<PAGE> 1
CAPSTONE NIKKO JAPAN FUND
A SERIES OF CAPSTONE INTERNATIONAL SERIES TRUST
SUPPLEMENT DATED MAY 24, 1995
TO
PROSPECTUS DATED MARCH 1, 1995
THE FOLLOWING PARAGRAPH IS ADDED TO THE END OF THE PURCHASING SHARES SECTION ON
PAGE 17 OF THE PROSPECTUS:
Effective June 7, 1995, payment for all orders to purchase Fund shares must
be received by the Fund's Transfer Agent within three business days after the
order was placed.
THE FOLLOWING INFORMATION REPLACES THE LAST TWO SENTENCES OF THE TELEPHONE
PURCHASE AUTHORIZATION (INVESTING BY PHONE) SECTION ON PAGE 17 OF THE
PROSPECTUS:
Effective June 7, 1995, payment for the telephone purchase must be received
by the Transfer Agent within three business days after the order is placed. If
payment is not received within three business days after the order is placed,
the stockholder will be liable for all losses incurred as a result of the
purchase. (Prior to June 7, 1995, payment must be received by the Transfer Agent
within 7 days).
<PAGE> 2
CAPSTONE NIKKO JAPAN FUND
(A FUND OF CAPSTONE INTERNATIONAL SERIES TRUST)
5847 San Felipe, Suite 4100
Houston, TX 77057
1-800-262-6631
March 1, 1995
PROSPECTUS
The investment objective of Capstone Nikko Japan Fund (the "Fund") is to
seek an average annual total return from a portfolio of shares in Japanese
companies which exceeds the average annual total return of the First Section of
the Tokyo Stock Exchange as measured by the Tokyo Stock Price Index (the
"Benchmark").
This Prospectus sets forth certain information about Capstone International
Series Trust and the Fund that a prospective investor should know before
investing. Investors should read and retain this Prospectus for future
reference.
A STATEMENT OF ADDITIONAL INFORMATION about the Fund dated March 1, 1995
has been filed with the Securities and Exchange Commission and contains further
information about the Fund. A copy of the Statement of Additional Information
may be obtained without charge by calling or writing the Fund at the telephone
number or address listed above. The Statement of Additional Information is
incorporated herein by reference.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSIONER NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSIONER PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE> 3
CAPSTONE NIKKO JAPAN FUND
<TABLE>
<S> <C>
Investment Adviser: Administrator:
Nikko Capital Management (U.S.A.), Inc. Capstone Asset Management Company
489 Fifth Avenue, 6th Floor 5847 San Felipe, Suite 4100
New York, New York 10017 Houston, Texas 77057
Distributor: Transfer and Dividend Paying Agent:
Capstone Asset Planning Company Fund/Plan Services, Inc.
5847 San Felipe, Suite 4100 P.O. Box 874
Houston, Texas 77057 2 W. Elm Street
1-800-262-6631 Conshohocken, Pennsylvania 19428
</TABLE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary................................................... 3
Fund Expenses........................................................ 5
Financial Highlights................................................. 7
Investment Objective and Policies.................................... 8
Risk Factors......................................................... 11
Investment Restrictions.............................................. 12
Performance Information.............................................. 12
Management of the Fund............................................... 13
Purchasing Shares.................................................... 16
Distributions and Taxes.............................................. 19
Redemption and Repurchase of Shares.................................. 20
Determination of Net Asset Value..................................... 22
Portfolio Transactions and Brokerage................................. 23
Stockholder Services................................................. 23
General Information.................................................. 25
Appendix............................................................. 27
</TABLE>
No dealer, salesman, or any other person has been authorized to give any
information or to make any representations, other than those contained in this
Prospectus, in connection with the offer contained in this Prospectus and, if
given or made, such other information or representations must not be relied upon
as having been authorized by the Fund or its Distributor. This Prospectus does
not constitute an offer by the Fund or by the Distributor to sell or a
solicitation of an offer to buy any of the securities offered hereby in any
jurisdiction to any person to whom it is unlawful for the Fund or the
Distributor to make such offer or solicitation in such jurisdiction.
2
<PAGE> 4
CAPSTONE NIKKO JAPAN FUND
PROSPECTUS SUMMARY
Type of Company................. The Fund, which commenced operations on July
10, 1989, is a series of an open-end
diversified management investment company.
(see page 25)
Investment Objective............ The objective of the Fund is to seek an
average annual total return from a portfolio
of shares in Japanese companies which exceeds
the average annual total return of the
Benchmark. (see page 8)
Investment Policies............. The Fund will seek to achieve this objective
by use of the Nikko Capital Management
(U.S.A.), Inc.'s proprietary Return Reversal
Strategy. The Return Reversal Strategy
identifies the bottom 25% of the Tokyo Stock
Exchange First Section's issues according to
the past 96-month performance period and then
ranks them in accordance to their exposure to
"Sales Revenue to Price", one of the 12 risk
indices of the BARRA/Nikko Japanese Equity
Risk Model, a dedicated computer system
developed for the Japanese equity market by
The Nikko Securities Co., Ltd. in conjunction
with BARRA, an international investment
consulting firm specializing in applications
of modern portfolio theory and investment
technology. (see page 8)
Investment Risk................. Investments in Japanese securities involve
certain risks not associated with U.S.
investments. These include currency exchange
rate fluctuations, non-negotiable brokerage
commissions, differences in securities
regulation, less liquidity and less publicly
available information about Japanese
securities. (see page 11)
Investment Adviser.............. Nikko Capital Management (U.S.A.), Inc. (the
"Adviser") is the Fund's Investment Adviser.
The Adviser provides investment advice and
portfolio management services to the Fund.
The Adviser is paid at an annual rate of
0.40% of the Fund's average net assets. (see
page 13)
Administrator................... Capstone Asset Management Company is the
Fund's Administrator (the "Administrator").
The Administrator provides advisory and/or
administrative services to the other
investment companies in the Capstone Group.
The Administrator is paid at an annual rate
of 0.20% of the Fund's average net assets,
plus a fee to cover the cost of
3
<PAGE> 5
accounting, bookkeeping and pricing services
it performs for the Fund. (see page 14)
Dividends and Distribution...... The Fund pays dividends from net investment
income and distributions from long-term
capital gains, if any, at least annually.
(see page 19)
Offering Price and Sales
Charge........................ The public offering price of Fund shares is
equal to the net asset value plus a sales
charge of up to 4.75% of the public offering
price (up to 4.99% of the amount invested),
reduced on investments of $100,000 or more.
The Fund bears certain expenses pursuant to a
written Rule 12b-1 distribution plan. (see
page 16)
Minimum Purchase................ The minimum initial investment is $200,
except for continuous investment plans, and
there is no minimum for subsequent purchases.
(see page 16)
Redemption...................... Shares of the Fund are redeemed at the net
asset value determined as of the close of
trading on the Japanese Exchanges on the
business day following receipt of the
redemption request. (see page 20)
Distributor..................... The Distributor is Capstone Asset Planning
Company.
4
<PAGE> 6
FUND EXPENSES
<TABLE>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases 4.75% on initial investment
(as a percentage of offering price)
Maximum Sales Load Imposed on Reinvested 0%
Dividends (as a percentage of offering
price)
Deferred Sales Load (as a percentage of 0%
original purchase price or redemption of
proceeds, as applicable)
Redemption Fees (as a percentage of amount 0%
redeemed, if applicable)
Exchange Fee 0%
A 4.75% maximum sales load applies to
exchanges of shares that have not been
outstanding at least 15 days
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management and Administrative Fees 0.00%
(After expense reimbursements)
12b-1 Fee* 0.35%
Other Expenses 3.02%
Total Fund Operating Expenses 3.37%
</TABLE>
EXAMPLE
<TABLE>
<CAPTION>
1 3 5 10
YEAR YEARS YEARS YEARS
---- ----- ----- -----
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000
investment, assuming (1) 5% annual return and (2)
redemption at the end of each time period: $ 80 $ 146 $ 215 $ 396
</TABLE>
---------------
* Under rules of the National Association of Securities Dealers, Inc. (the
"NASD"), a 12b-1 fee may be treated as a sales charge for certain purposes
under those rules. Because the 12b-1 fee is an annual fee charged against the
assets of a Fund, long-term stockholders may indirectly pay more in total
sales charges than the economic equivalent of the maximum front-end sales
charge permitted by rules of the NASD (see "Distributor").
The purpose of the foregoing table is to assist investors in understanding
the various costs and expenses that an investor in the Fund will bear directly
or indirectly. The information disclosed in the table under the heading
"Shareholder Transaction Expenses" is based on the maximum sales load now in
effect for the Fund. See "Purchasing Shares" and "Redemption and Repurchase of
Shares" for more complete descriptions of those expenses, including a
description of available reductions in the sales charge. The information
disclosed in the table for "Other Expenses" is based on expenses actually
incurred by the Fund during the fiscal year ended October 31, 1994. In light of
the Fund's objective of investing primarily in Japanese securities, the
operating expenses of the Fund are expected to be higher than those of
investment companies investing in domestic securities
5
<PAGE> 7
(see "Risk Factors"). The management and administration fee information
contained in the table reflects deductions for expense reimbursements by the
Fund's Adviser and Administrator during the fiscal year ended October 31, 1994.
Without the expense reimbursements, the fees paid to the Adviser and
Administrator, respectively, would have amounted to 0.40% and 0.20% of the
Fund's average net assets, total Fund operating expenses would have been 3.85%,
and expenses in the same 1, 3, 5 and 10 year periods shown in the Example would
have been $84, $159, $236 and $436, respectively. A separate charge by the
Administrator for accounting, pricing and bookkeeping services is included in
"Other Expenses". See "Management of the Fund" for more complete descriptions of
the fees paid to the Adviser and Administrator. The information disclosed in the
table for "12b-1 Fees" has been restated to reflect the maximum distribution
expense that may be incurred by the Fund. The actual amount paid by the Fund
during the fiscal year ended October 31, 1994 was 0.23% of its average net
assets. The example which immediately follows the table should not be considered
a representation of past or future expenses. Actual Fund expenses may be greater
or lesser than those shown in the example or in the table.
6
<PAGE> 8
FINANCIAL HIGHLIGHTS
The following table sets forth the per share operating performance data for
a share of capital stock outstanding, total return, ratios to average net assets
and other supplemental data for each year indicated. This information has been
derived from information provided in the Fund's financial statements which have
been examined by Tait, Weller & Baker, independent certified public accountants.
The Fund's Annual Report contains additional performance information and is
available free of charge by calling the Fund at 1-800-262-6631.
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
------------------------------------------------------------------------
1994 1993 1992 1991 1990 1989(1)
------ ------ ------- ------ ------- -------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE DATA
Net asset value at beginning of period.... $ 6.99 $ 4.89 $ 7.46 $ 7.96 $ 10.62 $ 10.00
------ ------ ------- ------ ------- -------
Income from investment operations:
Net investment income (loss).............. (.21) (.20) (.23) (.14) (.09) .01
Net realized and unrealized gain (loss) on
investments............................. 1.25 2.30 (2.34) (.36) (2.38) .61
------ ------ ------- ------ ------- -------
Total from investment operations.......... 1.04 2.10 (2.57) (.50) (2.47) .62
------ ------ ------- ------ ------- -------
Less distributions from net realized gain
on investments.......................... -- -- -- -- .19 --
------ ------ ------- ------ ------- -------
Net asset value at end of period.......... $ 8.03 $ 6.99 $ 4.89 $ 7.46 $ 7.96 $ 10.62
====== ====== ======== ====== ======== ========
TOTAL RETURN*............................. 14.88% 42.94% (34.45)% (6.28)% (23.73)% 6.20%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period
(in thousands).......................... $3,484 $3,096 $ 2,130 $3,552 $ 7,801 $19,647
Ratios:
Operating expenses to average
net assets.............................. 3.25%(2) 4.26%(2) 4.38%(2) 2.74%(2) 1.53% 1.36%**
Net investment income (loss) to average
net assets.............................. (2.62)%(2) (3.54)%(2) (3.42)%(2) (2.01)%(2) (.81)% .32%**
Portfolio turnover rate................... 57% 42% 112% 24% 39% 6%
</TABLE>
---------------
(1) For the period July 10, 1989 (commencement of operations) to October 31,
1989.
(2) Before reimbursement, the ratio of expenses and the net investment loss to
average net assets, respectively, were 3.85% and (3.22)%, in 1994; 4.86% and
(4.14)% in 1993; 4.98% and (4.02)% in 1992; and 3.07% and (2.34)% in 1991.
* Calculated without sales charge
** Annualized
7
<PAGE> 9
INVESTMENT OBJECTIVE AND POLICIES
The objective of the Fund is to seek an average annual total return from a
portfolio of shares in Japanese companies which exceeds the average annual total
return of the First Section of the Tokyo Stock Exchange ("TSE1") as measured by
the Tokyo Stock Price Index ("TOPIX"). The Fund will seek to achieve this
objective by use of the Adviser's proprietary Return Reversal Strategy (the
"Reversal Strategy") as the source of greater alpha returns. The Reversal
Strategy identifies the bottom 25% of the TOPIX issues according to the past
96-month performance period and then ranks them in accordance to their exposure
to Sales Revenue to Price.
The Fund's portfolio is constructed in three stages. First, a purely
technical screening of all stocks in the TOPIX universe is performed and the
issues whose performance ranks in the bottom 25% of the universe as measured
over the preceding 96-month period are identified. In order to measure the
fundamental value of these issues, the next stage in the strategy's process is
to rank these identified issues in accordance with their exposure to "Sales
Revenue to Price". This fundamental screening minimizes the risk of including
companies that have fundamental financial or business problems. In the third and
final step of the strategy, those issues that rank in the top 25% in terms of
"Sales Revenue to Price" are selected for inclusion in the Fund's portfolio.
The Reversal Strategy is based on the theory that, in the Japanese market,
equity securities which underperform the market during one period are likely to
overperform the market in the succeeding period ("return reversal effect").
Similarly, those stocks that overperform in the first period are likely to
underperform in the following period. According to this theory, these types of
deviations from a stock's fundamental value occur due to the tendency of
investors to overreact, either positively or negatively, to market information.
Over the longer term, however, according to this hypothesis, stock prices tend
to revert to their fundamental value. Accordingly, stocks which are currently
underperforming due to investor overreaction to negative information would,
under this theory, be excellent candidates for outperforming the market in the
near future.
Despite the existence of some empirical evidence and academic studies to
support the existence of the "return reversal effect", its validity in the
Japanese market has not been fully investigated nor has it been widely applied
to portfolio management. Based on its own analyses, however, the Adviser
believes that this theory represents one of the most significant anomalies that
can be successfully capitalized upon in order to achieve a superior risk/reward
profile in managing a portfolio of Japanese equity securities. There can, of
course, be no assurance that the Adviser's belief is correct or that the
Reversal Strategy will be successful in achieving the Fund's investment
objective.
TOPIX has been selected to serve as the standard performance comparison or
benchmark of the Fund. The index comprises all the stocks currently listed on
the TSE1 weighted by market capitalization. The stocks together account for over
90% of all Japanese equities traded on the Tokyo Stock Exchange.
It is expected that the investment portfolio of the Fund will consist of
about 75 of the stocks listed on the TSE1. Portfolio turnover is expected to be
higher than that of an index fund in view of the objective of pursuing active
returns.
The Fund is also authorized to engage in a number of practices designed to
manage or hedge against risks, such as fluctuations in securities prices and
fluctuations in currency exchange rates
8
<PAGE> 10
and to adjust its risk exposure relative to the Benchmark. These practices,
which the Fund will undertake only for hedging purposes, include entering into
interest-rate, index and currency futures contracts, and purchasing and writing
put and call options on those contracts, on individual securities, on currencies
and on stock indices (collectively, "derivatives"). The Fund may also enter into
forward foreign currency contracts. The extent to which the Fund may engage in
such practices will depend on the availability of the various hedging
instruments which are both suitable for use by the Fund and authorized for
investment by a U.S. registered investment company. In addition, the Fund's
exchange-traded options transactions are subject to trading and position limits.
Tax considerations also may limit the Fund's ability to engage in forward
contracts and futures and options transactions.
Interest rate and currency futures contracts create an obligation to
purchase or sell specified amounts of debt securities or currency on a specified
future date. Although these contracts generally call for making or taking
delivery of the underlying securities or currency, the contracts are in most
cases closed out before the maturity date by entering into an offsetting
transaction which may result in a profit or loss.
Securities index futures contracts are contracts to buy or sell units of a
particular index of securities at a specified future date for an amount equal to
the difference between the original contract purchase price and the price at the
time the contract is closed out, which may be at maturity or through an earlier
offsetting transaction.
The purchase or writing of put or call options on futures contracts,
individual securities or currencies would give the Fund, respectively, the right
or obligation to sell or purchase the underlying futures contract, security or
currency at the stated exercise price any time before the option expires. The
purchase or writing of put and call options on stock indices would give the
Fund, respectively, the right or obligation to receive or pay a specified amount
at any time prior to expiration of the option. The value of the option varies
with the aggregate price movements of the stocks reflected in the index. The
Fund's risk in purchasing an option, if the price of the underlying currency,
security or index moves adverse to the purchaser, is limited to the premium it
pays for the option. If price movements are favorable, on the other hand, the
option will increase in value and the Fund would benefit from the sale or
exercise of the option. As the writer of an option, the Fund would receive a
premium. The premium would be a gain to the Fund if price movements in the
underlying items are favorable to the writer and would reduce the loss if price
movements are unfavorable. Any call options written by the Fund are "covered",
i.e., backed by securities owned by the Fund. The writing of a covered call
option tends to limit the Fund's opportunity to profit from an increase in value
of the underlying securities to the amount of the premium.
The Fund may engage in options and futures transactions on exchanges and in
the over-the-counter ("OTC") markets. Exchange-traded contracts generally have
standardized strike prices and expiration dates and their performance is
guaranteed by an exchange or clearing corporation. OTC transactions, on the
other hand, are generally negotiated directly between the buyer and the seller
and there is no independent guarantor. Similar types of exchange-traded and OTC
contracts and options may be available in markets outside the U.S. from time to
time. The Fund may invest in such non-U.S. contracts and options to the extent
they are suitable for the Fund and are permissible investments for a U.S.
registered investment company.
9
<PAGE> 11
In addition to purchasing and writing put and call options on foreign
currencies, the Fund may also enter into forward foreign currency contracts as a
hedge against possible variations in the exchange rates of currencies in which
it conducts its activities. Forward currency contracts are two-party agreements
to purchase or sell a specified currency at a specified future date and price.
