File Nos. 2-10653
811-82
As filed with the Securities and Exchange Commission on March 1, 1999
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933 / /
POSTEFFECTIVE AMENDMENT NO. 87 /X/
and
REGISTRATION STATEMENT
UNDER THE INVESTMENT COMPANY ACT OF 1940 / /
AMENDMENT NO. 42 /X/
CGM TRUST
(Exact Name of Registrant as Specified in Charter)
One International Place, Boston, Massachusetts 02110
(Address of Principal Executive Offices)
Registrant's Telephone Number, including Area Code: (617) 737-3225
Jeremiah J. Bresnahan, Jr., Esq.
Bingham Dana LLP
150 Federal Street
Boston, Massachusetts 02110
(Name and Address of Agent for Service)
It is proposed that this filing will become effective on April 30, 1999,
pursuant to paragraph (a) of Rule 485.
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CGM
[Fencer Logo] MUTUAL
FUND
A No-Load Fund
The Fund's investment objective is reasonable long-term capital appreciation
with a prudent approach to protection of capital from undue risks. While the
investment manager considers current income in the selection of the Fund's
portfolio securities, it is not a controlling factor.
PROSPECTUS & APPLICATION
May 1, 1999
The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the adequacy of this prospectus. Any representation
to the contrary is a criminal offense.
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TABLE OF CONTENTS
FUND SUMMARY................................................................. 1
PAST PERFORMANCE............................................................. 2
EXPENSES..................................................................... 3
ADDITIONAL FUND INFORMATION.................................................. 4
MANAGEMENT................................................................... 7
HOW TO PURCHASE SHARES....................................................... 8
SHAREHOLDER SERVICES......................................................... 9
HOW TO SELL SHARES...........................................................11
TELEPHONE TRANSACTIONS.......................................................15
DIVIDENDS, CAPITAL GAINS AND TAXES...........................................16
PRICING OF SHARES............................................................18
YEAR 2000....................................................................19
FINANCIAL HIGHLIGHTS.........................................................19
CONTACT INFORMATION..................................................Back Cover
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FUND SUMMARY
INVESTMENT OBJECTIVE
The Fund's investment objective is reasonable long-term capital appreciation
with a prudent approach to protection of capital from undue risks. While the
investment manager considers current income in the selection of the Fund's
portfolio securities, it is not a controlling factor.
SUMMARY OF PRINCIPAL INVESTMENT STRATEGIES
The Fund seeks to attain its objective by investing in a managed mix of equity
and debt securities of predominately U.S. issuers. Under normal circumstances
the Fund expects to invest approximately 75% of its assets in equity securities
and 25% of its assets in debt or fixed-income securities. However, the Fund is
flexibly managed so that, depending on the investment manager's view of the
economy and investment outlook, it sometimes will be more heavily invested in
debt or fixed-income securities.
The Fund may invest up to 25% of its assets in securities issued by companies
in any single industry.
The Fund may invest up to 35% of its assets in debt or fixed-income securities
of a quality below investment grade, including securities commonly referred to
as "junk bonds".
SUMMARY OF PRINCIPAL RISKS
Like all mutual funds, you may lose money if you invest in the Fund. The Fund's
investments are subject to the MARKET RISKS inherent in all securities. This
means that you may lose money on your investment due to a fall in prices of
stocks or periods of below-average performance in the stock market.
In addition, because the Fund may also invest in debt or fixed-income
securities, it is subject to CREDIT RISK (the risk that the obligor will
default in the payment of principal and/or interest) and to INTEREST RATE RISK
(the risk that the market value of the securities will decline as a result of
changes in market rates of interest).
The Fund may also invest a significant portion of its assets in REAL ESTATE
INVESTMENT trusts, which are subject to risks associated with the direct
ownership of real estate as well as credit and interest rate risks generally
associated with fixed-income securities. Investments in LOWER QUALITY
SECURITIES such as JUNK BONDS are also subject to special risks, including
higher credit risk, higher economic and market sensitivity, and low liquidity.
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PAST PERFORMANCE
The bar chart and table below show the Fund's annual returns and its long-term
performance, and provide some indication of the risks of investing in the Fund.
The bar chart shows how the Fund's performance has varied from year to year.
The table compares the Fund's performance over time for the periods indicated
to that of the Standard and Poor's 500 Composite Index, a widely recognized
unmanaged index of common stock prices.
Both the bar chart and the table assume reinvestment of dividends and
distributions. The Fund's past performance does not necessarily indicate how
the Fund will perform in the future.
YEAR-BY-YEAR TOTAL RETURN (AS OF 12/31 EACH YEAR)
[Bar Chart]
During the ten-year period shown in the bar chart, the highest quarterly return
was 19.3% (for the quarter ended 12/31/98) and the lowest quarterly return was
- -13.8% (for the quarter ended 9/30/98).
AVERAGE ANNUAL TOTAL RETURN (AS OF 12/31/98)
1 Year 5 Years 10 Years
_______________________________________________________________________________
Fund 8.2% 10.2% 13.8%
S&P 500 Index 28.6% 24.1% 19.2%
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EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund.
SCHEDULE OF FEES
Shareholder Transaction Expenses (fees paid directly from your investment)
Maximum Sales Charge (Load) Imposed on Purchases....................None
Maximum Sales Charge (Load) Imposed on Reinvested Dividends.........None
Redemption Fees*....................................................None
Exchange Fees.......................................................None
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
(as a percentage of average net assets, based on expenses for year ended
12/31/98)
Management Fees.....................................................0.84%
Distribution (12b-1) Fees...........................................None
Other Expenses......................................................0.18%
Total Fund Operating Expenses.......................................1.02%
*A wire fee (currently $5.00) will be deducted from proceeds if a
shareholder elects to transfer redemption proceeds by wire.
EXAMPLE
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The example assumes that:
o you invest $10,000 in the Fund for the time periods indicated;
o you redeem your shares at the end of each period;
o your investment has a 5% return each year (the assumption of a 5%
return is required by the SEC and is not a prediction of the
Fund's future performance); and
o the Fund's operating expenses remain the same.
Although your actual costs may be higher or lower, under these assumptions your
costs would be:
Number of years 1 3 5 10
____________ ____________ ____________ ____________
Cost $104 $325 $563 $1,248
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ADDITIONAL FUND INFORMATION
The Fund's objective and principal investment strategies, and the main risks of
investing in the Fund, are summarized at the beginning of this prospectus. More
information on investment strategies, investments and risks appears in this
section. These are the strategies that, in the opinion of the Fund's investment
manager, are most likely to be important in trying to achieve the Fund's
investment objective. There can, of course, be no assurance that the Fund will
achieve its investment objective. The Fund's objective may be changed without
shareholder approval.
The Fund may also use strategies and invest in securities that are not
described below but which are described in the Statement of Additional
Information ("SAI"). Of course, the Fund's investment manager may decide, as a
matter of investment strategy, not to use the investments and investment
techniques described below and in the SAI at any particular time.
The Fund may also depart from its principal investment strategies by taking
temporary defensive positions in response to adverse market, economic or
political conditions. When doing so, the Fund may hold a substantial portion of
its assets in cash or investment grade fixed-income securities and may not be
pursuing its investment objective.
PRINCIPAL INVESTMENT STRATEGIES
The Fund seeks to attain its objective by investing in a managed mix of equity
and debt securities of predominately U.S. issuers. Under normal circumstances
the Fund expects to invest approximately 75% of its assets in equity securities
and 25% of its assets in debt or fixed-income securities. However, the Fund is
flexibly managed so that, depending on the investment manager's view of the
economy and investment outlook, it sometimes will be more heavily invested in
debt or fixed-income securities. The Fund's investments may include real estate
investment trusts ("REITs") and other real estate companies.
The Fund may invest up to 25% of its total assets in securities issued by
companies in any single industry.
The Fund may invest up to 35% of its total assets in debt or fixed-income
securities of a quality below investment grade (i.e. securities rated lower
than Baa or baa by Moody's Investors Service, Inc. or lower than BBB by
Standard and Poor's Corporation, or their equivalent as determined by the
investment manager), including up to 10% of its total assets in debt or
fixed-income securities rated at the time of investment Caa or lower by Moody's
or CCC or lower by S&P, or their equivalent as determined by the investment
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manager. These securities are commonly referred to as "junk bonds". Investing
in junk bonds is an aggressive approach to income investing.
MANAGEMENT STYLE. Rather than following a particular style, the Fund's
investment manager employs a flexible approach and seeks to take advantage of
opportunities as they arise. In making an investment decision, the Fund's
investment manager will generally employ the following method:
o It uses a top-down approach, meaning that it first analyzes the
overall economic factors that may affect a potential investment.
o It then conducts a thorough analysis of certain industries and
companies, evaluating the fundamentals of each on a case-by-case
basis and focusing on companies that it determines are
attractively valued.
o The investment manager will sell a security if it determines that
its investment expectations are not being met, if better
opportunities are identified, or if its price objective has been
attained.
PORTFOLIO TURNOVER. 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. Frequent trading involves higher
securities transaction costs which may adversely affect the Fund's performance.
To the extent that this policy results in the realization of gains on
investments, the Fund will make distributions to its shareholders, which may
accelerate shareholders' tax liabilities.
PRINCIPAL RISKS
Investing in a mutual fund involves risk. Before investing, you should consider
the risks you will assume. Some of these risks are described below. More
information about risks appears in the Fund's SAI. Remember that you may
receive little or no return on your investment in the Fund. You may lose money
if you invest in the Fund.
MARKET RISK. This is the risk that the prices of securities will rise or fall
due to changing economic, political or market conditions, or due to a company's
individual situation. The value of the Fund's shares will change daily as the
value of its underlying securities changes. This means that your Fund shares
may be worth more or less when you sell them than when you bought them.
Historically, equity securities have been more volatile than debt or
fixed-income securities.
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INTEREST RATE RISK. Interest rate risk is the risk that the market value of
debt and fixed income securities will fall when market interest rates increase.
In general, the prices of debt or fixed-income securities rise when interest
rates fall, and fall when interest rates rise. Longer term obligations are
usually more sensitive to interest rate changes than shorter term obligations.
A change in interest rates could cause the Fund's share price to go up or down.
Generally, the longer the average maturity of the bonds in the Fund, the more
the Fund's share price will fluctuate in response to interest rate changes.
CREDIT RISK. Credit risk is the possibility that an issuer will fail to make
timely payments of interest or principal. Some issuers may not make payments on
debt securities held by the Fund, causing a loss. Or, an issuer may suffer
adverse changes in its financial condition that could lower the credit quality
of a security, leading to greater volatility in the price of the security and
in shares of the Fund. A change in the quality rating of a bond or other
security can also affect the security's liquidity and make it more difficult
for the Fund to sell. The lower quality debt securities in which the Fund may
invest are more susceptible to these problems than higher quality obligations.
RISKS ASSOCIATED WITH REITS. REITs are sensitive to factors such as changes in
real estate values, property taxes, interest rates, cash flow of underlying
real estate assets, occupancy rates, government regulations affecting zoning,
land use, and rents, and the management skill and creditworthiness of the
issuer. REITs may also be subject to liabilities under environmental and
hazardous waste laws.
LOWER RATED DEBT SECURITIES. Lower rated debt securities, including securities
commonly referred to as "junk bonds", are very risky because the issuers may
fail to make payments of interest and principal. Part of the reason for this
high risk is that, in the event of a default or bankruptcy, holders of lower
rated debt securities generally will not receive payments until the holders of
all other debt have been paid. In addition, the market for lower rated debt
securities has in the past been more volatile than the markets for other
securities. Lower rated debt securities are also often less liquid than higher
rated debt securities.
PREPAYMENT RISK. The issuers of debt securities held by the Fund may be able to
prepay principal due on the securities, particularly during periods of
declining interest rates. The Fund may not be able to reinvest that principal
at attractive rates, reducing income to the Fund, and the Fund may lose any
premium paid. On the other hand, rising interest rates may cause prepayments to
occur at slower than expected rates. This effectively lengthens the maturities
of the affected securities, making them more sensitive to interest rate changes
and the Fund's share price more volatile.
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SPECIAL CHARACTERISTICS OF CONVERTIBLE SECURITIES. Convertible securities,
which are debt securities that may be converted into stock or other equity
interests, are subject to the market risk of stocks, and, like other debt
securities, are also subject to interest rate risk and the credit risk of their
issuers.
FOREIGN SECURITIES. The Fund may invest a portion of its assets in foreign
securities. Investing in foreign securities involves risks in addition to those
of investing in U.S. securities, including risks relating to political, social
and economic developments abroad, risks relating to currency fluctuation and
restrictions, and risks resulting from the differences between the regulations
to which U.S. and foreign issuers and markets are subject.
MANAGEMENT
THE INVESTMENT MANAGER
The Fund's investment manager is Capital Growth Management Limited Partnership
("CGM"), One International Place, Boston, Massachusetts, 02110. CGM, an
investment advisory firm founded in 1990, manages the Fund's daily investment
and business affairs subject to the policies established by the Fund's Board of
Trustees. CGM manages nine mutual fund portfolios and advisory accounts for
other clients.
In 1998, the Fund paid 0.84% of its average annual net assets in management
fees to CGM.
THE PORTFOLIO MANAGER
G. Kenneth Heebner has been the portfolio manager of the Fund or its
predecessor in interest since 1981. In 1990, 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. In addition
to the Fund, he currently manages CGM Capital Development Fund, CGM Realty
Fund, CGM Focus Fund and, with Janice H. Saul, co-manages CGM Fixed Income
Fund.
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HOW TO PURCHASE SHARES
The Fund sells its shares directly to investors without any sales load.
NEW ACCOUNTS
If you are not currently a shareholder in the Fund, you may make a purchase of
Fund shares in a new regular account or retirement plan account by submitting a
completed application form and check, made payable to CGM Mutual Fund, 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 or the Uniform Transfers to Minors
Act.
EXISTING ACCOUNTS
After your account has been established, you may send subsequent investments at
any time directly to the shareholder servicing agent at:
CGM Shareholder Services
c/o Boston Financial Data Services, Inc.
P.O. Box 8511
Boston, Massachusetts 02266-8511
You must include either the Additional Investment Stub detached from an account
statement 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 must be at least $50.
PAYMENT BY CHECK
If you pay for Fund shares by check, your 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 are not accepted.
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PAYMENT BY WIRE
You may also make subsequent investments 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.
ADDITIONAL INFORMATION
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 Fund 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 Fund's system for
recording investments eliminates the problems of handling and safekeeping
certificates.
The price you pay will be the per share net asset value next calculated after
your proper investment order is received by the Fund (in the case of your
initial investment) or by CGM Shareholder Services (in the case of subsequent
investments).
The Fund may reject any purchase order and may suspend, change or withdraw the
offering of its shares.
SHAREHOLDER SERVICES
The Fund offers the following shareholder services as more fully described in
the Fund's SAI. Explanations and forms are available from the Fund.
EXCHANGE PRIVILEGE
You may exchange your shares of CGM Mutual Fund for shares of CGM Fixed Income
Fund, CGM American Tax Free Fund, CGM Realty Fund and CGM Focus Fund. You may
also exchange your shares for shares of money market funds distributed by New
England Funds, L.P.
Additionally, you may exchange shares of CGM Mutual Fund for shares of CGM
Capital Development Fund, but only if you were a shareholder of the CGM Capital
Development Fund on September 24, 1993, and have remained a shareholder in the
CGM Capital Development Fund continuously since that date. CGM Capital
<PAGE>
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 SAI.
All exchanges are free of 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" below. Exchange requests cannot be revoked once they have been
received in good order. 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.
You 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
you can make to four exchanges per account (or two round trips) per calendar
year. Monthly automatic exchanges from money market funds distributed by New
England Funds, L.P. to the Fund are not subject to this restriction. The Fund
also reserves the right to prohibit exchanges during the first 15 days
following an investment in the Fund.
For federal income tax purposes, an exchange constitutes a sale of shares,
which may result in a capital gain or loss.
The Fund may terminate or change the terms of the exchange privilege.
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 will
be cancelled and the amounts will be reinvested in the Fund at the per share
net asset value determined as of the date of cancellation of the checks. No
interest will accrue on amounts represented by uncashed distribution or
redemption 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
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checking account. Please contact CGM Shareholder Services at 800-343-5678 to
determine the requirements associated with debits from savings banks and credit
unions. Debits from money market accounts are not acceptable.
You may terminate your participation in the AIP by sending written notice to
CGM Shareholder Services or by calling 800-343-5678 more than 14 days prior to
the next scheduled debit date. The Fund may terminate your participation in the
AIP immediately in the event that any item is unpaid by your financial
institution. The Fund may terminate or modify the AIP at any time. Additional
information about this Plan is set forth in the SAI.
RETIREMENT PLANS
The Fund's shares may be purchased by tax-deferred retirement plans. CGM makes
available retirement plan forms and plan documents for Traditional and Roth
IRAs, SEP-IRAs, 403(b)(7) custodial accounts, and Money Purchase Pension and
Profit Sharing plans ("CGM Retirement Plans").
CONFIRMATION STATEMENTS
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 will be charged
for any duplicate information requested for prior years.
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 Fund at 800-345-4048.
HOW TO SELL SHARES
You can sell (redeem) all or part of your shares in the Fund in three different
ways:
o by sending a written request for a check or wire representing the
redemption proceeds,
<PAGE>
o 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
o by making a telephone request for redemption proceeds to be wired
to a bank account 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.
WRITTEN REDEMPTION REQUESTS
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
custodian or 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, requesting that the
proceeds check be made payable 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), or
<PAGE>
requesting that the proceeds be wired to a bank account that you have not
predesignated, 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.
TELEPHONE REDEMPTION REQUESTS
If you elect to redeem shares by telephone, call CGM Shareholder Services
directly at 800-343-5678. See "Telephone Transactions" below. 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 unless this option is declined in the application or otherwise in
writing. 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 Fund 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. 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 Fund 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.
<PAGE>
REDEMPTION PROCEEDS
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 following receipt of a proper redemption request.
If you purchased your Fund shares by check (or through an automatic investment
plan) and elect to redeem shares within 15 days of the purchase, you may
experience delays in receiving redemption proceeds. The Fund will generally
postpone sending your redemption proceeds from an investment until the Fund can
verify that your check (or automatic investment plan 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, the checks will be cancelled and the proceeds
will be reinvested in the Fund at the per share net asset value determined as
of the date of cancellation of the checks. No interest will accrue on amounts
represented by uncashed distribution or redemption checks.
POSTPONEMENT OF REDEMPTION PROCEEDS OR SUSPENSION OF REDEMPTION RIGHT
The Fund may postpone payment of redemption proceeds for up to seven days. The
Fund may not postpone payment for more than seven days or suspend the right of
redemption, except: if you purchased your Fund shares by check (or through an
automatic investment plan) and redeem shares within 15 days of the purchase as
described in the preceding section, when the New York Stock 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.
REDEMPTION IN KIND
The Fund will normally redeem shares for cash; however, the Fund reserves the
right to pay the redemption price wholly in kind or partly in kind and partly
in cash if the Board of Trustees of the Fund determines it to be advisable in
the interests 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.
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MINIMUM ACCOUNT BALANCE AND AUTOMATIC REDEMPTION
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 or accounts set up under the
Uniform Gifts to Minors Act or the Uniform Transfers to Minors Act.
TELEPHONE TRANSACTIONS
You may initiate three types of transactions by telephone:
o telephone exchanges;
o telephone redemptions by wire; and
o 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.
You must select the telephone exchange privilege and/or telephone redemption by
wire privilege 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 Fund or CGM Shareholder Services. The telephone
redemptions by check privilege is available automatically unless you decline
this option in the application or otherwise in writing.
The telephone redemption privileges are not available for Traditional or Roth
IRAs, SEP-IRAs, 403(b)(7) custodial accounts or for Money Purchase Pension and
Profit Sharing accounts under a CGM Retirement Plan for which State Street Bank
is the custodian or 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.
<PAGE>
During periods of unusual market activity, severe weather or other abnormal
circumstances, it may be difficult for you to reach a representative of the
Fund or CGM Shareholder Services by telephone. In this case, please consider
sending written instructions.
DIVIDENDS, CAPITAL GAINS AND TAXES
The Fund declares and pays out quarterly dividends consisting of substantially
all of its net investment income. Any capital gains distributions are normally
made annually in December but may be made more frequently as deemed advisable
by the Board of Trustees. Certain restrictions may apply to participants in CGM
Retirement Plans.
You may elect to receive income dividends or capital gains distributions, or
both, in additional shares of the Fund or in cash. However, if you elect to
receive capital gains in cash, your income dividends must also be received in
cash. Certain restrictions may apply to participants in CGM Retirement Plans.
You can elect to receive payments of cash dividends and capital gains
distributions either by check or by direct deposit to a bank account that you
have predesignated. These elections may be made at the time your account is
opened and may be changed at any time by submitting a written request to CGM
Shareholder Services or by calling 800-343-5678. However, changes in bank
account information for direct deposits of cash dividends and capital gains
distributions must be made through a Service Options Form. In order for a
change to be effective 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" 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 the
six-month period, any undeliverable or uncashed checks will be cancelled and
the amounts will be reinvested in the Fund at the per share net asset value
determined as of the date of cancellation of the checks. No interest will
accrue on amounts represented by uncashed distribution or redemption checks.
Dividends paid by the Fund from net investment income (including dividends and
interest) and net short-term capital gains will be taxable to you as ordinary
income. If a portion of the Fund's income consists of dividends paid by U.S.
corporations, a portion of the dividends paid by the Fund may be eligible for
<PAGE>
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 to you as long-term capital gains, regardless of how long you have
owned your 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 your tax basis
in your shares, and then, to the extent the distribution exceeds such basis, as
a taxable gain from the sale of your shares. Dividends and distributions are
taxable to you in the same manner whether received in cash or reinvested in
additional shares.
If the Fund invests in foreign securities, it may be subject to foreign
withholding taxes on income earned on those securities and may be unable to
pass through to you foreign tax credits and deductions with respect to those
taxes.
A distribution will be treated as paid by the Fund and received by you 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,
generally depending upon how long you held your shares.
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.
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
<PAGE>
receive a statement providing the cost basis and gain or loss of each share lot
that you sold during such year. In limited circumstances, your actual cost
basis may differ from your CGM account cost basis. 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 generally will receive these cost basis statements but only for accounts
opened after January 1, 1991. Some restrictions apply; for more information,
please call 800-343-5678. 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, local and foreign
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.
Each year the Fund will indicate the portion of the Fund's income, if any,
which is derived from such obligations.
The tax discussion set forth above is included for general information only.
You should consult your own tax adviser 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 New York Stock Exchange (normally 4 p.m. Eastern time)
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 60 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 SAI.
Trading may take place in foreign securities held by the Fund on days when the
Fund is not open for business. As a result, the Fund's net asset value may
change on days on which it is not possible to purchase or sell shares of the
Fund.
<PAGE>
YEAR 2000
Like other mutual funds and other organizations around the world, the Fund
could be adversely affected if the computer systems used by the Fund or its
service providers do not properly process and calculate date-related
information from and after January 1, 2000. This is commonly known as the "Y2K
Problem." Failure to successfully address the Y2K Problem could result in
interruptions to and other material adverse effects on the Fund's business and
operations, such as problems calculating net asset value and difficulties in
implementing the Fund's purchase and redemption procedures. CGM has taken steps
that it believes are reasonably designed to address any potential Y2K Problem
for computer programs used by the Fund or CGM. Each of the Fund's and CGM's
service providers are taking steps that they believe are reasonably designed to
address the Y2K Problem with respect to computer systems that they use. At this
time, however, there can be no assurance that these steps being taken by third
party service providers will be sufficient to avoid any adverse impact to the
Fund. In addition, there can be no assurances that the Y2K Problem will not
have an adverse effect on the issuers whose securities are held by the Fund or
on the market or the economy in general.
FINANCIAL HIGHLIGHTS
The following Financial Highlights table is intended to help you understand the
Fund's financial performance for the past five years. Certain information
reflects financial results for a single Fund share. The total returns in the
table represent the rate that an investor would have earned (or lost) on an
investment in the Fund (assuming reinvestment of all dividends and
distributions). This information has been examined by PricewaterhouseCoopers
LLP, independent accountants, whose report, along with the Fund's financial
statements, is included in the Fund's Annual Report, which may be obtained from
the Fund free of charge.
[To be added by amendment.]
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
CONTACT INFORMATION
CGM MUTUAL FUND More information about this Fund is
c/o The CGM Funds available free by calling 800-345-4048,
P.O. Box 449 including the following:
Boston, MA 02117
ANNUAL/QUARTERLY REPORTS
SHAREHOLDER SERVICING AGENT
CGM Shareholder Services Additional information about the Fund's
c/o Boston Financial Data Services, Inc. investments is available in the Fund's
P.O. Box 8511 annual and quarterly reports to
Boston, MA 02266 shareholders. In the Fund's annual
report, you will find a discussion of the
INVESTMENT MANAGER market conditions and investment
Capital Growth Management strategies that significantly affected the
Limited Partnership Fund's performance during its last fiscal
One International Place year.
Boston, MA 02110
STATEMENT OF ADDITIONAL INFORMATION (SAI)
TRANSFER AND DIVIDEND PAYING AGENT
AND CUSTODIAN OF ASSETS The SAI provides more detailed
State Street Bank and Trust Company information about the Fund and is
Boston, MA 02102 incorporated into this prospectus by
reference (i.e. is legally considered part
of it).
</TABLE>
_______________________________________________________________________________
For additional information about:
[ ] Account procedures and status [ ] Prospectuses
[ ] Redemptions [ ] SAI
[ ] Exchanges [ ] Annual/Quarterly Reports
[ ] New account procedures [ ] Performance
Call 800-343-5678 Call 800-345-4048
_______________________________________________________________________________
Information about the Fund (including the SAI) is also available from the
Securities and Exchange Commission. You can find it on the SEC's Internet site
at http://www.sec.gov. You can receive copies of Fund information by sending
your request and a duplicating fee to the SEC's Public Reference Section,
Washington, DC 20549-6009. Information can also be reviewed and copied at the
SEC's Public Reference Room in Washington, DC. You can get information on the
operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
SEC File No. 811-82
<PAGE>
CGM
[Fencer Logo] REALTY
FUND
A No-Load Fund
The Fund's investment objective is above-average income and long-term growth of
capital. The Fund seeks to provide a yield in excess of the yield of the
Standard and Poor's 500 Composite Index.
PROSPECTUS & APPLICATION
May 1, 1999
The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the adequacy of this prospectus. Any representation
to the contrary is a criminal offense.
<PAGE>
TABLE OF CONTENTS
FUND SUMMARY................................................................. 1
PAST PERFORMANCE............................................................. 2
EXPENSES..................................................................... 3
ADDITIONAL FUND INFORMATION.................................................. 4
MANAGEMENT................................................................... 8
HOW TO PURCHASE SHARES....................................................... 8
SHAREHOLDER SERVICES.........................................................10
HOW TO SELL SHARES...........................................................13
TELEPHONE TRANSACTIONS.......................................................16
DIVIDENDS, CAPITAL GAINS AND TAXES...........................................17
PRICING OF SHARES............................................................19
YEAR 2000....................................................................20
FINANCIAL HIGHLIGHTS.........................................................20
CONTACT INFORMATION..................................................Back Cover
<PAGE>
FUND SUMMARY
INVESTMENT OBJECTIVE
The Fund's investment objective is above-average income and long-term growth of
capital. The Fund seeks to provide a yield in excess of the yield of the
Standard and Poor's 500 Composite Index.
SUMMARY OF PRINCIPAL INVESTMENT STRATEGIES
The Fund pursues its objective by investing primarily in equity securities of
companies in the real estate industry, including real estate investment trusts
("REITs"). Under normal circumstances the Fund expects to invest at least 65%
of its assets in these securities. Equity securities in which the Fund may
invest include common and preferred stocks, convertible securities and
warrants.
The Fund may invest up to 35% of its assets in equity or debt securities of
companies outside the real estate industry. The Fund may invest up to 25% of
its assets in debt or fixed-income securities of a quality below investment
grade, including securities commonly referred to as "junk bonds".
SUMMARY OF PRINCIPAL RISKS
Like all mutual funds, you may lose money if you invest in the Fund. The Fund's
investments are subject to the MARKET RISKS inherent in all securities. This
means that you may lose money on your investment due to a fall in prices of
stocks or periods of below-average performance in the stock market.
The Fund invests primarily in companies in the real estate industry, including
REITs, and is, therefore, subject to the SPECIAL RISKS ASSOCIATED WITH THE REAL
ESTATE INDUSTRY AND MARKET. Securities of companies in the real estate industry
are sensitive to factors such as changes in real estate values, property taxes,
interest rates, cash flow of underlying real estate assets, occupancy rates,
government regulations affecting zoning, land use, and rents, and the
management skill and creditworthiness of the issuer. Companies in the real
estate industry may also be subject to liabilities under environmental and
hazardous waste laws.
In addition, because the Fund may also invest in debt and fixed-income
securities and repurchase agreements, it is subject to CREDIT RISK (the risk
that the obligor will default in the payment of principal and/or interest) and
to INTEREST RATE RISK (the risk that the market value of the securities will
decline as a result of changes in market rates of interest).
<PAGE>
Investments in LOWER QUALITY SECURITIES such as JUNK BONDS are subject to
special risks, including higher credit risk, higher economic and market
sensitivity, and low liquidity.
PAST PERFORMANCE
The bar chart and table below show the Fund's annual returns and its long-term
performance, and provide some indication of the risks of investing in the Fund.
The bar chart shows how the Fund's performance has varied from year to year.
The table compares the Fund's performance over time for the periods indicated
to that of the Standard and Poor's 500 Composite Index, a widely recognized
unmanaged index of common stock prices.
Both the bar chart and the table assume reinvestment of dividends and
distributions. The Fund's past performance does not necessarily indicate how
the Fund will perform in the future.
YEAR-BY-YEAR TOTAL RETURN (AS OF 12/31 EACH YEAR)
[Bar Chart]
During the ten-year period shown in the bar chart, the highest quarterly return
was 22.0% (for the quarter ended 12/31/96) and the lowest quarterly return was
- -11.6% (for the quarter ended 9/30/98).
AVERAGE ANNUAL TOTAL RETURN (AS OF 12/31/98)
Since Inception
1 Year (5/13/94)
______________________________________________________________________________
Fund -21.2% 12.5%
S&P 500 Index 28.6% 26.7%
<PAGE>
EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund.
SCHEDULE OF FEES
Shareholder Transaction Expenses (fees paid directly from your investment)
Maximum Sales Charge (Load) Imposed on Purchases....................None
Maximum Sales Charge (Load) Imposed on Reinvested Dividends.........None
Redemption Fees*....................................................None
Exchange Fees.......................................................None
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
(as a percentage of average net assets, based on expenses for year ended
12/31/98)
Management Fees.....................................................0.85%
Distribution (12b-1) Fees...........................................None
Other Expenses......................................................0.19%
Total Fund Operating Expenses.......................................1.04%
*A wire fee (currently $5.00) will be deducted from proceeds if a
shareholder elects to transfer redemption proceeds by wire.
EXAMPLE
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The example assumes that:
o you invest $10,000 in the Fund for the time periods indicated;
o you redeem your shares at the end of each period;
o your investment has a 5% return each year (the assumption of a 5%
return is required by the SEC and is not a prediction of the
Fund's future performance); and
o the Fund's operating expenses remain the same.
Although your actual costs may be higher or lower, under these assumptions your
costs would be:
Number of years 1 3 5 10
____________ ____________ ____________ ____________
Cost $106 $331 $574 $1,271
<PAGE>
ADDITIONAL FUND INFORMATION
The Fund's objective and principal investment strategies, and the main risks of
investing in the Fund, are summarized at the beginning of this prospectus. More
information on investment strategies, investments and risks appears in this
section. These are the strategies that, in the opinion of the Fund's investment
manager, are most likely to be important in trying to achieve the Fund's
investment objective. There can, of course, be no assurance that the Fund will
achieve its investment objective. The Fund's objective may be changed without
shareholder approval.
The Fund may also use strategies and invest in securities that are not
described below but which are described in the Statement of Additional
Information ("SAI"). Of course, the Fund's investment manager may decide, as a
matter of investment strategy, not to use the investments and investment
techniques described below and in the SAI at any particular time.
The Fund may also depart from its principal investment strategies by taking
temporary defensive positions in response to adverse market, economic or
political conditions. When doing so, the Fund may hold a substantial portion of
its assets in cash or investment grade fixed-income securities and may not be
pursuing its investment objective.
PRINCIPAL INVESTMENT STRATEGIES
The Fund pursues its objective by investing primarily in equity securities of
companies in the real estate industry. Under normal circumstances the Fund
expects to invest at least 65% of its assets in these securities. Equity
securities in which the Fund may invest include common and preferred stocks,
convertible securities and warrants.
A company is considered to be in the real estate industry if construction,
ownership, management, financing or sales of residential, commercial or
industrial real estate account for at least 50% of its gross revenues or net
profits. Companies in the real estate industry include the following:
o REITs that own properties or make or invest in construction,
development or long-term mortgage loans;
o real estate brokers or developers; and
o companies with significant real estate holdings, including hotel
chains, supermarkets and mining, lumber and paper companies.
<PAGE>
REITs are sometimes informally characterized as equity REITs, mortgage REITs
and hybrid REITs. An equity REIT owns or leases real estate and derives its
income primarily from rental income. An equity REIT may also realize capital
gains (or losses) by selling real estate properties in its portfolio. A
mortgage REIT invests primarily in loans secured by real estate. A mortgage
REIT generally derives its income primarily from interest payments on its
mortgage loans. A hybrid REIT combines the characteristics of both equity REITs
and mortgage REITs, generally by holding both ownership and mortgage interests
in real estate. The Fund anticipates that under normal circumstances a majority
of its investments in REITs will consist of equity REITs, but this is not a
requirement.
Equity REITs may be further classified as operating companies or financing
companies. An operating company generally exercises some degree of control over
the operation of its real estate assets, including selecting tenants,
establishing lease terms, and arranging for property maintenance and repair.
Conversely, a financing company will generally not have control over the
operations that are conducted on its real estate assets. The Fund anticipates
that under normal circumstances a majority of its equity REIT investments will
consist of securities issued by operating companies but this is not a
requirement.
Under normal market circumstances the Fund may invest up to 35% of its assets
in equity or debt securities of companies outside the real estate industry.
The Fund may invest up to 25% of its total assets in debt or fixed-income
securities of a quality below investment grade (i.e. securities rated lower
than Baa or baa by Moody's Investors Service, Inc. or lower than BBB by
Standard and Poor's Corporation, or their equivalent as determined by the
investment manager). These may include securities commonly referred to as "junk
bonds". Investing in junk bonds is an aggressive approach to income investing.
The Fund may also invest up to 25% of its assets in repurchase agreements, by
which the Fund buys securities with the understanding that the seller will buy
them back with interest at a later date.
MANAGEMENT STYLE. Rather than following a particular style, the Fund's
investment manager employs a flexible approach and seeks to take advantage of
opportunities as they arise. In making an investment decision, the Fund's
investment manager will generally employ the following method:
o It uses a top-down approach, meaning that it first analyzes the
overall economic factors that may affect sectors of the real
estate industry and potential investments.
<PAGE>
o It then conducts a thorough analysis of certain companies,
evaluating the fundamentals of each on a case-by-case basis and
focusing on companies that it determines are attractively valued.
o The investment manager will sell a security if it determines that
its investment expectations are not being met, if better
opportunities are identified, or if its price objective has been
attained.
PORTFOLIO TURNOVER. The Fund's objective is above-average income and long-term
growth of capital and the Fund does not purchase securities with the intention
of engaging in short-term trading. The Fund will, however, sell any particular
security and reinvest proceeds when it is deemed prudent by the Fund's
investment manager, regardless of the length of the holding period. Frequent
trading involves higher securities transaction costs which may adversely affect
the Fund's performance. To the extent that this policy results in the
realization of gains on investments, the Fund will make distributions to its
shareholders, which may accelerate shareholders' tax liabilities.
PRINCIPAL RISKS
Investing in a mutual fund involves risk. Before investing, you should consider
the risks you will assume. Some of these risks are described below. More
information about risks appears in the Fund's SAI. Remember that you may
receive little or no return on your investment in the Fund. You may lose money
if you invest in the Fund.
MARKET RISK. This is the risk that the prices of securities will rise or fall
due to changing economic, political or market conditions, or due to a company's
individual situation. The value of the Fund's shares will change daily as the
value of its underlying securities change. This means that your Fund shares may
be worth more or less when you sell them than when you bought them.
Historically, equity securities have been more volatile than debt or
fixed-income securities.
RISKS OF REAL ESTATE AND REITS. The Fund invests primarily in companies in the
real estate industry, including REITs, and is, therefore, subject to the
special risks associated with the real estate industry and market. Securities
of companies in the real estate industry are sensitive to factors such as
changes in real estate values, property taxes, interest rates, cash flow of
underlying real estate assets, occupancy rates, government regulations
affecting zoning, land use, and rents, and the management skill and
creditworthiness of the issuer. Companies in the real estate industry may also
be subject to liabilities under environmental and hazardous waste laws. Changes
<PAGE>
in underlying real estate values may have an exaggerated effect to the extent
that REITs concentrate investments in particular geographic regions or property
types.
Investments in REITs may be adversely affected by rising interest rates. Rising
interest rates may cause investors in REITs to demand a higher annual yield,
which may in turn decrease market prices for equity securities issued by REITs.
Rising interest rates also generally increase the costs of obtaining financing,
which could cause the value of the Fund's investments to decline. During
periods of declining interest rates, many mortgages may be refinanced. This may
reduce the yield from mortgage REITs. REITs depend on payments under their
mortgage loans and leases to generate cash to make distributions to their
shareholders. Accordingly, REITs may be affected by defaults on their mortgage
loans or leases.
Some REITs have relatively small market capitalizations, which tends to
increase the volatility of the market price of securities issued by these
REITs. Furthermore, REITs are dependent upon specialized management skills,
have limited diversification and are, therefore, subject to risks inherent in
operating and financing a limited number of projects.
By investing in REITs indirectly through the Fund, a shareholder will bear
expenses of the REITs in addition to expenses of the Fund.
REPURCHASE AGREEMENTS. The Fund may invest a significant portion of its assets
in repurchase agreements, by which the Fund buys securities with the
understanding that the seller will buy them back with interest at a later date.
If the seller is unable to honor its commitment to repurchase the securities,
the Fund could lose money.
DEBT AND FIXED-INCOME SECURITIES. While the Fund expects to invest primarily in
equity securities, the Fund may also invest in debt and fixed-income
securities. Debt and fixed-income securities are subject to credit risk (the
risk that the obligor will default in the payment of principal and/or interest)
and to interest rate risk (the risk that the market value of the securities
will decline as a result of changes in market rates of interest). These
securities are also subject to the risk that interest rate changes may affect
prepayment rates and their effective maturity.
LOWER RATED DEBT SECURITIES. Lower rated debt securities, including securities
commonly referred to as "junk bonds", are very risky because the issuers may
fail to make payments of interest and principal. Part of the reason for this
high risk is that, in the event of a default or bankruptcy, holders of lower
rated debt securities generally will not receive payments until the holders of
all other debt have been paid. In addition, the market for lower rated debt
securities has in the past been more volatile than the markets for other
securities. Lower rated debt securities are also often less liquid than higher
rated debt securities.
<PAGE>
FOREIGN SECURITIES. The Fund may invest a portion of its assets in foreign
securities. Investing in foreign securities involves risks in addition to those
of investing in U.S. securities, including risks relating to political, social
and economic developments abroad, risks relating to currency fluctuation and
restrictions, and risks resulting from the differences between the regulations
to which U.S. and foreign issuers and markets are subject.
MANAGEMENT
THE INVESTMENT MANAGER
The Fund's investment manager is Capital Growth Management Limited Partnership
("CGM"), One International Place, Boston, Massachusetts, 02110. CGM, an
investment advisory firm founded in 1990, manages the Fund's daily investment
and business affairs subject to the policies established by the Fund's Board of
Trustees. CGM manages nine mutual fund portfolios and advisory accounts for
other clients.
In 1998, the Fund paid 0.85% of its average annual net assets in management
fees to CGM.
THE PORTFOLIO MANAGER
G. Kenneth Heebner has been the portfolio manager of the Fund since its
inception in 1994. In 1990, 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. In addition to the Fund, he currently
manages CGM Capital Development Fund, CGM Mutual Fund, CGM Focus Fund and, with
Janice H. Saul, co-manages CGM Fixed Income Fund.
HOW TO PURCHASE SHARES
The Fund sells its shares directly to investors without any sales load.
NEW ACCOUNTS
If you are not currently a shareholder in the Fund, you may make a purchase of
Fund shares in a new regular account or retirement plan account by submitting a
completed application form and check, made payable to CGM Realty Fund, to:
<PAGE>
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 or the Uniform Transfers to Minors
Act.
EXISTING ACCOUNTS
After your account has been established, you may send subsequent investments at
any time directly to the shareholder servicing agent at:
CGM Shareholder Services
c/o Boston Financial Data Services, Inc.
P.O. Box 8511
Boston, Massachusetts 02266-8511
You must include either the Additional Investment Stub detached from an account
statement 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 must be at least $50.
PAYMENT BY CHECK
If you pay for Fund shares by check, your check should be in U.S. dollars and
made payable to CGM Realty Fund. Third party checks (i.e. checks not payable to
CGM Realty Fund) are generally not accepted and checks drawn on credit card
accounts are not accepted.
PAYMENT BY WIRE
You may also make subsequent investments 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 Realty Fund, Shareholder
Name, Shareholder Account Number." Your bank may charge you a fee for
transmitting funds by wire.
<PAGE>
ADDITIONAL INFORMATION
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 Fund 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 Fund's system for
recording investments eliminates the problems of handling and safekeeping
certificates.
The Fund may accept telephone orders from certain broker-dealers or service
organizations which have been previously approved by the Fund. It is the
responsibility of such broker-dealers or service organizations to promptly
forward purchase orders and payments for shares to the Fund. Shares of the Fund
may be purchased through certain broker-dealers or service organizations who
may charge the investor a transaction fee or other fee for their services at
the time of purchase and/or redemption. Such fees would not otherwise be
charged if the shares were purchased or redeemed directly from the Fund.
The price you pay will be the per share net asset value next calculated after
your proper investment order is received by the Fund (in the case of your
initial investment) or by CGM Shareholder Services (in the case of subsequent
investments).
The Fund may reject any purchase order and may suspend, change or withdraw the
offering of its shares.
SHAREHOLDER SERVICES
The Fund offers the following shareholder services as more fully described in
the Fund's SAI. Explanations and forms are available from the Fund.
EXCHANGE PRIVILEGE
You may exchange your shares of CGM Realty Fund for shares of CGM Fixed Income
Fund, CGM American Tax Free Fund, CGM Mutual Fund and CGM Focus Fund. You may
also exchange your shares for shares of money market funds distributed by New
England Funds, L.P.
Additionally, you may exchange shares of CGM Realty Fund for shares of CGM
Capital Development Fund, but only if you were a shareholder of the CGM Capital
Development Fund on September 24, 1993, and have remained a shareholder in the
CGM Capital Development Fund continuously since that date. CGM Capital
<PAGE>
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 SAI.
All exchanges are free of 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" below. Exchange requests cannot be revoked once they have been
received in good order. 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.
You 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
you can make to four exchanges per account (or two round trips) per calendar
year. Monthly automatic exchanges from money market funds distributed by New
England Funds, L.P. to the Fund are not subject to this restriction. The Fund
also reserves the right to prohibit exchanges during the first 15 days
following an investment in the Fund.
For federal income tax purposes, an exchange constitutes a sale of shares,
which may result in a capital gain or loss.
The Fund may terminate or change the terms of the exchange privilege.
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 will
be cancelled and the amounts will be reinvested in the Fund at the per share
net asset value determined as of the date of cancellation of the checks. No
interest will accrue on amounts represented by uncashed distribution or
redemption 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
<PAGE>
checking account. Please contact CGM Shareholder Services at 800-343-5678 to
determine the requirements associated with debits from savings banks and credit
unions. Debits from money market accounts are not acceptable.
You may terminate your participation in the AIP by sending written notice to
CGM Shareholder Services or by calling 800-343-5678 more than 14 days prior to
the next scheduled debit date. The Fund may terminate your participation in the
AIP immediately in the event that any item is unpaid by your financial
institution. The Fund may terminate or modify the AIP at any time. Additional
information about this Plan is set forth in the SAI.
RETIREMENT PLANS
The Fund's shares may be purchased by tax-deferred retirement plans. CGM makes
available retirement plan forms and plan documents for Traditional and Roth
IRAs, SEP-IRAs, 403(b)(7) custodial accounts, and Money Purchase Pension and
Profit Sharing plans ("CGM Retirement Plans").
CONFIRMATION STATEMENTS
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 will be charged
for any duplicate information requested for prior years.
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 Fund at 800-345-4048.
<PAGE>
HOW TO SELL SHARES
You can sell (redeem) all or part of your shares in the Fund in three different
ways:
o by sending a written request for a check or wire representing the
redemption proceeds,
o 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
o by making a telephone request for redemption proceeds to be wired
to a bank account 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.
WRITTEN REDEMPTION REQUESTS
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
custodian or trustee must contain additional information. Please contact CGM
<PAGE>
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, requesting that the
proceeds check be made payable 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), or
requesting that the proceeds be wired to a bank account that you have not
predesignated, 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.
TELEPHONE REDEMPTION REQUESTS
If you elect to redeem shares by telephone, call CGM Shareholder Services
directly at 800-343-5678. See "Telephone Transactions" below. 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 unless this option is declined in the application or otherwise in
writing. 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 Fund 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. 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 Fund cannot accept your request and
a new one will be necessary.
<PAGE>
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.
REDEMPTION PROCEEDS
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 following receipt of a proper redemption request.
If you purchased your Fund shares by check (or through an automatic investment
plan) and elect to redeem shares within 15 days of the purchase, you may
experience delays in receiving redemption proceeds. The Fund will generally
postpone sending your redemption proceeds from an investment until the Fund can
verify that your check (or automatic investment plan 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, the checks will be cancelled and the proceeds
will be reinvested in the Fund at the per share net asset value determined as
of the date of cancellation of the checks. No interest will accrue on amounts
represented by uncashed distribution or redemption checks.
POSTPONEMENT OF REDEMPTION PROCEEDS OR SUSPENSION OF REDEMPTION RIGHT
The Fund may postpone payment of redemption proceeds for up to seven days. The
Fund may not postpone payment for more than seven days or suspend the right of
redemption, except: if you purchased your Fund shares by check (or through an
automatic investment plan) and redeem shares within 15 days of the purchase as
described in the preceding section, when the New York Stock 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.
<PAGE>
REDEMPTION IN KIND
The Fund will normally redeem shares for cash; however, the Fund reserves the
right to pay the redemption price wholly in kind or partly in kind and partly
in cash if the Board of Trustees of the Fund determines it to be advisable in
the interests of the remaining shareholders. If portfolio securities are
distributed in lieu of cash, the shareholder will normally incur brokerage
commissions upon subsequent disposition of any such securities. However, the
Fund will 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.
MINIMUM ACCOUNT BALANCE AND AUTOMATIC REDEMPTION
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 or accounts set up under the
Uniform Gifts to Minors Act or the Uniform Transfers to Minors Act.
TELEPHONE TRANSACTIONS
You may initiate three types of transactions by telephone:
o telephone exchanges;
o telephone redemptions by wire; and
o 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.
You must select the telephone exchange privilege and/or telephone redemption by
wire privilege 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 Fund or CGM Shareholder Services. The telephone
redemptions by check privilege is available automatically unless you decline
this option in the application or otherwise in writing.
<PAGE>
The telephone redemption privileges are not available for Traditional or Roth
IRAs, SEP-IRAs, 403(b)(7) custodial accounts or for Money Purchase Pension and
Profit Sharing accounts under a CGM Retirement Plan for which State Street Bank
is the custodian or 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.
