CAPSTONE NEW ZEALAND FUND
A Series of Capstone International Series Trust
Seeking long-term capital appreciation and current income
through investments in New Zealand securities.
Prospectus
February 29, 2000
The Securities and Exchange Commission does not approve or disapprove the
information in this Prospectus, and does not determine whether this information
is accurate or complete. It is a criminal offense to state otherwise.
<PAGE>
TABLE OF CONTENTS
PAGE
THE FUND..............................................................3
FEE TABLE.............................................................7
MANAGEMENT............................................................8
BUYING AND SELLING FUND SHARES........................................9
DIVIDENDS, DISTRIBUTIONS AND TAXES...................................13
FINANCIAL HIGHLIGHTS.................................................15
HOW TO GET MORE INFORMATION..........................................16
2
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THE FUND
The Fund's Investment Objective and Principal Investment Strategies
The Fund seeks to provide long-term capital appreciation and current income. It
invests primarily in equity securities, including common and preferred stock and
securities convertible into common stock, and debt securities of New Zealand
Issuers and securities denominated in New Zealand dollars. New Zealand Issuers
include: issuers that are organized under New Zealand law; issuers that are
listed on the New Zealand Stock Exchange; issuers that derive 50% or more of
their total revenue from goods and/or services produced or sold in New Zealand,
and New Zealand central and local government entities. In addition to buying
these securities directly, the Fund may invest in sponsored and unsponsored
American Depository Receipts (ADRs) related to these securities. Under normal
market conditions, at least 65% of the Fund's total assets will be invested in
the foregoing securities. The Fund's debt securities may include government
obligations as well as obligations of companies that have an outstanding debt
issue rated at least A by Standard & Poor's Corporation ("S&P"), S&P--Australian
Ratings ("S&P Australian"), or Moody's Investors Service ("Moody's"), or in
obligations deemed of comparable quality by the investment adviser. If these
securities are downgraded, the adviser has the discretion to hold or sell them.
In selecting investments for the Fund, the investment adviser looks primarily at
characteristics of the issuer, seeking those with adequate cash flow, reasonable
price/earnings ratios and current dividend payments. In determining the
appropriate distribution of the Fund's portfolio among debt, equity and
particular issuers, the adviser considers such macroeconomic factors as
prospects for relative economic growth, inflation trends, government policies,
currency relationship trends and the range of investment opportunities available
in the New Zealand market. Portfolio securities that no longer rank favorably in
terms of these factors are considered for sale.
The Fund also has authority to invest in money market instruments of U.S. or New
Zealand Issuers. It may invest in instruments issued or backed by U.S. or New
Zealand banks or savings institutions having, at the time of investment, at
least $1 billion in total assets. The Fund may invest up to 5% of its assets in
interest-bearing savings deposits of commercial or savings banks. For temporary
defensive purposes under unusual market conditions, the Fund may invest in these
instruments without limit, which can cause the Fund to fail to meet its
investment objective during such periods and lose benefits when the market
begins to improve. The Fund may invest in commercial paper rated at least A-2 by
S&P or S&P Australian, or P-2 by Moody's. The Fund may also lend its portfolio
securities. These loans will be fully collateralized at all times. The Fund may,
but is not obligated to, enter into forward foreign currency exchange contracts
to hedge against fluctuations in exchange rates between the U.S. and New Zealand
dollar. The Fund has authority, which it does not presently intend to use, to
enter into repurchase agreements and to use futures and options to hedge its
portfolio.
The Fund's most recent annual/semiannual report contains information on the
Fund's recent investment strategies, as discussed above, and securities
holdings. (See back cover.)
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The New Zealand Economy and Securities Market
New Zealand has a mixed free-market economy with sizeable agricultural, service
and manufacturing sectors. Its gross domestic product for the year ended June,
1999 was approximately NZ $99.2 billion (US $49 billion). New Zealand is
strongly trade-oriented, with significant exports to and imports from Australia,
Japan, the United Kingdom and the United States.
The New Zealand securities market is small relative to those of the U.S. and
many European and Asian countries. Trading of corporate and government
securities in New Zealand is centralized in the New Zealand Stock Exchange
(NZSE), which currently quotes securities of 226 issuers. As of February 18,
2000, the aggregate market capitalization of these issuers was approximately NZ
$51.8 billion (US $25.6 billion), with the six largest companies accounting
for approximately 52% of that amount.
Principal Risks
Investing in securities of New Zealand Issuers involve certain risks that are
different from investments in U.S. issuers. The New Zealand market is small and
certain issuers may have percentage restrictions on foreign ownership, limiting
the Fund's investment and diversification opportunities. The Fund may not be
able to participate in rights offerings that are not registered for sale to a
U.S. investor. Securities in this market are also generally less liquid and have
greater price fluctuation than is typical in the U.S. for securities of
comparable issuers. Transactions in New Zealand securities involve higher costs
and typically take longer to settle than in the U.S., making it more difficult
for the Fund to liquidate positions and causing delays in the Fund's receipt of
dividend and interest payments. There are also risks due to differences between
the U.S. and New Zealand in terms of tax policies, the level of regulation ,
accounting standards, as well as from fluctuations in currency values. Further,
there may be more limited information about New Zealand issuers, and there is
the possibility of negative governmental actions, and of political and social
unrest.
The Fund may purchase securities on a "when-issued" basis and may purchase or
sell securities on a "forward commitment" basis. These transactions, which
involve a commitment by the Fund to purchase or sell particular securities with
payment and delivery taking place at a future date (perhaps one or two months
later), permit the Fund to lock in a price or yield on a security it owns or
intends to purchase, regardless of future changes in interest rates. When-issued
and forward commitment transactions involve the risk, however, that the price or
yield obtained in a transaction may be less favorable than the price or yield
available in the market when the securities delivery takes place. The Fund's
when-issued purchases and forward commitments are not expected to exceed 25% of
the value of its total assets absent unusual market conditions. The Fund does
not intend to engage in when-issued purchases and forward commitments for
speculative purposes but only in furtherance of its objectives.
Investments in stocks of any type involve risk because stock prices have no
guaranteed value. Stock prices may fluctuate -- at times dramatically -- in
response to various factors, including market conditions, political and other
events, and developments affecting the particular issuer or its industry or
geographic segment. Despite these risks, stocks have historically tended to
out-perform other types of securities over the longer term.
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Investments in fixed income securities also entail risk. The values of these
securities will tend to fluctuate inversely with changes in interest rates.
Changes in the financial strength of the issuer, or its creditworthiness, can
also affect the value of the securities it issues. Convertible and preferred
stocks, which have some characteristics of both stock and fixed income
securities, also entail, to some extent, the risks of each.
ADRs are dollar-denominated depository receipts that, typically, are issued by a
United States bank or trust company and represent the deposit with that bank or
trust company of a security of a foreign issuer. ADRs are publicly traded on
exchanges or over-the-counter in the United States. 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. 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.
The Fund's investments will fluctuate in price. This means that Fund share
prices will go up and down, and you can lose money. Because of its emphasis on
securities of New Zealand issuers, the Fund should be considered a vehicle for
diversification and not as a balanced investment program.
Past Performance
The following two tables illustrate the Fund's past performance. The first table
provides some indication of the risks of investing in the Fund by showing how
the Fund's returns have varied from year to year. The second shows how the Fund
has performed on a cumulative basis since its inception in comparison to the New
Zealand Small Company Index ("NZSCI") which is an index composed of
approximately 100 equity securities of New Zealand Issuers that are not included
in the New Zealand Stock Exchange-40 ("NZSE-40"), an index of the largest market
capitalization of New Zealand Issuers. The NYSE-40 is dominated by a few large
issuers. The Fund's diversification requirements prevent it from duplicating the
weighting in the NZSE-40, so Fund management believes NZSCI both better reflects
the performance of the New Zealand stock market and is a more appropriate basis
for evaluating the performance of the Fund. Each table assumes that dividends
and distributions paid by the Fund have been reinvested in additional
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Fund shares. You should remember that past performance does not necessarily
indicate how the Fund will perform in the future.
[Bar Chart to be inserted here showing the following data:]
Year-by-year total return as of 12/31 each year (%).
12/31/89
12/31/90
12/31/91
12/31/92 2.80%
12/31/93 13.99%
12/31/94 (8.35%)
12/31/95 11.84%
12/31/96 26.36%
12/31/97 (23.16%)
12/31/98 (9.30%)
12/31/99 16.08%
Best Quarter - 4th Quarter 1998 34.64%
Worst Quarter - 4th Quarter 1997 (20.13%)
Average Annual Total Return as of 12/31/99
1 Year 5 Years Inception (11/25/91)
------ ------- --------------------
Fund 16.08% (6.82%) 2.57%
NZSCI 24.59% 9.01% 14.22%
6
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Fees and Expenses of the Fund
This table describes the fees and expenses you will pay if you invest in the
Fund. As you can see, the Fund has no fees that are charged directly to
shareholders. Shareholders do, however, bear indirectly a portion of the Fund's
annual operating expenses.
FEE TABLE
Shareholder Fees (fees paid directly from your investment)
Maximum front-end sales charge None
Maximum deferred sales charge None
Maximum sales charge on reinvested dividends and None
distributions
Redemption fee None
Exchange fee None
Maximum account fee
None
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
Investment Advisory Fees 0.75%
Distribution (12b-1) Fees* 0.25%
Other Expenses** 3.14%
Total Annual Fund Operating Expenses 4.14%
* The Fund has adopted a Rule 12b-1 Plan that permits it to pay up to 0.25% of
its average net assets each year for distribution costs. These fees are an
ongoing charge to the Fund and therefore are an indirect expense to you.
Over time these fees may cost you more than other types of sales charge.
** "Other expenses" include such expenses as custody, transfer agent, legal,
accounting and registration fees.
Example
The following example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds. The example assumes
that you invest $10,000 in the Fund for the time periods indicated and then
redeem all of your shares at the end of those periods. The example also assumes
that your investment returns 5% each year, and that the Fund's operating
expenses remain at a constant percentage. Because these assumptions may vary
from your actual experience, your actual return and expenses may be different.
1 Year 3 Years 5 Years 10 Years
- ------ ------- ------- --------
$416 $1,251 $2,100 $4,289
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MANAGEMENT
The Adviser
The Fund's investment adviser is FCA Corp. FCA is a fee-based financial planning
and investment counseling firm located at 5847 San Felipe, Suite 850, Houston,
Texas 77057. FCA and predecessors have been in business since 1975. FCA acts as
investment adviser to Capstone New Zealand Fund, as well as to several entities
focusing on real estate-related investments.
FCA manages the Fund's portfolio investments and places orders for Fund
transactions. For its services, it receives advisory fees from the Fund which
are based on the Fund's net assets. For its fiscal year ended October 31, 1999,
the Fund paid FCA fees equal to $0.75% of the Fund's average net assets.
Portfolio Manager
Robert W. Scharar, President of FCA Corp., has served as the Fund's portfolio
manager since 1991. Mr. Scharar co-founded the predecessor to FCA Corp. in
1975. He received a 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 Florida Certified Public Accountant. He has been
an accounting professor at Bentley and Nichols Colleges, was an officer of
United States Trust Company (Boston), and was 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 United Dominion Realty Trust.
W. Lance Hall has served as the Fund's assistant portfolio manager since 1994
and has been an employee of FCA Corp. since 1991. He received a BBA in Finance
from the University of Oklahoma. He also is the Manager of Acquisitions and
Development for United Investors Realty Trust, which is a public real estate
investment trust ("REIT") that is advised by FCA Corp. Other responsibilities
in the real estate department since his joining have been accountant and
acquisition analyst for three private REIT's advised by FCA Corp.
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BUYING AND SELLING FUND SHARES
SHARE PRICE
The purchase and redemption price of Fund shares is the Fund's net asset value
(NAV) per share determined after your order is received. NAV is generally
calculated as of the close of regular trading on the New York Stock Exchange,
generally 4:00 p.m. Eastern time, and reflects the Fund's aggregate assets less
its liabilities. The Fund's exchange-traded investments are valued at their
market value at that time in their primary market (certain derivatives are
priced at 4:15 p.m. Eastern time). If market value quotations are not readily
available for an investment, the investment will be valued at fair value as
determined in good faith by the Fund's Board of Trustees. For investments in
securities traded on foreign exchanges that close prior to the time at which a
Fund's net asset value is determined, the calculation of net asset value does
not take place contemporaneously with the determination of the prices of those
securities. If an event were to occur after the value of a Fund investment was
so established, but before the Fund's net asset value per share is determined
that is likely to materially change the Fund's net asset value, the Fund
instrument would be valued using fair value considerations established by the
Board of Trustees. Prices for debt securities may be obtained from pricing
services, except that short-term debt securities are valued at amortized cost.
Assets or liabilities denominated in foreign currencies are translated into U.S.
dollars at the prevailing market rates at 17:00 Greenwich Mean Time on each
day NAV is calculated. NAV is not calculated, and the Fund will not sell or
redeem its shares, on days the New York Stock Exchange is closed, although the
NZSE may be open on those days. Thus, the value of the Fund's shares may
change on days when shareholders may not be able to purchase or redeem shares.
