<PAGE> 1
REGISTRATION NO. 33-6867
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 / X /
Pre-Effective Amendment No. / /
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Post-Effective Amendment No. 26 / X /
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and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 / X /
Capstone International Series Trust
on behalf of its series, Capstone Nikko Japan Fund
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(Exact Name of Registrant as Specified in Charter)
5847 San Felipe, Suite 4100, Houston, Texas 77057
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (713) 260-9000
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Allan S. Mostoff, Esq., Dechert Price & Rhoads
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1500 K Street, N.C., Suite 500, Washington, DC 20005
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(Name and Address of Agent for Service)
It is proposed that this filing will become effective (check appropriate box)
/X / immediately upon filing pursuant to paragraph (b).
/ / on pursuant to paragraph (b).
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/ / 60 days after filing pursuant to paragraph (a).
/ / on (date) pursuant to paragraph (a) of rule 485.
The Registrant has filed with the Securities and Exchange Commission a
declaration pursuant to Rule 24f-2 under the Investment Company Act of 1940,
and:
/X / filed the notice required by that Rule on December 27, 1996; or
/ / intends to file the notice required by that Rule on or about
; or
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/ / during the most recent fiscal year did not sell any securities
pursuant to Rule 24f-2 under the Investment Company Act of 1940,
and, pursuant to Rule 24f-2(b)(2), need not file the Notice.
<PAGE> 2
CAPSTONE INTERNATIONAL SERIES TRUST
CAPSTONE NIKKO JAPAN FUND
CROSS REFERENCE SHEET
BETWEEN
ITEMS OF FORM N-1A AND PROSPECTUS
(PART A TO REGISTRATION STATEMENT NO. 33-6867)
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Item
Number Form N-1A Heading Caption in Prospectus
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1. Cover Page Prospectus Cover Page
2. Synopsis Prospectus Summary
3. Condensed Financial Information Financial Highlights
4. General Description of Registrant Investment Objective and Policies; Risk Factors; Investment
Restrictions; Management of the Fund; General Information
5. Management of the Fund Management of the Fund
6. Capital Stock and Other Securities General Information; Distributions and Taxes
7. Purchase of Securities Being Offered Determination of Net Asset Value; Purchasing Shares
8. Redemption or Repurchase Redemption and Repurchase of Shares
9. Pending Legal Proceedings Inapplicable
</TABLE>
<PAGE> 3
CAPSTONE INTERNATIONAL SERIES TRUST
CAPSTONE NIKKO JAPAN FUND
CROSS REFERENCE SHEET
BETWEEN
ITEMS OF FORM N-1A AND THE
STATEMENT OF ADDITIONAL INFORMATION
(PART B TO REGISTRATION STATEMENT NO. 33-6867)
<TABLE>
<CAPTION>
Item Caption in Statement of
Number Form N-1A Heading Additional Information
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<S> <C> <C>
10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. General Information and History General Information
13. Investment Objectives and Policies Investment Practices and Restrictions
14. Management of the Fund Trustees and Executive Officers
15. Control Persons and Principal Control Persons and Principal Holders of
Holders of Securities Securities
16. Investment Advisory and Other Investment Advisory Agreement;
Services Administration Agreement; Expenses; Other Information
17. Brokerage Allocation Portfolio Transactions and Brokerage
18. Capital Stock and Other Securities Inapplicable
19. Purchase, Redemption and Pricing of Determination of Net Asset Value; How to Buy
Securities Being Offered and Redeem Shares
20. Tax Status Taxes
21. Underwriter Distributor
22. Calculation of Performance Data Performance Information
23. Financial Statements Financial Statements
</TABLE>
<PAGE> 4
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> 5
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Investment Objective and Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Investment Restrictions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Performance Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Management of the Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Purchasing Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Distributions and Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Redemption and Repurchase of Shares . . . . . . . . . . . . . . . . . . . . . . . . . 18
Determination of Net Asset Value . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Portfolio Transactions and Brokerage . . . . . . . . . . . . . . . . . . . . . . . . . 21
Stockholder Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
General Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
</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> 6
CAPSTONE NIKKO JAPAN FUND
PROSPECTUS SUMMARY
<TABLE>
<CAPTION>
<S> <C>
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 23)
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 8)
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 8)
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 11).
