CAPSTONE GROWTH FUND, INC.
- --------------------------------------------------------------------------------
Dear Shareholder,
YEAR REVIEW
We have just ended a rather remarkable 12 months for the U.S. and global equity
markets. Several factors set this market apart from those of the previous few
years. Day-to-day volatility has increased to levels not seen since the market
correction of 1990. Movement of capital from one market sector to another seems
to have speeded up. And non-U.S. events have had a significant negative impact
on the level of the market. Each one of the factors deserves a brief comment.
After the turmoil leading up to the Gulf War, the equity market showed an
unusually low level of daily price volatility. Market advances and declines were
both contained in fairly narrow daily ranges as the market slowly trended
upward. Equity investors became conditioned to a very quiescent market and so
the recent daily and intraday swings seem even greater than they historically
are. Market leadership has also swung back and forth several times between the
large capitalization and small capitalization stocks over the last year. In the
last quarter of 1996 and first quarter of 1997, the large cap stocks were clear
leaders. Then in the Spring of 1997 the small and mid-cap issues began to do
much better as the stock market went through an explosive advance. The
preference for smaller issues lasted until the southeast Asian economic problems
surfaced this fall, and once again the larger stocks started to outperform as
investors looked for relative safety. Finally, it is unusual for problems on the
smaller stock exchanges to have a serious impact on the U.S. equity markets. But
the collapse of the Hong Kong stock market finally turned investors' focus on
the serious economic deterioration in Asia. Because of its importance to the
global equity situation, we will discuss the meaning of the southeast Asian
events later in this letter. During this tumultuous year, the fund returned
26.9% compared to 28.4% for the Lipper Growth Fund Index*. The Fund has also
kept a somewhat above average cash position because of the increased volatility
and exaggerated valuations we have seen in some sectors of the market.
Comparison of Change in Value of a $10,000 Investment in Capstone
Growth Fund, Inc.+ and the Lipper Equity Growth Fund Index*
AVERAGE ANNUAL TOTAL RETURN
as of 10/31/97
1 Year 5 Year 10 Year
Growth Fund 26.91% 13.50% 13.38%
Past performance is not predictive of future performance.
GRAPH DATA:
GROWTH FUND LIPPER EQUITY GROWTH FUND
11/01/87 10,000 10,000
10/31/88 11,300 11,525
10/31/89 14,775 14,435
10/31/90 14,296 12,584
10/31/91 19,261 17,799
10/31/92 19,422 19,188
10/31/93 20,608 22,831
10/31/94 19,007 23,297
10/31/95 24,555 28,883
10/31/96 28,786 33,776
10/31/97 35,155 43,373
THE GLOBAL ENVIRONMENT FOR STOCKS
We think that the southeast Asian currency and debt crisis is a regional
manifestation of a developing secular trend in the global economy. No one can
predict how this will ultimately affect the U.S. markets but we can discuss some
causes of the crises and how analogous events turned out in the past.
The root of the current Asian problems are found in currency exchange rates,
debt levels in the Asian countries and industrial overexpansion. First, the
currency of many of the southeast Asian countries was pegged to the U.S. dollar.
This promoted stable exchange rates relative to the biggest consumer of their
export products. As long as all the countries played by the same rules, no one
country had a significant competitive advantage when it came to export pricing.
Under these relatively stable conditions (stable when compared to Latin America,
for example) foreign investment flowed into the area, resulting in expanded
industrial capacity for export industries and in real estate development
projects. Then two events occurred, more or less at the same time, the
combination of which pushed these Asian economies down the path leading to the
present crisis. First, an exogenous event occurred, something which was outside
the system that had been in place and had worked relatively well for years. That
exogenous event was the Chinese government's decision to devalue its currency by
a significant amount in late 1993 (unlike the Korean won or the Thai baht, the
Chinese yuan is not freely convertible into other currencies). Then, the U.S.
dollar began to strengthen
<PAGE>
CAPSTONE GROWTH FUND, INC.
- --------------------------------------------------------------------------------
in 1995 and those Asian currencies tied to the dollar also rose relative to
those not pegged to the dollar, in particular relative to the Japanese yen. But
as long as all these Asian currencies moved together, the relative prices of
their exports to the U.S. would remain stable. Even as these events took place,
foreign investment continued to pour into southeast Asia, expanding export
capacity and also expanding the debt that went along with financing this
expansion. When China decided to stimulate export growth to support its economy,
Chinese manufacturers essentially were able to undercut their southeast Asian
competitors and take away market share in the U.S. and elsewhere. After about
two years of this, southeast Asian countries were forced into devaluations to
try to regain some competitive standing versus the Chinese. Profits and cash
flow crumpled; the real estate markets which depended on economic growth
foundered and several countries were forced to ask for International Monetary
Fund support to help restructure unserviceable debts.
