<PAGE> 1
CAPSTONE JAPAN FUND
(FORMERLY CAPSTONE NIKKO JAPAN FUND)
A FUND OF
CAPSTONE INTERNATIONAL SERIES TRUST
5847 San Felipe, Suite 4100
Houston, TX 77057
1-800-262-6631
MARCH 2, 1998
PROSPECTUS
The investment objective of Capstone Japan Fund ("the Fund") is to
seek long-term capital appreciation and current income. The Fund will pursue
this objective by investing primarily in securities listed on the Tokyo Stock
Exchange and in securities of issuers a substantial portion of whose business
activities, profits and/or earnings are in, or derived from, Japan.
This Prospectus sets forth certain information about Capstone
International Series Trust and the Fund that a prospective investor should know
before investing. Investors should read and retain this Prospectus for future
reference.
A STATEMENT OF ADDITIONAL INFORMATION about the Fund dated 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
COMMISSIONER NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
OR ANY STATE SECURITIES COMMISSIONER PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE> 2
CAPSTONE JAPAN FUND
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: Transfer and Dividend Paying Agent:
Capstone Asset Planning Company FPS Services, Inc.
5847 San Felipe, Suite 4100 P.O. Box 61503
Houston, Texas 77057 3200 Horizon Drive
1-800-262-6631 King of Prussia, Pennsylvania 19406-0903
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Fund Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Financial Highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Investment Objective and Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Investment Restrictions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Performance Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Management of the Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Purchasing Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Distributions and Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Redemption and Repurchase of Shares . . . . . . . . . . . . . . . . . . . . . . . . . 18
Determination of Net Asset Value . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Stockholder Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
General Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
</TABLE>
No dealer, salesman, or any other person has been authorized to give
any information or to make any representations, other than those contained in
this Prospectus, in connection with the offer contained in this Prospectus and,
if given or made, such other information or representations must not be relied
upon as having been authorized by the Fund or its Distributor. This Prospectus
does not constitute an offer by the Fund or by the Distributor to sell or a
solicitation of an offer to buy any of the securities offered hereby in any
jurisdiction to any person to whom it is unlawful for the Fund or the
Distributor to make such offer or solicitation in such jurisdiction.
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CAPSTONE JAPAN FUND
PROSPECTUS SUMMARY
Type of Company . . . . . . . . The Fund, which commenced operations on
July 10, 1989, is a series of an open-end
diversified management investment company.
(see page 22)
Investment Objective . . . . . The objective of the Fund is to seek
long-term capital appreciation and current
income. (see page 8)
Investment Policies . . . . . . The Fund will seek to achieve this
objective by investing primarily in
securities listed on the Tokyo Stock
Exchange and in securities of issuers a
substantial portion of whose business
activities, profits and/or earnings are in,
or derived from, Japan. The Fund may also
invest in debt securities and American
Depository Receipts, and may engage in
certain hedging transactions. (see page 8)
Investment Risk . . . . . . . . Investments in Japanese securities involve
certain risks not associated with U.S.
investments. These include currency
exchange rate fluctuations, non-negotiable
brokerage commissions, differences in
securities regulation, less liquidity and
less publicly available information about
Japanese securities. (see page 10).
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
at an annual rate of 0.75% of the Fund's
average net assets. (see page 12)
Administrator . . . . . . . . . Capstone Asset Management Company is the
Fund's Administrator (the "Administrator").
The Administrator provides advisory and/or
administrative services to the other
investment companies in the Capstone Group.
The Administrator is paid at an annual rate
of 0.20% of the Fund's average net assets.
(see page 13)
Dividends and Distributions . . The Fund pays dividends from net investment
income and distributions from long-term
capital gains, if any, at least annually.
(see page 17)
Distributor and Offering . . . Shares of the Fund are continuously offered
for sale through the Price Fund's
Distributor, Capstone Asset Planning
Company, without a sales load, at the net
asset value next determined after receipt
of the order. The Fund pays certain
expenses pursuant to a written distribution
plan. (see page 15)
Minimum Purchase . . . . . . . The minimum initial investment is $200,
except for continuous
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investment plans, and there is no minimum
for subsequent purchases. (see page 15)
Redemption . . . . . . . . . . Shares of the Fund are redeemed at the next
determined net asset value, without charge.
(see page 18)
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FUND EXPENSES
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<S> <C>
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price) 0%
Maximum Sales Load Imposed on Reinvested
Dividends (as a percentage of offering price) 0%
Deferred Sales Load (as a percentage of
original purchase price or redemption of
proceeds, as applicable) 0%
Redemption Fees (as a percentage of amount
redeemed, if applicable) 0%
Exchange Fee 0%
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees 0.00%
(Net of fees waived or reimbursed)
12b-1 Fee* 0.25%
Other Expenses (after expense reimbursement) 4.30%
Total Fund Operating Expenses 4.55%
</TABLE>
EXAMPLE
<TABLE>
<CAPTION>
1 year 3 years 5 years 10 years
------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000
investment, assuming (1) 5% annual return and (2)
redemption at the end of each time period: $46 $137 $230 $465
</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 indirectly pay more in total sales
charges than the economic equivalent of the maximum front-end sales charge
permitted by rules of the NASD (see "Distributor").
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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 information disclosed in the table for "Other
Expenses" is based on expenses actually incurred by the Fund during the fiscal
year ended October 31, 1997. In light of the Fund's objective of investing
primarily in Japanese securities, the operating expenses of the Fund are
expected to be higher than those of investment companies investing in domestic
securities (see "Risk Factors"). The management fee information contained in
the table reflects deductions for expense reimbursements by the Fund's Adviser
during the fiscal year ended October 31, 1997. Without the expense
reimbursements, the management fees would have amounted to 0.45% of the Fund's
average net assets, total Fund operating expenses would have been 5.46%, and
expenses in the same 1, 3, 5 and 10 year periods shown in the Example would
have been $54, $163, $270 and $534, respectively. See "Management of the Fund"
for more complete descriptions of the fees paid to the Adviser.
THE EXAMPLE WHICH IMMEDIATELY FOLLOWS THE TABLE SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL FUND EXPENSES MAY BE GREATER
OR LESSER THAN THOSE SHOWN IN THE EXAMPLE OR IN THE TABLE.
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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 periods indicated. The Fund's Annual
Report contains additional performance information and is available free of
charge by calling the Fund at 1-800-262-6631.
<TABLE>
<CAPTION>
Year Ended October 31,
--------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991(1) 1990 1989(2)
---- ---- ---- ---- ---- ---- ------- ---- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE DATA
Net asset value at beginning of year ....... $ 6.76 $ 6.96 $ 8.03 $ 6.99 $ 4.89 $ 7.46 $ 7.96 $ 10.62 $10.00
------- ------- ------- ------ ------ ------- ------ ------- -------
Income from investment operations:
Net investment income(loss) .............. (.28) (.19) (.21) (.21) (.20) (.23) (.14) (.09) .01
Net realized and unrealized gain(loss)
on investments ........................... (1.27) .25 (1.06) 1.25 2.30 (2.34) (.36) (2.38) .61
------- ------- ------- ------ ------ ------- ------ ------- -------
Total from investment operations ....... (1.55) .06 (1.27) 1.04 2.10 (2.57) (.50) (2.47) .62
------- ------- ------- ------ ------ ------- ------ ------- -------
Less distributions from net realized gain on
investments .............................. -- .06 -- -- -- -- -- .19 --
------- ------- ------- ------ ------ ------- ------ ------- -------
Net asset value at end of year ............. $ 5.21 $ 6.76 $ 6.76 $ 8.03 $ 6.99 $ 4.89 $ 7.46 $ 7.96 $ 10.62
======= ======= ======= ====== ====== ======= ====== ======= =======
TOTAL RETURN(3) ............................ (22.93)% .75% (15.82)% 14.88% 42.94% (34.45)% (6.28) (23.73)% 6.20%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of year (in thousands) ... $ 1,902 $ 2,975 $ 2,908 $3,484 $3,096 $ 2,130 $3,552 $ 7,801 $19,647
Ratios to average net assets:
Expenses ................................. 4.55% 3.30% 3.61% 3.25% 4.26% 4.38% 2.74% 1.53% 1.36%(4)
Net investment income(loss) .............. (3.87)% (2.59)% (2.93)% (2.62)% (3.54)% (3.42)% (2.01)% (.81)% .32%(4)
Ratios to average net assets, prior to
reimbursement of expenses:
Expenses ................................. 5.46% 3.90% 4.21 3.85% 4.86% 4.98% 3.07% .-- .--
Net investment income(loss) ............ (4.78%) (3.19)% (3.53)% (3.22)% (4.14)% (4.02)% (2.34)% .-- .--
Portfolio turnover rate .................... 73% 47% 27% 57% 42% 112% 24% 39% 6%
Average commission rate(5)
(per share of security) ................. $0.0371 $0.0864
</TABLE>
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(1) Based on average month-end shares outstanding.
(2) For the period July 10, 1989 ( commencement of operations) to October 31,
1989.
(3) Calculated without sales charge. Sales charge eliminated on August 21,
1995.
(4) Annualized.
(5) 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 objective of the Fund is to seek long-term capital appreciation
and current income. The Fund will pursue this objective by investing primarily
in securities listed on the Tokyo Stock Exchange and in securities of issuers a
substantial portion of whose business activities, profits and/or earnings were
in, or derived from, Japan. The Fund may also invest in debt securities, rated
BBB or better, of such issuers or that are payable in yen or are otherwise
linked to the performance of the Japanese market or economy. The Fund is also
authorized to invest in American Depository Receipts ("ADRs") related to these
securities, in addition to buying the securities directly. Under normal
circumstances, at least 65% of the Fund's assets will be invested in the
foregoing securities.
ADRs are dollar-denominated depository receipts that, typically, are
issued by a United States bank or trust company and which represent the deposit
with that bank or trust company of a security of a foreign issuer, and which
are publicly traded on exchanges or over-the-counter in the United States.
ADRs may, or may not, be sponsored by the issuer. There are certain risks and
costs associated with investments in unsponsored ADR programs. Because the
issuer is not involved in establishing the program (such programs are often
initiated by broker-dealers), the underlying agreement for payment and service
is between the depository and the shareholders. Expenses related to the
issuance, cancellation and transfer of the ADRs, as well as costs of custody
and dividend payment services may be passed in whole or in part through to
shareholders. The availability of regular reports regarding the issuer is also
less certain. Although ADRs provide a convenient means to invest in non-U.S.
securities, these investments involve risks generally similar to investment
directly in foreign securities. (See "Risk Factors.")
The Fund has authority to invest in U.S. securities, including money
market instruments such as U.S. Treasury bills, repurchase agreements,
commercial paper, certificates of deposit issued by domestic and foreign
branches of U.S. banks, bankers' acceptances and other debt securities, such
as U.S. Government obligations and corporate debt instruments. For temporary
defensive purposes, such investments may be made without limit, when the
Adviser deems such investments to be advisable in light of economic or market
conditions.
The Fund is also authorized to engage in a number of practices
designed to manage or hedge against risks, such as fluctuations in securities
prices and fluctuations in currency exchange rates. These practices, which the
Fund will undertake only for hedging purposes, include entering into
interest-rate, index and currency futures contracts, and purchasing and writing
put and call options on those contracts, on individual securities, on
currencies and on stock indices (collectively, "derivatives"). The Fund may
also enter into forward foreign currency contracts. The extent to which the
Fund may engage in such practices will depend on the availability of the
various hedging instruments which are both suitable for use by the Fund and
authorized for investment by a U.S. registered investment company. In
addition, the Fund's exchange-traded options transactions are subject to
trading and position limits. Tax considerations also may limit the Fund's
ability to engage in forward contracts and futures and options transactions.
Interest rate and currency futures contracts create an obligation to
purchase or sell specified amounts of debt securities or currency on a
specified future date. Although these contracts generally call for making or
taking delivery of the underlying securities or currency, the contracts are in
most cases closed out before the maturity date by entering into an offsetting
transaction which may result in a profit
8
<PAGE> 9
or loss.
Securities index futures contracts are contracts to buy or sell units
of a particular index of securities at a specified future date for an amount
equal to the difference between the original contract purchase price and the
price at the time the contract is closed out, which may be at maturity or
through an earlier offsetting transaction.
The purchase or writing of put or call options on futures contracts,
individual securities or currencies would give the Fund, respectively, the
right or obligation to sell or purchase the underlying futures contract,
security or currency at the stated exercise price any time before the option
expires. The purchase or writing of put and call options on stock indices
would give the Fund, respectively, the right or obligation to receive or pay a
specified amount at any time prior to expiration of the option. The value of
the option varies with the aggregate price movements of the stocks reflected in
the index. The Fund's risk in purchasing an option, if the price of the
underlying currency, security or index moves adverse to the purchaser, is
limited to the premium it pays for the option. If price movements are
favorable, on the other hand, the option will increase in value and the Fund
would benefit from the sale or exercise of the option. As the writer of an
option, the Fund would receive a premium. The premium would be a gain to the
Fund if price movements in the underlying items are favorable to the writer and
would reduce the loss if price movements are unfavorable. Any call options
written by the Fund are "covered", i.e., backed by securities owned by the
Fund. The writing of a covered call option tends to limit the Fund's
opportunity to profit from an increase in value of the underlying securities to
the amount of the premium.
The Fund may engage in options and futures transactions on exchanges
and in the over-the-counter ("OTC") markets. Exchange-traded contracts
generally have standardized strike prices and expiration dates and their
performance is guaranteed by an exchange or clearing corporation. OTC
transactions, on the other hand, are generally negotiated directly between the
buyer and the seller and there is no independent guarantor. Similar types of
exchange-traded and OTC contracts and options may be available in markets
outside the U.S. from time to time. The Fund may invest in such non-U.S.
contracts and options to the extent they are suitable for the Fund and are
permissible investments for a U.S. registered investment company.
In addition to purchasing and writing put and call options on foreign
currencies, the Fund may also enter into forward foreign currency contracts as
a hedge against possible variations in the exchange rates of currencies in
which it conducts its activities. Forward currency contracts are two-party
agreements to purchase or sell a specified currency at a specified future date
and price. The Fund will not enter into or maintain a position in these
contracts if their consummation would obligate the Fund to deliver an amount of
foreign currency greater than the value of the Fund's assets denominated or
quoted in, or its currency convertible into, that currency.
These hedging transactions involve brokerage costs and require the
Fund to make margin deposits against its performance obligations under the
contracts. The Fund may also be required to segregate assets in an amount
equal to the value of instruments underlying its futures contracts, call
options purchased and put options written; to otherwise "cover" its futures and
options positions; or to limit these transactions so that they are backed to a
level of 300 percent by total Fund assets. The aggregate of initial margin
deposits for futures contracts and related options and premiums paid for open
futures options may not exceed 5 percent of the fair market value of the Fund's
assets.
9
<PAGE> 10
There can be no assurance that the Fund's hedging transactions will be
successful. Securities prices, interest rates and currency exchange rates may
change in unanticipated manners or may move in ways which do not correlate
closely to movements in the value of securities held by the Fund.
Additionally, there can be no assurance that offsetting transactions will be
available at any given time to enable the Fund to close out particular futures
or options contracts. If these contracts cannot be closed out, the Fund may
incur losses in excess of its initial margin deposit. The bankruptcy of a
broker or other person with whom the Fund has an open futures or options
position may also expose the Fund to risk of losing its margin deposits or
collateral. See also "Investment Practices and Restrictions" in the Statement
of Additional Information.
The Fund may from time to time lend securities from its portfolio,
with a market value not exceeding 10% of its total assets at the time of the
loan, to banks, brokers and other financial institutions and receive collateral
in cash or securities issued or guaranteed by the United States Government or
its instrumentalities which will be maintained at all times in an amount equal
to at least 100% of the current market value of the loaned securities. During
the period of such a loan, the Fund will receive income on both the loaned
securities and the collateral, or on the investment of any cash received as
collateral, and thereby increase its yield. With respect to the lending of
portfolio securities, there is the risk of failure by the borrower to return
the securities involved in such transactions, in which event the Fund may incur
a loss.
There can be no assurance that the Fund will achieve its investment
objective. The investments of the Fund are subject to market fluctuations and
other risks inherent in investing in securities and, despite any attempts to
hedge or manage risk, the value of the Fund's shares and the income from them
may go down as well as up. The Fund's investment flexibility may be limited by
restrictions on foreign investment in certain Japanese securities.
The investment objective of the Fund is not a fundamental policy and
may be changed without stockholder approval.
The portfolio turnover rate for the fiscal years ended October 31,
1997 and 1996 was 73% and 47%, respectively.
RISK FACTORS
United States persons investing in securities of Japanese issuers
should be aware of certain information about Japan and international investment
which can make this type of investing different from investments in securities
of United States issuers.
The Japanese economy has experienced difficulties, although there have
been positive signs due to certain economic stimulus measures taken by the
Japanese government and low-interest rates.
The Adviser believes that structural reformation is necessary in order
for Japan to break out of this uncertain economy, i.e., government support for
troubled banks, overall deregulation of industry and society, improving labor
and productivity through corporate restructuring, and shifting of industrial
priorities toward promising new fields. What we have seen lately is either
realization or significant progress on all these aspects. The government has
been announcing a series of deregulation measures
10
<PAGE> 11
since late 1996, including the "Big-Bang" of financial markets. For the
resolution of the bad-loan problem experienced by Japanese banks, public
purchase of collateral land is being implemented. Banks are also making
progress in writing off significant portions of their non-performing
portfolios.
