As filed with the Securities and Exchange Commission on March 25, 1999
REGISTRATION NO. 2-28174
INVESTMENT COMPANY ACT FILE NO. 811-01597
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
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REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 / X /
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Pre-Effective Amendment No. _____ / /
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Post-Effective Amendment No. 52 / X /
and/or
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REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 / X /
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Capstone Fixed Income Series, Inc.
(Exact Name of Registrant as Specified in Charter)
5847 San Felipe, Suite 4100,
Houston, Texas 77057 (Address of
Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (713) 260-9000
Olivia P. Adler, Esq., Dechert Price & Rhoads
1775 Eye Street, N.W., Washington, DC 20006
(Name and Address of Agent for Service)
It is proposed that this filing will become effective (check appropriate box)
/ / immediately upon filing pursuant to paragraph (b).
/ X / on April 1, 1999 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.
<PAGE>
CAPSTONE GOVERNMENT INCOME FUND
A Series of Capstone Fixed Income Series, Inc.
Investing in U.S. Government securities for high total return, consistent with
safety of principal
Prospectus, April 1, 1999
The Securities and Exchange Commission does not approve or disapprove the
information in this Prospectus, and does not determine whether this information
is accurate or complete. It is a criminal offense to state otherwise.
<PAGE>
TABLE OF CONTENTS
Page
The Fund..................................................................
Management................................................................
Buying and Selling Fund Shares............................................
Dividends, Distributions and Taxes........................................
Financial Highlights......................................................
How To Get More Information...............................................
<PAGE>
THE FUND
The Fund's Investment Objective and Principal Investment Strategies
The Fund seeks to provide 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 from the Fund's portfolio investments. The
Fund's primary investments (at least 65% of its total assets) will be in
securities issued or guaranteed by the U.S. Government, its agencies and
instrumentalities that have remaining maturities of three years or less at the
time they are purchased by the Fund. Average weighted portfolio maturity will
not exceed two years as of the last business day of each calendar year. The
Fund's Adviser expects that changes in the Fund's daily net asset value will be
comparable to fluctuations in the prices of two-to-three year U.S. Treasury
notes.
The Fund seeks to earn income from its Government securities investments. It
also seeks to enhance that income and to hedge against price fluctuations of its
portfolio securities by writing (selling) put and call options on its portfolio
securities and by using the premium income from these options transactions to
purchase options. The Fund may also invest in repurchase agreements that are
backed by U.S. Government securities.
Appropriate purchases are determined by the Fund's managers as a part of an
overall strategy to create the highest yielding portfolio mix, while assuming
the least degree of price sensitivity. Specific securities are combined to
produce a yield consistent with present 1-2 year Treasury securities. Higher
yielding U.S. Agency securities are incorporated into the portfolio to increase
current returns, while producing lower duration levels. Covered option
strategies are also added to the Treaury portion of the portfolio to increase
yield. The exact characteristics of the covered options are determined by the
market levels of implied volatility. Portfolio sales are more likely to be
generated by cash outflows from the Fund, rather than strategic decisions by the
managers. However, market changes over the shorter-term may producer trading
opportunities. Some portfolio sales result naturally from the covered options
writing strategies.
The Fund intends to reinvest all interest income earned on its portfolio
securities in securities that will mature before the end of the then-current
calendar year. This process is designed to protect all the interest income the
Fund earns in a given year for possible distribution to shareholders. This
income will not be used to finance the Fund's options transactions. In this way,
the Fund hopes to protect its portfolio's principal value from erosion due to
net options trading losses.
The Fund does not intend to engage in short-term trading for the purpose of
generating gains from short-term interest rate changes. However, the Fund's
options transactions will cause it to have a high rate of portfolio turnover,
which causes correspondingly high transactions costs. These practices may also
generate short-term capital gains, which are taxed to taxable shareholders at
ordinary income rates.
The Fund's most recent annual or semiannual report contains information on the
Fund's recent investment strategies, as discussed above, and securities
holdings. (See back cover.)
Principal Risks
The value of the Fund's fixed income investments will change with fluctuations
in current interest rates and cause corresponding fluctuations in the Fund's
share price. You can lose money by investing in the Fund. Increases in current
interest rates would generally cause the value of fixed income securities owned
by the Fund to decline in value, while the securities would increase in value if
current interest rates decline. Although the Fund attempts to reduce these
fluctuations through maintaining a relatively short portfolio maturity, its
efforts may not be successful. Note that changes in the current market value of
the Fund's portfolio securities will not affect the investment income to the
Fund from these securities or the ability of the Fund to reinvest this income
prior to making distributions to shareholders. Additionally, certain securities
held by the Fund may be called before their maturity. This type of early call
tends to increase when interest rates are falling. The Fund is then forced to
reinvest the proceeds at the lower prevailing rates.
The Fund's options and repurchase transactions also involve certain risks. When
the Fund writes a call option, it loses the potential for gain on the underlying
security above the exercise price of the option while the option is outstanding.
When the Fund writes a put option, it could become obligated to purchase the
underlying security at a price that exceeds the then-current market price.
Although the Fund's repurchase agreement transactions are required to be fully
collaterialized for their duration, the Fund may experience delays and risk of
loss if the counterparty is unable to meet its obligation to repurchase or to
maintain collateral in accordance with the agreement. The law regarding the
Fund's rights under a repurchase agreement with a bank that becomes subject to
bankruptcy laws is unsettled. The Fund attempts to minimize these risks through
requirements that the Adviser carefully consider the creditworthiness of
repurchase agreement counterparties.
Past Performance
The following two tables illustrate the Fund's past performance. The first table
provides some indication of the risks of an investment in the Fund by showing
how the Fund's returns have varied from year to year. The second shows how the
Fund has performed on a cumulative basis for the past ten years in comparison to
the Lehman Brothers 1-3 Year Government Index. Each table assumes that dividends
and distributions paid by the Fund have been reinvested at net asset value in
additional Fund shares. You should remember that past performance does not
necessarily indicate how the Fund will perform in the future.
[Bar Chart to be inserted showing the following data:]
Year-by-year total return as of 12/31 each year (%).
12/31/89 7.30%
12/31/90 (1.17%)
12/31/91 6.57%
12/31/92 3.55%
12/31/93 3.32%
12/31/94 1.15%
12/31/95 5.54%
12/31/96 3.94%
12/31/97 4.43%
12/31/98 4.41%
Best Quarter - 2nd Quarter 1989 3.19%
Worst Quarter - 3rd Quarter 1990 (2.40%)
Average Annual Total Return as of 12/31/97
1 Year 5 Years 10 Years
------ ------- --------
Fund 4.41% 3.88% 3.88%
Lehman 1-3 Year Government Index 6.97% 5.96% 7.36%
Fees and Expenses of the Fund
This table describes the fees and expenses you will pay if you invest in the
Fund. As you can see, the Fund has no fees that are charged directly to
shareholders. Shareholders do, however, bear indirectly a portion of the Fund's
annual operating expenses.
