<PAGE> 1
CAPSTONE NIKKO JAPAN FUND
A FUND OF
CAPSTONE INTERNATIONAL SERIES TRUST
5847 San Felipe, Suite 4100
Houston, TX 77057
1-800-262-6631
February 28, 1997
PROSPECTUS
The investment objective of Capstone Nikko Japan Fund ("the Fund") is to
seek an average annual total return from a portfolio of shares in Japanese
companies which exceeds the average annual total return of the First Section of
the Tokyo Stock Exchange as measured by the Tokyo Stock Price Index (the
"Benchmark").
This Prospectus sets forth certain information about Capstone International
Series Trust and the Fund that a prospective investor should know before
investing. Investors should read and retain this Prospectus for future
reference.
A STATEMENT OF ADDITIONAL INFORMATION about the Fund dated February 28,
1997 has been filed with the Securities and Exchange Commission and contains
further information about the Fund. A copy of the Statement of Additional
Information may be obtained without charge by calling or writing the Fund at the
telephone number or address listed above. The Statement of Additional
Information is incorporated herein by reference.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSIONER NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSIONER PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE> 2
CAPSTONE NIKKO JAPAN FUND
<TABLE>
<S> <C>
Investment Adviser: Administrator:
Nikko Capital Management (U.S.A.), Inc. Capstone Asset Management Company
489 Fifth Avenue, 6th Floor 5847 San Felipe, Suite 4100
New York, New York 10017 Houston, Texas 77057
Distributor: Transfer and Dividend Paying Agent:
Capstone Asset Planning Company FPS Services, Inc.
5847 San Felipe, Suite 4100 P.O. Box 61503
Houston, Texas 77057 3200 Horizon Drive
1-800-262-6631 King of Prussia, Pennsylvania 19406-0903
</TABLE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.......................................... 3
Fund Expenses............................................... 5
Financial Highlights........................................ 6
Investment Objective and Policies........................... 7
Risk Factors................................................ 10
Investment Restrictions..................................... 11
Performance Information..................................... 12
Management of the Fund...................................... 12
Purchasing Shares........................................... 15
Distributions and Taxes..................................... 17
Redemption and Repurchase of Shares......................... 18
Determination of Net Asset Value............................ 19
Portfolio Transactions and Brokerage........................ 20
Stockholder Services........................................ 20
General Information......................................... 22
</TABLE>
No dealer, salesman, or any other person has been authorized to give any
information or to make any representations, other than those contained in this
Prospectus, in connection with the offer contained in this Prospectus and, if
given or made, such other information or representations must not be relied upon
as having been authorized by the Fund or its Distributor. This Prospectus does
not constitute an offer by the Fund or by the Distributor to sell or a
solicitation of an offer to buy any of the securities offered hereby in any
jurisdiction to any person to whom it is unlawful for the Fund or the
Distributor to make such offer or solicitation in such jurisdiction.
2
<PAGE> 3
CAPSTONE NIKKO JAPAN FUND
PROSPECTUS SUMMARY
Type of Company................. The Fund, which commenced operations on July
10, 1989, is a series of an open-end
diversified management investment company.
(see page 22)
Investment Objective............ The objective of the Fund is to seek an
average annual total return from a portfolio
of shares in Japanese companies which exceeds
the average annual total return of the
Benchmark. (see page 7)
Investment Policies............. The Fund will seek to achieve this objective
by use of the Nikko Capital Management
(U.S.A.), Inc.'s proprietary Return Reversal
Strategy. The Return Reversal Strategy
identifies the bottom 25% of the Tokyo Stock
Exchange First Section's issues according to
the past 96-month performance period and then
ranks them in accordance to their exposure to
"Sales Revenue to Price", one of the 12 risk
indices of the BARRA/Nikko Japanese Equity
Risk Model, a dedicated computer system
developed for the Japanese equity market by
The Nikko Securities Co., Ltd. in conjunction
with BARRA, an international investment
consulting firm specializing in applications
of modern portfolio theory and investment
technology. (see page 7)
Investment Risk................. Investments in Japanese securities involve
certain risks not associated with U.S.
investments. These include currency exchange
rate fluctuations, non-negotiable brokerage
commissions, differences in securities
regulation, less liquidity and less publicly
available information about Japanese
securities. (see page 10).
Investment Adviser.............. Nikko Capital Management (U.S.A.), Inc. (the
"Adviser") is the Fund's Investment Adviser.
The Adviser provides investment advice and
portfolio management services to the Fund.
The Adviser is paid at an annual rate of
0.40% of the Fund's average net assets. (see
page 12)
Administrator................... Capstone Asset Management Company is the
Fund's Administrator (the "Administrator").
The Administrator provides advisory and/or
administrative services to the other
investment companies in the Capstone Group.
The Administrator is paid at an annual rate
of 0.20% of the Fund's average net assets,
plus a fee to cover the cost of
3
<PAGE> 4
accounting, bookkeeping and pricing services
it performs for the Fund. (see page 13)
Dividends and Distributions..... The Fund pays dividends from net investment
income and distributions from long-term
capital gains, if any, at least annually.
(see page 17)
Distributor and Offering
Price........................... Shares of the Fund are continuously offered
for sale through the Fund's Distributor,
Capstone Asset Planning Company, without a
sales load, at the net asset value next
determined after receipt of the order. The
Fund pays certain expenses pursuant to a
written distribution plan. (see page 15)
Minimum Purchase................ The minimum initial investment is $200,
except for continuous investment plans, and
there is no minimum for subsequent purchases.
(see page 15)
Redemption...................... Shares of the Fund are redeemed at the next
determined net asset value, without charge.
(see page 18)
4
<PAGE> 5
FUND EXPENSES
<TABLE>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases (as a percentage of 0%
offering price)
Maximum Sales Load Imposed on Reinvested Dividends (as a 0%
percentage of offering price)
Deferred Sales Load (as a percentage of original purchase 0%
price or redemption of proceeds, as applicable)
Redemption Fees (as a percentage of amount redeemed, if 0%
applicable)
Exchange Fee 0%
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management and Administrative Fees (After expense 0.00%
reimbursements)
12b-1 Fee* 0.25%
Other Expenses 3.05%
Total Fund Operating Expenses 3.30%
</TABLE>
EXAMPLE
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000
investment, assuming (1) 5% annual return and
(2) redemption at the end of each time period: $33 $102 $172 $359
</TABLE>
- ---------------
* Under rules of the National Association of Securities Dealers, Inc. (the
"NASD"), a 12b-1 fee may be treated as a sales charge for certain purposes
under those rules. Because the 12b-1 fee is an annual fee charged against the
assets of a Fund, long-term stockholders may indirectly pay more in total
sales charges than the economic equivalent of the maximum front-end sales
charge permitted by rules of the NASD (see "Distributor").
The purpose of the foregoing table is to assist investors in understanding
the various costs and expenses that an investor in the Fund will bear directly
or indirectly. The information disclosed in the table for "Other Expenses" is
based on expenses actually incurred by the Fund during the fiscal year ended
October 31, 1996. In light of the Fund's objective of investing primarily in
Japanese securities, the operating expenses of the Fund are expected to be
higher than those of investment companies investing in domestic securities (see
"Risk Factors"). The management and administration fee information contained in
the table reflects deductions for expense reimbursements by the Fund's Adviser
and Administrator during the fiscal year ended October 31, 1996. Without the
expense reimbursements, the fees paid to the Adviser and Administrator,
respectively, would have amounted to 0.40% and 0.20% of the Fund's average net
assets, total Fund operating expenses would have been 3.90%, and expenses in the
same 1, 3, 5 and 10 year periods shown in the Example would have been $39, $119,
$200 and $412, respectively. A separate charge by the Administrator for
accounting, pricing and bookkeeping services is included in "Other Expenses".
See "Management of the Fund" for more complete descriptions of the fees paid to
the Adviser and Administrator.
THE EXAMPLE WHICH IMMEDIATELY FOLLOWS THE TABLE SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL FUND EXPENSES MAY BE GREATER
OR LESSER THAN THOSE SHOWN IN THE EXAMPLE OR IN THE TABLE.
5
<PAGE> 6
FINANCIAL HIGHLIGHTS
The following table sets forth the per share operating performance data for
a share of capital stock outstanding, total return, ratios to average net assets
and other supplemental data for each year indicated. This information has been
derived from information provided in the Fund's financial statements which have
been examined by Tait, Weller & Baker, independent certified public accountants.
The Fund's Annual Report contains additional performance information and is
available free of charge by calling the Fund at 1-800-262-6631.
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991(1) 1990 1989(2)
------- ------ ------ ------ ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE DATA
Net asset value at beginning of year.... $ 6.76 $ 8.03 $ 6.99 $ 4.89 $ 7.46 $ 7.96 $10.62 $ 10.00
------- ------ ------ ------ ------ ------ ------ -------
Income from investment operations:
Net investment income (loss)............ (.19) (.21) (.21) (.20) (.23) (.14) (.09) .01
Net realized and unrealized gain (loss)
on investments........................ .25 (1.06) 1.25 2.30 (2.34) (.36) (2.38) .61
------- ------ ------ ------ ------ ------ ------ -------
Total from investment operations........ .06 (1.27) 1.04 2.10 (2.57) (.50) (2.47) .62
------- ------ ------ ------ ------ ------ ------ -------
Less distributions from net realized
gain on investments................... .06 -- -- -- -- -- .19 --
------- ------ ------ ------ ------ ------ ------ -------
Net asset value at end of year.......... $ 6.76 $ 6.76 $ 8.03 $ 6.99 $ 4.89 $ 7.46 $ 7.96 $ 10.62
======= ====== ====== ====== ====== ====== ====== =======
TOTAL RETURN(3)......................... .75% (15.82)% 14.88% 42.74% (34.45)% (6.28)% (23.73)% 6.20%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of year (in
thousands)............................ $ 2,975 $2,908 $3,484 $3,096 $2,130 $3,552 $7,801 $19,647
Ratios to average net assets:
Expenses................................ 3.30% 3.61% 3.25% 4.26% 4.38% 2.74% 1.53% 1.36%(4)
Net investment income (loss)............ (2.59)% (2.93)% (2.62)% (3.54)% (3.42)% (2.01)% (.81)% .32%(4)
Ratios to average net assets, prior to
reimbursement of expenses:
Expenses................................ 3.90% 4.21% 3.85% 4.86% 4.98% 3.07% .-- .--
Net investment income (loss)............ (3.19)% (3.53)% (3.22)% (4.14)% (4.02)% (2.34)% .-- .--
Portfolio turnover rate................. 47% 27% 57% 42% 112% 24% 39% 6%
Average commission rate(5) (per share of
security)............................. $0.0864 N/A N/A N/A N/A N/A N/A N/A
</TABLE>
- ---------------
(1) Based on average month-end shares outstanding.
(2) For the period July 10, 1989 (commencement of operations) to October 31,
1989.
(3) Calculated without sales charge.
(4) Annualized.
(5) Average commission rate (per share of security) as required by amended
disclosure requirements effective September 1, 1995.
6
<PAGE> 7
INVESTMENT OBJECTIVE AND POLICIES
The objective of the Fund is to seek an average annual total return from a
portfolio of shares in Japanese companies which exceeds the average annual total
return of the First Section of the Tokyo Stock Exchange ("TSE1") as measured by
the Tokyo Stock Price Index ("TOPIX"). The Fund will seek to achieve this
objective by use of the Adviser's proprietary Return Reversal Strategy (the
"Reversal Strategy") as the source of greater returns. The Reversal Strategy
identifies the bottom 25% of the TOPIX issues according to the past 96-month
performance period and then ranks them in accordance to their exposure to Sales
Revenue to Price.
The Fund's portfolio is constructed in three stages. First, a purely
technical screening of all stocks in the TOPIX universe is performed and the
issues whose performance ranks in the bottom 25% of the universe as measured
over the preceding 96-month period are identified. In order to measure the
fundamental value of these issues, the next stage in the strategy's process is
to rank these identified issues in accordance with their exposure to "Sales
Revenue to Price". This fundamental screening minimizes the risk of including
companies that have fundamental financial or business problems. In the third and
final step of the strategy, those issues that rank in the top 25% in terms of
"Sales Revenue to Price" are selected for inclusion in the Fund's portfolio.
The Reversal Strategy is based on the theory that, in the Japanese market,
equity securities which underperform the market during one period are likely to
overperform the market in the succeeding period ("return reversal effect").
Similarly, those stocks that overperform in the first period are likely to
underperform in the following period. According to this theory, these types of
deviations from a stock's fundamental value occur due to the tendency of
investors to overreact, either positively or negatively, to market information.
Over the longer term, however, according to this hypothesis, stock prices tend
to revert to their fundamental value. Accordingly, stocks which are currently
underperforming due to investor overreaction to negative information would,
under this theory, be excellent candidates for outperforming the market in the
near future.
Despite the existence of some empirical evidence and academic studies to
support the existence of the "return reversal effect", its validity in the
Japanese market has not been fully investigated nor has it been widely applied
to portfolio management. Based on its own analyses, however, the Adviser
believes that this theory represents one of the most significant anomalies that
can be successfully capitalized upon in order to achieve a superior risk/reward
profile in managing a portfolio of Japanese equity securities. There can, of
course, be no assurance that the Adviser's belief is correct or that the
Reversal Strategy will be successful in achieving the Fund's investment
objective.
TOPIX has been selected to serve as the standard performance comparison or
benchmark of the Fund. The index comprises all the stocks currently listed on
the TSE1 weighted by market capitalization. The stocks together account for over
90% of all Japanese equities traded on the Tokyo Stock Exchange.
It is expected that the investment portfolio of the Fund will consist of
about 75 of the stocks listed on the TSE1. Portfolio turnover is expected to be
higher than that of an index fund in view of the objective of pursuing active
returns.
The Fund is also authorized to engage in a number of practices designed to
manage or hedge against risks, such as fluctuations in securities prices and
fluctuations in currency exchange rates
7
<PAGE> 8
and to adjust its risk exposure relative to the Benchmark. These practices,
which the Fund will undertake only for hedging purposes, include entering into
interest-rate, index and currency futures contracts, and purchasing and writing
put and call options on those contracts, on individual securities, on currencies
and on stock indices (collectively, "derivatives"). The Fund may also enter into
forward foreign currency contracts. The extent to which the Fund may engage in
such practices will depend on the availability of the various hedging
instruments which are both suitable for use by the Fund and authorized for
investment by a U.S. registered investment company. In addition, the Fund's
exchange-traded options transactions are subject to trading and position limits.
Tax considerations also may limit the Fund's ability to engage in forward
contracts and futures and options transactions.
Interest rate and currency futures contracts create an obligation to
purchase or sell specified amounts of debt securities or currency on a specified
future date. Although these contracts generally call for making or taking
delivery of the underlying securities or currency, the contracts are in most
cases closed out before the maturity date by entering into an offsetting
transaction which may result in a profit or loss.
Securities index futures contracts are contracts to buy or sell units of a
particular index of securities at a specified future date for an amount equal to
the difference between the original contract purchase price and the price at the
time the contract is closed out, which may be at maturity or through an earlier
offsetting transaction.
The purchase or writing of put or call options on futures contracts,
individual securities or currencies would give the Fund, respectively, the right
or obligation to sell or purchase the underlying futures contract, security or
currency at the stated exercise price any time before the option expires. The
purchase or writing of put and call options on stock indices would give the
Fund, respectively, the right or obligation to receive or pay a specified amount
at any time prior to expiration of the option. The value of the option varies
with the aggregate price movements of the stocks reflected in the index. The
Fund's risk in purchasing an option, if the price of the underlying currency,
security or index moves adverse to the purchaser, is limited to the premium it
pays for the option. If price movements are favorable, on the other hand, the
option will increase in value and the Fund would benefit from the sale or
exercise of the option. As the writer of an option, the Fund would receive a
premium. The premium would be a gain to the Fund if price movements in the
underlying items are favorable to the writer and would reduce the loss if price
movements are unfavorable. Any call options written by the Fund are "covered",
i.e., backed by securities owned by the Fund. The writing of a covered call
option tends to limit the Fund's opportunity to profit from an increase in value
of the underlying securities to the amount of the premium.
