As filed with the Securities and Exchange Commission on July 21, 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. 1 /X/
Post-Effective Amendment No. ___ / /
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 / /
AMENDMENT NO. 1 /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>
SUBJECT TO COMPLETION: DATED JULY 21, 1998
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 Equity 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.
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any state in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such state.
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 Equity 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
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
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
Equity 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 Equity 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 Int'l. Equity 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 Int'l. Equity 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. 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 Equity 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 has a
fundamental policy to invest more than 25% of its assets 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. Under normal market conditions, at least 65%
of the Fund's assets will be invested, either directly or through other
investment companies, in equity securities of issuers whose headquarters or
principal business activities are in at least 3 non-U.S. countries. The Fund may
also 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.
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. 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
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
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 Equity 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
To the extent consistent with their investment policies, the Funds (other than
the Money Market Fund) may employ special investment practices as a hedge
against changes in the value of securities held in the Funds' portfolios or
securities they intend to purchase.
A Fund may purchase put and call options on securities and securities indexes
for hedging purposes.
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. Price movements in securities which a
Fund owns or intends to purchase probably will not correlate perfectly with
movements in the level of an index and, therefore, the Fund bears the risk of a
loss on an index option which may not completely offset movements in the price
of such securities.
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
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 and the International Equity Fund will each
concentrate their 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 Equity 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 Equity 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.
Distributor
Pursuant to a Distribution Agreement with SERV dated ________________, 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 _____________, 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.
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
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. 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.
<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>
SUBJECT TO COMPLETION: DATED JULY 21, 1998
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.
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may any
offers to buy be accepted prior to the time the registration statement becomes
effective.
TABLE OF CONTENTS
GENERAL INFORMATION.........................................................37
INVESTMENT RESTRICTIONS.....................................................37
Foreign Securities (All Funds)........................................38
Forward Foreign Currency Exchange Transactions
(All Funds, except Money Market Fund).................................39
PERFORMANCE INFORMATION.....................................................39
TRUSTEES AND EXECUTIVE OFFICERS.............................................41
INVESTMENT ADVISORY AGREEMENT...............................................42
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 and the
International Equity Fund each will concentrate their 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.) 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. With respect to
concentration, the SEC staff takes the position that investment of more than 25%
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%.
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 hedge
against changes in the value of securities held in the Fund's portfolio or
securities it intends to purchase.
To protect the value of its portfolio against declining stock prices, a
Fund may purchase put options on securities indices. To protect against an
increase in the value of the securities that it wants to purchase, a Fund may
purchase call 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. Accordingly, successful use by a Fund of both put and
call options on securities indices will be subject to the Adviser and
Administrator's ability to accurately predict movements in the direction of the
securities market generally or of a particular industry. In cases where the
Adviser and Administrator's prediction proves to be inaccurate, a Fund will lose
the premium paid to purchase the option and it will have failed to realize any
gain.
In addition, a Fund's ability to hedge effectively all or a portion of its
securities through transactions in options on securities indices (and therefore
the extent of its gain or loss on such transactions) depends on the degree to
which price movements in the underlying index correlate with price movements in
the Fund's securities. Inasmuch as such securities will not duplicate the
components of an index, the correlation probably will not be perfect.
Consequently, a Fund will bear the risk that the prices of the securities being
hedged will not move in the same amount as the option. This risk will increase
as the composition of the Fund's portfolio diverges from the composition of the
index.
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 subject to the Adviser and Administrator's ability to predict
correctly movements in the direction of the stock markets. No assurance can be
given that the Adviser and Administrator's judgment in this respect will be
correct. Additionally, the correlation between movements in the price of futures
contracts or options on futures contracts and movements in prices of securities
being hedged or used for cover is not perfect.
A Fund will purchase and sell securities futures contracts and will
purchase put and call options on securities index contracts only as a hedge
against changes in the value of securities held in the Fund's portfolio or which
it intends to purchase and where the transactions are economically appropriate
to the reduction of the risks inherent in the ongoing management of the Fund.
Generally, a Fund may hedge its securities portfolio against a period of market
decline by selling securities index futures contracts or by purchasing puts on
securities index futures contracts for the purpose of protecting its portfolio
against such decline. Conversely, a Fund may purchase securities index futures
contracts or call options thereon as a means of protecting against an increase
in the prices of securities which the Fund intends to purchase. 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 by the Fund's custodian in the name
of 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.
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).
*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 and Treasurer. 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
_________________ (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 Equity 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).
ADMINISTRATION AGREEMENT
Pursuant to an Administration Agreement dated _______________, 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
____________ (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 ___________,
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>
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):
Statement of Assets and Liabilities at ___________, 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 Power of Attorney of Mr. Bernard J. Vaughan.
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 herewith.
*** To be filed by amendment.
<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 shall 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 &
Treasurer
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. 1 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 20th day of July, 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. 1 to the Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
- ------------------------- Trustee July 20, 1998
*Bernard J. Vaughan
Edward L. Jaroski President July 20, 1998
- ------------------------- (Principal Executive Officer)
Edward L. Jaroski
Linda Giuffre Secretary/Treasurer
- -------------------------- (Principal Financial & July 20, 1998
Linda Giuffre Accounting Officer)
By: Edward L. Jaroski
--------------------------------
*Edward L. Jaroski, Attorney In Fact
<PAGE>
INDEX TO EXHIBITS
Exhibit Description of Exhibits
Number
2 By-Laws
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(b) Form of proposed Shareholder Services Agreement between
Capstone Social Ethics and Religious Values Fund and
Declaration Service Group.
15 Service and Distribution Plan
BY-LAWS
OF
CAPSTONE SOCIAL ETHICS AND RELIGIOUS VALUES FUND
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE I - DEFINITIONS 1
ARTICLE II - OFFICES 1
Section 1. Offices. 1
ARTICLE III - SHAREHOLDERS 1
Section 1. Meetings. 1
Section 2. Notice of Meetings. 1
Section 3. Record Date for Meetings and Other Purposes. 2
Section 4. Proxies. 2
Section 5. Action Without Meeting. 3
ARTICLE IV - TRUSTEES 4
Section 1. Meetings of the Trustees. 4
Section 2. Quorum and Manner of Acting. 5
ARTICLE V - COMMITTEES 5
Section 1. Executive and Other Committees. 5
Section 2. Meetings, Quorum and Manner of Acting. 6
ARTICLE VI - OFFICERS 7
Section 1. General Provisions. 7
Section 2. Term of Office and Qualifications. 7
Section 3. Removal. 7
Section 4. Powers and Duties of the President. 8
Section 5. Powers and Duties of Vice Presidents. 8
Section 6. Powers and Duties of the Treasurer. 9
Section 7. Powers and Duties of the Secretary. 9
Section 8. Powers and Duties of Assistant Treasurers. 9
Section 9. Powers and Duties of Assistant Secretaries. 10
Section 10. Compensation of Officers and Trustees and
Members of the Advisory Board 10
ARTICLE VII - FISCAL YEAR 10
ARTICLE VIII - SEAL 10
ARTICLE IX - WAIVERS OF NOTICE 11
ARTICLE X - CUSTODY OF SECURITIES 11
Section 1. Employment of a Custodian. 11
Section 2. Action Upon Termination of Custodian Agreement. 11
Section 3. Provisions of Custodian Agreement. 12
Section 4. Central Certificate System. 13
Section 5. Acceptance of Receipts in Lieu of Certificates. 13
ARTICLE XI - AMENDMENTS 14
ARTICLE XII - INSPECTION OF BOOKS 14
ARTICLE XIII - MISCELLANEOUS 14
<PAGE>
BY-LAWS
OF
CAPSTONE SOCIAL ETHICS AND RELIGIOUS VALUES FUND
ARTICLE I - - DEFINITIONS
Any terms defined in the Declaration of Trust of Capstone Social Ethics
and Religious Values Fund dated April 13, 1998, as amended from time to time,
shall have the same meaning when used herein.
ARTICLE II - - OFFICES
Section 1. Offices.
The Trust may have its principal office and other offices in such places
within as well as without the Commonwealth as the Trustees may from time to time
determine.
ARTICLE III - - SHAREHOLDERS
Section 1. Meetings.
Meetings of the Shareholders shall be held as provided in the Declaration
of Trust at such place within or without the Commonwealth of Massachusetts as
the Trustees shall designate. The holders of a majority of outstanding Shares
present in person or by proxy shall constitute a quorum at any meeting of the
Shareholders.
Section 2. Notice of Meetings.
Notice of all meetings of the Shareholders, stating the time, place and
purposes of the meeting, shall be given by the Trustees by mail to each
Shareholder at his address as recorded on the register of the Trust mailed at
least ten (10) days and not more than sixty (60) days before the meeting. Only
the business stated in the notice of the meeting shall be considered at such
meeting. Any adjourned meeting may be held as adjourned without further notice.
No notice need be given to any Shareholder who shall have failed to inform the
Trust of his current address or if a written waiver of notice, executed before
or after the meeting by the Shareholder or his attorney thereunto authorized, is
filed with the records of the meeting.
Section 3. Record Date for Meetings and Other Purposes.
For the purpose of determining the Shareholders who are entitled to
notice of and to vote at any meeting, or to participate in any distribution, or
for the purpose of any other action, the Trustees may from time to time close
the transfer books for such period, not exceeding thirty (30) days, as the
Trustees may determine; or without closing the transfer books the Trustees may
fix a date not more than sixty (60) days prior to the date of any meeting of
Shareholders or distribution or other action as a record date for the
determinations of the persons to be treated as Shareholders of record for such
purposes, except for dividend payments which shall be governed by the
Declaration.
Section 4. Proxies.
At any meeting of Shareholders, any holder of Shares entitled to vote
thereat may vote by proxy, provided that no proxy shall be voted at any meeting
unless it shall have been placed on file with the Secretary, or with such other
officer or agent of the Trust as the Secretary may direct, for verification
prior to the time at which such vote shall be taken. Proxies may be solicited in
the name of one or more Trustees or one or more of the officers of the Trust.
Only Shareholders of record shall be entitled to vote. Each whole share shall be
entitled to one vote as to any matter on which it is entitled by the Declaration
to vote, and each fractional Share shall be entitled to a proportionate
fractional vote. When any Share is held jointly by several persons, any one of
them may vote at any meeting in person or by proxy in respect of such Share, but
if more than one of them shall be present at such meeting in person or by proxy,
and such joint owners or their proxies so present disagree as to any vote to be
cast, such vote shall not be received in respect of such Share. A proxy
purporting to be executed by or on behalf of a Shareholder shall be deemed valid
unless challenged at or prior to its exercise, and the burden of proving
invalidity shall rest on the challenger. If the holder of any such Share is a
minor or legally incompetent, and subject to guardianship or the legal control
of any other person as regards the charge or management of such Share, he may
vote by his guardian or such other person appointed or having such control, and
such vote may be given in person or by proxy.
Section 5. Action Without Meeting.
Any action which may be taken by Shareholders may be taken without a
meeting if a majority of Shareholders entitled to vote on the matter (or such
larger proportion thereof as shall be required by law, the Declaration or these
By-Laws for approval of such matter) consent to the action in writing and the
written consents are filed with the records of the meetings of Shareholders.
Such consents shall be treated for all purposes as a vote taken at a meeting of
Shareholders.
ARTICLE IV - - TRUSTEES
Section 1. Meetings of the Trustees.