Further, NAV may be calculated on certain days on which the NZSE is closed for
holidays or other reasons.
Minimum Investment
The minimum initial investment in the Fund is $200, with the exception of
continuous investment plans. There is no minimum for subsequent investments,
with the exception of continuous investment plans. (For telephone purchases, see
below.)
Certificates
The Fund will not issue share certificates unless you make a written request to
the Transfer Agent. (The Transfer Agent's address is provided below.)
Telephone Transactions
In your Investment Application, you may authorize the Fund to accept redemption
and exchange orders by phone. You will be liable for any fraudulent order as
long as the Fund has taken reasonable steps to assure that the order was
proper. Also note that during unusual market conditions, you may experience
delays in placing telephone orders. (See "Purchasing Fund Shares and Redeeming
Fund Shares.")
9
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Frequent Transactions
The Fund reserves the right to limit additional purchase and exchange
transactions by any investor who makes frequent purchases, redemptions or
exchanges that the Adviser believes might harm the Fund. In general, more than
one transaction per month may be viewed as excessive.
PURCHASING FUND SHARES
You may use any of the following methods to purchase Fund shares.
Through Authorized Dealers. You may place your order through any dealer
Authorized to take orders for the Fund. If the order is transmitted to the Fund
by 4:00 p.m. Central time, it will be priced at the NAV per share determined on
that day. Otherwise, later orders will receive the NAV per share next
determined. It is the dealer's responsibility to transmit orders timely.
Through the Distributor. You may place orders directly with the Fund's
distributor by mailing a completed Investment Application with a check or other
negotiable bank draft (payable to Capstone New Zealand Fund) to the Transfer
Agent.
The Transfer Agent's address is:
Capstone New Zealand Fund
c/o PFPC, Inc.
P.O. Box 61503
211 South Gulph Road
King of Prussia, Pennsylvania 19406-3101
(Remember to make your check for at least any applicable
minimum noted above.)
Investing By Wire. You may purchase shares by wire if you have an account with
a commercial bank that is a member of the Federal Reserve System. You should be
aware that your bank may charge a fee for this service.
For an initial investment by wire, you must first call 1-800-845-2340 to be
assigned a Fund account number. Ask your bank to wire the amount of your
investment to:
Boston Safe Deposit & Trust
ABA #: 011001234
Credit: "Complete Name of your Fund"
Acct #: 000515
FBO: "Shareholder name and account number"
Note that the wire must include: your name and address, your Fund account number
and your social security or tax identification number. You must follow up your
wire with a completed Investment Application. This application is contained in
the Fund's prospectus. Mail the application to the Transfer Agent's address
(see above, under "Distributor").
For a subsequent investment by wire, ask your bank to wire funds to the Boston
Safe Deposit & Trust address noted above. The wire must include your name and
your Fund account number.
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Telephone Investment
After you have opened your account, you may make additional investments by
telephone if you completed the "Telephone Purchase Authorization" section of
your Investment Application. You may place a telephone order by calling the
Transfer Agent at 1-800-845-2340.
The minimum for a telephone purchase is $1,000, and the maximum is five times
the NAV of your Fund shares on the day before your telephone order. (You may not
include the value of shares for which you have been issued certificates.) Your
order will be priced at the NAV next determined after your call. Payment for
your order must be received within 3 business days. Mail your payment to the
Transfer Agent's address (see "Distributor," above). If your payment is not
received within 3 business days, you will be liable for any losses caused by
your purchase.
Pre-Authorized Investment
You may arrange to make regular monthly investments of at least $25 through
automatic deductions from your checking account by completing the Pre-Authorized
Payment section of the Investment Application.
REDEEMING FUND SHARES
You may redeem your Fund shares at any time by writing to the Transfer Agent's
address. The Fund does not charge any fee for redemptions. If you request the
redemption proceeds to be sent to your address of record, you generally will not
need a signature guarantee. A signature guarantee will be required if:
o you were issued certificates for the shares you are redeeming;
o you want the proceeds to be mailed to a different address or to be
paid to someone other than the record owner;
o you want to transfer ownership of the shares.
Signature guarantee: A signature guarantee can be provided by most banks,
broker-dealers and savings associations, as well as by some credit unions.
Any certificates for shares you are redeeming must accompany your redemption
request. You will generally receive a check for your redemption amount within a
week.
Expedited Redemption
Through an authorized dealer: You may request a redemption through any
broker-dealer authorized to take orders for the Fund. The broker-dealer will
place the redemption order by telephone or telegraph directly with the Fund's
distributor and your share price will be based on the NAV next determined after
the distributor receives the order. The distributor does not charge for this
service, but the broker-dealer may charge a fee. You will generally receive your
proceeds within a week.
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Telephone redemption: You may order a redemption by calling the Transfer Agent
at 1-800-845-2340 if:
o your redemption will be at least $1,000;
o no share certificates were issued for the shares you are
redeeming;
o your Investment Application authorized expedited telephone
redemption and designated a bank or broker-dealer to receive
the proceeds.
The proceeds will be mailed or wired to the designated bank or broker-dealer on
the next business day after your redemption order is received. There is no fee
charged by the Fund for this service, although a fee may be imposed in the
future. The Fund may also decide to modify or not to offer this service. In this
case, the Fund will attempt to provide reasonable prior notice to shareholders.
Systematic Withdrawal
You may arrange for periodic withdrawals of $50 or more if you invest at least
$5,000 in the Fund. Under this arrangement, you must elect to have all your
dividends and distributions reinvested in shares of the Fund. Your withdrawals
under this plan may be monthly, quarterly, semi-annual or annual.
Payments under this plan are made by redeeming your Fund shares. The payments do
not represent a yield from the Fund and may be a return of your capital, thus
depleting your investment. Payments under this plan will terminate when all your
shares have been redeemed. The number of payments you receive will depend on
the size of your investment, the amount and frequency of payments, and the
yield and share price of the Fund, which can be expected to fluctuate.
You may terminate your plan at any time by writing to the Transfer Agent. You
continue to have the right to redeem your shares at any time. The cost of the
plan is borne by the Fund and there is no direct charge to you.
Redemption in Kind
If you place a redemption order for more than $1 million, the Fund reserves the
right to pay the proceeds in portfolio securities of the Fund, rather than in
cash to the extent consistent with applicable legal requirements. In that case,
you will bear any brokerage costs imposed when you sell those securities.
Redemption Suspensions or Delays
Although you may normally redeem your shares at any time, redemptions may not be
permitted at times when the New York Stock Exchange is closed for unusual
circumstances, or when the Securities and Exchange Commission allows redemptions
to be suspended.
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If you recently purchased the shares by check, the Fund may withhold the
proceeds of your redemption order until it has reasonable assurance that the
purchase check will be collected, which may take up to 15 days from the date
of purchase.
EXCHANGING FUND SHARES
You may exchange your Fund shares for shares of another Capstone fund at a price
based on their respective NAVs. There is no sales charge or other fee. We will
send you the prospectus of the fund into which you are exchanging and we urge
you to read it. If you have certificates for the shares you are exchanging, your
order cannot be processed until you have endorsed them for transfer and
delivered them to the Transfer Agent.
You may place an exchange order in two ways:
o you may mail your exchange order to the Transfer Agent's address.
o you may place your order by telephone if you authorized
telephone exchanges on your Investment Application. Telephone
exchange orders may be placed from 9:30 a.m. to 4:00 p.m.
Eastern time, on any business day.
Exchanges into a fund can be made only if that fund is eligible for sale in your
state. The Fund may terminate or amend the exchange privilege at any time with
60 days' notice to shareholders.
Remember that your exchange is a sale of your shares. Tax consequences are
described under "Dividends, Distributions and Taxes."
Tax-Deferred Retirement Plans
Fund shares may be used for virtually all types of tax-deferred retirement
plans, including traditional, Roth and Education IRAs and Simplified Employee
Pension Plans. For more information, call 1-800-262-6631.
DIVIDENDS, DISTRIBUTIONS AND TAXES
Dividends and Distributions
The Fund expects to pay dividends from its net income and distributions from its
net realized capital gains at least annually, generally in November. Normally,
income dividends and capital gains distributions on your Fund shares will be
paid in additional shares of the Fund, with no sales charge. However, on your
Investment Application, you may elect one of the following other options:
Option 1 To have income dividends paid in cash and capital gains distributions
paid in additional Fund shares.
Option 2 To have both income dividends and capital gains distributions paid to
you in cash.
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There is no sales charge or other fee for either option. If you select Option 1
or Option 2 and the checks sent to you cannot be delivered or remain uncashed
for six months, the aggregate amount of those checks will be invested in
additional Fund shares for your account at the then current NAV, and all your
future dividends and distributions will be paid in Fund shares.
Tax Treatment of Dividends, Distributions and Redemptions
You will generally be subject to federal income tax each year on dividend and
distribution payments, as well as on any gain realized when you sell (redeem) or
exchange your Fund shares. If you hold Fund shares through a tax-deferred
account (such as a retirement plan), you generally will not owe tax until you
receive a distribution from the account
The Fund will let you know each year which amounts of your dividend and
distribution payments are to be taxed as ordinary income and which are treated
as long-term capital gain. The tax treatment of these amounts does not depend on
how long you have held your Fund shares or on whether you receive payments in
cash or additional shares.
The tax treatment of any gain or loss you realize when you sell or exchange Fund
shares will depend on how long you held the shares.
You should consult your tax adviser about any special circumstances that could
affect the federal, state and local tax treatment of your Fund distributions and
transactions.
Massachusetts Business Trust
The Fund is a series of Capstone International Series Trust ("Trust"), a
Massachusetts business trust. Because of uncertainty regarding whether
shareholders of a Massachusetts business trust might, under certain
circumstances, be held liable as partners for obligations of the trust, the
Trust's Declaration of Trust specifically provides that the Fund, to the extent
of its assets, will repay any amount assessed against a shareholder by virtue of
being a Fund shareholder.
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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 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 . . . . . . . . $ 7.73 $11.25 $12.73 $11.12 $10.44
------ ------ ------ ------ ------
Income from investment operations:
Net investment income. . . . . . . . . . . . . . . . 0.13 0.14 0.24 0.19 0.31
Net realized and unrealized gain (loss). . . . . . . 1.44 (3.46) (1.55) 1.93 0.90
------ ------ ------ ------ ------
Total from investment operations. . . . . . . . . 1.57 (3.32) (1.31) 2.12 1.21
------ ------ ------ ------ ------
Less distributions from:
Net investment income . . . . . . . . . . . . . . (0.03) (0.20) (0.17) (0.29) (0.21)
Net realized gain on investments. . . . . . . . . -- -- -- (0.22) (0.32)
------ ------ ------ ------ ------
(0.03) (0.20) (0.17) (0.51) (0.53)
Net asset value at end of period . . . . . . . . . . . $ 9.27 $ 7.73 $11.25 $12.73 $11.12
====== ====== ====== ====== ======
TOTAL RETURN (%) (1) . . . . . . . . . . . . . . . . . 20.38% (29.88)% (10.46)% 20.03% 12.22%
====== ====== ====== ====== ======
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net assets at end of year (in thousands) . . . . . . . $4,349 $4,494 $6,844 $8,258 $3,494
Ratio of total expenses to average net assets. . . . . 4.14% 4.37% 2.89% 3.63% 4.77%
Ratio of total expenses to average net assets,
before reimbursement and waiver of expenses. . . . . N/A N/A 2.50% 2.72% 2.52%
Ratio of net investment income to average net assets . 1.42% 1.51% 1.65% 2.32% 3.06%
Portfolio turnover rate. . . . . . . . . . . . . . . . 8% 25% 24% 38% 38%
- --------
<FN>
(1) Calculated without sales charge. Sales charge eliminated on August 21, 1995.
</FN>
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
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HOW TO GET MORE INFORMATION
Further information about the Fund is contained in:
o the Statement of Additional Information (SAI). The SAI contains
more detail about some of the matters discussed in the Prospectus.
The SAI is incorporated into the Prospectus by reference.
o Annual and Semi-Annual Reports about the Fund describe its
performance and list its portfolio securities. They also include a
letter from Fund management describing the Fund's strategies and
discussing market conditions and trends and their implications for
the Fund.
You may obtain free copies of the SAI or reports, or other information about the
Fund or your account, by calling 1-800-262-6631.
You may also get copies of the SAI, reports and other information directly the
Securities and Exchange Commission (SEC) by:
o visiting the SEC's public reference room. (Call 1-202-942-8090 for
information.)
o sending a written request, plus a duplicating fee, to the SEC's
Public Reference Section, Washington, D.C. 20549-0102, or by e-mail
request to: [email protected]
o visiting the SEC's website - http://www.sec.gov
The Fund's Investment Company Act File Number with the SEC is: 811-4665.
16
<PAGE>
CAPSTONE NEW ZEALAND FUND
A Series of Capstone International Series Trust
STATEMENT OF ADDITIONAL INFORMATION
February 29, 2000
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 dated
February 29, 2000. 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.
