-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JSFk156Vgu5yQIkpgGdTVNHh7Lz0IY8rD2sFBObEFA2eSJWd8qhbgs+9s5/rnIgS dhKafSCbl5+okAA96duibQ== 0000894189-02-001427.txt : 20021120 0000894189-02-001427.hdr.sgml : 20021120 20021120172246 ACCESSION NUMBER: 0000894189-02-001427 CONFORMED SUBMISSION TYPE: N-14 PUBLIC DOCUMENT COUNT: 11 FILED AS OF DATE: 20021120 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AHA INVESTMENT FUNDS INC CENTRAL INDEX KEY: 0000831957 STATE OF INCORPORATION: MD FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: N-14 SEC ACT: 1933 Act SEC FILE NUMBER: 333-101351 FILM NUMBER: 02835240 BUSINESS ADDRESS: STREET 1: AHA INVESTMENT FUNDS, INC STREET 2: 190 SOUTH LASALLE STREET, SUITE 2800 CITY: CHICAGO STATE: IL ZIP: 60603 BUSINESS PHONE: 3124446200 MAIL ADDRESS: STREET 1: 190 SOUTH LASALLE STREET STREET 2: SUITE 2800 CITY: CHICAGO STATE: IL ZIP: 60603 N-14 1 combined.txt As filed with the Securities and Exchange Commission on November 20, 2002 Registration. No. 333- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM N-14 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X] AHA Investment Funds, Inc.* (Exact Name of Registrant as Specified in Charter) 190 South LaSalle Street, Suite 2800 Chicago, Illinois 60603 (Address of Principal Executive Offices) (800) 445-1341 (Area Code and Telephone Number) Douglas D. Peabody Alan Goldberg AHA Investment Funds, Inc. Bell, Boyd & Lloyd LLC 190 South LaSalle Street, Suite 2800 Three First National Plaza, #3300 Chicago, Illinois 60603 Chicago, Illinois 60602 (Names and Addresses of Agents for Service) Approximate Date of Proposed Public Offering: As soon as practicable after the Registration Statement becomes effective under the Securities Act of 1933. Title of Securities Being Registered: Class A shares, $0.01 par value per share An indefinite amount of the Registrant's securities has been registered under the Securities Act of 1933 under Rule 24f-2 under the Investment Company Act of 1940. In reliance upon such Rule, no filing fee is being paid at this time. It is proposed that the Registration Statement will become effective on December 20, 2002 pursuant to Rule 488. * On behalf of the AHA Diversified Equity Fund. KENILWORTH FUND, INC. 21 S. Clark Street, Suite 2594 Chicago, IL 60603 NOTICE OF A SPECIAL MEETING NOTICE IS HEREBY GIVEN that a Special Meeting of the Shareholders of Kenilworth Fund, Inc. (the "Kenilworth Fund") will be held at 21 S. Clark Street, Suite 2594, Chicago, IL 60603 on Friday, December 27, 2002, at 3:00 p.m. Central Time, for the following purpose: PROPOSAL: To consider and act upon a proposal to approve an Agreement and Plan of Reorganization (the "Plan of Reorganization"), between the Kenilworth Fund and AHA Investment Funds, Inc., and, solely for the purposes of paragraph 9.2 thereof, each of CCM Advisors LLC and Institutional Portfolio Services, Ltd., and the transactions contemplated thereby (the "Transaction"), including: (a) the transfer of all the assets of the Kenilworth Fund to, and the assumption of all the liabilities of the Kenilworth Fund by, the AHA Diversified Equity Fund (the "AHA Fund"), in exchange for Class A shares of the AHA Fund; (b) the distribution of the AHA Fund shares so received by the Kenilworth Fund pro rata to shareholders of the Kenilworth Fund; and (c) the dissolution of the Kenilworth Fund. The proposed Transaction and related matters are described in the attached Prospectus/Proxy Statement. The form of the Plan of Reorganization is attached to the Prospectus/Proxy Statement as Appendix A. Only shareholders of the Kenilworth Fund of record on December 4, 2002 are entitled to notice of and to vote at the Special Meeting and any adjournment thereof. Shareholders are requested to vote their shares by executing and returning promptly in the enclosed envelope the accompanying proxy card(s). This is important to ensure a quorum at the meeting. Proxies may be revoked at any time before they are exercised by submitting a written notice of revocation or a subsequently executed proxy or by attending the meeting and voting in person. By order of the Board of Directors, Savitri P. Pai, Secretary [KF, Inc. LETTERHEAD] [December 4, 2002] Dear Fellow Shareholder, Almost ten years ago we embarked on a journey with the creation of the Kenilworth Fund, Inc. Today, our journey takes a new course. The papers enclosed with this letter detail the proposed acquisition of the Kenilworth Fund, Inc. by the AHA Diversified Equity Fund. The AHA Diversified Equity Fund was founded in 1988, and since that time has produced favorable investment returns at a relatively low cost (see enclosed Proxy-Prospectus). The Board of Directors of the Kenilworth Fund, Inc. believe the proposed acquisition will be in the best, long-term interests of the Kenilworth Fund, Inc. shareholders. Please review the enclosed materials. We apologize for the numerous documents, but all are required to be sent to you by law. Please vote immediately as we would like to complete this transaction prior to the end of the year. A stamped, self-addressed envelope is enclosed for your convenience. Update: On March 31, the Fund's long-time investment advisor, B.P.Pai, suffered a serious stroke. We are pleased to report that his condition has improved considerably and well beyond our initial hopes. Thank you for your continued support. Sincerely, Mohini C. Pai Savitri P. Pai President General Counsel Prospectus/Proxy Statement Dated _________, 2002 ACQUISITION OF THE ASSETS AND LIABILITIES OF KENILWORTH FUND, INC. 21 S. Clark Street, Suite 2594 Chicago, IL 60603 (312) 236-5388 BY AND IN EXCHANGE FOR CLASS A SHARES OF AHA DIVERSIFIED EQUITY FUND (a series of AHA INVESTMENT FUNDS, INC.) 190 South LaSalle Street, Suite 2800 Chicago, IL 60603 (800) 445-1341 This Prospectus/Proxy Statement is furnished in connection with the solicitation of proxies by the Board of Directors of Kenilworth Fund, Inc. (the "Fund" or the "Kenilworth Fund") in connection with the Special Meeting of Shareholders (the "Meeting") to be held at 21 S. Clark Street, Suite 2594, Chicago, Illinois 60603 on Friday, December 27, 2002 at 3:00 p.m. Central Time, at which shareholders will be asked to consider and approve the proposed Agreement and Plan of Reorganization (the "Plan of Reorganization") between the Kenilworth Fund and AHA Investment Funds, Inc. ("AHA Investment Funds"), and, solely for the purposes of paragraph 9.2 thereof, each of CCM Advisors LLC ("CCM Advisors") and Institutional Portfolio Services, Ltd. ("IPS"), and the transactions contemplated thereby (the "Transaction"), including: (a) the transfer of all assets of the Kenilworth Fund to, and the assumption of all liabilities of the Kenilworth Fund by, AHA Diversified Equity Fund (the "AHA Fund"), a series of the AHA Investment Funds, in exchange for Class A shares of the AHA Fund; (b) the distribution of the AHA Fund shares so received by the Kenilworth Fund pro rata to shareholders of the Kenilworth Fund; and (c) the dissolution of the Kenilworth Fund. The AHA Investment Funds and the Kenilworth Fund are open-end management investment companies. The AHA Fund is diversified, and the Kenilworth Fund is non-diversified. The investment objective of the AHA Fund is to provide long-term capital growth, and the investment objective of the Kenilworth Fund is long-term capital appreciation. This Prospectus/Proxy Statement constitutes the proxy statement of the Kenilworth Fund for the Meeting and the prospectus for the shares of the AHA Fund that are to be issued by the AHA Fund in connection with the Transaction. The Securities and Exchange Commission has not approved or disapproved these securities or determined if this Prospectus/Proxy Statement is truthful or complete. Any representation to the contrary is a criminal offense. This Prospectus/Proxy Statement sets forth concisely the information about the AHA Fund that a Kenilworth Fund shareholder should know before voting on the Transaction and should be retained for future reference. Please review the enclosed Statement of Additional Information ("SAI") relating to this Prospectus/Proxy Statement, dated __________, 2002, which includes further information about the Transaction. The SAI is incorporated into this Prospectus/Proxy Statement by reference. Please review the enclosed Prospectus (as supplemented to date) and Statement of Additional Information for the Class A shares of the AHA Fund and the Annual Report of the AHA Investment Funds, including the AHA Fund, for the fiscal year ended June 30, 2002. Each of these documents, insofar as they relate to the AHA Fund, is incorporated into this Prospectus/Proxy Statement by reference. No other parts of these documents (which relate to other AHA funds) are incorporated herein. The following documents are also included with this Prospectus/Proxy Statement and are each incorporated into this Prospectus/Proxy Statement by reference (except that only the financial statements included in the Semi-Annual Report to Shareholders of the Kenilworth Fund referenced below are incorporated by reference into this Prospectus/Proxy Statement): o The Prospectus of the Kenilworth Fund dated April 24, 2002, as supplemented; o The Statement of Additional Information of the Kenilworth Fund dated April 24, 2002; o The Annual Report to Shareholders of the Kenilworth Fund dated December 31, 2002; and o The Semi-Annual Report to Shareholders of the Kenilworth Fund dated June 30, 2002. Additional information about the Kenilworth Fund has been filed with the SEC and may be obtained upon oral or written request and without charge by calling the Fund collect at 1-312-236-5388. Additional information about the AHA Fund has been filed with the SEC and may be obtained upon oral or written request and without charge by calling the Fund at 1-800-445-1341. The Kenilworth Fund and the AHA Fund are each subject to certain informational requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, as applicable, and in accordance with such requirements file reports, proxy statements, and other information with the SEC. These materials may be inspected and copied: o At the Public Reference Facilities maintained by the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549; o At the SEC's Regional Offices at 233 Broadway, New York, New York 10279 and at Citicorp Center, 175 West Jackson Blvd., Suite 900, Chicago, Illinois 60604; o By writing to the SEC's Public Reference Branch, Office of Consumer Affairs and Information Services, 450 Fifth Street, N.W., Washington, D.C. at rates prescribed by the SEC; o By e-mail request to publicinfo@sec.gov (for a duplicating fee); and o On the SEC's EDGAR database on the SEC's Internet web site at HTTP://WWW.SEC.GOV. This Prospectus/Proxy Statement was first mailed to shareholders on or about ____________, 2002. TABLE OF CONTENTS PAGE SUMMARY 1 ABOUT THE PROPOSED TRANSACTION 2 BOARD CONSIDERATIONS 2 REASONS FOR THE TRANSACTION 2 FEDERAL INCOME TAX CONSEQUENCES 2 INVESTMENT OBJECTIVES, STRATEGIES AND POLICIES OF THE AHA FUND AND THE KENILWORTH FUND 2 PRINCIPAL RISK CONSIDERATIONS 5 COMPARISON OF SHARES 5 THE PROPOSAL 6 ADDITIONAL INFORMATION ABOUT THE AHA FUND 6 PERFORMANCE INFORMATION 6 COMPARATIVE FEE TABLES 9 SHAREHOLDER RIGHTS 11 VOTING INFORMATION 12 INFORMATION RELATING TO THE PROPOSED TRANSACTION 12 AGREEMENT BETWEEN ADVISERS 12 DESCRIPTION OF THE PLAN OF REORGANIZATION 13 BOARD CONSIDERATIONS 14 CAPITALIZATION 15 FEDERAL INCOME TAX CONSEQUENCES 16 INFORMATION RELATING TO VOTING MATTERS 16 GENERAL INFORMATION 16 SHAREHOLDER APPROVAL 17 QUORUM; ADJOURNMENT 17 ANNUAL MEETINGS 18 ADVISORS, INVESTMENT MANAGERS AND UNDERWRITERS 18 LEGAL MATTERS OTHER BUSINESS 19 FINANCIAL HIGHLIGHTS 19 SHAREHOLDER INQUIRIES 19 APPENDIX A AGREEMENT AND PLAN OF REORGANIZATION A-1 SUMMARY The following is a summary of certain information relating to the proposed Transaction, and is qualified in its entirety by reference to the more complete information contained elsewhere in this Prospectus/Proxy Statement and the Appendix attached. About the Proposed Transaction The Board of Directors of the Kenilworth Fund and the Board of Directors of AHA Investment Funds, including in each case all the directors who are not "interested persons" of AHA Investment Funds or Kenilworth Fund within the meaning of Section 2(a)(19) of the Investment Company Act of 1940, as amended (the "1940 Act") (the "Boards"), have approved the Plan of Reorganization under which the AHA Fund would acquire all of the assets and assume all of the liabilities of the Kenilworth Fund, and each Kenilworth Fund shareholder become a shareholder of the AHA Fund. The Transaction will have three steps: o First, if the shareholders of the Kenilworth Fund approve the Transaction, the Kenilworth Fund will transfer all of its assets to the AHA Fund. In exchange, the Kenilworth Fund will receive Class A shares of the AHA Fund with a total net asset value equal to the value of the assets it is transferring (net of the Kenilworth Fund's liabilities) calculated as of the close of business on the date of the Transaction (currently scheduled to be December 30, 2002) and the AHA Fund will assume those liabilities. o Second, the AHA Fund, through its transfer agent, will open an account for each shareholder of the Kenilworth Fund, and will credit each such account with shares of the AHA Fund having the same value as the Kenilworth Fund shares that the shareholder owned on the date of the Transaction. o The Kenilworth Fund will subsequently dissolve. Approval of the Transaction will constitute approval of the transfer of assets by the Kenilworth Fund, the assumption of liabilities by the AHA Fund, the distribution of AHA Fund Class A shares to Kenilworth Fund shareholders and the dissolution of the Kenilworth Fund. No sales charge or fee of any kind will be charged to Kenilworth Fund shareholders in connection with the Transaction. Consummation of the Transaction is subject to a number of conditions, as described under "Information Relating to Proposed Transaction - Description of the Plan of Reorganization", including the closing of the transactions contemplated by the Agreement Between Advisers by and between CCM Advisors and IPS dated November 20, 2002 simultaneously with the closing of the Transaction. The Plan of Reorganization may be terminated by mutual agreement of the AHA Investment Funds and the Kenilworth Fund. Board Considerations Based upon their evaluation of the relevant information presented to them, and in light of their fiduciary duties under federal and state law, the Boards have determined that the Transaction is in the best interests of shareholders of the Kenilworth Fund and the AHA Fund, respectively, and that the interests of existing shareholders of the Kenilworth Fund will not be diluted as a result of the Transaction. See "Information Relating to the Proposed Transaction - Board Considerations." Reasons for the Transaction The primary reason that IPS, the investment adviser to the Kenilworth Fund, proposed the Transaction is that IPS determined that CCM Advisors would be able to provide the high quality administrative, operational and research support necessary to benefit the Kenilworth Fund shareholders. In approving the Transaction, the Board of the Kenilworth Fund considered, among other things, (a) the fact that the AHA Fund has investment objectives and principal investment strategies similar to those of the Kenilworth Fund, and that as shareholders of the AHA Fund, the former Kenilworth Fund shareholders would have the ability to exchange with five other AHA funds; (b) the fact that shareholder interests would not be diluted in the proposed Transaction; (c) the fact that the AHA Fund's management fees are lower than the Kenilworth Fund's management fees; (d) the agreement of CCM Advisors to use its reasonable efforts for three years to maintain the average total annual fund operating expenses for the Class A shares of the AHA Fund (after giving effect to the Transaction) at or below 1.35% of the net assets of the Class A shares of the AHA Fund, which is lower than the corresponding current level for the Kenilworth Fund; (e) the agreement of CCM Advisors to lower the voluntary expense reimbursement cap to 1.50%, which is lower than the corresponding current level for the Kenilworth Fund; and (f) the status of the Transaction as a tax-free transaction. Please review the "Information Relating to the Proposed Transaction - Board Considerations" section for more information regarding the factors considered by the Directors. Federal Income Tax Consequences The Transaction has been structured so that the Kenilworth Fund and its shareholders will not recognize any gain or loss for federal income tax purposes as a result of the Transaction, and the AHA Fund will not recognize gain or loss for federal tax purposes on its issuance of shares in the Transaction. See "Information Relating to the Proposed Transaction - Federal Income Tax Consequences." Investment Objectives, Strategies and Policies of the AHA Fund and the Kenilworth Fund The AHA Fund has an investment objective and policies and principal investment strategies that are similar to those of the Kenilworth Fund. This table shows the investment objectives and principal investment strategies of each Fund:
- ---------------------------------------------------- -------------------------------------------------- AHA Fund Kenilworth Fund - ---------------------------------------------------- -------------------------------------------------- Investment Objective: The AHA Fund seeks to Investment Objective: The Kenilworth Fund seeks provide long-term capital growth. long-term capital appreciation. - ---------------------------------------------------- -------------------------------------------------- Principal Investment Strategies: The AHA Fund Principal Investment Strategies: The Kenilworth seeks to achieve its goal by investing Fund seeks to achieve its goal as follows: substantially all of its assets in the Diversified o by investing in a non-diversified Equity Master Portfolio (the "Portfolio"). The portfolio of common stocks. Portfolio uses multiple Investment Managers that o Before investing in companies, the Fund each use distinct investment styles and research tries to determine the outlook for the techniques to achieve the Portfolio's investment economy, the course of monetary policy as objective. The Portfolio is a series of a mutual pursued by the Federal Reserve Board, the fund called CCM Advisors Funds (the "Master direction of interest rates and of overall Fund"). corporate profits -- the two most critical factors determining overall equity market The Portfolio has the same objective and values. Then, the Fund focuses on four or substantially similar strategies and policies as five large industries that are likely to the AHA Fund. perform well in that economic milieu and generally chooses two to four companies o Under normal circumstances, the Portfolio with dominant or growing market share in a invests at least 80% of its net assets plus growing market, in their respective any borrowings for investment purposes (at industries. market value at the time of purchase) in o The Fund generally rotates out of common stocks that are diversified among expensive stocks and into inexpensive various industries and market sectors. stocks by selling the stocks of those o The Portfolio may also invest up to 20% companies whose price/earnings ratios of its net assets at the time of purchase in become expensive relative to that of their fixed income securities, including money market growth rates and that of the overall instruments having one of the three highest market, and buying the stocks of those ratings of Moody's or S&P. companies whose price/earnings ratios are o The Portfolio has no restrictions on low relative to that of their growth rates market capitalization. and that of the overall market. The Fund o The investment strategies of the employs both a growth and value style of Portfolio's Investment Managers will differ, investing. but typically will emphasize securities that have one or more of the following o The Fund invests primarily in: characteristics: 1. large capitalization stocks listed on the United States stock exchanges, those 1. prices they believe to be significantly generally over $10 billion in size; below the intrinsic value of the company; 2. special situations such as: (a) those situations in which companies are likely to be bought out at a high 2. favorable prospects for earnings growth; premium to their current market price; (b) those situations in which a company's stock market price does 3. above average return on equity and not reflect the underlying value dividend yield; and of all the company's assets, particularly those of real-estate or patents carried 4. sound overall financial condition of at historic cost; the issuer. (c) those situations in which the stock o An Investment Manager may determine to market price of a corporation with two sell a security when its target value is very profitable businesses is trading realized, its earnings deteriorate, changing at a discount to its actual value circumstances affect the original reasons for because of political and/or legal a security's purchase, or more attractive uncertainties involving one of the investment alternatives exist. businesses, thereby placing a negative value on that business; 3. turnaround situations where due to new products, managements, or technologies a new future is forecast for a given company; or 4. in companies with a very strong technological niche in a dynamic growth industry. - ---------------------------------------------------- --------------------------------------------------
The investment objective of each Fund is fundamental and may not be changed by the board of directors of the respective Fund without shareholder approval. The principal investment strategies of the Kenilworth Fund and the AHA Fund are generally similar, except that the Kenilworth Fund invests its assets directly in securities of companies, while the AHA Fund invests its assets in the Portfolio. The Portfolio also uses multiple Investment Managers, each of whom use distinct investment style and research techniques, to achieve its objective. The Kenilworth Fund's assets are managed by its investment adviser. In addition, the Kenilworth Fund invests its assets primarily in companies with large market capitalizations, while the Portfolio has no restrictions on market capitalization. Unlike the Kenilworth Fund, the Portfolio may invest up to 20% of its net assets at the time of purchase in fixed income securities, including money market instruments having one of the three highest ratings of Moody's or S&P. Finally, the Kenilworth Fund is a non-diversified fund, while under normal circumstances the Portfolio will invest at least 80% of its net assets plus any borrowings for investment purposes (at market value at the time of purchase) in common stocks that are diversified among various industries and market sectors. The investment policies of each Fund are generally similar. Following are the primary differences between the Funds' investment policies: o Unlike the Kenilworth Fund, the AHA Fund may invest all of its investable assets in another registered investment company having the same investment objective and substantially the same investment policies as the AHA Fund; o Unlike the Kenilworth Fund, which may not invest in restricted, illiquid or other securities without readily available market quotations, the Portfolio may purchase illiquid securities of an issuer as long as no more than 10% of the value of the Portfolio's net assets would be invested in illiquid securities after giving effect to that purchase, and the AHA Fund may purchase illiquid securities of an issuer as long as no more than 10% of the value of the AHA Fund's total assets would be invested in illiquid securities after giving effect to that purchase; o Unlike the Kenilworth Fund, the AHA Fund may invest in repurchase and reverse repurchase agreements and may loan securities in an amount not exceeding one-third of its total assets; and o Unlike the Kenilworth Fund which has no such restriction, the AHA Fund will not purchase the stocks or bonds of companies identified by the American Medical Association Coalition of Tobacco-Free Investments (the "AMA") as engaged in growing, processing or otherwise handling tobacco and will dispose (within a reasonable period of time and consistent with prudent investment practice) of securities of an issuer subsequently identified by the AMA as being engaged in such practices. For a list of each Fund's investment policies and restrictions, see the Statement of Additional Information of each Fund. For information on each Fund's policies with respect to temporary defensive positions, please see each Fund's prospectus. PRINCIPAL RISK CONSIDERATIONS The AHA Fund is subject to credit risk, interest rate risk, management risk, market risk and prepayment risk. The principal risks associated with each Fund are generally similar because the Funds have generally similar investment goals and strategies, except that the Kenilworth Fund is also subject to industry risk and nondiversification risk and may not be as subject to some of the risks associated with investing in debt securities as is the AHA Fund. An investment in the AHA Fund is not a deposit in a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. You may lose money by investing in the AHA Fund. For more information about the principal investment risks of the AHA Fund, please see the enclosed Prospectus of the AHA Fund. The actual risks of investing in each Fund depend on the securities held in each Fund's portfolio and on market conditions, both of which change over time. Shareholders of the Kenilworth Fund should note that, although the investment goal and strategies of the AHA Fund and the Portfolio are generally similar to those of the Kenilworth Fund, there will be some differences in the investment style of the combined fund. The AHA Fund and the Portfolio have no restrictions on market capitalization and may invest up to 20% of net assets in fixed income securities. Please see "Investment Objectives, Strategies and Policies" above for more information comparing the investment goals, strategies and policies of the Funds and the Portfolio. COMPARISON OF SHARES If the Transaction occurs, you will receive Class A shares of the AHA Fund. In comparison to the shares you currently own, the shares you receive will have the following characteristics: o They will have an aggregate net asset value equal to the aggregate net asset value of your current shares as of the business day before the closing of the Transaction; o As with your current shares, they will not bear any initial sales charges and will not be subject to any redemption fees (other investors in Class A shares of the AHA Fund pay an initial sales charge); o Unlike the Kenilworth Fund, Class A shares purchased without an initial sales charge in accounts aggregating $1,000,000 or more at the time of purchase and redeemed within 12 months of the date of purchase are subject to a contingent deferred sales charge equal to 1.00% of the lesser of the purchase price or net asset value at the time of sale (this provision also does not apply to former Kenilworth Fund shareholders); o The procedures for purchasing and redeeming shares will change as a result of the Transaction. Please see the enclosed Prospectus of the AHA Fund for a description of the procedures for purchasing and redeeming shares. Shareholders of the Kenilworth Fund who acquire Class A shares of the AHA Fund as a result of the Transaction and any member of their immediate family (which means any parent, spouse of a parent, child, spouse of a child, spouse, brother or sister of that person, and includes step and adoptive relationships) may acquire additional Class A shares of the AHA Fund without paying an initial sales load or, upon redemption, contingent deferred sales charges, for as long as the former shareholder of the Kenilworth Fund maintains an open account in the Class A shares of the AHA Fund; o Unlike shares of the Kenilworth Fund, the Class A shares have exchange privileges. You will be able to exchange among the Class A shares of the AHA funds after the Transaction. Please see the enclosed Prospectus of the AHA Fund for a description of those exchange privileges; o You will have similar voting rights as you currently have, but as a shareholder of the AHA Fund and the AHA Investment Funds. Please see "Shareholder Rights" under "Overview of the AHA Fund and the Kenilworth Fund." For more information on how the AHA Fund calculates net asset value, please see its enclosed prospectus. THE PROPOSAL You are being asked to approve the Plan of Reorganization, the form of which is attached as Appendix A to this Prospectus/Proxy Statement. By approving the Plan of Reorganization, you are also approving the Transaction. ADDITIONAL INFORMATION ABOUT THE AHA FUND 12b-1 Plan Unlike the Kenilworth Fund, the Class A shares of the AHA Fund have adopted a plan under Rule 12b-1 of the Investment Company Act of 1940 that permits the AHA Fund to pay its Distributor a monthly fee as compensation for providing services to support the sale and distribution of the AHA Fund's shares. The annual service fee may equal up to 0.25% of the average net assets of the Class A shares of the AHA Fund. Over time these fees will reduce the return on your investment and may cost you more than paying other types of sales charges. PERFORMANCE INFORMATION The charts below show the percentage gain or loss in each calendar year for the ten-year period ended December 31, 2001, for the oldest class of shares of the AHA Fund (Class I shares) and for the eight-year period ended December 31, 2001, for the Kenilworth Fund (which does not offer classes of shares). They should give you a general idea of how each Fund's returns have varied from year to year. The charts include the effects of Fund expenses, but not sales charges (if applicable to the Fund's shares). You should note that for the AHA Fund, Class A shares bear higher expenses than Class I shares; if Class I shares had been subject to 12b-1 fees (like Class A shares), the performance shown would have been lower. Returns would be lower if any applicable sales charges were included. The calculations of total return assume the reinvestment of all dividends and capital gain distributions on the reinvestment date. Past performance is not an indication of future results. Performance results include the effect of expense reduction arrangements, if any. If these arrangements had not been in place, the performance results would have been lower. Additional discussion of the manner of calculation of total return is contained in each Fund's Statement of Additional Information. AHA Fund: Year-by-Year Total Return (as of 12/31 each year) Class I Shares(1) [BAR CHART] 1992: 9.51% 1993: 10.02% 1994: -0.39% 1995: 33.73% 1996: 23.35% 1997: 33.64% 1998: 16.67% 1999: 20.98% 2000: -2.92% 2001: -2.05% (1) During the periods included in this bar chart, the highest and lowest quarterly returns were 20.91% and - 12.59%, respectively, for the quarters ended December 1998 and September 1998. The year-to-date total return as of September 30, 2002 was -24.78% for Class I shares. Because Class A shares have not been offered to the public, the information provided in the bar chart represents only the performance of Class I shares, one of the Fund's other classes of shares, which are offered to institutional investors by a separate prospectus. Class A shares and Class I shares would have substantially similar annual returns because the shares are invested in the same portfolio of securities. However, because the classes do not have the same expenses, the expense ratio and the total return of Class A shares will differ from those of the Class I shares. Kenilworth Fund: Year-by-Year Total Return2 (as of 12/31 each year) [BAR CHART] 1994: -5.95% 1995: 28.03% 1996: 29.48% 1997: 20.67% 1998: 20.58% 1999: 26.95% 2000: -6.96% 2001: -26.16 % 2 During the periods included in this bar chart, the highest and lowest quarterly returns were 28.39% and - 22.00%, respectively, for the quarters ended December 1998 and March 2001. The following tables list each Fund's average annual total returns (before and after taxes) for the one-year, five-year and ten-year periods ended December 31, 2001, for Class I shares of the AHA Fund and for the one-year, five-year and since inception periods ended December 31, 2001, for shares of the Kenilworth Fund. These tables are intended to provide you with some indication of the risks of investing in a Fund. After-tax returns are intended to show the impact of assumed federal income taxes on an investment in a Fund. "Return After Taxes on Distributions" shows the effect of taxable distributions (dividends and capital gain distributions), but assumes that you still hold a Fund's shares at the end of the period and so do not have any taxable gain or loss on your investment in shares of a Fund. "Return After Taxes on Distributions and Sale of Fund Shares" shows the effect both of taxable distributions and any taxable gain or loss that would be realized if a Fund's shares were purchased at the beginning and sold at the end of the specified period. At the bottom of each table, you can compare the Funds' performance with one or more indices. After-tax returns are calculated using the historical highest individual federal income tax rate in effect at the time of each distribution and assumed sale of Fund shares, but do not reflect the impact of state and local taxes. In some instances, the "Return After Taxes on Distributions and Sale of Fund Shares" may be greater than the "Return Before Taxes" because you are assumed to be able to use any capital loss on the sale of Fund shares to offset other taxable capital gains. Your actual after-tax returns depend on your own tax situation and may differ from those shown. After-tax returns reflect past tax effects and are not predictive of future tax effects. After-tax returns are not relevant to investors who hold their Fund shares through tax-deferred arrangements such as 401(k) plans or individual retirement accounts or to investors who are tax-exempt. AHA Fund: Average Annual Total Returns (for periods ended 12/31/01) Class I Shares 1 All returns reflect reinvested dividends. 1 Year 5 Years 10 Years ------ ------- -------- AHA Fund Return Before Taxes -2.05% 12.40% 13.51% Return After Taxes on Distributions -3.49% 9.26% 10.32% Return After Taxes on Distributions and Sale of Fund Shares -0.64% 8.11% 8.50% S&P 500(R)Stock Index2 -11.86% 10.71% 12.93% (reflects no deduction for fees, expenses or taxes) Russell 1000(R)Value Index2 -5.59% 11.14% 14.15% (reflects no deduction for fees, expenses or taxes) 1 Because Class A shares have not yet been offered to the public, the information provided in the table represents only the performance of Class I shares, one of the Fund's other classes of shares, which are offered to institutional investors by a separate prospectus. Class A shares and Class I shares would have substantially similar annual returns because the shares are invested in the same portfolio of securities. However, because the classes do not have the same expenses, the expense ratio and the average annual total return of Class A shares will differ from those of the Class I shares. 2 The S&P 500(R) Stock Index is a broad market-weighted average of U.S. blue-chip companies. The Russell 1000(R) Value Index measures the performance of those Russell 1000(R) companies with lower price-to-book ratios and lower forecasted growth values. S&P 500(R) Stock Index is a registered trademark of McGraw-Hill, Inc. Russell 1000(R) Value Index is a registered trademark of The Frank Russell Company. Kenilworth Fund: Average Annual Total Return (as of 12/31/01) All returns reflect reinvested dividends. Since Kenilworth Fund 1 Year 5 Years Inception* ------ ------- ---------- Return Before Taxes -26.26% 4.88% 8.81% Return After Taxes on Distributions -26.16% 4.72% 8.49% Return After Taxes on Distributions and Sale of Fund Shares -15.93% 3.98% 7.30% S&P 500(R)Stock Index+ -11.87% 10.70% 13.81% * Inception date: July 1, 1993 + The S&P 500(R)Stock Index is a broad market-weighted average of U.S. blue-chip companies. COMPARATIVE FEE TABLES The table below shows the fees and expenses that you may pay if you buy and hold shares of the Funds. The annual operating expenses expected to be incurred by the combined fund (giving effect to the Transaction) is based on pro forma combined net assets as of June 30, 2002. Annual Fund Operating Expenses include management fees, 12b-1 fees (if applicable) and administrative costs, including pricing and custody services. Shareholders of the Kenilworth Fund who acquire Class A shares of the AHA Fund as a result of the Transaction and members of their immediate families will not pay any sales charges on Class A shares of the AHA Fund for as long as the shareholder of the Kenilworth Fund maintains an open account in the Class A shares of the AHA Fund. KENILWORTH AHA FUND FUND Shareholder Fees (fees paid directly from your investment) Maximum Sales Charge (Load) Imposed on Purchases 5.00%* None Maximum Deferred Sales Charge (Load) None None Maximum Sales Charge (Load) Imposed on Reinvested Dividends None None Exchange Fee None None Redemption Fee None None * Shareholders of the Kenilworth Fund who acquire Class A shares of the AHA Fund as a result of the Transaction and members of their immediate families do not pay these sales charges for as long as the shareholder of the Kenilworth Fund maintains an open account in the Class A shares of the AHA Fund. The initial sales charge declines based on the amount purchased according to the schedule set forth in the enclosed prospectus under "Sales Charges." The enclosed prospectus also contains information as to procedures for pricing the AHA Fund's shares (which are similar to those used by the Kenilworth Fund). Annual Fund Operating Expenses(1) (expenses that are deducted from Fund assets) - -------------------------------------------------------------------------------- Kenilworth Fund AHA Fund (Pro Expense AHA Fund Forma Combined) - -------------------------------------------------------------------------------- Management Fees 0.75%2 1.00% 0.75%2 - -------------------------------------------------------------------------------- Distribution (12b-1) Fees 0.25% None 0.25% - -------------------------------------------------------------------------------- Other Expenses 0.38% 0.46% 0.35% ----- ----- ----- - -------------------------------------------------------------------------------- Total Annual Fund Operating Expenses 1.38%3 1.46%4 1.35%3 ===== ====== ===== - -------------------------------------------------------------------------------- (1) The fees and expenses described in this table and the Example below reflect the fees and expenses of each Fund and the AHA Fund's share of the expenses of the Portfolio into which it invests. Expenses are based on amounts incurred by the AHA Fund during the fiscal year ended June 30, 2002, but "Other Expenses" do not include certain amounts that the AHA Fund incurred during this period and does not anticipate to incur in the future. 2 The Fund and Portfolio pay CCM Advisors, the Fund's and Portfolio's administrator, an administrative services fee at the annual rate of $20,000 and 0.055% of the Portfolio's average daily net assets, respectively, which is included in "Other Expenses." 3 CCM Advisors has undertaken to reimburse the Fund to the extent that the total operating expenses exceed 1.50% for each of the next three years. CCM Advisors or the Funds may terminate this undertaking at any time. If CCM Advisors reimburses the Fund for expenses that exceed 1.50%, CCM Advisors may recover the reimbursed amounts for a period that does not exceed three years, to the extent this can be done without exceeding the expense limit. CCM Advisors has also undertaken to use its reasonable efforts for three years to maintain the average total annual fund operating expenses of the Class A shares of the AHA Fund (after giving effect to the Transaction) at or below 1.35% of net assets of the Class A shares of the AHA Fund. 4 Expenses are based on the Fund's expenses for the fiscal year ended December 31, 2001. The Fund's expenses are limited to 1.60% of its average net assets. Expenses in excess of 1.60% are required to be reimbursed by the Fund's investment adviser, pursuant to its advisory agreement with the Fund. The Fund's advisory agreement, which contains the expense reimbursement agreement, is reviewed every year by the Fund's Board of Directors. The expense reimbursement clause cannot be terminated at will by the Fund's investment adviser. Example: This example is intended to help you compare the cost of investing in the Kenilworth Fund or the AHA Fund currently with the cost of investing in the combined fund on a pro forma basis if the Transaction is approved and also to allow you to compare these costs with the cost of investing in other mutual funds. The example assumes that you invest $10,000 for the time periods indicated and then redeem all of your shares at the end of those periods. The example also assumes that you earn a 5% return each year and that the Funds' operating expenses remain the same. This example is for illustration only; your actual costs may be higher or lower than the amounts shown. - --------------------------------------------------------------------------- Time Period AHA Fund Kenilworth Fund AHA Fund (Pro Forma Combined) - --------------------------------------------------------------------------- 1 year $ 140 $ 149 $ 137 - --------------------------------------------------------------------------- 3 years $ 437 $ 462 $ 428 - --------------------------------------------------------------------------- 5 years $ 755 $ 797 $ 739 - --------------------------------------------------------------------------- 10 years $ 1,657 $1,746 $1,624 - --------------------------------------------------------------------------- Shareholder Rights The chart below describes some of the differences between your rights as a shareholder of the Kenilworth Fund and your rights as a shareholder of the AHA Fund. The Kenilworth Fund is organized as an Illinois corporation, and the AHA Fund is a series of the AHA Investment Funds, Inc., a Maryland corporation.
- ---------------------------- -------------------------------------- -------------------------------------- Category Kenilworth Fund AHA Fund - ---------------------------- -------------------------------------- -------------------------------------- 1. Annual meetings Held at principal office or as Board No annual meetings required, unless of Directors shall prescribe required under the 1940 Act - ---------------------------- -------------------------------------- -------------------------------------- 2. Right to call meeting of Shall be called upon written request Shall be called upon written request shareholders of shareholders holding a majority of shareholders holding at least 25% of the outstanding shares of the outstanding shares - ---------------------------- -------------------------------------- -------------------------------------- 3. Notice of meetings Given to each shareholder entitled Mailed to each shareholder entitled to notice at least 10 days, but not to vote at least 10 days, but not more than 60 days, before the meeting more than 90 days, before the meeting (20 days' notice required for certain special meetings) - ---------------------------- -------------------------------------- -------------------------------------- 4. Record date of meetings Directors may close transfer book Directors may close transfer book not exceeding 60 days and not less not exceeding 90 days and not less than 10 days prior to the date of than 10 days prior to the date of such meeting such meeting - ---------------------------- -------------------------------------- -------------------------------------- 5. Election of Directors Majority of shares represented at Plurality of all votes cast at a meeting in person or by proxy a meeting at which a quorum is present - ---------------------------- -------------------------------------- -------------------------------------- - ---------------------------- -------------------------------------- -------------------------------------- 6. Removal of Directors by Majority of shares represented at May be removed from office by a vote Shareholders meeting in person or by proxy, of the shareholders holding a provided however that the notice of majority of the shares entitled to meeting states that a purpose of the vote meeting is to vote upon the removal of one or more named directors - ---------------------------- -------------------------------------- -------------------------------------- 7. Appraisal Rights Shareholders may dissent upon Shareholders may not demand fair written demand for payment prior to value of shares and are bound by the voting on the Transaction and terms of the Transaction shareholder votes against the Transaction - ---------------------------- -------------------------------------- --------------------------------------
Voting Information This Prospectus/Proxy Statement is being furnished in connection with the solicitation of proxies by the Board of Directors of the Kenilworth Fund in connection with the Meeting. Only shareholders of record at the close of business on December 4, 2002 will be entitled to notice of and to vote at the Meeting. Each share or fraction thereof is entitled to one vote or fraction thereof. Shares represented by a properly executed proxy will be voted in accordance with the instructions thereon, or if no instruction is given, the persons named as proxies will vote in favor of the proposed Transaction. Proxies may be revoked at any time before they are exercised by submitting a written notice of revocation or a subsequently executed proxy, or by attending the Meeting and voting in person. For additional information, including a description of the shareholder vote required for approval of the Transaction, see "Information Relating to Voting Matters." INFORMATION RELATING TO THE PROPOSED TRANSACTION Agreement Between Advisers IPS and CCM Advisors entered into an Agreement Between Advisers dated November 20, 2002. Subject to certain conditions, CCM Advisors has agreed to pay IPS certain amounts described below in consideration for IPS taking all actions within its control necessary to facilitate the Transaction. Consummation of the transactions contemplated by the Agreement Between Advisers is conditioned upon, among other things, shareholders of the Kenilworth Fund approving the Plan of Reorganization. The closing of the Transaction is conditioned upon, among other things, the closing of the transactions contemplated by the Agreement Between Advisers simultaneously with the closing of the Transaction. On the date of the closing of the Transaction, pursuant to the Agreement Between Advisers, CCM Advisors will pay to IPS 0.25% of the net assets of the Kenilworth Fund on such date. In years two through eight subsequent to the closing of the Transaction, pursuant to the Agreement Between Advisers, CCM Advisors will pay to IPS an amount equal to 0.25% of the average net assets of the Class A share class of the AHA Fund as of the anniversary of the closing that are attributable to shareholders of the A share class of the AHA Fund that were shareholders of the Kenilworth Fund on the date of closing (excluding any assets contributed by such shareholders to the AHA Fund after the date of closing). IPS has examined the strategic alternatives available to it for the Kenilworth Fund and determined that CCM Advisors would be able to provide the high quality administrative, operational, and research support necessary to benefit the Kenilworth Fund's shareholders. While it is not addressed in the Agreement Between Advisers, one of IPS's employees who is an officer and director of the Kenilworth Fund is currently in employment discussions with CCM Advisors. Description of the Plan of Reorganization AHA Investment Funds, on behalf of the AHA Fund, and the Kenilworth Fund have entered into the Plan of Reorganization, which provides that the AHA Fund is to acquire the assets and assume the liabilities of the Kenilworth Fund on the Closing date (expected to be December 30, 2002). The Plan of Reorganization sets forth the terms and conditions that will apply to the Transaction. The following description of the Plan of Reorganization is qualified in its entirety by reference to the actual Plan, the form of which is set forth as Appendix A. The Plan of Reorganization provides the details of the Transaction. In essence, the Transaction will have three steps: o First, if the shareholders of the Kenilworth Fund approve the Transaction, the Kenilworth Fund will transfer all of its assets to the AHA Fund. In exchange, the Kenilworth Fund will receive the number of Class A shares of the AHA Fund (including fractional shares, if any) determined by dividing the net asset value of the Kenilworth Fund on the business day next preceding the closing of the Transaction (the "Valuation Date") by the net asset value of one Class A share of the AHA Fund on the Valuation Date. The AHA Fund will assume all of the Kenilworth Fund's liabilities. o Second, the Kenilworth Fund will liquidate and distribute pro rata to its shareholders of record on the Valuation Date, the Class A shares of the AHA Fund received by the Kenilworth Fund from the AHA Fund. The AHA Fund, through its transfer agent, will open an account for each shareholder of the Kenilworth Fund, and will credit each such account with Class A shares of the AHA Fund having the same total value as the Kenilworth Fund shares that the shareholder owned on the date of the Transaction. o Third, the Kenilworth Fund will subsequently dissolve pursuant to the provisions of the laws of the State of Illinois and de-register as an investment company under the 1940 Act. On the day of the Transaction, Kenilworth Fund shareholders will receive Class A shares of the AHA Fund, with the same total value as their shares of the Kenilworth Fund, and thus there will be no dilution of their interest. Transaction expenses, including (i) fees paid to governmental authorities for the registration of the Class A shares of the AHA Fund received by the Kenilworth Fund in the Transaction and all transfer agency costs related to those shares will be paid by AHA Investment Funds, and (ii) fees and expenses related to printing, mailing, photocopying, solicitation of proxies and tabulation of votes of the Kenilworth Fund shareholders will be paid by CCM Advisors. All of the other expenses of the Transaction will be borne by the party incurring such expenses, except that all expenses of the Kenilworth Fund with respect to the Transaction will be paid by IPS, and all expenses of the AHA Fund (other than those set forth in the preceding sentence) will be paid by CCM Advisors. The consummation of the Transaction is subject to certain conditions set forth in the Plan of Reorganization, including those set forth below: o Continuing accuracy of the representations and warranties in the Plan of Reorganization; o The closing of the transactions contemplated by the Agreement Between Advisers simultaneously with the closing of the Transaction; o Receipt of certain legal opinions described in the Plan of Reorganization, including an opinion as to the tax-free nature of the Transaction; o The net assets of the Kenilworth Fund being no less than $4,000,000 on the day before the closing of the Transaction, unless waived by the Acquiring Fund; and o Approval of the Plan of Reorganization by the required two-thirds vote of the shareholders of the Kenilworth Fund. The respective Boards of Directors of the AHA Investment Funds, on behalf of the AHA Fund, and the Kenilworth Fund may mutually agree to waive conditions, other than the requirement of shareholder approval, under the Plan of Reorganization at or prior to the Transaction date, if, in their judgment, the waiver will not have a material adverse effect on the interests of the shareholders of the AHA Fund or the Kenilworth Fund. The Plan of Reorganization may be terminated by mutual agreement of the AHA Investment Funds and the Kenilworth Fund. In addition, either Fund may waive the other party's breach of a provision or failure to satisfy a condition of the Plan of Reorganization. If the transactions contemplated by the Plan of Reorganization have not been substantially completed by January 31, 2003, the Plan of Reorganization will automatically terminate on that date unless the parties agree to a later date. Board Considerations The Board of Directors of the Kenilworth Fund has determined that the Transaction is in the best interests of the Kenilworth Fund and its shareholders and has approved the Plan of Reorganization. In approving the Transaction, the Board considered the following factors, among others: o Because the AHA Investment Funds have a large investment management business, the Board believes the Transaction can provide the Kenilworth Fund with the benefit of broader administration and portfolio management services and can provide you with the benefit of broader shareholder services. This includes the opportunity to exchange shares of the AHA Fund with shares of other mutual funds in the AHA family of funds; o the fact that shareholder interests would not be diluted in the proposed Transaction; o the fact that the AHA Fund's management fees (0.75% of net assets) are lower than the Kenilworth Fund's management fees (1.00% of net assets); o the agreement of CCM Advisors to use its reasonable efforts for three years from the date of the Plan of Reorganization to maintain average total annual fund operating expenses in each fiscal year for the Class A shares of the AHA Fund (after giving effect to the Transaction) at or below 1.35% of the average net assets of the Class A shares of the AHA Fund, which is lower than the corresponding current level for the Kenilworth Fund (1.46% of net assets); o the agreement of CCM Advisors to lower the voluntary expense reimbursement cap to 1.50% of the Fund's average daily net assets for each of the next three years, which is lower than the corresponding current level for the Kenilworth Fund (1.60% of net assets); and o the status of the Transaction as a tax-free reorganization. The Kenilworth Fund Board, which is comprised of five directors, only one of whom is not an "interested person" under the 1940 Act, also considered the fact that IPS will receive compensation if the Reorganization occurs, but the disinterested director approved the Plan of Reorganization, believing it to be in the best interests of the Fund's shareholders. The Board reviewed the differences between the operations of the Kenilworth Fund (which are limited by the requirements of Section 10(d) of the 1940 Act) and those of the AHA Fund, and concluded that those differences often should benefit Fund shareholders. At a meeting held on November 20, 2002, the Board of Directors of AHA Investment Funds approved the Plan of Reorganization, finding that the Transaction is in the best interests of the AHA Fund and its shareholders. The Kenilworth Fund Board reviewed certain "due diligence" materials related to AHA Investment Funds and CCM Advisors. The Board was aware that CCM Advisors derives certain benefits from the Transaction and from the potential growth of the AHA Fund, and that IPS benefits from the Transaction from payments by CCM Advisors under the Agreement Between Advisers (albeit at a rate equal to one-quarter of the advisory fees it otherwise would receive from Kenilworth Fund). After consideration of the factors and other relevant information, the Board unanimously approved the Plan of Reorganization and directed that it be submitted to shareholders for approval. THE BOARD OF DIRECTORS OF THE KENILWORTH FUND UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" APPROVAL OF THE PLAN OF REORGANIZATION AND THE TRANSACTION. Capitalization The following table sets forth the unaudited capitalization of the AHA Fund's Class A shares, all classes of the AHA Fund and the Kenilworth Fund. It also sets forth the unaudited capitalization of the AHA Fund's Class A shares on a pro forma combined basis as of November 7, 2002, giving effect to the Transaction, and the unaudited capitalization of all classes of the AHA Fund on a pro forma combined basis as of November 7, 2002, giving effect to the Transaction:
AHA Fund (Class A Shares) AHA Fund and Kenilworth (All Classes) Fund Pro and Kenilworth AHA Fund AHA Fund Kenilworth Forma Fund Pro Forma (Class A) (All Classes) Fund Combined Combined Net Assets ($) 0 71,314,601 7,077,341 7,077,341 78,391,942 Net Asset Value Per Share ($) 0 -- 13.77 13.77 -- Shares Outstanding 0 6,026,890.58 514,124.56 514,124.56 6,541,015.14
If the Transaction is consummated, the capitalization of each Fund is likely to be different at the Closing date as a result of daily share purchase and redemption activity. Federal Income Tax Consequences The Transaction will constitute a "reorganization" within the meaning of Section 368(a)(1) of the Internal Revenue Code of 1986, as amended ("Code"). Neither Kenilworth Fund, the AHA Fund, nor their respective shareholders will recognize gain or loss for federal income tax purposes as a result of the Transaction. Following the Transaction, the AHA Fund will have the same federal tax basis in the assets of the Kenilworth Fund that the Kenilworth Fund had in those assets immediately prior to the Transaction. In addition, each shareholder of the Kenilworth Fund will have the same federal tax basis in the shares of the AHA Fund received in the Transaction that the shareholder had in his or her shares of the Kenilworth Fund immediately prior to the Transaction, and the shareholder's holding period for those AHA Fund shares will include his or her holding period for those Kenilworth Fund shares. It is not expected that Kenilworth Fund shareholders will incur any state or local tax liabilities as a result of the Transaction, but the Fund's shareholders should consult their tax advisors to make sure. AHA Investment Funds and the Kenilworth Fund have not sought a tax ruling from the Internal Revenue Service (the "IRS") regarding the foregoing, but are acting in reliance on an opinion of counsel. The opinion of counsel is not binding on the IRS and does not preclude the IRS from adopting a contrary position. The AHA Fund's utilization after the Transaction of any capital losses realized by the Kenilworth Fund could be subject to limitations in future years under the Code. Bell, Boyd & Lloyd LLC has delivered to the AHA Fund and the Kenilworth Fund an opinion, and the closing of the Transaction will be conditioned on receipt of a letter from Bell, Boyd & Lloyd LLC confirming such opinion, to the effect that, on the basis of existing law under specified sections of the Internal Revenue Code of 1986, as amended (the "Code"), for federal income tax purposes: o under Section 361 or Section 354 of the Code, respectively, no gain or loss will be recognized by the Kenilworth Fund or the shareholders of the Kenilworth Fund as a result of the Transaction; o under Section 358 of the Code, the tax basis of the AHA Fund shares you receive will be the same, in the aggregate, as the aggregate tax basis of your AHA Fund shares; o under Section 1223(1) of the Code, your holding period for the AHA Fund shares you receive will include the holding period for your Kenilworth Fund shares if you hold your shares as a capital asset; o under Section 1032 of the Code, no gain or loss will be recognized by the AHA Fund as a result of the Transaction; o under Section 362(b) of the Code, the AHA Fund's tax basis in the assets that the AHA Fund receives from the Kenilworth Fund will be the same as the Kenilworth Fund's basis in such assets; and o under Section 1223(2) of the Code, the AHA Fund's holding period in such assets will include the Kenilworth Fund's holding period in such assets. The opinion is, and the confirmation letter will be, based on certain factual assumptions made with respect to each Fund or the Transaction. The opinion is not a guarantee that the tax consequences of the Transaction will be as described above. INFORMATION RELATING TO VOTING MATTERS General Information The Board of Directors of the Kenilworth Fund is providing this Prospectus/Proxy Statement in connection with the solicitation of proxies for use at the Meeting. Solicitation of proxies will occur principally by mail, but officers of the Kenilworth Fund may also solicit proxies by telephone, telegraph, or personal interview. AHA Investment Funds will bear all costs of the proxy solicitation. Any shareholder giving a proxy may revoke it at any time before it is exercised by submitting to the Kenilworth Fund a written notice of revocation or a subsequently executed proxy, or by attending the Meeting and voting in person. Only shareholders of the Kenilworth Fund of record at the close of business on December 4, 2002 will be entitled to vote at the Meeting. On that date, there were outstanding and entitled to be voted ________ shares of the Kenilworth Fund. Each share or fractional share is entitled to one vote or fraction thereof. If the accompanying proxy is executed and returned in time for the Meeting, the shares covered thereby will be voted in accordance with the proxy on all matters that may properly come before the Meeting or any adjournment thereof. If you sign and date your proxy card but do not mark it "For," "Against" or "Abstain," the persons named as proxies will vote it FOR the Plan of Reorganization. For information on adjournments of the Meeting, see "Quorum" below. Shareholder Approval The Plan of Reorganization and the transactions contemplated by it are being submitted for approval at the Meeting in accordance with the provisions of the charter and bylaws of the Kenilworth Fund. Under Illinois law, the Transaction must be approved by two-thirds of the outstanding shares of common stock. In tallying shareholder votes, abstentions and broker non-votes (i.e., proxies sent in by brokers and other nominees that cannot be voted on the proposal because instructions have not been received from the beneficial owners) will be counted in determining whether a quorum is present for purposes of convening the Meeting. With respect to voting on the Transaction, abstentions and broker non-votes will have the same effect as votes cast against the proposal. As of December 4, 2002, the following persons owned beneficially and of record 5% or more of the shares of the Kenilworth Fund: As of December 4, 2002, the following persons owned of record 5% or more of the shares of the noted class of the AHA Fund: As of December 4, 2002, the directors and officers of the Kenilworth Fund, as a group, owned [___%] of the outstanding shares of the Fund. As of December 4, 2002, the directors and officers of the AHA Fund, as a group, owned [___%] of the outstanding shares of the Fund. As of December 4, 2002, the shareholders of record that owned 5% or more of the outstanding shares of the Kenilworth Fund or of the Class A shares of the AHA Fund would own the following percentage of the Class A shares of the AHA Fund (shareholders who owned 5% or more of the shares of another class of shares of the AHA Fund would continue to own the same percentage of shares of that class) upon consummation of the Transaction: Quorum; Adjournment A quorum is constituted by a majority of the outstanding shares of stock entitled to vote at the Meeting, present in person or represented by proxy. In the event that a quorum is not present at the Meeting, no business shall be transacted except that the shareholders present in person or represented by proxy and entitled to vote at the meeting may adjourn the meeting until a quorum is present. In the event that a quorum is present at the Meeting, the holders of the majority of the shares issued and outstanding and entitled to vote at the meeting who are present in person or by proxy may act upon all matters properly before the meeting, and also may adjourn the meeting to any specific time. The persons named as proxies will vote in favor of such adjournments if they determine that adjournment and additional solicitation is reasonable and in the best interest of shareholders of the Kenilworth Fund. Abstentions and broker non-votes have no effect on the outcome of a vote on adjournment. Annual Meetings The Kenilworth Fund holds annual meetings of shareholders for the election of directors and the transaction of general business. Special meetings of shareholders may be called upon the written request of holders of a majority of the shares issued and outstanding and entitled to vote. In the event that at any time less than a majority of the directors were elected by the shareholders, a special meeting of shareholders will be held for the purpose of electing directors. If the Transaction is approved by Kenilworth Fund shareholders, the Fund will be dissolved and will no longer hold annual meetings. The AHA Investment Funds does not hold annual or regular meetings of shareholders. Shareholder proposals to be presented at any future meeting of shareholders of either Kenilworth Fund or AHA Investment Funds must be received by the relevant Fund in writing a reasonable time before the relevant Fund or AHA Investment Funds solicits proxies for that meeting in order to be considered for inclusion in the proxy materials for that meeting. Shareholder proposals should be sent to the Kenilworth Fund or the AHA Fund, care of the AHA Investment Funds, as applicable, at the address listed on the cover of this Prospectus/Proxy Statement to the attention of the Secretary. ADVISORS, INVESTMENT MANAGERS AND DISTRIBUTOR The address of the AHA Fund's investment advisor, CCM Advisors, LLC is 190 South LaSalle Street, Suite 2800, Chicago, Illinois. The address of the Kenilworth Fund's investment advisor, Institutional Portfolio Services, Ltd., is 21 South Clark Street, Suite 2594, Chicago, Illinois 60603. Information as to the experience of CCM Advisors and IPS and the services each provides to the AHA Fund and the Kenilworth Fund, respectively, is contained in their enclosed prospectuses, which are incorporated herein. Information as to the portfolio managers, including their recent business experience, is contained in the enclosed prospectus for the AHA Fund, which is incorporated herein. The address of the AHA Fund's current Investment Managers is as follows: Cambiar Investors, Inc. 2401 East Second Avenue, Suite 400 Denver, Colorado 80206 Freeman Associates Investment Management LLC 16236 San Dieguito Road, Suite 2-20 Rancho Santa Fe, California 92067 The address of the AHA Fund's distributor, Quasar Distributors, LLC, is 615 East Michigan Street, Milwaukee, Wisconsin 53202. The Kenilworth Fund is a self-distributed fund. Please see the enclosed prospectus of the AHA Fund for more information on its investment adviser, Investment Managers and distributor. OTHER BUSINESS The Board of Directors of the Kenilworth Fund knows of no other business to be brought before the Meeting. However, if any other matters come before the Meeting, it is the intention that proxies that do not contain specific restrictions to the contrary will be voted on such matters in accordance with the judgment of the persons named in the enclosed form of proxy. FINANCIAL HIGHLIGHTS Please see the enclosed Annual Report for the financial highlights of the AHA Fund. The Annual Report is incorporated herein by reference. SHAREHOLDER INQUIRIES Shareholder inquiries may be addressed to the Kenilworth Fund in writing at the address on the cover page of this Prospectus/Proxy Statement or by telephoning 1-312-236-5388. SHAREHOLDERS WHO DO NOT EXPECT TO BE PRESENT AT THE MEETING ARE REQUESTED TO DATE AND SIGN THE ENCLOSED PROXY AND RETURN IT IN THE ENCLOSED ENVELOPE. By order of the Board of Directors, Savitri P. Pai Secretary Dated: December ___, 2002 Appendix A FORM OF AGREEMENT AND PLAN OF REORGANIZATION THIS AGREEMENT AND PLAN OF REORGANIZATION dated as of November 20, 2002, is by and among AHA Investment Funds, Inc., a Maryland corporation ("AHA Funds"), on behalf of AHA Diversified Equity Fund (the "Acquiring Fund") and Kenilworth Fund, Inc., an Illinois corporation ("Acquired Fund") and, solely for the purposes of paragraph 9.2 hereof, each of CCM Advisors LLC, a Delaware limited liability company ("CCM Advisors"), and Institutional Portfolio Services, Ltd., an Illinois corporation ("IPS"). (Acquiring Fund and Acquired Fund are sometimes referred to herein individually as a "Fund" and collectively as the "Funds.") All agreements, representations, actions, and obligations described herein made or to be taken or undertaken by Acquiring Fund are made and shall be taken or undertaken by AHA Funds. This Agreement is intended to be and is adopted as a plan of reorganization and liquidation within the meaning of Section 368(a) of the United States Internal Revenue Code of 1986, as amended (the "Code"), and any successor provision. The reorganization will consist of the transfer of all of the assets of the Acquired Fund in exchange for Class A shares of the Acquiring Fund ("Acquisition Shares") and the assumption by the Acquiring Fund of the liabilities of the Acquired Fund (other than certain expenses of the reorganization contemplated hereby) and the distribution of such Acquisition Shares to the shareholders of the Acquired Fund in liquidation of the Acquired Fund, all upon the terms and conditions set forth in this Agreement. In consideration of the premises and of the covenants and agreements hereinafter set forth, the parties hereto covenant and agree as follows: 1. TRANSFER OF ASSETS OF ACQUIRED FUND IN EXCHANGE FOR ACQUISITION SHARES AND ASSUMPTION OF LIABILITIES AND LIQUIDATION OF ACQUIRED FUND. 1.1 Subject to the terms and conditions herein set forth and on the basis of the representations and warranties contained herein, (a) The Acquired Fund will transfer and deliver to the Acquiring Fund, and the Acquiring Fund will acquire, all the assets of the Acquired Fund as set forth in paragraph 1.2 ("Assets"); (b) The Acquiring Fund will assume all of the Acquired Fund's liabilities and obligations as defined in paragraph 1.3 ("Liabilities") on the Closing Date (as defined in paragraph 1.2 hereof); and (c) In exchange for the Assets, the Acquiring Fund (i) will assume the Liabilities as set forth in subparagraph (b) above, and (ii) will issue and deliver to the Acquired Fund the number of Acquisition Shares (including fractional shares, if any) determined by dividing the net asset value of the Acquired Fund, computed in the manner and as of the time and date set forth in paragraph 2.1, by the net asset value of one Acquisition Share, computed in the manner and as of the time and date set forth in paragraph 2.2. Such transactions shall take place at the closing provided for in paragraph 3.1 (the "Closing"). 1.2 Assets shall consist of all cash, securities, dividends and interest receivable, receivables for shares sold and all other assets which are owned by the Acquired Fund on the closing date provided in paragraph 3.1 (the "Closing Date") and any deferred or prepaid expenses shown as an asset on the books of the Acquired Fund on the Closing Date. 1.3 The Liabilities shall include all of Acquired Fund's liabilities, debts, obligations, and duties of whatever kind or nature, whether absolute, accrued, contingent, or otherwise, whether or not arising in the ordinary course of business, whether or not determinable at the Closing Date, and whether or not specifically referred to in this Agreement. Notwithstanding the foregoing, Acquired Fund agrees to use its reasonable best efforts to discharge all its known Liabilities before the Closing Date. 1.4 As provided in paragraph 3.4, as promptly as possible after the Closing Date, the Acquired Fund will liquidate and distribute pro rata to its shareholders of record ("Acquired Fund Shareholders"), determined as of the close of business on the Valuation Date (as defined in paragraph 2.1), the Acquisition Shares received by the Acquired Fund pursuant to paragraph 1.1. The date on which such liquidation and distribution occurs shall be the "Liquidation Date." Such liquidation and distribution will be accomplished by the transfer of the Acquisition Shares then credited to the account of the Acquired Fund on the books of the Acquiring Fund to open accounts on the share records of the Acquiring Fund in the names of the Acquired Fund Shareholders and representing the respective pro rata number of Acquisition Shares due such shareholders. All issued and outstanding shares of the Acquired Fund will simultaneously be cancelled on the books of the Acquired Fund. The Acquiring Fund shall not be obligated to issue certificates representing Acquisition Shares in connection with such exchange. 1.5 As promptly as possible after the Liquidation Date, the Acquired Fund shall dissolve pursuant to the provisions of the laws of the State of Illinois, and de-register as an investment company under the Investment Company Act of 1940 (the "1940 Act") and, after the Closing Date, the Acquired Fund shall not conduct any business except in connection with its liquidation, dissolution and de-registration. 1.6 Any reporting responsibility of the Acquired Fund including, but not limited to, the responsibility for filing of regulatory reports, tax returns, or other documents with the Securities and Exchange Commission, any state securities commission, and any federal, state or local tax authorities or any other relevant regulatory authority, shall remain the responsibility of the Acquired Fund, and the Acquired Fund shall not dissolve until such responsibilities have been concluded. 1.7 The Acquired Fund will pay or cause to be paid to the Acquiring Fund any interest, cash or such dividends, rights and other payments received by it on or after the Closing Date with respect to the Investments (as defined in paragraph 4.1(q)) and other properties and assets of the Acquired Fund, whether accrued or contingent, received by it on or after the Closing Date. Any such distribution shall be deemed included in the assets transferred to the Acquiring Fund at the Closing Date and shall not be separately valued unless the securities in respect of which such distribution is made shall have gone "ex" such distribution prior to the Valuation Date, in which case any such distribution which remains unpaid at the Closing Date shall be included in the determination of the value of the assets of the Acquired Fund acquired by the Acquiring Fund. 2. VALUATION. 2.1 For the purpose of article 1, the value of Assets shall be the net asset value computed as of the close of regular trading on the New York Stock Exchange on the business day next preceding the Closing (such time and date being herein called the "Valuation Date") using the valuation procedures set forth in the then current prospectus or statement of additional information for Class A shares of the Acquiring Fund (collectively, as amended or supplemented from time to time, the "Acquiring Fund Prospectus"). Such value shall be calculated in the sole discretion of the Acquiring Fund, and the result shall be certified by the Acquired Fund. 2.2 For the purpose of paragraph 2.1, the net asset value of an Acquisition Share shall be the net asset value per share computed as of the close of regular trading on the New York Stock Exchange on the Valuation Date, using the valuation procedures set forth in the Acquiring Fund Prospectus. 3. CLOSING AND CLOSING DATE. 3.1 The Closing Date shall be on December 30, 2002, or on such other date as the parties may agree. The Closing shall be held at 9:00 a.m. at Acquiring Fund's offices, 190 South LaSalle Street, Suite 2800, Chicago, IL 60603, or at such other time and/or place as the parties may agree. 3.2 Unless alternative arrangements acceptable to the Acquiring Fund have been made, no later than eight business days prior to the Valuation Date, the portfolio securities of the Acquired Fund shall be delivered by the Acquired Fund to a Chicago-based broker (the "Broker") to be credited to an account (the "Account") in the name of the Acquired Fund with the Broker. Access to the securities held in such Account shall be granted by the Acquired Fund to U.S. Bank, N.A., as custodian for the Acquiring Fund (the "Custodian"), to permit examination of the Acquired Fund's portfolio securities no later than five business days preceding the Valuation Date. On the same date, the Acquired Fund shall deliver to the Acquiring Fund an accurate statement of the cash held by the Acquired Fund and shall provide an updated statement to the Acquiring Fund as of the close of business each day up to and including the Valuation Date. On the Closing Date, the Acquired Fund shall (i) deliver all of the Acquired Fund's cash and (ii) provide appropriate instructions to the Broker to deliver the portfolio securities of the Acquired Fund, to the Custodian for the account of the Acquiring Fund, such portfolio securities to be duly endorsed in proper form for transfer in such manner and condition as to constitute good delivery thereof in accordance with the custom of brokers and accompanied by all necessary federal and state stock transfer stamps or a check for the appropriate purchase price thereof. The cash delivered shall be in the form of a wire transfer of same day available funds, payable to the order of "U.S. Bank, N.A., custodian for AHA Investment Funds, Inc." Acquiring Fund shall deliver at the Closing a certificate of an authorized officer verifying that the information (including adjusted basis and holding period for federal income tax purposes, by lot) concerning the Assets, including all portfolio securities, transferred by Acquired Fund to Acquiring Fund, as reflected on Acquiring Fund's books immediately after the Closing, does or will conform to that information on Acquired Fund's books immediately before the Closing. 3.3 In the event that on the Valuation Date (a) the New York Stock Exchange shall be closed to trading or trading thereon shall be restricted, or (b) trading or the reporting of trading on said Exchange or elsewhere shall be disrupted so that accurate appraisal of the value of the net assets of the Acquired Fund or the Acquiring Fund is impracticable, the Closing Date shall be postponed until the first business day after the day when trading shall have been fully resumed and reporting shall have been restored; provided that if trading shall not be fully resumed and reporting restored within three business days of the Valuation Date, this Agreement may be terminated by either of the Acquired Fund or the AHA Funds upon the giving of written notice to the other party. 3.4 At the Closing, the Acquired Fund or its transfer agent shall deliver to the Acquiring Fund or its designated agent a list of the names and addresses of the Acquired Fund Shareholders and the number of outstanding shares of the Acquired Fund owned by each Acquired Fund Shareholder, all as of the close of business on the Valuation Date, certified by the Secretary or Assistant Secretary of the Acquired Fund. The AHA Funds will provide to the Acquired Fund evidence satisfactory to the Acquired Fund that the Acquisition Shares issuable pursuant to paragraph 1.1 have been credited to the Acquired Fund's account on the books of the Acquiring Fund. On the Liquidation Date, the AHA Funds will provide to the Acquired Fund evidence satisfactory to the Acquired Fund that such Acquisition Shares have been credited pro rata to open accounts in the names of the Acquired Fund Shareholders as provided in paragraph 1.4. In connection with the crediting of the Acquisition Shares to accounts of Acquired Fund Shareholders and for all subsequent purchases of Class A shares of the Acquiring Fund by any such Acquired Fund Shareholder or any member of his or her immediate family, the Acquiring Fund agrees to waive any and all sales loads which would otherwise be applicable to purchases of Class A shares of the Acquiring Fund by such Acquired Fund Shareholder as long as an open account in the Class A shares of the Acquiring Fund is maintained by such Acquired Fund Shareholder. For purposes of this paragraph 3.4, a "member of the immediate family" of a person means any parent, spouse of a parent, child, spouse of a child, spouse, brother or sister of that person, and includes step and adoptive relationships. 3.5 At the Closing each party shall deliver to the other such bills of sale, instruments of assumption of liabilities, checks, assignments, stock certificates, receipts or other documents as such other party or its counsel may reasonably request in connection with the transfer of Assets and assumption of Liabilities. 4. REPRESENTATIONS AND WARRANTIES. 4.1 The Acquired Fund represents and warrants the following to the AHA Funds on behalf of the Acquiring Fund as of the date hereof and agrees to confirm the continuing accuracy and completeness in all material respects of the following on the Closing Date: (a) The Acquired Fund is a corporation duly organized, validly existing and in good standing under the laws of the State of Illinois; (b) The Acquired Fund is a registered investment company classified as a management company of the open-end type and its registration with the Securities and Exchange Commission as an investment company under the 1940 Act is in full force and effect; (c) The Acquired Fund is not in violation in any material respect of any provision of its Articles of Incorporation or By-laws or of any agreement, indenture, instrument, contract, lease or other undertaking to which the Acquired Fund is a party or by which the Acquired Fund is bound, and the execution, delivery and performance of this Agreement will not result in any such violation; (d) The Acquired Fund has no contracts or other commitments (other than this Agreement and such other contracts as may be entered into in the ordinary course of its business) which if terminated may result in material liability to the Acquired Fund or under which (whether or not terminated) any material payments for periods subsequent to the Closing Date will be due. Prior to the Closing Date, the Acquired Fund will advise the Acquiring Fund of all material liabilities, contingent or otherwise, incurred by it subsequent to June 30, 2002, whether or not incurred in the ordinary course of business; (e) No litigation or administrative proceeding or investigation of or before any court or governmental body is presently pending or threatened against the Acquired Fund, any of its properties or Assets, or any person whom the Acquired Fund may be obligated to indemnify in connection with such litigation, proceeding or investigation. The Acquired Fund knows of no facts which might form the basis for the institution of such proceedings, and is not a party to or subject to the provisions of any order, decree or judgment of any court or governmental body which materially and adversely affects its business or its ability to consummate the transactions contemplated hereby; (f) Acquired Fund's current prospectus and statement of additional information conform in all material respects to the applicable requirements of the Securities Act of 1933, as amended ("1933 Act"), the 1940 Act and the rules and regulations thereunder and do not include any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, and there are no material contracts to which the Acquired Fund is a party that are not referred to in such Prospectus or in the registration statement of which it is a part; (g) The statement of assets and liabilities, the statement of operations, the statement of changes in net assets, and the schedule of investments at, as of and for the two years ended December 31, 2001, of the Acquired Fund, audited by Grant Thornton LLP, and the statement of assets, the statement of changes in net assets and the schedule of investments for the six months ended June 30, 2002, copies of which have been furnished to the Acquiring Fund, fairly reflect the financial condition and results of operations of the Acquired Fund as of such dates and for the periods then ended in accordance with generally accepted accounting principles, and the Acquired Fund has no liabilities of a material amount, contingent or otherwise, other than those disclosed on the statements of assets referred to above or those incurred in the ordinary course of its business since June 30, 2002; (h) Since June 30, 2002, there has not been any material adverse change in the Acquired Fund's financial condition, assets, liabilities or business (other than changes occurring in the ordinary course of business), or any incurrence by the Acquired Fund of indebtedness, except as disclosed in writing to the Acquiring Fund. For the purposes of this subparagraph (h), distributions of net investment income and net realized capital gains, changes in portfolio securities, changes in the market value of portfolio securities or net redemptions shall be deemed to be in the ordinary course of business; (i) By the Closing Date, all federal and other tax returns and reports of the Acquired Fund required by law to have been filed by such date (giving effect to extensions) shall have been filed, and all federal and other taxes shown to be due on said returns and reports shall have been paid so far as due, or provision shall have been made for the payment thereof, and no assessment has been asserted with respect to such returns and, to the best of Acquired Fund's knowledge, no such return is currently under audit; (j) For all taxable years and all applicable quarters of such years from the date of its inception, the Acquired Fund has met the requirements of subchapter M of the Code, for treatment as a "regulated investment company" within the meaning of Section 851 of the Code. The Acquired Fund has not at any time since its inception been liable for, nor is it now liable for, any material income or excise tax pursuant to Section 852 or 4982 of the Code. The Acquired Fund has duly filed all federal, state, local and foreign tax returns which are required to have been filed, and all taxes of the Acquired Fund which are due and payable have been paid except for amounts that alone or in the aggregate would not reasonably be expected to have a material adverse effect. The Acquired Fund is in compliance in all material respects with applicable regulations of the Internal Revenue Service pertaining to the reporting of dividends and other distributions on and redemptions of its capital stock and to withholding in respect of dividends and other distributions to shareholders, and is not liable for any material penalties which could be imposed thereunder; (k) The authorized capital of the Acquired Fund consists of 10,000,000 shares of capital stock. All issued and outstanding shares of the Acquired Fund are, and at the Closing Date will be, duly and validly issued and outstanding, fully paid and non-assessable by the Acquired Fund and will have been issued in compliance with all applicable registration or qualification requirements of federal and state securities laws. No options, warrants or other rights to subscribe for or purchase, or securities convertible into, any shares of the Acquired Fund are outstanding and none will be outstanding on the Closing Date; (l) The Acquired Fund's investment operations from inception to the date hereof have been in compliance in all material respects with the investment policies and investment restrictions set forth in its prospectus and statement of additional information as in effect from time to time, except as previously disclosed in writing to the Acquiring Fund; (m) The execution, delivery and performance of this Agreement has been duly authorized by the Board of Directors of the Acquired Fund, and, upon approval thereof by the required two-thirds of the shareholders of the Acquired Fund, this Agreement will constitute the valid and binding obligation of the Acquired Fund enforceable in accordance with its terms except as the same may be limited by bankruptcy, insolvency, reorganization or other similar laws affecting the enforcement of creditors' rights generally and other equitable principles; (n) The Acquisition Shares to be issued to the Acquired Fund pursuant to article 1 will not be acquired for the purpose of making any distribution thereof other than to the Acquired Fund Shareholders as provided in paragraph 1.4; (o) The information provided by the Acquired Fund for use in the Registration Statement and Proxy Statement referred to in paragraph 5.3 shall be accurate and complete in all material respects and shall comply with federal securities and other laws and regulations applicable thereto; (p) No consent, approval, authorization or order of any court or governmental authority is required for the consummation by the Acquired Fund of the transactions contemplated by this Agreement, except such as may be required under the 1933 Act, the Securities Exchange Act of 1934, as amended (the "1934 Act"), the 1940 Act and state securities or "Blue Sky" laws (which term used herein shall include the laws of the District of Columbia and of Puerto Rico); (q) At the Closing Date, the Acquired Fund will have good and marketable title to the Assets and will have full right, power and authority to sell, assign, transfer and deliver the Investments (as defined below) and any other assets and liabilities of the Acquired Fund to be transferred to the Acquiring Fund pursuant to this Agreement. At the Closing Date, subject only to the delivery of the Investments and any such other assets and liabilities and payment therefor as contemplated by this Agreement, the Acquiring Fund will acquire good and marketable title thereto and will acquire the Investments and any such other assets and liabilities subject to no encumbrances, liens or security interests whatsoever and without any restrictions upon the transfer thereof, except as previously disclosed to the Acquiring Fund. As used in this Agreement, the term "Investments" shall mean the Acquired Fund's investments shown on the schedule of its investments as of June 30, 2002, referred to in subparagraph 4.1 (g) hereof, as supplemented with such changes in the portfolio as the Acquired Fund shall make, and changes resulting from stock dividends, stock split-ups, mergers and similar corporate actions through the Closing Date. In accordance with paragraph 3.2 hereof, the Acquired Fund will inform the Acquiring Fund of any such changes no later than five business days prior to the Valuation Date; (r) At the Closing Date, the Acquired Fund will have sold such of its assets, if any, as it has been advised by the Acquiring Fund pursuant to paragraph 5.5 to be necessary to assure that, after giving effect to the acquisition of the Assets pursuant to this Agreement, the Acquiring Fund will remain a "diversified company" within the meaning of Section 5(b)(1) of the 1940 Act and in compliance with such other fundamental and non-fundamental investment restrictions as are set forth in the Acquiring Fund Prospectus, previously delivered to the Acquired Fund; and (s) No registration of any of the Investments would be required if they were, as of the time of such transfer, the subject of a public distribution by either of the Acquiring Fund or the Acquired Fund, except as previously disclosed by the Acquired Fund to the Acquiring Fund. 4.2 The AHA Funds, on behalf of the Acquiring Fund, represents and warrants the following to the Acquired Fund as of the date hereof and agrees to confirm the continuing accuracy and completeness in all material respects of the following on the Closing Date: (a) The AHA Funds is a Maryland corporation duly organized, validly existing and in good standing under the laws of the State of Maryland; (b) The AHA Funds is a registered investment company classified as a management company of the open-end type and its registration with the Securities and Exchange Commission as an investment company under the 1940 Act is in full force and effect, and the Acquiring Fund is a separate series thereof duly designated in accordance with the applicable provisions of the Charter of the AHA Funds and the 1940 Act; (c) The Acquiring Fund Prospectus conforms in all material respects to the applicable requirements of the 1933 Act, the 1940 Act and the rules and regulations thereunder and does not include any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, and there are no material contracts to which the Acquiring Fund is a party that are not referred to in such Prospectus or in the registration statement of which it is a part; (d) At the Closing Date, the Acquiring Fund will have good and marketable title to its assets; (e) The AHA Funds is not in violation in any material respect of any provisions of its Charter or By-laws or of any agreement, indenture, instrument, contract, lease or other undertaking to which the AHA Funds is a party or by which the Acquiring Fund is bound, and the execution, delivery and performance of this Agreement will not result in any such violation; (f) No litigation or administrative proceeding or investigation of or before any court or governmental body is presently pending or threatened against the Acquiring Fund or any of its properties or assets. The Acquiring Fund knows of no facts which might form the basis for the institution of such proceedings, and is not a party to or subject to the provisions of any order, decree or judgment of any court or governmental body which materially and adversely affects its business or its ability to consummate the transactions contemplated hereby; (g) The statement of assets, the statement of operations, the statement of changes in assets and the schedule of investments at, as of and for the two years ended June 30, 2002, of the Acquiring Fund, audited by either Arthur Andersen LLP or Ernst & Young LLP, and the statement of assets, the statement of changes in net assets and the schedule of investments for the six months ended December 31, 2001, copies of which have been furnished to the Acquired Fund, fairly reflect the financial condition and results of operations of the Acquiring Fund as of such dates and the results of its operations for the periods then ended in accordance with generally accepted accounting principles, and the Acquiring Fund has no known liabilities of a material amount, contingent or otherwise, other than those shown on the statements of assets referred to above or those incurred in the ordinary course of its business since June 30, 2002; (h) Since June 30, 2002, there has not been any material adverse change in the Acquiring Fund's financial condition, assets, liabilities or business (other than changes occurring in the ordinary course of business), or any incurrence by the Acquiring Fund of indebtedness. For the purposes of this subparagraph (h), changes in portfolio securities, changes in the market value of portfolio securities or net redemptions shall be deemed to be in the ordinary course of business; (i) By the Closing Date, all federal and other tax returns and reports of the Acquiring Fund required by law to have been filed by such date (giving effect to extensions) shall have been filed, and all federal and other taxes shown to be due on said returns and reports shall have been paid so far as due, or provision shall have been made for the payment thereof, and to the best of the Acquiring Fund's knowledge no such return is currently under audit and no assessment has been asserted with respect to such returns; (j) For each fiscal year of its operation including the current taxable year, the Acquiring Fund has met the requirements of Subchapter M of the Code for qualification as a regulated investment company; (k) The authorized capital of AHA Funds consists of 700,000,000 shares. The authorized capital of the Acquiring Fund consists of 50,000,000 shares, and the authorized capital of the Acquiring Fund's Class A shares consists of 12,500,000 shares. All issued and outstanding shares of the Acquiring Fund are, and at the Closing Date will be, duly and validly issued and outstanding, fully paid and non-assessable by the AHA Funds, and will have been issued in compliance with all applicable registration requirements of federal and state securities laws. No options, warrants or other rights to subscribe for or purchase, or securities convertible into, any shares in the Acquiring Fund of any class are outstanding and none will be outstanding on the Closing Date; (1) The Acquiring Fund's investment operations from inception to the date hereof have been in compliance in all material respects with the investment policies and investment restrictions set forth in its prospectus or prospectuses and statement or statements of additional information as in effect from time to time; (m) The execution, delivery and performance of this Agreement have been duly authorized by all necessary action on the part of the AHA Funds, and this Agreement constitutes the valid and binding obligation of the AHA Funds and the Acquiring Fund enforceable in accordance with its terms, except as the same may be limited by bankruptcy, insolvency, reorganization or other similar laws affecting the enforcement of creditors' rights generally and other equitable principles; (n) The Acquisition Shares to be issued and delivered to the Acquired Fund pursuant to the terms of this Agreement will at the Closing Date have been duly authorized and, when so issued and delivered, will be duly and validly issued Class A shares of the Acquiring Fund, and will be fully paid and non-assessable by the AHA Funds, and no shareholder of the AHA Funds will have any preemptive right of subscription or purchase in respect thereof; (o) The information furnished by the Acquiring Fund for use in the Registration Statement and Proxy Statement referred to in paragraph 5.3 shall be accurate and complete in all material respects and shall comply with federal securities and other laws and regulations applicable thereto; and (p) No consent, approval, authorization or order of any court or governmental authority is required for the consummation by the Acquiring Fund of the transactions contemplated by this Agreement, except such as may be required under the 1933 Act, the 1934 Act, the 1940 Act and state securities or "Blue Sky" laws (which term as used herein shall include the laws of the District of Columbia and of Puerto Rico). 