<PAGE> 1
CAPSTONE NEW ZEALAND FUND
A FUND OF
CAPSTONE INTERNATIONAL SERIES TRUST
5847 San Felipe, Suite 4100
Houston, TX 77057
1-800-262-6631
MARCH 2, 1998
PROSPECTUS
Capstone New Zealand Fund (the "Fund") is a series of Capstone
International Series Trust (the "Trust"), a diversified open-end management
investment company. The Fund seeks to provide long-term capital appreciation
and current income by investing in equity securities, debt securities,
securities convertible into common stock of issuers in New Zealand and local
authority and New Zealand government securities.
The Trust currently has one other series, Capstone Japan Fund, and may
create additional series in the future. Each existing and future series will
be treated as a separate mutual fund with its own investment objective and
policies.
This Prospectus sets forth certain information about the 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 March 2,
1998 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
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE> 2
CAPSTONE NEW ZEALAND FUND
<TABLE>
<S> <C>
Investment Adviser: Administrator:
FCA Corp Capstone Asset Management Company
5847 San Felipe #850 5847 San Felipe, Suite 4100
Houston, Texas 77057 Houston, Texas 77057
Distributor: Shareholder Servicing 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
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PAGE
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<S> <C>
Prospectus Summary . . . . . . . . . . . . . . . . . . . . . 3
Fund Expenses . . . . . . . . . . . . . . . . . . . . . . . 5
Financial Highlights . . . . . . . . . . . . . . . . . . . . 7
Investment Objective and Policies . . . . . . . . . . . . . 8
The New Zealand Economy and Securities Market . . . . . . . 10
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . 11
Investment Restrictions . . . . . . . . . . . . . . . . . . 12
Performance Information . . . . . . . . . . . . . . . . . . 13
Management of the Fund . . . . . . . . . . . . . . . . . . . 14
Purchasing Shares . . . . . . . . . . . . . . . . . . . . . 17
Distributions and Taxes . . . . . . . . . . . . . . . . . . 19
Redemption and Repurchase of Shares . . . . . . . . . . . . 20
Determination of Net Asset Value . . . . . . . . . . . . . 21
Stockholder Services . . . . . . . . . . . . . . . . . . . 22
General Information . . . . . . . . . . . . . . . . . . . . 24
</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
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CAPSTONE NEW ZEALAND FUND
PROSPECTUS SUMMARY
Type of Company . . . . . . . . The Fund, which commenced operations on
November 25, 1991, is a series of an
open-end diversified management investment
company organized on May 9, 1986 as a
Massachusetts business trust. (see page 24)
Investment Objective . . . . . The primary investment objective of the
Fund is to provide long-term capital
appreciation and current income. It offers
investors an opportunity to pursue this
objective by participating in the New
Zealand securities market. (see page 8)
Investment Policies . . . . . . The Fund invests primarily in equity and
debt securities and securities convertible
into common stock of New Zealand issuers
including issuers that are organized under
New Zealand law, issuers that are listed on
the New Zealand Stock Exchange, issuers
that derive 50% or more of their total
revenues from goods and/or services
produced or sold in New Zealand, New
Zealand government and local authority
securities, and securities denominated in
New Zealand dollars. The Fund places
primary emphasis on those securities of
high quality that afford current income and
which, in the case of equities, in the
opinion of the Fund's Adviser, seem capable
of appreciating. (see page 8)
Investment Adviser . . . . . . FCA Corp (the "Adviser") is the Fund's
investment adviser. The Adviser provides
investment advice and portfolio management
services to the Fund. The Adviser is paid
a monthly fee equal to an annual rate of
0.75% of the Fund's average net assets.
The Fund is the Adviser's only investment
company client. (see page 14)
Administrator . . . . . . . . . Capstone Asset Management Company is the
Fund's administrator (the "Administrator").
The Administrator provides advisory and/or
administrative services to the other mutual
funds in the Capstone Group. The
Administrator is paid a monthly fee equal
to an annual rate of 0.25% of the Fund's
average net assets, plus a monthly fee to
reimburse it for the cost of accounting,
bookkeeping and pricing services it
performs for the Fund. (see page 15)
Expenses of the Fund . . . . . For the last fiscal year, the Fund's total
operating expenses, after reimbursements
and voluntary payments by the Adviser and
Administrator, were 2.50% of its average
net assets. (see page 17)
Dividends and
Distributions . . . . . . . . The Fund pays dividends from net investment
income and distributions from capital
gains, if any, at least annually. (see
page 19)
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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 bears certain
expenses pursuant to a written Rule 12b-1
distribution plan. (see page 17)
Minimum Purchase . . . . . . . The minimum initial investment, with
certain exceptions, is $200. There is no
minimum for subsequent purchases. (see
page 17)
Redemption . . . . . . . . . . Shares of the Fund are redeemed at the next
determined net asset value, without charge.
(see page 20)
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FUND EXPENSES
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<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES
<S> <C>
Maximum Sales Load Imposed on Purchases 0%
(as a percentage of offering price)
Maximum Sales Load Imposed on Reinvested Dividends 0%
(as a percentage of offering price)
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) 0%
Exchange Fee 0%
</TABLE>
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
<S> <C>
Management Fees 0.43%
(After expense reimbursement)
12b-1 Fees* 0.25%
Other Expenses 1.82%
(After expense reimbursements)
Total Fund Operating Expenses 2.50%
</TABLE>
EXAMPLE
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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: $25 $78 $133 $284
</TABLE>
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* 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 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").
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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 management fee information contained in the
table reflects an expense reimbursement by the Fund's Adviser. Without the
expense reimbursement, the fees paid to the Adviser would have amounted to .75%
of the Fund's average net assets, total Fund operating expenses would have been
2.89%, (which is higher than that of most other investment companies), and
expenses in the same 1, 3, 5 and 10 year periods shown in the Example would
have been $29, $89, $152, and $321, respectively. See "Management of the Fund"
for more complete descriptions of the fees paid to the Adviser and of an
expense limitation applicable to the Fund.
THE EXAMPLE WHICH IMMEDIATELY FOLLOWS THE TABLE USES THE "TOTAL FUND OPERATING
EXPENSES" FIGURE ABOVE AND ASSUMES IT WILL REMAIN CONSTANT OVER THE ILLUSTRATED
PERIOD. THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL FUND EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN
IN THE EXAMPLE OR IN THE TABLE.
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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 the independent certified public
accounting firms of Briggs, Bunting & Dougherty, LLP for the most recent fiscal
year and by other accountants for the other periods indicated. The Fund's
Annual Report contains additional performance information and is available free
of charge upon request by calling the Fund at 800-262-6631.
<TABLE>
<CAPTION>
Year Ended October 31,
---------------------------------------------------------------------
PER SHARE DATA 1997 1996 1995 1994 1993 1992(1)
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net asset value at beginning of year . . . $ 12.73 $ 11.12 $ 10.44 $ 11.61 $ 9.75 $ 10.00
------- ------- ------- ------- ------- -------
Income from investment operations:
Net investment income(loss) . . . . . . . .24 .19 .31 .16 .09 (.06)
Net realized and unrealized gain(loss)
on investments . . . . . . . . . . . (1.55) 1.93 .90 (1.00) 1.77 (.19)
------- ------- ------- ------- ------- -------
Total from investment operations . . . . . (1.31) 2.12 1.21 (.84) 1.86 (.25)
------- ------- ------- ------- ------- -------
Less distributions from:
Net investment income . . . . . . . . . . .17 .29 .21 .06 .-- .--
Net realized gain on investments . . . . .-- .22 .32 .27 . -- .--
------- ------- ------- ------- ------- -------
Total distributions . . . . . . . . . . . . .17 .51 .53 .33 . -- .--
------- ------- ------- ------- ------- -------
Net asset value at end of year . . . . . . $ 11.25 $ 12.73 $ 11.12 $10.44 $ 11.61 $ 9.75
======= ======= ======= ======= ======= =======
TOTAL RETURN(2) . . . . . . . . . . . . . . (10.46)% 20.03% 12.22% (7.40)% 19.08% (2.50)%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of year (in thousands). . $ 6,844 $ 8,258 $ 3,494 $ 3,014 $ 2,732 $ 883
RATIOS:
Operating expenses to average net assets:
Before expense reimbursement . . . . . . 2.89% 3.63% 4.77% 4.40% 8.19% 28.18%
After expense reimbursement . . . . . . . 2.50% 2.72% 2.52% 2.50% 2.50% 5.18%
Net investment income to
average net assets . . . . . . . . . . . 1.65% 2.32% 3.06% 1.55% .95% (1.84)%
Portfolio turnover rate . . . . . . . . . . 24% 38% 38% 40% 32% 4%
Average commission rate
(per share of security)(3) . . . . . . . $.0079 $ .0050
</TABLE>
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(1) November 25, 1991 (commencement of operations) to October 31, 1992.
(2) Calculated without sales charge. Sales charge eliminated on
August 21,1995.
(3) Average commission rate (per share of security) as required by amended
disclosure requirements effective September 1, 1995.
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<PAGE> 8
INVESTMENT OBJECTIVE AND POLICIES
The Fund's primary investment objective is to seek long-term capital
appreciation and current income. The Fund provides investors an opportunity to
pursue this objective by participating in the New Zealand securities market.
The Fund pursues its objective by investing primarily in equity and debt
securities and securities convertible into common stock of New Zealand issuers,
including issuers that are organized under New Zealand law, issuers listed on
the New Zealand Stock Exchange, issuers that derive 50% or more of their total
revenue from goods and/or services produced or sold in New Zealand, New Zealand
government and local authority securities, ADRs of New Zealand companies, and
securities denominated in New Zealand dollars. Under normal circumstances, the
Fund will invest at least 65% of its assets in New Zealand securities. As of
the date of this prospectus, to the best of the knowledge of the Adviser the
Fund is the only U.S.-registered mutual fund that invests primarily in New
Zealand securities. The Fund may also invest in U.S. securities which will
consist primarily of debt and money market securities. These objectives and
policies are not fundamental policies of the Fund and may be changed without
the approval of holders of shares of beneficial interest of the Fund. There
can be no assurance that the Fund will achieve its investment objective.
The Fund will invest principally in securities, which in the opinion
of the Fund's Adviser, seem capable of capital appreciation and/or current
income. The Fund seeks to diversify its investments across government issues,
industry groups and companies.
In determining appropriate investments for the Fund, primary emphasis
is placed upon the characteristics of the particular issuer, with macroeconomic
factors assuming a secondary, though still important, role. The Adviser's
investment philosophy for the Fund is that the best value in equity investing
lies in equity securities of quality companies with adequate cash flow,
reasonable price/earnings ratios, and current dividend payments. In selecting
an investment for the Fund, the Adviser reviews the earnings power, dividend
payout, cash flow, asset values, and market price of the issuer involved.
Macroeconomic factors that ordinarily are considered by the Adviser in
determining the appropriate distribution of investments among debt and equities
and particular issuers include the prospects for relative economic growth,
expected levels of inflation, government policies influencing business
conditions, the outlook for currency relationships, and the range of individual
investment opportunities available in the New Zealand market.
Securities of issuers in which the Fund may invest include common and
preferred stock, debt convertible into equity, and debt securities.
Investments in debt securities may include obligations of governmental issuers,
as well as obligations of companies having an outstanding debt issue rated A or
better by Moody's Investors Service, Inc. ("Moody's"), A or better by Standard
& Poor's Corporation ("S&P"), A or better by S&P - Australian Ratings ("S&P
Australian"), or obligations of comparable quality as determined by the Adviser
pursuant to guidelines approved by the Board of Trustees. Many New Zealand
debt securities are not rated, so their quality will be determined in
accordance with such guidelines approved by the Board of Trustees. Debt
securities acquired by the Fund may include, without limitation, conventional
fixed and variable rate bonds and debentures, zero-coupon and original issue
discount bonds and warrants to purchase debt instruments.
In order to have funds available for redemption and investment
opportunities, the Fund may hold a portion of its portfolio in cash or
short-term money market securities of United States and New Zealand issuers.
The Fund may purchase commercial paper rated (at the time of purchase) "A-1" by
S&P or "P-1"
8
<PAGE> 9
by Moody's or "A-1" by S&P Australian or, when deemed advisable by the Adviser,
issues rated "A-2", "P-2" or "A-2" by S&P, Moody's and S&P Australian,
respectively. These rating symbols are described in Appendix A to the
Statement of Additional Information.
