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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. 50 / X /
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and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 / X /
Capstone Fixed Income Series, Inc.
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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
1775 I Street, N.W., Washington, DC 20005
(Name and Address of Agent for Service)
It is proposed that this filing will become effective (check appropriate box)
/ X / immediately upon filing pursuant to paragraph (b).
/ / on ________________ pursuant to paragraph (b).
/ / 60 days after filing pursuant to paragraph (a)(i).
/ / 75 days after filing pursuant to paragraph (a)(ii).
/ / on ________________ pursuant to paragraph (a)(ii) of Rule 485.
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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)
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Item
Number Form N-1A Heading Caption in Prospectus
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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 Risks; 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 Offered Determination of Net Asset Value; Purchasing
Shares
8. Redemption or Repurchase Redemption and Repurchase of Shares
9. Pending Legal Proceedings Inapplicable
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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)
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Item Caption in Statement of
Number Form N-1A Heading Additional Information
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10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. General Information and History General Information
13. Investment Objectives and Policies Investment Restrictions; Risk Factors
14. Management of the Fund Directors and Executive Officers
15. Control Persons and Principal Holders Control Persons and Principal Holders
of Securities of Securities
16. Investment Advisory and Other Investment Advisory 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 of Determination of Net Asset Value; How to Buy
Securities Being Offered and Redeem Shares
20. Tax Status Taxes
21. Underwriter Distributor
22. Calculation of Performance Data Performance Information
23. Financial Statements Financial Statements
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CAPSTONE GOVERNMENT INCOME FUND
A SERIES OF CAPSTONE FIXED INCOME SERIES, INC.
5847 San Felipe, Suite 4100
Houston, TX 77057
1-800-262-6631
MARCH 31, 1998
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 March 31,
1998 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.
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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 First Data Investor Services Group, Inc.
5847 San Felipe, Suite 4100 3200 Horizon Drive
Houston, Texas 77057 P.O. Box 61503
1-800-262-6631 King of Prussia, Pennsylvania 19406-0903
TABLE OF CONTENTS
PAGE
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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......................................................... 16
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.
2
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CAPSTONE GOVERNMENT INCOME FUND
PROSPECTUS SUMMARY
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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 14)
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
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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 16)
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)
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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 0.50%
12b-1 Fees* 0.20%
Other Expenses 0.17%
Total Fund Operating Expenses 0.87%
EXAMPLE
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1 year 3 years 5 years 10 years
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You would pay the following expenses on a $1,000
investment, assuming (1) 5% annual return and
(2) redemption at the end of each time period: $9 $28 $48 $107
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* 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, 1997. The management and administration fee information contained
in the table is based on the maximum asset-based fees. There
5
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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 OVER THE
ILLUSTRATED PERIOD. THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF
PAST OR FUTURE EXPENSES. ACTUAL FUND EXPENSES MAY BE GREATER OR LESSER THAN
THOSE SHOWN IN THE EXAMPLE OR IN THE TABLE.
6
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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 the independent public accounting firm of Briggs, Bunting &
Dougherty, LLP for the most recent fiscal year and by other accounting firms for
the other periods indicated. 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.
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PERIOD
FROM
ELEVEN OCT. 1,
YEAR ENDED MONTHS YEAR ENDED 1991 TO
NOVEMBER 30, ENDED DECEMBER 31 , DEC. 31, YEAR ENDED SEPTEMBER 30,
------------------ NOV. 30, -------------------------- --------- ---------------------------
1997 1996 1995(1) 1994 1993 1992 1991(2) 1991(3) 1990 1989
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PER SHARE DATA (4)
Net asset value at beginning
of period................. $24.45 $24.90 $23.65 $24.00 $23.70 $23.35 $23.65 $23.35 $25.45 $26.10
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Income from investment
operations:
Net investment income 1.15 1.00 1.20 .90 .85 1.15 .30 1.25 2.20 2.25
Net realized and
unrealized gain (loss) (.11) (.05) .05 (.60) (.05) (.30) .30 (.40) (2.00) (.55)
------- ------- ------ ------ ------ ------ ------ ------ ------- ------
Total from investment
operations................ 1.04 .95 1.25 .30 .80 .85 .60 .85 .20 1.70
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Less distributions from net
investment income......... (.53) (1.40) .00 (.65) (.50) (.50) (.90) (.55) (2.30) (2.35)
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Net asset value at end of
period.................... $24.96 $24.45 $24.90 $23.65 $24.00 $23.70 $23.35 $23.65 $23.35 $25.45
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Total Return................ 4.34% 4.07% 5.29% 1.13% 3.32% 3.55% 2.49% 3.63% .73% 6.73%
====== ====== ====== ====== ====== ====== ====== ====== ======= =====
RATIOS/SUPPLEMENTAL DATA
Ratio of operating expenses
to average net assets .87% .95% .77%(5) .87% .93% .92% .31% 1.45% 1.40% 1.24%
Ratio of interest expenses
to average net assets .00% .00% .00% .00% .00% .04% .10% .22% .00% .00%
------- ------- ------- ------ ------ ------ ------ ------ ------ ------
Ratio of total expenses to
average net assets........ .87% .95% .77%(5) .87% .93% .96% .41% 1.67% 1.40% 1.24%
====== ====== ======= ======= ======= ======= ======= ===== ===== =====
Ratio of net investment
income to average net assets 4.72% 4.44 5.56%(5) 4.20% 3.64% 4.69% 1.34% 5.29% 9.06% 8.75%
Portfolio turnover.......... 563.42% 615.39% 309.66% 285.13% 596.36% 633.41% 129.05% 753.62% 82.00% 69.89%
Net assets at end of period
(in thousands)............ $72,444 $79,754 $67,997 $8,705 $33,795 $29,847 $30,565 $36,720 $17,648 $20,214
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(1) Based on average shares outstanding determined daily.
(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.
(4) Adjusted for reverse 5:1 stock split on January 13, 1997.
(5) Annualized.
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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,
1997, 1996 and 1995 was 563%, 615% and 310%, 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).
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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 other highly liquid 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
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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
10
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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 premiums relating to 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 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.
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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
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<PAGE> 16
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 Lehman Brothers One to Three-Year Government 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 IBC Financial Data; (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 Lehman Brothers 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
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<PAGE> 17
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 three other mutual
funds: Capstone Growth Fund, Inc., Capstone Japan Fund and Capstone New Zealand
Fund (collectively, the "Capstone Funds"), and to pension and profit sharing
accounts, corporations and individuals. Assets under management are
approximately $1.8 billion.
The Fund has been managed since 1992 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, including the Fund. Mr. Potter assumed his present
position with the Adviser when NCA was acquired by the Advier's parent, Capstone
Financial Services, Inc., in 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 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, 1997
the Fund paid advisory fees to the Adviser equal to 0.40% of the Fund's average
daily net assets.
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 from year to year provided
its renewal 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
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<PAGE> 18
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.
The Fifth Third Bank of Cincinnati, Ohio performs accounting, bookkeeping and
pricing services for the Fund. For these services, Fifth Third Bank receives a
monthly fee from the Fund. Prior to February 10, 1997, the Adviser provided
these services and was reimbursed by the Fund for its costs. The amount paid to
the Adviser was not intended to include any profit, and was in addition to the
advisory and administrative fees.
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 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
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<PAGE> 19
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, 1997, the
effective rate of servicing fees paid to service organizations other than
Capstone Asset Planning Company was 0.14% 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 12, 1997.
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 related to the sale of 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. The Fund's total operating expenses as a
percentage of its average net assets during the fiscal year ended November 30,
1997 were 0.87%.
