CAPSTONE GROWTH FUND, INC.
SUPPLEMENT DATED AUGUST 21, 1995
TO
PROSPECTUS DATED JANUARY 17, 1995
AS SUPPLEMENTED JUNE 7, 1995
Effective August 21, 1995 the front-end sales load applicable to purchases of
shares of Capstone Growth Fund, Inc. (the "Fund") has been eliminated. All
references in the Prospectus to the front-end sales load are hereby deleted.
Also Effective August 21, 1995, payments made to the Fund's Distributor,
Capstone Asset Planning Company, pursuant to the Fund's Service and Distribution
Plan may not exceed .25% of the average net assets of the Fund.
<PAGE>
CAPSTONE GROWTH FUND, INC.
(FORMERLY CAPSTONE U.S. TREND FUND, INC.)
STATEMENT OF ADDITIONAL INFORMATION
February 13, 1995
As Supplemented August 21, 1995
This Statement of Additional Information is not a Prospectus but
contains information in addition to and more detailed than that set forth in the
Prospectus and should be read in conjunction with the Prospectus. The Statement
of Additional Information and the related Prospectus are both dated February 13,
1995 and supplemented August 21, 1995. A Prospectus may be obtained without
charge by contacting Capstone Asset Planning Company, by phone at (800) 262-
6631 or by writing to it at 5847 San Felipe, Suite 4100, Houston, Texas 77057.
TABLE OF CONTENTS
Page
General Information .................................................. 2
Investment Restrictions .............................................. 2
Risk Factors ......................................................... 3
Performance Information .............................................. 6
Directors and Executive Officers ..................................... 7
Investment Adviser ................................................... 9
Distributor .......................................................... 10
Portfolio Transactions and Brokerage ................................. 11
Determination of Net Asset Value ..................................... 12
How to Buy and Redeem Shares ......................................... 13
Dividends and Distributions .......................................... 13
Taxes ................................................................ 14
Control Persons and Principal Holders of Securities .................. 16
Other Information .................................................... 16
Financial Statements ................................................. 17
<PAGE>
GENERAL INFORMATION
The Fund is an "open-end diversified management company" under the
Investment Company Act of 1940. It was incorporated in New Jersey in 1952 and
commenced business shortly thereafter. On February 28, 1967, it was merged into
a Pennsylvania corporation and operated under the laws of that state until May
11, 1992 when it was reorganized as a Maryland corporation and its name changed
from U.S. Trend Fund, Inc. to Capstone U.S. Trend Fund, Inc. Effective September
6, 1994 the Fund's name was changed to Capstone Growth Fund, Inc. This change
was approved by stockholders at a meeting held August 25, 1994.
The Fund is a member of a group of investment companies sponsored by
Capstone Asset Management Company (the "Adviser"), which provides investment
advisory and administrative services to the Fund. The Adviser and Capstone Asset
Planning Company (the "Distributor") are wholly-owned subsidiaries of Capstone
Financial Services, Inc.
INVESTMENT RESTRICTIONS
The Fund has adopted the following restrictions which, along with its
investment objective, cannot be changed without approval by the holders of a
majority of its outstanding shares. In addition to the fundamental investment
limitations set forth in the Fund's Prospectus, the Fund shall not:
1. Invest in real estate, or other interests in real estate which
are not readily marketable.
2. Underwrite securities issued by others, or invest in
any securities it could not freely sell to the public without
registration under the Securities Act of 1933, as amended,
except that the Fund may invest up to 10% of its assets in
securities which have not been registered under the Securities
Act of 1933, as amended.
3. Purchase the securities of any one issuer if such
purchase would cause more than 10% of any class of outstanding
securities, including outstanding voting securities, of such
issuer to be held by the Fund.
4. Lend any part of its assets apart from the purchase of
portions of issues of publicly distributed bonds, debentures,
notes and other evidences of indebtedness and privately
distributed debt obligations of publicly owned companies.
5. Issue warrants or options for the acquisition of Fund shares.
6. Pledge or otherwise encumber any of its assets to an
extent greater than 15% of the gross assets of the Fund taken
at cost. (In order to comply with Illinois law, management has
decided to follow a more restrictive policy for the present
time. Accordingly, the Fund will not, as a matter of operating
policy, pledge, mortgage or hypothecate its portfolio
securities to the extent that at any time the percentage of
pledged securities will exceed 10% of the offering price of
the Fund's shares, except as permitted in transactions in
options and futures.)
7. Invest more than 25% of the value of its assets in a
particular industry.
8. The Fund will not invest in oil, gas or other mineral
exploration or development programs (although the Fund is not
prohibited from investing in issuers that own or invest in
such investors).
9. Invest in securities of other investment companies,
except (a) in connection with a merger, consolidation,
acquisition, or reorganization, and (b) the Fund may invest up
to 10% of its total assets in shares of other investment
companies.
2
The portfolio securities of the Fund may be turned over whenever
necessary or appropriate in the opinion of the Fund's management to seek the
achievement of the basic objective of the Fund. The turnover rate of the Fund's
portfolio was 12% for the fiscal year ended October 31, 1994 and 45% for the
fiscal year ended October 31, 1993.
RISK FACTORS
STOCK INDEX FUTURES AND RELATED OPTIONS
The Fund may engage in transactions in options on stock and stock
indices, and stock index futures and options on such futures as a hedge against
changes in the value of securities held in the Fund's portfolio or securities it
intends to purchase.
To protect the value of its portfolio against declining stock prices,
the Fund may purchase put options on stock indices. To protect against an
increase in the value of securities that it wants to purchase, the Fund may
purchase call options on stock indices. A stock index (such as the S&P 500)
assigns relative values to the common stocks included in the index and the index
fluctuates with the changes in the market values of the common stocks so
included. Options on stock indices are similar to options on stock except that,
rather than giving the purchaser the right to take delivery of stock at a
specified price, an option on a stock index gives the purchaser the right to
receive cash. The amount of cash is equal to the difference between the closing
price of the index and the exercise price of the option, expressed in dollars,
times a specified multiple (the "multiplier"). The writer of the option is
obligated, in return for the premium received, to make delivery of this amount.
Gain or loss with respect to options on stock indices depends on price movements
in the stock market generally rather than price movements in individual stocks.
The multiplier for an index option performs a function similar to the
unit of trading for a stock option. It determines the total dollar value per
contract of each point in the difference between the exercise price of an option
and the current level of the underlying index. A multiplier of 100 means that a
one-point difference will yield $100. Options on different indices may have
different multipliers.
Because the value of a stock index option depends upon movements in the
level of the stock index rather than the price of a particular stock, whether a
fund will realize a gain or loss on the purchase of a put or call option on a
stock index depends upon movements in the level of stock prices in the stock
market generally or in an industry or market segment rather than movements in
the price of a particular stock. Accordingly, successful use by the Fund of both
put and call options on stock indices will be subject to the Adviser's ability
to accurately predict movements in the direction of the stock market generally
or of a particular industry. In cases where the Adviser's prediction proves to
be inaccurate, the Fund will lose the premium paid to purchase the option and it
will have failed to realize any gain.
In addition, the Fund's ability to hedge effectively all or a portion
of its securities through transactions in options on stock indices (and
therefore the extent of its gain or loss on such transactions) depends on the
degree to which price movements in the underlying index correlate with price
movements in the Fund's securities. Inasmuch as such securities will not
duplicate the components of an index, the correlation probably will not be
perfect. Consequently, the Fund will bear the risk that the prices of the
securities being hedged will not move in the same amount as the option. This
risk will increase as the composition of the Fund's portfolio diverges from the
composition of the index.
A stock index futures contract is a bilateral agreement to which two
parties agree to take or make delivery of an amount of cash equal to a specified
dollar amount times the difference between the stock index value at the close of
the last trading day of the contract and the futures contract price. The value
of a unit is the current value of the stock index. For example, the Standard &
Poor's Stock Index is composed of 500 selected common stocks, most of which are
listed on the New York Stock Exchange. The S&P Index assigns relative weightings
to the value of one share of each of these 500 common stocks included in the
Index, and the Index fluctuates with changes in the market values of the shares
of those common stocks. In the case of the S&P 500 Index, contracts are to buy
or sell 500 units. Thus, if the value of the S&P 500 Index Futures were $150,
one contract would be worth $75,000 (500 units X $150). Stock index futures
contracts specify that no delivery of the actual stocks making up the index will
take place. Instead, settlement in cash
3
must occur upon the termination of a contract, with the settlement being the
difference between the contract price and the actual level of the stock index at
the expiration of the contract. For example, if the Fund enters into a futures
contract to buy 500 units of the S&P 500 Index at a specified future date at a
contract price of $150 and the S&P 500 Index is at $154 on that future date, the
Fund will gain $2,000 (500 units X gain of $4). If the Fund enters into a
futures contract to sell 500 units of the stock index at a specified future date
at a contract price of $150 and the S&P 500 Index is at $154 on that future
date, the Fund will lose $2,000 (500 units X loss of $4).
Options on stock index futures contracts are similar to options on
stocks except that an option on a stock index futures contract gives the
purchaser the right, in return for the premium paid, to assume a position in a
stock index futures contract (a long position if the option is a call and short
position if the option is a put), upon deposit of required margin. In the
alternative, the purchaser may resell the option, if it has value, or simply let
it expire. Upon expiration the purchaser will either realize a gain or the
option will expire worthless, depending on the closing price of the index on
that day. Thus, the purchaser's risk is limited to the premium paid for the
option.
