UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-00933
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CGM CAPITAL DEVELOPMENT FUND
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(Exact name of registrant as specified in charter)
One International Place, Boston, Massachusetts 02110
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(Address of principal executive offices) (Zip code)
T. John Holton, Esq.
Bingham McCutchen LLP
150 Federal Street
Boston, MA 02110
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(Name and address of agent for service)
Registrant's telephone number, including area code: 1-617-737-3225
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Date of fiscal year end: December 31, 2005
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Date of reporting period: December 31, 2005
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ITEM 1. REPORTS TO STOCKHOLDERS.
CGM
CAPITAL
DEVELOPMENT
FUND
45th Annual Report
December 31, 2005
A No-Load Fund
[logo] Investment Adviser
CAPITAL GROWTH MANAGEMENT
Limited Partnership
TO OUR SHAREHOLDERS:
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CGM Capital Development Fund returned -0.1% during the fourth quarter of 2005
compared to the unmanaged Standard and Poor's 500 Index which returned 2.1%
for the quarter. For the year just ended, CGM Capital Development Fund
returned 25.3% and the unmanaged S&P Index returned 4.9%.
THE YEAR IN REVIEW AND ECONOMIC OUTLOOK
The U.S. economy in 2005 left little room for complaint: Last year's worst
fears of a weaker dollar or a slowdown triggered by higher crude oil prices or
rising interest rates failed to materialize. Instead, we enjoyed another year
of above-trend growth in real Gross Domestic Product with solid gains in
corporate profits again leading the way. This multi-year recovery is still
creating new jobs and shaved the unemployment rate to just under 5% at the end
of 2005. In a near repeat of 2004, the economy continued to be propelled by a
strong market for new houses almost all year long despite numerous interest
rate hikes by the Federal Reserve Board.
Now that we are contemplating the fifth year of the expansion, we believe the
economy will grow at a slower rate on the consumer or retail level, but with
even more gusto when it comes to capital spending by corporations and
continued rebuilding in the aftermath of 2005's severe storms. Inflation
pressures may begin to surface and the Fed will be on the hot seat to apply
just the right amount of pressure to restrain inflation without tipping the
economy into recession. Thus far, the leap in the Federal Funds rate from 1%
to 4.25% over two years has yet to be reflected in the long-term interest rate
market. The yield on the ten year U.S. government bond was 4.25% in January of
2004, 4.24% last January and is now 4.39%. Mortgage rates are just slightly
higher than they were one year ago though new, tougher lending standards on
the part of financial institutions (with potentially even more stringent
regulations on the way) could put a damper on the new home market as seemed to
be indicated by November's significantly lower number of housing starts.
In 2000, the S&P 500 Index closed out the year at 1345. On December 31, 2005,
it was 1250. Despite the decline, earnings per share of the Index have risen
thirty percent over the past five years. This year was no exception with a 3%
increase in share prices in the S&P 500 Index while earnings jumped roughly
11%. The erosion of price-to-earnings multiples is slowly correcting the over-
generous pricing that crept into the market during the tech boom of the late
1990s. By historical standards, the market still has a way to go before anyone
is ready to declare an overall bargain. Nonetheless, we believe the market
offers some interesting values looking forward should inflation be limited to
2% or 3% per year.
PORTFOLIO STRATEGY
CGM Capital Development Fund remained fully invested during the year in
expectation of continued worldwide economic growth. We believed oil and gas
prices would significantly exceed consensus estimates throughout 2005 and so
increased the Fund's position in a number of energy-related industries to, in
the aggregate, above 40% of assets in the first quarter of the year, and
maintained those positions during the balance of 2005. Our energy investments
included oil and gas production companies, oil service companies, companies
that produce oil and gas tubular goods, and coal mining stocks.
At the beginning of the year, the portfolio included a 21% position in steel
stocks which were sold to provide funds for modest investments in technology,
retail and building materials securities. The Fund maintained an airline
position of between 5% and 10% throughout the year as we anticipated a swing
to industry profitability facilitated by a strong economy and industry
consolidation.
Most of the Fund's more than 25% appreciation occurred in the energy sector.
The largest energy gains occurred in Amerada Hess Corporation, Newfield
Exploration Company, and Helmerich and Payne, Inc. The biggest individual gain
during 2005 was in US Airways Group, Inc. which emerged from bankruptcy and
merged with America West Holding Corporation in a potentially dramatic
turnaround. Other significant non-energy contributors were Cleveland-Cliffs,
Inc. (iron ore producer) and Western Digital Corporation. The Fund realized
meaningful losses in Sotheby Holdings, Inc. and Massey Energy Company during
the year.
On December 31, 2005, CGM Capital Development Fund's three largest industry
positions were in oil and gas well drilling, independent oil production and
oil service. The Fund's three largest holdings were US Airways Group, Inc.,
Newfield Exploration Company and Helmerich & Payne, Inc.
/s/ Robert L. Kemp
Robert L. Kemp
President
/s/ G. Kenneth Heebner
G. Kenneth Heebner
Portfolio Manager
January 3, 2006
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN
CGM CAPITAL DEVELOPMENT FUND AND THE UNMANAGED S&P 500 INDEX
assuming reinvestment of dividends and capital gains
- ----------------------------
CGM Capital Development Fund
Average Annual Total Returns
through 12/31/05
- ----------------------------
1 year 5 year 10 year
25.3% 6.8% 9.5%
- ----------------------------
Past performance is no
indication of future results
- ----------------------------
CGM CAPITAL UNMANAGED S&P
DEVELOPMENT FUND 500 INDEX
$10,000 $10,000
1996 12,810 12,300
1997 15,872 16,408
1998 17,221 21,101
1999 18,547 25,532
2000 17,842 23,209
2001 13,649 20,447
2002 10,810 15,928
2003 16,766 20,500
2004 19,818 22,734
2005 24,832 23,848
CGM CAPITAL DEVELOPMENT FUND
PORTFOLIO MANAGER
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G. Kenneth Heebner has managed CGM Capital Development Fund since 1976. In
1990, Mr. Heebner founded Capital Growth Management Limited Partnership with
Robert L. Kemp. Prior to establishing the new company, Mr. Heebner was at
Loomis, Sayles and Company where he managed the Fund, then known as Loomis-
Sayles Capital Development Fund. In addition to CGM Capital Development Fund,
Mr. Heebner currently manages CGM Mutual Fund, CGM Realty Fund and CGM Focus
Fund.
