CAPSTONE GOVERNMENT INCOME FUND
- --------------------------------------------------------------------------------
Dear Shareholder:
Enclosed you will find the Capstone Government Income Fund (the "Fund" or
"CGIF") annual report for the year ended November 30, 1998.
Performance:
This year the U.S. credit markets have been characterized largely by the absence
of a positive yield spread between short and long-term securities. Long bond
rates were driven to very low levels based on several contributing factors.
Domestic economic growth was perceived to be weakening. Inflation remained in
check; deflation concerns spread globally; economic distress grew in Japan,
Russia and their surrounding areas; and, as a result, the U.S. dollar climbed
higher and higher against other currencies. As the long bond's yield approached
short-term rates, the main question for investors became if, and when, the
overall yield curve may "invert". Such an event is important because it removes
the economic incentive to purchase longer, i.e. "riskier" bonds at relatively
higher price levels, and forces investors to place a higher value on the future
direction of interest rates than is commonly necessary.
In this environment the Fund's managers were sensitive to the relatively small
amount of yield pickup available between very short and intermediate-term notes.
Since there was little economic incentive to extend duration, the weighted
average maturity of the Fund's investments were maintained at less than 1.0
years over much of the period. In addition, the Fund's managers attempted to
further hedge the portfolio against potential rate increases by selling
short-dated covered call options against the portfolio's longer-dated securities
when such purchases were made.
The result of this strategy for the past several years is depicted below. The
first graph illustrates the growth of a $10,000 investment in the Fund since
March 19911 versus the performance of an average money market fund, as monitored
in the IBC Donoghue Money Market Report (the "Money Fund Report")2. As you can
see, such an investment in the Fund grew to $13,749.40 compared to $13,893.99 in
the average money market fund, or 4.19% versus 4.33%, on an annualized basis.
Investors should be aware that the principal value of the Fund fluctuates with
changes in market conditions, while the primary objective of the average money
market fund is to maintain a stable net asset value.
Chart
CGIF vs. MONEY MARKET FUNDS
GROWTH OF $10,000 (2/28/91 - 11/30/98)
10000 10000
10408.3 10549.4
10773.6 10978.3
11056.2 11384.6
11433.3 11544.6
12040.1 12140.3
12619.6 12634.6
13238.8 13177.8
13894 13749.4
CGIF vs. LEHMAN BROS. 1-3 YR. GOV'T. INDEX
GROWTH OF $10,000 (12/01/88 - 11/30/98)
AVERAGE ANNUAL TOTAL RETURN
as of 11/30/98
1 Year 5 Year 10 Year
4.29% 3.85% 3.84%
10000 10000
10656 11071
10490 12058
11177 13421
11631 14343
12062 15199
12231 15307
12864 16871
13388 17862
13969 18926
14569 20305
The second graph compares the Fund's performance over the past 10 years to that
of the Lehman Brothers 1-3 year Government Index (the "Index"). The Index, which
is unmanaged, measures the performance of U.S. Government and agency fixed rate
debt issues rated investment grade or higher by Moody's, Standard & Poor's, or
Fitch. Total return includes price appreciation/depreciation and income as a
percentage of the original investment. All calculations for the Fund include the
reinvestment of distributions and are based on historical information. The
investment return and principal value of an investment in the Fund will
fluctuate so that an investor's shares when redeemed, may be worth more or less
than their original cost.
<PAGE>
CAPSTONE GOVERNMENT INCOME FUND
- --------------------------------------------------------------------------------
Dividends:
The Fund has not made regular distributions of income since December 30, 1997,
so as to stabilize expenses and net asset values. As a result, the Fund
accumulates all interest income and capital gains until the end of the calendar
year, when it must distribute substantially all such earnings in order to retain
its tax status as a regulated investment company. For 1998, the Fund distributed
$0.82 of income per share on December 21, 1998, for shareholders of record on
December 18, 1998.
