<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. 47 / X /
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 / X /
Capstone Fixed Income Series, Inc.
on behalf of its series, Capstone Government Income Fund
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(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
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Allan S. Mostoff, Esq., Dechert Price & Rhoads
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1500 K Street, N.W., Suite 500, Washington, DC 20005
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(Name and Address of Agent for Service)
It is proposed that this filing will become effective (check appropriate box)
/ / immediately upon filing pursuant to paragraph (b).
/ / on ________________ pursuant to paragraph (b).
/ / 60 days after filing pursuant to paragraph (a).
/ X / on March 25, 1996 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
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)
Item
Number Form N-1A Heading Caption in Prospectus
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
<PAGE> 3
CAPSTONE GOVERNMENT INCOME FUND
A SERIES OF CAPSTONE FIXED INCOME SERIES, INC.
5847 San Felipe, Suite 4100
Houston, TX 77057
1-800-262-6631
________________, 1996
PROSPECTUS
Capstone Government Income Fund (the "Fund") is the initial of two 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 _______________,
1996, 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 4>
CAPSTONE GOVERNMENT INCOME FUND
INVESTMENT ADVISER: ADMINISTRATOR:
Capstone Asset Management Company Capstone Asset Management Company
5847 San Felipe, Suite 4100 5847 San Felipe, Suite 4100
Houston, Texas 77057 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
1-800-262-6631 Conshohocken, Pennsylvania 19428
TABLE OF CONTENTS
Page
Prospectus Summary. . . . . . . . . . . . . . . . . . . . . . 3
Fund Expenses . . . . . . . . . . . . . . . . . . . . . . . . 5
Financial Highlights. . . . . . . . . . . . . . . . . . . . . 7
Investment Objective and Policies . . . . . . . . . . . . . . 8
Investment Practices. . . . . . . . . . . . . . . . . . . . . 9
Investment Risks. . . . . . . . . . . . . . . . . . . . . . . 12
Investment Restrictions . . . . . . . . . . . . . . . . . . . 12
Performance Information . . . . . . . . . . . . . . . . . . . 12
Management of the Fund . . . . . . . . . . . . . . . . . . . 13
Purchasing Shares . . . . . . . . . . . . . . . . . . . . . . 17
Distributions and Taxes . . . . . . . . . . . . . . . . . . . 18
Redemption and Repurchase of Shares . . . . . . . . . . . . . 20
Determination of Net Asset Value. . . . . . . . . . . . . . . 22
Stockholder Services . . . . . . . . . . . . . . . . . . . . 22
General Information . . . . . . . . . . . . . . . . . . . . . 24
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.
<PAGE> 5
CAPSTONE GOVERNMENT INCOME FUND
PROSPECTUS SUMMARY
Type of Company . . . The Fund is a 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 are incorrect.
(see page 12)
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.
(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)
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
<PAGE> 6
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
$200, 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)
<PAGE> 7
FUND EXPENSES
SHAREHOLDER TRANSACTION EXPENSES
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 _____%
12b-1 Fees* _____%
Other Expenses _____%
Total Fund Operating Expenses _____%
EXAMPLE
1 year 3 years 5 years 10 years
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: $___ $___ $___ $___
____________
* 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 November 30, 1995. The
management and administration fee information contained in the table is based on
the maximum asset-based fees. There
<PAGE> 8
were no deductions for expense reimbursements or waivers by the Fund's Adviser
or Administrator during the last fiscal year. See "Management of the Fund" for
more complete descriptions of the fees paid to the Adviser and the
Administrator.
THE EXAMPLE WHICH IMMEDIATELY FOLLOWS THE TABLE USES THE "TOTAL FUND
OPERATING EXPENSES" FIGURE ABOVE AND ASSUMES IT WILL REMAIN CONSTANT WITH 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.
<PAGE> 9
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 November 30, 1995 and
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
1-800-262-6631.
<TABLE>
<CAPTION>
PERIOD
YEAR FROM
ENDED OCT. 1,
NOV. YEAR ENDED 1991 TO
30, DECEMBER 31, DEC. 31, YEAR ENDED SEPTEMBER 30,
----- ------------------ -------- -------------------------------------
1995(1) 1994 1993 1992 1991(2) 1991(3) 1990 1989 1988 1987
------ ---- ---- ---- ------ ------ ---- ---- ---- ----
<S> <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
----- ----- ----- ----- ----- ----- ----- ------ -----
Income from investment
operations:
Net investment income . . . . .18 .17 .23 .06 .25 .44 .45 .44 .48
Net realized and
unrealized gain (loss). . . . (.12) (.01) (.06) .06 (.08) (.40) (.11) .09 (.07)
---- ---- ---- ----- ----- ----- ----- ------ -----
Total from investment
operations. . . . . . . . . . .06 .16 .17 .12 .17 .04 .34 .53 .41
---- ---- ---- ----- ----- ----- ----- ------ -----
Less distributions from net
investment income . . . . . . (.13) (.10) (.10) (.18) (.11) (.46) (.47) (.51) (.47)
---- ---- ---- ---- ----- ----- ----- ------ -----
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
===== ===== ===== ===== ===== ===== ===== ====== =====
Total Return. . . . . . . . . . 1.13% 3.32% 3.55% 2.49% 3.63% .73% 6.73% 10.73% 7.93%
===== ===== ===== ===== ===== ===== ===== ====== =====
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%
Ratio of interest expenses
to average net assets . . . . .00% .00% .04% .10% .22% .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%
===== ===== ==== ===== ===== ===== ===== ====== ====
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%
Portfolio turnover. . . . . . . 285.13% 596.36% 633.41% 129.05% 753.62% 82.00% 69.89% 100.48% 102.11%
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
</TABLE>
______________
(1) Fiscal year end was changed from December 31 to November 30.
(2) Selected per share data and ratios including total return have not been
annualized.
(3) Effective January 1991, the investment objective and investment adviser were
changed.
<PAGE> 10
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 transact
business that will cause the Fund's weighted-average maturity to be in excess of
two years on the last business day of each calendar year. Accordingly, the
Adviser expects 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 November 30, 1995
and December 31, 1994 and 1993 was ____%, 285% and 596%, 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).
<PAGE> 11
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 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
<PAGE> 12
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 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 verified in appropriate cases. An OTC
option transaction will be entered into by the Fund only with a securities
dealer meeting criteria established by the Fund.
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
<PAGE> 13
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.
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.
<PAGE> 14
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.
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
<PAGE> 15
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 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 federally 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
<PAGE> 16
by its Board of Directors.
INVESTMENT ADVISER
Capstone Asset Management Company 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 Adviser,
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. The
Adviser serves as investment adviser and/or administrator to five other mutual
funds: Capstone Growth Fund, Inc., Capstone Intermediate Government 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 accounts, corporations and individuals. Assets under management
are approximately $1.4 billion.
The Fund is managed primarily by Howard S. Potter, Managing Director of
Capstone Asset Management Company. 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. In 1991, Mr. Potter
formed New Castle Advisers, Inc. ("NCA"). As the president of this registered
investment advisory firm, Mr. Potter served as the portfolio manager of several
mutual funds, and since 1992 he has served as portfolio manager of the Fund.
Mr. Potter received a B.A. degree from the University of Wisconsin and a M.A.
degree from Northwestern University.
Since 1992, NCA has served as the Fund's subadviser, and Mr. Potter as the
Fund's portfolio manager. On January 1, 1996, Capstone Financial Services,
Inc., the parent of the Adviser, acquired a majority interest in NCA, and NCA
simultaneously resigned as subadviser to the Fund. Mr. Potter continues to act
as the Fund's portfolio manager through his position as Managing Director of the
Adviser. The Fund therefore no longer has a separate subadviser. This change
has had no effect on advisory fees paid by the Fund, since fees to NCA were
previously paid by the Adviser out of its fees from the Fund. The Adviser now
retains the entire fee.
Pursuant to the terms of the Advisory Agreement, the Adviser has 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 is permitted to consider
sales of Fund shares as a factor in selecting broker-dealers to execute
portfolio transactions, subject to best execution. For these services the Fund
pays the Adviser 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. For the fiscal year ended November 30, 1995
the Fund paid advisory fees to the Adviser equal to 0.40% of the Fund's average
daily net assets out of which the Adviser paid fees of $______ to NCA, which was
the Fund's subadviser during that year.
<PAGE> 17
The Advisory Agreement provides that the Adviser 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 in the performance of their obligations and duties, or by reason of
their reckless disregard of their obligations and duties under the Advisory
Agreement.
The Advisory Agreement will remain in effect until May 7, 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 interested persons of any such party. The Advisory Agreement will
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.
ADMINISTRATOR
Pursuant to a separate Administration Agreement, the Adviser also provides
administrative services for the Fund, 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. For these administrative
services, the Fund pays 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 7, 1995,
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
<PAGE> 18
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 November 30, 1995, the effective
rate of servicing fees paid to service organizations other than Capstone Asset
Planning Company was ____% of the Fund's average net assets.
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 May 7, 1995.
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.
EXPENSES
The Fund pays all expenses incurred in the operation of the Fund other than
those assumed by the Adviser under the Advisory 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; 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; administration fees; 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 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 and
administration fees will be reduced ratably (but not below zero) 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 November 30, 1995 were ____%.
<PAGE> 19
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, 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 $200, 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 the Adviser 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.