4.3 As used in this Agreement, an event, asset or other item identified as "material" means an event, asset or other item that is or is reasonably expected to be material to the business, assets, prospects, property, condition, financial position, results of operations or liabilities of the Assets or the Acquired Fund. 5. COVENANTS OF THE ACQUIRED FUND AND THE ACQUIRING FUND. The AHA Funds, on behalf of the Acquiring Fund, and the Acquired Fund each hereby covenants and agrees with the other as follows: 5.1 Except as required by paragraph 5.5. hereof, the Acquiring Fund and the Acquired Fund each will operate its business in the ordinary course between the date hereof and the Closing Date, it being understood that such ordinary course of business will include regular and customary periodic dividends and distributions and shareholder purchases and redemptions. 5.2 The Acquired Fund will call a meeting of its shareholders to be held prior to the Closing Date to consider and act upon this Agreement and will take all other reasonable action necessary to obtain the required shareholder approval of the transactions contemplated hereby. 5.3 In connection with the Acquired Fund shareholders' meeting referred to in paragraph 5.2, the Acquired Fund will assist in the preparation of a Proxy Statement for such meeting, to be included in a Registration Statement on Form N-14 (the "Registration Statement") which the AHA Funds will prepare and file for the registration under the 1933 Act of the Acquisition Shares to be distributed to the Acquired Fund Shareholders pursuant hereto, all in compliance with the applicable requirements of the 1933 Act, the 1934 Act, and the 1940 Act. 5.4 The information furnished by the Acquired Fund for use in the Registration Statement and the information furnished by the Acquiring Fund for use in the Proxy Statement, each as referred to in paragraph 5.3, shall be accurate and complete in all material respects as of the effectiveness thereof and shall comply with federal securities and other laws and regulations thereunder applicable thereto. 5.5 The Acquiring Fund will use its reasonable best efforts to advise the Acquired Fund promptly if at any time prior to the Closing Date the Assets include any securities which the Acquiring Fund is not permitted to acquire. At the Closing Date, the Acquired Fund will have sold such of its Assets, if any, as advised by the Acquiring Fund to be necessary to assure that, after giving effect to the acquisition of the Assets of the Acquired Fund pursuant to this Agreement, the Acquiring Fund will remain in compliance with its fundamental and non-fundamental investment restrictions as set forth in the Acquiring Fund Prospectus previously delivered to the Acquired Fund. 5.6 Subject to the provisions of this Agreement, the Acquired Fund and the Acquiring Fund will each take, or cause to be taken, all action, and do or cause to be done, all things reasonably necessary, proper or advisable to cause the conditions to the other party's obligations to consummate the transactions contemplated hereby to be met or fulfilled and otherwise to consummate and make effective such transactions. 5.7 The Acquiring Fund will use all reasonable efforts to obtain the approvals and authorizations required by the 1933 Act, the 1940 Act and such of the state securities or "Blue Sky" laws as it may deem appropriate in order to continue its operations after the Closing Date. 5.8 The Acquired Fund covenants that its books and records (including all books and records required to be maintained under the 1940 Act and the rules and regulations thereunder) will be turned over to the AHA Funds at the Closing, provided that the Acquired Fund may retain copies of records necessary for it to make the filings contemplated by paragraph 1.6 hereof. 6. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRED FUND. The obligations of the Acquired Fund to consummate the transactions provided for herein shall be subject, at its election, to the performance by the AHA Funds and the Acquiring Fund of all the obligations to be performed by them hereunder on or before the Closing Date and, in addition thereto, to the following further conditions: 6.1 The AHA Funds, on behalf of the Acquiring Fund, shall have delivered to the Acquired Fund a certificate executed in its name by its President or Vice President and its Treasurer or Assistant Treasurer, in form satisfactory to the Acquired Fund and dated as of the Closing Date, to the effect that the representations and warranties of the AHA Funds on behalf of the Acquiring Fund made in this Agreement are true and correct at and as of the Closing Date, except as they may be affected by the transactions contemplated by this Agreement, and that the AHA Funds and the Acquiring Fund have complied with all the covenants and agreements and satisfied all of the conditions on their parts to be performed or satisfied under this Agreement at or prior to the Closing Date. 6.2 The Acquired Fund shall have received an opinion of Bell, Boyd & Lloyd LLC, counsel to the AHA Funds, dated the Closing Date and, in a form satisfactory to the Acquired Fund, to the following effect; provided, however, that Bell, Boyd & Lloyd LLC, in rendering such opinion, may rely as to all matters of Maryland law on the opinion of Hogan & Hartson LLP, special counsel to the AHA Funds: (a) The AHA Funds is validly existing as a corporation under the laws of the State of Maryland and has the corporate power to conduct the business as described in its Charter, and the Acquiring Fund is a separate series thereof duly constituted in accordance with the applicable provisions of the 1940 Act; (b) This Agreement has been duly authorized, executed and delivered on behalf of the Acquiring Fund and, assuming the Proxy Statement and Registration Statement referred to in paragraph 5.3 comply with applicable federal securities laws and assuming the due authorization, execution and delivery of this Agreement by the Acquired Fund is the valid and binding obligation of the AHA Funds, on behalf of the Acquiring Fund, enforceable against the Acquiring Fund in accordance with its terms, except as the same may be limited by bankruptcy, insolvency, reorganization or other similar laws affecting the enforcement of creditors' rights generally and other equitable principles; (c) The Acquiring Fund has the corporate power to assume the Liabilities and upon consummation of the transactions contemplated hereby the Acquiring Fund will have duly assumed the Liabilities; (d) The Acquisition Shares to be issued for transfer to the Acquired Fund Shareholders, when issued in accordance with this Agreement and in an amount not to exceed the authorized but unissued shares of the Acquiring Fund set forth in its Charter, will be duly authorized and upon such transfer and delivery will be validly issued, fully paid and nonassessable Class A shares in the Acquiring Fund, and upon issuance in accordance with this Agreement, the Acquisition Shares will have the preferences, conversion or other rights, voting powers, restrictions, limitation as to dividends, qualifications and terms and conditions of redemption of the Acquiring Fund set forth in its Charter, and no shareholder of the Acquiring Fund has any statutory preemptive right under the General Corporation Law of the State of Maryland ("MGCL") or any right under the Charter of subscription in respect thereof; (e) The execution and delivery of this Agreement did not, and the performance by the AHA Funds and the Acquiring Fund of their respective obligations hereunder will not, violate the MGCL, the AHA Fund's Charter or By-laws, or any provision of any agreement known to such counsel to which the AHA Funds or the Acquiring Fund is a party or by which it is bound or, to the knowledge of such counsel, result in the acceleration of any obligation or the imposition of any penalty under any agreement, judgment, or decree to which the AHA Funds or the Acquiring Fund is a party or by which either of them is bound; (f) To the knowledge of such counsel, (i) the Registration Statement has been declared effective by the Securities and Exchange Commission, (ii) no stop order under the 1933 Act pertaining thereto has been issued, and (iii) all regulatory consents, approvals, authorizations or orders required for the consummation by the AHA Funds or the Acquiring Fund of the transactions contemplated by this Agreement, except such as may be required under state securities or "Blue Sky" laws, have been obtained; (g) Except as previously disclosed, such counsel does not know of any legal or governmental proceedings relating to the AHA Funds or the Acquiring Fund existing on or before the date of mailing of the Proxy Statement referred to in paragraph 5.3 or the Closing Date that are required to be described in the Registration Statement referred to in paragraph 5.3 which are not described as required; (h) The AHA Funds is registered with the Securities and Exchange Commission as an open-end management investment company under the 1940 Act; and (i) To the knowledge of such counsel, no litigation or administrative proceeding or investigation of or before any court or governmental body is presently pending or threatened as to the AHA Funds or the Acquiring Fund or any of their properties or assets and neither the AHA Funds nor the Acquiring Fund is a party to or subject to the provisions of any order, decree or judgment of any court or governmental body, which materially and adversely affects its business. 7. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRING FUND. The obligations of the AHA Funds, on behalf of the Acquiring Fund, to complete the transactions provided for herein shall be subject, at its election, to the performance by the Acquired Fund of all the obligations to be performed by it hereunder on or before the Closing Date and, in addition thereto, to the following further conditions: 7.1 The Acquired Fund shall have delivered to the AHA Funds a certificate executed in its name by its President or Vice President and its Treasurer or Assistant Treasurer, in form and substance satisfactory to the AHA Funds and dated the Closing Date, to the effect that the representations and warranties of the Acquired Fund made in this Agreement are true and correct at and as of the Closing Date, except as they may be affected by the transactions contemplated by this Agreement, and that the Acquired Fund has complied with all the covenants and agreements and satisfied all of the conditions on its part to be performed or satisfied under this Agreement at or prior to the Closing Date; 7.2 The AHA Funds shall have received a favorable opinion of Steven L. Kroll, counsel to the Acquired Fund, dated the Closing Date and in a form satisfactory to the AHA Funds, to the following effect: (a) The Acquired Fund is a corporation duly organized and validly existing under the laws of the State of Illinois and has power to own all of its properties and assets and to carry on its business as presently conducted; (b) This Agreement has been duly authorized, executed and delivered on behalf of the Acquired Fund and, assuming the Proxy Statement referred to in paragraph 5.3 complies with applicable federal securities laws and assuming the due authorization, execution and delivery of this Agreement by the AHA Funds on behalf of the Acquiring Fund, is the valid and binding obligation of the Acquired Fund enforceable against the Acquired Fund in accordance with its terms, except as the same may be limited by bankruptcy, insolvency, reorganization or other similar laws affecting the enforcement of creditors' rights generally and other equitable principles; (c) The Acquired Fund has the power to sell, assign, transfer and deliver the Assets and, upon consummation of the transactions contemplated hereby, the Acquired Fund will have duly transferred the Assets to the Acquiring Fund; (d) The execution and delivery of this Agreement did not, and the performance by the Acquired Fund of its obligations hereunder will not, violate the Acquired Fund's Charter or By-laws, or any provision of any agreement known to such counsel to which the Acquired Fund is a party or by which it is bound or, to the knowledge of such counsel, result in the acceleration of any obligation or the imposition of any penalty under any agreement, judgment, or decree to which the Acquired Fund is a party or by which it is bound; (e) To the knowledge of such counsel, no consent, approval, authorization or order of any court or governmental authority is required for the consummation by the Acquired Fund of the transactions contemplated by this Agreement, except such as have been obtained; (f) Such counsel does not know of any legal or governmental proceedings relating to the Acquired Fund existing on or before the date of mailing of the Proxy Statement referred to in paragraph 5.3 or the Closing Date that are required to be described in the Registration Statement referred to in paragraph 5.3 which are not described as required; (g) The Acquired Fund is registered with the Securities and Exchange Commission as an open-end management investment company under the 1940 Act; and (h) To the knowledge of such counsel, no litigation or administrative proceeding or investigation of or before any court or governmental body is presently pending or threatened as to the Acquired Fund or any of its properties or assets and the Acquired Fund is not a party to or subject to the provisions of any order, decree or judgment of any court or governmental body, which materially and adversely affects its business. 7.3 Prior to the Closing Date, the Acquired Fund shall have declared and paid a dividend or dividends which, together with all previous dividends, shall have the effect of distributing all of the Acquired Fund's net investment company taxable income for its taxable years ending on or after the end of the most recent taxable year before the taxable year that ends on the Closing Date, and on or prior to the Closing Date (computed without regard to any deduction for dividends paid), and all of its net capital gains realized in each of its taxable years ending on or after ending on or after the end of the most recent taxable year before the taxable year that ends on the Closing Date, and on or prior to the Closing Date. 7.4 The Acquired Fund shall have furnished to the Acquiring Fund a certificate, signed by the President (or any Vice President) and the Treasurer of the Acquired Fund, as to the adjusted tax basis in the hands of the Acquired Fund of the securities delivered to the Acquiring Fund pursuant to this Agreement. 7.5 The Acquired Fund shall have delivered to the Acquiring Fund a certificate, signed by the President (or any Vice President) and the Treasurer of the Acquired Fund, identifying all of the Assets held on behalf of the Acquired Fund as of the Valuation Date. 7.6 The value of the Assets (as calculated in accordance with paragraph 2.1 hereof) of the Acquired Fund as of the Valuation Date shall be no less than $4,000,000; provided, however, that the Acquiring Fund may waive this condition in its sole discretion. 8. FURTHER CONDITIONS PRECEDENT TO OBLIGATIONS OF EACH OF THE ACQUIRING FUND AND THE ACQUIRED FUND. The respective obligations of the Acquired Fund and the AHA Funds, on behalf of the Acquiring Fund, hereunder are each subject to the further conditions that on or before the Closing Date: 8.1 This Agreement and the transactions contemplated herein shall have been approved by the affirmative vote of holders of two-thirds of the shares entitled to vote that are voted at the meeting of shareholders of the Acquired Fund referred to in paragraph 5.2. 8.2 On the Closing Date no action, suit or other proceeding shall be pending before any court or governmental agency in which it is sought to restrain or prohibit, or obtain damages or other relief in connection with, this Agreement or the transactions contemplated hereby. 8.3 All consents of other parties and all other consents, orders and permits of federal, state and local regulatory authorities (including those of the Securities and Exchange Commission and of state "Blue Sky" and securities authorities) deemed necessary by the Acquired Fund or the AHA Funds to permit consummation, in all material respects, of the transactions contemplated hereby shall have been obtained, except where failure to obtain any such consent, order or permit would not involve a risk of a material adverse effect on the assets or properties of the Acquiring Fund or the Acquired Fund. 8.4 The Registration Statement referred to in paragraph 5.3 shall have become effective under the 1933 Act and no stop order suspending the effectiveness thereof shall have been issued and, to the best knowledge of the parties hereto, no investigation or proceeding for that purpose shall have been instituted or be pending, threatened or contemplated under the 1933 Act. 8.5 Each party shall have received an opinion of Bell, Boyd & Lloyd LLC, addressed to and in form and substance reasonably satisfactory to it, substantially to the effect that, for federal income tax purposes: (a) The acquisition by the Acquiring Fund of the Assets in exchange for the Acquiring Fund's assumption of the Liabilities and issuance of the Acquisition Shares, followed by the distribution by the Acquired Fund of such Acquisition Shares to the shareholders of the Acquired Fund in exchange for their shares of the Acquired Fund, all as provided in article 1 hereof, will constitute a reorganization within the meaning of Section 368(a) of the Code, and the Acquired Fund and the Acquiring Fund will each be "a party to a reorganization" within the meaning of Section 368(b) of the Code; (b) No gain or loss will be recognized by the Acquired Fund (i) upon the transfer of the Assets to the Acquiring Fund in exchange for the Acquisition Shares and the assumption of the Liabilities by the Acquiring Fund or (ii) upon the distribution of the Acquisition Shares to the shareholders of the Acquired Fund as contemplated in article 1 hereof; (c) No gain or loss will be recognized by the Acquiring Fund upon the receipt of the Assets in exchange for the assumption of Liabilities and issuance of the Acquisition Shares as contemplated in article 1 hereof; (d) The tax basis of the Assets will be the same as the tax basis of the Assets in the hands of the Acquired Fund immediately prior to the transfer, and the holding period of the Assets in the hands of the Acquiring Fund will include the period during which the Assets were held by the Acquired Fund; (e) The Acquired Fund Shareholders will recognize no gain or loss upon the exchange of all of their shares of the Acquired Fund for the Acquisition Shares; (f) The tax basis of the Acquisition Shares to be received by each Acquired Fund Shareholder will be the same in the aggregate as the aggregate tax basis of the shares of the Acquired Fund surrendered in exchange therefor; (g) The holding period of the Acquisition Shares to be received by the Acquired Fund Shareholders will include the period during which the shares of the Acquired Fund surrendered in exchange therefor were held, provided such shares of the Acquired Fund were held as capital assets on the date of the exchange; and (h) The Acquiring Fund will succeed to and take into account the items of the Acquired Fund described in Section 381(c) of the Code, subject to the conditions and limitations specified in Sections 381, 382, 383 and 384 of the Code and the regulations thereunder. 8.6 At any time prior to the Closing, any of the foregoing conditions of this Agreement, other than paragraph 8.1, may be waived by the Board of Directors of the Acquired Fund and the Board of Directors of the AHA Funds if, in their judgment, such waiver will not have a material adverse effect on the interests of the shareholders of the Acquired Fund and the Acquiring Fund. 8.7 The closing under the Agreement Between Advisers by and between CCM Advisors, LLC ("CCM Advisors") and IPS dated as of November 20, 2002 shall have occurred simultaneously with the Closing. 9. BROKERAGE FEES AND EXPENSES. 9.1 The Acquired Fund and the AHA Funds, on behalf of the Acquiring Fund, each represents and warrants to the other that there are no brokers or finders entitled to receive any payments in connection with the transactions provided for herein. 9.2 All fees paid to governmental authorities for the registration of the Acquisition Shares and all transfer agency costs related to the Acquisition Shares shall be allocated to the Acquiring Fund. All fees and expenses related to the drafting and filing of the proxy and calling and conducting the meeting of the Acquired Fund shareholders, including fees and expenses related to printing, mailing, photocopying, solicitation of proxies and tabulation of votes of Acquired Fund shareholders, shall be borne by CCM Advisors. All of the other expenses of the transactions contemplated by this Agreement shall be the expenses of the party incurring such expenses, except that all expenses of the Acquired Fund with respect to the transactions contemplated by this Agreement will be paid by its investment adviser, IPS, and all expenses of the Acquiring Fund with respect to the transactions contemplated by this Agreement other than those set forth in the first sentence of this paragraph 9.2 shall be borne by CCM Advisors. 10. ENTIRE AGREEMENT; SURVIVAL OF WARRANTIES. 10.1 The Acquired Fund and the AHA Funds, on behalf of the Acquiring Fund, agree that neither party has made any representation, warranty or covenant not set forth herein and that this Agreement constitutes the entire agreement between the parties. 10.2 The representations, warranties and covenants contained in this Agreement or in any document delivered pursuant hereto or in connection herewith shall not survive the consummation of the transactions contemplated hereunder except paragraphs 1.4, 1.5, 1.6 and 1.7. 11. TERMINATION. 11.1 This Agreement may be terminated by the mutual agreement of the AHA Funds and the Acquired Fund. In addition, either the AHA Funds or the Acquired Fund may at its option terminate this Agreement at or prior to the Closing Date because: (a) Of a material breach by the other of any representation, warranty, covenant or agreement contained herein to be performed by the other party at or prior to the Closing Date; (b) A condition herein expressed to be precedent to the obligations of the terminating party has not been met and it reasonably appears that it will not or cannot be met; or (c) Any governmental authority of competent jurisdiction shall have issued any judgment, injunction, order, ruling or decree or taken any other action restraining, enjoining or otherwise prohibiting this Agreement or the consummation of any of the transactions contemplated herein and such judgment, injunction, order, ruling, decree or other action becomes final and non-appealable; provided that the party seeking to terminate this Agreement pursuant to this Section 11.1(c) shall have used its reasonable best efforts to have such judgment, injunction, order, ruling, decree or other action lifted, vacated or denied. (d) The Agreement Between Advisers by and between CCM Advisors, LLC and Institutional Portfolio Services, Ltd. dated as of November 20, 2002 shall not have been executed and delivered at Closing. If the transactions contemplated by this Agreement have not been substantially completed by January 31, 2002, this Agreement shall automatically terminate on that date unless a later date is agreed to by both the AHA Funds and the Acquired Fund. 11.2 If for any reason the transactions contemplated by this Agreement are not consummated, no party shall be liable to any other party for any damages resulting therefrom, including without limitation consequential damages. 12. AMENDMENTS. This Agreement may be amended, modified or supplemented in such manner as may be mutually agreed upon in writing by the authorized officers of the Acquired Fund and the AHA Funds on behalf of the Acquiring Fund; provided, however, that following the shareholders' meeting called by the Acquired Fund pursuant to paragraph 5.2, no such amendment may have the effect of changing the provisions for determining the number of the Acquisition Shares to be issued to Acquired Fund Shareholders under this Agreement to the detriment of such Shareholders without their further approval. 13. NOTICES. Any notice, report, statement or demand required or permitted by any provisions of this Agreement shall be in writing and shall be given by prepaid telegraph, telecopy or certified mail addressed to AHA Funds: AHA Investment Funds, Inc. Attn: Douglas D. Peabody 190 S. LaSalle Street Suite 2800 Chicago, IL 60603 Acquired Fund: Kenilworth Fund, Inc. Savitri P. Pai, Secretary 21 S. Clark Street, Suite 2594 Chicago, Illinois 60603 14. HEADINGS; COUNTERPARTS; GOVERNING LAW; ASSIGNMENT; NON-RECOURSE. 14.1 The article and paragraph headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. 14.2 This Agreement may be executed in any number of counterparts, each of which shall be deemed an original. 14.3 This Agreement shall be governed by and construed in accordance with the domestic substantive laws of the State of Illinois, without giving effect to any choice or conflicts of law rule or provision that would result in the application of the domestic substantive laws of any other jurisdiction. 14.4 This Agreement shall bind and inure to the benefit of the parties hereto and their respective successors and assigns, but no assignment or transfer hereof or of any rights or obligations hereunder shall be made by any party without the written consent of the other party. Nothing herein expressed or implied is intended or shall be construed to confer upon or give any person, firm or corporation, other than the parties hereto and their respective successors and assigns, any rights or remedies under or by reason of this Agreement. IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be executed as a sealed instrument by its President or Treasurer and its corporate seal to be affixed thereto and attested by its Secretary or Assistant Secretary. AHA Investment Funds, Inc. on behalf of AHA Diversified Equity Fund By: ---------------------------------------------------------- Name: -------------------------------------------------------- Title: ------------------------------------------------------- ATTEST: Name: --------------------------------------- Title: -------------------------------------- Kenilworth Fund, Inc. By: ---------------------------------------------------------- Name: -------------------------------------------------------- Title: ------------------------------------------------------- ATTEST: Name: --------------------------------------- Title: -------------------------------------- Solely for purposes of paragraph 9.2 of this Agreement: CCM Advisors, LLC By: _______________________________ its ________________________ By: _______________________________ Name: ______________________________ Title: ________________________________ ATTEST: Name: --------------------------------------- Title: -------------------------------------- Solely for purposes of paragraph 9.2 of this Agreement: Institutional Portfolio Services, Ltd. By: _____________________________________ Name: ___________________________________ Title: ____________________________________ ATTEST: Name: --------------------------------------- Title: -------------------------------------- AHA DIVERSIFIED EQUITY FUND FORM N-14 PART B STATEMENT OF ADDITIONAL INFORMATION December ___, 2002 This Statement of Additional Information (the "SAI") is available to shareholders of the Kenilworth Fund, Inc. ("Kenilworth Fund") in connection with a proposed transaction in which the AHA Diversified Equity Fund (the "AHA Fund"), a series of the AHA Investment Funds, Inc. ("AHA Investment Funds") will acquire all the assets and assume all the liabilities of the Kenilworth Fund in exchange for Class A shares of the AHA Fund (the "Transaction"). This SAI contains information which may be of interest to shareholders but which is not included in the Prospectus/Proxy Statement dated December ___, 2002 (the "Prospectus/Proxy Statement") which relates to the Transaction. This SAI is not a prospectus and should be read in conjunction with the Prospectus/Proxy Statement. The Prospectus/Proxy Statement has been filed with the Securities and Exchange Commission and is available upon request and without charge by writing to the AHA Fund at 190 South LaSalle Street, Suite 2800, Chicago, IL 60603, or by calling 1-800-445-1341. Table of Contents I. Additional Information about the AHA Fund 2 II. Financial Statements 2 I. Additional Information about the AHA Fund Attached hereto as Appendix A is the Statement of Additional Information for the AHA Fund dated November 1, 2002. II. Financial Statements This SAI is accompanied by the Semi-Annual Report for the six months ended June 30, 2002, and the Annual Report for the year ended December 31, 2001, of the Kenilworth Fund, which reports contain historical financial information regarding the Kenilworth Fund. This SAI is accompanied by the Annual Report for the fiscal year ended June 30, 2002 of the AHA Investment Funds, which report contains historical financial information regarding the AHA Fund. Such reports have been filed with the Securities and Exchange Commission and are incorporated herein by reference. APPENDIX A AHA INVESTMENT FUNDS, INC. AHA LIMITED MATURITY FIXED INCOME FUND AHA FULL MATURITY FIXED INCOME FUND AHA BALANCED FUND AHA DIVERSIFIED EQUITY FUND AHA U.S. GROWTH EQUITY FUND AHA INTERNATIONAL CORE EQUITY FUND CLASS A SHARES CLASS I SHARES INSTITUTIONAL SERVICING CLASS SHARES STATEMENT OF ADDITIONAL INFORMATION November 1, 2002 190 South LaSalle Street, Suite 2800 Chicago, Illinois 60603 800-445-1341 AHA Limited Maturity Fixed Income Fund, AHA Full Maturity Fixed Income Fund, AHA Balanced Fund, AHA Diversified Equity Fund, AHA U.S. Growth Equity Fund and AHA International Core Equity Fund (each, a "Fund," together, the "Funds") are series of AHA Investment Funds, Inc. (the "AHA Funds"). This Statement of Additional Information is not a prospectus. It should be read in conjunction with the prospectus of the Funds dated November 1, 2002 and any supplement to the prospectus. The Funds' financial statements for the fiscal year ended June 30, 2002, including the notes thereto and the report of Ernst & Young LLP thereon, are incorporated herein by reference from the Funds' annual report to shareholders. A copy of the Funds' annual reports must accompany delivery of this Statement of Additional Information. You may obtain a copy of the prospectus without charge by calling (800) 445-1341 by writing to AHA Funds or via the internet at www.ahafunds.org. TABLE OF CONTENTS Page GENERAL INFORMATION AND HISTORY................................................1 INVESTMENT STRATEGIES..........................................................1 INVESTMENT RESTRICTIONS.......................................................13 CONTROL PERSONS/PRINCIPAL SHAREHOLDERS........................................23 INVESTMENT MANAGEMENT.........................................................25 DISTRIBUTOR...................................................................31 DISTRIBUTION AND SHAREHOLDER SERVICE PLANS....................................31 CODE OF ETHICS................................................................32 PORTFOLIO TRANSACTIONS........................................................33 PORTFOLIO TURNOVER............................................................35 DETERMINATION OF NET ASSET VALUE..............................................36 PERFORMANCE INFORMATION.......................................................37 PURCHASES AND REDEMPTIONS OF SHARES...........................................42 ANTI-MONEY LAUNDERING COMPLIANCE..............................................42 SHARES........................................................................43 THE PROGRAM...................................................................44 TAXES.........................................................................45 MASTER/FEEDER STRUCTURE.......................................................46 OTHER INFORMATION.............................................................48 APPENDIX ....................................................................A-1 i GENERAL INFORMATION AND HISTORY The AHA Funds is registered as an open-end management investment company under the Investment Company Act of 1940 (the "1940 Act"). The AHA Funds was incorporated on March 14, 1988 under the laws of Maryland and currently is comprised of seven funds, six of which (each, a "Fund," and collectively the "Funds"), are covered in this Statement of Additional Information ("SAI"). The AHA U.S. Government Money Market Fund is offered through a separate prospectus and SAI. Each Fund invests substantially all of its assets in a separate portfolio of the CCM Advisors Funds (the "Master Fund"), a corresponding registered, diversified open-end management investment company consisting of multiple portfolios, six of which have the same investment objective as a corresponding Fund (each a "Portfolio," collectively the "Portfolios"). The Master Fund was organized on December 27, 2000 as a business trust under the laws of the State of Delaware. INVESTMENT STRATEGIES The Portfolios use various investment techniques to achieve their investment objectives. By investing in the Portfolios, the Funds will have an indirect investment interest in some or all of the types of securities described below. Short Term Investments Each of the Portfolios may invest in a variety of short-term debt securities ("money market instruments"), including instruments issued or guaranteed by the U.S. Government or one of its agencies or instrumentalities ("Government Securities") and repurchase agreements for such securities. Money market instruments are generally considered to be debt securities having remaining maturities of approximately one year or less. Other types of money market instruments include: certificates of deposit, bankers' acceptances, commercial paper, letters of credit, short-term corporate obligations, and the other obligations discussed below. It is currently anticipated that the short-term investments in bank obligations (including certificates of deposit, bankers' acceptances, time deposits and letters of credit) will be limited to: (1) obligations of U.S. commercial banks and savings institutions having total assets of $1 billion or more, and instruments secured by such obligations, including obligations of foreign branches of U.S. banks and (2) similar obligations of foreign commercial banks having total assets of $1 billion or more or their U.S. branches which are denominated in U.S. dollars. Obligations of foreign banks and their U.S. branches are subject to the additional risks of the types generally associated with investment in foreign securities. See "Foreign Securities." Similar risks may apply to obligations of foreign branches of U.S. banks. There currently are no reserve requirements applicable for obligations issued by foreign banks or foreign branches of U.S. banks. Also, not all of the federal and state banking laws and regulations applicable to domestic banks relating to maintenance of reserves, loan limits and promotion of financial soundness apply to foreign branches of domestic banks, and none of them apply to foreign banks. 1 It is anticipated that commercial paper constituting the short-term investments must be rated within the two highest grades by Standard & Poor's Corporation, a division of The McGraw-Hill Companies ("S&P") or the highest grade by Moody's Investors Service, Inc. ("Moody's") or, if not rated, must be issued by a company having an outstanding debt issue rated at least AA by S&P or AA by Moody's. Other types of short-term corporate obligations (including loan participations and master demand notes) must be rated at least A by S&P or Moody's to qualify as a short-term investment, or, if not rated, must be issued by a company having an outstanding debt issue rated at least A by Moody's or S&P. The quality standards described above may be modified by a Portfolio upon the approval of the Master Fund's Board of Trustees. Information concerning securities ratings is found in the Appendix. Bank time deposits may be non-negotiable until expiration and may impose penalties for early withdrawal. Master demand notes are corporate obligations which permit the investment of fluctuating amounts at varying rates of interest pursuant to direct arrangements with the borrower. They permit daily changes in the amounts borrowed. The amount under the note may be increased at any time by the Portfolio making the investment up to the full amount provided by the note agreement, or may be decreased by the Portfolio. The borrower may prepay up to the full amount of the note without penalty. These notes may in some cases be backed by bank letters of credit. Because these notes are direct lending arrangements between the lender and borrower, it is generally not contemplated that they will be traded, and there is no secondary market for them, although they are redeemable (and thus immediately repayable by the borrower) at principal amount, plus accrued interest, at any time. Investments in bank time deposits and master demand notes are subject to limitations on the purchase of securities that are restricted or illiquid. See "Restricted and Illiquid Securities." No Portfolio intends to purchase any non-negotiable bank time deposits or master demand notes during the coming year. Repurchase Agreements. The Portfolios may enter into repurchase agreements involving the types of securities which are eligible for purchase by that Portfolio. However, it is expected that there will be no limitation upon the maturity of the securities underlying the repurchase agreements. Repurchase agreements, which may be viewed as a type of secured lending, typically involve the acquisition by a Portfolio of government securities or other securities from a selling financial institution such as a bank, savings and loan association or broker-dealer. The agreement provides that the Portfolio will sell back to the institution, and that the institution will repurchase, the underlying security ("collateral") at a specified price and at a fixed time in the future, usually not more than seven days from the date of purchase. The Portfolio will receive interest from the institution until the time when the repurchase is to occur. Although such date is deemed to be the maturity date of a repurchase agreement, the maturities of securities subject to repurchase agreements are not subject to any limits and may exceed one year. While repurchase agreements involve certain risks not associated with direct investments in debt securities, each Portfolio will follow procedures designed to minimize such risks. The value of the collateral underlying the repurchase agreement, which will be held by the Portfolio's custodian in a segregated account on behalf of a Portfolio, will always be at least equal to the repurchase price, including any accrued interest earned on the repurchase agreement. In the event of a default or bankruptcy by a selling financial institution, the Portfolio will seek to 2 liquidate such collateral. However, the exercise of a Portfolio's right to liquidate such collateral could involve certain costs or delays and, to the extent that proceeds from any sale upon a default of the obligation to repurchase were less than the repurchase price, the Portfolio could suffer a loss. It is anticipated that each Portfolio, as a policy, will not invest in repurchase agreements that do not mature within seven days if any such investment, together with any other illiquid assets held by the Portfolio, amount to more than 10% of its total assets. Investments in repurchase agreements may at times be substantial when, in the view of the Investment Managers, liquidity or other considerations warrant. Reverse Repurchase Agreements. Each Portfolio may enter into reverse repurchase agreements. These agreements, in which a Portfolio would sell the security underlying the repurchase agreement for cash and be obligated to repurchase the security, involve a form of leverage to the extent the Portfolio may invest the cash received and involve risks similar to repurchase agreements. Although this practice, if successful, may help a Portfolio increase its income or net assets through the investment of the cash received in a reverse repurchase agreement, if the return on those investments is inadequate or they decline in value during the term of the agreement, the income or the net assets of the Portfolio would be adversely affected as compared to its income and net assets absent the transaction. No Portfolio intends to enter into reverse repurchase agreements during the next year. Types of Debt Securities The debt obligations in which the Portfolios may invest are subject to certain quality limitations and other restrictions. Permissible investments may include money market instruments and other types of obligations. See "Short-Term Investments" and "Convertible Securities." Debt obligations are subject to various risks as described in the Funds' prospectus. In addition, interestholders should recognize that, although securities ratings issued by a securities rating service provide a generally useful guide as to credit risks, they do not offer any criteria to evaluate interest rate risk. Changes in interest rate levels cause fluctuations in the prices of debt obligations and may, therefore, cause fluctuations in net asset values per share of the Portfolios and the Funds. Applicable quality limitations of the Portfolios, as described in the Funds' prospectus, may require that debt securities purchased by the Limited Maturity Fixed Income Master Portfolio and the Diversified Equity Master Portfolio be rated at the time of purchase "A" or higher by S&P or Moody's or, if unrated, be of comparable quality as determined by the Investment Manager and that such securities purchased by the Full Maturity Fixed Income Master Portfolio and the Balanced Master Portfolio be rated at the time of purchase "BBB" or higher by S&P or "Baa" or higher by Moody's or, if unrated, be of comparable quality as determined by the Investment Manager. Although unrated securities eligible for purchase by the Portfolios must be determined to be comparable in quality to securities having certain specified ratings, the market for unrated securities may not be as broad as for rated securities since many investors rely on rating organizations for credit appraisal. Subsequent to the purchase of a debt security by a Portfolio, the ratings or credit quality of a debt security may deteriorate. A Portfolio is not required to sell a security if its credit quality or rating deteriorates after its purchase. However, the Investment Managers of the Portfolios will 3 evaluate and monitor the quality of all investments, including bonds rated lower than BBB or Baa, and will dispose of investments that have deteriorated in their creditworthiness or ratings if the Investment Manager determines such action is necessary to assure that a Portfolio's overall investments are constituted in a manner consistent with its investment objective. The economy and interest rates affect lower rated obligations differently from other securities. For example, the prices of these obligations have been found to be less sensitive to interest rate changes than higher rated investments, but more sensitive to adverse economic changes or individual corporate developments. Also, during an economic downturn or substantial period of rising interest rates, highly leveraged issuers may experience financial stress which would adversely affect their ability to service their principal and interest payment obligations, to meet projected business goals, and to obtain additional financing. To the extent that there is no established retail secondary market, there may be thin trading of lower rated obligations which may adversely impact the ability of the Portfolios' Investment Managers to accurately value such obligations and the Portfolios' assets, and may also adversely impact the Portfolios' ability to dispose of the obligations. Adverse publicity and investor perceptions, whether or not based on fundamental analysis, may decrease the values and liquidity of lower rated obligations, especially in a thinly traded market. Government Securities. Government securities include obligations issued by the U.S. Government, such as U.S. Treasury bills, notes and bonds, which differ as to their maturities at the time of issuance. Government Securities also include obligations guaranteed by the U.S. Government or issued by its agencies or instrumentalities, such as obligations of the Export-Import Bank of the United States, the General Services Administration, Federal Land Banks, Farmers Home Administration and Federal Home Loan Banks. Some Government Securities, such as U.S. Treasury obligations and obligations issued by the Export-Import Bank and the Federal Housing Administration, are backed by the full faith and credit of the U.S. Treasury. Others, such as those issued by Federal Home Loan Banks, are backed by the issuer's right to borrow from the U.S. Treasury. Some, such as those issued by the Federal National Mortgage Association and Federal Farm Credit Banks, are backed only by the issuer's own credit, with no guarantee or U.S. Treasury backing. Zero Coupon Securities. Debt securities purchased by the Portfolios may include zero coupon securities. These securities do not pay any interest until maturity and, for this reason, zero coupon securities of longer maturities may trade at a deep discount from their face or par values and may be subject to greater fluctuations in market value than ordinary debt obligations of comparable maturity. Current federal tax law requires the holder of a zero coupon security to accrue a portion of the discount at which the security was purchased as income each year even though the holder receives no interest payment that year. It is not anticipated that any Portfolio will invest more than 5% of its assets in zero coupon securities during the next year. Variable Rate Securities. Debt obligations purchased by the Portfolios may also include variable and floating rate securities. The interest rates payable on these securities are adjusted either at predesignated periodic intervals or whenever there is a change in an established market rate of interest. Other features may include a right whereby the Portfolio that holds the security may demand prepayment of the principal amount prior to the stated maturity (a "demand feature") and the right of an issuer to prepay the principal amount prior to maturity. One benefit 4 of variable and floating rate securities is that, because of interest rate adjustments on the obligation, changes in market value that would normally result from fluctuations in prevailing interest rates are reduced. The benefit of a demand feature is enhanced liquidity. Mortgage-Backed Securities. The Portfolios may invest in mortgage-backed securities issued or guaranteed by the U.S. Government, or one of its agencies or instrumentalities, or issued by private issuers. The mortgage-backed securities in which these Portfolios may invest include collateralized mortgage obligations ("CMOs") and REMIC interests. CMOs are debt instruments issued by special purpose entities and secured by mortgages or other mortgage-backed securities, which provide by their terms for aggregate payments of principal and interest based on the payments made on the underlying mortgages or securities. CMOs are typically issued in separate classes with varying coupons and stated maturities. REMIC interests are mortgage-backed securities as to which the issuers have qualified to be treated as real estate mortgage investment conduits under the Internal Revenue Code of 1986 and have the same characteristics as CMOs. It is expected that the amount of privately issued mortgage-backed securities that may be purchased by a Portfolio may not exceed 10% of the value of the Portfolio's total assets, and the securities of any one such issuer purchased by a Portfolio may not exceed 5% of the value of the Portfolio's total assets. The Portfolios may from time to time also invest in "stripped" mortgage-backed securities. These are securities which operate like CMOs but entitle the holder to disproportionate interests with respect to the allocation of interest or principal on the underlying mortgages or securities. A stripped mortgage-backed security is created by the issuer separating the interest and principal on a mortgage pool to form two or more independently tradable securities. The result is the creation of classes of discount securities which can be structured to produce faster or slower prepayment expectations based upon the particular underlying mortgage interest rate payments assigned to each class. These obligations exhibit risk characteristics similar to mortgage-backed securities generally and zero coupon securities. Due to existing market characteristics, "interest only" and "principal only" mortgage-backed securities are considered to be illiquid. Because the mortgages underlying mortgage-backed securities are subject to prepayment at any time, most mortgage-backed securities are subject to the risk of prepayment in an amount differing from that anticipated at the time of issuance. Prepayments generally are passed through to the holders of the securities. Any such prepayments received by a Portfolio must be reinvested in other securities. As a result, prepayments in excess of those anticipated could adversely affect yield to the extent reinvested in instruments with a lower interest rate than that of the original security. Prepayments on a pool of mortgages are influenced by a variety of economic, geographic, social and other factors. Generally, however, prepayments will increase during a period of falling interest rates and decrease during a period of rising interest rates. Accordingly, amounts required to be reinvested are likely to be greater (and the potential for capital appreciation less) during a period of declining interest rates than during a period of rising interests rates. Mortgage-backed securities may be purchased at a premium over the principal or face value in order to obtain higher income. The recovery of any premium that may have been paid for a given security is solely a function of the ability to liquidate such security at or above the purchase price. 5 Asset-Backed Securities. Each of the Portfolios may invest in asset-backed securities issued by private issuers. Asset-backed securities represent interests in pools of consumer loans (generally unrelated to mortgage loans) and most often are structured as pass-through securities. Interest and principal payments ultimately depend on payment of the underlying loans by individuals, although the securities may be supported by letters of credit or other credit enhancements. The value of asset-backed securities may also depend on the creditworthiness of the servicing agent for the loan pool, the originator of the loans, or the financial institution providing the credit enhancement. Asset-backed securities may be "stripped" into classes in a manner similar to that described under "Mortgage-Backed Securities," above, and are subject to the prepayment risks described therein. Types of Equity Securities The Balanced Equity Master Portfolio, Diversified Equity Master Portfolio, U.S. Growth Equity Portfolio and the International Core Equity Portfolio may purchase equity securities, including common and preferred and convertible preferred stocks and securities having equity characteristics such as rights, warrants and convertible debt securities. See "Convertible Securities." Common stocks and preferred stocks represent equity ownership interests in a corporation and participate in the corporation's earnings through dividends which may be declared by the corporation. Unlike common stocks, preferred stocks are entitled to stated dividends payable from the corporation's earnings, which in some cases may be "cumulative" if prior stated dividends have not been paid. Dividends payable on preferred stock have priority over distributions to holders of common stock, and preferred stocks generally have preferences on the distribution of assets in the event of the corporation's liquidation. Preferred stocks may be "participating" which means that they may be entitled to dividends in excess of the stated dividend in certain cases. The rights of common and preferred stocks are generally subordinate to rights associated with a corporation's debt securities. Rights and warrants are securities which entitle the holder to purchase the securities of a company (generally, its common stock) at a specified price during a specified time period. Because of this feature, the values of rights and warrants are affected by factors similar to those that determine the prices of common stocks and exhibit similar behavior. Rights and warrants may be purchased directly or acquired in connection with a corporate reorganization or exchange offer. The purchase of rights and warrants are subject to certain limitations. See "Investment Restrictions." Convertible Securities. The Balanced Master Portfolio, Diversified Equity Master Portfolio, U.S. Growth Equity Portfolio and International Core Equity Portfolio may purchase securities of this type, including convertible debt obligations and convertible preferred stock. A convertible security entitles the holder to exchange it for a fixed number of shares of common stock (or other equity security), usually at a fixed price within a specified period of time. Until conversion, the holder receives the interest paid on a convertible bond or the dividend preference of a preferred stock. Convertible securities have an "investment value" which is the theoretical value determined by the yield it provides in comparison with similar securities without the conversion feature. The investment value changes based upon prevailing interest rates and other factors. They also have a "conversion value" which is the worth in market value if the security were exchanged for the underlying equity security. Conversion value fluctuates directly with the price of the underlying 6 security. If conversion value is substantially below investment value, the price of the convertible security is governed principally by its investment value. If the conversion value is near or above investment value, the price of the convertible security generally will rise above investment value and may represent a premium over conversion value due to the combination of the convertible security's right to interest (or dividend preference) and the possibility of capital appreciation from the conversion feature. A convertible security's price, when price is influenced primarily by its conversion value, will generally yield less than a senior nonconvertible security of comparable investment value. Convertible securities may be purchased at varying price levels above their investment values. However, there is no assurance that any premium above investment value or conversion value will be recovered because price changes and, as a result, the ability to achieve capital appreciation through conversion may never be realized. Types of Foreign Securities Each Portfolio (with the exception of the International Core Equity Master Portfolio which may invest up to 100% of its total assets in securities of non-U.S. companies) may invest up to 10% of its total assets, at the time of purchase, in securities of non-U.S. companies. Each Portfolio may also invest in securities of certain Canadian issuers and securities purchased by means of American Depository Receipts ("ADRs") in an amount not to exceed 20% of a Portfolio's total assets at the time of purchase. Securities denominated in foreign currencies may be affected favorably or unfavorably by changes in foreign currency exchange rates and costs will be incurred in converting one currency to another. Exchange rates are determined by forces of supply and demand which forces are affected by a variety of factors including international balances of payments, economic and financial conditions, government intervention and speculation. Foreign currency exchange transactions of the Portfolios may be effected on a "spot" basis (cash basis) at the prevailing spot rate for purchasing or selling currency. The Portfolios may also utilize forward foreign currency contracts. See "Derivative Instruments - Forward Foreign Currency Contract." Foreign securities may also be affected by changes in exchange control regulations, changes in governmental administration or economic or monetary policy (in the U.S. and abroad), political events, expropriation or nationalization or confiscatory taxation. Dividends and interest paid on foreign securities may be subject to foreign withholding and other foreign taxes. In addition, there may be less publicly available information concerning foreign issuers than domestic issuers, and foreign issuers may not be subject to uniform accounting, auditing and financial reporting standards comparable to those of domestic issuers. Securities of certain foreign issuers and in certain foreign markets are less liquid and more volatile than domestic issues and markets, and foreign brokerage commissions are generally higher than in the U.S. There is also generally less regulation and supervision of exchanges, brokers and issuers in foreign countries. Derivative Instruments In pursuing its investment objectives, each Portfolio may purchase and sell (write) options on securities, securities indices, and foreign currencies and enter into interest rate, foreign currency and index futures contracts and purchase and sell options on such futures contracts and enter into forward foreign currency exchange contracts for hedging purposes. 7 Options. An option is a legal contract that gives the holder the right to buy or sell a specified amount of the underlying instrument at a fixed or determinable price upon the exercise of the option. A call option conveys the right to buy, in return for a premium paid, and a put option conveys the right, in return for a premium, to sell a specified quantity of the underlying instrument. Options on indices are settled in cash and gain or loss depends on changes in the index in question rather than on price movement in individual securities. There are certain risks associated with transactions in options on securities and on indices. For example, there are significant differences between the securities and options markets that could result in an imperfect correlation between these markets, causing a given transaction not to achieve its objectives. A decision as to whether, when, and how to use options involves the exercise and skill and judgment of the Investment Manager, and even a well-conceived transaction may be unsuccessful to some degree because of market behavior or unexpected events. There can be no assurance that a liquid market will exist when a Portfolio seeks to close out an option position. If a Portfolio were unable to close out an option that it had purchased on a security, it would have to exercise the option in order to realize any profit or the option may expire worthless. If a Portfolio were unable to close out a covered call option that it had written on a security, it would not be able to sell the underlying securities unless the option expired without exercise. As the writer of a covered call option, a Portfolio foregoes, during the life of the option, the opportunity to profit from increases in the market value of the security covering the call option above the sum of the premium and the exercise price of the call. If trading were suspended in an option purchased by a Portfolio, the Portfolio would not be able to close out the option. If restrictions on exercise were imposed, a Portfolio might be unable to exercise an option it had purchased. Except to the extent that a call option on an index written by a Portfolio is covered by an option on the same index purchased by the Portfolio, movements in the index may result in a loss to the Portfolio; however, such losses may be mitigated by changes in the value of the Portfolio's securities during the period the option was outstanding. Options On Foreign Currencies. Each Portfolio may purchase and write options on foreign currencies for hedging purposes. For example, a decline in the dollar value of a foreign currency in which portfolio securities are denominated will reduce the dollar value of such securities, even if their value in the foreign currency remains constant. In order to protect against such diminutions in the value of portfolio securities, a Portfolio may purchase put options on the foreign currency. If the value of the currency does decline, the Portfolio will have the right to sell such currency for a fixed amount in dollars and will thereby offset, in whole or in part, the adverse effect on its portfolio that otherwise would have resulted. Conversely, where the Investment Manager perceives a risk of a rise in the dollar value of a foreign currency in which securities to be acquired are denominated (which would increase the dollar cost of these securities to the Portfolio), a Portfolio may purchase call options on the currency involved. The purchase of such options could offset, at least partially, the effects of the adverse movements in exchange rates. As in the case of other types of options, however, the benefit to a Portfolio deriving from purchases of foreign currency options will be reduced by the amount of the premium and related transaction costs. In addition, where currency exchange rates 8 do not move in the direction or to the extent anticipated, a Portfolio could sustain losses on transactions in foreign currency options which would require it to forego a portion or all of the benefits of advantageous changes in such rates. Each Portfolio may write options on foreign currencies for the same types of hedging purposes. For example, where a Portfolio anticipates a decline in the dollar value of foreign currency denominated securities due to adverse fluctuations in exchange rates it could, instead of purchasing a put option, write a call option on the relevant currency. If the anticipated decline occurs, the option will most likely not be exercised, and the diminution in value of portfolio securities will be offset by the amount of the premium received. Similarly, instead of purchasing a call option to hedge against an anticipated increase in the dollar cost of securities to be acquired, a portfolio could write a put option on the relevant currency which, if rates move in the manner projected, will expire unexercised and allow the Portfolio to hedge such increased cost up to the amount of the premium. As in the case of other types of options, however, the writing of a foreign currency option will constitute only a partial hedge up to the amount of the premium, and only if exchange rates move in the expected direction. If this does not occur, the option may be exercised and a Portfolio would be required to purchase or sell the underlying currency at a loss, which may not be offset by the amount of the premium. Through the writing of options on foreign currencies, a Portfolio also may be required to forego all or a portion of the benefits that might otherwise have been obtained from favorable movements in exchange rates. Each Portfolio may write covered call options on foreign currencies. A call option written on a foreign currency by a Portfolio is "covered" if the Portfolio owns the underlying foreign currency covered by the call or has an absolute and immediate right to acquire that foreign currency without additional cash consideration (or for additional cash consideration held in a segregated account by the Fund's custodian) upon conversion or exchange of other foreign currency held in its portfolio. A call option is also covered if the Portfolio has a call on the same foreign currency and in the same principal amount as the call written where the exercise price of the call held (a) is equal to or less than the exercise price of the call written or (b) is greater than the exercise price of the call written if the difference is maintained by the Portfolio in cash, or liquid assets in a segregated account with the custodian. Each Portfolio also may write call options on foreign currencies for cross-hedging purposes. A call option on a foreign currency is for cross-hedging purposes if it is designed to provide a hedge against a decline in the U.S. dollar value of a security which the Portfolio owns or has the right to acquire and which is denominated in the currency underlying the option due to an adverse change in the exchange rate. In such circumstances, the Portfolio will collateralize the option by maintaining in a segregated account with the custodian, cash or liquid assets in an amount not less than the value of the underlying foreign currency in U.S. dollars marked-to-market daily. Forward Foreign Currency Contracts. The Portfolios may enter into forward currency contracts to purchase or sell foreign currencies as a hedge against possible variations in foreign exchange rates. A forward foreign currency exchange contract is an agreement between the contracting parties to exchange an amount of currency at some future time at an agreed upon rate. The rate can be higher or lower than the spot rate between the currencies that are the subject of the contract. A forward contract generally has no deposit requirement, and such 9 transactions do not involve commissions. By entering into a foreign contract for the purchase or sale of the amount of foreign currency invested in a foreign security, a Portfolio can hedge against possible variations in the value of the dollar versus the subject currency either between the date the foreign security is purchased or sold and the date on which payment is made or received ("transaction hedging"), or during the time the Portfolio holds the foreign security ("position hedging"). Hedging against a decline in the value of a currency through the use of forward contracts does not eliminate fluctuations in the prices of securities or prevent losses if the prices of securities decline. Hedging transactions preclude the opportunity for gain if the value of the hedged security should rise. The Portfolios will not speculate in foreign currency contracts. If a Portfolio enters into a "position hedging transaction," which is the sale of forward non-U.S. currency with respect to a security held by it and denominated in such foreign currency, the Fund's custodian will place cash or liquid securities in a separate account in an amount equal to the amount of the Portfolio's total assets committed to the consummation of such forward contract. If the value of the securities placed in the account declines, additional cash or securities will be placed in the account so that the value of cash or securities in the account will equal the amount of the Portfolio's commitments with respect to such contracts. A Portfolio will not attempt to hedge all of its non-U.S. portfolio positions and will enter into such transactions only to the extent, if any, deemed appropriate by its Investment Managers. The Portfolios will not enter into forward contracts for terms of more than one year. Each Portfolio also has the authority to engage in transactions in foreign currency options and futures, but the Portfolios have no intention to do so during the next year. These options and futures are similar to options and futures on securities, except they represent an option to purchase or to sell an amount of a specified currency prior to expiration of the option at a designated price (in the case of a currency option), or a contract to purchase or deliver a specified amount of currency at an agreed upon future time and price (in the case of a currency future). Such transactions would be used for purposes similar to those described above for forward foreign currency contracts. Securities Loans. A Portfolio may from time to time lend U.S. securities that it holds to brokers, dealers and financial institutions. Such loans will be secured by collateral in the form of cash or United States Treasury securities, or other liquid securities as permitted by the Securities and Exchange Commission, which at all times while the loan is outstanding, will be maintained in an amount at least equal to the current market value of the loaned securities. The Portfolio will continue to receive interest and dividends on the loaned securities during the term of the loan, and, in addition, will receive a fee from the borrower or interest earned from the investment of cash collateral in short-term securities. The Portfolio also will receive any gain or loss in the market value of loaned securities and of securities in which cash collateral is invested during the term of the loan. The right to terminate a loan of securities, subject to appropriate notice, will be given to either party. When a loan is terminated, the borrower will return the loaned securities to the Portfolio. A Portfolio will not have the right to vote securities on loan, but would terminate a loan and regain the right to vote if the Master Fund's Board of Trustees deems it to be necessary in a particular instance. For tax purposes, the dividends, interest and other distributions which a Portfolio receives on loaned securities may be treated as other than qualified income for the 90% test. (See TAXES.) 10 Each Portfolio intends to lend portfolio securities only to the extent that this activity does not jeopardize its status as a regulated investment company under the Code. The primary risk involved in lending securities is that the borrower will fail financially and return the loaned securities at a time when the collateral is insufficient to replace the full amount of the loan. The borrower would be liable for the shortage, but a Portfolio would be an unsecured creditor with respect to such shortage and might not be able to recover all or any of it. In order to minimize this risk, a Portfolio will make loans of securities only to firms CCM Advisors, LLC, the Portfolios' investment adviser, deems creditworthy. The Portfolio receives amounts equal to the interest on loaned securities and also receives one or more of (a) negotiated loan fees, (b) interest on securities used as collateral or (c) interest on short-term debt securities purchased with such collateral; either type of interest may be shared with the borrower. A Portfolio may also pay fees to placing brokers as well as custodian and administrative fees in connection with loans. Fees may only be paid to a placing broker provided that the Master Fund's Board of Trustees determines that the fee paid to the placing broker is reasonable and based solely upon services rendered, that the Trustees separately consider the propriety of any fee shared by the placing broker with the borrower and that the fees are not used to compensate CCM Advisors or an Investment Manager or any affiliated person of the Portfolio or an affiliated person of CCM Advisors or an Investment Manager. The terms of a Portfolio's loans must meet applicable tests under the Internal Revenue Code and permit the Portfolio to reacquire the loaned securities on five days' written notice or in time to vote on any important matter. Each Portfolio may lend foreign securities consistent with the foregoing requirements, but no Portfolio has any intention to do so in the forseeable future. Restricted and Illiquid Securities. Each Portfolio may invest up to 10% of the value of its net assets, measured at the time of investment, in restricted and illiquid securities. Restricted securities are securities which are subject to restrictions on resale because they have not been registered under the 1933 Act. Illiquid securities are securities which may be subject to other types of resale restrictions or which have no readily available markets for their disposition. These limitations on resale and marketability may have the effect of preventing a Portfolio from disposing of a security at the time desired or at a reasonable price. In addition, in order to resell a restricted security, the Portfolio might have to bear the expense and incur the delays associated with effecting registration. In purchasing restricted securities, the Portfolios do not intend to engage in underwriting activities, except to the extent a Portfolio may be deemed to be a statutory underwriter under the 1933 Act in disposing of such securities. It is expected that restricted securities will be purchased for investment purposes only and not for the purpose of exercising control or management of other companies. Under the Portfolio's anticipated policies, securities available for purchase and sale in accordance with Rule 144A under the 1933 Act are treated as restricted securities for the purposes of the limitation set forth above. Real Estate Investment Trusts (REITs). The Portfolios may invest in REITs. REITs are pooled investment vehicles that invest primarily in income producing real estate related loans or interests. Investing in REITs involves certain unique risks in addition to those risks associated with investing in the real estate industry in general. REITs may be affected by changes in the value of the underlying property owned by the REITs or the quality of loans held by the REIT. 11 REITs are dependent upon management skills, are not diversified, and are subject to the risks of financing projects. REITs are also subject to interest rate risks. When interest rates decline, the value of a REIT's investment in fixed rate obligations can be expected to rise. Conversely, when interest rates rise, the value of a REIT's investment in fixed rate obligations can be expected to decline. Investing in REITs involves risks similar to those associated with investing in small capitalization companies. REITs may have limited financial resources, may trade less frequently and in a limited volume and may be subject to more abrupt or erratic price movements than securities of larger companies. When-Issued Purchases and Forward Commitments (Delayed-Delivery). When-issued purchases and forward commitments (delayed-delivery) are commitments by a Portfolio to purchase or sell particular securities with payment and delivery to occur at a future date (perhaps one or two months later). These transactions permit the Portfolios to lock in a price or yield on a security, regardless of future changes in interest rates. When a Portfolio agrees to purchase securities on a when-issued or forward commitment basis, the Portfolio's custodian will segregate on the books of the Portfolio the liquid assets of the Portfolio. Normally, the custodian will set aside portfolio securities to satisfy a purchase commitment, and in such a case the Portfolio may be required subsequently to place additional assets in the separate account to ensure that the value of the account remains equal to the Portfolio's commitments. Because a Portfolio's liquidity and ability to manage its portfolio holdings might be affected when it sets aside cash or portfolio securities to cover such purchase commitments, the Investment Managers expect that commitments to purchase when-issued securities and forward commitments will not exceed 10% of the value of a Portfolio's total assets absent unusual market conditions. A Portfolio will purchase securities on a when-issued or forward commitment basis only with the intention of completing the transaction and actually purchasing the securities. If deemed advisable as a matter of investment strategy, however, a Portfolio may dispose of or renegotiate a commitment after it is entered into, and may sell securities it has committed to purchase before those securities are delivered to the Portfolio on the settlement date. In these cases the Portfolio may realize a capital gain or loss for Federal income tax purposes. When a Portfolio engages in when-issued and forward commitment transactions, it relies on the other party to consummate the trade. Failure of such party to do so may result in the Portfolio incurring a loss or missing an opportunity to obtain a price considered to be advantageous. The market value of the securities underlying a when-issued purchase or a forward commitment to purchase securities, and any subsequent fluctuations in their market value, are taken into account when determining the market value of a Portfolio starting on the day the Portfolio agrees to purchase the securities, A Portfolio does not earn interest on the securities it has committed to purchase until the securities are paid for and delivered on the settlement date. 12 INVESTMENT RESTRICTIONS Fundamental Restrictions In addition to the investment restrictions stated in the Prospectus, the investment restrictions listed below have been adopted as fundamental policies of each Fund and may not be changed without the vote of a majority of the outstanding voting securities of that Fund. 1. The Funds may not issue senior securities as defined in the 1940 Act or borrow money, except that a Fund may borrow from banks for temporary or emergency purposes (but not for investment), in an amount up to 10% of the value of its total assets (including the amount borrowed) less liabilities (not including the amount borrowed) at the time the borrowing was made. While any such borrowings exist for a Fund, it will not purchase securities. (However, a Fund which is authorized to do so by its investment policies may lend securities, enter into repurchase agreements without limit and reverse repurchase agreements in an amount not exceeding 10% of its total assets, purchase securities on a when-issued or delayed delivery basis and enter into forward foreign currency contracts.) 2. Purchase a security, other than Government Securities, if as a result of such purchase more than 5% of the value of the Fund's assets would be invested in the securities of any one issuer, or the Fund would own more than 10% of the voting securities, or of any class of securities, of any one issuer. For purposes of this restriction, all outstanding indebtedness of an issuer is deemed to be a single class except that all of the investable assets of a Fund may be invested in another registered investment company having the same investment objective and substantially the same investment policies as the Fund. 3. Purchase a security, other than Government Securities, if as a result of such purchase 25% or more of the value of the Fund's total assets would be invested in the securities of issuers in any one industry except that all of the investable assets of a Fund may be invested in another registered investment company having the same investment objective and substantially the same investment policies as the Fund. 4. Purchase the securities (other than Government Securities) of an issuer having a record, together with predecessors, of less than three years' continuous operations, if as a result of such purchase more than 5% of the value of the Fund's total assets would be invested in such securities except that this shall not prohibit a Fund from investing all of its investable assets in another registered investment company having the same investment objective and substantially the same investment policies as the Fund. 5. Make short sales of securities or purchase securities on margin, except for such short-term loans as are necessary for the clearance of purchases of securities. 6. Engage in the underwriting of securities except insofar as a Fund may be deemed an underwriter under the Securities Act of 1933 in disposing of a security and except that all of the investable assets of a Fund may be invested in another registered investment company having the same investment objective and substantially the same investment policies as the Fund. 13 7. Purchase or sell real estate or interests therein, or purchase oil, gas or other mineral leases, rights or royalty contracts or development programs, except that a Fund may invest in the securities of issuers engaged in the foregoing activities and may invest in securities secured by real estate or interests therein. 8. Make loans of money or securities, except through the purchase of permitted investments (including repurchase and reverse repurchase agreements) and through the loan of securities (in an amount not exceeding one-third of total assets) by any Fund. 9. Purchase or sell commodities or commodity contracts, except that the Fund may purchase and sell financial futures contracts and options on such contracts and may enter into forward foreign currency contracts and engage in the purchase and sale of foreign currency options and futures. 10. Invest more than 5% of the value of a Fund's total assets in warrants, including not more than 2% of such assets in warrants not listed on a U.S. stock exchange. (Rights and warrants attached to, received in exchange for, or as a distribution on, other securities are not subject to this restriction.) 11. Pledge, hypothecate, mortgage or otherwise encumber its assets, except as necessary to secure permitted borrowings. (Collateral arrangements and initial margin with respect to permitted options on securities, financial futures contracts and related options, and arrangements incident to other permitted practices, are not deemed to be subject to this restriction.) Non-Fundamental Restrictions The Funds have also adopted the following additional investment restrictions. These restrictions are not fundamental and may be changed by the Fund's Board of Directors (the "Board of Directors") without shareholder approval. 1. The Funds may not purchase the securities of any issuer, if as a result of such purchase more than 10% of the value of the Fund's total assets would be invested in securities that are illiquid. (As a matter of non-fundamental policy, repurchase agreements maturing in more than seven days, certain time deposits and over-the-counter options are considered to be illiquid.) 2. The Funds may not invest for the purpose of exercising control or management of another company except that all the investable assets of a Fund may be invested in another registered investment company having the same investment objective and substantially the same investment policies as the Fund. 3. Each Fund will invest, under normal circumstances, at least 80% of the value of its net assets in a particular type of investment that is suggested by the Fund's name and will notify its shareholders at least 60 days prior to any change in such policy. 4. Each Fund shall not purchase the stock or bonds of companies identified by the American Medical Association Coalition of Tobacco-Free Investments (the "AMA") as engaged in growing, processing or otherwise handling tobacco. If a Fund holds any such securities of an issuer which is subsequently identified by the AMA as engaged in such activities, the securities will be sold within a reasonable time period, consistent with prudent investment practice. 14 For purposes of these investment restrictions and other limitations, all percentage limitations apply at the time of a purchase or other transaction. Any subsequent change in a percentage resulting from market fluctuations or other changes in the amount of total assets does not require the sale or disposition of an investment or any other action. The fundamental and non-fundamental investment restrictions of each Portfolio follow: Fundamental Restrictions The investment restrictions listed below have been adopted as fundamental policies of each Portfolio, and may not be changed without a majority of the outstanding voting securities of that Portfolio. No Portfolio may: 1. Industry Concentration. No Portfolio will purchase a security, other than Government Securities, if as a result of such purchase 25% or more of the value of the Portfolio's total assets would be invested in the securities of issuers in any one industry. Notwithstanding anything herein to the contrary, to the extent permitted by the Investment Company Act of 1940, each Portfolio may invest in one or more investment companies; provided that, except to the extent the Portfolio invests in other investment companies pursuant to Section 12(d)(1)(A) of the 1940 Act, the Portfolio treats the assets of the investment companies in which it invests as its own for purposes of this policy. 2. Diversification. No Portfolio will purchase any security, other than Government Securities or securities of a registered investment company that relies on Rule 2a-7 under the 1940 Act or that has the same investment objective and substantially similar investment policies, if as a result of such purchase more than 5% of the value of the Portfolio's assets would be invested in the securities of any one issuer, or the Portfolio would own more than 10% of the voting securities, or of any class of securities, of any one issuer. For purposes of this restriction, all outstanding indebtedness of an issuer is deemed to be a single class. 3. Interests in Real Estate. No Portfolio will purchase real estate or any interest therein, except through the purchase of corporate or certain government securities (including securities secured by a mortgage or a leasehold interest or other interest in real estate). 4. Underwriting. No Portfolio may engage in the underwriting of securities except insofar as the Portfolio may be deemed an underwriter under the Securities Act of 1933 in disposing of a security and except that the Portfolio may invest in another registered investment company that relies on Rule 2a-7 under the 1940 Act or that has the same investment objective and substantially similar investment policies. 5. Borrowing. No Portfolio will borrow money, except that, for temporary purposes: (a) the Portfolio may borrow from banks (as defined in the 1940 Act) and through reverse repurchase 15 agreements in amounts up to 33 1/3% of its total assets (including the amount borrowed), taken at market value at the time of the borrowing; (b) the Portfolio may, to the extent permitted by applicable law, borrow up to an additional 5% of its total assets (including the amount borrowed), taken at market value at the time of the borrowing; and (c) the Portfolio may obtain such short-term credits as may be necessary for clearance of purchases and sales of portfolio securities. No Portfolio will make any additional investment while it has borrowings in excess of 5% of its total assets. 6. Lending. No Portfolio will lend any security or make any other loan, except through: (a) the purchase of debt obligations in accordance with the Portfolio's investment objective or objectives and policies; (b) repurchase agreements with banks, brokers, dealers, and other financial institutions; (c) participation in an interfund lending program among funds having a common investment adviser or distributor to the extent permitted by applicable law or by exemptive order of the Securities and Exchange Commission and (d) loans of securities as permitted by applicable law. 7. Commodities. No Portfolio will purchase or sell commodities or commodity contracts, except that a Portfolio may purchase and sell financial futures contracts and options on such contracts and may enter into forward foreign currency contracts and engage in the purchase and sale of foreign currency options and futures. 8. Senior Securities. No Portfolio will issue senior securities except to the extent the activities permitted in Fundamental Restriction No. 5 may be deemed to give rise to a senior security. 9. Securities of Registered Investment Companies. As a matter of fundamental policy, none of the foregoing investment policies or restrictions of the Portfolios shall prohibit a Portfolio from investing all or substantially all of its assets in the shares of one or more registered open-end investment company having the same investment objective and substantially similar investment policies. Non-Fundamental Restrictions The Portfolios have also adopted the following additional investment restrictions. These restrictions are not fundamental and may be changed by the Trust's Board of Trustees without shareholder approval. 1. Margin Purchases. No Portfolio may purchase any securities on margin or sell securities short. Each Portfolio may obtain such short-term credits as may be necessary for clearance of purchases and sales of portfolio securities. 2. Pledging Assets. No Portfolio may mortgage, pledge, hypothecate or in any manner transfer, as security for indebtedness, any securities owned or held by such Portfolio except as may be necessary in connection with borrowings mentioned in fundamental restriction number 5 above, and then such mortgaging, pledging or hypothecating may not exceed one-third of the Portfolio's total assets, taken at market value at the time thereof. 16 3. Illiquid Securities. No Portfolio will invest in illiquid securities, including certain repurchase agreements, reverse repurchase agreements or time deposits maturing in more than seven days, if, as a result thereof, more than 15% of the value of its net assets would be invested in assets that are illiquid. 4. Fund Name. Each Portfolio has adopted a policy to invest, under normal circumstances, at least 80% of the value of its net assets, plus the amount of any borrowings for investment purposes, in a particular type of investment that is suggested by the Portfolio's name and will notify its shareholders at least 60 days prior to any change in such policy. 5. Investment in another Investment Company. Each Portfolio shall not acquire any securities of a registered open-end investment company or registered unit investment trust that relies on Section 12(d)(1)(F) or Section 12(d)(1)(G) of the Investment Company Act of 1940. For purposes of these investment restrictions and other limitations, all percentage limitations apply at the time of a purchase or other transaction. Any subsequent change in a percentage resulting from market fluctuations or other changes in the amount of total assets does not require the sale or disposition of an investment or any other action. 17 DIRECTORS AND OFFICERS The Board of Directors has overall responsibility for the conduct of the affairs of the AHA Funds. Each Director serves an indefinite term of unlimited duration until the next annual meeting of shareholders and until the election and qualification of his or her successor. The Board of Directors may fill any vacancy on the board provided that after such appointment, at least two-thirds of the Directors have been elected by the shareholders. The shareholders may remove a Director by a vote of a majority of the outstanding shares of the Fund at any meeting of shareholders called for the purpose of removing such Director. The Board of Directors elects the officers of the AHA Funds. Each officer serves until the election and qualification of his or her successor, or until he or she sooner dies, resigns, or is removed or disqualified. The Board of Directors may remove any officer with or without cause at any time. The names and ages of the Directors and officers, the position each holds with AHA Funds, the date each was first elected to his position, their principal business occupations during the last five years and other directorships they have held for publicly traded companies are shown below. Each Director and officer serves in such capacity for each of the seven series of the AHA Funds Except for Messrs. Burke, Evans, Solberg and Yoder, each Director oversees the seven Portfolios of the CCM Advisors Funds and the two series of the CCMA Select Investment Trust. Messrs. Burke, Evans, Solberg and Yoder only oversee the seven series of the AHA Funds. Directors who are interested persons of AHA Funds:
- ----------------------- ---------------- ---------------------------------- ------------------------------- Name and Age at Position(s) Held Principal Occupation(s) Other Directorships Held October 1, 2002 with AHA Funds During Past 5 Years and Date First Elected or Appointed to Office - ----------------------- ---------------- ---------------------------------- ------------------------------- Douglas D. Peabody, 39* Director and Managing Director, CCM Advisors, None. President (since LLC (since Jan. 2001); Managing 2001) Director Convergent Capital Management Inc. (since 1999); formerly Principal, Eager Manager Advisory Services (1991 to 1999). Timothy G. Solberg, 49* Director and Managing Director, CCM Advisors, None. Secretary (since LLC (since 2001); formerly 2001) Director of Marketing and Client Services, Hewitt Investment Group, a Division of Hewitt Associates LLC.
