CAPSTONE GROWTH FUND, INC.
- --------------------------------------------------------------------------
Dear Shareholder,
For many investors, 1998 may well be remembered as the year of the
rollercoaster. As measured by the S&P 500, for the first six months of the
year, the equity market could do no wrong, returning 17.7% for the period.
This return was all the more astounding because it came atop the robust
returns of the prior three years. Then, during the summer months, with the
collapse in Asian markets, the continued stagnation in Japan, and the fear
of spreading "Asian Flu" impacting domestic economic activity, the equity
market finally gave way and entered its first correction (some might argue
bear market) since the summer and fall of 1990. From the beginning of July,
1998 to the end of August, 1998, the S&P 500 declined by 15.35%. Using daily
data, from its high on July 17 to the low on August 31st, the S&P 500 fell
by 19.18%.
While the correction itself was seen by some as long overdue, it is the
recovery from the lows that has attracted the most attention. From its
August low through the end of November, the S&P 500 rose 22.01%. A historical
perspective may be useful in evaluating how the recent decline and recovery
compares to previous experience.
Table 1 below presents the S&P 500's experience of decline and recovery for
the past 50 years. For the purpose of this table, monthly data are used. Only
declines exceeding 10% from the month end high are considered. The duration
of the decline in months is shown, followed by the actual percentage decline
during the period. The next three columns show the market's recovery at 1,
3 and 6 months from the bottom. The final column shows the number of months
that elapsed before the market recovered to its pre-decline level.
Table 1 indicates that from the perspective of history, the recent market
decline has been very routine, even below the average 17.34% for the twelve
periods of decline in the past 50 years. In its duration it has been shorter
than average, but again, not unusual. What has been unusual is the speedy
ascent following the decline. The S&P accomplished in 3 months the percentage
of recovery one might more readily expect at the 6 month interval. We
strongly suspect that the more rapid recovery has its roots in the interest
rate reductions by the Federal Reserve during this period. In fact, much of
the increase occurred on October 15th, the day of the surprise rate cut by
the Federal Reserve.
Table 1 shows that the 12 market declines during the past 50 years have not
been evenly distributed across time. If they were evenly distributed, we
would expect to see between 2 and 3 periods of decline during each of the
ten-year periods covered. But we do not. For example, during the decade
spanning the beginning of 1948 to the end of 1957, there was only 1 period
of market decline. In contrast, the decade of the 1960's had 4 declining
periods, and the 70's had 3. The 1980's and 1990's thus far have had only
2 periods of decline each. In broadest terms, the similarities between
the 50's, 80's and 90's are that they were periods of relative price
stability and modest economic growth. By contrast, the 1960's, particularly
the latter half, were characterized by rising inflation, rising interest
rates, and strong economic growth. The 1970's were the worst of all worlds,
being characterized by rapidly rising inflation, rising interest rates, and
sluggish or negative growth.
TABLE 1
<TABLE>
Analysis of Market Declines and Recoveries over the Past 50 Years (Includes
periods of market decline of greater than 10% from prior month end)
<CAPTION>
- - - From Bottom of Decline - - -
Decline from the Number of Percent % Change % Change % Change #of Months to
Beginning of To the End of Months Decline 1 month 3 months 6 months Pre-Decline Level
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
August 1957 December 1957 5 15.00% 4.45% 6.33% 15.50% 12
March 1962 September 1962 7 18.10% 0.64% 13.25% 20.52% 13
May 1966 September 1966 5 14.50% 4.94% 5.90% 19.94% 10
June 1969 July 1969 2 10.98% 4.54% 6.72% 1.76% 21
November 1969 January 1970 3 11.74% 5.86% -3.25% -12.95% 16
April 1970 June 1970 3 18.02% 7.52% 16.88% 29.06% 8
November 1973 September 1974 11 38.94% 16.57% 9.41% 34.46% 27
July 1975 September 1975 3 10.95% 6.37% 8.64% 24.95% 7
August 1981 September 1981 2 10.27% 5.28% 7.00% -0.74% 15
September 1987 November 1987 3 29.52% 7.38% 17.22% 15.80% 21
June 1990 October 1990 5 14.70% 6.44% 14.19% 25.63% 9
July 1998 August 1998 2 15.35% 6.40% 22.01% ? 5
______ ______ ______ ______ ______ ______
Averages 4.25 17.34% 6.37% 10.36% 15.81% 13.67
</TABLE>
<PAGE>
CAPSTONE GROWTH FUND, INC.
