CAPSTONE JAPAN FUND
- --------------------------------------------------------------------------------
Dear Shareholders:
We are pleased to present this annual report on the Capstone Japan Fund for the
twelve months ended October 31, 1999. The Fund's net asset value ("NAV") at
October 31, 1998 was US $4.55 per share compared to US $6.88 per share on
October 31, 1999.
FUND'S COMPARATIVE PERFORMANCE
The Fund's strategy is to seek a diversified portfolio of stocks of mostly
larger-cap companies that provide current income through dividends, trade at
comparatively low price/earnings multiples, have a below average price-to-book
ratio, and/or have potential for long-term capital appreciation. This includes
American Depository Receipts1 because they can provide an efficient currency
exchange management for a US dollar fund and greater liquidity.
The most relevant index against which to compare the Fund's performance is the
TOPIX2 that comprises all the stocks currently listed on the first section of
the Tokyo Stock Exchange. During the twelve months ended October 31, 1999, the
TOPIX increased by 51% in Japanese yen and by 67% in US$. For the same period,
the Fund's total US dollar return was 51%. In analyzing comparisons of
performance to the TOPIX, the reader should remember an index does not reflect
any cash positions, brokerage costs or administrative or management fees
incurred by the Fund or individual investor. The yen/dollar exchange rate was
115.90 (Y)/$ on October 31, 1998 versus 104.75 yen/$ on October 31, 1999.
Many attractive opportunities exist outside the United States. Companies outside
the U.S. represent over 50% of the world's market capitalization and therefore,
regional diversification in one's portfolio may be important, as performance
tends to rotate between regions over time. For example, during 1984-1988, Japan
was among the best-performing market, with an annualized U.S. dollar return of
45%. During the subsequent five years, 1989-1993, Japan was among the worst
performing region, losing 7% in U.S. dollars. One cannot know in advance where
the world's highest and worst performing regions will be, but by investing in
more than one country and region, the risk of the portfolio, as measured by the
standard deviation of returns, may be reduced.
JAPAN MARKET OVERVIEW
We believe the Japanese market, especially the larger cap stocks, have
significant upside still in them. Our view is that TOPIX will reach its former
1996 high of 1,722 and that the Nikkei Average will touch 20,000 within nine
months.
o We see these reasons for this position.
1. We expect FY2000 corporate recurring profits to grow by 15-20% at
the parent level and by 20-30% at the consolidated level, with
return on equity at Japanese corporations rising to 10%.
2. There will be an increase in the demand for equities. The massive
redemption of Japanese postal savings deposits looks set to
provide an inflow of individual investor funds into the equity
market. A total of Y58 trillion in fixed term postal savings
deposits will reach maturity in FY00, and (Y)48 trillion in FY01.3
3. The yen will weaken slightly within a range of US$ = (Y) 100 -
110. If the yen should fall, however, the economic recovery might
take hold across a broader front, and buying could spread to more
sectors in the stock market, versus the current narrower market.
Over the past 30 years, Japanese companies have focused on honing their
international competitiveness by making better and less expensive products, but
doing so has led to an erosion of their earnings power and concomitant decline
in share prices in recent years.
<PAGE>
CAPSTONE JAPAN FUND
- --------------------------------------------------------------------------------
During much of this period, they also allowed the cost of their permanent work
force to rise, so that the total of fixed costs to total costs rose. Fixed costs
are an inherent characteristic of Japanese style management, with its
traditional emphasis on "lifelong employment." More and more Japanese companies
have begun to define management objectives in terms of profit-margin targets and
return on asset goals. For instance, labor policies, long an area deemed off
limits to the scalpel of reform, are being revamped. A radical overhaul of
earnings structures may be the most important challenge facing Japanese
companies in the medium term.
Restructuring ultimately means pulling out of unprofitable businesses. With job
preservation no longer a top priority, many things become possible, including
shutting down or selling large business units. Companies are writing off assets
at a faster rate than before. With more and more companies embarking on bold
restructuring programs with the government assisting through the Industry
Revitalization Law and the other measures, we think the pace at which plant and
equipment are scrapped will only accelerate.
