CAPSTONE SOCIAL ETHICS AND
RELIGIOUS VALUES FUND
5847 San Felipe, Suite 4100
Houston, Texas 770571-800-262-6631
September 29, 1998
PROSPECTUS
This combined Prospectus describes the six investment portfolios ("Funds") of
the Capstone Social Ethics and Religious Values Fund ("SERV"), a Massachusetts
business trust registered as a diversified open-end investment company. The
Funds offered by this combined Prospectus are as follows:
Fixed Income Funds Equity Funds International Fund
Money Market Fund* Large Cap Equity Fund International Fund
Short-Term Bond Fund Small Cap Equity Fund
Bond Fund
* AN INVESTMENT IN A FUND IS NOT A DEPOSIT OF ANY BANK AND IS NEITHER INSURED
NOR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER
GOVERNMENT AGENCY. ALTHOUGH THE MONEY MARKET FUND SEEKS TO MAINTAIN A STABLE NET
ASSET VALUE OF $1.00 PER UNIT, THERE CAN BE NO ASSURANCE THIS VALUE CAN BE
MAINTAINED.
This combined Prospectus sets forth certain information about SERV and the Funds
that a prospective investor should know before investing and should be retained
for future reference.
A combined Statement of Additional Information ("SAI"), dated September 29,
1998, has been filed with the Securities and Exchange Commission and contains
further information about SERV. A copy of the SAI may be obtained without charge
by calling or writing SERV at the address or phone number listed above. The SAI
is incorporated into this Prospectus by reference.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR BY ANY STATE OR OTHER SECURITIES REGULATORY AUTHORITY,
NOR HAS THE COMMISSION OR ANY SUCH AUTHORITY PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
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TABLE OF CONTENTS
Page
Summary Information...........................................3
Fund Expenses.................................................5
The Funds: Investment Objective and Policies..................6
Money Market Fund..........................................6
Benchmark Funds............................................6
Short-Term Bond Fund....................................7
Bond Fund...............................................8
Large Cap Equity Fund...................................8
Small Cap Equity Fund...................................8
International Fund......................................9
Investment Policies...........................................9
Bank Obligations..........................................10
Commercial Paper..........................................10
Corporate Debt Securities.................................10
Repurchase Agreements.....................................10
When-Issued and Delayed Delivery Transactions.............11
Loans of Portfolio Securities.............................11
Foreign Securities........................................11
Forward Foreign Currency Exchange Contracts...............12
Investment Companies and Investment Funds.................14
Investment Restrictions......................................15
Performance and Yield Information............................15
Management of SERV...........................................16
Adviser and Administrator.................................16
Advisory Committee and Consultant.........................17
Distributor...............................................17
Expenses..................................................18
Purchasing Shares ...........................................18
Investing Through Authorized Dealers......................19
Purchases Through the Distributor.........................19
Telephone Purchase Authorization..........................19
Investing by Wire.........................................20
Distributions and Taxes .....................................20
Payment Options...........................................20
Taxes.....................................................21
Redemption and Repurchase of Shares..........................21
Check-Writing - Money Market Fund.........................22
Expedited Telephone Redemption............................22
Determination of Net Asset Value ............................22
Stockholder Services ........................................23
Tax-Deferred Retirement Plans.............................23
Exchange Privilege........................................23
Pre-Authorized Payment....................................24
Systematic Withdrawal Plan................................24
General Information .........................................25
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.
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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 tobacco products, meat
processing, pornography, or casino and
other gambling concerns.
Investment Objectives and Policies.....The Money Market Fund seeks to provide
current income, stability of capital and
liquidity. The Short-Term Bond Fund
seeks current income and relative
capital stability. The Bond Fund seeks
current income. Large Cap Equity Fund
seeks capital growth and income. Small
Cap Equity Fund and International Fund
each seek capital appreciation. There
can be no assurance that any Fund will
achieve its objective.
Adviser and Administrator...............Capstone Asset Management Company acts
as Adviser and Administrator to each
of the Funds. Formed in 1982 as a
wholly-owned subsidiary of Capstone
Financial Services, Inc. the Adviser
and Administrator acts as investment
adviser and/or administrator to
registered investment companies, and
is investment adviser to pension and
profit-sharing accounts, corporations
and individuals. Its assets under
management total over $2 billion.
Classes of Shares.......................Each Fund offers two classes of shares:
Class A and Class C. The classes
differ principally in the required
minimum investment and in that Class A
shares bear certain expenses pursuant
to a Rule 12b-1 distribution plan.
Under this plan, Class A shares of
each Fund pay 0.25% (0.10% for Money
Market Fund), on an annual basis, of
the average net assets of its Class A
shares to the Distributor. Fund
expenses (including a Fund's share of
SERV's expenses) are generally
allocated between the classes based on
their respective net asset values.
Other expenses borne by each class may
vary, including federal and state
registration and filin fees, certain
printing and other class specific
costs.
Distributor and Offering Price..........Shares of the Funds are continuously
offered for sale through SERV's
Distributor at net asset value per
share with no sales charge. Class A
shares of the Funds bear certain
expenses pursuant to a written Rule
12b-1 distribution plan.
Minimum Investments.....................The minimum initial investment in each
Fund is $200 for Class A shares and
$50,000 for Class C shares, except
that the minimum investment for Class
C shares is $5,000 for Charitable
Trusts or Grantor Trusts for which a
charitable organization serves as
Trustee. There is no minimum for
subsequent purchases of Class A
shares; the minimum for subsequent
purchases of Class C shares is $1,000.
There is no minimum for withdrawals.
Distributions...........................Each Fund will pay dividends from the
income of each class of its shares as
follows: Money Market Fund, monthly;
Short-Term Bond Fund, Bond Fund, Large
Cap Equity Fund, Small Cap Equity Fund
and International Fund, quarterly.
Capital gains distributions, if any,
will be paid annually in December.
Redemptions.............................Shares may be redeemed at the next
determined net asset value for the
particular Fund on any business
day, without charge.
Risk Factors............................Each of the funds, other than the Money
Market Fund, seeks to achieve
performance results comparable to
those of a designated index or blend
of indexes ("Benchmark"), before fees.
If these objectives are met (of which
there can be no assurance), the
performance of each Fund can be
expected to fluctuate in a manner
similar to that of its Benchmark.
Indexes representing common stocks can
have wide fluctuations in price, which
can be dramatic, in response to
developments affecting particular
issuers, particular segments of
issuers, or the market generally.
Indexes representing debt securities
also fluctuate, at times dramatically,
in response to interest rate changes,
events that could affect interest
rates, and other market conditions.
Additionally, if the techniques used
by the Adviser and Administrator to
achieve performance comparable to a
designated Benchmark do not operate as
anticipated, a Fund may fail to meet
its objectives.
FUND EXPENSES
Shareholder Transaction Expenses (All Funds)
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price).................................None
Maximum Sales Load Imposed on Reinvested Dividends
(as a percentage of offering price)................................None
Deferred Sales Load (as a percentage of original purchase
price or redemption of proceeds, as applicable).....................None
Redemption Fees (as a percentage of amount redeemed)................None
Exchange Fee........................................................None
Annual Fund Operating Expenses (as a percentage of average net assets)
Short-Term Bond, Bond,
Money Market Large Cap Equity, Small Cap
Fund Equity & International Funds
Class A Class C Class A Class C
Management Fees 0.10% 0.10% 0.15% 0.15%
12b-1 Fees* 0.10% 0.00% 0.25% 0.00%
Other Expenses (estimated) 0.15% 0.15% 0.15% 0.15%
Total Fund Operating Expenses 0.35% 0.25% 0.55% 0.30%
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:
Short-Term Bond, Bond,
Money Market Large Cap Equity, Small Cap
Fund Equity & International Funds
Class A Class C Class A Class C
1 Year $4 $3 $6 $3
3 Years $11 $8 $18 $10
*Under rules of the National Association of Securities Dealers, Inc. (the
"NASD"), a 12b-1 fee may be treated as a sales charge for certain purposes under
those rules. Because the 12b-1 fee is an annual fee charged against the assets
of a Fund to cover certain distribution and shareholder services expenses,
long-term stockholders may pay more in total sales charges than the economic
equivalent of the maximum front-end sales charge permitted by rules of the NASD
(see "Distributor").
The purpose of the foregoing table is to assist investors in understanding the
various costs and expenses that an investor in the Funds will bear directly or
indirectly. The information under the heading "Annual Fund Operating Expenses"
is based on projected expenses the Funds will incur during their first year of
operation. THE EXAMPLE WHICH IMMEDIATELY FOLLOWS THE TABLE SHOULD NOT BE
CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL FUND EXPENSES MAY
BE GREATER OR LESS THAN THOSE SHOWN IN THE EXAMPLE OR IN THE TABLE.
THE FUNDS:
INVESTMENT OBJECTIVES AND POLICIES
The investment policy of each of the six Funds is to invest in companies that
are managed in a socially responsible manner, reflecting certain ethical and
religious values. To that end, the Funds will not invest in companies whose
primary business is the manufacturing, operation or distribution of alcohol,
caffeine or tobacco products, meat processing, pornography, or casinos and other
gambling concerns.
The investment objectives and other policies of each of the Funds are described
below. The investment objectives of each Fund are not fundamental policies of
the Fund and may be changed without shareholder approval. There can be no
assurance that a Fund will achieve its investment objectives.
Money Market Fund
The objective of the Fund is to provide current income, stability of capital and
liquidity. It seeks to maintain a constant net asset value of $1.00 per share,
although there can be no assurance this goal will be achieved.
The Fund invests in other money market funds that are rated at least AAA by
Standard & Poor's (S&P) or Aaa by Moody's Investor Service, Inc. ("Moody's") and
in a variety of short-term money market instruments rated A1/P1 or above by a
nationally recognized statistical rating organization ("NRSRO") or deemed of
comparable quality by the Adviser and Administrator, including obligations
issued or guaranteed by the U.S. Government, its agencies or instrumentalities;
obligations of supranational organizations; bankers acceptances, certificates of
deposit, deposit notes and time deposits of U.S. banks and their foreign
branches; obligations of savings and loan institutions; corporate obligations
such as notes, bonds, loans, loan participations and commercial paper;
securities with various types of credit enhancement or with "put" arrangements
that enhance liquidity; asset-backed securities; municipal securities; and
repurchase agreements. The Fund may purchase securities on a when-issued or
delayed delivery basis. As a fundamental investment policy, the Fund will invest
more than 25% of its assets in shares of one or more unaffiliated money market
funds. To the extent the Fund invests in shares of other money market funds, it
will bear a portion of the expenses of that fund, which are in addition to the
expenses of the Fund, itself. Among other things, such expenses will include
fees paid by the underlying fund to its investment adviser, although the Fund's
own fees to the Adviser and Administrator will not be reduced.
A security whose rating declines below the above standards or which becomes
unrated will be sold unless the Adviser and Administrator determines that such
sale would not be in the Fund's best interests. Generally, the Fund will
purchase only securities that have a remaining maturity of 397 calendar days or
less, and the Fund will maintain an average weighted portfolio maturity of no
greater than 90 days.
The Adviser and Administrator intends to calculate the Fund's net asset value in
accordance with amortized cost procedures pursuant to a rule adopted by the
Securities and Exchange Commission with respect to money market funds.
Dividends, including net realized capital gain, will be declared and paid
monthly.
Benchmark Funds
Each Fund, except for the Money Market Fund, will seek to attain performance
that is comparable to a designated benchmark i.e., its portfolio will be
designed to have the investment characteristics of a designated index (or
blended index) ("Benchmark") of comparable securities. The Adviser and
Administrator will select portfolio investments for each Fund using statistical
methods designed to produce total returns that will be comparable to the
designated Benchmark. Thus, the Adviser and Administrator will not be using
traditional methods of security selection based on analysis of market conditions
and particular issuers. Additionally, these Funds will not assume temporary
defensive positions when market or other conditions negatively affect the
classes of securities reflected in their portfolios. It should be noted that in
avoiding investments that are inconsistent with the Funds' socially responsible
investment policies, a Fund may be limited in its ability to match the
performance of a particular Benchmark. Other factors, such as variations in a
Fund's size, the availability of various investment techniques, and regulatory
limitations on the use of certain techniques from time to time may also
interfere with a Fund's ability to match its Benchmark's performance. Because
the Adviser and Administrator may use a variety of techniques to pursue each
Fund's investment objective, the Funds are unlikely to hold securities identical
to, or in the same proportions as, those in any reference Benchmark. Further,
each Fund must maintain some portion of its assets in cash or short-term money
market instruments and repurchase agreements to meet redemptions and to cover
other Fund expenses. To the extent consistent with prudent management, the
Adviser and Administrator will take positions in futures contracts to gain
exposure to relevant securities markets when incoming cash cannot be immediately
invested in suitable securities. Neither the Fund, the Adviser and
Administrator, nor their affiliates are in any way sponsored by or affiliated
with the firms that publish the reference Benchmarks.
Short-Term Bond Fund
The investment objective of this Fund is to provide current income and relative
capital stability. The Fund pursues this objective by attempting to match the
price and yield performance, before Fund expenses, of a blended short-term index
consisting of three sub-portfolios -- one-third U.S. Treasury securities,
one-third U.S. government agency securities, and one-third investment grade
corporate obligations -- each consisting of securities with a maximum maturity
of three years. ("Investment grade" securities are those that are rated at least
BBB by S&P or Baa by Moody's or deemed by the Adviser and Administrator to be of
comparable quality.) Thus, the Fund's assets will generally be divided in
roughly equal proportions among the three sub-portfolios, each with a maximum
maturity of three years, provided that the Fund may, from time to time, have
small portions of its portfolio in cash or short-term money market instruments
or repurchase agreements. Each sub-portfolio will seek to match the total return
of an appropriate corresponding index. The indexes used for this purpose are the
Merrill Lynch 1-3 Year Treasury Index, the Merrill Lynch 1-3 Year U.S.
Government Agency Index and the Merrill Lynch 1-3 Year Investment Grade
Corporate Index, provided that the Adviser and Administrator may select other
indexes having closely comparable characteristics.
The securities in which each of these sub-portfolios will be invested are as
follows:
The U.S. Treasury sub-portfolio will consist primarily of obligations backed
by the full faith and credit of the U.S. Treasury that have remaining
maturities not greater than three years. These obligations include Treasury
bills, which generally mature in one year or less from their date of issue,
and Treasury notes, which have original maturities of one to ten years. This
sub-portfolio may also include Treasury bonds that have remaining maturities
of no more than three years.
The U.S. government agency sub-portfolio will include primarily securities,
with remaining maturities of no more than three years, issued or guaranteed
by U.S. government agencies or instrumentalities, including (but not limited
to) the Government National Mortgage Association, the Federal National
Mortgage Association, the Federal Home Loan Mortgage Corporation, the
Export-Import Bank of the United States, the Farmers Home Administration,
the Small Business Administration, the Federal Farm Credit Bank, the Bank
for Cooperatives, the Federal Land Bank, the Student Loan Marketing
Association, the Tennessee Valley Authority, and the Federal Intermediate
Credit Banks. Obligations of some of these organizations are backed by the
full faith and credit of the U.S. Treasury (for example, securities issued
by the Government National Mortgage Association). Others are backed by the
ability of the agency to borrow from the Treasury (such as securities issued
by the Federal Home Loan Bank), while others are supported only by the
credit of the issuer (such as securities issued by the Federal Farm Credit
Bank) with no assurance of financial support from the U.S. Treasury.
