CAPSTONE GROWTH FUND, INC.
- --------------------------------------------------------------------------------
Dear Shareholder:
We are pleased to present the annual report for Capstone Growth Fund, Inc. for
the period ended October 31, 1999.
ECONOMIC OVERVIEW
The third quarter of 1999 marked the fourth consecutive quarter of rising
interest rates. Investors could take some solace in the fact that the rise was
not as severe as what transpired in the first half of 1999, the yield on the
thirty-year U.S. Treasury bond rose just 8 basis points to finish the third
quarter with a yield of 6.05%. The year-over-year rise in interest rates has
been rather dramatic, recall that on September 30th of last year the yield on
the thirty-year Treasury was 4.96%. Interest rates have been pushed higher by
ongoing fears of possible inflation sparked by tight labor markets in the U.S.
and by further evidence that the modest recoveries in foreign economies will
continue. The rise in interest rates put pressure on equity prices leading to a
6.25% decline in the S&P 500 for the third quarter.
The recent strength in the Yen can be attributed to the modest economic recovery
that continues to unfold in Japan. Since late May, the Yen has appreciated more
than 14% versus the dollar. Japan's recovery is also confirmed by the rise in
their index of leading economic indicators, which rose to 85.70 in August - the
highest level in five years. While we do not believe the Japanese economy is on
the cusp of a dramatic turnaround, the positive developments we have seen so far
should help to bring some much needed stability to the entire region. For many
quarters, the U.S. economy has been the only bright spot on the world economic
stage. As other regions begin to show signs of improved economic performance
this will heighten fears of higher commodity prices and inflation.
At the August 24th meeting the Federal Reserve voted to raise short-term
interest rates by 25 basis points to 5.25%. This followed the 25 basis point
increase from the June meeting. In announcing the rate increase, the Fed also
adopted a symmetrical directive (neutral stance) for the near term noting that
the two rate increases from the summer and the firming of conditions in the U.S.
financial markets "should markedly diminish the risk of rising inflation going
forward." The move by the Federal Reserve was not the only noteworthy central
bank action of the quarter. In early September, the Bank of England voted to
raise its repurchase rate by 25 basis points to 5.25%. The move was prompted by
surging home prices in the U.K., the lowest unemployment in two decades, and by
faster economic growth worldwide. Many analysts are anticipating that the
European Central Bank (ECB) will also raise short-term interest rates soon in
response to a rebound in economic growth for the 11 nations governed by the ECB.
As we move into the final quarter of 1999 we expect the modest recovery in
overseas economies to continue. We would not be surprised to see the pace of
growth in the U.S. subside modestly and move closer to the 3% pace that the Fed
would like to see. The U.S. consumer may be a bit less ebullient going forward
since higher interest rates have eliminated many of the opportunities to benefit
from mortgage refinancing. Also, with equity markets likely to finish the year
with positive returns significantly lower than the last few years, spending
induced by the "wealth effect" may be diminished.