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See the Schedule of Investments on page 3 for the percentage of net assets of
the Fund invested in particular industries or securities as of December 31,
2005.
INVESTMENT PERFORMANCE
(unaudited)
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Cumulative Total Return for Periods Ended
December 31, 2005
CGM CAPITAL
DEVELOPMENT
FUND
-----------
10 Years ................................................... +148.5%
5 Years ................................................... + 39.1
1 Year .................................................... + 25.3
3 Months .................................................. - 0.1
The performance data contained in the report represent past performance, which
is no guarantee of future results. The graph and table above do not reflect
the deduction of taxes a shareholder would pay on Fund distributions or the
redemption of Fund shares and assume the reinvestment of all Fund
distributions. The investment return and the principal value of an investment
in the Fund will fluctuate so that investors' shares, when redeemed, may be
worth more or less than their original cost. Current performance may be lower
or higher than the performance data quoted.
CGM CAPITAL DEVELOPMENT FUND
- --------------------------------------------------------------------------------------------------------------------------------
INVESTMENTS AS OF DECEMBER 31, 2005
COMMON STOCKS -- 99.7% OF TOTAL NET ASSETS
SHARES VALUE(a)
------ --------
AIRLINES -- 9.6%
US Airways Group, Inc.(b) .................................................................... 1,190,310 $ 44,208,113
-------------
BEVERAGES AND TOBACCO -- 5.3%
Hansen Natural Corporation(b) ................................................................ 309,000 24,352,290
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BUSINESS SERVICES -- 9.9%
Chicago Bridge & Iron Company N.V ............................................................ 880,000 22,184,800
UTi Worldwide Inc. ........................................................................... 251,800 23,377,112
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45,561,912
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LIGHT CAPITAL GOODS -- 5.2%
Trinity Industries, Inc. ..................................................................... 540,000 23,797,800
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METALS AND MINING -- 11.3%
Agnico-Eagle Mines ........................................................................... 200,000 3,952,000
Compania de Minas Buenaventura S.A.A. ADR(c) ................................................. 720,000 20,376,000
Foundation Coal Holdings, Inc. ............................................................... 727,300 27,637,400
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51,965,400
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MISCELLANEOUS -- 2.5%
NS Group, Inc.(b) ............................................................................ 280,000 11,706,800
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OIL AND GAS WELL DRILLING -- 19.5%
Grey Wolf, Inc.(b) ........................................................................... 2,870,000 22,185,100
Helmerich & Payne, Inc. ...................................................................... 460,000 28,478,600
Patterson-UTI Energy, Inc. ................................................................... 625,000 20,593,750
TODCO ........................................................................................ 490,000 18,649,400
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89,906,850
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OIL - INDEPENDENT PRODUCTION -- 15.0%
Berry Petroleum Company ...................................................................... 405,000 23,166,000
Newfield Exploration Company(b) .............................................................. 578,000 28,940,460
Whiting Petroleum Corporation(b) ............................................................. 425,000 17,000,000
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69,106,460
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OIL SERVICE -- 11.3%
Cal Dive International, Inc.(b) .............................................................. 780,000 27,994,200
Cooper Cameron Corporation(b) ................................................................ 580,000 24,012,000
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52,006,200
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RETAIL -- 6.6%
The Dress Barn, Inc.(b) ...................................................................... 570,000 22,007,700
The Wet Seal, Inc.(b) ........................................................................ 1,870,000 8,302,800
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30,310,500
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TEXTILE AND APPAREL -- 3.5%
Hartmarx Corporation(b)(d) ................................................................... 2,098,800 $ 16,391,628
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TOTAL COMMON STOCKS (Identified Cost $385,711,268) ............................................. 459,313,953
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FACE
AMOUNT
SHORT-TERM INVESTMENT -- 1.1% OF TOTAL NET ASSETS
American Express Credit Corporation, 4.18%, 1/03/06 (Cost $5,260,000) ........................ $5,260,000 5,260,000
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TOTAL INVESTMENTS -- 100.8% (Identified Cost $390,971,268)(e) .................................. 464,573,953
Cash and receivables ......................................................................... 2,744,487
Liabilities .................................................................................. (6,491,639)
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TOTAL NET ASSETS -- 100.0% ..................................................................... $ 460,826,801
=============
(a) See Note 1A.
(b) Non-income producing security.
(c) An American Depositary Receipt (ADR) is a certificate issued by a U.S. bank representing the right to receive securities of
the foreign issuer described. The values of ADRs are significantly influenced by trading on exchanges not located in the
United States or Canada.
(d) Non-controlled affiliate (See Note 5).
(e) Federal Tax Information: At December 31, 2005 the net unrealized appreciation on investments based on cost of $390,971,268
for Federal income tax purposes was as follows:
Aggregate gross unrealized appreciation for all investments in which there is an excess
of value over tax cost ................................................................... $ 81,094,541
Aggregate gross unrealized depreciation for all investments in which there is an excess
of tax cost over value ................................................................... (7,491,856)
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$ 73,602,685
=============
See accompanying notes to financial statements.
