGM in
respect of services rendered to CGM American Tax Free Fund amounted to $1,987,
$63,445 and $66,010, respectively. As a result of such waiver, the fund paid no
investment advisory fees to CGM during these periods.
With respect to CGM Fixed Income Fund, CGM has voluntarily agreed,
until December 31, 1996, and thereafter until further notice to the Fund, to
waive its management fees and, if necessary, to bear certain expenses associated
with operating the Fund, in order to limit the Fund's total operating expenses
to an annual rate of 0.85% of the Fund's average net assets. For the fiscal
years ended December 31, 1993, 1994 and 1995, the investment advisory fees that
would have been payable to CGM in respect of services rendered to CGM Fixed
Income Fund amounted to $114,370, $185,360 and $167,688 respectively. As a
result of such waiver, the Fund paid no investment advisory fees to CGM during
such periods.
On December 29, 1995, the shareholders of each Fund approved a proposed
new advisory agreement between the Fund and CGM. The proposed advisory agreement
does not change the terms of the existing advisory agreement and does not change
the operations or management of either Fund. Shareholders were asked to approve
the proposed advisory agreement in connection with a change of control of CGM
that might be deemed to occur as a result of the proposed merger of New England
Mutual Life Insurance Company into Metropolitan Life Insurance Company. The
proposed advisory agreement will not be executed and will not become effective
until this merger is consummated, which each Fund understands is currently
scheduled to occur during the third quarter of 1996. The proposed advisory
agreement provides that it will continue in effect for an initial term of two
years from the date of execution unless otherwise terminated.
Each 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 each 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 each 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
net assets, 2% of the next $70 million of such assets and 1.5% of the remaining
average annual net assets. As a result of the fee waivers and expense provisions
described above, CGM American Tax Free Fund pays no operating expenses. Without
such waivers and expense provisions, total operating expenses on an annual basis
would be approximately 2.59% of CGM's American Tax Free Fund's average net
assets. CGM Fixed Income Fund's actual operating expenses are currently limited
to 0.85% of its average net assets on an annual basis.
CGM also acts as investment adviser to CGM Capital Development Fund,
CGM Mutual Fund, CGM Realty Fund and three other mutual fund portfolios. CGM
also provides investment advice to other institutional clients.
Certain officers and trustees of the Funds 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 Funds also invest. If a 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 that each Fund purchases or sells. In other cases, however, it is
believed that these practices may benefit the Funds. It is the opinion of the
trustees that the desirability of retaining CGM as adviser for the Funds
outweighs the disadvantages, if any, that might result from these practices.
Custodial Arrangements. State Street Bank and Trust Company ("State
Street Bank"), Boston, Massachusetts 02102, is the Funds' custodian. As such,
State Street Bank holds in safekeeping certificated securities and cash
belonging to each Fund and, in such capacity, is the registered owner of
securities held in book entry form belonging to each Fund. Upon instruction,
State Street Bank receives and delivers cash and securities of each 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 each Fund and calculates the
total net asset value, total net income, and net asset value per share of each
Fund on each business day.
Independent Accountants. Each Fund's independent accountants are Price
Waterhouse LLP, 160 Federal Street, Boston, Massachusetts 02110. Price
Waterhouse LLP conducts an annual audit of each Fund's financial statements,
assists in the preparation of each Fund's federal and state income tax returns
and consults with each 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 each 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 entitled to be reimbursed by each Fund
based on the cost of providing these services. As a result of the expense
provisions described above, CGM received no reimbursement for any of such costs
in 1995.
- --------------------------------------------------------------------------------
PORTFOLIO TRANSACTIONS AND BROKERAGE
- --------------------------------------------------------------------------------
In placing orders for the purchase and sale of portfolio securities for
each 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 Funds 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 that 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 that 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
Funds. Receipt of services or products other than research from brokers is not a
factor in the selection of brokers.