Outlook:
The Fund managers anticipate maintaining a conservative investment portfolio of
very short maturity U.S. Government and Treasury notes. Since the Federal
Reserve fiscal policymakers have reduced official short-term interest rates by
seventy-five basis points, and appear to be entering a "wait and see" period,
the interest rate sensitivity of the portfolio's longer duration holdings will
continue to be hedged with the sale of covered options. Little duration
extension will be made to the portfolio until such time as interest rates have
risen significantly in the managers' view and/or yield spreads between money
market instruments and two-year Treasury notes widen from current levels. In any
case, it is not an objective of the Fund to attempt to profit from speculation
as to the direction of interest rates or to leverage portfolio assets in any
way.
We thank you for your investment in the Fund and we are available to answer any
questions. Please contact us at (800) 262-6631.
/S/ Edward L. Jaroski /S/ Howard S. Potter
- ------------------------------ ------------------------------
Edward L. Jaroski Howard S. Potter
President Executive Vice President
- -------------------------
1 Changes to the name, investment objective and polices of the Fund were
approved by stockholders in January 1991 and became effective on March 1, 1991.
Prior to that date, the Fund invested in U.S. Government and corporate bonds,
money market instruments and other income producing securities.
2 The IBC/Donoghue Money Market Report is a weekly publication that tracks the
performance of money market mutual funds. The performance quoted herein of the
"average money market fund" is based on the performance of 101 funds, with
assets totaling $80 billion.
This publication must be accompanied or preceded by a current prospectus
for Capstone Government Income Fund.
<PAGE>
CAPSTONE GOVERNMENT INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PORTFOLIO OF INVESTMENTS - November 30, 1998
- -----------------------------------------------------------------------------------------------------------------------------
Principal Value Percentage of
BONDS Amount (See Note 1-A) Net Assets
<S> <C> <C> <C> >
U.S. GOVERNMENT & GOVERNMENT AGENCIES (90.53%)
U.S. Treasury Note, 5.625%, 10/31/99 $ 5,000,000 $ 5,041,100 24.73%
U.S. Treasury Note, 4.00%, 10/31/2000 3,500,000 3,462,812 16.99%
FMC Discount Note, 5.10%, 1/19/99 7,000,000 6,951,408 34.10%
FMC Discount Note, 5.08%, 12/4/98 3,000,000 2,998,753 14.71%
----------- ------
TOTAL U.S. GOVERNMENT (Cost $18,447,168) 18,454,073 90.53%
SHORT-TERM OBLIGATIONS
REPURCHASE AGREEMENTS (9.64%)
First Boston, 5.25%, 12/01/98 (dated 11/30/98) Collateralized by $1,785,000
Tennessee Valley Authority, 6.15%, due 1/15/38
(Repurchase Proceeds $1,965,287) 1,965,000 1,965,000 9.64%
----------- ------
TOTAL SHORT-TERM OBLIGATIONS (Cost $1,965,000) 1,965,000 9.64%
TOTAL INVESTMENTS IN SECURITIES (Cost $20,412,168) 20,419,073 100.17%
OTHER ASSETS LESS LIABILITIES (34,859) -0.17%
----------- ------
NET ASSETS, at values equivalent to $25.27 per share
for 806,745 shares of $.001 par value shares outstanding $20,384,214 100.00%
=========== ======
At November 30, 1998, unrealized appreciation of securities based on Federal
income tax cost is as follows:
Unrealized appreciation $ 6,905
Unrealized depreciation --
-----------
Net unrealized depreciation $ 6,905
===========
See Accompanying Notes to Financial Statements
</TABLE>
<PAGE>
CAPSTONE GOVERNMENT INCOME FUND
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES - November 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS:
<S> <C>
Investments in securities at market value ( identified cost $20,412,168)(Note 1A) $20,419,073
Cash 5,619
Interest receivable 36,295
Receivable for capital stock sold 761
------------
Total Assets 20,461,748
------------
LIABILITIES:
Payable for capital stock redeemed 25,043
Accrued expenses 52,491
------------
Total Liabilities 77,534
------------
NET ASSETS $20,384,214
============
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE:
($20,384,214/806,745 shares outstanding of $.001 par value, 200,000,000 shares authorized) $ 25.27
============
SOURCE OF NET ASSETS:
Paid in capital $25,905,019
Undistributed net investment income 1,190,987