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
<PAGE> 20
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) 845-2340. 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.
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.
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
<PAGE> 21
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.
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
<PAGE> 22
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.
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 1-800-845-2340,
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
<PAGE> 23
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.
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 1-800-845-2340. 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 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
<PAGE> 24
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 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 atamortized 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:
<PAGE> 25
o 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
o 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 at a price based on their
respective net asset values with no sales or administrative charge. Any
exchange must meet applicable minimum investment and other requirements for the
Capstone Fund (or class of such Fund) into which the exchange is requested. 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.
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, at the discretion of the Adviser, can be
limited by the Fund's refusal to accept further purchase and/or exchange orders
from the investor. Although the Adviser 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,
<PAGE> 26
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.
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.
There is one other series of shares outstanding, Capstone Intermediate
Government Fund, and the Corporation may create additional series in the future.
The Corporation has an authorized capitalization of two hundred million shares
of $.001 par value common stock. Each existing and future series will be
treated as a separate mutual fund with its own investment objective and
policies. 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
<PAGE> 27
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.
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.
ANNUAL MEETINGS
Neither the Corporation nor the Fund is 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.
<PAGE> 28
CAPSTONE INTERMEDIATE GOVERNMENT FUND
A Series of Capstone Fixed Income Series, Inc.
5847 San Felipe, Suite 4100
Houston, TX 77057
1-800-262-6631
__________________, 1996
PROSPECTUS
Capstone Intermediate Government Fund (the "Fund") is a newly organized
series of Capstone Fixed Income Series, Inc. (the "Corporation"), an open-end
diversified management investment company. The investment objectives of the
Fund are to earn a high level of total return and to moderate share price
volatility. The Fund seeks to achieve its objective of seeking high total
return by investing indebt obligations that have remaining maturities of seven
years or less. Its investments will be primarily in securities that are issued
or guaranteed by the U.S. Government, its agencies or instrumentalities. It may
also invest in securities of highly rated U. S. corporations and banks. In
pursuing its objectives to moderate share price volatility and to increase total
return, the Fund may purchase and sell futures contracts and options on U.S.
Government securities. 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 _______________,
1996 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> 29
CAPSTONE INTERMEDIATE GOVERNMENT FUND
Investment Adviser: Shareholder Servicing Agent:
Capstone Asset Management Company Fund/Plan Services, Inc.
5847 San Felipe, Suite 4100 2 W. Elm Street
Suite 4100 P.O. Box 874
Houston, Texas 77057 Conshohocken, Pennsylvania 19428
Distributor:
Capstone Asset Planning Company
5847 San Felipe, Suite 4100
Houston, Texas 77057
TABLE OF CONTENTS
Page
Prospectus Summary. . . . . . . . . . . . . . . . . . . . . . 3
Fund Expenses . . . . . . . . . . . . . . . . . . . . . . . . 4
Investment Objective and Policies . . . . . . . . . . . . . . 5
Investment Practices. . . . . . . . . . . . . . . . . . . . . 6
Investment Risks. . . . . . . . . . . . . . . . . . . . . . . 9
Investment Restrictions . . . . . . . . . . . . . . . . . . . 10
Performance Information . . . . . . . . . . . . . . . . . . . 10
Management of the Fund . . . . . . . . . . . . . . . . . . . 11
Purchasing Shares . . . . . . . . . . . . . . . . . . . . . . 14
Distributions and Taxes . . . . . . . . . . . . . . . . . . . 15
Redemption and Repurchase of Shares . . . . . . . . . . . . . 17
Determination of Net Asset Value. . . . . . . . . . . . . . . 19
Stockholder Services . . . . . . . . . . . . . . . . . . . . 20
General Information . . . . . . . . . . . . . . . . . . . . . 22
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.
<PAGE> 30
CAPSTONE INTERMEDIATE GOVERNMENT FUND
PROSPECTUS SUMMARY
Type of Company . . . . . The Fund is a newly organized series of Capstone Fixed
Income Series, Inc., an open-end diversified
management investment company organized as a Maryland
series company. (see page 22)
Investment Objective. . . The Fund's investment objectives are to earn a high
level of total return and to moderate share price
volatility. (see page 5)
Investment Policies . . . The Fund will invest in debt obligations that have
remaining maturities of seven years or less. Under
normal market conditions, at least 65% of its assets
will be invested in securities issued or guaranteed by
the U.S. Government, its agencies or
instrumentalities. The Fund may also invest in
securities issued by highly rated corporations and
banks and may buy and sell futures contracts and
options on U.S. Treasury securities and covered
options on U.S. Government securities. (see page 5)
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 futures contracts and options transactions if
forecasts of the Adviser are incorrect. (see page 9)
Investment Adviser . . . Capstone Asset Management Company (the "Adviser") is
the Fund's investment adviser and is paid a monthly
fee equal to an annual rate of 0.50% of the Fund's
average daily net assets. The Adviser provides
advisory and/or administrative services to the other
mutual funds in the Capstone Group. (see page 11)
Dividends and
Distributions . . . . . The Fund pays dividends from net investment income at
least annually and distributes capital gains at least
annually. (see page 15)
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 14)
Minimum Purchase. . . . . The minimum purchase required for initial investment
is $200, except for continuous investment plans, and
there is no minimum for subsequent investments.
Certain waivers are available. (see page 14)
Redemption . . . . . . . Shares of the Fund can be redeemed at net asset value,
without charge. (see page 17)
<PAGE> 31
FUND EXPENSES
Shareholder Transaction Expenses
Maximum Sales Load Imposed on Purchases (as a percentage of offering price) 0%
Maximum Sales Load Imposed on Reinvested Dividends (as a percentage of
offering price) 0%
Deferred Sales Load (as a percentage of original purchase price or
redemption proceeds, as applicable) 0%
Redemption Fees (as a percentage of amount redeemed, if applicable) 0%
Exchange Fee 0%
Estimated Annual Fund Operating Expenses
(as a percentage of average net assets)
Management and Administration Fees .45%
12b-1 Fees* .25%
Other Expenses .13%
Total Estimated Fund Operating Expenses .83%
EXAMPLE
1 year 3 years
----- -------
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: $8 $26
____________
* 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. The information under the heading "Estimated Annual Fund
Operating Expenses" is based on projected expenses the Fund will incur during
its first year of operation and assumes the average net assets of the Fund to be
$100 million. The management and administration fee information contained in
the table is based on the maximum asset-based fees. See "Management of the
Fund" for more complete descriptions of the fees paid to the Adviser.
The example which immediately follows the table should not be considered a
representation of
<PAGE> 32
past or future expenses or performance. Actual Fund expenses may be greater or
lesser than those shown in the example or in the table.
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objectives are to earn a high level of total return
and to moderate share price volatility. The Fund's total return would include
net realized and unrealized capital gains and net investment income. The Fund
seeks to achieve its objectives by investing in debt obligations that have
remaining maturities of seven years or less. Additionally, under normal market
conditions, at least 65% of its total assets will be invested in securities that
are issued or guaranteed by the U.S. Government, its agencies or
instrumentalities. The Fund may also invest in securities of U. S. corporations
and banks rated A or better by Moody's Investor Services, Inc. ("Moody's"), or
Standard & Poors Corporation ("S&P" ) and may engage in certain income
enhancement and hedging strategies. The Fund's investment objectives are
fundamental policies 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 objectives will be achieved.
By holding primarily U.S. Government and highly rated corporate and bank
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 and hedging strategies detailed below, including
the purchase and sale of futures contracts and covered put and call options
writing, 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, corporate or bank 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 seven years remaining to maturity, nor will the Adviser transact
business that will create a weighted-average maturity of the Fund to be in
excess of four years. Accordingly, the Adviser expects that the Fund's daily
net asset value will be limited in changes to those not exceeding the price
sensitivity of five-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.
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).
INVESTMENT PRACTICES
The significant investments and investment strategies employed by the Fund,
including related
<PAGE> 33
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 seven 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.
U.S. Corporate Securities. The Fund may invest up to 35% of its portfolio
in debt instruments issued by U.S. corporations and banks rated A or better by
Moodys or S&P. The Fund may not at any time hold securities of one corporate or
bank issuer in excess of 5% of its portfolio. This investment restriction does
not apply to securities issued by the U. S. Treasury or Government agencies.
Corporate and bank issues purchased by the Fund may include fixed coupon,
callable, asset-backed, and floating-rate securities, but does not include
convertible securities.
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
Fundbuys 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 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
<PAGE> 34
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 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 75% of its 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 50% of the Fund's total assets.
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 verified in appropriate cases. An OTC
option transaction will be entered into by the Fund only with a securities
dealer meeting criteria established by the Fund.
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
<PAGE> 35
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.
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. However, 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 35% 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.
<PAGE> 36
Interest Rate Futures Contracts and Options on Interest Rate Futures
Contracts. The Fund may invest in interest rate futures contracts and options
on interest rate futures contracts as a substitute for a comparable market
position and to hedge against adverse movements in interest rates. To the extent
that these instruments are utilized, the Fund will be subject to the investment
risks of having purchased or sold the securities underlying the contracts. The
Fund may purchase call options on interest rate futures contracts to hedge
against declines in interest rates and may purchase puts on interest rate
futures contracts to hedge its portfolio securities against the risk of rising
interest rates.