18 Directors who are not interested persons of AHA Funds:
- ---------------------- ------------------- ---------------------------------- ----------------------------- Name and Age at Position(s) Held Principal Occupation(s) Other Directorships Held October 1, 2002 with AHA Funds During Past 5 Years and Date First Elected or Appointed to Office - ---------------------- ------------------- ---------------------------------- ----------------------------- Anthony J. Burke, 37 Director (since President, American Hospital None. 1999) Association Financial Solutions, Inc. (since 1997); formerly, Marketing Development Director of AHA Insurance Resources Inc. (1997 to 1998); prior thereto, President of A. Burke & Associates (a marketing consulting firm). Charles V. Doherty, 68 Director (since Managing Director, Madison Trustee, Wayne Hummer September 2002) Advisory Group; Director, Lakeside Investment Trust (an open-end Bank; Director, Knight Trading investment company) (4 Group, Inc.; Director, Howe Barnes portfolios); formerly Trustee, Investments, Inc.; Director, Wayne Hummer Money Fund Trust Brauvin Capital Trust, Inc.; (an open-end investment Director, Bank of America company) (1994-1999). Financial Products, Inc. Frank A. Ehmann, 68 Director (since Retired. Director, American Director, SPX Corp. (global 1991) Healthways (provider of diabetes provider of technical products and cardiac disease management and systems, industrial services to health plans and products and services, flow hospitals) (since 1989); Director, technology and service Genderm Corp. (dermatology company solutions) (since 1989); offering prescription and formerly Director and non-prescription treatments for President, United Stationers skin conditions) (1997-2000). (wholesale distributor of business, computer, and facilities management products). 19 - ---------------------- ------------------- ---------------------------------- ----------------------------- Name and Age at Position(s) Held Principal Occupation(s) Other Directorships Held October 1, 2002 with AHA Funds During Past 5 Years and Date First Elected or Appointed to Office - ---------------------- ------------------- ---------------------------------- ----------------------------- Richard John Evans 50 Director (since Chief Financial Officer, American None. 1995) Hospital Association (since Dec. 1999); formerly, Vice President/Finance, American Hospital Association (1995-1999). John D. Oliverio, 49 Director (since Chief Executive Officer, President Director, Hewitt Series Trust 1995) and Director, Wheaton Franciscan (an open-end investment Services, Inc. (parent company) (since 1998) organization for more than 100 (2 portfolios). health and shelter service organizations) (since 1984); Director of the following: Affinity Health Systems (since 1995); Covenant Health Care System (since 1989); All Saints Health System (since 1992); Franciscan Ministries, Inc. (the holding company for Wheaton Franciscan Services, Inc.'s housing entities) (since 1998) and United Health System (since 1998). Edward M. Roob, 67 Director (since Retired. Arbitrator, New York Director, Brinson Funds, Inc. September 2002) Stock Exchange and National (since 1994); Director, UBS Association of Securities Dealers; Relationship Funds (since Trustee, Fort Dearborn Income 1995); Director, UBS Securities, Inc. (since 1994); Supplementary Trust (since Director, Brinson Trust Company 1997)(40 portfolios); (since 1993); Committee Member, Chicago Stock Exchange (1993 to 1999). John L. Yoder, 71 Director (since Vice President, Princeton None. 1988) Insurance Co. (since 1995).
* Messrs. Peabody and Solberg are "interested persons" of the AHA Funds as defined in the Investment Company Act of 1940 because they are Managing Directors of the Portfolios' investment adviser, CCM Advisors, LLC. The address of Messrs. Peabody and Solberg is 190 South LaSalle Street, Suite 2800, Chicago, Illinois 60603. The address of Mr. Burke is One North Franklin, Chicago, Illinois 60606; that of Mr. Doherty is 70 West Madison, Suite 1400, Chicago, IL 60602; that of Mr. Ehmann is 864 Bryant Avenue, Winnetka, Illinois 60093; that of Mr. Evans is One North Franklin, Chicago, IL 60606; that of Mr. Oliverio is 26 West 171 Roosevelt Road, Wheaton, Illinois 60189; that of Mr. Roob is 841 Woodbine Lane, Northbrook, Illinois 60062 and that of Mr. Yoder is 19 Tankard, Washington Crossing, Pennsylvania 18977. 20 Officers. Messrs. Peabody and Solberg are President and Secretary of AHA Funds, respectively. The preceding table gives more information about Messrs. Peabody and Solberg. The following table sets forth each other officer's name, position with AHA Funds, age, principal occupation during the past five years and the date on which he first became an officer of AHA Funds. Each officer serves until his successor is chosen and qualified or until his resignation or removal by the Board of Directors. - ------------------------ ----------------------- ------------------------------- Position(s) Held with AHA Funds and Date Name and Age at First Elected or Principal Occupation(s) October 1, 2002 Appointed to Office During Past 5 Years - ------------------------ ----------------------- ------------------------------- Gregory P. Francoeur, 31 Treasurer (since 2002) Director of Finance, Convergent Capital Management Inc. (since 1997); prior thereto, Auditor, Price Waterhouse LLP (1993-1997). James A. Henderson, 60 Vice President (since Vice President, Corporate 1988) Counsel and Assistant Secretary, American Hospital Association (since 1984); Secretary, AHA Financial Solutions, Inc. (since 1995); Secretary, Heath Forum, Inc. (since 1988).) The address of each officer is 190 South LaSalle, Suite 2800, Chicago, Illinois 60603. Directors, other than those who are affiliated with CCM Advisors, LLC ("CCM Advisors"), the Fund's investment adviser, or with the American Hospital Association, receive $1,000 for each quarterly meeting of the Board of Directors attended and $500 for each special meeting of the Board of Directors attended and for any committee meeting (not held on the date of a quarterly Board of Directors meeting) attended, plus reimbursement of related expenses. Meetings and Committees. The current Board of Directors consists of two interested and seven non-interested Trustees. Audit Committee. The Audit Committee, consisting of Messrs. Doherty, Ehmann, Oliverio, Roob and Yoder, all of whom are non-interested Directors, recommends to the Board of Directors the independent accountants to serve as auditors, and confers with the independent accountants on the scope and results of the audit. Governance Committee. The Governance Committee, consisting of Messrs. Burke, Doherty, Ehmann, Evans, Oliverio, Roob and Yoder, all of whom are non-interested Directors, recommends to the Board of Directors, among other things, nominees for Director who are not "interested persons" of the Fund. Neither the Board of Directors, nor the Governance Committee will consider shareholder recommendations regarding candidates for election of Directors; however, such recommendations may be made in the form of a shareholder proposal to be presented at any future meeting of shareholders of the Fund. Executive Committee. The Executive Committee, consisting of Messrs. Peabody and Solberg, both interested Directors and Mr. Doherty, a non-interested Director, is authorized to take certain actions delegated to it by the full Board of Directors and to exercise the full powers of the Board 21 of Directors under circumstances when the Board of Directors as a whole will not be able to meet. Valuation Committee. The Valuation Committee, consisting of Mr. Peabody, and interested Director and Messrs. Doherty, Ehmann, Oliverio and Roob, all of whom are non-interested Directors, has oversight responsibility for, among other things, determining and monitoring the value of the Fund's assets. Committee Meetings. The Audit Committee met twice during the fiscal year ended June 30, 2002. Directors and officers of the Fund do not receive any benefits from the Fund upon retirement, nor does the Fund accrue any expenses for pension or retirement benefits. The following table summarizes the compensation for the fiscal year ended June 30, 2002 paid to the Directors. Aggregate Total Compensation from the Compensation AHA Funds and Fund Complex Name from the AHA Funds Paid to Directors(1) ---- ------------------ ------------------ Douglas D. Peabody(2) None None Timothy G. Solberg(2) None None Anthony J. Burke(2) None None Charles V. Doherty(3) None $2000 Frank Ehmann $5000 $8000 Richard John Evans(2) None None John D. Oliverio $5000 $8000 Edward M. Roob(3) None $3000 Thomas J. Tucker(3) $5000 $5000 John L. Yoder $5000 $5000 (1) Messrs. Doherty, Ehmann, Oliverio, Peabody and Roob also serve on the Board of Trustees of CCM Advisors Funds and the Board of Trustees of the CCMA Select Investment Trust. Because the CCMA Select Investment Trust was not operational, each non-interested Trustee of CCMA Select Investment Trust was compensated by CCM Advisors, LLC. Messrs. Ehmann, Oliverio and Roob were each paid $2000. Mr. Doherty was paid $1000. This amount is not included in the Total Compensation from AHA Funds and Fund Complex Paid to Directors. (2) Non-compensated Director. (3) Mr. Tucker resigned as a Director in September 2002. Messrs. Doherty and Roob were appointed as Directors in September 2002. As of October 1, 2002, no Directors or officers owned beneficially or of record any security of any Fund nor did any person (other than a registered investment company) directly or indirectly controlling, controlled by or under common control with CCM Advisors, LLC (the "Adviser"), own shares of any Fund. As of December 31, 2001, no Director "beneficially" owned (within the meaning of that term as defined in Rule 16a-1(a)(2) under the Securities Exchange Act of 1934) any shares of any Fund. 22 CONTROL PERSONS/PRINCIPAL SHAREHOLDERS As of October 1, 2002, Sherman Hospital, an Illinois corporation, may be deemed to control the Limited Maturity Fixed Income Fund and Baptist Health Care Corporation, a Florida corporation, and Lee Hospital, a Pennsylvania corporation, may be deemed to control the Balanced Fund by virtue of owning more than 25% of the outstanding shares of such Funds. Sherman Hospital owned of record and beneficially owned directly 25% of the outstanding shares of the Limited Maturity Fixed Income Fund. Baptist Health Care Corporation and Lee Hospital owned of record and beneficially owned directly 51% and 33%, respectively, of the outstanding shares of the Balanced Fund. These control relationships will continue to exist until such time as each of the above-described share ownership represents 25% or less of the outstanding shares of the respective Funds. Through the exercise of voting rights with respect to shares of the Portfolio the controlling person set forth above may be able to determine the outcome of shareholder voting on matters to which approval of shareholders is required. The following persons were known by the Funds to own beneficially (with sole or shared voting or investment power) more than 5% of shares of one or more of the Funds or one or more of the Portfolios as of October 1, 2002. Limited Maturity Fixed Income Fund Percentage of Total Shareholder Class Outstanding Shares Sherman Hospital 934 Center St. I 25.47% Elgin, IL 60120 Laughlin Memorial Hospital 1420 Tusculum Blvd. I 16.42% Greenville, TN 37745 Lewistown Hospital 400 Highland Ave. I 14.90% Lewistown, PA 17044 Trinity Hospital 380 Summit Ave. I 5.29% Steubenville, OH 43952 23 Full Maturity Fixed Income Fund Percentage of Total Shareholder Class Outstanding Shares Vail Valley Medical Center 181 W. Meadow Drive I 22.35% Vail, CO 81657 Baptist Health Care Corporation 1000 W. Moreno St. I 21.74% Pensacola, FL 32522 Lee Hospital 320 Main St. I 18.03% Johnstown, PA 15901 Lewistown Hospital 400 Highland Ave. I 11.73% Lewistown, PA 17044 Dearborn County Hospital 600 Wilson Creek Rd. I 8.72% Lawrenceburg, IN 47025 Escambia County P.O. Box 469 I 5.23% Brewton, AL 36427 Balanced Fund Percentage of Total Shareholder Class Outstanding Shares Baptist Health Care Corporation 1000 W. Moreno St. I 50.95% Pensacola, FL 32522 Lee Hospital 320 Main St. I 33.40% Johnstown, PA 15901 Kalispell Regional Med Center 325 Claremont St. I 14.16% Kalispell, MT 59901 24 Diversified Equity Fund Percentage of Total Shareholder Class Outstanding Shares Laughlin Memorial Hospital 1420 Tusculum Blvd. I 22.58% Greeneville, TN 37745 Grande Ronde 900 Sunset Dr. I 10.87% LaGrande, OR 97850 Baptist Health Care Corporation 1000 W. Moreno St. I 8.11% Pensacola, FL 32522 Lewistown Hospital 400 Highland Ave. I 8.10% Lewistown, PA 17044 Lee Hospital 320 Main St. I 7.60% Johnstown, PA 15901 INVESTMENT MANAGEMENT CCM Advisors, LLC CCM Advisors serves as the investment adviser for each Portfolio pursuant to an Investment Advisory Agreement. Under each Investment Advisory Agreement, and subject to the supervision of, and policies established by, the Master Fund's Board of Trustees, CCM Advisors determines the investment strategies, and supervises adherence by the Investment Manager to each Portfolio's investment policies and guidelines. CCM Advisors also recommends the appointment of additional or replacement investment managers to the Master Fund's Board of Trustees. CCM Advisors is a majority-owned subsidiary of Convergent Capital Management Inc. The duties and responsibilities of CCM Advisors are specified in an Investment Advisory Agreement on behalf of each Portfolio between the Master Fund and CCM Advisors. At meetings held on October 2, 2001, called in part for approving the Investment Advisory Agreements for the Portfolios, the Board of Trustees of the Master Trust approved the Investment Advisory Agreements by the unanimous vote of all Trustees present and also by the unanimous vote of all non-interested Trustees. In evaluating the Investment Advisory Agreement, the Trustees of the Master Trust reviewed materials furnished by CCM Advisors, including information regarding CCM Advisors, and its personnel, operations and financial condition. The Trustees of the Master Trust discussed with representatives of CCM Advisors each Portfolio's operations and CCM Advisors' ability to provide advisory and other services to the Portfolios. The Trustees also reviewed, among other things: 25 o the proposed fees to be charged by CCM Advisors for the services it provides; o each Portfolio's projected total operating expenses; o the investment performance, fees and total expenses of investment companies with similar objectives and strategies managed by other investment advisers; and o the experience of the investment advisory and other personnel providing services to the Portfolios and the historical quality of the services provided by CCM Advisors to the Funds. The Trustees considered the following as relevant to their recommendations: (1) the favorable history, reputation, qualification and background of CCM Advisors, as well as the qualifications of its personnel and its financial condition; (2) the magnitude of CCM Advisors' fees and the expense ratio of each Portfolio in relation to the nature and quality of services expected to be provided and the fees and expense ratios of comparable investment companies; (3) the performance of each Portfolio in relation to the results of other comparable investment companies and unmanaged indices; and (4) other factors that the Trustees deemed relevant. The Investment Advisory Agreements are not assignable and may be terminated without penalty upon 60 days written notice at the option of the Master Fund or CCM Advisors, or by a vote of shareholders. Each Investment Advisory Agreement provides that it shall continue in effect for two years and can thereafter be continued from year to year so long as such continuance is specifically approved annually (a) by the Board of Trustees of the Master Fund or by a majority of the outstanding voting shares of the Portfolio and (b) by a majority vote of the Trustees who are not parties to the Agreement, or interested persons of any such party, cast in person at a meeting held for that purpose. In return for its services, each Portfolio pays a management fee to CCM Advisors for serving as its investment adviser. The fee is determined as a percentage of average daily net assets and is accrued daily and paid monthly. The following chart shows the investment advisory fees paid by each Portfolio to CCM Advisors: Limited Maturity Fixed Income Master Portfolio 0.50% Full Maturity Fixed Income Master Portfolio 0.50% Balanced Master Portfolio 0.75% Diversified Equity Master Portfolio 0.75% U.S. Growth Equity Portfolio 0.75% International Core Equity Portfolio 1.00% Except for those expenses that CCM Advisors assumes, including those noted above, the Funds pay for all of their own expenses. CCM Advisors has contractually agreed to reimburse each Fund for all ordinary operating expenses exceeding the following expense ratios: 26 Expense Level (as a % of average daily net assets) Institutional Fund Class A Class I Servicing Class - ---- ------- ------- --------------- Limited Maturity 1.00% 1.35% 1.25% Full Maturity 1.00% 1.35% 1.25% Balanced 1.50% 1.92% 1.75% Diversified Equity 1.25% 1.70% 1.50% U.S. Growth Equity 1.75% 2.20% 2.00% International Core Equity 2.00% 2.45% 2.25% CCM Advisors or the Funds may terminate this undertaking at any time. For any fiscal year of the Funds in which the Expense Ratio of the Fund would otherwise be less than the lowest Expense Cap applicable to that class in effect since the beginning of the preceding three fiscal years of the Fund, the Fund will pay to CCM Advisors any amount so reimbursed by CCM Advisors during such preceding three years and not previously paid by the Fund to CCM Advisors, except to the extent that such payment would cause the Expense Ratio of the class for the fiscal year to exceed such lowest Expense Cap. The following chart shows the fees paid to CCM Advisors by each Portfolio for the last fiscal year ended June 30. Information is not presented for the U.S. Growth Equity Master Portfolio and International Core Equity Master Portfolio because these portfolios have not yet commenced operations. Portfolio 6/30/02 ---------- --------- Limited Maturity Fixed Income Master Portfolio $237,003 Full Maturity Fixed Income Master Portfolio $121,907 Balanced Master Portfolio $121,168 Diversified Equity Master Portfolio $447,032 The following chart shows the Administration fees paid by each Fund to CCM Advisors: Fund 6/30/02 ---- -------- Limited Maturity Fixed Income Master Portfolio $13,896 Full Maturity Fixed Income Master Portfolio $12,127 Balanced Master Portfolio $13,331 Diversified Equity Master Portfolio $13,335 27 CCM Advisors is responsible for payment of all expenses it may incur in performing the services described. These expenses include costs incurred in providing investment advisory services, compensating and furnishing office space for officers and employees of CCM Advisors, and the payment of any fees to interested Trustees of the Master Fund. CCM Advisors provides all executive, administrative, clerical and other personnel necessary to operate the Master Fund and pays the salaries and other employment related costs of employing those persons. CCM Advisors furnishes the Master Fund with office space, facilities and equipment and pays the day-to-day expenses related to the operation and maintenance of such office space facilities and equipment. All other expenses incurred in the organization of the Master Fund or of any new series of the Master Fund, including legal and accounting expenses and costs of the initial registration of securities of the Master Fund under federal and state securities laws, are also paid by CCM Advisors. The Investment Advisory Agreement provides that the Master Fund is responsible for payment of all expenses it may incur in its operation and all of its general administrative expenses except those expressly assumed by CCM Advisors as described in the preceding paragraph. These include (by way of description and not of limitation), any share redemption expenses, expenses of portfolio transactions, shareholder servicing costs, pricing costs (including the daily calculation of net asset value), interest on borrowings by the Master Fund, charges of the custodian and transfer agent, cost of auditing services, non-interested Trustees' fees, legal expenses, all taxes and fees, investment advisory fees, certain insurance premiums, cost of maintenance of corporate existence, investor services (including allocable personnel and telephone expenses), costs of printing and mailing updated Master Fund prospectuses to shareholders, costs of preparing, printing, and mailing proxy statements and shareholder reports to shareholders, the cost of paying dividends, capital gains distribution, costs of Trustee and shareholder meetings, dues to trade organizations, and any extraordinary expenses, including litigation costs in legal actions involving the Master Fund, or costs related to indemnification of Trustees, officers and employees of the Master Fund. The Investment Advisory Agreement also provides that CCM Advisors shall not be liable to the Master Fund or to any shareholder or contract owner for any error of judgment or mistake of law or for any loss suffered by the Master Fund or by any shareholder in connection with matters to which such Agreement relates, except for a breach of fiduciary duty or a loss resulting from willful misfeasance, bad faith, gross negligence, or reckless disregard on the part of CCM Advisors in the performance of its duties thereunder. The Investment Managers The assets of each multi-manager Portfolio are divided into segments and CCM Advisors is responsible for allocating the assets among the Investment Managers in accordance with their specific investment styles. CCM Advisors pays the fees of the Investment Managers for the services they render pursuant to the Subadvisory Agreements. The Investment Manager(s) manage the investments of each Portfolio, determining which securities or other investments to buy and sell for the Portfolio, selecting the brokers and dealers to effect the transactions, and negotiating commissions. In placing orders for securities transactions, the Investment Managers seek to obtain a combination of the most favorable price and efficient execution available. 28 The Investment Managers may also serve as managers or advisers to other investment companies and other clients, including clients of CCM Advisors. The following organizations presently serve as Investment Managers of the Portfolios pursuant to Subadvisory Agreements, and manage the Portfolios indicated:
Portfolio Investment Manager(s) - --------- --------------------- Limited Maturity Fixed Income Master Portfolio The Patterson Capital Corporation Full Maturity Fixed Income Master Portfolio Baird Advisors Western Asset Management Company Balanced Master Portfolio Baird Advisors Cambiar Investors, Inc. Freeman Associates Investment Management LLC Diversified Equity Master Portfolio Cambiar Investors, Inc. Freeman Associates Investment Management LLC U.S. Growth Equity Portfolio KCM Investment Advisors International Core Equity Portfolio Pyrford International PLC
CCM Advisors pays each Investment Manager a fee for its services. The fee is determined as a percentage of average daily net assets and is accrued daily and paid monthly. The following chart shows the subadvisory fees CCM Advisors paid on behalf of each Portfolio for the last three fiscal years ended June 30. Information is not presented for the U.S. Growth Equity Master Portfolio and International Core Equity Master Portfolio because these portfolios have not yet commenced operations. Portfolio 6/30/02 6/30/01 6/30/00 --------- ------- ------- ------- Limited Maturity Fixed Income Master Portfolio $101,573 $93,551 $121,430 Full Maturity Fixed Income Master Portfolio $65,642 $95,151 $131,683 Balanced Master Portfolio $55,290 $80,455 $121,177 Diversified Equity Master Portfolio $223,516 $272,132 $319,365 Detailed information regarding each of the Investment Managers is contained in the Funds' Prospectus under "Investment Managers." At meetings held on October 2, 2001, called in part for approving the subadvisory agreements for the Portfolios and on September 10, 2002, called in part for approving the subadvisory 29 agreement related to the portion of the Balanced Master Portfolio managed by Baird Advisors, the Board of Trustees of the Master Trust approved the subadvisory agreements by the unanimous vote of all Trustees present and also by the unanimous vote of all non-interested Trustees. In evaluating the Investment Managers, the Trustees reviewed materials furnished by CCM Advisors and the Investment Managers, including information regarding each Investment Manager, and its personnel, operations and financial condition. The Trustees discussed with representatives of the Investment Managers each Portfolio's operations and each Investment Manager's ability to provide subadvisory and other services to the Portfolios. The Trustees also reviewed, among other things: o the proposed fees to be charged by each Investment Manager for the services it provides; o each Portfolio's projected total operating expenses; o the investment performance, fees and total expenses of investment companies with similar objectives and strategies managed by other investment advisers; and o the experience of the investment advisory and other personnel providing services to the Portfolios and the historical quality of the services provided by each Investment Manager. The Trustees considered the following as relevant to their recommendations: (1) the favorable history, reputation, qualification and background of each Investment Manager, as well as the qualifications of its personnel and its financial condition; (2) the magnitude of each Investment Manager's fees and the expense ratio of each Portfolio in relation to the nature and quality of services expected to be provided and the fees and expense ratios of comparable investment companies; (3) the performance of each Portfolio in relation to the results of other comparable investment companies and unmanaged indices; (4) the ability of each Investment Manager to receive research products and services from brokers in connection with brokerage transactions executed for the Portfolio and other accounts managed by each Investment Manager; and (5) other factors that the Trustees deemed relevant. The subadvisory agreements are not assignable and may be terminated without penalty upon 60 days written notice at the option of CCM Advisors or the Investment Manager, or by the Board of Trustees of the Master Fund or by a vote of a majority of the outstanding shares of the Portfolio. The subadvisory agreement provides that it shall continue in effect for two years and can thereafter be continued for a Portfolio from year to year so long as such continuance is specifically approved annually (a) by the Board of Trustees of the Master Fund or by a majority of the outstanding shares of the Portfolio and (b) by a majority vote of the Trustees who are not parties to the agreement, or interested persons of any such party, cast in person at a meeting held for that purpose. CCM Advisors has certain responsibilities regarding the supervision of the Investment Managers (see "The Investment Adviser," above); however, neither CCM Advisors nor the Master Fund's officers or Trustees evaluate the investment merits of investment selections or decisions made by the Investment Managers. The Investment Managers and their affiliated brokers may be 30 authorized to execute brokerage transactions for the Portfolios and receive commissions for their services. See "Portfolio Transactions." DISTRIBUTOR Quasar Distributors, LLC. ("Quasar") serves as the principal underwriter for the Funds pursuant to a distribution agreement initially approved by the Board of Directors (the "Distribution Agreement"). Quasar is a registered broker-dealer and a member of the National Association of Securities Dealers, Inc. ("NASD"). Shares of the Funds will be continuously offered. Quasar bears all the expenses of providing services pursuant to the Distribution Agreement, including the payment of the expenses relating to the distribution of Prospectuses for sales purposes as well as any advertising or sales literature. Each Fund bears the expenses of registering its shares with the Commission and paying the fees required to be paid by state regulatory authorities. The Distribution Agreement continues in effect for two years from initial approval and for successive one-year periods thereafter, provided that each such continuance is specifically approved (i) by vote of a majority of the Board of Directors, including a majority of the Directors who are not parties to the Distribution Agreement or interested persons of any such party, (as the term interested person is defined in the 1940 Act); or (ii) by the vote of a majority of the outstanding voting securities of each Fund. Quasar is not obligated to sell any specific amount of shares of any Fund. Quasar's business and mailing address is 615 East Michigan Street, Milwaukee, Wisconsin 53202. Quasar was organized as a limited liability company in the state of Delaware and is a wholly-owned subsidiary of U.S. Bancorp. DISTRIBUTION AND SHAREHOLDER SERVICE PLANS The Funds have adopted a separate distribution plan for Class A Shares and Institutional Servicing Class shares under Section 12(b) of the 1940 Act and Rule 12b-1 promulgated thereunder ("Rule 12b-1") that provides for distribution fees to Quasar up to 0.25% per annum of the average daily net asset values of the shares, respectively, for activities intended to result in the sale of Fund shares. The Funds also have the ability to enter into shareholder servicing agreements with unaffiliated entities to provide shareholder services to the Institutional Servicing Class shareholders. Distribution Plans The Distribution Plans under Rule 12b-1 compensates Quasar for its sales and distribution activities related to the Funds' Class A and Institutional Servicing Class Shares. The Plan covers certain expenses of Quasar and fees paid by Quasar to related and unrelated entities for marketing and distribution services, including but not limited to: (a) the payment of initial and ongoing commissions and other payments to registered representatives or others who sell Class A and Institutional Servicing Shares; (b) compensation to Quasar's employees; (c) expenses related to the printing and mailing or other dissemination of prospectuses and statements of additional information and the costs of preparation, printing and mailing of reports used for sales literature; and (d) related expenses advertisements and other distribution-related expenses. Compensation may be spent by Quasar, its affiliates and other organizations on any activities or 31 expenses related to the distribution and marketing of the Shares. The Distribution Plans also require that Quasar furnish to the Board of Directors, and the Board of Directors shall review, at least quarterly, a written report of the amounts expended (and purposes therefor). The Distribution Plans have each been adopted by a majority of the Board of Directors, including a majority of the non-interested Directors. Each Distribution Plan will continue in effect from year to year if such continuance is approved by a majority vote of both the Directors and the independent Directors. Agreements related to the Distribution Plans must also be approved by such vote. Each Distribution Plan will terminate automatically if assigned, and may be terminated at any time, without payment of any penalty, by vote of a majority of the outstanding shareholders of a Fund. No Distribution Plan may be amended to increase materially the amounts payable to Quasar without the approval of a majority of the outstanding shareholders of the Fund, and no material amendment to a Distribution Plan may be made except by a majority of both the Directors of the Funds and the independent Directors. Shareholder Servicing Plan The Funds can compensate unaffiliated entities (an "Agent") under a Shareholder Servicing Agreement for maintenance and personal service provided to Institutional Servicing Class shareholders that are customers of the Agent. The Funds shall pay Agents a fee, computed daily and paid monthly, at an annual rate of (i) 0.20% of the average daily net asset value for shares of each of Diversified Equity Fund, U.S. Growth Equity Fund, International Core Equity Fund and the equity portion of the Balanced Fund held of record by the Agent from time to time on behalf of the Agent's customers and (ii) 0.10% of the average daily net asset value for shares of the Limited Maturity Fixed Income Fund, Full Maturity Fixed Income Fund and the fixed income portion of Balanced Fund held of record by the Agent from time to time on behalf of the Agent's customers. Servicing activities provided by Agents may include, among other things, one or more of the following: (i) establishing and maintaining shareholder accounts and records; (ii) processing purchase and redemption transactions; (iii) answering customer inquiries; (iv) assisting customers in changing dividend options, account designations and addresses; (v) performing sub-accounting; (vi) investing customer cash account balances automatically in Fund shares; (vii) providing periodic statements showing a customer's account balance and integrating such statements with those of other transactions and balances in the customer's other accounts Serviced by the Servicing agent; and (viii) arranging for bank wires to the extent that the Agents are permitted by applicable statute, rule or regulation. CODE OF ETHICS The AHA Funds, the Master Fund, CCM Advisors and each of the Investment Managers have adopted codes of ethics pursuant to Rule 17j-1 under the 1940 Act (each, a "Code of Ethics") which govern personal securities trading by Directors and officers of the Funds and the Portfolios and the personnel of CCM Advisors and the Investment Managers who provide services or obtain current information regarding investment activities, as well as certain other personnel. The Codes of Ethics generally permit such personnel to purchase and sell securities, including securities which are purchased, sold or held by the Portfolios or the Funds, but only subject to certain conditions designed to ensure that purchase and sale for such persons' accounts do not adversely affect the Funds' investment activities. 32 PORTFOLIO TRANSACTIONS Subject to the general supervision of the Master Fund's Board of Trustees and CCM Advisors, Investment Managers are responsible for decisions to buy and sell securities, the selection of brokers and dealers to effect the transactions, and the negotiation of brokerage commissions, if any. Purchases and sales of securities on a stock exchange are effected through brokers who charge a commission for their services. In the over-the-counter market, securities are generally traded on a "net" basis with non-affiliated dealers acting as principal for their own accounts without a stated commission, although the price of the security usually includes a profit to the dealer. In underwritten offerings, securities are purchased at a fixed price which includes an amount of compensation to the underwriter, generally referred to as the underwriter's concession or discount. Certain money market instruments may be purchased directly from an issuer, in which case no commission or discounts are paid. The Portfolios anticipate that transactions involving foreign securities will be effected primarily on principal stock exchanges for such securities. Fixed commissions on such transactions are generally higher than negotiated commissions on domestic transactions. There is also generally less government supervision and regulation of foreign stock exchanges and brokers than in the United States. The Investment Managers currently serve as investment advisers to a number of clients, including other investment companies, and may in the future act as investment advisers to others. It is the practice of each of the Investment Managers to cause purchase and sale transactions to be allocated among the Portfolios and others whose assets it manages in such manner as it deems equitable. In making such allocations, the main factors considered 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 the opinions of the persons responsible for managing the Portfolios and the other client accounts. This procedure may, under certain circumstances, have an adverse effect on the Portfolios. Securities held by the Portfolios may also be held by separate accounts or mutual funds for which the Investment Managers act as an investment adviser, some of which may be affiliated with the Investment Managers. Because of different investment objectives, cash flows or other factors, a particular security may be bought by an Investment Manager for one or more of its clients, when one or more other clients are selling the same security. Pursuant to procedures adopted by the Board of Trustees, the Investment Managers may cause a Portfolio to buy or sell a security from another mutual fund or another account. Any such transaction would be executed at a price determined in accordance with those procedures and without sales commissions. Transactions executed pursuant to such procedures are reviewed by the Board of Trustees quarterly. The policy of the Master Fund regarding purchases and sales of securities is that primary consideration will be given to obtaining the most favorable prices and efficient executions of transactions. Consistent with this policy, when securities transactions are effected on a stock exchange, the Master Fund's policy is to pay commissions that are considered fair and reasonable without necessarily determining that the lowest possible commissions are paid in all circumstances. The Board of Trustees of the Master Fund believe that a requirement always to seek the lowest commission cost could impede effective management and preclude the Portfolios and the Investment Managers from obtaining high quality brokerage and research services. In 33 seeking to determine the reasonableness of brokerage commissions paid in any transaction, the Investment Managers rely on their experience and knowledge regarding commissions generally charged by various brokers and on their judgment in evaluating the brokerage and research services received from the broker effecting the transaction. Such determinations are necessarily subjective and imprecise, as in most cases an exact dollar value for those services is not ascertainable. In seeking to implement the Master Fund's policies, the Investment Managers effect transactions with those brokers and dealers whom they believe provide the most favorable prices and which are capable of providing efficient executions. If the Investment Managers believe such price and execution are obtainable from more than one broker or dealer, they may give consideration to placing portfolio transactions with those brokers and dealers who also furnish research and other services to the Portfolios or the Investment Managers. Such services may include, but are not limited to, any one or more of the following: information as to the availability of securities for purchase or sale; statistical or factual information or opinions pertaining to investments; wire services; and appraisals or evaluations of portfolio securities. The information and services received by the Investment Managers from brokers and dealers may be of benefit in the management of accounts of other clients and may not in all cases benefit the Portfolios directly. While such services are useful and important in supplementing their own research and facilities, the Investment Managers believe the value of such services is not determinable and does not significantly reduce their expenses. Consistent with the policies described above, brokerage transactions in securities listed on exchanges or admitted to unlisted trading privileges may be effected through Investment Managers or their affiliates which are registered brokers. In order for such transactions to be effected, the commissions, fees or other remuneration received by the broker must be reasonable and fair compared to the commissions, fees or other remuneration paid to other brokers in connection with comparable transactions involving similar securities being purchased or sold on an exchange during a comparable period of time. This standard would allow an Investment Manager or its affiliate to receive no more than the remuneration which would be expected to be received by an unaffiliated broker in a commensurate arm's-length transaction. In approving the use of an affiliated broker, the Board of Trustees of the Master Fund including a majority of the Independent Trustees, has adopted procedures which are reasonably designed to provide that any commissions, fees or other remuneration paid are consistent with the foregoing standard. Brokerage commissions paid by the Funds and the Portfolios for the last three fiscal year ended June 30 were: Limited Maturity Full Maturity Balanced Diversified Equity 2002(1) $0 $0 $40,055 $195,687 2001(2) - - $85,971 $349,344 2000(2) - - $63,031 $122,214 (1) Amounts reflect commissions paid by the Funds from July 1, 2001 to October 31, 2001 ( prior to conversion into feeder funds) and commissions paid by the Portfolios from November 1, 2001 to June 30, 2002. (2) Amounts reflect commissions paid by the Funds prior to conversion into feeder funds. 34 Historical data regarding commissions paid for the U.S. Growth Equity Fund and International Core Equity Fund is not available as the Funds have not yet commenced operations. Brokerage commissions allocated for research services during the fiscal year ended June 30, 2002 were $1,117 by the Balanced Fund (in transactions having an aggregate value of $33,432) and $4,277 by the Diversified Equity Fund (in transactions having an aggregate value of $126,066 ). During the fiscal year ended June 30, 2002, the Funds held securities of Bear Stearns Companies, Inc. ("Bear Stearns"); Credit Suisse First Boston ("First Boston"); Morgan Stanley Dean Witter & Co. ("Morgan Stanely"); Lehman Brothers Incorporated ("Lehman Brothers"); Merrill Lynch & Company ("Merrill Lynch"); and Wells Fargo Company ("Wells Fargo") which are companies which may be deemed to be the Funds' "regular brokers or dealers," as defined by Rule 10b-1 under the 1940 Act, or the parents of such brokers or dealers. Aggregate holdings, as of June 30, 2002, were as follows: Broker/Dealer Market Value ------------------------------- ------------------------------ Bear Stearns $896,035 ------------------------------- ------------------------------ First Boston $71,687 ------------------------------- ------------------------------ Morgan Stanley $1,992,491 ------------------------------- ------------------------------ Lehman Brothers Inc. $1,669,710 ------------------------------- ------------------------------ Merrill Lynch $1,374,514 ------------------------------- ------------------------------ Wells Fargo $1,269,165 ------------------------------- ------------------------------ PORTFOLIO TURNOVER There are no fixed limitations regarding portfolio turnover. Although the Portfolios generally do not trade for short-term profits, securities may be sold without regard to the time they have been held when investment considerations warrant such action. As a result, under certain market conditions, the turnover rate for a particular Portfolio will be higher than that of other investment companies and portfolios with similar investment objectives. Decisions to buy and sell securities are made by the Investment Managers for the assets assigned to them. Investment Managers make decisions to buy or sell securities independently from other Investment Managers. Thus, one Investment Manager may sell a security while another Investment Manager for the same Portfolio is purchasing the same security. In addition, when an Investment Manager's services are terminated, the new Investment Manager may restructure the Portfolio. These practices may result in higher portfolio turnover rates. Brokerage costs are commensurate with the rate of portfolio activity so that a Portfolio with higher turnover may incur higher brokerage costs. 35 DETERMINATION OF NET ASSET VALUE The net asset value of the shares of each class of the Funds is determined by dividing each class's total net assets by the number of that class's outstanding shares. Each Fund that invests in a Portfolio will value its holdings (i.e., shares of a Portfolio) at their fair value, which will be based on the daily net asset value of the Portfolio. The net income of these Funds will be determined at the same time and on the same days as the net income of the Portfolios are determined, which would be the same time and days that each Fund uses for this purpose. The value of the securities in the underlying Portfolios are determined based on the last sale price on the principal exchange on which the securities are traded as of the time of valuation. Absent any reported sale on the principal exchange at the time of valuation, the securities are valued at the last current sales price on a secondary exchange. In the absence of any sale on the valuation date, the securities are valued at the closing bid price. Securities traded only on over-the-counter markets generally are valued at closing over-the-counter bid prices. Securities that are primarily traded on foreign securities exchanges generally are valued at their closing values on the exchange. The markets on which non-U.S. securities trade are sometimes open on days when the NYSE is not open and the Portfolios do not calculate their net asset values, and sometime are not open on days when the Portfolios do calculate their net asset values. Even on days which both the foreign market and the NYSE are open, several hours may have passed between the time when trading in the foreign market closed and the NYSE closes and the Portfolios calculate their net asset value. The Portfolios monitor for significant events in foreign markets. Bonds are valued at the mean of the last bid and asked prices. In the absence of readily available market quotations (or when, in the view of the Investment Manager, available market quotations do not accurately reflect a security's fair value), securities are valued at their fair value as determined by the Master Fund's Board of Trustees. Prices used for valuation of securities are provided by independent pricing services. Debt obligations with remaining maturities of 60 days or less generally are valued at amortized cost. Net asset value is computed at the close of the regular trading session on the New York Stock Exchange ("NYSE") on each day the NYSE is open for business that is not bank holiday. The NYSE currently observes the following holidays: New Year's Day; Martin Luther King's Birthday (third Monday in January); Presidents' Day (third Monday in February); Good Friday (Friday before Easter); Memorial Day (last Monday in May); Independence Day; Labor Day (first Monday in September); Thanksgiving Day (last Thursday in November); and Christmas Day. Computation of NAV (and the sale and redemption of fund shares) may be suspended or postponed during any period when (a) trading on the NYSE is restricted, as determined by the Commission, or the NYSE is closed for other than customary weekend and holiday closings, (b) the Commission has by order permitted such suspension, or (c) an emergency, as determined by the Commission, exists making disposal of portfolio securities or valuation of the net assets of the Fund not reasonably practicable. 36 PERFORMANCE INFORMATION From time to time the Funds may quote total return figures. "Total Return" for a period is the percentage change in value during the period of an investment in shares of a fund, including the value of shares acquired through reinvestment of all dividends and capital gains distributions. "Average Annual Total Return" is the average annual compounded rate of change in value represented by the Total Return for the period. Average Annual Total Return is computed as follows: ERV = P(l+T)n Where: P = a hypothetical initial investment of $1,000 T = average annual total return n = number of years ERV = ending redeemable value of a hypothetical $1,000 investment made at the beginning of the period, at the end of the period (or fractional portion thereof) The Funds may also quote after-tax total returns to show the impact of assumed federal income taxes on an investment in a Fund. A Fund's total return "after taxes on distributions" shows the effect of taxable distributions, but not any taxable gain or loss, on an investment in shares of the Fund for a specified period of time. A Fund's total return "after taxes on distributions and sale" shows the effect of both taxable distributions and any taxable gain or loss realized by the shareholder upon the sale of fund shares at the end of a specified period. To determine these figures, all income, short-term capital gain distributions, and long-term capital gain distributions are assumed to have been taxed at the highest marginal individualized federal tax rate then in effect. Those maximum tax rates are applied to distributions prior to reinvestment and the after-tax portion is assumed to have been reinvested in the Fund. State and local taxes are ignored. Actual after-tax returns depend on a shareholder's tax situation and may differ from those shown. After-tax returns reflect past tax effects and are not predictive of future tax effects. Average Annual Total Return (After Taxes on Distributions) is computed as follows: ATVD = P(l+T)n Where: P = a hypothetical initial investment of $1,000 T = average annual total return (after taxes on distributions) n = number of years ATVD = ending value of a hypothetical $1,000 investment made at the beginning of the period, at the end of the period (or fractional portion thereof), after taxes on fund distributions but not after taxes on redemptions. 37 Average Annual Total Return (After Taxes on Distributions and Sale of Fund Shares) is computed as follows: ATVDR = P(l+T)n Where: P = a hypothetical initial investment of $1,000 T = average annual total return (after taxes on distributions and redemption) n = number of years ATVDR = ending value of a hypothetical $1,000 investment made at the beginning of the period, at the end of the period (or fractional portion thereof), after taxes on fund distributions and redemption. Each Fund's Total Return and Average Annual Total Return before and after taxes for various periods ended June 30, 2002 are shown in the tables below for Class I Shares. AHA U.S. Growth Equity Fund and AHA International Growth Equity Fund information is not presented because these Funds have not commenced operations and therefore have not been in operation for a full year. The Funds' returns may vary greatly over short periods of time and may be materially different by the time you receive this statement of additional information. For more current performance information call 1-800-445-1341. Investors should maintain realistic expectations for future performance. AHA Limited Maturity Fixed Income Fund - Class I Shares - -------------------------------------------------------- Average Annual Total Returns as of 6/30/02 - ----------------------------------------------------- ------ ------- --------- Before Taxes 1 Year 5 Years 10 years - ----------------------------------------------------- ------ ------- --------- Total Return 6.22% 34.29% 70.49% - ----------------------------------------------------- ------ ------- --------- Average Annual Total Return 6.22% 6.07% 5.48% - ----------------------------------------------------- ------ ------- --------- - ----------------------------------------------------- ------ ------- ---------- After Taxes on Distributions 1 Year 5 Years 10 years - ----------------------------------------------------- ------ ------- ---------- Total Return 4.52% 20.77% 36.89% - ----------------------------------------------------- ------ ------- ---------- Average Annual Total Return 4.52% 3.85% 3.19% - ----------------------------------------------------- ------ ------- ---------- - ----------------------------------------------------- ------ ------- --------- After Taxes on Distributions and Sale of Fund 1 Year 5 Years 10 years Shares - ----------------------------------------------------- ------ ------- --------- Total Return 3.77% 19.62% 38.36% - ----------------------------------------------------- ------ ------- --------- Average Annual Total Return 3.77% 3.65% 3.30% - ----------------------------------------------------- ------ ------- --------- AHA Full Maturity Fixed Income Fund - Class I Shares - ----------------------------------------------------- Average Annual Total Returns as of 6/30/02 - ----------------------------------------------------- ------ ------- ---------- Before Taxes 1 Year 5 Years 10 years - ----------------------------------------------------- ------ ------- ---------- Total Return 7.48% 39.85% 91.99% - ----------------------------------------------------- ------ ------- ---------- Average Annual Total Return 7.48% 6.94% 6.74% - ----------------------------------------------------- ------ ------- ---------- - ----------------------------------------------------- ------ ------- ---------- After Taxes on Distributions 1 Year 5 Years 10 years - ----------------------------------------------------- ------ ------- ---------- Total Return 5.40% 24.16% 46.61% - ----------------------------------------------------- ------ ------- ---------- Average Annual Total Return 5.40% 4.42% 3.90% - ----------------------------------------------------- ------ ------- ---------- 38 - ----------------------------------------------------- ------ ------- ---------- After Taxes on Distributions and Sale of Fund 1 Year 5 Years 10 years Shares - ----------------------------------------------------- ------ ------- ---------- Total Return 4.54% 22.63% 49.17% - ----------------------------------------------------- ------ ------- ---------- Average Annual Total Return 4.54% 4.16% 4.08% - ----------------------------------------------------- ------ ------- ---------- AHA Balanced Fund - Class I Shares - ----------------------------------- Average Annual Total Returns as of 6/30/02 - ----------------------------------------------------- ------- ------- --------- Before Taxes 1 Year 5 Years 10 years - ----------------------------------------------------- ------- ------- --------- Total Return -6.90% 35.79% 160.08% - ----------------------------------------------------- ------- ------- --------- Average Annual Total Return -6.90% 6.31% 10.03% - ----------------------------------------------------- ------- ------- --------- - ----------------------------------------------------- ------- ------- --------- After Taxes on Distributions 1 Year 5 Years 10 years - ----------------------------------------------------- ------- ------- --------- Total Return -8.32% 5.19% 72.11% - ----------------------------------------------------- ------- ------- --------- Average Annual Total Return -8.32% 1.02% 5.58% - ----------------------------------------------------- ------- ------- --------- - ----------------------------------------------------- ------- ------- --------- After Taxes on Distributions and Sale of Fund 1 Year 5 Years 10 years Shares - ----------------------------------------------------- ------- ------- --------- Total Return -3.97% 21.68% 82.49% - ----------------------------------------------------- ------- ------- --------- Average Annual Total Return -3.97% 4.00% 6.20% - ----------------------------------------------------- ------- ------- --------- AHA Diversified Equity Growth Fund - Class I Shares - ---------------------------------------------------- Average Annual Total Returns as of 6/30/02 - ----------------------------------------------------- ------- ------- --------- Before Taxes 1 Year 5 Years 10 years - ----------------------------------------------------- ------- ------- --------- Total Return -12.65% 37.18% 230.26% - ----------------------------------------------------- ------- ------- --------- Average Annual Total Return -12.65% 6.53% 12.69% - ----------------------------------------------------- ------- ------- --------- - ----------------------------------------------------- ------- ------- --------- After Taxes on Distributions 1 Year 5 Years 10 years - ----------------------------------------------------- ------- ------- --------- Total Return -13.85% 19.30% 148.50% - ----------------------------------------------------- ------- ------- --------- Average Annual Total Return -13.85% 3.59% 9.53% - ----------------------------------------------------- ------- ------- --------- 39 - ----------------------------------------------------- ------- ------- --------- After Taxes on Distributions and Sale of Fund 1 Year 5 Years 10 years Shares - ----------------------------------------------------- ------- ------- --------- Total Return -7.47% 25.35% 116.69% - ----------------------------------------------------- ------- ------- --------- Average Annual Total Return -7.47% 4.62% 8.04% - ----------------------------------------------------- ------- ------- --------- Total Return and Average Annual Total Return are calculated in the same way as for Class I Shares as for Class A and Institutional Servicing Class Shares. The performance of Class I Shares is expected to be different from the performance of Class A Shares because the Class A Shares impose sales charges and the overall expenses allocated to the classes are different. The performance of Class I Shares is expected to be different from the performance of the Institutional Servicing Class Shares because the Institutional Servicing Class may impose shareholder servicing fees. Because the expense ratio for Class I Shares is expected to be lower than Class A Shares and Institutional Servicing Class Shares, the Total Return and Average Annual Total Return of Class I Shares are expected to be greater than for Class A and Institutional Servicing Class Shares. The returns shown above assume reinvestment of dividends and distributions. Past performance is not necessarily indicative of future results. The performance of a Fund is a result of conditions in the securities markets, portfolio management, and operating expenses. Although information such as that shown above is useful in reviewing a Fund's performance and in providing some basis for comparison with other investment alternatives, it should not be used for comparison with other investments using different reinvestment assumptions or time periods. Yield Quotations of yield for the Limited Maturity Fixed Income Master Portfolio and Full Maturity Fixed Income Master Portfolio are computed by dividing net investment income per share earned during the period of the quotation by net asset value per share 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 outstanding during the period that were entitled to receive dividends "d" = net asset value per share on the last day of the period 40 The Fund's yields for Class I Shares for the one month period ended June 30, 2002 were as follows: Fund Yield Class I Limited Maturity Fixed Income Fund 3.20% Full Maturity Fixed Income Fund 4.46% Class A and Institutional Servicing Class Shares also bear the expenses of distribution fees paid to Quasar. As a result, at any given time, net yield could be lower than the yield of the Class I Shares. The yield of a Fund will vary from time to time depending on market conditions, the composition of the corresponding Portfolio's investment portfolio and the Funds' operating expenses allocated to that Fund or its classes of shares. These factors and possible differences in the methods used in calculating the yield should be considered when comparing a Fund's yield to yields published for other investment companies and other investment vehicles. Yield should also be considered relative to change in the value of a Fund's various classes of shares. These yields do not take into account any applicable sales charges. In advertising and sales literature, the performance of a Fund may be compared with that of other mutual funds, indexes or averages of other mutual funds, indexes of related financial assets or data, other accounts or investment vehicles managed by CCM Advisors, and other competing investment and deposit products available from or through other financial institutions. The composition of these indexes, averages or accounts differs from those of the Funds. A Fund's return may also be compared to the cost of living (measured by the Consumer Price Index) or the return of various categories of investments (as measured by Ibbotson Associates or others) over the same period. In addition to performance rankings, each Fund may compare its total expense ratio to the average total expense ratio of similar funds tracked by Lipper. Comparison of a Fund to an alternative investment should consider differences in features and expected performance. The Funds may quote or reprint financial or business publications and periodicals, including model portfolios or allocations, as they relate to current economic and political conditions, fund management, portfolio composition, investment philosophy, investment techniques, the desirability of owning a particular mutual fund, and CCM Advisors' services and products. CCM Advisors may provide information designed to clarify investment goals and explore various financial strategies. Such information may include information about current economic, market, and political conditions; materials that describe general principles of investing, such as asset allocation, diversification, risk tolerance, and goal setting. Materials may also include discussions of other products and services offered by CCM Advisors. The Funds may quote various measures of the volatility and benchmark correlation of the Funds in advertising. In addition, the Fund may compare these measures to those of other funds. Measures of volatility seek to compare a Fund's historical share price fluctuations or total returns to those of a benchmark. Measures of benchmark correlation indicate how valid a comparative benchmark may be. All measures of volatility and correlation are calculated using averages of 41 historical data. In advertising, the Fund may also discuss or illustrate examples of interest rate sensitivity. PURCHASES AND REDEMPTIONS OF SHARES Purchases and redemptions are discussed in the prospectus under the headings "How to Buy Shares," and "How to Sell Shares." Shares of each Fund may be purchased or redeemed through certain financial services companies, some of which may charge a transaction fee. Each Fund may authorize from time to time certain financial services companies, broker-dealers or their designees ("authorized agents") to accept share purchase and redemption orders on its behalf. For purchase orders placed through an authorized agent, a shareholder will pay a Fund's NAV per share (see "Net Asset Value") next computed after the receipt by the authorized agent of such purchase order, plus any applicable sales charges and transaction charges imposed by the agent. For redemption orders placed through an authorized agent, a shareholder will receive redemption proceeds which reflect the NAV per share next computed after the receipt by the authorized agent of the redemption order, less any sales charges and redemption fees imposed by the agent. In some instances, an authorized agent or other financial services company may not charge any transaction fees directly to investors in a Fund. However, for accounting and shareholder servicing services provided by such a company with respect to Fund shares held by that company for its customers, the company may charge a fee based on a percentage of the annual average value of those accounts. Class I and Institutional Servicing Class shareholders are also eligible to participate in the American Hospital Association Investment Program (the "Program"), a service provided by CCM Advisors that offers participants individualized asset management consultation to assist in determining an appropriate investment program. See "The Program." ANTI-MONEY LAUNDERING COMPLIANCE The Funds are required to comply with various anti-money laundering laws and regulations. Consequently, the Funds may request additional information from you to verify your identity. If at any time the Funds believe a shareholder may be involved in suspicious activity or if certain account information matches information on government lists of suspicious persons, the Funds may choose not to establish a new account or may be required to "freeze" a shareholder's account. The Funds also may be required to provide a governmental agency with information about transactions that have occurred in a shareholder's account or to transfer monies received to establish a new account, transfer an existing account or transfer the proceeds of an existing account to a governmental agency. In some circumstances, the law may not permit a Fund to inform the shareholder that it has taken the actions described above. 42 SHARES The AHA Funds' presently authorized capital is 700,000,000 shares. Interests in the AHA Funds are represented by shares of common stock, $.01 par value, with interests in each of the Funds represented by a separate series of such stock. Under the AHA Funds' Articles of Incorporation, the Board of Directors may increase the authorized shares, establish additional series (with different investment objectives and fundamental policies), establish additional classes of the Funds, and redesignate unissued shares among the series. Establishment of additional series will not alter the rights of the Funds' shareholders and additional classes within any series would be used to distinguish among the rights of different categories of shareholders. Each share of each series represents an equal proportionate interest in the Fund represented by such shares, without any priority or preference over other shares of the same series. All consideration received for the sales of shares of a particular series, all assets in which such consideration is invested, and all income, earnings and profits derived therefrom is allocated and belongs to that series. As such, the interest of shareholders in a particular Fund is separate and distinct from the interest of shareholders of the other Funds, and shares of a Fund are entitled to dividends and distributions only out of the net income and gains, if any, of that Fund as declared by the Board of Directors. Each share of a Fund class is entitled to participate pro rata in any dividends and other distributions declared by the Board of Directors with respect to that share class, and all shares of a Fund have proportionate rights in the event of liquidation of that Fund. Each shareholder is entitled to a full vote for each full share held (and fractional votes for fractional shares) on any matter presented to shareholders. Shares of the Funds will vote separately as individual series when required by the 1940 Act or other applicable law or when the Board of Directors determines that the matter affects only the interests of one or more Funds, such as, for example, a proposal to approve an amendment to that Fund's Management Agreement, but shares of all Funds vote together, to the extent required by the 1940 Act, in the election or selection of Directors and independent accountants. Voting rights are not cumulative, which means that that the holders of more than 50% of the shares voting for the election of Directors can, if they choose, elect all Directors being elected, while the holders of the remaining shares would be unable to elect any Directors. Under Maryland law, the AHA Funds are not required and therefore does not intend to hold annual meetings of shareholders. However, the Directors may call annual or special meetings of shareholders as may be required by the 1940 Act, Maryland law, or the Articles of Incorporation, or as they otherwise deem necessary or appropriate. In addition, the By-Laws of the AHA Funds contain procedures under which a director may be removed by the written declaration or vote of the holders of two-thirds of the AHA Funds' outstanding shares at a meeting called for that purpose upon the request of the shareholders whose interests represent 10% of the Fund's outstanding shares. 