10-K 1 capstone.txt ANNUAL REPORT |-------------------------------------| | ANNUAL REPORT | | OCTOBER 31, 2000 | |-------------------------------------| |-------------------------------------| | CAPSTONE | | GROWTH | | FUND, INC. | |-------------------------------------| |-------------------------------------| | | | [LOGO] A Member of | | THE CAPSTONE GROUP | | of Mutual Funds | |-------------------------------------| CAPSTONE GROWTH FUND, INC. Dear Shareholder: We are pleased to present the annual report for Capstone Growth Fund, Inc. for the twelve months ended October 31, 2000. ECONOMIC OVERVIEW The highlights of the third quarter were the efforts by economic policymakers to stem the rise in oil prices and to halt the decline in the euro. The quarter was also marked by weaker than expected earnings reports which pushed the S&P 500 to a 0.97% decline for the quarter. The tech-heavy NASDAQ index dropped 7.36% for the quarter. Bonds are actually on track to outperform stocks for the first year since 1990; the Lehman Aggregate Bond Index is up 7.12% since the start of the year while the S&P is down 1.39% year-to-date. The euro was launched on January 1st 1999 and was hailed by some as a currency that could ultimately challenge the dominance of the U.S. dollar. Eleven countries (including Germany and France) use the euro as their official currency and coordinate their monetary policy through the European Central Bank (ECB). Upon its launch 19 months ago, the euro was pegged at 1.18 dollars per euro. The currency has been unable to "challenge" the dollar as it dropped to an all time low of .8443 ($/euro) prior to a coordinated effort on the part of the U.S., Japan, Great Britain, Canada, and the ECB to establish a floor for the currency. The precipitous decline in the euro has eroded the purchasing power of the almost 300 million people living within the eurozone. With crude oil changing hands in dollars, the nearly three-fold increase in U.S. oil prices since early 1999 amounts to an almost four-fold increase in oil prices for much of Europe. When one adds in the high government taxes on gasoline in Europe, it is easy to see why Europeans have little sympathy for Americans who complain about high gas prices. One of the primary reasons for the intervention was to tame eurozone inflation which rose 2.3% year-over-year in August. A secondary reason was to help garner support from Danish voters who faced a referendum regarding Denmark's inclusion as the twelfth country in the eurozone. The move was "too little, too late" as the Danes rejected the measure by a 53-47 margin. So far, the euro has not dropped below the intervention level. While a stronger euro will make U.S. imports more expensive in the long-run the U.S. economy will benefit from a European economy with a healthy currency, stable growth and little inflation. [GRAPH] Euro Plunges vs. U.S. Dollar 1/1/99 - 9/30/00 |---------------------------------------------------------------------| | 1.15 | | | | 1.10 | | | | 1.05 | | | | 1.00 | | | | 0.95 | | | | 0.90 | | | | 0.85 | | | | 1/99 3/99 6/99 9/99 12/99 3/00 6/00 9/00 | |---------------------------------------------------------------------| Source: Bloomberg CAPSTONE GROWTH FUND, INC. Following the intervention to raise the price of the euro, President Clinton announced his plan to release 30 million barrels of oil from the 571 million barrel Strategic Petroleum Reserve (SPR). Technically, the release is a "swap" since the buyers will be required to replace the oil. The SPR was created after the oil shocks of the 1970's to prevent supply disruptions in times of emergencies. The SPR was last tapped in a major way in 1991 during the Persian Gulf War. There have been other instances of minor releases (each less than 1 million barrels) during recent years due to regional pipeline disruptions. In the days leading up to the President's announcement, the price of oil hit $37.80, the highest price since Iraq invaded Kuwait in October 1990. By the end of September, prices had dropped to just under $31 per barrel. It is unlikely