<PAGE> 1
REGISTRATION NO. 2-83397
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 / X /
Pre-Effective Amendment No. _____ / /
Post-Effective Amendment No. 20 / X /
-------
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 / X /
Capstone Growth Fund, Inc.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Charter)
5847 San Felipe, Suite 4100, Houston, Texas 77057
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (713) 260-9000
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Allan S. Mostoff, Esq., Dechert Price & Rhoads
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1500 K Street, N.C., Suite 500, Washington, DC 20005
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(Name and Address of Agent for Service)
It is proposed that this filing will become effective (check appropriate box)
/ X / immediately upon filing pursuant to paragraph (b).
/ / on ________________ pursuant to paragraph (b).
/ / 60 days after filing pursuant to paragraph (a).
/ / on (date) pursuant to paragraph (a) of rule 485.
The Registrant has filed with the Securities and Exchange Commission a
declaration pursuant to Rule 24f-2 under the Investment Company Act of 1940,
and:
/ X / filed the notice required by that Rule on December 26, 1996; or
/ / intends to file the notice required by that Rule on or about
________________; or
/ / during the most recent fiscal year did not sell any
securities pursuant to Rule 24f-2 under the Investment Company
Act of 1940, and, pursuant to Rule 24f-2(b)(2), need not file
the Notice.
<PAGE> 2
CAPSTONE GROWTH FUND, INC.
CROSS REFERENCE SHEET
BETWEEN
ITEMS OF FORM N-1A AND PROSPECTUS
(PART A TO REGISTRATION STATEMENT NO. 2-83397)
<TABLE>
<CAPTION>
Item
Number Form N-1A Heading Caption in Prospectus
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<S> <C> <C>
1. Cover Page Prospectus Cover Page
2. Synopsis Prospectus Summary; Fund
Expenses
3. Condensed Financial Information Financial Highlights
4. General Description of Registrant Investment Objective and
Policies; Investments and
Investment Practices;
Investment Restrictions;
Management of the Fund;
General Information
5. Management of the Fund Management of the Fund
6. Capital Stock and Other Securities General Information;
Distributions and Taxes
7. Purchase of Securities Being Determination of Net Asset
Value; Purchasing Offered
Shares
8. Redemption or Repurchase Redemption and Repurchase of
Shares
9. Pending Legal Proceedings Inapplicable
</TABLE>
<PAGE> 3
CAPSTONE GROWTH FUND, INC.
CROSS REFERENCE SHEET
BETWEEN
ITEMS OF FORM N-1A AND THE
STATEMENT OF ADDITIONAL INFORMATION
(PART B TO REGISTRATION STATEMENT NO. 2-83397)
<TABLE>
<CAPTION>
Item Caption in Statement of
Number Form N-1A Heading Additional Information
- ------ ----------------- -----------------------
<S> <C> <C>
10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. General Information and History General Information
13. Investment Objectives and Policies Investment Restrictions; Risk
Factors
14. Management of the Fund Directors and Executive
Officers
15. Control Persons and Principal Control Persons and Principal
Holders of Holders of
Securities Securities
16. Investment Advisory and Other Investment Adviser; Other
Information Services
17. Brokerage Allocation Portfolio Transactions and
Brokerage
18. Capital Stock and Other Securities Inapplicable
19. Purchase, Redemption and Pricing Determination of Net Asset
Value; How to Buy of
Securities Being Offered
Buy and Redeem Shares
20. Tax Status Dividends and Distributions;
Taxes
21. Underwriter Distributor
22. Calculation of Performance Data Performance Information
23. Financial Statements Financial Statements
</TABLE>
<PAGE> 4
CAPSTONE GROWTH FUND, INC.
(FORMERLY CAPSTONE U.S. TREND FUND, INC.)
5847 San Felipe, Suite 4100
Houston, TX 77057
1-800-262-6631
FEBRUARY 28, 1997
PROSPECTUS
Capstone Growth Fund, Inc. (the "Fund") is a diversified, open-end
management investment company. The Fund's investment objective is to seek
long-term capital appreciation. The Fund invests primarily in common stocks,
although the Fund can also invest in preferred and convertible preferred
stocks, as well as other instruments. The Fund would expect to invest
primarily in securities of U.S. issuers, but there is no limit on the extent to
which it can invest in securities of foreign issuers.
This Prospectus sets forth certain information about Capstone Growth
Fund, Inc. that a prospective investor should know before investing. Investors
should read and retain this Prospectus for future reference.
A STATEMENT OF ADDITIONAL INFORMATION about Capstone Growth Fund, Inc.
dated February 28, 1997 has been filed with the Securities and Exchange
Commission and contains further information about the Fund. A copy of the
Statement of Additional Information may be obtained without charge by calling
or writing the Fund at the telephone number or address listed above. The
Statement of Additional Information is incorporated herein by reference.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSIONER NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSIONER PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<PAGE> 5
CAPSTONE GROWTH FUND, INC.
Investment Adviser: Shareholder Servicing Agent:
Capstone Asset Management Company FPS Services, Inc.
5847 San Felipe, Suite 4100 P.O. Box 61503
Houston, Texas 77057 3200 Horizon Drive
King of Prussia, Pennsylvania 19406-0903
Distributor:
Capstone Asset Planning Company
5847 San Felipe, Suite 4100
Houston, Texas 77057
1-800-262-6631
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Fund Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Financial Highlights . . . . . . . . . . . . . . . . . . . . . . . . 7
Investment Objective and Policies . . . . . . . . . . . . . . . . . . . 8
Investments and Investment Practices . . . . . . . . . . . . . . . . . . 8
Investment Restrictions . . . . . . . . . . . . . . . . . . . . . . . . 10
Performance Information . . . . . . . . . . . . . . . . . . . . . . . 11
Management of the Fund . . . . . . . . . . . . . . . . . . . . . . . 11
Purchasing Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Distributions and Taxes . . . . . . . . . . . . . . . . . . . . . . . . 16
Redemption and Repurchase of Shares . . . . . . . . . . . . . . . . . . 17
Determination of Net Asset Value . . . . . . . . . . . . . . . . . . . 19
Stockholder Services . . . . . . . . . . . . . . . . . . . . . . . . 19
General Information . . . . . . . . . . . . . . . . . . . . . . . . 22
</TABLE>
No dealer, salesman, or any other person has been authorized to give any
information or to make any representations, other than those contained in this
Prospectus, in connection with the offer contained in this Prospectus and, if
given or made, such other information or representations must not be relied
upon as having been authorized by the Fund or its Distributor. This Prospectus
does not constitute an offer by the Fund or by the Distributor to sell or a
solicitation of an offer to buy any of the securities offered hereby in any
jurisdiction to any person to whom it is unlawful for the Fund or the
Distributor to make such offer or solicitation in such jurisdiction.
2
<PAGE> 6
CAPSTONE GROWTH FUND, INC.
PROSPECTUS SUMMARY
Type of Company . . . . . The Fund is an open-end diversified management
investment company. (see page 22)
Investment Objective. . . The Fund seeks long-term capital appreciation.
There is no assurance that this objective will be
achieved. (see page 8)
Investment Policies . . . The Fund will invest primarily in common stocks,
although the Fund can also invest in preferred and
convertible preferred stocks and certain other
instruments. The Fund would expect to invest
primarily in securities of U.S. issuers, but there
is no limit on the extent to which it can invest in
securities of foreign issuers. The Fund may also
engage in certain hedging transactions. (see page
8)
Risk Factors. . . . . . . For hedging purposes, the Fund may invest up to 2%
of its total net assets in stock options and
options on stock indexes and up to 5% of the market
value of its assets in margin deposits on stock
index futures and options on stock index futures.
The Fund may also enter into forward foreign
currency exchange contracts as a hedge in
connection with its foreign investments. These
investments entail special risks. The Fund's
investments in foreign securities involve different
risks than investments in securities of U.S.
issuers. See "Investments and Investment
Practices." Additionally, there can be no
assurance that the Fund will achieve its investment
objective and investors should be aware that the
value of the Fund's shares will fluctuate, which
may cause a loss in principal value. (see page 8)
Investment Adviser. . . . Capstone Asset Management Company (the Adviser") is
the Fund's Investment Adviser. The Adviser
provides advisory and/or administrative services to
the other mutual funds in the Capstone Group. (see
page 12)
Expenses of the Fund. . . For the last fiscal year, the Fund's total
operating expenses, including investment advisory
fees, were 1.29% of its average net assets. (see
page 14)
Dividends and . . . . . . The Fund pays any dividends from net investment
income and Distributions distributions from capital
gains at least annually. (see page 16)
Distributor and . . . . . Shares of the Fund are continuously offered for
Offering Price sale through the Fund's Distributor, Capstone
Asset Planning Company, without a sales load, at
the net asset value next determined after receipt
of the order. The Fund pays certain expenses
pursuant to a Rule 12b-1 distribution
3
<PAGE> 7
plan. (see page 14)
Minimum Purchase. . . . . The minimum initial investment is $200, except for
continuous investment plans, and there is no
minimum for subsequent purchases. (see page 14)
Redemption. . . . . . . . Shares of the Fund can be redeemed at the next
determined net asset value, without charge. (see
page 17)
4
<PAGE> 8
FUND EXPENSES
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES
<S> <C>
Maximum Sales Load Imposed on Purchases 0%
(as a percentage of offering price)
Maximum Sales Load Imposed on Reinvested
Dividends (as a percentage of offering price) 0%
Deferred Sales Load (as a percentage of
original purchase price or redemption
of proceeds, as applicable) 0%
Redemption Fee (as a percentage of
amount redeemed, if applicable) 0%
Exchange Fee 0%
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees 0.71%
12b-1 Fees* 0.25%
Other Expenses 0.33%
Total Fund Operating Expenses 1.29%
</TABLE>
EXAMPLE
<TABLE>
<CAPTION>
1 year 3 years 5 years 10 years
------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000
investment, assuming (1) 5% annual return and (2)
redemption at the end of each time period:
$13 $41 $71 $156
</TABLE>
- ---------------
* Under rules of the National Association of Securities Dealers, Inc. (the
"NASD"), a 12b-1 fee may be treated as a sales charge for certain
purposes under those rules. Because the 12b-1 fee is an annual fee
charged against the assets of a Fund, long-term stockholders may
indirectly pay more in total sales charges than the economic equivalent
of the maximum front-end sales charge permitted by rules of the NASD
(see "Distributor").
5
<PAGE> 9
The purpose of the foregoing table is to assist investors in
understanding the various costs and expenses that an investor in the Fund will
bear directly or indirectly. The management fee information contained in the
table is based on the maximum asset-based fees currently in effect and does not
include any deduction for expense reimbursements or waivers by the Fund's
Adviser. An administrative charge is also included in the expense information
contained in the table. See "Management of the Fund" for a more complete
description of the fees paid to the Adviser. The information disclosed in the
table for "Other Expenses" is based on expenses actually incurred by the Fund
during its last fiscal year ended October 31, 1996.
THE EXAMPLE WHICH IMMEDIATELY FOLLOWS THE TABLE USES THE "TOTAL FUND OPERATING
EXPENSES" FIGURE ABOVE AND ASSUMES IT WILL REMAIN CONSTANT OVER THE ILLUSTRATED
PERIOD. THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL FUND EXPENSES MAY BE GREATER OR LESSER THAN THOSE
SHOWN IN THE EXAMPLE OR IN THE TABLE.
6
<PAGE> 10
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. This information
has been derived from information provided in the Fund's financial statements
which have been examined by Tait, Weller & Baker, independent certified public
accountants. The Fund's Annual Report contains additional performance
information and is available free of charge upon request by calling the Fund at
800-262-6631.
YEAR ENDED OCTOBER 31,
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA
Net asset value at beginning of year $ 13.82 $ 13.23 $ 14.43 $ 14.00 $ 14.65
------- ------- ------- ------- -------
Income from investment operations:
Net investment income 0.22 0.17 0.11 0.17 0.20
Net realized and unrealized gain (loss) on
investments 2.31 1.93 (0.23) 0.80 0.56
------- ------- ------- ------- -------
Total from investment operations 2.53 2.10 (0.12) 0.97 0.76
------- ------- ------- ------- -------
Less distributions from:
Net investment income 0.06 0.16 0.13 0.22 0.24
Net realized gain on investments 0.73 1.35 0.95 0.32 1.17
------- ------- ------- ------- -------
Total distributions 0.79 1.51 1.08 0.54 1.41
------- ------- ------- ------- -------
Net asset value at end of year $ 15.56 $ 13.82 $ 13.23 $ 14.43 $ 14.00
======= ======= ======= ======= =======
TOTAL RETURN(1) 19.27% 17.04% (0.67)% 7.05% 5.83%
RATIOS/SUPPLEMENTAL DATA
Net assets at the end of year (in thousands) $60,230 $85,324 $80,941 $96,465 $97,076
Ratio of operating expenses to
average net assets 1.29% 1.31% 1.28% 1.24% 1.10%
Ratio of net investment income to
to average net assets 1.31% 1.21% 0.78% 0.19% 1.43%
Portfolio turnover rate 173% 119% 12% 45% 22%
Average commission rate (per share of security)(2) $0.0696 N/A N/A N/A N/A
<CAPTION>
1991 1990 1989 1988 1987
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA
Net asset value at beginning of year $ 11.88 $ 14.76 $ 12.12 $ 11.40 $ 14.71
------- ------- ------- ------- -------
Income from investment operations:
Net investment income 0.30 0.37 0.37 0.31 0.28
Net realized and unrealized gain (loss) on
investments 3.42 (1.48) 2.92 1.01 0.49
------- ------- ------- ------- -------
Total from investment operations 3.72 (1.11) 3.29 1.32 0.77
------- ------- ------- ------- -------
Less distributions from:
Net investment income 0.37 0.40 0.36 0.31 0.32
Net realized gain on investments 0.58 1.37 0.29 0.29 3.76
------- ------- ------- ------- -------
Total distributions 0.95 1.77 0.65 0.60 4.08
------- ------- ------- ------- -------
Net asset value at end of year $ 14.65 $ 11.88 $ 14.76 $ 12.12 $ 11.40
======= ======= ======= ======= =======
TOTAL RETURN(1) 33.58% (8.55)% 28.47% 12.23% 6.76%
RATIOS/SUPPLEMENTAL DATA
Net assets at the end of year (in thousands) $95,606 $76,780 $86,243 $88,658 $89,729
Ratio of operating expenses to
average net assets 0.97% 0.94% 0.95% 1.01% 0.94%
Ratio of net investment income to
to average net assets 2.21% 2.77% 2.76% 2.76% 2.14%
Portfolio turnover rate 38% 48% 50% 62% 56%
Average commission rate (per share of security)(2) N/A N/A N/A N/A N/A
</TABLE>
- --------------------
(1) Calculated without a sales charge.
