<PAGE> 1
CAPSTONE GROWTH FUND, INC.
Investing in stocks for long-term capital appreciation
FEBRUARY 26, 1999
PROSPECTUS
THE SECURITIES AND EXCHANGE COMMISSION DOES NOT APPROVE OR DISAPPROVE THE
INFORMATION IN THIS PROSPECTUS, AND DOES NOT DETERMINE WHETHER THIS INFORMATION
IS ACCURATE OR COMPLETE.
IT IS A CRIMINAL OFFENSE TO STATE OTHERWISE.
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
The Fund.................................................... 3
Fee Table................................................... 6
Management.................................................. 7
Buying and Selling Fund Shares.............................. 8
Dividends, Distributions and Taxes.......................... 12
Financial Highlights........................................ 14
How To Get More Information................................. 15
</TABLE>
2
<PAGE> 3
THE FUND
THE FUND'S INVESTMENT OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
The Fund seeks to provide long-term capital appreciation. It invests
primarily in common stocks of companies that represent a broad spectrum of the
economy. The Fund may also buy convertible and preferred securities and shares
of other investment companies. Although most of its investments will generally
be in U.S. issuers, the Fund may invest in foreign securities.
The Fund's investment approach is to invest in companies whose valuations
are attractive in relation to broad market averages and the company's own growth
rate. In selecting stocks for consideration, the Adviser reviews historical
performance and expected earnings growth, as well as recent relative
performance. For companies that rate favorably on those tests, the Adviser
performs a fundamental analysis. This analysis may involve evaluating the
company's industry, reviewing comments of securities analysts and press reports,
and interviewing company management. Finally, in selecting securities for
investment, the Adviser considers their impact on the Fund's overall risk and
return profile. When securities held by the Fund are reviewed according to these
standards and no longer rank favorably relative to other potential investments,
they may be considered for possible sale.
The Fund has authority to invest in securities of the U.S. Government, its
agencies and instrumentalities and in other debt securities that are rated at
least A by Moody's Investors Service (Moody's) or Standard & Poor's Corporation
(S&P) or deemed of comparable quality by the investment adviser. The Fund may
invest without limit in these instruments as a temporary defensive measure under
unusual market conditions, which can cause the Fund to fail to meet its
investment objective during such periods and to lose benefits when the market
begins to improve. (If these securities are downgraded, the adviser has the
discretion to hold or sell them.) The Fund may also use futures and options to
hedge its portfolio, and it may hedge its foreign securities purchases with
forward foreign currency exchange contracts.
The Fund's most recent annual/semiannual report contains information on
the Fund's recent investment strategies, as discussed above, and securities
holdings. (See back cover.)
PRINCIPAL RISKS
The Fund's investments will fluctuate in price. This means that Fund share
prices will go up and down, and an investor can lose money. Moreover, from time
to time, the Fund's performance may be better or worse than funds with similar
investment policies. Its performance is also likely to differ from that of funds
that use different strategies for selecting stocks.
Investments in stocks of any type involve risk because stock prices have
no guaranteed value. Stock prices may fluctuate -- at times dramatically -- in
response to various factors, including market conditions, political and other
events, and developments affecting the particular issuer or its industry or
geographic segment. Despite these risks, stocks have historically tended to
out-perform other types of securities over the longer term.
Investments in fixed income securities also entail risk. The values of
these securities will tend to fluctuate inversely with changes in interest
rates. Changes in the financial strength of the
3
<PAGE> 4
issuer, or its creditworthiness, can also affect the value of the securities it
issues. Convertible and preferred stocks, which have some characteristics of
both stock and fixed income securities, also entail, to some extent, the risks
of each.
The Fund's hedging activities, although they are designed to help offset
negative movements in the markets for the Fund's investments, will not always be
successful. Moreover, they can also cause the Fund to lose money or fail to get
the benefit of a gain. Among other things, these negative effects can occur if
the market moves in a direction that the Fund's investment adviser does not
expect or if the Fund cannot close out its position in a hedging instrument.