The Fund may engage in options and futures transactions on exchanges and in
the over-the-counter ("OTC") markets. Exchange-traded contracts generally have
standardized strike prices and expiration dates and their performance is
guaranteed by an exchange or clearing corporation. OTC transactions, on the
other hand, are generally negotiated directly between the buyer and the seller
and there is no independent guarantor. Similar types of exchange-traded and OTC
contracts and options may be available in markets outside the U.S. from time to
time. The Fund may invest in such non-U.S. contracts and options to the extent
they are suitable for the Fund and are permissible investments for a U.S.
registered investment company.
8
<PAGE> 9
In addition to purchasing and writing put and call options on foreign
currencies, the Fund may also enter into forward foreign currency contracts as a
hedge against possible variations in the exchange rates of currencies in which
it conducts its activities. Forward currency contracts are two-party agreements
to purchase or sell a specified currency at a specified future date and price.
The Fund will not enter into or maintain a position in these contracts if their
consummation would obligate the Fund to deliver an amount of foreign currency
greater than the value of the Fund's assets denominated or quoted in, or its
currency convertible into, that currency.
These hedging transactions involve brokerage costs and require the Fund to
make margin deposits against its performance obligations under the contracts.
The Fund may also be required to segregate assets in an amount equal to the
value of instruments underlying its futures contracts, call options purchased
and put options written; to otherwise "cover" its futures and options positions;
or to limit these transactions so that they are backed to a level of 300 percent
by total Fund assets. The aggregate of initial margin deposits for futures
contracts and related options and premiums paid for open futures options may not
exceed 5 percent of the fair market value of the Fund's assets.
There can be no assurance that the Fund's hedging transactions will be
successful. Securities prices, interest rates and currency exchange rates may
change in unanticipated manners or may move in ways which do not correlate
closely to movements in the value of securities held by the Fund. Additionally,
there can be no assurance that offsetting transactions will be available at any
given time to enable the Fund to close out particular futures or options
contracts. If these contracts cannot be closed out, the Fund may incur losses in
excess of its initial margin deposit. The bankruptcy of a broker or other person
with whom the Fund has an open futures or options position may also expose the
Fund to risk of losing its margin deposits or collateral. See also "Investment
Practices and Restrictions" in the Statement of Additional Information.
The Fund may from time to time lend securities from its portfolio, with a
market value not exceeding 10% of its total assets at the time of the loan, to
banks, brokers and other financial institutions and receive collateral in cash
or securities issued or guaranteed by the United States Government or its
instrumentalities which will be maintained at all times in an amount equal to at
least 100% of the current market value of the loaned securities. During the
period of such a loan, the Fund will receive income on both the loaned
securities and the collateral, or on the investment of any cash received as
collateral, and thereby increase its yield. With respect to the lending of
portfolio securities, there is the risk of failure by the borrower to return the
securities involved in such transactions, in which event the Fund may incur a
loss.
There can be no assurance that the Fund will achieve its investment
objective. The investments of the Fund are subject to market fluctuations and
other risks inherent in investing in securities and, despite any attempts to
hedge or manage risk, the value of the Fund's shares and the income from them
may go down as well as up. The Fund's investment flexibility may be limited by
restrictions on foreign investment in certain Japanese securities. In addition,
the Fund's flexibility to structure its portfolio to follow the Reversal
Strategy may be limited by various regulatory requirements applicable to the
Fund as a registered investment company.
The investment objective of the Fund is not a fundamental policy and may be
changed without stockholder approval.
The portfolio turnover rate for the fiscal years ended October 31, 1996 and
1995 was 47% and 27%, respectively.
9
<PAGE> 10
RISK FACTORS
United States persons investing in securities of Japanese issuers should be
aware of certain information about Japan and international investment which can
make this type of investing different from investments in securities of United
States issuers.
The Japanese economy is continuing moderate growth for the second
consecutive year, primarily due to the combination of a cyclical upswing of
capital investments, the remaining effect of economic stimulus measures, a
sustained accommodative monetary policy, and an extremely low interest rate. In
addition, the growth of exports due to the depreciation of the Yen is also
supporting the recent economy. However, given the lingering dampening effects of
the structural problems such as non-performing loans of financial institutions,
we are unlikely to see a return of the strong, rapid growth of earlier years.
Based on this, the Adviser further expects the present deflationary conditions
to persist for a while yet and for this reason, believe that interest rates will
hold at low levels for still some time to come.
The Adviser believes that structural reformation is necessary in order for
Japan to break out of this uncertain economy, i.e., government support for
troubled banks, overall deregulation of industry and society, improving labor
and productivity through corporate restructuring, and shifting of industrial
priorities toward promising new fields. What we have seen lately is either
realization or significant progress on all these aspects. The government has
been announcing a series of deregulation measures since late 1996, including the
"Big-Bang" of financial markets. For the resolution of the bad loan problem
experienced by Japanese banks, public purchase of collateral land is being
implemented. Banks are also making progress in writing off significant portions
of their non-performing portfolios.
For the short term, real GDP growth is estimated at 2.4% for fiscal year
("FY") 96 and 1.2% for FY 97. The slowdown in FY 97 is mainly attributable to
the rise of the consumption tax rate from 3% to 5%. However, this is rather a
temporary factor, and, for the medium term until 2001, we anticipate that
Japan's GDP will grow at an annual rate of 2.5% backed by the autonomous
expansion of private sector demands. Progress of deregulation will also help the
growth of private sectors. Turning to the micro economy side, corporate earnings
for all industries are expected to grow by 10% in FY 97. A recurring profit for
the manufacturing sector is expected to increase by 10.8%, while the
non-manufacturing sector profit will likely increase by an estimated 8.7%.
Corporate profit will increase steadily, despite the slowdown of the economy,
thanks to the growth of telecommunication and computer-related sectors and also
due to the benefit from the Yen's depreciation and the cost-cutting efforts of
Japanese companies.
Japan's stock price level is now at the historical lowest in terms of
dividend yield relative to bond yield, price to book value per share and other
valuation measures. This under-valuation may be attributable to: (1) concern
over economic slowdown due to the rise of the consumption tax rate and the
decrease of public works; (2) the financial institutions' bad loan problem; and
(3) uncertainty of deregulation and restructuring. However, the Adviser believes
that these issues will be resolved in due course as explained above. The basic
supply/demand condition is favorable for the stock market on the backdrop of the
continued super-low interest rate. Pension funds are steadily flowing into the
market and many believe foreign investors will also re-evaluate Japanese stocks
as the above-mentioned issues become better understood. Therefore, the Adviser
believes that the Japanese stock market will rebound steadily in 1997, and will
continue to manage the Fund using the
10
<PAGE> 11
Return Reversal Strategy which, in the opinion of the Adviser, is effective in
selecting underperforming stocks with good fundamental values in the recovery
phase of Japan's economic growth.
Various other factors involved in international investing generally may
affect the Fund's performance either favorably or unfavorably. These include:
fluctuations in currency exchange rates; possible imposition of, or changes in,
exchange controls; costs of currency conversion; non-negotiable brokerage
commissions (which may result in higher commissions); less publicly available
information; different accounting standards; less liquidity and greater market
volatility; difficulties of enforcing obligations in other countries;
differences in the nature and quality of securities regulation; differences in
taxation (which may include withholding taxes on income earned on Fund
securities and transfer tax on sales proceeds); war; expropriation; political or
social unrest; diplomatic developments; and natural disasters.
The Fund's management will attempt to be alert to these factors and to act
to mitigate any unfavorable consequences to the extent practicable, but there
can be no assurance its efforts will be successful or that protective action
will be feasible.
The operating expense ratio of the Fund can be expected to be higher than
that of an investment company investing exclusively in securities of United
States issuers since the expenses of the Fund (such as custodial, currency
exchange, valuation and communications costs) are higher. Because of its
emphasis on Japan, the Fund should be considered as a vehicle for
diversification of investments and not as a balanced investment program.
INVESTMENT RESTRICTIONS
The Fund has adopted certain investment restrictions which cannot be
changed without approval by holders of a majority of the Fund's shares. These
restrictions, which are designed to enhance the realization of the Fund's
investment objective, provide, among other things, that the Fund may not:
- As to 75% of its total assets, invest more than 5% of the value of such
assets in the securities of any one issuer, or purchase more than 10% of
the voting securities of any one issuer (except for investments in
securities issued or guaranteed by the United States Government, its
agencies or instrumentalities).
- Invest more than 25% of its total assets (taken at market value at the
time of each investment) in the securities of issuers in any particular
industry or in securities issued or guaranteed by the Japanese government
or its agencies or instrumentalities provided that this restriction shall
not prevent the Fund from purchasing the securities of any issuer
pursuant to the exercise of rights distributed to the Fund by the issuer,
except that no such purchase may be made if as a result the Fund would no
longer be a diversified investment company as defined in the Investment
Company Act of 1940.
Additional investment restrictions of the Fund, some of which are
fundamental policies that may not be changed without stockholder approval, are
set forth under the caption "Investment Practices and Restrictions" in the
Statement of Additional Information.
11
<PAGE> 12
PERFORMANCE INFORMATION
The Fund may from time to time include figures indicating the Fund's total
return or average annual total return in advertisements or reports to
stockholders or prospective investors. Average annual total return and total
return figures represent the increase (or decrease) in the value of an
investment in the Fund over a specified period. Both calculations assume that
all income dividends and capital gain distributions during the period are
reinvested at net asset value in additional Fund shares. Quotations of the
average annual total return reflect the deduction of a proportional share of
Fund expenses on an annual basis. The results, which are annualized, represent
an average annual compounded rate of return on a hypothetical investment in the
Fund over a period of 1, 5, and 10 years ending on the most recent calendar
quarter (but not for a period greater than the life of the Fund). Quotations of
total return, which are not annualized, represent historical earnings and asset
value fluctuations. Performance figures are based on past performance and are
not a guarantee of future results.
MANAGEMENT OF THE FUND
Capstone Nikko Japan Fund is a series of Capstone International Series
Trust, an open-end diversified management investment company, commonly called a
mutual fund. The management and affairs of the Fund and the Trust are supervised
by the Trust's Board of Trustees. Through the purchase of Fund shares, investors
with goals similar to the investment objective of the Fund can participate in
the investment performance of a diversified portfolio of investments designed to
meet that objective.
ADVISER
Nikko Capital Management (U.S.A.), Inc. (the "Adviser") provides investment
advice, portfolio management and brokerage allocation services to the Fund. The
Adviser is a wholly-owned subsidiary of Nikko International Capital Management
Co., Ltd., Tokyo and is registered as an investment adviser under the Investment
Advisers Act of 1940. The Adviser provides asset management and advisory
services to pension plans and other institutional investors and currently has
funds of approximately $1.3 billion under management or advice. The Adviser's
parent company, Nikko International Capital Management Co., Ltd., Tokyo, and its
subsidiaries has funds of approximately $16 billion under management or advice.
Nikko International Capital Management Co., Ltd., Tokyo is a separately managed
member of the Nikko Securities Co., Ltd. group of companies. Nikko Securities
Co., Ltd. is one of the largest broker-dealers in Japan.
The Adviser was incorporated under the laws of the State of New York on
June 8, 1981 for an indefinite period of duration and has issued and paid in
capital of $1 million. The Adviser's directors are: Takao Nakanishi (Chairman),
Tadao Kobayashi (Director), Higashino Kazuhiro (Director), Kenji Wada
(Director), Tetsuya Itoh (Director), and Stanley Kirtman (President).
Portfolio decisions for the Fund are made by the Portfolio Manager, Mr.
Tetsuya Itoh. After graduating from Chuo University in 1981, Mr. Itoh began his
career at Canon Inc. In 1990 he joined Nikko International Capital Management
Co., Ltd., Tokyo as an investment strategist in the International Planning
Division where he was responsible for marketing strategies and product
development. He was named Portfolio Manger of the Fund in March 1994.
12
<PAGE> 13
As compensation for its services, the Adviser receives from the Fund a fee
computed daily and payable at the end of each calendar quarter, equal to an
annual rate of 0.40% of the Fund's average net assets. Pursuant to an expense
limitation discussed below, the Adviser reimbursed all of its advisory fees
received from the Fund during the fiscal year ended October 31, 1996.
ADMINISTRATOR
Capstone Asset Management Company (the "Administrator"), a subsidiary of
Capstone Financial Services, Inc., provides administrative services for the Fund
and supervises the Fund's daily business affairs, including arranging for the
provision of the Fund's legal services, supervising the activities of persons
providing services to the Fund, and furnishing office space and equipment to the
Fund. These services are subject to general review by the Trust's Board of
Trustees.
As compensation for its services, the Administrator receives from the Fund
a fee, computed daily and payable quarterly, at an annual rate of 0.20% of the
Fund's average net assets. Pursuant to an expense limitation discussed below,
the Administrator reimbursed all of its administrative fees received from the
Fund during the fiscal year ended October 31, 1996.
The Administrator also performs certain accounting, bookkeeping and pricing
services. For these services the Administrator receives a monthly fee to
reimburse the Administrator for its costs. This amount is not intended to
include any profit to the Administrator and is in addition to the administrative
fees described above.
The Administrator provides administrative and/or investment advisory
services to four other mutual funds: Capstone Government Income Fund, Capstone
Intermediate Government Fund, Capstone Growth Fund, Inc. and Capstone New
Zealand Fund (the "Capstone Group"). The Administrator also provides investment
advice to pension and profit sharing accounts, corporations and individuals.
DISTRIBUTOR
Pursuant to a Distribution Agreement with the Trust dated August 10, 1992,
Capstone Asset Planning Company (the "Distributor") is the principal underwriter
of the Fund and, acting as exclusive agent, sells shares of the Fund to the
public on a continuous basis.
The Fund has adopted a Service and Distribution Plan (the "Plan") pursuant
to which it uses its assets to finance 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 expenditures incurred by it in connection with the distribution of the Fund
shares to investors and provision of certain stockholder services including but
not limited to the payment of compensation, including incentive compensation, to
securities dealers (which may include the Distributor itself) and other
financial institutions and organizations (collectively, the "Service
Organizations") to obtain various distribution related and/or administrative
services for the Fund. These services include, among other things, processing
new stockholder account applications, preparing and transmitting to the Fund's
Transfer Agent computer processable tapes of all transactions by customers and
serving as the primary source of information to customers in answering questions
concerning the Fund and their transactions with the Fund. The Distributor is
also authorized to engage in advertising, the preparation and distribution of
sales literature and other promotional activities on behalf of the Fund. In
addition, the Plan authorizes payment by the
13
<PAGE> 14
Fund of the cost of preparing, printing and distributing Fund Prospectuses and
Statements of Additional Information to prospective investors and of
implementing and operating the Plan.
Under the Plan, payments made to the Distributor may not exceed an amount
computed at an annual rate of 0.25% of the average net assets of the Fund. Of
this amount, the Distributor may reallocate amounts up to 0.25% of the Fund's
average net assets to Service Organizations (which may include the Distributor).
Any remaining amounts not so allocated will be retained by the Distributor for
the purposes described above. The Distributor is permitted to collect the fees
under the Plan on a monthly basis. Any expenditures incurred by the Distributor
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 0.25%
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.
The Plan was last approved by a majority of the Fund's trustees, including
a majority of the trustees who have no direct or indirect financial interest in
the operation of the Plan or any of its agreements ("Plan Trustees") on May 24,
1996. The Plan was approved by the Fund's stockholders on August 10, 1992 and
took effect on September 1, 1992. The Plan will continue from year to year,
provided that such continuance is approved at least annually by a vote of a
majority of the Board of Trustees, including a majority of the Plan Trustees.
The Glass-Steagall Act and other applicable laws currently prohibit banks
from engaging in the business of underwriting, selling or distributing
securities. Accordingly, unless such laws are changed, if the Fund engages banks
as Service Organizations, the banks would perform only administrative and
stockholder servicing functions. If a bank were prohibited from acting as a
Service Organization, alternative means for continuing the servicing of such
stockholders would be sought. State law may differ from Federal law and banks
and other financial institutions may be required to be registered as
broker-dealers to perform administrative and stockholder servicing functions.