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 13)
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
accounting, bookkeeping and pricing services it performs for the Fund. (see page
14)
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 18)
</TABLE>
3
<PAGE> 7
<TABLE>
<S> <C>
Distributor and Offering . . . Shares of the Fund are continuously offered for sale through the
Price 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 16)
Minimum Purchase . . . . . . . The minimum initial investment is $200, except for continuous investment plans, and
there is no minimum for subsequent purchases. (see page 16)
Redemption . . . . . . . . . . Shares of the Fund are redeemed at the next determined net asset value, without
charge. (see page 18)
</TABLE>
4
<PAGE> 8
FUND EXPENSES
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<S> <C>
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price) 0%
Maximum Sales Load Imposed on Reinvested
Dividends (as a percentage of offering price) 0%
Deferred Sales Load (as a percentage of
original purchase price or redemption of
proceeds, as applicable) 0%
Redemption Fees (as a percentage of amount
redeemed, if applicable) 0%
Exchange Fee 0%
</TABLE>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
<TABLE>
<S> <C>
Management and Administrative Fees 0.00%
(After expense 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").
5
<PAGE> 9
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.
6
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FINANCIAL HIGHLIGHTS
The following table sets forth the per share operating performance
data for a share of capital stock outstanding, total return, ratios to average
net assets and other supplemental data for each year indicated. This
information has been derived from information provided in the Fund's financial
statements which have been 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.
7
<PAGE> 11
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 and to
8
<PAGE> 12
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.
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
9
<PAGE> 13
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.
10
<PAGE> 14
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 etremely 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, we further expect 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, we believe 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 we believe foreign investors will also re-evaluate Japanese
stocks as the above-mentioned issues become better understood. Therefore, we
think that the Japanese stock market will rebound steadily in 1997. We will
continue to manage the Fund using the Return Reversal Strategy which, in the
opnion of the Adviser, is effective in selecting underperforming stocks with
good fundamental values in the recovery phase of Japan's economic growth.
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<PAGE> 15
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.
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<PAGE> 16
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 Manager of the Fund in March 1994.
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<PAGE> 17
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
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<PAGE> 18
Plan authorizes payment by the Fund of the cost of preparing, printing and
distributing Fund Prospectuses and Statements of Additional Information to
prospective investors and of implementing and operating the Plan.
Under the Plan, payments made to the Distributor may not exceed an
amount computed at an annual rate of 0.25% 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. 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.
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<PAGE> 19
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.
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<PAGE> 20
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.
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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.
REDEMPTION AND REPURCHASE OF SHARES
Generally, stockholders may require the Fund to redeem their shares by
sending a written
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<PAGE> 22
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.
EXPEDITED TELEPHONE REDEMPTION
A stockholder redeeming at least $1,000 of shares (for which
certificates have not been issued),
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<PAGE> 23
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 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
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<PAGE> 24
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:
o Individual Retirement Accounts (for individuals and their
non-employed spouses who wish to make limited tax deductible
contributions to a tax-deferred account for retirement); and
o Simplified Employee Pension Plans.
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
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<PAGE> 25
administrative charge. Any exchange must meet applicable minimum investment
and other 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.
22
<PAGE> 26
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.
23
<PAGE> 27
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.
24
<PAGE> 28
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 ........................................... 9
Investment Advisory Agreement ............................................. 10
Administration Agreement .................................................. 11
Expenses .................................................................. 11
Distributor ............................................................... 12
Portfolio Transactions and Brokerage ...................................... 13
Determination of Net Asset Value .......................................... 15
How to Buy and Redeem Shares .............................................. 15
Taxes ..................................................................... 16
Control Persons and Principal Holders of Securities ....................... 22
Other Information ......................................................... 22
Financial Statements ...................................................... 23
</TABLE>
<PAGE> 29
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
2
<PAGE> 30
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.
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
3
<PAGE> 31
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 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
4
<PAGE> 32
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 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
5
<PAGE> 33
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)
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
6
<PAGE> 34
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;
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
7
<PAGE> 35
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%. 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.
8
<PAGE> 36
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).
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.
- --------------
* Trustee who is an interested person as defined in the Investment
Company Act of 1940.
9
<PAGE> 37
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.
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).
10
<PAGE> 38
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 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
11
<PAGE> 39
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.
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-
12
<PAGE> 40
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
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
13
<PAGE> 41
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, 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
14
<PAGE> 42
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 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
15
<PAGE> 43
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 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
16
<PAGE> 44
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 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.
17
<PAGE> 45
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.
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.
18
<PAGE> 46
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.
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
19
<PAGE> 47
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.
20
<PAGE> 48
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
21
<PAGE> 49
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.
