As filed with the Securities and Exchange Commission on September 29, 1998
Registration No. 333-49995
Investment Company Act File No. 811-08749
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
-------------------------------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 / /
Pre-Effective Amendment No. 2 /X/
Post-Effective Amendment No. ___ / /
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 / /
AMENDMENT NO. 2 /X/
(Check appropriate box or boxes)
CAPSTONE SOCIAL ETHICS AND RELIGIOUS VALUES FUND
(Exact Name of Registrant as Specified in Charter)
5847 San Felipe, Suite 4100, Houston, TX 77057
(Address of Principal Executive Office)
Registrant's Telephone Number: (713) 260-9000
-------------------------------------
--------------------------------
(Name and Address of Agent for Service)
Allan S. Mostoff, Esq.
Dechert Price & Rhoads
1775 Eye Street, NW
Washington, DC 20006-2401
Proposed Maximum
Number of Offering Price Proposed Amount of
Title of Shares Per Share (within Maximum Registration
Securities Being 15 days of filing) Offering Fee
Being Registered Registered Price
Shares of Indefinite* N/A N/A $_________
Beneficial
Interest, Par
Value $.001
* Registrant elects to register an indefinite number of shares of beneficial
interest pursuant to Rule 24f-2 under the Investment Company Act of 1940.
Registrant intends to file the notice required by Rule 24f-2 with respect to
its fiscal year ending November 30, 1998 no later than 90 days after the end
of such year.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until this Registration
Statement shall become effective on such date as the Commission, acting
pursuant to said Section 8(a), may determine.
<PAGE>
CAPSTONE SOCIAL ETHICS AND RELIGIOUS VALUES FUND
CROSS REFERENCE SHEET
BETWEEN
ITEMS OF FORM N-1A AND PROSPECTUS
(PART A TO REGISTRATION STATEMENT NO. 333-49995)
Item Number Form N-1A Heading Caption in Prospectus
- ---------------------------------------- ---------------------------
1. Cover Page Prospectus Cover Page
2. Synopsis Summary Information
3. Condensed Financial Information Inapplicable
4. General Description of The Funds: Investment
Registrant Objective and Policies;
Investment Policies;
Investment Restrictions;
Management of SERV;
General Information
5. Management of the Fund Management of SERV
6. Capital Stock and Other General Information;
Securities Distributions and Taxes
7. Purchase of Securities Being Determination of Net
Offered Asset Value; Purchasing
Shares
8. Redemption or Repurchase Redemption and Repurchase
of Shares
9. Pending Legal Proceedings Inapplicable
<PAGE>
CAPSTONE SOCIAL ETHICS AND RELIGIOUS VALUES FUND
CROSS REFERENCE SHEET
BETWEEN
ITEMS OF FORM N-1A AND THE
STATEMENT OF ADDITIONAL INFORMATION
(PART B TO REGISTRATION STATEMENT NO. 333-49995)
Caption in Statement of
Item Number Form N-1A Heading Additional Information
- ---------------------------------------- ----------------------------
10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. General Information and Other Information
History
13. Investment Objectives and Investment Restrictions
Policies
14. Management of the Fund Trustees and Executive
Officers
15. Control Persons and Inapplicable
Principal Holders of
Securities
16. Investment Advisory and Investment Advisory
Other Services Agreement; Administration
Agreement; Other Information
17. Brokerage Allocation Portfolio Transactions and
Brokerage
18. Capital Stock and Other Dividends and Distributions
Securities
19. Purchase, Redemption and Determination of Net Asset
Pricing of Securities Being Value; How to Buy and Redeem
Offered Shares
20. Tax Status Taxes
21. Underwriter Distributor
22. Calculation of Performance Performance Information
Data
23. Financial Statements Inapplicable
<PAGE>
CAPSTONE SOCIAL ETHICS AND RELIGIOUS VALUES FUND
5847 San Felipe, Suite 4100
Houston, Texas 77057
1-800-262-6631
[Date]
PROSPECTUS
This combined Prospectus describes the six investment portfolios ("Funds")
of the Capstone Social Ethics and Religious Values Fund ("SERV"), a
Massachusetts business trust registered as a diversified open-end investment
company. The Funds offered by this combined Prospectus are as follows:
Fixed Income Funds Equity Funds International Fund
Money Market Fund Large Cap Equity Fund International Fund
Short-Term Bond Fund Small Cap Equity Fund
Bond Fund
* AN INVESTMENT IN A FUND IS NOT A DEPOSIT OF ANY BANK AND IS NEITHER INSURED
NOR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER
GOVERNMENT AGENCY. ALTHOUGH THE MONEY MARKET FUND SEEKS TO MAINTAIN A STABLE NET
ASSET VALUE OF $1.00 PER UNIT, THERE CAN BE NO ASSURANCE THIS VALUE CAN BE
MAINTAINED.
This combined Prospectus sets forth certain information about SERV and the
Funds that a prospective investor should know before investing and should be
retained for future reference.
A combined Statement of Additional Information ("SAI"), dated [_____], has
been filed with the Securities and Exchange Commission and contains further
information about SERV. A copy of the SAI may be obtained without charge by
calling or writing SERV at the address or phone number listed above. The SAI is
incorporated into this Prospectus by reference.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR BY ANY STATE OR OTHER SECURITIES REGULATORY AUTHORITY,
NOR HAS THE COMMISSION OR ANY SUCH AUTHORITY PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
TABLE OF CONTENTS
Page
Summary Information..............................................3
Fund Expenses ...................................................4
The Funds: Investment Objective and Policies ...................5
Money Market Fund..............................................5
Benchmark Funds................................................6
Short-Term Bond Fund.........................................6
Bond Fund....................................................7
Large Cap Equity Fund........................................8
Small Cap Equity Fund........................................8
International Fund...........................................8
Investment Policies..............................................9
Bank Obligations...............................................9
Commercial Paper...............................................9
Corporate Debt Securities......................................9
Repurchase Agreements.........................................10
When-Issued and Delayed Delivery Transactions.................11
Loans of Portfolio Securities.................................12
Foreign Securities............................................12
Forward Foreign Currency Exchange Contracts...................13
Investment Companies and Investment Funds.....................13
Investment Restrictions.........................................14
Performance and Yield Information...............................15
Management of SERV..............................................15
Adviser and Administrator.....................................16
Advisory Committee and Consultant.............................16
Distributor...................................................17
Expenses......................................................18
Purchasing Shares ..............................................18
Investing Through Authorized Dealers..........................19
Purchases Through the Distributor.............................19
Telephone Purchase Authorization..............................20
Investing by Wire.............................................20
Distributions and Taxes ........................................20
Payment Options...............................................20
Taxes.........................................................21
Redemption and Repurchase of Shares.............................21
Check-Writing - Money Market Fund.............................22
Expedited Telephone Redemption................................22
Determination of Net Asset Value ...............................23
Stockholder Services ...........................................24
Tax-Deferred Retirement Plans.................................24
Exchange Privilege............................................24
Pre-Authorized Payment........................................25
Systematic Withdrawal Plan....................................25
General Information ............................................26
APPENDIX - Description of Ratings...............................[A-1]
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 SERV or its Distributor. This Prospectus does not
constitute an offer by SERV 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 SERV or the Distributor to make such offer or
solicitation in such jurisdiction.
<PAGE>
SUMMARY INFORMATION
Capstone Social Ethics and SERV is a Massachusetts business trust
Religious Values Fund ("SERV") formed on April 13, 1998.
Socially Responsible Funds The investment policies of each of the
six Funds offered by SERV are
designed to avoid investments in
companies whose primary business is the
manufacturing, operation or distribution
of alcohol, caffeine or tobacco
products, meat processing,
pornography, or casino and other
gambling concerns.
Investment Objectives and The Money Market Fund seeks to provide
Policies current income, stability of capital
and liquidity. The Short-Term Bond Fund
seeks current income and relative
capital stability. The Bond Fund seeks
current income. Large Cap Equity
Fund seeks capital growth and income.
Small Cap Equity Fund and International
Fund each seek capital
appreciation. There can be no assurance
that any Fund will achieve its
objective.
Adviser and Administrator Capstone Asset Management Company acts
as Adviser and Administrator
to each of the Funds. Formed in 1982 as
a wholly-owned subsidiary of Capstone
Financial Services, Inc. the
Adviser and Administrator acts
as investment adviser and/or
administrator to registered investment
companies, and is investment adviser
to pension and profit-sharing
accounts, corporations and
individuals. Its assets under
management total over $2 billion.
Classes of Shares Each Fund offers two classes of
shares: Class A and Class C. The
classes differ principally in the
required minimum investment and in
that Class A shares bear certain
expenses pursuant to a Rule 12b-1
distribution plan. Under this plan,
Class A shares of each Fund pay 0.25%
(0.10% for Money Market Fund), on an
annual basis, of the average net assets
of its Class A shares to the
Distributor. Fund expenses (including
a Fund's share of SERV['s expenses) are
generally allocated between the classes
based on their respective net asset
values. Other expenses borne by each
class may vary, including federal and
state registration and filing fees,
certain printing and other class
specific costs.
Distributor and Offering Price Shares of the Funds are continuously
offered for sale through SERV's
Distributor at net asset value per
share with no sales charge. Class A
shares of the Funds bear certain
expenses pursuant to a written Rule
12b-1 distribution plan.
Minimum Investments The minimum initial investment in each
Fund is $200 for Class A shares and
$50,000 for Class C shares, except that
the minimum investment for Class C
shares is $5,000 for Charitable Trusts
or Grantor Trusts for which a charitable
organization serves as Trustee. There is
no minimum for subsequent purchases of
Class A shares; the minimum for
subsequent purchases of Class C shares
is $1,000. There is no minimum for
withdrawals.
Distributions Each Fund will pay dividends from the
income of each class of its shares as
follows: Money Market Fund, monthly;
Short-Term Bond Fund, Bond Fund, Large
Cap Equity Fund, Small Cap Equity Fund
and International Fund, quarterly.
Capital gains distributions, if any,
will be paid annually in December.
Redemptions Shares may be redeemed at the next
determined net asset value for the
particular Fund on any business day,
without charge.
Risk Factors Each of the funds, other than the Money
Market Fund, seeks to achieve
performance results comparable to
those of a designated index or blend of
indexes ("Benchmark"), before fees. If
these objectives are met (of which there
can be no assurance), the performance of
each Fund can be expected to fluctuate
in a manner similar to that of its
Benchmark. Indexes representing common
stocks can have wide fluctuations in
price, which can be dramatic, in
response to developments affecting
particular issuers, particular segments
of issuers, or the market generally.
Indexes representing debt securities
also fluctuate, at times dramatically,
in response to interest rate changes,
events that could affect interest rates,
and other market conditions.
Additionally, if the techniques used by
the Adviser and Administrator to achieve
performance comparable to a designated
Benchmark do not operate as anticipated,
a Fund may fail to meet its objectives.
FUND EXPENSES
Shareholder Transaction Expenses (All Funds)
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price) None
Maximum Sales Load Imposed on Reinvested Dividends
(as a percentage of offering price) None
Deferred Sales Load (as a percentage of original
purchase price or redemption of proceeds, as applicable) None
Redemption Fees (as a percentage of amount redeemed) None
Exchange Fee None
Annual Fund Operating Expenses (as a percentage of average net assets)
<TABLE>
<S> <C> <C> <C> <C>
Short-Term Bond, Bond, Large Cap
Money Market Equity, Small Cap Equity &
Fund International Funds
Class A Class C Class A Class C
Management Fees 0.10% 0.10% 0.15% 0.15%
12b-1 Fees* 0.10% 0.00% 0.25% 0.00%
Other Expenses (estimated) 0.15% 0.15% 0.15% 0.15%
Total Fund Operating Expenses 0.35% 0.25% 0.55% 0.30%
</TABLE>
EXAMPLE
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:
<TABLE>
<S> <C> <C> <C> <C>
Short-Term Bond, Bond, Large Cap
Money Market Equity, Small Cap Equity &
Fund International Funds
Class A Class C Class A Class C
1 Year $4 $3 $6 $3
3 Years $11 $8 $18 $10
</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 to cover certain distribution and shareholder services
expenses, long-term stockholders may pay more in total sales charges than
the economic equivalent of the maximum front-end sales charge permitted by
rules of the NASD (see "Distributor").
The purpose of the foregoing table is to assist investors in understanding
the various costs and expenses that an investor in the Funds will bear directly
or indirectly. The information under the heading "Annual Fund Operating
Expenses" is based on projected expenses the Funds will incur during their first
year of operation. 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 LESS THAN THOSE SHOWN IN THE EXAMPLE OR IN THE TABLE.
THE FUNDS:
INVESTMENT OBJECTIVES AND POLICIES
The investment policy of each of the six Funds is to invest in companies that
are managed in a socially responsible manner, reflecting certain ethical and
religious values. To that end, the Funds will not invest in companies whose
primary business is the manufacturing, operation or distribution of alcohol,
caffeine or tobacco products, meat processing, pornography, or casinos and other
gambling concerns.
The investment objectives and other policies of each of the Funds are described
below. The investment objectives of each Fund are not fundamental policies of
the Fund and may be changed without shareholder approval. There can be no
assurance that a Fund will achieve its investment objectives.
Money Market Fund
The objective of the Fund is to provide current income, stability of capital and
liquidity. It seeks to maintain a constant net asset value of $1.00 per share,
although there can be no assurance this goal will be achieved.
The Fund invests in other money market funds that are rated at least AAA by
Standard & Poor's (S&P) or Aaa by Moody's Investor Service, Inc. ("Moody's") and
in a variety of short-term money market instruments rated A1/P1 or above by a
nationally recognized statistical rating organization ("NRSRO") or deemed of
comparable quality by the Adviser and Administrator, including obligations
issued or guaranteed by the U.S. Government, its agencies or instrumentalities;
obligations of supranational organizations; bankers acceptances, certificates of
deposit, deposit notes and time deposits of U.S. banks and their foreign
branches; obligations of savings and loan institutions; corporate obligations
such as notes, bonds, loans, loan participations and commercial paper;
securities with various types of credit enhancement or with "put" arrangements
that enhance liquidity; asset-backed securities; municipal securities; and
repurchase agreements. The Fund may purchase securities on a when-issued or
delayed delivery basis. As a fundamental investment policy, the Fund will invest
more than 25% of its assets in shares of one or more unaffiliated money market
funds. To the extent the Fund invests in shares of other money market funds, it
will bear a portion of the expenses of that fund, which are in addition to the
expenses of the Fund, itself. Among other things, such expenses will include
fees paid by the underlying fund to its investment adviser, although the Fund's
own fees to the Adviser and Administrator will not be reduced.
A security whose rating declines below the above standards or which becomes
unrated will be sold unless the Adviser and Administrator determines that such
sale would not be in the Fund's best interests. Generally, the Fund will
purchase only securities that have a remaining maturity of 397 calendar days or
less, and the Fund will maintain an average weighted portfolio maturity of no
greater than 90 days.
The Adviser and Administrator intends to calculate the Fund's net asset value in
accordance with amortized cost procedures pursuant to a rule adopted by the
Securities and Exchange Commission with respect to money market funds.
Dividends, including net realized capital gain, will be declared and paid
monthly.
Benchmark Funds
Each Fund, except for the Money Market Fund, will seek to attain performance
that is comparable to a designated benchmark i.e., its portfolio will be
designed to have the investment characteristics of a designated index (or
blended index) ("Benchmark") of comparable securities. The Adviser and
Administrator will select portfolio investments for each Fund using statistical
methods designed to produce total returns that will be comparable to the
designated Benchmark. Thus, the Adviser and Administrator will not be using
traditional methods of security selection based on analysis of market conditions
and particular issuers. Additionally, these Funds will not assume temporary
defensive positions when market or other conditions negatively affect the
classes of securities reflected in their portfolios. It should be noted that in
avoiding investments that are inconsistent with the Funds' socially responsible
investment policies, a Fund may be limited in its ability to match the
performance of a particular Benchmark. Other factors, such as variations in a
Fund's size, the availability of various investment techniques, and regulatory
limitations on the use of certain techniques from time to time may also
interfere with a Fund's ability to match its Benchmark's performance. Because
the Adviser and Administrator may use a variety of techniques to pursue each
Fund's investment objective, the Funds are unlikely to hold securities identical
to, or in the same proportions as, those in any reference Benchmark. Further,
each Fund must maintain some portion of its assets in cash or short-term money
market instruments and repurchase agreements to meet redemptions and to cover
other Fund expenses. To the extent consistent with prudent management, the
Adviser and Administrator will take positions in futures contracts to gain
exposure to relevant securities markets when incoming cash cannot be immediately
invested in suitable securities. Neither the Fund, the Adviser and
Administrator, nor their affiliates are in any way sponsored by or affiliated
with the firms that publish the reference Benchmarks.
Short-Term Bond Fund
The investment objective of this Fund is to provide current income and relative
capital stability. The Fund pursues this objective by attempting to match the
price and yield performance, before Fund expenses, of a blended short-term index
consisting of three sub-portfolios -- one-third U.S. Treasury securities,
one-third U.S. government agency securities, and one-third investment grade
corporate obligations -- each consisting of securities with a maximum maturity
of three years. ("Investment grade" securities are those that are rated at least
BBB by S&P or Baa by Moody's or deemed by the Adviser and Administrator to be of
comparable quality.) Thus, the Fund's assets will generally be divided in
roughly equal proportions among the three sub-portfolios, each with a maximum
maturity of three years, provided that the Fund may, from time to time, have
small portions of its portfolio in cash or short-term money market instruments
or repurchase agreements. Each sub-portfolio will seek to match the total return
of an appropriate corresponding index. The indexes used for this purpose are the
Merrill Lynch 1-3 Year Treasury Index, the Merrill Lynch 1-3 Year U.S.
Government Agency Index and the Merrill Lynch 1-3 Year Investment Grade
Corporate Index, provided that the Adviser and Administrator may select other
indexes having closely comparable characteristics.
The securities in which each of these sub-portfolios will be invested are as
follows:
The U.S. Treasury sub-portfolio will consist primarily of obligations backed by
the full faith and credit of the U.S. Treasury that have remaining maturities
not greater than three years. These obligations include Treasury bills, which
generally mature in one year or less from their date of issue, and Treasury
notes, which have original maturities of one to ten years. This sub-portfolio
may also include Treasury bonds that have remaining maturities of no more than
three years.
The U.S. government agency sub-portfolio will include primarily securities, with
remaining maturities of no more than three years, issued or guaranteed by U.S.
government agencies or instrumentalities, including (but not limited to) the
Government National Mortgage Association, the Federal National Mortgage
Association, the Federal Home Loan Mortgage Corporation, the Export-Import Bank
of the United States, the Farmers Home Administration, the Small Business
Administration, the Federal Farm Credit Bank, the Bank for Cooperatives, the
Federal Land Bank, the Student Loan Marketing Association, the Tennessee Valley
Authority, and the Federal Intermediate Credit Banks. Obligations of some of
these organizations are backed by the full faith and credit of the U.S. Treasury
(for example, securities issued by the Government National Mortgage
Association). Others are backed by the ability of the agency to borrow from the
Treasury (such as securities issued by the Federal Home Loan Bank), while others
are supported only by the credit of the issuer (such as securities issued by the
Federal Farm Credit Bank) with no assurance of financial support from the U.S.
Treasury.
The investment grade corporate obligation sub-portfolio will include primarily
dollar-denominated obligations issued by domestic and foreign corporations that
are rated within the top four rating categories (BBB or better by S&P or Baa or
better by Moody's or a comparable rating by another Nationally Recognized
Statistical Rating Organization ("NRSRO")) or deemed of comparable quality by
the Adviser and Administrator and have remaining maturities of no more than
three years. These obligations may include corporate bonds, debentures, notes
(including demand and master demand notes) and other similar corporate debt
instruments. Obligations rated BBB or Baa may have speculative characteristics
and changes in economic conditions or other circumstances may lead to a weakened
capacity to make principal and interest payments than is the case with higher
grade bonds.