During periods of unusual market activity, severe weather or other abnormal
circumstances, it may be difficult for you to reach a representative of the
Fund or CGM Shareholder Services by telephone. In this case, please consider
sending written instructions.
DIVIDENDS, CAPITAL GAINS AND TAXES
The Fund declares and pays out quarterly dividends consisting of substantially
all of its net investment income. Any capital gains distributions are normally
made annually in December but may be made more frequently as deemed advisable
by the Board of Trustees. Certain restrictions may apply to participants in CGM
Retirement Plans.
You may elect to receive income dividends or capital gains distributions, or
both, in additional shares of the Fund or in cash. However, if you elect to
receive capital gains in cash, your income dividends must also be received in
cash. Certain restrictions may apply to participants in CGM Retirement Plans.
You can elect to receive payments of cash dividends and capital gains
distributions either by check or by direct deposit to a bank account that you
have predesignated. These elections may be made at the time your account is
opened and may be changed at any time by submitting a written request to CGM
Shareholder Services or by calling 800-343-5678. However, changes in bank
account information for direct deposits of cash dividends and capital gains
distributions must be made through a Service Options Form. In order for a
change to be effective 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" or remain uncashed for six months, your cash election will be
changed automatically and your future dividend and capital gains distributions
<PAGE>
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 the
six-month period, any undeliverable or uncashed checks will be cancelled and
the amounts will be reinvested in the Fund at the per share net asset value
determined as of the date of cancellation of the checks. No interest will
accrue on amounts represented by uncashed distribution or redemption checks.
Dividends paid by the Fund from net investment income (including dividends and
interest) and net short-term capital gains will be taxable to you as ordinary
income. If a portion of the Fund's income consists of dividends paid by U.S.
corporations, a portion of the dividends paid by the Fund may be eligible 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 to you as long-term capital gains, regardless of how long you have
owned your 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 your tax basis
in your shares, and then, to the extent the distribution exceeds such basis, as
a taxable gain from the sale of your shares. Dividends and distributions are
taxable to you in the same manner whether received in cash or reinvested in
additional shares.
If the Fund invests in foreign securities, it may be subject to foreign
withholding taxes on income earned on those securities and may be unable to
pass through to you foreign tax credits and deductions with respect to those
taxes.
A distribution will be treated as paid by the Fund and received by you 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,
generally depending upon how long you held your shares.
<PAGE>
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.
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. In limited circumstances, your actual cost
basis may differ from your CGM account cost basis. 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 generally will receive these cost basis statements but only for accounts
opened after January 1, 1991. Some restrictions apply; for more information,
please call 800-343-5678. 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, local and foreign
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.
Each year the Fund will indicate the portion of the Fund's income, if any,
which is derived from such obligations.
The tax discussion set forth above is included for general information only.
You should consult your own tax adviser 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 New York Stock Exchange (normally 4 p.m. Eastern time)
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
<PAGE>
by the Board of Trustees. Instruments with maturities of 60 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 SAI.
Trading may take place in foreign securities held by the Fund on days when the
Fund is not open for business. As a result, the Fund's net asset value may
change on days on which it is not possible to purchase or sell shares of the
Fund.
YEAR 2000
Like other mutual funds and other organizations around the world, the Fund
could be adversely affected if the computer systems used by the Fund or its
service providers do not properly process and calculate date-related
information from and after January 1, 2000. This is commonly known as the "Y2K
Problem." Failure to successfully address the Y2K Problem could result in
interruptions to and other material adverse effects on the Fund's business and
operations, such as problems calculating net asset value and difficulties in
implementing the Fund's purchase and redemption procedures. CGM has taken steps
that it believes are reasonably designed to address any potential Y2K Problem
for computer programs used by the Fund or CGM. Each of the Fund's and CGM's
service providers are taking steps that they believe are reasonably designed to
address the Y2K Problem with respect to computer systems that they use. At this
time, however, there can be no assurance that these steps being taken by third
party service providers will be sufficient to avoid any adverse impact to the
Fund. In addition, there can be no assurances that the Y2K Problem will not
have an adverse effect on the issuers whose securities are held by the Fund or
on the market or the economy in general.
FINANCIAL HIGHLIGHTS
The following Financial Highlights table is intended to help you understand the
Fund's financial performance since its inception. Certain information reflects
financial results for a single Fund share. The total returns in the table
represent the rate that an investor would have earned (or lost) on an
investment in the Fund (assuming reinvestment of all dividends and
distributions). This information has been examined by PricewaterhouseCoopers
LLP, independent accountants, whose report, along with the Fund's financial
statements, is included in the Fund's Annual Report, which may be obtained from
the Fund free of charge.
[To be added by amendment.]
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
CONTACT INFORMATION
CGM REALTY FUND More information about this Fund is
c/o The CGM Funds available free by calling 800-345-4048,
P.O. Box 449 including the following:
Boston, MA 02117
ANNUAL/QUARTERLY REPORTS
SHAREHOLDER SERVICING AGENT
CGM Shareholder Services Additional information about the Fund's
c/o Boston Financial Data Services, Inc. investments is available in the Fund's
P.O. Box 8511 annual and quarterly reports to
Boston, MA 02266 shareholders. In the Fund's annual
report, you will find a discussion of the
INVESTMENT MANAGER market conditions and investment
Capital Growth Management strategies that significantly affected the
Limited Partnership Fund's performance during its last fiscal
One International Place year.
Boston, MA 02110
STATEMENT OF ADDITIONAL INFORMATION (SAI)
TRANSFER AND DIVIDEND PAYING AGENT
AND CUSTODIAN OF ASSETS The SAI provides more detailed
Street Bank and Trust Company information about the Fund and is
Boston, MA 02102 incorporated into this State prospectus by
reference (i.e. is legally considered part
of it).
</TABLE>
_______________________________________________________________________________
For additional information about:
[ ] Account procedures and status [ ] Prospectuses
[ ] Redemptions [ ] SAI
[ ] Exchanges [ ] Annual/Quarterly Reports
[ ] New account procedures [ ] Performance
Call 800-343-5678 Call 800-345-4048
_______________________________________________________________________________
Information about the Fund (including the SAI) is also available from the
Securities and Exchange Commission. You can find it on the SEC's Internet site
at http://www.sec.gov. You can receive copies of Fund information by sending
your request and a duplicating fee to the SEC's Public Reference Section,
Washington, DC 20549-6009. Information can also be reviewed and copied at the
SEC's Public Reference Room in Washington, DC. You can get information on the
operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
SEC File No. 811-82
<PAGE>
CGM
AMERICAN
TAX
FREE
FUND
The Fund's primary objective is to provide high current income exempt from
federal income tax. The Fund's secondary objective is capital appreciation.
CGM
FIXED
INCOME
FUND
The Fund's 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.
[Fencer Logo]
No-Load Funds
PROSPECTUS & APPLICATION
May 1, 1999
The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the adequacy of this prospectus. Any representation
to the contrary is a criminal offense.
<PAGE>
TABLE OF CONTENTS
FUND SUMMARIES..............................................................1
PAST PERFORMANCE OF CGM AMERICAN TAX FREE FUND..............................4
PAST PERFORMANCE OF CGM FIXED INCOME FUND...................................5
EXPENSES OF CGM AMERICAN TAX FREE FUND......................................6
EXPENSES OF CGM FIXED INCOME FUND...........................................7
ADDITIONAL FUND INFORMATION.................................................8
PRINCIPAL RISKS............................................................11
MANAGEMENT.................................................................13
HOW TO PURCHASE SHARES.....................................................14
SHAREHOLDER SERVICES.......................................................16
HOW TO SELL SHARES.........................................................18
TELEPHONE TRANSACTIONS.....................................................22
DIVIDENDS, CAPITAL GAINS AND TAXES.........................................22
PRICING OF SHARES..........................................................26
YEAR 2000..................................................................26
FINANCIAL HIGHLIGHTS.......................................................27
CONTACT INFORMATION................................................Back Cover
<PAGE>
FUND SUMMARIES
CGM AMERICAN TAX FREE FUND
INVESTMENT OBJECTIVE
The Fund's primary objective is to provide high current income exempt from
federal income tax. The Fund's secondary objective is capital appreciation. The
Fund may not be an appropriate investment for retirement plans and similar
accounts.
SUMMARY OF PRINCIPAL INVESTMENT STRATEGIES
The Fund seeks to achieve its objectives by investing primarily in investment
grade debt securities that are exempt from federal income tax. Under normal
circumstances the Fund invests 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.
The Fund may invest in debt obligations issued by states, the District of
Columbia, territories or possessions of the United States or their political
subdivisions, agencies or instrumentalities. The Fund may also invest in
securities issued by multistate agencies or authorities.
There is no limitation on the dollar-weighted average maturity of the Fund's
portfolio and the maturity may be shortened or lengthened depending upon the
investment manager's outlook for interest rates.
The Fund may invest up to 25% of its total assets in debt or fixed-income
securities of a quality below investment grade, including securities commonly
referred to as "junk bonds".
SUMMARY OF PRINCIPAL RISKS
Like all mutual funds, you may lose money if you invest in the Fund. The Fund
invests in debt and fixed-income securities and is, therefore, subject to
CREDIT RISK and to INTEREST RATE RISK. Credit risk is the possibility that an
issuer will fail to make timely payments of interest or principal. In general,
the lower the credit quality of a security, the higher the yield and the higher
the risk. Interest rate risk is the risk that the market value of debt and
fixed-income securities will fall when market interest rates increase. In
general, the prices of debt or fixed-income securities rise when interest rates
fall, and fall when interest rates rise.
<PAGE>
Investments in LOWER QUALITY SECURITIES such as JUNK BONDS are subject to
special risks, including higher credit risk, higher economic and market
sensitivity, and low liquidity.
CGM FIXED INCOME FUND
INVESTMENT OBJECTIVE
The Fund's 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.
SUMMARY OF PRINCIPAL INVESTMENT STRATEGIES
The Fund seeks to achieve its objectives by investing primarily in investment
grade debt securities and preferred stocks that the investment manager believes
to be undervalued. The Fund's flexible investment policy allows it to invest in
fixed-income securities and variable-rate securities with varying maturities
and varying qualities ranging from the highest quality to non-investment grade.
The Fund may invest in securities of both government and non-government
issuers, as well as multi-national institutions. The Fund may invest up to 20%
of its net assets in foreign debt securities and preferred stock issued by
foreign entities.
There is no limitation on the dollar-weighted average maturity of the Fund's
portfolio and the maturity may be shortened or lengthened depending upon the
investment manager's outlook for interest rates.
The Fund may invest up to 35% of its assets in debt or fixed-income securities
of a quality below investment grade, including securities commonly referred to
as "junk bonds".
SUMMARY OF PRINCIPAL RISKS
Like all mutual funds, you may lose money if you invest in the Fund. The Fund
invests in debt and fixed-income securities and is, therefore, subject to
CREDIT RISK and to INTEREST RATE RISK. Credit risk is the possibility that an
issuer will fail to make timely payments of interest or principal. In general,
the lower the credit quality of a security, the higher the yield and the higher
the risk. Interest rate risk is the risk that the market value of debt and
fixed-income securities will fall when interest rates increase. In general, the
prices of debt or fixed-income securities rise when interest rates fall, and
fall when interest rates rise.
<PAGE>
Investments in LOWER QUALITY SECURITIES such as JUNK BONDS are subject to
special risks, including higher credit risk, higher economic and market
sensitivity, and low liquidity.
FOREIGN SECURITIES carry risks in addition to those of U.S. securities,
including the risk of currency fluctuations, higher volatility and less
liquidity. Foreign securities are also subject to additional risks of possible
adverse political and economic developments.
<PAGE>
PAST PERFORMANCE
CGM AMERICAN TAX FREE FUND
The bar chart and table below show the Fund's annual returns and its long-term
performance, and provide some indication of the risks of investing in the Fund.
The bar chart shows how the Fund's performance has varied from year to year.
The table compares the Fund's performance over time for the periods indicated
to that of the Lehman Municipal Bond Index, a widely recognized unmanaged index
of municipal bond prices.
Both the bar chart and the table assume reinvestment of dividends and
distributions. The Fund's past performance does not necessarily indicate how
the Fund will perform in the future.
YEAR-BY-YEAR TOTAL RETURN (AS OF 12/31 EACH YEAR)
[Bar Chart]
During the ten-year period shown in the bar chart, the highest quarterly return
was 6.2% (for the quarter ended 3/31/95) and the lowest quarterly return was
- -8.9% (for the quarter ended 3/31/94).
AVERAGE ANNUAL TOTAL ReTURN (AS OF 12/31/98)
Since Inception
1 Year 5 Years (11/10/93)
- -------------------------------------------------------------------------------
Fund 6.5% 5.3% 5.7%
Lehman Municipal Bond Index 6.5% 6.2% 6.1%
<PAGE>
PAST PERFORMANCE
CGM FIXED INCOME FUND
The bar chart and table below show the Fund's annual returns and its long-term
performance, and provide some indication of the risks of investing in the Fund.
The bar chart shows how the Fund's performance has varied from year to year.
The table compares the Fund's performance over time for the periods indicated
to that of the Merrill Lynch Master Bond Index, a widely recognized unmanaged
index of bond prices.
Both the bar chart and the table assume reinvestment of dividends and
distributions. The Fund's past performance does not necessarily indicate how
the Fund will perform in the future.
YEAR-BY-YEAR TOTAL RETURN (AS OF 12/31 EACH YEAR)
[Bar Chart]
During the ten-year period shown in the bar chart, the highest quarterly return
was 9.9% (for the quarter ended 6/30/95) and the lowest quarterly return was
- -5.4% (for the quarter ended 9/30/98).
AVERAGE ANNUAL TOTAL ReTURN (AS OF 12/31/98)
Since Inception
1 Year 5 Years (3/17/92)
- -------------------------------------------------------------------------------
Fund -1.2% 6.7% 9.0%
Merrill Lynch Master Bond Index 8.9% 7.3% 8.3%
<PAGE>
EXPENSES
CGM AMERICAN TAX FREE FUND
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund.
SCHEDULE OF FEES
Shareholder Transaction Expenses (fees paid directly from your investment)
Maximum Sales Charge (Load) Imposed on Purchases.....................None
Maximum Sales Charge (Load) Imposed on Reinvested Dividends..........None
Redemption Fees*.....................................................None
Exchange Fees........................................................None
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
(as a percentage of average net assets, based on expenses for year ended
12/31/98)
Management Fees.....................................................0.60%
Distribution (12b-1) Fees...........................................None
Other Expenses......................................................1.09%
Total Fund Operating Expenses.......................................1.69%**
*A wire fee (currently $5.00) will be deducted from proceeds if a
shareholder elects to transfer redemption proceeds by wire.
**The Fund's investment manager has voluntarily agreed, until December 31,
1999, to waive its management fees and to bear all of the expenses associated
with operating the Fund. As a result, the actual total fund operating expenses
for the year ended December 31, 1998 were 0%. These fee waivers and
reimbursements may be reduced or terminated at any time.
EXAMPLE
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The example assumes that:
o you invest $10,000 in the Fund for the time periods indicated;
o you redeem your shares at the end of each period;
o your investment has a 5% return each year (the assumption of a 5%
return is required by the SEC and is not a prediction of the Fund's
future performance); and
o the Fund's operating expenses remain the same, before taking into
consideration any fee waivers or reimbursements.
<PAGE>
Although your actual costs may be higher or lower, under these assumptions your
costs would be:
Number of years 1 3 5 10
------- ------- ------- -------
Cost $172 $533 $918 $1998
CGM FIXED INCOME FUND
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund.
SCHEDULE OF FEES
Shareholder Transaction Expenses (fees paid directly from your investment)
Maximum Sales Charge (Load) Imposed on Purchases.....................None
Maximum Sales Charge (Load) Imposed on Reinvested Dividends..........None
Redemption Fees*.....................................................None
Exchange Fees........................................................None
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
(as a percentage of average net assets, based on expenses for year ended
12/31/98)
Management Fees.....................................................0.65%
Distribution (12b-1) Fees...........................................None
Other Expenses......................................................0.61%
Total Fund Operating Expenses.......................................1.26%**
- ----------------
*A wire fee (currently $5.00) will be deducted from proceeds if a
shareholder elects to transfer redemption proceeds by wire.
**The Fund's investment manager has voluntarily agreed, until December 31,
1999, to waive its management fees and, if necessary, to bear certain expenses
associated with operating the Fund, to the extent necessary to limit the Fund's
total operating expenses to an annual rate of 0.85% of the Fund's average net
assets. These fee waivers and reimbursements may be reduced or terminated at
any time.
<PAGE>
EXAMPLE
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The example assumes that:
o you invest $10,000 in the Fund for the time periods indicated;
o you redeem your shares at the end of each period;
o your investment has a 5% return each year (the assumption of a 5%
return is required by the SEC and is not a prediction of the Fund's
future performance); and
o the Fund's operating expenses remain the same, before taking into
consideration any fee waivers or reimbursements.
Although your actual costs may be higher or lower, under these assumptions your
costs would be:
Number of years 1 3 5 10
------- ------- ------- -------
Cost $128 $400 $692 $1523
ADDITIONAL FUND INFORMATION
Each Fund's objective and principal investment strategies, and the main risks
of investing in each Fund, are summarized at the beginning of this prospectus.
More information on investment strategies, investments and risks appears in
this section. These are the strategies that, in the opinion of each Fund's
investment manager, are most likely to be important in trying to achieve the
Fund's investment objectives. There can, of course, be no assurance that any
Fund will achieve its investment objectives. Each Fund's objectives may be
changed without shareholder approval.
Each Fund may also use strategies and invest in securities that are not
described below but which are described in the Statement of Additional
Information ("SAI"). Of course, each Fund's investment manager may decide, as a
matter of investment strategy, not to use the investments and investment
techniques described below and in the SAI at any particular time.
Each Fund may also depart from its principal investment strategies by taking
temporary defensive positions in response to adverse market, economic or
political conditions. When doing so, each Fund may hold a substantial portion
of its assets in cash or high quality fixed-income securities and may not be
pursuing its investment objective.
<PAGE>
CGM AMERICAN TAX FREE FUND
The Fund seeks to achieve its objectives by investing primarily in investment
grade debt securities that are exempt from federal income tax. Under normal
circumstances the Fund invests 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.
The Fund may invest in debt obligations issued by states, the District of
Columbia, territories or possessions of the United States or their political
subdivisions, agencies or instrumentalities. The Fund may also invest in
securities issued by multistate agencies or authorities.
The Fund invests at least 75% of its assets in securities rated at the time of
purchase Baa, MIG-2, Prime-2 or higher by Moody's Investors Service, Inc., or
BBB, SP-2, A-2 or better by Standard & Poor's Corporation, or, if not rated by
Moody's or S&P at the time of purchase, determined to be of comparable quality
by the investment manager. Securities rated BBB by S&P or Baa by Moody's are
regarded as having an adequate capacity to pay interest and repay principal,
but these securities also have speculative characteristics and changes in
economic conditions and other circumstances are more likely to lead to a
weakened capacity to pay interest and repay principal.
The Fund's investments may include put bonds, floating and variable rate
securities and municipal lease obligations, each of which is described in the
SAI.
There is no limitation on the dollar-weighted average maturity of the Fund's
portfolio and the maturity may be shortened or lengthened depending upon the
investment manager's outlook for interest rates. As a result, your investment
in the Fund may be subject to the increased volatility associated with longer
term bonds. On the other hand, if the investment manager decides to shorten the
average maturity of the Fund's portfolio, your investment may not earn as much
income as might be available from longer term bonds.
In an effort to enhance return, the Fund intends to take advantage of pricing
inefficiencies between individual issues or groups of securities that may occur
as a result of temporary dislocations in the market, misconceptions of risk, or
cyclical or secular changes in the market causing undervaluation.
The Fund will not invest more than 25% of its total assets in any one industry.
Governmental issuers of tax-exempt securities are not considered part of any
industry. However, tax-exempt securities backed only by the assets and revenues
<PAGE>
of nongovernmental users may, for this purpose, be deemed to be issued by those
nongovernmental users, and the 25% limitation applies to those obligations. 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, the District of Columbia,
territories or United States possessions or any of their political
subdivisions.
The Fund may invest up to 25% of its total assets in debt or fixed-income
securities of a quality below investment grade, including securities commonly
referred to as "junk bonds". Investing in junk bonds is an aggressive approach
to income investing.
MANAGEMENT STYLE. The investment manager decides which particular debt
securities to buy based primarily on their yield relative to their credit
quality and duration.
CGM FIXED INCOME FUND
The Fund generally seeks to achieve its objectives by investing in debt
securities and preferred stocks that the investment manager believes to be
undervalued.
The Fund invests primarily in investment grade debt securities, which are rated
at the time of purchase at least Baa by Moody's Investors Service, Inc. or BBB
by Standard and Poor's Corporation, in preferred stocks rated at least baa by
Moody's or BBB by S&P, and in debt securities not rated by Moody's or S&P at
the time of purchase but which the investment manager believes to be of
comparable quality.
The Fund's flexible investment policy allows it to invest in fixed-income
securities and variable-rate securities, including preferred stocks, with
varying maturities and varying qualities ranging from the highest quality to
non-investment grade. There is no limitation on the dollar-weighted average
maturity of the Fund's portfolio and the maturity may be shortened or
lengthened depending upon the investment manager's outlook for interest rates.
As a result, your investment in the Fund may be subject to the increased
volatility associated with longer term bonds. On the other hand, if the
investment manager decides to shorten the average maturity of the Fund's
portfolio, your investment may not earn as much income as might be available
from longer term bonds.
Securities in which the Fund may invest include bonds, debentures, notes,
equipment trust certificates, asset-backed securities, mortgage-backed
securities (including interest-only and principal-only securities), preferred
<PAGE>
stocks and money market instruments such as commercial paper, Treasury bills,
time deposits, bankers' acceptances and repurchase agreements.
In some cases interest payments on Fund securities may be paid out as
additional securities (commonly referred to as "payment-in-kind securities"),
or deferred to a future date not to exceed maturity (commonly referred to as
"zero coupon securities").
The Fund may invest in securities that may be converted into stock or other
equity interests. The Fund may also invest in deferred interest securities and
securities purchased on a "when-issued" basis. These securities are described
in the SAI.
The Fund may invest in securities of both government and non-government
issuers, as well as multi-national institutions. The Fund may invest up to 20%
of its net assets in foreign debt securities and preferred stock issued by
foreign entities.
The Fund may invest up to 35% of its assets in debt or fixed-income securities
of a quality below investment grade (i.e. securities rated lower than Baa or
baa by Moody's or lower than BBB by S&P, or their equivalent as determined by
the investment manager), including up to 10% of its total assets in debt or
fixed- income securities rated at the time of investment Caa or caa or lower by
Moody's or CCC or lower by S&P, or their equivalent as determined by the
investment manager. These securities are commonly referred to as "junk bonds".
Investing in junk bonds is an aggressive approach to income investing.
MANAGEMENT STYLE. The investment manager decides which particular debt
securities to buy based primarily on their yield relative to their credit
quality and duration. Preferred stocks are viewed as defensive, income
producing vehicles. The investment manager tends to buy preferred stocks at a
discount and sell them when they trade above par value or when higher yields
are available on securities of comparable quality.
PRINCIPAL RISKS
Investing in a mutual fund involves risk. Before investing, you should consider
the risks you will assume. Some of these risks are described below. More
information about risks appears in the SAI. Remember that you may receive
little or no return on your investment in a Fund. You may lose money if you
invest in a Fund.
INTEREST RATE RISK. Interest rate risk is the risk that the market value of
debt and fixed-income securities will fall when market interest rates increase.
In general, the prices of debt or fixed-income securities rise when interest
rates fall, and fall when interest rates rise. Longer term obligations are
<PAGE>
usually more sensitive to interest rate changes than shorter term obligations.
A change in interest rates could cause a Fund's share price to go up or down.
Generally, the longer the average maturity of the bonds in a Fund, the more the
Fund's share price will rise or fall in response to interest rate changes.
CREDIT RISK. Credit risk is the possibility that an issuer will fail to make
timely payments of interest or principal. Some issuers may not make payments on
debt securities held by a Fund, causing a loss. Or, an issuer may suffer
adverse changes in its financial condition that could lower the credit quality
of a security, leading to greater volatility in the price of the security and
in shares of a Fund. A change in the quality rating of a bond or other security
can also affect the security's liquidity and make it more difficult for a Fund
to sell. The lower quality debt securities in which each Fund may invest are
more susceptible to these problems than higher quality obligations. Legislative
changes affecting the taxing and spending authority of a municipality may
affect the ability of the municipality to make payments of principal and
interest on its obligations.
PREPAYMENT RISK. The issuers of debt securities held by a Fund may be able to
prepay principal due on the securities, particularly during periods of
declining interest rates. The Fund may not be able to reinvest that principal
at attractive rates, reducing income to the Fund. On the other hand, rising
interest rates may cause prepayments to occur at slower than expected rates.
This effectively lengthens the maturities of the affected securities, making
them more sensitive to interest rate changes and the Fund's share price more
volatile.
Mortgage-backed securities are particularly susceptible to prepayment risk and
their prices may be very volatile. The price of interest-only securities, which
are the interest only component of stripped mortgage-backed securities, goes
down when interest rates decline and principal payments accelerate, causing a
reduction in the interest payment stream. The price of principal-only
securities goes down when interest rates are rising and prepayments are slower,
causing the maturity of the security to lengthen.
LOWER RATED DEBT SECURITIES. Lower rated debt securities, including securities
commonly referred to as "junk bonds", are very risky because the issuers may
fail to make payments of interest and principal. Part of the reason for this
high risk is that, in the event of a default or bankruptcy, holders of lower
rated debt securities generally will not receive payments until the holders of
all other debt have been paid. In addition, the market for lower rated debt
securities has in the past been more volatile than the markets for other
securities. Lower rated debt securities are also often less liquid than higher
rated debt securities.
<PAGE>
ZERO COUPON, DEFERRED INTEREST AND PAYMENT-IN-KIND SECURITIES. The CGM Fixed
Income Fund records the interest on these securities as income even though it
receives no cash interest until each security's maturity date. The Fund will be
required to distribute all or substantially all of this accrued interest
annually and may have to sell securities in order to obtain the cash to do so.
Thus, the Fund may be required to liquidate a portion of its assets, which it
would otherwise continue to hold, at a disadvantageous time. These
distributions will be taxable to shareholders as ordinary income. In addition,
because these securities may not pay interest at regular intervals, their
market prices may be very sensitive to interest rate changes and they may also
be subject to increased credit risk.
SPECIAL CHARACTERISTICS OF CONVERTIBLE SECURITIES. Convertible securities,
which are securities that may be converted into stock or other equity
interests, are subject to the market risk of stocks, and, like other debt
securities, are also subject to interest rate risk and the credit risk of their
issuers.
FOREIGN SECURITIES. The CGM Fixed Income Fund may invest a portion of its
assets in foreign securities. Investing in foreign securities involves risks in
addition to those of investing in U.S. securities, including risks relating to
political, social and economic developments abroad, risks relating to currency
fluctuation and restrictions, and risks resulting from the differences between
the regulations to which U.S. and foreign issuers and markets are subject.
PORTFOLIO TURNOVER. Although neither Fund purchases securities with the
intention of engaging in short-term trading, each Fund frequently sells
securities to respond to changes in market, industry, or individual company
conditions or outlook, although the Fund may only have held those securities
for a short period. Frequent trading involves higher securities transaction
costs which may adversely affect the Fund's performance. To the extent that
this policy results in the realization of gains on investments, the Fund will
make distributions to its shareholders, which may accelerate shareholders' tax
liabilities.
MANAGEMENT
THE INVESTMENT MANAGER
Each Fund's investment manager is Capital Growth Management Limited Partnership
("CGM"), One International Place, Boston, Massachusetts, 02110. CGM, an
investment advisory firm founded in 1990, manages the Funds' daily investment
and business affairs subject to the policies established by the Funds' Board of
Trustees. CGM manages nine mutual fund portfolios and advisory accounts for
other clients.
<PAGE>
In 1998, CGM American Tax Free Fund paid 0% of its average annual net assets in
management fees to CGM, after waivers and reimbursements, and CGM Fixed Income
Fund paid 0.24% of its average annual net assets in management fees to CGM,
after waivers and reimbursements.
THE PORTFOLIO MANAGERS
Janice H. Saul is the portfolio manager of CGM American Tax Free Fund. Prior to
joining CGM, Ms. Saul was employed as a portfolio manager by Loomis, Sayles &
Company, Incorporated and by Scudder, Stevens and Clark.
CGM Fixed Income Fund is co-managed by G. Kenneth Heebner and Janice H. Saul.
In 1990, 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. In addition to the Funds, he currently manages CGM
Mutual Fund, CGM Capital Development Fund, CGM Realty Fund and CGM Focus Fund.
HOW TO PURCHASE SHARES
The Funds sell their shares directly to investors without any sales load.
NEW ACCOUNTS
If you are not currently a shareholder, you may make a purchase of a Fund's
shares in a new regular account or retirement plan account by submitting a
completed application form and check, made payable to CGM American Tax Free
Fund or CGM Fixed Income Fund (as applicable), 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 accounts (see "Shareholder Services -- Retirement Plans") and
accounts set up under the Uniform Gifts to Minors Act or the Uniform Transfers
to Minors Act.
CGM AMERICAN TAX FREE FUND IS NOT AN APPROPRIATE INVESTMENT FOR INDIVIDUAL
RETIREMENT ACCOUNTS ("IRAS") OR SIMILAR ACCOUNTS.
<PAGE>
EXISTING ACCOUNTS
After your account has been established, you may send subsequent investments at
any time directly to the shareholder servicing agent at:
CGM Shareholder Services
c/o Boston Financial Data Services, Inc.
P.O. Box 8511
Boston, Massachusetts 02266-8511
You must include either the Additional Investment Stub detached from an account
statement 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 must be at least $50.
PAYMENT BY CHECK
If you pay for Fund shares by check, your check should be in U.S. dollars and
made payable to CGM American Tax Free Fund or CGM Fixed Income Fund (as
applicable). Third party checks (i.e. checks not payable to CGM American Tax
Free Fund or CGM Fixed Income Fund) are generally not accepted and checks drawn
on credit card accounts are not accepted.
PAYMENT BY WIRE
You may also make subsequent investments 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 American Tax Free Fund or
CGM Fixed Income Fund (as applicable), Shareholder Name, Shareholder Account
Number." Your bank may charge you a fee for transmitting funds by wire.
ADDITIONAL INFORMATION
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 Funds 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 Funds' system for
recording investments eliminates the problems of handling and safekeeping
certificates.
<PAGE>
The price you pay will be the per share net asset value next calculated after
your proper investment order is received by the applicable Fund (in the case of
your initial investment) or by CGM Shareholder Services (in the case of
subsequent investments).
Each Fund may reject any purchase order and may suspend, change or withdraw the
offering of its shares.
SHAREHOLDER SERVICES
Each Fund offers the following shareholder services as more fully described in
the SAI. Explanations and forms are available from the Funds.
EXCHANGE PRIVILEGE
You may exchange your shares of either Fund for shares of CGM American Tax Free
Fund or CGM Fixed Income Fund (as applicable), CGM Mutual Fund, CGM Realty Fund
and CGM Focus Fund. You may also exchange your shares for shares of money
market funds distributed by New England Funds, L.P.
Additionally, you may exchange shares of either Fund for shares of CGM Capital
Development Fund, but only if you were a shareholder of the CGM Capital
Development Fund on September 24, 1993, and have remained a shareholder in the
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 SAI.
All exchanges are free of 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" below. Exchange requests cannot be revoked once they have been
received in good order. 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.
You should not view the exchange privilege as a means for taking advantage of
short-term swings in the market, and each Fund limits the number of exchanges
you can make to four exchanges per account (or two round trips) per calendar
<PAGE>
year. Monthly automatic exchanges from money market funds distributed by New
England Funds, L.P. to the Funds are not subject to this restriction. Each Fund
also reserve the right to prohibit exchanges during the first 15 days following
an investment in the Fund.
For federal income tax purposes, an exchange constitutes a sale of shares,
which may result in a capital gain or loss.
The Funds may terminate or change the terms of the exchange privilege.
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 a Fund as "undeliverable" or remain uncashed for more than six
months, the plan will be cancelled. Undeliverable or uncashed checks will be
cancelled and the amounts will be reinvested in the same Fund at the per share
net asset value determined as of the date of cancellation of the checks. No
interest will accrue on amounts represented by uncashed distribution or
redemption 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. Please contact CGM Shareholder Services at 800-343-5678 to
determine the requirements associated with debits from savings banks and credit
unions. Debits from money market accounts are not acceptable.
You may terminate your participation in the AIP by sending written notice to
CGM Shareholder Services or by calling 800-343-5678 more than 14 days prior to
the next scheduled debit date. The Funds may terminate your participation in
the AIP immediately in the event that any item is unpaid by your financial
institution. The Funds may terminate or modify the AIP at any time. Additional
information about this Plan is set forth in the SAI.
RETIREMENT PLANS
CGM American Tax Free Fund is not an appropriate investment for: Traditional
and Roth IRA accounts, SEP-IRA accounts, 403(b)(7) custodial accounts, or Money
Purchase Pension and Profit Sharing plans.
CGM Fixed Income Fund's shares may be purchased by tax-deferred retirement
plans. CGM makes available retirement plan forms and plan documents for
<PAGE>
Traditional and Roth IRAs, SEP-IRAs, 403(b)(7) custodial accounts, and Money
Purchase Pension and Profit Sharing plans ("CGM Retirement Plans").
CONFIRMATION STATEMENTS
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 will be charged
for any duplicate information requested for prior years.
SHAREHOLDER REPORTS
Shareholders of each Fund will receive that Fund's financial statements and a
summary of the Fund's investments at least semiannually. The Funds intend 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 Fund at
800-345-4048.
HOW TO SELL SHARES
You can sell (redeem) all or part of your shares in either Fund in three
different ways:
o by sending a written request for a check or wire representing the
redemption proceeds,
o 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
o by making a telephone request for redemption proceeds to be wired to
a bank account 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.
<PAGE>
WRITTEN REDEMPTION REQUESTS
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 particular 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
custodian or 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, requesting that the
proceeds check be made payable 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), or
requesting that the proceeds be wired to a bank account that you have not
predesignated, 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.
<PAGE>
TELEPHONE REDEMPTION REQUESTS
If you elect to redeem shares by telephone, call CGM Shareholder Services
directly at 800-343-5678. See "Telephone Transactions" below. 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 Funds
automatically unless this option is declined in the application or otherwise in
writing. 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 Funds 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. 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 Funds 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.
REDEMPTION PROCEEDS
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 following receipt of a proper redemption request.
If you purchased your Fund shares by check (or through an automatic investment
plan) and elect to redeem shares within 15 days of the purchase, you may
experience delays in receiving redemption proceeds. A Fund will generally
postpone sending your redemption proceeds from an investment until the Fund can
verify that your check (or automatic investment plan investment) has been or
<PAGE>
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, the checks will be cancelled and the proceeds
will be reinvested in the same Fund at the per share net asset value determined
as of the date of cancellation of the checks. No interest will accrue on
amounts represented by uncashed distribution or redemption checks.
POSTPONEMENT OF REDEMPTION PROCEEDS OR SUSPENSION OF REDEMPTION RIGHT
Each Fund may postpone payment of redemption proceeds for up to seven days.
Neither Fund may postpone payment for more than seven days or suspend the right
of redemption, except: if you purchased your Fund shares by check (or through
an automatic investment plan) and redeem shares within 15 days of the purchase
as described in the preceding section, when the New York Stock 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.
REDEMPTION IN KIND
The Funds will normally redeem shares for cash; however, each Fund reserves the
right to pay the redemption price wholly in kind or partly in kind and partly
in cash if the Board of Trustees determines it to be advisable in the interests
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, each Fund will 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.
MINIMUM ACCOUNT BALANCE aND AUTOMATIC REDEMPTION
Because the expense of maintaining small accounts is disproportionately high,
each 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 a 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 or accounts set up under the
Uniform Gifts to Minors Act or the Uniform Transfers to Minors Act.
<PAGE>
TELEPHONE TRANSACTIONS
You may initiate three types of transactions by telephone:
o telephone exchanges;
o telephone redemptions by wire; and
o 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.
You must select the telephone exchange privilege and/or telephone redemption by
wire privilege 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 Funds or CGM Shareholder Services. The telephone
redemptions by check privilege is available automatically unless you decline
this option in the application or otherwise in writing.
The telephone redemption privileges are not available for Traditional or Roth
IRAs, SEP-IRAs, 403(b)(7) custodial accounts or for Money Purchase Pension and
Profit Sharing accounts under a CGM Retirement Plan for which State Street Bank
is the custodian or trustee.
Each 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 each Fund may be liable if
reasonable procedures are not employed.
During periods of unusual market activity, severe weather or other abnormal
circumstances, it may be difficult for you to reach a representative of the
Funds or CGM Shareholder Services by telephone. In this case, please consider
sending written instructions.
DIVIDENDS, CAPITAL GAINS AND TAXES
Each Fund declares and pays out monthly dividends consisting of substantially
all of its net investment income. Any capital gains distributions are normally
<PAGE>
made annually in December but may be made more frequently as deemed advisable
by the Board of Trustees. Certain restrictions may apply to participants in CGM
Retirement Plans.
You may elect to receive income dividends or capital gains distributions, or
both, in additional shares of the respective Fund or in cash. However, if you
elect to receive capital gains in cash, your income dividends must also be
received in cash. Certain restrictions may apply to participants in CGM
Retirement Plans.
You can elect to receive payments of cash dividends and capital gains
distributions either by check or by direct deposit to a bank account that you
have predesignated. These elections may be made at the time your account is
opened and may be changed at any time by submitting a written request to CGM
Shareholder Services or by calling 800-343-5678. However, changes in bank
account information for direct deposits of cash dividends and capital gains
distributions must be made through a Service Options Form. In order for a
change to be effective 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" 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 same Fund at the per share net asset value determined
as of the date of payment of the distribution. In addition, following the
six-month period, any undeliverable or uncashed checks will be cancelled and
the amounts will be reinvested in the same Fund at the per share net asset
value determined as of the date of cancellation of the checks. No interest will
accrue on amounts represented by uncashed distribution or redemption checks.
Dividends paid by a Fund from net taxable investment income (including
dividends and interest) and net short-term capital gains will be taxable to you
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 to you as
long-term capital gains, regardless of how long you have owned your shares in
the applicable 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 your tax basis in your
shares, and then, to the extent the distribution exceeds such basis, as a
taxable gain from the sale of your shares. Taxable dividends and distributions
are taxable to you in the same manner whether received in cash or reinvested in
additional Fund shares.
<PAGE>
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 your gross
income for federal income tax purposes. If you receive Social Security benefits
you should be aware that exempt interest dividends received from the Fund are
includable in your "modified adjusted gross income" for purposes of determining
the amount of your Social Security benefit, if any, that is required to be
included in your 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. You should consult your own tax
advisers about the status of dividends and distributions of CGM American Tax
Free Fund in your own state and locality.
If you receive an exempt-interest dividend with respect to any share and redeem
or exchange the 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 you receive a distribution taxable as a
long-term capital gain with respect to any share and redeem or exchange the
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 a 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
utilize 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 in the amount thereof. You
should consult your own tax adviser regarding the potential applicability of
AMT to you.
If CGM Fixed Income Fund invests in foreign securities, it may be subject to
foreign withholding taxes on income earned on those securities and may be
unable to pass through to you foreign tax credits and deductions with respect
to those taxes.
A distribution will be treated as paid by the Funds and received by you on
December 31 of the current calendar year if it is declared by the Funds 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
<PAGE>
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. 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 how long you held your shares.
Each 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.
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. In limited circumstances, your actual cost
basis may differ from your CGM account cost basis. 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
Funds generally will receive these cost basis statements but only for accounts
opened after January 1, 1991. Some restrictions apply; for more information,
please call 800-343-5678. 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, local and foreign
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, which is
derived from such obligations.
The tax discussion set forth above is included for general information only.
You should consult your own tax adviser concerning the tax consequences of an
investment in the Funds.
<PAGE>
PRICING OF SHARES
The share price or "net asset value" per share of each 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 each Fund is determined as of the close of the regular
trading session of the New York Stock Exchange (normally 4 p.m. Eastern time)
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 60 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 SAI.
Trading may take place in foreign securities held by CGM Fixed Income Fund on
days when the Fund is not open for business. As a result, the Fund's net asset
value may change on days on which it is not possible to purchase or sell shares
of the Fund.
YEAR 2000
Like other mutual funds and other organizations around the world, a Fund could
be adversely affected if the computer systems used by the Fund or its service
providers do not properly process and calculate date-related information from
and after January 1, 2000. This is commonly known as the "Y2K Problem." Failure
to successfully address the Y2K Problem could result in interruptions to and
other material adverse effects on the Funds' business and operations, such as
problems calculating net asset value and difficulties in implementing the
Funds' purchase and redemption procedures. CGM has taken steps that it believes
are reasonably designed to address any potential Y2K Problem for computer
programs used by the Funds or CGM. Each of the Funds' and CGM's service
providers are taking steps that they believe are reasonably designed to address
the Y2K Problem with respect to computer systems that they use. At this time,
however, there can be no assurance that these steps being taken by third party
service providers will be sufficient to avoid any adverse impact to the Funds.
In addition, there can be no assurances that the Y2K Problem will not have an
adverse effect on the issuers whose securities are held by the Funds or on the
market or the economy in general.
<PAGE>
FINANCIAL HIGHLIGHTS
The following Financial Highlights table is intended to help you understand
each Fund's financial performance for the past five years. Certain information
reflects financial results for a single Fund share. The total returns in the
table represent the rate that an investor would have earned (or lost) on an
investment in the Funds (assuming reinvestment of all dividends and
distributions). This information has been examined by PricewaterhouseCoopers
LLP, independent accountants, whose report, along with the Funds' financial
statements, is included in each Fund's Annual Report, which may be obtained
from the Fund free of charge.
[To be added by amendment.]
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
CONTACT INFORMATION
CGM AMERICAN TAX FREE FUND More information about these Funds are
CGM FIXED INCOME FUND available free by calling 800-345-4048,
c/o The CGM Funds including the following:
P.O. Box 449
Boston, MA 02117 ANNUAL/QUARTERLY REPORTS
SHAREHOLDER SERVICING AGENT Additional information about each Fund's
CGM Shareholder Services investments is available in the Fund's
c/o Boston Financial Data Services, Inc. annual and quarterly reports to
P.O. Box 8511 shareholders. In each Fund's annual
Boston, MA 02266 report, you will find a discussion of the
market conditions and investment
INVESTMENT MANAGER strategies that significantly affected the
Capital Growth Management Fund's performance during its last fiscal
Limited Partnership year.
One International Place
Boston, MA 02110 STATEMENT OF ADDITIONAL INFORMATION (SAI)
TRANSFER AND DIVIDEND PAYING AGENT The SAI provides more detailed
AND CUSTODIAN OF ASSETS information about each Fund and is
State Street Bank and Trust Company incorporated into this prospectus by
Boston, MA 02102 reference (i.e. is legally considered part of
it).
</TABLE>
- ------------------------------------------------------------------------------
For additional information about:
[ ] Account procedures and status [ ] Prospectuses
[ ] Redemptions [ ] SAI
[ ] Exchanges [ ] Annual/Quarterly Reports
[ ] New account procedures [ ] Performance
Call 800-343-5678 Call 800-345-4048
- ------------------------------------------------------------------------------
Information about the Funds (including the SAI) is also available from the
Securities and Exchange Commission. You can find it on the SEC's Internet site
at http://www.sec.gov. You can receive copies of Fund information by sending
your request and a duplicating fee to the SEC's Public Reference Section,
Washington, DC 20549-6009. Information can also be reviewed and copied at the
SEC's Public Reference Room in Washington, DC. You can get information on the
operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
SEC File No. 811-82
<PAGE>
CGM
[Fencer Logo] FOCUS
FUND
A No-Load Fund
The Fund's investment objective is long-term growth of capital.
PROSPECTUS & APPLICATION
May 1, 1999
The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the adequacy of this prospectus. Any representation
to the contrary is a criminal offense.
<PAGE>
TABLE OF CONTENTS
FUND SUMMARY.................................................................1
PAST PERFORMANCE.............................................................2
EXPENSES.....................................................................3
ADDITIONAL FUND INFORMATION..................................................4
MANAGEMENT...................................................................7
HOW TO PURCHASE SHARES.......................................................8
SHAREHOLDER SERVICES.........................................................9
HOW TO SELL SHARES..........................................................12
TELEPHONE TRANSACTIONS......................................................15
DIVIDENDS, CAPITAL GAINS AND TAXES..........................................16
PRICING OF SHARES...........................................................19
YEAR 2000...................................................................19
FINANCIAL HIGHLIGHTS........................................................20
CONTACT INFORMATION.................................................Back Cover
<PAGE>
FUND SUMMARY
INVESTMENT OBJECTIVE
The Fund's investment objective is long-term growth of capital.
SUMMARY OF PRINCIPAL INVESTMENT STRATEGIES
The Fund is non-diversified and intends to pursue its objective by
concentrating its investments in the equity securities of a smaller number of
companies than more diversified mutual funds. The Fund is flexibly managed,
with the ability to invest in different industry sectors and in foreign
issuers. The Fund may invest in companies regardless of the size of their
market capitalization.
Should the investment outlook of the investment manager so warrant, the Fund
may use a variety of investment techniques designed to capitalize on declines
in the market prices of equity securities or declines in market indexes. For
example, the Fund may establish short positions in specific securities or stock
indexes through short sales or investments in derivative instruments, including
options, futures contracts and options on futures. The Fund may also establish
long positions in specific securities or stock indexes through options, futures
contracts and options on futures.
The Fund may borrow for the purpose of purchasing portfolio securities and
other instruments.
SUMMARY OF PRiNCIPAL RISKS
Like all mutual funds, you may lose money if you invest in the Fund. As a
NON-DIVERSIFIED mutual fund, the Fund is able to take larger positions in a
smaller number of companies than a more diversified fund. Therefore, when the
value of one of the Fund's holdings changes, this is likely to have a greater
effect on the Fund's overall performance than on the performance of a more
diversified fund.
The Fund's investments are subject to the MARKET RISKS inherent in all
securities. This means that you may lose money on your investment due to a fall
in prices of stocks or periods of below-average performance in the stock
market.
The Fund's use of SHORT SALES AND DERIVATIVE INSTRUMENTS such as transactions
in stock index futures contracts and options on securities, stock indexes and
futures contracts involves additional investment risks and transaction costs.
While the use of these investment techniques can be used to further the Fund's
investment objective, under certain market conditions they can increase the
volatility of the Fund and may lower the Fund's return or result in a loss.
<PAGE>
The Fund's BORROWING may increase the Fund's volatility, and interest and other
borrowing costs may exceed the gain on securities purchased with borrowed
funds.
PAST PERFORMANCE
The bar chart and table below show the Fund's annual returns and its long-term
performance, and provide some indication of the risks of investing in the Fund.
The bar chart shows how the Fund's performance has varied from year to year.
The table compares the Fund's performance over time for the periods indicated
to that of the Standard and Poor's 500 Composite Index, a widely recognized
unmanaged index of common stock prices.
Both the bar chart and the table assume reinvestment of dividends and
distributions. The Fund's past performance does not necessarily indicate how
the Fund will perform in the future.
YEAR-BY-YEAR TOTAL RETURN (AS OF 12/31 EACH YEAR)
[Bar Chart]
During the ten-year period shown in the bar chart, the highest quarterly return
was 23.7% (for the quarter ended 12/31/98) and the lowest quarterly return was
- -27.2% (for the quarter ended 9/30/98).
AVERAGE ANNUAL TOTAL RETURN (AS OF 12/31/98)
Since Inception
1 Year (9/3/97)
- ------------------------------------------------------------------------------
Fund 3.5% -2.2%
S&P 500 Index 28.6% 25.3%
<PAGE>
EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund.