EXPENSES
The Fund's expenses are accrued daily and are deducted from its total
income before dividends are paid. These expenses include, but are not limited
to: fees paid to the Adviser and the Administrator; taxes; legal fees; custodian
and auditing fees; reimbursement of the costs incurred by the Administrator in
providing pricing and accounting services to the Fund; and printing and other
miscellaneous expenses paid by the Fund.
Under the Advisory and Administrative Agreements, if the Fund's ordinary
business expenses exceed the expense limitations of any state having
jurisdiction over the Fund, then the advisory and administration fees will be
reduced pro rata (but not below zero) to the extent necessary to comply with
such expense limitations. The Adviser and the Administrator have each agreed to
bear its pro rata share of any such fee reduction based on the percentage that
such person's fee bears to the total fees paid by the Fund to the Adviser under
the Investment Advisory Agreement and to the Administrator under the
Administration Agreement. Due to recent Federal and state legislation, such
state expense limitations are no longer applicable to the Fund. The Fund's total
operating expenses (after reimbursements from the Adviser and Administrator)
during the fiscal year ended October 31, 1996 were 3.30% of its average net
assets.
14
<PAGE> 15
PURCHASING SHARES
Capstone Asset Planning Company (the "Distributor"), located at 5847 San
Felipe, Suite 4100, Houston, Texas 77057, is the principal underwriter of the
Fund and, acting as exclusive agent, sells shares of the Fund to the public on a
continuous basis. Edward L. Jaroski is President of the Trust, and a director of
the Administrator and the Distributor. Some other officers of the Trust are also
officers of the Administrator and the Distributor.
Shares of the Fund are sold in a continuous offering and may be purchased
on any business day through authorized investment dealers or directly from the
Fund's Distributor. Except for the Fund itself, only the Distributor and
investment dealers which have a sales agreement with the Distributor are
authorized to sell shares of the Fund. For further information, reference is
made to the caption "Distributor" in the Fund's Statement of Additional
Information.
Shares of the Fund are sold at net asset value, without a sales charge and
will be credited to a stockholder's account at the net asset value next computed
after an order is received. The minimum initial investment is $200, except for
continuous investment plans which have no minimum, and there is no minimum for
subsequent purchases. 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.
At various times the Distributor may implement programs under which a
dealer's sales force may be eligible to win nominal awards for certain sales
efforts or recognition programs conforming to criteria established by the
Distributor, or to participate in sales programs sponsored by the Distributor.
In addition, the Adviser, the Administrator and/or the Distributor in their
discretion may from time to time, pursuant to objective criteria established by
the Adviser, the Administrator and/or the Distributor sponsor programs designed
to reward selected dealers for certain services or activities which are
primarily intended to result in the sale of shares of the Fund. Such payments
are made out of their own assets, and not out of the assets of the Fund. These
programs will not change the price you pay for your shares or the amount that
the Fund will receive from such sale.
Payment for all orders to purchase Fund shares must be received by the
Fund's Transfer Agent within three business days after the order was placed.
Checks made payable to third parties will not be accepted.
INVESTING THROUGH AUTHORIZED DEALERS
If any authorized dealer receives an order of at least $200, the dealer may
contact the Distributor directly. Orders received by dealers by the close of
trading on the New York Stock Exchange on a business day that are transmitted to
the Distributor by 4:00 p.m. Central time on that day will be effected at the
net asset value per share determined as of the close of trading on the New York
Stock Exchange on that day. It is the dealer's responsibility to transmit orders
so that they will be received by the Distributor before 4:00 p.m. Central time.
After each investment, the stockholder and the authorized investment dealer
receive confirmation statements of the number of shares purchased and owned.
15
<PAGE> 16
PURCHASES THROUGH THE DISTRIBUTOR
An account may be opened by mailing a check or other negotiable bank draft
(payable to Capstone Nikko Japan Fund) for $200 or more together with the
completed Investment Application Form to the Fund's Transfer Agent: Capstone
Nikko Japan Fund, c/o FPS Services, Inc., P.O. Box 61503, 3200 Horizon Drive,
King of Prussia, Pennsylvania 19406-0903. The $200 minimum initial investment
may be waived by the Distributor for plans involving continuing investments (see
"Stockholder Services"). There is no minimum for subsequent investments, which
may be mailed directly to the Transfer Agent. All such investments are effected
at the net asset value of Fund shares next computed following receipt of payment
by the Transfer Agent. Confirmations of the opening of an account and of all
subsequent transactions in the account are forwarded by the Transfer Agent to
the stockholder's address of record.
TELEPHONE PURCHASE AUTHORIZATION (INVESTING BY PHONE)
Stockholders who have completed the Telephone Purchase Authorization
section of the Investment Application Form may purchase additional shares by
telephoning the Fund's Transfer Agent at (800) 845-2340. The minimum telephone
purchase is $1,000 and the maximum is five times the net asset value of shares
for which payment has been received (and for which certificates have not been
issued) held by the stockholder on the day preceding such telephone purchase.
The telephone purchase will be effected at the net asset value next computed
after receipt of the call by the Transfer Agent. Payment for the telephone
purchase must be received by the Transfer Agent within three business days after
the order is placed. If payment is not received within three business days, the
stockholder will be liable for all losses incurred as a result of the purchase.
INVESTING BY WIRE
Investors having an account with a commercial bank that is a member of the
Federal Reserve System may purchase shares of the Fund by requesting their bank
to transmit funds by wire to: United Missouri Bank KC NA, ABA #10-10-00695, For:
FPS Services, Inc., Account #98-7037-0719; Further Credit Capstone Nikko Japan
Fund. The investor's name and account number must be specified in the wire.
Initial Purchases -- Before making an initial investment by wire, an
investor must first telephone (800) 845-2340 to be assigned an account number.
The investor's name, account number, taxpayer identification or social security
number, and address must be specified in the wire. In addition, the investment
application should be promptly forwarded to Capstone Nikko Japan Fund, c/o FPS
Services, Inc., P.O. Box 61503, 3200 Horizon Drive, King of Prussia,
Pennsylvania 19406-0903.
Subsequent Purchases -- Additional investments may be made at any time
through the wire procedures described above, which must include the investor's
name and account number. The investor's bank may impose a fee for investments by
wire.
16
<PAGE> 17
DISTRIBUTIONS AND TAXES
PAYMENT OPTIONS
Distributions (whether treated for tax purposes as ordinary income or
long-term capital gains) to the Fund's stockholders are paid in additional
shares of the Fund, with no sales charge, based on the Fund's net asset value as
of the close of business on the record date for such distributions. However, a
stockholder may elect on the application form to receive distributions as
follows:
Option 1. To receive income dividends treated as ordinary income in cash
and distributions treated as capital gains in additional Fund shares, or
Option 2. To receive all income dividend and capital gains distributions in
cash.
The Fund pays dividends from investment company taxable income and
distributions representing capital gains at least annually, usually in December.
The Fund will advise each stockholder annually of the amounts of dividends from
investment income and of long-term capital gain distributions reinvested or paid
in cash to the stockholder during the calendar year.
If you select Option 1 or Option 2 and the U.S. Postal Service cannot
deliver your checks, or if your checks remain uncashed for six months, your
distribution checks will be reinvested in your account at the then-current net
asset value and your election will be converted to the purchase of additional
shares.
TAXES
The Fund intends to qualify as a regulated investment company under the
Federal tax law. As such, the Fund generally will not pay Federal income tax on
the income and gains it pays as dividends to its stockholders. In order to avoid
a 4% Federal excise tax, the Fund intends to distribute each year all of its net
income and gains.
Stockholders will be taxed on dividends received from the Fund, regardless
of whether received in cash or reinvested in additional shares. Stockholders
must treat dividends, other than capital gain dividends, as ordinary income.
Dividends designated as capital gain dividends are taxable to stockholders as
long-term capital gains. Certain dividends declared in October, November or
December of a calendar year are taxable to stockholders as though received on
December 31 of that year if paid to stockholders during January of the following
calendar year. The Fund will advise stockholders annually of the amount and
nature of dividends paid to them.
Investors are advised to consult their tax advisers with respect to the
particular tax consequences to them of an investment in the Fund. A more
detailed description of tax consequences to stockholders is contained in the
Statement of Additional Information.
17
<PAGE> 18
REDEMPTION AND REPURCHASE OF SHARES
Generally, stockholders may require the Fund to redeem their shares by
sending a written request, signed by the record owner(s), to Capstone Nikko
Japan Fund, c/o FPS Services, Inc., P.O. Box 61503, 3200 Horizon Drive, King of
Prussia, Pennsylvania 19406-0903. In addition, certain expedited redemption
methods described below are available. If stock certificates have been issued
for shares being redeemed, such certificates must accompany the written request
with the stockholder's signature guaranteed by an "eligible guarantor
institution", as defined in Rule 17Ad-15 under the Securities Exchange Act of
1934, which participates in a signature guarantee program. Eligible guarantor
institutions include banks, brokers, dealers, credit unions, national securities
exchanges, registered securities associations, clearing agencies and savings
associations. A broker-dealer guaranteeing signatures must be a member of a
clearing corporation or maintain net capital of at least $100,000. Credit unions
must be authorized to issue signature guarantees. Signature guarantees will be
accepted from any eligible guarantor institution which participates in a
signature guarantee program. No signature guarantees for shares for which no
certificates have been issued are required when an application is on file at the
Transfer Agent and payment is to be made to the stockholder of record at the
stockholder's address of record. However, if the proceeds of the redemption are
to be paid to someone other than the registered holder, or to other than the
stockholder's address of record, or the shares are to be transferred, the
owner's signature must be guaranteed as specified above. The redemption price
shall be the net asset value per share next computed after receipt of the
redemption request. See "Determination of Net Asset Value."
In addition, the Distributor is authorized as agent for the Fund to offer
to repurchase shares which are presented by telephone or telegraph to the
Distributor by authorized investment dealers. The repurchase price is the net
asset value per share next determined after the request is received. See
"Determination of Net Asset Value". Broker-dealers may charge for their services
in connection with the repurchase, but the Distributor and its affiliates will
not charge any fee for such repurchase. Payment for shares presented for
repurchase or redemption by authorized investment dealers will be made within
seven days after receipt by the Transfer Agent of a written notice and/or
certificate in proper order.
The Fund reserves the right to pay any portion of redemption requests in
excess of $1 million in readily marketable securities from the Fund's portfolio.
In this case, the redeeming stockholder may incur brokerage charges on the sale
of the securities.
The right of redemption and payment of redemption proceeds are subject to
suspension for any period during which the New York Stock Exchange is closed,
other than customary weekend and holiday closings, or when trading on the New
York Stock Exchange is restricted as determined by the Securities and Exchange
Commission; during any period when an emergency as defined by the rules and
regulations of the Securities and Exchange Commission exists; or during any
period when the Securities and Exchange Commission has by order permitted such
suspension. The Fund will not mail redemption proceeds until checks (including
certified checks or cashier's checks) received for the shares purchased have
cleared, which can be as long as 15 days.
The value of shares on repurchase or redemption may be more or less than
the investor's cost depending upon the market value of the Fund's portfolio
securities at the time of redemption. No redemption fee is charged for the
redemption of shares.
18
<PAGE> 19
EXPEDITED TELEPHONE REDEMPTION
A stockholder redeeming at least $1,000 of shares (for which certificates
have not been issued), and who has authorized expedited redemption on the
application form filed with the Transfer Agent may at the time of such
redemption request that funds be mailed or wired to the commercial bank or
registered broker-dealer he has previously designated on the application form by
telephoning the Transfer Agent at (800) 845-2340. Redemption proceeds will be
sent to the investor on the next business day following receipt of the telephone
redemption request. In order to allow the Adviser to manage the Fund more
effectively, stockholders are strongly urged to initiate redemptions as early in
the day as possible and to notify the Transfer Agent as least 5 days in advance
of redemptions in excess of $1 million. If a stockholder seeks to use an
expedited method of redemption of shares recently purchased by check, the Fund
may withhold the redemption proceeds until it is reasonably assured of the
collection of the check representing the purchase, which may take up to 15 days
from the purchase date. The Fund, Distributor and Transfer Agent reserve the
right at any time to suspend or terminate the expedited redemption procedure or
to impose a fee for this service. At the present time there is no fee charged
for this service. During periods of unusual economic or market changes,
stockholders may experience difficulties or delays in effecting telephone
redemptions.
When exchanges or redemption requests are made by telephone, the Fund has
procedures in place designed to give reasonable assurance that such telephone
instructions are genuine, including recording telephone calls and sending
written confirmations of transactions. The Fund will not be liable for losses
due to unauthorized or fraudulent telephone transactions unless it does not
follow such procedures, in which case it may be liable for such losses.
DETERMINATION OF NET ASSET VALUE
The Fund's net asset value is computed daily, Monday through Friday, as of
the close of regular trading on the New York Stock Exchange, which is currently
4:00 p.m. Eastern time. The Fund's net asset value will not be computed on the
following holidays: New Year's Day, President's Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day. The Fund will
in some cases value its portfolio securities as of days on which the Japanese
Exchanges are closed for Japanese holidays or other reasons. At such times, the
Fund will follow such procedures as the trustees have determined to be
reasonable.
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 expenses) by the total number of Fund shares outstanding at such time.
To avoid large fluctuations in the computed net asset value, accrued expenses
will be charged against the Fund on a daily basis, i.e. 1/360 of the annual
amount due by the Fund each year.
Any assets or liabilities initially expressed in terms of foreign
currencies are translated into U.S. dollars at the prevailing market rates at
14:00 Greenwich Mean Time on each U.S. business day.
Portfolio securities and futures contracts which are traded on a Japanese
Exchange are valued at the last sale price on that exchange prior to the
relevant closing or, if there is no recent last sale price available, at the
last current bid quotation. A security or futures contract which is listed or
19
<PAGE> 20
traded on more than one exchange is valued at the quotation on the exchange
determined to be the primary market for such security or contract. All other
equity securities and futures contracts not so traded are valued at the last
current bid quotation prior to the relevant Japanese Exchange closing. Fixed
income securities are valued using market quotations or pricing services. In the
absence of an applicable price, securities and futures contracts will be valued
at a fair value as determined in good faith by the trustees or in accordance
with procedures established by the trustees.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Subject to policies established by the Fund's Board of Trustees, the
Adviser is primarily responsible for the execution of the Fund's portfolio
transactions and the allocation of brokerage. The policies established by the
trustees require that the Adviser seek to obtain the best net results in
executing transactions for the Fund, except that the Fund is authorized to pay
higher commissions in return for brokerage and research services in accordance
with certain regulatory conditions. Subject to the Fund's policy of seeking best
execution, the Fund may consider sales of Fund shares when allocating portfolio
brokerage and will generally execute transactions through Nikko Securities, an
affiliate of the Adviser. The Fund is also permitted to execute transactions
through broker-dealer affiliates of the Administrator. Since commission rates in
Japan are fixed, the Adviser is not able to negotiate commission rates on its
Japanese securities transactions.
STOCKHOLDER SERVICES
Capstone Nikko Japan Fund provides its stockholders with a number of
services and conveniences designed to assist investors in the management of
their investments. These stockholder services include the following:
TAX-DEFERRED RETIREMENT PLANS
Shares may be purchased by virtually all types of tax-deferred retirement
plans. The Distributor or its affiliates make available plan forms and/or
custody agreements for the following:
- Individual Retirement Accounts (for individuals and their non-employed
spouses who wish to make limited tax deductible contributions to a
tax-deferred account for retirement); and
- Simplified Employee Pension Plans.
Dividends and distributions will be automatically reinvested without a
sales charge. For further details, including fees charged, tax consequences and
redemption information, see the specific plan documents which can be obtained
from the Fund.
Investors should consult with their tax adviser before establishing any of
the tax-deferred retirement plans described above.
EXCHANGE PRIVILEGE
Shares of the Fund which have been outstanding for 15 days or more may be
exchanged for shares of other Capstone Funds at a price based on their
respective net asset values with no sales or administrative charge. Any exchange
must meet applicable minimum investment and other
20
<PAGE> 21
requirements for the Capstone Fund into which the exchange is requested. A
stockholder requesting such an exchange will be sent a current prospectus for
the fund into which the exchange is requested. Shares held less than 15 days
cannot be exchanged; such shares will be redeemed at the next computed net asset
value.