43 THE PROGRAM CCM Advisors has entered into an agreement with AHA and its wholly-owned subsidiary, AHA Financial Solutions, Inc. ("AHA-FSI"), which provides for the licensing of AHA's service marks to CCM Advisors and for AHA's sponsorship and endorsement of the Program (as described below). Pursuant to this agreement, AHA-FSI will provide certain additional services, including providing support for CCM Advisors' marketing of the Program and the Funds. CCM Advisors will pay licensing fees of $100,000 per year to AHA-FSI and a one-time start-up fee of $36,000. For marketing support, CCM Advisors will pay compensation on a quarterly basis to AHA-FSI at the following rates (as a percentage of the Funds' average daily net assets for the quarter): 0.0125% if net assets of the Funds are below $330 million; 0.01875% if net assets of the Funds are between $330 million and $500 million; and 0.2125% if net assets of the Fund are in excess of $500 million. The annual percentage rates used to determine compensation payable by CCM Advisors to AHA-FSI will increase if certain asset growth targets are not met for the Funds. These fees and other compensation are paid by CCM Advisors to AHA-FSI and will not be paid by the Funds or increase fees payable by participants in the Program. CCM Advisors has also agreed to support two designees of either the AHA or AHA-FSI to serve as Directors of the Funds. Generally since inception of the Funds, two of its Directors have been officers of the AHA. The Funds have acknowledged that the name "AHA" is a property right of AHA and that its right to use that name is non-exclusive. The Funds also have acknowledged that both AHA and CCM Advisors have the right to withdraw from the Funds the right to use the name "AHA." The Program is a service offered by CCM Advisors pursuant to arrangements with American Hospital Association Services, Inc. and is available to American Hospital Association member hospitals and their affiliated organizations, including employee benefit plans and hospital insurance funds ("Member Organizations"). To become a participant, a Member Organization must enter into a Program Services Agreement ("Program Agreement") with CCM Advisors and must own shares. Other hospital associations affiliated with AHA and their sponsored and affiliated organizations are also eligible to become participants by entering into Program Agreements. Under the Program Agreement, participants receive individualized asset management consulting services to assist in determining an appropriate investment program for their specific needs. CCM Advisors consults with each participant to help it define its investment objectives, desired returns and tolerance for risk, and develops a plan for the allocation of the participant's assets among different asset classes. Participants can implement their investment programs by investing in shares of the Funds, as described below, and may change the allocation of assets among the Funds or withdraw assets from the Funds at any time by redeeming shares. The Funds pay no fees to CCM Advisors for this Program. Instead, the Funds take actions necessary to permit the offering of Fund shares in the jurisdictions that CCM Advisors requests in order to enable organizations that have entered into Program Agreements to purchase Fund shares. 44 TAXES The AHA Funds intends that each Fund and Portfolio will qualify as a "regulated investment company" under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"), and thus not be subject to federal income taxes on amounts which it distributes to shareholders. If a Fund or Portfolio should fail to qualify for pass-through tax treatment under Subchapter M, then it would be required to pay taxes on any income and realized capital gains, reducing the amount of income and capital gains that would otherwise be available for distribution to the Fund's shareholders. For purposes of discussion in this section, the term "Fund" refers to a Fund and its corresponding Portfolio. In order to qualify as a regulated investment company, a Fund must, among other things, (i) derive at least 90% of its gross income in each taxable year from dividends, interest, payments with respect to securities loans, gains from the sale or other disposition of stock, securities, or foreign currency, or certain other income (including but not limited to gains from options, futures, and forward contracts) derived with respect to its business of investing in stock, securities, or currencies; and (ii) diversify its holdings so that at the end of each quarter of its taxable year the following two conditions are met: (a) at least 50% of the value of each Fund's total assets is represented by cash, U.S. Government securities, securities of other regulated investment companies, and other securities (for this purpose such other securities will qualify only if each Fund's investment is limited in respect to any issuer to an amount not greater than 5% of the Fund's assets and 10% of the outstanding voting securities of such issuer) and (b) not more than 25% of the value of each Fund's assets is invested in securities of any one issuer (other than U.S. Government securities or securities of other regulated investment companies) or two or more issuers which each Fund controls and which are engaged in the same, similar or related trades or businesses. In order to maintain the qualification of each Fund as a regulated investment company, the AHA Funds may, in its business judgment, restrict a Fund's ability to invest in certain financial instruments. For the same reason, the AHA Funds may, in its business judgment, require each Fund to maintain or dispose of an investment in certain types of financial instruments before or after the time when it might otherwise be advantageous to do so. Each Fund will be subject to a 4% non-deductible federal excise tax on certain amounts not distributed (and not treated as having been distributed) on a timely basis in accordance with annual minimum distribution requirement. Each Fund intends under normal circumstances to avoid liability for such tax by satisfying such distribution requirements. Investment in debt obligations that are at risk or in default present special tax issues for the Fund that may hold such obligations. Tax rules are not entirely clear about issues such as when the Fund may cease to accrue interest, original issue discount, or market discount, when and to what extent deductions may be taken for bad debts or worthless securities, how payments received on obligations in default should be allocated between principal and income, and whether exchanges of debt obligations in a workout context are taxable. These and other issues will be addressed by the Fund in order to reduce the risk of distributing insufficient income to preserve its status as a regulated investment company and avoid becoming subject to federal income or excise tax. 45 Distributions from each Fund's current or accumulated earnings and profits ("E&P"), as computed for federal income tax purposes, will be taxable as described in the Funds' prospectus whether taken in shares or in cash. Distributions, if any, in excess of E&P will constitute a return of capital, which will first reduce an investor's tax basis in a Fund's shares and thereafter (after such basis is reduced to zero) will generally give rise to capital gains. Shareholders electing to receive distributions in the form of additional shares will have a cost basis for federal income tax purposes in each share so received equal to the amount of cash they would have received had they elected to receive the distributions in cash, divided by the number of shares received. Different tax treatment, including penalties on certain excess contributions and deferrals, certain pre-retirement and post-retirement distributions and certain prohibited transactions, is accorded to shareholder accounts maintained as qualified retirement plans. Shareholders should consult their tax advisers for more information. Investment by a Fund in certain "passive foreign investment companies" could subject a Fund to a U.S. federal income tax (including interest charges) on distributions received from the company or on proceeds received from the disposition of shares in the company, which tax cannot be eliminated by making distributions to Fund shareholders. However, a Fund may be able to elect to treat a passive foreign investment company as a "qualified electing fund," in which case a Fund will be required to include its share of the company's income and net capital gain annually, regardless of whether it receives any distribution from the company. Alternatively, a Fund may make an election to mark the gains (and, to a limited extent, losses) in such holdings "to market" as though it had sold and repurchased its holdings in those passive foreign investment companies on the last day of a Fund's taxable year. Such gains and losses are treated as ordinary income and loss. The qualified electing fund and mark-to-market elections may have the effect of accelerating the recognition of income (without the receipt of cash) and increasing the amount required to be distributed for a Fund to avoid taxation. Making either of these elections therefore may require a Fund to liquidate other investments (including when it is not advantageous to do so) in order to meet its distribution requirement, which also may accelerate the recognition of gain and affect a Fund's total return. The foregoing discussion relates solely to U.S. Federal income tax law as applicable to U.S. persons (i.e., U.S. citizens or residents and U.S. domestic corporations, partnerships, trusts or estates) subject to such law. The discussion does not address special tax rules applicable to certain classes of investors, such as tax-exempt entities, insurance companies, and financial institutions. Dividends may also be subject to state and local taxes. Shareholders should consult their own tax advisers as to the federal, state or local tax consequences of ownership of shares of, and receipt of distributions from, the Funds in their particular circumstances. The Funds generally do not accept investments by non-U.S. investors. MASTER/FEEDER STRUCTURE The Board of Directors has approved the Funds to invest substantially all of their assets in other open-end management investment companies having the same investment objective and substantially similar investment policies and restrictions (a "Master/Feeder Structure"). 46 The Funds are "feeder funds" in the Master/Feeder Structure which means that all of the assets of each Fund are invested in a corresponding Portfolio of the Master Fund. The Funds have transferred their assets in exchange for shares of beneficial interest in a corresponding Portfolio of the Master Fund having the same net asset value as the value of the assets transferred. The Funds pursue their investment objectives through their investments in the Master Fund rather than through direct investments in the types of securities dictated by their investment objectives and policies. Each Portfolio of the Master Fund, whose shares may be offered to other feeder funds or other investors in addition to the Funds, invests in the same types of securities in which the Funds would have directly invested. However, the expense ratios, yields and total returns of other investors in the Portfolios of each Master Fund may differ to those of the Funds due to differences in Feeder Fund expenses. By investing substantially all of its assets in a Portfolio, a feeder fund could expect to be in a position to realize directly or indirectly certain economies of scale, in that a larger investment portfolio resulting from multiple feeder funds is expected to achieve a lower ratio of operating expenses to net assets. A Portfolio may be offered to an undetermined number of other feeder funds. However, there can be no assurance that any such additional investments in a Portfolio by other feeder funds will take place. Additionally, smaller funds investing in a Portfolio may be materially affected by the actions of larger funds investing in the Portfolio. For example, if a large fund withdraws from the Portfolio, the remaining funds may subsequently experience higher pro rata operating expenses, thereby producing lower returns. If a Portfolio becomes smaller due to feeder funds withdrawing their assets, the Portfolio may become less diversified, resulting in potentially increased portfolio risk (however, these possibilities also exist for traditionally structured funds which have large or institutional investors who may withdraw from a fund). Also, funds with a greater pro rata ownership in the Portfolio could have effective voting control of the operations of the Portfolio. A Fund may withdraw its investments in a Portfolio at any time if the Board of Directors determines that it is in the best interests of the Fund to do so. Upon any such withdrawal, the Board of Directors would consider what action might be taken, including the investment of all the assets of the Fund in another pooled investment entity having the same investment objective and restrictions as the Fund or the retaining of an investment adviser to manage the Fund's assets in accordance with its investment objective and policies. Whenever a Fund is asked to vote on a proposal by the Master Fund, the Fund will hold a meeting of its shareholders if required by applicable law or its policies, and cast its vote with respect to the Master Fund in the same proportion as its shareholders vote on the proposal. Investments in a Portfolio have no preemptive or conversion rights and are fully paid and non-assessable, except as set forth below. Similar to the Funds, the Master Fund is not required to hold annual meetings of its shareholders, but it is required to hold special meetings of shareholders when, in the judgement of its Trustees, it is necessary or desirable to submit matters for a shareholder vote. Other shareholders in the Portfolios have rights similar to those of Fund shareholders; under certain circumstances (e.g., upon application and submission of certain specified documents to the Board of Trustees of the Master Fund by a specified number of 47 investors), they have the right to communicate with other shareholders in connection with requesting a meeting of shareholders for the purpose of removing one or more of the Master Fund's Trustees. Shareholders also have the right to remove one or more Trustees, without a meeting, by a declaration in writing by a specified number of shareholders. Upon liquidation of a Portfolio of the Master Fund, investors would be entitled to share pro rata in the net assets of the Portfolio available for distribution to shareholders. Each Portfolio shareholder is entitled to one vote in proportion to the share of its investment in the Portfolio. Investments in the Portfolio are not transferable, but a shareholder (such as a Fund) could redeem all or any portion of its investment at any time at net asset value. Certain changes in a Portfolio's fundamental investment policies or restrictions, or a failure by a Fund's shareholders to approve such change in the Portfolio's investment restrictions, may require withdrawal of the Fund's interest in the Portfolio. Any such withdrawal could result in a distribution in kind of portfolio securities (as opposed to a cash distribution) from the Portfolio which may or may not be readily marketable. The distribution in kind may result in the Fund having a less diversified portfolio of investments or adversely affect the Fund's liquidity, and the Fund could incur brokerage, tax or other charges in converting the securities to cash. Notwithstanding the above, there are other means for meeting shareholder redemption requests, such as borrowing. OTHER INFORMATION Administrator CCM Advisors serves as the administrator to the Funds and the Portfolios pursuant to a separate Administration Agreement with the AHA Funds and the Master Fund and in that capacity has overall responsibility, subject to the ongoing supervision of the AHA Funds' Board of Directors and the Master Fund's Board of Trustees, respectively, for all aspects of administration and operation of each Fund and Portfolio. CCM Advisors has entered into a Sub-Administration Agreement with U.S. Bancorp Fund Services, LLC ("U.S. Bancorp") on behalf of the AHA Funds and the Master Fund. U.S. Bancorp has agreed to prepare and file various reports with the appropriate regulatory agencies, assist in preparing various materials required by the Commission and prepare various materials required by any state securities commission having jurisdiction over the AHA Funds and the Master Fund. Each Administration Agreement provides that CCM Advisors shall not be liable for any error of judgment or import of law, or for any loss suffered by the AHA Funds or the Master Fund in connection with the matters to which this agreement relates, except loss resulting from: (i) willful misfeasance, bad faith or gross negligence on the part of CCM Advisors in the performance of its obligations and duties under the agreement; and (ii) its reckless disregard of its obligations and duties under the agreement. Each Agreement may be terminated at any time without the payment of any penalty by vote of the respective Board of Directors or Board of Trustees. As compensation for its services, CCM Advisors is entitled to receive an annual fee of $20,000 from each Fund and a annual fee from each Portfolio of 0.055% of the average daily net assets of the Portfolios. 48 Custodian, Transfer Agent and Fund Accountant U.S. Bank, N.A. ("U.S. Bank"), 615 East Michigan Avenue, Milwaukee, Wisconsin, serves as custodian for the securities and other assets of the Funds and the Portfolios. U.S. Bank is responsible for, among other things, safeguarding and controlling the cash and securities of the Funds and Portfolios, handling the receipt and delivery of securities, and collecting interest and dividends on the investments of the Funds and Portfolios. U.S. Bancorp Fund Services, LLC performs transfer agency, dividend disbursing and portfolio accounting services for the Funds and Portfolios. Independent Accountants Ernst & Young LLP, 233 South Wacker Drive, Chicago, Illinois, serve as the independent public accountants of the Funds and the Portfolios. The independent accountants: (i) audit and report on the financial statements of the Funds and Portfolios; and (ii) provide assistance and consultation in connection with Securities and Exchange Commission filings filed on behalf of the Funds and Portfolios. 49 APPENDIX The following is a description of the characteristics of ratings used by Moody's Investors Service, Inc. ("Moody's") and Standard & Poor's, a division of The McGraw-Hill Companies ("S&P") Ratings by Moody's Aaa--Bonds rated Aaa are judged to be the best quality. They carry the smallest degree of investment risk and are generally referred to as "gilt edged." Interest payments are protected by a large or by an exceptionally stable margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such bonds. Aa--Bonds rated Aa are judged to be high quality by all standards. Together with the Aaa group they comprise what are generally known as high grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa bonds or fluctuation of protective elements may be of greater amplitude or there may be other elements present which make the long-term risk appear somewhat larger than in Aaa bonds. A--Bonds rated A possess many favorable investment attributes and are to be considered as upper medium grade obligations. Factors giving security to principal and interest are considered adequate, but elements may be present which suggest a susceptibility to impairment sometime in the future. Baa--Bonds rated Baa are considered as medium grade obligations, i.e., they are neither highly protected nor poorly secured. Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well. Ba--Bonds rated Ba are judged to have speculative elements; their future cannot be considered as well assured. Often the protection of interest and principal payments may be very moderate and thereby not well safeguarded during both good and bad times over the future. Uncertainty of position characterizes bonds in this class. B--Bonds rated B generally lack characteristics of the desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small. Caa--Bonds rated Caa are of poor standing. Such bonds may be in default or there may be present elements of danger with respect to principal or interest. Ca--Bonds rated Ca represent obligations which are speculative in a high degree. Such bonds are often in default or have other marked shortcomings. A-1 C--Bonds which are rated C are the lowest rated class of bonds, and issues so rated can be regarded as having extremely poor prospects of ever attaining any real investment standing. Conditional Ratings. The designation "Con." followed by a rating indicated bonds for which the security depends upon the completion of some act or the fulfillment of some condition. These are bonds secured by (a) earnings of projects under construction, (b) earnings of projects unseasoned in operating experience, (c) rentals which begin when facilities are completed, or (d) payments to which some other limiting condition attaches. Parenthetical rating denotes probable credit stature upon completion of construction or elimination of basis of condition. Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's believes possess the strongest investment attributes are designated by the symbols Aa 1, A 1, Baa 1, Ba 1, and B 1. Commercial Paper: Moody's employs the following three designations, all judged to be investment grade, to indicate the relative repayment capacity of rated issuers: Prime-1 Highest Quality Prime 2 Higher Quality Prime-3 High Quality If an issuer represents to Moody's that its commercial paper obligations are supported by the credit of another entity or entities, Moody's, in assigning ratings to such issuers, evaluates the financial strength of the indicated affiliated corporations, commercial banks, insurance companies, foreign governments, or other entities, but only as one factor in the total rating assessment. S&P Ratings AAA--Bonds rated AAA have the highest rating. The obligor's capacity to meet its financial commitment on the bond is extremely strong. AA--Bonds rated AA differ from AAA bonds only in small degree. The obligor's capacity to meet its financial commitment on the bond is very strong. A--Bonds rated A are somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than bonds in higher-rated categories. However, the obligor's capacity to meet its financial commitment on the bond is still strong. BBB--Bonds rated BBB exhibit adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the bond. BB--B--CCC--CC and C--Bonds rated BB, B, CCC, CC and C are regarded as having significant speculative characteristics. BB indicates the lowest degree of speculation among such bonds and C the highest degree of speculation. While such bonds will likely have some A-2 quality and protective characteristics, these may be outweighed by large uncertainties or major exposures to adverse conditions. In order to provide more detailed indications of credit quality, S&P's bond letter ratings described above (except for AAA category) may be modified by the addition of a plus or a minus sign to show relative standing within the rating category. Provisional Ratings. The letter "p" indicates that the rating is provisional. A provisional rating assumes the successful completion of the project being financed by the debt being rated and indicates that payment of debt service requirements is largely or entirely dependent upon the successful and timely completion of the project. This rating, however, although addressing credit quality subsequent to completion of the project, makes no comment on the likelihood of, or the risk of default upon the failure of, such completion. The investor should exercise his own judgment with respect to such likelihood and risk. Commercial Paper: A. Issues assigned this highest rating are regarded as having the greatest capacity for timely payment. Issues in this category are further refined with the designations 1, 2 and 3 to indicate the relative degree of safety. A-1. This designation indicates that the degree of safety regarding timely payment is either overwhelming or very strong. Those issues determined to possess overwhelming safety characteristics are designated A-1+. A-3 AHA INVESTMENT FUNDS, INC. AHA U.S. GOVERNMENT MONEY MARKET FUND STATEMENT OF ADDITIONAL INFORMATION November 1, 2002 190 S. LaSalle Street, Suite 2800 Chicago, IL 60603 (800) 445-1341 This Statement of Additional Information ("SAI") is not a prospectus but provides information that you should read in conjunction with the AHA U.S. Government Money Market Fund prospectus (the "Prospectus") dated November 1, 2002 and any supplement to that prospectus. No information is incorporated by reference into this SAI. You may obtain a copy of the Prospectus at no charge by writing or telephoning the AHA Investment Funds, Inc. (the "AHA Funds") at the address or telephone number shown above. TABLE OF CONTENTS Page INFORMATION ABOUT THE FUND.....................................................1 INVESTMENT OBJECTIVE...........................................................2 INVESTMENT TECHNIQUES AND RISKS................................................2 INVESTMENT POLICIES AND RESTRICTIONS...........................................8 INVESTMENT IN ANOTHER MONEY MARKET FUND.......................................10 DIRECTORS AND OFFICERS........................................................13 CONTROL PERSONS AND PRINCIPAL SHAREHOLDERS....................................18 INVESTMENT ADVISORY AGREEMENTS................................................18 SECURITIES ACTIVITIES OF THE SUBADVISER.......................................21 PORTFOLIO TRANSACTIONS........................................................21 PORTFOLIO TURNOVER............................................................22 DETERMINATION OF NET ASSET VALUE..............................................22 PERFORMANCE INFORMATION.......................................................23 PURCHASE AND REDEMPTION OF FUND SHARES........................................25 ANTI-MONEY LAUNDERING COMPLIANCE..............................................25 DISTRIBUTION EXPENSES.........................................................26 OTHER SERVICE PROVIDERS.......................................................26 TAXES.........................................................................27 CODE OF ETHICS................................................................28 SHARES........................................................................29 APPENDIX.....................................................................A-1 i INFORMATION ABOUT THE FUND The AHA Funds is an open-end management investment company registered under the Investment Company Act of 1940 (the "1940 Act"). The AHA Funds was incorporated on March 14, 1988 under the laws of Maryland and is currently comprised of seven funds. The AHA U.S. Government Money Market Fund (the "Fund") is covered in this Statement of Additional Information. The AHA Limited Maturity Fixed Income Fund, AHA Full Maturity Fixed Income Fund, AHA Balanced Fund, AHA Diversified Equity Fund, AHA U.S. Growth Equity Fund and AHA International Core Equity Fund are offered through a separate prospectus and SAI. The Fund currently offers one class of shares - Class I Shares. Class I Shares are currently offered only to participants in the American Hospital Association Investment Program, member hospitals of the American Hospital Association ("AHA"), as well as their affiliated organizations and organizations within the healthcare industry and are not available to individuals. Class I shares are offered through the Fund's distributor without any sales charge. The Fund is "diversified" as that term is defined in the 1940 Act. CCM Advisors, LLC ("CCM Advisors") is the investment adviser to the Fund and Patterson & Associates (the "Subadviser") is responsible for the day-to-day investment operations of the Fund. 1 INVESTMENT OBJECTIVE The investment objective of the Fund is set forth and described in the Prospectus. The investment objective of the Fund may be changed by the Board of Directors of the AHA Funds (the "Board of Directors") without the approval of a "majority of the outstanding voting securities" (as defined in the 1940 Act) of the Fund. Should the investment objective of the Fund change, the Fund will provide investors with 60 days prior written notice of the change. INVESTMENT TECHNIQUES AND RISKS The Fund invests only in instruments denominated in U.S. dollars that the Subadviser, under the supervision of the Board of Directors and CCM Advisors, determine present minimal credit risk and are, at the time of acquisition rated in one of the two highest rating categories for short-term debt obligations assigned by at least two nationally recognized statistical rating organizations ("NRSROs") (i.e., Standard & Poors Corporation, a division of The McGraw-Hill Companies ("S&P") and Moody's Investors Service, Inc. ("Moody's")), or by only one NRSRO if only one NRSRO has issued a rating with respect to the instrument (requisite NRSROs). Pursuant to Rule 2a-7 under the 1940 Act, securities which are rated in the highest short-term rating category by at least two NRSROs are designated "First Tier Securities." Securities rated in the top two short-term rating categories by at least two NRSROs, but which are not rated in the highest short-term category by at least two NRSROs, are designated "Second Tier Securities." See Appendix for a description of the ratings used by NRSROs. Pursuant to Rule 2a-7 under the 1940 Act, the Fund may not invest more than 5% of its assets taken at amortized cost in the securities of any one issuer (except the U.S. Government, including repurchase agreements collateralized by U.S. Government Securities (discussed below)). The Fund may, however, invest up to 25% of its assets in the First Tier Securities of a single issuer for a period of up to three business days after the purchase thereof, although the Fund may not make more than one such investment at any time. Further, the Fund will not invest more than the greater of (i) 1% of its total assets; or (ii) one million dollars in the securities of a single issuer that were Second Tier Securities when acquired by the Fund. In addition, the Fund may not invest more than 5% of its total assets in securities that were Second Tier Securities when acquired. U.S. Government Securities The Fund may purchase securities issued or guaranteed as to principal and interest by the U.S. Government, its agencies, authorities or instrumentalities ("U.S. Government Securities"). Some U.S. Government Securities, such as Treasury bills, notes and bonds, which differ only in their interest rates, maturities and times of issuance, are supported by the full faith and credit of the United States. Others, such as obligations issued or guaranteed by U.S. Government agencies, authorities or instrumentalities are supported either by (a) the full faith and credit of the U.S. Government (such as securities of the Small Business Administration), (b) the right of the issuer to borrow from the Treasury (such as securities of the Federal Home Loan Banks), (c) the discretionary authority of the U.S. Government to purchase the agency's obligations (such as securities of the Federal National Mortgage Association), or (d) only the credit of the issuer. No 2 assurance can be given that the U.S. Government will provide financial support to U.S. Government agencies, authorities or instrumentalities in the future. Accordingly, securities issued by a U.S. agency, authority or instrumentality are subject to default, and are also subject to interest rate and prepayment risks. U.S. Government Securities may also include zero coupon securities. Zero coupon securities are issued and traded at a discount and do not entitle the holder to any periodic payments of interest prior to maturity, and, for this reason, may trade at a deep discount from their face or par value and may be subject to greater fluctuations in market value than ordinary debt obligations of comparable maturity. With zero coupon securities there are no cash distributions to reinvest, so investors bear no reinvestment risk if they hold the zero coupon securities to maturity; holders of zero coupon securities, however, forego the possibility of reinvesting at a higher yield than the rate paid on the originally issued security. With zero coupon securities there is no reinvestment risk on the principal amount of the investment. When held to maturity, the entire return from such instruments is determined by the difference between such instrument's purchase price and its value at maturity. Securities guaranteed as to principal and interest by the U.S. Government, its agencies, authorities or instrumentalities are considered to include (a) securities for which the payment of principal and interest is backed by a guarantee of, or an irrevocable letter of credit issued by, the U.S. Government, its agencies, authorities or instrumentalities and (b) participation in loans made to foreign governments or their agencies that are so guaranteed. The secondary market for certain of these participations is limited. Such participations may therefore be regarded as illiquid. The Fund's yield will fluctuate due to changes in interest rates, economic conditions, quality ratings and other factors. The prepayment experience of the mortgages underlying mortgage-related securities, such as obligations issued by the Government National Mortgage Association, may affect the value of, and return on, an investment in such securities. Repurchase Agreements Repurchase agreements are transactions in which the Fund purchases a security from a bank or recognized securities dealer and simultaneously commits to resell that security to the bank or dealer at an agreed-upon price, date, and market rate of interest unrelated to the coupon rate or maturity of the purchased security. Although repurchase agreements carry certain risks not associated with direct investments in securities, the Fund intends to enter into repurchase agreements only with its custodian, banks having assets in excess of $10 billion and primary U.S. Government securities dealers as recognized by the Federal Reserve Bank of New York. The Fund may only enter into repurchase agreements fully collateralized by U.S. Government Securities. Although the securities subject to the repurchase agreement might bear maturities exceeding one year, settlement for the repurchase would never be more than one year after the Fund's acquisition of the securities and normally would be within a shorter period of time. The resale price will be in excess of the purchase price, reflecting an agreed upon market rate effective for the period of time the Fund's money will be invested in the securities and will not be related to the coupon rate of the purchased security. At the time the Fund enters into a repurchase agreement, the value of the underlying security, including accrued interest, will equal 3 or exceed 102% of the value of the repurchase agreement, and in the case of a repurchase agreement exceeding one day, the seller will agree that the value of the underlying security, including accrued interest, will at all times equal or exceed 102% of the value of the repurchase agreement. The collateral securing the seller's obligation will be held by the Fund's custodian in the Fund's account in the Federal Reserve Book Entry System or held by a custodian qualified as such under the 1940 Act. The Fund will not enter into a repurchase agreement that is not terminable within seven business days if, as a result thereof, more than 10% of the value of the net assets of the Fund would be invested in such securities and other illiquid securities. A repurchase agreement is a simultaneous agreement to sell a security and buy that security back at a later date, and, for purposes of the 1940 Act, is treated as a loan from the Fund to the seller subject to the repurchase agreement and is therefore subject to the Fund's investment restriction applicable to loans. It is not clear whether a court would consider the securities purchased by the Fund subject to a repurchase agreement as being owned by the Fund or as being collateral for a loan by the Fund to the seller. In the event of the commencement of bankruptcy or insolvency proceedings with respect to the seller of the securities before repurchase of the security under a repurchase agreement, the Fund may encounter delay and incur costs before being able to sell the security. Delays may involve loss of interest or decline in price of the security. If the court characterized the transaction as a loan and the Fund has not perfected a security interest in the security, the Fund may be required to return the security to the seller's estate and be treated as an unsecured creditor of the seller. As an unsecured creditor, the Fund would be at the risk of losing some or all of the principal and income involved in the transaction. As with any unsecured debt obligation purchased for the Fund, the Subadviser seeks to minimize the risk of loss through repurchase agreements by analyzing the creditworthiness of the obligor, in this case the seller. Apart from the risk of bankruptcy or insolvency proceedings, there is also the risk that the seller may fail to repurchase the security, in which case the Fund may incur a loss if the proceeds to the Fund of the sale to a third party are less than the repurchase price. However, if the market value of the securities subject to the repurchase agreement becomes less than the repurchase price (including interest), the Fund will direct the seller of the security to deliver additional securities so that the market value of all securities subject to the repurchase agreement will equal or exceed 102% of the repurchase price. It is possible that the Fund will be unsuccessful in seeking to enforce the seller's contractual obligation to deliver additional securities. Reverse Repurchase Agreements The Fund may enter into reverse repurchase agreements with banks and securities dealers. A reverse repurchase agreement is a repurchase agreement in which the Fund is the seller of, rather than the investor in, securities and agrees to repurchase them at an agreed-upon time and price. Use of a reverse repurchase agreement, may be preferable to a regular sale and later repurchase of securities because it avoids certain market risks and transaction costs. At the time the Fund enters into a reverse repurchase agreement, assets of the Fund having a value at least as great as the purchase price of the securities to be purchased will be segregated on the books of the Fund and held by the custodian throughout the period of the obligation. The use of these investment strategies, as well as any borrowing by the Fund, may increase net asset value fluctuation. 4 STRIPS STRIPS are U.S. Treasury bills, notes and bonds that have been issued without interest coupons or stripped of their unmatured interest coupons, interest coupons that have been stripped from such U.S. Treasury securities, and receipts or certificates representing interests in such stripped U.S. Treasury securities and coupons. A STRIPS security pays no interest in cash to its holder during its life although interest is accrued for federal income tax purposes. Its value to an investor consists of the difference between its face value at the time of maturity and the price for which it was acquired, which is generally an amount significantly less than its face value. Investing in STRIPS may help to preserve capital during periods of declining interest rates. For example, if interest rates decline, Government National Mortgage Association Certificates purchased at greater than par are more likely to be prepaid, which would cause a loss of principal. In anticipation of this, the Fund might purchase STRIPS, the value of which would be expected to increase when interest rates decline. STRIPS do not entitle the holder to periodic payments of interest prior to maturity. Accordingly, such securities usually trade at a deep discount from their face or par value and will be subject to greater fluctuations of market value in response to changing interest rates than debt obligations of comparable maturities that make periodic distributions of interest. On the other hand, because there are no periodic interest payments to be reinvested prior to maturity, STRIPS eliminate the reinvestment risk and lock in a rate of return to maturity. Current federal tax law requires that a holder of a STRIPS security accrue a portion of the discount at which the security was purchased as income each year even though the Fund received no interest payment in cash on the security during the year. Floating and Variable Rate Obligations The Fund may purchase securities having a floating or variable rate of interest. These securities pay interest at rates that are adjusted periodically according to a specified formula, usually with reference to an interest rate index or market interest rate. These adjustments tend to decrease the sensitivity of the security's market value to changes in interest rates. The Subadviser will monitor, on an ongoing basis, the ability of an issuer of a floating or variable rate demand instrument to pay principal and interest on demand. The Fund's right to obtain payment at par on a demand instrument could be affected by events (occurring between the date the Fund elects to demand payment and the date payment is due) that may affect the ability of the issuer of the instrument to make payment when due, except when such demand instrument permits same day settlement. To facilitate settlement, these same day demand instruments may be held in book entry form at a bank other than the Fund's custodian subject to a sub-custodian agreement between the bank and the Fund's custodian. The floating and variable rate obligations that the Fund may purchase include certificates of participation in such obligations purchased from banks. A certificate of participation gives a Fund an undivided interest in the underlying obligations in the proportion that the Fund's interest bears to the total principal amount of the obligation. Certain certificates of participation may carry a demand feature that would permit the holder to tender them back to the issuer prior to maturity. The Fund may invest in certificates of participation even if the underlying obligations carry stated maturities in excess of thirteen months upon compliance with certain conditions 5 contained in a rule of the Securities and Exchange Commission (the "Commission"). The income received on certificates of participation in tax-exempt municipal obligations constitutes interest from tax-exempt obligations. Similar to fixed rate debt instruments, variable and floating rate instruments are subject to changes in value based on changes in prevailing market interest rates or changes in the issuer's creditworthiness. A floating or variable rate instrument may be subject to the Fund's percentage limitation on illiquid securities if there is no reliable trading market for the instrument or if the Fund may not demand payment of the principal amount within seven days. Delayed Settlement Transactions The Fund will make commitments to purchase securities on a When-Issued ("WI") or To-Be-Announced ("TBA") basis. Obligations issued on a when-issued basis are settled by delivery and payment after the date of the transaction, usually within 15 to 45 days. In a to-be-announced transaction, the Fund commits to purchasing or selling securities for which all specific information is not yet known at the time of the trade, particularly the face amount in transactions involving mortgage-related securities. The Fund will only make commitments to purchase obligations on a when-issued or to-be-announced basis with the intention of actually acquiring the obligations, but the Fund may sell these securities before the settlement date if it is deemed advisable as a matter of investment strategy or in order to meet its obligations, although it would not normally expect to do so. The Fund intends to invest less than 5% of its net assets in securities purchased on this basis, and the Fund will not enter into a delayed settlement transaction which settles in more than 120 days. In connection with these investments, the Fund will direct the Custodian to place liquid securities in a segregated account in an amount sufficient to make payment for the securities to be purchased. When a segregated account is maintained because the Fund purchases securities on a WI or TBA basis, the assets deposited in the segregated account will be valued daily at market for the purpose of determining the adequacy of the securities in the account. If the market value of such securities declines, additional cash or securities will be placed in the account on a daily basis so that the market value of the account will equal the amount of the Fund's commitments to purchase securities on a WI or TBA basis. To the extent funds are in a segregated account, they will not be available for new investment or to meet redemptions. Securities in the Fund's portfolio are subject to changes in market value based upon changes in the level of interest rates (which will generally result in all of those securities changing in value in the same way, i.e., all those securities experiencing appreciation when interest rates decline and depreciation when interest rates rise). Therefore, if in order to achieve higher returns, the Fund remains substantially fully invested at the same time that it has purchased securities on a WI or TBA basis, there will be a possibility that the market value of the Fund's assets will have greater fluctuation. The purchase of securities on a WI or TBA basis may involve a risk of loss if the broker-dealer selling the securities fails to deliver after the value of the securities has risen. When the time comes for the Fund to make payment for securities purchased on a WI or TBA basis, the Fund will do so by using then available cash flow, by sale of the securities held in 6 the segregated account, by sale of other securities or, although it would not normally expect to do so, by directing the sale of the securities purchased on a WI or TBA basis themselves (which may have a market value greater or less than the Fund's payment obligation). Loans of Portfolio Securities The Fund may from time to time lend securities that it holds to brokers, dealers and financial institutions. Such loans will be secured by collateral in the form of cash or United States Treasury securities, or other liquid securities as permitted by the Commission, which at all times while the loan is outstanding, will be maintained in an amount at least equal to the current market value of the loaned securities. The Fund will continue to receive interest and dividends on the loaned securities during the term of the loan, and, in addition, will receive a fee from the borrower or interest earned from the investment of cash collateral in short-term securities. The Fund also will receive any gain or loss in the market value of loaned securities and of securities in which cash collateral is invested during the term of the loan. The right to terminate a loan of securities, subject to appropriate notice, will be given to either party. When a loan is terminated, the borrower will return the loaned securities to the Fund. The Fund will not have the right to vote securities on loan, but would terminate a loan and regain the right to vote if the Board of Directors deems it to be necessary in a particular instance. For tax purposes, the dividends, interest and other distributions which the Fund receives on loaned securities may be treated as other than qualified income for the 90% test. (See TAXES--General Tax Information.) The Fund intends to lend portfolio securities only to the extent that this activity does not jeopardize its status as a regulated investment company under the Code. The primary risk involved in lending securities is that the borrower will fail financially and return the loaned securities at a time when the collateral is insufficient to replace the full amount of the loan. The borrower would be liable for the shortage, but the Fund would be an unsecured creditor with respect to such shortage and might not be able to recover all or any of it. In order to minimize this risk, the Fund will make loans of securities only to firms CCM Advisors deems creditworthy. Borrowing and Pledging The Fund may borrow money from banks (provided there is 300% asset coverage) or other persons for temporary purposes. The Fund may pledge assets in connection with borrowings, but the Fund will not pledge more than one-third of its assets. The Fund will not make any additional purchases of portfolio securities if outstanding borrowings exceed 5% of the value of its total assets. The Fund's policies on borrowing and pledging are fundamental policies that may not be changed without the affirmative vote of a majority of its outstanding securities. The Fund receives amounts equal to the interest on loaned securities and also receives one or more of (a) negotiated loan fees, (b) interest on securities used as collateral or (c) interest on short-term debt securities purchased with such collateral; either type of interest may be shared with the borrower. The Fund may also pay fees to placing brokers as well as custodian and administrative fees in connection with loans. Fees may only be paid to a placing broker provided 7 that the Board of Directors determine that the fee paid to the placing broker is reasonable and based solely upon services rendered, that the Board of Directors separately consider the propriety of any fee shared by the placing broker with the borrower and that the fees are not used to compensate CCM Advisors or the Subadviser or any affiliated person of the Fund or an affiliated person of CCM Advisors or the Subadviser. The terms of the Fund's loans must meet applicable tests under the Internal Revenue Code and permit the Fund to reacquire the loaned securities on five days' written notice or in time to vote on any important matter. Investment Company Securities Investment Company Securities are securities of other open end or closed end investment companies. The 1940 Act generally prohibits an investment company from acquiring more than 3% of the outstanding voting shares of an investment company and limits such investments to no more than 10% in any combination of investment companies. The Fund may invest in Investment Company Securities of investment companies managed by CCM Advisors or its affiliates to the extent permitted under the 1940 Act or as otherwise authorized by the Commission. To the extent the Fund invests a portion of its assets in Investment Company Securities, those assets will be subject to the risks of the purchased investment company's portfolio securities. The Fund also will bear its proportionate share of the expense of the investment company in addition to its own expenses. INVESTMENT POLICIES AND RESTRICTIONS Fundamental Restrictions The Fund is subject to certain fundamental restrictions on its investments. These restrictions may not be changed without the approval of the holders of a majority of the outstanding voting shares of the Fund. 1. Industry Concentration. The Fund will not purchase a security, other than Government Securities, if as a result of such purchase 25% or more of the value of the Fund's total assets would be invested in the securities of issuers in any one industry. Notwithstanding anything herein to the contrary, to the extent permitted by the 1940 Act, the Fund may invest in one or more investment companies; provided that, except to the extent the Fund invests in other investment companies pursuant to Section 12(d)(1)(A) of the 1940 Act, the Fund treats the assets of the investment companies in which it invests as its own for purposes of this policy. 2. Diversification. The Fund will not purchase any security, other than Government Securities or securities of a registered investment company with the same investment objective and substantially similar investment policies, if as a result of such purchase more than 5% of the value of the Fund's assets would be invested in the securities of any one issuer, or the Fund would own more than 10% of the voting securities, or of any class of securities, of any one issuer. For purposes of this restriction, all outstanding indebtedness of an issuer is deemed to be a single class. 3. Interests in Real Estate. The Fund will not purchase real estate or any interest therein, except through the purchase of corporate or certain government securities (including securities secured by a mortgage or a leasehold interest or other interest in real estate). 8 4. Underwriting. The Fund may not engage in the underwriting of securities except insofar as the Fund may be deemed an underwriter under the Securities Act of 1933 in disposing of a security and except that the Fund may invest in another registered investment company with the same investment objective and substantially similar investment policies. 5. Borrowing. The Fund will not borrow money, except that, for temporary purposes: (a) the Fund may borrow from banks (as defined in the 1940 Act) or through reverse repurchase agreements in amounts up to 33 1/3% of its total assets (including the amount borrowed), taken at market value at the time of the borrowing; (b) the Fund may, to the extent permitted by applicable law, borrow up to an additional 5% of its total assets (including the amount borrowed), taken at market value at the time of the borrowing; and (c) the Fund may obtain such short-term credits as may be necessary for clearance of purchases and sales of portfolio securities. The Fund will not make any additional investment while it has borrowings in excess of 5% of its total assets. 6. Lending. The Fund will not lend any security or make any other loan, except through: (a) the purchase of debt obligations in accordance with the Fund's investment objective or objectives and policies; (b) repurchase agreements with banks, brokers, dealers, and other financial institutions; (c) participation in an interfund lending program among funds having a common investment adviser or distributor to the extent permitted by applicable law and (d) loans of securities as permitted by applicable law. 7. Commodities. The Fund will not purchase or sell commodities or commodity contracts. 8. Senior Securities. The Fund will not issue senior securities except to the extent the activities permitted in Fundamental Restriction No. 5 may be deemed to give rise to a senior security. 9. Securities of Registered Investment Companies. As a matter of fundamental policy, none of the foregoing investment policies or restrictions of the Fund shall prohibit the Fund from investing all or substantially all of its assets in the shares of one or more registered open-end investment company having the same investment objective and substantially similar investment policies. Non-Fundamental Restrictions The Fund also has adopted the following additional investment restrictions applicable to the Fund. These are not fundamental and may be changed by the Board of Directors without shareholder approval. 1. Margin Purchases. The Fund may not purchase any securities on margin or sell securities short. The Fund may obtain such short-term credits as may be necessary for clearance of purchases and sales of portfolio securities. 2. Pledging Assets. The Fund may not mortgage, pledge, hypothecate or in any manner transfer, as security for indebtedness, any securities owned or held by such Fund except as may be necessary in connection with borrowings mentioned in fundamental restriction number 9 5 above, and then such mortgaging, pledging or hypothecating may not exceed 33 1/3% of the Fund's total assets, taken at market value at the time thereof. 3. Illiquid Securities. The Fund will not invest in illiquid securities, including certain repurchase agreements, reverse repurchase agreements or time deposits maturing in more than seven days, if, as a result thereof, more than 10% of the value of its net assets would be invested in assets that are illiquid. 4. Options, Futures and Warrants. The Fund may not invest in options, futures contracts, options on futures contracts or warrants. 5. Fund Name. The Fund has adopted a policy to invest, under normal circumstances, at least 80% of the value of its net assets, plus the amount of any borrowings for investment purposes, in a particular type of investment that is suggested by the Fund's name and will notify its shareholders at least 60 days prior to any change in such policy. Whenever any investment restriction states a maximum percentage of the Fund's assets, it is intended that if the percentage limitation is met at the time the action is taken, subsequent percentage changes resulting from fluctuating asset values will not be considered a violation of such restrictions, except that at no time may the value of the illiquid securities held by the Fund exceed 10% of the Fund's net assets. If the Fund exceeds the 33 1/3% limitation in Fundamental Restriction number 5, the Fund will reduce its borrowings within three days (not including Sundays and holidays). INVESTMENT IN ANOTHER MONEY MARKET FUND Substantial Investment in Another Fund The Fund may seek to achieve its investment objective by investing a substantial portion of its investable assets in another money market fund. Accordingly, the Fund would acquire an indirect interest in the securities held by the other money market fund. Master/Feeder Fund Structure The Board of Directors have the authority to permit the Fund to invest substantially all of its investable assets in another open-end management investment company having the same investment objective and substantially similar policies and restrictions (a "Master/Feeder Fund Structure"). Prior to any such actual investment, however, the Board of Directors would be required to approve the transaction and will notify shareholders. Although the Board of Directors has not determined that the Fund should convert to a Master /Feeder Fund Structure at this time, the Board of Directors believes it could be in the best interests of the Fund at some future date and could vote at some time in the future to convert the Fund into a "Feeder Fund," under which all of the assets of the Fund would be invested in a Master Fund. The Feeder Fund would transfer its assets to a Master Fund in exchange for shares of beneficial interest in the Master Fund having the same net asset value as the value of the assets 10 transferred. (The ownership interests of the Fund's shareholders would not be altered by this change.) Any Master Fund in which the Fund would invest would be registered as an open-end management investment company under the 1940 Act and would be required to have the same investment objective and substantially similar policies and restrictions as the Fund. Accordingly, by investing in a Master Fund, the Fund would continue to pursue its then current investment objective and policies in substantially the same manner, except that it would pursue that objective through its investment in the Master Fund rather than through direct investments in the types of securities dictated by its investment objectives and policies. The Master Fund, whose shares could be offered to other feeder funds or other investors in addition to the Fund, would invest in the same type of securities in which the Fund would have directly invested, providing substantially the same investment results to the Fund's shareholders. However, the expense ratios, the yields, and the total returns of other investors in the Master Fund may be different from those of the Fund due to differences in fund expenses. By investing substantially all of its assets in a Master Fund, the Fund could expect to be in a position to realize directly or indirectly certain economies of scale, in that a larger investment portfolio resulting from multiple Feeder Funds could achieve a lower ratio of operating expenses to net assets. A Master Fund may be offered to an undetermined number of other Feeder Funds. However, there can be no assurance that any such additional investments in a Master Fund by other Feeder Funds will take place. If the Fund invests substantially all of its assets in a Master Fund, the Fund no longer would require portfolio management services. For this reason, if the Board of Directors were to convert the Fund into a Feeder Fund, the existing investment advisory agreements between the Fund and the Adviser and the Subadviser would be terminated. The Fund may withdraw its investment in a Master Fund at any time if the Board of Directors determined that it was in the best interests of the shareholders of the Fund to do so or if the investment policies or restrictions of the Master Fund were changed so that they were inconsistent with the policies and restriction of the Fund. Upon any such withdrawal, the Board of Directors of the Fund would consider what action might be taken, including the investment of all of the assets of the Fund in another pooled investment entity having substantially the same investment objective as the Fund or the retaining of an investment adviser to directly invest the Fund's assets in accordance with its investment objective and policies. If, after investing its assets in a Master Fund, the Fund is asked to vote on a proposal by a Master Fund, the Fund will hold a meeting of its shareholders if required by applicable law or its policies, and cast its vote with respect to the Master Fund in the same proportion as its shareholders vote on the proposal. Once its assets are invested in a Master Fund, the Fund will value its holdings (i.e., shares issued by the Master Fund) at their fair value, which will be based on the daily net asset value of the Master Fund. The net income of the Fund will be determined at the same time and on the same days as the net income of the Master Fund is determined, which will be the same time and days that the Fund uses for this purpose. 11 Investments in a Master Fund would have no preemptive or conversion rights and would be fully paid and non-assessable, except as set forth below. Similar to the AHA Funds, a Master Fund would not be required to hold annual meetings of its shareholders, but the Master Fund would be required to hold special meetings of shareholders when, in the judgment of its trustees, it is necessary or desirable to submit matters for a shareholder vote. Other shareholders in a Master Fund have rights similar to those of the Fund shareholders; under certain circumstances (e.g., upon application and submission of certain specified documents to the Board of Trustees by a specified number of investors), they have the right to communicate with other shareholders in connection with requesting a meeting of shareholders for the purpose of removing one or more of the Master Fund's trustees. Shareholders also have the right to remove one or more trustees, without a meeting, by a declaration in writing by a specified number of shareholders. Upon liquidation of a Master Fund, investors would be entitled to share pro rata in the net assets of the Master Fund available for distribution to shareholders. Each Master Fund shareholder would be entitled to a vote in proportion to the share of its investment in the Master Fund. Investments in a Master Fund would not be transferable, but a shareholder (such as the Fund) could redeem all or any portion of its investment at any time at net asset value. Tax Considerations. The implementation of a Master Fund/Feeder Fund structure is not expected to have any adverse tax effects on the Fund or its shareholders. The Fund would continue to qualify and elect to be treated as a "regulated investment company" under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). To so qualify, the Fund must meet certain income, distribution, and diversification requirements. It is expected that the Fund's investment in a Master Fund will satisfy these requirements. Provided that the Fund meets these requirements and distributes all of its net investment income and realized capital gains to its shareholders in accordance with the timing requirements imposed by the Code, the Fund would not pay any Federal income or excise taxes. Any Master Fund would qualify and elect to be treated as a "partnership" under the Code and, therefore, will also not expect to be required to pay any Federal income or excise taxes. Income dividends and any capital gain distributions by a Master Fund to the Fund would be distributed by the Fund to its shareholders, and such payments will be subject to Federal and applicable state income taxes on the Fund's shareholders. 12 DIRECTORS AND OFFICERS The Board of Directors has overall responsibility for the conduct of the affairs of the AHA Funds. Each Director serves an indefinite term of unlimited duration until the next annual meeting of shareholders and until the election and qualification of his or her successor. The Board of Directors may fill any vacancy on the board provided that after such appointment, at least two-thirds of the Directors have been elected by the shareholders. The shareholders may remove a Director by a vote of a majority of the outstanding shares of the Fund at any meeting of shareholders called for the purpose of removing such Director. The Board of Directors elects the officers of the AHA Funds. Each officer serves until the election and qualification of his or her successor, or until he or she sooner dies, resigns, or is removed or disqualified. The Board of Directors may remove any officer with or without cause at any time. The names and ages of the Directors and officers, the position each holds with AHA Funds, the date each was first elected to his position, their principal business occupations during the last five years and other directorships they have held for publicly traded companies are shown below. Each Director and officer serves in such capacity for each of the seven series of the AHA Funds Except for Messrs. Burke, Evans, Solberg and Yoder, each Director oversees the seven Portfolios of the CCM Advisors Funds and the two series of the CCMA Select Investment Trust. Messrs. Burke, Evans, Solberg and Yoder only oversee the seven series of the AHA Funds. Directors who are interested persons of AHA Funds:
- ----------------------- ----------------- ---------------------------------- ------------------------------ Name and Age at Position(s) Held Principal Occupation(s) Other Directorships Held October 1, 2002 with AHA Funds During Past 5 Years and Date First Elected or Appointed to Office - ----------------------- ----------------- ---------------------------------- ------------------------------ Douglas D. Peabody, 39* Director and Managing Director, CCM Advisors, None. President (since LLC (since Jan. 2001); Managing 2001) Director Convergent Capital Management Inc. (since 1999); formerly Principal, Eager Manager Advisory Services (1991 to 1999). 13 - ----------------------- ----------------- ---------------------------------- ------------------------------ Name and Age at Position(s) Held Principal Occupation(s) Other Directorships Held October 1, 2002 with AHA Funds During Past 5 Years and Date First Elected or Appointed to Office - ----------------------- ----------------- ---------------------------------- ------------------------------ Timothy G. Solberg, 49* Director and Managing Director, CCM Advisors, None. Secretary (since LLC (since 2001); formerly 2001) Director of Marketing and Client Services, Hewitt Investment Group, a Division of Hewitt Associates LLC.
Directors who are not interested persons of AHA Funds:
- ---------------------- ---------------- ------------------------------------ ------------------------------ Name and Age at Position(s) Held Principal Occupation(s) Other Directorships Held October 1, 2002 with AHA Funds During Past 5 Years and Date First Elected or Appointed to Office - ---------------------- ---------------- ------------------------------------ ------------------------------ Anthony J. Burke, 37 Director (since President, American Hospital None. 1999) Association Financial Solutions, Inc. (since 1997); formerly, Marketing Development Director of AHA Insurance Resources Inc. (1997 to 1998); prior thereto, President of A. Burke & Associates (a marketing consulting firm). Charles V. Doherty, 68 Director (since Managing Director, Madison Trustee, Wayne Hummer September 2002) Advisory Group; Director, Lakeside Investment Trust (an open-end Bank; Director, Knight Trading investment company) (4 Group, Inc.; Director, Howe Barnes portfolios); formerly Trustee, Investments, Inc.; Director, Wayne Hummer Money Fund Trust Brauvin Capital Trust, Inc.; (an open-end investment Director, Bank of America company) (1994-1999). Financial Products, Inc. Frank A. Ehmann, 68 Director (since Retired. Director, American Director, SPX Corp. (global 1991) Healthways (provider of diabetes provider of technical products and cardiac disease management and systems, industrial services to health plans and products and services, flow hospitals) (since 1989); Director, technology and service Genderm Corp. (dermatology company solutions) (since 1989); offering prescription and formerly Director and non-prescription treatments for President, United Stationers skin conditions) (1997-2000). (wholesale distributor of business, computer, and facilities management products). 14 - ----------------------- ----------------- ---------------------------------- ------------------------------ Name and Age at Position(s) Held Principal Occupation(s) Other Directorships Held October 1, 2002 with AHA Funds During Past 5 Years and Date First Elected or Appointed to Office - ----------------------- ----------------- ---------------------------------- ------------------------------ Richard John Evans 50 Director (since Chief Financial Officer, American None. 1995) Hospital Association (since Dec. 1999); formerly, Vice President/Finance, American Hospital Association (1995-1999). John D. Oliverio, 49 Director (since Chief Executive Officer, President Director, Hewitt Series Trust 1995) and Director, Wheaton Franciscan (an open-end investment Services, Inc. (parent company) (since 1998) (2 organization for more than 100 portfolios). health and shelter service organizations) (since 1984); Director of the following: Affinity Health Systems (since 1995); Covenant Health Care System (since 1989); All Saints Health System (since 1992); Franciscan Ministries, Inc. (the holding company for Wheaton Franciscan Services, Inc.'s housing entities) (since 1998) and United Health System (since 1998). Edward M. Roob, 67 Director (since Retired. Arbitrator, New York Director, Brinson Funds, Inc. September 2002) Stock Exchange and National (since 1994); Director, UBS Association of Securities Dealers; Relationship Funds (since Trustee, Fort Dearborn Income 1995); Director, UBS Securities, Inc. (since 1994); Supplementary Trust (since Director, Brinson Trust Company 1997)(40 portfolios); (since 1993); Committee Member, Chicago Stock Exchange (1993 to 1999). John L. Yoder, 71 Director (since Vice President, Princeton None. 1988) Insurance Co. (since 1995).