PURCHASING SHARES
Capstone Asset Planning Company (the "Distributor"), located at 5847
San Felipe, Houston, Texas 77057, is the principal underwriter of the Fund and,
acting as exclusive agent, sells shares of the Fund to the public on a
continuous basis. Edward L. Jaroski is a director of the Corporation, the
Adviser and the Distributor. Some officers of the Fund are also officers of the
Adviser, Distributor and their parent company, Capstone Financial Services, Inc.
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<PAGE> 20
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. Except for the Fund itself, 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. 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.
Checks made payable to third parties will not be accepted.
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 to the Fund's Transfer Agent: Capstone Government
Income Fund, c/o First Data Investor Services Group, Inc., 3200 Horizon Drive,
P.O. Box 61503, King of Prussia, Pennsylvania 19406-0903. 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
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<PAGE> 21
$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; First Data Investor Services Group, 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 should be promptly forwarded to Capstone Government Income Fund, c/o
First Data Investor Services Group, Inc., 3200 Horizon Drive, P.O. Box 61503,
King of Prussia, Pennsylvania 19406-0903.
Subsequent Purchases - Additional investments may be made at any time
through the wire procedures described above, which must include the investor's
name and account number. The investor's bank may impose a fee for investments by
wire.
DISTRIBUTIONS AND TAXES
PAYMENT OPTIONS
Distributions (whether treated for tax purposes as ordinary income or
long-term capital gains) to stockholders of the Fund are paid in additional
shares of the Fund, with no sales charge, based on the Fund's net asset value as
of the close of business on the record date for such distributions. However, a
stockholder may elect on the application form which accompanies this Prospectus
to receive distributions as follows:
Option 1. To receive income dividends in cash and capital gain
distributions in additional Fund shares, or
Option 2. To receive all income dividends and capital gain
distributions in cash.
The Fund pays any dividends from investment company taxable income
annually in December, and intends to make any distributions representing net
capital gain annually in December. The Fund will advise each stockholder
annually of the amounts of dividends from investment company taxable income and
of net capital gain distributions reinvested or paid in cash to the stockholder
during the calendar year.
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<PAGE> 22
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, but the rate of tax will depend on the Fund's holding period
for the assets whose sale gives rise to the gain. The tax treatment of
distributions treated as ordinary income or capital gain will be the same
whether the stockholder invests the distributions in additional shares or elects
to receive them in cash. Some of the Fund's distributions may constitute a
return of capital.
Stockholders will be notified each year of the amounts and nature of
dividends and distributions paid to them by the Fund, including the amounts (if
any) for that year which have been designated as capital gain dividends.
Special tax rules may apply to the Fund's transactions involving
options. These rules, among other things: (i) may affect whether capital gains
and losses from such transactions are considered to be short-term or long-term;
(ii) may have the effect of converting capital gains and losses into ordinary
income and losses; (iii) may have the effect of deferring losses and/or
accelerating the recognition of gains or losses; and (iv) for purposes of
qualifying as a regulated investment company, may limit the extent to which the
Fund will be able to engage in such transactions.
Upon the sale, redemption, or other disposition of shares of the Fund,
a stockholder generally will realize a taxable gain or loss, depending upon his
basis in the shares. Such gain or loss will be treated as capital gain or loss
if the shares are capital assets in the stockholder's hands and will be
long-term or short-term, depending on the stockholder's holding period for the
shares. Any loss realized on a sale or exchange will be disallowed to the extent
the shares disposed of are replaced (including shares acquired pursuant to the
reinvestment plan) within a period of 61 days beginning 30 days before and
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<PAGE> 23
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. 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 First Data Investor Services Group,
Inc., 3200 Horizon Drive, P.O. Box 61503, King of Prussia, Pennsylvania
19406-0903. 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
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<PAGE> 24
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 generally will 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 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.
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<PAGE> 25
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, Martin Luther King's Birthday,
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 at amortized value. Short-term instruments having a
maturity date of 60 days or less at the time of purchase are valued at amortized
cost value unless the Board of Directors determines this does not represent fair
market value. When market quotations are not readily available, portfolio
securities are valued at their fair value as determined in good faith under
procedures established by and under the general supervision of the Board of
Directors (valuation of securities for which market quotations are not readily
available may be based upon current market prices of securities which are
comparable in coupon, rating and maturity or an appropriate matrix utilizing
similar factors).
STOCKHOLDER SERVICES
Capstone Government Income Fund provides its stockholders with a number
of services and conveniences designed to assist investors in the management of
their investments. These stockholder services include the following:
TAX-DEFERRED RETIREMENT PLANS
Shares may be purchased by virtually all types of tax-deferred
retirement plans. The Distributor or its affiliates make available plan forms
and/or custody agreements for the following:
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.
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<PAGE> 26
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, 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
23
<PAGE> 27
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. 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 50% of the shares
voting for the election of directors may elect 100% of the directors if they
choose to do so, and in such event the holders of the remaining less than 50% of
the shares voting for the directors will not be able to elect any directors. All
shares have equal dividend rights, are fully paid, nonassessable and freely
transferable and have no conversion, pre-emptive or subscription rights.
Fractional shares have the same rights, pro rata, as full shares.
If the Corporation has more than one series of shares outstanding,
on all matters submitted to
24
<PAGE> 28
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. First Data Investor Services
Group, 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.
25
<PAGE> 29
CAPSTONE GOVERNMENT INCOME FUND
A SERIES OF CAPSTONE FIXED INCOME SERIES, INC.
STATEMENT OF ADDITIONAL INFORMATION
March 31, 1998
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 March 31,
1998. 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...................................... 11
Distributor................................................... 12
Portfolio Transactions and Brokerage.......................... 14
Determination of Net Asset Value.............................. 15
How to Buy and Redeem Shares.................................. 16
Taxes......................................................... 16
Control Persons and Principal Holders of Securities........... 20
Other Information............................................. 20
Financial Statements.......................................... 22
<PAGE> 30
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;
2
<PAGE> 31
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
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<PAGE> 32
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
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<PAGE> 33
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 other liquid securities in an amount of not less than the
exercise price of the option, or would hold a put on the same underlying
security at an equal or greater exercise price.
CLOSING PURCHASE TRANSACTIONS AND OFFSETTING TRANSACTIONS. In order to
terminate its position as a writer of a call or put option, the Fund could enter
into a "closing purchase transaction," which is the purchase of a call (put) on
the same underlying security and having the same exercise price and expiration
date as the call (put) previously written by the Fund. The Fund would realize a
gain (loss) if the premium plus commission paid in the closing purchase
transaction is less (greater) than the premium it received on the sale of the
option. The Fund would also realize a gain if an option it has written lapses
unexercised.
The Fund could write options that are listed on an exchange as well as
options which are privately negotiated in over-the-counter transactions. A Fund
could close out its position as a writer of an option only if a liquid secondary
market exists for options of that series, but there is no assurance that such a
market will exist, particularly in the case of over- the-counter options, since
they can be closed out only with the other party to the transaction.
Alternatively, the Fund could purchase an offsetting option, which would not
close out its position as a writer, but would provide an asset of equal value to
its obligation under the option written. If the Fund is not able to enter into a
closing purchase transaction or to purchase an offsetting option with respect to
an option it has written, it will be required to maintain the securities subject
to the call or the collateral underlying the put until a closing purchase
transaction can be entered into (or the option is exercised or expires), even
though it might not be advantageous to do so.
PURCHASING CALL AND PUT OPTIONS. The Fund could purchase call options
to protect (i.e., hedge) against anticipated increases in the prices of
securities it wishes to acquire. Alternatively, call options
5
<PAGE> 34
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 other liquid 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.
