<PAGE> 1
REGISTRATION NO. 2-28174
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 / X /
Pre-Effective Amendment No. _____ / /
Post-Effective Amendment No. 45 / X /
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 / X /
Amendment No. 41 / X /
Capstone Fixed Income Series, Inc.
on behalf of its series, Capstone Government Income Fund
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Charter)
5847 San Felipe, Suite 4100, Houston, Texas 77057
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (713) 260-9000
- --------------------------------------------------------------------------------
Allan S. Mostoff, Esq., Dechert Price & Rhoads
- --------------------------------------------------------------------------------
1500 K Street, N.W., Suite 500, Washington, DC 20005
- --------------------------------------------------------------------------------
(Name and Address of Agent for Service)
It is proposed that this filing will become effective (check appropriate box)
/ X / immediately upon filing pursuant to paragraph (b)
/ / on ________________ pursuant to paragraph (b)
/ / 60 days after filing pursuant to paragraph (a)
/ / on (date) pursuant to paragraph (a) of rule 485.
The Registrant has filed with the Securities and Exchange Commission a
declaration pursuant to Rule 24f-2 under the Investment Company Act of 1940,
and:
/ X / filed the notice required by that Rule on February 27, 1995; or
/ / intends to file the notice required by that Rule on or about
________________; or
/ / during the most recent fiscal year did not sell any securities
pursuant to Rule 24f-2 under the Investment Company Act of
1940, and, pursuant to Rule 24f-2(b)(2),
need not file the Notice.
Total Pages ______ Exhibit Index Page ______
<PAGE> 2
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
<TABLE>
<CAPTION>
===============================================================================================================
Proposed Proposed
Title of Maximum Maximum
Securities Amount Offering Aggregate Amount of
Being Being Price Offering Registration
Registered Registered Per Share Price* Fee
---------- ---------- --------- ------------ --------------
<S> <C> <C> <C> <C>
Shares of 4,836,947 $4.82 $23,314,084 $100.00
Common Stock (within
Par Value $.001 15 days
Per Share of filing)
===============================================================================================================
</TABLE>
* Registrant has elected to calculate its filing fee in the manner described
in Rule 24e-2 of the Investment Company Act of 1940. The total amount of
securities redeemed during the previous fiscal year was $214,019,438. The
total amount of securities used for reductions pursuant to paragraph (a) of
Rule 24e-2 or paragraph (c) of Rule 24f-2 during the current year was
$190,995,352. The amount of redeemed securities being used for reduction
of the registration fee in this Amendment is $23,024,086.
<PAGE> 3
CAPSTONE FIXED INCOME SERIES
CAPSTONE GOVERNMENT INCOME FUND
CROSS REFERENCE SHEET
BETWEEN
ITEMS OF FORM N-1A AND PROSPECTUS
(PART A TO REGISTRATION STATEMENT NO. 2-28174)
<TABLE>
<CAPTION>
Item
Number Form N-1A Heading Caption in Prospectus
- ------ ----------------- ---------------------
<S> <C> <C>
1. Cover Page Prospectus Cover Page
2. Synopsis Prospectus Summary; Fund Expenses
3. Condensed Financial Information Financial Highlights
4. General Description of Registrant Investment Objective and Policies; Investment Practices;
Investment Restrictions; Management of the Fund; General
Information
5. Management of the Fund Management of the Fund
6. Capital Stock and Other Securities General Information; Distributions and Taxes
7. Purchase of Securities Being Determination of Net Asset Offered Value; Purchasing Shares
8. Redemption or Repurchase Redemption and Repurchase of Shares
9. Pending Legal Proceedings Inapplicable
</TABLE>
<PAGE> 4
CAPSTONE GOVERNMENT INCOME FUND
A SERIES OF CAPSTONE FIXED INCOME SERIES, INC.
5847 San Felipe, Suite 4100
Houston, TX 77057
1-800-262-6631
May 1, 1995
PROSPECTUS
Capstone Government Income Fund (the "Fund") is the initial series of
Capstone Fixed Income Series, Inc. (the "Corporation"), an open-end diversified
management investment company. The investment objective of the Fund is to earn
a high level of total return, consistent with safety of principal. The Fund
seeks to achieve its investment objective by investing in debt obligations that
have remaining maturities of three years or less and that are issued or
guaranteed by the U.S. Government, its agencies or instrumentalities. The Fund
may also, in pursuit of its investment objective, engage in the purchasing and
selling of options on U.S. Government securities in seeking to hedge against
changes in interest rates and to enhance the Fund's yield. This Prospectus
sets forth certain information about the Fund that a prospective investor
should know before investing. Investors should read and retain this Prospectus
for future reference.
A STATEMENT OF ADDITIONAL INFORMATION about the Fund dated May 1,
1995, has been filed with the Securities and Exchange Commission and contains
further information about the Fund. A copy of the Statement of Additional
Information may be obtained without charge by calling or writing the Fund at
the telephone number or address listed above. The Statement of Additional
Information is incorporated herein by reference.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE> 5
CAPSTONE GOVERNMENT INCOME FUND
<TABLE>
<S> <C> <C>
INVESTMENT ADVISER: SUBADVISER:
Capstone Asset Management Company New Castle Advisers, Inc.
5847 San Felipe, Suite 4100 1 Barker Avenue, 4th Floor
Houston, Texas 77057 White Plains, New York 10601
ADMINISTRATOR:
Capstone Asset Management Company
5847 San Felipe, Suite 4100
Houston, Texas 77057
DISTRIBUTOR: SHAREHOLDER SERVICING AGENT:
Capstone Asset Planning Company Fund/Plan Services, Inc.
5847 San Felipe, Suite 4100 2 W. Elm Street
Houston, Texas 77057 P.O. Box 874
Conshohocken, Pennsylvania 19428
</TABLE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Fund Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Financial Highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Investment Objective and Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Investment Practices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Investment Risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Investment Restrictions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Performance Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Management of the Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Purchasing Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Distributions and Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Redemption and Repurchase of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Determination of Net Asset Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Stockholder Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
General Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
</TABLE>
No dealer, salesman, or any other person has been authorized to give any
information or to make any representations, other than those contained in this
Prospectus, in connection with the offer contained in this Prospectus and, if
given or made, such other information or representations must not be relied
upon as having been authorized by the Fund or its Distributor. This Prospectus
does not constitute an offer by the Fund or by the Distributor to sell or a
solicitation of an offer to buy any of the securities offered hereby in any
jurisdiction to any person to whom it is unlawful for the Fund or the
Distributor to make such offer or solicitation in such jurisdiction.
2
<PAGE> 6
CAPSTONE GOVERNMENT INCOME FUND
PROSPECTUS SUMMARY
<TABLE>
<S> <C>
Type of Company . . . . . . . . . . The Fund is the initial series of Capstone Fixed Income Series, Inc., an open-end diversified
management investment company organized as a Maryland series company. (see page 24)
Investment Objective . . . . . . . The Fund's investment objective is to earn a high level of total return, consistent with
safety of principal. The Fund seeks to achieve its objective by investing in short-and
intermediate-term securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities. (see page 8)
Investment Policies . . . . . . . . The Fund will invest in debt obligations that have remaining maturities of three years or less
and that are issued by the U.S. Treasury and other U.S. agencies and instrumentalities. The
Fund may also buy and sell covered options on U.S. Government securities. (see page 8)
Risk Factors . . . . . . . . . . . The securities in which the Fund may invest are subject to market, credit and interest rate
risks. Additionally, the Fund could be adversely affected by its options transactions if
forecasts of the Adviser or Subadviser are incorrect. (see page 11)
Investment Adviser . . . . . . . . Capstone Asset Management Company (the "Adviser") is the Fund's investment adviser pursuant to
an agreement dated May 11, 1992. The Adviser provides investment advice and places orders to
purchase and sell securities for the Fund. The Adviser is responsible chiefly for the overall
design and structure of the Fund's investment portfolio, the investment philosophy, strategy
and maturity structure. It is paid a monthly fee equal to an annual rate of 0.40% of the
Fund's average daily net assets, out of which it pays fees to the Subadviser. (see page 13)
Subadviser . . . . . . . . . . . . New Castle Advisers, Inc. (the "Subadviser") performs advisory services for the Fund pursuant
to a Subadvisory Agreement between the Subadviser and Adviser dated May 11, 1992. The
Subadviser is primarily responsible for the implementation of purchases and sales and all
hedging and yield enhancement strategies. CAMCO pays the Subadviser, out of CAMCO's fees, a
monthly fee equal to an annual rate of 0.30% of the Fund's average daily net assets. (see
page 13)
Administrator . . . . . . . . . . . Capstone Asset Management Company (the "Administrator") is the Fund's Administrator. The
Administrator provides advisory and/or administrative services to the other mutual funds in
the Capstone Group, and is Adviser of the Fund. For its services, the Administrator is paid a
monthly fee equal to an annual rate of 0.10% of the Fund's average daily net assets. (see
page 15)
</TABLE>
3
<PAGE> 7
<TABLE>
<S> <C>
Dividends and Distributions . . . . The Fund pays dividends from net investment income at least annually and distributes capital
gains at least annually. (see page 18)
Distributor and Offering Price . . Shares of the Fund are continuously offered for sale through the Fund's Distributor, Capstone
Asset Planning Company, without a sales load, at the net asset value next determined after
receipt of the order. The Fund bears certain expenses pursuant to a written Rule 12b-1
distribution plan. (see page 17)
Minimum Purchase . . . . . . . . . The minimum purchase required for initial investment is $10,000, except for continuous
investment plans, and there is no minimum for subsequent investments. Certain waivers are
available. (see page 17)
Redemption . . . . . . . . . . . . Shares of the Fund can be redeemed at net asset value, without charge. (see page 20)
</TABLE>
4
<PAGE> 8
FUND EXPENSES
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<S> <C>
Maximum Sales Load Imposed on Purchases 0%
(as a percentage of offering price)
Maximum Sales Load Imposed on Reinvested Dividends 0%
(as a percentage of offering price)
Deferred Sales Load (as a percentage of 0%
original purchase price or redemption
proceeds, as applicable)
Redemption Fees (as a percentage of 0%
amount redeemed, if applicable)
Exchange Fee 0%
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management and Administration Fees .50%
12b-1 Fees* .20%
Other Expenses .17%
Total Fund Operating Expenses .87%
</TABLE>
EXAMPLE
<TABLE>
<CAPTION>
1 year 3 years 5 years 10 years
------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000
investment, assuming (1) 5% annual return and
(2) redemption at the end of each time period: $9 $28 $48 $107
</TABLE>
- ------------
* Under rules of the National Association of Securities Dealers, Inc. (the
"NASD"), a 12b-1 fee may be treated as a sales charge for certain purposes
under those rules. Because the 12b-1 fee is an annual fee charged against the
assets of a Fund, long-term stockholders may pay more in total sales charges
than the economic equivalent of the maximum front-end sales charge permitted by
rules of the NASD (see "Distributor").
The purpose of the foregoing table is to assist investors in
understanding the various costs and expenses that an investor in the Fund will
bear directly or indirectly. See "Purchasing Shares" and "Redemption and
Repurchase of Shares" below for more complete descriptions of those expenses.
The information under the heading "Annual Fund Operating Expenses" is based on
expenses actually incurred by the Fund during its last fiscal year ended
December 31, 1994. The management and administration fee information contained
in the table is based on the maximum asset-based fees. There were no
deductions for expense reimbursements or waivers by the Fund's Adviser,
Subadviser or Administrator during the last fiscal
5
<PAGE> 9
year. See "Management of the Fund" for more complete descriptions of the fees
paid to the Adviser, the Subadviser and the Administrator.
THE EXAMPLE WHICH IMMEDIATELY FOLLOWS THE TABLE USES THE "TOTAL FUND
OPERATING EXPENSES" FIGURE ABOVE AND ASSUMES IT WILL REMAIN CONSTANT OVER THE
ILLUSTRATED PERIOD. THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF
PAST OR FUTURE EXPENSES. ACTUAL FUND EXPENSES MAY BE GREATER OR LESSER THAN
THOSE SHOWN IN THE EXAMPLE OR IN THE TABLE.
6
<PAGE> 10
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. This
information has been derived from information provided in the Fund's financial
statements which have been audited by Tait, Weller & Baker for the years ended
December 31, 1994 and 1993 and the year ended September 30, 1990, and by Ernst
& Young LLP, independent auditors, for the year ended December 31, 1992, the
period from October 1, 1991 to December 31, 1991 and the year ended September
30, 1991. The Fund's Annual Report contains additional performance information
and is available free of charge upon request by calling the Fund at
800-262-6631.
<TABLE>
<CAPTION>
PERIOD
FROM
YEAR ENDED OCT. 1,
DECEMBER 31 1991 TO YEAR ENDED SEPTEMBER 30,
----------------------- DEC. 31 -----------------------------------------------------
1994 1993 1992 1991(1) 1991(2) 1990 1989 1988 1987 1986
---- ---- ---- ------- ------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE DATA
Net asset value at beginning
of period . . . . . . . $4.80 $4.74 $4.67 $4.73 $4.67 $5.09 $5.22 $5.20 $5.26 $4.84
------ ------ ------ ------- ------ ------ ------ ------ ------ ------
Income from investment
operations:
Net investment income . .18 .17 .23 .06 .25 .44 .45 .44 .48 .47
Net realized and
unrealized gain (loss) (.12) (.01) (.06) .06 (.08) (.40) (.11) .09 (.07) .43
------ ------ ------ ------- ------ ------ ------ ------ ------ ------
Total from investment
operations . . . . . . .06 .16 .17 .12 .17 .04 .34 .53 .41 .90
------ ------ ------ ------- ------ ------ ------ ------ ------ ------
Less distributions from net
investment income . . . (.13) (.10) (.10) ( .18) (.11) (.46) (.47) (.51) (.47) (.48)
------ ------ ------ ------- ------ ------ ------ ------ ------ ------
Net asset value at end of
period . . . . . . . . $4.73 $4.80 $4.74 $4.67 $4.73 $4.67 $5.09 $5.22 $5.20 $5.26
====== ====== ====== ======= ====== ====== ====== ====== ====== ======
Total Return . . . . . . 1.13% 3.32% 3.55% 2.49% 3.63% .73% 6.73% 10.73% 7.93% 19.36%
====== ====== ====== ======= ====== ====== ====== ====== ====== ======
RATIOS/SUPPLEMENTAL DATA
Ratio of operating expenses
to average net assets . .87% .93% .92% .31% 1.45% 1.40% 1.24% 1.29% 1.29% 1.52%
Ratio of interest expenses
to average net assets . .00% .00% .04% .10% .22% .00% .00% .00% .00% .00%
------ ------ ------ ------- ------ ------ ------ ------ ------ ------
Ratio of total expenses to
average net assets . . .87% .93% .96% .41% 1.67% 1.40% 1.24% 1.29% 1.29% 1.52%
====== ====== ====== ======= ====== ====== ====== ====== ====== ======
Ratio of net investment
income to average net
assets . . . . . . . . 4.20% 3.64% 4.69% 1.34% 5.29% 9.06% 8.75% 8.51% 8.90% 9.18%
Portfolio turnover . . . 285.13% 596.36% 633.41% 129.05% 753.62% 82.00% 69.89% 100.48% 102.11% 186.70%
Net assets at end of period
(in thousands) . . . . 8,705 33,795 29,847 30,565 36,720 17,648 20,214 24,575 22,497 19,287
</TABLE>
- --------------
(1) Selected per share data and ratios including total return have not been
annualized.
(2) Effective January 1991, the investment objective and investment adviser
were changed.
7
<PAGE> 11
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to earn a high level of total
return, consistent with safety of principal. Total return would include net
realized and unrealized capital gains and net investment income. The Fund
seeks to achieve its objective by investing in debt obligations that have
remaining maturities of three years or less and that are issued or guaranteed
by the U.S. Government, its agencies or instrumentalities and by engaging in
certain income enhancement strategies. The Fund's investment objective is a
fundamental policy and may not be changed without the authorization of the
holders of a majority of the Fund's outstanding voting securities. There can
be no assurance that the Fund's investment objective will be achieved.
By holding primarily U.S. Government securities, the Fund will seek to
earn current income comparable to the stated coupons of the securities held in
the portfolio. In addition, by entering into the specific yield enhancement
strategies detailed below, including covered put and call option writing and
use of option premium income to purchase options, the Fund will attempt to
hedge the price risk of the portfolio securities and to enhance the current
income of the portfolio beyond the stated coupons attached to the portfolio
securities. Fund monies that are not invested in U.S. Government securities or
employed in hedging or income enhancement strategies will be invested in
repurchase agreements backed by U.S. Government securities.
Under no circumstances will the Fund purchase debt obligations that
have more than three years remaining to maturity, nor will the Adviser or
Subadviser transact business that will create a weighted-average maturity of
the Fund to be in excess of two years on the last business day of each calendar
year. Accordingly, the Adviser and Subadviser expect that the Fund's daily net
asset value will be limited in changes to those not exceeding the price
sensitivity of two-to-three year U.S. Treasury notes.
The Fund intends to reinvest all interest income earned by the Fund's
portfolio in securities that mature before the end of the calendar year. The
purpose of this procedure is to protect all interest income for possible
distribution to stockholders. Interest income is, therefore, not intended for
use in financing hedging or yield enhancement strategies. In this way the Fund
hopes to protect its portfolio's principal value from erosion due to net
options trading losses.
Prior to a Special Meeting of Stockholders held January 8, 1991, the
Fund's name was Investors Income Fund, Inc. and its investment objective was to
seek a high level of current income along with preservation of capital through
investments in U.S. Government and corporate bonds, money market instruments
and other income-producing securities.
The portfolio turnover rate for the fiscal years ended December 31,
1994, 1993 and 1992 was 285%, 596% and 633%, respectively. It is anticipated
that the Fund will incur a high portfolio turnover rate in connection with the
use of covered option writing strategies; high portfolio turnover can be
expected to increase the Fund's transaction costs. Additionally, to the extent
portfolio turnover results in realization of net short-term capital gains,
stockholders will be taxed on such gains at ordinary income tax rates (except
stockholders investing through retirement plans that are not taxed currently on
accumulations).
8
<PAGE> 12
INVESTMENT PRACTICES
The significant investments and investment strategies employed by the
Fund, including related risks, are described below. For more information
concerning the Fund's investment practices, see the Fund's Statement of
Additional Information.
U.S. GOVERNMENT SECURITIES. The Fund may invest in securities issued
by the U.S. Treasury, including bills, notes and bonds with three years or less
remaining until maturity. Those instruments are direct obligations of the U.S.
Government and, as such, are backed by the "full faith and credit" of the
United States. They differ primarily in the dates of their issuance, stated
coupons, call provisions and maturity dates.
U.S. GOVERNMENT AGENCIES SECURITIES. The Fund may invest up to 50% of
its portfolio in instruments issued by agencies or instrumentalities of the
U.S. Government. Some agencies, including the Department of Housing and Urban
Development, the Government National Mortgage Association, the Farmer's Home
Administration, and the Small Business Administration, issue securities backed
by the "full faith and credit" of the United States. U.S. Government agencies
and instrumentalities that issue securities not backed by the "full faith and
credit" of the U.S. Government in which the Fund may invest are limited to the
Federal Farm Credit System, the Federal Land Banks, the Federal Intermediate
Credit Banks, the Banks for Cooperatives, the Federal Home Loan Banks, the
Federal National Mortgage Association and the Federal Home Loan Mortgage
Corporation. In the case of issues not backed by the U.S. Government, the
investor must look principally to the agency issuing the obligation for
ultimate repayment of principal and interest.
REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements
(a purchase of, and simultaneous commitment to resell, a security at an agreed
upon price on an agreed upon date) only with member banks of the Federal
Reserve System, recognized primary dealers of Government securities, and member
firms of the New York Stock Exchange. When participating in repurchase
agreements, the Fund buys securities from a vendor, e.g., a bank or brokerage
firm, with the agreement that the vendor will repurchase the securities at a
higher price or agreed rate of interest at a later date. The securities
underlying a repurchase agreement will be marked-to-market every business day
so that the value of the collateral is at least equal to the value of the loan,
including the accrued interest thereon. Such transactions afford an
opportunity for the Fund to earn a return on available cash at minimal market
risk, although the Fund may be subject to various delays and risks of loss if
the vendor is unable to meet its obligation to repurchase or to maintain
collateral in accordance with the agreement. In evaluating whether to enter
into repurchase agreements, the Adviser and/or Subadviser will carefully
consider the creditworthiness of the vendor. If the member bank or member firm
that is the party to the repurchase agreement petitions for bankruptcy or
otherwise becomes subject to the U.S. Bankruptcy Code, the law regarding the
rights of the Fund is unsettled.
REVERSE REPURCHASE AGREEMENTS. A reverse repurchase agreement
involves the sale of a U.S. Treasury obligation by the Fund and its agreement
to repurchase the instrument at a specific time and price. The Fund will
maintain a segregated account, which will be marked-to-market daily, consisting
of cash, cash equivalents and U.S. Government securities at least equal to its
obligations under reverse repurchase agreements, including any accrued
interest. The Fund will not invest proceeds from these transactions beyond the
expiration of the reverse repurchase agreement. The Fund may not enter into
these transactions with more than 33% of its portfolio, and will only enter
into such agreements with dealers approved by the Fund for repurchase
agreements.
COVERED OPTIONS STRATEGIES. The Fund may write (or sell) put and call
options on the U.S. Government securities that the Fund is authorized to buy or
already holds in its portfolio. These option
9
<PAGE> 13
contracts may be listed for trading on a national securities exchange or traded
over-the-counter. The Fund may also purchase put and call options on U.S.
Government securities. The Fund will not write covered calls on more than 50%
of its portfolio, and the Fund will not write covered calls with strike prices
lower than the underlying securities' cost basis on more than 25% of its total
portfolio.
A call option gives the purchaser the right to buy, and the writer the
obligation to sell, the underlying security at the agreed upon exercise (or
"strike") price during the option period. A put option gives the purchaser
the right to sell, and the writer the obligation to buy, the underlying
security at the strike price during the option period. Purchasers of options
pay an amount, known as a premium, to the option writer in exchange for the
right under the option contract.
The Fund may sell "covered" put and call options as a means of hedging
the price risk of securities in the Fund's portfolio. The sale of a call
option against a security held by the portfolio constitutes a "covered call."
The sale of a put option against an amount of cash equal to the put's potential
liability constitutes a "covered put." When the Fund sells an option, if the
underlying securities do not increase (in the case of a call option) or
decrease (in the case of a put option) to a price level that would make the
exercise of the option profitable to the holder of the option, the option will
generally expire without being exercised and the Fund will realize as profit
the premium paid for such option. When a call option of which the Fund is the
writer is exercised, the option holder purchases the underlying security at the
strike price and the Fund does not participate in any increase in the price of
such securities above the strike price. When a put option of which the Fund is
the writer is exercised, the Fund will be required to purchase the underlying
securities at the strike price, which may be in excess of the market value of
such securities. Sales of covered puts will not total more than 10% of the
Fund's total assets however, the Fund may sell covered puts on up to 20% of the
Fund's total assets if the strike price of the put is lower than the underlying
security's current market value.
Over-the-counter options ("OTC options") differ from exchange-traded
options in several respects. They are transacted directly with dealers and not
with a clearing corporation, and there is a risk of non-performance by the
dealer. OTC options are available for a greater variety of securities and for
a wider range of expiration dates and exercise prices than exchange traded
options. Because OTC options are not traded on an exchange, pricing is
normally done by reference to information from a market maker. This
information is carefully monitored by the Adviser and Subadviser and verified
in appropriate cases. OTC options transactions will be made by the Fund only
with primary U.S. Government securities dealers who have given the Fund an
absolute right to repurchase according to a "repurchase formula", and will not
be subject to the Fund's 10% limit on investments on illiquid securities.
The Fund may, in order to avoid the exercise of an option sold by it,
cancel its obligation under the option by entering into a closing purchase
transaction, if available, unless it is determined to be in the Fund's interest
to sell (in the case of a call option) or to purchase (in the case of a put
option) the underlying securities. A closing purchase transaction consists of
the Fund purchasing an option having the same terms as the option sold by the
Fund and has the effect of cancelling the Fund's position as a seller. The
premium which the Fund will pay in executing a closing purchase transaction may
be higher than the premium received when the option was sold, depending in
large part upon the relative price of the underlying security at the time of
each transaction. To the extent options sold by the Fund are exercised and the
Fund either delivers portfolio securities to the holder of a call option or
liquidates securities in its portfolio as a source of funds to purchase
securities put to the Fund, the Fund's portfolio turnover rate may increase,
resulting in a possible increase in short-term capital gains and a possible
decrease in long-term capital gains.
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Put and call option purchases by the Fund are not limited in par
amount, nor in underlying security. However, the Fund may not exercise options
that call for purchases or sales of securities not authorized by the Fund's
investment policies. Put and call purchases are limited, however, in dollar
amount by the net premiums received by the Fund from options sales and not yet
distributed to stockholders as dividends. Moreover, the Fund may not invest
more than 5% of its total assets in option purchases.
RISKS OF WRITING OPTIONS. By writing a call option, the Fund loses
the potential for gain on the underlying security above the exercise price
while the option is outstanding; by writing a put option a Fund might become
obligated to purchase the underlying security at an exercise price that exceeds
the then current market price.
WHEN-ISSUED AND FORWARD DELIVERY SECURITIES. Securities may be
purchased on a "when-issued" or on a "forward delivery" basis, which means that
the obligations will be delivered at a future date beyond customary settlement
time. The commitment to purchase a security for which payment will be made on
a future date may be deemed a separate security. Although the Fund is not
limited in the amount of securities for which it may have commitments to
purchase on such basis, it is expected that in normal circumstances, the Fund
will commit no more than 25% of its assets to such purchases. The Fund does
not pay for securities until received or start earning interest on them until
it is notified of the settlement date. In order to invest its assets
immediately, while awaiting delivery of securities purchased on such basis, the
Fund will normally invest in short-term securities that may bear interest at a
lower rate than longer-term securities.
These transactions are subject to market fluctuations; the value of
the securities at delivery may be more or less than their purchase price, and
yields available in the market may be higher than yields on the securities
obtained pursuant to such transactions. Because the Fund relies on the buyer
or seller, as the case may be, to consummate the transactions, failure by the
other party to complete the transaction may result in the Fund missing the
opportunity of obtaining a price or yield considered to be advantageous. The
Fund will make commitments to purchase securities on such basis only with the
intention of actually acquiring these securities, but the Fund may sell such
securities prior to the settlement date if such sale is considered to be
advisable. To the extent the Fund engages in "when-issued" and "forward
delivery" transactions, it will do so for the purpose of acquiring securities
for the Fund's portfolio consistent with the Fund's investment objectives and
policies and not for the purpose of investment leverage.
The SEC generally requires that when investment companies, such as the
Fund, effect transactions of the foregoing nature, such funds must either
segregate cash or readily marketable high-grade debt securities with its
Custodian in the amount of its obligations under the foregoing transactions, or
cover such obligations by maintaining positions in portfolio securities or
options that would serve to satisfy or offset the risk of such obligations.
When effecting transactions of the foregoing nature, the Fund will comply with
such segregation or cover requirements.
INVESTMENT RISKS
The Fund is designed as a means of investing in short-term U.S.
Government securities, and not as a trading vehicle. To the extent that the
Fund invests in fixed rate obligations, the net asset value of the Fund may
rise and fall with general interest rate changes. During periods of falling
interest rates, the values of such securities generally rise. Conversely,
during periods of rising interest rates, the values of such securities
generally decline.
