CAPSTONE JAPAN FUND
- --------------------------------------------------------------------------------
Dear Shareholder,
Effective August 25, 1997, FCA Corp became investment adviser to the Fund. As
the new adviser, we are pleased to present this annual report on the Capstone
Japan Fund for the year ended October 31, 1997. The Fund's net asset value
("NAV" ) on October 31, 1997 was US $5.21 per share.
FUND'S COMPARATIVE PERFORMANCE
During most of fiscal year 1997, the Fund was advised by Nikko Capital
Management Company (U.S.A.), Inc. using its proprietary Return Reversal
Strategy. As the new adviser to the Fund, FCA Corp is applying the same
investment techniques that have made it successful with the Capstone New Zealand
Fund (CNZLX), which was ranked by Lipper Analytical Services among Pacific
ex-Japan funds as number one of 81, number one of 45 and number one of 25 for
the quarter, two-year and three-year periods, respectively, ending September 30,
1997. FCA Corp has committed to waive its fees and to reimburse expenses of the
Fund so they will be limited to no more than 2.5% of the fund's average annual
assets through October 31, 1998 which would cause the Fund's expenses to be
lower than they currently are.
The Fund's strategy is to seek a diversified portfolio of stocks of mostly
larger-cap companies that provide current income through dividends, trade at
comparatively low price/earnings multiples, have a below average price-to-book
ratio, and/or have potential for long-term capital appreciation. This includes a
focus on American Depository Receipts* because they can provide an efficient
currency exchange management for a US dollar fund and greater liquidity.
The most relevant index against which to compare the Fund's performance is the
TOPIX1, that comprises all the stocks currently listed on the first section of
the Tokyo Stock Exchange. During the twelve months ended October 31, 1997, the
TOPIX decreased by 17.6% in Japanese yen and by 22.2% in $US. For the same
period, the Fund's total US dollar return was -22.9%. In analyzing comparisons
of performance to the TOPIX, the reader should remember an index does not
reflect any cash positions, brokerage costs or administrative or management fees
incurred by the Fund or individual investor.
GRAPH DATA:
JAPAN FUND TOPIX
7/10/89 10,000.00 10,000.00
10/31/89 11,163.70 10,487.80
10/31/90 7,031.70 7,932.37
10/31/91 7,011.30 7,976.72
10/31/92 4,986.30 5,759.42
10/31/93 6,248.10 8,337.03
10/31/94 7,764.40 9,029.93
10/31/95 7,515.00 7,638.58
10/31/96 6,305.30 7,549.89
10/31/97 5,362.10 5,875.83
Comparison of Change in Value of a $10,000 Investment in Capstone
Japan Fund+, and the TOPIX
AVERAGE ANNUAL TOTAL RETURN
as of 10/31/97
1 Year 5 Years Inception
- -22.93% 1.43% -7.26%
Past performance is not predictive of future results.
+ The Fund's performance assumes the reinvestment of all income dividends and
capital gains distributions.
<PAGE>
CAPSTONE JAPAN FUND
- --------------------------------------------------------------------------------
JAPAN MARKET OVERVIEW
Bearish sentiment has dominated Japan's market throughout most of 1997. The
TOPIX has experienced a significant decline. The Southeast Asian currency crisis
has also contributed to Japan's problems. The recent extreme negative market
sentiment is likely to spur the Japanese government to use public funds to help
the economy by bailing out the banking system. The recent willingness of the
Japanese government to allow companies to fail could result in consolidation
through mergers and acquisitions, resulting in more competitive, profitable
companies.
According to USA Today December 9, 1997, Japan's economy accounts for about 20%
of the world's economy and is the world's second largest market. Japan also
holds over $300 billion of US Treasury obligations, or over 6% of total US
Treasury obligations.