22
<PAGE> 50
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
23
<PAGE> 51
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
24
<PAGE> 52
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
25
<PAGE> 53
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
26
<PAGE> 54
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
27
<PAGE> 55
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
28
<PAGE> 56
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,
29
<PAGE> 57
CAPSTONE NIKKO JAPAN FUND
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 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
30
<PAGE> 58
CAPSTONE NIKKO JAPAN FUND
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.
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.
31
<PAGE> 59
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
32
<PAGE> 60
CAPSTONE INTERNATIONAL SERIES TRUST
CAPSTONE NIKKO JAPAN FUND
OTHER INFORMATION
(PART C TO REGISTRATION STATEMENT NO. 33-6867)
Item 24. Financial Statements and Exhibits
Exhibits not incorporated by reference to a prior filing are
designated by an asterisk; all exhibits not so designated are incorporated
hereby by reference to a prior filing as indicated.
(a) Financial Statements of Capstone Nikko Japan Fund
(included in Parts A and B):
Per Share Data and Ratios for the period ended
October 31, 1996 (Part A) Auditor's Report (Part
B) Statement of Assets and Liabilities at October
31, 1996 (Part B) Portfolio of Investments in
Securities at October 31, 1996 (Part B) Statement
of Operations for the year ended October 31, 1996
(Part B) Statement of Changes in Net Assets for
the period ended October 31, 1996 (Part B) Notes
to Financial Statements (Part B)
(b) Exhibits:
A. Exhibits filed pursuant to Form N-1A
1 Copy of Declaration of Trust as
amended and restated September 29,
1986; Exhibit 1 to Pre-Effective
Amendment No. 1 to Registration No.
33-6867.
1(a) Proposed form of Written Instrument
of the Trustees Amending Name of the
Trust; Exhibit 1(a) to Post-
Effective Amendment No. 2 to
Registration No. 33- 6867.
1(b) Amendment and Restatement to the
Declaration of Trust dated September
19, 1991 to establish and designate
a separate series, New Zealand Fund;
Exhibit 1(b) to Post-Effective
Amendment No. 9 to Registration No.
33-6867.
2(a) Copy of By-Laws; Exhibit 2 to
Pre-Effective Amendment No. 1 to
Registration No. 33-6867.
2(b) Copy of Amendment to By-Laws dated
July 24, 1989; Exhibit 2(b) to Post-
Effective Amendment No. 5 to
Registration No. 33-6867.
3 None.
4(a) Copy of Specimen Certificate of
Beneficial Interest of The
<PAGE> 61
European Fund; Exhibit 4 to
Pre-Effective Amendment No. 1 to
Registration No. 33-6867.
4(b) Copy of Specimen Certificate of
Beneficial Interest of Nikko Japan
Tilt Fund; Exhibit 4 to Post-
Effective Amendment No. 5 to
Registration No. 33-6867.
4(c) Specimen Certificate of Beneficial
Interest of New Zealand Fund;
Exhibit 4(d) to Post-Effective
Amendment No. 9 to Registration No.
33-6867.
5(a) Copy of Investment Advisory
Agreement between Investors
International Series Trust, on
behalf of The European Fund, and CCF
International Finance Corp. dated
September 29, 1986; Exhibit 5 to
Pre-Effective Amendment No. 1 to
Registration No. 33-6867.
5(b) Copy of Investment Advisory
Agreement between Investors
International Series Trust, on
behalf of The European Fund, and CCF
International Finance Corp. dated
June 10, 1987; Exhibit 5(b) to
Post-Effective Amendment No. 1 to
Registration No. 33-6867.
5(c) Copy of Investment Advisory
Agreement between Capstone
International Series Trust, on
behalf of Nikko Japan Tilt Fund, and
NIKKO Capital Management (U.S.A),
Inc. dated April 24, 1989; Exhibit
5(c) to Post-Effective Amendment No.
3 to Registration No. 33-6867.
5(d) Proposed form of Investment Advisory
Agreement between Capstone
International Series Trust, on
behalf of New Zealand Fund, and FCA
Corp; Exhibit 5(e) to Post-Effective
Amendment No. 9 to Registration No.
33-6867.
6(a) Copy of General Distribution
Agreement between Investors
International Series Trust, on
behalf of The European Fund, and
Tenneco Asset Planning Company dated
September 29, 1986; Exhibit 6 to
Pre-Effective Amendment No. 1 to
Registration No. 33-6867.