Another factor is an ongoing change in share ownership. As at end-FY98, the
ratio of shares held in cross-shareholding arrangements stood at 23.6% (in
market cap terms) banks accounted for 13.9%, and non-financial companies for
9.4%. At end-FY99, the banking sector accounted for more than 60% (in market cap
terms) of all shares held by Japanese non-financial companies. Banks are set to
compress their equity holdings still further as they place more emphasis on
profitability. Changes in shareholder composition will likely force managers to
become more shareholder-friendly and probably lead to increased M & A activity.
SHAREHOLDINGS AT END-MARCH 1999
(MARKET-VALUE BASIS)
PIE CHART:
Others 28%
Individuals 20%
Foreigner 15%
Non-life 3%
Life Insurance 11%
Cross-shareholdings 24%
Listed Banks 14%
Listed non-financials 9%
Note: Data are for 2,426 listed companies as of the end of March 1999,
excluding shares held by listed parent companies in listed subsidiaries
and affiliates
Source: Nomura, based on various materials
Some observers have been explaining that the fundamental reason why the Japanese
economy has been in the doldrums is that extremely low expected inflation has
ensured that real interest rates are unusually high (though nominally low),
therefore, capital expenditure can only be stimulated by raising the expected
inflation rate and lowering the real interest rate.
This comparison of the overnight current interest rates for third quarter 1999
might prove useful.
Japan 0 - .1%
US 4.75%
<PAGE>
CAPSTONE JAPAN FUND
- --------------------------------------------------------------------------------
The problem is how to raise people's inflation rate expectations. One method is
using inflation target theory as a way of raising people's inflation rate
expectations. In it, a central bank publicly promises that it will achieve a
given inflation rate over a given period of time, thereby providing the
population with a clear idea of where monetary policy is heading. Countries that
have adopted this system include New Zealand, Canada and the UK, and all of them
report a certain measure of success.
What about the Bank of Japan's current 0% interest policy stance? It has been a
good decision to the extent that it has dissipated risks in the financial
system. Japan is still far from the standards of accountability that are
expected in the US and Europe. There are insufficient structures in place to
ensure accountability and Japanese central bankers are not used to the idea of
being held to account for their actions by the markets or the people. Before
talking about measures such as inflation targets or direct government bond
purchases, the Bank of Japan needs to be more accountable and explain its own
position more clearly and comprehensibly if Japan is to break out of the worst
recession it has faced since World War II.
If you have any questions, please feel free to contact us. We thank you for your
continued support.
Sincerely,
/s/ Robert W. Scharar
- ------------------------------
Robert W. Scharar
President and Portfolio Manager
1There are over 160 Japanese ADR stocks that are estimated to be about 25% of
the Japanese market capitalization. An ADR (American Depository Receipt) share
is a certificate representing ownership of foreign stocks, which is traded on
stock exchanges in the United States.
2TOPIX is an unmanaged index including all the stocks currently listed in the
Tokyo Stock Exchange First Section (over 90% of all equity securities traded on
the Tokyo Stock Exchange) weighted by market capitalization. Index returns are
calculated monthly and assume reinvestment of dividends. Unlike Fund returns,
TOPIX returns do reflect deduction of any fees or expenses.
3According to Nomura Japanese Equity Review, November 1999.
THIS PUBLICATION MUST BE ACCOMPANIED OR PRECEDED BY A
CURRENT PROSPECTUS FOR CAPSTONE JAPAN FUND (CNJFX).
LINE CHART:
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN CAPSTONE
JAPAN FUND+, AND THE TOPIX
Japan Fund TOPIX
10000 10000
10/31/90 7627 7564
10/31/91 7148 7606
10/31/92 4686 5492
10/31/93 6698 7949
10/31/94 7694 8610
10/31/95 6477 7283
10/31/96 6526 7199
10/31/97 5030 5603
10/31/98 4393 4543
10/31/99 6642 6861
AVERAGE ANNUAL TOTAL RETURN
as of 10/31/99
1 Year 5 Years 10 Years
51.21% -2.90% -4.01%
Past performance is not predictive of future results.
+ The Fund's performance assumes the reinvestment of all income dividends and
capital gains distributions.
* The date FCA took over as advisor.
