<PAGE>
CAPSTONE GOVERNMENT INCOME FUND
- --------------------------------------------------------------------------------
Dear Shareholder:
Enclosed you will find the Capstone Government Income Fund ("the Fund") semi-
annual report for the period from December 1, 1996 to May 31, 1997.
Performance:
------------
The U.S. credit markets were affected during this semi-annual period by robust
economic growth and the belief that the Federal Reserve's Board of Governors
would be forced to move to raise short-term interest rates in order to control
inflationary pressures. Two-year Treasury notes started the period at a low of
5.60% and rose consistently to a high of 6.54% as the Federal Reserve did move
to increase rates. After peaking in mid-April, two-year note yields fell to
6.20% by the end of May, as it appeared to market participants that the U.S.
economy may be slowing somewhat from prior expectations, and with the continued
absence of inflationary pressures, the Fed would opt to keep rates steady.
Indeed, the Fed left overnight rates unchanged at their May meeting.
The Fund's managers have been sensitive to the potential risk of rising U.S.
short-term interest rates and have maintained a relatively conservative
investment posture. The Fund's weighted average maturity has been kept to
approximately 1.0 years. Interest rate sensitivity has been minimized through
the use of hedging strategies, like covered option writing. Additional returns
have been sought through the use of callable agency securities which can be
purchased at considerable spreads to Treasury notes of the same maturity.
Since the start of the Fund's current fiscal year, the net asset value has risen
steadily. When combined with the annual distribution last December, the Fund has
produced a 1.79% total rate of return, or 3.62% annualized. This compares with a
2.06% rise in the Ryan 2-Year Treaury Index (1) over the same period.
Please note that on January 13, 1997, the Fund elected to reverse split its
shares by a 5:1 ratio. This action did not affect the value of an investor's
holdings, but did serve to increase the price of a share five fold and enhance
the Fund's overall liquidity.
Dividends:
----------
The Fund has not made regular distributions of income since December 30, 1996,
so as to minimize expenses and stabilize net asset values. As a result, the Fund
accumulates all interest income and capital gains until the end of the calendar
year, when it must distribute substantially all such earnings in order to retain
its status as a regulated investment company. It is too early to predict the
exact size of this year's distribution, but it will be consistent with the net
return of the Fund's investment portfolio over the course of the entire year.
- ----------
(1) The Ryan 2-Year Treasury Index is an unmanaged index, commonly known as an
"on-the-run" index because of the following characteristic. After an issue
in the Index expires, it is replaced by a newer issue of the same dollar
amount.
<PAGE>
CAPSTONE GOVERNMENT INCOME FUND
- --------------------------------------------------------------------------------
Management anticipates recommending to the Board of Directors that the
shareholders of record as of December 29, 1997 receive the Fund's distribution
for the year ending December 31, 1997. The Fund's net asset value would be
adjusted downward the following business day to reflect the distribution. The
payment of non-reinvested distributions would be made by the Fund's transfer
agent in January 1998.
We thank you for your investment in the Fund and we are available to answer any
questions. Please contact us at (800) 262-6631.
/s/ Edward L. Jaroski /s/ Howard S. Potter
- --------------------------------- ----------------------------------
Edward L. Jaroski Howard S. Potter
President Executive Vice President
<PAGE>
CAPSTONE GOVERNMENT INCOME FUND
PORTFOLIO OF INVESTMENTS - May 31, 1997(Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Value Percentage of
Amount (See Note 1-A) Net Assets
--------------- ---------------- ----------------
<S> <C> <C> <C>
BONDS
-----
U.S. Government & $ 1,750,000 FHLB Note, 5.700%, 4/15/98 $ 1,748,645 3.13%
Government Agencies 1,700,000 FHLB Note, 5.800%, 1/23/98 1,700,369 3.04
12,000,000 FHLB Note, 5.755%, 2/27/98 11,991,707 21.48
6,000,000 FNMA Note, 5.690%, 3/13/98 5,993,460 10.73
6,000,000 U.S. Treasury Note, 6.125%, 8/31/98 6,009,378 10.76
---------------- ----------------
Total U.S. Government (Cost $27,423,862) 27,443,559 49.14
Liability for Written
Put Options on U.S.