that the administration's move will have a lasting impact on energy prices. The President expressed concern that supplies of home heating oil for Northeasterners were at very low levels, but the American Petroleum Institute (API) stated that refineries are running at 94.7% capacity so supplies are likely to remain tight for some time. The situation could become very serious if we experience a harsh or early winter. The President failed to mention the 100% year-to-date rise in natural gas prices. Only 8% of households use oil to heat their homes, while natural gas is used by more than 30% of Americans. Natural gas is also the fuel for 50% of the electricity generated in the U.S. We are becoming increasingly concerned that energy prices could drain some of the strength from consumer spending in the next six months. For some time, we have been advising investors to anticipate equity returns that are closer to the long-run market averages rather than the returns that we witnessed in the late 90's. With the uncertainty looming over the global economy, a more cautious tone may be warranted for investors. [GRAPH] Oil Prices Move Higher West Texas Intermediate Crude |---------------------------------------------------------------------| | 35 | | | | 30 | | | | 25 | | | | 20 | | | | 15 | | 12/98 3/99 6/99 9/99 12/99 3/00 6/00 9/00 | |---------------------------------------------------------------------| Source: Bloomberg EQUITY MARKET OVERVIEW During the third quarter, we expected corporate earnings to have a significant impact with growing potential for volatility and amplified market excitement. Indeed, our expectations were realized. September brought with it a reversal from August for all the major indices. The Nasdaq, the Dow Jones Industrial Average and the S&P 500 Index were down 12.7%, 5.0%, and 5.3% respectively for the month of September. This poor performance resulted in all three indices turning negative on the year. By the end of the quarter, the Nasdaq, the Dow and the S&P CAPSTONE GROWTH FUND, INC. 500 were down 9.7%, 7.4% and 1.4% respectively, year-to-date. Unlike recent quarters, when the great majority of the negative pre-announcements were more company specific rather than indicative of industry or macro problems, this time the three "e's" have been the common thread causing this market downturn. Those are the slowing US economy, high energy prices and the weak euro. Looking forward, we try to dissect "what the market is saying" but it has been especially slippery in the past few years with the "new" and the "old" economy segments moving in opposite directions. That dichotomy remains very much in place. Since the middle of the third quarter, measures (including the Nasdaq and the S&P 500 Index) have fallen more than 20% yet the old economy is doing much better. The NYSE Index has fallen just 3% since mid quarter and the old-economy segments of the S&P 500 have actually risen. These old-economy stocks are often the better guides to the future of our economy and stock market performance. As a blend of the old and new, the large cap portfolio is ideally suited to participate in market sector rotation. For your reference, we have included a table showing the sector weightings of the portfolio and of the S&P 500 as of November 30, 2000. The sector distribution for your Fund closely parallels that of the S&P 500. This supports our approach of being properly diversified and relatively sector neutral. If you have any questions, please feel free to contact us at (800) 262-6631. We thank you for your continued support. SECTOR DISTRIBUTION--11/30/00 SECTOR GROWTH FUND S&P 500 +/- ----------------------------------------------------------------------------- Basic Materials 1.77% 2.21% -0.44% Capital Goods 12.84% 9.16% 3.68% Communication Service 4.36% 5.83% -1.47% Consumer Staples 9.18% 10.98% -1.80% Consumer-Cyclicals 6.31% 7.22% -0.91% Energy 6.95% 5.94% 1.01% Financials 17.24% 15.92% 1.32% Health Care 14.27% 12.75% 1.52% Technology 24.40% 26.02% -1.62% Transportation 0.00% 0.65% -0.65% Utilities 1.71% 3.32% -1.61% Other 