We see several areas of repercussion for the U.S. equity market. For one thing,
providers of infrastructure for the technology industry will see reduced demand
from southeast Asia. This has already happened in the semiconductor equipment
area. Also, large economic development projects have already been cancelled in
some countries and more will probably follow. This hurts heavy equipment makers
like Caterpillar and engineering firms like Fluor. Just like Mexico after its
currency crisis in 1994, these countries will probably experience a recession at
the same time as the prices of imported goods soar (for example, oil is priced
in U.S. dollars). We also expect to see some bad loan surface at money center
banks along with losses from various trading operations. Perhaps most
importantly, we expect to see lower earnings in many U.S. based multinationals
as the high level of the dollar begins to eat into their overseas profits.
Already Coca Cola and Minnesota Mining and Manufacturing have announced that
currency translation has had negative effects on corporate earnings. If the
southeast Asian economies slow next year, as they probably will, then the U.S.
multinationals will see some further profit erosion. Ultimately, we think this
will lead to some downward revision in investors' estimates of overall corporate
earnings growth. The gyrations in equity prices since the end of July seem to us
to reflect the ambivalence of investor opinion on this issue. In the final
analysis, we do not think that investors have factored a slower growth rate into
current equity prices, and this accounts for our somewhat cautious investment
stance.
Sincerely,
/s/ Albert P. Santa Luca
- ------------------------------
Albert P. Santa Luca
President and Portfolio Manager
*The Lipper Growth Fund Index is an unmanaged index of companies whose long-term
earnings are expected to grow significantly faster than the earnings of the
stocks represented in the major unmanaged stock indices. Performance figures
include the change in value of the stocks in the index and reinvestment of
dividends.
+The Fund's performance assumes the reinvestment of all income dividends and
capital gains distributions.
THIS PUBLICATION MUST BE ACCOMPANIED OR PRECEDED BY A CURRENT PROSPECTUS FOR
CAPSTONE GROWTH FUND, INC.
<PAGE>
CAPSTONE GROWTH FUND, INC.
<TABLE>
PORTFOLIO OF INVESTMENTS - OCTOBER 31, 1997
- --------------------------------------------------------------------------------
<CAPTION>
MARKET
VALUE PERCENTAGE OF
COMMON STOCKS - 86.24% SHARES (NOTE 1-A) NET ASSETS
<S> <C> <C> <C>
COMMERCIAL SERVICES (0.58%)
McGraw Hill Co., Inc. 6,220 $ 406,633 0.58%
CONSUMER DURABLES (3.47%)
Chrysler Corp. 18,910 666,578 0.96
Eastman Kodak 4,300 257,463 0.37
Ford Motor Company 17,520 765,405 1.10
General Motors Corporation 11,250 722,109 1.04
---------- ------
2,411,555 3.47
CONSUMER NON-DURABLES (7.29%)
Coca Cola Co. 18,590 1,050,335 1.51
Gillette Company 5,300 472,031 0.68
Kimberly-Clark Corp 13,050 677,784 0.97
Pepsico Inc. 14,640 538,935 0.77
Philip Morris Cos., Inc. 20,900 828,163 1.19
Proctor & Gamble Co. 9,400 639,200 0.92
UST Inc. 16,650 498,459 0.72
V F Corp. 4,130 369,119 0.53
---------- ------
5,074,026 7.29
CONSUMER SERVICES (4.05%)
Gannett Co. 12,800 672,800 0.97
HFS Inc. (a) 6,510 458,955 0.66
King World Productions, Inc. (a) 13,040 616,140 0.89
McDonalds Corporation 8,680 388,973 0.56
Walt Disney Company 8,200 674,450 0.97
---------- ------
2,811,318 4.05
ELECTRONIC TECHNOLOGY (5.79%)
Compaq Computer Corp. 5,060 322,575 0.46
Cisco Systems, Inc. (a) 4,470 366,680 0.53
Dell Computer Corp. (a) 2,290 183,486 0.26
Hewlett-Packard Co. 9,950 613,791 0.88
Intel Corp. 9,430 726,110 1.04
International Business Machines Corp. 5,160 506,002 0.73
Lockheed Martin Corp. 7,750 736,734 1.06
Lucent Technology, Inc. 7,000 577,062 0.83
---------- ------
4,032,440 5.79
<PAGE>
<CAPTION>
CAPSTONE GROWTH FUND, INC.