Treasury Notes
0.00%
5,000,000 par value, June 1997 at $108.00
5.6250%, due 1/31/99 (Premium Paid $9,766) (5,400) (0.00)
---------------- ----------------
SHORT-TERM
OBLIGATIONS
-----------
Repurchase Agreements 13,000,000 First Boston, 5.500%, 6/2/97 (dated 5/30/97)
Collateralized by $13,135,000 Federal Farm Credit
Bank, 5.450%, 3/3/98
(Repurchase Proceeds $13,005,958) 13,000,000 23.28
12,504,000 Merrill Lynch, 5.470%, 6/2/97 (dated 5/30/97)
Collateralized by $12,630,000 Federal Farm Credit
Bank, 5.550%, 7/1/97
(Repurchase proceeds $12,509,700) 12,504,000 22.39
U.S. Government Agency 2,500,000 Federal National Mortgage Assoc., 5.350%, 8/14/97 2,499,562 4.48
---------------- ----------------
Total Short-Term Obligations
(Cost $28,004,000) 28,003,562 50.15
---------------- ----------------
Total Investments in Securities
(Cost $55,418,096)(a) 55,441,721 99.29
---------------- ----------------
Other Assets Less Liabilities 398,114 0.71
---------------- ----------------
Net Assets, at values equivalent to $24.35 per share
for 2,292,752 shares of $.001 par value shares
outstanding $ 55,839,835 100.00%
================ ================
</TABLE>
See Accompanying Notes to Financial Statements
<PAGE>
CAPSTONE GOVERNMENT INCOME FUND
PORTFOLIO OF INVESTMENTS - May 31, 1997(Unaudited)
- --------------------------------------------------------------------------------
(a) At May 31, 1997, unrealized appreciation (depreciation) of securities based
on Federal income tax cost is as follows:
Unrealized appreciation $ 29,488
Unrealized depreciation (463)
-----------
Net unrealized appreciation $ 29,025
===========
<PAGE>
CAPSTONE GOVERNMENT INCOME FUND
STATEMENT OF ASSET AND LIABILITIES MAY 31, 1997 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Investments in securities at market value (identified cost $55,418,096)(Note 1-A) $ 55,441,721
Interest receivable 440,684
Other assets 29,430
------------
Total Assets 55,911,835
------------
LIABILITIES:
Overdraft 1,956
Accrued administration fees 22,008
Other accrued expenses 48,036
------------
Total Liabilities 72,000
------------
NET ASSETS: $ 55,839,835
============
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE:
($55,839,835/2,292,752 shares outstanding of $.001 par value, 200,000,000 shares authorized) $ 24.35
============
SOURCE OF NET ASSETS:
Paid in capital $ 59,242,381
Undistributed net investment income 3,350,856
Accumulated net realized gains (6,782,427)
Net unrealized appreciation of securities and written options 29,025
------------
$ 55,839,835
============
</TABLE>
See Accompanying Notes to Financial Statements
<PAGE>
CAPSTONE GOVERNMENT INCOME FUND
STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED MAY 31, 1997 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Interest Income $ 1,665,706
-----------
Expenses:
Advisory fees (Note 2) 120,072
Administrative services (Note 2) 32,218
Distribution fees (Note 2) 63,947
Transfer agent fees 15,250
Fund accounting fees 5,508
Professional fees 15,325
Directors' fees and expenses 7,458
Custodian fees 582
Registration and filing fees 3,729
Miscellaneous 2,809
-----------
Total Expenses 266,898
-----------
Net Investment Income 1,398,808
-----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain from security transactions 282,346
Unrealized appreciation (depreciation) of investments:
Beginning of period $ (34,222)
End of period 29,025
-----------
Net increase in unrealized appreciation of investments 63,247
-----------
Net realized and unrealized gain on investments 345,593
-----------
Net increase in net assets resulting form operations $ 1,744,401
===========
</TABLE>
See Accompanying Notes to Financial Statements
<PAGE>
CAPSTONE GOVERNMENT INCOME FUND
STATEMENT OF CHANGES IN NET ASSETS(Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months Ended Year Ended
May 31, 1997 November 30, 1996
----------------- -----------------
(Unaudited)
<S> <C> <C>
OPERATIONS:
Net investment income $ 1,398,808 $ 2,458,569
Net realized gain (loss) on investments 282,346 (154,720)
Net increase (decrease) in unrealized appreciation of investments 63,247 (117,237)
----------------- -----------------
Net increase in net assets resulting from operations 1,744,401 2,186,612
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income ($0.11 per share) (253,678) (599,304)
----------------- -----------------
CAPITAL SHARE TRANSACTIONS:
Increase (decrease) in net assets resulting from capital share
transactions (Note 3) (25,121,077) 10,169,466