Japan's stock price level have been generally low in terms of dividend
yield relative to bond yield, price to book value per share and other valuation
measures. This under-valuation may be attributable to: (1) concern over
economic slowdown due to the rise of the consumption tax rate and the decrease
of public works; (2) the financial institutions' bad loan problem; and (3)
uncertainty of deregulation and restructuring. The Adviser is cautiously
optimistic that these issues will be resolved in due course.
Various other factors involved in international investing generally
may affect the Fund's performance either favorably or unfavorably. These
include: fluctuations in currency exchange rates; possible imposition of, or
changes in, exchange controls; costs of currency conversion; non-negotiable
brokerage commissions (which may result in higher commissions); less publicly
available information; different accounting standards; less liquidity and
greater market volatility; difficulties of enforcing obligations in other
countries; differences in the nature and quality of securities regulation;
differences in taxation (which may include withholding taxes on income earned
on Fund securities and transfer tax on sales proceeds); war; expropriation;
political or social unrest; diplomatic developments; and natural disasters.
The Fund's management will attempt to be alert to these factors and to
act to mitigate any unfavorable consequences to the extent practicable, but
there can be no assurance its efforts will be successful or that protective
action will be feasible.
The operating expense ratio of the Fund can be expected to be higher
than that of an investment company investing exclusively in securities of
United States issuers since the expenses of the Fund (such as custodial,
currency exchange, valuation and communications costs) are higher. Because of
its emphasis on Japan, the Fund should be considered as a vehicle for
diversification of investments and not as a balanced investment program.
INVESTMENT RESTRICTIONS
The Fund has adopted certain investment restrictions which cannot be
changed without approval by holders of a majority of the Fund's shares. These
restrictions, which are designed to enhance the realization of the Fund's
investment objective, provide, among other things, that the Fund may not:
- As to 75% of its total assets, invest more than 5% of the
value of such assets in the securities of any one issuer, or
purchase more than 10% of the voting securities of any one
issuer (except for investments in securities issued or
guaranteed by the United States Government, its agencies or
instrumentalities).
- Invest more than 25% of its total assets (taken at market
value at the time of each investment) in the securities of
issuers in any particular industry or in securities issued or
guaranteed by the Japanese government or its agencies or
instrumentalities provided that this restriction shall not
prevent the Fund from purchasing the securities of any issuer
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<PAGE> 12
pursuant to the exercise of rights distributed to the Fund by
the issuer, except that no such purchase may be made if as a
result the Fund would no longer be a diversified investment
company as defined in the Investment Company Act of 1940.
Additional investment restrictions of the Fund, some of which are
fundamental policies that may not be changed without stockholder approval, are
set forth under the caption "Investment Practices and Restrictions" in the
Statement of Additional Information.
PERFORMANCE INFORMATION
The Fund may from time to time include figures indicating the Fund's
total return or average annual total return in advertisements or reports to
stockholders or prospective investors. Average annual total return and total
return figures represent the increase (or decrease) in the value of an
investment in the Fund over a specified period. Both calculations assume that
all income dividends and capital gain distributions during the period are
reinvested at net asset value in additional Fund shares. Quotations of the
average annual total return reflect the deduction of a proportional share of
Fund expenses on an annual basis. The results, which are annualized, represent
an average annual compounded rate of return on a hypothetical investment in the
Fund over a period of 1, 5, and 10 years ending on the most recent calendar
quarter (but not for a period greater than the life of the Fund). Quotations
of total return, which are not annualized, represent historical earnings and
asset value fluctuations. Performance figures are based on past performance
and are not a guarantee of future results.
MANAGEMENT OF THE FUND
Capstone Japan Fund is a series of Capstone International Series
Trust, an open-end diversified management investment company, commonly called a
mutual fund. The management and affairs of the Fund and the Trust are
supervised by the Trust's Board of Trustees. Through the purchase of Fund
shares, investors with goals similar to the investment objective of the Fund
can participate in the investment performance of a diversified portfolio of
investments designed to meet that objective.
ADVISER
On August 22, 1997 the Fund's shareholders approved a new Investment
Advisory Agreement between Capstone International Series Trust, on behalf of
the Fund, and FCA Corp ("FCA"). This action was in response to the resignation
of the Fund's previous investment adviser, Nikko Capital Management (USA), Inc.
("Nikko").
The new agreement became effective on August 25, 1997 and will
continue for two years from that date. Pursuant to the agreement, FCA manages
the Fund's portfolio in accordance with the Fund's stated policies, makes
investment decisions for the Fund, places orders to purchase and sell
securities, employs at its own expense executive and clerical personnel for the
Fund, and provides office space and services required for the transaction of
business.
FCA (the "Adviser"), a fee-based financial planning and investment
counseling firm located at 5847 San Felipe #850, Houston, Texas 77057, was
incorporated in 1983 and its predecessor was formed
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<PAGE> 13
in 1975. In addition to the Fund, the Adviser acts as an investment adviser
to: Capstone New Zealand 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 Investment Advisory Agreement with FCA increased the advisory fee
rate from 0.40% to 0.75% of the Fund's average annual net assets. However, FCA
has committed to reimburse expenses of the Fund so they will be limited to no
more than 2.5% of the Fund's average annual net assets through October 31,
1998.
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.
During the fiscal year ended October 31, 1997, the Fund accrued
investment advisory fees to Nikko equal to .34% of the average net assets of
the Fund, and .12% to FCA, all of which were waived pursuant to the expense
limitation discussed above (with respect to FCA) and pursuant to limits
previously applicable under state law (with respect to Nikko).
ADMINISTRATOR
Capstone Asset Management Company (the "Administrator"), a subsidiary
of Capstone Financial Services, Inc., provides administrative services for the
Fund and supervises the Fund's daily business affairs, including arranging for
the provision of the Fund's legal services, supervising the activities of
persons providing services to the Fund, and furnishing office space and
equipment to the Fund. These services are subject to general review by the
Trust's Board of Trustees.
As compensation for its services, the Administrator receives from the
Fund a fee, computed daily and payable monthly, at an annual rate of 0.20% 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 September 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.
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<PAGE> 14
The Administrator provides administrative and/or investment advisory
services to three other mutual funds: Capstone Government Income Fund, Capstone
Growth Fund, Inc. and Capstone New Zealand Fund (the "Capstone Group"). The
Administrator also provides investment advice to pension and profit sharing
accounts, corporations and individuals.
DISTRIBUTOR
Pursuant to a Distribution Agreement with the Trust dated August 10,
1992, Capstone Asset Planning Company (the "Distributor") is the principal
underwriter of the Fund and, acting as exclusive agent, sells shares of the
Fund to the public on a continuous basis.
The Fund has adopted a Service and Distribution Plan (the "Plan")
pursuant to which it uses its assets to finance activities relating to the
distribution of its shares to investors and provision of certain stockholder
services. The Plan permits payments to be made by the Fund to the Distributor
to reimburse it for expenditures incurred by it in connection with the
distribution of the Fund shares to investors and provision of certain
stockholder services including but not limited to the payment of compensation,
including incentive compensation, to securities dealers (which may include the
Distributor itself) and other financial institutions and organizations
(collectively, the "Service Organizations") to obtain various distribution
related and/or administrative services for the Fund. These services include,
among other things, processing new stockholder account applications, preparing
and transmitting to the Fund's Transfer Agent computer processable tapes of all
transactions by customers and serving as the primary source of information to
customers in answering questions concerning the Fund and their transactions
with the Fund. The Distributor is also authorized to engage in advertising,
the preparation and distribution of sales literature and other promotional
activities on behalf of the Fund. In addition, the Plan authorizes payment by
the Fund of the cost of preparing, printing and distributing Fund Prospectuses
and Statements of Additional Information to prospective investors and of
implementing and operating the Plan.
Under the Plan, payments made to the Distributor may not exceed an
amount computed at an annual rate of 0.25% of the average net assets of the
Fund. Of this amount, the Distributor may reallocate amounts up to 0.25% of
the Fund's average net assets to Service Organizations (which may include the
Distributor). Any remaining amounts not so allocated will be retained by the
Distributor for the purposes described above. The Distributor is permitted to
collect the fees under the Plan on a monthly basis. Any expenditures incurred
by the Distributor in excess of the limitation described above during a given
month may be carried forward up to twelve months for reimbursement, subject
always to the 0.25% limit, and no interest or carrying charges will be payable
by the Fund on amounts carried forward. The Plan may be terminated by the Fund
at any time and the Fund will not be liable for amounts not reimbursed as of
the termination date.
The Plan was last approved by a majority of the Fund's trustees,
including a majority of the trustees who have no direct or indirect financial
interest in the operation of the Plan or any of its agreements ("Plan
Trustees") on May 12, 1997. The Plan was approved by the Fund's stockholders
on August 10, 1992 and took effect on September 1, 1992. The Plan will
continue from year to year, provided that such continuance is approved at least
annually by a vote of a majority of the Board of Trustees, including a majority
of the Plan Trustees.
The Glass-Steagall Act and other applicable laws currently prohibit
banks from engaging in the business of underwriting, selling or distributing
securities. Accordingly, unless such laws are changed, if
14
<PAGE> 15
the Fund engages banks as Service Organizations, the banks would perform only
administrative and stockholder servicing functions. If a bank were prohibited
from acting as a Service Organization, alternative means for continuing the
servicing of such stockholders would be sought. State law may differ from
Federal law and banks and other financial institutions may be required to be
registered as broker-dealers to perform administrative and stockholder
servicing functions.
EXPENSES
The Fund's expenses are accrued daily and are deducted from its total
income before dividends are paid. These expenses include, but are not limited
to: fees paid to the Adviser and the Administrator; taxes; legal fees;
custodian and auditing fees; fees paid to outside firms providing pricing and
accounting services to the Fund; and printing and other miscellaneous expenses
paid by the Fund. The Fund's total operating expenses (after waivers from the
Adviser and Nikko and reimbursements from the Adviser) during the fiscal year
ended October 31, 1997 were 4.55% 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 of the Administrator and the Distributor. Some other officers of the
Trust are also officers of the Administrator and the Distributor.
Shares of the Fund are sold in a continuous offering and may be
purchased on any business day through authorized investment dealers or directly
from the Fund's Distributor. Except for the Fund itself, only the Distributor
and investment dealers which have a sales agreement with the Distributor are
authorized to sell shares of the Fund. For further information, reference is
made to the caption "Distributor" in the Fund's Statement of Additional
Information.
Shares of the Fund are sold at net asset value, without a sales charge
and will be credited to a stockholder's account at the net asset value next
computed after an order is received. The minimum initial investment is $200,
except for continuous investment plans which have no minimum, and there is no
minimum for subsequent purchases. No stock certificates representing shares
purchased will be issued except upon written request to the Fund's Transfer
Agent. The Fund's management reserves the right to reject any purchase order
if, in its opinion, it is in the Fund's best interest to do so.
At various times the Distributor may implement programs under which a
dealer's sales force may be eligible to win nominal awards for certain sales
efforts or recognition programs conforming to criteria established by the
Distributor, or to participate in sales programs sponsored by the Distributor.
In addition, the Adviser, the Administrator and/or the Distributor in their
discretion may from time to time, pursuant to objective criteria established by
the Adviser, the Administrator and/or the Distributor sponsor programs designed
to reward selected dealers for certain services or activities which are
primarily intended to result in the sale of shares of the Fund. Such payments
are made out of their own assets, and not out of the assets of the Fund. These
programs will not change the price you pay for your shares or the amount that
the Fund will receive from such sale.
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<PAGE> 16
Payment for all orders to purchase Fund shares must be received by the
Fund's Transfer Agent within three business days after the order was placed.
Checks made payable to third parties will not be accepted.
INVESTING THROUGH AUTHORIZED DEALERS
If any authorized dealer receives an order of at least $200, the
dealer may contact the Distributor directly. Orders received by dealers by the
close of trading on the New York Stock Exchange on a business day that are
transmitted to the Distributor by 4:00 p.m. Central time on that day will be
effected at the net asset value per share determined as of the close of trading
on the New York Stock Exchange on that day. It is the dealer's responsibility
to transmit orders so that they will be received by the Distributor before 4:00
p.m. Central time.
After each investment, the stockholder and the authorized investment
dealer receive confirmation statements of the number of shares purchased and
owned.
PURCHASES THROUGH THE DISTRIBUTOR
An account may be opened by mailing a check or other negotiable bank
draft (payable to Capstone Japan Fund) for $200 or more together with the
completed Investment Application Form to the Fund's Transfer Agent: Capstone
Japan Fund, c/o FPS Services, Inc., P.O. Box 61503, 3200 Horizon Drive, King of
Prussia, Pennsylvania 19406-0903. The $200 minimum initial investment may be
waived by the Distributor for plans involving continuing investments (see
"Stockholder Services"). There is no minimum for subsequent investments, which
may be mailed directly to the Transfer Agent. All such investments are
effected at the net asset value of Fund shares next computed following receipt
of payment by the Transfer Agent. Confirmations of the opening of an account
and of all subsequent transactions in the account are forwarded by the Transfer
Agent to the stockholder's address of record.
TELEPHONE PURCHASE AUTHORIZATION (INVESTING BY PHONE)
Stockholders who have completed the Telephone Purchase Authorization
section of the Investment Application Form may purchase additional shares by
telephoning the Fund's Transfer Agent at (800) 845-2340. The minimum telephone
purchase is $1,000 and the maximum is five times the net asset value of shares
for which payment has been received (and for which certificates have not been
issued) held by the stockholder on the day preceding such telephone purchase.
The telephone purchase will be effected at the net asset value next computed
after receipt of the call by the Transfer Agent. Payment for the telephone
purchase must be received by the Transfer Agent within three business days
after the order is placed. If payment is not received within three business
days, the stockholder will be liable for all losses incurred as a result of the
purchase.
INVESTING BY WIRE
Investors having an account with a commercial bank that is a member of
the Federal Reserve System may purchase shares of the Fund by requesting their
bank to transmit funds by wire to: United Missouri Bank KC NA, ABA
#10-10-00695, For: FPS Services, Inc., Account #98-7037-0719; Further Credit
Capstone Japan Fund. The investor's name and account number must be specified
in the wire.
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<PAGE> 17
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 Japan Fund, c/o FPS
Services, Inc., P.O. Box 61503, 3200 Horizon Drive, King of Prussia,
Pennsylvania 19406-0903.
Subsequent Purchases - Additional investments may be made at any time
through the wire procedures described above, which must include the investor's
name and account number. The investor's bank may impose a fee for investments
by wire.
DISTRIBUTIONS AND TAXES
PAYMENT OPTIONS
Distributions (whether treated for tax purposes as ordinary income or
long-term capital gains) to the Fund's stockholders are paid in additional
shares of the Fund, with no sales charge, based on the Fund's net asset value
as of the close of business on the record date for such distributions.
However, a stockholder may elect on the application form to receive
distributions as follows:
Option 1. To receive income dividends treated as ordinary
income in cash and distributions treated as capital
gains in additional Fund shares, or
Option 2. To receive all income dividend and capital gains
distributions in cash.
The Fund pays dividends from investment company taxable income and
distributions representing capital gains at least annually, usually in
December. The Fund will advise each stockholder annually of the amounts of
dividends from investment income and of long-term capital gain distributions
reinvested or paid in cash to the stockholder during the calendar year.
If you select Option 1 or Option 2 and the U.S. Postal Service cannot
deliver your checks, or if your checks remain uncashed for six months, your
distribution checks will be reinvested in your account at the then-current net
asset value and your election will be converted to the purchase of additional
shares.
TAXES
The Fund intends to qualify as a regulated investment company under
the Federal tax law. As such, the Fund generally will not pay Federal income
tax on the income and gains it pays as dividends to its stockholders. In order
to avoid a 4% Federal excise tax, the Fund intends to distribute each year all
of its net income and gains.
Stockholders will be taxed on dividends received from the Fund,
regardless of whether received in cash or reinvested in additional shares.
Stockholders must treat dividends, other than capital gain dividends, as
ordinary income. Dividends designated as capital gain dividends are taxable to
stockholders as long-term capital gains, but the rate of tax will depend on the
Fund's holding period for the assets whose sale results in the gain. Certain
dividends declared in October, November or December
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<PAGE> 18
of a calendar year are taxable to stockholders as though received on December
31 of that year if paid to stockholders during January of the following
calendar year. The Fund will advise stockholders annually of the amount and
nature of dividends paid to them.
Investors are advised to consult their tax advisers with respect to
the particular tax consequences to them of an investment in the Fund. A more
detailed description of tax consequences to stockholders is contained in the
Statement of Additional Information.
REDEMPTION AND REPURCHASE OF SHARES
Generally, stockholders may require the Fund to redeem their shares by
sending a written request, signed by the record owner(s), to Capstone Japan
Fund, c/o FPS Services, Inc., P.O. Box 61503, 3200 Horizon Drive, King of
Prussia, Pennsylvania 19406-0903. In addition, certain expedited redemption
methods described below are available. If stock certificates have been issued
for shares being redeemed, such certificates must accompany the written request
with the stockholder's signature guaranteed by an "eligible guarantor
institution", as defined in Rule 17Ad-15 under the Securities Exchange Act of
1934, which participates in a signature guarantee program. Eligible guarantor
institutions include banks, brokers, dealers, credit unions, national
securities exchanges, registered securities associations, clearing agencies and
savings associations. A broker-dealer guaranteeing signatures must be a member
of a clearing corporation or maintain net capital of at least $100,000. Credit
unions must be authorized to issue signature guarantees. Signature guarantees
will be accepted from any eligible guarantor institution which participates in
a signature guarantee program. No signature guarantees for shares for which no
certificates have been issued are required when an application is on file at
the Transfer Agent and payment is to be made to the stockholder of record at
the stockholder's address of record. However, if the proceeds of the
redemption are to be paid to someone other than the registered holder, or to
other than the stockholder's address of record, or the shares are to be
transferred, the owner's signature must be guaranteed as specified above. The
redemption price shall be the net asset value per share next computed after
receipt of the redemption request. See "Determination of Net Asset Value."