The Report of Independent Accountants and financial statements of the Fund
included in its Annual Report for the period ended October 31, 1999 ("Annual
Report") is incorporated herein by reference to such Report. Copies of such
Annual Report are available without charge upon request by writing to the Fund
at 5847 San Felipe, Suite 4100, Houston, Texas 77057 or by calling toll free
1-800-262-6631.
The financial statements in the Annual Report incorporated by reference
into this Statement of Additional Information have been audited by Briggs,
Bunting & Dougherty, LLP, independent accountants, have been so included and
incorporated by reference in reliance upon the report of said firm, which report
is given upon their authority as experts in auditing and accounting.
<PAGE>
TABLE OF CONTENTS
Page
General Information.......................................................
Investment Policies and Restrictions......................................
Risk Factors..............................................................
Performance Information...................................................
New Zealand...............................................................
New Zealand Stock Exchange................................................
Trustees and Executive Officers...........................................
Investment Advisory Agreement.............................................
Administration Agreement..................................................
Distributor...............................................................
Portfolio Transactions and Brokerage......................................
Determination of Net Asset Value..........................................
How to Buy and Redeem Shares..............................................
Taxes.....................................................................
Control Persons and Principal Holders of Securities.......................
Other Information.........................................................
Appendix A................................................................
Appendix B................................................................
Financial Statements......................................................
<PAGE>
GENERAL INFORMATION
Capstone New Zealand Fund (the "Fund") commenced operations on November
25, 1991 as a series (or fund) of Capstone International Series Trust (the
"Trust"). The Trust currently has one other active series, Capstone Japan Fund,
which invests primarily in Japanese securities. The Trust may create additional
series in the future, but each series will be treated as a separate mutual fund
with its own investment objectives and policies. The Trust was organized as a
business trust in Massachusetts on May 9, 1986 and commenced business shortly
thereafter. It is registered as an "open-end diversified management investment
company" under the Investment Company Act of 1940. The Fund is a member of a
group of investment companies sponsored by Capstone Asset Management Company
(the "Administrator"), which also provides administrative services to the Fund.
FCA Corp (the "Adviser") serves as the Fund's Investment Adviser.
INVESTMENT POLICIES AND RESTRICTIONS
Securities of issuers in which the Fund may invest include common and
preferred stock, debt convertible into equity, and debt securities. Investments
in debt securities may include obligations of governmental issuers, as well as
obligations of companies having an outstanding debt issue rated A or better by
Moody's Investors Service, Inc. ("Moody's"), A or better by Standard & Poor's
Corporation ("S&P"), A or better by S&P - Australian Ratings ("S&P Australian"),
or obligations of comparable quality as determined by the Adviser pursuant to
guidelines approved by the Board of Trustees. Many New Zealand debt securities
are not rated, so their quality will be determined in accordance with such
guidelines approved by the Board of Trustees. Debt securities acquired by the
Fund may include, without limitation, conventional fixed and variable rate bonds
and debentures, zero-coupon and original issue discount bonds and warrants to
purchase debt instruments. The Fund's investments in commercial paper must be
rated at least A-2 by S&P or S&P Australian or P-2 by Moody's.
Obligations of Domestic Banks, New Zealand Banks and New Zealand Branches
of U.S. Banks. With respect to bank obligations that may be acquired by the
Fund, the assets of a bank or savings institution will be deemed to include the
assets of its domestic and foreign branches. Thus, in addition to investments in
obligations of U.S. banks and savings institutions and their U.S. and foreign
branches, the Fund's investments in short-term bank obligations may include
obligations of New Zealand and other non-U.S. banks and their branches, wherever
situated.
The Fund may also make overnight deposits denominated in New Zealand
dollars in offshore banking units ("OBUs"), in accordance with the Fund's credit
quality criteria. An OBU is a bank or other financial institution in New Zealand
that is authorized to deal in foreign exchange which the New Zealand government
declares to be an OBU. OBUs are restricted to (i) receiving deposits denominated
in New Zealand dollars from non-residents of New Zealand or deposits in
currencies other than the New Zealand dollar from New Zealand residents and (ii)
lending to non-residents outside New Zealand and to other OBUs. A deposit in an
OBU is similar to a time deposit in a New Zealand bank except that interest
payable to non-residents on an OBU deposit is exempt from withholding tax.
Investment Company Securities. The Fund may make limited investments in
securities of other investment companies. (See "Investment Restrictions" below.)
Investments in other investment companies involve additional expenses because
Fund shareholders will indirectly bear a portion of the expenses of such
companies, including operating and administrative costs and advisory fees. These
expenses are in addition to similar expenses of the Fund that shareholders bear
directly.
Loans of Portfolio Securities. To increase income on its investments, the
Fund may lend its portfolio securities to broker-dealers and other institutional
investors pursuant to agreements requiring that the loans be continuously
secured by collateral equal at all times in value to at least the market value
of the securities loaned. Collateral for such loans may include cash, securities
of the U.S. Government or its agencies or instrumentalities or an irrevocable
letter of credit issued by a bank which is deemed creditworthy by the Adviser.
It is not anticipated that loans will involve over 5% of the Fund's total
assets. In no event will such loans be made if, as a result, the aggregate value
of securities loaned exceeds one-third of the value of the Fund's total assets.
There may be risks of delay in receiving additional collateral or in recovering
the securities loaned or even a loss of rights in the collateral should the
borrower of the securities fail financially. However, loans will be made only to
borrowers deemed by the Adviser to be creditworthy and when, in the Adviser's
judgment, the income to be earned from the loan justifies the attendant risks.
Zero Coupon Bonds. Although zero coupon securities pay no interest to
holders prior to maturity, interest on these securities is reported as income to
the Fund and distributed to its stockholders. These distributions must be made
from the Fund's cash assets or, if necessary, from the proceeds of sales of
portfolio securities. The Fund will not be able to purchase additional income
producing securities with cash used to make such distributions and its current
income ultimately may be reduced as a result.
U.S. Government Obligations. Examples of the types of U.S. Government
obligations which the Fund may hold include U.S. Treasury Bills, Treasury Notes
and Treasury Bonds and the obligations of Federal Home Loan Banks, Federal Farm
Credit Banks, Federal Land Banks, the Federal Housing Administration, Farmers
Home Administration, Export-Import Bank of the United States, Small Business
Administration, Federal National Mortgage Association, Government National
Mortgage Association, General Services Administration, Student Loan Marketing
Association, Central Bank for Cooperatives, Federal Home Loan Mortgage
Corporation, Federal Intermediate Credit Banks, Maritime Administration,
International Bank for Reconstruction and Development (the "World Bank"), the
Asian-American Development Bank and the Inter-American Development Bank.
When-Issued Purchases and Forward Commitments. When the Fund agrees to
purchase securities on a when-issued or forward commitment basis, the custodian
will set aside cash or liquid portfolio securities equal to the amount of the
commitment in a separate account. Normally, the custodian will set aside
portfolio securities to satisfy a purchase commitment, and in such a case the
Fund may be required subsequently to place additional assets in the separate
account in order to ensure that the value of the account remains equal to the
amount of the Fund's commitments. It may be expected that the market value of
the Fund's net assets will fluctuate to a greater degree when it sets aside
portfolio securities to cover such purchase commitments than when it sets aside
cash. Because the Fund's liquidity and ability to manage its portfolio might be
affected when it sets aside cash or portfolio securities to cover such purchase
commitments, the Fund expects that its commitments to purchase when-issued
securities and forward commitments will not exceed 25% of the value of its total
assets, absent unusual market conditions.
The Fund will purchase securities on a when-issued or forward commitment
basis only with the intention of completing the transaction and actually
purchasing the securities. If deemed advisable as a matter of investment
strategy, however, the Fund may dispose of or renegotiate a commitment after it
is entered into, and may sell securities it has committed to purchase before
those securities are delivered to the Fund on the settlement date. In these
cases the Fund may realize a taxable capital gain or loss.
When the Fund engages in when-issued and forward commitment transactions,
it relies on the other party to consummate the trade. Failure of such party to
do so may result in the Fund's incurring a loss or missing an opportunity to
obtain a price considered to be advantageous.
The market value of the securities underlying a when-issued purchase or a
forward commitment to purchase securities, and any subsequent fluctuations in
their market value, is taken into account when determining the market value of
the Fund starting on the day the Fund agrees to purchase the securities. The
Fund does not earn interest on the securities it has committed to purchase until
they are paid for and delivered on the settlement date.
Foreign Currency Transactions. In order to protect against a possible loss
on investments resulting from a decline in the New Zealand dollar against the
U.S. dollar, the Fund is authorized to enter into forward foreign currency
exchange contracts. These contracts involve an obligation to purchase or sell a
specified currency at a future date at a price set at the time of the contract.
Forward currency contracts do not eliminate fluctuations in the values of
portfolio securities but rather allow the Fund to establish a rate of exchange
for a future point in time. The Fund may enter into forward foreign currency
exchange contracts when deemed advisable by its Adviser under two circumstances.
First, when entering into a contract for the purchase or sale of a
security, the Fund may enter into a forward foreign currency exchange contract
for the amount of the purchase or sale price to protect against variations
between the date the security is purchased or sold and the date on which payment
is made or received, in the value of the New Zealand dollar relative to the U.S.
dollar.
Second, the Fund may enter into such a contract when the Adviser
anticipates that the New Zealand dollar may decline substantially relative to
the U.S. dollar, in order to sell, for a fixed amount, the amount of New Zealand
dollars approximating the value of some or all of the Fund's securities
denominated in such New Zealand dollars. The Fund does not intend to enter into
forward contracts under this second circumstance on a regular or continuing
basis and will not do so if, as a result, the Fund will have more than 15% of
the value of its total assets committed to such contracts. With respect to any
forward foreign currency contract, it will not generally be possible to match
precisely the amount covered by that contract and the value of the securities
involved due to the changes in the values of such securities resulting from
market movements between the date the forward contract is entered into and the
date it matures. In addition, while forward contracts may offer protection from
losses resulting from declines in the value of the New Zealand dollar, they also
limit potential gains which might result from increases in the value of the New
Zealand dollar. The Fund will also incur costs in connection with forward
foreign currency exchange contracts and conversions of New Zealand dollars and
U.S. dollars.
A separate account of the Fund consisting of cash or liquid securities
equal to the amount of the Fund's assets that could be required to consummate
any forward contracts entered into under the second circumstance, as set forth
above, will be established with the Fund's custodian. For the purpose of
determining the adequacy of the securities in the account, the deposited
securities will be valued at market or fair value. If the market or fair value
of such securities declines, additional cash or securities will be placed in the
account daily so that the value of the account will equal the amount of such
commitments by the Fund.
Hedging Transactions. The Fund is authorized to engage in certain types of
hedging practices, although it does not anticipate using this authority during
the next twelve months. These practices, which the Fund will undertake only for
hedging purposes, include entering into interest-rate and index futures
contracts and purchasing and writing put and call options on those contracts, on
individual securities and on stock indexes. It is anticipated that use of these
practices by the Fund will be very limited. In addition, the Fund's options
transactions will be subject to trading and position limits of various
exchanges. Tax considerations also may limit the Fund's ability to engage in
forward contracts and futures and options.
Interest-rate futures contracts create an obligation to purchase or sell
specified amounts of debt securities on a specified future date. Although these
contracts generally call for making or taking delivery of the underlying
securities, the contracts are in most cases closed out before the maturity date
by entering into an offsetting transaction which may result in a profit or loss.
Securities index futures contracts are contracts to buy or sell units of a
particular index of securities at a specified future date for an amount equal to
the difference between the original contract purchase price and the price at the
time the contract is closed out, which may be at maturity or through an earlier
offsetting transaction.
The purchase or writing of put or call options on futures contracts or
individual securities would give the Fund, respectively, the right or obligation
to sell or purchase the underlying futures contract or security at the stated
exercise price any time before the option expires. The purchase or writing of
put and call options on stock indexes would give the Fund, respectively, the
right or obligation to receive or pay a specified amount at any time prior to
expiration of the option. The value of the option varies with aggregate price
movements of the stocks reflected in the index. The Fund's risk in purchasing an
option, if the price of the underlying security or index moves adverse to the
purchaser, is limited to the premium it pays for the option. If price movements
are favorable, on the other hand, the option will increase in value and the Fund
would benefit from sale or exercise of the option. As the writer of an option,
the Fund would receive a premium. The premium would be gain to the Fund if price
movements in the underlying items are favorable to the writer and would reduce
the loss if price movements are unfavorable. Any call options written by the
Fund will be "covered", i.e., backed by securities owned by the Fund. The
writing of a covered call option tends to limit the Fund's opportunity to profit
from an increase in value of the underlying securities to the amount of the
premium.
To the extent required by applicable law and regulatory policy, the Fund
may deal only in options and futures that are traded on exchanges.
These hedging transactions, if any, would involve brokerage costs and
require the Fund to make margin deposits against its performance obligations
under the contracts. The Fund may also be required to segregate assets in an
amount equal to the value of instruments underlying its futures contracts, call
options purchased and put options written; to otherwise "cover" its futures and
options positions; or to limit these transactions so that they are backed to a
level of 300 percent by total Fund assets. The aggregate of initial margin
deposits for futures contracts and related options and premiums paid for open
futures options may not exceed 5 percent of the fair market value of the Fund's
assets.