Accumulated net realized loss on investments (6,718,697)
Net unrealized appreciation of securities 6,905
------------
Total $20,384,214
============
See Accompanying Notes to Financial Statements
<PAGE>
CAPSTONE GOVERNMENT INCOME FUND
- --------------------------------------------------------------------------------------------------------------------------
STATEMENT OF OPERATIONS For The Year Ended November 30, 1998
- --------------------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME
Interest income $1,779,710
Expenses:
Advisory fees (Note 2) $129,034
Distribution fees (Note 2) 64,803
Administrative services (Note 2) 32,257
Transfer agent fees 42,809
Fund Accounting fees 40,932
Audit fees 23,883
Legal fees 5,469
Trustees' fees and expenses 3,401
Custodian fees 3,960
Registration and filing fees 16,906
Reports and notices to stockholders 3,676
Insurance expense 1,058
Miscellaneous 18,852
----------
Total Expenses 387,040
----------
Net Investment Income 1,392,670
----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized loss from security transactions (37,009)
Net realized gain from written options 55,078
Unrealized appreciation (depreciation) of investments:
Beginning of period (30,855)
End of period 6,905
----------
Net change in unrealized appreciation of investments 37,760
----------
Net realized and unrealized gain on investments 55,829
----------
Net increase in net assets resulting from operations $1,448,499
==========
See Accompanying Notes to Financial Statements
<PAGE>
CAPSTONE GOVERNMENT INCOME FUND
- --------------------------------------------------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------------------------------------------------
Year Ended Year Ended
November 30, 1998 November 30, 1997
----------------- -----------------
OPERATIONS:
Net investment income $ 1,392,670 $ 2,945,523
Net realized gain (loss) on investments 18,069 (180,362)
Net change in unrealized depreciation of investments 37,760 3,367
------------ ------------
Net increase in net assets resulting from operations 1,448,499 2,768,528
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (155,105) (253,678)
CAPITAL SHARE TRANSACTIONS:
Decrease in net assets resulting
from capital share transactions (Note 3) (53,353,462) (9,824,539)
------------ ------------
Total decrease in net assets (52,060,068) (7,309,689)
NET ASSETS
Beginning of period 72,444,282 79,753,971
------------ ------------
End of period (including undistributed net investment income of $1,190,987
and $2,945,523, respectively) $20,384,214 $72,444,282
============ ============
</TABLE>
See Accompanying Notes to Financial Statements
NOTES TO FINANCIAL STATEMENTS - November 30, 1998
- --------------------------------------------------------------------------------
Note 1 - Summary of Significant Accounting Policies
Capstone Government Income Fund (the "Fund") is the initial series of
Capstone Fixed Income Series, Inc. (the "Corporation"), which is registered
under the Investment Company Act of 1940, as amended (the "Act"), as a
diversified, open-end management investment company. The Fund was originally
incorporated in Delaware in 1968 and was reorganized as the initial series of
the Corporation, which was established under Maryland Law on May 11, 1992.
The current investment objective of the Fund is to earn a high level of
total return, consistent with safety of principal. The Fund seeks to achieve
this objective by investing in debt obligations that have remaining maturities
of three years or less and that are issued or guaranteed by the U.S. Government,
its agencies or instrumentalities, and by engaging in certain income enhancement
strategies. Because of the risks inherent in any investment program, the Fund
cannot ensure that its investment objectives will be realized. The Fund changed
its fiscal year end to November 30, commencing with November 30, 1995, but
continues to maintain a December 31 tax year end.
The following is a summary of significant accounting policies followed by
the Fund in the preparation of its financial statements.
(A) Valuation of Investments - Debt securities (other than short-term
obligations) including listed issues are valued at the mean between the bid
and asked prices on the basis of valuations furnished by a pricing service.