Successful use of stock index futures contracts and options on such
contracts is subject to the Adviser's ability to predict correctly movements in
the direction of the stock markets. No assurance can be given that the Adviser's
judgement in this respect will be correct. Additionally, the correlation between
movements in the price of futures contracts or options on futures contracts and
movements in prices of securities being hedged or used for cover is not perfect.
The Fund will purchase and sell stock index futures contracts and will
purchase put and call options on stock index futures contracts only as a hedge
against changes in the value of securities held in the Fund's portfolio or which
it intends to purchase and where the transactions are economically appropriate
to the reduction of the risks inherent in the ongoing management of the Fund.
Generally, the Fund may hedge its securities portfolio against a period of
market decline by selling stock index futures contracts or by purchasing puts on
stock index futures contracts for the purpose of protecting its portfolio
against such decline. Conversely, the Fund may purchase stock index futures
contracts or call options thereon as a means of protecting against an increase
in the prices of securities which the Fund intends to purchase. The Fund will
not engage in transactions in stock index futures contracts or options on such
contracts for speculation and will not write options on stock index futures
contracts.
When purchasing stock index futures contracts, the Fund will be
required to post a small initial margin deposit, held by the Fund's custodian in
the name of the futures broker selected by the Fund; the remaining portion of
the contracts' value will be retained in short-term investments in order to meet
variation margin requirements or net redemptions. In the event of net
redemptions, the Fund would close out open futures contracts and meet
redemptions with cash realized from liquidating short-term investments.
The Fund will not leverage its portfolio by purchasing an amount of
contracts that would increase its exposure to stock market movements beyond the
exposure of a portfolio that was 100% invested in common stocks.
The Fund will not enter into transactions involving futures contracts
and options on futures contracts to the extent that, immediately thereafter, the
sum of its initial margin deposits on open futures contracts and premiums paid
for options on futures contracts would exceed 5% of the market value of the
Fund's total assets. In addition, the Fund will not enter into futures contracts
and options on futures contracts to the extent that its outstanding obligations
under these contracts and options would exceed 20% of the Fund's total assets.
Stock index futures contracts by their terms settle at settlement date
on a cash basis. In most cases, however, the contracts are "closed out" before
the settlement date. Closing out an open futures position is done by taking an
opposite position ("buying" a contract which has previously been "sold" or
selling a previously purchased contract) in an identical contract to terminate
the position.
Positions in stock index futures contracts may be closed out only on an
exchange which provides a secondary market for such futures. There can be no
assurance, however, that a liquid secondary market will exist for any particular
futures contract at any specified time. Thus, it may not be possible to close
out a futures position, which could have an
4
adverse impact on the cash position of the Fund, and which could possibly force
the sale of portfolio securities at a time when it may be disadvantageous to do
so. In the opinion of the Fund's management, the risk that the Fund will be
unable to close out a futures contract will be minimized by entering only into
futures contracts which are traded on national futures exchanges and for which
there appears to be a liquid secondary market.
The risk of loss in trading futures contracts in some strategies can be
substantial, due both to the low margin deposits required and to the extremely
high degree of leverage involved in futures pricing. As a result, a relatively
small price movement in a futures contract may result in immediate and
substantial loss (as well as gain) to an investor. Because the Fund will only
engage in futures strategies for hedging purposes, the Fund's management does
not believe that the Fund will be subject to the risks of substantial loss that
may be associated with futures transactions.
FOREIGN SECURITIES
Although the Fund expects to invest principally in securities of U.S.
issuers, it may invest in U.S. dollar- or foreign currency-denominated foreign
equity and debt securities traded in the United States or in foreign markets.
Its investments may include securities represented by European Depositary
Receipts ("EDRs) and American Depositary Receipts ("ADRs"). Investments in
securities of foreign issuers involve certain costs, risks and considerations
not typically associated with investments in U.S. issuers. These include:
differences in accounting, auditing and financial reporting standards; generally
higher commission rates on foreign portfolio transactions; the possibility of
nationalization, expropriation or confiscatory taxation; adverse changes in
investment or exchange control regulations (which may include suspension of the
ability to transfer currency from a country); and political instability which
could affect U.S. investments in foreign countries. Additionally, foreign
securities, and dividends and interest payable on those securities, may be
subject to foreign taxes, including taxes withheld from payments on those
securities. Foreign securities often trade with less frequency and volume than
domestic securities and, therefore, may exhibit greater price volatility and
less liquidity. Additional costs associated with an investment in foreign
securities may include higher custodial fees and transaction costs than are
typical of U.S. investments, as well as currency conversion costs. Changes in
foreign exchange rates also will affect the value of securities denominated or
quoted in currencies other than the U.S. dollar. The Fund's objective may be
affected either favorably or unfavorably by fluctuations in the relative rates
of exchange between the currencies of different nations, by exchange control
regulations and by indigenous economic and political developments. A decline in
the value of any particular currency against the U.S. dollar will cause a
decline in the U.S. dollar value of the Fund's holdings of securities
denominated in such currency and, therefore, will cause an overall decline in
the Fund's net asset value and any net investment income and capital gains to be
distributed in U.S. dollars to shareholders. The rate of exchange between the
U.S. dollar and other currencies is determined by several factors including the
supply and demand for particular currencies, central bank efforts to support
particular currencies, the movement of interest rates, the pace of business
activity in certain other countries and the United States, and other economic
and financial conditions affecting the world economy.
Although the Fund values its assets daily in terms of U.S. dollars, the
Fund does not intend to convert its holdings of foreign currencies into U.S.
dollars on a daily basis. When effected, currency conversion involves costs in
the form of a "spread" between the foreign exchange dealer's buying and selling
prices.
FORWARD FOREIGN CURRENCY EXCHANGE TRANSACTIONS
The Fund may enter into forward foreign currency exchange contracts in
connection with its investments in foreign securities. A forward foreign
currency exchange contract ("forward contract") is an agreement to purchase or
sell a specific amount of a particular foreign currency at a specified price on
a specified future date. These contracts are traded in the interbank market
conducted directly between currency traders (usually large commercial banks) and
their customers. A forward contract generally has no deposit requirement, and no
commissions are charged at any stage for trades. Closing transactions with
respect to forward contracts are effected with the currency trader who is a
party to the original forward contract.
The Fund will enter into a forward contract only for hedging purposes,
with respect to specific anticipated portfolio transactions (including
receivables and payables) or with respect to portfolio positions denominated in
a
5
particular currency. By entering into such a contract, the Fund hopes to protect
against, or benefit from, an anticipated change in relevant currency exchange
rates. For example, when the Fund anticipates purchasing or selling a security,
or receiving a dividend payment, it may enter into a forward contract to set the
rate at which the relevant currencies will be exchanged at the time of the
transaction. Or, if the Fund anticipates a decline in the value of a currency in
which some of its assets are denominated, it may attempt to "lock in" the
current more favorable rate by entering into a contract to sell an amount of
that currency which approximates the current value of those securities. Each
such contract involves some cost to the Fund and requires that the Fund maintain
with its custodian a segregated account of liquid assets sufficient to satisfy
its obligations under the contract. In the event that the currencies do not move
in the direction, or to the extent, or within the time frame, anticipated, the
Fund may lose some or all of the protection or benefit hoped for.
PERFORMANCE INFORMATION
The Fund may from time to time include figures indicating the Fund's
yield, total return or average annual total return in advertisements or reports
to stockholders or prospective investors. Quotations of the Fund's yield will be
based on all investment income per share earned during a particular 30-day
period (including dividends and interest), less expenses accrued during the
period ("net investment income"), and are computed by dividing net investment
income by the maximum offering price per share (which includes the maximum sales
charge) on the last day of the period, according to the following formula:
6
YIELD = 2[(a-b + 1)-1]
---
cd
where a = dividends and interest earned during the period,
b = expenses accrued for the period (net of reimbursements or
waivers),
c = the average daily number of shares outstanding during period
that were entitled to receive dividends,
and
d = the maximum offering price per share on the last day of the
period.
For the 30-day period ended October 31, 1994 the Fund's yield was
1.170%.
Average annual total return and total return figures represent the
increase (or decrease) in the value of an investment in the Fund over a
specified period. Both calculations assume that all income dividends and capital
gains distributions during the period are reinvested at net asset value in
additional Fund shares. Quotations of the average annual total return reflect
the deduction of the maximum sales charge and a proportional share of Fund
expenses on an annual basis. The results, which are annualized, represent an
average annual compounded rate of return on a hypothetical investment in the
Fund over a period of 1, 5 and 10 years ending on the most recent calendar
quarter calculated pursuant to the following formula:
n
P (1 + T)=ERV
where P = a hypothetical initial payment of $1,000,
T = the average annual total return,
n = the number of years, and
ERV = the ending redeemable value of a hypothetical $1,000 payment
made at the beginning of the period.
For the 1, 5 and 10 year periods ended October 31, 1994 the Fund's
average annual total return was (5.384)%, 5.534% and 10.805%, respectively.
Quotations of total return, which are not annualized, represent
historical earnings and asset value fluctuations. Total return is based on past
performance and is not a guarantee of future results. For the 1, 5 and 10 year
periods ended October 31, 1994 the Fund's total return was (0.665)%, 37.476% and
192.875%, respectively.