PORTFOLIO OF INVESTMENTS - OCTOBER 31, 1997
- --------------------------------------------------------------------------------
MARKET
VALUE PERCENTAGE OF
SHARES (NOTE 1-A) NET ASSETS
<S> <C> <C> <C>
ENERGY MINERALS (7.13%)
Amoco Corp. 5,740 $ 526,286 0.76%
Chevron Corp. 5,700 472,744 0.68
Exxon Corp. 18,610 1,143,352 1.64
Kerr McGee Corp. 2,500 168,906 0.24
Mobil Corp. 6,240 454,350 0.65
Phillips Petroleum Co. 10,230 494,876 0.71
Royal Dutch Petroleum 16,510 868,839 1.25
Texaco, Inc. 6,620 376,926 0.54
USX-Marathon Group. 12,830 458,672 0.66
---------- ------
4,964,951 7.13
FINANCE (18.62%)
American International Group 5,580 569,509 0.82
American Express Corp. 5,700 444,600 0.64
Bankamerica Corp. 7,820 559,130 0.80
Chase Manhattan Corp. 7,570 873,389 1.26
Cigna Corp. 3,600 558,900 0.80
Citicorp 7,350 919,209 1.32
Comerica, Inc. 5,410 427,728 0.61
First Chicago NBD Corp. 6,910 502,702 0.72
Fleet Financial Group Inc. 7,090 455,976 0.66
Federal National Mortgage Association 11,260 545,406 0.78
Federal Home Loan Mortgage Corp. 12,180 461,317 0.66
First Union Corp. 11,260 552,444 0.79
General Re Corp. 6,400 1,262,000 1.81
Jefferson Pilot Co. 8,040 621,592 0.89
Keycorp 6,980 427,089 0.61
MBIA Inc. 13,400 800,650 1.15
Morgan Stanley, Dean Witter & Co. 10,730 525,770 0.76
Nationsbank Corp. 8,080 483,790 0.70
Southtrust Corp. 9,010 432,480 0.62
St. Paul Companies, Inc. 6,660 532,384 0.76
Transamerica Corp. 3,400 343,187 0.49
Traveler's Group, Inc. 9,600 672,000 0.97
---------- ------
12,971,252 18.62
HEALTH TECHNOLOGY (9.88%)
Abbott Labs 9,610 589,213 0.85
American Home Products Corp. 8,120 601,895 0.86
Amgen, Inc. (a) 1,800 88,650 0.13
Bristol-Myer Squibb Co. 9,870 866,097 1.24
Johnson & Johnson 11,590 664,976 0.96
Lilly Eli & Co. 13,220 884,087 1.27
Merck & Co. 11,660 1,040,655 1.50
Pfizer, Inc. 11,260 796,645 1.14
Schering-Plough Corp. 9,510 533,154 0.77
Warner Lambert Co. 5,660 810,441 1.16
---------- ------
6,875,813 9.88
<PAGE>
<CAPTION>
CAPSTONE GROWTH FUND, INC.