The Trustees may in their discretion provide for regular or stated
meetings of the Trustees. Notice of regular or stated meetings need not be
given. Meetings of the Trustees other than regular or stated meetings shall be
held whenever called by the President, or by any one of the Trustees, at the
time being in office. Notice of the time and place of each meeting other than
regular or stated meetings shall be given by the Secretary or an Assistant
Secretary or by the officer or Trustee calling the meeting and shall be mailed
to each Trustee at least two days before the meeting, or shall be sent by
telegraph, facsimile, electronic mail or other communication leaving a visual
record to each Trustee at his business address, or personally delivered to him
at least one day before the meeting. Such notice may, however, be waived by any
Trustee. Notice of a meeting need not be given to any Trustee if a written
waiver of notice, executed by him before or after the meeting, is filed with the
records of the meeting, or to any Trustee who attends the meeting without
protesting prior thereto or at its commencement the lack of notice to him. A
notice or waiver of notice need not specify the purpose of any meeting. The
Trustees may meet by means of a telephone or video conference circuit or similar
communications equipment by means of which all persons participating in the
meeting can hear each other at the same time and such meeting shall be deemed to
have been held at a place designated by the Trustees at the meeting.
Participation in a telephone or video conference meeting shall constitute
presence in person at such meeting. Any action required or permitted to be taken
at any meeting of the Trustees may be taken by the Trustees without a meeting if
all the Trustees consent to the action in writing and the written consents are
filed with the records of the Trustees' meetings. Such consents shall be treated
as a vote for all purposes.
Section 2. Quorum and Manner of Acting.
A majority of the Trustees shall be present in person at any regular or
special meeting of the Trustees in order to constitute a quorum for the
transaction of business at such meeting and (except as otherwise required by
law, the Declaration or these By-Laws) the act of a majority of the Trustees
present at any such meeting, at which a quorum is present, shall be the act of
the Trustees. In the absence of a quorum, a majority of the Trustees present may
adjourn the meeting from time to time until a quorum shall be present. Notice of
an adjourned meeting need not be given.
ARTICLE V - - COMMITTEES
Section 1. Executive and Other Committees.
The Trustees by vote of a majority of all the Trustees may elect from
their own number an Executive Committee, to consist of such number of Trustees
as the Trustees shall determine, to hold office at the pleasure of the Trustees,
which shall have the power to conduct the current and ordinary business of the
Trust while the Trustees are not in session, including the purchase and sale of
securities and the designation of securities to be delivered upon redemption of
Shares of the Trust, and such other powers of the Trustees as the Trustees may,
from time to time, delegate to them except those powers which by law, the
Declaration or these By-Laws they are prohibited from delegating. The Trustees
may also elect from their own number other Committees from time to time, the
number composing such Committees, the powers conferred upon the same (subject to
the same limitations as with respect to the Executive Committee) and the term of
membership on such Committees to be determined by the Trustees. The Trustees may
designate a chairman of any such Committee. In the absence of such designation,
the Committee may elect its own Chairman.
Section 2. Meetings, Quorum and Manner of Acting.
The Trustees may (1) provide for stated meetings of any Committee, (2)
specify the manner of calling and notice required for special meetings of any
Committee, (3) specify the number of members of a Committee required to
constitute a quorum and the number of members of a Committee required to
exercise specified powers delegated to such Committee, (4) authorize the making
of decisions to exercise specified powers by written assent of the requisite
number of members of a Committee without a meeting, and (5) authorize the
members of a Committee to meet by means of a telephone or video conference
circuit.
The Executive Committee shall keep regular minutes of its meetings and
records of decisions taken without a meeting and cause them to be recorded in a
book designated for that purpose and kept in the Office of the Trust.
ARTICLE VI - - OFFICERS
Section 1. General Provisions.
The officers of the Trust shall be a President, a Treasurer and a
Secretary, who shall be elected by the Trustees. The Trustees may elect or
appoint such other officers or agents as the business of the Trust may require,
including one or more Executive Vice Presidents, one or more Vice Presidents,
one or more Assistant Secretaries, and one or more Assistant Treasurers. The
Trustees may delegate to any officer or Committee the power to appoint any
subordinate officers or agents.
Section 2. Term of Office and Qualifications.
Except as otherwise provided by law, the Declaration or these By-Laws, the
President, the Treasurer and the Secretary shall each hold office until his
successor shall have been duly elected and qualified, and all other officers
shall hold office at the pleasure of the Trustees. The Secretary and Treasurer
may be the same person. A Vice President and the Treasurer or Assistant
Treasurer or a Vice President and the Secretary or Assistant Secretary may be
the same person, but the offices of Vice President and Secretary and Treasurer
shall not be held by the same person. The President shall hold no other office.
Except as above provided, any two offices may be held by the same person. Any
officer may be, but none need be, a Trustee or Shareholder.
Section 3. Removal.
The Trustees, at any regular or special meeting of the Trustees, may
remove any officer without cause, by a vote of a majority of the Trustees then
in office. Any officer or agent appointed by an officer or Committee may be
removed with or without cause by such appointing officer or Committee.
Section 4. Powers and Duties of the President.
The President may call meetings of the Trustees and of any Committee
thereof when he deems it necessary and shall preside at all meetings of the
Shareholders. Subject to the control of the Trustees and to the control of any
Committees of the Trustees, within their respective spheres, as provided by the
Trustees, he shall at all times exercise a general supervision and direction
over the affairs of the Trust. He shall have the power to employ attorneys and
counsel for the Trust and to employ such subordinate officers, agents, clerks
and employees as he may find necessary to transact the business of the Trust. He
shall also have the power to grant, issue, execute or sign such powers of
attorney, proxies or other documents as may be deemed advisable or necessary in
furtherance of the interests of the Trust. The President shall have such other
powers and duties as from time to time may be conferred upon or assigned to him
by the Trustees.
Section 5. Powers and Duties of Vice Presidents.
In the absence or disability of the President, any Vice President
designated by the Trustees shall perform all the duties and may exercise any of
the powers of the President, subject to the control of the Trustees. Each Vice
President shall perform such other duties as may be assigned to him from time to
time by the Trustees and the President.
Section 6. Powers and Duties of the Treasurer.
The Treasurer shall be the principal financial and accounting officer of
the Trust. He shall deliver all funds of the Trust which may come into his hands
to such Custodian as the Trustees may employ pursuant to Article X of these
By-Laws. He shall in general perform all the duties incident to the office of
Treasurer and such other duties as from time to time may be assigned to him by
the Trustees.
Section 7. Powers and Duties of the Secretary.
The Secretary shall keep the minutes of all meetings of the Trustees and of
the Shareholders in proper books provided for that purpose; he shall have
custody of the seal of the Trust; he shall have charge of the Share transfer
books, lists and records unless the same are in the charge of the Transfer
Agent. He shall attend to the giving and serving of all notices by the Trust in
accordance with the provisions of these By-Laws and as required by law; and
subject to these By-Laws, he shall in general perform all duties incident to the
office of Secretary and such other duties as from time to time may be assigned
to him by the Trustees.
Section 8. Powers and Duties of Assistant Treasurers.
In the absence or disability of the Treasurer, any Assistant Treasurer
designated by the Trustees shall perform all the duties, and may exercise any of
the powers, of the Treasurer. Each Assistant Treasurer shall perform such other
duties as from time to time may be assigned to him by the Trustees.
Section 9. Powers and Duties of Assistant Secretaries.
In the absence or disability of the Secretary, any Assistant Secretary
designated by the Trustees shall perform all the duties, and may exercise any of
the powers, of the Secretary. Each Assistant Secretary shall perform such other
duties as from time to time may be assigned to him by the Trustees.
Section 10. Compensation of Officers and Trustees and Members of the
Advisory Board.
Subject to any applicable provisions of the Declaration, the compensation
of the officers and Trustees and members of any Advisory Board shall be fixed
from time to time by the Trustees or, in the case of officers, by any Committee
or officer upon whom such power may be conferred by the Trustees. No officer
shall be prevented from receiving such compensation as such officer by reason of
the fact that he is also a Trustee.
ARTICLE VII - - FISCAL YEAR
The fiscal year of the Trust shall begin on the first day of December in
each year and shall end on the 30th day of November in each year, provided,
however, that the Trustees may from time to time change the fiscal year.
ARTICLE VIII - - SEAL
The Trustees may adopt a seal which shall be in such form and shall have
such inscription thereon as the Trustees may from time to time prescribe.
ARTICLE IX - - WAIVERS OF NOTICE
Whenever any notice is required to be given by law, the Declaration or
these By-Laws, a waiver thereof in writing, signed by the person or persons
entitled to said notice, whether before or after the time stated therein, shall
be deemed equivalent thereto. A notice shall be deemed to have been telegraphed,
sent by facsimile, electronic mail or other communication leaving a visual
record for the purposes of these By-Laws when it has been delivered to a
representative of the appropriate communications company, or to an employee of
the sender responsible for communications, with instructions that it be
telegraphed, sent by facsimile, electronic mail or other means of communication
leaving a visual record.
ARTICLE X - - CUSTODY OF SECURITIES
Section 1. Employment of a Custodian.
The Trust shall place and at all times maintain in the custody of a
Custodian (including any sub-custodian for the Custodian, which may be a foreign
bank which meets applicable requirements of law) all trusts, securities and
similar investments included in the Trust Property. The Custodian (and any
sub-custodian) shall be a bank having not less than $2,000,000 aggregate
capital, surplus and undivided profits and shall be appointed from time to time
by the Trustees, who shall fix its remuneration.
Section 2. Action Upon Termination of Custodian Agreement.
Upon termination of a Custodian Agreement or inability of the Custodian to
continue to serve, the Trustees shall promptly appoint a successor custodian,
but in the event that no successor custodian can be found who has the required
qualifications and is willing to serve, the Trustees shall call as promptly as
possible a special meeting of the Shareholders to determine whether the Trust
shall function without a custodian or shall be liquidated. If so directed by
vote of the holders of a majority of the outstanding voting securities, the
Custodian shall deliver and pay over all Trust Property held by it as specified
in such vote.
Section 3. Provisions of Custodian Agreement.
The following provisions shall apply to the employment of a Custodian and
to any contract entered into with the Custodian so employed:
The Trustees shall cause to be delivered to the Custodian all
securities included in the Trust Property or to which the Trust may
become entitled, and shall order the same to be delivered by the
Custodian only in completion of a sale, exchange, transfer, pledge,
loan of portfolio securities to another person, or other disposition
thereof, all as the Trustees may generally or from time to time
require or approve or to a successor Custodian; and the Trustees
shall cause all trusts included in the Trust Property or to which it
may become entitled to be paid to the Custodian, and shall order the
same disbursed only for investment against delivery of the
securities acquired, or the return of cash held as collateral for
loans of portfolio securities, or in payment of expenses, including
management compensation, and liabilities of the Trust, including
distributions to shareholders, or to a successor Custodian. In
connection with the Trust's purchase or sale of futures contracts,
the Custodian shall transmit, prior to receipt on behalf of the
Trust of any securities or other property, funds from the Trust's
custodian account in order to furnish to and maintain funds with
brokers as margin to guarantee the performance of the Trust's
futures obligations in accordance with the applicable requirements
of commodities exchanges and brokers.
Section 4. Central Certificate System.
Subject to such rules, regulations and orders as the Commission may adopt,
the Trustees may direct the Custodian to deposit all or any part of the
securities owned by the Trust in a system for the central handling of securities
established by a national securities exchange or a national securities
association registered with the Commission under the Securities Exchange Act of
1934, or such other person as may be permitted by the Commission, or otherwise
in accordance with the 1940 Act, pursuant to which system all securities of any
particular class or series of any issuer deposited within the system are treated
as fungible and may be transferred or pledged by bookkeeping entry without
physical delivery of such securities, provided that all such deposits shall be
subject to withdrawal only upon the order of the Trust.
