ANNUAL REPORT
NOVEMBER 30, 1999
CAPSTONE
GOVERNMENT
INCOME FUND
A MEMBER OF
THE CAPSTONE GROUP
OF MUTUAL FUNDS
The Capstone Group
of Mutual Funds
EQUITY
o Capstone Growth Fund, Inc.
FIXED INCOME
o Capstone Government Income Fund
INTERNATIONAL/GLOBAL
o Capstone Japan Fund
o Capstone New Zealand Fund
For more complete information about the Capstone Funds
including charges and expenses, contact the Distributor at
the address below to receive 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
- --------------------------------------------------------------------------------
Dear Shareholder:
Enclosed you will find the Capstone Government Income Fund (the "Fund" or
"CGIF") annual report for the year ended November 30, 1999.
PERFORMANCE:
This year the U.S. credit markets has been characterized chiefly by a persistent
rise in domestic interest rates. Domestic economic growth continued to dazzle
the experts and maintain a healthy pace, even while price inflation remained in
check. In addition, last year's deflation concerns dissipated globally; the
economic distress in Japan and elsewhere alleviated, and fears of a Y2K meltdown
all but disappeared from the market environment. As a result, the Federal
Reserve Board decided to reverse the monetary policy easings of 1998 and slowly
raise short-term interest rates as a precaution against the economy overheating
dramatically and igniting inflationary pressures. The Federal Reserve Board
officially increased rates three times this year from 4.75% to 5.50%, in
twenty-five basis point increments.
In this environment the Fund's managers were sensitive to the risk associated
with holding fixed rate instruments and maintained a relatively conservative
portfolio. During the past twelve months, the one-year Treasury bill rose in
yield from 4.49% to 5.68%, and the two-year Treasury note rose from 4.50% to
6.01%. In addition to the Treasury market rising about 150 basis points in
response to the Federal Reserve's 75 basis point increase in the Federal funds
rate, the yield curve in this sector also widened dramatically. This increase in
the spread between securities of different maturities provided another negative
performance factor over the course of 1999.
Despite this negative backdrop, the Fund was able to produce positive returns.
The Fund's performance for this year and 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 $14,142 compared to
$14,517 in the average money market fund. 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.
GIF Money Market Funds CGIF vs. MONEY MARKET FUNDS
GROWTH OF $10,000 (2/28/91 - 11/30/99) M.MKT $14,517 GIF $14,142
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
14517 14142
CGIF vs. LEHMAN BROS. 1-3 YR. GOV'T. INDEX GROWTH OF $10,000 (12/01/89 -
11/30/99) AVERAGE ANNUAL TOTAL RETURN as of 11/30/99
1 Year 3.26%
5 Year 6.49%
10 Year 6.59%
10000 10000
9844 10891
10489 12122
10915 12956
11319 13729
11478 13826
12072 15239
12564 16134
13109 17095
13672 18340
14063 18939
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
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DIVIDENDS:
The Fund has not made regular distributions of income since December 21, 1998,
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
rear, when it must distribute substantially all such earnings in order to retain
its tax status as a regulated investment company. The next regular distribution
will be made on December 29, 1999, for shareholders of record on December 28,
1999.
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 raised official short-term interest rates by
seventy-five basis points, and appear to be entering another "wait and see"
period, the interest rate sensitivity of the portfolio's longer duration
holdings may 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 very dramatically 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 114 funds, with
assets totaling $78 billion.
THIS PUBLICATION MUST BE ACCOMPANIED OR PRECEDED BY A CURRENT PROSPECTUS FOR
CAPSTONE GOVERNMENT INCOME FUND.