CGM American Tax Free Fund pays no brokerage commissions, as such. The
tax-exempt security market is typically a "dealer" market in which investment
dealers buy and sell bonds for their own accounts, rather than for customers,
and although the price of a tax-exempt security may reflect a dealer's mark-up
or mark-down, such mark-up or mark-down is not considered to be a commission. In
addition, some securities may be purchased directly from issuers.
In 1995, brokerage transactions of CGM Fixed Income Fund aggregating
$10,622,459 were allocated to brokers providing research services and $21,273 in
commissions were paid on these transactions. During such period, CGM Fixed
Income Fund paid total brokerage fees of approximately $21,273. In 1993
brokerage transactions of CGM Fixed Income Fund aggregating $9,247,346 were
allocated to brokers providing research services and $12,142 in commissions were
paid on these transactions. During such period, CGM Fixed Income Fund paid total
brokerage fees of approximately $12,142.
- --------------------------------------------------------------------------------
DESCRIPTION OF THE TRUST
- --------------------------------------------------------------------------------
The Declaration of Trust of the Trust currently permits the trustees to
issue an unlimited number of shares of beneficial interest of separate series of
the Trust. Interests in the portfolio described in the Prospectus and in this
Statement are represented by shares of each Fund. Each share of a Fund
represents an interest in such series which is equal to and proportionate with
the interest represented by each other share. The shares of the Funds do not
have any preemptive rights. Upon liquidation of the portfolio, shareholders of
each Fund 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 1,227,859 shares of CGM American Tax Free
Fund outstanding.
On March 31, 1996, there were 2,830,606 shares of CGM Fixed Income
Fund outstanding. On that date, State Street Bank, acting as trustee for various
retirement plans and individual retirement accounts owned 826,867 shares - about
29% of the total. In almost all cases, State Street Bank does not have the power
to vote or 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 Trust and the termination of
the applicable 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 Trust 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 Trust'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 Trust 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.
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
Trust except (I) to change the Trust'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 Trust shares or other provisions relating to Trust shares
in response to applicable laws or regulations. The shareholders of one Fund
shall not be entitled to vote on matters exclusively affecting any other series,
such matters including, without limitation, the adoption or change in the
investment objectives, policies or restrictions of the series and the approval
of the investment advisory contracts of the series. Similarly, no shareholders
of any other series shall be entitled to vote on any such matters exclusively
affecting a particular Fund. 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 applicable Fund.
Shareholder and Trustee Liability
Under Massachusetts law, shareholders could, under certain
circumstances, be held personally liable for the obligations of the Trust;
however, the Declaration of Trust disclaims shareholder liability for acts or
obligations of the Trust and requires that notice of such disclaimer be given in
each agreement, obligation or instrument entered into or executed by the Trust
or trustees. The Declaration of Trust provides for indemnification out of each
Fund property for all losses and expenses of any shareholder held personally
liable for the obligations of the Trust. 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 particular 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 Trust provide for indemnification by the Trust of
the trustees and officers of the Trust 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 Trust. No officer
or trustee may be indemnified against any liability to the Trust or the Trust'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.
All persons dealing with a particular Fund must look only to the assets
of that Fund for the enforcement of any claims against that Fund and no other
series of the Trust assumes any liability for obligations entered into on behalf
of that Fund.
- --------------------------------------------------------------------------------
HOW TO BUY SHARES
- --------------------------------------------------------------------------------
The procedures for purchasing shares of the Fund are summarized in the
Prospectus under "How to Purchase Shares."
- --------------------------------------------------------------------------------
ADVERTISING AND PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
Calculation of Total Return
Each 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-year period ended December 31, 1995, and for the period
from inception (November 10, 1993) through December 31, 1995, CGM American Tax
Free Fund's average annual total return was 18.0% and 5.2%, respectively. If CGM
were not waiving its fee and was receiving reimbursement from CGM American Tax
Free Fund for its expenses, that Fund's total return for those periods would
have been lower.