Recovery Starting in Japan
Index of Leading Economic Indicators
Date Price
- ---------------------------
8/99 85.70
7/99 44.40
6/99 54.50
5/99 68.20
4/99 63.60
3/99 63.60
2/99 36.40
1/99 54.50
12/98 45.50
11/98 54.50
10/98 45.50
9/98 63.60
8/98 45.50
7/98 45.50
6/98 27.30
5/98 27.30
4/98 9.10
3/98 36.40
2/98 18.20
1/98 18.20
12/97 18.20
11/97 13.60
10/97 36.40
9/97 59.10
8/97 31.80
7/97 36.40
6/97 36.40
5/97 45.50
4/97 27.30
3/97 54.50
2/97 45.50
1/97 45.50
12/96 72.70
11/96 81.80
10/96 63.60
Source: Economic Planning Agency
Higher Rates Crimp Homeowner Refinancing
MBA "Refi" Index
Date Value
- ---------------------------
9/24 388.40
9/17 398.70
9/10 315.30
9/3 395.90
8/27 456.40
8/20 440.40
8/13 449.20
8/6 462.30
7/30 458.10
7/23 490.80
7/16 508.30
7/9 417.60
7/2 588.40
6/25 612.20
6/18 636.10
6/11 702.70
6/4 606.80
5/28 853.70
5/21 832.20
5/14 867.10
5/7 1042.10
4/30 1062.90
4/23 1093.40
4/16 1155.70
4/9 1203.90
4/2 1086.20
3/26 1177.20
3/19 1332.60
3/12 1153.30
3/5 1241.30
2/26 1512.80
2/19 1191.80
2/12 1401.40
2/5 1654.00
1/29 1741.70
1/22 1415.00
1/15 1634.40
1/8 1494.20
1/1 881.10
12/25 864.80
12/18 1569.00
12/11 1879.10
12/4 2055.10
11/27 1460.40
11/20 1814.80
11/13 1550.70
11/6 1987.00
10/30 2495.70
10/23 2774.30
10/16 2256.30
10/9 4389.10
10/2 3410.50
9/25 2682.70
9/18 2269.90
9/11 1713.50
9/4 1924.00
8/28 1331.50
8/21 1211.90
8/14 1310.50
8/7 1291.90
7/31 1278.80
7/24 1320.20
7/17 1292.20
7/10 1305.50
7/3 1176.50
6/26 1202.00
6/19 1406.20
6/12 1209.60
6/5 1120.70
Source: Mortgage Bankers Association
EQUITY MARKET OVERVIEW
The third quarter of 1999 produced negative returns for the equity market as
measured by the S&P 500 index. For the quarter, the index fell 6.25%, while year
to date it remains up by 5.36%. Given the equity market's long bull run, down
quarters are sometimes hard to remember, but they do happen. The last was in the
third quarter, 1998, when the S&P 500 fell by 9.95%. The current period's
negative return is slightly below the average down quarter for the past 50 years
of 5.36%.
<PAGE>
CAPSTONE GROWTH FUND, INC.
- --------------------------------------------------------------------------------
What can make negative periods more disconcerting is the unknown length of the
downturn. Investors can take some comfort from the fact that periods of decline
are usually not long lived. For example, as shown in Table 1, of the 36 times in
the past fifty years that the S&P 500 has turned down following a positive
quarter, in 24 cases, or 66.7%, the following quarter has been positive. In
seven cases, or about 20%, the market moves upward again after two quarters of
decline. There have been two instances of the quarter after quarter market
decline that investors wisely fear. The largest was the decline totaling over
44% which took place over 4 quarters ending September, 1974. The second was the
drop of nearly 29% which took six quarters before it ended in June, 1970.
Both cases of lengthy decline were driven in large part by ongoing external
forces which pushed inflation and interest rates up dramatically from
pre-decline levels and stock prices down. The 29% drop which ended in mid-1970
came about as fiscal policy was committed to the Vietnam war with no reduction
in domestic spending. The second was a result in the rapid increase in energy
prices which worked their way through the economy.
At the present time we do not see the conditions in place for the kind of
multiquarter torture of the type previously described. We do expect to see
moderation in the rate of return in equities in coming quarters. While the
inflation rate is likely to remain low, we expect the best news to be behind us.
Similarly, we do not expect a dramatic increase in rates from the current
levels, but believe the lows may be behind us for the time being.
Corporate profits continue to be the best news in the investment outlook. The
recent earnings reporting season was among the strongest on record in terms of
reported earnings exceeding expectations. Looking to the year 2000, we would
expect over all S&P operating earnings to grow at about 12%.
With this in mind, we would expect coming quarters to be more volatile than in
the past as the benign inflation and interest rate environment becomes somewhat
less positive for equities. While equity returns will moderate, we nonetheless
expect that over the space of more than one or two quarters they will be
positive.