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The Fund will attempt to achieve its objective of earning a high level
of total return by establishing the shortest possible maturity allowed by
market conditions consistent with its investment objective, but the Fund can
make no predictions as to what this maturity will be inside the stated
restriction of three year maximum maturity. Changes in the value of portfolio
securities do not affect the investment income from these securities, however,
or the ability of the Fund to reinvest these earnings as they become available
prior to distributions.
Although the Fund's option writing activities cause portfolio turnover
to be high (see "Investment Objective and Policies"), it is not an objective of
the Fund to attempt to profit from interest rate changes by entering
speculative positions or by excessively trading the portfolio. Obligations
held by the Fund may, however, be subject to call prior to their maturity.
Call provisions tend to be exercised when interest rates have fallen, forcing
reinvestment of the proceeds at lower interest rates.
INVESTMENT RESTRICTIONS
The Fund has certain investment restrictions some of which, as well as
the Fund's investment objective, are fundamental and, accordingly, may not be
changed without the approval of the holders of a majority of the Fund's shares,
which means the lesser of (i) more than 50% of the outstanding shares of the
Fund, or (ii) 67% or more the outstanding shares of the Fund present at a
meeting in which holders of more than 50% of its outstanding shares are
represented in person or by proxy. The Fund's fundamental and non-fundamental
investment restrictions are fully described in the Statement of Additional
Information. Among other things, the Fund's fundamental investment
restrictions provide that the Fund may not borrow money, except that the Fund
may enter into reverse repurchase agreements, and, as a temporary measure for
extraordinary or emergency purposes, it may borrow from banks in an amount not
to exceed 1/3 of the value its net assets, including the amount borrowed. The
Fund will not purchase additional securities while its borrowings exceed 5% of
its total assets.
PERFORMANCE INFORMATION
The Fund may from time to time include figures indicating the Fund's
yield, total return or average annual total return in advertisements or reports
to stockholders or prospective investors. Quotations of the Fund's yield will
be based on all investment income per share earned during a particular 30-day
period (including dividends and interest), less expenses accrued during the
period ("net investment income"), and will be computed by dividing net
investment income by the maximum offering price per share on the last day of
the period. Average annual total return and total return figures represent the
increase (or decrease) in the value of an investment in the Fund over a
specified period. Both calculations assume that all income dividends and
capital gain distributions during the period are reinvested at net asset value
in additional Fund shares. Quotations of the average annual total return
reflect the deduction of a proportional share of Fund expenses on an annual
basis. The results, which are annualized, represent an average annual
compounded rate of return on a hypothetical investment in the Fund over a
period of 1, 5 and 10 years ending on the most recent calendar quarter (but not
for a period greater than the life of the Fund). Quotations of total return,
which are not annualized, represent historical earnings and asset value
fluctuations.
Performance information for the Fund may be compared, in reports and
promotional literature, to: (i) the Merrill Lynch One to Three-Year Treasury
Index and the Shearson Lehman Intermediate Government/Corporate Bond Index;
(ii) certain performance figures prepared for broad groups of mutual
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<PAGE> 16
funds with investment goals similar to the Fund by organizations such as Lipper
Analytical and the Donoghue Organization; (iii) the Consumer Price Index, a
statistical measure of change, over time, in the price of goods and services in
major expenditure groups (such as food, housing, apparel, transportation,
medical care, entertainment and other goods and services) typically purchased
by urban consumers; (iv) other mutual funds with similar goals; and (v)
certificates of deposit. Instruments included in the Shearson and Merrill
indexes, which are unmanaged, may not necessarily be typical of the type of
investments made by the Fund. Other material differences between the Fund and
these indexes may include (i) the managed character of the Fund's portfolio
(i.e., the Fund may purchase and sell investment securities based on their
performance while securities comprising the particular index may remain as part
of the index without regard to their performance), and (ii) the index would not
generally reflect deductions for administrative expenses and costs. Further,
broad-based economic indexes measure developments of general matters which may
or may not be relevant to the Fund's performance during particular periods.
For example, the purchasing power of consumers' dollars is measured by
comparing the costs of goods and services today with the costs of the same
goods and services at an earlier date.
There are three material differences between an investment in the Fund
and ownership of a certificate of deposit ("CD"). First, an investment in the
Fund is subject to a greater degree of risk and fluctuation of value than a CD,
which guarantees a specific rate of return. Second, if interest rates rise in
the future, the capital value of bonds purchased at the present time will fall,
which will affect the Fund's performance if such securities are held in its
portfolio. Third, the underlying assets of a CD are insured on amounts up to
$100,000.
Performance information for the Fund reflects only the performance of
a hypothetical investment in the Fund during the particular time period on
which the calculations are based. Performance information should be considered
in light of the Fund's investment objectives and policies, the types and
quality of the Fund's portfolio investments, market conditions during the
particular time period and operating expenses. Such information should not be
considered as a representation of the Fund's future performance. For a
description of the methods used to determine the Fund's yield, total return and
average annual total return, see the Statement of Additional Information.
MANAGEMENT OF THE FUND
The Fund is a series of an open-end diversified management investment
company, commonly called a mutual fund. See "General Information". Through
the purchase of shares of the Fund, investors with goals similar to the
investment objective of the Fund can participate in the investment performance
of the portfolio of investments held by the Fund. The management and affairs
of the Fund are supervised by its Board of Directors.
INVESTMENT ADVISER AND SUBADVISER
Capstone Asset Management Company ("CAMCO") serves as the investment
adviser (the "Adviser") to the Fund pursuant to an investment advisory
agreement ("Advisory Agreement") dated May 11, 1992 between the Adviser and the
Fund. CAMCO, located at 5847 San Felipe, Suite 4100, Houston, Texas 77057 was
incorporated in 1982 and is a wholly-owned subsidiary of Capstone Financial
Services, Inc. CAMCO serves as investment adviser and/or administrator to five
other mutual funds: Capstone Growth Fund, Inc., Capstone Balanced Fund,
Capstone Nikko Japan Fund, Capstone New Zealand Fund, and Medical Research
Investment Fund, Inc. (collectively, the "Capstone Funds"), and to pension and
profit sharing
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accounts, corporations and individuals. Assets under management are
approximately $1.4 billion.
NCA was incorporated in 1991 and is principally owned by Howard S.
Potter. Its principal place of business is 1 Barker Avenue, 4th Floor, White
Plains, New York 10601. NCA also serves as subadviser to U.S. Government
Income Trust, a series of Quest for Value Family of Funds, a registered
investment company. Personnel now affiliated with NCA have participated in the
Fund's portfolio management since January 8, 1991 (until October 31, 1991, as
employees of James Money Management, the Fund's previous Co-Adviser).
The Fund is managed primarily by Howard S. Potter. Mr. Potter began
his Wall Street career trading financial futures as a local floor trader. In
1981 he joined Donaldson, Lufkin & Jenrette, Inc. as Assistant Vice President
of Marketing, where, in addition to other responsibilities, he published two
weekly newsletters on financial futures and debt options. He moved to
Oppenheimer & Company in 1984 to spearhead their Risk Management Group, and
from there joined James Money Management in 1988 as Chief Investment Officer
for all yield enhancement products and portfolio manager of several mutual
funds. Mr. Potter received a B.A. degree from the University of Wisconsin and
a M.A. degree from Northwestern University.
Pursuant to the terms of the Advisory Agreement and Subadvisory
Agreement, the Adviser and Subadviser, respectively, have agreed to (1) provide
a program of continuous investment management for the Fund in accordance with
the Fund's investment objectives, policies and limitations, (2) make investment
decisions for the Fund and (3) place orders to purchase and sell securities for
the Fund, subject to the supervision of the Board of Directors. In accordance
with the Fund's policy of allocating portfolio brokerage described in the
Statement of Additional Information, the Adviser and Subadviser are permitted
to consider sales of Fund shares as a factor in selecting broker-dealers to
execute portfolio transactions, subject to best execution. CAMCO is
responsible chiefly for the overall design and structure of the Fund's
investment portfolio, as well as for establishing the Fund's investment
philosophy, strategy and maturity structure. CAMCO is also responsible for
performance yield curve and creditworthiness analysis. NCA is responsible
chiefly for the market timing of purchases and sales, and for all yield
enhancement strategies. For these services the Fund pays CAMCO a fee computed
daily and payable monthly at the annual rate of 0.40% of the first $250 million
of the Fund's average daily net assets and 0.36% of such assets over $250
million. Out of these fees, CAMCO pays NCA a fee computed daily and payable
monthly at the annual rate of 0.30% of the first $250 million and 0.27% of the
Fund's average daily net assets over $250 million. For the fiscal year ended
December 31, 1994 the Fund paid advisory fees to CAMCO equal to 0.40% of the
Fund's average daily net assets, and CAMCO paid to NCA for subadvisory services
fees equal to 0.30% of the Fund's average daily net assets.
The Advisory Agreement and Subadvisory Agreement provide that the
Adviser and Subadviser, respectively, shall not be liable for any error of
judgment or of law, or for any loss suffered by the Fund in connection with the
matters to which the agreements relate except a loss resulting from willful
misfeasance, bad faith or gross negligence on the part of the Adviser or
Subadviser in the performance of their obligations and duties, or by reason of
their reckless disregard of their obligations and duties under the Advisory
Agreement and Subadvisory Agreement.
The Advisory Agreement and the Subadvisory Agreement will remain in
effect until May 11, 1994, and will continue in effect thereafter only if such
continuance is specifically approved at least annually by the Board of
Directors or by vote of a majority of the Fund's outstanding voting securities
(as defined in the 1940 Act) and, in either case, by a majority of the
directors who are not parties to the Advisory Agreement or the Subadvisory
Agreement, or interested persons of any such party. The Advisory Agreement and
the
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<PAGE> 18
Subadvisory Agreement will each terminate automatically in the event of its
assignment and may be terminated without penalty by vote of a majority of the
Fund's outstanding voting securities or by either party on not more than 60
days' written notice. The Subadvisory Agreement will also terminate upon
termination or assignment of the Advisory Agreement.
ADMINISTRATOR
Capstone Asset Management Company (the "Administrator"), a
wholly-owned subsidiary of Capstone Financial Services, Inc., provides
administrative services for the Fund and supervises the Fund's daily business
affairs, coordinates the activities of persons providing services to the Fund
and furnishes office space and equipment to the Fund. Such services are
subject to general review by the Board of Directors. As compensation for its
services, the Administrator receives from the Fund a fee, computed daily and
payable monthly, at an annual rate of 0.10% of the Fund's average net assets.
DISTRIBUTOR
Pursuant to a Distribution Agreement with the Fund dated May 11, 1992,
Capstone Asset Planning Company (the "Distributor"), is the principal
underwriter of the Fund and, acting as exclusive agent, sells shares of the
Fund to the public on a continuous basis.
The Fund has adopted a Service and Distribution Plan (the "Plan")
pursuant to which it uses its assets to finance certain activities relating to
the distribution of its shares to investors and provision of certain
stockholder services. The Plan permits payments to be made by the Fund to the
Distributor to reimburse it for particular expenditures incurred by it in
connection with the distribution of the Fund's shares to investors and
provision of certain stockholder services including but not limited to the
payment of compensation, including incentive compensation, to securities
dealers (which may include the Distributor itself) and certain banks,
investment advisers and pension consultants (collectively, the "Service
Organizations") to obtain various distribution related and/or administrative
services for the Fund. These services include, among other things, processing
new stockholder account applications, preparing and transmitting to the Fund's
Transfer Agent computer processable tapes of all transactions by customers and
serving as the primary source of information to customers in answering
questions concerning the Fund and their transactions with the Fund. The
Distributor is also authorized to engage in advertising, the preparation and
distribution of sales literature and other promotional activities on behalf of
the Fund. In addition, the Plan authorizes payment by the Fund of the cost of
preparing, printing and distributing Fund Prospectuses and Statements of
Additional Information to prospective investors and of implementing and
operating the Plan.
Under the Plan, payments made to the Distributor may not exceed an
amount computed at an annual rate of 0.20% of the average net assets of the
Fund. The Distributor is permitted to collect fees under the Plan on a monthly
basis. Any expenditures incurred in excess of the limitation described above
during a given month may be carried forward up to twelve months for
reimbursement, subject always to the 0.20% limit, and no interest or carrying
charges will be payable by the Fund on amounts carried forward. Payments under
the Plan are further limited by rules of the National Association of Securities
Dealers. The Plan may be terminated by the Fund at any time and the Fund will
not be liable for amounts not reimbursed as of the termination date. During the
fiscal year ended December 31, 1994, the effective rate of servicing fees paid
by the Fund to Service Organizations other than Capstone Asset Planning Company
was .20% of the Fund's average annual net assets, and the effective rate of
servicing fees paid to Capstone Asset Planning Company was .04% of the Fund's
average annual net assets.
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The Plan was approved by a majority of the Fund's stockholders on
January 8, 1991, and may be continued thereafter from year to year, provided
that such continuance is approved at least annually by a vote of a majority of
the Board of Directors, including a majority of the directors who have no
direct or indirect financial interest in the operation of the Plan or any of
its agreements ("Plan Directors"). The Plan was last approved by unanimous
vote of a majority of the Board of Directors, including a majority of the Plan
Directors, on November 13, 1994.
The Glass-Steagall Act and other applicable laws currently prohibit
banks from engaging in the business of underwriting, selling or distributing
securities. Accordingly, unless such laws are changed, if the Fund engages
banks as Service Organizations, the banks would perform only administrative and
shareholder servicing functions. If a bank were prohibited from acting as a
Service Organization, alternative means for continuing the servicing of such
shareholders would be sought.
The staff of the SEC has proposed amendments to Rule 12b-1 which, if
the rule is amended as proposed or in some other manner, may make it necessary
for the Fund to consider amending the Plan and any related agreements.
EXPENSES
The Fund pays all expenses incurred in the operation of the Fund other
than those assumed by the Adviser, Subadviser and Administrator under the
Advisory Agreement, Subadvisory Agreement or Administration Agreement,
respectively. Expenses payable by the Fund include: fees and expenses of
directors who are not "interested persons" (as defined in the 1940 Act); fees
of the Adviser and Subadviser; Board of Directors meeting-related expenses of
the directors and officers; mailing expenses of all Fund officers and
directors; expenses for legal and auditing services; data processing and
pricing services; costs of printing and mailing proxies, stock certificates and
stockholder reports; fees of the Administrator; charges of the custodian,
transfer agent, registrar or dividend disbursing agent; expenses pursuant to
the Service and Distribution Plan; Securities and Exchange Commission fees;
membership fees in trade associations; fidelity bond coverage for the Fund's
officers; directors' and officers' errors and omissions insurance coverage;
interest; brokerage costs; taxes; expenses of qualifying the Fund's shares for
sale in various states; litigation; and other extraordinary or non-recurring
expenses and other expenses properly payable by the Fund.
The Fund's expenses are accrued daily and are deducted from its total
income before dividends are paid. Under the Advisory, Subadvisory and
Administration Agreements, if the Fund's ordinary expenses for any fiscal year
(including advisory and administrative fees, but excluding interest, local,
state and Federal taxes and extraordinary expenses) exceed the expense
limitations of any state having jurisdiction over the Fund, then the annual
advisory, subadvisory and administration fees will be reduced ratably (but not
below zero) by the Adviser, Subadviser and Administrator until the Fund can
operate within the expense limitation discussed above. The Fund's total
operating expenses as a percentage of its average net assets during the fiscal
year ended December 31, 1994 were .87%.
PURCHASING SHARES
Capstone Asset Planning Company (the "Distributor"), located at 5847
San Felipe, Houston, Texas 77057, is the principal underwriter of the Fund and,
acting as exclusive agent, sells shares of the Fund to the public on a
continuous basis. Edward L. Jaroski is a director of the Corporation, the
Adviser and the Distributor. Some officers of the Fund are also officers of
the Adviser, Distributor and their parent company,
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<PAGE> 20
Capstone Financial Services, Inc.
Shares of the Fund are sold in a continuous offering and may be
purchased on any business day through authorized investment dealers or directly
from the Fund's Distributor. Only the Distributor and investment dealers which
have a sales agreement with the Distributor are authorized to sell shares of
the Fund. For further information, reference is made to the caption
"Distributor" in the Fund's Statement of Additional Information.
The initial purchase must be at least $10,000, except for continuous
investment plans which have no minimum, and there is no minimum for subsequent
investments. The minimum purchase requirement is waived for stockholders of
the Fund as of January 8, 1991 and for employees of CAMCO and NCA and their
immediate family members. "Immediate family member" is defined as a spouse,
parent, child or sibling. Shares of the Fund are sold at net asset value,
without a sales charge, and will be credited to a stockholder's account at the
net asset value next computed after an order is received by the Distributor.
Whenever a transaction takes place in the stockholder's account, a statement
will be mailed reflecting the status of the account. Share certificates are
not issued unless requested by the stockholder in writing to the Fund's
Transfer Agent. The Fund's management reserves the right to reject any
purchase order if, in its opinion, it is in the Fund's best interest to do so.
Effective June 7, 1995, payment for all orders to purchase Fund shares
must be received by the Fund's Transfer Agent within three business days after
the order was placed.
INVESTING THROUGH AUTHORIZED DEALERS
If any authorized dealer receives an order, the dealer may contact the
Distributor directly. Orders received by dealers by the close of trading on
the New York Stock Exchange on a business day that are transmitted to the
Distributor by 4:00 p.m. Central time on that day will be effected at the net
asset value per share determined as of the close of trading on the New York
Stock Exchange that day. Otherwise, the orders will be effected at the next
determined net asset value. It is the dealer's responsibility to transmit
orders so that they will be received by the Distributor before 4:00 p.m.
Central time.
After each investment, the stockholder and the authorized investment
dealer receive confirmation statements of the number of shares purchased and
owned.
PURCHASES THROUGH THE DISTRIBUTOR
An account may be opened by mailing a check or other negotiable bank
draft (payable to Capstone Government Income Fund) together with the completed
Investment Application Form included with this Prospectus to the Fund's
Transfer Agent: Capstone Government Income Fund, c/o Fund/Plan Services, Inc.,
2 W. Elm Street, P.O. Box 874, Conshohocken, Pennsylvania 19428. All such
investments are effected at the net asset value of Fund shares next computed
following receipt of payment by the Transfer Agent. Confirmations of the
opening of an account and of all subsequent transactions in the account are
forwarded by the Transfer Agent to the stockholder's address of record.
TELEPHONE PURCHASE AUTHORIZATION (INVESTING BY PHONE)
Stockholders who have completed the Telephone Purchase Authorization
section of the Investment Application Form may purchase additional shares by
telephoning the Fund's Transfer Agent at (800) 845-
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<PAGE> 21
2340. The minimum telephone purchase is $1,000 and the maximum is the
greater of $1,000 or five times the net asset value of shares (for which
certificates have not been issued) held by the stockholder on the day preceding
such telephone purchase for which payment has been received. The telephone
purchase will be effected at the net asset value next computed after receipt of
the call by the Fund's Transfer Agent. Effective June 7, 1995, payment for the
telephone purchase must be received by the Transfer Agent within three business
days after the order is placed. If payment is not received within three
business days after the order is placed, the stockholder will be liable for all
losses incurred as a result of the purchase. (Prior to June 7, 1995, payment
must be received by the Transfer Agent within 7 days.)
INVESTING BY WIRE
Investors having an account with a commercial bank that is a member of
the Federal Reserve System may purchase shares of the Fund by requesting their
bank to transmit funds by wire to: United Missouri Bank KC NA, ABA
10-10-00695, For; Fund/Plan Services, Inc. Account 98-7037-0719; Further Credit
Capstone Government Income Fund. The investor's name and account number must
be specified in the wire.
Initial Purchases - Before making an initial investment by wire, an
investor must first telephone (800) 845-2340 to be assigned an account number.
The investor's name, account number, taxpayer identification or social security
number, and address must be specified in the wire. In addition, the investment
application which accompanies this Prospectus should be promptly forwarded to
Capstone Government Income Fund, c/o Fund/Plan Services, Inc., 2 W. Elm Street,
P.O. Box 874, Conshohocken, Pennsylvania 19428.
Subsequent Purchases - Additional investments may be made at any time
through the wire procedures described above, which must include the investor's
name and account number. The investor's bank may impose a fee for investments
by wire.
DISTRIBUTIONS AND TAXES
PAYMENT OPTIONS
Distributions (whether treated for tax purposes as ordinary income or
long-term capital gains) to stockholders of the Fund are paid in additional
shares of the Fund, with no sales charge, based on the Fund's net asset value
as of the close of business on the record date for such distributions.
However, a stockholder may elect on the application form which accompanies this
Prospectus to receive distributions as follows:
Option 1. To receive income dividends in cash and capital gain
distributions in additional Fund shares, or
Option 2. To receive all income dividends and capital gain
distributions in cash.
The Fund pays any dividends from investment company taxable income
annually in December, and intends to make any distributions representing net
capital gain annually in December. The Fund will advise each stockholder
annually of the amounts of dividends from investment company taxable income and
of net capital gain distributions reinvested or paid in cash to the stockholder
during the calendar year.
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If you select Option 1 or Option 2 and the U.S. Postal Service cannot
deliver your checks, or if your checks remain uncashed for six months, your
distribution checks will be reinvested in your account at the then current net
asset value and your election will be converted to the purchase of additional
shares.
TAXES
The Fund intends to qualify and elect to be treated as a regulated
investment company under the Federal tax law. In any taxable year in which the
Fund so qualifies and distributes at least 90% of its investment company
taxable income (which includes, among other items, interest and the excess of
realized net short-term capital gain over realized net long-term capital loss),
the Fund generally will be relieved of Federal income tax on its investment
company taxable income and net capital gains (the excess of realized net
long-term capital gains over realized net short-term capital losses)
distributed to stockholders. Amounts not distributed on a timely basis in
accordance with a calendar year distribution requirement are also subject to a
nondeductible 4% excise tax. To prevent application of the excise tax, the
Fund intends to make its distributions in accordance with the calendar year
distribution requirement. A distribution will be treated as paid on December
31 of the calendar year if it is declared by the Fund in October, November or
December of that year to stockholders of record on a date in such a month and
paid by the Fund during January of the following calendar year. Such
distributions will be taxable to stockholders in the calendar year in which the
distributions are declared, rather than the calendar year in which the
distributions are received.
Distributions from investment company taxable income are taxable to
stockholders as ordinary income. Distributions of the net capital gain
designated by the Fund as capital gain dividends are taxable as long-term
capital gains regardless of the length of time a stockholder may have held
shares of the Fund. The tax treatment of distributions treated as ordinary
income or capital gain will be the same whether the stockholder invests the
distributions in additional shares or elects to receive them in cash. Some of
the Fund's distributions may constitute a return of capital.
Stockholders will be notified each year of the amounts and nature of
dividends and distributions paid to them by the Fund, including the amounts (if
any) for that year which have been designated as capital gain dividends.
Special tax rules may apply to the Fund's transactions involving
options. These rules, among other things: (i) may affect whether capital
gains and losses from such transactions are considered to be short-term or
long-term; (ii) may have the effect of converting capital gains and losses into
ordinary income and losses; (iii) may have the effect of deferring losses
and/or accelerating the recognition of gains or losses; and (iv) for purposes
of qualifying as a regulated investment company, may limit the extent to which
the Fund will be able to engage in such transactions.
Upon the sale, redemption, or other disposition of shares of the Fund,
a stockholder generally will realize a taxable gain or loss, depending upon his
basis in the shares. Such gain or loss will be treated as capital gain or loss
if the shares are capital assets in the stockholder's hands and will be
long-term or short-term, depending on the stockholder's holding period for the
shares. Any loss realized on a sale or exchange will be disallowed to the
extent the shares disposed of are replaced (including shares acquired pursuant
to the reinvestment plan) within a period of 61 days beginning 30 days before
and ending 30 days after the shares are disposed of. In such a case, the basis
of the shares acquired will be adjusted to reflect the disallowed loss. Any
loss realized by a stockholder on a disposition of Fund shares held by the
stockholder for six months or less will be treated as a long-term capital loss
to the extent of any capital gain dividends received by the stockholder with
respect to such shares.
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The Fund may be required to withhold Federal income tax at the rate of
31% of all taxable distributions (including gross proceeds from the redemption
of Fund shares) payable to stockholders who fail to provide the Fund with their
correct taxpayer identification number or to make required certifications, or
where the Fund or the stockholder has been notified by the Internal Revenue
Service that the stockholder is subject to backup withholding. Corporate
stockholders and certain other stockholders specified in the Code generally are
exempt from such backup withholding. Backup withholding is not an additional
tax. Any amounts withheld may be credited against the stockholder's Federal
income tax liability.
Distributions also may be subject to additional state, local and
foreign taxes, depending on each stockholder's particular situation. In
addition, foreign stockholders may be subject to Federal income tax rules that
differ significantly from those described above. Stockholders are advised to
consult their tax advisers with respect to the particular tax consequences to
them of an investment in the Fund.
REDEMPTION AND REPURCHASE OF SHARES
Shares of the Fund, in any amount, may be redeemed at any time,
without charge, at the net asset value next determined after a request is
received by the Fund. See "Determination of Net Asset Value." In addition,
the Distributor is authorized as agent for the Fund to offer to repurchase at
the net asset value next determined after the request is received by the
Distributor, shares which are presented by telephone or telegraph to the
Distributor by authorized investment dealers. Broker-dealers may charge for
their services in connection with the repurchase, but the Distributor and its
affiliates will not charge any fee for such repurchase.
Requests for redemption may be made by calling the Fund at
800-845-2340, by telegraph or other wire communication, or by letter upon
completion of the Expedited Redemption portion set forth in the application
form included in this Prospectus. Payment of redemption proceeds may be
delayed if the shares to be redeemed were purchased by check and such check has
not cleared (which may take up to 15 days from the purchase date). Generally,
stockholders may require the Fund to redeem their shares by sending a written
request, signed by the record owner(s), to Capstone Government Income Fund, c/o
Fund/Plan Services, Inc., 2 W. Elm Street, P.O. Box 874, Conshohocken,
Pennsylvania 19428. In addition, certain expedited redemption methods
described below are available. If stock certificates have been issued for
shares being redeemed, such certificates must accompany the written request
with the stockholder's signature guaranteed by an "eligible guarantor
institution", as defined in Rule 17Ad-15 under the Securities Exchange Act of
1934, which participates in a signature guarantee program. Eligible guarantor
institutions include banks, brokers, dealers, credit unions, national
securities exchanges, registered securities associations, clearing agencies and
savings associations. A broker-dealer guaranteeing signatures must be a
member of a clearing corporation or maintain net capital of at least $100,000.
Credit unions must be authorized to issue signature guarantees. No signature
guarantees for shares for which no certificates have been issued are required
when an application is on file at the Transfer Agent and payment is to be made
to the stockholder of record at the stockholder's address of record. However,
if the proceeds of the redemption are to be paid to someone other than the
registered holder, or to other than the stockholder's address of record, or the
shares are to be transferred, the owner's signature must be guaranteed by a
commercial bank or by a securities firm having membership on a recognized
national securities exchange.
The Fund reserves the right to pay any portion of redemption requests
in excess of $1 million in readily marketable securities from the Fund's
portfolio. In this case, the stockholders may incur brokerage charges on the
sale of the securities.
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<PAGE> 24
Normally the Fund will make payment for all shares redeemed within two
(2) business days, but in no event will payment be made more than three (3)
business days after receipt of a redemption request and/or certificate in
proper order. However, payment may be postponed or the right of redemption
suspended for more than three (3) business days under unusual circumstances,
such as when trading is not taking place on the New York Stock Exchange.
Proceeds of redeemed shares will be transmitted by Federal Funds wire to the
shareholder's bank account designated on the application form (which must be at
a commercial bank which is a member of the Federal Reserve System) or by check.