Even in light of the recent turbulence in Asian markets, there remains high
future growth potential for a number of sectors, such as the electronics and
automotive industries. The fund contains many examples of the type of companies
that are likely to benefit in the current market. For example as of October 31
1997:
o SONY CORP., ADR manufactures consumer electronics such as audio equipment,
VCRs and TVs. Sony is listed on stock exchanges worldwide. The company's
current P/E ratio was 27.37%, Price-to-Book ratio ("P/B") was 2.60% and
their yield was 0.56%.
o HONDA MOTOR COMPANY, ADR Worldwide automaker, and worlds' leading
motorcycle manufacturer. The Company's current P/E ratio was 14.88%, P/B
was 3.27% and their yield was 0.33%.
o BRIDGESTONE CORP., ADR One of the largest automobile tire makers in the
world following the company's acquisition of Firestone, and has license
agreements with Goodyear in the US, and had begun to expand into sporting
goods through Freed, a subsidiary. The Company's P/E ratio is about
twenty-two times next year's estimated earnings, P/B was 3.18% and their
yield was 0.5%.
o FUJITSU LTD., ADR manufactures computers, and is the largest such company
in Japan and the worlds 2nd largest in terms of group scale; the Company
is also a major producer of communications equipment and semiconductors.
The Company's P/E ratio is about twenty-five times next year's estimated
earnings, P/B was 2.05% and their yield was 0.7%.
Japanese stocks, relative to both the US and other developed markets, appear
greatly undervalued in terms of price-to-book ratios2. According to Smith
Barney's Global Investment Outlook, November 1997, Japan's 1998 forecasted
earnings growth rate is projected to be the fastest in the developed world. The
same source ranks Japan's real exchange rates as one of the most undervalued in
the world and feels that Japan has the best positive monetary conditions, as
measured by interest rates. Japan's market remains one of the least correlated
to the US market. More than one-third of the stocks listed on the First Section
of the Exchange are trading below book value (Source: Nomura Securities Outlook
for Japanese Equity Market, November, 1997). Japan's market is considered over
valued by other valuation ratios. Total market averages can be misleading, as
you may be able to purchase individual securities whose fundamental valuation
ratios may be attractive. Coupled with these facts, the deregulation measures
being planned make prospects for the Japanese economy look much brighter.
<PAGE>
CAPSTONE JAPAN FUND
- --------------------------------------------------------------------------------
THE PORTFOLIO
The Fund is widely diversified by industry sector. At October 31, 1997 the
percentages of equity investments of the Fund by major industry categories
were as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Communications Equipment 15.30% Auto Parts 3.10%
Automotive 10.78% Real Estate 3.07%
Pharmaceuticals 9.59% Consumer Electronics 2.95%
Food & Beverage 7.41% Semiconductors 2.78%
Auto/Video Equipment 7.01% Banking 2.59%
Miscellaneous Electrical Products 6.44% Indices 2.43%
Communications 4.91% Services 1.99%
Industrial Machinery 4.83% Precision Machinery 1.98%
Miscellaneous Financing 4.46% Chemicals 1.84%
Wire & Cables 3.47%
</TABLE>
If you have any questions, please feel free to contact us. We thank you for your
continued support.
Sincerely,
?s/ Robert W. Scharar /s/ Kimberly Haley-Coleman
- ------------------------------ ------------------------------
Robert W. Scharar Kimberly Haley-Coleman
President and Portfolio Manager Assistant Portfolio Manager
*There are over 150 Japanese ADR stocks that are estimated to be about 23% of
the Japanese market capitalization. An ADR (American Depository Receipt) share
is a certificate representing ownership of foreign stocks, which are traded on
stock exchanges in the United States.
(1)TOPIX is an unmanaged index including all the stocks currently listed in the
Tokyo Stock Exchange First Section (over 90% of all equity securities traded on
the Tokyo Stock Exchange) weighted by market capitalization. Index returns are
calculated monthly and assume reinvestment of dividends. Unlike Fund returns,
TOPIX returns do reflect deduction of any fees or expenses.
(2)With an average price-to-book ratio of 2.0 versus the world average of 2.7
(Source: Smith Barney's Global Investment Outlook, October 1997).
THIS PUBLICATION MUST BE ACCOMPANIED OR PRECEDED BY A CURRENT
PROSPECTUS FOR CAPSTONE JAPAN FUND.