The Fund's investments in foreign securities also involve higher costs and
some risks that are different from its investments in U.S. securities. These
different risks come from differences in securities markets in other countries,
in tax policies, in the level of regulation and in accounting standards, as well
as from fluctuations in currency values. Further, there is often more limited
information about foreign issuers, and there is the possibility of negative
governmental actions and of political and social unrest.
The Fund's investments in other investment companies involve additional
expenses because Fund shareholders will indirectly bear a portion of the
expenses of such companies, including operating costs and administrative and
advisory fees. These expenses are in addition to similar expenses of the Fund
that shareholders bear directly.
PAST PERFORMANCE
The following two tables illustrate the Fund's past performance. The first
table provides some indication of the risks of an investment in the Fund by
showing how the Fund's returns have varied from year to year. The second shows
how the Fund has performed on a cumulative basis for the past ten years in
comparison to the S&P 500 Index, which is a broad measure of the performance of
the U.S. stock market. Each table assumes that dividends and distributions paid
by
4
<PAGE> 5
the Fund have been reinvested at net asset value in additional Fund shares. You
should remember that past performance does not necessarily indicate how the Fund
will perform in the future.
[GRAPH]
<TABLE>
<CAPTION>
Year-by-year total return
as of 12/31 each year (%)
- ------------------------- -----
<S> <C>
1989 ......................................... 30.76
1990 ......................................... (3.24)
1991 ......................................... 34.73
1992 ......................................... .84
1993 ......................................... 6.11
1994 ......................................... (7.77)
1995 ......................................... 29.20
1996 ......................................... 17.23
1997 ......................................... (28.74)
1998 ......................................... 23.32
</TABLE>
Best Quarter Q4 '98 +22.00%
Worst Quarter: Q3 '90 -12.74%
AVERAGE ANNUAL TOTAL RETURN AS OF 12/31/98
<TABLE>
<CAPTION>
1 YEAR 5 YEARS 10 YEARS
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fund 23.32% 17.27% 15.00%
S&P Index 28.52% 24.02% 19.l6%
</TABLE>
5
<PAGE> 6
FEES AND EXPENSES OF THE FUND
This table describes the fees and expenses you will pay if you invest in
the Fund. As you can see, the Fund has no fees that are charged directly to
shareholders. Shareholders do, however, bear indirectly a portion of the Fund's
annual operating expenses.
FEE TABLE
<TABLE>
<S> <C>
SHAREHOLDER FEES (fees paid directly from your investment)
Maximum front-end sales charge None
Maximum deferred sales charge None
Maximum sales charge on reinvested dividends and
distributions None
Redemption fee None
Exchange fee None
Maximum account fee None
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from Fund
assets)
Investment Advisory Fees 0.71%
12b-1 Fees* 0.25%
Other Expenses** 0.31%
Total Annual Fund Operating Expenses 1.27%
</TABLE>
* The Fund has adopted a Rule 12b-1 Plan that permits it to pay up to 0.25%
of its average net assets each year for distribution costs. These fees are
an ongoing charge to the Fund and therefore are an indirect expense to you.
Over time these fees may cost you more than other types of sales charge.
** "Other expenses" include such expenses as custody, transfer agent, legal,
accounting and registration fees.
EXAMPLE
The following example is intended to help you compare the cost of
investing in the Fund with the cost of investing in other mutual funds. The
example assumes that you invest $10,000 in the Fund for the time periods
indicated and then redeem all of your shares at the end of those periods. The
example also assumes that your investment returns 5% each year, and that the
Fund's operating expenses remain at a constant percentage. Because these
assumptions may vary from your actual experience, your actual return and
expenses may be different.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------------------------------------
<S> <C> <C> <C>
$129 $403 $697 $1,534
</TABLE>
6
<PAGE> 7
MANAGEMENT
THE ADVISER
The Fund's investment adviser is Capstone Asset Management Company
(CAMCO), 5847 San Felipe, Suite 4100, Houston, Texas 77057. CAMCO provides
continuous investment management and administration services for the Fund. CAMCO
also provides investment advisory and/or administrative services to several
other mutual funds and provides investment advice to pension and profit sharing
accounts, corporations and individuals. Total assets under management are about
$2.1 billion.