If the Fund engages in hedging transactions, there can be no assurance
that these transactions will be successful. Securities prices and interest rates
may change in unanticipated manners or may move in ways which do not correlate
closely to movements in the value of securities held by the Fund. Additionally,
there can be no assurance that offsetting transactions will be available at any
given time to enable the Fund to close out particular futures or options
contracts. If these contracts cannot be closed out, the Fund may incur losses in
excess of its initial margin deposit. The bankruptcy of a broker or other person
with whom the Fund has an open futures or options position may also expose the
Fund to risk of losing its margin deposits or collateral.
Repurchase Agreements. The Fund may agree to purchase debt securities from
financial institutions subject to the seller's agreement to purchase them at an
agreed upon time and price ("repurchase agreements"). The financial institutions
with whom the Fund may enter into repurchase agreements will be banks, and
non-bank dealers of U.S. Government securities that are listed on the Federal
Reserve Bank of New York's list of reporting dealers, if such banks and non-bank
dealers are deemed creditworthy by the Fund's Adviser. The Adviser will continue
to monitor creditworthiness of the seller under the repurchase agreement, and
will require the seller to maintain during the term of the agreement the value
of the securities subject to the agreement at not less than the repurchase
price. In addition, the Adviser will mark-to-market daily the value of the
securities, and will, if necessary, require the seller to deliver additional
securities to ensure that the value is not less than the repurchase price.
Default by or bankruptcy of the seller would, however, expose the Fund to
possible loss because of adverse market action or delays in connection with the
disposition of the underlying obligations.
Yields and Ratings. The yields on certain obligations are dependent on a
variety of factors, including general market conditions, conditions in the
particular market for the obligation, the financial condition of the issuer, the
size of the offering, the maturity of the obligation and the ratings of the
issue.
The ratings of Moody's Investors Service, Inc. ("Moody's"), Standard &
Poor's Corporation ("S&P") and S&P - Australian Ratings ("S&P Australian")
represent their respective opinions as to the quality of the obligations they
undertake to rate. (See Appendix A and B). Ratings, however, are general and are
not absolute standards of quality. Consequently, obligations with the same
rating, maturity and interest rate may have different market prices. Subsequent
to its purchase by the Fund, a rated security may cease to be rated. The Adviser
will consider such an event in determining whether the Fund should continue to
hold the security. In the event that the rating of the security is reduced below
the minimum rating required for purchase by the Fund, the Fund's Adviser may,
but will not necessarily, dispose of the security.
New Zealand obligations in which the Fund may invest may not necessarily
be rated by a recognized rating agency. Investments will be made in such
obligations only when they are deemed by the Adviser to meet the quality
standards required by the Fund.
Ratings are described further in Appendix A.
Investment Restrictions. The Trust has adopted with respect to the Fund
the following "fundamental" restrictions which cannot be changed without
approval by the holders of a majority of the shares of beneficial interest in
the Fund ("Fund shares"). Such majority is defined by the Investment Company Act
of 1940 as the lesser of (i) 67% or more of the Fund shares present in person or
by proxy at a meeting, if the holders of more than 50% of the outstanding voting
securities are present or represented by proxy, or (ii) more than 50% of the
outstanding voting securities. The Fund may not:
1. With respect to 75% of its total assets, purchase more than 10% of
the voting securities of any one issuer or invest more than 5% of
the value of such assets in the securities or instruments of any one
issuer, except securities or instruments issued or guaranteed by the
U.S. Government, its agencies or instrumentalities.
2. Purchase securities or instruments which would cause 25% or more of
the market value of the Fund's total assets at the time of such
purchase to be invested in securities or instruments of one or more
issuers having their principal business activities in the same
industry or in securities or instruments issued or guaranteed by a
single government or its agencies or instrumentalities, or with
respect to repurchase agreements secured by such securities or
instruments, provided that there is no limit with respect to
investments in the U.S. Government, its agencies and
instrumentalities.
3. Borrow money, except that as a temporary measure for extraordinary
or emergency purposes it may borrow from banks in an amount not to
exceed 1/3 of the value of its net assets, including the amount
borrowed.
4. Issue any senior securities, except as appropriate to evidence
indebtedness which it is permitted to incur, and provided that
collateral arrangements with respect to forward contracts, futures
contracts or options, including deposits of initial and variation
margin, are not considered to be the issuance of a senior security
for purposes of this restriction.
5. Underwrite securities issued by other persons except to the extent
that in connection with the purchase of portfolio securities and
their later disposition it may be deemed to be an underwriter under
the Federal securities laws.
6. Purchase or sell real estate including limited partnership interests
(except that the Fund may invest in securities of companies which
deal in real estate and securities secured by real estate or
interests therein and the Fund reserves the freedom of action to
hold and sell real estate acquired as a result of the Fund's
ownership of securities).
7. Purchase or sell commodities or commodity contracts, except that the
Fund may invest in futures contracts and in options related to such
contracts (for purposes of this restriction, forward foreign
currency exchange contracts are not deemed to be commodities).
8. Make loans to other persons except (a) through the lending of
securities held by it and (b) by the purchase of debt securities in
accordance with its investment policies.
The Fund has adopted the following additional restrictions which are not
fundamental and which may be changed without stockholders' approval, to the
extent permitted by applicable law, regulation or regulatory policy. The Fund
may not:
a. Purchase securities on margin, except for such short-term credits as
are necessary for the clearance of transactions and in connection
with entering into futures contracts and related options;
b. Sell securities short or maintain a short position (except as may be
otherwise required in connection with the Fund's transactions in
futures, options or forward transactions or may be necessary in
connection with clearance of Fund transactions);
c. Invest more than 5% of its total assets in the aggregate in
securities of issuers which are not readily marketable, including
securities of issuers which together with any predecessors have a
record of less than three years continuous operation, repurchase
agreements not terminable within 7 days and restricted securities.
d. Invest in securities of other open-end investment companies (other
than in connection with a merger, consolidation, reorganization or
acquisition of assets) and may not invest in closed-end investment
companies if immediately after such investment (i) more than 5% of
the value of the Fund's total assets would be invested in the
securities of any one investment company; (ii) more than 10% of the
value of its total assets would be invested in securities of
investment companies; (iii) more than 3% of the outstanding voting
stock of any one investment company would be owned by the Fund; and
(iv) more than 10% of the outstanding voting securities of a closed-
end investment company would be owned by the Fund, other investment
companies having the same investment adviser and companies
controlled by such investment companies;
e. Write put and call options unless the options are "covered," the
underlying securities are ones which the Fund is permitted to
purchase and the option is issued by the Options Clearing
Corporation, provided that the aggregate value of the securities
underlying the calls or obligations underlying the puts determined
as of the date the options are sold shall not exceed 25% of the
Fund's net assets;
f. Buy and sell stock index futures, financial futures and put and call
options written by others on securities, stock indexes, stock index
futures and financial futures unless (a) the options or futures are
offered through the facilities of a national securities association
which has obtained applicable regulatory approval or are listed on a
national securities or commodities exchange, (b) the aggregate
premiums paid on all such options held by the Fund at any time do
not exceed 20% of its total net assets and (c) the aggregate margin
deposits on all such futures and premiums on related options held by
the Fund at any time do not exceed 5% of its total assets;
g. Purchase or retain for the Fund the securities of any issuer if
those officers and Trustees of the Trust, or directors and officers
of its investment adviser, who individually own more than 1/2 of 1%
of the outstanding securities of such issuer, together own more than
5% of such outstanding securities;
h. Invest in oil, gas or other mineral leases or exploration or
development programs (although it may purchase securities of issuers
which own, sponsor or invest in such interests);
i. Pledge, mortgage or hypothecate its assets, except that to secure
permitted borrowings it may pledge securities having a value at the
time of the pledge of not more than 15% of the Fund's total assets
taken at cost;
j. Invest more than 5% of the Fund's assets (valued at the lower of
cost or market) in warrants. Included within that amount, but not to
exceed 2% of the value of the Fund's net assets, may be warrants
which are not listed on the New York or American Stock Exchange.
k. Purchase additional securities if its borrowings exceed 5% of its
total assets.
For purposes of restriction Nos. 1 and 2, above, a security or instrument
is considered to be issued by the entity (or entities) whose assets and revenues
back the security or instrument. A guarantee of a security or instrument shall
not be deemed to be a security or instrument issued by the guarantor when the
value of all securities and instruments issued and guaranteed by the guarantor,
and owned by the Fund, does not exceed 10% of the value of the Fund's total
assets. For purposes of restriction No. 2, above, wholly-owned finance companies
will be considered to be in the industries of their parents if their activities
are primarily related to financing the activities of the parents and utilities
will be divided according to their services. For example, gas, gas transmission,
electric and gas, electric and telephone will each be considered a separate
industry.
With regard to non-fundamental restriction No. c., above, included in the
5% limit will be, for purposes of determination of daily net asset value,
securities for which there is no sales price available or securities not quoted
on the New Zealand Stock Exchange or another exchange. The valuation of such
securities will be based on the average of quotations from two leading New
Zealand brokers in the relevant equity or fixed income securities market (see
"Determination of Net Asset Value"). For purposes of non-fundamental restriction
No. i., above, securities held in escrow or separate accounts in connection with
the Fund's investment practices are not deemed to be pledged.
Although the foregoing investment limitations would permit the Fund to
invest in options and to sell securities short against the box, the Fund does
not currently intend to trade in such instruments during the next twelve months.
In addition, although the foregoing investment limitations would permit the Fund
to invest in futures contracts and options on futures contracts, the Fund does
not intend to trade in such instruments during the next twelve months. Prior to
making any other such investments, the Fund would notify its stockholders and
add appropriate disclosure concerning the Fund's investment in such instruments
to the Prospectus and this Statement of Additional Information.
The portfolio securities of the Fund may be turned over whenever necessary
or appropriate in the opinion of the Fund's management to seek the achievement
of the basic objective of the Fund. The Fund's portfolio turnover rate for the
fiscal year ended October 31, 1999 was 8%.
RISK FACTORS
Investments by United States investors in securities of foreign issuers
involve risks not associated with their investments in securities of United
States issuers. Since the Fund will invest heavily in securities denominated or
quoted in New Zealand dollars, the Fund may be affected favorably or unfavorably
by exchange control regulations or changes in the exchange rate between the New
Zealand and the U.S. dollar. Changes in currency exchange rates will influence
values within the portfolio from the perspective of United Changes in currency
exchange rates will influence values within the portfolio from the perspective
of United States investors. Changes in currency exchange rates may also affect
the value of dividends and interest earned, gains and losses realized on the
sale of securities and net investment income and gains, if any to be distributed
to stockholders of the Fund. The New Zealand Dollar is fully exchangeable into
U.S. dollars without legal restriction and trades on a floating basis against
all major currencies. The rate of exchange between the U.S. dollar and the New
Zealand dollar is determined by the forces of supply and demand in the foreign
exchange markets. These forces are affected by the international balance of
payments and other economic and financial conditions, government intervention,
speculation and other factors. The Fund may, to a limited extent, enter into
forward foreign currency contracts as a hedge against possible variations in the
exchange rates between the U.S. dollar and the New Zealand dollar. Such
contracts are agreements to purchase or sell a specified currency at a specified
future date (up to a year) and price. The Fund's dealings in currency exchange
contracts will be limited to hedging involving either specific transactions or
portfolio positions. The Fund is not obligated to enter into these contracts and
there is no guarantee any such contracts will achieve the desired objective. The
Fund will not enter into or maintain a position in those contracts if their
consummation would obligate the Fund to deliver an amount of New Zealand
currency greater than the value of the Fund's assets denominated or quoted in,
or currency convertible into, such currency.
There may be less publicly available information about New Zealand issuers
than about United States issuers, and New Zealand issuers are subject to uniform
accounting, auditing and financial reporting standards and requirements not
exactly like those of United States issuers. While the New Zealand securities
market is growing, it has substantially less trading volume than United States
markets, and, as a result, securities are generally less liquid and their prices
more volatile than securities of comparable United States issuers.
Brokerage commissions and other transaction costs in New Zealand may be
higher than in the United States. There is generally less government supervision
and regulation of business and industry practices of exchanges, brokers and
issuers in New Zealand than there is in the United States. In particular, delays
in settling securities transactions may occur. This may, at times, make it
difficult for the Fund to liquidate a previously established securities
position. Settlement delays may result in the Fund experiencing delays in the
receipt of dividends interest. The Fund will rely on the expertise of its
custodian bank to help reduce these delays.
Although New Zealand has relatively stable and friendly government, there
is the possibility of imposition of exchange controls or other restrictions,
expropriation of assets, confiscatory taxation, imposition of foreign
withholding taxes, political or social instability or diplomatic developments
which could affect investments in New Zealand securities.
The Fund's investment flexibility may be further limited by restrictions
on percentage of ownership by the non-New Zealand persons that may be applicable
under New Zealand law or corporate charters with respect to certain New Zealand
companies. Additionally, certain rights offerings to shareholders of New Zealand
companies in which the Fund may invest may not be made available to the Fund as
a U.S. shareholder if such an offer to a U.S. investor would require
registration with the Securities and Exchange Commission.