The Fund will, under normal market conditions, have at least 65% of its total
assets invested in bonds. The instruments in which the Fund invests may have
fixed, variable or floating rates of interest. The Fund may purchase futures as
a temporary substitute for investment in bonds. The Fund may have small portions
of its portfolio in cash or short-term money market instruments. It may also
invest in repurchase agreements with respect to permitted portfolio investments.
The Fund may purchase securities on a when-issued or forward commitment basis.
Bond Fund
The investment objective of this Fund is to provide current income. The Fund
pursues this objective by attempting to match the price and yield performance,
before Fund expenses, of the Lehman Brothers Government/Corporate Bond ("LBG/C")
Index. The Fund will pursue this objective by investing primarily in obligations
of the U.S. government, its agencies and instrumentalities, and investment grade
corporate obligations having a broad range of maturities. The LBG/C Index is
comprised of U.S. Treasury obligations, U.S. government agency/instrumentality
obligations, and investment grade corporate obligations. The Fund's portfolio
will be structured in a manner designed to provide generally comparable
performance by investing primarily in similar types of securities.
Under normal market conditions, at least 65% of the Fund's total assets will be
invested in bonds. The instruments in which the Fund invests may have fixed,
variable or floating rates of interest. The Fund may have small portions of its
portfolio in cash or short-term money market instruments. It may also invest in
repurchase agreements with respect to permitted portfolio investments. The Fund
may purchase futures as a temporary substitute for investment in bonds. The Fund
may purchase securities on a when-issued or forward commitment basis.
Large Cap Equity Fund
The investment objective of this Fund is to provide capital growth and income.
The Fund pursues this objective by attempting to match the performance, before
expenses, of the S&P 500 Index. This index consists of 500 common stocks of
large companies whose securities are widely held and have an active trading
market. Each security's weight in the index is proportional to its market value.
Thus, the largest stocks included in the index will comprise a disproportionate
portion of the value of the index. The securities in the index represent a
variety of industries. Most securities in the index are listed on the New York
Stock Exchange, but NASDAQ and American Stock Exchange securities are also
represented. The Fund will seek to match the performance of this index by
investing primarily in equity securities of the type that are included in this
index. "Equity securities" include common stocks (including SPDRs), preferred
stocks, and securities convertible or exchangeable for common stock. At least
65% of the Fund's total assets will be, under normal market conditions, invested
in equity securities of issuers whose capitalization, at the time of investment,
is equal to or exceeds the minimum capitalization of issuers in the S&P 500
Index. As of June 30, 1998 the minimum capitalization of issuers included in
that index was $687.5 million. The Fund may also, however, have small portions
of its portfolio in cash or short-term money market instruments and in
repurchase agreements. The Fund may purchase futures as a temporary substitute
for investment in equity securities. The Fund may invest up to 10% of its total
assets in S&P's Depository Receipts ("SPDRs"). SPDRs are interests in the SPDR
Trust, a unit investment trust that seeks to provide investment results
generally comparable to the price and yield performance of the S&P 500 Index.
Small Cap Equity Fund
The investment objective of this Fund is to provide capital appreciation. The
Fund pursues this objective by attempting to match total return before Fund
expenses, of the S&P SmallCap 600 Index. The S&P SmallCap 600 Index consists of
600 stocks with smaller capitalization than those included in the S&P 500 Index.
As of June 30, 1998, issuers represented in this index had aggregate
capitalization ranging from about $50 million to about $3.3 billion. The Fund
will seek to match the performance of this index by investing primarily in
equity securities of the type that are included in this index. At least 65% of
the Fund's total assets will, under normal market conditions, be invested in
equity securities (as defined for Large Cap Equity Fund, above) of issuers whose
capitalization, at the time of investment, falls within the capitalization range
of issuers in the S&P SmallCap 600 Index. It may also, however, have small
portions of its portfolio in cash or short-term money market instruments and in
repurchase agreements. The Fund may purchase futures contracts as a temporary
substitute for investment in equity securities. Like the Large Cap Equity Fund,
this Fund may invest up to 10% of its total assets in S&P's Depository Receipts
("SPDRs").
International Fund
The investment objective of this Fund is capital appreciation. The Fund pursues
this objective by attempting to match the performance and yield characteristics
of the Morgan Stanley Capital International Europe, Australia, Far East ("EAFE")
Index, net of witholding taxes. The EAFE Index is based on the share prices of
more than 1,000 companies listed on the stock exchanges of Europe, Australia,
New Zealand and the Far East. Europe includes Austria, Belgium, Denmark,
Finland, France, Germany, Italy, The Netherlands, Norway, Spain, Sweden,
Switzerland and the United Kingdom. The Far East includes Japan, Hong Kong and
Singapore/Malaysia. The Fund will seek to match the performance of this index by
investing primarily in securities with characteristics generally comparable to
those that are included in this index or whose performance is expected to be
comparable to that of the index or a portion of the index. The Fund may invest
in securities of other investment companies. Applicable law limits investments
by the Fund and its affiliated persons to no more than 3% of the total
outstanding stock of a particular other investment company. Further, the Fund
may, in any 30-day period, redeem an amount equal to no more than 1% of the
other investment company's total outstanding securities. The Fund will monitor
its investments in other investment companies to assure compliance with its
policy to have no more than 15% of its net assets invested in illiquid
securities. The Fund's investment company investments will include shares of
other investment companies that invest in foreign securities. The Fund may
invest in World Equity Benchmark Shares (sm) ("WEBS"). WEBS are shares of
various Series of WEBS Index Fund, Inc., a registered open-end investment
company, each of whose Series seeks to provide investment results that
correspond generally to the price and yield performance of publicly traded
securities in the aggregate in particular markets, as represented by an index
for that market compiled by Morgan Stanley Capital International. WEBS are
available for at least the following markets: Australia, Austria, Belgium,
Canada, France, Germany, Hong Kong, Italy, Japan, Malaysia, Mexico, Netherlands,
Singapore, Spain, Sweden, Switzerland and the United Kingdom. WEBS are listed
for trading on the American Stock Exchange. The Fund's investments may be in the
form of American Depositary Receipts ("ADRs"), European Depositary Receipts
("EDRs") and similar instruments. (See "Foreign Securities," below.) The Fund
may invest in forward foreign currency exchange contracts. It may also, however,
have small portions of its portfolio in cash or short-term money market
instruments and in repurchase agreements. The Fund may purchase futures as a
temporary substitute for investment in equity securities. Under normal market
conditions, at least 65% of the Fund's assets will be invested, either directly
or through other investment companies, in securities and other instruments
representing issuers whose headquarters or principal business activities are in
at least three countries.
INVESTMENT POLICIES
About Ratings
After purchase by a Fund, a security may cease to be rated or its rating may be
reduced below the minimum required for purchase by the Fund. Neither event will
require a sale of such security by the Fund, except that the Money Market Fund
will not hold downgraded securities that do not satisfy the portfolio quality
and diversification requirements of federal securities rules applicable to money
market funds and no other Fund will hold below-investment grade securities
totalling more than 5% of its net assets. However, the Adviser and Administrator
will consider such event in its determination of whether the Fund should
continue to hold the security. To the extent the ratings given by Moody's, S&P
or another NRSRO may change as a result of changes in such organizations or
their rating systems, the Funds will attempt to use comparable ratings as
standards for investments in accordance with the investment policies contained
in this Prospectus.
The Funds (other than the Money Market Fund) may invest in debt securities rated
Baa by Moody's or BBB by S&P. Such securities may have speculative
characteristics and changes in economic conditions or other circumstances may
lead to a weakened capacity to make principal and interest payments that is the
case with higher grade bonds.
Government Obligations. Some obligations issued or guaranteed by agencies or
instrumentalities of the U.S. government are backed by the full faith and credit
of the U.S. Treasury. No assurances can be given that the U.S. government will
provide financial support to other agencies or instrumentalities, since it is
not obligated to do so. These agencies and instrumentalities are supported by:
o the issuer's right to borrow an amount limited to a specific line of credit
from the U.S. Treasury;
o the discretionary authority of the U.S. government to purchase certain
obligations of an agency or instrumentality; or
o the credit of the agency or instrumentality.
Bank Obligations (All Funds)
These obligations include negotiable certificates of deposit and bankers'
acceptances. A certificate of deposit is a short-term, interest-bearing
negotiable certificate issued by a commercial bank against funds deposited in
the bank. A bankers' acceptance is a short-term draft drawn on a commercial bank
by a borrower, usually in connection with an international commercial
transaction. The borrower is liable for payment as is the bank, which
unconditionally guarantees to pay the draft at its face amount on the maturity
date. The Funds will limit their bank investments to dollar-denominated
obligations of U.S. or foreign banks rated A or better by Moody's or S&P, that
have more than $1 billion in total assets at the time of investments and, in the
case of U.S. banks, are members of the Federal Reserve System or are examined by
the Comptroller of the Currency, or whose deposits are insured by the Federal
Deposit Insurance Corporation.
Commercial Paper (All Funds)
Commercial paper includes short-term unsecured promissory notes issued by
domestic and foreign bank holding companies, corporations and financial
institutions and similar taxable instruments issued by government agencies and
instrumentalities. All commercial paper purchased by a Fund must have a
remaining maturity of no more than 270 days from the date of purchase by a Fund,
and must be rated at least A-1 or P-1 by an NRSRO, or deemed of comparable
quality by the Investment Adviser and Administrator. No Fund may invest more
than 5% of its total assets in commercial paper of a single issuer.
Corporate Debt Securities (All Funds)
Fund investments in these securities are limited to corporate debt securities
(corporate bonds, debentures, notes and similar corporate debt instruments) that
meet the particular Fund's quality standards. No Fund will invest in corporate
debt securities that, at the time of investment, are rated below BBB by S&P or
Baa by Moody's, or if not rated, are determined by the Adviser and Administrator
to be below such quality.
Repurchase Agreements (All Funds)
The Funds may invest in securities subject to repurchase agreements with U.S.
banks or broker-dealers. A repurchase agreement is a transaction in which the
seller of a security commits itself at the time of the sale to repurchase that
same security from the buyer at a mutually agreed-upon time and price. The
repurchase price exceeds the sale price, reflecting an agreed-upon interest rate
effective for the period the buyer owns the security subject to repurchase. The
agreed-upon rate is unrelated to the interest rate on that security. The
agreement will be fully collateralized by the underlying securities and will be
marked-to-market on a daily basis during the term of the repurchase agreement to
insure that the value of the collateral always equals or exceeds the repurchase
price. The Adviser and Administrator will enter into repurchase agreements only
with firms that present minimal credit risks as determined in accordance with
guidelines adopted by the Board of Trustees. In the event of default by the
seller under the repurchase agreement, the Funds may have problems in exercising
their rights to the underlying securities and may incur costs and experience
time delays in connection with the disposition of such securities.
When-Issued and Delayed Delivery Securities (All Funds)
The Funds may purchase securities on a when-issued or delayed delivery basis.
These transactions are arrangements in which the Funds purchase securities with
payment and delivery scheduled for a future time. The seller's failure to
complete these transactions may cause a Fund to miss a price or yield considered
to be advantageous. Settlement dates may be a month or more after entering into
these transactions, and the market values of the securities purchased may vary
from the purchase price. Accordingly, a Fund may pay more or less than the
market value of the securities on the settlement date.
The Funds may dispose of a commitment prior to settlement if the Adviser and
Administrator deems it appropriate to do so. In addition, the Funds may enter
into transactions to sell their purchase commitments to third parties at current
market values and simultaneously acquire other commitments to purchase similar
securities at later dates. The Funds may realize short-term profits or losses
upon the sale of such commitments.
Loans of Portfolio Securities (All Funds)
The Funds may lend their portfolio securities to brokers, dealers and financial
institutions, provided: (1) the loan is secured continuously by collateral
consisting of U.S. Government securities or cash or letters of credit maintained
on a daily mark-to-market basis in an amount at least equal to the current
market value of the securities loaned; (2) the Funds may at any time call the
loan and obtain the return of the securities loaned within three business days;
and (3) the Funds will receive any interest or dividends paid on the loaned
securities.
The Funds will earn income for lending their securities because cash collateral
pursuant to these loans will be invested in short-term money market instruments.
In connection with lending securities, the Funds may pay reasonable finders,
administrative and custodial fees. Loans of securities involve a risk that the
borrower may fail to return the securities or may fail to provide additional
collateral.
Foreign Securities (All Funds)
Changes in foreign exchange rates will affect the value of the securities
denominated or quoted in currencies other than the U.S. dollar.
The Money Market Fund's investments in securities of non-U.S. issuers will be
only in dollar-denominated instruments. The other Funds may invest directly in
both sponsored and unsponsored U.S. dollar or foreign currency-denominated
corporate securities (including preferred or preference stock), certificates of
deposit and bankers' acceptances issued by foreign banks, U.S.
dollar-denominated bonds sold in the United States ("Yankee bonds"), other bonds
denominated in U.S. dollars or other currencies and sold to investors outside
the United States ("Eurobonds"), and obligations of foreign governments or their
subdivisions, agencies and instrumentalities, international agencies and
supranational entities. There may be less information available to a Fund
concerning unsponsored securities, for which the paying agent is located outside
the United States.
The Funds may purchase foreign securities traded in the United States or in
foreign markets. The Funds may invest directly in foreign equity securities and
in securities represented by European Depositary Receipts ("EDRs"), American
Depositary Receipts ("ADRs") and similar securities. ADRs are dollar-denominated
receipts generally issued by domestic banks, which represent the deposit with
the bank of a security of a foreign issuer, and which are publicly traded on
exchanges or over-the-counter in the United States. EDRs are receipts similar to
ADRs and are issued and traded in Europe.
There are certain risks associated with investments in unsponsored ADR programs.
Because the non-U.S. company does not actively participate in the creation of
the ADR program, the underlying agreements for service and payment will be
between the depositary and the shareholders. The company issuing the stock
underlying the ADRs pays nothing to establish the unsponsored facility, as fees
for ADR issuance and cancellation are paid by brokers. Investors directly bear
the expenses associated with certificate transfer, custody and dividend payment.
In addition, in an unsponsored ADR program, there may be several depositaries
with no defined legal obligations to the non-U.S. company. The duplicate
depositaries may lead to marketplace confusion because there would be no central
source of information to buyers, sellers and intermediaries. The efficiency of
centralization gained in a sponsored program can greatly reduce the delays in
delivery of dividends and annual reports.
Since certain Funds may invest in securities denominated in currencies other
than the U.S. dollar, and since those Funds may, for various periods pending
investment for non-speculative purposes, hold funds in bank deposits or other
money market investments denominated in foreign currencies, a Fund may be
affected favorably or unfavorably by exchange control regulations or changes in
the exchange rate between such currencies and the dollar. Changes in foreign
currency exchange rates will influence values of securities in the Fund's
portfolio, from the perspective of U.S. investors. Changes in foreign currency
exchange rates may also affect the value of dividends and interest earned, gains
and losses realized on the sale of securities, and net investment income and
gains, if any, to be distributed to shareholders by a Fund. The rate of exchange
between the U.S. dollar and other currencies is generally determined by the
forces of supply and demand in the foreign exchange markets. These forces are
affected by the international balance of payments and other economic and
financial conditions, government intervention, speculation and other factors.
Forward Foreign Currency Exchange Contracts (All Funds, except Money Market
Fund)
Those Funds that purchase foreign currency-denominated securities may enter into
forward foreign currency exchange contracts in order to protect against
uncertainty in the level of future foreign exchange rates. A forward foreign
currency exchange contract involves an obligation to purchase or sell a specific
currency at a future date, which may be any fixed number of days from the date
of the contract agreed upon by the parties, at a price set at the time of the
contract. These contracts are entered into in the interbank market conducted
between currency traders (usually large commercial banks) and their customers.
Forward foreign currency exchange contracts may be bought or sold to protect a
Fund against a possible loss resulting from an adverse change in the
relationship between foreign currencies and the U.S. dollar, or between foreign
currencies. Although such contracts are intended to minimize the risk of loss
due to a decline in the value of the hedged currency, at the same time, they
tend to limit any potential gain which might result should the value of such
currency increase.
Eurodollar and Yankee Dollar Investments (Bond Fund, Short-Term Bond Fund)
The Bond Fund and the Short-Term Bond Fund may invest in Eurodollar and Yankee
Dollar instruments. Eurodollar instruments are bonds of foreign corporate and
government issuers that pay interest and principal in U.S. dollars generally
held in banks outside the United States, primarily in Europe. Yankee Dollar
instruments are U.S. dollar denominated bonds typically issued in the U.S. by
foreign governments and their agencies and foreign banks and corporations. These
Funds may invest in Eurodollar Certificates of Deposit ("ECDs"), Eurodollar Time
Deposits ("ETDs") and Yankee Certificates of Deposit ("Yankee CDs"). ECDs are
U.S. dollar-denominated certificates of deposit issued by foreign branches of
domestic banks; ETDs are U.S. dollar-denominated deposits in a foreign branch of
a U.S. bank or in a foreign bank; and Yankee CDs are U.S. dollar-denominated
certificates of deposit issued by a U.S. branch of a foreign bank and held in
the U.S. These investments involve risks that are different from investments in
securities issued by U.S. issuers, including potential unfavorable political and
economic developments, foreign withholding or other taxes, seizure of foreign
deposits, currency controls, interest limitations or other governmental
restrictions which might affect payment of principal or interest.
Restricted and Illiquid Securities (All Funds)
Each Fund may invest up to 15% (10% for the Money Market Fund) of its net assets
in illiquid securities. Illiquid securities include those that are not readily
marketable, repurchase agreements maturing in more than seven days, time
deposits with a notice or demand period of more than seven days, certain OTC
options, certain investment company securities, and certain restricted
securities. Based upon continuing review of the trading markets for a specific
restricted security, the security may be determined to be eligible for resale to
qualified institutional buyers pursuant to Rule 144A under the Securities Act of
1933 and, therefore, to be liquid. Also, certain securities deemed to be
illiquid may subsequently be determined to be liquid if they are found to
satisfy relevant liquidity requirements.
Investments by the Funds in securities of other investment companies may be
subject to restrictions regarding redemption. In particular, the Money Market
and International Funds will invest in securities of other investment companies
in reliance on provisions of the 1940 Act that limit each Fund's redemptions to
no more than 1% of another investment company's total outstanding securities
during any period less than 30 days. To the extent a Fund owns securities of
such a company in excess of 1% of that company's total outstanding securities,
such holdings by a Fund could be deemed to be illiquid and would be subject to
the Fund's 15% (10%) limit on illiquid investments.
The Board of Trustees has adopted guidelines and delegated to the Adviser and
Administrator the daily function of determining and monitoring the liquidity of
portfolio securities, including restricted and illiquid securities. The Board of
Trustees, however, retains oversight and is ultimately responsible for such
determinations. The purchase price and subsequent valuation of illiquid
securities normally reflect a discount, which may be significant, from the
market price of comparable securities for which a liquid market exists.
Options and Futures (All Funds except Money Market Fund)
To the extent consistent with their investment policies, the Funds (other than
the Money Market Fund) may employ special investment practices as a means of
obtaining market exposure to securities without purchasing the securities
directly. These practices include the purchase of put and call options on
securities and securities indexes.
A call option gives the purchaser of the option, in return for premium paid, the
right to buy the underlying security at a specified price at any point during
the term of the option. A put option gives the purchaser the right to sell the
underlying security at the exercise price during the option period. In the case
of an option on a securities index, the option holder has the right to obtain,
upon exercise of the option, a cash settlement based on the difference between
the exercise price and the value of the underlying index.