<PAGE>
<TABLE>
CAPSTONE JAPAN FUND
PORTFOLIO OF INVESTMENTS - OCTOBER 31, 1997
- --------------------------------------------------------------------------------
<CAPTION>
MARKET % OF
VALUE NET
COMMON STOCKS- 96.93% SHARES (NOTE 1-A) ASSETS
-------------------------------------------------
<S> <C> <C> <C>
AUTOMOTIVE (10.78%)
Bridgestone Corp. - ADR 400 $ 98,000 5.15%
Honda Motor - ADR # 1,600 107,000 5.63
--------- ------
205,000 10.78
AUTO PARTS (3.10%)
Autobacs Seven Co. Limited 600 31,280 1.64
NGK Sparg Plug Company 4,000 27,837 1.46
--------- ------
59,117 3.10
AUTO /VIDEO EQUIPMENT (7.01%)
SONY Corp - ADR # 1,100 92,812 4.88
Victor Co. of Japan, Limited 4,000 40,575 2.13
--------- ------
133,387 7.01
BANKING (2.59%)
Mitsubishi Trust & Banking 4,000 49,223 2.59
CHEMICALS (1.84%)
Konica Corporation 7,000 34,921 1.84
COMMUNICATIONS (4.91%)
Kyocera Corporation - ADR 800 93,300 4.91
COMMUNICATIONS EQUIPMENT (15.30%)
Fujitsu, Limited 2,000 21,951 1.16
Fujitsu, Limited - ADR 1,600 90,400 4.75
Kokusai Corporation 3,000 45,148 2.37
Matsushita Electric Works 5,000 45,315 2.38
NEC Corporation - ADR 1,600 88,200 4.64
--------- ------
291,014 15.30
CONSUMER ELECTRONICS (2.95%)
Alps Electric Co., Limited 5,000 56,124 2.95
FOOD & BEVERAGE (7.41%)
Ajinomoto, Inc. 1,200 104,400 5.49
Asahi Chemical 8,000 36,451 1.92
--------- ------
140,851 7.41
INDICES (2.43%)
World Equity Benchmark Series - Japan Index Series 4,100 46,125 2.43
<PAGE>
<CAPTION>
CAPSTONE JAPAN FUND
PORTFOLIO OF INVESTMENTS - OCTOBER 31, 1997
- --------------------------------------------------------------------------------
MARKET % OF
VALUE NET
SHARES (NOTE 1-A) ASSETS
-------------------------------------------------
<S> <C> <C> <C>
INDUSTRIAL MACHINERY (4.83%)
Makita Corp. 3,000 $ 42,155 2.22%
Matsushita Refrigeration 5,000 22,533 1.18
Toshiba Corp. 6,000 27,189 1.43
--------- ------
91,877 4.83
MISCELLANEOUS ELECTRICAL PRODUCTS (6.44%)
Aritsu Corporation 5,000 61,944 3.26
Fanuc, Limited 1,500 60,614 3.18
--------- ------
122,558 6.44
MISCELLANEOUS FINANCING (4.46%)
Nomura Securities Co., Limited 3,000 34,921 1.84
Tokio Marine & Fire 5,000 49,888 2.62
--------- ------
84,809 4.46
PHARMACEUTICALS (9.59%)
Badyu Pharmaceuticals Co. - ADR 300 86,400 4.54
Eisai Co. Limited - ADR 6,000 96,000 5.05
--------- ------
182,400 9.59
PRECISION MACHINERY (1.98%)
Shimadzu Corp. 10,000 37,582 1.98
REAL ESTATE (3.07%)
Sumitomo Realty Development 8,000 58,468 3.07
SEMICONDUCTORS (2.78%)
Sumitomo Sitix Corp. 3,000 52,881 2.78
SERVICES (1.99%)
Intec 4,000 37,915 1.99
WIRE & CABLES (3.47%)
Sumitomo Electric Inc 5,000 66,101 3.47
TOTAL COMMON STOCKS (Cost $2,089,985) 1,843,653 96.93
<PAGE>
<CAPTION>
CAPSTONE JAPAN FUND
PORTFOLIO OF INVESTMENTS - OCTOBER 31, 1997
- --------------------------------------------------------------------------------
MARKET % OF
VALUE NET
SHARES (NOTE 1-A) ASSETS
-------------------------------------------------
<S> <C> <C> <C>
Merrill Lynch & Co., Variable rate, 01/31/00 (Cost $50,925) $50,000 $ 50,375 2.65%
TOTAL INVESTMENTS (Cost $2,140,910) 1,894,028 99.58
OTHER ASSETS, LESS LIABILITIES 7,923 0.42
--------- ------
NET ASSETS $1,901,951 100.00%
========== ======
# Call options have been written by the Fund against these positions. (Note 5)
</TABLE>
<PAGE>
<TABLE>
CAPSTONE JAPAN FUND
STATEMENT OF ASSETS AND LIABILITIES OCTOBER 31, 1997
- --------------------------------------------------------------------------------
<CAPTION>
<S> <C> <C>
ASSETS:
Investments in securities at market value (identified cost $2,140,910) (Note 1-A) .................... $ 1,894,028
Receivables:
Investment securities sold ..................................................... $ 118,394
Dividends ...................................................................... 4,872
Investment adviser (Note 2) .................................................... 12,085 135,351
----------- -----------
Total Assets .................................................................................... 2,029,379
-----------
LIABILITIES:
Cash overdraft ...................................................................... 89,693
Covered call options written, at value (premiums received $23,060 (Notes 1 and 5) ... 13,669
Accrued expenses .................................................................... 24,066
-----------
Total Liabilities ............................................................................... 127,428
-----------
NET ASSETS .................................................................................................... $ 1,901,951
===========
NET ASSET VALUE PRICE PER SHARE:
($1,901,951 / 365,008 shares of beneficial interest outstanding) ............................................. $ 5.21
===========
SOURCE OF NET ASSETS:
Paid in capital ...................................................................................... $ 5,481,881
Accumulated net realized loss on investments ......................................................... (3,342,797)
Net unrealized depreciation on investments and foreign currencies .................................... (237,133)
-----------
Total ........................................................................................... $ 1,901,951