The value of shares on repurchase or redemption may be more or less
than the investor's cost depending upon the market value of the Fund's
portfolio securities at the time of redemption. No redemption fee is charged
for the redemption of shares.
EXPEDITED TELEPHONE REDEMPTION
A stockholder redeeming at least $1,000 of shares (for which
certificates have not been issued), and who has authorized expedited redemption
on the application form filed with the Fund's Transfer Agent may, at the time
of such redemption, request that funds be mailed or wired to the commercial
bank or registered broker-dealer he has previously designated on the
application by telephoning the Transfer Agent at 800-845-2340. Proceeds for
redemptions requested by 2:45 p.m. Central time will be sent on the next
business day. In order to allow the Adviser and Subadviser to manage the Fund
more effectively, stockholders are strongly urged to initiate redemptions as
early in the day as possible and to notify the Transfer Agent in advance of
redemptions in excess of $5 million. If a stockholder seeks to use an
expedited method of redemption of shares recently purchased by check, the Fund
may withhold the redemption proceeds until it is reasonably assured of the
collection of the check representing the purchase, which may take up to 15 days
from the purchase date. The Fund, Distributor and Transfer Agent reserve the
right at any time to suspend or terminate the expedited redemption procedure or
to impose a fee for this service. At the present time there is no fee charged
for this service. During periods of unusual economic or market changes,
stockholders may experience difficulties or delays in effecting telephone
redemptions.
When exchange or redemption requests are made by telephone, the Fund
has procedures in place designed to give reasonable assurance that such
telephone instructions are genuine, including recording telephone calls and
sending written confirmation of transactions. The Fund will not be liable for
losses due to unauthorized or fraudulent telephone transactions unless it does
not follow such procedures, in which case it may be liable for such losses.
DETERMINATION OF NET ASSET VALUE
The Fund's net asset value is computed daily, Monday through Friday,
as of 4:15 p.m. Eastern Time, except that the net asset value will not be
computed on the following holidays: New Year's Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day and the days that the Federal Reserve wire system is closed. The
Fund also will determine its net asset value on any day in which there is
sufficient trading in its portfolio securities that the net asset value might
be affected materially, but only if on any such day the Fund is required to
sell or redeem shares. The Fund's net asset value per share is computed by
dividing the value of the securities held by the Fund plus any cash or other
assets (including any accrued interest and dividends receivable but not yet
received) minus all liabilities (including accrued expenses) by the total
number of shares outstanding at such time, adjusted to the nearest whole cent.
The net asset value so computed will be used for all purchase orders and
redemption requests
21
<PAGE> 25
received between such computation and the preceding computation.
All portfolio securities for which over-the-counter market quotations
are readily available are valued at the mean between the bid and asked prices.
OTC options are valued using the Black-Scholes Model, which utilizes the
option's characteristics when bought or sold and the market price of the
underlying security to determine a daily price for each OTC option's position.
The only pricing variable changed daily is the price of the underlying
security. Short-term instruments having a maturity date of more than 60 days
are valued on a "mark-to-market" basis, that is, at prices based on market
quotations for securities of similar type, yield, quality and maturity, until
60 days prior to maturity and thereafter at amortized value. Short-term
instruments having a maturity date of 60 days or less at the time of purchase
are valued at amortized cost value unless the Board of Directors determines
this does not represent fair market value. When market quotations are not
readily available, portfolio securities are valued at their fair value as
determined in good faith under procedures established by and under the general
supervision of the Board of Directors (valuation of securities for which market
quotations are not readily available may be based upon current market prices of
securities which are comparable in coupon, rating and maturity or an
appropriate matrix utilizing similar factors).
STOCKHOLDER SERVICES
Capstone Government Income Fund provides its stockholders with a
number of services and conveniences designed to assist investors in the
management of their investments. These stockholder services include the
following:
TAX-DEFERRED RETIREMENT PLANS
Shares may be purchased by virtually all types of tax-deferred
retirement plans. The Distributor or its affiliates make available plan forms
and/or custody agreements for the following:
-- Individual Retirement Accounts (for individuals and their
non-employed spouses who wish to make limited tax deductible
contributions to a tax-deferred account for retirement); and
-- Simplified Employee Pension Plans.
Dividends and distributions will be automatically reinvested without a
sales charge. For further details, including fees charged, tax consequences
and redemption information, see the specific plan documents which can be
obtained from the Fund.
Investors should consult with their tax adviser before establishing
any of the tax-deferred retirement plans described above.
EXCHANGE PRIVILEGE
Shares of the Fund which have been outstanding 15 days or more may be
exchanged for shares of other Capstone Funds with no administrative charge.
The exchange of shares held 15 days or more will be effected at net asset
values plus an amount equal to the difference, if any, between the sales
charges previously paid or deemed applicable with respect of the shares being
exchanged, and the sales charge payable on shares of the Capstone Fund for
which those shares are being exchanged, determined in
22
<PAGE> 26
accordance with applicable legal requirements. A Fund stockholder requesting
such an exchange will be sent a current prospectus for the fund into which the
exchange is requested. Shares held less than 15 days cannot be exchanged. In
such instances, the shares will be redeemed at the next computed net asset
value and the entire sales commission paid on the purchase will be refunded to
the investor.
Purchases, redemptions, and exchanges should be made for investment
purposes only. A pattern of frequent exchanges, purchases and sales may be
deemed abusive by the Adviser and Subadviser and, at the discretion of the
Adviser and Subadviser, can be limited by the Fund's refusal to accept further
purchase and/or exchange orders from the investor. Although the Adviser and
Subadviser will consider all factors it deems relevant in determining whether a
pattern of frequent purchases, redemptions and/or exchanges by a particular
investor is abusive and not in the best interests of the Fund or its other
stockholders, as a general policy investors should be aware that engaging in
more than one exchange or purchase-sale transaction during any thirty-day
period with respect to a particular fund may be deemed abusive and therefore
subject to the above restrictions.
An exchange of shares is treated for Federal income tax purposes as a
sale of shares given in exchange and the stockholder may, therefore, realize a
taxable gain or loss. The exchange privilege may be exercised only in those
states where shares of the fund for which shares held are being exchanged may
be legally sold, and the privilege may be amended or terminated upon 60 days'
notice to stockholders.
The stockholder may exercise the following exchange privilege options:
Exchange by Mail - Stockholders may mail a written notice
requesting an exchange to the Fund's Transfer Agent.
Exchange by Telephone - Stockholders must authorize telephone
exchange on the application form filed with the Fund's
Transfer Agent to exchange shares by telephone. Telephone
exchanges may be made from 9:30 a.m. to 4:00 p.m. Eastern
time, Monday through Friday, except holidays. If certificates
have been issued to the investor, this procedure may be
utilized only if he delivers his certificates, duly endorsed
for transfer, to the Transfer Agent prior to giving telephone
instructions. During periods of unusual economic or market
changes, stockholders may experience difficulties or delays in
effecting telephone exchanges.
When exchange or redemption requests are made by telephone, the Fund
has procedures in place designed to give reasonable assurance that such
telephone instructions are genuine, including recording telephone calls and
sending written confirmation of transactions. The Fund will not be liable for
losses due to unauthorized or fraudulent telephone transactions unless it does
not follow such procedures, in which case it may be liable for such losses.
PRE-AUTHORIZED PAYMENT
A stockholder may arrange to make regular monthly investments of $25
or more automatically from his checking account by authorizing the Fund's
Transfer Agent to withdraw the payment from his checking account.
Pre-Authorized Payment Forms can be obtained by contacting the Transfer Agent.
23
<PAGE> 27
SYSTEMATIC WITHDRAWAL PLAN
Investors may open a withdrawal plan providing for withdrawals of $50
or more monthly, quarterly, semi-annually or annually if they have a minimum
balance of $5,000 in shares of the Fund. The minimum periodic amount which may
be withdrawn pursuant to this plan is $50.
These payments do not represent a yield or return on investment and
may constitute return of initial capital. In addition, such payments may
deplete or eliminate the investment. Stockholders cannot be assured that they
will receive payment for any specific period because payments will terminate
when all shares have been redeemed. The number of such payments will depend
primarily upon the amount and frequency of payments and the yield on the
remaining shares. Under this plan, any distributions must be reinvested in
additional shares at net asset value.
The Systematic Withdrawal Plan is voluntary, flexible, and under the
stockholder's control and direction at all times, and does not limit or alter
the stockholder's right to redeem shares. Such plan may be terminated in
writing at any time by either the stockholder or the Fund. The cost of
operating the Systematic Withdrawal Plan is borne by the Fund. It would not be
advisable for investors to make purchases of shares involving any sales charge
while participating in the Systematic Withdrawal Plan.
GENERAL INFORMATION
The Fund is the initial series of Capstone Fixed Income Series, Inc.
(the "Corporation"), an open-end diversified management investment company, as
defined in the Investment Company Act of 1940, as amended. It was originally
incorporated in Delaware in 1968 and was reorganized as the initial series of
the Corporation, which was established under Maryland law on May 11, 1992. The
series has an authorized capitalization of two hundred million shares of $.001
par value common stock. There is no other class of security outstanding. All
shares have equal voting and liquidation rights and have one vote per share.
Voting rights are noncumulative, which means that holders of more than 50% of
the shares voting for the election of directors may elect 100% of the directors
if they choose to do so, and in such event the holders of the remaining less
than 50% of the shares voting for the directors will not be able to elect any
directors. All shares have equal dividend rights, are fully paid,
nonassessable and freely transferable and have no conversion, pre-emptive or
subscription rights. Fractional shares have the same rights, pro rata, as full
shares.
If additional series are added, on all matters submitted to
stockholder vote, all shares of the Corporation then issued and outstanding,
irrespective of series, will be voted in the aggregate and not by individual
series, except (1) when required by the Investment Company Act of 1940, shares
will be voted by individual series, and (ii) when a matter is determined by the
directors to affect less than all of the Corporation's series, then only
holders of shares of the affected series will be entitled to vote on such a
matter.
The Fund's securities are held by The Fifth Third Bank, Cincinnati,
Ohio, under a Custodian Agreement with the Fund. Fund/Plan Services, Inc. acts
as both Transfer Agent and dividend paying agent for the Fund.
Inquiries by stockholders of the Fund should be addressed to the Fund
at its address stated on the cover page of this Prospectus.
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<PAGE> 28
ANNUAL MEETINGS
The Fund is not required to hold an annual meeting of its
stockholders; however, stockholders have the right to require the Secretary of
the Corporation to call a stockholders' meeting upon the written request of
stockholders entitled to vote not less than ten percent of all votes entitled
to be cast at such meeting, provided that (1) such request shall state the
purposes of such meeting and the matters proposed to be acted on, and (2) the
stockholders requesting such meeting shall have paid to the Fund the reasonably
estimated cost of preparing and mailing the notice thereof, which the Secretary
shall determine and specify to such stockholders. No meeting shall be called
upon the request of stockholders to consider any matter which is substantially
the same as a matter voted upon at any special meeting of the stockholders held
during the preceding twelve months, unless requested by the holders of a
majority of all shares entitled to be voted at such meeting.
25
<PAGE> 29
CAPSTONE FIXED INCOME SERIES, INC.
CAPSTONE GOVERNMENT INCOME FUND
CROSS REFERENCE SHEET
BETWEEN
ITEMS OF FORM N-1A AND THE
STATEMENT OF ADDITIONAL INFORMATION
(PART B TO REGISTRATION STATEMENT NO. 2-28174)
<TABLE>
<CAPTION>
Item Caption in Statement of
Number Form N-1A Heading Additional Information
- ------ ----------------- ----------------------
<S> <C> <C>
10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. General Information and History General Information
13. Investment Objectives and Policies Investment Restrictions; Risk Factors
14. Management of the Fund Directors and Executive Officers
15. Control Persons and Principal Holders Control Persons and Principal Holders
of Securities of Securities
16. Investment Advisory and Other Investment Advisory and Subadvisory
Services Agreements; Administration Agreement; Other Information
17. Brokerage Allocation Portfolio Transactions and Brokerage
18. Capital Stock and Other Securities Inapplicable
19. Purchase, Redemption and Pricing of Determination of Net Asset Value; How to Buy
Securities Being Offered and Redeem Shares
20. Tax Status Taxes
21. Underwriter Distributor
22. Calculation of Performance Data Performance Information
23. Financial Statements Financial Statements
</TABLE>
<PAGE> 30
CAPSTONE GOVERNMENT INCOME FUND
A SERIES OF CAPSTONE FIXED INCOME SERIES, INC.
STATEMENT OF ADDITIONAL INFORMATION
May 1, 1995
This Statement of Additional Information is not a Prospectus but
contains information in addition to and more detailed than that set forth in
the Prospectus and should be read in conjunction with the Prospectus. The
Statement of Additional Information and the related Prospectus are both dated
May 1, 1995. A Prospectus may be obtained without charge by contacting
Capstone Asset Planning Company, by phone at (800) 262-6631 or by writing to it
at 5847 San Felipe, Houston, Texas 77057.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
General Information . . . . . . . . . . . . . . . . . . . . . . . . 2
Investment Restrictions . . . . . . . . . . . . . . . . . . . . . . 2
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Performance Information . . . . . . . . . . . . . . . . . . . . . . 6
Directors and Executive Officers . . . . . . . . . . . . . . . . . . 8
Investment Advisory and Subadvisory Agreements . . . . . . . . . . . 10
Administration Agreement . . . . . . . . . . . . . . . . . . . . . . 12
Distributor . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Portfolio Transactions and Brokerage . . . . . . . . . . . . . . . . 14
Determination of Net Asset Value . . . . . . . . . . . . . . . . . . 15
How to Buy and Redeem Shares . . . . . . . . . . . . . . . . . . . . 16
Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Control Persons and Principal Holders of Securities . . . . . . . . 20
Other Information . . . . . . . . . . . . . . . . . . . . . . . . . 20
Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . 22
</TABLE>
<PAGE> 31
GENERAL INFORMATION
The Fund was originally incorporated in Delaware in 1968 and commenced
business shortly thereafter as an open-end diversified management company under
the Investment Company Act of 1940. In February 1991 the Fund's name was
changed to Capstone Government Income Fund, Inc. from Investors Income Fund,
Inc. On February 18, 1992 stockholders approved a plan of reorganization
pursuant to which the Fund became, on May 11, 1992, the initial series of a new
Maryland series company, Capstone Fixed Income Series, Inc. (the
"Corporation"), and the Fund's name was changed to Capstone Government Income
Fund (see "General Information" in the Prospectus).
The Fund is a member of a group of investment companies (the "Capstone
Group") sponsored by Capstone Asset Management Company which provides advisory
and administrative services to the Fund.
INVESTMENT RESTRICTIONS
A. FUNDAMENTAL
The Fund may not:
1. With respect to 75% of its assets, purchase more than 10% of
the voting securities of any one issuer or invest more than 5%
of the value of its total assets in the securities of any one
issuer, except the U.S. Government, its agencies or
instrumentalities (see additional non-fundamental restriction
1., below);
2. borrow money, except that the Fund may enter into reverse
repurchase agreements, and, as a temporary measure for
extraordinary or emergency purposes, it may borrow from banks
in an amount not to exceed 1/3 of the value of its net assets,
including the amount borrowed;
3. issue any senior securities, except as appropriate to evidence
indebtedness which it is permitted to incur;
4. act as underwriter, except to the extent that it might be
deemed to be an underwriter for the purposes of the Securities
Act of 1933, as amended, with respect to securities which it
sells to the public if registration under such Act, as
amended, is required in connection with such sale;
5. purchase any securities which would cause 25% or more of the
market value of its total assets at the time of such purchase
to be invested in the securities of one or more issuers having
their principal business activities in the same industry,
provided that there is no limit with respect to investments in
securities issued or guaranteed by the U.S. Government, its
agencies and instrumentalities, or in repurchase or reverse
repurchase agreements backed by such securities;
6. purchase or sell real estate except for its own use in
connection with its business;
7. purchase or sell commodities or commodity contracts, except
that the Fund may invest in futures contracts and related
options;
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<PAGE> 32
8. make loans to other persons except (a) through the use of
repurchase agreements and (b) by the purchase of debt
securities in accordance with its investment policies; and
9. invest in securities or other instruments that are not
authorized for investment by a Federal savings association
without limitation as to a percentage of its assets and that
are not authorized for investment by national banks without
limitation as to a percentage of its capital and surplus, and
none of the above Fundamental Investment Restrictions shall be
construed to permit any such investment(s).
The Fund will make no purchases of securities so long as it has
outstanding borrowings, except for reverse repurchase agreements.
Additionally, the Fund has agreed with the staff of the Securities and Exchange
Commission that it will not include any reverse repurchase agreements,
including those backed by securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities, within the exception from the
25% limit in restriction Number 5, above. Finally, the Fund has no present
intention to lend its portfolio securities or to engage in transactions in
futures contracts or related options, and will not engage in such transactions
until appropriate disclosure concerning these practices, including their risks,
is included in the Fund's Prospectus and Statement of Additional Information.
B. NON-FUNDAMENTAL
The following restrictions are not fundamental and may be changed by
the Fund without stockholder approval, but only in compliance with applicable
law, regulation or regulatory policy and in compliance with the Fundamental
Investment Restrictions listed above, including but not limited to, Number 9.
The Fund may not:
1. as to the portion of its assets not subject to Fundamental
Restriction 1., above, purchase more than 10% of the voting
securities of any one issuer or invest more than 5% of the
value of its total assets in the securities of any one issuer,
except the U.S. Government, its agencies or instrumentalities
(the Fund does not generally intend to invest in voting
securities of any issuer);
2. acquire or retain securities of any investment company, except
as part of a plan of merger, reorganization or consolidation;
3. pledge, mortgage or hypothecate its assets in excess, together
with permitted borrowings, of 1/3 of its net assets;
4. invest more than 10% of its total assets in securities that
are not readily marketable, the disposition of which is
restricted under Federal securities laws, or in repurchase
agreements not terminable within 7 days, provided that
over-the-counter options with primary U.S. Government
securities dealers that give the Fund an absolute right to
repurchase according to a "repurchase formula" will not be
considered securities that are not readily marketable;
5. purchase or retain securities of any issuer if the officers or
directors of the Fund, the Adviser and the Subadviser who own
beneficially more than 1/2 of 1% of the securities of such
issuer together own beneficially more than 5% of such
securities;
6. sell securities short or purchase securities on margin, except
for such short-term credits as
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<PAGE> 33
are necessary for the clearance of transactions and in
connection with entering into futures contracts and related
options to the extent permitted by the Fund's investment
policies;
7. write put and call options except to the extent permitted by
the Fund's investment policies;
8. invest in oil, gas or other mineral exploration or development
programs (although the Fund is not prohibited from investing
in issuers that own or invest in such interests); and
9. under normal circumstances, invest less than 65% of its assets
in obligations that are issued or guaranteed as to principal
or interest by the U.S. Government, its agencies, authorities
or instrumentalities or in repurchase agreements fully
collateralized by such obligations.
The portfolio securities of the Fund may be turned over whenever
necessary or appropriate in the opinion of the Fund's management to seek the
achievement of the basic objective of the Fund. It is anticipated that the
Fund will incur a high portfolio turnover rate in connection with the use of
covered option writing strategies.
RISK FACTORS
REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements
with U.S. Government securities dealers recognized by the Federal Reserve
Board, with member banks of the Federal Reserve System or with such other
brokers or dealers that meet the credit guidelines of the Fund's Board of
Directors. In a repurchase agreement, the Fund buys a security from a seller
that has agreed to repurchase the same security at a mutually agreed upon date
and price. The Fund's resale price will be in excess of the purchase price,
reflecting an agreed upon interest rate. This interest rate is effective for
the period of time the Fund is invested in the agreement and is not related to
the coupon rate on the underlying security. Repurchase agreements may also be
viewed as fully collateralized loans of money by the Fund to the seller. The
period of these repurchase agreements will usually be short, from overnight to
one week, and at no time will the Fund invest in repurchase agreements for more
than one year. The Fund will always receive as collateral securities whose
market value including accrued interest is, and during the entire term of the
agreement remains, at least equal to 100% of the dollar amount invested by the
Fund in each agreement, and the Fund will make payment for such securities only
upon physical delivery or upon evidence of book entry transfer to the account
of the custodian. If the seller defaults, the Fund might incur a loss if the
value of the collateral securing the repurchase agreement declines and might
incur disposition costs in connection with liquidating the collateral. In
addition, if bankruptcy proceedings are commenced with respect to the seller of
a security which is the subject of a repurchase agreement, realization upon the
collateral by the Fund may be delayed or limited. In an attempt to minimize
these risks, the Adviser and Subadviser will consider and monitor the
creditworthiness of parties to repurchase agreements.
OPTIONS
PURPOSE. The principal reason for writing options is to hedge, to a
limited extent, adverse price changes of the portfolio due to general interest
rate changes. In addition, options are written to obtain, through receipt of
premiums, a greater current return than would be realized on the underlying
securities alone. Such current return could be expected to fluctuate because
premiums earned from an options writing program and dividend or interest income
yields on portfolio securities vary as economic and market
4
<PAGE> 34
conditions change. Actively writing options on portfolio securities is likely
to result in a substantially higher portfolio turnover rate than that of most
other investment companies. Additionally, if the Adviser or Subadviser is
incorrect in its forecast, the result to the Fund from these hedging practices
may be worse than if no hedging transactions were entered into.
WRITING OPTIONS. The purchaser of a call option pays a premium to the
writer (i.e., the seller) for the right to buy the underlying security from the
writer at a specified price during a certain period. The Fund would write call
options only on a covered basis, which means that at all times during the
option period, the Fund would own or have the right to acquire securities of
the type that it would be obligated to deliver if any outstanding options were
exercised.
The purchaser of a put option pays a premium to the writer (i.e., the
seller) for the right to sell the underlying security to the writer at a
specified price during a certain period. The Fund would write put options only
on a "covered" basis, which means that at all times during the option period,
the Fund would maintain in a segregated account with its Custodian cash, cash
equivalents or U.S. Government securities in an amount of not less than the
exercise price of the option, or would hold a put on the same underlying
security at an equal or greater exercise price.
CLOSING PURCHASE TRANSACTIONS AND OFFSETTING TRANSACTIONS. In order
to terminate its position as a writer of a call or put option, the Fund could
enter into a "closing purchase transaction," which is the purchase of a call
(put) on the same underlying security and having the same exercise price and
expiration date as the call (put) previously written by the Fund. The Fund
would realize a gain (loss) if the premium plus commission paid in the closing
purchase transaction is less (greater) than the premium it received on the sale
of the option. The Fund would also realize a gain if an option it has written
lapses unexercised.
The Fund could write options that are listed on an exchange as well as
options which are privately negotiated in over-the-counter transactions. A
Fund could close out its position as a writer of an option only if a liquid
secondary market exists for options of that series, but there is no assurance
that such a market will exist, particularly in the case of over-the-counter
options, since they can be closed out only with the other party to the
transaction. Alternatively, the Fund could purchase an offsetting option,
which would not close out its position as a writer, but would provide an asset
of equal value to its obligation under the option written. If the Fund is not
able to enter into a closing purchase transaction or to purchase an offsetting
option with respect to an option it has written, it will be required to
maintain the securities subject to the call or the collateral underlying the
put until a closing purchase transaction can be entered into (or the option is
exercised or expires), even though it might not be advantageous to do so.
PURCHASING CALL AND PUT OPTIONS. The Fund could purchase call options
to protect (i.e., hedge) against anticipated increases in the prices of
securities it wishes to acquire. Alternatively, call options could be
purchased for capital appreciation. Since the premium paid for call options is
typically a small fraction of the price of the underlying security, a given
amount of funds will purchase call options covering a much larger quantity of
such security than could be purchased directly. By purchasing call options,
the Fund could benefit from any significant increase in the price of the
underlying security to a greater extent than had it invested the same amount in
the security directly. However, because of the very high volatility of option
premiums, the Fund would bear a significant risk of losing the entire premium
if the price of the underlying security did not rise sufficiently, or if it did
not do so before the option expired.
5
<PAGE> 35
Conversely, put options could be purchased to protect (i.e., hedge)
against anticipated declines in the market of either specific portfolio
securities or of the Fund's assets generally. Alternatively, put options could
be purchased for capital appreciation in anticipation of a price decline in the
underlying security and a corresponding increase in the value of the put
option. The purchase of put options for capital appreciation involves the same
significant risk of loss as described above for call options.
In any case, the purchase of options for capital appreciation would
increase the Fund's volatility by increasing the impact of changes in the
market prices of the underlying securities on the Fund's net asset value.
OVER-THE-COUNTER OPTIONS. The Fund may invest up to ten percent of
its net assets (determined at the time of investment) in illiquid securities,
including securities that are not readily marketable and repurchase agreements
which have a maturity of longer than seven days. To the extent
over-the-counter options with primary U.S. Government securities dealers give
the Fund an absolute right to repurchase according to a "repurchase formula",
they will not be considered securities that are not readily marketable.
REVERSE REPURCHASE AGREEMENTS. A reverse repurchase agreement
involves the sale of a U.S. Treasury obligation by the Fund and its agreement
to repurchase the instrument at a specific time and price. The Fund will
maintain a segregated account, which will be marked-to-market daily consisting
of cash, cash equivalents and U.S. Government securities at least equal to its
obligations under reverse repurchase agreements, including any accrued
interest. The Fund will not invest proceeds from these transactions beyond the
expiration of the reverse repurchase agreement. The Fund may not enter into
these transactions with more than 33% of its portfolio, and will only transact
these agreements with dealers approved by the Fund for repurchase agreements.
PERFORMANCE INFORMATION
The Fund may from time to time include figures indicating its yield,
total return or average annual total return in advertisements or reports to
stockholders or prospective investors. Quotations of the Fund's yield will be
based on all investment income per share earned during a particular 30-day
period (including dividends and interest), less expenses accrued during the
period ("net investment income"), and are computed by dividing net investment
income per share earned during the period by the maximum offering price per
share on the last day of the period, according to the following formula:
6
YIELD = 2[a-b + 1) -1]
---
cd
where a = dividends and interest earned during the period,
b = expenses accrued for the period (net of
reimbursements or waivers),
c = the average daily number of shares outstanding during
the period that were entitled to receive dividends, and
d = the maximum offering price per share on the last day
of the period.
For the 30-day period ended December 31, 1994 the Fund's yield was
5.493%.
Average annual total return and total return figures represent the
increase (or decrease) in the value of an investment in the Fund over a
specified period. Both calculations assume that all income dividends and
capital gains distributions during the period are reinvested at net asset value
in additional Fund shares.
6
<PAGE> 36
Quotations of the average annual total return reflect a proportional share of
Fund expenses on an annual basis. The results, which are annualized, represent
an average annual compounded rate of return on a hypothetical investment in the
Fund over a period of 1, 5 and 10 years ending on the most recent calendar
quarter (but not for a period greater than the life of the Fund), calculated
pursuant to the following formula:
n
P (1 + T) = ERV
where P = a hypothetical initial payment of $1,000,
T = the average annual total return,
n = the number of years, and
ERV = the ending redeemable value of a hypothetical $1,000
payment made at the beginning of the period.
For the 1, 5 and 10 year periods ended December 31, 1994 the Fund's
average annual total return was 1.146%, 2.652% and 7.083%, respectively.
Quotations of total return, which are not annualized, represent
historical earnings and asset value fluctuations. Total return is based on
past performance and is not a guarantee of future results. For the 1, 5 and 10
year periods ended December 31, 1994 the Fund's total return was 1.146%,
13.983% and 98.249%, respectively.