The purchase of put and call options does involve certain risks. Through
investment in options, a Fund can profit from favorable movements in the price
of an underlying security to a greater extent than if the Fund purchased the
security directly. However, if the security does not move in the anticipated
direction during the term of the option in an amount greater than the premium
paid for the option, the Fund may lose a greater percentage of its investment
than if the transaction were effected in the security directly. Generally,
transactions in securities index options pose the same type of risks as do
transactions in securities options.
Subject to certain limits imposed by the Commodity Futures Trading Commission
("CFTC"), a Fund may also (i) invest in securities index futures contracts and
options on securities index futures and (ii) engage in margin transactions with
respect to such investments. A Fund will use futures as a temporary means of
gaining exposure to its particular market prior to making investments of
incoming cash in additional securities.
A securities index futures contract is an agreement under which two parties
agree to take or make delivery of an amount of cash based on the difference
between the value of a securities index at the beginning and at the end of the
contract period. When a Fund enters into a securities index futures contract, it
must make an initial deposit, known as "initial margin," as a partial guarantee
of its performance under the contract. As the value of the securities index
fluctuates, the Fund may be required to make additional margin deposits, known
as "variation margin," to cover any additional obligation it may have under the
contract.
Options on securities index futures contracts are similar to options on
securities except that an option on a securities index futures contract gives
the purchaser the right, in return for the premium paid, to assume a position in
a securities index futures contract (a long position if the option is a call and
a short position if the option is a put), upon deposit of required margin. In
the alternative, the purchaser may resell the option, if it has value, or simply
let it expire. Upon expiration, the purchaser will either realize a gain or the
option will expire worthless, depending on the closing price of the index on
that day. Thus, the purchaser's risk is limited to the premium paid for the
option.
The Funds' transactions in futures contracts and related options are subject to
limits under certain rules of the Commodity Futures Trading Commission ("CFTC").
Under these rules, initial margin deposits and premiums paid by a Fund for such
transactions, except those for bona fide hedging purposes, are limited to no
more than 5% of the fair market value of the Fund's total assets.
Successful use by a Fund of securities index futures contracts is subject to
certain special risk considerations. A liquid index futures market may not be
available when a Fund seeks to purchase or sell a contract. In addition, there
may be an imperfect correlation between movements in the securities included in
the index and movements in the prices of securities the Fund wishes to purchase.
Successful use of securities index futures contracts and options on such
contracts is further dependent on the Adviser and Administrator's ability to
predict correctly movements in the direction of the stock markets, and no
assurance can be given that its judgment in this respect will be correct. Risks
in the purchase and sale of securities index futures contracts are discussed
further in the Statement of Additional Information.
The SEC generally requires that when investment companies, such as the Funds,
effect transactions of the foregoing nature, such funds must segregate either
cash or readily marketable securities with its Custodian in the amount of its
obligations under the foregoing transactions, or cover such obligations by
maintaining positions in portfolio securities or options that would serve to
satisfy or offset the risk of such obligations. When effecting transactions of
the foregoing nature, the Funds will comply with such segregation or cover
requirements.
Investment Companies and Investment Funds (All Funds)
Each of the Funds is permitted to invest in shares of other open-end or
closed-end investment companies, to the extent consistent with its investment
objective and policies. A Fund's investments (together with those of its
affiliated persons) in any other single investment company are limited to no
more than 3% of the outstanding shares of that other investment company.
Additionally, a Fund, in any 30-day period, may not redeem any amount in excess
of 1% of the total outstanding share of such other investment company. On issues
on which shareholders of such another investment company are asked to vote, the
Funds will vote their shares in the same proportion as the vote of all other
holders of shares of that investment company. To the extent a Fund invests a
portion of its assets in other investment companies, those assets will be
subject to the expenses of any such investment company as well as to the
expenses of the Fund itself. A Fund may not purchase shares of any affiliated
investment company except as permitted by SEC rule or order.
INVESTMENT RESTRICTIONS
The Funds are subject to investment restrictions designed to reflect their
socially acceptable investment policies. In addition, the Funds have adopted the
following investment restrictions which are fundamental policies of each of the
Funds (except as otherwise noted) and may not be changed with respect to a Fund
without approval by vote of a majority of the outstanding shares of the
particular Fund. For this purpose such a majority vote means the lesser of (1)
67% or more of the voting securities present at an annual or special meeting of
shareholders, if holders of more than 50% of the outstanding voting securities
of the particular Fund are present or represented by proxy or (2) more than 50%
of the outstanding voting securities of the Fund.
Each of the Funds has elected to be qualified as a diversified series of SERV.
A Fund may not:
borrow money, except as permitted under the Investment Company Act of
1940, as amended, and as interpreted or modified by regulatory
authority having jurisdiction, from time to time;
issue senior securities, except as permitted under the Investment
Company Act of 1940, as amended, and as interpreted or modified by
regulatory authority having jurisdiction, from time to time;
concentrate its investments in a particular industry, as that term is
used in the Investment Company Act of 1940, as amended, and as
interpreted or modified by regulatory authority having jurisdiction,
from time to time, except that the Money Market Fund reserves
freedom of action to concentrate its investments in instruments
issued by domestic banks (excluding their foreign branches) and in
government securities, as that term is defined in the Investment
Company Act of 1940 and in relevant rules and regulatory
interpretations thereunder, as amended from time to time, and the
Money Market Fund will its concentrate its investments in investment
companies;
engage in the business of underwriting securities issued by others,
except to the extent that the Fund may be deemed to be an underwriter
in connection with the disposition of portfolio securities;
purchase or sell real estate, which does not include securities of
companies which deal in real estate or mortgages or investments
secured by real estate or interests therein, except that the Fund
reserves freedom of action to hold and to sell real estate acquired as
a result of the Fund's ownership of securities;
purchase physical commodities or contracts relating to physical
commodities; or
make loans to other persons, except (i) loans of portfolio securities,
and (ii) to the extent that entry into repurchase agreements and the
purchase of debt instruments or interests in indebtedness in
accordance with the Fund's investment objective and policies may be
deemed to be loans.
PERFORMANCE AND YIELD INFORMATION
Large Cap Equity Fund, Small Cap Equity Fund and International Fund: The Funds
may from time to time include figures indicating the Funds' total return or
average annual total return in advertisements or reports to stockholders or
prospective investors. Average annual total return and total return figures are
calculated for each Class of shares and represent the increase (or decrease) in
the value of an investment in a Fund over a specified period. Both calculations
assume that all income dividends and capital gain distributions during the
period are reinvested at net asset value in additional Fund shares. Quotations
of the average annual total return reflect the deduction of a proportional share
of Fund expenses on an annual basis. The results, which are annualized,
represent an average annual compounded rate of return on a hypothetical
investment in the Fund over a period of 1, 3, 5 and 10 years (or life of the
Fund) ending on the most recent calendar quarter. Quotations of total return,
which are not annualized, represent historical earnings and asset value
fluctuations.
Money Market Fund, Short-Term Bond Fund and Bond Fund: Quotations of a Fund's
yield and effective yield may be included along with total return or average
annual total return calculations in advertisements or reports to stockholders or
prospective investors. Both yield figures are based on the historical
performance of a Fund and show the performance of a hypothetical investment.
Yield refers to the net investment income generated by a Fund's portfolio over a
specified seven-day period. This income is then annualized. That is, the amount
of income generated by the portfolio during that week is assumed to be generated
during each week over a 52-week period and is shown as a percentage. The
effective yield is expressed similarly but, when annualized, the income earned
by an investment in the Fund is assumed to be reinvested. The effective yield
will be slightly higher than the yield because of the compounding effect on the
assumed reinvestment. Yield and effective yield for a Fund will vary based upon,
among other things, changes in market conditions, the level of interest rates
and the level of the Fund's expenses.
Performance and yield calculations are based on past performance and are not a
guarantee of future results. For a more detailed description of the methods used
to determine the Funds' average annual total return, total return, yield and
effective yield, see the Statement of Additional Information.
MANAGEMENT OF SERV
The Trustees are responsible for the overall management and supervision of SERV
and to perform the functions of Trustees under SERV's Declaration of Trust, its
principal governing document, as amended from time to time. The Trustees, while
retaining overall supervisory responsibility, have delegated day-to-day
operating responsibilities to Capstone Asset Management Company, the Adviser and
Administrator; Fifth Third Bank of Cincinnati, Ohio, the custodian; and
Declaration Services Company, which acts as fund accounting, transfer and
shareholder servicing agent.
Adviser and Administrator
Capstone Asset Management Company ("Capstone"), a wholly-owned subsidiary of
Capstone Financial Services, Inc., acts as Adviser and Administrator pursuant to
Investment Advisory and Administration Agreements between SERV and Capstone.
Capstone is located at 5847 San Felipe, Suite 4100, Houston, Texas 77057. The
Adviser and Administrator provides investment management services to pension and
profit sharing accounts, corporations and individuals, and serves as investment
adviser and/or administrator to four registered investment companies. The
Adviser and Administrator manages assets in excess of $2 billion.
The Investment Advisory Agreement provides that the Adviser and Administrator
shall have full discretion to manage the assets of the Funds in accordance with
their investment objectives and policies and the terms of the Declaration of
Trust. The Adviser and Administrator is authorized, with the consent of the
Trustees, to engage sub-advisers for the Funds. The Adviser and Administrator
has sole authority to select broker-dealers to execute transactions for the
Funds, subject to the reserved authority of the Trustees to designate particular
broker-dealers for this purpose. The Adviser and Administrator will vote proxies
on portfolio securities of the Funds, subject to any guidelines that may be
established by the Trustees. The Investment Advisory Agreement provides that the
Adviser and Administrator will generally not be liable in connection with its
services except for acts or omissions that constitute misfeasance, bad faith or
gross negligence, and the Adviser and Administrator shall not be liable for the
acts of third parties. The Investment Advisory Agreement provides that it may be
terminated at any time without penalty on sixty days' notice by either party.
For its services under the Agreement, the Funds will pay the Adviser and
Administrator fees monthly, in arrears, at the following annual rates. The fee
rate indicated for the Money Market Fund is based on the average daily net
assets of that Fund. The fee rates indicated for the other five Funds are
applied to the aggregate average daily net assets of those Funds, as a group,
and the resulting total fees are pro rated among those Funds based on their
relative net assets.
Annual Fee rate as a percentage
Name of Fund of average daily net assets
Money Market Fund 0.10%
Aggregate assets of Short-Term Bond 0.15% of the first $500 million Fund
Fund, Bond Fund, 0.10% of the next $250 million
Large Cap Equity Fund, Small Cap Equity 0.075% of the next $250 million
Fund, International Fund 0.05% of assets over $1 billion
Pursuant to the Administration Agreement between Capstone and SERV, the Adviser
and Administrator provides administrative services to the Funds, supervises the
Funds' daily business affairs, coordinates the activities of persons providing
services to the Funds, and furnishes office space and equipment to the Funds.
These services are subject to general review by the SERV's Board of Trustees. As
compensation for its services, the Administration Agreement provides that the
Adviser and Administrator receives from each Fund a fee, computed daily and
payable monthly in arrears, at an annual rate of 0.05% of each Fund's average
net assets.
Accounting, bookkeeping and pricing services for the Funds are provided by
Declaration Service Company. Fifth Third Bank of Cincinnati, Ohio, acts as
custodian.
Advisory Committee and Consultant
The Board of Trustees may from time to time appoint an advisory committee
("Advisory Committee") to consult with and make recommendations to the Trustees
regarding the application of social, ethical and religious values principles in
selecting investments for the Funds, as well as on other matters regarding the
structure, philosophy and operations of the Funds. Members of the Advisory
Committee, when and if appointed, will not compensated for their services,
although they will be reimbursed by the Trust for expenses of attendance at
Trust-related meetings. The Advisory Committee is expected to consist of members
selected by the Board of Trustees on the basis of their qualifications to
provide this type of advice to the Board. Additionally, the Board has retained
Madison Portfolio Consultants, 400 Madison Avenue, Suite 810, New York, New
York, 10017 ("Madison") to serve as an independent source of expertise and
education for any Advisory Committee and for the Board regarding (a) the general
design and operation of the Funds, (b) the performance of the Adviser and
Administrator and of other service providers to the Funds and (c) economic and
other developments relevant to the operations of the Funds. Neither the Board of
Trustees nor the Adviser and Administrator are obliged to accept the
recommendations of any Advisory Committee or Madison. For its services, Madison
receives a fee (subject to an annual minimum of $50,000) based on the aggregate
net assets of SERV, payable quarterly at an annual rate equal to .025% of the
Funds' average daily net assets up to $200,000,000, .01% of the next
$200,000,000 of such assets, .005% of the next $600,000,000 of such assets, and
an amount to be negotiated for assets in excess of $1 billion.
Distributor
Pursuant to a Distribution Agreement with SERV dated October 1, 1998,
Capstone Asset Planning Company (the "Distributor") is the principal underwriter
of the Funds and, acting as exclusive agent, sells shares of the Funds to the
public on a continuous basis.
SERV has adopted a Service and Distribution Plan (the "Plan") for the Class A
shares of each Fund pursuant to which Class A shares of each Fund makes payments
to the Distributor to compensate the Distributor for expenditures incurred by it
in connection with the distribution of Class A shares of each Fund and for the
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 Funds. These
services include, among other things, processing new stockholder account
applications, preparing and transmitting to the Funds' 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 Funds
and their transactions with the Funds. 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 Class A shares of each Fund to bear the cost of preparing, printing
and distributing Fund Prospectuses and Statements of Additional Information to
prospective Class A investors and of implementing and operating the Plan.
Under the Plan, payments are made to the Distributor at an annual rate of 0.10%
of the average net assets of Class A shares of the Money Market Fund and 0.25%
of the average net assets of Class A shares of each other Fund. Subject to these
limits, the Distributor may reallow to firms ("Service Organizations") providing
certain services to shareholders (which firms may include the Distributor)
amounts at an annual rate up to 0.10% for Money Market Fund and up to 0.25% for
each other Fund based on the average net asset value of shares held by
shareholders for whom the firm provides services. Any remaining amounts not so
allocated will be retained by the Distributor for the purposes described above.
The Distributor collects the fees under the Plan on a monthly basis. The Plan
may be terminated at any time.
The Plan was approved by a majority of the 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 September 16, 1998. The
Plan will be continued from year to year provided that such continuance is
approved at least annually by a vote of a majority of the Board of Trustees,
including a majority of the Plan Trustees.
The Glass-Steagall Act and other applicable laws currently prohibit banks from
engaging in the business of underwriting, selling or distributing securities.
Accordingly, unless such laws are changed, if the Funds engage banks as Service
Organizations, the banks would perform only administrative and stockholder
servicing functions. If a bank were prohibited from acting as a Service
Organization, alternative means for continuing the servicing of such
stockholders would be sought. State law may differ from Federal law and banks
and other financial institutions may be required to be registered as
broker-dealers to perform administrative and stockholder servicing functions.
Expenses
Each Fund's expenses and expenses of each class of shares, are accrued daily and
are deducted from total income before dividends are paid. These expenses
include, but are not limited to: fees paid to the Adviser and Administrator;
taxes; legal fees; custodian and auditing fees; transfer agent fees; fees paid
to outside firms providing pricing and accounting services to the Funds; and
printing and other miscellaneous expenses paid by the Funds. Class A shares also
incur certain expenses pursuant to the Service and Distribution Plan. Fund
expenses (including a Fund's share of SERV expenses) are generally allocated
between classes based on their respective net asset values. Certain class
specific expenses, however, will be borne by the class incurring the expense,
such as federal registration and state notice filing fees, certain printing and
other class specific costs.
PURCHASING SHARES
Capstone Asset Planning Company (the "Distributor"), located at 5847 San Felipe,
Suite 4100, Houston, Texas 77057, is the principal underwriter of the Funds and,
acting as exclusive agent, sells shares of the Funds to the public on a
continuous basis. Edward L. Jaroski is President of SERV, and a Director and
President of the Adviser and Administrator and the Distributor. Some other
officers of SERV are also officers of the Adviser and Administrator, the
Distributor and Capstone Financial Services, Inc.
Shares of the Funds are sold in a continuous offering and may be purchased on
any business day through authorized investment dealers or directly from the
Fund's Distributor. Except for the Funds themselves, only the Distributor and
investment dealers which have a sales agreement with the Distributor are
authorized to sell shares of the Funds. For further information, reference is
made to the caption "Distributor" in the SERV's Statement of Additional
Information.
Shares of each class of the Funds are sold at net asset value for that class,
without a sales charge, and will be credited to a stockholder's account at the
net asset value for the particular class next computed after an order is
received. The minimum initial investment for Class A shares is $200, except for
continuous investment plans which have no minimum, and there is no minimum for
subsequent purchases. The minimum initial investment for Class C shares is
$50,000, with a $1,000 minimum required for subsequent purchases, except that
for Charitable Trusts or Grantor Trusts for which a charitable organization
serves as trustee, the minimum initial investment in Class C shares is $5,000.
No stock certificates representing shares purchased will be issued. SERV's
management reserves the right to reject any purchase order if, in its opinion,
it is in SERV's best interest to do so.
At various times the Distributor may implement programs under which a dealer's
sales force may be eligible to win nominal awards for certain sales efforts or
recognition programs conforming to criteria established by the Distributor, or
to participate in sales programs sponsored by the Distributor. In addition, the
Adviser and Administrator and/or the Distributor in their discretion may from
time to time, pursuant to objective criteria established by the Adviser and
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 Funds. Such payments are made out of
their own assets, and not out of the assets of the Funds. These programs will
not change the price you pay for your shares or the amount that the Funds will
receive from such sale.
Payment for all orders to purchase Fund shares must be received by the Transfer
Agent within three business days after the order was placed. Checks made payable
to third parties will not be accepted.
Investing Through Authorized Dealers
If any authorized dealer receives an order of at least $200 for Class A shares
or $50,000 for Class C shares (or $1,000 for eligible trust accounts), the
dealer may contact the Distributor directly. Orders received by dealers by the
close of trading on the New York Stock Exchange on a business day that are
transmitted to the Distributor by 4:00 p.m. Central time on that day will be
effected at the net asset value per share determined as of the close of trading
on the New York Stock Exchange that day. It is the dealer's responsibility to
transmit orders so that they will be received by the Distributor before 4:00
p.m. Central time.
After each investment, the stockholder and the authorized investment dealer
receive confirmation statements of the number of shares purchased and owned.
Purchases Through the Distributor
An account may be opened by mailing a check or other negotiable bank draft
(payable to Capstone SERV Fund) together with the completed Investment
Application Form to the Fund's Transfer Agent: Capstone SERV Fund, c/o
Declaration Service Company, 555 North Lane, Suite 6160, Conshohocken, PA 19428.
The $200 minimum initial investment applicable to the purchase of Class A shares
will be waived by the Distributor for plans involving continuing investments
(see "Stockholder Services"). Subsequent investments may be mailed directly to
the Transfer Agent. All such investments are effected at the net asset value of
Fund shares next computed following receipt of payment by the Transfer Agent.
Confirmations of the opening of an account and of all subsequent transactions in
the account are forwarded by the Transfer Agent to the stockholder's address of
record.
Telephone Purchase Authorization (Investing by Phone)
Stockholders who have completed the Telephone Purchase Authorization section of
the Investment Application Form may purchase additional shares by telephoning
the Transfer Agent at ______________. The minimum telephone purchase for Class A
shares is $1,000 and the maximum is the greater of $1,000 or five times the net
asset value of shares held by the stockholder on the day preceding such
telephone purchase for which payment has been received. The minimum telephone
purchase for Class C shares is $50,000 and the maximum is the greater of $50,000
or five times the net asset value of shares held by the stockholder on the day
preceding such telephone purchase for which payment has been received. The
telephone purchase will be effected at the net asset value next computed after
receipt of the call by the Transfer Agent. Payment for the telephone purchase
must be received by the Transfer Agent within three business days after the
order is placed. If payment is not received within three business days, the
stockholder will be liable for all losses incurred as a result of the purchase.