CAMCO receives advisory fees from the Fund which are based on the Fund's
net assets. For its fiscal year ended October 31, 1998, the Fund paid CAMCO fees
equal to 0.71% of the Fund's average net assets.
PORTFOLIO MANAGER
The Fund's portfolio manager is Dan E. Watson. Mr. Watson is one of the
Adviser's co-founders. He is the Adviser's Chief Investment Officer and Senior
Equity Portfolio Manager and serves on both the investment and client service
teams. Mr. Watson began his career with Texas Commerce Bank, and joined Tenneco,
Inc. in 1977, where he subsequently served as Assistant to the Chairman of the
Board. Mr. Watson helped form Tenneco Financial Services, the Adviser's
predecessor, in 1981 and served as its President. Mr. Watson received his
Bachelor's Degree from Baylor University (magna cum laude), Masters Degrees from
Baylor and Rice Universities, and a Ph.D. from Rice University.
7
<PAGE> 8
BUYING AND SELLING FUND SHARES
Share Price: The purchase and redemption price of Fund shares is
the Fund's net asset value (NAV) per share next
determined after your order is received. NAV is
generally calculated as of the close of regular
trading on the New York Stock Exchange, generally
4:00 p.m. Eastern time, and reflects the Fund's
aggregate assets less its liabilities. The Fund's
exchange-traded securities are valued at their market
value at that time (certain derivatives are priced at
4:15 Eastern time). Prices for debt securities may be
obtained from pricing services, except that
short-term debt securities are valued at amortized
cost. If market value quotations are not readily
available for an investment, the investment will be
valued at fair value as determined in good faith by
the Fund's Board of Directors. NAV is not calculated
on days the New York Stock Exchange is closed.
Minimum Investment: The minimum initial investment in the Fund is $200,
except that there is no minimum for continuous
investment plans. There is no minimum for subsequent
investments. (For telephone purchases, see below.)
Share Certificates: The Fund will not issue share certificates unless you
make a written request to the Transfer Agent. (The
Transfer Agent's address is provided below.)
Telephone Transactions: In your Investment Application, you may authorize the
Fund to accept orders for additional purchases,
redemptions and exchanges by phone. You will be
liable for any fraudulent order as long as the Fund
has taken reasonable steps to assure the order was
proper. Also note that during unusual market
conditions, you may experience delays in placing
telephone orders. (See "Purchasing Fund Shares" and
"Redeeming Fund Shares.")
Frequent Transactions: The Fund reserves the right to limit additional
purchase and exchange transactions by any investor
who makes frequent purchases, redemptions or
exchanges that the Adviser believes might harm the
Fund. In general, more than one transaction per month
may be viewed as excessive.
8
<PAGE> 9
PURCHASING FUND SHARES
You may use any of the following methods to purchase Fund shares.
Through Authorized Dealers - You may place your order through any
dealer authorized to take orders for the Fund. If the order is
transmitted to the Fund by 4:00 p.m. Central time, it will be
priced at the NAV per share determined on that day. Otherwise,
later orders will receive the NAV per share next determined. It is
the dealer's responsibility to transmit orders timely.
Through the Distributor - You may place orders directly with the
Fund's distributor by mailing a completed Investment Application
with a check or other negotiable bank draft (payable to Capstone
Growth Fund, Inc.) to the Transfer Agent.
The Transfer Agent's address is:
Capstone Growth Fund, Inc.
c/o First Data Investor Services Group, Inc.
P.O. Box 61503
211 South Gulph Road
King of Prussia, Pennsylvania 19406-3101
(Remember to make your check for at least any applicable minimum
noted above.)
INVESTING BY WIRE
You may purchase shares by wire if you have an account with a commercial
bank that is a member of the Federal Reserve System. You should be aware that
your bank may charge a fee for this service.
For an initial investment by wire, you must first call 1-800-845-2340 to
be assigned a Fund account number. Ask your bank to wire the amount of your
investment to:
United Missouri Bank KC NA, ABA #10-10-00695
For: First Data Investor Services Group, Inc.