6(b) Copy of General Distribution
Agreement between Investors
International Series Trust, on
behalf of The European Fund, and
Capstone Asset Planning Company
dated September 1, 1987; Exhibit
6(b) to Post-Effective Amendment No.
1 to Registration No. 33-6867.
6(c) Copy of General Distribution
Agreement between Capstone
International Series Trust, on
behalf of Nikko Japan Tilt Fund, and
Capstone Asset Planning Company
dated April 24, 1989;
<PAGE> 62
Exhibit 6 to Post-Effective Amendment
No. 3 to Registration Statement No.
33-6867.
6(d) Copy of General Distribution
Agreement between Capstone
International Series Trust, on
behalf of New Zealand Fund, and
Capstone Asset Planning Company;
Exhibit 6(e) to Post-Effective
Amendment No. 9 to Registration No.
33-6867.
6(e) Proposed form of General
Distribution Agreement between
Capstone International Series Trust,
on behalf of New Zealand Fund, and
Capstone Asset Planning Company;
Exhibit 6(e) to Post-Effective
Amendment No. 18 to Registration No.
33-6867.
6(f) Copy of General Distribution
Agreement dated July 31, 1992
between Capstone International
Series Trust, on behalf of Capstone
European Fund, and Capstone Asset
Planning Company; Exhibit 6(f) to
Post-Effective Amendment No. 17 to
Registration No. 33-6867.
6(g) Copy of General Distribution
Agreement dated August 10, 1992
between Capstone International
Series Trust, on behalf of Capstone
Nikko Japan Fund, and Capstone Asset
Planning Company; Exhibit 6(g) to
Post-Effective Amendment No. 18 to
Registration Statement No. 33-6867.
7 None.
8(a) Copy of Custodian Agreement between
Investors International Series
Trust, on behalf of The European
Fund, and Credit Commercial de
France dated September 29, 1986;
Exhibit 8(a) to Pre-Effective
Amendment No. 1 to Registration No.
33-6867.
8(b) Copy of Custodian Agreement between
Investors International Series
Trust, on behalf of The European
Fund, and First Pennsylvania Bank,
N.A. dated November 1, 1986; Exhibit
8(b) to Pre-Effective Amendment No.
1 to Registration No. 33-6867.
8(c) Copy of Custodian Agreement between
Capstone International Series Trust,
on behalf of Nikko Japan Tilt Fund,
and The Bank of Tokyo Trust Company
dated July 10, 1989; Exhibit 8(c) to
Post-Effective Amendment No. 5 to
Registration No. 33-6867.
8(d) Copy of Custodian Agreement between
Capstone International Series Trust,
on behalf of New Zealand Fund, and
Citibank, N.A.; Exhibit 8(e) to
Post-Effective Amendment No. 9 to
Registration No. 33-6867.
9(a)(1) Copy of Administration Agreement
between Investors International
Series Trust, on behalf of The
European Fund, and
<PAGE> 63
Tenneco Asset Management Company
dated September 29, 1986; Exhibit
9(a) to Pre-Effective Amendment
No. 1 to Registration No. 33-6867.
9(a)(2) Copy of Administration Agreement
between Investors International
Series Trust, on behalf of The
European Fund, and Capstone Asset
Management Company dated September 1,
1987; Exhibit 9(a)(2) to Post-
Effective Amendment No. 1 to
Registration No. 33-6867.
9(a)(3) Copy of Administration Agreement
between Capstone International
Series Trust, on behalf of Nikko
Japan Tilt Fund, and Capstone Asset
Management Company dated April 24,
1989; Exhibit 9(a)(3) to
Post-Effective Amendment No. 3 to
Registration No. 33-6867.
9(a)(4) Copy form of Administration
Agreement between Capstone
International Series Trust, on
behalf of New Zealand Fund, and
Capstone Asset Management Company;
Exhibit 9(a)(5) to Post-Effective
Amendment No. 9 to Registration No.
33-6867.
9(b)(1) Copy of Transfer Agency Agreement
between Investor International
Series Trust, on behalf of The
European Fund, and Fund/Plan
Services, Inc. dated November 1,
1986; Exhibit 9(b) to Pre-Effective
Amendment No. 1 to Registration No.
33- 6867.
9(b)(2) Copy of Agency Agreement between
Investors International Series Trust
and Capstone Financial Services,
Inc. dated October 2, 1987; Exhibit
9(b)(2) to Post-Effective Amendment
No. 1 to Registration No. 33-6867.