Purchases, redemptions and exchanges should be made for investment purposes
only. A pattern of frequent exchanges, purchases and sales may be deemed abusive
by the Administrator and, at the discretion of the Administrator, can be limited
by the Fund's refusal to accept further purchase and/or exchange orders from the
investor. Although the Administrator will consider all factors it deems relevant
in determining whether a pattern of frequent purchases, redemptions and/or
exchanges by a particular investor is abusive and not in the best interests of
the Fund or its other stockholders, as a general policy investors should be
aware that engaging in more than one exchange or purchase-sale transaction
during any thirty-day period with respect to a particular fund may be deemed
abusive and therefore subject to the above restrictions.
An exchange of shares is treated for Federal income tax purposes as a sale
of shares given in exchange and the stockholder may, therefore, realize a
taxable gain or loss. The exchange privilege may be exercised only in those
states where shares of the fund for which shares held are being exchanged may be
legally sold, and the privilege may be amended or terminated upon 60 days'
notice to stockholders.
The stockholder may exercise the following exchange privilege options:
Exchange by Mail -- Stockholders may mail a written notice requesting an
exchange to the Fund's Transfer Agent.
Exchange by Telephone -- Stockholders must complete telephone exchange
on the application form filed with the Transfer Agent to exchange shares
by telephone. Telephone exchanges may be made from 9:30 a.m. to 4:00
p.m. Eastern time, Monday through Friday, except holidays. If
certificates have been issued to the investor, this procedure may be
utilized only if he delivers his certificates, duly endorsed for
transfer, to the Transfer Agent prior to giving telephone instructions.
During periods of unusual economic or market changes, stockholders may
experience difficulties or delays in effecting exchanges over the
telephone.
When exchanges or redemption requests are made by telephone, the Fund has
procedures in place designed to give reasonable assurance that such telephone
instructions are genuine, including recording telephone calls and sending
written confirmations of transactions. The Fund will not be liable for losses
due to unauthorized or fraudulent telephone transactions unless it does not
follow such procedures, in which case it may be liable for such losses.
PRE-AUTHORIZED PAYMENT
A stockholder may arrange to make regular monthly investments of $25 or
more automatically from his checking account by authorizing the Fund's Transfer
Agent to withdraw the payment from his checking account.
21
<PAGE> 22
SYSTEMATIC WITHDRAWAL PLAN
Investors may open a withdrawal plan providing for withdrawals of $50 or
more monthly, quarterly, semi-annually or annually if they have made a minimum
investment in the shares of the Fund of $5,000. The minimum amount which may be
withdrawn pursuant to this plan is $50.
These payments do not represent a yield or return on investment and may
constitute return of initial capital. In addition, such payments may deplete or
eliminate the investment. Stockholders cannot be assured that they will receive
payment for any specific period because payments will terminate when all shares
have been redeemed. The number of such payments will depend primarily upon the
amount and frequency of payments and the yield on the remaining shares. Under
this plan, any distributions must be reinvested in additional shares at net
asset value.
The Systematic Withdrawal Plan is voluntary, flexible, and under the
stockholder's control and direction at all times, and does not limit or alter
the stockholder's right to redeem shares. Such plan may be terminated in writing
at any time by either the stockholder or the Fund. The cost of operating the
Systematic Withdrawal Plan is borne by the Fund.
GENERAL INFORMATION
Capstone International Series Trust is an open-end diversified management
investment company, as defined in the Investment Company Act of 1940, as
amended. It was organized in Massachusetts in 1986 as a business trust. The
Trust is authorized to issue an unlimited number of shares of beneficial
interest of $0.01 par value and to divide such shares into separate series (or
funds). The Fund was established as a series of the Trust on April 24, 1989. The
Trust currently has one other series, Capstone New Zealand Fund, which invests
in securities of New Zealand issuers. Stockholders are entitled to one vote for
each full share held and to fractional votes for fractional shares held in the
election of trustees (to the extent hereafter provided) and on other matters
submitted to the vote of stockholders of the Fund. The Trust is not required to
hold regular annual meetings of stockholders and will do so only when required
by law. There are no cumulative voting rights. In the event additional series
are established, matters submitted to stockholder vote must be approved by each
series except (i) as to matters required by the Investment Company Act of 1940
to be voted on by all stockholders as a single class and (ii) as to matters
determined by the trustees not to affect a particular series, which will not be
submitted to vote by stockholders of that series. Stockholders may, in
accordance with the Declaration of Trust, cause a meeting of stockholders to be
held for the purpose of voting on the removal of trustees. Fund shares have
equal dividend rights, are fully paid, non-assessable and freely transferable
and have no conversion, pre-emptive or subscription rights. Fractional shares
have the same rights, pro rata, as full shares.
Under Massachusetts law, stockholders of a business trust may, under
certain circumstances, be held personally liable as partners for the obligations
of the trust. The Declaration of Trust contains an express disclaimer of
stockholder liability for acts or obligations of the Trust. The Declaration of
Trust provides for indemnification out of the Trust's property for any
stockholder held personally liable for the obligations of the Trust. Thus, the
risk of a stockholder's incurring financial loss on account of stockholder's
liability is limited to circumstances in which the Trust itself would be unable
to meet its obligations.
22
<PAGE> 23
The Fund's custodian is The Bank of Tokyo Trust Company. It is anticipated
that the Fund's assets will be maintained primarily in Japan with The Bank of
Tokyo, Ltd., pursuant to a sub-custody agreement between The Bank of Tokyo Trust
Company and The Bank of Tokyo, Ltd. In approving these custody arrangements, the
Board of Trustees considered the effect that Japanese law may have on the safety
of the Fund's assets and the Fund's ability to convert those assets into U.S.
dollars, the ability of the custodian and sub-custodian to provide the services
required by the Fund in a cost-effective manner, the safeguards used by the
custodian and sub-custodian to protect the Fund's assets and other factors
deemed relevant by the trustees.
As of February 20, 1997, the following stockholders owned more than 5% of
the Fund's outstanding shares of beneficial interest: Nikko Capital Management
Company (USA), Inc. (23.9%), SMC Pneumatics, Inc. (22.8%) and Smith Barney
Shearson (8.7%).
FPS Services, Inc. acts as both Transfer Agent and Dividend Paying Agent
for the Fund.
Stockholders should address inquiries to the Fund at its address stated on
the cover page of this Prospectus.
23
<PAGE> 24
--------------------------------
[LOGO] THE CAPSTONE GROUP Prospectus
OF MUTUAL FUNDS February 28, 1997
- -------------------------------- --------------------------------
EQUITY
*CAPSTONE GROWTH FUND, INC. --------------------------------
- --------------------------------
- -------------------------------- CAPSTONE
FIXED INCOME NIKKO JAPAN
FUND
*CAPSTONE GOVERNMENT INCOME FUND
- --------------------------------
- --------------------------------
INTERNATIONAL/GLOBAL
*CAPSTONE NIKKO JAPAN FUND
*CAPSTONE NEW ZEALAND FUND The Fund is now
- -------------------------------- [LOGO]
NO LOAD
For more complete information about the
Capstone Funds, including charges and
expenses, contact the Distributor at the --------------------------------
address below to receive a prospectus.
Please read it carefully before you
invest or send money.
--------------------------------
CAPSTONE ASSET PLANNING COMPANY [LOGO] A Member Of
5847 San Felipe, Suite 4100 THE CAPSTONE GROUP
Houston, Texas 77057 OF MUTUAL FUNDS
1-800-262-6631 --------------------------------
<PAGE> 25
CAPSTONE NIKKO JAPAN FUND
A FUND OF
CAPSTONE INTERNATIONAL SERIES TRUST
STATEMENT OF ADDITIONAL INFORMATION
FEBRUARY 28, 1997
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
February 28, 1997. 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, Suite 4100, Houston, Texas 77057.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
General Information ....................................................... 2
Investment Practices and Restrictions ..................................... 2
Performance Information ................................................... 7
Trustees and Executive Officers ........................................... 8
Investment Advisory Agreement ............................................. 10
Administration Agreement .................................................. 10
Expenses .................................................................. 11
Distributor ............................................................... 11
Portfolio Transactions and Brokerage ...................................... 12
Determination of Net Asset Value .......................................... 14
How to Buy and Redeem Shares .............................................. 15
Taxes ..................................................................... 15
Control Persons and Principal Holders of Securities ....................... 21
Other Information ......................................................... 21
Financial Statements ...................................................... 22
</TABLE>
<PAGE> 26
GENERAL INFORMATION
Capstone Nikko Japan Fund (the "Fund") is a series (or fund) of
Capstone International Series Trust (the "Trust"). The Trust currently has one
other series, Capstone New Zealand Fund, which invests in securities of New
Zealand issuers. The Trust may create additional series in the future, but each
series will be treated as a separate mutual fund. The Trust was organized as a
business trust in Massachusetts on May 9, 1986 and commenced business shortly
thereafter. It is an open end diversified management investment company under
the Investment Company Act of 1940. The Fund is a member of a group of
investment companies sponsored by Capstone Asset Management Company (the
"Administrator"), which also provides administrative services to the Fund.
INVESTMENT PRACTICES AND RESTRICTIONS
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 Trust's Board of
Trustees. 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 a fully collateralized loan 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. The Adviser seeks to minimize
the risk of loss through repurchase agreements by analyzing the
creditworthiness of the obligors under repurchase agreements, in accordance
with the credit guidelines of the Trust's Board of Trustees.
FOREIGN CURRENCY TRANSACTIONS. The Fund may, to a limited extent, deal
in forward foreign exchange between the currencies of the United States and
Japan as a hedge against possible variations in the foreign exchange rates
between these currencies. This is accomplished through contractual agreements
to purchase or sell a specified currency at a specified future date (up to one
year) and price set at the time of the contract. The Fund's dealings in forward
foreign exchange contracts are limited to hedging involving either specific
transactions or portfolio positions. Transaction hedging is the purchase or
sale of forward foreign currency with respect to specific receivables or
payables of the Fund accruing in connection with the purchase and sale of its
portfolio securities, the sale and redemption of shares of the Fund or the
payment of dividends and distributions by the Fund. Position hedging is the
sale of forward foreign currency with respect to portfolio security positions
denominated or quoted in such foreign currency. The Fund will not enter into or
maintain a position in those contracts if their consummation would obligate
the Fund to deliver an amount of foreign currency greater than the value of
the Fund's assets denominated or quoted in, or currency convertible into,
such currency.
2
<PAGE> 27
When the Fund enters into a position hedging transaction, its
custodian bank places cash or liquid securities in a separate account of the
Fund in an amount equal to the value of the Fund's total assets committed to
the consummation of the forward contract. The amount of the securities placed
in the separate account are adjusted to maintain the value of those securities
equal to the Fund's commitment under the contract.
Hedging against a decline in the value of a currency by means of
forward currency contracts, options on currencies, currency futures contracts
and options on currency futures contracts (see below and "Investment Objectives
and Policies" in the Prospectus) does not eliminate fluctuations in the value
of the Fund's portfolio securities or prevent losses. Such transactions also
preclude the opportunity for gain if the value of the currency moves in an
unanticipated manner. Moreover, it may not be possible for the Fund to hedge
against a change which is generally anticipated, since appropriate transactions
might not then be available.
The cost of engaging in foreign currency transactions by the Fund
varies with such factors as the currencies involved, the length of the contract
period and the market conditions then prevailing. Transactions in foreign
currency exchange usually are conducted on a principal basis, so no fees or
commissions are involved.
LOANS OF PORTFOLIO SECURITIES. The Fund has authority to lend its
portfolio securities provided: (1) the loan is secured continuously by
collateral consisting of U.S. Government securities or cash or cash equivalents
adjusted daily to make a market value at least equal to the current market
value of the securities loaned; (2) the Fund may at any time call the loan and
regain the securities loaned; (3) the Fund will receive any interest or
dividends paid on the loaned securities; and (4) the aggregate market value of
securities loaned will not at any time exceed 10% of the total assets of the
Fund. In addition, it is anticipated that the Fund may share with the borrower
some of the income received on the collateral for the loan or that it will be
paid a premium for the loan. In determining whether to lend securities, the
Adviser considers all relevant factors and circumstances including the
creditworthiness of the borrower.
FUTURES TRANSACTIONS. The Fund may enter into futures contracts on
U.S. and foreign debt securities ("interest-rate futures"), on stock indices
and on currencies of countries in which the Fund conducts its investment
activities. Interest rate and currency futures contracts create an obligation
to purchase or sell specified amounts of debt securities or currency on a
specified future date. Although these contracts generally call for making or
taking delivery of the underlying securities or currency, the contracts are in
most cases closed out before the maturity date by entering into an offsetting
transaction which may result in a profit or loss.
Securities index futures contracts are contracts to buy or sell units
of a particular index of securities at a specified future date for an amount
equal to the difference between the original contract purchase price and the
price at the time the contract is closed out, which may be at maturity or
through an earlier offsetting transaction.
The purchase or sale of a futures contract involves no sale price or
premium, unlike the purchase of a security or option. Instead, an amount of
cash or securities acceptable to the broker and the relevant contract
market, generally about 5% of the contract amount, must be deposited with
the broker as "initial margin." This "initial margin" represents a "good
faith" deposit assuring the performance of both the purchaser and the seller
under the futures contract. Subsequent "variation margin" payments must be made
daily to and by the broker to reflect variations in the price of the futures
contract. When the contract is settled or closed out by
3
<PAGE> 28
an offsetting transaction, a final determination is made of variation margin
due to or from the broker. A nominal commission is also paid on each
completed sale transaction.
OPTIONS TRANSACTIONS. The Fund may purchase or write put or call
options on futures contracts, individual securities, currencies or stock
indices to hedge against fluctuations in securities prices and currency
exchange rates and to adjust its risk exposure relative to the Benchmark. See
"Investment Objective and Policies" in the Prospectus.
The Fund may purchase options on exchanges and in over-the-counter
markets to the extent the value of such options owned by the Fund does not
exceed 5% of its net assets. The Fund may write put options and covered call
options on exchanges and in the over-the-counter markets. A call option gives
the purchaser the right, until the option expires, to purchase the underlying
futures contract, security or currency at the exercise price or, in the case of
a stock index option, to receive a specified amount. A put option gives the
purchaser the right, until the option expires, to sell the underlying futures
contract, security or currency at the exercise price or, in the case of a stock
index option, to pay a specified amount.
When the Fund writes an option, it receives a premium which it retains
whether or not the option is exercised. By writing a call option, the Fund
becomes obligated, either for a certain period or on a certain date, to sell
the underlying futures contract, security or currency to the purchaser at the
exercise price (or to pay a specified price with respect to an index option) if
the option is exercised. At the time or during the period when the option may
be exercised, the Fund risks losing any gain in the value of the underlying
futures contract, security or currency or stock index over the exercise price.
By writing a put option, the Fund becomes obligated either for a certain period
or on a certain date, to purchase the underlying futures contract, security or
currency at the exercise price, or to pay the specified price in connection
with an index option, if the option is exercised. The Fund might, therefore, be
obligated to purchase or make a payment for more than the current market price
of the particular futures contract, security, currency or index option.
The Fund writes only "covered" options on securities and currencies.
This means that so long as the Fund is obligated as the writer of a call option
on a security or currency, it will own an equivalent amount of the underlying
security, currency or liquid securities denominated, quoted in or currently
convertible into such currency. The Fund will be considered "covered" with
respect to a put option it writes if, so long as it is obligated as the writer
of a put option, it deposits and maintains with its custodian in a segregated
account an amount of the underlying securities, currency or liquid securities
denominated, quoted in or currently convertible into such currency having a
value equal to or greater than the exercise price of the option. There is no
limitation on the amount of call options the Fund may write. However, the Fund
may write covered put options on currencies only to the extent that cover for
such options does not exceed 25% of the Fund's net assets.
The writer of an option that wishes to terminate an obligation may in
some cases be able to effect a "closing purchase transaction." This is
accomplished by buying an option of the same series as the
option previously written. The effect of the purchase is that the writer's
position will be cancelled by the clearing corporation. However, a writer may
not effect a closing purchase transaction after being notified of the exercise
of an option. Likewise, an investor who is the holder of an option may
liquidate a position by effecting a "closing sale transaction." This is
accomplished by selling an option of the same series as the option previously
purchased. There is no guarantee that either a closing purchase or a closing
sale transaction can be effected.