Section 5. Acceptance of Receipts in Lieu of Certificates.
Subject to such rules, regulations and orders as the Commission may adopt,
the Trustees may direct the Custodian to accept written receipts or other
written evidences indicating purchases of securities held in book-entry form in
the Federal Reserve System in accordance with regulations promulgated by the
Board of Governors of the Federal Reserve System and the local Federal Reserve
Banks in lieu of receipt of certificates representing such securities.
ARTICLE XI - - AMENDMENTS
These By-Laws, or any of them, may be altered, amended or repealed, or new
By-Laws may be adopted by (a) vote of a majority of the Shares outstanding and
entitled to vote or (b) the Trustees, provided, however, that no By-Law may be
amended, adopted or repealed by the Trustees if such amendment, adoption or
repeal requires, pursuant to law, the Declaration or these By-Laws, a vote of
the Shareholders.
ARTICLE XII - - INSPECTION OF BOOKS
The Trustees shall from time to time determine whether and to what extent,
and at what times and places, and under what conditions and regulations the
accounts and books of the Trust or any of them shall be open to the inspection
of the shareholders; and no shareholder shall have any right of inspecting any
account or book or document of the Trust except as conferred by law or
authorized by the Trustees or by resolution of the shareholders.
ARTICLE XIII - - MISCELLANEOUS
(A) Except as hereinafter provided, no officer or Trustee of the Trust
and no partner, officer, director or shareholder of the Investment Adviser of
the Trust or of the Distributor of the Trust, and no Investment Adviser or
Distributor of the Trust, shall take long or short positions in the securities
issued by the Trust.
(1) The foregoing provisions shall not prevent the
Distributor from purchasing Shares from the Trust if
such purchases are limited (except for reasonable
allowances for clerical errors, delays and errors of
transmission and cancellation of orders) to purchases
for the purpose of filling orders for such Shares
received by the Distributor, and provided that orders to
purchase from the Trust are entered with the Trust or
the Custodian promptly upon receipt by the Distributor
of purchase orders for such Shares, unless the
Distributor is otherwise instructed by its customer.
(2) The foregoing provision shall not prevent the
Distributor from purchasing Shares of the Trust as agent
for the account of the Trust.
(3) The foregoing provision shall not prevent the purchase
from the Trust or from the Distributor of Shares issued
by the Trust, by any officer, or Trustee of the Trust or
by any partner, officer, director or shareholder of the
Investment Adviser of the Trust or of the Distributor of
the Trust at the price available to the public generally
at the moment of such purchase, or as described in the
then currently effective Prospectus of the Trust.
(4) The foregoing shall not prevent the Distributor, or any
affiliate thereof, of the Trust from purchasing Shares
prior to the effectiveness of the first registration
statement relating to the Shares under the Securities
Act of 1933.
(B) The Trust shall not lend assets of the Trust to any officer or
Trustee of the Trust, or to any partner, officer, director or shareholder of, or
person financially interested in, the Investment Adviser of the Trust, or the
Distributor of the Trust, or to the Investment Adviser of the Trust or to the
Distributor of the Trust.
(C) The Trust shall not impose any restrictions upon the transfer of the
Shares of the Trust except as provided in the Declaration, but this requirement
shall not prevent the charging of customary transfer agent fees.
(D) The Trust shall not permit any officer or Trustee of the Trust, or
any partner, officer or director of the Investment Adviser or Distributor of the
Trust to deal for or on behalf of the Trust with himself as principal or agent,
or with any partnership, association or corporation in which he has a financial
interest; provided that the foregoing provisions shall not prevent (a) officers
and Trustees of the Trust or partners, officers or directors of the Investment
Adviser or Distributor of the Trust from buying, holding or selling shares in
the Trust, or from being partners, officers or directors or otherwise
financially interested in the Investment Adviser or Distributor of the Trust;
(b) purchases or sales of securities or other property by the Trust from or to
an affiliated person or to the Investment Adviser or Distributor of the Trust if
such transaction is not prohibited by the 1940 Act; (c) purchases of investments
for the portfolio of the Trust or sales of investments owned by the Trust
through a security dealer who is, or one or more of whose partners,
shareholders, officers or directors is, an officer or Trustee of the Trust, or a
partner, officer or director of the Investment Adviser or Distributor of the
Trust, if such transactions are handled in the capacity of broker only and
commissions charged do not exceed customary brokerage charges for such services;
(d) employment of legal counsel, registrar, Transfer Agent, dividend disbursing
agent or Custodian who is, or has a partner, shareholder, officer, or director
who is, an officer or Trustee of the Trust, or a partner, officer or director of
the Investment Adviser or Distributor of the Trust, if only customary fees are
charged for services to the Trust; (e) sharing statistical research, legal and
management expenses and office hire and expenses with any other investment
company in which an officer or Trustee of the Trust, or a partner, officer or
director of the Investment Adviser or Distributor of the Trust, is an officer or
director or otherwise financially interested.
CUSTODY AGREEMENT
THIS AGREEMENT, is made as of ___________, 1998, by and between CAPSTONE
SOCIAL ETHICS AND RELIGIOUS VALUES FUND, a business trust organized under the
laws of the State of (the "Trust"), and THE FIFTH THIRD BANK, a banking company
organized under the laws of the State of Ohio (the "Custodian").
WITNESSETH:
WHEREAS, the Trust desires that the Securities and cash of each of the
investment portfolios identified in Exhibit A hereto (such investment portfolios
and individually referred to herein as a "Fund" and collectively as the
"Funds"), be held and administered by the Custodian pursuant to this Agreement;
and
WHEREAS, the Trust is an open-end management investment company registered
under the Investment Company Act of 1940, as amended (the "1940 Act"); and
WHEREAS, the Custodian represents that it is a bank having the
qualifications prescribed in Section 26(a)(i) of the 1940 Act;
NOW, THEREFORE, in consideration of the mutual agreements herein made, the
Trust and the Custodian hereby agree as follows:
ARTICLE I
DEFINITIONS
Whenever used in this Agreement, the following words and phrases, unless
the context otherwise requires, shall have the following meanings:
1.1 "Authorized Person" means any Officer or other person duly authorized
by resolution of the Board of Trustees to give Oral Instructions and Written
Instructions on behalf of the Trust and named in Exhibit B hereto or in such
resolutions of the Board of Trustees, certified by an Officer, as may be
received by the Custodian from time to time.
1.2 "Board of Trustees" shall mean the Trustees from time to time serving
under the Trust's Agreement and Declaration of Trust, dated
, 19 , as from time to time amended.
1.3 "Book-Entry System" shall mean a federal book-entry system as provided
in Subpart O of Treasury Circular No. 300, 31 CFR 306, in Subpart B of 31 CFR
Part 350, or in such book-entry regulations of federal agencies as are
substantially in the form of such Subpart O.
1.4 "Business Day" shall mean any day recognized as a settlement day by
The New York Stock Exchange, Inc. and any other day for which the Fund computes
the net asset value of the Fund.
1.5 "NASD" shall mean The National Association of Securities Dealers, Inc.
1.6 "Officer" shall mean the President, any Vice President, the Secretary,
any Assistant Secretary, the Treasurer, or any Assistant Treasurer of the Trust.
1.7 "Oral Instructions" shall mean instructions orally transmitted to and
accepted by the Custodian because such instructions are: (i) reasonably believed
by the Custodian to have been given by an Authorized Person, (ii) recorded and
kept among the records of the Custodian made in the ordinary course of business
and (iii) orally confirmed by the Custodian. The Trust shall cause all Oral
Instructions to be confirmed by Written Instructions. If such Written
Instructions confirming Oral Instructions are not received by the Custodian
prior to a transaction, it shall in no way affect the validity of the
transaction or the authorization thereof by the Trust. If Oral Instructions vary
from the Written Instructions which purport to confirm them, the Custodian shall
notify the Trust of such variance but such Oral Instructions will govern unless
the Custodian has not yet acted.
1.8 "Custody Account" shall mean any account in the name of the Trust,
which is provided for in Section 3.2 below.
1.9 "Proper Instructions" shall mean Oral Instructions or Written
Instructions. Proper Instructions may be continuing Written Instructions when
deemed appropriate by both parties.
1.10 "Securities Depository" shall mean The Participants Trust Company or
The Depository Trust Company and (provided that Custodian shall have received a
copy of a resolution of the Board of Trustees, certified by an Officer,
specifically approving the use of such clearing agency as a depository for the
Trust) any other clearing agency registered with the Securities and Exchange
Commission under Section 17A of the Securities and Exchange Act of 1934 (the
"1934 Act"), which acts as a system for the central handling of Securities where
all Securities of any particular class or series of an issuer deposited within
the system are treated as fungible and may be transferred or pledged by
bookkeeping entry without physical delivery of the Securities.
1.11 "Securities" shall include, without limitation, common and preferred
stocks, bonds, call options, put options, debentures, notes, bank certificates
of deposit, bankers' acceptances, mortgage-backed securities, other money market
instruments or other obligations, and any certificates, receipts, warrants or
other instruments or documents representing rights to receive, purchase or
subscribe for the same, or evidencing or representing any other rights or
interests therein, or any similar property or assets that the Custodian has the
facilities to clear and to service.
1.12 "Shares" shall mean the units of beneficial interest issued by the
Trust.
1.13 "Written Instructions" shall mean (i) written communications actually
received by the Custodian and signed by one or more persons as the Board of
Trustees shall have from time to time authorized, or (ii) communications by
telex or any other such system from a person or persons reasonably believed by
the Custodian to be Authorized, or (iii) communications transmitted
electronically through the Institutional Delivery System (IDS), or any other
similar electronic instruction system acceptable to Custodian and approved by
resolutions of the Board of Trustees, a copy of which, certified by an Officer,
shall have been delivered to the Custodian.
ARTICLE II
APPOINTMENT OF CUSTODIAN
2.1 Appointment. The Trust hereby constitutes and appoints the Custodian
as custodian of all Securities and cash owned by or in the possession of the
Trust at any time during the period of this Agreement, provided that such
Securities or cash at all times shall be and remain the property of the Trust.
2.2 Acceptance. The Custodian hereby accepts appointment as such custodian
and agrees to perform the duties thereof as hereinafter set forth and in
accordance with the 1940 Act as amended. Except as specifically set forth
herein, the Custodian shall have no liability and assumes no responsibly for any
non-compliance by the Trust or a Fund of any laws, rules or regulations.
ARTICLE III
CUSTODY OF CASH AND SECURITIES
3.1 Segregation. All Securities and non-cash property held by the
Custodian for the account of the Fund, except Securities maintained in a
Securities Depository or Book-Entry System, shall be physically segregated from
other Securities and non-cash property in the possession of the Custodian and
shall be identified as subject to this Agreement.
3.2 Custody Account. The Custodian shall open and maintain in its trust
department a custody account in the name of each Fund, subject only to draft or
order of the Custodian, in which the Custodian shall enter and carry all
Securities, cash and other assets of the Fund which are delivered to it.
3.3 Appointment of Agents. In its discretion, the Custodian may appoint,
and at any time remove, any domestic bank or trust company, which has been
approved by the Board of Trustees and is qualified to act as a custodian under
the 1940 Act, as sub-custodian to hold Securities and cash of the Funds and to
carry out such other provisions of this Agreement as it may determine, and may
also open and maintain one or more banking accounts with such a bank or trust
company (any such accounts to be in the name of the Custodian and subject only
to its draft or order), provided, however, that the appointment of any such
agent shall not relieve the Custodian of any of its obligations or liabilities
under this Agreement.