6
Performance information for the Fund may be compared, in reports and
promotional literature, to: (i) the Standard & Poor's 500 Stock Price Index
("S&P 500 Index"), the Dow Jones Industrial Average ("DJIA"), or other
appropriate unmanaged indices of performance of various types of investments, so
that investors may compare the Fund's results with those of indices widely
regarded by investors as representative of the securities markets in general;
(ii) other groups of mutual funds tracked by Lipper Analytical Services, a
widely used independent research firm which ranks mutual funds by overall
performance, investment objectives, and assets, or tracked by other services,
companies, publications, or persons who rank mutual funds on overall performance
or other criteria; and (iii) the Consumer Price Index (a measure of inflation)
to assess the real rate of return from an investment in the Fund. Unmanaged
indices may assume the reinvestment of dividends, but generally do not reflect
deductions for administrative and management costs and expenses.
Performance information for the Fund reflects only the performance of a
hypothetical investment in the Fund during the particular time period on which
the calculations are based. Performance information should be considered in
light of the Fund's investment objectives and policies, the types and quality of
the Fund's portfolio investments, market conditions during the particular time
period and operating expenses. Such information should not be considered as a
representation of the Fund's future performance.
DIRECTORS AND EXECUTIVE OFFICERS
The Fund's directors and executive officers are listed below. All
persons named as directors also serve in similar capacities for other mutual
funds sponsored by the Adviser as indicated below.
* EDWARD L. JAROSKI, Chairman of the Board, Executive Vice President and
Director. 5847 San Felipe, Suite 4100, Houston, Texas 77057.
President (since 1992) and Director (since 1987) of the Capstone
Asset Management Company; President and Director of Capstone Asset
Planning Company and Capstone Financial Services, Inc. (since 1987);
Director/Trustee and Officer of other Capstone Funds.
JAMES F. LEARY, Director. 12221 Merit Drive, Dallas, TX 75251.
President of Sunwestern Management, Inc. (since June 1982) and
President of SIF Management (since January 1992), venture capital
limited partnership concerns; General Partner of Sunwestern
Associates, Sunwestern Associates II, Sunwestern Partners, L.P. and
Sunwestern Ventures, Ltd. (venture capital limited partnership
entities affiliated with Sunwestern Management, Inc. and SIF
Management, Inc.). Director of: other Capstone Funds; Anthem
Financial, Inc. (financial services); Associated Materials, Inc.
(tire cord, siding and industrial cable manufacturer); CareTeam
Management Services (home health care nursing services); The
Flagship Group, Inc. (vertical market microcomputer software); Kine
& Company, Inc. (marking and strategic consultants) Marketing
Mercadeo International (public relations and marketing consultants);
MaxServ, Inc. (appliance repair database systems); MESBIC Ventures,
Inc. (minority enterprise small business investment company);
Norwood Venture Corp (small business investment company);
OpenConnect Systems, Inc. (computer networking hardware and
software); PhaseOut of America, Inc. (smoking cessation products);
and Science Accessories, Inc. (sonic digitizers).
JOHN R. PARKER, Director. 220 Oak Ridge Avenue, Summit, NJ 07901.
Senior Vice President of McRae Capital Management, Inc. (since
1991); Director of Nova Natural Resources (oil, gas, minerals);
Director of other Capstone Funds; formerly independent financial
consultant and investor (1987-1989); General Partner of Printon,
Kane & Company (securities firm) (1983-1988); and registered
representative of Rickel & Associates (1988-1991).
PHILIP C. SMITH, Director. 87 Lord's Highway, Weston, Connecticut
06880. Private investor; Director of other Capstone Funds and the
Lexington Mutual Funds.
------------
* Director who is an interested person as defined in the Investment Company Act
of 1940 because of his relationship to the Adviser and Distributor.
7
BERNARD J. VAUGHAN, Director. 113 Bryn Mawr Avenue, Bala Cynwyd,
Pennsylvania 19004. Director of other Capstone Funds; formerly Vice
President of Fidelity Bank (1979-1993).
DAN E. WATSON, President. 5847 San Felipe, Suite 4100, Houston, Texas
77057. Chairman of the Board (since 1992) and Director of Capstone
Asset Management Company (since 1987); Chairman of the Board and
Director of Capstone Asset Planning Company and Capstone Financial
Services, Inc. (since 1987); Officer of other Capstone Funds.
SHARON K. KEITH, Vice President. 5847 San Felipe, Suite 4100, Houston,
Texas 77057. Senior Vice President (since 1992) and Vice President
(1987-1992) of Capstone Financial Services, Inc. and Capstone Asset
Management Company; Officer of other Capstone Funds.
ALBERT P. SANTA LUCA, Vice President. 5847 San Felipe, Suite 4100,
Houston, Texas 77057. Vice President of Capstone Financial Services,
Inc. and Capstone Asset Management Company (since 1994); Officer of
other Capstone Funds; formerly Vice President and Equity Fund
Manager of BancOne -- BancOne Investment Advisors (1984-1994).
IRIS R. CLAY, Secretary. 5847 San Felipe, Suite 4100, Houston, Texas
77057. Assistant Secretary of Capstone Financial Services, Inc.,
Capstone Asset Management Company and Capstone Planning Company
(since 1990); Manager, Mutual Fund Administration (since 1993) and
Compliance Analyst (1987-1993) with Capstone Financial Services,
Inc.; Officer of other Capstone Funds.
LINDA G. GIUFFRE, Treasurer. 5847 San Felipe, Suite 4100, Houston,
Texas 77057. Treasurer of Capstone Financial Services, Inc.,
Capstone Asset Management Company and Capstone Asset Planning
Company (since 1990); Officer of other Capstone Funds.
The directors and officers of the Fund as a group own less than one
percent of the outstanding shares of the Fund. The directors of the Fund (other
than Mr. Jaroski) also received compensation for serving as directors of other
Capstone Funds.
Each director not affiliated with the Adviser is entitled to $125 for
each Board meeting attended, and is paid a $2,000 annual retainer by the Fund.
The directors and officers of the Fund are also reimbursed for expenses incurred
in attending meetings of the Board of Directors. For the fiscal year ended
October 31, 1994, the Fund paid or accrued for the account of its officers and
directors, as a group for services in all capacities, a total of $13,377.
The following table represents the fees paid during the 1994 calendar
year to the directors of the Fund and the total compensation each director
received during that period from the Capstone Funds complex.
8
<PAGE>
COMPENSATION TABLE
<TABLE>
<CAPTION>
TOTAL
COMPENSATION
FROM
AGGREGATE PENSION OR REGISTRANT
COMPENSATION RETIREMENT ESTIMATED ANNUAL AND FUND
NAME OF PERSON, FROM BENEFITS ACCRUED BENEFITS UPON COMPLEX PAID
POSITION REGISTRANT* AS PART OF FUND RETIREMENT TO TRUSTEES
<S> <C> <C> <C> <C>
James F. Leary, Director .............................. $2,500 $ 0 $ 0 $5,000(1)
John R. Parker, Director .............................. 2,500 0 0 5,000(1)
Philip C. Smith, Director ............................. 2,500 0 0 8,000(1)(2)(3)
Bernard J. Vaughan, Director .......................... 2,500 0 0 7,000(1)(2)
</TABLE>
--------------
* Amounts do not include deferred compensation.
(1) Director of Capstone Fixed Income Series, Inc., Capstone Series, Inc. and
Capstone Growth Fund, Inc.
(2) Trustee of Capstone International Series Trust
(3) Director of Medical Research Investment Fund, Inc.
INVESTMENT ADVISER
Pursuant to the terms of a new investment advisory agreement dated May
11, 1992 (the "Advisory Agreement"), the Fund employs Capstone Asset Management
Company (the "Adviser") to furnish investment advisory and administrative
services. The Adviser is a wholly-owned subsidiary of Capstone Financial
Services, Inc.
Prior to February 19, 1992 the Adviser provided investment advisory and
administrative services pursuant to an investment advisory contract dated
September 1, 1987 ("Old Advisory Agreement"). Services provided under the
Advisory Agreement do not differ from those provided under the Old Advisory
Agreement.
Fees paid to the Adviser under the Advisory Agreement are unchanged
from those paid under the Old Advisory Agreement. For its services, the Adviser
receives an annual fee at the rate of .75 of 1% per annum on the first $50
million of the Fund's net assets, .60 of 1% per annum on the next $150 million
of the Fund's net assets, .50 of 1% per annum on the next $300 million of the
Fund's net assets and .40 of 1% per annum on all of the Fund's net assets in
excess of $500 million. The fee is payable monthly at a rate of 1/16th of 1% of
the first $50 million of the Fund's net assets, 1/20th of 1% of the next $150
million of the Fund's net assets, 1/24th of 1% of the next $300 million of the
Fund's net assets and 1/30th of 1% of all of the Fund's net assets in excess of
$500 million, respectively. The Fund's net assets are determined at the close of
the last business day of each month. The fee paid to the Adviser may be somewhat
higher than that paid by other investment companies. For the fiscal years ended
October 31, 1994, 1993 and 1992, the Fund paid investment advisory fees in the
amounts of $623,303, $671,890 and $658,846, respectively. As a percentage of the
average net assets of the Fund, the investment advisory fee was .68% for each of
those years.
The Adviser also performs for the Fund certain accounting and
recordkeeping services for which the Adviser receives a monthly fee to reimburse
the Adviser for its costs. The Adviser also receives a monthly fee to reimburse
the Adviser for its costs in making daily computation of net asset value. These
amounts are not intended to include any profit to the Adviser and are in
addition to the advisory fee described above.
9
The Advisory Agreement contains an expense limitation provision
pursuant to which the Adviser will contribute money to the Fund up to an amount
equal to its advisory fees or waive all or a portion of its advisory fees to
insure that the aggregate annual expenses of the Fund, including the advisory
fee, but excluding certain expenses such as brokerage commissions, litigation
costs and certain distribution plan expenses, do not exceed the expense
limitations of any state having jurisdiction over the Fund. In such event, the
annual advisory fees of the Adviser will be reduce pro rata (but not below zero)
to the extent necessary to comply with such expense limitations. At the date of
this Statement of Additional Information, the strictest expense limitation
applicable to the Fund is 2.5% of the first $30 million of the Fund's average
net assets, 2.0% of the next $70 million of average net assets and 1.5% of the
remaining average net assets for any fiscal year. Prior to February 19, 1992 the
Adviser was liable for reimbursing the Fund if the operating expenses of the
Fund exceeded the limit of 1 1/2% of the balance of the Fund's average net
assets.
Pursuant to the Advisory Agreement, the Adviser pays the compensation
and expenses of all of its directors, officers and employees who serve as
officers and executive employees of the Fund (including the Fund's share of
payroll taxes), except expenses of travel to attend meetings of the Fund's Board
of Directors or committees or advisers to the Board. The Adviser also agrees to
make available, without expense to the Fund, the services of its directors,
officers and employees who serve as officers of the Fund. The Fund pays all of
its expenses not borne by the Adviser pursuant to the Advisory Agreement
including such expenses as (i) the advisory fee, (ii) fees under the Service and
Distribution Plan (see "Distributor"), (iii) fees for legal, auditing, transfer
agent, dividend disbursing, and custodian services, (iv) the expenses of issue,
repurchase, or redemption of shares, (v) interest, taxes and brokerage
commissions, (vi) membership dues in the Investment Company Institute allocable
to the Fund, (vii) the cost of reports and notices to stockholders, and (viii)
fees to directors and salaries of any officers or employees who are not
affiliated with the Adviser, if any.
The Advisory Agreement provides that the Adviser shall not be liable
for any error of judgment or of law, or for any loss suffered by the Fund in
connection with the matters to which the agreement relates except a loss
resulting from willful misfeasance, bad faith or gross negligence on the part of
the Adviser in the performance of its obligations and duties, or by reason of
its reckless disregard of its obligations and duties under the Advisory
Agreement.
The Advisory Agreement will remain in effect until May 11, 1995 and
from year to year thereafter if specifically approved (a) by the Fund's Board of
Directors or by vote of a majority of the Fund's outstanding voting securities,
and (b) by the affirmative vote of a majority of the directors who are not
parties to the agreement or interested persons of any such party, by votes cast
in person at a meeting called for such purpose. The Advisory Agreement may be
terminated (a) at any time without penalty by the Fund upon the vote of a
majority of the directors or by vote of the majority of the Fund's outstanding
voting securities, upon 60 days' written notice to the Adviser or (b) by the
Adviser at any time without penalty, upon 60 days' written notice to the Fund.
The Advisory Agreement will also terminate automatically in the event of its
assignment (as defined in the 1940 Act).
The following individuals are affiliated persons of both the Fund and
the Adviser as defined in the 1940 Act: Dan E. Watson, Edward L. Jaroski, Sharon
K. Keith, Albert P. Santa Luca, Linda G. Giuffre, and Iris R. Clay. (For further
information, reference is made to the caption herein "Directors and Officers".)
DISTRIBUTOR
Capstone Asset Planning Company (the "Distributor") acts as the
principal underwriter of the Fund's shares pursuant to a written agreement with
the Fund dated May 11, 1992 (the "Distribution Agreement"). The Distributor has
the exclusive right (except for distributions of shares directly by the Fund) to
distribute shares of the Fund in a continuous offering through affiliated and
unaffiliated dealers. The Distributor's obligation is an agency or "best
efforts" arrangement under which the Distributor is required to take and pay for
only such Fund shares as may be sold to the public. The Distributor is not
obligated to sell any stated number of shares. Except to the extent otherwise
permitted by the Service and Distribution Plan (see below), the Distributor
bears the cost of printing (but not typesetting) prospectuses used in connection
with this offering and the cost and expense of supplemental sales literature,
promotion and advertising. Prior to August 21, 1995, the Distributor received
commissions from sales of shares of the Fund, which amounts were not an expense
of the Fund but represented the sales commission added to the net asset value of
shares
10
purchased from the Fund. The sales charge was paid to the Distributor, who
reallowed a portion of the sales charge to broker-dealers who had an agreement
with the Distributor to participate in the offering of the Fund's shares. During
the fiscal year ended October 31, 1994 the Distributor earned $1,585 in
commissions on the sale of Fund shares.
The Distribution Agreement is renewable from year to year if approved
(a) by the Fund's Board of Directors or by a vote of a majority of the Fund's
outstanding voting securities and (b) by the affirmative vote of a majority of
directors who are not parties to the Distribution Agreement or interested
persons of any party, by votes cast in person at a meeting called for such
purpose. The Distribution Agreement provides that it will terminate if assigned,
and that it may be terminated without penalty by either party on 60 days'
written notice.
Prior to March 1, 1992 the Distributor served as principal underwriter
pursuant to a written agreement with the Fund dated September 1, 1987 ("Old
Distribution Agreement"). The Distribution Agreement and Old Distribution
Agreement are substantially similar except that the Distribution Agreement
incorporates language which discusses adoption by the Fund of a Service and
Distribution Agreement (discussed below). For the fiscal years ended October 31,
1993 and 1992 the Distributor received $3,733 and $3,627, respectively, in
commissions from the sale of Fund shares.
On March 1, 1992, the Fund adopted a Service and Distribution Plan (the
"Plan") pursuant to Rule 12b-1 of the Investment Company Act of 1940 which
permits the Fund to absorb certain expenses in connection with the distribution
of its shares and provision of certain services to stockholders. See "Management
of the Fund - Distributor" in the Fund's Prospectus. As required by Rule 12b-1,
the Fund's Plan and related agreements were approved by a vote of the Fund's
Board of Directors, and by a vote of the directors who are not "interested
persons" of the Fund as defined under the 1940 Act and have no direct or
indirect interest in the operation of the Plan or any agreements related to the
Plan (the "Plan Directors"), and by the Fund's stockholders at the Annual
Meeting of Stockholders held February 18, 1992.
As required by Rule 12b-1, the directors will review quarterly reports
prepared by the Distributor on the amounts expended and the purposes for the
expenditures. The Fund paid $313,597 in 12b-1 fees during the fiscal year ended
October 31, 1994. Of this amount less than 1% was paid to outside Service
Organizations and the balance was retained by the Distributor as reimbursement
of distribution-related expenses.
The Plan and related agreements may be terminated at any time by a vote
of the Plan Directors or by vote of a majority of the Fund's outstanding voting
securities. As required by Rule 12b-1, selection and nomination of disinterested
directors for the Fund is committed to the discretion of the directors who are
not "interested persons" as defined under the 1940 Act.
Any change in the Plan that would materially increase the distribution
expenses of the Fund requires stockholder approval, but otherwise, the Plan may
be amended by the directors, including a majority of the Plan Directors.
The Plan will continue in effect for successive one year periods
provided that such continuance is specifically approved by a majority of the
directors, including a majority of the Plan Directors. Continuance of the Plan
was last approved by a majority of directors and Plan Directors on November 13,
1994. In compliance with the Rule, the directors, in connection with both the
adoption and continuance of the Plan, requested and evaluated information they
thought necessary to make an informed determination of whether the Plan and
related agreements should be implemented, and concluded, in the exercise of
reasonable business judgment and in light of their fiduciary duties, that there
is a reasonable likelihood that the Plan and related agreements will benefit the
Fund and its stockholders.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Adviser is responsible for decisions to buy and sell securities for
the Fund and for the placement of its portfolio business and the negotiation of
the commissions paid on such transactions. It is the policy of the Adviser to
11
seek the best security price available with respect to each transaction. In
over-the-counter transactions, orders are placed directly with a principal
market maker unless it is believed that a better price and execution can be
obtained by using a broker. The Adviser seeks the best security price at the
most favorable commission rate. In selecting dealers and in negotiating
commissions, the Adviser considers the firm's reliability, the quality of its
execution services on a continuing basis and its financial condition. When more
than one firm are believed to meet these criteria, preference may be given to
firms which also provide research services to the Fund or the Adviser. In
addition, the Adviser may cause the Fund to pay a broker that provides brokerage
and research services a commission in excess of the amount another broker might
have charged for effecting a securities transaction. Such higher commission may
be paid if the Adviser determines in good faith that the amount paid is
reasonable in relation to the services received in terms of the particular
transaction or the Adviser's overall responsibilities to the Fund and the
Adviser's other clients. Such research services must provide lawful and
appropriate assistance to the Adviser in the performance of its investment
decision-making responsibilities and may include advice, both directly and in
writing, as to the value of the securities, the advisability of investing in,
purchasing or selling securities, and the availability of securities, or
purchasers or sellers of securities, as well as furnishing analyses and reports
concerning issues, industries, securities, economic factors and trends,
portfolio strategy and the performance of accounts.
From time to time, the Adviser effects securities transactions through
Capstone Asset Planning Company ("CAPCO"), TradeStar Investments, Inc. and
Williams McKay Jordan & Mills, Inc. ("WMJM"), broker-dealer affiliates of the
Adviser. WMJM is deemed to be an affiliated broker since one of the principals
of that firm serves as a director of Capstone Financial Services, Inc., the
parent company of the Adviser and CAPCO.
Consistent with the Rules of Fair Practice of the National Association
of Securities Dealers, Inc. and subject to seeking best execution and such other
policies as the Board of Directors may determine, the Adviser may consider sales
of shares of the Fund as a factor in the selection of dealers to execute
portfolio transactions for the Fund.
The Adviser places portfolio transactions for other advisory accounts
including other investment companies. Research services furnished by firms
through which the Fund effects its securities transactions may be used by the
Adviser in servicing all of its accounts; not all of such services may be used
by the Adviser in connection with the Fund. In the opinion of the Adviser, the
benefits from research services to each of the accounts (including the Fund)
managed by the Adviser cannot be measured separately.
The Adviser seeks to allocate portfolio transactions equitably whenever
concurrent decisions are made to purchase or sell securities by the Fund and
another advisory account. In some cases, this procedure could have an adverse
effect on the price or the amount of securities available to the Fund. In making
such allocations among the Fund and other advisory accounts, the main factors
considered by the Adviser are the respective investment objectives, the relative
size of portfolio holdings of the same or comparable securities, the
availability of cash for investment, the size of investment commitments
generally held, and opinions of the persons responsible for recommending the
investment.
During the fiscal year ended October 31, 1994, the Fund incurred
brokerage commissions of $108,908, which represented 0.12% of the Fund's net
assets. Securities transactions effected through brokers who furnished the Fund
with statistical, research and advisory information amounted to $38,042,495
(100% of the aggregate dollar amount of transactions executed with a
commission), and commissions paid by the Fund on these trades totaled $108,908
(100% of total commissions). The Fund also executed trades in the amount of
$6,001,125 in which a "mark-up" (the dealer's profit) was included in the price
of the securities.
During the fiscal years ended October 31, 1993 and 1992, the Fund paid
$216,759 and $160,056, respectively, in brokerage commissions on portfolio
trades. During these periods, CAPCO received brokerage commissions of $0 and
$30,766, respectively.
DETERMINATION OF NET ASSET VALUE
The net asset value per share is computed daily, Monday through Friday,
as of the close of regular trading on
12
the New York Stock Exchange, which is currently 4:00 p.m. Eastern Time, except
that the net asset value will not be computed on the following holidays: New
Year's Day, President's Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving Day, and Christmas Day.
The net asset value of Fund shares is computed by dividing the value of
all securities plus other assets, less liabilities, by the number of shares
outstanding, and adjusting to the nearest cent per share. Such computation is
made by (i) valuing securities listed on an exchange or quoted on the NASDAQ
national market system at the last reported sale price, or if there has been no
sale that day at the mean between the last reported bid and asked prices, (ii)
valuing other securities at the mean between the last reported bid and asked
prices and (iii) valuing any securities for which market quotations are not
readily available and any other assets at fair value as determined in good faith
by the Board of Directors of the Fund.
However, debt securities (other than short-term obligations) including
listed issues, are valued on the basis of valuations furnished by a pricing
service which utilizes electronic data processing techniques to determine
valuations for normal institutional size trading units of debt securities,
without exclusive reliance upon exchange or over-the-counter prices. Short-term
obligations are valued at amortized cost.
During the period a financial futures contact is open, changes in the
value of the contract are recognized as unrealized gain or loss by
"marking-to-market" on a daily basis to reflect the market value of the contract
at the end of each day's trading. Variation margin payments are received or made
daily as unrealized gain or loss is incurred. When the contract is closed, the
Fund records a realized gain or loss equal to the difference between the
proceeds from (or cost of) the closing transaction and the Fund's basis in the
contract.
HOW TO BUY AND REDEEM SHARES
Shares of the Fund are sold in a continuous offering and may be
purchased on any business day through authorized dealers, including Capstone
Asset Planning Company. Certain broker-dealers assist their clients in the
purchase of shares from the Distributor and charge a fee for this service in
addition to the Fund's public offering price.
Shares will be credited to a stockholder's account at the net asset
value next computed after an order is received by the Distributor as specified
below. Initial purchases must be at least $200; however, this requirement may be
waived by the Distributor for plans involving continuing investments. There is
no minimum for subsequent purchases of shares. No stock certificates
representing shares purchased will be issued except upon written request to the
Fund's Transfer Agent. The Fund's management reserves the right to reject any
purchase order if, in its opinion, it is in the Fund's best interest to do so.
See "Purchasing Shares" in the Prospectus.
Generally, stockholders may require the Fund to redeem their shares by
sending a written request, signed by the record owner(s), to Capstone Growth
Fund, Inc., c/o Fund/Plan Services, Inc., P.O. Box 874, 2 W. Elm Street,
Conshohocken, Pennsylvania 19428. In addition, certain expedited redemption
methods are available. See "Redemption and Repurchase of Shares" in the
Prospectus.
DIVIDENDS AND DISTRIBUTIONS
The Fund's policy is to distribute to stockholders substantially all 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) in annual dividends. The Fund intends similarly to
distribute to stockholders at least annually any net realized capital gains (the
excess of net long-term capital gains over net short-term capital losses). All
dividends and capital gain distributions are reinvested in shares of the Fund at
net asset value without sales commission, except that any stockholder may
otherwise instruct the Transfer Agent in writing and receive cash. Stockholders
are informed as to the sources of distributions at the time of payment. Any
dividend or distribution paid shortly after a purchase of shares by an investor
will have the effect of reducing the per share net asset value of his shares by
the amount of the dividend or
13
distribution. All or a portion of any such dividend or distribution,
although in effect a return of capital, may be taxable, as set forth below.
TAXES
The Fund intends to qualify annually and elect to be treated as a
regulated investment company under Subchapter M of the Internal Revenue Code of
1986, as amended (the "Code"). Qualification and election to be taxed as a
regulated investment company involves no supervision of management or investment
policies or practices by any government agency. To qualify as a regulated
investment company, the Fund must, with respect to each taxable year, distribute
to stockholders at least 90% of its investment company taxable income (which
includes, among other items, dividends, interest, certain foreign currency gains
and the excess of net short-term capital gains over net long-term capital
losses) and meet certain diversification of assets, source of income, and other
requirements of the Code.
As a regulated investment company, the Fund generally is not subject to
Federal income tax on its investment company taxable income and net capital gain
(net long-term capital gains in excess of net short-term capital losses), if
any, that it distributes to stockholders. The Fund intends to distribute to its
stockholders, at least annually, substantially all of its investment company
taxable income and net capital gain. 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 tax, the Fund must
distribute during each calendar year (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 for the
twelve-month period ending on October 31 of the calendar year (reduced by
certain ordinary losses, as prescribed by the Code), and (3) all ordinary income
and capital gains for previous years that were not distributed during such
years. A distribution will be treated as paid on December 31 of the calendar
year if it is declared by the Fund in October, November or December of that year
to stockholders on 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
stockholders in the calendar year 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.
If the Fund retains net capital gains for reinvestment, although it has
no plans to do so, the Fund may elect to treat such amounts as having been
distributed to its stockholders. As a result, the stockholders would be subject
to tax on undistributed capital gain, would be able to claim their proportionate
share of the Federal income taxes paid by the Fund on such gain as a credit
against their own Federal income tax liabilities, and would be entitled to an
increase in their basis in their Fund shares.
DISTRIBUTIONS. Dividends paid out of the Fund's investment company
taxable income will be taxable to a stockholder as ordinary income.
Distributions of net capital gains, if any, designated by the Fund as capital
gain dividends, are taxable as long-term capital gains, regardless of how long
the stockholder has held the Fund's shares.
Dividends received by corporate stockholders may qualify for the
dividends received deduction to the extent the Fund designates its dividends as
derived from dividends from domestic corporations. The amount designated by the
Fund as so qualifying cannot exceed the aggregate amount of dividends received
by the Fund from domestic corporations for the taxable year. Since the Fund's
income may not consist exclusively of dividends eligible for the corporate
dividends received deduction, its distributions of investment company taxable
income likewise may not be eligible, in whole or in part, for that deduction.
The alternative minimum tax applicable to corporations may reduce the benefits
of the dividends received deduction. The dividends received deduction may be
further reduced if the shares of the Fund are debt-financed or are deemed to
have been held less than 46 days.
All distributions are taxable to the stockholder whether reinvested in
additional shares or received in cash. Stockholders receiving distributions in
the form of additional shares will have a cost basis for Federal income tax
purposes in each share received equal to the net asset value of a share of the
Fund on the reinvestment date. Stockholders will be notified annually as to the
Federal tax status of distributions.
14
Distributions by the Fund reduce the net asset value of the Fund
shares. Should a distribution reduce the net asset value below a stockholder's
cost basis, such distribution nevertheless would be taxable to the stockholder
as ordinary income or capital gain as described above, even though, from an
investment standpoint, it may constitute a partial return of capital. In
particular, investors should be careful to consider the tax implications of
buying shares just prior to a distribution by the Fund. The price of shares
purchased at that time includes the amount of the forthcoming distribution, but
the distribution will generally be taxable to them.
HEDGING AND OTHER TRANSACTIONS. Certain options and futures contracts
are "section 1256 contracts." Any gains or losses on section 1256 contracts
generally are considered 60% long-term and 40% short-term capital gains or
losses ("60/40"). Also, section 1256 contracts held by the Fund at the end of
each taxable year (and at other times prescribed pursuant to the Code) are
"marked-to-market" with the result that unrealized gains or losses are treated
as though they were realized and the resulting gain or loss is generally treated
as 60/40 gain or loss.
Generally, the hedging transactions undertaken by the Fund may result
in "straddles" for Federal income tax purposes. The straddle rules may affect
the character of gains (or losses) realized by the Fund. In addition, losses
realized by the Fund on positions that are part of a straddle may be deferred
under the straddle rules, rather than being taken into account in calculating
the taxable income for the taxable year in which such losses are realized.
Because only a few regulations implementing the straddle rules have been
promulgated, the tax consequences to the Fund of hedging transactions are not
entirely clear. The hedging transactions may increase the amount of short-term
capital gain realized by the Fund which is taxed as ordinary income when
distributed to stockholders.
The Fund may make one or more of the elections available under the Code
which are applicable to straddles. If the Fund makes any of the elections, the
amount, character and timing of the recognition of gains or losses from the
affected straddle positions will be determined under rules that vary according
to the election(s) made. The rules applicable under certain of the elections may
operate to accelerate the recognition of gains or losses from the affected
straddle positions.
Because application of the straddle rules may affect the character of
gains or losses, defer losses and/or accelerate the recognition of gains or
losses from the affected straddle positions, the amount which must be
distributed to stockholders, and which will be taxed to stockholders as ordinary
income or long-term capital gain, may be increased or decreased substantially as
compared to a Fund that did not engage in such hedging transactions.
Because the tax consequences of straddle transactions to the Fund are
not entirely clear, it may ultimately be determined that the Fund's tax
accounting procedures failed to conform to the straddle rules. Consequently, the
Fund may have inadvertently failed to satisfy one or more of the requirements
for qualification as a regulated investment company. If the Fund has failed to
satisfy the requirement that it distribute at least 90% of its net investment
company taxable income, the Fund may be able to preserve its regulated
investment company status by making a "deficiency dividend" distribution. In
addition, the Fund would have to pay interest and a penalty on the amount of the
deficiency dividend distribution. If the Fund fails to satisfy one of the other
requirements for qualification as a regulated investment company, the Fund would
be taxed as an ordinary corporation, and its distributions, including net
capital gain distributions, would be taxable to stockholders as ordinary
dividends. Moreover, upon any requalification as a regulated investment company,
the Fund might be subject to a corporate-level tax on certain gains.
Certain requirements that must be met under the Code in order for the
Fund to qualify as a regulated investment company may limit the extent to which
the Fund will be able to engage in transactions in options and futures
contracts.
DISPOSITION OF SHARES. Upon disposition (by redemption, repurchase,
sale or exchange) of Fund shares, a stockholder will realize a taxable gain or
loss depending upon his basis in his shares. Such gain or loss will be treated
as capital gain or loss if the shares are capital assets in the stockholder's
hands. Such gain or loss will generally be long-term or short-term depending
upon the stockholder's holding period for the shares. However, a loss realized
by a stockholder on the disposition of Fund shares with respect to which capital
gain dividends have been paid will, to the extent of such capital gain
dividends, be treated as long-term capital loss if such shares have been held by
the stockholder for six months or less. Further, a loss realized on a
disposition will be disallowed to the extent the shares
15
disposed of are replaced (whether by reinvestment of distributions or otherwise)
within a period of 61 days beginning 30 days before and ending 30 days after the
shares are disposed of. In such a case, the basis of the shares acquired will be
adjusted to reflect the disallowed loss. Exchanges of Fund shares for shares of
other funds generally would be treated as taxable sales of the shares exchanged
by the stockholder.
Certain of the debt securities acquired by the Fund may be treated as
debt securities that were originally issued at a discount. Original issue
discount can generally be defined as the difference between the price at which a
security was issued and its stated redemption price at maturity. Although no
cash income is actually received by the Fund, original issue discount on a
taxable debt security earned in a given year generally is treated for Federal
income tax purposes as interest and, therefore, such income would be subject to
the distribution requirements of the Code.
BACKUP WITHHOLDING. The Fund may be required to withhold Federal income
tax at the rate of 31% of all taxable distributions from the Fund and of gross
proceeds from the redemption of shares payable to stockholders who fail to
provide the Fund with their correct taxpayer identification number or to make
required certifications, or who have been notified by the Internal Revenue
Service that they are subject to backup withholding. Corporate stockholders and
certain other stockholders specified in the Code generally are exempt from
backup withholding. Backup withholding is not an additional tax. Any amounts
withheld may be credited against the stockholder's U.S. Federal income tax
liability.
OTHER TAXES. Distributions also may be subject to additional state,
local and foreign taxes depending on each stockholder's particular situation.
Foreign stockholders may be subject to U.S. tax rules that differ significantly
from those described above, including the likelihood that distributions to them
would be subject to withholding of U.S. tax at a rate of 30% (or at a lower rate
under a tax treaty). Stockholders are advised to consult their own tax advisers
with respect to the particular tax consequences to them of an investment in the
Fund.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As of January 3, 1995, NationsBank, in its capacity as trustee of the
Tenneco Inc. Thrift Plan, owned approximately 38.3% of the outstanding shares of
common stock of the Fund. The address of NationsBank is 700 Louisiana, Houston,
Texas 77002.
PLIFunds Investment Plans, 5847 San Felipe, Suite 4100, Houston, Texas
77057 on January 3, 1995 owned of record and beneficially 7.4% of the
outstanding shares of common stock of the Fund.
OTHER INFORMATION
CUSTODY OF ASSETS. All securities owned by the Fund and all cash,
including proceeds from the sale of shares of the Fund and of securities in the
Fund's investment portfolio, are held by The Fifth Third Bank, 38 Fountain
Square, Cincinnati, Ohio 45263, as custodian.
STOCKHOLDER REPORTS. Semi-annual statements are furnished to
stockholders, and annually such statements are audited by the independent
accountants.
INDEPENDENT ACCOUNTANTS. Tait, Weller & Baker, Two Penn Center Plaza,
Suite 700, Philadelphia, PA 19102-1707, the independent accountants for the
Fund, performs annual audits of the Fund's financial statements.
LEGAL COUNSEL. Dechert Price & Rhoads, 1500 K Street, N.W., Washington,
DC 20005, is legal counsel to the Fund.
16
CAPSTONE GROWTH FUND, INC.
PORTFOLIO OF INVESTMENTS OCTOBER 31, 1994
------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARKET
VALUE PERCENT OF
COMMON STOCKS -- 84.77% SHARES (NOTE 1-A) NET ASSETS
------------------------------------- ------------ ------------- ----------
<S> <C> <C> <C>
BEVERAGE-SOFT DRINKS 54,800 Coca-Cola Co.......................... $ 2,760,550 3.41%
3.41%
COMMUNICATIONS 25,000 Times Mirror Co. Class A.............. 818,750 1.01
1.01%
COMMUNICATIONS 23,500 Gannett Co............................ 1,128,000 1.39
EQUIP. 48,000 Motorola, Inc......................... 2,826,144 3.49
4.88%
------------ ----------
3,954,144 4.88
COMPUTERS & 6,000 Apple Computer, Inc................... 259,125 0.32
BUSINESS EQUIPMENT 500 Keane, Inc.(a)........................ 10,250 0.01
1.18% 7,000 Hewlett-Packard Co.................... 685,125 0.85
------------ ----------
954,500 1.18
CONSUMER DRUGS 33,600 Abbott Laboratories................... 1,041,600 1.29
3.61% 34,400 Johnson & Johnson..................... 1,879,100 2.32
------------ ----------
2,920,700 3.61
DRUGS 7,400 Allergan, Inc......................... 195,175 0.24
1.23% 10,800 Pfizer, Inc........................... 800,550 0.99
------------ ----------
995,725 1.23
ELECTRICAL EQUIPMENT 61,000 Arrow Electronics, Inc.(a)............ 2,302,750 2.85
11.71% 106,000 General Electric Co................... 5,180,750 6.40
52,875 Sensormatic Electrics Corp............ 1,989,422 2.46
------------ ----------
9,472,922 11.71
ENTERTAINMENT 12,000 The Walt Disney Co.................... 474,000 0.59
.59%
FINANCIAL SERVICES 38,000 Bank of New York Co., Inc............. 1,211,250 1.50
5.20% 37,500 Beneficial Corp....................... 1,467,187 1.81
44,000 Travelers, Inc........................ 1,529,000 1.89
------------ ----------
4,207,437 5.20
GROCERY STORES 40,000 Albertson's, Inc...................... 1,200,000 1.48
1.48%
HOSPITAL SUPPLIES 49,500 Biomet, Inc.(a)....................... 569,250 0.70
.70%
MANUFACTURING 55,000 Applied Materials, Inc.(a)............ 2,860,000 3.53
DIVERSIFIED INDUSTRY 10,000 The Bombay Company, Inc.(a)........... 120,000 0.15
10.45% 56,000 Dana Corp............................. 1,435,000 1.77
22,700 Johnson Controls, Inc................. 1,129,325 1.40
56,000 Mattel, Inc........................... 1,638,000 2.02
13,000 Offshore Logistics, Inc.(a)........... 170,625 0.21
11,000 Parker Hannifin Corp.................. 514,250 0.64
12,300 Tosco Corp............................ 390,525 0.48
5,000 Zebra Technologies Corp. Class A(a)... 201,250 0.25
------------ ----------
8,458,975 10.45
MISCELLANEOUS 50,000 Kinder-Care Learning Centers(a)....... $ 662,500 0.82%
.82%
MULTI-LINE INSURANCE 33,000 American General Corp................. 907,500 1.12
1.12%
OIL-INTEGRATED: 24,200 Amoco Corp............................ 1,533,675 1.89
DOMESTIC
1.89%
OIL-INTEGRATED: 12,600 Chevron Corp.......................... 567,000 0.70
INTERNATIONAL 12,800 Exxon Corp............................ 804,800 0.99
8.31% 17,150 Mobil Corp............................ 1,474,900 1.82
98,000 Panhandle Eastern Corp................ 2,303,000 2.85
18,000 Tenneco, Inc.......................... 796,500 0.98
12,000 Texaco, Inc........................... 784,500 0.97
------------ ----------
6,730,700 8.31
RAILROAD 15,000 Trinity Industries, Inc............... 513,750 0.63
1.74% 18,400 Union Pacific Corp.................... 899,300 1.11
------------ ----------
1,413,050 1.74
RESTAURANTS 89,700 Brinker International, Inc.(a)........ 2,074,312 2.56
5.05% 69,800 McDonald's Corp....................... 2,015,475 2.49
------------ ----------
4,089,787 5.05
RETAIL-SPECIALTY 117,656 Dollar General........................ 3,412,024 4.22
5.93% 15,000 Pep Boys-Manny, Moe & Jack............ 540,000 0.67
21,700 Toys R Us, Inc.(a).................... 838,163 1.04
------------ ----------
4,790,187 5.93
SAVINGS & LOAN CO. 15,000 Federal National Mortgage 1,140,000 1.41
Association.........................
1.41%
SOAPS 20,000 Gillette Co........................... 1,487,500 1.84
1.84%
TELEPHONE (NEW) 45,550 American Telephone & Telegraph Co..... 2,505,250 3.10
11.21% 11,917 Bell Atlantic Corp.................... 624,153 0.77
15,800 BellSouth Corp........................ 841,350 1.04
16,000 GTE Corp.............................. 496,000 0.61
136,500 MCI Communications Corp............... 3,139,500 3.88
24,000 Southwestern Bell Corp................ 1,005,000 1.24
12,200 US West, Inc.......................... 459,025 0.57
------------ ----------
9,070,278 11.21
------------ ----------
TOTAL COMMON STOCK
(Cost $50,766,177).................... 68,612,130 84.77
</TABLE>
CAPSTONE GROWTH FUND, INC.
PORTFOLIO OF INVESTMENTS OCTOBER 31, 1994
------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARKET
SHARES/ VALUE PERCENT OF
PAR VALUE (NOTE 1-A) NET ASSETS
----------- ------------ ----------
<S> <C> <C> <C> <C>
SHORT-TERM $ 2,526,000 American Express Credit Corp.
OBLIGATIONS 4.88% 11-01-94........................ $ 2,526,000 3.12%
9.30% 1,780,000 Associates Corp.
4.94% 11-08-94........................ 1,780,000 2.20
1,023,000 Associates Corp.
4.76% 11-15-94........................ 1,023,000 1.26
2,200,000 Ford Motor Credit Corp.
4.76% 11-22-94........................ 2,200,000 2.72
------------ ----------
TOTAL SHORT-TERM
OBLIGATIONS (Cost $7,529,000)......... 7,529,000 9.30
------------ ----------
TOTAL INVESTMENTS 76,141,130 94.07
(Cost $58,295,177)..................
OTHER ASSETS LESS LIABILITIES......... 4,799,973 5.93
------------ ----------
NET ASSETS............................ $ 80,941,103 100.00%
============ ==========
</TABLE>
(a) Non-income producing security.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
<PAGE>
CAPSTONE GROWTH FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES OCTOBER 31, 1994
------------------------------------------------------------------------------
ASSETS:
Investments in securities at market
value (identified cost
$58,295,177) (Note 1-A).......... $ 76,141,130
Cash................................. 179,478
Receivables:
Investments sold................. $ 6,391,345
Dividends and interest........... 109,619
Capital stock sold............... 1,231 6,502,195
----------- ------------
Total assets................. 82,822,803
LIABILITIES:
Payables:
Investments purchased............ 1,686,499
Capital stock redeemed........... 91,992
Accrued advisory and administration
fees............................... 48,960
Other accrued expenses............... 54,249
-----------
Total liabilities............ 1,881,700
------------
NET ASSETS........................... $ 80,941,103
============
NET ASSET VALUE PER SHARE:
($80,941,103 6,118,689 shares
outstanding) $.001 par value,
150,000,000 shares authorized.... $ 13.23
============
COMPUTATION OF OFFERING PRICE PER
SHARE: (Net asset value
$13.23 x 100/95.25).............. $ 13.89
============
SOURCE OF NET ASSETS:
Paid in capital.................. $ 61,735,272
Undistributed net investment
income........................ 345,195
Accumulated net realized gain on
investments................... 1,014,683
Net unrealized appreciation of
investments................... 17,845,953
------------
$ 80,941,103
============
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
<PAGE>
CAPSTONE GROWTH FUND, INC.
STATEMENT OF OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 1994
------------------------------------------------------------------------------
INVESTMENT INCOME:
<TABLE>
<S> <C> <C>
Income:
Dividends.................................................................... $ 1,425,129
Interest..................................................................... 450,780
------------
Total investment income.................................................. 1,875,909
Expenses:
Advisory fees (Note 2)....................................................... $ 623,303
Distribution fees (Note 2)................................................... 313,597
Transfer agent fees (Note 2)................................................. 77,891
Professional fees............................................................ 33,637
Custodian fees............................................................... 30,774
Administrative services (Note 2)............................................. 24,000
Registration and filing fees................................................. 22,072
Directors' fees and expenses................................................. 13,377
Reports and notices to stockholders.......................................... 10,389
Miscellaneous................................................................ 16,360
------------
Total operating expenses................................................. 1,165,400
------------
Net investment income................................................ 710,509
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS: (Note 5)
Net realized gain (loss) from:
Security transactions........................................................ 1,641,917
Futures contracts............................................................ (627,234)
------------
Net realized gains....................................................... 1,014,683
Unrealized appreciation of investments:
Beginning of year............................................................ 20,751,035
End of year.................................................................. 17,845,953
------------
Net decrease in unrealized appreciation of investments................... (2,905,082)
------------
Net realized and unrealized loss on investments.......................... (1,890,399)
------------
Net decrease in net assets resulting from operations................. $ (1,179,890)
============
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
<PAGE>
CAPSTONE GROWTH FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
----------------------------
OPERATIONS: 1994 1993
------------- -------------
<S> <C> <C>
Net investment income................................................................... $ 710,509 $ 1,184,533
Net realized gain on investments........................................................ 1,641,917 5,950,605
Net realized gain (loss) on futures contracts........................................... (627,234) 367,734
Net decrease in unrealized appreciation of investments.................................. (2,905,082) (750,669)
------------- -------------
Net increase (decrease) in net assets resulting from operations..................... (1,179,890) 6,752,203
NET EQUALIZATION DEBITS (Note 1-C)...................................................... (23,748) (1,450)
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income................................................................... (875,074) (1,496,980)
Net realized gains from investment transactions......................................... (6,318,338) (2,218,728)
CAPITAL SHARE TRANSACTIONS:
Decrease in net assets resulting from capital share transactions (Note 3)............... (7,127,271) (3,646,382)
------------- -------------
Total decrease in net assets........................................................ (15,524,321) (611,337)
NET ASSETS:
Beginning of year....................................................................... 96,465,424 97,076,761
------------- -------------
End of year (including undistributed net investment income of $345,195 and $509,760,
respectively)......................................................................... $ 80,941,103 $ 96,465,424
============= =============
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
<PAGE>
------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 1994
------------------------------------------------------------------------------
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Capstone Growth Fund, Inc., formerly Capstone U.S. Trend Fund, Inc. (the
"Fund"), is registered under the Investment Company Act of 1940, as amended
(the "Act"), as a diversified open-end management investment company. The
following is a summary of significant accounting policies followed by the Fund
in the preparation of its financial statements. The policies are in conformity
with generally accepted accounting principles.
A) VALUATION OF SECURITIES -- The Fund's investments in securities are carried
at market value. Securities listed on an exchange or quoted on a national
market system are valued at the last sales price. Other securities are quoted
at the mean between the most recent bid and asked prices. Short-term
obligations are valued at cost. Securities as to which market quotations are
not readily available and other assets held by the Fund, if any, are valued at
their fair value as determined in good faith by the Board of Directors.
B) FEDERAL INCOME TAXES -- No provision has been made for Federal income taxes
since it is the policy of the Fund to distribute all of its taxable income,
including the net realized gains on investments, and to continue to qualify as
a "regulated investment company" under the applicable sections of the Internal
Revenue Code.
C) EQUALIZATION -- The Fund follows the accounting practice known as
equalization by which a portion of the proceeds from sales and costs of
repurchases of capital shares, equivalent on a per share basis to the amount
of distributable investment income on the date of transactions, is credited or
charged to undistributed income. As a result, undistributed investment income
per share is unaffected by sales or redemptions of Fund shares.
D) FUTURES CONTRACTS -- Initial margin deposits required upon entering into
futures contracts are made by depositing cash, as collateral, for the account
of the broker (the Fund's agent in acquiring the futures position). During the
period the futures contracts are open, changes in the value of the contract
are recognized as unrealized gains or losses by "marking to market" on a daily
basis to reflect the market value of the contract at the end of each day's
trading. Variation margin payments are made or received, depending upon
whether unrealized gains or losses are incurred. When the contract is closed
the Fund records a realized gain or loss equal to the difference between the
proceeds from (or cost of) the closing transaction and the Fund's basis in the
contract.
Futures contracts involve credit and market risk in excess of the amounts
reflected in the Statement of Assets and Liabilities. The contract amounts of
these futures contracts reflect the extent of the Fund's exposure to
off-balance sheet risk. The Fund's credit risk is minimized by entering only
into futures contracts which are traded on national futures exchanges and for
which there appears to be a liquid secondary market. The Fund assumes the
market risk which arises from any changes in securities values.
E) OTHER -- Investment security transactions are accounted for on a trade date
basis. Dividend income and distributions to shareholders are recorded on the
ex-dividend date. Interest income is recorded on an accrual basis. Realized
gains and losses from security transactions are determined on the basis of
identified cost for both financial and Federal income tax reporting purposes.
NOTE 2 -- INVESTMENT ADVISORY FEES, ADMINISTRATIVE FEES AND OTHER TRANSACTIONS
WITH AFFILIATES
The Fund retains Capstone Asset Management Company as its Investment
Adviser. Under the Investment Advisory Agreement (the "Agreement"), the
Adviser is paid a monthly fee based on the average net assets at the annual
rate of .75% on the first $50 million and .60% on the next $150 million.
Pursuant to the Agreement, the Adviser will reimburse the Fund up to an amount
equal to its advisory fees to insure that the Fund's aggregate annual expenses
(including the advisory fee but excluding interest, taxes, brokerage fees and
commissions, litigation costs and certain distribution plan expenses) do not
exceed the expense limitations of any state having jurisdiction over the Fund.
Currently, the strictest expense limitation applicable to the Fund is 2.5% of
the first $30 million of the Fund's average net assets, 2% of the next $70
million of the Fund's average net assets, and 1.5% of the Fund's average net
assets in excess of $100 million. For the year ended October 31, 1994, no
reimbursement was required pursuant to this provision. The Adviser is also
paid a monthly fee of $2,000 representing the cost of certain accounting and
bookkeeping services. This amount is not intended to include any profit to the
Adviser and is in addition to the advisory fees described above.
Capstone Asset Planning Company ("CAPCO") serves as Distributor and
Underwriter of the Fund's shares. Commissions and underwriting fees earned on
sales of the Fund's shares during the year ended October 31, 1994 by the
Distributor / Underwriter were $1,408 and $177, respectively.
The Fund has adopted a Service and Distribution Plan (the "Plan") pursuant
to Rule 12b-1 under the Act whereby the Fund assets are used to reimburse CAPCO
for costs and expenses incurred with the distribution and marketing of shares of
the Fund and servicing of Fund shareholders. Distribution and marketing expenses
include, among other things, printing of prospectuses, advertising literature,
and costs of personnel involved with the promotion and the distribution of the
Fund's shares. Under the Plan, the Fund pays CAPCO an amount computed at an
annual rate of up to .35% of the Fund's average net assets (including reinvested
dividends paid with respect to those assets). Of this amount, CAPCO may
reallocate to securities dealers (which may include CAPCO itself) and other
financial institutions and organizations (collectively, "Service Organizations")
amounts up to .25% of the Fund's average net assets owned by shareholders for
whom the Service Organization has a servicing relationship. The Plan permits
CAPCO to carry forward for a maximum of twelve months distribution expenses
covered by the Plan for which CAPCO has not yet received reimbursement. For the
year ended October 31, 1994, the Fund paid $313,597 in 12b-1 fees. Of this
amount less than 1% was paid to Service Organizations other than CAPCO.
The Adviser is an affiliate of the Distributor/Underwriter and both are
wholly-owned subsidiaries of Capstone Financial Services, Inc. ("CFS").
Certain officers and directors of the Corporation are also officers and
directors of the Adviser, Underwriter and CFS. During the year ended October
31, 1994 Directors of the Fund who are not "interested persons" received
directors' fees of $10,000. All other officers and Directors serve without
compensation from the Fund.
NOTE 3 -- CAPITAL STOCK
Transactions in capital stock were as follows:
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
-------------------------------------------------------
1994 1993
------------------------- ----------------------------
SHARES AMOUNT SHARES AMOUNT
---------- ------------- ------------ --------------
<S> <C> <C> <C> <C>
Shares sold................................................. 838,553 $ 11,369,698 530,833 $ 7,558,487
Shares issued to shareholders in reinvestment of
distributions............................................. 509,170 6,613,689 245,331 3,419,584
---------- ------------- ------------ --------------
1,347,723 17,983,387 776,164 10,978,071
Shares redeemed............................................. 1,913,976 25,110,658 (1,024,945) (14,624,453)
---------- ------------- ------------ --------------
Net decrease................................................ (566,253) $ (7,127,271) (248,781) $ (3,646,382)
========== ============= ============ ==============
</TABLE>
NOTE 4 -- DIVIDEND DISTRIBUTIONS
On November 13, 1994 the Board of Directors declared a distribution of
$.225 a share, consisting of $.168 from realized gains and $.057 from ordinary
income. The distribution is payable on November 28, 1994 to shareholders of
record on November 21, 1994.
NOTE 5 -- PURCHASES AND SALES OF SECURITIES
Purchases and sales of securities other than short-term obligations and
futures aggregated $9,545,051 and $31,284,168, respectively.
NOTE 6 -- CHANGE OF FUND NAME AND INVESTMENT OBJECTIVE
On August 25, 1994, shareholders approved a change in the Fund's
investment objective to that of a "growth fund", to seek long-term capital
appreciation. To reflect the change in the Fund's investment objective,
shareholders also approved changing the Fund's name to Capstone Growth Fund,
Inc.
<PAGE>
CAPSTONE GROWTH FUND, INC.
FINANCIAL HIGHLIGHTS
------------------------------------------------------------------------------
The following table sets forth the per share operating performance data for a
share of capital stock outstanding, total return, ratios to average net assets
and other supplemental data for each year indicated.
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
-----------------------------------------------------
1994 1993 1992 1991 1990
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA
Net asset value at beginning of year......................... $ 14.43 $ 14.00 $ 14.65 $ 11.88 $ 14.76
--------- --------- --------- --------- ---------
Income from investment operations:
Net investment income.................................... 0.11 0.17 0.20 0.30 0.37
Net realized and unrealized gain (loss) on investments.. (0.23) 0.80 0.56 3.42 (1.48)
--------- --------- --------- --------- ---------
Total from investment operations..................... (0.12) 0.97 0.76 3.72 (1.11)
--------- --------- --------- --------- ---------
Less Distributions:
From net investment income............................... 0.13 0.22 0.24 0.37 0.40
From net realized gain on investments.................... 0.95 0.32 1.17 0.58 1.37
--------- --------- --------- --------- ---------
Total distributions...................................... 1.08 0.54 1.41 0.95 1.77
--------- --------- --------- --------- ---------
Net asset value at end of year............................... $ 13.23 $ 14.43 $ 14.00 $ 14.65 $ 11.88
========= ========= ========= ========= =========
TOTAL RETURN+................................................ (0.67)% 7.05% 5.83% 33.58% (8.55)%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of year (in thousands)..................... $ 80,941 $ 96,465 $ 97,076 $ 95,606 $ 76,780
Ratios of operating expenses to average net assets........... 1.28% 1.24% 1.10% 0.97% 0.94%
Ratio of net investment income to average net assets......... 0.78% 0.19% 1.43% 2.21% 2.77%
Portfolio turnover rate...................................... 12% 45% 22% 38% 48%
</TABLE>
+ Calculated without sales charge.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
<PAGE>
CAPSTONE GROWTH FUND, INC.
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors
of Capstone Growth Fund, Inc.
We have audited the accompanying statement of assets and liabilities of
Capstone Growth Fund, Inc. (formerly Capstone U.S. Trend Fund, Inc.) including
the portfolio of investments, as of October 31, 1994, and the related
statement of operations for the year then ended, the statement of changes in
net assets for each of the two years in the period then ended, and financial
highlights for each of the 5 years ended. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether financial statements and financial
highlights are free from material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. Our procedures included confirmation of securities owned
as of October 31, 1994 by correspondence with the custodian and brokers. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights
referred to above present fairly, in all material respects, the financial
position of Capstone Growth Fund, Inc. as of October 31, 1994, the results of
its operations, changes in its net assets and financial highlights for each of
the periods presented, in conformity with generally accepted accounting
principles.
Tait, Weller & Baker
Philadelphia, Pennsylvania
November 22, 1994
<PAGE>
CAPSTONE GROWTH FUND, INC.
5847 San Felipe, Suite 4100
Houston, TX 77057
1-800-262-6631
ANNUAL REPORT TO SHAREHOLDERS
OCTOBER 31, 1994
------------------------------------------------------------------------------
DIRECTORS: OFFICERS:
Edward L. Jaroski Dan E. Watson
James F. Leary President
John R. Parker Edward L. Jaroski
Philip C. Smith Executive Vice President
Bernard J. Vaughan Sharon K. Keith
Vice President
Albert P. Santa Luca
Vice President
Linda G. Giuffre
Treasurer
Iris R. Clay
Secretary
------------------------------------------------------------------------------
INVESTMENT ADVISER & ADMINISTRATOR: TRANSFER AGENT:
Capstone Asset Management Company Fund/Plan Services, Inc.
5847 San Felipe, Suite 4100 P. O. Box 874
Houston, Texas 77057 Conshohocken, PA 19428
1-800-845-2340
UNDERWRITER: CUSTODIAN:
Capstone Asset Planning Company National Westminster Bank NJ
5847 San Felipe, Suite 4100 One Exchange Place
Houston, Texas 77057 Jersey City, NJ 07302
1-800-262-6631
AUDITORS:
Tait, Weller & Baker
Two Penn Center Plaza, Suite 700
Philadelphia, PA 19102-1707
<PAGE>