The Fund will not enter into or maintain a position in these contracts if their
consummation would obligate the Fund to deliver an amount of foreign currency
greater than the value of the Fund's assets denominated or quoted in, or its
currency convertible into, that currency.
These hedging transactions involve brokerage costs and require the Fund to
make margin deposits against its performance obligations under the contracts.
The Fund may also be required to segregate assets in an amount equal to the
value of instruments underlying its futures contracts, call options purchased
and put options written; to otherwise "cover" its futures and options positions;
or to limit these transactions so that they are backed to a level of 300 percent
by total Fund assets. The aggregate of initial margin deposits for futures
contracts and related options and premiums paid for open futures options may not
exceed 5 percent of the fair market value of the Fund's assets.
There can be no assurance that the Fund's hedging transactions will be
successful. Securities prices, interest rates and currency exchange rates may
change in unanticipated manners or may move in ways which do not correlate
closely to movements in the value of securities held by the Fund. Additionally,
there can be no assurance that offsetting transactions will be available at any
given time to enable the Fund to close out particular futures or options
contracts. If these contracts cannot be closed out, the Fund may incur losses in
excess of its initial margin deposit. The bankruptcy of a broker or other person
with whom the Fund has an open futures or options position may also expose the
Fund to risk of losing its margin deposits or collateral. See also "Investment
Practices and Restrictions" in the Statement of Additional Information.
The Fund may from time to time lend securities from its portfolio, with a
market value not exceeding 10% of its total assets at the time of the loan, to
banks, brokers and other financial institutions and receive collateral in cash
or securities issued or guaranteed by the United States Government or its
instrumentalities which will be maintained at all times in an amount equal to at
least 100% of the current market value of the loaned securities. During the
period of such a loan, the Fund will receive income on both the loaned
securities and the collateral, or on the investment of any cash received as
collateral, and thereby increase its yield. With respect to the lending of
portfolio securities, there is the risk of failure by the borrower to return the
securities involved in such transactions, in which event the Fund may incur a
loss.
There can be no assurance that the Fund will achieve its investment
objective. The investments of the Fund are subject to market fluctuations and
other risks inherent in investing in securities and, despite any attempts to
hedge or manage risk, the value of the Fund's shares and the income from them
may go down as well as up. The Fund's investment flexibility may be limited by
restrictions on foreign investment in certain Japanese securities. In addition,
the Fund's flexibility to structure its portfolio to follow the Reversal
Strategy may be limited by various regulatory requirements applicable to the
Fund as a registered investment company.
The investment objective of the Fund is not a fundamental policy and may be
changed without stockholder approval.
The portfolio turnover rate for the fiscal years ended October 31, 1994 and
1993 was 57% and 42%, respectively.
10
<PAGE> 12
RISK FACTORS
United States persons investing in securities of Japanese issuers should be
aware of certain information about Japan and international investment which can
make this type of investing different from investments in securities of United
States issuers.
The Japanese economy has grown substantially over the past three decades.
Early reliance on heavy industries subsequently shifted to higher technology
products assembly and, most recently, to automobile, electrical and electronic
production, and its success in exporting its products has generated a sizeable
trade surplus. Japan has recently become the largest creditor nation and a
significant donor of foreign aid. Its economy typically exhibits low inflation.
Japan's economic success is leading to problems with its trading partners,
particularly the U.S., to whom it sells significantly more than it buys in
return. Even the dramatic appreciation of the yen relative to the dollar -- from
Y 239 to approximately 97 per dollar between September 1985 and February
1995 -- has not altered the trade imbalance with the U.S. However, Japan is
taking steps to stimulate domestic demand through tax deductions, increased
spending on construction and redevelopment, and easing of the discount rate.
Efforts are underway, in particular, to open up Japanese markets to more U.S.
products. Internally, certain commentators have seriously pointed to Japan's
rapidly aging population, and outdated retail and distribution system, a rigid
education system, and a decrease in the work ethic among Japanese youth as
potential sources of future economic difficulties. However, the Japanese
Government is now considering ways to revitalize the Japanese society by means
of income tax reform and deregulation of complicated traditional trading system
and public restriction to encourage more competition and innovation. On the
other hand, private companies are successfully making a global diversification
of their production facilities to cope with the yen appreciation against the
U.S. dollar.
The Adviser expects that the Japanese economy will grow at an annual rate
of about 1.80% in real term in fiscal year 1995 as compared to 1.10% in fiscal
year 1994. The economy is recovering from its low point in October of 1993.
There is no fear of inflation, which will be controlled with a CPI increase of
0.4% in fiscal year 1995. Corporate earnings for all industries posted a 9.1%
increase during fiscal year 1994; we project a 26.40% increase for fiscal year
1995 due to the nationalization and re-energizing efforts.
We expect that the effect of the Kobe earthquake will push down the GDP
rate by approximately -0.10% in the short term, but we expect that it will raise
the GDP in the midterm period by approximately 0.40% for the fiscal year 1995
and 0.60% for fiscal year 1996.
We expect the steady performance in the stock market will continue
throughout this year. We will continue to manage the Fund using the Return
Reversal Strategy which is extremely effective in selecting promising
under-performing and under-valued stocks in the recovery phase of the Japanese
economy.
Various other factors involved in international investing generally may
affect the Fund's performance either favorably or unfavorably. These include:
fluctuations in currency exchange rates; possible imposition of, or changes in,
exchange controls; costs of currency conversion; non-negotiable brokerage
commissions (which may result in higher commissions); less publicly available
information; different accounting standards; less liquidity and greater market
volatility; difficulties of enforcing obligations in other countries;
differences in the nature and quality of securities
11
<PAGE> 13
regulation; differences in taxation (which may include withholding taxes on
income earned on Fund securities and transfer tax on sales proceeds); war;
expropriation; political or social unrest; diplomatic developments; and natural
disasters.
The Fund's management will attempt to be alert to these factors and to act
to mitigate any unfavorable consequences to the extent practicable, but there
can be no assurance its efforts will be successful or that protective action
will be feasible.
The operating expense ratio of the Fund can be expected to be higher than
that of an investment company investing exclusively in securities of United
States issuers since the expenses of the Fund (such as custodial, currency
exchange, valuation and communications costs) are higher. Because of its
emphasis on Japan, the Fund should be considered as a vehicle for
diversification of investments and not as a balanced investment program.
INVESTMENT RESTRICTIONS
The Fund has adopted certain investment restrictions which cannot be
changed without approval by holders of a majority of the Fund's shares. These
restrictions, which are designed to enhance the realization of the Fund's
investment objective, provide, among other things, that the Fund may not:
-- As to 75% of its total assets, invest more than 5% of the value of such
assets in the securities of any one issuer, or purchase more than 10% of
the voting securities of any one issuer (except for investments in
securities issued or guaranteed by the United States Government, its
agencies or instrumentalities).
-- Invest more than 25% of its total assets (taken at market value at the
time of each investment) in the securities of issuers in any particular
industry or in securities issued or guaranteed by the Japanese
government or its agencies or instrumentalities provided that this
restriction shall not prevent the Fund from purchasing the securities of
any issuer pursuant to the exercise of rights distributed to the Fund by
the issuer, except that no such purchase may be made if as a result the
Fund would no longer be a diversified investment company as defined in
the Investment Company Act of 1940.
Additional investment restrictions of the Fund, some of which are
fundamental policies that may not be changed without stockholder approval, are
set forth under the caption "Investment Practices and Restrictions" in the
Statement of Additional Information.
PERFORMANCE INFORMATION
The Fund may from time to time include figures indicating the Fund's yield,
total return or average annual total return in advertisements or reports to
stockholders or prospective investors. Quotations of the Fund's yield will be
based on all investment income per share earned during a given 30-day period
(including dividends and interest), less expenses accrued during the period
("net investment income"), and will be computed by dividing net investment
income by the maximum public offering price per share on the last day of the
period. Average annual total return and total return figures represent the
increase (or decrease) in the value of an investment in the Fund over a
specified period. Both calculations assume that all income dividends and capital
gain
12
<PAGE> 14
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 the maximum sales charge and a proportional share of Fund expenses on an
annual basis. The results, which are annualized, represent an average annual
compounded rate of return on a hypothetical investment in the Fund over a period
of 1, 5, and 10 years ending on the most recent calendar quarter (but not for a
period greater than the life of the Fund). Quotations of total return, which are
not annualized, represent historical earnings and asset value fluctuations.
Total return figures used in advertisements or sales literature will not usually
reflect the deduction of the maximum sales charge which if deducted would reduce
the Fund's total return. Performance figures are based on past performance and
are not a guarantee of future results.
MANAGEMENT OF THE FUND
Capstone Nikko Japan Fund is a series of Capstone International Series
Trust, an open-end diversified management investment company, commonly called a
mutual fund. The management and affairs of the Fund and the Trust are supervised
by the Trust's Board of Trustees. Through the purchase of Fund shares, investors
with goals similar to the investment objective of the Fund can participate in
the investment performance of a diversified portfolio of investments designed to
meet that objective.
ADVISER
Nikko Capital Management (U.S.A.), Inc. (the "Adviser") provides investment
advice, portfolio management and brokerage allocation services to the Fund. The
Adviser is a wholly-owned subsidiary of Nikko International Capital Management
Co., Ltd., Tokyo and is registered as an investment adviser under the Investment
Advisers Act of 1940. The Adviser provides asset management and advisory
services to pension plans and other institutional investors and currently has
funds of approximately $1.6 billion under management or advice. The Adviser's
parent company, Nikko International Capital Management Co., Ltd., Tokyo, has
funds of approximately $16 billion under management or advice. Nikko
International Capital Management Co., Ltd., Tokyo is a separately managed member
of the Nikko Securities Co., Ltd. group of companies. Nikko Securities Co., Ltd.
is one of the largest broker-dealers in Japan.
The Adviser was incorporated under the laws of the State of New York on
June 8, 1981 for an indefinite period of duration and has issued and paid in
capital of $1 million. The Adviser's directors are: Shigekazu Kurishima
(Chairman & President), Tadao Kobayashi (Director), Higashino Kazuhiro
(Director), Yukihiro Noguchi (Director), and Stanley Kirtman (Director & Chief
Investment Officer).
Portfolio decisions for the Fund are made by the Portfolio Manager, Mr.
Tetsuya Itoh. After graduating from Chuo University in 1981, Mr. Itoh began his
career at Canon Inc. In 1990 he joined Nikko International Capital Management
Co., Ltd., Tokyo as an investment strategist in the International Planning
Division where he was responsible for marketing strategies and product
development. He was named Portfolio Manger of the Fund in 1994.
As compensation for its services, the Adviser receives from the Fund a fee
computed daily and payable at the end of each calendar quarter, equal to an
annual rate of 0.40% of the Fund's average
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<PAGE> 15
net assets. Pursuant to an expense limitation discussed below, the Adviser
reimbursed all of its advisory fees received from the Fund during the fiscal
year ended October 31, 1994.
ADMINISTRATOR
Capstone Asset Management Company (the "Administrator"), a subsidiary of
Capstone Financial Services, Inc. provides administrative services for the Fund
and supervises the Fund's daily business affairs, including arranging for the
provision of the Fund's legal services, supervising the activities of persons
providing services to the Fund, and furnishing office space and equipment to the
Fund. These services are subject to general review by the Trust's Board of
Trustees.
As compensation for its services, the Administrator receives from the Fund
a fee, computed daily and payable quarterly, at an annual rate of 0.20% of the
Fund's average net assets. Pursuant to an expense limitation discussed below,
the Administrator reimbursed all of its administrative fees received from the
Fund during the fiscal year ended October 31, 1994.
The Administrator also performs certain accounting, bookkeeping and pricing
services. For these services the Administrator receives a monthly fee to
reimburse the Administrator for its costs. This amount is not intended to
include any profit to the Administrator and is in addition to the administrative
fees described above.
The Administrator provides administrative and/or investment advisory
services to five other mutual funds: Capstone Government Income Fund, Capstone
Growth Fund, Inc., Capstone Balanced Fund, Capstone New Zealand Fund and Medical
Research Investment Fund, Inc. (the "Capstone Group"). The Administrator also
provides investment advice to pension and profit sharing accounts, corporations
and individuals.
DISTRIBUTOR
Pursuant to a Distribution Agreement with the Trust dated August 10, 1992,
Capstone Asset Planning Company (the "Distributor") is the principal underwriter
of the Fund and, acting as exclusive agent, sells shares of the Fund to the
public on a continuous basis.
The Fund has adopted a Service and Distribution Plan (the "Plan") pursuant
to which it uses its assets to finance activities relating to the distribution
of its shares to investors and provision of certain stockholder services. The
Plan permits payments to be made by the Fund to the Distributor to reimburse it
for expenditures incurred by it in connection with the distribution of the Fund
shares to investors and provision of certain stockholder services including but
not limited to the payment of compensation, including incentive compensation, to
securities dealers (which may include the Distributor itself) and other
financial institutions and organizations (collectively, the "Service
Organizations") to obtain various distribution related and/or administrative
services for the Fund. These services include, among other things, processing
new stockholder account applications, preparing and transmitting to the Fund's
Transfer Agent computer processable tapes of all transactions by customers and
serving as the primary source of information to customers in answering questions
concerning the Fund and their transactions with the Fund. The Distributor is
also authorized to engage in advertising, the preparation and distribution of
sales literature and other promotional activities on behalf of the Fund. In
addition, the Plan authorizes payment by the Fund of the cost of preparing,
printing and distributing Fund Prospectuses and Statements of Additional
Information to prospective investors and of implementing and operating the Plan.
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<PAGE> 16
Under the Plan, payments made to the Distributor may not exceed an amount
computed at an annual rate of 0.35% of the average net assets of the Fund. Of
this amount, the Distributor may reallocate amounts up to 0.25% of the Fund's
average net assets to Service Organizations (which may include the Distributor).
Any remaining amounts not so allocated will be retained by the Distributor for
the purposes described above. The Distributor is permitted to collect the fees
under the Plan on a monthly basis. Any expenditures incurred by the Distributor
in excess of the limitation described above during a given month may be carried
forward up to twelve months for reimbursement, subject always to the 0.35%
limit, and no interest or carrying charges will be payable by the Fund on
amounts carried forward. The Plan may be terminated by the Fund at any time and
the Fund will not be liable for amounts not reimbursed as of the termination
date.
The Plan was last approved by a majority of the Fund's trustees, including
a majority of the trustees who have no direct or indirect financial interest in
the operation of the Plan or any of its agreements ("Plan Trustees") on November
13, 1994. The Plan was approved by the Fund's stockholders on August 10, 1992
and took effect on September 1, 1992. The Plan will continue from year to year,
provided that such continuance is approved at least annually by a vote of a
majority of the Board of Trustees, including a majority of the Plan Trustees.
The Glass-Steagall Act and other applicable laws currently prohibit banks
from engaging in the business of underwriting, selling or distributing
securities. Accordingly, unless such laws are changed, if the Fund engages banks
as Service Organizations, the banks would perform only administrative and
stockholder servicing functions. If a bank were prohibited from acting as a
Service Organization, alternative means for continuing the servicing of such
stockholders would be sought. State law may differ from Federal law and banks
and other financial institutions may be required to be registered as
broker-dealers to perform administrative and stockholder servicing functions.
The staff of the SEC has proposed amendments to Rule 12b-1. If the rule is
amended as proposed or in some other manner, it may be necessary for the Fund to
consider amending the Plan and any related agreements.
EXPENSES
The Fund's expenses are accrued daily and are deducted from its total
income before dividends are paid. These expenses include, but are not limited
to: fees paid to the Adviser and the Administrator; taxes; legal fees; custodian
and auditing fees; reimbursement of the costs incurred by the Administrator in
providing pricing and accounting services to the Fund; and printing and other
miscellaneous expenses paid by the Fund. Under the Advisory and Administrative
Agreements, if the Fund's ordinary business expenses exceed the expense
limitations of any state having jurisdiction over the Fund, then the advisory
and administration fees will be reduced pro rata (but not below zero) to the
extent necessary to comply with such expense limitations. The Adviser and the
Administrator have each agreed to bear its pro rata share of any such fee
reduction based on the percentage that such person's fee bears to the total fees
paid by the Fund to the Adviser under the Investment Advisory Agreement and to
the Administrator under the Administration Agreement. The Fund's total operating
expenses (after reimbursements from the Adviser and Administrator) during the
fiscal year ended October 31, 1994 were 3.25% of its average net assets.
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<PAGE> 17
PURCHASING SHARES
Capstone Asset Planning Company (the "Distributor"), located at 5847 San
Felipe, Suite 4100, Houston, Texas 77057, is the principal underwriter of the
Fund and, acting as exclusive agent, sells shares of the Fund to the public on a
continuous basis. Edward L. Jaroski is President of the Trust, and a director of
the Administrator and the Distributor. Some officers of the Trust are also
officers of the Administrator and the Distributor.
Shares of the Fund are sold in a continuous offering and may be purchased
on any business day through authorized investment dealers or directly from the
Fund's Distributor. Only the Distributor and investment dealers which have a
sales agreement with the Distributor are authorized to sell shares of the Fund.
For further information, reference is made to the caption "Distributor" in the
Fund's Statement of Additional Information.
After an order is received by the Distributor, shares will be credited to a
stockholder's account at the public offering price computed as of the close of
trading on the Japanese Exchanges the following business day. See "Determination
of Net Asset Value". The minimum initial investment is $200, except for
continuous investment plans which have no minimum, and there is no minimum for
subsequent purchases. No stock certificates representing shares purchased will
be issued except upon written request to the Fund's Transfer Agent. The Fund's
management reserves the right to reject any purchase order if, in its opinion,
it is in the Fund's best interest to do so.
The public offering price is the net asset value (see "Determination of Net
Asset Value") plus a sales charge which varies in accordance with the amount of
the purchase as follows:
<TABLE>
<CAPTION>
SALES CHARGE AS A DEALER
PERCENTAGE OF REALLOWANCE
----------------- AS A
NET PERCENTAGE
OFFERING AMOUNT OF OFFERING
AMOUNT OF SINGLE TRANSACTION PRICE INVESTED PRICE
---------------------------------------------------------------- -------- ------ -----------
<S> <C> <C> <C>
Less than $100,000.............................................. 4.75% 4.99% 4.25%
$100,000 but less than $250,000................................. 3.50% 3.63% 3.00%
$250,000 but less than $500,000................................. 2.50% 2.56% 2.00%
$500,000 but less than $1,000,000............................... 2.00% 2.04% 1.75%
$1,000,000 but less than $2,500,000............................. 1.00% 1.01% .90%
$2,500,000 but less than $5,000,000............................. .50% .50% .45%
$5,000,000 and over............................................. .00% .00% .00%*
</TABLE>
---------------
* A negotiated broker commission will be paid by the Distributor.