9(b)(3) Copy of Shareholder Services
Agreement between Capstone
International Series Trust and
Fund/Plan Services, Inc. dated
February 1, 1991; Exhibit 9(b)(3) to
Post-Effective Amendment No. 7 to
Registration No. 33-6867.
10 Opinion of Dechert Price & Rhoads;
Exhibit 10 to Rule 24f-2 Notice
dated December 23, 1989.
10(a) Opinion of Dechert Price & Rhoads.
*11(a) Consent of Tait, Weller & Baker,
Independent Certified Public
Accountants.
*11(b) Powers of Attorney of Messrs. Eugene
W. Potter, Jr. and Bernard J.
Vaughan.
____________
* Filed herewith
<PAGE> 64
12 None.
13 None.
14 None.
15 Form of Service and Distribution
Plan.
*16 Schedule for Computation of
Performance Quotations.
B. Exhibits filed pursuant to Rule 483 of Regulation
C under the Securities Act of 1933, as amended.
Item 25. Persons Controlled by or under Common Control with Registrant
Registrant does not control and is not under common control with
any person.
Item 26. Number of Holders of Securities
<TABLE>
<CAPTION>
Number of Record Holders
Title of Class as of February 21, 1997
-------------- -----------------------------
<S> <C>
Shares of beneficial interest,
par value $0.01 1,240
</TABLE>
Item 27. Indemnification
The Declaration of Trust of the Registrant includes the following:
Section 4.3. Mandatory Indemnification.
(a) Subject to the exceptions and limitations
contained in paragraph (b) below:
(i) every person who is, or has been, a
Trustee or officer of the Trust
shall be indemnified by the Trust to
the fullest extent permitted by law
against all liability and against
all expenses reasonably incurred or
paid by him in connection with any
claim, action, suit or proceeding in
which he becomes involved as a party
or otherwise by virtue of his being
or having been a Trustee or officer
and against amounts paid or incurred
by him in the settlement thereof;
____________
* Filed herewith
<PAGE> 65
(ii) the words "claim", "action", "suit",
or "proceeding" shall apply to all
claims, actions, suits or
proceedings (civil, criminal, or
other, including appeals), actual or
threatened; and the words
"liability" and "expenses" shall
include, without limitation,
attorneys' fees, costs, judgments,
amounts paid in settlement, fines,
penalties and other liabilities.
(b) No indemnification shall be provided hereunder to
a Trustee or officer:
(i) against any liability to the Trust
or the Shareholders by reason of a
final adjudication by the court or
other body before which the
proceeding was brought that he
engaged in willful misfeasance, bad
faith, gross negligence or reckless
disregard of the duties involved in
the conduct of his office;
(ii) with respect to any matter as to
which he shall have been finally
adjudicated not to have acted in
good faith in the reasonable belief
that his action was in the best
interest of the Trust;
(iii) in the event of a settlement or
other disposition not involving a
final adjudication as provided in
paragraph (b)(i) resulting in a
payment by a Trustee or officer,
unless there has been a
determination that such Trustee or
officer did not engage in willful
misfeasance, bad faith, gross
negligence or reckless disregard of
the duties involved in the conduct
of his office:
(A) By the court or other body
approving the settlement or
other disposition; or
(B) based upon a review of readily
available facts (as opposed
to a full trial-type inquiry)
by (1) vote of a majority of
the Disinterested Trustees
acting on the matter
(provided that a majority of
the Disinterested Trustees
then in office act on the
matter) or (2) written
opinion of independent legal
counsel.
(c) The rights of indemnification herein provided may
be insured against by policies maintained by the
Trust, shall be severable, shall not affect any
other rights to which any Trustee or officer may
now or hereafter be entitled, shall continue as
to a person who has ceased to be such Trustee or
officer and shall inure to the benefit of the
heirs, executors, administrators and assigns of
such a person. Nothing contained herein shall
affect any rights to indemnification to which
personnel of the Trust other than Trustees and
officers may be entitled by contract or otherwise
under law.
(d) Expenses of preparation and presentation of a
defense to any claim, action, suit or proceeding
of the character described in paragraph (a) of
this Section 4.3 may be advanced by the Trust
prior to final disposition thereof upon receipt
of an undertaking by or on behalf of the
recipient to repay such
<PAGE> 66
amount if it is ultimately determined that he is
not entitled to indemnification under this
Section 4.3, provided that either:
(i) such undertaking is secured by a
surety bond or some other
appropriate security provided by the
recipient, or the Trust shall be
insured against losses arising out
of any such advances; or (ii)a
majority of the Disinterested
Trustees acting on the matter
(provided that a majority of the
Disinterested Trustees act on the
matter) or an independent legal
counsel in a written opinion shall
determine, based upon a review of
readily available facts (as opposed
to a full trial-type inquiry), that
there is reason to believe that the
recipient ultimately will be found
entitled to indemnification.