<PAGE>
CAPSTONE GOVERNMENT INCOME FUND
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<TABLE>
<CAPTION>
PORTFOLIO OF INVESTMENTS - November 30, 1999
Principal Value Percentage of
BONDS Amount (See Note 1-A) Net Assets
U.S. GOVERNMENT & GOVERNMENT AGENCIES - (98.10%)
<S> <C> <C> <C>
U.S. Treasury Bill, 5.31%, 1/20/2000 ..... $3,550,000 $3,524,484 32.04%
U.S. Treasury Note, 5.00%, 4/30/2001 ..... 2,000,000 1,989,257 18.09%
FHLB Note, 5.155%, 10/27/2000 ............ 2,000,000 1,980,880 18.01%
FHLB Discount Note, 5.45%, 12/22/99 ...... 1,810,000 1,804,246 16.40%
FNMA Note, 6.14%, 10/25/2000 ............. 500,000 500,097 4.55%
FNMA Note, 5.125%,11/30/2000 ............. 1,000,000 990,642 9.01%
---------- --------
TOTAL U.S. GOVERNMENT (Cost $10,809,457) 10,789,606 98.10%
TOTAL INVESTMENTS IN SECURITIES (Cost $10,809,457) ..... 10,789,606 98.10%
OTHER ASSETS LESS LIABILITIES .......................... 208,992 1.90%
----------- --------
NET ASSETS, at value equivalent to $25.15 per share
for 437,389 shares of $.001 par value shares outstanding $10,998,598 100.00%
=========== =========
</TABLE>
At November 30, 1999, unrealized depreciation of securities based on Federal
income tax cost is as follows:
Unrealized appreciation $--
Unrealized depreciation (19,851)
-----------
Net unrealized depreciation $ (19,851)
===========
See Accompanying Notes to Financial Statements
<PAGE>
CAPSTONE GOVERNMENT INCOME FUND
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STATEMENT OF ASSETS AND LIABILITIES - NOVEMBER 30, 1999
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ASSETS:
Investments in securities at market value
(identified cost $10,809,457) (Note 1A) ................. $ 10,789,606
Cash ...................................................... 147,549
Interest receivable ....................................... 21,620
Receivable for capital stock sold ......................... 74,902
------------
Total Assets .................................. 11,033,677
------------
LIABILITIES:
Accrued expenses ............................................. 35,079
------------
Total Liabilities ....................................... 35,079
------------
NET ASSETS ..................................................... $ 10,998,598
============
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE:
($10,998,598/437,389 shares outstanding of $.001 par value,
200,000,000 shares authorized) ............................ $ 25.15
============
SOURCE OF NET ASSETS:
Paid in capital .......................................... $ 17,439,452
Undistributed net investment income ...................... 324,953
Accumulated net realized loss on investments ............. (6,745,956)
Net unrealized depreciation of securities ................ (19,851)
------------
$ 10,998,598
============
See Accompanying Notes to Financial Statements
<PAGE>
CAPSTONE GOVERNMENT INCOME FUND
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STATEMENT OF OPERATIONS FOR THE YEAR ENDED NOVEMBER 30, 1999
INVESTMENT INCOME
Interest income ............................................... $544,743
Expenses:
Advisory fees (Note 2) .............................. $ 42,976
Distribution fees (Note 2) .......................... 21,487
Administrative services (Note 2) .................... 10,744
Transfer agent fees ................................. 23,722
Fund Accounting fees ................................ 23,250
Audit fees .......................................... 14,040
Legal fees .......................................... 9,969
Trustees' fees and expenses ......................... 7,852
Custodian fees ...................................... 2,676
Registration and filing fees ........................ 13,072
Reports and notices to stockholders ................. 9,575
Insurance expense ................................... 269
Miscellaneous ....................................... 2,065
--------
Total Expenses ............................................ 181,697
Less: Custodian fees paid indirectly .................. 1,349
--------
Net expenses .......................................... 180,348
--------
Net Investment Income ................................. 364,395
--------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized loss from security transactions................. (34,759)
Net realized gain from written options....................... 7,500
Unrealized appreciation (depreciation) of investments:
Beginning of period ............................... $ 6,905
End of period ..................................... (19,851)
---------
Net change in unrealized appreciation of investments (26,756)
----------
Net realized and unrealized loss on investments (54,015)
----------
Net increase in net assets resulting from operations $ 310,380
==========
See Accompanying Notes to Financial Statements
<PAGE>
CAPSTONE GOVERNMENT INCOME FUND
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STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Year Ended Year Ended
November 30, 1999 November 30, 1998
OPERATIONS:
<S> <C> <C>
Net investment income ............................... $ 364,395 $1,392,670
Net realized gain (loss) on investments ............. (27,259) 18,069
Net change in unrealized appreciation of investments (26,756) 37,760
---------- -----------
Net increase in net assets resulting from operations 310,380 1,448,499
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income ............................... (159,766) (155,105)
CAPITAL SHARE TRANSACTIONS:
Decrease in net assets resulting
from capital share transactions (Note 3) .......... (9,536,230) (53,353,462)
----------- -----------
Total decrease in net assets .................... (9,385,616) (52,060,068)
NET ASSETS
Beginning of period.................................. 20,384,214 72,444,282
----------- -----------
End of year (including undistributed net investment
income of $324,953 and $1,190,987, respectively)... $10,998,598 $20,384,214
=========== ===========
</TABLE>
See Accompanying Notes to Financial Statements
NOTES TO FINANCIAL STATEMENTS - November 30, 1999
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
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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 $6,703,800 of capital losses for
Federal income tax purposes available to offset future taxable capital gains, if
any, of which $1,891,300 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
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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. CAMCO receives a 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 30,1999 were $53,720.