<TABLE>
<CAPTION>
Table I
ANALYSIS OF S&P 500 PERFORMANCE FOLLOWING INITIAL DOWN QUARTER
--------------------------------------------------------------
Number of Subsequent Average Decline/ Total
Down Quarters Frequency % Frequency Quarter Decline
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
0 24 66.7% -5.07 -5.07
1 7 19.4 -5.54 -10.15
2 3 8.3 -3.59 -10.77
3 1 2.8 -11.17 -44.68
4 0 0.0 0.00 0.00
5 1 2.8 -4.75 -28.50
</TABLE>
If you have any questions please feel free to contact us at (800) 262-6631. We
thank you for your continued support.
Sincerely,
/s/ Dan Watson
- ------------------------------
Dan Watson,
President and Portfolio Manager
THIS PUBLICATION MUST BE ACCOMPANIED OR PRECEDED BY
A CURRENT PROSPECTUS FOR CAPSTONE GROWTH FUND, INC.
<PAGE>
CAPSTONE GROWTH FUND, INC.
- --------------------------------------------------------------------------------
LINE CHART:
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 10/31/99
1 Year 5 Year 10 Year
Growth Fund 27.77% 21.19% 13.65%
Growth Lipper Equity
Fund Growth Fund
10/31/89 10000 10000
10/31/90 9145 8717
10/31/91 12216 12330
10/31/92 12928 13293
10/31/93 13839 15816
10/31/94 13747 16139
10/31/95 16089 20009
10/31/96 19189 23408
10/31/97 24354 30050
10/31/98 28130 34221
10/31/99 35941 44255
*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.
<PAGE>
<TABLE>
<CAPTION>
CAPSTONE GROWTH FUND, INC.
- -------------------------------------------------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS - OCTOBER 31, 1999
- -------------------------------------------------------------------------------------------------------------------------
MARKET
VALUE PERCENTAGE OF
COMMON STOCKS (99.81%) SHARES (NOTE 1-A) NET ASSETS
--------- --------- ----------
<S> <C> <C> <C>
COMMERCIAL SERVICES (0.80%)
McGraw Hill Company, Incorporated 11,760 $ 701,190 0.80%
---------- -----
701,190 0.80%
CONSUMER DURABLES (1.74%)
Ford Motor Company 14,180 778,126 0.90%
General Motors Coporation 10,260 720,765 0.84%
---------- -----
1,498,891 1.74%
CONSUMER NON-DURABLES (6.24%)
Anheuser Busch Cos., Incorporated 6,890 494,788 0.57%
Colgate 10,600 641,300 0.74%
General Mills Incorporated 7,070 616,415 0.71%
Kimberly-Clark, Incorporated 11,820 746,137 0.87%
Loews Corporation 11,060 783,878 0.91%
Philip Morris Cos., Incorporated 22,900 576,794 0.67%
Proctor & Gamble Company 9,130 957,509 1.11%
Quaker Oats Company 8,060 564,200 0.65%
---------- -----
5,381,021 6.24%
CONSUMER SERVICES (3.28%)
Gannett Co., Incorporated 10,510 810,584 0.94%
McDonalds Corporation 24,100 994,125 1.15%
Time Warner, Incorporated 14,720 1,025,800 1.19%
---------- -----
2,830,509 3.28%
ELECTRONIC TECHNOLOGY (13.74%)
Applied Materials (a) 4,280 384,397 0.45%
Cisco Systems (a) 27,204 2,013,096 2.33%
Dell Computer Corporation (a) 21,960 881,145 1.02%
Hewlett-Packard Company 10,860 804,319 0.93%
International Business Machines 15,320 1,507,105 1.75%
Intel Corporation 26,870 2,080,746 2.41%
Lucent Technologies 25,940 1,666,645 1.93%
Motorola, Incorporated 9,410 916,887 1.06%
Qualcomm Incorporated (a) 1,680 374,220 0.43%
Tellabs, Incorporated (a) 5,920 374,440 0.43%
Texas Instruments, Incorporated 9,380 841,855 0.98%
---------- -----
11,844,855 13.74%
<PAGE>
<CAPTION>
CAPSTONE GROWTH FUND, INC.