PORTFOLIO OF INVESTMENTS - OCTOBER 31, 1997
- --------------------------------------------------------------------------------
MARKET
VALUE PERCENTAGE OF
SHARES (NOTE 1-A) NET ASSETS
<S> <C> <C> <C>
INDUSTRIAL SERVICES (1.30%)
Helmerich & Payne, Inc. 5,990 $ 483,318 0.69%
Schlumberger Limited 4,820 421,750 0.61
---------- ------
905,068 1.30
NON-ENERGY MINERALS (1.77%)
Phelps Dodge Corp. 16,530 1,229,419 1.77
PROCESS INDUSTRIES (3.41%)
Dow Chemical Co. 18,370 1,667,078 2.40
Dupont (E.I.) De Nemours & Co. Inc. 12,420 706,387 1.01
---------- ------
2,373,465 3.41
PRODUCER MANUFACTURING (7.31%)
Dover Corporation 6,400 432,000 0.62
Eaton Corporation 9,170 886,051 1.27
General Electric Co. 24,500 1,581,781 2.27
Honeywell, Inc. 15,000 1,020,938 1.47
Minnesota, Mining & Manufacturing Co. 8,130 743,895 1.07
Xerox Corporation 3,000 237,937 0.34
York International Corp. 4,100 187,062 0.27
---------- ------
5,089,664 7.31
RETAIL TRADE (2.49%)
Dayton Hudson Corp. 7,470 469,209 0.67
Rite Aid Corp. 7,700 457,188 0.66
Wal-Mart Stores, Inc. 23,060 809,982 1.16
--------- ------
1,736,379 2.49
TECHNOLOGY SERVICES (2.50%)
Computer Associates International, Inc. 2,000 149,125 0.21
Microsoft Corp. (a) 8,000 1,040,000 1.49
Oracle Corp. (a) 12,660 452,991 0.65
Parametric Technology Corp. (a) 2,400 105,900 0.15
---------- ------
1,748,016 2.50
TRANSPORTATION (2.15%)
Burlington Northern Santa Fe Corp. 15,740 1,495,300 2.15
<PAGE>
<CAPTION>
CAPSTONE GROWTH FUND, INC.
PORTFOLIO OF INVESTMENTS - OCTOBER 31, 1997
- --------------------------------------------------------------------------------
SHARES MARKET
OR VALUE PERCENTAGE OF
PAR VALUE (NOTE 1-A) NET ASSETS
<S> <C> <C> <C>
UTILITIES (8.50%)
AT&T Corp. 18,860 $ 922,961 1.33%
Ameritech Corp. 14,860 965,900 1.39
Bell Atlantic Corp. 16,880 1,348,290 1.94
Bellsouth Corp. 16,530 782,076 1.12
Entergy Corp. 23,870 583,323 0.84
SBC Communications, Inc. 11,600 738,050 1.06
Williams Companies, Inc. 11,200 570,500 0.82
---------- ------
5,911,100 8.50
TOTAL COMMON STOCK (Cost $54,138,820) 60,036,399 86.24
CORPORATE BONDS - 0.07%
Philip Morris Cos, Inc. 9.25%, 12/01/97 (Cost $49,983) $ 50,000 50,125 0.07
SHORT-TERM CORPORATE NOTES - 8.63%
Ford Motor Credit Corp., 5.65%, 11/04/97 1,500,000 1,500,235 2.16
Ford Motor Credit Corp., 5.64%, 11/07/97 1,500,000 1,500,235 2.16
General Electric Capital Corp., 5.40%, 11/03/97 3,000,000 3,001,352 4.31
---------- ------
TOTAL SHORT-TERM CORPORATE NOTES (Cost $6,001,822) 6,001,822 8.63
TOTAL INVESTMENTS (Cost $60,190,625) 66,088,346 94.94
OTHER ASSETS, LESS LIABILITIES 3,520,423 5.06
----------- ------
NET ASSETS $69,608,769 100.00%
=========== ======
<FN>
(a) Non-income producing security
</FN>
See Accompanying Notes to Financial Statements
</TABLE>
<PAGE>
<TABLE>
CAPSTONE GROWTH FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES OCTOBER 31, 1997
- --------------------------------------------------------------------------------
<CAPTION>
<S> <C> <C>
ASSETS:
Investments in securities at market value (identified cost $60,190,625) (Note 1-A)... $66,088,346
Cash and cash equivalents ........................................................... 3,162,060
Receivables:
Investment securities sold ..................................................... $ 9,655,108
Dividends and interest ......................................................... 81,870 9,736,978
----------- -----------
Total Assets ................................................................................... 78,987,384
-----------
LIABILITIES:
Payable for investment securities purchased ......................................... 9,283,003
Accrued advisory fees ............................................................... 43,209
Other accrued expenses .............................................................. 52,403
-----------
Total Liabilities .............................................................................. 9,378,615
-----------
NET ASSETS ................................................................................................... $69,608,769
===========
NET ASSET VALUE PRICE PER SHARE:
($69,608,769 / 4,154,497 shares outstanding) $.001 par value, 25,000,000 shares authorized ................... $ 16.76
===========
SOURCE OF NET ASSETS:
Paid in capital ..................................................................................... $47,740,314
Undistributed net investment income ................................................................. 658,977
Accumulated net realized gain on investments ........................................................ 15,311,757
Net unrealized appreciation of investments .......................................................... 5,897,721
-----------
Total .......................................................................................... $69,608,769
===========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
</TABLE>
<PAGE>
<TABLE>
CAPSTONE GROWTH FUND, INC.