----------------- -----------------
Total increase (decrease) in net assets (23,630,354) 11,756,774
NET ASSETS:
Beginning of year 79,753,971 67,997,197
----------------- -----------------
End of year (including undistributed net investment income of
$3,350,856 and $2,205,726, respectively) $ 56,123,617 $ 79,753,971
================= =================
</TABLE>
See Accompanying Notes to Financial Statements
<PAGE>
CAPSTONE GOVERNMENT INCOME FUND
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS - May 31, 1997(Unaudited)
- --------------------------------------------------------------------------------
Note 1 - Summary of Significant Accounting Policies
Capstone Government Income Fund (the "Fund") referred to as the "Fund" is
the initial series of Capstone Fixed Income Series, Inc. (the "Corporation"),
which is registered under the Investment Company Act of 1940, as amended (the
"Act"), as a diversified, open-end management investment company. The Fund was
originally incorporated in Delaware in 1968 and was reorganized as the initial
series of the Corporation, which was established under Maryland Law on May 11,
1992.
The current investment objective of the Fund is to earn a high level of
total return, consistent with safety of principal. The Fund seeks to achieve
this objective by investing in debt obligations that have remaining maturities
of three years or less and that are issued or guaranteed by the U.S. Government,
its agencies or instrumentalities, and by engaging in certain income enhancement
strategies. Because of the risks inherent in any investment program, the Fund
cannot ensure that its investment objectives will be realized. The Fund changed
its fiscal and tax year end from September 30 to December 31, commencing with
December 31, 1991. The Fund changed its fiscal year end to November 30,
commencing with November 30, 1995, but continues to maintain a December 31 tax
year end.
The following is a summary of significant accounting policies followed by
the Fund in the preparation of its financial statements.
(A) Valuation of Investments - Debt securities (other than short-term
obligations) including listed issues are valued at the mean between the bid and
asked prices on the basis of valuations furnished by a pricing service.
Over-the-counter options, which include both written and purchased options, are
valued using the Black-Scholes Model, which utilizes the option's
characteristics when bought or sold and the market price of the underlying
security to determine a daily price for each OTC option's position. The only
pricing variable changed daily is the price of the underlying security. When
market quotations are not readily available, portfolio securities are valued at
their fair value as determined in good faith under procedures established by and
under the general supervision of the Board of Directors (valuation of securities
for which market quotations are not readily available may be based upon current
market prices of securities which are comparable in coupon, rating and maturity
or an appropriate matrix utilizing similar factors). Short-term investments are
valued at amortized cost which approximates value.
(B) Call and Put Options - When the Fund writes a call or put option, an amount
equal to the premium received is reflected as a liability. The amount of the
liability is subsequently "marked to market" to reflect the current market value
of the option written. If an option which the Fund has written either expires on
its stipulated expiration date, or if the Fund enters into a closing purchase
transaction, the Fund realizes a gain (or loss if the cost of the closing
transaction exceeds the premium received when the option is sold), and the
liability related to such option is extinguished. If a call option which the
Fund has written is exercised, the Fund realizes a gain or loss from the sale of
the underlying security and the proceeds from such a sale are increased by the
premium originally received. If a put option which the Fund has written is
exercised, the amount of the premium originally received reduces the cost of the
security which the Fund purchases upon exercise of the option. The Fund, as the
writer of a call option, loses the potential for gain on the underlying security
above the exercise price while the option is outstanding. By writing a put
option, the Fund might become obligated to purchase the underlying security at
an exercise price that exceeds the current market price.
The premium paid by the Fund for the purchase of a call or put option is
recorded as an investment and subsequently "marked to market" to reflect the
current market value of the option purchased. If an option which the Fund has
purchased expires on the stipulated expiration date, the Fund realizes a loss in
the amount of the cost of the option. If the Fund enters into a closing
transaction, it realizes a gain (loss) if the proceeds from the sale are greater
(less) than the cost of the option purchased. If the Fund exercises a put
option, it realizes a gain or loss from the sale of the underlying security and
the proceeds from such sale will be decreased by the premium originally paid. If
the Fund exercises a call option, the cost of the security purchased upon
exercise is increased by the premium originally paid. These option contracts may
be listed for trading on a national securities exchange or traded
over-the-counter. Over-the-counter options are transacted directly with dealers
and not with a clearing corporation, and there is a risk of non-performance by
the dealer.
<PAGE>
CAPSTONE GOVERNMENT INCOME FUND
(C) Repurchase Agreements - The Fund may enter into repurchase agreements with
U.S. Government securities dealers recognized by the Federal Reserve Board, with
member banks of the Federal Reserve System or with such other brokers or dealers
that meet the credit guidelines of the Corporation's Board of Directors. In a
repurchase agreement, the Fund buys a security from a seller that has agreed to
repurchase the same security at a mutually agreed upon date and price. The
Fund's resale price will be in excess of the purchase price, reflecting an
agreed upon interest rate. This interest rate is effective for the period of
time the Fund is invested in the agreement and is not related to the coupon rate
on the underlying security. Repurchase agreements may also be viewed as fully
collateralized loans of money by the Fund to the seller. The period of these
repurchase agreements will usually be short, from overnight to one week, and at
no time will the Fund invest in repurchase agreements for more than one year.
The Fund will always receive as collateral securities whose market value
including accrued interest is, and during the entire term of the agreement
remains, at least equal to 100% of the dollar amount invested by the Fund in
each agreement, and the Fund will make payment for such securities only upon
physical delivery or upon evidence of book entry transfer to the account of the
custodian. If the seller defaults, the Fund might incur a loss if the value of
the collateral securing the repurchase agreement declines and might incur
disposition costs in connection with liquidating the collateral. In addition, if
bankruptcy proceedings are commenced with respect to the seller of a security
which is the subject of a repurchase agreement, realization of the collateral by
the Fund may be delayed or limited. In an attempt to minimize these risks, the
Adviser will consider and monitor the creditworthiness of parties to repurchase
agreements.
(D) Security Transactions and Investment Income - Security transactions are
accounted for on the trade date (the date the securities are purchased or sold).
Interest income on investments is accrued daily. Premiums on securities
purchased are amortized over the life of the respective securities and discounts
are recharacterized to income, limited to the extent of any capital gain upon
sale or maturity of the respective security. Realized gains and losses from
security transactions are determined on the basis of identified cost.
(E) Federal Income Taxes - No provision is considered necessary for Federal
income taxes since it is the policy of the Fund to distribute all of its taxable
income, including any net realized gains on sales of investments, and to qualify
as a "regulated investment company" under the applicable section of the Internal
Revenue Code. The Fund has approximately $6,870,000 of capital losses for
Federal income tax purposes available to offset future taxable capital gains, if
any, of which $508,400 expires in December 1996, $702,100 expires in December
1998, $1,207,900 expires in December 1999, $2,194,000 expires in December 2001,
$1,252,600 expires in December 2002, and $1,005,000 expires in December 2003.
(F) Share Transactions and Distributions to Shareholders - Fund shares are sold
in continuous public offering at the net asset value. Transactions in Fund
shares are recorded on the trade date. The Fund redeems its shares at the net
asset value. Dividends and other distributions are recorded by the Fund on the
ex-dividend date and may be reinvested at net asset value.
Income distributions and capital gain distributions, if any, are determined
in accordance with income tax regulations which may differ from generally
accepted accounting principles. The Fund also utilizes earnings and profits
distributed to shareholders on redemption of shares as part of the dividend paid
deduction for income tax purposes. The Fund files its tax return on a December
31 basis; all permanent book/tax differences are adjusted at that time.
(G) Use of Estimates in Financial Statements - In preparing financial statements
in conformity with generally accepted accounting principles, management makes
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements, as well as the reported
amounts of income and expenses during the reporting period. Actual results may
differ from the estimates.
Note 2 - Investment Advisory and Administration Fees and Other Transactions with
Affiliates
Capstone Asset Management Company ("CAMCO"), serves as the Investment
Adviser to the Fund pursuant to an Investment Advisory Agreement dated May 11,
1992 between CAMCO and the Fund. Since May, 1992 New Castle Advisers, Inc.
("NCA") had served as Subadviser to the Fund pursuant to a Subadvisory Agreement
between CAMCO and NCA. On January 1, 1996, Capstone Financial Services, Inc.
("CFS"), the parent company of the Adviser, acquired a majority interest in NCA,
and NCA simultaneously resigned as subadviser to the Fund. The Fund therefore no
longer has a separate subadviser. This change has had no effect on the
management of the Fund or the 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,
<PAGE>
CAPSTONE GOVERNMENT INCOME FUND
which is computed daily and paid monthly at the annual rate of 0.40% of the
first $250 million of the Fund's average daily net assets and 0.36% of such
assets over $250 million.
CAMCO also provides administrative services to the Fund pursuant to an
Administrative Agreement. For these services, CAMCO is paid a monthly fee equal
to an annual rate of 0.10% of the Fund's average daily net assets. Effective
February 10, 1997, Fifth Third Bank serves as Fund Accountant.
Investment advisory and administrative fees paid to CAMCO for the six
months ended May 31, 1997 were $152,290.
Pursuant to the Investment Advisory Agreement and the Administrative
Agreement, CAMCO has agreed to reduce its fees on a pro rata basis (but not
below zero) to the extent that the Fund's ordinary expenses for any fiscal year
(including advisory or administrative fees, but excluding brokerage commissions,
interest, local, state and Federal taxes and extraordinary expenses) exceed the
expense limitation of any state having jurisdiction over the Fund. Due to recent
Federal and state legislation, such state expense limitations are no longer
applicable to the Fund.
Pursuant to a Distribution Agreement with the Fund dated May 11, 1992,
Capstone Asset Planning Company ("CAPCO"), is the principal underwriter of the
Fund and, acting as exclusive agent, sells shares of the Fund to the public on a
continuous basis.
The Fund has adopted a Service and Distribution Plan (the "Plan") pursuant
to Rule 12b-1 under the Act whereby it uses its assets to finance certain
activities relating to the distribution of its shares to investors and provision
of certain stockholder services. The Plan permits payments to be made by the
Fund to the Distributor to reimburse it for particular expenditures incurred by
it in connection with the distribution of the Fund's shares to investors and
provision of certain stockholder services including, but not limited to, the
payment of compensation, including incentive compensation, to securities dealers
(which may include CAPCO itself) and certain banks, investment advisers and
pension consultants (collectively, the "Service Organizations") to obtain
various distribution-related and/or administrative services for the Fund. CAPCO
is also authorized to engage in advertising, the preparation and distribution of
sales literature and other promotional activities on behalf of the Fund. In
addition, the Plan authorizes payment by the Fund of the cost of preparing,
printing and distributing Fund Prospectuses and Statements of Additional
Information to prospective investors and of implementing and operating the Plan.
Under the Plan, payments made to CAPCO may not exceed an amount computed at
an annual rate of 0.20% of the average net assets of the Fund. CAPCO is
permitted to collect fees under the Plan on a monthly basis. Any expenditures
incurred in excess of the 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. 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 six months ended May 31, 1997, the Fund paid $63,947 in
distribution expenses. Of this amount $44,145 was paid to Service Organizations
other than CAPCO.
CAMCO is an affiliate of CAPCO and both are wholly-owned subsidiaries of
CFS. Certain officers and directors of the Fund, are also officers and directors
of CAMCO, CAPCO, and CFS.
<PAGE>
CAPSTONE GOVERNMENT INCOME FUND
Note 3 - Capital Stock
Transactions in capital stock were as follows:
<TABLE>
<CAPTION>
Six Months Ended Year Ended
May 31, 1997 November 30, 1996
---------------------------- -----------------------------
Shares Value Shares Value
------ ----- ------ -----
<S> <C> <C> <C> <C>
Shares sold 6,355,348 $ 99,298,620 25,642,220 $ 122,330,049
Shares issued to shareholders in reinvestment of
distributions 48,422 231,939 120,724 568,610
----------- ------------- ------------ -------------
6,403,770 99,530,559 25,762,944 122,898,659
Shares reacquired (20,415,627) (124,935,418) (23,104,288) (112,729,193)
----------- ------------- ------------ -------------
Net increase (14,011,857 $ (25,121,077) 2,658,656 $ 10,169,466
=========== ============= ============ =============
</TABLE>
Note 4 - Purchases and Sales of Securities
For the six months ended May 31, 1997, the cost of purchases and proceeds from
sales of securities other than short-term obligations aggregated $57,430,687 and
$120,364,569, respectively.
<PAGE>
CAPSTONE GOVERNMENT INCOME FUND
FINANCIAL HIGHLIGHTS May 31, 1997
- --------------------------------------------------------------------------------
The following table sets forth the per share operating performance data for a
share of captial stock outstanding, total return, ratios to average net assets
and other supplemental data for each period indicated.
<TABLE>
<CAPTION>
Eleven
Six Months Year Months
Ended Ended Ended
5/31/97 11/30/96 11/30/95(1)
========== ========== ==========
(Unaudited)
<S> <C> <C> <C>
Per Share Data(4)
Net asset value at beginning of period $ 24.45 $ 24.90 $ 23.65
Income from investment operations:
Net investment income 0.11 1.00 1.20
Net realized and unrealized gain (loss) on investments (0.10) (0.05) 0.05
---------- ---------- ----------
Total from investment operations 0.01 0.95 1.25
Less distributions from net investment income (0.11) (1.40) 0.00
---------- ---------- ----------
Net asset value at end of period $ 24.35 $ 24.45 $ 24.90
---------- ---------- ----------
Total Return 0.04% 4.07% 5.29%
Ratios/Supplemental Data
Ratio of operating expenses to average net assets 0.88%(3) 0.95% 0.77%(3)
Ratio of interest to average net assets 0.00%(3) 0.00% 0.00%
---------- ---------- ----------
Ratio of total expenses to average net assets 0.88%(3) 0.95% 0.77%(3)
========== ========== ==========
Ratio of net investment income to average net assets 1.31%(3) 4.44% 5.56%
Portfolio turnover rate 8.80% 615.39% 309.66%
Net assets at end of period (in thousands) $ 55,840 $ 79,754 $ 67,997
</TABLE>
<TABLE>
<CAPTION>
Year Ended 12/31
======---------------------------======
1994 1993 1992
========= ========== ==========
<S> <C> <C> <C>
Per Share Data(4)
Net asset value at beginning of period $ 24.00 $ 23.70 $ 23.35
Income from investment operations:
Net investment income 0.90 0.85 1.15
Net realized and unrealized gain (loss) on investments (0.60) (0.05) (0.30)
--------- ---------- ----------
Total from investment operations 0.30 0.80 0.85
Less distributions from net investment income (0.65) (0.50) (0.50)
--------- ---------- ----------
Net asset value at end of period 23.65 $ 24.00 $ 23.70
--------- ---------- ----------
Total Return 1.13% 3.32% 3.55%
Ratios/Supplemental Data
Ratio of operating expenses to average net assets 0.87% 0.93% 0.92%
Ratio of interest to average net assets 0.00% 0.00% 0.04%
--------- ---------- ----------
Ratio of total expenses to average net assets 0.87% 0.93% 0.96%
========= ========== ==========
Ratio of net investment income to average net assets 4.20% 33.64% 4.69%
Portfolio turnover rate 285.13% 596.36% 633.41%
Net assets at end of period (in thousands) $8,705.00 $ 33,795 $ 29,847
</TABLE>
(1) Based on average shares outstanding determined daily.
(2) Selected per share data and ratios including total return have not been
annualized.
(3) Annualized.
(4) Adjusted for reverse 5:1 stock split on January 13, 1997.
See Accompanying Notes to Financial Statements
<PAGE>
CAPSTONE GOVERNMENT INCOME FUND
5847 San Felipe, Suite 4100
Houston, Texas 77057
1-800-262-6631
SEMI-ANNUAL REPORT TO SHAREHOLDERS
May 31, 1997
- --------------------------------------------------------------------------------
DIRECTORS OFFICERS
- --------- --------
Edward L. Jaroski Edward L. Jaroski
President
James F. Leary
Howard S. Potter
John R. Parker Executive Vice President
Bernard J. Vaughan Dan E. Watson
Executive Vice President
John M. Metzinger
Vice President
Linda G. Giuffre
Treasurer
Iris R. Clay
Secretary
Norma R. Ybarbo
Assistant Secretary
- --------------------------------------------------------------------------------
INVESTMENT ADVISER TRANSFER AGENT
- ------------------ --------------
Capstone Asset Management Company FPS Services, Inc.
5847 San Felipe 3200 Horizon Drive
Suite 4100 P. O. Box 61503
Houston, TX 77057 King of Prussia, PA 19406-0903
1-800-845-2340
ADMINISTRATOR CUSTODIAN
- ------------- ---------
Capstone Asset Management Company Fifth Third Bank, N.A.
5847 San Felipe Fifth Third Center
Suite 4100 38 Fountain Square Plaza
Houston, TX 77057 Cincinnati, OH 45263
UNDERWRITER AUDITORS
- ----------- --------
Capstone Asset Planning Company Tait, Weller & Baker
5847 San Felipe, Suite 4100 Two Penn Center Plaza, Suite 700
Houston, TX 77057 Philadelphia, PA 19102-1707
1-800-262-6631
<PAGE>
- --------------------------------------------------------------------------------
Semi-Annual Report
May 31, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
CAPSTONE
GOVERNMENT
INCOME
FUND
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
[LOGO]
A Member Of
THE CAPSTONE GROUP
of Mutual Funds
- --------------------------------------------------------------------------------
[LOGO] THE CAPSTONE GROUP OF MUTUAL FUNDS
================================================================================
- --------------------------------------------------------------------------------
EQUITY
*CAPSTONE GROWTH FUND, INC.
- --------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
FIXED INCOME
*CAPSTONE GOVERNMENT INCOME FUND
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
INTERNATIONAL/GLOBAL
*CAPSTONE NIKKO JAPAN FUND
*CAPSTONE NEW ZEALAND FUND
- --------------------------------------------------------------------------------
For more complete information about the Capstone Funds including charges and
expenses, contact the Distributor at the address below to receive a prospectus.
Please read it carefully before you invest or send money.
This publication must be accompanied or preceded by a current prospectus for
Capstone Government Income Fund.
CAPSTONE ASSET PLANNING COMPANY
5847 San Felipe, Suite 4100
Houston, Texas 77057
1-800-262-6631
CAPSTONE GOVERNMENT INCOME FUND
5847 SAN FELIPE, SUITE 4100
HOUSTON, TX 77057
