<PAGE>
TO OUR SHAREHOLDERS:
- -----------------------------------------------------------------------------
CGM Capital Development Fund increased +0.2% during the third quarter of 1996
compared to a rise of +3.1% in the Standard and Poor's 500 Index. Over the first
nine months of the year, CGM Capital Development Fund returned 17.0% compared to
the S&P 500 Index which increased +13.5%.
"Robust" and "low inflation" continue to be the catchwords for the economy in
the second half of 1996. In an economy with few excesses, one danger lies in the
tightening labor market. Despite the media's preoccupation with corporate
restructurings and massive layoffs at large corporations over the past five
years, the economy has added approximately 1.5 million new jobs each year since
1991. The unemployment rate is a low 5.2%. The shortage of qualified job
applicants is now a potential barrier to continued economic growth. Companies
are already competing for qualified employees, bidding up compensation. Over
time, wages not offset by higher levels of productivity will exert pressure on
prices, to drive inflation higher. Nevertheless, the Federal Reserve Board's
position continues to be one of "wait and see" as reflected by its recent
decision to look for further signs of overheating before raising interest rates.
In recent weeks, we have been getting mixed signals on business activity.
The third quarter began with a sharp sell-off in both the stock and bond
markets. Exceptionally strong employment numbers were reported in early July
frightening bond investors and shortly thereafter, two prominent technology
companies, Hewlett-Packard and Motorola, reported disappointing earnings which
triggered selling in the equity market. Leading averages fell roughly 10% but
individual issues, technology stocks in particular, fell as much as 50% off
their highs in some cases. As the quarter progressed, the bond market stabilized
with long-term rates trading in the 6.75% to 7.25% range and currently back at
6.75%. The equity market gradually recovered its losses and has reached record
highs. One could make the case the equity market is selling on a somewhat
generous basis relative to historical norms in response to the strong economy.
While the market overall is hardly cheap, sectors such as financial services,
real estate, oil services, and consumer goods continue to offer reasonable
prospects for the coming year.
At September 30, CGM Capital Development Fund's three largest industry positions
were in money center banks, offshore drilling and retail companies. The Fund's
three largest holdings are Jones Apparel Group, Inc., Reading & Bates
Corporation and Citicorp.
/s/ Robert L. Kemp
Robert L. Kemp
President
October 8, 1996
- -----------------------------------------------------------------------------
INVESTMENT PERFORMANCE
(unaudited)
Total Return for Periods Ended September 30, 1996
CGM CAPITAL
DEVELOPMENT S&P 500 THE FUND'S AVERAGE
FUND INDEX ANNUAL TOTAL RETURN
----------- ------- -------------------
10 Years .......... +439.0% +303.4% +18.4%
5 Years ........... +118.4 +103.0 +16.9
1 Year ............ + 25.0 + 20.3 +25.0
3 Months .......... + 0.2 + 3.1 --
The percentage figures for the Fund are based upon the beginning net asset
values of $24.22, $32.51, $27.17 and $31.91, respectively, and the September 30,
1996 net asset value of $31.97 per share assuming the reinvestment of income
dividends, capital gains and paid-in capital distributions during such
respective periods. The S&P 500 Index has also been adjusted for the
reinvestment of income dividends during these periods. Although the S&P 500
Index and the Fund are not directly comparable, the index is shown because it is
widely used by investors to measure unmanaged stock market performance. When
viewing the Fund's performance, one should keep in mind the Fund's investment
objective and policies, the characteristics and quality of its portfolio
securities, and the periods selected.
The performance data contained in the report represent past performance, which
is no guarantee of future results. 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 their original cost.