SCHEDULE OF FEES
Shareholder Transaction Expenses (fees paid directly from your investment)
Maximum Sales Charge (Load) Imposed on Purchases....................None
Maximum Sales Charge (Load) Imposed on Reinvested Dividends.........None
Redemption Fees*....................................................None
Exchange Fees.......................................................None
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
(as a percentage of average net assets, based on expenses for year ended
12/31/98)
Management Fees....................................................1.00%
Distribution (12b-1) Fees..........................................None
Other Expenses.....................................................0.40%
Total Fund Operating Expenses......................................1.40%**
________________
*A wire fee (currently $5.00) will be deducted from proceeds if a
shareholder elects to transfer redemption proceeds by wire.
**The Fund's investment manager has voluntarily agreed, until December 31,
1999, to waive its management fees and, if necessary, to bear certain expenses
associated with operating the Fund, to the extent necessary to limit the Fund's
total operating expenses to an annual rate of 1.20% of the Fund's average net
assets, exclusive of any dividend expenses incurred on short sales. These fee
waivers and reimbursements may be reduced or terminated at any time.
EXAMPLE
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The example assumes that:
o you invest $10,000 in the Fund for the time periods indicated;
o you redeem your shares at the end of each period;
o your investment has a 5% return each year (the assumption of a 5%
return is required by the SEC and is not a prediction of the
Fund's future performance); and
o the Fund's operating expenses remain the same, before taking into
consideration any fee waivers or reimbursements.
<PAGE>
Although your actual costs may be higher or lower, under these assumptions your
costs would be:
Number of years 1 3 5 10
--------- --------- -------- --------
Cost $143 $443 $766 $1,680
ADDITIONAL FUND INFORMATION
The Fund's objective and principal investment strategies, and the main risks of
investing in the Fund, are summarized at the beginning of this prospectus. More
information on investment strategies, investments and risks appears in this
section. These are the strategies that, in the opinion of the Fund's investment
manager, are most likely to be important in trying to achieve the Fund's
investment objective. There can, of course, be no assurance that the Fund will
achieve its investment objective. The Fund's objective may be changed without
shareholder approval.
The Fund may also use strategies and invest in securities that are not
described below but which are described in the Statement of Additional
Information ("SAI"). Of course, the Fund's investment manager may decide, as a
matter of investment strategy, not to use the investments and investment
techniques described below and in the SAI at any particular time.
The Fund may also depart from its principal investment strategies by taking
temporary defensive positions in response to adverse market, economic or
political conditions. When doing so, the Fund may hold a substantial portion of
its assets in cash or investment grade fixed-income securities and may not be
pursuing its investment objective.
PRINCIPAL INVESTMENT STRATEGIES
The Fund is non-diversified and intends to pursue its objective by
concentrating its investments in the equity securities of a smaller number of
companies than more diversified mutual funds. The Fund is flexibly managed,
with the ability to invest in different industry sectors and in foreign
issuers. The Fund may invest in companies regardless of the size of their
market capitalization.
Should the investment outlook of the investment manager so warrant, the Fund
may use a variety of investment techniques designed to capitalize on declines
in the prices of equity securities of one or more companies or declines in
market indexes. For example, the Fund may establish short positions in specific
securities or stock indexes through short sales or investments in a variety of
derivative instruments, including options, futures contracts and options on
<PAGE>
futures. The Fund may also establish long positions in specific securities or
stock indexes through options, futures contracts and options on futures.
The Fund may borrow for the purpose of purchasing portfolio securities and
other instruments. This involves special risks.
MANAGEMENT STYLE. Rather than following a particular investment style, the
Fund's investment manager employs a flexible approach and seeks to take
advantage of opportunities as they arise. In making an investment decision, the
Fund's investment manager will generally employ the following method:
o It uses a top-down approach, meaning that it first analyzes the
overall economic factors that may affect a potential investment.
o It then conducts a thorough analysis of certain industries and
companies, evaluating the fundamentals of each on a case-by-case
basis and focusing on companies that it determines are attractively
valued.
o The investment manager will sell a security if it determines that its
investment expectations are not being met, if better opportunities
are identified, or if its price objective has been attained.
PORTFOLIO TURNOVER. The Fund's objective is long-term growth of capital and the
Fund does not purchase securities with the intention of engaging in short-term
trading. The Fund will, however, sell any particular security and reinvest
proceeds when it is deemed prudent by the Fund's investment manager, regardless
of the length of the holding period. Frequent trading involves higher
securities transaction costs which may adversely affect the Fund's performance.
To the extent that this policy results in the realization of gains on
investments, the Fund will make distributions to its shareholders, which may
accelerate shareholders' tax liabilities.
The Fund's portfolio turnover rate may exceed 300%. The Fund's investments in
short sales and options and futures contracts that mature in less than one year
are excluded for purposes of computing the Fund's portfolio turnover.
PRINCIPAL RISKS
Investing in a mutual fund involves risk. Before investing, you should consider
the risks you will assume. Some of these risks are described below. More
information about risks appears in the Fund's SAI. Remember that you may
receive little or no return on your investment in the Fund. You may lose money
if you invest in the Fund.
<PAGE>
MARKET RISK. This is the risk that the prices of securities will rise or fall
due to changing economic, political or market conditions, or due to a company's
individual situation. The value of the Fund's shares will change daily as the
value of its underlying securities change. This means that your Fund shares may
be worth more or less when you sell them than when you bought them.
Historically, equity securities have been more volatile than debt or
fixed-income securities.
LACK OF DIVERSIFICATION. The Fund generally takes larger positions in a smaller
number of companies than a more diversified fund. Therefore, when the value of
one of the Fund's holdings changes, this is likely to have a greater effect on
the Fund's overall performance than on the performance of a more diversified
fund.
SMALL AND MEDIUM CAPITALIZATION COMPANIES. The securities of small and medium
capitalization companies may have more risks than those of larger, more
seasoned companies. They may be particularly susceptible to market downturns
because of limited product lines, markets, distribution channels or financial
and management resources. Also, there may be less publicly available
information about small and medium cap companies. Investments in small and
medium cap companies may be in anticipation of future products or services to
be provided by the companies. If those products or services are delayed, the
prices of the securities of the companies may drop. Sometimes, the prices of
the securities of small and medium cap companies rise and fall based on
investor perception rather than economics. Securities of small and medium cap
companies may be thinly traded, making their disposition more difficult. For
all these reasons, the prices of the securities of small and medium cap
companies may be more volatile, causing the Fund's share price to be volatile.
Funds that invest a higher percentage of their assets in small and medium cap
stocks are generally more volatile than funds investing a higher percentage of
their assets in larger, more established companies.
SHORTS SALES AND DERIVATIVES. The Fund's use of short sales and derivative
instruments such as transactions in stock index futures contracts and options
on securities, stock indexes and futures contracts involves additional
investment risks and transaction costs. While the use of these investment
techniques can be used to further the Fund's investment objective, under
certain market conditions, they can increase the volatility of the Fund and
decrease the liquidity of the Fund. If the Fund uses these techniques at
inappropriate times or judges market conditions incorrectly, such investments
may lower the Fund's return or result in a loss.
The Fund's potential loss from an uncovered short position in an equity
security or stock index resulting from a short sale or the sale of a futures
contract is unlimited. The Fund also could experience losses if these
investment techniques were poorly correlated with its other investments, or if
the Fund were unable to liquidate its position because of an illiquid secondary
market.
<PAGE>
The market for many derivative instruments is, or suddenly can become,
illiquid. Changes in liquidity may result in significant, rapid and
unpredictable changes in the prices for these instruments. Other risks inherent
in the use of these investment techniques include adverse changes in the value
of the derivative instruments, imperfect correlation between the price of the
instrument and movements in the price of the underlying securities, and the
fact that the skills needed to use these investment techniques are different
from those needed to select portfolio securities.
BORROWING. The Fund may borrow money in order to increase its holdings of
portfolio securities. Borrowing will exaggerate the effect of any increase or
decrease in the market price of securities in the Fund's portfolio on the
Fund's net asset value and, therefore, may increase the volatility of the Fund.
Money borrowed will be subject to interest and other costs. These costs may
exceed the gain on securities purchased with borrowed funds.
FOREIGN SECURITIES. The Fund may invest a portion of its assets in foreign
securities. Investing in foreign securities involves risks in addition to those
of investing in U.S. securities, including risks relating to political, social
and economic developments abroad, risks relating to currency fluctuation and
restrictions, as well as risks resulting from the differences between the
regulations to which U.S. and foreign issuers and markets are subject.
DEBT AND FIXED-INCOME SECURITIES. While the Fund expects to invest primarily in
equity securities, the Fund may also invest in debt and fixed-income
securities. Debt and fixed-income securities are subject to credit risk (the
risk that the obligor will default in the payment of principal and/or interest)
and to interest rate risk (the risk that the market value of the securities
will change as a result of changes in market rates of interest). These
securities are also subject to the risk that interest rate changes may affect
prepayment rates and their effective maturity.
MANAGEMENT
THE INVESTMeNT MANAGER
The Fund's investment manager is Capital Growth Management Limited Partnership
("CGM"), One International Place, Boston, Massachusetts, 02110. CGM, an
investment advisory firm founded in 1990, manages the Fund's daily investment
and business affairs subject to the policies established by the Fund's Board of
Trustees. CGM manages nine mutual fund portfolios and advisory accounts for
other clients.
<PAGE>
In 1998, the Fund paid 0.80% of its average annual net assets in management
fees to CGM, after waivers and reimbursements.
THE PORTFOLIO MANAGER
G. Kenneth Heebner has been the portfolio manager of the Fund since its
inception in 1997. In 1990, 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. In addition to the Fund, he currently
manages CGM Capital Development Fund, CGM Mutual Fund, CGM Realty Fund, and,
with Janice H. Saul, co-manages CGM Fixed Income Fund.
HOW TO PURCHASE SHARES
The Fund sells its shares directly to investors without any sales load.
NEW ACCOUNTS
If you are not currently a shareholder in the Fund, you may make a purchase of
Fund shares in a new regular account or retirement plan account by submitting a
completed application form and check, made payable to CGM Focus Fund, 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 or the Uniform Transfers to Minors
Act.
EXISTING ACCOUNTS
After your account has been established, you may send subsequent investments at
any time directly to the shareholder servicing agent at:
CGM Shareholder Services
c/o Boston Financial Data Services, Inc.
P.O. Box 8511
Boston, Massachusetts 02266-8511
You must include either the Additional Investment Stub detached from an account
statement or a note containing sufficient information to identify the account
<PAGE>
(i.e. the Fund name, your account number, your name and social security
number). Subsequent investments must be at least $50.
PAYMENT BY CHECK
If you pay for Fund shares by check, your check should be in U.S. dollars and
made payable to CGM Focus Fund. Third party checks (i.e. checks not payable to
CGM Focus Fund) are generally not accepted and checks drawn on credit card
accounts are not accepted.
PAYMENT BY WIRE
You may also make subsequent investments 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 Focus Fund, Shareholder
Name, Shareholder Account Number." Your bank may charge you a fee for
transmitting funds by wire.
ADDITIONAL INFORMATION
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 Fund 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 Fund's system for
recording investments eliminates the problems of handling and safekeeping
certificates.
The price you pay will be the per share net asset value next calculated after
your proper investment order is received by the Fund (in the case of your
initial investment) or by CGM Shareholder Services (in the case of subsequent
investments).
The Fund may reject any purchase order and may suspend, change or withdraw the
offering of its shares.
SHAREHOLDER SERVICES
The Fund offers the following shareholder services as more fully described in
the Fund's SAI. Explanations and forms are available from the Fund.
<PAGE>
EXCHANGE PRIVILEGE
You may exchange your shares of CGM Focus Fund for shares of CGM Mutual Fund,
CGM Fixed Income Fund, CGM American Tax Free Fund and CGM Realty Fund. You may
also exchange your shares for shares of money market funds distributed by New
England Funds, L.P.
Additionally, you may exchange shares of CGM Focus Fund for shares of CGM
Capital Development Fund, but only if you were a shareholder of the CGM Capital
Development Fund on September 24, 1993, and have remained a shareholder in the
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 SAI.
All exchanges are free of 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" below. Exchange requests cannot be revoked once they have been
received in good order. 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.
You 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
you can make to four exchanges per account (or two round trips) per calendar
year. Monthly automatic exchanges from money market funds distributed by New
England Funds, L.P. to the Fund are not subject to this restriction. The Fund
also reserves the right to prohibit exchanges during the first 15 days
following an investment in the Fund.
For federal income tax purposes, an exchange constitutes a sale of shares,
which may result in a capital gain or loss.
The Fund may terminate or change the terms of the exchange privilege.
<PAGE>
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 will
be cancelled and the amounts will be reinvested in the Fund at the per share
net asset value determined as of the date of cancellation of the checks. No
interest will accrue on amounts represented by uncashed distribution or
redemption 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. Please contact CGM Shareholder Services at 800-343-5678 to
determine the requirements associated with debits from savings banks and credit
unions. Debits from money market accounts are not acceptable.
You may terminate your participation in the AIP by sending written notice to
CGM Shareholder Services or by calling 800-343-5678 more than 14 days prior to
the next scheduled debit date. The Fund may terminate your participation in the
AIP immediately in the event that any item is unpaid by your financial
institution. The Fund may terminate or modify the AIP at any time. Additional
information about this Plan is set forth in the SAI.
RETIREMENT PLANS
The Fund's shares may be purchased by tax-deferred retirement plans. CGM makes
available retirement plan forms and plan documents for Traditional and Roth
IRAs, SEP-IRAs, 403(b)(7) custodial accounts, and Money Purchase Pension and
Profit Sharing plans ("CGM Retirement Plans").
CONFIRMATION STATEMENTS
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 will be charged
for any duplicate information requested for prior years.
<PAGE>
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 Fund at 800-345-4048.
HOW TO SELL SHARES
You can sell (redeem) all or part of your shares in the Fund in three different
ways:
o by sending a written request for a check or wire representing the
redemption proceeds,
o 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
o by making a telephone request for redemption proceeds to be wired to
a bank account 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.
WRITTEN REDEMPTION REQUESTS
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
<PAGE>
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
custodian or 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, requesting that the
proceeds check be made payable 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), or
requesting that the proceeds be wired to a bank account that you have not
predesignated, 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.
TELEPHONE REDEMPTION REQUESTS
If you elect to redeem shares by telephone, call CGM Shareholder Services
directly at 800-343-5678. See "Telephone Transactions" below. 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 unless this option is declined in the application or otherwise in
writing. 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
<PAGE>
Options Form (with a signature guarantee), available from the Fund 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. 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 Fund 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.
REDEMPTION PROCEEDS
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 following receipt of a proper redemption request.
If you purchased your Fund shares by check (or through an automatic investment
plan) and elect to redeem shares within 15 days of the purchase, you may
experience delays in receiving redemption proceeds. The Fund will generally
postpone sending your redemption proceeds from an investment until the Fund can
verify that your check (or automatic investment plan 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, the checks will be cancelled and the proceeds
will be reinvested in the Fund at the per share net asset value determined as
of the date of cancellation of the checks. No interest will accrue on amounts
represented by uncashed distribution or redemption checks.
<PAGE>
POSTPONEMENT OF REDEMPTION PROCEEDS OR SUSPENSION OF REDEMPTION RIGHT
The Fund may postpone payment of redemption proceeds for up to seven days. The
Fund may not postpone payment for more than seven days or suspend the right of
redemption, except: if you purchased your Fund shares by check (or through an
automatic investment plan) and redeem shares within 15 days of the purchase as
described in the preceding section, when the New York Stock 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.
REDEMPTION IN KIND
The Fund will normally redeem shares for cash; however, the Fund reserves the
right to pay the redemption price wholly in kind or partly in kind and partly
in cash if the Board of Trustees of the Fund determines it to be advisable in
the interests 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.
MINIMUM ACCOUNT BALANCE AND AUTOMATIC REDEMPTION
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 or accounts set up under the
Uniform Gifts to Minors Act or the Uniform Transfers to Minors Act.
TELEPHONE TRANSACTIONS
You may initiate three types of transactions by telephone:
o telephone exchanges;
o telephone redemptions by wire; and
o telephone redemptions by check.
<PAGE>
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.
You must select the telephone exchange privilege and/or telephone redemption by
wire privilege 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 Fund or CGM Shareholder Services. The telephone
redemptions by check privilege is available automatically unless you decline
this option in the application or otherwise in writing.
The telephone redemption privileges are not available for Traditional or Roth
IRAs, SEP-IRAs, 403(b)(7) custodial accounts or for Money Purchase Pension and
Profit Sharing accounts under a CGM Retirement Plan for which State Street Bank
is the custodian or 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.
During periods of unusual market activity, severe weather or other abnormal
circumstances, it may be difficult for you to reach a representative of the
Fund or CGM Shareholder Services by telephone. In this case, please consider
sending written instructions.
DIVIDENDS, CAPITAL GAINS AND TAXES
Any income dividends and capital gains distributions are normally made annually
in December but may be made more frequently as deemed advisable by the Board of
Trustees. Certain restrictions may apply to participants in CGM Retirement
Plans.
You may elect to receive income dividends or capital gains distributions, or
both, in additional shares of the Fund or in cash. However, if you elect to
receive capital gains in cash, your income dividends must also be received in
cash. Certain restrictions may apply to participants in CGM Retirement Plans.
You can elect to receive payments of cash dividends and capital gains
distributions either by check or by direct deposit to a bank account that you
have predesignated. These elections may be made at the time your account is
opened and may be changed at any time by submitting a written request to CGM
<PAGE>
Shareholder Services or by calling 800-343-5678. However, changes in bank
account information for direct deposits of cash dividends and capital gains
distributions must be made through a Service Options Form. In order for a
change to be effective 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" 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 the
six-month period, any undeliverable or uncashed checks will be cancelled and
the amounts will be reinvested in the Fund at the per share net asset value
determined as of the date of cancellation of the checks. No interest will
accrue on amounts represented by uncashed distribution or redemption checks.
Dividends paid by the Fund from net investment income (including dividends and
interest) and net short-term capital gains will be taxable to you as ordinary
income. If a portion of the Fund's income consists of dividends paid by U.S.
corporations, a portion of the dividends paid by the Fund may be eligible 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 to you as long-term capital gains, regardless of how long you have
owned your 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 your tax basis
in your shares, and then, to the extent the distribution exceeds such basis, as
a taxable gain from the sale of your shares. Dividends and distributions are
taxable to you in the same manner whether received in cash or reinvested in
additional shares.
If the Fund invests in foreign securities, it may be subject to foreign
withholding taxes on income earned on those securities and may be unable to
pass through to you foreign tax credits and deductions with respect to those
taxes.
A distribution will be treated as paid by the Fund and received by you 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
<PAGE>
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,
generally depending upon how long you held your shares.
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.
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. In limited circumstances, your actual cost
basis may differ from your CGM account cost basis. 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 generally will receive these cost basis statements but only for accounts
opened after January 1, 1991. Some restrictions apply; for more information,
please call 800-343-5678. 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, local and foreign
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.
Each year the Fund will indicate the portion of the Fund's income, if any,
which is derived from such obligations.
The tax discussion set forth above is included for general information only.
You should consult your own tax adviser concerning the tax consequences of an
investment in the Fund.
<PAGE>
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 New York Stock Exchange (normally 4 p.m. Eastern time)
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 60 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 SAI.
Trading may take place in foreign securities held by the Fund on days when the
Fund is not open for business. As a result, the Fund's net asset value may
change on days on which it is not possible to purchase or sell shares of the
Fund.
YEAR 2000
Like other mutual funds and other organizations around the world, the Fund
could be adversely affected if the computer systems used by the Fund or its
service providers do not properly process and calculate date-related
information from and after January 1, 2000. This is commonly known as the "Y2K
Problem." Failure to successfully address the Y2K Problem could result in
interruptions to and other material adverse effects on the Fund's business and
operations, such as problems calculating net asset value and difficulties in
implementing the Fund's purchase and redemption procedures. CGM has taken steps
that it believes are reasonably designed to address any potential Y2K Problem
for computer programs used by the Fund or CGM. Each of the Fund's and CGM's
service providers are taking steps that they believe are reasonably designed to
address the Y2K Problem with respect to computer systems that they use. At this
time, however, there can be no assurance that these steps being taken by third
party service providers will be sufficient to avoid any adverse impact to the
Fund. In addition, there can be no assurances that the Y2K Problem will not
have an adverse effect on the issuers whose securities are held by the Fund or
on the market or the economy in general.
<PAGE>
FINANCIAL HIGHLIGHTS
The following Financial Highlights table is intended to help you understand the
Fund's financial performance since its inception. Certain information reflects
financial results for a single Fund share. The total returns in the table
represent the rate that an investor would have earned (or lost) on an
investment in the Fund (assuming reinvestment of all dividends and
distributions). This information has been examined by PricewaterhouseCoopers
LLP, independent accountants, whose report, along with the Fund's financial
statements, is included in the Fund's Annual Report, which may be obtained from
the Fund free of charge.
[To be added by amendment.]
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
CONTACT INFORMATION
CGM FOCUS FUND More information about this Fund is
c/o The CGM Funds available free by calling 800-345-4048,
P.O. Box 449 including the following:
Boston, MA 02117
ANNUAL/QUARTERLY REPORTS
SHAREHOLDER SERVICING AGENT
CGM Shareholder Services Additional information about the Fund's
c/o Boston Financial Data Services, Inc. investments is available in the Fund's
P.O. Box 8511 annual and quarterly reports to
Boston, MA 02266 shareholders. In the Fund's annual
report, you will find a discussion of the
INVESTMENT MANAGER market conditions and investment
Capital Growth Management strategies that significantly affected the
Limited Partnership Fund's performance during its last fiscal
One International Place year.
Boston, MA 02110
STATEMENT OF ADDITIONAL INFORMATION (SAI)
TRANSFER AND DIVIDEND PAYING AGENT
AND CUSTODIAN OF ASSETS The SAI provides more detailed
State Street Bank and Trust Company information about the Fund and is
Boston, MA 02102 incorporated into this prospectus by
reference (i.e. is legallyconsidered part
of it).
</TABLE>
For additional information about:
- -------------------------------------------------------------------------------
[ ] Account procedures and status [ ] Prospectuses
[ ] Redemptions [ ] SAI
[ ] Exchanges [ ] Annual/Quarterly Reports
[ ] New account procedures [ ] Performance
Call 800-343-5678 Call 800-345-4048
- -------------------------------------------------------------------------------
Information about the Fund (including the SAI) is also available from the
Securities and Exchange Commission. You can find it on the SEC's Internet site
at http://www.sec.gov. You can receive copies of Fund information by sending
your request and a duplicating fee to the SEC's Public Reference Section,
Washington, DC 20549-6009. Information can also be reviewed and copied at the
SEC's Public Reference Room in Washington, DC. You can get information on the
operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
SEC File No. 811-82
<PAGE>
CGM MUTUAL FUND
STATEMENT OF ADDITIONAL INFORMATION
May 1, 1999
This Statement of Additional Information (the "Statement" or "SAI") provides
further information concerning the activities and operations of CGM Mutual
Fund. This Statement is not a prospectus and should be read in conjunction with
the CGM Mutual Fund Prospectus dated May 1, 1999 (the "Prospectus"). Certain
information which is included in the Prospectus is incorporated by reference
into this Statement. A copy of the Prospectus may be obtained by writing to:
CGM Trust, c/o The CGM Funds Investor Services Division, P.O. Box 449, Boston,
Massachusetts 02117, or by calling 800-345-4048.
Certain financial information which is included in the Fund's Annual Report to
shareholders dated December 31, 1998 is incorporated by reference into this
Statement. A copy of the Annual Report accompanies this Statement.
<PAGE>
TABLE OF CONTENTS
Page
INTRODUCTION................................................................1
ADDITIONAL INFORMATION REGARDING STRATEGIES AND RISKS.......................1
FUNDAMENTAL INVESTMENT RESTRICTIONS.........................................3
PORTFOLIO TURNOVER..........................................................5
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........................................9
DESCRIPTION OF THE TRUST...................................................10
Shareholder Rights.......................................................11
Shareholder and Trustee Liability........................................12
ADVERTISING AND PERFORMANCE INFORMATION....................................13
Calculation of Total Return..............................................13
Performance Comparisons..................................................14
Price-to-Earnings Ratio Comparisons......................................15
NET ASSET VALUE AND PUBLIC OFFERING PRICE..................................16
HOW TO PURCHASE SHARES.....................................................17
SHAREHOLDER SERVICES.......................................................17
Open Accounts............................................................17
Systematic Withdrawal Plans ("SWP")......................................17
Exchange Privilege.......................................................18
Automatic Investment Plans ("AIP").......................................19
Retirement Plans.........................................................20
Address Changes..........................................................20
REDEMPTIONS................................................................20
Redeeming by Telephone...................................................21
Check Sent to the Record Address.........................................21
Proceeds Wired to a Predesignated Bank...................................22
All Redemptions..........................................................22
INCOME DIVIDENDS, CAPITAL GAINS DISTRIBUTIONS AND TAX STATUS...............23
FINANCIAL STATEMENTS.......................................................26
APPENDIX A -- RATINGS.....................................................A-1
<PAGE>
INTRODUCTION
CGM Mutual Fund (the "Fund") is registered with the Securities and Exchange
Commission ("SEC") as a diversified open-end management investment company, and
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 in 1986. The Trust is governed by an Amended and Restated
Agreement and Declaration of Trust (the "Declaration of Trust") dated January
23, 1997. 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.
Descriptions in the Prospectus and in this Statement of a particular investment
practice or technique in which a Fund may engage or a financial instrument
which a Fund may purchase are meant to describe the spectrum of investments
that CGM, in its discretion, might, but is not required to, use in managing the
Fund's portfolio assets. CGM may, in its discretion, at any time employ such
practice, technique or instrument for one or more funds but not for all funds
advised by it. Furthermore, it is possible that certain types of financial
instruments or investment techniques described herein may not be available,
permissible, economically feasible or effective for their intended purposes in
all markets. Certain practices, techniques, or instruments may not be principal
activities of a Fund but, to the extent employed, could from time to time have
a material impact on the Fund's performance.
ADDITIONAL INFORMATION REGARDING STRATEGIES AND RISKS
THE FOLLOWING SUPPLEMENTS THE DISCUSSION IN THE PROSPECTUS OF THE VARIOUS
INVESTMENT STRATEGIES AND TECHNIQUES THAT MAY BE EMPLOYED BY THE FUND AND
CERTAIN ASSOCIATED RISKS. SEE APPENDIX A FOR A DESCRIPTION OF CREDIT RATINGS.
NON-INVESTMENT GRADE 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 or 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 debt or fixed-income
securities rated at the time of investment Caa or lower by Moody's or CCC or
<PAGE>
lower 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. High yield securities are subject to the following risks, in addition to
those described in the Prospectus:
o 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.
o 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 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.
o 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 creditworthiness 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.
o It is reasonable 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.
REPURCHASE AGREEMENTS. 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
Investment Company Act of 1940, as amended (the "1940 Act"), a recognized
<PAGE>
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.
ILLIQUID SECURITIES. The Fund may invest up to 10% of its net assets in
illiquid securities. Securities that may be resold without registration
pursuant to Rule 144A under the Securities Act of 1933, as amended, may be
treated as liquid for these purposes, subject to the supervision and oversight
of the Board of Trustees, in accordance with guidelines established by the
Board of Trustees to determine whether there is a readily available market for
such securities. The foregoing investment practice could have the effect of
increasing the level of illiquidity in the Fund to the extent that qualified
institutional buyers become uninterested in purchasing the securities.
TEMPORARY DEFENSIVE POSITIONS. The Fund may depart from its principal
investment strategies by taking temporary defensive positions in response to
adverse market, economic or political conditions. When doing so, the Fund may
hold a substantial portion of its assets in cash or investment grade
fixed-income securities and may not be pursuing its investment objective.
FUNDAMENTAL INVESTMENT RESTRICTIONS
The Fund may not:
(1) 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;
<PAGE>
(2) Act as underwriter of securities issued by others;
(3) Invest in oil, gas or other mineral leases, rights or royalty contracts or
in real estate, commodities or commodity contracts;
(4) 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);
(5) 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;
(6) 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; or
(7) 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.
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 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. Non-fundamental investment restrictions may be changed at any time by
vote of a majority of the Trust's Board of Trustees.
<PAGE>
PORTFOLIO TURNOVER
Although the Fund's investment 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. Frequent trading involves higher securities
transaction costs which may adversely affect the Fund's performance. To the
extent that this policy results in the realization of gains on investments, the
Fund will make distributions to its shareholders, which may accelerate
shareholders' tax liabilities.
The Fund's portfolio turnover rate 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
The Fund's Board of Trustees (the "Board") is responsible for the overall
management of the Fund, including general supervision and review of the Fund's
investment activities. The Board, in turn, elects the officers who are
responsible for administering the Fund's day-to-day operations.
The affiliations of the officers and Board members and their principal
occupations for the past five years are shown below.
PETER O. BROWN (Age 58) -- 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.
G. KENNETH HEEBNER (Age 58)* -- Trustee and Vice President
Employee, CGM; formerly Vice President and Director, Loomis Sayles and
Company, Incorporated ("Loomis Sayles").
ROBERT L. KEMP (Age 66)* -- Trustee and President
Employee, CGM; formerly President and Director, Loomis Sayles.
ROBERT B. KITTREDGE (Age 78) -- Trustee
21 Sturdivant Street, Cumberland Foreside, ME; Retired; formerly Vice
President, General Counsel and Director, Loomis Sayles.
LAURENS MACLURE (Age 73) -- Trustee
183 Sohier Street, Cohasset, MA; Retired; formerly President and Chief
Executive Officer, New England Deaconess Hospital.
<PAGE>
JAMES VAN DYKE QUEREAU, JR. (Age 50) -- Trustee
59 Annewood Lane, Wayne, PA; Managing Partner, Stratton Management
Company; formerly Institutional Managing Partner, Loomis Sayles.
J. BAUR WHITTLESEY (Age 52) -- Trustee 1521 Locust Street, Philadelphia, PA;
Attorney.
KATHLEEN S. HAUGHTON (Age 38) -- Vice President
Employee -- Investor Services Division, CGM; formerly Vice President,
Boston Financial Data Services, Inc.
LESLIE A. LAKE (Age 54) -- Vice President and Secretary
Employee -- Office Administrator, CGM; formerly Office Administrator,
Capital Growth Management Division of Loomis Sayles.
MARTHA I. MAGUIRE (Age 43) -- Vice President
Employee -- Funds Marketing, CGM; formerly marketing communications
consultant (self-employed); formerly Sales Promotion Consultant, The
New England.
MARY L. STONE (Age 54) -- Assistant Vice President
Employee -- Coordinator, Mutual Fund Recordkeeping, CGM; formerly
Coordinator, Mutual Fund Recordkeeping, Loomis Sayles.
FRANK N. STRAUSS (Age 37) -- Treasurer
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 (Age 61) -- 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 or 222 Berkeley Street,
Boston, Massachusetts 02116.
As of February 5, 1999, the trustees and officers of the Fund owned
beneficially less than 1% of the outstanding shares of the Fund.
<PAGE>
The Fund pays no compensation to its officers or to the trustees listed above
who are interested persons of the Fund. Trustees and officers 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, 1998:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
___________________________________________________________________________________________________________
PENSION OR
RETIREMENT
BENEFITS ESTIMATED
AGGREGATE ACCRUED AS ANNUAL COMPENSATION
COMPENSATION PART OF FUND BENEFITS UPON FROM THE TRUSTS AND FUND
NAME OF TRUSTEE FROM TRUST EXPENSES RETIREMENT COMPLEX PAID TO TRUSTEES (A)
___________________________________________________________________________________________________________
PETER O. BROWN $28,398 None None $37,000
___________________________________________________________________________________________________________
NICHOLAS J. GRANT (B) $33,898 None None $44,000
___________________________________________________________________________________________________________
G. KENNETH HEEBNER None None None None
___________________________________________________________________________________________________________
ROBERT L. KEMP None None None None
___________________________________________________________________________________________________________
ROBERT B. KITTREDGE $28,398 None None $37,000
___________________________________________________________________________________________________________
LAURENS MACLURE $28,398 None None $37,000
___________________________________________________________________________________________________________
JAMES VAN DYKE QUEREAU, JR. $28,398 None None $37,000
___________________________________________________________________________________________________________
J. BAUR WHITTLESEY $28,398 None None $37,000
___________________________________________________________________________________________________________
</TABLE>
(a) The Fund Complex is comprised of two Trusts with a total of six funds.
(b) Nicholas Grant retired as of February 4, 1999.
INVESTMENT ADVISORY AND OTHER SERVICES
ADVISORY AGREEMENT
CGM serves as investment manager of the Fund under an advisory agreement
approved by the shareholders of the Fund at a special meeting held on December
12, 1996 and effective as of December 13, 1996. CGM has served as investment
manager of the Fund since March 1, 1990. Prior to March 1, 1990, the Fund was
managed by Loomis Sayles, whose Capital Growth Management Division was
reorganized into CGM on that date. The Fund has been continuously managed since
1981 by G. Kenneth Heebner.
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 0.90%
of the first $500 million of the Fund's average daily net asset value, 0.80% of
the next $500 million of such value and 0.75% of such value in excess of $1
billion. While this rate is higher than that paid by most other investment
<PAGE>
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, 1996, 1997 and 1998, the advisory fee paid to
CGM in respect of services rendered to the Fund amounted to $8,033,863,
$10,642,444 and $8,746,758, respectively.
The Fund pays the compensation of its trustees who are not partners, directors,
officers or employees of CGM or its affiliates (other than registered
investment companies); registration, filing, and other fees in connection with
requirements of regulatory authorities; all charges and expenses of its
custodian and transfer agent; the charges and expenses of its independent
accountants; all brokerage commissions and transfer taxes in connection with
portfolio transactions; all taxes and fees payable to governmental agencies;
the cost of any certificates representing shares of the Fund; the expenses of
meetings of the shareholders and trustees of the Fund; the charges and expenses
of the Fund's legal counsel; interest, including on any borrowings by the Fund;
the cost of services, including services of counsel, required in connection
with the preparation of, and the costs of printing, registration statements and
prospectuses relating to the Fund, including amendments and revisions thereto,
annual, semiannual, and other periodic reports of the Fund, and notices and
proxy solicitation material furnished to shareholders of the Fund or regulatory
authorities, to the extent that any such materials relate to the Fund or its
shareholders; and the Fund's expenses of bookkeeping, accounting, auditing and
financial reporting, including related clerical expenses.
CGM also acts as investment adviser to CGM Capital Development Fund, CGM Fixed
Income Fund, CGM American Tax Free Fund, CGM Realty Fund and CGM Focus 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.
<PAGE>
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 PricewaterhouseCoopers LLP, 160 Federal
Street, Boston, Massachusetts 02110. PricewaterhouseCoopers 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 PricewaterhouseCoopers 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 1996, 1997 and 1998 fiscal years, CGM was
reimbursed in the amounts of $83,000, $85,000 and $84,000, respectively.
PORTFOLIO TRANSACTIONS AND BROKERAGE
In placing orders for the purchase and sale of portfolio securities for the
Fund, CGM always seeks the best price and execution. Transactions in unlisted
securities will be carried out through broker-dealers who make the primary
market for such securities unless, in the judgment of CGM, a more favorable
price can be obtained by carrying out such transactions through other brokers.
<PAGE>
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 1998, brokerage transactions of the Fund aggregating $4,542,662,071 were
allocated to brokers providing research services and $5,809,430 in commissions
were paid on these transactions. During 1996, 1997 and 1998 the Fund paid total
brokerage fees of approximately $4,313,317, $7,291,272 and $6,491,280,
respectively. The variation in the Fund's brokerage commissions is
substantially attributable to fluctuating portfolio activity.
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
<PAGE>
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
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)
on 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
<PAGE>
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 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.
On January 29, 1999, there were 34,283,946.439 shares of the Fund outstanding.
On that date, State Street Bank, acting as trustee for various retirement plans
and individual retirement accounts, owned 9,038,549.561 -- about 26% 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.
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
<PAGE>
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.
ADVERTISING AND PERFORMANCE INFORMATION
CALCULATION OF TOTAL RETURN
The Fund may include total return information in advertisements or written
sales material. Total return is a measure of the change in value of an
investment in the Fund over the period covered, which assumes that any
dividends or capital gains distributions are automatically reinvested in the
Fund rather than paid to the investor in cash. The formula for total return
used by the Fund includes three steps:
(1) adding to the total number of shares purchased by a hypothetical $1,000
investment in the Fund all additional shares that would have been purchased if
all dividends and distributions paid or distributed during the period had been
automatically reinvested;
(2) calculating the value of the hypothetical initial investment as of the end
of the period by multiplying the total number of shares owned at the end of the
period by the net asset value per share on the last trading day of the period;
and
(3) dividing this account value for the hypothetical investor by the amount of
the initial investment, and annualizing the result for periods of less than one
year.
For the one, five and ten year periods ended December 31, 1998, the Fund's
average annual total return was 8.2%, 10.2% and 13.8%, respectively. For the
one, five, and ten year periods ended December 31, 1998, the total return on a
hypothetical $1,000 investment in the Fund on an aggregate basis was 8.2%,
62.5% and 263.8%, respectively.
<PAGE>
In computing performance information for the Fund, no adjustment is made for a
shareholder's tax liability on taxable dividends and capital gains
distributions.
PERFORMANCE COMPARISONS
Total return may be used to compare the performance of the Fund against certain
widely acknowledged standards or indexes 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 11,332 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
<PAGE>
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 7,976 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, programs and articles about the Fund regarding performance,
rankings and other characteristics of the Fund and information about persons
responsible for its portfolio management may appear on television and in
national publications and major metropolitan newspapers including, but not
limited to, CNBC, PBC, CNN-fn, The Wall Street Journal, The Boston Globe, The
New York Times and Barron's, Forbes, Fortune, Money, Worth, Kiplinger's
Personal Finance, Mutual Funds, Individual Investor, Bloomberg Personal and
Business Week magazines. In particular, some or all of these media may publish
their own rankings or performance reviews of mutual funds, including the Fund.
References to or reprints of, or quotations from, such articles may be used in
the Fund's promotional literature. The Fund may also include in its advertising
and sales literature information concerning the experience of Mr. Heebner, the
Fund's portfolio manager, in managing other mutual funds and private accounts,
including ranking and rating information about such funds.
PRICE-TO-EARNINGS RATIO COMPARISONS
From time to time the Fund may include information about the weighted average
price-to-earnings ratio ("P/E ratio") of the equity portion of its portfolio
and the P/E ratio of the equity portion of the portfolios of other mutual funds
tracked by Morningstar in advertisements or written sales material. Morningstar
calculates the P/E ratio monthly based on the Fund's portfolio statistics
provided by One Source, a financial information firm. The P/E ratio as
calculated by Morningstar is the weighted average of the P/E ratios of the
stocks in a fund's portfolio. The P/E ratio of a stock is calculated by
dividing the current price of the stock by its trailing 12 months earnings per
share. In computing the average, Morningstar weighs each portfolio holding by
the percentage of equity assets it represents, so that larger positions have
proportionately greater influence on a fund's final P/E ratio. The statistics
used by Morningstar are based on the most recent information available to
Morningstar concerning a fund's portfolio composition and the price and
earnings of the stocks in its portfolio.
<PAGE>
CGM Mutual Fund's P/E ratio at December 31, 1998 was 31.2 as calculated by
Morningstar. Morningstar calculates the P/E ratios of 5,123 U.S. diversified
equity funds.
NET ASSET VALUE AND PUBLIC OFFERING PRICE
The method for determining the public offering price and net asset value per
share is summarized in the Prospectus under "Pricing of Shares."
The net asset value of a share of the Fund is determined by dividing the Fund's
total net assets (the excess of its assets over its liabilities) by the total
number of shares outstanding and rounding to the nearest cent. Such
determination is made as of the close of normal trading on the New York Stock
Exchange on each day on which the Exchange is open for unrestricted trading,
and no less frequently than once daily on each day during which there is
sufficient trading in the Fund's portfolio securities that the value of the
Fund's shares might be materially affected. During the 12 months following the
date of this Statement, the New York Stock Exchange is currently expected to be
closed on the following holidays: Memorial Day, Independence Day, Labor Day,
Thanksgiving Day, Christmas Day, New Year's Day, Martin Luther King, Jr. 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.
<PAGE>
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.
HOW TO PURCHASE SHARES
The procedures for purchasing shares of the Fund are summarized in the
Prospectus under "How to Purchase Shares."
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,
<PAGE>
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. A shareholder may establish a SWP by completing
the Service Options Form.
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 Service
Options Form. 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, CGM Focus 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 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
<PAGE>
fund to the following additional persons: trustees of CGM Capital Development
Fund, employees of CGM, and counsel to CGM Capital Development Fund and CGM.
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 or Service Options Form to
CGM Shareholder Services. 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 checking account at a bank
or other financial institution. Please contact CGM Shareholder Services at
800-343-5678 to determine the requirements associated with debits from savings
banks and credit unions. Debits from money market accounts are not acceptable.
Shareholders receive a confirmation of each purchase of Fund shares under the
AIP. If a shareholder elects to redeem shares of the 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,
<PAGE>
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 terminate a
shareholder's participation in the AIP immediately 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, Traditional and Roth 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, generally, 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.
If a statement or check sent to a shareholder is returned three times, mailings
to the shareholder may be discontinued until the shareholder contacts CGM
Shareholder Services with correct address information.
REDEMPTIONS
The procedures for redemption of Fund shares are summarized in the Prospectus
under "How to Sell Shares."
<PAGE>
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, as amended (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, as amended (the "1934 Act");
credit unions (as defined in ss. 19(b)(1)(A) of the Federal Reserve Act, as
amended [12 U.S.C. ss. 461(b)]); national securities exchanges, registered
securities associations and clearing agencies, as those terms are defined under
the 1934 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 Traditional or
Roth 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
custodian or 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. Except in the case of a CGM
retirement plan, the service option of telephone redemption by check is
available to shareholders automatically unless this option is declined in the
application or in writing. 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
<PAGE>
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
(with a signature guarantee) available from the Trust or CGM Shareholder
Services. 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 or wired 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.
<PAGE>
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.
A redemption constitutes a sale of the shares for federal income tax purposes
on which the investor may realize a long-term 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 may elect to receive their income dividends or
capital gain distributions, or both, in cash. However, if a shareholder elects
to receive capital gains in cash, his or her income dividends must also be
received in cash. Shareholders can elect to receive payments of cash dividends
and capital gains distributions either by check or by direct deposit to a bank
account that they have predesignated. These elections can be made at the time
the account is opened and may be changed by the shareholder at any time by
submitting a written request directly to CGM Shareholder Services or by calling
800-343-5678. However, changes in bank account information for direct deposits
of cash dividends and capital gains distributions must be made through a
Service Options Form. In order for a change to be effective 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 a shareholder elects to
receive distributions in cash and checks are returned "undeliverable" or remain
<PAGE>
uncashed for six months, such shareholder's cash election will be changed
automatically and the shareholder's 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 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 meet the requirements of the Internal Revenue
Code with respect to regulated investment companies. To qualify, the Fund must,
among other things, (a) derive in each taxable year at least 90% of its gross
income from dividends, interest, payments with respect to securities loans and
gains from the sale or other disposition of stock, securities or foreign
currencies or other income derived with respect to its business of investing in
such stock, securities or currencies; (b) diversify its holdings so that, at
the end of each quarter of the taxable year, (i) at least 50% of the market
value of the Fund's assets is represented by cash and cash items (including
receivables), U.S. Government securities, the securities of other regulated
investment companies and other securities, with such other securities of any
one issuer limited for the purposes of this calculation to an amount not
greater than 5% of the value of the Fund's total assets and not greater than
10% of the outstanding voting securities of such issuer, and (ii) not more than
25% of the value of its total assets is invested in the securities of any one
issuer (other than U.S. Government securities or the securities of other
regulated investment companies); and (c) distribute at least 90% of its
investment company taxable income (which includes, among other items,
dividends, interest and the excess of net short-term capital gains over net
long-term capital losses) and its net tax-exempt interest income each taxable
year, if any.
As a regulated investment company, the Fund generally will not be subject to
U.S. federal income tax on its investment company taxable income and net
capital gains (the excess of net long-term capital gains over net short-term
capital losses), if any, that it distributes to shareholders. The Fund intends
to distribute to its shareholders, at least annually, substantially all of its
investment company taxable income and net capital gains. Amounts not
distributed on a timely basis in accordance with a calendar year distribution
requirement are subject to a nondeductible 4% excise tax. To prevent imposition
of the excise tax, the Fund must distribute during each calendar year an amount
equal to the sum of (1) at least 98% of its ordinary income (not taking into
account any capital gains or losses) for the calendar year, (2) at least 98% of
its capital gains in excess of its capital losses (adjusted for certain
ordinary losses, as prescribed by the Code) for the one-year period ending on
October 31 of the calendar year, and (3) any ordinary income and capital gains
for previous years that was not distributed during those years. A distribution
will be treated as paid on December 31 of the current calendar year if it is
<PAGE>
declared by the Fund in October, November or December with a record date in
such a month and paid by the Fund during January of the following calendar
year. Such distributions will be taxable to shareholders in the calendar year
in which the distributions are declared, rather than the calendar year in which
the distributions are received. To prevent application of the excise tax, the
Fund intends to make its distributions in accordance with the calendar year
distribution requirement.
Dividends paid by the Fund from net investment income (including dividends and
interest) and net short-term capital gain 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 dividends 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. Dividends and
distributions are taxable to shareholders in the same manner whether received
in cash or reinvested in additional shares of the Fund.
If a portion of the Fund's income consists of dividends paid by U.S.
corporations, a portion of the dividends paid by the Fund may qualify for 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.
Upon the sale or other disposition of shares of the Fund, a shareholder may
realize a capital gain or loss which will be long-term or short-term, generally
depending upon the shareholder's holding period for the shares. Any loss
realized on a sale or exchange will be disallowed to the extent the shares
disposed of are replaced (including shares acquired pursuant to a dividend
reinvestment plan) within a period of 61 days beginning 30 days before and
ending 30 days after disposition of the shares. In such a case, the basis of
the shares acquired will be adjusted to reflect the disallowed loss. Any loss
realized by a shareholder on a disposition of Fund shares held by the
shareholder for six months or less will be treated as a long-term capital loss
to the extent of any distributions of net capital gains received by the
shareholder with respect to such shares.
Investments by the Fund in zero coupon securities will result in income to the
Fund equal to a portion of the excess of the face value of the securities over
their issue price (the "original issue discount") each year that the securities
are held, even though the Fund receives no cash interest payments. This income
<PAGE>
is included in determining the amount of income which the Fund must distribute
to maintain its status as a regulated investment company and to avoid the
payment of federal income tax and the 4% excise tax. In addition, if the Fund
invests in certain high yield original issue discount obligations issued by
corporations, a portion of the original issue discount accruing on the
obligation may be eligible for the deduction for dividends received by
corporations.
Gain derived by the Fund from the disposition of any market discount bonds
(i.e. bonds purchased other than at original issue, where the face value of the
bonds exceeds their purchase price) held by the Fund will be taxed as ordinary
income to the extent of the accrued market discount on the bonds, unless the
Fund elects to include the market discount in income as it accrues.
Income received by the Fund from sources within foreign countries may be
subject to withholding and other taxes imposed by such countries.
A shareholder may be subject to backup withholding at the rate of 31% of any
taxable distributions unless such shareholder (a) is a corporation or comes
within certain other exempt categories and, when required, demonstrates this
fact, or (b) provides a taxpayer identification number, certifies that the
shareholder is not subject to backup withholding, and otherwise complies with
applicable requirements of the backup withholding rules. A shareholder who does
not provide the Fund with his correct taxpayer identification number may also
be subject to penalties imposed by the IRS. Any amount paid as backup
withholding will be creditable against the shareholder's income tax liability.
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.