PORTFOLIO OF INVESTMENTS - OCTOBER 31, 1999
- --------------------------------------------------------------------------------------------------------------------------
MARKET
VALUE PERCENTAGE OF
SHARES (NOTE 1-A) NET ASSETS
<S> <C> <C> <C>
ENERGY MINERALS (6.46%)
ALCOA 9,390 $ 570,442 0.66%
Atlantic Richfield Company 11,480 1,069,793 1.24%
Chevron Corporation 7,870 718,629 0.83%
Coastal Corporation 16,760 706,015 0.82%
Kerr McGee Corporation 8,720 468,700 0.54%
Mobil Corporation 10,200 984,300 1.14%
Royal Dutch Petroleum 17,570 1,053,102 1.22%
---------- -----
5,570,981 6.46%
FINANCE (16.42%)
American Express Corporation 4,710 725,340 0.84%
American International Group 14,331 1,475,197 1.71%
Bank Of America 12,640 813,700 0.94%
BB & T Corporation 23,000 836,625 0.97%
Chase Manhattan Corporation 10,750 939,281 1.09%
Citigroup, Incorporated 35,722 1,933,453 2.24%
Federal Home Loan Mortgage Corporation 10,350 559,547 0.65%
Federal National Mortgage Association 11,160 789,570 0.92%
First Union Corporation 12,950 552,803 0.64%
Fleet Boston Corporation 14,180 618,602 0.72%
J.P. Morgan & Company 5,230 684,476 0.79%
Jefferson Pilot Company 8,290 622,268 0.72%
Keycorp 13,960 390,008 0.45%
Marsh & Mclennan Company, Incorporated 5,870 464,097 0.54%
Merrill Lynch & Company, Incorporated 6,730 528,305 0.61%
Morgan Stanley, Dean Witter & Company 7,900 871,469 1.01%
SPDR Trust Shares 1,000 136,750 0.16%
State Street Corporation 6,020 458,273 0.53%
Wells Fargo & Company 15,900 761,213 0.88%
---------- -----
14,160,977 16.42%
HEALTH SERVICES (0.50%)
United Healthcare Corporation 8,390 433,658 0.50%
---------- -----
433,658 0.50%
HEALTH TECHNOLOGY (10.69%)
Abbott Labs 19,220 776,008 0.90%
Amgen, Incorporated (a) 5,530 441,017 0.51%
Bristol-Myers Squibb Company 16,390 1,258,957 1.46%
Johnson & Johnson 11,650 1,220,338 1.42%
Lilly Eli & Company 12,620 869,203 1.01%
Merck & Company 20,430 1,625,462 1.88%
Pfizer, Incorporated 20,210 798,294 0.93%
Pharmacia & Upjohn, Incorporated 10,630 573,356 0.66%
Schering-Plough Corporation 16,430 813,285 0.94%
Warner Lambert Company 10,560 842,820 0.98%
---------- -----
9,218,740 10.69%
<PAGE>
<CAPTION>
CAPSTONE GROWTH FUND, INC.