The size of investment shown in the above table applies to the total amount
being invested by any person in shares of the Fund alone or in any combination
of shares of the Fund and shares of certain other mutual funds sponsored by the
Administrator. See "Reduced Sales Charges". The Distributor retains the entire
sales charge when it makes sales directly to the public. Dealers who receive 90%
or more of the entire sales charge may be deemed to be underwriters under the
Securities Act of 1933.
At various times the Distributor may implement programs under which a
dealer's sales force may be eligible to win nominal awards for certain sales
efforts or under which the Distributor during
16
<PAGE> 18
such programs will reallow an amount not exceeding the total applicable sales
charges on the sales generated by the dealer to any dealer that sponsors sales
contests or recognition programs conforming to criteria established by the
Distributor, or participates in sales programs sponsored by the Distributor. In
addition, the Adviser, the Administrator and/or the Distributor in their
discretion may from time to time, pursuant to objective criteria established by
the Adviser, the Administrator and/or the Distributor sponsor programs designed
to reward selected dealers for certain services or activities which are
primarily intended to result in the sale of shares of the Fund. Such payments
are made out of their own assets, and not out of the assets of the Fund. These
programs will not change the price you pay for your shares or the amount that
the Fund will receive from such sale.
INVESTING THROUGH AUTHORIZED DEALERS
If any authorized dealer receives an order of at least $200, the dealer may
contact the Distributor directly. Orders received by dealers by the close of
trading on the New York Stock Exchange on a business day that are transmitted to
the Distributor by 5:00 p.m. EST on that day will be based on the public
offering price per share determined as of the close of trading on the Japanese
Exchanges on the following business day. See "Determination of Net Asset Value".
It is the dealer's responsibility to transmit orders so that they will be
received by the Distributor before 5:00 p.m. EST.
After each investment, the stockholder and the authorized investment dealer
receive confirmation statements of the number of shares purchased and owned.
PURCHASES THROUGH THE DISTRIBUTOR
An account may be opened by mailing a check or other negotiable bank draft
(payable to Capstone Nikko Japan Fund) for $200 or more together with the
completed Investment Application Form included with this Prospectus to the
Fund's Transfer Agent: Capstone Nikko Japan Fund, c/o Fund/Plan Services, Inc.,
P.O. Box 874, 2 W. Elm Street, Conshohocken, Pennsylvania 19428. The $200
minimum initial investment may be waived by the Distributor for plans involving
continuing investments (see "Stockholder Services"). There is no minimum for
subsequent investments which may be mailed directly to the Transfer Agent. All
such investments are made at the public offering price determined as of the
close of trading on the Japanese Exchanges on the following business day after
receipt of payment by the Transfer Agent. Confirmations of the opening of an
account and of all subsequent transactions in the account are forwarded by the
Transfer Agent to the stockholder's address of record.
TELEPHONE PURCHASE AUTHORIZATION (INVESTING BY PHONE)
Stockholders who have completed the Telephone Purchase Authorization
section of the Investment Application Form may purchase additional shares by
telephoning the Fund's Transfer Agent at (800) 845-2340. The minimum telephone
purchase is $1,000 and the maximum is five times the net asset value of shares
for which payment has been received (and for which certificates have not been
issued) held by the stockholder on the day preceding such telephone purchase.
The telephone purchase will be made at the offering price next computed after
receipt of the call by the Transfer Agent. Payment for the telephone purchase
must be received by the Transfer Agent within seven days. If payment is not
received within seven days, the stockholder will be liable for all losses
incurred as a result of the purchase.
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<PAGE> 19
INVESTING BY WIRE
Investors having an account with a commercial bank that is a member of the
Federal Reserve System may purchase shares of the Fund by requesting their bank
to transmit funds by wire to: United Missouri Bank KC NA, ABA #10-10-00695, For:
Fund/Plan Services, Inc., Account #98-7037-0719; Further Credit Capstone Nikko
Japan Fund. The investor's name and account number must be specified in the
wire.
Initial Purchases -- Before making an initial investment by wire, an
investor must first telephone (800) 845-2340 to be assigned an account number.
The investor's name, account number, taxpayer identification or social security
number, and address must be specified in the wire. In addition, the investment
application which accompanies this Prospectus should be promptly forwarded to
Capstone Nikko Japan Fund, c/o Fund/Plan Services, Inc., P.O. Box 874, 2 W. Elm
Street, Conshohocken, Pennsylvania 19428.
Subsequent Purchases -- Additional investments may be made at any time
through the wire procedures described above, which must include the investor's
name and account number. The investor's bank may impose a fee for investments by
wire.
REDUCED SALES CHARGES
Investors can utilize one of the programs described below to reduce the
sales charge on purchases of shares of the Fund alone or on purchases of shares
of the Fund and certain other Capstone Funds.
Quantity Discounts -- Purchases of shares of the Fund and certain other
Capstone Funds made at the same time by a "Purchaser" may be combined to receive
a quantity discount. The term "Purchaser" is defined as:
-- an individual, his/her spouse and children under the age of 21, trust or
custodial accounts established for their sole benefit(s), and any
corporation, partnership or sole proprietorship which is 100% owned,
either alone or in combination, with any of the foregoing;
-- a trustee or other fiduciary purchasing for a single trust estate or a
single fiduciary account; and
-- a "company" as defined in Section 2(a)(8) of the Investment Company Act
of 1940.
Rights of Accumulation -- A Purchaser may also qualify for reduced sales
charges by combining the amount being invested in shares of the Fund and shares
of the Capstone Funds owned by the Purchaser calculated at the then current
offering price. To qualify for obtaining the discount on a particular purchase,
the Purchaser must send the Distributor a list of account numbers and the names
in which such accounts of the Purchaser are registered at the time the purchase
is made. If shares are being purchased through an authorized dealer, such
information must be communicated by the dealer to the Distributor at the time of
purchase.
Letter of Intent -- A Letter of Intent provides an opportunity for a
Purchaser to obtain a reduced sales charge by aggregating the investments in the
Fund and the Capstone Funds over a thirteen-month period to determine the sales
charge applicable to the amount invested. An alternative is to compute the
thirteen-month period starting up to ninety days before the date of the
execution of the Letter of Intent. Each investment made during the period
receives the reduced sales commission
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<PAGE> 20
applicable to the total amount of the investment goal. If all shares are not
purchased, a price adjustment is made, depending upon the actual amount invested
within the period covered by the Letter of Intent, by the redemption of
sufficient shares held in escrow for the account of the Purchaser. During the
period of the Letter of Intent the Transfer Agent will hold a portion of the
shares purchased in escrow. Those shares will be released upon completion of the
intended investment. Additional information is contained in the Appendix in the
back of the Prospectus.
401(k) Plans -- For information concerning reduced sales charges applicable
to 401(k) plans, reference is made to the caption "Reduced Sales Charges" in the
Fund's Statement of Additional Information.
SALES AT NET ASSET VALUE
Purchases of the Fund's shares at net asset value without a sales charge
may be made by the following persons: (a) tax-exempt entities whose minimum
initial investment (or whose investment pursuant to a Letter of Intent) is
$250,000 or more, (b) purchases by a bank or trust company in a single account
where such bank or trust company is named as trustee and the minimum initial
investment (or whose investment pursuant to a Letter of Intent) is $250,000 or
more, (c) any current or retired officer, trustee or employee, or any member of
the immediate family of such person of the Fund, Adviser, Administrator,
Distributor or its affiliates thereof, (d) the Fund's Adviser, Administrator,
Distributor or any affiliated company thereof, (e) any employee benefit plan
established for employees of the Adviser, Administrator, Distributor or its
affiliates, (f) advisory clients of the Adviser or Administrator of the Fund,
(g) registered representatives and their spouses and minor children and
employees of broker-dealers who have entered into Selling Group Agreements with
the Distributor, (h) separate accounts of life insurance companies or commingled
accounts of financial institutions, (i) Tenneco Inc. and its affiliates,
present, future and retired employees and any employee benefit plan established
for such employees, (j) investors who are clients of recognized consulting firms
which provide consulting services to pension funds or corporations, state and
local governments, Taft-Hartley Plans and foundations and endowments which have
contacted the Fund, the Adviser, the Administrator or the Distributor with
respect to furnishing advice to such clients of such consulting firm or with
respect to distribution of securities of the Fund by such client or purchase of
securities of the Fund by such client, and (k) in connection with the Fund's
merger with or acquisition of any investment company or trust. In the opinion of
the Fund's management these sales will result in less selling effort and
expense.
If purchases by tax-exempt entities, bank or trust companies, separate
accounts or commingled accounts at net asset value are made through dealers who
have executed dealer agreements with respect to the Capstone Group, the
Distributor may make a payment out of its own resources to such dealers.
DISTRIBUTIONS AND TAXES
PAYMENT OPTIONS
Distributions (whether treated for tax purposes as ordinary income or
long-term capital gains) to the Fund's stockholders are paid in additional
shares of the Fund, with no sales charge, based on the Fund's net asset value as
of the close of business on the record date for such distributions.
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<PAGE> 21
However, a stockholder may elect on the application form contained in this
Prospectus to receive distributions as follows:
Option 1. To receive income dividends treated as ordinary income in cash
and distributions treated as capital gains in additional Fund
shares, or
Option 2. To receive all income dividend and capital gains distributions in
cash.
The Fund pays dividends from investment company taxable income and
distributions representing capital gains at least annually, usually in December.
The Fund will advise each stockholder annually of the amounts of dividends from
investment income and of long-term capital gain distributions reinvested or paid
in cash to the stockholder during the calendar year.
If you select Option 1 or Option 2 and the U.S. Postal Service cannot
deliver your checks, or if your checks remain uncashed for six months, your
distribution checks will be reinvested in your account at the then-current net
asset value and your election will be converted to the purchase of additional
shares.
TAXES
The Fund intends to qualify as a regulated investment company under the
Federal tax law. As such, the Fund generally will not pay Federal income tax on
the income and gains it pays as dividends to its stockholders. In order to avoid
a 4% Federal excise tax, the Fund intends to distribute each year all of its net
income and gains.
Stockholders will be taxed on dividends received from the Fund, regardless
of whether received in cash or reinvested in additional shares. Stockholders
must treat dividends, other than capital gain dividends, as ordinary income.
Dividends designated as capital gain dividends are taxable to stockholders as
long-term capital gains. Certain dividends declared in October, November or
December of a calendar year are taxable to stockholders as though received on
December 31 of that year if paid to stockholders during January of the following
calendar year. The Fund will advise stockholders annually of the amount and
nature of dividends paid to them.
Investors are advised to consult their tax advisers with respect to the
particular tax consequences to them of an investment in the Fund. A more
detailed description of tax consequences to stockholders is contained in the
Statement of Additional Information.
REDEMPTION AND REPURCHASE OF SHARES
Generally, stockholders may require the Fund to redeem their shares by
sending a written request, signed by the record owner(s), to Capstone Nikko
Japan Fund, c/o Fund/Plan Services, Inc., P.O. Box 874, 2 W. Elm Street,
Conshohocken, Pennsylvania 19428. In addition, certain expedited redemption
methods described below are available. If stock certificates have been issued
for shares being redeemed, such certificates must accompany the written request
with the stockholder's signature guaranteed by an "eligible guarantor
institution", as defined in Rule 17Ad-15 under the Securities Exchange Act of
1934, which participates in a signature guarantee program. Eligible guarantor
institutions include banks, brokers, dealers, credit unions, national securities
exchanges, registered securities associations, clearing agencies and savings
associations. A broker-dealer guaranteeing signatures must be a member of a
clearing corporation
20
<PAGE> 22
or maintain net capital of at least $100,000. Credit unions must be authorized
to issue signature guarantees. No signature guarantees for shares for which no
certificates have been issued are required when an application is on file at the
Transfer Agent and payment is to be made to the stockholder of record at the
stockholder's address of record. However, if the proceeds of the redemption are
to be paid to someone other than the registered holder, or to other than the
stockholder's address of record, or the shares are to be transferred, the
owner's signature must be guaranteed as specified above.
In addition, the Distributor is authorized as agent for the Fund to offer
to repurchase shares which are presented by telephone or telegraph to the
Distributor by authorized investment dealers. The repurchase price is the net
asset value per share determined as of the close of trading on the Japanese
Exchanges on the following business day after the request is received. See
"Determination of Net Asset Value". Broker-dealers may charge for their services
in connection with the repurchase, but, except as noted below, the Distributor
and its affiliates will not charge any fee for such repurchase. Payment for
shares presented for repurchase or redemption by authorized investment dealers
will be made within seven days after receipt by the Transfer Agent of a written
notice and/or certificate in proper order.
The Fund reserves the right to pay any portion of redemption requests in
excess of $1 million in readily marketable securities from the Fund's portfolio.
In this case, the redeeming stockholder may incur brokerage charges on the sale
of the securities.
The right of redemption and payment of redemption proceeds are subject to
suspension for any period during which the New York Stock Exchange is closed,
other than customary weekend and holiday closings, or when trading on the New
York Stock Exchange is restricted as determined by the Securities and Exchange
Commission; during any period when an emergency as defined by the rules and
regulations of the Securities and Exchange Commission exists; or during any
period when the Securities and Exchange Commission has by order permitted such
suspension. The Fund will not mail redemption proceeds until checks (including
certified checks or cashier's checks) received for the shares purchased have
cleared, which can be as long as 15 days.
The value of shares on repurchase or redemption may be more or less than
the investor's cost depending upon the market value of the Fund's portfolio
securities at the time of redemption.
EXPEDITED TELEPHONE REDEMPTION
A stockholder redeeming at least $1,000 of shares (for which certificates
have not been issued), and who has authorized expedited redemption on the
application form filed with the Transfer Agent may at the time of such
redemption request that funds be mailed or wired to the commercial bank or
registered broker-dealer he has previously designated on the application form by
telephoning the Transfer Agent at (800) 845-2340. Redemption proceeds will be
calculated as of the close of trading on the Japanese Exchanges on the day
following receipt of the telephone redemption request, and will be sent to the
investor on the next (second) business day. In order to allow the Adviser to
manage the Fund more effectively, stockholders are strongly urged to initiate
redemptions as early in the day as possible and to notify the Transfer Agent as
least 5 days in advance of redemptions in excess of $1 million. If a stockholder
seeks to use an expedited method of redemption of shares recently purchased by
check, the Fund may withhold the redemption proceeds until it is reasonably
assured of the collection of the check representing the purchase,
21
<PAGE> 23
which may take up to 15 days from the purchase date. The Fund, Distributor and
Transfer Agent reserve the right at any time to suspend or terminate the
expedited redemption procedure or to impose a fee for this service. At the
present time there is no fee charged for this service. During periods of unusual
economic or market changes, stockholders may experience difficulties or delays
in effecting telephone redemptions.
When exchanges or redemption requests are made by telephone, the Fund has
procedures in place designed to give reasonable assurance that such telephone
instructions are genuine, including recording telephone calls and sending
written confirmations of transactions. The Fund will not be liable for losses
due to unauthorized or fraudulent telephone transactions unless it does not
follow such procedures, in which case it may be liable for such losses.
DETERMINATION OF NET ASSET VALUE
The Fund determines its net asset value per share on each day the New York
Stock Exchange is open for business. The Fund's net asset value will not be
computed on the following holidays: New Year's Day, President's Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day.
Purchase, redemption or repurchase orders properly received by the
Distributor by 4:00 p.m. EST on Monday through Thursday are priced based upon
the net asset value determined as of the close of regular trading on the
Japanese stock exchanges (3:00 p.m. Tokyo time) on the following day. The
Japanese stock exchanges are: Hiroshima, Osaka, Nagoyo, Kyoto, Yamagata,
Sapporo, Nigata, Fukuoka and JASDAQ (the "Japanese Exchanges"). Orders received
by the Distributor prior to 4:00 p.m. EST on a Friday will be effected at the
net asset value determined as of the close of regular trading on the Japanese
Exchanges on the following Monday. The Fund will in some cases value its
portfolio securities as of days on which the Japanese Exchanges are closed for
Japanese 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
14:00 Greenwich Mean Time on each U.S. business day.
Portfolio securities and futures contracts which are traded on a Japanese
Exchange are valued at the last sale price on that exchange prior to the
relevant closing or, if there is no recent last sale price available, at the
last current bid quotation. A security or futures contract which is listed or
traded on more than one exchange is valued at the quotation on the exchange
determined to be the primary market for such security or contract. All other
equity securities and futures contracts not so traded are valued at the last
current bid quotation prior to the relevant Japanese Exchange closing. Fixed
income securities are valued using market quotations or pricing services. In the
absence of an applicable price, securities and futures contracts will be valued
at a fair value as determined in good faith by the trustees or in accordance
with procedures established by the trustees.
22
<PAGE> 24
PORTFOLIO TRANSACTIONS AND BROKERAGE
Subject to policies established by the Fund's Board of Trustees, the
Adviser is primarily responsible for the execution of the Fund's portfolio
transactions and the allocation of brokerage. The policies established by the
trustees require that the Adviser seek to obtain the best net results in
executing transactions for the Fund, except that the Fund is authorized to pay
higher commissions in return for brokerage and research services in accordance
with certain regulatory conditions. Subject to the Fund's policy of seeking best
execution, the Fund may consider sales of Fund shares when allocating portfolio
brokerage and may execute transactions through Nikko Securities, an affiliate of
the Adviser, and through broker-dealer affiliates of the Administrator. Since
commission rates in Japan are fixed, the Adviser is not able to negotiate
commission rates on its Japanese securities transactions.
STOCKHOLDER SERVICES
Capstone Nikko Japan Fund provides its stockholders with a number of
services and conveniences designed to assist investors in the management of
their investments. These stockholder services include the following:
TAX-DEFERRED RETIREMENT PLANS
Shares may be purchased by virtually all types of tax-deferred retirement
plans. The Distributor or its affiliates make available plan forms and/or
custody agreements for the following:
- Individual Retirement Accounts (for individuals and their non-employed
spouses who wish to make limited tax deductible contributions to a
tax-deferred account for retirement); and
- Simplified Employee Pension Plans.