===========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
</TABLE>
<PAGE>
<TABLE>
CAPSTONE JAPAN FUND
STATEMENT OF OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 1997
- --------------------------------------------------------------------------------
<CAPTION>
INVESTMENT INCOME
<S> <C> <C>
Income:
Dividends (net of foreign taxes withheld of $2,359) .................................................... $ 17,947
---------
Expenses: (Note 2)
Advisory fees ............................................................................ $ 12,039
Transfer agent fees ...................................................................... 35,381
Administrative services .................................................................. 25,304
Professional fees ........................................................................ 20,020
Custodian fees ........................................................................... 12,060
Registration and filing fees ............................................................. 11,241
Reports and notices to stockholders ...................................................... 9,328
Distribution fees ........................................................................ 6,630
Trustees' fees and expenses .............................................................. 6,223
Fund accounting fees ..................................................................... 4,000
Miscellaneous ............................................................................ 2,524
---------
Total Expenses ........................................................................................ 144,750
Less: Advisory fees waived ............................................................... 12,039
Expenses reimbursed by Investment Adviser ........................................... 12,085 24,124
--------- ---------
Net Expenses ........................................................................................ 120,626
---------
Net Investment Loss ............................................................................. (102,679)
---------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS: (Note 4)
Net realized loss from security transactions .................................................. (435,466)
Net realized gain on conversion of foreign currencies to U.S. dollars ......................... 56,437
Net realized gain from forward currency contracts ............................................. 14,936
---------
Net realized loss on investments ....................................................................... (364,093)
Net unrealized depreciation of investments, foreign currencies and forward currency contracts .............. (101,501
---------
Net realized and unrealized depreciation of investments ................................................ (465,594)
---------
Net decrease in net assets resulting from operations .............................................. $(568,273)
=========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
</TABLE>
<PAGE>
<TABLE>
CAPSTONE JAPAN FUND
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED OCTOBER 31,
1997 1996
---------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS
Net investment loss ................................................................... $ (102,679) $ (85,184)
Net realized gain (loss) on investments ............................................... (364,093) 101,948
Net unrealized depreciation of investments, forward currency contracts and
foreign currencies ............................................................... (101,501) (29,017)
----------- -----------
Net decrease in net assets resulting from operations .................................. (568,273) (12,253)
DIVIDENDS TO SHAREHOLDERS FROM:
Net investment income ................................................................. -- (24,587)
TRUST SHARE TRANSACTIONS:
Increase (decrease) in net assets resulting from capital share
transactions (Note 3) ............................................................ (504,622) 103,784
----------- -----------
Net increase (decrease) in net assets .......................................... (1,072,895) 66,944
NET ASSETS
Beginning of year ..................................................................... 2,974,846 2,907,902
----------- -----------
End of year ........................................................................... $ 1,901,951 $ 2,974,846
=========== ===========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
</TABLE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS-OCTOBER 31, 1997
- --------------------------------------------------------------------------------
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
Capstone Japan Fund, formerly 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 (the
"Act"), as a diversified open-end management investment company. The Fund's
investment objective is to seek long-term capital appreciation and income using
a research-oriented approach. The following is a summary of significant
accounting policies consistently followed by the Fund in the preparation of its
financial statements.