<PAGE>
<TABLE>
<CAPTION>
CAPSTONE JAPAN FUND
PORTFOLIO OF INVESTMENTS - OCTOBER 31, 1999
- ----------------------------------------------------------------------------------------------------------------------
MARKET % OF
VALUE NET
COMMON STOCKS (93.32%) PAR VALUE (NOTE 1-A) ASSETS
--------- --------- ------
<S> <C> <C> <C>
AUTOMOTIVE (5.61%)
Bridgestone Coproration - ADR 550 $ 151,255 2.85%
Honda Motor Corporation - ADR # 600 50,475 0.95%
Keihin Seiki Corporation 4,000 61,326 1.16%
Toyota Motor Corporation - ADR 500 34,500 0.65%
--------- -------
297,556 5.61%
AUDIO/ VIDEO EQUIPMENT (1.51%)
SONY Corporation - ADR # 500 79,875 1.51%
CONSTRUCTION (2.76%)
Daiwa House Industry Co., Limited - ADR 1,600 146,263 2.76%
COMMUNICATIONS EQUIPMENT (13.47%)
Cannon Inc - ADR 6,500 184,844 3.48%
Fujitsu, Limited - ADR 1,600 240,705 4.54%
NEC Corporation - ADR 2,850 288,919 5.45%
--------- -------
714,468 13.47%
CONSUMER ELECTRONICS (6.88%)
Alps Electric Co., Limited 6,000 116,136 2.19%
Softbank Corporation 600 248,946 4.69%
--------- -------
365,082 6.88%
ELECTRONIC EQUIPMENT (2.42%)
Murata Manufacturing 1,000 128,402 2.42%
FOOD & BEVERAGE (10.80%)
Ajinomoto, Incorporated - ADR 1,200 134,419 2.53%
Coca-Cola West Japan 7,072 314,432 5.93%
Kirin Brewery Company Limited-ADR 900 102,825 1.94%
Mikuni Coca- Cola Bottling 1,000 21,081 0.40%
--------- -------
572,757 10.80%
INDICES (5.63%)
Salomon Nikkei 225 Index 10,000 96,250 1.82%
World Equity Benchmark Series - Japan Index Series 13,600 202,300 3.81%
--------- -------
298,550 5.63%
<PAGE>
<CAPTION>
CAPSTONE JAPAN FUND
PORTFOLIO OF INVESTMENTS - OCTOBER 31, 1999
- ----------------------------------------------------------------------------------------------------------------------
MARKET % OF
VALUE NET
PAR VALUE (NOTE 1-A) ASSETS
--------- --------- ------
<S> <C> <C> <C>
MACHINERY (4.53%)
Kurita Water Industries 5,000 $ 91,989 1.74%
Minebea Co., Limited - ADR 5,500 148,093 2.79%
--------- -------
240,082 4.53%
MISCELLANEOUS FINANCING (3.64%)
Nomura Securities Co., Limited 3,000 49,473 0.93%
Tokio Marine & Fire Insurance Co. 8,000 104,638 1.97%
Tokio Marine & Fire Insurance Co. - ADR 600 39,000 0.74%
--------- -------
193,111 3.64%
PHARMACEUTICALS (10.23%)
Banyu Pharmaceuticals Co., Limited - ADR 300 109,755 2.07%
Eisai Co., Limited - ADR 7,400 203,152 3.83%
Takeda Chemical Industry 4,000 229,590 4.33%
--------- -------
542,497 10.23%
PRODUCER MANUFACTURING (4.13%)
Nippon Steel Corporation 63,000 159,975 3.01%
Sumitomo Rubber Industries 10,000 59,314 1.12%
--------- -------
219,289 4.13%
REAL ESTATE (0.42%)
Daito Trust Construction 1,500 22,408 0.42%
RETAIL (8.44%)
Fast Retailing... 200 47,911 0.90%
Nu Skin Asia Pacific Incorporated 8,000 88,500 1.67%
Seven-Eleven Japan Co., Limited - ADR 3,400 311,134 5.87%
--------- -------
447,545 8.44%
TECHNOLOGY SERVIECS (2.23%)
Trend Micro Incorportated - ADR 6,000 118,500 2.23%
TELECOMMUNICATIONS (3.79%)
Nippon Telegraph & Telephone Corporation - ADR 2,600 201,013 3.79%
TRANSPORTATION (0.57%)
East Japan Railway 5 30,615 0.57%
<PAGE>
<CAPTION>
CAPSTONE JAPAN FUND
PORTFOLIO OF INVESTMENTS - OCTOBER 31, 1999
- ----------------------------------------------------------------------------------------------------------------------
MARKET % OF
VALUE NET
PAR VALUE (NOTE 1-A) ASSETS
--------- --------- ------
<S> <C> <C> <C>
TRANSPORT EQUIPMENT (5.42%)
Yamato Transport Company, Limited 10,000 $ 287,466 5.42%
UTILITIES (0.84%)
Tokyo Electric Power 2,000 44,653 0.84%
TOTAL COMMON STOCKS (Cost $3,447,733) 4,950,132 93.32%
CORPORATE BONDS (2.84%)
Merrill Lynch & Co., Variable rate, 01/31/2000 (Cost $139,635) 139,000 150,815 2.84%
TOTAL INVESTMENTS (Cost $3,587,368) 5,100,947 96.16%
OTHER ASSETS, LESS LIABILITIES 203,740 3.84%
--------- ------
NET ASSETS $5,304,687 100.00%
========== =======
# Call options have been written by the Fund against these positions. (Note 5)
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CAPSTONE JAPAN FUND
STATEMENT OF ASSETS AND LIABILITIES - OCTOBER 31, 1999