* Messrs. Peabody and Solberg are "interested persons" of the AHA Funds as defined in the Investment Company Act of 1940 because they are Managing Directors of the Fund's investment adviser, CCM Advisors, LLC. The address of Messrs. Peabody and Solberg is 190 South LaSalle Street, Suite 2800, Chicago, Illinois 60603. The address of Mr. Burke is One North Franklin, Chicago, Illinois 60606; that of Mr. Doherty is 70 West Madison, Suite 1400, Chicago, IL 60602; that of Mr. Ehmann is 864 Bryant Avenue, Winnetka, Illinois 60093; that of Mr. Evans is One North Franklin, Chicago, IL 60606; that of Mr. Oliverio is 26 West 171 Roosevelt Road, Wheaton, Illinois 60189; that of Mr. Roob is 841 Woodbine Lane, Northbrook, Illinois 60062 and that of Mr. Yoder is 19 Tankard, Washington Crossing, Pennsylvania 18977. 15 Officers. Messrs. Peabody and Solberg are President and Secretary of the AHA Funds, respectively. The preceding table gives more information about Messrs. Peabody and Solberg. The following table sets forth each other officer's name, position with the AHA Funds, age, principal occupation during the past five years and the date on which he first became an officer of the AHA Funds. Each officer serves until his successor is chosen and qualified or until his resignation or removal by the Board of Directors. - ------------------------ ---------------------- -------------------------------- Name and Age at Position(s) Held with Principal Occupation(s) October 1, 2002 AHA Funds and Date During Past 5 Years First Elected or Appointed to Office - ------------------------ ---------------------- -------------------------------- Gregory P. Francoeur, 31 Treasurer (since 2002) Director of Finance, Convergent Capital Management Inc.(since 1997); prior thereto, Auditor, Price Waterhouse LLP(1993-1997). James A. Henderson, 60 Vice President (since Vice President, Corporate 1988) Counsel and Assistant Secretary, American Hospital Association (since 1984); Secretary, AHA Financial Solutions, Inc. (since 1995); Secretary, Heath Forum, Inc. (since 1988).) The address of each officer is 190 South LaSalle, Suite 2800, Chicago, Illinois 60603. Directors, other than those who are affiliated with CCM Advisors, LLC ("CCM Advisors"), the Fund's investment adviser, or with the American Hospital Association, receive $1,000 for each quarterly meeting of the Board of Directors attended and $500 for each special meeting of the Board of Directors attended and for any committee meeting (not held on the date of a quarterly Board of Directors meeting) attended, plus reimbursement of related expenses. Meetings and Committees. The current Board of Directors consists of two interested and seven non-interested Trustees. Audit Committee. The Audit Committee, consisting of Messrs. Doherty, Ehmann, Oliverio, Roob and Yoder, all of whom are non-interested Directors, recommends to the Board of Directors the independent accountants to serve as auditors, and confers with the independent accountants on the scope and results of the audit. Governance Committee. The Governance Committee, consisting of Messrs. Burke, Doherty, Ehmann, Evans, Oliverio, Roob and Yoder, all of whom are non-interested Directors, recommends to the Board of Directors, among other things, nominees for Director who are not "interested persons" of the Fund. Neither the Board of Directors, nor the Governance Committee will consider shareholder recommendations regarding candidates for election of Directors; however, such recommendations may be made in the form of a shareholder proposal to be presented at any future meeting of shareholders of the Fund. Executive Committee. The Executive Committee, consisting of Messrs. Peabody and Solberg, both interested Directors and Mr. Doherty, a non-interested Director, is authorized to take certain actions delegated to it by the full Board of Directors and to exercise the full powers of the Board of Directors under circumstances when the Board of Directors as a whole will not be able to meet. 16 Valuation Committee. The Valuation Committee, consisting of Mr. Peabody, and interested Director and Messrs. Doherty, Ehmann, Oliverio and Roob, all of whom are non-interested Directors, has oversight responsibility for, among other things, determining and monitoring the value of the Fund's assets. Committee Meetings. The Audit Committee met twice during the fiscal year ended June 30, 2002. Directors and officers of the Fund do not receive any benefits from the Fund upon retirement, nor does the Fund accrue any expenses for pension or retirement benefits. The following table summarizes the compensation for the fiscal year ended June 30, 2002 paid to the Directors. Aggregate Total Compensation from the Compensation AHA Funds and Fund Complex Name from the AHA Funds Paid to Directors(1) ---- ------------------ ------------------ Douglas D. Peabody(2) None None Timothy G. Solberg(2) None None Anthony J. Burke(2) None None Charles V. Doherty(3) None $2000 Frank Ehmann $5000 $8000 Richard John Evans(2) None None John D. Oliverio $5000 $8000 Edward M. Roob(3) None $3000 Thomas J. Tucker(3) $5000 $5000 John L. Yoder $5000 $5000 (1) Messrs. Doherty, Ehmann, Oliverio, Peabody and Roob also serve on the Board of Trustees of CCM Advisors Funds and the Board of Trustees of the CCMA Select Investment Trust. Because the CCMA Select Investment Trust was not operational, each non-interested Trustee of CCMA Select Investment Trust was compensated by CCM Advisors, LLC. Messrs. Ehmann, Oliverio and Roob were each paid $2000. Mr. Doherty was paid $1000. This amount is not included in the Total Compensation from AHA Funds and Fund Complex Paid to Directors. (2) Non-compensated Director. (3) Mr. Tucker resigned as a Director in September 2002. Messrs. Doherty and Roob were appointed as Directors in September 2002. As of October 28, 2002, no Directors or officers owned beneficially or of record any security of the Fund nor did any person (other than a registered investment company) directly or indirectly controlling, controlled by or under common control with CCM Advisors, LLC (the "Adviser"), own shares of the Fund. As of December 31, 2001, no Director "beneficially" owned (within the meaning of that term as defined in Rule 16a-1(a)(2) under the Securities Exchange Act of 1934) any shares of the Fund. 17 CONTROL PERSONS AND PRINCIPAL SHAREHOLDERS Because the Fund is a newly created series of the AHA Funds, there is no person who controls the Fund as of the date of this SAI. INVESTMENT ADVISORY AGREEMENTS Between the Fund and CCM Advisors CCM Advisors serves as the investment adviser to the Fund pursuant to an Investment Advisory Agreement. Under the Investment Advisory Agreement, and subject to the supervision of, and policies established by, the Fund's Board of Directors, CCM Advisors determines the investment strategies, and supervises adherence by the Subadviser to the Fund's investment policies and guidelines. CCM Advisors is a majority-owned subsidiary of Convergent Capital Management Inc. The duties and responsibilities of CCM Advisors are specified in an Investment Advisory Agreement between the Fund and CCM Advisors. At a meeting held on July 2, 2001, called in part for approving the Investment Advisory Agreement, the Board of Directors approved the Investment Advisory Agreement by the unanimous vote of all Directors present and also by the unanimous vote of all non-interested Directors. In evaluating the Investment Advisory Agreement, the Directors reviewed materials furnished by CCM Advisors, including information regarding CCM Advisors, and its personnel, operations and financial condition. The Directors discussed with representatives of CCM Advisors the Fund's proposed operations and CCM Advisors' ability to provide advisory and other services to the Fund. The Directors also reviewed, among other things: o the proposed fees to be charged by CCM Advisors for the services it provides; and o the Fund's projected total operating expenses. The Directors considered the following as relevant to their recommendations: (1) the favorable history, reputation, qualification and background of CCM Advisors, as well as the qualifications of its personnel and its financial condition; (2) the magnitude of CCM Advisors' fees and the expense ratio of the Fund in relation to the nature and quality of services expected to be provided and the fees and expense ratios of comparable investment companies; and (3) other factors that the Directors deemed relevant. Subject to the supervision by the Board of Directors, CCM Advisors is responsible for overseeing the day-to-day operations and business affairs of the Fund, including monitoring the performance of the Subadviser. The Fund pays CCM Advisors an investment advisory fee of 0.10% of the Fund's average daily net assets. The fee is accrued daily and paid monthly. CCM Advisors has undertaken to waive its entire investment advisory fee. This waiver may be reduced or terminated at any time at the option of CCM Advisors, subject to approval by the Board of Directors. 18 As described below, CCM Advisors has engaged Patterson & Associates as the Subadviser for the Fund. CCM Advisors is responsible for payment of all expenses it may incur in performing the services described. These expenses include costs incurred in providing investment advisory services, compensating and furnishing office space for officers and employees of CCM Advisors, and the payment of any fees to interested Directors of the Fund. CCM Advisors provides all executive, administrative, clerical and other personnel necessary to operate the Fund and pays the salaries and other employment related costs of employing those persons. CCM Advisors furnishes the Fund with office space, facilities and equipment and pays the day-to-day expenses related to the operation and maintenance of such office space facilities and equipment. All other expenses incurred in the organization of the Fund or of any new series of the Fund, including legal and accounting expenses and costs of the initial registration of securities of the Fund under federal and state securities laws, are also paid by CCM Advisors. The Investment Advisory Agreement is not assignable and may be terminated without penalty upon 60 days written notice at the option of the Fund or CCM Advisors, or by a vote of shareholders. The Investment Advisory Agreement provides that it shall continue in effect for two years and can thereafter be continued from year to year so long as such continuance is specifically approved annually (a) by the Board of Directors of the Master Fund or by a majority of the outstanding voting shares of the Fund and (b) by a majority vote of the Directors who are not parties to the Agreement, or interested persons of any such party, cast in person at a meeting held for that purpose. The Investment Advisory Agreement provides that the Fund is responsible for payment of all expenses it may incur in its operation and all of its general administrative expenses except those expressly assumed by CCM Advisors as described in the preceding paragraph. These include (by way of description and not of limitation), any share redemption expenses, expenses of portfolio transactions, shareholder servicing costs, pricing costs (including the daily calculation of net asset value), interest on borrowings by the Fund, charges of the custodian and transfer agent, cost of auditing services, non-interested Directors' fees, legal expenses, all taxes and fees, investment advisory fees, certain insurance premiums, cost of maintenance of corporate existence, investor services (including allocable personnel and telephone expenses), costs of printing and mailing updated Fund prospectuses to shareholders, costs of preparing, printing, and mailing proxy statements and shareholder reports to shareholders, the cost of paying dividends, capital gains distribution, costs of Director and shareholder meetings, dues to trade organizations, and any extraordinary expenses, including litigation costs in legal actions involving the Fund, or costs related to indemnification of Directors, officers and employees of the Fund. The Investment Advisory Agreement also provides that CCM Advisors shall not be liable to the Fund or to any shareholder or contract owner for any error of judgment or mistake of law or for any loss suffered by the Fund or by any shareholder in connection with matters to which such Agreement relates, except for a breach of fiduciary duty or a loss resulting from willful misfeasance, bad faith, gross negligence, or reckless disregard on the part of CCM Advisors in the performance of its duties thereunder. 19 Between the Subadviser and CCM Advisors Pursuant to the separate subadvisory agreement described below, CCM Advisors has engaged Patterson & Associates as the Subadviser to provide day-to-day portfolio management for the Fund. The Subadviser manages the investments of the Fund, determining which securities or other investments to buy and sell for the Fund and selecting the brokers and dealers to effect the transactions. In placing orders for securities transactions, the Subadviser seeks to obtain a combination of the most favorable price and efficient execution available. At a meeting held on July 2, 2001, called in part for approving the subadvisory agreement, the Board of Directors approved the subadvisory agreement by the unanimous vote of all Directors present and also by the unanimous vote of all non-interested Directors. In evaluating the Subadviser, the Directors reviewed materials furnished by CCM Advisors and the Subadviser, including information regarding the Subadviser, and its personnel, operations and financial condition. The Directors discussed with representatives of the Subadviser, the Fund's proposed operations and the Subadviser's ability to provide advisory and other services to the Fund. The Directors also reviewed, among other things: o the proposed fees to be charged by the Subadviser for the services it provides; o the Fund's projected total operating expenses; o the investment performance of similar accounts managed by the Subadviser; and o the experience of the investment advisory and other personnel that would be providing services to the Fund. The Directors considered the following as relevant to their recommendations: (1) the favorable history, reputation, qualification and background of the Subadviser, as well as the qualifications of its personnel and its financial condition; (2) the magnitude of the Subadviser's fees and the expense ratio of the Fund in relation to the nature and quality of services expected to be provided and the fees and expense ratios of comparable investment companies; (3) the performance of accounts similar in nature to the Fund under the management of the Subadviser; and (4) other factors that the Directors deemed relevant. The subadvisory agreement is not assignable and may be terminated without penalty upon 60 days written notice at the option of CCM Advisors or the Subadviser, or by the Board of Directors of the Fund or by a vote of a majority of the outstanding shares of the Fund. The subadvisory agreement provides that it shall continue in effect for two years and can thereafter be continued for the Fund from year to year so long as such continuance is specifically approved annually (a) by the Board of Directors of the Fund or by a majority of the outstanding shares of the Fund and (b) by a majority vote of the Directors who are not parties to the agreement, or interested persons of any such party, cast in person at a meeting held for that purpose. For its services, CCM Advisors pays the Subadviser an investment subadvisory fee equal to a percentage of the average daily net assets of the Fund at the rate of 0.08%. The fee is accrued daily and paid to the Subadviser monthly. 20 SECURITIES ACTIVITIES OF THE SUBADVISER Securities held by the Fund may also be held by separate accounts or mutual funds for which the Subadviser acts as an investment adviser, some of which may be affiliated with the Subadviser. Because of different investment objectives, cash flows or other factors, a particular security may be bought by the Subadviser for one or more of its clients, when one or more other clients are selling the same security. Pursuant to procedures adopted by the Board of Directors, the Subadviser may cause the Fund to buy or sell a security from another mutual fund or another account. Any such transaction would be executed at a price determined in accordance with those procedures and without sales commissions. Transactions executed pursuant to such procedures are reviewed by the Board of Directors quarterly. If purchases or sales of securities for the Fund or other clients of the Subadviser arise for consideration at or about the same time, transactions in such securities will be allocated as to amount and price, insofar as feasible, for the Fund and other clients in a manner deemed equitable to all. To the extent that transactions on behalf of more than one client of the Subadviser during the same period may increase the demand for securities being purchased or the supply of securities being sold, there may be an adverse effect on price. It is the opinion of the Board of Directors of the Fund, however, that the benefits available to the Fund outweigh any possible disadvantages that may arise from such concurrent transactions. On occasions when the Subadviser (under the supervision of the Board of Directors and CCM Advisors) deems the purchase or sale of a security to be in the best interests of the Fund as well as other accounts or companies, it may, to the extent permitted by applicable laws and regulations, but will not be obligated to, aggregate the securities to be sold or purchased for the Fund with those to be sold or purchased for other accounts or companies to obtain favorable execution and low brokerage commissions. In that event, allocation of the securities purchased or sold, as well as the expenses incurred in the transaction, will be made by the Subadviser in the manner it considers to be most equitable and consistent with its fiduciary obligations to the Fund and to such other accounts or companies. In some cases this procedure may adversely affect the size of the position obtainable for the Fund. PORTFOLIO TRANSACTIONS The Subadviser places orders on behalf of the Fund for the purchase or sale of securities. Portfolio transactions for the Fund are placed with those securities dealers that the Subadviser believes will provide the best value in transaction and research services for the Fund, either in a particular transaction or over a period of time. Purchases and sales of securities for the Fund will usually be principal transactions. Portfolio securities normally will be purchased or sold from or to dealers serving as market makers for the securities at a net price. Transactions of the Fund in the over-the-counter market are executed with primary market makers acting as principal, except where it is believed that better prices and execution may be obtained otherwise. The Fund will also purchase portfolio securities in underwritten offerings and will, on occasion, purchase securities directly from the issuer. Generally, taxable money market securities are traded on a net basis and do not involve brokerage commissions. The cost of executing the Fund's portfolio securities transactions will 21 consist primarily of dealer spreads and underwriting commissions. The Fund may effect purchases and sales through brokers who charge commissions, although the Fund does not anticipate that it will do so. The Fund may not always pay the lowest commission or spread available. Rather, in determining the amount of commissions, including certain dealer spreads, paid in connection with securities transactions, the Subadviser takes into account factors such as size of the order, difficulty of execution, efficiency of the executing broker's facilities (including the services described below) and any risk assumed by the executing broker. The Subadviser may also take into account payments made by brokers effecting transactions for the Fund: (a) to the Fund; or (b) to other persons on behalf of the Fund for services provided to the Fund for which it would be obligated to pay. In addition, the Subadviser may give consideration to research services furnished by brokers to the Subadviser for its use and may cause the Fund to pay these brokers a higher amount of commission than may be charged by other brokers. Such research and analysis is of the types described in Section 28(e) (3) of the Securities Exchange Act of 1934, as amended, and is designed to augment the Subadviser's own internal research and investment strategy capabilities. Such research may be used by the Subadviser in connection with services to clients other than the Fund, and not all services may be used by the Subadviser in connection with the Fund. The Subadviser's fees are not reduced by reason of the Subadviser's receipt of the research services. PORTFOLIO TURNOVER Since short term instruments are excluded from the calculation of a portfolio turnover rate, no meaningful portfolio turnover rate can be estimated or calculated for the Fund. Turnover rates may vary greatly from year to year as well as within a particular year and may also be affected by cash requirements for redemptions of the Fund's shares and by requirements, the satisfaction of which enable the Fund to receive certain favorable tax treatment. DETERMINATION OF NET ASSET VALUE The Net Asset Value (NAV) for the Fund is determined at 1:00 p.m., Eastern Time, on each day that the New York Stock Exchange (the "NYSE") is open for regular session trading and that is not a bank holiday. However, on any day, when the trading markets for U.S. Government securities close early, net asset value will be determined as of that earlier closing time. Shares of the Fund will not be priced on days when the NYSE is closed. All of the assets of the Fund are valued on the basis of amortized cost in an effort to maintain a constant net asset value of $1.00 per share. The Board of Directors of the Fund has determined this to be in the best interests of the Fund and its shareholders. Under the amortized cost method of valuation, securities are valued at cost on the date of their acquisition, and thereafter as adjusted for amortization of premium or accretion of discount, regardless of the impact of fluctuating interest rates on the market value of the security. While this method provides certainty in valuation, it may result in periods in which value as determined by amortized cost is higher or lower than the price the Fund would receive if it sold the security. 22 During such periods, the quoted yield to investors may differ somewhat from that obtained by a similar fund or portfolio which uses available market quotations to value all of its portfolio securities. The Board of Directors has established procedures reasonably designed, taking into account current market conditions and the Fund's investment objectives, to stabilize the Fund's net asset value per share for purposes of sales and redemptions, at $1.00. These procedures include review by the Board of Directors, at such intervals as it deems appropriate, to determine the extent, if any, to which the net asset value per share calculated by using available market quotations deviates from $1.00 per share. In the event such deviation should exceed one half of one percent, the Board of Directors will promptly consider initiating corrective action. If the Board of Directors believes that the extent of any deviation from a $1.00 amortized cost price per share may result in material dilution or other unfair results to new or existing shareholders, it will take such steps as it considers appropriate to eliminate or reduce these consequences to the extent reasonably practicable. Such steps may include, selling portfolio securities prior to maturity; shortening the average maturity of the portfolio; withholding or reducing dividends; redeeming shares in kind; or utilizing a net asset value per share determined from available market quotations. Even if these steps were taken, the Fund's net asset value might still decline. Computation of NAV (and the sale and redemption of Fund shares) may be suspended or postponed during any period when (a) trading on the NYSE is restricted, as determined by the Commission, or the NYSE is closed for other than customary weekend and holiday closings, (b) the Commission has by order permitted such suspension, or (c) an emergency, as determined by the Commission, exists making disposal of portfolio securities or valuation of the net assets of the Fund not reasonably practicable. PERFORMANCE INFORMATION Performance information for the Fund is not presented because the Fund has not yet commenced operations. Investors should maintain realistic expectations for future performance. Past performance is not necessarily indicative of future results. The Fund from time to time may quote or otherwise use yield information for the Fund in advertisements, shareholder reports, sales literature or other communications to shareholders or prospective investors. The performance information is historical and is not intended to indicate future returns. Although published yield information is useful in reviewing a Fund's performance, the Fund's yield fluctuates daily and the Fund's yield for any given period is not an indication or representation by the Fund of future yields or rates of return on the Fund's shares. the Fund's yield is not fixed or guaranteed, and an investment in the Fund is not insured or guaranteed. Accordingly, yield information may not necessarily be used to compare shares of the Fund with investment alternatives, like money market instruments or bank accounts, that provide a fixed rate of interest. Also, it may not be appropriate to compare the Fund's yield information directly to similar information regarding investment alternatives that are insured or guaranteed. 23 Yield quotations for the Fund will include an annualized historical yield, carried at least to the nearest hundredth of one percent, based on a specific seven calendar day period and are calculated by dividing the net change during the seven day period in the value of an account having a balance of one share at the beginning of the period by the value of the account at the beginning of the period, and multiplying the quotient by 365/7. For this purpose, the net change in account value reflects the value of additional shares purchases with dividends declared on the original shares and dividends declared on both the original shares and any such additional shares, but would not reflect any realized gains or losses from the sale of securities or any unrealized appreciation or depreciation on portfolio securities. In addition, any effective annualized yield quotation used by the Fund is calculated by compounding the current yield quotation for such period by adding 1 to the product, raising the sum to a power equal to 365/7, and subtracting 1 from the result, according to the following formula: EFFECTIVE YIELD = [(BASE PERIOD RETURN + 1)365/7 ]-1 From time to time the Fund may publish an indication of its past performance as measured by independent sources such as (but not limited to) Lipper, Inc., Weisenberger Investment Companies Service, Donoghue's Money Fund Report, Barron's, Business Week, Changing Times, Financial World, Forbes, Fortune, Money, Personal Investor, Sylvia Porter's Personal Finance and The Wall Street Journal. The Fund may also advertise information which has been provided to the NASD for publication in regional and local newspapers. In addition, the Fund may from time to time advertise its performance relative to certain indices and benchmark investments, including (a) the Lipper, Inc. Mutual Fund Performance Analysis and Mutual Fund Indices (which measure total return and average current yield for the mutual fund industry and rank mutual fund performance); (b) the CDA Mutual Fund Report published by CDA Investment Technologies, Inc. (which analyzes price, risk and various measures of return for the mutual fund industry); (c) the Consumer Price Index published by the U.S. Bureau of Labor Statistics (which measures changes in the price of goods and services); (d) Stocks, Bonds, Bills and Inflation published by Ibbotson Associates (which provides historical performance figures for stocks, government securities and inflation); (e) Donoghue's Money Market Fund Report (which provides industry averages of 7-day annualized and compounded yields of taxable, tax-free and U.S. Government money market funds); (f) other taxable investments including certificates of deposit, money market deposit accounts, checking accounts, savings accounts, money market mutual funds and repurchase agreements; (g) historical investment data supplied by the research departments of Goldman Sachs, Lehman Brothers, First Boston Corporation, Morgan Stanley, Salomon Brothers, Merrill Lynch, Donaldson Lufkin and Jenrette or other providers of such data; (h) mutual fund performance indices published by Variable Annuity Research & Data Service; and (i) mutual fund performance indices published by Morningstar, Inc. The composition of the investments in such indices and the characteristics of such benchmark investments are not identical to, and in some cases are very different from, those of the Fund's portfolio. These indices and averages are generally unmanaged and the items included in the calculations of such indices and averages may be different from those of the equations used by the Fund to calculate its performance figures. The Fund may from time to time summarize the substance of discussions contained in shareholder reports in advertisements and publish the views of the Subadviser, the rationale for the Fund's investments and discussions of the Fund's current asset allocation. 24 From time to time, advertisements or information may include a discussion of certain attributes or benefits to be derived by an investment in the Fund. Such advertisements or information may include symbols, headlines or other material, which highlight or summarize the information discussed in more detail in the communication. Such performance data will be based on historical results and will not be intended to indicate future performance. The yield of the Fund will vary based on market conditions, portfolio expenses, portfolio investments and other factors. The value of the Fund's shares will fluctuate and your shares may be worth more or less than their original cost upon redemption. PURCHASE AND REDEMPTION OF FUND SHARES Purchases of Fund shares are discussed fully in the Prospectus under the heading "Shareholder Information." The Fund reserves the right, in its sole discretion, to reject a purchase order when, in the judgment of CCM Advisors or the Subadviser, the purchase would not be in the best interest of the Fund. Special Redemptions. Although it would not normally do so, the Fund has the right to pay the redemption price of shares of the Fund in whole or in part in portfolio securities as prescribed by the Board of Directors of the Fund. When the shareholder sells portfolio securities received in this fashion, the shareholder would incur a brokerage charge. Any such securities would be valued for the purposes of making such payment at the same value as used in determining net asset value. Suspension of Redemptions. The Fund may not suspend a shareholder's right of redemption, or postpone payment for a redemption for more than seven days, unless the NYSE is closed for other than customary weekends or holidays, or trading on the NYSE is restricted, or for any period during which an emergency exists as determined by the Commission as a result of which (1) disposal by the Fund of securities owned by it is not reasonably practicable, or (2) it is not reasonably practicable for the Fund to fairly determine the value of its assets, or for such other periods as the Commission may permit for the protection of investors. ANTI-MONEY LAUNDERING COMPLIANCE The Fund is required to comply with various anti-money laundering laws and regulations. Consequently, the Fund may request additional information from you to verify your identity. If at any time the Fund believes a shareholder may be involved in suspicious activity or if certain account information matches information on government lists of suspicious persons, the Fund may choose not to establish a new account or may be required to "freeze" a shareholder's account. The Fund also may be required to provide a governmental agency with information about transactions that have occurred in a shareholder's account or to transfer monies received to establish a new account, transfer an existing account or transfer the proceeds of an existing account to a governmental agency. In some circumstances, the law may not permit the Fund to inform the shareholder that it has taken the actions described above. 25 DISTRIBUTION EXPENSES Quasar Distributors, LLC. ("Quasar") serves as the principal underwriter for the Fund pursuant to a Distribution Agreement initially approved by the Board of Directors of the Fund. Quasar is a registered broker-dealer and a member of the National Association of Securities Dealers, Inc. ("NASD"). Shares of the Fund will be continuously offered. Quasar bears all the expenses of providing services pursuant to the Distribution Agreement, including the payment of the expenses relating to the distribution of Prospectuses for sales purposes as well as any advertising or sales literature. The Fund bears the expenses of registering its shares with the Commission and paying the fees required to be paid by state regulatory authorities. The Distribution Agreement continues in effect for two years from initial approval and for successive one-year periods thereafter, provided that each such continuance is specifically approved (i) by vote of a majority of the Board of Directors of the Fund, including a majority of the Directors who are not parties to the Distribution Agreement or interested persons of any such party, (as the term interested person is defined in the 1940 Act); or (ii) by the vote of a majority of the outstanding voting securities of the Fund. Quasar is not obligated to sell any specific amount of shares of the Fund. Quasar's business and mailing address is 615 East Michigan Street, Milwaukee, Wisconsin 53202. Quasar was organized as a limited liability company in the state of Delaware and is a wholly-owned subsidiary of U.S. Bancorp. OTHER SERVICE PROVIDERS Administrator CCM Advisors serves as the Fund's administrator pursuant to an Administration Agreement with the Fund and in that capacity has overall responsibility, subject to the ongoing supervision of the Fund's Board of Directors, for all aspects of the Fund's administration and operation. CCM Advisors has entered into a Sub-Administration Agreement with U.S. Bancorp Fund Services, LLC ("U.S. Bancorp" or the "Sub-Administrator") on behalf of the Fund. U.S. Bancorp has agreed to prepare and file various reports with the appropriate regulatory agencies, assist in preparing various materials required by the Commission and prepare various materials required by any state securities commission having jurisdiction over the Fund. The Administration Agreement provides that CCM Advisors shall not be liable for any error of judgment or import of law, or for any loss suffered by the Fund in connection with the matters to which this agreement relates, except loss resulting from: (i) willful misfeasance, bad faith or gross negligence on the part of CCM Advisors in the performance of its obligations and duties under the agreement; and (ii) its reckless disregard of its obligations and duties under the agreement. The agreement may be terminated at any time without the payment of any penalty by vote of the Board of Directors. As compensation for its services, the Fund pays CCM Advisors is entitled to receive a fee based on the aggregate average daily net assets of the Fund, payable quarterly at an annual rate of 0.05% of the Fund's average net assets. 26 Custodian, Transfer Agent and Fund Accountant U.S. Bank, N.A. (the "Custodian"), 615 East Michigan Avenue, Milwaukee, Wisconsin, serves as Custodian for the securities and cash assets of the Fund. Cash held by the Custodian, which may at times be substantial, is insured by the Federal Deposit Insurance Corporation up to the amount of insurance coverage limits (presently, $100,000). U.S. Bancorp Fund Services, LLC serves as transfer agent of the Fund's shares, dividend disbursing agent, provides additional services as the Fund's shareholder servicing agent and provides certain accounting services to the Fund. Independent Accountants Ernst & Young LLP, 233 South Wacker Drive, Chicago, Illinois, are the independent public accountants of the Fund. The independent accountants are responsible for auditing the financial statements of the Fund. The selection of the independent accountants is approved annually by the Board of Directors. TAXES General Tax Information The AHA Funds intend for the Fund to qualify as a regulated investment company under the Subchapter M of the Code. If the Fund qualifies as a regulated investment company and distributes substantially all of its net income and gains to its shareholders (which the Fund intends to do), then under the provisions of Subchapter M, the Fund should have little or no income taxable to it under the Code. The Fund must meet several requirements to maintain its status as a regulated investment company. These requirements include the following: (1) at least 90% of the Fund's gross income must be derived from dividends, interest, payments with respect to securities loans and gains from the sale or disposition of stocks, other securities, or foreign currencies; and (2) at the close of each quarter of the Fund taxable year, (a) at least 50% of the value of the Fund's total assets must consist of cash, U.S. Government securities, securities of other regulated investment companies, and other securities (for this purpose such other securities will qualify only if the Fund's investment is limited in respect to any issuer to an amount not greater than 5% of the Fund's assets and 10% of the outstanding voting securities of such issuer), and (b) the Fund must not invest more than 25% of the value of its total assets in the securities of any one issuer (other than U.S. Government securities) or two or more issuers which the Fund controls and which are engaged in the same, similar or related trades or businesses. In order to maintain the qualification of the Fund as a regulated investment company, the Fund may, in its business judgment, restrict the Fund's ability to invest in certain financial instruments. For the same reason, the Fund may, in its business judgment, require the Fund to maintain or dispose of an investment in certain types of financial instruments before or after the time when it might otherwise be advantageous to do so. The Fund will be subject to a 4% non-deductible federal excise tax on certain amounts not distributed (and not treated as having been distributed) on a timely basis in accordance with 27 annual minimum distribution requirement. The Fund intends under normal circumstances to avoid liability for such tax by satisfying such distribution requirements. Investment in debt obligations that are at risk or in default presents special tax issues for the Fund that may hold such obligations. Tax rules are not entirely clear about issues such as when the Fund may cease to accrue interest, original issue discount, or market discount, when and to what extent deductions may be taken for bad debts or worthless securities, how payments received on obligations in default should be allocated between principal and income, and whether exchanges of debt obligations in a workout context are taxable. These and other issues will be addressed by the Fund in order to reduce the risk of distributing insufficient income to preserve its status as a regulated investment company and avoid becoming subject to federal income or excise tax. Distributions from the Fund's current or accumulated earnings and profits ("E&P"), as computed for federal income tax purposes, will be taxable as dividends as described in the Fund's prospectus whether taken in shares or in cash. Distributions, if any, in excess of E&P will constitute a return of capital, which will first reduce an investor's tax basis in the Fund's shares and thereafter (after such basis is reduced to zero) will generally give rise to capital gains. Shareholders electing to receive distributions in the form of additional shares will have a cost basis for federal income tax purposes in each share so received equal to the amount of cash they would have received had they elected to receive the distributions in cash, divided by the number of shares received. Different tax treatment, including penalties on certain excess contributions and deferrals, certain pre-retirement and post-retirement distributions and certain prohibited transactions, is accorded to shareholder accounts maintained as qualified retirement plans. Shareholders should consult their tax advisers for more information. The foregoing discussion relates solely to U.S. Federal income tax law as applicable to U.S. persons (i.e., U.S. citizens or residents and U.S. domestic corporations, partnerships, trusts or estates) subject to such law. The discussion does not address special tax rules applicable to certain classes of investors, such as tax-exempt entities, insurance companies, and financial institutions. Dividends may also be subject to state and local taxes. Shareholders should consult their own tax advisers as to the federal, state or local tax consequences of ownership of shares of, and receipt of distributions from, the Fund in their particular circumstances. CODE OF ETHICS CCM Advisors and the Subadviser intend that: all of their activities function exclusively for the benefit of the owners or beneficiaries of the assets they manage; assets under management or knowledge as to current or prospective transactions in managed assets are not utilized for personal advantage or for the advantage of anyone other than the owners or beneficiaries of those assets; persons associated with CCM Advisors and the Fund avoid situations involving actual or potential conflicts of interest with the owners or beneficiaries of managed assets; and situations appearing to involve actual or potential conflicts of interest or impairment of objectivity are avoided whenever doing so does not run counter to the interests of the owners or beneficiaries of the managed assets. The Board of Directors of the AHA Funds 28 and CCM Advisors have adopted a Code of Ethics which imposes certain prohibitions, restrictions, preclearance requirements and reporting rules on the personal securities transactions of subscribers to the Code, who include the Fund's officers and Directors and the employees of CCM Advisors. The Board of Directors believes that the provisions of its Code of Ethics are reasonably designed to prevent employees from engaging in conduct that violates these principles. SHARES The AHA Funds' presently authorized capital is 700,000,000 shares. Interests in the AHA Funds are represented by shares of common stock, $.01 par value, with interests in each of the AHA Funds represented by a separate series of such stock. Under the AHA Funds' Articles of Incorporation, the Board of Directors may increase the authorized shares, establish additional series (with different investment objectives and fundamental policies), establish additional classes of the AHA Funds, and redesignate unissued shares among the series. Establishment of additional series will not alter the rights of the AHA Funds' shareholders and additional classes within any series would be used to distinguish among the rights of different categories of shareholders. Each share represents an equal proportionate interest in the Fund. The interest of shareholders in the Fund is separate and distinct from the interest of shareholders of the other AHA Funds. Each share of the Fund is entitled to participate pro rata in any dividends and other distributions declared by the Board of Directors, and have proportionate rights in the event of liquidation of that Fund. Each shareholder is entitled to a full vote for each full share held (and fractional votes for fractional shares) on any matter presented to shareholders. Shares of each AHA Fund will vote separately when required by the 1940 Act or other applicable law or when the Board of Directors determines that the matter affects only the interests of one or more AHA Fund, such as, for example, a proposal to approve an amendment to a particular AHA Fund's Management Agreement, but shares of all AHA Funds vote together, to the extent required by the 1940 Act, in the election or selection of Directors and independent accountants. Voting rights are not cumulative, which means that that the holders of more than 50% of the shares voting for the election of Directors can, if they choose, elect all Directors being elected, while the holders of the remaining shares would be unable to elect any Directors. Under Maryland law, the AHA Funds are not required and therefore do not intend to hold annual meetings of shareholders. However, the Directors may call annual or special meetings of shareholders as may be required by the 1940 Act, Maryland law, or the Articles of Incorporation, or as they otherwise deem necessary or appropriate. In addition, the By-Laws of the AHA Funds contain procedures under which a Director may be removed by the written declaration or vote of the holders of two-thirds of the AHA Funds' outstanding shares at a meeting called for that purpose upon the request of the shareholders whose interests represent 10% of the AHA Funds' outstanding shares. 29 APPENDIX DESCRIPTION OF BOND RATINGS A rating of a rating service represents the service's opinion as to the credit quality of the security being rated. However, the ratings are general and are not absolute standards of quality or guarantees as to the creditworthiness of an issuer. Consequently, CCM Advisors and the Subadviser believe that the quality of debt securities in which the Fund invests should be continuously reviewed and that individual analysts give different weightings to the various factors involved in credit analysis. A rating is not a recommendation to purchase, sell or hold a security, because it does not take into account market value or suitability for a particular investor. When a security has received a rating from more than one service, each rating should be evaluated independently. Ratings are based on current information furnished by the issuer or obtained by the ratings services from other sources, which they consider reliable. Ratings may be changed, suspended or withdrawn as a result of changes in or unavailability of such information, or for other reasons. The following is a description of the characteristics of ratings used by Moody's Investors Service, Inc. ("Moody's") and Standard & Poor's Corporation, a division of The McGraw-Hill Companies ("S&P"). Ratings by Moody's Aaa--Bonds rated Aaa are judged to be the best quality. They carry the smallest degree of investment risk and are generally referred to as "gilt edged." Interest payments are protected by a large or by an exceptionally stable margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such bonds. Aa--Bonds rated Aa are judged to be high quality by all standards. Together with the Aaa group they comprise what are generally known as high grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa bonds or fluctuation of protective elements may be of greater amplitude or there may be other elements present that make the long-term risk appear somewhat larger than in Aaa bonds. A--Bonds rated A possess many favorable investment attributes and are to be considered as upper medium grade obligations. Factors giving security to principal and interest are considered adequate, but elements may be present which suggest a susceptibility to impairment sometime in the future. Baa--Bonds rated Baa are considered as medium grade obligations, i.e., they are neither highly protected nor poorly secured. Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well. Ba--Bonds rated Ba are judged to have speculative elements; their future cannot be considered as well assured. Often the protection of interest and principal payments may be very moderate A-1 and thereby not well safeguarded during both good and bad times over the future. Uncertainty of position characterizes bonds in this class. B--Bonds rated B generally lack characteristics of the desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small. Caa--Bonds rated Caa are of poor standing. Such bonds may be in default or there may be present elements of danger with respect to principal or interest. Ca--Bonds rated Ca represent obligations which are speculative in a high degree. Such bonds are often in default or have other marked shortcomings. C--Bonds which are rated C are the lowest rated class of bonds, and issues so rated can be regarded as having extremely poor prospects of ever attaining any real investment standing. Conditional Ratings. The designation "Con." followed by a rating indicated bonds for which the security depends upon the completion of some act or the fulfillment of some condition. These are bonds secured by (a) earnings of projects under construction, (b) earnings of projects unseasoned in operating experience, (c) rentals which begin when facilities are completed, or (d) payments to which some other limiting condition attaches. Parenthetical rating denotes probable credit stature upon completion of construction or elimination of basis of condition. Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's believes possess the strongest investment attributes are designated by the symbols Aa 1, A 1, Baa 1, Ba 1, and B 1. Commercial Paper: Moody's employs the following three designations, all judged to be investment grade, to indicate the relative repayment capacity of rated issuers: Prime-1 Highest Quality Prime 2 Higher Quality Prime-3 High Quality If an issuer represents to Moody's that its commercial paper obligations are supported by the credit of another entity or entities, Moody's, in assigning ratings to such issuers, evaluates the financial strength of the indicated affiliated corporations, commercial banks, insurance companies, foreign governments, or other entities, but only as one factor in the total rating assessment. S&P Ratings AAA--Bonds rated AAA have the highest rating. The obligor's capacity to meet its financial commitment on the bond is extremely strong. A-2 AA--Bonds rated AA differ from AAA bonds only in small degree. The obligor's capacity to meet its financial commitment on the bond is very strong. A--Bonds rated A are somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than bonds in higher-rated categories. However, the obligor's capacity to meet its financial commitment on the bond is still strong. BBB--Bonds rated BBB exhibit adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the bond. BB--B--CCC--CC and C--Bonds rated BB, B, CCC, CC and C are regarded as having significant speculative characteristics. BB indicates the lowest degree of speculation among such bonds and C the highest degree of speculation. While such bonds will likely have some quality and protective characteristics, these may be outweighed by large uncertainties or major exposures to adverse conditions. In order to provide more detailed indications of credit quality, S&P's bond letter ratings described above (except for AAA category) may be modified by the addition of a plus or a minus sign to show relative standing within the rating category. Provisional Ratings. The letter "p" indicates that the rating is provisional. A provisional rating assumes the successful completion of the project being financed by the debt being rated and indicates that payment of debt service requirements is largely or entirely dependent upon the successful and timely completion of the project. This rating, however, although addressing credit quality subsequent to completion of the project, makes no comment on the likelihood of, or the risk of default upon the failure of, such completion. The investor should exercise his own judgment with respect to such likelihood and risk. Commercial Paper: A. Issues assigned this highest rating are regarded as having the greatest capacity for timely payment. Issues in this category are further refined with the designations 1, 2 and 3 to indicate the relative degree of safety. A-1. This designation indicates that the degree of safety regarding timely payment is either overwhelming or very strong. Those issues determined to possess overwhelming safety characteristics are designated A-1+. A-3 PART C OTHER INFORMATION ITEM 15. Indemnification. Section 2-418 of the General Corporation Law of Maryland authorizes the registrant to indemnify its directors and officers except under specified circumstances. Article VII of Registrant's Articles of Incorporation (Exhibit (a)(1), (2) and (3) to the registration statement, which are incorporated herein by reference) and Section 3.15 of Article III of the Registrant's Bylaws (exhibit (b) to the registration statement, which is incorporated herein by reference) provide in effect that the Registrant shall provide certain indemnification of its directors and officers, directors, officers, agents and employees, respectively. In accordance with Section 17(h) of the Investment Company Act, these provisions of the Articles of Incorporation and Bylaws shall not protect any person against any liability to the registrant or its shareholders to which he or she would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his or her office. Insofar as indemnification for liabilities arising under the Securities Act of 1933 (the "Securities Act") may be permitted to directors, officers, and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer, or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question of whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. ITEM 16. Exhibits Exhibit Number Description (1)(a) Articles of Incorporation of the Registrant. (b) (1)(b) Articles of Amendment dated February 12, 1998. (c) (1)(c) Articles of Amendment and Articles Supplementary dated August 3, 2001. (c) (2) Bylaws. (b) (3) Not applicable. (4) Agreement and Plan of Reorganization dated November 20, 2002, among Kenilworth Fund, Inc. and AHA Investment Funds, Inc., and, solely for the purposes of paragraph 9.2 thereof, each of CCM Advisors LLC and Institutional Portfolio Services, Ltd. (filed as Appendix A to Part A of this registration statement). (5) Article V, Sections 2, 3 and 4, Article VI and Article VIII of the Articles of Incorporation, Article Second of the Articles Supplementary, and Article 2, Sections 2.3, 2.4 and 2.6 of the Bylaws, each define the rights of shareholders. (6)(a) Corporate Management Agreement between the Registrant and CCM Advisors LLC. (c) (6)(b) Portfolio Advisory Agreement between the Registrant and Patterson & Associates. (c) (7) Distribution Agreement between the Registrant and Quasar Distributors, LLC. (e) (8) Not Applicable. (9)(a) Custody Agreement between the Registrant and U.S. Bank, N.A. (e) (9)(b) Amendment to Custody Agreement between the Registrant and U.S. Bank, N.A. dated January 1, 2002. (e) (10)(a) Rule 12b-1 Plan for Class A Shares. (c) (10)(b) Rule 12b-1 Plan for Institutional Servicing Class Shares. (c) (10)(c) Multiple Class Plan pursuant to Rule 18f-3. (c) (11) Opinion and Consent of Hogan & Hartson, L.L.P. (12) Opinion and Consent of Bell, Boyd & Lloyd LLC on Tax Matters and Consequences to Shareholders. (13)(a) Transfer Agency Servicing Agreement between the Registrant and U.S. Bancorp Fund Services LLC. (e) (13)(b) Amendment to Transfer Agency Servicing Agreement between the Registrant and U.S. Bancorp Fund Services LLC dated January 1, 2002. (e) (13)(c) Fund Accounting Servicing Agreement between the Registrant and U.S. Bancorp Fund Services LLC. (e) (13)(d) Amendment to Fund Accounting Servicing Agreement between the Registrant and U.S. Bancorp Fund Services LLC dated January 1, 2002. (e) (13)(e) Administration Agreement between the Registrant and CCM Advisors, LLC. (e) (13)(f) Third Party Feeder Fund Agreement among Registrant and CCM Advisors Funds. (e) (14) Consent of Ernst & Young LLP. (15) Not Applicable. (16) Not Applicable. (17)(a) Code of Ethics of AHA Investment Funds, Inc. and CCM Advisors LLC. (d) (17)(b) Code of Ethics of CCM Advisors, LLC and CCM Advisors Funds. Previously filed. Incorporated by reference to Exhibit (17)(a) filed with Amendment No. 1 to CCM Advisors Funds' registration statement, Investment Company Act file 811-10241, filed on November 1, 2001. (17)(c) Code of Ethics of Cambiar Investors, Inc. Previously filed. Incorporated by reference to Exhibit (17)(b) filed with Amendment No. 1 to CCM Advisors Funds' registration statement, Investment Company Act file 811-10241, filed on November 1, 2001. (17)(d) Code of Ethics of Freeman Associates Investment Management LLC. Previously filed. Incorporated by reference to Exhibit (17)(c) filed with Amendment No. 1 to CCM Advisors Funds' registration statement, Investment Company Act file 811-10241, filed on November 1, 2001. (17)(e) Code of Ethics of KCM Investment Advisors. (e) (17)(f) Code of Ethics of Patterson Capital Corp. Previously filed. Incorporated by reference to Exhibit (17) (e) filed with Amendment No. 1 to CCM Advisors Funds' registration statement, Investment Company Act file 811-10241, filed on November 1, 2001. (17)(g) Code of Ethics of Pyrford International PLC. Previously filed. Incorporated by reference to Exhibit (17)(f) filed with Amendment No. 1 to CCM Advisors Funds' registration statement, Investment Company Act file 811-10241, filed on November 1, 2001. (17)(h) Code of Ethics of Robert W. Baird & Co. Incorporated. Previously filed. Incorporated by reference to Exhibit (17)(g) filed with Amendment No. 1 to CCM Advisors Funds' registration statement, Investment Company Act file 811-10241, filed on November 1, 2001. (17)(i) Code of Ethics of Western Asset Management. Previously filed. Incorporated by reference to Exhibit (17)(h) filed with Amendment No. 1 to CCM Advisors Funds' registration statement, Investment Company Act file 811-10241, filed on November 1, 2001. (17)(j) Form of Proxy Card of Kenilworth Fund, Inc. - ---------------------------- (a) Previously filed. Incorporated by reference to the post-effective amendment no. 17 to Registrant's registration statement, Securities Act file number 33-21969 (the "Registration Statement"), filed on August 31, 2000. (b) Previously filed. Incorporated by reference to the post-effective amendment no. 18 to Registrant's Registration Statement filed on October 31, 2000. (c) Previously filed. Incorporated by reference to the post-effective amendment no. 19 to Registrant's Registration Statement filed on August 3, 2001. (d) Previously filed. Incorporated by reference to the post-effective amendment no. 20 to Registrant's Registration Statement filed on November 1, 2001. (e) Previously filed. Incorporated by reference to the post-effective amendment no. 22 to Registrant's Registration Statement filed on November 1, 2002. ITEM 17. Undertakings. (1) The undersigned Registrant agrees that prior to any public reoffering of the securities registered through the use of a prospectus which is a part of this Registration Statement by any person or party who is deemed to be an underwriter within the meaning of Rule 145(c) of the Securities Act, the reoffering prospectus will contain the information called for by the applicable registration form for reofferings by persons who may be deemed underwriters, in addition to the information called for by the other items of the applicable form. (2) The undersigned Registrant agrees that every prospectus that is filed under paragraph (1) above will be filed as a part of an amendment to this Registration Statement and will not be used until the amendment is effective, and that, in determining any liability under the 1933 Act, each post-effective amendment shall be deemed to be a new registration statement for the securities offered therein, and the offering of the securities at that time shall be deemed to be the initial bona fide offering of them. SIGNATURES As required by the Securities Act of 1933, this registration statement has been signed on behalf of the Registrant, in the city of Chicago, and the state of Illinois on the 20th day of November, 2002. AHA INVESTMENT FUNDS, INC. By: /s/ Douglas D. Peabody ----------------------------------- Douglas D. Peabody, President As required by the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the date indicated. Name Title Date /s/ Anthony J. Burke Director ) - ------------------------ Anthony J. Burke ) ) /s/ Charles V. Doherty Director ) - ------------------------ Charles V. Doherty ) ) /s/ Frank A. Ehmann Director ) - ------------------------ Frank A. Ehmann ) ) Director ) - ------------------------ Richard John Evans ) ) /s/ Gregory Francoeur Treasurer (chief ) - ------------------------ accounting officer) Gregory Francoeur ) ) November 20th, 2002 ) /s/ Douglas D. Peabody Director and President ) - ------------------------ Douglas D. Peabody (principal executive ) officer) ) ) /s/ John D. Oliverio Director ) - ------------------------ John D. Oliverio ) ) /s/ Edward M. Roob Director ) - ------------------------ Edward M. Roob ) ) /s/ Timothy G. Solberg Director and Secretary ) - ------------------------ Timothy G. Solberg ) ) /s/ John L. Yoder Director ) - ------------------------ John L. Yoder ) SIGNATURES As required by the Securities Act of 1933, CCM Advisors Funds has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Chicago, and state of Illinois on the 20th day of November, 2002. CCM ADVISORS FUNDS By /s/ Douglas D. Peabody ------------------------ Douglas D. Peabody, President As required by the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the date indicated. Name Title Date /s/ Charles V. Doherty Trustee, CCM Advisors ) - ------------------------ Charles V. Doherty Funds ) ) ) /s/ Frank A. Ehmann Trustee, CCM Advisors ) - ------------------------ Frank A. Ehmann Funds ) ) ) ) /s/ Gregory Francoeur Treasurer (chief ) November 20th, 2002 - ------------------------ Gregory Francoeur accounting officer), ) CCM Advisors Funds ) ) /s/ John D. Oliverio Trustee, CCM Advisors ) - ------------------------ John D. Oliverio Funds ) ) ) /s/ Douglas D. Peabody Trustee and President ) - ------------------------ Douglas D. Peabody (principal executive ) officer), CCM Advisors ) Funds ) ) /s/ Edward M. Roob Trustee, CCM Advisors ) - ------------------------ Edward M. Roob Funds ) Index of Exhibits Filed with this Registration Statement Exhibit Number Description - ---------------- --------------------------------------------------------------- (4) Agreement and Plan of Reorganization dated November 20, 2002, among Kenilworth Fund, Inc. and AHA Investment Funds, Inc., and, solely for the purposes of paragraph 9.2 thereof, each of CCM Advisors LLC and Institutional Portfolio Services, Ltd. (filed as Appendix A to Part A of this registration statement). (11) Opinion and Consent of Hogan & Hartson, L.L.P. (12) Opinion and Consent of Bell, Boyd & Lloyd LLC on Tax Matters and Consequences to Shareholders. (14) Consent of Ernst & Young LLP. (17)(j) Form of Proxy Card. EX-99.11 OPIN COUNSL 3 secopnion.txt OPINION OF HOGAN & HARTSON LLP November 20, 2002 Board of Directors AHA Investment Funds, Inc. 190 South LaSalle Street - Suite 2800 Chicago, IL 60606 Ladies and Gentlemen: We are acting as special Maryland counsel to AHA Investment Funds, Inc., a Maryland corporation (the "Company"), in connection with its registration statement on Form N-14, as amended (the "Registration Statement"), filed with the Securities and Exchange Commission relating to the proposed public offering of an indefinite number of Class A shares of the Company's common stock, par value $.01 per share of the AHA Diversified Equity Fund series of capital stock (the "Shares"), all of which Shares are to be offered and sold by the Company pursuant to an Agreement and Plan of Reorganization dated as of November 20, 2002 among the Company and Kenilworth Fund, Inc. and, solely for the purposes of paragraph 9.2 thereof, each of CCM Advisors LLC and Institutional Portfolio Services, Ltd. (the "Plan of Reorganization"). This opinion letter is furnished to you at your request to enable you to fulfill the requirements of Exhibit 11 of Form N-14 under the Investment Company Act of 1940, as amended, in connection with the Registration Statement. For purposes of this opinion letter, we have examined copies of the following documents: 1. An executed copy of the Registration Statement. 2. An executed copy of the Plan of Reorganization. 3. The Charter of the Company, as certified by the Maryland State Department of Assessments and Taxation on October 23, 2002 and by the Secretary of the Company on the date hereof as being complete, accurate, and in effect. 4. The Bylaws of the Company, as certified by the Secretary of the Company on the date hereof as being complete, accurate, and in effect. 5. Resolutions of the Board of Directors of the Company adopted at a meeting held on November 20, 2002, as certified by the Secretary of the Company on the date hereof as being complete, accurate, and in effect, relating to the issuance and sale of the Shares and arrangements in connection therewith. In our examination of the aforesaid documents, we have assumed the genuineness of all signatures, the legal capacity of all natural persons, the accuracy and completeness of all documents submitted to us, the authenticity of all original documents, and the conformity to authentic original documents of all documents submitted to us as copies (including telecopies). This opinion letter is given, and all statements herein are made, in the context of the foregoing. This opinion letter is based as to matters of law solely on the Maryland General Corporation Law, as amended. We express no opinion herein as to any other laws, statutes, ordinances, rules, or regulations. As used herein, the term "Maryland General Corporation Law, as amended" includes the statutory provisions contained therein, all applicable provisions of the Maryland Constitution and reported judicial decisions interpreting these laws. Based upon, subject to and limited by the foregoing, we are of the opinion that following (i) effectiveness of the Registration Statement, and (ii) issuance and delivery of the Shares in certificated or uncertificated form and in an amount that together with then issued shares would not exceed the total authorized shares of Class A Common Stock of the AHA Diversified Fund series of capital stock under the Company's Charter and as contemplated by the Plan of Reorganization, the Shares will be validly issued, fully paid and nonassessable. This opinion letter has been prepared for your use in connection with the Registration Statement and speaks as of the date hereof. We assume no obligation to advise you of any changes in the foregoing subsequent to the delivery of this opinion letter. We hereby consent to the filing of this opinion letter as Exhibit 11 to the Registration Statement. In giving this consent, we do not thereby admit that we are an "expert" within the meaning of the Securities Act of 1933, as amended. Very truly yours, /s/ Hogan & Hartson L.L.P. ---------------------------- HOGAN & HARTSON L.L.P. EX-99.12 TAX OPINION 4 opinion.txt OPINION OF BELL BOYD & LLOYD November 20, 2002 The Boards of Directors AHA Investment Funds, Inc. Kenilworth Fund, Inc. 190 South LaSalle Street 21 South Clark Street, Suite 2594 Chicago, Illinois 60603 Chicago, Illinois 60603 Re: Federal Income Tax Consequences of the Transfer of Substantially All the Assets of Kenilworth Fund, Inc. to AHA Diversified Equity Fund Ladies and Gentlemen: You have requested our opinion concerning the Federal income tax consequences of the transactions described below. Kenilworth Fund, Inc. ("Acquired Fund"), is an Illinois corporation. AHA Diversified Equity Fund ("Acquiring Fund") is a series of AHA Investment Funds, Inc., a Maryland corporation. Pursuant to the Agreement and Plan of Reorganization dated as of November 20, 2002 (the "Agreement"), which is described in greater detail in the preliminary Proxy Statement/Prospectus dated November 20, 2002 (the "Proxy Statement"), Acquired Fund will transfer all its assets to Acquiring Fund in exchange for shares of Acquiring Fund and the assumption by Acquiring Fund of all the liabilities of Acquired Fund. Acquired Fund will liquidate and distribute the shares of Acquiring Fund among its shareholders in exchange for their Acquired Fund shares. These transactions are referred to as the "Reorganization." Capitalized terms not otherwise defined herein shall have the meanings assigned to them in the Agreement or the Proxy Statement. In rendering the opinions expressed herein, we have examined such documents as we have deemed appropriate, including the Agreement and the Proxy Statement. In our examination of documents, we have assumed, with your consent, that all documents submitted to us as photocopies or telecopies faithfully reproduce the originals thereof, that such originals are authentic, that all such documents have been or will be duly executed to the extent required, and that all statements of fact set forth in such documents are accurate. In addition, we have obtained such additional information and representations as we have deemed relevant and necessary through consultation with various representatives of the Acquired Fund and Acquiring Fund. We have assumed, with your consent, that the following statements are true and correct on the date hereof and will be true at the effective date of the Reorganization: 1. The Reorganization will be consummated in compliance with the material terms of the Agreement, none of the material terms and conditions therein will have been waived or modified, and neither of the Acquired Fund nor Acquiring Fund has any plan or intention to waive or to modify any such material term or condition. 2. The fair market value of the Acquiring Fund shares and other consideration that will be received by Acquired Fund will be approximately equal to the fair market value of the assets transferred in exchange therefor. 3. Acquiring Fund will acquire at least 90 percent of the fair market value of the net assets and at least 70 percent of the fair market value of the gross assets held by Acquired Fund immediately prior to the Reorganization. For purposes of this assumption, amounts used by Acquired Fund or Acquiring Fund to pay reorganization expenses, and all redemptions and distributions (except for regular, normal dividends, distributions of net realized capital gain or transactions in the ordinary course of Acquired Fund's business as a regulated investment company) made by Acquired Fund immediately preceding the Reorganization will be included as assets held by Acquired Fund immediately prior to the Reorganization. 4. Acquiring Fund has no plan or intention to reacquire any of the shares of Acquiring Fund issued in the Reorganization except through redemptions in the ordinary course of its business as a regulated investment company. 5. Acquiring Fund has no plan or intention to issue additional shares following the transaction except in the ordinary course of its business as a regulated investment company. 6. Acquiring Fund has no plan or intention following the Reorganization to sell or otherwise to dispose of any of the assets of Acquired Fund acquired in the Reorganization, except for dispositions made in the ordinary course of its business as a regulated investment company. For purposes of this assumption, Acquiring Fund has no plan or intention to transfer any of the assets of Acquired Fund acquired in the Reorganization to a "master fund" treated as a partnership for Federal income tax purposes unless, immediately following such a transfer, Acquiring Fund's percentage ownership of such master fund is at least 90 percent. 7. The liabilities of Acquired Fund assumed by Acquiring Fund and the liabilities to which the transferred assets of Acquired Fund are subject were incurred by Acquired Fund in the ordinary course of its business. 8. Following the Reorganization, Acquiring Fund will continue the historic business of Acquired Fund or use a significant portion of Acquired Fund's historic business assets in a business, and Acquiring Fund and Acquired Fund will have substantially identical investment strategies and objectives. 9. In connection with the Reorganization, the Acquiring Fund will not bear any of the expenses of Acquired Fund, nor will Acquired Fund bear any of the expenses of the Acquiring Fund, other than expenses directly and solely related to the Reorganization. 10. There is no intercorporate indebtedness existing between Acquiring Fund and Acquired Fund that was, or will be, issued, acquired, or settled at a discount. 11. Acquired Fund and Acquiring Fund are regulated investment companies and Acquiring Fund intends to continue to qualify as a regulated investment company. 12. The fair market value of the assets of Acquired Fund transferred to Acquiring Fund will equal or exceed the sum of the liabilities assumed by Acquiring Fund, plus the amount of liabilities, if any, to which the transferred assets are subject. 13. Acquired Fund is not under the jurisdiction of a court in a case under Title 11 of the United States Code or a receivership, foreclosure, or similar proceeding in a federal or state court. 