The Fund will realize a profit from a closing transaction if the price
of the transaction is less than the
4
<PAGE> 29
premium received from writing the option or is more than the premium paid to
purchase the option; the Fund will realize a loss from a closing transaction
if the price of the transaction is more than the premium paid to purchase
the option. Because increases in the market price of a call option will
generally reflect increases in the value of the underlying security, futures
contract, index option or currency, any loss in closing out a call option is
likely to be offset in whole or in part by appreciation of the underlying
collateral owned by the Fund.
INVESTMENT RESTRICTIONS. The Trust has adopted with respect to the
Fund the following "fundamental" restrictions which, along with its investment
objective, cannot be changed without approval by the holders of a majority of
the shares of beneficial interest in the Fund ("Fund shares"). Such majority is
defined by the Investment Company Act of 1940 as the lesser of (i) 67% or more
of the Fund shares present in person or by proxy at a meeting, if the holders
of more than 50% of the outstanding voting securities are present or
represented by proxy; or (ii) more than 50% of the outstanding voting
securities. The Fund may not:
1. With respect to 75% of its total assets, invest more than 5%
of the value of such assets in the securities of any one
issuer or purchase more than 10% of the voting securities of
any one issuer (except for investments in securities issued
or guaranteed by the U.S. Government, its agencies or
instrumentalities).
2. Invest more than 25% of its total assets (taken at market
value at the time of each investment) in the securities of
issuers in any particular industry or in securities issued or
guaranteed by the Japanese government or its agencies or
instrumentalities provided that this restriction shall not
prevent the Fund from purchasing the securities of any issuer
pursuant to the exercise of rights distributed to the Fund by
the issuer, except that no such purchase may be made if as a
result the Fund would no longer be a diversified investment
company as defined in the Investment Company Act of 1940.
3. Borrow amounts in excess of 10% of its total assets taken at
cost (not including the amount borrowed) and then only for
temporary or emergency purposes.
4. Issue senior securities except as appropriate to evidence
permitted borrowing (for the purpose of this restriction,
forward foreign currency exchange contracts and collateral
arrangements with respect to such contracts are not deemed to
be senior securities).
5. Underwrite securities issued by other persons except to the
extent that the purchase of portfolio securities and their
later disposition may be deemed to be underwriting.
6. Purchase or sell real estate except that the Fund may invest
in securities secured by real
estate or interests therein or securities issued by companies
which invest in real estate or interests therein.
7. Purchase or sell commodities or commodity contracts (for
purposes of this restriction, interest-rate, index and
currency futures contracts, options on such contracts and on
stock indices and currencies, and forward foreign currency
exchange contracts are not deemed to be commodities or
commodity contracts).
8. Make loans to other persons except that the Fund may (i) lend
its portfolio securities in accordance with applicable legal
requirements, (ii) enter into repurchase agreements and (iii)
5
<PAGE> 30
purchase debt obligations in accordance with its investment
objective and policies.
With respect to restriction 8, above, the Fund has no present
intention of lending its portfolio securities.
The Fund has adopted the following additional restrictions which are
not fundamental and which may be changed without stockholder approval, to the
extent permitted by applicable law, regulation or regulatory policy. The Fund
may not:
a. With respect to 25% of its total assets, invest more than 5%
of the value of such assets in the securities of any one
issuer, or purchase more than 10% of the voting securities of
any one issuer (except for investments in securities issued
or guaranteed by the U.S. Government, its agencies
or instrumentalities)(1)
b. Make short sales of securities, maintain short positions or
purchase securities on margin, except for short-term credits
as are necessary for the clearance of transactions and in
connection with transactions involving forward foreign
currency exchange contracts, futures contracts and related
options;
c. Invest more than 5% of its total assets in securities of
unseasoned issuers which, including their predecessors, have
been in operation for less than three years (except
obligations issued or guaranteed by the U.S. Government, the
Japanese government or their agencies or instrumentalities)
and equity securities which are not readily marketable;
d. Enter into a repurchase agreement not terminable within seven
days if the total of such agreements would be more than 5% of
the value of the Fund's total assets;
e. Invest in securities of other investment companies (other
than in connection with a merger, consolidation,
reorganization or acquisition of assets) except to the extent
permitted by the Investment Company Act of 1940 and related
rules and regulatory interpretation;
f. Purchase put or call options if, as a result thereof, the
value of put and call options owned by the Fund would exceed
5% of the Fund's net assets;
g. Purchase warrants of any issuer if, as a result more than 2%
of the value of the total assets of the Fund would be
invested in warrants which are not listed on the New York
Stock Exchange or the American Stock Exchange, or more than
5% of the value of the total assets of the Fund would be
invested in warrants. Warrants acquired by the Fund in
units or attached to securities may be deemed to be without
value;
h. Purchase or retain for the Fund the securities of any issuer
if those officers and trustees of the Trust, or directors and
officers of its investment adviser, who individually own more
than 1/2 of 1% of the outstanding securities of such issuer,
together own more than 5% of such outstanding securities;
i. Purchase from or sell to any of the officers and trustees of
the Trust, its investment adviser, its principal underwriter
or the officers and directors of its investment adviser or
principal underwriter, portfolio securities of the Fund;
6
<PAGE> 31
j. Invest in oil, gas or other mineral exploration or development
companies (although it may purchase securities of issuers
which own, sponsor or invest in such interests);
k. Pledge, mortgage or hypothecate its assets, except that to
secure permitted borrowings it may pledge securities having a
value at the time of the pledge of not more than 15% of the
Fund's total assets taken at cost. (For purposes of this
restriction, collateral arrangements with respect to
permitted options and futures transaction and forward foreign
exchange contracts are not deemed to involve a pledge of
assets.);
l. Purchase any securities subject to legal or contractual
restrictions on the resale thereof, or purchase securities
which are not readily marketable including securities of
foreign issuers which are not listed on a recognized domestic
or foreign securities exchange, or enter into repurchase
agreements which are not terminable within seven days if such
purchase or entering into a repurchase agreement would cause
more than 10% of the value of the total assets of the Fund to
be invested in such securities and such repurchase
agreements, except that the Fund may not invest more than 5%
of the value of the total assets in repurchase agreements
which are not terminable within seven days.
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. The turnover rate of the Fund's
portfolio was 47% for the fiscal year ended October 31, 1996.
- ------------
(1) With respect to the remaining 75% of the value of the Fund's total
assets, this limitation is fundamental and therefore cannot be
changed without the approval of a majority of the Fund shares. See
restriction number 1, supra.
PERFORMANCE INFORMATION
The Fund may from time to time include figures indicating the Fund's
total return or average annual total return in advertisements or reports to
stockholders or prospective investors. 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 the deduction of a proportional share
of Fund expenses on an annual basis. The results, which are annualized,
represent an average annual compounded rate of return on a hypothetical
investment in the Fund over a period of 1, 5 and 10 years ending on the most
recent calendar quarter (but not for a period greater than the life of the
Fund), calculated pursuant to the following formula:
n
P (1 + T) = ERV
where P = a hypothetical initial payment of $1,000,
T = the average annual total return,
n = the number of years, and
ERV = the ending redeemable value of a hypothetical $1,000
payment made at the beginning of the period.
For the one year period ended October 31, 1996, the Fund's average
annual total return was 0.75%.
7
<PAGE> 32
For the five year period ended October 31, 1996 and the period July 10, 1989
(commencement of operations) to October 31, 1996, the Fund's average annual
total return was (1.80)% and (4.89)%, 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 one year and five
year periods ended October 31, 1996 and the period July 10, 1989 to October 31,
1996 the Fund's total return was 0.75%, (8.70)%, and (30.69)%, respectively.
Performance information for the Fund may be compared, in reports and
promotional literature, to: (i) the Morgan Stanley Capital International Index;
(ii) the Tokyo Stock Exchange; (iii) the Standard & Poor's 500 Stock Price
Index ("S&P 500 Index"), the Dow Jones Industrial Average ("DJIA"), or other
appropriate unmanaged indices of performance of various types of investments,
so that investors may compare the Fund's results with those of indices widely
regarded by investors as representative of the securities markets in general;
(iv) other groups of mutual funds tracked by Lipper Analytical Services, a
widely used independent research firm which ranks mutual funds by overall
performance, investment objectives, and assets, or tracked by other services,
companies, publications, or persons who rank mutual funds on overall
performance or other criteria; (v) the Consumer Price Index (a measure of
inflation) to assess the real rate of return from an investment in the Fund;
and (vi) a universe of money managers with similar country allocation and
performance objectives. Unmanaged indices may assume the reinvestment of
dividends, but generally do not reflect deductions for administrative and
management costs and expenses.
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.
TRUSTEES AND EXECUTIVE OFFICERS
The trustees and executive officers of the Trust are listed below.
Certain persons named as trustees also serve in similar capacities for other
mutual funds sponsored by the Distributor as indicated below.
* EDWARD L. JAROSKI (50), Trustee and President of the Trust.
5847 San Felipe, Suite 4100, Houston, Texas 77057.
Chairman of the Board and Director of the Administrator
since 1992; President and Director of Capstone Asset
Planning Company and Capstone Financial Services, Inc.
since 1987; Director and officer of other Capstone Funds.
EUGENE W. POTTER, JR (71)., Trustee. 43 Elm Lane, Bronxville,
New York 10708. Corporate Director and Private Investor;
formerly President of Inco Investment Management Services
(1981-1986); Director of the Schafer Value Fund, Inc. and
Formula 40 U.S.A., Inc.
BERNARD J. VAUGHAN (68), Trustee. 113 Bryn Mawr Avenue, Bala
Cynwyd, Pennsylvania 19004. Director of other Capstone
Funds; formerly Vice President of Fidelity Bank
(1979-1993).
- --------------
* Trustee who is an interested person as defined in the Investment
Company Act of 1940.
8
<PAGE> 33
STANLEY KIRTMAN (41), President of the Fund. 485 Fifth Avenue,
6th Floor, New York, New York 10017. President and Chief
Investment Officer of Nikko Capital Management (U.S.A.),
Inc. (since September 1995) and Director and Chief
Investment Officer of Nikko Capital Management (U.S.A.),
Inc. (1987-1995).
IRIS R. CLAY (44), Secretary. 5847 San Felipe, Suite 4100,
Houston, Texas 77057. Secretary (since February 1996),
Assistant Vice President (1994-1996) and Assistant
Secretary (1990-1994) of Capstone Financial Services,
Inc., Capstone Asset Management Company and Capstone
Asset Planning Company; Officer of other Capstone Funds.
NORMA R. YBARBO (32), Assistant Secretary. 5847 San Felipe,
Suite 4100, Houston, Texas 77057. Assistant Compliance
Officer (since 1994), Compliance Analyst (1993-1994) and
Compliance Assistant (1987-1993) of Capstone Financial
Services, Inc.; Officer of other Capstone Funds.
LINDA G. GIUFFRE (35), Treasurer. 5847 San Felipe, Suite
4100, Houston, Texas 77057. Vice President and Treasurer
(since February 1996) of Capstone Financial Services,
Inc. Capstone Asset Management Company and Capstone Asset
Planning Company; Treasurer (1990-1996) and Secretary
(1994-1996) of Capstone Financial Services, Inc. and
Capstone Asset Management Company; Treasurer (1990-1996)
and Secretary (1995-1996) of Capstone Asset Planning
Company; Officer of other Capstone Funds.
The trustees and officers of the Trust as a group own less than one
percent of the outstanding Fund shares. Mr. Smith, a former trustee, and Mr.
Vaughan also received compensation for serving as directors of other investment
companies sponsored by the Administrator.
Each trustee not affiliated with the Adviser or Administrator is
entitled to $250 for each Board meeting attended, and is paid a $1,000 annual
retainer by the Trust. The trustees and officers of the Trust are also
reimbursed for expenses incurred in attending meetings of the Board of
Trustees. For the fiscal year ended October 31, 1996, the Fund paid or accrued
for the account of the trustees and officers, as a group for services and
expenses in all capacities, a total of $6,696.
9
<PAGE> 34
The following table represents the fees paid during the 1996 calendar
year to the trustees of the Trust and the total compensation each trustee
received during that period from the Capstone Funds complex.
COMPENSATION TABLE
<TABLE>
<CAPTION>
Total
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 Trustees
--------------- ------------ ---------------- ---------------- -------------
<S> <C> <C> <C> <C>
Eugene W. Potter, Jr., Trustee $1,500 $0 $0 $3,000(2)
Philip C. Smith(1), Trustee 1,500 0 0 9,250(2,3,4)
Bernard J. Vaughan, Trustee 1,500 0 0 8,000(2,3)
</TABLE>
- --------------
* Fund does not pay deferred compensation.
(1) Resigned from Board effective December 31, 1996
(2) Trustee of Capstone International Series Trust. - Capstone New Zealand Fund
(3) Director of Capstone Fixed Income Series, Inc. and Capstone Growth Fund,
Inc.
(4) Director of Medical Research Investment Fund, Inc.
INVESTMENT ADVISORY AGREEMENT
Pursuant to an investment advisory agreement dated July 10, 1989 (the
"Advisory Agreement"), Nikko Capital Management (USA), Inc. (the "Adviser")
manages the investment of the Fund's assets and places orders for the purchase
and sale of its portfolio securities. The Adviser is responsible for obtaining
and evaluating economic, statistical, and financial data and for formulating
and implementing investment programs in furtherance of the Fund's investment
objectives and policies.
Under the Advisory Agreement, the Fund pays to the Adviser as
compensation for the services rendered by it a fee, calculated daily and
payable quarterly, equal to an annual rate of 0.40% of the average net assets
of the Fund. For the fiscal year ended October 31, 1996 the Fund paid
investment advisory fees in the amount of $13,163, all of which was reimbursed
to the Fund pursuant to an expense limitation (see "Expenses" below).
The Advisory Agreement also provides that the Adviser shall not be
liable to the Fund for any actions or omissions in the absence of willful
misfeasance, bad faith, gross negligence or reckless disregard of the Adviser's
obligations or duties under the Advisory Agreement.
The Advisory Agreement was last approved by the Board of Trustees on
May 24, 1996 and may be continued from year to year if specifically approved at
least annually (a) by the Board of Trustees of the Trust or by vote of a
majority of the Fund shares and (b) by the affirmative vote of a majority of
the trustees who are not parties to the agreement or interested persons of any
such party by votes cast in person at a meeting called for such purpose. The
Advisory Agreement provides that it shall terminate automatically if assigned
and that it may be terminated without penalty by either party on 60 days'
written notice.
ADMINISTRATION AGREEMENT
Under an agreement ("Administration Agreement") between the Trust and
Capstone Asset Management Company (the "Administrator"), the Administrator
supervises all aspects of the Fund's
10
<PAGE> 35
operations other than the management of its investments. As part of these
services, it oversees the performance of administrative and professional
services to the Fund by others; provides office facilities; prepares reports to
stockholders and the Securities and Exchange Commission; and provides personnel
for supervisory, administrative and clerical functions. Except as noted below,
the costs of these services are borne by the Administrator. For the
Administrator's services, the Fund will pay to the Administrator a fee,
calculated daily and payable quarterly, equal to an annual rate of 0.20% of the
Fund's average net assets. For the fiscal year ended October 31, 1996 the Fund
paid administrative fees in the amount of $6,582, all of which was reimbursed
to the Fund (see "Expenses" below).
Under the Administration Agreement, the Fund bears the cost of its
accounting services, which includes maintaining its financial books and records
and calculating its daily net asset value. The cost of such accounting services
includes the salaries and overhead expenses of personnel of the Administrator,
office space, facilities and equipment costs attributable to the provision of
accounting services to the Fund. The services are provided at cost which is
allocated among the investment companies administered by the Administrator. The
Fund also pays transfer agency fees, custodian fees, legal and auditing fees,
the costs of printing reports to stockholders and the Securities and Exchange
Commission, fees under the Service and Distribution Plan (see "Distributor")
and all other expenses not specifically borne by the Administrator.