The Fund may purchase bank obligations, such as certificates of
deposit, bankers' acceptances and time deposits, including U.S.
dollar-denominated instruments issued or supported by the credit of U.S. or New
Zealand banks or savings institutions having total assets at the time of
purchase in excess of $1 billion. Investment obligations of New Zealand banks
and New Zealand branches of domestic banks may entail risks that are different
from those of investments in domestic obligations of U.S. banks. These risks
may include future unfavorable political and economic developments, possible
withholding taxes on interest income, seizure or nationalization of foreign
deposits, currency controls, interest limitations, or other governmental
restrictions which might affect the payment of principal or interest on the
securities held by the Fund. Additionally, these institutions may be subject
to less stringent reserve requirements and to different accounting, auditing,
reporting and recordkeeping requirements than those applicable to domestic
branches of U.S. banks. The Fund, however, will invest in obligations of
domestic and New Zealand branches of New Zealand banks, and New Zealand
branches of domestic banks, only when the Adviser believes that the risks
associated with such investments are minimal. The Fund may also make
interest-bearing savings deposits in commercial and savings banks in accounts
not in excess of 5% of its total assets.
The Fund may purchase securities on a "when-issued" basis and may
purchase or sell securities on a "forward commitment" basis. These
transactions, which involve a commitment by the Fund to purchase or sell
particular securities with payment and delivery taking place at a future date
(perhaps one or two months later), permit the Fund to lock in a price or yield
on a security it owns or intends to purchase, regardless of future changes in
interest rates. When-issued and forward commitment transactions involve the
risk, however, that the price or yield obtained in a transaction may be less
favorable than the price or yield available in the market when the securities
delivery takes place. The Fund's when-issued purchases and forward commitments
are not expected to exceed 25% of the value of its total assets absent unusual
market conditions. The Fund does not intend to engage in when-issued purchases
and forward commitments for speculative purposes but only in furtherance of its
objectives.
To increase income on its investments, the Fund may lend its portfolio
securities to broker-dealers and other institutional investors pursuant to
agreements requiring that the loans be continuously secured by collateral equal
at all times in value to at least the market value of the securities loaned.
Collateral for such loans may include cash, securities of the U.S. Government
or its agencies or instrumentalities or an irrevocable letter of credit issued
by a bank which is deemed creditworthy by the Adviser. It is not anticipated
that loans will involve over 5% of the Fund's total assets. In no event will
such loans be made if, as a result, the aggregate value of securities loaned
exceeds one-third of the value of the Fund's total assets. There may be risks
of delay in receiving additional collateral or in recovering the securities
loaned or even a loss of rights in the collateral should the borrower of the
securities fail financially. However, loans will be made only to borrowers
deemed by the Adviser to be creditworthy and when, in the Adviser's judgment,
the income to be earned from the loan justifies the attendant risks.
Although the Fund has the authority to invest in options on stock and
stock indexes, futures contracts, options on futures contracts and repurchase
agreements, the Fund does not currently intend to trade in such instruments
during the next twelve months and will not trade in such instruments until
appropriate disclosure has been added in the Fund's Prospectus and Statement of
Additional Information.
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For additional information regarding such instruments, see Appendix B to the
Statement of Additional Information.
The ratings referred to in the above description of the Fund's
investment objectives and policies represent the minimum rating of a security
in which the Fund may invest, although the Fund may not necessarily dispose of
a security if it drops below the minimum rating.
The Fund's portfolio turnover rate will not be a factor preventing a
sale or purchase when the Adviser believes investment considerations warrant
such sale or purchase. Portfolio turnover may vary greatly from year to year
as well as within a particular year, subject to restrictions under Federal
income tax laws applicable to regulated investment companies. High portfolio
turnover rates will generally result in higher transaction costs to the Fund.
The portfolio turnover rate for the fiscal years ended October 31, 1997 and
October 31, 1996 was 24% and 38%, respectively.
THE NEW ZEALAND ECONOMY AND SECURITIES MARKET
THE NEW ZEALAND ECONOMY
The general consensus of the local market analysts is that the New
Zealand economy is improving. Macroeconomic fundamentals are strong as are
corporate balance sheets and it is estimated economic growth will be in excess
of 3.0% in the March years 1999 and 2000. The projected fiscal surplus for
1998 will allow the government to continue to repay its foreign debt and to
follow through with proposed personal income tax cuts as well as announce
cuts to company tax rates. The America Cup races, the Olympics in Sydney and
other global events being held in New Zealand should have a very positive
impact in the near future. The Fund's Adviser believes that with the
additional government spending, the reduction in the tax rates and the weaker
New Zealand dollar, inflation will rise over the next year but will remain
within the Reserve Bank's target range of 0 to 3%.
10
<PAGE> 11
THE NEW ZEALAND SECURITIES MARKET
Securities trading in New Zealand is centralized in the New Zealand
Stock Exchange ("NZSE"), which provides facilities for buying and selling a
wide range of listed government, semi-government, state-owned enterprise and
private corporate securities. Relative to securities markets in the U.S. and
in many European and Asian countries, the New Zealand securities market is
small. Market capitalization and trading volume is concentrated in a limited
number of New Zealand companies representing a small number of industries.
The NZSE currently quotes the securities of more than 226 companies.
The aggregate market capitalization of the securities quoted on the NZSE at
February 27, 1998 was approximately NZ $52 billion (US $30.5 billion), with
the six largest companies accounting for approximately 60% of the total market
capitalization of such securities.
The performance of the New Zealand securities market is measured by
three indices, the NZSE-40, the NZSE-30 and the NZSCI. The NZSE-40 is composed
of a basket of the 40 leading equity securities weighted by their full market
capitalization. The NZSE-30 measures the 30 largest issuers by value after
excluding any shares held in ownership blocks of 30% or more. The NZSCI Capital
is composed of approximately 100 small company securities weighted by their full
market capitalization, and typically have less offshore investment than
companies in the main NZSE-40. Although Capstone New Zealand Fund invests in the
leading securities, the NZSCI may provide a more meaningful comparison to the
Fund because it more closely resembles the Fund's portfolio mix.
RISK FACTORS
Investments by United States investors in securities of foreign
issuers involve risks not associated with their investments in securities of
United States issuers. Since the Fund will invest heavily in securities
denominated or quoted in New Zealand dollars, the Fund may be affected
favorably or unfavorably by exchange control regulations or changes in the
exchange rate between the New Zealand and the U.S. dollar. Changes in currency
exchange rates will influence values within the portfolio from the perspective
of United States investors. Changes in currency exchange rates may also affect
the value of dividends and interest earned, gains and losses realized on the
sale of securities and net investment income and gains, if any, to be
distributed to stockholders of the Fund. The New Zealand dollar is fully
exchangeable into U.S. dollars without legal restriction and trades on a
floating basis against all major currencies. The rate of exchange between the
U.S. dollar and the New Zealand dollar is determined by the forces of supply
and demand in the foreign exchange markets. These forces are affected by the
international balance of payments and other economic and financial conditions,
government intervention, speculation and other factors. The Fund may, to a
limited extent, enter into forward foreign currency contracts as a hedge
against possible variations in the exchange rates between the U.S. dollar and
the New Zealand dollar. Such contracts are agreements to purchase or sell a
specified currency at a specified future date (up to a year) and price. The
Fund's dealings in currency exchange contracts will be limited to hedging
involving either specific transactions or portfolio positions. The Fund is not
obligated to enter into these contracts and there is no guarantee any such
contracts will achieve the desired objective. The Fund will not enter into or
maintain a position in those contracts if their consummation would obligate the
Fund to deliver an amount of New Zealand currency greater than the value of the
Fund's assets
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denominated or quoted in, or currency convertible into, such currency.
There may be less publicly available information about New Zealand
issuers than about United States issuers, and New Zealand issuers are subject
to uniform accounting, auditing and financial reporting standards and
requirements not exactly like those of United States issuers. While the New
Zealand securities market is growing, it has substantially less trading volume
than United States markets, and, as a result, securities are generally less
liquid and their prices more volatile than securities of comparable United
States issuers.
Brokerage commissions and other transaction costs in New Zealand may
be higher than in the United States. There is generally less government
supervision and regulation of business and industry practices of exchanges,
brokers and issuers in New Zealand than there is in the United States. In
particular, delays in settling securities transactions may occur. This may, at
times, make it difficult for the Fund to liquidate a previously established
securities position. Settlement delays may result in the Fund experiencing
delays in the receipt of dividends and interest. The Fund will rely on the
expertise of its custodian bank to help reduce these delays.
Although New Zealand has a relatively stable and friendly government,
there is the possibility of imposition of exchange controls or other
restrictions, expropriation of assets, confiscatory taxation, imposition of
foreign withholding taxes, political or social instability or diplomatic
developments which could affect investments in New Zealand securities.
The Fund's investment flexibility may be further limited by
restrictions on percentage of ownership by non-New Zealand persons that may be
applicable under New Zealand law or corporate charters with respect to certain
New Zealand companies. Additionally, certain rights offerings to shareholders
of New Zealand companies in which the Fund may invest may not be made available
to the Fund as a U.S. shareholder if such an offer to a U.S. investor would
require registration with the Securities and Exchange Commission.
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 investments in New Zealand issuers, 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 a majority of the Fund's stockholders ("fundamental
policies"), and which are designed to enhance the realization of the Fund's
investment objective. Among other things, these restrictions provide that the
Fund may not:
o with respect to 75% of its assets, purchase more than 10% of
the voting securities of any one issuer or invest more than 5%
of the value of its total assets in the securities or
instruments of any one issuer, except securities or
instruments issued or guaranteed by the U.S. Government, its
agencies or instrumentalities;
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<PAGE> 13
o purchase securities or instruments which would cause 25% or
more of the market value of its total assets at the time of
such purchase to be invested in securities or instruments of
one or more issuers having their principal business activities
in the same industry or in securities issued or guaranteed by
a single government or its agencies or instrumentalities, or
with respect to repurchase agreements secured by such
securities or instruments, provided that there is no limit
with respect to investments in the U.S. Government, its
agencies and instrumentalities;
o borrow money, except that as a temporary measure for
extraordinary or emergency purposes it may borrow from banks
in an amount not to exceed 1/3 of the value of its net assets,
including the amount borrowed.
For a complete list of the Fund's fundamental and non-fundamental
policies, see the Statement of Additional Information.
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 average
annual total return reflect 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. Total return is based on past performance and is not a guarantee
of future results.
Performance information for the Fund may be compared, in reports and
promotional literature, to those of other mutual funds with similar investment
objectives and to other relevant indices or to ratings prepared by independent
services or other financial or industry publications that monitor the
performance of mutual funds. For example, the total return, average annual
total return and/or yield of the Fund may be compared to data prepared by
Lipper Analytical Services, Inc., the New Zealand Small Company Index, CDA
Investment Technologies, Inc. and Weisenberger Investment Company Service,
analytical firms such as Frank Russell Company and SEI Corporation and with the
performances of Standard & Poor's 500 Stock Index ("S&P 500"), Barclays
Industrial Share Index, the NZSE-40 Capital, the NZSE-30, the Dow Jones
Industrial Average ("DJIA"), the Shearson Lehman Hutton Government Corporate
Bond Index 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. Total return and yield data as reported in
national financial publications such as Money Magazine, Forbes, Fortune,
Business Review Weekly, The Wall Street Journal and The New York Times, or in
publications of a local or regional nature may also be used in comparing the
performance of the Fund. Unmanaged indices may assume the reinvestment of
dividends but generally do not reflect deductions for administrative and
management costs and expenses.
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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. For a
description of the methods used to determine the Fund's yield, average annual
total return and total return, see the Statement of Additional Information.
MANAGEMENT OF THE FUND
Capstone New Zealand 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
FCA Corp (the "Adviser"), a fee-based financial planning and
investment counseling firm located at 5847 San Felipe #850, Houston, Texas
77057, provides investment advice and portfolio management services to the
Fund. FCA was incorporated in 1983 and its predecessor was formed in 1975.
In addition to the Fund, the Adviser acts as an investment adviser to:
Capstone Japan Fund, an open-end management investment company; United
Investors Realty Trust, an equity real estate investment trust ("REIT"); First
Commonwealth Mortgage Trust, a mortgage REIT; and Ivy Realty Trust, an equity
real estate investment trust, as well as providing investment advice to
individual clients.
The Fund is managed by Robert W. Scharar, the President of FCA Corp.
In 1975 Mr. Scharar co-founded First Commonwealth Associates, the predecessor
to FCA Corp, which he formed in 1983. Mr. Scharar received an AA from Polk
Community College, a BSBA in Accounting from the University of Florida, an MBA
and JD from Northeastern University, and a LLM in Taxation from Boston
University Law School. He is a member of the Florida and Massachusetts Bars
and is a member of the Florida Institute of Certified Public Accountants. He
has experience as an Accounting Professor at Bentley and Nichols Colleges, and
was an officer of United States Trust Company (Boston) and a tax specialist at
Coopers & Lybrand. Mr. Scharar is a contributing author to the Clark Boardman
Callaghan's publication, "Estate and Personal Financial Planning." His
directorships include the American Association of Attorney-CPA's, First
Commonwealth Mortgage Trust, United Investors Realty Trust and Southwestern
Property Trust.