PORTFOLIO OF INVESTMENTS - OCTOBER 31, 1999
- ----------------------------------------------------------------------------------------------------------------------
MARKET
VALUE PERCENTAGE OF
SHARES (NOTE 1-A) NET ASSETS
--------- --------- ----------
<S> <C> <C> <C>
PROCESS INDUSTRIES (1.32%)
Dow Chemical Company 3,190 $ 377,218 0.44%
Dupont De Nemours & Company 11,860 764,229 0.89%
---------- -----
1,141,447 1.32%
PRODUCER MANUFACTURING (10.08%)
Allied Signal, Incorporated 8,790 500,481 0.58%
Boeing Company 12,990 598,352 0.69%
Emerson Electric Company 11,550 693,722 0.80%
FMC Corporation (a) 8,520 346,657 0.40%
General Electric Company 22,980 3,115,226 3.61%
Honeywell, Incorporated 3,940 415,424 0.48%
Illinois Tool Works 7,040 515,680 0.60%
Minnesota Mining & Manufacturing 8,320 790,920 0.92%
Textron, Incorporated 5,810 448,459 0.52%
Tyco International 18,040 720,473 0.84%
Weyerhaeuser Company 9,148 546,021 0.63%
---------- -----
8,691,415 10.08%
RETAIL TRADE (6.45%)
Albertson's, Incorporated 9,070 329,354 0.38%
Dayton Hudson Corporation 8,950 578,394 0.67%
Gap, Incorporated 12,787 474,717 0.55%
Home Depot, Incorporated 15,650 1,181,575 1.37%
May Department Stores Company 12,390 429,778 0.50%
Sears, Roebuck & Company 11,690 329,512 0.38%
Wal-Mart Stores, Incorporated 39,160 2,237,015 2.59%
---------- -----
5,560,345 6.45%
TECHNOLOGY SERVICES (10.69%)
America Online, Incorporated (a) 9,390 1,217,766 1.41%
Computer Associates International, Incorporated 8,050 454,825 0.53%
EMC Corporation (a) 10,400 759,200 0.88%
First Data Corporation 15,220 695,364 0.81%
Microsoft Corporation (a) 40,680 3,765,443 4.37%
Oracle Corporation (a) 17,820 847,564 0.98%
Sun Microsystems, Incorporated (a) 8,130 860,255 1.00%
United Technologies Corporation 10,120 612,260 0.71%
---------- -----
9,212,677 10.69%
TRANSPORTATION (0.58%)
Union Pacific Corporation 8,940 498,405 0.58%
---------- -----
498,405 0.58%
<PAGE>
<CAPTION>
CAPSTONE GROWTH FUND, INC.
PORTFOLIO OF INVESTMENTS - OCTOBER 31, 1999
- --------------------------------------------------------------------------------------------------------------------------
MARKET
VALUE PERCENTAGE OF
SHARES (NOTE 1-A) NET ASSETS
--------- --------- ----------
<S> <C> <C> <C>
UTILITIES (10.82%)
AT&T Corporation 25,680 $ 1,200,540 1.39%
Bell Atlantic Corporation 17,030 1,105,885 1.28%
Bellsouth Corporation 19,320 869,400 1.01%
Columbia Energy Group 9,970 648,050 0.75%
Enron Corporation 12,800 511,200 0.59%
GTE Corporation 10,150 761,250 0.88%
MCI Worldcom, Incorporated (a) 15,880 1,362,702 1.58%
SBC Communications, Incorporated 29,776 1,516,715 1.76%
Sprint Corporation (Fon Group) 11,900 884,319 1.03%
Sprint Corporation (PCS Group) (a) 5,650 468,597 0.54%
---------- ------
9,328,658 10.82%
TOTAL COMMON STOCK (Cost $60,191,010) 86,073,769 99.81%
PAR VALUE
----------
CASH EQUIVALENTS (0.02%)
Aim Prime Money Market (Cost $15,228) $15,228 15,228 0.02%
---------- ---------- ------
TOTAL INVESTMENTS (Cost $60,206,238) 86,088,997 99.83%
OTHER ASSETS, LESS LIABILITIES 145,343 0.17%
---------- ------
NET ASSETS $86,234,340 100.00%
========== ======
(a) Non-income producing security
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
<PAGE>
<TABLE>
<CAPTION>
CAPSTONE GROWTH FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES - OCTOBER 31, 1999
- --------------------------------------------------------------------------------------------------------------------------
ASSETS:
<S> <C>
Investments in securities at market value (identified cost $60,206,238)(Note 1A) $86,088,997
Cash 301,037
Receivable for securities sold 1,941,065
Dividends and interest receivable 75,667
Prepaid expenses 3,982
Receivable for capital stock sold 725
------------
Total Assets 88,411,473
------------
LIABILITIES:
Payable for securities purchased 1,606,440
Payable for capital stock redeemed 411,098
Accrued expenses 159,595
------------
Total Liabilities 2,177,133
------------
NET ASSETS $86,234,340
============
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE:
($86,234,340 / 4,672,308 shares outstanding of $.001 par value, 200,000,000 shares authorized) $18.46
============
SOURCE OF NET ASSETS:
Paid in capital $54,296,896
Undistributed net investment income 95,795
Accumulated net realized gain on investments 5,958,890
Net unrealized appreciation of securities 25,882,759
------------
$86,234,340
============
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
<PAGE>
<TABLE>
<CAPTION>
CAPSTONE GROWTH FUND, INC.