- ----------------------------------------------------------------------------------------------------------------------
ASSETS:
<S> <C>
Investments in securities at market value (identified cost $3,587,368) (Note 1A) $ 5,100,947
Receivable for capital shares sold 318,175
Interest and dividends receivable 3,032
Prepaid expenses 3,544
-------------
Total Assets 5,425,698
-------------
LIABILITIES:
Cash overdraft 41,420
Foreign currency overdraft, at value (identified cost $4,795) 4,936
Accrued expenses 37,675
Covered call options written, at value (premiums received $14,270) 21,494
Payable for capital shares redeemed 15,486
-------------
Total Liabilities 121,011
-------------
NET ASSETS $ 5,304,687
=============
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE:
($5,303,803 / 771,247 shares of beneficial interest outstanding) $ 6.88
=============
SOURCE OF NET ASSETS:
Paid in capital $ 7,371,796
Accumulated net realized loss on investments (3,573,374)
Net unrealized appreciation on securities and foreign currencies 1,506,265
-------------
$ 5,304,687
=============
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
<PAGE>
<TABLE>
<CAPTION>
CAPSTONE JAPAN FUND
STATEMENT OF OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 1999
- ----------------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME:
<S> <C> <C>
Dividend income (net of foreign taxes withheld of $1,332) $ 18,210
Interest income 6,707
----------
Total Investment Income 24,917
----------
Expenses: (Note 2)
Advisory fees $ 27,893
Distribution fees 9,612
Administrative services 7,604
Transfer agent fees 25,269
Reports and notices to stockholders 10,032
Audit fees 10,375
Legal fees 10,741
Directors' fees and expenses 4,259
Fund accounting fees 45,143
Registration and filing fees 10,021
Overdraft fees 7,566
Miscellaneous 3,090
-----------
Total Expenses 171,605
----------
Net Investment Loss (146,688)
----------
REALIZED AND UNREALIZED (LOSS) ON INVESTMENTS:
Net realized gain from security transactions 2,804
Net realized gain on option contracts written 11,602
Net realized gain on conversion of foreign currencies to U.S. Dollars 16,639
Unrealized appreciation (depreciation) of investments, foreign currencies
and forward currency contracts:
Beginning of period $ (217,909)
End of period 1,506,265
-----------
Net change in unrealized depreciation of investments,
foreign currencies and forward currency contracts 1,724,174
-----------
Net realized and unrealized gain on investments 1,755,219
-----------
Net increase in net assets resulting from operations $1,608,531
==========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CAPSTONE JAPAN FUND
STATEMENT OF CHANGES IN NET ASSETS
- ----------------------------------------------------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED
OCTOBER 31, 1999 OCTOBER 31, 1998
------------------------------------------
OPERATIONS:
<S> <C> <C>
Net investment loss $ (146,688) $ (41,478)
Net realized gain (loss) on investments 31,045 (263,434)
Net change in unrealized depreciation of investments, forward
currency contracts and foreign currencies 1,724,174 19,224
----------- -----------
Net increase (decrease) in net assets resulting from operations 1,608,531 (285,688)
CAPITAL SHARE TRANSACTIONS:
Increase in net assets resulting from
capital share transactions (Note 3) 1,092,263 987,630
----------- -----------
Total increase in net assets 2,700,794 701,942
NET ASSETS
Beginning of period 2,603,893 1,901,951
----------- -----------
End of period $5,304,687 $2,603,893
=========== ===========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
</TABLE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS - OCTOBER 31, 1999
- --------------------------------------------------------------------------------
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
Capstone Japan Fund, formerly Capstone Nikko Japan Fund, (the "Fund"), is
one of two series of beneficial interest of Capstone International Series Trust