CGM CAPITAL DEVELOPMENT FUND
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STATEMENT OF
ASSETS AND LIABILITIES
December 31, 2005
ASSETS
Investments at value:
Unaffiliated issuers (Identified
cost -- $372,253,535) ............... $448,182,325
Non-controlled affiliates (Identified
cost -- $18,717,733) ................ 16,391,628 $464,573,953
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Cash .................................... 1,797
Receivable for:
Securities sold ......................... 2,734,328
Shares of the Fund sold.................. 4,500
Interest ................................ 1,222
Dividend tax reclaim..................... 2,640 2,742,690
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Total assets .......................................... 467,318,440
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LIABILITIES
Payable for:
Securities purchased..................... 5,627,312
Shares of the Fund redeemed ............. 365,751 5,993,063
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Accrued expenses:
Management fees ......................... 404,199
Trustees' fees .......................... 14,966
Accounting, Administration and
Compliance ............................ 7,392
Transfer agent fees ..................... 16,013
Other expenses .......................... 56,006 498,576
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Total liabilities ..................................... 6,491,639
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NET ASSETS .................................................. $460,826,801
============
Net Assets consist of:
Capital paid-in ........................................... $387,224,116
Net unrealized appreciation on
investments ............................................. 73,602,685
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NET ASSETS .................................................. $460,826,801
============
Shares of beneficial interest
outstanding, no par value ................................. 16,162,091
============
Net asset value per share* .................................. $28.51
======
* Shares of the Fund are sold and redeemed at net asset value
($460,826,801 / 16,162,091).
See accompanying notes to financial statements.
CGM CAPITAL DEVELOPMENT FUND
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STATEMENT OF
OPERATIONS
Year Ended December 31, 2005
INVESTMENT INCOME
Income
Dividends (net of withholding tax
of $106,483) ............................................. $ 2,422,760
Interest .................................................. 176,257
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2,599,017
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Expenses
Management fees ........................................... 4,360,284
Trustees' fees ............................................ 59,934
Accounting, Administration and Compliance ................. 88,703
Custodian ................................................. 97,248
Transfer agent fees ....................................... 121,061
Audit and tax services .................................... 32,700
Legal ..................................................... 44,124
Printing .................................................. 35,863
Registration .............................................. 27,333
Miscellaneous ............................................. 2,252
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4,869,502
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Net investment loss ....................................... (2,270,485)
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REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS AND FOREIGN CURRENCY TRANSACTIONS
Net realized gain on investments and foreign currency
transactions ............................................ 92,382,493
Net unrealized appreciation ............................... 8,106,228
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Net realized and unrealized gain on investments and foreign
currency transactions ................................... 100,488,721
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NET CHANGE IN ASSETS FROM OPERATIONS ........................ $ 98,218,236
============
See accompanying notes to financial statements.
CGM CAPITAL DEVELOPMENT FUND
- --------------------------------------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
YEAR ENDED DECEMBER 31,
-----------------------------
2005 2004
------------- -------------
FROM OPERATIONS
Net investment loss ..................................................... $ (2,270,485) $ (220,850)
Net realized gain from investments and foreign currency transactions .... 92,382,493 108,049,158
Unrealized appreciation (depreciation) .................................. 8,106,228 (44,857,849)
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Change in net assets from operations .................................. 98,218,236 62,970,459
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DISTRIBUTIONS TO SHAREHOLDERS
Net realized short-term capital gain on investments ..................... (57,886,555) --
Net realized long-term capital gain on investments ...................... (29,553,609) --
------------- -------------
(87,440,164) --
------------- -------------
FROM CAPITAL SHARE TRANSACTIONS
Proceeds from sale of shares ............................................ 2,803,858 4,782,667
Net asset value of shares issued in connection with reinvestment of:
Distribution from net short-term realized capital gain ................ 49,431,710 --
Distribution from net long-term realized capital gain ................. 25,237,888 --
------------- -------------
77,473,456 4,782,667
Cost of shares redeemed ................................................. (27,773,482) (36,425,296)
------------- -------------
Change in net assets derived from capital share transactions ............ 49,699,974 (31,642,629)
------------- -------------
Total change in net assets .............................................. 60,478,046 31,327,830
NET ASSETS
Beginning of year ....................................................... 400,348,755 369,020,925
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End of year ............................................................. $ 460,826,801 $ 400,348,755
============= =============
NUMBER OF SHARES OF THE FUND:
Issued from sale of shares .............................................. 90,624 195,724
Net asset value of shares issued in connection with reinvestment of:
Distribution from net short-term realized capital gain ................ 1,729,591 --
Distribution from net long-term realized capital gain ................. 883,061 --
------------- -------------
2,703,276 195,724
Redeemed ................................................................ (894,776) (1,477,851)
------------- -------------
Net change .............................................................. 1,808,500 (1,282,127)
============= =============
See accompanying notes to financial statements.
CGM CAPITAL DEVELOPMENT FUND
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FINANCIAL HIGHLIGHTS
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------
2005 2004 2003 2002 2001
---- ---- ---- ---- ----
For a share of the Fund outstanding
throughout each period:
Net asset value at the beginning of period . $27.89 $23.60 $15.22 $19.21 $25.12
------ ------ ------ ------ ------
Net investment loss ........................ (0.16)(a) (0.01)(a) (0.10)(a) (0.12)(a) (0.08)(b)
Net realized and unrealized gain (loss) on
investments and foreign currency
transactions ............................. 7.23 4.30 8.48 (3.87) (5.83)
------ ------ ------ ------ ------
Total from investment operations ........... 7.07 4.29 8.38 (3.99) (5.91)
------ ------ ------ ------ ------
Distribution from net short-term realized
gain ..................................... (4.27) -- -- -- --
Distribution from net long-term realized
gain ..................................... (2.18) -- -- -- --
------ ------ ------ ------ ------
Total distributions ........................ (6.45) -- -- -- --
------ ------ ------ ------ ------
Net increase (decrease) in net asset value . 0.62 4.29 8.38 (3.99) (5.91)
------ ------ ------ ------ ------
Net asset value at end of period ........... $28.51 $27.89 $23.60 $15.22 $19.21
====== ====== ====== ====== ======
Total Return (%) ........................... 25.3 18.2 55.1 (20.8) (23.5)
Ratios:
Operating expenses to average net assets (%) 1.12 1.14 1.17 1.15 1.12
Net investment loss to average net assets (%) (0.52) (0.06) (0.56) (0.67) (0.38)
Portfolio turnover (%) ..................... 211 263 305 209 283
Net assets at end of period (in thousands) ($) 460,827 400,349 369,021 259,818 353,365
(a) Per share net investment loss has been calculated using the average shares outstanding during the period.