STATEMENT OF OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME
Income:
Dividends .......................................................................................... $ 1,181,630
Interest ........................................................................................... 293,300
------------
Total Investment Income ........................................................................... 1,474,930
Expenses: (Note 2)
Advisory fees ......................................................................... $ 474,503
Administrative services ............................................................... 26,357
Distribution fees ..................................................................... 166,384
Transfer agent fees ................................................................... 78,422
Professional fees ..................................................................... 29,141
Director fees and expenses ............................................................ 14,054
Registration and filing fees .......................................................... 13,351
Reports and notices to stockholders ................................................... 12,739
Custodian fees ........................................................................ 11,693
Miscellaneous ......................................................................... 5,566
------------
Total Expenses ....................................................................... 832,210
Less: Custodian fees paid indirectly .................................................. 16,257
------------
Net Expenses .................................................................................... 815,953
------------
Net Investment Income ....................................................................... 658,977
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS: (Note 4)
Net realized gain from security transactions ............................................... 15,329,584
Net realized loss from futures contracts ................................................... (16,102)
------------
Net realized gain on investments .................................................................... 15,313,482
Unrealized appreciation of investments:
Beginning of year ..................................................................... 6,312,872
End of year ........................................................................... 5,897,721
------------
Net decrease in unrealized appreciation of investments ............................................. (415,151)
------------
Net realized and unrealized gain on investments .................................................... 14,898,331
------------
Net increase in net assets resulting from operations ........................................... $ 15,557,308
============
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
</TABLE>
<PAGE>
<TABLE>
CAPSTONE GROWTH FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED OCTOBER 31,
1997 1996
----------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS
Net investment income .................................................................. $ 658,977 $ 867,784
Net realized gain on investments ....................................................... 15,313,482 8,805,614
Net unrealized depreciation of investments ............................................. (415,151) (13,637,514)
------------ ------------
Net increase (decrease) in net assets resulting from operations ........................ 15,557,308 (3,964,116)
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income .................................................................. (863,940) (391,940)
Net realized gain on investments ....................................................... (8,807,338) (4,464,666)
CAPITAL SHARE TRANSACTIONS
Increase (decrease) in net assets resulting from capital share
transactions (Note 3) ............................................................. 3,492,744 (16,273,183)
------------ ------------
Net increase (decrease) in net assets ........................................... 9,378,774 (25,093,905)
NET ASSETS
Beginning of year ...................................................................... 60,229,995 85,323,900
------------ ------------
End of year (including undistributed net investment income of $658,977
and $863,940, respectively) ...................................................... $ 69,608,769 $ 60,229,995
============ ============
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS-OCTOBER 31, 1997
- --------------------------------------------------------------------------------
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
Capstone Growth Fund, Inc. (the "Fund"), is registered under the Investment
Company Act of 1940 (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 consistently followed by the Fund in the
preparation of its financial statements.
A) VALUATION OF SECURITIES - The Fund's investment 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.
B) FEDERAL INCOME TAXES - No provision has been made for Federal income taxes on
net income or capital gains, since it is the policy of the Fund to continue to
comply with the special provisions of the Internal Revenue Code applicable to
investment companies and to make sufficient distributions of income and capital
gains to relieve it from all, or substantially all, such taxes.
C) CASH EQUIVALENTS - Funds on deposit in money market mutual fund accounts are
considered to be a cash equivalent.
<PAGE>
CAPSTONE GROWTH FUND, INC.
D) FUTURES CONTRACTS - Initial margin deposits required upon entering into
futures contracts are made by depositing cash, as collateral, for the account of
the broker (the Fund's agent in acquiring the futures position). During the
period the futures contracts are open, changes in the value of the contract are
recognized as unrealized gains or losses by "marking to market" on a daily basis
to reflect the market value of the contract at the end of each day's trading.
Variation margin payments are made or received, depending upon whether
unrealized gains or losses are incurred. When the contract is closed the Fund
records a realized gain or loss equal to the difference between the proceeds
from (or cost of) the closing transaction and the Fund's basis in the contract.
The Fund may purchase or sell 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.