In addition, the Distributor is authorized as agent for the Fund to
offer to repurchase shares which are presented by telephone or telegraph to the
Distributor by authorized investment dealers. The repurchase price is the net
asset value per share next determined after the request is received. See
"Determination of Net Asset Value". Broker-dealers may charge for their
services in connection with the repurchase, but the Distributor and its
affiliates will not charge any fee for such repurchase. Payment for shares
presented for repurchase or redemption by authorized investment dealers will be
made within seven days after receipt by the Transfer Agent of a written notice
and/or certificate in proper order.
The Fund reserves the right to pay any portion of redemption requests
in excess of $1 million in readily marketable securities from the Fund's
portfolio. In this case, the redeeming stockholder may incur brokerage charges
on the sale of the securities.
The right of redemption and payment of redemption proceeds are subject
to suspension for any period during which the New York Stock Exchange is
closed, other than customary weekend and holiday closings, or when trading on
the New York Stock Exchange is restricted as determined by the Securities and
Exchange Commission; during any period when an emergency as defined by the
rules and
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<PAGE> 19
regulations of the Securities and Exchange Commission exists; or during any
period when the Securities and Exchange Commission has by order permitted such
suspension. The Fund will not mail redemption proceeds until checks (including
certified checks or cashier's checks) received for the shares purchased have
cleared, which can be as long as 15 days.
The value of shares on repurchase or redemption may be more or less
than the investor's cost depending upon the market value of the Fund's
portfolio securities at the time of redemption. No redemption fee is charged
for the redemption of shares.
EXPEDITED TELEPHONE REDEMPTION
A stockholder redeeming at least $1,000 of shares (for which
certificates have not been issued), and who has authorized expedited redemption
on the application form filed with the Transfer Agent may at the time of such
redemption request that funds be mailed or wired to the commercial bank or
registered broker-dealer he has previously designated on the application form
by telephoning the Transfer Agent at (800) 845-2340. Redemption proceeds will
be sent to the investor on the next business day following receipt of the
telephone redemption request. In order to allow the Adviser to manage the Fund
more effectively, stockholders are strongly urged to initiate redemptions as
early in the day as possible and to notify the Transfer Agent as least 5 days
in advance of redemptions in excess of $1 million. If a stockholder seeks to
use an expedited method of redemption of shares recently purchased by check,
the Fund may withhold the redemption proceeds until it is reasonably assured of
the collection of the check representing the purchase, which may take up to 15
days from the purchase date. The Fund, Distributor and Transfer Agent reserve
the right at any time to suspend or terminate the expedited redemption
procedure or to impose a fee for this service. At the present time there is no
fee charged for this service. During periods of unusual economic or market
changes, stockholders may experience difficulties or delays in effecting
telephone redemptions.
When exchanges or redemption requests are made by telephone, the Fund
has procedures in place designed to give reasonable assurance that such
telephone instructions are genuine, including recording telephone calls and
sending written confirmations of transactions. The Fund will not be liable for
losses due to unauthorized or fraudulent telephone transactions unless it does
not follow such procedures, in which case it may be liable for such losses.
DETERMINATION OF NET ASSET VALUE
The Fund's net asset value is computed daily, Monday through Friday,
as of the close of regular trading on the New York Stock Exchange, which is
currently 4:00 p.m. Eastern time. The Fund's net asset value will not be
computed on the following holidays: New Year's Day, 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 non-U.S. exchanges on which its
portfolio securities are principally traded are 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
19
<PAGE> 20
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 and futures contracts which are traded on a
securities exchange are valued at the last sale price on that exchange prior to
the relevant closing or, if there is no recent last sale price available, at
the last current bid quotation. A security or futures contract which is listed
or traded on more than one exchange is valued at the quotation on the exchange
determined to be the primary market for such security or contract. All other
equity securities and futures contracts not so traded are valued at the last
current bid quotation prior to the relevant securities exchange closing. Fixed
income securities are valued using market quotations or pricing services. In
the absence of an applicable price, securities and futures contracts will be
valued at a fair value as determined in good faith by the trustees or in
accordance with procedures established by the trustees.
STOCKHOLDER SERVICES
Capstone Japan Fund provides its stockholders with a number of
services and conveniences designed to assist investors in the management of
their investments. These stockholder services include the following:
TAX-DEFERRED RETIREMENT PLANS
Shares may be purchased by virtually all types of tax-deferred
retirement plans. The Distributor or its affiliates make available plan forms
and/or custody agreements for the following:
o Individual Retirement Accounts (for individuals and their
non-employed spouses who wish to make limited tax deductible
contributions to a tax-deferred account for retirement); and
o Simplified Employee Pension Plans.
Dividends and distributions will be automatically reinvested without a
sales charge. For further details, including fees charged, tax consequences
and redemption information, see the specific plan documents which can be
obtained from the Fund.
Investors should consult with their tax adviser before establishing
any of the tax-deferred retirement plans described above.
EXCHANGE PRIVILEGE
Shares of the Fund which have been outstanding for 15 days or more may
be exchanged for shares of other Capstone Funds at a price based on their
respective net asset values with no sales or administrative charge. Any
exchange must meet applicable minimum investment and other requirements
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<PAGE> 21
for the Capstone Fund into which the exchange is requested. A stockholder
requesting such an exchange will be sent a current prospectus for the fund into
which the exchange is requested. Shares held less than 15 days cannot be
exchanged; such shares will be redeemed at the next computed net asset value.
Purchases, redemptions and exchanges should be made for investment
purposes only. A pattern of frequent exchanges, purchases and sales may be
deemed abusive by the Administrator and, at the discretion of the
Administrator, can be limited by the Fund's refusal to accept further purchase
and/or exchange orders from the investor. Although the Administrator will
consider all factors it deems relevant in determining whether a pattern of
frequent purchases, redemptions and/or exchanges by a particular investor is
abusive and not in the best interests of the Fund or its other stockholders, as
a general policy investors should be aware that engaging in more than one
exchange or purchase-sale transaction during any thirty-day period with respect
to a particular fund may be deemed abusive and therefore subject to the above
restrictions.
An exchange of shares is treated for Federal income tax purposes as a
sale of shares given in exchange and the stockholder may, therefore, realize a
taxable gain or loss. The exchange privilege may be exercised only in those
states where shares of the fund for which shares held are being exchanged may
be legally sold, and the privilege may be amended or terminated upon 60 days'
notice to stockholders.
The stockholder may exercise the following exchange privilege options:
Exchange by Mail - Stockholders may mail a written notice
requesting an exchange to the Fund's Transfer Agent.
Exchange by Telephone - Stockholders must complete telephone
exchange on the application form filed with the Transfer Agent
to exchange shares by telephone. Telephone exchanges may be
made from 9:30 a.m. to 4:00 p.m. Eastern time, Monday through
Friday, except holidays. If certificates have been issued to
the investor, this procedure may be utilized only if he
delivers his certificates, duly endorsed for transfer, to the
Transfer Agent prior to giving telephone instructions. During
periods of unusual economic or market changes, stockholders
may experience difficulties or delays in effecting exchanges
over the telephone.
When exchanges or redemption requests are made by telephone, the Fund
has procedures in place designed to give reasonable assurance that such
telephone instructions are genuine, including recording telephone calls and
sending written confirmations of transactions. The Fund will not be liable for
losses due to unauthorized or fraudulent telephone transactions unless it does
not follow such procedures, in which case it may be liable for such losses.
PRE-AUTHORIZED PAYMENT
A stockholder may arrange to make regular monthly investments of $25
or more automatically from his checking account by authorizing the Fund's
Transfer Agent to withdraw the payment from his checking account.
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<PAGE> 22
SYSTEMATIC WITHDRAWAL PLAN
Investors may open a withdrawal plan providing for withdrawals of $50
or more monthly, quarterly, semi-annually or annually if they have made a
minimum investment in the shares of the Fund of $5,000. The minimum amount
which may be withdrawn pursuant to this plan is $50.
These payments do not represent a yield or return on investment and
may constitute return of initial capital. In addition, such payments may
deplete or eliminate the investment. Stockholders cannot be assured that they
will receive payment for any specific period because payments will terminate
when all shares have been redeemed. The number of such payments will depend
primarily upon the amount and frequency of payments and the yield on the
remaining shares. Under this plan, any distributions must be reinvested in
additional shares at net asset value.
The Systematic Withdrawal Plan is voluntary, flexible, and under the
stockholder's control and direction at all times, and does not limit or alter
the stockholder's right to redeem shares. Such plan may be terminated in
writing at any time by either the stockholder or the Fund. The cost of
operating the Systematic Withdrawal Plan is borne by the Fund.
GENERAL INFORMATION
Capstone International Series Trust is an open-end diversified
management investment company, as defined in the Investment Company Act of
1940, as amended. It was organized in Massachusetts in 1986 as a business
trust. Effective September 2, 1997, the Fund's name was changed from Capstone
Nikko Japan Fund to Capstone Japan Fund.
The Trust is authorized to issue an unlimited number of shares of
beneficial interest of $0.01 par value and to divide such shares into separate
series (or funds). The Fund was established as a series of the Trust on April
24, 1989. The Trust currently has one other series, Capstone New Zealand Fund,
which invests in securities of New Zealand issuers. Stockholders are entitled
to one vote for each full share held and to fractional votes for fractional
shares held in the election of trustees (to the extent hereafter provided) and
on other matters submitted to the vote of stockholders of the Fund. The Trust
is not required to hold regular annual meetings of stockholders and will do so
only when required by law. There are no cumulative voting rights. In the
event additional series are established, matters submitted to stockholder vote
must be approved by each series except (i) as to matters required by the
Investment Company Act of 1940 to be voted on by all stockholders as a single
class and (ii) as to matters determined by the trustees not to affect a
particular series, which will not be submitted to vote by stockholders of that
series. Stockholders may, in accordance with the Declaration of Trust, cause a
meeting of stockholders to be held for the purpose of voting on the removal of
trustees. Fund shares have equal dividend rights, are fully paid,
non-assessable and freely transferable and have no conversion, pre-emptive or
subscription rights. Fractional shares have the same rights, pro rata, as full
shares.
Under Massachusetts law, stockholders of a business trust may, under
certain circumstances, be held personally liable as partners for the
obligations of the trust. The Declaration of Trust contains an express
disclaimer of stockholder liability for acts or obligations of the Trust. The
Declaration of Trust provides for indemnification out of the Trust's property
for any stockholder held personally liable for the obligations of the Trust.
Thus, the risk of a stockholder's incurring financial loss on account of
stockholder's liability is limited to circumstances in which the Trust itself
would be unable to meet its obligations.
22
<PAGE> 23
The Fund's securities are held by Fifth Third Bank of Cincinnati 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 stockholders owned more than 5%
of the Fund's outstanding shares of beneficial interest: SMC Pneumatics, Inc.
(21.95%) and Smith Barney Shearson (19.26%); Charles Schwab & Company, Inc.
(9.52%); and Donaldson Lufkin Jenrette Securities Corp. (8.24%).
Stockholders should address inquiries to the Fund at its address
stated on the cover page of this Prospectus.
23
<PAGE> 24
CAPSTONE JAPAN FUND
(FORMERLY CAPSTONE NIKKO JAPAN 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 Practices and Restrictions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Performance Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Trustees and Executive Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Investment Advisory Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Administration Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Distributor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Portfolio Transactions and Brokerage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Determination of Net Asset Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
How to Buy and Redeem Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Control Persons and Principal Holders of Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
</TABLE>
<PAGE> 25
GENERAL INFORMATION
Capstone Japan Fund (the "Fund") is a series (or fund) of Capstone
International Series Trust (the "Trust"). Prior to September 2, 1997, the
Fund's name was Capstone Nikko Japan Fund. The Trust currently has one other
series, Capstone New Zealand Fund, which invests in securities of New Zealand
issuers. The Trust may create additional series in the future, but each series
will be treated as a separate mutual fund. The Trust was organized as a
business trust in Massachusetts on May 9, 1986 and commenced business shortly
thereafter. It is an open end diversified management investment company under
the Investment Company Act of 1940. The Fund is a member of a group of
investment companies sponsored by Capstone Asset Management Company (the
"Administrator"), which also provides administrative services to the Fund.
INVESTMENT PRACTICES AND RESTRICTIONS
REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements
with U.S. government securities dealers recognized by the Federal Reserve
Board, with member banks of the Federal Reserve System or with such other
brokers or dealers that meet the credit guidelines of the Trust's Board of
Trustees. In a repurchase agreement, the Fund buys a security from a seller
that has agreed to repurchase the same security at a mutually agreed upon date
and price. The Fund's resale price will be in excess of the purchase price,
reflecting an agreed upon interest rate. This interest rate is effective for
the period of time the Fund is invested in the agreement and is not related to
the coupon rate on the underlying security. Repurchase agreements may also be
viewed as a fully collateralized loan of money by the Fund to the seller. The
period of these repurchase agreements will usually be short, from overnight to
one week, and at no time will the Fund invest in repurchase agreements for more
than one year. The Fund will always receive as collateral securities whose
market value including accrued interest is, and during the entire term of the
agreement remains, at least equal to 100% of the dollar amount invested by the
Fund in each agreement, and the Fund will make payment for such securities only
upon physical delivery or upon evidence of book entry transfer to the account
of the Custodian. If the seller defaults, the Fund might incur a loss if the
value of the collateral securing the repurchase agreement declines and might
incur disposition costs in connection with liquidating the collateral. In
addition, if bankruptcy proceedings are commenced with respect to the seller of
a security which is the subject of a repurchase agreement, realization upon the
collateral by the Fund may be delayed or limited. The Adviser seeks to
minimize the risk of loss through repurchase agreements by analyzing the
creditworthiness of the obligors under repurchase agreements, in accordance
with the credit guidelines of the Trust's Board of Trustees.
FOREIGN CURRENCY TRANSACTIONS. The Fund may, to a limited extent,
deal in forward foreign exchange between the currencies of the United States
and Japan as a hedge against possible variations in the foreign exchange rates
between these currencies. This is accomplished through contractual agreements
to purchase or sell a specified currency at a specified future date (up to one
year) and price set at the time of the contract. The Fund's dealings in
forward foreign exchange contracts are limited to hedging involving either
specific transactions or portfolio positions. Transaction hedging is the
purchase or sale of forward foreign currency with respect to specific
receivables or payables of the Fund accruing in connection with the purchase
and sale of its portfolio securities, the sale and redemption of shares of the
Fund or the payment of dividends and distributions by the Fund. Position
hedging is the sale of forward foreign currency with respect to portfolio
security positions denominated or quoted in such
2
<PAGE> 26
foreign currency. The Fund will not enter into or maintain a position in those
contracts if their consummation would obligate the Fund to deliver an amount of
foreign currency greater than the value of the Fund's assets denominated or
quoted in, or currency convertible into, such currency.
When the Fund enters into a position hedging transaction, its
custodian bank places cash or liquid securities in a separate account of the
Fund in an amount equal to the value of the Fund's total assets committed to
the consummation of the forward contract. The amount of the securities placed
in the separate account are adjusted to maintain the value of those securities
equal to the Fund's commitment under the contract.
Hedging against a decline in the value of a currency by means of
forward currency contracts, options on currencies, currency futures contracts
and options on currency futures contracts (see below and "Investment Objectives
and Policies" in the Prospectus) does not eliminate fluctuations in the value
of the Fund's portfolio securities or prevent losses. Such transactions also
preclude the opportunity for gain if the value of the currency moves in an
unanticipated manner. Moreover, it may not be possible for the Fund to hedge
against a change which is generally anticipated, since appropriate transactions
might not then be available.
The cost of engaging in foreign currency transactions by the Fund
varies with such factors as the currencies involved, the length of the contract
period and the market conditions then prevailing. Transactions in foreign
currency exchange usually are conducted on a principal basis, so no fees or
commissions are involved.
LOANS OF PORTFOLIO SECURITIES. The Fund has authority to lend its
portfolio securities provided: (1) the loan is secured continuously by
collateral consisting of U.S. Government securities or cash or cash equivalents
adjusted daily to make a market value at least equal to the current market
value of the securities loaned; (2) the Fund may at any time call the loan and
regain the securities loaned; (3) the Fund will receive any interest or
dividends paid on the loaned securities; and (4) the aggregate market value of
securities loaned will not at any time exceed 10% of the total assets of the
Fund. In addition, it is anticipated that the Fund may share with the borrower
some of the income received on the collateral for the loan or that it will be
paid a premium for the loan. In determining whether to lend securities, the
Adviser considers all relevant factors and circumstances including the
creditworthiness of the borrower.
FUTURES TRANSACTIONS. The Fund may enter into futures contracts on
U.S. and foreign debt securities ("interest-rate futures"), on stock indices
and on currencies of countries in which the Fund conducts its investment
activities. Interest rate and currency futures contracts create an obligation
to purchase or sell specified amounts of debt securities or currency on a
specified future date. Although these contracts generally call for making or
taking delivery of the underlying securities or currency, the contracts are in
most cases closed out before the maturity date by entering into an offsetting
transaction which may result in a profit or loss.