- ---------------------------------------------------------------------------
Our outlook calls for continued low inflation and moderate economic growth.
As this work shows, and recent experience has reminded, financial markets
can fall even in a positive environment. However, the fifty years of history
examined here also demonstrate that unpleasant downdrafts are less likely
when inflation is low and growth is moderate.
Performance of your fund for the past fiscal year has been better than that
of the Lipper Equity Growth Fund Index*. For the fiscal year ended
October 31, 1998, your fund has returned 15.37% vs.13.90% for the Lipper
Index. We would add that during the recent "bounce back", from the end of
August to the end of November, the Fund** has risen 22.31% vs. 20.86% for
the Lipper Index.
We thank you for your continued support.
Sincerely,
/s/ Dan Watson
___________________________
Dan Watson,
President and Portfolio Manager
LINE GRAPH
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 10/31/98
1 year 5 year 10 year
Growth Fund 15.51% 15.24% 13.71%
Past performance is not predictive of future performance
GRAPH DATA:
Growth Fund Lipper Equity Growth Fund
11/01/88 10000 10000
10/31/89 12847.3 12525.7
10/31/90 11749.4 10918.8
10/31/91 15694.5 15444.5
10/31/92 16608.8 16649.9
10/31/93 17779.7 19810.5
10/31/94 17661.4 20215.4
10/31/95 20670.1 25062.4
10/31/96 24652.9 29320.7
10/31/97 31287.9 37640.2
10/31/98 36139.6 42864.1
*The Lipper Equity 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.
PORTFOLIO OF INVESTMENTS - October 31, 1998
- --------------------------------------------------------------------------
Market
Value Percentage of
COMMON STOCKS (99.84%) Shares (Note 1-A) Net Assets
COMMERCIAL SERVICES (1.36%)
McGraw Hill Co., Inc. 6,910 $ 621,468 0.87%
Waste Management, Inc. 7,740 349,268 0.49%
__________ _______
970,736 1.36%
CONSUMER DURABLES (2.26%)
Chrysler Corporation 10,460 503,388 0.70%
Eastman Kodak 5,340 413,850 0.58%
Ford Motor Company 12,950 702,537 0.98%
__________ _______
1,619,775 2.26%
CONSUMER NON-DURABLES (9.23%)
Anheuser Busch Cos., Incorporated 8,250 490,359 0.69%
Colgate 4,960 438,340 0.61%
General Mills Incorporated 6,420 471,870 0.66%
Loews Corporation 5,150 483,778 0.68%
Pepsico Incorporated 15,290 516,037 0.72%
Philip Morris Cos., Incorporated 20,900 1,068,513 1.49%
Proctor & Gamble Company 12,890 1,145,599 1.60%
Sara Lee Corporation 6,780 404,681 0.57%
UST Incorporated 16,650 566,100 0.79%
Unilever N V 8,030 604,258 0.84%
Wm. Wrigley Jr. Company 5,160 417,638 0.58%
__________ _______
6,607,173 9.23%
CONSUMER SERVICES (4.03%)
The Walt Disney Company 27,960 753,173 1.05%
Gannett Co., Incorporated 10,510 650,306 0.91%
McDonalds Corporation 12,050 805,844 1.13%
Time Warner, Inc. 7,240 671,962 0.94%
__________ _______
2,881,285 4.03%
ELECTRONIC TECHNOLOGY (10.54%)
Cisco Systems (a) 15,652 986,107 1.38%
Dell Computer Corporation 12,800 840,000 1.17%
Hewlett-Packard Company 12,550 755,353 1.06%
Intel Corporation 17,060 1,521,539 2.13%
International Business Machines 9,480 1,407,187 1.97%
Lockheed Martin Corporation 5,570 620,359 0.87%
Lucent Technologies 12,830 1,028,806 1.44%
Texas Instruments, Inc. 5,800 370,838 0.52%
__________ _______
7,530,189 10.54%
<PAGE>
CAPSTONE GROWTH FUND, INC.