Investors should consult their tax advisors regarding the application of the
above-described general federal taxation rules to their own circumstances and
the state, local, or foreign tax consequences to them of any investment in the
Fund.
FINANCIAL STATEMENTS
The financial statements and Report of Independent Accountants for the year
ended December 31, 1998, included in the Fund's Annual Report to Shareholders
for the year ended December 31, 1998, are incorporated herein by reference.
<PAGE>
APPENDIX A
RATINGS
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC. DEBT RATINGS -- TAXABLE DEBT &
DEPOSITS GLOBALLY:
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.
<PAGE>
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.
Ca -- Bonds that are rated 'Ca' represent obligations that are speculative in a
high degree. Such issues are often in default or have other marked
shortcomings.
C -- Bonds that are rated 'C' are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
Moody's applies the numerical modifiers 1, 2 and 3 to each generic rating
classification from 'Aa' through 'Caa.' 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 MOODY'S INVESTORS SERVICE, INC. PREFERRED STOCK RATINGS:
aaa -- An issue which is rated 'aaa' is considered to be a top-quality
preferred stock. This rating indicates good asset protection and the least risk
of dividend impairment within the universe of preferred stocks.
aa -- An issue which is rated 'aa' is considered a high-grade preferred stock.
This rating indicates that there is reasonable assurance the earnings and asset
protection will remain relatively well maintained in the foreseeable future.
a -- An issue which is rated 'a' is considered to be an upper-medium grade
preferred stock. While risks are judged to be somewhat greater than in the
'aaa' and 'aa' classifications, earnings and asset protection are,
nevertheless, expected to be maintained at adequate levels.
baa -- An issue which is rated 'baa' is considered to be a medium-grade
preferred stock, neither highly protected nor poorly secured. Earnings and
asset protection appear adequate at present but may be questionable over any
great length of time.
ba -- An issue which is rated 'ba' is considered to have speculative elements,
and its future cannot be considered well assured. Earnings and asset protection
may be very moderate and not well safeguarded during adverse periods.
Uncertainty of position characterizes preferred stocks in this class.
<PAGE>
b -- An issue which is rated 'b' generally lacks the characteristics of a
desirable investment. Assurance of dividend payments and maintenance of other
terms of the issue over any long period of time may be small.
caa -- An issue which is rated 'caa' is likely to be in arrears on dividend
payments. This rating designation does not purport to indicate the future
status of payments.
ca -- An issue which is rated 'ca' is speculative in a high degree and is
likely to be in arrears on dividends with little likelihood of eventual
payments.
c -- This is the lowest rated class of preferred or preference stock. Issues so
rated can thus be regarded as having extremely poor prospects of ever attaining
any real investment standing.
DESCRIPTION OF STANDARD & POOR'S CORPORATION LONG-TERM ISSUE CREDIT RATINGS:
AAA -- An obligation rated 'AAA' has the highest rating assigned by Standard &
Poor's. The obligor's capacity to meet its financial commitment on the
obligation is extremely strong.
AA -- An obligation rated 'AA' differs from the highest rated obligations only
in small degree. The obligor's capacity to meet its financial commitment on the
obligation is very strong.
A -- An obligation rated 'A' is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than obligations in
higher rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.
BBB -- An obligation rated 'BBB' exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.
BB, B, CCC, CC and C -- Obligations rated 'BB', 'B', 'CCC', 'CC', and 'C' are
regarded as having significant speculative characteristics. 'BB' indicates the
least degree of speculation and 'C' the highest. While such obligations will
likely have some quality and protective characteristics, these may be
outweighed by large uncertainties or major exposures to adverse conditions.
BB -- An obligation rated 'BB' is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or exposure
<PAGE>
to adverse business, financial, or economic conditions which could lead to the
obligor's inadequate capacity to meet its financial commitment on the
obligation.
B -- An obligation rated 'B' is more vulnerable to nonpayment than obligations
rated 'BB', but the obligor currently has the capacity to meet its financial
commitment on the obligation. Adverse business, financial, or economic
conditions will likely impair the obligor's capacity or willingness to meet its
financial commitment on the obligation.
CCC -- An obligation rated 'CCC' is currently vulnerable to nonpayment, and is
dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation. In the event of
adverse business, financial, or economic conditions, the obligor is not likely
to have the capacity to meet its financial commitment on the obligation.
CC -- An obligation rated 'CC' is currently highly vulnerable to nonpayment.
C -- The 'C' rating may be used to cover a situation where a bankruptcy
petition has been filed or similar action has been taken, but payments on this
obligation are being continued.
Plus (+) or Minus (-): The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
r -- This symbol is attached to the ratings of instruments with significant
noncredit risks. It highlights risks to principal or volatility of expected
returns which are not addressed in the credit rating. Examples include:
obligations linked or indexed to equities, currencies, or commodities;
obligations exposed to severe prepayment risk -- such as interest-only or
principal-only mortgage securities; and obligations with unusually risky
interest terms, such as inverse floaters.
DESCRIPTION OF STANDARD & POOR'S CORPORATION PREFERRED STOCK RATING
DEFINITIONS:
AAA -- This is the highest rating that may be assigned by Standard & Poor's to
a preferred stock issue and indicates an extremely strong capacity to pay the
preferred stock obligations.
AA -- A preferred stock issue rated 'AA' also qualifies as a high-quality,
fixed-income security. The capacity to pay preferred stock obligations is very
strong, although not as overwhelming as for issues rated 'AAA'.
<PAGE>
A -- An issue rated 'A' is backed by a sound capacity to pay the preferred
stock obligations, although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions.
BBB -- An issue rated 'BBB' is regarded as backed by an adequate capacity to
pay the preferred stock obligations. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity to make payments for a preferred
stock in this category than for issues in the 'A' category.
BB, B, CCC -- Preferred stock rated 'BB,' 'B,' and 'CCC' are regarded, on
balance, as predominantly speculative with respect to the issuer's capacity to
pay preferred stock obligations. 'BB' indicates the lowest degree of
speculation and 'CCC' the highest. While such issues will likely have some
quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
CC -- The rating 'CC' is reserved for a preferred stock issue in arrears on
dividends or sinking fund payments, but that is currently paying.
C -- A preferred stock rated 'C' is a nonpaying issue.
<PAGE>
CGM REALTY FUND
STATEMENT OF ADDITIONAL INFORMATION
May 1, 1999
This Statement of Additional Information (the "Statement" or "SAI") provides
further information concerning the activities and operations of CGM Realty
Fund. This Statement is not a prospectus and should be read in conjunction with
the CGM Realty Fund Prospectus dated May 1, 1999 (the "Prospectus"). Certain
information which is included in the Prospectus is incorporated by reference
into this Statement. A copy of the Prospectus may be obtained without charge
from CGM Trust, c/o The CGM Funds Investor Services Division, P.O. Box 449,
Boston, Massachusetts 02117, or by calling 800-345-4048.
Certain financial information which is included in the Fund's Annual Report to
shareholders dated December 31, 1998 is incorporated by reference into this
Statement. A copy of the Annual Report accompanies this Statement.
<PAGE>
TABLE OF CONTENTS
Page
INTRODUCTION...............................................................1
ADDITIONAL INFORMATION REGARDING STRATEGIES AND RISKS......................1
FUNDAMENTAL INVESTMENT RESTRICTIONS........................................5
PORTFOLIO TURNOVER.........................................................7
MANAGEMENT OF THE FUND.....................................................7
INVESTMENT ADVISORY AND OTHER SERVICES.....................................9
Advisory Agreement.......................................................9
Custodial Arrangements..................................................11
Independent Accountants.................................................11
Other Arrangements......................................................11
PORTFOLIO TRANSACTIONS AND BROKERAGE......................................11
DESCRIPTION OF THE TRUST..................................................12
Shareholder Rights......................................................13
Shareholder and Trustee Liability.......................................14
ADVERTISING AND PERFORMANCE INFORMATION...................................15
Calculation of Total Return.............................................15
Calculation of Yield....................................................16
Performance Comparisons.................................................16
NET ASSET VALUE AND PUBLIC OFFERING PRICE.................................18
HOW TO PURCHASE SHARES....................................................19
SHAREHOLDER SERVICES......................................................19
Open Accounts...........................................................19
Systematic Withdrawal Plans ("SWP").....................................20
Exchange Privilege......................................................20
Automatic Investment Plans ("AIP")......................................21
Retirement Plans........................................................22
Address Changes.........................................................22
REDEMPTIONS...............................................................23
Redeeming by Telephone..................................................23
Check Sent to the Record Address........................................24
Proceeds Wired to a Predesignated Bank..................................24
All Redemptions.........................................................24
INCOME DIVIDENDS, CAPITAL GAINS DISTRIBUTIONS AND TAX STATUS..............25
FINANCIAL STATEMENTS......................................................29
APPENDIX A -- RATINGS....................................................A-1
<PAGE>
INTRODUCTION
CGM Realty Fund (the "Fund") is registered with the Securities and Exchange
Commission ("SEC") as a diversified open-end management investment company and
is organized as a separate series of shares of CGM Trust (the "Trust"). The
Trust was established as a Massachusetts business trust under the laws of
Massachusetts in 1986. The Trust is governed by an Amended and Restated
Agreement and Declaration of Trust (the "Declaration of Trust") dated January
23, 1997. 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.
Descriptions in the Prospectus and in this Statement of a particular investment
practice or technique in which a Fund may engage or a financial instrument
which a Fund may purchase are meant to describe the spectrum of investments
that CGM, in its discretion, might, but is not required to, use in managing the
Fund's portfolio assets. CGM may, in its discretion, at any time employ such
practice, technique or instrument for one or more funds but not for all funds
advised by it. Furthermore, it is possible that certain types of financial
instruments or investment techniques described herein may not be available,
permissible, economically feasible or effective for their intended purposes in
all markets. Certain practices, techniques, or instruments may not be principal
activities of a Fund but, to the extent employed, could from time to time have
a material impact on the Fund's performance.
ADDITIONAL INFORMATION REGARDING STRATEGIES AND RISKS
THE FOLLOWING SUPPLEMENTS THE DISCUSSION IN THE PROSPECTUS OF THE VARIOUS
INVESTMENT STRATEGIES AND TECHNIQUES THAT MAY BE EMPLOYED BY THE FUND AND
CERTAIN ASSOCIATED RISKS. SEE APPENDIX A FOR A DESCRIPTION OF CREDIT RATINGS.
REAL ESTATE COMPANIES. At least 65% of the Fund's total assets will be invested
under normal conditions in equity securities of companies in the real estate
industry. A company is considered in the real estate industry if construction,
ownership, management, financing and sales of residential, commercial or
industrial real estate accounts for not less than 50% of its gross revenues or
net profits. Investments that the Fund makes in companies with significant real
estate holdings (but not otherwise in the real estate industry) will be
considered to be investments in the real estate industry for purposes of
evaluating compliance with the Fund's investment restrictions. The Fund's total
<PAGE>
investment in companies possessing such significant real estate holdings within
any particular industry will not exceed 25% of the market value of the Fund's
total assets.
NON-INVESTMENT GRADE SECURITIES. The Fund may invest up to 25% 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 or 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). The Fund may not invest in securities rated lower than Caa or caa by
Moody's or CCC by S&P. 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. High yield securities are subject to the following
risks, in addition to those described in the Prospectus:
o 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.
o 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 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.
o 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 creditworthiness 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.
<PAGE>
o It is reasonable 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.
REPURCHASE AGREEMENTS. The Fund may invest up to 25% 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
Investment Company Act of 1940, as amended (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.
REVERSE REPURCHASE AGREEMENTS. The 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.
MORTGAGE-RELATED AND ASSET-BACKED SECURITIES. The Fund may invest in
mortgage-related securities and asset-backed securities. Mortgage-related
<PAGE>
securities are represented by pools of mortgage loans or loans assembled for
sale to investors by various governmental agencies, such as the Government
National Mortgage Association, and government-related organizations, such as
the Federal National Mortgage Association and the Federal Home Loan Mortgage
Corporation, as well as by private issuers, such as commercial banks, savings
and loan institutions, financial corporations, mortgage bankers and private
mortgage insurance companies. Asset-backed securities are pass-through
securities backed by non-mortgage assets, including automobile loans, credit
card receivables and consumer receivables. Although certain mortgage-related
and asset-backed securities are guaranteed by a third party or otherwise
similarly secured, the market value of the security, which may fluctuate, and
the yield are not so secured. If the Fund purchases a mortgage-related or an
asset-backed security at a premium, all or part of the premium may be lost if
there is a decline in the market value of the security, whether resulting from
changes in interest rates or prepayments in the underlying mortgage collateral.
As with other interest-bearing securities, the prices of such securities are
inversely affected by changes in interest rates. However, although the value of
a mortgage-related or asset-backed security may decline when interest rates
rise, the converse is not necessarily true, because in periods of declining
interest rates the mortgages or assets underlying the security may be more
likely to be prepaid. The possibility of prepayment may cause mortgage-backed
securities to experience significantly greater price and yield volatility than
traditional debt securities. A mortgage-related or asset-backed security's
stated maturity may be shortened by unscheduled prepayments on the underlying
mortgages or assets and, therefore, it is not possible to predict accurately
the security's return. Such prepayments may expose the Fund to a lower rate of
return on reinvestment. To the extent that such mortgage-related securities are
held by the Fund, the prepayment right of the mortgagors may limit the increase
in net asset value of the Fund because the value of the mortgage-related
securities held by the Fund may not appreciate as rapidly as the price of other
debt securities.
FINITE-LIFE REITS. Although the Fund has the ability to invest in REITs without
regard to the expected duration of the REIT, the Fund does not presently intend
to invest in REITs with finite lives without amending the Trust's registration
statement or supplying further information in the Prospectus or Statement
concerning investments in finite-life REITs. Finite-life REITs may entail
special risks, such as the risk that shareholders will elect to continue the
REIT indefinitely or the risk that the REIT will liquidate and make
distributions of capital returns at any time.
ILLIQUID SECURITIES. The Fund may invest up to 10% of its net assets in
illiquid securities. Securities that may be resold without registration
pursuant to Rule 144A under the Securities Act of 1933, as amended, may be
<PAGE>
treated as liquid for these purposes, subject to the supervision and oversight
of the Board of Trustees, in accordance with guidelines established by the
Board of Trustees to determine whether there is a readily available market for
such securities. These securities may include securities issued by certain
REITs that are not publicly traded. The foregoing investment practice could
have the effect of increasing the level of illiquidity in the Fund to the
extent that qualified institutional buyers become uninterested in purchasing
the securities.
FUTURES, OPTIONS, ETC. Although the 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 and to loan portfolio securities, the Fund has no current
intention of doing so without amending the Trust's registration statement or
supplying further information in the Prospectus or Statement concerning such
activities.
TEMPORARY DEFENSIVE POSITIONS. The Fund may depart from its principal
investment strategies by taking temporary defensive positions in response to
adverse market, economic or political conditions. When doing so, the Fund may
hold a substantial portion of its assets in cash or investment grade
fixed-income securities and may not be pursuing its investment objective.
FUNDAMENTAL INVESTMENT RESTRICTIONS
The 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;
<PAGE>
(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 real estate industry and 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 or are engaged in the real estate
business, including real estate investment trusts, 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; or
(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 securities of any one issuer, except the U.S.
Government, its agencies or instrumentalities.
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 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. Non-fundamental investment restrictions may be changed at any time by
vote of a majority of the Trust's Board of Trustees.
<PAGE>
PORTFOLIO TURNOVER
The Fund's investment objective is above-average income and long-term growth of
capital and the Fund does not purchase securities with the intention of
engaging in short-term trading. The Fund will, however, sell any particular
security and reinvest proceeds when it is deemed prudent by the Fund's
investment manager, regardless of the length of the holding period. Frequent
trading involves higher securities transaction costs which may adversely affect
the Fund's performance. To the extent that this policy results in the
realization of gains on investments, the Fund will make distributions to its
shareholders, which may accelerate shareholders' tax liabilities.
The 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."
MANAGEMENT OF THE FUND
The Fund's Board of Trustees (the "Board") is responsible for the overall
management of the Funds, including general supervision and review of the Fund's
investment activities. The Board, in turn, elects the officers who are
responsible for administering the Fund's day-to-day operations.
The affiliations of the officers and Board members and their principal
occupations for the past five years are shown below.
PETER O. BROWN (Age 58) -- 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.
G. KENNETH HEEBNER (Age 58)* -- Trustee and Vice President
Employee, CGM; formerly Vice President and Director, Loomis Sayles and
Company, Incorporated ("Loomis Sayles").
ROBERT L. KEMP (Age 66)* -- Trustee and President
Employee, CGM; formerly President and Director, Loomis Sayles.
ROBERT B. KITTREDGE (Age 78) -- Trustee
21 Sturdivant Street, Cumberland Foreside, ME; Retired; formerly Vice
President, General Counsel and Director, Loomis Sayles.
LAURENS MACLURE (Age 73) -- Trustee
183 Sohier Street, Cohasset, MA; Retired; formerly President and Chief
Executive Officer, New England Deaconess Hospital.
<PAGE>
JAMES VAN DYKE QUEREAU, JR. (Age 50) -- Trustee
59 Annewood Lane, Wayne, PA; Managing Partner, Stratton Management
Company; formerly Institutional Managing Partner, Loomis Sayles.
J. BAUR WHITTLESEY (Age 52) -- Trustee 1521 Locust Street, Philadelphia, PA;
Attorney.
KATHLEEN S. HAUGHTON (Age 38) -- Vice President
Employee -- Investor Services Division, CGM; formerly Vice President,
Boston Financial Data Services, Inc.
LESLIE A. LAKE (Age 54) -- Vice President and Secretary
Employee -- Office Administrator, CGM; formerly Office Administrator,
Capital Growth Management Division of Loomis Sayles.
MARTHA I. MAGUIRE (Age 43) -- Vice President
Employee -- Funds Marketing, CGM; formerly marketing communications
consultant (self-employed); formerly Sales Promotion Consultant, The
New England.
MARY L. STONE (Age 54) -- Assistant Vice President
Employee -- Coordinator, Mutual Fund Recordkeeping, CGM; formerly
Coordinator, Mutual Fund Recordkeeping, Loomis Sayles.
FRANK N. STRAUSS (Age 37) -- Treasurer
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 (Age 61) -- 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 Trust'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 or 222 Berkeley Street,
Boston, Massachusetts 02116.
As of February 5, 1999, the trustees and officers of the Fund owned
beneficially 1.644% of the outstanding shares of the Fund.
<PAGE>
The Trust pays no compensation to its officers or to the trustees listed above
who are interested persons of the Trust. Trustees and officers 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, 1998:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
___________________________________________________________________________________________________________
PENSION OR
RETIREMENT
BENEFITS ESTIMATED
AGGREGATE ACCRUED AS ANNUAL COMPENSATION
COMPENSATION PART OF FUND BENEFITS UPON FROM THE TRUSTS AND FUND
NAME OF TRUSTEE FROM TRUST EXPENSES RETIREMENT COMPLEX PAID TO TRUSTEES (A)
___________________________________________________________________________________________________________
PETER O. BROWN $28,398 None None $37,000
___________________________________________________________________________________________________________
NICHOLAS J. GRANT (B) $33,898 None None $44,000
___________________________________________________________________________________________________________
G. KENNETH HEEBNER None None None None
___________________________________________________________________________________________________________
ROBERT L. KEMP None None None None
___________________________________________________________________________________________________________
ROBERT B. KITTREDGE $28,398 None None $37,000
___________________________________________________________________________________________________________
LAURENS MACLURE $28,398 None None $37,000
___________________________________________________________________________________________________________
JAMES VAN DYKE QUEREAU, JR. $28,398 None None $37,000
___________________________________________________________________________________________________________
J. BAUR WHITTLESEY $28,398 None None $37,000
___________________________________________________________________________________________________________
</TABLE>
(a) The Fund Complex is comprised of two Trusts with a total of six funds.
(b) Nicholas Grant retired as of February 4, 1999.
INVESTMENT ADVISORY AND OTHER SERVICES
ADVISORY AGREEMENT
CGM serves as investment manager of the Fund under an advisory agreement which
became effective on August 30, 1996 upon the merger of New England Mutual Life
Insurance Company into Metropolitan Life Insurance Company. 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 0.85% of the first $500 million of
the Fund's average daily net asset value, and 0.75% of such value in excess of
$500 million. For the period May 13, 1994 (commencement of operations) through
December 31, 1997, CGM voluntarily agreed to limit 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 1.0% of
the Fund's average net assets. For the fiscal years ended December 31, 1996 and
1997, the investment advisory fees that would have been payable to CGM in
respect of services rendered to the Fund amounted to $717,641 and $2,906,862,
<PAGE>
respectively. As a result of such limitation, the Fund actually paid advisory
fees of $508,519 and $2,664,741, respectively. For the fiscal year ended
December 31, 1998, the Fund paid advisory fees of $4,238,774.
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.
CGM also acts as investment adviser to CGM Capital Development Fund, CGM Focus
Fund, CGM Mutual Fund, CGM Fixed Income Fund and CGM American Tax Free Fund and
three other mutual fund portfolios. CGM also provides investment advice to
other institutional clients.
Certain officers and trustees of the Trust 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.
<PAGE>
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 PricewaterhouseCoopers LLP, 160 Federal
Street, Boston, Massachusetts 02110. PricewaterhouseCoopers 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 PricewaterhouseCoopers LLP, independent accountants,
given on the authority of said firm as experts in auditing and accounting.
OTHER ARRANGEMENTS
Certain office space, facilities, equipment and administrative services for the
Fund and other mutual funds under the investment management of the CGM
organization are furnished by CGM. In addition, CGM provides bookkeeping,
accounting, auditing, financial recordkeeping and related clerical services for
which it is entitled to be reimbursed by the Fund based on the cost of
providing these services. For services rendered to the Fund for fiscal years
1996, 1997 and 1998, CGM was reimbursed $18,000, $24,000 and $36,000,
respectively, by the Fund for such expenses.
PORTFOLIO TRANSACTIONS AND BROKERAGE
In placing orders for the purchase and sale of portfolio securities for the
Fund, CGM always seeks the best price and execution. Transactions in unlisted
securities will be carried out through broker-dealers who make the primary
market for such securities unless, in the judgment of CGM, a more favorable
price can be obtained by carrying out such transactions through other brokers.
<PAGE>
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 1998, brokerage transactions of the Fund
aggregating $942,004,921 were allocated to brokers providing research services
and $2,619,707 in commissions were paid on these transactions. During 1996,
1997 and 1998, the Fund paid total brokerage fees of $787,194, $4,420,942 and
$2,704,957, respectively.
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 the Fund. Each share of the Fund
<PAGE>
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
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)
on the election of trustees of the Trust 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 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
<PAGE>
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 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.
On January 29, 1999, there were 34,849,260.549 shares of the Fund outstanding.
On that date, State Street Bank, acting as trustee for various retirement plans
and individual retirement accounts, owned 4,438,260.006 shares -- about 13% 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.
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
<PAGE>
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.
ADVERTISING AND PERFORMANCE INFORMATION
CALCULATION OF TOTAL RETURN
The Fund may include total return information in advertisements or written
sales material. Total return is a measure of the change in value of an
investment in the Fund over the period covered, which assumes that any
dividends or capital gains distributions are automatically reinvested in the
Fund rather than paid to the investor in cash. The formula for total return
used by the Fund includes three steps:
(1) adding to the total number of shares purchased by a hypothetical $1,000
investment in the Fund all additional shares that would have been purchased if
all dividends and distributions paid or distributed during the period had been
automatically reinvested;
(2) calculating the value of the hypothetical initial investment as of the end
of the period by multiplying the total number of shares owned at the end of the
period by the net asset value per share on the last trading day of the period;
and
(3) dividing this account value for the hypothetical investor by the amount of
the initial investment, and annualizing the result for periods of less than one
year.
For the one-year period ended December 31, 1998, and for the period from
inception (May 13, 1994) through December 31, 1998, the average annual total
return of the Fund was -21.2% and 12.5%, respectively. If CGM had not agreed to
the fee limitations and expense provisions described above, the Fund's total
return from inception through December 31, 1998 would have been lower.
In computing performance information for the Fund, no adjustment is made for a
shareholder's tax liability on taxable dividends and capital gains
distributions.
<PAGE>
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. The Fund's 30-day
yield as of December 31, 1998, was 6.82%.
PERFORMANCE COMPARISONS
Total return may be used to compare the performance of the Fund against certain
widely acknowledged standards or indexes 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.
<PAGE>
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 11,332 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 7,976 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.
The Fund may compare its total return or yield or both to that of the National
Association of Real Estate Investment Trusts' (NAREIT) Equity REIT Index.
From time to time, programs and articles about the Fund regarding performance,
rankings and other characteristics of the Fund, information about persons
responsible for its portfolio management, and information about the
characteristics and performance of the real estate industry, REITs and mutual
funds that invest in real estate securities may appear on television and in
national publications and major metropolitan newspapers including, but not
<PAGE>
limited to, CNBC, PBC, CNN-fn, The Wall Street Journal, The Boston Globe, The
New York Times and Barron's, Forbes, Fortune, Money, Worth, Kiplinger's
Personal Finance, Mutual Funds, Individual Investor, Bloomberg Personal and
Business Week magazines. In particular, some or all of these media may publish
their own rankings or performance reviews of mutual funds, including the Fund.
References to or reprints of, or quotations from, such articles may be used in
the Fund's promotional literature. The Fund may also include in its advertising
and sales literature information concerning the experience of Mr. Heebner, the
Fund's portfolio manager, in managing other mutual funds and private accounts,
including ranking and rating information about such funds.
NET ASSET VALUE AND PUBLIC OFFERING PRICE
The method for determining the public offering price and net asset value per
share is summarized in the Prospectus under "Pricing of Shares."
The net asset value of a share of the Fund is determined by dividing the Fund's
total net assets (the excess of its assets over its liabilities) by the total
number of shares outstanding and rounding to the nearest cent. Such
determination is made as of the close of normal trading on the New York Stock
Exchange on each day on which the Exchange is open for unrestricted trading,
and no less frequently than once daily on each day during which there is
sufficient trading in the Fund's portfolio securities that the value of the
Fund's shares might be materially affected. During the 12 months following the
date of this Statement, the New York Stock Exchange is currently expected to be
closed on the following holidays: Memorial Day, Independence Day, Labor Day,
Thanksgiving Day, Christmas Day, New Year's Day, Martin Luther King, Jr. 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
<PAGE>
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.
HOW TO PURCHASE SHARES
The procedures for purchasing shares of the Fund are summarized in the
Prospectus under "How to Purchase Shares."
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
<PAGE>
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. A shareholder may establish a SWP by completing
the Service Options Form.
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 Service
Options Form. Shares to be included in a Systematic Withdrawal Plan must be
held in an Open Account rather than certificated form. Income dividends and
capital gain distributions will be reinvested at the net asset value determined
as of the close of the New York Stock Exchange on the record date for the
dividend or distribution. If withdrawal checks are returned to the Fund as
"undeliverable" or remain uncashed for more than six months the shareholder's
Systematic Withdrawal Plan will be cancelled, such undeliverable or uncashed
checks will be cancelled and such amounts reinvested in the Fund at the per
share net asset value determined as of the date of cancellation of the checks.
Since withdrawal payments represent in whole or in part proceeds from the
liquidation of shares, the shareholder should recognize that withdrawals may
reduce and possibly exhaust the value of the account, particularly in the event
of a decline in net asset value. Accordingly, the shareholder should consider
whether a Systematic Withdrawal Plan and the specified amounts to be withdrawn
are appropriate in the circumstances. The 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 Mutual Fund,
CGM Fixed Income Fund, CGM American Tax Free Fund, CGM Focus 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 be
exchanged for only if you were a shareholder on September 24, 1993, and have
<PAGE>
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 CGM and counsel to CGM Capital Development Fund and CGM. 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 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 a special authorization form is on file with
the Trust, or (ii) a written exchange request or Service Options Form to CGM
Shareholder Services. 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 checking account at a bank
or other financial institution. Please contact CGM Shareholder Services at
800-343-5678 to determine the requirements associated with debits from savings
banks and credit unions. Debits from money market accounts are not acceptable.
Shareholders receive a confirmation of each purchase of Fund shares under the
AIP. If a shareholder elects to redeem shares of the Fund purchased under the
<PAGE>
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 terminate a
shareholder's participation in the AIP immediately 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, Traditional and Roth 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, generally, 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 the 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 of address may be mailed to: CGM Shareholder Services,
c/o BFDS, P.O. Box 8511, Boston, MA 02266-8511.
<PAGE>
If a statement or check sent to a shareholder is returned three times, mailings
to the shareholder may be discontinued until the shareholder contacts CGM
Shareholder Services with correct address information.
REDEMPTIONS
The procedures for redemption of Fund shares are summarized in the Prospectus
under "How to Sell 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 provide that an "eligible guarantor institution" means any of
the following: banks (as defined in ss. 3(a) of the Federal Deposit Insurance
Act, as amended (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, as amended (the "1934 Act"); credit unions (as defined in ss.
19(b)(1)(A) of the Federal Reserve Act, as amended [12 U.S.C. ss. 461(b)]);
national securities exchanges, registered securities associations and clearing
agencies, as those terms are defined under the 1934 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 Traditional or
Roth 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
custodian or trustee.
<PAGE>
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. Except in the case of a CGM
retirement plan, the service option of telephone redemption by check is
available to shareholders automatically unless this option is declined in the
application or in writing. The check will be made payable to the registered
owner(s) of the account.
If checks representing redemption proceeds are returned "undeliverable" or
remain uncashed for six months, such checks shall be cancelled and such
proceeds shall be reinvested in the Fund at the per share net asset value
determined as of the date of cancellation of such checks.
PROCEEDS WIRED TO A PREDESIGNATED BANK
A shareholder may request that the redemption proceeds be wired to the bank
selected on the Fund application or subsequently on the Service Options Form
(with a signature guarantee) available from the Trust or CGM Shareholder
Services. 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 or wired 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.
<PAGE>
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 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-term 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
<PAGE>
or distribution. Shareholders, however, may elect to receive their income
dividends or capital gain distributions, or both, in cash. However, if a
shareholder elects to receive capital gains in cash, his or her income
dividends must also be received in cash. Shareholders can elect to receive
payments of cash dividends and capital gains distributions either by check or
by direct deposit to a bank account that they have predesignated. These
elections can be made at the time the account is opened and may be changed by
the shareholder at any time by submitting a written request directly to CGM
Shareholder Services or by calling 800-343-5678. However, changes in bank
account information for direct deposits of cash dividends and capital gains
distributions must be made through a Service Options Form. In order for a
change to be effective 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 a shareholder elects to receive distributions in cash and
checks are returned "undeliverable" or remain uncashed for six months, such
shareholder's cash election will be changed automatically and the shareholder's
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 will be cancelled and such amounts reinvested in the Fund at
the per share net asset value determined as of the date of cancellation of such
checks.
The Fund has met and intends to meet the requirements of the Internal Revenue
Code with respect to regulated investment companies. To qualify, the Fund must,
among other things, (a) derive in each taxable year at least 90% of its gross
income from dividends, interest, payments with respect to securities loans and
gains from the sale or other disposition of stock, securities or foreign
currencies or other income derived with respect to its business of investing in
such stock, securities or currencies; (b) diversify its holdings so that, at
the end of each quarter of the taxable year, (i) at least 50% of the market
value of the Fund's assets is represented by cash and cash items (including
receivables), U.S. Government securities, the securities of other regulated
investment companies and other securities, with such other securities of any
one issuer limited for the purposes of this calculation to an amount not
greater than 5% of the value of the Fund's total assets and not greater than
10% of the outstanding voting securities of such issuer, and (ii) not more than
25% of the value of its total assets is invested in the securities of any one
issuer (other than U.S. Government securities or the securities of other
regulated investment companies); and (c) distribute at least 90% of its
investment company taxable income (which includes, among other items,
dividends, interest and the excess of net short-term capital gains over net
long-term capital losses) and its net tax-exempt interest income each taxable
year, if any.
<PAGE>
As a regulated investment company, the Fund generally will not be subject to
U.S. federal income tax on its investment company taxable income and net
capital gains (the excess of net long-term capital gains over net short-term
capital losses), if any, that it distributes to shareholders. The Fund intends
to distribute to its shareholders, at least annually, substantially all of its
investment company taxable income and net capital gains. Amounts not
distributed on a timely basis in accordance with a calendar year distribution
requirement are subject to a nondeductible 4% excise tax. To prevent imposition
of the excise tax, the Fund must distribute during each calendar year an amount
equal to the sum of (1) at least 98% of its ordinary income (not taking into
account any capital gains or losses) for the calendar year, (2) at least 98% of
its capital gains in excess of its capital losses (adjusted for certain
ordinary losses, as prescribed by the Code) for the one-year period ending on
October 31 of the calendar year, and (3) any ordinary income and capital gains
for previous years that was not distributed during those years. A distribution
will be treated as paid on December 31 of the current calendar year if it is
declared by the Fund in October, November or December with a record date in
such a month and paid by the Fund during January of the following calendar
year. Such distributions will be taxable to shareholders in the calendar year
in which the distributions are declared, rather than the calendar year in which
the distributions are received. To prevent application of the excise tax, the
Fund intends to make its distributions in accordance with the calendar year
distribution requirement.
Dividends paid by the Fund from net investment income (including dividends and
interest) and net short-term capital gain 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 dividends 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. Dividends and
distributions are taxable to shareholders in the same manner whether received
in cash or reinvested in additional shares of the Fund.
If a portion of the Fund's income consists of dividends paid by U.S.
corporations, a portion of the dividends paid by the Fund may qualify for the
dividends-received deduction applicable to corporate shareholders.
Distributions that the Fund receives from a REIT, and dividends paid by the
Fund from such distributions, will not qualify for this deduction.
<PAGE>
Dividends and distributions on Fund shares received shortly after their
purchase, although in effect a return of capital, are subject to federal income
taxes.
Upon the sale or other disposition of shares of the Fund, a shareholder may
realize a capital gain or loss which will be long-term or short-term, generally
depending upon the shareholder's holding period for the shares. Any loss
realized on a sale or exchange will be disallowed to the extent the shares
disposed of are replaced (including shares acquired pursuant to a dividend
reinvestment plan) within a period of 61 days beginning 30 days before and
ending 30 days after disposition of the shares. In such a case, the basis of
the shares acquired will be adjusted to reflect the disallowed loss. Any loss
realized by a shareholder on a disposition of Fund shares held by the
shareholder for six months or less will be treated as a long-term capital loss
to the extent of any distributions of net capital gains received by the
shareholder with respect to such shares.
Investments by the Fund in zero coupon securities will result in income to the
Fund equal to a portion of the excess of the face value of the securities over
their issue price (the "original issue discount") each year that the securities
are held, even though the Fund receives no cash interest payments. This income
is included in determining the amount of income which the Fund must distribute
to maintain its status as a regulated investment company and to avoid the
payment of federal income tax and the 4% excise tax. In addition, if the Fund
invests in certain high yield original issue discount obligations issued by
corporations, a portion of the original issue discount accruing on the
obligation may be eligible for the deduction for dividends received by
corporations.
Gain derived by the Fund from the disposition of any market discount bonds
(i.e. bonds purchased other than at original issue, where the face value of the
bonds exceeds their purchase price) held by the Fund will be taxed as ordinary
income to the extent of the accrued market discount on the bonds, unless the
Fund elects to include the market discount in income as it accrues.
Income received by the Fund from sources within foreign countries may be
subject to withholding and other taxes imposed by such countries.
A shareholder may be subject to backup withholding at the rate of 31% of any
taxable distributions unless such shareholder (a) is a corporation or comes
within certain other exempt categories and, when required, demonstrates this
fact, or (b) provides a taxpayer identification number, certifies that the
shareholder is not subject to backup withholding, and otherwise complies with
applicable requirements of the backup withholding rules. A shareholder who does
not provide the Fund with his correct taxpayer identification number may also
<PAGE>
be subject to penalties imposed by the IRS. Any amount paid as backup
withholding will be creditable against the shareholder's income tax liability.
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.
Investors should consult their tax advisors regarding the application of the
above-described general federal taxation rules to their own circumstances and
the state, local, or foreign tax consequences to them of any investment in the
Fund.
FINANCIAL STATEMENTS
The financial statements for the year ended December 31, 1998, included in the
Fund's Annual Report to shareholders for the year ended December 31, 1998, are
incorporated herein by reference.
<PAGE>
APPENDIX A
RATINGS
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC. DEBT RATINGS -- TAXABLE DEBT &
DEPOSITS GLOBALLY:
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.
<PAGE>
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 'Caa.' 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 MOODY'S INVESTORS SERVICE, INC. PREFERRED STOCK RATINGS:
aaa -- An issue which is rated 'aaa' is considered to be a top-quality
preferred stock. This rating indicates good asset protection and the least risk
of dividend impairment within the universe of preferred stocks.
aa -- An issue which is rated 'aa' is considered a high-grade preferred stock.
This rating indicates that there is reasonable assurance the earnings and asset
protection will remain relatively well maintained in the foreseeable future.
a -- An issue which is rated 'a' is considered to be an upper-medium grade
preferred stock. While risks are judged to be somewhat greater than in the
'aaa' and 'aa' classifications, earnings and asset protection are,
nevertheless, expected to be maintained at adequate levels.
baa -- An issue which is rated 'baa' is considered to be a medium-grade
preferred stock, neither highly protected nor poorly secured. Earnings and
asset protection appear adequate at present but may be questionable over any
great length of time.
ba -- An issue which is rated 'ba' is considered to have speculative elements,
and its future cannot be considered well assured. Earnings and asset protection
may be very moderate and not well safeguarded during adverse periods.
Uncertainty of position characterizes preferred stocks in this class.
b -- An issue which is rated 'b' generally lacks the characteristics of a
desirable investment. Assurance of dividend payments and maintenance of other
terms of the issue over any long period of time may be small.
caa -- An issue which is rated 'caa' is likely to be in arrears on dividend
payments. This rating designation does not purport to indicate the future
status of payments.
<PAGE>
DESCRIPTION OF STANDARD & POOR'S CORPORATION LONG-TERM ISSUE CREDIT RATINGS:
AAA -- An obligation rated 'AAA' has the highest rating assigned by Standard &
Poor's. The obligor's capacity to meet its financial commitment on the
obligation is extremely strong.
AA -- An obligation rated 'AA' differs from the highest rated obligations only
in small degree. The obligor's capacity to meet its financial commitment on the
obligation is very strong.
A -- An obligation rated 'A' is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than obligations in
higher rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.
BBB -- An obligation rated 'BBB' exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.
BB, B, CCC, CC and C -- Obligations rated 'BB', 'B', 'CCC', 'CC', and 'C' are
regarded as having significant speculative characteristics. 'BB' indicates the
least degree of speculation and 'C' the highest. While such obligations will
likely have some quality and protective characteristics, these may be
outweighed by large uncertainties or major exposures to adverse conditions.
BB -- An obligation rated 'BB' is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or exposure
to adverse business, financial, or economic conditions which could lead to the
obligor's inadequate capacity to meet its financial commitment on the
obligation.
B -- An obligation rated 'B' is more vulnerable to nonpayment than obligations
rated 'BB', but the obligor currently has the capacity to meet its financial
commitment on the obligation. Adverse business, financial, or economic
conditions will likely impair the obligor's capacity or willingness to meet its
financial commitment on the obligation.
CCC -- An obligation rated 'CCC' is currently vulnerable to nonpayment, and is
dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation. In the event of
adverse business, financial, or economic conditions, the obligor is not likely
to have the capacity to meet its financial commitment on the obligation.
<PAGE>
Plus (+) or Minus (-): The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
r -- This symbol is attached to the ratings of instruments with significant
noncredit risks. It highlights risks to principal or volatility of expected
returns which are not addressed in the credit rating. Examples include:
obligations linked or indexed to equities, currencies, or commodities;
obligations exposed to severe prepayment risk -- such as interest-only or
principal-only mortgage securities; and obligations with unusually risky
interest terms, such as inverse floaters.
DESCRIPTION OF STANDARD & POOR'S CORPORATION PREFERRED STOCK RATING
DEFINITIONS:
AAA -- This is the highest rating that may be assigned by Standard & Poor's to
a preferred stock issue and indicates an extremely strong capacity to pay the
preferred stock obligations.
AA -- A preferred stock issue rated 'AA' also qualifies as a high-quality,
fixed-income security. The capacity to pay preferred stock obligations is very
strong, although not as overwhelming as for issues rated 'AAA'.
A -- An issue rated 'A' is backed by a sound capacity to pay the preferred
stock obligations, although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions.
BBB -- An issue rated 'BBB' is regarded as backed by an adequate capacity to
pay the preferred stock obligations. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity to make payments for a preferred
stock in this category than for issues in the 'A' category.
BB, B, CCC -- Preferred stock rated 'BB,' 'B,' and 'CCC' are regarded, on
balance, as predominantly speculative with respect to the issuer's capacity to
pay preferred stock obligations. 'BB' indicates the lowest degree of
speculation and 'CCC' the highest. While such issues will likely have some
quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
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 major rating
categories.
<PAGE>
CGM AMERICAN TAX FREE FUND
CGM FIXED INCOME FUND
STATEMENT OF ADDITIONAL INFORMATION
May 1, 1999
This Statement of Additional Information (the "Statement" or "SAI") provides
further information concerning the activities and operations of CGM American
Tax Free Fund and CGM Fixed Income Fund. This Statement is not a prospectus and
should be read in conjunction with the Funds' Prospectus dated May 1, 1999 (the
"Prospectus"). Certain information which is included in the Prospectus is
incorporated by reference into this Statement. A copy of the Prospectus may be
obtained by writing to: CGM Trust, c/o The CGM Funds Investor Services
Division, P.O. Box 449, Boston, Massachusetts 02117, or by calling
800-345-4048.
CGM AMERICAN TAX FREE FUND IS NOT AN APPROPRIATE INVESTMENT FOR RETIREMENT PLAN
AND SIMILAR ACCOUNTS.
Certain financial information which is included in each Fund's Annual Report to
shareholders dated December 31, 1998 is incorporated by reference into this
Statement. A copy of each Fund's Annual Report accompanies this Statement.
<PAGE>
TABLE OF CONTENTS
Page
INTRODUCTION.................................................................1
ADDITIONAL INFORMATION REGARDING STRATEGIES AND RISKS........................1
CGM American Tax Free Fund...........................................1
CGM Fixed Income Fund................................................3
Information Applicable to Both Funds.................................7
FUNDAMENTAL INVESTMENT RESTRICTIONS.........................................10
PORTFOLIO TURNOVER..........................................................11
MANAGEMENT OF THE FUNDS.....................................................12
INVESTMENT ADVISORY AND OTHER SERVICES......................................14
Advisory Agreements.................................................14
Custodial Arrangements..............................................16
Independent Accountants.............................................16
Other Arrangements..................................................16
PORTFOLIO TRANSACTIONS AND BROKERAGE........................................17
DESCRIPTION OF THE TRUST....................................................18
Shareholder Rights..................................................18
Shareholder and Trustee Liability...................................20
ADVERTISING AND PERFORMANCE INFORMATION.....................................20
Calculation of Total Return.........................................20
Calculation of Yield................................................21
Performance Comparisons.............................................22
NET ASSET VALUE AND PUBLIC OFFERING PRICE...................................24
HOW TO PURCHASE SHARES......................................................25
SHAREHOLDER SERVICES........................................................25
Open Accounts.......................................................25
Systematic Withdrawal Plans ("SWP").................................26
Exchange Privilege..................................................27
Automatic Investment Plans ("AIP")..................................28
Retirement Plans....................................................28
Address Changes.....................................................29
REDEMPTIONS.................................................................29
Redeeming by Telephone..............................................30
Check Sent to the Record Address....................................30
Proceeds Wired to a Predesignated Bank..............................30
All Redemptions.....................................................31
INCOME DIVIDENDS, CAPITAL GAINS DISTRIBUTIONS AND TAX STATUS................32
FINANCIAL STATEMENTS........................................................37
APPENDIX A -- RATINGS......................................................A-1
APPENDIX B -- TAXABLE EQUIVALENT YIELD TABLE...............................B-1
<PAGE>
INTRODUCTION
CGM American Tax Free Fund and CGM Fixed Income Fund (each, a "Fund", and,
collectively, the "Funds") are each organized as open-end, diversified separate
series of shares of CGM Trust (the "Trust"). The Trust is a Massachusetts
business trust established under the laws of Massachusetts in 1986. The Trust
is governed by an Amended and Restated Agreement and Declaration of Trust (the
"Declaration of Trust") dated January 23, 1997. 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.
Descriptions in the Prospectus and in this Statement of a particular investment
practice or technique in which a Fund may engage or a financial instrument
which a Fund may purchase are meant to describe the spectrum of investments
that CGM, in its discretion, might, but is not required to, use in managing the
Fund's portfolio assets. CGM may, in its discretion, at any time employ such
practice, technique or instrument for one or more funds but not for all funds
advised by it. Furthermore, it is possible that certain types of financial
instruments or investment techniques described herein may not be available,
permissible, economically feasible or effective for their intended purposes in
all markets. Certain practices, techniques, or instruments may not be principal
activities of a Fund but, to the extent employed, could from time to time have
a material impact on the Fund's performance.
ADDITIONAL INFORMATION REGARDING STRATEGIES AND RISKS
THE FOLLOWING SUPPLEMENTS THE DISCUSSION IN THE PROSPECTUS OF THE VARIOUS
INVESTMENT STRATEGIES AND TECHNIQUES THAT MAY BE EMPLOYED BY EACH FUND AND
CERTAIN ASSOCIATED RISKS. SEE APPENDIX A FOR A DESCRIPTION OF CREDIT RATINGS.
CGM AMERICAN TAX FREE FUND
TAX-EXEMPT SECURITIES. Tax-exempt securities are debt obligations issued by
states (including the District of Columbia), territories and possessions of the
United States and their political subdivisions, agencies and instrumentalities,
or by multistate agencies or authorities to obtain funds for various public
purposes, including projects to construct or rebuild schools, hospitals, roads,
utilities and transportation systems throughout the United States. These
securities are commonly classified as general obligation bonds, revenue bonds
and notes. General obligation bonds are secured by the issuer's pledge of its
<PAGE>
faith, credit and taxing power for the payment of principal and interest.
Revenue bonds are payable from the revenue derived from a particular facility
or class of facilities or, in some cases, from the proceeds of a special excise
tax or other specific revenue source, but not from the general taxing power.
Some revenue bonds are structured as municipal lease obligations or equipment
purchase contracts. Industrial development bonds are revenue bonds that
generally do not carry a pledge of the credit of the issuing municipality, but
generally are guaranteed by the corporate entity on whose behalf they are
issued. Notes are short-term instruments which are obligations of the issuing
municipalities or agencies and are sold in anticipation of a bond sale,
collection of taxes or receipt of other revenues. Tax-exempt securities may
bear fixed, floating or variable rates of interest, which are determined in
some instances by formulas under which the security's interest rate will change
directly or inversely relative to changes in interest rates or an index, or
multiples thereof, in many cases subject to a maximum and a minimum. Certain
tax-exempt securities are subject to redemption at a date earlier than their
stated maturity pursuant to call options, which may be separated from the
related security and purchased and sold independently.
MUNICIPAL LEASE OBLIGATIONS. CGM American Tax Free Fund may invest in lease
obligations or installment purchase contract obligations, which are instruments
supported by lease payments, made by a municipality ("municipal lease
obligations"). Although municipal lease obligations do not normally constitute
general obligations of the municipality, a lease obligation is ordinarily
backed by the municipality's agreement to make the payments due under the lease
obligation. However, certain lease obligations contain "non-appropriation"
clauses, which provide that the municipality has no obligation to make lease or
installment purchase payments in later years unless money is appropriated in
the future. Municipal lease obligations are a relatively new form of financing
and the market for such obligations is still developing and is less liquid than
other markets for tax-exempt securities. Municipal lease obligations may be
determined to be liquid (for purposes of complying with the Fund's investment
restrictions) in accordance with procedures adopted by the Board of Trustees.