The operating expense ratio of the Fund can be expected to be higher than
that of an investment company investing exclusively in securities of United
States issuers since the expenses of the Fund (such as custodial, currency
exchange, valuation and communications costs) are higher. Because of its
emphasis on investments in New Zealand issuers, the Fund should be considered as
a vehicle for diversification of investments and not as a balanced investment
program.
PERFORMANCE INFORMATION
The Fund may from time to time include figures indicating its total return
or average annual total return in advertisements or reports to stockholders or
prospective investors. Average annual total return and total return figures
represent the increase (or decrease) in the value of an investment in the Fund
over a specified period. Both calculations assume that all income dividends and
capital gains distributions during the period are reinvested at net asset value
in additional Fund shares. Quotations of the average annual total return reflect
the deduction of a proportional share of Fund expenses on an annual basis. The
results, which are annualized, represent an average annual compounded rate of
return on a hypothetical investment in the Fund over a period of 1, 5 and 10
years ending on the most recent calendar quarter (but not for a period greater
than the life of the Fund), calculated pursuant to the following formula:
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 and five years ended October 31, 1999 and the period November
25, 1991 (commencement of operations) to October 31, 1999, the Fund's average
annual total return was 20.38%, 0.36% and 1.15%, respectively.
Quotations of total return, which are not annualized, represent historical
earnings and asset value fluctuations. For the one and five years ended October
31, 1999 and the period November 25, 1991 (commencement of operations) to
October 31, 1999, the Fund's total return was 20.38%, 1.81% and 9.45%,
respectively.
Performance information for the Fund may be compared, in reports and
promotional literature, to those of other mutual funds with similar investment
objectives and to other relevant indexes or to ratings prepared by independent
services or other financial or industry publications that monitor the
performance of mutual funds. For example, the total return and/or yield of the
Fund may be compared to data prepared by Lipper Analytical Services, Inc., the
New Zealand Small Company Index, CDA Investment Technologies, Inc. and
Weisenberger Investment Company Service, analytical firms such as Frank Russell
Company and SEI Corporation and with the performance of Standard & Poor's 500
Stock Index ("S&P 500"), Barclay's Industrial Share Index, NZSE - 40, the Dow
Jones Industrial Average ("DJIA"), the Shearson Lehman Hutton Government
Corporate Bond Index or other appropriate unmanaged indexes of performance of
various types of investments so that investors may compare the Fund's results
with those of indexes widely regarded by investors as representative of the
securities markets in general. Total return and yield data as reported in
national financial publications such as Money Magazine, Forbes, Fortune,
Business Review Weekly, The Wall Street Journal and The New York Times, or in
publications of a local or regional nature, may also be used in comparing the
performance of the Fund. Unmanaged indexes may assume the reinvestment of
dividends but generally do not reflect deductions for administrative and
management costs and expenses.
Performance information for the Fund reflects only the performance of a
hypothetical investment in the Fund during the particular time period on which
the calculations are based. Performance information should be considered in
light of the Fund's investment objectives and policies, the types and quality of
the Fund's portfolio investments, market conditions during the particular time
period and operating expenses. Such information should not be considered as a
representation of the Fund's future performance.
NEW ZEALAND
Area and Population
New Zealand is located in the South Pacific just west of the International
Dateline. It is about 1,200 miles east of Australia, and approximately 4,000
miles southwest of Hawaii. The country is more than 1,000 miles long, consisting
of the North Island and the South Island and a number of smaller islands. The
total land area of approximately 103,000 square miles is similar in size to the
United Kingdom and Japan.
The population of New Zealand is approximately 3.81 million and has been
growing at approximately 1.6% over the last three years. Of the total
population, approximately 69% live in the five main urban areas of Auckland,
Hamilton, Christchurch, Dunedin and Wellington. Auckland, in the North Island,
is the major population and commercial center and Wellington, in the south of
the North Island, is the nation's capital and financial center. The population
is approximately 85% of European origin and approximately 15% Polynesian.
English is the official language, although Maori language is also officially
recognized. The labor force of approximately 1.8 million people is mainly
engaged in the services, manufacturing and construction sectors.
Government
New Zealand is a sovereign state that is part of the British Commonwealth.
Pursuant to the Treaty of Waitangi, the Maori people reached an agreement for
the ongoing governance of New Zealand with the British monarch in 1840. Like
Australia and Canada, the British monarch is the titular Head of State. The
British Queen is represented in New Zealand by the Governor General, appointed
by her on the advice of the New Zealand Government.
New Zealand has a democratic parliamentary government based on the
Westminster system. Legislative power is vested in Parliament, a unicameral body
designated the House of Representatives. The executive government of New Zealand
is carried out by the Executive Council, which consists of the Governor General,
the Prime Minister and other Ministers chosen from elected members of the House
of Representatives. The first general election under the Mixed Member
Proprietary ("MMP") electoral system was held on October 6, 1996. The MMP
system, which was approved by a majority of voters in the 1993 referendum, is
loosely modeled after the German parliament. Key features of the system are:
o Voters have one vote for a political party to be represented in
Parliament (the "party vote") and one vote for a candidate to be
a member of Parliament ("MP");
o Parliament will normally have 120 MPs: 60 MPs are chosen by the
electorate vote, 5 MPs by the Maori electorates and 55 MPs
selected from lists of candidates nominated by the political
parties; and
o Parliament representation will be determined by a party's share
of the party vote.
No political party won a majority of the Parliament and a coalition
government was formed between National and NZ First. This is a positive result
for the equity markets and New Zealand will continue to benefit from its prior
economic reforms.
The constitutional basis for government in New Zealand is an accumulation
of convention, precedent and tradition. The judicial system is based on the
British model. By convention, the judiciary is separate from the executive.
Economic Structure
New Zealand has a mixed economy that operates on free-market principles.
It has sizable service and manufacturing sectors complementing a large
agriculture sector. Over the past three decades, the New Zealand economy has
undergone significant structural changes marked by a diversification of exports,
a shift away from pastoral agriculture and significant growth in the services
sector. New Zealand's gross domestic product ("GDP") for the year ended June,
1999 was approximately NZ $99.8 billion (US $49 billion).
The New Zealand economy is strongly trade-oriented, with exports of goods
and services. Primary products (principally agriculture, forestry, mining
energy, fishing and horticulture) accounted for approximately 47% of New
Zealand's total overseas earnings for the year. Exports of non-food manufactured
goods and of services also make large contributions to New Zealand's total
exports. Principal export markets for the year ended June, 1997 were Australia,
Japan, the United States and the United Kingdom. Those countries were also the
main sources of imports for the same period. Principal imports are raw materials
and capital goods for manufacturing, followed by minerals, chemicals, plastics
and motor vehicles.
The increase in the complexity of the New Zealand economy has been
accompanied by a steady growth in service industries. Finance, insurance and
real estate services are the largest components of the service industries,
followed by restaurants, hotels, transport and communications. Tourism is an
important source of foreign exchange revenue and a major growth industry in New
Zealand.
Economic Developments
Following a period of economic expansion after World War II, the New
Zealand economy deteriorated in the late 1960s. Faced with growing balance of
payments problems, successive governments sought to maintain New Zealand's high
standard of living with increased levels of overseas borrowings and increasingly
protective economic policies. Following the sharp increase in oil prices and a
fall in export prices in 1973 and 1974, New Zealand attempted to respond to
changed external circumstances. The policies implemented were aimed at
maintaining a high level of economic activity and led to macroeconomic
imbalances and structural adjustment problems. The successive shifts in oil and
commodity prices in 1979 and 1980 resulted in further economic difficulties.
Since 1984, successive administrations have implemented comprehensive
programs of economic reform. Macroeconomic policies have been directed at
achieving low inflation and fiscal balance. Macroeconomic policies have fostered
competition and efficient operation of markets. Policy-making has also shifted
from short-term to medium-term objectives designed to provide a more stable and
predictable environment for private sector decision-making. Principal reforms
have included: the removal of controls on prices, interest rates and wages;
floating of the exchange rate; abolition of all agricultural subsidies and price
supports; liberalization of banking; deregulation of financial markets;
corporation and privatization of some state-owned enterprises; elimination of
most import controls and reduction of tariffs; implementation of free trade with
Australia; reform and reduction of business and personal taxes; introduction of
a comprehensive value-added tax; adoption of more flexible labor laws; extensive
deregulation of infrastructure (telecommunications, land transport and
seaports); and widespread reform of the public service sector.
Inflation has been reduced from over 18% in 1986 to approximately 1.3% as
of September 30, 1999. Interest rates have decreased dramatically. The 90-day
bank bill rate has fallen from over 22% in March 1986 to under 6% as of
September 30, 1999 and New Zealand continues to operate with a government fiscal
surplus.
NEW ZEALAND STOCK EXCHANGE
The NZSE currently quotes the securities of more than 226 companies. The
aggregate market capitalization of the securities quoted on the NZSE at February
18, 2000 was approximately NZ $51.8 billion (US $25 billion), with the 6 largest
listed companies accounting for approximately 52% of the total market
capitalization of such securities.
Holders of securities that are quoted on the NZSE must generally instruct
a stockbroker who is a member of the NZSE to handle transactions in their
securities. Such stockbrokers are obliged to follow the NZSE's rules and
regulations. The members' compliance with the NZSE's regulatory requirements is
monitored by the Disciplinary Committee appointed by the NZSE Board of Directors
and the Board itself. There are 269 members of the NZSE representing 43 firms. A
number of those firms are subsidiaries or affiliates of international brokerage
houses or banks.
Until June 24, 1991, the NZSE operated trading floors in Auckland,
Wellington and Christchurch with trading conducted on an open outcry basis
through its members. The NZSE converted to national computer screen trading on
June 24, 1991. Trading is now conducted during one continuous daily trading
session running from 9:30 a.m. to 3:30 p.m. Bids, offers, the identity of the
prospective buying and selling brokers and recent sales prices of each quoted
security are displayed on the trading screen. There is automatic computer
matching of bids and offers by price and time priority. There are no constraints
on price fluctuations. There are no stamp taxes, levies or charges payable with
respect to trades on the NZSE, other than negotiable brokerage charges.
Trades in securities quotes on the NZSE can be effected outside the NZSE
trading system, outside the NZSE trading sessions, on different terms from sales
made through the NZSE trading system and outside the range of price quotations
for the days on which such trades were made. If such trades are conducted
through a broker who is a member of the NZSE, such trades must be reported to
the NZSE. The NZSE records off-market trades in a special report. As with
on-market trades, off-market trades of securities quoted on the NZSE are
generally conducted by stockbrokers that are members of the NZSE. There is,
however, no restriction that prevents private trades or transactions from being
effected by persons who are not members of the NZSE.
All trades on the NZSE are netted and confirmed daily between the brokers
through the NZSE in a single transaction. Upon consummation of a transaction,
the NZSE computer automatically calculates the amount owing by or to each
broker, offsets the amounts and simultaneously calculates the net overall
settlement of the broker to the NZSE on a daily basis. There is no fixed
settlement date for equity transactions, but NZSE regulations require that all
trades between brokers be settled within 10 business days. Settlements between
brokers are instigated by the selling broker giving notice to the buying broker
that it expects to settle on the next business day. The NZSE publishes a daily
official price list that includes price information on each listed security.
The NZSE generally requires listed companies to report annual and
six-month results in a timely fashion and disclose all capital changes or any
significant matters that may affect the value of the quoted securities. The NZSE
also requires listed companies to comply with certain procedures regarding
certain significant transactions and the issuance of shares. The NZSE has the
power, in certain circumstances, to suspend trading in the shares of a listed
company and to de-list a security.
Until mid-1991, the Barclays Industrial Share Price Index (the "Barclays
Index") was widely used to measure the performance of the New Zealand securities
market. The Barclays Index was composed of a basket of 40 leading equity
securities quoted on the NZSE weighted by their full market capitalization. In
1991, the NZSE introduced two new indices, the NZSE-40 Capital and the NZSE-30.
The NZSE-40 is calculated in the same manner as the prior Barclays Index. The
NZSE-30 measures the 30 largest issuers by value after excluding any shares held
in blocks of 30% or more. In April of 1993, a small company index (the "NZSCI")
was introduced and is composed of approximately 100 small company securities
weighed by their full market capitalization, and typically have less offshore
investment than companies in the main NZSE-40. Although the Capstone New Zealand
Fund (the "Fund") invests in the leading securities, the NZSCI may provide a
more meaningful comparison to the Fund because it more closely resembles the
Fund's portfolio mix.
TRUSTEES AND EXECUTIVE OFFICERS
The trustees provide overall supervision of the affairs of the Trust. The
trustees and executive officers of the Trust, and their principal occupations
for the last 5 years, 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 (53), Trustee and President of the Trust. 5847 San
Felipe, Suite 4100, Houston, Texas 77057. Chairman of the Board and
Director of the Administrator since 1992; President and Director of
Capstone Asset Planning Company and Capstone Financial Services, Inc.
since 1987; Director/Trustee and officer of other Capstone Funds.