14. Acquired Fund will dissolve and distribute its assets promptly after the effective date of the transfer of its assets to and the assumption of its liabilities by Acquiring Fund. Based upon the foregoing, it is our opinion that: A. The acquisition by Acquiring Fund of the Assets in exchange for Acquiring Fund's assumption of the Liabilities and issuance of the Acquisition Shares, followed by the distribution by Acquired Fund of such Acquisition Shares to the shareholders of Acquired Fund in exchange for their shares of Acquired Fund, all as provided in Article 1 of the Agreement, will constitute a reorganization within the meaning of Section 368(a) of the Code, and Acquired Fund and Acquiring Fund will each be "a party to a reorganization" within the meaning of Section 368(b) of the Code; B. Under Sections 361 and 357(a) of the Code, no gain or loss will be recognized by Acquired Fund (i) upon the transfer of the Assets to Acquiring Fund in exchange for the Acquisition Shares and the assumption of the Liabilities by Acquiring Fund or (ii) upon the distribution of the Acquisition Shares to the shareholders of Acquired Fund as contemplated in Article 1 of the Agreement; C. Under Section 1032 of the Code, no gain or loss will be recognized by Acquiring Fund upon the receipt of the Assets in exchange for the assumption of Liabilities and issuance of the Acquisition Shares as contemplated in Article 1 of the Agreement; D. Under Section 362 of the Code, the tax basis of the Assets in the hands of Acquiring Fund will be the same as the tax basis of the Assets in the hands of Acquired Fund immediately prior to the transfer, and under Section 1223(1) of the Code, the holding period of the Assets in the hands of Acquiring Fund will include the period during which the Assets were held by Acquired Fund; E. Under Section 354 of the Code, Acquired Fund Shareholders will recognize no gain or loss upon the exchange of all of their shares of Acquired Fund for the Acquisition Shares; F. Under Section 358 of the Code, the tax basis of the Acquisition Shares to be received by each Acquired Fund Shareholder will be the same in the aggregate as the aggregate tax basis of the shares of Acquired Fund surrendered in exchange therefor; G. Under Section 1223(1) of the Code, the holding period of the Acquisition Shares to be received by an Acquired Fund Shareholder will include the period during which the shares of Acquired Fund surrendered in exchange therefor were held, provided such shares of Acquired Fund were held as capital assets on the date of the exchange; and H. Acquiring Fund will succeed to and take into account the items of Acquired Fund described in Section 381(c) of the Code, subject to the conditions and limitations specified in Sections 381, 382, 383 and 384 of the Code and the regulations thereunder. The opinions expressed herein are based upon existing statutory, regulatory, and judicial authority, any of which may be changed at any time with retroactive effect. In addition, our opinions are based on the documents that we have examined, the additional information that we have obtained, and the statements of fact set out herein that we have assumed, with your consent, to be true and correct. Our opinions cannot be relied upon if any of the facts contained in such documents or in any such additional information is, or later becomes, inaccurate or if any of the assumed facts set out herein is, or later becomes, inaccurate. Finally, our opinions are limited to the tax matters specifically covered thereby, and we have not been asked to address, nor have we addressed, any other tax consequences of the Reorganization. Very truly yours, /s/ Bell, Boyd & Lloyd LLC EX-99.14 OTH CONSENT 5 consent.txt CONSENT OF AUDITORS CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference of our report dated July 29, 2002 on the AHA Diversified Equity Fund (a series of the AHA Investment Funds, Inc.) in the Registration Statement (Form N-14) and related Prospectus/Proxy Statement filed with the Securities and Exchange Commission in this Registration Statement under the Securities Act of 1933. ERNST & YOUNG LLP Chicago, Illinois November 18, 2002 EX-99.17 (AS APPROP) 6 proxycard.txt PROXY CARD PLEASE VOTE PROMPTLY Your vote is important, no matter how many shares you own. Please vote on the reverse side of this proxy card and sign in the space(s) provided. Return your completed proxy card in the enclosed envelope today. You may receive additional proxies for other accounts. These are not duplicates; you should sign and return each proxy card in order for your votes to be counted. THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS. The signers of this proxy hereby appoint each of Savitri P. Pai and Mohini C. Pai, or either of them, proxy agents of the signers, with power of substitution, to vote at the Special Meeting of Shareholders to be held at 3:00 p.m. (Chicago time), at the Fund's offices at 21 South Clark Street, Suite 2594, Chicago, Illinois 60603, on Friday, December 27, 2002, and at any adjournments, as specified herein and in accordance with their best judgment on any other business that may properly come before this meeting. AFTER CAREFUL REVIEW, THE BOARD OF DIRECTORS UNANIMOUSLY HAS RECOMMENDED A VOTE "FOR" THE PROPOSAL. ------------------------------------------------------------ KENILWORTH FUND, INC. ------------------------------------------------------------ Please be sure to sign and date this proxy. ------------------------------------------------------------ - --------------------------- --------------------- --------- Shareholder sign here Co-owner sign here Date THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED BELOW AND, ABSENT DIRECTION, WILL BE VOTED FOR PROPOSAL 1 LISTED BELOW. THIS PROXY WILL BE VOTED IN ACCORDANCE WITH THE PROXY AGENT'S BEST JUDGMENT AS TO ANY OTHER MATTER THAT MAY PROPERLY COME BEFORE THE MEETING. THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE PROPOSAL: 1. Proposal to approve the Agreement and Plan of Reorganization between the Kenilworth Fund, Inc. and the AHA Investment Funds, Inc. and the transactions contemplated thereby. [ ] FOR [ ] AGAINST [ ] ABSTAIN MARK BOX AT RIGHT FOR ADDRESS CHANGE AND NOTE NEW ADDRESS AT LEFT [ ] PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY PROMPTLY USING THE ENCLOSED ENVELOPE. Please sign exactly as name or names appear hereon. Joint owners should each sign personally. When signing as attorney, executor, administrator, trustee or guardian, please give full title as such. If a corporation, please sign in corporate name by President or other authorized officer. If a partnership, please sign in partnership name by authorized person. The enclosed proxy statement provides details on important issues affecting your fund. THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THE PROPOSAL. EX-99.17 (AS APPROP) 7 ahaclaprosp.txt PROSPECTUS - AHA FUNDS CLASS A AHA INVESTMENT FUNDS, INC. AHA LIMITED MATURITY FIXED INCOME FUND AHA FULL MATURITY FIXED INCOME FUND AHA BALANCED FUND AHA DIVERSIFIED EQUITY FUND AHA U.S. GROWTH EQUITY FUND AHA INTERNATIONAL CORE EQUITY FUND SUPPLEMENT DATED November 1, 2002 TO PROSPECTUS DATED November 1, 2002 Shares of AHA U.S. Growth Equity Fund and AHA International Core Equity Fund are not currently available for purchase as these Funds have not yet commenced operations. AHA INVESTMENT FUNDS, INC. AHA LIMITED MATURITY FIXED INCOME FUND AHA FULL MATURITY FIXED INCOME FUND AHA BALANCED FUND AHA DIVERSIFIED EQUITY FUND AHA U.S. GROWTH EQUITY FUND AHA INTERNATIONAL CORE EQUITY FUND CLASS A SHARES P R O S P E C T U S November 1, 2002 190 South LaSalle Street, Suite 2800 Chicago, Illinois 60603 1-800-445-1341 --------------- Be sure to read this prospectus before you invest and retain it for future reference. This prospectus presents essential facts about the Funds, including investment strategies, management fees and services available to you as an investor. The Securities and Exchange Commission has not approved or disapproved any of the Funds' shares or determined whether this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. --------------- TABLE OF CONTENTS Page INVESTMENTS, RISKS AND PERFORMANCE.............................................1 AHA LIMITED MATURITY FIXED INCOME FUND................................2 AHA FULL MATURITY FIXED INCOME FUND...................................5 AHA BALANCED FUND.....................................................8 AHA DIVERSIFIED EQUITY FUND..........................................11 AHA U.S. GROWTH EQUITY FUND..........................................14 AHA INTERNATIONAL CORE EQUITY FUND...................................15 PRINCIPAL RISK CONSIDERATIONS.................................................17 ADDITIONAL INFORMATION ABOUT FUND INVESTMENTS.................................19 FEES AND EXPENSES.............................................................19 SHAREHOLDER INFORMATION.......................................................21 Pricing of Fund Shares...............................................21 Investment Minimums..................................................21 How to Buy Shares....................................................22 Sales Charges........................................................24 How to Exchange Shares...............................................25 How to Sell Shares...................................................27 Policy on Trading of Fund Shares.....................................29 Automatic Redemption of Small Accounts...............................29 Reporting to Shareholders............................................30 Distribution and Service Fees........................................30 MASTER/FEEDER STRUCTURE.......................................................30 MANAGEMENT OF THE FUNDS.......................................................31 Investment Adviser...................................................31 Investment Managers..................................................32 DIVIDENDS, DISTRIBUTIONS AND TAXES............................................37 FINANCIAL HIGHLIGHTS..........................................................40 Past Performance of KCM......................................................A-1 Past Performance of Pyrford..................................................B-1 i INVESTMENTS, RISKS AND PERFORMANCE Each Fund is a series of AHA Investment Funds, Inc. (the "Funds"). The Funds are designed to provide investors with a broad range of investment choices and strategies and offer three classes of shares, Class A Shares, Class I Shares and Institutional Servicing Class Shares. This prospectus describes Class A Shares, which are offered through broker/dealers and financial institutions who hold such shares for the benefit of their customers, and to professionals and organizations engaged in the healthcare industry, including (but not limited to) employee benefit plans, pension and profit-sharing plans and hospital insurance funds of such organizations. Class I Shares and Institutional Servicing Class Shares are currently offered only to participants in the American Hospital Associate Investment Program, member hospitals of the American Hospital Association ("AHA"), as well as their affiliated organizations and organizations within the healthcare industry, including (but not limited to) employee benefit plans, pension and profit-sharing plans and hospital insurance funds of such investors and are offered through a separate prospectus. Each Fund invests substantially all of its assets in a separate series of a mutual fund called CCM Advisors Funds (the "Master Fund"). Each series of the Master Fund (each a "Portfolio") has substantially similar objectives, strategies and policies as a corresponding Fund. The following Fund summaries identify each Fund's investment objective and principal investment strategies. Other investment strategies and techniques are described in the Statement of Additional Information. 1 AHA LIMITED MATURITY FIXED INCOME FUND Investment Objective The Fund seeks to provide a high level of current income, consistent with the preservation of capital and liquidity. Principal Investment Strategies The Fund invests substantially all of its assets in the Limited Maturity Fixed Income Master Portfolio. Under normal circumstances, the Portfolio invests at least 80% of its net assets plus any borrowings for investment purposes (at market value at the time of purchase) in: (i) fixed income securities that the U.S. Government, its agents or instrumentalities issue or guarantee, and (ii) money market instruments and non-convertible fixed income securities of other issuers having one of the three highest ratings of either Moody's Investors Service, Inc. ("Moody's") or Standard & Poor's Corporation, a division of The McGraw-Hill Companies ("S&P"). The dollar-weighted average maturity of the Portfolio is normally less than three years. In no event will the dollar-weighted average maturity of the Portfolio exceed five years. There is no limit on the maturities of individual securities. The Portfolio's Investment Manager determines which securities to purchase or sell and adjusts the Portfolio's average maturity based upon a variety of factors aimed at controlling risk while seeking to capture market opportunities. These factors include an analysis of interest rates and yields, the quality of particular securities, and the comparative risks and returns of alternative investments. The Portfolio's Investment Manager may sell a security if the security's creditworthiness or rating has deteriorated. However, as long as a security continues to meet the Fund's other criteria, the Portfolio's Investment Manager is not required to sell a security if the security's rating or credit quality deteriorates after its purchase. Principal Investment Risks The principal risks of investing in the Fund are listed below. o Credit Risk o Interest Rate Risk o Prepayment Risk o Management Risk Please see "Principal Risk Considerations" following the Fund summaries for a description of these and other risks that may be applicable to your investment. 2 Performance The bar chart below shows the changes in the Fund's performance from yearto year. When you consider the Fund's performance information, please remember that past performance is not necessarily an indication of how the Fund will perform in the future. Fund performance may be materially different by the time you receive this prospectus. For more current performance information, call 1-800-445-1341. [BAR CHART APPEARS HERE] Year-by-Year Total Returns (as of 12/31 each year) - -------------------------- Class I Shares(1) 1992: 3.59% 1993: 4.96% 1994: 0.33% 1995: 10.54% 1996: 4.09% 1997: 5.93% 1998: 6.31% 1999: 2.75% 2000: 7.61% 2001: 8.19% During the periods included in this bar chart, the highest and lowest quarterly returns were 3.22% and -0.69%, respectively, for the quarters ended March 1995 and March 1992. The year-to-date total return as of September 30, 2002 was 4.41% for Class I Shares. (1) Because Class A Shares have not yet been offered to the public, the information provided in the bar chart represents only the performance of Class I Shares, one of the Fund's other classes of shares, which are offered to institutional investors by a separate prospectus. Class A Shares and Class I Shares would have substantially similar annual returns because the shares are invested in the same portfolio of securities. However, because the classes do not have the same expenses, the expense ratio and the total return of Class A Shares will differ from the Class I Shares. The table on the next page compares the Fund's average annual total returns (before and after taxes) and the change in value of a broad measure of market performance over various periods ended December 31, 2001. After-tax returns are intended to show the impact of assumed federal income taxes on an investment in the Fund's Class I Shares. The Fund's "Return After Taxes on Distributions" shows the effect of taxable distributions (dividends and capital gain distributions), but assumes that you still hold the Fund shares at the end of the period and so do not have any taxable gain or loss on your investment in shares of the Fund. The Fund's "Return After Taxes on Distributions and 3 Sale of Fund Shares" shows the effect both of taxable distributions and any taxable gain or loss that would be realized if the Fund shares were purchased at the beginning and sold at the end of the specified period. After-tax returns are calculated using the highest individual federal income tax rate in effect at the time of each distribution and assumed sale of Fund shares, but do not include the impact of state and local taxes. In some instances, the "Return After Taxes on Distributions and Sale of Fund Shares" may be greater than the "Return Before Taxes" because you are assumed to be able to use any capital loss on the sale of Fund shares to offset other taxable capital gains. Your actual after-tax returns depend on your own tax situation and may differ from those shown. After-tax returns reflect past tax effects and are not predictive of future tax effects. After-tax returns are not relevant to investors who hold their Fund shares through tax-deferred arrangements such as 401(k) plans or individual retirement accounts or to investors who are tax-exempt. Average Annual Total Returns (for periods ended 12/31/01) Class I Shares(1) All returns reflect reinvested dividends. 1 Year 5 Years 10 Years ------ ------- -------- Limited Maturity Fixed Income Fund Return Before Taxes 8.19% 6.14% 5.39% Return After Taxes on Distributions 5.95% 3.80% 3.09% Return After Taxes on Distributions and Sale of Fund Shares 4.92% 3.68% 3.26% Merrill Lynch 1-3 Year Treasury Index(2) 8.31% 6.59% 6.10% Lehmann Brothers Government 1-3 Year Index(2) 8.53% 6.64% 6.03% (reflects no deduction for fees, expenses or taxes) (1) Because Class A Shares have not yet been offered to the public, the information provided in the table represents only the performance of Class I Shares, one of the Fund's other classes of shares, which are offered to institutional investors by a separate prospectus. Class A Shares and Class I Shares would have substantially similar annual returns because the shares are invested in the same portfolio of securities. However, because the classes do not have the same expenses, the expense ratio and the average annual total return of Class A Shares will differ from the Class I Shares. (2) Performance was previously compared against the Lehman Brothers Government 1-3 Year Index but was changed to the Merrill Lynch 1-3 Year Treasury Index because it is a more appropriate benchmark. The Merrill Lynch 1-3 Year Treasury Index is a subset of the Merrill Lynch Treasury Master Index. The maturity range on these securities is from one to three years. This index is available on a monthly basis in price-only and total return versions. The value was set at 100 on 12/31/1975. The Lehman Brothers Government 1-3 Year Index is an unmanaged index comprised of all publicly issued, non-convertible domestic debt of the U.S. government, or any agency thereof, or any quasi-federal corporation and of corporate debt guaranteed by the U.S. government. Only notes and bonds with a minimum outstanding principal of $1 million and a minimum maturity of one year are included. Lehman Brothers Government 1-3 Year Index is a trademark of Lehman Brothers, Inc. 4 AHA FULL MATURITY FIXED INCOME FUND Investment Objective The Fund seeks to provide the highest level of income consistent with long-term preservation of capital. Principal Investment Strategies The Fund invests substantially all of its assets in the Full Maturity Fixed Income Master Portfolio. The Portfolio uses multiple Investment Managers that each use distinct investment strategies to achieve the Portfolio's investment objective. Under normal circumstances, the Portfolio invests at least 80% of its net assets plus any borrowings for investment purposes (at market value at the time of purchase) in: (i) fixed income securities that the U.S. Government, its agents or instrumentalities issue or guarantee, and (ii) money market instruments and non-convertible fixed income securities of other issuers having one of the three highest ratings of Moody's or S&P. The Portfolio may invest up to 20% of its total assets at the time of purchase in securities that Moody's rates Baa or S&P rates BBB or which, if not rated, the Portfolio's Investment Managers determine are of comparable quality. The Portfolio has no minimum or maximum maturity for the securities it may purchase. The Portfolio's Investment Managers may vary the average maturity of the Portfolio's assets substantially and make buy and sell decisions based upon their individual analysis of prevailing interest rates and yields, the quality and value of particular securities, and the comparative risks and returns of alternative investments. The Portfolio's Investment Managers may sell a portfolio holding if the security's creditworthiness or rating has deteriorated. However, so long as a security continues to meet the Fund's other criteria, the Portfolio's Investment Manager is not required to sell a security if the security's rating or credit quality deteriorates after its purchase. Principal Investment Risks The principal risks of investing in the Fund are listed below. o Credit Risk o Interest Rate Risk o Prepayment Risk o Management Risk Please see "Principal Risk Considerations" following the Fund summaries for a description of these and other risks that may be applicable to your investment. 5 Performance The bar chart below shows the changes in the Fund's performance from year to year. When you consider the Fund's performance information, please remember that past performance is not necessarily an indication of how the Fund will perform in the future. Fund performance may be materially different by the time you receive this prospectus. For more current performance information, call 1-800-445-1341. [BAR CHART APPEARS HERE] Year-by-Year Total Returns (as of 12/31 each year) - -------------------------- Class I Shares(1) 1992: 5.70% 1993: 11.11% 1994: -3.74% 1995: 17.18% 1996: 2.24% 1997: 9.36% 1998: 8.11% 1999: -1.48% 2000: 10.72% 2001: 7.97% During the periods included in this bar chart, the highest and lowest quarterly returns were 5.88% and -3.11%, respectively, for the quarters ended June 1995 and March 1994. The year-to-date total return as of September 30, 2002 was 7.21% for Class I Shares. (1) Because Class A Shares have not yet been offered to the public, the information provided in the bar chart represents only the performance of Class I Shares, one of the Fund's other classes of shares, which are offered to institutional investors by a separate prospectus. Class A Shares and Class I Shares would have substantially similar annual returns because the shares are invested in the same portfolio of securities. However, because the classes do not have the same expenses, the expense ratio and the total return of Class A Shares will differ from the Class I Shares. The table on the next page compares the Fund's average annual total returns (before and after taxes) and the change in value of a broad measure of market performance over various periods ended December 31, 2001. After-tax returns are intended to show the impact of assumed federal income taxes on an investment in the Fund's Class I Shares. The Fund's "Return After Taxes on Distributions" shows the effect of taxable distributions (dividends and capital gain distributions), but assumes that you still hold the Fund shares at the end of the period and so do not have any taxable gain or loss on your investment in shares of the Fund. The Fund's "Return After Taxes on Distributions and Sale of Fund Shares" shows the effect both of taxable 6 distributions and any taxable gain or loss that would be realized if the Fund shares were purchased at the beginning and sold at the end of the specified period. After-tax returns are calculated using the highest individual federal income tax rate in effect at the time of each distribution and assumed sale of Fund shares, but do not include the impact of state and local taxes. In some instances, the "Return After Taxes on Distributions and Sale of Fund Shares" may be greater than the "Return Before Taxes" because you are assumed to be able to use any capital loss on the sale of Fund shares to offset other taxable capital gains. Your actual after-tax returns depend on your own tax situation and may differ from those shown. After-tax returns reflect past tax effects and are not predictive of future tax effects. After-tax returns are not relevant to investors who hold their Fund shares through tax-deferred arrangements such as 401(k) plans or individual retirement accounts or to investors who are tax-exempt. Average Annual Total Returns (for periods ended 12/31/01) Class I Shares (1) All returns reflect reinvested dividends. 1 Year 5 Years 10 Years ------ ------- -------- Full Maturity Fixed Income Fund Return Before Taxes 7.97% 6.84% 6.55% Return After Taxes on Distributions 5.62% 4.25% 3.70% Return After Taxes on Distributions and Sale of Fund Shares 4.81% 4.10% 3.98% Lehman Brothers Government/Corporate(2) Intermediate Total Return Index 8.98% 7.09% 6.81% Lehman Brothers Aggregate Bond Index(2) 8.42% 7.43% 7.23% (reflects no deduction for fees, expenses or taxes) (1) Because Class A Shares have not yet been offered to the public, the information provided in the table represents only the performance of Class I Shares, one of the Fund's other classes of shares, which are offered to institutional investors by a separate prospectus. Class A Shares and Class I Shares would have substantially similar annual returns because the shares are invested in the same portfolio of securities. However, because the classes do not have the same expenses, the expense ratio and the average annual total return of Class A Shares will differ from the Class I Shares. (2) Performance was previously compared against the Lehman Brothers Aggregate Bond Index but was changed to the Lehman Brothers Government/Corporate Intermediate Total Return Index because it is a more appropriate benchmark. The Lehman Brothers Government/Corporate Intermediate Total Return Index is a total return index consisting of investment grade corporate debt issues, as well as debt issues of U.S. government agencies and the U.S. Treasury. The debt issues all maintain maturities within a range of one to ten years. The Lehman Brothers Aggregate Bond Index is an unmanaged index generally representative of intermediate-term government bonds, investment grade corporate debt securities and mortgage-backed securities. The Lehman Brothers Aggregate Bond Index and The Lehman Brothers Government/Corporate Intermediate Total Return Index are trademarks of Lehman Brothers, Inc. 7 AHA BALANCED FUND Investment Objective The Fund seeks to provide a combination of growth of capital and income. Principal Investment Strategies The Fund invests substantially all of its assets in the Balanced Master Portfolio. The Portfolio uses multiple Investment Managers to obtain expertise in both the equity and fixed-income markets to achieve the Portfolio's investment objective. Under normal circumstances, the Portfolio invests no more than 75% of its net assets (at market value at the time of purchase) in common stocks that the Portfolio's Investment Managers believe offer long-term growth and/or income potential and at least 25% of its net assets in fixed income securities, some of which may be convertible into common stocks. Fixed income investments may include U.S. Government Securities, non-convertible debt of "investment grade" quality (e.g., that Moody's has rated Baa or higher or S&P has rated BBB or higher) and money market instruments. The Portfolio has no restrictions on market capitalization. The Portfolio's Investment Managers pursue the Portfolio's objectives in a way that seeks to reduce the magnitude and rapidity of short term movements in the net asset value of its shares. For the fixed income portion of the Portfolio, the Portfolio's Investment Managers may vary the average maturity of the Portfolio's assets substantially and make buy and sell decisions based upon their individual analysis of prevailing interest rates and yields, the quality and value of particular securities, and the comparative risks and returns of alternative investments. The Portfolio has no restrictions concerning the minimum or maximum maturity of its fixed income investments. For the equity portion of the Portfolio, the investment strategies of the Portfolio's Investment Managers will differ, but typically will emphasize securities that have one or more of the following characteristics: o prices they believe are significantly below the intrinsic value of the company; o favorable prospects for earnings growth; o above average return on equity and dividend yield; and o sound overall financial condition of the issuer. An Investment Manager may determine to sell a security when its target value is realized, its earnings deteriorate, changing circumstances affect the original reasons for a security's purchase, or more attractive investment alternatives are identified. Principal Investment Risks The principal risks of investing in the Fund are listed below. o Market Risk o Credit Risk o Interest Rate Risk o Prepayment Risk 8 o Management Risk Please see "Principal Risk Considerations" following the Fund summaries for a description of these and other risks that may be applicable to your investment. Performance The bar chart below shows the changes in the Fund's performance from year to year. When you consider the Fund's performance information, please remember that past performance is not necessarily an indication of how the Fund will perform in the future. Fund performance may be materially different by the time you receive this prospectus. For more current performance information, call 1-800-445-1341. [BAR CHART APPEARS HERE] Year-by-Year Total Returns (as of 12/31 each year) - -------------------------- Class I Shares(1) 1992: 5.06% 1993: 10.76% 1994: -1.93% 1995: 25.02% 1996: 18.05% 1997: 24.45% 1998: 8.83% 1999: 15.43% 2000: 1.61% 2001: 1.27% During the periods included in this bar chart, the highest and lowest quarterly returns were 12.71% and -8.39%, respectively, for the quarters ended December 1998 and September 1998. The year-to-date total return as of September 30, 2002 was -14.65% for Class I Shares. (1) Because Class A Shares have not yet been offered to the public, the information provided in the bar chart represents only the performance of Class I Shares, one of the Fund's other classes of shares, which are offered to institutional investors by a separate prospectus. Class A Shares and Class I Shares would have substantially similar annual returns because the shares are invested in the same portfolio of securities. However, because the classes do not have the same expenses, the expense ratio and the total return of Class A Shares will differ from the Class I Shares. The table on the next page compares the Fund's average annual total returns (before and after taxes) and the change in value of a broad measure of market performance over various periods ended December 31, 2001. After-tax returns are intended to show the impact of assumed federal income taxes on an investment in the Fund's Class I Shares. The Fund's "Return After Taxes on Distributions" shows the effect of taxable distributions (dividends and capital gain distributions), but assumes that you still hold the Fund shares at the end of the period and so do not have any taxable gain or loss on your investment in shares of the Fund. The Fund's "Return After Taxes on Distributions and Sale of Fund Shares" shows the effect both of taxable distributions and any 9 taxable gain or loss that would be realized if the Fund shares were purchased at the beginning and sold at the end of the specified period. After-tax returns are calculated using the highest individual federal income tax rate in effect at the time of each distribution and assumed sale of Fund shares, but do not include the impact of state and local taxes. In some instances, the "Return After Taxes on Distributions and Sale of Fund Shares" may be greater than the "Return Before Taxes" because you are assumed to be able to use any capital loss on the sale of Fund shares to offset other taxable capital gains. Your actual after-tax returns depend on your own tax situation and may differ from those shown. After-tax returns reflect past tax effects and are not predictive of future tax effects. After-tax returns are not relevant to investors who hold their Fund shares through tax-deferred arrangements such as 401(k) plans or individual retirement accounts or to investors who are tax-exempt. Average Annual Total Returns (for periods ended 12/31/01) Class I Shares(1) All returns reflect reinvested dividends. 1 Year 5 Years 10 Years ------ ------- -------- Balanced Fund Return Before Taxes 1.27% 9.98% 10.48% Return After Taxes on Distributions (0.40)% 4.46% 6.00% Return After Taxes on Distributions and Sale of Fund Shares 1.20% 6.17% 6.45% S&P 500(R)Stock Index(2) (11.86)% 10.71% 12.93% (reflects no deduction for fees, expenses or taxes) Lehman Brothers Aggregate Bond Index(2) 8.42% 7.43% 7.23% (reflects no deduction for fees, expenses or taxes) (1) Because Class A Shares have not yet been offered to the public, the information provided in the table represents only the performance of Class I Shares, one of the Fund's other classes of shares, which are offered to institutional investors by a separate prospectus. Class A Shares and Class I Shares would have substantially similar annual returns because the shares are invested in the same portfolio of securities. However, because the classes do not have the same expenses, the expense ratio and the average annual total return of Class A Shares will differ from the Class I Shares. (2) The S&P 500(R) Stock Index is a broad market-weighted average of U.S. blue-chip companies. The Lehman Brothers Aggregate Bond Index is an unmanaged index generally representative of intermediate-term government bonds, investment grade corporate debt securities and mortgage-backed securities. S&P 500(R) Stock Index is a registered trademark of McGraw-Hill, Inc. The Lehman Brothers Aggregate Bond Index is a trademark of Lehman Brothers, Inc. 10 AHA DIVERSIFIED EQUITY FUND Investment Objective The Fund seeks to provide long-term capital growth. Principal Investment Strategies The Fund invests substantially all of its assets in the Diversified Equity Master Portfolio. The Portfolio uses multiple Investment Managers that each use distinct investment styles and research techniques to achieve the Portfolio's investment objective. Under normal circumstances, the Portfolio invests at least 80% of its net assets plus any borrowings for investment purposes (at market value at the time of purchase) in common stocks that are diversified among various industries and market sectors. The Portfolio may also invest up to 20% of its net assets at the time of purchase in fixed income securities, including money market instruments, having one of the three highest ratings of Moody's or S&P. The Portfolio has no restrictions on market capitalization. The investment strategies of the Portfolio's Investment Managers will differ, but typically will emphasize securities that have one or more of the following characteristics: o prices they believe to be significantly below the intrinsic value of the company; o favorable prospects for earnings growth; o above average return on equity and dividend yield; and o sound overall financial condition of the issuer. An Investment Manager may determine to sell a security when its target value is realized, its earnings deteriorate, changing circumstances affect the original reasons for a security's purchase, or more attractive investment alternatives are identified. Principal Investment Risks The principal risks of investing in the Fund are listed below. o Market Risk o Credit Risk o Interest Rate Risk o Prepayment Risk o Management Risk Please see "Principal Risk Considerations" following the Fund summaries for a description of these and other risks that may be applicable to your investment. 11 Performance The bar chart below shows the changes in the Fund's performance from year to year. When you consider the Fund's performance information, please remember that past performance is not necessarily an indication of how the Fund will perform in the future. Fund performance may be materially different by the time you receive this prospectus. For more current performance information, call 1-800-445-1341. [BAR CHART APPEARS HERE] Year-by-Year Total Returns (as of 12/31 each year) - -------------------------- Class I Shares(1) 1992: 9.51% 1993: 10.02% 1994: -0.39% 1995: 33.73% 1996: 23.35% 1997: 33.64% 1998: 16.67% 1999: 20.98% 2000: -2.92% 2001: -2.05% During the periods included in this bar chart, the highest and lowest quarterly returns were 20.91% and -12.59%, respectively, for the quarters ended December 1998 and September 1998. The year-to-date total return as of September 30, 2002 was -24.78% for Class I Shares. (1) Because Class A Shares have not yet been offered to the public, the information provided in the bar chart represents only the performance of Class I Shares, one of the Fund's other classes of shares, which are offered to institutional investors by a separate prospectus. Class A Shares and Class I Shares would have substantially similar annual returns because the shares are invested in the same portfolio of securities. However, because the classes do not have the same expenses, the expense ratio and the total return of Class A Shares will differ from the Class I Shares. The table on the next page compares the Fund's average annual total returns (before and after taxes) and the change in value of a broad measure of market performance over various periods ended December 31, 2001. After-tax returns are intended to show the impact of assumed federal income taxes on an investment in the Fund's Class I Shares. The Fund's "Return After Taxes on Distributions" shows the effect of taxable distributions (dividends and capital gain distributions), but assumes that you still hold the Fund shares at the end of the period and so do not have any taxable gain or loss on your investment in shares of the Fund. The Fund's "Return After Taxes on Distributions and Sale of Fund Shares" shows the effect both of taxable distributions and any taxable gain or loss that would be realized if the Fund shares were purchased at the beginning and sold at the end of the specified period. 12 After-tax returns are calculated using the highest individual federal income tax rate in effect at the time of each distribution and assumed sale of Fund shares, but do not include the impact of state and local taxes. In some instances, the "Return After Taxes on Distributions and Sale of Fund Shares" may be greater than the "Return Before Taxes" because you are assumed to be able to use any capital loss on the sale of Fund shares to offset other taxable capital gains. Your actual after-tax returns depend on your own tax situation and may differ from those shown. After-tax returns reflect past tax effects and are not predictive of future tax effects. After-tax returns are not relevant to investors who hold their Fund shares through tax-deferred arrangements such as 401(k) plans or individual retirement accounts or to investors who are tax-exempt. Average Annual Total Returns (for periods ended 12/31/01) Class I Shares(1) All returns reflect reinvested dividends. 1 Year 5 Years 10 Years ------ ------- -------- Diversified Equity Fund Return Before Taxes (2.05)% 12.40% 13.51% Return After Taxes on Distributions (3.49)% 9.26% 10.32% Return After Taxes on Distributions and Sale of Fund Shares (0.64)% 8.11% 8.50% S&P 500(R)Stock Index(2) (11.86)% 10.71% 12.93% (reflects no deduction for fees, expenses or taxes) Russell 1000(R)Value Index(2) (5.59)% 11.14% 14.15% (reflects no deduction for fees, expenses or taxes) (1) Because Class A Shares have not yet been offered to the public, the information provided in the table represents only the performance of Class I Shares, one of the Fund's other classes of shares, which are offered to institutional investors by a separate prospectus. Class A Shares and Class I Shares would have substantially similar annual returns because the shares are invested in the same portfolio of securities. However, because the classes do not have the same expenses, the expense ratio and the average annual total return of Class A Shares will differ from the Class I Shares. (2) The S&P 500(R) Stock Index is a broad market-weighted average of U.S. blue-chip companies. The Russell 1000(R) Value Index measures the performance of those Russell 1000(R) companies with lower price-to-book ratios and lower forecasted growth values. S&P 500(R) Stock Index is a registered trademark of McGraw-Hill, Inc. Russell 1000(R) Value Index is a registered trademark of The Frank Russell Company. 13 AHA U.S. GROWTH EQUITY FUND Investment Objective The Fund seeks long-term capital appreciation. Principal Investment Strategies The Fund invests substantially all of its assets in the U.S. Growth Equity Master Portfolio. Under normal circumstances, the Portfolio invests at least 80% of its net assets plus any borrowings for investment purposes (at market value at the time of purchase) in the common stocks of U.S. issuers, but may also invest up to 10% of its net assets at the time of purchase in the common stocks of non-U.S. companies. The Portfolio may also invest up to 20% of its net assets at the time of purchase in fixed income securities, including money market instruments, having one of the three highest ratings of Moody's or S&P. The Portfolio typically will invest in a security of a company that has one or more of the following characteristics: o a market capitalization of at least $5 billion at the time of investment; o superior earnings growth prospects (relative to companies in the same industry or the market as a whole); o high profitability; o superior management; and o a sustainable competitive advantage. The Investment Manager may determine to sell a security when its target value is realized, its earnings deteriorate, changing circumstances affect the original reasons for a security's purchase, or it identifies more attractive investment alternatives. Principal Investment Risks The principal risks of investing in the Fund are listed below. o Market Risk o Growth Securities Risk o Credit Risk o Interest Rate Risk o Prepayment Risk o Foreign Securities Risk o Management Risk Please see "Principal Risk Considerations" following the Fund summaries for a description of these and other risks that may be applicable to your investment. Performance Performance information for the Fund has not been presented because the Fund had not commenced operations and therefore had not been in operation for a full calendar year. 14 AHA INTERNATIONAL CORE EQUITY FUND Investment Objective The Fund seeks to provide long-term capital appreciation. Principal Investment Strategies The Fund invests substantially all of its assets in the International Core Equity Master Portfolio. Under normal circumstances, the Portfolio invests at least 80% of its net assets, plus the amount of any borrowings for investment purposes (at market value at the time of purchase), in the common stock and depository receipts of foreign issuers domiciled in developed countries within Europe, Australia and the Far East. The Portfolio also may invest up to 20% of its net assets in fixed income securities, including money market instruments having one of the three highest ratings of Moody's or S&P. The Portfolio buys and sells foreign currencies to enable it to purchase and sell securities in markets outside the U.S. The Portfolio may use other hedging strategies, including those that employ futures and options, to gain or reduce exposure to particular markets. These strategies, commonly called derivatives, involve the use of financial instruments the values of which depend on, or are derived from, the value of an underlying security, index or currency. Although the Portfolio may engage in foreign currency hedge transactions to help reduce risk, those transactions may not be effective or appropriate in particular situations, nor will they protect against declines in security values. The Portfolio typically will invest in the securities of a company that the Investment Manager believes has one or more of the following characteristics: o a leader in its industry on a global, regional or local basis; o consistent and superior earnings growth (relative to companies in the same industry or the market as a whole); o high profitability; o superior management; and o sustainable competitive advantage. The Investment Manager may determine to sell a security when its target value is realized, its earnings deteriorate, changing circumstances affect the original reasons for a security's purchase, or it identifies more attractive investment alternatives. 15 Principal Investment Risks The principal risks of investing in the Fund are listed below. o Market Risk o Foreign Securities Risk o Currency Risk o Credit Risk o Interest Rate Risk o Prepayment Risk= o Hedging Risk o Management Risk Please see "Principal Risk Considerations" following the Fund summaries for a description of these and other risks that may be applicable to your investment. Performance Performance information for the Fund has not been presented because the Fund had not commenced operations and therefore had not been in operation for a full calendar year. 16 PRINCIPAL RISK CONSIDERATIONS There is no guarantee that a Fund will be able to achieve its investment objective. The value of your investment in a Fund will change with the value of the Portfolio in which that Fund invests, which means that you may lose money by investing in any of the Funds. The principal risks of investing in the various Funds are summarized in the chart below.
- ------------------------ -------- -------- -------- ----------- ------ ------------- Limited Full Maturity Maturity U.S. Fixed Fixed Diversified Growth International Income Income Balanced Equity Equity Core Equity - ------------------------ -------- -------- -------- ----------- ------ ------------- Credit Risk X X X X X X - ------------------------ -------- -------- -------- ----------- ------ ------------- Currency Risk X - ------------------------ -------- -------- -------- ----------- ------ ------------- Foreign Securities Risk X X - ------------------------ -------- -------- -------- ----------- ------ ------------- Growth Securities Risk X - ------------------------ -------- -------- -------- ----------- ------ ------------- Hedging/Derivatives Risk X - ------------------------ -------- -------- -------- ----------- ------ ------------- Interest Rate Risk X X X X X X - ------------------------ -------- -------- -------- ----------- ------ ------------- Management Risk X X X X X X - ------------------------ -------- -------- -------- ----------- ------ ------------- Market Risk X X X X - ------------------------ -------- -------- -------- ----------- ------ ------------- Prepayment Risk X X X X X X - ------------------------ -------- -------- -------- ----------- ------ -------------
Credit Risk - The risk that the issuer or the guarantor of a fixed income security or the counterparty to a derivative contract, repurchase agreement or loan of a security may not be able to meet its principal and/or interest payment obligations or otherwise to honor its obligations. Securities are subject to varying degrees of credit risk, which are often reflected in their credit ratings. Currency Risk - The risk that fluctuations in the exchange rates between the U.S. dollar and foreign currencies will negatively affect the values of the Fund's non-U.S. investments. The exchange rates between foreign currencies and the U.S. dollar fluctuate daily for many reasons, including changes in interest rates, currency controls or adverse political or economic developments. Foreign Securities Risk - The risk that the prices of foreign securities, including depository receipts that trade on U.S. markets may be more volatile than securities of U.S. issuers or securities that trade exclusively on U.S. markets due to limited availability of public information concerning foreign issuers, less securities regulation, less liquidity, exchange controls or exchange rate fluctuation, less favorable tax provisions, restrictions on currency transfer, expropriation, limits on repatriation of capital or other adverse political or economic 17 developments. To the extent that a Portfolio focuses its investments in a particular currency or narrowly defined area, such as the Pacific Rim, it generally will have more exposure to regional economic risks associated with foreign investments because companies in those areas may share common characteristics and often are subject to similar business risks and regulatory burdens, and their securities may react similarly to economic, market, political or other developments. Growth Securities Risk - The risk that an investment in the equity securities of the companies that the Investment Manager believes will experience relatively rapid earnings growth may be volatile. The values of growth securities may be more sensitive to changes in current or expected earnings than the values of other securities. Growth stocks may not perform as well as other asset types during given periods. Hedging Risk - The risk that downward price changes in a security may result in a loss greater than the Portfolio's investment in the security. This risk exists through the use of certain securities or techniques (e.g., derivative securities or purchases on margin) that tend to magnify changes in an index or market. Interest Rate Risk - The risk that changing interest rates may adversely affect the value of an investment. With fixed-rate securities, an increase in prevailing interest rates typically causes the value of those securities to fall. Changes in interest rates will affect the value of longer-term fixed income securities more than shorter-term securities and lower quality securities more than higher quality securities. Management Risk - The risk that the Investment Managers' security selections and other investment decisions might produce losses or cause the Fund or Portfolio to underperform when compared to other funds with similar investment goals. The Investment Managers' ability to choose suitable investments has a significant impact on each Fund's ability to achieve its investment objective. The Portfolios, with the exception of the Limited Maturity Fixed Income Master Portfolio, U.S. Growth Equity Master Portfolio and International Core Equity Master Portfolio use multiple Investment Managers. The use of multiple Investment Managers may also cause a high level of portfolio turnover, resulting in higher brokerage expenses and increased tax liability from the Portfolio's and/or the Fund's realization of capital gains. Market Risk - The risk that the value of securities will rise and fall due to factors affecting securities' markets. Market risk may affect a single issuer, a section of the economy, or the market as a whole. Equity securities generally have greater price volatility in response to company, market, economic or other news than fixed income securities. Prepayment Risk - The risk that issuers will prepay fixed-rate obligations when interest rates fall, forcing a fund to re-invest in obligations with lower interest rates than the original obligations. 18 ADDITIONAL INFORMATION ABOUT FUND INVESTMENTS The investment objective of each Fund is fundamental and may not be changed by the board of directors of the Funds (the "Board of Directors") without shareholder approval. Temporary Defensive Investments During periods of adverse market or economic conditions, the Balanced Master Portfolio, Diversified Equity Master Portfolio, U.S. Growth Equity Master Portfolio and International Core Equity Master Portfolio may temporarily invest all or a substantial portion of their assets in fixed income securities and money market instruments having one of the three highest ratings of Moody's or S&P, or may hold cash. Such a defensive position may prevent a Fund from meeting its investment objectives. Portfolio Turnover There are no limits on portfolio turnover. Turnover may vary significantly from year to year. It is estimated that the portfolio turnover rates of the Limited Maturity Fixed Income Master Portfolio and the Full Maturity Fixed Income Master Portfolio will not exceed 350%. The turnover rates of these Portfolios reflect the effect of their policies to alter their maturity structures in response to market conditions. It is estimated that the turnover rate for the fixed income segment of the Balanced Master Portfolio will not exceed 200%, and its equity segment will not exceed 150%. The Balanced Master Portfolio's assets may be shifted between fixed income and equity securities, but it is estimated that overall portfolio turnover rate of this Portfolio will not exceed 200%. It is estimated that the portfolio turnover rate of the U.S. Growth Equity Master Portfolio, the International Core Equity Master Portfolio and the Diversified Equity Master Portfolio will not exceed 150%. Portfolio turnover may produce capital gains or losses that result in tax consequences for Fund investors. Portfolio turnover also increases transaction expenses, which reduces a Fund's return. FEES AND EXPENSES Below are the fees and expenses that you may pay if you buy and hold shares of a Fund. Shareholder Fees (fees paid directly from your investment) Maximum Sales Charge (Load) Imposed on Purchases 5.00%* Maximum Deferred Sales Charge (Load) None Maximum Sales Charge (Load) Imposed on Reinvested Dividends None Exchange Fee None Redemption Fee None * The initial sales charge declines based on the amount purchased according to the schedule set forth below under "Sales Charges." 19 Annual Fund Operating Expenses(1) (expenses that are deducted from Fund assets)
- ---------------------------------------------------------------------------------------- U.S. Int'l Expense Limited Full Diversified Growth Core Maturity Maturity Balanced Equity Equity Equity - ---------------------------------------------------------------------------------------- Management Fees(2) 0.50% 0.50% 0.75% 0.75% 0.75% 1.00% - ---------------------------------------------------------------------------------------- Distribution (12b-1) Fees 0.25% 0.25% 0.25% 0.25% 0.25% 0.25% - ---------------------------------------------------------------------------------------- Other Expenses 0.33% 0.69% 0.95% 0.38% 0.68%(4) 0.81%(4) - ---------------------------------------------------------------------------------------- Total Annual Fund Operating 1.08% 1.44% 1.95% 1.38% 1.68%(4) 2.06%(4) Expenses(3) - ----------------------------------------------------------------------------------------
(1) The fees and expenses described in this table and the Examples below reflect the fees and expenses of each Fund and the Fund's share of the expenses of the Portfolio into which it invests. Expenses are based on amounts incurred by the Funds during the fiscal year ended June 30, 2002, but "Other Expenses" do not include certain amounts that the Funds incurred during this period and do not anticipate to incur in the future. (2) The Fund and Portfolio pay CCM Advisors, LLC ("CCM Advisors"), the Fund's administrator, an administrative services fee at the annual rate of $20,000 and 0.055% of the Portfolio's average daily net assets, respectively, which is included in "Other Expenses." (3) CCM Advisors has undertaken to reimburse each Fund to the extent that the total operating expenses exceed the levels indicated below: Expense Level Fund (as a % of average daily net assets) ---- ------------------------------------ Limited Maturity 1.25% Full Maturity 1.25% Balanced 1.75% Diversified Equity 1.50% U.S. Growth Equity 2.00% International Core Equity 2.25% CCM Advisors or the Funds may terminate this undertaking at any time. Total operating expenses as shown in the table above do not include amounts that CCM Advisors anticipates it will reimburse the Fund pursuant to that undertaking. When CCM Advisors has reimbursed a Fund for expenses that exceed the levels shown above, CCM Advisors may recover the reimbursed amounts for a period that does not exceed three years, to the extent this can be done without exceeding the expense limits. (4) Because the Fund is new, the amount shown for "other expenses" is the estimated amount that the Fund will incur. Example: This example is intended to help you compare the cost of investing in a Fund with that of investing in other mutual funds. The example assumes that you invest $10,000 in a Fund for the time periods indicated and then redeem all of your shares at the end of those periods. The example also assumes that you earn a 5% return each year and that operating expenses remain the same. The example is for illustration only, your actual costs may be higher or lower then the amounts shown. 20 - -------------------------------------------------------------------------------- U.S. Int'l Time Period Limited Full Diversified Growth Core Maturity Maturity Balanced Equity Equity Equity - -------------------------------------------------------------------------------- 1 year $110 $147 $198 $140 $171 $209 - -------------------------------------------------------------------------------- 3 years $343 $456 $612 $437 $530 $646 - -------------------------------------------------------------------------------- 5 years $595 $787 $1,052 $755 N/A N/A - -------------------------------------------------------------------------------- 10 years $1,317 $1,724 $2,275 $1,657 N/A N/A - -------------------------------------------------------------------------------- SHAREHOLDER INFORMATION Pricing of Fund Shares Shares of the Funds are bought and sold at net asset value on each day the New York Stock Exchange ("NYSE") is open for regular session trading, that is not a bank holiday. Net asset value is determined by dividing the value of a Fund's securities and other assets, less liabilities, by the number of shares outstanding. The Funds calculate their net asset value at the close of the regular trading session on the NYSE, usually 4:00 p.m., Eastern Time. Investments in the Portfolios are valued based on a Fund's proportionate ownership interest in the Portfolio's aggregate net assets. The aggregate net asset value of the Portfolio is determined daily at the close of the regular trading on the NYSE, usually 4:00 p.m., Eastern Time, on each day the NYSE is open for regular session trading. Portfolio securities and assets are valued chiefly by quotations from the primary market in which they are traded. When reliable market quotations are not readily available, securities are valued by a method that the Master Fund's board of trustees believes reflects a fair value. A Fund may also use fair-value pricing if the value of a security it holds is materially affected by events occurring after the close of the primary market on which the security is traded. The effect of fair-value pricing will be that net asset value will not be based on quoted prices, but on a price which the Master Fund's board of trustees believes reflects the current and true price of the security. Values of foreign securities are translated from local currencies into U.S. dollars using currency exchange rates. Trading in securities in foreign markets takes place on some days (including some weekend days and U.S. holidays) when the NYSE is not open, and does not take place on some days the NYSE is open. Accordingly, the value of a Portfolio's securities may change on days when a Fund does not calculate its NAV and shareholders are not able to buy or sell Fund shares. Investment Minimums The minimum initial investment in each Fund is $1,000. There is no minimum for subsequent investments. The Funds reserve the right to change the minimum amount required to open an account or to add to an existing account without prior notice. 21 How to Buy Shares You may purchase shares on any day that the NYSE is open for regular session trading that is not a bank holiday. There are three ways to purchase shares of the Fund:
- --------------------------------------------------------------------------------------------------- BY MAIL - --------------------------------------------------------------------------------------------------- TO OPEN AN ACCOUNT: TO ADD TO AN ACCOUNT: - ------------------- --------------------- Complete and sign an application. Make your check payable to the Fund in which you Make your check payable to the Fund in which choose to invest. The check must be drawn on a U.S. you choose to invest. The check must be bank. The Funds will not accept third-party drawn on a U.S. bank and payable in U.S. checks. Please be sure to furnish your taxpayer dollars. The Funds will not accept third- identification number. Please include your account party checks. number on the check and send your check to: Send your completed application and check to: Regular Mail: Regular Mail: AHA Investment Funds, Inc. AHA Investment Funds, Inc. c/o U.S. Bancorp Services, LLC c/o U.S. Bancorp Services, LLC P.O. Box 701 P.O. Box 701 Milwaukee, WI 53201-0701 Milwaukee, WI 53201-0701 Overnight Delivery Overnight Delivery AHA Investment Funds, Inc. AHA Investment Funds, Inc. c/o U.S. Bancorp Services, LLC c/o U.S. Bancorp Services, LLC 615 East Michigan Street 615 East Michigan Street Milwaukee, WI 53202 Milwaukee, WI 53202 You may make an initial investment prior to U.S. Bancorp's receipt of your completed application; however, redemptions will not be processed or paid until U.S. Bancorp receives your completed application. - ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------- BY BANK WIRE - ---------------------------------------------------------------------------------------------------------- TO OPEN AN ACCOUNT: TO ADD TO AN ACCOUNT: Complete, sign and mail your completed application to: Call the Fund at 1-800-445-1341, during business hours, to initiate your purchase. Please be AHA Investment Funds, Inc. sure to furnish your account number. c/o U.S. Bancorp Fund Services, LLC P.O. Box 701 Wire your funds to: Milwaukee, WI 53201-0701 U.S. Bank, N.A. Overnight Delivery: Account of U.S. Bancorp Fund Services, LLC 777 East Wisconsin Ave. 22 AHA Investment Funds, Inc. c/o U.S. Bancorp Services, LLC Milwaukee, WI 615 East Michigan Street ABA Number 042000013 Milwaukee, WI 53202 For Credit to: AC #112-952-137 Account Name: Name of Investor Fund Name You may make an initial investment prior to U.S. Bancorp's receipt of your completed application; however, redemptions will not be paid until U.S. Bancorp receives your completed If you wish to make purchases via Electronic application. Funds Transfer, please call the Funds at 1-800-445-1341 during business hours to initiate the Electronic Call the Fund at 1-800-445-1341, during business Funds Transfers through your checking/savings hours, to initiate your purchase. Please be sure account. Electronic Funds Transfers are not to furnish your taxpayer identification number. allowed for initial purchase, only subsequent purchase. Wire your funds to: Amounts sent by wire or electronic funds must be U.S. Bank, N.A. received by 4:00 p.m. (Eastern Time) in order to Account of U.S. Bancorp Fund Services, LLC buy shares that day. 777 East Wisconsin Ave. Milwaukee, WI ABA Number 042000013 For Credit to: AC #112-952-137 Account Name: Name of Investor Fund Name - ----------------------------------------------------------------------------------------------------------