The investment grade corporate obligation sub-portfolio will include
primarily dollar-denominated obligations issued by domestic and foreign
corporations that are rated within the top four rating categories (BBB or
better by S&P or Baa or better by Moody's or a comparable rating by another
Nationally Recognized Statistical Rating Organization ("NRSRO")) or deemed
of comparable quality by the Adviser and Administrator and have remaining
maturities of no more than three years. These obligations may include
corporate bonds, debentures, notes (including demand and master demand
notes) and other similar corporate debt instruments. Obligations rated BBB
or Baa may have speculative characteristics and changes in economic
conditions or other circumstances may lead to a weakened capacity to make
principal and interest payments than is the case with higher grade bonds.
The Fund will, under normal market conditions, have at least 65% of its total
assets invested in bonds. The instruments in which the Fund invests may have
fixed, variable or floating rates of interest. The Fund may purchase futures as
a temporary substitute for investment in bonds. The Fund may have small portions
of its portfolio in cash or short-term money market instruments. It may also
invest in repurchase agreements with respect to permitted portfolio investments.
The Fund may purchase securities on a when-issued or forward commitment basis.
Bond Fund
The investment objective of this Fund is to provide current income. The Fund
pursues this objective by attempting to match the price and yield performance,
before Fund expenses, of the Lehman Brothers Government/Corporate Bond ("LBG/C")
Index. The Fund will pursue this objective by investing primarily in obligations
of the U.S. government, its agencies and instrumentalities, and investment grade
corporate obligations having a broad range of maturities. The LBG/C Index is
comprised of U.S. Treasury obligations, U.S. government agency/instrumentality
obligations, and investment grade corporate obligations. The Fund's portfolio
will be structured in a manner designed to provide generally comparable
performance by investing primarily in similar types of securities.
Under normal market conditions, at least 65% of the Fund's total assets will be
invested in bonds. The instruments in which the Fund invests may have fixed,
variable or floating rates of interest. The Fund may have small portions of its
portfolio in cash or short-term money market instruments. It may also invest in
repurchase agreements with respect to permitted portfolio investments. The Fund
may purchase futures as a temporary substitute for investment in bonds. The Fund
may purchase securities on a when-issued or forward commitment basis.
Large Cap Equity Fund
The investment objective of this Fund is to provide capital growth and income.
The Fund pursues this objective by attempting to match the performance, before
expenses, of the S&P 500 Index. This index consists of 500 common stocks of
large companies whose securities are widely held and have an active trading
market. Each security's weight in the index is proportional to its market value.
Thus, the largest stocks included in the index will comprise a disproportionate
portion of the value of the index. The securities in the index represent a
variety of industries. Most securities in the index are listed on the New York
Stock Exchange, but NASDAQ and American Stock Exchange securities are also
represented. The Fund will seek to match the performance of this index by
investing primarily in equity securities of the type that are included in this
index. "Equity securities" include common stocks (including SPDRs), preferred
stocks, and securities convertible or exchangeable for common stock. At least
65% of the Fund's total assets will be, under normal market conditions, invested
in equity securities of issuers whose capitalization, at the time of investment,
is equal to or exceeds the minimum capitalization of issuers in the S&P 500
Index. As of June 30, 1998 the minimum capitalization of issuers included in
that index was $687.5 million. The Fund may also, however, have small portions
of its portfolio in cash or short-term money market instruments and in
repurchase agreements. The Fund may purchase futures as a temporary substitute
for investment in equity securities. The Fund may invest up to 10% of its total
assets in S&P's Depository Receipts ("SPDRs"). SPDRs are interests in the SPDR
Trust, a unit investment trust that seeks to provide investment results
generally comparable to the price and yield performance of the S&P 500 Index.
Small Cap Equity Fund
The investment objective of this Fund is to provide capital appreciation. The
Fund pursues this objective by attempting to match total return before Fund
expenses, of the S&P SmallCap 600 Index. The S&P SmallCap 600 Index consists of
600 stocks with smaller capitalization than those included in the S&P 500 Index.
As of June 30, 1998, issuers represented in this index had aggregate
capitalization ranging from about $50 million to about $3.3 billion. The Fund
will seek to match the performance of this index by investing primarily in
equity securities of the type that are included in this index. At least 65% of
the Fund's total assets will, under normal market conditions, be invested in
equity securities (as defined for Large Cap Equity Fund, above) of issuers whose
capitalization, at the time of investment, falls within the capitalization range
of issuers in the S&P SmallCap 600 Index. It may also, however, have small
portions of its portfolio in cash or short-term money market instruments and in
repurchase agreements. The Fund may purchase futures contracts as a temporary
substitute for investment in equity securities. Like the Large Cap Equity Fund,
this Fund may invest up to 10% of its total assets in S&P's Depository Receipts
("SPDRs").
International Fund
The investment objective of this Fund is capital appreciation. The Fund pursues
this objective by attempting to match the performance and yield characteristics
of the Morgan Stanley Capital International Europe, Australia, Far East ("EAFE")
Index, net of withholding taxes. The EAFE Index is based on the share prices of
more than 1,000 companies listed on the stock exchanges of Europe, Australia,
New Zealand and the Far East. Europe includes Austria, Belgium, Denmark,
Finland, France, Germany, Italy, The Netherlands, Norway, Spain, Sweden,
Switzerland and the United Kingdom. The Far East includes Japan, Hong Kong and
Singapore/Malaysia. The Fund will seek to match the performance of this index by
investing primarily in securities with characteristics generally comparable to
those that are included in this index or whose performance is expected to be
comparable to that of the index or a portion of the index. The Fund may invest
in securities of other investment companies. Applicable law limits investments
by the Fund and its affiliated persons to no more than 3% of the total
outstanding stock of a particular other investment company. Further, the Fund
may, in any 30-day period, redeem an amount equal to no more than 1% of the
other investment company's total outstanding securities. The Fund will monitor
its investments in other investment companies to assure compliance with its
policy to have no more than 15% of its net assets invested in illiquid
securities. The Fund's investment company investments will include shares of
other investment companies that invest in foreign securities. The Fund may
invest in World Equity Benchmark SharesSM ("WEBS"). WEBS are shares of various
Series of WEBS Index Fund, Inc., a registered open-end investment company, each
of whose Series seeks to provide investment results that correspond generally to
the price and yield performance of publicly traded securities in the aggregate
in particular markets, as represented by an index for that market compiled by
Morgan Stanley Capital International. WEBS are available for at least the
following markets: Australia, Austria, Belgium, Canada, France, Germany, Hong
Kong, Italy, Japan, Malaysia, Mexico, Netherlands, Singapore, Spain, Sweden,
Switzerland and the United Kingdom. WEBS are listed for trading on the American
Stock Exchange. The Fund's investments may be in the form of American Depositary
Receipts ("ADRs"), European Depositary Receipts ("EDRs") and similar
instruments. (See "Foreign Securities," below.) The Fund may invest in forward
foreign currency exchange contracts. It may also, however, have small portions
of its portfolio in cash or short-term money market instruments and in
repurchase agreements. The Fund may purchase futures as a temporary substitute
for investment in equity securities. Under normal market conditions, at least
65% of the Fund's assets will be invested, either directly or through other
investment companies, in securities and other instruments representing issuers
whose headquarters or principal business activities are in at least three
countries.
INVESTMENT POLICIES
About Ratings
After purchase by a Fund, a security may cease to be rated or its rating may be
reduced below the minimum required for purchase by the Fund. Neither event will
require a sale of such security by the Fund, except that the Money Market Fund
will not hold downgraded securities that do not satisfy the portfolio quality
and diversification requirements of federal securities rules applicable to money
market funds and no other Fund will hold below-investment grade securities
totalling more than 5% of its net assets. However, the Adviser and Administrator
will consider such event in its determination of whether the Fund should
continue to hold the security. To the extent the ratings given by Moody's, S&P
or another NRSRO may change as a result of changes in such organizations or
their rating systems, the Funds will attempt to use comparable ratings as
standards for investments in accordance with the investment policies contained
in this Prospectus.
The Funds (other than the Money Market Fund) may invest in debt securities rated
Baa by Moody's or BBB by S&P. Such securities may have speculative
characteristics and changes in economic conditions or other circumstances may
lead to a weakened capacity to make principal and interest payments that is the
case with higher grade bonds.
Government Obligations. Some obligations issued or guaranteed by agencies or
instrumentalities of the U.S. government are backed by the full faith and credit
of the U.S. Treasury. No assurances can be given that the U.S. government will
provide financial support to other agencies or instrumentalities, since it is
not obligated to do so. These agencies and instrumentalities are supported by:
the issuer's right to borrow an amount limited to a specific line of
credit from the U.S. Treasury
the discretionary authority of the U.S. government to purchase certain
obligations of an agency or instrumentality; or
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.
On January 1, 1999, the European Monetary Union (EMU) plans to implement a new
currency union, the Euro. The countries initially expected to convert or tie
their currencies to the Euro include Austria, Belgium, France, Germany,
Luxembourg, the Netherlands, Ireland, Finland, Italy, Portugal and Spain.
Although it is not possible to predict the impact of the Euro implementation
plan on the Funds, the conversion presents unique risks and uncertainties
including: whether the payment and operational systems of banks and other
financial institutions will be ready by the scheduled launch date; the treatment
of outstanding financial contracts after January 1, 1999 that refer to existing
currencies rather than the Euro; the establishment of exchange rates for
existing currencies and the Euro; and the creation of suitable clearing and
settlement payment systems for the new currency. These or other factors,
including political risks, could cause market disruptions before or after the
introduction of the Euro, and could adversely affect the value of securities
held by the Funds.
Forward Foreign Currency Exchange Contracts (All Funds, except Money Market
Fund)
Those Funds that purchase foreign currency-denominated securities may enter into
forward foreign currency exchange contracts in order to protect against
uncertainty in the level of future foreign exchange rates. A forward foreign
currency exchange contract involves an obligation to purchase or sell a specific
currency at a future date, which may be any fixed number of days from the date
of the contract agreed upon by the parties, at a price set at the time of the
contract. These contracts are entered into in the interbank market conducted
between currency traders (usually large commercial banks) and their customers.
Forward foreign currency exchange contracts may be bought or sold to protect a
Fund against a possible loss resulting from an adverse change in the
relationship between foreign currencies and the U.S. dollar, or between foreign
currencies. Although such contracts are intended to minimize the risk of loss
due to a decline in the value of the hedged currency, at the same time, they
tend to limit any potential gain which might result should the value of such
currency increase.
Eurodollar and Yankee Dollar Investments (Bond Fund, Short-Term Bond Fund)
The Bond Fund and the Short-Term Bond Fund may invest in Eurodollar and Yankee
Dollar instruments. Eurodollar instruments are bonds of foreign corporate and
government issuers that pay interest and principal in U.S. dollars generally
held in banks outside the United States, primarily in Europe. Yankee Dollar
instruments are U.S. dollar denominated bonds typically issued in the U.S. by
foreign governments and their agencies and foreign banks and corporations. These
Funds may invest in Eurodollar Certificates of Deposit ("ECDs"), Eurodollar Time
Deposits ("ETDs") and Yankee Certificates of Deposit ("Yankee CDs"). ECDs are
U.S. dollar-denominated certificates of deposit issued by foreign branches of
domestic banks; ETDs are U.S. dollar-denominated deposits in a foreign branch of
a U.S. bank or in a foreign bank; and Yankee CDs are U.S. dollar-denominated
certificates of deposit issued by a U.S. branch of a foreign bank and held in
the U.S. These investments involve risks that are different from investments in
securities issued by U.S. issuers, including potential unfavorable political and
economic developments, foreign withholding or other taxes, seizure of foreign
deposits, currency controls, interest limitations or other governmental
restrictions which might affect payment of principal or interest.
Restricted and Illiquid Securities (All Funds)
Each Fund may invest up to 15% (10% for the Money Market Fund) of its net assets
in illiquid securities. Illiquid securities include those that are not readily
marketable, repurchase agreements maturing in more than seven days, time
deposits with a notice or demand period of more than seven days, certain OTC
options, certain investment company securities, and certain restricted
securities. Based upon continuing review of the trading markets for a specific
restricted security, the security may be determined to be eligible for resale to
qualified institutional buyers pursuant to Rule 144A under the Securities Act of
1933 and, therefore, to be liquid. Also, certain securities deemed to be
illiquid may subsequently be determined to be liquid if they are found to
satisfy relevant liquidity requirements.
Investments by the Funds in securities of other investment companies may be
subject to restrictions regarding redemption. In particular, the Money Market
and International Funds will invest in securities of other investment companies
in reliance on provisions of the 1940 Act that limit each Fund's redemptions to
no more than 1% of another investment company's total outstanding securities
during any period less than 30 days. To the extent a Fund owns securities of
such a company in excess of 1% of that company's total outstanding securities,
such holdings by a Fund could be deemed to be illiquid and would be subject to
the Fund's 15% (10%) limit on illiquid investments.
The Board of Trustees has adopted guidelines and delegated to the Adviser and
Administrator the daily function of determining and monitoring the liquidity of
portfolio securities, including restricted and illiquid securities. The Board of
Trustees, however, retains oversight and is ultimately responsible for such
determinations. The purchase price and subsequent valuation of illiquid
securities normally reflect a discount, which may be significant, from the
market price of comparable securities for which a liquid market exists.
Options and Futures (All Funds except Money Market Fund)
To the extent consistent with their investment policies, the Funds (other than
the Money Market Fund) may employ special investment practices as a means of
obtaining market exposure to securities without purchasing the securities
directly. These practices include the purchase of put and call options on
securities and securities indexes.
A call option gives the purchaser of the option, in return for premium paid, the
right to buy the underlying security at a specified price at any point during
the term of the option. A put option gives the purchaser the right to sell the
underlying security at the exercise price during the option period. In the case
of an option on a securities index, the option holder has the right to obtain,
upon exercise of the option, a cash settlement based on the difference between
the exercise price and the value of the underlying index.
The purchase of put and call options does involve certain risks. Through
investment in options, a Fund can profit from favorable movements in the price
of an underlying security to a greater extent than if the Fund purchased the
security directly. However, if the security does not move in the anticipated
direction during the term of the option in an amount greater than the premium
paid for the option, the Fund may lose a greater percentage of its investment
than if the transaction were effected in the security directly. Generally,
transactions in securities index options pose the same type of risks as do
transactions in securities options.
Subject to certain limits imposed by the Commodity Futures Trading Commission
("CFTC"), a Fund may also (i) invest in securities index futures contracts and
options on securities index futures and (ii) engage in margin transactions with
respect to such investments. A Fund will use futures as a temporary means of
gaining exposure to its particular market prior to making investments of
incoming cash in additional securities.
A securities index futures contract is an agreement under which two parties
agree to take or make delivery of an amount of cash based on the difference
between the value of a securities index at the beginning and at the end of the
contract period. When a Fund enters into a securities index futures contract, it
must make an initial deposit, known as "initial margin," as a partial guarantee
of its performance under the contract. As the value of the securities index
fluctuates, the Fund may be required to make additional margin deposits, known
as "variation margin," to cover any additional obligation it may have under the
contract.