0.97% 0.00% 0.97% ------- ------- 100.00% 100.00% ======= ======= Sincerely, /s/___________________________ /s/_____________________________ Edward L. Jaroski Dan E. Watson President and Chairman of the Board Executive Vice President CAPSTONE GROWTH FUND, INC. [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 10/31/00 | | | |------------|--------|---------|---------| | | | | 1 Year | 5 Year | 10 Year| | | |------------|--------|---------|---------| | | |Growth Fund | 5.40 | 18.68 | 15.27 | | | |------------|--------|---------|---------| | | | |$60,000 | | +$56,863 | |$50,000 | | | |$40,000 | | ++$41,423 | |$30,000 | | | |$20,000 | | | |$10,000 | | 10/31/ 10/31/ 10/31/ 10/31/ 10/31/ 10/31/ 10/31/ 10/31 10/31 10/31 10/31| | 90 91 92 93 94 95 96 97 98 99 00 | | ++Growth Fund +Lipper Equity Growth Fund | |------------------------------------------------------------------------------| *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. 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, 2000, the related statement of operations for the year then ended, and 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 four 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 the year 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 audits 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, 2000, 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, 2000, 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 four years in the period then ended in conformity with generally accepted accounting principles. BRIGGS, BUNTING & DOUGHERTY, LLP PHILADELPHIA, PENNSYLVANIA DECEMBER 1, 2000 CAPSTONE GROWTH FUND, INC. SCHEDULE OF INVESTMENTS - OCTOBER 31, 2000 ------------------------------------------------------------------------------- SHARES VALUE ------ ----- COMMON STOCK (99.03%) ADVERTISING (0.62%) Omnicom Group, Inc. .............................. 5,660 $ 522,135 ---------- AEROSPACE (1.88%) Boeing Co. ....................................... 12,990 880,884 United Technologies Corp. ........................ 10,120 706,502 ---------- 1,587,386 ---------- AUTOMOBILE MANUFACTURERS (1.64%) Ford Motor Co. ................................... 28,722 750,363 General Motors Corp. ............................. 10,260 637,402 ---------- 1,387,765 ---------- BANKS (5.13%) Bank of America Corp. ............................ 17,000 817,062 BB&T Corp. ....................................... 23,000 733,125 Chase Manhattan Corporation....................... 14,205 646,327 Morgan, (J. P.) & Co., Inc. ...................... 4,720 781,160 State Street Boston Corp. ........................ 5,040 628,690 Wells Fargo & Co. ................................ 15,900 736,369 ---------- 4,342,733 ---------- BROADCASTING (0.29%) Time Warner, Inc. ................................ 3,260 247,467 ---------- CHEMICALS (0.67%) Dow Chemical Co. ................................. 18,660 571,462 ---------- COMPUTER HARDWARE (8.72%) Compaq Computer Corp. ............................ 20,430 621,276 Dell Computer Corp.*.............................. 21,270 627,465 EMC Corp.*........................................ 17,780 1,583,531 Hewlett-Packard Co. .............................. 19,620 911,104 International Business Machines Corp. ............ 17,390 1,712,915 Sun Microsystems, Inc.*........................... 12,810 1,420,309 VERITAS Software Co.*............................. 3,520 496,375 ---------- 7,372,975 ---------- CAPSTONE GROWTH FUND, INC. SCHEDULE OF INVESTMENTS - OCTOBER 31, 2000 ------------------------------------------------------------------------------- SHARES VALUE ------ ----- COMPUTER SERVICES & SOFTWARE (5.65%) America Online, Inc.*............................. 15,790 $ 796,290 Automatic Data Processing, Inc. .................. 8,080 527,725 First Data Corp. ................................. 12,070 605,009 Network Appliance, Inc.*.......................... 3,280 390,320 Oracle Corp.*..................................... 49,220 1,624,260 Siebel Systems, Inc.*............................. 5,140 539,379 Yahoo, Inc.*...................................... 