Over-the-counter options, which include both written and purchased options,
are valued using the Black-Scholes Model, which utilizes the option's
characteristics when bought or sold and the market price of the underlying
security to determine a daily price for each OTC option's position. The only
pricing variable changed daily is the price of the underlying security. When
market quotations are not readily available, portfolio securities are valued
at their fair value as determined in good faith under procedures established
by and under the general supervision of the Board of Directors (valuation of
securities for which market quotations are not readily available may be
based upon current market prices of securities which are comparable in
coupon, rating and maturity or an appropriate matrix utilizing similar factors).
Short-term investments are valued at amortized cost which approximates value.
<PAGE>
CAPSTONE GOVERNMENT INCOME FUND
(B) Call and Put Options - When the Fund writes a call or put option, an amount
equal to the premium received is reflected as a liability. The amount of the
liability is subsequently "marked to market" to reflect the current market value
of the option written. If an option which the Fund has written either expires on
its stipulated expiration date, or if the Fund enters into a closing purchase
transaction, the Fund realizes a gain (or loss if the cost of the closing
transaction exceeds the premium received when the option is sold), and the
liability related to such option is extinguished. If a call option which the
Fund has written is exercised, the Fund realizes a gain or loss from the sale of
the underlying security and the proceeds from such a sale are increased by the
premium originally received. If a put option which the Fund has written is
exercised, the amount of the premium originally received reduces the cost of the
security which the Fund purchases upon exercise of the option. The Fund, as the
writer of a call option, loses the potential for gain on the underlying security
above the exercise price while the option is outstanding. By writing a put
option, the Fund might become obligated to purchase the underlying security at
an exercise price that exceeds the current market price.
The premium paid by the Fund for the purchase of a call or put option is
recorded as an investment and subsequently "marked to market" to reflect the
current market value of the option purchased. If an option which the Fund has
purchased expires on the stipulated expiration date, the Fund realizes a loss in
the amount of the cost of the option. If the Fund enters into a closing
transaction, it realizes a gain (loss) if the proceeds from the sale are greater
(less) than the cost of the option purchased. If the Fund exercises a put
option, it realizes a gain or loss from the sale of the underlying security and
the proceeds from such sale will be decreased by the premium originally paid. If
the Fund exercises a call option, the cost of the security purchased upon
exercise is increased by the premium originally paid. These option contracts may
be listed for trading on a national securities exchange or traded
over-the-counter. Over-the-counter options are transacted directly with dealers
and not with a clearing corporation, and there is a risk of non-performance by
the dealer.
(C) Repurchase Agreements - The Fund may enter into repurchase agreements with
U.S. Government securities dealers recognized by the Federal Reserve Board, with
member banks of the Federal Reserve System or with such other brokers or dealers
that meet the credit guidelines of the Corporation's Board of Directors. In a
repurchase agreement, the Fund buys a security from a seller that has agreed to
repurchase the same security at a mutually agreed upon date and price. The
Fund's resale price will be in excess of the purchase price, reflecting an
agreed upon interest rate. This interest rate is effective for the period of
time the Fund is invested in the agreement and is not related to the coupon rate
on the underlying security. Repurchase agreements may also be viewed as fully
collateralized loans of money by the Fund to the seller. The period of these
repurchase agreements will usually be short, from overnight to one week, and at
no time will the Fund invest in repurchase agreements for more than one year.
The Fund will always receive as collateral securities whose market value
including accrued interest is, and during the entire term of the agreement
remains, at least equal to 100% of the dollar amount invested by the Fund in
each agreement, and the Fund will make payment for such securities only upon
physical delivery or upon evidence of book entry transfer to the account of the
custodian. If the seller defaults, the Fund might incur a loss if the value of
the collateral securing the repurchase agreement declines and might incur
disposition costs in connection with liquidating the collateral. In addition, if
bankruptcy proceedings are commenced with respect to the seller of a security
which is the subject of a repurchase agreement, realization of the collateral by
the Fund may be delayed or limited. In an attempt to minimize these risks, the
Adviser will consider and monitor the creditworthiness of parties to repurchase
agreements.