Account #98-7037-0719;
Further credit Capstone Growth Fund, Inc.
Note that the wire must include: your name and address, your Fund account
number, and your social security or tax identification number. You must follow
up your wire with a completed Investment Application. This application is
contained in the Fund's prospectus. Mail the application to the Transfer Agent's
address (see above, under "Distributor").
For a subsequent investment by wire, ask your bank to wire funds to the
United Missouri Bank address noted above. The wire must include your name and
your Fund account number.
TELEPHONE INVESTMENT
After you have opened your account, you may make additional investments by
telephone if you completed the "Telephone Purchase Authorization" section of
your Investment Application.
9
<PAGE> 10
You may place a telephone order by calling the Transfer Agent at
1-800-845-2340.
The minimum for a telephone purchase is $1,000, and the maximum is five
times the NAV of your Fund shares on the day before your telephone order. (You
may not include the value of shares for which you have been issued
certificates.) Your order will be priced at the NAV next determined after your
call. Payment for your order must be received within 3 business days. Mail your
payment to the Transfer Agent's address (see "Distributor," above). If your
payment is not received within 3 business days, you will be liable for any
losses caused by your purchase.
PRE-AUTHORIZED INVESTMENT
You may arrange to make regular monthly investments of at least $25
through automatic deductions from your checking account by completing the
Pre-Authorized Payment section of the Investment Application.
REDEEMING FUND SHARES
You may redeem your Fund shares at any time by writing to the Transfer
Agent's address. The Fund does not charge any fee for redemptions. If you
request the redemption proceeds to be sent to your address of record, you
generally will not need a signature guarantee. A signature guarantee will be
required if:
o you were issued certificates for the shares you are redeeming;
o you want the proceeds to be mailed to a different address or to be
paid to someone other than the record owner;
o you want to transfer ownership of the shares.
Signature guarantee: A signature guarantee can be provided by most banks,
broker-dealers and savings associations, as well as by some credit unions.
Any certificates for shares you are redeeming must accompany your
redemption request. You will generally receive a check for your redemption
amount within a week.
EXPEDITED REDEMPTION
Through an authorized dealer: You may request a redemption through any
broker-dealer authorized to take orders for the Fund. The broker-dealer will
place the redemption order by telephone or telegraph directly with the Fund's
distributor and your share price will be based on the NAV next determined after
the distributor receives the order. The distributor does not charge for this
service, but the broker-dealer may charge a fee. You will generally receive your
proceeds within a week.
Telephone redemption: You may order a redemption by calling the Transfer
Agent at 1-800-845-2340 if:
o your redemption will be at least $1,000;
o no share certificates were issued for the shares you are redeeming;
10
<PAGE> 11
o your Investment Application authorized expedited telephone
redemption and designated a bank or broker-dealer to receive the
proceeds.
The proceeds will be mailed or wired to the designated bank or
broker-dealer on the next business day after your redemption order is received.
There is no fee charged by the Fund for this service, although a fee may be
imposed in the future. The Fund may also decide to modify or not to offer this
service. In this case, the Fund will attempt to provide reasonable prior notice
to shareholders.
SYSTEMATIC WITHDRAWAL
You may arrange for periodic withdrawals of $50 or more if you invest at
least $5,000 in the Fund. Under this arrangement, you must elect to have all
your dividends and distributions reinvested in shares of the Fund. Your
withdrawals under this plan may be monthly, quarterly, semi-annual or annual.
Payments under this plan are made by redeeming your Fund shares. The
payments do not represent a yield from the Fund and may be a return of your
capital, thus depleting your investment. Payments under this plan will terminate
when all your shares have been redeemed. The number of payments you receive will
depend on the size of your investment, the amount and frequency of payments, and
the yield and share price of the Fund, which can be expected to fluctuate.
You may terminate your plan at any time by writing to the Transfer Agent.
You continue to have the right to redeem your shares at any time. The cost of
the plan is borne by the Fund and there is no direct charge to you.