Shareholder Fees (fees paid directly from your investment)
Maximum front-end sales charge None
Maximum deferred sales charge None
Maximum sales charge on reinvested dividends and None
distributions
Redemption fee None
Exchange fee None
Maximum account fee None
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
Investment Advisory Fees 0.40%
Distribution (12b-1) Fees* 0.20%
Other Expenses** 0.60%
Total Annual Fund Operating Expenses 1.20%
* The Fund has adopted a Rule 12b-1 Plan that permits it to pay up to 0.20%
of its average net assets each year for distribution costs. These fees are
an ongoing charge to the Fund and therefore are an indirect expense to
you. Over time these fees may cost you more than other types of sales
charge.
** "Other expenses" include such expenses as custody, transfer agent, legal,
accounting and registration fees.
Example
The following table shows how much the Fund's expenses described above could
cost you as an investor in the Fund for the illustrated time periods. The
example assumes that you initially invested $10,000 in the Fund, that the Fund
returns 5% each year, and that its expenses remain at a constant percentage. It
also assumes that you reinvest all dividends and distributions in additional
shares of the Fund. Because these assumptions may vary from your actual
experience, your actual return and expenses may be different.
1 Year 3 Years 5 Years 10 Years
- ------ ------- ------- --------
$122 $381 $660 $1,455
MANAGEMENT
The Adviser
The Fund's investment adviser is Capstone Asset Management Company (CAMCO), 5847
San Felipe, Suite 4100, Houston, Texas 77057. CAMCO provides continuous
investment management and administration services for the Fund. CAMCO also
provides investment advisory and/or administrative services to several other
mutual funds and provides investment advice to pension and profit sharing
accounts, corporations and individuals. Total assets under management are about
$2.1 billion.
CAMCO receives advisory fees from the Fund which are based on the Fund's net
assets. For its fiscal year ended October 31, 1998, the Fund paid CAMCO fees
equal to 0.40% of the Fund's average net assets. CAMCO also receives fees for
serving as the Fund's administrator.
Portfolio Manager
The Fund's portfolio manager since 1991 has been Howard S. Potter. Mr. Potter is
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 Adviser'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.
BUYING AND SELLING FUND SHARES
Share Price: The purchase and redemption price of Fund shares
is the Fund's net asset value (NAV) per share next
determined after your order is received. NAV is
generally calculated as of 4:15 p.m. Eastern time,
except on days when the Federal Reserve wire system
is closed and 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. NAV
reflects the Fund's aggregate assets less its
liabilities. 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 - a widely-used option
pricing model. Short-term debt securities with
maturities over 60 days at the time of purchase by
the Fund are priced by marking to the market.
Securities with remaining maturities of 60 days or
less are valued at amortized cost. Prices for debt
securities may be obtained from pricing services. If
market value quotations are not readily available
for an investment, the investment will be valued at
fair value as determined in good faith by the Fund's
Board of Directors. NAV is not calculated on days
the New York Stock Exchange is closed.
Minimum Investment: The minimum initial investment in the Fund is
$200, except that there is no minimum for
continuous investment plans. There is no minimum
for subsequent investments. (For telephone
purchases, see below.)
Share Certificates: The Fund will not issue share certificates unless
you make a written request to the Transfer Agent.
(The Transfer Agent's address is provided below.)
Telephone Transactions: In your Investment Application, you may authorize
the Fund to accept orders for additional purchases,
redemptions and exchanges by phone. You will be
liable for any fraudulent order as long as the Fund
has taken reasonable steps to assure that the order
was proper. Also note that during unusual market
conditions, you may experience delays in placing
telephone orders. In that event, you should try one
of the alternative procedures described below.
Frequent Transactions: The Fund reserves the right to limit additional
transactions by any investor who makes frequent
purchases, redemptions or exchanges that the Adviser
believes might harm the Fund. In general, more than
one transaction per month may be viewed as
excessive.
Purchasing Fund Shares
You may use any of the following methods to purchase Fund shares.
Through Authorized Dealers
You may place your order through any dealer authorized to take
orders for the Fund. If the order is transmitted to the Fund by 4:00
p.m. Central time, it will be priced at the NAV per share determined
on that day. Otherwise, later orders will receive the NAV per share
next determined. It is the dealer's responsibility to transmit
orders timely.
Through the Distributor
You may place orders directly with the Fund's distributor by mailing
a completed Investment Application with a check or other negotiable
bank draft (payable to Capstone Government Income Fund, Inc.) to
the Transfer Agent.
The Transfer Agent's address is:
Capstone Government Income Fund
c/o First Data Investor Services Group, Inc.
P.O. Box 61503
211 South Gulph Road
King of Prussia, Pennsylvania 19406-3101
(Remember to make your check for at least any applicable
minimum noted above.)
Investing By Wire
You may purchase shares by wire if you have an account with a
commercial bank that is a member of the Federal Reserve System. You
should be aware that your bank may charge a fee for this service.
For an initial investment by wire, you must first call
1-800-845-2340 to be assigned a Fund account number. Ask your bank
to wire the amount of your investment 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
Note that the wire must include: your name and address, your Fund
account number, and your social security or tax identification
number. You must follow up your wire with a completed Investment
Application. This application is contained in the Fund's prospectus.
Mail the application to the Transfer Agent's address (see above,
under "Distributor").
For a subsequent investment by wire, ask your bank to wire funds to
the United Missouri Bank address noted above. The wire must include
your name and your Fund account number.
Telephone Investment
After you have opened your account, you may make additional
investments by telephone if you completed the "Telephone Purchase
Authorization" section of your Investment Application.
You may place a telephone order by calling the Transfer Agent at
1-800-845-2340.
The minimum for a telephone purchase is $1000, and the maximum is
five times the NAV of your Fund shares on the day before your
telephone order. (You may not include the value of shares for which
you have been issued certificates.) Your order will be priced at the
NAV next determined after your call. Payment for your order must be
received within 3 business days. Mail your payment to the Transfer
Agent's address (see "Distributor," above). If your payment is not
received within 3 business days, you will be liable for any losses
caused by your purchase.
Pre-Authorized Investment
You may arrange to make regular monthly investments of at least $25
through automatic deductions from your checking account by
completing the Pre-Authorized Payment section of the Investment
Application.
Redeeming Fund Shares
You may redeem your Fund shares at any time by writing to the Transfer Agent's
address. The Fund does not charge any fee for redemptions. If you request the
redemption proceeds to be sent to your address of record, you generally will not
need a signature guarantee. A signature guarantee will be required if:
o you were issued certificates for the shares you are redeeming;
o you want the proceeds to be mailed to a different address or to be
paid to someone other than the record owner;
o you want to transfer ownership of the shares.
Signature guarantee: A signature guarantee can be provided by most banks,
broker-dealers and savings associations, as well as by some credit unions.
Any certificates for shares you are redeeming must accompany your redemption
request. You will generally receive a check for your redemption amount within
a week.