Options on securities index futures contracts are similar to options on
securities except that an option on a securities index futures contract gives
the purchaser the right, in return for the premium paid, to assume a position in
a securities index futures contract (a long position if the option is a call and
a short position if the option is a put), upon deposit of required margin. In
the alternative, the purchaser may resell the option, if it has value, or simply
let it expire. Upon expiration, the purchaser will either realize a gain or the
option will expire worthless, depending on the closing price of the index on
that day. Thus, the purchaser's risk is limited to the premium paid for the
option.
The Funds' transactions in futures contracts and related options are subject to
limits under certain rules of the Commodity Futures Trading Commission ("CFTC").
Under these rules, initial margin deposits and premiums paid by a Fund for such
transactions, except those for bona fide hedging purposes, are limited to no
more than 5% of the fair market value of the Fund's total assets.
Successful use by a Fund of securities index futures contracts is subject to
certain special risk considerations. A liquid index futures market may not be
available when a Fund seeks to purchase or sell a contract. In addition, there
may be an imperfect correlation between movements in the securities included in
the index and movements in the prices of securities the Fund wishes to purchase.
Successful use of securities index futures contracts and options on such
contracts is further dependent on the Adviser and Administrator's ability to
predict correctly movements in the direction of the stock markets, and no
assurance can be given that its judgment in this respect will be correct. Risks
in the purchase and sale of securities index futures contracts are discussed
further in the Statement of Additional Information.
The SEC generally requires that when investment companies, such as the Funds,
effect transactions of the foregoing nature, such funds must segregate either
cash or readily marketable securities with its Custodian in the amount of its
obligations under the foregoing transactions, or cover such obligations by
maintaining positions in portfolio securities or options that would serve to
satisfy or offset the risk of such obligations. When effecting transactions of
the foregoing nature, the Funds will comply with such segregation or cover
requirements.
Investment Companies and Investment Funds (All Funds)
Each of the Funds is permitted to invest in shares of other open-end or
closed-end investment companies, to the extent consistent with its investment
objective and policies. A Fund's investments (together with those of its
affiliated persons) in any other single investment company are limited to no
more than 3% of the outstanding shares of that other investment company.
Additionally, a Fund, in any 30-day period, may not redeem any amount in excess
of 1% of the total outstanding share of such other investment company. On issues
on which shareholders of such another investment company are asked to vote, the
Funds will vote their shares in the same proportion as the vote of all other
holders of shares of that investment company. To the extent a Fund invests a
portion of its assets in other investment companies, those assets will be
subject to the expenses of any such investment company as well as to the
expenses of the Fund itself. A Fund may not purchase shares of any affiliated
investment company except as permitted by SEC rule or order.
INVESTMENT RESTRICTIONS
The Funds are subject to investment restrictions designed to reflect their
socially acceptable investment policies. In addition, the Funds have adopted the
following investment restrictions which are fundamental policies of each of the
Funds (except as otherwise noted) and may not be changed with respect to a Fund
without approval by vote of a majority of the outstanding shares of the
particular Fund. For this purpose such a majority vote means the lesser of (1)
67% or more of the voting securities present at an annual or special meeting of
shareholders, if holders of more than 50% of the outstanding voting securities
of the particular Fund are present or represented by proxy or (2) more than 50%
of the outstanding voting securities of the Fund.
Each of the Funds has elected to be qualified as a diversified series of
SERV.
A Fund may not:
borrow money, except as permitted under the Investment Company Act of
1940, as amended, and as interpreted or modified by regulatory
authority having jurisdiction, from time to time;
issue senior securities, except as permitted under the Investment
Company Act of 1940, as amended, and as interpreted or modified by
regulatory authority having jurisdiction, from time to time;
concentrate its investments in a particular industry, as that term is
used in the Investment Company Act of 1940, as amended, and as
interpreted or modified by regulatory authority having jurisdiction,
from time to time, except that the Money Market Fund reserves freedom
of action to concentrate its investments in instruments issued by
domestic banks (excluding their foreign branches) and in government
securities, as that term is defined in the Investment Company Act of
1940 and in relevant rules and regulatory interpretations thereunder,
as amended from time to time, and the Money Market Fund will
concentrate its investments in investment companies;
engage in the business of underwriting securities issued by others,
except to the extent that the Fund may be deemed to be an underwriter
in connection with the disposition of portfolio securities;
purchase or sell real estate, which does not include securities of
companies which deal in real estate or mortgages or investments secured
by real estate or interests therein, except that the Fund reserves
freedom of action to hold and to sell real estate acquired as a result
of the Fund's ownership of securities;
purchase physical commodities or contracts relating to physical
commodities; or
make loans to other persons, except (i) loans of portfolio securities,
and (ii) to the extent that entry into repurchase agreements and the
purchase of debt instruments or interests in indebtedness in accordance
with the Fund's investment objective and policies may be deemed to be
loans.
PERFORMANCE AND YIELD INFORMATION
Large Cap Equity Fund, Small Cap Equity Fund and International Fund: The Funds
may from time to time include figures indicating the Funds' total return or
average annual total return in advertisements or reports to stockholders or
prospective investors. Average annual total return and total return figures are
calculated for each Class of shares and represent the increase (or decrease) in
the value of an investment in a Fund over a specified period. Both calculations
assume that all income dividends and capital gain distributions during the
period are reinvested at net asset value in additional Fund shares. Quotations
of the average annual total return reflect the deduction of a proportional share
of Fund expenses on an annual basis. The results, which are annualized,
represent an average annual compounded rate of return on a hypothetical
investment in the Fund over a period of 1, 3, 5 and 10 years (or life of the
Fund) ending on the most recent calendar quarter. Quotations of total return,
which are not annualized, represent historical earnings and asset value
fluctuations.
Money Market Fund, Short-Term Bond Fund and Bond Fund: Quotations of a Fund's
yield and effective yield may be included along with total return or average
annual total return calculations in advertisements or reports to stockholders or
prospective investors. Both yield figures are based on the historical
performance of a Fund and show the performance of a hypothetical investment.
Yield refers to the net investment income generated by a Fund's portfolio over a
specified seven-day period. This income is then annualized. That is, the amount
of income generated by the portfolio during that week is assumed to be generated
during each week over a 52-week period and is shown as a percentage. The
effective yield is expressed similarly but, when annualized, the income earned
by an investment in the Fund is assumed to be reinvested. The effective yield
will be slightly higher than the yield because of the compounding effect on the
assumed reinvestment. Yield and effective yield for a Fund will vary based upon,
among other things, changes in market conditions, the level of interest rates
and the level of the Fund's expenses.
Performance and yield calculations are based on past performance and are not a
guarantee of future results. For a more detailed description of the methods used
to determine the Funds' average annual total return, total return, yield and
effective yield, see the Statement of Additional Information.
MANAGEMENT OF SERV
The Trustees are responsible for the overall management and supervision of SERV
and to perform the functions of Trustees under SERV's Declaration of Trust, its
principal governing document, as amended from time to time. The Trustees, while
retaining overall supervisory responsibility, have delegated day-to-day
operating responsibilities to Capstone Asset Management Company, the Adviser and
Administrator; Fifth Third Bank of Cincinnati, Ohio, the custodian; and
Declaration Services Company, which acts as fund accounting, transfer and
shareholder servicing agent.
Adviser and Administrator
Capstone Asset Management Company ("Capstone"), a wholly-owned subsidiary of
Capstone Financial Services, Inc., acts as Adviser and Administrator pursuant to
Investment Advisory and Administration Agreements between SERV and Capstone.
Capstone is located at 5847 San Felipe, Suite 4100, Houston, Texas 77057. The
Adviser and Administrator provides investment management services to pension and
profit sharing accounts, corporations and individuals, and serves as investment
adviser and/or administrator to four registered investment companies. The
Adviser and Administrator manages assets in excess of $2 billion.
The Investment Advisory Agreement provides that the Adviser and Administrator
shall have full discretion to manage the assets of the Funds in accordance with
their investment objectives and policies and the terms of the Declaration of
Trust. The Adviser and Administrator is authorized, with the consent of the
Trustees, to engage sub-advisers for the Funds. The Adviser and Administrator
has sole authority to select broker-dealers to execute transactions for the
Funds, subject to the reserved authority of the Trustees to designate particular
broker-dealers for this purpose. The Adviser and Administrator will vote proxies
on portfolio securities of the Funds, subject to any guidelines that may be
established by the Trustees. The Investment Advisory Agreement provides that the
Adviser and Administrator will generally not be liable in connection with its
services except for acts or omissions that constitute misfeasance, bad faith or
gross negligence, and the Adviser and Administrator shall not be liable for the
acts of third parties. The Investment Advisory Agreement provides that it may be
terminated at any time without penalty on sixty days' notice by either party.
For its services under the Agreement, the Funds will pay the Adviser and
Administrator fees monthly, in arrears, at the following annual rates. The fee
rate indicated for the Money Market Fund is based on the average daily net
assets of that Fund. The fee rates indicated for the other five Funds are
applied to the aggregate average daily net assets of those Funds, as a group,
and the resulting total fees are pro rated among those Funds based on their
relative net assets.
Annual Fee rate as a percentage
Name of Fund of average daily net assets
Money Market Fund 0.10%
Aggregate assets of Short-Term Bond 0.15% of the first$500 million
Fund, Bond Fund, Large Cap Equity 0.10% of the next $250 million
Fund, Small Cap Equity Fund, 0.075% of the next $250 million
International Fund 0.05% of assets over $1 billion
Pursuant to the Administration Agreement between Capstone and SERV, the Adviser
and Administrator provides administrative services to the Funds, supervises the
Funds' daily business affairs, coordinates the activities of persons providing
services to the Funds, and furnishes office space and equipment to the Funds.
These services are subject to general review by the SERV's Board of Trustees. As
compensation for its services, the Administration Agreement provides that the
Adviser and Administrator receives from each Fund a fee, computed daily and
payable monthly in arrears, at an annual rate of 0.05% of each Fund's average
net assets.
Accounting, bookkeeping and pricing services for the Funds are provided by
Declaration Service Company. Fifth Third Bank of Cincinnati, Ohio, acts as
custodian.
Advisory Committee and Consultant
The Board of Trustees may from time to time appoint an advisory committee
("Advisory Committee") to consult with and make recommendations to the Trustees
regarding the application of social, ethical and religious values principles in
selecting investments for the Funds, as well as on other matters regarding the
structure, philosophy and operations of the Funds. Members of the Advisory
Committee, when and if appointed, will not be compensated for their services,
although they will be reimbursed by the Trust for expenses of attendance at
Trust-related meetings. The Advisory Committee is expected to consist of members
selected by the Board of Trustees on the basis of their qualifications to
provide this type of advice to the Board. Additionally, the Board has retained
Madison Portfolio Consultants, 400 Madison Avenue, Suite 810, New York, New
York, 10017 ("Madison") to serve as an independent source of expertise and
education for any Advisory Committee and for the Board regarding (a) the general
design and operation of the Funds, (b) the performance of the Adviser and
Administrator and of other service providers to the Funds and (c) economic and
other developments relevant to the operations of the Funds. Neither the Board of
Trustees nor the Adviser and Administrator are obliged to accept the
recommendations of any Advisory Committee or Madison. For its services, Madison
receives a fee (subject to an annual minimum of $50,000) based on the aggregate
net assets of SERV, payable quarterly at an annual rate equal to .025% of the
Funds' average daily net assets up to $200,000,000, .01% of the next
$200,000,000 of such assets, .005% of the next $600,000,000 of such assets, and
an amount to be negotiated for assets in excess of $1 billion.
Distributor
Pursuant to a Distribution Agreement with SERV dated October 1, 1998, Capstone
Asset Planning Company (the "Distributor") is the principal underwriter of the
Funds and, acting as exclusive agent, sells shares of the Funds to the public on
a continuous basis.
SERV has adopted a Service and Distribution Plan (the "Plan") for the Class A
shares of each Fund pursuant to which Class A shares of each Fund makes payments
to the Distributor to compensate the Distributor for expenditures incurred by it
in connection with the distribution of Class A shares of each Fund and for the
provision of certain stockholder services including but not limited to the
payment of compensation, including incentive compensation, to securities dealers
(which may include the Distributor itself) and other financial institutions and
organizations (collectively, the "Service Organizations") to obtain various
distribution related and/or administrative services for the Funds. These
services include, among other things, processing new stockholder account
applications, preparing and transmitting to the Funds' Transfer Agent computer
processable tapes of all transactions by customers and serving as the primary
source of information to customers in answering questions concerning the Funds
and their transactions with the Funds. The Distributor is also authorized to
engage in advertising, the preparation and distribution of sales literature and
other promotional activities on behalf of the Fund. In addition, the Plan
authorizes Class A shares of each Fund to bear the cost of preparing, printing
and distributing Fund Prospectuses and Statements of Additional Information to
prospective Class A investors and of implementing and operating the Plan.
Under the Plan, payments are made to the Distributor at an annual rate of 0.10%
of the average net assets of Class A shares of the Money Market Fund and 0.25%
of the average net assets of Class A shares of each other Fund. Subject to these
limits, the Distributor may reallow to firms ("Service Organizations") providing
certain services to shareholders (which firms may include the Distributor)
amounts at an annual rate up to 0.10% for Money Market Fund and up to 0.25% for
each other Fund based on the average net asset value of shares held by
shareholders for whom the firm provides services. Any remaining amounts not so
allocated will be retained by the Distributor for the purposes described above.
The Distributor collects the fees under the Plan on a monthly basis. The Plan
may be terminated at any time.
The Plan was approved by a majority of the Trustees, including a majority of the
Trustees who have no direct or indirect financial interest in the operation of
the Plan or any of its agreements ("Plan Trustees") on September 16, 1998. The
Plan will be continued from year to year provided that such continuance is
approved at least annually by a vote of a majority of the Board of Trustees,
including a majority of the Plan Trustees.
The Glass-Steagall Act and other applicable laws currently prohibit banks from
engaging in the business of underwriting, selling or distributing securities.
Accordingly, unless such laws are changed, if the Funds engage banks as Service
Organizations, the banks would perform only administrative and stockholder
servicing functions. If a bank were prohibited from acting as a Service
Organization, alternative means for continuing the servicing of such
stockholders would be sought. State law may differ from Federal law and banks
and other financial institutions may be required to be registered as
broker-dealers to perform administrative and stockholder servicing functions.
Expenses
Each Fund's expenses and expenses of each class of shares, are accrued daily and
are deducted from total income before dividends are paid. These expenses
include, but are not limited to: fees paid to the Adviser and Administrator;
taxes; legal fees; custodian and auditing fees; transfer agent fees; fees paid
to outside firms providing pricing and accounting services to the Funds; and
printing and other miscellaneous expenses paid by the Funds. Class A shares also
incur certain expenses pursuant to the Service and Distribution Plan. Fund
expenses (including a Fund's share of SERV expenses) are generally allocated
between classes based on their respective net asset values. Certain class
specific expenses, however, will be borne by the class incurring the expense,
such as federal registration and state notice filing fees, certain printing and
other class specific costs.
PURCHASING SHARES
Capstone Asset Planning Company (the "Distributor"), located at 5847 San Felipe,
Suite 4100, Houston, Texas 77057, is the principal underwriter of the Funds and,
acting as exclusive agent, sells shares of the Funds to the public on a
continuous basis. Edward L. Jaroski is President of SERV, and a Director and
President of the Adviser and Administrator and the Distributor. Some other
officers of SERV are also officers of the Adviser and Administrator, the
Distributor and Capstone Financial Services, Inc.