The Funds do not impose charges for wire services, but your bank may impose such charges. The Fund and U.S. Bank are not responsible for the consequences of delays resulting from the banking or Federal Reserve Wire System, or from incomplete wiring instructions. 23 - -------------------------------------------------------------------------------- THROUGH A FINANCIAL INSTITUTION/FINANCIAL PROFESSIONAL - -------------------------------------------------------------------------------- Contact your financial institution or financial professional for more information. If a financial institution/financial professional is an agent or designee of the Fund, orders are processed at the net asset value next calculated after the agent receives the order. The agent must segregate any orders it receives after the close of regular trading on the NYSE and transmit those orders separately for execution at the net asset value next determined. Your financial institution or financial professional may establish higher minimum investment requirements than the Funds and may also independently charge you transaction fees and additional amounts in return for its services. - -------------------------------------------------------------------------------- Additional Information About Purchasing Shares o As long as the Funds receive your purchase order and Federal funds before the close of regular session trading on the NYSE (generally 4:00 p.m., Eastern Time), your shares will be considered to be received that day and your shares will be purchased at that day's net asset value. Otherwise, your purchase order will be considered to be received the next business day, and your shares will be purchased at the next day's net asset value. o You will begin earning dividends on the next business day after your purchase order is executed. o The Funds reserve the right to reject any purchase request, including a purchase request that may disrupt a Fund's operation or performance (See "Policy on Trading of Fund Shares"). The Funds also reserve the right to reject certain purchase requests in connection with various anti-money laundering laws and regulations. The Funds will not be responsible for any loss, liability, cost or expense resulting from rejecting any purchase request. o The Funds will not accept cash, money orders, travelers checks or starter checks. o You must certify whether you are subject to withholding for failing to report income to the Internal Revenue Service. The Funds may return investments received without a certified taxpayer identification number. o The Funds will not issue share certificates (although share certificates have been issued in the past). Sales Charges You may be subject to an initial sales charge when you purchase shares, or a contingent deferred sales charge (CDSC) when you sell your shares under certain circumstances. These sales charges are described below. In some circumstances these sales charges may be waived. These circumstances are described below and in the Statement of Additional Information. Your purchase of Class A Shares is subject to a sales charge that is included in the offering price. The sales charge is based on the amount of your investment and is the commission paid to the financial advisor firm on the sale of the shares. The sales charge you pay on additional investments is based on the total amount of your purchase and the current value of your account. 24 The initial sales charge varies depending upon the size of your purchase as shown below: Initial Sales Charge - -------------------- ------------------- ------------ ---------------------- Amount of Purchase Commission retained by As a % Financial Advisor As a % of of Offering as a % Net Amount Invested Price of Offering Price - -------------------- ------------------- ------------ ---------------------- Less than $25,000 5.26% 5.00% 4.75% - -------------------- ------------------- ------------ ---------------------- $25,000 to $49,999 4.43% 4.25% 4.00% - -------------------- ------------------- ------------ ---------------------- $50,000 to $99,999 3.63% 3.50% 3.25% - -------------------- ------------------- ------------ ---------------------- $100,000 to $249,999 3.09% 3.00% 2.75% - -------------------- ------------------- ------------ ---------------------- $250,000 to $499,999 2.30% 2.25% 2.00% - -------------------- ------------------- ------------ ---------------------- $500,000 to $999,999 1.52% 1.50% 1.25% - -------------------- ------------------- ------------ ---------------------- $1,000,000 or more None None None - -------------------- ------------------- ------------ ---------------------- Class A shares purchased without an initial sales charge in accounts aggregating $1,000,000 or more at the time of purchase and redeemed within 12 months of the date of purchase are subject to a CDSC equal to 1.00% of the lesser of the purchase price or net asset value at the time of sale. Shares purchased by certain institutional investors receiving investment advice from an intermediary, including 401(k) or 403(b) qualified employee benefit plans with at least $500,000 or more in plan assets are not subject to an initial sales charge. The Fund reserves the right to change the minimum without notice. In addition, a Fund will not impose a sales charges upon the initial purchase of Class A Shares for an investor who is reinvesting the proceeds from the redemption of another Fund's shares, provided that the shares were initially subject to a sales charge and the reinvestment occurs within thirty days of the redemption. The Funds' distributor is Quasar Distributors, LLC (the "Distributor"). The Distributor normally retains a portion of the sales charge from the sale of Class A Shares and pays the balance to the broker-dealer or other financial intermediary through which the sale was made. The Distributor may also pay fees to banks from sales charges for services performed on behalf of their customers in connection with the purchase of shares of the Funds. In addition, entities whose clients have purchased Class A shares may be paid a trailing commission equal to 0.25 of 1% annually of the average daily value of such shares held by their clients. In addition to the commissions paid to dealers, the Distributor or CCM Advisors may pay cash compensation to dealers in connection with sales of shares of a Fund. How to Exchange Shares Shares of any Fund may be exchanged for the same class of shares of any other Fund on the basis of the respective net asset values of the Funds at the time of exchange. An exchange involves the redemption of shares of one Fund and investment of the redemption proceeds in the same class of shares of another Fund. Redemptions will be made at the net asset value per share next determined after receipt of an exchange request in proper order. Shares of the Fund to be acquired will be purchased after receipt of your redemption request at the net asset value of those shares next determined after satisfaction of the purchase order requirements of the Fund whose shares are being acquired. An exchange is a sale and any gain or loss realized on an exchange may be recognized for federal income tax purposes. You will not pay either an initial sales 25 charge or a CDSC when exchanging shares. However, when you redeem the shares acquired through the exchange, the shares redeemed may be subject to a CDSC, depending on when you originally purchased the shares you exchanged. For purposes of computing the CDSC, the Fund will compute the length of time you have owned your shares from the date of your original purchase. The Fund reserves the right to modify or terminate the exchange privilege and to impose fees for and limitations on its use. If you wish to exchange between Funds, you may transfer investments among existing accounts or you may open a new account to accept the exchange from an existing account. When requesting an exchange between Funds, both accounts must be registered in the same name, with the same address and taxpayer identification number. There are three ways to exchange your shares: - -------------------------------------------------------------------------------- BY MAIL - -------------------------------------------------------------------------------- Send a written request using the procedures for written redemption requests below. No signature guarantee is required. If you were issued certificates for the shares being exchanged, the signed certificates and completed stock power form must accompany your written request. For further information call: 1-800-445-1341. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- BY TELEPHONE - -------------------------------------------------------------------------------- You must request telephone exchange privileges on your initial account application. To authorize telephone exchanges after establishing your Fund account, send a signed written request to: AHA Investment Funds, Inc. c/o U.S. Bancorp Fund Services, LLC 615 East Michigan Street - 3rd Floor Milwaukee, WI 53202 To request an exchange, call: 1-800-445-1341 Shares exchanged by telephone must have a value of $1,000 or more. Exchange instructions must be received before 4:00 p.m. (Eastern Time). - -------------------------------------------------------------------------------- 26 - -------------------------------------------------------------------------------- THROUGH A FINANCIAL INSTITUTION/FINANCIAL PROFESSIONAL - -------------------------------------------------------------------------------- Contact your financial institution or financial professional for more information. Exchange instructions must be received before 4:00 p.m. (Eastern Time). Your financial institution or financial professional may charge you transaction fees and additional amounts in return for its services. - -------------------------------------------------------------------------------- Excessive trading can hurt both performance and shareholders. If you make excessive exchanges, the Funds may limit the number of exchanges between Funds, modify or discontinue the exchange privilege and impose fees for its use upon not less than sixty days written notice to shareholders. (See "Policy on Trading of Fund Shares"). How to Sell Shares You may redeem some or all of your shares on any day the NYSE is open for regular session trading and that is not a bank holiday. The Funds ordinarily will pay redemption proceeds within seven days after receipt and acceptance of your redemption request. Redemption proceeds will be paid by wire transfer of Federal funds to the bank account designated on your account application. Upon request, the Funds will pay redemption proceeds by check mailed to your address of record. There are three ways to redeem your shares: - -------------------------------------------------------------------------------- BY MAIL - -------------------------------------------------------------------------------- Complete a written redemption request that includes: o the Fund's name; o your account number; o each account owner's name and address; o the dollar amount or number of shares to be sold; and o the signature of each owner as it appears on the account. Send the written request to: Regular Mail: Overnight Delivery: AHA Investment Funds, Inc. AHA Investment Funds, Inc. c/o U.S. Bancorp Services, LLC c/o U.S. Bancorp Services, LLC P.O. Box 701 615 East Michigan Street Milwaukee, WI 53201-0701 Milwaukee, WI 53202 If you were issued certificates for the shares being redeemed, the signed certificates and completed stock power form must accompany your written request. - -------------------------------------------------------------------------------- 27 - -------------------------------------------------------------------------------- BY TELEPHONE - -------------------------------------------------------------------------------- You must make arrangements to redeem by telephone prior to the redemption. Please call 1-800-445-1341 for more information or to redeem during regular business hours. Please be sure to furnish your taxpayer identification number. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- THROUGH A FINANCIAL INSTITUTION/FINANCIAL PROFESSIONAL - -------------------------------------------------------------------------------- Contact your financial institution or financial professional for more information. Redemption requests must be received before 4:00 p.m. (Eastern Time). Your financial institution or financial professional may charge you transaction fees and additional amounts in return for its services. - -------------------------------------------------------------------------------- Additional Information About Selling Shares o As long as the Funds receive your redemption request in proper form before the close of regular trading on the NYSE (generally 4:00 p.m., Eastern Time), your shares will be sold at that day's net asset value. A redemption request is in proper form if it includes all of the required information listed in "How to Sell Shares" and the Fund has a completed application on file. If the Funds receive your redemption request after the close of regular trading on the NYSE, your redemption request will be executed the next business day, and your shares will be sold at the next day's net asset value. o Shares generally continue earning dividends until the next business day after your trade date. o If you were issued stock certificates for your shares, you must forward the certificates and a stock power, along with your redemption or exchange request. Each must be signed on behalf of the registered shareholder or by an authorized signatory. o The Funds require a signature guarantee when a redemption request will be payable to anyone other than the account owners of record, mailed to an address other than the address of record, or wired to a bank other than one previously authorized. You can obtain a signature guarantee from most commercial and savings banks, credit unions, trust companies, or member firms of a U.S. stock exchange. o Special documentation may be required to redeem from certain types of accounts, such as trust, corporate, non-profit or retirement accounts. Please call us at 1-800-445-1341 before attempting to redeem from these types of accounts. o Generally, payment of redemption proceeds will be made to your pre-authorized bank account within seven days of receipt and processing of your redemption request. If you recently have made a purchase, a Fund may withhold redemption proceeds until it is reasonably satisfied that it has received payment, which may take up to 15 days from the date of purchase. 28 o The Funds may suspend redemptions or postpone payments of redemption proceeds for more than seven days during any period when (a) the NYSE is closed for other than customary weekends or holidays; (b) trading on the NYSE is restricted; (c) there are emergency circumstances as determined by the Securities and Exchange Commission; or (d) the Securities and Exchange Commission has by order permitted such suspension to protect shareholders of a Fund. o The Funds reserve the right to pay redemptions "in kind" - payment of portfolio securities rather than cash - if the amount you are redeeming is large enough to effect a Fund's operation. In these cases, you might incur brokerage costs in converting the securities to cash and will be subject to market exposure until the securities are sold. By calling us before you attempt to redeem a large dollar amount, you are more likely to avoid in-kind or delayed payment of your redemption. Additional Information About Telephone Transactions You may give up some level of security by choosing to exchange or sell shares by telephone rather than by mail. To prevent unauthorized transactions in your account, the Funds will employ reasonable procedures to confirm that telephone instructions are genuine. If the Funds or their service providers follow these procedures, neither the Funds nor their service providers will be liable for any loss, liability, cost or expense arising from unauthorized or fraudulent telephone instructions. Because you may be responsible for unauthorized telephone requests, you should verify the accuracy of each telephone transaction as soon as you receive your account statement and you should take precautions to keep confidential your account number and tax identification number. During times of drastic economic or market changes, telephone transactions may be difficult to implement. In the event that you are unable to reach the Funds by telephone, requests may be mailed or hand-delivered to the Funds c/o U.S. Bancorp Fund Services, LLC, 615 East Michigan Street, 3rd Floor, Milwaukee, Wisconsin 53202. Policy on Trading of Fund Shares The Funds do not permit short-term or excessive trading. Excessive purchases, redemptions or exchanges of Fund shares disrupt investment management and increase Fund expenses. To promote the best interests of the Funds, each Fund reserves the right to reject any purchase order or exchange request it deems inappropriate - for example, one that appears so large that it would disrupt management of the Fund. Automatic Redemption of Small Accounts The Funds reserve the right to redeem accounts having a value less than $500, unless the account value was reduced due to market activity. Proceeds from such a redemption will be sent directly to the shareholder. Before automatically redeeming your account, the Funds will notify you in writing and give you at least 60 days to increase the account balance. The Funds reserve the right to change the minimum needed to maintain an account at any time. 29 Reporting to Shareholders To reduce the volume of mail that you receive, only one copy of certain materials, such as shareholder reports, will be mailed to your household (same address). Please call 1-800-445-1341, if you want to receive additional copies free of charge. This policy may not apply if you purchase shares through an intermediary. Distribution and Service Fees The Funds' distributor is Quasar Distributors, LLC (the "Distributor"). The Distributor, located at 615 East Michigan Street, Milwaukee, Wisconsin 53202, is a broker-dealer registered with the Securities and Exchange Commission. The Class A Shares of each Fund have adopted a plan under Rule 12b-1 of the Investment Company Act of 1940 that permits the Funds to pay the Distributor a monthly fee as compensation for providing services to support the sale and distribution of the Funds' shares. The annual service fee may equal up to 0.25% of the average net assets of the Class A Shares of each Fund. Over time these fees will reduce the return on your investment and may cost you more than paying other types of sales charges. MASTER/FEEDER STRUCTURE Each Fund is a "feeder fund" in a "master/feeder" structure in which each Fund, instead of investing all of its assets directly in a portfolio of securities, pursues its investment objective by investing substantially all of its investable assets in a larger "master" portfolio which has the same investment objective and substantially similar investment policies and restrictions. Other funds with similar investment objectives and restrictions may also invest in the same master portfolio. Each Fund bears its corresponding Portfolio's expenses in proportion to the amount of assets it invests in the corresponding Portfolio. Each Fund can set its own transaction minimums, fund-specific expenses and conditions. The investment performance of each Fund depends on the investment performance of the Portfolio in which it invests. If the investment policies of a Fund and a Portfolio become inconsistent, the Board of Directors may determine to withdraw a Fund's assets from a Portfolio if it believes doing so is in the best interest of the Fund and its shareholders. If the Board of Directors withdraws assets of a Fund from a Portfolio, the Board of Directors would then consider whether that Fund should invest in another master portfolio or whether to take other actions. For more information on the master/feeder structure, see the Statement of Additional Information. 30 MANAGEMENT OF THE FUNDS Investment Adviser CCM Advisors serves as each Portfolio's investment adviser. Subject to the supervision of the Master Fund's board of trustees, CCM Advisors is responsible for overseeing the day-to-day operations and business affairs of each Portfolio, including monitoring the performance of each Portfolio's Investment Manager(s). CCM Advisors' principal office is located at 190 South LaSalle Street, Suite 2800, Chicago, Illinois. CCM Advisors is majority-owned by Convergent Capital Management Inc. ("CCM"). CCM is a holding company that owns and maintains ownership interests (including majority ownership interests) in asset management firms. CCM does not provide investment advisory or related services to its affiliates, each of which operate independently of CCM, or to any clients of its affiliates. As of September 30, 2002, CCM affiliated firms managed assets for clients in excess of $16 billion. CCM Advisors provides all executive, administrative, clerical and other personnel necessary to operate the Funds and the Portfolios and pays the salaries and other costs of employing all of those persons. CCM Advisors furnishes the Funds and Portfolios with office space, facilities, and equipment and pays the day-to-day expenses related to the operating and maintenance of such office space, facilities and equipment. Except for those expenses that CCM Advisors assumes, including those noted above, the Funds and Portfolios pay for all of their own expenses. Each Portfolio pays a management fee to CCM Advisors determined as a percentage of the Portfolio's average daily net assets. The fee is accrued daily and paid monthly. Out of the advisory fees that it receives from each Portfolio, CCM Advisors pays each Portfolio's Investment Manager for its sub-advisory services. The following chart shows the investment advisory fees paid by each Portfolio as a percentage of a Portfolio's average daily net assets, for the fiscal year ended June 30, 2002: Limited Maturity Fixed Income Master Portfolio 0.50% Full Maturity Fixed Income Master Portfolio 0.50% Balanced Master Portfolio 0.75% Diversified Equity Master Portfolio 0.75% U.S. Growth Equity Master Portfolio and International Core Equity Master Portfolio have not yet commenced operations. U.S. Growth Equity Master Portfolio will pay an annual management fee of 0.75% of that Portfolio's average daily net assets. International Core Equity Master Portfolio will pay an annual management fee of 1.00% of that Portfolio's average daily net assets. 31 Investment Managers CCM Advisors is responsible for the evaluation, selection and monitoring of each Portfolio's Investment Manager(s). CCM Advisors selects Investment Managers based on a variety of factors, including: investment style, performance record and the characteristics of each Investment Manager's typical investments. The assets of each multi-manager Portfolio are divided into segments and CCM Advisors is responsible for allocating the assets among the Investment Managers in accordance with their specific investment styles. The Investment Managers manage each Portfolio's investments and are responsible for making all investment decisions and placing orders to purchase and sell securities for the Portfolios. Subject to the oversight of CCM Advisors and the board of trustees of the Master Fund, the Investment Managers have complete discretion as to the purchase and sale of investments for the Portfolios consistent with each Portfolio's investment objective, policies and restrictions. Under an exemptive order from the Securities and Exchange Commission, CCM Advisors is permitted to enter into and materially amend portfolio management agreements with Investment Managers that are not affiliated with CCM Advisors without such agreements first being approved by the Portfolio's shareholders, which includes the Funds. The exemptive order also permits the Portfolios and the Funds to disclose: (a) the aggregate fees paid to CCM Advisors and any affiliated Investment Manager and (b) aggregate fees paid to unaffiliated Investment Managers. If a Portfolio employs an Investment Manager affiliated with CCM Advisors, the Portfolio and Fund will provide separate disclosure of any fees paid to that Investment Manager. In addition, it is a condition of the exemptive order that within 90 days of hiring of any new Investment Manager that is unaffiliated with CCM Advisors, CCM Advisors will furnish shareholders of the Portfolios and the Fund with an information statement about the new Investment Manager and Investment Sub-advisory Agreement. Any changes to the investment advisory contract between the Master Fund and CCM Advisors will still require shareholder approval. CCM Advisors has ultimate responsibility, subject to oversight of the board of trustees of the master fund, to oversee each investment manager and recommend its hiring, termination and replacement. Limited Maturity Fixed Income Fund The Patterson Capital Corporation ("Patterson") serves as Investment Manager to the Limited Maturity Fixed Income Master Portfolio. Patterson is located at 2029 Century Park East #2950, Los Angeles, California 90067, and is a privately held advisory organization that provides investment management services to a variety of institutions, including investment companies and employee benefit plans. As of September 30, 2002, Patterson had approximately $1 billion of assets under management. 32 The following individuals at Patterson share primary responsibility for the Limited Maturity Fixed Income Master Portfolio: - ------------------- ----------------- ------------------------------------------ Manager Length of Service Professional Experience (for the past 5 years) - ------------------- ----------------- ------------------------------------------ Jean M. Clark Since 1991 Senior Vice President / Portfolio Manager, Patterson. - ------------------- ----------------- ------------------------------------------ Joseph B. Patterson Since 1998 President, Chief Investment Strategist, Patterson. - ------------------- ----------------- ------------------------------------------ Full Maturity Fixed Income Fund Baird Advisors and Western Asset Management Company ("Western") serve as Investment Managers to the Full Maturity Fixed Income Master Portfolio. Baird Advisors is located at 777 East Wisconsin Avenue, Suite 2100, Milwaukee, Wisconsin 53202, and is an institutional fixed income department within Robert W. Baird & Co., Inc. ("Baird"). Baird provides management services to pension plans, non-profit organizations and individuals. As of September 30, 2002, Baird had approximately $5.1 billion of assets under management. The following individuals at Baird Advisors share primary responsibility for the Full Maturity Fixed Income Portfolio: - ------------------- ---------- ------------------------------------------------- Manager Length of Professional Experience Service (for the past five years) - ------------------- ---------- ------------------------------------------------- Gary A. Elfe Since 2000 Managing Director, Senior Portfolio Manager, Baird Advisors (since 2000); prior thereto, Senior Vice President, Senior Portfolio Manager, Firstar Investment Research & Management Company, LLC (1978 - 2000). - ------------------- ---------- ------------------------------------------------- Daniel A. Tranchita Since 2000 Senior Vice President, Senior Portfolio Manager, Baird Advisors; prior thereto, Senior Vice President, Senior Portfolio Manager, Firstar Investment Research & Management Company, LLC (1989 - 2000). - ------------------- ---------- ------------------------------------------------- Western is located at 117 East Colorado Boulevard, Pasadena, California 91105, and is an independent affiliate of Legg Mason, Inc., a publicly held financial services organization that engages through its subsidiaries in the businesses of securities brokerage, investment management, corporate and public finance and real estate services. Western's Fixed-Income team has responsibility for the management of the Full Maturity Fixed Income Master Portfolio. All portfolios are managed on a team basis. The core investment team at Western has been together for 11 years. The average experience of the portfolio management group is 13 years. As of September 30, 2002, the firm had approximately $90.4 billion in assets under management for institutional clients and approximately $ 18.8 billion of assets under management for mutual funds. 33 The following individual at Western is primarily responsible for the Full Maturity Fixed Income Master Portfolio: - --------------- ------------------ --------------------------------------------- Manager Length of Service Professional Experience (for the past five years) - --------------- ------------------ --------------------------------------------- Edward M. Moody Since 2000 Portfolio Manager, Western (since 1985). - --------------- ------------------ --------------------------------------------- Balanced Fund Baird Advisors serves as Investment Manager to the fixed income portion of the Balanced Master Portfolio. Cambiar Investors, Inc. and Freeman Associates Investment Management LLC serve as Investment Managers to the equity portion of the Balanced Master Portfolio. See the descriptions under the Full Maturity Fixed Income Portfolio for information regarding Baird Advisors and the individuals at Baird Advisors who share primary responsibility for the fixed income portion of the Balanced Master Portfolio. Cambiar Investors, Inc. ("Cambiar") is located at 2401 East Second Avenue, Suite 400, Denver, Colorado 80206 and until July 2001, was a subsidiary of United Asset Management Corporation ("UAM"), a subsidiary of Old Mutual plc, a publicly held company. In July 2001, Cambiar's principals purchased Cambiar from UAM/Old Mutual. Cambiar was organized in 1973 and provides investment management services for pension plans, foundations and endowments and high net worth individuals. As of September 30, 2002, the firm had approximately $45 million of assets under management. The following individuals at Cambiar share primary responsibility for the Balanced Master Portfolio: - ------------------ ---------- -------------------------------------------------- Manager Length of Professional Experience Service (for the past five years) - ------------------ ---------- -------------------------------------------------- Brian M. Barish Since 1997 President and Treasurer (since Feb. 2000), Director of Research (since Jan. 1999); Portfolio Manager (since Feb. 1997), Senior Vice President (Jan. 1999 - Jan. 2000), Vice President and Analyst (Feb. 1997 - Dec. 1998), Cambiar; prior thereto, Vice President of Investment Research, Lazard Freres & Co. LLC. - ------------------ ---------- -------------------------------------------------- Anna A. Aldrich Since 1999 Vice President and Portfolio Manager, Cambiar (since 1999); prior thereto, Global Equity Analyst, Bankers Trust Company. - ------------------ ---------- -------------------------------------------------- Maria L. Azari Since 1998 Vice President and Portfolio Manager (since 1999), Securities Analyst (since 1997), Cambiar; prior thereto Investment Analyst, Eaton Vance. - ------------------ ---------- -------------------------------------------------- 34 Michael J. Gardner Since 1999 Vice President and Portfolio Manager, Cambiar (since 1995); prior thereto, Investment Analyst, Simmons & Co. - ------------------ ---------- -------------------------------------------------- Freeman Associates Investment Management LLC ("Freeman") is located at 16236 San Dieguito Road, Suite 2-20, P.O. Box 9210, Rancho Santa Fe, California 92067, and is a privately held company that is controlled by John D. Freeman. Formerly known as the Investment Research Company, the firm was organized in 1985 and provides investment management services to institutions, retirement plans, and non-profit organizations. As of September 30, 2002, the firm had approximately $34 billion of assets under management. The following individuals at Freeman share primary responsibility for the Balanced Master Portfolio: - --------------- ---------- ---------------------------------------------------- Manager Length of Professional Experience Service (for the past five years) - --------------- ---------- ---------------------------------------------------- John D. Freeman Since 1996 President, Freeman (since 1996); prior thereto, Portfolio Manager, Martingale Asset Management. - --------------- ---------- ---------------------------------------------------- Jeffrey Norman Since 1999 Executive Vice President (since 1999), Freeman; Risk Manager, ZAIS Group) (1997-1999); prior thereto, Risk Manager, Trader, Mariner Investment Group. - --------------- ---------- ---------------------------------------------------- Diversified Equity Fund Cambiar and Freeman serve as Investment Managers to the Diversified Equity Master Portfolio. See the descriptions under the Balanced Fund in this section for information regarding Cambiar and Freeman and the individuals who share primary responsibility for the Diversified Equity Master Portfolio. 35 U.S. Growth Equity Fund KCM Investment Advisors ("KCM") serves as Investment Manager to the Portfolio. KCM is located at 300 Drake's Landing Road, Suite 190, Greenbrae, California, 94904 and is an investment management company that manages domestic and international equity and fixed income portfolios for individuals and institutions. As of September 30, 2002, the firm had approximately $608 million of assets under management. The following individuals at KCM share primary responsibility for the Portfolio: - ------------------ ---------- -------------------------------------------------- Manager Length of Professional Experience Service (past five years) - ------------------ ---------- -------------------------------------------------- Jay Aubrey Kellett Since 2001 Chief Executive Officer, Chief Investment Officer, KCM. - ------------------ ---------- -------------------------------------------------- Richard N. Vanscoy Since 2001 Managing Director and Director of Research, KCM (since 1997); prior thereto, Managing Director, Barclays Global Investors (1979 - 1997). - ------------------ ---------- -------------------------------------------------- Craig A. Stephens Since 2001 Principal and Portfolio Manager, KCM (since 1997); prior thereto, Senior Equity Manager, RCM Capital Management (1988 - 1997). - ------------------ ---------- -------------------------------------------------- John A. Lundin Since 2001 Principal and Portfolio Manager, KCM (since May 2000); prior thereto, Senior Vice President, Portfolio Manager, Scudder Stevens and Clark (1981 - 2000). - ------------------ ---------- -------------------------------------------------- Patricia Small Since 2001 Principal and Portfolio Manager, KCM (since July Kellett 2000), prior thereto, Treasurer, Regents of the University of California (1996 - 2000). - ------------------ ---------- -------------------------------------------------- William Prince Since 2001 Chief Operating Officer, KCM (since Sept. 2000); Investment Manager, Fischer Investments (Jan. 2000 - Aug. 2000); prior thereto, Vice President and Director, Wall Street Associates (Feb. 1992 - Oct. 1999). - ------------------ ---------- -------------------------------------------------- Appendix A to this Prospectus shows the investment performance for KCM. This information is provided to illustrate KCM's past performance in managing investment mandates with substantially similar investment objectives, policies and strategies. 36 International Core Equity Fund Pyrford International PLC ("Pyrford") serves as Investment Manager to the Portfolio. Pyrford is located at 79 Grosvenor Street - Mayfair, London, England W1J3JU. Founded in 1987, Pyrford is majority-owned by Pyrford Capital Limited, which is 40% owned by employees and 49% by Euro Equity Holdings SA, a European investment company. As of September 30, 2002, the firm had approximately $1 billion of assets under management. The following individuals at Pyrford share primary responsibility for the Portfolio: - ----------------------- ----------- -------------------------------------------- Manager Length of Professional Experience Service (for the past five years) - ----------------------- ----------- -------------------------------------------- Bruce L. Campbell Since 2001 Chief Investment Officer and Chief Executive Officer, Pyrford. - ----------------------- ----------- -------------------------------------------- Anthony N. Cousins, CFA Since 2001 Portfolio Manager, United Kingdom and Europe, Pyrford. - ----------------------- ----------- -------------------------------------------- Charu L. Fernando, CFA Since 2001 Portfolio Manager, Asia and Canada, Pyrford. - ----------------------- ----------- -------------------------------------------- Appendix B to this Prospectus shows the investment performance for Pyrford. This information is provided to illustrate Pyrford's past performance in managing investment mandates with substantially similar investment objectives, policies and strategies. DIVIDENDS, DISTRIBUTIONS AND TAXES Dividends and Distributions The Funds distribute to shareholders virtually all of their net income (interest less expenses). It is expected that dividends from net investment income will be declared and paid on the following schedule: Declared Payable Funds Monthly End of each month. Limited Maturity Fixed Income Fund and Full Maturity Fixed Income Fund Quarterly Mid - March, June, September, Balanced Fund; Diversified Equity and December Fund; U.S. Growth Equity Fund; and International Core Equity Fund A Fund may realize capital gains from time to time when it sells securities. Capital gains will be distributed annually. Dividends and other distributions will be automatically reinvested in more shares of your Fund unless you request otherwise. 37 Taxes The discussion below regarding federal and state income taxation is included for general information only. You should consult your tax advisor concerning the federal and state tax consequences of an investment in the Fund. The Fund will send you a statement each year showing the tax status of all your distributions. In addition, taxable investors should be aware of the following: o The tax status of any distribution is the same regardless of how long you have held shares of the Fund and whether you reinvest in additional shares of the Fund or take the distribution in cash. o Distributions declared in October, November or December -- if paid to you by the end of the following January--are taxable for federal income tax purposes as if received in December. o Any dividends and distributions of short-term capital gains, if any, received by you are taxable to you as ordinary income for federal income tax purposes. A Fund's distributions of long-term capital gains, if any, are taxable to you as capital gains. o Dividend distributions that you receive may be subject to state and local income taxes. Depending on your state's rules, however, any dividends attributable to interest earned on direct obligations of the U.S. Treasury may be exempt from state and local taxes. The Fund will notify you each year concerning how much, if any, of your dividends may qualify for this exemption. o Each of the U.S. Growth Equity Fund and International Core Equity Fund may receive income from sources in foreign countries and that income may be subject to foreign taxes at its source. If a Fund pays non-refundable taxes to foreign governments during the year, those taxes will reduce the Fund's dividend but will still be included in your taxable income. You may be able to claim an offsetting credit or deduction on your tax return for your share of foreign taxes paid by a Fund for a particular year if more than 50% of its total assets consists of stock or securities in foreign corporations and the Fund makes a special tax election for such year whereby each of its shareholders includes in his gross income and treats as paid by him his proportionate share of such foreign taxes. The Fund will send you detailed information about the foreign tax credit or deduction each year. By law, the Fund must withhold a percentage of any taxable distributions or redemptions from your account if you do not: o provide us with your correct taxpayer identification; o certify that your taxpayer identification is correct; o certify that you are a U.S. person; and o confirm that you are not subject to backup withholding. 38 The backup withholding percentage is currently 30% and will decrease to 29% in 2004 and 2005, and 28% thereafter until 2011, when it will revert to 31% unless amended by Congress. The Fund must withhold taxes from your account if the IRS instructs us to do so. If a dividend distribution mailed to your address of record is returned as undeliverable, the Fund will automatically reinvest all future distributions until you provide us with a valid mailing address. 39 FINANCIAL HIGHLIGHTS The following tables are intended to help you understand each Fund's financial performance for the last five years as it relates to Class I Shares (not Institutional Servicing Class Shares). Certain information reflects financial results for a single Class I Share. Because Institutional Servicing Class Shares have not previously been issued, similar information does not exist for them. Total returns represent the rate you would have earned (or lost) on an investment, assuming reinvestment of all dividends and distributions. This information has been audited by Ernst & Young LLP, independent accountants, whose report, along with each Fund's financial statements, is included in the annual report, which is available upon request. For each year shown, all information is for the fiscal year ended June 30. Information is not presented for U.S. Growth Equity Fund or International Core Equity Fund because those Funds have not yet commenced operations. AHA Limited Maturity Fixed Income Fund - CLASS I SHARES FOR THE PERIOD ENDED JUNE 30,
- ----------------------------------------------------- PER SHARE DATA (1) 2002 2001 2000 1999 1998 ---- ---- ---- ---- ---- Net Asset Value Beginning of Period............... $10.43 $10.11 $10.20 $10.22 $10.16 ------ ------- ------- ------- ------ Income from Investment Operations: Net investment income............. 0.44 0.63 0.58 0.53 0.60 Net realized and unrealized gain (loss) on investments.... 0.22 0.32 (0.09) (0.02) 0.06 ------ ------- ------- ------- ------ Total gain from investment operations 0.66 0.95 0.49 0.51 0.66 ------ ------- ------- ------- ------ Less Distributions: From net investment income........ (0.44) (0.63) (0.58) (0.53) (0.60) From realized gains............... -- -- -- -- -- ------ ------- ------- ------- ------ Total distributions........ (0.44) (0.63) (0.58) (0.53) (0.60) ------ ------- ------- ------- ------ Net Asset Value, end of period........ $10.65 $10.43 $10.11 $10.20 $10.22 ====== ====== ====== ====== ====== Total Return on Net Asset Value (2)... 6.16% 9.17% 4.37% 4.59% 6.11% SUPPLEMENTAL DATA AND RATIOS: Net assets, end of period (000's). $85,644 $51,076 $85,813 $104,675 $129,717 Ratio of net operating expenses to 0.76%(5) 0.24% 0.14% 0.12% 0.12% average net assets (3)(4)..... Program service fee (4) .......... 0.13% 0.50% 0.50% 0.50% 0.50% Ratio of investment income to average net assets(3)...... 4.00%(5) 6.50% 5.86% 5.30% 5.92% Portfolio turnover rate........... 60.24%(6) 189.31% 161.89% 176.78% 144.97%
(1) Information presented relates to a share of capital stock outstanding for the entire period. (2) Total Return on Net Asset Value is net of the service fee for the period July 1, 2001 through October 31, 2001, and for the fiscal years ended 2001, 2000, 1999 and 1998. Beginning November 1, 2001 the management fee is included in the calculation of the Funds' net asset value. (3) Ratios include all management fees and expenses except for the program services fee. (4) Program service fee discontinued as of October 31, 2001. Effective November 1, 2001, the CCM Advisors' expense ratio is included as a general operating expense of the fund. (5) Operating expense is net of reimbursement and waivers. The ratio excluding reimbursements and waivers for the period ended June 30, 2002 would have been 0.78%. The ratio of net investment income to average net assets, excluding reimbursements and waivers for the period ended June 30, 2002 would have been 3.98%. (6) Rate listed represents the portfolio turnover rate from July 1, 2002 through October 31, 2001 (date on which Feeder Fund entered into a master-feeder fund structure). 40 AHA Full Maturity Fixed Income Fund - CLASS I SHARES FOR THE PERIOD ENDED JUNE 30,
- -------------------------------------------------- PER SHARE DATA (1) 2002 2001 2000 1999 1998 ---- ---- ---- ---- ---- Net Asset Value Beginning of Period................. $10.10 $9.68 $9.85 $10.18 $9.79 ------ ------- ------- ------- ------ Income from Investment Operations: Net investment income............... 0.52 0.63 0.64 0.60 0.64 Net realized and unrealized gain (loss) on investments...... 0.24 0.42 (0.17) (0.33) 0.39 ------ ------- ------- ------- ------ Total gain from investment operations. 0.76 1.05 0.47 0.27 1.03 ------ ------- ------- ------- ------ Less Distributions: From net investment income.......... (0.52) (0.63) (0.64) (0.60) (0.64) From realized gains................. -- -- -- -- -- ------ ------- ------- ------- ------ Total distributions........ (0.52) (0.63) (0.64) (0.60) (0.64) ------ ------- ------- ------- ------ Net Asset Value, end of period............... $10.34 $10.10 $9.68 $9.85 $10.18 ====== ====== ===== ===== ====== Total Return on Net Asset Value (2).......... 7.40% 10.61% 4.41% 2.11% 10.20% SUPPLEMENTAL DATA AND RATIOS: Net assets, end of period (000's)... $38,267 $38,540 $78,188 $73,420 $71,829 Ratio of net operating expenses to average net assets (3)(4)....... 0.76%(5) 0.31% 0.17% 0.16% 0.17% Program service fee (4) ............ 0.17% 0.50% 0.50% 0.50% 0.50% Ratio of investment income to average net assets(3)........ 5.09%(5) 6.74% 6.55% 5.90% 6.19% Portfolio turnover rate............. 99.46%(6) 236.10% 211.40% 273.61% 178.52% - -----------
(1) Information presented relates to a share of capital stock outstanding for the entire period. (2) Total Return on Net Asset Value is net of the service fee for the period July 1, 2001 through October 31, 2001, and for the fiscal years ended 2001, 2000, 1999 and 1998. Beginning November 1, 2001 the management fee is included in the calculation of the Funds' net asset value. (3) Ratios include all management fees and expenses except for the program services fee. (4) Program service fee discontinued as of October 31, 2001. Effective November 1, 2001, CCM Advisors' expense ratio is included as a general operating expense of the Fund. (5) Operating expense is net of reimbursement and waivers. The ratio excluding reimbursements and waivers for the period ended June 30, 2002 would have been 1.08%. The ratio of net investment income to average net assets, excluding reimbursements and waivers for the period ended June 3, 2002 would have been 4.76%. (6) Rate listed represents the portfolio turnover rate from July 1, 2001 through October 31, 2001 (date on which Feeder Fund entered into a master-feeder fund structure). 41 AHA Balanced Fund - CLASS I SHARES FOR THE PERIOD ENDED JUNE 30,
- --------------------------------------------- PER SHARE DATA (1) 2002 2001 2000 1999 1998 ---- ---- ---- ---- ---- Net Asset Value Beginning of Period.................. $9.17 $12.44 $14.69 $14.61 $14.86 ----- ------ ------ ------ ------ Income from Investment Operations: Net investment income................ 0.12 0.45 0.37 0.36 0.41 Net realized and unrealized gain (loss) on investments... (0.72) 0.16 0.26 1.45 2.01 ------ ------ ------ ------ ------ Total gain (loss) from investment operations.. (0.60) 0.61 0.63 1.81 2.42 ------ ------ ------ ------ ------ Less Distributions: From net investment income........... (0.12) (0.36) (0.37) (0.36) (0.44) From realized gains.................. (0.42) (3.52) (2.51) (1.37) (2.23) ------ ------ ------ ------ ------ Total distributions......... (0.54) (3.88) (2.88) (1.73) (2.67) ------ ------ ------ ------ ------ Net Asset Value, end of period................ $8.03 $9.17 $12.44 $14.69 $14.61 ====== ====== ======= ======= ======= Total Return on Net Asset Value (2)........... (6.94)% 6.21% 3.99% 13.10% 16.79% SUPPLEMENTAL DATA AND RATIOS: Net assets, end of period (000's).... $23,375 $23,591 $48,936 $63,301 $59,360 Ratio of net operating expenses to average net assets (3)(4)........ 1.13%(5) 0.46% 0.24% 0.18% 0.18% Program service fee (4) ............. 0.24% 0.75% 0.75% 0.75% 0.75% Ratio of investment income to average net assets (3)....... 1.42%(5) 2.66% 2.59% 2.55% 2.86% Portfolio turnover rate.............. 80.33%(6) 220.34% 169.10% 206.43% 169.04% - -----------
(1) Information presented relates to a share of capital stock outstanding for the entire period. (2) Total Return on Net Asset Value is net of the service fee for the period July 1, 2001 through October 31, 2001, and for the fiscal years ended 2001, 2000, 1999 and 1998. Beginning November 1, 2001 the management fee is included in the calculation of the Funds' net asset value. (3) Ratios include all management fees and expenses except for the program services fee. (4) Program service fees discontinued as of October 31, 2001. Effective November 1, 2001, CCM Advisors' expense ratio is included as a general operating expense of the Fund. (5) Operating expense is net of reimbursement and waivers. The ratio excluding reimbursements and waivers for the period ended June 30, 2002 would have been 1.64%. The ratio of net investment income to average net assets, excluding reimbursements and waivers for the period ended June 30, 2002 would have been 0.92% (6) Rate listed represents the portfolio turnover rate from July 1, 2001 through October 31, 2001 (date on which Feeder Fund entered into a master-feeder fund structure). 42 AHA Diversified Equity Fund - CLASS I SHARES FOR THE PERIOD ENDED JUNE 30,
- ---------------------------------------------------------- PER SHARE DATA (1) 2002 2001 2000 1999 1998 ---- ---- ---- ---- ---- Net Asset Value Beginning of Period.................. $15.90 $21.04 $22.15 $20.37 $20.72 ------ ------ ------ ------ ------ Income from Investment Operations: Net investment income................ 0.10 0.26 0.24 0.29 0.32 Net realized and unrealized gain (loss) on investments....... (2.01) (0.21) 1.05 3.42 4.14 ------ ------ ---- ---- ---- Total gain (loss) from investment operations.. (1.91) 0.05 1.29 3.71 4.46 ------ ---- ---- ---- ---- Less Distributions: From net investment income........... (0.11) (0.26) (0.24) (0.29) (0.32) From realized gains.................. (0.80) (4.93) (2.16) (1.64) (4.49) ------ ------ ------ ------ ------ Total distributions......... (0.91) (5.19) (2.40) (1.93) (4.81) ------ ------ ------ ------ ------ Net Asset Value, end of period................ $13.08 $15.90 $21.04 $22.15 $20.37 ====== ====== ====== ====== ====== Total Return on Net Asset Value (2)........... (12.75)% 1.17% 5.28% 18.90% 24.05% SUPPLEMENTAL DATA AND RATIOS: Net assets, end of period (000's)....$85,673 $92,053 $131,786 $126,892 $85,736 Ratio of net operating expenses to average net assets (3)(4)........ 0.84% 0.16% 0.11% 0.10% 0.14% Program service fee (4) ............. 0.25% 0.75% 0.75% 0.75% 0.75% Ratio of investment income to average net assets (3)........ 0.66% 1.33% 1.11% 1.43% 1.51% Portfolio turnover rate.............. 29.13%(5) 99.48% 66.84% 74.35% 65.82% - -----------
(1) Information presented relates to a share of capital stock outstanding for the entire period. (2) Total Return on Net Asset Value is net of the service fee for the period July 1, 2001 through October 31, 2001, and for the fiscal years ended 2001, 2000, 1999 and 1998. Beginning November 1, 2001 the management fee is included in the calculation of the Funds' net asset value. (3) Ratios include all management fees and expenses except for the program services fee. (4) Program service fee discontinued as of October 31, 2001. Effective November 1, 2001, the CCM Advisors' expense ratio is included as a general operating expense of the Fund. (5) Rate listed represents the portfolio turnover rate from July 1, 2001 through October 31, 2001 (date on which Feeder Fund entered into a master-feeder fund structure). 43 Appendix A Past Performance of KCM The performance of the composite below shows the performance of KCM in managing all substantially similar accounts with investment objectives, policies, strategies, and risks substantially similar to those of the U.S. Growth Equity Fund and U.S. Growth Equity Master Portfolio. The composite shown below is an aggregation of all accounts managed by KCM that have investment objectives, policies, strategies, and risks that are substantially similar to those of the U.S. Growth Equity Fund and U.S. Growth Equity Master Portfolio. The performance shown below is for the one-, three-, five- and ten-year periods ending September 30, 2002 and does not represent the performance of the U.S. Growth Equity Fund or U.S. Growth Equity Master Portfolio. The composite performance data has been provided by KCM. The composite includes all accounts that KCM managed or sub-advised that have substantially similar investment profiles. The accounts included in the composite are not subject to the same type of expenses to which the U.S. Growth Equity Fund is subject. The accounts also are not subject to the diversification requirements, specific tax restrictions and investment limitations imposed on the U.S. Growth Equity Master Portfolio and the U.S. Growth Equity Fund by the Investment Company Act of 1940 or Subchapter M of the Internal Revenue Code. In fact, the expenses of the accounts included in the composite are lower than the U.S. Growth Equity Fund's expenses. Consequently, if the expenses of the U.S. Growth Equity Fund had been included in the composite, the composite's performance results would have been lower than what is shown below. The performance information of the account is not intended to predict or suggest the performance that might be experienced by the U.S. Growth Equity Fund, the U.S. Growth Equity Master Portfolio or an individual investor in the U.S. Growth Equity Fund. The performance information was calculated using standards promulgated by the Association for Investment Management & Research. Investors should be aware that the methodology used for the composite performance is not the SEC standard to calculate the performance. As a result, such performance results may differ from results calculated according to the SEC's methodology. - ---------------------------------- --------- -------- -------- ------------ Average Annual Total Return 1 Year 3 Years 5 Years 10 Years for periods ended 9/30/02 - ---------------------------------- --------- -------- -------- ------------ Composite (20.56)% (7.65)% 5.48% 14.76% - ---------------------------------- --------- -------- -------- ------------ Russell 1000 Growth Index (22.50)% (19.59)% (4.87)% 6.69% - ---------------------------------- --------- -------- -------- ------------ A-1 Appendix B Past Performance of Pyrford The performance of the composite below shows the performance of Pyrford in managing all substantially similar accounts with investment objectives, policies, strategies, and risks substantially similar to those of the International Core Equity Fund and International Core Equity Master Portfolio. The composite shown below is an aggregation of all accounts managed by Pyrford that have investment objectives, policies, strategies, and risks that are substantially similar to those of the International Core Equity Fund and International Core Equity Master Portfolio. The performance shown below is for the one-, three-, five- and ten-year periods ending September 30, 2002 and does not represent the performance of the AHA International Core Equity Fund or International Core Equity Master Portfolio. The composite performance data has been provided by Pyrford. The composite includes all accounts that Pyrford managed or sub-advised that have substantially similar investment profiles. The accounts included in the composite are not subject to the same type of expenses to which the International Core Equity Fund is subject. The accounts also are not subject to the diversification requirements, specific tax restrictions and investment limitations imposed on the International Core Equity Master Portfolio and the International Core Equity Fund by the Investment Company Act of 1940 or Subchapter M of the Internal Revenue Code. In fact, the expenses of the accounts included in the composite are lower than the International Core Equity Fund's expenses. Consequently, if the expenses of the International Core Equity Fund had been included in the composite, the composite's performance results would have been lower than what is shown below. The performance information of the account is not intended to predict or suggest the performance that might be experienced by the International Core Equity Fund, the International Core Equity Fund Master Portfolio or an individual investor in the International Core Equity Fund. The performance information was calculated using standards promulgated by the Association for Investment Management & Research. Investors should be aware that the methodology used for the composite performance is not the SEC standard to calculate the performance. As a result, such performance results may differ from results calculated according to the SEC's methodology. - ----------------------------- -------- ----------- --------------- ------------- Average Annual Total Return 1 Year 3 Years 5 Years 10 Years for periods ended 9/30/02 - ----------------------------- -------- ----------- --------------- ------------- Composite (11.68)% (5.94)% (0.56)% 8.53% - ----------------------------- -------- ----------- --------------- ------------- MSCI World ex USA Index* (15.31)% (14.20)% (5.48)% 3.12% - ----------------------------- -------- ----------- --------------- ------------- * The Morgan Stanley Capital International (MSCI) World ex-USA Index comprises the entire developed world less the United States. The MSCI World ex-USA Index is a trademark of Morgan Stanley Capital International, Inc. B-1 FOR MORE INFORMATION More information about the Funds is available free upon request: Statement of Additional Information (SAI) The SAI provides more details about the Funds and their policies. A current SAI is on file with the SEC and is incorporated by reference into this Prospectus. Shareholder Reports Additional information about the Funds' investments is available in the Funds' annual and semi-annual reports to shareholders. Those documents contain a discussion of the market conditions and investment strategies that significantly affected the Funds' performance during its most recent fiscal period. TO OBTAIN INFORMATION To obtain free copies of the annual, semi-annual report or the SAI or to discuss questions about the Funds: By Telephone - 1-800-445-1341 By Mail AHA Investment Funds, Inc. c/o U.S. Bancorp Fund Services, LLC P.O. Box 701 Milwaukee, Wisconsin 53201-0701 By Internet Information about the Funds is available via the internet at www.ahafunds.org. Information about the Funds (including the SAI) can be reviewed and copied at the SEC's Public Reference Room in Washington D.C. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-202-942-8090. Free text only versions of the Funds' documents are available on the EDGAR Database on the SEC's Internet web-site, at www.sec.gov. You can also obtain copies of this information, after paying a duplication fee, by e-mail request at: publicinfo@sec.gov, or by writing the SEC's Public Reference Section, 450 5th Street, N.W., Washington, D.C. 20549-0102. 811-05534 EX-99.17 (AS APPROP) 8 ahan30-d.txt ANNUAL REPORT - AHA FUNDS (AHA LOGO) AHA INVESTMENT FUNDS, INC. o AHA LIMITED MATURITY FIXED INCOME FUND o AHA FULL MATURITY FIXED INCOME FUND o AHA BALANCED FUND o AHA DIVERSIFIED EQUITY FUND ANNUAL REPORT JUNE 30, 2002 WWW.AHAFUNDS.ORG AHA INVESTMENT FUNDS, INC. SHAREHOLDER LETTER Dear Shareholders: By any measure the tumultuous events of the past twelve months have been challenging to say the least. The unthinkable becomes headlines. The horrific multiple tragedies of 9/11, the bursting of the dot-com bubble and breaking news of the corporate scandals and Wall Street improprieties have traumatized the nation, investors, Wall Street and corporate America. Yet through it all, glimmers of optimism can be seen. The U.S. capital markets have been shaken - repeatedly - by this avalanche of bad news. They may now be down but we do not believe they are out for the count. For example the fixed income markets have provided an element of stability for investor portfolios. That belief inspires two obvious questions: What will trigger a turnaround in the investment markets and when will it happeno The honest answer to both: No one knows. But we remain confident in the resilience of the U.S. capital markets. To better appreciate this, one must change one's view of these markets. The news media and investment pundits always report that "the market is doing such and such." They make it sound as if the market is an independent entity. Driven by its own wants, needs and motives. However the market is the sum total of millions of individual investment decisions all too often based upon fear and greed. Look at the technology bubble. Greed was the engine pulling this gravy train: Make as much money as possible as fast as possible. Fear was the caboose: Don't miss out on what everyone else is doing. Now investors have a "deer-in-the- headlights" look. Greed and fear have given way to panic. In this environment, emotions and a follow-the herd mentality seem to prevail. When delivering numbers became more important than the underlying business reality, ignoring conflicts of interest, self dealing and a sense of ethical responsibility. Many investors and their advisors have never experienced this type of market environment. Investors fear losing capital and lack the discipline to follow a game plan (assuming there is one). Too many investors have now over compensated by backpedaling from total confidence in the market to traumatized cynicism. Their panic translates into irrational selling, which fuels the market's current volatility. All this has two serious implications for your AHA Investment Funds. First, the recent avalanche of corporate accounting scandals and Wall Street games has focused investor attention back on the real issues: fiduciary responsibility, ethics, conflicts of interests and the business at the heart of the investment decision. The AHA Investment Funds takes this seriously. We are stewards of your capital. The Fund and its portfolio management teams have remained true to their investment philosophy rather than chasing returns. A long-standing system of checks and balances is woven into the fabric of our Fund family: a Board composed of a majority of independent members; independent Board members having their own independent counsel; enforcement and reporting on our code of ethics and conflict of interest policies and procedures. These protections are not knee-jerk reactions to recent events. Instead, the Funds and its Advisors have adopted procedures that are reasonably designed to protect you and your capital. This brings us to the second issue our investors need to focus on: We believe that investors who have developed a game plan based upon reasonable assumptions are taking advantage of today's irrational market environment. Our risk-averse game plan drives our disciplined investment approach. This discipline combined with our value-oriented philosophy seeks to insure rational behavior based on sound judgment and fact - not emotion - which increases the likelihood of consistency within the portfolios. The Funds and its advisors cannot control the market. But we can continue to focus on the things we can control, mitigating the effects of market greed and fear through disciplined approaches and investment processes, diversification of risk, and effective communication with our shareholders and our portfolio management teams. We thank you for your continued interest and support and look forward to a prosperous 2003. As always we look forward to assisting you in any way we can in the future. Sincerely, /s/Douglas Peabody Douglas Peabody President Opinions expressed are those of Douglas Peabody and the AHA Investment Funds and are subject to change, are not guaranteed and should not be considered recommendations to buy or sell any security. Mutual Fund investing involves risks, including possible loss of principal. This material must be preceded or accompanied by a current prospectus. Read it carefully before you invest or send money. Quasar Distributors, LLC, Distributor 08/02 AHA LIMITED MATURITY FIXED INCOME FUND GROWTH OF $10,000 AHA Limited Merrill Lynch Maturity Fixed 90 Day 1-3 Year Date Income Fund T-Bills Treasury Index ---- ----------- ------- -------------- 12/22/88 $10,000 $10,000 $10,000 12/31/88 $10,020 $10,024 $10,008 3/31/89 $10,208 $10,239 $10,130 6/30/89 $10,501 $10,451 $10,635 9/30/89 $10,646 $10,656 $10,791 12/31/89 $10,830 $10,860 $11,101 3/31/90 $10,943 $11,071 $11,205 6/30/90 $11,186 $11,288 $11,524 9/30/90 $11,327 $11,496 $11,797 12/31/90 $11,717 $11,706 $12,186 3/31/91 $11,937 $11,885 $12,463 6/30/91 $12,136 $12,052 $12,705 9/30/91 $12,653 $12,216 $13,126 12/31/91 $13,220 $12,358 $13,608 3/31/92 $13,128 $12,480 $13,626 6/30/92 $13,406 $12,598 $14,017 9/30/92 $13,703 $12,697 $14,428 12/31/92 $13,694 $12,795 $14,457 3/31/93 $13,942 $12,892 $14,770 6/30/93 $14,143 $12,989 $14,934 9/30/93 $14,335 $13,088 $15,140 12/31/93 $14,375 $13,190 $15,237 3/31/94 $14,306 $13,298 $15,160 6/30/94 $14,303 $13,433 $15,161 9/30/94 $14,433 $13,586 $15,313 12/31/94 $14,422 $13,765 $15,314 3/31/95 $14,886 $13,966 $15,822 6/30/95 $15,331 $14,160 $16,324 9/30/95 $15,556 $14,347 $16,569 12/31/95 $15,942 $14,551 $16,986 3/31/96 $15,921 $14,765 $17,042 6/30/96 $16,045 $14,946 $17,214 9/30/96 $16,264 $15,138 $17,498 12/31/96 $16,593 $15,346 $17,831 3/31/97 $16,682 $15,546 $17,949 6/30/97 $17,013 $15,757 $18,343 9/30/97 $17,315 $15,968 $18,703 12/31/97 $17,574 $16,168 $19,017 3/31/98 $17,803 $16,378 $19,297 6/30/98 $18,052 $16,590 $19,592 9/30/98 $18,549 $16,825 $20,195 12/31/98 $18,684 $17,015 $20,349 3/31/99 $18,796 $17,196 $20,471 6/30/99 $18,881 $17,402 $20,588 9/30/99 $19,087 $17,623 $20,847 12/31/99 $19,195 $17,843 $22,098 3/31/00 $19,391 $18,093 $22,374 6/30/00 $19,705 $18,366 $22,759 9/30/00 $20,137 $18,644 $23,237 12/31/00 $20,656 $18,947 $23,864 3/31/01 $21,235 $19,234 $24,523 6/30/01 $19,645 $18,243 $22,560 9/30/01 $20,330 $18,522 $23,528 12/31/01 $20,266 $18,739 $23,416 3/31/02 $20,665 $19,033 $23,864 6/30/02 $21,702 $19,320 $25,107 * inception date. This chart assumes an initial gross investment of $10,000 made on December 22, 1988 (since inception) for the AHA Limited Maturity Fixed Income Fund, as well as the 90 Day T-Bill Index and the Merrill Lynch 1-3 Year Treasury Index. Past performance does not guarantee future results. Performance figures include reinvested dividends and capital gains. Investment return and principal value will fluctuate, so that your shares, when redeemed, may be worth more or less than the original cost. AVERAGE ANNUALIZED TOTAL RETURN AHA LIMITED MERRILL LYNCH MATURITY FIXED 1-3 YEAR INCOME FUND 90 DAY T-BILLS TREASURY INDEX -------------- -------------- -------------- Last Year 6.16% 2.28% 6.65% Last 5 Years 6.07% 4.47% 6.49% Last 10 Years 5.47% 4.68% 6.03% 90 Day T-Bills - ------------- This index is derived from secondary market interest rates as published by the Federal Reserve Bank in release H.15 (519). Average U.S. Treasury Bill rates expressed as annual percentage yields are converted back to daily rates based on 360 days per year. The daily rates are then transformed to 30-day compounded annual yields. This figure is divided by 12 and the resulting monthly "dividend" is reinvested at a constant $1 price to measure monthly performance. This process is repeated every month. Merrill Lynch 1-3 Year Treasury Index - ------------------------------------- A subset of the Merrill Lynch Treasury Master Index. The maturity range on these securities is from one to three years. This index is available on a monthly basis in price-only and total return versions. The value was set at 100 on 12/31/1975. AHA FULL MATURITY FIXED INCOME FUND GROWTH OF $10,000 AHA Full Maturity Lehman Government/Corporate Date Fixed Income Fund Intermediate Total Return Index ---- ----------------- ------------------------------- 10/20/88* $10,000 $10,000 12/31/88 $10,094 $10,059 3/31/89 $10,298 $10,167 6/30/89 $10,860 $10,842 9/30/89 $10,846 $10,973 12/31/89 $11,052 $11,344 3/31/90 $10,956 $11,328 6/30/90 $11,362 $11,692 9/30/90 $11,272 $11,896 12/31/90 $11,835 $12,384 3/31/91 $12,118 $12,696 6/30/91 $12,256 $12,922 9/30/91 $13,001 $13,545 12/31/91 $13,719 $14,195 3/31/92 $13,450 $14,066 6/30/92 $13,930 $14,623 9/30/92 $14,446 $15,268 12/31/92 $14,503 $15,213 3/31/93 $15,160 $15,815 6/30/93 $15,599 $16,157 9/30/93 $16,143 $16,520 12/31/93 $16,098 $16,548 3/31/94 $15,596 $16,212 6/30/94 $15,376 $16,115 9/30/94 $15,396 $16,247 12/31/94 $15,496 $16,229 3/31/95 $16,117 $16,940 6/30/95 $17,065 $17,787 9/30/95 $17,334 $18,081 12/31/95 $18,159 $18,715 3/31/96 $17,615 $18,560 6/30/96 $17,676 $18,677 9/30/96 $17,989 $19,009 12/31/96 $18,567 $19,475 3/31/97 $18,424 $19,454 6/30/97 $19,107 $20,028 9/30/97 $19,715 $20,568 12/31/97 $20,298 $21,008 3/31/98 $20,576 $21,334 6/30/98 $21,056 $21,735 9/30/98 $21,824 $22,709 12/31/98 $21,918 $22,775 3/31/99 $21,739 $22,731 6/30/99 $21,499 $22,643 9/30/99 $21,641 $22,851 12/31/99 $21,594 $22,863 3/31/00 $22,136 $23,203 6/30/00 $22,448 $23,595 9/30/00 $23,081 $24,275 12/31/00 $23,909 $25,173 3/31/01 $24,675 $26,029 6/30/01 $24,830 $26,203 9/30/01 $25,851 $27,411 12/31/01 $25,796 $27,436 3/31/02 $25,776 $27,373 6/30/02 $26,667 $28,345 * inception date. This chart assumes an initial gross investment of $10,000 made on October 20, 1988 (since inception) for the AHA Full Maturity Fixed Income Fund and the Lehman Government/Corporate Intermediate Total Return Index. Past performance does not guarantee future results. Performance figures include reinvested dividends and capital gains. Investment return and principal value will fluctuate, so that your shares, when redeemed, may be worth more or less than the original cost. AVERAGE ANNUALIZED TOTAL RETURN AHA FULL LEHMAN GOVERNMENT/ MATURITY FIXED CORPORATE INTERMEDIATE INCOME FUND TOTAL RETURN INDEX -------------- --------------------- Last Year 7.40% 8.17% Last 5 Years 6.89% 7.19% Last 10 Years 6.71% 6.84% Lehman Government/Corporate Intermediate Total Return Index - ----------------------------------------------------------- A total return index consisting of investment grade corporate debt issues as well as debt issues of U.S. government agencies and the U.S. Treasury. The debt issues all maintain maturities within a range of one to ten years. AHA BALANCED FUND GROWTH OF $10,000 AHA Standard & Lehman Government/ Balanced Poor's 500 Corporate Intermediate Date Fund Stock Index Total Return Index ---- -------- ----------- ---------------------- 10/20/88* $10,000 $10,000 $10,000 12/31/88 $10,010 $10,125 $10,059 3/31/89 $10,403 $10,843 $10,167 6/30/89 $10,996 $11,800 $10,842 9/30/89 $11,739 $13,064 $10,973 12/31/89 $11,737 $13,333 $11,344 3/31/90 $11,335 $12,933 $11,328 6/30/90 $11,583 $13,745 $11,692 9/30/90 $10,641 $11,855 $11,896 12/31/90 $11,143 $12,918 $12,384 3/31/91 $12,505 $14,795 $12,696 6/30/91 $12,350 $14,762 $12,922 9/30/91 $13,201 $15,552 $13,545 12/31/91 $14,259 $16,855 $14,195 3/31/92 $14,006 $16,430 $14,066 6/30/92 $14,078 $16,743 $14,623 9/30/92 $14,399 $17,272 $15,268 12/31/92 $14,980 $18,139 $15,213 3/31/93 $15,599 $18,929 $15,815 6/30/93 $15,911 $19,020 $16,157 9/30/93 $16,454 $19,511 $16,520 12/31/93 $16,592 $19,964 $16,548 3/31/94 $16,167 $19,209 $16,212 6/30/94 $15,957 $19,290 $16,115 9/30/94 $16,294 $20,231 $16,247 12/31/94 $16,269 $20,227 $16,229 3/31/95 $17,019 $22,195 $16,940 6/30/95 $18,345 $24,310 $17,787 9/30/95 $19,413 $26,241 $18,081 12/31/95 $20,342 $27,820 $18,715 3/31/96 $21,093 $29,314 $18,560 6/30/96 $21,867 $30,627 $18,677 9/30/96 $22,431 $31,574 $19,009 12/31/96 $23,997 $34,204 $19,475 3/31/97 $24,038 $35,124 $19,454 6/30/97 $26,947 $41,250 $20,028 9/30/97 $29,213 $44,339 $20,568 12/31/97 $29,861 $45,612 $21,008 3/31/98 $32,492 $51,970 $21,334 6/30/98 $31,472 $53,685 $21,735 9/30/98 $28,831 $48,354 $22,709 12/31/98 $32,496 $58,644 $22,775 3/31/99 $32,678 $61,564 $22,731 6/30/99 $35,596 $65,905 $22,643 9/30/99 $33,453 $61,792 $22,851 12/31/99 $37,507 $70,981 $22,863 3/31/00 $38,505 $72,606 $23,203 6/30/00 $37,015 $70,675 $23,595 9/30/00 $39,288 $69,989 $24,275 12/31/00 $38,121 $64,516 $25,173 3/31/01 $37,629 $56,871 $26,029 6/30/01 $39,311 $60,198 $26,203 9/30/01 $36,422 $51,367 $27,411 12/31/01 $38,600 $56,858 $27,436 3/31/02 $38,739 $57,012 $27,373 6/30/02 $36,585 $49,378 $28,345 * inception date. This chart assumes an initial gross investment of $10,000 made on October 20, 1988 (since inception) for the AHA Balanced Fund, as well as the Standard & Poor's 500 Stock Index and the Lehman Government/Corporate Intermediate Total Return Index. Past performance does not guarantee future results. Performance figures include reinvested dividends and capital gains. Investment return and principal value will fluctuate, so that your shares, when redeemed, may be worth more or less than the original cost. AVERAGE ANNUALIZED TOTAL RETURN AHA STANDARD & LEHMAN GOVERNMENT/ BALANCED POOR'S 500 CORPORATE INTERMEDIATE FUND STOCK INDEX TOTAL RETURN INDEX -------- ----------- ------------------ Last Year (6.94%) (17.97%) 8.17% Last 5 Years 6.31% 3.67% 7.19% Last 10 Years 10.02% 11.42% 6.84% Standard & Poor's 500 Stock Index - --------------------------------- A market capitalization-weighted, price-only index composed of 500 widely held common stocks listed on the New York Stock Exchange, American Stock Exchange, and Over-The-Counter market. Lehman Government/Corporate Intermediate Total Return Index - ----------------------------------------------------------- A total return index consisting of investment grade corporate debt issues as well as debt issues of U.S. government agencies and the U.S. Treasury. The debt issues all maintain maturities within a range of one to ten years. AHA DIVERSIFIED EQUITY FUND GROWTH OF $10,000 AHA Diversified Standard & Poor's Date Equity Fund 500 Stock Index ---- --------------- ----------------- 10/20/88* $10,000 $10,000 12/31/88 $10,117 $10,125 3/31/89 $10,570 $10,843 6/30/89 $11,445 $11,800 9/30/89 $12,243 $13,064 12/31/89 $12,051 $13,333 3/31/90 $11,770 $12,933 6/30/90 $12,334 $13,745 9/30/90 $10,414 $11,855 12/31/90 $11,126 $12,918 3/31/91 $12,889 $14,795 6/30/91 $12,733 $14,762 9/30/91 $13,825 $15,552 12/31/91 $14,985 $16,855 3/31/92 $14,523 $16,430 6/30/92 $14,661 $16,743 9/30/92 $15,093 $17,272 12/31/92 $16,410 $18,139 3/31/93 $16,813 $18,929 6/30/93 $16,783 $19,020 9/30/93 $17,088 $19,511 12/31/93 $18,061 $19,964 3/31/94 $17,526 $19,209 6/30/94 $17,489 $19,290 9/30/94 $18,234 $20,231 12/31/94 $17,994 $20,227 3/31/95 $19,372 $22,195 6/30/95 $21,007 $24,310 9/30/95 $22,856 $26,241 12/31/95 $24,067 $27,820 3/31/96 $25,369 $29,314 6/30/96 $26,556 $30,627 9/30/96 $27,473 $31,574 12/31/96 $29,692 $34,204 3/31/97 $29,867 $35,124 6/30/97 $35,312 $41,250 9/30/97 $38,995 $44,339 12/31/97 $39,682 $45,612 3/31/98 $44,872 $51,970 6/30/98 $43,804 $53,685 9/30/98 $38,285 $48,354 12/31/98 $46,294 $58,644 3/31/99 $47,544 $61,564 6/30/99 $52,084 $65,905 9/30/99 $47,871 $61,792 12/31/99 $55,999 $70,981 3/31/00 $57,881 $72,606 6/30/00 $54,836 $70,675 9/30/00 $57,699 $69,989 12/31/00 $54,387 $64,516 3/31/01 $52,124 $56,871 6/30/01 $55,476 $60,198 9/30/01 $49,002 $51,367 12/31/01 $53,221 $56,858 3/31/02 $53,854 $57,012 6/30/02 $48,404 $49,378 * inception date. This chart assumes an initial gross investment of $10,000 made on October 20, 1988 (since inception) for the AHA Diversified Equity Fund and the Standard & Poor's 500 Stock Index. Past performance does not guarantee future results. Performance figures include reinvested dividends and capital gains. Investment return and principal value will fluctuate, so that your shares, when redeemed, may be worth more or less than the original cost. AVERAGE ANNUALIZED TOTAL RETURN AHA STANDARD & DIVERSIFIED POOR'S 500 EQUITY FUND STOCK INDEX ----------- ----------- Last Year (12.75%) (17.97%) Last 5 Years 6.51% 3.67% Last 10 Years 12.69% 11.42% Standard & Poor's 500 Stock Index - --------------------------------- A market capitalization-weighted, price-only index composed of 500 widely held common stocks listed on the New York Stock Exchange, American Stock Exchange, and Over-The-Counter market. AHA INVESTMENT FUNDS, INC. CHANGE OF INDEPENDENT ACCOUNTANTS On May 16, 2002, Arthur Andersen LLP ("Andersen") was terminated as independent accountants for the AHA Investment Fund, Inc. (comprising the AHA Limited Maturity Fixed Income Fund, AHA Full Maturity Fixed Income Fund, AHA Balanced Fund, and AHA Diversified Equity Fund) (the "Funds"). Andersen's report for the Funds' financial statements for the period ended June 30, 2001, did not contain an adverse opinion or disclaimer of opinion and was not qualified as to uncertainty, audit scope or accounting principles. In addition there have not been any disagreements with Andersen during the Funds' most recent fiscal year on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure which, if not resolved to the satisfaction of Andersen, would have caused it to make a reference to the subject matter of the disagreement in connection with its reports. The Funds' Board of Directors appointed Ernst & Young LLP as independent accountants for the fiscal year ended June 30, 2002. AHA INVESTMENT FUNDS, INC. - FEEDER FUNDS STATEMENT OF ASSETS & LIABILITIES June 30, 2002 AHA LIMITED AHA FULL MATURITY FIXED MATURITY FIXED AHA BALANCED AHA DIVERSIFIED INCOME FUND INCOME FUND FUND EQUITY FUND --------------- --------------- ------------- --------------- ASSETS: Investments in the Master Portfolios, at value* $85,873,120 $38,366,451 $23,338,178 $85,683,438 Receivable from Advisor 3,644 44,173 45,581 -- Prepaid expenses and other assets 12,655 12,838 12,845 12,149 ----------- ----------- ----------- ----------- Total assets 85,889,419 38,423,462 23,396,604 85,695,587 ----------- ----------- ----------- ----------- LIABILITIES: Payable for Master Portfolio interest purchased 220,942 135,703 -- -- Accrued expenses and other liabilities 24,427 21,106 21,373 22,210 ----------- ----------- ----------- ----------- Total liabilities 245,369 156,809 21,373 22,210 ----------- ----------- ----------- ----------- Net assets $85,644,050 $38,266,653 $23,375,231 $85,673,377 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- NET ASSETS CONSIST OF: Paid in capital $86,195,516 $38,390,746 $24,437,519 $92,589,877 Accumulated undistributed net investment income 1,454 1,867 9,613 20,267 Accumulated undistributed net realized loss on investments sold, option contracts expired or closed, and futures contracts closed (1,616,159) (880,465) (514,318) (2,934,828) Net unrealized appreciation (depreciation) on: Investments 1,063,239 748,647 (563,628) (4,001,939) Futures contracts -- 5,858 6,045 -- ----------- ----------- ----------- ----------- Net assets $85,644,050 $38,266,653 $23,375,231 $85,673,377 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Shares outstanding (200,000,000 shares authorized, $0.01 par value) 8,040,631 3,701,573 2,910,173 6,551,022 Net Asset Value, Redemption Price and Offering Price per share $ 10.65 $ 10.34 $ 8.03 $ 13.08 ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
*Each Feeder Fund invests its assets directly in the corresponding Master Portfolio. The financial statements for the Master Portfolios, along with the schedule of investments in securities, are contained elsewhere in this report and should be read in conjunction with the Fund's financial statements. See Notes to the Financial Statements. AHA INVESTMENT FUNDS, INC. - FEEDER FUNDS STATEMENT OF OPERATIONS For the Period Ended June 30, 2002 AHA LIMITED AHA FULL MATURITY FIXED MATURITY FIXED INCOME FUND INCOME FUND -------------- -------------- INVESTMENT INCOME ALLOCATED FROM MASTER PORTFOLIOS*: Interest $3,187,290 $2,194,784 Income from securities lending 346 359 ---------- ---------- Total Investment Income 3,187,636 2,195,143 ---------- ---------- EXPENSES: Expenses allocated from Master Portfolios 355,059 224,869 Transfer agent fees and expenses 13,896 12,127 Administration fee 13,310 13,331 Reports to shareholders 1,948 2,344 Registration fees 21,366 17,225 Legal fees 75,455 90,208 Audit fees 8,959 7,105 Custodian fees and expenses 2,802 7,552 Directors' fees and expenses 5,429 5,715 Fund accounting fees 17,880 20,445 Insurance expense 8,432 6,297 ---------- ---------- Total expenses 524,536 407,218 Less, expense reimbursement (17,226) (122,999) ---------- ---------- Net expenses 507,310 284,219 ---------- ---------- NET INVESTMENT INCOME 2,680,326 1,910,924 ---------- ---------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS ALLOCATED FROM MASTER PORTFOLIOS**: Realized gain (loss) on: Investments sold 921,087 559,964 Option contracts expired or closed -- 27,454 Futures contracts closed -- (87,833) ---------- ---------- Net realized gain 921,087 499,585 Change in unrealized appreciation (depreciation) on: Investments 92,174 430,731 Written options -- (5,750) Futures contracts -- 591 ---------- ---------- Net unrealized gain 92,174 425,572 ---------- ---------- NET GAIN ON INVESTMENTS 1,013,261 925,157 ---------- ---------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $3,693,587 $2,836,081 ---------- ---------- ---------- ---------- * Income allocated from Master Portfolios includes income before entry into a master-feeder fund structure of Dividends: $ -- $ -- ---------- ---------- ---------- ---------- Interest: $ 925,702 $ 764,248 ---------- ---------- ---------- ---------- ** Includes realized and unrealized gain (loss) on investments prior to formation of master-feeder fund structure. See Notes to the Financial Statements. AHA INVESTMENT FUNDS, INC. - FEEDER FUNDS STATEMENT OF OPERATIONS For the Period Ended June 30, 2002 AHA BALANCED AHA DIVERSIFIED FUND EQUITY FUND -------------- -------------- INVESTMENT INCOME ALLOCATED FROM MASTER PORTFOLIOS*: Dividends+ $ 224,922 $ 1,278,202 Interest 377,392 60,177 Income from securities lending 202 819 ----------- ------------ Total Investment Income 602,516 1,339,198 ----------- ------------ EXPENSES: Expenses allocated from Master Portfolios 214,461 563,538 Transfer agent fees and expenses 11,211 15,452 Administration fee 13,331 13,335 Reports to shareholders 2,365 2,824 Registration fees 15,875 23,179 Legal fees 87,048 58,103 Audit fees 7,085 9,261 Custodian fees and expenses 8,985 15,664 Directors' fees and expenses 5,487 5,985 Fund accounting fees 16,350 22,524 Insurance expense 3,673 17,986 ----------- ------------ Total expenses 385,871 747,851 Less, expense reimbursement (118,925) -- ----------- ------------ Net expenses 266,946 747,851 ----------- ------------ NET INVESTMENT INCOME 335,570 591,347 ----------- ------------ REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS ALLOCATED FROM MASTER PORTFOLIOS**: Realized gain (loss) on: Investments sold (477,854) (2,934,828) Option contracts expired or closed 5,332 -- Futures contracts closed (28,143) -- ----------- ------------ Net realized loss (500,665) (2,934,828) Change in unrealized appreciation (depreciation) on: Investments (1,467,561) (9,374,094) Written options (4,585) -- Futures contracts (1,788) -- ----------- ------------ Net unrealized loss (1,473,934) (9,374,094) ----------- ------------ NET LOSS ON INVESTMENTS (1,974,599) (12,308,922) ----------- ------------ NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(1,639,029) $(11,717,575) ----------- ------------ ----------- ------------ + Net of Foreign Taxes Withheld of: $ 5,411 $ 21,164 ----------- ------------ ----------- ------------ * Income allocated from Master Portfolios includes income before entry into a master-feeder fund structure of Dividends: $ 73,131 $ 419,932 ----------- ------------ ----------- ------------ Interest: $ 127,369 $ 18,432 ----------- ------------ ----------- ------------ ** Includes realized and unrealized gain (loss) on investments prior to formation of master-feeder fund structure. See Notes to the Financial Statements. AHA INVESTMENT FUNDS, INC. - FEEDER FUNDS STATEMENT OF CHANGES IN NET ASSETS AHA AHA AHA LIMITED LIMITED MATURITY AHA FULL FULL MATURITY MATURITY FIXED FIXED INCOME MATURITY FIXED FIXED INCOME INCOME FUND PORTFOLIO INCOME FUND PORTFOLIO FOR THE PERIOD ENDED FOR THE PERIOD ENDED FOR THE PERIOD ENDED FOR THE PERIOD ENDED JUNE 30, 2002 JUNE 30, 2001 JUNE 30, 2002 JUNE 30, 2001 -------------------- -------------------- -------------------- -------------------- OPERATIONS: Net investment income $ 2,680,326 $ 3,900,752 $ 1,910,924 $ 3,520,897 Net realized gain (loss) on: Investments sold 921,087 580,337 559,964 569,302(1) Option contracts expired or closed -- -- 27,454 -- Futures contracts closed -- -- (87,833) -- Net change in unrealized appreciation (depreciation) on: Investments 92,174 1,327,187 430,731 1,749,253(2) Written options -- -- (5,750) -- Futures contracts -- -- 591 -- ----------- ----------- ----------- ----------- Net increase in net assets resulting from operations 3,693,587 5,808,276 2,836,081 5,839,452 ----------- ----------- ----------- ----------- DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS: Net investment income (2,680,326) (3,900,752) (1,910,924) (3,520,897) Net realized gain on securities transactions -- -- -- -- ----------- ----------- ----------- ----------- Total dividends and distributions (2,680,326) (3,900,752) (1,910,924) (3,520,897) ----------- ----------- ----------- ----------- FUND SHARE TRANSACTIONS: Net proceeds from shares sold 57,336,921 1,423,590 2,429,432 1,150,038 Reinvestment of distributions 2,663,550 3,890,314 1,909,612 3,428,039 Cost of shares redeemed (26,445,199) (41,959,090) (5,537,142) (46,545,306) ----------- ----------- ----------- ----------- Net increase (decrease) in net assets from capital share contributions 33,555,272 (36,645,186) (1,198,098) (41,967,229) ----------- ----------- ----------- ----------- Total increase (decrease) in net assets 34,568,533 (34,737,662) (272,941) (39,648,674) NET ASSETS: Beginning of period 51,075,517 85,813,179 38,539,594 78,188,268 ----------- ----------- ----------- ----------- End of period* $85,644,050 $51,075,517 $38,266,653 $38,539,594 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- * Including undistributed net investment income of: $ 1,454 -- $ 1,867 -- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- CHANGES IN SHARES OUTSTANDING: Shares sold 5,397,979 138,102 236,427 115,024 Shares issued in connection with payment of dividends and distributions 251,607 381,543 185,103 345,825 Shares redeemed (2,505,998) (4,106,938) (536,558) (4,724,557) ----------- ----------- ----------- ----------- Net increase (decrease) in shares outstanding 3,143,588 (3,587,293) (115,028) (4,263,708) ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