The Fund may also sell options on interest rate futures contracts as part
of closing purchase transactions to terminate its options positions. No
assurance can be given that such closing transactions can be effected or that
there will be a correlation between price movements in the options on interest
rate futures and price movements in the Fund's portfolio securities which are
the subject of the hedge. Also, the Fund's purchase of such options will be
based upon predictions as to anticipated interest rate changes, which may prove
to be inaccurate.
INVESTMENT RISKS
The Fund is designed as a means of investing in intermediate-term U.S.
Government, corporate and bank 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.
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
seven year maximum, and four-year weighted-average maturities. 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.
The Fund attempts to moderate share price fluctuations through its
transactions in options and futures. These transactions require the Fund to
segregate assets to cover its obligations under the contracts and also result in
brokerage costs. Further, these transactions may not have their intended effect
if the Adviser's expectations as to market conditions are incorrect, in which
case losses to the Fund may be greater than if these techniques had not been
used. Moreover, if the Fund wishes to close out a futures or option
transaction, there is no assurance that an appropriate closing transaction will
be available.
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.
<PAGE> 37
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 of 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 Treasury Indices and the
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 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
<PAGE> 38
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'sperformance if such securities are held in its
portfolio. Third, the underlying assets of a CD are federallyinsured 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
Capstone Asset Management Company ("CAMCO") serves as the investment
adviser (the "Adviser") to the Fund pursuant to an investment advisory agreement
("Advisory Agreement") dated _____________________ 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 Government Income
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 accounts, corporations and individuals. Assets under management
are approximately $1.3 billion.
The Fund is managed primarily by Howard S. Potter, Managing Director of
Capstone Asset Management Company. 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 anddebt options. He moved to Oppenheimer & Company in 1984 to
spearhead their Risk ManagementGroup, and from there joined James Money
Management in 1988 as Chief Investment Officer for all yield enhancement
projects and portfolio manager of several mutual funds. In 1991, Mr. Potter
formed New Castle Advisers, Inc. As the president of this registered investment
advisory firm, Mr. Potter served
<PAGE> 39
as the portfolio manager of several mutual funds, and since 1992 he has served
as portfolio manager of Capstone Government Income Fund. Capstone Financial
Services, Inc., the parent of the Fund's adviser, acquired a majority interest
in New Castle Advisers, Inc. in January 1996. 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, the Adviser has 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, (3) place orders to purchase and sell
securities for the Fund, subject to the supervision of the Board of Directors
and (4)provide administrative services for the Fund. In accordance with the
Fund's policy of allocating portfoliobrokerage described in the Statement of
Additional Information, the Adviser is permitted to consider sales of Fund
shares as a factor in selecting broker-dealers to execute portfolio
transactions, subject tobest execution. For these services the Fund pays CAMCO
a fee computed daily and payable monthly atthe annual rate of 0.40% of the first
$450 million of the Fund's average daily net assets and ___% of such assets over
$450 million.
The Advisory Agreement provides that the Adviser 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 agreement relates except a loss
resulting from willful misfeasance, bad faith or gross negligence on the part of
the Adviser in the performance of its obligations and duties, or by reason of
its reckless disregard of its obligations and duties under the Advisory
Agreement.
The Advisory Agreement will remain in effect until ____________________,
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 interested persons of such party. The Advisory Agreement will
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 Adviser reserves the right at its own discretion to waive all or part
of its advisory fees at any time. If such action is elected by the Adviser, it
will be done so under the appropriate rules and regulations as they relate to
such matters and appropriately disclosed in all performance and marketing
literature.
Distributor
Pursuant to a Distribution Agreement with the Fund dated _________________,
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
<PAGE> 40
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 bycustomers 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 inadvertising, 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 0.25% 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 0.25% 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.
The Plan was approved by a majority of the Fund's 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") on
November 13, 1995. The Plan may be continued from year to year, provided that
such continuance is approved at least annually by a vote of a majority of the
Board ofDirectors, including a majority of the Plan Directors.
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.
Expenses
The Fund pays all expenses incurred in the operation of the Fund other than
those assumed by the Adviser under the Advisory Agreement. 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; 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-
ecurring expenses and other expenses properly payable by the Fund.
<PAGE> 41
The Fund's expenses are accrued daily and are deducted from its total
income before dividends are paid. Under the Advisory Agreement, if the Fund's
ordinary expenses for any fiscal year (including advisory 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 fees will be reduced ratably (but not below zero) by the Adviser
until the Fund can operate within the expense limitation discussed above.
PURCHASING SHARES
Capstone Asset Planning Company (the "Distributor"), located at 5847 San
Felipe, Suite 4100, 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 Corporation are also officers
of theAdviser, Distributor and their parent company, 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 $200, except for continuous
investment plans which have no minimum, and there is no minimum for subsequent
investments. The minimum purchase requirement is waived for employees of CAMCO
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 asales charge, and will be credited to a stockholder's account at
the net asset value next computed after anorder 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.
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.
<PAGE> 42
Purchases Through the Distributor
An account may be opened by mailing a check or other negotiable bank draft
(payable to Capstone Intermediate Government Fund) together with the completed
Investment Application Form included with this Prospectus to the Fund's Transfer
Agent: Capstone Intermediate Government 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) 845-2340. 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.
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.
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
Intermediate Government 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 Intermediate Government 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-
erm capital gains) to
<PAGE> 43
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.
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.
<PAGE> 44
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.
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
<PAGE> 45
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 Intermediate Government 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.
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 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
<PAGE> 46
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 received between such
computation and the preceding computation.
The value of the Fund's portfolio securities and other assets is based on
market values determined by procedures established by the Corporation's Board of
Directors. Securities listed on a national exchange or designated as national
market system securities are valued at the last sale price or, if there has been
no sale that day, at the last bid price. 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).
<PAGE> 47
STOCKHOLDER SERVICES
Capstone Intermediate Government 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:
o 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
o 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 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, at the discretion of the Adviser, can be
limited by the Fund's refusal to accept further purchase and/or exchange orders
from the investor. Although the Adviser 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
<PAGE> 48
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.
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.
<PAGE> 49
GENERAL INFORMATION
The Fund is a 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. The Corporation,
which was established under Maryland law on May 11, 1992, has an authorized
capitalization of two hundred million shares of $.001 par value common stock.
There is one other series of shares outstanding, Capstone Government Income
Fund. 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.
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 (i) 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.
Annual Meetings
Neither the Corporation nor the Fund is 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.
<PAGE> 50
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)
Item Caption in Statement of
Number Form N-1A Heading Additional Information
- ------ ----------------- -----------------------
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 Control Persons and Principal
Holders of Securities Holders of Securities
16. Investment Advisory and Other Investment Advisory Agreement;
Services Administration Agreement; Other
Information
17. Brokerage Allocation Portfolio Transactions and
Brokerage
18. Capital Stock and Other Securities Inapplicable
19. Purchase, Redemption and Pricing Determination of Net Asset Value;
of Securities Being Offered How to Buy and Redeem Shares
20. Tax Status Taxes
21. Underwriter Distributor
22. Calculation of Performance Data Performance Information
23. Financial Statements Financial Statements
<PAGE> 51
CAPSTONE GOVERNMENT INCOME FUND
A SERIES OF CAPSTONE FIXED INCOME SERIES, INC.
STATEMENT OF ADDITIONAL INFORMATION
________________, 1996
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 ____________
____, 1996. 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
Page
General Information . . . . . . . . . . . . . . . . . . . . . . . . 2
Investment Restrictions . . . . . . . . . . . . . . . . . . . . . . 2
Risk Factors. . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Performance Information . . . . . . . . . . . . . . . . . . . . . . 7
Directors and Executive Officers. . . . . . . . . . . . . . . . . . 8
Investment Advisory Agreement . . . . . . . . . . . . . . . . . . . 11
Administration Agreement. . . . . . . . . . . . . . . . . . . . . . 12
Distributor . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Portfolio Transactions and Brokerage. . . . . . . . . . . . . . . . 15
Determination of Net Asset Value. . . . . . . . . . . . . . . . . . 16
How to Buy and Redeem Shares. . . . . . . . . . . . . . . . . . . . 16
Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Control Persons and Principal Holders of Securities . . . . . . . . 20
Other Information . . . . . . . . . . . . . . . . . . . . . . . . . 21
Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . 22
<PAGE> 52
GENERAL INFORMATION
Capstone Government Income Fund ("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
Corporation has one other series, Capstone Intermediate Government Fund, and may
create additional series in the future. Each existing and future series will be
treated as a separate mutual fund with its own investment objective and
policies.
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;
<PAGE> 53
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;
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
<PAGE> 54
securities dealers meeting criteria established by the Fund's Board of
Directors that give the Fund an absolute right to repurchase (a)
according to a "repurchase formula" or (b) at a price determined from
independent sources by the Adviser 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 and the Adviser 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 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
<PAGE> 55
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
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 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 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
<PAGE> 56
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.
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. An over-the-counter option transaction
will be entered into by the Fund only with a securities dealer meeting criteria
established by the Fund's Board of Directors that gives the Fund an absolute
right to repurchase the option on demand by the Fund at a price (a) based on an
agreed formula or (b) determined from independent sources and agreed to by the
Adviser. Such an OTC option will not be subject to the Fund's 10% limit on
investments in illiquid securities.
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.