The Investment Advisory Agreement between the Fund and the Adviser
provides that the Fund pays the Adviser a fee computed daily and payable
monthly, equal to an annual rate of 0.75% of the Fund's average net assets.
For the fiscal year ended October 31, 1997, the Fund paid advisory fees equal
to 0.75% of its average net assets, of which approximately .32% was reimbursed
by the Adviser pursuant to an expense limitation discussed below.
Pursuant to the terms of the Investment Advisory Agreement, and
subject to the authority of the
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<PAGE> 15
Fund's Board of Trustees, the Adviser is responsible for providing a program of
continuous investment management for the Fund in accordance with the Fund's
investment objective, policies and limitations; making investment decisions for
the Fund; and placing orders to purchase and sell securities for the Fund.
Consistent with policies described in the Statement of Additional Information
regarding allocation of the Fund's portfolio transactions, the Adviser may place
orders for portfolio transactions with the Distributor, TradeStar Investments,
Inc. and Williams MacKay Jordan & Co., Inc. (affiliates of the Administrator),
and may consider sales of Fund shares as a factor in placing such orders.
ADMINISTRATOR
Capstone Asset Management Company (the "Administrator"), a
wholly-owned subsidiary of Capstone Financial Services, Inc., provides
administrative services for the Fund, supervises the Fund's daily business
affairs, coordinates the activities of persons providing services to the Fund,
and furnishes 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 Administration Agreement
provides that the Administrator receives from the Fund a fee, computed daily
and payable monthly, at an annual rate of 0.25% of the Fund's average net
assets.
Accounting, bookkeeping and pricing services for the Fund are provided
by Fifth Third Bank of Cincinnati, Ohio. Prior to June 1997, these services
were provided by the Administrator, for which the Administrator received a
monthly fee to reimburse the Administrator for its costs. This amount was not
intended to include any profit to the Administrator and was in addition to the
administrative fees described above.
The Administrator provides administrative and/or investment advisory
services to three other mutual funds: Capstone Japan Fund, Capstone Government
Income Fund and Capstone Growth Fund, Inc. (collectively, the "Capstone
Funds"), and 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
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<PAGE> 16
information to customers in answering questions concerning the Fund and their
transactions with the Fund. The Distributor is also authorized to engage in
advertising, the preparation and distribution of sales literature and other
promotional activities on behalf of the Fund. In addition, the Plan authorizes
payment by the 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. During the fiscal year ended October
31, 1997, the effective rate of servicing fees paid to the Distributor and
other Service Organizations was approximately 0.20% and 0.05%, respectively, of
the Fund's average net assets. 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 approved by the Fund's stockholders on August 10, 1992
and took effect on September 1, 1992. It 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 12, 1997. The Plan will be continued 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 Administrator and the Adviser; taxes; legal fees;
custodian and auditing fees; transfer agent fees; fees paid to outside firms
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
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<PAGE> 17
under the Investment Advisory Agreement and to the Administrator under the
Administration Agreement. Due to recent Federal and state legislation, such
state expense limitations are no longer applicable to the Fund. However, the
Adviser has voluntarily agreed to honor the expense limitation contained in its
agreement with the Fund and to make additional payments to the Fund if the
Fund's operating expenses exceed 2.5% of its average net assets after
reimbursement of the advisory fees. The payments will be out of the Adviser's
own resources and will not be subject to re-payment by the Fund. The Fund's
annual total operating expenses, after reimbursements from the Adviser, during
the fiscal year ended October 31, 1997 were 2.50% of its average net assets.
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 and President of the Administrator and the Distributor. Some other
officers of the Trust are also officers of the Administrator, the Distributor
and Capstone Financial Services, Inc.
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, 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
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<PAGE> 18
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 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.
PURCHASES THROUGH THE DISTRIBUTOR
An account may be opened by mailing a check or other negotiable bank
draft (payable to Capstone New Zealand Fund) for $200 or more together with the
completed Investment Application Form to the Fund's Transfer Agent: Capstone
New Zealand Fund, c/o FPS Services, Inc., 3200 Horizon Drive, P.O. Box 61503,
King of Prussia, Pennsylvania 19406-0903. The $200 minimum initial investment
will 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 the greater of $1,000 or five times the
net asset value of shares (for which certificates have not been issued) held by
the stockholder on the day preceding such telephone purchase for which payment
has been received. The telephone purchase will be effected at the net asset
value next computed after receipt of the call by the Fund's 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 New Zealand 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 New Zealand Fund, c/o FPS
Services, Inc., 3200 Horizon Drive, P.O. Box 61503, King of Prussia,
Pennsylvania 19406-0903.
Subsequent Purchases - Additional investments may be made at any time
through the wire procedures
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<PAGE> 19
described above, which must include the investor's name and account number. The
investor's bank may impose a fee for investments by wire.
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 in cash and capital gain
distributions in additional Fund shares, or
Option 2. To receive all dividend and capital gain distributions
in cash.
The Fund intends to pay any dividends from investment company taxable
income and distributions representing net 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 U.S. 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, but the rate of tax will depend on the
Fund's holding period of the assets whose sale results in the gain. 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.
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<PAGE> 20
REDEMPTION AND REPURCHASE OF SHARES
Generally, stockholders may require the Fund to redeem their shares by
sending a written request, signed by the record owner(s), to Capstone New
Zealand Fund, c/o FPS Services, Inc., 3200 Horizon Drive, P.O. Box 61503, 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 charge
for the redemption of shares.
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<PAGE> 21
EXPEDITED TELEPHONE REDEMPTION
A stockholder redeeming at least $1,000 of shares (for which
certificates have not been issued), and who has authorized expedited redemption
on the application form filed with the Fund's 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. 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 exchange 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 confirmation 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, Martin Luther King's
Birthday, 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 New Zealand Stock Exchange is
closed for 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
17:00 Greenwich Mean Time on each U.S. business day.
Portfolio securities which are primarily traded on securities
exchanges are valued at the last sale price on that exchange or, if there is no
recent last sale 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 prior to the time of valuation.
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<PAGE> 22
Debt securities, except short-term obligations, are valued by using
market quotations or independent pricing services which use prices provided by
market makers or estimates of market values obtained from yield data relating
to instruments or securities with similar characteristics. Other securities,
including restricted securities, and other assets are valued at fair value as
determined in good faith by the Board of Trustees. Because of the need to
obtain prices as of the close of trading on the New Zealand Stock Exchange, the
calculation of net asset value does not take place contemporaneously with the
determination of the prices of the majority of the portfolio securities. If an
event were to occur after the value of a Fund instrument was so established but
before the net asset value per share is determined which is likely to
materially change the net asset value, the Fund instrument would be valued
using fair value considerations established by the Board of Trustees.
STOCKHOLDER SERVICES
Capstone New Zealand 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 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
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<PAGE> 23
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 stockholders 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 authorize 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 telephone
exchanges.
When exchange 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 confirmation 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.
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.
23
<PAGE> 24
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 Fund was established as a separate series of the Trust on November
14, 1990. 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). 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, nonassessable 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.
The Fund's securities are held by The Fifth Third Bank under a
Custodian Agreement with the Fund. FPS Services, Inc. acts as both Transfer
Agent and dividend paying agent for the Fund.
As of February 17, 1998, the following stockholder owned more than 5%
of the Fund's outstanding shares of beneficial interest: Smith Barney Shearson
(14.10%); Charles Schwab & Company, Inc. (13.36%); and Merrill Lynch (5.96%).
Stockholders should address inquiries to the Fund at its address
stated on the cover page of this Prospectus.
24
<PAGE> 25
CAPSTONE NEW ZEALAND FUND
A FUND
OF CAPSTONE INTERNATIONAL SERIES TRUST
STATEMENT OF ADDITIONAL INFORMATION
MARCH 2, 1998
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
March 2, 1998. 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 Policies and Restrictions . . . . . . . . . . . . . . . . . 2
Performance Information . . . . . . . . . . . . . . . . . . . . . . . . 7
New Zealand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
New Zealand Stock Exchange . . . . . . . . . . . . . . . . . . . . . . 11
Trustees and Executive Officers . . . . . . . . . . . . . . . . . . . . 12
Investment Advisory Agreement . . . . . . . . . . . . . . . . . . . . . 14
Administration Agreement . . . . . . . . . . . . . . . . . . . . . . . 15
Distributor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Portfolio Transactions and Brokerage . . . . . . . . . . . . . . . . . 16
Determination of Net Asset Value . . . . . . . . . . . . . . . . . . . 18
How to Buy and Redeem Shares . . . . . . . . . . . . . . . . . . . . . 19
Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Control Persons and Principal Holders of Securities . . . . . . . . . . 26
Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Appendix A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Appendix B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . 31
</TABLE>
<PAGE> 26
GENERAL INFORMATION
Capstone New Zealand Fund (the "Fund") commenced operations on
November 25, 1991 as a series (or fund) of Capstone International Series Trust
(the "Trust"). The Trust currently has one other active series, Capstone
Japan Fund, which invests primarily in Japanese securities. 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
registered as 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. FCA Corp (the
"Adviser") serves as the Fund's Investment Adviser.
INVESTMENT POLICIES AND RESTRICTIONS
OBLIGATIONS OF DOMESTIC BANKS, NEW ZEALAND BANKS AND NEW ZEALAND
BRANCHES OF U.S. BANKS. With respect to bank obligations that may be acquired
by the Fund, the assets of a bank or savings institution will be deemed to
include the assets of its domestic and foreign branches. Thus, in addition to
investments in obligations of U.S. banks and savings institutions and their
U.S. and foreign branches, the Fund's investments in short-term bank
obligations may include obligations of New Zealand and other non-U.S. banks and
their branches, wherever situated.
The Fund may also make overnight deposits denominated in New Zealand
dollars in offshore banking units ("OBUs"), in accordance with the Fund's
credit quality criteria. An OBU is a bank or other financial institution in
New Zealand that is authorized to deal in foreign exchange which the New
Zealand government declares to be an OBU. OBUs are restricted to (i) receiving
deposits denominated in New Zealand dollars from non-residents of New Zealand
or deposits in currencies other than the New Zealand dollar from New Zealand
residents and (ii) lending to non-residents outside New Zealand and to other
OBUs. A deposit in an OBU is similar to a time deposit in a New Zealand bank
except that interest payable to non-residents on an OBU deposit is exempt from
withholding tax.
ZERO COUPON BONDS. Although zero coupon securities pay no interest to
holders prior to maturity, interest on these securities is reported as income
to the Fund and distributed to its stockholders. These distributions must be
made from the Fund's cash assets or, if necessary, from the proceeds of sales
of portfolio securities. The Fund will not be able to purchase additional
income producing securities with cash used to make such distributions and its
current income ultimately may be reduced as a result.
U.S. GOVERNMENT OBLIGATIONS. Examples of the types of U.S. Government
obligations which the Fund may hold include U.S. Treasury Bills, Treasury Notes
and Treasury Bonds and the obligations of Federal Home Loan Banks, Federal Farm
Credit Banks, Federal Land Banks, the Federal Housing Administration, Farmers
Home Administration, Export-Import Bank of the United States, Small Business
Administration, Federal National Mortgage Association, Government National
Mortgage Association, General Services Administration, Student Loan Marketing
Association, Central Bank for Cooperatives, Federal Home Loan Mortgage
Corporation, Federal Intermediate Credit Banks, Maritime Administration,
International Bank for Reconstruction and Development (the "World Bank"), the
Asian-American Development Bank and the Inter-American Development Bank.
2
<PAGE> 27
WHEN-ISSUED PURCHASES AND FORWARD COMMITMENTS. When the Fund agrees
to purchase securities on a when-issued or forward commitment basis, the
custodian will set aside cash or liquid portfolio securities equal to the
amount of the commitment in a separate account. Normally, the custodian will
set aside portfolio securities to satisfy a purchase commitment, and in such a
case the Fund may be required subsequently to place additional assets in the
separate account in order to ensure that the value of the account remains equal
to the amount of the Fund's commitments. It may be expected that the market
value of the Fund's net assets will fluctuate to a greater degree when it sets
aside portfolio securities to cover such purchase commitments than when it sets
aside cash. Because the Fund's liquidity and ability to manage its portfolio
might be affected when it sets aside cash or portfolio securities to cover such
purchase commitments, the Fund expects that its commitments to purchase
when-issued securities and forward commitments will not exceed 25% of the value
of its total assets, absent unusual market conditions.
The Fund will purchase securities on a when-issued or forward
commitment basis only with the intention of completing the transaction and
actually purchasing the securities. If deemed advisable as a matter of
investment strategy, however, the Fund may dispose of or renegotiate a
commitment after it is entered into, and may sell securities it has committed
to purchase before those securities are delivered to the Fund on the settlement
date. In these cases the Fund may realize a taxable capital gain or loss.