<PAGE>
INVESTMENTS AS OF SEPTEMBER 30, 1996
(unaudited)
COMMON STOCKS -- 97.4% OF TOTAL NET ASSETS
SHARES VALUE(A)
------ --------
AEROSPACE -- 7.1%
Boeing Company................................ 320,800 $ 30,315,600
Rohr Industries, Inc.......................... 620,000 12,167,500
------------
42,483,100
------------
AIRLINES -- 4.3%
Continental Airlines, Inc..................... 377,200 8,439,850
UAL Corporation............................... 376,200 17,681,400
------------
26,121,250
------------
BANKS -- MONEY CENTER -- 11.9%
Chase Manhattan Corporation................... 437,000 35,014,625
Citicorp...................................... 400,000 36,250,000
------------
71,264,625
------------
BASIC MATERIALS -- 6.7%
Medusa Corporation............................ 351,500 10,808,625
Southdown, Inc................................ 1,182,000 29,106,750
------------
39,915,375
------------
COMPUTER SOFTWARE AND SERVICES -- 4.9%
Dell Computer Corporation..................... 376,000 29,234,000
------------
CONSUMER DURABLES -- 0.4%
Furniture Brands International, Inc........... 181,700 2,657,363
------------
ELECTRONIC COMPONENTS -- 5.4%
Intel Corporation............................. 342,000 32,639,625
------------
FOOD -- RETAILERS/WHOLESALERS -- 5.1%
Philip Morris Companies, Inc.................. 340,000 30,515,000
------------
HOUSING AND BUILDING MATERIALS -- 0.7%
Fibreboard Corporation........................ 120,000 4,200,000
------------
LEISURE -- 3.1%
Coachman Industries, Inc...................... 720,000 18,540,000
------------
MACHINERY -- 1.0%
Robbins & Myers, Inc.......................... 270,000 6,108,750
------------
MISCELLANEOUS -- 5.2%
NIKE, Inc..................................... 254,900 30,970,350
------------
<PAGE>
INVESTMENTS AS OF SEPTEMBER 30, 1996 (CONTINUED)
(unaudited)
COMMON STOCKS -- (CONTINUED)
SHARES VALUE(A)
------ --------
OFFSHORE DRILLING -- 11.6%
Atwood Oceanics, Inc.......................... 142,000 $ 6,248,000
Diamond Offshore Drilling..................... 469,000 25,795,000
Reading & Bates Corporation................... 1,385,000 37,568,125
------------
69,611,125
------------
OIL -- MAJOR INTEGRATED -- 2.3%
Texaco, Inc................................... 150,000 13,800,000
------------
OIL -- SERVICE -- 10.6%
Halliburton Company........................... 603,000 31,129,875
Schlumberger LTD.............................. 382,600 32,329,700
------------
63,459,575
------------
RETAIL -- 10.7%
Claire's Stores, Inc.......................... 480,000 10,260,000
Consolidated Stores Corporation............... 120,000 4,800,000
Fila Holdings ADR............................. 373,000 35,854,625
Friedmans, Inc................................ 205,000 3,843,750
Mark Brothers Jewelers, Inc................... 130,000 3,510,000
Zale Corporation.............................. 275,000 6,015,625
------------
64,284,000
------------
TEXTILE AND APPAREL -- 6.4%
Jones Apparel Group, Inc...................... 598,600 38,160,750
------------
TOTAL COMMON STOCKS (Identified Cost $477,534,409) ............ 583,964,888
------------
FACE
SHORT-TERM INVESTMENTS -- 2.9% AMOUNT
------
American Express Credit Corp., 5.35%, 10/01/96 ... $ 2,520,000 $ 2,520,000
United States Treasury Bills, 4.948%, 12/05/96 ... 15,000,000 14,865,150
------------
TOTAL SHORT-TERM INVESTMENTS (Cost $17,379,979) ............... 17,385,150
------------
TOTAL INVESTMENTS -- 100.3% (Identified Cost $494,914,388) .... 601,350,038
Cash and Receivables .................................... 4,701,489
Liabilities ............................................. (6,734,699)
------------
TOTAL NET ASSETS -- 100% ...................................... $599,316,828
============
(a) Security valuation--Equity securities are valued on the basis of valuations
furnished by a pricing service, authorized by the Board of Trustees, which
provides 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. Short-term notes having a maturity of less
than sixty days are stated at amortized cost, which approximates value.