As used in this Section 4.3, a "Disinterested
Trustee" is one who is not (i) an "Interested
Person" of the Trust (including anyone who has
been exempted from being an "Interested Person"
by any rule, regulation or order of the
Commission), or (ii) involved in the claim,
action, suit or proceeding."
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to trustees, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised by the Securities and Exchange Commission that,
in the opinion of the Commission, such indemnification is against public policy
as expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a trustee, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such trustee, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
or not such indemnification by it is against public policy as expressed in the
Act and will be governed by the final adjudication of such issue.
To the extent that the Declaration of Trust, By-Laws or any other
instrument pursuant to which the Registrant is organized or administered
indemnify any trustee or officer of the Registrant, or that any contract or
agreement indemnifies any person who undertakes to act as investment advisor or
principal underwriter to the Registrant, any such provision protecting or
purporting to protect such persons against any liability to the Registrant or
its security holders to which he would otherwise be subject by reason of
willful misfeasance, bad faith, or gross negligence, in the performance of his
duties, or by reason of his reckless disregard of his duties pursuant to the
conduct of his office or obligations pursuant to such contract or agreement,
will be interpreted and enforced in a manner consistent with the provisions of
Sections 17(h) and (i) of the Investment Company Act of 1940, as amended, and
Release No. IC-11330 issued thereunder.
Item 28. Business and Other Connections of Investment Adviser
The Registrant's investment adviser, NIKKO Capital Management
(USA), Inc., also manages the corporate assets of foreign institutions, and
pension and profit sharing plans.
Set forth below is a list of each officer and director of the
Registrant's investment adviser,
<PAGE> 67
indicating each business, profession, vocation or employment of a substantial
nature in which each such person has been engaged for the past two years, for
his own account or in the capacity of director, officer, partner or trustee.
<TABLE>
<CAPTION>
Other Substantial
Position with Business, Profession,
Name Investment Adviser Vocation or Employment
---- ------------------ ----------------------
<S> <C> <C>
Kazuhiro Higashino Director Managing Director of Nikko
International Capital
Management, Co., Ltd.
Tetsuya Itoh Director & Portfolio Manager --
Stanley Kirtman President --
Tadao Kobayashi Director Chairman of Nikko International Capital
Management, Co., Ltd.
Takao Nakanishi Chairman President of Nikko International Capital
Management, Co., Ltd.
Kenji Wada Director Managing Director of Nikko International Capital
Management, Co., Ltd.
</TABLE>
Item 29. Principal Underwriters
(a) The principal underwriter of the Registrant, Capstone
Asset Planning Company, also acts as principal underwriter for Capstone
Government Income Fund, Capstone Intermediate Government Fund, Capstone Growth
Fund, Inc. and Capstone New Zealand Fund.
(b)
<TABLE>
<CAPTION>
Name and Principal Positions and Offices Positions and Offices
Business Address* with Underwriter with Registrant
- ------------------ --------------------- ------------------------
<S> <C> <C>
Dan E. Watson Chairman of the Board --
and Director
Edward L. Jaroski President and Director Trustee and President of the Trust
Leticia N. Jaroski Vice President --
Janet K. Roberts Assistant Vice President --
Iris R. Clay Secretary Secretary
</TABLE>
<PAGE> 68
<TABLE>
<S> <C> <C>
Norma R. Ybarbo -- Assistant Secretary
Linda G. Giuffre Vice President and Treasurer Treasurer
</TABLE>
_____________
* 5847 San Felipe, Suite 4100, Houston, Texas 77057
Item 30. Location of Accounts and Records
Capstone Asset Management Company, the administrator to the
Registrant, 5847 San Felipe, Suite 4100, Houston, TX 77057, The Bank of Tokyo
Trust Company, the custodian of the Registrant, 100 Broadway, 4th Floor, New
York, New York 10005, and FPS Services, Inc., 3200 Horizon Drive, King of
Prussia, Pennsylvania 19406-0903 maintain physical possession of each account,
book or other document required to be maintained by Section 31(a) of Investment
Company Act of 1940 and the rules promulgated thereunder.
Item 31. Management Services
Not applicable.
Item 32. Undertakings
Not applicable.