(b) Per share net investment loss does not reflect the year's reclassification of permanent differences between book and
tax basis net investment loss. See Note 1D.
See accompanying notes to financial statements.
CGM CAPITAL DEVELOPMENT FUND
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NOTES TO FINANCIAL STATEMENTS -- DECEMBER 31, 2005
1. The Fund is organized as a Massachusetts business trust under the laws of
Massachusetts pursuant to an Agreement and Declaration of Trust. The Fund is
registered under the Investment Company Act of 1940 as a diversified, open-end
management investment company. Along with three other funds in a separate
Trust, there are four CGM Funds. The Fund's objective is long-term capital
appreciation. The Fund seeks to attain its objective by investing in the
equity securities of a relatively small but diverse group of companies and
industries.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts and disclosures in
the financial statements. Actual results could differ from those estimates.
A. SECURITY VALUATION -- Equity securities are valued on the basis of
valuations furnished by a pricing service, authorized by the Board of
Trustees. The pricing service provides the last reported sale price for
securities listed on a national securities exchange or, in the case of the
NASDAQ national market system, the NASDAQ official closing price. For
securities with no sale reported and in the case of over-the-counter
securities not so listed, the last reported bid price is used. Short-term
investments having a maturity of sixty days or less are stated at
amortized cost, which approximates 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.
B. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME -- Security
transactions are accounted for on the trade date (date the order to buy or
sell is executed) and dividend income is recorded on the ex-dividend date
net of applicable foreign taxes. Interest income is recorded on the
accrual basis. Net gain or loss on securities sold is determined on the
identified cost basis.
C. FEDERAL INCOME TAXES -- It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies, and to distribute to its shareholders all of its
taxable income and net realized capital gains, within the prescribed time
period. Accordingly, no provision for federal income tax has been made. At
December 31, 2005, there were no capital loss carryovers available to
offset future realized gains. During the year 2005 the Fund utilized
$1,538,498 of capital loss carryovers. The tax basis components of the
distributable earnings of the Fund are $73,602,685 which represents the
unrealized appreciation on investments as of December 31, 2005.
D. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS -- Dividends and distributions
are recorded by the Fund on the ex-dividend date. The classification of
income and capital gains distributions is determined in accordance with
income tax regulations. Distributions from net investment income and
short-term capital gains are treated as ordinary income for income tax
purposes. Permanent book and tax differences relating to shareholder
distributions may result in reclassifications to paid-in capital or
accumulated realized gain/loss. These differences are primarily related to
foreign exchange gains/losses and netting net operating loss with net
short-term gains. The Fund also utilized earnings and profits distributed
to shareholders on redemption of shares as a part of the dividend
deduction for income tax purposes. Undistributed net investment income or
accumulated net investment loss may include temporary book and tax
differences such as tax deferral of losses on wash sales, which will
reverse in a subsequent period. Any taxable income or gain remaining at
fiscal year end is distributed in the following year. During the year
ended December 31, 2005, the tax character of distributions paid was as
follows: ordinary income $57,886,555 and long-term gains $29,553,609.
E. FOREIGN CURRENCY TRANSLATION -- All assets and liabilities initially
expressed in terms of foreign currencies are translated into U.S. dollars.
Transactions affecting statement of operations accounts and net realized
gain/(loss) on investments are translated at the rates prevailing at the
dates of the transactions. The Fund does not isolate that portion of the
results of operations resulting from changes in foreign exchange rates on
investments from the fluctuations arising from changes in market prices of
securities held. Such fluctuations are included with the net realized and
unrealized gain or loss from investments. Reported net realized foreign
exchange gains or losses arise from sales of foreign currency, currency
gains or losses realized between the trade and settlement dates on
securities transactions and the difference between the amounts of
dividends, interest, and foreign withholding taxes recorded on the Fund's
books and the U.S. dollar equivalent of the amounts actually received or
paid. Net unrealized foreign exchange gains or losses arise from changes
in the value of assets and liabilities other than investments in
securities at the end of the period, resulting from changes in the
exchange rate.
F. INDEMNITIES -- In the normal course of business, CGM Capital Development
Fund may enter into contracts that provide indemnities to third parties
for various potential losses and claims. CGM Capital Development Fund's
maximum exposure under these arrangements is unknown as this would depend
on future claims that may be made against CGM Capital Development Fund.
The risk of material loss from such claims is considered remote.
2. INVESTMENT RISK -- There are certain additional risks involved in
investing in foreign securities that are not inherent in investments in
domestic securities. These risks may involve adverse political and economic
developments and the possible imposition of currency exchange blockages or
other foreign governmental laws or restrictions. In addition, the securities
of some foreign companies and securities markets are less liquid and at times
more volatile than securities of comparable U.S. companies and U.S. securities
markets.
3. PURCHASES AND SALES OF SECURITIES -- For the period ended December 31,
2005, purchases and sales of securities other than United States government
obligations and short-term investments aggregated $916,788,510 and
$957,086,213, respectively. There were no purchases or sales of United States
government obligations.
4. A. MANAGEMENT FEES -- During the period ended December 31, 2005, the Fund
incurred management fees of $4,360,284 paid or payable to the Fund's
investment adviser, Capital Growth Management Limited Partnership (CGM),
certain officers and directors of which are also officers and trustees of
the Fund. The management agreement provides for a fee at the annual rate
of 1.00% on the first $500 million of the Fund's average daily net
assets, 0.95% of the next $500 million and 0.80% of such assets in excess
of $1 billion.