Shares of the Funds are sold in a continuous offering and may be purchased on
any business day through authorized investment dealers or directly from the
Fund's Distributor. Except for the Funds themselves, only the Distributor and
investment dealers which have a sales agreement with the Distributor are
authorized to sell shares of the Funds. For further information, reference is
made to the caption "Distributor" in the SERV's Statement of Additional
Information.
Shares of each class of the Funds are sold at net asset value for that class,
without a sales charge, and will be credited to a stockholder's account at the
net asset value for the particular class next computed after an order is
received. The minimum initial investment for Class A shares is $200, except for
continuous investment plans which have no minimum, and there is no minimum for
subsequent purchases. The minimum initial investment for Class C shares is
$50,000, with a $1,000 minimum required for subsequent purchases, except that
for Charitable Trusts or Grantor Trusts for which a charitable organization
serves as trustee, the minimum initial investment in Class C shares is $5,000.
No stock certificates representing shares purchased will be issued. SERV's
management reserves the right to reject any purchase order if, in its opinion,
it is in SERV's best interest to do so.
At various times the Distributor may implement programs under which a dealer's
sales force may be eligible to win nominal awards for certain sales efforts or
recognition programs conforming to criteria established by the Distributor, or
to participate in sales programs sponsored by the Distributor. In addition, the
Adviser and Administrator and/or the Distributor in their discretion may from
time to time, pursuant to objective criteria established by the Adviser and
Administrator and/or the Distributor, sponsor programs designed to reward
selected dealers for certain services or activities which are primarily intended
to result in the sale of shares of the Funds. Such payments are made out of
their own assets, and not out of the assets of the Funds. These programs will
not change the price you pay for your shares or the amount that the Funds will
receive from such sale.
Payment for all orders to purchase Fund shares must be received by the Transfer
Agent within three business days after the order was placed. Checks made payable
to third parties will not be accepted.
Investing Through Authorized Dealers
If any authorized dealer receives an order of at least $200 for Class A shares
or $50,000 for Class C shares (or $1,000 for eligible trust accounts), the
dealer may contact the Distributor directly. Orders received by dealers by the
close of trading on the New York Stock Exchange on a business day that are
transmitted to the Distributor by 4:00 p.m. Central time on that day will be
effected at the net asset value per share determined as of the close of trading
on the New York Stock Exchange that day. It is the dealer's responsibility to
transmit orders so that they will be received by the Distributor before 4:00
p.m. Central time.
After each investment, the stockholder and the authorized investment dealer
receive confirmation statements of the number of shares purchased and owned.
Purchases Through the Distributor
An account may be opened by mailing a check or other negotiable bank draft
(payable to Capstone SERV Fund) together with the completed Investment
Application Form to the Fund's Transfer Agent: Capstone SERV Fund, c/o
Declaration Service Company, 555 North Lane, Suite 6160, Conshohocken, PA 19428.
The $200 minimum initial investment applicable to the purchase of Class A shares
will be waived by the Distributor for plans involving continuing investments
(see "Stockholder Services"). Subsequent investments may be mailed directly to
the Transfer Agent. All such investments are effected at the net asset value of
Fund shares next computed following receipt of payment by the Transfer Agent.
Confirmations of the opening of an account and of all subsequent transactions in
the account are forwarded by the Transfer Agent to the stockholder's address of
record.
Telephone Purchase Authorization (Investing by Phone)
Stockholders who have completed the Telephone Purchase Authorization section of
the Investment Application Form may purchase additional shares by telephoning
the Transfer Agent at (800) 695-3208. 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: Fifth Third Bank NA, ABA 042000314, For:
Declaration Service Company, Account No. 729-70495; 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 (800) 695-3208 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 an capital gain distributions
in additional Fund shares, or
Option 2. To receive all dividend and capital gain distributions in cash.
The Money Market Fund intends to declare as dividends all of its investment
company taxable income daily and to pay such amounts as dividends monthly. Each
other Fund intends to declare and pay such dividends quarterly. Capital gains,
if any, will be paid annually in December. The Funds will advise each
stockholder annually of the amounts of dividends from investment income and of
long-term capital gain distributions reinvested or paid in cash to the
stockholder during the calendar year.
If you select Option 1 or Option 2 and the U.S. Postal Service cannot deliver
your checks, or if your checks remain uncashed for six months, your distribution
checks will be reinvested in your account at the then-current net asset value
and your election will be converted to the purchase of additional shares.
Taxes
Each Fund intends to qualify as a regulated investment company under the U.S.
Federal tax law. As such, a Fund generally will not pay Federal income tax on
the income and gains it pays as dividends to its stockholders. In order to avoid
a 4% Federal excise tax, each Fund intends to distribute each year all of its
net income and gains.
Stockholders will be taxed on dividends received from each Fund, regardless of
whether received in cash or reinvested in additional shares. Stockholders must
treat dividends, other than capital gain dividends, as ordinary income.
Dividends designated as capital gain dividends are taxable to stockholders as
long-term capital gains, but the rate of tax will depend on the Fund's holding
period of the assets whose sale results in the gain. Certain dividends declared
during a calendar year are taxable to stockholders as though received on
December 31 of that year if paid to stockholders during January of the following
calendar year. The Funds will advise stockholders annually of the amount and
nature of dividends paid to them.
Investors are advised to consult their tax advisers with respect to the
particular tax consequences to them of an investment in the Funds. A more
detailed description of tax consequences to stockholders is contained in the
Statement of Additional Information.
REDEMPTION AND REPURCHASE OF SHARES
Generally, stockholders may require a Fund to redeem their shares by sending a
written request, signed by the record owner(s), to Capstone SERV Fund, c/o
Declaration Service Company, 555 North Lane, Suite 6160, Conshohocken, PA 19428.
In addition, certain expedited redemption methods described below are available.
If the proceeds of the redemption are to be paid to someone other than the
registered holder, or to other than the stockholder's address of record, or the
shares are to be transferred, the owner's signature must be guaranteed by an
"eligible guarantor institution", as defined in Rule 17Ad-15 under the
Securities Exchange Act of 1934, which participates in a signature guarantee
program. Eligible guarantor institutions include banks, brokers, dealers, credit
unions, national securities exchanges, registered securities associations,
clearing agencies and savings associations. A broker-dealer guaranteeing
signatures must be a member of a clearing corporation or maintain net capital of
at least $100,000. Credit unions must be authorized to issue signature
guarantees. Signature guarantees will be accepted from any eligible guarantor
institution which participates in a signature guarantee program. The redemption
price shall be the net asset value per share next computed after receipt of the
redemption request. See "Determination of Net Asset Value".
In addition, the Distributor is authorized as agent for the Funds to offer to
repurchase shares which are presented by telephone or telegraph to the
Distributor by authorized investment dealers. The repurchase price is the net
asset value per share next determined after the request is received. See
"Determination of Net Asset Value". Broker-dealers may charge for their services
in connection with the repurchase, but the Distributor and its affiliates will
not charge any fee for such repurchase. Payment for shares presented for
repurchase or redemption by authorized investment dealers will be made within
three days after receipt by the Transfer Agent of a written notice in proper
order.
Each Fund reserves the right to pay any portion of redemption requests in excess
of $1 million in readily marketable securities from the Fund's portfolio. In
this case, the redeeming stockholder may incur brokerage charges on the sale of
the securities.
The right of redemption and payment of redemption proceeds are subject to
suspension for any period during which the New York Stock Exchange is closed,
other than customary weekend and holiday closings, or when trading on the New
York Stock Exchange is restricted as determined by the Securities and Exchange
Commission; during any period when an emergency as defined by the rules and
regulations of the Securities and Exchange Commission exists; or during any
period when the Securities and Exchange Commission has by order permitted such
suspension. The Funds will not mail redemption proceeds until any checks
(including certified checks or cashier's checks) received for the shares
purchased have cleared, which can be as long as 15 days from the date of
purchase.
The value of shares on repurchase or redemption may be more or less than the
investor's cost depending upon the market value of a Fund's portfolio securities
at the time of redemption. No redemption fee is charged for the redemption of
shares.
Check-Writing - Money Market Fund
Free check-writing (minimum of $500.00, no maximum) is available to stockholders
in the Money Market Fund. Note that when an investment in Money Market Fund is
made by check, a stockholder may not write checks against that investment until
the purchase check has cleared, which may take up to 15 business days from the
purchase date. An account in the Money Market Fund cannot be closed by writing a
check because additional shares accrue daily. The Fund and the Trust reserve the
right to suspend, terminate or to amend this privilege, or to impose a charge,
at any time upon notice to stockholders.
Expedited Telephone Redemption
A stockholder redeeming at least $1,000 of shares and who has authorized
expedited redemption on the application form filed with the Fund's Transfer
Agent may at the time of such redemption request that funds be mailed or wired
to the commercial bank or registered broker-dealer he has previously designated
on the application form by telephoning the Transfer Agent at (800) 695-3208.
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:
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);
Roth IRAs (for individuals who wish to make limited non-deductible
contributions to a retirement plan, with earnings and withdrawals
tax-free);
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
Simplified Employee Pension Plans.
Dividends and distributions will be automatically reinvested without a sales
charge. For further details, including fees charged, tax consequences and
redemption information, see the specific plan documents which can be obtained
from the Funds.
Investors should consult with their tax adviser before establishing any of the
tax-deferred retirement plans described above.
Exchange Privilege
Shares of a Fund may be exchanged for shares of the same class of another Fund
at a price based on the respective net asset values of the Funds' shares, with
no sales or administrative charge. Any exchange must meet applicable minimum
investment and other requirements for the class of shares of the Fund into which
the exchange is requested.
Purchases, redemptions and exchanges should be made for investment purposes
only. A pattern of frequent exchanges, purchases and sales may be deemed abusive
by the Adviser and Administrator and, at the discretion of the Adviser and
Administrator, can be limited by a Fund's refusal to accept further purchase
and/or exchange orders from the investor. Although the Adviser and Administrator
will consider all factors it deems relevant in determining whether a pattern of
frequent purchases, redemptions and/or exchanges by a particular investor is
abusive and not in the best interests of a Fund or its other stockholders, as a
general policy investors should be aware that engaging in more than one exchange
or purchase-sale transaction during any thirty-day period with respect to a
particular Fund may be deemed abusive and therefore subject to the above
restrictions.
An exchange of shares is treated for Federal income tax purposes as a sale of
shares given in exchange and the stockholders may, therefore, realize a taxable
gain or loss. The exchange privilege may be exercised only in those states where
shares of the Fund for which shares held are being exchanged may be legally
sold, and the privilege may be amended or terminated upon 60 days' notice to
stockholders.
The stockholder may exercise the following exchange privilege options:
Exchange by Mail - Stockholders may mail a written notice requesting an
exchange to the Fund's Transfer Agent.
Exchange by Telephone - Stockholders must authorize telephone exchange on
the application form filed with the Transfer Agent to exchange shares by
telephone. Telephone exchanges may be made from 9:30 a.m. to 4:00 p.m.
Eastern time, Monday through Friday, except holidays. During periods of
unusual economic or market changes, stockholders may experience difficulties
or delays in effecting telephone exchanges.
When exchange or redemption requests are made by telephone, the Funds have
procedures in place designed to give reasonable assurance that such telephone
instructions are genuine, including recording telephone calls and sending
written confirmation of transactions. A Fund will not be liable for losses due
to unauthorized or fraudulent telephone transactions unless it does not follow
such procedures, in which case it may be liable for such losses.
Pre-Authorized Payment
A stockholder holding Class A shares may arrange to make regular monthly
investments of $25 or more automatically from his checking account by
authorizing the Transfer Agent to withdraw the payment from his checking
account.
Systematic Withdrawal Plan
Investors holding Class A shares may open a withdrawal plan providing for
withdrawals of $50 or more monthly, quarterly, semi-annually or annually if they
have made a minimum investment in the shares of a Fund of $5,000. The minimum
amount which may be withdrawn pursuant to this plan is $50.
These payments do not represent a yield or return on investment and may
constitute return of initial capital. In addition, such payments may deplete or
eliminate the investment. Stockholders cannot be assured that they will receive
payment for any specific period because payments will terminate when all shares
have been redeemed. The number of such payments will depend primarily upon the
amount and frequency of payments and the yield on the remaining shares. Under
this plan, any distributions must be reinvested in additional shares of a Fund
at net asset value.
This Systematic Withdrawal Plan is voluntary, flexible, and under the
stockholder's control and direction at all times, and does not limit or alter
the stockholder's right to redeem shares. Such Plan may be terminated in writing
at any time by either the stockholder or a Fund. The cost of operating the
Systematic Withdrawal Plan is borne by the Funds.
GENERAL INFORMATION
SERV is an open-end diversified management investment company, as defined in the
Investment Company Act of 1940, as amended. It was organized in Massachusetts on
April 13, 1998 as a business trust. The Funds are established as separate series
of SERV. SERV is authorized to issue an unlimited number of shares of beneficial
interest of $0.01 par value and to divide such shares into separate series (or
funds). Shares of each Fund have been divided into multiple classes. Each class
represents an interest in a Fund, but is subject to different rights, expenses
and privileges. Stockholders are entitled to one vote for each full share held
and to fractional votes for fractional shares held in the election of Trustees
(to the extent hereafter provided) and on other matters submitted to the vote of
stockholders of the particular Fund. SERV is not required to hold regular annual
meetings of stockholders and will do so only when required by law. There are no
cumulative voting rights. Matters submitted to stockholder vote must be approved
by each Fund as to that Fund except (i) as to matters required by the Investment
Company Act of 1940 to be voted on by all stockholders of SERV as a single class
and (ii) as to matters determined by the Trustees not to affect a particular
Fund or class, which will not be submitted to vote by stockholders of that Fund
or class and (iii) matters affecting only a particular class, or affecting that
class in a manner different from other classes must be approved by each such
class. Stockholders may, in accordance with the Declaration of Trust, cause a
meeting of stockholders to be held for the purpose of voting on the removal of
Trustees. Shares of a Fund have equal dividend rights, are fully paid,
nonassessable and freely transferable and have no conversion, pre-emptive or
subscription rights. Fractional shares have the same rights, pro rata, as full
shares.
Under Massachusetts law, stockholders of a business trust may, under certain
circumstances, be held personally liable as partners for the obligations of the
trust. The Declaration of Trust contains an express disclaimer of stockholder
liability for acts or obligations of SERV. The Declaration of Trust provides for
indemnification out of SERV's property for any stockholder held personally
liable for the obligations of SERV. Thus, the risk of a stockholder's incurring
financial loss on account of stockholder's liability is limited to circumstances
in which SERV itself would be unable to meet its obligations.
SERV's securities are held by Fifth Third Bank under a Custodian Agreement with
the Fund. Declaration Service Company acts as both Transfer Agent and dividend
paying agent for SERV.
Stockholders should address inquiries to SERV at its address stated on the cover
page of this Prospectus.
Year 2000 Risks
Computer users around the world are faced with the dilemma of the Year 2000
issue, which stems from the use of two digits in most computer systems to
designate the year. When the year advances from 1999 to 2000, many computers
will not recognize "00" as the Year 2000. This issue could potentially affect
every aspect of computer-related activity, on an individual and corporate level.