PORTFOLIO OF INVESTMENTS - October 31, 1998
- --------------------------------------------------------------------------
Market
Value Percentage of
Shares (Note 1-A) Net Assets
ENERGY MINERALS (6.03%)
ALCOA 7,710 $ 611,017 0.85%
Chevron Corporation 10,020 816,630 1.14%
Exxon Corporation 21,470 1,529,738 2.14%
Phillips Petroleum Company 15,500 670,375 0.94%
Texaco, Incorporated 11,530 683,873 0.96%
__________ _______
4,311,633 6.03%
FINANCE (18.86%)
American Express Corporation 6,580 581,508 0.81%
American International Group 10,155 865,714 1.21%
Associates First Capital Class A 4,780 336,990 0.47%
BB & T Corporation 23,000 820,813 1.15%
Bank One Corporation 12,544 613,098 0.86%
Bankamerica Corporation 17,389 998,781 1.40%
Chase Manhattan Corporation 9,940 564,716 0.79%
Citigroup, Inc. 27,575 1,297,748 1.81%
Comerica Incorporated 7,635 492,457 0.69%
Federal Home Loan Mortgage Corporation 13,770 791,775 1.11%
Federal National Mortgage Association 11,260 797,349 1.11%
First Union Corporation 11,260 653,080 0.91%
Fleet Financial Group Incorporated 14,180 566,314 0.79%
General Re Corporation 2,080 456,950 0.64%
Jefferson Pilot Company 8,600 522,450 0.73%
Keycorp 13,960 423,162 0.59%
MBIA Incorporated 10,740 656,482 0.92%
J.P. Morgan & Company 4,340 409,045 0.57%
Morgan Stanley, Dean Witter & Company 9,550 618,362 0.86%
Transamerica Corporation 4,240 440,960 0.62%
Wells Fargo & Company 1,590 588,300 0.82%
__________ _______
13,496,054 18.86%
HEALTH TECHNOLOGY (12.11%)
Abbott Labs 19,220 902,139 1.26%
American Home Products Corporation 16,240 791,700 1.11%
Bristol-Myer Squibb Company 9,440 1,043,710 1.46%
Johnson & Johnson 12,530 1,021,195 1.43%
Lilly Eli & Company 10,020 810,994 1.13%
Merck & Company 10,810 1,462,052 2.04%
Pfizer, Incorporated 11,400 1,223,363 1.71%
Schering-Plough Corporation 7,710 793,166 1.11%
Warner Lambert Company 7,840 614,460 0.86%
__________ _______
8,662,779 12.11%
<PAGE>
CAPSTONE GROWTH FUND, INC.
PORTFOLIO OF INVESTMENTS - October 31, 1998
- --------------------------------------------------------------------------
Market
Value Percentage of
Shares (Note 1-A) Net Assets
PRODUCER MANUFACTURING (11.65%)
Emerson Electric Company 10,500 $ 693,000 0.97%
General Electric Company 25,640 2,243,500 3.14%
Goodyear Tire & Rubber 8,920 480,565 0.67%
Halliburton Company 13,250 476,172 0.67%
Honeywell, Incorporated 5,970 476,854 0.67%
Illinois Tool Works 7,440 477,090 0.67%
Minnesota Mining & Manufacturing Company 9,070 725,600 1.01%
Raytheon Company 7,570 439,533 0.61%
Rohm & Haas Company 15,840 534,600 0.75%
Temple-Inland Inc. 6,850 332,653 0.46%
Tyco International 7,700 476,919 0.67%
Weyerhaeuser Company 9,850 461,103 0.64%
Xerox Corporation 5,300 513,437 0.72%
__________ _______
8,331,026 11.65%
RETAIL TRADE (5.00%)
Dayton Hudson Corporation 12,620 534,772 0.75%
Home Depot, Incorporated 15,940 693,390 0.97%
Rite Aid Corporation 10,900 432,594 0.60%
Sears, Roebuck & Company 9,620 432,299 0.60%
Wal-Mart Stores, Incorporated 21,530 1,485,570 2.08%
__________ _______
3,578,625 5.00%
TECHNOLOGY SERVICES (6.06%)
EMC Corporation 6,030 388,181 0.54%
First Data Corporation 20,000 530,000 0.74%
Microsoft Corporation 22,440 2,375,835 3.32%
Oracle Corporation 12,020 355,341 0.50%
United Technologies Corporation 7,220 687,705 0.96%
__________ _______
4,337,062 6.06%
TRANSPORTATION (0.79%)
Burlington North/Santa Fe 18,240 563,160 0.79%
<PAGE>
CAPSTONE GROWTH FUND, INC.