5,000 293,125 ---------- 4,776,108 ---------- COSMETICS & TOILETRIES (2.22%) Colgate Palmolive Co. ............................ 8,230 483,595 Kimberly Clark Corp. ............................. 11,820 780,120 Procter & Gamble Co. ............................. 8,560 611,505 ---------- 1,875,220 ---------- DIVERSIFIED CONGLOMERATES (7.29%) Corning, Inc. .................................... 8,620 659,430 General Electric Co. ............................. 67,590 3,704,777 Illinois Tool Works, Inc. ........................ 7,860 436,721 Textron, Inc. .................................... 6,680 336,922 Tyco International Ltd. .......................... 18,040 1,022,642 ---------- 6,160,492 ---------- ELECTRONIC EQUIPMENT (6.15%) Altera Corp.*..................................... 7,420 303,756 Emerson Electric Co. ............................. 11,550 848,203 Intel Corp. ...................................... 44,280 1,992,600 Motorola, Inc..................................... 20,190 503,488 Texas Instruments, Inc. .......................... 14,040 688,837 Uniphase Corp. ................................... 6,580 535,447 Xilinx, Inc.*..................................... 4,570 331,039 ---------- 5,203,370 ---------- CAPSTONE GROWTH FUND, INC. SCHEDULE OF INVESTMENTS - OCTOBER 31, 2000 ------------------------------------------------------------------------------- SHARES VALUE ------ ----- FINANCIAL SERVICES (9.95%) American Express Co. ............................. 13,470 $ 808,200 American International Group, Inc. ............... 18,736 1,836,128 Citigroup, Inc. .................................. 40,242 2,117,735 Fannie Mae........................................ 11,160 859,320 Federal Home Loan Mortgage Corp. ................. 10,350 621,000 Merrill Lynch & Co., Inc. ........................ 11,820 827,400 Morgan Stanley Dean Witter & Co. ................. 11,480 921,988 Providian Financial Corp. ........................ 4,080 424,320 ---------- 8,416,091 ---------- FOOD & BEVERAGE (5.58%) Anheuser Busch Cos., Inc. ........................ 13,780 630,435 Coca-Cola Co. .................................... 16,090 971,434 General Mills, Inc. .............................. 14,140 590,345 McDonald's Corp. ................................. 23,170 718,270 Philip Morris Co., Inc. .......................... 31,480 1,152,955 Quaker Oats Co. .................................. 8,060 657,394 ---------- 4,720,833 ---------- FOREST & PAPER PRODUCTS (0.52%) Weyerhaeuser Co. ................................. 9,348 438,772 ---------- HEALTH CARE (0.60%) Unitedhealth Group, Inc. ......................... 4,630 506,406 ---------- INSURANCE (2.28%) Jefferson Pilot Corp. ............................ 8,290 569,938 Loews Corp. ...................................... 7,780 707,494 Marsh & McLennan Co., Inc. ....................... 4,960 648,520 ---------- 1,925,952 ---------- MATERIALS (0.48%) Alcoa, Inc. ...................................... 14,080 403,920 ---------- MEDICAL PRODUCTS (0.66%) Medtronic, Inc. .................................. 10,300 559,419 ---------- CAPSTONE GROWTH FUND, INC. SCHEDULE OF INVESTMENTS - OCTOBER 31, 2000 ------------------------------------------------------------------------------- SHARES VALUE ------ ----- MISCELLANEOUS MANUFACTURING (1.25%) Minnesota Mining & Manufacturing Co. ............. 10,910 $ 1,054,179 ----------- OIL & GAS (8.73%) Amerada Hess Corp. ............................... 7,230 448,260 Chevron Oil Corp. ................................ 11,970 983,036 Coastal Corp. .................................... 9,290 700,814 Enron Corp. ...................................... 9,980 818,984 Exxon Mobil Corp. ................................ 29,125 2,597,586 Kerr-McGee Corp. ................................. 10,880 710,600 Royal Dutch Petroleum Co. ADR..................... 8,820 523,688 Schlumberger, Ltd. ............................... 7,850 597,581 ----------- 7,380,549 ----------- PHARMACEUTICALS (11.32%) Abbott Labs....................................... 13,390 707,159 Amgen, Inc. ...................................... 