EXPENSES
The Adviser and Administrator have agreed to reduce their fees (and
reimburse the Fund if necessary) if the ordinary business expenses of the Fund
exceed any expense limitation applicable to the Fund pursuant to the laws or
regulations of any state. Such reimbursement shall be shared by the Adviser and
the Administrator ratably in proportion to the fees received by them from the
Fund. Due to recent Federal and state regulations, such state expense
limitations are no longer applicable to the Fund.
During the fiscal year ended October 31, 1996 the total operating
expenses of the Fund prior to the reimbursements by the Adviser and
Administrator were 3.90% of the Fund's average net assets, and 3.30% after the
reimbursements.
DISTRIBUTOR
Capstone Asset Planning Company (the "Distributor"), acts as the
principal underwriter of the Fund shares pursuant to an agreement with the
Trust (the "Distribution Agreement"). The Distributor has the exclusive right
to distribute Fund shares in a continuous offering through affiliated and
unaffiliated dealers. The Distributor's obligation is an agency or "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. 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. Effective August 21, 1995, the front end sales load applicable
to sales of the Fund's shares was eliminated. Prior to August 21, 1995, sales
of Fund shares were subject to a sales charge equal to a percentage of the net
asset value of the shares to be purchased. The sales charge was paid to the
Distributor, who reallowed a portion of the sales charge to broker-dealers who
had an agreement with the Distributor to participate in the offering of Fund
shares. For the fiscal years ended October 31, 1995 and 1994, the Distributor
received $2,840 and $19,267, respectively, from the sale of Fund shares.
11
<PAGE> 36
The Distribution Agreement is renewable from year to year if approved
(a) by the Fund's Board of Trustees or by a vote of a majority of the Fund's
outstanding voting securities and (b) by the affirmative vote of a majority of
trustees who are not parties to the Distribution Agreement or interested
persons of any party, by votes cast in person at a meeting called for such
purpose. The Distribution Agreement provides that it will terminate if
assigned, and that it may be terminated without penalty by either party on 60
days' written notice.
The Fund adopted, effective September 1, 1992, 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 Trustees, and by a vote of the
trustees 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 Trustees"), and by the Fund's
stockholders at a Special Meeting of Stockholders held August 10, 1992.
As required by Rule 12b-1, the directors will review quarterly reports
prepared by the Distributor on the amounts expended and the purposes for the
expenditures. The Fund paid $8,226 in 12b-1 fees during the fiscal year ended
October 31, 1996. Of this amount, approximately $475 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 $22,900); printing
of advertising materials, prospectuses and financial reports distributed to
prospective investors (approximately $37,475); postage and mailing expenses
(approximately $5,475); and other miscellaneous costs and expenses incurred in
the operation of the Plan (approximately $7,000).
The Plan and related agreements may be terminated at any time by a
vote of the Plan Trustees or by vote of a majority of the Fund's outstanding
voting securities. As required by Rule 12b-1, selection and nomination of
disinterested trustees for the Fund is committed to the discretion of the
trustees who are not "interested persons" as defined under the 1940 Act.
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 trustees, including a majority of the Plan Trustees.
The Plan will continue in effect for successive one year periods
provided that such continuance is specifically approved by a majority of the
trustees, including a majority of the Plan Trustees. Continuance of the Plan
was last approved by a majority of trustees and Plan Trustees on May 24, 1996.
In compliance with the Rule, the trustees, in connection with both the adoption
and continuance of the Plan, 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.
PORTFOLIO TRANSACTIONS AND BROKERAGE
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. In over-the-counter
12
<PAGE> 37
transactions, orders are placed directly with a principal market maker unless
it is believed that a better price and execution can be obtained by using a
broker. Except to the extent that the Fund may pay higher brokerage commissions
for brokerage and research services (as described below) on a portion of its
transactions executed on securities exchanges, the Adviser seeks the best
security price at the most favorable commission rate. 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. Subject to the Fund's overall brokerage policies, the
Adviser may effect securities transactions through Capstone Asset Planning
Company, TradeStar Investments, Inc. and Williams MacKay Jordan & Co., Inc.,
broker-dealer affiliates of the Administrator, and with The Nikko Securities
Company International, Inc., an affiliate of the Fund's Adviser.
Section 28(e) of the Securities Exchange Act of 1934 ("Section 28(e)")
permits an investment adviser, under certain circumstances, to cause an account
to pay a broker or dealer who supplies brokerage and research services a
commission for effecting a securities transaction in excess of the amount of
commission another broker or dealer would have charged for effecting the
transaction. Brokerage and research services 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 purchasers or
sellers of securities, (b) furnishing analyses and reports concerning
issuers, industries, securities, economic factors and trends, portfolio
strategy, and the performance of accounts, and (c) effecting securities
transactions and performing functions incidental thereto (such as clearance,
settlement and custody).
Pursuant to provisions of the Advisory Agreement, the Trust's Board of
Trustees has authorized the Adviser to cause the Fund to incur brokerage
commissions in an amount higher than the lowest available rate in return for
brokerage and research services which provide lawful and appropriate assistance
to the Adviser in carrying out its investment-decision making responsibilities.
The Adviser is of the opinion that the continued receipt of supplemental
investment research services from dealers is essential to its provision of high
quality portfolio management services to the Fund. The Adviser undertakes that
such higher commissions will not be paid by the Fund unless (a) the Adviser
determines in good faith that the amount is reasonable in relation to the
services in terms of the particular transaction or in terms of the Adviser's
overall responsibilities with respect to the accounts as to which it exercises
investment discretion, (b) such payment is made in compliance with the
provisions of Section 28(e) and other applicable state and Federal laws and
regulations, and (c) in the opinion of the Adviser, the total commissions paid
by the Fund are reasonable in relation to the expected benefits to the Fund
over the long term. The investment advisory fee paid by the Fund under the
Advisory Agreement is not reduced as a result of the Adviser's receipt of
research services.
Consistent with the Rules of Fair Practice of the National Association
of Securities Dealers, Inc. and subject to seeking best execution and such
other policies as the Board of Trustees may determine, the Adviser may consider
sales of Fund shares as a factor in the selection of dealers to execute
portfolio transactions for the Fund.
The Adviser places portfolio transactions for other advisory accounts.
Research services furnished by firms through which the Fund effects its
securities transactions may be used by the Adviser in servicing all of its
accounts; not all of such services may be used by the Adviser in connection
with the Fund. In the opinion of the Adviser, the benefits from research
services to each of the accounts (including the Fund) managed by the Adviser
cannot be measured separately. Because the volume and nature of the trading
activities of the accounts are not uniform, the amount of commissions in excess
of the lowest available rate paid by each account for brokerage and research
services will vary. However, in the opinion of the Adviser,
13
<PAGE> 38
such costs to the Fund will not be disproportionate to the benefits received
by the Fund on a continuing basis.
The Adviser seeks to allocate portfolio transactions equitably
whenever concurrent decisions are made to purchase or sell securities by the
Fund and another advisory account. In some cases, this procedure could have an
adverse effect on the price or the amount of securities available to the Fund.
In making such allocations among the Fund and other advisory accounts, the main
factors considered by the Adviser are the respective investment objectives, the
relative size of portfolio holdings of the same or comparable securities, the
availability of cash for investment, the size of investment commitments
generally held, and opinions of the persons responsible for recommending the
investment.
The Fund contemplates that, consistent with its policy of obtaining
best net results, a substantial amount of its brokerage transactions will be
conducted through affiliates of the Adviser. Fixed commissions are charged on
the securities exchanges in Japan. Such fixed commissions are generally higher
than negotiated commissions on comparable United States transactions. Brokerage
commissions paid by the Fund on portfolio transactions for the fiscal year
ended October 31, 1996 totalled $4,084 (0.12% of the average net assets of the
Fund), all of which was paid to The Nikko Securities Co. International, Inc.,
an affiliate of the Adviser. Securities transactions effected through brokers
who furnished the Fund with statistical, research and advisory information
amounted to $427,906 (100% of the aggregate dollar amount of transactions
executed with a commission), and commissions paid on these trades totaled
$4,084 (100% of total commissions). The Fund also executed trades in the amount
of $2,604,544 in which a "mark up" (the dealer's profit) was included in the
price of the securities.
During the fiscal years ended October 31, 1995 and 1994, the Fund paid
$17,273 and $35,894, respectively, in brokerage commissions on portfolio
trades, all of which was paid to The Nikko Securities Co. International, Inc.
DETERMINATION OF NET ASSET VALUE
The Fund's net asset value is computed daily, Monday through Friday,
as of the close of regular trading on the New York Stock Exchange, which is
currently 4:00 p.m. Eastern time. The Fund's net asset value will not be
computed on the following holidays: New Year's Day, President's Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day. The Fund will in some cases value its portfolio securities as of
days on which the Japanese Exchanges are closed for Japanese holidays or other
reasons. At such times, the Fund will follow such procedures as the trustees
have determined to be reasonable.
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 expenses) by the total number of Fund shares outstanding at such time.
To avoid large fluctuations in the computed net asset value, accrued expenses
will be charged against the Fund on a daily basis, i.e. 1/360 of the annual
amount due by the Fund each year.
Any assets or liabilities initially expressed in terms of foreign
currencies are translated into U.S. dollars at the prevailing market rates at
14:00 Greenwich Mean Time on each U.S. business day.
Portfolio securities and futures contracts which are traded on a
Japanese Exchange are valued at the last sale price on that exchange prior to
the relevant closing or, if there is no recent last sale price available, at
the last current bid quotation. A security or futures contract which is listed
or traded on more than one
14
<PAGE> 39
exchange is valued at the quotation on the exchange determined to be the
primary market for such security or contract. All other equity securities
and futures contracts not so traded are valued at the last current bid
quotation prior to the relevant Japanese Exchange closing. Fixed
income securities are valued using market quotations or pricing services. In
the absence of an applicable price, securities and futures contracts will be
valued at a fair value as determined in good faith by the trustees or in
accordance with procedures established by the trustees.
HOW TO BUY AND REDEEM SHARES
Shares of the Fund are sold in a continuous offering without a sales
charge and may be purchased on any business day through authorized dealers,
including Capstone Asset Planning Company or The Nikko Securities Co.
International, Inc., an affiliate of the Adviser. Certain broker-dealers
assist their clients in the purchase of shares from the Distributor and
charge a fee for this service in addition to the Fund's public offering price.
After an order is received by the Distributor, shares will be credited
to a stockholder's account at the net asset value next computed after an order
is received. See "Determination of Net Asset Value". Initial purchases must be
at least $200; however, this requirement may be waived by the Distributor for
plans involving continuing investments. There is no minimum for subsequent
purchases of shares. 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, stockholders may require the Fund to redeem their shares by
sending a written request, signed by the record owner(s), to Capstone Nikko
Japan Fund, c/o FPS Services, Inc., P.O. Box 61503, King of Prussia,
Pennsylvania 19406-0903. In addition, certain expedited redemption methods are
available. See "Redemption and Repurchase of Shares" in the Prospectus.
TAXES
The following summary describes some of the more significant U.S.
Federal income tax consequences applicable to investors in the Fund based on
existing Federal tax law. New tax laws may be enacted which 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 annually 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, dividends, interest, certain foreign
currency gains and losses 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 will not be
subject to Federal income tax on
15
<PAGE> 40
its investment company taxable income and net capital gains (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 gains. 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 an amount equal to the sum of: (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 net operating losses, as prescribed by the
Code), and (3) all ordinary income and capital gains from 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 in which 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.
The Fund may invest in stocks of foreign companies that are classified
under the Code as passive foreign investment companies ("PFICs"). In general, a
foreign company is classified as a PFIC if at least one-half of its assets
constitute investment-type assets or 75% or more of its gross income is
investment-type income. Under the PFIC rules, an "excess distribution"
received with respect to PFIC stock is treated as having been realized ratably
over the period during which the Fund held the PFIC stock. The Fund itself will
be subject to tax on the portion, if any, of the excess distribution that is
allocated to the Fund's holding period in prior taxable years (and an interest
factor will be added to the tax, as if the tax had actually been payable in
such prior taxable years) even though the Fund distributes the corresponding
income to stockholders. Excess distributions include any gain from the sale of
PFIC stock as well as certain distributions from a PFIC. All excess
distributions are taxable as ordinary income.
The Fund may be able to elect alternative tax treatment with respect
to PFIC stock. Under an election that currently may be available, the Fund
generally would be required to include in its gross income its share of the
earnings of a PFIC on a current basis, regardless of whether any distributions
are received from the PFIC. If this election is made, the special rules,
discussed above, relating to the taxation of excess distributions, would not
apply. Alternatively, the Fund may elect to mark-to-market its PFIC stock,
resulting in the stock being treated as sold at fair market value on the last
business day of each taxable year. Any resulting gain would be reported as
ordinary income, and any resulting loss would not be recognized. If this
election were made, the special rules described above with respect to excess
distributions would still apply. The Fund's intention to qualify annually as a
regulated investment company may limit its elections with respect to PFIC
stock.
Because the application of the PFIC rules may affect, among other
things, the character of gains, the amount of gain or loss and the timing of
the recognition of income with respect to PFIC stock, as well as subject the
Fund itself to tax on certain income from PFIC stock, the amount that 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 invest in PFIC stock.
If the Fund retains net capital gains for reinvestment, 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 gains, 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
16
<PAGE> 41
liabilities, and would be entitled to an increase in their basis in the Fund
shares.
DISTRIBUTIONS. Dividends paid out of the Fund's investment company
taxable income will be taxable to a stockholder as ordinary income.
Distributions of net capital gains, if any, designated by the Fund as capital
gain dividends, are taxable as long-term capital gains, regardless of how long
the stockholder has held the Fund's shares, and are not eligible for the
dividends received deduction.
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 deductions. The dividends received deduction may be
further reduced if the shares of the Fund are debt-financed or are deemed to
have been held less than 46 days.
All distributions are taxable to the stockholder whether reinvested in
additional shares of the Fund 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, futures contracts and
forward foreign currency contracts 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"); however, foreign currency gains
or losses (as discussed below) arising from certain section 1256 contracts may
be treated as ordinary income or loss. Also, section 1256 contracts held by the
Fund at the end of each taxable year 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.
17
<PAGE> 42
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 defer the recognition of losses and/or 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.
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, futures and forward
contracts.
FOREIGN CURRENCY GAINS AND LOSSES. Under the Code, gains or losses
attributable to fluctuations in foreign currency exchange rates which occur
between the time the Fund accrues interest or other receivables or accrues
expenses or other liabilities denominated in a foreign currency and the time
the Fund actually collects such receivables or pays such liabilities generally
are treated as ordinary income or ordinary loss. Similarly, on the disposition
of debt securities denominated in a foreign currency and on the disposition of
certain options, futures and forward contracts, gains or losses attributable to
fluctuations in the value of foreign currency between the date of acquisition
of the security or contract and the date of disposition also are treated as
ordinary gain or loss. These gains or losses, referred to under the Code as
"section 988" gains or losses, may increase or decrease the amount of the
Fund's investment company taxable income to be distributed to its stockholders
as ordinary income.
DISPOSITION OF SHARES. Upon a taxable disposition (by redemption,
repurchase, sale or exchange) of Fund shares, a stockholder may realize a
taxable gain or loss, depending upon his basis in his shares. That gain or loss
will be a capital gain or loss if the shares are capital assets in the
stockholder's hands, and generally will be long-term or short-term depending
upon the stockholder's holding period for the shares. Any loss realized by a
stockholder on a disposition of Fund shares held by the stockholder for six
months or less will be treated as a long-term capital loss to the extent of any
distributions of capital gain dividends received by the stockholder with
respect to such shares. Any 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 date of disposition of the shares. In such a case,
the basis of the shares acquired will be adjusted to reflect the disallowed
loss.
Under certain circumstances, the sales charge incurred in acquiring
shares of the Fund may not be taken into account in determining the gain or
loss on the disposition of those shares. This rule applies where shares of the
Fund are exchanged within 90 days after the date they were purchased and new
shares of a Capstone Fund or another regulated investment company are acquired
without a sales charge or at a reduced sales charge. In that case, the gain or
loss recognized on the exchange will be determined by excluding from the tax
basis of the shares exchanged all or a portion of the sales charge incurred in
acquiring those shares. This exclusion applies to the extent that the otherwise
applicable sales charge with respect to the newly acquired shares is reduced as
a result of having incurred a sales charge initially. The portion of the sales
charge affected by this rule will be treated as a sales charge for the new
shares.