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, 1999, the Fund paid $21,487 in
distribution expenses. Of this amount 49.9% was paid to Service Organizations
other than CAPCO.
CAMCO is an affiliate of CAPCO and both are wholly-owned subsidiaries
of CFS. Certain officers and directors of the Fund, are also officers and
directors of CAMCO, CAPCO, and CFS.
<PAGE>
CAPSTONE GOVERNMENT INCOME FUND
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NOTE 3 - CAPITAL STOCK
Transactions in capital stock were as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
NOVEMBER 30, 1999 NOVEMBER 30, 1998
SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
Shares sold................... 502,457 $ 12,405,790 3,009,473 $ 74,057,893
Shares issued to shareholders
in reinvestment
of distributions............ 6,264 153,536 6,175 149,861
-------- ------------ ---------- -------------
508,721 12,559,326 3,015,648 74,207,754
Shares redeemed............... (878,077) (22,095,556) (5,111,573) (127,561,216)
-------- ------------ ---------- -------------
Net decrease.................. (369,356) $ (9,536,230) (2,095,925) $ (53,353,462)
======== ============ ========== =============
</TABLE>
NOTE 4 - PURCHASES AND SALES OF SECURITIES
For the year ended November 30, 1999, the cost of purchases and
proceeds from sales of securities other than short-term obligations aggregated
$19,267,491 and $17,215,766, respectively.
Written options transactions during the period are summarized as
follows:
Call options Written Face amount
Premiums Received of Contracts
Options outstanding at November 30, 1998..... $ 0 $ 0
Options written ............................. 7,500 4,100,000
Options expired ............................. (7,500) (4,100,000)
----------- -----------
Options outstanding at November 30, 1999..... $ 0 $ 0
=========== ===========
<PAGE>
CAPSTONE GOVERNMENT INCOME FUND
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FINANCIAL HIGHLIGHTS - November 30, 1999
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 NOVEMBER 30, ENDED
1999 1998 1997 1996 1/30/95(1)
<S> <C> <C> <C> <C> <C>
Net asset value at beginning of period ............. $ 25.27 $ 24.96 $ 24.45 $ 24.90 $ 23.65
------------- ------------- ------------- ------------- -------------
Income from investment operations:
Net investment income ............................ 0.82 1.00 1.15 1.00 1.20
Net realized and unrealized gain (loss) .......... (0.12) 0.04 (0.11) (0.05) 0.05
------------- ------------- ------------- ------------- -------------
Total from investment operations ................. 0.70 1.04 1.04 0.95 1.25
Less distributions from net investment income ...... (0.82) (0.73) (0.53) (1.40) 0.00
------------- ------------- ------------- ------------- -------------
Net asset value at end of period ................... $ 25.15 $ 25.27 $ 24.96 $ 24.45 $ 24.90
============= ============= ============= ============= =============
Total Return ....................................... 2.86% 4.29% 4.34% 4.07% 5.29%
============= ============= ============= ============= =============
Ratios/Supplemental Data
Ratio of operating expenses to average net assets .. 1.69% 1.20% 0.87% 0.95% 0.77%(2)
Ratio of net investment income to average net assets 3.38% 4.31% 4.72% 4.44% 5.56%(2)
Portfolio turnover rate ............................ 296.66% 378.29% 563.42% 615.39% 309.66%
Net assets at end of period (in thousands) ......... $ 10,999 $ 20,384 $ 72,444 $ 79,754 $ 67,997
</TABLE>
(1) Based on average shares outstanding determined daily.
(2) Annualized
(3) Adjusted for reverse 5:1 stock split on January 13, 1997.
See Accompanying Notes to Financial Statements
<PAGE>
CAPSTONE GOVERNMENT INCOME FUND
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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, 1999, and the
related statement of operations for the year then ended, the statement of
changes in net assets for each of the two years in the period then ended, and
the financial highlights for each of the three 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 and the eleven months ended
November 30, 1995 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 audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
November 30, 1999, by correspondence with the custodian. 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, 1999, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended, and the financial highlights for each of
the three years in the period then ended in conformity with generally accepted
accounting principles.
BRIGGS, BUNTING & DOUGHERTY, LLP
Philadelphia, Pennsylvania
December 10, 1999
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CAPSTONE GOVERNMENT INCOME FUND
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CAPSTONE GOVERNMENT INCOME FUND
5847 San Felipe, Suite 4100
Houston, Texas 77057
1-800-262-6631
ANNUAL REPORT TO SHAREHOLDERS
November 30, 1999
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
INVESTMENT ADVISER TRANSFER AGENT
Capstone Asset Management Company PFPC, 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