For the one-year and three year periods ended December 31, 1995, and
for the period from inception (March 17, 1992) through December 31, 1995, the
average annual total return of CGM Fixed Income Fund was 27.3%, 11.7% and 11.7%,
respectively. For the one and three year periods ended December 31, 1995, and
for the period from inception (March 17, 1992) through December 31, 1995, the
total return on a hypothetical $1,000 investment in CGM Fixed Income Fund was
27.3%, 39.2% and 52.0%, respectively. If CGM were not limiting CGM Fixed Income
Fund's expenses to 0.85% of its average net assets, the annual total return and
total return on a hypothetical $1,000 investment for those periods would have
been lower. In computing performance information for CGM Fixed Income Fund, no
adjustment has been made for a shareholder's tax liability on taxable dividends
and capital gains distributions.
In computing performance information for the Funds, no adjustment has
been made for a shareholder's tax liability on taxable dividends and capital
gains distributions.
Calculation of Yield
Each Fund may include yield information in advertisements or written
sales material. Each Fund's yield is based on a recent 30 day period, and is
determined in accordance with the SEC's standardized formula by:
(1) calculating the aggregate dividends and adjusted interest
earned during that period, net of recurring expenses accrued for the period; and
(2) dividing that amount by the product of (A) the average
daily number of shares outstanding during the period and (B) the maximum
offering price per share on the last day of the period (less any earned income
expected to be declared as a dividend shortly thereafter).
The result is annualized, assuming a quarterly compounding, to
determine the Fund's yield. Interest earned during the period will be adjusted
to reflect amortization of any premium or discount from par on the Fund's fixed
income securities (other than obligations backed by mortgages or other assets),
using the market value for these securities on the last day of the period, or,
for securities purchased during the period, using actual cost. Each Fund's yield
will vary from time to time depending upon market conditions, the composition of
the Fund's portfolio and operating expenses of the Fund. CGM American Tax Free
Fund may also utilize tax equivalent yields with adjustments for assumed income
tax rates. The 30-day yields of CGM American Tax Free Fund and CGM Fixed Income
Fund for the period ended December 31, 1995, were 6.06% and 6.67%, respectively.
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 Funds may include their respective
rankings 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 Funds may include ranking information
provided by Value Line in advertisements and sales literature.
The Funds may also compare their respective total return or yield or
both to that of money market funds and other investments, such as certificates
of deposit and may refer to standard measures of performance for such
investments, including information published by the Bank Rate Monitor and the
Federal Reserve System. Investors should note that, although the Fund may
experience better returns and higher yields than money market funds and other
investments, they do not seek to maintain stable net asset values. Thus,
particularly during periods of rising interest rates, the per share net asset
value of each Fund may decrease while the principal value of such other
investments will not change. Each Fund may invest in securities of varying
qualities, although 75% of CGM American Tax Free Fund's portfolio and 65% of CGM
Fixed Income Fund's portfolio will consist of investment grade securities. In
addition, unlike certificates of deposit, shares of the Funds are not insured by
the FDIC or any other entity.
Bank Rate Monitor is an independent financial service that generates
indexes of bank products, including an index of stated rates for certificates of
deposit and bank money market accounts in the ten largest metropolitan areas in
the U.S. The Federal Reserve System publishes data about the U.S. banking
system. Average rates for certificates of deposit traded in the secondary market
are published by the Board of Governors of the Federal Reserve System in
Selected Interest Rates.
From time to time, articles about a particular Fund's performance,
rankings and other characteristics, and information about persons responsible
for the Fund's 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 Funds. References to or
reprints of such articles may be used in the Funds' promotional literature.
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NET ASSET VALUE AND PUBLIC OFFERING PRICE
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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 each Fund is determined by dividing
the particular 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.