PUT BONDS. CGM American Tax Free Fund may invest in tax-exempt securities
(including securities with variable interest rates) which may be redeemed or
sold back (put) to the issuer of the security or a third party at face value
prior to stated maturity. Such securities will normally trade as if maturity is
the earlier put date, even though stated maturity is longer.
FLOATING AND VARIABLE-RATE SECURITIES. CGM American Tax Free Fund may purchase
floating and variable-rate notes and bonds, which are tax-exempt obligations
ordinarily having stated maturities in excess of one year, but which permit the
holder to demand payment of principal at any time or at specified intervals.
Variable-rate demand notes include master demand notes, which are obligations
<PAGE>
that permit the Fund to invest fluctuating amounts that may change daily
without penalty pursuant to direct arrangements between the Fund, as lender,
and the borrower. The interest rates on these obligations fluctuate from time
to time. Frequently, such obligations are secured by letters of credit or other
credit support arrangements provided by banks. Use of letters of credit or
other support arrangements will not adversely affect the tax-exempt status of
these obligations. Because these obligations are direct lending arrangements
between the lender and borrower, it is not contemplated that such instruments
generally will be traded, and there generally is no established secondary
market for these obligations, although they are redeemable at face value.
Accordingly, where these obligations are not secured by letters of credit or
other credit support arrangements, the Fund's right to redeem is dependent on
the ability of the borrower to pay principal and interest on demand. The
Investment Manager, on behalf of the Fund, will consider on an ongoing basis
the creditworthiness of the issuers of the floating and variable-rate demand
obligations in the Fund's portfolio.
CGM FIXED INCOME FUND
FOREIGN SECURITIES. CGM Fixed Income Fund may invest up to 20% of its net
assets at the time of purchase in debt securities and preferred stocks issued
by institutions, corporations and governments established by or in one or more
foreign countries, which may be developed or undeveloped countries. Such
foreign securities will otherwise satisfy the limitations and restrictions
applicable to the Fund, including the Fund's policies regarding credit quality.
In making foreign investments, the Fund will also give appropriate
consideration to the following factors, among others:
o In addition to the risks associated with such investments as
described in the Prospectus, because some foreign securities the
Fund may acquire are purchased with and payable in currency of
foreign countries, the value of these assets as measured in U.S.
dollars may be affected favorably or unfavorably by changes in
currency rates and exchange control regulations. Certain currency
exchange expenses may be incurred when the Fund changes
investments from one country to another. The Fund also may be
affected by the conversion of the currency of several European
countries to the "Euro" currency.
o Foreign securities markets generally are not as developed or
efficient as those in the United States. Securities of some
foreign issuers are less liquid and more volatile than securities
of comparable U.S. issuers. Similarly, volume and liquidity in
most foreign securities markets are less than in U.S. markets and,
at times, volatility of prices can be greater than in the United
<PAGE>
States. There may be less government supervision and regulation of
securities exchanges, brokers and listed companies. The issuers of
some of these securities, such as foreign bank obligations, may be
subject to less stringent or different regulations than those
governing U.S. issuers. In addition, there may be less publicly
available information about a foreign issuer, and foreign issuers
are not subject to uniform accounting and financial reporting
standards, practices and requirements comparable to those
applicable to U.S. issuers. Further, it may be more difficult to
obtain current information about corporate actions by foreign
issuers of portfolio securities that affect the prices of such
securities.
o Foreign securities are also subject to additional risks of
possible adverse political and economic developments, possible
seizure or nationalization of foreign deposits and possible
adoption of governmental restrictions, which might adversely
affect the payment of principal and interest on the foreign
securities or might restrict the payment of principal and interest
to investors located outside the country of the issuer, whether
from currency blockage or otherwise. The Fund's ability and
decisions to purchase and sell portfolio securities may be
affected by laws or regulations relating to the convertibility and
repatriation of assets.
o Some foreign securities may be subject to transfer taxes levied by
foreign governments, and the income received by the Fund from
sources within foreign countries may be reduced by withholding and
other taxes imposed by such countries. The Fund will also incur
higher custody costs in connection with foreign securities.
BORROWINGS. 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. Although CGM Fixed Income Fund is permitted to borrow amounts
(including obligations under reverse repurchase agreements) aggregating up to
33.3% of the value of its total assets, the Fund does not intend to borrow for
purposes of leveraging its portfolio. Under ordinary circumstances, the Fund
will borrow only for temporary purposes in amounts not to exceed 5% of the
value of its total assets.
MORTGAGE-RELATED AND ASSET-BACKED SECURITIES. CGM Fixed Income Fund may invest
in mortgage-related securities and asset-backed securities. Mortgage-related
securities are represented by pools of mortgage loans or loans assembled for
sale to investors by various governmental agencies, such as the Government
<PAGE>
National Mortgage Association, and government-related organizations, such as
the Federal National Mortgage Association and the Federal Home Loan Mortgage
Corporation, as well as by private issuers, such as commercial banks, savings
and loan institutions, financial corporations, mortgage bankers and private
mortgage insurance companies. Asset-backed securities are pass-through
securities backed by non-mortgage assets, including automobile loans, credit
card receivables and consumer receivables. Although certain mortgage-related
and asset-backed securities are guaranteed by a third party or otherwise
similarly secured, the market value of the security, which may fluctuate, and
the yield are not so secured. If the Fund purchases a mortgage-related or an
asset-backed security at a premium, all or part of the premium may be lost if
there is a decline in the market value of the security, whether resulting from
changes in interest rates or prepayments in the underlying mortgage collateral.
As with other interest-bearing securities, the prices of such securities are
inversely affected by changes in interest rates. However, although the value of
a mortgage-related or asset-backed security may decline when interest rates
rise, the converse is not necessarily true, because in periods of declining
interest rates the mortgages or assets underlying the security may be more
likely to be prepaid. The possibility of prepayment may cause mortgage-backed
securities to experience significantly greater price and yield volatility than
traditional debt securities. A mortgage-related or asset-backed security's
stated maturity may be shortened by unscheduled prepayments on the underlying
mortgages or assets and, therefore, it is not possible to predict accurately
the security's return. Such prepayments may expose CGM Fixed Income Fund to a
lower rate of return on reinvestment. To the extent that such mortgage-related
securities are held by the Fund, the prepayment right of the mortgagors may
limit the increase in net asset value of the Fund because the value of the
mortgage-related securities held by the Fund may not appreciate as rapidly as
the price of other debt securities.
STRIPPED MORTGAGE-RELATED SECURITIES. CGM Fixed Income Fund may also invest in
stripped mortgage-related securities often referred to as IO (interest-only)
and PO (principal-only) securities. IO and PO securities are formed by
separating the principal and interest payments of a mortgage-related security
to create two or more classes of securities with different characteristics than
the underlying security. IOs receive all of the coupon interest from
mortgage-related securities and can be high yielding securities, while POs
receive all of the principal payments from mortgage-related securities and are
seldom high yielding securities. IOs and POs are extremely sensitive to changes
in both interest rates and prepayment rates.
Because an IO receives only the interest payments of an underlying
mortgage-related security, an increase in prepayments (due to lower interest
rates) will result in less interest being paid to the IO investor. The decrease
<PAGE>
in interest payments will cause the value of the IO to decline as most other
bonds increase in value. A decline in prepayments (due to higher interest
rates), however, will result in increased interest being paid to the IO
investor. The increase in interest payments will generally result in a higher
value for the IO security. PO securities, on the other hand, are zero coupon
securities, as they receive no interest, but do receive all principal payments
of an underlying mortgage-related security. The value of these securities will
increase as prepayments increase, particularly if interest rates are declining.
Like zero coupon securities, PO securities are extremely volatile securities,
which increase in value as interest rates decline and/or prepayments increase
and decline when rates increase and/or prepayments decline.
IO and PO securities that are issued by the U.S. Government or its agencies and
instrumentalities and are backed by fixed-rate mortgages may be treated as
liquid for purposes of investment restrictions applicable to investments in
illiquid securities, in accordance with guidelines established by the Board of
Trustees to determine whether there is a readily available market for such
securities. All other IO and PO securities will be treated as illiquid for
purposes of applicable investment restrictions.
DEFERRED INTEREST, ZERO COUPON AND PAYMENT-IN-KIND SECURITIES. There may be
special tax considerations associated with investing in securities structured
as deferred interest, zero coupon or payment-in-kind securities. CGM Fixed
Income Fund records the interest on these securities as income even though it
receives no cash interest until each security's maturity date. The Fund will be
required to distribute all or substantially all such amounts annually and may
have to obtain the cash to do so by selling securities. Thus, to meet cash
distribution obligations, the Fund may be required to liquidate a portion of
its assets, which it would otherwise continue to hold, at a disadvantageous
time. These distributions will be taxable to shareholders as ordinary income.
In the case of securities structured as deferred interest, zero coupon or
payment-in-kind securities, the market prices of such securities are affected
to a greater extent by interest rate changes, and therefore tend to be more
volatile than securities which pay interest periodically and in cash.
ILLIQUID SECURITIES. CGM Fixed Income Fund may invest up to 10% of its net
assets in illiquid securities. Securities that may be resold without
registration pursuant to Rule 144A, and IO and PO securities issued by the U.S.
Government and its agencies and instrumentalities and backed by fixed-rate
mortgages, may be treated as liquid for these purposes, subject to the
supervision and oversight of the Board of Trustees, in accordance with
guidelines established by the Board of Trustees to determine whether there is a
readily available market for such securities. The foregoing investment practice
<PAGE>
could have the effect of increasing the level of illiquidity in the Fund to the
extent that qualified institutional buyers become uninterested in purchasing
the securities.
CONVERTIBLE SECURITIES. CGM Fixed Income Fund may invest in convertible
securities. Convertible securities are securities, such as bonds, notes,
debentures or preferred stocks, which may be converted at a stated price within
a specified period of time into a specified number of shares of common stock of
the same or a different issuer. Convertible securities are senior to common
stock in a corporation's capital structure, but usually are subordinated to
non-convertible debt securities. While providing an income stream (generally
higher in yield than the income from a common stock but lower than that of a
non-convertible debt security), a convertible security may also afford an
investor the opportunity, through its conversion feature, to participate in the
capital appreciation of the common stock. However, investors ordinarily pay a
premium to obtain such conversion feature.
In general, the market value of a convertible security is the higher of its
"investment value" (i.e., its value as a fixed-income or variable-rate
security) or its "conversion value" (i.e., the value of the underlying security
if the security is converted). To the extent that a convertible security is a
fixed-income security, its market value generally increases when interest rates
decline and generally decreases when interest rates rise. However, the price of
a convertible security is also influenced by the market value of the security's
underlying security, often common stock. Thus, the price of a convertible
security generally increases as the market value of the underlying security
increases, and generally decreases as the market value of the underlying
security declines.
INFORMATION APPLICABLE TO BOTH FUNDS
NON-INVESTMENT GRADE SECURITIES. Each Fund may invest a portion of its 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 or baa by Moody's
Investors Service, Inc. or lower than BBB by Standard and Poor's Corporation,
or their equivalent as determined by the Investment Manager). These securities
are sometimes referred to as "high yield" or "junk" bonds. High yield
securities are subject to the following risks, in addition to those described
in the Prospectus:
o 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
<PAGE>
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.
o 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 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.
o 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 creditworthiness 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.
o It is reasonable 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.
REPURCHASE AGREEMENTS. Each 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
Investment Company Act of 1940, as amended (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
<PAGE>
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.
REVERSE REPURCHASE AGREEMENTS. Each 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.
WHEN-ISSUED SECURITIES. Each Fund may purchase some debt securities on a
"when-issued" basis, which means that it may be as long as 60 days after
purchase before the securities are delivered to the Fund. Payment and interest
terms, however, are fixed at the time the purchaser enters into the commitment.
The Fund does not pay for when-issued securities or start earning interest on
them until the contractual settlement date. At the time of settlement, the
market value of the security may be more or less than the purchase price. A
segregated account of the Fund consisting of cash, cash equivalents, U.S.
Government Securities or other high quality liquid debt securities at least
equal at all times to the amount of when-issued securities held by the Fund
will be established and maintained at the Fund's custodian bank.
FINANCIAL FUTURES CONTRACTS. Each 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
amending the Trust's registration statement or supplying further information in
the Prospectus or Statement concerning such activities.
<PAGE>
TEMPORARY DEFENSIVE POSITIONS. Each Fund may depart from its principal
investment strategies by taking temporary defensive positions in response to
adverse market, economic or political conditions. When doing so, each Fund may
hold a substantial portion of its assets in cash or high quality fixed-income
securities and may not be pursuing its investment objective.
FUNDAMENTAL INVESTMENT RESTRICTIONS
Neither Fund may:
(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;
<PAGE>
(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; or
(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.
In addition, 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.
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 above have been adopted by the Trust as fundamental
policies of each 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 applicable 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. Non-fundamental investment restrictions may be changed at any time
by vote of a majority of the Trust's Board of Trustees.
PORTFOLIO TURNOVER
Although neither Fund purchases securities with the intention of engaging in
short-term trading, each Fund frequently sells securities to respond to changes
in market, industry, or individual company conditions or outlook, although the
Fund may only have held those securities for a short period. Frequent trading
involves higher securities transaction costs which may adversely affect the
Fund's performance. To the extent that this policy results in the realization
of gains on investments, the Fund will make distributions to its shareholders,
which may accelerate shareholders' tax liabilities.
Each 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."
<PAGE>
MANAGEMENT OF THE FUNDS
The Trust's Board of Trustees (the "Board") is responsible for the overall
management of the Funds, including general supervision and review of each
Fund's investment activities. The Board, in turn, elects the officers who are
responsible for administering each Fund's day-to-day operations.
The affiliations of the officers and Board members and their principal
occupations for the past five years are shown below.
PETER O. BROWN (Age 58) -- 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.
G. KENNETH HEEBNER (Age 58)* -- Trustee and Vice President
Employee, CGM; formerly Vice President and Director, Loomis Sayles and
Company, Incorporated ("Loomis Sayles").
ROBERT L. KEMP (Age 66)* -- Trustee and President
Employee, CGM; formerly President and Director, Loomis Sayles.
ROBERT B. KITTREDGE (Age 78) -- Trustee
21 Sturdivant Street, Cumberland Foreside, ME; Retired; formerly Vice
President, General Counsel and Director, Loomis Sayles.
LAURENS MACLURE (Age 73) -- Trustee
183 Sohier Street, Cohasset, MA; Retired; formerly President and Chief
Executive Officer, New England Deaconess Hospital.
JAMES VAN DYKE QUEREAU, JR. (Age 50) -- Trustee
59 Annewood Lane, Wayne, PA; Managing Partner, Stratton Management
Company; formerly Institutional Managing Partner, Loomis Sayles.
J. BAUR WHITTLESEY (Age 52) -- Trustee 1521 Locust Street, Philadelphia, PA;
Attorney.
KATHLEEN S. HAUGHTON (Age 38) -- Vice President
Employee -- Investor Services Division, CGM; formerly Vice President,
Boston Financial Data Services, Inc.
LESLIE A. LAKE (Age 54) -- Vice President and Secretary
Employee -- Office Administrator, CGM; formerly Office Administrator,
Capital Growth Management Division of Loomis Sayles.
<PAGE>
MARTHA I. MAGUIRE (Age 43) -- Vice President
Employee -- Funds Marketing, CGM; formerly marketing communications
consultant (self-employed); formerly Sales Promotion Consultant, The
New England.
JANICE H. SAUL (Age 43) -- Vice President
Employee -- Portfolio Manager, CGM; formerly Senior Portfolio Manager,
Loomis Sayles.
MARY L. STONE (Age 54) -- Assistant Vice President
Employee -- Coordinator, Mutual Fund Recordkeeping, CGM; formerly
Coordinator, Mutual Fund Recordkeeping, Loomis Sayles.
FRANK N. STRAUSS (Age 37) -- Treasurer
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 (Age 61) -- Vice President
Employee -- Director of Marketing, CGM; formerly Director of Marketing,
Loomis Sayles.
*Trustees deemed "interested persons" of the Funds, as defined under the 1940
Act.
Each of the Fund's trustees is also a trustee of one or more other investment
companies for which CGM acts as investment manager. Except as indicated above,
the address of each trustee and officer of the Fund affiliated with CGM is One
International Place, Boston, Massachusetts 02110 or 222 Berkeley Street,
Boston, Massachusetts 02116.
As of February 5, 1999, the trustees and officers owned beneficially
approximately 6.1% of the outstanding shares of CGM American Tax Free Fund and
approximately 1% of the outstanding shares of CGM Fixed Income Fund.
The Funds pay no compensation to their officers or to the trustees listed above
who are interested persons of the Funds. Trustees and officers of the Funds
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, 1998:
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
___________________________________________________________________________________________________________
PENSION OR
RETIREMENT
BENEFITS ESTIMATED
AGGREGATE ACCRUED AS ANNUAL COMPENSATION
COMPENSATION PART OF FUND BENEFITS UPON FROM THE TRUSTS AND FUND
NAME OF TRUSTEE FROM TRUST EXPENSES RETIREMENT COMPLEX PAID TO TRUSTEES (A)
___________________________________________________________________________________________________________
PETER O. BROWN $28,398 None None $37,000
___________________________________________________________________________________________________________
NICHOLAS J. GRANT (B) $33,898 None None $44,000
___________________________________________________________________________________________________________
G. KENNETH HEEBNER None None None None
___________________________________________________________________________________________________________
ROBERT L. KEMP None None None None
___________________________________________________________________________________________________________
ROBERT B. KITTREDGE $28,398 None None $37,000
___________________________________________________________________________________________________________
LAURENS MACLURE $28,398 None None $37,000
___________________________________________________________________________________________________________
JAMES VAN DYKE QUEREAU, JR. $28,398 None None $37,000
___________________________________________________________________________________________________________
J. BAUR WHITTLESEY $28,398 None None $37,000
___________________________________________________________________________________________________________
</TABLE>
(a) The Fund Complex is comprised of two Trusts with a total of six funds.
(b) Nicholas Grant retired as of February 4, 1999.
INVESTMENT ADVISORY AND OTHER SERVICES
ADVISORY AGREEMENTS
CGM serves as investment manager of CGM American Tax Free Fund under an
advisory agreement which became effective on August 30, 1996 upon the merger of
New England Mutual Life Insurance Company into Metropolitan Life Insurance
Company. CGM serves as investment manager of CGM Fixed Income Fund under an
advisory agreement approved by the shareholders of CGM Fixed Income Fund at a
special meeting held on December 12, 1996 and effective as of December 13,
1996. 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 0.65% of the
first $200 million of the Fund's average daily net asset value, 0.55% of the
next $300 million of such value and 0.40% of such value in excess of $500
million.
CGM has voluntarily agreed, until December 31, 1999, 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 fiscal years ended December 31,
1996, 1997 and 1998, the investment advisory fees that would have been payable
<PAGE>
to CGM in respect of services rendered to CGM American Tax Free Fund amounted
to $70,051, $79,103 and $93,642, 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, 1999, to waive a portion of its management fee and, if necessary,
bear certain expenses associated with operating CGM Fixed Income Fund, in order
to limit CGM Fixed Income Fund's operating expenses to an annual rate of 0.85%
of its average net assets. CGM has also agreed to obtain approval of the Board
of Trustees of CGM Fixed Income Fund prior to any modification of this
commitment thereafter. For the fiscal years ended December 31, 1996, 1997 and
1998, the investment advisory fees that would have been payable to CGM in
respect of services rendered to CGM Fixed Income Fund amounted to $200,912,
$282,615 and $249,622, respectively. As a result of such waiver, the Fund paid
no investment advisory fees to CGM for the fiscal year ended December 31, 1996,
$102,534 for the fiscal year ended December 31, 1997 and $90,597 for the fiscal
year ended December 31, 1998.
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.
CGM also acts as investment adviser to CGM Capital Development Fund, CGM Mutual
Fund, CGM Realty Fund, CGM Focus 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
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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 PricewaterhouseCoopers LLP, 160 Federal
Street, Boston, Massachusetts 02110. PricewaterhouseCoopers 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 PricewaterhouseCoopers 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
<PAGE>
providing these services. As a result of the expense provisions described
above, CGM received no reimbursement from CGM American Tax Free Fund for any of
such costs in 1996, 1997 and 1998. For such services rendered to CGM Fixed
Income Fund for fiscal years 1996, 1997 and 1998, CGM was reimbursed $10,000,
$10,500 and $9,000, respectively.
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
<PAGE>
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 1998, CGM Fixed Income Fund paid no brokerage commissions. During 1996 and
1997, CGM Fixed Income Fund paid total brokerage commissions of approximately
$32,412 and $36,015.
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 portfolios 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
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)
on the election of trustees of the Trust and the termination of the applicable
<PAGE>
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.
On January 29, 1999, State Street Bank, acting as trustee for various
retirement plans and individual retirement accounts, owned 1,058,438.561 shares
of CGM Fixed Income Fund out of 3,259,283.747 shares outstanding -- about 32%
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.
<PAGE>
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
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.
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:
<PAGE>
(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 and five year periods ended December 31, 1998, and for the period
from inception (November 10, 1993) through December 31, 1998, CGM American Tax
Free Fund's average annual total return was 6.5%, 5.3% and 5.7%, respectively.
For the one and five year periods ended December 31, 1998, and for the period
from inception (November 10, 1993) through December 31, 1998, the total return
on a hypothetical $1,000 investment in CGM American Tax Free Fund was 6.5%,
29.4% and 33.0%, 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 and five year periods ended December 31, 1998, and for the period
from inception (March 17, 1992) through December 31, 1998, the average annual
total return of CGM Fixed Income Fund was -1.2%, 6.7% and 9.0%, respectively.
For the one and five year periods ended December 31, 1998, and for the period
from inception (March 17, 1992) through December 31, 1998, the total return on
a hypothetical $1,000 investment in CGM Fixed Income Fund was -1.2%, 38.3% and
79.6%, 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:
<PAGE>
(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. Tax equivalent yield is calculated by
determining the pre-tax yield which, after being taxed at a stated rate, would
be equivalent to a stated yield calculated as described above. See Appendix B
for illustrations of this yield.
The 30-day yields of CGM American Tax Free Fund and CGM Fixed Income Fund for
the period ended December 31, 1998, were 5.70% and 8.84%, respectively.
PERFORMANCE COMPARISONS
Total return may be used to compare the performance of the Fund against certain
widely acknowledged standards or indexes 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.
<PAGE>
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 11,332 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 7,976 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
<PAGE>
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, programs and articles about a particular Fund's performance,
rankings and other characteristics, and information about persons responsible
for the Fund's portfolio management may appear on television and in national
publications and major metropolitan newspapers including, but not limited to,
CNBC, PBC, CNN-fn, The Wall Street Journal, The Boston Globe, The New York
Times and Barron's, Forbes, Fortune, Money, Worth, Kiplinger's Personal
Finance, Mutual Funds, Individual Investor, Bloomberg Personal and Business
Week magazines. In particular, some or all of these media may publish their own
rankings or performance reviews of mutual funds, including the Funds.
References to, or reprints of, or quotations from, such articles may be used in
the Funds' promotional literature. Each Fund may also include in its
advertising and sales literature information concerning the experience of the
Fund's portfolio manager(s) in managing other mutual funds and private
accounts, including ranking and rating information about such funds.
NET ASSET VALUE AND PUBLIC OFFERING PRICE
The method for determining the public offering price and net asset value per
share is summarized in the Prospectus under "Pricing of Shares."
The net asset value of a share of 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
<PAGE>
following the date of this Statement the New York Stock Exchange is currently
expected to be closed on the following holidays: Memorial Day, Independence Day
(observed), Labor Day, Thanksgiving Day, Christmas Day, New Year's Day, Martin
Luther King, Jr. 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.
HOW TO PURCHASE SHARES
The procedures for purchasing shares of the Fund are summarized in the
Prospectus under "How to Purchase Shares."
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
<PAGE>
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. A shareholder may establish a SWP by completing
the Service Options Form.
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 Service
Options Form. 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
<PAGE>
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 Focus 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 CGM, and counsel to CGM Capital Development Fund and CGM.
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
<PAGE>
the Trust, or (ii) a written exchange request or Service Options Form to CGM
Shareholder Services. 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 with respect to a
particular Fund (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 checking account at a bank or other financial institution. Please
contact CGM Shareholder Services at 800-343-5678 to determine the requirements
associated with debits from savings banks and credit unions. Debits from money
market accounts are not acceptable. Shareholders receive a confirmation of each
purchase of Fund shares under the AIP. If a shareholder elects to redeem shares
of the 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 terminate a
shareholder's participation in the AIP immediately 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, Traditional and Roth 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.
<PAGE>
CGM American Tax Free Fund is not an appropriate investment for Traditional or
Roth 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, generally, 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.
If a statement or check sent to a shareholder is returned three times, mailings
to the shareholder may be discontinued until the shareholder contacts CGM
Shareholder Services with correct address information.
REDEMPTIONS
The procedures for redemption of Fund shares are summarized in the Prospectus
under "How to Sell 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, as amended (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, as amended (the "1934 Act");
credit unions (as defined in ss. 19(b)(1)(A) of the Federal Reserve Act, as
amended [12 U.S.C. ss. 461(b)]); national securities exchanges, registered
<PAGE>
securities associations and clearing agencies, as those terms are defined under
the 1934 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 Traditional or
Roth 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
custodian or 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. Except in the case of a CGM
retirement plan, the service option of telephone redemption by check is
available to shareholders automatically unless this option is declined in the
application or in writing. 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
(with a signature guarantee) available from the Trust or CGM Shareholder
Services. 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
<PAGE>
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 or wired 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, CGM
American Tax Free Fund and CGM Fixed Income Fund have elected to be governed by
Rule 18f-1 under the 1940 Act pursuant to which each Fund is obligated to
redeem shares solely in cash for any shareholder during any 90-day period up to
the lesser of $250,000 or 1% of the total net asset value of the 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-term or short-term capital gain or
loss. See "Income Dividends, Capital Gains Distributions and Tax Status."
<PAGE>
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 and Taxes" it is
the policy of each Fund 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 a
shareholder elects to receive capital gains in cash, his or her income
dividends must also be received in cash. Shareholders can elect to receive
payments of cash dividends and capital gains distributions either by check or
by direct deposit to a bank account that they have predesignated. These
elections can be made at the time the account is opened and may be changed by
the shareholder at any time by submitting a written request directly to CGM
Shareholder Services or by calling 800-343-5678. However, changes in bank
account information for direct deposits of cash dividends and capital gains
distributions must be made through a Service Options Form. In order for a
change to be effective 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 a shareholder elects to receive distributions in cash and
checks are returned "undeliverable" or remain uncashed for six months, such
shareholder's cash election will be changed automatically and the shareholder's
future dividend and capital gains 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.
Each Fund has met, and intends to meet the requirements of the Internal Revenue
Code with respect to regulated companies. To qualify, a Fund must, among other
things, (a) derive in each taxable year at least 90% of its gross income from
<PAGE>
dividends, interest, payments with respect to securities loans and gains from
the sale or other disposition of stock, securities or foreign currencies or
other income derived with respect to its business of investing in such stock,
securities or currencies; (b) diversify its holdings so that, at the end of
each quarter of the taxable year, (i) at least 50% of the market value of the
Fund's assets is represented by cash and cash items (including receivables),
U.S. Government securities, the securities of other regulated investment
companies and other securities, with such other securities of any one issuer
limited for the purposes of this calculation to an amount not greater than 5%
of the value of the Fund's total assets and not greater than 10% of the
outstanding voting securities of such issuer, and (ii) not more than 25% of the
value of its total assets is invested in the securities of any one issuer
(other than U.S. Government securities or the securities of other regulated
investment companies); and (c) distribute at least 90% of its investment
company taxable income (which includes, among other items, dividends, interest
and the excess of net short-term capital gains over net long-term capital
losses) and its net tax-exempt interest income each taxable year, if any.
As a regulated investment company, the Fund generally will not be subject to
U.S. federal income tax on its investment company taxable income and net
capital gains (the excess of net long-term capital gains over net short-term
capital losses), if any, that it distributes to shareholders. The Fund intends
to distribute to its shareholders, at least annually, substantially all of its
investment company taxable income and net capital gains. Amounts not
distributed on a timely basis in accordance with a calendar year distribution
requirement are subject to a nondeductible 4% excise tax. To prevent imposition
of the excise tax, the Fund must distribute during each calendar year an amount
equal to the sum of (1) at least 98% of its ordinary income (not taking into
account any capital gains or losses) for the calendar year, (2) at least 98% of
its capital gains in excess of its capital losses (adjusted for certain
ordinary losses, as prescribed by the Code) for the one-year period ending on
October 31 of the calendar year, and (3) any ordinary income and capital gains
for previous years that was not distributed during those years. A distribution
will be treated as paid on December 31 of the current calendar year if it is
declared by the Fund in October, November or December with a record date in
such a month and paid by the Fund during January of the following calendar
year. Such distributions will be taxable to shareholders in the calendar year
in which the distributions are declared, rather than the calendar year in which
the distributions are received. To prevent application of the excise tax, the
Fund intends to make its distributions in accordance with the calendar year
distribution requirement.
Dividends paid by a Fund from net investment income (including dividends and
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
<PAGE>
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) which are designated by a Fund as capital
gains distributions 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 from the 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.
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.
Under the Code, a shareholder may not deduct that portion of interest on
indebtedness incurred or continued to purchase or carry shares of an investment
company paying exempt-interest dividends (such as those of the CGM American Tax
<PAGE>
Free Fund) which bears the same ratio to the total of such interest as the
exempt-interest dividends bear to the total dividends (excluding net capital
gain dividends) received by the shareholder. In addition, under rules issued by
the Internal Revenue Service for determining when borrowed funds are considered
to be used to purchase or carry particular assets, the purchase of shares may
be considered to have been made with borrowed funds even though the borrowed
funds are not directly traceable to such purchase.
Shareholders are advised to consult their own tax advisers with respect to the
particular tax consequences to them of an investment in the CGM American Tax
Free Fund. Persons who may be "substantial users" (or "related persons" of
substantial users) of facilities financed by industrial development bonds
should consult their tax advisers before purchasing shares of the Fund. The
term "substantial user" generally includes any "non-exempt person" who
regularly uses in his or her trade or business a part of a facility financed by
industrial development bonds. Generally, an individual will not be a "related
person" of a substantial user under the Code unless the person or his or her
immediate family owns directly or indirectly in the aggregate more than a 50%
equity interest in the substantial user.
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.
Upon the sale or other disposition of shares of a Fund, a shareholder may
realize a capital gain or loss which will be long-term or short-term, generally
depending upon the shareholder's holding period for the shares. Any loss
realized on a sale or exchange will be disallowed to the extent the shares
disposed of are replaced (including shares acquired pursuant to a dividend
reinvestment plan) within a period of 61 days beginning 30 days before and
ending 30 days after disposition of the shares. In such a case, the basis of
the shares acquired will be adjusted to reflect the disallowed loss. Any loss
realized by a shareholder on a disposition of Fund shares held by the
shareholder for six months or less will be treated as a long-term capital loss
to the extent of any distributions of net capital gains received by the
shareholder with respect to such shares.
Investments by CGM Fixed Income Fund in zero coupon securities will result in
income to the Fund equal to a portion of the excess of the face value of the
securities over their issue price (the "original issue discount") each year
that the securities are held, even though the Fund receives no cash interest
payments. This income is included in determining the amount of income which the
<PAGE>
Fund must distribute to maintain its status as a regulated investment company
and to avoid the payment of federal income tax and the 4% excise tax. In
addition, if a Fund invests in certain high yield original issue discount
obligations issued by corporations, a portion of the original issue discount
accruing on the obligation may be eligible for the deduction for dividends
received by corporations.
Gain derived by a Fund from the disposition of any market discount bonds (i.e.,
bonds purchased other than at original issue, where the face value of the bonds
exceeds their purchase price) will be taxed as ordinary income to the extent of
the accrued market discount on the bonds, unless the Fund elects to include the
market discount in income as it accrues.
Income received by the CGM Fixed Income Fund from sources within foreign
countries may be subject to withholding and other taxes imposed by such
countries.
Each Fund will report to its U.S. shareholders and the IRS the amount of
dividends paid during each calendar year and the amount of tax withheld, if
any. Under the backup withholding rules, a shareholder may be subject to backup
withholding at the rate of 31% with respect to dividends paid and redemptions
unless such shareholder (a) is a corporation or comes within certain other
exempt categories and, when required, demonstrates this fact, or (b) provides a
taxpayer identification number, certifies that the shareholder is not subject
to backup withholding, and otherwise complies with applicable requirements of
the backup withholding rules. A shareholder who does not provide a Fund with
his correct taxpayer identification number may also be subject to penalties
imposed by the IRS. Any amount paid as backup withholding will be creditable
against the shareholder's income tax liability.
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. CGM Shareholder Services, 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
<PAGE>
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.
Investors should consult their tax advisors regarding the application of the
above-described general federal taxation rules to their own circumstances and
the state, local, or foreign tax consequences to them of any investment in
either Fund.
FINANCIAL STATEMENTS
The financial statements and Report of Independent Accountants for the year
ended December 31, 1998 for each Fund, which are included in the respective
Fund's Annual Report to Shareholders for the year ended December 31, 1998, are
incorporated herein by reference.
<PAGE>
APPENDIX A
RATINGS
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC. DEBT RATINGS -- TAXABLE DEBT &
DEPOSITS GLOBALLY:
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 the 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.
<PAGE>
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 Caa. 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 MOODY'S INVESTORS SERVICE, INC. SHORT-TERM MIG/VMIG RATINGS --
U.S. TAX-EXEMPT MUNICIPALS:
MIG 1/VMIG 1 -- This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support or
demonstrated broadbased access to the market for refinancing.
MIG 2/VMIG 2 -- This designation denotes high quality. Margins of protection
are ample although not so large as in the preceding group.
MIG 3/VMIG 3 -- This designation denotes favorable quality. All security
elements are accounted for but there is lacking the undeniable strength of the
preceding grades. Liquidity and cash flow protection may be narrow and market
access for refinancing is likely to be less well-established.
MIG 4/VMIG 4 -- This designation denotes adequate quality. Protection commonly
regarded as required of an investment security is present and although not
distinctly or predominantly speculative, there is specific risk.
S.G. -- This designation denotes speculative quality. Debt instruments in this
category lack margins of protection.
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC. PREFERRED STOCK RATINGS:
aaa -- An issue which is rated 'aaa' is considered to be a top-quality
preferred stock. This rating indicates good asset protection and the least risk
of dividend impairment within the universe of preferred stocks.
aa -- An issue which is rated 'aa' is considered a high-grade preferred stock.
This rating indicates that there is reasonable assurance the earnings and asset
protection will remain relatively well maintained in the foreseeable future.
<PAGE>
a -- An issue which is rated 'a' is considered to be an upper-medium grade
preferred stock. While risks are judged to be somewhat greater than in the
'aaa' and 'aa' classifications, earnings and asset protection are,
nevertheless, expected to be maintained at adequate levels.
baa -- An issue which is rated 'baa' is considered to be a medium-grade
preferred stock, neither highly protected nor poorly secured. Earnings and
asset protection appear adequate at present but may be questionable over any
great length of time.
ba -- An issue which is rated 'ba' is considered to have speculative elements,
and its future cannot be considered well assured. Earnings and asset protection
may be very moderate and not well safeguarded during adverse periods.
Uncertainty of position characterizes preferred stocks in this class.
b -- An issue which is rated 'b' generally lacks the characteristics of a
desirable investment. Assurance of dividend payments and maintenance of other
terms of the issue over any long period of time may be small.
caa -- An issue which is rated 'caa' is likely to be in arrears on dividend
payments. This rating designation does not purport to indicate the future
status of payments.
MOODY'S SHORT-TERM PRIME RATING SYSTEM -- TAXABLE DEBT & DEPOSITS GLOBALLY:
Moody's short-term debt ratings are opinions of the ability of issuers to repay
punctually senior debt obligations. These obligations have an original maturity
not exceeding one year, unless explicitly noted.
Moody's employs the following three designations, all judged to be investment
grade, to indicate the relative repayment ability of rated issuers:
PRIME-1 Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1 repayment
ability will often be evidenced by many of the following characteristics:
o Leading market positions in well-established industries
o High rates of return on funds employed.
o Conservative capitalization structure with moderate reliance on
debt and ample asset protection.
o Broad margins in earnings coverage of fixed financial charges and
high internal cash generation.
o Well-established access to a range of financial markets and
assured sources of alternate liquidity.
<PAGE>
PRIME-2 Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
PRIME-3 Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of senior short-term obligations. The effect of industry
characteristics and market compositions may be more pronounced. Variability in
earnings and profitability may result in changes in the level of debt
protection measurements and may require relatively high financial leverage.
Adequate alternate liquidity is maintained.
NOT PRIME Issuers rated Not Prime do not fall within any of the Prime rating
categories.
DESCRIPTION OF STANDARD & POOR'S CORPORATION LONG-TERM ISSUE CREDIT RATINGS:
AAA -- An obligation rated 'AAA' has the highest rating assigned by Standard &
Poor's. The obligor's capacity to meet its financial commitment on the
obligation is extremely strong.
AA -- An obligation rated 'AA' differs from the highest rated obligations only
in small degree. The obligor's capacity to meet its financial commitment on the
obligation is very strong.
A -- An obligation rated 'A' is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than obligations in
higher rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.
BBB -- An obligation rated 'BBB' exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.
BB, B, CCC, CC and C -- Obligations rated 'BB', 'B', 'CCC', 'CC', and 'C' are
regarded as having significant speculative characteristics. 'BB' indicates the
least degree of speculation and 'C' the highest. While such obligations will
likely have some quality and protective characteristics, these may be
outweighed by large uncertainties or major exposures to adverse conditions.
<PAGE>
BB -- An obligation rated 'BB' is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or exposure
to adverse business, financial, or economic conditions which could lead to the
obligor's inadequate capacity to meet its financial commitment on the
obligation.
B -- An obligation rated 'B' is more vulnerable to nonpayment than obligations
rated 'BB', but the obligor currently has the capacity to meet its financial
commitment on the obligation. Adverse business, financial, or economic
conditions will likely impair the obligor's capacity or willingness to meet its
financial commitment on the obligation.
CCC -- An obligation rated 'CCC' is currently vulnerable to nonpayment, and is
dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation. In the event of
adverse business, financial, or economic conditions, the obligor is not likely
to have the capacity to meet its financial commitment on the obligation.
Plus (+) or Minus (-): The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
r -- This symbol is attached to the ratings of instruments with significant
noncredit risks. It highlights risks to principal or volatility of expected
returns which are not addressed in the credit rating. Examples include:
obligations linked or indexed to equities, currencies, or commodities;
obligations exposed to severe prepayment risk -- such as interest-only or
principal-only mortgage securities; and obligations with unusually risky
interest terms, such as inverse floaters.
DESCRIPTION OF STANDARD & POOR'S CORPORATION PREFERRED STOCK RATING
DEFINITIONS:
AAA -- This is the highest rating that may be assigned by Standard & Poor's to
a preferred stock issue and indicates an extremely strong capacity to pay the
preferred stock obligations.
AA -- A preferred stock issue rated 'AA' also qualifies as a high-quality,
fixed-income security. The capacity to pay preferred stock obligations is very
strong, although not as overwhelming as for issues rated 'AAA'.
A -- An issue rated 'A' is backed by a sound capacity to pay the preferred
stock obligations, although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions.
<PAGE>
BBB -- An issue rated 'BBB' is regarded as backed by an adequate capacity to
pay the preferred stock obligations. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity to make payments for a preferred
stock in this category than for issues in the 'A' category.
BB, B, CCC -- Preferred stock rated 'BB,' 'B,' and 'CCC' are regarded, on
balance, as predominantly speculative with respect to the issuer's capacity to
pay preferred stock obligations. 'BB' indicates the lowest degree of
speculation and 'CCC' the highest. While such issues will likely have some
quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
DESCRIPTION OF STANDARD & POOR'S CORPORATION MUNICIPAL NOTES RATINGS:
An S&P note rating reflects the liquidity factors and market access risks
unique to notes. Notes due in three years or less will likely receive a note
rating. Notes maturing beyond three years will most likely receive a long-term
debt rating. The following criteria will be used in making that assessment:
- -- Amortization schedule (the larger the final maturity relative to other
maturities, the more likely it will be treated as a note).
- -- Source of payment (the more dependent the issue is on the market for its
refinancing, the more likely it will be treated as a note).
Note rating symbols and definitions are as follows:
SP-1 -- Strong capacity to pay principal and interest. An issue determined to
possess a very strong capacity to pay debt service is given a plus (+)
designation.
SP-2 -- Satisfactory capacity to pay principal and interest, with some
vulnerability to adverse financial and economic changes over the term of the
notes.
SP-3 -- Speculative capacity to pay principal and interest.
SHORT-TERM ISSUE CREDIT RATINGS:
A-1 -- A short-term obligation rated 'A-1' is rated in the highest category by
Standard & Poor's. The obligor's capacity to meet its financial commitment on
the obligation is strong. Within this category, certain obligations are
designated with a plus sign (+). This indicates that the obligor's capacity to
meet its financial commitment on these obligations is extremely strong.
<PAGE>
A-2 -- A short-term obligation rated 'A-2' is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than
obligations in higher rating categories. However, the obligor's capacity to
meet its financial commitment on the obligation is satisfactory.
A-3 -- A short-term obligation rated 'A-3' exhibits adequate protection
parameters. However, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
B -- A short-term obligation rated 'B' is regarded as having significant
speculative characteristics. The obligor currently has the capacity to meet its
financial commitment on the obligation; however, it faces major ongoing
uncertainties which could lead to the obligor's inadequate capacity to meet its
financial commitment on the obligation.
C -- A short-term obligation rated 'C' is currently vulnerable to nonpayment
and is dependent upon favorable business, financial, and economic conditions
for the obligor to meet its financial commitment on the obligation.
<PAGE>
<TABLE>
<CAPTION>
APPENDIX B
CGM AMERICAN TAX FREE FUND
TAXABLE EQUIVALENT YIELD TABLE
<S> <C> <C> <C> <C>
A FULLY TAXABLE INVESTMENT
TO WOULD HAVE TO PAY YOU:
MATCH A ____________________________________________________________
TAX-FREE ASSUMING A ASSUMING A ASSUMING A ASSUMING A
YIELD MARGINAL TAX MARGINAL TAX MARGINAL TAX MARGINAL TAX
OF: RATE OF 28% RATE OF 31% RATE OF 36% RATE OF 39.6%
2.00% 2.78% 2.90% 3.13% 3.31%
3.00% 4.17% 4.35% 4.69% 4.97%
4.00% 5.56% 5.80% 6.25% 6.62%
5.00% 6.94% 7.25% 7.81% 8.28%
6.00% 8.33% 8.70% 9.38% 9.93%
</TABLE>
This table is a hypothetical illustration and should not be considered an
indication of CGM American Tax Free Fund's performance.
The assumed marginal tax rates are not necessarily the highest possible
marginal tax rates, nor are they the lowest rates. These rates were picked as
exemplary rates that may apply to many taxpayers.
<PAGE>
CGM FOCUS FUND
STATEMENT OF ADDITIONAL INFORMATION
May 1, 1999
This Statement of Additional Information (the "Statement" or "SAI") provides
further information concerning the activities and operations of CGM Focus Fund.
This Statement is not a prospectus, and should be read in conjunction with CGM
Focus Fund Prospectus dated May 1, 1999 (the "Prospectus"). Certain information
which is included in the Prospectus is incorporated by reference into this
Statement. A copy of the Prospectus may be obtained from CGM Trust, by writing
to: c/o The CGM Funds Investor Services Division, P.O. Box 449, Boston,
Massachusetts 02117, or by calling 800-345-4048.
Certain financial information which is included in the Fund's Annual Report to
shareholders dated December 31, 1998 is incorporated by reference into this
Statement. A copy of the Annual Report accompanies this Statement.
<PAGE>
TABLE OF CONTENTS
Page
INTRODUCTION................................................................1
ADDITIONAL INFORMATION REGARDING STRATEGIES AND RISKS.......................1
FUNDAMENTAL INVESTMENT RESTRICTIONS.........................................8
PORTFOLIO TURNOVER..........................................................9
MANAGEMENT OF THE FUND.....................................................10
INVESTMENT ADVISORY AND OTHER SERVICES.....................................12
Advisory Agreement.................................................12
Custodial Arrangements.............................................13
Independent Accountants............................................14
Other Arrangements.................................................14
PORTFOLIO TRANSACTIONS AND BROKERAGE.......................................14
DESCRIPTION OF THE TRUST...................................................15
Shareholder Rights.................................................16
Shareholder and Trustee Liability..................................17
ADVERTISING AND PERFORMANCE INFORMATION....................................18
Calculation of Total Return........................................18
Performance Comparisons............................................19
NET ASSET VALUE AND PUBLIC OFFERING PRICE..................................20
HOW TO PURCHASE SHARES.....................................................21
SHAREHOLDER SERVICES.......................................................21
Open Accounts......................................................21
Systematic Withdrawal Plans ("SWP")................................22
Exchange Privilege.................................................23
Automatic Investment Plans ("AIP").................................23
Retirement Plans...................................................24
Address Changes....................................................24
REDEMPTIONS................................................................25
Redeeming by Telephone.............................................25
Check Sent to the Record Address...................................26
Proceeds Wired to a Predesignated Bank.............................26
All Redemptions....................................................26
INCOME DIVIDENDS, CAPITAL GAINS DISTRIBUTIONS AND TAX STATUS...............27
FINANCIAL STATEMENTS.......................................................31
<PAGE>
INTRODUCTION
CGM Focus Fund (the "Fund") is organized as an open-end, non-diversified
separate series of shares of CGM Trust (the "Trust"). The Trust is a
Massachusetts business trust established under the laws of Massachusetts in
1986. The Trust is governed by an Amended and Restated Agreement and
Declaration of Trust (the "Declaration of Trust") dated January 23, 1997. 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.
Descriptions in the Prospectus and in this Statement of a particular investment
practice or technique in which a Fund may engage (such as short selling,
hedging, etc.) or a financial instrument which a Fund may purchase (such as
options, forward foreign currency contracts, etc.) are meant to describe the
spectrum of investments that CGM, in its discretion, might, but is not required
to, use in managing the Fund's portfolio assets. CGM may, in its discretion, at
any time employ such practice, technique or instrument for one or more funds
but not for all funds advised by it. Furthermore, it is possible that certain
types of financial instruments or investment techniques described herein may
not be available, permissible, economically feasible or effective for their
intended purposes in all markets. Certain practices, techniques, or instruments
may not be principal activities of a Fund but, to the extent employed, could
from time to time have a material impact on the Fund's performance.
ADDITIONAL INFORMATION REGARDING STRATEGIES AND RISKS
THE FOLLOWING SUPPLEMENTS THE DISCUSSION IN THE PROSPECTUS OF THE VARIOUS
INVESTMENT STRATEGIES AND TECHNIQUES THAT MAY BE EMPLOYED BY THE FUND AND
CERTAIN ASSOCIATED RISKS.
SHORT SALES. The Fund may make short sales of securities. A short sale is a
transaction in which the Fund sells a security it does not own in anticipation
that the market price of that security will decline. When the Fund makes a
short sale, it must borrow the security sold short to make delivery to the
buyer. The Fund then is obligated to replace the security borrowed by
purchasing the security at the market price at the time of replacement. The
price at such time may be more or less than the price at which the security was
sold by the Fund. The Fund may have to pay a premium to borrow the security and
is obligated to pay the lender amounts equal to any dividends or interest that
accrue during the period of the loan. If the price of the security sold short
increases between the time of the short sale and the time the Fund replaces the
<PAGE>
borrowed security, the Fund will incur a loss. Conversely, if the price
declines, the Fund will realize a gain. Any gain will be decreased, and any
loss increased, by the premium and transaction costs described above. Although
the Fund's gain is limited to the price at which it sold the security short,
the potential loss is theoretically unlimited.