PORTFOLIO OF INVESTMENTS - October 31, 1998
- --------------------------------------------------------------------------
Market
Value Percentage of
Shares (Note 1-A) Net Assets
UTILITIES (11.92%)
AT&T Corporation 14,520 $ 903,870 1.26%
Airtouch Communications, Incorporated (a) 11,230 628,880 0.88%
Ameritech Corporation 10,000 539,375 0.75%
Bell Atlantic Corporation 17,840 947,750 1.32%
Bellsouth Corporation 9,560 763,007 1.07%
Consolidated Natural Gas Company 11,590 612,097 0.86%
Duke Power 6,050 391,359 0.55%
Enron Corporation 11,090 584,998 0.82%
GTE Corporation 8,040 471,848 0.66%
MCI Worldcom, Incorporated 18,770 1,037,055 1.44%
SBC Communications, Incorporated 14,000 648,375 0.91%
Sprint Corporation (Fon Group) 6,190 475,082 0.66%
Williams Cos., Incorporated 19,510 535,306 0.74%
__________ _______
8,539,002 11.92%
TOTAL COMMON STOCK (Cost $58,946,348) 71,428,499 99.84%
Par Value
CASH EQUIVALENTS (0.15%)
Aim Prime Money Market (Cost $102,826) $102,826 102,826 0.15%
TOTAL INVESTMENTS (Cost $59,049,174) 71,531,325 99.99%
OTHER ASSETS, LESS LIABILITIES 8,097 0.01%
__________ ______
NET ASSETS $71,539,422 100.00%
__________ ______
__________ ______
[FN]
(a) Non-income producing security
</FN>
See Accompanying Notes to Financial Statments
<PAGE>
CAPSTONE GROWTH FUND, INC.
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES - October 31, 1998
- --------------------------------------------------------------------------
<S> <C>
ASSETS:
Investments in securities at market value (identified cost $59,049,174)(Note 1A) $ 71,531,325
Cash 69,454
Receivable for capital stock sold 184
Dividends receivable 82,054
Interest receivable 992
_____________
Total Assets 71,684,009
_____________
LIABILITIES:
Payable for capital stock redeemed 288
Accrued expenses 144,299
_____________
Total Liabilities 144,587
_____________
NET ASSETS $ 71,539,422
_____________
_____________
NET ASSET VALUE PRICE PER SHARE:
($71,539,422 / 4,713,301 shares outstanding of $.001 par value, 200,000,000 shares authorized) $15.18
_____________
_____________
SOURCE OF NET ASSETS:
Paid in capital $ 55,369,508
Undistributed net investment income 580,529
Accumulated net realized gain on investments 3,107,234
Net unrealized appreciation of securities 12,482,151
_____________
Total $ 71,539,422
_____________
_____________
See Accompanying Notes to Financial Statements
</TABLE>
<PAGE>
CAPSTONE GROWTH FUND, INC.
STATEMENT OF OPERATIONS For The Year Ended - October 31, 1998
- --------------------------------------------------------------------------
INVESTMENT INCOME:
Income:
Dividend income $ 1,010,725
Interest income 479,510
____________
Total Investment Income 1,490,235
Expenses:
Advisory fees (Note 2) $ 505,250
Distribution fees (Note 2) 184,752
Transfer agent fees 61,336
Reports and notices to stockholders 30,378
Audit fees 26,450
Legal fees 3,974
Directors' fees and expenses 18,220
Custodian fees 12,185
Fund accounting fees 46,237
Registration and filing fees 13,300
Miscellaneous 6,469
____________
Total Expenses 908,551
Less: Custodian fees paid indirectly (Note 2) (12,611)
____________
Net Expenses 895,940
____________
Net Investment Income 594,295
____________
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain from security transactions 3,124,664
Unrealized appreciation of investments:
Beginning of period 5,897,721
End of period 12,482,151
____________
Net change in unrealized appreciation of investments 6,584,430
____________
Net realized and unrealized gain on investments 9,709,094
____________
Net increase in net assets resulting from operations $10,303,389
____________
____________
See Accompanying Notes to Financial Statements
<PAGE>
CAPSTONE GROWTH FUND, INC.
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
- ---------------------------------------------------------------------------
<S> <C> <C>
Year Ended Year Ended
October 31, 1998 October 31, 1997
OPERATIONS:
Net investment income $ 594,295 $ 658,977
Net realized gain on investments 3,124,664 15,313,482
Net change in unrealized appreciation (depreciation) of investments 6,584,430 (415,151)
____________ ____________
Net increase in net assets resulting from operations 10,303,389 15,557,308
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (672,743) (863,940)
Net realized gain on investments (15,329,188) (8,807,338)
____________ ____________
Net decrease in net assets reulting from distributions (16,001,931) (9,671,278)
CAPITAL SHARE TRANSACTIONS:
Increase in net assets resulting from capital share transactions (Note 3) 7,629,195 3,492,744
____________ ____________
Total increase in net assets 1,930,653 9,378,774
NET ASSETS:
Beginning of period 69,608,769 60,229,995
_ ___________ ____________
End of period (including undistributed net investment income of
$580,529 and $658,977 respectively) $71,539,422 $69,608,769
____________ ____________
____________ ____________
See Accompanying Notes to Financial Statements
</TABLE>
___________________________________________________________________________
NOTES TO FINANCIAL STATEMENTS - October 31, 1998
- ---------------------------------------------------------------------------
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 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.