(D) Security Transactions and Investment Income - Security transactions are
accounted for on the trade date (the date the securities are purchased or sold).
Interest income on investments is accrued daily. Premiums on securities
purchased are amortized over the life of the respective securities and discounts
are recharacterized to income, limited to the extent of any capital gain upon
sale or maturity of the respective security. Realized gains and losses from
security transactions are determined on the basis of identified cost.
(E) Federal Income Taxes - No provision is considered necessary for Federal
income taxes since it is the policy of the Fund to distribute all of its taxable
income, including any net realized gains on sales of investments, and to qualify
as a "regulated investment company" under the applicable section of the Internal
Revenue Code. The Fund has approximately $6,722,500 of capital losses for
Federal income tax purposes available to offset future taxable capital gains, if
any, of which $1,910,000 expires in December 1999, $2,194,600 expires in
December 2001, $1,252,800 expires in December 2002, $1,005,300 expires in
December 2003, $170,000 expires in December 2004 and $189,800 expires in
December 2005.
(F) Share Transactions and Distributions to Shareholders - Fund shares are sold
in continuous public offering at the net asset value. Transactions in Fund
shares are recorded on the trade date. The Fund redeems its shares at the net
asset value. Dividends and other distributions are recorded by the Fund on the
ex-dividend date and may be reinvested at net asset value.
<PAGE>
- --------------------------------------------------------------------------------
CAPSTONE GOVERNMENT INCOME FUND
Income distributions and capital gain distributions, if any, are determined
in accordance with income tax regulations which may differ from generally
accepted accounting principles. The Fund also utilizes earnings and profits
distributed to shareholders on redemption of shares as part of the dividend paid
deduction for income tax purposes. The Fund files its tax return on a December
31 basis; all permanent book/tax differences are adjusted at that time.
(G) Use of Estimates in Financial Statements - In preparing financial statements
in conformity with generally accepted accounting principles, management makes
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements, as well as the reported
amounts of income and expenses during the reporting period. Actual results may
differ from the estimates.
Note 2 - Investment Advisory and Administration Fees and Other Transactions
with Affiliates
Capstone Asset Management Company ("CAMCO"), serves as the Investment
Adviser to the Fund pursuant to an Investment Advisory Agreement dated May 11,
1992 between CAMCO and the Fund. Since May, 1992 New Castle Advisers, Inc.
("NCA") had served as Subadviser to the Fund pursuant to a Subadvisory Agreement
between CAMCO and NCA. On January 1, 1996, Capstone Financial Services, Inc.
("CFS"), the parent company of the Adviser, acquired a majority interest in NCA,
and NCA simultaneously resigned as subadviser to the Fund. The Fund therefore no
longer has a separate subadviser. This change has had no effect on the
management of the Fund or the advisory fees paid by the Fund, since fees to NCA
were previously paid by the Adviser out of its fees from the Fund. The Adviser
now retains the entire fee, which is computed daily and paid monthly at the
annual rate of 0.40% of the first $250 million of the Fund's average daily net
assets and 0.36% of such assets over $250 million.
CAMCO also provides administrative services to the Fund pursuant to an
Administrative Agreement. For these services, CAMCO is paid a monthly fee equal
to an annual rate of 0.10% of the Fund's average daily net assets.
Investment advisory and administrative fees paid to CAMCO for the year
ended November 30, 1998 were $161,291.
Pursuant to the Investment Advisory Agreement and the Administrative
Agreement, CAMCO has agreed to reduce its fees on a pro rata basis (but not
below zero) to the extent that the Fund's ordinary expenses for any fiscal year
(including advisory or administrative fees, but excluding brokerage commissions,
interest, local, state and Federal taxes and extraordinary expenses) exceed the
expense limitation of any state having jurisdiction over the Fund. Due to recent
Federal and state legislation, such state expense limitations are no longer
applicable to the Fund.