(2) Average commission rate (per share of security) as required by amended
disclosure requirements effective September 1, 1995.
7
<PAGE> 11
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to seek long-term capital
appreciation. This investment objective is a fundamental policy of the Fund and
cannot be changed without stockholder approval. There can be no assurance the
Fund's objective will be achieved. In pursuit of its investment objective of
long-term capital appreciation, the Fund invests primarily in common stocks of
rapidly growing companies that have demonstrated the ability to gain market
share and achieve and maintain consistent profitability. The Fund may also
invest in preferred and convertible preferred stocks. Although the Fund's
investments are expected to be primarily in securities of U.S. issuers, it may
invest without limit in securities of foreign issuers. For temporary defensive
purposes, the Fund may invest to an unlimited extent in securities of the U.S.
Government, its agencies and instrumentalities. The Fund may also invest, to a
limited extent, in securities of other investment companies.
Although the Fund anticipates normally being substantially invested in
stocks, the Fund is permitted to invest up to 35% of its assets in bonds and
other fixed income securities and may invest without limit in such securities
during abnormal market conditions for temporary defensive purposes. The Fund's
fixed income investments may include securities of the U.S. Government, its
agencies and instrumentalities, corporate notes and bonds, commercial paper,
bankers' acceptances, and certificates of deposit. Fixed income securities
must be rated at least A by Standard & Poor's Corporation or Moody's Investors
Service, or deemed of comparable quality by the Adviser, at the time of
purchase by the Fund. A security held by the Fund which is downgraded below
such ratings will be sold or retained based on the Adviser's determination of
what is best for the Fund and its stockholders.
INVESTMENTS AND INVESTMENT PRACTICES
U.S. Government Securities - Securities of the U.S. Government, its
agencies and instrumentalities include instruments backed by the full faith and
credit of the U.S. Treasury, such as Treasury bills, notes and bonds and
obligations of the Government National Mortgage Association. Other such
instruments, including obligations of the Federal Home Loan Banks, Federal Farm
Credit Bank, Bank for Cooperatives, Federal Intermediate Credit Banks and the
Federal Land Bank, are guaranteed by the right of the issuer to borrow from the
U.S. Treasury. Still others, such as obligations of the Federal National
Mortgage Association, are supported by the discretionary authority of the U.S.
Government to purchase certain of the agency's obligations or, in the case of
agencies such as the Student Loan Marketing Association and the Tennessee
Valley Authority, are backed only by the credit of the issuing agency. For
investments not backed by the full faith and credit of the United States, the
investor must look principally to the agency issuing or guaranteeing the
obligation for ultimate repayment.
Options and Futures - The Fund may employ special investment practices
as a hedge against changes in the value of securities held in the Fund's
portfolio or securities it intends to purchase.
The Fund may purchase put and call options on stock and stock indexes
for hedging purposes. The Fund will not purchase a call or put option if as a
result the premium paid for the option together with premiums paid for all
other stock options and options on stock indexes then held by the Fund exceed
2% of the Fund's total net assets.
A call option gives the purchaser of the option, in return for premium
paid, the right to buy the underlying security at a specified price at any
point during the term of the option. A put option gives the
8
<PAGE> 12
purchaser the right to sell the underlying security at the exercise price
during the option period. In the case of an option on a stock index, the
option holder has the right to obtain, upon exercise of the option, a cash
settlement based on the difference between the exercise price and the value of
the underlying stock index.
The purchase of put and call options does involve certain risks.
Through investment in options, the Fund can profit from favorable movements in
the price of an underlying stock to a greater extent than if the Fund purchased
the stock directly. However, if the stock does not move in the anticipated
direction during the term of the option in an amount greater than the premium
paid for the option, the Fund may lose a greater percentage of its investment
than if the transaction were effected in the stock directly.
Generally, transactions in stock index options pose the same type of
risks as do transactions in stock options. Price movements in securities which
the Fund owns or intends to purchase probably will not correlate perfectly with
movements in the level of an index and, therefore, the Fund bears the risk of a
loss on an index option which may not completely offset movements in the price
of such securities.
The Fund may also (i) invest up to 5% of its total assets in stock index
futures contracts and options on stock index futures and (ii) engage in margin
transactions with respect to such investments.
A stock index futures contract is an agreement under which two parties
agree to take or make delivery of an amount of cash based on the difference
between the value of a stock index at the beginning and at the end of the
contract period. When the Fund enters into a stock index futures contract, it
must make an initial deposit, known as "initial margin", as a partial guarantee
of its performance under the contract. As the value of the stock index
fluctuates, the Fund may be required to make additional margin deposits, known
as "variation margin", to cover any additional obligation it may have under the
contract.
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 a
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.
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 in futures contracts and options on such contracts
to the extent that, immediately thereafter, the sum of its initial margin
deposits on open futures contracts and premiums paid for options, exceeds 5% of
the market value of the Fund's total assets. In addition, the Fund will not
enter into futures contracts and options on such contracts to the extent that
its outstanding obligations under these contracts would exceed 20% of the
Fund's total assets.
Successful use by the Fund of stock index futures contracts is subject
to certain special risk considerations. A liquid index futures market may not
be available when the Fund seeks to offset adverse market movements. In
addition, there may be an imperfect correlation between movements in the
securities included in the index and movements in the securities in the Fund's
portfolio. Successful use of stock index futures contracts and options on such
contracts is further dependent on the Adviser's ability to predict correctly
movements in the direction of the stock markets, and no assurance can be given
that its judgment in this respect will be correct. Risks in the purchase and
sale of stock index futures contracts are discussed
9
<PAGE> 13
further in the Statement of Additional Information.
Foreign Securities - Investment in foreign securities entails certain
special cost and risks. Although the Fund does not expect to invest
extensively in foreign securities, stockholders should be aware that such
investments often involve higher brokerage and custody costs, currency
conversion costs and longer settlement time. Other special factors regarding
foreign investing include thinner and more volatile trading markets; less
extensive information about securities, markets and issuers; lower levels of
government regulation; difficulties in enforcing obligations; different
accounting standards; fluctuations in values of foreign currencies against the
U.S. dollar; and the risk of negative government actions such as expropriation,
nationalization, imposition of withholding, confiscatory or other taxes,
currency blockages or restrictions on transfer.
Forward Foreign Currency Exchange Transactions - The Fund may enter into
forward foreign currency exchange contracts in an attempt to hedge against
adverse movements in the relative rates of exchange between the U.S. dollar and
the currencies in which any non-U.S. investments are denominated, or between
two foreign currencies. The Fund may enter into this type of contract with
respect to a specific transaction or as a hedge for the Fund's portfolio
positions. These contracts involve an obligation to purchase or sell a
specific currency at a specified future date at a specified price. These
contracts are traded in the interbank market conducted between currency traders
(generally large commercial banks) and their customers. Although the Fund
would enter into such a contract to minimize the risk of loss due to adverse
currency fluctuations, such a contract may also limit the extent to which the
Fund could gain from positive fluctuations. There can be no assurance that
these activities will be successful in protecting the Fund against negative
effects of currency fluctuation. For more information on foreign securities
and forward contracts, see the Statement of Additional Information.
INVESTMENT RESTRICTIONS
The Fund has adopted certain investment restrictions which, together
with the investment objective of the Fund, cannot be changed without approval
by holders of a majority of the Fund's outstanding voting shares. Such
majority is defined by the Investment Company Act of 1940 as the lesser of (i)
67% or more of the voting securities present in person or by proxy at a
meeting, if the holders of more than 50% of the outstanding voting securities
are present or represented by proxy, or (ii) more than 50% of the outstanding
voting securities. These restrictions, which are designed to enhance the
realization of the Fund's investment objective, provide, among other things,
that the Fund may not:
1. Engage in margin transactions or short sales, except that the
Fund may engage in margin transactions with respect to
transactions in stock index futures contracts and options on
stock index futures.
2. Invest more than 5% of the value of its total assets (at time of
investment) in the securities of any one issuer except the United
States Government and its instrumentalities.
3. Invest in companies for the purpose of exercising control of
management.
4. Borrow any amount in excess of 5% of the value of its total
assets less all liabilities not represented by senior securities
at the time the loan is made, or amounts in excess of 10% of the
gross assets of the Fund taken at cost, whichever is less, and
provided further that any
10
<PAGE> 14
such borrowings shall be undertaken only as a temporary measure
for extraordinary or emergency purposes. Normally the Fund will
borrow only to permit timely payment for shares liquidated by
stockholders for which it does not have ready funds to make
payment. While authorized to borrow, the Fund has never done so
and has no plans to do so.
5. Invest in securities of companies having a record of less than
three years continuous operation, if such purchase at the time
would cause more than 5% of the total assets to be invested in
the securities of such company or companies.
6. Purchase or retain securities of a company, if those officers or
directors of the Fund or the Adviser who individually own
beneficially more than 1/2 of 1% of the shares or securities of
such company together own beneficially more than 5% of the shares
or securities of such company.
7. Invest in commodities or commodity contracts except that the Fund
may enter into stock index futures contracts and options on stock
index futures contracts to the extent that, (a) immediately
thereafter, the sum of its initial margin deposits on such open
contracts and premiums paid for options on such futures contracts
does not exceed 5% of the market value of the Fund's total assets
and (b) its outstanding obligations under such contracts and
options does not exceed 20% of the Fund's total assets.
Any investment restriction which involves a maximum percentage of
securities or assets shall not be considered to be violated unless an excess
over the percentage occurs immediately after an acquisition of securities.
Additional investment restrictions of the Fund which may not be changed
without stockholder approval are found under the caption "Investment
Restrictions" in the Fund's Statement of Additional Information.
PERFORMANCE INFORMATION
The Fund may from time to time include figures indicating the Fund's
total return or average annual total return in advertisements or reports to
stockholders or prospective investors. 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 gain 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 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. 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.
MANAGEMENT OF THE FUND
The Fund is an open-end diversified management investment company,
commonly called a mutual fund. Through the purchase of shares of the Fund,
investors with goals similar to the investment objective of
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<PAGE> 15
the Fund can participate in the investment performance of the portfolio of
investments held by the Fund. The management and affairs of the Fund are
supervised by its Board of Directors.
ADVISER
Capstone Asset Management Company, a wholly-owned subsidiary of Capstone
Financial Services, Inc., acts as the Investment Adviser to the Fund. The
address of the Adviser is 5847 San Felipe, Suite 4100, Houston, Texas 77057.
The Adviser provides investment advisory and/or administrative services to four
other mutual funds: Capstone Government Income Fund, Capstone Intermediate
Government Fund, Capstone Nikko Japan Fund and Capstone New Zealand Fund (the
"Capstone Group"), pension and profit sharing accounts, corporations and
individuals. Total assets under management are approximately $1.4 billion.
Investment decisions for the Fund are made by the portfolio manager,
Albert P. Santa Luca, Ph.D. Dr. Santa Luca was appointed as co-manager in
October 1994 and assumed full responsibility in August, 1995. Dr. Santa Luca
began his investment career in 1984 at Team Bank/Texas American Bank by
managing common fund investing in midcap value and growth stocks, and managing
accounts for large charitable foundations, employee benefit plans and high net
worth individuals. In 1993 Team Bank/Team American Bank became BancOne --
BancOne Investment Advisors. Dr. Santa Luca was subsequently appointed as
back-up manager and, in 1994, fund manager for the One Group Small Company
Growth Fund, a $400 million small capitalization growth fund.
Pursuant to the terms of an investment advisory agreement which was
approved by stockholders on February 18, 1992, the Fund retains the Adviser to
(1) provide a program of continuous investment management for the Fund in
accordance with the Fund's investment objectives, policies and limitations, (2)
make investment decisions for the Fund, (3) place orders to purchase and sell
securities for the Fund, subject to the supervision of the Board of Directors,
and (4) provide administrative services for the Fund. In accordance with the
Fund's policy of allocating portfolio brokerage described in the Statement of
Additional Information, the Adviser is permitted to consider sales of Fund
shares as a factor in selecting broker-dealers to execute portfolio
transactions, subject to best execution, and may also place orders for Fund
portfolio transactions with the Fund's Distributor, TradeStar Investments, Inc.
and Williams MacKay Jordan & Co., Inc, broker-dealer affiliates of the Adviser.