The Funds could be adversely impacted if the computer systems used by the
Adviser and Administrator and other service providers have not been converted to
meet the requirements of the new century. The Funds' Adviser and Administrator
has evaluated its own internal systems and expects them to be fully capable to
handle the change of millenium. The Adviser and Administrator is working with
the providers of the software it uses to address the Year 2000 issue, and is
monitoring on an ongoing basis the progress of the Funds' other service
providers to convert their systems to comply with the requirements of Year 2000.
The Adviser and Administrator currently has no reason to believe that these
service providers will not be fully and timely compliant. However, investors
should be aware that there can be no assurance that all systems will be
successfully converted prior to January 1, 2000, in which case it would become
necessary for the Funds to enter into agreements with new service providers or
to make other arrangements.
<PAGE>
APPENDIX
DESCRIPTION OF BOND RATINGS
Description of Moody's Bond Ratings:
Excerpts from Moody's description of its bond ratings are listed as follows: AAA
judged to be the best quality and they carry the smallest degree of investment
risk; AA - judged to be of high quality by all standards - together with the AAA
group, they comprise what are generally known as high grade bonds; A - possess
many favorable investment attributes and are to be considered as "upper medium
grade obligations;" BAA - considered to be medium grade obligations, i.e., they
are neither highly protected nor poorly secured - interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time; BA - judged to have speculative elements, their future cannot be
considered as well assured; B - generally lack characteristics of the desirable
investment; CAA - are of poor standing - such issues may be in default or there
may be present elements of danger with respect to principal or interest; CA -
speculative in a high degree, often in default; C - lowest rated class of bonds,
regarded as having extremely poor prospects.
Moody's also supplies numerical indicators 1, 2 and 3 to rating categories. The
modifier 1 indicates that the security is in the higher end of its rating
category; the modifier 2 indicates a mid-range ranking; and modifier 3 indicates
a ranking toward the lower end of the category.
Description of S&P's Bond Ratings:
Excerpts from S&P's description of its bond ratings are listed as follows: AAA
highest grade obligations, in which capacity to pay interest and repay principal
is extremely strong: AA - has a very strong capacity to pay interest and repay
principal, and differs from AAA issues only in a small degree; A - has a strong
capacity to pay interest and repay principal, although they are somewhat more
susceptible to the adverse effects of changes in circumstances and economic
conditions than debt in higher rated categories; BBB - regarded as having an
adequate capacity to pay interest and repay principal; whereas it normally
exhibits adequate protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay interest and
repay principal for debt in this category than in higher rated categories. This
group is the lowest which qualifies for commercial bank investment. BB, B, CCC,
CC, C - predominantly speculative with respect to capacity to pay interest and
repay principal in accordance with terms of the obligations; BB indicates the
highest grade and C the lowest within the speculative rating categories. D -
interest or principal payments are in default.
S&P applies indicators "+," no character, and "-" to its rating categories. The
indicators show relative standing within the major rating categories.
Description of Moody's Ratings of Short-Term Municipal Obligations:
Moody's ratings for state and municipal short-term obligations will be
designated Moody's Investment Grade or MIG. Such ratings recognize the
differences between short-term credit and long-term risk. Short-term ratings on
issues with demand features (variable rate demand obligations) are
differentiated by the use of the VMIG symbol to reflect such characteristics as
payment upon periodic demand rather than fixed maturity dates and payments
relying on external liquidity. Ratings categories for securities in these groups
are as follows: MIG 1/VMIG 1 - denotes best quality, there is present strong
protection by established cash flows, superior liquidity support or demonstrated
broad-based access to the market for refinancing; MIG2/VMIG 2 - denotes high
quality, margins of protection are ample although not as large as in the
preceding group; MIG 3/VMIG 3 - denotes high quality, all security elements are
accounted for but there is lacking the undeniable strength of the preceding
grades; MIG 4/VMIG 4 - denotes adequate quality, protection commonly regarded as
required of an investment security is present, but there is specific risk; SQ -
denotes speculative quality, instruments in this category lack margins of
protection.
<PAGE>
Description of Moody's Commercial Paper Ratings:
Excerpts from Moody's commercial paper ratings are listed as follows: PRIME-1
issuers (or supporting institutions) have a superior ability for repayment of
senior short-term debt obligations; PRIME-2 - issuers (or supporting
institutions) have a strong ability for repayment of senior short-term debt
obligations; PRIME-3 - issuers (or supporting institutions) have an acceptable
ability for repayment of senior short-term debt obligations; NOT PRIME - issuers
do not fall within any of the Prime categories.
Description of S&P's Ratings for Corporate and Municipal Bonds:
Investment Grade Ratings: Aaa - the highest rating assigned by S&P, capacity to
pay interest and repay principal is extremely strong; AA - has a very strong
capacity to pay interest and repay principal and differs from the highest rated
issues only in a small degree; A - has strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories; BBB regarded as having an adequate capacity to pay interest and
repay principal whereas it normally exhibits adequate protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay interest and repay principal for debt in this
category than in higher rated categories.
Speculative Grade Ratings: Bb, B, Ccc, Cc, C - debt rated in these categories is
regarded as having predominantly speculative characteristics with respect to
capacity to pay interest and repay principal - while such debt will likely have
some quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions; CI - reserved for
income bonds on which no interest is being paid; D - in default, and payment of
interest and/or repayment of principal is in arrears. Plus (+) OR Minus (-) -
the ratings from "AA" to "CCC" may be modified by the addition of a plus or
minus sign to show relative standing within the major rating categories.
Description of S&P's Rating for Municipal Notes and Short-Term Municipal Demand
Obligations:
Rating categories are as follows: SP-1 - has a very strong or strong capacity to
pay principal and interest - those issues determined to possess overwhelming
safety characteristics will be given a plus (+) designation; SP-2 - has a
satisfactory capacity to pay principal and interest; SP-3 - issues carrying this
designation have a speculative capacity to pay principal and interest.
Description of S&P's Ratings for Short-Term Corporate Demand Obligations and
Commercial Paper:
An S&P commercial paper rating is a current assessment of the likelihood of
timely repayment of debt having an original maturity of no more than 365 days.
Excerpts from S&P's description of its commercial paper ratings are listed as
follows: A-1 the degree of safety regarding timely payment is strong - those
issues determined to possess extremely strong safety characteristics will be
denoted with a plus (+) designation; A-2 - capacity for timely payment is
satisfactory - however, the relative degree of safety is not as high as for
issues designated "A-1"; A-3 - has adequate capacity for timely payment -
however, is more vulnerable to the adverse effects of changes in circumstances
than obligations carrying the higher designations; B - regarded as having only
speculative capacity for timely payment; C - a doubtful capacity for payment; D
- - in payment default - the "D" rating category is used when interest payments or
principal payments are not made on the date due, even if the applicable grace
period has not expired, unless S&P believes that such payments will be made
during such grace period.
<PAGE>
CAPSTONE SOCIAL ETHICS AND RELIGIOUS VALUES FUND
5847 San Felipe, Suite 4100
Houston, Texas 77057
1-800-262-6631
<PAGE>
CAPSTONE SOCIAL ETHICS AND
RELIGIOUS VALUES FUND
STATEMENT OF ADDITIONAL INFORMATION
September 29, 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 September
29, 1998. A Prospectus may be obtained without charge by contacting Capstone
Asset Planning Company, by phone at (800) 262-6631 or by writing to it at 5847
San Felipe, Suite 4100, Houston, Texas 77057.
TABLE OF CONTENTS
GENERAL INFORMATION........................................2
INVESTMENT RESTRICTIONS....................................2
INVESTMENTS AND INVESTMENT STRATEGIES......................3
PERFORMANCE INFORMATION....................................6
TRUSTEES AND EXECUTIVE OFFICERS............................7
INVESTMENT ADVISORY AGREEMENT..............................8
ADVISORY COMMITTEE AND CONSULTANT..........................9
ADMINISTRATION AGREEMENT...................................9
DISTRIBUTOR...............................................10
OTHER SERVICES............................................11
PORTFOLIO TRANSACTIONS AND BROKERAGE......................11
DETERMINATION OF NET ASSET VALUE..........................12
HOW TO BUY AND REDEEM SHARES..............................12
DIVIDENDS AND DISTRIBUTIONS...............................13
TAXES.....................................................13
OTHER INFORMATION.........................................17
GENERAL INFORMATION
Capstone Social Ethics and Religious Values Fund ("SERV") is an "open-end
diversified management company" under the Investment Company Act of 1940 which
has six series ("Funds"). Shares of each Fund have been divided into multiple
classes, including Class A and Class C shares. Each class represents an interest
in a Fund, but is subject to different rights, expenses and privileges. SERV was
organized as a Massachusetts business trust on April 13, 1998.
SERV is a member of a group of investment companies sponsored by Capstone Asset
Management Company (the "Adviser and Administrator"), which provides investment
advisory and administrative services to the Funds. The Adviser and Administrator
and Capstone Asset Planning Company (the "Distributor") are wholly-owned
subsidiaries of Capstone Financial Services, Inc.
INVESTMENT RESTRICTIONS
The Funds have adopted the following restrictions which cannot be changed with
regard to a Fund without approval by the holders of a majority of that Fund's
outstanding shares.
Each Fund has elected to be qualified as a diversified series of SERV.
A Fund may not:
1. borrow money, except as permitted under the Investment Company Act of
1940, as amended, and as interpreted or modified by regulatory authority
having jurisdiction, from time to time;
2. issue senior securities, except as permitted under the Investment Company
Act of 1940, as amended, and as interpreted or modified by regulatory
authority having jurisdiction, from time to time;
3. concentrate its investments in a particular industry, as that term is used
in the Investment Company Act of 1940, as amended, and as interpreted or
modified by regulatory authority having jurisdiction, from time to time
(except that the Money Market Fund reserves the freedom of action to
concentrate its investments in instruments issued by domestic banks
(excluding their foreign branches) and in government securities, as that
term is defined in the Investment Company Act of 1940 and in relevant
rules and regulatory interpretations thereunder, as amended from time to
time, and the Money Market Fund will concentrate its investments in
investment companies);
4. engage in the business of underwriting securities issued by others, except
to the extent that the Fund may be deemed to be an underwriter in
connection with the disposition of portfolio securities;
5. purchase or sell real estate, which does not include securities of
companies which deal in real estate or mortgages or investments secured by
real estate or interests therein, except that the Fund reserves freedom of
action to hold and to sell real estate acquired as a result of the Fund's
ownership of securities;
6. purchase physical commodities or contracts relating to physical
commodities;
7. make loans to other persons, except (i) loans of portfolio securities, and
(ii) to the extent that entry into repurchase agreements and the purchase
of debt instruments or interests in indebtedness in accordance with a
Fund's investment objective and policies may be deemed to be loans.
With respect to senior securities, borrowing and concentrating investments, the
Investment Company Act of 1940, as amended, and regulatory interpretations of
relevant provisions of that Act establish the following general limits. Open-end
registered investment companies ("funds"), such as the Funds, are not permitted
to issue any class of senior security or to sell any senior security of which
they are the issuers. Funds are, however, permitted to issue separate series of
shares (the Funds are series of SERV) and to divide those series into separate
classes (Class A and Class C are such separate classes.) The Funds have no
intention to issue senior securities, except that SERV may issue its shares in
separate series and divide those series into classes of shares. Although
borrowings could be deemed to be senior securities, a fund is "permitted to
borrow from a bank provided that immediately after any such borrowing there is
an asset coverage of at least 300 per cent for all borrowings by the fund. The
Act also permits a fund to borrow for temporary purposes only in an amount not
exceeding 5 per cent of the value of the total assets of the issuer at the time
when the loan is made. (A loan shall be presumed to be for temporary purposes if
it is repaid within 60 days and is not extended or renewed.) The Securities and
Exchange Commission ("SEC") has indicated, however, that certain types of
transactions, which could be deemed "borrowings" (such as firm commitment
agreements and reverse repurchase agreements), are permissible if a fund
"covers" the agreements by establishing and maintaining segregated accounts,
subject, however to the 300% asset coverage requirement. The Funds presently do
not intend to borrow except when advisable to satisfy redemptions and a Fund
will make no purchases if its outstanding borrowings exceed 5% of its total
assets. With respect to concentration, the SEC staff takes the position that
investment of 25% or more of a fund's assets in any one industry represents
concentration.
The portfolio securities of a Fund may be turned over whenever necessary or
appropriate in the opinion of the Fund's management to seek the achievement of
the basic objective of the Fund. The turnover rate of each of the Funds is not
expected to exceed 30%.
INVESTMENTS AND INVESTMENT STRATEGIES
Foreign Securities (All Funds)
The Money Market Fund's investments in foreign securities must be U.S.
dollar-denominated. The other Funds may invest in U.S. dollar- or foreign
currency-denominated foreign equity and debt securities in the United States or
in foreign markets. These investments may include securities represented by
European Depositary Receipts ("EDRs") and American Depositary Receipts ("ADRs")
and similar types of investments. Investments in securities of foreign issuers
involve certain costs, risks and considerations not typically associated with
investments in U.S. issuers. These include: differences in accounting, auditing
and financial reporting standards; generally higher commission rates on foreign
portfolio transactions; the possibility of nationalization, expropriation or
confiscatory taxation; adverse changes in investment or exchange control
regulations (which may include suspension of the ability to transfer currency
from a country); and political instability which could affect U.S. investments
in foreign countries. Additionally, foreign securities, and dividends and
interest payable on those securities, may be subject to foreign taxes, including
taxes withheld from payments on those securities. Foreign securities often trade
with less frequency and volume than domestic securities and, therefore, may
exhibit greater price volatility and less liquidity. Additional costs associated
with an investment in foreign securities may include higher custodial fees and
transaction costs than are typical of U.S. investments, as well as currency
conversion costs. Changes in foreign exchange rates also will affect the value
of securities denominated or quoted in currencies other than the U.S. dollar. A
Fund's objective may be affected either favorably or unfavorably by fluctuations
in the relative rates of exchange between the currencies of different nations,
by exchange control regulations and by indigenous economic and political
developments. A decline in the value of any particular currency against the U.S.
dollar will cause a decline in the U.S. dollar value of a Fund's holdings of
securities denominated in such currency and, therefore, will cause an overall
decline in the Fund's net asset value and any net investment income and capital
gains to be distributed in U.S. dollars to shareholders. The rate of exchange
between the U.S. dollar and other currencies is determined by several factors
including the supply and demand for particular currencies, central bank efforts
to support particular currencies, the movement of interest rates, the pace of
business activity in certain other countries and the United States, and other
economic and financial conditions affecting the world economy.
Although each Fund values its assets daily in terms of U.S. dollars, the Funds
do not intend to convert any holdings of foreign currencies into U.S. dollars on
a daily basis. When effected, currency conversion involves costs in the form of
a "spread" between the foreign exchange dealer's buying and selling prices.
Forward Foreign Currency Exchange Transactions (All Funds, except Money Market
Fund)
Each Fund may enter into forward foreign currency exchange contracts in
connection with its investments in foreign securities. A forward foreign
currency exchange contract ("forward contract") is an agreement to purchase or
sell a specific amount of a particular foreign currency at a specified price on
a specified future date. These contracts are traded in the interbank market
conducted directly between currency traders (usually large commercial banks) and
their customers. A forward contract generally has no deposit requirement, and no
commissions are charged at any stage for trades. Closing transactions with
respect to forward contracts are effected with the currency trader who is a
party to the original forward contract.
A Fund will enter into a forward contract only for hedging purposes, with
respect to specific anticipated portfolio transactions (including receivables
and payables) or with respect to portfolio positions denominated in a particular
currency. By entering into such a contract, the Fund hopes to protect against,
or benefit from, an anticipated change in relevant currency exchange rates. For
example, when the Fund anticipates purchasing or selling a security, or
receiving a dividend payment, it may enter into a forward contract to set the
rate at which the relevant currencies will be exchanged at the time of the
transaction. Or, if the Fund anticipates a decline in the value of a currency in
which some of its assets are denominated, it may attempt to "lock in" the
current more favorable rate by entering into a contract to sell an amount of
that currency which approximates the current value of those securities. Each
such contract involves some cost to the Fund and requires that the Fund maintain
with its custodian a segregated account of liquid assets sufficient to satisfy
its obligations under the contract. In the event that the currencies do not move
in the direction, or to the extent, or within the time frame, anticipated, the
Fund may lose some or all of the protection or benefit hoped for.
Securities Index Futures and Related Options
A Fund may engage in transactions in options on securities and securities
indices, and securities index futures and options on such futures as a proxy for
investing in underlying securities in accordance with the Fund's investment
policies.
A Fund may purchase options on securities indices. A securities index (such as
the S&P 500) assigns relative values to the securities included in the index and
the index fluctuates with the changes in the market values of the securities so
included. Options on securities indices are similar to options on securities
except that, rather than giving the purchaser the right to take delivery of the
securities at a specified price, an option on a securities index gives the
purchaser the right to receive cash. The amount of cash is equal to the
difference between the closing price of the index and the exercise price of the
option, expressed in dollars, times a specified multiple (the "multiplier"). The
writer of the option is obligated, in return for the premium received, to make
delivery of this amount. Gain or loss with respect to options on securities
indices depends on price movements in the stock market generally rather than
price movements in individual securities.
The multiplier for an index option performs a function similar to the unit of
trading for a securities option. It determines the total dollar value per
contract of each point in the difference between the exercise price of an option
and the current level of the underlying index. A multiplier of 100 means that a
one-point difference will yield $100. Options on different indices may have
different multipliers.
Because the value of the securities index option depends upon movements in the
level of the index rather than the price of a particular security, whether a
fund will realize a gain or loss on the purchase of a put or call option on a
securities index depends upon movements in the level of prices in the market
generally or in an industry or market segment rather than movements in the price
of a particular security.
A securities index futures contract is a bilateral agreement to which two
parties agree to take or make delivery of an amount of cash equal to a specified
dollar amount times the difference between the index value at the close of the
last trading day of the contract and the futures contract price. The value of a
unit is the current value of the securities index. For example, the Standard &
Poor's Stock Index is composed of 500 selected common stocks, most of which are
listed on the New York Stock Exchange. The S&P 500 Index assigns relative
weightings to the value of one share of each of these 500 common stocks included
in the Index, and the Index fluctuates with changes in the market values of the
shares of those common stocks. In the case of the S&P 500 Index, contracts are
to buy or sell 500 units. Thus, if the value of the S&P 500 Index Futures were
$150, one contract would be worth $75,000 (500 units X $150). Stock index
futures contracts specify that no delivery of the actual stocks making up the
index will take place. Instead, settlement in cash must occur upon the
termination of a contract, with the settlement being the difference between the
contract price and the actual level of the stock index at the expiration of the
contract. For example, a Fund enters into a futures contract to buy 500 units of
the S&P 500 Index at a specified future date at a contract price of $150 and the
S&P 500 Index is at $154 on that future date, the Fund will gain $2,000 (500
units X gain of $4). If the Fund enters into a futures contract to sell 500
units of the stock index at a specified future date at a contract price of $150
and the S&P 500 Index is at $154 on that future date, the Fund will lose $2,000
(500 units X loss of $4).
Options on securities index futures contracts are similar to options on
securities except that an option on a securities index futures contract gives
the purchaser the right, in return for a premium paid, to assume a position in a
securities index futures contract (a long position if the option is a call and a
short position if the option is a put), upon deposit of required margin. In the
alternative, the purchaser may resell the option, if it has value, or simply let
it expire. Upon expiration the purchaser will either realize a gain or the
option will expire worthless, depending on the closing price of the index on
that day. Thus, the purchaser's risk is limited to the premium paid for the
option.
Successful use of securities index futures contracts and options on such
contracts is limited by the fact that the correlation between movements in the
price of futures contracts or options on futures contracts and movements in
prices of securities in a particular Benchmark may not be perfect.
A Fund will purchase and sell securities futures contracts and will purchase put
and call options on securities index contracts only as a means of obtaining
market exposure to securities in its Benchmark. A Fund will not engage in
transactions in securities index futures contracts or options on such contracts
for speculation and will not write options on securities index futures
contracts.
When purchasing securities index futures contracts, a Fund will be required to
post a small initial margin deposit, held in a segregated account with the
futures broker selected by the Fund; the remaining portion of the contracts'
value will be retained in short-term investments in order to meet variation
margin requirements or net redemptions. In the event of net redemptions, the
Fund would close out open futures contracts and meet redemptions with cash
realized from liquidating short-term investments.
A Fund will not leverage its portfolio by purchasing an amount of contracts that
would increase its exposure to securities market movements beyond the exposure
of a portfolio that was 100% invested in those securities.
A Fund's transactions in futures and related options are subject to limits under
rules of the Commodity Futures Trading Commission ("CFTC"). In accordance with
those rules, a Fund will not enter into transactions involving futures contracts
and options on futures contracts to the extent that, immediately thereafter, the
sum of its initial margin deposits on open futures contracts and premiums paid
for options on futures contracts, other than contracts entered into for bona
fide hedging purposes, as defined by applicable rules of the CFTC, would exceed
5% of the market value of the Fund's total assets.
Securities index futures contracts by their terms settle at settlement date on a
cash basis. In most cases, however, the contracts are "closed out" before the
settlement date. Closing out an open futures position is done by taking an
opposite position ("buying" a contract which has previously been "sold" or
selling a previously purchased contract) in an identical contract to terminate
the position.
Positions in securities index futures contracts may be closed out only on an
exchange which provides a secondary market for such futures. There can be no
assurance, however, that a liquid secondary market will exist for any particular
futures contract at any specified time. Thus, it may not be possible to close
out a futures position, which could have an adverse impact on the cash position
of a Fund, and which could possibly force the sale of portfolio securities at a
time when it may be disadvantageous to do so. In the option of the Funds'
management, the risk that a Fund will be unable to close out a futures contract
will be minimized by entering only into futures contracts which are traded on
national futures exchanges and for which there appears to be a liquid secondary
market.
The risk of loss in trading futures contracts in some strategies can be
substantial, due both to the low margin deposits required and to the extremely
high degree of leverage involved in futures pricing. As a result, a relatively
small price movement in a futures contract may result in immediate and
substantial loss (as well as gain) to an investor. Because a Fund will only
engage in futures strategies for hedging purposes, the Funds' management does
not believe that the Funds will be subject to the risks of substantial loss that
may be associated with futures transactions. Below-Investment Grade Securities
(All Funds Except Money Market Fund)
Although a Fund may not purchase debt obligations rated below Baa by Moody's or
BBB by S&P (or, if unrated, deemed of comparable quality by the Adviser and
Administrator), a Fund will not necessarily sell securities whose rating falls
below Baa or BBB (or, if unrated, whose quality is deemed by the Adviser and
Administrator to be below Baa or BBB). However, a Fund may not hold such
downgraded securities in an amount in excess of 5% of its net assets.
Below-investment grade securities (sometimes referred to as "junk bonds") are
considered predominantly speculative with respect to their capacity to pay
interest and to repay principal. They generally involve a greater risk of
default and have more price volatility than securities in higher rating
categories. The risk of default can increase with changes in the financial
condition of the issuer or with changes in the U.S. economy, such as a
recession.
PERFORMANCE INFORMATION
SERV may from time to time include figures indicating a Fund's yield, total
return or average annual total return in advertisements or reports to
shareholders or prospective investors.
a. The Money Market Fund
From time to time, quotations of the Money Market Fund's yield may be
included in advertisements, sales literature or shareholder reports. These
yield figures are calculated in the following manner:
The current yield is the net annualized yield based on a specified 7
calendar-days calculated at simple interest rates. Current yield is
calculated by determining the net change, exclusive of capital changes, in
the value of a hypothetical pre-existing account having a balance of one
share at the beginning of the period, subtracting a hypothetical charge
reflecting deductions from shareholder accounts, and dividing such change
by the value of the account at the beginning of the base period to obtain
the base-period return. The base-period return is then annualized by
multiplying it by 365/7; the resultant product equals net annualized
current yield. The current yield figure is stated to the nearest hundredth
of one percent.
The effective yield is the net annualized yield for a specified 7
calendar-days assuming a reinvestment in Fund shares of all dividends
during the period, i.e., compounding. Effective yield is calculated by
using the same base-period return used in the calculation of current yield
except that the base-period return is compounded by adding 1, raising the
sum to a power equal to 365 divided by 7, and subtracting 1 from the
result, according to the following formula:
Effective Yield = [(Base Period Return + 1)365/7]-1.
As described above, current yield and effective yield are based on
historical earnings, show the performance of a hypothetical investment and
are not intended to indicate future performance. Current yield and
effective yield will vary based on changes in market conditions and the
level of Fund expenses.
In connection with communicating its current yield and effective yield to
current or prospective shareholders, the Fund also may compare these figures
to the performance of other mutual funds tracked by mutual fund rating
services or to other unmanaged indices which may assume reinvestment of
dividends but generally do not reflect deductions for administrative and
management costs.
b. Other Funds
Average annual total return and total return figures represent the
increase (or decrease) in the value of an investment in a Fund over a
specified period. Both calculations assume that all income dividends and
capital gains distributions during the period are reinvested at net asset
value in additional Fund shares. Quotations of the average annual total
return reflect the deduction of a proportional share of Fund expenses on
an annual basis. The results, which are annualized, represent an average
annual compounded rate of return on a hypothetical investment in the Fund
over a period of 1, 5 and 10 years ending on the most recent calendar
quarter calculated pursuant to the following formula:
P(1 + T)n = ERV
Where P.....= a hypothetical initial payment of $1,000,
T.....= the average annual total return,
n.....= the number of years, and
ERV...= the ending redeemable value of a hypothetical $1,000
payment made at the beginning of the period.
Quotations of total return, which are not annualized, represent historical
earnings and asset value fluctuations. Total return is based on past
performance and is not a guarantee of future results.
Performance information for the Funds may be compared, in reports and
promotional literature, to: (i) the Standard & Poor's 500 Stock Price Index
("S&P 500 Index"), the Dow Jones Industrial Average ("DJIA"), or other
appropriate unmanaged indices of performance of various types of investments, so
that investors may compare the Fund's results with those of indices widely
regarded by investors as representative of the securities markets in general;
(ii) other groups of mutual funds tracked by Lipper Analytical Services, a
widely used independent research firm which ranks mutual funds by overall
performance, investment objectives, and assets, or tracked by other services,
companies, publications, or persons who rank mutual funds on overall performance
or other criteria; and (iii) the Consumer Price Index (a measure of inflation)
to assess the real rate of return from an investment in a Fund. Unmanaged
indices may assume the reinvestment of dividends, but generally do not reflect
deductions for administrative and management costs and expenses.
Performance information for the Funds reflects only the performance of a
hypothetical investment in a Fund during the particular time period on which the
calculations are based. Performance information should be considered in light of
each Fund's investment objectives and policies, the types and quality of the
Fund's portfolio investments, market conditions during the particular time
period and operating expenses. Such information should not be considered as a
representation of a Fund's future performance.
TRUSTEES AND EXECUTIVE OFFICERS
SERV's Trustees and executive officers are listed below:
BERNARD J. VAUGHAN (69), Trustee. 113 Bryn Mawr Avenue, Bala Cynwyd,
Pennsylvania 19004. Director of other Capstone Funds; formerly Vice President of
Fidelity Bank (1979-1993).
JAMES F. LEARY (67), Trustee. c/o Search Capital Group, Inc., 600 N. Pearl
Street, Suite 2500, Dallas, Texas 75201. President of Sunwestern Management,
Inc. (since June 1982) and President of SIF Management (since January 1992),
venture capital limited partnership concerns; General Partner of Sunwestern
Advisors, L.P., Sunwestern Associates, Sunwestern Associates II, Sunwestern
Partners, L.P. and Sunwestern Ventures, Ltd. (venture capital limited
partnership entities affiliated with Sunwestern Management, Inc. and SIF
Management, Inc.). Director of: other Capstone Funds; Anthem Financial, Inc.
(financial services); Associated Materials, Inc. (tire cord, siding and
industrial cable manufacturer); The Flagship Group, Inc. (vertical market
microcomputer software); Marketing Mercadeo International (public relations and
marketing consultants); MaxServ, Inc. (appliance repair database systems);
MESBIC Ventures, Inc. (minority enterprise small business investment company);
OpenConnect Systems, Inc. (computer networking hardware and software); PhaseOut
of America, Inc. (smoking cessation products); and Search Capital Group, Inc.
(financial services).
JOHN R. PARKER (51), Trustee. 541 Shaw Hill, Stowe, Vermont 05672. Consultant
and private investor (since 1990); Director of Nova Natural Resources (oil, gas,
minerals); Director of other Capstone Funds; formerly Senior Vice President of
McRae Capital Management, Inc. (1991-1995); and registered representative of
Rickel & Associates (1988-1991).
*EDWARD L. JAROSKI (51), President. 5847 San Felipe, Suite 4100, Houston, Texas
77057. President (since 1992) and Director (since 1987) of the Capstone Asset
Management Company; President and Director of Capstone Asset Planning Company
and Capstone Financial Services, Inc. (since 1987); Director/Trustee and Officer
of other Capstone Funds.
DAN E. WATSON (49), Executive Vice President. 5847 San Felipe, Suite 4100,
Houston, Texas 77057. Chairman of the Board (since 1992) and Director of
Capstone Asset Management Company (since 1987); Chairman of the Board and
Director of Capstone Asset Planning Company and Capstone Financial Services,
Inc. (since 1987); Officer of other Capstone Funds.
LINDA G. GIUFFRE (36), Secretary/Treasurer. 5847 San Felipe, Suite 4100,
Houston, Texas 77057. Vice President and Secretary and Treasurer of Capstone
Financial Services, Inc., Capstone Asset Management Company and Capstone
Planning Company; Officer of other Capstone Funds.
The Trustees are entitled to $250 per fund for each Board meeting attended, and
are paid a $1,000 annual retainer by SERV. The Trustees 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 trustees during fiscal 1998 from Capstone Funds complex.
Compensation Table
<TABLE>
<CAPTION>
Aggregate Pension or Retirement Estimated Total Compensation From
Compensation Benefits Accrued Annual Benefits Registrant and Fund
Name of Person, Position From Registrant* As Part of Fund Upon Retirement Complex 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**
- ---------------
<FN>
* 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.
</FN>
</TABLE>
INVESTMENT ADVISORY AGREEMENT
Pursuant to the terms of an investment advisory agreement dated October 1, 1998
(the "Advisory Agreement"), SERV employs Capstone Asset Management Company (the
"Adviser and Administrator") to furnish investment advisory services. The
Adviser and Administrator is a wholly-owned subsidiary of Capstone Financial
Services, Inc.
For its services, the Adviser and Administrator receives investment advisory
fees monthly, in arrears, from each Fund at the following annual rates. The
indicated rate for the Money Market Fund is based on the average daily net
assets of that Fund. The fee rates indicated for the other five Funds are
applied to the aggregate average daily net assets of those Funds, as a group,
and the resulting total fees are pro rated among those Funds based on their
relative net assets.
Annual Fee rate as a percentage
Name of Fund 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 next $250 million
Equity Fund, Small Cap Equity 0.075% of the next $250 million
Fund, International Fund 0.05% of assets over $1 billion
Pursuant to the Advisory Agreement, the Adviser and Administrator pays the
compensation and expenses of all of its directors, officers and employees who
serve as officers and executive employees of SERV (including SERV's share of
payroll taxes), except expenses of travel to attend meetings of SERV's Board of
Trustees or committees or advisers to the Board. The Adviser and Administrator
also agrees to make available, without expense to SERV, the services of its
directors, officers and employees who serve as officers of SERV.
The Advisory Agreement provides that the Adviser and Administrator shall not be
liable for any error of judgment or of law, or for any loss suffered by a Fund
in connection with the matters to which the agreement relates except a loss
resulting from willful misfeasance, bad faith or gross negligence on the part of
the Adviser and Administrator in the performance of its obligations and duties,
or by reason of its reckless disregard of its obligations and duties under the
Advisory Agreement.
The Advisory Agreement will remain in effect for an initial two year period and
thereafter from year to year provided its renewal in each case and as to each
Fund is specifically approved (a) by SERV's Board of Trustees or, as to each
Fund, by vote of a majority of the Fund's outstanding voting securities, and (b)
by the affirmative vote of a majority of the Trustees who are not parties to the
agreement or interested persons of any such party, by votes cast in person at a
meeting called for such purpose. The Advisory Agreement may be terminated (a) at
any time without penalty by SERV upon the vote of a majority of the Trustees or,
as to a Fund, by vote of the majority of that Fund's outstanding voting
securities, upon 60 days' written notice to the Adviser and Administrator or (b)
by the Adviser and Administrator at any time without penalty, upon 90 days'
written notice to SERV. The Advisory Agreement will also terminate automatically
in the event of its assignment (as defined in the 1940 Act).
ADVISORY COMMITTEE AND CONSULTANT
The Board of Trustees may from time to time appoint an advisory committee
("Advisory Committee") to consult with and make recommendations to the Trustees
regarding the application of social, ethical and religious values principles in
selecting investments for the Funds, as well as on other matters regarding the
structure, philosophy and operations of the Funds. Members of the Advisory
Committee, when and if appointed, will not compensated for their services,
although they will be reimbursed by the Trust for expenses of attendance at
Trust-related meetings. The Advisory Committee is expected to consist of members
selected by the Board of Trustees on the basis of their qualifications to
provide this type of advice to the Board. Additionally, the Board has retained
Madison Portfolio Consultants, 400 Madison Avenue, Suite 810, New York, New
York, 10017 ("Madison") to serve as an independent source of expertise and
education for any Advisory Committee and for the Board regarding (a) the general
design and operation of the Funds, (b) the performance of the Adviser and
Administrator and of other service providers to the Funds and (c) economic and
other developments relevant to the operations of the Funds. Neither the Board of
Trustees nor the Adviser and Administrator are obliged to accept the
recommendations of any Advisory Committee or Madison. For its services, Madison
receives a fee (subject to an annual minimum of $50,000) based on the aggregate
net assets of SERV, payable quarterly at an annual rate equal to .025% of the
Funds' average daily net assets up to $200,000,000, .01% of the next
$200,000,000 of such assets, .005% of the next $600,000,000 of such assets, and
an amount to be negotiated for assets in excess of $1 billion.
ADMINISTRATION AGREEMENT
Pursuant to an Administration Agreement dated October 1, 1998 between SERV and
Capstone Asset Management Company, the Adviser and Administrator supervises all
aspects of the Funds' operations. It oversees the performance of administrative
and professional services to the Funds by others; provides office facilities;
prepares reports to stockholders and the Securities and Exchange Commission; and
provides personnel for supervisory, administrative and clerical functions.
Except as noted below, the costs of these services are borne by the Adviser and
Administrator. For these services, the Funds will pay to the Adviser and
Administrator a fee, calculated daily and payable monthly in arrears, equal to
an annual rate of 0.05% of each Fund's average net assets.
SERV pays all of its expenses not borne by the Adviser and Administrator
pursuant to the Administration Agreement including such expenses as (i) advisory
and administrative fees, (ii) fees under the Service and Distribution Plan (see
"Distributor"), (iii) fees for legal, auditing, transfer agent, dividend
disbursing, and custodian services, (iv) the expenses of issue, repurchase, or
redemption of shares, (v) interest, taxes and brokerage commissions, (vi)
membership dues in the Investment Company Institute allocable to SERV, (vii) the
cost of reports and notices to shareholders, and (viii) fees to Trustees and
salaries of any officers or employees who are not affiliated with the Adviser
and Administrator, if any.
The Administration Agreement will remain in effect for an initial two-year
period and will continue thereafter until terminated by either party.
DISTRIBUTOR
Capstone Asset Planning Company (the "Distributor") acts as the principal
underwriter of the Funds' shares pursuant to a written agreement with SERV dated
October 1, 1998 (the "Distribution Agreement"). The Distributor has the
exclusive right (except for distributions of shares directly by SERV) to
distribute shares of the Funds in a continuous offering through affiliated and
unaffiliated dealers. The Distributor's obligation is an agency or "best
efforts" arrangement under which the Distributor is required to take and pay for
only such Fund shares as may be sold to the public. The Distributor is not
obligated to sell any stated number of shares. Except to the extent otherwise
permitted by the Service and Distribution Plan (see below), the Distributor
bears the cost of printing (but not typesetting) prospectuses used in connection
with this offering and the cost and expense of supplemental sales literature,
promotion and advertising.
The Distribution Agreement shall continue for an initial two-year term and is
renewable from year to year if approved in each case as to each Fund (a) by
SERV's Board of Trustees or, with respect to a Fund, by a vote of a majority of
the Fund's outstanding voting securities and (b) by the affirmative vote of a
majority of Trustees who are not parties to the Distribution Agreement or
interested persons of any party, by votes cast in person at a meeting called for
such purpose. The Distribution Agreement provides that it will terminate if
assigned, and that it may be terminated without penalty by either party on 60
days' written notice.
SERV has adopted a Service and Distribution Plan (the "Plan") pursuant to Rule
12b-1 of the Investment Company Act of 1940 for the Funds' Class A shares which
permits Class A shares of each Fund to make payments to the Distributor in
connection with the distribution of its Class A shares and provision of certain
services to Class A shareholders. Rule 12b-1 requires that SERV's Plan and
related agreements have been approved by a vote of SERV's Board of Trustees, and
by a vote of the Trustees who are not "interested persons" of SERV as defined
under the 1940 Act and have no direct or indirect interest in the operation of
the Plan or any agreements related to the Plan (the "Plan Trustees"). Such
actions were taken by SERV's Board of Trustees at a meeting held September 16,
1998.
As required by Rule 12b-1, the Trustees will review quarterly reports prepared
by the Distributor on the amounts expended and the purposes for the
expenditures. The Plan and related agreements may be terminated at any time by a
vote of the Plan Trustees or, as to a Fund, by vote of a majority of the Fund's
outstanding voting securities. As required by Rule 12b-1, selection and
nomination of disinterested Trustees for SERV is committed to the discretion of
the Trustees who are not "interested persons" as defined under the 1940 Act.
Any change in the Plan that would materially increase the distribution expenses
to be paid requires approval by shareholders of Class A shares of each affected
Fund, but otherwise, the Plan may be amended by the Trustees, including a
majority of the Plan Trustees.
The Plan will continue in effect for successive one year periods provided that
such continuance is specifically approved by a majority of the Trustees,
including a majority of the Plan Trustees. In compliance with the Rule, the
Trustee, in connection with the adoption of the Plan, requested and evaluated
information they thought necessary to make an informed determination of whether
the Plan and related agreements should be implemented, and concluded, in the
exercise of reasonable business judgment and in light of their fiduciary duties,
that there is a reasonable likelihood that the Plan and related agreements will
benefit the Funds and their shareholders.
OTHER SERVICES
Under the Administration Agreement, SERV bears the cost of the Funds' accounting
services, which includes maintaining the financial books and records of the
Funds and calculating daily net asset value. Declaration Service Company, of
Conshohocken, Pennsylvania, performs accounting, bookkeeping and pricing
services for SERV. For these services, Declaration Service Company receives a
monthly fee from SERV.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Adviser and Administrator is responsible for decisions to buy and sell
securities for each Fund and for the placement of its portfolio business and the
negotiation of the commissions paid on such transactions. It is the policy of
the Adviser and Administrator to seek the best security price available with
respect to each transaction. In over-the-counter transactions, orders are placed
directly with a principal market maker unless it is believed that a better price
and execution can be obtained by using a broker. The Adviser and Administrator
seeks the best security price at the most favorable commission rate. In
selecting dealers and in negotiating commissions, the Adviser and Administrator
considers the firm's reliability, the quality of its execution services on a
continuing basis and its financial condition. When more than one firm are
believed to meet these criteria, preference may be given to firms which also
provide research services to the Funds or the Adviser and Administrator. In
addition, the Adviser and Administrator may cause a Fund to pay a broker that
provides brokerage and research services a commission in excess of the amount
another broker might have charged for effecting a securities transaction. Such
higher commission may be paid if the Adviser and Administrator determines in
good faith that the amount paid is reasonable in relation to the services
received in terms of the particular transaction or the Adviser and
Administrator's overall responsibilities to the Fund and the Adviser and
Administrator's other clients. Such research services must provide lawful and
appropriate assistance to the Adviser and Administrator in the performance of
its investment decision-making responsibilities and may include advice, both
directly and in writing, as to the value of the securities, the advisability of
investing in, purchasing or selling securities, and the availability of
securities, or purchasers or sellers of securities, as well as furnishing
analyses and reports concerning issuers, industries, securities, economic
factors and trends, portfolio strategy and the performance of accounts.
From time to time, the Adviser and Administrator may effect securities
transactions through Capstone Asset Planning Company ("CAPCO"), TradeStar
Investments, Inc. and Williams MacKay Jordan & Co., Inc. ("WMJ"), broker-dealer
affiliates of the Adviser and Administrator. WMJ is deemed to be an affiliated
broker since one of the owners of that firm serves as a director of Capstone
Financial Services, Inc., the parent company of the Adviser and Administrator
and CAPCO.
Consistent with the Rules of Fair Practice of the National Association of
Securities Dealers, Inc. and subject to seeking best execution and such other
policies as the Board of Trustees may determine, the Adviser and Administrator
may consider sales of shares of the Funds as a factor in the selection of
dealers to execute portfolio transactions for the Funds.
The Adviser and Administrator places portfolio transactions for other advisory
accounts including other investment companies. Research services furnished by
firms through which a Fund effects its securities transactions may be used by
the Adviser and Administrator in servicing all of its accounts; not all of such
services may be used by the Adviser and Administrator in connection with the
Fund. In the opinion of the Adviser and Administrator, the benefits from
research services to each of the accounts (including the Funds) managed by the
Adviser and Administrator cannot be measured separately.
The Adviser and Administrator seeks to allocate portfolio transactions equitably
whenever concurrent decisions are made to purchase or sell securities by a Fund
and another advisory account. In some cases, this procedure could have an
adverse effect on the price or the amount of securities available to the Fund.
In making such allocations among the Fund and other advisory accounts, the main
factors considered by the Adviser and Administrator are the respective
investment objectives, the relative size of portfolio holdings of the same or
comparable securities, the availability of cash for investment, the size of
investment commitments generally held, and opinions of the persons responsible
for recommending the investment.
DETERMINATION OF NET ASSET VALUE
The net asset value per share of each Fund is computed daily, Monday through
Friday, as of the close of regular trading on the New York Stock Exchange, which
is currently 4:00 p.m. Eastern Time, except that the net asset value will not be
computed on the following holidays: New Year's Day, Martin Luther King's
Birthday, President's Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving Day, and Christmas Day.
a) Money Market Fund
The valuation of the Money Market Fund's portfolio securities is based
upon their amortized cost which does not take into account unrealized
securities gains or losses. This method involves initially valuing an
instrument at its cost and thereafter amortizing to maturity any discount
or premium, regardless of the impact of fluctuating interest rates on the
market value of the instrument. While this method provides certainty in
valuation, it may result in periods during which value, as determined by
amortized cost, is higher or lower than the price the Fund would receive
if it sold the instrument. During periods of declining interest rates, the
quoted yield on shares of the Fund may tend to be higher than a like
computation made by a fund with identical investments utilizing a method
of valuation based upon market prices and estimates of market prices for
all of its portfolio instruments. The converse would apply in a period of
rising interest rates. Other securities and assets for which market
quotations are not readily available are valued in good faith at fair
value using methods determined by the Trustees and applied on a consistent
basis. For example, securities with remaining maturities of more than 60
days for which market quotations are not readily available are valued on
the basis of market quotations for securities of comparable maturity,
quality and type. The Trustees review the valuation of the Fund's
securities through receipt of regular reports from the Adviser and
Administrator at each regular Trustees' meeting.
b) The Other Funds
The net asset value of each of the other Funds' shares is computed by
dividing the value of all securities plus other assets, less liabilities,
by the number of shares outstanding, and adjusting to the nearest cent per
share. Such computation is made by (i) valuing securities listed on an
exchange or quoted on the NASDAQ national market system at the last
reported sale price, or if there has been no sale that day at the mean
between the last reported bid and asked prices, (ii) valuing other
securities at the mean between the last reported bid and asked prices and
(iii) valuing any securities for which market quotations are not readily
available and any other assets at fair value as determined in good faith
by the Board of Trustees.
However, debt securities (other than short-term obligations) including
listed issues, are valued on the basis of valuations furnished by a
pricing service which utilizes electronic data processing techniques to
determine valuations for normal institutional size trading units of debt
securities, without exclusive reliance upon exchange or over-the-counter
prices. Short-term obligations are valued at amortized cost.
HOW TO BUY AND REDEEM SHARES
Shares of each Fund are sold in a continuous offering without a sales charge and
may be purchased on any business day through authorized dealers, including
Capstone Asset Planning Company. Certain broker-dealers assist their clients in
the purchase of shares from the Distributor and may charge a fee for this
service in addition to a Fund's net asset value.
Shares will be credited to a shareholder's account at the net asset value next
computed after an order is received by the Distributor. Initial purchases of
Class A shares must be at least $200; however, this requirement may be waived by
the Distributor for plans involving continuing investments. There is no minimum
for subsequent purchases of shares. The minimum initial investment for Class C
shares is $50,000, with a $1,000 minimum required for subsequent purchases,
except for that Charitable Trusts or Grantor Trusts for which a charitable
organization serves as trustee. The minimum investment is $5,000. No stock
certificates representing shares purchased will be issued. SERV's management
reserves the right to reject any purchase order if, in its opinion, it is in
SERV's best interest to do so. See "Purchasing Shares" in the Prospectus.
Generally, shareholders may require the Fund to redeem their shares by sending a
written request, signed by the record owner(s), to Capstone Social Ethics and
Religious Values Fund, c/o Declaration Service Company, 555 North Lane, Suite
6160, Conshohocken, PA 19428. In addition, certain expedited redemption methods
are available. See "Redemption and Repurchase of Shares" in the Prospectus.