Investing By Wire
Investors having an account with a commercial bank that is a member of the
Federal Reserve System may purchase shares of the Fund by requesting their bank
to transmit funds by wire to: _____________________________, For: Declaration
Service Company, Account No. ____________; Further Credit Capstone Social Ethics
and Religious Values Fund (Insert Fund Name). 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 ______________ to be assigned an account number. The
investor's name, account number, taxpayer identification or social security
number, and address must be specified in the wire. In addition, the investment
application should be promptly forwarded to Capstone Social Ethics and Religious
Values Fund, c/o Declaration Service Company, 555 North Lane, Suite 6160,
Conshohocken, PA 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.
DISTRIBUTIONS AND TAXES
Payment Options
Distributions (whether treated for tax purposes as ordinary income or long-term
capital gains) to each Fund's stockholders are paid in additional shares of each
Fund, with no sales charge, based on the Fund's net asset value as of the close
of business on the record date for such distributions. However, a stockholder
may elect on the application form to receive distributions as follows:
Option 1. To receive income dividends in cash and capital gain
distributions in additional Fund shares, or
Option 2. To receive all dividend and capital gain distributions in
cash.
The Money Market Fund intends to declare as dividends all of its investment
company taxable income daily and to pay such amounts as dividends monthly. Each
other Fund intends to declare and pay such dividends quarterly. Capital gains,
if any, will be paid annually in December. The Funds 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
Each Fund intends to qualify as a regulated investment company under the U.S.
Federal tax law. As such, a 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, each Fund intends to distribute each year all of its
net income and gains.
Stockholders will be taxed on dividends received from each Fund, regardless of
whether received in cash or reinvested in additional shares. Stockholders must
treat dividends, other than capital gain dividends, as ordinary income.
Dividends designated as capital gain dividends are taxable to stockholders as
long-term capital gains, but the rate of tax will depend on the Fund's holding
period of the assets whose sale results in the gain. Certain dividends declared
during 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 Funds 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 Funds. 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 a Fund to redeem their shares by sending a
written request, signed by the record owner(s), to Capstone SERV Fund, c/o
Declaration Service Company, 555 North Lane, Suite 6160, Conshohocken, PA 19428.
In addition, certain expedited redemption methods described below are available.
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 by an
"eligible guarantor institution", as defined in Rule 17Ad-15 under the
Securities Exchange Act of 1934, which participates in a signature guarantee
program. Eligible guarantor institutions include banks, brokers, dealers, credit
unions, national securities exchanges, registered securities associations,
clearing agencies and savings associations. A broker-dealer guaranteeing
signatures must be a member of a clearing corporation or maintain net capital of
at least $100,000. Credit unions must be authorized to issue signature
guarantees. Signature guarantees will be accepted from any eligible guarantor
institution which participates in a signature guarantee program. The redemption
price shall be the net asset value per share next computed after receipt of the
redemption request. See "Determination of Net Asset Value".
In addition, the Distributor is authorized as agent for the Funds to offer to
repurchase shares which are presented by telephone or telegraph to the
Distributor by authorized investment dealers. The repurchase price is the net
asset value per share next determined after the request is received. See
"Determination of Net Asset Value". Broker-dealers may charge for their services
in connection with the repurchase, but the Distributor and its affiliates will
not charge any fee for such repurchase. Payment for shares presented for
repurchase or redemption by authorized investment dealers will be made within
three days after receipt by the Transfer Agent of a written notice in proper
order.
Each 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 Funds will not mail redemption proceeds until any checks
(including certified checks or cashier's checks) received for the shares
purchased have cleared, which can be as long as 15 days from the date of
purchase.
The value of shares on repurchase or redemption may be more or less than the
investor's cost depending upon the market value of a Fund's portfolio securities
at the time of redemption. No redemption fee is charged for the redemption of
shares.
Check-Writing - Money Market Fund
Free check-writing (minimum of $_____, no maximum) is available to stockholders
in the Money Market Fund. Note that when an investment in Money Market Fund is
made by check, a stockholder may not write checks against that investment until
the purchase check has cleared, which may take up to 15 business days from the
purchase date. An account in the Money Market Fund cannot be closed by writing a
check because additional shares accrue daily. The Fund and the Trust reserve the
right to suspend, terminate or to amend this privilege, or to impose a charge,
at any time upon notice to stockholders.
Expedited Telephone Redemption
A stockholder redeeming at least $1,000 of shares and who has authorized
expedited redemption on the application form filed with the Fund's Transfer
Agent may at the time of such redemption request that funds be mailed or wired
to the commercial bank or registered broker-dealer he has previously designated
on the application form by telephoning the Transfer Agent at _______________.
Redemption proceeds will be sent to the investor on the next business day
following receipt of the telephone redemption request. In order to allow the
Adviser and Administrator to manage the Funds more effectively, stockholders are
strongly urged to initiate redemptions as early in the day as possible. If a
stockholder seeks to use an expedited method of redemption of shares recently
purchased by check, the Fund may withhold the redemption proceeds until it is
reasonably assured of the collection of the check representing the purchase,
which may take up to 15 days from the purchase date. The Funds, Distributor and
Transfer Agent reserve the right at any time to suspend or terminate the
expedited redemption procedure or to impose a fee for this service. At the
present time there is no fee charged for this service. During periods of unusual
economic or market changes, stockholders may experience difficulties or delays
in effecting telephone redemptions.
When exchange or redemption requests are made by telephone, the Funds have
procedures in place designed to give reasonable assurance that such telephone
instructions are genuine, including recording telephone calls and sending
written confirmation of transactions. The Funds 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 next asset value for each class of shares of each Fund is computed daily,
Monday through Friday, as of the close of regular trading on the New York Stock
Exchange, which is currently 4:00 p.m. Eastern time. The net asset values will
not be computed on the following holidays: New Year's Day, Martin Luther King's
Birthday, President's Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving Day and Christmas Day.
Each Fund's net asset value per share for each class is computed by dividing the
value (amortized cost value for the Money Market Fund) 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 each class on a daily basis, i.e. 1/360 of the annual amount due by the
Fund or class each year.
Any assets or liabilities initially expressed in terms of foreign currencies are
translated into U.S. dollars at the prevailing market rates at 17:00 Greenwich
Mean Time on each U.S. business day.
Portfolio equity securities which are primarily traded on securities exchanges
are valued at the last sale price on that exchange or, if there is no recent
last sale price available, at the last current bid quotation. A security which
is listed or traded on more than one exchange is valued at the quotation on the
exchange determined to be the primary market for such security. All other equity
securities not so traded are valued at the last current bid quotation prior to
the time of valuation.
Debt securities, except short-term obligations, are valued by using market
quotations or independent pricing services which use prices provided by market
makers or estimates of market values obtained from yield data relating to
instruments or securities with similar characteristics. Other securities,
including restricted securities, and other assets are valued at fair value as
determined in good faith by the Board of Trustees. Because of the need to obtain
prices of foreign securities as of the close of trading on foreign securities
exchanges, the calculation of net asset value does not take place
contemporaneously with the determination of the prices of those securities. If
an event were to occur after the value of a Fund instrument was so established
but before the net asset value per share is determined which is likely to
materially change the net asset value, the Fund instrument would be valued using
fair value considerations established by the Board of Trustees.
STOCKHOLDER SERVICES
The Funds provide stockholders with a number of services and conveniences
designed to assist investors in the management of their investments. These
stockholder services include the following:
Tax-Deferred Retirement Plans
Shares may be purchased by virtually all types of tax-deferred retirement plans.
The Distributor or its affiliates make available plan forms and/or custody
agreements for the following:
o Individual Retirement Accounts ("IRAs") (for individuals and their
non-employed spouses who wish to make limited tax deductible
contributions to a tax-deferred account for retirement);
o Roth IRAs (for individuals who wish to make limited non-deductible
contributions to a retirement plan, with earnings and withdrawals
tax-free);
o Education IRA (for individuals wishing to make limited non-deductible
contributions to a plan for the post secondary education of a child
who is under 18 years of age at the time of the contribution); and
o Simplified Employee Pension Plans.
Dividends and distributions will be automatically reinvested without a sales
charge. For further details, including fees charged, tax consequences and
redemption information, see the specific plan documents which can be obtained
from the Funds.
Investors should consult with their tax adviser before establishing any of the
tax-deferred retirement plans described above.
Exchange Privilege
Shares of a Fund may be exchanged for shares of the same class of another Fund
at a price based on the respective net asset values of the Funds' shares, with
no sales or administrative charge. Any exchange must meet applicable minimum
investment and other requirements for the class of shares of the Fund into which
the exchange is requested.
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 Adviser and Administrator and, at the discretion of the Adviser and
Administrator, can be limited by a Fund's refusal to accept further purchase
and/or exchange orders from the investor. Although the Adviser and 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 a Fund or its other stockholders, as a
general policy investors should be aware that engaging in more than one exchange
or purchase-sale transaction during any thirty-day period with respect to a
particular Fund may be deemed abusive and therefore subject to the above
restrictions.
An exchange of shares is treated for Federal income tax purposes as a sale of
shares given in exchange and the stockholders may, therefore, realize a taxable
gain or loss. The exchange privilege may be exercised only in those states where
shares of the Fund for which shares held are being exchanged may be legally
sold, and the privilege may be amended or terminated upon 60 days' notice to
stockholders.
The stockholder may exercise the following exchange privilege options:
Exchange by Mail - Stockholders may mail a written notice requesting
an exchange to the Fund's Transfer Agent.
Exchange by Telephone - Stockholders must authorize telephone
exchange on the application form filed with the Transfer Agent to
exchange shares by telephone. Telephone exchanges may be made from
9:30 a.m. to 4:00 p.m. Eastern time, Monday through Friday, except
holidays. During periods of unusual economic or market changes,
stockholders may experience difficulties or delays in effecting
telephone exchanges.
When exchange or redemption requests are made by telephone, the Funds have
procedures in place designed to give reasonable assurance that such telephone
instructions are genuine, including recording telephone calls and sending
written confirmation of transactions. A Fund will not be liable for losses due
to unauthorized or fraudulent telephone transactions unless it does not follow
such procedures, in which case it may be liable for such losses.
Pre-Authorized Payment
A stockholder holding Class A shares may arrange to make regular monthly
investments of $25 or more automatically from his checking account by
authorizing the Transfer Agent to withdraw the payment from his checking
account.
Systematic Withdrawal Plan
Investors holding Class A shares 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 a Fund of $5,000. The minimum
amount which may be withdrawn pursuant to this plan is $50.
These payments do not represent a yield or return on investment and may
constitute return of initial capital. In addition, such payments may deplete or
eliminate the investment. Stockholders cannot be assured that they will receive
payment for any specific period because payments will terminate when all shares
have been redeemed. The number of such payments will depend primarily upon the
amount and frequency of payments and the yield on the remaining shares. Under
this plan, any distributions must be reinvested in additional shares of a Fund
at net asset value.
This 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 a Fund. The cost of operating the
Systematic Withdrawal Plan is borne by the Funds.
GENERAL INFORMATION
SERV is an open-end diversified management investment company, as defined in the
Investment Company Act of 1940, as amended. It was organized in Massachusetts on
April 13, 1998 as a business trust. The Funds are established as separate series
of SERV. SERV 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). Shares of each Fund have been divided into multiple classes. Each class
represents an interest in a Fund, but is subject to different rights, expenses
and privileges. 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 particular Fund. SERV 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. Matters submitted to stockholder vote must be approved
by each Fund as to that Fund except (i) as to matters required by the Investment
Company Act of 1940 to be voted on by all stockholders of SERV as a single class
and (ii) as to matters determined by the Trustees not to affect a particular
Fund or class, which will not be submitted to vote by stockholders of that Fund
or class and (iii) matters affecting only a particular class, or affecting that
class in a manner different from other classes must be approved by each such
class. 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. Shares of a Fund have equal dividend rights, are fully paid,
nonassessable and freely transferable and have no conversion, pre-emptive or
subscription rights. Fractional shares have the same rights, pro rata, as full
shares.
Under Massachusetts law, stockholders of a business trust may, under certain
circumstances, be held personally liable as partners for the obligations of the
trust. The Declaration of Trust contains an express disclaimer of stockholder
liability for acts or obligations of SERV. The Declaration of Trust provides for
indemnification out of SERV's property for any stockholder held personally
liable for the obligations of SERV. Thus, the risk of a stockholder's incurring
financial loss on account of stockholder's liability is limited to circumstances
in which SERV itself would be unable to meet its obligations.
SERV's securities are held by Fifth Third Bank under a Custodian Agreement with
the Fund. Declaration Service Company acts as both Transfer Agent and dividend
paying agent for SERV.
Stockholders should address inquiries to SERV at its address stated on the cover
page of this Prospectus.
Year 2000 Risks
Computer users around the world are faced with the dilemma of the Year 2000
issue, which stems from the use of two digits in most computer systems to
designate the year. When the year advances from 1999 to 2000, many computers
will not recognize "00" as the Year 2000. This issue could potentially affect
every aspect of computer-related activity, on an individual and corporate level.
The Funds could be adversely impacted if the computer systems used by the
Adviser and Administrator and other service providers have not been converted to
meet the requirements of the new century. The Funds' Adviser and Administrator
has evaluated its own internal systems and expects them to be fully capable to
handle the change of millenium. The Adviser and Administrator is working with
the providers of the software it uses to address the Year 2000 issue, and is
monitoring on an ongoing basis the progress of the Funds' other service
providers to convert their systems to comply with the requirements of Year 2000.
The Adviser and Administrator currently has no reason to believe that these
service providers will not be fully and timely compliant. However, investors
should be aware that there can be no assurance that all systems will be
successfully converted prior to January 1, 2000, in which case it would become
necessary for the Funds to enter into agreements with new service providers or
to make other arrangements.
<PAGE>
APPENDIX
DESCRIPTION OF BOND RATINGS
DESCRIPTION OF MOODY'S BOND RATINGS:
Excerpts from Moody's description of its bond ratings are listed as follows: AAA
- -- judged to be the best quality and they carry the smallest degree of
investment risk; AA -- judged to be of high quality by all standards -- together
with the AAA group, they comprise what are generally known as high grade bonds;
A -- possess many favorable investment attributes and are to be considered as
"upper medium grade obligations;" BAA -- considered to be medium grade
obligations, i.e., they are neither highly protected nor poorly secured --
interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time; BA -- judged to have speculative
elements, their future cannot be considered as well assured; B -- generally lack
characteristics of the desirable investment; CAA -- are of poor standing -- such
issues may be in default or there may be present elements of danger with respect
to principal or interest; CA -- speculative in a high degree, often in default;
C -- lowest rated class of bonds, regarded as having extremely poor prospects.
Moody's also supplies numerical indicators 1, 2 and 3 to rating categories. The
modifier 1 indicates that the security is in the higher end of its rating
category; the modifier 2 indicates a mid-range ranking; and modifier 3 indicates
a ranking toward the lower end of the category.
DESCRIPTION OF S&P'S BOND RATINGS:
Excerpts from S&P's description of its bond ratings are listed as follows: AAA
- -- highest grade obligations, in which capacity to pay interest and repay
principal is extremely strong: AA -- has a very strong capacity to pay interest
and repay principal, and differs from AAA issues only in a small degree; A --
has a strong capacity to pay interest and repay principal, although they are
somewhat more susceptible to the adverse effects of changes in circumstances and
economic conditions than debt in higher rated categories; BBB -- regarded as
having an adequate capacity to pay interest and repay principal; whereas it
normally exhibits adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than in higher rated
categories. This group is the lowest which qualifies for commercial bank
investment. BB, B, CCC, CC, C -- predominantly speculative with respect to
capacity to pay interest and repay principal in accordance with terms of the
obligations; BB indicates the highest grade and C the lowest within the
speculative rating categories. D -- interest or principal payments are in
default.
S&P applies indicators "+," no character, and "-" to its rating categories. The
indicators show relative standing within the major rating categories.
DESCRIPTION OF MOODY'S RATINGS OF SHORT-TERM MUNICIPAL OBLIGATIONS:
Moody's ratings for state and municipal short-term obligations will be
designated Moody's Investment Grade or MIG. Such ratings recognize the
differences between short-term credit and long-term risk. Short-term ratings on
issues with demand features (variable rate demand obligations) are
differentiated by the use of the VMIG symbol to reflect such characteristics as
payment upon periodic demand rather than fixed maturity dates and payments
relying on external liquidity. Ratings categories for securities in these groups
are as follows: MIG 1/VMIG 1 -- denotes best quality, there is present strong
protection by established cash flows, superior liquidity support or demonstrated
broad-based access to the market for refinancing; MIG2/VMIG 2 -- denotes high
quality, margins of protection are ample although not as large as in the
preceding group; MIG 3/VMIG 3 -- denotes high quality, all security elements are
accounted for but there is lacking the undeniable strength of the preceding
grades; MIG 4/VMIG 4 -- denotes adequate quality, protection commonly regarded
as required of an investment security is present, but there is specific risk; SQ
- -- denotes speculative quality, instruments in this category lack margins of
protection.
DESCRIPTION OF MOODY'S COMMERCIAL PAPER RATINGS:
Excerpts from Moody's commercial paper ratings are listed as follows: PRIME-1 --
- -- issuers (or supporting institutions) have a superior ability for repayment of
senior short-term debt obligations; PRIME-2 -- issuers (or supporting
institutions) have a strong ability for repayment of senior short-term debt
obligations; PRIME-3 -- issuers (or supporting institutions) have an acceptable
ability for repayment of senior short-term debt obligations; NOT PRIME --
issuers do not fall within any of the Prime categories.
DESCRIPTION OF S&P'S RATINGS FOR CORPORATE AND MUNICIPAL BONDS:
Investment Grade Ratings: Aaa -- the highest rating assigned by S&P, capacity to
pay interest and repay principal is extremely strong; AA -- has a very strong
capacity to pay interest and repay principal and differs from the highest rated
issues only in a small degree; A -- has strong capacity to pay interest and
repay principal although it is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than debt in higher rated
categories; BBB -- regarded as having an adequate capacity to pay interest and
repay principal -- whereas it normally exhibits adequate protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay interest and repay principal for debt in this
category than in higher rated categories.
Speculative Grade Ratings: Bb, B, Ccc, Cc, C -- debt rated in these categories
is regarded as having predominantly speculative characteristics with respect to
capacity to pay interest and repay principal -- while such debt will likely have
some quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions; CI -- reserved for
income bonds on which no interest is being paid; D -- in default, and payment of
interest and/or repayment of principal is in arrears. Plus (+) OR Minus (-) --
the ratings from "AA" to "CCC" may be modified by the addition of a plus or
minus sign to show relative standing within the major rating categories.
DESCRIPTION OF S&P'S RATING FOR MUNICIPAL NOTES AND SHORT-TERM MUNICIPAL DEMAND
OBLIGATIONS:
Rating categories are as follows: SP-1 -- has a very strong or strong capacity
to pay principal and interest -- those issues determined to possess overwhelming
safety characteristics will be given a plus (+) designation; SP-2 -- -- has a
satisfactory capacity to pay principal and interest; SP-3 -- issues carrying
this designation have a speculative capacity to pay principal and interest.
DESCRIPTION OF S&P'S RATINGS FOR SHORT-TERM CORPORATE DEMAND OBLIGATIONS AND
COMMERCIAL PAPER:
An S&P commercial paper rating is a current assessment of the likelihood of
timely repayment of debt having an original maturity of no more than 365 days.
Excerpts from S&P's description of its commercial paper ratings are listed as
follows: A-1 -- the degree of safety regarding timely payment is strong -- those
issues determined to possess extremely strong safety characteristics will be
denoted with a plus (+) designation; A-2 -- capacity for timely payment is
satisfactory -- however, the relative degree of safety is not as high as for
issues designated "A-1;" A-3 -- has adequate capacity for timely payment --
however, is more vulnerable to the adverse effects of changes in circumstances
than obligations carrying the higher designations; B -- regarded as having only
speculative capacity for timely payment; C -- a doubtful capacity for payment; D
- -- -- in payment default -- the "D" rating category is used when interest
payments or principal payments are not made on the date due, even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period.