The Fund pays all expenses incurred in the operation of the Fund other
than those borne by the Adviser under the Advisory Agreement. Expenses payable
by the Fund include: fees of directors who are not "interested persons" (as
defined in the 1940 Act) of the Adviser or its affiliates; Board of Director
meeting-related expenses of the directors and officers; expenses for legal and
auditing services; data processing and pricing services; costs of printing and
mailing proxies, stock certificates and stockholder reports; charges of the
custodian, transfer agent, registrar or dividend disbursing agent; expenses
pursuant to the Service and Distribution Plan; Securities and Exchange
Commission fees; membership fees in trade associations; fidelity bond coverage
for the Fund's officers; directors' and officers' errors and omissions
insurance coverage; interest; brokerage costs; taxes; expenses relating to
selling the Fund's shares in various states; litigation; and other
extraordinary or non-recurring expenses and other expenses properly payable by
the Fund.
For its services, the Adviser receives an annual fee on the basis of a
percentage of net assets. For the fiscal year ended October 31, 1996, the Fund
paid advisory fees equal to 0.71% of the average net assets of the Fund.
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The Fifth Third Bank of Cincinnati, Ohio performs accounting,
bookkeeping and pricing services for the Fund. For these services, Fifth Third
Bank receives a monthly fee from the Fund. Prior to February 10, 1997, the
Adviser provided these services and was reimbursed by the Fund for its costs.
The amount paid to the Adviser was not intended to include any profit, and was
in addition to the advisory fees.
DISTRIBUTOR
Pursuant to a Distribution Agreement with the Fund dated May 11, 1992,
Capstone Asset Planning Company (the "Distributor") is the principal
underwriter of the Fund and, acting as exclusive agent, sells shares of the
Fund to the public on a continuous basis.
The Fund has adopted a Service and Distribution Plan (the "Plan")
pursuant to which it uses its assets to finance activities relating to the
distribution of its shares to investors and provision of certain stockholder
services. The Plan permits payments to be made by the Fund to the Distributor
to reimburse it for expenditures incurred by it in connection with the
distribution of the Fund shares to investors and provision of certain
stockholder services including but not limited to the payment of compensation,
including incentive compensation, to securities dealers (which may include the
Distributor itself) and other financial institutions and organizations
(collectively, the "Service Organizations") to obtain various distribution
related and/or administrative services for the Fund. These services include,
among other things, processing new stockholder account applications, preparing
and transmitting to the Fund's Transfer Agent computer processable tapes of all
transactions by customers and serving as the primary source of information to
customers in answering questions concerning the Fund and their transactions
with the Fund. The Distributor is also authorized to engage in advertising,
the preparation and distribution of sales literature and other promotional
activities on behalf of the Fund. In addition, the Plan authorizes payment by
the Fund of the cost of preparing, printing and distributing Fund Prospectuses
and Statements of Additional Information to prospective investors and of
implementing and operating the Plan.
Under the Plan, payments made to the Distributor may not exceed an
amount computed at an annual rate of 0.25% of the average net assets of the
Fund. Of this amount, the Distributor may reallocate amounts up to 0.25% of
the Fund's average net assets to Service Organizations (which may include the
Distributor). Any amounts not so allocated will be retained by the Distributor
for the purposes described above. The Distributor is permitted to collect the
fees under the Plan on a monthly basis. Any expenditures incurred by the
Distributor in excess of the limitation described above during a given month
may be carried forward up to twelve months for reimbursement, subject always to
the 0.25% limit, and no interest or carrying charges will be payable by the
Fund on amounts carried forward. The Plan may be terminated by the Fund at any
time and the Fund will not be liable for amounts not reimbursed as of the
termination date.
The Plan was last approved by a majority of the Fund's directors,
including a majority of the directors who have no direct or indirect financial
interest in the operation of the Plan or any of its agreements ("Plan
Directors") on May 24, 1996. The Plan was approved by the Fund's stockholders
on February 18, 1992 and took effect on March 1, 1992. The Plan may be
continued from year to year, provided that such continuance is approved at
least annually by a vote of a majority of the Board of Directors, including a
majority of the Plan Directors.
The Glass-Steagall Act and other applicable laws currently prohibit
banks from engaging in the business of underwriting, selling or distributing
securities. Accordingly, unless such laws are changed, if the Fund engages
banks as Service Organizations, the banks would perform only administrative and
stockholder servicing functions. If a bank were prohibited from acting as a
Service Organization, alternative means for
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<PAGE> 17
continuing the servicing of such stockholders would be sought. State law may
differ from Federal law and banks and other financial institutions may be
required to be registered as broker-dealers to perform administrative and
stockholder servicing functions.
EXPENSES
The Fund's expenses are accrued daily and are deducted from its total
income before dividends are paid. The Fund's total operating expenses during
the fiscal year ended October 31, 1996 were 1.29% of its average net assets.
PURCHASING SHARES
Capstone Asset Planning Company (the "Distributor"), located at 5847 San
Felipe, Suite 4100, Houston, Texas 77057, is the principal underwriter of the
Fund and, acting as exclusive agent, sells shares of the Fund to the public on
a continuous basis. Edward L. Jaroski, a director and officer of the Fund, is
President and director of the Distributor and the Adviser. Most officers of
the Fund are also officers of the Adviser, the Distributor and their parent
company, Capstone Financial Services, Inc.
Shares of the Fund are sold in a continuous offering and may be
purchased on any business day through authorized investment dealers or directly
from the Fund's Distributor. Except for the Fund itself, only the Distributor
and investment dealers which have a sales agreement with the Distributor are
authorized to sell shares of the Fund. For further information, reference is
made to the caption "Distributor" in the Fund's Statement of Additional
Information.
Shares of the Fund are sold at net asset value, without a sales charge,
and will be credited to a stockholder's account at the net asset value next
computed after an order is received by the Distributor. The minimum initial
investment is $200, except for continuous investment plans which have no
minimum, and there is no minimum for subsequent purchases. 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.
At various times the Distributor may implement programs under which a
dealer's sales force may be eligible to win nominal awards for certain sales
efforts or recognition programs conforming to criteria established by the
Distributor, or participates in sales programs sponsored by the Distributor.
In addition, the Adviser and/or the Distributor in their discretion may from
time to time, pursuant to objective criteria established by the Adviser and/or
Distributor, sponsor programs designed to reward selected dealers for certain
services or activities which are primarily intended to result in the sale of
shares of the Fund. These programs will not change the price you pay for your
shares or the amount that the Fund will receive from such sale.
Payment for all orders to purchase Fund shares must be received by the
Fund's Transfer Agent within three business days after the order was placed.
Checks made payable to third parties will not be accepted.
INVESTING THROUGH AUTHORIZED DEALERS
If any authorized dealer receives an order of at least $200, the dealer
may contact the Distributor directly. Orders received by dealers by the close
of trading on the New York Stock Exchange on a business
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<PAGE> 18
day that are transmitted to the Distributor by 4:00 p.m. Central time on that
day will be effected at the net asset value per share determined as of the
close of trading on the New York Stock Exchange on that day. Otherwise, the
orders will be based on the next determined net asset value. It is the
dealer's responsibility to transmit orders so that they will be received by the
Distributor before 4:00 p.m. Central time.
After each investment, the stockholder and the authorized investment
dealer receive confirmation statements of the number of shares purchased and
owned.
PURCHASES THROUGH THE DISTRIBUTOR
An account may be opened by mailing a check or other negotiable bank
draft (payable to Capstone Growth Fund, Inc.) for $200 or more together with
the completed Investment Application Form to the Transfer Agent: Capstone
Growth Fund, Inc., c/o FPS Services, Inc., P.O. Box 61503, 3200 Horizon Drive,
King of Prussia, Pennsylvania 19406-0903. The $200 minimum initial investment
may be waived by the Distributor for plans involving continuing investments
(see "Stockholder Services"). There is no minimum for subsequent investments,
which may be mailed directly to the Transfer Agent. All such investments are
effected at the net asset value of Fund shares next computed following receipt
of payment by the Transfer Agent. Confirmations of the opening of an account
and of all subsequent transactions in the account are forwarded by the Transfer
Agent to the stockholder's address of record.
TELEPHONE PURCHASE AUTHORIZATION (Investing by Phone)
Stockholders who have completed the Telephone Purchase Authorization
section of the Investment Application Form may purchase additional shares by
telephoning the Fund's Transfer Agent at (800) 845-2340. The minimum telephone
purchase is $1,000 and the maximum is five times the net asset value of shares
(for which certificates have not been issued) held by the stockholder on the
day preceding such telephone purchase for which payment has been received. The
telephone purchase will be effected at the net asset value next computed after
receipt of the call by the Transfer Agent. Payment for the telephone purchase
must be received by the Transfer Agent within three business days after the
order is placed. If payment is not received within three business days, the
stockholder will be liable for all losses incurred as a result of the purchase.
INVESTING BY WIRE
Investors having an account with a commercial bank that is a member of
the Federal Reserve System may purchase shares of the Fund by requesting their
bank to transmit funds by wire to: United Missouri Bank KC NA, ABA #10-10-
00695, For: FPS Services, Inc. Account #98-7037-0719; Further Credit Capstone
Growth Fund, Inc. The investor's name and account number must be specified in
the wire.
Initial Purchases - Before making an initial investment by wire, an
investor must first telephone (800) 845-2340 to be assigned an account number.
The investor's name, account number, taxpayer identification or social security
number, and address must be specified in the wire. In addition, the investment
application which accompanies this Prospectus should be promptly forwarded to
Capstone Growth Fund, Inc., c/o FPS Services, Inc., P.O. Box 61503, 3200
Horizon Drive, King of Prussia, Pennsylvania 19406-0903.
Subsequent Purchases - Additional investments may be made at any time
through the wire procedures described above, which must include the investor's
name and account number. The investor's
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bank may impose a fee for investments by wire.
DISTRIBUTIONS AND TAXES
PAYMENT OPTIONS
Distributions (whether treated for tax purposes as ordinary income or
long-term capital gains) to stockholders of the Fund are paid in additional
shares of the Fund, with no sales charge, based on the Fund's net asset value
as of the close of business on the record date for such distributions.
However, a stockholder may elect on the application form which accompanies this
Prospectus to receive distributions as follows:
Option 1. To receive income dividends in cash and capital gain
distributions in additional Fund shares, or
Option 2. To receive all income dividends and capital gain distributions in
cash.
The Fund intends to pay any dividends from investment company taxable
income and distributions representing capital gain at least annually, usually
in November. The Fund will advise each stockholder annually of the amounts of
dividends from investment company taxable income and of net capital gain
distributions reinvested or paid to the stockholder during the calendar year.
If you select Option 1 or Option 2 and the U.S. Postal Service cannot
deliver your checks, or if your checks remain uncashed for six months, your
distribution checks will be reinvested in your account at the then current net
asset value and your election will be converted to the purchase of additional
shares.
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TAXES
The Fund intends to continue to qualify and elect to be treated as a
regulated investment company under the Federal tax law. In any taxable year in
which the Fund so qualifies and distributes at least 90% of its investment
company taxable income (which includes, among other items, dividends, interest,
and the excess of realized net short-term capital gain over realized net long-
term capital loss), the Fund generally will be relieved of Federal income tax
on its investment company taxable income and net capital gain (the excess of
realized net long-term capital gains over realized net short-term capital
losses) distributed to stockholders. Amounts not distributed on a timely basis
in accordance with a calendar year distribution requirement are also subject to
a nondeductible 4% excise tax. To prevent application of the excise tax, the
Fund intends to make its distributions in accordance with the calendar year
distribution requirement. 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 of record on a 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 in which the
distributions are declared, rather than the calendar year in which the
distributions are received.
Distributions from investment company taxable income are taxable to
stockholders as ordinary income. Distributions of the net capital gain
designated by the Fund as capital gain dividends are taxable as long-term
capital gains regardless of the length of time a stockholder may have held
shares of the Fund. The tax treatment of distributions treated as ordinary
income or capital gain will be the same whether the stockholder reinvests the
distributions in additional shares or elects to receive them in cash.
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Stockholders will be notified each year of the amounts and nature of
dividends and distributions including the amounts (if any) for that year which
have been designated as capital gain dividends.
Special tax rules may apply to the Fund's purchase of put and call
options, its acquisition of stock index futures, and its acquisition of options
on such futures. Such rules, among other things: (i) may affect whether
capital gains and losses from such transactions are considered to be short-term
or long-term; (ii) may have the effect of converting capital gains and losses
into ordinary income and losses; (iii) may have the effect of deferring losses
and/or accelerating the recognition of gains or losses; and (iv) for purposes
of qualifying as a regulated company, may limit the extent to which the Fund
will be able to engage in such transactions.
Upon the sale, redemption or other disposition of shares of the Fund, a
stockholder generally will realize a taxable gain or loss, depending upon his
basis in the shares. Such gain or loss will be treated as capital gain or loss
if the shares are capital assets in the stockholder's hands and generally will
be long-term or short-term, depending upon the stockholder's holding period for
the shares. Any loss realized on a sale or exchange will be disallowed to the
extent the shares disposed of are replaced (including shares acquired pursuant
to the reinvestment plan) 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. Any
loss realized by a stockholder on a disposition of Fund shares held by the
stockholder for six months or less will be treated as a long-term capital loss
to the extent of any capital gain dividends received by the stockholder with
respect to such shares.
The Fund may be required to withhold Federal income tax at the rate of
31% of all taxable distributions (including gross proceeds from the redemption
of Fund shares) payable to stockholders who fail to provide the Fund with their
correct taxpayer identification number or to make required certifications, or
where the Fund or the stockholder has been notified by the Internal Revenue
Service that the stockholder is subject to backup withholding. Corporate
stockholders and certain other stockholders specified in the Code generally are
exempt from such backup withholding. Backup withholding is not an additional
tax. Any amounts withheld may be credited against the stockholder's Federal
income tax liability.
Distributions also may be subject to additional state, local, and
foreign taxes depending upon each stockholder's particular situation. In
addition, foreign stockholders may be subject to Federal income tax rules that
differ significantly from those described above. Stockholders are advised to
consult their tax advisers with respect to the particular tax consequences to
them of an investment in the Fund.