Expedited Redemption
Through an authorized dealer: You may request a redemption through any
broker-dealer authorized to take orders for the Fund. The broker-dealer
will place the redemption order by telephone or telegraph directly with
the Fund's distributor and your share price will be based on the NAV next
determined after the distributor receives the order. The distributor does
not charge for this service, but the broker-dealer may charge a fee. You
will generally receive your proceeds within a week.
Telephone redemption: You may order a redemption by calling the Transfer
Agent at 1-800-845-2340 if:
o your redemption will be at least $1000;
o no share certificates were issued for the shares you are
redeeming;
o your Investment Application authorized expedited telephone
redemption and designated a bank or broker-dealer to receive
the proceeds.
The proceeds will be mailed or wired to the designated bank or
broker-dealer on the next business day after your redemption order is
received. There is no fee charged by the Fund for this service, although a
fee may be imposed in the future. The Fund may also decide not to offer
this service. In this case, the Fund will attempt to provide reasonable
prior notice to shareholders.
Systematic Withdrawal
You may arrange for periodic withdrawals of $50 or more if you invest at
least $5000 in the Fund. Under this arrangement, you must elect to have
all your dividends and distributions reinvested in shares of the Fund.
Your withdrawals under this plan may be monthly, quarterly, semi-annual or
annual.
Payments under this plan are made by redeeming your Fund shares. The
payments do not represent a yield from the Fund and may be a return of
your capital, thus depleting your investment. Payments under this plan
will terminate when all your shares have been redeemed. The number of
payments you receive will depend on the size of your investment, the
amount and frequency of payments, and the yield and share price of the
Fund, which can be expected to fluctuate.
You may terminate your plan at any time by writing to the Transfer Agent.
You continue to have the right to redeem your shares at any time. The cost
of the plan is borne by the Fund and there is no direct charge to you.
Redemption in Kind:
If you place a redemption order for more than $1 million, the Fund
reserves the right to pay the proceeds in portfolio securities of the
Fund, rather than in cash. In that case, you will bear any brokerage costs
imposed when you sell those securities.
Redemption Suspensions or Delays
Although you may normally redeem your shares at any time, redemptions may
not be permitted at times when the New York Stock Exchange is closed for
unusual circumstances, or when the Securities and Exchange Commission
allows redemptions to be suspended.
If you recently purchased the shares by check, the Fund may withhold the
proceeds of your redemption order until it has reasonable assurance that
the purchase check will be collected, which may take up to 15 days from
the date of purchase.
Exchanging Fund Shares
You may exchange your Fund shares for shares of another Capstone fund at a price
based on their respective NAVs. There is no sales charge or other fee. We will
send you the prospectus of the fund into which you are exchanging and we urge
you to read it. If you have certificates for the shares you are exchanging, your
order cannot be processed until you have endorsed them for transfer and
delivered them to the Transfer Agent.
You may place an exchange order in two ways:
o you may mail your exchange order to the Transfer Agent's
address.
o you may place your order by telephone if you authorized
telephone exchanges on your Investment Application. Telephone
exchange orders may be placed from 9:30 a.m. to 4:00 p.m.
Eastern time, on any business day.
Exchanges into a fund can be made only if that fund is eligible for sale in your
state. The Fund may terminate or amend the exchange privilege at any time with
60 days' notice to shareholders.
Remember that your exchange is a sale of your shares. Tax consequences are
described under "Dividends, Distributions and Taxes."
Tax-Deferred Retirement Plans
Fund shares may be used for virtually all types of tax-deferred retirement
plans, including traditional, Roth and Education IRAs and Simplified Employee
Pension Plans. For more information, call 1-800-262-6631.
DIVIDENDS, DISTRIBUTIONS AND TAXES
Dividends and Distributions
The Fund expects to pay dividends from its net income and distributions from its
net realized capital gains at least annually, generally in December. Normally,
income dividends and capital gains distributions on your Fund shares will be
paid in additional shares of the Fund, with no sales charge. However, on your
Investment Application, you may elect one of the following other options:
Option 1 To have income dividends paid in cash and capital gains distributions
paid in additional Fund shares.
Option 2 To have both income dividends and capital gains distributions paid to
you in cash.
There is no sales charge or other fee for either option. If you select Option 1
or Option 2 and the checks sent to you cannot be delivered or remain uncashed
for six months, the aggregate amount of those checks will be invested in
additional Fund shares for your account at the then current NAV, and all your
future dividends and distributions will be paid in Fund shares.
Tax Treatment of Dividends, Distributions and Redemptions
You will generally be subject to federal income tax each year on dividend and
distribution payments, as well as on any gain realized when you sell (redeem) or
exchange your Fund shares. If you hold Fund shares through a tax-deferred
account (such as a retirement plan), you generally will not owe tax until you
receive a distribution from the account.
The Fund will let you know each year which amounts of your dividend and
distribution payments are to be taxed as ordinary income and which are treated
as long-term capital gain. The tax treatment of these amounts does not depend on
how long you have held your Fund shares or on whether you receive payments in
cash or additional shares.
The tax treatment of any gain or loss you realize when you sell or exchange Fund
shares will depend on how long you held the shares.
You should consult your tax adviser about any special circumstances that could
affect the federal, state and local tax treatment of your Fund distributions and
transactions.
Year 2000 Risks
Computer users around the world are faced with the dilemma of the Year 2000
issue, which stems from the use of two digits in most computer systems to
designate the year. When the year advances from 1999 to 2000, many computers
will not recognize "00" as the Year 2000. This issue could potentially affect
every aspect of computer-related activity, on an individual and corporate level.
The Fund could be adversely impacted if the computer systems used by CAMCO and
other service providers have not been converted to meet the requirements of the
new century. CAMCO has evaluated its own internal systems and expects them to be
fully capable to handle the change of millennium. CAMCO is working with the
providers of the software it uses to address the Year 2000 issue, and is
monitoring on an ongoing basis the progress of the Fund's other service
providers to convert their systems to comply with the requirements of Year 2000.
CAMCO currently has no reason to believe that these service providers will not
be fully and timely compliant. However, investors should be aware that there can
be no assurance that all systems will be successfully converted prior to January
1, 2000, in which case it would become necessary for the Fund to enter into
agreements with new service providers or to make other arrangements.
With respect to securities in which the Fund invests, Year 2000 compliance is
considered as a factor in selecting investments for the Fund, to the extent such
information is available.
<PAGE>
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 period indicated.