B. OTHER EXPENSES -- CGM performs certain administrative, accounting,
compliance and other services for the Fund. The expenses of those
services, which are paid to CGM by the Fund, include the following: (i)
expenses for personnel performing bookkeeping, accounting, and financial
reporting functions and clerical functions relating to the Fund; (ii)
expenses for services required in connection with the preparation of
registration statements and prospectuses, shareholder reports and
notices, proxy solicitation material furnished to shareholders of the
Fund or regulatory authorities and reports and questionnaires for SEC
compliance; (iii) registration, filing and other fees in connection with
requirements of regulatory authorities; and (iv) compliance in connection
to the Investment Company Act of 1940 and the Sarbanes Oxley Act of 2002.
The Accounting, Administration and Compliance expense of $88,703, for the
period ended December 31, 2005, is shown separately in the financial
statements. These expenses include the reimbursement of a portion of the
compensation expenses incurred by CGM for its employees who provide these
administrative, accounting, compliance, and other services to the Fund,
some of whom are officers of the Fund. Of the total expense
reimbursement, $69,923 represented reimbursements by the Fund to CGM for
a portion of the salaries of CGM employees who are officers of the Fund.
C. TRUSTEES FEES AND EXPENSES -- The Fund does not pay any compensation
directly to any trustees who are directors, officers or employees of CGM,
or any affiliate of CGM (other than registered investment companies). For
the period ended December 31, 2005, each disinterested trustee was
compensated by the CGM Funds with an annual fee of $50,000 plus travel
expenses for each meeting attended. The disinterested trustees are
responsible for the audit committee functions of the CGM Funds and have
designated a chairman to oversee these functions who receives an
additional $30,000 annually. Of these amounts, each of the CGM Funds is
responsible for $7,000 per trustee annually, plus an annual variable fee
calculated based on the proportion of each of the CGM Funds' average net
assets relative to the aggregate average net assets of the CGM Funds.
5. AFFILIATED ISSUERS -- Affiliated issuers, as defined under the Investment
Company Act of 1940, are those in which the Fund's holdings of an issuer
represent 5% or more of the outstanding voting securities of the issuer. The
following summarizes transactions with affiliates of the Fund during the
period ended December 31, 2005:
NUMBER OF NUMBER OF
SHARES HELD GROSS GROSS SHARES HELD DIVIDEND MARKET VALUE
NAME OF ISSUER DECEMBER 31, 2004 PURCHASES SALES DECEMBER 31, 2005 INCOME DECEMBER 31, 2005
- -------------- ----------------- --------- ----- ----------------- ------ -----------------
American West Holdings
Corporation*+ ............ 0 2,885,600 2,885,600 0 $0 $ 0
Hartmarx Corporation+....... 0 2,098,800 0 2,098,800 0 16,391,628
-- ----------
$0 $16,391,628
== ===========
- ------------
* Merged into US Airways Group, Inc. and is no longer an affiliated issuer.
+ Non-income producing security.
CGM CAPITAL DEVELOPMENT FUND
- -------------------------------------------------------------------------------
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Trustees and Shareholders of CGM Capital Development Fund:
In our opinion, the accompanying statement of assets and liabilities,
including the schedule of investments, and the related statements of
operations and of changes in net assets and the financial highlights present
fairly, in all material respects, the financial position of CGM Capital
Development Fund (the "Fund") at December 31, 2005, the results of its
operations, the changes in its net assets and the financial highlights for the
periods indicated, in conformity with accounting principles generally accepted
in the United States of America. These financial statements and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at December 31, 2005 by correspondence with the
custodian and brokers, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 16, 2006
ADDITIONAL INFORMATION
(unaudited)
AVAILABILITY OF PROXY VOTING INFORMATION:
Proxy voting policies and information regarding how the Fund voted proxies
relating to portfolio securities during the twelve month period ended June 30,
2005 are available without charge, upon request by calling 1-800-345-4048. The
policies also appear in the Fund's Statement of Additional Information, which
can be found on the SEC's website, http://www.sec.gov. The voting records can
also be found on the SEC's website on the N-PX filing.
PORTFOLIO HOLDINGS:
The Fund files its complete schedule of portfolio holdings with the SEC for
the first and third quarters of each fiscal year on Form N-Q. The Fund's Forms
N-Q are available on the SEC's website at http://www.sec.gov and may be
reviewed and copied at the SEC's Public Reference Room in Washington, D.C.
Information on the operation of the Public Reference Room may be obtained by
calling 1-800-SEC-0330.
CGM CAPITAL DEVELOPMENT FUND
- -------------------------------------------------------------------------------
FUND EXPENSES
As a shareholder of CGM Capital Development Fund, you incur two types of
costs: (1) transaction costs, which could include, among other charges, wire
fees and custodial maintenance fees for certain types of accounts and (2)
ongoing costs, including management fees and other Fund expenses. This Example
is intended to help you understand your ongoing costs (in dollars) of
investing in the Fund and to compare these costs with the ongoing costs of
investing in other mutual funds.
The Example is based on an investment of $1,000 invested at the beginning of
the period and held for the entire period July 1, 2005 to December 31, 2005.
ACTUAL RETURN AND EXPENSES
The first line of the table below provides information about actual account
values and actual expenses. You may use the information in this line, together
with the amount you invested, to estimate the expenses that you paid over the
period. Simply divide your account value by $1,000 (for example, an $8,600
account value divided by $1,000 = 8.6), then multiply the result by the number
in the first line under the heading entitled "Expenses Paid During Period" to
estimate the expenses you paid on your account during this period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The second line of the table below provides information about hypothetical
account values and hypothetical expenses based on the Fund's actual expense
ratio and an assumed rate of return of 5% per year before expenses, which is
not the Fund's actual return. The hypothetical account values and expenses may
not be used to estimate the actual ending account balance or expenses you paid
for the period. You may use this information to compare the ongoing costs of
investing in the Fund and other funds. To do so, compare this 5% hypothetical
example with the 5% hypothetical examples that appear in the shareholder
reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs such as any wire
fees or custodial maintenance fees that may be payable. Therefore, the second
line of the table is useful in comparing ongoing costs only, and will not help
you determine the relative total costs of owning different funds. In addition,
if these transactional costs were included, your costs would have been higher.