<PAGE> 57
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:
YIELD = 2[(a-b + 1)6-1]
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 November 30, 1995 the Fund's yield was ______%.
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. 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:
P (1 + T)n= 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 November 30, 1995 the Fund's average
annual total return was ______%, ______% and ______%, 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 November 30, 1995 the Fund's total return was ______%, ______% and
______%, 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
<PAGE> 58
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 federally 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.
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.
______________
* Director who is an interested person as defined in the Investment Company
Act of 1940 because of his relationship to the Adviser and Distributor.
<PAGE> 59
JAMES F. LEARY, Director. c/o Search Capital Group, Inc., 700 N. Pearl
Street, Suite 400, L.B. 401, Dallas, Texas 75201-2809. 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 Advisors, L.P., 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); The Flagship Group, Inc. (vertical market
microcomputer software); Marketing Mercadeo International (public
relations and marketing consultants); MaxServ, Inc. (appliance repair
database systems); MESBIC Ventures, Inc. (minority enterprise small
business investment company); OpenConnect Systems, Inc. (computer
networking hardware and software); PhaseOut of America, Inc. (smoking
cessation products); and Search Capital Group, Inc.(financial services).
JOHN R. PARKER, Director. P.O. Box 42, Woodbury, Vermont 05681. 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.
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. Managing Director of Capstone Asset Management Company
(since 1996); formerly President of New Castle Advisers, Inc. (1991-1995)
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
<PAGE> 60
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 $250 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 November 30, 1995, the Fund paid or accrued for the account of the
directors and officers, as a group for services in all capacities, a total of
$______.
The following table represents the fees paid during the 1995 calendar year
to the directors of the Fund and the total compensation each director received
during that period from the Capstone Fund complex.
<PAGE> 61
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)
John R. Parker, Director _____ __ __ _____(1)
Philip C. Smith, Director _____ __ __ _____(1)(2)(3)
Bernard J. Vaughan, Director _____ __ __ _____(1)(2)
____________
* Directors do not receive any deferred compensation.
(1) Director of Capstone Fixed Income Series, Inc. and Capstone Growth Fund,
Inc.
(2) Trustee of Capstone International Series Trust.
(3) Director of Medical Research Investment Fund, Inc.
</TABLE>
INVESTMENT ADVISORY AGREEMENT
Capstone Asset Management Company 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. The Adviser,
located at 5847 San Felipe, Suite 4100, Houston, Texas 77057 is a wholly-owned
subsidiary of Capstone Financial Services, Inc. Subadvisory services were
provided to the Fund from February 1992 to January 1996 by New Castle Advisers,
Inc. ("NCA"), pursuant to a Subadvisory Agreement.
In January 1996, Capstone Financial Services, Inc., the parent of the
Adviser, acquired a majority interest in NCA and NCA resigned as subadviser to
the Fund. All advisory services to the Fund are now provided by the Adviser.
Howard Potter, formerly president of NCA and now managing director of Capstone
Asset Management Company, continues to provide portfolio management services
to the Fund.
Pursuant to the terms of the Advisory Agreement, the Adviser has 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. For these services the Fund pays the Adviser 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.
Advisory fees paid to the Adviser during the fiscal year ended November 30, 1995
totaled $_______.
<PAGE> 62
The Adviser received advisory fees from the Fund totaling $357,033 during
the fiscal year ended December 31, 1994, of which $267,775 was paid to NCA.
During the fiscal year ended December 31, 1993, the Adviser received advisory
fees from the Fund totaling $303,978, of which $227,984 was paid to NCA.
The annual fees of the Adviser 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 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 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.
DURATION AND TERMINATION
Unless terminated earlier as described below, the current Advisory
Agreement between the Fund and the Adviser will remain in effect until May 7,
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 interested persons of any such party. The Advisory
Agreement will 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.
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, 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
<PAGE> 63
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 and Administrator under the Advisory 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; 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.
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 7, 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
<PAGE> 64
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.
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 May 7,
1995.
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:
FISCAL YEAR TOTAL 12B-1 AMOUNT RETAINED AMOUNT PAID TO OTHER
ENDED FEES PAID BY CAPCO SERVICE ORGANIZATIONS
11/95 $_______ $______ $_______
12/94 177,501 33,902 143,599
12/93 151,989 39,683 112,306
<PAGE> 65
PORTFOLIO TRANSACTIONS AND BROKERAGE
Subject to the policies established by the Corporation's Board of
Directors, the Adviser is 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
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 considers 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 or the Adviser. From time to time, the
Adviser effects 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 generally seeks
reasonably competitive commission rates for transactions they place on behalf of
the Fund, although the Fund does not necessarily pay the lowest commission
available. For non-principal transactions the Adviser is 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 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
overall responsibilities to the Fund and other clients of the Adviser. Such
research services must provide lawful and appropriate assistance to the Adviser
in the performance of its 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 under the
Advisory Agreement. The expenses of the Adviser will not necessarily be reduced
as a result of the receipt of such supplemental information. This information
may be useful to the Adviser in providing services to clients other than the
Fund, and not all such information is used by the Adviser in connection with the
Fund. Conversely, such information provided to the Adviser by brokers and
dealers through whom other clients of the Adviser effect securities transactions
may be useful to the Adviser 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
<PAGE> 66
accounts managed by the Adviser, 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 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 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
(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
<PAGE> 67
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 $200, 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.
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
<PAGE> 68
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.
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
<PAGE> 69
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 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.
<PAGE> 70
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 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 ______________________:
<PAGE> 71
REGISTRATION PERCENT OWNED
------------ -------------
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 financial statements.
LEGAL COUNSEL. Dechert Price & Rhoads, 1500 K Street, N.W., Suite 500,
Washington, DC 20005, is legal counsel to the Fund.
<PAGE> 72
CAPSTONE INTERMEDIATE GOVERNMENT FUND
A Series of Capstone Fixed Income Series, Inc.
STATEMENT OF ADDITIONAL INFORMATION
______________________, 1996
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 ____________
_____, 1996. 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
Page
General Information . . . . . . . . . . . . . . . . . . . . . . . . 2
Investment Restrictions . . . . . . . . . . . . . . . . . . . . . . 2
Investment Policies and Risk Factors. . . . . . . . . . . . . . . . 4
Performance Information . . . . . . . . . . . . . . . . . . . . . . 8
Directors and Executive Officers. . . . . . . . . . . . . . . . . . 10
Investment Advisory Agreement . . . . . . . . . . . . . . . . . . . 12
Distributor . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Portfolio Transactions and Brokerage. . . . . . . . . . . . . . . . 15
Determination of Net Asset Value. . . . . . . . . . . . . . . . . . 16
How to Buy and Redeem Shares. . . . . . . . . . . . . . . . . . . . 17
Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Control Persons and Principal Holders of Securities . . . . . . . . 21
Other Information . . . . . . . . . . . . . . . . . . . . . . . . . 21
<PAGE> 73
GENERAL INFORMATION
Capstone Intermediate Government Fund (the "Fund") is a newly organized
series of Capstone Fixed Income Series, Inc. (the "Corporation"). The
Corporation 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. On May 11, 1992, it was reorganized as a
Maryland series company (see "General Information" in the Prospectus).
The Fund is a member of a group of mutual funds (the "Capstone Group")
sponsored by Capstone Asset Management Company which provides advisory 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;
<PAGE> 74
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 securities
dealers meeting criteria established by the Fund's Board of Directors
that give the Fund an absolute right to repurchase (a) according to a
"repurchase formula" or (b) at a price determined from independent
sources by the Adviser will not be considered securities that are not
readily marketable;
<PAGE> 75
5. purchase or retain securities of any issuer if the officers or
directors of the Fund, the Adviser 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 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.
INVESTMENT POLICIES AND 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
<PAGE> 76
agreement, realization upon the collateral by the Fund may be delayed or
limited. In an attempt to minimize these risks, the Adviser will consider and
monitor the creditworthiness of parties to repurchase agreements.
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.
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 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 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.
<PAGE> 77
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.
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. An OTC option transaction will be entered
into by the Fund only with a securities dealer meeting criteria established by
the Fund's Board of Directors that gives the Fund an absolute right to
repurchase the option on demand by the Fund at a price (a) based on an agreed
formula or (b) determined from independent sources and agreed to by the Adviser.
Such an OTC option will not be subject to the Fund's 10% limit on investments in
illiquid securities.
Futures and Related Options
Interest Rate Futures Contracts. The Fund may purchase and sell interest
rate futures contracts ("futures contracts") as a hedge against changes in
interest rates. A futures contract is an agreement between two parties to buy
and sell a security for a set price on a future date. Futures contracts are
traded on designated "contracts markets" which, through their clearing
corporations,guarantee performance of the contracts. Currently, there are
futures contracts based on securities such as
<PAGE> 78
long-term U.S. Treasury bonds, U.S. Treasury notes, GNMA Certificates and three-
onth U.S. Treasury bills. For municipal securities, there is the Bond Buyer
Municipal Bond Index.