<PAGE>
CAPSTONE SOCIAL ETHICS AND RELIGIOUS VALUES FUND
STATEMENT OF ADDITIONAL INFORMATION
_____________________________, 1998
This Statement of Additional Information is not a Prospectus but contains
information in addition to and more detailed than that set forth in the
Prospectus and should be read in conjunction with the Prospectus. The Statement
of Additional Information and the related Prospectus are both dated
_______________, 1998. A Prospectus may be obtained without charge by contacting
Capstone Asset Planning Company, by phone at (800) 262-6631 or by writing to it
at 5847 San Felipe, Suite 4100, Houston, Texas 77057.
TABLE OF CONTENTS
GENERAL INFORMATION.........................................................37
INVESTMENT RESTRICTIONS.....................................................37
INVESTMENTS AND INVESTMENT STRATEGIES.......................................37
PERFORMANCE INFORMATION.....................................................39
TRUSTEES AND EXECUTIVE OFFICERS.............................................41
INVESTMENT ADVISORY AGREEMENT...............................................42
ADVISORY COMMITTEE AND CONSULTANT...........................................43
ADMINISTRATION AGREEMENT....................................................43
DISTRIBUTOR.................................................................44
OTHER SERVICES..............................................................45
PORTFOLIO TRANSACTIONS AND BROKERAGE........................................45
DETERMINATION OF NET ASSET VALUE............................................46
HOW TO BUY AND REDEEM SHARES................................................47
DIVIDENDS AND DISTRIBUTIONS.................................................48
TAXES...................................................................... 48
OTHER INFORMATION...........................................................54
<PAGE>
GENERAL INFORMATION
Capstone Social Ethics and Religious Values Fund ("SERV") is an "open-end
diversified management company" under the Investment Company Act of 1940 which
has six series ("Funds"). Shares of each Fund have been divided into multiple
classes, including Class A and Class C shares. Each class represents an interest
in a Fund, but is subject to different rights, expenses and privileges. SERV was
organized as a Massachusetts business trust on April 13, 1998.
SERV is a member of a group of investment companies sponsored by Capstone
Asset Management Company (the "Adviser and Administrator"), which provides
investment advisory and administrative services to the Funds. The Adviser and
Administrator and Capstone Asset Planning Company (the "Distributor") are
wholly-owned subsidiaries of Capstone Financial Services, Inc.
INVESTMENT RESTRICTIONS
The Funds have adopted the following restrictions which cannot be changed
with regard to a Fund without approval by the holders of a majority of that
Fund's outstanding shares.
Each Fund has elected to be qualified as a diversified series of SERV.
A Fund may not:
1. borrow money, except as permitted under the Investment Company Act of
1940, as amended, and as interpreted or modified by regulatory
authority having jurisdiction, from time to time;
2. issue senior securities, except as permitted under the Investment
Company Act of 1940, as amended, and as interpreted or modified by
regulatory authority having jurisdiction, from time to time;
3. concentrate its investments in a particular industry, as that term is
used in the Investment Company Act of 1940, as amended, and as
interpreted or modified by regulatory authority having jurisdiction,
from time to time (except that the Money Market Fund reserves the
freedom of action to concentrate its investments in instruments issued
by domestic banks (excluding their foreign branches) and in government
securities, as that term is defined in the Investment Company Act of
1940 and in relevant rules and regulatory interpretations thereunder,
as amended from time to time, and the Money Market Fund will
concentrate its investments in investment companies);
4. engage in the business of underwriting securities issued by others,
except to the extent that the Fund may be deemed to be an underwriter
in connection with the disposition of portfolio securities;
5. purchase or sell real estate, which does not include securities of
companies which deal in real estate or mortgages or investments
secured by real estate or interests therein, except that the Fund
reserves freedom of action to hold and to sell real estate acquired as
a result of the Fund's ownership of securities;
6. purchase physical commodities or contracts relating to physical
commodities;
7. make loans to other persons, except (i) loans of portfolio securities,
and (ii) to the extent that entry into repurchase agreements and the
purchase of debt instruments or interests in indebtedness in
accordance with a Fund's investment objective and policies may be
deemed to be loans.
With respect to senior securities, borrowing and concentrating investments,
the Investment Company Act of 1940, as amended, and regulatory interpretations
of relevant provisions of that Act establish the following general limits.
Open-end registered investment companies ("funds"), such as the Funds, are not
permitted to issue any class of senior security or to sell any senior security
of which they are the issuers. Funds are, however, permitted to issue separate
series of shares (the Funds are series of SERV) and to divide those series into
separate classes (Class A and Class C are such separate classes.) The Funds have
no intention to issue senior securities, except that SERV may issue its shares
in separate series and divide those series into classes of shares. Although
borrowings could be deemed to be senior securities, a fund is "permitted to
borrow from a bank provided that immediately after any such borrowing there is
an asset coverage of at least 300 per cent for all borrowings by the fund. The
Act also permits a fund to borrow for temporary purposes only in an amount not
exceeding 5 per cent of the value of the total assets of the issuer at the time
when the loan is made. (A loan shall be presumed to be for temporary purposes if
it is repaid within 60 days and is not extended or renewed.) The Securities and
Exchange Commission ("SEC") has indicated, however, that certain types of
transactions, which could be deemed "borrowings" (such as firm commitment
agreements and reverse repurchase agreements), are permissible if a fund
"covers" the agreements by establishing and maintaining segregated accounts,
subject, however to the 300% asset coverage requirement. The Funds presently do
not intend to borrow except when advisable to satisfy redemptions and a Fund
will make no purchases if its outstanding borrowings exceed 5% of its total
assets. With respect to concentration, the SEC staff takes the position that
investment of 25% or more of a fund's assets in any one industry represents
concentration.
The portfolio securities of a 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 each of the Funds is
not expected to exceed 30%.
INVESTMENTS AND INVESTMENT STRATEGIES
Foreign Securities (All Funds)
The Money Market Fund's investments in foreign securities must be U.S.
dollar-denominated. The other Funds may invest in U.S. dollar- or foreign
currency-denominated foreign equity and debt securities in the United States or
in foreign markets. These investments may include securities represented by
European Depositary Receipts ("EDRs") and American Depositary Receipts ("ADRs")
and similar types of investments. Investments in securities of foreign issuers
involve certain costs, risks and considerations not typically associated with
investments in U.S. issuers. These include: differences in accounting, auditing
and financial reporting standards; generally higher commission rates on foreign
portfolio transactions; the possibility of nationalization, expropriation or
confiscatory taxation; adverse changes in investment or exchange control
regulations (which may include suspension of the ability to transfer currency
from a country); and political instability which could affect U.S. investments
in foreign countries. Additionally, foreign securities, and dividends and
interest payable on those securities, may be subject to foreign taxes, including
taxes withheld from payments on those securities. Foreign securities often trade
with less frequency and volume than domestic securities and, therefore, may
exhibit greater price volatility and less liquidity. Additional costs associated
with an investment in foreign securities may include higher custodial fees and
transaction costs than are typical of U.S. investments, as well as currency
conversion costs. Changes in foreign exchange rates also will affect the value
of securities denominated or quoted in currencies other than the U.S. dollar. A
Fund's objective may be affected either favorably or unfavorably by fluctuations
in the relative rates of exchange between the currencies of different nations,
by exchange control regulations and by indigenous economic and political
developments. A decline in the value of any particular currency against the U.S.
dollar will cause a decline in the U.S. dollar value of a Fund's holdings of
securities denominated in such currency and, therefore, will cause an overall
decline in the Fund's net asset value and any net investment income and capital
gains to be distributed in U.S. dollars to shareholders. The rate of exchange
between the U.S. dollar and other currencies is determined by several factors
including the supply and demand for particular currencies, central bank efforts
to support particular currencies, the movement of interest rates, the pace of
business activity in certain other countries and the United States, and other
economic and financial conditions affecting the world economy.
Although each Fund values its assets daily in terms of U.S. dollars, the
Funds do not intend to convert any holdings of foreign currencies into U.S.
dollars on a daily basis. When effected, currency conversion involves costs in
the form of a "spread" between the foreign exchange dealer's buying and selling
prices.
Forward Foreign Currency Exchange Transactions (All Funds, except Money
Market Fund)
Each Fund may enter into forward foreign currency exchange contracts in
connection with its investments in foreign securities. A forward foreign
currency exchange contract ("forward contract") is an agreement to purchase or
sell a specific amount of a particular foreign currency at a specified price on
a specified future date. These contracts are traded in the interbank market
conducted directly between currency traders (usually large commercial banks) and
their customers. A forward contract generally has no deposit requirement, and no
commissions are charged at any stage for trades. Closing transactions with
respect to forward contracts are effected with the currency trader who is a
party to the original forward contract.
A Fund will enter into a forward contract only for hedging purposes, with
respect to specific anticipated portfolio transactions (including receivables
and payables) or with respect to portfolio positions denominated in a particular
currency. By entering into such a contract, the Fund hopes to protect against,
or benefit from, an anticipated change in relevant currency exchange rates. For
example, when the Fund anticipates purchasing or selling a security, or
receiving a dividend payment, it may enter into a forward contract to set the
rate at which the relevant currencies will be exchanged at the time of the
transaction. Or, if the Fund anticipates a decline in the value of a currency in
which some of its assets are denominated, it may attempt to "lock in" the
current more favorable rate by entering into a contract to sell an amount of
that currency which approximates the current value of those securities. Each
such contract involves some cost to the Fund and requires that the Fund maintain
with its custodian a segregated account of liquid assets sufficient to satisfy
its obligations under the contract. In the event that the currencies do not move
in the direction, or to the extent, or within the time frame, anticipated, the
Fund may lose some or all of the protection or benefit hoped for.
Securities Index Futures and Related Options
A Fund may engage in transactions in options on securities and securities
indices, and securities index futures and options on such futures as a proxy for
investing in underlying securities in accordance with the Fund's investment
policies.
A Fund may purchase options on securities indices. A securities index (such
as the S&P 500) assigns relative values to the securities included in the index
and the index fluctuates with the changes in the market values of the securities
so included. Options on securities indices are similar to options on securities
except that, rather than giving the purchaser the right to take delivery of the
securities at a specified price, an option on a securities index gives the
purchaser the right to receive cash. The amount of cash is equal to the
difference between the closing price of the index and the exercise price of the
option, expressed in dollars, times a specified multiple (the "multiplier"). The
writer of the option is obligated, in return for the premium received, to make
delivery of this amount. Gain or loss with respect to options on securities
indices depends on price movements in the stock market generally rather than
price movements in individual securities.
The multiplier for an index option performs a function similar to the unit
of trading for a securities option. It determines the total dollar value per
contract of each point in the difference between the exercise price of an option
and the current level of the underlying index. A multiplier of 100 means that a
one-point difference will yield $100. Options on different indices may have
different multipliers.
Because the value of the securities index option depends upon movements in
the level of the index rather than the price of a particular security, whether a
fund will realize a gain or loss on the purchase of a put or call option on a
securities index depends upon movements in the level of prices in the market
generally or in an industry or market segment rather than movements in the price
of a particular security.
A securities index futures contract is a bilateral agreement to which two
parties agree to take or make delivery of an amount of cash equal to a specified
dollar amount times the difference between the index value at the close of the
last trading day of the contract and the futures contract price. The value of a
unit is the current value of the securities index. For example, the Standard &
Poor's Stock Index is composed of 500 selected common stocks, most of which are
listed on the New York Stock Exchange. The S&P 500 Index assigns relative
weightings to the value of one share of each of these 500 common stocks included
in the Index, and the Index fluctuates with changes in the market values of the
shares of those common stocks. In the case of the S&P 500 Index, contracts are
to buy or sell 500 units. Thus, if the value of the S&P 500 Index Futures were
$150, one contract would be worth $75,000 (500 units X $150). Stock index
futures contracts specify that no delivery of the actual stocks making up the
index will take place. Instead, settlement in cash must occur upon the
termination of a contract, with the settlement being the difference between the
contract price and the actual level of the stock index at the expiration of the
contract. For example, a Fund enters into a futures contract to buy 500 units of
the S&P 500 Index at a specified future date at a contract price of $150 and the
S&P 500 Index is at $154 on that future date, the Fund will gain $2,000 (500
units X gain of $4). If the Fund enters into a futures contract to sell 500
units of the stock index at a specified future date at a contract price of $150
and the S&P 500 Index is at $154 on that future date, the Fund will lose $2,000
(500 units X loss of $4).
Options on securities index futures contracts are similar to options on
securities except that an option on a securities index futures contract gives
the purchaser the right, in return for a premium paid, to assume a position in a
securities index futures contract (a long position if the option is a call and a
short position if the option is a put), upon deposit of required margin. In the
alternative, the purchaser may resell the option, if it has value, or simply let
it expire. Upon expiration the purchaser will either realize a gain or the
option will expire worthless, depending on the closing price of the index on
that day. Thus, the purchaser's risk is limited to the premium paid for the
option.
Successful use of securities index futures contracts and options on such
contracts is limited by the fact that the correlation between movements in the
price of futures contracts or options on futures contracts and movements in
prices of securities in a particular Benchmark may not be perfect.
A Fund will purchase and sell securities futures contracts and will
purchase put and call options on securities index contracts only as a means of
obtaining market exposure to securities in its Benchmark. A Fund will not engage
in transactions in securities index futures contracts or options on such
contracts for speculation and will not write options on securities index futures
contracts.
When purchasing securities index futures contracts, a Fund will be required
to post a small initial margin deposit, held in a segregated account with the
futures broker selected by the Fund; the remaining portion of the contracts'
value will be retained in short-term investments in order to meet variation
margin requirements or net redemptions. In the event of net redemptions, the
Fund would close out open futures contracts and meet redemptions with cash
realized from liquidating short-term investments.
A Fund will not leverage its portfolio by purchasing an amount of contracts
that would increase its exposure to securities market movements beyond the
exposure of a portfolio that was 100% invested in those securities.
A Fund's transactions in futures and related options are subject to limits
under rules of the Commodity Futures Trading Commission ("CFTC"). In accordance
with those rules, a Fund will not enter into transactions involving futures
contracts and options on futures contracts to the extent that, immediately
thereafter, the sum of its initial margin deposits on open futures contracts and
premiums paid for options on futures contracts, other than contracts entered
into for bona fide hedging purposes, as defined by applicable rules of the CFTC,
would exceed 5% of the market value of the Fund's total assets.
Securities index futures contracts by their terms settle at settlement date
on a cash basis. In most cases, however, the contracts are "closed out" before
the settlement date. Closing out an open futures position is done by taking an
opposite position ("buying" a contract which has previously been "sold" or
selling a previously purchased contract) in an identical contract to terminate
the position.
Positions in securities index futures contracts may be closed out only on
an exchange which provides a secondary market for such futures. There can be no
assurance, however, that a liquid secondary market will exist for any particular
futures contract at any specified time. Thus, it may not be possible to close
out a futures position, which could have an adverse impact on the cash position
of a Fund, and which could possibly force the sale of portfolio securities at a
time when it may be disadvantageous to do so. In the option of the Funds'
management, the risk that a Fund will be unable to close out a futures contract
will be minimized by entering only into futures contracts which are traded on
national futures exchanges and for which there appears to be a liquid secondary
market.
The risk of loss in trading futures contracts in some strategies can be
substantial, due both to the low margin deposits required and to the extremely
high degree of leverage involved in futures pricing. As a result, a relatively
small price movement in a futures contract may result in immediate and
substantial loss (as well as gain) to an investor. Because a Fund will only
engage in futures strategies for hedging purposes, the Funds' management does
not believe that the Funds will be subject to the risks of substantial loss that
may be associated with futures transactions.
Below-Investment Grade Securities (All Funds Except Money Market Fund)
Although a Fund may not purchase debt obligations rated below Baa by
Moody's or BBB by S&P (or, if unrated, deemed of comparable quality by the
Adviser and Administrator), a Fund will not necessarily sell securities whose
rating falls below Baa or BBB (or, if unrated, whose quality is deemed by the
Adviser and Administrator to be below Baa or BBB). However, a Fund may not hold
such downgraded securities in an amount in excess of 5% of its net assets.
Below-investment grade securities (sometimes referred to as "junk
bonds") are considered predominantly speculative with respect to their capacity
to pay interest and to repay principal. They generally involve a greater risk of
default and have more price volatility than securities in higher rating
categories. The risk of default can increase with changes in the financial
condition of the issuer or with changes in the U.S. economy, such as a
recession.
PERFORMANCE INFORMATION
SERV may from time to time include figures indicating a Fund's yield, total
return or average annual total return in advertisements or reports to
shareholders or prospective investors.
a. The Money Market Fund
From time to time, quotations of the Money Market Fund's yield may be
included in advertisements, sales literature or shareholder reports. These yield
figures are calculated in the following manner:
The current yield is the net annualized yield based on a specified 7
calendar-days calculated at simple interest rates. Current yield is calculated
by determining the net change, exclusive of capital changes, in the value of a
hypothetical pre-existing account having a balance of one share at the beginning
of the period, subtracting a hypothetical charge reflecting deductions from
shareholder accounts, and dividing such change by the value of the account at
the beginning of the base period to obtain the base-period return. The
base-period return is then annualized by multiplying it by 365/7; the resultant
product equals net annualized current yield. The current yield figure is stated
to the nearest hundredth of one percent.
The effective yield is the net annualized yield for a specified 7
calendar-days assuming a reinvestment in Fund shares of all dividends during the
period, i.e., compounding. Effective yield is calculated by using the same
base-period return used in the calculation of current yield except that the
base-period return is compounded by adding 1, raising the sum to a power equal
to 365 divided by 7, and subtracting 1 from the result, according to the
following formula:
Effective Yield = [(Base Period Return + 1)365/7]-1.
As described above, current yield and effective yield are based on
historical earnings, show the performance of a hypothetical investment and are
not intended to indicate future performance. Current yield and effective yield
will vary based on changes in market conditions and the level of Fund expenses.
In connection with communicating its current yield and effective yield to
current or prospective shareholders, the Fund also may compare these figures to
the performance of other mutual funds tracked by mutual fund rating services or
to other unmanaged indices which may assume reinvestment of dividends but
generally do not reflect deductions for administrative and management costs.
b. Other Funds
Average annual total return and total return figures represent the
increase (or decrease) in the value of an investment in a Fund over a specified
period. Both calculations assume that all income dividends and capital gains
distributions during the period are reinvested at net asset value in additional
Fund shares. Quotations of the average annual total return reflect the deduction
of a proportional share of Fund expenses on an annual basis. The results, which
are annualized, represent an average annual compounded rate of return on a
hypothetical investment in the Fund over a period of 1, 5 and 10 years ending on
the most recent calendar quarter calculated pursuant to the following formula:
P(1 + T)n = ERV
where P.....= a hypothetical initial payment of $1,000,
T.....= the average annual total return,
n.....= the number of years, and
ERV = the ending redeemable value of a hypothetical $1,000
payment made at the beginning of the period.
Quotations of total return, which are not annualized, represent historical
earnings and asset value fluctuations. Total return is based on past performance
and is not a guarantee of future results.
Performance information for the Funds may be compared, in reports and
promotional literature, to: (i) 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;
(ii) 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; and (iii) the Consumer Price Index (a measure of inflation)
to assess the real rate of return from an investment in a Fund. 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 Funds reflects only the performance of a
hypothetical investment in a Fund during the particular time period on which the
calculations are based. Performance information should be considered in light of
each 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 a Fund's future performance.