- -------------------------------------------------------------------------------
Expenses Paid
Beginning Ending During Period*
Account Value Account Value 7/01/05 - 12/
7/01/05 12/31/05 31/05
- -------------------------------------------------------------------------------
Actual $1,000.00 $1,147.49 $6.01
- -------------------------------------------------------------------------------
Hypothetical
(5% return before expenses) $1,000.00 $1,019.61 $5.65
- -------------------------------------------------------------------------------
* Expenses are equal to the Fund's annualized expense ratio of 1.11%,
multiplied by the average account value over the period, multiplied by
184/365 (to reflect the one-half year period).
CGM CAPITAL DEVELOPMENT FUND
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
25 YEAR INVESTMENT RECORD
DECEMBER 31, 1980 -- DECEMBER 31, 2005 (UNAUDITED)
- --------------------------------------------------------------------------------------------------------------------------------
IF YOU HAD PURCHASED ONE SHARE OF THE FUND ON DECEMBER 31, 1980
- --------------------------------------------------------------------------------------------------------------------------------
-- AND HAD TAKEN ALL DIVIDENDS OR -- HAD REINVESTED ALL DIVIDENDS AND CAPITAL
AND DISTRIBUTIONS IN CASH GAINS DISTRIBUTIONS IN ADDITIONAL SHARES
------------------------------------------------------------------------------------------------------------------
During the Year
You Would Have Received Which Would Represent
---------------------------------- ------------------------------------
The Value of A Cumulative
The Net Your Original Change
Asset Value Per Share Per Share Investment An Expressed
On of Your Capital Gains Income At Each Annual As An Index With
December Share Would Distributions Distributions Year End Total Return December 31,
31 Have Been of of Would Have Been of 1980 = 100.0
- --------------------------------------------------------------------------------------------------------------------------------
1980 $20.50 100.0
1981 17.34 $ 3.38 $0.36 $ 21.42 + 4.5% 104.5
1982 24.88 2.88 0.41 38.32 + 78.9 187.0
1983 25.21 2.50 0.47 44.30 + 15.6 216.2
1984 17.28 6.15 0.11 40.67 - 8.2 198.5
1985 25.02 -- 0.18 59.46 + 46.2 290.2
1986 23.12 7.46 0.16 76.35 + 28.4 372.6
1987 16.56 10.09 0.14 88.49 + 15.9 431.8
1988 15.87 0.02 0.62 88.22 - 0.3 430.5
1989 18.37 -- 0.34 104.01 + 17.9 507.6
1990 18.53 -- 0.10 105.47 + 1.4 514.7
1991 25.80 11.07* 0.06 209.99 + 99.1 1024.8
1992 27.43 2.68* 0.20 246.74 + 17.5 1204.1
1993 27.71 7.51 0.07 317.55 + 28.7 1549.7
1994 20.58 0.71 0.07 244.83 - 22.9 1194.8
1995 27.33 1.68 0.02 345.46 + 41.1 1685.9
1996 29.08 5.87 0.07 442.53 + 28.1 2159.6
1997 26.96 9.08 -- 548.29 + 23.9 2675.7
1998 24.95 4.19 0.11 594.89 + 8.5 2903.1
1999 26.20 0.56 0.11 640.70 + 7.7 3126.6
2000 25.12 -- 0.10 616.35 - 3.8 3007.8
2001 19.21 -- -- 471.51 - 23.5 2301.0
2002 15.22 -- -- 373.44 - 20.8 1822.4
2003 23.60 -- -- 579.21 + 55.1 2826.5
2004 27.89 -- -- 684.63 + 18.2 3340.9
2005 28.51 6.45 -- 857.84 + 25.3 4186.1
------ ----- -------
Totals $82.28 $3.70 +4086.1
- --------------------------------------------------------------------------------------------------------------------------------
* Includes $0.02 and $0.02 per share distributed from paid-in capital.
- --------------------------------------------------------------------------------------------------------------------------------
The performance data contained in this report represent past performance, which is no guarantee of future results. The table
above does not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund
shares. The investment return on, and the principal value of, an investment in the Fund will fluctuate so that investors'
shares, when redeemed, may be worth more or less than the original cost. Current performance may be lower or higher than the
performance data quoted.
CGM CAPITAL DEVELOPMENT FUND
- -------------------------------------------------------------------------------
TAX INFORMATION (UNAUDITED) FOR THE TAX YEAR ENDED 12/31/2005
We are providing this information as required by the Internal Revenue Code.
The amounts shown may differ from those elsewhere in this report because of
differences between tax and financial reporting requirements.
For the year ended December 31, 2005, the Fund designated $29,975,115 as long-
term capital dividends.
TRUSTEES AND OFFICERS
The Fund is supervised by the board of trustees (the "Board") of the Trust.
The Board is responsible for the general oversight 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.
An asterisk in the table below identifies those trustees and officers who are
"interested persons" of the Trust as defined in the Investment Company Act of
1940. Each trustee and officer of the Trust noted as an interested person is
interested by virtue of that individual's position with Capital Growth
Management Limited Partnership ("CGM"), the Fund's investment adviser, as
described in the table below. Each trustee serves during the continued
lifetime of the Trust or until he earlier dies, resigns or is removed, or if
sooner, until the election and qualification of his successor. Each officer
serves until his or her successor is elected or qualified or until the officer
sooner dies, resigns, or is removed or becomes disqualified.