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SHAREHOLDER SERVICES
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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
Funds, and no direct charges are made to shareholders. Although the Funds have
no present intention of making such direct charges to shareholders, they reserve
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. If withdrawal checks are returned to
the Funds 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 Funds 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 Trust 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 CGM American Tax Free Fund or CGM
Fixed Income Fund for shares of CGM Mutual Fund, CGM Realty Fund, CGM Fixed
Income Fund or CGM American Tax Free Fund (as applicable), New England Cash
Management Trust, New England Tax Exempt Money Market Trust or CGM Capital
Development Fund; however, shares of CGM Capital Development Fund may be
exchanged only if you were a shareholder on September 24, 1993, and have
continuously remained a shareholder in the CGM Capital Development Fund since
that date. CGM Capital Development Fund shares are not generally available to
other persons except in special circumstances that have been approved by, or
under the authority of, the Board of Trustees of CGM Capital Development Fund.
The special circumstances currently approved by the Board of Trustees of CGM
Capital Development Fund are limited to the offer and sale of shares of such
fund to the following additional persons: trustees of CGM Capital Development
Fund, employees of the Investment Manager and counsel to such fund and the
Investment Manager. CGM Realty Fund shares are not available in South Dakota as
described in the prospectus for CGM Realty Fund. 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."
Exchange requests cannot be revoked once they have been received in good order.
The Trust 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 a
particular 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.
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. The Trust
reserves the right to modify this exchange privilege without prior notice,
except as otherwise required by law or regulation.
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
shares of either Fund 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 CGM Fixed Income Fund. CGM American Tax Free Fund may not be an
appropriate investment for: IRA accounts, SEP-IRA accounts, 403(b)(7) custodial
accounts, qualified profit sharing plans, or qualified money purchase plans.
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 Trust by writing or calling the
Trust 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 policies and procedures of the Trust. 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 in address may be mailed to: CGM Shareholder
Services, c/o BFDS, P.O. Box 8511, Boston, MA 02266-8511.
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REDEMPTIONS
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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 Trust 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 applicable 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 Trust. 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 Trust will process your
redemption request upon receipt of a request in good order. However, the Trust
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 Trust 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 Trust may in any case
postpone payment of redemption proceeds for up to seven days.
The Trust will normally redeem shares for cash; however, the Trust
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 Trust 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
Trust has elected to be governed by Rule 18f-1 under the 1940 Act pursuant to
which the Trust 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 particular 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 Trust 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 Trust'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.
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INCOME DIVIDENDS, CAPITAL GAINS DISTRIBUTIONS AND TAX STATUS
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As described in the Prospectus under "Dividends, Capital Gains and
Taxes" it is the policy of each Fund to qualify annually as a "regulated
investment company" under the Internal Revenue Code and to declare and pay
monthly substantially all net investment income in the form of dividends 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 each 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 BFDS. In
order for a change to be in effect for any dividend or distribution, it must be
received by BFDS on or before the record date for such dividend or distribution.
If you elect to receive distributions in cash, and checks are returned
"undeliverable" or remain uncashed for six months, your cash election will be
automatically changed and your future distributions will be reinvested in the
same 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 same Fund at the per share net asset value determined as of the date of
cancellation of such checks.
Dividends paid by a Fund from net taxable investment income, including
dividends, interest and net short-term gains, will be taxable to shareholders as
ordinary income. For corporate investors, no portion of dividends paid by either
Fund is expected to qualify for the corporate dividends-received deduction.
Distributions of net capital gains (the excess of net long-term capital gains
over net short-term capital losses) are taxable as long-term capital gains,
regardless of the length of time shareholders have owned shares in a Fund. To
the extent that a 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. Taxable dividends and capital gains are
taxable to shareholders of a Fund in the same manner whether received in cash or
reinvested in additional Fund shares.