When the Fund engages in when-issued and forward commitment
transactions, it relies on the other party to consummate the trade. Failure of
such party to do so may result in the Fund's incurring a loss or missing an
opportunity to obtain a price considered to be advantageous.
The market value of the securities underlying a when-issued purchase
or a forward commitment to purchase securities, and any subsequent fluctuations
in their market value, is taken into account when determining the market value
of the Fund starting on the day the Fund agrees to purchase the securities.
The Fund does not earn interest on the securities it has committed to purchase
until they are paid for and delivered on the settlement date.
FOREIGN CURRENCY TRANSACTIONS. In order to protect against a possible
loss on investments resulting from a decline in the New Zealand dollar against
the U.S. dollar, the Fund is authorized to enter into forward foreign currency
exchange contracts. These contracts involve an obligation to purchase or sell
a specified currency at a future date at a price set at the time of the
contract. Forward currency contracts do not eliminate fluctuations in the
values of portfolio securities but rather allow the Fund to establish a rate of
exchange for a future point in time. The Fund may enter into forward foreign
currency exchange contracts when deemed advisable by its Adviser under two
circumstances.
First, when entering into a contract for the purchase or sale of a
security, the Fund may enter into a forward foreign currency exchange contract
for the amount of the purchase or sale price to protect against variations
between the date the security is purchased or sold and the date on which
payment is made or received, in the value of the New Zealand dollar relative to
the U.S. dollar.
Second, the Fund may enter into such a contract when the Adviser
anticipates that the New Zealand dollar may decline substantially relative to
the U.S. dollar, in order to sell, for a fixed amount, the amount of New
Zealand dollars approximating the value of some or all of the Fund's securities
denominated in such New Zealand dollars. The Fund does not intend to enter
into forward contracts under this second circumstance on a regular or
continuing basis and will not do so if, as a result, the Fund
3
<PAGE> 28
will have more than 15% of the value of its total assets committed to such
contracts. With respect to any forward foreign currency contract, it will not
generally be possible to match precisely the amount covered by that contract
and the value of the securities involved due to the changes in the values of
such securities resulting from market movements between the date the forward
contract is entered into and the date it matures. In addition, while forward
contracts may offer protection from losses resulting from declines in the value
of the New Zealand dollar, they also limit potential gains which might result
from increases in the value of the New Zealand dollar. The Fund will also
incur costs in connection with forward foreign currency exchange contracts and
conversions of New Zealand dollars and U.S. dollars.
A separate account of the Fund consisting of cash or liquid securities
equal to the amount of the Fund's assets that could be required to consummate
any forward contracts entered into under the second circumstance, as set forth
above, will be established with the Fund's custodian. For the purpose of
determining the adequacy of the securities in the account, the deposited
securities will be valued at market or fair value. If the market or fair value
of such securities declines, additional cash or securities will be placed in
the account daily so that the value of the account will equal the amount of
such commitments by the Fund.
YIELDS AND RATINGS. The yields on certain obligations are dependent
on a variety of factors, including general market conditions, conditions in the
particular market for the obligation, the financial condition of the issuer,
the size of the offering, the maturity of the obligation and the ratings of the
issue.
The ratings of Moody's Investors Service, Inc. ("Moody's"), Standard &
Poor's Corporation ("S&P") and S&P - Australian Ratings ("S&P Australian")
represent their respective opinions as to the quality of the obligations they
undertake to rate. (See Appendix A and B). Ratings, however, are general and
are not absolute standards of quality. Consequently, obligations with the same
rating, maturity and interest rate may have different market prices.
Subsequent to its purchase by the Fund, a rated security may cease to be rated.
The Adviser will consider such an event in determining whether the Fund should
continue to hold the security. In the event that the rating of the security is
reduced below the minimum rating required for purchase by the Fund, the Fund's
Adviser may, but will not necessarily, dispose of the security.
New Zealand obligations in which the Fund may invest may not
necessarily be rated by a recognized rating agency. Investments will be made
in such obligations only when they are deemed by the Adviser to meet the
quality standards required by the Fund.
INVESTMENT RESTRICTIONS. The Trust has adopted with respect to the
Fund the following "fundamental" restrictions which 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, purchase more than
10% of the voting securities of any one issuer or invest more
than 5% of the value of such assets in the securities or
instruments of any one issuer, except securities or
instruments issued or guaranteed by the U.S. Government, its
agencies or instrumentalities.
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<PAGE> 29
2. Purchase securities or instruments which would cause 25% or
more of the market value of the Fund's total assets at the
time of such purchase to be invested in securities or
instruments of one or more issuers having their principal
business activities in the same industry or in securities or
instruments issued or guaranteed by a single government or its
agencies or instrumentalities, or with respect to repurchase
agreements secured by such securities or instruments, provided
that there is no limit with respect to investments in the U.S.
Government, its agencies and instrumentalities.
3. Borrow money, except that as a temporary measure for
extraordinary or emergency purposes it may borrow from banks
in an amount not to exceed 1/3 of the value of its net assets,
including the amount borrowed.
4. Issue any senior securities, except as appropriate to evidence
indebtedness which it is permitted to incur, and provided that
collateral arrangements with respect to forward contracts,
futures contracts or options, including deposits of initial
and variation margin, are not considered to be the issuance of
a senior security for purposes of this restriction.
5. Underwrite securities issued by other persons except to the
extent that in connection with the purchase of portfolio
securities and their later disposition it may be deemed to be
an underwriter under the Federal securities laws.
6. Purchase or sell real estate including limited partnership
interests (except that the Fund may invest in securities of
companies which deal in real estate and securities secured by
real estate or interests therein and the Fund reserves the
freedom of action to hold and sell real estate acquired as a
result of the Fund's ownership of securities).
7. Purchase or sell commodities or commodity contracts, except
that the Fund may invest in futures contracts and in options
related to such contracts (for purposes of this restriction,
forward foreign currency exchange contracts are not deemed to
be commodities).
8. Make loans to other persons except (a) through the lending of
securities held by it and (b) by the purchase of debt
securities in accordance with its investment policies.
The Fund has adopted the following additional restrictions which are
not fundamental and which may be changed without stockholders' approval, to the
extent permitted by applicable law, regulation or regulatory policy. The Fund
may not:
a. Purchase securities on margin, except for such short-term
credits as are necessary for the clearance of transactions and
in connection with entering into futures contracts and related
options;
b. Sell securities short or maintain a short position (except as
may be otherwise required in connection with the Fund's
transactions in futures, options or forward transactions or
may be necessary in connection with clearance of Fund
transactions);
c. Invest more than 5% of its total assets in the aggregate in
securities of issuers which are
5
<PAGE> 30
not readily marketable, including securities of issuers which
together with any predecessors have a record of less than three
years continuous operation, repurchase agreements not
terminable within 7 days and restricted securities.
d. Invest in securities of other open-end investment companies
(other than in connection with a merger, consolidation,
reorganization or acquisition of assets) and may not invest in
closed-end investment companies if immediately after such
investment (i) more than 5% of the value of the Fund's total
assets would be invested in the securities of any one
investment company; (ii) more than 10% of the value of its
total assets would be invested in securities of investment
companies; (iii) more than 3% of the outstanding voting stock
of any one investment company would be owned by the Fund; and
(iv) more than 10% of the outstanding voting securities of a
closed-end investment company would be owned by the Fund,
other investment companies having the same investment adviser
and companies controlled by such investment companies;
e. Write put and call options unless the options are "covered,"
the underlying securities are ones which the Fund is permitted
to purchase and the option is issued by the Options Clearing
Corporation, provided that the aggregate value of the
securities underlying the calls or obligations underlying the
puts determined as of the date the options are sold shall not
exceed 25% of the Fund's net assets;
f. Buy and sell stock index futures, financial futures and put
and call options written by others on securities, stock
indexes, stock index futures and financial futures unless (a)
the options or futures are offered through the facilities of a
national securities association which has obtained applicable
regulatory approval or are listed on a national securities or
commodities exchange, (b) the aggregate premiums paid on all
such options held by the Fund at any time do not exceed 20% of
its total net assets and (c) the aggregate margin deposits on
all such futures and premiums on related options held by the
Fund at any time do not exceed 5% of its total assets;
g. 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;
h. Invest in oil, gas or other mineral leases or exploration or
development programs (although it may purchase securities of
issuers which own, sponsor or invest in such interests);
i. 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;
j. Invest more than 5% of the Fund's assets (valued at the lower
of cost or market) in warrants. Included within that amount,
but not to exceed 2% of the value of the Fund's net assets,
may be warrants which are not listed on the New York or
American Stock Exchange.
6
<PAGE> 31
For purposes of restriction Nos. 1 and 2, above, a security or
instrument is considered to be issued by the entity (or entities) whose assets
and revenues back the security or instrument. A guarantee of a security or
instrument shall not be deemed to be a security or instrument issued by the
guarantor when the value of all securities and instruments issued and
guaranteed by the guarantor, and owned by the Fund, does not exceed 10% of the
value of the Fund's total assets. For purposes of restriction No. 2, above,
wholly-owned finance companies will be considered to be in the industries of
their parents if their activities are primarily related to financing the
activities of the parents and utilities will be divided according to their
services. For example, gas, gas transmission, electric and gas, electric and
telephone will each be considered a separate industry.
With regard to non-fundamental restriction No. c., above, included in
the 5% limit will be, for purposes of determination of daily net asset value,
securities for which there is no sales price available or securities not quoted
on the New Zealand Stock Exchange or another exchange. The valuation of such
securities will be based on the average of quotations from two leading New
Zealand brokers in the relevant equity or fixed income securities market (see
"Determination of Net Asset Value" in the Prospectus). For purposes of
non-fundamental restriction No. i., above, securities held in escrow or
separate accounts in connection with the Fund's investment practices are not
deemed to be pledged.
Although the foregoing investment limitations would permit the Fund to
invest in options and to sell securities short against the box, the Fund does
not currently intend to trade in such instruments during the next twelve
months. In addition, although the foregoing investment limitations would
permit the Fund to invest in futures contracts and options on futures
contracts, the Fund does not intend to trade in such instruments during the
next twelve months. Prior to making any other such investments, the Fund would
notify its stockholders and add appropriate disclosure concerning the Fund's
investment in such instruments to the Prospectus and this Statement of
Additional Information.
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 Fund's portfolio turnover
rate for the fiscal year ended October 31, 1997 was 24%.
PERFORMANCE INFORMATION
The Fund may from time to time include figures indicating its total
return or average annual total return in advertisements or reports to
stockholders or prospective investors. Average annual total return and total
return figures represent the increase (or decrease) in the value of an
investment in the Fund over a specified period. Both calculations assume that
all income dividends and capital gains distributions during the period are
reinvested at net asset value in additional Fund shares. Quotations of the
average annual total return reflect the deduction of a proportional share of
Fund expenses on an annual basis. The results, which are annualized, represent
an average annual compounded rate of return on a hypothetical investment in the
Fund over a period of 1, 5 and 10 years ending on the most recent calendar
quarter (but not for a period greater than the life of the Fund), calculated
pursuant to the following formula:
n
P(1 + T) = ERV
where P = a hypothetical initial payment of $1,000,
7
<PAGE> 32
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 and five years ended October 31, 1997 and the period
November 25, 1991 (commencement of operations) to October 31, 1997, the Fund's
average annual total return was -10.46%, 5.87% and 4.47%, respectively.
Quotations of total return, which are not annualized, represent
historical earnings and asset value fluctuations. For the one and five years
ended October 31, 1997 and the period November 25, 1991 (commencement of
operations) to October 31, 1997, the Fund's total return was -10.46%. 32.98%
and 29.66%, respectively.
Performance information for the Fund may be compared, in reports and
promotional literature, to those of other mutual funds with similar investment
objectives and to other relevant indexes or to ratings prepared by independent
services or other financial or industry publications that monitor the
performance of mutual funds. For example, the total return and/or yield of the
Fund may be compared to data prepared by Lipper Analytical Services, Inc., the
New Zealand Small Company Index, CDA Investment Technologies, Inc. and
Weisenberger Investment Company Service, analytical firms such as Frank Russell
Company and SEI Corporation and with the performance of Standard & Poor's 500
Stock Index ("S&P 500"), Barclay's Industrial Share Index, NZSE - 40, the Dow
Jones Industrial Average ("DJIA"), the Shearson Lehman Hutton Government
Corporate Bond Index or other appropriate unmanaged indexes of performance of
various types of investments so that investors may compare the Fund's results
with those of indexes widely regarded by investors as representative of the
securities markets in general. Total return and yield data as reported in
national financial publications such as Money Magazine, Forbes, Fortune,
Business Review Weekly, The Wall Street Journal and The New York Times, or in
publications of a local or regional nature, may also be used in comparing the
performance of the Fund. Unmanaged indexes 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.