<TABLE>
<CAPTION>
Per Share Data(3) Year Ended 11/30 Year Ended 12/31
1998 1997 1996 11/30/95(1) 1994 1993
---- ---- ---- ----------- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net asset value at beginning of period................. $24.96 $24.45 $24.90 $23.65 $24.00 $23.70
------ ------ ------ ------ ------ ------
Income from investment operations:
Net investment income................................ 1.00 1.15 1.00 1.20 0.90 0.85
Net realized and unrealized gain (loss).............. 0.04 (0.11) (0.05) 0.05 (0.60) (0.05)
------ ------ ------ ------ ------ ------
Total from investment operations....................... 1.04 1.04 0.95 1.25 0.30 0.80
Less distributions from net investment income.......... (0.73) (0.53) (1.40) 0.00 (0.65) (0.50)
------ ------ ------ ------ ------ ------
Net asset value at end of period....................... $25.27 $24.96 $24.45 $24.90 $23.65 $24.00
Total Return........................................... 4.29% 4.34% 4.07% 5.29% 1.13% 3.32%
------ ------ ------ ------ ------ ------
Ratios/Supplemental Data
Ratio of operating expenses to average net assets...... 1.20% 0.87% 0.95% 0.77%(2) 0.87% 0.93%
Ratio of net investment income to average net assets... 4.31% 4.72% 4.44% 5.56%(2) 4.20% 33.64%
Portfolio turnover rate............................... 378.29% 563.42% 615.39% 309.66% 285.13% 596.36%
Net assets at end of period (in thousands)............. $20,384 $72,444 $79,754 $67,997 $8,705 $33,795
____________________
<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>
HOW TO GET MORE INFORMATION
Further information about the Fund is contained in:
o the Statement of Additional Information (SAI). The SAI contains more
detail about some of the matters discussed in the Prospectus. The
SAI is incorporated into the Prospectus by reference.
o Annual and Semi-Annual Reports about the Fund describe its
performance and list its portfolio securities. They also include a
letter from Fund management describing the Fund's strategies and
discussing market conditions and trends and their implications for
the Fund.
You may obtain free copies of the SAI or reports, or other information about the
Fund or your account, by calling 1-800-262-6631.
You may also get copies of the SAI, reports and other information directly the
Securities and Exchange Commission (SEC) by:
o visiting the SEC's public reference room. (Call 1-800-SEC-0330 for
information.)
o sending a written request, plus a duplicating fee, to the SEC's
Public Reference Section, Washington, D.C. 20549-6009;
o visiting the SEC's website - http://www.sec.gov
SEC File number: 811-1436
<PAGE>
CAPSTONE GOVERNMENT INCOME FUND
A Series of Capstone Fixed Income Series, Inc.
STATEMENT OF ADDITIONAL INFORMATION
April 1, 1999
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 April 1,
1999. 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.
The report of Independent Accountants and financial statements of the Fund
included in its Annual Report for the period ended November 30, 1998 ("Annual
Report") is incorporated herein by reference to such Report. Copies of such
Annual Report are availble without charge upon request by writing to the Fund at
5847 San Felipe, Suite 4100, Houston, Texas 77057 or by calling toll free
1-800-262-6631.
The financial statements in the Annual Report incorporated by reference
into this Statement of Additional Information have been audited by Briggs,
Bunting & Dougherty, LLP, independent accountants, and have been so included and
incorporated by reference in reliance upon the report of said firm, which report
is given upon their authority as experts in auditing and accounting.
TABLE OF CONTENTS
Page
General Information............................................
Investment Policies............................................
Investment Restrictions........................................
Risk Factors...................................................
Options........................................................
Performance Information........................................
Directors and Executive Officers...............................
Investment Advisory Agreement..................................
Administration Agreement.......................................
Distributor....................................................
Portfolio Transactions and Brokerage...........................
Determination of Net Asset Value...............................
How to Buy and Redeem Shares...................................
Taxes..........................................................
Control Persons and Principal Holders of Securities............
Other Information..............................................
Financial Statements...........................................
<PAGE>
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 POLICIES
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 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 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 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 udnerlying 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.e 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 purchae 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 wit 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 of 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 ro cover
requirements.
INVESTMENT RESTRICTIONS
The Fund has certain investment restrictions some of which, as well as the
Fund's investment objective, are fundamental and, accordingly, may not be
changed without the approval of the holders of a majority of the Fund's shares,
which means the lesser of (i) more than 50% of the outstanding shares of the
Fund, or (ii) 67% or more of the outstanding shares of the Fund present at a
meeting in which holders of more than 50% of its outstanding shares are
represented in person or by proxy. The Fund's fundamental and non-fundamental
investment restrictions are described below.
A. Fundamental
The Fund may not:
1. With respect to 75% of its assets, purchase more than 10% of the
voting securities of any one issuer or invest more than 5% of the
value of its total assets in the securities of any one issuer,
except the U.S. Government, its agencies or instrumentalities (see
additional non-fundamental restriction 1., below);
2. borrow money, except that the Fund may enter into reverse repurchase
agreements, and, as a temporary measure for extraordinary or
emergency purposes, it may borrow from banks in an amount not to
exceed 1/3 of the value of its net assets, including the amount
borrowed;
3. issue any senior securities, except as appropriate to evidence
indebtedness which it is permitted to incur;
4. act as underwriter, except to the extent that it might be deemed to
be an underwriter for the purposes of the Securities Act of 1933, as
amended, with respect to securities which it sells to the public if
registration under such Act, as amended, is required in connection
with such sale;
5. purchase any securities which would cause 25% or more of the market
value of its total assets at the time of such purchase to be
invested in the securities of one or more issuers having their
principal business activities in the same industry, provided that
there is no limit with respect to investments in securities issued
or guaranteed by the U.S. Government, its agencies and
instrumentalities, or in repurchase or reverse repurchase agreements
backed by such securities;
6. purchase or sell real estate except for its own use in connection
with its business;
7. purchase or sell commodities or commodity contracts, except that the
Fund may invest in futures contracts and related options;
8. make loans to other persons except (a) through the use of repurchase
agreements and (b) by the purchase of debt securities in accordance
with its investment policies; and
9. invest in securities or other instruments that are not authorized
for investment by a Federal savings association without limitation
as to a percentage of its assets and that are not authorized for
investment by national banks without limitation as to a percentage
of its capital and surplus, and none of the above Fundamental
Investment Restrictions shall be construed to permit any such
investment(s).
The Fund will make no purchases of securities so long as it has
outstanding borrowings, except for reverse repurchase agreements. Additionally,
the Fund has agreed with the staff of the Securities and Exchange Commission
that it will not include any reverse repurchase agreements, including those
backed by securities issued or guaranteed by the U.S. Government, its agencies
or instrumentalities, within the exception from the 25% limit in restriction
Number 5, above. Finally, the Fund has no present intention to lend its
portfolio securities or to engage in transactions in futures contracts or
related options, and will not engage in such transactions until appropriate
disclosure concerning these practices, including their risks, is included in the
Fund's Prospectus and Statement of Additional Information.
B. Non-Fundamental
The following restrictions are not fundamental and may be changed by the
Fund without stockholder approval, but only in compliance with applicable law,
regulation or regulatory policy and in compliance with the Fundamental
Investment Restrictions listed above, including but not limited to, Number 9.