Performance information for the Fund may be compared, in reports and
promotional literature, to: (i) certain unmanaged indexes such as the Merrill
Lynch One to Three-Year Treasury Index and the Shearson Lehman Intermediate
Government/Corporate Bond Index; (ii) certain performance figures prepared for
broad groups of mutual funds with investment goals similar to the Fund by
organizations such as Lipper Analytical and the Donoghue Organization; (iii)
the Consumer Price Index (the "CPI"), a statistical measure of change, over
time, in the price of goods and services in major expenditure groups (such as
food, housing, apparel, transportation, medical care, entertainment and other
goods and services) typically purchased by urban consumers; (iv) other mutual
funds with similar goals; and (v) certificates of deposit. Instruments
included in unmanaged indexes, such as the Shearson and Merrill indexes, may
not necessarily be typical of the type of investments made by the Fund. Other
material differences between the Fund and such indexes may include (i) the
managed character of the Fund's portfolio (i.e. the Fund may purchase and sell
investment securities based on their performance while securities comprising
the particular index may remain as part of the index without regard to their
performance), and (ii) the index would not generally reflect deductions for
administrative expenses and costs. Further, broad-based economic indexes
measure developments of general matters which may or may not be relevant to the
Fund's performance during particular periods. For example, the purchasing
power of consumers' dollars by comparing the costs of goods and services today
with the costs of the same goods and services at an earlier date.
There are three material differences between an investment in the Fund
and ownership of a certificate of deposit ("CD"). First, an investment in the
Fund is subject to a greater degree of risk and fluctuation of value than a CD,
which guarantees a specific rate of return. Second, if interest rates rise in
the future, the capital value of bonds purchased at the present time will fall,
which will affect the Fund's performance if such securities are held in its
portfolio. Third, the underlying assets of a CD are insured on amounts up to
$100,000.
Performance information for the Fund reflects only the performance of
a hypothetical investment in the Fund during the particular time period on
which the calculations are based. Performance information
7
<PAGE> 37
should be considered in light of the Fund's investment objectives and policies,
the types and quality of the Fund's portfolio investments, market conditions
during the particular time period and operating expenses. Such information
should not be considered as a representation of the Fund's future performance.
DIRECTORS AND EXECUTIVE OFFICERS
The names and addresses of the directors and principal officers of the
Corporation are set forth below, together with their positions and their
principal occupations during the last five years and, in the case of the
directors, their positions with certain other organizations and companies.
* EDWARD L. JAROSKI, Chairman of the Board, President and Director.
5847 San Felipe, Suite 4100, Houston, Texas 77057. President
(since 1992) and Director (since 1987) of the Capstone Asset
Management Company; President and Director of Capstone Asset
Planning Company and Capstone Financial Services, Inc. (since
1987); Director/Trustee and Officer of other Capstone Funds.
JAMES F. LEARY, Director. 12221 Merit Drive, Dallas, TX 75251.
President of Sunwestern Management, Inc., (since June 1982) and
President of SIF Management (since January 1992), venture capital
limited partnership concerns; General Partner of Sunwestern
Associates, Sunwestern Associates II, Sunwestern Partners, L.P.
and Sunwestern Ventures, Ltd. (venture capital limited partnership
entities affiliated with Sunwestern Management, Inc. and SIF
Management, Inc.). Director of: other Capstone Funds; Anthem
Financial, Inc. (financial services); Associated Materials, Inc.
(tire cord, siding and industrial cable manufacturer); CareTeam
Management Services (home health care nursing services); The
Flagship Group, Inc. (vertical market microcomputer software);
Kine & Company, Inc. (marketing and strategic consultants);
Marketing Mercadeo International (public relations and marketing
consultants); MaxServ, Inc. (appliance repair database systems);
MESBIC Ventures, Inc. (minority enterprise small business
investment company); Norwood Venture Corp (small business
investment company); OpenConnect Systems, Inc. (computer
networking hardware and software); PhaseOut of America, Inc.
(smoking cessation products); and Science Accessories, Inc. (sonic
digitizers).
JOHN R. PARKER, Director. 220 Oak Ridge Avenue, Summit, NJ 07901.
Senior Vice President of McRae Capital Management, Inc. (since
1991); Director of Nova Natural Resources (oil, gas, minerals);
Director of other Capstone Funds; formerly independent financial
consultant and investor (1987-1989); General Partner of Printon,
Kane & Company (securities firm) (1983-1988); and registered
representative of Rickel & Associates (1988-1991).
PHILIP C. SMITH, Director. 87 Lord's Highway, Weston, Connecticut
06880. Private investor; Director of other Capstone Funds and
the Lexington Mutual Funds.
____________________
* Director who is an interested person as defined in the Investment
Company Act of 1940 because of his relationship to the Adviser and
Distributor.
8
<PAGE> 38
BERNARD J. VAUGHAN, Director. 113 Bryn Mawr Avenue, Bala Cynwyd,
Pennsylvania 19004. Director of other Capstone Funds; formerly
Vice President of Fidelity Bank (1979-1993).
DAN E. WATSON, Executive Vice President. 5847 San Felipe, Suite 4100,
Houston, Texas 77057. Chairman of the Board (since 1992) and
Director of Capstone Asset Management Company (since 1987);
Chairman of the Board and Director of Capstone Asset Planning
Company and Capstone Financial Services, Inc. (since 1987);
Officer of other Capstone Funds.
HOWARD S. POTTER, Executive Vice President. 1 Barker Avenue, White
Plains, New York 10601. President of New Castle Advisers, Inc.
(since 1991); formerly Senior Vice President of James Money
Management, Inc. (1988-1991).
JOHN M. METZINGER, Vice President. 5847 San Felipe, Suite 4100,
Houston, Texas 77057. Assistant Vice President (1992-1993) and
Vice President (since 1993) of Capstone Financial Services, Inc.
and Capstone Asset Management Company; Investment Analyst
(1990-1991) and Assistant Portfolio Manager (1991-1992) with
Capstone Financial Services, Inc.; Officer of other Capstone
Funds.
IRIS R. CLAY, Secretary. 5847 San Felipe, Suite 4100, Houston, Texas
77057. Assistant Secretary (1990-1994) and Assistant Vice
President (since 1994) of Capstone Financial Services, Inc. and
Capstone Asset Management Company; Assistant Secretary
(1990-1994) and Assistant Vice President (since 1995) of Capstone
Planning Company; Manager, Mutual Fund Administration (since 1993)
and Compliance Analyst (1987-1993) with Capstone Financial
Services, Inc.; Officer of other Capstone Funds.
NORMA R. YBARBO, Assistant Secretary. 5847 San Felipe, Suite 4100,
Houston, Texas 77057. Compliance Assistant (1987-1993),
Compliance Analyst (1993-1994) and Assistant Compliance Officer
(since 1994) of Capstone Financial Services, Inc.; Officer of
other Capstone Funds.
LINDA G. GIUFFRE, Treasurer. 5847 San Felipe, Suite 410, Houston,
Texas 77057. Treasurer (since 1990) and Secretary (since 1994) of
Capstone Financial Services, Inc. and Capstone Asset Management
Company; Treasurer (since 1990) and Secretary (since 1995) of
Capstone Asset Planning Company; Officer of other Capstone Funds;
formerly Transfer Agent Manager with Capstone Financial Services,
Inc. (1987-1990).
The Fund has an Audit Committee and a Nominating Committee that
consist of the Corporation's disinterested directors. Mr. Leary serves as
Chairman of the Audit Committee and Mr. Smith is Chairman of the Nominating
Committee.
The directors and officers of the Corporation as a group own less than
one percent of the outstanding shares of the Fund. The directors of the
Corporation (other than Mr. Jaroski) also received compensation for serving as
directors of other investment companies sponsored by the Adviser as identified
in the foregoing table.
Each director not affiliated with the Adviser is entitled to $125 for
each Board meeting attended, and is paid a $500 annual retainer by the Fund.
The directors and officers of the Corporation are also reimbursed
for expenses incurred in attending meetings of the Board of Directors. For
the fiscal year ended December
9
<PAGE> 39
31, 1994, the Fund paid or accrued for the account of the directors and
officers, as a group for services in all capacities, a total of $8,261.
The following table represents the fees paid during the 1994 calendar
year to the directors of the Fund and the total compensation each director
received during that period from the Capstone Fund complex.
COMPENSATION TABLE
<TABLE>
<CAPTION>
Total
Compensation
From
Aggregate Pension or Registrant
Compensation Retirement Estimated Annual and Fund
Name of Person, From Benefits Accrued Benefits Upon Complex Paid
Position Registrant* As Part of Fund Retirement to Directors
-------- ----------- --------------- ---------- ------------
<S> <C> <C> <C> <C>
James F. Leary, Director $1,000 $0 $0 $5,000(1)
John R. Parker, Director 1,000 0 0 5,000(1)
Philip C. Smith, Director 1,000 0 0 8,000(1,2,3)
Bernard J. Vaughan, Director 1,000 0 0 7,000(1,2)
</TABLE>
INVESTMENT ADVISORY AND SUBADVISORY AGREEMENTS
Capstone Asset Management Company ("CAMCO") serves as the investment
adviser (the "Adviser") to the Fund pursuant to an investment advisory
agreement ("Advisory Agreement") dated May 11, 1992 between the Adviser and the
Fund. The Advisory Agreement was approved by stockholders on February 18,
1992. CAMCO, located at 5847 San Felipe, Suite 4100, Houston, Texas 77057 is a
wholly-owned subsidiary of Capstone Financial Services, Inc.
From January 8, 1991 to October 31, 1991 James Money Management, Inc.
("JMM") and CAMCO served as Co-Advisers to the Fund pursuant to investment
advisory agreements between the Fund and each Co-Adviser dated January 8, 1991
("Old Advisory Agreements"). On November 1, 1991 the persons at JMM who were
responsible for providing portfolio management services to the Fund left JMM
and formed New Castle Advisers, Inc. ("NCA") which is registered with the
Securities and Exchange Commission as an investment adviser. Effective
November 1, 1991 the Fund's Board of Directors terminated the Old Advisory
Agreement with JMM, and CAMCO assumed full responsibility for managing the
Fund's portfolio, in accordance with the terms of the Old Advisory Agreement
with CAMCO. The Board also approved interim
______________
* Amounts do not include deferred compensation.
(1) Director of Capstone Fixed Income Series, Inc., Capstone Series, Inc. and
Capstone Growth Fund, Inc.
(2) Trustee of Capstone International Series Trust.
(3) Director of Medical Research Investment Fund, Inc.
10
<PAGE> 40
arrangements, including an Interim Subadvisory Agreement, with NCA (on terms
substantially identical to the JMM Old Advisory Agreement) designed to assure
continuity in the Fund's management, pending submission of a new subadvisory
agreement between NCA and CAMCO (with terms substantially the same as those of
the JMM Old Advisory Agreement) for approval at the Fund's Annual Meeting of
Stockholders held February 18, 1992. At the Annual Meeting, stockholders
approved a new Advisory Agreement between the Fund and CAMCO and the new
Subadvisory Agreement between CAMCO and NCA. The advisory arrangements
provided under the new Advisory Agreement and Subadvisory Agreement are
substantially similar to the arrangements under the Old Advisory Agreements,
except that the new agreements reflect an adviser/subadviser relationship
rather than the previous Co-Adviser arrangement.
NCA was incorporated in 1991 and is principally owned by Howard S.
Potter. Its principal place of business is 1 Barker Avenue, 4th Floor, White
Plains, New York 10601. NCA also serves as subadviser to U.S. Government
Income Trust, a series of the Quest for Value Family of Funds, which is a
registered investment company.
Pursuant to the terms of the Advisory Agreement and Subadvisory
Agreement, the Adviser and Subadviser, respectively, have agreed to (1) provide
a program of continuous investment management for the Fund in accordance with
the Fund's investment objectives, policies and limitations, (2) make investment
decisions for the Fund, and (3) place orders to purchase and sell securities
for the Fund, subject to the supervision of the Board of Directors. CAMCO is
responsible chiefly for the overall design and structure of the Fund's
investment portfolio, as well as for establishing the Fund's investment
philosophy, strategy and maturity structure. NCA is responsible chiefly for
the market timing of purchases and sales and for all yield enhancement
strategies. For these services the Fund pays CAMCO a fee computed daily and
payable monthly at the annual rate of 0.40% of the Fund's average daily net
assets up to $250 million and 0.36% of such assets in excess of $250 million.
Out of these fees, CAMCO pays NCA a fee computed daily and payable monthly at
the annual rate of 0.30% of the Fund's average daily net assets up to $250
million and 0.27% of such assets in excess of $250 million. Advisory fees paid
to CAMCO during the fiscal year ended December 31, 1994 totaled $357,033, of
which $267,775 was paid by CAMCO to NCA for its subadvisory services.
CAMCO received advisory fees from the Fund totaling $303,978 during
the fiscal year ended December 31, 1993, of which $227,984 was paid to NCA.
During the fiscal year ended December 31, 1992, CAMCO received advisory fees
from the Fund totaling $477,270, of which $357,952 was paid to NCA.
The annual fees of the Adviser, the Subadviser and the Administrator
(see "Administration Agreement") will be reduced to the extent that the Fund's
ordinary expenses for any fiscal year (including advisory or administrative
fees, but excluding brokerage commissions, interest, local, state and Federal
taxes and extraordinary expenses) exceed the expense limitations of any state
having jurisdiction over the Fund. In such event, the annual advisory and
administration fees of the Adviser, the Subadviser and the Administrator will
be reduced pro rata (but not below zero) to the extent necessary to comply with
such expense limitations. Each will bear its pro rata share of any such fee
reduction or reimbursement based on the percentage that such firm's fee bears
to the total fees paid or due to them by or on behalf of the Fund under the
Advisory Agreement, the Subadvisory Agreement and the Administration Agreement
(described below). At the date of this Statement of Additional Information,
the strictest expense limitation applicable to the Fund is 2.5% of the first
$30 million of the Fund's average net assets, 2.0% of the next $70 million of
average net assets, and 1.5% of the remaining average net assets for any fiscal
year.
11
<PAGE> 41
DURATION AND TERMINATION
Unless terminated earlier as described below, the current Advisory
Agreement between the Fund and the Adviser and the Subadvisory Agreement
between CAMCO and NCA will, by their terms, remain in effect until May 11,
1995, and will continue in effect thereafter only if such continuance is
specifically approved at least annually by the Board of Directors or by vote of
a majority of the Fund's outstanding voting securities (as defined in the 1940
Act) and, in either case, by a majority of the directors who are not parties to
the Advisory Agreement or Subadvisory Agreement or interested persons of any
such party. The Advisory Agreement and the Subadvisory Agreement will each
terminate automatically in the event of its assignment and may be terminated
without penalty by vote of a majority of the Fund's outstanding voting
securities or by either party on not more than 60 days' written notice. The
Subadvisory Agreement will also terminate upon termination or assignment of the
Advisory Agreement.
ADMINISTRATION AGREEMENT
Under an agreement ("Administration Agreement") dated May 11, 1992
between the Fund and Capstone Asset Management Company (the "Administrator"),
the Administrator supervises all aspects of the Fund's operations other than
the management of its investments. The Administrator is the Fund's Adviser and
an affiliate of Capstone Asset Planning Company, the principal underwriter of
the Fund.
The Administrator administers the affairs of the Fund subject to the
direction of the Corporation's Board of Directors and officers. In this
connection, the Administrator (i) assists in supervising all aspects of the
Fund's operations, including the coordination of all matters relating to the
functions of the Adviser, Subadviser, custodian, transfer agent, other
stockholder service agents, accountants, attorneys and other parties performing
services or operational functions for the Fund, (ii) provides the Fund, at the
Administrator's expense, with the services of persons competent to perform such
administrative and clerical functions as are necessary in order to provide
effective administration of the Fund, including duties in connection with
stockholder relations, reports, redemption requests and account adjustments and
the maintenance of certain books and records of the Fund, (iii) coordinates the
preparation of registration statements, prospectuses, reports, proxy
solicitation materials and amendments thereto, (iv) provides the Fund with
office space and facilities necessary to perform the Administrator's
obligations under the Administration Agreement, and (v) pays all compensation
of officers of the Corporation and the fees of all directors of the Corporation
who are affiliated persons of the Administrator, the Administrator's parent,
CFS, and other subsidiaries.
The Administration Agreement provides that the Administrator receives
a fee from the Fund for its services as Administrator. The Fund may also be
required to reimburse the Administrator for its costs in calculating the Fund's
daily net asset value and providing related accounting and books and records
maintenance services. Pursuant to the Administration Agreement, the
Administrator receives for its services a fee calculated daily and payable
monthly, equal to an annual rate of 0.10% of the Fund's average net assets.
The Fund pays all expenses incurred in the operation of the Fund other
than those assumed by the Adviser, Subadviser and Administrator under the
Advisory Agreement, Subadvisory Agreement or Administration Agreement,
respectively. Expenses payable by the Fund include: fees and expenses of
directors who are not "interested persons" (as defined in the 1940 Act); fees
of the Adviser and Subadviser; Board of Directors meeting-related expenses of
the directors and officers; mailing expenses of all Fund officers and
directors; expenses for legal and auditing services; data processing and
pricing services; costs of
12
<PAGE> 42
printing and mailing proxies, stock certificates and stockholder reports; fees
of the Administrator; charges of the custodian, transfer agent, registrar or
dividend disbursing agent; expenses pursuant to the Service and Distribution
Plan; Securities and Exchange Commission fees; membership fees in trade
associations; fidelity bond coverage for the Fund's officers; directors' and
officers' errors and omissions insurance coverage; interest; brokerage costs;
taxes; expenses of qualifying the Fund's shares for sale in various states;
litigation; and other extraordinary or non-recurring expenses and other
expenses properly payable by the Fund.
DISTRIBUTOR
Capstone Asset Planning Company (the "Distributor") acts as the
principal underwriter of the Fund's shares pursuant to a written agreement with
the Fund dated May 11, 1992 (the "Distribution Agreement"). The Distributor
has the exclusive right (except for distributions of shares directly by the
Fund) to distribute Fund shares in a continuous offering through affiliated and
unaffiliated dealers. The Distributor's obligation is a "best efforts"
arrangement under which the Distributor is required to take and pay for only
such Fund shares as may be sold to the public. The Distributor is not
obligated to sell any stated number of shares. Except to the extent otherwise
permitted by the Service and Distribution Plan (see below), the Distributor
bears the cost of printing (but not typesetting) prospectuses used in
connection with this offering and the cost and expense of supplemental sales
literature, promotion and advertising. Prior to December 1990 sales of Fund
shares were subject to a sales charge. The sales charge was paid to the
Distributor, who re-allowed a portion of the sales charge to broker-dealers who
had entered into an agreement with the Distributor to offer for sale the Fund's
shares. The commissions earned by the Distributor on the sale of Fund shares
during the fiscal year ended September 30, 1991 amounted to $1,250.
The Distribution Agreement will remain in effect until May 11, 1995
(unless earlier terminated as discussed below), and is renewable from year to
year thereafter if approved (a) by the Corporation's Board of Directors or by a
vote of a majority of the Fund's outstanding voting securities and (b) by the
affirmative vote of a majority of directors who are not parties to the
Distribution Agreement or interested persons of any party thereto, by votes
cast in person at a meeting called for such purpose. The Distribution Agreement
provides that it will terminate if assigned (as defined in the 1940 Act), and
that it may be terminated without penalty by either party on 60 days' written
notice.
On January 8, 1991, the Fund adopted a Service and Distribution Plan
(the "Plan") pursuant to Rule 12b-1 of the Investment Company Act of 1940 which
permits the Fund to absorb certain expenses in connection with the distribution
of its shares and provision of certain services to stockholders. See
"Management of the Fund - Distributor" in the Fund's Prospectus. As required by
Rule 12b-1, the Fund's Plan and related agreements were approved by a vote of
the Fund's Board of Directors, and by a vote of the directors who are not
"interested persons" of the Fund as defined under the 1940 Act and have no
direct or indirect interest in the operation of the Plan or any agreements
related to the Plan (the "Plan Directors"), and by the Fund's stockholders at a
Special Meeting of Stockholders held December 20, 1990. In compliance with the
Rule, the directors requested and evaluated information they thought necessary
to make an informed determination of whether the Plan and related agreements
should be implemented, and concluded, in the exercise of reasonable business
judgment and in light of their fiduciary duties, that there is a reasonable
likelihood that the Plan and related agreements will benefit the Fund and its
stockholders.
As required by Rule 12b-1, the directors review quarterly reports
prepared by the Distributor on the amounts expended and the purposes for the
expenditures.
13
<PAGE> 43
The Plan and related agreements may be terminated at any time by a
vote of the Plan Directors. As required by Rule 12b-1, selection and
nomination of disinterested directors for the Corporation is committed to the
discretion of the directors who are not "interested persons" as defined under
the 1940 Act, who comprise the Corporation's Nominating Committee.
The Plan and related agreements may be terminated by a vote of the
stockholders. Any change in the Plan that would materially increase the
distribution expenses of the Fund requires stockholder approval, but otherwise,
the Plan may be amended by the directors, including a majority of the Plan
Directors.
The Plan will continue in effect for successive one year periods
provided that such continuance is specifically approved by a majority of the
directors, including a majority of the Plan Directors. The Plan was last
approved by a majority of directors, including a majority of the Plan Directors
on November 8, 1993.
The Distributor is reimbursed by the Fund for stockholder servicing,
printing and advertising expenses incurred in connection with the Plan. The
amounts paid to the Distributor and reallowed by the Distributor to other
Service Organizations were as follows:
<TABLE>
<CAPTION>
FISCAL YEAR TOTAL 12b-1 AMOUNT RETAINED AMOUNT PAID TO OTHER
ENDED FEES PAID BY CAPCO SERVICE ORGANIZATIONS
<S> <C> <C> <C>
12/94 $177,501 $33,902 $143,599
12/93 151,989 39,683 112,306
12/92 238,299 122,453 115,846
</TABLE>
PORTFOLIO TRANSACTIONS AND BROKERAGE
Subject to the policies established by the Corporation's Board of
Directors, the Adviser and the Subadviser are responsible for decisions to buy
and sell securities for the Fund and for the placement of its portfolio
business and the negotiation of the commissions paid on such transactions. It
is the policy of the Adviser and the Subadviser to seek (except as noted below)
the best security price available with respect to each transaction. In
selecting dealers and in negotiating commissions, the Adviser and Subadviser
consider the firm's reliability, the quality of its execution services on a
continuing basis and its financial condition. When more than one firm are
believed to meet these criteria, preference may be given to firms which also
provide research services to the Fund, the Adviser or the Subadviser. From
time to time, the Adviser or Subadviser effect securities transactions through
Capstone Asset Planning Company, TradeStar Investments, Inc. and Williams McKay
Jordan & Mills, Inc., broker-dealer affiliates of the Adviser.
The portfolio of the Fund is composed primarily of cash, short-term
and intermediate-term debt securities and when purchases and sales of
securities for the portfolio are made, a "spread" or "mark-up" (dealer's
profit) is generally included in the price of the securities. The Fund's
portfolio transactions are generally effected without the payment of brokerage
commissions; during the last three fiscal years, the Fund paid no brokerage
commissions on portfolio transactions.
The Fund has no obligation to deal with any broker or group of brokers
in executing transactions in portfolio securities. As discussed above, most of
the Fund's transactions are executed on a principal basis without the payment
of a commission. On trades involving a commission, the Adviser and Subadviser
generally seek reasonably competitive commission rates for transactions they
place on behalf of the Fund,
14
<PAGE> 44
although the Fund does not necessarily pay the lowest commission available.
For non-principal transactions the Adviser and Subadviser are authorized to
cause the Fund to pay a broker that provides brokerage and research services a
commission in excess of the amount another broker might have charged for
effecting a securities transaction. Such higher commission may be paid if the
Adviser or Subadviser determines in good faith that the amount paid is
reasonable in relation to the services received in terms of the particular
transaction or the Adviser's or Subadviser's overall responsibilities to the
Fund and other clients of the Adviser or Subadviser. Such research services
must provide lawful and appropriate assistance to the Adviser or Subadviser in
the performance of their investment decision-making responsibilities and may
include: (a) furnishing advice as to the value of securities, the advisability
of investing in, purchasing or selling securities, and the availability of
securities or the purchasers or sellers of securities; and (b) furnishing
analyses and reports concerning issuers, industries, securities, economic
factors and trends, portfolio strategy, and the performance of accounts. Such
information may be received orally or in writing and will be in addition to and
not in lieu of the services required to be performed by the Adviser and
Subadviser under the Advisory Agreement and Subadvisory Agreement,
respectively. The expenses of the Adviser and Subadviser will not necessarily
be reduced as a result of the receipt of such supplemental information. This
information may be useful to the Adviser and Subadviser in providing services
to clients other than the Fund, and not all such information is used by the
Adviser and Subadviser in connection with the Fund. Conversely, such
information provided to the Adviser and Subadviser by brokers and dealers
through whom other clients of the Adviser and Subadviser effect securities
transactions may be useful to the Adviser and Subadviser in providing services
to the Fund.
Some of the securities in which the Fund invests may be traded in the
OTC markets, and the Fund intends to deal directly with the dealers who make
markets in the securities involved, except in those circumstances where better
prices and execution are available elsewhere.
Although investment decisions for the Fund are made independently from
those of the other accounts managed by the Adviser and Subadviser, investments
of the kind made by the Fund may also be made by those other accounts.
Opportunities to purchase or sell securities will be allocated in the
discretion of the Adviser and Subadviser by such means as will, in their
judgment, result in fair and equal treatment in connection with the other
accounts managed by them. Such means may include allocating opportunities
ratably, rotationally or at random among the Fund and other accounts, on the
basis of accounts having the least favorable performance or any combination of
the foregoing. The Adviser and Subadviser may aggregate orders for purchases
and sales of securities of the same issuer on the same day among the Fund and
other accounts and the price paid to or received by the Fund and those accounts
will be the average obtained in those orders. In some cases, the foregoing
aggregation and allocation procedures may affect adversely the price paid or
received by the Fund or the size of the position purchased or sold by the Fund.
DETERMINATION OF NET ASSET VALUE
The Fund's net asset value is computed daily, Monday through Friday,
as of 4:15 p.m. Eastern Time, except that the net asset value will not be
computed on the following holidays: New Year's Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day and the days that the Federal Reserve wire system is closed. The
Fund also will determine its net asset value on any day in which there is
sufficient trading in its portfolio securities that the net asset value might
be affected materially, but only if on any such day the Fund is required to
sell or redeem shares. The Fund's net asset value per share is computed by
dividing the value of the securities held by the Fund plus any cash or other
assets (including any accrued interest and dividends receivable but not yet
received) minus all liabilities
15
<PAGE> 45
(including accrued expenses) by the total number of shares outstanding at such
time, adjusted to the nearest whole cent. The net asset value so computed will
be used for all purchase orders and redemption requests received between such
computation and the preceding computation.
All portfolio securities for which over-the-counter ("OTC") market
quotations are readily available are valued at the mean between the bid and
asked prices. OTC options are valued using the Black-Scholes Model, which
utilizes the option's characteristics when bought or sold and the market price
of the underlying security to determine a daily price for each OTC option's
position. The only pricing variable changed daily is the price of the
underlying security. Short-term instruments having a maturity date of more
than 60 days are valued on a "mark-to-market" basis, that is, at prices based
on market quotations for securities of similar type, yield, quality and
maturity, until 60 days prior to maturity and thereafter at amortized value.