NEW ZEALAND
AREA AND POPULATION
New Zealand is located in the South Pacific just west of the
International Dateline. It is about 1,200 miles east of Australia, and
approximately 4,000 miles southwest of Hawaii. The country is more than 1,000
miles long, consisting of the North Island and the South Island and a number of
smaller islands. The total land area of approximately 103,000 square miles is
similar in size to the United
8
<PAGE> 33
Kingdom and Japan.
The population of New Zealand is approximately 3.6 million and has
been growing at approximately 1.5% over the last three years. Of the total
population, approximately 69% live in the five main urban areas of Auckland,
Hamilton, Christchurch, Dunedin and Wellington. Auckland, in the North Island,
is the major population and commercial center and Wellington, in the south of
the North Island, is the nation's capital and financial center. The population
is approximately 85% of European origin and approximately 15% Polynesian.
English is the official language, although Maori language is also officially
recognized. The labor force of approximately 1.8 million people is mainly
engaged in the services, manufacturing and construction sectors.
GOVERNMENT
New Zealand is a sovereign state that is part of the British
Commonwealth. Pursuant to the Treaty of Waitangi, the Maori people reached an
agreement for the ongoing governance of New Zealand with the British monarch in
1840. Like Australia and Canada, the British monarch is the titular Head of
State. The British Queen is represented in New Zealand by the Governor
General, appointed by her on the advice of the New Zealand Government.
New Zealand has a democratic parliamentary government based on the
Westminster system. Legislative power is vested in Parliament, a unicameral
body designated the House of Representatives. The executive government of New
Zealand is carried out by the Executive Council, which consists of the Governor
General, the Prime Minister and other Ministers chosen from elected members of
the House of Representatives. The first general election under the Mixed
Member Proprietary ("MMP") electoral system was held on October 6, 1996. The
MMP system, which was approved by a majority of voters in the 1993 referendum,
is loosely modeled after the German parliament. Key features of the system
are:
o Voters have one vote for a political party to be
represented in Parliament (the "party vote") and one vote
for a candidate to be a member of Parliament ("MP");
o Parliament will normally have 120 MPs: 60 MPs are chosen
by the electorate vote, 5 MPs by the Maori electorates and
55 MPs selected from lists of candidates nominated by the
political parties; and
o Parliament representation will be determined by a party's
share of the party vote.
No political party won a majority of the Parliament and a coalition
government was formed between National and NZ First. This is a positive result
for the equity markets and New Zealand will continue to benefit from its prior
economic reforms.
The constitutional basis for government in New Zealand is an
accumulation of convention, precedent and tradition. The judicial system is
based on the British model. By convention, the judiciary is separate from the
executive.
9
<PAGE> 34
ECONOMIC STRUCTURE
New Zealand has a mixed economy that operates on free-market
principles. It has sizable service and manufacturing sectors complementing a
large agriculture sector. Over the past three decades, the New Zealand economy
has undergone significant structural changes marked by a diversification of
exports, a shift away from pastoral agriculture and significant growth in the
services sector. New Zealand's gross domestic product ("GDP") for the year ended
June, 1997 was approximately NZ $97 billion (US $57 billion).
The New Zealand economy is strongly trade-oriented, with exports of
goods and services. Primary products (principally agriculture, forestry, mining
energy, fishing and horticulture) accounted for approximately 50% of New
Zealand's total overseas earnings for the year. Exports of non-food manufactured
goods and of services also make large contributions to New Zealand's total
exports. Principal export markets for the year ended June, 1997 were Australia,
Japan, the United States and the United Kingdom. Those countries were also the
main sources of imports for the same period. Principal imports are raw materials
and capital goods for manufacturing, followed by minerals, chemicals, plastics
and motor vehicles.
The increase in the complexity of the New Zealand economy has been
accompanied by a steady growth in service industries. Finance, insurance and
real estate services are the largest components of the service industries,
followed by restaurants, hotels, transport and communications. Tourism is an
important source of foreign exchange revenue and a major growth industry in New
Zealand.
ECONOMIC DEVELOPMENTS
Following a period of economic expansion after World War II, the New
Zealand economy deteriorated in the late 1960s. Faced with growing balance of
payments problems, successive governments sought to maintain New Zealand's high
standard of living with increased levels of overseas borrowings and
increasingly protective economic policies. Following the sharp increase in oil
prices and a fall in export prices in 1973 and 1974, New Zealand attempted to
respond to changed external circumstances. The policies implemented were aimed
at maintaining a high level of economic activity and led to macroeconomic
imbalances and structural adjustment problems. The successive shifts in oil
and commodity prices in 1979 and 1980 resulted in further economic
difficulties.
Since 1984, successive administrations have implemented comprehensive
programs of economic reform. Macroeconomic policies have been directed at
achieving low inflation and fiscal balance. Macroeconomic policies have
fostered competition and efficient operation of markets. Policy-making has
also shifted from short-term to medium-term objectives designed to provide a
more stable and predictable environment for private sector decision-making.
Principal reforms have included: the removal of controls on prices, interest
rates and wages; floating of the exchange rate; abolition of all agricultural
subsidies and price supports; liberalization of banking; deregulation of
financial markets; corporatization and privatization of some state-owned
enterprises; elimination of most import controls and reduction of tariffs;
implementation of free trade with Australia; reform and reduction of business
and personal taxes; introduction of a comprehensive value-added tax; adoption
of more flexible labor laws; extensive deregulation of infrastructure
(telecommunications, land transport and seaports); and widespread reform of the
public service sector.
Inflation has been reduced from over 18% in 1986 to approximately 1%
as of September 30, 1997. Interest rates have decreased dramatically. The
90-day bank bill rate has fallen from over 22% in March 1986 to under 8.1% as
of September 30, 1997 and New Zealand continues to operate with a government
fiscal surplus.
10
<PAGE> 35
NEW ZEALAND STOCK EXCHANGE
The NZSE currently quotes the securities of more than 226 companies.
The aggregate market capitalization of the securities quoted on the NZSE at
February 27, 1998 was approximately NZ $52 billion (US $30.5 billion), with
the 6 largest listed companies accounting for approximately 60% of the total
market capitalization of such securities.
Holders of securities that are quoted on the NZSE must generally
instruct a stockbroker who is a member of the NZSE to handle transactions in
their securities. Such stockbrokers are obliged to follow the NZSE's rules and
regulations. The members' compliance with the NZSE's regulatory requirements is
monitored by the Disciplinary Committee appointed by the NZSE Board of Directors
and the Board itself. There are 267 members of the NZSE representing 45 firms. A
number of those firms are subsidiaries or affiliates of international brokerage
houses or banks.
Until June 24, 1991, the NZSE operated trading floors in Auckland,
Wellington and Christchurch with trading conducted on an open outcry basis
through its members. The NZSE converted to national computer screen trading on
June 24, 1991. Trading is now conducted during one continuous daily trading
session running from 9:30 a.m. to 3:30 p.m. Bids, offers, the identity of the
prospective buying and selling brokers and recent sales prices of each quoted
security are displayed on the trading screen. There is automatic computer
matching of bids and offers by price and time priority. There are no
constraints on price fluctuations. There are no stamp taxes, levies or charges
payable with respect to trades on the NZSE, other than negotiable brokerage
charges.
Trades in securities quotes on the NZSE can be effected outside the
NZSE trading system, outside the NZSE trading sessions, on different terms from
sales made through the NZSE trading system and outside the range of price
quotations for the days on which such trades were made. If such trades are
conducted through a broker who is a member of the NZSE, such trades must be
reported to the NZSE. The NZSE records off-market trades in a special report.
As with on-market trades, off-market trades of securities quoted on the NZSE
are generally conducted by stockbrokers that are members of the NZSE. There
is, however, no restriction that prevents private trades or transactions from
being effected by persons who are not members of the NZSE.
All trades on the NZSE are netted and confirmed daily between the
brokers through the NZSE in a single transaction. Upon consummation of a
transaction, the NZSE computer automatically calculates the amount owing by or
to each broker, offsets the amounts and simultaneously calculates the net
overall settlement of the broker to the NZSE on a daily basis. There is no
fixed settlement date for equity transactions, but NZSE regulations require
that all trades between brokers be settled within 10 business days.
Settlements between brokers are instigated by the selling broker giving notice
to the buying broker that it expects to settle on the next business day. The
NZSE publishes a daily official price list that includes price information on
each listed security.
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<PAGE> 36
The NZSE generally requires listed companies to report annual and
six-month results in a timely fashion and disclose all capital changes or any
significant matters that may affect the value of the quoted securities. The
NZSE also requires listed companies to comply with certain procedures regarding
certain significant transactions and the issuance of shares. The NZSE has the
power, in certain circumstances, to suspend trading in the shares of a listed
company and to de-list a security.
Until mid-1991, the Barclays Industrial Share Price Index (the
"Barclays Index") was widely used to measure the performance of the New Zealand
securities market. The Barclays Index was composed of a basket of 40 leading
equity securities quoted on the NZSE weighted by their full market
capitalization. In 1991, the NZSE introduced two new indices, the NZSE-40
Capital and the NZSE-30. The NZSE-40 is calculated in the same manner as the
prior Barclays Index. The NZSE-30 measures the 30 largest issuers by value after
excluding any shares held in blocks of 30% or more. In April of 1993, a small
company index (the "NZSCI") was introduced and is composed of approximately 100
small company securities weighed by their full market capitalization, and
typically have less offshore investment than companies in the main NZSE-40.
Although the Capstone New Zealand Fund (the "Fund") invests in the leading
securities, the NZSCI may provide a more meaningful comparison to the Fund
because it more closely resembles the Fund's portfolio mix.
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/Trustee and officer of other Capstone Funds.
JAMES F. LEARY (67), Director. c/o Search Capital Group, Inc., 600
N. Pearl Street, Suite 2500, Dallas, Texas 75201. President of
Sunwestern Management, Inc. (since June 1982) and President of SIF
Management (since January 1992), venture capital limited partnership
concerns; General Partner of Sunwestern Advisors, L.P., Sunwestern
Associates, Sunwestern Associates II, Sunwestern Partners, L.P. and
Sunwestern Ventures, Ltd. (venture capital limited partnership
entities affiliated with Sunwestern Management, Inc. and SIF
Management, Inc.). Director of: other Capstone Funds; Anthem
Financial, Inc. (financial services); Associated Materials, Inc.
(tire cord, siding and industrial cable manufacturer); The Flagship
Group, Inc. (vertical market microcomputer software); Marketing
Mercadeo International (public relations and marketing consultants);
MaxServ, Inc. (appliance repair database systems); MESBIC Ventures,
Inc. (minority enterprise small business investment company);
OpenConnect Systems, Inc. (computer networking hardware and
software); PhaseOut of America, Inc. (smoking cessation products);
and Search Capital Group, Inc. (financial services).
- --------------
* Trustee who is an interested person as defined in the Investment Company
Act of 1940.
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<PAGE> 37
JOHN R. PARKER (51), Director. 541 Shaw Hill, Stowe, Vermont 05672.
Consultant and private investor (since 1990); Director of Nova
Natural Resources (oil, gas, minerals); Director of other Capstone
Funds; formerly Senior Vice President of McRae Capital Management,
Inc. (1991-1995); and registered representative of Rickel & Associates
(1988-1991).
BERNARD J. VAUGHAN (69), Trustee. 113 Bryn Mawr Avenue, Bala Cynwyd,
Pennsylvania 19004. Director of other Capstone Funds; formerly Vice
President of Fidelity Bank (1979-1993).
ROBERT W. SCHARAR (49), President of the Fund. 5847 San Felipe,
Suite 850, Houston, Texas 77057. President and Director of FCA Corp
since 1983.
IRIS R. CLAY (45), 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.
LINDA G. GIUFFRE (36), Treasurer. 5847 San Felipe, Suite 4100,
Houston, Texas 77057. Vice President and Treasurer (since February
1996) of Capstone Financial Services, Inc., Capstone Asset Management
Company and Capstone Asset Planning Company; Treasurer (1990-1996)
and Secretary (1994-1996) of Capstone Financial Services, Inc. and
Capstone Asset Management Company; Treasurer (1990-1996) and
Secretary (1995-1996) of Capstone Asset Planning Company; officer of
other Capstone Funds.
The trustees and officers of the Trust as a group own less than one
percent of the outstanding Fund shares. The independent trustees also receive
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. 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, 1997, 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 $6,372.
The following table represents the fees paid during the 1997 calendar
year to the trustees of the Trust and the total compensation each trustee
received during that period from the Capstone Funds complex.