18
<PAGE> 43
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.
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 Fund 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.
FOREIGN TAXES. Income received by the Fund from sources within foreign
countries may be subject to withholding and other taxes imposed by such
countries. Tax conventions between certain countries and the United States may
reduce or eliminate these taxes. Under the current income tax treaty between
the United States and Japan, the withholding tax imposed by Japan on dividends
from Japanese sources is generally 15% (although a 10% rate may be applicable
in some circumstances) and the withholding tax on interest from Japanese
sources is generally 10%. Japan also imposes a tax on the transfer of
securities. It is impossible to determine in advance the amount of foreign
taxes that will be imposed on the Fund.
If more than 50% of the value of the Fund's total assets at the close
of its taxable year consists of securities of foreign corporations, the Fund
will be eligible and intends to elect to "pass-through" to the Fund's
stockholders the amount of foreign income and similar taxes paid by the Fund.
Pursuant to this election, a stockholder will be required to include in gross
income (in addition to taxable dividends actually received) his pro rata share
of the foreign income and similar taxes paid by the Fund, and generally will be
entitled either to deduct (as an itemized deduction) his pro rata share of such
foreign taxes in computing his taxable income or to use it (subject to
limitations) as a foreign tax credit against his U.S. Federal income tax
liability. No deduction for foreign taxes may be claimed by a stockholder who
does not itemize deductions. Each stockholder will be notified within 60 days
after the close of the Fund's taxable year whether the foreign taxes paid by
the Fund will "pass-through" for that year and, if so, such notification will
designate (a) the stockholder's portion of the foreign taxes paid to foreign
countries and (b) the portion of the dividend which represents income derived
from sources outside the U.S.
Generally, a credit for foreign taxes is subject to the limitation
that it may not exceed the stockholder's U.S. Federal income tax attributable
to his total foreign source taxable income. For this purpose, if the
pass-through election is made, the source of the Fund's income flows through to
its stockholders. With respect to the Fund, gains from the sale of securities
will be treated as derived from U.S. sources and certain currency fluctuation
gains, including fluctuation gains from foreign currency denominated debt
securities, receivables and payables, will be treated as derived from U.S.
sources. The limitation on the foreign tax credit is applied separately to
foreign source passive income, such as dividends received from the Fund.
Stockholders may be unable to claim a credit for the full amount of their
proportionate share of foreign taxes paid by the Fund. In addition, the foreign
tax credit may offset only 90% of the alternative minimum tax (prior to
reduction for the "regular" tax liability for the year) imposed on corporations
and individuals. In addition, foreign taxes may not be deducted by a
stockholder that is an individual in computing alternative minimum taxable
income.
19
<PAGE> 44
The foregoing is only a general description of the foreign tax credit
under current law. Because application of the credit depends on the particular
circumstances of each stockholder, stockholders are advised to consult their
own tax advisers.
FOREIGN STOCKHOLDERS - U.S. FEDERAL INCOME TAXATION. U.S. Federal
income taxation of a stockholder who, as to the United States, is a
non-resident alien individual, a foreign trust or estate, a foreign
corporation, or a foreign partnership (a "foreign stockholder"), depends on
whether the income from the Fund is "effectively connected" with a U.S. trade
or business carried on by such stockholder, as discussed generally below.
Special U.S. Federal income tax rules that differ from those described below
may apply to foreign persons who invest in the Fund. For example, the tax
consequences to a foreign stockholder entitled to claim the benefits of an
applicable tax treaty may be different from those described below. Foreign
stockholders are advised to consult their own tax advisers with respect to the
particular tax consequences to them of an investment in the Fund.
FOREIGN STOCKHOLDERS - INCOME NOT EFFECTIVELY CONNECTED. If the income
from the Fund is not effectively connected with a U.S. trade or business
carried on by the stockholder, distributions of investment company taxable
income generally will be subject to a U.S. Federal withholding tax of 30% (or
lower treaty rate) on the gross amount of the distribution. Foreign
stockholders may also be subject to the U.S. Federal withholding tax on the
income resulting from any election by the Fund to treat foreign taxes paid by
it as paid by its stockholders, but foreign stockholders will not be able to
claim a credit or deduction for the foreign taxes treated as having been paid
by them.
Capital gains realized directly by foreign stockholders upon the sale
of Fund shares and distributions of net capital gains, as well as amounts
retained by the Fund which are designated as undistributed capital gains,
generally will not be subject to U.S. Federal income tax unless the foreign
stockholder is a non-resident alien individual and is physically present in the
United States for more than 182 days during the taxable year. However, this
rule only applies in exceptional cases because any individual present in the
United States for more than 182 days during the taxable year generally is
treated as a resident for U.S. Federal income tax purposes and is taxable on
his worldwide income at the graduated rates applicable to U.S. citizens, rather
than the 30% U.S. Federal withholding tax. In the case of certain foreign
stockholders, the Fund may be required to withhold U.S. Federal income tax at a
rate of 31% of distributions of net capital gains and of the gross proceeds
from a redemption of Fund shares unless the stockholder furnishes the Fund with
certifications regarding the stockholder's foreign status.
See "Backup Withholding."
FOREIGN STOCKHOLDERS - INCOME EFFECTIVELY CONNECTED. If the income
from the Fund is effectively connected with a U.S. trade or business carried on
by a foreign stockholder, then all distributions and any gains realized upon
the disposition of Fund shares will be subject to U.S. Federal income tax at
the graduated rates applicable to U.S. citizens and domestic corporations.
Foreign stockholders may also be subject to the branch profits tax.
FOREIGN STOCKHOLDERS - ESTATE TAX. Foreign individuals generally are
subject to U.S. Federal estate tax on their U.S. situs property, such as shares
of the Fund, that they own at the time of their death. Certain credits against
such tax and relief under applicable tax treaties may be available.
OTHER TAXATION. Distributions and redemption proceeds with respect to
the Fund also may be subject to additional state, local and foreign taxes,
depending upon each stockholder's particular
20
<PAGE> 45
situation. Stockholders are advised to consult their 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 such persons
which, to the knowledge of the Fund's Board of Trustees, owned more than five
percent of the Fund's shares as of February 20, 1997:
<TABLE>
<CAPTION>
Name and Address Percent of Ownership
---------------- --------------------
<S> <C>
Nikko Capital Management Company (USA), Inc. 23.9%
489 Fifth Avenue, 6th Floor
New York, NY 10017
SMC Pneumatics, Inc. 22.8%
3011 N. Franklin Rd.
Indianapolis, IN 46226-6308
Smith Barney Shearson 8.7%
333 W. 34th Street, 7th Floor
New York, NY 10001
</TABLE>
OTHER INFORMATION
CUSTODY OF ASSETS. All securities owned by the Fund and cash from the
sale of securities in the Fund's investment portfolio are held by The Bank of
Tokyo Trust Company, as custodian, either directly or pursuant to a Sub-Custody
Agreement with The Bank of Tokyo, Ltd. in Tokyo.
STOCKHOLDER REPORTS. Semi-annual reports are furnished to
stockholders, and annually the financial statements in such reports are audited
by the Fund's independent accountants.
INDEPENDENT ACCOUNTANTS. Tait, Weller & Baker, Two Penn Center Plaza,
Suite 700, Philadelphia, PA 19102-1707, the independent accountants for the
Fund, performs annual audits of the Fund's financial statements.
LEGAL COUNSEL. Dechert Price & Rhoads, 1500 K Street, N.W., Washington,
DC 20005, is legal counsel to the Fund.
21
<PAGE> 46
CAPSTONE NIKKO JAPAN FUND
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Shareholders and Board of Trustees
of Capstone Nikko Japan Fund
We have audited the accompanying statement of assets and liabilities
of Capstone Nikko Japan Fund, including the portfolio of investments, as of
October 31, 1996 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 financial highlights for each of the five 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
audits.
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 from material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosure in
the financial statements. Our procedures included confirmation of securities
owned as of October 31, 1996 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 Nikko Japan Fund as of October 31, 1996, the results of
its operations, changes in its net assets and financial highlights for each of
the years presented, in conformity with generally accepted accounting
principles.
Tait, Weller & Baker
Philadelphia, Pennsylvania
November 18, 1996
22
<PAGE> 47
CAPSTONE NIKKO JAPAN FUND
PORTFOLIO OF INVESTMENTS - OCTOBER 31, 1996
<TABLE>
<CAPTION>
MARKET
VALUE PERCENTAGE OF
COMMON STOCKS - 96.82% SHARES (NOTE 1-A) NET ASSETS
- ---------------------- ---------- ---------- -------------
<S> <C> <C> <C>
BANKING (3.32%)
Industrial Bank of Japan . . . . . . . . . . . . . . . . . . . . 2,000 $ 39,866 1.34%
Mitsubishi Trust Bank . . . . . . . . . . . . . . . . . . . . . . 4,000 59,009 1.98
-------- ----
98,875 3.32
CHEMICALS (4.63%)
Asahi Organic Chemical Industry . . . . . . . . . . . . . . . . . 6,000 40,569 1.36
Daicel Chemical Industries.. . . . . . . . . . . . . . . . . . . 10,000 50,579 1.70
Konica Corporation . . . . . . . . . . . . . . . . . . . . . . . 7,000 46,777 1.57
-------- ----
137,925 4.63
COMMUNICATIONS EQUIPMENT (5.41%)
Kokusai Corporation . . . . . . . . . . . . . . . . . . . . . . . 3,000 47,682 1.60
Matsushita Electric Works . . . . . . . . . . . . . . . . . . . . 3,000 47,945 1.61
NEC Corporation . . . . . . . . . . . . . . . . . . . . . . . . . 6,000 65,332 2.20
-------- ----
160,959 5.41
CONSUMER ELECTRONICS (4.75%)
Alps Electric Co., Ltd (a) . . . . . . . . . . . . . . . . . . . 5,000 61,907 2.08
Tamura Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000 29,636 1.00
Uniden Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . 3,000 49,789 1.67
-------- ----
141,332 4.75
FOOD & BEVERAGES (14.28%)
Asahi Chemical . . . . . . . . . . . . . . . . . . . . . . . . . 8,000 49,877 1.68
Daio Paper Corp. . . . . . . . . . . . . . . . . . . . . . . . . 3,450 35,748 1.20
Kandenko Co., Ltd . . . . . . . . . . . . . . . . . . . . . . . . 3,300 35,643 1.20
Kuraray Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . 4,000 38,637 1.30
Marudai Foods Co., Ltd . . . . . . . . . . . . . . . . . . . . . 6,000 36,934 1.24
Misawa Home . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000 40,481 1.36
Nippon Hido . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,000 41,886 1.41
Sapporo Breweries . . . . . . . . . . . . . . . . . . . . . . . . 6,000 52,529 1.77
SXL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000 43,555 1.47
Taisei Corp . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,000 49,175 1.65
-------- -----
424,465 14.28
INDUSTRIAL MACHINERY (5.24%)
Matsushita Refrigeration . . . . . . . . . . . . . . . . . . . . 5,000 34,466 1.16
Tadano. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,000 51,581 1.73
Torishima Pump Mfg. . . . . . . . . . . . . . . . . . . . . . . . 4,000 32,315 1.09
Toshiba Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . 6,000 37,513 1.26
-------- ----
155,875 5.24
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
23
<PAGE> 48
CAPSTONE NIKKO JAPAN FUND
PORTFOLIO OF INVESTMENTS - OCTOBER 31, 1996
<TABLE>
<CAPTION>
MARKET
VALUE PERCENTAGE OF
SHARES (NOTE 1-A) NET ASSETS
---------- ---------- ------------
IRON/STEEL (3.56%)
<S> <C> <C> <C>
Mory Industries . . . . . . . . . . . . . . . . . . . . . . . . . 8,000 43,063 1.45
NKK Corp (a) . . . . . . . . . . . . . . . . . . . . . . . . . . 25,000 62,785 2.11
-------- -----
105,848 3.56
MACHINERY DIVERSIFIED (1.46%)
Rheon Automatic Machinery . . . . . . . . . . . . . . . . . . . . 5,000 $ 43,467 1.46%
MASS-MEDIA/COMMUNICATIONS (1.45%)
Kokusai Denshin Denwa . . . . . . . . . . . . . . . . . . . . . . 500 43,247 1.45
MASS-SALES STORES & FOOD SERVICES (2.93%)
Life Corporation. . . . . . . . . . . . . . . . . . . . . . . . . 6,000 49,526 1.67
Parco . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,000 37,583 1.26
-------- ----
87,109 2.93
MISCELLANEOUS ELECTRICAL PRODUCTS (10.92%)
Fanuc, Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,500 48,077 1.62
Ishikawajima-Harima Hvy. Ind. . . . . . . . . . . . . . . . . . . 15,000 69,152 2.33
Matsushita Electric Works . . . . . . . . . . . . . . . . . . . . 5,000 48,296 1.62
Nippon Chemi-Con Corp. . . . . . . . . . . . . . . . . . . . . . 6,000 35,090 1.18
Nitto Denko Corporation . . . . . . . . . . . . . . . . . . . . . 4,000 59,361 2.00
Taiyo Yuden Co., Ltd . . . . . . . . . . . . . . . . . . . . . . 5,000 64,542 2.17
-------- -----
324,518 10.92
MISCELLANEOUS FINANCING (6.38%)
Daiwa Securities Co., Ltd . . . . . . . . . . . . . . . . . . . . 4,000 43,203 1.45
Monura Securities Co., Ltd . . . . . . . . . . . . . . . . . . . 3,000 49,526 1.67
Nippon Shinpan Co . . . . . . . . . . . . . . . . . . . . . . . . 7,000 42,352 1.42
Tokio Marine & Fire . . . . . . . . . . . . . . . . . . . . . . . 5,000 54,882 1.84
-------- ----
189,963 6.38
MOTOR VEHICLES (5.88%)
Fuji Heavy Industries . . . . . . . . . . . . . . . . . . . . . . 14,000 65,157 2.19
Mitsubishi Motors Corp. . . . . . . . . . . . . . . . . . . . . . 7,000 57,903 1.95
Shinmaywa Ind. . . . . . . . . . . . . . . . . . . . . . . . . . 6,000 51,897 1.74
-------- ----
174,957 5.88
PETROLEUM PRODUCTS (1.53%)
Nippon Oil Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . 8,000 45,662 1.53
PHARMACEUTICALS (3.76%)
Takeda Chemicals, Inc. . . . . . . . . . . . . . . . . . . . . . 2,000 34,247 1.15
Tanabe Seiyaku Co., Ltd . . . . . . . . . . . . . . . . . . . . . 5,000 37,276 1.25
Yamanouchi Pharmaceuticals. . . . . . . . . . . . . . . . . . . . 2,000 40,569 1.36
-------- ----
112,092 3.76
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
24
<PAGE> 49
CAPSTONE NIKKO JAPAN FUND
PORTFOLIO OF INVESTMENTS - OCTOBER 31, 1996
<TABLE>
<CAPTION>
MARKET
VALUE PERCENTAGE OF
SHARES (NOTE 1-A) NET ASSETS
---------- ---------- -------------
<S> <C> <C> <C>
PHARMACEUTICALS (3.76%)
Takeda Chemicals, Inc. . . . . . . . . . . . . . . . . . . . . . 2,000 34,247 1.15
Tanabe Seiyaku Co., Ltd . . . . . . . . . . . . . . . . . . . . . 5,000 37,276 1.25
Yamanouchi Pharmaceuticals. . . . . . . . . . . . . . . . . . . . 2,000 40,569 1.36
-------- -----
112,092 3.76
PRECISION MACHINERY (4.61%)
Kyodo Printing . . . . . . . . . . . . . . . . . . . . . . . . . 3,000 31,085 1.05
NIFCO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,400 47,137 1.58
Shimadzu Corp. . . . . . . . . . . . . . . . . . . . . . . . . . 10,000 58,834 1.98
-------- -----
137,056 4.61
REAL ESTATE (3.77%)
Sumitomo Realty Development . . . . . . . . . . . . . . . . . . . 8,000 $ 58,166 1.96%
Tokyo Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,000 53,741 1.81
-------- -----
111,907 3.77
RETAIL STORES & FOOD SERVICES (7.41%)
Best Denki . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,000 50,580 1.70
Maruetsu . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,000 50,158 1.69
Royal Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . 4,000 72,357 2.43
Seiyo Food Systems, Inc. . . . . . . . . . . . . . . . . . . . . 5,000 47,418 1.59
-------- -----
220,513 7.41
SERVICES (3.32%)
Intec. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,000 56,200 1.89
Kansai Electric Power . . . . . . . . . . . . . . . . . . . . . . 2,020 42,394 1.43
-------- -----
98,594 3.32
WIRE & CABLES (2.21%)
Sumitomo Electric Inc. . . . . . . . . . . . . . . . . . . . . . 5,000 65,859 2.21
TOTAL INVESTMENTS (COST $3,029,109) . . . . . . . . . . . . 2,880,223 96.82
OTHER ASSETS, LESS LIABILITIES . . . . . . . . . . . . . . . 94,623 3.18
---------- -------
NET ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . $2,974,846 100.00%
========== =======
</TABLE>
(a) Non-income producing security
FORWARD CURRENCY CONTRACT OUTSTANDING - OCTOBER 31, 1996
<TABLE>
<CAPTION>
Face Value Contract Delivery Unrealized
(U. S. Dollars) Price Date Appreciation