(the "Trust") which is registered under the Investment Company Act of 1940 (the
"Act"), as a diversified open-end management investment company. The Fund's
investment objective is to seek long-term capital appreciation and income using
a research oriented approach. The following is a summary of significant
accounting policies consistently followed by the Fund in the preparation of its
financial statements.
A) VALUATION OF SECURITIES - Portfolio securities which are traded on Japanese
securities exchanges are valued at the last sales price or, if there is no
recent last sales price available, at the last current bid quotation. A security
which is listed or traded on more than one exchange is valued at the quotation
on the exchange determined to be the primary market for such security. All other
equity securities not so traded are valued at the last current bid quotation. In
the absence of any applicable price, securities will be valued at a fair value
as determined in good faith in accordance with procedures established by the
Board of Trustees.
B) CURRENCY TRANSLATION - For purposes of determining the Fund's net asset
value, all assets and liabilities initially expressed in foreign currency values
are converted into U.S. dollar values at the prevailing market rate at 14:00 GMT
on each U.S. business day, as established by the Board of Trustees. The cost of
securities is determined by using historical exchange rates. Income is
translated at approximate rates prevailing when accrued. The Fund does not
isolate that portion of gains and losses on investments which is due to changes
in foreign exchange rates from that which is due to changes in the market prices
of the investments. Such fluctuations are included with the net realized and
unrealized gains and losses from investments.
<PAGE>
CAPSTONE JAPAN FUND
C) ACCOUNTING FOR INVESTMENTS - Security transactions are accounted for on the
trade date. Realized gains and losses on security transactions are based on the
identified cost basis for both financial statement and Federal income tax
purposes. Dividend income and distributions to shareholders are recorded on the
ex-dividend date. Discounts and 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 recorded as a 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 transaction 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 on
net income or capital gains, since it is the policy of the Fund to continue to
comply with the special provisions of the Internal Revenue Code applicable to
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, 1999, the Fund had capital loss
carryovers of $3,573,374 of which $1,399,016 expires in 2000, $1,494,646 expires
in 2001, $434,729 expires in 2005 and $244,983 expires in 2006. 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
The Fund retains FCA Corp, ("FCA") as its Investment Adviser. Under the
Investment Advisory Agreement (the "Agreement"), the Adviser is paid a monthly
fee based on the average net assets at the annual rate of .75%.
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.
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").
<PAGE>
CAPSTONE JAPAN FUND
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 CAPCO an amount computed at an
annual rate of up to 0.25% of the Fund's average net assets (including
reinvested dividends paid with respect to those assets). Of this amount, CAPCO
may reallocate to securities dealers (which may include CAPCO itself) and other
financial institutions and organizations (collectively, "Service Organizations")
amounts based on the Fund's average net assets owned by stockholders for whom
the Service Organizations have a servicing relationship. The Plan permits CAPCO
to carry forward for a maximum of twelve months distribution expenses covered by
the Plan for which CAPCO has not yet received reimbursement. For the year ended
October 31, 1999, the Fund paid $9,612 in 12b-1 fees. Of this amount
approximately 2.3% was paid to Service Organizations other than CAPCO.