Generally, if market interest rates increase, the value of outstanding debt
securities declines (and vice versa). Entering into a futures contract for the
sale of securities has an effect similar to the actual sale of securities,
although sale of the futures contract might be accomplished more easily and
quickly. For example, if the Fund holds long-term U.S. Government securities
and the Adviser anticipates a rise in long-term interest rates, the Fund could,
in lieu of disposing of its portfolio securities, enter into futures contracts
for the sale of similar long-term securities. If rates increased and the value
of the Fund's portfolio securities declined, the value of the Fund's futures
contracts would increase, thereby protecting the Fund by preventing net asset
value from declining as much as it otherwise would have. Similarly, entering
into futures contracts for the purchase of securities has an effect similar to
actual purchase of the underlying securities, but permits the continued holding
of securities other than the underlying securities. For example, if the Adviser
expects long-term interest rates to decline, the Fund might enter into futures
contracts for the purchase of long-term securities, so that it could gain rapid
market exposure that may offset anticipated increases in the cost of securities
it intends to purchase, while continuing to hold higher-yielding short-term
securities or waiting for the long-term market to stabilize.
Options on Futures Contracts. The Fund may purchase and write put and call
options on futures contracts that are traded on a U.S. exchange or board of
trade and enter into related closing transactions to attempt to gain additional
protection against the effects of interest rate, currency or equity market
fluctuations. There can be no assurance that such closing transactions will be
available at all times. In return for the premium paid, such an option gives
the purchaser the right to assume a position in a futures contract at any time
during the option period for a specified exercise price.
The Fund may purchase put options on futures contracts in lieu of, and for
the same purpose as, the sale of a futures contract. It also may purchase such
put options in order to hedge a long position in the underlying futures
contract.
The purchase of call options on futures contracts is intended to serve the
same purpose as the actual purchase of the futures contracts. The Fund may
purchase call options on futures contracts in anticipation of a market advance
when it is not fully invested.
The Fund may write a call option on a futures contract in order to hedge
against a decline in the prices of the index or securities underlying the
futures contracts. If the price of the futures contract at expiration is below
the exercise price, the Fund would retrain the option premium, which would
offset, in part, any decline in the value of its portfolio securities.
The writing of a put option on a futures contract is similar to the
purchase of the futures contracts, except that, if market price declines, the
Fund would pay more than the market price for the underlying securities or index
units. The net cost to that Fund would be reduced, however, by the premium
received on the sale of the put, less any transaction costs.
Risks of Futures and Options Investments. The Fund will incur brokerage
fees in connection with its futures and options transactions, and it will be
required to segregate funds for the benefit of brokers as margin to guarantee
performance of its futures and options contracts. In addition, while such
<PAGE> 79
contracts will be entered into to reduce certain risks, trading in these
contracts entails certain other risks. Thus, while the Fund may benefit from
the use of futures contracts and related options, unanticipated changes in
interest rates may result in a poorer overall performance for the Fund than if
it had not entered into any such contracts. Additionally, the skills required
to invest successfully in futures and options may differ from skills required
for managing other assets in the Fund's portfolio. Further, although the
Adviser may engage in transactions with respect to index-based futures contracts
if the Adviser believes a correlation exists between price movements in the
index and in the Fund's portfolio securities, such a correlation is not likely
to be perfect because the Fund's portfolio is not likely to duplicate the index,
making the futures contract an imperfect hedge.
Limitations on Futures Contracts and Options on Futures Contracts. The
Fund will use financial futures contracts and related options only for "bona
fide hedging" purposes, as such term is defined in applicable regulations of the
CFTC, or, with respect to positions in financial futures and related options
that do not qualify as "bona fide hedging" positions, will enter such non-
hedging positions only to the extent that aggregate initial margin deposits plus
premiums paid by it for open futures option positions, less the amount by which
any such positions are "in-the-money", would not exceed 5% of the Fund's total
assets.
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:
YIELD = 2[(a-b + 1)6-1]
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.
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. 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:
<PAGE> 80
P (1 + T)n= 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.
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.
Performance information for the Fund may be compared, in reports and
promotional literature, to: (i) certain unmanaged indexes such as the Merrill
Lynch __________________________ 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 federally 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.
<PAGE> 81
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. c/o Search Capital Group, Inc., 700 N. Pearl
Street, Suite 400,L.B. 401, Dallas, Texas 75201-2809. 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 Advisors, L.P., 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. P.O. Box 42, Woodbury, Vermont 056819. 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.
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).
____________________
* Director who is an interested person as defined in the Investment Company
Act of 1940 because of his relationship to the Adviser and Distributor.
<PAGE> 82
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. Managing Director of Capstone Asset Management Company
(since 1996); formerly President of New Castle Advisers, Inc. (1991-
1995); 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 Corporation 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 $250 for each
Board meeting attended, and is paid a $1,000 annual retainer by the Corporation.
The directors and officers of the Corporation are also reimbursed for expenses
incurred in attending meetings of the Board of Directors.
<PAGE> 83
The following table represents the fees paid during the 1995 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)
____________
* Directors do not receive any deferred compensation.
(1) Director of Capstone Fixed Income Series, Inc. and Capstone Growth Fund,
Inc.
(2) Trustee of Capstone International Series Trust.
(3) Director of Medical Research Investment Fund, Inc.
</TABLE>
INVESTMENT ADVISORY AGREEMENT
Capstone Asset Management Company ("the Adviser") serves as the investment
adviser to the Fund pursuant to an investment advisory agreement ("Advisory
Agreement") dated ________________ between the Adviser and the Fund. The
Advisory Agreement was approved by the Fund's initial stockholder on ___________
______________. The Adviser, located at 5847 San Felipe, Suite 4100, Houston,
Texas 77057 is a wholly-owned subsidiary of Capstone Financial Services, Inc.
Pursuant to the terms of the Advisory Agreement and subject to the
supervision of the Board of Directors, the Adviser has 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, (3) place orders to purchase and sell securities for the
Fund, and (4) provide administrative services for the Fund. In this connection,
the Adviser (i) assists in supervising all aspects of the Fund's operations,
including the coordination of all matters relating to the functions of the
Adviser, 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 Adviser's expense, with
the services of persons competent to perform such administrative and clerical
functions as
<PAGE> 84
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 Adviser's obligations under the Advisory 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 Adviser, the Adviser's parent, and
other subsidiaries. For these services the Fund pays the Adviser a fee computed
daily and payable monthly at the annual rate of 0.40% of the Fund's average
daily net assets up to $450 million and ________% of such assets in excess of
$450 million.
The annual fees of the Adviser will be reduced to the extent that the
Fund's ordinary expenses for any fiscal year (including advisory 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 fees of the
Adviser will be reduced pro rata (but not below zero) to the extent necessary to
comply with such expense limitations. 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.
The Fund pays all expenses incurred in the operation of the Fund other than
those assumed by the Adviser under the Advisory Agreement. 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; Board of Directors
meeting-related expenses of the directors and officers; mailing expenses of all
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 Adviser; charges of the
custodian, transfer agent, registrar or dividend disbursing agent; expenses
pursuant to the Service and Distribution Plan (see "Distributor"); 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 following individuals are affiliated persons of both the Corporation
and the Adviser as defined in the 1940 Act: Dan E. Watson, Edward L. Jaroski,
Howard S. Potter, John M. Metzinger, Iris R. Clay, Linda G. Giuffre and Norma
Ybarbo.
Duration and Termination
Unless terminated earlier as described below, the Advisory Agreement will,
by its terms, remain in effect until ___________________, 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
interested persons of any such party. The Advisory Agreement will 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.
<PAGE> 85
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 _________________ (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.
The Distribution Agreement will remain in effect until ____________________
(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.
The Fund has 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 initial stockholder on _________________________.
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.
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.
<PAGE> 86
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.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Subject to the policies established by the Corporation's Board of
Directors, the Adviser is 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
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 considers 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 or the Adviser. From time to time, the
Adviser effects 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.
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 generally seeks
reasonably competitive commission rates for transactions it places on behalf of
the Fund, although the Fund does not necessarily pay the lowest commission
available. For non-principal transactions the Adviser is 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 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
overall responsibilities to the Fund and other clients of the Adviser. Such
research services must provide lawful and appropriate assistance to the Adviser
in the performance of its 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 under the
Advisory Agreement. The expenses of the Adviser will not necessarily be reduced
as a result of the receipt of such supplemental information. This information
may be useful to the Adviser in providing services to clients other than the
Fund, and not all such information is used by the Adviser in connection with the
Fund. Conversely, such information provided to the Adviser by brokers and
dealers through whom other clients of the Adviser effect securities transactions
may be useful to the Adviser 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
<PAGE> 87
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, 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 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 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
(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.
The value of the Fund's portfolio securities and other assets is based on
market values determined by procedures established by the Corporation's Board of
Directors. Securities listed on a national exchange or designated as national
market system securities are valued at the last sale price or, if there has been
no sale that day, at the last bid price. 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
<PAGE> 88
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
Intermediate Government 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.
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
<PAGE> 89
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.
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
<PAGE> 90
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 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 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.
<PAGE> 91
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
To the knowledge of the Board of Directors, no person owns more than five
percent of the Fund's common stock.
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 financial statements.
LEGAL COUNSEL. Dechert Price & Rhoads, 1500 K Street, N.W., Suite 500,
Washington, DC 20005, is legal counsel to the Fund.
<PAGE> 92
CAPSTONE FIXED INCOME SERIES, INC.
CAPSTONE GOVERNMENT INCOME FUND
CAPSTONE INTERMEDIATE GOVERNMENT 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
<PAGE> 93
Incorporation dated January 12, 1990; Exhibit 1(g) to
Post-Effective Amendment 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
<PAGE> 94
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.