The Fund may not:
1. as to the portion of its assets not subject to Fundamental
Restriction 1., above, purchase more than 10% of the voting
securities of any one issuer or invest more than 5% of the value of
its total assets in the securities of any one issuer, except the
U.S. Government, its agencies or instrumentalities (the Fund does
not generally intend to invest in voting securities of any issuer);
2. acquire or retain securities of any investment company, except as
part of a plan of merger, reorganization or consolidation;
3. pledge, mortgage or hypothecate its assets in excess, together with
permitted borrowings, of 1/3 of its net assets;
4. invest more than 10% of its total assets in securities that are not
readily marketable, the disposition of which is restricted under
Federal securities laws, or in repurchase agreements not terminable
within 7 days, provided that over-the-counter options with
securities dealers meeting criteria established by the Fund's Board
of Directors that give the Fund an absolute right to repurchase (a)
according to a "repurchase formula" or (b) at a price determined
from independent sources by the Adviser will not be considered
securities that are not readily marketable;
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 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 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.
[All financial information in the remainder of this SAI to be updated by
amendment.]
PERFORMANCE INFORMATION
The Fund may from time to time include figures indicating its yield, total
return or average annual total return in advertisements or reports to
stockholders or prospective investors. Quotations of the Fund's yield will be
based on all investment income per share earned during a particular 30-day
period (including dividends and interest), less expenses accrued during the
period ("net investment income"), and are computed by dividing net investment
income per share earned during the period by the maximum offering price per
share on the last day of the period, according to the following formula:
YIELD = 2[(a-b + 1)6-1]
cd
where a = dividends and interest earned during the period,
b = expenses accrued for the period (net of
reimbursements or waivers),
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends, and
d = the maximum offering price per share on the last day of the
period.
For the 30-day period ended November 30, 1998 the Fund's yield was 3.62%.
Average annual total return and total return figures represent the
increase (or decrease) in the value of an investment in the Fund over a
specified period. Both calculations assume that all income dividends and capital
gains distributions during the period are reinvested at net asset value in
additional Fund shares. Quotations of the average annual total return reflect a
proportional share of Fund expenses on an annual basis. The results, which are
annualized, represent an average annual compounded rate of return on a
hypothetical investment in the Fund over a period of 1, 5 and 10 years ending on
the most recent calendar quarter (but not for a period greater than the life of
the Fund), calculated pursuant to the following formula:
P (1 + T)n= ERV
where P = a hypothetical initial payment of $1,000,
T = the average annual total return,
n = the number of years, and
ERV = the ending redeemable value of a hypothetical $1,000 payment
made at the beginning of the period.
For the 1, 5 and 10 year periods ended November 30, 1998 the Fund's
average annual total return was 4.30%, 3.85% and 3.84%, 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, 1998 the Fund's total return was 4.30%, 20.80% and 45.70%,
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 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 (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 directors provide overall supervision of the affairs of the
Corporation. 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 (52), Chairman of the Board, President and Director.
5847 San Felipe, Suite 4100, Houston, Texas 77057. President (since 1992)
and Director (since 1987) of the Capstone Asset Management Company;
President and Director of Capstone Asset Planning Company and Capstone
Financial Services, Inc. (since 1987); Director/Trustee and Officer of
other Capstone Funds.
JAMES F. LEARY (68), 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 (52), 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 (70), 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 (50), 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 (47), 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 (36), 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.
LINDA G. GIUFFRE (37), Secretary/Treasurer. 5847 San Felipe, Suite 410,
Houston, Texas 77057. Vice President and Treasurer (since February 1996)
of Capstone Financial Services, Inc.; Secretary/Treasurer (since July
1998), Vice President (1996-1998) of Capstone Asset Planning Company and
Capstone Asset Managment 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.
- --------------
* Director who is an interested person as defined in the Investment Company
Act of 1940 because of his relationship to the Adviser and Distributor.
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 $1,500 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, 1998, the Fund paid or accrued for the account of the
directors and officers, as a group for services in all capacities, a total of
$3,401.
The following table represents the fees paid during the 1998 fiscal 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 (4)
________________ ____________ ________________ ________________ ____________
<S> <C> <C> <C> <C>
James F. Leary, Director $2,500 $0 $0 $13,500 (1)(2)(3)
John R. Parker, Director 2,500 0 0 12,000 (1)(2)(3)
Bernard J. Vaughan, Director 2,500 0 0 12,000 (1)(2)(3)
- ------------
<FN>
* Directors do not receive any deferred compensation.
(1) Director of Capstone Growth Fund, Inc.
(2) Trustee of Capstone International Series Trust.
(3) Trustee of Capstone Social Ethics and Religious Values Fund (commenced
operations October 1, 1998).
(4) Fund Complex includes 10 funds.
</FN>
</TABLE>
INVESTMENT ADVISORY AGREEMENT
Capstone Asset Management Company serves as the investment adviser (the
"Adviser") to the Fund pursuant to an investment advisory agreement ("Advisory
Agreement") dated May 11, 1992 between the Adviser and the Fund. The Advisory
Agreement was approved by stockholders on February 18, 1992. The Adviser,
located at 5847 San Felipe, Suite 4100, Houston, Texas 77057 is a wholly-owned
subsidiary of Capstone Financial Services, Inc. Subadvisory services were
provided to the Fund from February 1992 to January 1996 by New Castle Advisers,
Inc. ("NCA"), pursuant to a Subadvisory Agreement.
In January 1996, Capstone Financial Services, Inc., the parent of the
Adviser, acquired a majority interest in NCA and NCA resigned as subadviser to
the Fund. All advisory services to the Fund are now provided by the Adviser.
Howard Potter, formerly president of NCA and now managing director of Capstone
Asset Management Company, continues to provide portfolio management services to
the Fund.
Pursuant to the terms of the Advisory Agreement, the Adviser has agreed to
(1) provide a program of continuous investment management for the Fund in
accordance with the Fund's investment objectives, policies and limitations, (2)
make investment decisions for the Fund, and (3) place orders to purchase and
sell securities for the Fund, subject to the supervision of the Board of
Directors. For these services the Fund pays the Adviser a fee computed daily and
payable monthly at the annual rate of 0.40% of the Fund's average daily net
assets up to $250 million and 0.36% of such assets in excess of $250 million.
Advisory fees paid to the Adviser during the fiscal year ended November 30, 1998
and 1997 totaled $129,034 and $249,523, respectively.
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.
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 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"), 5847 San Felipe,
Suite 4100, Houston, Texas 77057, acts as the principal underwriter of the
Fund's shares pursuant to a written agreement with the Fund dated May 11, 1992
(the "Distribution Agreement"). The Distributor has the exclusive right (except
for distributions of shares directly by the Fund) to distribute Fund shares in a
continuous offering through affiliated and unaffiliated dealers. The
Distributor's obligation is a "best efforts" arrangement under which the
Distributor is required to take and pay for only such Fund shares as may be sold
to the public. The Distributor is not obligated to sell any stated number of
shares. Except to the extent otherwise permitted by the Service and Distribution
Plan (see below), the Distributor bears the cost of printing (but not
typesetting) prospectuses used in connection with this offering and the cost and
expense of supplemental sales literature, promotion and advertising. Prior to
December 1990 sales of Fund shares were subject to a sales charge. The sales
charge was paid to the Distributor, who re-allowed a portion of the sales charge
to broker-dealers who had entered into an agreement with the Distributor to
offer for sale the Fund's shares.