JAMES F. LEARY (69), Trustee. 2006 Peakwood Dr., Garland, Texas 75044.
Managing Director of Benefit Capital South West, Inc. ( financial
services). Director: other Capstone Funds; Associated Materials, Inc.
(tire cord, siding and industrial cable manufacturer); MESBIC Ventures,
Inc. (minority enterprise small business investment company); Quest
Products Corp. (consumer products); Prospect Street High Income Fund
(closed end mutual fund).
JOHN R. PARKER (53), Trustee. 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 (71), 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 (51), President of the Fund. 5847 San Felipe, Suite 850,
Houston, Texas 77057. President and Director of FCA Corp since 1983.
LINDA G. GIUFFRE (38), Secretary/Treasurer. 5847 San Felipe, Suite 4100,
Houston, Texas 77057. Vice President, Compliance of Capstone Financial
Services, Capstone Asset Management Company and Capstone Asset Planning
Company (since November 1999), Vice President and Treasurer (1996-1999) of
Capstone Financial Services, Inc.; Secretary/Treasurer (1998-1999) of
Capstone Asset Planning Company; Vice President (1996-1998) of Capstone
Asset Management Company and Capstone Asset Planning Company; Treasurer
(1990-1996) and Secretary (1994-1996) of Capstone Financial Services, Inc.
and Capstone Asset Management Company; Treasurer (1990-1996) and Secretary
(1995-1996) of Capstone Asset Planning Company; officer of other Capstone
Funds.
--------------
* Trustee who is an interested person as defined in the Investment Company
Act of 1940.
The trustees and officers of the Fund as a group own less than one percent
of the outstanding shares of the Fund. Each independent Trustee serves as a
director or trustee on the Board of four other registered investment companies
comprising the Capstone Complex of Mutual Funds. The independent Directors/
Trustees are entitled to $2,000 per meeting attended and are paid an annual
retainer of $6,000. In addition, each independent Director/Trustee is paid $500
per committee for serving on four (4) committees. The Lead Director is paid an
additional $2,000 for serving the complex. All fees received by the Directors/
Trustees are allocated among the funds based on net assets. The Directors/
Trustees and officers of the Capstone Funds are also reimbursed for expenses
incurred in attending meetings of the Boards of Directors/Trustees. For the
fiscal year ended October 31, 1999, the Fund paid or accrued for the account
of its officers and trustees, as a group for services and expenses in all
capacities, a total of $3,808.
The following table represents the compensation received by the independent
Directors/Trustees during fiscal 1999 from the Capstone Funds complex.
<TABLE>
Compensation Table
Aggregate Pension or Total Compensation
Compensation Retirement Benefits Estimated Annual From Registrant and
From Accrued As Part of Benefits Upon Fund Complex Paid
Name of Person, Position Registrant* Fund Expenses Retirement to Directors (4)
<S> <C> <C> <C> <C>
James F. Leary, Trustee $ 880 $0 $0 $18,250 (1)(2)(3)
John R. Parker, Trustee $1,130 $0 $0 $19,500 (1)(2)(3)
Bernard J. Vaughan, Trustee $1,130 $0 $0 $19,500 (1)(2)(3)
- ---------------------
<FN>
* Company does not pay deferred compensation.
(1) Trustee of Capstone International Series Trust - Capstone Japan Fund
(2) Director of Capstone Growth Fund, Inc. and Capstone Fixed Income Series,Inc.
(3) Trustee of Capstone Social Ethics and Religious Values Fund
(4) Fund Complex includes 10 funds.
</FN>
</TABLE>
INVESTMENT ADVISORY AGREEMENT
Pursuant to an investment advisory agreement dated November 25, 1991
between FCA Corp (the "Adviser") and Capstone International Series Trust (the
"Trust") with respect to the Fund (the "Advisory Agreement"), the Adviser
manages the investment of the Fund's assets and places orders for the purchase
and sale of its portfolio securities. In connection with its responsibilities,
the Adviser provides the Fund with research, analysis, advice, and economic and
statistical data and judgments involving individual investments, general
economic conditions and trends, and long-range investment policy.
Under the Advisory Agreement, the Fund pays to the Adviser as compensation
for the services rendered by it a fee, calculated daily and payable monthly,
equal to an annual rate of 0.75% of the average net assets of the Fund. During
the fiscal years ended October 31, 1997, 1998 and 1999, the Fund paid investment
advisory fees in the amount of $63,809, $38,680, and $35,350, of which $26,923,
$0, and $0, respectively, was reimbursed to the Fund pursuant to a
voluntary expense limitation policy whereby the Adviser has agreed to reimburse
to the Fund all or a portion of its advisory fees if the Fund's operating
expenses exceed 2.5% of the Fund's average net assets. During the fiscal years
ended October 31, 1997, 1998 and 1999, the annual total operating expenses of
the Fund prior to and after the reimbursements by the Adviser were 2.89%, 4.37%
and 4.14%, and 2.50% , 4.37% and 4.14%, respectively.
The Advisory Agreement also provides that the Adviser shall not be liable
to the Fund for any errors or losses unless they result from willful
misfeasance, bad faith, gross negligence or reckless disregard of the Adviser's
duties under the Advisory Agreement.
The Advisory Agreement was last approved by the Board of Trustees on May
3, 1999 and may be continued from year to year if specifically approved at
least annually (a) by the Board of Trustees of the Trust or by vote of a
majority of the Fund's shares and (b) by the affirmative vote of a majority of
the trustees who are not parties to the agreement or interested persons of any
such party by votes cast in person at a meeting called for such purpose. The
Advisory Agreement provides that it shall terminate automatically if assigned
and that it may be terminated without penalty by either party on 60 days'
written notice.
ADMINISTRATION AGREEMENT
Under an agreement ("Administration Agreement") between the Trust and
Capstone Asset Management Company (the "Administrator"), the Administrator
supervises all aspects of the Fund's operations other than the management of its
investments. As part of these services, it oversees the performance of
administrative and professional services to the Fund by others; provides office
facilities; prepares reports to stockholders and the Securities and Exchange
Commission; and provides personnel for supervisory, administrative and clerical
functions. Except as noted below, the costs of these services are borne by the
Administrator. For the Administrator's services, the Fund will pay to the
Administrator a fee, calculated daily and payable monthly, equal to an annual
rate of 0.25% of the Fund's average net assets. During the fiscal year ended
October 31, 1999, the Fund paid administrative fees in the amount of $11,783.
The Fund bears the cost of its accounting services, performed by The Fifth
Third Bank, which includes maintaining its financial books and records and
calculating its daily net asset value. The Fund also pays transfer agency fees,
custodian fees, legal and auditing fees, the costs of printing reports to
stockholders and the Securities and Exchange Commission, fees under the Service
and Distribution Plan (see "Distribution") and all other ordinary expenses not
specifically borne by the Administrator.
DISTRIBUTOR
Capstone Asset Planning Company (the "Distributor"), 5847 San Felipe,
Suite 4100, Houston, Texas 77057, acts as the principal underwriter of the
Fund's shares pursuant to an agreement, dated August 10, 1992, with the Trust
(the "Distribution Agreement"). The Distributor has the exclusive right to
distribute Fund shares in a continuous offering through affiliated and
unaffiliated dealers. The Distributor's obligation is a "best efforts"
arrangement under which the Distributor is required to take and pay for only
such Fund shares as may be sold to the public. The Distributor is not obligated
to sell any stated number of shares. The Distributor bears the cost of printing
(but not typesetting) prospectuses used in connection with this offering and the
cost and expense of supplemental sales literature, promotion and advertising.
Effective August 21, 1995, the front end sales load applicable to sales of the
Fund's shares was eliminated. Prior to August 21, 1995, sales of Fund shares
were subject to a sales charge equal to a percentage of the net asset value of
the sales to be purchased. The sales charge was paid to the Distributor, who
reallowed a portion of the sales charge to broker-dealers who have an agreement
with the Distributor to participate in the offering of Fund shares.
The Distribution Agreement is renewable from year to year if approved (a)
by the Trust's Board of Trustees or by a vote of a majority of the Fund's shares
or (b) by the affirmative vote of a majority of trustees who are not parties to
the Distribution Agreement or interested persons of any party, by votes cast in
person at a meeting called for such purpose. The Distribution Agreement provides
that it will terminate if assigned, and that it may be terminated without
penalty by either party on 60 days' written notice. The Distributor receives no
discounts or commissions, redemptions or repurchase fees or brokerage
commissions from the Fund. It does receive payments, as described below, under
the Fund's Service and Distribution Plan.
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 reimburse the Distributor for certain expenses in
connection with the distribution of its shares and provision of certain services
to stockholders. See "Management of the Fund - Distributor" in the Fund's
Prospectus. As required by Rule 12b-1, the Fund's Plan and related agreements
were approved by a vote of the Fund's Board of Trustees, and by a vote of the
trustees who are not "interested persons" of the Fund as defined under the 1940
Act and have no direct or indirect interest in the operation of the Plan or any
agreements related to the Plan (the "Plan Trustees"), and by the Fund's
stockholders at the Special Meeting of Stockholders held August 10, 1992.
As required by Rule 12b-1, the trustees will review quarterly reports
prepared by the Distributor on the amounts expended and the purposes for the
expenditures. The amounts paid to the Distributor and reallowed by the
Distributor to other Service Organizations during the past three fiscal years
were as follows:
Fiscal Year Total 12b-1 Amount Retained Amount Paid to Other
Ended Fees Paid by CAPCO Service Organizations
10/99 $11,783 $10,499 $1,284
10/98 $12,893 $11,926 $ 967
10/97 $21,261 $16,811 $4,450
The Plan and related agreements may be terminated at any time by a vote of
the Plan Trustees or by a vote of a majority of the Fund's outstanding voting
securities. As required by Rule 12b-1, selection and nomination of the
disinterested trustees for the Fund is committed to the discretion of the
trustees who are not "interested persons" as defined under the 1940 Act.
Any change in the Plan that would materially increase the distribution
expenses of the Fund requires stockholder approval, but otherwise, the Plan may
be amended by the trustees, including a majority of the Plan Trustees.
The Plan will continue in effect for successive one year periods provided
that such continuance is specifically approved by a majority of the trustees,
including a majority of the Plan Trustees. Continuance of the Plan was last
approved by a majority of trustees and Plan Trustees on May 3, 1999. 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.
The Adviser may effect securities transactions through Capstone Asset
Planning Company ("CAPCO"), a broker-dealer affiliate of the Administrator,
provided such placement of orders is consistent with the Fund's objective of
obtaining best price and execution.
Section 28(e) of the Securities Exchange Act of 1934 ("Section 28(e)")
permits an investment adviser, under certain circumstances, to cause an account
to pay a broker or dealer who supplies brokerage and research services a
commission for effecting a securities transaction in excess of the amount of
commission another broker or dealer would have charged for effecting the
transaction. Brokerage and research services include (a) furnishing advice as to
the value of securities, the advisability of investing in, purchasing or selling
securities, and the availability of securities or purchasers or sellers of
securities, (b) furnishing analyses and reports concerning issuers, industries,
securities, economic factors and trends, portfolio strategy, and the performance
of accounts, and (c) effecting securities transactions and performing functions
incidental thereto (such as clearance, settlement and custody).
The Trust's Board of Trustees has authorized the Adviser to cause the Fund
to incur brokerage commissions in an amount higher than the lowest available
rate in return for research services provided to the Adviser that provide lawful
and appropriate assistance to the Adviser in the performance of its
decision-making responsibilities. The Adviser is of the opinion that the
continued receipt of supplemental investment research services from dealers is
essential to its provision of high quality portfolio management services to the
Fund. The Adviser undertakes that such higher commissions will not be paid by
the Fund unless (a) the Adviser determines in good faith that the amount is
reasonable in relation to the services in terms of the particular transaction or
in terms of the Adviser's overall responsibilities with respect to the accounts
as to which it exercises investment discretion, (b) such payment is made in
compliance with the provisions of Section 28(e) and other applicable state and
Federal laws and regulations, and (c) in the opinion of the Adviser, the total
commissions paid by the Fund are reasonable in relation to the expected benefits
to the Fund over the long term. The investment advisory fee paid by the Fund
under the Advisory Agreement is not reduced as a result of the Adviser's receipt
of research services.
Consistent with the Rules of Fair Practice of the National Association of
Securities Dealers, Inc. and subject to seeking best execution and such other
policies as the Board of Trustees may determine, the Adviser may consider sales
of Fund shares as a factor in the selection of dealers to execute portfolio
transactions for the Fund.
The Adviser places portfolio transactions for other advisory accounts.
Research services furnished by firms through which the Fund effects its
securities transactions may be used by the Adviser in servicing all of its
accounts; not all of such services may be used by the Adviser in connection with
the Fund. In the opinion of the Adviser, the benefits from research services to
each of the accounts (including the Fund) managed by the Adviser cannot be
measured separately. Because the volume and nature of the trading activities of
the accounts are not uniform, the amount of commissions in excess of the lowest
available rate paid by each account for brokerage and research services will
vary. However, in the opinion of the Adviser, such costs to the Fund will not be
disproportionate to the benefits received by the Fund on a continuing basis.
The Adviser seeks to allocate portfolio transactions equitably whenever
concurrent decisions are made to purchase or sell securities by the Fund and
another advisory account. In some cases, this procedure could have an adverse
effect on the price or the amount of securities available to the Fund. In making
such allocations among the Fund and other advisory accounts, the main factors
considered by the Adviser are the respective investment objectives, the relative
size of portfolio holdings of the same or comparable securities, the
availability of cash for investment, the size of investment commitments
generally held, and opinions of the persons responsible for recommending the
investment.
During the fiscal year ended October 31, 1999, the Fund incurred brokerage
commissions of $9,622 (0.20% of the Fund's average net assets), none of which
was paid to affiliated brokers. There were no securities transactions effected
through brokers who furnished the Fund with statistical, research and advisory
information. The Fund executed trades in the amount of $104,049 in which a
"mark up" (the dealer's profit) was included in the price of the securities.
During the fiscal years ended October 31, 1998 and 1997, the Fund paid
$13,915 and $25,285, respectively, in brokerage commissions on portfolio trades.
There were no transactions effected through affiliated brokers during those
years.
Personal Trading Policies
- -------------------------
The Funds, the Adviser, and the Distributor have adopted Codes of Ethics under
Rule 17j-1 under the Investment Company Act of 1940. Consistent with
requirements of that Rule, the codes permit persons subject to the codes to
invest in securities, including securities that may be purchased by a Fund. The
codes and the Rule require these transactions to be monitored.
DETERMINATION OF NET ASSET VALUE
The Fund's net asset value is computed, Monday through Friday, as of the
close of regular trading on the New York Stock Exchange, which is currently 4:00
p.m. Eastern time. The Fund's net asset value will not be computed on the
following holidays: New Year's Day, Martin Luther King's Birthday, President's
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day
and Christmas Day. The Fund will in some cases value its portfolio securities as
of days on which the New Zealand Stock Exchange is closed for holidays or other
reasons. At such times, the Fund will follow such procedures as the Trustees
have determined to be reasonable.
The Fund's net asset value per share is computed by dividing the value of
the securities held by the Fund plus any cash or other assets (including any
accrued expenses) by the total number of Fund shares outstanding at such time.
To avoid large fluctuations in the computed net asset value, accrued expenses
will be charged against the Fund on a daily basis, i.e. 1/360 of the annual
amount due by the Fund each year.
Any assets or liabilities initially expressed in terms of foreign
currencies are translated into U.S. dollars at the prevailing market rates at
17:00 Greenwich Mean Time on each U.S. business day.
Portfolio securities which are primarily traded on securities exchanges
are valued at the last sale price on that exchange or, if there is no recent
last sale price available, at the last current bid quotation. A security which
is listed or traded on more than one exchange is valued at the quotation on the
exchange determined to be the primary market for such security.
Debt securities, except short-term obligations, are valued by using market
quotations or independent pricing services which use prices provided by market
makers or estimates of market values obtained from yield data relating to
instruments or securities with similar characteristics. Equity and debt
securities for which there is no sales price available and securities not quoted
on any exchange are valued based on the average of quotations from two leading
New Zealand brokers in the relevant equity or fixed income securities market. In
the absence of such quotations, securities and other assets are valued at fair
value as determined in good faith by the Board of Trustees. Because of the need
to obtain prices as of the close of trading on the New Zealand Stock Exchange,
the calculation of net asset value does not take place contemporaneously with
the determination of the prices of the majority of the portfolio securities. If
an event were to occur after the value of a Fund instrument was so established,
but before the net asset value per share is determined which is likely to
materially change the net asset value, the Fund instrument would be valued using
fair value considerations established by the Board of Trustees.
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 "Buying and Selling Fund Shares" in the
Prospectus.
Generally, stockholders may require the Fund to redeem their shares by
sending a written request, signed by the record owner(s), to the Capstone New
Zealand Fund, c/o PFPC, Inc., P.O. Box 61503, 211 South Gulph Road, King of
Prussia, Pennsylvania 19406-3101. In addition, certain expedited redemption
methods are available. See "Buying and Selling Fund Shares" in the Prospectus.
TAXES
The following discussion summarizes certain U.S. Federal tax
considerations incident to an investment in the Fund. Investors are advised to
consult their own tax advisers with respect to the particular tax consequences
to them of an investment in the Fund.
The Fund intends to qualify annually and elect to be treated as a
regulated investment company under Subchapter M of the Internal Revenue Code of
1986, as amended (the "Code"). Qualification and election to be taxed as a
regulated investment company involves no supervision of management or investment
policies or practices by any government agency.
To qualify as a regulated investment company, the Fund must, among other
things: (1) derive in each taxable year at least 90% of its gross income from
dividends, interest, payments with respect to securities loans, and gains from
the sale or other disposition of stock, securities or foreign currencies, or
other income derived with respect to its business of investing in stock,
securities or foreign currencies; (2) diversify its holdings so that, at the end
of each quarter of the taxable year (i) at least 50% of the market value of the
Fund's assets is represented by cash, U.S. Government securities, the securities
of other regulated investment companies and other securities, with such other
securities of any one issuer limited for the purposes of this calculation to an
amount not greater than 5% of the value of the Fund's total assets and 10% of
the outstanding voting securities of such issuer and (ii) not more than 25% of
the value of its total assets is invested in the securities of any one issuer
(other than U.S. Government securities or the securities of other regulated
investment companies); and (3) distribute in each taxable year at least 90% of
its investment company taxable income (which includes, among other items,
dividends, interest, certain foreign currency gains and net short-term capital
gains in excess of net long-term capital losses).
The Treasury Department is authorized to issue regulations to provide that
foreign currency gains that are not directly related to the Fund's principal
business of investing in stock or securities (or options and futures with
respect to stock or securities) may be excluded from the income which qualifies
for purposes of the 90% gross income requirement described above. To date,
however, no regulations have been issued.
As a regulated investment company, the Fund generally will not be subject
to Federal income tax on its investment company taxable income and net capital
gains (net long-term capital gains in excess of net short-term capital losses),
if any, that it distributes to stockholders. The Fund intends to distribute to
its stockholders, at least annually, substantially all of its investment company
taxable income and net capital gains.
The Fund may invest in stocks of foreign companies that are classified
under the Code as passive foreign investment companies ("PFICs"). In general, a
foreign company is classified as a PFIC if at least one-half of its assets
constitute investment-type assets or 75% or more of its gross income is
investment-type income. Under the PFIC rules, an "excess distribution" received
with respect to PFIC stock is treated as having been realized ratably over the
period during which the Fund held the PFIC stock. The Fund itself will be
subject to tax on the portion, if any, of the excess distribution that is
allocated to the Fund's holding period in prior taxable years (and an interest
factor will be added to the tax, as if the tax had actually been payable in such
prior taxable years) even though the Fund distributes the corresponding income
to stockholders. Excess distributions include any gain from the sale of PFIC
stock as well as certain distributions from a PFIC. All excess distributions are
taxable as ordinary income.
The Fund may be able to elect alternative tax treatment with respect to
PFIC stock. Under an election that currently may be available, the Fund
generally would be required to include in its gross income its share of the
earnings of a PFIC on a current basis, regardless of whether any distributions
are received from the PFIC. If this election is made, the special rules,
discussed above, relating to the taxation of excess distributions, would not
apply. Alternatively, another election would involve marking-to-market the
Fund's PFIC shares at the end of each taxable year, with the result that
unrealized gains would be treated as though they were realized and reported as
ordinary income. Any mark-to-market losses and any loss from an actual
disposition of PFIC shares would be deductible as ordinary losses to the extent
of any net mark-to-market gains included in income in prior years.
Because the application of the PFIC rules may affect, among other things,
the character of gains, the amount of gain or loss and the timing of the
recognition of income with respect to PFIC stock, as well as subject the Fund
itself to tax on certain income from PFIC stock, the amount that must be
distributed to stockholders, and which will be taxed to stockholders as ordinary
income or long-term capital gain, may be increased or decreased substantially as
compared to a fund that did not invest in PFIC stock.
Certain of the debt securities acquired by the Fund may be treated as debt
securities that were originally issued at a discount. Original issue discount
can generally be defined as the difference between the price at which a security
was issued and its stated redemption price at maturity. Although no cash income
is actually received by the Fund, original issue discount on a taxable debt
security earned in a given year generally is treated for Federal income tax
purposes as interest and, therefore, such income would be subject to the
distribution requirements of the Code.
Amounts not distributed by the Fund on a timely basis in accordance with a
calendar year distribution requirement are subject to a nondeductible 4% excise
tax. To prevent imposition of the tax, the Fund must distribute during each
calendar year an amount equal to the sum of: (1) at least 98% of its ordinary
income (not taking into account any capital gains or losses) for the calendar
year; (2) at least 98% of its capital gains in excess of its capital losses for
the twelve month period ending on October 31 of the calendar year (reduced by
certain net operating losses, as prescribed by the Code); and (3) all ordinary
income and capital gain net income from previous years that were not distributed
during such years. A distribution will be treated as paid on December 31 of the
calendar year if it is declared by the Fund in October, November or December of
that year to stockholders on a record date in such a month and paid by the Fund
during January of the following calendar year. Such a distribution will be
taxable to stockholders in the calendar year in which it is declared, rather
than the calendar year in which it is received. To prevent application of the
excise tax, the Fund intends to make its distributions in accordance with the
calendar year distribution requirement.
If the Fund retains net capital gains for reinvestment (although it has no
plans to do so), the Fund may elect to treat such amounts as having been
distributed to its stockholders. As a result, the stockholders would be subject
to tax on undistributed net capital gains, would be able to claim their
proportionate share of the Federal income taxes paid by the Fund on such gains
as a credit against their own Federal income tax liabilities, and would be
entitled to an increase in their basis in their Fund shares.
Distributions. Dividends paid out of the Fund's investment company taxable
income, whether received in cash or reinvested in Fund shares, will be taxable
to a stockholder as ordinary income. The excess of net long-term capital gains
over the short-term capital losses realized, properly designated and distributed
by the Fund, whether paid in cash or reinvested in Fund shares, will generally
be taxable to shareholders as long-term capital gain. 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 stockholders whether reinvested in
additional shares of the Fund or received in cash. Stockholders receiving
distributions in the form of additional shares will have a cost basis for
Federal income tax purposes in each share received equal to the net asset value
of a share of the Fund on the reinvestment date. Stockholders will be notified
annually as to the Federal tax status of distributions paid to them by the Fund.
Distributions by the Fund reduce the net asset value of the Fund shares.
Should a distribution reduce the net asset value below a stockholder's cost
basis, the distribution nevertheless would be taxable to the stockholder as
ordinary income or capital gain as described above, even though, from an
investment standpoint, it may constitute a partial return of capital. In
particular, investors should be careful to consider the tax implications of
buying shares just prior to a distribution by the Fund. The price of shares
purchased at that time includes the amount of the forthcoming distribution, but
the distribution will generally be taxable to them.
Options, Futures and Forward Foreign Currency Contract Transactions. Many
of the options, futures and forward foreign currency contracts that may be
entered into by the Fund will be classified as "section 1256 contracts."
Generally, gains or losses on section 1256 contracts are considered to be 60%
long-term and 40% short-term capital gains or losses ("60/40"); however, foreign
currency gains or losses (as discussed below) arising from certain section 1256
contracts may be treated as ordinary income or loss. Also, section 1256
contracts held by the Fund at the end of each taxable year are
"marked-to-market" with the result that unrealized gains or losses are treated
as though they were realized and the resulting gain or loss is generally treated
as 60/40 gain or loss.
Generally, the transactions involving options, futures and forward foreign
currency contracts that may be undertaken by the Fund may result in "straddles"
for Federal income tax purposes. The straddle rules may affect the character of
gains (or losses) realized by the Fund. In addition, losses realized by the Fund
on positions that are part of a straddle may be deferred under the straddle
rules, rather than being taken into account in calculating the taxable income
for the taxable year in which such losses are realized. Because only a few
regulations implementing the straddle rules have been promulgated, the tax
consequences to the Fund of transactions in options, futures and forward foreign
currency contracts are not entirely clear. These transactions may increase the
amount of short-term capital gain realized by the Fund, which is taxed as
ordinary income when distributed to stockholders.
The Fund may make one or more of the elections available under the Code
which are applicable to straddles. If the Fund makes any of the elections, the
amount, character and timing of the recognition of gains or losses from the
affected straddle positions will be determined under rules that vary according
to the election(s) made. The rules applicable under certain of the elections may
operate to defer the recognition of losses and/or accelerate the recognition of
gains or losses from the affected straddle positions.
Because application of the straddle rules may affect the character of
gains or losses, defer losses and/or accelerate the recognition of gains or
losses from the affected straddle positions, the amount which must be
distributed to stockholders, and which will be taxed to stockholders as ordinary
income or long-term capital gain, may be increased or decreased substantially as
compared to a fund that did not engage in such transactions.