<PAGE> 69
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Registration Statement or Amendment
pursuant to Rule 485(b) under the Securities Act of 1933 and had duly caused
this Registration Statement or Amendment to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Houston, and State of
Texas on the 28th day of February, 1997.
CAPSTONE INTERNATIONAL SERIES TRUST
CAPSTONE NIKKO JAPAN FUND
Registrant
By: /s/ EDWARD L. JAROSKI
----------------------------------
Edward L. Jaroski, President
Pursuant to the requirements of the Securities Act of 1933, this
Amendment to Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
---------- ----- -----
<S> <C> <C>
/s/ EDWARD L. JAROSKI President and Trustee February 28, 1997
- ------------------------- (Principal Executive
Edward L. Jaroski Officer)
/s/ LINDA G. GIUFFRE Treasurer (Principal February 28, 1997
- ------------------------- Financial & Accounting
Linda G. Giuffre Officer)
EUGENE W. POTTER, JR.* Trustee February 28, 1997
- -------------------------
Eugene W. Potter, Jr.
BERNARD J. VAUGHAN* Trustee February 28, 1997
- -------------------------
Bernard J. Vaughan
* By: /s/ EDWARD L. JAROSKI
-----------------------------------
Edward L. Jaroski, Attorney-In-Fact
</TABLE>
<PAGE> 70
INDEX TO EXHIBITS
Exhibit
Number Description of Exhibits
- ------ -----------------------
11(a) Consent of Tait, Weller & Baker, Independent
Certified Public Accountants
11(b) Powers of Attorney for Messrs. Eugene W. Potter, Jr.
and Bernard J. Vaughan
16 Schedule of Computation of Performance Quotations
27 Financial Data Schedule
<PAGE> 1
EXHIBIT 11(a)
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the reference to our firm in the Registration Statement,
(Form N-1A) and related Statement of Additional Information of Capstone Nikko
Japan Fund and to the inclusion of our report dated November 18, 1996 to the
Shareholders and Board of Trustees of Capstone Nikko Japan Fund.
/s/ TAIT, WELLER & BAKER
TAIT, WELLER & BAKER
Philadelphia, Pennsylvania
February 27, 1997
<PAGE> 1
EXHIBIT 11(b)
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below appoints Edward L. Jaroski as his true and lawful
attorney-in-fact, with full power of substitution and resubstitution, for him
and in his name, place and stead, in any and all capacities, to sign any and
all amendments (including post-effective amendments) to this Registration
Statement, and to file the same, with all exhibits thereto, and other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorney-in-fact full power and authority to do and perform each and
every act and thing requisite and necessary to be done in connection therewith,
as fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorney-in-fact, or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
/s/ EUGENE W. POTTER, JR. Trustee February 28, 1997
- ----------------------------
Eugene W. Potter, Jr.
/s/ BERNARD J. VAUGHAN Trustee February 28, 1997
- ----------------------------
Bernard J. Vaughan
<PAGE> 1
EXHIBIT 16
CAPSTONE NIKKO JAPAN FUND
SCHEDULE OF COMPUTATION FOR AVERAGE ANNUAL TOTAL RETURN
P (1 + T)n = ERV
P = a hypothetical initial payment of $1,000,
T = the average annual total return,
n = the number of years,
ERV = the ending redeemable value of a hypothetical $1,000 payment
made at the beginning of the period.
********************
The Fund's average annualized total return for the one year period ending
October 31, 1996 is 0.75%.
$1,000 (1 + .00751)1 = ERV
$1,007.51 = ERV
An initial payment of $1,000 invested on 11/01/95 will result in 147.929
shares. An income distribution of $0.055 per share during the period resulted
in 1.111 additional shares, rendering a total of 149.040 shares. On 10/31/96
the net asset value of Capstone Nikko Japan Fund was $6.76 per share, thereby
creating a total market value of $1,007.51 and yielding a return of 0.75%.
********************
The Fund's average annualized total return for the five year period from
November 1, 1991 to ending October 31, 1996 is (1.80)%.
$1,000 (1 + -.01800)5 = ERV
$912.96 = ERV
An initial payment of $1,000 invested on 11/01/91 will result in 134.048
shares. An income distribution of $0.055 per share during the period resulted
in 1.005 additional shares, rendering a total of 135.053 shares. On 10/31/96
the net asset value of Capstone Nikko Japan Fund was $6.76 per share, thereby
creating a total market value of $912.96 and yielding a return of (1.80)%.
********************
The Fund's average annualized total return for the period July 10, 1989
(inception) to October 31, 1996 is (4.89)%.
$1,000(1+ -.0489)7.31 = ERV
$693.07 = ERV
An initial payment of $1,000 invested on 07/10/89 will result in 100.000
shares. An income distribution of $0.055 per share and a capital gain
distribution of $0.19 per share for the period resulted in 2.525 additional
shares, rendering a total of 102.525 shares. On 10/31/96 the net asset value
of Capstone Nikko Japan Fund was $6.76 per share, thereby creating a total
market value of $693.07 and yielding a return of (4.89)%.
<PAGE> 2
CAPSTONE NIKKO JAPAN FUND
SCHEDULE OF COMPUTATION FOR TOTAL RETURN
P(1+T) = ERV
P = a hypothetical initial payment of $1,000,
T = the total return,
ERV = the ending redeemable value of a hypothetical $1,000 payment made at
the beginning of the period.
********************
The Fund's total return for the one year period ending October 31, 1996 is
0.75%.
$1,000(1 + .00751) = ERV
$1,007.51 = ERV
An initial payment of $1,000 invested on 11/01/95 will result in 147.929
shares. An income distribution of $0.055 per share during the period resulted
in 1.111 additional shares, rendering a total of 149.040 shares. On 10/31/96
the net asset value of Capstone Nikko Japan Fund was $6.76 per share, thereby
creating a total market value of $1,007.51 and yielding a return of 0.75%.
********************
The Fund's total return for the five year period from November 1, 1991 to
October 31, 1996 is (8.70)%.
$1,000(1 + -.0870) = ERV
$912.96 = ERV
An initial payment of $1,000 invested on 11/01/91 will result in 134.048
shares. An income distribution of $0.055 per share during the period resulted
in 1.005 additional shares, rendering a total of 135.053 shares. On 10/31/96
the net asset value of Capstone Nikko Japan Fund was $6.76 per share, thereby
creating a total market value of $912.96 and yielding a return of (8.70)%.
********************
The Fund's total return for the period July 10, 1989 (inception) through
October 31, 1996 is (30.69)%.
1,000(1 + -.3069) = ERV
$693.07 = ERV
An initial payment of $1,000 invested on 07/10/89 will result in 100.000
shares. An income distribution of $0.055 per share and a capital gain
distribution of $0.190 for the period resulted in 2.525 additional shares,
rendering a total of 102.525 shares. On 10/31/96 the net asset value of
Capstone Nikko Japan Fund was $6.76 per share, thereby creating a total market
value of $693.07 and yielding a return of (30.690)%.
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL
REPORT OF CAPSTONE NIKKO JAPAN FUND FOR THE FISCAL YEAR ENDED OCTOBER 31, 1996.
</LEGEND>
<SERIES>
<NUMBER> 1
<NAME> CAPSTONE NIKKO JAPAN FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-START> NOV-01-1995
<PERIOD-END> OCT-31-1996
<INVESTMENTS-AT-COST> 3,029,109
<INVESTMENTS-AT-VALUE> 2,880,223
<RECEIVABLES> 318,280
<ASSETS-OTHER> 83,619
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 3,282,122
<PAYABLE-FOR-SECURITIES> 285,801
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 21,475
<TOTAL-LIABILITIES> 307,276
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 6,032,745
<SHARES-COMMON-STOCK> 440,359
<SHARES-COMMON-PRIOR> 430,009
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (2,922,267)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (135,632)
<NET-ASSETS> 2,974,846
<DIVIDEND-INCOME> 23,520
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 108,704
<NET-INVESTMENT-INCOME> (85,184)
<REALIZED-GAINS-CURRENT> 101,948
<APPREC-INCREASE-CURRENT> (29,017)
<NET-CHANGE-FROM-OPS> (12,253)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (24,587)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 199,045
<NUMBER-OF-SHARES-REDEEMED> (191,828)
<SHARES-REINVESTED> 3,133
<NET-CHANGE-IN-ASSETS> 10,350
<ACCUMULATED-NII-PRIOR> (90,106)
<ACCUMULATED-GAINS-PRIOR> (2,921,095)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 13,163
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 128,449
<AVERAGE-NET-ASSETS> 3,290,764
<PER-SHARE-NAV-BEGIN> 6.76
<PER-SHARE-NII> (0.19)
<PER-SHARE-GAIN-APPREC> .25
<PER-SHARE-DIVIDEND> .06
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 6.76
<EXPENSE-RATIO> 3.30
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