Dividends and distributions will be automatically reinvested without a
sales charge. For further details, including fees charged, tax consequences and
redemption information, see the specific plan documents which can be obtained
from the Fund.
Investors should consult with their tax adviser before establishing any of
the tax-deferred retirement plans described above.
EXCHANGE PRIVILEGE
Shares of the Fund which have been outstanding for 15 days or more may be
exchanged for shares of other Capstone Funds with no administrative charge. The
exchange of shares held 15 days or more will be effected at net asset value,
plus an amount equal to the difference, if any, between the sales charges
previously paid or deemed applicable with respect to the shares being exchanged,
and the sales charge payable on shares of the Capstone Fund for which those
shares are being exchanged, determined in accordance with applicable legal
requirements. A stockholder requesting such an exchange will be sent a current
prospectus for the fund into which the exchange is requested. Shares held less
than 15 days cannot be exchanged. In such instances, the shares will be redeemed
(see "Redemption and Repurchase of Shares") and the entire sales commission paid
on the purchase will be refunded to the investor.
23
<PAGE> 25
Purchases, redemptions and exchanges should be made for investment purposes
only. A pattern of frequent exchanges, purchases and sales may be deemed abusive
by the Administrator and, at the discretion of the Administrator, can be limited
by the Fund's refusal to accept further purchase and/or exchange orders from the
investor. Although the Administrator will consider all factors it deems relevant
in determining whether a pattern of frequent purchases, redemptions and/or
exchanges by a particular investor is abusive and not in the best interests of
the Fund or its other stockholders, as a general policy investors should be
aware that engaging in more than one exchange or purchase-sale transaction
during any thirty-day period with respect to a particular fund may be deemed
abusive and therefore subject to the above restrictions.
An exchange of shares is treated for Federal income tax purposes as a sale
of shares given in exchange and the stockholder may, therefore, realize a
taxable gain or loss. The exchange privilege may be exercised only in those
states where shares of the fund for which shares held are being exchanged may be
legally sold, and the privilege may be amended or terminated upon 60 days'
notice to stockholders.
Under certain circumstances, the sales charge incurred in acquiring shares
of the Fund may not be taken into account in determining the gain or loss on the
disposition of those shares. This rule applies where shares of a Capstone 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 paid for the new shares.
The stockholder may exercise the following exchange privilege options:
Exchange by Mail -- Stockholders may mail a written notice requesting
an exchange to the Fund's Transfer Agent.
Exchange by Telephone -- Stockholders must complete telephone exchange
on the application form filed with the Transfer Agent to exchange shares by
telephone. Telephone exchanges may be made from 9:30 a.m. to 4:00 p.m.
Eastern time, Monday through Friday, except holidays. If certificates have
been issued to the investor, this procedure may be utilized only if he
delivers his certificates, duly endorsed for transfer, to the Transfer
Agent prior to giving telephone instructions. During periods of unusual
economic or market changes, stockholders may experience difficulties or
delays in effecting exchanges over the telephone.
When exchanges or redemption requests are made by telephone, the Fund has
procedures in place designed to give reasonable assurance that such telephone
instructions are genuine, including recording telephone calls and sending
written confirmations of transactions. The Fund will not be liable for losses
due to unauthorized or fraudulent telephone transactions unless it does not
follow such procedures, in which case it may be liable for such losses.
24
<PAGE> 26
PRE-AUTHORIZED PAYMENT
A stockholder may arrange to make regular monthly investments of $25 or
more automatically from his checking account by authorizing the Fund's Transfer
Agent to withdraw the payment from his checking account. Pre-Authorized Payment
Forms can be obtained by contacting the Transfer Agent.
SYSTEMATIC WITHDRAWAL PLAN
Investors may open a withdrawal plan providing for withdrawals of $50 or
more monthly, quarterly, semi-annually or annually if they have made a minimum
investment in the shares of the Fund of $5,000. The minimum amount which may be
withdrawn pursuant to this plan is $50.
These payments may constitute return of initial capital and do not
represent a yield or return on investment. In addition, such payments may
deplete or eliminate the investment. Stockholders cannot be assured that they
will receive payment for any specific period because payments will terminate
when all shares have been redeemed. The number of such payments will depend
primarily upon the amount and frequency of payments and the yield on the
remaining shares. Under this plan, any distributions must be reinvested in
additional shares at net asset value.
The Systematic Withdrawal Plan is voluntary, flexible, and under the
stockholder's control and direction at all times, and does not limit or alter
the stockholder's right to redeem shares. Such plan may be terminated in writing
at any time by either the stockholder or the Fund. The cost of operating the
Systematic Withdrawal Plan is borne by the Fund. It would not be advisable for
investors to make purchases of shares involving any sales charge while
participating in the Systematic Withdrawal Plan.
GENERAL INFORMATION
Capstone International Series Trust is an open-end diversified management
investment company, as defined in the Investment Company Act of 1940, as
amended. It was organized in Massachusetts in 1986 as a business trust. The
Trust is authorized to issue an unlimited number of shares of beneficial
interest of $0.01 par value and to divide such shares into separate series (or
funds). The Fund was established as a series of the Trust on April 24, 1989. The
Trust currently has one other series, Capstone New Zealand Fund, which invests
in securities of New Zealand issuers. Stockholders are entitled to one vote for
each full share held and to fractional votes for fractional shares held in the
election of trustees (to the extent hereafter provided) and on other matters
submitted to the vote of stockholders of the Fund. The Trust is not required to
hold regular annual meetings of stockholders and will do so only when required
by law. There are no cumulative voting rights. In the event additional series
are established, matters submitted to stockholder vote must be approved by each
series except (i) as to matters required by the Investment Company Act of 1940
to be voted on by all stockholders as a single class and (ii) as to matters
determined by the trustees not to affect a particular series, which will not be
submitted to vote by stockholders of that series. Stockholders may, in
accordance with the Declaration of Trust, cause a meeting of stockholders to be
held for the purpose of voting on the removal of trustees. Fund shares have
equal dividend rights, are fully paid, non-assessable and freely transferable
and have no conversion, pre-emptive or subscription rights. Fractional shares
have the same rights, pro rata, as full shares.
25
<PAGE> 27
Under Massachusetts law, stockholders of a business trust may, under
certain circumstances, be held personally liable as partners for the obligations
of the trust. The Declaration of Trust contains an express disclaimer of
stockholder liability for acts or obligations of the Trust. The Declaration of
Trust provides for indemnification out of the Trust's property for any
stockholder held personally liable for the obligations of the Trust. Thus, the
risk of a stockholder's incurring financial loss on account of stockholder's
liability is limited to circumstances in which the Trust itself would be unable
to meet its obligations.
The Fund's custodian is The Bank of Tokyo Trust Company. It is anticipated
that the Fund's assets will be maintained primarily in Japan with The Bank of
Tokyo, Ltd., pursuant to a sub-custody agreement between The Bank of Tokyo Trust
Company and The Bank of Tokyo, Ltd. In approving these custody arrangements, the
Board of Trustees considered the effect that Japanese law may have on the safety
of the Fund's assets and the Fund's ability to convert those assets into U.S.
dollars, the ability of the custodian and sub-custodian to provide the services
required by the Fund in a cost-effective manner, the safeguards used by the
custodian and sub-custodian to protect the Fund's assets and other factors
deemed relevant by the trustees.
As of February 27, 1995, the following stockholders owned more than 5% of
the Fund's outstanding shares of beneficial interest: Nikko Capital Management
Company (USA), Inc. (25.2%) and SMC Pneumatics, Inc. (24.0%).
Fund/Plan Services, Inc. acts as both Transfer Agent and Dividend Paying
Agent for the Fund.
Stockholders should address inquiries to the Fund at its address stated on
the cover page of this Prospectus.
26
<PAGE> 28
APPENDIX
INFORMATION PERTAINING TO LETTER OF INTENT
Subject to conditions specified below, each purchase during the
thirteen-month period subsequent to the effective date of a Letter of Intent
(the "Letter") will be made at the public offering price applicable to a single
transaction of the dollar amount indicated, as described in the then effective
prospectus. The offering price may be further reduced under the Rights of
Accumulation if the Transfer Agent is advised of any shares previously purchased
and still owned. At any time during the period the Purchaser may revise upward
his stated intention by submitting a written request to this effect. Such
revision shall provide for the escrowing of additional shares. The original
period of the Letter, however, shall remain unchanged. Each separate purchase
made pursuant to the Letter is subject to the terms and conditions contained in
the prospectus in effect at the time of that particular purchase. The Letter
does not constitute a commitment to purchase shares, but if purchases so made
within thirteen months from this date do not aggregate the amount specified, the
Purchaser must pay the increased amount of sales charge prescribed in the terms
of escrow. The Purchaser or the dealer must refer to his Letter in placing each
future order for shares while the Letter is in effect. When remitting funds
directly to the Transfer Agent for investment in an account, specific reference
must be made to the Letter.
TERMS OF ESCROW
1. To assure compliance with provisions of the Investment Company Act of
1940, out of the initial purchase (or subsequent purchase if necessary) 5% of
the dollar amount indicated on the Application Form will be held in escrow in
the form of shares (computed to the nearest full share at the applicable public
offering price) registered in the Purchaser's name. These shares will be held at
the Fund's Transfer Agent and be subject to the terms of escrow.
2. If total purchases pursuant to the Letter equal the amount specified as
the expected aggregate purchases, escrow shares will be released from
restriction.
3. If the total purchases pursuant to the Letter are less than the amount
specified, the Purchaser shall remit to the Distributor an amount equal to the
difference between the dollar amount of sales charge actually paid and the
amount of sales charge which would have been paid on the total purchases if all
such purchases had been made at a single time. If the Distributor, within 10
business days after request, does not receive said difference in sales charge,
it will instruct the Fund's Transfer Agent to redeem an appropriate number of
escrow shares to realize such difference. If the proceeds from this redemption
are inadequate, the Purchaser will be liable to the Distributor for the
difference. The remaining shares after the redemption will be deposited to his
account unless otherwise instructed.
4. Under the Letter, the Purchaser hereby irrevocably constitutes and
appoints the Fund's Transfer Agent as attorney to surrender for redemption any
or all shares on the books of the Fund, under the conditions previously
outlined, with full power of substitutions in the premises.
REINVESTMENT OF DIVIDENDS AND DISTRIBUTIONS
As all dividends and/or capital gain distributions are reinvested at net
asset value without sales commissions, shares acquired through reinvestment are
not applied to the Letter.
PROVISIONS FOR PRICE ADJUSTMENT
If total purchases made under the Letter of Intent and the Rights of
Accumulation are large enough to qualify for a lower sales charge than that
applicable to the amount initially specified, or if trades not initially made
under the Letter subsequently qualify for a lower sales charge through the
90-day back-dating provisions (See "Reduced Sales Charges -- Letter of Intent"
in the Prospectus), an adjustment will be made at the expiration of the Letter
to give effect to the lower charge. Such adjustment in sales charge will be used
to purchase additional shares for the Purchaser.
CANCELLATION OR LIQUIDATION
If at any time prior to or after completion of a Letter the Purchaser wishes
to cancel the Letter, he must notify the Distributor in writing. If at any time
prior to the completion of the Letter the Purchaser requests the Fund's Transfer
Agent to liquidate his total shares, a cancellation of the Letter will
automatically be effected. Under either of the above conditions the total
purchased pursuant to the Letter may be less than the amount specified as the
expected aggregate purchases. If so, the Fund's Transfer Agent will redeem an
appropriate number of escrowed shares and remit to the Distributor an amount
equal to the difference between the dollar amount of sales charge actually paid
and the amount of sales charge which would have been paid on the total purchases
if all such purchases had been made at a single time.
27
<PAGE> 29
CAPSTONE NIKKO JAPAN FUND
A SERIES OF CAPSTONE INTERNATIONAL SERIES TRUST
SUPPLEMENT DATED MAY 24, 1995
TO
STATEMENT OF ADDITIONAL INFORMATION
DATED MARCH 1, 1995
THE FOLLOWING INFORMATION IS ADDED TO THE END OF THE TRUSTEES AND EXECUTIVE
OFFICERS SECTION ON PAGE 9 OF THE STATEMENT OF ADDITIONAL INFORMATION:
The following table represents the fees paid during the 1994 calendar year
to the trustees of the Trust and the total compensation each trustee received
during that period from the Capstone Fund complex.
COMPENSATION TABLE
<TABLE>
<CAPTION>
TOTAL
COMPENSATION
PENSION OR FROM
RETIREMENT ESTIMATED REGISTRANT
AGGREGATE BENEFITS ANNUAL AND FUND
COMPENSATION ACCRUED BENEFITS COMPLEX
NAME OF PERSON, FROM AS PART UPON PAID TO
POSITION REGISTRANT* OF FUND RETIREMENT TRUSTEES
--------------- ------ ---------- --------- ---------
<S> <C> <C> <C> <C>
Eugene W. Potter, Jr., Trustee................... $1,000 $ 0 $ 0 $ 2,000(1)
Philip C. Smith, Trustee......................... 1,000 0 0 8,000(1,2,3)
Bernard J. Vaughan, Trustee...................... 1,000 0 0 7,000(1,2)
</TABLE>
---------------
* Amounts do not include deferred compensation.
(1) Trustee of Capstone International Series Trust. -- Capstone New Zealand Fund
(2) Director of Capstone Fixed Income Series, Inc., Capstone Series, Inc. and
Capstone Growth Fund, Inc.
(3) Director of Medical Research Investment Fund, Inc.
THE LAST SENTENCE OF THE FIRST PARAGRAPH IN THE PORTFOLIO TRANSACTIONS AND
BROKERAGE SECTION ON PAGE 12 OF THE STATEMENT OF ADDITIONAL INFORMATION IS
AMENDED AS FOLLOWS:
Subject to the Fund's overall brokerage policies, the Adviser may effect
securities transactions through Capstone Asset Planning Company, TradeStar
Investments, Inc. and Williams MacKay Jordan & Mills, Inc., broker-dealer
affiliates of the Administrator, and with The Nikko Securities Company
International, Inc., an affiliate of the Fund's Adviser.
<PAGE> 30
CAPSTONE NIKKO JAPAN FUND
A FUND OF
CAPSTONE INTERNATIONAL SERIES TRUST
STATEMENT OF ADDITIONAL INFORMATION
March 1, 1995
This Statement of Additional Information is not a Prospectus but contains
information in addition to and more detailed than that set forth in the
Prospectus and should be read in conjunction with the Prospectus. The Statement
of Additional Information and the related Prospectus are both dated March 1,
1995. A Prospectus may be obtained without charge by contacting Capstone Asset
Planning Company, by phone at (800) 262-6631 or by writing to it at 5847 San
Felipe, Suite 4100, Houston, Texas 77057.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
General Information................................................... 2
Investment Practices and Restrictions................................. 2
Performance Information............................................... 6
Trustees and Executive Officers....................................... 7
Investment Advisory Agreement......................................... 8
Administration Agreement.............................................. 9
Expenses.............................................................. 9
Distributor........................................................... 10
Portfolio Transactions and Brokerage.................................. 11
Determination of Net Asset Value...................................... 12
How to Buy and Redeem Shares.......................................... 13
Reduced Sales Charges................................................. 13
Taxes................................................................. 13
Control Persons and Principal Holders of Securities................... 18
Other Information..................................................... 18
Financial Statements.................................................. 19
</TABLE>
<PAGE> 31
GENERAL INFORMATION
Capstone Nikko Japan Fund (the "Fund") is a series (or fund) of Capstone
International Series Trust (the "Trust"). The Trust currently has one other
series, Capstone New Zealand Fund, which invests in securities of New Zealand
issuers. The Trust may create additional series in the future, but each series
will be treated as a separate mutual fund. The Trust was organized as a business
trust in Massachusetts on May 9, 1986 and commenced business shortly thereafter.
It is an open end diversified management investment company under the Investment
Company Act of 1940. The Fund is a member of a group of investment companies
sponsored by Capstone Asset Management Company (the "Administrator"), which also
provides administrative services to the Fund.
INVESTMENT PRACTICES AND RESTRICTIONS
REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements with
U.S. government securities dealers recognized by the Federal Reserve Board, with
member banks of the Federal Reserve System or with such other brokers or dealers
that meet the credit guidelines of the Trust's Board of Trustees. In a
repurchase agreement, the Fund buys a security from a seller that has agreed to
repurchase the same security at a mutually agreed upon date and price. The
Fund's resale price will be in excess of the purchase price, reflecting an
agreed upon interest rate. This interest rate is effective for the period of
time the Fund is invested in the agreement and is not related to the coupon rate
on the underlying security. Repurchase agreements may also be viewed as a fully
collateralized loan of money by the Fund to the seller. The period of these
repurchase agreements will usually be short, from overnight to one week, and at
no time will the Fund invest in repurchase agreements for more than one year.
The Fund will always receive as collateral securities whose market value
including accrued interest is, and during the entire term of the agreement
remains, at least equal to 100% of the dollar amount invested by the Fund in
each agreement, and the Fund will make payment for such securities only upon
physical delivery or upon evidence of book entry transfer to the account of the
Custodian. If the seller defaults, the Fund might incur a loss if the value of
the collateral securing the repurchase agreement declines and might incur
disposition costs in connection with liquidating the collateral. In addition, if
bankruptcy proceedings are commenced with respect to the seller of a security
which is the subject of a repurchase agreement, realization upon the collateral
by the Fund may be delayed or limited. The Adviser seeks to minimize the risk of
loss through repurchase agreements by analyzing the creditworthiness of the
obligors under repurchase agreements, in accordance with the credit guidelines
of the Trust's Board of Trustees.
FOREIGN CURRENCY TRANSACTIONS. The Fund may, to a limited extent, deal in
forward foreign exchange between the currencies of the United States and Japan
as a hedge against possible variations in the foreign exchange rates between
these currencies. This is accomplished through contractual agreements to
purchase or sell a specified currency at a specified future date (up to one
year) and price set at the time of the contract. The Fund's dealings in forward
foreign exchange contracts are limited to hedging involving either specific
transactions or portfolio positions. Transaction hedging is the purchase or sale
of forward foreign currency with respect to specific receivables or payables of
the Fund accruing in connection with the purchase and sale of its portfolio
securities, the sale and redemption of shares of the Fund or the payment of
dividends and distributions by the Fund. Position hedging is the sale of forward
foreign currency with respect to portfolio security positions denominated or
quoted in such foreign currency. The Fund will not enter into or maintain a
position in those contracts if their consummation would obligate the Fund to
deliver an amount of foreign currency greater than the value of the Fund's
assets denominated or quoted in, or currency convertible into, such currency.