Securities index futures contracts are contracts to buy or sell units
of a particular index of securities at a specified future date for an amount
equal to the difference between the original contract purchase price and the
price at the time the contract is closed out, which may be at maturity or
through an earlier offsetting transaction.
3
<PAGE> 27
The purchase or sale of a futures contract involves no sale price or
premium, unlike the purchase of a security or option. Instead, an amount of
cash or securities acceptable to the broker and the relevant contract market,
generally about 5% of the contract amount, must be deposited with the broker as
"initial margin." This "initial margin" represents a "good faith" deposit
assuring the performance of both the purchaser and the seller under the futures
contract. Subsequent "variation margin" payments must be made daily to and by
the broker to reflect variations in the price of the futures contract. When
the contract is settled or closed out by an offsetting transaction, a final
determination is made of variation margin due to or from the broker. A nominal
commission is also paid on each completed sale transaction.
OPTIONS TRANSACTIONS. The Fund may purchase or write put or call
options on futures contracts, individual securities, currencies or stock
indices to hedge against fluctuations in securities prices and currency
exchange rates and to adjust its risk exposure relative to the Benchmark. See
"Investment Objective and Policies" in the Prospectus.
The Fund may purchase options on exchanges and in over-the-counter
markets to the extent the value of such options owned by the Fund does not
exceed 5% of its net assets. The Fund may write put options and covered call
options on exchanges and in the over-the-counter markets. A call option gives
the purchaser the right, until the option expires, to purchase the underlying
futures contract, security or currency at the exercise price or, in the case of
a stock index option, to receive a specified amount. A put option gives the
purchaser the right, until the option expires, to sell the underlying futures
contract, security or currency at the exercise price or, in the case of a stock
index option, to pay a specified amount.
When the Fund writes an option, it receives a premium which it retains
whether or not the option is exercised. By writing a call option, the Fund
becomes obligated, either for a certain period or on a certain date, to sell
the underlying futures contract, security or currency to the purchaser at the
exercise price (or to pay a specified price with respect to an index option) if
the option is exercised. At the time or during the period when the option may
be exercised, the Fund risks losing any gain in the value of the underlying
futures contract, security or currency or stock index over the exercise price.
By writing a put option, the Fund becomes obligated either for a certain period
or on a certain date, to purchase the underlying futures contract, security or
currency at the exercise price, or to pay the specified price in connection
with an index option, if the option is exercised. The Fund might, therefore,
be obligated to purchase or make a payment for more than the current market
price of the particular futures contract, security, currency or index option.
The Fund writes only "covered" options on securities and currencies.
This means that so long as the Fund is obligated as the writer of a call option
on a security or currency, it will own an equivalent amount of the underlying
security, currency or liquid securities denominated, quoted in or currently
convertible into such currency. The Fund will be considered "covered" with
respect to a put option it writes if, so long as it is obligated as the writer
of a put option, it deposits and maintains with its custodian in a segregated
account an amount of the underlying securities, currency or liquid securities
denominated, quoted in or currently convertible into such currency having a
value equal to or greater than the exercise price of the option. There is no
limitation on the amount of call options the Fund may write. However, the Fund
may write covered put options on currencies only to the extent that cover for
such options does not exceed 25% of the Fund's net assets.
4
<PAGE> 28
The writer of an option that wishes to terminate an obligation may in
some cases be able to effect a "closing purchase transaction." This is
accomplished by buying an option of the same series as the option previously
written. The effect of the purchase is that the writer's position will be
cancelled by the clearing corporation. However, a writer may not effect a
closing purchase transaction after being notified of the exercise of an option.
Likewise, an investor who is the holder of an option may liquidate a position
by effecting a "closing sale transaction." This is accomplished by selling an
option of the same series as the option previously purchased. There is no
guarantee that either a closing purchase or a closing sale transaction can be
effected.
The Fund will realize a profit from a closing transaction if the price
of the transaction is less than the premium received from writing the option or
is more than the premium paid to purchase the option; the Fund will realize a
loss from a closing transaction if the price of the transaction is more than
the premium paid to purchase the option. Because increases in the market price
of a call option will generally reflect increases in the value of the
underlying security, futures contract, index option or currency, any loss in
closing out a call option is likely to be offset in whole or in part by
appreciation of the underlying collateral owned by the Fund.
INVESTMENT RESTRICTIONS. The Trust has adopted with respect to the
Fund the following "fundamental" restrictions which, along with its investment
objective, cannot be changed without approval by the holders of a majority of
the shares of beneficial interest in the Fund ("Fund shares"). Such majority
is defined by the Investment Company Act of 1940 as the lesser of (i) 67% or
more of the Fund shares present in person or by proxy at a meeting, if the
holders of more than 50% of the outstanding voting securities are present or
represented by proxy; or (ii) more than 50% of the outstanding voting
securities. The Fund may not:
1. With respect to 75% of its total assets, invest more than 5%
of the value of such assets in the securities of any one
issuer or purchase more than 10% of the voting securities of
any one issuer (except for investments in securities issued or
guaranteed by the U.S. Government, its agencies or
instrumentalities).
2. Invest more than 25% of its total assets (taken at market
value at the time of each investment) in the securities of
issuers in any particular industry or in securities issued or
guaranteed by the Japanese government or its agencies or
instrumentalities provided that this restriction shall not
prevent the Fund from purchasing the securities of any issuer
pursuant to the exercise of rights distributed to the Fund by
the issuer, except that no such purchase may be made if as a
result the Fund would no longer be a diversified investment
company as defined in the Investment Company Act of 1940.
3. Borrow amounts in excess of 10% of its total assets taken at
cost (not including the amount borrowed) and then only for
temporary or emergency purposes.
4. Issue senior securities except as appropriate to evidence
permitted borrowing (for the purpose of this restriction,
forward foreign currency exchange contracts and collateral
arrangements with respect to such contracts are not deemed to
be senior securities).
5. Underwrite securities issued by other persons except to the
extent that the purchase of portfolio securities and their
later disposition may be deemed to be underwriting.
5
<PAGE> 29
6. Purchase or sell real estate except that the Fund may invest
in securities secured by real estate or interests therein or
securities issued by companies which invest in real estate or
interests therein.
7. Purchase or sell commodities or commodity contracts (for
purposes of this restriction, interest-rate, index and
currency futures contracts, options on such contracts and on
stock indices and currencies, and forward foreign currency
exchange contracts are not deemed to be commodities or
commodity contracts).
8. Make loans to other persons except that the Fund may (i) lend
its portfolio securities in accordance with applicable legal
requirements, (ii) enter into repurchase agreements and (iii)
purchase debt obligations in accordance with its investment
objective and policies.
With respect to restriction 8, above, the Fund has no present
intention of lending its portfolio securities.
The Fund has adopted the following additional restrictions which are
not fundamental and which may be changed without stockholder approval, to the
extent permitted by applicable law, regulation or regulatory policy. The Fund
may not:
a. With respect to 25% of its total assets, invest more than 5%
of the value of such assets in the securities of any one
issuer, or purchase more than 10% of the voting securities of
any one issuer (except for investments in securities issued or
guaranteed by the U.S. Government, its agencies or
instrumentalities)1
b. Make short sales of securities, maintain short positions or
purchase securities on margin, except for short-term credits
as are necessary for the clearance of transactions and in
connection with transactions involving forward foreign
currency exchange contracts, futures contracts and related
options;
c. Invest more than 5% of its total assets in securities of
unseasoned issuers which, including their predecessors, have
been in operation for less than three years (except
obligations issued or guaranteed by the U.S. Government, the
Japanese government or their agencies or instrumentalities)
and equity securities which are not readily marketable;
d. Enter into a repurchase agreement not terminable within seven
days if the total of such agreements would be more than 5% of
the value of the Fund's total assets;
e. Invest in securities of other investment companies (other than
in connection with a merger, consolidation, reorganization or
acquisition of assets) except to the extent permitted by the
Investment Company Act of 1940 and related rules and
regulatory interpretation;
f. Purchase put or call options if, as a result thereof, the
value of put and call options owned by the Fund would exceed
5% of the Fund's net assets;
6
<PAGE> 30
g. Purchase warrants of any issuer if, as a result more than 2%
of the value of the total assets of the Fund would be invested
in warrants which are not listed on the New York Stock
Exchange or the American Stock Exchange, or more than 5% of
the value of the total assets of the Fund would be invested in
warrants. Warrants acquired by the Fund in units or attached
to securities may be deemed to be without value;
h. Purchase or retain for the Fund the securities of any issuer
if those officers and trustees of the Trust, or directors and
officers of its investment adviser, who individually own more
than 1/2 of 1% of the outstanding securities of such issuer,
together own more than 5% of such outstanding securities;
i. Purchase from or sell to any of the officers and trustees of
the Trust, its investment adviser, its principal underwriter
or the officers and directors of its investment adviser or
principal underwriter, portfolio securities of the Fund;
j. Invest in oil, gas or other mineral exploration or development
companies (although it may purchase securities of issuers
which own, sponsor or invest in such interests);
k. Pledge, mortgage or hypothecate its assets, except that to
secure permitted borrowings it may pledge securities having a
value at the time of the pledge of not more than 15% of the
Fund's total assets taken at cost. (For purposes of this
restriction, collateral arrangements with respect to permitted
options and futures transaction and forward foreign exchange
contracts are not deemed to involve a pledge of assets.);
l. Purchase any securities subject to legal or contractual
restrictions on the resale thereof, or purchase securities
which are not readily marketable including securities of
foreign issuers which are not listed on a recognized domestic
or foreign securities exchange, or enter into repurchase
agreements which are not terminable within seven days if such
purchase or entering into a repurchase agreement would cause
more than 10% of the value of the total assets of the Fund to
be invested in such securities and such repurchase agreements,
except that the Fund may not invest more than 5% of the value
of the total assets in repurchase agreements which are not
terminable within seven days.
The portfolio securities of the Fund may be turned over whenever
necessary or appropriate in the opinion of the Fund's management to seek the
achievement of the basic objective of the Fund. The turnover rate of the
Fund's portfolio was 73% for the fiscal year ended October 31, 1997.
- ----------------
1 With respect to the remaining 75% of the value of the Fund's total
assets, this limitation is fundamental and therefore cannot be changed
without the approval of a majority of the Fund shares. See
restriction number 1, supra.
PERFORMANCE INFORMATION
The Fund may from time to time include figures indicating the Fund's
total return or average annual total return in advertisements or reports to
stockholders or prospective investors. Average annual total return and total
return figures represent the increase (or decrease) in the value of an
investment in the Fund over a specified period. Both calculations assume that
all income dividends and capital gains
7
<PAGE> 31
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:
P (1 + T)n= ERV
where P = a hypothetical initial payment of $1,000,
T = the average annual total return,
n = the number of years, and
ERV = the ending redeemable value of a hypothetical $1,000
payment made at the beginning of the period.
For the one year period ended October 31, 1997, the Fund's average
annual total return was (22.93)%. For the five year period ended October 31,
1997 and the period July 10, 1989 (commencement of operations) to October 31,
1997, the Fund's average annual total return was 1.43% and (7.27)%,
respectively.
Quotations of total return, which are not annualized, represent
historical earnings and asset value fluctuations. Total return is based on
past performance and is not a guarantee of future results. For the one year
and five year periods ended October 31, 1997 and the period July 10, 1989 to
October 31, 1997 the Fund's total return was (22.93)%, 7.34%, and (46.58)%,
respectively.
Performance information for the Fund may be compared, in reports and
promotional literature, to: (i) the Morgan Stanley Capital International
Index; (ii) the Tokyo Stock Exchange; (iii) the Standard & Poor's 500 Stock
Price Index ("S&P 500 Index"), the Dow Jones Industrial Average ("DJIA"), or
other appropriate unmanaged indices of performance of various types of
investments, so that investors may compare the Fund's results with those of
indices widely regarded by investors as representative of the securities
markets in general; (iv) other groups of mutual funds tracked by Lipper
Analytical Services, a widely used independent research firm which ranks mutual
funds by overall performance, investment objectives, and assets, or tracked by
other services, companies, publications, or persons who rank mutual funds on
overall performance or other criteria; (v) the Consumer Price Index (a measure
of inflation) to assess the real rate of return from an investment in the Fund;
and (vi) a universe of money managers with similar country allocation and
performance objectives. Unmanaged indices may assume the reinvestment of
dividends, but generally do not reflect deductions for administrative and
management costs and expenses.
Performance information for the Fund reflects only the performance of
a hypothetical investment in the Fund during the particular time period on
which the calculations are based. Performance information should be considered
in light of the Fund's investment objectives and policies, the types and
quality of the Fund's portfolio investments, market conditions during the
particular time period and operating expenses. Such information should not be
considered as a representation of the Fund's future performance.
8
<PAGE> 32
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 (51), Trustee and President of the Trust.
5847 San Felipe, Suite 4100, Houston, Texas 77057.
Chairman of the Board and Director of the Administrator
since 1992; President and Director of Capstone Asset
Planning Company and Capstone Financial Services, Inc.
since 1987; Director and officer of other Capstone Funds.
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).
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.
- ----------------
* Trustee who is an interested person as defined in the Investment
Company Act of 1940.
9
<PAGE> 33
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 received
compensation for serving as directors of other investment companies sponsored
by the Administrator.
Each trustee not affiliated with the Adviser or Administrator is
entitled to $250 for each Board meeting attended, and is paid a $1,000 annual
retainer by the Trust. The trustees and officers of the Trust are also
reimbursed for expenses incurred in attending meetings of the Board of
Trustees. For the fiscal year ended October 31, 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 $6,223.
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.
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 1,875 0 0 9,750(2),(3)
</TABLE>
- --------------
* Fund does not pay deferred compensation.
1 Deceased
2 Trustee of Capstone International Series Trust. - Capstone New Zealand Fund
3 Director of Capstone Fixed Income Series, Inc. and Capstone Growth Fund,
Inc.
10
<PAGE> 34
INVESTMENT ADVISORY AGREEMENT
On August 22, 1997 the Fund's shareholders approved a new Investment
Advisory Agreement between Capstone International Series Trust, on behalf of
the Fund, and FCA Corp ("FCA"). This action was in response to the resignation
of the Fund's previous investment adviser, Nikko Capital Management (USA), Inc.
("Nikko"). The new agreement became effective on August 25, 1997.
The Investment Advisory Agreement with FCA differs from the agreement
with Nikko in the following substantive ways. The advisory fee rate was
increased from 0.40% to 0.75% of the Fund's average annual net assets.
However, concurrent with the date of its investment advisory agreement with the
Fund, FCA has committed to reimburse expenses of the Fund so they will be
limited to no more than 2.5% of the Fund's average annual net assets through
October 31, 1998. Pursuant to its agreement with the Fund, Nikko agreed to
reduce its fees (and reimburse the Fund if necessary) if the ordinary business
expenses of the Fund exceeded any expense limitation applicable to the Fund
pursuant to the laws or regulations of any state. Such reimbursements were
shared by Nikko and the Administrator ratably in proportion to the fees
received by them from the Fund. Due to Federal legislation enacted in 1996,
such state expense limitations are no longer applicable to the Fund. However,
Nikko continued to honor the expense limitation contained in its agreement with
Fund.
The new Investment Advisory Agreement also clarifies that the Fund will
bear travel expenses of persons affiliated with FCA and the Fund's
administrator, Capstone Asset Management Company, related to attendance at
meetings of the Board of Trustees and its committees. Finally, in addition to
a new date and term, the new Investment Advisory Agreement provides that FCA
will give the Fund 90 days (rather than the previous 60 days) notice of
termination of the agreement.
Pursuant to the investment advisory agreement, FCA (the "Adviser")
manages the investment of the Fund's assets and places orders for the purchase
and sale of its portfolio securities. The Adviser is responsible for obtaining
and evaluating economic, statistical, and financial data and for formulating
and implementing investment programs in furtherance of the Fund's investment
objectives and policies.
The Advisory Agreement also provides that the Adviser shall not be
liable to the Fund for any actions or omissions in the absence of willful
misfeasance, bad faith, gross negligence or reckless disregard of the Adviser's
obligations or duties under the Advisory Agreement.
The Advisory Agreement will be in effect until August 25, 1997 and
thereafter may be continued from year to year if specifically approved at least
annually (a) by the Board of Trustees of the Trust or by vote of a majority of
the Fund shares and (b) by the affirmative vote of a majority of the trustees
who are not parties to the agreement or interested persons of any such party by
votes cast in person at a meeting called for such purpose. The Advisory
Agreement provides that it shall terminate automatically if assigned and that
it may be terminated without penalty by either party on 90 days' written
notice.
During the fiscal year ended October 31, 1997, the Fund accrued
investment advisory fees to Nikko in the amount of $8,975 and $3,064 to FCA,
all of which were waived pursuant to legal and voluntary expense limitations.
11
<PAGE> 35
ADMINISTRATION AGREEMENT
Under an agreement ("Administration Agreement") between the Trust and
Capstone Asset Management Company (the "Administrator"), the Administrator
supervises all aspects of the Fund's operations other than the management of
its investments. As part of these services, it oversees the performance of
administrative and professional services to the Fund by others; provides office
facilities; prepares reports to stockholders and the Securities and Exchange
Commission; and provides personnel for supervisory, administrative and clerical
functions. Except as noted below, the costs of these services are borne by the
Administrator. For the Administrator's services, the Fund will pay to the
Administrator a fee, calculated daily and payable quarterly, equal to an annual
rate of 0.20% of the Fund's average net assets. For the fiscal year ended
October 31, 1997 the Fund paid administrative fees in the amount of $29,304.
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 "Distributor") 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 shares pursuant to an agreement with the
Trust (the "Distribution Agreement"). The Distributor has the exclusive right
to distribute Fund shares in a continuous offering through affiliated and
unaffiliated dealers. The Distributor's obligation is an agency or "best
efforts" arrangement under which the Distributor is required to take and pay
for only such Fund shares as may be sold to the public. The Distributor is not
obligated to sell any stated number of shares. The Distributor bears the cost
of printing (but not typesetting) prospectuses used in connection with this
offering and the cost and expense of supplemental sales literature, promotion
and advertising. Effective August 21, 1995, the front end sales load
applicable to sales of the Fund's shares was eliminated. Prior to August 21,
1995, sales of Fund shares were subject to a sales charge equal to a percentage
of the net asset value of the shares to be purchased. The sales charge was
paid to the Distributor, who reallowed a portion of the sales charge to
broker-dealers who had an agreement with the Distributor to participate in the
offering of Fund shares. For the fiscal year ended October 31, 1995, the
Distributor received $2,840 from the sale of Fund shares.
The Distribution Agreement is renewable from year to year if approved
(a) by the Fund's Board of Trustees or by a vote of a majority of the Fund's
outstanding voting securities and (b) by the affirmative vote of a majority of
trustees who are not parties to the Distribution Agreement or interested
persons of any party, by votes cast in person at a meeting called for such
purpose. The Distribution Agreement provides that it will terminate if
assigned, and that it may be terminated without penalty by either party on 60
days' written notice.
The Fund adopted, effective September 1, 1992, a Service and
Distribution Plan (the "Plan") pursuant to Rule 12b-1 of the Investment Company
Act of 1940 which permits the Fund to absorb certain expenses in connection
with the distribution of its shares and provision of certain services to
stockholders. See "Management of the Fund - Distributor" in the Fund's
Prospectus. As required by
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Rule 12b-1, the Fund's Plan and related agreements were approved by a vote of
the Fund's Board of Trustees, and by a vote of the trustees who are not
"interested persons" of the Fund as defined under the 1940 Act and have no
direct or indirect interest in the operation of the Plan or any agreements
related to the Plan (the "Plan Trustees"), and by the Fund's stockholders at a
Special Meeting of Stockholders held August 10, 1992.
As required by Rule 12b-1, the directors will review quarterly reports
prepared by the Distributor on the amounts expended and the purposes for the
expenditures. The Fund paid $6,630 in 12b-1 fees during the fiscal year ended
October 31, 1997. Of this amount, approximately $725 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 $50,084); printing of
advertising materials, prospectuses and financial reports distributed to
prospective investors (approximately $6,205); postage and mailing expenses
(approximately $4,106); and other miscellaneous costs and expenses incurred in
the operation of the Plan (approximately $9,742).
The Plan and related agreements may be terminated at any time by a
vote of the Plan Trustees or by vote of a majority of the Fund's outstanding
voting securities. As required by Rule 12b-1, selection and nomination of
disinterested trustees for the Fund is committed to the discretion of the
trustees who are not "interested persons" as defined under the 1940 Act.
Any change in the Plan that would materially increase the distribution
expenses of the Fund requires stockholder approval, but otherwise, the Plan may
be amended by the trustees, including a majority of the Plan Trustees.
The Plan will continue in effect for successive one year periods
provided that such continuance is specifically approved by a majority of the
trustees, including a majority of the Plan Trustees. Continuance of the Plan
was last approved by a majority of trustees and Plan Trustees on May 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 Adviser. Subject to the Fund's overall
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brokerage policies, the Adviser may effect securities transactions through
Capstone Asset Planning Company, TradeStar Investments, Inc. and Williams
MacKay Jordan & Co., Inc., broker-dealer affiliates of the Administrator, and
with The Nikko Securities Company International, Inc., an affiliate of Nikko,
the Fund's former investment adviser.
Section 28(e) of the Securities Exchange Act of 1934 ("Section 28(e)")
permits an investment adviser, under certain circumstances, to cause an account
to pay a broker or dealer who supplies brokerage and research services a
commission for effecting a securities transaction in excess of the amount of
commission another broker or dealer would have charged for effecting the
transaction. Brokerage and research services include (a) furnishing advice as
to the value of securities, the advisability of investing in, purchasing or
selling securities, and the availability of securities or purchasers or sellers
of securities, (b) furnishing analyses and reports concerning issuers,
industries, securities, economic factors and trends, portfolio strategy, and
the performance of accounts, and (c) effecting securities transactions and
performing functions incidental thereto (such as clearance, settlement and
custody).
Pursuant to provisions of the Advisory Agreement, the Trust's Board of
Trustees has authorized the Adviser to cause the Fund to incur brokerage
commissions in an amount higher than the lowest available rate in return for
brokerage and research services which provide lawful and appropriate assistance
to the Adviser in carrying out its investment- decision making
responsibilities. The Adviser is of the opinion that the continued receipt of
supplemental investment research services from dealers is essential to its
provision of high quality portfolio management services to the Fund. The
Adviser undertakes that such higher commissions will not be paid by the Fund
unless (a) the Adviser determines in good faith that the amount is reasonable
in relation to the services in terms of the particular transaction or in terms
of the Adviser's overall responsibilities with respect to the accounts as to
which it exercises investment discretion, (b) such payment is made in
compliance with the provisions of Section 28(e) and other applicable state and
Federal laws and regulations, and (c) in the opinion of the Adviser, the total
commissions paid by the Fund are reasonable in relation to the expected
benefits to the Fund over the long term. The investment advisory fee paid by
the Fund under the Advisory Agreement is not reduced as a result of the
Adviser's receipt of research services.
Consistent with the Rules of Fair Practice of the National Association
of Securities Dealers, Inc. and subject to seeking best execution and such
other policies as the Board of Trustees may determine, the Adviser may consider
sales of Fund shares as a factor in the selection of dealers to execute
portfolio transactions for the Fund.
The Adviser places portfolio transactions for other advisory accounts.
Research services furnished by firms through which the Fund effects its
securities transactions may be used by the Adviser in servicing all of its
accounts; not all of such services may be used by the Adviser in connection
with the Fund. In the opinion of the Adviser, the benefits from research
services to each of the accounts (including the Fund) managed by the Adviser
cannot be measured separately. Because the volume and nature of the trading
activities of the accounts are not uniform, the amount of commissions in excess
of the lowest available rate paid by each account for brokerage and research
services will vary. However, in the opinion of the Adviser, such costs to the
Fund will not be disproportionate to the benefits received by the Fund on a
continuing basis.
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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.
Fixed commissions are charged on the securities exchanges in Japan.
Such fixed commissions are generally higher than negotiated commissions on
comparable United States transactions. Brokerage commissions paid by the Fund
on portfolio transactions for the fiscal year ended October 31, 1997 totalled
$8,932 (0.34% of the average net assets of the Fund), none of which was paid to
affiliated broker-dealers. There were no securities transactions effected
through brokers who furnished the Fund with statistical, research and advisory
information. The Fund also executed trades in the amount of $9,404,974 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
$4,084 and $17,273, respectively, in brokerage commissions on portfolio trades,
all of which was paid to The Nikko Securities Co. International, Inc.
DETERMINATION OF NET ASSET VALUE
The Fund's net asset value is computed daily, Monday through Friday,
as of the close of regular trading on the New York Stock Exchange, which is
currently 4:00 p.m. Eastern time. The Fund's net asset value will not be
computed on the following holidays: New Year's Day, 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 non-U.S. exchanges on which its
portfolio securities are principally traded are 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 and futures contracts which are traded on a
securities exchange are valued at the last sale price on that exchange prior to
the relevant closing or, if there is no recent last sale price available, at
the last current bid quotation. A security or futures contract which is listed
or traded on more than one exchange is valued at the quotation on the exchange
determined to be the primary market for such security or contract. All other
equity securities and futures contracts not so traded are valued at the last
current bid quotation prior to the relevant securities exchange closing. Fixed
income securities are valued using market quotations or pricing services. In
the absence of an applicable price, securities
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and futures contracts will be valued at a fair value as determined in good
faith by the trustees or in accordance with procedures established by the
trustees.
HOW TO BUY AND REDEEM SHARES
Shares of the Fund are sold in a continuous offering without a sales
charge and may be purchased on any business day through authorized dealers,
including Capstone Asset Planning Company. Certain broker-dealers assist their
clients in the purchase of shares from the Distributor and charge a fee for
this service in addition to the Fund's public offering price.
After an order is received by the Distributor, shares will be credited
to a stockholder's account at the net asset value next computed after an order
is received. See "Determination of Net Asset Value". Initial purchases must
be at least $200; however, this requirement may be waived by the Distributor
for plans involving continuing investments. There is no minimum for subsequent
purchases of shares. No stock certificates representing shares purchased will
be issued except upon written request to the Fund's Transfer Agent. The Fund's
management reserves the right to reject any purchase order if, in its opinion,
it is in the Fund's best interest to do so. See "Purchasing Shares" in the
Prospectus.
Generally, stockholders may require the Fund to redeem their shares by
sending a written request, signed by the record owner(s), to Capstone Japan
Fund, c/o FPS Services, Inc., P.O. Box 61503, King of Prussia, Pennsylvania
19406- 0903. In addition, certain expedited redemption methods are available.
See "Redemption and Repurchase of Shares" in the Prospectus.
TAXES
The following summary describes some of the more significant U.S.
Federal income tax consequences applicable to investors in the Fund based on
existing Federal tax law. New tax laws may be enacted which may affect the tax
consequences of an investment in the Fund. The following discussion is
necessarily general, and prospective investors are urged to consult their own
tax advisers with respect to the particular tax consequences to the investor of
an investment in the Fund.
The Fund intends to qualify annually and elect to be treated as a
regulated investment company under Subchapter M of the Internal Revenue Code of
1986, as amended (the "Code"). Qualification and election to be taxed as a
regulated investment company involves no supervision of management or
investment policies or practices by any government agency. To qualify as a
regulated investment company the Fund must, with respect to each taxable year,
distribute to stockholders at least 90% of its investment company taxable
income (which includes, among other items, dividends, interest, certain foreign
currency gains and losses and the excess of net short-term capital gains over
net long-term capital losses) and meet certain diversification of assets,
source of income, and other requirements of the Code.
As a regulated investment company, the Fund generally will not be
subject to Federal income tax on its investment company taxable income and net
capital gains (net long-term capital gains in excess of net short-term capital
losses), if any, that it distributes to stockholders. The Fund intends to
distribute to its stockholders, at least annually, substantially all of its
investment company taxable income and net
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capital gains. Amounts not distributed on a timely basis in accordance with a
calendar year distribution requirement are subject to a nondeductible 4% excise
tax. To prevent imposition of the tax, the Fund must distribute during each
calendar year an amount equal to the sum of: (1) at least 98% of its ordinary
income (not taking into account any capital gains or losses) for the calendar
year, (2) at least 98% of its capital gains in excess of its capital losses for
the twelve-month period ending on October 31 of the calendar year (reduced by
certain net operating losses, as prescribed by the Code), and (3) all ordinary
income and capital gains from previous years that were not distributed during
such years. A distribution will be treated as paid on December 31 of the
calendar year if it is declared by the Fund in October, November or December of
that year to stockholders on a record date in such a month and paid by the Fund
during January of the following calendar year. Such distributions will be
taxable to stockholders in the calendar year in which the distributions are
declared, rather than the calendar year in which the distributions are
received. To prevent application of the excise tax, the Fund intends to make
its distributions in accordance with the calendar year distribution
requirement.
The Fund may invest in stocks of foreign companies that are classified
under the Code as passive foreign investment companies ("PFICs"). In general,
a foreign company is classified as a PFIC if at least one-half of its assets
constitute investment-type assets or 75% or more of its gross income is
investment-type income. Under the PFIC rules, an "excess distribution"
received with respect to PFIC stock is treated as having been realized ratably
over the period during which the Fund held the PFIC stock. The Fund itself
will be subject to tax on the portion, if any, of the excess distribution that
is allocated to the Fund's holding period in prior taxable years (and an
interest factor will be added to the tax, as if the tax had actually been
payable in such prior taxable years) even though the Fund distributes the
corresponding income to stockholders. Excess distributions include any gain
from the sale of PFIC stock as well as certain distributions from a PFIC. All
excess distributions are taxable as ordinary income.
The Fund may be able to elect alternative tax treatment with respect
to PFIC stock. Under an election that currently may be available, the Fund
generally would be required to include in its gross income its share of the
earnings of a PFIC on a current basis, regardless of whether any distributions
are received from the PFIC. If this election is made, the special rules,
discussed above, relating to the taxation of excess distributions, would not
apply. Alternatively, 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 well as subject the
Fund itself to tax on certain income from PFIC stock, the amount that must be
distributed to stockholders and which will be taxed to stockholders as ordinary
income or long-term capital gain, may be increased or decreased substantially
as compared to a fund that did not invest in PFIC stock.
If the Fund retains net capital gains for reinvestment, although it
has no plans to do so, the Fund may elect to treat such amounts as having been
distributed to its stockholders. As a result, the stockholders would be
subject to tax on undistributed capital gains, would be able to claim their
proportionate share of the Federal income taxes paid by the Fund on such gains
as a credit against their own Federal income tax liabilities, and would be
entitled to an increase in their basis in the Fund shares.
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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
received by the Fund from domestic corporations for the taxable year. Since
the Fund's income may not consist exclusively of dividends eligible for the
corporate dividends received deduction, its distributions of investment company
taxable income likewise may not be eligible, in whole or in part, for that
deduction. The alternative minimum tax applicable to corporations may reduce
the benefits of the dividends received deductions. The dividends received
deduction may be further reduced if the shares of the Fund are debt-financed or
are deemed to have been held less than 46 days.
All distributions are taxable to the stockholder whether reinvested in
additional shares of the Fund or received in cash. Stockholders receiving
distributions in the form of additional shares will have a cost basis for
Federal income tax purposes in each share received equal to the net asset value
of a share of the Fund on the reinvestment date. Stockholders will be notified
annually as to the Federal tax status of distributions paid to them by the
Fund.
Distributions by the Fund reduce the net asset value of the Fund
shares. Should a distribution reduce the net asset value below a stockholder's
cost basis, such distribution nevertheless would be taxable to the stockholder
as ordinary income or capital gain as described above, even though, from an
investment standpoint, it may constitute a partial return of capital. In
particular, investors should be careful to consider the tax implications of
buying shares just prior to a distribution by the Fund. The price of shares
purchased at that time includes the amount of the forthcoming distribution, but
the distribution will generally be taxable to them.
HEDGING AND OTHER TRANSACTIONS. Certain options, futures contracts
and forward foreign currency contracts are "section 1256 contracts." Any gains
or losses on section 1256 contracts generally are considered 60% long-term and
40% short-term capital gains or losses ("60/40"); however, foreign currency
gains or losses (as discussed below) arising from certain section 1256
contracts may be treated as ordinary income or loss. Also, section 1256
contracts held by the Fund at the end of each taxable year are
"marked-to-market" with the result that unrealized gains or losses are treated
as though they were realized and the resulting gain or loss is generally
treated as 60/40 gain or loss.
Generally, the hedging transactions undertaken by the Fund may result
in "straddles" for Federal income tax purposes. The straddle rules may affect
the character of gains (or losses) realized by the Fund. In addition, losses
realized by the Fund on positions that are part of a straddle may be deferred
under the straddle rules, rather than being taken into account in calculating
the taxable income for the
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taxable year in which such losses are realized. Because only a few regulations
implementing the straddle rules have been promulgated, the tax consequences to
the Fund of hedging transactions are not entirely clear. The hedging
transactions may increase the amount of short-term capital gain realized by the
Fund, which is taxed as ordinary income when distributed to stockholders.
The Fund may make one or more of the elections available under the
Code which are applicable to straddles. If the Fund makes any of the
elections, the amount, character and timing of the recognition of gains or
losses from the affected straddle positions will be determined under rules that
vary according to the election(s) made. The rules applicable under certain of
the elections may operate to defer the recognition of losses and/or accelerate
the recognition of gains or losses from the affected straddle positions.
Because application of the straddle rules may affect the character of
gains or losses, defer losses and/or accelerate the recognition of gains or
losses from the affected straddle positions, the amount which must be
distributed to stockholders, and which will be taxed to stockholders as
ordinary income or long-term capital gain, may be increased or decreased
substantially as compared to a fund that did not engage in such hedging
transactions.
Certain requirements that must be met under the Code in order for the
Fund to qualify as a regulated investment company may limit the extent to which
the Fund will be able to engage in transactions in options, futures and forward
contracts.
FOREIGN CURRENCY GAINS AND LOSSES. Under the Code, gains or losses
attributable to fluctuations in foreign currency exchange rates which occur
between the time the Fund accrues interest or other receivables or accrues
expenses or other liabilities denominated in a foreign currency and the time
the Fund actually collects such receivables or pays such liabilities generally
are treated as ordinary income or ordinary loss. Similarly, on the disposition
of debt securities denominated in a foreign currency and on the disposition of
certain options, futures and forward contracts, gains or losses attributable to
fluctuations in the value of foreign currency between the date of acquisition
of the security or contract and the date of disposition also are treated as
ordinary gain or loss. These gains or losses, referred to under the Code as
"section 988" gains or losses, may increase or decrease the amount of the
Fund's investment company taxable income to be distributed to its stockholders
as ordinary income.
DISPOSITION OF SHARES. Upon a taxable disposition (by redemption,
repurchase, sale or exchange) of Fund shares, a stockholder may realize a
taxable gain or loss, depending upon his basis in his shares. That gain or
loss will be a capital gain or loss if the shares are capital assets in the
stockholder's hands, and generally will be long- term or short-term depending
upon the stockholder's holding period for the shares. Any loss realized by a
stockholder on a disposition of Fund shares held by the stockholder for six
months or less will be treated as a long-term capital loss to the extent of any
distributions of capital gain dividends received by the stockholder with
respect to such shares. Any loss realized on a disposition will be disallowed
to the extent the shares disposed of are replaced (whether by reinvestment of
distributions or otherwise) within a period of 61 days beginning 30 days before
and ending 30 days after the date of disposition of the shares. In such a
case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss.
Under certain circumstances, the sales charge incurred in acquiring
shares of the Fund may not be taken into account in determining the gain or
loss on the disposition of those shares. This rule applies
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where shares of the Fund are exchanged within 90 days after the date they were
purchased and new shares of a Capstone Fund or another regulated investment
company are acquired without a sales charge or at a reduced sales charge. In
that case, the gain or loss recognized on the exchange will be determined by
excluding from the tax basis of the shares exchanged all or a portion of the
sales charge incurred in acquiring those shares. This exclusion applies to the
extent that the otherwise applicable sales charge with respect to the newly
acquired shares is reduced as a result of having incurred a sales charge
initially. The portion of the sales charge affected by this rule will be
treated as a sales charge for the new shares.
Certain of the debt securities acquired by the Fund may be treated as
debt securities that were originally issued at a discount. Original issue
discount can generally be defined as the difference between the price at which
a security was issued and its stated redemption price at maturity. Although no
cash income is actually received by the Fund, original issue discount on a
taxable debt security earned in a given year generally is treated for Federal
income tax purposes as interest and, therefore, such income would be subject to
the distribution requirements of the Code.
BACKUP WITHHOLDING. The Fund may be required to withhold Federal
income tax at the rate of 31% of all taxable distributions from the Fund and of
gross proceeds from the redemption of Fund shares payable to stockholders who
fail to provide the Fund with their correct taxpayer identification number or
to make required certifications, or who have been notified by the Internal
Revenue Service that they are subject to backup withholding. Corporate
stockholders and certain other stockholders specified in the Code generally are
exempt from backup withholding. Backup withholding is not an additional tax.
Any amounts withheld may be credited against the stockholder's U.S. Federal
income tax liability.
FOREIGN TAXES. Income received by the Fund from sources within
foreign countries may be subject to withholding and other taxes imposed by such
countries. Tax conventions between certain countries and the United States may
reduce or eliminate these taxes. Under the current income tax treaty between
the United States and Japan, the withholding tax imposed by Japan on dividends
from Japanese sources is generally 15% (although a 10% rate may be applicable
in some circumstances) and the withholding tax on interest from Japanese
sources is generally 10%. Japan also imposes a tax on the transfer of
securities. It is impossible to determine in advance the amount of foreign
taxes that will be imposed on the Fund.
If more than 50% of the value of the Fund's total assets at the close
of its taxable year consists of securities of foreign corporations, the Fund
will be eligible and intends to elect to "pass-through" to the Fund's
stockholders the amount of foreign income and similar taxes paid by the Fund.
Pursuant to this election, a stockholder will be required to include in gross
income (in addition to taxable dividends actually received) his pro rata share
of the foreign income and similar taxes paid by the Fund, and generally will be
entitled either to deduct (as an itemized deduction) his pro rata share of such
foreign taxes in computing his taxable income or to use it (subject to
limitations) as a foreign tax credit against his U.S. Federal income tax
liability. No deduction for foreign taxes may be claimed by a stockholder who
does not itemize deductions. Each stockholder will be notified within 60 days
after the close of the Fund's taxable year whether the foreign taxes paid by
the Fund will "pass-through" for that year and, if so, such notification will
designate (a) the stockholder's portion of the foreign taxes paid to foreign
countries and (b) the portion of the dividend which represents income derived
from sources outside the U.S.
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Generally, a credit for foreign taxes is subject to the limitation
that it may not exceed the stockholder's U.S. Federal income tax attributable
to his total foreign source taxable income. For this purpose, if the
pass-through election is made, the source of the Fund's income flows through to
its stockholders. With respect to the Fund, gains from the sale of securities
will be treated as derived from U.S. sources and certain currency fluctuation
gains, including fluctuation gains from foreign currency denominated debt
securities, receivables and payables, will be treated as derived from U.S.
sources. The limitation on the foreign tax credit is applied separately to
foreign source passive income, such as dividends received from the Fund.
Stockholders may be unable to claim a credit for the full amount of their
proportionate share of foreign taxes paid by the Fund. In addition, the
foreign tax credit may offset only 90% of the alternative minimum tax (prior to
reduction for the "regular" tax liability for the year) imposed on corporations
and individuals. In addition, foreign taxes may not be deducted by a
stockholder that is an individual in computing alternative minimum taxable
income.
The foregoing is only a general description of the foreign tax credit
under current law. Because application of the credit depends on the particular
circumstances of each stockholder, stockholders are advised to consult their
own tax advisers.
FOREIGN STOCKHOLDERS - U.S. FEDERAL INCOME TAXATION. U.S. Federal
income taxation of a stockholder who, as to the United States, is a
non-resident alien individual, a foreign trust or estate, a foreign
corporation, or a foreign partnership (a "foreign stockholder"), depends on
whether the income from the Fund is "effectively connected" with a U.S. trade
or business carried on by such stockholder, as discussed generally below.
Special U.S. Federal income tax rules that differ from those described below
may apply to foreign persons who invest in the Fund. For example, the tax
consequences to a foreign stockholder entitled to claim the benefits of an
applicable tax treaty may be different from those described below. Foreign
stockholders are advised to consult their own tax advisers with respect to the
particular tax consequences to them of an investment in the Fund.
FOREIGN STOCKHOLDERS - INCOME NOT EFFECTIVELY CONNECTED. If the
income from the Fund is not effectively connected with a U.S. trade or business
carried on by the stockholder, distributions of investment company taxable
income generally will be subject to a U.S. Federal withholding tax of 30% (or
lower treaty rate) on the gross amount of the distribution. Foreign
stockholders may also be subject to the U.S. Federal withholding tax on the
income resulting from any election by the Fund to treat foreign taxes paid by
it as paid by its stockholders, but foreign stockholders will not be able to
claim a credit or deduction for the foreign taxes treated as having been paid
by them.
Capital gains realized directly by foreign stockholders upon the sale
of Fund shares and distributions of net capital gains, as well as amounts
retained by the Fund which are designated as undistributed capital gains,
generally will not be subject to U.S. Federal income tax unless the foreign
stockholder is a non-resident alien individual and is physically present in the
United States for more than 182 days during the taxable year. However, this
rule only applies in exceptional cases because any individual present in the
United States for more than 182 days during the taxable year generally is
treated as a resident for U.S. Federal income tax purposes and is taxable on
his worldwide income at the graduated rates applicable to U.S. citizens, rather
than the 30% U.S. Federal withholding tax. In the case of certain foreign
stockholders, the Fund may be required to withhold U.S. Federal income tax at a
rate of 31% of distributions of net capital gains and of the gross proceeds
from a redemption of Fund shares unless the stockholder furnishes the Fund with
certifications regarding the stockholder's foreign status. See "Backup
Withholding."
21
<PAGE> 45
FOREIGN STOCKHOLDERS - INCOME EFFECTIVELY CONNECTED. If the income
from the Fund is effectively connected with a U.S. trade or business carried on
by a foreign stockholder, then all distributions and any gains realized upon
the disposition of Fund shares will be subject to U.S. Federal income tax at
the graduated rates applicable to U.S. citizens and domestic corporations.
Foreign stockholders may also be subject to the branch profits tax.
FOREIGN STOCKHOLDERS - ESTATE TAX. Foreign individuals generally are
subject to U.S. Federal estate tax on their U.S. situs property, such as shares
of the Fund, that they own at the time of their death. Certain credits against
such tax and relief under applicable tax treaties may be available.
OTHER TAXATION. Distributions and redemption proceeds with respect to
the Fund also may be subject to additional state, local and foreign taxes,
depending upon each stockholder's particular situation. Stockholders are
advised to consult their tax advisers with respect to the particular tax
consequences to them of an investment in the Fund.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
The following table sets forth information concerning such persons
which, to the knowledge of the Fund's Board of Trustees, owned more than five
percent of the Fund's shares as of February 17, 1998:
<TABLE>
<CAPTION>
Name and Address Percent of Ownership
---------------- --------------------
<S> <C>
SMC Pneumatics, Inc. 21.95%
3011 N. Franklin Rd.
Indianapolis, IN 46226-6308
Smith Barney Shearson 19.26%
333 W. 34th Street, 7th Floor
New York, NY 10001
Charles Schwab & Company, Inc. 9.52%
Special Custody Account for Benefit
of its Customers
101 Montgomery Street
San Francisco, CA 94104
Donaldson Lufkin Jenrette Securities Corp. 8.24%
P.O. Box 2052
Jersey City, NJ 07303-9998
</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 Fifth Third
Bank, as custodian.
22
<PAGE> 46
STOCKHOLDER REPORTS. Semi-annual reports are furnished to
stockholders, and annually the financial statements in such reports are audited
by the Fund's independent accountants.
INDEPENDENT ACCOUNTANTS. 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.
23
<PAGE> 47
CAPSTONE JAPAN FUND
PORTFOLIO OF INVESTMENTS - October 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market % of
Value Net
Shares (Note 1-A) Assets
------ ---------- ------
<S> <C> <C> <C>
INDUSTRIAL MACHINERY (4.83%)
Makita Corp. .................................. 3,000 $ 42,155 2.22%
Matsushita Refrigeration ...................... 5,000 22,533 1.18
Toshiba Corp. ................................. 6,000 27,189 1.43
--------- ----
91,877 4.83
MISCELLANEOUS ELECTRICAL PRODUCTS (6.44%)
Aritsu Corporation ............................ 5,000 61,944 3.26
Fanuc, Limited ................................ 1,500 60,614 3.18
--------- ----
122,558 6.44
MISCELLANEOUS FINANCING (4.46%)
Nomura Securities Co., Limited ................ 3,000 34,921 1.84
Tokio Marine & Fire ........................... 5,000 49,888 2.62
--------- ----
84,809 4.46
PHARMACEUTICALS (9.59%)
Badyu Pharmaceuticals Co. - ADR ............... 300 86,400 4.54
Eisai Co. Limited - ADR ....................... 6,000 96,000 5.05
--------- ----
182,400 9.59
PRECISION MACHINERY (1.98%)
Shimadzu Corp. ................................ 10,000 37,582 1.98
REAL ESTATE (3.07%)
Sumitomo Realty Development ................... 8,000 58,468 3.07
SEMICONDUCTORS (2.78%)
Sumitomo Sitix Corp. .......................... 3,000 52,881 2.78
SERVICES (1.99%)
Intec ......................................... 4,000 37,915 1.99
WIRE & CABLES (3.47%)
Sumitomo Electric Inc ......................... 5,000 66,101 3.47
TOTAL COMMON STOCKS (Cost $2,089,985) ......... 1,843,653 96.93
</TABLE>
<PAGE> 48
CAPSTONE JAPAN FUND
PORTFOLIO OF INVESTMENTS - OCTOBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market % of
Value Net
BONDS- 2.65% Par Value (Note 1-A) Assets
--------- ------------- ------
<S> <C> <C> <C>
Merrill Lynch & Co., Variable rate, 01/31/00 (Cost $50,925) .......... $50,000 $ 50,375 2.65%
TOTAL INVESTMENTS (Cost $2,140,910) .......................... 1,894,028 99.58
OTHER ASSETS, LESS LIABILITIES ............................... 7,923 0.42
------------- ------
NET ASSETS ................................................... $ 1,901,951 100.00%
============= ======
</TABLE>
# Call options have been written by the Fund against these positions. (Note 5)
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
<PAGE> 49
CAPSTONE JAPAN FUND
STATEMENT OF ASSETS AND LIABILITIES OCTOBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
Investments in securities at market value (identified cost $2,140,910) (Note 1-A) ........... $ 1,894,028
Receivables:
Investment securities sold .............................................................. $ 118,394
Dividends ............................................................................... 4,872
Investment adviser (Note 2) ............................................................. 12,085 135,351
----------- -----------
Total Assets ............................................................................. 2,029,379
-----------
LIABILITIES:
Cash overdraft ............................................................................. 89,693
Covered call options written, at value (premiums received $23,060 (Notes 1 and 5) .......... 13,669
Accrued expenses ........................................................................... 24,066
-----------
Total Liabilities ....................................................................... 127,428
-----------
NET ASSETS .................................................................................... $ 1,901,951
===========
NET ASSET VALUE PRICE PER SHARE:
($1,901,951 divided by 365,008 shares of beneficial interest outstanding) .................... $ 5.21
===========
SOURCE OF NET ASSETS:
Paid in capital ............................................................................ $ 5,481,881
Accumulated net realized loss on investments ............................................... (3,342,797)
Net unrealized depreciation on investments and foreign currencies .......................... (237,133)
-----------
Total ................................................................................... $ 1,901,951
===========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
<PAGE> 50
CAPSTONE JAPAN FUND
STATEMENT OF OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Income:
Dividends (net of foreign taxes withheld of $2,359) ........................................... $ 17,947
---------
Expenses: (Note 2)
Advisory fees ................................................................................. $ 12,039
Transfer agent fees ........................................................................... 35,381
Administrative services ....................................................................... 25,304
Professional fees ............................................................................. 20,020
Custodian fees ................................................................................ 12,060
Registration and filing fees .................................................................. 11,241
Reports and notices to stockholders ........................................................... 9,328
Distribution fees ............................................................................. 6,630
Trustees' fees and expenses ................................................................... 6,223
Fund accounting fees .......................................................................... 4,000
Miscellaneous ................................................................................. 2,524
---------
Total Expenses ................................................................................ 144,750
Less: Advisory fees waived .................................................................... 12,039
Expenses reimbursed by Investment Adviser ............................................... 12,085 24,124
--------- ---------
Net Expenses ............................................................................ 120,626
---------
Net Investment Loss ..................................................................... (102,679)
---------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS: (Note 4)
Net realized loss from security transactions ..................................................... (435,466)
Net realized gain on conversion of foreign currencies to U.S. dollars ............................ 56,437
Net realized gain from forward currency contracts ................................................ 14,936
---------
Net realized loss on investments .............................................................. (364,093)
Net unrealized depreciation of investments, foreign currencies and forward currency contracts..... (101,501)
---------
Net realized and unrealized depreciation of investments ....................................... (465,594)
---------
Net decrease in net assets resulting from operations .................................... $(568,273)
=========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
<PAGE> 51
CAPSTONE JAPAN 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 loss ...................................................... $ (102,679) $ (85,184)
Net realized gain (loss) on investments .................................. (364,093) 101,948
Net unrealized depreciation of investments, forward currency contracts and
foreign currencies ............................................... (101,501) (29,017)
----------- -----------
Net decrease in net assets resulting from operations ..................... (568,273) (12,253)
DIVIDENDS TO SHAREHOLDERS FROM:
Net investment income .................................................... -- (24,587)
TRUST SHARE TRANSACTIONS:
Increase (decrease) in net assets resulting from capital share
transactions (Note 3) ............................................ (504,622) 103,784
----------- -----------
Net increase (decrease) in net assets .......................... (1,072,895) 66,944
NET ASSETS
Beginning of year ........................................................ 2,974,846 2,907,902
----------- -----------
End of year .............................................................. $ 1,901,951 $ 2,974,846
=========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS-October 31, 1997
- --------------------------------------------------------------------------------
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
Capstone Japan Fund, formerly Capstone Nikko Japan Fund, (the "Fund"),
is one of two series of beneficial interest of Capstone International Series
Trust (the "Trust") which is registered under the Investment Company Act of 1940
(the "Act"), as a diversified open-end management investment company. The Fund's
investment objective is to seek long-term capital appreciation and income using
a research-oriented approach. The following is a summary of significant
accounting policies consistently followed by the Fund in the preparation of its
financial statements.
A) VALUATION OF SECURITIES - Portfolio securities which are traded on Japanese
securities exchanges are valued at the last sales price or, if there is no
recent last sales price available, at the last current bid quotation. A security
which is listed or traded on more than one exchange is valued at the quotation
on the exchange determined to be the primary market for such security. All other
equity securities not so traded are valued at the last current bid quotation. In
the absence of any applicable price, securities will be valued at a fair value
as determined in good faith in accordance with procedures established by the
Board of Trustees.
B) CURRENCY TRANSLATION - For purposes of determining the Fund's net asset
value, all assets and liabilities initially expressed in foreign currency values
are converted into U.S. dollar values at the prevailing market rate at 14:00 GMT
on each U.S. business day, as established by the Board of Trustees. The cost of
securities is determined by using historical exchange rates. Income is
translated at approximate rates prevailing when accrued. The Fund does not
isolate that portion of gains and losses on investments which is due to changes
in foreign exchange rates from that which is due to changes in the market prices
of the investments. Such fluctuations are included with the net realized and
unrealized gains and losses from investments.
<PAGE> 52
CAPSTONE JAPAN FUND
C) ACCOUNTING FOR INVESTMENTS - Security transactions are accounted for on the
trade date. Realized gains and losses on security transactions are based on the
identified cost basis for both financial statement and Federal income tax
purposes. Dividend income and distributions to shareholders are recorded on the
ex-dividend date. Premiums on bonds purchased are amortized over the life of the
bonds. Interest income and estimated expenses are accrued daily.