Pursuant to a Distribution Agreement with the Fund dated May 11, 1992,
Capstone Asset Planning Company ("CAPCO"), is the principal underwriter of the
Fund and, acting as exclusive agent, sells shares of the Fund to the public on a
continuous basis.
The Fund has adopted a Service and Distribution Plan (the "Plan") pursuant
to Rule 12b-1 under the Act whereby it uses its assets to finance certain
activities relating to the distribution of its shares to investors and provision
of certain stockholder services. The Plan permits payments to be made by the
Fund to the Distributor to reimburse it for particular expenditures incurred by
it in connection with the distribution of the Fund's shares to investors and
provision of certain stockholder services including, but not limited to, the
payment of compensation, including incentive compensation, to securities dealers
(which may include CAPCO itself) and certain banks, investment advisers and
pension consultants (collectively, the "Service Organizations") to obtain
various distribution-related and/or administrative services for the Fund. CAPCO
is also authorized to engage in advertising, the preparation and distribution of
sales literature and other promotional activities on behalf of the Fund. In
addition, the Plan authorizes payment by the Fund of the cost of preparing,
printing and distributing Fund Prospectuses and Statements of Additional
Information to prospective investors and of implementing and operating the Plan.
Under the Plan, payments made to CAPCO may not exceed an amount computed at
an annual rate of 0.20% of the average net assets of the Fund. CAPCO is
permitted to collect fees under the Plan on a monthly basis. Any expenditures
incurred in excess of the limitation described above during a given month may be
carried forward up to twelve months for reimbursement, subject always to the
0.20% limit, and no interest or carrying charges will be payable by the Fund on
amounts carried forward. The Plan may be terminated by the Fund at any time and
the Fund will not be liable for amounts not reimbursed as of the termination
date. During the year ended November 30, 1998, the Fund paid $64,803 in
distribution expenses. Of this amount $49,898 was paid to Service Organizations
other than CAPCO.
<PAGE>
CAPSTONE GOVERNMENT INCOME FUND
- --------------------------------------------------------------------------------
CAMCO is an affiliate of CAPCO and both are wholly-owned subsidiaries of
CFS. Certain officers and directors of the Fund, are also officers and
directors of CAMCO, CAPCO, and CFS.
Note 3 - Capital Stock
Transactions in capital stock were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
November 30, 1998 November 30, 1997
Shares Value Shares Value
<S> <C> <C> <C> <C>
Shares sold 3,009,473 $ 74,057,893 7,182,708 $174,386,902
Shares issued to shareholders in reinvestment
of distributions 6,175 149,861 9,684 231,939
---------- ------------- --------- -------------
3,015,648 74,207,754 7,192,392 174,618,841
Shares reacquired (5,111,573) (127,561,216) (7,550,644) (184,443,380)
---------- ------------- --------- -------------
Net increase (decrease) (2,095,925) $ (53,353,462) (358,252) $ (9,824,539)
========== ============= ========= =============
</TABLE>
In January 1997, the Fund effected a five for one reverse stock split. All
shares and per share information have been adjusted to reflect this transaction.
Note 4 - Purchases and Sales of Securities
For the year ended November 30, 1998, the cost of purchases and proceeds
from sales of securities other than short-term obligations aggregated
$51,769,543 and $87,906,133, respectively.
Written options transactions during the period are summarized as follows:
<TABLE>
<CAPTION>
Call Options Written Face Amount
Premiums Received of Contracts
<S> <C> <C>
Options outstanding at November 30, 1997 $(12,500) $ 10,000,000
Options written (46,484) 25,000,000
Options closed 10,937 (5,000,000)
Options exercised 12,500 (10,000,000)
Options expired 35,547 (20,000,000)
-------- ------------
Options outstanding at November 30, 1998 $ 0 $ 0
======== ============
</TABLE>
<PAGE>
CAPSTONE GOVERNMENT INCOME FUND
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS - November 30, 1998
- --------------------------------------------------------------------------------
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>
Eleven
Months
Per Share Data(3) Year Ended 11/30 Ended Year Ended 12/31
1998 1997 1996 11/30/95(1) 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------
<S> <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
</TABLE>
(1) Based on average shares outstanding determined daily. (2) Annualized (3)
Adjusted for reverse 5:1 stock split on January 13, 1997.