While the short sale is outstanding, the Fund is required to collateralize its
obligations, which has the practical effect of limiting the extent to which the
Fund may engage in short sales. The proceeds of the short sale will be retained
by the broker, to the extent necessary to meet its margin requirements, until
the short position is closed out. In general, the Fund will also be required to
pledge additional cash or liquid securities to the broker as collateral for its
obligations, such that the cash held by the broker and the additional pledged
cash and securities equals at least 150% of the current market value of the
securities sold short. Until the Fund closes its short position, the Fund will
be required to (a) maintain with its custodian a segregated account, which will
be marked to market daily, containing cash or liquid securities (which may
include equity securities) such that (i) the amount deposited in the segregated
account plus the amount deposited with the broker as collateral will equal the
current market value of the security sold short or (b) otherwise cover the
Fund's short position. The Fund may also cover its short position by owning the
security sold short or by holding a call option on the security with a strike
price no higher than the price at which the security was sold.
OPTIONS ON SECURITIES AND STOCK INDEXES. The Fund may purchase put and call
options on equity securities. A put option gives the purchaser of the option,
in exchange for the payment of a premium, the right to sell and the writer, if
the purchaser exercises his right, the obligation to buy the underlying
security at the exercise price during the option period. A call option gives
the purchaser of the option, in exchange for the payment of a premium, the
right to buy and the writer, if the purchaser exercises his right, the
obligation to sell the underlying security at the exercise price during the
option period. If the option is not sold while it has remaining value, or if
during the life of an option the underlying security does not depreciate (in
the case of a put option) or appreciate (in the case of a call option), the
purchaser of the option may lose his entire investment. Further, except where
the value of the remaining life of the option may be realized in the secondary
market, for the option purchase to be profitable, the market price of the
underlying security must be below (in the case of a put option) or above (in
the case of a call option) the exercise price by more than the premium and
transaction costs paid in connection with the purchase of the option and its
sale or exercise. Because option premiums paid by the Fund are small in
relation to the market value of the investments underlying the options,
purchasing options can be more speculative than investing directly in equity
securities.
<PAGE>
The Fund may also purchase put and call options on stock indexes. The amount of
cash received upon exercise of a stock index option, if any, will be the
difference between the closing price of the index and the exercise price of the
option, multiplied by a specified dollar multiple. All settlements of stock
index option transactions are in cash. Some stock index options are based on a
broad market index such as the S&P 500 Index, the New York Stock Exchange
Composite Index, or the American Stock Exchange Major Market Index, or on a
narrower index such as the Philadelphia Stock Exchange Over-the-Counter Index.
Because the value of a stock index option depends upon movements in the level
of the index rather than the price of a particular stock, whether the Fund will
realize a gain or loss from the purchase of options on an index depends upon
movements in the level of stock prices in the stock market generally or, in the
case of certain indexes, in an industry or market segment, rather that upon
movements in the price of a particular stock.
The Fund may liquidate its position as the holder of an option by effecting a
"closing sale transaction." The Fund accomplishes this by selling an option of
the same series as the option previously purchased by the Fund. There is no
guarantee that a closing sale transaction can be effected. If any option is not
exercised or sold, the option will become worthless on its expiration date. The
Fund will realize a gain (or a loss) on a closing sale transaction with respect
to an option previously purchased by the Fund if the premium, less commission
costs, received by the Fund on the sale of the option to close the transaction
is greater (or less) than the premium, plus commission costs, paid by the Fund
to purchase the option. If an option which the Fund has purchased expires
"out-of-the-money," the option will become worthless on the expiration date,
and the Fund will realize a loss in the amount of the premium paid, plus
commission costs.
The options purchased by the Fund may be exchange-listed options ("OCC
Options") or over-the-counter options ("OTC Options"). OCC Options are issued
by the Options Clearing Corporation ("OCC"). The OCC is a clearing organization
for financial derivative instruments and guarantees the performance of the
obligations of the parties to such options. The Fund's ability to close out its
position as a writer or purchaser of an OCC Option is dependent upon the
existence of a liquid secondary market on option exchanges. Among the possible
reasons for the absence of a liquid secondary market on an exchange are: (i)
insufficient trading interest in certain options; (ii) restrictions on
transactions imposed by an exchange; (iii) trading halts, suspensions or other
restrictions imposed with respect to particular classes or series of options or
underlying securities; (iv) interruption of the normal operations on an
exchange; (v) inadequacy of the facilities of an exchange or the OCC to handle
current trading volume; or (vi) a decision by one or more exchanges to
discontinue the trading of options (or a particular class or series of options)
in which event the secondary market on that exchange (or in that class or
<PAGE>
series of options) would cease to exist, although outstanding options on that
exchange that had been listed by the OCC as a result of trades on that exchange
would generally continue to be exercisable in accordance with their terms. Each
of the exchanges on which stock index options are traded has established
limitations governing the maximum number of call or put options on the same
index which may be bought by a single investor, whether acting alone or in
concert with others (regardless of whether such options are written on the same
or different exchanges or are held or written on one or more accounts or
through one or more brokers). Under these limitations, option positions of all
investment companies advised by the same investment adviser are combined for
purposes of these limits. Pursuant to these limitations, an exchange may order
the liquidation of positions and may impose other sanctions or restrictions.
These positions limits may restrict the number of stock index options which the
Fund may buy or sell. Although certain option exchanges attempt to provide
continuously liquid markets in which holders of options can close out their
positions at any time prior to the expiration of the option, no assurance can
be given that a market will exist at all times for all outstanding options
purchased by the Fund. If an options market were to become unavailable, the
Fund would be unable to realize its profits or limit its losses until the Fund
could exercise options it holds.
With OTC Options, such variables as expiration date, exercise price and premium
will be agreed upon between the Fund and the transacting dealer, without the
intermediation of a third party such as the OCC. If the transacting dealer
fails to take delivery of the securities underlying an option it has written,
in accordance with the terms of that option as written, the Fund would lose the
premium paid for the option as well as any anticipated benefit of the
transaction. The Fund will engage in OTC Option transactions only with primary
United States Government securities dealers recognized by the Federal Reserve
Bank of New York. To the extent that the option markets close before the
markets for the underlying securities, significant price and rate movements can
take place in the underlying markets that cannot be reflected in the option
markets.
FUTURES CONTRACTS AND RELATED OPTIONS. The Fund may purchase and sell stock
index futures contracts. The Fund may also purchase put and call options on
stock index futures contracts. A stock index futures contract obligates the
seller to deliver (and the purchaser to take delivery of) an amount of cash
equal to a specific dollar amount multiplied by the difference between the
value of a specific stock index at the close of the last trading day of the
contract and the price at which the agreement is made. No physical delivery of
the underlying stocks in the index is made. The Fund may also purchase stock
index futures contracts as a substitute for a comparable market position in the
underlying securities.
The Fund may also purchase put and call options on stock index futures
contracts. When the Fund purchases a put or call option on a futures contract,
<PAGE>
the Fund pays a premium for the right to sell or purchase, respectively, the
underlying futures contract for a specified price upon exercise at any time
during the option period. Options on futures contracts are similar to options
on securities except that an option on a futures contract gives the purchaser
the right, in exchange for the premium paid, to assume a position in a futures
contract. The Fund may engage in related closing transactions with respect to
options on futures contracts.
The Fund will only engage in transactions in futures contracts and options
thereupon that are traded on a United States exchange or board of trade.
Whether the Fund realizes a gain or loss from futures activities depends
generally upon movements in the underlying commodity. The extent of the Fund's
loss from an uncovered short position on futures contracts is potentially
unlimited.
When the Fund purchases or sells a stock index futures contract, the Fund will
be required to (a) maintain with its custodian a segregated account, which will
be marked to market daily, containing cash or liquid securities (which may
include equity securities), that, when added to any amounts deposited with a
futures commission merchant as margin, are equal to the market value of the
futures contract or (b) otherwise "cover" its position. The Fund may cover its
short position in a futures contract by taking a long position in the
instruments underlying the futures contract, or by taking positions in
instruments the prices of which are expected to move relatively consistently
with the futures contract. The Fund may cover its long position in a futures
contract by purchasing a put option on the same futures contract with a strike
price (i.e., an exercise price) as high or higher than the price of the futures
contract, or, if the strike price of the put is less than the price of the
futures contract, the Fund will maintain in a segregated account cash or liquid
securities equal in value to the difference between the strike price of the put
and the price of the future. The Fund may also cover its long position in a
futures contract by taking a short position in the instruments underlying the
futures contract, or by taking positions in instruments the prices of which are
expected to move relatively consistently with the futures contract.
Typically, an investment in a futures contract requires the Fund to deposit
with the applicable exchange or other specified financial intermediary as
security for its obligations an amount of cash or other specified debt
securities which initially is 1% to 5% of the face amount of the contract and
which thereafter fluctuates on a periodic basis as the value of the contract
fluctuates. If the price of an open futures contract changes (by increase in
the case of a sale or decrease in the case of a purchase) so that the loss on
the futures contract reaches a point at which the margin on deposit does not
satisfy margin requirements, the broker will require an increase in the margin.
However, if the value of a position increases because of favorable price
changes in the futures contract so that the margin deposit exceeds the required
<PAGE>
margin, the broker will pay the excess to the Fund. These subsequent payments,
called "variation margin," to and from the futures broker, are made on a daily
basis as the price of the underlying assets fluctuate making the long and short
positions in the futures contract more or less valuable, a process known as
"marking to the market."
Although the Fund intends to sell futures contracts only if there is an active
market for such contracts, no assurance can be given that a liquid market will
exist for any particular contract at any particular time. Many futures
exchanges and boards of trade limit the amount of fluctuation permitted in
futures contract prices during a single trading day. Once the daily limit has
been reached in a particular contract, no trades may be made that day at a
price beyond that limit or trading may be suspended for specified periods
during the day. Futures contract prices could move to the limit for several
consecutive trading days with little or no trading, thereby preventing prompt
liquidation of futures positions and potentially subjecting the Fund to
substantial losses. If trading is not possible, or the Fund determines not to
close a futures position in anticipation of adverse price movements, the Fund
will be required to make daily cash payments of variation margin. The risk that
the Fund will be unable to close out a futures position will be minimized by
entering into such transactions on a national exchange with an active and
liquid secondary market.
The Fund's use of futures and options on futures will in all cases be
consistent with applicable regulatory requirements and in particular the rules
and regulations of the Commodity Futures Trading Commission ("CFTC") with which
the Fund must comply in order not to be deemed a commodity pool operator within
the meaning and intent of the Commodity Exchange Act and the regulations
promulgated thereunder. Regulations of the CFTC applicable to the Fund
currently require that all of the Fund's futures and options on futures
transactions be either for bona fide hedging purposes or for non-hedging
purposes provided that the sum of the amounts of initial margin deposits and
premiums paid for options on futures required to establish such non-hedging
positions does not exceed 5% of the liquidation value of the Fund's total
assets (after taking into account unrealized profits and unrealized losses on
such futures and options transactions). In the case of an option on a futures
contract that is "in-the-money" at the time of purchase (i.e. the amount by
which the exercise price of the put option exceeds the current market value of
the underlying security or the amount by which the current market value of the
underlying security exceeds the exercise price of the call option), the
in-the-money amount may be excluded in calculating this 5% limitation.
ILLIQUID SECURITIES. The Fund may invest up to 15% of its net assets in
illiquid securities. Securities that may be resold without registration
pursuant to Rule 144A may be treated as liquid for these purposes, subject to
the supervision and oversight of the Board of Trustees, in accordance with
<PAGE>
guidelines established by the Board of Trustees to determine whether there is a
readily available market for such securities. The foregoing investment practice
could have the effect of increasing the level of illiquidity in the Fund to the
extent that qualified institutional buyers become uninterested in purchasing
the securities.
BORROWING. The Fund may borrow to increase its holdings of portfolio securities
and other instruments or for liquidity purposes. At all times when borrowings
are outstanding the Fund must maintain at least 300% "asset coverage," meaning
that the total assets of the Fund must have a value of at least 300% of all
amounts borrowed. It is anticipated that such borrowings would be pursuant to a
negotiated loan agreement with a bank or by means of reverse repurchase
agreements with other institutional lenders, such as broker dealers. The Fund's
borrowing policies are fundamental and, therefore, may not be changed without
shareholder approval.
REPURCHASE AGREEMENTS. The Fund may invest 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 Investment Company Act of 1940, as
amended (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.
REVERSE REPURCHASE AGREEMENTS. The 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
<PAGE>
agreements, a segregated account of the Fund consisting of cash, cash
equivalents, U.S. Government securities or other liquid securities (which may
include equity 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.
TEMPORARY DEFENSIVE POSITIONS. The Fund may depart from its principal
investment strategies by taking temporary defensive positions in response to
adverse market, economic or political conditions. When doing so, the Fund may
hold a substantial portion of its assets in cash or investment grade
fixed-income securities and may not be pursuing its investment objective.
FUNDAMENTAL INVESTMENT RESTRICTIONS
The 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 the 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 or are engaged in the real estate
business, including real estate investment trusts, 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;
<PAGE>
(6) Purchase or sell commodities or commodity futures contracts, except that
the Fund may invest in financial futures contracts, options thereon and similar
instruments; or
(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.
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 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. Non-fundamental investment restrictions may be changed at any time by
vote of a majority of the Trust's Board of Trustees.
PORTFOLIO TURNOVER
The Fund's investment objective is long-term growth of capital and the Fund
does not purchase securities with the intention of engaging in short-term
trading. The Fund will, however, sell any particular security and reinvest
proceeds when it is deemed prudent by the Fund's investment manager, regardless
of the length of the holding period. Frequent trading involves higher
securities transaction costs which may adversely affect the Fund's performance.
To the extent that this policy results in the realization of gains on
investments, the Fund will make distributions to its shareholders, which may
accelerate shareholders' tax liabilities.
The Fund's portfolio turnover rate may exceed 300%. The Fund's investments in
short sales and options and futures contracts that mature in less than one year
are excluded for purposes of computing the Fund's portfolio turnover.
The Fund's portfolio turnover rate is set forth in the Prospectus in the table
entitled "Financial Highlights."
<PAGE>
MANAGEMENT OF THE FUND
The Fund's Board of Trustees ("the Board") is responsible for the overall
management of the Fund, including general supervision and review of the Fund's
investment activities. The Board, in turn, elects the officers who are
responsible for administering the Fund's day-to-day operations.
The affiliations of the officers and Board members and their principal
occupations for the past five years are shown below.
PETER O. BROWN (Age 58) -- 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.
G. KENNETH HEEBNER (Age 58)* -- Trustee and Vice President
Employee, CGM; formerly Vice President and Director, Loomis Sayles and
Company, Incorporated ("Loomis Sayles").
ROBERT L. KEMP (Age 66)* -- Trustee and President
Employee, CGM; formerly President and Director, Loomis Sayles.
ROBERT B. KITTREDGE (Age 78) -- Trustee
21 Sturdivant Street, Cumberland Foreside, ME; Retired; formerly Vice
President, General Counsel and Director, Loomis Sayles.
LAURENS MACLURE (Age 73) -- Trustee
183 Sohier Street, Cohasset, MA; Retired; formerly President and Chief
Executive Officer, New England Deaconess Hospital.
JAMES VAN DYKE QUEREAU, JR. (Age 50) -- Trustee
59 Annewood Lane, Wayne, PA; Managing Partner, Stratton Management
Company; formerly Institutional Managing Partner, Loomis Sayles.
J. BAUR WHITTLESEY (Age 52) -- Trustee 1521 Locust Street, Philadelphia, PA;
Attorney.
KATHLEEN S. HAUGHTON (Age 38) -- Vice President
Employee -- Investor Services Division, CGM; formerly Vice President,
Boston Financial Data Services, Inc.
LESLIE A. LAKE (Age 54) -- Vice President and Secretary
Employee -- Office Administrator, CGM; formerly Office Administrator,
Capital Growth Management Division of Loomis Sayles.
<PAGE>
MARTHA I. MAGUIRE (Age 43) -- Vice President
Employee -- Funds Marketing, CGM; formerly marketing communications
consultant (self-employed); formerly Sales Promotion Consultant, The
New England.
MARY L. STONE (Age 54) -- Assistant Vice President
Employee -- Coordinator, Mutual Fund Recordkeeping, CGM; formerly
Coordinator, Mutual Fund Recordkeeping, Loomis Sayles.
FRANK N. STRAUSS (Age 37) -- Treasurer
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 (Age 61) -- Vice President
Employee -- Director of Marketing, CGM; formerly Director of Marketing,
Loomis Sayles.
* Trustees deemed "interested persons" of the Fund, as defined under the 1940
Act.
Each of the Fund's trustees is also a trustee of one or more other investment
companies for which CGM acts as investment manager. Except as indicated above,
the address of each trustee and officer of the Fund affiliated with CGM is One
International Place, Boston, Massachusetts 02110 or 222 Berkeley Street,
Boston, Massachusetts 02116.
As of February 5, 1999, the trustees and officers 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. Trustees and officers 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, 1998:
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
___________________________________________________________________________________________________________
PENSION OR
RETIREMENT
BENEFITS ESTIMATED
AGGREGATE ACCRUED AS ANNUAL COMPENSATION
COMPENSATION PART OF FUND BENEFITS UPON FROM THE TRUSTS AND FUND
NAME OF TRUSTEE FROM TRUST EXPENSES RETIREMENT COMPLEX PAID TO TRUSTEES (A)
___________________________________________________________________________________________________________
PETER O. BROWN $28,398 None None $37,000
___________________________________________________________________________________________________________
NICHOLAS J. GRANT (B) $33,898 None None $44,000
___________________________________________________________________________________________________________
G. KENNETH HEEBNER None None None None
___________________________________________________________________________________________________________
ROBERT L. KEMP None None None None
___________________________________________________________________________________________________________
ROBERT B. KITTREDGE $28,398 None None $37,000
___________________________________________________________________________________________________________
LAURENS MACLURE $28,398 None None $37,000
___________________________________________________________________________________________________________
JAMES VAN DYKE QUEREAU, JR. $28,398 None None $37,000
___________________________________________________________________________________________________________
J. BAUR WHITTLESEY $28,398 None None $37,000
___________________________________________________________________________________________________________
</TABLE>
(a) The Fund Complex is comprised of two Trusts with a total of six funds.
(b) Nicholas Grant retired as of February 4, 1999.
INVESTMENT ADVISORY AND OTHER SERVICES
ADVISORY AGREEMENT
CGM serves as investment manager of the Fund under an advisory agreement dated
September 2, 1997. The Fund has been continuously managed since that date by G.
Kenneth Heebner.
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 1.00%
of the first $500 million of the Fund's average daily net asset value, 0.95% of
the next $500 million of such value, and 0.90% of such value in excess of $1
billion. CGM has voluntarily agreed, until December 31, 1999, and thereafter
until further notice to the Fund, to limit 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 1.20%
of the Fund's average net assets. For the period September 3, 1997
(commencement of operations) through December 31, 1997, the advisory fee that
would have been payable to CGM for services rendered to the Fund amounted to
$223,679. As a result of such waiver, the advisory fee paid was $128,271. For
the fiscal year ended December 31, 1998, the advisory fee that would have been
payable to CGM for services rendered to the Fund amounted to $1,277,430. As a
result of such waiver, the advisory fee paid was $1,027,951.
<PAGE>
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.
CGM also acts as investment adviser to CGM Capital Development Fund, CGM Mutual
Fund, CGM Fixed Income Fund, CGM American Tax Free 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 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
<PAGE>
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 PricewaterhouseCoopers LLP, 160 Federal
Street, Boston, Massachusetts 02110. PricewaterhouseCoopers 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 PricewaterhouseCoopers LLP, independent accountants,
given on the authority of said firm as experts in auditing and accounting.
OTHER ARRANGEMENTS
Certain office space, facilities, equipment and administrative services for the
Fund and other mutual funds under the investment management of the CGM
organization are furnished by CGM. In addition, CGM provides bookkeeping,
accounting, auditing, financial recordkeeping and related clerical services for
which it is entitled to be reimbursed by the Fund based on the cost of
providing these services. CGM received no reimbursements for such services from
the Fund during the period September 3, 1997 (commencement of operations)
through December 31, 1997. For the year ended December 31, 1998, CGM received
reimbursements in the amount of $10,000.
PORTFOLIO TRANSACTIONS AND BROKERAGE
In placing orders for the purchase and sale of portfolio securities for the
Fund, CGM always seeks the best price and execution. Transactions in unlisted
securities will be carried out through broker-dealers who make the primary
market for such securities unless, in the judgment of CGM, a more favorable
price can be obtained by carrying out such transactions through other brokers.
CGM selects only brokers it believes are financially responsible, will provide
efficient and effective services in executing, clearing and settling an order
and will charge commission rates which, when combined with the quality of the
foregoing services, will produce the best price and execution for the
<PAGE>
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.
For the period September 3, 1997 (commencement of operations) through December
31, 1997, Fund brokerage transactions aggregating $204,250,135 were allocated
to brokers providing research services and $312,588 in commissions were paid on
these transactions. During the same period, the Fund paid total brokerage fees
of approximately $398,885. In 1998, Fund brokerage transactions aggregating
$672,846,702 were allocated to brokers providing research services and
$1,296,777 in commissions were paid on these transactions. During the same
period, the Fund paid total brokerage fees of approximately $1,357,349.
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 the Fund. Each share of the Fund
<PAGE>
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
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)
on the election of trustees of the Trust 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 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
<PAGE>
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 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.
On January 29, 1999, there were 10,816,472.02 shares of the Fund outstanding.
On that date, State Street Bank, acting as trustee for various retirement plans
and individual retirement accounts, owned 3,042,101.548 shares -- about 28% 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.
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
<PAGE>
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.
ADVERTISING AND PERFORMANCE INFORMATION
CALCULATION OF TOTAL RETURN
The Fund may include total return information in advertisements or written
sales material. Total return is a measure of the change in value of an
investment in the Fund over the period covered, which assumes that any
dividends or capital gains distributions are automatically reinvested in the
Fund rather than paid to the investor in cash. The formula for total return
used by the Fund includes three steps:
(1) adding to the total number of shares purchased by a hypothetical $1,000
investment in the Fund all additional shares that would have been purchased if
all dividends and distributions paid or distributed during the period had been
automatically reinvested;
(2) calculating the value of the hypothetical initial investment as of the end
of the period by multiplying the total number of shares owned at the end of the
period by the net asset value per share on the last trading day of the period;
and
(3) dividing this account value for the hypothetical investor by the amount of
the initial investment, and annualizing the result for periods of less than one
year.
For the year ended December 31, 1998, the Fund's total return was 3.5%. For the
period from September 3, 1997 (commencement of operations) through December 31,
1998, the Fund's average annual total return was -2.2%. If CGM had not limited
expenses to 1.20% of average annual net assets, the Fund's total return for
each period would have been lower.
In computing performance information for the Fund, no adjustment is made for a
shareholder's tax liability on taxable dividends and capital gains
distributions.
<PAGE>
PERFORMANCE COMPARISONS
Total return may be used to compare the performance of the Fund against certain
widely acknowledged standards or indexes 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 11,332 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.
<PAGE>
Value Line, Inc. ("Value Line"), an independent mutual fund ranking service
reviews the performance of 7,976 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, programs and articles about the Fund regarding performance,
rankings and other characteristics of the Fund and information about persons
responsible for its portfolio management may appear on television and in
national publications and major metropolitan newspapers including, but not
limited to, CNBC, PBC, CNN-fn, The Wall Street Journal, The Boston Globe, The
New York Times and Barron's, Forbes, Fortune, Money, Worth, Kiplinger's
Personal Finance, Mutual Funds, Individual Investor, Bloomberg Personal and
Business Week magazines. In particular, some or all of these media may publish
their own rankings or performance reviews of mutual funds, including the Fund.
References to or reprints of, or quotations from, such articles may be used in
the Fund's promotional literature. The Fund may also include in its advertising
and sales literature information concerning the experience of Mr. Heebner, the
Fund's portfolio manager, in managing other mutual funds and private accounts,
including ranking and rating information about such funds.
NET ASSET VALUE AND PUBLIC OFFERING PRICE
The method for determining the public offering price and net asset value per
share is summarized in the Prospectus under "Pricing of Shares."
The net asset value of a share of the Fund is determined by dividing the Fund's
total net assets (the excess of its assets over its liabilities) by the total
number of shares outstanding and rounding to the nearest cent. Such
determination is made as of the close of normal trading on the New York Stock
Exchange on each day on which the Exchange is open for unrestricted trading,
and no less frequently than once daily on each day during which there is
sufficient trading in the Fund's portfolio securities that the value of the
Fund's shares might be materially affected. During the 12 months following the
date of this Statement, the New York Stock Exchange is currently expected to be
closed on the following holidays: Memorial Day, Independence Day (observed),
Labor Day, Thanksgiving Day, Christmas Day, New Year's Day, Martin Luther King,
Jr. 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
<PAGE>
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. 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.
HOW TO PURCHASE SHARES
The procedures for purchasing shares of the Fund are summarized in the
Prospectus under "How to Purchase Shares."
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.
<PAGE>
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. A shareholder may establish a SWP by completing
the Service Options Form.
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 Service
Options Form. Shares to be included in a Systematic Withdrawal Plan must be
held in an Open Account rather than certificated form. Income dividends and
capital gain distributions will be reinvested at the net asset value determined
as of the close of the New York Stock Exchange on the record date for the
dividend or distribution. If withdrawal checks are returned to the Fund as
"undeliverable" or remain uncashed for more than six months, the shareholder's
Systematic Withdrawal Plan will be cancelled, such undeliverable or uncashed
checks will be cancelled and such amounts reinvested in the Fund at the per
share net asset value determined as of the date of cancellation of the checks.
Since withdrawal payments represent in whole or in part proceeds from the
liquidation of shares, the shareholder should recognize that withdrawals may
reduce and possibly exhaust the value of the account, particularly in the event
of a decline in net asset value. Accordingly, the shareholder should consider
whether a Systematic Withdrawal Plan and the specified amounts to be withdrawn
are appropriate in the circumstances. The 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.
<PAGE>
EXCHANGE PRIVILEGE
A shareholder may exchange shares of the Fund for shares of CGM Mutual Fund,
CGM Fixed Income Fund, CGM American Tax Free Fund, CGM Realty Fund, New England
Cash Management Trust, 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 CGM, and counsel to CGM Capital Development Fund and CGM.
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 the Fund.
Exchanges may be effected by (i) a telephone request to CGM Shareholder
Services at 800-343-5678, provided a special authorization form is on file with
the Trust, or (ii) a written exchange request or Service Options Form to CGM
Shareholder Services. 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 checking account at a bank
or other financial institution. Please contact CGM Shareholder Services at
<PAGE>
800-343-5678 to determine the requirements associated with debits from savings
banks and credit unions. Debits from money market accounts are not acceptable.
Shareholders receive a confirmation of each purchase of Fund shares under the
AIP. If a shareholder elects to redeem shares of the 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 terminate a
shareholder's participation in the AIP immediately 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, Traditional and Roth 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, generally, 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 the 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
<PAGE>
requests for a change of address may be mailed to: CGM Shareholder Services,
c/o BFDS, P.O. Box 8511, Boston, MA 02266-8511.
If a statement or check sent to a shareholder is returned three times, mailings
to the shareholder may be discontinued until the shareholder contacts CGM
Shareholder Services with correct address information.
REDEMPTIONS
The procedures for redemption of Fund shares are summarized in the Prospectus
under "How to Sell 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 provide that an "eligible guarantor institution" means any of
the following: banks (as defined in ss. 3(a) of the Federal Deposit Insurance
Act, as amended (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, as amended (the "1934 Act"); credit unions (as defined in ss.
19(b)(1)(A) of the Federal Reserve Act, as amended [12 U.S.C. ss. 461(b)]);
national securities exchanges, registered securities associations and clearing
agencies, as those terms are defined under the 1934 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 Traditional or
Roth 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
custodian or trustee.
<PAGE>
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. Except in the case of a CGM
retirement plan, the service option of telephone redemption by check is
available to shareholders automatically unless this option is declined in the
application or in writing. The check will be made payable to the registered
owner(s) of the account.
If checks representing redemption proceeds are returned "undeliverable" or
remain uncashed for six months, such checks shall be cancelled and such
proceeds shall be reinvested in the Fund at the per share net asset value
determined as of the date of cancellation of such checks.
PROCEEDS WIRED TO A PREDESIGNATED BANK
A shareholder may request that the redemption proceeds be wired to the bank
selected on the Fund application or subsequently on the Service Options Form
(with a signature guarantee) available from the Trust or CGM Shareholder
Services. 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 or wired 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.
<PAGE>
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.
A redemption constitutes a sale of the shares for federal income tax purposes
on which the investor may realize a long-term 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 annually, as dividends,
substantially all net investment income and to distribute annually all net
realized capital gains, if any, after offsetting any capital loss carryovers.
Income dividends and capital gain distributions are payable in full and
fractional shares of the Fund based upon the net asset value determined as of
the close of the New York Stock Exchange on the record date for such dividend
or distribution. Shareholders, however, may elect to receive their income
dividends or capital gain distributions, or both, in cash. However, if a
shareholder elects to receive capital gains in cash, his or her income
<PAGE>
dividends must also be received in cash. Shareholders can elect to receive
payments of cash dividends and capital gains distributions either by check or
by direct deposit to a bank account that they have predesignated. These
elections can be made at the time the account is opened and may be changed by
the shareholder at any time by submitting a written request directly to CGM
Shareholder Services or by calling 800-343-5678. However, changes in bank
account information for direct deposits of cash dividends and capital gains
distributions must be made through a Service Options Form. In order for a
change to be effective 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 a shareholder elects to receive distributions in cash and
checks are returned "undeliverable" or remain uncashed for six months, such
shareholder's cash election will be changed automatically and the shareholder's
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 will be cancelled and such amounts reinvested in the Fund at
the per share net asset value determined as of the date of cancellation of such
checks.
The Fund has met, and intends to meet, the requirements of the Internal Revenue
Code with respect to regulated investment companies. To qualify, the Fund must,
among other things, (a) derive in each taxable year at least 90% of its gross
income from dividends, interest, payments with respect to securities loans and
gains from the sale or other disposition of stock, securities or foreign
currencies or other income derived with respect to its business of investing in
such stock, securities or currencies; (b) diversify its holdings so that, at
the end of each quarter of the taxable year, (i) at least 50% of the market
value of the Fund's assets is represented by cash and cash items (including
receivables), U.S. Government securities, the securities of other regulated
investment companies and other securities, with such other securities of any
one issuer limited for the purposes of this calculation to an amount not
greater than 5% of the value of the Fund's total assets and not greater than
10% of the outstanding voting securities of such issuer, and (ii) not more than
25% of the value of its total assets is invested in the securities of any one
issuer (other than U.S. Government securities or the securities of other
regulated investment companies); and (c) distribute at least 90% of its
investment company taxable income (which includes, among other items,
dividends, interest and the excess of net short-term capital gains over net
long-term capital losses) and its net tax-exempt interest income each taxable
year, if any.
As a regulated investment company, the Fund generally will not be subject to
U.S. federal income tax on its investment company taxable income and net
capital gains (the excess of net long-term capital gains over net short-term
capital losses), if any, that it distributes to shareholders. The Fund intends
to distribute to its shareholders, at least annually, substantially all of its
<PAGE>
investment company taxable income and net capital gains. Amounts not
distributed on a timely basis in accordance with a calendar year distribution
requirement are subject to a nondeductible 4% excise tax. To prevent imposition
of the excise tax, the Fund must distribute during each calendar year an amount
equal to the sum of (1) at least 98% of its ordinary income (not taking into
account any capital gains or losses) for the calendar year, (2) at least 98% of
its capital gains in excess of its capital losses (adjusted for certain
ordinary losses, as prescribed by the Code) for the one-year period ending on
October 31 of the calendar year, and (3) any ordinary income and capital gains
for previous years that was not distributed during those years. A distribution
will be treated as paid on December 31 of the current calendar year if it is
declared by the Fund in October, November or December with a record date in
such a month and paid by the Fund during January of the following calendar
year. Such distributions will be taxable to shareholders in the calendar year
in which the distributions are declared, rather than the calendar year in which
the distributions are received. To prevent application of the excise tax, the
Fund intends to make its distributions in accordance with the calendar year
distribution requirement.
Dividends paid by the Fund from net investment income (including dividends and
interest) and net short-term capital gains will be taxable to shareholders as
ordinary income. If a portion of a Fund's income consists of dividends paid by
U.S. corporations, a portion of the dividends paid by the Fund may be eligible
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) which are designated by the Fund as capital gains dividends 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 from the sale of such shares. Dividends and
distributions are taxable to shareholders in the same manner whether received
in cash or reinvested in additional shares of the Fund.
Dividends and distributions on Fund shares received shortly after their
purchase, although in effect a return of capital, are subject to federal income
taxes.
Upon the sale or other disposition of shares of the Fund, a shareholder may
realize a capital gain or loss which will be long-term or short-term, generally
depending upon the shareholder's holding period for the shares. Any loss
realized on a sale or exchange will be disallowed to the extent the shares
disposed of are replaced (including shares acquired pursuant to a dividend
reinvestment plan) within a period of 61 days beginning 30 days before and
ending 30 days after disposition of the shares. In such a case, the basis of
<PAGE>
the shares acquired will be adjusted to reflect the disallowed loss. Any loss
realized by a shareholder on a disposition of Fund shares held by the
shareholder for six months or less will be treated as a long-term capital loss
to the extent of any distributions of net capital gains received by the
shareholder with respect to such shares.
Under the Code, gains or losses attributable to fluctuations in exchange rates
which occur between the time the Fund accrues receivables or liabilities
denominated in a foreign currency, and the time the Fund actually collects such
receivables or pays such liabilities, generally are treated as ordinary income
or ordinary loss. Similarly, on disposition of debt securities denominated in a
foreign currency, gains or losses attributable to fluctuations in the value of
foreign currency between the date of acquisition of the security or contract
and the date of disposition also are treated as ordinary gain or loss. These
gains or losses, referred to under the Code as "section 988" gains or losses,
may increase or decrease the amount of the Fund's investment company taxable
income to be distributed to its shareholders as ordinary income.
If the Fund invests in stock of certain foreign investment companies, the Fund
may be subject to U.S. federal income taxation on a portion of any "excess
distribution" with respect to, or gain from the disposition of, such stock. The
tax would be determined by allocating such distribution or gain ratably to each
day of the Fund's holding period for the stock. The distribution or gain so
allocated to any taxable year of the Fund, other than the taxable year of the
excess distribution or disposition, would be taxed to the Fund at the highest
ordinary income tax rate in effect for such year, and the tax would be further
increased by an interest charge to reflect the value of the tax deferral deemed
to have resulted from the ownership of the foreign company's stock. Any amount
of distribution or gain allocated to the taxable year of the distribution or
disposition would be included in the Fund's investment company taxable income
and, accordingly, would not be taxable to the Fund to the extent distributed by
the Fund as a dividend to its shareholders.
The Fund may elect to mark to market its foreign investment company stock,
resulting in the stock being treated as sold at fair market value on the last
business day of each taxable year. Any resulting gain would be reported as
ordinary income; any resulting loss and any loss from an actual disposition of
the stock would be reported as ordinary loss to the extent of any net gains
reported in prior years. Alternatively, the Fund may be able to make an
election, in lieu of being taxable in the manner described above, to include
annually in income its pro rata share of the ordinary earnings and net capital
gain of the foreign investment company, regardless of whether it actually
received any distributions from the foreign company. These amounts would be
included in the Fund's investment company taxable income and net capital gain
which, to the extent distributed by the Fund as ordinary or capital gain
dividends, as the case may be, would not be taxable to the Fund. In order to
<PAGE>
make this election, the Fund would be required to obtain certain annual
information from the foreign investment companies in which it invests, which in
many cases may be difficult to obtain.
Income received by the Fund from sources within foreign countries may be
subject to withholding and other taxes imposed by such countries.
A shareholder may be subject to backup withholding at the rate of 31% of any
taxable distributions unless such shareholder (a) is a corporation or comes
within certain other exempt categories and, when required, demonstrates this
fact, or (b) provides a taxpayer identification number, certifies that the
shareholder is not subject to backup withholding, and otherwise complies with
applicable requirements of the backup withholding rules. A shareholder who does
not provide the Fund with his correct taxpayer identification number may also
be subject to penalties imposed by the IRS. Any amount paid as backup
withholding will be creditable against the shareholder's income tax liability.
Foreign shareholders, including shareholders who are nonresident aliens, may be
subject to U.S. withholding tax on certain distributions at a rate of 30% or
such lower rates as may be prescribed by any applicable treaty.
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.
Investors should consult their tax advisors regarding the application of the
above-described general federal taxation rules to their own circumstances and
the state, local, or foreign tax consequences to them of any investment in the
Fund.
FINANCIAL STATEMENTS
The financial statements for the year ended December 31, 1998, included in the
Fund's Annual Report to shareholders for the year ended December 31, 1998, are
incorporated herein by reference.
<PAGE>
CGM TRUST
PART C. OTHER INFORMATION
Item 23. Exhibits
(a) (1) Amended and Restated Agreement and Declaration
of Trust of the Registrant is contained in
Post-Effective Amendment No. 82 on Form N-1A (File
No. 2-10653) filed on February 27, 1997.
(2) Amendment No. 1 to the Amended and Restated
Agreement and Declaration of Trust of the
Registrant is contained in Post-Effective
Amendment No. 83 on Form N-1A (File No. 2-10653)
filed on June 17, 1997.
(b) By-laws of the Registrant are contained in Post-Effective
Amendment No. 82 on Form N-1A (File No. 2-10653) filed on
February 27, 1997.
(c) (1) Form of share certificate of the Registrant's
CGM Mutual Fund is contained in Post-Effective
Amendment No. 82 on Form N-1A (File No. 2-10653)
filed on February 27, 1997.
(2) Form of share certificate of the Registrant's CGM
Fixed Income Fund is contained in Post-Effective
Amendment No. 82 on Form N-1A (File No. 2-10653)
filed on February 27, 1997.
(3) Form of share certificate of the Registrant's CGM
American Tax Free Fund is contained in
Post-Effective Amendment No. 82 on Form N-1A (File
No. 2-10653) filed on February 27, 1997.
(4) Form of share certificate of the Registrant's CGM
Realty Fund is contained in Post-Effective
Amendment No. 82 on Form N-1A (File No. 2-10653)
filed on February 27, 1997.
(5) Form of share certificate of the Registrant's CGM
Focus Fund is filed herewith.
(d) (1) Advisory Agreement of the Registrant dated
December 13, 1996 with respect to CGM Mutual Fund
is contained in Post-Effective Amendment No. 82 on
Form N-1A (File No. 2-10653) filed on February 27,
1997.
(2) Advisory Agreement of the Registrant dated
December 13, 1996 with respect to CGM Fixed Income
Fund is contained in Post-Effective Amendment No.
82 on Form N-1A (File No. 2-10653) filed on
February 27, 1997.
<PAGE>
(3) Advisory Agreement of the Registrant dated August
30, 1996 with respect to CGM American Tax Free
Fund is contained in Post-Effective Amendment No.
82 on Form N-1A (File No. 2-10653) filed on
February 27, 1997.
(4) Advisory Agreement of the Registrant dated August
30, 1996 with respect to CGM Realty Fund is
contained in Post-Effective Amendment No. 82 on
Form N-1A (File No. 2-10653) filed on February 27,
1997.
(5) Advisory Agreement of the Registrant dated
September 2, 1997 with respect to CGM Focus Fund
is filed herewith.
(e) None.
(f) None.
(g) (1) Custodian Agreement with respect to CGM Mutual
Fund is contained in Post-Effective Amendment No.
82 on Form N-1A (File No. 2-10653) filed on
February 27, 1997.
(2) Supplement dated March 6, 1992 to Custodian
Contract with respect to CGM Mutual Fund is
contained in Post-Effective Amendment No. 82 on
Form N-1A (File No. 2-10653) filed on February 27,
1997.
(3) Custodian Contract dated March 6, 1992 with
respect to CGM Fixed Income Fund is contained in
Post-Effective Amendment No. 82 on Form N-1A (File
No. 2-10653) filed on February 27, 1997.
(4) Amendment dated April 16, 1992 to the Custodian
Contract with respect to CGM Fixed Income Fund is
contained in Post-Effective Amendment No. 82 on
Form N-1A (File No. 2-10653) filed on February 27,
1997.
(5) Amendment dated October 30, 1998 to the Custodian
Contract with respect to CGM Fixed Income Fund is
filed herewith.
(6) Custodian Contract with respect to CGM American
Tax Free Fund is contained in Post-Effective
Amendment No. 82 on Form N-1A (File No. 2-10653)
filed on February 27, 1997.
(7) Custodian Contract with respect to CGM Realty Fund
is contained in Post-Effective Amendment No. 82 on
Form N-1A (File No. 2-10653) filed on February 27,
1997.
(8) Custodian Contract with respect to CGM Focus Fund
is filed herewith.
<PAGE>
(h) (1) Transfer Agency and Service Agreement with
respect to CGM Mutual Fund dated June 1, 1987 is
contained in Post-Effective Amendment No. 82 on
Form N-1A (File No. 2-10653) filed on February 27,
1997.
(2) Supplement dated March 6, 1992 to Transfer Agency
and Service Agreement with respect to CGM Mutual
Fund is contained in Post-Effective Amendment No.
82 on Form N-1A (File No. 2-10653) filed on
February 27, 1997.
(3) Transfer Agency and Service Agreement dated March
6, 1992 with respect to CGM Fixed Income Fund is
contained in Post-Effective Amendment No. 82 on
Form N-1A (File No. 2-10653) filed on February 27,
1997.
(4) Transfer Agency Agreement with respect to CGM
American Tax Free Fund is contained in
Post-Effective Amendment No. 82 on Form N-1A (File
No. 2-10653) filed on February 27, 1997.
(5) Powers of Attorney are contained in Post-Effective
Amendment No. 82 on Form N-1A (File No. 2-10653)
filed on February 27, 1997.
(6) Transfer Agency Agreement with respect to CGM
Realty Fund is contained in Post-Effective
Amendment No. 82 on Form N-1A (File No. 2-10653)
filed on February 27, 1997.
(7) Transfer Agency Agreement with respect to CGM
Focus Fund is filed herewith.
(i) (1) Opinion and consent of counsel with respect to
shares of CGM Mutual Fund is incorporated herein
by reference to Post-Effective Amendment No. 59 on
Form N-1A (File No. 2-10653) filed on April 30,
1986.
(2) Opinion and consent of counsel with respect to
shares of CGM Fixed Income Fund is incorporated
herein by reference to Post-Effective Amendment
No. 69 on Form N-1A (File No. 2-10653) filed on
December 23, 1991.
(3) Opinion and consent of counsel with respect to
shares of CGM American Tax Free Fund is
incorporated herein by reference to Post-Effective
Amendment No. 74 on Form N-1A (File No. 2-10653)
filed on September 10, 1993.
(4) Opinion and consent of counsel with respect to
shares of CGM Realty Fund is incorporated herein
<PAGE>
by reference to Post-Effective Amendment No. 76 on
Form N-1A (No. 2-10653) filed on March 14, 1994.
(5) Opinion and consent of counsel with respect to
shares of CGM Focus Fund is incorporated herein by
reference to Post-Effective Amendment No. 83 on
Form N-1A (File No. 2-10653) filed on June 17,
1997.
(j) None.
(k) None.
(l) None.
(m) None.
(n) None.
(o) None.
(p) Powers of attorney are filed herewith.
Item 24. Persons Controlled by or Under Common Control with Registrant
Information pertaining to persons controlled by or under common
control with the Registrant is hereby incorporated by reference
to the section captioned "Investment Manager" in each Prospectus
and the section captioned "Investment Advisory and Other
Services - Advisory Agreement" in each Statement of Additional
Information.
Item 25. Indemnification
See Article 4 of the Trust's By-laws which is incorporated by
reference herein to Post-Effective Amendment No. 82 on Form N-1A
(File No. 2-10653) filed on February 27, 1997. In addition, the
Trust maintains a trustees and officers liability insurance
policy with maximum coverage of $5 million under which the Trust
and its trustees and officers will be named insureds.
Insofar as indemnification for liability arising under the
Securities Act of 1933 may be permitted to trustees, officers
and controlling persons of the Registrant pursuant to the
Trust's By-laws, or otherwise, the Registrant has been advised
that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in
the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a
trustee, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is
<PAGE>
asserted by such trustee, officer or controlling person in
connection with the securities being registered, the Registrant
will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such
indemnification by it is against the public policy as expressed
in the Securities Act of 1933 and will be governed by the final
adjudication of such issue.
Item 26. Business and Other Connections of the Investment Adviser
Capital Growth Management Limited Partnership ("CGM"), the
investment manager of CGM Mutual Fund, CGM Fixed Income Fund,
CGM American Tax Free Fund, CGM Realty Fund and CGM Focus Fund,
provides investment advice to a number of other registered
investment companies and to other organizations and individuals.
CGM is owned by KenBob, Inc., which is in turn owned by Robert
L. Kemp and G. Kenneth Heebner. Both Mr. Kemp and Mr. Heebner
are trustees and officers of the Registrant and of CGM Capital
Development Fund, another registered investment company managed
by CGM.
Item 27. Principal Underwriters
Not applicable.
Item 28. Location of Accounts and Records
The following companies maintain possession of the documents
required by the specified rules:
(a) Registrant
Rule 31a-1(a)(4); Rule 31a-1(d); Rule 31a-2(a);
Rule 31a-2(c)
(b) State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02110
Rule 31a-1(a); Rule 31a-1(b)(1), (2), (3), (5), (6), (7),
(8); Rule 31a-2(a)
(c) Capital Growth Management Limited Partnership One
International Place Boston, Massachusetts 02110 Rule
31a-1(a); Rule 31a-1(b)(9), (10), (11); Rule 31a-1(f);
Rule 31a-2(a); Rule 31a-2(e)
Item 29. Management Services
Not applicable.
<PAGE>
Item 30. Undertakings
Not applicable.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it has duly
caused this amendment to its Registration Statement to be signed on its behalf
by the undersigned, thereto duly authorized, in the City of Boston, and the
Commonwealth of Massachusetts, on the 1st day of March, 1999.
CGM TRUST
By: /s/ Robert L. Kemp
------------------------------
Robert L. Kemp
President
Pursuant to the requirements of the Securities Act of 1933, this
post-effective amendment to this Registration Statement has been signed below
by the following persons on March 1, 1999 in the capacities indicated.
Signature Title
President (Principal
Executive Officer) and
/s/ Robert L. Kemp Trustee
- ------------------------------------
Robert L. Kemp
Treasurer (Principal
Financial and
/s/ Frank N. Strauss Accounting Officer)
- ------------------------------------
Frank N. Strauss
* Peter O. Brown Trustee
- ------------------------------------
Peter O. Brown
/s/ G. Kenneth Heebner Trustee
- ------------------------------------
G. Kenneth Heebner
* Robert B. Kittredge Trustee
- ------------------------------------
Robert B. Kittredge
* Laurens MacLure Trustee
- ------------------------------------
Laurens MacLure
* James Van Dyke Quereau, Jr. Trustee
- ------------------------------------
James Van Dyke Quereau, Jr.
* J. Baur Whittlesey Trustee
- ------------------------------------
J. Baur Whittlesey
*By: /s/ Robert L. Kemp
--------------------------------
Robert L. Kemp
Attorney-In-Fact pursuant to powers of attorney filed herewith.
<PAGE>
EXHIBIT INDEX
(c)(5) Form of share certificate of the Registrant's CGM Focus Fund.
(d)(5) Advisory Agreement with respect to CGM Focus Fund.
(g)(5) Amendment dated October 30, 1998 to the Custodian Contract with
respect to CGM Fixed Income Fund.
(g)(8) Custodian Contract with respect to CGM Focus Fund.