D) OPTION ACCOUNTING PRINCIPLES - When the Fund sells an option, an amount equal
to the premium received by the Fund is included as an asset and an equivalent
liability. The amount of the liability is marked-to-market to reflect the
current market value of the options written. The current market value of a
traded option is the last sale price and options not traded that day are valued
at the prevailing quoted bid price. When an option expires on its stipulated
expiration date or the Fund enters into a closing purchase transaction, the Fund
realizes a gain (or loss, if the cost of a closing purchase transaction exceeds
the premium received when the option was sold) without regard to any unrealized
gain or loss on the underlying security, and the liability related to such
option is extinguished. If a call option is exercised, the premium is added to
the proceeds from the sale of the underlying security in determining whether the
Fund has a realized gain or loss.
E) FORWARD CURRENCY CONTRACTS - Forward currency transactions are undertaken to
hedge against possible variations in the foreign exchange rates between the
United States Dollar and the Japanese Yen. A forward currency contract is an
agreement between two parties to buy or sell a currency at a set price on a
future date. Forward contracts are marked-to-market daily and the change in the
market value is recorded by the Fund as an unrealized gain or loss. When a
contract is closed, the Fund records a realized gain or loss equal to the
difference between the value of the contract at the time it was opened and the
value at the time it was closed. The Fund could be exposed to risk if the
counterparties are unable to meet the terms of the contracts or if the value of
the currency changes unfavorably.
F) FEDERAL INCOME TAXES - No provision has been made for Federal income taxes
since it is the Fund's policy to continue to comply with the special provisions
of the Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable income and realized capital gains, in excess of
any capital loss carryovers, to relieve it from all, or substantially all, such
taxes. At October 31, 1997, the Fund had capital loss carryovers of $3,342,797
of which $1,413,422 expires in 1999, $1,494,646 expires in 2000 and $434,729
expires in 2005. Under the United States-Japan tax treaty, Japan imposes a
withholding tax of 15% on the dividends received by the Fund. There is currently
no Japanese tax on capital gains.
G) DISTRIBUTIONS TO SHAREHOLDERS - The Fund distributes its net investment
income, if any, and net realized gains (net of any capital loss carryovers)
annually. Income and capital gain distributions are determined in accordance
with income tax regulations which may differ from generally accepted accounting
principles. These differences are primarily due to differing treatments for
foreign currency transactions and net operating losses.
H) USE OF ESTIMATES - The preparation of the financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenue and expense during the reporting period. Actual results could differ
from those estimates.
NOTE 2 - INVESTMENT ADVISORY FEES, ADMINISTRATIVE FEES AND OTHER TRANSACTIONS
WITH AFFILIATES
For the period November 1, 1996 to August 24, 1997 the Fund's Investment
Adviser, Nikko Capital Management (USA), Inc. ("NICAM") earned a fee calculated
at an annual rate of .40% of the average net assets of the Fund. For the above
period, this fee amounting to $8,975 was waived by NICAM. Upon the resignation
of NICAM the Board of Trustees approved a new investment advisory agreement with
FCA Corp,("FCA") the current adviser to Capstone New Zealand Fund. Under the new
agreement, the advisory fee is increased to .75% of the average net assets and
the new adviser has undertaken to cap the Fund's expenses at 2.5% until October
31, 1998. For the period August 25, 1997 through October 31, 1997, $3,064 in
advisory fees were waived by FCA and FCA reimbursed the Fund $12,085 for excess
expenses for the August 25th through October 31, 1997 period.
The Administrator, Capstone Asset Management Company, is paid a fee,
calculated daily and paid monthly, equal to an annual rate of .20% of the Fund's
average daily net assets. The Administrator was also paid a monthly fee of
$2,000 representing the cost of certain accounting and bookkeeping services.
Effective September 1997, Fifth Third Bank began performing the accounting,
bookkeeping and pricing services for the Fund.
<PAGE> 53
CAPSTONE JAPAN FUND
Capstone Asset Planning Company ("CAPCO") serves as Distributor of the
Fund's shares. CAPCO is an affiliate of the Administrator, and both are
wholly-owned subsidiaries of Capstone Financial Services, Inc. ("CFS").
The Fund has adopted a Service and Distribution Plan (the "Plan")
pursuant to Rule 12b-1 under the Act whereby Fund assets are used to reimburse
CAPCO for costs and expenses incurred with the distribution and marketing of
shares of the Fund and servicing of Fund shareholders. Distribution and
marketing expenses include, among other things, printing of prospectuses,
advertising literature, and costs of personnel involved with the promotion and
distribution of the Fund's shares. Under the Plan, the Fund pays to CAPCO an
amount computed at an annual rate of up to .25% of the Fund's average net assets
(including reinvested dividends paid with respect to those assets). Of this
amount, CAPCO may reallocate to securities dealers (which may include CAPCO
itself) and other financial institutions and organizations (collectively,
"Service Organizations") amounts based on the Fund's average net assets owned by
stockholders for whom the Service Organizations have a servicing relationship.
The Plan permits CAPCO to carry forward for a maximum of twelve months
distribution expenses covered by the Plan for which CAPCO has not yet received
reimbursement. For the year ended October 31, 1997, the Fund paid $6,630 in
12b-1 fees, of which approximately 11% was paid to Service Organizations other
than CAPCO.
Certain officers and trustees of the Trust and the Fund who are also
officers and directors of the Adviser, the Administrator, Distributor or CFS
received no compensation from the Trust. During the year ended October 31, 1997,
trustees of the Fund who are not "interested persons" received trustees' fees of
$3,000.
Note 3 - Trust Shares
At October 31, 1997 there were 365,008 Trust shares outstanding.
Transactions in Trust shares were as follows:
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
----------------------
1997 1996
---- ----
SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------
<S> <C> <C> <C> <C>
Shares sold ...................... 395,272 $ 2,281,972 199,045 $ 1,474,183
Shares issued to shareholders in
reinvestment of dividends ..... -- -- 3,133 22,966
-------- ----------- -------- -----------
395,272 2,281,972 202,178 1,497,149
Shares redeemed .................. (470,624) (2,786,594) (191,828) (1,393,365)
-------- ----------- -------- -----------
Net increase (decrease) .......... (75,352) $ (504,622) 10,350 $ 103,784
======== =========== ======== ===========
</TABLE>
NOTE 4 - SECURITIES TRANSACTIONS
Purchases and sales of securities, other than U.S. Government
obligations, aggregated $1,843,806 and $2,296,539, respectively. At October 31,
1997, the cost of investments for Federal income tax purposes was $2,140,910.
Accumulated net unrealized depreciation on investments was $246,882 consisting
of $50,025 gross unrealized appreciation and $296,907 gross unrealized
depreciation.
NOTE 5 - OPTIONS WRITTEN BY THE FUND
A call option gives the holder the right to buy the underlying stock
from the writer (the Fund) at a specified price within a fixed period of time.
Therefore, the securities held by the Fund against which options are written may
not be traded and are held in escrow by the custodian.
The following table sets forth the outstanding call options written by the Fund
as of October 31, 1997.
<TABLE>
<CAPTION>
Premium Market Unrealized
Call Options On Received Value Appreciation
--------------- -------- ----- ------------
<S> <C> <C> <C>
1,600 shs Honda Corp-ADR @ 70 exp Apr 1998 $14,095 $ 9,200 $4,895
1,100 shs Sony Corp-ADR @ 100 exp Apr 1998 8,965 4,469 4,496
------- ------- ------
$23,060 $13,669 $9,391
======= ======= ======
</TABLE>
<PAGE> 54
CAPSTONE JAPAN FUND
The aggregate market value at October 31, 1997 of securities subject to
call options is $199,812 or approximately 10% of net assets.
At November 1, 1996, the Fund had no option contracts outstanding.
During the year ended October 31, 1997 the Fund wrote 27 option contracts for
which it received premiums aggregating $23,060. These 27 option contracts were
all outstanding at October 31, 1997.
NOTE 6 - CHANGE OF FUND NAME AND MODIFICATION OF INVESTMENT OBJECTIVE
Upon approval of the new advisory agreement between the Fund and FCA
Corp the Fund's name was changed to Capstone Japan Fund. FCA will maintain the
Fund's investment objective and continue to seek long-term capital appreciation
along with current income, but FCA will pursue this objective by investing not
only in securities listed on the Tokyo Stock Exchange, but also in securities of
issuers a substantial portion of whose business activities, profits and/or
earnings are in, or are derived from Japan. FCA will also invest in debt
securities, rated BBB or better, of such issues or that are payable in yen or
are otherwise linked to the performance of the Japanese market or economy.
Finally, FCA will invest in American Depository Receipts related to these
securities, in addition to buying these securities directly. FCA will no longer
use the computer model-based stock selection system employed by the former
adviser, but will rely, instead, on a research-oriented approach to selecting
securities.
NOTE 7 - SPECIAL MEETING OF SHAREHOLDERS (UNAUDITED)
Capstone International Series Trust held a special meeting of
shareholders of the Capstone Japan Fund on December 4, 1997. On July 14, 1997,
the record date for the meeting, the Fund had 453,665 shares outstanding, of
which 266,397 (59% of the total) were represented at the meeting. The votes at
the meeting were as follows:
Item 1: To approve a new investment advisory agreement for Capstone Japan Fund
with FCA Corp, with an increased fee.
<TABLE>
<CAPTION>
Number of Shares
----------------
<S> <C>
Affirmative 253,917
Against 2,304
Abstain 10,176
</TABLE>
Item 2: Election of Trustees
<TABLE>
<CAPTION>
Number of Shares
------------------------
Nominees for Trustee Affirmative Withheld
-------------------- ----------- --------
<S> <C> <C>
Edward L. Jaroski 264,978 1,419
James F. Leary 264,978 1,419
John R. Parker 264,978 1,419
Bernard J. Vaughan 264,978 1,419
</TABLE>
Item 3: To ratify the selection of Briggs, Bunting & Dougherty, LLP as
independent public accountants of the Trust for the fiscal year ended
October 31, 1997.
<TABLE>
<CAPTION>
Number of Shares
----------------
<S> <C>
Affirmative 162,466
Against 103,931
Abstain 0
</TABLE>
<PAGE> 55
CAPSTONE JAPAN FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The following table sets forth the per share operating performance data for a
share of capital stock outstanding, total return, ratios to average net assets
and other supplemental data for each year indicated.
<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 .................. $ 6.76 $ 6.76 $ 8.03 $ 6.99 $ 4.89
------ ------ ------ ------ ------
Income from investment operations:
Net investment loss ........................... (0.28) (0.19) (0.21) (0.21) (0.20)
Net realized and unrealized gain (loss)
on investments .............................. (1.27) 0.25 (1.06) 1.25 2.30
------ ------ ------ ------ ------
Total from investment operations .............. (1.55) 0.06 (1.27) 1.04 2.10
------ ------ ------ ------ ------
Less dividends from:
Net investment income ......................... -- 0.06 -- -- --
------ ------ ------ ------ ------
Net asset value at end of year ........................ $5.21 $ 6.76 $ 6.76 $ 8.03 $ 6.99
===== ====== ====== ====== ======
TOTAL RETURN (%) (1) .................................. (22.93) 0.75 (15.82) 14.88 42.74
RATIOS/SUPPLEMENTAL DATA
Net assets at end of year (in thousands) .............. $1,902 $2,975 $2,908 $3,484 $3,096
Ratio to average net assets:
Expenses (%) .................................. 4.55 3.30 3.61 3.25 4.26
Net investment income (%) ..................... (3.87) (2.59) (2.93) (2.62) (3.54)
Ratio to average net assets, prior to
reimbursements and waivers of expenses:
Expenses (%) .................................. 5.46 3.90 4.21 3.85 4.86
Net investment income (%) ..................... (4.78) (3.19) (3.53) (3.22) (4.14)
Portfolio turnover rate (%) ........................... 73 47 27 57 42
Average commission rate (per share of security) (2) $0.0371 $0.0864
</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> 56
CAPSTONE JAPAN FUND
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Shareholders and Board of Trustees
of Capstone Japan Fund
We have audited the accompanying statement of assets and liabilities of Capstone
Japan Fund (formerly "Capstone Nikko Japan Fund"), including the portfolio of
investments as of October 31, 1997, and the related statements of operations,
changes in net assets and financial highlights for the year then ended. These
financial statements and financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audit. The statement
of changes in net assets for the year ended October 31, 1996 and the financial
highlights for each of the four years in the period ended October 31, 1996, were
audited by other auditors, whose report, dated November 18, 1996, expressed an
unqualified opinion on that statement and the financial highlights.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements and financial highlights are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of securities owned as of October 31, 1997 by
correspondence with the custodian. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audit provided a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Capstone Japan Fund at October 31, 1997, and the results of its operations,
changes in its net assets and financial highlights for the year ended October
31, 1997, in conformity with generally accepted accounting principles.
Briggs, Bunting & Dougherty, LLP
Philadelphia, Pennsylvania
December 8, 1997
<PAGE> 57
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibits
------ -----------------------
<S> <C>
8(e) Custodian Agreement between Capstone International Series Trust
and Fifth Third Bank
</TABLE>
<PAGE> 1
EXHIBIT 8(e)
FUND ACCOUNTING AND SERVICES AGREEMENT
THIS AGREEMENT is made as of September 2, 1997, by and among THE FIFTH THIRD
BANK, a banking company organized under the laws of the State of Ohio ("Fifth
Third"), and CAPSTONE ASSET MANAGEMENT COMPANY ("CAMCO") on behalf of Capstone
International Series Trust (the "Trust"). See attached Exhibit A for the Trusts
and their effective dates of service.
W I T N E S S E T H
WHEREAS, the Trust is an open-end management investment company
registered under the Investment Company Act of 1940, as amended (the "Investment
Company Act").
WHEREAS, Fifth Third provides certain fund accounting, administrative
and other services to investment companies; and
WHEREAS, CAMCO desires to retain Fifth Third to provide fund accounting
and other services for the Trust and the Trust's Board of Trustees has approved
such retention, and Fifth Third is willing to provide such services, all as more
fully set forth below;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants herein contained, and intending to be legally bound hereby, the
parties hereto agree as follows:
(1) Definitions, As Used in This Agreement.
(a) Authorized Person means any Trustee of the Trust, any
officer or employee of CAMCO and any other person duly authorized by
the Trust's Board of Trustees to give Oral and Written Instructions on
behalf of the Trust and listed on the Authorized Persons Appendix
attached hereto and made a part hereof or any amendment thereto as may
be received by Fifth Third. An Authorized Person's scope of authority
may be limited by the Trust by setting forth such limitation in the
Authorized Persons Appendix.
(b) Oral Instructions mean instructions orally transmitted to
and accepted by Fifth Third because such instructions are: (i) given by
an Authorized Person or from a person reasonably believed by Fifth
Third to have been an Authorized Person, (ii) recorded and kept among
the records of Fifth Third made in the ordinary course of business and
(iii) orally confirmed by Fifth Third. CAMCO shall cause all Oral
Instructions to be confirmed by Written Instructions. If such Written
Instructions confirming Oral Instructions are not received by Fifth
Third prior to a transaction, it shall in no way affect the validity of
the transaction or the authorization thereof by CAMCO. If Oral
Instructions vary from the Written Instructions which purport to
confirm them, Fifth Third shall notify the Trust or CAMCO of such
variance but such Oral Instructions will govern unless Fifth Third has
not yet acted.
(c) Written Instructions mean (i) written communications
actually received by Fifth Third and signed by one or more persons as
the Board of Trustees shall have from time to time authorized, or (ii)
communications by fax or any other such system from a person or persons
reasonably believed by Fifth Third to be Authorized or (iii)
communications transmitted electronically through the Institutional
Delivery System (IDS), or any other similar electronic instruction
system acceptable to Fifth Third and approved by resolutions of the
Board of Trustees, a copy of which, certified by the Secretary, shall
have been delivered to Fifth Third.
(d) Shares mean the shares of common stock of any series or
class of the Trust.
2. Appointment. As authorized by the Trust's Board of Trustees, CAMCO
hereby appoints Fifth Third to provide fund accounting and other specified
services to the Trust, in accordance with the terms set forth in this Agreement.
Fifth Third accepts such appointment and agrees to furnish such specified
services.
<PAGE> 2
3. Delivery of Documents. CAMCO has provided or, where applicable, will
provide Fifth Third with the following:
(a) certified or authenticated copies of the resolutions of
the Trust's Board of Trustees, approving the appointment of Fifth Third
or its affiliates to provide services to the Trust and approving this
Agreement;
(b) a copy of the Trust's most recent effective registration
statement;
(c) a copy of the Trust's advisory agreement;
(d) a copy of any distribution agreement or similar agreement
made with respect to each class of Shares;
(e) a copy of the Management Agreement and any administration
agreements or similar agreements with respect to the Trust;
(f) a copy of any shareholder servicing agreement made in
respect of the Trust; and
(g) copies (certified or authenticated, where applicable) of
any and all amendments or supplements to the foregoing.
4. Compliance with Rules and Regulations. Fifth Third undertakes to
comply with all applicable requirements of the Investment Company Act, and any
laws, rules and regulations of governmental authorities having jurisdiction with
respect to the duties to be performed by Fifth Third hereunder. Except as
specifically set forth herein, Fifth Third assumes no responsibility for such
compliance by the Trust or CAMCO.
5. Instructions. Fifth Third will provide fund accounting and such
other services as is agreed hereunder.
(a) With respect to other services Fifth Third shall act only
upon Oral or Written Instructions.