Short-term instruments having a maturity date of 60 days or less at the time of
purchase are valued at amortized cost value unless the Board of Directors
determines this does not represent fair market value. When market quotations
are not readily available, portfolio securities are valued at their fair value
as determined in good faith under procedures established by and under the
general supervision of the Board of Directors (valuation of securities for
which market quotations are not readily available may be based upon current
market prices of securities which are comparable in coupon, rating and maturity
or an appropriate matrix utilizing similar factors).
HOW TO BUY AND REDEEM SHARES
Shares of the Fund are sold in a continuous offering and may be
purchased on any business day through authorized dealers, including Capstone
Asset Planning Company. Certain broker-dealers assist their clients in the
purchase of shares from the Distributor and charge a fee for this service in
addition to the Fund's public offering price.
Shares will be credited to a stockholder's account at the public
offering price next computed after an order is received by the Distributor.
Initial purchases must be at least $10,000, and there is no minimum for
subsequent investments. No stock certificates representing shares purchased
will be issued except upon written request to the Fund's Transfer Agent. The
Fund's management reserves the right to reject any purchase order if, in its
opinion, it is in the Fund's best interest to do so. See "Purchasing Shares"
in the Prospectus.
Generally, a stockholder may require the Fund to redeem his shares by
sending a written request, signed by the record owner(s), to Capstone
Government Income Fund, c/o Fund/Plan Services, Inc., P.O. Box 874, 2 W. Elm
Street, Conshohocken, Pennsylvania 19428. In addition, certain expedited
redemption methods are available. See "Redemption and Repurchase of Shares" in
the Prospectus.
TAXES
The following summary describes some of the more significant Federal
income tax consequences applicable to investors in the Fund based on existing
Federal tax law. New tax laws may be enacted which might affect the tax
consequences of an investment in the Fund. The following discussion is
necessarily general, and prospective investors are urged to consult their own
tax advisers with respect to the particular tax consequences to the investor of
an investment in the Fund.
16
<PAGE> 46
The Fund intends to qualify and elect to be treated as a regulated
investment company under Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code"). Qualification and election to be taxed as a regulated
investment company involves no supervision of management or investment policies
or practices by any government agency. To qualify as a regulated investment
company the Fund must, with respect to each taxable year, distribute to
stockholders at least 90% of its investment company taxable income (which
includes, among other items, interest and the excess of net short-term capital
gains over net long-term capital losses) and meet certain diversification of
assets, source of income, and other requirements of the Code.
As a regulated investment company, the Fund generally is not subject
to Federal income tax on its investment company taxable income and net capital
gain (net long-term capital gains in excess of net short-term capital losses),
if any, that it distributes to stockholders. The Fund intends to distribute to
its stockholders, at least annually, substantially all of its investment
company taxable income and net capital gain. Amounts not distributed on a
timely basis in accordance with a calendar year distribution requirement are
subject to a nondeductible 4% excise tax. To prevent imposition of the tax,
the Fund must distribute during each calendar year (1) at least 98% of its
ordinary income (not taking into account any capital gains or losses) for the
calendar year, (2) at least 98% of its capital gains in excess of its capital
losses for the twelve-month period ending on October 31 of the calendar year
(reduced by certain ordinary losses, as prescribed by the Code), and (3) all
ordinary income and capital gains for previous years that were not distributed
during such years. A distribution will be treated as paid on December 31 of
the calendar year if it is declared by the Fund in October, November or
December of that year to stockholders on a record date in such a month and paid
by the Fund during January of the following calendar year. Such distributions
will be taxable to stockholders in the calendar year the distributions are
declared, rather than the calendar year in which the distributions are
received. To prevent application of the excise tax, the Fund intends to make
its distributions in accordance with the calendar year distribution
requirement.
If the Fund retains net capital gains for reinvestment, although it
has no plans to do so, the Fund may elect to treat such amounts as having been
distributed to its stockholders. As a result, the stockholders would be
subject to tax on undistributed capital gain, would be able to claim their
proportionate share of the Federal income taxes paid by the Fund on such gains
as a credit against their own Federal income tax liabilities, and would be
entitled to an increase in their basis in their Fund shares.
DISTRIBUTIONS. Dividends paid out of the Fund's investment company
taxable income will be taxable to a stockholder as ordinary income.
Distributions of net capital gains, if any, designated by the Fund as capital
gain dividends, are taxable as long-term capital gains, regardless of how long
the stockholder has held the Fund's shares. Any distributions that are not
from the Fund's investment company taxable income or net capital gains may be
characterized as a return of capital to shareholders or, in some cases, as
capital gains.
Dividends received by corporate stockholders may qualify for the
dividends received deduction to the extent the Fund designates its dividends as
derived from dividends from domestic corporations. The amount designated by
the Fund as so qualifying cannot exceed the aggregate amount of dividends
received by the Fund from domestic corporations for the taxable year. Since
the Fund's income may not consist exclusively of dividends eligible for the
corporate dividends received deduction, its distributions of investment company
taxable income likewise may not be eligible, in whole or in part, for that
deduction. The alternative minimum tax applicable to corporations may reduce
the benefits of the dividends received deduction. The dividends received
deduction may be further reduced if the shares of the Fund are debt-financed or
are deemed to have been held less than 46 days.
17
<PAGE> 47
All distributions are taxable to the stockholder whether reinvested in
additional shares or received in cash. Stockholders receiving distributions in
the form of additional shares will have a cost basis for Federal income tax
purposes in each share received equal to the net asset value of a share of the
Fund on the reinvestment date. Stockholders will be notified annually as to
the Federal tax status of distributions paid to them by the Fund.
Distributions by the Fund reduce the net asset value of the Fund
shares. Should a distribution reduce the net asset value below a stockholder's
cost basis, such distribution nevertheless would be taxable to the stockholder
as ordinary income or capital gain as described above, even though, from an
investment standpoint, it may constitute a partial return of capital. In
particular, investors should be careful to consider the tax implications of
buying shares just prior to a distribution by the Fund. The price of shares
purchased at that time includes the amount of the forthcoming distribution, but
the distribution will generally be taxable to them.
HEDGING AND OTHER TRANSACTIONS. Certain options are "section 1256
contracts." Any gains or losses on section 1256 contracts generally are
considered 60% long-term and 40% short-term capital gains or losses ("60/40").
Also, section 1256 contracts held by the Fund at the end of each taxable year
(and at other times prescribed pursuant to the Code) are "marked-to-market"
with the result that unrealized gains or losses are treated as though they were
realized and the resulting gain or loss is generally treated as 60/40 gain or
loss.
Generally, the hedging transactions undertaken by the Fund may result
in "straddles" for Federal income tax purposes. The straddle rules may affect
the character of gains (or losses) realized by the Fund. In addition, losses
realized by the Fund on positions that are part of a straddle may be deferred
under the straddle rules, rather than being taken into account in calculating
the taxable income for the taxable year in which such losses are realized.
Because only a few regulations implementing the straddle rules have been
promulgated, the tax consequences to the Fund of hedging transactions are not
entirely clear. The hedging transactions may increase the amount of short-term
capital gain realized by the Fund which is taxed as ordinary income when
distributed to stockholders.
The Fund may make one or more of the elections available under the
Code which are applicable to straddles. If the Fund makes any of the
elections, the amount, character and timing of the recognition of gains or
losses from the affected straddle positions will be determined under rules that
vary according to the election(s) made. The rules applicable under certain of
the elections may operate to accelerate the recognition of gains or losses from
the affected straddle positions.
Because application of the straddle rules may affect the character of
gains or losses, defer losses and/or accelerate the recognition of gains or
losses from the affected straddle positions, the amount which must be
distributed to stockholders, and which will be taxed to stockholders as
ordinary income or long-term capital gain, may be increased or decreased
substantially as compared to a fund that did not engage in such hedging
transactions.
Because the tax consequences of straddle transactions to the Fund are
not entirely clear, it may ultimately be determined that the Fund's tax
accounting procedures failed to conform to the straddle rules. Consequently,
the Fund may have inadvertently failed to satisfy one or more of the
requirements for qualification as a regulated investment company. If the Fund
has failed to satisfy the requirement that it distribute at least 90% of its
net investment company taxable income, the Fund may be able to preserve its
regulated investment company status by making a "deficiency dividend"
distribution. In addition, the Fund
18
<PAGE> 48
would have to pay interest and a penalty on the amount of the deficiency
dividend distribution. If the Fund fails to satisfy one of the other
requirements for qualification as a regulated investment company, the Fund
would be taxed as an ordinary corporation, and its distributions, including net
capital gain distributions, would be taxable to stockholders as ordinary
dividends. Moreover, upon any requalification as a regulated investment
company, the Fund might be subject to a corporate-level tax on certain gains.
Certain requirements that must be met under the Code in order for the
Fund to qualify as a regulated investment company may limit the extent to which
the Fund will be able to engage in transactions in options.
Certain of the debt securities acquired by the Fund may be treated as
debt securities that were originally issued at a discount. Original issue
discount can generally be defined as the difference between the price at which
a security was issued and its stated redemption price at maturity. Although no
cash income is actually received by the Fund, original issue discount on a
taxable debt security earned in a given year generally is treated for Federal
income tax purposes as interest and, therefore, such income would be subject to
the distribution requirements of the Code.
Some of the debt securities may be purchased by the Fund at a discount
which exceeds the original issue discount on such debt securities, if any.
This additional discount represents market discount for Federal income tax
purposes. The gain realized on the disposition of any debt security acquired
after April 30, 1993 or any taxable debt security acquired prior to May 1, 1993
having market discount will be treated as ordinary income to the extent it
does not exceed the accrued market discount on such debt security. Generally,
market discount accrues on a daily basis for each day the debt security is held
by the Fund at a constant rate over the time remaining to the debt security
maturity or, at the election of the Fund, at a constant yield to maturity which
takes into account the semi-annual compounding of interest.
DISPOSITION OF SHARES. Upon disposition (by redemption, repurchase,
sale or exchange) of Fund shares, a stockholder will realize a taxable gain or
loss depending upon his basis in his shares. Such gain or loss will be treated
as capital gain or loss if the shares are capital assets in the stockholder's
hands. Such gain or loss generally will be long-term or short-term depending
upon the stockholder's holding period for the shares. However, a loss realized
by a stockholder on the disposition of Fund shares with respect to which
capital gain dividends have been paid will, to the extent of such capital gain
dividends, be treated as long-term capital loss if such shares have been held
by the stockholder for six months or less. Further, a loss realized on a
disposition will be disallowed to the extent the shares disposed of are
replaced (whether by reinvestment of distributions or otherwise) within a
period of 61 days beginning 30 days before and ending 30 days after the shares
are disposed of. In such a case, the basis of the shares acquired will be
adjusted to reflect the disallowed loss. Exchanges of Fund shares for shares
of other funds generally would be treated as taxable sales of the shares
exchanged by the stockholder.
BACKUP WITHHOLDING. The Fund may be required to withhold Federal
income tax at the rate of 31% of all taxable distributions from the Fund and of
gross proceeds from the redemption of shares payable to stockholders who fail
to provide the Fund with their correct taxpayer identification number or to
make required certifications, or who have been notified by the Internal Revenue
Service that they are subject to backup withholding. Corporate stockholders
and certain other stockholders specified in the Code generally are exempt from
backup withholding. Backup withholding is not an additional tax. Any amounts
withheld may be credited against the stockholder's U.S. Federal income tax
liability.
OTHER TAXES. Distributions also may be subject to additional state,
local and foreign taxes depending on each stockholder's particular situation.
Foreign stockholders may be subject to U.S. tax rules
19
<PAGE> 49
that differ significantly from those described above, including the likelihood
that distributions to them would be subject to withholding of U.S. tax at a
rate of 30% (or at a lower rate under a tax treaty). Stockholders are advised
to consult their own tax advisers with respect to the particular tax
consequences to them of an investment in the Fund.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
The following table sets forth information concerning each person who,
to the knowledge of the Board of Directors, owned more than five percent of the
Fund's common stock as of April 19, 1995:
<TABLE>
<CAPTION>
REGISTRATION PERCENT OWNED
- ------------ -------------
<S> <C>
Barnett Bank of Pinellas County NA 23.87
200 Central Avenue
St. Petersburg, FL 33701
Barnett Bank of Palm Beach County NA 19.93
625 N. Flager Drive
West Palm Beach, FL 33401
Perpetual Bank 16.55
P.O. Box 1247
Anderson, SC 29622
Barnett Bank of Volusia County NA 7.97
230 N. Woodland Blvd.
Deland, FL 32720
Cheshire County Savings Bank 6.47
P.O. Box 746
Keene, NH 03431
</TABLE>
To the knowledge of the Board of Directors, each person named has sole
voting investment power with respect to the shares owned.
OTHER INFORMATION
CUSTODY OF ASSETS. All securities owned by the Fund and all cash,
including proceeds from the sale of shares of the Fund and of securities in the
Fund's investment portfolio, are held by The Fifth Third Bank, 38 Fountain
Square, Cincinnati, Ohio 45263, as Custodian.
STOCKHOLDER REPORTS. Semi-annual statements are furnished to
stockholders, and annually such statements are audited by the Fund's
independent accountants.
INDEPENDENT ACCOUNTANTS. Tait, Weller & Baker, Two Penn Center Plaza,
Suite 700, Philadelphia, Pennsylvania 19102-1707, the independent accountants
for the Fund, performs annual audits of the Fund's
20
<PAGE> 50
financial statements.
LEGAL COUNSEL. Dechert Price & Rhoads, 1500 K Street, N.W., Suite
500, Washington, DC 20005, is legal counsel to the Fund.
21
<PAGE> 51
CAPSTONE GOVERNMENT INCOME FUND
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and Board of Directors
Capstone Fixed Income Series, Inc.
We have audited the accompanying statement of assets and liabilities of
Capstone Government Income Fund (the 'Fund'), a series of Capstone Fixed Income
Series, Inc., including the portfolio of investments, as of December 31, 1994,
and the related statement of operations and the statement of changes in net
assets for the year then ended, and the financial highlights for the year then
ended, the year ended December 31, 1993 and the year ended September 30, 1990.
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 December 31, 1992, the period from October 1, 1991
to December 31, 1991 and the year ended September 30, 1991 were audited by other
auditors whose report dated February 9, 1993 expressed an unqualified opinion
thereon.
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 misstatements. 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
December 31, 1994, by correspondence with the custodian. 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 Government Income Fund at December 31, 1994, the results of its
operations and the changes in its net assets for the year then ended, and the
financial highlights for the year then ended, the year ended December 31, 1993
and the year ended September 30, 1990, in conformity with generally accepted
accounting principles.
Tait, Weller & Baker
Philadelphia, Pennsylvania
February 3, 1995
<PAGE> 52
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and Board of Directors
Capstone Government Income Fund
a series of Capstone Fixed Income Series, Inc.
We have audited the statement of assets and liabilities of Capstone Government
Income Fund (the "Fund"), a series of Capstone Fixed Income Series, Inc.,
including the schedule of investments, as of December 31, 1992, and the related
statement of operations for the year then ended, the statement of changes in
net assets for the year then ended and the period from October 1, 1991 to
December 31, 1991 (not presented separately herein), and the financial
highlights for the year then ended, the period from October 1, 1991 to December
31, 1991 and the year ended September 30, 1991. These financial statements and
financial highlights and 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.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards required 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 December 31, 1992, by correspondence with custodian and brokers.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, financial statements and financial highlights referred to above
present fairly, in all material respects, the financial position of Capstone
Government Income Fund at December 31, 1992, the results of its operations for
the year then ended, the changes in its net assets for the year then ended and
the period from October 1, 1991 to December 31, 1991, and the financial
highlights for the year then ended, the period from October 1, 1991 to December
31, 1991, and the year ended September 30, 1991, in conformity with generally
accepted accounting principles.
/s/ERNST & YOUNG LLP
Ernst & Young LLP
Houston, Texas
February 9, 1993
<PAGE> 53
CAPSTONE GOVERNMENT INCOME FUND
<TABLE>
PORTFOLIO OF INVESTMENTS DECEMBER 31, 1994
- ------------------------------------------------------------------------------
<CAPTION>
PRINCIPAL VALUE PERCENTAGE OF
AMOUNT (SEE NOTE 1-A) NET ASSETS
----------- -------------- ----------------
BONDS
---------------
<S> <C> <C> <C> <C>
U.S. Government $ 8,000,000 U.S. Treasury Note, 7.250%,
11/30/96............................. $ 7,938,760 91.20%
------------- -------
91.20%
Total U.S. Government (Cost
$7,938,125).......................... 7,938,760 91.20%
SHORT-TERM OBLIGATIONS
- ----------------------
Repurchase Agreements 1,108,000 Fuji Securities, 5.25%, 01/03/95
12.73% (dated 12/30/94). Collateralized by
$1,080,000, U.S. Treasury Note
11.250%, 02/15/95
(Repurchase Proceeds $1,108,646)..... 1,108,000 12.73
------------- -------
Total Short-Term Obligations
(Cost $1,108,000).................... 1,108,000 12.73
------------- -------
Total Investments in Securities
(Cost $9,046,125)(a)................. 9,046,760 103.93%
------------- -------
Liabilities in excess of cash and
other assets......................... (341,683) (3.93)
------------- -------
Net Assets, at values equivalent to
$4.73 per share for 1,839,593 shares
of $.001 par value shares
outstanding.......................... $ 8,705,077 100.00%
============== =======
(a) At December 31, 1994, unrealized appreciation of securities based on
Federal income tax cost is as follows:
Unrealized appreciation.............. $ 635
--------------
Net appreciation..................... $ 635
==============
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
<PAGE> 54
CAPSTONE GOVERNMENT INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES DECEMBER 31, 1994
- ------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Investments in securities at market
value (identified cost
$9,046,125)(Notes 1A and 1C) ...................... $ 9,046,760
Cash .................................................. 24,758
Receivables:
Interest .......................................... 51,312
Capital stock ..................................... 1,145
-------------
Total assets .............................. 9,123,975
-------------
LIABILITIES:
Payable for capital stock ............................. 323,469
Accrued expenses ...................................... 75,285
Distributions payable ................................. 20,144
-------------
Total liabilities ......................... 418,898
-------------
NET ASSETS: ........................................... $ 8,705,077
=============
NET ASSET VALUE AND OFFERING PRICE
PER SHARE: (8,705,077 1,839,593
shares outstanding of $.001 par
value, 200,000,000 shares
authorized) ......................................... $ 4.73
=============
SOURCE OF NET ASSETS:
Paid in capital ................................... 16,138,665
Accumulated net realized loss on
investments .................................... (7,434,223)
Net unrealized appreciation of
securities ..................................... 635
-------------
$ 8,705,077
=============
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
<PAGE> 55
CAPSTONE GOVERNMENT INCOME FUND
STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1994
- ------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest income ............................................. $ 4,526,826
------------
Expenses:
Advisory fees (Note 2) .................................. 357,033
Administrative services (Note
2) ..................................................... 89,258
Custodian fees .......................................... 38,921
Transfer agent fees ..................................... 30,744
Professional fees ....................................... 45,197
Directors' fees and expenses
(Note 2) ............................................... 8,261
Filing and registration fees ............................ 21,733
Distribution expenses (Note 2) .......................... 177,501
Reports to shareholders ................................. 6,982
Miscellaneous ........................................... 2,275
------------
Total expenses ...................................... 777,905
------------
Net investment income ........................... 3,748,921
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized loss from security transactions ................ (2,871,813)
Net realized gain on written options ........................ 401,758
Unrealized appreciation
(depreciation) of investments:
Beginning of period ...................... $(110,931)
End of period ............................ 635
---------
Net change in unrealized appreciation
(depreciation) of investments ....................... 111,566
------------
Net realized and unrealized loss on
investments .................................... (2,358,489)
------------
Net increase in net assets resulting
from operations ................................ $ 1,390,432
============
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
<PAGE> 56
CAPSTONE GOVERNMENT INCOME FUND
STATEMENT OF CHANGES IN NET ASSETS
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
OPERATIONS: 1994 1993
------------- -------------
<S> <C> <C>
Net investment income .................... $ 3,748,921 $ 2,763,205
Net realized loss on investments ......... (2,470,055) (359,616)
Net change in unrealized appreciation
of investments ........................... 111,566 49,861
------------- -------------
Net increase in net assets resulting
from operations .......................... 1,390,432 2,453,450
EQUALIZATION:
Undistributed investment income
included in prices of shares sold
and redeemed (Note 1-H) ................ (3,436,857) (1,529,658)
DISTRIBUTIONS TO SHAREHOLDERS:
Distributions from net investment
income ................................. (219,989) (629,727)
CAPITAL SHARE TRANSACTIONS:
Increase (decrease) in net assets
resulting from capital share
transactions (Note 3) .................. (22,824,241) 3,654,439
------------- -------------
Total increase (decrease) in net
assets ............................... (25,090,655) 3,948,504
NET ASSETS:
Beginning of period ...................... 33,795,732 29,847,228
------------- -------------
End of period ............................ $ 8,705,077 $ 33,795,732
============= =============
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
<PAGE> 57
- ------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1994
- ------------------------------------------------------------------------------
NOTE 1 -- ORGANIZATION AND SUMMARY ACCOUNTING POLICIES
Capstone Government Income Fund (previously Investors Income Fund, Inc.),
referred to as the 'Fund', is the initial series of Capstone Fixed Income
Series, Inc. (the 'Corporation'), which is registered under the Investment
Company Act of 1940 (the 'Act'), as amended, as a diversified, open-end
management investment company. The Fund was originally incorporated in
Delaware in 1968 and was reorganized as the initial series of the Corporation,
which was established under Maryland Law on May 11, 1992. On January 8, 1991,
shareholders approved various changes in the fundamental investment policies
of the Fund. The current investment objective of the Fund is to earn a high
level of total return, consistent with safety of principal. The Fund seeks to
achieve this objective by investing in debt obligations that have remaining
maturities of three years or less and that are issued or guaranteed by the
U.S. Government, its agencies or instrumentalities, and by engaging in certain
income enhancement strategies. Prior to the change, the Fund's investment
objective was to secure a high level of current income on its investments
along with the preservation of the Fund's capital. To achieve this objective,
the Fund invested in U.S. Government securities and corporate obligations,
convertibles, preferred and common stocks, and money market investments. The
Fund changed its fiscal and tax year end from September 30 to December 31,
commencing with December 31, 1991.
The following is a summary of significant accounting policies followed by
the Fund in the preparation of its financial statements.
(A) VALUATION OF INVESTMENTS -- Debt securities (other than short-term
obligations) including listed issues are valued at the mean between the bid
and asked prices on the basis of valuations furnished by a pricing service.
Over-the-counter ('OTC') options, which include both written and purchased
options, are valued using the Black-Scholes Model, which utilizes the option's
characteristics when bought or sold and the market price of the underlying
security to determine a daily price for each OTC option's position. The only
pricing variable changed daily is the price of the underlying security. When
the market quotations are not readily available, portfolio securities are
valued at their fair value as determined in good faith under procedures
established by and under the general supervision of the Board of Directors
(valuation of securities for which market quotations are not readily available
may be based upon current market prices of securities which are comparable in
coupon, rating and maturity or an appropriate matrix utilizing similar
factors). Short-term investments are valued at amortized cost which
approximates value.
(B) CALL AND PUT OPTIONS -- When the Fund writes a call or put option an amount
equal to the premium received is reflected as a liability. The amount of the
liability is subsequently 'marked to market' to reflect the current market
<PAGE> 58
value of the option written. If an option which the Fund has written either
expires on its stipulated expiration date, or if the Fund enters into a
closing purchase transaction, the Fund realizes a gain (or loss if the cost of
the closing transaction exceeds the premium received when the option is sold),
and the liability related to such option is extinguished. If a call option
which the Fund has written is exercised, the Fund realizes a gain or loss from
the sale of the underlying security and the proceeds from such a sale are
increased by the premium originally received. If a put option which the Fund
has written is exercised, the amount of the premium originally received
reduces the cost of the security which the Fund purchases upon exercise of the
option.
The premium paid by the Fund for the purchase of a call or put option is
recorded as an investment and subsequently marked to market to reflect the
current market value of the option purchased. If an option which the Fund has
purchased expires on the stipulated expiration date, the Fund realizes a loss
in the amount of the cost of the option. If the Fund enters into a closing
transaction, it realizes a gain (loss) if the proceeds from the sale are
greater (less) than the cost of the option purchased. If the Fund exercises a
put option, it realizes a gain or loss from the sale of the underlying
security and the proceeds from such sale will be decreased by the premium
originally paid. If the Fund exercises a call option, the cost of the security
purchased upon exercise is increased by the premium originally paid.
These option contracts may be listed for trading on a national securities
exchange or traded over-the-counter. OTC options are transacted directly with
dealers and not with a clearing corporation, and there is a risk of
non-performance by the dealer. The Fund, as writer of a call option, loses the
potential for gain on the underlying security above the exercise price while
the option is outstanding. By writing a put option, the Fund might become
obligated to purchase the underlying security at an exercise price that
exceeds the then current market price.
(C) REPURCHASE AGREEMENTS -- The Fund may enter into repurchase agreements with
U.S. Government securities dealers recognized by the Federal Reserve Board,
with member banks of the Federal Reserve System or with such other brokers or
dealers that meet the credit guidelines of the Corporation's Board of
Directors. In a repurchase agreement, the Fund buys a security from a seller
that has agreed to repurchase the same security at a mutually agreed upon date
and price. The Fund's resale price will be in excess of the purchase price,
reflecting an agreed upon interest rate. This interest rate is effective for
the period of time the Fund is invested in the agreement and is not related to
the coupon rate on the underlying security. Repurchase agreements may also be
viewed as fully collateralized loans of money by the Fund to the seller. The
period of these repurchase agreements will usually be short, from overnight to
one week, and at no time will the Fund invest in repurchase agreements for
more than one year. The Fund will always receive as collateral securities
whose market value including accrued interest is, and during the entire term
of the agreement remains, at least equal to 100% of the dollar amount invested
by the Fund in each agreement, and the Fund will make payment for such
securities only upon physical delivery or upon evidence of book entry transfer
to the account of the custodian. If the seller defaults, the Fund might incur
a loss if the value of the collateral securing the repurchase agreement
declines and might incur disposition costs in connection with liquidating the
collateral. In addition, if bankruptcy proceedings are commenced with respect
to the seller of a security which is the subject of a repurchase agreement,
realization of the collateral by the Fund may be delayed or limited. In an
attempt to minimize these risks, New Castle Advisers, Inc., the Subadviser,
will consider and monitor the creditworthiness of parties to repurchase
agreements.
<PAGE> 59
(D) REVERSE REPURCHASE AGREEMENTS -- A reverse repurchase agreement involves
the sale of an investment obligation by the Fund and its agreement to
repurchase the instrument at a specific time and price. The Fund will maintain
a segregated account, which will be marked to market daily, consisting of
cash, cash equivalents and U.S. Government securities at least equal to its
obligations under reverse repurchase agreements, including any accrued
interest. The Fund will not invest proceeds from these transactions beyond the
expiration of the reverse repurchase agreement. The Fund may not enter into
these transactions with more than 33% of its portfolio, and will only enter
into such agreements with dealers approved by the Board of Directors of the
Corporation for repurchase agreements.
(E) SECURITY TRANSACTIONS AND INVESTMENT INCOME -- Security transactions are
accounted for on the trade date (the date the securities are purchased and
sold). Interest income on investments is accrued daily. Realized gains and
losses from security transactions are determined on the basis of identified
cost.
(F) FEDERAL INCOME TAXES -- No provision is considered necessary for Federal
income taxes since it is the policy of the Fund to distribute all of its
taxable income, including any net realized gains on sales of investments and
to qualify as a 'regulated investment company' under the applicable section of
the Internal Revenue Code. The Fund has approximately $5,865,000 of capital
losses for Federal income tax purposes available to offset future taxable
capital gains, if any, of which $508,400 expires in December 1996, $702,100
expires in December 1998, $1,207,900 expires in December 1999, $2,210,100
expires in December 2002, and $1,236,500 expires in December 2003.