The 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. The Distributor receives no
underwriting discounts or commissions, redemption or repurchase fees on
brokerage commissions from the Fund. It does receive payments, as described
below, under the Fund's Service and Distribution Plan.
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 $64,803 in 12b-1 fees during the fiscal year ended
November 30, 1998. Of this amount, $49,898 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 $156,119); printing of advertising
materials, prospectuses and financial reports distributed to prospective
investors (approximately $10,294); postage and mailing expenses (approximately
$4,305); and other miscellaneous costs and expenses incurred in the operation of
the Plan ($161,690). 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
11/98 $ 64,803 $ 14,905 $ 49,898
11/97 124,893 39,118 85,775
11/96 110,894 32,139 78,755
11/95 305,403 180,514 124,889
In addition, the Distributor incurred distribution-related expenses of
$317,503 on behalf of the Fund in excess of the amount paid by the Fund.
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 11, 1998.
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 and TradeStar Investments, Inc., broker-dealer affiliates of the
Adviser.
The portfolio of the Fund is composed primarily of cash, short-term and
intermediate-term debt securities and when purchases and sales of securities for
the portfolio are made, a "spread" or "mark-up" (dealer's profit) is generally
included in the price of the securities. The Fund's portfolio transactions are
generally effected without the payment of brokerage commissions; during the last
three fiscal years, the Fund paid no brokerage commissions on portfolio
transactions.
The Fund has no obligation to deal with any broker or group of brokers
in executing transactions in portfolio securities. As discussed above, most of
the Fund's transactions are executed on a principal basis without the payment of
a commission. On trades involving a commission, the Adviser generally seeks
reasonably competitive commission rates for transactions they place on behalf of
the Fund, although the Fund does not necessarily pay the lowest commission
available. For non-principal transactions the Adviser is authorized to cause the
Fund to pay a broker that provides brokerage and research services a commission
in excess of the amount another broker might have charged for effecting a
securities transaction. Such higher commission may be paid if the Adviser
determines in good faith that the amount paid is reasonable in relation to the
services received in terms of the particular transaction or the Adviser's
overall responsibilities to the Fund and other clients of the Adviser. Such
research services must provide lawful and appropriate assistance to the Adviser
in the performance of its investment decision-making responsibilities and may
include: (a) furnishing advice as to the value of securities, the advisability
of investing in, purchasing or selling securities, and the availability of
securities or the purchasers or sellers of securities; and (b) furnishing
analyses and reports concerning issuers, industries, securities, economic
factors and trends, portfolio strategy, and the performance of accounts. Such
information may be received orally or in writing and will be in addition to and
not in lieu of the services required to be performed by the Adviser under the
Advisory Agreement. The expenses of the Adviser will not necessarily be reduced
as a result of the receipt of such supplemental information. This information
may be useful to the Adviser in providing services to clients other than the
Fund, and not all such information is used by the Adviser in connection with the
Fund. Conversely, such information provided to the Adviser by brokers and
dealers through whom other clients of the Adviser effect securities transactions
may be useful to the Adviser in providing services to the Fund.
Some of the securities in which the Fund invests may be traded in the
OTC markets, and the Fund intends to deal directly with the dealers who make
markets in the securities involved, except in those circumstances where better
prices and execution are available elsewhere.
Although investment decisions for the Fund are made independently from
those of the other accounts managed by the Adviser, investments of the kind made
by the Fund may also be made by those other accounts. Opportunities to purchase
or sell securities will be allocated in the discretion of the Adviser by such
means as will, in their judgment, result in fair and equal treatment in
connection with the other accounts managed by them. Such means may include
allocating opportunities ratably, rotationally or at random among the Fund and
other accounts, on the basis of accounts having the least favorable performance
or any combination of the foregoing. The Adviser may aggregate orders for
purchases and sales of securities of the same issuer on the same day among the
Fund and other accounts and the price paid to or received by the Fund and those
accounts will be the average obtained in those orders. In some cases, the
foregoing aggregation and allocation procedures may affect adversely the price
paid or received by the Fund or the size of the position purchased or sold by
the Fund.
DETERMINATION OF NET ASSET VALUE
The Fund's net asset value is computed daily, Monday through Friday, as
of 4:15 p.m. Eastern Time, except that the net asset value will not be computed
on the following holidays: New Year's Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day
and the days that the Federal Reserve wire system is closed. The Fund also will
determine its net asset value on any day in which there is sufficient trading in
its portfolio securities that the net asset value might be affected materially,
but only if on any such day the Fund is required to sell or redeem shares. The
Fund's net asset value per share is computed by dividing the value of the
securities held by the Fund plus any cash or other assets (including any accrued
interest and dividends receivable but not yet received) minus all liabilities
(including accrued expenses) by the total number of shares outstanding at such
time, adjusted to the nearest whole cent. The net asset value so computed will
be used for all purchase orders and redemption requests received between such
computation and the preceding computation.
All portfolio securities for which over-the-counter ("OTC") market
quotations are readily available are valued at the mean between the bid and
asked prices. OTC options are valued using the Black-Scholes Model, which
utilizes the option's characteristics when bought or sold and the market price
of the underlying security to determine a daily price for each OTC option's
position. The only pricing variable changed daily is the price of the underlying
security. Short-term instruments having a maturity date of more than 60 days are
valued on a "mark-to-market" basis, that is, at prices based on market
quotations for securities of similar type, yield, quality and maturity, until 60
days prior to maturity and thereafter at amortized value. Short-term instruments
having a maturity date of 60 days or less at the time of purchase are valued at
amortized cost value unless the Board of Directors determines this does not
represent fair market value. When market quotations are not readily available,
portfolio securities are valued at their fair value as determined in good faith
under procedures established by and under the general supervision of the Board
of Directors (valuation of securities for which market quotations are not
readily available may be based upon current market prices of securities which
are comparable in coupon, rating and maturity or an appropriate matrix utilizing
similar factors).
HOW TO BUY AND REDEEM SHARES
Shares of the Fund are sold in a continuous offering and may be
purchased on any business day through authorized dealers, including Capstone
Asset Planning Company. Certain broker-dealers assist 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, 211
South Gulph Road, King of Prussia, Pennsylvania 19406-3101. 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 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, properly designated and distributed
by the Fund, whether paid in cash or reinvested in Fund shares, will generally
be taxable to stockholders as long-term capital gain. 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 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
for qualification as a regulated investment company. If the Fund has failed to
satisfy the requirement that it distribute at least 90% of its net investment
company taxable income, the Fund may be able to preserve its regulated
investment company status by making a "deficiency dividend" distribution. In
addition, the Fund would have to pay interest and a penalty on the amount of the
deficiency dividend distribution. If the Fund fails to satisfy one of the other
requirements for qualification as a regulated investment company, the Fund would
be taxed as an ordinary corporation, and its distributions, including net
capital gain distributions, would be taxable to stockholders as ordinary
dividends. Moreover, upon any requalification as a regulated investment company,
the Fund might be subject to a corporate-level tax on certain gains.