3.4 Delivery of Assets to Custodian. The Fund shall deliver, or cause to
be delivered, to the Custodian all of the Fund's Securities, cash and other
assets, including (a) all payments of income, payments of principal and capital
distributions received by the Fund with respect to such Securities, cash or
other assets owned by the Fund at any time during the period of this Agreement,
and (b) all cash received by the Fund for the issuance, at any time during such
period, of Shares. The Custodian shall not be responsible for such Securities,
cash or other assets until actually received by it.
3.5 Securities Depositories and Book-Entry Systems. The Custodian may
deposit and/or maintain Securities of the Funds in a Securities Depository or in
a Book-Entry System, subject to the following provisions:
(a) Prior to a deposit of Securities of the Funds in any Securities
Depository or Book-Entry System, the Fund shall deliver to the
Custodian a resolution of the Board of Trustees, certified by an
Officer, authorizing and instructing the Custodian on an on-going
basis to deposit in such Securities Depository or Book-Entry System
all Securities eligible for deposit therein and to make use of such
Securities Depository or Book-Entry System to the extent possible
and practical in connection with its performance hereunder, including,
without limitation, in connection with settlements of purchases and
sales of Securities, loans of Securities, and deliveries and
returns of collateral consisting of Securities. So long as such
Securities Depository or Book-Entry System shall continue to be
employed for the deposit of Securities of the Funds, the Trust shall
annually re-adopt such resolution and deliver a copy thereof,
certified by an Officer, to the Custodian.
(b) Securities of the Fund kept in a Book-Entry System or Securities
Depository shall be kept in an account ("Depository Account") of the
Custodian in such Book-Entry System or Securities Depository which
includes only assets held by the Custodian as a fiduciary, custodian
or otherwise for customers.
(c) The records of the Custodian and the Custodian's account on the
books of the Book-Entry System and Securities Depository as the case
may be, with respect to Securities of a Fund maintained in a
Book-Entry System or Securities Depository shall, by book-entry, or
otherwise identify such Securities as belonging to the Fund.
(d) If Securities purchases by the Fund are to be held in a Book-Entry
System or Securities Depository, the Custodian shall pay for such
Securities upon (i) receipt of advice from the Book-Entry System or
Securities Depository that such Securities have been transferred to
the Depository Account, and (ii) the making of an entry on the
records of the Custodian to reflect such payment and transfer for
the account of the Fund. If Securities sold by the Fund are held in
a Book-Entry System or Securities Depository, the Custodian shall
transfer such Securities upon (i) receipt of advice from the
Book-Entry System or Securities depository that payment for such
Securities has been transferred to the Depository Account, and (ii)
the making of an entry on the records of the Custodian to reflect
such transfer and payment for the account of the Fund.
(e) Upon request, the Custodian shall provide the Fund with copies of
any report (obtained by the Custodian from a Book-Entry System or
Securities Depository in which Securities of the Fund is kept) on
the internal accounting controls and procedures for safeguarding
Securities deposited in such Book-Entry System or Securities
Depository.
<PAGE>
(f) Anything to the contrary n this Agreement notwithstanding, the
Custodian shall be liable to the Trust for any loss or damage to the
Trust resulting (i) fro the use of a Book-Entry System or
Securities Depository by reason of any negligence or willful
misconduct on the part of Custodian or any sub-custodian appointed
pursuant to Section 3.3 above or any of its or their employees, or
(ii) from failure of Custodian or any such sub-custodian to
enforce effectively such rights as it may have against a Book-
Entry System or Securities Depository. At its election, the
Trust shall be subrogated to the rights of the Custodian with
respect to any claim against a Book-Entry System or Securities
Depository or any other person for any loss or damage to the
Funds arising from the use of such Book-Entry System or Securities
Depository, if and to the extent that the Trust has been made whole
for any such loss or damage.
3.6 Disbursement of Moneys from Custody Accounts. Upon receipt of Proper
Instructions, the Custodian shall disburse moneys from a Fund Custody Account
but only in the following cases:
(a) For the purchase of Securities for the Fund but only upon compliance
with Section 4.1 of this Agreement and only (i) in the case of
Securities (other than options on Securities, futures contracts and
options on futures contracts), against the delivery to the Custodian
(or any sub-custodian appointed pursuant to Section 3.3 above) of
such Securities registered as provided in Section 3.9 below in
proper form for transfer, or if the purchase of such Securities is
effected through a Book-Entry System or Securities Depository, in
accordance with the conditions set forth in Section 3.5 above; (ii)
in the case of options on Securities, against delivery to the
Custodian (or such sub-custodian) of such receipts as are required
by the customs prevailing among dealers in such options; (iii)
in the case of futures contracts and options on futures contracts,
against delivery to the Custodian (or such sub-custodian) of
evidence of title thereto in favor of the Trust or any nominee
referred to in Section 3.9 below; and (iv) in the case of repurchase
or reverse repurchase agreements entered into between the Trust
and a bank which is a member of the Federal Reserve System or
between the Trust and a primary dealer in U.S. Government
securities, against delivery of the purchased Securities either
in certificate form or through an entry crediting the Custodian's
account at a Book-Entry System or Securities Depository for the
account of the Fund with such Securities;
(b) In connection with the conversion, exchange or surrender, as set
forth in Section 3.7(f) below, of Securities owned by the Fund;
(c) For the payment of any dividends or capital gain distributions
declared by the Fund;
(d) In payment of the redemption price of Shares as provided in Section
5.1 below;
(e) For the payment of any expense or liability incurred by the Trust,
including but not limited to the following payments for the account
of a Fund: interest; taxes; administration, investment management,
investment advisory, accounting, auditing, transfer agent,
custodian, trustee and legal fees; and other operating expenses of a
Fund; in all cases, whether or not such expenses are to be in whole
or in part capitalized or treated as deferred expenses;
(f) For transfer in accordance with the provisions of any agreement
among the Trust, the Custodian and a broker-dealer registered under
the 1934 Act and a member of the NASD, relating to compliance with
rules of The Options Clearing Corporation and of any registered
national securities exchange (or of any similar organization or
organizations) regarding escrow or other arrangements in connection
with transactions by the Trust;
(g) For transfer in accordance with the provisions of any agreement
among the Trust, the Custodian, and a futures commission merchant
registered under the Commodity Exchange Act, relating to compliance
with the rules of the Commodity Futures Trading Commission and/or
any contract market (or any similar organization or organizations)
regarding account deposits in connection with transactions by the
Trust;
(h) For the funding of any uncertificated time deposit or other
interest-bearing account with any banking institution (including the
Custodian), which deposit or account has a term of one year or less;
and
(i) For any other proper purposes, but only upon receipt, in addition to
Proper Instructions, of a copy of a resolution of the Board of
Trustees, certified by an Officer, specifying the amount and purpose
of such payment, declaring such purpose to be a proper corporate
purpose, and naming the person or persons to whom such payment is to
be made.
3.7 Delivery of Securities from Fund Custody Accounts. Upon receipt of
Proper Instructions, the Custodian shall release and deliver Securities from a
Custody Account but only in the following cases:
(a) Upon the sale of Securities for the account of a Fund but only
against receipt of payment therefor in cash, by certified or
cashiers check or bank credit;
(b) In the case of a sale effected through a Book-Entry System or
Securities Depository, in accordance with the provisions of Section
3.5 above;
(c) To an Offeror's depository agent in connection with tender or other
similar offers for Securities of a Fund; provided that, in any such
case, the cash or other consideration is to be delivered to the
Custodian;
(d) To the issuer thereof or its agent (i) for transfer into the name of
the Trust, the Custodian or any sub-custodian appointed pursuant to
Section 3.3 above, or of any nominee or nominees of any of the
foregoing, or (ii) for exchange for a different number of
certificates or other evidence representing the same aggregate face
amount or number of units; provided that, in any such case, the new
Securities are to be delivered to the Custodian;
(e) To the broker selling Securities, for examination in accordance with
the "street delivery" custom;
(f) For exchange or conversion pursuant to any plan of merger,
consolidation, recapitalization, reorganization or readjustment of
the issuer of such Securities, or pursuant to provisions for
conversion contained in such Securities, or pursuant to any deposit
agreement, including surrender or receipt of underlying Securities
in connection with the issuance or cancellation of depository
receipts; provided that, in any such case, the new Securities and
cash, if any, are to be delivered to the Custodian;
(g) Upon receipt of payment therefor pursuant to any repurchase or
reverse repurchase agreement entered into by a Fund;
(h) In the case of warrants, rights or similar Securities, upon the
exercise thereof, provided that, in any such case, the new
Securities and cash, if any, are to be delivered to the Custodian;
(i) For delivery in connection with any loans of Securities of a Fund,
but only against receipt of such collateral as the Trust shall have
specified to the Custodian in Proper Instructions;
(j) For delivery as security in connection with any borrowings by the
Trust on behalf of a Fund requiring a pledge of assets by such Fund,
but only against receipt by the Custodian of the amounts borrowed;
(k) Pursuant to any authorized plan of liquidation, reorganization,
merger, consolidation or recapitalization of the Trust or a Fund;
(l) For delivery in accordance with the provisions of any agreement
among the Trust, the Custodian and a broker-dealer registered under
the 1934 Act and a member of the NASD, relating to compliance with
the rules of The Options Clearing Corporation and of any registered
national securities exchange (or of any similar organization or
organizations) regarding escrow or other arrangements in connection
with transactions by the Trust on behalf of a Fund;
(m) For delivery in accordance with the provisions of any agreement
among the Trust on behalf of a Fund, the Custodian, and a futures
commission merchant registered under the Commodity Exchange Act,
relating to compliance with the rules of the Commodity Futures
Trading Commission and/or any contract market (or any similar
organization or organizations) regarding account deposits in
connection with transactions by the Trust on behalf of a Fund; or
(n) For any other proper corporate purposes, but only upon receipt, in
addition to Proper Instructions, of a copy of a resolution of the
Board of Trustees, certified by an Officer, specifying the
Securities to be delivered, setting forth the purpose for which such
delivery is to be made, declaring such purpose to be a proper
corporate purpose, and naming the person or persons to whom delivery
of such Securities shall be made.
3.8 Actions Not Requiring Proper Instructions. Unless otherwise instructed
by the Trust, the Custodian shall with respect to all Securities held for a
Fund;
(a) Subject to Section 7.4 below, collect on a timely basis all income
and other payments to which the Trust is entitled either by law or
pursuant to custom in the securities business;
(b) Present for payment and, subject to Section 7.4 below, collect on a
timely basis the amount payable upon all Securities which may mature
or be called, redeemed, or retired, or otherwise become payable;
(c) Endorse for collection, in the name of the Trust, checks, drafts and
other negotiable instruments;
(d) Surrender interim receipts or Securities in temporary form for
Securities in definitive form;
(e) Execute, as custodian, any necessary declarations or certificates of
ownership under the federal income tax laws or the laws or
regulations of any other taxing authority now or hereafter in
effect, and prepare and submit reports to the Internal Revenue
Service ("IRS") and to the Trust at such time, in such manner and
containing such information as is prescribed by the IRS;
(f) Hold for a Fund, either directly or, with respect to Securities held
therein, through a Book-Entry System or Securities Depository, all
rights and similar securities issued with respect to Securities of
the Fund; and
(g) In general, and except as otherwise directed in Proper Instructions,
attend to all non-discretionary details in connection with sale,
exchange, substitution, purchase, transfer and other dealings with
Securities and assets of the Fund.