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.
*5(l) Proposed form of Investment Advisory Agreement between
______________
* Filed herewith
<PAGE> 95
Capstone Fixed Income Series, Inc., on behalf of
Capstone Intermediate Government Fund, and Capstone
Asset Management Company.
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.
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., on behalf of Capstone
Government Income Fund, 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.
<PAGE> 96
8(c) Copy of Custody Agreement between Capstone Fixed Income
Series, Inc. 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 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.
______________
* Filed herewith
<PAGE> 97
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.
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.
<PAGE> 98
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.
*15(d) Proposed form of Service and Distribution Plan between
Capstone Fixed Income Series, Inc., on behalf of
Capstone Intermediate Government Fund, and Capstone
Asset Planning Company.
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
______________
* Filed herewith
<PAGE> 99
Number of Record Holders
Title of Class Title of Series As of December 6, 1995
-------------- -------------- ------------------------
Common Stock, CGIF 1,040
par value $.001
Common Stock, CIGF 0
par value $.001
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 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)
<PAGE> 100
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) 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 four other investment companies: 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 Growth Fund, Inc.,
Capstone Nikko Japan Fund, Capstone
<PAGE> 101
New Zealand Fund and Medical Research Investment Fund, Inc.
(b)
Name and Principal Positions and Offices Positions and Offices
Business Address* with Underwriter with Registrant
- ------------------ ---------------------- ---------------------
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
______________
* 5847 San Felipe, Suite 4100, Houston, Texas 77057
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.
<PAGE> 102
Item 31. Management Services
Not applicable.
Item 32. Undertakings
Not applicable.
<PAGE> 103
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Amendment to
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Houston, and State of Texas on the 10th day of
January, 1996.
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.
Signatures Title Date
---------- ----- ----
/sEDWARD L. JAROSKI President (Principal January 10, 1996
- ------------------------------
Edward L. Jaroski Executive Officer)
/s/LINDA G. GIUFFRE Treasurer (Principal January 10, 1996
- -----------------------------
Linda G. Giuffre Financial & Accounting
Officer)
JAMES F. LEARY* Director January 10, 1996
- -----------------------------
James F. Leary
JOHN R. PARKER* Director January 10, 1996
- -----------------------------
John R. Parker
PHILIP C. SMITH* Director January 10, 1996
- -----------------------------
Philip C. Smith
BERNARD J. VAUGHAN* Director January 10, 1996
- -----------------------------
Bernard J. Vaughan
* By: /s/EDWARD L. JAROSKI
-------------------------------
Edward L. Jaroski, Attorney-In-Fact
<PAGE> 104
INDEX TO EXHIBITS
Exhibit
Number Description of Exhibits
5(l) Proposed form of Investment Advisory Agreement
between Capstone Fixed Income Series, Inc., on
behalf of Capstone Intermediate Government Fund,
and Capstone Asset Management Company
11(b) Powers of Attorney of Messrs. James F. Leary,
John R. Parker, Philip C. Smith and Bernard J.
Vaughan
15(d) Proposed form of Service and Distribution Plan
between Capstone Fixed Income Series, Inc., on
behalf of Capstone Intermediate Government Fund,
and Capstone Asset Planning Company
<PAGE> 1 EXHIBIT 5.L.
CAPSTONE FIXED INCOME SERIES, INC.
on behalf of
CAPSTONE INTERMEDIATE GOVERNMENT FUND
INVESTMENT ADVISORY AGREEMENT
AGREEMENT, effective commencing on _________________, 1996, between
Capstone Asset Management Company (the "Adviser") and Capstone Fixed Income
Series, Inc. (the "Fund"), on behalf of its Series, Capstone Intermediate
Government Fund (the "Series").
WHEREAS, the Fund is a Maryland corporation organized under Articles of
Incorporation dated ______________________, (the "Articles") and the Fund,
including the Series, is registered under the Investment Company Act of 1940, as
amended (the "1940 Act"), as an open-end, diversified management investment
company;
WHEREAS, the Fund wishes to retain the Adviser to render investment
advisory services to the Fund, on behalf of the Series, and the Adviser is
willing to furnish such services to the Fund;
WHEREAS, the Adviser is registered as an investment adviser under the
Investment Advisers Act of 1940, as amended ("Advisers Act");
NOW THEREFORE, in consideration of the promises and mutual covenants herein
contained, it is agreed between the Fund and the Adviser as follows:
1. Appointment. The Fund hereby appoints the Adviser to act as
investment adviser to the Fund, on behalf of the Series, for the periods and on
the terms set forth in this Agreement. The Adviser accepts such appointment and
agrees to furnish the services herein set forth, for the compensation herein
provided.
2. Investment Advisory Duties. Subject to the supervision of the
Directors of the Fund, the Adviser will, (a) provide a program of continuous
investment management for the Series in accordance with the Series' investment
objectives, policies and limitations as stated in the prospectus and Statement
of Additional Information for the Series included as part of the Fund's
Registration Statement filed with the Securities and Exchange Commission, as
they may be amended from time to time, copies of which shall be provided to the
Adviser by the Fund; (b) make investment decisions for the Series; and (c) place
orders to purchase and sell securities for the Series.
In performing its investment management services for the Series hereunder,
the Adviser will provide the Fund, for the Series, with ongoing investment
guidance and policy direction, including oral and written research, analysis,
advice, statistical and economic data and judgments regarding individual
investments, general economic conditions and trends and long-range
<PAGE> 2
investment policy. The Adviser will determine the securities, instruments,
repurchase agreements, options, futures and other investments and techniques
that the Series will purchase, sell, enter into or use, and will provide an
ongoing evaluation of the Series' portfolio. The Adviser will determine what
portion of the Series' portfolio shall be invested in securities and other
assets, and what portion, if any, should be held uninvested.
The Adviser further agrees that, in performing its duties hereunder, it
will:
(a) comply with the 1940 Act and all rules and regulations thereunder, the
Advisers Act, the Internal Revenue Code (the "Code") and all other applicable
federal and state laws and regulations, and with any applicable procedures
adopted by the Directors;
(b) use reasonable efforts to manage the Series so that it will qualify,
and continue to qualify, as a regulated investment company under Subchapter M of
the Code and regulations issued thereunder;
(c) place orders pursuant to its investment determinations for the Series
directly with the issuer, or with any broker or dealer, in accordance with
applicable policies expressed in the Series' prospectus and/or Statement of
Additional Information and in accordance with applicable legal requirements;
(d) furnish to the Fund for the Series whatever statistical information
the Fund may reasonably request with respect to the Series' assets or
contemplated investments. In addition, the Adviser will keep the Fund and the
Directors informed of developments materially affecting the Series' portfolio
and shall, on the Adviser's own initiative, furnish to the Fund from time to
time whatever information the Adviser believes appropriate for this purpose;
(e) make available to the Fund's administrator, Capstone Asset Management
Company (the "Administrator"), and the Fund, promptly upon their request, such
copies of its investment records and ledgers with respect to the Series as may
be required to assist the Administrator and the Fund in their compliance with
applicable laws and regulations. The Adviser will furnish the Directors with
such periodic and special reports regarding the Series as they may reasonably
request;
(f) immediately notify the Fund in the event that the Adviser or any of
its affiliates: (1) becomes aware that it is subject to a statutory
disqualification that prevents the Adviser from serving as investment adviser
pursuant to this Agreement; or (2) becomes aware that it is the subject of an
administrative proceeding or enforcement action by the Securities and Exchange
Commission ("SEC") or other regulatory authority. The Adviser further agrees to
notify the Fund immediately of any material fact known to the Adviser respecting
or relating to the Adviser that is not contained in the Fund's Registration
Statement, or any amendment or supplement thereto, but that is required to be
disclosed therein, and of any statement contained therein that becomes untrue in
any material respect.
<PAGE> 3
3. Allocation of Charges and Expenses. Except as otherwise specifically
provided in this Section 3, the Adviser shall pay the compensation and expenses
of all its directors, officers and employees who serve as officers and executive
employees of the Fund (including the Fund's share of payroll taxes), and the
Adviser shall make available, without expense to the Fund, the service of its
directors, officers and employees who may be duly elected officers of the Fund,
subject to their individual consent to serve and to any limitations imposed by
law.