REDEMPTION IN KIND
If you place a redemption order for more than $1 million, the Fund
reserves the right to pay the proceeds in portfolio securities of the Fund,
rather than in cash, to the extent consistent with applicable legal
requirements. In that case, you will bear any brokerage costs imposed when you
sell those securities.
REDEMPTION SUSPENSIONS OR DELAYS
Although you may normally redeem your shares at any time, redemptions may
not be permitted at times when the New York Stock Exchange is closed for unusual
circumstances, or when the Securities and Exchange Commission allows redemptions
to be suspended.
If you recently purchased the shares by check, the Fund may withhold the
proceeds of your redemption order until it has reasonable assurance that the
purchase check will be collected, which may take up to 15 days from the date of
purchase.
11
<PAGE> 12
EXCHANGING FUND SHARES
You may exchange your Fund shares for shares of another Capstone fund at a
price based on their respective NAVs. There is no sales charge or other fee. We
will send you the prospectus of the fund into which you are exchanging and we
urge you to read it. If you have certificates for the shares you are exchanging,
your order cannot be processed until you have endorsed them for transfer and
delivered them to the Transfer Agent.
You may place an exchange order in two ways:
o you may mail your exchange order to the Transfer Agent's address.
o you may place your order by telephone if you authorized telephone
exchanges on your Investment Application. Telephone exchange orders
may be placed from 9:30 a.m. to 4:00 p.m. Eastern time, on any
business day.
Exchanges into a fund can be made only if that fund is eligible for sale
in your state. The Fund may terminate or amend the exchange privilege at any
time with 60 days' notice to shareholders.
Remember that your exchange is a sale of your shares. Tax consequences are
described under "Dividends, Distributions and Taxes."
TAX-DEFERRED RETIREMENT PLANS
Fund shares may be used for virtually all types of tax-deferred retirement
plans, including traditional, Roth and Education IRAs and Simplified Employee
Pension Plans. For more information, call 1-800-262-6631.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
The Fund expects to pay dividends from its net income and distributions
from its net realized capital gains at least annually, generally in November.
Normally, income dividends and capital gains distributions on your Fund shares
will be paid in additional shares of the Fund, with no sales charge. However, on
your Investment Application, you may elect one of the following other options:
Option 1 To have income dividends paid in cash and capital gains
distributions paid in additional Fund shares.
Option 2 To have both income dividends and capital gains distributions
paid to you in cash.
There is no sales charge or other fee for either option. If you select
Option 1 or Option 2 and the checks sent to you cannot be delivered or remain
uncashed for six months, the aggregate amount of those checks will be invested
in additional Fund shares for your account at the then current NAV, and all your
future dividends and distributions will be paid in Fund shares.
12
<PAGE> 13
TAX TREATMENT OF DIVIDENDS, DISTRIBUTIONS AND REDEMPTIONS
You will generally be subject to federal income tax each year on dividend
and distribution payments, as well as on any gain realized when you sell
(redeem) or exchange your Fund shares. If you hold Fund shares through a
tax-deferred account (such as a retirement plan), you generally will not owe tax
until you receive a distribution from the account.
The Fund will let you know each year which amounts of your dividend and
distribution payments are to be taxed as ordinary income and which are treated
as long-term capital gain. The tax treatment of these amounts does not depend on
how long you have held your Fund shares or on whether you receive payments in
cash or additional shares.
The tax treatment of any gain or loss you realize when you sell or
exchange Fund shares will depend on how long you held the shares.
You should consult your tax adviser about any special circumstances that
could affect the federal, state and local tax treatment of your Fund
distributions and transactions.
YEAR 2000 RISKS
Computer users around the world are faced with the dilemma of the Year
2000 issue, which stems from the use of two digits in most computer systems to
designate the year. When the year advances from 1999 to 2000, many computers
will not recognize "00" as the Year 2000. This issue could potentially affect
every aspect of computer-related activity, on an individual and corporate level.