When the Fund enters into a position hedging transaction, its custodian
bank places cash or liquid securities in a separate account of the Fund in an
amount equal to the value of the Fund's total assets committed to the
consummation of the forward contract. The amount of the securities placed in the
separate account are adjusted to maintain the value of those securities equal to
the Fund's commitment under the contract.
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<PAGE> 32
Hedging against a decline in the value of a currency by means of forward
currency contracts, options on currencies, currency futures contracts and
options on currency futures contracts (see below and "Investment Objectives and
Policies" in the Prospectus) does not eliminate fluctuations in the value of the
Fund's portfolio securities or prevent losses. Such transactions also preclude
the opportunity for gain if the value of the currency moves in an unanticipated
manner. Moreover, it may not be possible for the Fund to hedge against a change
which is generally anticipated, since appropriate transactions might not then be
available.
The cost of engaging in foreign currency transactions by the Fund varies
with such factors as the currencies involved, the length of the contract period
and the market conditions then prevailing. Transactions in foreign currency
exchange usually are conducted on a principal basis, so no fees or commissions
are involved.
LOANS OF PORTFOLIO SECURITIES. The Fund has authority to lend its portfolio
securities provided: (1) the loan is secured continuously by collateral
consisting of U.S. Government securities or cash or cash equivalents adjusted
daily to make a market value at least equal to the current market value of the
securities loaned; (2) the Fund may at any time call the loan and regain the
securities loaned; (3) the Fund will receive any interest or dividends paid on
the loaned securities; and (4) the aggregate market value of securities loaned
will not at any time exceed 10% of the total assets of the Fund. In addition, it
is anticipated that the Fund may share with the borrower some of the income
received on the collateral for the loan or that it will be paid a premium for
the loan. In determining whether to lend securities, the Adviser considers all
relevant factors and circumstances including the creditworthiness of the
borrower.
FUTURES TRANSACTIONS. The Fund may enter into futures contracts on U.S. and
foreign debt securities ("interest-rate futures"), on stock indices and on
currencies of countries in which the Fund conducts its investment activities.
Interest rate and currency futures contracts create an obligation to purchase or
sell specified amounts of debt securities or currency on a specified future
date. Although these contracts generally call for making or taking delivery of
the underlying securities or currency, the contracts are in most cases closed
out before the maturity date by entering into an offsetting transaction which
may result in a profit or loss.
Securities index futures contracts are contracts to buy or sell units of a
particular index of securities at a specified future date for an amount equal to
the difference between the original contract purchase price and the price at the
time the contract is closed out, which may be at maturity or through an earlier
offsetting transaction.
The purchase or sale of a futures contract involves no sale price or
premium, unlike the purchase of a security or option. Instead, an amount of cash
or securities acceptable to the broker and the relevant contract market,
generally about 5% of the contract amount, must be deposited with the broker as
"initial margin." This "initial margin" represents a "good faith" deposit
assuring the performance of both the purchaser and the seller under the futures
contract. Subsequent "variation margin" payments must be made daily to and by
the broker to reflect variations in the price of the futures contract. When the
contract is settled or closed out by an offsetting transaction, a final
determination is made of variation margin due to or from the broker. A nominal
commission is also paid on each completed sale transaction.
OPTIONS TRANSACTIONS. The Fund may purchase or write put or call options on
futures contracts, individual securities, currencies or stock indices to hedge
against fluctuations in securities prices and currency exchange rates and to
adjust its risk exposure relative to the Benchmark. See "Investment Objective
and Policies" in the Prospectus.
The Fund may purchase options on exchanges and in over-the-counter markets
to the extent the value of such options owned by the Fund does not exceed 5% of
its net assets. The Fund may write put options and covered call options on
exchanges and in the over-the-counter markets. A call option gives the purchaser
the right, until the option expires, to purchase the underlying futures
contract, security or currency at the exercise price or, in the case of a stock
index option, to receive a specified amount. A put option gives the purchaser
the right, until the option expires, to sell the underlying futures contract,
security or currency at the exercise price or, in the case of a stock index
option, to pay a specified amount.
3
<PAGE> 33
When the Fund writes an option, it receives a premium which it retains
whether or not the option is exercised. By writing a call option, the Fund
becomes obligated, either for a certain period or on a certain date, to sell the
underlying futures contract, security or currency to the purchaser at the
exercise price (or to pay a specified price with respect to an index option) if
the option is exercised. At the time or during the period when the option may be
exercised, the Fund risks losing any gain in the value of the underlying futures
contract, security or currency or stock index over the exercise price. By
writing a put option, the Fund becomes obligated either for a certain period or
on a certain date, to purchase the underlying futures contract, security or
currency at the exercise price, or to pay the specified price in connection with
an index option, if the option is exercised. The Fund might, therefore, be
obligated to purchase or make a payment for more than the current market price
of the particular futures contract, security, currency or index option.
The Fund writes only "covered" options on securities and currencies. This
means that so long as the Fund is obligated as the writer of a call option on a
security or currency, it will own an equivalent amount of the underlying
security, currency or liquid securities denominated, quoted in or currently
convertible into such currency. The Fund will be considered "covered" with
respect to a put option it writes if, so long as it is obligated as the writer
of a put option, it deposits and maintains with its custodian in a segregated
account an amount of the underlying securities, currency or liquid securities
denominated, quoted in or currently convertible into such currency having a
value equal to or greater than the exercise price of the option. There is no
limitation on the amount of call options the Fund may write. However, the Fund
may write covered put options on currencies only to the extent that cover for
such options does not exceed 25% of the Fund's net assets.
The writer of an option that wishes to terminate an obligation may in some
cases be able to effect a "closing purchase transaction." This is accomplished
by buying an option of the same series as the option previously written. The
effect of the purchase is that the writer's position will be cancelled by the
clearing corporation. However, a writer may not effect a closing purchase
transaction after being notified of the exercise of an option. Likewise, an
investor who is the holder of an option may liquidate a position by effecting a
"closing sale transaction." This is accomplished by selling an option of the
same series as the option previously purchased. There is no guarantee that
either a closing purchase or a closing sale transaction can be effected.
The Fund will realize a profit from a closing transaction if the price of
the transaction is less than the premium received from writing the option or is
more than the premium paid to purchase the option; the Fund will realize a loss
from a closing transaction if the price of the transaction is more than the
premium paid to purchase the option. Because increases in the market price of a
call option will generally reflect increases in the value of the underlying
security, futures contract, index option or currency, any loss in closing out a
call option is likely to be offset in whole or in part by appreciation of the
underlying collateral owned by the Fund.
INVESTMENT RESTRICTIONS. The Trust has adopted with respect to the Fund the
following "fundamental" restrictions which, along with its investment objective,
cannot be changed without approval by the holders of a majority of the shares of
beneficial interest in the Fund ("Fund shares"). Such majority is defined by the
Investment Company Act of 1940 as the lesser of (i) 67% or more of the Fund
shares present in person or by proxy at a meeting, if the holders of more than
50% of the outstanding voting securities are present or represented by proxy; or
(ii) more than 50% of the outstanding voting securities. The Fund may not:
1. With respect to 75% of its total assets, invest more than 5% of the
value of such assets in the securities of any one issuer or purchase more
than 10% of the voting securities of any one issuer (except for investments
in securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities).
2. Invest more than 25% of its total assets (taken at market value at
the time of each investment) in the securities of issuers in any particular
industry or in securities issued or guaranteed by the Japanese government
or its agencies or instrumentalities provided that this restriction shall
not prevent the Fund from purchasing the securities of any issuer pursuant
to the exercise of rights distributed to the Fund by the issuer, except
that no such purchase may be made if as a result the Fund would no longer
be a diversified investment company as defined in the Investment Company
Act of 1940.
4
<PAGE> 34
3. Borrow amounts in excess of 10% of its total assets taken at cost
(not including the amount borrowed) and then only for temporary or
emergency purposes.
4. Issue senior securities except as appropriate to evidence permitted
borrowing (for the purpose of this restriction, forward foreign currency
exchange contracts and collateral arrangements with respect to such
contracts are not deemed to be senior securities).
5. Underwrite securities issued by other persons except to the extent
that the purchase of portfolio securities and their later disposition may
be deemed to be underwriting.
6. Purchase or sell real estate except that the Fund may invest in
securities secured by real estate or interests therein or securities issued
by companies which invest in real estate or interests therein.
7. Purchase or sell commodities or commodity contracts (for purposes
of this restriction, interest-rate, index and currency futures contracts,
options on such contracts and on stock indices and currencies, and forward
foreign currency exchange contracts are not deemed to be commodities or
commodity contracts).
8. Make loans to other persons except that the Fund may (i) lend its
portfolio securities in accordance with applicable legal requirements, (ii)
enter into repurchase agreements and (iii) purchase debt obligations in
accordance with its investment objective and policies.
With respect to restriction 8, above, the Fund has no present intention of
lending its portfolio securities.
The Fund has adopted the following additional restrictions which are not
fundamental and which may be changed without stockholder approval, to the extent
permitted by applicable law, regulation or regulatory policy. The Fund may not:
a. With respect to 25% of its total assets, invest more than 5% of the
value of such assets in the securities of any one issuer, or purchase more
than 10% of the voting securities of any one issuer (except for investments
in securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities)1
b. Make short sales of securities, maintain short positions or
purchase securities on margin, except for short-term credits as are
necessary for the clearance of transactions and in connection with
transactions involving forward foreign currency exchange contracts, futures
contracts and related options;
c. Invest more than 5% of its total assets in securities of unseasoned
issuers which, including their predecessors, have been in operation for
less than three years (except obligations issued or guaranteed by the U.S.
Government, the Japanese government or their agencies or instrumentalities)
and equity securities which are not readily marketable;
d. Enter into a repurchase agreement not terminable within seven days
if the total of such agreements would be more than 5% of the value of the
Fund's total assets;
e. Invest in securities of other investment companies (other than in
connection with a merger, consolidation, reorganization or acquisition of
assets) except to the extent permitted by the Investment Company Act of
1940 and related rules and regulatory interpretation;
f. Purchase put or call options if, as a result thereof, the value of
put and call options owned by the Fund would exceed 5% of the Fund's net
assets;
g. Purchase warrants of any issuer if, as a result more than 2% of the
value of the total assets of the Fund would be invested in warrants which
are not listed on the New York Stock Exchange or the American Stock
Exchange, or more than 5% of the value of the total assets of the Fund
would be invested
---------------
(1) With respect to the remaining 75% of the value of the Fund's total assets,
this limitation is fundamental and therefore cannot be changed without the
approval of a majority of the Fund shares. See restriction number 1, supra.
5
<PAGE> 35
in warrants. Warrants acquired by the Fund in units or attached to
securities may be deemed to be without value;
h. Purchase or retain for the Fund the securities of any issuer if
those officers and trustees of the Trust, or directors and officers of its
investment adviser, who individually own more than 1/2 of 1% of the
outstanding securities of such issuer, together own more than 5% of such
outstanding securities;
i. Purchase from or sell to any of the officers and trustees of the
Trust, its investment adviser, its principal underwriter or the officers
and directors of its investment adviser or principal underwriter, portfolio
securities of the Fund;
j. Invest in oil, gas or other mineral exploration or development
companies (although it may purchase securities of issuers which own,
sponsor or invest in such interests);
k. Pledge, mortgage or hypothecate its assets, except that to secure
permitted borrowings it may pledge securities having a value at the time of
the pledge of not more than 15% of the Fund's total assets taken at cost.
(For purposes of this restriction, collateral arrangements with respect to
permitted options and futures transaction and forward foreign exchange
contracts are not deemed to involve a pledge of assets.);
l. Purchase any securities subject to legal or contractual
restrictions on the resale thereof, or purchase securities which are not
readily marketable including securities of foreign issuers which are not
listed on a recognized domestic or foreign securities exchange, or enter
into repurchase agreements which are not terminable within seven days if
such purchase or entering into a repurchase agreement would cause more than
10% of the value of the total assets of the Fund to be invested in such
securities and such repurchase agreements, except that the Fund may not
invest more than 5% of the value of the total assets in repurchase
agreements which are not terminable within seven days.
The portfolio securities of the Fund may be turned over whenever necessary
or appropriate in the opinion of the Fund's management to seek the achievement
of the basic objective of the Fund. The turnover rate of the Fund's portfolio
was 57% for the fiscal year ended October 31, 1994.
PERFORMANCE INFORMATION
The Fund may from time to time include figures indicating the Fund's yield,
total return or average annual total return in advertisements or reports to
stockholders or prospective investors. Quotations of the Fund's yield will be
based on all investment income per share earned during a particular 30-day
period (including dividends and interest), less expenses accrued during the
period ("net investment income"), and are computed by dividing net investment
income by the maximum offering price per share (which includes the maximum sales
charge) on the last day of the period, according to the following formula:
YIELD = 2[(a-b + 1)6 - 1]
cd
where a = dividends and interest earned during the period,
b = expenses accrued for the period (net of reimbursements or
waivers),
c = the average daily number of shares outstanding during the period
that were entitled to receive dividends, and
d = the maximum offering price per share on the last day of the
period.
For the 30-day period ended October 31, 1994 the Fund's yield was (5.396)%.
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 the maximum sales charge and a proportional share of Fund expenses on an
annual basis. The results, which are annualized, represent an average annual
6
<PAGE> 36
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
<TABLE>
<S> <C> <C> <C>
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.
</TABLE>
For the one year period ended October 31, 1994, the Fund's average annual
total return was 9.401%. For the five year period ended October 31, 1994 and the
period July 10, 1989 (commencement of operations) to October 31, 1994 the Fund's
average annual total return was (6.027)% and (4.610)%, respectively.
Quotations of total return, which are not annualized, represent historical
earnings and asset value fluctuations. Total return figures used in
advertisements or sales literature will not usually reflect the deduction of the
maximum sales charges which if deducted would reduce the Fund's total return.
Total return is based on past performance and is not a guarantee of future
results. For the one year and five year periods ended October 31, 1994 and the
period July 10, 1989 to October 31, 1994 the Fund's total return was 14.879%,
(23.057)% and (18.286)%, respectively.
Performance information for the Fund may be compared, in reports and
promotional literature, to: (i) the Morgan Stanley Capital International Index;
(ii) the Tokyo Stock Exchange; (iii) the Standard & Poor's 500 Stock Price Index
("S&P 500 Index"), the Dow Jones Industrial Average ("DJIA"), or other
appropriate unmanaged indices of performance of various types of investments, so
that investors may compare the Fund's results with those of indices widely
regarded by investors as representative of the securities markets in general;
(iv) other groups of mutual funds tracked by Lipper Analytical Services, a
widely used independent research firm which ranks mutual funds by overall
performance, investment objectives, and assets, or tracked by other services,
companies, publications, or persons who rank mutual funds on overall performance
or other criteria; (v) the Consumer Price Index (a measure of inflation) to
assess the real rate of return from an investment in the Fund; and (vi) a
universe of money managers with similar country allocation and performance
objectives. Unmanaged indices may assume the reinvestment of dividends, but
generally do not reflect deductions for administrative and management costs and
expenses.
Performance information for the Fund reflects only the performance of a
hypothetical investment in the Fund during the particular time period on which
the calculations are based. Performance information should be considered in
light of the Fund's investment objectives and policies, the types and quality of
the Fund's portfolio investments, market conditions during the particular time
period and operating expenses. Such information should not be considered as a
representation of the Fund's future performance.
TRUSTEES AND EXECUTIVE OFFICERS
The trustees and executive officers of the Trust are listed below. Certain
persons named as trustees also serve in similar capacities for other mutual
funds sponsored by the Distributor as indicated below.
* EDWARD L. JAROSKI, Trustee and President of the Trust. 5847 San Felipe,
Suite 4100, Houston, Texas 77057. Chairman of the Board and Director of
the Administrator since 1992; President and Director of Capstone Asset
Planning Company and Capstone Financial Services, Inc. since 1987;
Director and officer of other Capstone Funds.
---------------
* Trustee who is an interested person as defined in the Investment Company Act
of 1940.
7
<PAGE> 37
* SHIGEKAZU KURISHIMA, Trustee and President of the Fund. 350 Park Avenue,
New York, New York 10022. Chairman and President of the Adviser since
1991; formerly Adviser to the Chairman of Wells Fargo Nikko Investment
Advisors (1990-1991); General Manager, Management Office of The Nikko
Securities Co., Ltd. (1990); and General Manager, International Investment
Department of Nikko International Capital Management Co., Ltd.
(1987-1990).
EUGENE W. POTTER, JR., Trustee. 43 Elm Lane, Bronxville, New York 10708.
Corporate Director and Private Investor; formerly President of Inco
Investment Management Services (1981-1986); Director of the Schafer Value
Fund, Inc. and Formula 40 U.S.A., Inc.
PHILIP C. SMITH, Trustee. 87 Lord's Highway, Weston, Connecticut 06880.
Private investor; Director of the Lexington Mutual Funds and other
Capstone Funds.
BERNARD J. VAUGHAN, Trustee. 113 Bryn Mawr Avenue, Bala Cynwyd,
Pennsylvania 19004. Director of other Capstone Funds; formerly Vice
President of Fidelity Bank (1979-1993).
IRIS R. CLAY, Secretary. 5847 San Felipe, Suite 4100, Houston, Texas
77057. Assistant Secretary (1990-1994) and Assistant Vice President (since
1994) of Capstone Financial Services, Inc. and Capstone Asset Management
Company; Assistant Secretary (1990-1994) and Assistant Vice President
(since 1995) of Capstone Asset Planning Company; Manager, Mutual Fund
Administration (since 1993) and Compliance Analyst (1987-1993) with
Capstone Financial Services, Inc.; officer of other Capstone Funds.
NORMA R. YBARBO, Assistant Secretary. 5847 San Felipe, Suite 4100,
Houston, Texas 77057. Compliance Assistant (1987-1993), Compliance Analyst
(1993-1994) and Assistant Compliance Officer (since 1994) of Capstone
Financial Services, Inc.; officer of other Capstone Funds.
LINDA G. GIUFFRE, Treasurer. 5847 San Felipe, Suite 4100, Houston, Texas
77057. Treasurer (since 1990) and Secretary (since 1994) of Capstone
Financial Services, Inc. and Capstone Asset Management Company; Treasurer
(since 1990) and Secretary (since 1995) of Capstone Asset Planning
Company; officer of other Capstone Funds; formerly Transfer Agent Manager
with Capstone Financial Services, Inc. (1987-1990).
The trustees and officers of the Trust as a group own less than one percent
of the outstanding Fund shares. Messrs. Smith and Vaughan also receive
compensation for serving as directors of other investment companies sponsored by
the Administrator.
Each trustee not affiliated with the Adviser or Administrator is entitled
to $125 for each Board meeting attended, and is paid a $1,000 annual retainer.
The trustees and officers of the Trust are also reimbursed for expenses incurred
in attending meetings of the Board of Trustees. For the fiscal year ended
October 31, 1994, the Fund paid or accrued for the account of the trustees and
officers, as a group for services in all capacities, a total of $6,850.
INVESTMENT ADVISORY AGREEMENT
Pursuant to an investment advisory agreement dated July 10, 1989 (the
"Advisory Agreement"), Nikko Capital Management (USA), Inc. (the "Adviser")
manages the investment of the Fund's assets and places orders for the purchase
and sale of its portfolio securities. The Adviser is responsible for obtaining
and evaluating economic, statistical, and financial data and for formulating and
implementing investment programs in furtherance of the Fund's investment
objectives and policies.
Under the Advisory Agreement, the Fund pays to the Adviser as compensation
for the services rendered by it a fee, calculated daily and payable quarterly,
equal to an annual rate of 0.40% of the average net assets of the Fund. For the
fiscal year ended October 31, 1994 the Fund paid investment advisory fees in the
amount of $14,087, all of which was reimbursed to the Fund pursuant to an
expense limitation (see "Expenses" below).
---------------
* Trustee who is an interested person as defined in the Investment Company Act
of 1940.
8
<PAGE> 38
The Advisory Agreement also provides that the Adviser shall not be liable
to the Fund for any actions or omissions in the absence of willful misfeasance,
bad faith, gross negligence or reckless disregard of the Adviser's obligations
or duties under the Advisory Agreement.
The Advisory Agreement was last approved by the Board of Trustees on May 2,
1994 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 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 quarterly, equal to an annual
rate of 0.20% of the Fund's average net assets. For the fiscal year ended
October 31, 1994 the Fund paid administrative fees in the amount of $7,044, all
of which was reimbursed to the Fund (see "Expenses" below).
Under the Administration Agreement, the Fund bears the cost of its
accounting services, which includes maintaining its financial books and records
and calculating its daily net asset value. The cost of such accounting services,
which is currently $2,000 per month, includes the salaries and overhead expenses
of personnel of the Administrator, office space, facilities and equipment costs
attributable to the provision of accounting services to the Fund. The services
are provided at cost which is allocated among the investment companies
administered by the Administrator. The Fund also pays transfer agency fees,
custodian fees, legal and auditing fees, the costs of printing reports to
stockholders and the Securities and Exchange Commission, fees under the Service
and Distribution Plan (see "Distributor") and all other ordinary expenses not
specifically borne by the Administrator.
The overhead of the Administrator which is charged to the Fund relates only
to the maintenance of the account records of the Fund and calculating its net
asset value. Such overhead does not include any costs with respect to legal,
blue sky, supervisory personnel, preparation of stockholder and director reports
and other functions of the Administrator for which it is already being
compensated under the Administration Agreement.
EXPENSES
The Adviser and Administrator have agreed to reduce their fees (and
reimburse the Fund if necessary) if the ordinary business expenses of the Fund
exceed any expense limitation applicable to the Fund pursuant to the laws or
regulations of any state. Such reimbursement shall be shared by the Adviser and
the Administrator ratably in proportion to the fees received by them from the
Fund. The most restrictive limitation presently applicable to the Fund is equal
to the sum of 2 1/2% of the first $30 million of the Fund's average net assets,
2% of the next $70 million of the Fund's average net assets, and 1 1/2% of the
Fund's average net assets in excess of $100 million.
During the fiscal year ended October 31, 1994 the total operating expenses
of the Fund prior to the reimbursements by the Adviser and Administrator were
3.85% of the Fund's average net assets, and 3.25% after the reimbursements.
9
<PAGE> 39
DISTRIBUTOR
Capstone Asset Planning Company (the "Distributor"), acts as the principal
underwriter of the Fund shares pursuant to an agreement with the Trust (the
"Distribution Agreement"). The Distributor has the exclusive right to distribute
Fund shares in a continuous offering through affiliated and unaffiliated
dealers. The Distributor's obligation is an agency or "best efforts" arrangement
under which the Distributor is required to take and pay for only such Fund
shares as may be sold to the public. The Distributor is not obligated to sell
any stated number of shares. The Distributor bears the cost of printing (but not
typesetting) prospectuses used in connection with this offering and the cost and
expense of supplemental sales literature, promotion and advertising. Sales of
Fund shares are subject to a sales charge equal to a percentage of the net asset
value of the shares to be purchased. See "Purchasing Shares" in the Prospectus.
The sales charge will be paid to the Distributor, who is permitted to reallow
the sales charge to broker-dealers who have an agreement with the Distributor to
participate in the offering of Fund shares. For the fiscal year ended October
31, 1994 the Distributor received $19,267 from the sale of Fund shares.
The Distribution Agreement is renewable from year to year if approved (a)
by the Fund's Board of Directors or by a vote of a majority of the Fund's
outstanding voting securities and (b) by the affirmative vote of a majority of
directors 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.
Prior to August 11, 1992 the Distributor served as principal underwriter
pursuant to a written agreement with the Fund dated July 10, 1989 ("Old
Distribution Agreement"). The Distribution Agreement and Old Distribution
Agreement are substantially similar except that the Distribution Agreement
incorporates language which discusses adoption by the Fund of a Service and
Distribution Agreement (discussed below). During the fiscal years ended October
31, 1993 and October 31, 1992, the Distributor received $5,822 and $189,
respectively, from the sale of Fund shares.
The Fund has adopted, effective September 1, 1992, a Service and
Distribution Plan (the "Plan") pursuant to Rule 12b-1 of the Investment Company
Act of 1940 which permits the Fund to absorb certain expenses in connection with
the distribution of its shares and provision of certain services to
stockholders. See "Management of the Fund -- Distributor" in the Fund's
Prospectus. As required by Rule 12b-1, the Fund's Plan and related agreements
were approved by a vote of the Fund's Board of Trustees, and by a vote of the
trustees who are not "interested persons" of the Fund as defined under the 1940
Act and have no direct or indirect interest in the operation of the Plan or any
agreements related to the Plan (the "Plan Trustees"), and by the Fund's
stockholders at a Special Meeting of Stockholders held August 10, 1992.
As required by Rule 12b-1, the trustees review quarterly reports prepared
by the Distributor on the amounts expended and the purposes for the
expenditures. The Fund paid $8,177 in 12b-1 fees during the fiscal year ended
October 31, 1994, of which approximately 11% was paid to Service Organizations
other than the Distributor.
The Plan and related agreements may be terminated at any time by a vote of
the Plan Trustees or by vote of a majority of the Fund's outstanding voting
securities. As required by Rule 12b-1, selection and nomination of disinterested
trustees for the Fund is committed to the discretion of the trustees who are not
"interested persons" as defined under the 1940 Act.
Any change in the Plan that would materially increase the distribution
expenses of the Fund requires stockholder approval, but otherwise, the Plan may
be amended by the trustees, including a majority of the Plan Trustees.
The Plan will continue in effect for successive one year periods provided
that such continuance is specifically approved by a majority of the trustees,
including a majority of the Plan Trustees. Continuance of the Plan was last
approved by a majority of trustees and Plan Trustees on November 13, 1994. 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
10
<PAGE> 40
and in light of their fiduciary duties, that there is a reasonable likelihood
that the Plan and related agreements will benefit the Fund and its stockholders.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Adviser is responsible for decisions to buy and sell securities for the
Fund and for the placement of its portfolio business and the negotiation of the
commissions paid on such transactions. In over-the-counter transactions, orders
are placed directly with a principal market maker unless it is believed that a
better price and execution can be obtained by using a broker. Except to the
extent that the Fund may pay higher brokerage commissions for brokerage and
research services (as described below) on a portion of its transactions executed
on securities exchanges, the Adviser seeks the best security price at the most
favorable commission rate. In selecting dealers and in negotiating commissions,
the Adviser considers the firm's reliability, the quality of its execution
services on a continuing basis and its financial condition. When more than one
firm are believed to meet these criteria, preference may be given to firms which
also provide research services to the Fund or the Adviser. Subject to the Fund's
overall brokerage policies, the Adviser may effect securities transactions
through Capstone Asset Planning Company and Williams McKay Jordan & Mills, Inc.,
broker-dealer affiliates of the Administrator, and with The Nikko Securities
Company International, Inc., an affiliate of the Fund's Adviser.
Section 28(e) of the Securities Exchange Act of 1934 ("Section 28(e)")
permits an investment adviser, under certain circumstances, to cause an account
to pay a broker or dealer who supplies brokerage and research services a
commission for effecting a securities transaction in excess of the amount of
commission another broker or dealer would have charged for effecting the
transaction. Brokerage and research services include (a) furnishing advice as to
the value of securities, the advisability of investing in, purchasing or selling
securities, and the availability of securities or purchasers or sellers of
securities, (b) furnishing analyses and reports concerning issuers, industries,
securities, economic factors and trends, portfolio strategy, and the performance
of accounts, and (c) effecting securities transactions and performing functions
incidental thereto (such as clearance, settlement and custody).
Pursuant to provisions of the Advisory Agreement, the Trust's Board of
Trustees has authorized the Adviser to cause the Fund to incur brokerage
commissions in an amount higher than the lowest available rate in return for
brokerage and research services which provide lawful and appropriate assistance
to the Adviser in carrying out its investment-decision making responsibilities.
The Adviser is of the opinion that the continued receipt of supplemental
investment research services from dealers is essential to its provision of high
quality portfolio management services to the Fund. The Adviser undertakes that
such higher commissions will not be paid by the Fund unless (a) the Adviser
determines in good faith that the amount is reasonable in relation to the
services in terms of the particular transaction or in terms of the Adviser's
overall responsibilities with respect to the accounts as to which it exercises
investment discretion, (b) such payment is made in compliance with the
provisions of Section 28(e) and other applicable state and Federal laws and
regulations, and (c) in the opinion of the Adviser, the total commissions paid
by the Fund are reasonable in relation to the expected benefits to the Fund over
the long term. The investment advisory fee paid by the Fund under the Advisory
Agreement is not reduced as a result of the Adviser's receipt of research
services.
Consistent with the Rules of Fair Practice of the National Association of
Securities Dealers, Inc. and subject to seeking best execution and such other
policies as the Board of Trustees may determine, the Adviser may consider sales
of Fund shares as a factor in the selection of dealers to execute portfolio
transactions for the Fund.
The Adviser places portfolio transactions for other advisory accounts.
Research services furnished by firms through which the Fund effects its
securities transactions may be used by the Adviser in servicing all of its
accounts; not all of such services may be used by the Adviser in connection with
the Fund. In the opinion of the Adviser, the benefits from research services to
each of the accounts (including the Fund) managed by the Adviser cannot be
measured separately. Because the volume and nature of the trading activities of
the accounts are not uniform, the amount of commissions in excess of the lowest
available rate paid by each
11
<PAGE> 41
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.
The Fund contemplates that, consistent with its policy of obtaining best
net results, a substantial amount of its brokerage transactions will be
conducted through affiliates of the Adviser. Fixed commissions are charged on
the securities exchanges in Japan. Such fixed commissions are generally higher
than negotiated commissions on comparable United States transactions. Brokerage
commissions paid by the Fund on portfolio transactions for the fiscal year ended
October 31, 1994 totalled $35,894 (1.02% of the average net assets of the Fund),
all of which was paid to The Nikko Securities Co. International, Inc., an
affiliate of the Adviser. For the fiscal year ended October 31, 1994 all
portfolio transactions were effected with the payment of a commission.
DETERMINATION OF NET ASSET VALUE
The Fund determines its net asset value per share on each day the New York
Stock Exchange is open for business. The Fund's net asset value will not be
computed on the following holidays: New Year's Day, President's Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day.
Purchase, redemption or repurchase orders properly received by the
Distributor by 4:00 p.m. EST on Monday through Thursday are priced based upon
the net asset value determined as of the close of regular trading on the
Japanese stock exchanges (3:00 p.m. Tokyo time) on the following day. The
Japanese stock exchanges are: Hiroshima, Osaka, Nagoyo, Kyoto, Yamagata,
Sapporo, Niigata, Fukuoka and JASDAQ (the "Japanese Exchanges"). Orders received
by the Distributor prior to 4:00 p.m. EST on a Friday will be effected at the
net asset value determined as of the close of regular trading on the Japanese
Exchanges on the following Monday. The Fund will in some cases value its
portfolio securities as of days on which the Japanese Exchanges are closed for
Japanese 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
14:00 Greenwich Mean Time on each U.S. business day.
Portfolio securities and futures contracts which are traded on a Japanese
Exchange are valued at the last sale price on that exchange prior to the
relevant closing or, if there is no recent last sale price available, at the
last current bid quotation. A security or futures contract which is listed or
traded on more than one exchange is valued at the quotation on the exchange
determined to be the primary market for such security or contract. All other
equity securities and futures contracts not so traded are valued at the last
current bid quotation prior to the relevant Japanese Exchange closing. Fixed
income securities are valued using market quotations or pricing services. In the
absence of an applicable price, securities and futures contracts will be valued
at a fair value as determined in good faith by the trustees or in accordance
with procedures established by the trustees.
12
<PAGE> 42
HOW TO BUY AND REDEEM SHARES
Shares of the Fund are sold in a continuous offering and may be purchased
on any business day through authorized dealers, including Capstone Asset
Planning Company or The Nikko Securities Co. International, Inc., an affiliate
of the Adviser. 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 public offering price determined as of the close of
trading on the Japanese Exchanges on the following day. See "Determination of
Net Asset Value". Initial purchases must be at least $200; however, this
requirement may be waived by the Distributor for plans involving continuing
investments. There is no minimum for subsequent purchases of shares. No stock
certificates representing shares purchased will be issued except upon written
request to the Fund's Transfer Agent. The Fund's management reserves the right
to reject any purchase order if, in its opinion, it is in the Fund's best
interest to do so. See "Purchasing Shares" in the Prospectus.
Generally, stockholders may require the Fund to redeem their shares by
sending a written request, signed by the record owner(s), to Capstone Nikko
Japan Fund, c/o Fund/Plan Services, Inc., P.O. Box 874, 2 W. Elm Street,
Conshohocken, Pennsylvania 19428. In addition, certain expedited redemption
methods are available. See "Redemption and Repurchase of Shares" in the
Prospectus.
REDUCED SALES CHARGES
401(k) Plans - The Rights of Accumulation and Letters of Intent for the
account of each group member participating in a plan qualified under Section 401
of the Internal Revenue Code will be determined on an individual basis. The
schedule of sales charges below applies to each participant of qualified 401(k)
plans:
<TABLE>
<CAPTION>
SALES CHARGE AS A DEALER
PERCENTAGE OF REALLOWANCE
--------------- AS A NET
NET PERCENTAGE
OFFERING AMOUNT OF OFFERING
AMOUNT OF SINGLE TRANSACTION PRICE INVESTED PRICE
---------------------------- -------- -------- ----------
<S> <C> <C> <C>
Less than $100,000....................................... 3.75% 3.90% 3.25%
$100,000 but less than $250,000.......................... 2.75% 2.83% 2.25%
$250,000 but less than $500,000.......................... 1.75% 1.78% 1.25%
$500,000 but less than $1,000,000........................ 1.00% 1.01% .90%
$1,000,000 or more....................................... .50% .50% .45%
</TABLE>
Please refer to "Purchasing Shares--Reduced Sales Charges" in the Fund's
Prospectus for information regarding other programs which allow purchases of
Fund shares with a reduced sales charge.
TAXES
The following summary describes some of the more significant U.S. Federal
income tax consequences applicable to investors in the Fund based on existing
Federal tax law. New tax laws may be enacted which may affect the tax
consequences of an investment in the Fund. The following discussion is
necessarily general, and prospective investors are urged to consult their own
tax advisers with respect to the particular tax consequences to the investor of
an investment in the Fund.
The Fund intends to qualify annually and elect to be treated as a regulated
investment company under Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code"). Qualification and election to be taxed as a regulated
investment company involves no supervision of management or investment policies
or practices by any government agency. To qualify as a regulated investment
company the Fund must, with respect to each taxable year, distribute to
stockholders at least 90% of its investment company taxable income (which
includes, among other items, dividends, interest, certain foreign currency gains
and losses and the excess of net short-term capital gains over net long-term
capital losses) and meet certain diversification of assets, source of income,
and other requirements of the Code.
13
<PAGE> 43
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. Amounts not distributed on a timely basis
in accordance with a calendar year distribution requirement are subject to a
nondeductible 4% excise tax. To prevent imposition of the tax, the Fund must
distribute during each calendar year an amount equal to the sum of: (1) at least
98% of its ordinary income (not taking into account any capital gains or losses)
for the calendar year, (2) at least 98% of its capital gains in excess of its
capital losses for the twelve-month period ending on October 31 of the calendar
year (reduced by certain net operating losses, as prescribed by the Code), and
(3) all ordinary income and capital gains from previous years that were not
distributed during such years. A distribution will be treated as paid on
December 31 of the calendar year if it is declared by the Fund in October,
November or December of that year to stockholders on a record date in such a
month and paid by the Fund during January of the following calendar year. Such
distributions will be taxable to stockholders in the calendar year in which the
distributions are declared, rather than the calendar year in which the
distributions are received. To prevent application of the excise tax, the Fund
intends to make its distributions in accordance with the calendar year
distribution requirement.
The Fund may invest in stocks of foreign companies that are classified
under the Code as passive foreign investment companies ("PFICs"). In general, a
foreign company is classified as a PFIC if at least one-half of its assets
constitute investment-type assets or 75% or more of its gross income is
investment-type income. Under the PFIC rules, an "excess distribution" received
with respect to PFIC stock is treated as having been realized ratably over the
period during which the Fund held the PFIC stock. The Fund itself will be
subject to tax on the portion, if any, of the excess distribution that is
allocated to the Fund's holding period in prior taxable years (and an interest
factor will be added to the tax, as if the tax had actually been payable in such
prior taxable years) even though the Fund distributes the corresponding income
to stockholders. Excess distributions include any gain from the sale of PFIC
stock as well as certain distributions from a PFIC. All excess distributions are
taxable as ordinary income.