DIVIDENDS AND DISTRIBUTIONS
Each Fund's policy is to distribute each year to shareholders substantially all
of its investment company taxable income (which includes, among other items,
dividends, interest and the excess of net short-term capital gains over net
long-term capital losses). Each Fund intends similarly to distribute to
shareholders at least annually any net realized capital gains (the excess of net
long-term capital gains over net short-term capital losses). The Money Market
Fund intends to declare such amounts as dividends daily and to pay such amounts
as dividends monthly. The other Funds intend to declare and pay such amounts as
dividends quarterly. All dividends and capital gain distributions are reinvested
in shares of the particular Fund at net asset value without sales commission,
except that any shareholder may otherwise instruct the Transfer Agent in writing
and receive cash. Shareholders are informed as to the sources of distributions
at the time of payment. Except with respect to the Money Market Fund, any
dividend or distribution paid shortly after a purchase of shares by an investor
will have the effect of reducing the per share net asset value of his shares by
the amount of the dividend or distribution. All or a portion of any such
dividend or distribution, although in effect a return of capital, may be
taxable, as set forth below.
TAXES
Set forth below is a discussion of certain U.S. federal income tax issues
concerning the Funds and the purchase, ownership, and disposition of Fund
shares. This discussion does not purport to be complete or to deal with all
aspects of federal income taxation that may be relevant to shareholders in light
of their particular circumstances. This discussion is based upon present
provisions of the Internal Revenue Code of 1986, as amended (the "Code"), the
regulations promulgated thereunder, and judicial and administrative ruling
authorities, all of which are subject to change, which change may be
retroactive. Prospective investors should consult their own tax advisors with
regard to the federal tax consequences of the purchase, ownership, or
disposition of Fund shares, as well as the tax consequences arising under the
laws of any state, foreign country, or other taxing jurisdiction.
Each Fund intends to be taxed as a regulated investment company under Subchapter
M of the Internal Revenue Code of 1986, as amended (the "Code"). Accordingly,
each Fund generally must, among other things, (a) derive in each taxable year at
least 90% of its gross income from dividends, interest, payments with respect to
certain securities loans, and gains from the sale or other disposition of stock,
securities or foreign currencies, or other income derived with respect to its
business of investing in such stock, securities or currencies; and (b) diversify
its holdings so that, at the end of each fiscal quarter, (i) at least 50% of the
value of the Fund's total assets is represented by cash and cash items, U.S.
Government securities, the securities of other regulated investment companies
and other securities, with such other securities limited, in respect of any one
issuer, to an amount not greater than 5% of the value of the Fund's total assets
and 10% of the outstanding voting securities of such issuer, and (ii) not more
than 25% of the value of its total assets is invested in the securities of any
one issuer (other than U.S. Government securities and the securities of other
regulated investment companies).
As a regulated investment company, a Fund generally is not subject to U.S.
federal income tax on income and gains that it distributes to shareholders, if
at least 90% of the Fund's investment company taxable income (which includes,
among other items, dividends, interest and the excess of any net short-term
capital gains over net long-term capital losses) for the taxable year is
distributed. Each Fund intends to distribute substantially all of such income.
Amounts not distributed on a timely basis in accordance with a calendar year
distribution requirement are subject to a nondeductible 4% excise tax at the
Fund level. To avoid the tax, each Fund must distribute during each calendar
year an amount equal to the sum of (1) at least 98% of its ordinary income (not
taking into account any capital gains or losses) for the calendar year, (2) at
least 98% of its capital gains in excess of its capital losses (adjusted for
certain ordinary losses) for a one-year period generally ending on October 31 of
the calendar year, and (3) all ordinary income and capital gains for previous
years that were not distributed during such years. To avoid application of the
excise tax, the Funds intend to make distributions in accordance with the
calendar year distribution requirement. A distribution will be treated as paid
on December 31 of a calendar year if it is declared by the Fund in October,
November or December of that year with a record date in such a month and paid by
the Fund during January of the following year. Such distributions will be
taxable to shareholders in the calendar year in which the distributions are
declared, rather than the calendar year in which the distributions are received.
SERV is organized as a Massachusetts business trust and, under current law, is
not liable for any income or franchise tax in the Commonwealth of Massachusetts,
provided that each of the Funds qualifies as a regulated investment company for
purposes of Massachusetts law.
Market Discount
If a Fund purchases a debt security at a price lower than the stated redemption
price of such debt security, the excess of the stated redemption price over the
purchase price is "market discount". If the amount of market discount is more
than a de minimis amount, a portion of such market discount must be included as
ordinary income (not capital gain) by the Fund in each taxable year in which the
Fund owns an interest in such debt security and receives a principal payment on
it. In particular, the Fund will be required to allocate that principal payment
first to the portion of the market discount on the debt security that has
accrued but has not previously been includable in income. In general, the amount
of market discount that must be included for each period is equal to the lesser
of (i) the amount of market discount accruing during such period (plus any
accrued market discount for prior periods not previously taken into account) or
(ii) the amount of the principal payment with respect to such period. Generally,
market discount accrues on a daily basis for each day the debt security is held
by a Fund at a constant rate over the time remaining to the debt security's
maturity or, at the election of the Fund, at a constant yield to maturity which
takes into account the semi-annual compounding of interest. Gain realized on the
disposition of a market discount obligation must be recognized as ordinary
interest income (not capital gain) to the extent of the "accrued market
discount."
Original Issue Discount
Certain debt securities acquired by the Funds may be treated as debt securities
that were originally issued at a discount. Very generally, original issue
discount is defined as the difference between the price at which a security was
issued and its stated redemption price at maturity. Although no cash income on
account of such discount is actually received by a Fund, original issue discount
that accrues on a debt security in a given year generally is treated for federal
income tax purposes as interest and, therefore, such income would be subject to
the distribution requirements applicable to regulated investment companies.
Some debt securities may be purchased by the Funds at a discount that exceeds
the original issue discount on such debt securities, if any. This additional
discount represents market discount for federal income tax purposes (see above).
Options, Futures and Forward Contracts
Any regulated futures contracts and certain options (namely, nonequity options
and dealer equity options) in which a Fund may invest may be "section 1256
contracts." Gains (or losses) on these contracts generally are considered to be
60% long-term and 40% short-term capital gains or losses. Also, section 1256
contracts held by a Fund at the end of each taxable year (and on certain other
dates prescribed in the Code) are "marked to market" with the result that
unrealized gains or losses are treated as though they were realized.
Transactions in options, futures and forward contracts undertaken by the Funds
may result in "straddles" for federal income tax purposes. The straddle rules
may affect the character of gains (or losses) realized by a Fund, and losses
realized by the Fund on positions that are part of a straddle may be deferred
under the straddle rules, rather than being taken into account in calculating
the taxable income for the taxable year in which the losses are realized. In
addition, certain carrying charges (including interest expense) associated with
positions in a straddle may be required to be capitalized rather than deducted
currently. Certain elections that a Fund may make with respect to its straddle
positions may also affect the amount, character and timing of the recognition of
gains or losses from the affected positions.
Because only a few regulations implementing the straddle rules have been
promulgated, the consequences of such transactions to the Funds are not entirely
clear. The straddle rules may increase the amount of short-term capital gain
realized by a Fund, which is taxed as ordinary income when distributed to
shareholders. Because application of the straddle rules may affect the character
of gains or losses, defer losses and/or accelerate the recognition of gains or
losses from the affected straddle positions, the amount which must be
distributed to shareholders as ordinary income or long-term capital gain may be
increased or decreased substantially as compared to a fund that did not engage
in such transactions.
Constructive Sales
Recently enacted rules may affect the timing and character of gain if a Fund
engages in transactions that reduce or eliminate its risk of loss with respect
to appreciated financial positions. If a Fund enters into certain transactions
in property while holding substantially identical property, the Fund would be
treated as if it had sold and immediately repurchased the property and would be
taxed on any gain (but not loss) from the constructive sale. The character of
gain from a constructive sale would depend upon the Fund's holding period in the
property. Loss from a constructive sale would be recognized when the property
was subsequently disposed of, and its character would depend on the Fund's
holding period and the application of various loss deferral provisions of the
Code.
Currency Fluctuations - Section 988 Gains or Losses
Gains or losses attributable to fluctuations in exchange rates which occur
between the time a Fund accrues income or other receivables or accrues expenses
or other liabilities denominated in a foreign currency and the time the Fund
actually collects such receivables or pays such liabilities generally are
treated as ordinary income or ordinary loss. Similarly, on disposition of some
investments, including debt securities and certain forward contracts denominated
in a foreign currency, gains or losses attributable to fluctuations in the value
of the foreign currency between the acquisition and disposition of the position
also are treated as ordinary gain or loss. These gains and losses, referred to
under the Code as "section 988" gains or losses, increase or decrease the amount
of a Fund's investment company taxable income available to be distributed to its
shareholders as ordinary income. If section 988 losses exceed other investment
company taxable income during a taxable year, a Fund would not be able to make
any ordinary dividend distributions, or distributions made before the losses
were realized would be recharacterized as a return of capital to shareholders,
rather than as an ordinary dividend, reducing each shareholder's basis in his or
her Fund shares.
Passive Foreign Investment Companies
The Funds may invest in shares of foreign corporations that may be classified
under the Code as passive foreign investment companies ("PFICs"). In general, a
foreign corporation is classified as a PFIC if at least one-half of its assets
constitute investment-type assets, or 75% or more of its gross income is
investment-type income. If a Fund receives a so-called "excess distribution"
with respect to PFIC stock, the Fund itself may be subject to a tax on a portion
of the excess distribution, whether or not the corresponding income is
distributed by the Fund to shareholders. In general, under the PFIC rules, an
excess distribution is treated as having been realized ratably over the period
during which the Fund held the PFIC shares. Each Fund will itself be subject to
tax on the portion, if any, of an excess distribution that is so allocated to
prior Fund taxable years and an interest factor will be added to the tax, as if
the tax had been payable in such prior taxable years. Certain distributions from
a PFIC as well as gain from the sale of PFIC shares are treated as excess
distributions. Excess distributions are characterized as ordinary income even
though, absent application of the PFIC rules, certain excess distributions might
have been classified as capital gain.
The Funds may be eligible to elect alternative tax treatment with respect to
PFIC shares. Under an election that currently is available in some
circumstances, a Fund generally would be required to include in its gross income
its share of the earnings of a PFIC on a current basis, regardless of whether
distributions were received from the PFIC in a given year. If this election were
made, the special rules, discussed above, relating to the taxation of excess
distributions, would not apply. In addition, another election would involve
marking to market the Fund's PFIC shares at the end of each taxable year, with
the result that unrealized gains would be treated as though they were realized
and reported as ordinary income. Any mark-to-market losses and any loss from an
actual disposition of Fund shares would be deductible as ordinary losses to the
extent of any net mark-to-market gains included in income in prior years.
Distributions
Distributions of investment company taxable income are taxable to a U.S.
shareholder as ordinary income, whether paid in cash or shares. Dividends paid
by a Fund to a corporate shareholder, to the extent such dividends are
attributable to dividends received by the Fund from U.S. corporations, may,
subject to limitation, be eligible for the dividends received deduction.
However, the alternative minimum tax applicable to corporations may reduce the
value of the dividends received deduction.
The excess of net long-term capital gains over the short-term capital losses
realized and distributed by a Fund, whether paid in cash or reinvested in Fund
shares, will generally be taxable to shareholders as either "20% Gain" or "28%
Gain," depending upon the Fund's holding period for the assets sold. "20% Gains"
arise from sales of assets held by a Fund for more than 18 months and are
subject to a maximum tax rate of 20%; "28% Gains" arise from sales of assets
held by a Fund for more than one year but no more than 18 months and are subject
to a maximum tax rate of 28%. Net capital gains from assets held for one year or
less will be taxed as ordinary income. Distributions will be subject to these
capital gains rates regardless of how long a shareholder has held Fund shares.
Shareholders will be notified annually as to the U.S. federal tax status of
distributions, and shareholders receiving distributions in the form of newly
issued shares will receive a report as to the net asset value of the shares
received.
If the net asset value of shares is reduced below a shareholder's cost as a
result of a distribution by a Fund, such distribution generally will be taxable
even though it represents a return of invested capital. Investors should be
careful to consider the tax implications of buying shares of a Fund just prior
to a distribution. The price of shares purchased at this time will include the
amount of the forthcoming distribution, but the distribution will generally be
taxable to the shareholder.
If a Fund retains its net capital gains, although there are no plans to do so,
the Fund may elect to treat such amounts as having been distributed to
shareholders. As a result, the shareholders would be subject to tax on
undistributed capital gain, would be able to claim their proportionate share of
the federal income taxes paid by the Fund on such gain as a credit against their
own federal income tax liabilities, and would be entitled to an increase in the
basis of their Fund shares.
Disposition of Shares
Upon a redemption, sale or exchange of shares of a Fund, a shareholder will
realize a taxable gain or loss depending upon his or her basis in the shares. A
gain or loss will be treated as capital gain or loss if the shares are capital
assets in the shareholder's hands, and the rate of tax will depend upon the
shareholder's holding period for the shares. Any loss realized on a redemption,
sale or exchange will be disallowed to the extent the shares disposed of are
replaced (including through reinvestment of dividends) within a period of 61
days, beginning 30 days before and ending 30 days after the shares are disposed
of. In such a case the basis of the shares acquired will be adjusted to reflect
the disallowed loss. If a shareholder holds Fund shares for six months or less
and during that period receives a distribution taxable to the shareholder as
long-term capital gain, any loss realized on the sale of such shares during such
six-month period would be a long-term loss to the extent of such distribution.
Backup Withholding
Each Fund generally will be required to withhold federal income tax at a rate of
31% ("backup withholding") from dividends paid, capital gain distributions, and
redemption proceeds to shareholders if (1) the shareholder fails to furnish the
Fund with the shareholder's correct taxpayer identification number or social
security number, (2) the IRS notifies the shareholder or the Fund that the
shareholder has failed to report properly certain interest and dividend income
to the IRS and to respond to notices to that effect, or (3) when required to do
so, the shareholder fails to certify that he or she is not subject to backup
withholding. Any amounts withheld may be credited against the shareholder's
federal income tax liability.
Other Taxation
Distributions may be subject to additional state, local and foreign taxes,
depending on each shareholder's particular situation. Non-U.S. shareholders may
be subject to U.S. tax rules that differ significantly from those summarized
above, including the likelihood that ordinary income dividends to them would be
subject to withholding of U.S. tax at a rate of 30% (or a lower treaty rate, if
applicable).
OTHER INFORMATION
Custody of Assets. All securities owned by the Funds and all cash, including
proceeds from the sale of shares of the Funds and of securities in the Funds'
investment portfolio, are held by The Fifth Third Bank, 38 Fountain Square,
Cincinnati, Ohio 45263, as custodian.
Shareholder Reports. Semi-annual statements are furnished to shareholders, and
annually such statements are audited by the independent accountants.
Independent Accountants. Briggs, Bunting & Dougherty, LLP, Two Logan Square,
Suite 2121, Philadelphia, Pennsylvania 19103-4901, the independent accountants
for SERV, performs annual audits of each Fund's financial statements.
Legal Counsel. Dechert Price & Rhoads, 1775 Eye Street, N.W., Washington, DC
20006, is legal counsel to SERV.