Certain officers and directors of the Fund who are also officers and
directors of the Adviser, the Administrator, Distributor or CFS, received no
compensation from the Fund. During the year ended October 31, 1999, directors of
the Fund who are not "interested persons" received directors' fees of $4,259.
NOTE 3 - CAPITAL STOCK
At October 31, 1999 there were 771,247 shares outstanding. Transactions in
capital stock were as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
OCTOBER 31, 1999 OCTOBER 31, 1998
---------------- ----------------
SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------
<S> <C> <C> <C> <C>
Shares sold 694,202 $ 3,880,475 536,185 $ 2,510,425
Shares issued to shareholders in reinvestment
of distributions -- -- -- --
-------- ----------- -------- -----------
694,202 3,880,475 536,185 2,510,425
Shares redeemed (495,243) (2,788,212) (328,905) (1,522,795)
-------- ----------- -------- -----------
Net increase 198,959 $ 1,092,263 207,280 $ 987,630
======== =========== ======== ===========
</TABLE>
NOTE 4 - PURCHASES AND SALES OF SECURITIES
Purchases and sales of securities other than U.S. Government obligations
aggregated $1,423,521 and $601,440 respectively. At October 31, 1999, the cost
of investments for Federal income tax purposes was $3,587,368. Accumulated net
unrealized appreciation on investments was $1,513,579 consisting of $1,599,169
gross unrealized appreciation and $85,590 gross unrealized depreciation.
<PAGE>
CAPSTONE JAPAN FUND
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, 1999
<TABLE>
<CAPTION>
UNREALIZED
CALL OPTIONS ON PREMIUM MARKET APPRECIATION
--------------- RECEIVED VALUE (DEPRECIATION)
-------- ----- --------------
<S> <C> <C> <C>
300 shs Honda Corp-ADR@ 90 exp April 2000 $ 2,510 $ 1,650 $ 860
300 shs Honda Corp-ADR@ 90 exp Jan 2000 2,595 881 1,714
300 shs Sony Corp-ADR@ 135 exp April 2000 4,085 9,788 (5,703)
200 shs Sony Corp-ADR@ 130 exp Jan 2001 5,080 9,175 (4,095)
------- ------- -------
$14,270 $21,494 $(7,224)
======= ======= =======
</TABLE>
The aggregate market value at October 31, 1999 of securities subject to
call options is $130,350 or approximately 2% of net assets. Written option
activity for the year ended October 31, 1999 was as follows:
NUMBER OF AMOUNT OF
OPTIONS PREMIUM
------- -------
Options outstanding at October 31, 1998 32 $ 11,602
Options written 11 14,270
Options expired (32) (11,602)
--- -------
Options outstanding at October 31, 1999 11 $ 14,270
=== =======
<PAGE>
CAPSTONE JAPAN FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The following table sets forth the per share operating performance data for a
share of captial stock outstanding, total return, ratios to average net assets
and other supplemental data for each period indicated.
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
----------------------------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
PER SHARE DATA
<S> <C> <C> <C> <C> <C>
Net asset value at beginning of period $ 4.55 $ 5.21 $ 6.76 $ 6.76 $ 8.03
------ ------ ------ ------ ------
Income from investment operations:
Net investment loss (0.21) (0.07) (0.28) (0.19) (0.21)
Net realized and unrealized gain (loss) 2.54 (0.59) (1.27) 0.25 (1.06)
------ ------ ------ ------ ------
Total from investment operations 2.33 (0.66) (1.55) 0.06 (1.27)
------ ------ ------ ------ ------
Less distributions from:
Net investment income -- -- -- (0.06) --
------ ------ ------ ------ ------
Net asset value at end of period $ 6.88 $ 4.55 $ 5.21 $ 6.76 $ 6.76
====== ====== ====== ====== ======
TOTAL RETURN (%) (1) 51.21% (12.67)% (22.93)% 0.75% (15.82)%
- ------------ ====== ====== ====== ====== ======
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (in thousands) $5,305 $2,604 $1,902 $2,975 $2,908
Ratio of total expenses to average net assets 4.61% 2.50% 4.55% 3.30% 3.61%
Ratio of net investment loss to average net assets (3.94)% (1.87)% (3.87)% (2.59)% (2.93)%