3.9 Registration and Transfer of Securities. All Securities held for a
Fund that are issued or issuable only in bearer form shall be held by the
Custodian in that form, provided that any such Securities shall be held in a
Book-Entry System for the account of the Trust on behalf of a Fund, if eligible
therefor. All other Securities held for a Fund may be registered in the name of
the Trust on behalf of such Fund, the Custodian, or any sub-custodian appointed
pursuant to Section 3.3 above, or in the name of any nominee of any of them, or
in the name of a Book-Entry System, Securities Depository or any nominee of
either thereof; provided, however, that such Securities are held specifically
for the account of the Trust on behalf of a Fund. The Trust shall furnish to the
Custodian appropriate instruments to enable the Custodian to hold or deliver in
proper form for transfer, or to register in the name of any of the nominees
hereinabove referred to or in the name of a Book-Entry System or Securities
Depository, any Securities registered in the name of a Fund.
<PAGE>
3.10 Records. (a) The Custodian shall maintain, by Fund, complete and
accurate records with respect to Securities, cash or other property held for the
Trust, including (i) journals or other records of original entry containing an
itemized daily record in detail of all receipts and deliveries of Securities and
all receipts and disbursements of cash; (ii) ledgers (or other records)
reflecting (A) Securities in transfer, (B) Securities in physical possession,
(C) monies and Securities borrowed and monies and Securities loaned (together
with a record of the collateral therefor and substitutions of such collateral),
(D) dividends and interest received, and (E) dividends receivable and interest
accrued; and (iii) canceled checks and bank records related thereto. The
Custodian shall keep such other books and records of the Trust as the Trust
shall reasonably request, or as may be required by the 1940 Act, including, but
not limited to Section 3.1 and Rule 31a-1 and Rule 31a-2 promulgated thereunder.
(b) All such books and records maintained by the Custodian shall (i) be
maintained in a form acceptable to the Trust and in compliance with rules and
regulations of the Securities and Exchange Commission, (ii) be the property of
the Trust and at all times during the regular business hours of the Custodian be
made available upon request for inspection by duly authorized officers,
employees or agents of the Trust and employees or agents of the Securities and
Exchange Commission, and (iii) if required to be maintained by Rule 31a-1 under
the 1940 Act, be preserved for the periods prescribed in Rule 31a-2 under the
1940 Act.
3.11 Fund Reports by Custodian. The Custodian shall furnish the Trust with
a daily activity statement by Fund and a summary of all transfers to or from the
Custody Account on the day following such transfers. At least monthly and from
time to time, the Custodian shall furnish the Trust with a detailed statement,
by Fund, of the Securities and moneys held for the Trust under this Agreement.
3.12 Other Reports by Custodian. The Custodian shall provide the Trust
with such reports, as the Trust may reasonably request from time to time, on the
internal accounting controls and procedures for safeguarding Securities, which
are employed by the Custodian or any sub-custodian appointed pursuant to Section
3.3 above.
3.13 Proxies and Other Materials. The Custodian shall cause all proxies if
any, relating to Securities which are not registered in the name of a Fund, to
be promptly executed by the registered holder of such Securities, without
indication of the manner in which such proxies are to be voted, and shall
include all other proxy materials, if any, promptly deliver to the Trust such
proxies, all proxy soliciting materials, which should include all other proxy
materials, if any, and all notices to such Securities.
3.14 Information on Corporate Actions. Custodian will promptly notify the
Trust of corporate actions, limited to those Securities registered in nominee
name and to those Securities held at a Depository or sub-Custodian acting as
agent for Custodian. Custodian will be responsible only if the notice of such
corporate actions is published by the Financial Daily Card Service, J.J. Kenny
Called Bond Service, DTC, or received by first class mail from the agent. For
market announcements not yet received and distributed by Custodian's services,
Trust will inform its custody representative with appropriate instructions.
Custodian will, upon receipt of Trust's response within the required deadline,
affect such action for receipt or payment for the Trust. For those responses
received after the deadline, Custodian will affect such action for receipt or
payment, subject to the limitations of the agent(s) affecting such actions.
Custodian will promptly notify Trust for put options only if the notice is
received by first class mail from the agent. The Trust will provide or cause to
be provided to Custodian with all relevant information contained in the
prospectus for any security which has unique put/option provisions and provide
Custodian with specific tender instructions at least ten business days prior to
the beginning date of the tender period.
ARTICLE IV
PURCHASE AND SALE OF INVESTMENTS OF THE FUND
4.1 Purchase of Securities. Promptly upon each purchase of Securities for
the Trust, Written Instructions shall be delivered to the Custodian, specifying
(a) the name of the issuer or writer of such Securities, and the title or other
description thereof, (b) the number of shares, principal amount (and accrued
interest, if any) or other units purchased, (c) the date of purchase and
settlement, (d) the purchase price per unit, (e) the total amount payable upon
such purchase, and (f) the name of the person to whom such amount is payable.
The Custodian shall upon receipt of such Securities purchased by a Fund pay out
of the moneys held for the account of such Fund the total amount specified in
such Written Instructions to the person named therein. The Custodian shall not
be under any obligation to pay out moneys to cover the cost of a purchase of
Securities for a Fund, if in the relevant Custody Account there is insufficient
cash available to the Fund for which such purchase was made.
4.2 Liability for Payment in Advance of Receipt of Securities Purchased.
In any and every case where payment for the purchase of Securities for a Fund is
made by the Custodian in advance of receipt for the account of the Fund of the
Securities purchased but in the absence of specific Written or Oral Instructions
to so pay in advance, the Custodian shall be liable to the Fund for such
Securities to the same extent as if the Securities had been received by the
Custodian.
4.3 Sale of Securities. Promptly upon each sale of Securities by a Fund,
Written Instructions shall be delivered to the Custodian, specifying (a) the
name of the issuer or writer of such Securities, and the title or other
description thereof, (b) the number of shares, principal amount (and accrued
interest, if any), or other units sold, (c) the date of sale and settlement (d)
the sale price per unit, (e) the total amount payable upon such sale, and (f)
the person to whom such Securities are to be delivered. Upon receipt of the
total amount payable to the Trust as specified in such Written Instructions, the
Custodian shall deliver such Securities to the person specified in such Written
Instructions. Subject to the foregoing, the Custodian may accept payment in such
form as shall be satisfactory to it, and may deliver Securities and arrange for
payment in accordance with the customs prevailing among dealers in Securities.
4.4 Delivery of Securities Sold. Notwithstanding Section 4.3 above or any
other provision of this Agreement, the Custodian, when instructed to deliver
Securities against payment, shall be entitled, if in accordance with generally
accepted market practice, to deliver such Securities prior to actual receipt of
final payment therefor. In any such case, the Trust shall bear the risk that
final payment for such Securities may not be made or that such Securities may be
returned or otherwise held or disposed of by or through the person to whom they
were delivered, and the Custodian shall have no liability for any of the
foregoing.
4.5 Payment for Securities Sold, etc. In its sole discretion and from time
to time, the Custodian may credit the relevant Custody Account, prior to actual
receipt of final payment thereof, with (i) proceeds from the sale of Securities
which it has been instructed to deliver against payment, (ii) proceeds from the
redemption of Securities or other assets of the Trust, and (iii) income from
cash, Securities or other assets of the Trust. Any such credit shall be
conditional upon actual receipt by Custodian of final payment and may be
reversed if final payment is not actually received in full. The Custodian may,
in its sole discretion and from time to time, permit the Trust to use funds so
credited to its Custody Account in anticipation of actual receipt of final
payment. Any such funds shall be repayable immediately upon demand made by the
Custodian at any time prior to the actual receipt of all final payments in
anticipation of which funds were credited to the Custody Account.
4.6 Advances by Custodian for Settlement. The Custodian may, in its sole
discretion and from time to time, advance funds to the Trust to facilitate the
settlement of a Trust transactions on behalf of a Fund in its Custody Account.
Any such advance shall be repayable immediately upon demand made by Custodian.
ARTICLE V
REDEMPTION OF TRUST SHARES
Transfer of Funds. From such funds as may be available for the purpose in
the relevant Custody Account, and upon receipt of Proper Instructions specifying
that the funds are required to redeem Shares of a Fund, the Custodian shall wire
each amount specified in such Proper Instructions to or through such bank as the
Trust may designate with respect to such amount in such Proper Instructions.
Upon effecting payment or distribution in accordance with proper Instruction,
the Custodian shall not be under any obligation or have any responsibility
thereafter with respect to any such paying bank.
<PAGE>
ARTICLE VI
SEGREGATED ACCOUNTS
Upon receipt of Proper Instructions, the Custodian shall establish and
maintain a segregated account or accounts for and on behalf of each Fund, into
which account or accounts may be transferred cash and/or Securities, including
Securities maintained in a Depository Account,
(a) in accordance with the provisions of any agreement among the Trust,
the Custodian and a broker-dealer registered under the 1934 Act and
a member of the NASD (or any futures commission merchant registered
under the Commodity Exchange Act), relating to compliance with the
rules of The Options Clearing Corporation and of any registered
national securities exchange (or the Commodity Futures Trading
commission or any registered contract market), or of any similar
organization or organizations, regarding escrow or other
arrangements in connection with transactions by the Trust,
(b) for purposes of segregating cash or Securities in connection with
securities options purchased or written by a Fund or in connection
with financial futures contracts (or options thereon) purchased or
sold by a Fund,
(c) which constitute collateral for loans of Securities made by a Fund,
(d) for purposes of compliance by the Trust with requirements under the
1940 Act for the maintenance of segregated accounts by registered
investment companies in connection with reverse repurchase
agreements and when-issued, delayed delivery and firm commitment
transactions, and
(e) for other proper corporate purposes, but only upon receipt of, in
addition to Proper Instructions, a certified copy of a resolution of
the Board of Trustees, certified by an Officer, setting forth the
purpose or purposes of such segregated account and declaring such
purposes to be proper corporate purposes.
ARTICLE VII
CONCERNING THE CUSTODIAN
7.1 Standard of Care. The Custodian shall be held to the exercise of
reasonable care in carrying out its obligations under this Agreement, and shall
be without liability to the Trust for any loss, damage, cost, expense (including
attorneys' fees and disbursements), liability or claim unless such loss,
damages, cost, expense, liability or claim arises from negligence, bad faith or
willful misconduct on its part or on the part of any sub-custodian appointed
pursuant to Section 3.3 above. The Custodian's cumulative liability within a
calendar year shall be limited with respect to the Trust or any party claiming
by, through or on behalf of the Trust for the initial and all subsequent renewal
terms of this Agreement, to the lessor amount of (a) the actual damages
sustained by the Trust, (actual damages for uninvested funds shall be the
overnight Feds fund rate), or (b) to an amount not to exceed one-half of the net
fees paid to the Custodian within the prior three calendar months. The Custodian
shall be entitled to rely on and may act upon advice of counsel on all matters,
and shall be without liability for any action reasonably taken or omitted
pursuant to such advice. The Custodian shall promptly notify the Trust of any
action taken or omitted by the Custodian pursuant to advice of counsel. The
Custodian shall not be under any obligation at any time to ascertain whether the
Trust is in compliance with the 1940 Act, the regulations thereunder, the
provisions of the Trust's charter documents or by-laws, or its investment
objectives and policies as then in effect.
7.2 Actual Collection Required. The Custodian shall not be liable for, or
considered to be the custodian of, any cash belonging to the Trust or any money
represented by a check, draft or other instrument for the payment of money,
until the Custodian or its agents actually receive such cash or collect on such
instrument.
7.3 No Responsibility for title, etc. So long as and to the extent that it
is in the exercise of reasonable care, the Custodian shall not be responsible
for the title, validity or genuineness of any property or evidence of title
thereto received or delivered by it pursuant to this Agreement.
<PAGE>
7.4 Limitation on Duty to Collect. Custodian shall not be required to
enforce collection, by legal means or otherwise, of any money or property due
and payable with respect to Securities held for the Trust if such Securities are
in default or payment is not made after due demand or presentation.
7.5 Reliance Upon Documents and Instructions. The Custodian shall be
entitled to rely upon any certificate, notice or other instrument in writing
received by it and reasonably believed by it to be genuine. The Custodian shall
be entitled to rely upon any Oral Instructions and/or any Written Instructions
actually received by it pursuant to this Agreement.
7.6 Express Duties Only. The Custodian shall have no duties or obligations
whatsoever except such duties and obligations as are specifically set forth in
this Agreement, and no covenant or obligation shall be implied in this Agreement
against the Custodian.
7.7 Cooperation. The Custodian shall cooperate with and supply necessary
information, by the Trust, to the entity or entities appointed by the Trust to
keep the books of account of the Trust and/or compute the value of the assets of
the Trust. The Custodian shall take all such reasonable actions as the Trust may
from time to time request to enable the Trust to obtain, from year to year,
favorable opinions from the Trust's independent accountants with respect to the
Custodian's activities hereunder in connection with (a) the preparation of the
Trust's report on Form N-1A and Form N-SAR and any other reports required by the
Securities and Exchange Commission, and (b) the fulfillment by the Trust of any
other requirements of the Securities and Exchange Commission.
ARTICLE VIII
INDEMNIFICATION
8.1 Indemnification. The Trust shall indemnify and hold harmless the
Custodian and any sub-custodian appointed pursuant to Section 3.3 above, and any
nominee of the Custodian or of such sub-custodian from and against any loss,
damage, cost, expense (including attorneys' fees and disbursements), liability
(including, without limitation, liability arising under the Securities Act of
1933, the 1934 Act, the 1940 Act, and any state or foreign securities and/or
banking laws) or claim arising directly or indirectly (a) from the fact that
Securities are registered in the name of any such nominee, or (b) from any
action or inaction by the Custodian or such sub-custodian (i) at the request or
direction of or in reliance on the advice of the Trust, or (ii) upon Proper
Instructions, or (c) generally, from the performance of its obligations under
this Agreement or any sub-custody agreement with a sub-custodian appointed
pursuant to Section 3.3 above or, in the case of any such sub-custodian, from
the performance of its obligations under such custody agreement, provided that
neither the Custodian nor any such sub-custodian shall be indemnified and held
harmless from and against any such loss, damage, cost, expense, liability or
claim arising from the Custodian's or such sub-custodian's negligence, bad faith
or willful misconduct.
8.2 Indemnity to be Provided. If the Trust requests the Custodian to take
any action with respect to Securities, which may, in the opinion of the
custodian, result in the Custodian or its nominee becoming liable for the
payment of money or incurring liability of some other form, the Custodian shall
not be required to take such action until the Trust shall have provided
indemnity therefor to the Custodian in an amount and form satisfactory to the
Custodian.
ARTICLE IX
FORCE MAJEURE
Neither the Custodian nor the Trust shall be liable for any failure or
delay in performance of its obligations under this Agreement arising out of or
caused, directly or indirectly, by circumstances beyond its reasonable control,
including, without limitation, acts of God; earthquakes; fires; floods; wars;
civil or military disturbances; sabotage; strikes; epidemics; riots; power
failures; computer failure and any such circumstances beyond its reasonable
control as may cause interruption, loss or malfunction of utility,
transportation, computer (hardware or software) or telephone communication
service; accidents; labor disputes, acts of civil or military authority;
governmental actions; or inability to obtain labor, material, equipment or
transportation; provided, however, that the Custodian in the event of a failure
or delay shall use its best efforts to ameliorate the effects of any such
failure or delay. Notwithstanding the foregoing, the Custodian shall maintain
sufficient disaster recovery procedures to minimize interruptions.
ARTICLE X
EFFECTIVE PERIOD; TERMINATION
10.1 Effective Period. This Agreement shall become effective as of the
date first set forth above and shall continue in full force and effect until
terminated as hereinafter provided.
10.2 Termination. Either party hereto may terminate this Agreement by
giving to the other party a notice in writing specifying the date of such
termination, which shall be not less than ninety (90) days after the date of the
giving of such notice. If a successor custodian shall have been appointed by the
Board of Trustees, the Custodian shall, upon receipt of a notice of acceptance
by the successor custodian, on such specified date of termination (a) deliver
directly to the successor custodian all Securities (other than Securities held
in a Book-Entry System or Securities Depository) and cash then owned by the
Trust and held by the Custodian as custodian, and (b) transfer any Securities
held in a Book-Entry System or Securities Depository to an account of or for the
benefit of the Trust at the successor custodian, provided that the Trust shall
have paid to the Custodian all fees, expenses and other amounts to the payment
or reimbursement of which it shall then be entitled. Upon such delivery and
transfer, the Custodian shall be relieved of all obligations under this
Agreement. The Trust may at any time immediately terminate this Agreement in the
event of the appointment of a conservator or receiver for the Custodian by
regulatory authorities in the State of Ohio or upon the happening of a like
event at the direction of an appropriate regulatory agency or court of competent
jurisdiction.
10.3 Failure to Appoint Successor Custodian. If a successor custodian is
not designated by the Trust on or before the date of termination specified
pursuant to Section 10.1 above, then the Custodian shall have the right to
deliver to a bank or trust company of its own selection, which is (a) a "Bank"
as defined in the 1940 Act, (b) has aggregate capital, surplus and undivided
profits as shown on its then most recent published report of not less than $25
million, and (c) is doing business in New York, New York, all Securities, cash
and other property held by Custodian under this Agreement and to transfer to an
account of or for the Trust at such bank or trust company all Securities of the
Trust held in a Book-Entry System or Securities Depository. Upon such delivery
and transfer, such bank or trust company shall be the successor custodian under
this Agreement and the Custodian shall be relieved of all obligations under this
Agreement. If, after reasonable inquiry, Custodian cannot find a successor
custodian as contemplated in this Section 10.3, then Custodian shall have the
right to deliver to the Trust all Securities and cash then owned by the Trust
and to transfer any Securities held in a Book-Entry System or Securities
Depository to an account of or for the Trust. Thereafter, the Trust shall be
deemed to be its own custodian with respect to the Trust and the Custodian shall
be relieved of all obligations under this Agreement.
ARTICLE XI
COMPENSATION OF CUSTODIAN
The Custodian shall be entitled to compensation as agreed upon from time
to time by the Trust and the Custodian. The fees and other charges in effect on
the date hereof and applicable to the Funds are set forth in Exhibit B attached
hereto.
ARTICLE XII
LIMITATION OF LIABILITY
The Trust is a business trust organized under and under a Declaration of
Trust, to which reference is hereby made a copy of which is on file at the
office of the Secretary of State of as required by law, and to any and all
amendments thereto so filed or hereafter filed. The obligations of the Trust
entered into in the name of the Trust or on behalf thereof by any of the
Trustees, officers, employees or agents are made not individually, but in such
capacities, and are not binding upon any of the Trustees, officers, employees,
agents or shareholders of the Trust or the Funds personally, but bind only the
assets of the Trust, and all persons dealing with any of the Funds of the Trust
must look solely to the assets of the Trust belonging to such Fund for the
enforcement of any claims against the Trust.
<PAGE>
ARTICLE XIII
NOTICES
Unless otherwise specified herein, all demands, notices, instructions, and
other communications to be given hereunder shall be in writing and shall be sent
or delivered to The receipt at the address set forth after its name herein
below:
To the Trust:
--------------------------
--------------------------
--------------------------
Attn:
Telephone: ( )---------------------
Facsimile: ( )---------------------
To the Custodian:
The Fifth Third Bank
38 Fountain Square Plaza
Cincinnati, Ohio 45263
Attn: Area Manager - Trust Operations
Telephone: (513) 579-5300
Facsimile: (513) 579-4312
or at such other address as either party shall have provided to the other by
notice given in accordance with this Article XIII. Writing shall include
transmission by or through teletype, facsimile, central processing unit
connection, on-line terminal and magnetic tape.
ARTICLE XIV
MISCELLANEOUS
14.1 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Ohio.
14.2 References to Custodian. The Trust shall not circulate any printed
matter which contains any reference to Custodian without the prior written
approval of Custodian, excepting printed matter contained in the prospectus or
statement of additional information or its registration statement for the Trust
and such other printed matter as merely identifies Custodian as custodian for
the Trust. The Trust shall submit printed matter requiring approval to Custodian
in draft form, allowing sufficient time for review by Custodian and its counsel
prior to any deadline for printing.
14.3 No Waiver. No failure by either party hereto to exercise and no delay
by such party in exercising, any right hereunder shall operate as a waiver
thereof. The exercise by either party hereto of any right hereunder shall not
preclude the exercise of any other right, and the remedies provided herein are
cumulative and not exclusive of any remedies provided at law or in equity.
14.4 Amendments. This Agreement cannot be changed orally and no amendment
to this Agreement shall be effective unless evidenced by an instrument in
writing executed by the parties hereto.
14.5 Counterparts. This Agreement may be executed in one or more
counterparts, and by the parties hereto on separate counterparts, each of which
shall be deemed an original but all of which together shall constitute but one
and the same instrument.
14.6 Severability. If any provision of this Agreement shall be invalid,
illegal or unenforceable in any respect under any applicable law, the validity,
legality and enforceability of the remaining provisions shall not be affected or
impaired thereby.
14.7 Successors and Assigns. This Agreement shall be binding upon and
shall inure to the benefit of the parties hereto and their respective successors
and assigns; provided, however, that this Agreement shall not be assignable by
either party hereto without the written consent of the other party hereto.
14.8 Headings. The headings of sections in this Agreement are for
convenience of reference only and shall not affect the meaning or construction
of any provision of this Agreement.
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement
to be executed and delivered in its name and on its behalf by its
representatives thereunto duly authorized, all as of the day and year first
above written.
ATTEST: ____________________________________
___________________________ By:_________________________________
Its:________________________________
ATTEST: THE FIFTH THIRD BANK
___________________________ By:_________________________________
Its:________________________________
<PAGE>
Dated: ______________, 19
EXHIBIT A
TO THE CUSTODY AGREEMENT BETWEEN
AND THE FIFTH THIRD BANK
_______________, 19
Name of Fund Date
Short Term Bond Fund
Bond Fund
Large-Cap Equity Fund
Small-Cap Equity Fund
International Equity Fund
Money Market Fund
-------------------------------------
By: _____________________________________
Its:_____________________________________
THE FIFTH THIRD BANK
By: _____________________________________
Its: ____________________________________
<PAGE>
Dated: ____________, 19
EXHIBIT B
TO THE CUSTODY AGREEMENT BETWEEN
AND THE FIFTH THIRD BANK
________________, 19
AUTHORIZED PERSONS
Set forth below are the names and specimen signatures of the persons
authorized by the Trust to Administer each Custody Account.