(G) SHARE TRANSACTIONS AND DISTRIBUTIONS TO SHAREHOLDERS -- Fund shares are
sold in continuous public offering at the net asset value. Transactions in
Fund shares are recorded on the trade date. The Fund redeems its shares at the
net asset value. Dividends and other distributions are recorded by the Fund on
the ex-dividend date and may be reinvested at net asset value.
Income distributions and capital gain distributions, if any, are determined
in accordance with income tax regulation which may differ from generally
accepted accounting principles. The Fund also utilized earnings and profits
distributed to shareholders on redemption of shares as part of the dividend paid
deduction for income tax purposes.
(H) EQUALIZATION -- The Fund follows the accounting practice known as
equalization by which a portion, on a per-share basis, of the proceeds from
sales and costs of redemptions of capital shares equivalent to the amount of
distributable investment income on the date of the transaction is credited or
charged to undistributed income. As a result, undistributed investment income
per share is unaffected by sales or redemptions of capital shares.
NOTE 2 -- INVESTMENT ADVISORY AND ADMINISTRATOR'S FEES AND OTHER TRANSACTIONS
WITH AFFILIATES
Capstone Asset Management Company ('CAMCO'), serves as the Investment
Adviser to the Fund pursuant to an Investment Advisory Agreement dated May 11,
1992 between CAMCO and the Fund. New Castle Advisers, Inc. ('NCA') serves as
Subadviser to the Fund pursuant to a Subadvisory Agreement between CAMCO and NCA
dated May 11, 1992.
CAMCO is responsible chiefly for the overall design and structure of the
Fund's investment portfolio, as well as for establishing the Fund's investment
philosophy, strategy and maturity structure. CAMCO is also responsible for
<PAGE> 60
performance and yield curve analysis. NCA is responsible chiefly for the market
timing of purchases and sales, for all yield enhancement strategies and
creditworthiness analysis. For these services the Fund pays CAMCO a fee computed
daily and paid monthly at the annual rate of 0.40% of the first $250 million of
the Fund's average daily net assets and 0.36% of such assets over $250 million.
Out of these fees, CAMCO pays NCA a fee computed daily and payable monthly at
the annual rate of 0.30% of the first $250 million and 0.27% of the Fund's
average daily net assets over $250 million.
CAMCO also provides administrative services to the Fund pursuant to an
Administration Agreement. For these services, CAMCO is paid a monthly fee equal
to an annual rate of 0.10% of the Fund's average daily net assets.
Investment advisory and administrative fees paid to CAMCO for the year
ended December 31, 1994 were $446,291, of which CAMCO retained $178,516.
Pursuant to the Investment Advisory and Subadvisory Agreements and the
Administrative Agreement, CAMCO and NCA have agreed to reduce their fees on a
pro rata basis (but not below zero) to the extent that the Fund's ordinary
expenses for any fiscal year (including advisory or administrative fees, but
excluding brokerage commissions, interest, local, state and federal taxes and
extraordinary expenses) exceed the expense limitation of any state having
jurisdiction over the Fund.
Pursuant to a Distribution Agreement with the Fund dated May 11, 1992,
Capstone Asset Planning Company ('CAPCO'), is the principal underwriter of the
Fund and, acting as exclusive agent, sells shares of the Fund to the public on a
continuous basis.
The Fund has adopted a Service and Distribution Plan (the 'Plan') pursuant
to Rule 12b-1 under the Act in which it uses its assets to finance certain
activities relating to the distribution of its shares to investors and provision
of certain stockholder services. The Plan permits payments to be made by the
Fund to the Distributor to reimburse it for particular expenditures incurred by
it in connection with the distribution of the Fund's shares to investors and
provision of certain stockholder services including, but not limited to, the
payment of compensation, including incentive compensation, to securities dealers
(which may include CAPCO itself) and certain banks, investment advisers and
pension consultants (collectively, the 'Service Organizations') to obtain
various distribution-related and/or administrative services for the Fund. CAPCO
is also authorized to engage in advertising, the preparation and distribution of
sales literature and other promotional activities on behalf of the Fund. In
addition, the Plan authorizes payment by the Fund of the cost of preparing,
printing and distributing Fund Prospectuses and Statements of Additional
Information to prospective investors and of implementing and operating the Plan.
Under the Plan, payments made to CAPCO may not exceed an amount computed at
an annual rate of 0.20% of the average net assets of the Fund. CAPCO is
permitted to collect fees under the Plan on a monthly basis. Any expenditures
incurred in excess of the limitations described above during a given month may
be carried forward up to twelve months for reimbursement, subject always to the
0.20% limit, and no interest or carrying charges will be payable by the Fund on
amounts carried forward. The Plan may be terminated by the Fund at any time and
the Fund will not be liable for amounts not reimbursed as of the termination
date. During the year ended December 31, 1994, the Fund paid $177,501 in
distribution expenses. Of this amount, $143,599 was paid to Service
Organizations other then CAPCO.
CAMCO is an affiliate of CAPCO and both are wholly-owned subsidiaries of
Capstone Financial Services, Inc. ('CFS'). Certain officers and directors of the
<PAGE> 61
Corporation are also officers and directors of CAMCO, CAPCO, and CFS.
NOTE 3 -- CAPITAL STOCK
Transactions in capital stock were as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
1994 1993
---------------------------- ----------------------------
SHARES VALUE SHARES VALUE
------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
Shares sold .................... 39,255,843 $ 186,318,073 28,601,544 $ 130,750,793
Shares issued in Asset Transfer
(Note 5) ...................... 974,433 4,677,279 0 0
Shares issued to shareholders in
reinvestment of distributions 42,251 199,845 101,730 488,306
------------ ------------- ------------ -------------
40,272,527 191,195,197 28,703,274 131,239,099
Shares reacquired .............. (45,478,766) (214,019,438) (27,948,288) (127,584,660)
------------ ------------- ------------ -------------
Net increase (decrease) ........ (5,206,239) $ (22,824,241) 754,986 $ 3,654,439
============ ============= ============ =============
</TABLE>
<PAGE> 62
NOTE 4 -- COST, PURCHASE AND SALES OF SECURITIES
The cost of purchases and proceeds from sales of securities other than
short-term obligations for the year ended December 31, 1994 aggregated
$172,972,281 and $182,740,078, respectively.
Written options transactions during the period are summarized as follows:
<TABLE>
<CAPTION>
CALL/PUT OPTIONS WRITTEN FACE AMOUNT
PREMIUMS RECEIVED OF CONTRACTS
------------------------ --------------
<S> <C> <C>
Options outstanding at December 31,
1993 ................................ $ (30,078) $ 15,000,000
Options written ...................... (587,656) 264,000,000
Options closed ....................... 220,703 (100,000,000)
Options exercised .................... 165,000 (71,000,000)
Options expired ...................... 232,031 (108,000,000)
---------- -------------
Options outstanding at December 31,
1994 ............................... $ 0 $ 0
========== =============
</TABLE>
NOTE 5 -- ACQUISITION OF INVESTORS CASH RESERVE FUND, INC.
On June 6, 1994, Capstone Government Income Fund (the 'Fund') purchased
all of the assets of Investors Cash Reserve Fund, Inc. ('ICRF') in exchange
for shares of the Fund of equivalent value and the assumption by the Fund of
certain identified liabilities of ICRF. The transaction was pursuant to a
Purchase Agreement and Plan of Complete Liquidation approved by stockholders
of ICRF on May 31, 1994. The acquisition was accomplished by a tax-free
exchange of 974,433 shares of the Fund (valued at $4,677,279) for the
4,677,279 shares of ICRF on June 6, 1994. The exchange had no effect on the
net asset value per share of the Fund. ICRF's net assets at that date were
$4,677,279, consisting of capital stock of $46,772, and paid in surplus of
$4,630,507. The aggregate net assets of the Fund and ICRF immediately before
the acquisition were $110,929,732, and $4,677,279, respectively.
<PAGE> 63
CAPSTONE FIXED INCOME SERIES, INC.
CAPSTONE GOVERNMENT INCOME FUND
OTHER INFORMATION
(PART C TO REGISTRATION STATEMENT NO. 2-28174)
Item 24. Financial Statements and Exhibits
Exhibits not incorporated by reference to a prior filing are
designated by an asterisk; all exhibits not so designated are incorporated
hereby by reference to a prior filing as indicated.
(a) Financial Statements:
Condensed Financial Information (Part A)
Statement of Assets and Liabilities, including
the schedule of investments, as of December 31,
1994 (Part B)
Statement of Operations for the year ended
December 31, 1994 (Part B)
Statement of Changes in Net Assets for the years
ended December 31, 1994 and 1993 (Part B)
Notes to Financial Statements (Part B)
(b) Exhibits:
A. Exhibits filed pursuant to Form N-1A
1(a) Copy of Certificate of Incorporation
dated December 6, 1967; Exhibit 1 to
Registration No. 2-28174.
1(b) Copy of Certificate of Amendment of
Certificate of Incorporation dated
May 14, 1968; Exhibit 1A to
Amendment No. 1 to Registration No.
2-28174.
1(c) Copy of Certificate of Amendment of
Certificate of Incorporation dated
July 23, 1979; Exhibit 1 to
Amendment No. 6 to Registration No.
2-28174.
1(d) Copy of Certificate of Amendment of
Certificate of Incorporation dated
December 19, 1980; Exhibit 2(ii) to
Post-Effective Amendment No. 22 to
Registration No. 2-28174.
1(e) Copy of Certificate of Amendment of
Certificate of Incorporation dated
July 25, 1977; Exhibit 1(e) to
Post-Effective Amendment No. 29 to
Registration No. 2-28174.
1(f) Copy of Certificate of Amendment of
Certificate of Incorporation dated
April 30, 1986; Exhibit 1(f) to
Post-Effective Amendment No. 29 to
Registration No. 2-28174.
1(g) Copy of Certificate of Amendment of
Certificate of Incorporation dated
January 12, 1990; Exhibit 1(g) to
Post-Effective Amendment
<PAGE> 64
No. 33 to Registration No. 2-28174.
1(h) Copy of Certificate of Amendment of
Certificate of Incorporation of
Investors Income Fund, Inc. dated
January 8, 1991; Exhibit 1(h) to
Post-Effective Amendment No. 36 to
Registration No. 2-28174.
1(i) Copy of Certificate of Amendment of
Certificate of Incorporation of
Investors Income Fund, Inc. dated
February 15, 1991; Exhibit 1(i) to
Post-Effective Amendment No. 36 to
Registration No. 2-28174.
1(j) Copy of Agreement and Articles of
Merger of Capstone Fixed Income
Series, Inc. dated May 11, 1992;
Exhibit 1(j) to Post-Effective
Amendment No. 41 to Registration No.
2-28174.
1(k) Copy of Articles of Incorporation of
Capstone Fixed Income Series, Inc.
dated May 11, 1992; Exhibit 1(k) to
Post-Effective Amendment No. 41 to
Registration No. 2-28174.
2(a) Copy of By-Laws of Southwestern
Investors Income Fund, Inc., as
amended; Exhibit 2 to Post-Effective
Amendment No. 25 to Registration No.
2-28174.
2(b) Copy of Amendment to By-Laws of
Investors Income Fund, Inc., as
amended; Exhibit 2(b) to
Post-Effective Amendment No. 33 to
Registration No. 2-28174.
2(c) Copy of By-Laws of Capstone Fixed
Income Series, Inc.; Exhibit 2(c) to
Post- Effective Amendment No. 41 to
Registration No. 2-28174.
3 None
4 Specimen Common Stock Certificate
5(a) Copy of Investment Advisory
Agreement between Southwestern
Investors Income Fund, Inc. and
Tenneco Asset Management Company
dated as of July 26, 1982; Exhibit 5
to Post-Effective Amendment No. 25
to Registration No. 2-28174.
5(b) Copy of Amendment to Investment
Advisory Agreement between
Southwestern Investors Income Fund,
Inc. and Tenneco Asset Management
Company dated as of February 21,
1984; Exhibit 5(b) to Post-Effective
Amendment No. 27 to Registration No.
2-28174.
5(c) Copy of Investment Advisory
Agreement between Investors Income
Fund, Inc. and Capstone Asset
Management Company dated as of
September 1, 1987; Exhibit 5(c) to
Post-Effective Amendment No. 30 to
Registration No. 2-28174.
<PAGE> 65
5(d) Copy of Consulting Agreement between
Howard S. Potter and Capstone Asset
Management Company dated as of
November 1, 1991; Exhibit 5(d) to
Post- Effective Amendment No. 39 to
Registration No. 2-28174.
5(e) Copy of Interim Subadvisory
Agreement between New Castle
Advisers, Inc. and Capstone Asset
Management Company dated November
21, 1991; Exhibit 5(e) to
Post-Effective Amendment No. 39 to
Registration No. 2-28174.
5(f) Copy of Investment Advisory
Agreement between Capstone
Government Income Fund and Capstone
Asset Management Company dated
February 19, 1992; Exhibit 5(f) to
Post-Effective Amendment No. 39 to
Registration No. 2-28174.
5(g) Copy of Subadvisory Agreement
between New Castle Advisers, Inc.
and Capstone Asset Management
Company dated February 19, 1992;
Exhibit 5(g) to Post- Effective
Amendment No. 39 to Registration No.
2-28174.
5(h) Copy of Investment Advisory
Agreement between Capstone Fixed
Income Series, Inc. and Capstone
Asset Management Company dated May
11, 1992; Exhibit 5(h) to
Post-Effective Amendment No. 41 to
Registration No. 2-28174.
5(i) Copy of Subadvisory Agreement
between New Castle Advisers, Inc.
and Capstone Asset Management
Company dated May 11, 1992; Exhibit
5(i) to Post-Effective Amendment No.
41 to Registration No. 2-28174.
5(j) Proposed form of Investment Advisory
Agreement between Capstone Fixed
Income Series, Inc. on behalf of
Bond USA Fund and Greenwich Asset
Management, Incorporated; Exhibit
5(j) to Post-Effective Amendment No.
42 to Registration No. 2-28174.
5(k) Proposed form of Subadvisory
Agreement between Capstone Asset
Management Company and Greenwich
Asset Management, Incorporated;
Exhibit 5(k) to Post- Effective
Amendment No. 42 to Registration No.
2-28174.
6(a) Copy of General Distribution
Agreement between Southwestern
Investors Income Fund, Inc. and
Tenneco Asset Planning Company dated
October 1, 1984; Exhibit 6 to
Post-Effective Amendment No. 28 to
Registration No. 2-28174.
6(b) Copy of General Distribution
Agreement between Investors Income
Fund, Inc. and Capstone Asset
Planning Company dated September 1,
1987; Exhibit 6(b) to Post-
Effective Amendment No. 30 to
Registration No. 2-28174.
<PAGE> 66
6(c) Copy of General Distribution
Agreement between Capstone
Government Income Fund and Capstone
Asset Planning Company dated March
1, 1992; Exhibit 6(c) to Post-
Effective Amendment No. 39 to
Registration No. 2-28174.
6(d) Copy of General Distribution
Agreement between Capstone Fixed
Income Series, Inc. and Capstone
Asset Planning Company dated May 11,
1992; Exhibit 6(d) to Post-Effective
Amendment No. 41 to Registration No.
2-28174.
6(e) Copy of Selling Group Agreement;
Exhibit 6(e) to Post-Effective
Amendment No. 39 to Registration
No. 2-28174.
6(f) Proposed form of General
Distribution Agreement between
Capstone Fixed Income Series, Inc.
on behalf of Bond USA Fund and
Capstone Asset Planning Company;
Exhibit 6(f) to Post-Effective
Amendment No. 42 to Registration No.
2-28174.
7 None
8(a) Copy of Custodian Agreement between
Southwestern Investors Income Fund,
Inc. and First Pennsylvania Bank
N.A., dated July 1, 1985; Exhibit 8
to Post- Effective Amendment No. 28
to Registration No. 2-28174.
8(b) Proposed form of Custodian Agreement
between Capstone Fixed Income
Series, Inc. on behalf of Bond USA
Fund and The Nottingham Company,
Inc.; Exhibit 8(b) to Post-Effective
Amendment No. 42 to Registration No.
2-28174.
*8(c) Copy of Custody Agreement between
Capstone Fixed Income Series, Inc.
on behalf of Capstone Government
Income Fund and The Fifth Third Bank
dated December 13, 1994.
9(a)(1) Copy of Administration Agreement
between Southwestern Investors
Income Fund, Inc. and First
Pennsylvania Bank, N.A. dated as of
May 19, 1982.
9(a)(2) Copy of Amendment of the
Administration Agreement among
Southwestern Investors Income Fund,
Inc., First Pennsylvania Bank, N.A.
and Fund/Plan Services, Inc. dated
as of December 23, 1985.
9(a)(3) Copy of Administration Agreement
between Investors Income Fund, Inc.
and Capstone Financial Services,
Inc. dated as of
______________
* Filed herewith
<PAGE> 67
October 1, 1987; Exhibit 9(c) to
Post-Effective Amendment No. 30 to
Registration No. 2-28174.
9(a)(4) Proposed form of Administration
Agreement between Capstone Fixed
Income Series, Inc. on behalf of
Bond USA Fund and Capstone Asset
Management Company; Exhibit 9(a)(4)
to Post-Effective Amendment No. 42
to Registration No. 2- 28174.
9(b)(1) Copy of Amendment of the
Administration Agreement among
Southwestern Investors Income Fund,
Inc., First Pennsylvania Bank, N.A.
and Fund/Plan Services, Inc. dated
as of December 23, 1985.
9(c) Copy of Administration Agreement
between Investors Income Fund, Inc.
and Capstone Financial Services,
Inc. dated as of October 1, 1987;
Exhibit 9(c) to Post-Effective
Amendment No. 30 to Registration No.
2-28174.
*10 Opinion of Dechert Price & Rhoads
*11(a)(1) Consent of Ernst & Young LLP,
Independent Auditors.
*11(a)(2) Consent of Tait, Weller & Baker,
Independent Certified Public
Accountants.
*11(b) Powers of Attorney of Messrs. James
F. Leary, John R. Parker, Philip C.
Smith and Bernard J. Vaughan.
12 None
13 None
14(a)(1) Southwestern Life Insurance Company
Defined Benefit Pension Plan and
Trust; Exhibit 14(a)(1) to
Pre-Effective Amendment No. 1 to
Registration No. 2-99810.
14(a)(2) Adoption Agreement for Southwestern
Life Insurance Company Standardized
Integrated Defined Benefit Pension
Plan and Trust (with Pairing
Provisions); Exhibit 14(a)(2) to
Pre-Effective Amendment No. 1 to
Registration No. 2-99810.
14(a)(3) Adoption Agreement for Southwestern
Life Insurance Company Standardized
Non-Integrated Defined Benefit
Pension Plan and Trust (with Pairing
Provisions); Exhibit 14(a)(3) to
Pre-Effective Amendment No. 1 to
Registration No. 2-99810.
14(a)(4) Adoption Agreement for Southwestern
Life Insurance Company
Non-Standardized Integrated Defined
Benefit Pension Plan and Trust;
Exhibit 14(a)(4) to Pre- Effective
Amendment No. 1 to Registration No.
2-99810.
14(a)(5) Adoption Agreement for Southwestern
Life Insurance Company
Non-Standardized Non-Integrated
Defined Benefit Pension Plan and
Trust; Exhibit 14(a)(5) to
Pre-Effective Amendment No. 1 to
Registration No. 2-99810.
_______________
* Filed herewith
<PAGE> 68
14(b)(1) Southwestern Life Insurance Company
Combination Profit Sharing-Money
Purchase Plan and Trust; Exhibit
14(b)(1) to Pre-Effective Amendment
No. 1 to Registration No. 2-99810.
14(b)(2) Adoption Agreement for Southwestern
Life Insurance Company Standardized
Money Purchase Plan and Trust (with
Pairing Provisions); Exhibit
14(b)(2) to Pre- Effective Amendment
No. 1 to Registration No. 2-99810.
14(b)(3) Adoption Agreement for Southwestern
Life Insurance Company Standardized
Profit Sharing Plan and Trust (with
Pairing Provisions); Exhibit
14(b)(3) to Pre- Effective Amendment
No. 1 to Registration No. 2-99810.
14(b)(4) Adoption Agreement for Southwestern
Life Insurance Company
Non-Standardized Money Purchase Plan
and Trust; Exhibit 14(b)(4) to
Pre-Effective Amendment No. 1 to
Registration No. 2-99810.
14(b)(5) Adoption Agreement for Southwestern
Life Insurance Company
Non-Standardized Profit Sharing Plan
and Trust; Exhibit 14(b)(5) to
Pre-Effective Amendment No. 1 to
Registration No. 2-99810.
14(c) Form 5305, Simplified Employee
Pension-Individual Retirement
Accounts Contribution Agreement;
Exhibit 14(c) to Pre-Effective
Amendment No. 1 to Registration No.
2-99810.
14(d) Form 5305-A, Individual Retirement
Custodial Account; Exhibit 14(d) to
Pre- Effective Amendment No. 1 to
Registration No. 2-99810.
14(e)(1) Southwestern Life Insurance Company
Tax Deferred Annuity Program
Custodial Agreement; Exhibit
14(e)(1) to Pre-Effective Amendment
No. 1 to Registration No. 2-99810.
14(e)(2) Amendment to Application for
Investment Plans under a 403(b)(7)
Plan; Exhibit 14(e)(2) to
Pre-Effective Amendment No. 1 to
Registration No. 2-99810.
15(a) Copy of Service and Distribution
Plan; Exhibit 15(a) to
Post-Effective Amendment No. 39 to
Registration No. 2-28174.
15(b) Copy of Service Agreement; Exhibit
15(b) to Post-Effective Amendment
No. 39 to Registration No. 2-28174.
15(c) Proposed form of Service and
Distribution Plan between Capstone
Fixed Income Series, Inc. on behalf
of Bond USA Fund and Capstone Asset
Planning Company; Exhibit 15(c) to
Post-Effective Amendment No. 42 to
Registration No. 2-28174.
<PAGE> 69
* 16 Schedule for Computation of
Performance Quotations.
B. Exhibits filed pursuant to Rule 483 of Regulation
C under the Securities Act of 1933, as amended.
Item 25. Persons Controlled by or under Common Control with Registrant
Registrant does not control and is not under common control with
any person.
Item 26. Number of Holders of Securities
<TABLE>
<CAPTION>
Number of Record Holders
Title of Class As of April 19, 1995
-------------- -----------------------------
<S> <C>
Common Stock,
par value $.001 1,173
</TABLE>
Item 27. Indemnification
The Articles of Incorporation of the Registrant include the
following:
ARTICLE VII
"Article 7.4 Indemnification. The Corporation, including
its successors and assigns, shall indemnify its directors and
officers and make advance payment of related expenses to the
fullest extent permitted, and in accordance with the procedures
required, by the General Laws of the State of Maryland and the
Investment Company Act of 1940. The By-Laws may provide that the
Corporation shall indemnify its employees and/or agents in any
manner and within such limits as permitted by applicable law.
Such indemnification shall be in addition to any other right or
claim to which any director, officer, employee or agent may
otherwise be entitled. The Corporation may purchase and maintain
insurance on behalf of any person who is or was a director,
officer, employee or agent of the Corporation or is or was serving
at the request of the Corporation as a director, officer, partner,
trustee, employee or agent of another foreign or domestic
corporation, partnership, joint venture, trust or other enterprise
or employee benefit
______________
* Filed herewith
<PAGE> 70
plan, against any liability (including, with respect to employee
benefit plans, excise taxes) asserted against and incurred by such
person in any such capacity or arising out of such person's
position, whether or not the Corporation would have had the power
to indemnify against such liability. The rights provided to any
person by this Article 7.4 shall be enforceable against the
Corporation by such person who shall be presumed to have relied
upon such rights in serving or continuing to serve in the
capacities indicated herein. No amendment of these Articles of
Incorporation shall impair the rights of any person arising at any
time with respect to events occurring prior to such amendment."
The By-Laws of the Registrant include the following:
ARTICLE VI
INDEMNIFICATION
The Corporation shall indemnify (a) its Directors and
officers, whether serving the Corporation or at its request any
other entity, to the full extent required or permitted by (i)
Maryland law now or hereafter in force, including the advance of
expenses under the procedures and to the full extent permitted by
law, and (ii) the Investment Company Act of 1940, as amended, and
(b) other employees and agents to such extent as shall be
authorized by the Board of Directors and be permitted by law. The
foregoing rights of indemnification shall not be exclusive of any
other rights to which those seeking indemnification may be
entitled. The Board of Directors may take such action as is
necessary to carry out these indemnification provisions and is
expressly empowered to adopt, approve and amend from time to time
such resolutions or contracts implementing such provisions or such
further indemnification arrangements as may be permitted by law."
Insofar as indemnification for liability arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, the Registrant has been advised that in
the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment
by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful
defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the
securities being registered, the Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final
adjudication of such issue.
To the extent that the Articles of Incorporation, By-Laws or any
other instrument pursuant to which the Registrant is organized or
administered indemnify any director or officer of the Registrant,
or that any contract or agreement indemnifies any person who
undertakes to act as investment adviser or principal underwriter
to the Registrant, any such provision protecting or purporting to
protect such persons against any liability to the Registrant or
its security holders to which he would otherwise by subject by
reason of willful misfeasance, bad faith, or gross negligence, in
the performance of this duties, or by reason of his reckless
disregard of this duties pursuant to the conduct of his office or
obligations pursuant to such contract or agreement, will be
interpreted and enforced in a manner consistent with the
provisions of Sections 17(h) and (i)
<PAGE> 71
of the Investment Company Act of 1940, as amended, and Release No.
IC-11330 issued thereunder.
Item 28. Business and Other Connections of Investment Adviser
The investment adviser of the Registrant is also the investment
adviser and/or administrator of five other investment companies: Capstone
Balanced Fund, Capstone Growth Fund, Inc., Capstone Nikko Japan Fund, Capstone
New Zealand Fund and Medical Research Investment Fund, Inc. Such adviser also
manages private accounts and is an adviser for a portion of the Tenneco Inc.
Pension Plan. For further information, see "Directors and Officers" in Part B
hereof.
Item 29. Principal Underwriters
(a) The principal underwriter of the Registrant, Capstone
Asset Planning Company, also acts as principal underwriter for Capstone
Balanced Fund, Capstone Growth Fund, Inc., Capstone Nikko Japan Fund, Capstone
New Zealand Fund and Medical Research Investment Fund, Inc.
(b)
<TABLE>
<CAPTION>
Name and Principal Positions and Offices Positions and Offices
Business Address* with Underwriter with Registrant
- ------------------ ---------------------- ------------------------
<S> <C> <C>
Dan E. Watson Chairman of the Board Executive Vice President
and Director
Edward L. Jaroski President and Director President and Chairman of the Board
Howard S. Potter -- Executive Vice President
John M. Metzinger -- Vice President
Leticia N. Jaroski Vice President --
Janet K. Roberts Assistant Vice President --
Iris R. Clay Assistant Vice President Corporate Secretary
Norma R. Ybarbo -- Assistant Secretary
Linda G. Giuffre Corporate Secretary and Treasurer
Treasurer
</TABLE>
______________
* 5847 San Felipe, Suite 4100, Houston, Texas 77057
<PAGE> 72
Item 30. Location of Accounts and Records
Capstone Asset Management Company, the investment adviser to the
Registrant, 5847 San Felipe, Suite 4100, Houston, Texas 77057, The Fifth Third
Bank, the custodian of the Registrant, 38 Fountain Square, Cincinnati, Ohio
45263, and Fund/Plan Services, Inc., the transfer agent of the Registrant, 2 W.