REDEMPTION AND REPURCHASE OF SHARES
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 FPS Services, Inc., P.O. Box 61503, 3200 Horizon Drive, King of
Prussia, Pennsylvania 19406-0903. In addition, certain expedited redemption
methods described below are available. If stock certificates have been issued
for shares being redeemed, such certificates must accompany the written request
with the stockholder's signature guaranteed by an "eligible guarantor
institution", as defined in Rule 17Ad-15 under the Securities Exchange Act of
1934, which participates in a signature guarantee program. Eligible guarantor
institutions include banks, brokers, dealers, credit unions, national
securities exchanges, registered securities associations, clearing agencies and
savings associations. A broker-dealer guaranteeing signatures must be a member
of a clearing corporation or maintain net capital of at least $100,000. Credit
unions must be authorized to issue signature guarantees.
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<PAGE> 22
Signature guarantees will be accepted from any eligible guarantor institution
which participates in a signature guarantee program. No signature guarantees
for shares for which no certificates have been issued are required when an
application is on file at the Transfer Agent and payment is to be made to the
stockholder of record at the stockholder's address of record. However, if the
proceeds of the redemption are to be paid to someone other than the registered
holder, or to other than the stockholder's address of record, or if the shares
are to be transferred, the owner's signature must be guaranteed as specified
above. The redemption price shall be the net asset value per share next
computed after receipt of the redemption request. See "Determination of Net
Asset Value".
In addition, the Distributor is authorized as agent for the Fund to
offer to repurchase shares which are presented by telephone or telegraph to the
Distributor by authorized investment dealers. The repurchase price is the net
asset value per share next determined after the request is received. See
"Determination of Net Asset Value". Broker-dealers may charge for their
services in connection with the repurchase, but the Distributor and its
affiliates will not charge any fee for such repurchase. Payment for shares
presented for repurchase or redemption by authorized investment dealers will be
made within seven days after receipt by the Transfer Agent of a written notice
and/or certificate in proper order.
The Fund reserves the right to pay any portion of redemption requests in
excess of $1 million in readily marketable securities from the Fund's
portfolio. In this case, the stockholder may incur brokerage charges on the
sale of the securities.
The right of redemption and payment of redemption proceeds are subject
to suspension for any period during which the New York Stock Exchange is
closed, other than customary weekend and holiday closings, or when trading on
the New York Stock Exchange is restricted as determined by the Securities and
Exchange Commission; during any period when an emergency as defined by the
rules and regulations of the Securities and Exchange Commission exists; or
during any period when the Securities and Exchange Commission has by order
permitted such suspension. The Fund will not mail redemption proceeds until
checks (including certified checks or cashier's checks) received for the shares
purchased have cleared, which can be as long as 15 days.
The value of shares on repurchase or redemption may be more or less than
the investor's cost depending upon the market value of the Fund's portfolio
securities at the time of redemption. No redemption fee is charged for the
redemption of shares.
EXPEDITED TELEPHONE REDEMPTION
A stockholder redeeming at least $1,000 of shares (for which
certificates have not been issued), and who has authorized expedited redemption
on the application form filed with the Transfer Agent may at the time of such
redemption request that funds be mailed or wired to the commercial bank or
registered broker-dealer he has previously designated on the application form
by telephoning the Transfer Agent at (800) 845-2340. Redemption proceeds will
be sent on the next business day following receipt of the telephone redemption
request. If a stockholder seeks to use an expedited method of redemption of
shares recently purchased by check, the Fund may withhold the redemption
proceeds until it is reasonably assured of the collection of the check
representing the purchase. The Fund, Distributor and Transfer Agent reserve
the right at any time to suspend or terminate the expedited redemption
procedure or to impose a fee for this service. During periods of unusual
economic or market changes, stockholders may experience difficulties or delays
in effecting telephone redemptions.
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When exchange or redemption requests are made by telephone, the Fund has
procedures in place designed to give reasonable assurance that such telephone
instructions are genuine, including recording telephone calls and sending
written confirmations of transactions. The Fund will not be liable for losses
due to unauthorized or fraudulent telephone transactions unless it does not
follow such procedures, in which case it may be liable for such losses.
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 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 per share is computed by deducting total
liabilities from total assets of the Fund and dividing the remainder by the
total number of shares outstanding. The net asset value so computed will be
used for all purchase orders and redemption requests received between such
computation and the preceding computation.
Portfolio securities listed on an exchange or quoted on a national
market system are valued at the last sales price. Other securities are valued
at the mean between the most recent bid and asked prices. In the event a
listed security is traded on more than one exchange, it is valued at the last
sale price on the exchange on which it is principally traded. If there are no
transactions in a security during the day, it is valued at the mean between the
most recent bid and asked price. However, debt securities (other than short-
term obligations) including listed issues, may be 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.
For information concerning pricing of financial futures, see "Determination of
Net Asset Value" in the Fund's Statement of Additional Information. 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.
All portfolio securities, except options on stock and stock indexes and
except for stock index futures and options thereon, are valued as of the close
of regular trading on the New York Stock Exchange (which is currently 4:00 p.m.
Eastern time). Options on stock and stock indexes traded on national
securities exchanges, and stock index futures and options thereon, which are
traded on commodities exchanges, are valued at their last daily settlement
prices as of the close of such exchanges (which is currently 4:15 p.m. Eastern
time).
STOCKHOLDER SERVICES
Capstone Growth Fund, Inc. provides its stockholders with a number of
services and conveniences designed to assist investors in the management of
their investments. These stockholder services include the following:
TAX-DEFERRED RETIREMENT PLANS
Shares may be purchased by virtually all types of tax-deferred
retirement plans. The Distributor or its affiliates make available plan forms
and/or custody agreements for the following:
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o Individual Retirement Accounts (for individuals and their non-
employed spouses who wish to make limited tax deductible
contributions to a tax-deferred account for retirement); and
o Simplified Employee Pension Plans.
Dividends and distributions will be automatically reinvested without a
sales charge. For further details, including fees charged, tax consequences
and redemption information, see the specific plan documents which can be
obtained from the Fund.
Investors should consult with their tax adviser before establishing any
of the tax-deferred retirement plans described above.
EXCHANGE PRIVILEGE
Shares of the Fund which have been outstanding 15 days or more may be
exchanged for shares of other Capstone Funds at a price based on their
respective net asset values with no sales or administrative charge. A
stockholder requesting such an exchange will be sent a current prospectus for
the fund into which the exchange is requested. Shares held less than 15 days
cannot be exchanged; such shares will be redeemed at the next computed net
asset value.
Purchases, redemptions and exchanges should be made for investment
purposes only. A pattern of frequent exchanges, purchases and sales may be
deemed abusive by the Adviser and, at the discretion of the Adviser, can be
limited by the Fund's refusal to accept further purchase and/or exchange orders
from the investor. Although the Adviser will consider all factors it deems
relevant in determining whether a pattern of frequent purchases, redemptions
and/or exchanges by a particular investor is abusive and not in the best
interests of the Fund or its other stockholders, as a general policy investors
should be aware that engaging in more than one exchange or purchase-sale
transaction during any thirty-day period with respect to a particular fund may
be deemed abusive and therefore subject to the above restrictions.
An exchange of shares is treated for Federal income tax purposes as a
sale of shares given in exchange and the stockholders may, therefore, realize a
taxable gain or loss. The exchange privilege may be exercised only in those
states where shares of the fund for which shares held are being exchanged may
be legally sold, and the privilege may be amended or terminated upon 60 days'
notice to stockholders.
The stockholder may exercise the following exchange privilege options:
Exchange by Mail - Stockholders may mail a written notice
requesting an exchange to the Fund's Transfer Agent.
Exchange by Telephone - Stockholders must authorize telephone
exchange on the application form filed with the Transfer Agent to
exchange shares by telephone. Telephone exchanges may be made
from 9:30 a.m. to 4:00 p.m. Eastern time, Monday through Friday,
except holidays. If certificates have been issued to the
investor, this procedure may be utilized only if he delivers his
certificates, duly endorsed for transfer, to the Transfer Agent
prior to giving telephone instructions. During periods of
unusual economic or market changes, stockholders may experience
difficulties or delays in effecting exchanges over the telephone.
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<PAGE> 25
When exchange or redemption requests are made by telephone, the Fund has
procedures in place designed to give reasonable assurance that such telephone
instructions are genuine, including recording telephone calls and sending
written confirmations of transactions. The Fund will not be liable for losses
due to unauthorized or fraudulent telephone transactions unless it does not
follow such procedures, in which case it may be liable for such losses.
PRE-AUTHORIZED PAYMENT
A stockholder who has completed the Pre-Authorized Payment section of
the Investment Application Form may arrange to make regular monthly investments
of $25 or more automatically from his checking account by authorizing the
Fund's Transfer Agent to withdraw the payment from his checking account.
SYSTEMATIC WITHDRAWAL PLAN
Investors may open a withdrawal plan providing for withdrawals of $50 or
more monthly, quarterly, semi-annually or annually if they have made a minimum
investment of $5,000 in shares of the Fund. The minimum amount which may be
withdrawn pursuant to this plan is $50.
These payments do not represent a yield or return on investment and may
constitute return of initial capital. In addition, such payments may deplete
or eliminate the investment. Stockholders cannot be assured that they will
receive payment for any specific period because payments will terminate when
all shares have been redeemed. The number of such payments will depend
primarily upon the amount and frequency of payments and the yield on the
remaining shares. Under this plan, any distributions must be reinvested in
additional shares at net asset value.
The Systematic Withdrawal Plan is voluntary, flexible, and under the
stockholder's control and direction at all times, and does not limit or alter
the stockholder's right to redeem shares. Such Plan may be terminated in
writing at any time by either the stockholder or the Fund. The cost of
operating the Systematic Withdrawal Plan is borne by the Fund.
GENERAL INFORMATION
The Fund is an open-end diversified management investment company, as
defined in the Investment Company Act of 1940, as amended. It was incorporated
in New Jersey in 1952 and merged into a Pennsylvania corporation in 1967.
Effective May 11, 1992 the Fund was reorganized as a Maryland corporation and
its name was changed from U.S. Trend Fund, Inc. to Capstone U.S. Trend Fund,
Inc. The Fund's name was changed to Capstone Growth Fund, Inc. effective
September 6, 1994, upon approval by the Fund's stockholders at a special
meeting held on August 25, 1994.
The Fund's authorized capitalization consists of twenty-five million
shares of $0.001 par value common stock. There is no other series or class of
security outstanding. All shares have equal voting and liquidation rights and
have one vote per share. Voting rights are non-cumulative, which means that
holders of more than 50% of the shares voting for the election of directors may
elect 100% of the directors if they choose to do so, and in such event the
holders of the remaining less than 50% of the shares voting for the directors
will not be able to elect any directors. All shares have equal dividend
rights, are fully paid, nonassessable and freely transferable and have no
conversion, pre-emptive or subscription rights. Fractional shares have the
same rights, pro rata, as full shares.
If additional series or classes are added, on all matters submitted to
stockholder vote, all shares of the Fund then issued and outstanding,
irrespective of series or class, will be voted in the aggregate and not by
individual series or class except (i) when required by the Investment Company
Act of 1940, shares will be voted by individual series or classes, and (ii)
when a matter is determined by the directors to affect less than all of the
Fund's series, then only holders of shares of the affected series or class will
be entitled to vote on such matter.
As of February 20, 1997, PliFunds Investment Plans owned approximately
11.38% of the outstanding shares of the Fund.
22
<PAGE> 26
The Fund's securities are held by The Fifth Third Bank, Cincinnati,
Ohio, under a Custodian Agreement with the Fund. FPS Services, Inc. acts as
both Transfer Agent and dividend paying agent for the Fund.
Inquiries by stockholders of the Fund should be addressed to the Fund at
its address stated on the cover page of this Prospectus.
ANNUAL MEETING
The Fund is not required to hold an annual meeting of its stockholders;
however, stockholders have the right to require the Secretary of the Fund to
call a stockholders' meeting upon the written request of stockholders entitled
to vote not less than ten percent of all votes entitled to be cast at such
meeting, provided that (1) such request shall state the purposes of such
meeting and the matters proposed to be acted on, and (2) the stockholders
requesting such meeting shall have paid to the Fund the reasonably estimated
cost of preparing and mailing the notice thereof, which the Secretary shall
determine and specify to such stockholders. No meeting shall be called upon
the request of stockholders to consider any matter which is substantially the
same as a matter voted upon at any special meeting of the stockholders held
during the preceding twelve months, unless requested by the holders of a
majority of all shares entitled to be voted at such meeting.
23
<PAGE> 27
CAPSTONE GROWTH FUND, INC.
(FORMERLY CAPSTONE U.S. TREND FUND, INC.)
STATEMENT OF ADDITIONAL INFORMATION
FEBRUARY 28, 1997
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 28, 1997. 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
<TABLE>
<CAPTION>
Page
----
<S> <C>
General Information . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Investment Restrictions . . . . . . . . . . . . . . . . . . . . . . . . . 2
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Performance Information . . . . . . . . . . . . . . . . . . . . . . . . . 7
Directors and Executive Officers . . . . . . . . . . . . . . . . . . . . 8
Investment Adviser . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Distributor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Portfolio Transactions and Brokerage . . . . . . . . . . . . . . . . . . 12
Determination of Net Asset Value . . . . . . . . . . . . . . . . . . . . 14
How to Buy and Redeem Shares . . . . . . . . . . . . . . . . . . . . . . 14
Dividends and Distributions . . . . . . . . . . . . . . . . . . . . . . . 15
Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Control Persons and Principal Holders of Securities . . . . . . . . . . . 18
Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . 19
</TABLE>
<PAGE> 28
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.