Name Signature
- ----------------------------------- --------------------------------
- ----------------------------------- --------------------------------
- ----------------------------------- --------------------------------
- ----------------------------------- --------------------------------
- ----------------------------------- --------------------------------
- ----------------------------------- --------------------------------
- ----------------------------------- --------------------------------
- ----------------------------------- --------------------------------
<PAGE>
SIGNATURE RESOLUTION
RESOLVED, That all of the following officers of and any of them, namely the
Chairman, President, Vice President, Secretary and Treasurer, are hereby
authorized as signers for the conduct of business for an on behalf of the Funds
with THE FIFTH THIRD BANK:
_________________________ CHAIRMAN ____________________________
_________________________ PRESIDENT ____________________________
_________________________ VICE PRESIDENT ____________________________
_________________________ VICE PRESIDENT ____________________________
_________________________ VICE PRESIDENT ____________________________
_________________________ VICE PRESIDENT ____________________________
_________________________ TREASURER ____________________________
_________________________ SECRETARY ____________________________
The undersigned officers of hereby certify that the foregoing is within the
parameters of a Resolution adopted by Trustees of the Trust in a meeting held ,
19 , directing and authorizing preparation of documents and to do everything
necessary to effect the Custody Agreement between and THE FIFTH THIRD BANK.
By:_________________________________
Its:________________________________
By:_________________________________
Its:________________________________
<PAGE>
EXHIBIT C
TO THE CUSTODY AGREEMENT BETWEEN
AND THE FIFTH THIRD BANK
______________, 1998
MUTUAL FUND CUSTODY FEE SCHEDULE
BASIC ACCOUNT CHARGE
FUND SIZE:
Less than $25MM .01%
$25MM - $99MM .0075%
$100MM - $199MM .005%
Over $200MM .0025%
Minimum Annual Fee $2,400.00
TRANSACTION FEES
DTC/FED Eligible Trades $9.00
DTC/FED Ineligible Trades $25.00
Amortized Security Trades $25.00
Repurchase Agreements (purchase and maturity) $9.00
Third Party Repo's (purchase and maturity) $9.00
Phycical Commercial Paper Trades $25.00
(purchase and maturity)
Book-Entry Commercial Paper Trades $9.00
(purchase and maturity)
Options, each transaction $25.00
Amortized Security Receipts $5.00
A transaction is a purchase, sale, maturity, redemption, tender, exchange,
dividend reinvestment, deposit or withdrawal of a security (with the exception
of Fifth Third Certificates of Deposit, Commercial Paper & Repo)
MISCELLANEOUS FEES
Wire Transfers & Check Disbursements $7.00
Depository/Transfer Agent Reject $5.00
July 8, 1998
Mr. Ed Jaroski
Capstone Social Ethics & Religious Values Fund
c/o Capstone Financial Services
5847 San Felipe
Suite 4100
Houston, TX 77057
Dear Ed:
We would like to thank you for choosing Madison Portfolio Consultants, Inc. as
the investment consultant to the Board of Trustees ("Board") of the Capstone
Social Ethics and Religious Values Fund ("SERV Fund"). We look forward to
working with you. This letter outlines the specific services we will be
providing and their associated costs.
Specifically, we will perform the following tasks:
1) We will meet with the Board of SERV Fund, any Advisory Committee
that may be appointed by the Board, and/or its other professionals
(managers, accountants, lawyers, et. - probably by phone) to review
the needs and constraints on the individual portfolios of SERV Fund.
These include consideration of the purpose, cash-flow needs,
philosophies, etc. of SERV Fund and its portfolios.
2) Based upon these discussions, we will prepare a suggested
statement of objectives and guidelines for consideration by the
Advisory Committee and the Board as a basis for ongoing review and
monitoring of the operations and performance of the portfolios.
3) As necessary, we will conduct a search to identify potential
additional and alternative investment managers for consideration by
the Advisory Committee and the Board.
4) We will meet with the Advisory Committee and the Board quarterly
to review investment performance of each of SERV Fund's portfolios,
and to assist the Advisory Committee and Board in determining
whether the investment manager is performing to expectations. We
will be monitoring how much the manager has earned, how it compares
against other investment managers, what types of risks it is taking,
etc. We will also be reviewing the efficiency of certain
administrative and custodial functions.
5) We will act as a resource for the Advisory Committee and the
Board on questions they may have and on topics with which we think
they should become acquainted. This educational function is
important to enable the Board and the Advisory Committee to keep
abreast of what is happening in the investment arena.
6) We will work with the Advisory Committee and the Board to develop
material and presentations which may assist entities investing in
the SERV Fund to develop an appropriate asset allocation mix among
the various portfolios (i.e., large capitalization stocks, short
term bonds, etc.). These materials would include:
a) educational material concerning asset allocation
(including simulations of returns of various portfolio mixes
across the risk spectrum and the efficient frontier).
b) periodic in-person educational sessions provided
during quarterly review meetings.
c) telephone response to questions about general or
specific investment policy matters concerning SERV Fund and/or
long-term asset allocation policies.
7) Our fee schedule for the above services, based on the annual
average aggregate daily net assets of SERV Fund, is as follows:
Net Total Assets Annual Fee
First $200,000,000 2.5 basis points
Next $200,000,000 1.0 basis points
Next $600,000,000 0.5 basis points
Amounts over $1,000,000,000 negotiable
Minimum Fee = $50,000 per annum
Fees will be paid quarterly, in arrears, based upon a
calendar quarter billing cycle.
The above fee schedule includes all travel and expenses
associated with attending up to four meetings per year at mutually
agreed upon locations in the United States. Any additional travel
and expenses incurred by Madison as part of the consulting
relationship would be an additional cost to the SERV Fund.
8) Either party may terminate this agreement without penalty by
notification in writing, with 60 days' notice. In the event this
agreement is terminated, Madison will be compensated pro rata for
any period during which it provides services hereunder and for which
it has not been compensated, plus any outstanding reimbursable
expenses.
9) This agreement shall be governed by the laws of the State of New
York.
10) All information furnished by either party to the other,
including their respective agents and employees, shall be treated as
confidential and shall not be disclosed to third parties except as
required by law.
11) It is understood:
a) that Madison's services hereunder are of a
consulting nature only;
b) that Madison will have no power to determine
that any security or other investment shall be purchased by
any portfolio of SERV Fund;
c) that Madison will not furnish advice to SERV Fund or
any of its portfolios with respect to the desirability of
investing in, purchasing or selling securities or other
property; and
d) that Madison will not provide services that would
cause it to be deemed an investment adviser (as that term is
defined in the Investment Company Act of 1940) to SERV Fund or
that would require it to register as an investment adviser
under the Investment Advisers Act of 1940.
<PAGE>
This letter serves as our official proposal of services to the SERV Fund.
Sincerely,
Frederick W. Weiss III
Vice President
Upon your acceptance of this proposal, Madison Portfolio Consultants, Inc. will
begin providing services as of July 20, 1998. If this is acceptable, please sign
below.
THE CAPSTONE SOCIAL ETHICS AND
RELIGIOUS VALUES FUND
By:________________________________
Name: (Print/Type)_________________________
Title:____________________________________
Date:__________________
Capstone Social Ethics and Religious Values Fund
Investment Company Services Agreement
This AGREEMENT, dated as of the 15th day of August, 1998, made by and
between the Capstone Social Ethics and Religious Values Fund (the "Trust"), a
business trust operating as an open-end, management investment company
registered under the Investment Company Act of 1940, as amended (the "Act"),
duly organized and existing under the laws of the Commonwealth of Massachusetts,
and Declaration Service Company ("Declaration"), a corporation duly organized
under the laws of the Commonwealth of Pennsylvania (collectively, the
"Parties").
WITNESSETH THAT:
WHEREAS, the Trust is authorized by its Trust Instrument to issue separate
series of shares representing interests in separate investment portfolios which
are identified on Schedule "C" attached hereto and which Schedule "C" may be
amended from time to time by mutual agreement of the Trust and Declaration; and
WHEREAS, the Parties desire to enter into an agreement whereby Declaration
will provide the services to the Trust as specified herein and set forth in
particular in Schedule "A" which is attached hereto and made a part hereof.
NOW THEREFORE, in consideration of the premises and mutual covenants
contained herein, and in exchange of good and valuable consideration, the
sufficiency and receipt of which are hereby acknowledged, the Parties hereto,
intending to be legally bound, do hereby agree as follows:
GENERAL PROVISIONS
Section 1. Appointment. The Trust hereby appoints Declaration as servicing
agent and Declaration hereby accepts such appointment. In order that Declaration
may perform its duties under the terms of this Agreement, the Board of Trustees
of the Trust shall direct the officers, investment adviser(s), legal counsel,
independent accountants and custodian of the Trust to cooperate fully with
Declaration and, upon request of Declaration, to provide such information,
documents and advice relating to the Trust which Declaration requires to execute
its responsibilities hereunder. In connection with its duties, Declaration shall
be entitled to rely, and will be held harmless by the Trust when acting in
reasonable reliance, upon any instruction, advice or document relating to the
Trust as provided to Declaration by any of the aforementioned persons on behalf
of the Trust. All fees charged by any such persons acting on behalf of the Trust
will be deemed an expense of the Trust.
Any services performed by Declaration under this Agreement will conform to
the requirements of:
(a) the provisions of the Act and the Securities Act of 1933, as amended,
and any rules or regulations in force thereunder;
(b) any other applicable provision of state and federal law;
(c) the provisions of the Trust Instrument and the By-Laws as amended from
time to time and delivered to Declaration;
(d) any policies and determinations of the Board of Trustees of the Trust
which are communicated to Declaration; and
(e) the policies of the Trust as reflected in the Trust's
registration statement as filed with the U.S. Securities and Exchange
Commission.
Nothing in this Agreement will prevent Declaration or any officer thereof
from providing the same or comparable services for or with any other person,
firm or corporation. While the services supplied to the Trust may be different
than those supplied to other persons, firms or corporations, Declaration will
provide the Trust equitable treatment in supplying services. The Trust
recognizes that it will not receive preferential treatment from Declaration as
compared with the treatment provided to other Declaration clients.
Section 2. Duties and Obligations of Declaration.
Subject to the provisions of this Agreement, Declaration will provide to
the Trust the specific services as set forth in Schedule "A" attached hereto.
Section 3. Definitions. For purposes of this Agreement:
"Certificate" will mean any notice, instruction, or other instrument in
writing, authorized or required by this Agreement. To be effective, such
Certificate shall be given to and received by the custodian and shall be signed
on behalf of the Trust by any two of its designated officers, and the term
Certificate shall also include instructions communicated to the custodian by
Declaration.
"Custodian" will refer to that agent which provides safekeeping of the
assets of the Trust.
"Instructions" will mean communications containing instructions
transmitted by electronic or telecommunications media including, but not limited
to, Industry Standardization for Institutional Trade Communications,
computer-to-computer interface, dedicated transmission line, facsimile
transmission (which may be signed by an officer or unsigned) and tested telex.
"Oral Instruction" will mean an authorization, instruction, approval, item
or set of data, or information of any kind transmitted to Declaration in person
or by telephone, telegram, telecopy or other mechanical or documentary means
lacking original signature, by a person or persons reasonably identified to
Declaration to be a person or persons so authorized by a resolution of the Board
of Trustees of the Trust to give Oral Instructions to Declaration on behalf of
the Trust.
"Shareholders" will mean the registered owners of the shares of the Trust
in accordance with the share registry records maintained by Declaration for the
Trust.
"Shares" will mean the issued and outstanding shares of the Trust.
"Signature Guarantee" will mean the guarantee of signatures by an
"eligible guarantor institution" as defined in Rule 17Ad-15 under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). Eligible guarantor
institutions include banks, brokers, dealers, credit unions, national securities
exchanges, registered securities associations, clearing agencies and savings
associations. Broker-dealers guaranteeing signatures must be members of a
clearing corporation or maintain net capital of at least $100,000. Signature
guarantees will be accepted from any eligible guarantor institution which
participates in a signature guarantee program.