<PAGE>
CAPSTONE GOVERNMENT INCOME FUND
- -------------------------------------------------------------------------------
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of
Capstone Fixed Income Series, Inc.
Houston, Texas
We have audited the accompanying statement of assets and liabilities of Capstone
Government Income Fund (the "Fund"), a series of Capstone Fixed Income Series,
Inc., including the portfolio of investments as of November 30, 1998, and the
related statement of operations for the year then ended, and the statement of
changes in net assets and the financial highlights for each of the two years in
the period then ended. These financial statements and financial highlights are
the responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audit. The financial highlights for the year ended November 30, 1996, the eleven
months ended November 30, 1995, and each of the two years in the period ended
December 31, 1994 were audited by other auditors whose report dated December 13,
1996, expressed an unqualified opinion on the financial highlights.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
November 30, 1998 by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Capstone Government Income Fund as of November 30, 1998, the results of its
operations for the year then ended, and the changes in its net assets and the
financial highlights for each of the two years in the period then ended in
conformity with generally accepted accounting principles.
BRIGGS, BUNTING & DOUGHERTY, LLP
Philadelphia, Pennsylvania
December 16, 1998
<PAGE>
CAPSTONE GOVERNMENT INCOME FUND
5847 San Felipe, Suite 4100
Houston, Texas 77057
1-800-262-6631
ANNUAL REPORT TO SHAREHOLDERS
November 30, 1998
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DIRECTORS OFFICERS
Edward L. Jaroski Edward L. Jaroski
President
James F. Leary
Howard S. Potter
John R. Parker Executive Vice President
Bernard J. Vaughan Dan E. Watson
Executive Vice President
John M. Metzinger
Vice President
Linda G. Giuffre
Secretary/Treasurer
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INVESTMENT ADVISER TRANSFER AGENT
Capstone Asset Management Company First Data Investor Services Group, Inc.
5847 San Felipe 3200 Horizon Drive
Suite 4100 P.O. Box 61503
Houston, TX 77057 King of Prussia, PA 19406-0903
1-800-845-2340
ADMINISTRATOR CUSTODIAN
Capstone Asset Management Company Fifth Third Bank
5847 San Felipe Fifth Third Center
Suite 4100 38 Fountain Square Plaza
Houston, TX 77057 Cincinnati, OH 45263
UNDERWRITER AUDITORS
Capstone Asset Planning Company Briggs, Bunting & Dougherty, LLP
5847 San Felipe, Suite 4100 Two Logan Square, Suite 2121
Houston, TX 77057 Philadelphia, PA 19103-4901
1-800-262-6631
<PAGE>
Annual Report
November 30, 1998
CAPSTONE
GOVERNMENT
INCOME FUND
LOGO
A Member Of
THE CAPSTONE GROUP
of Mutual Funds
LOGO
THE CAPSTONE GROUP OF MUTUAL FUNDS
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EQUITY
O CAPSTONE GROWTH FUND, INC.
FIXED INCOME
O CAPSTONE GOVERNMENT INCOME FUND
INTERNATIONAL/GLOBAL
O CAPSTONE JAPAN FUND
O CAPSTONE NEW ZEALAND FUN
For more complete information about the Capstone Funds including charges and
expenses, contact the Distributor at the address below to receive additional
prospectuses. Please read it carefully before you invest or send money.
This publication must be accompanied or preceded by a
current prospectus for Capstone Government Income Fund
CAPSTONE ASSET PLANNING COMPANY
5847 San Felipe, Suite 4100
Houston, Texas 77057
1-800-262-6631
CAPSTONE GOVERNMENT INCOME FUND
5847 SAN FELIPE, SUITE 4100
HOUSTON, TX 77057