Futures contracts involve credit and market risk in excess of the amounts
reflected in the Statement of Assets and Liabilities. The contract amounts of
these futures contracts reflect the extent of the Fund's exposure to off-balance
sheet risk. The Fund's credit risk is minimized by entering only into futures
contracts which are traded on national futures exchanges and for which there
appears to be a liquid secondary market. The Fund assumes the market risk which
arises from any changes in securities values.
E) 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.
F) OTHER - The Fund distributes its net investment income and net realized gains
annually. Security transactions are accounted for on the date the securities are
purchased or sold. Cost is determined, and gains and losses are based, on the
identified cost basis for both financial statement and Federal income tax
purposes. Dividend income and distributions to shareholders are recorded on the
ex-dividend date. Discounts and premiums on bonds purchased are amortized over
the life of the bonds. Interest income and estimated expenses are accrued daily.
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.
The Fifth Third Bank of Cincinnati, Ohio performs accounting, bookkeeping
and pricing services for the Fund. Prior to February 10, 1997, CAMCO provided
these services and was reimbursed by the Fund for its costs. This fee was not
intended to include any profit to the Adviser and was in addition to the
advisory fee described above.
Capstone Asset Planning Company ("CAPCO") serves as Distributor of the
Fund's shares. 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 CAPCO an amount computed at an
annual rate of up to 0.25% 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, 1997, the Fund paid $166,384 in 12b-1 fees. Of this amount
approximately 7.5% was paid to Service Organizations other than CAPCO.
<PAGE>
CAPSTONE GROWTH FUND, INC.
The Fund's Custodian provided credits during the year in the amount of
$16,257 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 Distributor or CFS, received no compensation from
the Fund. During the year ended October 31, 1997, directors of the Fund who are
not "interested persons" received directors' fees of $8,750.
NOTE 3 - CAPITAL STOCK
At October 31, 1997 there were 4,154,497 shares outstanding. Transactions
in capital stock were as follows:
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
1997 1996
------------------------------- -------------------------------
SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
Shares sold ......................................... 336,768 $ 4,956,842 215,449 $ 3,088,151
Shares issued to shareholders in reinvestment
of distributions .................................. 606,599 8,540,957 336,133 4,494,094
------------ ------------ ------------ ------------
943,367 13,497,799 551,582 7,582,245
Shares redeemed ..................................... (659,908) (10,005,055) (2,855,388) (23,855,428)
------------ ------------ ------------ ------------
Net increase (decrease) ............................. 283,459 $ 3,492,744 (2,303,806) $(16,273,183)
============ ============ ============ ============
</TABLE>
NOTE 4 - PURCHASES AND SALES OF SECURITIES
Purchases and sales of securities other than U.S. Government securities and
short-term investments aggregated $130,365,684 and $141,201,220, respectively.
At October 31, 1997, the cost of investments for Federal income tax purposes was
$60,190,625. Accumulated net unrealized appreciation on investments was
$5,897,721 consisting of $6,542,445 gross unrealized appreciation and $644,724
gross unrealized depreciation.
NOTE 5 - DIVIDEND DISTRIBUTION
On November 11, 1997 the Board of Directors declared a distribution of
$3.81 a share, consisting of $3.65 from realized gains (long-term $1.686 per
share; short-term $1.964 per share) and $.16 from ordinary income. The
distribution is payable on December 8, 1997 to shareholders of record on
November 28, 1997.
<PAGE>
<TABLE>
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.
<CAPTION>
PER SHARE DATA YEAR ENDED OCTOBER 31,
----------------------------------------------------
1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value at beginning of year............................. $15.56 $13.82 $13.23 $14.43 $14.00
------ ------ ------ ------ ------
Income from investment operations:
Net investment income....................................... 0.16 0.22 0.17 0.11 0.17
Net realized and unrealized gain (loss) on investments...... 3.55 2.31 1.93 (0.23) 0.80
------ ------ ------ ------ ------
Total from investment operations............................ 3.71 2.53 2.10 (0.12) 0.97
------ ------ ------ ------ ------
Less distributions from:
Net investment income....................................... 0.22 0.06 0.16 0.13 0.22
Net realized gains.......................................... 2.29 0.73 1.35 0.95 0.32
------ ------ ------ ------ ------
Total distributions......................................... 2.51 0.79 1.51 1.08 0.54
------ ------ ------ ------ ------
Net asset value at end of year................................... $16.76 $15.56 $13.82 $13.23 $14.43
====== ====== ====== ====== ======
TOTAL RETURN (%) (1)............................................. 26.91 19.27 17.04 (0.67) 7.05
- ------------
RATIOS/SUPPLEMENTAL DATA
Net assets at end of year (in thousands)......................... $69,609 $60,230 $85,324 $80,941 $96,465
Ratio to average net assets:
Expenses (%)................................................ 1.25 1.29 1.31 1.28 1.24
Net investment income (%)................................... 0.99 1.31 1.21 0.78 0.19
Portfolio turnover rate (%)...................................... 229 173 119 12 45
Average commission rate (per share of security)(2)............... $.0658 $.0696
<FN>
(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.