13
<PAGE> 38
COMPENSATION TABLE
<TABLE>
<CAPTION>
Total
Compensation
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.1, Trustee $1,000 $0 $0 $2,000(2)
James F. Leary, Trustee 250 0 0 5,750(2,3)
John R. Parker, Trustee 125 0 0 5,750(2,3)
Bernard J. Vaughan, Trustee 1,500 0 0 8,000(2,3)
- --------------
</TABLE>
* Fund does not pay deferred compensation.
1 Deceased
2 Trustee of Capstone International Series Trust - Capstone Japan Fund
3 Director of Capstone Fixed Income Series, Inc. and Capstone Growth Fund, Inc.
INVESTMENT ADVISORY AGREEMENT
Pursuant to an investment advisory agreement dated November 25, 1991
between FCA Corp (the "Adviser") and Capstone International Series Trust (the
"Trust") with respect to the Fund (the "Advisory Agreement"), the Adviser
manages the investment of the Fund's assets and places orders for the purchase
and sale of its portfolio securities. In connection with its responsibilities,
the Adviser provides the Fund with research, analysis, advice, and economic and
statistical data and judgments involving individual investments, general
economic conditions and trends, and long-range investment policy.
Under the Advisory Agreement, the Fund pays to the Adviser as
compensation for the services rendered by it a fee, calculated daily and
payable monthly, equal to an annual rate of 0.75% of the average net assets of
the Fund. During the fiscal year ended October 31, 1997 the Fund paid
investment advisory fees in the amount of $63,809, of which $26,923 was
reimbursed to the Fund pursuant to a voluntary expense limitation policy
whereby the Adviser has agreed to reimburse to the Fund all or a portion of its
advisory fees if the Fund's operating expenses exceed 2.5% of the Fund's
average net assets. During the fiscal year ended October 31, 1997, the annual
total operating expenses of the Fund prior to and after the reimbursements by
the Adviser were 2.89% and 2.50%, respectively.
The Advisory Agreement also provides that the Adviser shall not be
liable to the Fund for any errors or losses unless they result from willful
misfeasance, bad faith, gross negligence or reckless disregard of the Adviser's
duties under the Advisory Agreement.
The Advisory Agreement was last approved by the Board of Trustees on
May 12, 1997 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's 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.
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<PAGE> 39
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 monthly, equal to an annual
rate of 0.25% of the Fund's average net assets. During the fiscal year ended
October 31, 1997, the Fund paid administrative fees in the amount of $35,270.
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 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 "Distribution") and all other ordinary expenses not
specifically borne by the Administrator.
DISTRIBUTOR
Capstone Asset Planning Company (the "Distributor"), acts as the
principal underwriter of the Fund's shares pursuant to an agreement, dated
August 10, 1992, 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 a "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 sales to be purchased. The
sales charge was paid to the Distributor, who reallowed a portion of the sales
charge to broker-dealers who have an agreement with the Distributor to
participate in the offering of Fund shares. During the fiscal year ended
October 31, 1995, the Distributor received $2,478 from the sale of Fund shares.
The Distribution Agreement is renewable from year to year if approved
(a) by the Trust's Board of Trustees or by a vote of a majority of the Fund's
shares or (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
15
<PAGE> 40
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 the Special Meeting of Stockholders held August 10, 1992.
As required by Rule 12b-1, the trustees will review quarterly reports
prepared by the Distributor on the amounts expended and the purposes for the
expenditures. The Fund paid $21,261 in 12b-1 fees during the fiscal year ended
October 31, 1997. Of this amount, approximately $4,450 was paid to outside
Service Organizations and the balance was retained by the Distributor as
reimbursement of distribution-related expenses including, but not limited to:
compensation of Capstone employees who engage in or support the marketing and
servicing efforts on behalf of the Fund (approximately $71,679); printing of
advertising materials, prospectuses and financial reports distributed to
prospective investors (approximately $6,481); postage and mailing expenses
(approximately $4,447); and miscellaneous costs and expenses incurred in the
operation of the Plan (approximately $14,890).
The Plan and related agreements may be terminated at any time by a
vote of the Plan Trustees or by a vote of a majority of the Fund's outstanding
voting securities. As required by Rule 12b-1, selection and nomination of the
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 12, 1997.
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
16
<PAGE> 41
Adviser.
The Adviser may effect securities transactions through the
Distributor, TradeStar Investments, Inc. and Williams MacKay Jordan & Co.,
Inc., broker-dealer affiliates of the Administrator, provided such placement of
orders is consistent with the Fund's objective of obtaining best price and
execution.
Section 28(e) of the Securities Exchange Act of 1934 ("Section 28(e)")
permits an investment adviser, under certain circumstances, to cause an account
to pay a broker or dealer who supplies brokerage and research services a
commission for effecting a securities transaction in excess of the amount of
commission another broker or dealer would have charged for effecting the
transaction. Brokerage and research services include (a) furnishing advice as
to the value of securities, the advisability of investing in, purchasing or
selling securities, and the availability of securities or purchasers or sellers
of securities, (b) furnishing analyses and reports concerning issuers,
industries, securities, economic factors and trends, portfolio strategy, and
the performance of accounts, and (c) effecting securities transactions and
performing functions incidental thereto (such as clearance, settlement and
custody).
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 research services provided to the Adviser that
provide lawful and appropriate assistance to the Adviser in the performance of
its 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.
17
<PAGE> 42
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.
During the fiscal year ended October 31, 1997, the Fund incurred
brokerage commissions of $25,285 which represented 0.30% of the Fund's average
net assets. Securities transactions effected through brokers who furnished the
Fund with statistical, research and advisory information amounted to $4,430,477
(100% of the aggregate dollar amount of transactions executed with a
commission), and commissions paid by the Fund on these trades totaled $25,285
(100% of total commissions). The Fund also executed trades in the amount of
$728,818 in which a "mark up" (the dealer's profit) was included in the price
of the securities.
During the fiscal years ended October 31, 1996 and 1995, the Fund paid
$30,855 and $14,520, respectively, in brokerage commissions on portfolio
trades. There were no transactions effected through affiliated brokers during
those years.
DETERMINATION OF NET ASSET VALUE
The Fund's net asset value is computed, 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, Martin Luther King's Birthday, 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 New Zealand Stock Exchange is closed for 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
17:00 Greenwich Mean Time on each U.S. business day.
Portfolio securities which are primarily traded on securities
exchanges are valued at the last sale price on that exchange or, if there is no
recent last sale 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 prior to the time of valuation.
Debt securities, except short-term obligations, are valued by using
market quotations or
18
<PAGE> 43
independent pricing services which use prices provided by market makers or
estimates of market values obtained from yield data relating to instruments or
securities with similar characteristics. Other securities, including restricted
securities, and other assets are valued at fair value as determined in good
faith by the Board of Trustees. Because of the need to obtain prices as of the
close of trading on the New Zealand Stock Exchange, the calculation of net asset
value does not take place contemporaneously with the determination of the prices
of the majority of the portfolio securities. If an event were to occur after
the value of a Fund instrument was so established but before the net asset value
per share is determined which is likely to materially change the net asset
value, the Fund instrument would be value using fair value considerations
established by the Board of 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. 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 the Capstone New
Zealand 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 are available. See "Redemption and Repurchase of Shares" in
the Prospectus.
TAXES
The following discussion summarizes certain U.S. Federal tax
considerations incident to an investment in the Fund. Investors are advised to
consult their own tax advisers with respect to the particular tax consequences
to them 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, among
other things: (1) derive in each taxable year at least 90% of its gross income
from dividends, interest, payments with respect to securities loans, and gains
from the sale or other disposition of stock, securities or foreign currencies,
or
19
<PAGE> 44
other income derived with respect to its business of investing in stock,
securities or foreign currencies; (2) diversify its holdings so that, at the
end of each quarter of the taxable year (i) at least 50% of the market value of
the Fund's assets is represented by cash, U.S. Government securities, the
securities of other regulated investment companies and other securities, with
such other securities of any one issuer limited for the purposes of this
calculation to an amount not greater than 5% of the value of the Fund's total
assets and 10% of the outstanding voting securities of such issuer and (ii) not
more than 25% of the value of its total assets is invested in the securities of
any one issuer (other than U.S. Government securities or the securities of
other regulated investment companies); and (3) distribute in each taxable year
at least 90% of its investment company taxable income (which includes, among
other items, dividends, interest, certain foreign currency gains and net
short-term capital gains in excess of net long-term capital losses).
The Treasury Department is authorized to issue regulations to provide
that foreign currency gains that are not directly related to the Fund's
principal business of investing in stock or securities (or options and futures
with respect to stock or securities) may be excluded from the income which
qualifies for purposes of the 90% gross income requirement described above. To
date, however, no regulations have been issued.
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.
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, another election would involve marking-to-market the
Fund's PFIC shares at the end of each taxable year, with the result that
unrealized gains would be treated as though they were realized and reported as
ordinary income. Any mark-to-market losses and any loss from an actual
disposition of PFIC shares would be deductible as ordinary losses to the extent
of any net mark-to-market gains included in income in prior years.
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
20
<PAGE> 45
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.
Certain of the debt securities acquired by the Fund may be treated as
debt securities that were originally issued at a discount. Original issue
discount can generally be defined as the difference between the price at which
a security was issued and its stated redemption price at maturity. Although no
cash income is actually received by the Fund, original issue discount on a
taxable debt security earned in a given year generally is treated for Federal
income tax purposes as interest and, therefore, such income would be subject to
the distribution requirements of the Code.
Amounts not distributed by the Fund 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 gain net income from previous years that were
not distributed during such years. A distribution will be treated as paid on
December 31 of the calendar year if it is declared by the Fund in October,
November or December of that year to stockholders on a record date in such a
month and paid by the Fund during January of the following calendar year. Such
a distribution will be taxable to stockholders in the calendar year in which it
is declared, rather than the calendar year in which it is received. To prevent
application of the excise tax, the Fund intends to make its distributions in
accordance with the calendar year distribution requirement.
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 net 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 their Fund shares.
DISTRIBUTIONS. Dividends paid out of the Fund's investment company
taxable income, whether received in cash or reinvested in Fund shares, will be
taxable to a stockholder as ordinary income. The excess of net long-term
capital gains over the short-term capital losses realized and distributed by
the Fund, whether paid in cash or reinvested in Fund shares, will generally be
taxable to shareholders as either "20% Rate Gain" or "28% Rate Gain," depending
upon the Fund's holding period for the assets sold. "20% Rate Gains" arise
from sales of assets held by the Fund for more than 18 months and are subject
to a maximum tax rate of 20%; "28% Rate Gains" arise from sales of assets held
by the Fund for more than one year but no more than 18 months and are subject
to a maximum tax rate of 28%. Net capital gains from assets held for one year
or less will be taxed as ordinary income. Distributions will be subject to
these capital gain rates regardless of how long a stockholder has held Fund
shares.
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
21
<PAGE> 46
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 stockholders 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, the 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.
OPTIONS, FUTURES AND FORWARD FOREIGN CURRENCY CONTRACT TRANSACTIONS.
Many of the options, futures and forward foreign currency contracts that may be
entered into by the Fund will be classified as "section 1256 contracts."
Generally, gains or losses on section 1256 contracts are considered to be 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 transactions involving options, futures and forward
foreign currency contracts that may be 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 transactions in options,
futures and forward foreign currency contracts are not entirely clear. These
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.
22
<PAGE> 47
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 transactions.
Certain requirements that must be met in order for the Fund to qualify
as a regulated investment company may limit the extent to which the Fund will
be able to undertake transactions involving options, futures and forward
foreign currency 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, forward foreign currency contracts and forward
contracts with respect to debt securities, 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.
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 their current income tax treaty,
between the United States and New Zealand, the withholding tax imposed by New
Zealand on dividends from New Zealand sources is generally 15% and the
withholding tax on interest from New Zealand is generally 10%. It is
impossible to determine the rate of foreign tax in advance, since the amount of
the Fund's assets to be invested in various countries is not known.
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 to elect to "pass-through" to the Fund's stockholders the
amount of foreign income and similar taxes paid by the Fund. If this election
is made, 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 Federal income tax liability. Each
stockholder will be notified within 60 days after the close of the Fund's
taxable year whether the Fund has elected to "pass-through" its foreign taxes
for that year and, if so, the relevant amounts of foreign tax and foreign
source income to be taken into account by the stockholder. It cannot be
determined in advance whether the Fund will be eligible to make the foreign tax
pass-through election. If the Fund is ineligible to do so, the foreign income
and similar taxes incurred by it generally will reduce the Fund's investment
company taxable income that is distributable to stockholders.
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
23
<PAGE> 48
purpose, if the pass-through election is made, the source of the Fund's income
will flow through to its stockholders. With respect to the Fund, gains from the
sale of securities generally 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 and to certain other types
of income. Stockholders may be unable to claim a credit for the full amount of
their proportionate share of foreign taxes paid by the Fund. 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.