10,080 584,010 Bristol-Myers Squibb Co. ......................... 16,390 998,766 Johnson & Johnson................................. 12,300 1,133,138 Lilly, (Eli) & Co. ............................... 9,950 889,281 Merck & Co. ...................................... 19,030 1,711,511 Pfizer, Inc. ..................................... 50,707 2,189,909 Pharmacia Corp. .................................. 9,230 507,650 Schering-Plough Corp. ............................ 16,430 849,226 ------------ 9,570,650 ----------- PUBLISHING (2.61%) Gannett, Inc. .................................... 9,940 576,520 McGraw-Hill Cos., Inc. ........................... 10,950 702,853 Viacom, Inc. Cl B. ............................... 16,258 924,674 ----------- 2,204,047 ----------- RETAIL STORES (3.56%) Home Depot, Inc. ................................. 20,055 862,365 Target Corp. ..................................... 18,240 503,880 Wal Mart Stores, Inc. ............................ 36,270 1,645,751 ----------- 3,011,996 ----------- CAPSTONE GROWTH FUND, INC. SCHEDULE OF INVESTMENTS - OCTOBER 31, 2000 ------------------------------------------------------------------------------- SHARES VALUE ------ ----- TECHNOLOGY (1.84%) Applied Materials, Inc.*.......................... 8,570 $ 455,281 Broadcom Corp.*................................... 1,730 384,709 Honeywell International, Inc. .................... 13,307 716,083 ----------- 1,556,073 ----------- TELECOMMUNICATIONS (9.39%) ADC Telecommunications, Inc.*..................... 10,040 214,605 ALLTEL Corp. ..................................... 11,210 722,344 BellSouth Corp. .................................. 21,720 1,049,348 Cisco Systems, Inc.*.............................. 52,118 2,807,857 Lucent Technologies, Inc. ........................ 16,210 377,896 Nortel Networks Corp. ............................ 23,040 1,048,320 QUALCOMM, Inc.*................................... 7,260 472,694 Sprint Corp. (PCS Group).......................... 9,080 346,175 Tellabs, Inc.*.................................... 6,090 304,119 Worldcom, Inc.*................................... 25,270 600,163 ----------- 7,943,521 ----------- TOTAL COMMON STOCK (COST $61,093,057) 83,739,521 ----------- MISCELLANEOUS ASSETS (0.80%) AIM Prime Money Market............................ 16,317 16,317 S & P 500 Depositary Receipt...................... 4,600 658,087 ----------- TOTAL MISCELLANEOUS ASSETS (COST $666,098).. 674,404 ----------- REPURCHASE AGREEMENTS (0.86%) Fifth Third Bank, 5.95%, dated 10/31/00, due 11/01/00, repurchase price $730,912 (collateralized by FNMA Pool #313115, 8.00%, due 10/01/16, market value $745,407) (Cost $730,791)...................................730,791 730,791 ----------- TOTAL INVESTMENTS (COST $62,489,946) (100.69%)................................. 85,144,716 LIABILITIES IN EXCESS OF OTHER ASSETS(-0.69%) (585,168) ----------- NET ASSETS--(100%) ......................... $84,559,548 =========== * Non-income producing investment. SEE NOTES TO FINANCIAL STATEMENTS CAPSTONE GROWTH FUND, INC. STATEMENT OF ASSETS AND LIABILITIES - OCTOBER 31, 2000 ------------------------------------------------------------------------------- ASSETS: Investments, at market (identified cost $62,489,946)... $85,144,716 Receivables: Dividends and interest............................. 43,568 Fund shares sold................................... 637 Prepaid expenses....................................... 16,821 ----------- Total assets................................... 85,205,742 ----------- LIABILITIES: Payables: Investments purchased.............................. 499,914 Accrued distribution fees.......................... 40,789 Due to advisor..................................... 48,389 Accrued expenses................................... 56,862 Other liabilities.................................. 240 ----------- Total liabilities.............................. 646,194 ----------- NET ASSETS .................................................. $84,559,548 =========== NET ASSETS CONSIST OF: Paid-in capital........................................ 