A) VALUATION OF SECURITIES - Portfolio securities which are traded on Japanese
securities exchanges are valued at the last sales price 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. All other
equity securities not so traded are valued at the last current bid quotation. 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
Board of Trustees.
B) CURRENCY TRANSLATION - For purposes of determining the Fund's net asset
value, all assets and liabilities initially expressed in foreign currency values
are converted into U.S. dollar values at the prevailing market rate at 14:00 GMT
on each U.S. business day, as established by the Board of Trustees. The cost of
securities is determined by using historical exchange rates. Income is
translated at approximate rates prevailing when accrued. 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.
<PAGE>
CAPSTONE JAPAN FUND
C) ACCOUNTING FOR INVESTMENTS - Security transactions are accounted for on the
trade date. Realized gains and losses on security transactions are based on the
identified cost basis for both financial statement and Federal income tax
purposes. Dividend income and distributions to shareholders are recorded on the
ex-dividend date. Premiums on bonds purchased are amortized over the life of the
bonds. Interest income and estimated expenses are accrued daily.
D) OPTION ACCOUNTING PRINCIPLES - When the Fund sells an option, an amount equal
to the premium received by the Fund is included as an asset and an equivalent
liability. The amount of the liability is marked-to-market to reflect the
current market value of the options written. The current market value of a
traded option is the last sale price and options not traded that day are valued
at the prevailing quoted bid price. When an option expires on its stipulated
expiration date or the Fund enters into a closing purchase transaction, the Fund
realizes a gain (or loss, if the cost of a closing purchase transaction exceeds
the premium received when the option was sold) without regard to any unrealized
gain or loss on the underlying security, and the liability related to such
option is extinguished. If a call option is exercised, the premium is added to
the proceeds from the sale of the underlying security in determining whether the
Fund has a realized gain or loss.
E) FORWARD CURRENCY CONTRACTS - Forward currency transactions are undertaken to
hedge against possible variations in the foreign exchange rates between the
United States Dollar and the Japanese Yen. A forward currency contract is an
agreement between two parties to buy or sell a currency at a set price on a
future date. Forward contracts are marked-to-market daily and the change in the
market value is recorded by the Fund as an unrealized gain or loss. When a
contract is closed, the Fund records a realized gain or loss equal to the
difference between the value of the contract at the time it was opened and the
value at the time it was closed. The Fund could be exposed to risk if the
counterparties are unable to meet the terms of the contracts or if the value of
the currency changes unfavorably.
F) FEDERAL INCOME TAXES - No provision has been made for Federal income taxes
since it is the Fund's policy to continue to comply with the special provisions
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 relieve it from all, or substantially all, such
taxes. At October 31, 1997, the Fund had capital loss carryovers of $3,342,797
of which $1,413,422 expires in 1999, $1,494,646 expires in 2000 and $434,729
expires in 2005. Under the United States-Japan tax treaty, Japan imposes a
withholding tax of 15% on the dividends received by the Fund. There is currently
no Japanese tax on capital gains.
G) 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.
H) 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, ADMINISTRATIVE FEES AND OTHER TRANSACTIONS
WITH AFFILIATES
For the period November 1, 1996 to August 24, 1997 the Fund's Investment
Adviser, Nikko Capital Management (USA), Inc. ("NICAM") earned a fee calculated
at an annual rate of .40% of the average net assets of the Fund. For the above
period, this fee amounting to $8,975 was waived by NICAM. Upon the resignation
of NICAM the Board of Trustees approved a new investment advisory agreement with
FCA Corp,("FCA") the current adviser to Capstone New Zealand Fund. Under the new
agreement, the advisory fee is increased to .75% of the average net assets and
the new adviser has undertaken to cap the Fund's expenses at 2.5% until October
31, 1998. For the period August 25, 1997 through October 31, 1997, $3,064 in
advisory fees were waived by FCA and FCA reimbursed the Fund $12,085 for excess
expenses for the August 25th through October 31, 1997 period.
The Administrator, Capstone Asset Management Company, is paid a fee,
calculated daily and paid monthly, equal to an annual rate of .20% of the Fund's
average daily net assets. The Administrator was also paid a monthly fee of
$2,000 representing the cost of certain accounting and bookkeeping services.
Effective September 1997, Fifth Third Bank began performing the accounting,
bookkeeping and pricing services for the Fund.
<PAGE>
CAPSTONE JAPAN FUND
Capstone Asset Planning Company ("CAPCO") serves as Distributor of the
Fund's shares. 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 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 to CAPCO an amount computed at an
annual rate of up to .25% of the Fund's average net assets (including reinvested
dividends paid with respect to those assets). Of this amount, CAPCO may
reallocate to securities dealers (which may include CAPCO itself) and other
financial institutions and organizations (collectively, "Service Organizations")
amounts based on the Fund's average net assets owned by stockholders for whom
the Service Organizations have a servicing relationship. The Plan permits CAPCO
to carry forward for a maximum of twelve months distribution expenses covered by
the Plan for which CAPCO has not yet received reimbursement. For the year ended
October 31, 1997, the Fund paid $6,630 in 12b-1 fees, of which approximately 11%
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, Distributor or CFS
received no compensation from the Trust. During the year ended October 31, 1997,
trustees of the Fund who are not "interested persons" received trustees' fees of
$3,000.
NOTE 3 - TRUST SHARES
At October 31, 1997 there were 365,008 Trust shares outstanding.
Transactions in Trust shares were as follows:
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
1997 1996
---- ----
SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
Shares sold ......................................... 395,272 $ 2,281,972 199,045 $ 1,474,183
Shares issued to shareholders in reinvestment
of dividends ...................................... -- -- 3,133 22,966
----------- ----------- ----------- -----------
395,272 2,281,972 202,178 1,497,149
Shares redeemed ..................................... (470,624) (2,786,594) (191,828) (1,393,365)
----------- ----------- ----------- -----------
Net increase (decrease) ............................. (75,352) $ (504,622) 10,350 $ 103,784
=========== =========== =========== ===========
</TABLE>
NOTE 4 - SECURITIES TRANSACTIONS
Purchases and sales of securities, other than U.S. Government obligations,
aggregated $1,843,806 and $2,296,539, respectively. At October 31, 1997, the
cost of investments for Federal income tax purposes was $2,140,910. Accumulated
net unrealized depreciation on investments was $246,882 consisting of $50,025
gross unrealized appreciation and $296,907 gross unrealized depreciation.
NOTE 5 - OPTIONS WRITTEN BY THE FUND
A call option gives the holder the right to buy the underlying stock from
the writer (the Fund) at a specified price within a fixed period of time.
Therefore, the securities held by the Fund against which options are written may
not be traded and are held in escrow by the custodian.
The following table sets forth the outstanding call options written by the Fund
as of October 31, 1997.
<TABLE>
<CAPTION>
PREMIUM MARKET UNREALIZED
CALL OPTIONS ON RECEIVED VALUE APPRECIATION
- ----------------------------------------------------------------------------------------------
<C> <C> <C> <C>
1,600 shs Honda Corp-ADR @ 70 exp Apr 1998 $14,095 $ 9,200 $4,895
1,100 shs Sony Corp-ADR @ 100 exp Apr 1998 8,965 4,469 4,496
------- ------- ------
$23,060 $13,669 $9,391
======= ======= ======
</TABLE>
<PAGE>
CAPSTONE JAPAN FUND
The aggregate market value at October 31, 1997 of securities subject to
call options is $199,812 or approximately 10% of net assets.
At November 1, 1996, the Fund had no option contracts outstanding. During
the year ended October 31, 1997 the Fund wrote 27 option contracts for which it
received premiums aggregating $23,060. These 27 option contracts were all
outstanding at October 31, 1997.
NOTE 6 - CHANGE OF FUND NAME AND MODIFICATION OF INVESTMENT OBJECTIVE
Upon approval of the new advisory agreement between the Fund and FCA Corp
the Fund's name was changed to Capstone Japan Fund. FCA will maintain the Fund's
investment objective and continue to seek long-term capital appreciation along
with current income, but FCA will pursue this objective by investing not only in
securities listed on the Tokyo Stock Exchange, but also in securities of issuers
a substantial portion of whose business activities, profits and/or earnings are
in, or are derived from Japan. FCA will also invest in debt securities, rated
BBB or better, of such issues or that are payable in yen or are otherwise linked
to the performance of the Japanese market or economy. Finally, FCA will invest
in American Depository Receipts related to these securities, in addition to
buying these securities directly. FCA will no longer use the computer
model-based stock selection system employed by the former adviser, but will
rely, instead, on a research- oriented approach to selecting securities.
NOTE 7 - SPECIAL MEETING OF SHAREHOLDERS (UNAUDITED)
Capstone International Series Trust held a special meeting of shareholders
of the Capstone Japan Fund on December 4, 1997. On July 14, 1997, the record
date for the meeting, the Fund had 453,665 shares outstanding, of which 266,397
(59% of the total) were represented at the meeting. The votes at the meeting
were as follows:
Item 1: To approve a new investment advisory agreement for Capstone Japan Fund
with FCA Corp, with an increased fee.
<TABLE>
<CAPTION>
NUMBER OF SHARES
<S> <C>
Affirmative 253,917
Against 2,304
Abstain 10,176
<CAPTION>
Item 2: Election of Trustees
NUMBER OF SHARES
NOMINEES FOR TRUSTEE AFFIRMATIVE WITHHELD
- ----------------------------------------------------------------
<S> <C> <C>
Edward L. Jaroski 264,978 1,419
James F. Leary 264,978 1,419
John R. Parker 264,978 1,419
Bernard J. Vaughan 264,978 1,419
</TABLE>
Item 3: To ratify the selection of Briggs, Bunting & Dougherty, LLP as
independent public accountants of the Trust for the fiscal year ended October
31, 1997.
<TABLE>
<CAPTION>
NUMBER OF SHARES
<S> <C>
Affirmative 162,466
Against 103,931
Abstain 0
</TABLE>
<PAGE>
<TABLE>
CAPSTONE 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.
PER SHARE DATA YEAR ENDED OCTOBER 31,
----------------------------------------------------
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Net asset value at beginning of year............................. $ 6.76 $ 6.76 $ 8.03 $ 6.99 $ 4.89
------ ------ ------ ------ ------
Income from investment operations:
Net investment loss......................................... (0.28) (0.19) (0.21) (0.21) (0.20)
Net realized and unrealized gain (loss) on investments...... (1.27) 0.25 (1.06) 1.25 2.30
------ ------ ------ ------ ------
Total from investment operations............................ (1.55) 0.06 (1.27) 1.04 2.10
------ ------ ------ ------ ------
Less dividends from:
Net investment income....................................... -- 0.06 -- -- --
------ ------ ------ ------ ------
Net asset value at end of year................................... $ 5.21 $ 6.76 $ 6.76 $ 8.03 $ 6.99
====== ====== ====== ====== ======
TOTAL RETURN (%) (1)............................................. (22.93) 0.75 (15.82) 14.88 42.74
- ------------
RATIOS/SUPPLEMENTAL DATA
Net assets at end of year (in thousands)......................... $1,902 $2,975 $2,908 $3,484 $3,096
Ratio to average net assets:
Expenses (%)................................................ 4.55 3.30 3.61 3.25 4.26
Net investment income (%)................................... (3.87) (2.59) (2.93) (2.62) (3.54)
Ratio to average net assets, prior to reimbursements and
waivers of expenses:
Expenses (%)................................................ 5.46 3.90 4.21 3.85 4.86
Net investment income (%)................................... (4.78) (3.19) (3.53) (3.22) (4.14)
Portfolio turnover rate (%)...................................... 73 47 27 57 42
Average commission rate (per share of security)(2)............... $0.0371 $0.0864
<FN>
(1) Calculated without sales charge. Sales charge eliminated on August 21, 1995.