Ratio of total expenses to average net assets,
before reimbursements and waivers of expenses 4.61% 6.32% 5.46% 3.90% 4.21%
Ratio of net investment loss to average net assets,
before reimbursements and waivers of expenses (3.94)% (5.67)% (4.78)% (3.19)% (3.53)%
Portfolio turnover rate 17% 35% 73% 47% 27%
</TABLE>
(1) Calculated without sales charge. Sales charge eliminated on August 21, 1995.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
<PAGE>
CAPSTONE JAPAN FUND
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Shareholders and Board of Trustees of
Capstone International Series Trust
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments of Capstone Japan Fund (a series of Capstone
International Series Trust), as of October 31, 1999, the related statement of
operations for the year then ended, the statement of changes in net assets for
each of the two years in the period then ended, and the financial highlights for
each of the three years in the period then ended. These financial statements and
financial highlights are the responsibility of the Trust's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits. The financial highlights for each of
the two years in the period ended October 31, 1996 were audited by other
auditors whose report dated November 18, 1996, expressed an unqualified opinion
on 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, 1999 by
correspondence with the custodian and brokers. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Capstone Japan Fund at October 31, 1999, the results of its operations for the
year then ended, the changes in its net assets for each of the two years in the
period then ended, and the financial highlights for each of the three years in
the period then ended in conformity with generally accepted accounting
principles.
BRIGGS, BUNTING & DOUGHERTY, LLP
Philadelphia, Pennsylvania
November 19, 1999
<PAGE>
CAPSTONE JAPAN FUND
5847 SAN FELIPE, SUITE 4100
HOUSTON, TEXAS 77057
1-800-262-6631
ANNUAL REPORT TO SHAREHOLDERS
OCTOBER 31, 1999
- --------------------------------------------------------------------------------
TRUSTEES OFFICERS
Edward L. Jaroski Edward L. Jaroski
President-Capstone
International Series Trust
James F. Leary
Robert W. Scharar
John R. Parker President-Capstone
Japan Fund
Bernard J. Vaughan Linda G. Giuffre
Secretary/Treasurer
- --------------------------------------------------------------------------------
INVESTMENT ADVISER TRANSFER AGENT
FCA Corp. PFPC Inc.
5847 San Felipe 3200 Horizon Drive
Suite 850 P.O. Box 61503
Houston, TX 77057 King of Prussia, PA 19406-0903
1-713-781-7193 1-800-845-2340
ADMINISTRATOR CUSTODIAN
Capstone Asset Management Company Fifth Third Bank
5847 San Felipe, Suite 4100 Fifth Third Center
Houston, TX 77057 38 Fountain Square
1-800-262-6631 Cincinnati, OH 45263
DISTRIBUTOR AUDITORS
Capstone Asset Planning Company Briggs, Bunting & Dougherty, LLP
5847 San Felipe, Suite 4100 Two Logan Square, Suite 2121
Houston, TX 77057 Philadelphia, PA 19103-4901
1-800-262-6631
<PAGE>
CAPSTONE JAPAN FUND
5847 SAN FELIPE, SUITE 4100
HOUSTON, TEXAS 77057
ANNUAL REPORT
OCTOBER 31, 1999
CAPSTONE
JAPAN FUND
CAPSTONE PYRAMID LOGO
A Member Of
THE CAPSTONE GROUP
of Mutual Funds
CAPSTONE PYRAMID LOGO
THE CAPSTONE GROUP
OF MUTUAL FUNDS
- --------------------------------------------------------------------------------
EQUITY
O CAPSTONE GROWTH FUND, INC.
FIXED INCOME
O CAPSTONE GOVERNMENT INCOME FUND
INTERNATIONAL/GLOBAL
O CAPSTONE JAPAN FUND
O CAPSTONE NEW ZEALAND FUND
For more complete information about the Capstone Funds including charges and
expenses, contact the Distributor at the address below to receive additional
prospectuses. Please read it carefully before you invest or send money.
This publication must be accompanied or preceded by a
current prospectus for Capstone Japan Fund
CAPSTONE ASSET PLANNING COMPANY
5847 SAN FELIPE, SUITE 4100
HOUSTON, TEXAS 77057
1-800-262-6631