The Adviser shall not be required to pay any expenses of the Fund
other than those specifically allocated to the Adviser in this Section 3. In
particular, but without limiting the generality of the foregoing, the Adviser
shall not be responsible, except to the extent of the reasonable compensation of
such of the Fund's employees as are officers or employees of the Adviser whose
services may be involved, for the following expenses of the Fund: organization
and certain offering expenses of the Fund (including out-of-pocket expenses, but
not including the Adviser's overhead and employee costs); fees payable to the
Adviser; legal expenses; auditing and accounting expenses; interest expenses;
telephone, telex, facsimile, postage and other communications expenses; taxes
and governmental fees; fees, dues and expenses incurred by or with respect to
the Fund in connection with membership in investment company trade
organizations; cost of insurance relating to fidelity coverage for the Fund's
officers and employees; fees and expenses of the Fund's Administrator or of any
custodian, subcustodian, transfer agent, registrar, or dividend disbursing agent
of the Fund; payments to the Administrator for maintaining the Fund's financial
books and records and calculating the daily net asset value of Series of the
Fund's shares; other payments for portfolio pricing or valuation services to
pricing agents, accountants, bankers and other specialists, if any; expenses of
preparing share certificates and, except as provided below in this Section 3,
other expenses in connection with the issuance, offering, distribution or sale
of securities issued by the Fund; expenses relating to investor and public
relations; expenses of registering and qualifying shares of the Fund for sale;
freight, insurance and other charges in connection with the shipment of the
portfolio securities of any Series of the Fund; brokerage commissions or other
costs of acquiring or disposing of any portfolio securities or other assets of
any Series of the Fund, or of entering into other transactions or engaging in
any investment practices with respect to the Fund or a Series; expenses of
printing and distributing prospectuses, Statements of Additional Information,
reports, notices and dividends to stockholders; costs of stationery; any
litigation expenses; costs of stockholders' and other meetings; the compensation
and all expenses (specifically including travel expenses relating to the Fund's
business) of officers, directors and employees of the Fund who are not
interested persons of the Adviser; and travel expenses (or an appropriate
portion thereof) of officers or directors of the Fund who are officers,
directors or employees of the Adviser to the extent that such expenses relate to
attendance at meetings of the Board of Directors of the Fund or any committees
thereof or advisers thereto.
The Adviser shall not be required to pay expenses of any activity
which is primarily intended to result in sales of shares of the Series if and to
the extent that (i) such expenses are assumed or required to be borne by the
principal underwriter for the Series or some other party, or (ii) the Fund on
behalf of the Series shall have adopted a plan in conformity with
<PAGE> 4
Rule 12b-1 under the 1940 Act providing that the Fund or the Series (or some
other party) shall assume some or all of such expenses. The Adviser shall be
required to pay such of the foregoing sales expenses with respect to the Series
as are not assumed or required to be paid by the principal underwriter or some
other party or are not permitted to be paid by the Fund or Series (or some other
party) pursuant to such a plan.
4. Compensation. As compensation for the services provided and expenses
assumed by the Adviser under this Agreement, the Fund will pay the Adviser at
the end of each calendar month, out of the assets of the Series, an advisory fee
computed daily at an annual rate equal to 0.40% of the first $450 million of the
Series' average daily net assets. The "average daily net assets" of the Series
shall mean the average of the values placed on the Series' net assets as of
4:00 p.m. (New York time) on each day on which the net asset value of the Series
is determined consistent with the provisions of Rule 22c-1 under the 1940 Act
or, if the Series lawfully determines the value of its net assets as of some
other time on each business day, as of such other time. The value of net assets
of the Series shall always be determined pursuant to the applicable provisions
of the Articles and the Registration Statement. If, pursuant to such
provisions, the determination of net asset value is suspended for any particular
business day, then for the purposes of this Section 4, the value of the net
assets of the Series as last determined shall be deemed to be the value of its
net assets as of the close of regular trading on the New York Stock Exchange, or
as of such other time as the value of the net assets of the Series' portfolio
may lawfully be determined, on that day. If the determination of the net asset
value of the shares of the Series has been so suspended for a period including
any month end when the Adviser's compensation is payable pursuant to this
Section, then the Adviser's compensation payable at the end of such month shall
be computed on the basis of the value of the net assets of the Series as last
determined (whether during or prior to such month). If the Fund determines the
value of the net assets of the Series more than once on any day, then the last
such determination thereof on that day shall be deemed to be the sole
determination thereof on that day for the purposes of this Section 4.
In the event that the Adviser's gross compensation hereunder together
with that paid or payable by the Fund on behalf of the Series to the
Administrator for any fiscal year shall, when added to the other expenses of the
Series, cause the aggregate expenses of the Series to exceed the maximum
expenses permitted under the lowest applicable expense limitation established
pursuant to the statutes or regulations of any jurisdiction in which the shares
of the Series may be qualified for offer and sale, the total compensation paid
or payable to the Adviser, and the Administrator shall each be reduced pro rata
(but not below zero), to the extent necessary to cause the Series not to exceed
such expense limitation. Except to the extent that such reduction with respect
to the Adviser has been reflected in lowered monthly payments to the Adviser,
the Adviser shall refund to the Series its pro rata portion of the amount by
which the total of payments received by the Adviser and the Administrator are in
excess of such expense limitation as promptly as practicable after the end of
such fiscal year, provided that neither the Adviser nor the Administrator shall
be required to pay the Series an amount greater than the fee otherwise payable
to the Adviser or the Administrator, respectively, in respect of such year. As
<PAGE> 5
used in this Section 4, "expenses" shall mean those expenses included in the
applicable expense limitation having the broadest specifications thereof, and
"expense limitation" means a limit on the maximum annual expenses which may be
incurred by an investment company as determined by applicable law. The words
"lowest applicable expense limitation" shall be deemed to be that which results
in the largest reduction of the Adviser's and the Administrator's compensation
for any fiscal year of the Series; provided, however, that nothing in this
Agreement shall limit the Adviser's or the Administrator's fees if not required
by an applicable statute or regulation referred to above in this Section 4.
5. Books and Records. The Adviser agrees to maintain such books and
records with respect to its services to the Series as are required by Section 31
under the 1940 Act, and rules adopted thereunder, and by other applicable legal
provisions, and to preserve such records for the periods and in the manner
required by that Section, and those rules and legal provisions. The Adviser
also agrees that records it maintains and preserves pursuant to Rules 31a-1 and
Rule 31a-2 under the 1940 Act and otherwise in connection with its services
hereunder are the property of the Fund and will be surrendered promptly to the
Fund upon its request. And the Adviser further agrees that it will furnish to
regulatory authorities having the requisite authority any information or reports
in connection with its services hereunder which may be requested in order to
determine whether the operations of the Series are being conducted in accordance
with applicable laws and regulations.
6. Standard of Care and Limitation of Liability. The Adviser shall
exercise its best judgment in rendering the services provided by it under this
Agreement. The Adviser shall not be liable for any error of judgment or mistake
of law or for any loss suffered by the Fund, the Series or the holders of the
Series' shares in connection with the matters to which this Agreement relates,
provided that nothing in this Agreement shall be deemed to protect or purport to
protect the Adviser against any liability to the Fund, the Series or to holders
of the Series' shares to which the Adviser would otherwise be subject by reason
of willful misfeasance, bad faith or gross negligence on its part in the
performance of its duties or by reason of the Adviser's reckless disregard of
its obligations and duties under this Agreement. As used in this Section 6, the
term "Adviser" shall include any officers, directors, employees or other
affiliates of the Adviser performing services for the Series.
7. Services Not Exclusive. It is understood that the services of the
Adviser are not exclusive, and that nothing in this Agreement shall prevent the
Adviser from providing similar services to other investment companies or Series
of the Fund or of other investment companies (whether or not their investment
objectives and policies are similar to those of the Series) or from engaging in
other activities, provided such other services and activities do not, during the
term of this Agreement, interfere in a material manner with the Adviser's
ability to meet its obligations to the Series hereunder. When the Adviser
recommends the purchase or sale of a security for other investment companies and
other clients, and at the same time the Adviser recommends the purchase or sale
of the same security for the Series, it is understood that in light of its
fiduciary duty to the Series, such transactions will be executed on a basis that
is fair and equitable to the
<PAGE> 6
Series. In connection with purchases or sales of portfolio securities for the
account of the Series, neither the Adviser nor any of its directors, officers or
employees shall act as a principal or agent or receive any commission, provided
that portfolio transactions for the Series may be executed through firms
affiliated with the Adviser. If the Adviser provides any advice to its clients
concerning the shares of the Series, the Adviser shall act solely as investment
counsel for such clients and not in any way on behalf of the Series.
8. Duration and Termination. This Agreement shall continue until _______
_____, 1995, and thereafter shall continue automatically for successive annual
periods, provided such continuance is specifically approved at least annually by
(i) the Directors or (ii) a vote of a "majority" (as defined in the 1940 Act) of
the Series' outstanding voting securities (as defined in the 1940 Act), provided
that in either event the continuance is also approved by a majority of the
Directors who are not "interested persons" (as defined in the 1940 Act) of any
party to this Agreement, by vote cast in person at a meeting called for the
purpose of voting on such approval. Notwithstanding the foregoing, this
Agreement may be terminated: (a) at any time without penalty by the Fund on
behalf of the Series upon the vote of a majority of the Directors or by vote of
the majority of the Series' outstanding voting securities, upon sixty (60) days'
written notice to the Adviser or (b) by the Adviser at any time without penalty,
upon sixty (60) days' written notice to the Fund. This Agreement will also
terminate automatically in the event of its assignment (as defined in the 1940
Act).
9. Amendments. No provision of this Agreement may be changed, waived,
discharged or terminated orally, but only by an instrument in writing signed by
the party against which enforcement of the change, waiver, discharge or
termination is sought, and no amendment of this Agreement shall be effective
until approved by an affirmative vote of (i) a majority of the outstanding
voting securities of the Series, and (ii) a majority of the Directors of the
Fund, including a majority of Directors who are not interested persons of any
party to this Agreement, cast in person at a meeting called for the purpose of
voting on such approval, if such approval is required by applicable law.