Certain requirements that must be met under the Code in order for the
Fund to qualify as a regulated investment company may limit the extent to which
the Fund will be able to engage in transactions in options.
Certain of the debt securities acquired by the Fund may be treated as
debt securities that were originally issued at a discount. Original issue
discount can generally be defined as the difference between the price at which a
security was issued and its stated redemption price at maturity. Although no
cash income is actually received by the Fund, original issue discount on a
taxable debt security earned in a given year generally is treated for Federal
income tax purposes as interest and, therefore, such income would be subject to
the distribution requirements of the Code.
Some of the debt securities may be purchased by the Fund at a discount
which exceeds the original issue discount on such debt securities, if any. This
additional discount represents market discount for Federal income tax purposes.
The gain realized on the disposition of any debt security acquired after April
30, 1993 or any taxable debt security acquired prior to May 1, 1993 having
market discount will be treated as ordinary income to the extent it does not
exceed the accrued market discount on such debt security. Generally, market
discount accrues on a daily basis for each day the debt security is held by the
Fund at a constant rate over the time remaining to the debt security maturity
or, at the election of the Fund, at a constant yield to maturity which takes
into account the semi-annual compounding of interest.
Disposition of Shares. Upon disposition (by redemption, repurchase,
sale or exchange) of Fund shares, a stockholder will realize a taxable gain or
loss depending upon his basis in his shares. Such gain or loss will be treated
as capital gain or loss if the shares are capital assets in the stockholder's
hands. Such gain or loss generally will be long-term or short-term depending
upon the stockholder's holding period for the shares. However, a loss realized
by a stockholder on the disposition of Fund shares with respect to which capital
gain dividends have been paid will, to the extent of such capital gain
dividends, be treated as long-term capital loss if such shares have been held by
the stockholder for six months or less. Further, a loss realized on a
disposition will be disallowed to the extent the shares disposed of are replaced
(whether by reinvestment of distributions or otherwise) within a period of 61
days beginning 30 days before and ending 30 days after the shares are disposed
of. In such a case, the basis of the shares acquired will be adjusted to reflect
the disallowed loss. Exchanges of Fund shares for shares of other funds
generally would be treated as taxable sales of the shares exchanged by the
stockholder.
Backup Withholding. The Fund may be required to withhold Federal income
tax at the rate of 31% of all taxable distributions from the Fund and of gross
proceeds from the redemption of shares payable to stockholders who fail to
provide the Fund with their correct taxpayer identification number or to make
required certifications, or who have been notified by the Internal Revenue
Service that they are subject to backup withholding. Corporate stockholders and
certain other stockholders specified in the Code generally are exempt from
backup withholding. Backup withholding is not an additional tax. Any amounts
withheld may be credited against the stockholder's U.S. Federal income tax
liability.
Other Taxes. Distributions also may be subject to additional state,
local and foreign taxes depending on each stockholder's particular situation.
Foreign stockholders may be subject to U.S. tax rules that differ significantly
from those described above, including the likelihood that distributions to them
would be subject to withholding of U.S. tax at a rate of 30% (or at a lower rate
under a tax treaty). Stockholders are advised to consult their own tax advisers
with respect to the particular tax consequences to them of an investment in the
Fund.
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 of record more than five percent
of the Fund's common stock as of March 17, 1999:
Registration Percent Owned
Jack Henry & Associates, Inc. 41.21%
663 Highway 60
Monett, Missouri 65708
West Alabama Bank & trust 12.43%
P.O. Box 151, Court Square
Carrollton, Alabama 35447
To the knowledge of the Board of Directors, each person named has sole
voting investment power with respect to the shares owned.
OTHER INFORMATION
Custody of Assets. All securities owned by the Fund and all cash,
including proceeds from the sale of shares of the Fund and of securities in the
Fund's investment portfolio, are held by The Fifth Third Bank, 38 Fountain
Square, Cincinnati, Ohio 45263, as Custodian.
Stockholder Reports. Semi-annual statements are furnished to stockholders,
and annually such statements are audited by the Fund's independent accountants.
Independent Accountants. 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 Eye Street, N.W., Washington,
DC 20006, is legal counsel to the Fund.
Transfer Agent and Shareholder Servicing Agent. The Fund's transfer and
shareholder servicing agent is First Data Investor Services Group, Inc., 211
South Gulph Road, P.O. Box 61503, King of Prussia, Pennsylvania 19406-3101.
<PAGE>
CAPSTONE FIXED INCOME SERIES, INC.
CAPSTONE GOVERNMENT INCOME FUND
OTHER INFORMATION
(PART C TO REGISTRATION STATEMENT NO. 2-28174)
Item 23. 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.
1(a) Copy of Certificate of Incorporation dated December 6, 1967;
Exhibit 1 to Registration No. 2-28174.
1(b) Copy of Certificate of Amendment of Certificate of
Incorporation dated May 14, 1968; Exhibit 1A to Amendment No. 1
to Registration No. 2-28174.
1(c) Copy of Certificate of Amendment of Certificate of
Incorporation dated July 23, 1979; Exhibit 1 to Amendment No. 6
to Registration No. 2-28174.
1(d) Copy of Certificate of Amendment of Certificate of
Incorporation dated December 19, 1980; Exhibit 2(ii) to
Post-Effective Amendment No. 22 to Registration No. 2-28174.
1(e) Copy of Certificate of Amendment of Certificate of
Incorporation dated July 25, 1977; Exhibit 1(e) to
Post-Effective Amendment No. 29 to Registration No. 2-28174.
1(f) Copy of Certificate of Amendment of Certificate of
Incorporation dated April 30, 1986; Exhibit 1(f) to
Post-Effective Amendment No. 29 to Registration No. 2-28174.
1(g) Copy of Certificate of Amendment of Certificate of
Incorporation dated January 12, 1990; Exhibit 1(g) to
Post-Effective Amendment 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 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(a) 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.
4(b) 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.
4(c) 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.
4(d) 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.
4(e) 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.
4(f) 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.
4(g) 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 No.
2-28174.
5(a) 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.
5(b) Copy of Selling Group Agreement; Exhibit 6(e) to Post-Effective
Amendment No. 39 to Registration No. 2-28174.
5(c) 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.
6 None
7(a) 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.
7(b) 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.
8(a) 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.
8(b) 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.
8(c) 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.
8(d) 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.
8(e) 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.
8(f) 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.
8(g) 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.
8(h) 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.
8(i) 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.
8(j) 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.
8(k) 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.
8(l) 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.
8(m) Form 5305, Simplified Employee Pension-Individual Retirement
Accounts Contribution Agreement; Exhibit 14(c) to Pre-Effective
Amendment No. 1 to Registration No. 2-99810.
8(n) Form 5305-A, Individual Retirement Custodial Account; Exhibit
14(d) to Pre-Effective Amendment No. 1 to Registration No.
2-99810.
8(o) 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.
8(p) 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.
9 Opinion of Dechert Price & Rhoads, filed herewith.
10(a) Consent of Briggs, Bunting & Dougherty, LLP Independent
Certified Public Accountants, filed herewith.