STATEMENT OF OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 1999
- --------------------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME:
<S> <C> <C>
Dividend income (net of foreign taxes withheld of $2,963) $ 1,061,628
Interest income 1,472
------------
Total Investment Income 1,063,100
Expenses:
Advisory fees (Note 2) 568,101
Distribution fees (Note 2) 205,458
Transfer agent fees 57,138
Reports and notices to stockholders 26,186
Audit fees 27,103
Legal fees 10,500
Directors' fees and expenses 15,358
Custodian fees 9,491
Fund accounting fees 27,805
Registration and filing fees 12,332
Miscellaneous 13,626
------------
Total Expenses 973,098
Less: Custodian fees paid indirectly 5,793
------------
Net Expenses 967,305
Net Investment Income 95,795
------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain from security transactions 5,958,890 Unrealized
appreciation of investments:
Beginning of period $12,482,151
End of period 25,882,759
------------
Net change in unrealized appreciation of investments 13,400,608
------------
Net realized and unrealized gain on investments 19,359,498
------------
Net increase in net assets resulting from operations $19,455,293
============
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
<PAGE>
<TABLE>
CAPSTONE GROWTH FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
- ----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED YEAR ENDED
OCTOBER 31, 1999 OCTOBER 31, 1998
-------------------------------------------
OPERATIONS:
<S> <C> <C>
Net investment income $ 95,795 $ 594,295
Net realized gain on investments 5,958,890 3,124,664
Net change in unrealized appreciation of investments 13,400,608 6,584,430
------------ ------------
Net increase in net assets resulting from operations 19,455,293 10,303,389
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (580,527) (672,743)
Net realized gain on investments (3,107,233) (15,329,188)
------------ ------------
Net decrease in net assets reulting from distributions (3,687,760) (16,001,931)
CAPITAL SHARE TRANSACTIONS:
Increase (decrease) in net assets resulting from capital share
transactions (Note3) (1,072,615) 7,629,195
------------ ------------
Total increase in net assets 14,694,918 1,930,653
NET ASSETS:
Beginning of year 71,539,422 69,608,769
------------ ------------
End of year (including undistributed net investment income of
$95,795 and $580,529 respectively) $86,234,340 $71,539,422
============ ============
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
</TABLE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS - OCTOBER 31, 1999
- --------------------------------------------------------------------------------
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.
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.
<PAGE>
CAPSTONE GROWTH FUND, INC.
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, 1999, the Fund paid $205,458 in 12b-1 fees. Of this amount
approximately 2.4% was paid to Service Organizations other than CAPCO.
The Fund's Custodian provided credits during the period in the amount of
$5,793 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. For the year ended October 31,1999, directors of the Fund who are not
"interested persons" received directors' fees of $15,358.
<PAGE>
CAPSTONE GROWTH FUND, INC.
NOTE 3 - CAPITAL STOCK
At October 31, 1999 there were 4,672,308 shares outstanding. Transactions
in capital stock were as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
OCTOBER 31, 1999 OCTOBER 31, 1998
---------------- ----------------
SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------
<S> <C> <C> <C> <C>
Shares sold 433,255 $ 7,405,216 471,488 $ 7,234,565
Shares issued to shareholders in reinvestment
of distributions 201,768 3,127,404 1,008,093 13,951,999
--------- ------------- ---------- ------------
635,023 10,532,620 1,479,581 21,186,564
Shares redeemed (676,016) (11,605,235) (920,777) (13,557,369)
--------- ------------- ---------- ------------
Net Increase (40,993) $ (1,072,615) 558,804 $ 7,629,195
========= ============= ========== ============
</TABLE>
NOTE 4 - PURCHASES AND SALES OF SECURITIES
Purchases and sales of securities other than U.S. Government securities and
short-term investments aggregated $57,123,013 and $61,837,240 respectively. At
October 31, 1999 the cost of investments for Federal income tax purposes was
$60,206,238. Accumulated net unrealized appreciation on investments was
$25,882,759 consisting of $27,595,944 gross unrealized appreciation and
$1,713,185 gross unrealized depreciation.