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.
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, 1998, the Fund paid
$184,752 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 period in the amount of
$12,611 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, 1998, directors of the Fund
who are not "interested persons" received directors' fees of $18,220.
Note 3 - Capital Stock
At October 31, 1998 there were 4,713,301 shares outstanding. Transactions
in capital stock were as follows:
<TABLE>
<CAPTION> Year Ended Year Ended
October 31, 1998 October 31, 1997
Shares Amount Shares Amount
<S> <C> <C> <C> <C>
Shares sold 471,488 $ 7,234,565 336,768 $ 4,956,842
Shares issued to shareholders in reinvestment
of distributions 1,008,093 13,951,999 606,599 8,540,957
_________ __________ ________ __________
1,479,581 21,186,564 943,367 13,497,799
Shares redeemed (920,777) (13,557,369)(659,908) (10,005,055)
_________ __________ ________ __________
Net increase (decrease) 558,804 $ 7,629,195 283,459 $ 3,492,744
_________ __________ ________ __________
_________ __________ ________ __________
</TABLE>
Note 4 - Purchases and Sales of Securities
Purchases and sales of securities other than U.S. Government securities
and short-term investments aggregated $59,474,388 and $57,791,451 respectively.
At October 31, 1998, the cost of investments for Federal income tax purposes
was $59,049,174. Accumulated net unrealized appreciation on investments was
$12,482,151 consisting of $13,549,778 gross unrealized appreciation and
$1,067,627 gross unrealized depreciation.
Note 5 - Dividend Distribution
On November 16, 1998 the Board of Directors declared a distribution of
$0.78 a share, consisting of $0.66 from long-term realized gains and $0.12
from ordinary income. The distribution was payable on December 8, 1998 to
shareholders of record on November 30, 1998.
<PAGE>
CAPSTONE GROWTH FUND, INC.
FINANCIAL HIGHLIGHTS
- ----------------------------------------------------------------------------
The following table sets forth the per share operating performance data
for a share of capital stock outstanding, total return, ratios to average
net assets and other supplemental data for each year indicated.
<TABLE>
<CAPTION>
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) (0.16) (0.13)
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%
<FN>
(1) Calculated without sales charge. Sales charge eliminated on August 21, 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, 1998, the related statement of operations for the year then
ended, and the statement of changes in net assets, and the financial
highlights for each of the two 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. The
financial highlights for each of the three years in the period ended
October 31, 1996 were audited by other auditors whose report dated
November 18, 1996, expressed an unqualified opinion on 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, 1998, 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, 1998, the results of its
operations for the year then ended, and the changes in its net assets, and
the financial highlights for each of the two years in the period then ended
in conformity with generally accepted accounting principles.
Briggs, Bunting & Dougherty, LLP
Philadelphia, Pennsylvania
November 20, 1998 (except for
Note 5 as to which the date is
December 1, 1998)
<PAGE>
CAPSTONE GROWTH FUND, INC.
5847 San Felipe, Suite 4100
Houston, Texas 77057
1-800-262-6631
ANNUAL REPORT TO SHAREHOLDERS
October 31, 1998
DIRECTORS OFFICERS
Edward L. Jaroski Dan E. Watson
President
James F. Leary
Edward L. Jaroski
John R. Parker Executive Vice President
Bernard J. Vaughan Linda G. Giuffre
Secretary/Treasurer
INVESTMENT ADVISER & ADMINISTRATOR TRANSFER AGENT
Capstone Asset Management Company First Data Investor Services Group, 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 Planning Company Fifth Third Bank
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, 1998
Capstone
Growth
Fund, Inc.
Capstone logo
A Member Of
The Capstone Group
of Mutual Funds
Capstone logo The Capstone Group
of Mutual Funds
Equity
Capstone Growth Fund, Inc.
Fixed Income
Capstone Government Income Fund
International/Global
Capstone Japan Fund
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