CGM American Tax Free Fund anticipates that a substantial portion of
its investment income will be tax-exempt interest income. Dividends paid by the
Fund from net tax-exempt interest income will be excluded from a shareholder's
gross income for federal income tax purposes. Shareholders who are recipients of
Social Security benefits should be aware that exempt-interest dividends received
from the Fund are includable in their "modified adjusted gross income" for
purposes of determining the amount of such Social Security benefits, if any,
that is required to be included in their gross income. The exemption of certain
dividends from federal income tax does not necessarily result in exemption under
the income tax laws of any state or local taxing authority. Shareholders should
consult their own tax advisers about the status of dividends and distributions
of CGM American Tax Free Fund in their own states and localities.
If a shareholder of CGM American Tax Free Fund receives an
exempt-interest dividend with respect to any share and redeems or exchanges such
share before holding it for more than six months, any loss on the redemption or
exchange will be disallowed to the extent of such exempt-interest dividend.
Similarly, if a shareholder of CGM American Tax Fee Fund receives a distribution
taxable as long-term capital gain with respect to any share and redeems or
exchanges such share before holding it for more than six months, any loss on the
redemption or exchange (not otherwise disallowed as attributable to an
exempt-interest dividend) will be treated as long-term capital loss to the
extent of the long-term capital gain recognized on such distribution.
CGM American Tax Free Fund may invest in private activity bonds.
Interest on private activity bonds issued after August 7, 1986, although
generally excludable from gross income for federal income tax purposes, may be
subject to the federal alternative minimum tax ("AMT"). AMT is imposed on
taxpayers who utilized to a significant degree certain tax deductions and
exclusions (known as "items of tax preference"). Interest from private activity
bonds is an item of tax preference that is included with items of income from
certain other sources in calculating if a taxpayer is subject to AMT and the
amount thereof. Shareholders should consult their own tax advisers regarding the
potential applicability of the AMT to them.
If CGM Fixed Income Fund invests in foreign securities, it may be
subject to foreign withholding taxes on income earned on such securities and may
be unable to pass through to shareholders foreign tax credits and deductions
with respect to such taxes.
A distribution will be treated as paid by a Fund and received by its
respective shareholders on December 31 of the current calender year if it is
declared in October, November, or December of that year with a record date in
such a month and paid in January of the subsequent year.
Any dividends or distributions paid shortly after a purchase of shares
will have the effect of reducing the per share net asset value of the shares by
the amount of the dividends or distributions. Although in effect a return of
capital, these distributions (if derived from taxable investment income or net
capital gains) are subject to tax, even if their effect is to reduce the per
share net asset value below a shareholder's cost. To the extent that a 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 the sale
of such shares. Each Fund will notify you annually as to the tax status of
dividend and capital gains distributions paid by the Fund.
The sale or other disposition of shares of a Fund, including a
redemption of shares or an exchange of shares into another fund, is a taxable
event and may result in a capital gain or loss which will be long-term or
short-term, generally depending upon the shareholder's holding period for the
shares.
Each 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, each 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. BFDS, the shareholder servicing agent, will send you and
the Internal Revenue Service an annual statement detailing federal tax
information, including information about dividends and distributions paid to you
during the preceding year. If you redeem or exchange shares in any year,
following the end of a year, you will receive a statement providing the cost
basis and gain or loss of each share lot that you sold in each year. Your CGM
account cost basis will be calculated using the "single category average cost
method," which is one of the four calculation methods allowed by the IRS. Be
sure to keep these statements as permanent records. A fee may be charged for any
duplicate information that you request.
Dividend distributions, capital gains distributions, and capital gains
or losses from redemptions and exchanges may also be subject to state and local
taxes. In certain states, a portion of each Fund's income derived from certain
direct U.S. Government obligations may be exempt from state and local taxes.
Each year, each Fund will indicate the portion of its income, if any, that is
derived from such obligations.
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FINANCIAL STATEMENTS
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The financial statements and Report of Independent Accountants for the
year ended December 31, 1995 for each Fund, which are included in the respective
Fund's Annual Report to Shareholders for the year ended December 31, 1995, are
incorporated herein by reference.
167286.c4