Elm Street, P.O. Box 874, Conshohocken, Pennsylvania 19428, maintain physical
possession of each account, book or other document required to be maintained by
Section 31(a) of Investment Company Act of 1940 and the rules promulgated
thereunder.
Item 31. Management Services
Not applicable.
Item 32. Undertakings
Not applicable.
<PAGE> 73
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Registration Statement or Amendment
pursuant to Rule 485(b) under the Securities Act of 1933 and had duly caused
this Registration Statement or Amendment to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Houston, and State of
Texas on the 28th day of April, 1995.
CAPSTONE FIXED INCOME SERIES, INC.
Registrant
By: /s/EDWARD L. JAROSKI
----------------------------
Edward L. Jaroski, President
Pursuant to the requirements of the Securities Act of 1933, this
Amendment to Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
---------- ----- ----
<S> <C> <C>
/s/EDWARD L. JAROSKI President (Principal April 28, 1995
- -----------------------------
Edward L. Jaroski Executive Officer)
/s/LINDA G. GIUFFRE Treasurer (Principal April 28, 1995
- -----------------------------
Linda G. Giuffre Financial & Accounting
Officer)
JAMES F. LEARY* Director April 28, 1995
- -----------------------------
James F. Leary
JOHN R. PARKER* Director April 28, 1995
- -----------------------------
John R. Parker
PHILIP C. SMITH* Director April 28, 1995
- -----------------------------
Philip C. Smith
BERNARD J. VAUGHAN* Director April 28, 1995
- -----------------------------
Bernard J. Vaughan
* By: /s/EDWARD L. JAROSKI
-----------------------------------------
Edward L. Jaroski, Attorney-In-Fact
</TABLE>
<PAGE> 74
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibits
- ------ -----------------------
<S> <C>
8(c) Copy of Custody Agreement between
Capstone Fixed Income Series, Inc. and
The Fifth Third Bank
10 Opinion of Dechert Price & Rhoads
11(a)(1) Consent of Ernst & Young, Independent Auditors
11(a)(2) Consent of Tait, Weller & Baker, Independent
Certified Public Accountants
11(b) Powers of Attorney of Messrs. James F. Leary,
John R. Parker, Philip C. Smith and Bernard J.
Vaughan
16 Schedule for Computation of Performance
Quotations
27 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 8(c)
CUSTODY AGREEMENT
THIS AGREEMENT, is made as of _____________, 19______, by and between
_________________________________, a business trust organized under the laws of
the State of ________________ (the "Trust"), and THE FIFTH THIRD BANK, a
banking company organized under the laws of the State of Ohio (the
"Custodian").
WITNESSETH:
WHEREAS, the Trust desires that the Securities and cash of each of the
investment portfolios and any additional portfolios of the Trust, as each are
or will be identified in Exhibit A hereto (such current investment portfolios
and any additional portfolios individually referred to herein as a "Fund" and
collectively as the "Funds"), be held and administered by the Custodian
pursuant to this Agreement; and
WHEREAS, the Trust is an open-end management investment company
registered under the Investment Company Act of 1940, as amended (the "1940
Act"); and
WHEREAS, the Custodian represents that it is a bank having the
qualifications prescribed in Section 26(a)(i) of the 1940 Act;
NOW, THEREFORE, in consideration of the mutual agreements herein made,
the Trust and the Custodian hereby agree as follows:
ARTICLE I
DEFINITIONS
Whenever used in this Agreement, the following words and phrases,
unless the context otherwise requires, shall have the following meanings:
1.1 "Authorized Person" means any Officer or other person duly
authorized by resolution of the Board of Trustees to give Oral Instructions and
Written Instructions on behalf of the Trust and named in Exhibit B hereto or in
such resolutions of the Board of Trustees, certified by an Officer, as may be
received by the Custodian from time to time.
1.2 "Board of Trustees" shall mean the Trustees from time to time
serving under the Trust's Agreement and Declaration of Trust, dated
_________________, 19______, as from time to time amended.
1.3 "Book-Entry System" shall mean a federal book-entry system as
provided in Subpart O of Treasury Circular No. 300, 31 CFR 306, in Subpart B of
31 CFR Part 350, or in such book-entry regulations of federal agencies as are
substantially in the form of such Subpart O.
<PAGE> 2
1.4 "Business Day" shall mean any day recognized as a settlement
day by The New York Stock Exchange, Inc. and any other day for which the Fund
computes the net asset value of the Fund.
1.5 "NASD" shall mean The National Association of Securities
Dealers, Inc.
1.6 "Officer" shall mean the President, any Vice President, the
Secretary, any Assistant Secretary, the Treasurer, or any Assistant Treasurer
of the Trust.
1.7 "Oral Instructions" shall mean instructions orally transmitted
to and accepted by the Custodian because such instructions are: (i) reasonably
believed by the Custodian to have been given by an Authorized Person, (ii)
recorded and kept among the records of the Custodian made in the ordinary
course of business and (iii) orally confirmed by the Custodian. The Trust
shall cause all Oral Instructions to be confirmed by Written Instructions. If
such Written Instructions confirming Oral Instructions are not received by the
Custodian prior to a transaction, it shall in no way affect the validity of the
transaction or the authorization thereof by the Trust. If Oral Instructions
vary from the Written Instructions which purport to confirm them, the Custodian
shall notify the Trust of such variance but such Oral Instructions will govern
unless the Custodian has not yet acted.
1.8 "Custody Account" shall mean any account in the name of the
Trust, which is provided for in Section 3.2 below.
1.9 "Proper Instructions" shall mean Oral Instructions or Written
Instructions. Proper Instructions may be continuing Written Instructions when
deemed appropriate by both parties.
1.10 "Securities Depository" shall mean The Participants Trust
Company or The Depository Trust Company and (provided that Custodian shall have
received a copy of a resolution of the Board of Trustees, certified by an
Officer, specifically approving the use of such clearing agency as a depository
for the Trust) any other clearing agency registered with the Securities and
Exchange Commission under Section 17A of the Securities and Exchange Act of
1934 (the "1934 Act"), which acts as a system for the central handling of
Securities where all Securities of any particular class or series of an issuer
deposited within the system are treated as fungible and may be transferred or
pledged by bookkeeping entry without physical delivery of the Securities.
1.11 "Securities" shall include, without limitation, common and
preferred stocks, bonds, call options, put options, debentures, notes, bank
certificates of deposit, bankers' acceptances, mortgage-backed securities,
other money market instruments or other obligations, and any certificates,
receipts, warrants or other instruments or documents representing rights to
receive, purchase or subscribe for the same, or evidencing or
-2-
<PAGE> 3
representing any other rights or interests therein, or any similar property or
assets that the Custodian has the facilities to clear and to service.
1.12 "Shares" shall mean the units of beneficial interest issued by
the Trust.
1.13 "Written Instructions" shall mean (i) written communications
actually received by the Custodian and signed by one or more persons as the
Board of Trustees shall have from time to time authorized, or (ii)
communications by telex or any other such system from a person or persons
reasonably believed by the Custodian to be Authorized, or (iii) communications
transmitted electronically through the Institutional Delivery System (IDS), or
any other similar electronic instruction system acceptable to Custodian and
approved by resolutions of the Board of Trustees, a copy of which, certified by
an Officer, shall have been delivered to the Custodian.
ARTICLE II
APPOINTMENT OF CUSTODIAN
2.1 Appointment. The Trust hereby constitutes and appoints the
Custodian as custodian of all Securities and cash owned by or in the possession
of the Trust at any time during the period of this Agreement, provided that
such Securities or cash at all times shall be and remain the property of the
Trust.
2.2 Acceptance. The Custodian hereby accepts appointment as such
custodian and agrees to perform the duties thereof as hereinafter set forth.
ARTICLE III
CUSTODY OF CASH AND SECURITIES
3.1 Segregation. All Securities and non-cash property held by the
Custodian for the account of the Fund, except Securities maintained in a
Securities Depository or Book-Entry System, shall be physically segregated from
other Securities and non- cash property in the possession of the Custodian and
shall be identified as subject to this Agreement.
3.2 Custody Account. The Custodian shall open and maintain in its
trust department a custody account in the name of each Fund, subject only to
draft or order of the Custodian, in which the Custodian shall enter and carry
all Securities, cash and other assets of the Fund which are delivered to it.
3.3 Appointment of Agents. In its discretion, the Custodian may
appoint, and at any time remove, any domestic bank or trust company, which has
been approved by the Board of Trustees and is qualified to act as a custodian
under the 1940 Act, as sub-
-3-
<PAGE> 4
custodian to hold Securities and cash of the Funds and to carry out such other
provisions of this Agreement as it may determine, and may also open and
maintain one or more banking accounts with such a bank or trust company (any
such accounts to be in the name of the Custodian and subject only to its draft
or order), provided, however, that the appointment of any such agent shall not
relieve the Custodian of any of its obligations or liabilities under this
Agreement.
3.4 Delivery of Assets to Custodian. The Fund shall deliver, or
cause to be delivered, to the Custodian all of the Fund's Securities, cash and
other assets, including (a) all payments of income, payments of principal and
capital distributions received by the Fund with respect to such Securities,
cash or other assets owned by the Fund at any time during the period of this
Agreement, and (b) all cash received by the Fund for the issuance, at any time
during such period, of Shares. The Custodian shall not be responsible for such
Securities, cash or other assets until actually received by it.
3.5 Securities Depositories and Book-Entry Systems. The Custodian
may deposit and/or maintain Securities of the Funds in a Securities Depository
or in a Book-Entry System, subject to the following provisions:
(a) Prior to a deposit of Securities of the Funds in any
Securities Depository or Book-Entry System, the Fund shall
deliver to the Custodian a resolution of the Board of
Trustees, certified by an Officer, authorizing and instructing
the Custodian on an on-going basis to deposit in such
Securities Depository or Book-Entry System all Securities
eligible for deposit therein and to make use of such
Securities Depository or Book-Entry System to the extent
possible and practical in connection with its performance
hereunder, including, without limitation, in connection with
settlements of purchases and sales of Securities, loans of
Securities, and deliveries and returns of collateral
consisting of Securities. So long as such Securities
Depository or Book-Entry System shall continue to be employed
for the deposit of Securities of the Funds, the Trust shall
annually re-adopt such resolution and deliver a copy thereof,
certified by an Officer, to the Custodian.
(b) Securities of the Fund kept in a Book-Entry System or
Securities Depository shall be kept in an account ("Depository
Account") of the Custodian in such Book-Entry System or
Securities Depository which includes only assets held by the
Custodian as a fiduciary, custodian or otherwise for
customers.
(c) The records of the Custodian and the Custodian's account on
the books of the Book-Entry System and Securities Depository
as the case may be, with respect to Securities of a Fund
maintained in a Book-Entry System or Securities Depository
shall, by book-entry, or otherwise identify such Securities as
belonging to the Fund.
-4-
<PAGE> 5
(d) If Securities purchases by the Fund are to be held in a
Book-Entry System or Securities Depository, the Custodian
shall pay for such Securities upon (i) receipt of advice from
the Book-Entry System or Securities Depository that such
Securities have been transferred to the Depository Account,
and (ii) the making of an entry on the records of the
Custodian to reflect such payment and transfer for the account
of the Fund. If Securities sold by the Fund are held in a
Book-Entry System or Securities Depository, the Custodian
shall transfer such Securities upon (i) receipt of advice from
the Book-Entry System or Securities depository that payment
for such Securities has been transferred to the Depository
Account, and (ii) the making of an entry on the records of the
Custodian to reflect such transfer and payment for the account
of the Fund.
(e) Upon request, the Custodian shall provide the Fund with copies
of any report (obtained by the Custodian from a Book-Entry
System or Securities Depository in which Securities of the
Fund is kept) on the internal accounting controls and
procedures for safeguarding Securities deposited in such
Book-Entry System or Securities Depository.
(f) Anything to the contrary in this Agreement notwithstanding,
the Custodian shall be liable to the Trust for any loss or
damage to the Trust resulting (i) from the use of a Book-Entry
System or Securities Depository by reason of any negligence or
willful misconduct on the part of Custodian or any
sub-custodian appointed pursuant to Section 3.3 above or any
of its or their employees, or (ii) from failure of Custodian
or any such sub-custodian to enforce effectively such rights
as it may have against a Book-Entry System or Securities
Depository. At its election, the Trust shall be subrogated to
the rights of the Custodian with respect to any claim against
a Book-Entry System or Securities Depository or any other
person for any loss or damage to the Funds arising from the
use of such Book-Entry System or Securities Depository, if
and to the extent that the Trust has been made whole for any
such loss or damage.
3.6 Disbursement of Moneys from Custody Accounts. Upon receipt of
Proper Instructions, the Custodian shall disburse moneys from a Fund Custody
Account but only in the following cases:
(a) For the purchase of Securities for the Fund but only upon
compliance with Section 4.1 of this Agreement and only (i) in
the case of Securities (other than options on Securities,
futures contracts and options on futures contracts), against
the delivery to the Custodian (or any sub-custodian appointed
pursuant to Section 3.3 above) of such Securities registered
as provided in Section 3.9 below in proper form for transfer,
or if the purchase
-5-
<PAGE> 6
of such Securities is effected through a Book-Entry System or
Securities Depository, in accordance with the conditions set
forth in Section 3.5 above; (ii) in the case of options on
Securities, against delivery to the Custodian (or such
sub-custodian) of such receipts as are required by the customs
prevailing among dealers in such options; (iii) in the case of
futures contracts and options on futures contracts, against
delivery to the Custodian (or such sub-custodian) of evidence
of title thereto in favor of the Trust or any nominee referred
to in Section 3.9 below; and (iv) in the case of repurchase or
reverse repurchase agreements entered into between the Trust
and a bank which is a member of the Federal Reserve System or
between the Trust and a primary dealer in U.S. Government
securities, against delivery of the purchased Securities
either in certificate form or through an entry crediting the
Custodian's account at a Book-Entry System or Securities
Depository for the account of the Fund with such Securities;
(b) In connection with the conversion, exchange or surrender, as
set forth in Section 3.7(f) below, of Securities owned by the
Fund;
(c) For the payment of any dividends or capital gain distributions
declared by the Fund;
(d) In payment of the redemption price of Shares as provided in
Section 5.1 below;
(e) For the payment of any expense or liability incurred by the
Trust, including but not limited to the following payments for
the account of a Fund: interest; taxes; administration,
investment management, investment advisory, accounting,
auditing, transfer agent, custodian, trustee and legal fees;
and other operating expenses of a Fund; in all cases, whether
or not such expenses are to be in whole or in part capitalized
or treated as deferred expenses;
(f) For transfer in accordance with the provisions of any
agreement among the Trust, the Custodian and a broker-dealer
registered under the 1934 Act and a member of the NASD,
relating to compliance with rules of The Options Clearing
Corporation and of any registered national securities exchange
(or of any similar organization or organizations) regarding
escrow or other arrangements in connection with transactions
by the Trust;
(g) For transfer in accordance with the provisions of any
agreement among the Trust, the Custodian, and a futures
commission merchant registered under the Commodity Exchange
Act, relating to compliance with the rules of the Commodity
Futures Trading Commission and/or any contract market (or any
-6-
<PAGE> 7
similar organization or organizations) regarding account
deposits in connection with transactions by the Trust;
(h) For the funding of any uncertificated time deposit or other
interest-bearing account with any banking institution
(including the Custodian), which deposit or account has a term
of one year or less; and
(i) For any other proper purposes, but only upon receipt, in
addition to Proper Instructions, of a copy of a resolution of
the Board of Trustees, certified by an Officer, specifying the
amount and purpose of such payment, declaring such purpose to
be a proper corporate purpose, and naming the person or
persons to whom such payment is to be made.
3.7 Delivery of Securities from Fund Custody Accounts. Upon
receipt of Proper Instructions, the Custodian shall release and deliver
Securities from a Custody Account but only in the following cases:
(a) Upon the sale of Securities for the account of a Fund but only
against receipt of payment therefor in cash, by certified or
cashiers check or bank credit;
(b) In the case of a sale effected through a Book-Entry System or
Securities Depository, in accordance with the provisions of
Section 3.5 above;
(c) To an Offeror's depository agent in connection with tender or
other similar offers for Securities of a Fund; provided that,
in any such case, the cash or other consideration is to be
delivered to the Custodian;
(d) To the issuer thereof or its agent (i) for transfer into the
name of the Trust, the Custodian or any sub-custodian
appointed pursuant to Section 3.3 above, or of any nominee or
nominees of any of the foregoing, or (ii) for exchange for a
different number of certificates or other evidence
representing the same aggregate face amount or number of
units; provided that, in any such case, the new Securities are
to be delivered to the Custodian;
(e) To the broker selling Securities, for examination in
accordance with the "street delivery" custom;
(f) For exchange or conversion pursuant to any plan of merger,
consolidation, recapitalization, reorganization or
readjustment of the issuer of such Securities, or pursuant to
provisions for conversion contained in such Securities, or
pursuant to any deposit agreement, including surrender or
receipt of underlying Securities in connection with the
issuance or
-7-
<PAGE> 8
cancellation of depository receipts; provided that, in any
such case, the new Securities and cash, if any, are to be
delivered to the Custodian;
(g) Upon receipt of payment therefor pursuant to any repurchase or
reverse repurchase agreement entered into by a Fund;
(h) In the case of warrants, rights or similar Securities, upon
the exercise thereof, provided that, in any such case, the new
Securities and cash, if any, are to be delivered to the
Custodian;
(i) For delivery in connection with any loans of Securities of a
Fund, but only against receipt of such collateral as the Trust
shall have specified to the Custodian in Proper Instructions;
(j) For delivery as security in connection with any borrowings by
the Trust on behalf of a Fund requiring a pledge of assets by
such Fund, but only against receipt by the Custodian of the
amounts borrowed;
(k) Pursuant to any authorized plan of liquidation,
reorganization, merger, consolidation or recapitalization of
the Trust or a Fund;
(l) For delivery in accordance with the provisions of any
agreement among the Trust, the Custodian and a broker-dealer
registered under the 1934 Act and a member of the NASD,
relating to compliance with the rules of The Options Clearing
Corporation and of any registered national securities exchange
(or of any similar organization or organizations) regarding
escrow or other arrangements in connection with transactions
by the Trust on behalf of a Fund;
(m) For delivery in accordance with the provisions of any
agreement among the Trust on behalf of a Fund, the Custodian,
and a futures commission merchant registered under the
Commodity Exchange Act, relating to compliance with the rules
of the Commodity Futures Trading Commission and/or any
contract market (or any similar organization or organizations)
regarding account deposits in connection with transactions by
the Trust on behalf of a Fund; or
(n) For any other proper corporate purposes, but only upon
receipt, in addition to Proper Instructions, of a copy of a
resolution of the Board of Trustees, certified by an Officer,
specifying the Securities to be delivered, setting forth the
purpose for which such delivery is to be made, declaring such
purpose to be a proper corporate purpose, and naming the
person or persons to whom delivery of such Securities shall be
made.
-8-
<PAGE> 9
3.8 Actions Not Requiring Proper Instructions. Unless otherwise
instructed by the Trust, the Custodian shall with respect to all Securities
held for a Fund;
(a) Subject to Section 7.4 below, collect on a timely basis all
income and other payments to which the Trust is entitled
either by law or pursuant to custom in the securities
business;
(b) Present for payment and, subject to Section 7.4 below, collect
on a timely basis the amount payable upon all Securities which
may mature or be called, redeemed, or retired, or otherwise
become payable;
(c) Endorse for collection, in the name of the Trust, checks,
drafts and other negotiable instruments;
(d) Surrender interim receipts or Securities in temporary form for
Securities in definitive form;
(e) Execute, as custodian, any necessary declarations or
certificates of ownership under the federal income tax laws or
the laws or regulations of any other taxing authority now or
hereafter in effect, and prepare and submit reports to the
Internal Revenue Service ("IRS") and to the Trust at such
time, in such manner and containing such information as is
prescribed by the IRS;
(f) Hold for a Fund, either directly or, with respect to
Securities held therein, through a Book-Entry System or
Securities Depository, all rights and similar securities
issued with respect to Securities of the Fund; and
(g) In general, and except as otherwise directed in Proper
Instructions, attend to all non-discretionary details in
connection with sale, exchange, substitution, purchase,
transfer and other dealings with Securities and assets of the
Fund.
3.9 Registration and Transfer of Securities. All Securities held
for a Fund that are issued or issuable only in bearer form shall be held by the
Custodian in that form, provided that any such Securities shall be held in a
Book-Entry System for the account of the Trust on behalf of a Fund, if eligible
therefor. All other Securities held for a Fund may be registered in the name
of the Trust on behalf of such Fund, the Custodian, or any sub-custodian
appointed pursuant to Section 3.3 above, or in the name of any nominee of any
of them, or in the name of a Book-Entry System, Securities Depository or any
nominee of either thereof; provided, however, that such Securities are held
specifically for the account of the Trust on behalf of a Fund. The Trust shall
furnish to the Custodian appropriate instruments to enable the Custodian to
hold or deliver in proper form for transfer, or to register in the name of any
of the nominees hereinabove referred to or in the name of a
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<PAGE> 10
Book-Entry System or Securities Depository, any Securities registered in the
name of a Fund.
3.10 Records. (a) The Custodian shall maintain, by Fund,
complete and accurate records with respect to Securities, cash or other
property held for the Trust, including (i) journals or other records of
original entry containing an itemized daily record in detail of all receipts
and deliveries of Securities and all receipts and disbursements of cash; (ii)
ledgers (or other records) reflecting (A) Securities in transfer, (B)
Securities in physical possession, (C) monies and Securities borrowed and
monies and Securities loaned (together with a record of the collateral therefor
and substitutions of such collateral), (D) dividends and interest received, and
(E) dividends receivable and interest accrued; and (iii) cancelled checks and
bank records related thereto. The Custodian shall keep such other books and
records of the Trust as the Trust shall reasonably request, or as may be
required by the 1990 Act, including, but not limited to Section 3.1 and Rule
31a-1 and 31a-2 promulgated thereunder.
(b) All such books and records maintained by the Custodian shall
(i) be maintained in a form acceptable to the Trust and in compliance with
rules and regulations of the Securities and Exchange Commission, (ii) be the
property of the Trust and at all times during the regular business hours of the
Custodian be made available upon request for inspection by duly authorized
officers, employees or agents of the Trust and employees or agents of the
Securities and Exchange Commission, and (iii) if required to be maintained by
Rule 31a-1 under the 1940 Act, be preserved for the periods prescribed in Rule
31a-2 under the 1940 Act.
3.11 Fund Reports by Custodian. The Custodian shall furnish the
Trust with a daily activity statement by Fund and a summary of all transfers to
or from the Custody Account on the day following such transfers. At least
monthly and from time to time, the Custodian shall furnish the Trust with a
detailed statement, by Fund, of the Securities and moneys held for the Trust
under this Agreement.
3.12 Other Reports by Custodian. The Custodian shall provide the
Trust with such reports, as the Trust may reasonably request from time to time,
on the internal accounting controls and procedures for safeguarding Securities,
which are employed by the Custodian or any sub-custodian appointed pursuant to
Section 3.3 above.
3.13 Proxies and Other Materials. The Custodian shall cause all
proxies if any, relating to Securities which are not registered in the name of
a Fund, to be promptly executed by the registered holder of such Securities,
without indication of the manner in which such proxies are to be voted, and
shall include all other proxy materials, if any, promptly deliver to the Trust
such proxies, all proxy soliciting materials, which should include all other
proxy materials, if any, and all notices to such Securities.
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<PAGE> 11
3.14 Information on Corporate Actions. Custodian will promptly
notify the Trust of corporate actions, limited to those Securities registered
in nominee name and to those Securities held at a Depository or sub-Custodian
acting as agent for Custodian. Custodian will be responsible only if the
notice of such corporate actions is published by the Financial Daily Card
Service, J.J. Kenny Called Bond Service, DTC, or received by first class mail
from the agent. For market announcements not yet received and distributed by
Custodian's services, Trust will inform its custody representative with
appropriate instructions. Custodian will, upon receipt of Trusts's response
within the required deadline, affect such action for receipt or payment for the
Trust. For those responses received after the deadline, Custodian will affect
such action for receipt or payment, subject to the limitations of the agent(s)
affecting such actions. Custodian will promptly notify Trust for put options
only if the notice is received by first class mail from the agent. The Trust
will provide or cause to be provided to Custodian with all relevant information
contained in the prospectus for any security which has unique put/option
provisions and provide Custodian with specific tender instructions at least ten
business days prior to the beginning date of the tender period.
ARTICLE IV
PURCHASE AND SALE OF INVESTMENTS OF THE FUND
4.1 Purchase of Securities. Promptly upon each purchase of
Securities for the Trust, Written Instructions shall be delivered to the
Custodian, specifying (a) the name of the issuer or writer of such Securities,
and the title or other description thereof, (b) the number of shares, principal
amount (and accrued interest, if any) or other units purchased, (c) the date of
purchase and settlement, (d) the purchase price per unit, (e) the total amount
payable upon such purchase, and (f) the name of the person to whom such amount
is payable. The Custodian shall upon receipt of such Securities purchased by a
Fund pay out of the moneys held for the account of such Fund the total amount
specified in such Written Instructions to the person named therein. The
Custodian shall not be under any obligation to pay out moneys to cover the cost
of a purchase of Securities for a Fund, if in the relevant Custody Account
there is insufficient cash available to the Fund for which such purchase was
made.
4.2 Liability for Payment in Advance of Receipt of Securities
Purchased. In any and every case where payment for the purchase of Securities
for a Fund is made by the Custodian in advance of receipt for the account of
the Fund of the Securities purchased but in the absence of specific Written or
Oral Instructions to so pay in advance, the Custodian shall be liable to the
Fund for such Securities to the same extent as if the Securities had been
received by the Custodian.
4.3 Sale of Securities. Promptly upon each sale of Securities by
a Fund, Written Instructions shall be delivered to the Custodian, specifying
(a) the name of the issuer or
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<PAGE> 12
writer of such Securities, and the title or other description thereof, (b) the
number of shares, principal amount (and accrued interest, if any), or other
units sold, (c) the date of sale and settlement (d) the sale price per unit,
(e) the total amount payable upon such sale, and (f) the person to whom such
Securities are to be delivered. Upon receipt of the total amount payable to
the Trust as specified in such Written Instructions, the Custodian shall
deliver such Securities to the person specified in such Written Instructions.
Subject to the foregoing, the Custodian may accept payment in such form as
shall be satisfactory to it, and may deliver Securities and arrange for payment
in accordance with the customs prevailing among dealers in Securities.
4.4 Delivery of Securities Sold. Notwithstanding Section 4.3
above or any other provision of this Agreement, the Custodian, when instructed
to deliver Securities against payment, shall be entitled, if in accordance with
generally accepted market practice, to deliver such Securities prior to actual
receipt of final payment therefor. In any such case, the Trust shall bear the
risk that final payment for such Securities may not be made or that such
Securities may be returned or otherwise held or disposed of by or through the
person to whom they were delivered, and the Custodian shall have no liability
for any of the foregoing.
4.5 Payment for Securities Sold, etc. In its sole discretion and
from time to time, the Custodian may credit the relevant Custody Account, prior
to actual receipt of final payment thereof, with (i) proceeds from the sale of
Securities which it has been instructed to deliver against payment, (ii)
proceeds from the redemption of Securities or other assets of the Trust, and
(iii) income from cash, Securities or other assets of the Trust. Any such
credit shall be conditional upon actual receipt by Custodian of final payment
and may be reversed if final payment is not actually received in full. The
Custodian may, in its sole discretion and from time to time, permit the Trust
to use funds so credited to its Custody Account in anticipation of actual
receipt of final payment. Any such funds shall be repayable immediately upon
demand made by the Custodian at any time prior to the actual receipt of all
final payments in anticipation of which funds were credited to the Custody
Account.