53,996,582 Accumulated realized gain on investments............... 7,908,196 Net unrealized gain on investments..................... 22,654,770 ----------- Net Assets (200,000,000 of $.001 par value shares authorized, 4,669,702 shares outstanding).............................. $84,559,548 =========== Net Asset Value, offering and redemption price per share..... $ 18.11 =========== SEE NOTES TO FINANCIAL STATEMENTS. CAPSTONE GROWTH FUND, INC. STATEMENT OF OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 2000 ------------------------------------------------------------------------------- INVESTMENT INCOME: Interest............................................... $ 2,755 Dividends.............................................. 963,819 ----------- Total investment income............................ 966,574 ----------- EXPENSES: Investment advisory fees (Note 4)...................... 599,719 Accounting fee (Note 4)................................ 26,061 Custodian fees......................................... 2,079 Transfer agency fees................................... 75,386 Distribution fees - Class A (Note 4)................... 218,583 Trustee expense (Note 4)............................... 15,668 Audit fees............................................. 25,947 Legal fees............................................. 15,734 Registration fees...................................... 16,377 Reports to shareholders................................ 12,915 Miscellaneous expense.................................. 19,051 ----------- Total expenses..................................... 1,027,520 Less: Custodian fees paid indirectly................... (2,841) ----------- Net expenses................................... 1,024,679 ----------- Net investment loss........................ (58,105) ----------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS: Net realized gain on investments....................... 7,908,196 Net change in unrealized appreciation on investments... (3,227,989) ----------- 4,680,207 ----------- Net increase in net assets resulting from operations............................. $ 4,622,102 =========== SEE NOTES TO FINANCIAL STATEMENTS. CAPSTONE GROWTH FUND, INC.

SEE NOTES TO FINANCIAL STATEMENTS. CAPSTONE GROWTH FUND, INC. -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS - OCTOBER 31, 2000 -------------------------------------------------------------------------------- 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. 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. CAPSTONE GROWTH FUND, INC. 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"). Effective October 7, 2000 Declaration Service Company replaced PFPC Inc. as transfer agent. 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, 2000, the Fund paid $218,583 in 12b-1 fees. Of this amount approximately 2.5% was paid to Service Organizations other than CAPCO. The Fund's Custodian provided credits during the year in the amount of $2,841 against custodian charges based on the uninvested cash balances of the Fund. CAPSTONE GROWTH FUND, INC. 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, 2000, directors of the Fund who are not "interested persons" received directors' fees of $15,668. NOTE 3 - CAPITAL STOCK At October 31, 2000 there were 4,669,702 shares outstanding. Transactions in capital stock were as follows: YEAR ENDED YEAR ENDED OCTOBER 31, 2000 OCTOBER 31, 1999 ---------------- ---------------- SHARES AMOUNT SHARES AMOUNT ------ ------ ------ ------ Shares sold ........................................ 329,813 $ 6,088,255 433,255 $ 7,405,216 Shares issued to shareholders in reinvestment of distributions ............................... 291,464 5,118,145 201,768 3,127,404 ------- ------------ ------- ------------ 621,277 11,206,400 635,023 10,532,620 ------- ------------ ------- ------------ Shares redeemed .................................... (623,883) (11,448,609) (676,016) (11,605,235) ------- ------------ ------- ------------ Net increase (decrease) ............................ (2,606) $ (242,209) (40,993) $ 1,072,615) ======= ============ ======= ============

NOTE 4 - PURCHASES AND SALES OF SECURITIES Purchases and sales of securities other than U.S. Government securities and short-term investments aggregated $47,986,075 and $54,342,443 respectively. At October 31, 2000 the cost of investments for Federal income tax purposes was $62,489,946. Accumulated net unrealized appreciation on investments was $22,654,770 consisting of $26,895,027 gross unrealized appreciation and $4,240,257 gross unrealized depreciation. NOTE 5 - DIVIDEND DISTRIBUTION On November 13, 2000 the Board of Directors declared a distribution of $1.70 per share consisting entirely of realized long-term capital gains. The distribution was payable on December 1, 2000 to shareholders of record on November 30, 2000. 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. YEARS ENDED OCTOBER 31, ----------------------- 2000 1999 1998 1997 1996 ---- ---- ---- ---- ---- NET ASSET VALUE, BEGINNING OF PERIOD ...... $18.46 $15.18 $16.76 $15.56 $13.82 ------ ------ ------ ------ ------ INVESTMENT OPERATIONS: Net investment income (loss) .......... (0.01) 0.02 0.12 0.16 0.22 Net realized and unrealized gain on investments ..................... 0.97 4.04 2.11 3.55 2.31 ------ ------ ------ ------ ------ Total from investment operations .. 0.96 4.06 2.23 3.71 2.53 ------ ------ ------ ------ ------ DISTRIBUTIONS FROM: Net investment income ................. (0.02) (0.12) (0.16) (0.22) (0.06) Net realized gains .................... (1.29) (0.66) (3.65) (2.29) (0.73) ------ ------ ------ ------ ------ Total distributions ................. (1.31) (0.78) (3.81) (2.51) (0.79) ------ ------ ------ ------ ------ NET ASSET VALUE, END OF PERIOD ............ $18.11 $18.46 $15.18 $16.76 $15.56 ====== ====== ====== ====== ====== TOTAL RETURN .............................. 5.40% 27.77% 15.51% 26.91% 19.27% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in 000's) .. $84,560 $86,234 $71,539 $69,609 $60,230 Ratio of expenses to average net assets 1.18% 1.18% 1.27% 1.25% 1.29% Ratio of net investment income (loss) to average net assets ............... (0.07)% 0.11% 0.81% 0.99% 1.31% Portfolio turnover rate ............... 55% 70% 93% 229% 173%

SEE NOTES TO FINANCIAL STATEMENTS. CAPSTONE GROWTH FUND, INC. 5847 SAN FELIPE, SUITE 4100 HOUSTON, TEXAS 77057 1-800-262-6631 ANNUAL REPORT TO SHAREHOLDERS OCTOBER 31, 2000 ------------------------------------------------------------------------------- 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 Declaration Service Company 5847 San Felipe 555 North Lane Suite 4100 Suite 6160 Houston, TX 77057 Conshohocken, PA 19420 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 [LOGO] THE CAPSTONE GROUP OF MUTUAL FUNDS |----------------------------------------| | EQUITY | | CAPSTONE GROWTH FUND, INC. | | CSF LARGE CAP EQUITY INDEX FUND* | | CSF SMALL CAP EQUITY INDEX FUND* | | SERV LARGE CAP EQUITY FUND** | | SERV SMALL CAP EQUITY FUND** | |----------------------------------------| |----------------------------------------| | FIXED INCOME | | CSF BOND INDEX FUND* | | SERV BOND FUND** | | SERV SHORT-TERM BOND FUND** | |----------------------------------------- |----------------------------------------| | INTERNATIONAL/GLOBAL | | CSF INTERNATIONAL INDEX FUND* | | SERV INTERNATIONAL FUND** | |----------------------------------------| |---------------------------------------- | MONEY MARKET | | SERV MONEY MARKET FUND** | |----------------------------------------| *Series of the Christian Stewardship Funds **Series of the Capstone Social Ethics and Religious Values Fund For more complete information about the Capstone Funds, including charges and expenses, contact the Distributor at the address below to receive additional prospectuses. Please read it carefully before you invest or send money. This publication must be accompanied or preceded by a current prospectus for Capstone Growth Fund, Inc. CAPSTONE ASSET PLANNING COMPANY 5847 SAN FELIPE, SUITE 4100 HOUSTON, TEXAS 77057 1-800-262-6631

CAPSTONE GROWTH FUND INC 10-K