(h)(7) Transfer Agency Agreement with respect to CGM Focus Fund.
(p) Powers of Attorney.
Exhibit (c)(5)
NUMBER SHARES
KC 0208045 *****1
CGM Trust
This is to certify that CGM FOCUS FUND Is the owner of *** ONE ***
CAPITAL GROWTH MANAGEMENT LP
C/O FRANK STRAUSS *SEE REVERSE FOR CERTAIN DEFINITIONS
222 BERKELEY ST STE 1013
BOSTON MA 02116-3748
CUSIP 125325506
........................................................................shares
of fully paid and non-assessable shares, without par value, of beneficial
interest of the above referenced series of CGM Trust, the said shares being
issued, received and held under and subject to the terms and provisions of the
Agreement and Declaration of Trust dated January 16, 1986, establishing CGM
Trust, and all amendments thereto, copies of which are on file with the
Secretary of State of the Commonwealth of Massachusetts. The said owner by
accepting this certificate agrees to and is bound by all of the said terms and
provisions. The shares represented hereby are transferable in writing by the
owner thereof in person or by attorney upon surrender of this certificate to
the Trustees properly endorsed for transfer. This certificate is executed on
behalf of the Trustees of the Trust, as Trustees, and not individually, and the
obligations hereof are not binding upon any of the Trustees, officers or
shareholders of the Trust individually but are binding only upon the assets and
property of the Trust. In addition, the rights, obligations and remedies
represented by this certificate constitute rights, obligations and remedies
only with respect to the above-referenced series and the assets thereof, and no
other series of CGM Trust shall have any rights, obligations or remedies with
respect hereto. This certificate is not valid until countersigned by the
Transfer Agent.
IN WITNESS WHEREOF, CGM Trust has caused facsimiles of the signatures of
its duly authorized officers to be hereunto affixed.
ACCOUNT NO. 8090629 Dated
ALPHA CODE CAPITAL-GR By 09/03/97
/s/ Frank N. Strauss TREASURER PRESIDENT /s/ Robert L. Kemp
- --------------------------------- ---------------------------------
KC 208045
[The following text runs perpendicular to the above text on the face of the
share certificate.]
COUNTERSIGNED: STATE STREET BANK AND TRUST COMPANY
TRANSFER AGENT (Boston, Massachusetts)
P.O. BOX 8511, BOSTON, MA 02266-8511
BY /s/ Ronald A. Dion
------------------------------------
AUTHORIZED OFFICER
<PAGE>
[The following text appears on the reverse side of the share certificate.]
CGM TRUST
Under certain circumstances and in accordance with its Agreement and
Declaration of Trust, the Trust has the right, at its option, to redeem shares
held in certain shareholder accounts. All shares are subject to the provisions
of the Trust's Agreement and Declaration of Trust and By-Laws, as amended from
time to time.
SEE CURRENT PROSPECTUS AND STATEMENT OF ADDITIONAL INFORMATION OF THE TRUST FOR
FURTHER INFORMATION CONCERNING REDEMPTION OF SHARES.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common
TEN ENT - as tenants by the entireties
JT TEN - as joint tenants with right of survivorship
and not as tenants in common
UGMA / TRANSFERS
UTMA
__________ Custodian for __________
(Cust) (Minor)
under Uniform Gifts/Transfers to Minors Act of __________
(State)
Additional abbreviations may also be used though not in the above list.
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFICATION NUMBER OF ASSIGNEE
[ ]
FOR VALUE RECEIVED....................................hereby sell, assign,
and transfer unto..............................................................
...............................................................................
...............................................................................
...............................................................................
.........................................................................Shares
of the ______________________________ Series of CGM Trust represented by the
within certificate, and do irrevocably constitute and appoint
......................................................................Attorney
to transfer the said shares on the books of CGM Trust with full power of
substitution in the premises.
Dated..................
Signature(s).......................................
.......................................
NOTE: The Signature to this Assignment must
correspond with the name as written upon the face
of this Certificate in every particular, without
alteration or enlargement or any change whatever.
(If more than one owner, all must sign. Persons
acting in a fiduciary capacity or on behalf of a
Corporation, Partnership or Trust must specify, in
full, the capacity in which they are signing.)
Signature Guaranteed:
.......................
Signature(s) must be guaranteed by a bank, a member firm of a national stock
exchange, or other eligible guarantor institution in accordance with procedures
established by the Trust's Transfer Agent.
Exhibit (d)(5)
ADVISORY AGREEMENT
AGREEMENT made this 2nd day of September, 1997 by and between CGM TRUST, a
Massachusetts business trust (the "Trust"), with respect to its CGM Focus Fund
series (the "Series"), and CAPITAL GROWTH MANAGEMENT LIMITED PARTNERSHIP, a
Massachusetts partnership (the "Adviser").
WITNESSETH:
WHEREAS, the Trust and the Adviser wish to enter into an agreement setting
forth the terms upon which the Adviser will perform certain services for the
Series;
NOW THEREFORE, in consideration of the premises and covenants hereinafter
contained, the Trust and the Adviser agree as follows:
1. The Trust hereby employs the Adviser to manage the investment and
reinvestment of the assets of the Series and to perform the other services
herein set forth, subject to the supervision of the Board of Trustees of the
Trust. The Adviser hereby accepts such employment and agrees, at its own
expense, to render the services and to assume the obligations herein set forth,
for the compensation herein provided. The Adviser shall for all purposes herein
be deemed to be an independent contractor and shall, unless otherwise expressly
provided or authorized, have no authority to act for or represent the Trust in
any way or otherwise be deemed an agent of the Trust.
2. In carrying out its obligations to manage the investment and
reinvestment of the assets belonging to the Series, the Adviser shall:
(a) obtain and evaluate such economic, statistical and financial data
and information and undertake such additional investment research as it
shall believe necessary or advisable for the management of the investment
and reinvestment of the assets belonging to the Series in accordance with
the investment objective and policies of the Series;
(b) take such steps as are necessary to implement the investment
policies of the Series by purchase and sale of securities, including the
placing of orders for such purchase and sale; and
(c) regularly report to the Board of Trustees with respect to the
implementation of the investment policies of the Series.
3. All activities in connection with the management of the affairs of the
Series undertaken by the Adviser pursuant to this Agreement shall at all times
be subject to the supervision and control of the Board of Trustees, any duly
constituted committee thereof or any officer of the Trust acting pursuant to
like authority.
<PAGE>
4. In addition to performing at its expense the obligations set forth in
section 2 hereof, the Adviser shall furnish to the Trust at the Adviser's own
expense or pay the expenses of the Trust for the following:
(a) office space in such place or places as may be agreed upon
from time to time, and all necessary office supplies, facilities and
equipment;
(b) necessary executive and other personnel for managing the
affairs of the Series (exclusive of those related to and to be
performed under contract for custodial, transfer, dividend and plan
agency services by the bank selected to perform such services and
exclusive of any managerial functions described in section 5); and
(c) compensation, if any, of Trustees of the Trust who are
directors, officers, partners or employees of the Adviser or any
affiliated person (other than a registered investment company) of the
Adviser.
5. Nothing in section 4 hereof shall require the Adviser to bear, or to
reimburse the Trust for:
(a) any of the costs of printing and distributing the items referred to
in subsection (m) of this section 5, except as otherwise provided in any
agreement between the Trust and its principal underwriter in effect from
time to time relating to distribution of shares of the Series;
(b) compensation of Trustees of the Trust who are not directors,
officers, partners or employees of the Adviser or of any affiliated person
(other than a registered investment company) of the Adviser;
(c) registration, filing and other fees in connection with requirements
of regulatory authorities;
(d) the charges and expenses of the custodian appointed by the Trust
for custodial services;
(e) charges and expenses of independent accountants retained by the
Trust;
(f) charges and expenses of any transfer agents, paying agents, plan
agents and registrars appointed by the Trust;
(g) brokers, commissions and issue and transfer taxes chargeable to the
Trust in connection with securities transactions to which the Trust is a
party;
<PAGE>
(h) taxes and fees payable by the Trust to Federal, State or other
governmental agencies;
(i) the cost of certificates representing shares of the Series;
(j) expenses of meetings of shareholders and Trustees of the Trust;
(k) charges and expenses of legal counsel retained by the Trust;
(l) interest, including interest on borrowings by the Trust;
(m) the cost of services, including services of counsel, required in
connection with the preparation of the Trust's registration statements and
prospectuses with respect to shares of the Series, including amendments
and revisions thereto, annual, semiannual and other periodic reports of
the Trust, and notices and proxy solicitation material furnished to
shareholders of the Trust or regulatory authorities, to the extent that
any such materials relate to the Series or to the shareholders thereof;
and
(n) the Trust's expenses of bookkeeping, accounting, auditing and
financial reporting, including related clerical expenses with respect to
the Series.
6. The services of the Adviser to the Trust hereunder are not to be deemed
exclusive and the Adviser shall be free to render similar services to others,
so long as its services hereunder are not impaired thereby.
7. As full compensation for all services rendered, facilities furnished
and expenses borne by the Adviser hereunder, the Trust shall pay the Adviser
compensation at the annual percentage rates of the corresponding levels of the
Series' average daily net assets set forth in the following chart:
Annual Average Daily
PercentageRate Net Asset Value Levels
1.00% of the first $500,000,000;
0.95% of the next $500,000,000; and
0.90% of such assets in excess of $1,000,000,000.
Such compensation shall be payable monthly in arrears or at such other
intervals, not less frequently than quarterly, as the Board of Trustees of the
Trust may from time to time determine and specify in writing to the Adviser.
The Adviser hereby acknowledges that the Trust's obligation to pay such
compensation is binding only on the assets and property belonging to the
Series.
<PAGE>
8. It is understood that any of the shareholders, trustees, officers,
employees and agents of the Trust may be a partner, shareholder, director,
officer, employee or agent of, or be otherwise interested in, the Adviser, any
affiliated person of the Adviser, any organization in which the Adviser may
have an interest or any organization which may have an interest in the Adviser;
that the Adviser, any such affiliated person or any such organization may have
an interest in the Trust; and that the existence of any such dual interest
shall not affect the validity hereof or of any transactions hereunder except as
otherwise provided in the Agreement and Declaration of Trust, as amended or
restated, of the Trust and the partnership agreement of the Adviser,
respectively, or by specific provisions of applicable law.
9. The Adviser consents to the use by the Trust of the names "CGM Trust"
and "CGM Focus Fund," or other names embodying the words "Capital Growth
Management" or "CGM" in such forms as the Adviser shall in writing approve, but
only on condition that so long as this Agreement shall remain in force the
Trust shall fully perform, fulfill and comply with all provisions of this
Agreement expressed herein to be performed, fulfilled or complied with by it.
No such name shall be used by the Trust at any time or in any place for any
purposes or under any conditions except as in this paragraph provided.
Upon any termination of this Agreement by either party or upon the
violation of any of its provisions by the Trust, the Trust will, at the request
of the Adviser made within sixty days after the Adviser has knowledge of such
termination or violation, change its name so as to eliminate all reference to
"Capital Growth Management" or "CGM" and will not thereafter transact any
business in a name containing "Capital Growth Management" or "CGM" in any form
or combination whatsoever, or designate itself as the same business trust as or
successor to a business trust of such name, or otherwise use the name "Capital
Growth Management" or "CGM" or any other reference to the Adviser. Such
covenants on the part of the Trust shall be binding upon it, its Trustees,
officers, shareholders, creditors and all other persons claiming under or
through it.
10. This Agreement shall become effective as of the date of its execution,
and
(a) unless otherwise terminated, after two years from the date of its
execution this Agreement shall continue in effect only so long as such
continuance is specifically approved at least annually (i) by the Board of
Trustees of the Trust or by vote of a majority of the outstanding voting
securities of the Series, and (ii) by vote of a majority of the Trustees
of the Trust who are not interested persons of the Trust or the Adviser,
cast in person at a meeting called for the purpose of voting on such
approval;
(b) this Agreement may at any time be terminated on sixty days written
notice to the Adviser either by vote of the Board of Trustees of the Trust
or by vote of a majority of the outstanding voting securities of the
Series;
<PAGE>
(c) this Agreement shall automatically terminate in the event of its
assignment;
(d) this Agreement may be terminated by the Adviser on ninety days
written notice to the Trust.
Termination of this Agreement pursuant to this section 10 shall be without
payment of any penalty.
11. This Agreement may be amended at any time by mutual consent of the
parties, provided that such consent on the part of the Trust shall have been
approved by vote of a majority of the outstanding voting securities of the
Series and by vote of a majority of the Trustees of the Trust who are not
interested persons of the Trust or the Adviser, cast in person at a meeting
called for the purpose of voting on such approval.
12. For the purpose of this Agreement, the terms "vote of a majority of
the outstanding voting securities", "interested person", "affiliated person"
and "assignment" shall have their respective meanings defined in the Investment
Company Act of 1940, subject, however, to such exemptions as may be granted by
the Securities and Exchange Commission under said Act. References in this
Agreement to any assets, property or liabilities "belonging to" the Series
shall have the meaning defined in the Trust's Agreement and Declaration of
Trust.
13. In the absence of willful misfeasance, bad faith or gross negligence
on the part of the Adviser, or reckless disregard of its obligations and duties
hereunder, the Adviser shall not be subject to any liability to the Trust, to
any shareholder of the Trust or to any other person, firm or organization, for
any act or omission in the course of, or connected with, rendering services
hereunder.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the
day and year first above written.
CGM TRUST on behalf of its CGM
FOCUS FUND series
By: /s/ G. Kenneth Heebner
------------------------------------
G. Kenneth Heebner, Vice President
CAPITAL GROWTH MANAGEMENT
LIMITED PARTNERSHIP
By: /s/ Robert L. Kemp
------------------------------------
President, Kenbob, Inc.,
General Partner
A copy of the Amended and Restated Agreement and Declaration of Trust, as
amended, of CGM Trust is on file with the Secretary of State of the
Commonwealth of Massachusetts, and notice is hereby given that this Agreement
is executed with respect to the Series on behalf of the Trust by officers of
the Trust as officers and not individually and that the obligations of or
arising out of this Agreement are not binding upon any of the Trustees,
officers or shareholders individually but are binding only upon the assets and
property belonging to the Series.
Exhibit (g)(5)
AMENDMENT TO CUSTODIAN CONTRACT
This Amendment to the Custodian Contract is made as of October 30, 1998,
by and between CGM Trust (the "Fund") and State Street Bank and Trust Company
(the "Custodian"). Capitalized terms used in this Amendment without definition
shall have the respective meanings given to such terms in the Custodian
Contract referred to below.
WHEREAS, the Fund and the Custodian entered into a Custodian Contract
dated as of March 6, 1992 (as amended and in effect from time to time, the
"Contract"); and
WHEREAS, the Fund is authorized to issue shares in separate series, with
each such series representing interests in a separate portfolio of securities
and other assets, and the Fund has made CGM Fixed Income Fund subject to the
Contract (each such series, together with all other series subsequently
established by the Fund and made subject to the Contract in accordance with the
terms thereof, shall be referred to as a "Series", and, collectively, the
"Series"); and
WHEREAS, the Fund and the Custodian desire to amend certain provisions of
the Contract to reflect revisions to Rule 17f-5 ("Rule 17f-5") promulgated
under the Investment Company Act of 1940, as amended (the "1940 Act"); and
WHEREAS, the Fund and the Custodian desire to amend and restate certain
other provisions of the Contract relating to the custody of assets of the
Series held outside of the United States.
NOW THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements hereinafter contained, the parties hereby agree to amend the
Contract, pursuant to the terms thereof, as follows:
I. The amendment to the Contract relating to foreign custody dated as of
April 16, 1992 is hereby deleted.
II. Articles 3 through 14 of the Contract are hereby renumbered, as of the
effective date of this Amendment, as Articles 5 through 16, respectively.
III. New Articles 3 and 4 of the Contract are hereby added, as of the effective
date of this Amendment, as set forth below.
<PAGE>
3. THE CUSTODIAN AS FOREIGN CUSTODY MANAGER.
3.1. DEFINITIONS.
Capitalized terms in this Article 3 shall have the following meanings:
"Country Risk" means all factors reasonably related to the systemic risk
of holding Foreign Assets in a particular country including, but not limited
to, such country's political environment; economic and financial infrastructure
(including any Mandatory Securities Depositories operating in the country);
prevailing or developing custody and settlement practices; and laws and
regulations applicable to the safekeeping and recovery of Foreign Assets held
in custody in that country.
"Eligible Foreign Custodian" has the meaning set forth in section (a)(1)
of Rule 17f-5, including a majority-owned or indirect subsidiary of a U.S. Bank
(as defined in Rule 17f-5), a bank holding company meeting the requirements of
an Eligible Foreign Custodian (as set forth in Rule 17f-5 or by other
appropriate action of the U.S. Securities and Exchange Commission (the "SEC")),
or a foreign branch of a Bank (as defined in Section 2(a)(5) of the 1940 Act)
meeting the requirements of a custodian under Section 17(f) of the 1940 Act,
except that the term does not include Mandatory Securities Depositories.
"Foreign Assets" means any of the Series' investments (including foreign
currencies) for which the primary market is outside the United States and such
cash and cash equivalents as are reasonably necessary to effect the Series'
transactions in such investments.
"Foreign Custody Manager" has the meaning set forth in section (a)(2) of
Rule 17f-5.
"Mandatory Securities Depository" means a foreign securities depository or
clearing agency that, either as a legal or practical matter, must be used if
the Fund, on the Series' behalf, determines to place Foreign Assets in a
country outside the United States (I) because required by law or regulation;
(ii) because securities cannot be withdrawn from such foreign securities
depository or clearing agency; or (iii) because maintaining or effecting trades
in securities outside the foreign securities depository or clearing agency is
not consistent with prevailing or developing custodial or market practices.
<PAGE>
3.2. DELEGATION TO THE CUSTODIAN AS FOREIGN CUSTODY MANAGER.
The Fund, by resolution adopted by its Board of Trustees (the "Board"),
hereby delegates to the Custodian, with respect to the Series, subject to
Section (b) of Rule 17f-5, the responsibilities set forth in this Article 3
with respect to Foreign Assets of the Series held outside the United States,
and the Custodian hereby accepts such delegation, as Foreign Custody Manager
with respect to the Series.
3.3. COUNTRIES COVERED.
The Foreign Custody Manager shall be responsible for performing the
delegated responsibilities defined below only with respect to the countries and
custody arrangements for each such country listed on Schedule A to this
Contract, which list of countries may be amended from time to time by the Fund
with the agreement of the Foreign Custody Manager. The Foreign Custody Manager
shall list on Schedule A the Eligible Foreign Custodians selected by the
Foreign Custody Manager to maintain the assets of the Series which list of
Eligible Foreign Custodians may be amended from time to time in the sole
discretion of the Foreign Custody Manager. Mandatory Securities Depositories
are listed on Schedule B to this Contract, which Schedule B may be amended from
time to time by the Foreign Custody Manager. The Foreign Custody Manager will
provide amended versions of Schedules A and B in accordance with Section 3.7 of
this Article 3.
Upon the receipt by the Foreign Custody Manager of Proper Instructions to
open an account or to place or maintain Foreign Assets in a country listed on
Schedule A, and the fulfillment by the Fund on behalf of the Series of the
applicable account opening requirements for such country, the Foreign Custody
Manager shall be deemed to have been delegated by the Board on behalf of the
Series responsibility as Foreign Custody Manager with respect to that country
and to have accepted such delegation. Execution of this Amendment by the Fund
shall be deemed to be a Proper Instruction to open an account, or to place or
maintain Foreign Assets, in each country listed on Schedule A in which the
Custodian has previously placed or currently maintains Foreign Assets pursuant
to the terms of the Contract. Following the receipt of Proper Instructions
directing the Foreign Custody Manager to close the account of the Series with
the Eligible Foreign Custodian selected by the Foreign Custody Manager in a
designated country, the delegation by the Board on behalf of the Series to the
Custodian as Foreign Custody Manager for that country shall be deemed to have
been withdrawn and the Custodian shall immediately cease to be the Foreign
Custody Manager of the Series with respect to that country.
<PAGE>
The Foreign Custody Manager may withdraw its acceptance of delegated
responsibilities with respect to a designated country upon written notice to
the Fund. Ninety days (or such longer period as to which the parties agree in
writing) after receipt of any such notice by the Fund, the Custodian shall have
no further responsibility as Foreign Custody Manager to the Fund with respect
to the country as to which the Custodians acceptance of delegation is
withdrawn.
3.4. SCOPE OF DELEGATED RESPONSIBILITIES.
3.4.1. SELECTION OF ELIGIBLE FOREIGN CUSTODIANS.
Subject to the provisions of this Article 3, the requirements of Rule
17f-5 and any other applicable law, the Series' Foreign Custody Manager may
place and maintain the Foreign Assets in the care of the Eligible Foreign
Custodian selected by the Foreign Custody Manager in each country listed on
Schedule A, as amended from time to time.
In performing its delegated responsibilities as Foreign Custody Manager to
place or maintain Foreign Assets with an Eligible Foreign Custodian, the
Foreign Custody Manager shall determine that the Foreign Assets will be subject
to reasonable care, based on the standards applicable to custodians in the
relevant market, after considering all factors relevant to the safekeeping of
such assets, including, without limitation, the factors specified in Rule
17f-5(c)(1).
3.4.2. CONTRACTS WITH ELIGIBLE FOREIGN CUSTODIANS.
The Foreign Custody Manager shall determine that the contract (or the
rules or established practices or procedures in the case of an Eligible Foreign
Custodian that is a foreign securities depository or clearing agency) governing
the foreign custody arrangements with each Eligible Foreign Custodian selected
by the Foreign Custody Manager satisfies the requirements of Rule 17f-5(c)(2).
3.4.3. MONITORING.
In each case in which the Foreign Custody Manager maintains Foreign Assets
with an Eligible Foreign Custodian selected by the Foreign Custody Manager, the
Foreign Custody Manager shall comply with Rule 17f-5(c)(3). In the event the
Foreign Custody Manager determines that the custody arrangements with an
Eligible Foreign Custodian it has selected are no longer appropriate, the
<PAGE>
Foreign Custody Manager shall notify the Board in accordance with Section 3.7
hereunder.
3.5. GUIDELINES FOR THE EXERCISE OF DELEGATED AUTHORITY.
For purposes of this Article 3, as between the Board and the Custodian
only, the Board shall be deemed to have considered and determined to accept
such Country Risk as is incurred by placing and maintaining the Foreign Assets
in each country for which the Custodian is serving as Foreign Custody Manager
of the Series. The Board shall be deemed to be monitoring on a continuing basis
such Country Risk to the extent that the Board considers necessary or
appropriate. The Fund and the Custodian each expressly acknowledge that the
Foreign Custody Manager shall not be delegated any responsibilities under this
Article 3 with respect to Mandatory Securities Depositories. Nothing in this
section shall limit the Board's ability to delegate any responsibility with
respect to Country Risk or Mandatory Securities Depositories to the Fund's
investment adviser or any other third party.
3.6. STANDARD OF CARE AS FOREIGN CUSTODY MANAGER.
In performing the responsibilities delegated to it, the Foreign Custody
Manager agrees to exercise reasonable care, prudence and diligence such as a
person having responsibility for the safekeeping of assets of management
investment companies registered under the 1940 Act would exercise.
3.7. REPORTING REQUIREMENTS.
The Foreign Custody Manager shall report the withdrawal of the Foreign
Assets from an Eligible Foreign Custodian and the placement of such Foreign
Assets with another Eligible Foreign Custodian by providing to the Board
amended Schedules A or B at the end of the calendar quarter in which an
amendment to either Schedule has occurred. The Foreign Custody Manager shall
make written reports notifying the Board of any other material change in the
foreign custody arrangements of the Series described in this Article 3 promptly
after the occurrence of the material change.
Upon request of the Fund, the Foreign Custody Manager shall provide an
annual certification to the Board that the foreign custody arrangements
delegated by the Board to the Foreign Custody Manager are in compliance with
Rule 17f-5.
<PAGE>
3.8. REPRESENTATIONS WITH RESPECT TO RULE 17F-5.
The Foreign Custody Manager represents to the Fund that it is a U.S. Bank
as defined in section (a)(7) of Rule 17f-5.
The Fund represents to the Custodian that the Board has determined that it
is reasonable for the Board to rely on the Custodian to perform the
responsibilities delegated pursuant to this Contract to the Custodian as the
Foreign Custody Manager of the Series. This representation shall not limit the
responsibility of the Custodian in its capacity as Foreign Custody Manager.
3.9. EFFECTIVE DATE AND TERMINATION OF THE CUSTODIAN AS FOREIGN CUSTODY
MANAGER.
The Board's delegation to the Custodian as Foreign Custody Manager of the
Series shall be effective as of the date hereof and shall remain in effect
until terminated at any time, without penalty, by written notice from the
terminating party to the non-terminating party. Termination will become
effective ninety (90) days after receipt by the non-terminating party of such
notice. The provisions of Section 3.3 hereof shall govern the delegation to and
termination of the Custodian as Foreign Custody Manager of the Series with
respect to designated countries.
4. DUTIES OF THE CUSTODIAN WITH RESPECT TO PROPERTY OF THE SERIES HELD
OUTSIDE THE UNITED STATES.
4.1 DEFINITIONS.
Capitalized terms in this Article 4 shall have the following meanings:
"Foreign Securities System" means either a clearing agency or a securities
depository listed on Schedule A hereto or a Mandatory Securities Depository
listed on Schedule B hereto.
"Foreign Sub-Custodian" means a foreign banking institution serving as an
Eligible Foreign Custodian.
4.2. HOLDING SECURITIES.
The Custodian shall identify on its books as belonging to the Series the
foreign securities held by each Foreign Sub-Custodian or Foreign Securities
System. The Custodian may hold foreign securities for all of its customers,
<PAGE>
including the Series, with any Foreign Sub-Custodian in an account that is
identified as belonging to the Custodian for the benefit of its customers,
provided however, that (I) the records of the Custodian with respect to foreign
securities of the Series which are maintained in such account shall identify
those securities as belonging to the Series and (ii), to the extent permitted
and customary in the market in which the account is maintained, the Custodian
shall require that securities so held by the Foreign Sub-Custodian be held
separately from any assets of such Foreign Sub-Custodian or of other customers
of such Foreign Sub-Custodian.
4.3. FOREIGN SECURITIES SYSTEMS.
Foreign securities shall be maintained in a Foreign Securities System in a
designated country only through arrangements implemented by the Foreign
Sub-Custodian in such country pursuant to the terms of this Contract. Except
for those Foreign Securities Systems which are Mandatory Securities
Depositories, the Custodian shall confirm that each such Foreign Securities
System is an Eligible Foreign Custodian.
4.4. TRANSACTIONS IN FOREIGN CUSTODY ACCOUNT.
4.4.1. DELIVERY OF FOREIGN SECURITIES.
The Custodian or a Foreign Sub-Custodian shall release and deliver foreign
securities of the Series held by such Foreign Sub-Custodian, or in a Foreign
Securities System account, only upon receipt of Proper Instructions, which may
be continuing instructions when deemed appropriate by the parties, and only in
the following cases:
(i) upon the sale of such foreign securities for the Series in
accordance with commercially reasonable market practice in the
country where such foreign securities are held or traded,
including, without limitation: (A) delivery against
expectation of receiving later payment; or (B) in the case of
a sale effected through a Foreign Securities System, in
accordance with the rules governing the operation of the
Foreign Securities System;
(ii) in connection with any repurchase agreement related to foreign
securities;
(iii) to the depository agent in connection with tender or other
similar offers for foreign securities of the Series;
<PAGE>
(iv) to the issuer thereof or its agent when such foreign
securities are called, redeemed, retired or otherwise become
payable;
(v) to the issuer thereof, or its agent, for transfer into the
name of the Custodian (or the name of the respective Foreign
Sub-Custodian or of any nominee of the Custodian or such
Foreign Sub-Custodian) or for exchange for a different number
of bonds, certificates or other evidence representing the same
aggregate face amount or number of units;
(vi) to brokers, clearing banks or other clearing agents for
examination or trade execution in accordance with market
custom; provided that in any such case the Foreign
Sub-Custodian shall have no responsibility or liability for
any loss arising from the delivery of such securities prior to
receiving payment for such securities except as may arise from
the Foreign Sub-Custodian's own negligence or willful
misconduct;
(vii) for exchange or conversion pursuant to any plan of merger,
consolidation, recapitalization, reorganization or
readjustment of the securities of the issuer of such
securities, or pursuant to provisions for conversion contained
in such securities, or pursuant to any deposit agreement,
provided that in any such case the new securities and cash are
to be delivered to the Custodian or a Foreign Sub-Custodian;
(viii) in the case of warrants, rights or similar foreign securities,
the surrender thereof in the exercise of such warrants, rights
or similar securities or the surrender of interim receipts or
temporary securities for definitive securities, provided that
in any such case the new securities and cash are to be
delivered to the Custodian or a Foreign Sub-Custodian;
(ix) for delivery as security in connection with any borrowing by
the Series requiring a pledge of assets by the Series;
(x) in connection with trading in options and futures contracts,
including delivery as original margin and variation margin;
(xi) in connection with the lending of foreign securities; and
(xii) for any other proper purpose, but only upon receipt of Proper
Instructions specifying the foreign securities to be
<PAGE>
delivered, setting forth the purpose for which such delivery
is to be made, declaring such purpose to be a proper trust
purpose, and naming the person or persons to whom delivery of
such securities shall be made.
4.4.2. PAYMENT OF SERIES MONIES.
Upon receipt of Proper Instructions, which may be continuing instructions
when deemed appropriate by the parties, the Custodian shall pay out, or direct
the respective Foreign Sub-Custodian or the respective Foreign Securities
System to pay out, monies of the Series in the following cases only:
(i) upon the purchase of foreign securities for the Series, unless
otherwise directed by Proper Instructions, by (A) delivering
money to the seller thereof or to a dealer therefor (or an
agent for such seller or dealer) against expectation of
receiving later delivery of such foreign securities in
accordance with customary established securities trading or
processing practices and procedures in the jurisdiction or
market in which the transaction occurs; or (B) in the case of
a purchase effected through a Foreign Securities System, in
accordance with the rules governing the operation of such
Foreign Securities System;
(ii) in connection with the conversion, exchange or surrender of
foreign securities of the Series;
(iii) for the payment of any expense or liability of the Series,
including but not limited to the following payments: interest,
taxes, investment advisory fees, transfer agency fees, fees
under this Contract, legal fees, accounting fees, and other
operating expenses;
(iv) for the purchase or sale of foreign exchange or foreign
exchange contracts for the Series, including transactions
executed with or through the Custodian or its Foreign
Sub-Custodians;
(v) in connection with trading in options and futures contracts,
including delivery as original margin and variation margin;
(vi) for payment of part or all of the dividends received in
respect of securities sold short;
<PAGE>
(vii) in connection with the borrowing or lending of foreign
securities; and
(viii) for any other proper purpose, but only upon receipt of Proper
Instructions specifying the amount of such payment, setting
forth the purpose for which such payment is to be made,
declaring such purpose to be a proper trust purpose, and
naming the person or persons to whom such payment is to be
made.
4.4.3. MARKET CONDITIONS; MARKET INFORMATION.
Notwithstanding any provision of this Contract to the contrary, settlement
and payment for Foreign Assets received for the account of the Series and
delivery of Foreign Assets maintained for the account of the Series may be
effected in accordance with the customary established securities trading or
processing practices and procedures in the country or market in which the
transaction occurs, including, without limitation, delivering Foreign Assets to
the purchaser thereof or to a dealer therefor (or an agent for such purchaser
or dealer) with the expectation of receiving later payment for such Foreign
Assets from such purchaser or dealer.
The Custodian shall provide to the Board the information with respect to
custody and settlement practices in countries in which the Custodian employs a
Foreign Sub-Custodian, including without limitation information relating to
Foreign Securities Systems, described on Schedule C hereto at the time or times
set forth on such Schedule. The Custodian may revise Schedule C from time to
time, provided that no such revision shall result in the Board being provided
with substantively less information than had been previously provided
hereunder.
4.5. REGISTRATION OF FOREIGN SECURITIES.
The foreign securities maintained in the custody of a Foreign
Sub-Custodian (other than bearer securities) shall be registered in the name of
the Series or in the name of the Custodian or in the name of any Foreign
Sub-Custodian or in the name of any nominee of the foregoing, and the Fund on
behalf of the Series agrees to hold any such nominee harmless from any
liability solely as a holder of record of such foreign securities. The
Custodian or a Foreign Sub-Custodian shall not be obligated to accept
securities on behalf of the Series under the terms of this Contract unless the
<PAGE>
form of such securities and the manner in which they are delivered are in
accordance with reasonable market practice.
4.6. BANK ACCOUNTS.
The Custodian shall identify on its books as belonging to the Fund cash
(including cash denominated in foreign currencies) deposited with the
Custodian. Where the Custodian is unable to maintain, or market practice does
not facilitate the maintenance of, cash on the books of the Custodian, a bank
account or bank accounts opened and maintained outside the United States on
behalf of the Series with a Foreign Sub-Custodian shall be subject only to
draft or order by the Custodian or such Foreign Sub-Custodian, acting pursuant
to the terms of this Contract to hold cash received by or from or for the
account of the Series.
4.7. COLLECTION OF INCOME.
The Custodian shall use reasonable commercial efforts to collect all
income and other payments with respect to the Foreign Assets held hereunder to
which the Series shall be entitled and shall credit such income, as collected,
to the Series In the event that extraordinary measures are required to collect
such income, the Fund and the Custodian shall consult as to such measures and
as to the compensation and expenses of the Custodian relating to such measures.
4.8. SHAREHOLDER RIGHTS.
With respect to the foreign securities held pursuant to this Article 4,
the Custodian will facilitate the exercise of voting and other shareholder
rights, subject always to the laws, regulations and practical constraints that
may exist in the country where such securities are issued. The Fund
acknowledges that local conditions, including lack of regulation, onerous
procedural obligations, lack of notice and other factors may have the effect of
severely limiting the ability of the Fund to exercise shareholder rights.
4.9. COMMUNICATIONS RELATING TO FOREIGN SECURITIES.
The Custodian shall transmit promptly to the Fund written information
(including, without limitation, pendency of calls and maturities of foreign
securities and expirations of rights in connection therewith) received by the
Custodian via the Foreign Sub-Custodians from issuers of the foreign securities
being held for the account of the Series. With respect to tender or exchange
offers, the Custodian shall transmit promptly to the Fund written information
<PAGE>
so received by the Custodian from issuers of the foreign securities whose
tender or exchange is sought or from the party (or its agents) making the
tender or exchange offer. The Custodian shall not be liable for any untimely
exercise of any tender, exchange or other right or power in connection with
foreign securities or other property of the Series at any time held by it
unless the Custodian has failed to perform its obligations under the first two
sentences of this Section or unless (I) the Custodian or the respective Foreign
Sub-Custodian is in actual possession of such foreign securities or property
and (ii) the Custodian receives Proper Instructions with regard to the exercise
of any such right or power, and both (I) and (ii) occur at least three business
days prior to the date on which the Custodian is to take action to exercise
such right or power.
4.10. LIABILITY OF FOREIGN SUB-CUSTODIANS AND FOREIGN SECURITIES SYSTEMS.
Each agreement pursuant to which the Custodian employs a Foreign
Sub-Custodian shall, to the extent possible, require the Foreign Sub-Custodian
to exercise reasonable care in the performance of its duties and, to the extent
possible, to indemnify, and hold harmless, the Custodian and the Fund from and
against any loss, damage, cost, expense, liability or claim arising out of or
in connection with the Foreign Sub-Custodian's performance of such obligations.
At the Fund's election, the Fund shall be entitled to be subrogated to the
rights of the Custodian with respect to any claims against a Foreign
Sub-Custodian as a consequence of any such loss, damage, cost, expense,
liability or claim if and to the extent that the Series have not been made
whole for any such loss, damage, cost, expense, liability or claim.
4.11. TAX LAW.
The Custodian shall have no responsibility or liability for any
obligations now or hereafter imposed on the Fund, the Series or the Custodian
as custodian of the Series by the tax law of the United States or of any state
or political subdivision thereof. It shall be the responsibility of the Fund to
notify the Custodian of the obligations imposed on the Fund with respect to the
Series or the Custodian as custodian of the Series by the tax law of countries
other than those mentioned in the above sentence, including responsibility for
withholding and other taxes, assessments or other governmental charges,
certifications and governmental reporting. The sole responsibility of the
Custodian with regard to such tax law shall be to use reasonable efforts to
assist the Fund with respect to any claim for exemption or refund under the tax
law of countries for which the Fund has provided such information.
<PAGE>
4.12. ACCESS OF INDEPENDENT ACCOUNTANTS OF THE FUND.
To the extent account structure and local law allow and upon request of
the Fund, the Custodian will use its best efforts to arrange for the
independent accountants of the Fund to be afforded access to the books and
records of any Foreign Sub-Custodian insofar as such books and records relate
to the performance of such Foreign Sub-Custodian under its agreement with the
Custodian.
4.13. LIABILITY OF CUSTODIAN.
Except as may arise from the Custodian's own negligence, bad faith or
willful misconduct or the negligence, bad faith or willful misconduct of a
Sub-Custodian, the Custodian shall be without liability to the Fund for any
loss, liability, claim or expense resulting from or caused by anything which is
(A) part of Country Risk or (B) part of the "prevailing country risk" of the
Fund and the Series, as such term is used in SEC Release Nos. IC-22658; IS-1080
(May 12, 1997).
The Custodian shall be liable for the acts or omissions of a Foreign
Sub-Custodian to the same extent as set forth with respect to sub-custodians
generally in the Contract and, regardless of whether assets are maintained in
the custody of a Foreign Sub-Custodian or a Foreign Securities Depository, the
Custodian shall not be liable for any loss, damage, cost, expense, liability or
claim resulting from nationalization, expropriation, currency restrictions, or
acts of war or terrorism, or any other loss where the Sub-Custodian has
otherwise acted with reasonable care.
4.14. LIMITATION ON LIABILITY OF TRUSTEES.
The Amended and Restated Agreement and Declaration of Trust of the Fund
dated as of January 23, 1997 is on file with the Secretary of The Commonwealth
of Massachusetts.
This Amendment is executed on behalf of the Fund and not on behalf of the
Trustees or officers of the Fund or individually, and the obligations of this
Amendment are not binding upon any of such Trustees, such officers, or the
Shareholders of the Fund individually but are binding only upon the assets and
property of the Series.
IV. Except as specifically superseded or modified herein, the terms and
provisions of the Contract shall continue to apply with full force and effect.
<PAGE>
In the event of any conflict between the terms of the Contract prior to this
Amendment and this Amendment, the terms of this Amendment shall prevail. If the
Custodian is delegated the responsibilities of Foreign Custody Manager pursuant
to the terms of Article 3 hereof, in the event of any conflict between the
provisions of Articles 3 and 4 hereof, the provisions of Article 3 shall
prevail.
IN WITNESS WHEREOF, each of the parties has caused this Amendment to be
executed in its name and behalf by its duly authorized representative as of the
date first above written.
WITNESSED BY: STATE STREET BANK AND TRUST COMPANY
/s/ Marc L. Parsons By: /s/ Ronald E. Logue
- ------------------------- -----------------------------
Marc L. Parsons Name: Ronald E. Logue
Associate Counsel Title: Executive Vice President
WITNESSED BY: CGM TRUST
/s/ Leslie A. Lake By: /s/ Robert L. Kemp
- ------------------------- ----------------------------------
Name: Leslie A. Lake Name: Robert L. Kemp
Title: Vice President Title: President
and Secretary
Exhibit (g)(8)
CUSTODIAN CONTRACT
Between
CGM TRUST
and
STATE STREET BANK AND TRUST COMPANY
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
1. Employment of Custodian and Property to be Held by It................................1
2. Duties of the Custodian with Respect to Property of the Fund Held By the Custodian...2
2.1 Holding Securities............................................................2
2.2 Delivery of Securities........................................................2
2.3 Registration of Securities....................................................4
2.4 Bank Accounts.................................................................4
2.5 Payments for Shares...........................................................5
2.6 Investment and Availability of Federal Funds..................................5
2.7 Collection of Income..........................................................5
2.8 Payment of Fund Moneys........................................................6
2.9 Liability for Payment in Advance of Receipt of Securities Purchased...........8
2.10 Payments for Repurchase or Redemptions of Shares of the Fund..................8
2.11 Appointment of Agents.........................................................9
2.12 Deposit of Fund Assets in Securities Systems..................................9
2.13 Ownership Certificates for Tax Purposes......................................10
2.14 Proxies......................................................................10
2.15 Communications Relating to Fund Portfolio Securities.........................11
2.16 Proper Instructions..........................................................11
2.17 Actions Permitted without Express Authority..................................12
2.18 Evidence of Authority........................................................12
3. Duties of Custodian with Respect to the Books of Account and Calculation of
Net Asset Value and Net Income......................................................13
4. Records.............................................................................13
5. Opinion of Fund's Independent Accountant............................................14
6. Reports to Fund by Independent Public Accounts......................................14
7. Compensation of Custodian...........................................................15
8. Responsibility of Custodian.........................................................15
9. Effective Period, Termination and Amendment.........................................16
<PAGE>
10. Successor Custodian.................................................................17
11. Interpretive and Additional Provisions..............................................18
12. Massachusetts Law to Apply..........................................................18
13. Prior Contracts.....................................................................18
14. Multiple Series.....................................................................18
</TABLE>
<PAGE>
CUSTODIAN CONTRACT
This Contract between CGM Trust, a business trust organized and existing
under the laws of Massachusetts, having its principal place of business at One
International Place, Boston, Massachusetts, 02110 (hereinafter called the
"Fund") and STATE STREET BANK AND TRUST COMPANY, having its usual place of
business at 225 Franklin Street, Boston, Massachusetts, 02110 (hereinafter
called the "Custodian"),
WITNESSETH: That in consideration of the mutual covenants and agreements
hereinafter contained, the parties hereto agree as follows
1. Employment of Custodian and Property to be Held by It.
The Fund hereby employs the Custodian as the custodian of its assets held
in CGM Focus Fund, a series of the Fund (the "Series"), pursuant to the
provisions of the Fund's By-Laws. The Fund agrees to deliver to the Custodian
all securities and cash owned by the Series, and all payments of income,
payments of principal or capital distributions received by it with respect to
all securities owned by the Series from time to time, and the cash
consideration received by it for such units of beneficial interest, no par
value ("Shares"), of the Series as may be issued or sold from time to time. The
Custodian shall not be responsible for any property of the Fund held or
received by the Fund and not delivered to the Custodian.
The Custodian may from time to time employ one or more sub-custodians, but
only in accordance with an applicable vote by the Trustees of the Fund
certified to the Custodian in the manner set forth in Section 2.18 hereof, and
<PAGE>
provided that the Custodian shall have no more or less responsibility or
liability to the Fund on account of any actions or omissions of any
sub-custodian so employed than any such sub-custodian has to the Custodian.
Notwithstanding the foregoing, each approval by the Board of Trustees of the
Fund of the employment of a particular sub-custodian shall not relieve the
Custodian of its obligations to exercise reasonable care in selecting such
sub-custodian.
2. Duties of the Custodian with Respect to Property of the Fund Held By
the Custodian.
2.1 Holding Securities. The Custodian shall hold and physically
segregate for the account of the Fund all non-cash property, including all
securities owned by the Fund, other than securities which are maintained in a
"Securities System" as defined in Section 2.12 hereof.
2.2 Delivery of Securities. The Custodian shall release and deliver
securities owned by the Fund held by the Custodian or in a Securities System
account of the Custodian only upon receipt of proper instructions, which may by
their terms be continuing instructions when deemed appropriate by the parties,
and only in the following cases:
1) Upon sale of such securities for the account of the Fund and
receipt of payment therefor;
2) Upon the receipt of payment in connection with any repurchase
agreement related to such securities entered into by the Fund;
3) In the case of a sale effected through a Securities System, in
accordance with the provisions of Section 2.12 hereof;
<PAGE>
4) To the depository agent in connection with tender or other
similar offers for portfolio securities of the Fund;
5) To the issuer thereof or its agent when such securities are
called, redeemed, retired or otherwise become payable; provided
that, in any such case, the cash or other consideration is to be
delivered to the Custodian;
6) To the issuer thereof, or its agent, for transfer into the name
of the Fund or into the name of any nominee or nominees of the
Fund or the Custodian or into the name or nominee name of any
agent appointed pursuant to Section 2.11 or into the name or
nominee name of any sub-custodian appointed pursuant to Article
1; or for exchange for a different number of bonds, certificates
or other evidence representing the same aggregate face amount or
number of units; provided that, or any such case, the new
securities are to be delivered to the Custodian;
7) To the broker selling the same for examination in accordance
with the "street delivery" custom;
8) For exchange or conversion pursuant to any plan of merger,
consolidation, recapitalization, reorganization or readjustment
of the securities of the issuer of such securities, or pursuant
to provisions for conversion contained in such securities, or
pursuant to any deposit agreement; provided that, in any such
case, the new securities and cash, if any, are to be delivered
to the Custodian;
9) In the case of warrants, rights or similar securities, the
surrender thereof in the exercise of such warrants, rights or
similar securities or the surrender of interim receipts or
temporary securities for definitive securities; provided that,
in any such case, the new securities and cash, if any, are to be
delivered to the Custodian;
10) For delivery in connection with any loans of securities made by
the Fund, but only against receipt by the Custodian of adequate
collateral as set forth in proper instructions from the Fund,
which collateral may be in the form of cash or obligations
issued by the United States government, its agencies or
instrumentalities or in any other form approved in a vote of the
<PAGE>
Board of Trustees of the Fund certified to the Custodian in the
manner set forth in Section 2.18 hereof;
11) For delivery as security in connection with any borrowings by
the Fund requiring a pledge of assets by the Fund, but only
against receipt of amounts borrowed or to provide additional
collateral if it is required to secure a borrowing already made;
12) Upon receipt of instructions from the transfer agent for the
Fund (the "Transfer Agent"), for delivery to such Transfer Agent
or to the holders of shares in connection with distributions in
kind, as may be described from time to time in the Fund's
currently effective prospectus, in satisfaction of requests by
holders of Shares for repurchase or redemption; and
13) For any other proper trust purpose, but only upon receipt of, in
addition to proper instructions, a certified copy of a
resolution of the Trustees or of the Executive Committee signed
by an officer of the Fund and certified by the Secretary or an
Assistant Secretary, specifying the securities to be delivered,
setting forth the purpose for which such delivery is to be made,
declaring such purposes to be proper trust purposes, and naming
the person or persons to whom delivery of such securities shall
be made.
2.3 Registration of Securities. Securities held by the Custodian
(other than bearer securities) shall be registered in the name of the Fund or
in the name of any nominee of the Fund or of any nominee of the Custodian which
nominee shall be assigned exclusively to the Fund, unless the Fund has
authorized in writing the appointment of a nominee to be used in common with
other registered investment companies in the same mutual fund group as the
Fund, or in the name or nominee name of any agent appointed pursuant to Section
2.11 or in the name or nominee name of any sub-custodian appointed pursuant to
<PAGE>
Article 1. All securities accepted by the Custodian on behalf of the Fund under
the terms of this Contract shall be in "street" or other good delivery form.
2.4 Bank Accounts. The Custodian shall open and maintain a separate
bank account or accounts in the name of the Fund, subject only to draft or
order by the Custodian acting pursuant to the terms of this Contract, and shall
hold in such account or accounts, subject to the provisions hereof, all cash
received by it from or for the account of the Fund, other than cash maintained
by the Fund in a bank account established and used in accordance with Rule
17f-3 under the Investment Company Act of 1940. Funds held by the Custodian for
the Fund may be deposited by it to its credit as Custodian in the Banking
Department of the Custodian or in such other banks or trust companies as it may
in its discretion deem necessary or desirable; provided, however, that every
such bank or trust company shall be qualified to act as a custodian under the
Investment Company Act of 1940 and that each such bank or trust company and the
funds to be deposited with each such bank or trust company shall be approved by
vote of a majority of the Trustees of the Fund certified to the Custodian in
the manner set forth in Section 2.18 hereof. Such funds shall be deposited by
the Custodian in its capacity as Custodian and shall be withdrawable by the
Custodian only in that capacity.