The foregoing is a general description of the foregoing 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.
DISPOSITION OF SHARES. Upon a taxable disposition (for example, a
redemption) 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 rules 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.
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 the 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 Federal income
tax liability.
24
<PAGE> 49
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.
Distributions of net capital gains, if any, designated by the Fund as
capital gain dividends (as well as amounts retained by the Fund which are
designated as undistributed capital gains) and gain realized upon a disposition
of Fund shares 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 that are corporations 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 TAXES. Distributions and redemption proceeds with respect to
the Fund also may be subject to state, local and foreign taxes, depending upon
each stockholder's particular situation. Stockholders are advised to consult
their tax advisers with respect to the particular tax consequences to them of
an investment in the Fund.
25
<PAGE> 50
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 17, 1998:
<TABLE>
<CAPTION>
Name and Address Percent of Ownership
---------------- --------------------
<S> <C>
Smith Barney Shearson 14.10%
333 West 34th Street, 7th Floor
New York, New York 10001
Charles Schwab & Company, Inc. 13.36%
Special Custody Account for Benefit
of its Customers
101 Montgomery Street
San Francisco, California 94104
Merrill Lynch 5.96%
4800 Deer lake Drive East, 3rd Floor
Jacksonville, Florida 3246
</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 Fifth
Third Bank.
STOCKHOLDER REPORTS. Semi-annual reports are furnished to
stockholders, and annually the financial statements in such reports are audited
by the independent accountants.
INDEPENDENT ACCOUNTANTS. Briggs, Bunting & Dougherty, LLP, Two Logan
Square, Suite 2121, Philadelphia, PA 19103-4901, the independent accountants
for the Fund, performs annual audits of the Fund's financial statements.
LEGAL COUNSEL. Dechert Price & Rhoads, 1775 I Street, N.W.,
Washington, DC 20006 is legal counsel to the Fund.
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<PAGE> 51
APPENDIX A
RATING DEFINITIONS
LONG-TERM RATINGS
AAA rated corporations, financial institutions, governments or asset-backed
financing structures (entities) have an extremely strong capacity to pay
interest and repay principal in a timely manner.
AA rated entities have a strong capacity to pay interest and repay principal in
a timely manner and differ from the highest rated entities only in small
degree.
A rated entities have a strong capacity to pay interest and repay principal in
a timely manner although they may be somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than those in
higher rating categories.
BBB rated entities have a satisfactory or adequate capacity to pay interest and
repay principal in a timely manner. Protection levels are more likely to be
weakened by adverse changes in circumstances and economic conditions than for
borrowers in higher rating categories.
Entities rated "BB", "B", "CCC", "CC" and "C" are regarded as having
predominantly speculative characteristics with respect to the capacity to pay
interest and repay principal. "BB" indicates the least degree of speculation
and "C" the highest. While such entities will likely have some quality and
protective characteristics these are outweighed by large uncertainties or major
exposures to adverse conditions.
BB rated entities face ongoing uncertainties or exposure to adverse business,
financial, or economic conditions which could lead to a less adequate capacity
to meet timely debt service commitments.
B rated entities are more vulnerable to adverse business, financial or economic
conditions than entities in higher rating categories. This vulnerability is
likely to impair the borrower's capacity or willingness to meet timely debt
service commitments.
CCC rated entities have a currently identifiable vulnerability to default and
are dependent upon favorable business, financial and economic conditions to
meet timely debt service commitments. In the event of adverse business,
financial or economic conditions, they are not likely to have the capacity to
pay interest and repay principal.
CC is typically applied to debt subordinated to senior debt that is assigned an
actual or implied "CCC" rating.
C rated entities have a high risk of default or are reliant on arrangements
with third parties to prevent defaults.
D rated entities are in default. The rating is assigned when interest payments
or principal payments are
27
<PAGE> 52
not made on the date due, even if the applicable grace period has not expired.
The "D" rating is also used upon the filing of insolvency petition or a request
to appoint a receiver if debt service payments are jeopardized.
Plus (+) or Minus (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
Rating Watch highlights an emerging situation which may materially affect the
profile of a rated corporation.
SHORT-TERM RATINGS
INCLUDES COMMERCIAL PAPER (UP TO 12 MONTHS)
A.1 rated entities possess a strong degree of safety regarding timely payment.
Those entities determined to possess extremely strong safety characteristics
are denoted with an "A.1+" designation.
A.2 rated entities have a satisfactory capacity for timely payment. However,
the relative degree of safety is not as high as for those rated "A.1".
A.3 rated entities have an adequate capacity for timely repayment. They are
more vulnerable to the adverse effects of changes in circumstances than
obligations carrying the higher designations.
B rated entities have only a speculative capacity for timely payment. Those
with a "B.1" have a greater capacity to meet obligations and are somewhat less
likely to be weakened by adverse changes in the environment and economic
conditions than those rated "B.2".
C.1 rated entities possess a doubtful capacity for payment.
D.1 rated entities are in default.
RATINGS OF BBB- (LONG-TERM) OR A.3 (SHORT-TERM) AND ABOVE ARE INVESTMENT GRADE.
28
<PAGE> 53
APPENDIX B
As stated in the Prospectus, the Fund has the authority to invest in
options on stock and stock indexes, futures contracts, options on futures
contracts and repurchase agreements, although the Fund does not currently
intend to trade in such instruments during the next twelve months.
HEDGING TRANSACTIONS. As indicated above, the Fund is authorized to
engage in certain types of hedging practices. These practices, which the Fund
will undertake only for hedging purposes, include entering into interest-rate
and index futures contracts and purchasing and writing put and call options on
those contracts, on individual securities and on stock indexes. It is
anticipated that use of these practices by the Fund will be very limited. In
addition, the Fund's options transactions will be subject to trading and
position limits of various exchanges. Tax considerations also may limit the
Fund's ability to engage in forward contracts and futures and options.
Interest-rate futures contracts create an obligation to purchase or
sell specified amounts of debt securities on a specified future date. Although
these contracts generally call for making or taking delivery of the underlying
securities, 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 or
individual securities would give the Fund, respectively, the right or
obligation to sell or purchase the underlying futures contract or security at
the stated exercise price any time before the option expires. The purchase or
writing of put and call options on stock indexes 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 aggregate price movements of the stocks reflected in the index. The
Fund's risk in purchasing an option, if the price of the underlying 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 sale or exercise of the
option. As the writer of an option, the Fund would receive a premium. The
premium would be 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 will be "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.
To the extent required by applicable law and regulatory policy, the
Fund may deal only in options and futures that are traded on exchanges.
These hedging transactions, if any, would 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
29
<PAGE> 54
futures options may not exceed 5 percent of the fair market value of the Fund's
assets.
If the Fund engages in hedging transactions, there can be no assurance
that these transactions will be successful. Securities prices and interest
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.
REPURCHASE AGREEMENTS
The Fund may agree to purchase debt securities from financial
institutions subject to the seller's agreement to purchase them at an agreed
upon time and price ("repurchase agreements"). The securities held subject to
a repurchase agreement may have stated maturities exceeding a year, provided
the repurchase agreement itself matures in less than one year. The financial
institutions with whom the Fund may enter into repurchase agreements will be
banks, and non-bank dealers of U.S. Government securities that are listed on
the Federal Reserve Bank of New York's list of reporting dealers, if such banks
and non-bank dealers are deemed creditworthy by the Fund's Adviser. The
Adviser will continue to monitor creditworthiness of the seller under the
repurchase agreement, and will require the seller to maintain during the term
of the agreement the value of the securities subject to the agreement at not
less than the repurchase price. In addition, the Adviser will mark-to-market
daily the value of the securities, and will, if necessary, require the seller
to deliver additional securities to ensure that the value is not less than the
repurchase price. Default by or bankruptcy of the seller would, however,
expose the Fund to possible loss because of adverse market action or delays in
connection with the disposition of the underlying obligations.
30
<PAGE> 55
CAPSTONE NEW ZEALAND FUND
PORTFOLIO OF INVESTMENTS - OCTOBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARKET % OF
VALUE NET
COMMON STOCKS- 94.57% SHARES (NOTE 1-A) ASSETS
------ ---------- ------
<S> <C> <C> <C>
BREWERIES (2.27%)
DB Group, Limited........................ 100,000 $ 155,695 2.27%
BROADCAST MEDIA (6.30%)
Radio Otago, Limited..................... 64,300 109,723 1.60
Radio Pacific, Limited................... 151,700 321,218 4.70
---------- ------
430,941 6.30
CHEMICALS (2.38%)
Nuplex Industries, Limited............... 70,798 163,139 2.38
COMMERCIAL SERVICES (6.45%)
Baycorp Holdings, Limited................ 100,000 336,302 4.91
Taylors Group, Limited................... 120,100 105,462 1.54
---------- ------
441,764 6.45
CONSTRUCTION/BUILDING MATERIALS (4.44%)
Fletcher Challenge Forestry, Limited..... 234,864 226,717 3.31
Milburn Corp., Limited................... 49,724 77,418 1.13
---------- ------
304,135 4.44
ELECTRICAL/APPLIANCE MANUFACTURING (5.71%)
Fisher & Paykel Industries............... 56,949 180,881 2.64
PDL Holdings, Limited.................... 41,100 209,890 3.07
---------- ------
390,771 5.71
ENTERTAINMENT (0.71%)
Shotover Jet, Limited (a)................ 260,000 48,577 0.71
ENVIRONMENTAL CONTROL (2.89%)
Waste Management NZ, Limited............. 52,874 197,574 2.89
FISHERIES (1.14%)
Sanford, Limited......................... 50,000 77,848 1.14
FOOD PRODUCTS (0.95%)
Restaurant Brands, Limited (a)........... 50,000 64,769 0.95
HORTICULTURAL SUPPLIER (3.88%)
Fruitfed Supplies, Limited............... 449,000 265,648 3.88
</TABLE>
<PAGE> 56
CAPSTONE NEW ZEALAND FUND
PORTFOLIO OF INVESTMENTS - OCTOBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARKET % OF
VALUE NET
SHARES (NOTE 1-A) ASSETS
------ ---------- ------
<S> <C> <C> <C>
INSURANCE (10.19%)
Colonial Limited (a) .................. 30,000 $ 79,405 1.16%
Metropolitan Lifecare Group ........... 400,000 448,403 6.55
National Mutual Holdings, Limited ..... 111,059 169,455 2.48
-------- -----
697,263 10.19
INVESTMENT COMPANIES (1.51%)
Helaby Holdings, Limited .............. 61,640 103,648 1.51
LUMBER & WOOD PRODUCTS (2.64%)
Evergreen Forest, Limited (a) ......... 500,000 180,607 2.64
MANUFACTURING DISTRIBUTION (0.62%)
Scott Technologies, Limited (a) ....... 36,697 42,280 0.62
OIL & GAS (2.11%)
New Zealand Refining, Limited ......... 9,647 144,191 2.11
PORT OPERATIONS (13.85%)
Lyttleton Port Corp., Limited ......... 250,000 319,176 4.66
Northland Port Corp., Limited ......... 262,300 392,053 5.73
Port of Tauranga., Limited ............ 5,000 11,054 0.16
South Port New Zealand, Limited ....... 289,500 225,369 3.30
-------- -----
947,652 13.85
REAL ESTATE (2.67%)
Kiwi Income ........................... 140,000 104,627 1.53
New Zealand Guardian Trust (Note 5) ... 68,913 77,999 1.14
-------- -----
182,626 2.67
RETAIL-APPAREL (1.15%)
Hallenstein Glasson Holdings, Limited.. 57,900 78,969 1.15
RETAIL-DEPARTMENT STORES (3.46%)
Arthur Barnett, Limited ............... 210,300 237,057 3.46
STOCK & STATION SERVICES (2.95%)
Williams & Kettle, Limited ............ 153,500 201,710 2.95
TEXTILES - MANUFACTURING (0.91%)
Donaghy's, Limited .................... 58,715 62,163 0.91
</TABLE>
<PAGE> 57
CAPSTONE NEW ZEALAND FUND
PORTFOLIO OF INVESTMENTS - OCTOBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARKET % OF
VALUE NET
SHARES (NOTE 1-A) ASSETS
------ ---------- ------
<S> <C> <C> <C>
TRANSPORTATION (9.79%)
Air New Zealand, Limited - Class B ................ 62,600 $ 132,553 1.94%
Mainfreight, Limited .............................. 234,000 276,889 4.04
Owens Group, Limited .............................. 213,680 260,829 3.81
---------- ------
670,271 9.79
UTILITIES- ELECTRIC (3.69%)
Infrastructure & Utilities Corporation, Limited ... 216,229 134,663 1.97
Transalta New Zealand, Limited .................... 88,000 117,830 1.72
---------- ------
252,493 3.69
VEHICLE DISTRIBUTOR (1.91%)
The Colonial Motor Co., Limited ................... 91,100 130,491 1.91
TOTAL COMMON STOCKS (Cost $6,292,659) .......................... 6,472,282 94.57
BONDS (3.57%) ..................................... Par Value
----------
Shortland Properties, 6.375%, Conv. 12/31/98 ...... $ 226,500 132,596 1.94
State Bank of South Australia, 9%, 07/30/02 ....... 94,000 62,997 0.92
Transalta NZ Capital Notes, 9.84%, 10/01/01 ....... 25,000 15,185 0.22
Transalta NZ 7 year Conv. Notes, 8.81%, 10/01/03... 25,000 16,597 0.24
Transalta NZ 10 year Conv. Notes, 8.86%, 10/01/06.. 25,000 16,737 0.25
---------- ------
TOTAL BONDS (Cost $276,639) ............................ 244,112 3.57
TOTAL INVESTMENTS (Cost $6,569,298) .................... 6,716,394 98.14
OTHER ASSETS, LESS LIABILITIES ......................... 127,634 1.86