</FN>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
</TABLE>
<PAGE>
CAPSTONE GROWTH FUND, INC.
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Shareholders and Board of Directors
of Capstone Growth Fund, Inc.
We have audited the accompanying statement of assets and liabilities of Capstone
Growth Fund, Inc., including the portfolio of investments as of October 31,
1997, and the related statements of operations, changes in net assets and
financial highlights for the year 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 audit. The statement of changes in net assets
for the year ended October 31, 1996 and the financial highlights for each of the
four years in the period ended October 31, 1996, were audited by other auditors,
whose report, dated November 18, 1996, expressed an unqualified opinion on that
statement and the financial highlights.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements and financial highlights are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of securities owned as of October 31, 1997 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 audit provided 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. at October 31, 1997, and the results of its
operations, changes in its net assets and financial highlights for the year
ended October 31, 1997, in conformity with generally accepted accounting
principles.
Briggs, Bunting & Dougherty, LLP
Philadelphia, Pennsylvania November 21, 1997 (except for Note 5 as to which the
date is December 1, 1997)
<PAGE>
CAPSTONE GROWTH FUND, INC
5847 SAN FELIPE, SUITE 4100
HOUSTON, TEXAS 77057
1-800-262-6631
ANNUAL REPORT TO SHAREHOLDERS
OCTOBER 31, 1997
- --------------------------------------------------------------------------------
DIRECTORS OFFICERS
Edward L. Jaroski Albert P. Santa Luca
President
James F. Leary
Dan E. Watson
John R. Parker Executive Vice President
Bernard J. Vaughan Edward L. Jaroski
Executive Vice President
Linda G. Giuffre
Treasurer
Iris R. Clay
Secretary
Norma R. Ybarbo
Assistant Secretary
- --------------------------------------------------------------------------------
INVESTMENT ADVISER & ADMINISTRATOR TRANSFER AGENT
Capstone Asset Management Company FPS Services, Inc.
5847 San Felipe 3200 Horizon Drive
Suite 4100 P.O. Box 61503
Houston, TX 77057 King of Prussia, PA 19406-0903
1-800-845-2340
DISTRIBUTOR CUSTODIAN
Capstone Asset Management Company Fifth Third Bank, N.A.
5847 San Felipe, Suite 4100 Fifth Third Center
Houston, TX 77057 38 Fountain Square Plaza
1-800-262-6631 Cincinnati, OH 45263
AUDITORS
Briggs, Bunting & Dougherty, LLP
Two Logan Square, Suite 2121
Philadelphia, PA 19103-4901
<PAGE>
ANNUAL REPORT
OCTOBER 31, 1997
CAPSTONE
GROWTH
FUND, INC.
GRAPHIC OF: Pyramid
A Member Of
THE CAPSTONE GROUP
of Mutual Funds
GRAPHIC OF: Pyramid
THE CAPSTONE GROUP
OF MUTUAL FUNDS
EQUITY
O CAPSTONE GROWTH FUND, INC.
FIXED INCOME
O CAPSTONE GOVERNMENT INCOME FUND
INTERNATIONAL/GLOBAL
O CAPSTONE JAPAN FUND
O CAPSTONE NEW ZEALAND FUND
For more complete information about the Capstone Funds
including charges and expenses, contact the Distributor at
the address below to receive additional prospectuses.
Please read it carefully before you
invest or send money.
This publication must be accompanied or preceded by a
current prospectus for Capstone Growth Fund, Inc.
CAPSTONE ASSET PLANNING COMPANY
5847 SAN FELIPE, SUITE 4100
HOUSTON, TEXAS 77057
1-800-262-6631
CAPSTONE GROWTH FUND, INC.
5847 SAN FELIPE, SUITE 4100
HOUSTON, TX 77057