TRUSTEES AND EXECUTIVE OFFICERS
SERV's Trustee and executive officers are listed below:
BERNARD J. VAUGHAN (69), Trustee. 113 Bryn Mawr Avenue, Bala Cynwyd,
Pennsylvania 19004. Director of other Capstone Funds; formerly Vice President of
Fidelity Bank (1979-1993).
JAMES F. LEARY (67), Director. c/o Search Capital Group, Inc., 600 N. Pearl
Street, Suite 2500, Dallas, Texas 75201. President of Sunwestern Management,
Inc. (since June 1982) and President of SIF Management (since January 1992),
venture capital limited partnership concerns; General Partner of Sunwestern
Advisors, L.P., Sunwestern Associates, Sunwestern Associates II, Sunwestern
Partners, L.P. and Sunwestern Ventures, Ltd. (venture capital limited
partnership entities affiliated with Sunwestern Management, Inc. and SIF
Management, Inc.). Director of: other Capstone Funds; Anthem Financial, Inc.
(financial services); Associated Materials, Inc. (tire cord, siding and
industrial cable manufacturer); The Flagship Group, Inc. (vertical market
microcomputer software); Marketing Mercadeo International (public relations and
marketing consultants); MaxServ, Inc. (appliance repair database systems);
MESBIC Ventures, Inc. (minority enterprise small business investment company);
OpenConnect Systems, Inc. (computer networking hardware and software); PhaseOut
of America, Inc. (smoking cessation products); and Search Capital Group, Inc.
(financial services).
JOHN R. PARKER (51), Director. 541 Shaw Hill, Stowe, Vermont 05672.
Consultant and private investor (since 1990); Director of Nova Natural Resources
(oil, gas, minerals); Director of other Capstone Funds; formerly Senior Vice
President of McRae Capital Management, Inc. (1991-1995); and registered
representative of Rickel & Associates (1988-1991).
*EDWARD L. JAROSKI (51), President. 5847 San Felipe, Suite 4100, Houston,
Texas 77057. President (since 1992) and Director (since 1987) of the Capstone
Asset Management Company; President and Director of Capstone Asset Planning
Company and Capstone Financial Services, Inc. (since 1987); Director/Trustee and
Officer of other Capstone Funds.
DAN E. WATSON (49), Executive Vice President. 5847 San Felipe, Suite 4100,
Houston, Texas 77057. Chairman of the Board (since 1992) and Director of
Capstone Asset Management Company (since 1987); Chairman of the Board and
Director of Capstone Asset Planning Company and Capstone Financial Services,
Inc. (since 1987); Officer of other Capstone Funds.
LINDA G. GIUFFRE (36), Secretary/Treasurer. 5847 San Felipe, Suite 4100,
Houston, Texas 77057. Vice President and Secretary and Treasurer of Capstone
Financial Services, Inc., Capstone Asset Management Company and Capstone
Planning Company; Officer of other Capstone Funds.
The Trustee is entitled to $250 per fund for each Board meeting attended,
and is paid a $1,000 annual retainer by SERV. The Trustee and officers of SERV
are also reimbursed for expenses incurred in attending meetings of the Board of
Trustees.
The following table represents the projected compensation to be received by
the indepdendent trustee during fiscal 1998 from Capstone Funds complex.
Compensation Table
<TABLE>
<CAPTION>
Aggregate Pension or Estimated Annual Total Compensation From
Compensation Retirement Benefits Benefits Upon Registrant and Fund Complex
Name of Person, Position From Registrant* Accrued as Part of Fund Retirement Paid to Trustees
<S> <C> <C> <C> <C>
Bernard J. Vaughan, Trustee $4,000 $0 $0 $15,500**
James F. Leary, Trustee $4,000 $0 $0 $15,000**
John Parker, Trustee $4,000 $0 $0 $14,500**
_______________
* Trust does not pay deferred compensation.
** Director of Capstone Fixed Income Series, Inc.; Trustee of Capstone
International Series Trust; Director of Capstone Growth Fund, Inc.
</TABLE>
INVESTMENT ADVISORY AGREEMENT
Pursuant to the terms of an investment advisory agreement dated
October 1, 1998 (the "Advisory Agreement"), SERV employs Capstone Asset
Management Company (the "Adviser and Administrator") to furnish investment
advisory services. The Adviser and Administrator is a wholly-owned subsidiary of
Capstone Financial Services, Inc.
For its services, the Adviser and Administrator receives investment
advisory fees monthly, in arrears, from each Fund at the following annual rates.
The indicated rate for the Money Market Fund is based on the average daily net
assets of that Fund. The fee rates indicated for the other five Funds are
applied to the aggregate average daily net assets of those Funds, as a group,
and the resulting total fees are pro rated among those Funds based on their
relative net assets.
Name of Fund Annual Fee rate as a percentage of
average daily net assets
Money Market Fund 0.10%
Aggregate assets of Short-Term 0.15% of the first $500 million
Bond Fund, Bond Fund, Large Cap 0.10% of the nest $250 million
Equity Fund, Small Cap Equity 0.075% of the next $250 million
Fund, International Fund 0.05% of assets over $1 billion
Pursuant to the Advisory Agreement, the Adviser and Administrator pays the
compensation and expenses of all of its directors, officers and employees who
serve as officers and executive employees of SERV (including SERV's share of
payroll taxes), except expenses of travel to attend meetings of SERV's Board of
Trustees or committees or advisers to the Board. The Adviser and Administrator
also agrees to make available, without expense to SERV, the services of its
directors, officers and employees who serve as officers of SERV.
The Advisory Agreement provides that the Adviser and Administrator shall
not be liable for any error of judgment or of law, or for any loss suffered by a
Fund in connection with the matters to which the agreement relates except a loss
resulting from willful misfeasance, bad faith or gross negligence on the part of
the Adviser and Administrator in the performance of its obligations and duties,
or by reason of its reckless disregard of its obligations and duties under the
Advisory Agreement.
The Advisory Agreement will remain in effect for an initial two year period
and thereafter from year to year provided its renewal in each case and as to
each Fund is specifically approved (a) by SERV's Board of Trustees or, as to
each Fund, by vote of a majority of the Fund's outstanding voting securities,
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 may be
terminated (a) at any time without penalty by SERV upon the vote of a majority
of the Trustees or, as to a Fund, by vote of the majority of that Fund's
outstanding voting securities, upon 60 days' written notice to the Adviser and
Administrator or (b) by the Adviser and Administrator at any time without
penalty, upon 90 days' written notice to SERV. The Advisory Agreement will also
terminate automatically in the event of its assignment (as defined in the 1940
Act).
ADVISORY COMMITTEE AND CONSULTANT
The Board of Trustees may from time to time appoint an advisory committee
("Advisory Committee") to consult with and make recommendations to the Trustees
regarding the application of social, ethical and religious values principles in
selecting investments for the Funds, as well as on other matters regarding the
structure, philosophy and operations of the Funds. Members of the Advisory
Committee, when and if appointed, will not compensated for their services,
although they will be reimbursed by the Trust for expenses of attendance at
Trust-related meetings. The Advisory Committee is expected to consist of members
selected by the Board of Trustees on the basis of their qualifications to
provide this type of advice to the Board. Additionally, the Board has retained
Madison Portfolio Consultants, 400 Madison Avenue, Suite 810, New York, New
York, 10017 ("Madison") to serve as an independent source of expertise and
education for any Advisory Committee and for the Board regarding (a) the general
design and operation of the Funds, (b) the performance of the Adviser and
Administrator and of other service providers to the Funds and (c) economic and
other developments relevant to the operations of the Funds. Neither the Board of
Trustees nor the Adviser and Administrator are obliged to accept the
recommendations of any Advisory Committee or Madison. For its services, Madison
receives a fee (subject to an annual minimum of $50,000) based on the aggregate
net assets of SERV, payable quarterly at an annual rate equal to .025% of the
Funds' average daily net assets up to $200,000,000, .01% of the next
$200,000,000 of such assets, .005% of the next $600,000,000 of such assets, and
an amount to be negotiated for assets in excess of $1 billion.
ADMINISTRATION AGREEMENT
Pursuant to an Administration Agreement dated October 1, 1998 between SERV
and Capstone Asset Management Company, the Adviser and Administrator supervises
all aspects of the Funds' operations. It oversees the performance of
administrative and professional services to the Funds 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
Adviser and Administrator. For these services, the Funds will pay to the Adviser
and Administrator a fee, calculated daily and payable monthly in arrears, equal
to an annual rate of 0.05% of each Fund's average net assets.
SERV pays all of its expenses not borne by the Adviser and Administrator
pursuant to the Administration Agreement including such expenses as (i) advisory
and administrative fees, (ii) fees under the Service and Distribution Plan (see
"Distributor"), (iii) fees for legal, auditing, transfer agent, dividend
disbursing, and custodian services, (iv) the expenses of issue, repurchase, or
redemption of shares, (v) interest, taxes and brokerage commissions, (vi)
membership dues in the Investment Company Institute allocable to SERV, (vii) the
cost of reports and notices to shareholders, and (viii) fees to Trustees and
salaries of any officers or employees who are not affiliated with the Adviser
and Administrator, if any.
The Administration Agreement will remain in effect for an initial two-year
period and will continue thereafter until terminated by either party.
DISTRIBUTOR
Capstone Asset Planning Company (the "Distributor") acts as the principal
underwriter of the Funds' shares pursuant to a written agreement with SERV dated
October 1, 1998 (the "Distribution Agreement"). The Distributor has the
exclusive right (except for distributions of shares directly by SERV) to
distribute shares of the Funds 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. Except to the extent otherwise
permitted by the Service and Distribution Plan (see below), 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.
The Distribution Agreement shall continue for an initial two-year term and
is renewable from year to year if approved in each case as to each Fund (a) by
SERV's Board of Trustees or, with respect to a Fund, by a vote of a majority of
the Fund's outstanding voting securities and (b) by the affirmative vote of a
majority of Trustees who are not parties to the Distribution Agreement or
interested persons of any party, by votes cast in person at a meeting called for
such purpose. The Distribution Agreement provides that it will terminate if
assigned, and that it may be terminated without penalty by either party on 60
days' written notice.
SERV has adopted a Service and Distribution Plan (the "Plan") pursuant to
Rule 12b-1 of the Investment Company Act of 1940 for the Funds' Class A shares
which permits Class A shares of each Fund to make payments to the Distributor in
connection with the distribution of its Class A shares and provision of certain
services to Class A shareholders. Rule 12b-1 requires that SERV's Plan and
related agreements have been approved by a vote of SERV's Board of Trustees, and
by a vote of the Trustees who are not "interested persons" of SERV 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"). Such
actions were taken by SERV's Board of Trustees at a meeting held September 16,
1998.
As required by Rule 12b-1, the Trustees will review quarterly reports
prepared by the Distributor on the amounts expended and the purposes for the
expenditures. The Plan and related agreements may be terminated at any time by a
vote of the Plan Trustees or, as to a Fund, 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 SERV 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 to be paid requires approval by shareholders of Class A shares of each
affected Fund, 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. In compliance with the Rule, the
Trustee, in connection with the adoption of the Plan, requested and evaluated
information they thought necessary to make an informed determination of whether
the Plan and related agreements should be implemented, and concluded, in the
exercise of reasonable business judgment and in light of their fiduciary duties,
that there is a reasonable likelihood that the Plan and related agreements will
benefit the Funds and their shareholders.
OTHER SERVICES
Under the Administration Agreement, SERV bears the cost of the Funds'
accounting services, which includes maintaining the financial books and records
of the Funds and calculating daily net asset value. Declaration Service Company,
of Conshohocken, Pennsylvania, performs accounting, bookkeeping and pricing
services for SERV. For these services, Declaration Service Company receives a
monthly fee from SERV.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Adviser and Administrator is responsible for decisions to buy and sell
securities for each Fund and for the placement of its portfolio business and the
negotiation of the commissions paid on such transactions. It is the policy of
the Adviser and Administrator to seek the best security price available with
respect to each transaction. 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. The Adviser and Administrator
seeks the best security price at the most favorable commission rate. In
selecting dealers and in negotiating commissions, the Adviser and Administrator
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 Funds or the Adviser and Administrator. In
addition, the Adviser and Administrator may cause a Fund to pay a broker that
provides brokerage and research services a commission in excess of the amount
another broker might have charged for effecting a securities transaction. Such
higher commission may be paid if the Adviser and Administrator determines in
good faith that the amount paid is reasonable in relation to the services
received in terms of the particular transaction or the Adviser and
Administrator's overall responsibilities to the Fund and the Adviser and
Administrator's other clients. Such research services must provide lawful and
appropriate assistance to the Adviser and Administrator in the performance of
its investment decision-making responsibilities and may include advice, both
directly and in writing, as to the value of the securities, the advisability of
investing in, purchasing or selling securities, and the availability of
securities, or purchasers or sellers of securities, as well as furnishing
analyses and reports concerning issuers, industries, securities, economic
factors and trends, portfolio strategy and the performance of accounts.
From time to time, the Adviser and Administrator may effect securities
transactions through Capstone Asset Planning Company ("CAPCO"), TradeStar
Investments, Inc. and Williams MacKay Jordan & Co., Inc. ("WMJ"), broker-dealer
affiliates of the Adviser and Administrator. WMJ is deemed to be an affiliated
broker since one of the owners of that firm serves as a director of Capstone
Financial Services, Inc., the parent company of the Adviser and Administrator
and CAPCO.
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 and Administrator
may consider sales of shares of the Funds as a factor in the selection of
dealers to execute portfolio transactions for the Funds.
The Adviser and Administrator places portfolio transactions for other
advisory accounts including other investment companies. Research services
furnished by firms through which a Fund effects its securities transactions may
be used by the Adviser and Administrator in servicing all of its accounts; not
all of such services may be used by the Adviser and Administrator in connection
with the Fund. In the opinion of the Adviser and Administrator, the benefits
from research services to each of the accounts (including the Funds) managed by
the Adviser and Administrator cannot be measured separately.
The Adviser and Administrator seeks to allocate portfolio transactions
equitably whenever concurrent decisions are made to purchase or sell securities
by a 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 and Administrator 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.
DETERMINATION OF NET ASSET VALUE
The net asset value per share of each Fund is computed daily, Monday
through Friday, as of the close of regular trading on the New York Stock
Exchange, which is currently 4:00 p.m. Eastern Time, except that the net asset
value will not be computed on the following holidays: New Year's Day, Martin
Luther King's Birthday, President's Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day, and Christmas Day.
a) Money Market Fund
The valuation of the Money Market Fund's portfolio securities is based upon
their amortized cost which does not take into account unrealized securities
gains or losses. This method involves initially valuing an instrument at its
cost and thereafter amortizing to maturity any discount or premium, regardless
of the impact of fluctuating interest rates on the market value of the
instrument. While this method provides certainty in valuation, it may result in
periods during which value, as determined by amortized cost, is higher or lower
than the price the Fund would receive if it sold the instrument. During periods
of declining interest rates, the quoted yield on shares of the Fund may tend to
be higher than a like computation made by a fund with identical investments
utilizing a method of valuation based upon market prices and estimates of market
prices for all of its portfolio instruments. The converse would apply in a
period of rising interest rates. Other securities and assets for which market
quotations are not readily available are valued in good faith at fair value
using methods determined by the Trustees and applied on a consistent basis. For
example, securities with remaining maturities of more than 60 days for which
market quotations are not readily available are valued on the basis of market
quotations for securities of comparable maturity, quality and type. The Trustees
review the valuation of the Fund's securities through receipt of regular reports
from the Adviser and Administrator at each regular Trustees' meeting.
b) The Other Funds
The net asset value of each of the other Funds' shares is computed by
dividing the value of all securities plus other assets, less liabilities, by the
number of shares outstanding, and adjusting to the nearest cent per share. Such
computation is made by (i) valuing securities listed on an exchange or quoted on
the NASDAQ national market system at the last reported sale price, or if there
has been no sale that day at the mean between the last reported bid and asked
prices, (ii) valuing other securities at the mean between the last reported bid
and asked prices and (iii) valuing any securities for which market quotations
are not readily available and any other assets at fair value as determined in
good faith by the Board of Trustees.
However, debt securities (other than short-term obligations) including
listed issues, are valued on the basis of valuations furnished by a pricing
service which utilizes electronic data processing techniques to determine
valuations for normal institutional size trading units of debt securities,
without exclusive reliance upon exchange or over-the-counter prices. Short-term
obligations are valued at amortized cost.
HOW TO BUY AND REDEEM SHARES
Shares of each Fund are sold in a continuous offering without a sales
charge and may be purchased on any business day through authorized dealers,
including Capstone Asset Planning Company. Certain broker-dealers assist their
clients in the purchase of shares from the Distributor and may charge a fee for
this service in addition to a Fund's net asset value.
Shares will be credited to a shareholder's account at the net asset value
next computed after an order is received by the Distributor. Initial purchases
of Class A shares 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. The minimum initial investment for
Class C shares is $50,000, with a $1,000 minimum required for subsequent
purchases, except for that Charitable Trusts or Grantor Trusts for which a
charitable organization serves as trustee. The minimum investment is $5,000. No
stock certificates representing shares purchased will be issued. SERV's
management reserves the right to reject any purchase order if, in its opinion,
it is in SERV's best interest to do so. See "Purchasing Shares" in the
Prospectus.
Generally, shareholders may require the Fund to redeem their shares by
sending a written request, signed by the record owner(s), to Capstone Social
Ethics and Religious Values Fund, c/o Declaration Service Company, 555 North
Lane, Suite 6160, Conshohocken, PA 19428. In addition, certain expedited
redemption methods are available. See "Redemption and Repurchase of Shares" in
the Prospectus.
DIVIDENDS AND DISTRIBUTIONS
Each Fund's policy is to distribute each year to shareholders
substantially all of its investment company taxable income (which includes,
among other items, dividends, interest and the excess of net short-term capital
gains over net long-term capital losses). Each Fund intends similarly to
distribute to shareholders at least annually any net realized capital gains (the
excess of net long-term capital gains over net short-term capital losses). The
Money Market Fund intends to declare such amounts as dividends daily and to pay
such amounts as dividends monthly. The other Funds intend to declare and pay
such amounts as dividends quarterly. All dividends and capital gain
distributions are reinvested in shares of the particular Fund at net asset value
without sales commission, except that any shareholder may otherwise instruct the
Transfer Agent in writing and receive cash. Shareholders are informed as to the
sources of distributions at the time of payment. Except with respect to the
Money Market Fund, any dividend or distribution paid shortly after a purchase of
shares by an investor will have the effect of reducing the per share net asset
value of his shares by the amount of the dividend or distribution. All or a
portion of any such dividend or distribution, although in effect a return of
capital, may be taxable, as set forth below.
TAXES
Set forth below is a discussion of certain U.S. federal income tax issues
concerning the Funds and the purchase, ownership, and disposition of Fund
shares. This discussion does not purport to be complete or to deal with all
aspects of federal income taxation that may be relevant to shareholders in light
of their particular circumstances. This discussion is based upon present
provisions of the Internal Revenue Code of 1986, as amended (the "Code"), the
regulations promulgated thereunder, and judicial and administrative ruling
authorities, all of which are subject to change, which change may be
retroactive. Prospective investors should consult their own tax advisors with
regard to the federal tax consequences of the purchase, ownership, or
disposition of Fund shares, as well as the tax consequences arising under the
laws of any state, foreign country, or other taxing jurisdiction.
Each Fund intends to be taxed as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code").
Accordingly, each Fund generally must, among other things, (a) derive in each
taxable year at least 90% of its gross income from dividends, interest, payments
with respect to certain securities loans, and gains from the sale or other
disposition of stock, securities or foreign currencies, or other income derived
with respect to its business of investing in such stock, securities or
currencies; and (b) diversify its holdings so that, at the end of each fiscal
quarter, (i) at least 50% of the value of the Fund's total assets is represented
by cash and cash items, U.S. Government securities, the securities of other
regulated investment companies and other securities, with such other securities
limited, in respect of any one issuer, to an amount not greater than 5% of the
value of the Fund's total assets and 10% of the outstanding voting securities of
such issuer, and (ii) not more than 25% of the value of its total assets is
invested in the securities of any one issuer (other than U.S. Government
securities and the securities of other regulated investment companies).