The trustees and officers of the Trust, their ages, their principal occupations
during the past five years, the number of CGM Funds they oversee, and other
directorships they hold are set forth below. Unless otherwise noted below, the
address of each interested trustee and officer is One International Place,
Boston, Massachusetts 02110. Correspondence intended for the trustees who are
not "interested persons" of the Trust may be sent c/o Capital Growth
Management, One International Place, Boston, Massachusetts 02110.
The Statement of Additional Information for the Fund includes additional
information about Fund trustees and is available, without charge, upon request
by calling the CGM Marketing Department, toll free, at 800-345-4048.
NUMBER OF
FUNDS IN THE
PRINCIPAL OCCUPATION DURING CGM FUNDS
POSITION HELD AND PAST 5 YEARS AND COMPLEX
NAME, ADDRESS AND AGE LENGTH OF TIME SERVED OTHER DIRECTORSHIPS HELD OVERSEEN
- --------------------- --------------------- --------------------------- ------------
INTERESTED TRUSTEES
G. Kenneth Heebner* Trustee since 1993 Co-founder and Employee, CGM; Controlling Owner, 4
age 65 Kenbob, Inc. (general partner of CGM)
Robert L. Kemp* Trustee since 1990 Co-founder and Employee, CGM; Non-voting Owner, 4
age 73 Kenbob, Inc. (general partner of CGM)
DISINTERESTED TRUSTEES
Peter O. Brown Trustee since 1993 Counsel (formerly, Partner), Harter, Secrest & 4
age 65 Emery LLP (law firm); Trustee, TT International
U.S.A. Master and Feeder Trusts (four mutual
funds)
Mark W. Holland Trustee since 2004 President, Wellesley Financial Advisors, LLC; 4
age 56 formerly Vice President and Chief Operating
Officer, Fixed Income Management, Loomis, Sayles
& Company, L.P.; formerly Director, Loomis,
Sayles & Company, L.P.
Laurens MacLure Trustee since 1990 Retired; formerly President and Chief Executive 4
age 80 Officer, New England Deaconess Hospital; formerly
Trustee, New England Zenith Fund; formerly
Director, Massachusetts Blue Cross/Blue Shield
James Van Dyke Quereau, Jr. Trustee since 1993 Managing Partner and Director, Stratton 4
age 57 Management Company (investment management);
Director and Vice President, Semper Trust Co.
J. Baur Whittlesey Trustee since 1990 Member, Ledgewood Law Firm, P.C. 4
age 59
OFFICERS
G. Kenneth Heebner* Vice President since 1990 Co-founder and Employee, CGM; Controlling Owner, 4
age 65 Kenbob, Inc. (general partner of CGM)
Robert L. Kemp* President since 1990 Co-founder and Employee, CGM; Non-voting Owner, 4
age 73 Kenbob, Inc. (general partner of CGM)
David C. Fietze* Chief Compliance Officer Employee - Legal counsel, CGM; formerly counsel, 4
age 36 since 2004 Bartlett Hackett Feinberg, P.C.; formerly
address: counsel, McLane, Graf, Raulerson & Middleton
222 Berkeley Street,
Boston, Massachusetts
02116
Kathleen S. Haughton* Vice President since 1992 Employee - Investor Services Division, CGM 4
age 45 and Anti-Money Laundering
address: Compliance Officer since 2002
222 Berkeley Street,
Boston, Massachusetts
02116
Jem A. Hudgins* Treasurer since 2004 Employee - CGM; formerly Vice President - Tax and 4
age 42 Treasury, AEW Capital Management L.P.
Leslie A. Lake* Vice President and Secretary Employee - Office Administrator, CGM 4
age 60 since 1992
Martha I. Maguire* Vice President since 1994 Employee - Funds Marketing, CGM 4
age 50
Mary L. Stone* Assistant Vice President Employee - Portfolio Transactions, CGM 4
age 61 since 1990
INVESTMENT ADVISER
CAPITAL GROWTH MANAGEMENT
LIMITED PARTNERSHIP
Boston, Massachusetts 02110
TRANSFER AND DIVIDEND PAYING
AGENT AND CUSTODIAN OF ASSETS
STATE STREET BANK AND TRUST COMPANY
Boston, Massachusetts 02102
SHAREHOLDER SERVICING AGENT
FOR STATE STREET BANK AND
TRUST COMPANY
BOSTON FINANCIAL DATA SERVICES, INC.
P.O. Box 8511
Boston, Massachusetts 02266-8511
- -------------------------------------------------------------------------------
TELEPHONE NUMBERS
For information about:
[ ] Account Procedures and Status
[ ] Redemptions
[ ] Exchanges
Call 800-343-5678
[ ] New Account Procedures
[ ] Prospectuses
[ ] Performance
[ ] Proxy Voting Policies and Voting Records
[ ] Complete Schedule of Portfolio Holdings for the 1st & 3rd Quarters
(as filed on Form N-Q)
Call 800-345-4048
- -------------------------------------------------------------------------------
MAILING ADDRESS
CGM Shareholder Services
c/o Boston Financial Data Services
P.O. Box 8511
Boston, MA 02266-8511
- -------------------------------------------------------------------------------
This report has been prepared for the shareholders of the Fund and is not
authorized for distribution to current or prospective investors in the Fund
unless it is accompanied or preceded by a prospectus.
CAR 05 Printed in U.S.A.
ITEM 2. CODE OF ETHICS.
CGM Capital Development Fund has adopted a code of ethics that applies to the
registrant's principal executive officer and principal financial officer (the
"Code"). The Code is filed herewith as Exhibit 99.CODE ETH. There were no
amendments to the Code required to be disclosed in response to this Item 2
during the fiscal year ended December 31, 2005. There were no waivers or
implicit waivers from the Code granted by the registrant during the fiscal year
ended December 31, 2005.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
CGM Capital Development Fund's Board of Trustees has determined that it has at
least one audit committee financial expert serving on its audit committee. The
name of the audit committee financial expert is James Van Dyke Quereau, Jr.