(2) Average commission rate (per share of security) as required by amended
disclosure requirements effective September 1, 1995.
</FN>
</TABLE>
<PAGE>
CAPSTONE JAPAN FUND
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Shareholders and Board of Trustees
of Capstone Japan Fund
We have audited the accompanying statement of assets and liabilities of Capstone
Japan Fund (formerly "Capstone Nikko Japan Fund"), including the portfolio of
investments as of October 31, 1997, and the related statements of operations,
changes in net assets and financial highlights for the year then ended. These
financial statements and financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audit. The statement
of changes in net assets for the year ended October 31, 1996 and the financial
highlights for each of the four years in the period ended October 31, 1996, were
audited by other auditors, whose report, dated November 18, 1996, expressed an
unqualified opinion on that statement and the financial highlights.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements and financial highlights are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of securities owned as of October 31, 1997 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
audit provided 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 Japan Fund at October 31, 1997, and the results of its operations,
changes in its net assets and financial highlights for the year ended October
31, 1997, in conformity with generally accepted accounting principles.
Briggs, Bunting & Dougherty, LLP
Philadelphia, Pennsylvania
December 8, 1997
<PAGE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
CAPSTONE JAPAN FUND
5847 SAN FELIPE, SUITE 4100
HOUSTON, TEXAS 77057
1-800-262-6631
ANNUAL REPORT TO SHAREHOLDERS
OCTOBER 31, 1997
- --------------------------------------------------------------------------------
TRUSTEES OFFICERS
Edward L. Jaroski Edward L. Jaroski
President-Capstone International
Series Trust
James F. Leary
Robert W. Scharar
John R. Parker President-Capstone Japan Fund
Bernard J. Vaughan Linda G. Giuffre
Treasurer
Iris R. Clay
Secretary
Norma R. Ybarbo
Assistant Secretary
- --------------------------------------------------------------------------------
INVESTMENT ADVISER TRANSFER AGENT
FCA Corp. FPS Services, Inc.
5847 San Felipe 3200 Horizon Drive
Suite 850 P.O. Box 61503
Houston, TX 77057 King of Prussia, PA 19406-0903
1-800-845-2340
ADMINISTRATOR CUSTODIAN
Capstone Asset Management Company Bank of Tokyo-Mitsubishi Trust
Company
5847 San Felipe, Suite 4100 1251 Avenue of the Americas
Houston, TX 77057 New York, NY 10020
1-800-262-6631
DISTRIBUTOR AUDITORS
Capstone Asset Planning Company Briggs, Bunting & Dougherty, LLP
5847 San Felipe, Suite 4100 Two Logan Square, Suite 2121
Houston, TX 77057 Philadelphia, PA 19103-4901
1-800-262-6631
<PAGE>
ANNUAL REPORT
OCTOBER 31, 1997
CAPSTONE
JAPAN FUND
GRAPHIC OF: Pyramid
A Member Of
THE CAPSTONE GROUP
of Mutual Funds
GRAPHIC OF: Pyramid
THE CAPSTONE GROUP
OF MUTUAL FUNDS
- --------------------------------------------------------------------------------
EQUITY
O CAPSTONE GROWTH FUND, INC.
FIXED INCOME
O CAPSTONE GOVERNMENT INCOME FUND
INTERNATIONAL/GLOBAL
O CAPSTONE JAPAN FUND
O CAPSTONE NEW ZEALAND FUND
For more complete information about the Capstone Funds including charges and
expenses, contact the Distributor at the address
below to receive additional prospectuses.
Please read it carefully before you invest or send money.
This publication must be accompanied or preceded by a
current prospectus for Capstone Japan Fund
CAPSTONE ASSET PLANNING COMPANY
5847 SAN FELIPE, SUITE 4100
HOUSTON, TEXAS 77057
1-800-262-6631
CAPSTONE JAPAN FUND
5847 SAN FELIPE, SUITE 4100
HOUSTON, TX 77057