As a regulated investment company, a Fund generally is not subject to U.S.
federal income tax on income and gains that it distributes to shareholders, if
at least 90% of the Fund's investment company taxable income (which includes,
among other items, dividends, interest and the excess of any net short-term
capital gains over net long-term capital losses) for the taxable year is
distributed. Each Fund intends to distribute substantially all of such income.
Amounts not distributed on a timely basis in accordance with a calendar year
distribution requirement are subject to a nondeductible 4% excise tax at the
Fund level. To avoid the tax, each 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 (adjusted for
certain ordinary losses) for a one-year period generally ending on October 31 of
the calendar year, and (3) all ordinary income and capital gains for previous
years that were not distributed during such years. To avoid application of the
excise tax, the Funds intend to make distributions in accordance with the
calendar year distribution requirement. A distribution will be treated as paid
on December 31 of a calendar year if it is declared by the Fund in October,
November or December of that year with a record date in such a month and paid by
the Fund during January of the following year. Such distributions will be
taxable to shareholders in the calendar year in which the distributions are
declared, rather than the calendar year in which the distributions are received.
SERV is organized as a Massachusetts business trust and, under current law,
is not liable for any income or franchise tax in the Commonwealth of
Massachusetts, provided that each of the Funds qualifies as a regulated
investment company for purposes of Massachusetts law.
Market Discount
If a Fund purchases a debt security at a price lower than the stated
redemption price of such debt security, the excess of the stated redemption
price over the purchase price is "market discount". If the amount of market
discount is more than a de minimis amount, a portion of such market discount
must be included as ordinary income (not capital gain) by the Fund in each
taxable year in which the Fund owns an interest in such debt security and
receives a principal payment on it. In particular, the Fund will be required to
allocate that principal payment first to the portion of the market discount on
the debt security that has accrued but has not previously been includable in
income. In general, the amount of market discount that must be included for each
period is equal to the lesser of (i) the amount of market discount accruing
during such period (plus any accrued market discount for prior periods not
previously taken into account) or (ii) the amount of the principal payment with
respect to such period. Generally, market discount accrues on a daily basis for
each day the debt security is held by a Fund at a constant rate over the time
remaining to the debt security's maturity or, at the election of the Fund, at a
constant yield to maturity which takes into account the semi-annual compounding
of interest. Gain realized on the disposition of a market discount obligation
must be recognized as ordinary interest income (not capital gain) to the extent
of the "accrued market discount."
Original Issue Discount
Certain debt securities acquired by the Funds may be treated as debt
securities that were originally issued at a discount. Very generally, original
issue discount is defined as the difference between the price at which a
security was issued and its stated redemption price at maturity. Although no
cash income on account of such discount is actually received by a Fund, original
issue discount that accrues on a debt security 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 applicable to regulated
investment companies.
Some debt securities may be purchased by the Funds at a discount that
exceeds the original issue discount on such debt securities, if any. This
additional discount represents market discount for federal income tax purposes
(see above).
Options, Futures and Forward Contracts
Any regulated futures contracts and certain options (namely, nonequity
options and dealer equity options) in which a Fund may invest may be "section
1256 contracts." Gains (or losses) on these contracts generally are considered
to be 60% long-term and 40% short-term capital gains or losses. Also, section
1256 contracts held by a Fund at the end of each taxable year (and on certain
other dates prescribed in the Code) are "marked to market" with the result that
unrealized gains or losses are treated as though they were realized.
Transactions in options, futures and forward contracts undertaken by the
Funds may result in "straddles" for federal income tax purposes. The straddle
rules may affect the character of gains (or losses) realized by a Fund, and
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 the losses are
realized. In addition, certain carrying charges (including interest expense)
associated with positions in a straddle may be required to be capitalized rather
than deducted currently. Certain elections that a Fund may make with respect to
its straddle positions may also affect the amount, character and timing of the
recognition of gains or losses from the affected positions.
Because only a few regulations implementing the straddle rules have been
promulgated, the consequences of such transactions to the Funds are not entirely
clear. The straddle rules may increase the amount of short-term capital gain
realized by a Fund, which is taxed as ordinary income when distributed to
shareholders. 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 shareholders as ordinary income or long-term capital gain may be
increased or decreased substantially as compared to a fund that did not engage
in such transactions.
Constructive Sales
Recently enacted rules may affect the timing and character of gain if a
Fund engages in transactions that reduce or eliminate its risk of loss with
respect to appreciated financial positions. If a Fund enters into certain
transactions in property while holding substantially identical property, the
Fund would be treated as if it had sold and immediately repurchased the property
and would be taxed on any gain (but not loss) from the constructive sale. The
character of gain from a constructive sale would depend upon the Fund's holding
period in the property. Loss from a constructive sale would be recognized when
the property was subsequently disposed of, and its character would depend on the
Fund's holding period and the application of various loss deferral provisions of
the Code.
Currency Fluctuations - Section 988 Gains or Losses
Gains or losses attributable to fluctuations in exchange rates which occur
between the time a Fund accrues income 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 disposition of some
investments, including debt securities and certain forward contracts denominated
in a foreign currency, gains or losses attributable to fluctuations in the value
of the foreign currency between the acquisition and disposition of the position
also are treated as ordinary gain or loss. These gains and losses, referred to
under the Code as "section 988" gains or losses, increase or decrease the amount
of a Fund's investment company taxable income available to be distributed to its
shareholders as ordinary income. If section 988 losses exceed other investment
company taxable income during a taxable year, a Fund would not be able to make
any ordinary dividend distributions, or distributions made before the losses
were realized would be recharacterized as a return of capital to shareholders,
rather than as an ordinary dividend, reducing each shareholder's basis in his or
her Fund shares.
Passive Foreign Investment Companies
The Funds may invest in shares of foreign corporations that may be
classified under the Code as passive foreign investment companies ("PFICs"). In
general, a foreign corporation 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. If a Fund receives a so-called "excess distribution"
with respect to PFIC stock, the Fund itself may be subject to a tax on a portion
of the excess distribution, whether or not the corresponding income is
distributed by the Fund to shareholders. In general, under the PFIC rules, an
excess distribution is treated as having been realized ratably over the period
during which the Fund held the PFIC shares. Each Fund will itself be subject to
tax on the portion, if any, of an excess distribution that is so allocated to
prior Fund taxable years and an interest factor will be added to the tax, as if
the tax had been payable in such prior taxable years. Certain distributions from
a PFIC as well as gain from the sale of PFIC shares are treated as excess
distributions. Excess distributions are characterized as ordinary income even
though, absent application of the PFIC rules, certain excess distributions might
have been classified as capital gain.
The Funds may be eligible to elect alternative tax treatment with respect
to PFIC shares. Under an election that currently is available in some
circumstances, a 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
distributions were received from the PFIC in a given year. If this election were
made, the special rules, discussed above, relating to the taxation of excess
distributions, would not apply. In addition, another election would involve
marking to market the Fund's PFIC shares at the end of each taxable year, with
the result that unrealized gains would be treated as though they were realized
and reported as ordinary income. Any mark-to-market losses and any loss from an
actual disposition of Fund shares would be deductible as ordinary losses to the
extent of any net mark-to-market gains included in income in prior years.
Distributions
Distributions of investment company taxable income are taxable to a U.S.
shareholder as ordinary income, whether paid in cash or shares. Dividends paid
by a Fund to a corporate shareholder, to the extent such dividends are
attributable to dividends received by the Fund from U.S. corporations, may,
subject to limitation, be eligible for the dividends received deduction.
However, the alternative minimum tax applicable to corporations may reduce the
value of the dividends received deduction.
The excess of net long-term capital gains over the short-term capital
losses realized and distributed by a Fund, whether paid in cash or reinvested in
Fund shares, will generally be taxable to shareholders as either "20% Gain" or
"28% Gain," depending upon the Fund's holding period for the assets sold. "20%
Gains" arise from sales of assets held by a Fund for more than 18 months and are
subject to a maximum tax rate of 20%; "28% Gains" arise from sales of assets
held by a Fund for more than one year but no more than 18 months and are subject
to a maximum tax rate of 28%. Net capital gains from assets held for one year or
less will be taxed as ordinary income. Distributions will be subject to these
capital gains rates regardless of how long a shareholder has held Fund shares.
Shareholders will be notified annually as to the U.S. federal tax status
of distributions, and shareholders receiving distributions in the form of newly
issued shares will receive a report as to the net asset value of the shares
received.
If the net asset value of shares is reduced below a shareholder's cost as
a result of a distribution by a Fund, such distribution generally will be
taxable even though it represents a return of invested capital. Investors should
be careful to consider the tax implications of buying shares of a Fund just
prior to a distribution. The price of shares purchased at this time will include
the amount of the forthcoming distribution, but the distribution will generally
be taxable to the shareholder.
If a Fund retains its net capital gains, although there are no plans to do
so, the Fund may elect to treat such amounts as having been distributed to
shareholders. As a result, the shareholders would be subject to tax on
undistributed capital gain, would be able to claim their proportionate share of
the federal income taxes paid by the Fund on such gain as a credit against their
own federal income tax liabilities, and would be entitled to an increase in the
basis of their Fund shares.
Disposition of Shares
Upon a redemption, sale or exchange of shares of a Fund, a shareholder
will realize a taxable gain or loss depending upon his or her basis in the
shares. A gain or loss will be treated as capital gain or loss if the shares are
capital assets in the shareholder's hands, and the rate of tax will depend upon
the shareholder's holding period for the shares. Any loss realized on a
redemption, sale or exchange will be disallowed to the extent the shares
disposed of are replaced (including through reinvestment of dividends) within a
period of 61 days, beginning 30 days before and ending 30 days after the shares
are disposed of. In such a case the basis of the shares acquired will be
adjusted to reflect the disallowed loss. If a shareholder holds Fund shares for
six months or less and during that period receives a distribution taxable to the
shareholder as long-term capital gain, any loss realized on the sale of such
shares during such six-month period would be a long-term loss to the extent of
such distribution.
Backup Withholding
Each Fund generally will be required to withhold federal income tax at a
rate of 31% ("backup withholding") from dividends paid, capital gain
distributions, and redemption proceeds to shareholders if (1) the shareholder
fails to furnish the Fund with the shareholder's correct taxpayer identification
number or social security number, (2) the IRS notifies the shareholder or the
Fund that the shareholder has failed to report properly certain interest and
dividend income to the IRS and to respond to notices to that effect, or (3) when
required to do so, the shareholder fails to certify that he or she is not
subject to backup withholding. Any amounts withheld may be credited against the
shareholder's federal income tax liability.
Other Taxation
Distributions may be subject to additional state, local and foreign taxes,
depending on each shareholder's particular situation. Non-U.S. shareholders may
be subject to U.S. tax rules that differ significantly from those summarized
above, including the likelihood that ordinary income dividends to them would be
subject to withholding of U.S. tax at a rate of 30% (or a lower treaty rate, if
applicable).
OTHER INFORMATION
Custody of Assets. All securities owned by the Funds and all cash,
including proceeds from the sale of shares of the Funds and of securities in the
Funds' investment portfolio, are held by The Fifth Third Bank, 38 Fountain
Square, Cincinnati, Ohio 45263, as custodian.
Shareholder Reports. Semi-annual statements are furnished to shareholders,
and annually such statements are audited by the independent accountants.
Independent Accountants. Briggs, Bunting & Dougherty, LLP, Two Logan
Square, Suite 2121, Philadelphia, Pennsylvania 19103-4901, the independent
accountants for SERV, performs annual audits of each Fund's financial
statements.
Legal Counsel. Dechert Price & Rhoads, 1775 Eye Street, N.W., Washington,
DC 20006, is legal counsel to SERV.
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Shareholders and Board of Trustees of
Capstone Social Ethics and Religious Values Fund
Houston, Texas
We have audited the accompanying statement of assets and liabilities of the
Large Cap Equity Fund (one of the funds constituting the Capstone Social Ethics
and Religious Values Fund) as of September 28, 1998. This financial statement is
the responsibility of the Fund's management. Our responsibility is to express an
opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statement of assets and liabilities is free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the statement of assets and
liabilities. 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 our audit provides a reasonable
basis for our opinion.
In our opinion, the statement of assets and liabilities referred to above
presents fairly, in all material respects, the financial position of the Large
Cap Equity Fund of the Capstone Social Ethics and Religious Values Fund as of
September 28, 1998 in conformity with generally accepted accounting principles.
BRIGGS, BUNTING & DOUGHERTY, LLP
Philadelphia, Pennsylvania
September 28, 1998
<PAGE>
THE LARGE CAP EQUITY FUND
STATEMENT OF ASSETS AND LIABILITIES
September 28, 1998
ASSETS
Cash $100,050
LIABILITIES -
NET ASSETS $100,050
Net assets consist of:
Paid-in capital $100,050
Net asset value:
Class A - based on net assets of $25
and 1 share outstanding $25.00
======
Class C - based on net assets of $100,025
and 4,001 shares outstanding $25.00
======
See notes to statement of assets and liabilities
<PAGE>
THE LARGE CAP EQUITY FUND
NOTES TO STATEMENT OF ASSETS AND LIABILITIES
September 28, 1998
(1) ORGANIZATION
The Capstone Social Ethics and Religious Values Fund (the "Trust") was
organized as a Massachusetts business trust on April 13, 1998 and is
registered under the Investment Company Act of 1940 (the "1940 Act") as a
diversified open-end management investment company. The Trust currently
consists of six diversified series: The Large Cap Equity Fund (the "Fund"),
Small Cap Equity Fund, International Fund, Money Market Fund, Short-Term
Bond Fund and the Bond Fund. Between the date of organization and September
28, 1998, the Fund had no operations other than those relating to
organizational matters and the sale of 1 Class A share and 1 Class C share
to Capstone Asset Management Company ("Capstone"), the Trust's adviser and
administrator for $50, and the sale of 4,000 Class C shares to another
shareholder for $100,000.
The Trust is authorized to issue an unlimited number of shares of beneficial
interest of $.01 par value. The Fund currently offers two Classes of shares
("Class A" and "Class C"). Each Class of shares has equal rights as to
earnings, assets and voting privileges, except that each Class bears
different distribution expenses. Each Class of shares has exclusive voting
rights with respect to matters that affect just that Class. Income, expenses
(other than expenses attributable to a specific Class) and realized and
unrealized gains or losses on investments are allocated to each Class of
shares based on its relative net assets.
(2) SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statement.
A. FEDERAL INCOME TAXES
It is the policy of the Fund to comply with the requirements of
Internal Revenue Code applicable to regulated investment companies and
to distribute substantially all of its taxable income to its
shareholders in a manner which results in no tax to the Fund.
Therefore, no federal income or excise tax provision is required.
B. ORGANIZATION EXPENSES
Capstone has agreed to bear all of the costs incurred in connection
with the organization and registration of the Trust's shares.
C. USE OF ESTIMATES
In preparing financial statements in accordance with generally accepted
accounting principles, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and the disclosure of contingent assets and liabilities at the date of
the financial statements. Actual results could differ from those
estimates.
<PAGE>
THE LARGE CAP EQUITY FUND
NOTES TO STATEMENT OF ASSETS AND LIABILITIES - (Continued)
September 28, 1998
(3) INVESTMENT ADVISER AND ADMINISTRATOR
Capstone serves as the Fund's adviser and administrator. Pursuant to the
terms of the Investment Advisory Agreement, Capstone shall have full
discretion to manage the assets of the Fund in accordance with its
investment objective. As compensation for its services Capstone receives, on
a monthly basis, an investment advisory fee calculated at the annual rate of
0.15% on the first $500 million of the collective average daily net assets
of each series of the Trust. The fee is reduced on average daily net assets
in excess of $500 million.
Pursuant to the terms of the Administration Agreement, Capstone will
supervise the Fund's daily business affairs, coordinate the activities of
persons providing services to the Fund, and furnish office space and
equipment to the Fund. As compensation for its services Capstone receives a
monthly fee calculated at the annual rate of 0.05% of the Fund's average
daily net assets.
(4) DISTRIBUTION PLAN AND OTHER TRANSACTIONS WITH AFFILIATES
Capstone Asset Planning Company (the "Distributor") serves as the Fund's
principal underwriter pursuant to a Distribution Agreement.
The Distributor is an affiliate of Capstone.
The Class A shares of the Fund have adopted a Service and Distribution Plan
(the "Plan") pursuant to Rule 12(b)-1 under the 1940 Act. The Plan provides
that the Class A shares will make payments to the Distributor to compensate
the Distributor for expenditures incurred by it in connection with the
distribution of Class A shares and for the provision of certain stockholder
services including but not limited to the payment of compensation to
security dealers and other financial organizations to obtain various
distribution related and/or administrative services for the Fund. As
compensation for its services the Distributor receives a monthly fee
calculated at the annual rate of 0.25% of the average daily net asset value
of the Class A shares.
Certain officers of the Trust are also officers of Capstone and the
Distributor.
<PAGE>
CAPSTONE SOCIAL ETHICS AND RELIGIOUS VALUES FUND
OTHER INFORMATION
(PART C TO REGISTRATION STATEMENT NO. 333-49995)
Item 24. Financial Statements and Exhibits
Exhibits not incorporated by reference to a prior filing are designated
by an asterisk; all exhibits not so designated are incorporated hereby by
reference to a prior filing as indicated.
(a) Financial Statements (included in Part B):
***Report of Indepdendent Certified Public Accountants and
Statement of Assets and Liabilities of Capstone Large Cap
Equity Fund at September 28, 1998.
(b) Exhibits:
*1 Copy of Declaration of Trust dated April 13, 1998.
**2 Copy of by-laws.
3 None.
4 None.
*5 Copy of Investment Advisory Agreement between Capstone
Social Ethics and Religious Values Fund and Capstone
Asset Management Company.
*6(a) Copy of General Distribution Agreement between Capstone
Social Ethics and Religious Values Fund and Capstone
Asset Planning Company.
*6(b) Copy of Selling Group Agreement/Service Agreement.
7 None.
**8(a) Form of proposed Custodian Agreement between Capstone
Social Ethics and Religious Values Fund and Fifth Third
Bank.
**8(b) Form of proposed Consulting Services Agreement with Madison
Portfolio Consultants, Inc.
*9(a) Copy of Administration Agreement between Capstone Social
Ethics and Religious Values Fund and Capstone Asset
Management Company.
**9(b) Form of proposed Shareholder Services Agreement between
Capstone Social Ethics and Religious Values Fund and
Declaration Service Company.
***10 Opinion of Dechert Price & Rhoads.
***11(a) Power of Attorney of Messrs. Bernard J. Vaughan, James F.
Leary and John R. Parker.
***11(b) Consent of Briggs, Bunting & Dougherty, LLP
12 None.
13 None.
14 None.
**15 Service and Distribution Plan.
16 None.
17 None.
***18 Multi Class Plan pursuant to Rule 18f-3.
- -------------------------
* Filed with initial registration statement.
** Filed with Pre-Effective Amendment No. 1.
*** Filed herewith.
<PAGE>
Item 25. Persons Controlled by or under Common Control with Registrant
Registrant does not control and is not under common control with any
person.
Item 26. Number of Holders of Securities
Number of Record Holders
Title of Class as of March 30, 1998
-------------- --------------------
Shares of beneficial None
interest, par value $0.01
Item 27. Indemnification
The Declaration of Trust of the Registrant includes the following:
Section 4.3 Mandatory Indemnification.