The Fund may be able to elect alternative tax treatment with respect to
PFIC stock. Under an election that currently may be available, the Fund
generally would be required to include in its gross income its share of the
earnings of a PFIC on a current basis, regardless of whether any distributions
are received from the PFIC. If this election is made, the special rules,
discussed above, relating to the taxation of excess distributions, would not
apply. Alternatively, the Fund may elect to mark-to-market its PFIC stock,
resulting in the stock being treated as sold at fair market value on the last
business day of each taxable year. Any resulting gain would be reported as
ordinary income, and any resulting loss would not be recognized. If this
election were made, the special rules described above with respect to excess
distributions would still apply. The Fund's intention to qualify annually as a
regulated investment company may limit its elections with respect to PFIC stock.
Because the application of the PFIC rules may affect, among other things,
the character of gains, the amount of gain or loss and the timing of the
recognition of income with respect to PFIC stock, as well as subject the Fund
itself to tax on certain income from PFIC stock, the amount that must be
distributed to stockholders and which will be taxed to stockholders as ordinary
income or long-term capital gain, may be increased or decreased substantially as
compared to a fund that did not invest in PFIC stock.
If the Fund retains net capital gains for reinvestment, although it has no
plans to do so, the Fund may elect to treat such amounts as having been
distributed to its stockholders. As a result, the stockholders would be subject
to tax on undistributed capital gains, would be able to claim their
proportionate share of the Federal income taxes paid by the Fund on such gains
as a credit against their own Federal income tax liabilities, and would be
entitled to an increase in their basis in the Fund shares.
DISTRIBUTIONS. Dividends paid out of the Fund's investment company taxable
income will be taxable to a stockholder as ordinary income. Distributions of net
capital gains, if any, designated by the Fund as capital gain dividends, are
taxable as long-term capital gains, regardless of how long the stockholder has
held the Fund's shares, and are not eligible for the dividends received
deduction.
14
<PAGE> 44
Dividends received by corporate stockholders may qualify for the dividends
received deduction to the extent the Fund designates its dividends as derived
from dividends from domestic corporations. The amount designated by the Fund as
so qualifying cannot exceed the aggregate amount of dividends received by the
Fund from domestic corporations for the taxable year. Since the Fund's income
may not consist exclusively of dividends eligible for the corporate dividends
received deduction, its distributions of investment company taxable income
likewise may not be eligible, in whole or in part, for that deduction. The
alternative minimum tax applicable to corporations may reduce the benefits of
the dividends received deductions. The dividends received deduction may be
further reduced if the shares of the Fund are debt-financed or are deemed to
have been held less than 46 days.
All distributions are taxable to the stockholder whether reinvested in
additional shares of the Fund or received in cash. Stockholders receiving
distributions in the form of additional shares will have a cost basis for
Federal income tax purposes in each share received equal to the net asset value
of a share of the Fund on the reinvestment date. Stockholders will be notified
annually as to the Federal tax status of distributions.
Distributions by the Fund reduce the net asset value of the Fund shares.
Should a distribution reduce the net asset value below a stockholder's cost
basis, such distribution nevertheless would be taxable to the stockholder as
ordinary income or capital gain as described above, even though, from an
investment standpoint, it may constitute a partial return of capital. In
particular, investors should be careful to consider the tax implications of
buying shares just prior to a distribution by the Fund. The price of shares
purchased at that time includes the amount of the forthcoming distribution, but
the distribution will generally be taxable to them.
HEDGING AND OTHER TRANSACTIONS. Certain options, futures contracts and
forward foreign currency contracts are "section 1256 contracts." Any gains or
losses on section 1256 contracts generally are considered 60% long-term and 40%
short-term capital gains or losses ("60/40"); however, foreign currency gains or
losses (as discussed below) arising from certain section 1256 contracts may be
treated as ordinary income or loss. Also, section 1256 contracts held by the
Fund at the end of each taxable year are "marked-to-market" with the result that
unrealized gains or losses are treated as though they were realized and the
resulting gain or loss is generally treated as 60/40 gain or loss.
Generally, the hedging transactions undertaken by the Fund may result in
"straddles" for Federal income tax purposes. The straddle rules may affect the
character of gains (or losses) realized by the Fund. In addition, losses
realized by the Fund on positions that are part of a straddle may be deferred
under the straddle rules, rather than being taken into account in calculating
the taxable income for the taxable year in which such losses are realized.
Because only a few regulations implementing the straddle rules have been
promulgated, the tax consequences to the Fund of hedging transactions are not
entirely clear. The hedging transactions may increase the amount of short-term
capital gain realized by the Fund, which is taxed as ordinary income when
distributed to stockholders.
The Fund may make one or more of the elections available under the Code
which are applicable to straddles. If the Fund makes any of the elections, the
amount, character and timing of the recognition of gains or losses from the
affected straddle positions will be determined under rules that vary according
to the election(s) made. The rules applicable under certain of the elections may
operate to defer the recognition of losses and/or accelerate the recognition of
gains or losses from the affected straddle positions.
Because application of the straddle rules may affect the character of gains
or losses, defer losses and/or accelerate the recognition of gains or losses
from the affected straddle positions, the amount which must be distributed to
stockholders, and which will be taxed to stockholders as ordinary income or
long-term capital gain, may be increased or decreased substantially as compared
to a fund that did not engage in such hedging transactions.
Certain requirements that must be met under the Code in order for the Fund
to qualify as a regulated investment company may limit the extent to which the
Fund will be able to engage in transactions in options, futures and forward
contracts.
15
<PAGE> 45
FOREIGN CURRENCY GAINS AND LOSSES. Under the Code, gains or losses
attributable to fluctuations in foreign currency exchange rates which occur
between the time the Fund accrues interest or other receivables or accrues
expenses or other liabilities denominated in a foreign currency and the time the
Fund actually collects such receivables or pays such liabilities generally are
treated as ordinary income or ordinary loss. Similarly, on the disposition of
debt securities denominated in a foreign currency and on the disposition of
certain options, futures and forward contracts, gains or losses attributable to
fluctuations in the value of foreign currency between the date of acquisition of
the security or contract and the date of disposition also are treated as
ordinary gain or loss. These gains or losses, referred to under the Code as
"section 988" gains or losses, may increase or decrease the amount of the Fund's
investment company taxable income to be distributed to its stockholders as
ordinary income.
DISPOSITION OF SHARES. Upon a taxable disposition (by redemption,
repurchase, sale or exchange) of Fund shares, a stockholder may realize a
taxable gain or loss, depending upon his basis in his shares. That gain or loss
will be a capital gain or loss if the shares are capital assets in the
stockholder's hands, and generally will be long-term or short-term depending
upon the stockholder's holding period for the shares. Any loss realized by a
stockholder on a disposition of Fund shares held by the stockholder for six
months or less will be treated as a long-term capital loss to the extent of any
distributions of capital gain dividends received by the stockholder with respect
to such shares. Any loss realized on a disposition will be disallowed to the
extent the shares disposed of are replaced (whether by reinvestment of
distributions or otherwise) within a period of 61 days beginning 30 days before
and ending 30 days after the date of disposition of the shares. In such a case,
the basis of the shares acquired will be adjusted to reflect the disallowed
loss.
Under certain circumstances, the sales charge incurred in acquiring shares
of the Fund may not be taken into account in determining the gain or loss on the
disposition of those shares. This rule applies where shares of the Fund are
exchanged within 90 days after the date they were purchased and new shares of a
Capstone Fund or another regulated investment company are acquired without a
sales charge or at a reduced sales charge. In that case, the gain or loss
recognized on the exchange will be determined by excluding from the tax basis of
the shares exchanged all or a portion of the sales charge incurred in acquiring
those shares. This exclusion applies to the extent that the otherwise applicable
sales charge with respect to the newly acquired shares is reduced as a result of
having incurred a sales charge initially. The portion of the sales charge
affected by this rule will be treated as a sales charge for the new shares.
Certain of the debt securities acquired by the Fund may be treated as debt
securities that were originally issued at a discount. Original issue discount
can generally be defined as the difference between the price at which a security
was issued and its stated redemption price at maturity. Although no cash income
is actually received by the Fund, original issue discount on a taxable debt
security earned in a given year generally is treated for Federal income tax
purposes as interest and, therefore, such income would be subject to the
distribution requirements of the Code.
BACKUP WITHHOLDING. The Fund may be required to withhold Federal income tax
at the rate of 31% of all taxable distributions from the Fund and of gross
proceeds from the redemption of Fund shares payable to stockholders who fail to
provide the Fund with their correct taxpayer identification number or to make
required certifications, or who have been notified by the Internal Revenue
Service that they are subject to backup withholding. Corporate stockholders and
certain other stockholders specified in the Code generally are exempt from
backup withholding. Backup withholding is not an additional tax. Any amounts
withheld may be credited against the stockholder's U.S. Federal income tax
liability.
FOREIGN TAXES. Income received by the Fund from sources within foreign
countries may be subject to withholding and other taxes imposed by such
countries. Tax conventions between certain countries and the United States may
reduce or eliminate these taxes. Under the current income tax treaty between the
United States and Japan, the withholding tax imposed by Japan on dividends from
Japanese sources is generally 15% (although a 10% rate may be applicable in some
circumstances) and the withholding tax on interest from Japanese sources is
generally 10%. Japan also imposes a tax on the transfer of securities. It is
impossible to determine in advance the amount of foreign taxes that will be
imposed on the Fund.
16
<PAGE> 46
If more than 50% of the value of the Fund's total assets at the close of
its taxable year consists of securities of foreign corporations, the Fund will
be eligible and intends to elect to "pass-through" to the Fund's stockholders
the amount of foreign income and similar taxes paid by the Fund. Pursuant to
this election, a stockholder will be required to include in gross income (in
addition to taxable dividends actually received) his pro rata share of the
foreign income and similar taxes paid by the Fund, and generally will be
entitled either to deduct (as an itemized deduction) his pro rata share of such
foreign taxes in computing his taxable income or to use it (subject to
limitations) as a foreign tax credit against his U.S. Federal income tax
liability. No deduction for foreign taxes may be claimed by a stockholder who
does not itemize deductions. Each stockholder will be notified within 60 days
after the close of the Fund's taxable year whether the foreign taxes paid by the
Fund will "pass-through" for that year and, if so, such notification will
designate (a) the stockholder's portion of the foreign taxes paid to foreign
countries and (b) the portion of the dividend which represents income derived
from sources outside the U.S.
Generally, a credit for foreign taxes is subject to the limitation that it
may not exceed the stockholder's U.S. Federal income tax attributable to his
total foreign source taxable income. For this purpose, if the pass-through
election is made, the source of the Fund's income flows through to its
stockholders. With respect to the Fund, gains from the sale of securities will
be treated as derived from U.S. sources and certain currency fluctuation gains,
including fluctuation gains from foreign currency denominated debt securities,
receivables and payables, will be treated as derived from U.S. sources. The
limitation on the foreign tax credit is applied separately to foreign source
passive income, such as dividends received from the Fund. Stockholders may be
unable to claim a credit for the full amount of their proportionate share of
foreign taxes paid by the Fund. In addition, the foreign tax credit may offset
only 90% of the alternative minimum tax (prior to reduction for the "regular"
tax liability for the year) imposed on corporations and individuals. In
addition, foreign taxes may not be deducted by a stockholder that is an
individual in computing alternative minimum taxable income.
The foregoing is only a general description of the foreign tax credit under
current law. Because application of the credit depends on the particular
circumstances of each stockholder, stockholders are advised to consult their own
tax advisers.
FOREIGN STOCKHOLDERS - U.S. FEDERAL INCOME TAXATION. U.S. Federal income
taxation of a stockholder who, as to the United States, is a non-resident alien
individual, a foreign trust or estate, a foreign corporation, or a foreign
partnership (a "foreign stockholder"), depends on whether the income from the
Fund is "effectively connected" with a U.S. trade or business carried on by such
stockholder, as discussed generally below. Special U.S. Federal income tax rules
that differ from those described below may apply to foreign persons who invest
in the Fund. For example, the tax consequences to a foreign stockholder entitled
to claim the benefits of an applicable tax treaty may be different from those
described below. Foreign stockholders are advised to consult their own tax
advisers with respect to the particular tax consequences to them of an
investment in the Fund.
FOREIGN STOCKHOLDERS - INCOME NOT EFFECTIVELY CONNECTED. If the income from
the Fund is not effectively connected with a U.S. trade or business carried on
by the stockholder, distributions of investment company taxable income generally
will be subject to a U.S. Federal withholding tax of 30% (or lower treaty rate)
on the gross amount of the distribution. Foreign stockholders may also be
subject to the U.S. Federal withholding tax on the income resulting from any
election by the Fund to treat foreign taxes paid by it as paid by its
stockholders, but foreign stockholders will not be able to claim a credit or
deduction for the foreign taxes treated as having been paid by them.
Capital gains realized directly by foreign stockholders upon the sale of
Fund shares and distributions of net capital gains, as well as amounts retained
by the Fund which are designated as undistributed capital gains, generally will
not be subject to U.S. Federal income tax unless the foreign stockholder is a
non-resident alien individual and is physically present in the United States for
more than 182 days during the taxable year. However, this rule only applies in
exceptional cases because any individual present in the United States for more
than 182 days during the taxable year generally is treated as a resident for
U.S. Federal income tax purposes and is taxable on his worldwide income at the
graduated rates applicable to U.S. citizens, rather than the 30% U.S. Federal
withholding tax. In the case of certain foreign stockholders, the Fund may be
required to
17
<PAGE> 47
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 may also be subject to the branch profits tax.
FOREIGN STOCKHOLDERS - ESTATE TAX. Foreign individuals generally are
subject to U.S. Federal estate tax on their U.S. situs property, such as shares
of the Fund, that they own at the time of their death. Certain credits against
such tax and relief under applicable tax treaties may be available.
OTHER TAXATION. Distributions and redemption proceeds with respect to the
Fund also may be subject to additional state, local and foreign taxes, depending
upon each stockholder's particular situation. Stockholders are advised to
consult their tax advisers with respect to the particular tax consequences to
them of an investment in the Fund.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
The following table sets forth information concerning such persons which,
to the knowledge of the Fund's Board of Trustees, owned more than five percent
of the Fund's shares as of February 27, 1995:
<TABLE>
<CAPTION>
PERCENT
OF
NAME AND ADDRESS OWNERSHIP
---------------- ---------
<S> <C>
Nikko Capital Management Company (USA), Inc. ................. 25.2%
489 Fifth Avenue, 6th Floor
New York, NY 10017
SMC Pneumatics, Inc. ......................................... 24.0%
3011 N. Franklin Rd.
Indianapolis, IN 46226-6308
</TABLE>
OTHER INFORMATION
CUSTODY OF ASSETS. All securities owned by the Fund and cash from the sale
of securities in the Fund's investment portfolio are held by The Bank of Tokyo
Trust Company, as custodian, either directly or pursuant to a Sub-Custody
Agreement with The Bank of Tokyo, Ltd. in Tokyo.
STOCKHOLDER REPORTS. Semi-annual reports are furnished to stockholders, and
annually the financial statements in such reports are audited by the Fund's
independent accountants.
INDEPENDENT ACCOUNTANTS. Tait, Weller & Baker, Two Penn Center Plaza, Suite
700, Philadelphia, PA 19102-1707, the independent accountants for the Fund,
performs annual audits of the Fund's financial statements.
LEGAL COUNSEL. Dechert Price & Rhoads, 1500 K Street, N.W., Washington, DC
20005, is legal counsel to the Fund.
18
<PAGE> 48
CAPSTONE NIKKO JAPAN FUND
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Shareholders and Board of Trustees
of Capstone Nikko Japan Fund
We have audited the accompanying statement of assets and liabilities of
Capstone Nikko Japan Fund, including the portfolio of investments, as of October
31, 1994, and the related statement of operations for the year then ended, the
statement of changes in net assets for each of the two years in the period then
ended, and financial highlights for each of the five years in the period then
ended. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free from material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
October 31, 1994, by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
Capstone Nikko Japan Fund as of October 31, 1994, and the results of its
operations, changes in its net assets and financial highlights for the periods
presented, in conformity with generally accepted accounting principles.