(b) Fifth Third shall be entitled to rely upon any Oral and
Written Instructions it receives from an Authorized Person (or from a
person reasonably believed by Fifth Third to be an Authorized Person)
pursuant to this Agreement. Fifth Third may assume that any Oral or
Written Instruction received hereunder is not in any way inconsistent
with the provisions of organizational documents or this Agreement or of
any vote, resolution or proceeding of the Trust's Board of Trustees or
of the Trust's shareholders, unless and until Fifth Third receives
Written Instructions to the contrary.
(c) CAMCO agrees to forward, to Fifth Third, Written
Instructions confirming Oral Instructions so that Fifth Third receives
the Written Instructions by the close of business on the same day that
such Oral Instructions are received. The fact that such confirming
Written Instructions are not received by Fifth Third shall in no way
invalidate the transactions or enforceability of the transactions
authorized by the Oral Instructions. Where Oral or Written Instructions
reasonably appear to have been received from an Authorized Person,
Fifth Third shall incur no liability to CAMCO or the Trust in acting
upon such Oral or Written Instructions.
6. Right to Receive Advice.
(a) Advice of CAMCO. If Fifth Third is in doubt as to any
action it should or should not take, Fifth Third shall request
directions or advice, including Oral or Written Instructions, from
CAMCO.
2
<PAGE> 3
(b) Advice of Counsel. If Fifth Third shall be in doubt as to
any questions of law pertaining to any action it should or should not
take, Fifth Third shall request advice from Dechert, Price & Rhoads,
Trust's counsel and the Trust shall reimburse such reasonable cost.
(c) Conflicting Advice. In the event of a conflict between
directions, advice or Oral or Written Instructions Fifth Third receives
from CAMCO and the advice Fifth Third receives from counsel, Fifth
Third shall inform CAMCO of the conflict and seek resolution.
(d) Protection of Fifth Third. Fifth Third shall be protected
in any action it takes or does not take in reliance upon directions,
advice or Oral or Written Instructions it receives from the Trust,
CAMCO or counsel and which Fifth Third believes, in good faith, to be
consistent with those directions, advice or Oral or Written
Instructions. Nothing in this section shall be construed so as to
impose an obligation upon Fifth Third (i) to seek such directions,
advice or Oral or Written Instructions, or (ii) to act in accordance
with such directions, advice or Oral or Written Instructions unless
such obligation is imposed under the terms of other provisions of this
Agreement. Nothing in this subsection shall excuse Fifth Third when an
action or omission on the part of Fifth Third constitutes willful
misfeasance, lack of good faith, or reckless disregard by Fifth Third
of its duties, obligation or responsibilities set forth in this
Agreement.
7. Records; Visits.
(a) The books and records pertaining to the Trust which are in
the possession or under the control of Fifth Third shall be the
property of the Trust. Such books and records shall be prepared,
maintained and preserved as required by the Investment Company Act and
other applicable Securities Laws, rules and regulations. Authorized
Persons shall have access to such books and records at all times during
Fifth Third's normal business hours. Upon the reasonable request of the
Trust or CAMCO, copies of any such books and records shall be provided
by Fifth Third to the Trust, CAMCO or to an Authorized Person, at the
expense of the Trust or CAMCO, as applicable.
(b) Fifth Third shall keep the following records:
(i) all books and records relating to the services
it performs hereunder with respect to the Trust's
books of account;
(ii) records relating to the services it performs
hereunder with respect to the Trust's securities transactions;
and
(iii) all other books and records as Fifth Third is
required to maintain pursuant to Rule 31a-1 of the Investment
Company Act in connection with the services provided
hereunder.
8. Confidentiality. Fifth Third agrees to keep confidential all records
of the Trust and information relating to the Trust and its shareholders (past,
present and future), unless the release of such records or information is
otherwise consented to, in writing, by the Trust or CAMCO. The Trust and CAMCO
agree that such consent shall not be unreasonably withheld and may not be
withheld where Fifth Third may be exposed to civil or criminal contempt
proceedings or when required to divulge such information or records to duly
constituted authorities.
9. Liaison with Accountants. Fifth Third shall act as liaison with the
Trust's independent public accountants and shall provide account analysis,
fiscal year summaries, and other audit-related schedules with respect to the
services provided to the Trust. Fifth Third shall take all reasonable action in
the performance of its duties under this Agreement to assure that the necessary
information in Fifth Third's control is made available to such accountants for
the expression of their opinion, as required by the Trust or CAMCO.
10. Disaster Recovery. Fifth Third shall maintain in effect a disaster
recovery plan, and enter into any agreement necessary with appropriate parties
making reasonable provisions for emergency use of electronic data processing
3
<PAGE> 4
equipment customary in the industry. In the event of equipment failures, Fifth
Third shall, at no additional expense to the Trust or CAMCO, take reasonable
steps to minimize service interruptions. Fifth Third shall have no liability
with respect to the loss of data or service interruptions caused by equipment
failure provided such loss or interruption is not caused by Fifth Third's own
willful misfeasance or gross negligence.
11. Compensation. As compensation for services rendered by Fifth Third
during the term of this Agreement, CAMCO will pay to Fifth Third a fee or fees
set forth in Exhibit A, as may be amended from time to time. It is agreed that
fees set forth in Exhibit A may be increased with not less than ninety (90)
days' written notice. In the event that Exhibit C is amended such that
additional services as requested by the Trust or CAMCO are required from Fifth
Third on an ongoing basis, with the approval of CAMCO and the Trust, additional
fees may be charged as applicable. The fee for the period from the day of the
year this Agreement is entered into until the end of that year shall be prorated
according to the proportion that such period bears to the full annual period.
12. Indemnification.
(a) CAMCO and the Trust agree to indemnify and hold harmless
Fifth Third and its agents or subcontractor from all taxes, charges,
expenses, assessments, claims and liabilities (including, without
limitation, liabilities arising under the Securities Laws and any state
or foreign securities and blue sky laws, and amendments thereto), and
expenses, including (without limitation) attorneys' fees and
disbursements arising directly or indirectly from any action or
omission to act which Fifth Third takes in reasonable reliance on Oral
or Written Instructions. Fifth Third, shall not be indemnified against
any liability (or any expenses incident to such liability) arising out
of Fifth Third's own willful misfeasance, lack of good faith or
reckless disregard of its duties and obligations under this Agreement.
For any legal proceedings giving rise to this indemnification, CAMCO or
the Trust shall be entitled to defend or prosecute any claim in the
name of Fifth Third at CAMCO and the Trust's own expense through
counsel of its own choosing if it gives written notice to Fifth Third
within ten (10) business days of receiving notice of such claim.
(b) Fifth Third agrees to indemnify and hold harmless CAMCO
and the Trust from actual taxes, charges, expenses, assessments, claims
and liabilities (excluding liabilities arising under the Securities
Laws and any state or foreign securities and blue sky laws, and
amendments thereto), and expenses, including (without limitation)
attorneys' fees and disbursements arising directly from Fifth Third's
own willful misfeasance, bad faith or reckless disregard of its duties
and obligations under this Agreement. For any legal proceedings giving
rise to this, Fifth Third shall be entitled to defend or prosecute any
claim in the name of CAMCO or the Trust, as applicable, at Fifth
Third's own expense through counsel of its own choosing if it gives
written notice to CAMCO or the Trust, as applicable within ten (10)
business days of receiving notice of such claim.
13. Responsibilities of Fifth Third.
(a) Fifth Third shall be under no duty to take any action on
behalf of the Trust or CAMCO except as specifically set forth herein or
as may be specifically agreed to by Fifth Third in writing. Fifth Third
shall be obligated to exercise commercially reasonable care and
diligence in the performance of its duties hereunder, to act in good
faith and act within reasonable limits, in performing services provided
for under this Agreement. Fifth Third shall only be liable for actual
damages arising out of Fifth Third's failure to perform its duties
under this Agreement to the extent such damages arise out of Fifth
Third's willful misfeasance, bad faith or reckless disregard of such
duties.
(b) In no event shall Fifth Third be liable for any special,
consequential, extraordinary or punitive damages, arising from its
performance or non-performance under this Agreement, or failure to
comply with any of the terms of this Agreement. Cumulative liability
within a calendar year shall be limited to CAMCO and the Trust or any
party claiming by, through or on behalf of CAMCO or the Trust for the
initial and all subsequent renewal terms of this Agreement, to the
lessor of (a) the actual damages sustained by CAMCO and/or by the
Trust; or (b) one-half of the net fees paid to Fifth Third, but not to
exceed one half of the net fees paid within the prior twelve calendar
months as in accordance with this Agreement.
4
<PAGE> 5
(c) Without limiting the generality of the foregoing or of
any other provision of this Agreement,
(i) Fifth Third shall not be liable for losses beyond
its reasonable control, provided that Fifth Third has acted in
accordance with the standard of care set forth above; and
(ii) Fifth Third shall not be liable for:
(A) the validity or invalidity or authority
or lack thereof of any Oral or Written Instruction,
notice or other instrument which conforms to the
applicable requirements of this Agreement, and which
Fifth Third reasonably believes to be genuine; or
(B) subject to Section 10, delays or errors
or loss of data occurring by reason of circumstances
beyond Fifth Third's control, including acts of civil
or military authority, national emergencies,
non-Fifth Third labor difficulties, fire, flood,
catastrophe, acts of God, insurrection, war, riots or
failure of the mails, transportation, communication
or power supply.
14. Description of Accounting Services on a Continuous Basis. Fifth
Third will perform the accounting services as set forth on Exhibit C, as may be
amended from time to time, with respect to the Trust.
15. Description of Other Services on a Continuous Basis. Fifth Third
will perform the other services as set forth on Exhibit B, as may be amended
from time to time, with respect to the Trust:
16. Duration and Termination. This Agreement shall continue until
terminated by either CAMCO or the Trust, on the one part, or by Fifth Third, on
the other part, on ninety (90) days' prior written notice to the other party.
17. Notices. All notices and other communications, including Written
Instructions, shall be in writing or by confirming telegram, cable, telex or
facsimile sending device. If notice is sent by confirming telegram, cable, telex
or facsimile sending device, it shall be deemed to have been given immediately
If notice is sent by first class mad, it shall be deemed to have been given
three days after it has been mailed. If notice is sent by messenger, it shall be
deemed to have been given on the day it is delivered. Notices shall be addressed
as stated below or to such other address as shall have been provided by like
notice to the sender of any such notice or other communication by the receiving
party.
(a) if to Fifth Third: (b) if to the CAMCO or the Trust:
38 Fountain Square Plaza 5847 San Felipe, Suite 4100
Cincinnati, Ohio 45263 Houston, Texas 77057
Attention: Trust Accounting Manager Attn.: Corporate Secretary
18. Amendments. This Agreement, or any term thereof, may be changed or
waived only by written amendment, signed by the party against whom enforcement
of such change or waiver is sought.
19. Delegation; Assignment. Fifth Third may assign its rights and
delegate its duties hereunder upon prior written consent of CAMCO and the Trust
to any wholly-owned direct or indirect subsidiary of Fifth Third, provided that:
(a) Fifth Third gives CAMCO and the Trust sixty (60) days'
prior written notice;
(b) the delegate (or assignee) agrees with Fifth Third and
with CAMCO and the Trust to comply with all relevant provisions of the
Securities Laws; and
5
<PAGE> 6
(c) Fifth Third and such delegate (or assignee) promptly
provide such information as CAMCO or the Trust may request, and respond
to such questions as CAMCO or the Trust may ask, relative to the
delegation (or assignment), including (without limitation) the
capabilities of the delegate (or assignee).
20. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
21. Further Actions. Each party agrees to perform such further acts and
execute such further documents as are necessary to effectuate the purposes
hereof
22. Miscellaneous.
(a) Entire Agreement. This Agreement embodies the entire
agreement and understanding among the parties and supersedes all prior
agreements and understandings relating to the subject matter hereof,
provided that CAMCO and the Trust and Fifth Third may embody in one or
more separate documents their agreement, if any, with respect to
delegated duties and Oral Instructions.
(b) Captions. The captions in this Agreement are included for
convenience of reference only and in no way define or delimit any of
the provisions hereof or otherwise affect their construction or effect.
(c) Governing Law. This Agreement will be governed and
consumed in accordance with the laws of the State of New York without
regard to principles or conflicts of law. The parties agree that venue
for any action or proceeding brought pursuant to this Agreement shall
be in the state or federal courts located in the State of New York.
(d) Partial Invalidity. If any provision of this Agreement
shall be held or made invalid by a court decision, statute, rule or
otherwise, the remainder of this Agreement shall not be affected
thereby.
(e) Successors and Assigns. This Agreement shall be binding
upon and shall inure to the benefit of the parties hereto and their
respective successors and permitted assigns.
(f) Facsimile Signatures. The facsimile signature of any party
to this Agreement shall constitute the valid and binding execution
hereof by such party.
6
<PAGE> 7
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the day and year first above written.
THE FIFTH THIRD BANK CAPSTONE ASSET
MANAGEMENT COMPANY
By: ____________________________ By: ___________________________
Its: ____________________________ Its: ___________________________
CAPSTONE INTERNATIONAL
SERIES TRUST
By: ___________________________
Its: ___________________________
7
<PAGE> 8
EXHIBIT A
FUNDS OF THE CAPSTONE INTERNATIONAL SERIES TRUST
FUND SERVICE DATE
---- ------------
Capstone New Zealand Fund June 2, 1997
Capstone Japan Fund September 2, 1997
8
<PAGE> 9
EXHIBIT B
FEE SCHEDULE
THIS EXHIBIT B, dated as of September 2, 1997, is Exhibit A to the
Trust Accounting and Services Agreement dated as of September 2 by and among
Capstone Asset Management Company and the undersigned Trust and Fifth Third
Bank. This Exhibit A shall supersede all previous forms of Exhibit A.
Capstone Asset Management Company will pay Fifth Third an annual fund accounting
and service fee (the "Fee"), to be calculated daily and paid monthly. The annual
Fee for each Portfolio shall be the greater of a monthly minimum or an asset
based fee, as follows:
Asset Based Fees
Monthly First Next Assets over
Minimum OR $100,000,000 $100,000,000 $200,000,000
------- -- ------------ ------------ -------------
$3,500 .04% .03% .02%
Should the Trust add additional share classes, there will be an annual charge of
$7,000 per additional class per portfolio, also to be charged monthly. CAMCO
will also reimburse Fifth Third for its out-of-pocket expense incurred in
performing its services under this Agreement, including, but not limited to:
postage and mailing, telephone, facsimile, overnight courier services and
outside independent pricing service charges, and record retention/storage.
THE FIFTH THIRD BANK CAPSTONE ASSET
MANAGEMENT COMPANY
By: ____________________________ By: ___________________________
Its: ____________________________ Its: ___________________________
CAPSTONE INTERNATIONAL
SERIES TRUST
By: ___________________________
Its: ___________________________
9
<PAGE> 10
EXHIBIT C
Fifth Third will perform the accounting services with respect to the Trust:
(a) Journalize investment, capital share and income and expense
activities;
(b) Verify investment buy/sell trade tickets when received from the
Trust's investment adviser (the "Money Manager") and transmit trades to the
Trust's custodian (the "Custodian") for proper settlement;
(c) Maintain individual ledgers for investment securities;
(d) Maintain historical tax lots for each security;
(e) Reconcile cash and investment balances with the Custodian, and
provide the Money Manager with the beginning cash balance available for
investment purposes;
(f) Update the cash availability daily;
(g) Post to and prepare the Statement of Assets and Liabilities and
the Statement of Operations;
(h) Calculate the various contractual expenses (e.g., advisory and
custody fees);
(I) Monitor the expense accruals and notify an officer of the Trust
of any proposed adjustments;
(j) Control all disbursements and authorize such disbursements upon
Written Instructions;
(k) Calculate capital gains and losses and only upon Written
Instructions from the Trust transmit such information to the Trust's transfer
agent (or other agreed upon procedures);
(l) Determine net income;
(m) Obtain security market quotes from independent pricing services, if
available, approved by the Money Manager, or if such quotes are unavailable,
then obtain such prices from the Money Manager, and in either case calculate the
market value of the Trust's investments;
(n) Transmit or mail a copy of the daily portfolio valuation to the
Money Manager;
(o) Compute net asset value;
(p) As appropriate, compute yields, total return, expense ratios,
portfolio turnover rate, and, if required, portfolio average dollar-weighted
maturity; and
(q) Prepare a monthly financial statement, which will include the
following items:
Schedule of Investments
Statement of Assets and Liabilities
Statement of Operations
Statement of Changes in Net Assets
Cash Statement
Schedule of Capital Gains and Losses.
10
<PAGE
Fifth Third will perform the following other services with respect to the Trust:
(a) Prepare quarterly broker security transactions summaries;
(b) Prepare monthly security transaction listings;
(c) Supply access to Portfolio and find accounting data maintained on
Sunguard investor/spectra product on an on-going basis;
(d) Prepare and file the Trust's Semi-Annual Reports with the
Securities and Exchange Commission on Form N-SAR;
(e) Prepare the Trust's annual, semi-annual, and quarterly
shareholder reports;
(f) Monitor the Trust's status as a regulated investment company under
Sub-chapter M of the Internal Revenue Code of 1986, as amended; and
(g) Provide such information to the Trust's Money Manager as shall be
mutually agreed upon between the Money Manager and Fifth Third to allow the
Money Manager to monitor the Trust's compliance with certain requirements of the
Investment Company Act and the Trust's registration statement on Form N-IA.
(h) Rule 24 F 2 filings.
11
<PAGE> 11
AUTHORIZED PERSONS APPENDIX
Name Signature
---- ---------
12