---------- ------
NET ASSETS ............................................. $6,844,028 100.00%
========== ======
</TABLE>
(a) Non-income producing security
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
<PAGE> 58
CAPSTONE NEW ZEALAND FUND
STATEMENT OF ASSETS AND LIABILITIES OCTOBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
Investments in securities at market value (identified cost $6,569,298) (Note 1-A)................ $ 6,716,394
Foreign currency holdings - New Zealand Dollar account, at market (Note 1-B) .................... 179,578
Receivables:
Dividends and interest .................................................... $ 15,604
Trust shares sold ......................................................... 8,315
Investment adviser ........................................................ 1,884 25,803
----------- -----------
Total Assets ....................................................................... 6,921,775
-----------
LIABILITIES:
Cash overdraft .................................................................... 47,812
Payable for Trust shares redeemed ................................................. 444
Accrued expenses .................................................................. 29,491
-----------
Total Liabilities .................................................................. 77,747
-----------
NET ASSETS .............................................................................................. $ 6,844,028
===========
NET ASSET VALUE PRICE PER SHARE:
($6,844,028 / 608,142 shares of beneficial interest outstanding) ........................................ $ 11.25
===========
SOURCE OF NET ASSETS:
Paid in capital ................................................................................. $ 6,605,516
Undistributed net investment income ............................................................. 98,434
Accumulated net realized loss on investments .................................................... (1,471)
Net unrealized appreciation on investments and foreign currencies ............................... 141,549
-----------
Total .............................................................................. $ 6,844,028
===========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
<PAGE> 59
CAPSTONE NEW ZEALAND FUND
STATEMENT OF OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Income:
Dividends ..................................................... $343,023
Interest 45,158
--------
388,181
Less: Foreign taxes withheld ............................. 34,847
--------
Total investment Income ............................................... $ 353,334
---------
Expenses: (Note 2)
Advisory fees ................................................. 63,809
Transfer agent fees ........................................... 43,564
Administrative services ....................................... 35,270
Distribution fees ............................................. 21,261
Fund accounting fees ......................................... 17,500
Professional fees ............................................. 16,708
Custodian fees ................................................ 16,484
Registration and filing fees .................................. 12,050
Reports and notices to stockholders ........................... 8,897
Trustees' fees and expenses ................................... 6,372
Miscellaneous ................................................. 3,592
--------
Total Expenses ........................................................ 245,507
Less: Advisory fees waived .................................... 26,923
Custodian fees paid indirectly ............................ 5,546 32,469
--------- ---------
Net Expenses. ......................................................... 213,038
---------
Net Investment Income ........................................... 140,296
---------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS: (Note 4)
Net realized gain from security transactions .......................... 43,537
Net realized loss on conversion of foreign currencies to U.S. dollars . (39,168)
--------
Net realized gain on investments ........................................... 4,369
Net unrealized depreciation of investments and foreign currencies .................. (920,559)
---------
Net realized and unrealized depreciation of investments .................... (916,190)
---------
Net decrease in net assets resulting from operations ............... $(775,894)
=========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
<PAGE> 60
CAPSTONE NEW ZEALAND FUND
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
----------------------
1997 1996
---- ----
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS
Net investment income ................................................... $ 140,296 $ 111,784
Net realized gain on investments ........................................ 4,369 1,011,044
Net unrealized depreciation of investments, forward currency contracts
and foreign currencies .......................................... (920,559) (11,788)
----------- -----------
Net increase (decrease) in net assets resulting from operations ......... (775,894) 1,111,040
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income ................................................... (134,014) (94,166)
Net realized gains from investment transactions ......................... -- (73,239)
TRUST SHARE TRANSACTIONS:
Increase (decrease) in net assets resulting from capital share
transactions (Note 3) ........................................... (503,680) 3,819,564
----------- -----------
Net increase (decrease) in net assets ......................... (1,413,588) 4,763,199
NET ASSETS
Beginning of year ....................................................... 8,257,616 3,494,417
----------- -----------
End of year (including undistributed net investment income of $98,434 and
$98,100, respectively) .......................................... $ 6,844,028 $ 8,257,616
=========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS-OCTOBER 31, 1997
- --------------------------------------------------------------------------------
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
Capstone New Zealand 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 seeks to provide
long-term capital appreciation and current income by investing in equity
securities, debt securities, and securities convertible into common stock of New
Zealand issuers. The following is a summary of significant accounting policies
followed by the Fund in the preparation of its financial statements.
A) VALUATION OF SECURITIES - Portfolio securities which are traded on securities
exchanges are valued at the last sales 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 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. Fixed income securities are valued using
market quotations or pricing services. In the absence of any applicable price,
securities will be valued at a fair value as determined in good faith in
accordance with procedures established by the Trustees.
B) CURRENCY TRANSLATION - For purposes of determining the Fund's net asset
value, all assets and liabilities initially expressed in foreign currency values
are converted into U.S. dollar values at the prevailing market rate at 14:00 GMT
on each U.S. business day, as established by the Board of Trustees. The cost of
securities is determined by using historical exchange rates. Income 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> 61
CAPSTONE NEW ZEALAND 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. Discounts on bonds purchased are amortized over the life of
the respective issue. Interest income and estimated expenses are accrued daily.
D) 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, to relieve it
from all, or substantially all, such taxes. Under the United States-New Zealand
tax treaty, New Zealand imposes a withholding tax on dividends (15%) and
interest (10%) received by the Fund. There is currently no New Zealand tax on
capital gains.
E) DISTRIBUTIONS TO SHAREHOLDERS - The Fund distributes its net investment
income and net realized gains 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 capital loss
carryovers.
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, ADMINISTRATIVE FEES AND OTHER TRANSACTIONS
WITH AFFILIATES
The Investment Adviser, FCA Corp., is paid a fee, calculated daily and paid
monthly, equal to an annual rate of 0.75% of the average net assets of the Fund.
For the year ended October 31, 1997, FCA Corp. has voluntarily waived $26,923 of
its advisory fees in order to limit the Fund's expenses to 2.5% of the Fund's
average net assets.
The Administrator, Capstone Asset Management Company, is paid a fee,
calculated daily and paid monthly, equal to an annual rate of 0.25% of the
Fund's average daily net assets. Prior to June 1997, the Administrator was also
paid a monthly fee representing the cost of certain accounting and bookkeeping
services. Effective June 1997, Fifth Third Bank performs the accounting,
bookkeeping and pricing services for the 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 0.25% of the Fund's average net assets (including
reinvested dividends paid with respect to those assets). Of this amount, CAPCO
may reallocate to securities dealers (which may include CAPCO itself) and other
financial institutions and organizations (collectively, "Service Organizations")
amounts based on the Fund's average net assets owned by stockholders for whom
the Service Organizations have a servicing relationship. The Plan permits CAPCO
to carry forward for a maximum of twelve months distribution expenses covered by
the Plan for which CAPCO has not yet received reimbursement. For the year ended
October 31, 1997, the Fund paid $21,261 in 12b-1 fees, of which approximately
21% 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.
<PAGE> 62
CAPSTONE NEW ZEALAND FUND
NOTE 3 - TRUST SHARES
At October 31, 1997 there were 608,142 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 .................................... 598,767 $ 7,747,373 634,364 $ 7,280,993
Shares issued to shareholders in reinvestment of
distributions ................................ 7,766 102,048 15,526 163,953
-------- ----------- -------- -----------
606,533 7,849,421 649,890 7,444,946
Shares redeemed ................................ (647,261) (8,353,101) (315,346) (3,625,382)
-------- ----------- -------- -----------
Net increase (decrease) ...................... (40,728) $ (503,680) 334,544 $ 3,819,564
======== =========== ======== ===========
</TABLE>
NOTE 4 - SECURITIES TRANSACTIONS
Purchases and sales of securities aggregated $2,375,862 and $2,069,863,
respectively. At October 31, 1997, the cost of investments for Federal income
tax purposes was $6,569,298. Accumulated net unrealized appreciation on
investments was $147,096 consisting of $918,915 gross unrealized appreciation
and $771,819 gross unrealized depreciation.
NOTE 5 - RESTRICTED SECURITY
In 1993, the Fund acquired 61,015 shares of Guardian Property Fund
("Guardian"), a closed-end mutual fund (offered by The New Zealand Guardian
Trust Company Limited), through private placements at a cost of $60,606. These
shares cannot be sold prior to their valuation date, which occurs two years
after the date of investment. In October 1995 and October 1997, the Guardian
shares were renewed for additional two year periods to October 15, 1999. 1996
and 1997 cash dividends were reinvested into 7,898 additional shares, bringing
the position to 68,913 shares. The Guardian shares are valued daily based on a
weekly quoted price. At October 31, 1997, the value of the Guardian investment
was $77,999 representing approximately 1% of the Fund's net assets.
NOTE 6 - SPECIAL MEETING OF SHAREHOLDERS (UNAUDITED)
Capstone International Series Trust held a special meeting of shareholders
of the Capstone New Zealand Fund on December 4, 1997. On July 14, 1997, the
record date for the meeting, the Fund had 650,723 shares outstanding, of which
330,542 (51% of the total) were represented at the meeting. The votes at the
meeting were as follows:
Item 1: Election of Trustees
<TABLE>
<CAPTION>
Number of Shares
-----------------------
Nominees for Trustee Affirmative Withheld
- -------------------- ----------- --------
<S> <C> <C>
Edward L. Jaroski 325,144 5,398
James F. Leary 324,788 5,754
John R. Parker 325,652 4,890
Bernard J. Vaughan 325,409 5,133
</TABLE>
Item
2: 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 318,548
Against 1,545
Abstain 10,449
</TABLE>
<PAGE> 63
CAPSTONE NEW ZEALAND 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.
<TABLE>
<CAPTION>
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 ................................. $12.73 $11.12 $10.44 $11.61 $ 9.75
------ ------ ------ ------ ------
Income from investment operations:
Net investment income ........................................ 0.24 0.19 0.31 0.16 0.09
Net realized and unrealized gain (loss) on investments ....... (1.55) 1.93 0.90 (1.00) 1.77
------ ------ ------ ------ ------
Total from investment operations ............................. (1.31) 2.12 1.21 (0.84) 1.86
------ ------ ------ ------ ------
Less dividends from:
Net investment income ........................................ 0.17 0.29 0.21 0.06 --
Net realized gain on investments ............................. -- 0.22 0.32 0.27 --
------ ------ ------ ------ ------
Total distributions .................................................. 0.17 0.51 0.53 0.33 --
------ ------ ------ ------ ------
Net asset value at end of year ....................................... $11.25 $12.73 $11.12 $10.44 $11.61
====== ====== ====== ====== ======
TOTAL RETURN (%) (1) ................................................. (10.46) 20.03 12.22 (7.40) 19.08
RATIOS/SUPPLEMENTAL DATA
Net assets at end of year (in thousands) ............................. $6,844 $8,258 $3,494 $3,014 $2,732
RATIOS:
Operating expenses to average net assets:
Before expense reimbursement (%) ............................. 2.89 3.63 4.77 4.40 8.19
After expense reimbursement (%) .............................. 2.50 2.72 2.52 2.50 2.50
Net investment income to average net assets (%). ..................... 1.65 2.32 3.06 1.55 0.95
Portfolio turnover rate (%) .......................................... 24 38 38 40 32
Average commission rate (per share of security)(2) ................... $.0079 $.0050
</TABLE>
(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.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
<PAGE> 64
CAPSTONE NEW ZEALAND FUND
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Shareholders and Board of Trustees
of Capstone New Zealand Fund
We have audited the accompanying statement of assets and liabilities of Capstone
New Zealand 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 New Zealand 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