"Written Instruction" will mean an authorization, instruction, approval,
item or set of data or information of any kind transmitted to Declaration in an
original writing containing an original signature or a copy of such document
transmitted by telecopy including transmission of such signature reasonably
identified to Declaration to be the signature of a person or persons so
authorized by a resolution of the Board of Trustees of the Trust, or so
identified by the Trust to give Written Instructions to Declaration on behalf of
the Trust.
Concerning Oral and Written Instructions For all purposes under this
Agreement, Declaration is authorized to act upon receipt of the first of
any Written or Oral Instruction it receives from the Trust or its agents.
In cases where the first instruction is an Oral Instruction that is not in
the form of a document or written record, a confirmatory Written
Instruction or Oral Instruction in the form of a document or written
record shall be delivered. In cases where Declaration receives an
Instruction, whether Written or Oral, to enter a portfolio transaction
onto the Trust's records, the Trust shall cause the broker/dealer
executing such transaction to send a written confirmation to the
Custodian.
Declaration shall be entitled to rely on the first Instruction received.
For any act or omission undertaken by Declaration in compliance therewith,
it shall be free of liability and fully indemnified and held harmless by
the Trust, provided however, that in the event a Written or Oral
Instruction received by Declaration is countermanded by a subsequent
Written or Oral Instruction received prior to acting upon such
countermanded Instruction, Declaration shall act upon such subsequent
Written or Oral Instruction. The sole obligation of Declaration with
respect to any follow-up or confirmatory Written Instruction or Oral
Instruction in documentary or written form shall be to make reasonable
efforts to detect any such discrepancy between the original Instruction
and such confirmation and to report such discrepancy to the Trust. The
Trust shall be responsible and bear the expense of its taking any action,
including any reprocessing, necessary to correct any discrepancy or error.
To the extent such action requires Declaration to act, the Trust shall
give Declaration specific Written Instruction as to the action required.
The Trust will file with Declaration a certified copy of each resolution
of the Trust's Board of Trustees authorizing execution of Written Instructions
or the transmittal of Oral Instructions as provided above.
Section 4. Indemnification.
(a) Declaration, its directors, officers, employees, shareholders, and
agents will be liable for any loss suffered by the Trust resulting from the
willful misfeasance, bad faith, negligence or disregard on the part of
Declaration in the performance of its obligations and duties under this
Agreement.
(b) Any director, officer, employee, shareholder or agent of Declaration,
who may be or become an officer, director, employee or agent of the Trust, will
be deemed, when rendering services to the Trust, or acting on any business of
the Trust (other than services or business in connection with Declaration'
duties hereunder), to be rendering such services to or acting solely for the
Trust and not as a director, officer, employee, shareholder or agent of, or
under the control or direction of Declaration even though such person may be
receiving compensation from Declaration.
CAPSTONE SOCIAL ETHICS AND RELIGIOUS VALUES FUND
Money Market Fund Short-Term Bond Fund
Bond Fund Large Cap Equity Fund
Small Cap Equity Fund International Equity Fund
(series of Capstone Social Ethics and Religious Values Fund)
SERVICE AND DISTRIBUTION PLAN
Introduction: It has been determined that series and classes indicated on
Schedule A hereto (each a "Fund" and "Class," respectively), which are series
and classes of Capstone Social Ethics and Religious Values Fund ("SERV"), will
pay specified amounts to Capstone Asset Planning Company ("Distributor") as
compensation for providing certain distribution-related and
shareholder-servicing services with respect to shares and shareholders of such
Fund and Class. The Board of Trustees of SERV therefore adopts the Service and
Distribution Plan (the "Plan") for the Funds and Classes, as set forth herein,
pursuant to Rule 12b-1 under the Investment Company Act of 1940 (the "Act").
The Board of Trustees, in considering whether the Funds should implement
the Plan, has requested and evaluated such information as it deemed necessary to
make an informed determination as to whether the Plan should be implemented and
has considered such pertinent factors as it deemed necessary to form the basis
for a decision to use assets of the Funds and Classes for such purposes.
In voting to approve the implementation of the Plan, the Trustees have
concluded, in the exercise of their reasonable business judgment and in light of
their respective fiduciary duties, that there is a reasonable likelihood that
the Plan will benefit the Funds, Classes and their shareholders.
The Plan: The material aspects of the financing by the Funds and Classes of
distribution and shareholder servicing activities to be performed for the Funds
and are as follows:
1. Each Fund or Class, as applicable, will compensate Capstone Asset
Planning Company ("Distributor") for services provided and expenses incurred in
connection with the distribution and marketing of shares of the particular Fund
or Class and for the servicing shareholders of that Fund or Class. Such
distribution, marketing and shareholder servicing activities to be provided by
the Distributor may include (1) printing and advertising expenses; (2) payments
to employees or agents of the Distributor who engage in or support distribution
of the Funds' shares, including salary, commissions, travel and related
expenses; (3) the costs of preparing, printing and distributing prospectuses and
reports to prospective investors; (4) expenses of organizing and conducting
sales seminars; (5) expenses related to selling and servicing efforts, including
processing new account applications, transmitting customer transaction
information to the Funds' transfer agent and answering questions of
shareholders; (6) payments of fees to one or more broker-dealers (which may
include the Distributor itself), financial institutions or other industry
professionals, such as investment advisers, accountants and estate planning
firms (severally, a "Service Organization"), in respect of the average daily
value of shares of a Fund or Class owned by shareholders for whom the Service
Organization is the dealer of record or holder of record, or owned by
shareholders with whom the Service Organization has a servicing relationship;
(7) costs and expenses incurred in implementing and operating the Plan; and (8)
such other similar services as the Funds' Board of Trustees determines to be
reasonably calculated to result in the sale of the shares of the Funds and
Classes.
Subject to the limitations of applicable law and regulation, including
rules of the National Association of Securities Dealers ("NASD"), the
Distributor will be compensated monthly for such services at the annual rate
indicated in Schedule A based on the average daily net assets of the Funds or
Classes.
2. Out of the amounts provided in Schedule A, the Distributor may
periodically pay to one or more Service Organizations (which may include the
Distributor itself) a fee in respect of the shares of a Fund or Class owned by
shareholders for whom the Service Organizations are the dealers of record or
holders of record, or owned by shareholders with whom the Service Organizations
have servicing relationships. Such fees will be computed daily and paid
quarterly by the Distributor at such annual rates as may be determined from time
to time by the Board of Trustees, consistent with applicable law, regulation and
regulatory interpretation, and disclosed in the Funds' prospectus, such rates to
be based on the average daily net asset value of the shares of the Funds or
Classes owned by shareholders for whom the Service Organizations are the dealers
of record or holders of record, or owned by shareholders with whom the Service
Organizations have servicing relationships. Subject to the limits herein and the
requirements of applicable law and regulations, including rules of the NASD, the
distributor may designate as "Service Fees," as that term is defined by
applicable rules and regulatory interpretations applicable to payments under a
plan such as the Plan, some or all of any payments made to Service Organizations
(including the Distributor itself) for services that may be covered by "Service
Fees," as so defined.
The payment to a Service Organization is subject to compliance by the
Service Organization with the terms of a written agreement between the Service
Organization and the Distributor (the "Agreement"), in such form(s) as may be
approved by the Trustees from time to time. If a shareholder of a Fund or Class
ceases to be a client of a Service Organization that has entered into an
agreement with the Distributor, but continues to hold shares of the Fund or
Class, the Distributor will be entitled to receive a similar payment in respect
of the servicing provided to such shareholder. For the purposes of determining
the fees payable under the Plan, the average daily net asset value of the shares
of a Fund or Class, as applicable, shall be computed in the manner specified in
SERV's Declaration of Trust, including any Establishment and Designation of
Series, and the Funds' current prospectus for the computation of the net asset
value of the Fund or Class.
3. The Plan will become effective immediately upon approval, with respect
to each Fund and Class, by (a) a majority of the Board of Trustees, including a
majority of the Trustees who are not "interested persons" (as defined in the
Act) of SERV and who have no direct or indirect financial interest in the
operation of the Plan or in any agreements entered into in connection with the
Plan (the "Plan Trustees"), pursuant to a vote cast in person at a meeting
called for the purpose of voting on the approval of the Plan. Additional series
or classes of shares may be added to the Plan effective as to each such series
and class upon approval by (a) a majority of the outstanding voting securities
of such series or class, as applicable, if shares of the series or class have
been sold to persons who are not "affiliated persons" (as defined in the Act) of
SERV, promoters of SERV, or affiliated persons of either of the foregoing, and
(b) majorities of both the Board of Trustees and the Plan Trustees, pursuant to
votes cast in person at a meeting called for such purpose. Each such series or
class added to the Plan shall become a "Fund" or "Class" hereunder.
4. The Plan shall continue for a period of one year from its effective
date, unless earlier terminated in accordance with its terms, and thereafter
shall continue automatically for successive annual periods, provided such
continuance is approved by a majority of the Board of Trustees, including a
majority of the Plan Trustees pursuant to a vote cast in person at a meeting
called for the purpose of voting on the continuance of the Plan.
5. The Plan may be amended at any time by the Board of Trustees provided
that (a) any amendment to increase materially the amounts which a Fund or Class
may pay for distribution pursuant to the Plan shall be effective only upon
approval by a vote of a majority of the outstanding voting securities of the
respective Fund or Class, as applicable and (b) any material amendments of the
terms of the Plan shall become effective only upon approval by vote of a
majority of the Trustees and by vote of a majority of the Plan Trustees, cast in
person at a meeting called for the purpose of voting on such amendment.
6. The Plan is terminable without penalty at any time with respect to any
Fund or Class by (a) vote of a majority of the Plan Trustees, or (b) vote of a
majority of the outstanding voting securities of the respective Fund or Class,
as applicable.
7. Any person authorized to direct the disposition of monies paid or
payable by a Fund or Class pursuant to the Plan or any agreement entered into in
connection with the Plan shall provide to the Board of Trustees, and the Board
of Trustees shall review, at least quarterly, a written report of the amounts
expended pursuant to the Plan and the purposes for which such expenditures were
made.
8. While the Plan is in effect, the selection and nomination of Trustees
who are not "interested persons" (as defined in the Act) of SERV shall be
committed to the discretion of the Trustees who are not "interested persons".
9. SERV shall preserve copies of the Plan, any agreement into connection
with the Plan, and any report made pursuant to paragraph 7 hereof, for a period
of not less than six years from the date of the Plan, such agreement or report,
the first two years in an easily accessible place.
CAPSTONE SOCIAL ETHICS AND RELIGIOUS VALUES FUND
Date:_____________ By:______________________
President
Attest:
-------------------------
Secretary
<PAGE>
SERVICE AND DISTRIBUTION PLAN
CAPSTONE SOCIAL ETHICS AND RELIGIOUS VALUES FUND
SCHEDULE A
The amounts payable to the Distributor pursuant the Service and
Distribution Plan are as indicated below for the listed Funds and Classes. The
Distributor shall be paid monthly at the following annual rates to be applied to
the average daily net asset value of the respective Fund or Class:
Name of Fund Class of Shares Annual Fee Rate
Money Market Fund Class A 0.10%
Short-Term Bond Fund Class A 0.25%
Bond Fund Class A 0.25%
Large Cap Equity Fund Class A 0.25%
Small Cap Equity Fund Class A 0.25%
International Equity Fund Class A 0.25%