6
<PAGE> 35
PERFORMANCE INFORMATION
The Fund may from time to time include figures indicating its yield,
total return or average annual total return in advertisements or reports to
stockholders or prospective investors. Quotations of the Fund's yield will be
based on all investment income per share earned during a particular 30-day
period (including dividends and interest), less expenses accrued during the
period ("net investment income"), and are computed by dividing net investment
income per share earned during the period by the maximum offering price per
share on the last day of the period, according to the following formula:
6
YIELD = 2[(a-b + 1) -1]
---
cd
where a = dividends and interest earned during the period,
b = expenses accrued for the period (net of reimbursements or
waivers),
c = the average daily number of shares outstanding during
the period that were entitled to receive dividends, and
d = the maximum offering price per share on the last day of
the period.
For the 30-day period ended November 30, 1997 the Fund's yield was
4.85%.
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:
n
P (1 + T) = ERV
where P = a hypothetical initial payment of $1,000,
T = the average annual total return,
n = the number of years, and
ERV = the ending redeemable value of a hypothetical
$1,000 payment made at the beginning of the period.
For the 1, 5 and 10 year periods ended November 30, 1997 the Fund's
average annual total return was 4.34%, 3.73% and 4.60%, 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, 1997 the Fund's total return was 4.34%, 20.10% and
56.13%, 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 Lehman Brothers One to Three-Year
Government Bond Index; (ii) certain performance figures prepared
7
<PAGE> 36
for broad groups of mutual funds with investment goals similar to the Fund by
organizations such as Lipper Analytical and IBC Financial Data; (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 Lehman Brothers 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 (51), 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.
8
<PAGE> 37
JAMES F. LEARY (67), Director. c/o Search Capital Group, Inc., 600 N.
Pearl Street, Suite 2500, Dallas, Texas 75201. 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 (51), Director. 541 Shaw Hill, Stowe, Vermont 05672.
Consultant and private investor (since 1990); Director of
Nova Natural Resources (oil, gas, minerals); Director of
other Capstone Funds; formerly Senior Vice President of
McRae Capital Management, Inc. (1991-1995); and registered
representative of Rickel & Associates (1988-1991).
BERNARD J. VAUGHAN (69), 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 (49), 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 (46), Executive Vice President. 1 Barker Avenue,
White Plains, New York 10601. Managing Director of Capstone
Financial Services, Inc., Capstone Asset Management Company
and Capstone Asset Planning 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 (35), Vice President. 5847 San Felipe, Suite 4100,
Houston, Texas 77057. Senior Vice President (since 1997),
Vice President (1993-1997) and Assistant Vice President
(1992-1993) of Capstone Financial Services, Inc. and
Capstone Asset Management Company; Assistant Portfolio
Manager (1991-1992) and Investment Analyst (1990-1991) with
Capstone Financial Services, Inc.
IRIS R. CLAY (45), Secretary. 5847 San Felipe, Suite 4100, Houston,
Texas 77057. Secretary (since February 1996); Assistant Vice
President (1994-1996) and Assistant Secretary (1990-1994) of
Capstone Financial Services, Inc., Capstone Asset Management
Company and Capstone Planning Company; Officer of other
Capstone Funds.
9
<PAGE> 38
LINDA G. GIUFFRE (36), Treasurer. 5847 San Felipe, Suite 410,
Houston, Texas 77057. Vice President and Treasurer (since
February 1996) of Capstone Financial Services, Inc., Capstone
Asset Management Company and Capstone Asset Planning Company;
Treasurer and Secretary (1994-1996) of Capstone Financial
Services, Inc., Capstone Asset Management Company and Capstone
Asset Planning Company; Treasurer (1987- 1994) of Capstone
Financial Services, Inc.; Officer of other Capstone Funds.
The Corporation has an Audit Committee and a Nominating Committee
(chaired by Mr. Vaughan), a Compliance Committee (chaired by Mr. Leary) and a
Valuation Committee (chaired by Mr. Parker). The disinterested directors serve
on each 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, 1997, the Fund paid or accrued for the account of the
directors and officers, as a group for services in all capacities, a total of
$7,487.
The following table represents the fees paid during the 1997 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 $2,000 $0 $0 $5,750(1,2)
John R. Parker, Director 2,125 0 0 5,750(1,2)
Bernard J. Vaughan, Director 2,375 0 0 9,750(1,2)
</TABLE>
- ------------
* Directors do not receive any deferred compensation.
(1) Director of Capstone Growth Fund, Inc.
(2) Trustee of Capstone International Series Trust.
10
<PAGE> 39
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, 1997
totaled $249,523.
The Adviser received advisory fees from the Fund totaling $221,614
during the fiscal year ended November 30, 1996, of which $15,105 was paid to
NCA. During the fiscal year ended November 30, 1995, the Adviser received
advisory fees from the Fund totaling $604,189, of which $453,142 was paid to
NCA.
DURATION AND TERMINATION
Unless terminated earlier as described below, the current Advisory
Agreement between the Fund and the Adviser will remain in effect from year to
year provided its renewal 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
11
<PAGE> 40
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 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. 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 Fifth Third Bank of Cincinnati, Ohio performs accounting,
bookkeeping and pricing services for the Fund. For these services, Fifth Third
Bank receives a monthly fee from the Fund. Prior to February 10, 1997, the
Adviser provided these services and was reimbursed by the Fund for its costs.
The amount paid to the Adviser was not intended to include any profit, and was
in addition to the advisory and administrative fees.
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
12
<PAGE> 41
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 Distribution Agreement is renewable from year to year if approved
(a) by the Corporation's Board of Directors or by a vote of a majority of the
Fund's outstanding voting securities and (b) by the affirmative vote of a
majority of directors who are not parties to the Distribution Agreement or
interested persons of any party thereto, by votes cast in person at a meeting
called for such purpose. The Distribution Agreement provides that it will
terminate if assigned (as defined in the 1940 Act), and that it may be
terminated without penalty by either party on 60 days' written notice.
On January 8, 1991, the Fund adopted a Service and Distribution Plan
(the "Plan") pursuant to Rule 12b-1 of the Investment Company Act of 1940 which
permits the Fund to absorb certain expenses in connection with the distribution
of its shares and provision of certain services to stockholders. See "Management
of the Fund - Distributor" in the Fund's Prospectus. As required by Rule 12b-1,
the Fund's Plan and related agreements were approved by a vote of the Fund's
Board of Directors, and by a vote of the directors who are not "interested
persons" of the Fund as defined under the 1940 Act and have no direct or
indirect interest in the operation of the Plan or any agreements related to the
Plan (the "Plan Directors"), and by the Fund's stockholders at a Special Meeting
of Stockholders held December 20, 1990. In compliance with the Rule, the
directors requested and evaluated information they thought necessary to make an
informed determination of whether the Plan and related agreements should be
implemented, and concluded, in the exercise of reasonable business judgment and
in light of their fiduciary duties, that there is a reasonable likelihood that
the Plan and related agreements will benefit the Fund and its stockholders.
As required by Rule 12b-1, the directors review quarterly reports
prepared by the Distributor on the amounts expended and the purposes for the
expenditures. The Fund paid $124,893 in 12b-1 fees during the fiscal year ended
November 30, 1997. Of this amount, $85,775 was paid to outside Service
Organizations and the balance was retained by the Distributor as reimbursement
of distribution-related expenses including, but not limited to: compensation of
Capstone employees who engage in or support the marketing and servicing efforts
on behalf of the Fund (approximately $199,387); printing of advertising
materials, prospectuses and financial reports distributed to prospective
investors (approximately $19,355); postage and mailing expenses (approximately
$2,823); and other miscellaneous costs and expenses incurred in the operation of
the Plan ($78,035). 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
----------- ----------- --------------- ---------------------
11/97 $124,893 $39,118 $85,775
11/96 110,894 32,139 78,755
11/95 305,403 15,643 289,760
13
<PAGE> 42
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 12, 1997.
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 may effect securities transactions through Capstone Asset Planning
Company, TradeStar Investments, Inc. and Williams MacKay Jordan & Co., 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
14
<PAGE> 43
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 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
15
<PAGE> 44
pricing variable changed daily is the price of the underlying security.
Short-term instruments having a maturity date of more than 60 days are valued on
a "mark-to-market" basis, that is, at prices based on market quotations for
securities of similar type, yield, quality and maturity, until 60 days prior to
maturity and thereafter at amortized value. Short-term instruments having a
maturity date of 60 days or less at the time of purchase are valued at amortized
cost value unless the Board of Directors determines this does not represent fair
market value. When market quotations are not readily available, portfolio
securities are valued at their fair value as determined in good faith under
procedures established by and under the general supervision of the Board of
Directors (valuation of securities for which market quotations are not readily
available may be based upon current market prices of securities which are
comparable in coupon, rating and maturity or an appropriate matrix utilizing
similar factors).
HOW TO BUY AND REDEEM SHARES
Shares of the Fund are sold in a continuous offering and may be
purchased on any business day through authorized dealers, including Capstone
Asset Planning Company. Certain broker-dealers assist their clients in the
purchase of shares from the Distributor and may charge a fee for this service in
addition to the Fund's net asset value.
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 First Data Investor Services Group, Inc., P.O. Box
61503, 3200 Horizon Drive, King of Prussia, Pennsylvania 19406-0903. 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. Future changes in tax laws may 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
16
<PAGE> 45
short-term capital gains over net long-term capital losses) and meet certain
diversification of assets, source of income, and other requirements of the Code.
As a regulated investment company, the Fund generally is not
subject to Federal income tax on its investment company taxable income and net
capital gain (net long-term capital gains in excess of net short-term capital
losses), if any, that it distributes to stockholders. The Fund intends to
distribute to its stockholders, at least annually, substantially all of its
investment company taxable income and net capital gain. Amounts not distributed
on a timely basis in accordance with a calendar year distribution requirement
are subject to a nondeductible 4% excise tax. To prevent imposition of the tax,
the Fund must distribute during each calendar year (1) at least 98% of its
ordinary income (not taking into account any capital gains or losses) for the
calendar year, (2) at least 98% of its capital gains in excess of its capital
losses for the twelve-month period ending on October 31 of the calendar year
(reduced by certain ordinary losses, as prescribed by the Code), and (3) all
ordinary income and capital gains for previous years that were not distributed
during such years. A distribution will be treated as paid on December 31 of the
calendar year if it is declared by the Fund in October, November or December of
that year to stockholders on a record date in such a month and paid by the Fund
during January of the following calendar year. Such distributions will be
taxable to stockholders in the calendar year the distributions are declared,
rather than the calendar year in which the distributions are received. To
prevent application of the excise tax, the Fund intends to make its
distributions in accordance with the calendar year distribution requirement.
If the Fund retains its net capital gains, 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, whether received in cash or reinvested in Fund shares, will be
taxable to a stockholder as ordinary income. The excess of net long-term capital
gains over the short-term capital losses realized and distributed by the Fund,
whether paid in cash or reinvested in Fund shares, will generally be taxable to
stockholders as either "20% Rate Gain" or "28% Rate Gain," depending upon the
Fund's holding period for the assets sold. "20% Rate Gains" arise from sales of
assets held by the Fund for more than 18 months and are subject to a maximum tax
rate of 20%; "28% Rate Gains" arise from sales of assets held by the Fund for
more than one year but no more than 18 months and are subject to a maximum tax
rate of 28%. Net capital gains from assets held for one year or less will be
taxed as ordinary income. Distributions will be subject to these capital gain
rates regardless of how long a stockholder has held Fund shares.
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
17
<PAGE> 46
of the Fund are debt-financed or if the stockholder does not meet certain
holding period requirements.
All distributions are taxable to the stockholder whether reinvested
in additional shares or received in cash. Stockholders receiving distributions
in the form of additional shares will have a cost basis for Federal income tax
purposes in each share received equal to the net asset value of a share of the
Fund on the reinvestment date. Stockholders will be notified annually as to the
Federal tax status of distributions paid to them by the Fund.
Distributions by the Fund reduce the net asset value of the Fund
shares. Should a distribution reduce the net asset value below a stockholder's
cost basis, such distribution nevertheless would be taxable to the stockholder
as ordinary income or capital gain as described above, even though, from an
investment standpoint, it may constitute a partial return of capital. In
particular, investors should be careful to consider the tax implications of
buying shares just prior to a distribution by the Fund. The price of shares
purchased at that time includes the amount of the forthcoming distribution, but
the distribution will generally be taxable to them.
HEDGING AND OTHER TRANSACTIONS. Certain options are "section 1256
contracts." Any gains or losses on section 1256 contracts generally are
considered 60% long-term and 40% short-term capital gains or losses ("60/40").
Also, section 1256 contracts held by the Fund at the end of each taxable year
(and at other times prescribed pursuant to the Code) are "marked-to-market" with
the result that unrealized gains or losses are treated as though they were
realized and the resulting gain or loss is generally treated as 60/40 gain or
loss.
Generally, the hedging transactions undertaken by the Fund may
result in "straddles" for Federal income tax purposes. The straddle rules may
affect the character of gains (or losses) realized by the Fund. In addition,
losses realized by the Fund on positions that are part of a straddle may be
deferred under the straddle rules, rather than being taken into account in
calculating the taxable income for the taxable year in which such losses are
realized. Because only a few regulations implementing the straddle rules have
been promulgated, the tax consequences to the Fund of hedging transactions are
not entirely clear. The hedging transactions may increase the amount of
short-term capital gain realized by the Fund which is taxed as ordinary income
when distributed to stockholders.
The Fund may make one or more of the elections available under the
Code which are applicable to straddles. If the Fund makes any of the elections,
the amount, character and timing of the recognition of gains or losses from the
affected straddle positions will be determined under rules that vary according
to the election(s) made. The rules applicable under certain of the elections may
operate to accelerate the recognition of gains or losses from the affected
straddle positions.
Because application of the straddle rules may affect the character
of gains or losses, defer losses and/or accelerate the recognition of gains or
losses from the affected straddle positions, the amount which must be
distributed to stockholders, and which will be taxed to stockholders as ordinary
income or long-term capital gain, may be increased or decreased substantially as
compared to a fund that did not engage in such hedging transactions.
Because the tax consequences of straddle transactions to the Fund
are not entirely clear, it may ultimately be determined that the Fund's tax
accounting procedures failed to conform to the straddle rules. Consequently, the
Fund may have inadvertently failed to satisfy one or more of the requirements
18
<PAGE> 47
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
19
<PAGE> 48
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 March 20, 1998:
REGISTRATION PERCENT OWNED
------------ -------------
The Standard Register Company 44.21%
600 Albany Street
Dayton, Ohio 45408
Jack Henry & Associates, Inc. 11.94%
663 Highway 60
Monett, Missouri 65708
Jacobs Bank 5.90%
510 E. Laurel Street
Scottsboro, Alabama 35768
Sierra West 5.87%
10181 Truckee Tahoe Airport Road
Truckee, California 96160
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.
20
<PAGE> 49
INDEPENDENT ACCOUNTANTS. Briggs, Bunting & Dougherty, LLP, Two Logan
Square, Suite 211, Philadelphia, Pennsylvania 19103-4901, the independent
accountants for the Fund, performs annual audits of the Fund's financial
statements.
LEGAL COUNSEL. Dechert Price & Rhoads, 1775 I Street, N.W.,
Washington, DC 20006, is legal counsel to the Fund.
21
<PAGE> 50
CAPSTONE GOVERNMENT INCOME FUND
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Shareholders and Board of Directors of
Capstone Fixed Income Series, Inc.
Houston, Texas
We have audited the accompanying statement of assets and liabilities of Capstone
Government Income Fund (the "Fund"), a series of Capstone Fixed Income Series,
Inc., including the portfolio of investments and schedule of option contracts
written, as of November 30, 1997, the related statement of operations, the
statement of changes in net assets, and the financial highlights for the year
then ended. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audit. The statement of changes in net assets of Capstone Government Income Fund
for the year ended November 30, 1996 and the financial highlights for the year
then ended, the eleven months ended November 30, 1995, and each of the three
years in the period ended December 31, 1994 were audited by other auditors whose
reports dated December 13, 1996 and February 9, 1993, expressed unqualified
opinions on the statement of changes in net assets and the financial highlights.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements and financial highlights are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of securities owned as of November 30, 1997 by
correspondence with the custodian and brokers. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Capstone Government Income Fund as of November 30, 1997, the results of its
operations, the changes in its net assets, and the financial highlights for the
year then ended in conformity with generally accepted accounting principles.
Briggs, Bunting & Dougherty, LLP
Philadelphia, Pennsylvania
December 19, 1997
<PAGE> 51
<TABLE>
CAPSTONE GOVERNMENT INCOME FUND
- --------------------------------------------------------------------------------
<CAPTION>
PORTFOLIO OF INVESTMENTS - November 30, 1997
- ------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL VALUE PERCENTAGE OF
BONDS AMOUNT (SEE NOTE 1-A) NET ASSETS
<S> <C> <C> <C>
U.S. GOVERNMENT & GOVERNMENT AGENCIES (83.64%)
U.S. Treasury Note, 5.500%, 11/15/98 .....................................$ 17,000,000 $ 16,957,500 23.40%
U.S. Treasury Note, 5.625%, 10/31/99 ..................................... 10,000,000 9,968,100 13.76
FNMA, 5.691%, 03/13/98 ................................................... 6,000,000 5,999,940 8.28
FHLB Note, 5.945%, 05/26/99 .............................................. 5,000,000 5,000,000 6.90
FHLB Note, 5.800%, 01/23/98 .............................................. 1,700,000 1,699,703 2.37
FHLB Note, 6.085%, 12/09/99 .............................................. 3,000,000 3,000,000 4.14
FHLB Note, 6.270%, 12/20/99 .............................................. 3,000,000 2,997,885 4.14
FMC Discount Note, 12/15/97 .............................................. 15,000,000 14,968,208 20.65
------------ ------
TOTAL U.S. GOVERNMENT (Cost $60,628,491) ................................. 60,591,336 83.64
SHORT-TERM OBLIGATIONS
REPURCHASE AGREEMENTS (16.00%)
First Boston, 5.70%, 12/01/97 (dated 11/28/97) Collateralized by $10,935,000
Tennessee Valley Authority, 8.625%, due 11/15/29
(Repurchase Proceeds $11,595,505) ..................................... 11,590,000 11,590,000 16.00
------------ ------
TOTAL SHORT-TERM OBLIGATIONS (Cost $11,590,000) .................................... 11,590,000 16.00
TOTAL INVESTMENTS IN SECURITIES (Cost $72,218,491) ................................. 72,181,336 99.64
OTHER ASSETS LESS LIABILITIES ...................................................... 262,946 0.36
------------ ------
NET ASSETS .........................................................................$ 72,444,282 100.00%
============ ======
At November 30, 1997, unrealized appreciation (depreciation) of securities based
on Federal income tax cost is as follows:
Unrealized appreciation ..................................................................$ 11,654
Unrealized depreciation .................................................................. (42,509)
-----------
Net unrealized depreciation ............................................................$ (30,855)
===========
<CAPTION>
SCHEDULE OF OPTIONS WRITTEN
FACE AMOUNT
COVERED CALL OPTION OF CONTRACT VALUE
<S> <C> <C>
U.S. Treasury Note, 5.625%, due 10/31/99 .................................................$ 10,000,000 $6,200
======
December 1997 at $99.875 (Premium received $12,500)
</TABLE>
See Accompanying Notes to Financial Statements
<PAGE> 52
<TABLE>
CAPSTONE GOVERNMENT INCOME FUND
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES - November 30, 1997
- --------------------------------------------------------------------------------
<CAPTION>
ASSETS:
<S> <C>
Investments in securities at market value (identified cost $72,218,491) (Note 1A) ......... $ 72,181,336
Cash ...................................................................................... 5,434
Interest receivable ....................................................................... 425,286
------------
Total Assets ......................................................................... 72,612,056
------------
LIABILITIES:
Written option, at value (premium received $12,500) (Notes 1A, 1B, and 4) ................. 6,200
Payable for capital stock redeemed ........................................................ 109,730
Accrued expenses .......................................................................... 51,844
------------
Total Liabilities .................................................................... 167,774
------------
NET ASSETS ......................................................................................... $ 72,444,282
============
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE:
($72,444,282/2,902,670 shares outstanding of $.001 par value, 200,000,000 shares authorized) ....... $ 24.96
============
SOURCE OF NET ASSETS:
Paid in capital ........................................................................... $ 76,266,380
Undistributed net investment income ....................................................... 2,945,523
Accumulated net realized loss on investments .............................................. (6,736,766)
Net unrealized depreciation of securities and written options ............................. (30,855)
------------
Total ................................................................................ $ 72,444,282
============
See Accompanying Notes to Financial Statements
</TABLE>
<PAGE> 53
<TABLE>
CAPSTONE GOVERNMENT INCOME FUND
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS FOR THE YEAR ENDED - November 30, 1997
- --------------------------------------------------------------------------------
<CAPTION>
<S> <C> <C>
INVESTMENT INCOME
Interest income .............................................................................$ 3,490,346
Expenses:
Advisory fees (Note 2) ...................................................$ 249,523
Distribution fees (Note 2) ............................................... 124,893
Administrative services (Note 2) ......................................... 61,380
Transfer agent fees ...................................................... 33,538
Reports and notices to stockholders ...................................... 11,907
Professional fees ........................................................ 22,079
Directors' fees and expenses ............................................. 7,487
Custodian fees ........................................................... 4,790
Registration and filing fees ............................................. 12,776
Miscellaneous ............................................................ 16,450
-----------
Total Expenses ...................................................................... 544,823
-----------
Net Investment Income ........................................................... 2,945,523
-----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized loss from security transactions ................................................ (225,479)
Net realized gain from written options ...................................................... 45,117
Unrealized depreciation of investments:
Beginning of period ...................................................... (34,222)
End of period ............................................................ (30,855)
-----------
Net change in unrealized depreciation of investments ................................... 3,367
-----------
Net realized and unrealized loss on investments ........................................ (176,995)
-----------
Net increase in net assets resulting form operations ...............................$ 2,768,528
===========
See Accompanying Notes to Financial Statements
</TABLE>
<PAGE> 54
<TABLE>
CAPSTONE GOVERNMENT INCOME FUND
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED YEAR ENDED
NOVEMBER 30, 1997 NOVEMBER 30, 1996
<S> <C> <C>
OPERATIONS:
Net investment income ........................................................ $ 2,945,523 $ 2,458,569
Net realized loss on investments ............................................. (180,362) (154,720)
Net change in unrealized depreciation of investments ......................... 3,367 (117,237)
------------ ------------
Net increase in net assets resulting from operations ......................... 2,768,528 2,186,612
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income ........................................................ (253,678) (599,304)
------------ ------------
CAPITAL SHARE TRANSACTIONS:
Increase (decrease) in net assets resulting
from capital share transactions (Note 3) ................................ (9,824,539) 10,169,466
------------ ------------
Total increase (decrease) in net assets ............................... (7,309,689) 11,756,774
NET ASSETS
Beginning of year ............................................................ 79,753,971 67,997,197
------------ ------------
End of year (including undistributed net investment income of $2,945,523
and $2,205,726, respectively) ........................................... $ 72,444,282 $ 79,753,971
============ ============
See Accompanying Notes to Financial Statements
</TABLE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS - November 30, 1997
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Capstone Government Income 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.
<PAGE> 55
CAPSTONE GOVERNMENT INCOME FUND
- --------------------------------------------------------------------------------
(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.
(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 $6,532,700 of capital losses for
Federal income tax purposes available to offset future taxable capital gains, if
any, of which $1,910,000 expires in December 1999, $2,194,600 expires in
December 2001, $1,252,800 expires in December 2002, $1,005,300 expires in
December 2003 and $170,000 expires in December 2004.
(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.
<PAGE> 56
CAPSTONE GOVERNMENT INCOME FUND
- --------------------------------------------------------------------------------
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, 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 year
ended November 30, 1997 were $310,903.
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 year ended November 30, 1997, the Fund paid $124,893 in
distribution expenses. Of this amount $85,775 was paid to Service Organizations
other than CAPCO.
<PAGE> 57
CAPSTONE GOVERNMENT INCOME FUND
- --------------------------------------------------------------------------------
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.
NOTE 3 - CAPITAL STOCK
Transactions in capital stock were as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
NOVEMBER 30, 1997 NOVEMBER 30, 1996
SHARES VALUE SHARES VALUE
<S> <C> <C> <C> <C>
Shares sold .......................................... 7,182,708 $ 174,386,902 5,128,444 $ 122,330,049
Shares issued to shareholders in reinvestment
of distributions ................................... 9,684 231,939 24,145 568,610
------------- ------------- ------------- -------------
7,192,392 174,618,841 5,152,589 122,898,659
Shares reacquired .................................... (7,550,644) (184,443,380) (4,620,858) (112,729,193)
------------- ------------- ------------- -------------
Net increase (decrease) .............................. (358,252) $ (9,824,539) 531,731 $ 10,169,466
============= ============= ============= =============
</TABLE>
In January 1997, the Fund effected a five for one reverse stock split. All
shares and per share information have been adjusted to reflect this transaction.
NOTE 4 - PURCHASES AND SALES OF SECURITIES
For the year ended November 30, 1997, the cost of purchases and proceeds
from sales of securities other than short-term obligations aggregated
$169,918,706 and $176,610,732, respectively.
Written options transactions during the period are summarized as follows:
<TABLE>
<CAPTION>
CALL/PUT OPTIONS WRITTEN FACE AMOUNT
PREMIUMS RECEIVED OF CONTRACTS
<S> <C> <C>
Options outstanding at November 30, 1996 ......................... $ (15,625) $ 10,000,000
Options written .................................................. (76,563) 49,000,000
Options closed ................................................... 60,938 (35,000,000)
Options exercised ................................................ 18,750 (14,000,000)
Options expired .................................................. -- --
------------ ------------
Options outstanding at November 30, 1997 ......................... $ (12,500) $ 10,000,000
============ ============
</TABLE>
As of November 30, 1997, portfolio securities valued at $9,968,100 were subject
to covered call options written by the Fund.
<PAGE> 58
<TABLE>
CAPSTONE GOVERNMENT INCOME FUND
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS - November 30, 1997
- --------------------------------------------------------------------------------
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 period indicated
<CAPTION>
ELEVEN
MONTHS
PER SHARE DATA(3) YEAR ENDED 11/30 ENDED YEAR ENDED 12/31
1997 1996 11/30/95(1) 1994 1993 1992
<S> <C> <C> <C> <C> <C> <C>
Net asset value at beginning of period............... $24.45 $24.90 $23.65 $24.00 $23.70 $23.35
------ ------ ------ ------ ------ ------
Income from investment operations:
Net investment income........................... 1.15 1.00 1.20 0.90 0.85 1.15
Net realized and unrealized gain (loss)......... (0.11) (0.05) 0.05 (0.60) (0.05) (0.30)
------ ------ ------ ------ ------ ------
Total from investment operations................ 1.04 0.95 1.25 0.30 0.80 0.85
------ ------ ------ ------ ------ ------
Less distributions from net investment income........ (0.53) (1.40) 0.00 (0.65) (0.50) (0.50)
------ ------ ------ ------ ------ ------
Net asset value at end of period..................... $24.96 $24.45 $24.90 $23.65 $24.00 $23.70
====== ====== ====== ====== ====== ======
TOTAL RETURN......................................... 4.34% 4.07% 5.29% 1.13% 3.32% 3.55%
====== ====== ====== ====== ====== ======
RATIOS/SUPPLEMENTAL DATA
Ratio of operating expenses to average net assets.... 0.87% 0.95% 0.77%(2) 0.87% 0.93% 0.92%
Ratio of interest expense to average net assets...... 0.00% 0.00% 0.00% 0.00% 0.00% 0.04%
------ ------ ------ ------ ------ ------
Ratio of total expenses to average net assets........ 0.87% 0.95% 0.77%(2) 0.87% 0.93% 0.96%
====== ====== ====== ====== ====== ======
Ratio of net investment income to average net assets. 4.72% 4.44% 5.56%(2) 4.20% 33.64% 4.69%
Portfolio turnover rate.............................. 563.42% 615.39% 309.66% 285.13% 596.36% 633.41%
Net assets at end of period (in thousands)........... $72,444 $79,754 $67,997 $8,705 $33,795 $29,847
<FN>
(1) Based on average shares outstanding determined daily.
(2) Annualized
(3) Adjusted for reverse 5:1 stock split on January 13, 1997.
</FN>
</TABLE>
<PAGE> 59
CAPSTONE FIXED INCOME SERIES, INC.
CAPSTONE GOVERNMENT INCOME FUND
OTHER INFORMATION
(PART C TO REGISTRATION STATEMENT NO. 2-28174)
Item 24. Financial Statements and Exhibits
Exhibits not incorporated by reference to a prior filing are
designated by an asterisk; all exhibits not so designated are incorporated
hereby by reference to a prior filing as indicated.
(a) Financial Statements:
Condensed Financial Information (Part A)
Statement of Assets and Liabilities, including
the schedule of investments, as of November 30,
1997 (Part B) Statement of Operations for the
year ended November 30, 1997 (Part B) Statement
of Changes in Net Assets for the years ended
November 30, 1997 and November 30, 1996 (Part B)
Notes to Financial Statements (Part B)
(b) Exhibits:
A. Exhibits filed pursuant to Form N-1A
<TABLE>
<S> <C> <C>
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
</TABLE>
<PAGE> 60
<TABLE>
<S> <C> <C>
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
</TABLE>
<PAGE> 61
<TABLE>
<S> <C> <C>
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) Copy of Investment Advisory Agreement between Capstone
Fixed Income Series, Inc., on behalf of Capstone Intermediate
Government Fund, and Capstone Asset Management Company;
Exhibit 5(l) to Post-Effectiv Amendment No. 49 to Registration
</TABLE>
<PAGE> 62
<TABLE>
<S> <C> <C>
No. 2-28174.
6(a) Copy of General Distribution Agreement between Southwestern
Investors Income Fund, Inc. and Tenneco Asset Planning
Company dated October 1, 1984; Exhibit 6 to Post-Effective
Amendment No. 28 to Registration No. 2-28174.
6(b) Copy of General Distribution Agreement between Investors
Income Fund, Inc. and Capstone Asset Planning Company dated
September 1, 1987; Exhibit 6(b) to Post-Effective Amendment
No. 30 to Registration No. 2-28174.
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.
8(c) Copy of Custody Agreement between Capstone Fixed Income
Series, Inc. and The Fifth Third Bank dated December 13, 1994;
Exhibit 8(c) to Post-Effective Amendment No. 46 to
Registration No. 2-28174.
</TABLE>
<PAGE> 63
<TABLE>
<S> <C> <C>
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; Exhibit
11(a)(1) to Post-Effective Amendment No. 48 to Registration
No. 2-28174.
*11(a)(2) Consent of Briggs, Bunting & Dougherty, LLP Independent
Certified Public Accountants.
*11(b) Powers of Attorney of Messrs. James F. Leary, John R. Parker
and Bernard J. Vaughan.
12 None
13 None
</TABLE>
- --------------
* Filed herewith
<PAGE> 64
<TABLE>
<S> <C> <C>
14(a)(1) Southwestern Life Insurance Company Defined Benefit Pension
Plan and Trust; Exhibit 14(a)(1) to Pre-Effective Amendment
No. 1 to Registration No. 2-99810.
14(a)(2) Adoption Agreement for Southwestern Life Insurance Company
Standardized Integrated Defined Benefit Pension Plan and Trust
(with Pairing Provisions); Exhibit 14(a)(2) to Pre-Effective
Amendment No. 1 to Registration No. 2-99810.
14(a)(3) Adoption Agreement for Southwestern Life Insurance Company
Standardized Non-Integrated Defined Benefit Pension Plan and
Trust (with Pairing Provisions); Exhibit 14(a)(3) to Pre-
Effective Amendment No. 1 to Registration No. 2-99810.
14(a)(4) Adoption Agreement for Southwestern Life Insurance Company
Non-Standardized Integrated Defined Benefit Pension Plan and
Trust; Exhibit 14(a)(4) to Pre-Effective Amendment No. 1 to
Registration No. 2-99810.
14(a)(5) Adoption Agreement for Southwestern Life Insurance Company
Non-Standardized Non-Integrated Defined Benefit Pension Plan
and Trust; Exhibit 14(a)(5) to Pre-Effective Amendment No. 1
to Registration No. 2-99810.
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
</TABLE>
<PAGE> 65
<TABLE>
<S> <C> <C>
Retirement Accounts Contribution Agreement; Exhibit 14(c) to
Pre-Effective Amendment No. 1 to Registration No. 2-99810.
14(d) Form 5305-A, Individual Retirement Custodial Account; Exhibit
14(d) to Pre-Effective Amendment No. 1 to Registration No. 2-
99810.
14(e)(1) Southwestern Life Insurance Company Tax Deferred Annuity
Program Custodial Agreement; Exhibit 14(e)(1) to Pre-Effective
Amendment No. 1 to Registration No. 2-99810.
14(e)(2) Amendment to Application for Investment Plans under a
403(b)(7) Plan; Exhibit 14(e)(2) to Pre-Effective Amendment
No. 1 to Registration No. 2-99810.
15(a) Copy of Service and Distribution Plan; Exhibit 15(a) to Post-
Effective Amendment No. 39 to Registration No. 2-28174.
15(b) Copy of Service Agreement; Exhibit 15(b) to Post-Effective
Amendment No. 39 to Registration No. 2-28174.
15(c) Proposed form of Service and
Distribution Plan between Capstone
Fixed Income Series, Inc., on behalf
of Bond USA Fund, and Capstone Asset
Planning Company; Exhibit 15(c) to
Post-Effective Amendment No. 42 to
Registration No. 2-28174.
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; Exhibit 15(d) to
Post-Effective Amendment No. 47 to
Registration No. 2-28174.
*16 Schedule for Computation of Performance Quotations.
</TABLE>
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.
- --------------
* Filed herewith
<PAGE> 66
Item 26. Number of Holders of Securities
Number of Record Holders
Title of Class Title of Series As of March 20, 1998
-------------- --------------- -----------------------
Common Stock, CGIF 869
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)
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
<PAGE> 67
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 three other investment companies: Capstone
Growth Fund, Inc., Capstone Japan Fund and Capstone New Zealand Fund. 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 Japan Fund and Capstone New Zealand Fund.
(b)
<PAGE> 68
<TABLE>
<CAPTION>
Name and Principal Positions and Offices Positions and Offices
Business Address* with Underwriter with Registrant
- ------------------ --------------------- ---------------------
<S> <C> <C>
Dan E. Watson Chairman of the Board Executive Vice President
and Director
Edward L. Jaroski President and Director President and Chairman of the
Board
Howard S. Potter Managing Director Executive Vice President
John M. Metzinger -- Vice President
Leticia N. Jaroski Vice President --
Iris R. Clay Corporate Secretary Corporate Secretary
Linda G. Giuffre Vice President and Treasurer
Treasurer
</TABLE>
- --------------
* 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 First Data Investor Services Group, Inc., the transfer agent of the
Registrant, 3200 Horizon Drive, P.O. Box 61503, King of Prussia, Pennsylvania
19406-0903, maintain physical possession of each account, book or other document
required to be maintained by Section 31(a) of Investment Company Act of 1940 and
the rules promulgated thereunder.
Item 31. Management Services
Not applicable.
Item 32. Undertakings
Not applicable.
<PAGE> 69
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Registration Statement or Amendment
pursuant to Rule 485(b) under the Securities Act of 1933 and has duly caused
this Registration Statement or Amendment to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Houston, and State of
Texas on the 31st day of March, 1998.
CAPSTONE FIXED INCOME SERIES, INC.
Registrant
By: ______________________________
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
---------- ----- ----
__________________________ President (Principal March 31, 1998
Edward L. Jaroski Executive Officer)
__________________________ Treasurer (Principal March 31, 1998
Linda G. Giuffre Financial & Accounting
Officer)
JAMES F. LEARY* Director March 31, 1998
- --------------------------
James F. Leary
JOHN R. PARKER* Director March 31, 1998
- --------------------------
John R. Parker
BERNARD J. VAUGHAN* Director March 31, 1998
- --------------------------
Bernard J. Vaughan
* By: _______________________________
Edward L. Jaroski, Attorney-In-Fact
<PAGE> 70
INDEX TO EXHIBITS
Exhibit
Number Description of Exhibits
11(a)(2) Consent of Briggs, Bunting & Dougherty, LLP, Independent Certified
Public Accountants
11(b) Powers of Attorney of Messrs. James F. Leary, John R.
Parker and Bernard J. Vaughan
16 Schedule for Computation of Performance Quotations
<PAGE> 1
EXHIBIT 11(a)(2)
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the reference to our firm in the Registration Statement (Form
N-1A) and related Statement of Additional Information of Capstone Government
Income Fund, a series of Capstone Fixed Income Series, Inc., and to the
inclusion of our report dated December 19 1997.
/s/BRIGGS, BUNTING & DOUGHERTY, LLP
BRIGGS, BUNTING & DOUGHERTY, LLP
Philadelphia, Pennsylvania
March 25, 1998
<PAGE> 2
[GRAPHIC OMITTED]
DIRECT DIAL: (202) 261-3352
March 31, 1998
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Capstone Fixed Income Series, Inc. ("Fund") --Post-Effective
Amendment No. 50, File No. 2-28174
Dear Sirs::
As counsel to the Fund, including its one active series,
Capstone Government Income Fund, I represent pursuant to Rule 485(e) under the
Securities Act of 1933 (the "Act") that the Fund's Post-Effective Amendment No.
50 to its Registration Statement under the Act does not contain disclosures
which would render it ineligible to become effective pursuant to paragraph (b)
of that Rule.
Yours truly,
Olivia P. Adler
OPA
cc: Iris Clay
<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 March 31, 1998
- -------------------
James F. Leary
/s/JOHN R. PARKER Director March 31, 1998
- -------------------
John R. Parker
/s/BERNARD J. VAUGHAN Director March 31, 1998
- ---------------------
Bernard J. Vaughan
<PAGE> 1
EXHIBIT 16
CAPSTONE GOVERNMENT INCOME FUND
SCHEDULE FOR COMPUTATION OF YIELD
Yield = 2[(a - b) + 1)6 - 1]
cd
a = dividends and interest earned during the period,
b = expenses accrued for the period (net of reimbursements),
c = the average daily number of shares outstanding
during the period that were entitled to receive
dividends, and
d = the maximum offering price per share on the last day of
the period.
*****************************
Yield = 2[(351,123.47 - 51,994.53) + 1)6 - 1]
----------------------
(2,993,479.627)(24.969)
= 4.852% (for 1 month period ending November 30, 1997)
<PAGE> 2
CAPSTONE GOVERNMENT INCOME FUND
SCHEDULE OF COMPUTATION FOR AVERAGE ANNUAL TOTAL RETURN
P (1 + T)n = ERV
P = a hypothetical initial payment of $1,000,
T = the average annual total return,
n = the number of years,
ERV = the ending redeemable value of a
hypothetical $1,000 payment made at the
beginning of the period.
*****************************
The Fund's average annualized total return for the one year period ending
November 30, 1997 is 4.343%.
$1,000 (1 + .04343)1 = ERV
$1,043.43 = ERV
An initial payment of $1,000 invested on 12/01/96 will result in 40.900 shares.
An income distribution of $0.529 per share resulted in 0.904 additional shares
rendering a total of 41.804 shares. On 11/30/97 the net asset value of Capstone
Government Income Fund was $24.96 per share, thereby creating a total market
value of $1,043.43 and yielding an average annual total return of 4.343%.
*****************************
The Fund's average annualized total return for the five year period from
December 1, 1992 to November 30, 1997 is 3.73%.
$1,000 (1 + .0373)5 = ERV
$1,201.03 = ERV
An initial payment of $1,000 on 12/01/92 will result in 41.58 shares. Income
distributions of $3.527 per share resulted in 6.538 additional shares, rendering
a total of 48.118 shares. At 11/30/97 the net asset value of Capstone Government
Income Fund was $24.96 per share, thereby creating a total market value of
$1,201.03 and yielding an average annual total return of 3.73%.
*****************************
The Fund's average annualized total return for the ten year period from December
1, 1987 to November 30, 1997 is 4.56%.
$1,000 (1 + .0456)10 = ERV
$1,561.30 = ERV
An initial payment of $1,000 on 12/01/87 will result in 39.293 shares. Income
distributions of $11.497 per share resulted in 23.259 additional shares,
rendering a total of 62.552 shares. At 11/30/97 the net asset value of Capstone
Government Income Fund was $24.96 per share, thereby creating a total market
value of $1,561.30 and yielding an average annual total return of 4.56%.
<PAGE> 3
CAPSTONE GOVERNMENT INCOME FUND
SCHEDULE OF COMPUTATION FOR TOTAL RETURN
P (1 + T) = ERV
P = a hypothetical initial payment of $1,000,
T = the total return,
ERV = the ending redeemable value of a
hypothetical $1,000 payment made at the
beginning of the period.
*****************************
The Fund's total return for the one year period ending November 30, 1997 is
4.343%.
$1,000(1 + .04343) = ERV
$1,043.43 = ERV
An initial payment of $1,000 invested on 12/01/96 will result in 40.903 shares.
An income distribution of $0.529 per share resulted in 0.904 additional shares
rendering a total of 41.804 shares. On 11/30/97 the net asset value of Capstone
Government Income Fund was $24.96 per share, thereby creating a total market
value of $1,043.43 and yielding a total return of 4.343%.
*****************************
The Fund's total return for the five year period from December 1, 1992 to
November 30, 1997 is 20.103%.
$1,000(1 + .20103) = ERV
$1,201.03 = ERV
An initial payment of $1,000 on 12/01/92 will result in 41.58 shares. Income
distributions of $3.527 per share resulted in 6.538 additional shares, rendering
a total of 48.118 shares. At 11/30/97 the net asset value of Capstone Government
Income Fund was $24.96 per share, thereby creating a total market value of
$1,201.03 and yielding a total return of 20.103%.
*****************************
The Fund's total return for the ten year period from December 1, 1987 to
November 30, 1997 is 56.130%.
$1,000 (1 + .56130) = ERV
$1,561.30 = ERV
An initial payment of $1,000 on 12/01/87 will result in 39.293 shares. Income
distributions of $11.497 per share resulted in 23.259 additional shares,
rendering a total of 62.552 shares. At 11/30/97 the net asset value of Capstone
Government Income Fund was $24.96 per share, thereby creating a total market
value of $1,561.30 and yielding a total return of 56.130%.
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ANNUAL
REPORT OF CAPSTONE GOVERNMENT INCOME FUND FOR THE FISCAL YEAR ENDED 11/30/97.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> NOV-30-1997
<PERIOD-START> DEC-01-1996
<PERIOD-END> NOV-30-1997<F1>
<INVESTMENTS-AT-COST> 72,218,491
<INVESTMENTS-AT-VALUE> 72,181,336
<RECEIVABLES> 425,286
<ASSETS-OTHER> 5,434
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 72,612,056
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 167,774
<TOTAL-LIABILITIES> 167,774
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 76,266,380
<SHARES-COMMON-STOCK> 2,902,670
<SHARES-COMMON-PRIOR> 16,304,609
<ACCUMULATED-NII-CURRENT> 2,945,523
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (6,736,766)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (30,855)
<NET-ASSETS> 72,444,282
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 3,490,346
<OTHER-INCOME> 0
<EXPENSES-NET> 544,823
<NET-INVESTMENT-INCOME> 2,945,523
<REALIZED-GAINS-CURRENT> (180,362)
<APPREC-INCREASE-CURRENT> 3,367
<NET-CHANGE-FROM-OPS> 2,768,528
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (253,678)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 7,182,708
<NUMBER-OF-SHARES-REDEEMED> 7,550,644
<SHARES-REINVESTED> 9,684
<NET-CHANGE-IN-ASSETS> (358,252)
<ACCUMULATED-NII-PRIOR> 2,205,726
<ACCUMULATED-GAINS-PRIOR> (7,064,772)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 249,523
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 544,823
<AVERAGE-NET-ASSETS> 62,370,459
<PER-SHARE-NAV-BEGIN> 24.45
<PER-SHARE-NII> 1.15
<PER-SHARE-GAIN-APPREC> (0.11)
<PER-SHARE-DIVIDEND> (0.53)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 24.96
<EXPENSE-RATIO> 0.87
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>Adjusted for reverse 5:1 stock split on January 13, 1997
</FN>
</TABLE>