Tait, Weller & Baker
Philadelphia, Pennsylvania
November 18, 1994
19
<PAGE> 49
CAPSTONE NIKKO JAPAN FUND
PORTFOLIO OF INVESTMENTS OCTOBER 31, 1994
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARKET
COMMON VALUE PERCENT OF
STOCK -- 95.90% SHARES (NOTE 1-A) NET ASSETS
--------------------- ------ ---------- ----------
<S> <C> <C> <C> <C>
AUTOMOBILES & TRUCKS 14,000 Fuji Heavy Industries(a)......... $ 64,775 1.86%
3.94% 13,000 Tokico, Ltd...................... 72,311 2.08
---------- ---------
137,086 3.94
BANKING 8,000 Nippon Trust & Banking........... 38,083 1.09
1.09%
Asahi Organic Chemical
CHEMICALS 6,000 Industry......................... 51,820 1.49
6.94% 15,000 Central Glass Co., Ltd.(a)....... 61,074 1.75
10,000 Daicel Chemical Industries....... 60,765 1.74
10,000 NOF Corporation.................. 68,168 1.96
---------- ---------
241,827 6.94
COMMERCE 9,000 Hitachi Sales Corporation........ 63,294 1.82
9.78% 4,000 K. Hattori....................... 39,893 1.15
6,000 Mutow............................ 57,064 1.64
4,000 Nissei Sangyo Co., Ltd........... 57,578 1.65
5,000 Shinko Shoji Co., Ltd............ 70,430 2.02
2,000 Uni-Charm........................ 52,231 1.50
---------- ---------
340,490 9.78
COMMUNICATIONS 6,000 NEC Corporation.................. 76,496 2.20
EQUIP. 5,000 Tokin Corp....................... 74,543 2.14
4.34% ---------- ---------
151,039 4.34
CONSUMER 5,000 Alps Electric Co., Ltd.(a)....... 67,345 1.93
ELECTRONICS
1.93%
FOOD & BEVERAGE 6,000 Fuji Oil Co., Ltd................ 55,460 1.59
8.75% 8,000 Fujiya Confectionary............. 49,352 1.42
6,000 Marudai Foods Co., Ltd........... 46,021 1.32
5,000 Misawa Homes..................... 47,296 1.36
6,000 Sapporo Breweries................ 54,719 1.57
9,000 Wakachiku Construction........... 51,820 1.49
---------- ---------
304,668 8.75
INDUSTRIAL MACHINERY 4,000 Hisaka Works..................... 57,166 1.64
6.56% 5,000 Shibuya Kogyo.................... 61,176 1.76
6,000 Sumitomo Precision Products...... 46,576 1.34
7,000 Toyoda Machine Works, Ltd........ 63,335 1.82
---------- ---------
228,253 6.56
MACHINE TOOLS 6,000 Amada Sonoike Co., Ltd........... 53,979 1.55
1.55%
MASS-MEDIA 500 Kokusai Denshin Denwa............ 51,151 1.47
COMMUNICATIONS
1.47%
</TABLE>
20
<PAGE> 50
CAPSTONE NIKKO JAPAN FUND
PORTFOLIO OF INVESTMENTS OCTOBER 31, 1994
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARKET
VALUE PERCENT OF
SHARES (NOTE 1-A) NET ASSETS
------ ---------- ----------
<S> <C> <C> <C> <C>
MASS-SALES STORE 6,000 Life Corporation................. $ 46,021 1.32%
& FOOD SERVICES 3,000 Marui Co., Ltd................... 54,596 1.57
4.06% 4,000 Mitsukoshi, Ltd.................. 40,839 1.17
---------- ---------
141,456 4.06
MISC. ELECTRICAL 5,000 Casio Computer Co., Ltd.......... 66,317 1.90
PRODUCTS 1,500 Fanuc, Ltd....................... 72,486 2.08
13.54% 9,000 Fuji Electrochemical(a).......... 75,879 2.18
6,000 Graphtec......................... 57,989 1.67
5,000 Maatshushita Electric Works...... 55,007 1.58
2,000 Matsushita Communication Ind..... 55,521 1.59
4,000 Nitto Denko Corporation.......... 68,682 1.97
450 Stanley Electric Co., Ltd........ 3,595 0.10
1,000 Tabai Espec...................... 16,451 0.47
---------- ---------
471,927 13.54
MISC. FINANCING 4,000 Diamond Lease Co., Ltd........... 67,037 1.92
3.72% 3,000 Monura Securities Co., Ltd....... 62,616 1.80
---------- ---------
129,653 3.72
PETROLEUM PRODUCTS 8,000 Nippon Oil Co., Ltd.............. 57,578 1.65
1.65%
PHARMACEUTICALS 4,000 Dainippon Pharmaceutical......... 43,595 1.25
6.81% 5,000 Green Cross...................... 49,301 1.42
200 Kaken Pharmaceutical............. 2,735 0.08
5,000 Shiseido Co., Ltd................ 60,148 1.72
5,000 Tanabe Seiyaku Co., Ltd.......... 42,155 1.21
2,000 Yamanouchi Pharmaceutical........ 39,276 1.13
---------- ---------
237,210 6.81
PRECISION MACHINERY 4,000 NIFCO............................ 64,980 1.86
9.49% 8,000 Sankyo Seiki Mfg.(a)............. 61,115 1.76
10,000 Shimadzu Corp.................... 73,206 2.10
8,000 Topcon Corporation(a)............ 64,980 1.87
5,000 Yamaha Corp...................... 66,317 1.90
---------- ---------
330,598 9.49
Sumitomo Realty & Development
REAL ESTATE 8,000 Co............................... 50,997 1.46
1.46%
RETAIL STORES 4,000 Royal Co., Ltd................... 64,569 1.85
& FOOD SERVICES 5,000 Seiyo Food Systems, Incorporated 62,204 1.79
3.64% ---------- ---------
126,773 3.64
</TABLE>
21
<PAGE> 51
CAPSTONE NIKKO JAPAN FUND
PORTFOLIO OF INVESTMENTS OCTOBER 31, 1994
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARKET
VALUE PERCENT OF
SHARES (NOTE 1-A) NET ASSETS
------ ---------- ----------
<S> <C> <C> <C> <C>
SERVICES 4,000 Intec............................ $ 62,102 1.78%
1.78%
TEXTILES 8,000 Asahi Chemical Industry.......... 64,487 1.85
1.85%
WIRES & CABLES 7,000 Totoku Electric Co., Ltd......... 54,123 1.55
1.55%
TOTAL INVESTMENTS
(Cost $2,711,437)................ 3,340,825 95.90
OTHER ASSETS, LESS
LIABILITIES...................... 142,843 4.10
---------- -------
NET ASSETS....................... $3,483,668 100.00%
========== =======
</TABLE>
---------------
(a) Non-income producing income.
See Accompanying Notes to Financial Statements
22
<PAGE> 52
CAPSTONE NIKKO JAPAN FUND
STATEMENT OF ASSETS AND LIABILITIES OCTOBER 31, 1994
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
Investments in securities at market (identified cost $2,711,437) (Note
1-A)................................................................ $ 3,340,825
Cash.................................................................. 122,566
Foreign currency holdings -- Yen account, at market (Note 1-B)........ 12,255
Receivables:
Trust shares sold................................................... $33,097
Dividends........................................................... 8,270 41,367
------- -----------
Total assets................................................ 3,517,013
LIABILITIES:
Payable for Trust shares redeemed..................................... 5,876
Accrued expenses...................................................... 27,469
-------
Total liabilities........................................... 33,345
-----------
NET ASSETS............................................................ $ 3,483,668
==========
NET ASSET VALUE PER SHARE: ($3,483,668 / 433,566 shares of beneficial
interest outstanding) $.01 par value, unlimited shares authorized
(Note 3)............................................................ $ 8.03
==========
COMPUTATION OF OFFERING PRICE PER SHARE: (Net asset value $8.03 x
100/95.25).......................................................... $ 8.43
==========
SOURCE OF NET ASSETS:
Paid in capital..................................................... $ 6,063,837
Accumulated net realized loss on investments........................ (3,209,969)
Net unrealized appreciation on investments and foreign currencies... 629,800
-----------
$ 3,483,668
==========
</TABLE>
See Accompanying Notes to Financial Statements
23
<PAGE> 53
CAPSTONE NIKKO JAPAN FUND
STATEMENT OF OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 1994
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Income:
Dividends (net of foreign taxes withheld of $3,738)................... $ 21,184
Interest.............................................................. 723
--------
Total investment income............................................ 21,907
--------
Expenses:
Advisory fees (Note 2)................................................ $ 14,087
Administration services (Note 2)...................................... 31,044
Transfer agent fees................................................... 29,853
Professional fees..................................................... 14,807
Custodian fees........................................................ 10,649
Distribution fees (Note 2)............................................ 8,177
Amortization of organization expenses................................. 6,934
Trustees' fees and expenses........................................... 6,850
Filing and registration fees.......................................... 6,500
Reports and notices to stockholders................................... 5,226
Miscellaneous......................................................... 1,294
--------
Total expenses..................................................... 135,421
Less reimbursements from:
Adviser............................................................ 14,087
Administrator...................................................... 7,044 21,131
-------- --------
Net expenses....................................................... 114,290
--------
Net investment loss........................................... (92,383)
--------
REALIZED AND UNREALIZED GAIN/LOSS ON INVESTMENTS
(Note 4):
Net realized gain from security transactions............................ 532,180
Realized loss on conversion of foreign currencies to U.S. dollars....... (46,136)
--------
Net realized gain..................................................... 486,044
Unrealized appreciation of investments and foreign currencies........... 149,232
--------
Net realized and unrealized gain on investments and foreign
currencies......................................................... 635,276
--------
Net increase in net assets resulting from operations.......... $542,893
========
</TABLE>
See Accompanying Notes to Financial Statements
24
<PAGE> 54
CAPSTONE NIKKO JAPAN FUND
STATEMENT OF CHANGES IN NET ASSETS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
-------------------------
1994 1993
---------- ----------
<S> <C> <C>
OPERATIONS:
Net investment loss................................................. $ (92,383) $ (98,491)
Net realized gain on investments and foreign currencies............. 486,044 274,542
Net increase in unrealized appreciation of investments
and foreign currencies............................................ 149,232 736,860
---------- ----------
Net increase in net assets resulting from operations.............. 542,893 912,911
TRUST SHARE TRANSACTIONS:
Increase (decrease) in net assets resulting from Trust share
transactions (Note 3)............................................. (154,853) 53,119
---------- ----------
Net increase in net assets........................................ 388,040 966,030
NET ASSETS:
Beginning of year................................................... 3,095,628 2,129,598
---------- ----------
End of year......................................................... $3,483,668 $3,095,628
========= =========
</TABLE>
See Accompanying Notes to Financial Statements
25
<PAGE> 55
CAPSTONE NIKKO JAPAN FUND
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 1994
--------------------------------------------------------------------------------
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Capstone Nikko Japan Fund (the "Fund") is one of two series of beneficial
interest of Capstone International Series Trust (the "Trust") which is
registered under the Investment Company Act of 1940, as amended (the "Act"), as
a diversified open-end management investment company. The Trust was organized as
a Massachusetts business trust and has an unlimited number of $.01 par value
shares authorized. The following is a summary of significant accounting policies
followed by the Fund in the preparation of its financial statements in
conformity with generally accepted accounting principles.
A) SECURITY VALUATION -- Portfolio securities which are traded on Japanese
securities exchanges are valued at the last sales price on the valuation date
or, if there is no recent last sales price available, at the last current bid
quotation. A security which is listed or traded on more than one exchange is
valued at the quotation on the exchange determined to be the primary market for
such security or contract. All other equity securities not so traded are valued
at the last current bid quotation on the valuation date. In the absence of an
applicable price, securities will be valued at a fair value as determined in
good faith in accordance with procedures established by the trustees.
B) CURRENCY TRANSLATION -- For purposes of determining the Fund's net asset
value, all assets and liabilities initially expressed in foreign currency values
are converted into U.S. dollar values at the prevailing market rate at 14:00 GMT
on each U.S. business day, as established by the Board of Trustees. The cost of
securities is determined by using historical exchange rates. Income and expenses
are translated at approximate rates prevailing when accrued or incurred. The
Fund does not isolate that portion of gains and losses on investments which is
due to changes in foreign exchange rates from that which is due to changes in
market prices of the investments. Such fluctuations are included with the net
realized and unrealized gains and losses from investments.
C) ACCOUNTING FOR INVESTMENTS -- Security transactions are accounted for on
the trade date. Realized gains and losses on security transactions are
determined based on the identified cost method. Dividend income and other
distributions are recorded on the ex-dividend date, except that certain
dividends from foreign securities are recorded as soon as the Fund is informed
after the ex-dividend date. Interest income and expenses are accrued daily.
D) FORWARD CURRENCY CONTRACTS -- Forward currency transactions are
undertaken to hedge against possible variations in the foreign exchange rates
between the United States Dollar and the Japanese Yen. A forward currency
contract is an agreement between two parties to buy or sell a currency at a set
price on a future date. Forward contracts are marked to market daily and the
change in the market value is recorded by the Fund as an unrealized gain or
loss. When a contract is closed, the Fund records a realized gain or loss equal
to the difference between the value of the contract at the time it was opened
and the value at the time it was closed. The Fund could be exposed to risk if
the counterparties are unable to meet the terms of the contracts or if the value
of the currency changes unfavorably.
E) FEDERAL INCOME TAXES -- No provision for Federal income taxes has been
made since it is the Fund's policy to continue to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable income and realized capital gains in excess of any
capital loss carryovers to its shareholders. At October 31, 1994 the Fund had
capital loss carryovers of $3,209,969 of which $1,715,323 expires in 1999 and
$1,494,646 expires in 2000. Under the United States-Japan tax treaty, Japan
imposes a withholding tax of 15% of the dividends. There is currently no
Japanese tax on capital gains.
26
<PAGE> 56
CAPSTONE NIKKO JAPAN FUND
F) DEFERRED ORGANIZATION EXPENSES -- All expenses of the Fund incurred in
connection with its organization and the public offering of its shares have been
assumed by the Fund. These organization expenses are being amortized over a
five-year period from the effective date of the Fund's registration statement.
G) RECLASSIFICATIONS -- The Fund has adopted Statement of Position 93-2
Determination, Disclosure, and Financial Presentation of Income, Capital Gain,
and Return of Capital Distributions by Investment Companies. Accordingly,
certain permanent book and tax basis differences relating to net operating
losses and foreign currency transactions have been reclassified to paid-in
capital. The cumulative effect of such differences during the current year was
to reclassify $92,383 from net investment loss and $46,139 from accumulated net
realized loss on investments, respectively, to paid-in capital. Investment loss,
net realized gain, and net assets were not affected by this change.
>NOTE 2 -- INVESTMENT ADVISORY FEES AND OTHER TRANSACTIONS WITH AFFILIATES
The Investment Adviser, Nikko Capital Management (USA), Inc. (the
"Adviser"), is paid a fee, calculated daily and paid quarterly, equal to an
annual rate of 0.40% of the average net assets of the Fund. The Administrator,
Capstone Asset Management Company (the "Administrator"), is paid a fee,
calculated daily and paid quarterly, equal to an annual rate of 0.20% of the
Fund's average daily net assets. The Administrator is also paid a monthly fee of
$2,000 representing the cost of certain accounting and bookkeeping services.
This fee, which amounted to $24,000 for the year ended October 31, 1994, is not
subject to the expense limitation discussed below.
The Adviser and Administrator have agreed to reduce their fees if the
ordinary business expenses of the Fund exceed any expense limitation applicable
to the Fund pursuant to the laws or regulations of any state. Such reimbursement
shall be shared by the Adviser and the Administrator ratably in proportion to
the fees received by them from the Fund, except that reimbursement shall not
exceed the amount paid to the Adviser and Administrator, respectively. The most
restrictive limitation presently applicable to the Fund is equal to the sum of
2.5% of the first $30 million of the Fund's average net assets, 2.0% of the next
$70 million of the Fund's average net assets and 1.5% of the Fund's average net
assets in excess of $100 million. For the year ended October 31, 1994, the
Adviser and the Administrator reimbursed the Fund $14,087 and $7,044,
respectively.
Capstone Asset Planning Company ("CAPCO"), as principal underwriter and
exclusive distributor of the Fund's shares, received $15,258 in commissions and
$4,009 in underwriting fees on sales of the Fund's shares for the year ended
October 31, 1994.
The Fund has adopted a Service and Distribution Plan (the "Plan") pursuant
to Rule 12b-1 under the Act whereby Fund assets are used to reimburse CAPCO for
costs and expenses incurred with the distribution and marketing of shares of the
Fund and servicing of Fund shareholders. Distribution and marketing expenses
include, among other things, printing of prospectuses, advertising literature,
and costs of personnel involved with the promotion and the distribution of the
Fund's shares. Under the Plan, the Fund pays CAPCO an amount computed at an
annual rate of up to 0.35% of the Fund's average net assets (including
reinvested dividends paid with respect to those assets). Of this amount, CAPCO
may reallocate to securities dealers (which may include CAPCO itself) and other
financial institutions and organizations (collectively, "Service Organizations")
amounts up to 0.25% of the Fund's average net assets owned by shareholders for
whom the Service Organizations have a servicing relationship. The Plan permits
CAPCO to carry forward for a maximum of twelve months distribution expenses
covered by the Plan for which CAPCO has not yet received reimbursement. For the
year ended October 31, 1994, the Fund paid $8,177 in 12b-1 fees, of which
approximately 11% was paid to Service Organizations other than CAPCO.
The Administrator is an affiliate of CAPCO and both are wholly-owned
subsidiaries of Capstone Financial Services, Inc. ("CFS").
27
<PAGE> 57
CAPSTONE NIKKO JAPAN FUND
Certain officers and trustees of the Trust, who are also officers and
directors of the Adviser, the Administrator, CAPCO or CFS, received no
compensation from the Trust. During the year ended October 31, 1994, Trustees of
the Trust who are not "interested Persons" received trustees' fees of $3,000.
Commissions earned by The Nikko Securities Co. International, Inc., an
affiliate of the Adviser, on investment transactions for the year ended October
31, 1994 were $35,894.
NOTE 3 -- TRUST SHARES
Transactions in Trust shares were as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED OCTOBER 31,
--------------------------------------------
1994 1993
---------------------- -------------------
SHARES AMOUNT SHARES AMOUNT
-------- ----------- ------- ---------
<S> <C> <C> <C> <C>
Shares sold........................................ 405,829 $ 2,987,493 61,810 $ 416,269
Shares redeemed.................................... (415,218) (3,142,346) (54,628) (363,150)
-------- ----------- ------- ---------
Net increase (decrease).................. (9,389) $ (154,853) 7,182 $ 53,119
======== ========== ======= =========
</TABLE>
NOTE 4 -- SECURITIES TRANSACTIONS
Purchases and sales of securities, other than U.S. Government and
short-term obligations, aggregated $1,793,349 and $2,124,006, respectively. At
October 31, 1994 the cost of investments for Federal income tax purposes was
$2,711,437. Accumulated net unrealized appreciation on investments was $629,388,
consisting of $680,879 gross unrealized appreciation and $51,491 gross
unrealized depreciation.
28
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information extracted from (a) the
Annual Report of Capstone Nikko Japan Fund for the fiscal year ended October 31,
1994
</LEGEND>
<SERIES>
<NUMBER> 1
<NAME> CAPSTONE NIKKO JAPAN FUND
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1994
<PERIOD-START> NOV-01-1993
<PERIOD-END> OCT-31-1994
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 2,711,437
<INVESTMENTS-AT-VALUE> 3,340,825
<RECEIVABLES> 41,367
<ASSETS-OTHER> 134,821
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 3,517,013
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 33,345
<TOTAL-LIABILITIES> 33,345
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 6,063,837
<SHARES-COMMON-STOCK> 433,566
<SHARES-COMMON-PRIOR> 442,955
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (3,209,969)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 629,800
<NET-ASSETS> 3,483,668
<DIVIDEND-INCOME> 21,184
<INTEREST-INCOME> 723
<OTHER-INCOME> 0
<EXPENSES-NET> 114,290
<NET-INVESTMENT-INCOME> (92,383)
<REALIZED-GAINS-CURRENT> 486,044
<APPREC-INCREASE-CURRENT> 635,276
<NET-CHANGE-FROM-OPS> 542,893
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 405,829
<NUMBER-OF-SHARES-REDEEMED> 415,218
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> (9,389)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 14,087
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 135,421
<AVERAGE-NET-ASSETS> 3,521,750
<PER-SHARE-NAV-BEGIN> 6.99
<PER-SHARE-NII> (.21)
<PER-SHARE-GAIN-APPREC> 1.25
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 8.03
<EXPENSE-RATIO> 3.25
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