--------------- ----------- ---------- ------------
<S> <C> <C> <C> <C>
Japanese Yen (Sell) $3,000,000 108.49 12/26/96 $14,199
========== =======
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
25
<PAGE> 50
CAPSTONE NIKKO JAPAN FUND
STATEMENT OF ASSETS AND LIABILITIES OCTOBER 31, 1996
<TABLE>
<S> <C>
ASSETS:
Investments in securities at market (identified cost $3,029,109)(Note 1-A) . . . . . . . . . . . . . . $ 2,880,223
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,146
Foreign currency holdings - Yen account, at market (Note 1-B) . . . . . . . . . . . . . . . . . . . . . 62,782
Receivables:
Forward currency contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 300,000
Trust shares sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,763
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,517 318,280
----------
Due from affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,691
------------
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,282,122
------------
LIABILITIES:
Forward currency contract payable at market value (proceeds $300,000) . . . . . . . . . . . 285,801
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,475
----------
Total Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 307,276
------------
NET ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,974,846
============
NET ASSET VALUE PER SHARE:
($2,974,846 / 440,359 shares of beneficial interest outstanding) . . . . . . . . . . . . . . . $ 6.76
============
SOURCE OF NET ASSETS:
Paid in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,032,745
Accumulated net realized loss on investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,922,267)
Net unrealized depreciation on investments and foreign currencies . . . . . . . . . . . . . . . . . . . (135,632)
------------
$ 2,974,846
============
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
26
<PAGE> 51
CAPSTONE NIKKO JAPAN FUND
STATEMENT OF OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 1996
<TABLE>
<S> <C>
INVESTMENT INCOME:
Income:
Dividends (net of foreign taxes withheld of $4,151) . . . . . . . . . . . . . . . . . . . . . . . $ 23,520
---------
Expenses:
Advisory fees (Note 2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 13,163
Administration services (Note 2) . . . . . . . . . . . . . . . . . . . . . . . . . . 30,582
Transfer agent fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,523
Professional fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,582
Filing and registration fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,616
Custodian fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,311
Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,750
Distribution fees (Note 2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,226
Trustees' fees and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,696
--------
Total Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 128,449
Less Reimbursements from:
Adviser . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,163
Administrator . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,582 19,745
-------- ---------
Net Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108,704
---------
Net Investment Loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (85,184)
---------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS: (Note 4)
Net realized gain from security transactions . . . . . . . . . . . . . . . . . . . . . . 107,505
Realized loss on conversion of foreign currencies to U.S. dollars . . . . . . . . . . . . (5,557)
---------
Net realized gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101,948
Net unrealized depreciation of investments, forward currency contracts and foreign currencies . . . . . (29,017)
---------
Net realized and unrealized gain on investments, forward currency contracts and foreign currencies 72,931
---------
Net decrease in net assets resulting from operations . . . . . . . . . . . . . . . . . . . . . $ (12,253)
=========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
27
<PAGE> 52
CAPSTONE NIKKO JAPAN FUND
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
--------------------------------------------
1996 1995
--------------------------------------------
<S> <C> <C>
OPERATIONS:
Net investment loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (85,184) $ (90,106)
Net realized gain on investments and foreign currencies . . . . . . . . . . 101,948 288,874
Net unrealized depreciation of investments, forward currency contracts and
foreign currencies . . . . . . . . . . . . . . . . . . . . . . . . . . . (29,017) (736,415)
----------- -----------
Net decrease in net assets resulting from operations . . . . . . . . . . . . . (12,253) (537,647)
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . (24,587) --
TRUST SHARE TRANSACTIONS:
Increase (decrease) in net assets resulting from Trust share transactions
(Note 3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103,784 (38,119)
---------- ----------
Net increase (decrease) in net assets . . . . . . . . . . . . . . . . 66,944 (575,766)
NET ASSETS:
Beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,907,902 3,483,668
---------- ----------
End of year (including net investment deficit of $0 and $90,106, respectively) $2,974,846 $2,907,902
========== ==========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
NOTES TO FINANCIAL STATEMENTS - OCTOBER 31, 1996
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Capstone Nikko Japan Fund (the "Fund") is one of two series of beneficial
interest of Capstone International Series Trust (the "Trust") which is
registered under the Investment Company Act of 1940, as amended (the "Act"), as
a diversified, open-end management investment company. The Fund's investment
objective is to seek an average annual total return from a portfolio of shares
in Japanese companies which exceeds the average annual total return of the
First Section of the Tokyo Stock Exchange as measured by the Tokyo Stock Price
Index. The following is a summary of significant accounting policies followed
by the Fund in the preparation of its financial statements.
A) SECURITY VALUATION - Portfolio securities which are traded on Japanese
securities exchanges are valued at the last sales price on the valuation date
or, if there is no recent last sales price available, at the last current bid
quotation. A security which is listed or traded on more than one exchange is
valued at the quotation on the exchange determined to be the primary market for
such security or contract. All other equity securities not so traded are
valued at the last current bid quotation on the valuation date. In the absence
of any applicable price, securities will be valued at a fair value as
determined in good faith in accordance with procedures established by the
trustees.
B) CURRENCY TRANSLATION - For purposes of determining the Fund's net asset
value, all assets and liabilities initially expressed in foreign currency
values are converted into U.S. dollar values at the prevailing market rate at
14:00 GMT on each U.S. business day, as established by the Board of Trustees.
The cost of securities is determined by using historical exchange rates.
Income and expenses are translated at approximate rates prevailing when
accrued or incurred. The Fund does not isolate that portion of gains and
losses on investments which is due to changes in foreign exchange rates from
that which is due to changes in the market prices of the investments. Such
fluctuations are included with the net realized and unrealized gains and
losses from investments.
C) ACCOUNTING FOR INVESTMENTS - Security transactions are accounted for on the
trade date. Realized gains and losses on security transactions are determined
based on the identified cost method. Dividend income and other distributions
are recorded on the ex-dividend
29
<PAGE> 53
CAPSTONE NIKKO JAPAN FUND
date. Interest income and expenses are accrued daily.
D) FEDERAL INCOME TAXES - No provision for Federal income taxes has been made
since it is the Fund's policy to continue to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable income and realized capital gains in excess of
any capital loss carryovers to its shareholders. At October 31, 1996, the Fund
had capital loss carryovers of $2,908,068 of which $1,413,422 expires in 1999
and $1,494,646 expires in 2000. Under the United States-Japan tax treaty,
Japan imposes a withholding tax of 15% on the dividends received. There is
currently no Japanese tax on capital gains.
E) DISTRIBUTIONS TO SHAREHOLDERS - The Fund distributes its net investment
income, if any, and net realized gains (net of any capital loss carryovers)
annually. Income and capital gain distributions are determined in accordance
with income tax regulations which may differ from generally accepted accounting
principles. These differences are primarily due to differing treatments for
foreign currency transactions and net operating losses.
F) USE OF ESTIMATES - The preparation of the financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenue and expense during the reporting period. Actual results could differ
from those estimates.
NOTE 2 - INVESTMENT ADVISORY FEES, AND OTHER TRANSACTIONS WITH AFFILIATES
The Investment Adviser, Nikko Capital Management (USA), Inc., is paid a
fee, calculated daily and paid quarterly, equal to an annual rate of 0.40% of
the average net assets of the Fund. The Administrator, Capstone Asset
Management Company, is paid a fee, calculated daily and paid quarterly, equal
to an annual rate of 0.20% of the Fund's average daily net assets. The
Administrator is also paid a monthly fee of $2,000 representing the cost of
certain accounting and bookkeeping services. This fee, which amounted to
$24,000 for the year ended October 31, 1996, is not subject to the expense
limitation discussed below.
The Adviser and Administrator have agreed to reduce their fees if the
ordinary business expenses of the Fund exceed any expense limitation applicable
to the Fund pursuant to the laws or regulations of any state. Such
reimbursement shall be shared by the Adviser and the Administrator ratably in
proportion to the fees received by them from the Fund, except that
reimbursement shall not exceed the amount paid to the Adviser and
Administrator, respectively. The most restrictive limitation presently
applicable to the Fund is equal to the sum of 2.5% of the first $30 million of
the Fund's average net assets, 2.0% of the next $70 million of the Fund's
average net assets and 1.5% of the Fund's average net assets in excess of $100
million. For the year ended October 31, 1996, the Adviser and the
Administrator reimbursed the Fund $13,163 and $6,582, respectively.
Capstone Asset Planning Company ("CAPCO") serves as Distributor and
Underwriter to the Fund. Effective August 21, 1995, the 4.75% front-end sales
load applicable to sales for Fund shares was eliminated. CAPCO is an affiliate
of the Administrator, and both are wholly-owned subsidiaries of Capstone
Financial Services, Inc. ("CFS").
The Fund has adopted a Service and Distribution Plan (the "Plan") pursuant
to Rule 12b-1 under the Act whereby Fund assets are used to reimburse CAPCO for
costs and expenses incurred with the distribution and marketing of shares of
the Fund and servicing of the Fund shareholders. Distribution and marketing
expenses include, among other things, printing of prospectuses, advertising
literature and costs of personnel involved with the promotion and distribution
of the Fund's shares. Under the Plan, the Fund pays CAPCO an amount computed
at an annual rate of up to 0.25% of the Fund's average net assets (including
reinvested dividends paid with respect to those assets). Of this amount, CAPCO
may reallocate to securities dealers (which may include CAPCO itself) and other
financial institutions and organizations (collectively, "Service
Organizations") amounts based on the Fund's average net assets owned by
stockholders for whom the Service Organizations have a servicing relationship.
The Plan permits CAPCO to carry forward for a
maximum of twelve months distribution expenses covered by the Plan for which
CAPCO has not yet received reimbursement. For the year ended October 31, 1996,
the Fund paid $8,226 in 12b-1 fees, of which approximately 6% was paid to
Service Organizations other than CAPCO.
Certain officers and trustees of the Trust and the Fund, who are also
officers and directors of the Adviser, the Administrator, CAPCO or CFS,
received no compensation from the Trust. During the year ended October 31,
1996, trustees of the Trust who are not "interested persons" received trustees'
fees of $4,250.
Commissions earned by The Nikko Securities Co. International, Inc., (an
affiliate of the Adviser), on investment transactions for the year ended
October 31, 1996 were $2,987.
29
<PAGE> 54
CAPSTONE NIKKO JAPAN FUND
NOTE 3 -TRUST SHARES
Transactions in Trust shares were as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED OCTOBER 31,
------------------------------------------------------------
1996 1995
----------------------------- ----------------------------
SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------
<S> <C> <C> <C> <C>
Shares sold . . . . . . . . . . . . . . . . . . . . . . . 199,045 $ 1,474,183 121,924 $ 850,114
Shares issued to shareholders in reinvestment of
dividends . . . . . . . . . . . . . . . . . . . . . . . 3,133 22,966 -- --
------- ----------- ------- ---------
202,178 1,497,149 121,924 850,114
Shares redeemed . . . . . . . . . . . . . . . . . . . . . (191,828) (1,393,365) (125,481) (888,233)
-------- ----------- -------- ---------
Net increase (decrease) . . . . . . . . . . . . . . 10,350 $ 103,784 (3,557) $ (38,119)
======== =========== ======== =========
</TABLE>
NOTE 4 - SECURITIES TRANSACTIONS
Purchases and sales of securities, other than U.S. Government obligations,
aggregated $1,493,201 and $1,566,462, respectively. At October 31, 1996, the
cost of investments for Federal income tax purposes was $3,029,109.
Accumulated net unrealized depreciation on investments was $148,886 consisting
of $173,560 gross unrealized appreciation and $322,446 gross unrealized
depreciation.
30
<PAGE> 55
CAPSTONE NIKKO JAPAN FUND
FINANCIAL HIGHLIGHTS
The following table sets forth the per share operating performance data for
a share of capital stock outstanding, total return, ratios to average net
assets and other supplemental data for each year indicated. This information
has been derived from information provided in the Fund's financial statements
which have been examined by Tait, Weller & Baker, independent certified public
accountants. The Fund's Annual Report contains additional performance
information and is available free of charge by calling the Fund at
1-800-262-6631.
<TABLE>
<CAPTION>
Year Ended October 31,
----------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991(1) 1990 1989(2)
---- ---- ---- ---- ---- ------- ---- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE DATA
- --------------
Net asset value at beginning of year . $ 6.96 $8.03 $6.99 $4.89 $7.46 $7.96 $10.62 $10.00
------ ----- ----- ----- ----- ----- ------ ------
Income from investment operations:
Net investment income(loss) (.19) (.21) (.21) (.20) (.23) (.14) (.09) .01
Net realized and unrealized gain(loss)
on investments . . . . . . . . . . . .25 (1.06) 1.25 2.30 (2.34) (.36) (2.38) .61
------ ----- ----- ----- ----- ----- ------ ------
Total from investment operations .06 (1.27) 1.04 2.10 (2.57) (.50) (2.47) .62
------ ----- ----- ----- ----- ----- ------ ------
Less distributions from net realized gain on
investments . . . . . . . . . . . .06 -- -- -- -- -- .19 --
------ ----- ----- ----- ----- ----- ------ ------
Net asset value at end of year . . . . $6.76 $6.76 $8.03 $6.99 $4.89 $7.46 $ 7.96 $10.62
====== ===== ===== ===== ===== ===== ====== ======
TOTAL RETURN(3) . . . . . . . . . . . . . .75% (15.82)% 14.88% 42.94% (34.45)% (6.28)% (23.73)% 6.20%
- ------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net assets at end of year (in thousands) $2,975 $2,908 $3,484 $3,096 $2,130 $3,552 $7,801 $19,647
Ratios to average net assets:
Expenses . . . . . . . . . . . . . . . 3.30% 3.61% 3.25% 4.26% 4.38% 2.74% 1.53% 1.36%(4)
Net investment income(loss) . . . . . (2.59)% (2.93)% (2.62)% (3.54)% (3.42)% (2.01)% (.81)% .32%(4)
Ratios to average net assets, prior to
reimbursement of expenses:
Expenses . . . . . . . . . . . . . . . 3.90% 4.21% 3.85% 4.86% 4.98% 3.07% .-- .--
Net investment income(loss) . . . . (3.19)% (3.53)% (3.22)% (4.14)% (4.02)% (2.34)% .-- .--
Portfolio turnover rate . . . . . . . . . 47% 27% 57% 42% 112% 24% 39% 6%
Average commission rate(5)
(per share of security) . . . . . . . $0.0864 N/A N/A N/A N/A N/A N/A N/A
</TABLE>
______________
(1) Based on average month-end shares outstanding.
(2) For the period July 10, 1989 ( commencement of operations) to October 31,
1989.
(3) Calculated without sales charge.
(4) Annualized.
(5) Average commission rate (per share of security) as required by amended
disclosure requirements effective September 1, 1995.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
31