2.5 Payments for Shares. The Custodian shall receive from the
distributor for the Fund's Shares or from the Transfer Agent of the Fund and
<PAGE>
deposit into the Fund's account such payments as are received for Shares of the
Fund issued or sold from time to time by the Fund. The Custodian will provide
timely notification to the Fund and the Transfer Agent of any receipt by it of
payments for Shares of the Fund.
2.6 Investment and Availability of Federal Funds. Upon mutual
agreement between the Fund and the Custodian, the Custodian shall, upon the
receipt of proper instructions,
1) invest, in such instruments as may be set forth in such
instructions on the same day as received, all federal funds
received after a time agreed upon between the Custodian and the
Fund; and
2) make federal funds available to the Fund as of specified times
agreed upon from time to time by the Fund and the Custodian in
the amount of checks received in payment for Shares of the Fund
which checks are deposited into the Fund's account.
2.7 Collection of Income. The Custodian shall collect on a timely
basis all income and other payments with respect to registered securities held
hereunder to which the Fund shall be entitled either by law or pursuant to
custom in the securities business, and shall collect on a timely basis all
income and other payments with respect to bearer securities if, on the date of
payment by the issuer, such securities are held by the Custodian or agent
thereof and shall credit such income, as collected, to the Fund's custodian
account. Without limiting the generality of the foregoing, the Custodian shall
detach and present for payment all coupons and other income items requiring
<PAGE>
presentation as and when they become due and shall collect interest when due on
securities held hereunder.
In any case in which the Custodian does not receive any due and unpaid
income within a reasonable time after it has made proper demands for the same
(which shall be presumed to consist of at least three demand letters and at
least one telephonic demand), it shall so notify the Fund in writing, including
copies of all demand letters, any written responses thereto, and memoranda of
all oral responses thereto and to telephonic demands, and await proper
instructions; the Custodian shall not be obliged to take legal action for
collection unless and until reasonably indemnified to its satisfaction. It
shall also notify the Fund as soon as reasonably practicable whenever income
due on securities, in respect to which the Fund requests such notice, is not
collected in due course.
2.8 Payment of Fund Moneys. Upon receipt of proper instructions,
which may by their terms be continuing instructions when deemed appropriate by
the parties, the Custodian shall pay out moneys of the Fund in the following
cases only:
1) Upon the purchase of securities for the account of the Fund but
only (a) against the delivery of such securities to the
Custodian (or any bank, banking firm or trust company doing
business in the United States or abroad which is qualified under
the Investment Company Act of 1940, as amended, to act as a
custodian and has been designated by the Custodian as its agent
for this purpose) registered in the name of the Fund or in the
name of a nominee of the Custodian referred to in Section 2.3
hereof or in proper form for transfer. All securities accepted
by the Custodian shall be accompanied by payment of, or a "due
<PAGE>
bill" for, any dividends, interest, or other distributions of
the issuer, due the purchaser; (b) in the case of a purchase
effected through a Securities System, in accordance with the
conditions set forth in Section 2.12 hereof; or (c) in the case
of repurchase agreements entered into between the Fund and the
Custodian, or another bank, (i) against delivery of the
securities either in certificate form or through an entry
crediting the Custodian's account at the Federal Reserve Bank
with such securities or (ii) against delivery of the receipt
evidencing purchase by the Fund of securities owned by the
Custodian along with written evidence of the agreement by the
Custodian to repurchase such securities from the Fund;
2) In connection with conversion, exchange or surrender of
securities owned by the Fund as set forth in Section 2.2 hereof;
3) For the redemption or repurchase of Shares issued by the Fund as
set forth in Section 2.10 hereof;
4) For the payment of any expense or liability incurred by the
Fund, including but not limited to the following payments for
the account of the Fund: interest, taxes, management,
accounting, transfer agent, and legal fees, and operating
expenses of the Fund whether or not such expenses are to be in
whole or part capitalized or treated as deferred expenses;
5) For the payment of principal on any loan to the Fund upon
receipt of the collateral, if any, for such loan and upon the
surrender of any note or notes evidencing such loan;
6) For the payment of any dividends declared pursuant to the
governing documents of the Fund;
7) For the repayment of any collateral upon the return of
securities loaned or payment to return excess collateral to the
borrower of such securities;
8) For any other proper purpose, but only upon receipt of, in
addition to proper instructions, a certified copy of a
resolution of the Trustees of the Fund signed by an officer of
the Fund and certified by its Secretary or an Assistant
<PAGE>
Secretary, specifying the amount of such payment, setting forth
the purpose for which such payment is to be made, declaring such
purpose to be a proper purpose, and naming the person or persons
to whom such payment is to be made.
2.9 Liability for Payment in Advance of Receipt of Securities
Purchased. In any and every case where payment for purchase of securities for
the account of the Fund is made by the Custodian in advance of receipt of the
securities purchased in the absence of specific written instructions from the
Fund to so pay in advance, the Custodian shall be absolutely liable to the Fund
for such securities to the same extent as if the securities had been received
by the Custodian, except that in the case of repurchase agreements entered into
by the Fund with a bank which is a member of the Federal Reserve System, the
Custodian may transfer funds to the account of such bank prior to the receipt
of written evidence that the securities subject to such repurchase agreement
have been transferred by book-entry into a segregated non-proprietary account
of the Custodian maintained with the Federal Reserve Bank of Boston [or of the
safe-keeping receipt], provided that such securities have in fact been so
transferred by book-entry.
2.10 Payments for Repurchase or Redemptions of Shares of the Fund.
From such funds as may be available for the purpose but subject to the
limitations of the Fund's Amended and Restated Agreement and Declaration of
Trust (the "Declaration"), and By-Laws and any applicable votes of the Trustees
of the Fund pursuant thereto, the Custodian shall, upon receipt of instructions
<PAGE>
from the Transfer Agent, make funds available for payment to holders of Shares
who have delivered to the Transfer Agent a request for redemption or repurchase
of their Shares. In connection with the redemption or repurchase of Shares of
the Fund, the Custodian is authorized upon receipt of instructions from the
Transfer Agent to wire funds to or through a commercial bank designated by the
redeeming shareholders to the extent authorized and in accordance with any
procedures set forth in the Fund's current prospectus.
2.11 Appointment of Agents. The Custodian may at any time or times in
its discretion appoint (and may at any time remove) any other bank or trust
company which is itself qualified under the Investment Company Act of 1940, as
amended, to act as a custodian, as its agent to carry out such of the
provisions of this Article 2 as the Custodian may from time to time direct;
provided, that the appointment of any agent shall not relieve the Custodian of
its responsibilities or liabilities hereunder.
2.12 Deposit of Fund Assets in Securities Systems. The Custodian may
deposit and/or maintain securities owned by the Fund in a clearing agency
registered with the Securities and Exchange Commission under Section 17A of the
Securities Exchange Act of 1934, which acts as a securities depository, or in
the book-entry system authorized by the U.S. Department of the Treasury and
certain federal agencies, each of which is referred to herein as "a Securities
System" in accordance with applicable Federal Reserve Board and Securities and
<PAGE>
Exchange Commission rules and regulations, if any, and subject to the following
provisions:
1) The Custodian may keep securities of the Fund in a Securities
System provided that such securities are represented in an
account ("Account") of the Custodian in the Securities System
which shall not include any assets of the Custodian other than
assets held as a fiduciary, custodian or otherwise for
customers;
2) The records of the Custodian with respect to securities of the
Fund which are maintained in the Securities System shall
identify by book-entry those securities belonging to the Fund;
3) The Custodian shall pay for [securities purchased for the
account of] the Fund upon (i) receipt of advice from the
Securities System that such securities have been transferred to
the Account, and (ii) the making of an entry on the records of
the Custodian to reflect such payment and transfer for the
account of the Fund. The Custodian shall transfer securities
sold or loaned for the account of the Fund upon (i) receipt of
advice from the Securities System that payment or collateral for
such securities has been transferred to the Account, and (ii)
the making of an entry on the records of the Custodian to
reflect such transfer and payment for the account of the Fund.
Copies of all advices from the Securities System of transfers of
securities for the account of the Fund shall identify the Fund,
be maintained for the Fund by the Custodian and be provided to
the Fund at its request. The Custodian shall furnish the Fund
confirmation of each transfer to or from the account of the Fund
in the form of a written advice or notice and shall furnish to
the Fund copies of daily transaction sheets reflecting each
day's transactions in the Securities System for the account of
the Fund on the next business day;
4) The Custodian shall promptly provide the Fund with any report
obtained by the Custodian on the Securities System's accounting
system, internal accounting control and procedures for
safeguarding securities deposited in the Securities System;
5) The Custodian shall have received the initial certificate
required by Article 9 hereof;
<PAGE>
6) Anything to the contrary in this Contract notwithstanding, the
Custodian shall be liable to the Fund for any loss or damage to
the Fund resulting from use of the Securities System by reason
of any negligence, misfeasance or misconduct of the Custodian or
any of its agents or of any of its or their employees or from
failure of the Custodian or any such agent to enforce
effectively such rights as it may have against the Securities
System; at the election of the Fund, the Fund shall be entitled
to be subrogated to the rights of the Custodian with respect to
any claim against the Securities System or any other person
which the Custodian may have as a consequence of any such loss
or damage if and to the extent that the Fund has not been made
whole for any such loss or damage.
2.13 Ownership Certificates for Tax Purposes. The Custodian shall
execute ownership and other certificates and affidavits for all federal and
state tax purposes in connection with receipt of income or other payments with
respect to securities of the Fund held by it and in connection with transfers
of securities.
2.14 Proxies. The Custodian shall, with respect to the securities
held hereunder, cause to be promptly executed by the registered holder of such
securities, if the securities are registered otherwise than in the name of the
Fund or a nominee of the Fund, all proxies, without indication of the manner in
which such proxies are to be voted, and shall promptly deliver to the Fund such
proxies, all proxy soliciting materials and all notices relating to such
securities.
2.15 Communications Relating to Fund Portfolio Securities. The
Custodian shall transmit promptly to the Fund all written information
(including, without limitation, pendency of calls and maturities of securities
and expirations of rights in connection therewith) received by the Custodian
<PAGE>
from issuers of the securities being held for the Fund. With respect to tender
or exchange offers, the Custodian shall transmit promptly to the Fund all
written information received by the Custodian from issuers of the securities
whose tender or exchange is sought and from the party (or his agents) making
the tender or exchange offer. If the Fund desires to take action with respect
to any tender offer, exchange offer or any other similar transaction, the Fund
shall notify the Custodian at least three business days prior to the date on
which the Custodian is to take such action.
2.16 Proper Instructions. Proper Instructions as used throughout this
Article 2 means a writing signed or initialed by one or more person or persons
as the Trustees of the Fund shall have from time to time authorized. Each such
writing shall set forth the specific transaction or type of transaction
involved, including a specific statement of the purpose for which such action
is requested. Oral instructions will be considered Proper Instructions pursuant
to written authorizations and procedures agreed to by the Fund and the
Custodian if the Custodian reasonably believes such oral instructions to have
been given by a person authorized to give such instructions with respect to the
transaction involved. The Fund shall cause all oral instructions to be
confirmed in writing. Upon receipt of a certificate of the Secretary or an
Assistant Secretary as to the authorization by the Trustees of the Fund
accompanied by a detailed description of procedures approved by the Trustees,
Proper Instructions may include communications effected directly between
<PAGE>
electro-mechanical or electronic devices unless the Custodian indicates within
two days after receipt of such procedures that it objects to such procedures.
2.17 Actions Permitted without Express Authority. The Custodian may
in its discretion, without express authority from the Fund:
1) make payments to itself or others for minor expenses of handling
securities or other similar items relating to its duties under
this contract, provided that all such payments shall be promptly
accounted for to the Fund;
2) surrender securities in temporary form for securities in
definitive form;
3) endorse for collection, in the name of the Fund, checks, drafts
and other negotiable instruments; and
4) in general, attend to all non-discretionary details in
connection with the sale, exchange, substitution, purchase,
transfer and other dealings with the securities and property of
the Fund except as otherwise directed by the Trustees of the
Fund.
2.18 Evidence of Authority. The Custodian shall be protected in
acting upon any instructions, notice, request, consent, certificate or other
instrument or paper reasonably believed by it to be genuine and to have been
properly executed by or on behalf of the Fund. The Custodian may receive and
accept a certified copy of a vote of the Trustees of the Fund as conclusive
evidence (a) of the authority of any person to act in accordance with such vote
or (b) of any determination or of any action by the Trustees pursuant to the
Fund's Declaration as described in any vote, and such vote may be considered as
in full force and effect until receipt by the Custodian of written notice to
the contrary.
<PAGE>
3. Duties of Custodian with Respect to the Books of Account and
Calculation of Net Asset Value and Net Income.
The Custodian shall cooperate with and supply necessary information to the
entity or entities appointed by the Trustees of the Fund to keep the books of
account of the Fund and/or compute the net asset value per share of the
outstanding shares of the Fund or, if directed in writing to do so by the Fund,
shall itself keep such books of account and/or compute such net asset value per
share. If so directed, the Custodian shall also calculate daily the net income
of the Fund as described in the Fund's currently effective prospectus and shall
advise the Fund and the Transfer Agent daily of the total amounts of such net
income and, if instructed in writing by an officer of the Fund to do so, shall
advise the Transfer Agent periodically of the division of such net income among
its various components. The calculations of the net asset value per share and
the daily income of the Fund shall be made at the time or times described from
time to time in the Fund's currently effective prospectus.
4. Records.
The Custodian shall create and maintain all records relating to its
activities and obligations under this Contract in such manner as will meet the
obligations of the Fund under the Investment Company Act of 1940, with
particular attention to Section 31 thereof and Rules 31a-1 and 31a-2
thereunder, applicable federal and state tax laws and any other law or
administrative rules or procedures which may be applicable to the Fund. All
<PAGE>
such records shall be the property of the Fund and shall at all times during
the regular business hours of the Custodian be open for inspection by duly
authorized officers, employees or agents of the Fund and employees and agents
of the Securities and Exchange Commission. The Custodian shall, at the Fund's
request, supply the Fund with a tabulation of securities owned by the Fund and
held by the Custodian and shall, when requested to do so by the Fund and for
such compensation as shall be agreed upon between the Fund and the Custodian,
include certificate numbers in such tabulations. The Custodian shall provide to
the Fund as of the end of each month a list of all securities transactions that
remain unsettled at such time.
5. Opinion of Fund's Independent Accountant.
The Custodian shall take all reasonable action, as the Fund may from time
to time request, to obtain from year to year favorable opinions from the Fund's
independent accountants with respect to the Fund's activities hereunder in
connection with the preparation of the Fund's Form N-1A and Form N-SAR or other
annual reports to the Securities and Exchange Commission and with respect to
any other requirements of such Commission.
6. Reports to Fund by Independent Public Accounts.
The Custodian shall provide the Fund, at such times as the Fund may
reasonably require, with reports by independent public accountants on the
accounting system, internal accounting control and procedures for safeguarding
securities, including securities deposited and/or maintained in a Securities
<PAGE>
System, relating to the services provided by the Custodian under this Contract;
such reports, which shall be of sufficient scope and in sufficient detail, as
may reasonably be required by the Fund, to provide reasonable assurance that
any material inadequacies would be disclosed by such examination, and, if there
are no such inadequacies, shall so state.
7. Compensation of Custodian.
The Custodian shall be entitled to reasonable compensation for its
services and expenses as Custodian, as agreed upon from time to time between
the Fund and the Custodian.
8. Responsibility of Custodian.
So long as and to the extent that it is in the exercise of reasonable
care, the Custodian shall not be responsible for the title, validity or
genuineness of any property or evidence of title thereto received by it or
delivered by it pursuant to this Contract and shall be held harmless in acting
upon any notice, request, consent, certificate or other instrument reasonably
believed by it to be genuine and to be signed by the proper party or parties.
The Custodian shall be held to the exercise of reasonable care in carrying out
the provisions of this Contract, but shall be kept indemnified by and shall be
without liability to the Fund for any action taken or omitted by it in good
faith without negligence. It shall be entitled to rely on and may act upon
advice of counsel (who may be counsel for the Fund) on all matters, and shall
<PAGE>
be without liability for any action reasonably taken or omitted pursuant to
such advice.
If the Fund requires the Custodian to take any action with respect to
securities, which action involves the payment of money or which action may, in
the opinion of the Custodian, result in the Custodian or its nominee assigned
to the Fund being liable for the payment of money or incurring liability of
some other form, the Custodian may require the Fund, as a prerequisite to
requiring the Custodian to take such action, and the Fund shall provide
indemnity to the Custodian in an amount and form satisfactory to it.
9. Effective Period, Termination and Amendment.
This Contract shall become effective as of its execution, shall continue
in full force and effect until terminated as hereinafter provided, may be
amended at any time by mutual agreement of the parties hereto and may be
terminated by either party by an instrument in writing delivered or mailed,
postage prepaid to the other party, such termination to take effect not sooner
than one hundred twenty (120) days after the date of such delivery or mailing;
provided, however that the Custodian shall not act under Section 2.12 hereof in
the absence of receipt of an initial certificate of the Secretary or an
Assistant Secretary that the Trustees of the Fund have approved the initial use
of a particular Securities System, as required in each case by Rule 17f-4 under
the Investment Company Act of 1940, as amended; provided further, however, that
the Fund shall not amend or terminate this Contract in contravention of any
<PAGE>
applicable federal or state regulations, or any provision of the Declaration,
and further provided, that the Fund may at any time by action of its Trustees
(i) substitute another bank or trust company for the Custodian by giving notice
as described above to the Custodian, or (ii) immediately terminate this
Contract in the event of the appointment of a conservator or receiver for the
Custodian by the Comptroller of the Currency or upon the happening of a like
event at the direction of an appropriate regulatory agency or court of
competent jurisdiction.
Upon termination of the Contract, the Fund shall pay to the Custodian such
compensation as may be due as of the date of such termination and shall
likewise reimburse the Custodian for its costs, expenses and disbursements.
10. Successor Custodian.
If a successor custodian shall be appointed by the Trustees of the Fund,
the Custodian shall, upon termination, deliver to such successor custodian at
the office of the Custodian, duly endorsed and in the form for transfer, all
securities then held by it hereunder.
If no such successor custodian shall be appointed, the Custodian shall, in
like manner, upon receipt of a certified copy of a vote of the Trustees of the
Fund, deliver at the office of the Custodian such securities, funds and other
properties in accordance with such vote.
In the event that no written order designating a successor custodian or
certified copy of a vote of the Trustees shall have been delivered to the
<PAGE>
Custodian on or before the date when such termination shall become effective,
then the Custodian shall have the right to deliver to a bank or trust company,
which is a "bank" as defined in the Investment Company Act of 1940, doing
business in Boston, Massachusetts, of its own selection, having an aggregate
capital, surplus, and undivided profits, as shown by its last published report,
of not less than $25,000,000, all securities, funds and other properties held
by the Custodian and all instruments held by the Custodian relative thereto and
all other property held by it under this Contract. Thereafter, such bank or
trust company shall be the successor of the Custodian under this Contract.
In the event that securities, funds and other properties remain in the
possession of the Custodian after the date of termination hereof owning to
failure of the Fund to procure the certified copy of vote referred to or of the
Trustees to appoint a successor custodian, the Custodian shall be entitled to
fair compensation for its services during such period as the Custodian retains
possession of such securities, funds and other properties and the provisions of
this Contract relating to the duties and obligations of the Custodian shall
remain in full force and effect.
11. Interpretive and Additional Provisions.
In connection with the operation of this Contract, the Custodian and the
Fund may from time to time agree on such provisions interpretive of or in
addition to the provisions of this Contract as may in their joint opinion be
consistent with the general tenor of this Contract. Any such interpretive or
<PAGE>
additional provisions shall be in a writing signed by both parties and shall be
annexed hereto, provided that no such interpretive or additional provisions
shall contravene any applicable federal or state regulations or any provision
of the Declaration of the Fund. No interpretive or additional provisions made
as provided in the preceding sentence shall be deemed to be an amendment of
this Contract.
12. Massachusetts Law to Apply.
This Contract shall be construed and the provisions thereof interpreted
under and in accordance with laws of the Commonwealth of Massachusetts.
13. Prior Contracts.
This Contract supersedes and terminates, as of the date hereof, all prior
contracts between the Fund and the Custodian relating to the custody of the
Fund's assets.
14. Multiple Series.
Notwithstanding any other provision hereof, the rights, obligations and
remedies under this Contract of the parties hereto shall constitute rights,
obligations and remedies only with respect to the Series and the assets of the
Series, and no other series of the Fund shall have any rights, obligations or
remedies under this Contract.
<PAGE>
IN WITNESS WHEREOF, each of the parties has caused this instrument to be
executed in its name and behalf by its duly authorized representative and its
seal to be hereunder affixed as of the 29th day of August, 1997.
SEAL
ATTEST CGM TRUST
/s/ Robert L. Kemp
- ---------------------------- ---------------------------------
Title: President
SEAL
ATTEST STATE STREET BANK AND TRUST
COMPANY
/s/ Trang Nguyen-Vo /s/ Ronald E. Logue
- ---------------------------- ---------------------------------
Title:
A copy of the Declaration is on file with the Secretary of State of The
Commonwealth of Massachusetts, and notice is hereby given that this Agreement
is executed with respect to the Series on behalf of the Fund by officers of the
Fund as officers and not individually and that the obligations of or arising
out of this Agreement are not binding upon any trustees, officers or
shareholders individually but are binding only upon the assets and property
belonging to the Series.
Exhibit (h)(7)
TRANSFER AGENCY AND SERVICE AGREEMENT
between
CGM TRUST
and
STATE STREET BANK AND TRUST COMPANY
<PAGE>
TABLE OF CONTENTS
PAGE
Article 1 Terms of Appointment........................................... 1
Article 2 Fees and Expenses.............................................. 5
Article 3 Representations and Warranties of the Bank..................... 6
Article 4 Representations and Warranties the Fund........................ 6
Article 5 Indemnification................................................ 7
Article 6 Covenants of the Trust and the Bank............................10
Article 7 Termination of Agreement.......................................11
Article 8 Assignment.....................................................11
Article 9 Amendment......................................................12
Article 10 Massachusetts Law to Apply....................................12
Article 11 Entire Agreement..............................................12
Article 12 Multiple Series...............................................12
<PAGE>
TRANSFER AGENCY AND SERVICE AGREEMENT
AGREEMENT made as of the 2nd day of September, 1997, by and between CGM
Trust, a Massachusetts business trust (the "Trust"), having its principal
office and place of business at One International Place, Boston, Massachusetts
02110, and STATE STREET BANK AND TRUST COMPANY, a Massachusetts trust company
having its principal office and place of business at 225 Franklin Street,
Boston, Massachusetts 02110 (the "Bank").
WHEREAS, the Trust, on behalf of CGM Focus Fund, a series of the Trust
(the "Series" or the "Fund") desires to appoint the Bank as the Fund's transfer
agent, dividend disbursing agent and agent in connection with certain other
activities, and the Bank desires to accept such appointment;
NOW, THEREFORE, in consideration of the mutual covenants herein contained,
the parties hereto agree as follows:
Article 1 Terms of Appointment
1.01 Subject to the terms and conditions set forth in this Agreement, the
Trust hereby employs and appoints the Bank to act as, and the Bank agrees to
act as its transfer agent for the Fund's authorized and issued shares of
beneficial interest ("Shares"), dividend disbursing agent and agent in
connection with any accumulation, open-account or similar plans provided to the
shareholders of the Fund ("Shareholders") and set out in the currently
effective prospectus and statement of additional information ("Prospectus") of
the Fund, including without limitation any periodic investment plan or periodic
withdrawal program.
1.02 The Bank agrees that it will perform the following services:
(a) In accordance with procedures established from time to time by
agreement between the Trust and the Bank, the Bank shall:
<PAGE>
(i) Receive for acceptance, orders for the purchase of Shares,
and promptly deliver payment and appropriate documentation
therefor to the authorized custodian of the Fund (the
"Custodian");
(ii) Pursuant to purchase orders, issue the appropriate number
of Shares and hold such Shares in the appropriate
Shareholder account;
(iii) Receive for acceptance redemption requests and redemption
directions and deliver the appropriate documentation
therefor to the Custodian;
(iv) At the appropriate time as and when it receives monies
paid to it by the Custodian with respect to any
redemption, pay over or cause to be paid over in the
appropriate manner such monies as instructed by the
redeeming Shareholders;
(v) Effect transfers of Shares by the registered owners
thereof upon receipt of appropriate instructions; upon
receipt of proper request for transfer and surrender to it
of Share certificates in proper form for transfer, the
Bank is authorized to transfer Shares on the records of
the Trust maintained by it from time to time and upon
cancellation of surrendered certificates to credit a like
amount of Shares to the transferee and to countersign,
issue and deliver new certificates, if requested;
<PAGE>
(vi) Prepare and transmit payments for dividends and
distributions declared by the Trust;
(vii) Maintain records of account for and advise the Trust and
its Shareholders an to the foregoing;
(viii) Record the issuance of Shares of the Fund and maintain
pursuant to SEC Rule 17Ad-10(e) a record of the total
number of Shares of the Fund which are issued and
outstanding. Bank shall also provide the Trust on a
regular basis with the total number of Shares which are
issued and outstanding and shall have no obligation, when
recording the issuance of Shares, to monitor the issuance
of such Shares or to take cognizance of any state blue sky
laws relating to the issue or sale of such Shares which
functions shall be the sole responsibility of the Trust;
and
(ix) If a Shareholder of uncertificated Shares requests the
issuance of a Share certificate or the registration of a
pledge of such Shares, the Bank, as Transfer Agent, shall
countersign and mail by first class mail a Share
certificate to the Shareholder at his address as set forth
on the transfer books of the Trust, subject to any other
instructions for delivery of certificates which the Trust
may give to the Bank with respect to certificates
representing newly purchased Shares, and subject to the
limitation that no certificates representing newly
<PAGE>
purchased Shares shall be mailed until the cash purchase
price of the Shares has been deposited in the bank account
of the Fund maintained by the Custodian.
(b) In addition to and not in lieu of the services set forth in the
above paragraph (a), the Bank shall: (i) perform all of the customary services
of a transfer agent, dividend disbursing agent and, as relevant, agent in
connection with accumulation, open-account or similar plans (including without
limitation any periodic investment plan or periodic withdrawal program),
including but not limited to: maintaining all Shareholder accounts, preparing
Shareholder meeting lists, mailing proxies, receiving and tabulating proxies,
mailing Shareholder reports and prospectuses to current Shareholders,
withholding taxes on non-resident alien accounts, withholding income dividends,
capital gains distributions and redemption proceeds as required by federal
withholding regulations, preparing and filing U.S. Treasury Department Forms
1099 and other appropriate forms required with respect to dividends and
distributions by federal authorities for all Shareholders, preparing and
mailing confirmation forms and statements of account to Shareholders for all
purchases and redemptions of Shares and other confirmable transactions in
Shareholder accounts, preparing and mailing activity statements for
Shareholders, and providing Shareholder account information and (ii) provide a
system which will enable the Trust to monitor the total number of Shares sold
in each state. The Trust shall (i) identify to the Bank in writing those Fund
transactions and assets to be treated as exempt from blue sky reporting for
each state and (ii) verify the establishment of transactions for each state on
<PAGE>
the system prior to activation and thereafter monitor the daily activity for
each state. The responsibility of the Bank for the blue sky state registration
status of the Trust and the Fund is solely limited to the initial establishment
of transactions subject to blue sky compliance by the Trust or the Fund, as
appropriate, and the reporting of such transactions to the Trust as provided
above.
Procedures applicable to certain of these services may be established from
time to time by agreement between the Trust and the Bank.
Article 2 Fees and Expenses
2.01 For performance by the Bank pursuant to this Agreement, the Trust
agrees on behalf of each of the Fund, to pay the Bank fees for each Shareholder
account as set out in the initial fee schedule attached hereto. Such fees and
out-of-pocket expenses and advances identified under Section 2.02 below may be
changed from time to time subject to mutual written agreement between the Trust
and the Bank.
2.02 In addition to the fees paid under Section 2.01 above, the Trust
agrees, on behalf of the Fund, to reimburse the Bank for out-of-pocket expenses
or advances incurred by the Bank for the items set out in the fee schedule
attached hereto. In addition, any other expenses incurred by the Bank at the
request or with the consent of the Trust, will be reimbursed by the Trust on
behalf of the Fund.
2.03 The Trust agrees, on behalf of the Fund, to pay all fees and
reimbursable expenses within five days following the mailing of the respective
billing notice. Postage for mailing of dividends, proxies, Fund reports and
other mailings to all shareholder accounts shall be advanced to the Bank by the
<PAGE>
Trust on behalf of the Fund at least seven (7) days prior to the mailing date
of such materials.
Article 3 Representations and Warranties of the Bank
The Bank represents and warrants to the Trust that:
3.01 It is a trust company duly organized and existing and in good
standing under the laws of The Commonwealth of Massachusetts.
3.02 It is duly qualified to carry on its business in The Commonwealth of
Massachusetts.
3.03 It is empowered under applicable laws and by its charter and By-laws
to enter into and perform this Agreement.
3.04 All requisite corporate proceedings have been taken to authorize it
to enter into and perform this Agreement.
3.05 It has and will continue to have access to the necessary facilities,
equipment and personnel to perform its duties and obligations under this
Agreement.
Article 4 Representations and Warranties the Fund
The Fund represents and warrants to the Bank that;
4.01 The Trust is a business trust duly organized and existing and in good
standing under the laws of The Commonwealth of Massachusetts.
4.02 It to empowered under applicable laws and by the Amended and Restated
Agreement and Declaration of Trust, as amended (the "Declaration of Trust"),
and By-laws of the Trust to enter into and perform this Agreement.
4.03 All corporate proceedings required by said Declaration of Trust and
By-laws have been taken to authorize it to enter into and perform this
Agreement.
<PAGE>
4.04 It is an open-end management investment company registered under the
Investment Company Act of 1940.
4.05 A registration statement under the Securities Act of 1933 in
currently effective and will remain effective, and appropriate state securities
law filings have been made and will continue to be made, with respect to all
Shares of the Fund being offered for sale.
4.06 The beneficial interest in the Fund la divided into an unlimited
number of Shares of beneficial interest, without a par value.
Article 5 Indemnification
5.01 The Bank shall not be responsible for, and the Trust on behalf of the
Fund shall indemnify and hold the Bank harmless from and against, any and all
losses, damages, costs, charges, counsel fees, payments, expenses and liability
arising out of or attributable to:
(a) All actions of the Bank or its agent or subcontractors required
to be taken pursuant to this Agreement, provided that such actions are taken in
good faith and without negligence or willful misconduct.
(b) The Trust's refusal or failure to comply with the terms of this
Agreement, or which arise out of the Trust's lack of good faith, negligence or
willful misconduct or which arise out of the breach of any representation or
warranty of the Trust hereunder.
(c) The reliance on or use by the Bank or its agents or
subcontractors of information, records and documents which (i) are received by
the Bank or its agents or subcontractors and furnished to it by or on behalf of
the Fund, and (ii) have been prepared and/or maintained by the Fund or any
other person or firm on behalf of the Fund.
<PAGE>
(d) The reliance on, or the carrying out by the Bank or its agents or
subcontractors of any instructions or requests of the Fund.
(e) The offer or sale of Shares in violation of any requirement under
the federal securities laws or regulations or the securities laws or
regulations of any state that such Shares be registered in such state or in
violation of any stop order or other determination or ruling by any federal
agency or any state with respect to the offer or sale of such Shares in such
state.
5.02 The Bank shall indemnify and hold the Trust harmless from and against
any and all losses, damages, costs, charges, counsel fees, payments, expenses
and liability arising out of or attributable to any action or failure or
omission to act by the Bank as a result of the Bank's lack of good faith,
negligence of willful misconduct.
5.03 At any time the Bank may apply to any officer of the Trust for
instructions, and may consult with legal counsel with respect to any matter
arising in connection with the services to be performed by the Bank under this
Agreement, and the Bank and its agents or subcontractors shall not be liable
and shall be indemnified by the Fund for any action taken or omitted by it
without negligence and in good faith in reliance upon such instructions or upon
the opinion of such counsel. The Bank, its agents and subcontractors shall be
protected and indemnified in acting upon any paper or document furnished by or
on behalf of the Trust, reasonably believed to be genuine and to have been
signed by the proper person or persons, or upon any instruction, information,
data, records or documents provided the Bank or its agents or subcontractors by
machine readable input, telex, CRT data entry or other similar means authorized
by the Trust, and shall not be held to have notice of any change of authority
<PAGE>
of any person, until receipt of written notice thereof from the Trust. The
Bank, its agents and subcontractors shall also be protected and indemnified in
recognizing stock certificates which are reasonably believed to bear the proper
manual or facsimile signatures of the officers of the Fund, and the proper
countersignature of any former transfer agent or registrar, or of a co-transfer
agent or co-registrar.
5.04 In the event either party is unable to perform its obligations under
the terms of this Agreement because of acts of God, strikes, equipment or
transmission failure or damage reasonably beyond its control, or other causes
reasonably beyond its control, such party shall not be liable for damages to
the other for any damages resulting from such failure to perform or otherwise
from such causes. The Bank shall use its best efforts to minimize the
likelihood of such damage resulting from the events described in the
immediately preceding sentence and if such damage occurs, the Bank shall use
its best efforts to mitigate the effects of such events.
5.05 Neither party to this Agreement shall be liable to the other party
for consequential damages under any provision of this Agreement or for any act
or failure to act hereunder.
5.06 In order that the indemnification provisions contained in this
Article 5 shall apply, upon the assertion of a claim for which either party may
be required to indemnify the other, the party seeking indemnification shall
promptly notify the other party of such assertion, and shall keep the other
party advised with respect to all developments concerning such claim. The party
who may be required to indemnify shall have the option to participate with the
party seeking indemnification in the defense of such claim. The party seeking
indemnification shall in no case confess any claim or make any compromise in
<PAGE>
any case in which the other party say be required to indemnify it except with
the other party's prior written consent.
Article 6 Covenants of the Trust and the Bank
6.01 The Trust shall promptly furnish to the Bank the following:
(a) A certified copy of the resolution of the Trustees of the Trust
authorizing the appointment of the Bank and the execution and delivery of this
Agreement
(b) A copy of the Declaration of Trust and By-laws of the Fund and
all amendments thereto.
6.02 The Bank hereby agrees to establish and maintain facilities and
procedures reasonably acceptable to the Trust for safekeeping of stock
certificates, check forms and facsimile signature imprinting devices, if any;
and for the preparation or use, and for keeping account of, such certificates,
forms and devices.
6.03 The Bank shall keep records relating to the services to be performed
hereunder, in the form and manner as it may deem advisable. To the extent
required by Section 31 of the Investment Company Act of 1940, as amended, and
the Rules thereunder, the Bank agrees that all such records prepared or
maintained by the Bank relating to the services to be performed by the Bank
hereunder are the property of the Fund and will be preserved, maintained and
made available in accordance with such Section and Rules, and will be
surrendered promptly to the Fund on and in accordance with its request.
6.04 The Bank and the Trust agree that all books, records, information and
data pertaining to the business of the other party which are exchanged or
received pursuant to the negotiation or the carrying out of this Agreement
<PAGE>
shall remain confidential, and shall not be voluntarily disclosed to any other
person, except as may be required by law.
6.05 In case of any requests or demands for the inspection of the
Shareholder records of the Trust relating to the Fund, the Bank will endeavor
to notify the Trust and to secure instructions from an authorized officer of
the Trust as to such inspection. The Bank reserves the right, however, to
exhibit the Shareholder records to any person whenever it is advised by its
counsel that it may be held liable for the failure to exhibit the Shareholder
records to such person.
Article 7 Termination of Agreement
7.01 This Agreement may be terminated by either party upon one hundred
twenty (120) days written notice to the other.
7.02 Should the Trust exercise its right to terminate, all out-of-pocket
expenses associated with the movement of records and material will be borne by
the Trust on behalf of the Fund. Additionally, the Bank reserves the right to
charge for any other reasonable expenses associated with such termination.
Article 8 Assignment
8.01 Except as provided in Section 8.03 below, neither this Agreement nor
any rights or obligations hereunder may be assigned by either party without the
written consent of the other party.
8.02 This Agreement shall inure to the benefit of and be binding upon the
parties and their respective permitted successors and assigns.
8.03 The Bank may, without further consent on the part of the Trust,
subcontract for the performance hereof with (i) Boston Financial Data Services,
Inc., a Massachusetts corporation ("BFDS") which is duly registered as a
<PAGE>
transfer agent pursuant to Section 17A (c) (1) of the Securities Exchange Act
Of 1934 ("Section 17A(c)(1)", (ii) a BFDS subsidiary duly registered as a
transfer agent pursuant to Section 17A(c)(1); provided, however, that the Bank
shall be as fully responsible to the Trust for the acts and omissions of any
subcontractor as it is for its own acts and omissions.
Article 9 Amendment
9.01 This Agreement may be amended or modified by a written agreement
executed by both parties.
Article 10 Massachusetts Law to Apply
10.01 This Agreement shall be construed and the provisions thereof
interpreted under and in accordance with the laws of the Commonwealth of
Massachusetts.
Article 11 Entire Agreement
11.01 This Agreement constitutes the entire agreement between the parties
hereto and supersedes any prior agreement with respect to the subject matter
hereof whether oral or written.
Article 12 Multiple Series
Notwithstanding any other provision hereof, the rights, obligations and
remedies under this Agreement of the parties hereto shall constitute rights,
obligations and remedies only with respect to the Series and the assets of the
Series, and no other series of the Trust shall have any rights, obligations or
remedies under this Agreement.
<PAGE>
IN WITNESS WHEREOF, the Parties hereto have caused this Agreement to be
executed in their names and on their behalf under their seals by and through
their duly authorized officers, as of the day and year first above written.
CGM Trust
BY: /s/ Robert L. Kemp
------------------------------------
Title: President
ATTEST:
__________________________________
Title:
STATE STREET BANK AND TRUST COMPANY
BY: /s/ Ronald E. Logue
------------------------------------
Title: Executive Vice President
ATTEST:
/s/ Stephen Cesso
- ----------------------------------
Title: Vice President
A copy of the Declaration of Trust establishing CGM Trust is on file with
the Secretary of The Commonwealth of Massachusetts, and notice is hereby given
that this Agreement is executed with respect to the Series on behalf of the
Trust by officers of the Trust as officers and not individually and that the
obligations of or arising out of this Agreement are not binding upon any of the
trustees, officers or shareholders individually but are binding only upon the
assets and property belonging to the Series.
<PAGE>
STATE STREET BANK AND TRUST COMPANY [State Street
Fee Information for Services as Logo]
Plan, Transfer and Dividend Disbursing Agent
CAPITAL GROWTH MANAGEMENT
Annual Account Service Fees
CGM Focus Fund $ 8.00
Closed Account Fee $ 1.50
Annual Maintenance Charges
The per account annual fee will be billed at a rate of 1/12 of the annual fee
for each fund account serviced during the month. Accounts serviced is defined
as all open accounts at month end and accounts which close during the month.
There is a minimum charge of $1,500 per month.
Activity Based Fees
New Account Set-up $ 3.00 each
Telephone Calls $ 1.50 each
ACH $ 0.35 each
Other Fees
Investor Processing $ 1.80/Investor
Disaster Recovery/Emergency
Backup Per Account Serviced, Per Year $ 0.25
IRA Custodian Fees
Acceptance & Set-up $ 5.00/account
Annual Maintenance $10.00/account
Out-of-Pocket Expenses
Out-of-Pocket expenses include but are not limited to: Confirmation statements,
postage, forms telephone retention, transcripts, microfilm, microfiche, proxy
tabulation and expenses incurred at the specific direction of the fund.
*This schedule will not be activated until Fund becomes effective.
CAPITAL GROWTH MANAGEMENT STATE STREET BANK & TRUST CO.
By: /s/ Robert L. Kemp By: /s/ Ronald E. Logue
----------------------------- ---------------------------------
Title: President Title: Executive Vice President
-------------------------- ------------------------------
Date: 7/25/97 Date: 7/23/97
--------------------------- -------------------------------
<PAGE>
CGM
THIRD PARTY CHECK PROCEDURES
The following is the CGM policy for reviewing THIRD PARTY CHECKS:
DEFINITION: A THIRD PARTY CHECK is any deposit not payable to CGM or State
Street Bank & Trust Co. for new accounts or subsequent investments.
Any $10,000 and over THIRD PARTY CHECK to establish a new account or a
subsequent investment will be rejected by Boston Financial. A front and back
copy of the check will be faxed to CGM for review.
CGM will provide indemnification if a check is to be processed. Operations will
scan the authorization with a copy of the check as a "PURCH". The check will be
deposited to cover this purchase.
When rejecting, CGM will advise Operations in writing and the item will be
scanned as a "CORHOT". A letter along with the check will be forwarded to the
address of record.
NOTE: If CGM does not respond same day or if the check is received late, the
item will be rejected to correspondence and CGM notified the next business day.
EXCEPTIONS:
o All new accounts with THIRD PARTY CHECKS, regardless of amount, will be
automatically rejected. CGM should provide instructions to reject or
indemnification to process before sending applications to Boston Financial.
NOTE: The check fraud list should be checked against any THIRD PARTY INVESTMENT
CHECK that is accepted for processing.
FUND AUTHORIZATION: The Fund shall indemnify and hold BFDS harmless from and
against, any and all losses, damages, costs, charges, counsel, fees, payments,
expenses and liability arising out of or attributing to honoring the above
instructions.
CGM, SSB and BFDS may revoke this indemnity agreement upon prior written
notice, and in case of such revocation, this indemnity agreement shall remain
effective for all refunded checks issued prior thereto.
<PAGE>
/s/ Frank N. Strauss, Treasurer
- -------------------------------------------
Name and Title
/s/ Richard Ahl, Divisional Vice President
- -------------------------------------------
Officer Name and Title
Exhibit (p)
CGM TRUST
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints Robert L. Kemp and G.
Kenneth Heebner, and each of them, with full powers of substitution, as his
true and lawful attorneys and agents to execute in his name and on his behalf
in any and all capacities the Registration Statements on Form N-1A, and any and
all amendments thereto, filed by CGM Trust (on behalf of each of its series now
or hereinafter created) (the "Registrant") with the Securities and Exchange
Commission under the Securities Act of 1933, as amended, and under the
Investment Company Act of 1940, as amended, and any and all other instruments
which such attorneys and agents, or either of them, deem necessary or advisable
to enable the Registrant to comply with the Securities Act of 1933, as amended,
and the Investment Company Act of 1940, as amended, the rules, regulations and
requirements of the Securities and Exchange Commission, and the securities or
Blue Sky laws of any state or other jurisdiction; and the undersigned hereby
ratifies and confirms as his own act and deed any and all that such attorneys
and agents, or either of them, shall do or cause to be done by virtue hereof.
Either one of such attorneys and agents shall have, and may exercise, all of
the powers hereby conferred.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 28th day of
January, 1999.
/s/ Peter O. Brown
-------------------------
Peter O. Brown
<PAGE>
CGM TRUST
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints Robert L. Kemp and G.
Kenneth Heebner, and each of them, with full powers of substitution, as his
true and lawful attorneys and agents to execute in his name and on his behalf
in any and all capacities the Registration Statements on Form N-1A, and any and
all amendments thereto, filed by CGM Trust (on behalf of each of its series now
or hereinafter created) (the "Registrant") with the Securities and Exchange
Commission under the Securities Act of 1933, as amended, and under the
Investment Company Act of 1940, as amended, and any and all other instruments
which such attorneys and agents, or either of them, deem necessary or advisable
to enable the Registrant to comply with the Securities Act of 1933, as amended,
and the Investment Company Act of 1940, as amended, the rules, regulations and
requirements of the Securities and Exchange Commission, and the securities or
Blue Sky laws of any state or other jurisdiction; and the undersigned hereby
ratifies and confirms as his own act and deed any and all that such attorneys
and agents, or either of them, shall do or cause to be done by virtue hereof.
Either one of such attorneys and agents shall have, and may exercise, all of
the powers hereby conferred.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 28th day of
January, 1999.
/s/ Robert B. Kittredge
------------------------------
Robert B. Kittredge
<PAGE>
CGM TRUST
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints Robert L. Kemp and G.
Kenneth Heebner, and each of them, with full powers of substitution, as his
true and lawful attorneys and agents to execute in his name and on his behalf
in any and all capacities the Registration Statements on Form N-1A, and any and
all amendments thereto, filed by CGM Trust (on behalf of each of its series now
or hereinafter created) (the "Registrant") with the Securities and Exchange
Commission under the Securities Act of 1933, as amended, and under the
Investment Company Act of 1940, as amended, and any and all other instruments
which such attorneys and agents, or either of them, deem necessary or advisable
to enable the Registrant to comply with the Securities Act of 1933, as amended,
and the Investment Company Act of 1940, as amended, the rules, regulations and
requirements of the Securities and Exchange Commission, and the securities or
Blue Sky laws of any state or other jurisdiction; and the undersigned hereby
ratifies and confirms as his own act and deed any and all that such attorneys
and agents, or either of them, shall do or cause to be done by virtue hereof.
Either one of such attorneys and agents shall have, and may exercise, all of
the powers hereby conferred.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 28th day of
January, 1999.
/s/ Laurens MacLure
----------------------------
Laurens MacLure
<PAGE>
CGM TRUST
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints Robert L. Kemp and G.
Kenneth Heebner, and each of them, with full powers of substitution, as his
true and lawful attorneys and agents to execute in his name and on his behalf
in any and all capacities the Registration Statements on Form N-1A, and any and
all amendments thereto, filed by CGM Trust (on behalf of each of its series now
or hereinafter created) (the "Registrant") with the Securities and Exchange
Commission under the Securities Act of 1933, as amended, and under the
Investment Company Act of 1940, as amended, and any and all other instruments
which such attorneys and agents, or either of them, deem necessary or advisable
to enable the Registrant to comply with the Securities Act of 1933, as amended,
and the Investment Company Act of 1940, as amended, the rules, regulations and
requirements of the Securities and Exchange Commission, and the securities or
Blue Sky laws of any state or other jurisdiction; and the undersigned hereby
ratifies and confirms as his own act and deed any and all that such attorneys
and agents, or either of them, shall do or cause to be done by virtue hereof.
Either one of such attorneys and agents shall have, and may exercise, all of
the powers hereby conferred.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 28th day of
January, 1999.
/s/ James Van Dyke Quereau, Jr.
------------------------------------
James Van Dyke Quereau, Jr.
<PAGE>
CGM TRUST
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints Robert L. Kemp and G.
Kenneth Heebner, and each of them, with full powers of substitution, as his
true and lawful attorneys and agents to execute in his name and on his behalf
in any and all capacities the Registration Statements on Form N-1A, and any and
all amendments thereto, filed by CGM Trust (on behalf of each of its series now
or hereinafter created) (the "Registrant") with the Securities and Exchange
Commission under the Securities Act of 1933, as amended, and under the
Investment Company Act of 1940, as amended, and any and all other instruments
which such attorneys and agents, or either of them, deem necessary or advisable
to enable the Registrant to comply with the Securities Act of 1933, as amended,
and the Investment Company Act of 1940, as amended, the rules, regulations and
requirements of the Securities and Exchange Commission, and the securities or
Blue Sky laws of any state or other jurisdiction; and the undersigned hereby
ratifies and confirms as his own act and deed any and all that such attorneys
and agents, or either of them, shall do or cause to be done by virtue hereof.
Either one of such attorneys and agents shall have, and may exercise, all of
the powers hereby conferred.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 28th day of
January, 1999.
/s/ J. Baur Whittlesey
-------------------------------
J. Baur Whittlesey