The Fund could be adversely impacted if the computer systems used by the Adviser
and other service providers have not been converted to meet the requirements of
the new century. The Fund's Adviser has evaluated its own internal systems and
expects them to be fully capable to handle the change of millennium. The Adviser
is working with the providers of the software it uses to address the Year 2000
issue, and is monitoring on an ongoing basis the progress of the Fund's other
service providers to convert their systems to comply with the requirements of
Year 2000. The Adviser currently has no reason to believe that these service
providers will not be fully and timely compliant. However, investors should be
aware that there can be no assurance that all systems will be successfully
converted prior to January 1, 2000, in which case it would become necessary for
the Fund to enter into agreements with new service providers or to make other
arrangements.
With respect to securities in which the Fund invests, Year 2000 compliance
is considered as part of the fundamental review of issuers held by the Fund or
being considered for investment, using data from a variety of sources.
13
<PAGE> 14
FINANCIAL HIGHLIGHTS
The following table is intended to help you understand the Fund's
financial performance for the past five years. The "Per Share Data" reflects
financial results for a single Fund share. The "Total Return" numbers represent
the rate that an investor would have earned (or lost) on an investment in the
Fund (assuming reinvestment of all dividends and distributions). The information
for the years ended October 31, 1998 and 1997 has been audited by Briggs,
Bunting & Dougherty, whose report, along with the Fund's financial statements,
are included in the Fund's Annual Report for the fiscal year ended October 31,
1998, which is available on request. The information for each of the three years
in the period ended October 31, 1996 was audited by other auditors.
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
-----------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA
Net asset value at beginning of period.................. $ 16.76 $ 15.56 $ 13.82 $ 13.23 $ 14.43
------- ------- ------- ------- -------
Income from investment operations:
Net investment income................................. 0.12 0.16 0.22 0.17 0.11
Net realized and unrealized gain (loss)............... 2.11 3.55 2.31 1.93 (0.23)
------- ------- ------- ------- -------
Total from investment operations...................... 2.23 3.71 2.53 2.10 (0.12)
Less distributions from:
Net investment income................................. (0.16) (0.22) (0.06) (0.13) 0.11
Net realized gains.................................... (3.65) (2.29) (0.73) (1.35) (0.95)
------- ------- ------- ------- -------
Total distributions................................... (3.81) (2.51) (0.79) (1.51) (1.08)
------- ------- ------- ------- -------
Net asset value at end of period........................ $ 15.18 $ 16.76 $ 15.56 $ 13.82 $ 13.23
======= ======= ======= ======= =======
TOTAL RETURN (%)(1)..................................... 15.51% 26.91% 19.27% 17.04% (0.67)%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (in thousands).............. $71,539 $69,609 $60,230 $85,324 $80,941
Ratio of total expenses to average net assets........... 1.27% 1.25% 1.29% 1.31% 1.28%
Ratio of net investment income to average net assets.... 0.81% 0.99% 1.31% 1.21% 0.78%
Portfolio turnover rate................................. 93% 229% 173% 119% 12%
</TABLE>
- ---------------
1 Calculated without sales charge. Sales charge eliminated on August 21, 1995.
14
<PAGE> 15
HOW TO GET MORE INFORMATION
Further information about the Fund is contained in:
o the Statement of Additional Information (SAI). The SAI contains
more detail about some of the matters discussed in the Prospectus.
The SAI is incorporated into the Prospectus by reference.
o Annual and Semi-Annual Reports about the Fund describe its
performance and list its portfolio securities. They also include a
letter from Fund management describing the Fund's strategies and
discussing market conditions and trends and their implications for
the Fund.
You may obtain free copies of the SAI or reports, or other information
about the Fund or your account, by calling 1-800-262-6631.
You may also get copies of the SAI, reports and other information directly
the Securities and Exchange Commission (SEC) by:
o visiting the SEC's public reference room. (Call 1-800-SEC-0330 for
information.)
o sending a written request, plus a duplicating fee, to the SEC's
Public Reference Section, Washington, D.C. 20549-6009.
o visiting the SEC's website -- http://www.sec.gov.
The Fund's Investment Company Act File Number with the SEC is: 811-1436.
15