(a) Subject to the exceptions and limitations contained
in paragraph (b) below:
(i) every person who is, or has been, a Trustee or
officer of SERV shall be indemnified by SERV
to the fullest extent permitted by law
against all liability and against all expenses
reasonably incurred or paid by him in connection
with any claim, action, suit or proceeding in
which he becomes involved as a party or otherwise
by virtue of his being or having been a Trustee
or officer and against amounts paid or incurred
by him in the settlement thereof;
(ii) the words "claim," "action," "suit," or
"proceeding" shall apply to all claims, actions,
suits or proceedings (civil, criminal,
administrative or other, including appeals),
actual or threatened; and the words "liability"
and "expenses" shall include, without
limitation, attorneys' fees, costs, judgments,
amounts paid in settlement, fines, penalties and
other liabilities.
(b) No indemnification shall be provided hereunder to a
Trustee or officer:
(i) against any liability to SERV, a Series thereof,
or the Shareholders by reason of a final
adjudication by a court or other body before
which a proceeding was brought that he engaged in
willful misfeasance, bad faith, gross negligence
or reckless disregard of the duties involved in
the conduct of his office;
(ii) with respect to any matter as to which he shal
have been finally adjudicated not to have acted
in good faith in the reasonable belief that his
action was in the best interest of SERV;
(iii) in the event of a settlement or other disposition
not involving a final adjudication as provided in
paragraph (b)(i) or (b)(ii) resulting in a
payment by a Trustee or officer, unless there has
been a determination that such Trustee or officer
did not engage in willful misfeasance, bad faith,
gross negligence or reckless disregard of the
duties involved in the conduct of his office:
(a) by the court or other body approving the
settlement or other disposition; or
(b) based upon a review of readily available
facts (as opposed to a full trial-type
inquiry) by (x) vote of a majority of the
Disinterested Trustees acting on the
matter (provided that a majority of the
Disinterested Trustees then in office act
on the matter) or (y) written opinion of
independent legal counsel.
(c) The rights of indemnification herein
provided may be insured against by
policies maintained by SERV, shall be
severable, shall not affect any other
rights to which any Trustee or officer may
now or hereafter be entitled, shall
continue as to a person who has ceased to
be such Trustee or officer and shall inure
to the benefit of the heirs, executors,
administrators and assigns of such a
person. Nothing contained herein shall
affect any rights to indemnification to
which personnel of SERV other than
Trustees and officers may be entitled by
contract or otherwise under law.
(d) Expenses of preparation and presentation
of a defense to any claim, action, suit or
proceeding of the character described in
paragraph (a) of this Section 4.3 may be
advanced by SERV prior to final
disposition thereof upon receipt of an
undertaking by or on behalf of the
recipient to repay such amount if
it is ultimately determined that he is
not entitled to indemnification under
this Section 4.3, provided that 1either:
(i) such undertaking is secured by a
surety bond or some other appropriate
security provided by the recipient, or
SERV shall be insured against losses
arising out of any such advances; or
(ii) a majority of the Disinterested
Trustees acting on the matter
(provided that a majority of the
Disinterested Trustees act on the
matter) or an independent legal
counsel in a written opinion shall
determine, based upon a review of
readily available facts (as opposed to
a full trial-type inquiry), that there
is reason to believe that the
recipient ultimately will be found
entitled to indemnification.
As used in this Section 4.3, a "Disinterested Trustee" is one who is not
(i) an Interested Person of SERV (including anyone who has been exempted from
being an Interested Person by any rule, regulation or order of the Commission),
or (ii) involved in the claim, action, suit or proceeding.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to trustees, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised by the Securities and Exchange Commission that, in
the opinion of the Commission, such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a trustee, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such trustee, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether or not such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
To the extent that the Declaration of Trust, By-Laws or any other
instrument pursuant to which the Registrant is organized or administered
indemnify any trustee or officer of the Registrant, or that any contract or
agreement indemnifies any person who undertakes to act as investment adviser or
principal underwriter to the Registrant, any such provision protecting or
purporting to protect such persons against any liability to the Registrant or
its security holders to which he would otherwise be subject by reason of willful
misfeasance, bad faith, or gross negligence, in the performance of his duties,
or by reason of his reckless disregard of his duties pursuant to the conduct of
his office or obligations pursuant to such contract or agreement, will be
interpreted and enforced in a manner consistent with the provisions of Sections
17(h) and (i) of the Investment Company Act of 1940, as amended, and Release No.
IC-11330 issued thereunder.
Item 28. Business and Other Connections of Investment Adviser
The investment adviser of the Registrant is also the investment adviser
and/or administrator of four other investment companies: Capstone Growth Fund,
Inc., Capstone Government Income Fund, Capstone Japan Fund and Capstone New
Zealand Fund. Such adviser also manages private accounts. For further
information, see "Directors and Officers" in Part B. hereof.
Item 29. Principal Underwriters
(a) The principal underwriter of the Registrant, Capstone Asset
Planning Company, also acts as principal underwriter for Capstone Government
Income Fund, Capstone Growth Fund, Inc., Capstone New Zealand Fund and Capstone
Japan Fund.
(b)
Name and Principal Positions and Offices Positions and Offices
Business Address* with Underwriter with Registrant
Dan E. Watson Chairman of the Board and Executive Vice
Director President
Edward L. Jaroski President and Director President
Leticia N. Jaroski Vice President --
Linda G. Giuffre Vice President, Secretary Secretary/Treasurer
and Treasurer
- -------------
* 5847 San Felipe, Suite 4100, Houston, Texas 77057
Item 30. Location of Accounts and Records
Capstone Asset Management Company, the investment adviser and
administrator to the Registrant, 5847 San Felipe, Suite 4100, Houston, TX 77057;
The Fifth Third Bank, the Registrant's custodian, 38 Fountain Square,
Cincinnati, Ohio 45263; and Declaration Service Group, 555 North Lane, Suite
6160, Conshohocken, PA 19428, the Registrant's shareholder service agent,
maintain physical possession of each account, book or other document required to
be maintained by Section 31(a) of Investment Company Act of 1940 and the rules
promulgated thereunder.
Item 31. Management Services
Not applicable.
Item 32. Undertakings
(a) N/A
(b) N/A
(c) Registrant undertakes to furnish each person to whom a prospectus
is delivered with a copy of the Registrant's latest annual report
to shareholders upon request and without charge.
(d) Registrant undertakes to call a meeting of shareholders for the
purpose of voting upon the question of removal of a person
serving as Trustee if requested in writing to do so by the
holders of not less than 10% of the outstanding shares of
Registrant.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this
Pre-Effective Amendment No. 2 to its Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the city of Houston,
and State of Texas on the 29th day of September, 1998.
CAPSTONE SOCIAL ETHICS AND RELIGIOUS VALUES FUND
Registrant
By: Edward L. Jaroski
------------------------
Edward L. Jaroski
Pursuant to the requirements of the Securities Act of 1993, this Amendment
No. 2 to the Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
- ------------------------- Trustee September 29, 1998
*Bernard J. Vaughan
- ------------------------- Trustee September 29, 1998
*James F. Leary
- ------------------------- Trustee September 29, 1998
*John R. Parker
Edward L. Jaroski President September 29, 1998
- ------------------------- (Principal Executive Officer)
Edward L. Jaroski
Linda Giuffre Secretary/Treasurer
- -------------------------- (Principal Financial & September 29, 1998
Linda Giuffre Accounting Officer)
By: Edward L. Jaroski
--------------------------------
*Edward L. Jaroski, Attorney In Fact
<PAGE>
INDEX TO EXHIBITS
Exhibit Description of Exhibits
Number
10 Opinion of Dechert Price and Rhoads
11(a) Power of Attorney of Messrs. James F. Leary, John R.
Parker and Bernard J. Vaughan
11(b) Consent of Briggs, Bunting & Dougherty, LLP
18 Form of 18F-3 Plan
DECHERT PRICE & RHOADS
1775 EYE STREET, N.W.
WASHINGTON, DC 20006-2401
TELEPHONE: (202) 261-3300
FAX: (202) 261-3333
September 29, 1998
Capstone Social Ethics and Religious Values Fund
5847 San Felipe, Suite 4100
Houston, Texas 77057
Dear Sirs:
We have acted as counsel for Capstone Social Ethics and Religious Values
Fund (the "Fund") in connection with the registration of an indefinite number of
its shares of beneficial interest under the Securities Act of 1933, as amended.
The Fund is a series-type fund organized as a business trust under the laws of
Massachusetts.
We have examined the Fund's Declaration of Trust, as amended, the minutes
of the meeting of the Fund's Board of Trustees relating to the authorization and
issuance of capital stock of the Fund, the Fund's Notification of Registration
on Form N-8A filed under the Investment Company Act of 1940, the Fund's
Registration Statement filed on Form N-1A under the Securities Act of 1933 and
the Investment Company Act of 1940 and all amendments thereto, and such other
documents and matters as we have deemed necessary to enable us to give this
opinion. Based upon the foregoing, we are of the opinion that the shares of
beneficial interest proposed to be sold pursuant to the Fund's Registration
Statement, when it is made effective by the Securities and Exchange Commission,
will have been validly authorized and, when sold in accordance with the terms of
the Registration Statement and the requirements of applicable federal and state
law and delivered by the Fund against receipt of cash equal to the initial
amount to be invested per share (in the case of initial shares sold) or the net
asset value of shares sold thereafter, as each is described in the Registration
Statement, will have been legally and validly issued and will be fully paid and
non-assessable.
We hereby consent to the filing of this opinion as an exhibit to
Pre-Effective Amendment No. 2 to the Fund's Registration on Form N-1A to be
filed with the Securities and Exchange Commission in connection with the
registration of the shares of beneficial interest of the Fund, as indicated
above, and to the reference to us by name in the capacity of legal counsel to
the Fund in the Fund's prospectus and/or Statement of Additional Information to
be dated as of the effective date of the Fund's Registration Statement and in
any revised or amended versions thereof.
Very truly yours,
/s/ Dechert Price & Rhoads
DECHERT PRICE & RHOADS
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below appoints Edward L. Jaroski as his true and lawful
attorney-in-fact, with full power of substitution and resubstitution, for him
and in his name, place and stead, in any and all capacities, to sign any and all
amendments (including post-effective amendments) to this Registration Statement,
and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorney-in-fact full power and authority to do and perform each and every
act and thing requisite and necessary to be done in connection therewith, as
fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorney-in-fact, or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
/s/ James F. Leary Director/Trustee September 23, 1998
James F. Leary
/s/ John R. Parker Director/Trustee September 23, 1998
John R. Parker
/s/ Bernard J. Vaughan Director/Trustee September 16, 1998
Bernard J. Vaughan
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the reference to our firm in the Registration Statement (Form
N-1A) and related Statement of Additional Information of the Large Cap Equity
Fund (one of the funds constituting the Capstone Social Ethics and Religious
Values Fund), and to the inclusion of our report dated September 28, 1998.
BRIGGS, BUNTING & DOUGHERTY, LLP
Philadelphia, Pennsylvania
September 28, 1998
CAPSTONE SOCIAL ETHICS AND RELIGIOUS VALUES FUND
("SERV")
Money Market Fund Short-Term Bond Fund
Bond Fund Large Cap Equity Fund
Small Cap Equity Fund International Fund
(the "Funds")
PLAN PURSUANT TO RULE 18F-3
under the
INVESTMENT COMPANY ACT OF 1940
The Plan
I. Introduction
As required by Rule 18f-3 under the Investment Company Act of 1940, as
amended ("1940 Act"), this Plan describes the multi-class system for the Funds,
including the separate class arrangements for shareholder services and/or
distribution of shares, the method for allocating expenses to classes and any
related conversion features or exchange privileges applicable to the classes.
Upon the effective date of this Plan, SERV, on behalf of the Funds,
elects to offer multiple classes of shares of each of the Funds, as described
herein, pursuant to Rule 18f-3 and this Plan.
II. The Multi-Class System
Each of the Funds shall offer two classes of shares, Class A and Class
C. Shares of each class of a Fund shall represent an equal pro rata interest in
that Fund and, generally, shall have identical voting, dividend, liquidation,
and other rights, preferences, powers, restrictions, limitations, qualifications
and terms and conditions, except that: (a) each class shall have a different
designation; (b) each class of shares shall bear any Class Expenses, as defined
in Section C, below; (c) each class shall have exclusive voting rights on any
matter submitted to shareholders that relates solely to its distribution
arrangement; and (d) each class shall have separate voting rights on any matter
submitted to shareholders in which the interests of one class differ from the
interests of any other class. In addition, Class A and Class C shares shall have
the features described in Sections A, B, C and D, below.
A. Sales Charge Structure
1. Class A Shares. Class A shares of each Fund shall be
offered at the then-current net asset value. Class A shares shall generally not
be subject to either a front end or contingent deferred sales charge provided,
however, that such charges may be imposed in such cases as the Board may approve
and as disclosed in a future prospectus or prospectus supplement for a Fund.
Class A shares shall be distinguished from Class C shares by the fees under the
Service and Distribution Plan (see below) applicable to Class A shares.
2. Class C Shares. Class C shares of each Fund shall be
offered at the then-current net asset value. Class C shares shall generally not
be subject to a front-end or contingent deferred sales charge provided, however,
that such charges may be imposed in such cases as the Board may approve and as
disclosed in a future prospectus or prospectus supplement for a Fund. Class C
shares shall be distinguished from Class A shares by fees under the Service and
Distribution Plan (see below) applicable to Class A shares.
B. Service and Distribution Plans
The Funds have adopted a Service and Distribution Plan pursuant to Rule
12b-1 under the 1940 Act, containing the following terms with respect to Class A
shares:
1. Money Market Fund. Class A shares of Money Market Fund
shall reimburse the Distributor for costs and expenses incurred in connection
with distribution and marketing of Class A shares of Money Market Fund, as
provided in the Service and Distribution Plan, subject to an annual limit of
0.10% of the average daily net assets of Money Market Fund attributable to its
Class A shares, provided that up to 0.10% of such average daily net assets may
be designated out of such reimbursements as a "service fee," as defined in rules
and policy statements of the National Association of Securities Dealers.
2. Short-Term Bond Fund, Bond Fund, Large Cap Equity Fund,
Small Cap Equity Fund and International Fund. Class A shares of each Fund shall
reimburse the Distributor for costs and expenses incurred in connection with
distribution and marketing of Class A shares of the Funds, as provided in the
Service and Distribution Plan, subject to an annual limit of 0.25% of the
average daily net assets of a Fund attributable to its Class A shares, provided
that up to 0.25% of such average daily net assets may be designated out of such
reimbursements as a "service fee," as defined in rules and policy statements of
the National Association of Securities Dealers.
C. Allocation of Income and Expenses
1. General
a. Daily Dividend Funds
A Fund that declares distributions of net investment
income daily and that maintains the same net asset value per share in each class
("Daily Dividend Fund") will allocate gross income, realized and unrealized
capital gains and losses and expenses (other than Class Expenses, as defined
below) to each class on the basis of relative net assets (settled shares).
"Relative net assets (settled shares)," for this purpose, are net assets valued
in accordance with generally accepted accounting principles but excluding the
value of subscriptions receivable, in relation to the net assets of the Daily
Dividend Fund. Expenses to be so allocated also include expenses of SERV that
are allocated to a Fund and are not attributable to a particular Fund or class
of a Fund ("SERV Expenses") and expenses of the particular Fund that are not
attributable to a particular class of the Fund ("Fund Expenses"). SERV Expenses
include, but are not limited to, Trustees' fees, insurance costs and certain
legal fees. Fund Expenses include, but are not limited to, certain registration
fees, advisory fees, custodial fees, and other expenses relating to the
management of the Fund's assets.
b. Non-Daily Dividend Funds
The gross income, realized and unrealized capital
gains and losses and expenses (other than Class Expenses, as defined below) of
each Fund, other than a Daily Dividend Fund, shall be allocated to each class on
the basis of its net asset value relative to the net asset value of the Fund.
Expenses to be so allocated also include expenses of SERV that are allocated to
a Fund and are not attributable to a particular Fund or class of a Fund ("SERV
Expenses") and expenses of the particular Fund that are not attributable to a
particular class of the Fund ("Fund Expenses"). SERV Expenses include, but are
not limited to, Trustees' fees, insurance costs and certain legal fees. Fund
Expenses include, but are not limited to, certain registration fees, advisory
fees, custodial fees, and other expenses relating to the management of a Fund's
assets.
2. Class Expenses
Expenses attributable to a particular class ("Class Expenses")
shall be limited to: (a) payments pursuant to the Service and Distribution Plan
by that class; (b) transfer agent fees attributable to that class; (c) printing
and postage expenses related to preparing and distributing material such as
shareholder reports, prospectuses and proxy materials to current shareholders of
that class; (d) registration fees for shares of that class; (e) the expense of
administrative personnel and services as required to support the shareholders of
that class; (f) litigation or other legal expenses relating solely to that
class; and (g) Trustees' fees incurred as a result of issues relating to that
class. Expenses described in (a) of this paragraph must be allocated to the
class for which they are incurred. All other expenses described in this
paragraph may be allocated as Class Expenses, but only if SERV's President and
Treasurer have determined, subject to Board approval or ratification, which of
such categories of expenses will be treated as Class Expenses, consistent with
applicable legal principles under the 1940 Act and the Internal Revenue Code of
1986, as amended ("Code").
In the event a particular expense is no longer reasonably allocable by
class or to a particular class, it shall be treated as a SERV Expense or Fund
Expense, and in the event a SERV Expense or Fund Expense becomes allocable at a
different level, including as a Class Expense, it shall be so allocated, subject
to compliance with Rule 18f-3 and to approval or ratification by the Board of
Trustees.
The initial determination of expenses that will be allocated as Class
Expenses and any subsequent changes thereto shall be reviewed by the Board of
Trustees and approved by such Board and by a majority of the Trustees who are
not "interested persons" of the Funds, as defined in the 1940 Act.
3. Waivers or Reimbursements of Expenses
Expenses may be waived or reimbursed by the Adviser and
Administrator, the Distributor or any other provider of services to a Fund or
SERV without the prior approval of the Board of Trustees.
D. Exchange and Conversion Privileges
Shareholders of a Fund may exchange shares of a particular class for
shares of the same class in another Fund at relative net asset value and with no
sales charge, provided the shares to be acquired in the exchange are qualified
for sale in the shareholder's state of residence and subject to the applicable
requirements as to minimum amount.
There are currently no conversion privileges.
E. Board Review
1. Initial Approval
The Board of Trustees, including a majority of the Trustees
who are not interested persons (as defined in the 1940 Act) of SERV or a Fund
("Independent Trustees"), at a meeting held , 1998, initially approved the Plan
based on a determination that the Plan, including the expense allocation, is in
the best interests of each class and Fund individually and of SERV. Their
determination was based on their review of information furnished to them which
they deemed reasonably necessary and sufficient to evaluate the Plan.
2. Approval of Amendments
The Plan may not be amended materially unless the Board of
Trustees, including a majority of the Independent Trustees, have found that the
proposed amendment, including any proposed related expense allocation, is in the
best interests of each class and Fund individually and of SERV. Such finding
shall be based on information requested by the Board and furnished to them which
the Board deems reasonably necessary to evaluate the proposed amendment.
3. Periodic Review
The Board shall review reports of expense allocations and such
other information as they request at such times, or pursuant to such schedule,
as they may determine consistent with applicable legal requirements.
F. Contracts
Any agreement related to the Multi-Class System shall require the
parties thereto to furnish to the Board of Trustees, upon their request, such
information as is reasonably necessary to permit the Trustees to evaluate the
Plan or any proposed amendment.
G. Effective Date
The Plan, having been reviewed and approved by the Board of Trustees
and by a majority of the Independent Trustees as indicated in Section E1 of the
Plan, shall take effect as of _____, 1998.
H. Amendments
The Plan may not be amended to modify materially its terms unless such
amendment has been approved in the manner specified in Section E2 of the Plan.
Effective Date:
