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CAPSTONE SOCIAL ETHICS AND RELIGIOUS VALUES FUND
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
PROSPECTUS
FEBRUARY 1, 2000
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THE
SHARES DESCRIBED IN THIS PROSPECTUS OR DETERMINED WHETHER THIS PROSPECTUS IS
ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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TABLE OF CONTENTS
PAGE
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RISK/RETURN SUMMARY AND FUND EXPENSES
About The Capstone Social Ethics and Religious Values Fund
(SERV)................................................. 3
Money Market Fund......................................... 3
Benchmark Funds........................................... 4
Short-Term Bond Fund...................................... 4
Bond Fund................................................. 6
Large Cap Equity Fund..................................... 6
Small Cap Equity Fund..................................... 7
International Fund........................................ 7
Principal Risks........................................... 8
Performance Information................................... 10
Fees and Expenses......................................... 16
MANAGEMENT.................................................. 17
BUYING AND SELLING SHARES................................... 18
Purchasing Fund Shares.................................... 19
Redeeming Fund Shares..................................... 20
Exchanging Fund Shares.................................... 22
DIVIDENDS, DISTRIBUTIONS AND TAXES.......................... 23
FINANCIAL HIGHLIGHTS........................................ 24
HOW TO GET MORE INFORMATION................................. 26
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RISK/RETURN SUMMARY AND FUND EXPENSES
ABOUT THE CAPSTONE SOCIAL ETHICS AND RELIGIOUS VALUES FUND (SERV)
The Funds offered by SERV and described in this prospectus are as follows:
FIXED INCOME FUNDS DOMESTIC EQUITY FUNDS INTERNATIONAL FUND
------------------ --------------------- ------------------
Money Market Fund Large Cap Equity Fund International Fund
Short-Term Bond Fund Small Cap Equity Fund
Bond Fund
Each of SERV's six investment portfolios (Funds) has different investment
policies.
Benchmark Funds -- Each Fund, except Money Market Fund, is an "index-type
fund" -- i.e., each Fund is designed to produce performance generally comparable
to a designated index or "benchmark."
Socially Responsible Investment Policies -- Each Fund follows certain
socially responsible criteria in making its investments. The Funds avoid
investing in companies whose primary business is the manufacture, operation or
distribution of alcohol, caffeinated beverages or tobacco products, meat
packing, pornography, or casino and other gambling activities, although some of
these companies may be indirectly represented in derivatives in which a Fund
invests.
Two Classes of Shares -- Each of the Funds offers Class A shares and Class
C shares, which differ in terms of expenses and minimum investments. (See
"Shareholder Information.")
Adviser and Administrator -- The Funds' investment adviser and
administrator is Capstone Asset Management Company.
The investment objectives and principal investment strategies of each Fund
are described below. The investment objective(s) of a Fund may be changed
without shareholder approval.
MONEY MARKET FUND
Investment Objective: Current Income, stability of capital and liquidity.
PRINCIPAL INVESTMENT STRATEGIES
The Fund seeks to maintain a constant net asset value of $1.00 per share,
although this cannot be assured. The Fund invests more than 25% of its assets
(and may invest substantial amounts) in unaffiliated money market funds that are
rated at least AAA by Standard & Poor's (S&P) or Aaa by Moody's Investors
Service, Inc. (Moody's). The Fund may also invest in a variety of other money
market instruments rated at least A1/P1 by a nationally recognized statistical
rating agency (NRSRO) or deemed of comparable quality by the Adviser and
Administrator. Money market investments in which the Fund may invest must meet
requirements of Federal rules applicable to money market funds and may include
U.S. Government obligations, obligations of supranational organizations, and
various types of obligations of U.S. banks and their foreign branches, of
savings institutions and of corporations, municipal obligations, asset-backed
3
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securities and repurchase agreements. These instruments may have credit
enhancements or "put" arrangements to enhance liquidity, and may be purchased on
a when-issued or delayed delivery basis. Instruments whose ratings or quality
decline below the above standards will be sold unless the Adviser and
Administrator determines that a sale would not be in the best interests of the
Fund and its shareholders. The Fund will purchase only securities that have a
remaining maturity of 397 calendar days or less and will maintain an average
weighted portfolio maturity of not greater than 90 days or will invest in
another money market fund reasonably believed by its board of directors to be in
compliance with these limits and other federal requirements for money market
funds.
BENCHMARK FUNDS
Each of the Funds except Money Market Fund seeks to match the performance
of a designated index or blended index. 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
Investment Objective: Current income and relative capital stability.
PRINCIPAL INVESTMENT STRATEGIES
The Fund attempts to match the price and yield performance, before Fund
expenses, of a blended short-term index consisting of one-third U.S. Treasury
securities, one-third, U.S. government agency securities, and one-third
investment grade corporate obligations. Each of these sub-portfolios consists of
securities with a maximum maturity of three years. (Investment grade securities
are those that are rated at least BBB by Standard & Poor's Corporation ("S&P")
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or Baa by Moody's Investors Service ("Moody's") or deemed of comparable quality
by the Adviser and Administrator.) The Fund's assets will be divided in roughly
equal proportions among securities of the types represented by the three
sub-portfolios. However, the Fund will also maintain small portions of its
assets in cash, short-term money market instruments and/or repurchase
agreements. Each sub-portfolio seeks to match the total return of an appropriate
corresponding index. The indexes currently 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. The
Adviser and Administrator may, however, determine to use other indexes with
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 of not greater than three years. These
obligations include Treasury bills, which generally mature in one year or
less from their date of issue. 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 that 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.
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
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to permitted portfolio investments. The Fund may purchase securities on a
when-issued or forward commitment basis.
BOND FUND
Investment Objective: Current income
PRINCIPAL INVESTMENT STRATEGIES
The Fund pursues its objective by attempting to match the price and yield
performance, before Fund expenses, of the Lehman Brothers Government/Corporate
Bond ("LBG/C") Index. The LBG/C Index is comprised of U.S. Treasury obligations,
U.S. government agency or 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 having a broad range of maturities.
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
Investment Objective: Capital growth and income.
PRINCIPAL INVESTMENT STRATEGIES
The Fund pursues its 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 most highly priced 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 December 9, 1999, the minimum capitalization of issuers
included in that index was $385 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 Depository Receipts ("SPDRs"). SPDRs are
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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
Investment Objective: Capital appreciation.
PRINCIPAL INVESTMENT STRATEGIES
The Fund pursues its 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 December 9, 1999, issuers represented in this index had
aggregate capitalization ranging from about $25.8 million to about $4.4 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
Investment Objective: Capital appreciation
PRINCIPAL INVESTMENT STRATEGIES
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
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Benchmark Shares(SM) ("WEBS"). WEBS are shares of various Series of WEBS Index
Fund, Inc., a registered open-end investment company, each of whose Series seeks
to provide investment results that correspond generally to the price and yield
performance of publicly traded securities in the aggregate in particular
markets, as represented by an index for that market compiled by Morgan Stanley
Capital International. WEBS are available for at least the following markets:
Australia, Austria, Belgium, Canada, France, Germany, Hong Kong, Italy, Japan,
Malaysia, Mexico, Netherlands, Singapore, Spain, Sweden, Switzerland and the
United Kingdom. WEBS are listed for trading on the American Stock Exchange. The
Fund's investments may be in the form of American Depositary Receipts ("ADRs"),
European Depositary Receipts ("EDRs") and similar instruments. (See "Foreign
Securities," below.) The Fund may invest in forward foreign currency exchange
contracts. It may also, however, have small portions of its portfolio in cash or
short-term money market instruments and in repurchase agreements. The Fund may
purchase futures as a temporary substitute for investment in equity securities.
Under normal market conditions, at least 65% of the Fund's assets will be
invested, either directly or through other investment companies, in securities
and other instruments representing issuers whose headquarters or principal
business activities are in at least three countries.
PRINCIPAL RISKS
Investment in any of the Funds involves risk. There can be no assurance
that a Fund will achieve its investment objective. Additionally, there can be no
assurance that a Benchmark Fund will match the performance of its benchmark
index(es). You can lose money on your investment. When you sell your Fund
shares, they may be worth less than you paid for them. No Fund, by itself,
constitutes a balanced investment program.
FIXED INCOME FUNDS
The Fixed Income Funds, including Money Market Fund, are not bank deposits
and are not insured or guaranteed by the Federal Deposit Insurance Corporation
or by any other government agency. Although the Money Market Fund seeks to
preserve the value of your investment at $1.00 per share value, it is possible
to lose money by investing in this Fund, as well as in the other Funds.
Each of the Fixed Income Funds has the following principal risks:
Interest Rate Risk. The value of fixed income securities fluctuates
with changes in interest rates, and if interest rates rise, the value of
securities held by a Fund will fall. If interest rates fall, a Fund must
invest new funds and proceeds of expired investments at a lower interest
rate, reducing the Fund's yield.
Credit Risk. The issuer of a fixed income security may fail to make
payments of interest and principal in a timely manner, or may default
entirely. Also, when an issuer's credit rating drops or it ceases to be
rated, the value of its securities tends to fall. These developments can
cause the value of a Fund's shares and/or its yield to decline. When a
security ceases to be rated or its rating is downgraded below the minimum
required for purchase by a Fund, the Adviser and Administrator will
determine whether it is in the best interest of the Fund (other than Money
Market Fund) to continue to hold the security,
8
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subject to a 5% limit on below-investment grade holdings by any of these
Funds. For the Money Market Fund, the Trustees will determine what action
is appropriate, in accordance with federal law applicable to money market
funds.
Short-Term Bond Fund and Bond Fund may invest in securities rated
BBB or Baa by Moody's or S&P. 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 relative to higher grade bonds.
Index Risk. Because the Short-Term Bond Fund and Bond Fund are
index-type funds, their performance is intended to track that of the
particular market their Benchmark(s) is designed to reflect. When the
value of that index declines, the value of the particular Fund's shares
can also be expected to decline.
EQUITY FUNDS
Equity Risk. Equity securities have no guaranteed value and may
fluctuate -- at times dramatically -- in response to various factors, including
market conditions, political and other events, and developments affecting the
particular issuer or its industry or geographic segment.
Small Cap Risk. Small Cap Fund is exposed to the risks of smaller
capitalization companies whose securities prices can be quite volatile and which
are more vulnerable to economic changes than other issuers. These risks can
cause sudden and substantial changes in prices of the Fund's portfolio
securities and, thus, of its shares.
Index Risk. Because the Equity Funds are index-type funds, their
performance is intended to track that of the particular market their
Benchmark(s) is designed to reflect. When the value of that index declines, the
value of an Equity Fund's shares can also be expected to decline.
INTERNATIONAL FUND
In addition to the risks noted below, the International Fund has risks
similar to those of the Equity Funds.
Foreign Security Risk. Foreign securities investments involve higher costs
and some risks that are different from its investments in U.S. securities. These
different risks come from differences in securities markets in other countries,
in tax policies, in the level of regulation and in accounting standards, as well
as from fluctuations in currency values. Further, there is often more limited
information about foreign issuers, and there is the possibility of negative
governmental actions and of political and social unrest.
OTHER RISKS OF THE FUNDS
Investments in Other Investment Companies -- A Fund, particularly Money
Market Fund and International Fund, may invest in shares of other investment
companies ("funds"). A Fund bears a proportional share of the expenses of that
other fund, which are in addition to those of the Fund. For example, a Fund will
bear a portion of the other fund's investment advisory fees, although the fees
paid by the Fund to the Adviser and Administrator will not be proportionally
reduced.
9
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PERFORMANCE INFORMATION
The following bar charts and tables illustrate the past performance of
each of the Funds. The bar charts and tables provide an indication of the risks
on an investment in the Fund by comparing the Fund's performance with a broad
measure of market performance. The bar chart shows returns only for Class C
shares of each Fund, which are higher than those for Class A shares due to the
lower expenses borne by Class C shares. Each chart and table assumes that
dividends and distributions paid by the particular Fund have been reinvested in
additional Fund shares at net asset value. You should remember that past
performance does not necessarily indicate how a Fund will perform in the future.
MONEY MARKET FUND
[Insert one-year bar chart - annual total return for calendar year ended
December 31, 1999: Class C shares: 4.84%]
TOTAL RETURN FOR THE CALENDAR YEAR ENDED 12/31/99
1 YEAR
- -----------------------------------------------------------------------
Class C shares 4.84%
MM Index* 4.53%
* The IBC Money Market Fund Report Average TM Government & Agencies Retail ("MM
Index") is an unmanaged index consisting of the most broadly based of the
government retail funds. These funds can invest in U.S. Treasuries, other U.S.
Government obligations and repurchase agreements, whether or not they are
backed by U.S. Treasuries and government-backed floating rate notes.
Seven-Day Yield for the period ended 12/31/99 -- Class A, 4.73%; Class C,
4.82%. For information on the Fund's current 7-day yield, call 1-800-262-6631.
10
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SHORT-TERM BOND FUND
[Insert one-year bar chart - annual return for the period January 4, 1999
to December 31, 1999: Class C shares: 2.62%]
TOTAL RETURN FOR THE CALENDAR YEAR ENDED 12/31/99
1 YEAR
- -----------------------------------------------------------------------
Class C shares 2.62%
1-3 Year Blended Index* 3.46%
* The 1-3 Year Blended Index is calculated by weighting each of the following
indexes equally: (1) Merrill Lynch 1-3 Year Treasury Index, an unmanaged index
consisting of coupon-bearing Treasury issues exclusive of flower bonds with a
maturity of 1-2.9 years; (2) Merrill Lynch 1-3 Year Government Agency Index,
an unmanaged index consisting of coupon-bearing debt of agencies of the U.S.
Government with a maturity of 1-2.9 years, excluding agency pass-throughs,
CMOs and flower bonds; and (3) Merrill Lynch 1-3 Year Investment Grade
Corporate Index, an unmanaged index consisting of investment grade (BB/Baa or
better) corporate debt representing a cross-section of industries with
maturities ranging from 1-2.9 years.
11
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BOND FUND
[Insert one-year bar chart - annual total return for the calendar year ended
December 31, 1999: Class C shares: -2.54%]
TOTAL RETURN FOR THE CALENDAR YEAR ENDED 12/31/99
1 YEAR
- -----------------------------------------------------------------------
Class C shares -2.54%
Lehman Brothers: Government/Corporate Bond Index* -2.15%
* The Lehman Brothers Government/Corporate Bond Index ("LBG/C") is an unmanaged
index consisting of approximately 5,300 corporate and government issues with
at least $100 million outstanding for government issues and $25 million for
corporates, and greater than one year maturity. The LBG/C Index is comprised
of U.S. Treasury obligations, U.S. government agency/instrumentality
obligations, and investment grade corporate obligations.
12
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LARGE CAP EQUITY FUND
[Insert one-year bar chart - annual total return for the calendar year ended
December 31, 1999: Class C shares: 21.84%]
TOTAL RETURN FOR THE CALENDAR YEAR ENDED 12/31/99
1 YEAR
- -----------------------------------------------------------------------
Class C shares 21.84%
S&P 500 Composite Stock Price Index* 21.04%
* The S&P 500 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. "Equity securities" include common stocks (including SPDRs),
preferred stocks, and securities convertible or exchangeable for common stock.
13
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SMALL CAP EQUITY FUND
[Insert one-year bar chart - annual total return for the calendar year ended
December 31, 1999: Class C shares: 13.74%]
TOTAL RETURN FOR THE CALENDAR YEAR ENDED 12/31/99
1 YEAR
- -----------------------------------------------------------------------
Class C shares 13.74%
S&P SmallCap 600 Index* 12.41%
* The S&P SmallCap 600 Index is a broadly diversified unmanaged index consisting
of 600 stocks with smaller market capitalization than those included in the
S&P 500 Index.
14
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INTERNATIONAL FUND
[Insert one-year bar chart - annual total return for the calendar year ended
December 31, 1999: Class C shares: 26.61%]
TOTAL RETURN FOR THE CALENDAR YEAR ENDED 12/31/99
1 YEAR
- ---------------------------------------------------------------------
Class C shares 26.61%
EAFE Index* 25.27%
* The Morgan Stanley Capital International Europe, Australia, Far East Index
("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
index is translated into U.S. dollars and includes reinvestment of all
dividends and capital gain distributions.
15
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FEES AND EXPENSES
This table describes the fees and expenses you will pay if you invest in
the Funds. As you can see, the Funds have no fees that are charged directly to
shareholders. Shareholders of a Fund do, however, bear indirectly a portion of
that Fund's operating expenses.
FEE TABLE
SHAREHOLDER FEES (fees paid directly from your investment)
Maximum front-end sales charge None
Maximum deferred sales charge None
Maximum sales charge on reinvested dividends and
distributions None
Redemption fee None
Exchange fee None
Maximum account fee None
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted
from Fund assets)
<TABLE>
<CAPTION>
MONEY MARKET SHORT-TERM BOND
------------------ ------------------
CLASS A CLASS C CLASS A CLASS C
------- ------- ------- -------
<S> <C> <C> <C> <C>
Investment Advisory Fees..................... 0.05% 0.05% 0.15% 0.15%
Distribution (12b -1 Fees)*.................. 0.10% 0.00% 0.25% 0.00%
Other Expenses............................... 0.37% 0.37% 0.39% 0.39%
Total Annual Fund Operating Expenses......... 0.52% 0.42% 0.79% 0.54%
</TABLE>
<TABLE>
<CAPTION>
BOND LARGE CAP EQUITY
------------------ ------------------
CLASS A CLASS C CLASS A CLASS C
------- ------- ------- -------
<S> <C> <C> <C> <C>
Investment Advisory Fees..................... 0.15% 0.15% 0.15% 0.15%
Distribution (12b -1 Fees)*.................. 0.25% 0.00% 0.25% 0.00%
Other Expenses............................... 0.22% 0.22% 0.23% 0.23%
Total Annual Fund Operating Expenses......... 0.62% 0.37% 0.63% 0.38%
</TABLE>
<TABLE>
<CAPTION>
SMALL CAP EQUITY INTERNATIONAL
------------------ ------------------
CLASS CLASS C CLASS A CLASS C
------- ------- ------- -------
<S> <C> <C> <C> <C>
Investment Advisory Fees..................... 0.15% 0.15% 0.15% 0.15%
Distribution (12b -1 Fees)*.................. 0.25% 0.00% 0.25% 0.00%
Other Expenses**............................. 0.26% 0.26% 0.24% 0.24%
Total Annual Fund Operating Expenses......... 0.66% 0.41% 0.64% 0.39%
- --------------------
<FN>
* The Funds have adopted Rule 12b-1 plans that permit Class A shares of each
Fund to pay portions of its average net assets each year for distribution
costs. These fees are an ongoing charge to Class A shares of each Fund and
therefore are an indirect expense to Class A shareholders. Over time these
fees may cost you more than other types of sales charges.
** "Other Expenses" include such items as custody, transfer agent, legal,
accounting and registration fees.
</FN>
</TABLE>
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EXAMPLE
The following table shows how much each Fund's expenses described above
could cost you as an investor in a Fund for the illustrated time periods. The
example assumes that you initially invested $10,000 in a Fund, that the Fund
returns 5% each year, and that its expenses remain at a constant percentage. It
also assumes that you reinvest all dividends and distributions in additional
shares of the Fund. Because these assumptions may vary from your actual
experience, your actual return and expenses may be different.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
----------------- ----------------- ----------------- -----------------
CLASS A CLASS C CLASS A CLASS C CLASS A CLASS C CLASS A CLASS C
------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Money Market Fund......... $53 $43 $167 $135 $291 $235 $653 $530
Short-Term Bond Fund...... $81 $55 $252 $173 $439 $302 $978 $677
Bond Fund................. $63 $38 $199 $119 $346 $208 $774 $468
Large Cap Equity Fund..... $64 $39 $202 $122 $351 $213 $786 $480
Small Cap Equity Fund..... $67 $42 $211 $132 $368 $230 $822 $518
International Fund........ $65 $40 $205 $125 $357 $219 $798 $493
</TABLE>
MANAGEMENT
ADVISER AND ADMINISTRATOR
Capstone Asset Management Company ("CAMCO"), a wholly-owned subsidiary of
Capstone Financial Services, Inc. located at 5847 San Felipe, Suite 4100,
Houston, Texas 77057, acts as investment adviser and administrator for the
Funds. CAMCO provides investment management and administrative services to other
mutual funds, and provides investment management services to pension and
profit-sharing accounts, corporations and individuals. As of the date of this
prospectus CAMCO manages assets in excess of $2.7 billion.
For its investment advisory services, CAMCO receives fees from each Fund
based on the Fund's net assets. For its fiscal year ended September 30, 1999,
the Funds paid the following fees to CAMCO for these services: Money Market
Fund, $23,138; Short-Term Bond Fund, $24,082; Bond Fund, $87,738; Large Cap
Equity Fund, $97,754; Small Cap Equity Fund, $92,137; and International Fund,
$59,614. Of these amounts, the Adviser and Administrator waived $23,138 in
advisory fees from Money Market Fund and $21,529 in advisory fees from
Short-Term Bond Fund. CAMCO also receives fees from each Fund for administrative
services.
ADVISORY COMMITTEE AND CONSULTANT
The Funds' Board of Trustees have appointed an Advisory Committee that
consults with the Board regarding the application of the Funds' social, ethical
and religious values to their investment policies, and various other
philosophical, structural and operational matters concerning the Funds. Advisory
Committee members serve without fee but are compensated for expenses of
attending Fund-related meetings. The Board has also retained Madison Portfolio
Consultants, 400 Madison Avenue, Suite 810, New York, New York 10017, to serve
as an independent source of expertise and education for the Board and the
Advisory Committee regarding (a) the general design and operation of the Funds,
(b) the performance of the investment adviser and other service providers, and
(c) economic and other developments relevant to the operation of the Funds. Each
of the Funds pays Madison a fee for these services.
17
<PAGE>
BUYING AND SELLING FUND SHARES
SHARE PRICE
The purchase and redemption price for shares of each class of shares of a
Fund is the net asset value (NAV) per share of the particular class that is next
determined after your purchase or sale order is received. NAV is generally
calculated as of 4:00 p.m. Eastern time, except on days when the Federal Reserve
wire system is closed and 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. NAV of a class reflects the
aggregate assets of a Fund less the liabilities attributable to that class.
Portfolio securities of Money Market Fund are valued based on their amortized
cost. For the other Funds, exchange-traded securities are valued at their market
value at that time (certain derivatives are priced at 4:15 Eastern time). Other
equity securities are valued at the mean between the last reported bid and asked
prices. Prices for debt securities may be obtained from independent pricing
services, except that short-term securities are valued at amortized cost. If
market value quotations are not readily available for an investment, the
investment will be valued at fair value as determined in good faith by the Board
of Trustees. For investments in securities traded on foreign exchanges that
close prior to the time at which a Fund's net asset value is determined, the
calculation of net asset value does not take place contemporaneously with the
determination of the prices of those securities. If an event were to occur after
the value of a Fund investment was so established but before the Fund's net
asset value per share is determined that is likely materially to change the
Fund's net asset value, the Fund instrument would be valued using fair value
considerations established by the Board of Trustees.
MINIMUM INVESTMENT
Class A shares -- The minimum initial investment is $200, except for
continuous investment plans. There is no minimum for subsequent purchases,
except for continuous investment plans. Minimum for telephone purchase is
$1,000.
Class C shares -- The minimum initial investment is $50,000, except that
for Charitable Trusts or Grantor Trusts for which a charitable organization
serves as trustee, the minimum initial investment is $5,000. The minimum
subsequent investment is $1,000. The minimum telephone purchase is $50,000.
SHARE CERTIFICATES
The Funds will not issue certificates representing shares.
TELEPHONE TRANSACTIONS
In your investment application, you may authorize the Funds to accept
orders for additional purchases, redemptions and exchanges by phone. You will be
liable for any fraudulent order as long as the Funds have taken reasonable steps
to assure that the order was proper. Also note that, during unusual market
conditions, you may experience delays in placing telephone orders. In that
event, you should try one of the alternative procedures described below.
18
<PAGE>
FREQUENT TRANSACTIONS
The Funds reserve the right to limit additional purchases by any investor
who makes frequent purchases, redemptions or exchanges that the Adviser and
Administrator believes might harm the Funds. In general, more than one
purchase-sale, or exchange transaction per month may be viewed as excessive.
PURCHASING FUND SHARES
You may use any of the following methods to purchase Fund shares:
THROUGH AUTHORIZED DEALERS. You may place your order through any dealer
authorized to take orders for the Funds. If the order is received by the
authorized dealer by 4:00 p.m. Eastern time and transmitted to the Funds by 4:00
p.m. Central time, it will be priced at the NAV per share for the applicable
class of shares on that day. Later orders will receive the NAV per share next
determined. It is the dealer's responsibility to transmit orders timely.
THROUGH THE DISTRIBUTOR. You may place orders directly with the Funds'
distributor by mailing a completed Investment Application with a check or other
negotiable bank draft payable to Capstone SERV Fund, to the Funds' Transfer
Agent:
TRANSFER AGENT'S ADDRESS
Capstone SERV Fund
c/o Declaration Service Company
555 North Lane, Suite 6160
Conshohocken, PA 19428
Remember to make your check for at least any applicable minimum noted
above. Payment for all orders must be received by the Transfer Agent within
three business days after the order was placed or you will be liable for any
losses resulting from your purchase order. Checks from third parties will not be
accepted. Subsequent investments may be mailed to the same address.
Confirmations of each purchase and transaction in the account are sent to the
stockholder's address of record.
INVESTING BY WIRE. You may purchase shares by wire if you have an account
with a commercial bank that is a member of the Federal Reserve System. Your bank
may charge a fee for this service.
For an initial investment by wire, you must first call 1-800-695-3208 to
be assigned a Fund account number. Ask your bank to wire the amount of your
investment 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 Name of Fund and class)
Note that the wire must include your name and address, your Fund account
number, and your social security or tax identification number. You must follow
up your wire with a completed
19
<PAGE>
Investment Application. An application may be obtained by calling 1-800-262-6631
or by visiting the Fund's website at www.SERVFunds.com. Mail the application to
the Transfer Agent's address (see above).
Subsequent investments may also be made by wire at any time by following
the above procedures. The wire must include your name and your Fund account
number.
TELEPHONE INVESTMENT
After you have opened your account, you may make additional investments by
telephone if you completed the "Telephone Purchase Authorization" section of
your Investment Application. You may place a telephone order by calling the
Transfer Agent at 1-800-695-3208.
The minimum telephone purchase for Class A shares is $1,000 and the
maximum is the greater of $1,000 or five time the NAV of your shares held, for
which payment has been received, on the day preceding your order. For Class C
shares, the minimum telephone purchase is $50,000 and the maximum is the greater
of $50,000 or five times the NAV of your shares held, for which payment has been
received, on the day preceding your order.
Your telephone purchase will be priced at the NAV next determined after
your call. Payment for your order must be received within three business days.
Mail your payment to the Transfer Agent's address (see above). If your payment
is not received within three business days, you will be liable for any losses
caused by your purchase.
PRE-AUTHORIZED INVESTMENT
If you hold or are purchasing Class A shares, you may arrange to make
regular monthly investments of at least $25 automatically from your bank account
by completing the Pre-Authorized Payment section of the Investment Application.
TAX-DEFERRED RETIREMENT PLANS
Fund shares may be used for virtually all types of tax-deferred retirement
plans, including traditional, Roth and Education IRAs and Simplified Employee
Pension Plans. For more information, call 1-800-262-6631.
REDEEMING FUND SHARES
You may redeem your Fund shares on any business day using one of the
following procedures:
Through Authorized Dealers. You may request a redemption through
any broker-dealer authorized to take orders for the Fund. The
broker-dealer will place the redemption order by telephone or telegraph
directly with the Funds' distributor and your share price will be the NAV
next determined after the order is received. The Funds do not charge a fee
for these redemptions, but a dealer may impose a charge for this service.
Redemption proceeds will paid within three days after the Transfer Agent
receives a redemption order in proper form.
20
<PAGE>
Through the Distributor. You may redeem your Fund shares by writing
to the Transfer Agent's address (see "Purchasing Fund Shares," above). You
will generally receive a check for your redemption amount within a week.
The Funds do not charge any fee for redemptions. If you request the
proceeds to be sent to your address of record, you generally will not need
a signature guarantee. A signature guarantee will be required if:
- you want the proceeds mailed to a different address or to be paid
to someone other than the record owner; or
- you want to transfer ownership of the shares.
Signature Guarantee. A signature guarantee can be provided by most banks,
broker-dealers and savings associations, as well as by some credit unions.
Redemption of Shares Purchased by Check. Redemptions of amounts purchased
by check may be withheld until the purchase check has cleared, which may take up
to 15 days from the purchase date.
CHECK-WRITING (MONEY MARKET FUND ONLY)
Check-writing is available to stockholders in the Money Market Fund.
Checks can be written for a minimum of $25 and no maximum per check with a limit
of 3 per month. An administrative charge of $25 per check will be assessed to an
account for checks over the monthly 3 check minimum. Additionally, there will be
a $25 charge per check on checks returned due to insufficient funds. 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 REDEMPTION
If you want to redeem at least $1,000 of Fund shares and have authorized
expedited redemption on the Investment Application currently on file with the
Transfer Agent, you may request that your redemption proceeds be mailed or wired
to a broker-dealer or commercial bank that you previously designated on the
Investment Application by calling the Transfer Agent at 1-800-695-3208.
Redemption proceeds will be forwarded the next day to the designated entity. You
are urged to place your redemption request early in the day to permit efficient
management of the Funds' cash reserves. The Funds do not impose a fee for this
service, but they (and their service providers) reserve the right to modify or
not to offer this service in the future. They will attempt to give shareholders
reasonable notice of any change.
SYSTEMATIC WITHDRAWAL
If you hold Class A shares, you may arrange for periodic withdrawals of
$50 or more if you have invested at least $5,000 in a Fund. Your withdrawals
under this plan may be monthly, quarterly, semi-annual or annual. If you elect
this plan, you must elect to have all your dividends
21
<PAGE>
and distributions reinvested in shares of the particular Fund. Note that
payments under this plan come from redemptions of your Fund shares. The payments
do not represent a yield from a Fund and may be a return of capital, thus
depleting your investment. Payments under this plan will terminate when all your
shares have been redeemed. The number of payments you receive will depend on the
size of your investment, the amount and frequency of your withdrawals, and the
yield and share price of the Fund, which can be expected to fluctuate.
You may terminate this plan at any time by writing to the Transfer Agent.
You continue to have the right to redeem your shares at any time. The cost of
the plan is borne by the Funds and there is no direct charge to you.
REDEMPTION IN KIND
If you request a redemption in excess of $1 million, each Fund reserves
the right to pay any portion of the redemption proceeds in securities from the
Fund's portfolio rather than in cash, in accordance with applicable legal
requirements. In that case, you will bear any brokerage costs imposed when you
sell those securities.
REDEMPTION SUSPENSIONS OR DELAYS
Although you may normally redeem your shares at any time, redemptions may
not be permitted at times when the New York Stock Exchange is closed for unusual
circumstances, or when the Securities and Exchange Commission allows redemptions
to be suspended.
EXCHANGING FUND SHARES
You may exchange your shares of a Fund for shares of the same class of
another Fund at a price based on the respective NAVs of each Fund. There is no
sales charge or other fee. Please read the information in the Funds' prospectus
concerning the Fund into which you wish to exchange. Your exchange must satisfy
the applicable minimum investment and other requirements for the class of shares
of the Fund into which you wish to exchange. The Fund into which you are
exchanging must be available for sale in your state, and the exchange privilege
may be amended or terminated upon 60 days' notice to shareholders.
You may place an exchange order by:
- mailing your exchange order to the Transfer Agent's address.
- telephoning 1-800-695-3208 (only if you have authorized telephone
exchanges on the Investment Application. Telephone exchange orders
may be placed from 9:30 to 4:00 p.m. Eastern time on any business
day.
Remember that your exchange involves a sale of shares, with possible tax
consequences. See "Dividends, Distributions and Taxes."
22
<PAGE>
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
Each Fund pays dividends from its net investment income and distributions from
any net realized capital gains in additional shares of the Fund, with no sales
charge. However, you may elect on the Investment Application to:
- receive income dividends in cash and capital gain distributions in
additional Fund shares; or
- receive all dividend and capital gain distributions in cash.
The Money Market Fund intends to declare dividends of its net investment
income daily and to pay these amounts monthly. Each of the other Funds intends
to declare and pay these dividends quarterly. Capital gains, if any, will be
paid at least annually, generally in December.
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 future dividends and distributions will be paid in Fund
shares.
TAX TREATMENT OF DIVIDENDS, DISTRIBUTIONS AND REDEMPTIONS
If you are a taxable investor, you will generally be subject to federal
income tax each year on dividend and distribution payments you receive from the
Funds, as well as on any gain realized when you sell (redeem) or exchange shares
of a Fund. If you hold shares through a tax-deferred account (such as a
retirement plan), you generally will not owe tax until you receive a
distribution from the account.
The Funds will let you know each year which amounts of your dividend and
distribution payments are subject to taxation as ordinary income or as long-term
capital gain. The tax treatment of capital gains distributions from a Fund does
not depend on how long you have held your Fund shares or on whether you receive
payments in cash or additional shares. The tax treatment of any gain or loss
when you sell shares of a Fund will depend on how long you held those shares.
Some dividends paid by a Fund may be taxable in the year in which they are
declared, even if they are paid or appear on your account statement the
following year.
You should consult your tax adviser about any special circumstances that
could affect the federal, state and local tax treatment of your Fund
distributions and transactions.
23
<PAGE>
FINANCIAL HIGHLIGHTS
The following table is intended to help you understand the Funds'
financial performance since they commenced operations. The "Per Share Data"
reflects financial results for a single Fund share. The "Total Return" numbers
represent the rate that an investor would have earned (or lost) on an investment
in a Fund (assuming reinvestment of all dividends and distributions). The
information for the year ended September 30, 1999 has been audited by Briggs,
Bunting & Dougherty, whose report, along with the Funds' financial statements,
are included in the Funds' annual report for the fiscal year ended September 30,
1999, which is available on request.
<TABLE>
<CAPTION>
SHORT-TERM BOND
MONEY MARKET FUND FUND
--------------------- ---------------------
CLASS A CLASS C CLASS A CLASS C
------- ----------- ------- -----------
<S> <C> <C> <C> <C>
Net Asset Value -- Beginning of Period.................... $ 1.00 $ 1.00 $25.00 $ 25.00
------- ----------- ------- -----------
Investment Operations:
Net investment income................................... 0.05 0.05 0.68 0.80
Net realized and unrealized gain (loss) on investments
and foreign currency transactions..................... 0.00 0.00 (0.23) (0.30)
------- ----------- ------- -----------
Total from investment operations........................ 0.05 0.05 0.45 0.50
------- ----------- ------- -----------
Distributions:
From net investment income.............................. (0.05) (0.05) (0.77) (0.78)
From net realized capital gain.......................... -- -- -- --
------- ----------- ------- -----------
Total distributions..................................... (0.05) (0.05) (0.77) (0.78)
------- ----------- ------- -----------
Net Asset Value -- End of Period.......................... $ 1.00 $ 1.00 $24.68 $ 24.72
======= =========== ======= ===========
TOTAL RETURN.............................................. 4.80% 4.90% 1.84% 2.05%
Ratios of expenses to average net assets:
before fee waivers...................................... 0.52% 0.42% 0.79%(1) 0.54%(1)
after fee waivers....................................... 0.36% 0.26% 0.61%(1) 0.36%(1)
Ratios of net investment income to average net assets:
before fee waivers...................................... 4.50% 4.60% 4.34%(1) 4.59%(1)
after fee waivers....................................... 4.66% 4.76% 4.52%(1) 4.77%(1)
Portfolio turnover rate................................... N/A N/A 47.85% 47.85%
Net assets, end of period................................. $14,356 $23,170,107 $ 727 $25,927,109
</TABLE>
<TABLE>
<CAPTION>
BOND FUND LARGE CAP EQUITY FUND
--------------------- ----------------------
CLASS A CLASS C CLASS A CLASS C
------- ----------- ------- ------------
<S> <C> <C> <C> <C>
Net Asset Value -- Beginning of Period................... $25.00 $ 25.00 $25.00 $ 25.00
------- ----------- ------- ------------
Investment Operations:
Net investment income.................................. 1.06 1.16 0.22 0.30
Net realized and unrealized gain (loss) on investments
and foreign currency transactions.................... (1.57) (1.62) 6.80 6.79
------- ----------- ------- ------------
Total from investment operations....................... (0.51) (0.46) 7.02 7.09
------- ----------- ------- ------------
Distributions:
From net investment income............................. (1.13) (1.14) (0.27) (0.30)
From net realized capital gains........................ -- -- -- --
------- ----------- ------- ------------
Total distributions.................................... (1.13) (1.14) (0.27) (0.30)
------- ----------- ------- ------------
Net Asset Value -- End of Period......................... $23.36 $ 23.40 $31.75 $ 31.79
======= =========== ======= ============
TOTAL RETURN............................................. (2.04)% (1.83)% 28.10% 28.35%
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
BOND FUND LARGE CAP EQUITY FUND
--------------------- ----------------------
CLASS A CLASS C CLASS A CLASS C
------- ----------- ------- ------------
<S> <C> <C> <C> <C>
Ratios of expenses to average net assets:
before fee waivers..................................... 0.62% 0.37% 0.63% 0.38%
after fee waivers...................................... 0.62% 0.37% 0.63% 0.38%
Ratios of net investment income to average net assets:
before fee waivers..................................... 4.69% 4.94% 0.74% 0.99%
after fee waivers...................................... 4.69% 4.94% 0.74% 0.99%
Portfolio turnover rate.................................. 17.09% 17.09% 142.56% 142.56%
Net assets, end of period................................ $8,466 $60,335,227 $99,888 $132,381,985
</TABLE>
<TABLE>
<CAPTION>
SMALL CAP INTERNATIONAL
EQUITY FUND EQUITY FUND
--------------------- ---------------------
CLASS A CLASS C CLASS A CLASS C
------- ----------- ------- -----------
<S> <C> <C> <C> <C>
Net Asset Value -- Beginning of Period.................... $25.00 $ 25.00 $25.00 $ 25.00
------- ----------- ------- -----------
Investment Operations:
Net investment income................................... 0.14 0.16 0.84 0.99
Net realized and unrealized gain on investments and
foreign currency transactions......................... 4.17 4.21 7.00 6.91
------- ----------- ------- -----------
Total from investment operations........................ 4.31 4.37 7.84 7.90
------- ----------- ------- -----------
Distributions:
From net investment income.............................. (0.14) (0.16) (0.92) (0.97)
From net realized capital gains......................... 0.00 0.00 (1.38) (1.38)
------- ----------- ------- -----------
Total distributions..................................... (0.14) (0.16) (2.30) (2.35)
------- ----------- ------- -----------
Net Asset Value -- End of Period.......................... $29.17 $ 29.21 $30.54 $ 30.55
======= =========== ======= ===========
Total Return.............................................. 17.27% 17.49% 31.98% 32.23%
Ratios of expenses to average net assets:
before fee waivers...................................... 0.66% 0.41% 0.64% 0.39%
after fee waivers....................................... 0.66% 0.41% 0.64% 0.39%
Ratios of net investment income to average net assets:
before fee waivers...................................... 0.31% 0.56% 3.12% 3.37%
after fee waivers....................................... 0.31% 0.56% 3.12% 3.37%
Portfolio turnover rate................................... 41.02% 41.02% 52.42% 52.42%
Net assets, end of period................................. $28,060 $67,544,211 $10,038 $41,838,180
</TABLE>
- ---------------
[FN]
1 Annualized -- Fund commenced operations on January 4, 1999.
</FN>
See notes to financial statements.
25
<PAGE>
HOW TO GET MORE INFORMATION
Further information about the Funds is contained in:
- the Statement of Additional Information ("SAI"). The SAI contains
more detail about some of the matters discussed in this Prospectus.
The SAI is incorporated into the Prospectus by reference.
- Annual and Semi-Annual Reports about the Funds describe their
performance and list their portfolio securities. They also include
letters from Fund management describing the Funds' strategies and
discussing market conditions and trends and their implications for
the Funds.
You may obtain free copies of the SAI or reports, or other information
about the Funds or your account by calling 1-800-262-6631.
You may also get copies of the SAI, reports, or other information about
the Funds directly from the Securities and Exchange Commission ("SEC") by:
- visiting the SEC's public reference room. (Call 1-202-942-8090 for
information or e-mail [email protected]).
- sending a written request, plus a duplicating fee, to the SEC's
Public Reference Section, Washington, D.C. 20549-0102.
- visiting the SEC's website -- http://www.sec.gov/
The Funds' Investment Company Act File Number with the SEC is: 811-08749.
26
<PAGE>
CAPSTONE SOCIAL ETHICS AND
RELIGIOUS VALUES FUND
STATEMENT OF ADDITIONAL INFORMATION
February 1, 2000
This Statement of Additional Information is not a Prospectus but contains
information in addition to and more detailed than that set forth in the
Prospectuses for all the Funds and for the Money Market Fund and should be read
in conjunction with the Prospectuses. The Statement of Additional Information
and the related Prospectuses are all dated February 1, 2000. This Statement of
Additional Information is incorporated in its entirety into the Prospectuses.
The Prospectuses 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 AND YIELD INFORMATION..........................6
TRUSTEES AND EXECUTIVE OFFICERS............................7
INVESTMENT ADVISORY AGREEMENT..............................8
ADVISORY COMMITTEE AND CONSULTANT..........................9
ADMINISTRATION AGREEMENT...................................9
DISTRIBUTOR...............................................10
OTHER SERVICES............................................11
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES.......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
<PAGE>
GENERAL INFORMATION
Capstone Social Ethics and Religious Values Fund ("SERV") is an "open-end
diversified management company" registered under the Investment Company Act of
1940 and has six series ("Funds"). Shares of each Fund have been divided into
two 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.
INVESTMENTS AND INVESTMENT STRATEGIES
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
totaling 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 (All Funds)
- ----------------------------------
Some obligations issued or guaranteed by agencies or instrumentalities of the
U.S. government are backed by the full faith and credit of the U.S. Treasury. No
assurances can be given that the U.S. Government will provide financial support
to other agencies or instrumentalities, since it is not obligated to do so.
These agencies and instrumentalities are supported by:
o the issuer's right to borrow an amount limited to a specific line of
credit from the U.S. Treasury
o the discretionary authority of the U.S. government to purchase certain
obligations of an agency or instrumentality; or
o the credit of the agency or instrumentality.
Bank Obligations (All Funds)
- ----------------------------
These obligations include negotiable certificates of deposit and bankers'
acceptances. A certificate of deposit is a short-term, interest-bearing
negotiable certificate issued by a commercial bank against funds deposited in
the bank. A bankers' acceptance is a short-term draft drawn on a commercial bank
by a borrower, usually in connection with an international commercial
transaction. The borrower is liable for payment as is the bank, which
unconditionally guarantees to pay the draft at its face amount on the maturity
date. The Funds will limit their bank investments to dollar-denominated
obligations of U.S. or foreign banks rated A or better by Moody's or S&P, that
have more than $1 billion in total assets at the time of investments and, in the
case of U.S. banks, are members of the Federal Reserve System or are examined by
the Comptroller of the Currency, or whose deposits are insured by the Federal
Deposit Insurance Corporation.
Commercial Paper (All Funds)
- ----------------------------
Commercial paper includes short-term unsecured promissory notes issued by
domestic and foreign bank holding companies, corporations and financial
institutions and similar taxable instruments issued by government agencies and
instrumentalities. All commercial paper purchased by a Fund must have a
remaining maturity of no more than 270 days from the date of purchase by a Fund,
and must be rated at least A-1 or P-1 by an NRSRO, or deemed of comparable
quality by the Investment Adviser and Administrator. No Fund may invest more
than 5% of its total assets in commercial paper of a single issuer.
Corporate Debt Securities (All Funds)
- -------------------------------------
Fund investments in these securities are limited to corporate debt securities
(corporate bonds, debentures, notes and similar corporate debt instruments) that
meet the particular Fund's quality standards. No Fund will invest in corporate
debt securities that, at the time of investment, are rated below BBB by S&P or
Baa by Moody's, or if not rated, are determined by the Adviser and Administrator
to be below such quality.
Repurchase Agreements (All Funds)
- ---------------------------------
The Funds may invest in securities subject to repurchase agreements with U.S.
banks or broker-dealers. A repurchase agreement is a transaction in which the
seller of a security commits itself at the time of the sale to repurchase that
same security from the buyer at a mutually agreed-upon time and price. The
repurchase price exceeds the sale price, reflecting an agreed-upon interest rate
effective for the period the buyer owns the security subject to repurchase. The
agreed-upon rate is unrelated to the interest rate on that security. The
agreement will be fully collateralized by the underlying securities and will be
marked-to-market on a daily basis during the term of the repurchase agreement to
insure that the value of the collateral always equals or exceeds the repurchase
price. The Adviser and Administrator will enter into repurchase agreements only
with firms that present minimal credit risks as determined in accordance with
guidelines adopted by the Board of Trustees. In the event of default by the
seller under the repurchase agreement, the Funds may have problems in exercising
their rights to the underlying securities and may incur costs and experience
time delays in connection with the disposition of such securities.
When-Issued and Delayed Delivery Securities (All Funds)
- -------------------------------------------------------
The Funds may purchase securities on a when issued or delayed delivery basis.
These transactions are arrangements in which the Funds purchase securities with
payment and delivery scheduled for a future time. The seller's failure to
complete these transactions may cause a Fund to miss a price or yield considered
to be advantageous. Settlement dates may be a month or more after entering into
these transactions, and the market values of the securities purchased may vary
from the purchase price. Accordingly, a Fund may pay more or less than the
market value of the securities on the settlement date.
The Funds may dispose of a commitment prior to settlement if the Adviser and
Administrator deems it appropriate to do so. In addition, the Funds may enter
into transactions to sell their purchase commitments to third parties at current
market values and simultaneously acquire other commitments to purchase similar
securities at later dates. The Funds may realize short-term profits or losses
upon the sale of such commitments.
Loans of Portfolio Securities (All Funds)
- -----------------------------------------
The Funds may lend their portfolio securities to brokers, dealers and financial
institutions, provided: (1) the loan is secured continuously by collateral
consisting of U.S. Government securities or cash or letters of credit maintained
on a daily mark-to-market basis in an amount at least equal to the current
market value of the securities loaned; (2) the Funds may at any time call the
loan and obtain the return of the securities loaned within three business days;
and (3) the Funds will receive any interest or dividends paid on the loaned
securities.
The Funds will earn income for lending their securities because cash collateral
pursuant to these loans will be invested in short-term money market instruments.
In connection with lending securities, the Funds may pay reasonable finders,
administrative and custodial fees. Loans of securities involve a risk that the
borrower may fail to return the securities or may fail to provide additional
collateral.
Foreign Securities (All Funds)
- ------------------------------
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. 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 generally determined by several factors, including the forces of
supply and demand in the foreign exchange markets. These forces are affected by
the international balance of payments, interest rate movements and other
economic and financial conditions, government or central bank intervention,
speculation and other factors.
On January 1, 1999, the European Monetary Union (EMU) implemented a new currency
union, the Euro. It may not be clear how financial contracts outstanding prior
to January 1, 1999 that refer to existing currencies rather than the Euro will
be treated, and there may be uncertainties regarding exchange rates 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 during the early years following introduction of the Euro, and could
adversely affect the value of securities held by the Funds.
Investments in securities of foreign issuers involve certain costs, and other
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. 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.
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 that are denominated in
foreign currencies. 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.
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.
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.
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.
Securities Index Futures and Related Options
(All Funds, except Money Market Fund)
- --------------------------------------------
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.
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:
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%.
PERFORMANCE AND YIELD 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.
Large Cap Equity Fund, Small Cap Equity Fund and International Fund: The Funds
may from time to time include figures indicating 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 class of shares of 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 shares of that
class. Quotations of the average annual total return reflect the deduction of a
proportional share of Fund and class expenses on an annual basis. The results,
which are annualized, represent an average annual compounded rate of return on a
hypothetical investment in the particular class of shares of the Fund over a
period of 1, 3, 5 and 10 years (or life of the Fund or class) 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 class of shares of a Fund and show the performance of a
hypothetical investment. Yield refers to the net investment income generated by
a Fund's portfolio with respect to a particular class of shares over a specified
seven-day period. This income is then annualized. That is, the amount of income
generated with respect to that class of shares 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 a particular class of shares of 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 class of shares of a Fund will vary based upon, among
other things, changes in market conditions, the level of interest rates and the
level of expenses borne by the class.
Performance and yield calculations are based on past performance and are not a
guarantee of future results. A more detailed description of the methods used to
determine the Funds' average annual total return, total return, yield and
effective yield follows.
The Money Market Fund
Quotations of yield for each class of shares of Money Market Fund that may be
included in advertisements, sales literature or shareholder reports from time to
time 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 shares of a particular class of a Fund 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 of September 30, 1999, the current yield and effective yield, respectively,
for each class of shares of the Money Market Fund were: Class A shares,4.95% and
5.03%; Class C shares, 5.05% and 5.14%.
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.
Other Funds
Quotations of yield for each class of shares of a Fund will be based on the
investment income per share earned during a particular 30-day period, less
expenses accrued with respect to that class during the period ("net investment
income"), and will be computed by dividing net investment income for the class
by the maximum offering price per share of that class on the last day of the
period, according to the following formula:
YIELD = 2[(a-b + 1)6-1]/cd
where a = dividends and interest earned during the period, b = expenses accrued
for the period (net of any reimbursements), c = the average daily number of
shares of the class outstanding during the period that were entitled to receive
dividends, and d = the maximum offering price per share of the class on the last
day of the period.
The 30-day yield and effective yield, respectively, for the period ended
September 30, 1999 was as follows:
Class A shares: Short-Term Bond Fund, 4.57% and 4.04%; Bond Fund, 4.93% and
4.04%.
Class C shares: Short-Term Bond Fund, 4.82% and 4.32%; Bond Fund, 5.18% and
4.76%.
Average annual total return and total return figures represent the increase (or
decrease) in the value of an investment in a class of shares of 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 shares of the class.
Quotations of the average annual total return reflect the deduction of a
proportional share of class expenses on an annual basis. The results, which are
annualized, represent an average annual compounded rate of return on a
hypothetical investment in the particular class of shares of the Fund over a
period of 1, 5 and 10 years ending on the most recent calendar quarter, or the
life of the Fund or class, 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 of a class of shares. 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.
MANAGEMENT OF SERV
Trustees and Executive Officers
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.
SERV's Trustees and executive officers are listed below:
BERNARD J. VAUGHAN (71), Trustee. 113 Bryn Mawr Avenue, Bala Cynwyd,
Pennsylvania 19004. Director of other Capstone Funds; formerly Vice President of
Fidelity Bank (1979-1993).
JAMES F. LEARY (69), Director. 2006 Peakwood Dr., Garland, Texas 75044. Managing
Director of Benefit Capital South West, Inc. (financial services) Director/
Trustee of other Capstone Funds; Director: Associated Materials, Inc. (tire
cord, siding and industrial cable manufacturer); MESBIC Ventures, Inc.
(minority enterprise small business investment company); Quest Products Corp.
(consumer products); Prospect Street High Income Fund (closed end mutual fund).
JOHN R. PARKER (53), Trustee. 541 Shaw Hill, Stowe, Vermont 05672. Consultant
and private investor (since 1990); Director of Nova Natural Resources (oil, gas,
minerals); Director of other Capstone Funds; formerly Senior Vice President of
McRae Capital Management, Inc. (1991-1995); and registered representative of
Rickel & Associates (1988-1991).
*EDWARD L. JAROSKI (53), Trustee and 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 (51), 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 (38), Secretary/Treasurer. 5847 San Felipe, Suite 4100,
Houston, Texas 77057. Vice President, Compliance of Capstone Financial Services,
Inc., Capstone Asset Management Company and Capstone Asset Planning Company
(since November 1999), Vice President and Treasurer (1996-1999) of Capstone
Financial Services, Inc.; Secretary/Treasurer (1998-1999) of Capstone Asset
Planning Company; Vice President (1996-1998) of Capstone Asset Management
Company and Capstone Asset Planning Company; Treasurer (1990-1996) and Secretary
(1994-1996) of Capstone Financial Services, Inc. and Capstone Asset Management
Company; Treasurer (1990-1996) and Secretary (1995-1996) of Capstone Asset
Planning Company; officer of other Capstone Funds.
- ---------------
* Mr. Jaroski is an "interested person" of SERV, as defined in the
Investment Company Act of 1940.
The trustees and officers of the Fund as a group own less than one percent of
the outstanding shares of the Fund. Each independent Trustee serves as a
director or trustee on the Board of three other registered investment companies
comprising the Capstone Complex of Mutual Funds. The independent
Directors/Trustees are entitled to $2,000 per meeting attended and are paid an
annual retainer of $6,000. In addition, each independent Director/Trustee is
paid $500 per committee for serving on four (4) committees. All fees received by
the Directors/Trustees are allocated among the funds based on net assets. The
Directors/Trustees and officers of the Capstone Funds are also reimbursed for
expenses incurred in attending meetings of the Boards of Directors/Trustees. For
the fiscal year ended September 30, 1999, SERV paid or accrued for the account
of its officers and trustees, as a group for services and expenses in all
capacities, a total of $38,424.
The following table represents the compensation received by the independent
Directors/Trustees during fiscal 1999 from the Capstone Funds complex.
Compensation Table
<TABLE>
Aggregate Pension or Estimated Annual Total Compensation From
Compensation Retirement Benefits Benefits Upon Registrant and Fund Complex
Name of Person, Position From Registrant(1) Accrued As Part of Fund Retirement Paid to Trustees
<S> <C> <C> <C> <C>
James F. Leary, Trustee $11,632 (4) $0 $0 $18,250 (1)(2)(3)
John R. Parker, Trustee $11,632 (4) $0 $0 $19,500 (1)(2)(3)
Bernard J. Vaughan, Trustee $11,532 (4) $0 $0 $19,500 (1)(2)(3)
- ---------------
<FN>
(1) SERV does not pay deferred compensation.
(2) Director of Capstone Growth Fund, Inc.; Trustee of Capstone Social Ethics
and Religious Values Fund, and Trustee of Capstone Interional Series Trust.
(3) Fund Complex includes 10 funds.
(4) Compensation received by independent Directors/Trustees is allocated among
the Capstone Complex of Mutual Funds based on net assets.
</FN>
</TABLE>
Adviser and Administrator
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 was formed in 1982 as a wholly-owned subsidiary of
Capstone Financial Services, Inc. The Adviser and Administrator 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 $2.7 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, 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
For the Trust's fiscal year ended September 30, 1999, each Fund paid the
following investment advisory fees: Money Market Fund - $23,138; Short-Term Bond
Fund - $24,082; Bond Fund - $87,738; Large Cap Equity Fund - $97,754; Small Cap
Equity Fund - $92,137; and International Fund - $59,614. These fees were
allocated to each class of shares based on their relative asset values. Of these
amounts, the Adviser and Administrator waived $23,138 in advisory fees from
Money Market Fund and $21,529 in advisory fees from Short-Term Bond Fund.
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 and the Adviser and Administrator shall not be liable for the
acts of third parties.
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 has appointed 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 are
not compensated for their services, although they will be reimbursed by the
Trust for expenses of attendance at Trust-related meetings. The Advisory
Committee consists 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. For the fiscal
year ended September 30, 1999, the Funds paid Madison the following fees: Money
Market Fund - $5,785; Short-Term Bond Fund - $3,996; Bond Fund - $8,280; Large
Cap Equity Fund - $6,016; Small Cap Equity Fund - $6,916; and International Fund
- - $4,357.
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. For the fiscal year
ended September 30, 1999, the Funds paid the following administration fees:
Money Market Fund - $11,569; Short-Term Bond Fund - $8,027; Bond Fund - $29,246;
Large Cap Equity Fund - $32,585; Small Cap Equity Fund - $30,712; and
International Fund - $19,871. The Adviser and Administrator waived the following
administration fees: Money Market Fund - $11,569; and Short-Term Bond Fund -
$7,177.
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"), 5847 San Felipe, Suite
4100, Houston, Texas 77057, 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.
Edward L. Jaroski is President of SERV and is 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 their
parent, Capstone Financial Services.
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 compensate the Distributor for its
services in connection with the distribution of its Class A shares and provision
of certain services to Class A shareholders. These services include, but are 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, "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 of the other Funds. Subject
to these limits, the Distributor may reallow to Service Organizations (which may
include the Distributor itself)) 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 Service Organization provides
services. Any remaining amounts not so allocated will be retained by the
Distributor. The Distributor collects the fees under the Plan on a monthly
basis. During the fiscal year ended September 30, 1999, the Funds paid the
following fees under the Plan: Money Market Fund - $2; Short-Term Bond Fund -
$1; Large Cap Equity Fund - $76; Small Cap Equity Fund - $12; and International
Fund - $5.
Rule 12b-1 requires that SERV's Plan and related agreements have been approved
by a vote of SERV's Board of and by a vote of the Trustees who are not
"interested persons" of SERV as defined under Trustees, 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"). The Plan will continue in effect for
successive one year periods provided that such continuance is specifically
approved at least annually by a majority of the Trustees, including a majority
of the Plan Trustees. In determining whether to adopt or continue the Plan, the
Trustees must request and evaluate information they believe is necessary to make
an informed determination of whether the Plan and related agreements should be
implemented, and must conclude, 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 Class A
shareholders. 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.
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.
The following table concerns compensation paid by each Fund to the Distributor
during the fiscal year ended September 30, 1999.
<TABLE>
<CAPTION>
Name of Principal Net Underwriting Compensation on Redemptions Brokerage Other
Underwriter Discounts and Commissions and Repurchases Commissions Compensation
- ----------------- ------------------------- --------------------------- ----------- -------------
<S> <C> <C> <C> <C>
Money Market Fund*
Short-Term Bond Fund*
Bond Fund*
Large Cap Equity Fund*
Small Cap Equity Fund*
International Bund*
- ---------------
<FN>
* No compensation was paid to the Distributor during the fiscal year ended
September 30, 1999. The Funds paid an aggregate total of $99 pursuant to the
Plan during that year, none of which was retained by the Distributor.
</FN>
</TABLE>
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. During the fiscal year ended September 30, 1999, the
Funds paid the following fees to Declaration Service Company for accounting and
pricing services: Money Market Fund - $17,001; Short-Term Bond Fund - $18,325;
Bond Fund - $31,221; Large Cap Equity Fund - $41,229; Small Cap Equity Fund k-
$51,460; and International Fund - $24,473. Declaration waived the following
amount: Money Market Fund - $1,630. Declaration Services Company received the
following fees for transfer agency services: Money Market Fund - $7,501;
Short-Term Bond Fund - $5,528; Bond Fund: - $11,645; Large Cap Equity Fundj -
$13,873; Small Cap Equity Fund - $9,271; and International Fund - $7,501.
Expenses
- --------
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.
Each Fund's expenses and expenses of each class of shares are accrued daily and
are deducted from total income before dividends are paid. SERV expenses are
generally allocated among the Funds based on their respective net asset values.
Fund expenses, as well as a Fund's share of SERV expenses, are generally
allocated between classes based on their respective net asset values, except
that Class A expenses pursuant the Service and Distribution Plan are borne only
by Class A shares and the Trustees may determine that other expenses are
specific to a particular class and should be borne by that class alone.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
The following table sets forth information concerning each person who, to the
knowledge of the Board of Directors, owned of record more than five percent of
the Fund's common stock as of January 21, 2000.
Money Market Fund
-----------------
Class A
- -------
Registration Percent Owned
------------ -------------
W. Dean Rogers & 51.00%
Linda Kay Rogers Jt Ten
1513 Rainbow Drive
Silver Spring, MD 20905
Andrei Mikhailenko & 32.69%
Teresa Mikhailenko Jt Ten
1121 University Blvd. West
Silver Spring, MD 20902
Thomas L. Fagan 10.12%
P.O. Box 337
Beaver Meadows, PA 18216
Class C
- -------
General Conference of Seventh-day Adventists 70.76%
12501 Old Columbia Pike
Silver Spring, MD 20904-8600
Andrews University - Plant Fund 19.80%
Berrien Springs, MI 49104
Short-Term Bond Fund
--------------------
Class A
- -------
Fifth Third Bank C/F Educ IRA of 69.20%
Ingo W. Sorke
FBO Kollin B. Sorke
1108 CR 701
Cleburne, TX 76031
George Gomoll C/F 27.29%
Laura Gomoll UGMA IL
4300 Polk Street
Matteson, IL 60443
Class C
- -------
General Conference of Seventh-day Adventists 23.57%
Inter-American Division
P.O. Box 140760
Miami, FL 33114
General Conference Corp of SDA 20.97%
Inter-American Division
760 Ponce de Leon Blvd
Coral Gables, FL 33134-0760
General Conference Corporation of Seventh-Day 19.78%
Adventists - South American Division
12501 Old Columbia Pike
Silver Spring, MD 20904
General Conference of Seventh-Day Adventists 13.86%
South Asia Division
12501 Old Columbia Pike
Silver Spring, MD 20904
Adventist Health 11.72%
Non-Profit Religious Corporation
2100 Douglas Boulevard
Roseville, CA 95661
General Conference Corp. - Hospital Medical 7.65%
General Conf. of Seventh-day Adventists
12501 Old Columbia Pike
Silver Spring, MD 20904-6600
Bond Fund
---------
Class A
- -------
Mac & Co. A/C AQTF8768092 42.39%
P.O. Box 3198
Pittsburgh, PA 15230-3198
Valic Trust Company as Cust 18.02%
FBO Adventist Retirement Plan
2929 Allen Parkway A7-30
Houston, TX 77019
Fifth Third Bank C/F IRA of 16.98%
Marlene G. Klam
2730 Ridgewood Trail
Berrien Springs, MI 49103
Andrei Mikhailenko & 10.49%
Teresa Mikhailenko Jt Ten
1121 University Blvd. West
Silver Spring, MD 20902
Thomas L. Fagan 7.10%
P.O. Box 337
Beaver Meadows, PA 18216
Class C
- -------
General Conference Corp. - Hospital Retirement 59.89%
General Conf. of Seventh-Day Adv.
12501 Old Columbia Pike
Silver Spring, MD 20904-6600
General Conference Corp. - Hospital Medical 14.77%
General Conf. of Seventh-Day Adventists
12501 Old Columbia Pike
Silver Spring, MD 20904-6600
General Conference Corporation of Seventh-Day 7.72%
Adventists - South American Division
12501 Old Columbia Pike
Silver Spring, MD 20904
General Conference Corp. of Seventh-Day Adventists 6.92%
GC Corp-Plant Fund
12501 Old Columbia Pike
Silver Spring, MD 20904
General Conference Corp. of SDA 5.82%
General Conference of Seventh-Day Adventists
12501 Old Columbia Pike
Silver Spring, MD 20904-6600
Large Cap Equity Fund
Class A
- -------
Mac & Co. A/C AQTF8768102 78.56%
P.O. Box 3198
Pittsburgh, PA 15230-3198
Class C
- -------
General Conference Corp. - Hospital Retirement 71.92%
General Conf. of Seventh-Day Adv.
12501 Old Columbia Pike
Silver Spring, MD 20904-6600
Adventist Health System Malpractice Trust 7.01%
P.O. Box 92956
Chicago, IL 60675
Loma Linda University - 99GRW Account 6.44%
Foundation Administration
1145 Anderson St., Suite 203
Loma Linda, CA 92350
Small Cap Equity Fund
---------------------
Class A
- -------
Mac & Co. A/C AQTF8768112 33.05%
Mutual Fund Operations
P.O. Box 3198
Pittsburgh, PA 15230-3198
Fifth Third Bank C/F IRA R/O of 15.40%
Francis A. Russell
520 Willow Street
Oxnard, CA 93033-6012
Upper Columbia Corporation of SDA 14.58%
Revocable Trust #52417 DTD1/5/2000
P.O. Box 19039
Spokane, WA 99219
Harold E. Peters & 8.65%
Verna R. Peters JTWROS
5621 Perkin Drive
C/O WF Peters
New Port Richey, FL 34652
Fifth Third Bank C/F IRA of 6.05%
Marianne F. Goltz
4349 Joann Dr. NE
Moses Lake, WA 98837
Robert A. Karisch 5.18%
6261 Willers Way
Houston, TX 77057
Class C
- -------
General Conference Corp. - Hospital Retirement 47.04%
General Conf. of Seventh-day Adv.
12501 Old Columbia Pike
Silver Spring, MD 209040-6600
Loma Linda University - 99GRW Account 18.35%
Foundation Administration
1145 Anderson St., Suite 203
Loma Linda, CA 92350
General Conference Corp. of SDA 17.77%
General Conference of Seventh-day Adventists
12501 Old Columbia Pike
Silver Spring, MD 20904-6600
General Conference Corp. - Hospital Medical 12.00%
General Conf. of Seventh-day Adventists
12501 Old Columbia Pike
Silver Spring, MD 20904-6600
International Fund
------------------
Class A
- -------
Fifth Third Bank C/F IRA R/O of 32.04%
Francis A. Russell
520 Willow St.
Oxnard, CA 93033-6012
Donald Eugene Robinson 31.80%
7382 Hopkins Way
Clarksville, MD 21029
Harold E. Peters & 13.16%
Verna R. Peters JTWROS
5621 Perkin Dr.
C/O WF Peters
New Port Richey, FL 34652
Upper Columbia Corporation of SDA 5.76%
Revocable Trust #52417 DTD1/5/2000
P.O. Box 19039
Spokane, WA 99219
Class C
- -------
General Conference Corp. - Hospital Retirement 82.08%
General Conf. of Seventh-day Adv.
12501 Old Columbia Pike
Silver Spring, MD 20904-6600
General Conference Corp. - Hospital Medical 10.71%
General Conf. of Seventh-day Adventists
12501 Old Columbia Pike
Silver Spring, MD 20904-6600
General Conference Corp. of SDA 6.06%
General Conference of Seventh-day Adventists
12501 Columbia Pike
Silver Spring, MD 20904-6600
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.
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. The Adviser and Administrator has arrangements to receive research only
with respect to accounts for which it exercises brokerage discretion, including
the Funds. Many of the clients of the Adviser and Administrator have not granted
brokerage discretion and therefore, any research services received as a result
of paying commissions in excess of the amount another broker might have charged
is subsidized by accounts that have granted CAMCO such discretion, including the
Fund. Other research received, although not by a specific arrangement may also
be used by the Adviser and Administrator in providing service to other accounts,
including the Funds. 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.
From time to time, the Adviser and Administrator may effect securities
transactions through Capstone Asset Planning Company ("CAPCO"),a broker-dealer
affiliate of the Adviser and Administrator.
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.
Personal Trading Policies
- -------------------------
The Funds, the Adviser and Administrator, and the Distributor have adopted Codes
of Ethics under Rule 17j-1 under the Investment Company Act of 1940. Consistent
with requirements of that Rule, the codes permit persons subject to the codes to
invest in securities, including securities that may be purchased by a Fund. The
codes and the Rule require these transactions to be monitored.
DETERMINATION OF NET ASSET VALUE
The net asset value per share of 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, 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.
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.
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. 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.
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. After each investment, the
stockholder and the authorized investment dealer receive confirmation statements
of the number of shares purchased and owned.
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.
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 paid by a stockholder for shares of a Fund or the amount that
the Funds will receive from such sale.
Generally, shareholders may require the Funds 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.
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.
Properly designated distributions of net capital gains, if any, will generally
be taxable to shareholders as long-term capital gains, regardless of how long
the stockholder has held the Fund's shares, and are not eligible for the
dividends received deduction.
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
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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).
SERV is organized as a Massachusetts business trust and, under current law,
neither SERV nor any Fund is liable for any income or franchise tax in the
Commonwealth of Massachusetts, provided that each Fund continues to qualify as a
regulated investment company under Subchapter M of the Code.
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. The
financial statements and notes, including the investment portfolio of each Fund,
together with the Report of Independent Accountants in the Funds' most recent
annual report are incorporated by reference in this Statement of Additional
Information.
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.