2
<PAGE> 29
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.
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 173% for the fiscal year ended October 31, 1996 and 119%
for the fiscal year ended October 31, 1995.
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.
3
<PAGE> 30
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 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
4
<PAGE> 31
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 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
5
<PAGE> 32
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 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.
6
<PAGE> 33
PERFORMANCE INFORMATION
The Fund may from time to time include figures indicating the Fund's
total return or average annual total return in advertisements or reports to
stockholders or prospective investors. 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 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:
P (1 + T)(n)= 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, 1996 the Fund's
average annual total return was 19.27%, 9.45% and 11.44%, 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, 1996 the Fund's total return was 19.27%, 57.08%
and 195.38%, respectively.
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.
7
<PAGE> 34
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 (50), 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 (66), Director. c/o Search Capital Group, Inc., 700 N.
Pearl Street, Suite 400, L.B. 401, Dallas, Texas 75201-2809.
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
Advisors, L.P., 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); The Flagship Group, Inc. (vertical market
microcomputer software); Marketing Mercadeo International (public
relations and marketing consultants); MaxServ, Inc. (appliance
repair database systems); MESBIC Ventures, Inc. (minority
enterprise small business investment company); OpenConnect Systems,
Inc. (computer networking hardware and software); PhaseOut of
America, Inc. (smoking cessation products); and Search Capital
Group, Inc. (financial services).
JOHN R. PARKER (50), Director. P.O. Box 42, Woodbury, Vermont 05681.
Consultant and private investor (since 1990); Director of Nova
Natural Resources (oil, gas, minerals); Director of other Capstone
Funds; formerly Senior Vice President of McRae Capital Management,
Inc. (1991-1995); and registered representative of Rickel &
Associates (1988-1991).
BERNARD J. VAUGHAN (68), Director. 113 Bryn Mawr Avenue, Bala Cynwyd,
Pennsylvania 19004. Director of other Capstone Funds; formerly
Vice President of Fidelity Bank (1979-1993).
ALBERT P. SANTA LUCA (47), 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).
DAN E. WATSON (48), Executive Vice 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.
- ---------------
* Director who is an interested person as defined in the Investment Company
Act of 1940 because of his relationship to the Adviser and Distributor.
8
<PAGE> 35
IRIS R. CLAY (44), Secretary. 5847 San Felipe, Suite 4100, Houston, Texas
77057. Secretary (since February 1996), Assistant Vice President
(1994-1996) and Assistant Secretary (1990-1994) of Capstone
Financial Services, Inc., Capstone Asset Management Company and
Capstone Asset Planning Company; Officer of other Capstone Funds.
NORMA R. YBARBO (32), Assistant Secretary. 5847 San Felipe, Suite 4100,
Houston, Texas 77057. Assistant Compliance Officer (since 1994),
Compliance Analyst (1993-1994) and Compliance Assistant (1987-1993)
of Capstone Financial Services, Inc.; Officer of other Capstone
Funds.
LINDA G. GIUFFRE (35), Treasurer. 5847 San Felipe, Suite 4100, Houston,
Texas 77057. Vice President and Treasurer (since February 1996) of
Capstone Financial Services, Inc., Capstone Asset Management
Company and Capstone Asset Planning Company; Treasurer (1990-1996)
and Secretary (1994-1996) of Capstone Financial Services, Inc. and
Capstone Asset Management Company; Treasurer (1990-1996) and
Secretary (1995-1996) of Capstone Asset Planning Company; 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 $250 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, 1996, the Fund paid or accrued for the account of its officers and
directors, as a group for services in all capacities, a total of $12,500.
The following table represents the fees paid during the 1996 calendar year
to the directors of the Fund and the total compensation each director received
during that period from the Capstone Funds complex.
COMPENSATION TABLE
<TABLE>
<CAPTION>
Total
Compensation
From
Aggregate Pension or Registrant
Compensation Retirement Estimated Annual and Fund
Name of Person, From Benefits Accrued Benefits UponComplex Paid
Position Registrant* As Part of Fund Retirement to Trustees
- ---------------- ---------------- ----------------- ------------------- ------------------
<S> <C> <C> <C>
James F. Leary, Director $2,750 $0 $0 $4,500(2)
John R. Parker, Director 3,000 0 0 5,000(2)
Philip C. Smith(1), Director 3,000 0 0 9,250(2),(3),(4)
Bernard J. Vaughan, Director 3,000 0 0 8,000(2),(3)
</TABLE>
- ---------------
* Fund does not pay deferred compensation.
(1) Resigned from Board effective December 31, 1996
(2) Director of Capstone Fixed Income Series, Inc.
(3) Trustee of Capstone International Series Trust
(4) Director of Medical Research Investment Fund, Inc.
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<PAGE> 36
INVESTMENT ADVISER
Pursuant to the terms of an 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.
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, 1996, 1995 and
1994, the Fund paid investment advisory fees in the amounts of $484,337,
$560,434 and $623,303, respectively. As a percentage of the average net assets
of the Fund, the investment advisory fee was .71%, .69% and .68%, respectively,
for each of those years.
The Fifth Third Bank of Cincinnati, Ohio performs accounting,
bookkeeping and pricing services for the Fund. For these services, Fifth Third
Bank receives a monthly fee from the Fund. Prior to February 10, 1997, the
Adviser provided these services and was reimbursed by the Fund for its costs.
The amount paid to the Adviser was not intended to include any profit, and was
in addition to the advisory fees.
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 reduced pro rata (but not below
zero) to the extent necessary to comply with such expense limitations. Due to
recent Federal and state regulations, such state expense limitations are no
longer applicable to the Fund.
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
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<PAGE> 37
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 from year to year
provided its renewal is specifically approved at least annually (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: Albert P. Santa Luca, Dan E. Watson,
Edward L. Jaroski, Linda G. Giuffre, Iris R. Clay and Norma R. Ybarbo. (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. Effective August 21,
1995, the front end sales load applicable to sales of the Fund's shares was
eliminated. 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
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 years ended October 31, 1995 and 1994, the Distributor earned
$5,056 and $1,585, respectively, 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.
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
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<PAGE> 38
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 $170,762 in 12b-1 fees during the fiscal year
ended October 31, 1996. Of this amount, approximately $2,000 was paid to
outside Service Organizations and the balance was retained by the Distributor
as reimbursement of distribution-related expenses including, but not limited
to: compensation of Capstone employees who engage in or support the marketing
and servicing efforts on behalf of the Fund (approximately $79,200); printing
of advertising materials, prospectuses and financial reports distributed to
prospective investors (approximately $45,500); postage and mailing expenses
(approximately $17,700); and other miscellaneous costs and expenses incurred in
the operation of the Plan (approximately $23,750).
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 May 24,
1996. 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 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
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<PAGE> 39
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 MacKay Jordan & Co., Inc. ("WMJ"), broker-dealer affiliates of the
Adviser. WMJ 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. The percentage of the aggregate
dollar amount of transactions involving the payment of a brokerage commission
effected through WMJ during the fiscal year ended October 31, 1996 was 0.33%.
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, 1996, the Fund incurred
brokerage commissions of $252,934, which represented 0.37% of the Fund's
average net assets. Securities transactions effected through brokers who
furnished the Fund with statistical, research and advisory information amounted
to $190,545,200 (100% of the aggregate dollar amount of transactions executed
with a commission), and commissions paid by the Fund on these trades totaled
$252,934 (100% of total commissions). The Fund also executed trades in the
amount of $12,737,613 in which a "mark-up" (the dealer's profit) was included
in the price of the securities.
During the fiscal years ended October 31, 1995 and 1994, the Fund paid
$311,645 and $108,908, respectively, in brokerage commissions on portfolio
trades. During these periods, CAPCO received no brokerage commissions.
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<PAGE> 40
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 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 without a sales
charge 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 may charge a fee for
this service in addition to the Fund's net asset value.
Shares will be credited to a stockholder's account at the net asset
value next computed after an order is received by the Distributor. 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 FPS Services, Inc., P.O. Box 61503, 3200 Horizon Drive, King of
Prussia, Pennsylvania 19406-0903. In addition, certain expedited redemption
methods are available. See "Redemption and Repurchase of Shares" in the
Prospectus.
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<PAGE> 41
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 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 its net capital gains, 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.
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<PAGE> 42
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, and are not eligible for the
dividends received deduction.
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 paid to them by the Fund.
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
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<PAGE> 43
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 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
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<PAGE> 44
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 ordinary income
dividends 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 February 20, 1997, PLIFunds Investment Plans, 5847 San Felipe,
Suite 4100, Houston, Texas 77057 owned of record and beneficially 11.38% 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, Pennsylvania 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.
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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. including the portfolio of investments, as of
October 31, 1996 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 five years in the
period then 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 disclosure in the financial
statements. Our procedures included confirmation of securities owned as of
October 31, 1996 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, 1996, the results of
its operations, changes in its net assets and financial highlights for each of
the years presented, in conformity with generally accepted accounting
principles.
Tait, Weller & Baker
Philadelphia, Pennsylvania
November 18, 1996 (except for Note 6 as to which the date is November 25, 1996)
19
<PAGE> 46
CAPSTONE GROWTH FUND, INC.
PORTFOLIO OF INVESTMENTS - OCTOBER 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARKET
VALUE PERCENTAGE OF
COMMON STOCKS - 92.82% SHARES (NOTE 1-A) NET ASSETS
- ---------------------- ------ ---------- ----------
<S> <C> <C> <C>
COMMERCIAL SERVICES (0.79%)
W. W. Grainger, Inc ........................................ 6,400 $ 474,4000.79%
CONSUMER DURABLES (2.01%)
Eastman Kodak Co. .......................................... 8,000 638,000 1.06
General Motors Corp. ....................................... 10,600 571,075 0.95
--------- ----
1,209,075 2.01
CONSUMER NON-DURABLES (12.26%)
Anheuser Busch ............................................. 10,000 385,000 0.64
Campbell Soup Co. .......................................... 6,900 552,000 0.92
Coca-Cola Company .......................................... 19,000 959,500 1.59
Colgate-Palmolive Co. ...................................... 5,500 506,000 0.84
Gillette Co. ............................................... 5,800 433,550 0.72
Kimberly-Clark Corp. ....................................... 6,000 559,500 0.93
Pepsico, Inc ............................................... 18,800 556,950 0.93
Philip Morris Companies, Inc ............................... 13,500 1,250,437 2.08
Proctor & Gamble Co. ....................................... 10,400 1,029,600 1.71
Sara Lee Corp. ............................................. 14,000 497,000 0.82
VF Corp. ................................................... 10,000 653,750 1.08
--------- ----
7,383,287 12.26
CONSUMER SERVICES (3.55%)
Gannett Co. ................................................ 7,500 569,062 0.94
Hilton Hotels Corp. ........................................ 16,000 486,000 0.81
McDonald's Corp. ........................................... 11,500 510,313 0.85
Tribune Co. ................................................ 7,000 572,250 0.95
--------- ----
2,137,625 3.55
ELECTRONIC TECHNOLOGY (9.25%)
Boeing Co. ................................................. 3,500 333,812 0.56
Harris Corp. ............................................... 8,800 551,100 0.92
Hewlett-Packard Co. ........................................ 16,000 706,000 1.17
Intel Corp. ................................................ 11,100 1,219,613 2.03
Int'l Business Machines Corp. .............................. 5,000 645,000 1.07
Litton Industries, Inc ..................................... 9,400 421,825 0.70
Lockheed Martin Corp. ...................................... 5,000 448,125 0.74
Rockwell International ..................................... 10,000 550,000 0.91
United Technologies Corp. .................................. 5,400 695,250 1.15
--------- ----
5,570,725 9.25
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
20
<PAGE> 47
CAPSTONE GROWTH FUND, INC.
PORTFOLIO OF INVESTMENTS - OCTOBER 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARKET
SHARES OR VALUE PERCENTAGE OF
PAR VALUE (NOTE 1-A) NET ASSETS
--------- ---------- ----------
ENERGY MINERALS (9.57%)
- -----------------------
<S> <C> <C> <C>
Amoco, Inc. ..................................................... 6,000 454,500 0.76
Atlantic Richfield Co. .......................................... 6,300 834,750 1.38
Chevron Corp. ................................................... 12,000 789,000 1.31
Exxon Corp. ..................................................... 6,000 531,750 0.88
Mobil Corp. ..................................................... 7,000 817,250 1.36
Royal Dutch Petroleum Co. ....................................... 8,000 1,323,000 2.19
Texaco Inc. ..................................................... 10,000 1,016,250 1.69
---------- -----
5,766,500 9.57
FINANCE (17.32%)
American Express Co. ............................................ 15,000 $ 705,0001.17%
American International Group .................................... 6,100 662,612 1.10
BankAmerica Corp. ............................................... 8,000 732,000 1.22
Bankers Trust NY Corp. .......................................... 8,700 735,150 1.22
Chase Manhattan Corp. ........................................... 8,500 728,875 1.21
CIGNA Corp. ..................................................... 5,000 652,500 1.08
Citicorp ........................................................ 8,200 811,800 1.35
General Re Corp. ................................................ 5,000 736,250 1.22
Golden West Financial Corp. ..................................... 15,000 973,125 1.62
J. P. Morgan & Co. .............................................. 6,000 518,250 0.86
Marsh & McLennan Corp. .......................................... 6,700 697,637 1.16
NationsBank Corp. ............................................... 7,500 706,875 1.17
Republic NY Corp. ............................................... 8,000 610,000 1.01
Suntrust Banks, Inc ............................................. 11,000 512,875 0.85
Travelers Group, Inc. ........................................... 12,000 651,000 1.08
---------- -----
10,433,949 17.32
HEALTH SERVICES (0.74%)
Bergen Brunswig Corp. Class A ................................... 14,200 445,525 0.74
HEALTH TECHNOLOGY (8.17%)
Abbott Laboratories ............................................. 11,900 602,438 1.00
American Home Products Co. ...................................... 7,700 471,625 0.78
Bristol-Myers Squibb Co. ........................................ 6,300 666,225 1.11
Eli Lilly & Co. ................................................. 10,000 705,000 1.17
Johnson & Johnson ............................................... 13,500 664,875 1.10
Merck & Co., Inc ................................................ 15,000 1,108,125 1.84
Pfizer, Inc ..................................................... 8,500 703,375 1.17
---------- -----
4,921,663 8.17
INDUSTRIAL SERVICES (0.97%)
Schlumberger, Ltd ............................................... 5,900 584,838 0.97
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
21
<PAGE> 48
CAPSTONE GROWTH FUND, INC.
PORTFOLIO OF INVESTMENTS - OCTOBER 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARKET
SHARES OR VALUE PERCENTAGE OF
PAR VALUE (NOTE 1-A) NET ASSETS
--------- ---------- ----------
<S> <C> <C> <C>
PROCESS INDUSTRIES (4.46%)
Dow Chemical Co. ................................................ 9,000 699,750 1.16
Ei Dupont De Nemours & Co. ...................................... 9,600 890,400 1.48
Mead Corp. ...................................................... 10,900 618,575 1.03
Rohm & Haas Co. ................................................. 6,700 478,213 0.79
--------- ----
2,686,938 4.46
PRODUCER MANUFACTURING (9.43%)
Armstrong World Industries ...................................... 6,300 420,525 0.70
Caterpillar Co. ................................................. 6,100 418,612 0.70
Emerson Electric Co. ............................................ 7,000 623,000 1.03
General Electric Co. ............................................ 17,000 1,644,750 2.73
Illinois Tool Works, Inc ........................................ 5,900 414,475 0.69
Johnson Controls, Inc ........................................... 6,500 474,500 0.79
Minnesota Mining & Manufacturing Co. ............................ 8,900 681,963 1.13
Olin Corp. ...................................................... 10,400 442,000 0.73
Pitney Bowes Corp. .............................................. 10,000 558,750 0.93
--------- ----
5,678,575 9.43
RETAIL TRADE (5.26%)
Harcourt General, Inc ........................................... 11,800 587,050 0.98
Home Depot Inc .................................................. 15,000 821,250 1.36
Sears Roebuck & Co. ............................................. 10,900 527,288 0.88
Walgreen Co. .................................................... 15,000 566,250 0.94
Wal-Mart Stores ................................................. 25,000 665,625 1.10
--------- ----
3,167,463 5.26
TECHNOLOGY SERVICES (4.26%)
Automatic Data Processing ....................................... 14,300 595,237 0.99
Computer Associates Int'l Inc ................................... 10,000 591,250 0.98
Microsoft Corp.* ................................................ 7,000 960,750 1.60
Oracle Corp.* ................................................... 9,900 418,894 0.69
--------- ----
2,566,131 4.26
TRANSPORTATION (1.27%)
CSX Corp. ....................................................... 11,000 474,375 0.79
Southwest Airlines Co. .......................................... 13,000 292,500 0.48
--------- ----
766,875 1.27
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
22
<PAGE> 49
CAPSTONE GROWTH FUND, INC.
PORTFOLIO OF INVESTMENTS - OCTOBER 31, 1996
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARKET
SHARES OR VALUE PERCENTAGE OF
PAR VALUE (NOTE 1-A) NET ASSETS
--------- ---------- ----------
<S> <C> <C> <C>
UTILITIES (3.51%)
AT&T Corp. ......................................................... 10,000 350,000 0.58
Ameritech Corp. .................................................... 13,500 739,125 1.23
Bellsouth Corp. .................................................... 12,300 501,225 0.83
Northern Telecom Limited ........................................... 8,000 521,000 0.87
----------- -----------
2,111,350 3.51
TOTAL COMMON STOCKS (COST $49,596,061) 55,904,919 92.82
CORPORATE BONDS - 0.17%
Ford Holdings, Inc., 9.25%, 07/15/97 ............................... 50,000 51,088 0.08
Philip Morris, Inc., 9.25%, 12/01/97 ............................... 50,000 51,620 0.09
----------- -----------
TOTAL CORPORATE BONDS (COST $98,694) 102,708 0.17
SHORT-TERM CORPORATE NOTE - 4.15%
American Express, 5.20%, 11/08/96 (Cost $2,501,447) ................ 2,500,000 2,501,447 4.15
TOTAL INVESTMENTS (COST $52,196,202) 58,509,074 97.14
OTHER ASSETS, LESS LIABILITIES 1,720,921 2.86
----------- -----------
NET ASSETS $60,229,995 100.00%
=========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
23
<PAGE> 50
CAPSTONE GROWTH FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES OCTOBER 31, 1996
- --------------------------------------------------------------------------------
ASSETS:
<TABLE>
<S> <C>
Investments in securities at market value (identified cost $52,196,202) (Note 1-A) . . . . . . $58,509,074
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,132,222
Receivables:
Dividends and interest . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 59,650
Capital stock sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,275 64,925
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,706,221
------------
LIABILITIES:
Payables:
Investments purchased . . . . . . . . . . . . . . . . . . . . . . . . . . . 383,200
Capital stock redeemed . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,026 390,226
Accrued advisory and administration fees . . . . . . . . . . . . . . . . . . . . . . . . . . . 38,783
Other accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47,217
------------
Total Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 476,226
------------
NET ASSETS: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 60,229,995
============
NET ASSET VALUE PRICE PER SHARE: ($60,229,995 divided by 3,871,038 shares outstanding)
$.001 par value, 25,000,000 shares authorized . . . . . . . . . . . . . . . . . . . . $ 15.56
============
SOURCE OF NET ASSETS:
Paid in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 44,247,570
Undistributed net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 863,940
Accumulated net realized gain on investments . . . . . . . . . . . . . . . . . . . . . . . . . 8,805,613
Net unrealized appreciation of investments . . . . . . . . . . . . . . . . . . . . . . . . . . 6,312,872
------------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 60,229,995
============
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
24
<PAGE> 51
CAPSTONE GROWTH FUND, INC.
STATEMENT OF OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 1996
- --------------------------------------------------------------------------------
INVESTMENT INCOME:
<TABLE>
Income:
<S> <C> <C>
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,200,413
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 508,751
-----------
Total Investment Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,709,164
Expenses: (Note 2)
Advisory fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 484,337
Administrative services . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,000
Distribution fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 170,762
Transfer agent fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82,145
Professional fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28,980
Directors' fees and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . 17,900
Custodian fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,529
Registration and filing fees . . . . . . . . . . . . . . . . . . . . . . . . . . 13,547
Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,369
Reports and notices to stockholders . . . . . . . . . . . . . . . . . . . . . . 8,561
---------
Total Operating Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . 856,130
Less: Custodian fees paid indirectly . . . . . . . . . . . . . . . . . . . . 14,750
---------
Net Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 841,380
-----------
Net Investment Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 867,784
-----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS: (Note 4)
Net realized gain from security transactions . . . . . . . . . . . . . . . . . . . . . . 8,805,614
Unrealized appreciation of investments:
Beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . 19,950,386
End of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,312,872
---------
Net decrease in unrealized appreciation of investments . . . . . . . . . . . . . . . (13,637,514)
-----------
Net realized and unrealized loss on investments . . . . . . . . . . . . . . . . . (4,831,900)
-----------
Net decrease in net assets resulting from operations . . . . . . . . . . . . . ($3,964,116)
===========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
25
<PAGE> 52
CAPSTONE GROWTH FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
---------------------------------------
1996 1995
-------------- -------------
<S> <C> <C>
OPERATIONS:
Net investment income . . . . . . . . . . . . . . . . . . . . . $ 867,784 $ 992,854
Net realized gain on investments . . . . . . . . . . . . . . . 8,805,614 11,206,356
Net increase (decrease) in unrealized appreciation of investments (13,637,514) 587,851
Net increase (decrease) in net assets resulting from operations (3,964,116) 12,787,061
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income . . . . . . . . . . . . . . . . . . . . . (391,940) (949,953)
Net realized gains from investment transactions . . . . . . . . (4,464,666) (7,756,374)
CAPITAL SHARE TRANSACTIONS:
Increase (decrease) in net assets resulting from capital share
transactions (Note 3) . . . . . . . . . . . . . . . . . . . . (16,273,183) 302,063
-------------- -------------
Total increase (decrease) in net assets . . . . . . . . . . (25,093,905) 4,382,797
NET ASSETS:
Beginning of year . . . . . . . . . . . . . . . . . . . . . . . 85,323,900 80,941,103
-------------- -------------
End of year (including undistributed net investment income
of $863,940 and $388,096, respectively) . . . . . . . . . . . $ 60,229,995 $ 85,323,900
============== =============
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS - OCTOBER 31, 1996
- -------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Capstone Growth 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 Fund's investment objective is to seek
long-term capital appreciation by primarily investing in common stocks. The
following is a summary of significant accounting policies followed by the Fund
in the preparation of its financial statements.
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 amortized cost. Securities as to which market
quotations are not readily available and other assets held by the Fund, if any,
26
<PAGE> 53
CAPSTONE GROWTH FUND, INC.
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) CASH EQUIVALENTS - Funds on deposit in money market mutual fund accounts are
considered to be a cash equivalent.
D) USE OF ESTIMATES - The preparation of the financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenue and expense during the reporting period. Actual results could differ
from those estimates.
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 and expenses are accrued daily. 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 ("CAMCO") 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.
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, 1996, 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 Underwriter and
Distributor of the Fund's shares. Effective August 21, 1995, the 4.75% front
end sales load applicable to sales of Fund shares was eliminated. CAPCO is an
affiliate of the Adviser, and both are wholly-owned subsidiaries of Capstone
Financial Services, Inc. ("CFS").
The Fund has adopted a Service and Distribution Plan (the "Plan") pursuant
to Rule 12b-1 under the Act whereby 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 distribution
of the Fund's shares. Under the Plan, the Fund pays to CAPCO an amount computed
at an annual rate of up to .25% 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 based on the Fund's average net assets owned by
stockholders for whom the Service Organizations have 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, 1996,
27
<PAGE> 54
CAPSTONE GROWTH FUND, INC.
the Fund paid $170,762 in 12b-1 fees. Of this amount approximately 4% was paid
to Service Organizations other than CAPCO.
The Fund's Custodian provided credits during the year in the amount of
$14,750 against custodian charges based on the uninvested cash balances of the
Fund.
Certain officers and directors of the Fund who are also officers and
directors of the Adviser, the Underwriter and CFS received no compensation from
the Fund. During the year ended October 31, 1996, directors of the Fund who are
not "interested persons" received directors' fees of $12,500.
Also, the Fund paid brokerage commissions in the amount of $12,584 to
Williams MacKay Jordan & Co., Inc., a broker-dealer affiliate of the Fund.
NOTE 3 - CAPITAL STOCK
Transactions in capital stock were as follows:
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
-------------------------------------------------------
1996 1995
------------------------- -------------------------
SHARES AMOUNT SHARES AMOUNT
---------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
Shares sold ........................................... 215,449 $ 3,088,151 267,373 $ 3,541,972
Shares issued to shareholders in reinvestment
of distributions .................................... 336,133 4,494,094 627,165 8,000,990
Shares issued in acquisition of fund (Note 5) ......... -- -- 256,477 3,290,596
---------- ------------ ---------- ------------
551,582 7,582,245 1,151,015 14,833,558
Shares redeemed ....................................... (2,855,388) (23,855,428) (1,094,860) (14,531,495)
---------- ------------ ---------- ------------
Net increase (decrease) ............................. (2,303,806) ($16,273,183) 56,155 $ 302,063
========== ============ ========== ============
</TABLE>
NOTE 4 - PURCHASES AND SALES OF SECURITIES
Purchases and sales of securities other than U.S. Government securities and
short-term investments aggregated $106,784,528 and $100,034,333, respectively.
At October 31, 1996, the cost of investments for Federal income tax purposes
was $52,196,202. Accumulated net unrealized appreciation on investments was
$6,312,872 consisting of $6,499,246 gross unrealized appreciation and $186,374
gross unrealized depreciation.
NOTE 5 - ACQUISITION OF CAPSTONE BALANCED FUND
On May 31, 1995, Capstone Growth Fund, Inc. acquired all the net assets of
Capstone Balanced Fund ("CBF"), a series of Capstone Series, Inc., pursuant to
an Agreement and Plan of Reorganization approved by CBF shareholders on May 30,
1996. The acquisition was accomplished by a tax-free exchange of 256,477 shares
of Capstone Growth Fund, Inc. (valued at $3,290,596) for the 1,037,029 shares
of CBF outstanding on May 31, 1995. The exchange had no effect on the net asset
value per share of the Capstone Growth Fund, Inc. CBF's net assets at that date
were $3,290,596, consisting of unrealized appreciation on investments of
$1,516,582 and paid in capital of $1,774,014. The aggregate net assets of
Capstone Growth Fund, Inc. immediately after the reorganization was
$83,129,841.
28
<PAGE> 55
CAPSTONE GROWTH FUND, INC.
NOTE 6 - DIVIDEND DISTRIBUTIONS
On November 4, 1996 the Board of Directors declared a distribution of $2.51
a share, consisting of $2.286 from realized gains (long-term, $1.341 per share;
short-term, $0.945 per share) and $0.224 from ordinary income. The distribution
is payable on December 2, 1996 to shareholders of record on November 25, 1996.
29
<PAGE> 56
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,
--------------------------------------------------------------------
1996 1995 1994 1993 1992
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA
Net asset value at beginning of year ...................... $ 13.82 $ 13.23 $ 14.43 $ 14.00 $ 14.65
------------ ------------ ------------ ------------ ------------
Income from investment operations:
Net investment income .................................. 0.22 0.17 0.11 0.17 0.20
Net realized and unrealized gain (loss) on investments . 2.31 1.93 (0.23) 0.80 0.56
------------ ------------ ------------ ------------ ------------
Total from investment operations ....................... 2.53 2.10 (0.12) 0.97 0.76
------------ ------------ ------------ ------------ ------------
Less distributions from:
Net investment income .................................. 0.06 0.16 0.13 0.22 0.24
Net realized gain on investments ....................... 0.73 1.35 0.95 0.32 1.17
------------ ------------ ------------ ------------ ------------
Total distributions .................................... 0.79 1.51 1.08 0.54 1.41
------------ ------------ ------------ ------------ ------------
Net asset value at end of year ............................ $ 15.56 $ 13.82 $ 13.23 $ 14.43 $ 14.00
============ ============ ============ ============ ============
TOTAL RETURN(1) ........................................... 19.27% 17.04% (0.67)% 7.05% 5.83%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of year (in thousands) .................. $ 60,230 $ 85,324 $ 80,941 $ 96,465 $ 97,076
Ratios of operating expenses to average net assets ........ 1.29% 1.31% 1.28% 1.24% 1.10%
Ratios of net investment income to average net assets ..... 1.31% 1.21% 0.78% 0.19% 1.43%
Portfolio turnover rate ................................... 173% 119% 12% 45% 22%
Average commission rate (per share of security)(2) ........ $ .0696 N/A N/A N/A N/A
</TABLE>
(1) Calculated without sales charge. Sales charge eliminated on August 21,
1995.
(2) Average commission rate (per share of security) as required by amended
disclosure requirements effective September 1, 1995.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
30
<PAGE> 57
CAPSTONE GROWTH FUND, INC.
OTHER INFORMATION
(PART C TO REGISTRATION STATEMENT NO. 2-83397)
Item 24. Financial Statements and Exhibits
Exhibits not incorporated by reference to a prior filing are
designated by an asterisk; all exhibits not so designated are incorporated
hereby by reference to a prior filing as indicated.
(a) Financial Statements (included in Parts A and B):
Per Share Income and Capital Changes for each of the ten years in
the period ended October 31, 1996 (Part A)
Auditor's Report (Part B)
Statement of Assets and Liabilities at October 31, 1996 (Part B)
Portfolio of Investments in Securities at October 31, 1996
(Part B)
Statement of Operations for the year ended October 31, 1996
(Part B)
Statement of Changes in Net Assets for each of the two years in
the period ended October 31, 1996 (Part B)
Notes to Financial Statements (Part B)
(b) Exhibits:
A. Exhibits filed pursuant to Form N-1A
1(a) Copy of Articles of Incorporation dated October 14,
1966.
1(b) Copy of Articles of Amendment dated February 20,
1969.
1(c) Copy of Articles of Amendment dated February 27,
1970.
1(d) Copy of Articles of Amendment dated February 21,
1974.
1(e) Copy of Articles of Amendment dated April 20, 1986.
1(f) Copy of Articles of Amendment dated May 10, 1988;
Exhibit 1(f) to Post-Effective Amendment No. 6 to
Registration Statement No. 2-83397.
1(g) Copy of Agreement and Articles of Transfer between
Capstone U.S. Trend Fund, Inc. and U.S. Trend Fund,
Inc. dated May 11, 1992; Exhibit 1(g) to Post-
Effective Amendment No. 13 to Registration
Statement No. 2-83397.
1(h) Form of Articles of Incorporation of Capstone U.S.
Trend Fund, Inc.; Exhibit 1(h) to Post-Effective
Amendment No. 12 to Registration Statement No. 2-
83397.
<PAGE> 58
1(i) Copy of Articles of Amendment to Articles of
Incorporation of Capstone Growth Fund, Inc.;
Exhibit 1(i) to Post-Effective Amendment No. 16 to
Registration Statement No. 2-83397.
2(a) Copy of By-Laws, as amended.
2(b) Copy of Amendment to By-Laws, Exhibit 2(a) to Post-
Effective Amendment No. 6 to Registration Statement
No. 2-83397.
2(c) Form of By-Laws of Capstone U.S. Trend Fund, Inc.;
Exhibit 2(c) to Post-Effective Amendment No. 12 to
Registration Statement No. 2-83397.
3 None
4 Copy of Specimen Common Stock Certificate; Exhibit
(4) to Registration No. 2-83397.
5(a) Copy of Investment Advisory Agreement between
Plitrend Fund, Inc. and Capstone Asset Management
Company dated July 26, 1982.
5(b) Copy of Investment Advisory Agreement between U.S.
Trend Fund, Inc. and Capstone Asset Management
Company dated as of September 1, 1987; Exhibit 5(b)
to Post-Effective Amendment No. 5 to Registration
No. 2-83397.
5(c) Copy of revised Investment Advisory Agreement
between U.S. Trend Fund, Inc. and Capstone Asset
Management Company dated as of September 1, 1987;
Exhibit 5(c) to Post-Effective Amendment No. 9 to
Registration No. 2-83397.
5(d) Copy of Investment Advisory Agreement between U.S.
Trend Fund, Inc. and Capstone Asset Management
Company dated as of February 19, 1992.; Exhibit
5(d) to Post-Effective Amendment No. 12 to
Registration Statement No. 2-83397.
5(e) Copy of Investment Advisory Agreement between
Capstone U.S. Trend Fund, Inc. and Capstone Asset
Management Company dated May 11, 1992; Exhibit 5(e)
to Post-Effective Amendment No. 13 to Registration
Statement No. 2-83397.
6(a) Copy of General Distribution Agreement between
Plitrend Fund, Inc. and Tenneco Asset Planning
Company dated as of September 1, 1984; Exhibit 6 to
Post-Effective Amendment No. 3 to Registration No.
2-83397.
6(b) Copy of General Distribution Agreement between U.S.
Trend, Fund, Inc. and Capstone Asset Planning
Company dated as of September 1, 1987; Exhibit 6(b)
to Post-Effective Amendment No.
<PAGE> 59
5 to Registration No. 2-83397
6(c) Copy of Amendment to General Distribution
Agreement between U.S. Trend Fund, Inc. and
Capstone Asset Planning Company dated
September 1, 1987; Exhibit 6(c) to Post-
Effective Amendment No. 11 to Registration
No. 2-83397.
6(d) Copy of General Distribution Agreement
between U.S. Trend Fund, Inc. and Capstone
Asset Planning Company dated March 1, 1992;
Exhibit 6(d) to Post-Effective Amendment No.
12 to Registration Statement No. 2-83397.
6(e) Copy of General Distribution Agreement
between Capstone U.S. Trend Fund, Inc. and
Capstone Asset Planning Company dated May
11, 1992; Exhibit 6(e) to Post-Effective
Amendment No. 13 to Registration No. 2-
83397.
6(f) Copy of Selling Group Agreement; Exhibit
6(f) to Post-effective Amendment No. 12 to
Registration Statement No. 2-83397.
7 None
8(a) Copy of Custodian Agreement between Plitrend
Fund, Inc. and First Pennsylvania Bank N.A.,
dated as of July 19, 1985; Exhibit 8(a) to
Post-Effective Amendment No. 3 to
Registration No. 2-83397.
8(b) Copy of Custody Agreement between Capstone
Growth Fund, Inc. and The Fifth Third Bank
dated December 13, 1994; Exhibit 8(b) to
Post-Effective Amendment No. 17 to
Registration No. 2-83397.
9(a)(1) Copy of Administration Agreement between
Plitrend Fund, Inc. and First Pennsylvania
Bank N.A. as of May 19, 1982; Exhibit
9(a)(1) to Post-Effective Amendment No. 3 to
Registration No. 2-83397.
9(a)(2) Copy of amendment of the Administration
Agreement between Plitrend Fund, Inc. and
First Pennsylvania Bank N.A. dated as of
December 23, 1985; Exhibit 9(a)(2) to Post-
Effective Amendment No. 3 to Registration
No. 2-83397.
9(b) Copy of Agency Agreement between U.S. Trend
Fund, Inc. and Capstone Financial Services,
Inc. dated as of October 2, 1987; Exhibit
9(b) to Post-Effective Amendment No. 5 to
Registration No. 2-83397.
9(c) Copy of Shareholder Services Agreement
between U.S. Trend Fund, Inc. and Fund/Plan
Services, Inc. dated February 1, 1991;
Exhibit 9(c) to Post-Effective Amendment No.
11 to Registration No. 2-83397.
<PAGE> 60
10 Opinion of Dechert Price & Rhoads.
*11(a) Consent of Tait, Weller & Baker, Independent
Certified Public Accountants.
*11(b) Powers of Attorney of Messrs. James F.
Leary, John R. Parker and Bernard J.
Vaughan.
12 None.
13 None.
14(a)(1) Southwestern Life Insurance Company Defined
Benefit Pension Plan and Trust; Exhibit
14(a)(1) to Pre-Effective Amendment No. 1 to
Registration No. 2-99810.
14(a)(2) Adoption Agreement for Southwestern Life
Insurance Company Standardized Integrated
Defined Benefit Pension Plan and Trust (with
Pairing Provisions); Exhibit 14(a)(2) to
Pre-Effective Amendment No. 1 to
Registration No. 2-99810.
14(a)(3) Adoption Agreement for Southwestern Life
Insurance Company Standardized Non-
Integrated Defined Benefit Pension Plan and
Trust (with Pairing Provisions); Exhibit
14(a)(3) to Pre-Effective Amendment No. 1 to
Registration No. 2-99810.
14(a)(4) Adoption Agreement for Southwestern Life
Insurance Company Non-Standardized
Integrated Defined Benefit Pension Plan and
Trust; Exhibit 14(a)(4) to Pre-Effective
Amendment No. 1 to Registration No. 2-99810.
14(a)(5) Adoption Agreement for Southwestern Life
Insurance Company Non-Standardized Non-
Standardized Non-Integrated Defined Benefit
Pension Plan and Trust; Exhibit 14(a)(5) to
Pre-Effective Amendment No. 1 to
Registration No. 2-99810.
14(b)(1) Southwestern Life Insurance Company
Combination Profit Sharing-Money Purchase
Plan and Trust; Exhibit 14(b)(1) to Pre-
Effective Amendment No. 1 to Registration
No. 2-99810.
14(b)(2) Adoption Agreement for Southwestern Life
Insurance Company Standardized Money
Purchase Plan and Trust (with Pairing
Provisions); Exhibit 14(b)(2) to Pre-
Effective Amendment No. 1 to Registration
No. 2-99810.
- ---------------
* Filed herewith
<PAGE> 61
14(b)(3) Adoption Agreement for Southwestern Life
Insurance Company Standardized Profit
Sharing Plan and Trust (with Pairing
Provisions); Exhibit 14(b)(3) to Pre-
Effective Amendment No. 1 to Registration
No. 2-99810.
14(b)(4) Adoption Agreement for Southwestern Life
Insurance Company Non-Standardized Money
Purchase Plan and Trust; Exhibit 14(b)(4) to
Pre-Effective Amendment No. 1 to
Registration No. 2-99810.
14(b)(5) Adoption Agreement for Southwestern Life
Insurance Company Non-Standardized Profit
Sharing Plan and Trust; Exhibit 14(b)(5) to
Pre-Effective Amendment No. 1 to
Registration No. 2-99810.
14(c) Form 5305, Simplified Employee Pension-
Individual Retirement Accounts Contribution
Agreement; Exhibit 14(c) to Pre-Effective
Amendment No. 1 to Registration No. 2-99810.
14(d) Form 5305-A, Individual Retirement Custodial
Account; Exhibit 14(d) to Pre-Effective
Amendment No. 1 to Registration No. 2-99810.
14(e)(1) Southwestern Life Insurance Company Tax
Deferred Annuity Program Custodial
Agreement; Exhibit 14(e)(1) to Pre-Effective
Amendment No. 1 to Registration No. 2-99810.
14(e)(2) Amendment to Application for Investment
Plans under 403(b)(7) Plan; Exhibit 14(e)(2)
to Pre-Effective Amendment No. 1 to
Registration No. 2-99810.
14(f)(1) Southwestern Life Insurance Company Salary
Reduction Plan and Trust; Exhibit 14(f)(1)
to Post-Effective Amendment No. 3 to
Registration No. 2-83397.
14(f)(2) Adoption Agreement for Southwestern Life
Insurance Company Salary Reduction Plan and
Trust; Exhibit 14(1)(2) to Post-Effective
Amendment No. 3 to Registration No. 2-83397.
15(a) Copy of Service and Distribution Plan;
Exhibit 15(a) to Post-Effective Amendment
No. 12 to Registration Statement No. 2-
83397.
15(b) Copy of Service Agreement; Exhibit 15(b) to
Post-Effective Amendment No. 12 to
Registration No. 2-83397.
*16 Schedule for Computation of Performance
Quotations.
- ---------------
* Filed herewith
<PAGE> 62
B. Exhibits filed pursuant to Rule 483 of Regulation C under
the Securities Act of 1933, as amended.
Item 25. Persons Controlled or under Common Control with Registrant
Registrant is controlled by NationsBank (the "Bank"), as trustee of
the Tenneco Inc. Thrift Plan.
Item 26. Number of Holders of Securities
<TABLE>
<CAPTION>
Number of Record Holders
Title of Class as of February 21, 1997
-------------- ----------------------------
<S> <C>
Common Stock, par value $0.001 3,487
</TABLE>
Item 27. Indemnification
The Articles of Incorporation include the following:
ARTICLE VII
"Article 7.4 Indemnification. The Corporation, including its
successors and assigns, shall indemnify its directors and officers and make
advance payment of related expenses to the fullest extent permitted, and in
accordance with the procedures required, by the General Laws of the State of
Maryland and the Investment Company Act of 1940. The By-Laws may provide that
the Corporation shall indemnify its employees and/or agents in any manner and
within such limits as permitted by applicable law. Such indemnification shall
be in addition to any other right or claim to which any director, officer,
employee or agent may otherwise be entitled. The Corporation may purchase and
maintain insurance on behalf of any person who is or was a director, officer,
employee or agent of the Corporation or is or was serving at the request of the
Corporation as a director, officer, partner, trustee, employee or agent of
another foreign or domestic corporation, partnership, joint venture, trust or
other enterprise or employee benefit plan, against any liability (including,
with respect to employee benefit plans, excise taxes) asserted against and
incurred by such person in any such capacity or arising out of such person's
position, whether or not the Corporation would have had the power to indemnify
against such liability. The rights provided to any person by this Article 7.4
shall be enforceable against the Corporation by such person who shall be
presumed to have relied upon such rights in serving or continuing to serve in
the capacities indicated herein. No amendment of these Articles of
Incorporation shall impair the rights of any person arising at any time with
respect to events occurring prior to such amendment."
The By-Laws of the Registrant include the following:
ARTICLE VI
INDEMNIFICATION
"The Corporation shall indemnify (a) its Directors and officers,
whether serving the Corporation or at its request any other entity, to the full
extent required or permitted by (i) Maryland law now or hereafter in force,
including the advance of expenses under the procedures and to the full extent
permitted by law, and (ii) the Investment Company Act of 1940, as amended, and
(b) other employees and agents to such extent as
<PAGE> 63
shall be authorized by the Board of Directors and be permitted by law. The
foregoing rights of indemnification shall not be exclusive of any other rights
to which those seeking indemnification may be entitled. The Board of Directors
may take such action as is necessary to carry out these indemnification
provisions and is expressly empowered to adopt, approve and amend from time to
time such resolutions or contracts implementing such provisions or such further
indemnification arrangements as may be permitted by law."
Insofar as indemnification for liability arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
To the extent that the Articles of Incorporation, By-Laws or any other
instrument pursuant to which the Registrant is organized or administered
indemnify any director or officer of the Registrant, or that any contract or
agreement indemnifies any person who undertakes to act as investment advisor or
principal underwriter to the Registrant, any such provisions protecting or
purporting to protect such persons against any liability to the Registrant or
its security holders to which he would otherwise be subject by reason of
willful misfeasance, bad faith, or gross negligence, in the performance of his
duties, or by reason of his reckless disregard of his duties pursuant to the
conduct of his office or obligations pursuant to such contract or agreement,
will be interpreted and enforced in a manner consistent with the provisions of
Section 17(h) and (i) of the Investment Company Act of 1940, as amended, and
Release No. IC-11330 issued thereunder.
Item 28. Business and other Connections of Investment Adviser
The investment adviser of the Registrant is also the investment
adviser and/or administrator of five other investment companies: Capstone
Government Income Fund, Capstone Intermediate Government Fund, Capstone Nikko
Japan Fund and Capstone New Zealand Fund. Such adviser also manages private
accounts and is an adviser for a portion of the Tenneco Inc. Pension Plan. For
further information, see "Directors and Officers" in Part B. hereof.
Item 29. Principal Underwriters
(a) The principal underwriter of the Registrant, Capstone Asset
Planning Company, also acts as principal underwriter for Capstone Government
Income Fund, Capstone Intermediate Government Fund, Capstone Nikko Japan Fund
and Capstone New Zealand Fund.
(b)
<TABLE>
<CAPTION>
Name and Principal Positions and Offices Positions and Offices
Business Address* with Underwriter with Registrant
- ------------------ ---------------------- ------------------------
<S> <C> <C>
Dan E. Watson Chairman of the Board President
and Director
</TABLE>
<PAGE> 64
<TABLE>
<S> <C> <C>
Edward L. Jaroski President and Director Executive Vice President
and Chairman of the Board
Albert P. Santa Luca -- Executive Vice President
Leticia N. Jaroski Vice President --
Janet K. Roberts Assistant Vice President --
Iris R. Clay Secretary Secretary
Norma R. Ybarbo -- Assistant Secretary
Linda G. Giuffre Vice President and Treasurer Treasurer
</TABLE>
Item 30. Location of Accounts and Records
Capstone Asset Management Company, the investment adviser to the
Registrant, 5847 San Felipe, Suite 4100, Houston, Texas 77057, The Fifth Third
Bank, the custodian and accounting agent of the Registrant, 38 Fountain Square,
Cincinnati, Ohio 45263, and FPS Services, Inc., the transfer agent of the
Registrant, 3200 Horizon Drive, King of Prussia, Pennsylvania 19406-0903
maintain physical possession of each account, book or other document required
to be maintained by Section 31(a) of Investment Company Act of 1940 and the
rules promulgated thereunder.
Item 31. Management Services
Not applicable
Item 32. Undertakings
Not applicable
- ---------------
* 5847 San Felipe, Suite 4100, Houston, Texas 77057
<PAGE> 65
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Registration Statement or Amendment
pursuant to Rule 485(b) under the Securities Act of 1933 and has duly caused
this Registration Statement or Amendment to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Houston, and State of
Texas on the 28th day of February, 1997.
CAPSTONE GROWTH FUND, INC.
Registrant
By: /s/ EDWARD L. JAROSKI
-----------------------------------------
Edward L. Jaroski, Executive Vice President
Pursuant to the requirements of the Securities Act of 1933, this
Amendment to Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
---------- ----- ----
<S> <C> <C>
/s/ EDWARD L. JAROSKI
- -------------------------- Executive Vice President February 28, 1997
Edward L. Jaroski & Director (Principal
Executive Officer)
/s/ LINDA G. GIUFFRE
- -------------------------- Treasurer (Principal February 28, 1997
Linda G. Giuffre Financial & Accounting
Officer)
JAMES F. LEARY* Director February 28, 1997
- --------------------------
James F. Leary
JOHN R. PARKER* Director February 28, 1997
- --------------------------
John R. Parker
BERNARD J. VAUGHAN* Director February 28, 1997
- -------------------------
Bernard J. Vaughan
* By: /s/ EDWARD L. JAROSKI
--------------------------------------
Edward L. Jaroski, Attorney-In-Fact
</TABLE>
<PAGE> 66
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibits
- ------ -----------------------
<S> <C>
11(a) Consent of Tait, Weller & Baker, Independent Certified Public
Accountants
11(b) Powers of Attorney of Messrs. James F. Leary, John R. Parker and
Bernard J. Vaughan
16 Schedule of Computation of Performance Quotations
27 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 11(a)
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the reference to our firm in the Registration Statement,
(Form N-1A) and related Statement of Additional Information of Capstone Growth
Fund, Inc. and to the inclusion of our report dated November 18, 1996 (except
for Note 6 as to which the date is November 25, 1996) to the Shareholders and
Board of Directors of Capstone Growth Fund, Inc.
/s/TAIT, WELLER & BAKER
TAIT, WELLER & BAKER
Philadelphia, Pennsylvania
February 27, 1997
<PAGE> 1
EXHIBIT 11(b)
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below appoints Edward L. Jaroski as his true and lawful attorney-in-
fact, with full power of substitution and resubstitution, for him and in his
name, place and stead, in any and all capacities, to sign any and all
amendments (including post-effective amendments) to this Registration
Statement, and to file the same, with all exhibits thereto, and other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorney-in-fact full power and authority to do and perform each and
every act and thing requisite and necessary to be done in connection therewith,
as fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorney-in-fact, or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
<TABLE>
<S> <C> <C>
/s/JAMES F. LEARY Director February 28, 1997
- -----------------------------------
James F. Leary
/s/JOHN R. PARKER Director February 28, 1997
- -----------------------------------
John R. Parker
/s/BERNARD J. VAUGHAN Director February 28, 1997
- -----------------------------------
Bernard J. Vaughan
</TABLE>
<PAGE> 1
EXHIBIT 16
CAPSTONE GROWTH FUND, INC.
SCHEDULE OF COMPUTATION FOR AVERAGE ANNUAL TOTAL RETURN
P (1 + T)(n) = ERV
P = a hypothetical initial payment of $1,000,
T = the average annual total return,
n = the number of years,
ERV = the ending redeemable value of a hypothetical $1,000
payment made at the beginning of the period.
********************
The Fund's average annual total return for the one year period ending October
31, 1996 is 19.27%.
$1,000 (1 + .19269)1 = ERV
$1,192.69 = ERV
An initial payment of $1,000 invested on 11/01/95 will result in 72.359 shares.
Income distributions of $0.064 per share and a capital gain distribution of
$0.729 per share resulted in 4.292 additional shares, rendering a total of
76.651 shares. On 10/31/96 the net asset value of the Fund was $15.56 per
share, thereby creating a total market value of $1,192.69 and yielding a return
of 19.27%.
********************
The Fund's average annual total return for the five year period from November
1, 1991 to October 31, 1996 is 9.45%.
$1,000 (1 + .0945)(5) = ERV
$1,570.80 = ERV
An initial payment of $1,000 invested on 11/01/91 will result in 68.259 shares.
Income distributions of $0.812 per share and capital gain distributions of
$4.519 per share for the five year period resulted in 32.692 additional shares,
rendering a total of 100.951 shares. On 10/31/96 the net asset value of the
Fund was $15.56 per share, thereby creating a total market value of $1,570.80
and yielding a return of 9.45%.
<PAGE> 2
********************
The Fund's average annual total return for the ten year period from November 1,
1986 to October 31, 1996 is 11.44%.
$1,000 (1 + .1144)(10) = ERV
$2,953.82 = ERV
An initial payment of $1,000 invested on 11/01/86 will result in 67.981 shares.
Income distributions of $2.572 per share and capital gain distributions of
$10.809 per share for the ten year period resulted in 121.853 additional
shares, rendering a total of 189.834 shares. On 10/31/96 the net asset value
of the Fund was $15.56 per share, thereby creating a total market value of
$2,953.82 and yielding a return of 11.44%.
<PAGE> 3
CAPSTONE GROWTH FUND, INC.
SCHEDULE OF COMPUTATION FOR TOTAL RETURN
P (1 + T) = ERV
P = a hypothetical initial payment of $1,000,
T = the total return,
ERV = the ending redeemable value of a hypothetical $1,000 payment
made at the beginning of the period.
********************
The Fund's total return for the one year period ending October 31, 1996 is
19.27%.
$1,000 (1 + .1927) = ERV
$1,192.69 = ERV
An initial payment of $1,000 invested on 11/01/95 will result in 72.359 shares.
Income distributions of $0.064 per share and a capital gain distribution of
$0.729 per share resulted in 4.292 additional shares, rendering a total of
76.651 shares. On 10/31/96 the net asset value of the Fund was $15.56 per
share, thereby creating a total market value of $1,192.69 and yielding a return
of 19.27%.
********************
The Fund's total return for the five year period from November 1, 1991 to
October 31, 1996 is 57.08%.
$1,000 (1 + .5708) = ERV
$1,570.80 = ERV
An initial payment of $1,000 invested on 11/01/91 will result in 68.259 shares.
Income distributions of $0.812 per share and capital gain distributions of
$4.519 per share for the five year period resulted in 32.692 additional shares,
rendering a total of 100.951 shares. On 10/31/96 the net asset value of the
Fund was $15.56 per share, thereby creating a total market value of $1,570.80
and yielding a return of 57.08%.
********************
The Fund's total return for the ten year period from November 1, 1986 to
October 31, 1996 is 195.38%.
$1,000 (1 +1.9538) = ERV
$2,953.82 = ERV
An initial payment of $1,000 invested on 11/01/86 will result in 67.981 shares.
Income distributions of $2.572 per share and capital gain distributions of
$10.809 per share for the ten year period resulted in 121.853 additional
shares, rendering a total of 189.834 shares. On 10/31/96 the net asset value
of the Fund was $15.56 per share, thereby creating a total market value of
$2,953.82 and yielding a return of 195.38%.
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACED FROM REGISTRANT'S
ANNUAL REPORT FOR THE FISCAL YEAR ENDED OCTOBER 31, 1996.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-START> NOV-01-1995
<PERIOD-END> OCT-31-1996
<INVESTMENTS-AT-COST> 52,196,202
<INVESTMENTS-AT-VALUE> 58,509,074
<RECEIVABLES> 64,925
<ASSETS-OTHER> 2,132,222
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 60,706,221
<PAYABLE-FOR-SECURITIES> 390,226
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 86,000
<TOTAL-LIABILITIES> 476,226
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 44,247,570
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<REALIZED-GAINS-CURRENT> 8,805,614
<APPREC-INCREASE-CURRENT> (13,637,514)
<NET-CHANGE-FROM-OPS> (3,964,116)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (391,940)
<DISTRIBUTIONS-OF-GAINS> (4,464,666)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 215,449
<NUMBER-OF-SHARES-REDEEMED> (2,855,388)
<SHARES-REINVESTED> 336,133
<NET-CHANGE-IN-ASSETS> (2,303,806)
<ACCUMULATED-NII-PRIOR> 388,096
<ACCUMULATED-GAINS-PRIOR> 4,464,665
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
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<INTEREST-EXPENSE> 0
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<AVERAGE-NET-ASSETS> 68,222,814
<PER-SHARE-NAV-BEGIN> 13.82
<PER-SHARE-NII> 0.22
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<PER-SHARE-DIVIDEND> 0.06
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<PER-SHARE-NAV-END> 15.56
<EXPENSE-RATIO> 1.29
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