James Van Dyke Quereau, Jr. is "independent" as defined in Item 3(a)(2) of Form
N-CSR.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
(a) Audit Fee: The aggregate fees billed for each of the last two fiscal
years for professional services rendered by the principal
accountant for the audit of CGM Capital Development Fund's annual
financial statements or services that are normally provided by the
accountant in connection with statutory and regulatory filings or
engagements are the following: 2004 - $26,750 and 2005 - $26,750.
(b) Audit-Related Fees: The aggregate fees billed in each of the last two
fiscal years for assurance and related services by the principal
accountant that are reasonably related to the performance of the
audit of CGM Capital Development Fund's financial statements and
are not reported under paragraph (a) of this Item are the
following: 2004 - $0 and 2005 - $0.
(c) Tax Fees: The aggregate fees billed in each of the last two fiscal
years for professional services rendered by the principal
accountant for tax compliance, tax advice, and tax planning are the
following: 2004 - $3,500 and 2005 - $3,500. The nature of the
services comprising the fees disclosed under this category is tax
compliance related to the preparation and review of federal income
and excise tax returns and review of excise tax distribution
requirements.
(d) All Other Fees: The aggregate fees billed in each of the last two
fiscal years for products and services provided by the principal
accountant, other than the services reported in paragraphs (a)
through (c) of this Item are the following: 2004 - $0 and 2005 -
$0.
(e) (1) The Trustees Committees of the Boards of Trustees of the Capital
Development Fund and the CGM Trust (the "Trustees Committees") are
required to pre-approve (i) all audit services, tax services and
permitted non-audit services provided by PricewaterhouseCoopers LLP
or any other independent public accountant engaged by the CGM
Capital Development Fund and CGM Trust (together, the "Trusts") and
(ii) any engagement of PricewaterhouseCoopers LLP to provide
non-audit services to (a) Capital Growth Management Limited
Partnership ("CGM"), and (b) any entity controlling, controlled by,
or under common control with CGM that provides ongoing services to
the Trusts if the engagement relates directly to the operations and
financial reporting of the Trusts. The Trustees Committees
generally review each necessary pre-approval on a case by case
basis. However, the Trustees Committees have authorized the
President or Treasurer of each of the CGM Capital Development Fund
and the CGM Trust, on behalf of its series (such series
collectively with the Capital Development Fund, the "Funds"), to
incur additional fees totaling in the aggregate not more than
$7,500.00 for services relating to the audit of the Funds for the
fiscal year ended December 31, 2005, the close-out of the 2005
accounts, calculation of year-end dividends, and/or related tax or
accounting matters.
(2) 0% of services described in each of paragraphs (b)through(d) of
this Item were approved by the Trustees Committees pursuant to
paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X.
(f) Not applicable.
(g) The aggregate non-audit fees billed by CGM Capital Development Fund's
accountant for services rendered to (i) CGM Capital Development
Fund, (ii) CGM, and (iii)any entity controlling, controlled by, or
under common control with CGM that provides ongoing services to the
CGM Capital Development Fund for each of the last two fiscal years
of the CGM Capital Development Fund are the following: 2004 -
$3,500 and 2005 - $3,500.
(h) There were no non-audit services that were rendered to CGM or any
entity controlling, controlled by, or under common control with CGM
that provides ongoing services to CGM Capital Development Fund that
were not pre-approved pursuant to paragraph (c)(7)(ii) or Rule 2-01
of Regulation S-X, thus no consideration by the Trustees Committees
was necessary to determine if services were compatible with
maintaining the principal accountant's independence.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable.
ITEM 6. SCHEDULE OF INVESTMENTS.
Not applicable. Investments in securities of unaffiliated issuers as of
December 31, 2005, as set forth in 210.12-12 of Regulation S-X, are included as
part of the report to shareholders filed under Item 1 of this Form.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
Not applicable.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
Not applicable.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not applicable.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
As described in the CGM Capital Development Fund's most recent proxy statement
on Schedule 14A filed on September 24, 2004, the CGM Capital Development Fund
does not have a formal policy for considering any trustee candidates
recommended by shareholders.
ITEM 11. CONTROLS AND PROCEDURES.
(a) Based on their evaluation of the CGM Capital Development Fund's disclosure
controls and procedures within 90 days of the filing of this Form N-CSR, the
principal executive officer and principal financial officer of CGM Capital
Development Fund have concluded that the CGM Capital Development Fund's
disclosure controls and procedures are effective to provide reasonable
assurance that information required to be disclosed by the CGM Capital
Development Fund on Form N-CSR and Form N-Q is recorded, processed, summarized
and reported within the time periods specified in Securities and Exchange
Commission rules and forms.
(b) There were no changes in CGM Capital Development Fund's internal control
over financial reporting (as defined in Rule 30a-3(d) under the Act) that
occurred during the CGM Capital Development Fund's last fiscal quarter of the
period covered by this report.
ITEM 12. EXHIBITS.
(a)(1) Code of ethics described in Item 2 is attached hereto as EX-99.CODE ETH.
(a)(2) Certifications for each principal executive officer and principal
financial officer of the registrant as required by Rule 30a-2(a) under the
Investment Company Act of 1940 are attached hereto as EX-99.CERT.
(b) Certifications for each principal executive officer and principal financial
officer of the registrant as required by Rule 30a-2(b) under the Investment
Company Act of 1940 are attached hereto as EX-99.906CERT.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
CGM Capital Development Fund
By: /S/Robert L. Kemp
Robert L. Kemp
President
Principal Executive Officer
Date: February 22, 2006
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
By: /S/ Robert L. Kemp
Robert L. Kemp
President
Principal Executive Officer
Date: February 22, 2006
By: /S/ Jem A. Hudgins
Jem A. Hudgins
CFO & Treasurer
Principal Financial Officer
Date: February 22, 2006