<PAGE>
------------------------------------------------------------------------
TELEPHONE NUMBERS
------------------------------------------------------------------------
For information about:
[] Account Procedures and Status [] New Account Procedures
[] Redemptions [] Prospectuses
[] Exchanges [] Performance
Call 800-343-5678 Call 800-345-4048
------------------------------------
MAILING ADDRESSES
------------------------------------
FOR EXISTING ACCOUNTS FOR NEW ACCOUNT APPLICATIONS ONLY
CGM Shareholder Services The CGM Funds
c/o Boston Financial Data Services P.O. Box 449
P.O. Box 8511 Boston, MA 02117-0449
Boston, MA 02266-8511
------------------------------------------------------------------------
<PAGE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------
25 YEAR INVESTMENT RECORD
DECEMBER 31, 1970 -- SEPTEMBER 30, 1996 (UNAUDITED)
------------------------------------------------------------------------------------------------------------------------------
IF YOU HAD PURCHASED ONE SHARE OF THE FUND ON DECEMBER 31, 1970
------------------------------------------------------------------------------------------------------------------------------
--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 Dividends Year End Total Return December 31,
31 Have Been of of Would Have Been of 1970 = 100.0
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1970 10.45 100.0
1971 12.55 -- 0.20 12.79 + 22.4 122.4
1972 14.63 -- 0.08 15.03 + 17.5 143.8
1973 12.69 -- 0.08 13.09 - 12.9 125.2
1974 7.78 0.37* 0.14 8.38 - 36.0 80.1
1975 9.35 -- 0.15 10.27 + 22.5 98.1
1976 10.98 -- 0.13 12.23 + 19.1 116.8
1977 10.74 -- 0.18 12.16 - 0.6 116.1
1978 13.05 -- 0.27 15.19 + 24.9 145.0
1979 16.20 -- 0.35 19.35 + 27.4 184.7
1980 20.50 1.65* 0.36 27.65 + 42.9 263.9
1981 17.34 3.38 0.36 28.89 + 4.5 275.8
1982 24.88 2.88 0.41 51.68 + 78.9 493.4
1983 25.21 2.50 0.47 59.74 + 15.6 570.4
1984 17.28 6.15 0.11 54.84 - 8.2 523.6
1985 25.02 -- 0.18 80.18 + 46.2 765.5
1986 23.12 7.46 0.16 102.95 + 28.4 982.9
1987 16.56 10.09 0.14 119.32 + 15.9 1139.2
1988 15.87 0.02 0.62 118.96 - 0.3 1135.8
1989 18.37 -- 0.34 140.25 + 17.9 1339.1
1990 18.53 -- 0.10 142.21 + 1.4 1357.8
1991 25.80 11.07* 0.06 283.14 + 99.1 2703.4
1992 27.43 2.68* 0.20 332.69 + 17.5 3176.5
1993 27.71 7.51 0.07 428.17 + 28.7 4088.2
1994 20.58 0.71 0.07 330.12 - 22.9 3152.0
1995 27.33 1.68 0.02 465.80 + 41.1 4447.5
1996(9/30) 31.97 -- -- 544.99 + 17.0** 5203.6
------ ----- -------
Totals $58.15 $5.25 +5103.6
------------------------------------------------------------------------------------------------------------------------------
<FN>
* Includes $0.15, $0.09, $0.02 and $0.02 per share distributed from paid-in capital.
** Total return for the nine months ended September 30, 1996.
</TABLE>
----------------------------------------------------------------------------
The performance data contained in this report represent past performance,
which is no guarantee of future results. 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 their
original cost.
<PAGE>
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
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.
CQR3 Printed in U.S.A.
CGM
CAPITAL
DEVELOPMENT
FUND
141st Quarterly Report
September 30, 1996
A No-Load Fund
[fencer logo] Investment Adviser
CAPITAL GROWTH MANAGEMENT
Limited Partnership