4.6 Advances by Custodian for Settlement. The Custodian may, in
its sole discretion and from time to time, advance funds to the Trust to
facilitate the settlement of a Trust transactions on behalf of a Fund in its
Custody Account. Any such advance shall be repayable immediately upon demand
made by Custodian.
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<PAGE> 13
ARTICLE V
REDEMPTION OF TRUST SHARES
5.1 Transfer of Funds. From such funds as may be available for
the purpose in the relevant Custody Account, and upon receipt of Proper
Instructions specifying that the funds are required to redeem Shares of a Fund,
the Custodian shall wire each amount specified in such Proper Instructions to
or through such bank as the Trust may designate with respect to such amount in
such Proper Instructions.
5.2 No Duty Regarding Paying Banks. The Custodian shall not be
under any obligation to effect payment or distribution by any bank designated
in Proper Instructions given pursuant to Section 5.1 above of any amount paid
by the Custodian to such bank in accordance with such Proper Instructions.
ARTICLE VI
SEGREGATED ACCOUNTS
Upon receipt of Proper Instructions, the Custodian shall establish and
maintain a segregated account or accounts for and on behalf of each Fund, into
which account or accounts may be transferred cash and/or Securities, including
Securities maintained in a Depository Account,
(a) in accordance with the provisions of any agreement among the
Trust, the Custodian and a broker-dealer registered under the
1934 Act and a member of the NASD (or any futures commission
merchant registered under the Commodity Exchange Act),
relating to compliance with the rules of The Options Clearing
Corporation and of any registered national securities exchange
(or the Commodity Futures Trading commission or any registered
contract market), or of any similar organization or
organizations, regarding escrow or other arrangements in
connection with transactions by the Trust,
(b) for purposes of segregating cash or Securities in connection
with securities options purchased or written by a Fund or in
connection with financial futures contracts (or options
thereon) purchased or sold by a Fund,
(c) which constitute collateral for loans of Securities made by a
Fund,
(d) for purposes of compliance by the Trust with requirements
under the 1940 Act for the maintenance of segregated accounts
by registered investment companies in connection with reverse
repurchase agreements and when-issued, delayed delivery and
firm commitment transactions, and
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<PAGE> 14
(e) for other proper corporate purposes, but only upon receipt of,
in addition to Proper Instructions, a certified copy of a
resolution of the Board of Trustees, certified by an Officer,
setting forth the purpose or purposes of such segregated
account and declaring such purposes to be proper corporate
purposes.
ARTICLE VII
CONCERNING THE CUSTODIAN
7.1 Standard of Care. The Custodian shall be held to the exercise
of reasonable care in carrying out its obligations under this Agreement, and
shall be without liability to the Trust for any loss, damage, cost, expense
(including attorneys' fees and disbursements), liability or claim unless such
loss, damages, cost, expense, liability or claim arises from negligence, bad
faith or willful misconduct on its part or on the part of any sub-custodian
appointed pursuant to Section 3.3 above. The Custodian shall be entitled to
rely on and may act upon advice of counsel on all matters, and shall be without
liability for any action reasonably taken or omitted pursuant to such advice.
The Custodian shall promptly notify the Trust of any action taken or omitted by
the Custodian pursuant to advice of counsel. The Custodian shall not be under
any obligation at any time to ascertain whether the Trust is in compliance with
the 1940 Act, the regulations thereunder, the provisions of the Trust's charter
documents or by-laws, or its investment objectives and policies as then in
effect.
7.2 Actual Collection Required. The Custodian shall not be liable
for, or considered to be the custodian of, any cash belonging to the Trust or
any money represented by a check, draft or other instrument for the payment of
money, until the Custodian or its agents actually receive such cash or collect
on such instrument.
7.3 No Responsibility for title, etc. So long as and to the
extent that it is in the exercise of reasonable care, the Custodian shall not
be responsible for the title, validity or genuineness of any property or
evidence of title thereto received or delivered by it pursuant to this
Agreement.
7.4 Limitation on Duty to Collect. Custodian shall not be
required to enforce collection, by legal means or otherwise, of any money or
property due and payable with respect to Securities held for the Trust if such
Securities are in default or payment is not made after due demand or
presentation.
7.5 Reliance Upon Documents and Instructions. The Custodian shall
be entitled to rely upon any certificate, notice or other instrument in writing
received by it and reasonably believed by it to be genuine. The Custodian
shall be entitled to rely upon any
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<PAGE> 15
Oral Instructions and/or any Written Instructions actually received by it
pursuant to this Agreement.
7.6 Express Duties Only. The Custodian shall have no duties or
obligations whatsoever except such duties and obligations as are specifically
set forth in this Agreement, and no covenant or obligation shall be implied in
this Agreement against the Custodian.
7.7 Cooperation. The Custodian shall cooperate with and supply
necessary information, by the Trust, to the entity or entities appointed by the
Trust to keep the books of account of the Trust and/or compute the value of the
assets of the Trust. The Custodian shall take all such reasonable actions as
the Trust may from time to time request to enable the Trust to obtain, from
year to year, favorable opinions from the Trust's independent accountants with
respect to the Custodian's activities hereunder in connection with (a) the
preparation of the Trust's report on Form N-1A and Form N-SAR and any other
reports required by the Securities and Exchange Commission, and (b) the
fulfillment by the Trust of any other requirements of the Securities and
Exchange Commission.
ARTICLE VIII
INDEMNIFICATION
8.1 Indemnification. The Trust shall indemnify and hold harmless
the Custodian and any sub-custodian appointed pursuant to Section 3.3 above,
and any nominee of the Custodian or of such sub-custodian from and against any
loss, damage, cost, expense (including attorneys' fees and disbursements),
liability (including, without limitation, liability arising under the
Securities Act of 1933, the 1934 Act, the 1940 Act, and any state or foreign
securities and/or banking laws) or claim arising directly or indirectly (a)
from the fact that Securities are registered in the name of any such nominee,
or (b) from any action or inaction by the Custodian or such sub-custodian (i)
at the request or direction of or in reliance on the advice of the Trust, or
(ii) upon Proper Instructions, or (c) generally, from the performance of its
obligations under this Agreement or any sub-custody agreement with a
sub-custodian appointed pursuant to Section 3.3 above or, in the case of any
such sub-custodian, from the performance of its obligations under such custody
agreement, provided that neither the Custodian nor any such sub-custodian shall
be indemnified and held harmless from and against any such loss, damage, cost,
expense, liability or claim arising from the Custodian's or such
sub-custodian's negligence, bad faith or willful misconduct.
8.2 Indemnity to be Provided. If the Trust requests the Custodian
to take any action with respect to Securities, which may, in the opinion of the
custodian, result in the Custodian or its nominee becoming liable for the
payment of money or incurring liability of some other form, the Custodian shall
not be required to take such action until the Trust
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<PAGE> 16
shall have provided indemnity therefor to the Custodian in an amount and form
satisfactory to the Custodian.
ARTICLE IX
FORCE MAJEURE
Neither the Custodian nor the Trust shall be liable for any failure or
delay in performance of its obligations under this Agreement arising out of or
caused, directly or indirectly, by circumstances beyond its reasonable control,
including, without limitation, acts of God; earthquakes; fires; floods; wars;
civil or military disturbances; sabotage; strikes; epidemics; riots; power
failures; computer failure and any such circumstances beyond its reasonable
control as may cause interruption, loss or malfunction of utility,
transportation, computer (hardware or software) or telephone communication
service; accidents; labor disputes, acts of civil or military authority;
governmental actions; or inability to obtain labor, material, equipment or
transportation; provided, however, that the Custodian in the event of a failure
or delay shall use its best efforts to ameliorate the effects of any such
failure or delay.
ARTICLE X
EFFECTIVE PERIOD; TERMINATION
10.1 Effective Period. This Agreement shall become effective as of
the date first set forth above and shall continue in full force and effect
until terminated as hereinafter provided.
10.2 Termination. Either party hereto may terminate this Agreement
by giving to the other party a notice in writing specifying the date of such
termination, which shall be not less than ninety (90) days after the date of
the giving of such notice. If a successor custodian shall have been appointed
by the Board of Trustees, the Custodian shall, upon receipt of a notice of
acceptance by the successor custodian, on such specified date of termination
(a) deliver directly to the successor custodian all Securities (other than
Securities held in a Book-Entry System or Securities Depository) and cash then
owned by the Trust and held by the Custodian as custodian, and (b) transfer any
Securities held in a Book-Entry System or Securities Depository to an account
of or for the benefit of the Trust at the successor custodian, provided that
the Trust shall have paid to the Custodian all fees, expenses and other amounts
to the payment or reimbursement of which it shall then be entitled. Upon such
delivery and transfer, the Custodian shall be relieved of all obligations under
this Agreement. The Trust may at any time immediately terminate this Agreement
in the event of the appointment of a conservator or receiver for the Custodian
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<PAGE> 17
by regulatory authorities in the State of Ohio or upon the happening of a like
event at the direction of an appropriate regulatory agency or court of
competent jurisdiction.
10.3 Failure to Appoint Successor Custodian. If a successor
custodian is not designated by the Trust on or before the date of termination
specified pursuant to Section 10.1 above, then the Custodian shall have the
right to deliver to a bank or trust company of its own selection, which is (a)
a "Bank" as defined in the 1940 Act, (b) has aggregate capital, surplus and
undivided profits as shown on its then most recent published report of not less
than $25 million, and (c) is doing business in New York, New York, all
Securities, cash and other property held by Custodian under this Agreement and
to transfer to an account of or for the Trust at such bank or trust company all
Securities of the Trust held in a Book-Entry System or Securities Depository.
Upon such delivery and transfer, such bank or trust company shall be the
successor custodian under this Agreement and the Custodian shall be relieved of
all obligations under this Agreement. If, after reasonable inquiry, Custodian
cannot find a successor custodian as contemplated in this Section 10.3, then
Custodian shall have the right to deliver to the Trust all Securities and cash
then owned by the Trust and to transfer any Securities held in a Book-Entry
System or Securities Depository to an account of or for the Trust. Thereafter,
the Trust shall be deemed to be its own custodian with respect to the Trust and
the Custodian shall be relieved of all obligations under this Agreement.
ARTICLE XI
COMPENSATION OF CUSTODIAN
The Custodian shall be entitled to compensation as agreed upon from
time to time by the Trust and the Custodian. The fees and other charges in
effect on the date hereof and applicable to the Funds are set forth in Exhibit
B attached hereto.
ARTICLE XII
LIMITATION OF LIABILITY
The Trust is a business trust organized under ________________________
_____________________and under a Declaration of Trust, to which reference is
hereby made a copy of which is on file at the office of the Secretary of State
of ______________________ as required by law, and to any and all amendments
thereto so filed or hereafter filed. The obligations of the Trust entered
into in the name of the Trust or on behalf thereof by any of the Trustees,
officers, employees or agents are made not individually, but in such
capacities, and are not binding upon any of the Trustees, officers, employees,
agents or shareholders of the Trust or the Funds personally, but bind only the
assets of the Trust, and all persons dealing with any of the Funds of the Trust
must look solely to the assets of the Trust belonging to such Fund for the
enforcement of any claims against the Trust.
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<PAGE> 18
ARTICLE XIII
NOTICES
Unless otherwise specified herein, all demands, notices, instructions,
and other communications to be given hereunder shall be in writing and shall be
sent or delivered to The receipt at the address set forth after its name herein
below:
To the Trus:
_____________________________________
_____________________________________
_____________________________________
Attn: ______________________________
Telephone: (_____) _________________
Facsimile: (_____) _________________
To the Custodia:
The Fifth Third Bank
38 Fountain Square Plaza
Cincinnati, Ohio 45263
Attn: Area Manager - Trust Operations
Telephone: (513) 579-5300
Facsimile: (513) 579-4312
or at such other address as either party shall have provided to the other by
notice given in accordance with this Article XIII. Writing shall include
transmission by or through teletype, facsimile, central processing unit
connection, on-line terminal and magnetic tape.
ARTICLE XIV
MISCELLANEOUS
14.1 Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Ohio.
14.2 References to Custodian. The Trust shall not circulate any
printed matter which contains any reference to Custodian without the prior
written approval of Custodian, excepting printed matter contained in the
prospectus or statement of additional information
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<PAGE> 19
or its registration statement for the Trust and such other printed matter as
merely identifies Custodian as custodian for the Trust. The Trust shall submit
printed matter requiring approval to Custodian in draft form, allowing
sufficient time for review by Custodian and its counsel prior to any deadline
for printing.
14.3 No Waiver. No failure by either party hereto to exercise and
no delay by such party in exercising, any right hereunder shall operate as a
waiver thereof. The exercise by either party hereto of any right hereunder
shall not preclude the exercise of any other right, and the remedies provided
herein are cumulative and not exclusive of any remedies provided at law or in
equity.
14.4 Amendments. This Agreement cannot be changed orally and no
amendment to this Agreement shall be effective unless evidenced by an
instrument in writing executed by the parties hereto.
14.5 Counterparts. This Agreement may be executed in one or more
counterparts, and by the parties hereto on separate counterparts, each of which
shall be deemed an original but all of which together shall constitute but one
and the same instrument.
14.6 Severability. If any provision of this Agreement shall be
invalid, illegal or unenforceable in any respect under any applicable law, the
validity, legality and enforceability of the remaining provisions shall not be
affected or impaired thereby.
14.7 Successors and Assigns. This Agreement shall be binding upon
and shall inure to the benefit of the parties hereto and their respective
successors and assigns; provided, however, that this Agreement shall not be
assignable by either party hereto without the written consent of the other
party hereto.
14.8 Headings. The headings of sections in this Agreement are for
convenience of reference only and shall not affect the meaning or construction
of any provision of this Agreement.
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<PAGE> 20
IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be executed and delivered in its name and on its behalf by its
representatives thereunto duly authorized, all as of the day and year first
above written.
ATTEST: ________________________________
_________________________________ By: ________________________________
Its: ________________________________
ATTEST: THE FIFTH THIRD BANK
_________________________________ By: ________________________________
Tracie Hoffman
Assistant Vice President
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<PAGE> 21
Dated: ____________________, 19______
EXHIBIT A
TO THE CUSTODY AGREEMENT BETWEEN
_________________________________ AND THE FIFTH THIRD BANK
___________________, 19______
<TABLE>
<CAPTION>
Name of Fund Date
------------ ----
<S> <C>
Balanced Fund , 19
- ------------------- -------------------- ------
Aggressive Growth Fund , 19
- ------------------- -------------------- ------
</TABLE>
_______________________________________
By: __________________________________
Its: __________________________________
THE FIFTH THIRD BANK
By: __________________________________
Tracie Hoffman
Assistant Vice President
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<PAGE> 22
Dated: ____________________, 1993
EXHIBIT B
TO THE CUSTODY AGREEMENT BETWEEN
_________________________________ AND THE FIFTH THIRD BANK
____________________, 19______
AUTHORIZED PERSONS
Set forth below are the names and specimen signatures of the persons
authorized by the Trust to Administer each Custody Account.
___________________ BALANCED FUND
Name Signature
---- ---------
- ----------------------------- -----------------------------
- ----------------------------- -----------------------------
- ----------------------------- -----------------------------
- ----------------------------- -----------------------------
- ----------------------------- -----------------------------
___________________ AGGRESSIVE GROWTH FUND
Name Signature
---- ---------
- ----------------------------- -----------------------------
- ----------------------------- -----------------------------
- ----------------------------- -----------------------------
- ----------------------------- -----------------------------
- ----------------------------- -----------------------------
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<PAGE> 23
SIGNATURE RESOLUTION
RESOLVED, That all of the following officers of _____________________________
and any of them, namely the Chairman, President, Vice President, Secretary and
Treasurer, are hereby authorized as signers for the conduct of business for an
on behalf of the Funds with THE FIFTH THIRD BANK:
_______________________ CHAIRMAN _____________________________________
_______________________ PRESIDENT _____________________________________
_______________________ VICE PRESIDENT _____________________________________
_______________________ VICE PRESIDENT _____________________________________
_______________________ VICE PRESIDENT _____________________________________
_______________________ VICE PRESIDENT _____________________________________
_______________________ TREASURER _____________________________________
_______________________ SECRETARY _____________________________________
In addition, the following Assistant Treasurer is authorized to sign on behalf
of the Trust for the purpose of effecting securities transactions:
_______________________ ASSISTANT _____________________________________
TREASURER
The undersigned officers of _________________________ hereby certify that the
foregoing is within the parameters of a Resolution adopted by Trustees of the
Trust in a meeting held __________________, 19______, directing and authorizing
preparation of documents and to do everything necessary to effect the Custody
Agreement between _____________________________ and THE FIFTH THIRD BANK.
By: ______________________________________
Its: ______________________________________
By: ______________________________________
Its: ______________________________________
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<PAGE> 24
EXHIBIT C
TO THE CUSTODY AGREEMENT BETWEEN
_____________________________ AND THE FIFTH THIRD BANK
____________________, 19______
MUTUAL FUND CUSTODY FEE SCHEDULE
BASIC ACCOUNT CHARGE
FUND SIZE:
Less than $50MM $____________________
$50MM - $99MM $____________________
$100MM - $199MM $____________________
$200MM - $349MM $____________________
Greater than $350MM $____________________
TRANSACTION FEES
DTC/FED Eligible Trades $____________________
DTC/FED Ineligible Trades $____________________
Amortized Security Trades $____________________
Repurchase Agreements (purchase and maturity) $____________________
Third Party Repo's (purchase and maturity) $____________________
Physical Commercial Paper Trades
(purchase and maturity) $____________________
Book-Entry Commercial Paper Trades
(purchase and maturity) $____________________
Options, each transaction $____________________
Amortized Security Receipts $____________________
A transaction is a purchase, sale, maturity, redemption, tender, exchange,
dividend reinvestment, deposit or withdrawal of a security (with the exception
of Fifth Third Certificates of Deposit, Commercial Paper & Repo's).
MISCELLANEOUS FEES
Wire Transfers & Check Disbursements $____________________
Depository/Transfer Agent Reject $____________________
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<PAGE> 1
EXHIBIT 10
April 20, 1995
Capstone Fixed Income Series, Inc.
5847 San Felipe, Suite 4100
Houston, Texas 77057
Dear Sirs:
As counsel for Capstone Fixed Income Series, Inc., (the
"Fund"), including its series Capstone Government Income Fund, we are familiar
with the Fund's registration under the Investment Company Act of 1940 and with
the registration statement relating to its Common Shares (the "Shares") under
the Securities Act of 1933 (File No. 2- 28174) (the "Registration Statement").
We also have examined such other corporate records, agreements, documents and
instruments as we deemed appropriate.
Based upon the foregoing, it is our opinion that the Shares
being registered pursuant to Post-Effective Amendment No. 45 to the Fund's
Registration Statement will, when sold at the public offering price and
delivered by the Fund against receipt of the net asset value of the Shares in
accordance with the terms of the Registration Statement and the requirements of
applicable law, have been duly and validly authorized, legally and validly
issued, and fully paid and non-assessable.
We consent to the filing of this opinion in connection with
Post-Effective Amendment No. 45 which is filed pursuant to Section 24(e) under
the Investment Company Act of 1940 on behalf of the Fund with the Securities
and Exchange Commission.
Very truly yours,
Dechert Price & Rhoads
<PAGE> 1
EXHIBIT 11.a.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference made to our firm under the caption "Financial
Highlights" and to the use of our report dated February 9, 1993 on the
financial highlights of Capstone Government Income Fund for the year ended
December 31, 1992, the period from October 1, 1991 to December 31, 1991 and the
year ended September 30, 1991 in Post-Effective Amendment No. 45 to the
Registration Statement (Form N-1A No. 2-28174) of Capstone Fixed Income Series,
Inc.
/s/ERNST & YOUNG LLP
Ernst & Young LLP
April 19, 1995
<PAGE> 1
EXHIBIT 11.a.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the reference to our firm in the Registration Statement (Form
N-1A) and related Statement of Additional Information of Capstone Government
Income Fund, a series of Capstone Fixed Income Series, Inc., and to the
inclusion of our report dated February 3, 1995.
TAIT, WELLER & BAKER
PHILADELPHIA, PENNSYLVANIA
APRIL 10, 1995
<PAGE> 1
EXHIBIT 11.b
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below appoints Edward L. Jaroski as his true and lawful
attorney-in-fact, with full power of substitution and resubstitution, for him
and in his name, place and stead, in any and all capacities, to sign any and
all amendments (including post-effective amendments) to this Registration
Statement, and to file the same, with all exhibits thereto, and other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorney-in-fact full power and authority to do and perform each and
every act and thing requisite and necessary to be done in connection therewith,
as fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorney-in-fact, or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
<TABLE>
<S> <C> <C>
/s/JAMES F. LEARY Director April 28, 1995
- ------------------------------------
James F. Leary
/s/JOHN R. PARKER Director April 28, 1995
- ------------------------------------
John R. Parker
/s/PHILIP C. SMITH Director April 28, 1995
- ------------------------------------
Philip C. Smith
/s/BERNARD J. VAUGHAN Director April 28, 1995
- ------------------------------------
Bernard J. Vaughan
</TABLE>
<PAGE> 1
EXHIBIT 16
CAPSTONE GOVERNMENT INCOME FUND
SCHEDULE FOR COMPUTATION OF YIELD
Yield = 2[(a - b) + 1)6 - 1]
-----
cd
a = dividends and interest earned during the period,
b = expenses accrued for the period (net of
reimbursements),
c = the average daily number of shares outstanding during
the period that were entitled to receive dividends,
and
d = the maximum offering price per share on the last day
of the period.
*****************************
Yield = 2[(274,992.45 - 45,048.39) + 1)6 - 1]
(10,741,621.226)(4.73)
= 5.493% (for 1 month period ending December 31, 1994)
<PAGE> 2
CAPSTONE GOVERNMENT INCOME FUND
SCHEDULE OF COMPUTATION FOR AVERAGE ANNUAL TOTAL RETURN
P (1 + T)n = ERV
P = a hypothetical initial payment of $1,000,
T = the average annual total return,
n = the number of years,
ERV = the ending redeemable value of a hypothetical
$1,000 payment made at the beginning of the
period.
*****************************
The Fund's average annualized total return for the one year period ending
December 31, 1994 is 1.146%.
$1,000 (1 + .01146)1 = ERV
$1,011.46 = ERV
An initial payment of $1,000 invested on 01/01/94 will result in 208.333
shares. Income distribution of $0.125 resulted in 5.506 additional shares
rendering a total of 213.839 shares. On 12/31/94 the net asset value of
Capstone Government Income Fund was $4.73 per share, thereby creating a total
market value of $1,011.46 and yielding an average annual total return of
1.146%.
*****************************
The Fund's average annualized total return for the five year period from January
1, 1990 to December 31, 1994 is 2.652%.
$1,000 (1 + .02652)5 = ERV
$1,139.83 = ERV
An initial payment of $1,000 on 01/01/90 will result in 198.02 shares. Income
distributions of $0.942 resulted in 42.958 additional shares, rendering a total
of 240.978 shares. At 12/31/94 the net asset value of Capstone Government
Income Fund was $4.73 per share, thereby creating a total market value of
$1,139.83 and yielding an average annual total return of 2.652%.
*****************************
The Fund's average annualized total return for the ten year period from January
1, 1985 to December 31, 1994 is 7.083%.
$1,000 (1 + .07083)10 = ERV
$1,982.49 = ERV
An initial payment of $1,000 on 01/01/85 will result in 215.517 shares. Income
distributions of $3.342 resulted in 203.615 additional shares, rendering a
total of 419.132 shares. At 12/31/94 the net asset value of Capstone
Government Income Fund was $4.73 per share, thereby creating a total market
value of $1,982.49 and yielding an average return of 7.083%.
<PAGE> 3
CAPSTONE GOVERNMENT INCOME FUND
SCHEDULE OF COMPUTATION FOR TOTAL RETURN
P (1 + T) = ERV
P = a hypothetical initial payment of $1,000,
T = the total return,
ERV = the ending redeemable value of a hypothetical
$1,000 payment made at the beginning of the
period.
*****************************
The Fund's total return for the one year period ending December 31, 1994 is
1.146%.
$1,000(1 + .01146) = ERV
$1,011.46 = ERV
An initial payment of $1,000 invested on 01/01/94 will result in 208.333
shares. Income distributions of $0.125 resulted in 5.506 additional shares
rendering a total of 213.839 shares. On 12/31/94 the net asset value of
Capstone Government Income Fund was $4.73 per share, thereby creating a total
market value of $1,011.46 and yielding a total return of 1.146%.
*****************************
The Fund's total return for the five year period from January 1, 1990 to
December 31, 1994 is 13.983%.
$1,000(1 + .13983) = ERV
$1,39.83 = ERV
An initial payment of $1,000 on 01/01/90 will result in 198.02 shares. Income
distributions of $0.942 resulted in 42.958 additional shares, rendering a total
of 240.978 shares. At 12/31/94 the net asset value of Capstone Government
Income Fund was $4.73 per share, thereby creating a total market value of
$1,139.83 and yielding a total return of 13.983%.
*****************************
The Fund's total return for the ten year period from January 1, 1985 to
December 31, 1994 is 98.249%.
$1,000 (1 + .98249) = ERV
$1,982.49 = ERV
An initial payment of $1,000 on 01/01/85 will result in 215.517 shares. Income
distributions of $3.342 resulted in 203.615 additional shares, rendering a
total of 419.132 shares. At 12/31/94 the net asset value of Capstone
Government Income Fund was $4.73 per share, thereby creating a total market
value of $1,982.49 and yielding a total return of 98.249%.
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
The Annual Report of Capstone Government Income Fund for the fiscal year Ended
December 31, 1994.
</LEGEND>
<SERIES>
<NUMBER> 1
<NAME> CAPSTONE GOVERNMENT INCOME FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> DEC-31-1994
<INVESTMENTS-AT-COST> 9,046,125
<INVESTMENTS-AT-VALUE> 9,046,760
<RECEIVABLES> 52,457
<ASSETS-OTHER> 24,758
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 9,123,975
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 418,898
<TOTAL-LIABILITIES> 418,898
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 16,138,665
<SHARES-COMMON-STOCK> 1,839,593
<SHARES-COMMON-PRIOR> 7,045,833
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (7,434,223)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 635
<NET-ASSETS> 8,705,077
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 4,526,826
<OTHER-INCOME> 0
<EXPENSES-NET> 777,905
<NET-INVESTMENT-INCOME> 3,748,921
<REALIZED-GAINS-CURRENT> (2,470,055)
<APPREC-INCREASE-CURRENT> 111,566
<NET-CHANGE-FROM-OPS> 1,390,432
<EQUALIZATION> (3,436,857)
<DISTRIBUTIONS-OF-INCOME> (219,989)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 40,230,276
<NUMBER-OF-SHARES-REDEEMED> 45,478,766
<SHARES-REINVESTED> 42,251
<NET-CHANGE-IN-ASSETS> (5,206,239)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (4,964,168)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 357,033
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 777,905
<AVERAGE-NET-ASSETS> 89,258,000
<PER-SHARE-NAV-BEGIN> 4.80
<PER-SHARE-NII> .18
<PER-SHARE-GAIN-APPREC> (.12)
<PER-SHARE-DIVIDEND> (.13)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 4.73
<EXPENSE-RATIO> .87
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