NOTE 5 - DIVIDEND DISTRIBUTION
On November 15, 1999 the Board of Directors declared a distribution of
$1.31 a share, consisting of $.88 from long-term realized gains, $.41 from
short-term realized gains and $.02 from ordinary income. The distribution was
payable on December 1, 1999 to shareholders of record on November 30, 1999.
<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,
----------------------------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
PER SHARE DATA
- --------------
<S> <C> <C> <C> <C> <C>
Net asset value at beginning of period........................... $ 15.18 $ 16.76 $ 15.56 $ 13.82 $ 13.23
Income from investment operations:
Net investment income....................................... 0.02 0.12 0.16 0.22 0.17
Net realized and unrealized gain (loss)..................... 4.04 2.11 3.55 2.31 1.93
------- ------- ------- ------- -------
Total from investment operations............................ 4.06 2.23 3.71 2.53 2.10
------- ------- ------- ------- -------
Less distributions from:
Net investment income....................................... (0.12) (0.16) (0.22) (0.06) (0.16)
Net realized gains.......................................... (0.66) (3.65) (2.29) (0.73) (1.35)
------- ------- ------- ------- -------
Total distributions......................................... (0.78) (3.81) (2.51) (0.79) (1.51)
------- ------- ------- ------- -------
Net asset value at end of period................................. $ 18.46 $ 15.18 $ 16.76 $ 15.56 $ 13.82
======= ======= ======= ======= =======
TOTAL RETURN (%) (1)............................................. 27.77% 15.51% 26.91% 19.27% 17.04%
- ------------ ======= ======= ======= ======= =======
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net assets at end of period (in thousands)....................... $86,234 $71,539 $69,609 $60,230 $85,324
Ratio of total expenses to average net assets.................... 1.18% 1.27% 1.25% 1.29% 1.31%
Ratio of net investment income to average net assets............. 0.11% 0.81% 0.99% 1.31% 1.21
Portfolio turnover rate.......................................... 70% 93% 229% 173% 119%
</TABLE>
(1) Calculated without sales charge. Sales charge eliminated on August 21, 1995.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
<PAGE>
CAPSTONE GROWTH FUND, INC.
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Shareholders and Board of Directors of
Capstone Growth Fund, Inc.
We have audited the accompanying statement of assets and liabilities of Capstone
Growth Fund, Inc., including the portfolio of investments, as of October 31,
1999, the related statement of operations for the year then ended, the statement
of changes in net assets for each of the two years in the period then ended, and
the financial highlights for each of the three 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 two 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, 1999, 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, 1999, the results of its operations
for the year then ended, the changes in its net assets for each of the two years
in the period then ended, and the financial highlights for each of the three
years in the period then ended in conformity with generally accepted accounting
principles.
BRIGGS, BUNTING & DOUGHERTY, LLP
Philadelphia, Pennsylvania
November 19, 1999 (except for
Note 5 as to which the
date is December 1, 1999)
<PAGE>
CAPSTONE GROWTH FUND, INC.
5847 SAN FELIPE, SUITE 4100
HOUSTON, TEXAS 77057
1-800-262-6631
ANNUAL REPORT TO SHAREHOLDERS
OCTOBER 31, 1999
- --------------------------------------------------------------------------------
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 PFPC 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>
CAPSTONE GROWTH FUND, INC.
5847 SAN FELIPE, SUITE 4100
HOUSTON, TEXAS 77057
Annual Report
October 31, 1999
CAPSTONE
GROWTH
FUND, INC.
CAPSTONE PYRAMID LOGO
A Member Of
THE CAPSTONE GROUP
of Mutual Funds
CAPSTONE PYRAMID LOGO
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