Foreign Currency Gains and Losses. Under the Code, gains or losses
attributable to fluctuations in foreign currency exchange rates which occur
between the time the Fund accrues interest or other receivables or accrues
expenses or other liabilities denominated in a foreign currency and the time the
Fund actually collects such receivables or pays such liabilities generally are
treated as ordinary income or ordinary loss. Similarly, on the disposition of
debt securities denominated in a foreign currency and on the disposition of
certain options, futures, forward foreign currency contracts and forward
contracts with respect to debt securities, gains or losses attributable to
fluctuations in the value of foreign currency between the date of acquisition of
the security or contract and the date of disposition also are treated as
ordinary gain or loss. These gains or losses, referred to under the Code as
"section 988" gains or losses, may increase or decrease the amount of the Fund's
investment company taxable income to be distributed to its stockholders as
ordinary income.
Foreign Taxes. Income received by the Fund from sources within foreign
countries may be subject to withholding and other taxes imposed by such
countries. Tax conventions between certain countries and the United States may
reduce or eliminate these taxes. Under the current income tax treaty between the
United States and New Zealand, the withholding tax imposed by New Zealand on
dividends from New Zealand sources is generally 15% and the withholding tax on
interest from New Zealand sources is generally 10%. It is impossible to
determine the rate of foreign tax in advance, since the amount of the Fund's
assets to be invested in various countries is not known.
If more than 50% of the value of the Fund's total assets at the close of
its taxable year consists of securities of foreign corporations, the Fund will
be eligible to elect to "pass-through" to the Fund's stockholders the amount of
foreign income and similar taxes paid by the Fund. If this election is made, a
stockholder will be required to include in gross income (in addition to taxable
dividends actually received) his pro rata share of the foreign income and
similar taxes paid by the Fund, and generally will be entitled either to deduct
(as an itemized deduction) his pro rata share of such foreign taxes in computing
his taxable income or to use it (subject to limitations) as a foreign tax credit
against his Federal income tax liability. Each stockholder will be notified
within 60 days after the close of the Fund's taxable year whether the Fund has
elected to "pass-through" its foreign taxes for that year and, if so, the
relevant amounts of foreign tax and foreign source income to be taken into
account by the stockholder. It cannot be determined in advance whether the Fund
will be eligible to make the foreign tax pass-through election. If the Fund is
ineligible to do so, the foreign income and similar taxes incurred by it
generally will reduce the Fund's investment company taxable income that is
distributable to stockholders.
Generally, a credit for foreign taxes is subject to the limitation that it
may not exceed the stockholder's U.S. Federal income tax attributable to his
total foreign source taxable income. For this purpose, if the pass-through
election is made, the source of the Fund's income will flow through to its
stockholders. With respect to the Fund, gains from the sale of securities
generally will be treated as derived from U.S. sources and certain currency
fluctuation gains, including fluctuation gains from foreign currency denominated
debt securities, receivables and payables will be treated as derived from U.S.
sources. The limitation on the foreign tax credit is applied separately to
foreign source passive income and to certain other types of income. Stockholders
may be unable to claim a credit for the full amount of their proportionate share
of foreign taxes paid by the Fund. The foreign tax credit may offset only 90% of
the alternative minimum tax (prior to reduction for the "regular" tax liability
for the year) imposed on corporations and individuals. In addition, foreign
taxes may not be deducted by a stockholder that is an individual in computing
alternative minimum taxable income.
The foregoing is a general description of the 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.
Disposition of Shares. Upon a taxable disposition (for example, a
redemption) of Fund shares, a stockholder may realize a taxable gain or loss,
depending upon his basis in his shares. That gain or loss will be a capital gain
or loss if the shares are capital assets in the stockholder's hands, and
generally will be long-term or short-term depending upon the stockholder's
holding period for the shares. Any loss realized by a stockholder on a
disposition of Fund shares held by the stockholder for six months or less will
be treated as a long-term capital loss to the extent of any distributions of
capital gain dividends received by the stockholder with respect to such shares.
Any loss realized on a disposition will be disallowed to the extent the shares
disposed of are replaced (whether by reinvestment of distributions or otherwise)
within a period of 61 days beginning 30 days before and ending 30 days after the
date of disposition of the shares. In such a case, the basis of the shares
acquired will be adjusted to reflect the disallowed loss.
Under certain circumstances, the sales charge incurred in acquiring shares
of the Fund may not be taken into account in determining the gain or loss on the
disposition of those shares. This rules applies where shares of the Fund are
exchanged within 90 days after the date they were purchased and new shares of a
Capstone Fund or another regulated investment company are acquired without a
sales charge or at a reduced sales charge. In that case, the gain or loss
recognized on the exchange will be determined by excluding from the tax basis of
the shares exchanged all or a portion of the sales charge incurred in acquiring
those shares. This exclusion applies to the extent that the otherwise applicable
sales charge with respect to the newly acquired shares is reduced as a result of
having incurred a sales charge initially. The portion of the sales charge
affected by this rule will be treated as a sales charge for the new shares.
Backup Withholding. The Fund may be required to withhold Federal income
tax at the rate of 31% of all taxable distributions from the Fund and of gross
proceeds from the redemption of the Fund shares payable to stockholders who fail
to provide the Fund with their correct taxpayer identification number or to make
required certifications, or who have been notified by the Internal Revenue
Service that they are subject to backup withholding. Corporate stockholders and
certain other stockholders specified in the Code generally are exempt from
backup withholding. Backup withholding is not an additional tax. Any amounts
withheld may be credited against the stockholder's Federal income tax liability.
Foreign Stockholders - U.S. Federal Income Taxation. U.S. Federal income
taxation of a stockholder who, as to the United States, is a non-resident alien
individual, a foreign trust or estate, a foreign corporation, or a foreign
partnership (a "foreign stockholder") depends on whether the income from the
Fund is "effectively connected" with a U.S. trade or business carried on by such
stockholder, as discussed generally below. Special U.S. Federal income tax rules
that differ from those described below may apply to foreign persons who invest
in the Fund. For example, the tax consequences to a foreign stockholder entitled
to claim the benefits of an applicable tax treaty may be different from those
described below. Foreign stockholders are advised to consult their own tax
advisers with respect to the particular tax consequences to them of an
investment in the Fund.
Foreign Stockholders - Income Not Effectively Connected. If the income
from the Fund is not effectively connected with a U.S. trade or business carried
on by the stockholder, distributions of investment company taxable income
generally will be subject to a U.S. Federal withholding tax of 30% (or lower
treaty rate) on the gross amount of the distribution. Foreign stockholders may
also be subject to the U.S. Federal withholding tax on the income resulting from
any election by the Fund to treat foreign taxes paid by it as paid by its
stockholders, but foreign stockholders will not be able to claim a credit or
deduction for the foreign taxes treated as having been paid by them.
Distributions of net capital gains, if any, designated by the Fund as
capital gain dividends (as well as amounts retained by the Fund which are
designated as undistributed capital gains) and gain realized upon a disposition
of Fund shares generally will not be subject to U.S. Federal income tax unless
the foreign stockholder is a non-resident alien individual and is physically
present in the United States for more than 182 days during the taxable year.
However, this rule only applies in exceptional cases because any individual
present in the United States for more than 182 days during the taxable year
generally is treated as a resident for U.S. Federal income tax purposes and is
taxable on his worldwide income at the graduated rates applicable to U.S.
citizens, rather than the 30% U.S. Federal withholding tax. In the case of
certain foreign stockholders, the Fund may be required to withhold U.S. Federal
income tax at a rate of 31% of distributions of net capital gains and of the
gross proceeds from a redemption of Fund shares unless the stockholder furnishes
the Fund with certifications regarding the stockholder's foreign status. See
"Backup Withholding."
Foreign Stockholders - Income Effectively Connected. If the income from
the Fund is effectively connected with a U.S. trade or business carried on by a
foreign stockholder, then all distributions and any gains realized upon the
disposition of Fund shares will be subject to U.S. Federal income tax at the
graduated rates applicable to U.S. citizens and domestic corporations. Foreign
stockholders that are corporations may also be subject to the branch profits
tax.
Foreign Stockholders - Estate Tax. Foreign individuals generally are
subject to U.S. Federal estate tax on their U.S. situs property, such as shares
of the Fund, that they own at the time of their death. Certain credits against
such tax and relief under applicable tax treaties may be available.
Other Taxes. Distributions and redemption proceeds with respect to the
Fund also may be subject to state, local and foreign taxes, depending upon each
stockholder's particular situation. Stockholders are advised to consult their
tax advisers with respect to the particular tax consequences to them of an
investment in the Fund.
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, of record, more than
five percent of the Fund's shares as of February 16, 2000:
Name and Address Percent of Ownership
Smith Barney Shearson 22.8260%
333 West 34th Street, 7th Floor
New York, New York 10001
Charles Schwab & Company, Inc. 9.1259%
Special Custody Account for Benefit
of its Customers
101 Montgomery Street
San Francisco, California 94104
FINANCIAL INFORMATION
The Report of Independent Certified Public Accountants and financial
statements of the Fund included in its Annual Report to shareholders for the
fiscal year ended October 31, 1998 are incorporated herein by reference to such
Annual Report. Copies of the Fund's Annual and Semi-Annual Reports may be
obtained without charge by calling 1-800-262-6631.
OTHER INFORMATION
Custody of Assets. All securities owned by the Fund and cash from the sale
of securities in the Fund's investment portfolio are held by The Fifth Third
Bank (the "custodian"), 38 Fountain Square, Cincinnati, Ohio 45263.
Stockholder Reports. Semi-annual reports are furnished to stockholders,
and annually the financial statements in such reports are audited by the
independent accountants.
Independent Accountants. Briggs, Bunting & Dougherty, LLP, Two Logan
Square, Suite 2121, Philadelphia, PA 19103-4901, the independent accountants for
the Fund, performs annual audits of the Fund's financial statements.
Legal Counsel. Dechert Price & Rhoads, 1775 Eye Street, N.W., Washington,
DC 20006 is legal counsel to the Fund.
Transfer and Shareholder Servicing Agent. The Fund's transfer and
shareholder servicing agent is PFPC, Inc., 211 South Gulph Road, P.O. Box 61503,
King of Prussia, Pennsylvania 19406-3101
<PAGE>
APPENDIX A
RATING DEFINITIONS
LONG-TERM RATINGS
AAA rated corporations, financial institutions, governments or asset-backed
financing structures (entities) have an extremely strong capacity to pay
interest and repay principal in a timely manner.
AA rated entities have a strong capacity to pay interest and repay principal in
a timely manner and differ from the highest rated entities only in small degree.
A rated entities have a strong capacity to pay interest and repay principal in a
timely manner although they may be somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than those in higher
rating categories.
BBB rated entities have a satisfactory or adequate capacity to pay interest and
repay principal in a timely manner. Protection levels are more likely to be
weakened by adverse changes in circumstances and economic conditions than for
borrowers in higher rating categories.
Entities rated "BB", "B", "CCC", "CC" and "C" are regarded as having
predominantly speculative characteristics with respect to the capacity to pay
interest and repay principal. "BB" indicates the least degree of speculation and
"C" the highest. While such entities will likely have some quality and
protective characteristics these are outweighed by large uncertainties or major
exposures to adverse conditions.
BB rated entities face ongoing uncertainties or exposure to adverse business,
financial, or economic conditions which could lead to a less adequate capacity
to meet timely debt service commitments.
B rated entities are more vulnerable to adverse business, financial or economic
conditions than entities in higher rating categories. This vulnerability is
likely to impair the borrower's capacity or willingness to meet timely debt
service commitments.
CCC rated entities have a currently identifiable vulnerability to default and
are dependent upon favorable business, financial and economic conditions to meet
timely debt service commitments. In the event of adverse business, financial or
economic conditions, they are not likely to have the capacity to pay interest
and repay principal.
CC is typically applied to debt subordinated to senior debt that is assigned an
actual or implied "CCC" rating.
C rated entities have a high risk of default or are reliant on arrangements with
third parties to prevent defaults.
D rated entities are in default. The rating is assigned when interest payments
or principal payments are not made on the date due, even if the applicable grace
period has not expired. The "D" rating is also used upon the filing of
insolvency petition or a request to appoint a receiver if debt service payments
are jeopardized.
Plus (+) or Minus (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
Rating Watch highlights an emerging situation which may materially affect the
profile of a rated corporation.
SHORT-TERM RATINGS
Includes Commercial Paper (up to 12 months)
A.1 rated entities possess a strong degree of safety regarding timely payment.
Those entities determined to possess extremely strong safety characteristics are
denoted with an "A.1+" designation.
A.2 rated entities have a satisfactory capacity for timely payment. However, the
relative degree of safety is not as high as for those rated "A.1".
A.3 rated entities have an adequate capacity for timely repayment. They are more
vulnerable to the adverse effects of changes in circumstances than obligations
carrying the higher designations.
B rated entities have only a speculative capacity for timely payment. Those with
a "B.1" have a greater capacity to meet obligations and are somewhat less likely
to be weakened by adverse changes in the environment and economic conditions
than those rated "B.2".
C.1 rated entities possess a doubtful capacity for payment.
D.1 rated entities are in default.
Ratings of BBB- (Long-Term) or A.3 (Short-Term) and above are investment grade.