10(b) Powers of Attorney of Messrs. James F. Leary, John R. Parker
and Bernard J. Vaughan, filed as exhibit to Post-Effective
Amendment No. 50.
11 None
12 None
13(a) Copy of Service and Distribution Plan; Exhibit 15(a) to
Post-Effective Amendment No. 39 to Registration No. 2-28174.
13(b) Copy of Service Agreement; Exhibit 15(b) to Post-Effective
Amendment No. 39 to Registration No. 2-28174.
13(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.
13(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.
14 Financial Data Schedules, filed herewith.
Item 24. Persons Controlled by or under Common Control with Registrant
Registrant does not control and is not under common control with any
person.
Item 25. 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 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 26. 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 27. 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)
Name and Principal Positions and Offices Positions and Offices
Business Address* with Underwriter with Registrant
Dan E. Watson Chairman of the Board Executive Vice President
and Director
Edward L. Jaroski President and Director President and Chairman
of the Board
Howard S. Potter Managing Director Executive Vice President
John M. Metzinger -- Vice President
Leticia N. Jaroski Vice President --
Linda G. Giuffre Vice President and Treasurer
Treasurer
- --------------
* 5847 San Felipe, Suite 4100, Houston, Texas 77057
Item 28. 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, 211 South Gulph Road, P.O. Box 61503, King of Prussia, Pennsylvania
19406-3101, 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 29. Management Services
Not applicable.
Item 30. Undertakings
Not applicable.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant represents that this Amendment satisfies the
criteria for filing pursuant to Rule 485(b) under the Securities Act of 1933, as
amended, and has duly caused this Amendment to its Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Houston, and State of Texas on the 24th day of March, 1999.
CAPSTONE FIXED INCOME SERIES, INC.
Registrant
By: /s/EDWARD L. JAROSKI
Edward L. Jaroski, President
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
Signatures Title Date
/sEDWARD L. JAROSKI President (Principal March 24, 1999
Edward L. Jaroski Executive Officer)
/s/LINDA G. GIUFFRE Treasurer (Principal March 24, 1999
Linda G. Giuffre Financial & Accounting
Officer)
JAMES F. LEARY* Director March 24, 1999
James F. Leary
JOHN R. PARKER* Director March 24, 1999
John R. Parker
BERNARD J. VAUGHAN* Director March 24, 1999
Bernard J. Vaughan
* By: /s/EDWARD L. JAROSKI
Edward L. Jaroski, Attorney-In-Fact
<PAGE>
EXHIBITS INDEX
Exhibit No.
9 Opinion of Dechert Price & Rhoads
10(a) Consent of Auditors
14 Financial Data Schedules
DECHERT PRICE & RHOADS
1775 EYE STREET, N.W.
WASHINGTON, DC 20006-2401
Telephone: 202-261-3300
Facsimile: 202-261-3333
March 22, 1999
Capstone Fixed Income Series, Inc.
on behalf of Capstone Government Income Fund
5847 San Felipe, Suite 4100
Houston, Texas 77057
Dear Sirs:
We have acted as counsel for Capstone Fixed Income Series, Inc. ("Registrant"),
including its sole publicly offered series Capstone Government Income Fund (the
"Fund"), and are familiar with its registration statement under the Investment
Company Act of 1940, as amended, and with the registration statement relating to
its shares under the Securities Act of 1933, as amended. Registrant is organized
as a corporation under the laws of Maryland.
We have examined Registrant's Articles of Incorporation and other materials
relating to the authorization and issuance of capital stock of Registrant,
Amendment No 52 to Registrant's Registration Statement filed on Form N-1A under
the Securities Act of 1933 and the Investment Company Act of 1940, and such
other documents and matters as we have deemed necessary to enable us to give
this opinion.
Based upon the foregoing, we are of the opinion that the shares proposed to be
sold pursuant to Amendment No. 52 to Registrant's Registration Statement, when
it is made effective by the Securities and Exchange Commission, will have been
validly authorized and, when sold in accordance with the terms of such Amendment
and the requirements of applicable federal and state law and delivered by
Registrant against receipt of the net asset value of the shares of the Fund, as
described in the Registration Statement, will have been legally and validly
issued and will be fully paid and non-assessable.
We hereby consent to the filing of this opinion as an exhibit to Amendment No.
52 to Registrant's Registration Statement on Form N-1A to be filed with the
Securities and Exchange Commission in connection with the continuous offering of
the shares of Registrant's capital stock, as indicated above, and to references
to our firm, as counsel to Registrant, in Registrant's prospectus and Statement
of Additional Information to be dated as of the effective date of Amendment No
52 to Registrant's Registration Statement and in any revised or amended versions
thereof, until such time as we revoke such consent.
Very truly yours,
/s/ Dechert Price & Rhoads
---------------------------------
Dechert Price & Rhoads
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated December 16, 1998, accompanying the November 30,
1998 financial statements of Capstone Government Income Fund, a series of shares
of Capstone Fixed Income Series, Inc., which are incorporated by reference in
Part B of the Post-Effective Amendment to this Registration Statement and
Prospectus. We consent to the use of the aforementioned report in the
Registration Statement and Prospectus.
BRIGGS, BUNTING & DOUGHERTY, LLP
Philadelphia, Pennsylvania
March 22, 1999
<TABLE> <S> <C>
<ARTICLE> 6
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> NOV-30-1998
<PERIOD-END> NOV-30-1998
<INVESTMENTS-AT-COST> 20,412,168
<INVESTMENTS-AT-VALUE> 20,419,073
<RECEIVABLES> 37,056
<ASSETS-OTHER> 5,619
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 20,461,748
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 77,534
<TOTAL-LIABILITIES> 77,534
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 25,905,019
<SHARES-COMMON-STOCK> 806,745
<SHARES-COMMON-PRIOR> 2,902,670
<ACCUMULATED-NII-CURRENT> 1,190,987
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (6,718,697)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 6,905
<NET-ASSETS> 20,384,214
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 1,779,710
<OTHER-INCOME> 0
<EXPENSES-NET> 387,040
<NET-INVESTMENT-INCOME> 1,392,670
<REALIZED-GAINS-CURRENT> 18,069
<APPREC-INCREASE-CURRENT> 37,760
<NET-CHANGE-FROM-OPS> 1,448,499
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (155,105)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 3,009,473
<NUMBER-OF-SHARES-REDEEMED> 5,111,573
<SHARES-REINVESTED> 6,175
<NET-CHANGE-IN-ASSETS> (52,060,068)
<ACCUMULATED-NII-PRIOR> 2,945,523
<ACCUMULATED-GAINS-PRIOR> (6,736,766)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 129,034
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 387,040
<AVERAGE-NET-ASSETS> 32,253,333
<PER-SHARE-NAV-BEGIN> 24.96
<PER-SHARE-NII> 1.00
<PER-SHARE-GAIN-APPREC> .04
<PER-SHARE-DIVIDEND> (.73)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 25.27
<EXPENSE-RATIO> 1.20
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