10. Subadvisory Agreements, Etc. In rendering the services required under
this Agreement, the Adviser may, subject to the legally required approval by the
Directors and by the shareholders of the Series, cause such services to be
provided by one or more other registered investment advisers and receive such
assistance from such other investment adviser(s) pursuant to an agreement or
agreements, and may, subject to compliance with the requirements of applicable
law, contract with such other parties as the Fund may deem appropriate to obtain
information, advice and management services and other assistance, but any fees,
compensation or expenses to be paid to any such party shall be paid by the
Adviser, and no obligation shall be incurred on behalf of the Fund or the Series
in any such respect.
11. Miscellaneous.
a. This Agreement shall be governed by the laws of the State of Texas,
provided that
<PAGE> 7
nothing herein shall be construed in a manner inconsistent with the 1940 Act,
the Advisers Act, or rules or orders of the SEC thereunder.
b. The captions of this Agreement are included for convenience only and
in no way define or limit any of the provisions hereof or otherwise affect their
construction or effect.
c. If any provision of this Agreement shall be held or made invalid by a
court decision, statute, rule or otherwise, the remainder of this Agreement
shall not be affected hereby and, to this extent, the provisions of this
Agreement shall be deemed to be severable.
d. Nothing herein shall be construed as constituting the Adviser as an
agent of the Fund or the Series.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed by their officers designated below as of ________________, 1995.
CAPSTONE FIXED INCOME SERIES, INC.
By ___________________________________
President
CAPSTONE ASSET MANAGEMENT COMPANY
By ___________________________________
President
<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.
/s/JAMES F. LEARY Director January 10, 1996
- -------------------------------
James F. Leary
/s/JOHN R. PARKER Director January 10, 1996
- -------------------------------
John R. Parker
/s/PHILIP C. SMITH Director January 10, 1996
- -------------------------------
Philip C. Smith
/s/BERNARD J. VAUGHAN Director January 10, 1996
- -------------------------------
Bernard J. Vaughan
<PAGE> 1 EXHIBIT 15.D.
CAPSTONE FIXED INCOME SERIES, INC.
ON BEHALF OF
CAPSTONE INTERMEDIATE GOVERNMENT FUND
5847 San Felipe, Suite 4100
Houston, Texas 77057
SERVICE AND DISTRIBUTION PLAN
Introduction: It has been determined that Capstone Intermediate Government
Fund (the "Fund"), a series of Capstone Fixed Income Series, Inc. (the
"Series"), will pay for certain costs and expenses incurred in connection with
the distribution of its shares and servicing of its shareholders and adopt the
Service and Distribution Plan (the "Plan") set forth herein pursuant to Rule
12b-1 under the Investment Company Act of 1940 (the "Act").
The Board of Directors, in considering whether the Fund should implement
the Plan, has requested and evaluated such information as it deemed necessary to
make an informed determination as to whether the Plan should be implemented and
has considered such pertinent factors as it deemed necessary to form the basis
for a decision to use assets of the Fund for such purposes.
In voting to approve the implementation of the Plan, the Directors have
concluded, in the exercise of their reasonable business judgment and in light of
their respective fiduciary duties, that there is a reasonable likelihood that
the Plan will benefit the Fund and its existing and future shareholders.
The Plan: The material aspects of the financing by the Fund of
distribution expenses to be incurred in connection with securities of which it
is the issuer are as follows:
1. The Fund will reimburse Capstone Asset Planning Company ("CAPCO") for
costs and expenses incurred in connection with the distribution and marketing of
shares of the
<PAGE> 2
Fund and servicing of Fund shareholders. Such distribution and servicing costs
and expenses may include (1) printing and advertising expenses; (2) payments to
employees or agents of CAPCO who engage in or support distribution of the Fund's
shares, including salary, commissions, travel and related expenses; (3) the
costs of preparing, printing and distributing prospectuses and reports to
prospective investors; (4) expenses of organizing and conducting sales seminars;
(5) expenses related to selling and servicing efforts, including processing new
account applications, transmitting customer transaction information to the
Fund's transfer agent and answering questions of shareholders; (6) payments of
fees to one or more broker-dealers (which may include CAPCO itself), financial
institutions or other industry professionals, such as investment advisers,
accountants and estate planning firms (severally, a "Service Organization"), in
respect of the average daily value of the Fund's shares owned by shareholders
for whom the Service Organization is the dealer of record or holder of record,
or owned by shareholders with whom the Service Organization has a servicing
relationship; (7) costs and expenses incurred in implementing and operating the
Plan; and (8) such other similar services as the Fund's Board of Directors
determines to be reasonably calculated to result in the sale of Fund shares.
Subject to the limitations of applicable law and regulation, including
rules of the National Association of Securities Dealers ("NASD"), CAPCO will be
reimbursed monthly for such costs, expenses or payments at an annual rate of up
to but not more than 0.25% of the average daily net assets of the Fund. Any
expense payable hereunder may be carried forward for reimbursement for up to
twelve months beyond the date on which it is incurred, subject always to the
limit that not more than 0.25% of the Fund's average daily net assets may be
used in any month to pay expenses pursuant to the Plan. The Fund shall incur
no interest or carrying charges for expenses
<PAGE> 3
carried forward. In the event the Plan is terminated as herein provided, the
Fund shall have no liability for expenses that were not reimbursed as of the
date of termination.
2. Subject to the limits herein and the requirements of applicable law
and regulations, including rules of the NASD, CAPCO may designate as "Service
Fees", as that term is defined by applicable rules and regulatory
interpretations applicable to payments under a plan such as the Plan, some or
all of any payments made to Service Organizations (including CAPCO itself) for
services that may be covered by "Service Fees," as so defined. Such fees will
be computed daily and paid quarterly by CAPCO at an annual rate not exceeding
0.25% of the average net asset value of the Fund's shares owned by shareholders
for whom the Service Organizations are the dealers of record or holders of
record, or owned by shareholders with whom the Service Organizations have
servicing relationships.
The payment to a Service Organization is subject to compliance by the
Service Organization with the terms of a Selling Group Agreement between the
Service Organization and CAPCO (the "Agreement"), a form of which is attached
hereto as Exhibit A. If a shareholder of the Fund ceases to be a client of a
Service Organization that has entered into an Agreement with CAPCO, but
continues to hold shares of the Fund, CAPCO will be entitled to receive a
similar payment in respect of the servicing provided to such investors. For the
purposes of determining the fees payable under the Plan, the average daily net
asset value of the Fund's shares shall be computed in the same manner specified
in the Fund's Articles of Incorporation and current prospectus for the
computation of the value of the Fund's net asset value per share.
3. The Board of Directors shall be provided, at least quarterly, with a
written report of all amounts expended pursuant to the Plan. The report shall
state the purposes for which the
<PAGE> 4
amounts were expended.
4. The Plan will become effective immediately upon approval by (a) a
majority of the outstanding voting securities of the Fund, and (b) a majority of
the Board of Directors, including a majority of the Directors who are not
"interested persons" (as defined in the Act) of the Fund and have no direct or
indirect financial interest in the operation of the Plan or in any agreements
entered into in connection with the Plan (the "Plan Directors"), pursuant to a
vote cast in person at a meeting called for the purpose of voting on the
approval of the Plan. If additional series are added to the Fund, the Plan will
become effective as to each such series upon approval by (a) a majority of the
outstanding voting securities of such series, and (b) a majority of the Board of
Directors, including a majority of the Plan Directors, pursuant to a vote cast
in person at a meeting called for such purpose.
5. The Plan shall continue for a period of one year from its effective
date, unless earlier terminated in accordance with its terms, and thereafter
shall continue automatically for successive annual periods, provided such
continuance is approved by a majority of the Board of Directors, including a
majority of the Plan Directors, pursuant to a vote cast in person at a meeting
called for the purpose of voting on the continuance of the Plan.
6. The Plan may be amended at any time by the Board of Directors provided
that (a) any amendment to increase materially the costs which the Fund or a
series may bear for distribution pursuant to the Plan shall be effective only
upon approval by a vote of a majority of the outstanding voting securities of
the respective series or the Fund and (b) any material amendments of the terms
of the Plan shall become effective only upon approval as provided in
<PAGE> 5
paragraph 4(b) hereof.
7. The Plan is terminable without penalty at any time with respect to any
series or the Fund by (a) vote of a majority of the Plan Directors, or (b) vote
of a majority of the outstanding voting securities of the respective series or
the Fund.
8. Any person authorized to direct the disposition of monies paid or
payable by the Fund pursuant to the Plan or any agreement entered into in
connection with the Plan shall provide to the Board of Directors, and the Board
of Directors shall review, at least quarterly, a written report of the amounts
expended pursuant to the Plan and the purposes for which such expenditures were
made.
9. While the Plan is in effect, the selection and nomination of Directors
who are not "interested persons" (as defined in the Act) of the Fund shall be
committed to the discretion of the Directors who are not "interested persons".
10. The Fund shall preserve copies of the Plan, any agreement in
connection with the Plan, and any report made pursuant to paragraph 8 hereof,
for a period of not less than six years from the date of the Plan, such
agreement or report, the first two years in an easily accessible place.
CAPSTONE FIXED INCOME SERIES, INC.
ON BEHALF OF
CAPSTONE INTERMEDIATE GOVERNMENT
FUND
Date: _______________________ By: ______________________________
Edward L. Jaroski
President
Attest:
_____________________________
Iris R. Clay
Secretary