(1) Includes net realized gain on investments sold, option contracts expired or closed and futures contracts closed. (2) Includes change in unrealized appreciation (depreciation) on investments, written options and futures contracts. See Notes to the Financial Statements. AHA INVESTMENT FUNDS, INC. - FEEDER FUNDS STATEMENT OF CHANGES IN NET ASSETS AHA AHA AHA DIVERSIFIED DIVERSIFIED EQUITY AHA BALANCED FUND BALANCED PORTFOLIO EQUITY FUND PORTFOLIO FOR THE PERIOD ENDED FOR THE PERIOD ENDED FOR THE PERIOD ENDED FOR THE PERIOD ENDED JUNE 30, 2002 JUNE 30, 2001 JUNE 30, 2002 JUNE 30, 2001 -------------------- -------------------- -------------------- -------------------- OPERATIONS: Net investment income $ 335,570 $ 878,760 $ 591,347 $ 1,424,818 Net realized gain (loss) on: Investments sold (477,854) 3,861,353(1) (2,934,828) 12,613,723 Option contracts expired or closed 5,332 -- -- -- Futures contracts closed (28,143) -- -- -- Net change in unrealized appreciation (depreciation) on: Investments (1,467,561) (1,626,577)(2) (9,374,094) (10,701,080) Written options (4,585) -- -- -- Futures contracts (1,788) -- -- -- ----------- ----------- ----------- ----------- Net increase (decrease) in net assets resulting from operations (1,639,029) 3,113,536 (11,717,575) 3,337,461 ----------- ----------- ----------- ----------- DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS: Net investment income (341,166) (918,011) (700,693) (1,451,483) Net realized gain on securities transactions (1,082,958) (6,418,632) (4,876,329) (20,955,046) ----------- ----------- ----------- ----------- Total dividends and distributions (1,424,124) (7,336,643) (5,577,022) (22,406,529) ----------- ----------- ----------- ----------- FUND SHARE TRANSACTIONS: Net proceeds from shares sold 2,000,000 -- 10,916,813 5,626,330 Reinvestment of distributions 1,192,522 7,336,643 5,319,119 22,406,529 Cost of shares redeemed (344,928) (28,458,702) (5,320,687) (48,696,948) ----------- ----------- ----------- ----------- Net increase (decrease) in net assets from capital share contributions 2,847,594 (21,122,059) 10,915,245 (20,664,089) ----------- ----------- ----------- ----------- Total decrease in net assets (215,559) (25,345,166) (6,379,352) (39,733,157) NET ASSETS: Beginning of period 23,590,790 48,935,956 92,052,729 131,785,886 ----------- ----------- ----------- ----------- End of period* $23,375,231 $23,590,790 $85,673,377 $92,052,729 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- * Including undistributed net investment income of: $ 9,613 $ 15,193 $ 20,267 $ 22,670 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- CHANGES IN SHARES OUTSTANDING: Shares sold 234,192 -- 754,427 306,142 Shares issued in connection with payment of dividends and distributions 142,559 821,120 373,936 1,477,476 Shares redeemed (40,060) (2,180,712) (365,123) (2,260,046) ----------- ----------- ----------- ----------- Net increase (decrease) in shares outstanding 336,691 (1,359,592) 763,240 (476,428) ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
(1) Includes net realized gain on investments sold, option contracts expired or closed and futures contracts closed. (2) Includes change in unrealized appreciation (depreciation) on investments, written options and futures contracts. See Notes to the Financial Statements. AHA INVESTMENT FUNDS, INC. - FEEDER FUNDS FINANCIAL HIGHLIGHTS AHA LIMITED MATURITY FIXED INCOME FUND - CLASS I SHARES FOR THE PERIOD ENDED JUNE 30, -------------------------------------------------------------------- 2002 2001 2000 1999 1998 ------ ------ ------ ------ ------ PER SHARE DATA(1): Net Asset Value Beginning of Period $10.43 $10.11 $10.20 $10.22 $10.16 ------ ------ ------ ------ ------ Income from Investment Operations: Net investment income 0.44 0.63 0.58 0.53 0.60 Net realized and unrealized gain (loss) on investments 0.22 0.32 (0.09) (0.02) 0.06 ------ ------ ------ ------ ------ Total gain from investment operations 0.66 0.95 0.49 0.51 0.66 ------ ------ ------ ------ ------ Less Distributions: From net investment income (0.44) (0.63) (0.58) (0.53) (0.60) From realized gains -- -- -- -- -- ------ ------ ------ ------ ------ Total distributions (0.44) (0.63) (0.58) (0.53) (0.60) ------ ------ ------ ------ ------ Net Asset Value, end of period $10.65 $10.43 $10.11 $10.20 $10.22 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Total Return on Net Asset Value(2) 6.16% 9.17% 4.37% 4.59% 6.11% SUPPLEMENTAL DATA AND RATIOS: Net assets, end of period (000's) $85,644 $51,076 $85,813 $104,675 $129,717 Ratio of net operating expenses to average net assets(3)(4) 0.76%(5) 0.24% 0.14% 0.12% 0.12% Program service fee(4) 0.13% 0.50% 0.50% 0.50% 0.50% Ratio of investment income to average net assets(3) 4.00%(5) 6.50% 5.86% 5.30% 5.92% Portfolio turnover rate 60.24%(6) 189.31% 161.89% 176.78% 144.97%
(1) Information presented relates to a share of capital stock outstanding for the entire period. (2) Total Return on Net Asset Value is net of the service fee for the period July 1, 2001 through October 31, 2001, and for the fiscal years ended 2001, 2000, 1999 and 1998. Beginning November 1, 2001 the management fee is included in the calculation of the Funds' net asset value. (3) Ratios include all management fees and expenses except for the program services fee. (4) Program service fee discontinued as of October 31, 2001. Effective November 1, 2001, the Advisor expense ratio is included as a general operating expense of the Fund. (5) Operating expense is net of reimbursement and waivers. The ratio excluding reimbursements and waivers for the period ended June 30, 2002 would have been 0.78%. The ratio of net investment income to average net assets, excluding reimbursements and waivers for the period ended June 30, 2002 would have been 3.98%. (6) Rate listed represents the portfolio turnover rate from July 1, 2001 through October 31, 2001 (date on which Feeder Fund entered into a master-feeder fund structure). See Notes to the Financial Statements. AHA INVESTMENT FUNDS, INC. - FEEDER FUNDS FINANCIAL HIGHLIGHTS AHA FULL MATURITY FIXED INCOME FUND - CLASS I SHARES FOR THE PERIOD ENDED JUNE 30, -------------------------------------------------------------------- 2002 2001 2000 1999 1998 ------ ------ ------ ------ ------ PER SHARE DATA(1): Net Asset Value Beginning of Period $10.10 $ 9.68 $ 9.85 $10.18 $ 9.79 ------ ------ ------ ------ ------ Income from Investment Operations: Net investment income 0.52 0.63 0.64 0.60 0.64 Net realized and unrealized gain (loss) on investments 0.24 0.42 (0.17) (0.33) 0.39 ------ ------ ------ ------ ------ Total gain from investment operations 0.76 1.05 0.47 0.27 1.03 ------ ------ ------ ------ ------ Less Distributions: From net investment income (0.52) (0.63) (0.64) (0.60) (0.64) From realized gains -- -- -- -- -- ------ ------ ------ ------ ------ Total distributions (0.52) (0.63) (0.64) (0.60) (0.64) ------ ------ ------ ------ ------ Net Asset Value, end of period $10.34 $10.10 $ 9.68 $ 9.85 $10.18 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Total Return on Net Asset Value(2) 7.40% 10.61% 4.41% 2.11% 10.20% SUPPLEMENTAL DATA AND RATIOS: Net assets, end of period (000's) $38,267 $38,540 $78,188 $73,420 $71,829 Ratio of net operating expenses to average net assets(3)(4) 0.76%(5) 0.31% 0.17% 0.16% 0.17% Program service fee(4) 0.17% 0.50% 0.50% 0.50% 0.50% Ratio of investment income to average net assets(3) 5.09%(5) 6.74% 6.55% 5.90% 6.19% Portfolio turnover rate 99.46%(6) 236.10% 211.40% 273.61% 178.52%
(1) Information presented relates to a share of capital stock outstanding for the entire period. (2) Total Return on Net Asset Value is net of the service fee for the period July 1, 2001 through October 31, 2001, and for the fiscal years ended 2001, 2000, 1999 and 1998. Beginning November 1, 2001 the management fee is included in the calculation of the Funds' net asset value. (3) Ratios include all management fees and expenses except for the program services fee. (4) Program service fee discontinued as of October 31, 2001. Effective November 1, 2001, the Advisor expense ratio is included as a general operating expense of the Fund. (5) Operating expense is net of reimbursement and waivers. The ratio excluding reimbursements and waivers for the period ended June 30, 2002 would have been 1.08%. The ratio of net investment income to average net assets, excluding reimbursements and waivers for the period ended June 30, 2002 would have been 4.76%. (6) Rate listed represents the portfolio turnover rate from July 1, 2001 through October 31, 2001 (date on which Feeder Fund entered into a master-feeder fund structure). See Notes to the Financial Statements. AHA INVESTMENT FUNDS, INC. - FEEDER FUNDS FINANCIAL HIGHLIGHTS AHA BALANCED FUND - CLASS I SHARES FOR THE PERIOD ENDED JUNE 30, -------------------------------------------------------------------- 2002 2001 2000 1999 1998 ------ ------ ------ ------ ------ PER SHARE DATA(1): Net Asset Value Beginning of Period $ 9.17 $12.44 $14.69 $14.61 $14.86 ------ ------ ------ ------ ------ Income from Investment Operations: Net investment income 0.12 0.45 0.37 0.36 0.41 Net realized and unrealized gain (loss) on investments (0.72) 0.16 0.26 1.45 2.01 ------ ------ ------ ------ ------ Total gain (loss) from investment operations (0.60) 0.61 0.63 1.81 2.42 ------ ------ ------ ------ ------ Less Distributions: From net investment income (0.12) (0.36) (0.37) (0.36) (0.44) From realized gains (0.42) (3.52) (2.51) (1.37) (2.23) ------ ------ ------ ------ ------ Total distributions (0.54) (3.88) (2.88) (1.73) (2.67) ------ ------ ------ ------ ------ Net Asset Value, end of period $ 8.03 $ 9.17 $12.44 $14.69 $14.61 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Total Return on Net Asset Value(2) (6.94)% 6.21% 3.99% 13.10% 16.79% SUPPLEMENTAL DATA AND RATIOS: Net assets, end of period (000's) $23,375 $23,591 $48,936 $63,301 $59,360 Ratio of net operating expenses to average net assets(3)(4) 1.13%(5) 0.46% 0.24% 0.18% 0.18% Program service fee(4) 0.24% 0.75% 0.75% 0.75% 0.75% Ratio of investment income to average net assets(3) 1.42%(5) 2.66% 2.59% 2.55% 2.86% Portfolio turnover rate 80.33%(6) 220.34% 169.10% 206.43% 169.04%
(1) Information presented relates to a share of capital stock outstanding for the entire period. (2) Total Return on Net Asset Value is net of the service fee for the period July 1, 2001 through October 31, 2001, and for the fiscal years ended 2001, 2000, 1999 and 1998. Beginning November 1, 2001 the management fee is included in the calculation of the Funds' net asset value. (3) Ratios include all management fees and expenses except for the program services fee. (4) Program service fee discontinued as of October 31, 2001. Effective November 1, 2001, the Advisor expense ratio is included as a general operating expense of the Fund. (5) Operating expense is net of reimbursement and waivers. The ratio excluding reimbursements and waivers for the period ended June 30, 2002 would have been 1.64%. The ratio of net investment income to average net assets, excluding reimbursements and waivers for the period ended June 30, 2002 would have been 0.92%. (6) Rate listed represents the portfolio turnover rate from July 1, 2001 through October 31, 2001 (date on which Feeder Fund entered into a master-feeder fund structure). See Notes to the Financial Statements. AHA INVESTMENT FUNDS, INC. - FEEDER FUNDS FINANCIAL HIGHLIGHTS AHA DIVERSIFIED EQUITY FUND - CLASS I SHARES FOR THE PERIOD ENDED JUNE 30, ------------------------------------------------------------------ 2002 2001 2000 1999 1998 ------ ------ ------ ------ ------ PER SHARE DATA(1): Net Asset Value Beginning of Period $15.90 $21.04 $22.15 $20.37 $20.72 ------ ------ ------ ------ ------ Income from Investment Operations: Net investment income 0.10 0.26 0.24 0.29 0.32 Net realized and unrealized gain (loss) on investments (2.01) (0.21) 1.05 3.42 4.14 ------ ------ ------ ------ ------ Total gain (loss) from investment operations (1.91) 0.05 1.29 3.71 4.46 ------ ------ ------ ------ ------ Less Distributions: From net investment income (0.11) (0.26) (0.24) (0.29) (0.32) From realized gains (0.80) (4.93) (2.16) (1.64) (4.49) ------ ------ ------ ------ ------ Total distributions (0.91) (5.19) (2.40) (1.93) (4.81) ------ ------ ------ ------ ------ Net Asset Value, end of period $13.08 $15.90 $21.04 $22.15 $20.37 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Total Return on Net Asset Value(2) (12.75)% 1.17% 5.28% 18.90% 24.05% SUPPLEMENTAL DATA AND RATIOS: Net assets, end of period (000's) $85,673 $92,053 $131,786 $126,892 $85,736 Ratio of net operating expenses to average net assets(3)(4) 0.84% 0.16% 0.11% 0.10% 0.14% Program service fee(4) 0.25% 0.75% 0.75% 0.75% 0.75% Ratio of investment income to average net assets(3) 0.66% 1.33% 1.11% 1.43% 1.51% Portfolio turnover rate 29.13%(5) 99.48% 66.84% 74.35% 65.82%
(1) Information presented relates to a share of capital stock outstanding for the entire period. (2) Total Return on Net Asset Value is net of the service fee for the period July 1, 2001 through October 31, 2001, and for the fiscal years ended 2001, 2000, 1999 and 1998. Beginning November 1, 2001 the management fee is included in the calculation of the Funds' net asset value. (3) Ratios include all management fees and expenses except for the program services fee. (4) Program service fee discontinued as of October 31, 2001. Effective November 1, 2001, the Advisor expense ratio is included as a general operating expense of the Fund. (5) Rate listed represents the portfolio turnover rate from July 1, 2001 through October 31, 2001 (date on which Feeder Fund entered into a master-feeder fund structure). See Notes to the Financial Statements. AHA INVESTMENT FUNDS, INC. - FEEDER FUNDS NOTES TO FINANCIAL STATEMENTS June 30, 2002 1. ORGANIZATION The AHA Investment Funds, Inc. (the "AHA Funds") is registered as an open-end management investment company under the Investment Company Act of 1940. The AHA Funds was incorporated on March 14, 1988 under the laws of Maryland. The AHA Funds currently offer the following series of shares: The AHA Limited Maturity Fixed Income Fund ("Limited Maturity Fund"), The AHA Full Maturity Fixed Income Fund ("Full Maturity Fund"), The AHA Balanced Fund ("Balanced Fund"), The AHA Diversified Equity Fund ("Diversified Fund"), The AHA U.S. Growth Equity Fund ("U.S. Growth Fund"), and The AHA International Core Equity Fund ("International Fund") (each a "Feeder Fund" and collectively, the "Feeder Funds"). The AHA Funds also offer another series of shares which are not part of a master-feeder relationship, The AHA U.S. Government Money Market Fund ("Money Market Fund"). As of June 30, 2002, the U.S. Growth Fund, the International Fund, and the Money Market Fund had not commenced operations. The shares of common stock of the Feeder Funds are further divided into three classes: Class A Shares, Class I Shares, and Institutional Servicing Class Shares. As of June 30, 2002, the Class A Shares and the Institutional Servicing Class Shares for the Feeder Funds had not commenced operations. Each series, unlike many other investment companies which directly acquire and manage their own portfolios of securities, seeks its investment objective by investing all of its investable assets in a corresponding portfolio series (each a "Master Portfolio" and collectively the "Master Portfolios") of CCM Advisors Funds (the "Trust"). On November 1, 2001, each Fund in the series, excluding the Money Market Fund, entered into a master-feeder structure. By entering into this structure, each Feeder Fund invested all of its assets in a corresponding Master Portfolio which had the same investment objective as the Feeder Fund. Each Master Portfolio has multiple feeder funds. Each feeder fund receives a proportionate amount of interest in the Master Portfolio equal to its relative contribution of capital. Thus, each feeder fund is allocated its portion of income, gains (losses) and expenses from the Master Portfolio. Each Feeder Fund's respective interest in the corresponding Master Portfolio as of June 30, 2002 is as follows: Interest in Master Portfolio ---------------------------- Limited Maturity Fund 99.999% Full Maturity Fund 99.997% Balanced Fund 99.996% Diversified Fund 99.999% Prior to the conversion to a master-feeder structure, on November 1, 2001, each then existing Feeder Fund conducted its own investment operations. The Statement of Operations and the Statement of Changes in Net Assets reflect the activities of the Feeder Funds prior to the conversion as well as the activities following the conversion. Refer to the Master Portfolio's financial statements to obtain information about the investment objective of the corresponding Feeder Fund. The financial statements of the Master Portfolios, including the schedule of investments in securities, are contained elsewhere in this report and should be read in conjunction with the Feeder Funds' financial statements. 2. SIGNIFICANT ACCOUNTING POLICIES SECURITY VALUATIONS Master Portfolio securities (other than Government) that are listed on a U.S. securities exchange (whether domestic or foreign) or the Nasdaq Stock Market for which market quotations are readily available are valued at the last quoted sale price as of 4:00 p.m. Eastern time on the day the valuation is made. Purchased options, futures, unlisted U.S. securities and listed U.S. securities not traded on the valuation date for which market quotations are readily available are valued at the most recent bid price. Fixed-income securities (other than obligations having a maturity of 60 days or less) are normally valued on the basis of quotes obtained from pricing services, which take into account appropriate factors such as institutional sized trading in similar groups of securities, yield, quality, coupon rate, maturity, type of issue, trading characteristics and other market data. Securities convertible into equity securities are valued at the greater of latest bid valuation or net conversion value. Short-term securities, or securities with remaining maturities of 60 days or less are valued at amortized cost, which approximates fair value. Other assets and securities for which no quotations are readily available (including restricted securities) will be valued in good faith at fair value using methods determined by the Board of Trustees of the Master Portfolios. ACCOUNTING FOR FUTURES The Master Portfolios may enter into long or short positions in futures contracts in order to hedge against the effect of changing values on portfolio securities held. When a Master Portfolio enters into a futures contract, it is required to deposit, into a segregated account at its custodian bank, U.S. Government securities as a guarantee that it will meet the futures commitment. Each day the Master Portfolio receives or pays cash, called "variation margin," equal to the daily change in the market value of the futures contracts. Such receipts and payments are recorded as unrealized gains or losses until the futures contracts expire or are closed out. Risks of entering into futures contracts include the possibility that there may be an illiquid market at the time the Master Portfolio seeks to close out a contract, and changes in the value of the futures contract may not correlate with changes in the value of the portfolio securities being hedged. ACCOUNTING FOR OPTIONS The Master Portfolios may purchase and write (sell) put and call options on U.S. securities, stock indices, and futures contracts that are traded on U.S. securities exchanges and over-the-counter markets. The risk associated with purchasing an option is that the Master Portfolio pays a premium whether or not the option is exercised. Additionally, the Master Portfolio bears the risk of loss of premium and change in market value should the counterparty not perform under the contract. Put and call options purchased are accounted for in the same manner as portfolio securities. The cost of securities acquired through the exercise of call options is increased by premiums paid. The proceeds from securities sold through the exercise of put options are decreased by the premiums paid. When the Master Portfolio writes an option, the premium received by the Master Portfolio is recorded as a liability and is subsequently adjusted to the current market value of the option written. Premiums received from writing options, which expire unexercised, are recorded by the Master Portfolio on the expiration date as realized gains from option transactions. The difference between the premium and the amount paid on effecting a closing purchase transaction, including brokerage commissions, is also treated as a realized gain, or if the premium is less than the amount paid for the closing purchase transaction, as a realized loss. If a call option is exercised, the premium is added to the proceeds from the sale of the underlying security or currency in determining whether the Master Portfolio has realized a gain or loss. If a put option is exercised, the premium reduces the cost basis of the security or currency purchased by the Master Portfolio. In writing an option, the Master Portfolio bears the market risk of an unfavorable change in the price of the security or currency underlying the written option. Exercise of an option written by the Master Portfolio could result in the Master Portfolio selling or buying a security or currency at a price different from the current market value. REPURCHASE AGREEMENTS The Master Portfolios may enter into repurchase agreements with respect to any of the types of securities in which they are authorized to invest without regard to the maturity of the underlying security. Repurchase agreements will be affected only with banks, savings institutions and broker-dealers. They involve the purchase by a Master Portfolio of a debt security with the condition that, after a stated period of time, the original seller will buy back the same security at a predetermined price or yield. Repurchase agreements are used to enhance liquidity and to earn income for periods as short as overnight. To minimize risk, the securities underlying each repurchase agreement will be maintained with the Master Portfolio's custodian, or a sub-custodian, in an amount at least equal in value to the repurchase price under the agreement (including accrued interest thereunder), and such agreements will only be affected with parties that meet certain creditworthiness standards. However, in the event the other party to the repurchase agreement fails to repurchase the securities subject to such agreement, a Master Portfolio could suffer a loss to the extent it is precluded from selling the securities or, if due to delays, proceeds from the same securities are less than the repurchase price. WHEN-ISSUED SECURITIES The Master Portfolios may purchase securities on a when-issued or delayed delivery basis. Although the purchase amounts of these securities are established at the time the purchaser enters into the agreement, these securities may be delivered and paid for at a future date. The Master Portfolios record purchases of when-issued securities and reflect the values of such securities in determining net asset value in the same manner as other portfolio securities. The Master Portfolios maintain at all times cash or other liquid assets in an amount at least equal to the amount of outstanding commitments for when-issued securities. EXPENSE ALLOCATION Common expenses incurred by Feeder Funds are allocated among the Feeder Funds (i) based upon relative average net assets, (ii) as incurred on a specific identification basis, or (iii) equally among the Feeder Funds, depending on the nature of the expenditure. Each Feeder Fund records its proportionate share of the Master Portfolio's expenses on a daily basis. In addition, each Feeder Fund accrues its own separate expenses. Any cap on expenses includes Feeder Fund specific expenses as well as the expenses allocated from the Master Portfolio. FEDERAL INCOME TAXES Each Master Portfolio intends to qualify as a partnership for federal income tax purposes. Therefore, the Master Portfolios believe they will not be subject to any federal income tax on their income and net realized capital gains (if any). However, each investor in the Master Portfolios will report its allocable share of the Master Portfolio's income and capital gains for purposes of determining its federal income tax liability. It is the Feeder Funds' policy to meet the requirements of the Internal Revenue Code applicable to regulated investment companies and the Feeder Funds intend to distribute investment company net taxable income and net capital gains to shareholders. Therefore, no federal income tax provision is required. At June 30, 2002 the Feeder Funds had accumulated net realized capital loss carryovers expiring in the following years: 2010 2009 2008 2005 2003 ---- ---- ---- ---- ---- Limited Maturity Fund -- $48,858 $443,185 $640,027 $453,358 Full Maturity Fund -- -- $784,903 -- -- Balanced Fund $196,873 -- -- -- -- Diversified Fund $1,204,471 -- -- -- -- At June 30, 2002, the following Feeder Funds deferred, on a tax basis, post- October losses of: Feeder Fund Post-October Losses ----------- ------------------- Full Maturity Fund $ 83,006 Balanced Fund 226,813 Diversified Fund 710,488 The tax character of distributions paid during the year ended June 30, 2002 was as follows: Ordinary Long-Term Total Feeder Fund Income Capital Gains Distributions ----------- ------ ------------- ------------- Limited Maturity Fund $2,680,326 -- $2,680,326 Full Maturity Fund $1,910,924 -- $1,910,924 Balanced Fund $341,170 $1,082,954 $1,424,124 Diversified Fund $700,723 $4,876,299 $5,577,022 The components of distributable earnings on a tax basis at June 30, 2002, were as follows: Undistributed Capital Unrealized Ordinary Loss Appreciation Feeder Fund Income Carryforward (Depreciation) ----------- ------ ------------- ------------- Limited Maturity Fund $1,454 ($1,585,428) $1,032,508 Full Maturity Fund $1,867 ($784,903) $658,943 Balanced Fund $9,613 ($196,873) ($875,028) Diversified Fund $20,267 ($1,204,471) ($5,732,296) Due to inherent differences in the recognition of income, expenses and realized gains/losses under accounting principles generally accepted in the United States of America, permanent differences between book and tax basis reporting have been identified and appropriately reclassified on the Statement of Assets and Liabilities. Accordingly, at June 30, 2002, the following reclassifications were recorded: Accumulated Accumulated Undistributed Undistributed Net Investment Net Feeder Fund Income Realized Loss Paid in Capital ----------- ------ ------------- --------------- Limited Maturity Fund $1,454 $8,544 ($9,998) Full Maturity Fund $1,867 $2,208 ($4,075) Balanced Fund $16 $686,962 ($686,978) Diversified Fund $106,943 ($106,950) $7 Net investment income and realized gains and losses for federal income tax purposes may differ from that reported on the financial statements because of temporary book and tax basis differences. Temporary differences are primarily the result of losses from wash sales and the mark-to-market of certain non- equity futures contracts at June 30, 2002. FUND DISTRIBUTIONS The Full Maturity Fund and the Limited Maturity Fund declare income dividends from net investment income daily and pay these dividends monthly, on the last business day of every month. In the Diversified Fund and Balanced Fund, dividends from net investment income are declared and paid quarterly. USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts in the financial statements. Actual results could differ from those estimates. OTHER INFORMATION Realized gains and losses on the sale of investments are calculated on the identified cost basis. Dividend income is recorded on the ex-dividend date and interest income is recognized on the accrual basis. Securities transactions are recorded on the trade date. In November 2000, a revised AICPA Audit and Accounting Guide, Audits of Investment Companies, was issued, and is effective for fiscal years beginning after December 15, 2000. The revised Guide required the Master Portfolios to amortize premiums and discounts on all fixed-income securities. Upon initial adoption, the Master Portfolios were required to adjust the cost of their fixed- income securities by the cumulative amount of amortization that would have been recognized had amortization been in effect from the purchase date of each holding. Adopting this accounting principle did not affect the Feeder Funds' net asset value, but it did change the classification of certain amounts between interest income and realized and unrealized gain/loss in the Statement of Operations. The impact of the adoption of this principle was not material to the financial statements. Furthermore, it did not affect the determination of either net asset values or total returns of the Feeder Funds. 3. INVESTMENT ADVISOR Effective November 1, 2001, the Trust has an Investment Advisory Agreement (the "Agreement") with CCM Advisors, LLC (the "Advisor"), with whom certain officers and trustees of the Trust are affiliated, to furnish investment advisory services to the Master Portfolios. Under the terms of the Agreement, the Master Portfolios compensate the Advisor for its management services at the annual rate of 0.50% of each Master Portfolio's average daily net assets for the Limited Maturity Fund and the Full Maturity Fund, and an annual rate of 0.75% of each Master Portfolio's average daily net assets for the Balanced Fund and the Diversified Fund. The Advisor has contractually agreed to pay all operating expenses in excess of the annual rates presented below as applied to each Feeder Fund's daily net assets. Expense Cap (as a % of average daily net assets) Fund Class A Class I Institutional Servicing Class ---- ------- ------- ----------------------------- Limited Maturity Fund 1.50% 1.00% 1.50% Full Maturity Fund 1.50% 1.00% 1.50% Balanced Fund 2.00% 1.50% 2.00% Diversified Fund 1.75% 1.25% 1.75% The expense cap includes Feeder Fund specific expenses as well as the Master Portfolio's expenses allocated to the Feeder Fund. These expense limitations will continue until June 30, 2003. Under the terms of the Agreement, any Feeder Fund expenses waived or reimbursed by the Advisor may be recovered by the Advisor to the extent actual operating expenses for a subsequent period are less than the expense limitation caps at the time of the waiver or reimbursement. The Advisor intends to seek potential recovery of such amounts for a period of three years from the fiscal year in which such amounts were waived or reimbursed. As of June 30, 2002, the Limited Maturity Fund, the Full Maturity Fund and the Balanced Fund had $17,226, $122,999 and $118,925, respectively, which is subject to potential recovery through June 30, 2005. Prior to November 1, 2001, the Advisor was compensated for its services directly by the shareholders and not by the Funds pursuant to The Program Services Agreement it had with each shareholder, under which the Advisor provided asset allocation consulting and certain other services. The fees of the investment managers were paid by the Advisor. The Program Service Fee was equal to 0.50% for the Full Maturity Fund and Limited Maturity Fund, and 0.75% for the Balanced Fund and Diversified Fund. This service fee was reflected in the total return as disclosed in the financial highlights tables and in the financial statements. 4. SECURITIES TRANSACTIONS Purchases and sales of investment securities, other than short-term investments and options, for the period from July 1, 2001 through October 31, 2001 were as follows: Purchases Sales ----------------------- ------------------------ U.S. Government Other U.S. Government Other --------------- ----- --------------- ----- Limited Maturity Fund -- $65,473,028 -- $47,879,038 Full Maturity Fund $2,907,967 $35,241,963 $4,435,250 $37,142,165 Balanced Fund $795,291 $17,120,899 $687,334 $17,646,284 Diversified Fund -- $26,038,506 -- $24,892,667 5. OPTION CONTRACTS WRITTEN Effective November 1, 2001, the investments of the Funds were transferred into corresponding master portfolios. The premium amount and the number of option contracts written for the Funds for the period July 1, 2001 through October 31, 2001, were as follows: Number Premium of Contracts Amount ------------ ------ Full Maturity Fund ------------------ Options outstanding at June 30, 2001 37 $ 22,904 Options written 174 107,022 Options closed (95) (63,056) Options expired (45) (14,381) --- -------- Options outstanding at October 31, 2001 71 $ 52,489 --- -------- --- -------- Balanced Fund ------------- Options outstanding at June 30, 2001 13 $ 10,226 Options written 13 6,038 Options closed (14) (8,258) Options expired (9) (6,396) --- -------- Options outstanding at October 31, 2001 3 $ 1,610 --- -------- --- -------- The Limited Maturity and Diversified Funds did not write or cover any options during the period July 1, 2001 through October 31, 2001. 6. SECURITIES LENDING Each Master Portfolio may lend its portfolio securities to broker-dealers by entering directly into lending arrangements with such broker-dealers or indirectly through repurchase agreements to no more than 33-1/3% of its assets. Securities lending and repurchase transactions will be fully collateralized at all times with cash and/or short-term debt obligations. The Master Portfolios receive interest on the collateral received. 7. DIRECTORS AND OFFICERS (UNAUDITED) The table below provides information about each of the Funds' directors and officers, including biographical information about their business experience and information about their relationships with CCM Advisors, LLC. The mailing address of each director and officer is 190 South LaSalle Street, Suite 2800, Chicago, IL 60603. NUMBER OF DATE FIRST PORTFOLIOS IN ELECTED OR FUND COMPLEX NAME AND APPOINTED TO PRINCIPAL OVERSEEN BY OTHER AGE AT POSITIONS HELD OFFICE AND TERM OCCUPATION(S) DIRECTOR*** DIRECTORSHIPS 8/1/02 WITH FUNDS OF OFFICE** DURING PAST 5 YEARS HELD -------- -------------- ---------------- ------------------- ------------ ------------- DIRECTORS WHO ARE "INTERESTED PERSONS"* Douglas D. Peabody Director Since 2001 Managing Director, CCM Advisors, LLC 14 Trustee, CCMA 39 and President (since Jan. 2001); Managing Director Select Investment Convergent Capital Management Inc. Trust (an open- (since 1999); formerly Principal, Eager end investment Manager Advisory Services (1991 to 1999). company) (2 portfolios). Timothy G. Solberg Director Since 1994 Managing Director, CCM Advisors, LLC 7 None 49 Secretary Since 2001 (since 2001); formerly Director of Marketing and Client Services, Hewitt Investment Group, a Division of Hewitt Associates LLC. * Messrs. Peabody and Solberg are directors who are "interested persons" of the Funds as defined in the Investment Company Act of 1940 because they are Managing Directors of the Funds' investment adviser, CCM Advisors, LLC. DIRECTORS WHO ARE NOT "INTERESTED PERSONS" Anthony J. Burke Director Since 2000 President, American Hospital Association 7 None 37 Financial Solutions, Inc. (since 1997); formerly, Marketing Development Director of AHA Insurance Resources Inc. (1997 to 1998); prior thereto, President of A. Burke & Associates (a marketing consulting firm). Frank A. Ehmann Director Since 1988 Retired. Director, American Healthways 14 Trustee, CCMA 68 (provider of diabetes and cardiac disease Select Investment management services to health plans and Trust (an open- hospitals) (since 1989); Director, Genderm end investment Corp. (dermatology company offering company) (2 prescription and non-prescription treatments portfolios); for skin conditions) (1997-2000). Director, SPX Corp. (global provider of technical products and systems, industrial products and services, flow technology and service solutions) (since 1989); for- merly Director and President, United Stationers (whole- sale distributor of business, computer, and facilities man- agement products). Richard John Evans Director Since 2000 Chief Financial Officer, American 7 None 50 Hospital Association (since Dec. 1999); formerly Vice President/Finance, American Hospital Association (1995-1999). John D. Oliverio Director Since 1995 Chief Executive Officer, President and 14 Trustee, CCMA 49 Director, Wheaton Franciscan Services, Select Investment Inc. (parent organization for more than Trust (an open- 100 health and shelter service organizations) end investment (since 1984), Director of the following: company) (2 Affinity Health Systems (since 1995), portfolios); Covenant Health Care System (since 1989), Director, Hewitt All Saints Health Systems (since 1992), Series Trust (an Franciscan Ministries, Inc. (the holding open-end invest- company for Wheaton Franciscan Services, ment company) Inc.' s housing entities) (since 1998) and (since 1998) United Health System (since 1998). (2 portfolios). Thomas J. Tucker Director Since 1992 Retired Health Care Executive, formerly 7 None 70 Vice President of Incarnate Word Health Services. John L. Yoder Director Since 1988 Vice President, Princeton Insurance Co. 7 None 71 (since 1995).
** Directors of the Funds serve a term of indefinite length until resignation or removal and stand for re-election by shareholders only as and when required by the Investment Company Act of 1940. Officers serve a term of indefinite length until their respective successors are elected and qualified. *** Each Director currently serves on the Board of the Funds (7 portfolios). Messrs. Peabody, Ehmann and Oliverio also serve on the Board of Trustees of the CCM Advisors Funds (7 portfolios). DATE FIRST ELECTED OR NAME AND APPOINTED TO PRINCIPAL OTHER AGE AT POSITIONS HELD OFFICE AND TERM OCCUPATION(S) DIRECTORSHIPS 8/1/02 WITH FUNDS OF OFFICE* DURING PAST 5 YEARS HELD -------- -------------- --------------- ------------------- ------------- ADDITIONAL OFFICERS OF THE FUNDS Gregory P. Francoeur Treasurer Since 2002 Director of Finance, Convergent Capital Management None 31 Inc. (since 1997); prior thereto, Auditor, Price Waterhouse LLP (1993-1997). James A. Henderson Vice President Since 1988 Vice President, Corporate Counsel and Assistant None 60 Secretary, American Hospital Association (since 1984); Secretary, AHA Financial Solutions, Inc. (since 1995); Secretary, Health Forum, Inc. (since 1988).
* Officers serve a term of indefinite length until their respective successors are elected and qualified. AHA INVESTMENT FUNDS, INC. - FEEDER FUNDS REPORT OF INDEPENDENT ACCOUNTANTS To the Shareholders and Board of Directors of AHA Investment Funds, Inc.: We have audited the accompanying statements of assets and liabilities, including the schedules of investments, of AHA Investment Funds, Inc. (comprising the AHA Limited Maturity Fixed Income Fund, AHA Full Maturity Fixed Income Fund, AHA Balanced Fund, and AHA Diversified Equity Fund) as of June 30, 2002, and the related statements of operations, changes in net assets, and the financial highlights for the period ended June 30, 2002. These financial statements and financial highlights are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. The statements of changes in net assets for the period ended June 30, 2001 and the financial highlights for the periods ending June 30, 2001 and prior were audited by other independent accountants whose report dated August 3, 2001 expressed an unqualified opinion on those statements. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and financial highlights. Our procedures included confirmation of securities owned as of June 30, 2002, by correspondence with the custodian. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of each of the portfolios constituting the AHA Investment Funds, Inc., at June 30, 2002, the results of their operations, changes in their net assets, and their financial highlights for the period ended June 30, 2002, in conformity with accounting principles generally accepted in the United States. /s/Ernst & Young LLP Chicago, Illinois July 29, 2002 CCM ADVISORS LIMITED MATURITY FIXED INCOME MASTER PORTFOLIO PORTFOLIO OF INVESTMENTS June 30, 2002 PRINCIPAL AMOUNT VALUE --------- ----- CORPORATE BONDS - 21.8% AEROSPACE & DEFENSE - 0.7% United Technologies Corporation, 6.625%, 11/15/2004 $ 535,000 $ 571,154 ----------- BANKING - 2.0% Bank of America Corporation, 6.500%, 08/15/2003 360,000 375,064 Bank of America Corporation, 6.125%, 07/15/2004 1,300,000 1,363,885 ----------- 1,738,949 ----------- FINANCIAL - 8.2% Caterpillar Financial Services Corporation, 7.590%, 12/10/2003 750,000 796,269 Citigroup Inc., 5.700%, 02/06/2004 1,350,000 1,404,566 Countrywide Home Loans, Inc., 5.250%, 06/15/2004 350,000 359,950 Countrywide Home Loans, Inc., 6.850%, 06/15/2004 640,000 677,281 Household Finance Corporation, 7.000%, 08/01/2003 490,000 506,132 Toyota Motor Credit Corporation, 5.625%, 11/13/2003 1,000,000 1,036,553 Unilever Capital Corp., 6.750%, 11/01/2003 1,090,000 1,145,883 Wells Fargo & Company, 4.800%, 07/29/2005 800,000 816,860 Wells Fargo Financial, Inc., 5.450%, 05/03/2004 300,000 312,137 ----------- 7,055,631 ----------- FINANCIAL - INVESTMENT BANKING CORPORATIONS - 5.4% The Bear Stearns Companies Inc., 6.750%, 04/15/2003 650,000 669,595 Lehman Brothers Holdings Inc., 7.250%, 10/15/2003 1,025,000 1,079,855 Merrill Lynch & Co., Inc., 5.350%, 06/15/2004 750,000 772,035 Merrill Lynch & Co., Inc., 6.000%, 11/15/2004 575,000 602,479 Morgan Stanley, 7.125%, 08/15/2003 360,000 377,349 Morgan Stanley, 5.625%, 01/20/2004 570,000 590,674 Morgan Stanley, 7.750%, 06/15/2005 470,000 516,124 ----------- 4,608,111 ----------- FOOD & BEVERAGES - 2.1% Anheuser-Busch Companies, Inc., 6.750%, 08/01/2003 500,000 525,767 The Coca-Cola Company, 4.000%, 06/01/2005 800,000 808,521 Coca-Cola Enterprises Inc., 6.625%, 08/01/2004 481,000 512,468 ----------- 1,846,756 ----------- INSURANCE - 1.1% The Allstate Corporation, 7.875%, 05/01/2005 850,000 937,418 ----------- METALS - 0.7% Alcoa Inc., 7.250%, 08/01/2005 540,000 591,821 ----------- MULTIMEDIA - 0.9% The Walt Disney Company, 4.875%, 07/02/2004(1) 730,000 746,326 ----------- RETAIL STORES - 0.7% Wal-Mart Stores, Inc., 6.500%, 06/01/2003 565,000 585,210 ----------- TOTAL CORPORATE BONDS (COST $18,472,370) 18,681,376 ----------- U.S. GOVERNMENT AGENCY OBLIGATIONS - 29.7% Federal Home Loan Mortgage Corporation, 3.500%, 09/15/2003(1) 3,260,000 3,307,955 Federal Home Loan Mortgage Corporation, 5.250%, 02/15/2004(1) 6,600,000 6,871,049 Federal Home Loan Mortgage Corporation, 6.875%, 01/15/2005(1) 4,030,000 4,372,312 Federal Home Loan Mortgage Corporation, 4.250%, 06/15/2005(1) 4,895,000 4,997,722 Federal National Mortgage Association, 4.750%, 11/14/2003(1) 3,840,000 3,959,958 Federal National Mortgage Association, 5.625%, 05/14/2004(1) 1,900,000 1,991,183 ----------- TOTAL U.S. GOVERNMENT AGENCY OBLIGATIONS (COST $25,300,866) 25,500,179 ----------- ASSET BACKED SECURITIES - 36.5% American Express Credit Account Master Trust, 1999-1 A, 5.600%, 11/15/2006 1,000,000 1,044,612 American Express Master Trust, 1998-1 A, 5.900%, 04/15/2004 1,370,500 1,414,767 BMW Vehicle Owner Trust, 2001-A A4, 5.110%, 05/25/2006 895,000 927,237 Capital Auto Receivables Asset Trust, 2001-2 A4, 5.000%, 12/15/2006 600,000 620,388 Capital Auto Receivables Asset Trust, 2002-1 A4, 4.160%, 07/16/2007 940,000 944,087 Capital One Master Trust, 1998-4 A, 5.430%, 01/15/2007 630,000 653,740 Chase Credit Card Master Trust, 1998-3 A, 6.000%, 08/15/2005 1,065,000 1,097,728 Chase Credit Card Master Trust, 1999-3 A, 6.660%, 01/15/2007 1,380,000 1,476,350 Chase Manhattan Auto Owner Trust, 2000-A A4, 6.260%, 06/15/2007 1,045,000 1,097,729 Chase Manhattan Auto Owner Trust, 2001-A A4, 5.070%, 02/15/2008 900,000 932,182 Citibank Credit Card Master Trust I, 1999-1 A, 5.500%, 02/15/2006 1,000,000 1,041,025 Daimler Chrysler Auto Trust, 2000-E A4, 6.160%, 01/08/2006 855,000 900,166 Daimler Chrysler Auto Trust, 2001-C A4, 4.630%, 12/06/2006 805,000 826,100 Discover Card Master Trust I, 1998-6 A, 5.850%, 01/17/2006 1,070,000 1,107,845 Discover Card Master Trust I, 2001-5 A, 5.300%, 11/16/2006 1,000,000 1,038,444 First USA Credit Card Master Trust, 1998-9 A, 5.280%, 09/18/2006 1,000,000 1,036,643 Ford Credit Auto Owner Trust, 2001-C A5, 5.250%, 09/15/2005 270,000 280,385 Ford Credit Auto Owner Trust, 2002-A A4A, 4.360%, 09/15/2006 1,415,000 1,440,281 Honda Auto Receivables Owner Trust, 2002-1 A4, 4.220%, 04/16/2007 1,400,000 1,417,129 MBNA Master Credit Card Trust, 1998-J A, 5.250%, 02/15/2006 930,000 960,506 Nations Bank Credit Card Master Trust, 1993-2 A, 6.000%, 12/15/2005 860,000 900,059 Nationslink Funding Corporation, 1998-2 A1, 6.001%, 08/20/2030 821,148 857,480 Nissan Auto Receivables Owner Trust, 2000-B A4, 7.270%, 11/15/2004 1,280,000 1,347,428 Nissan Auto Receivables Owner Trust, 2001-C A3, 4.310%, 05/16/2005 1,425,000 1,456,337 Standard Credit Card Master Trust, Series A, 5.950%, 09/07/2003 500,000 520,391 Toyota Auto Receivables Owner Trust, 2000-A A4, 7.210%, 04/15/2007 1,385,000 1,467,892 Toyota Auto Receivables Owner Trust, 2000-B A4, 6.800%, 04/15/2007 1,390,000 1,466,545 USAA Auto Owner Trust, 2000-1 A4, 6.980%, 06/15/2005 880,000 925,117 USAA Auto Owner Trust, 2001-1 A4, 5.080%, 03/15/2006 1,300,000 1,345,975 WFS Financial Owner Trust, 2001-C A4, 5.180%, 03/20/2009 750,000 776,133 ----------- TOTAL ASSET BACKED SECURITIES (COST $30,727,607) 31,320,701 ----------- MORTGAGE BACKED SECURITIES - U.S. AGENCY - 9.8% FNMA, Pool 527835, 7.500%, 02/01/2030 9,255 9,723 FNMA, Pool 541946, 7.500%, 07/01/2030 10,948 11,502 FNMA, Pool 584930, 7.500%, 05/01/2031 12,602 13,240 FNMA, Pool 620204, 7.500%, 01/01/2032 637,898 670,196 FNMA, Pool 624331, 7.500%, 02/01/2032 921,687 968,354 FNMA, Pool 637540, 7.500%, 03/01/2032 493,599 518,586 FNMA Series 1993-214 Class J, 6.000%, 09/25/2008(1) 1,735,000 1,800,667 FNMA Series 2002-11 Class QA, 5.000%, 02/25/2010(1) 1,440,000 1,480,015 FNMA Series 2002-11 Class QD, 5.000%, 02/25/2008(1) 1,335,000 1,371,597 GNMA, Pool 523009, 8.000%, 06/15/2030 74,572 79,486 GNMA, Pool 537749, 8.000%, 12/15/2030 46,495 49,559 GNMA, Pool 539935, 8.000%, 12/15/2030 163,540 174,315 GNMA, Pool 582209, 8.000%, 02/15/2032 1,195,265 1,274,008 ----------- TOTAL MORTGAGE BACKED SECURITIES - U.S. AGENCY (COST $8,359,409) 8,421,248 ----------- SHORT-TERM INVESTMENTS - 1.1% American General Corporation Commercial Paper, 1.896%, 07/01/2002 960,000 960,000 ----------- TOTAL SHORT-TERM INVESTMENTS (COST $960,000) 960,000 ----------- TOTAL INVESTMENTS (COST $83,820,252) - 98.9% 84,883,504 ----------- Other Assets Less Liabilities - 1.1% 990,638 ----------- TOTAL NET ASSETS - 100.0% $85,874,142 ----------- ----------- (1) This security or a portion of this security is out on loan at June 30, 2002. Total loaned securities had a market value of $23,094,499 at June 30, 2002. (Note 8). See Notes to the Financial Statements. CCM ADVISORS FULL MATURITY FIXED INCOME MASTER PORTFOLIO PORTFOLIO OF INVESTMENTS June 30, 2002 PRINCIPAL AMOUNT VALUE --------- ------ CORPORATE BONDS - 25.7% AEROSPACE & DEFENSE - 0.6% Lockheed Martin Corporation, 7.650%, 05/01/2016 $ 90,000 $ 102,576 Lockheed Martin Corporation, 8.500%, 12/01/2029 40,000 48,425 Systems 2001 Asset Trust, 6.664%, 09/15/2013 (Cost $91,067, Acquired 06/04/2001 and 06/07/2001)(2) 90,639 96,353 ----------- 247,354 ----------- AIRLINES - 0.9% Continental Airlines, Inc., 6.800%, 07/02/2007 339,036 326,941 ----------- AUTOMOBILES - 1.3% Daimler Chrysler NA Holding Corp., 8.000%, 06/15/2010 100,000 108,847 Ford Motor Company, 9.215%, 09/15/2021 250,000 274,146 Ford Motor Company, 8.900%, 01/15/2032 120,000 130,207 ----------- 513,200 ----------- BANKING - 3.8% Bank of America Corporation, 5.250%, 02/01/2007 100,000 102,185 Bank of America Corporation, 10.200%, 07/15/2015 325,000 428,075 Bank One Corporation, 5.900%, 11/15/2011 100,000 100,121 BSCH Issuances Ltd., 7.625%, 09/14/2010(1) 200,000 219,622 Dresdner Bank New York, 7.250%, 09/15/2015(1) 250,000 274,939 Firstar Bank N.A., 7.125%, 12/01/2009 10,000 10,938 Key Bank, N.A., 7.000%, 02/01/2011 20,000 21,137 Key Bank Washington, 7.125%, 08/15/2006 150,000 162,291 Wachovia Corporation, 6.300%, 04/15/2008 150,000 154,939 ----------- 1,474,247 ----------- BUILDING PRODUCTS - 0.2% Masco Corporation, 5.875%, 07/15/2012 75,000 74,157 ----------- CHEMICALS - 0.2% The Dow Chemical Company, 5.250%, 05/14/2004 90,000 92,148 ----------- COMMUNICATION & MEDIA - 2.0% AOL Time Warner Inc., 7.700%, 05/01/2032 60,000 53,369 Continental Cablevision, Inc., 9.500%, 08/01/2013 325,000 342,982 News America Holdings Inc., 8.500%, 02/23/2025 100,000 109,896 News America Holdings Inc., 7.625%, 11/30/2028 (Cost $101,972, Acquired 11/16/1998)(2) 100,000 92,855 TCI Communications, Inc., 6.375%, 05/01/2003 70,000 71,503 TCI Communications, Inc., 7.875%, 02/15/2026 100,000 89,092 ----------- 759,697 ----------- COMPUTER SERVICES - 0.4% Electronic Data Systems Corporation, 7.450%, 10/15/2029 150,000 157,295 ----------- ENERGY - 2.0% Dynegy Holdings Inc., 8.125%, 03/15/2005 75,000 57,789 FirstEnergy Corp., 6.450%, 11/15/2011 20,000 19,458 FirstEnergy Corp., 7.375%, 11/15/2031 20,000 19,045 Hydro-Quebec, 6.300%, 05/11/2011(1) 50,000 53,112 Hydro-Quebec, 7.500%, 04/01/2016(1) 40,000 46,604 Korea Electric Power Corporation, 7.750%, 04/01/2013(1) 95,000 105,780 Korea Electric Power Corporation, 6.750%, 08/01/2027(1) 75,000 79,126 Progress Energy, Inc., 7.100%, 03/01/2011 100,000 105,847 PSI Energy, Inc., 7.850%, 10/15/2007 250,000 261,352 ----------- 748,113 ----------- FINANCIAL - 4.4% Anadarko Finance Company, 7.500%, 05/01/2031(1) 100,000 106,991 Auburn Hills Trust, 12.375%, 05/01/2020 280,000 402,540 Citigroup Inc., 6.000%, 02/21/2012 95,000 95,558 Ford Motor Credit Company, 7.875%, 06/15/2010 40,000 41,879 Ford Motor Credit Company, 7.375%, 02/01/2011(5) 35,000 35,507 General Electric Capital Corporation, 6.000%, 06/15/2012 75,000 74,783 General Electric Capital Corporation, 6.750%, 03/15/2032 150,000 147,807 General Motors Acceptance Corporation, 6.750%, 01/15/2006 10,000 10,390 General Motors Acceptance Corporation, 6.125%, 09/15/2006 50,000 50,754 General Motors Nova Scotia Finance Company, 6.850%, 10/15/2008(1) 30,000 31,183 Household Finance Corporation, 6.400%, 06/17/2008 30,000 30,132 Household Finance Corporation, 6.500%, 11/15/2008 46,000 46,206 Household Finance Corporation, 6.750%, 05/15/2011(5) 20,000 19,717 PDVSA Finance Ltd., 8.500%, 11/16/2012(1) 40,000 35,100 Petrozuata Finance Inc., 8.220%, 04/01/2017 (Cost $258,892, Acquired 10/1998 - 01/2000)(1)(2) 300,000 201,750 Verizon Global Funding Corp., 6.875%, 06/15/2012(5) 170,000 167,235 Wharf International Finance Ltd., 7.625%, 03/13/2007(1) 100,000 108,589 Wharf International Finance Ltd., 7.625%, 03/13/2007 (Cost $75,471, Acquired 08/19/1997)(1)(2) 75,000 81,442 ----------- 1,687,563 ----------- FINANCIAL - INVESTMENT BANKING CORPORATIONS - 1.0% Credit Suisse First Boston, 5.750%, 04/15/2007 50,000 51,205 J.P. Morgan & Co. Incorporated, 6.000%, 01/15/2009(5) 50,000 50,901 J.P. Morgan Chase & Co., 5.250%, 05/30/2007 40,000 40,274 Lehman Brothers Holdings Inc., 8.500%, 05/01/2007 200,000 227,239 ----------- 369,619 ----------- FOOD & BEVERAGES - 1.1% Anheuser-Busch Companies, Inc., 6.500%, 05/01/2042 60,000 60,207 Kellogg Company, 6.600%, 04/01/2011 100,000 105,030 Kellogg Company, 7.450%, 04/01/2031 100,000 110,249 The Pepsi Bottling Group, Inc., 7.000%, 03/01/2029 (Cost $149,076, Acquired 03/03/1999)(2) 150,000 160,119 ----------- 435,605 ----------- INDUSTRIAL - 0.4% Dryden Investor Trust, 7.157%, 07/23/2008 (Cost $156,754, Acquired 07/16/1998)(2)(3) 148,617 155,411 ----------- MANUFACTURING - DIVERSIFIED - 0.4% Tyco International Group SA, 6.375%, 10/15/2011(1) 145,000 111,214 Tyco International Group SA, 6.875%, 01/15/2029(1) 60,000 42,697 ----------- 153,911 ----------- OIL & GAS - 2.0% Apache Corporation, 6.250%, 04/15/2012 30,000 31,028 BP Capital Markets plc, 4.625%, 05/27/2005 90,000 92,512 Conoco Funding Co., 6.350%, 10/15/2011 120,000 124,629 El Paso Corporation, 7.750%, 01/15/2032 130,000 120,886 El Paso Natural Gas, 8.375%, 06/15/2032 (Cost $10,234, Acquired 06/13/2002)(2) 10,000 10,319 Petroliam Nasional Berhad, 7.625%, 10/15/2026 (Cost $9,555, Acquired 06/27/2002)(1)(2) 10,000 9,382 Petronas Capital Ltd., 7.875%, 05/22/2022 (Cost $19,906, Acquired 05/15/2002)(1)(2) 20,000 19,928 Phillips Petroleum Company, 8.750%, 05/25/2010 100,000 118,917 Sonat Inc., 7.625%, 07/15/2011 10,000 9,859 Tennessee Gas Pipeline Company, 8.375%, 06/15/2032 20,000 20,741 The Williams Companies, Inc., 7.625%, 07/15/2019 200,000 157,767 The Williams Companies, Inc., 7.750%, 06/15/2031 50,000 36,732 The Williams Companies, Inc., 8.750%, 03/15/2032 (Cost $41,534, Acquired 04/10/2002)(2) 40,000 32,657 ----------- 785,357 ----------- PAPER & FOREST PRODUCTS - 1.2% Georgia-Pacific Corp, 9.875%, 11/01/2021 75,000 73,691 Georgia-Pacific Corp, 9.625%, 03/15/2022 200,000 195,010 Georgia-Pacific Corp, 9.500%, 05/15/2022 50,000 48,276 MeadWestvaco Corporation, 6.850%, 04/01/2012 30,000 31,552 Scotia Pacific Co. LLC, 7.710%, 01/20/2014 14,000 10,530 Weyerhaeuser Company, 6.750%, 03/15/2012 (Cost $79,338, Acquired 03/06/2002, 03/12/2002 and 04/04/2002)(2) 80,000 82,988 Weyerhaeuser Company, 7.375%, 03/15/2032 (Cost $19,771, Acquired 03/06/2002 and 03/12/2002)(2) 20,000 20,361 ----------- 462,408 ----------- RAILROAD TRANSPORTATION - 0.1% Consolidated Rail Corp., 7.875%, 05/15/2043 40,000 43,519 ----------- RETAIL - 0.7% J. C. Penney Company, Inc., 9.750%, 06/15/2021 229,000 222,117 Target Corporation, 5.875%, 03/01/2012 30,000 30,395 ----------- 252,512 ----------- STEEL MANUFACTURING - 0.2% Pohang Iron & Steel Co., Ltd., 7.125%, 07/15/2004(1) 65,000 69,173 ----------- TELECOMMUNICATION - 0.9% AT&T Corp., 8.000%, 11/15/2031, (Cost $29,678, Acquired 11/15/2001)(2) 30,000 23,614 British Telecommunications PLC, 8.625%, 12/15/2030(1) 110,000 120,203 Qwest Corporation, 8.875%, 06/01/2031 225,000 176,625 Sprint Capital Corporation, 6.900%, 05/01/2019 40,000 26,766 ----------- 347,208 ----------- TRANSPORTATION SERVICES - 1.0% FedEx Corp., 9.650%, 06/15/2012 300,000 366,387 ----------- WASTE DISPOSAL - 0.9% Waste Management, Inc., 7.000%, 07/15/2028 375,000 352,241 ----------- TOTAL CORPORATE BONDS (COST $10,068,754) 9,874,066 ----------- FOREIGN GOVERNMENT BONDS - 1.2% National Bank of Hungary, 8.875%, 11/01/2013(1) 75,000 90,203 Quebec Province, 7.500%, 09/15/2029(1) 40,000 45,973 Republic of Poland, 6.250%, 07/03/2012(1) 100,000 99,130 United Mexican States, 11.500%, 05/15/2026(1) 160,000 203,360 ----------- TOTAL FOREIGN GOVERNMENT BONDS (COST $418,894) 438,666 ----------- U.S. GOVERNMENT AGENCY OBLIGATIONS - 3.1% FHLMC, 6.625%, 09/15/2009(5) 775,000 851,295 FHLMC, 5.750%, 01/15/2012(5) 300,000 308,788 FNMA, 6.000%, 05/15/2011(5) 38,000 39,894 ----------- TOTAL U.S. GOVERNMENT AGENCY OBLIGATIONS (COST $1,173,461) 1,199,977 ----------- U.S. TREASURY SECURITIES - 17.3% U.S. TREASURY BONDS - 13.5% United States Treasury Bond, 11.875%, 11/15/2003 20,000 22,560 United States Treasury Bond, 9.875%, 11/15/2015(5) 1,825,000 2,618,474 United States Treasury Bond, 9.250%, 02/15/2016(5) 425,000 584,190 United States Treasury Bond, 5.250%, 11/15/2028(5) 530,000 498,479 United States Treasury Inflation Index Bond, 3.625%, 04/15/2028 188,947 204,121 United States Treasury Inflation Index Bond, 3.875%, 04/15/2029(5) 1,115,389 1,257,428 ----------- 5,185,252 ----------- U.S. TREASURY NOTES - 3.4% United States Treasury Note, 3.875%, 07/31/2003(5) 200,000 203,897 United States Treasury Note, 5.750%, 11/15/2005(5) 720,000 768,601 United States Treasury Note, 5.750%, 08/15/2010(5) 10,000 10,700 United States Treasury Note, 4.875%, 02/15/2012(5) 310,000 311,260 ----------- 1,294,458 ----------- U.S. TREASURY STRIPS - 0.4% United States Treasury Strips, 0.000%, 11/15/2027(5) 680,000 152,863 ----------- TOTAL U.S. TREASURY SECURITIES (COST $6,354,059) 6,632,573 ----------- ASSET BACKED SECURITIES - 12.1% Advanta Mortgage Loan Trust, 1997-1 A5, 7.350%, 05/25/2027 495,247 517,439 Americredit Automobile Receivables Trust, 2000-D A2, 6.690%, 05/12/2004 58,766 59,078 Chevy Chase Home Loan Trust, 1996-1 A, 7.150%, 05/15/2015 85,612 89,073 Cityscape Home Equity Loan Trust, 1997-C A4, 7.000%, 07/25/2028 95,440 101,149 Contimortgage Home Equity Loan Trust, 1997-2 A9, 7.090%, 04/15/2028 203,747 210,691 Contimortgage Home Equity Loan Trust, 1999-3 A7, 7.280%, 04/25/2014 475,000 504,339 Delta Funding Home Equity Loan Trust, 1997-3 A6F, 6.860%, 10/25/2028 224,310 236,254 Fairbanks Capital Mortgage Loan Trust, 1999-1 A, 2.440%, 05/25/2028(4) 162,131 163,433 Green Tree Financial Corporation, 1997-7 A6, 6.760%, 07/15/2029 374,234 390,250 Green Tree Financial Corporation, 1999-3 A5, 6.160%, 02/01/2031 450,000 473,289 Green Tree Home Improvement Loan Trust, 1996-D HEM2, 8.300%, 09/15/2027 400,000 416,958 IMC Home Equity Loan Trust, 1997-5 A10, 6.880%, 11/20/2028 296,267 312,701 The Money Store Home Equity Trust, 1997-D AF7, 6.485%, 12/15/2038 399,880 418,455 Salomon Brothers Mortgage Securities VII, 1997-LB6 A6, 6.820%, 12/25/2027 509,880 537,412 SLM Student Loan Trust, Series 1998-2 A1, 2.450%, 04/25/2007(4) 15,320 15,351 UCFC Home Equity Loan, 1998-C A7, 5.935%, 01/15/2030 179,971 186,673 ----------- TOTAL ASSET BACKED SECURITIES (COST $4,350,694) 4,632,545 ----------- MORTGAGE BACKED SECURITIES - PRIVATE - 3.4% Asset Securitization Corporation, 1996-D2 A1, 6.920%, 02/14/2029 170,267 181,085 Commercial Mortgage Acceptance Corporation, 1997-ML1 A4, 6.735%, 12/15/2030 90,100 95,290 GMAC Commercial Mortgage Securities Inc., 1997-C1 A3, 6.869%, 07/15/2029 100,000 108,164 Nomura Asset Securities Corporation, 1996-MD5 A1B, 7.120%, 04/13/2039 170,000 184,443 Residential Asset Securitization Trust, 1998-A8 A8, 6.750%, 08/25/2028 250,000 260,239 Residential Funding Mortgage Securities I, 1992-S41 A11, 7.000%, 12/25/2007 353,111 355,716 Residential Funding Mortgage Securities I, 1996-S14 M1, 7.500%, 05/25/2026 123,804 130,419 ----------- TOTAL MORTGAGE BACKED SECURITIES - PRIVATE (COST $1,123,783) 1,315,356 ----------- MORTGAGE BACKED SECURITIES - U.S. AGENCY - 32.9% FHLMC, Pool 160098, 10.500%, 01/01/2010 24,183 26,848 FHLMC, Series 1 Class Z, 9.300%, 04/15/2019 85,341 89,442 FHLMC, Series 2277, 7.500%, 01/15/2031 349,014 370,926 FHLMC, Series 2418, 6.000%, 09/15/2019 654,781 677,767 FHLMC Gold, Pool C00647, 6.500%, 09/01/2028 128,847 132,160 FHLMC Gold, Pool C00689, 6.500%, 12/01/2028 184,072 188,804 FHLMC Gold, Pool C00742, 6.500%, 04/01/2029 573,926 587,672 FHLMC Gold, Pool C00760, 6.500%, 05/01/2029 294,144 301,189 FHLMC Gold, Pool C20300, 6.500%, 01/01/2029 284,683 290,719 FNMA, Pool 251967, 6.500%, 09/01/2028 226,263 231,894 FNMA, Pool 252162, 6.500%, 12/01/2028 184,089 188,670 FNMA, Pool 252645, 6.500%, 08/01/2029 180,779 185,002 FNMA, Pool 253183, 7.500%, 04/01/2030 40,384 42,704 FNMA, Pool 253398, 8.000%, 08/01/2030 187,533 199,270 FNMA, Pool 303168, 9.500%, 02/01/2025 48,634 53,902 FNMA, Pool 585226, 6.500%, 05/01/2031 179,414 183,309 FNMA, Pool 627116, 6.000%, 02/01/2032(5) 591,923 591,483 FNMA, Pool TBA, 7.000%, 07/01/2032 200,000 199,500 FNMA, Pool TBA, 7.000%, 07/01/2032 700,000 725,157 FNMA, Series1990-105 Class J, 6.500%, 09/25/2020 233,765 245,799 FNMA, Series 1991-86 Class Z, 6.500%, 07/25/2021 295,831 309,142 FNMA, Series 1992-136 Class PK, 6.000%, 08/25/2022 300,000 305,229 FNMA, Series 1998-66 Class C, 6.000%, 12/25/2028 171,330 174,880 GNMA, Pool 780315, 9.500%, 12/15/2017 91,034 101,972 GNMA, Pool 781340, 6.500%, 10/15/2031(5) 977,666 1,001,692 GNMA, Pool TBA, 6.500%, 07/01/2032 4,500,000 4,591,404 GNMA, Pool TBA, 8.000%, 07/01/2032 600,000 638,625 ----------- TOTAL MORTGAGE BACKED SECURITIES - U.S. AGENCY (COST $12,490,033) 12,635,161 ----------- SHORT-TERM INVESTMENTS - 19.2% U.S. GOVERNMENT AGENCY OBLIGATIONS - 19.2% Federal Home Loan Bank Discount Note, 1.713%, 07/01/2002 7,047,000 7,047,000 FNMA Discount Note, 1.850%, 08/14/2002(5) 300,000 299,322 ----------- TOTAL SHORT-TERM INVESTMENTS (COST $7,346,322) 7,346,322 ----------- TOTAL INVESTMENTS (COST $43,326,000) - 114.9% 44,074,666 ----------- Liabilities, less Other Assets - (14.9%) (5,707,203) ----------- TOTAL NET ASSETS - 100.0% $38,367,463 ----------- ----------- (1) Foreign security. (2) Restricted under Rule 144A of the Securities Act of 1933. (3) Fair valued security. (4) Variable rate security. The rate shown is the rate in effect on June 30, 2002. (5) This security or a portion of this security is out on loan at June 30, 2002. Total loaned securities had a market value of $9,762,027 at June 30, 2002. (Note 8). See Notes to the Financial Statements. CCM ADVISORS BALANCED MASTER PORTFOLIO PORTFOLIO OF INVESTMENTS June 30, 2002 SHARES VALUE ------ ----- COMMON STOCKS - 61.6% AEROSPACE & DEFENSE - 0.7% Lockheed Martin Corporation 100 $ 6,950 Northrop Grumman Corporation 200 25,000 Raytheon Company 3,400 138,550 ----------- 170,500 ----------- AIR TRANSPORTATION - 0.1% Southwest Airlines Co.(5) 1,500 24,240 ----------- AUTOMOBILES - 0.1% General Motors Corporation(5) 600 32,070 ----------- BANKING - 5.6% AmSouth Bancorporation 800 17,904 Bank of America Corporation 3,800 267,368 BB&T Corporation 800 30,880 FleetBoston Financial Corporation 12,800 414,080 Marshall & Ilsley Corporation 600 18,558 National City Corporation(5) 1,600 53,200 Regions Financial Corporation 300 10,545 SouthTrust Corporation 300 7,836 SunTrust Banks, Inc. 600 40,632 Union Planters Corporation 600 19,422 U.S. Bancorp(5) 16,000 373,600 Wachovia Corporation(5) 1,000 38,180 Wells Fargo & Company 200 10,012 ----------- 1,302,217 ----------- BIOTECHNOLOGY - 0.1% Amgen Inc.*(5) 200 8,376 Immunex Corporation*(5) 1,200 26,808 ----------- 35,184 ----------- BUILDINGS - RESIDENTIAL/COMMERCIAL - 0.1% KB HOME 300 15,453 ----------- BUSINESS MACHINES & SOFTWARE - 0.4% International Business Machines Corporation(5) 1,000 72,000 Pitney Bowes Inc. 400 15,888 ----------- 87,888 ----------- BUSINESS SERVICES - 2.4% Deluxe Corporation 500 19,445 Equifax Inc. 900 24,300 First Data Corporation(5) 800 29,760 Synopsys, Inc.*(5) 8,800 482,328 ----------- 555,833 ----------- CHEMICALS - 0.3% Ashland Inc. 600 24,300 E.I. du Pont de Nemours and Company 1,100 48,840 PPG Industries, Inc. 200 12,380 ----------- 85,520 ----------- COMMUNICATION & MEDIA - 0.1% AOL Time Warner Inc.*(5) 400 5,884 The Walt Disney Company 600 11,340 ----------- 17,224 ----------- COMPUTER SERVICES - 1.4% Computer Sciences Corporation*(5) 400 19,120 Electronic Data Systems Corporation(5) 800 29,720 Unisys Corporation*(5) 32,500 292,500 ----------- 341,340 ----------- COMPUTERS - 0.3% Dell Computer Corporation*(5) 2,500 65,350 ----------- CONSUMER PRODUCTS - 0.0% The Clorox Company 300 12,405 ----------- COSMETICS & SOAP - 0.3% Kimberly-Clark Corporation 500 31,000 The Procter & Gamble Company(5) 400 35,720 ----------- 66,720 ----------- DRUGS - 7.3% Abbott Laboratories 9,600 361,440 Eli Lilly and Company(5) 600 33,840 GlaxoSmithKline plc - ADR(1) 4,400 189,816 Johnson & Johnson 1,892 98,876 Merck & Co. Inc. 500 25,320 Pfizer Inc. 3,600 126,000 Roche Holding AG - ADR(1) 4,500 340,185 Schering-Plough Corporation 12,000 295,200 Watson Pharmaceuticals, Inc.* 8,900 224,903 ----------- 1,695,580 ----------- ELECTRONICS - 1.1% Motorola, Inc.(5) 17,300 249,466 ----------- ENERGY - 0.3% Edison International*(5) 1,200 20,400 PG&E Corporation* 900 16,101 The Southern Company(5) 1,200 32,880 ----------- 69,381 ----------- ENERGY SERVICES - 0.1% McDermott International, Inc.*(1) 1,200 9,720 TXU Corp. 300 15,465 ----------- 25,185 ----------- ENTERTAINMENT & LEISURE - 0.1% Brunswick Corporation 600 16,800 ----------- FINANCIAL - INVESTMENT BANKING CORPORATIONS - 0.4% The Bear Stearns Companies Inc.(5) 300 18,360 Lehman Brothers Holdings Inc.(5) 500 31,260 Morgan Stanley 1,000 43,080 ----------- 92,700 ----------- FINANCIAL SERVICES - 4.7% Citigroup Inc. 1,666 64,557 Fannie Mae 900 66,375 Freddie Mac(5) 1,000 61,200 Household International, Inc. 500 24,850 ING Groep N.V. - ADR(1)(5) 16,500 419,595 John Hancock Financial Services, Inc. 600 21,120 MBIA Inc. 6,800 384,404 Prudential Financial, Inc.*(5) 2,000 66,720 ----------- 1,108,821 ----------- FOOD & BEVERAGE - 3.2% The Coca-Cola Company 600 33,600 Coca-Cola Enterprises Inc.(5) 900 19,872 ConAgra Foods, Inc. 1,100 30,415 Diageo plc - ADR(1) 3,700 191,105 Kellogg Company 900 32,274 PepsiCo., Inc. 300 14,460 Sara Lee Corporation 20,000 412,800 Unilever NV - NYS(1) 200 12,960 ----------- 747,486 ----------- GOLD & PRECIOUS METAL - 0.0% Freeport-McMoRan Copper & Gold, Inc. - Class B* 500 8,925 ----------- HEALTHCARE SUPPLIES - 0.1% C. R. Bard, Inc. 300 16,974 McKesson Corporation 600 19,620 ----------- 36,594 ----------- HEALTH MAINTENANCE ORGANIZATIONS - 0.1% WellPoint Health Networks Inc.* 300 23,343 ----------- HOSPITALS - 0.1% Tenet Healthcare Corporation* 200 14,310 ----------- HOTELS/CASINOS - 0.1% Harrah's Entertainment, Inc.* 500 22,175 ----------- INSURANCE - 8.1% ACE Limited(1)(5) 9,700 306,520 Allianz AG - ADR(1)(5) 18,900 376,110 The Allstate Corporation 11,000 406,780 American International Group, Inc. 812 55,403 MGIC Investment Corporation 300 20,340 The Progressive Corporation 500 28,925 SAFECO Corporation 10,000 308,900 Travelers Property Casualty Corp. - Class A* 21,900 387,630 ----------- 1,890,608 ----------- MANUFACTURING - DIVERSIFIED - 0.5% 3M Co. 200 24,600 Cooper Industries, Ltd. - Class A(1) 400 15,720 Danaher Corporation 300 19,905 Dover Corporation 500 17,500 Fortune Brands, Inc. 400 22,400 Tyco International Ltd.(1) 700 9,457 ----------- 109,582 ----------- MEDICAL INSTRUMENTS - 2.6% Boston Scientific Corporation* 7,500 219,900 Cardinal Health, Inc.(5) 250 15,352 Guidant Corporation* 12,000 362,760 ----------- 598,012 ----------- METAL PROCESSING - 0.1% United States Steel Corporation 900 17,901 ----------- MULTI-INDUSTRY - 0.4% General Electric Company(5) 3,400 98,770 ----------- NATURAL GAS - 0.1% Nicor Inc. 400 18,300 ----------- NETWORKING - 0.3% Cisco Systems, Inc.* 4,700 65,565 ----------- OIL & GAS - DOMESTIC - 1.7% Amerada Hess Corporation(5) 300 24,750 Apache Corporation 420 24,142 Conoco Inc. 11,900 330,820 Phillips Petroleum Company 100 5,888 ----------- 385,600 ----------- OIL & GAS - INTERNATIONAL - 0.7% Exxon Mobil Corporation 2,248 91,988 Marathon Oil Corporation 700 18,984 Occidental Petroleum Corporation 800 23,992 Royal Dutch Petroleum Company - NYS(1) 400 22,108 ----------- 157,072 ----------- OIL & GAS - SERVICES - 4.4% ENSCO International Incorporated 7,800 212,628 Noble Corporation*(5) 6,000 231,600 Schlumberger Limited(1) 8,000 372,000 Transocean Inc.(1)(5) 6,900 214,935 ----------- 1,031,163 ----------- PACKAGING - 0.2% Ball Corporation 400 16,592 Bemis Company, Inc. 300 14,250 Pactiv Corporation* 800 19,040 ----------- 49,882 ----------- REAL ESTATE INVESTMENT TRUSTS (REITS) - 0.1% Equity Office Properties Trust 300 9,030 Plum Creek Timber Company, Inc. 300 9,210 ----------- 18,240 ----------- RESTAURANTS - 0.1% Darden Restaurants, Inc.(5) 750 18,525 ----------- RETAIL - 6.5% Albertson's, Inc.(5) 700 21,322 AutoZone, Inc.* 200 15,460 Best Buy Co., Inc.* 200 7,260 Circuit City Stores-Circuit City Group 19,200 360,000 CVS Corporation 11,900 364,140 Dillard's, Inc. - Class A 600 15,774 The Home Depot, Inc. 400 14,692 The Kroger Co.*(5) 1,600 31,840 Limited Brands(5) 11,500 244,950 Lowe's Companies, Inc.(5) 900 40,860 Nordstrom, Inc. 10,300 233,295 Office Depot, Inc.* 1,200 20,160 Sears, Roebuck and Co.(5) 700 38,010 SUPERVALU INC. 700 17,171 The TJX Companies, Inc.(5) 1,000 19,610 Wal-Mart Stores, Inc.(5) 1,400 77,014 ----------- 1,521,558 ----------- SEMICONDUCTOR COMPONENTS & EQUIPMENT - 0.2% Analog Devices, Inc.* 600 17,820 KLA-Tencor Corporation*(5) 300 13,197 Maxim Integrated Products, Inc.* 200 7,666 ----------- 38,683 ----------- SEMICONDUCTORS - 0.5% Intel Corporation(5) 4,600 84,042 National Semiconductor Corporation* 600 17,502 NVIDIA Corporation*(5) 800 13,744 ----------- 115,288 ----------- SOFTWARE - 3.2% Autodesk, Inc.(5) 1,000 13,250 BMC Software, Inc.*(5) 30,000 498,000 Microsoft Corporation* 2,000 109,400 Oracle Corporation* 900 8,523 Parametric Technology Corporation* 36,300 124,509 ----------- 753,682 ----------- TELECOMMUNICATIONS - 0.7% ALLTEL Corporation(5) 800 37,600 AT&T Corp.(5) 4,000 42,800 BellSouth Corporation 1,300 40,950 CenturyTel, Inc. 600 17,700 SBC Communications Inc. 779 23,760 Verizon Communications Inc. 176 7,066 ----------- 169,876 ----------- TELECOMMUNICATIONS EQUIPMENT - 0.1% Andrew Corporation* 900 12,897 Scientific-Atlanta, Inc. 800 13,160 ----------- 26,057 ----------- TIRE & RUBBER - 0.1% Cooper Tire & Rubber Company 800 16,440 The Goodyear Tire & Rubber Company 800 14,968 ----------- 31,408 ----------- TRANSPORTATION - 0.1% Union Pacific Corporation 500 31,640 ----------- TRAVEL & RECREATION - 1.3% Carnival Corporation(1)(5) 10,700 296,283 ----------- TRUCKING - 0.1% Ryder System, Inc. 700 18,963 ----------- TOTAL COMMON STOCKS (COST $15,062,573) 14,385,368 ----------- PRINCIPAL AMOUNT --------- CORPORATE BONDS - 8.1% AEROSPACE & DEFENSE - 0.6% Lockheed Martin Corporation, 7.650%, 05/01/2016 $ 30,000 34,192 Lockheed Martin Corporation, 8.500%, 12/01/2029 20,000 24,213 Raytheon Company, 7.200%, 08/15/2027 40,000 40,959 Systems 2001 Asset Trust, 6.664%, 09/15/2013 (Cost $27,192, Acquired 09/19/2001)(2) 27,192 28,906 ----------- 128,270 ----------- AUTOMOBILES - 0.5% Ford Motor Company, 7.700%, 05/15/2097 120,000 109,012 ----------- BANKS - 0.5% Bank of America Corporation, 7.400%, 01/15/2011 50,000 54,848 Bank One Corporation, 6.000%, 02/17/2009 40,000 41,078 Key Bank, N.A., 7.000%, 02/01/2011 30,000 31,706 ----------- 127,632 ----------- CHEMICALS - 0.2% The Dow Chemical Company, 5.250%, 05/14/2004 40,000 40,955 ----------- COMMUNICATION & MEDIA - 0.3% AOL Time Warner Inc., 7.700%, 05/01/2032 20,000 17,790 TCI Communications, Inc., 6.375%, 05/01/2003 50,000 51,073 ----------- 68,863 ----------- COMPUTER SERVICES - 0.2% Electronic Data Systems Corporation, 7.450%, 10/15/2029 50,000 52,432 ----------- DRUGS - 0.1% Bristol-Myers Squibb Company, 5.750%, 10/01/2011 30,000 29,901 ----------- ENERGY - 0.5% Commonwealth Edison Company, 6.150%, 03/15/2012 (Cost $61,283, Acquired 06/13/2002)(2) 60,000 61,852 FirstEnergy Corp., 6.450%, 11/15/2011 10,000 9,729 FirstEnergy Corp., 7.375%, 11/15/2031 10,000 9,522 Hydro-Quebec, 6.300%, 05/11/2011(1) 20,000 21,245 Hydro-Quebec, 7.500%, 04/01/2016(1) 10,000 11,651 ----------- 113,999 ----------- FINANCIAL - 1.6% Citigroup Inc., 6.000%, 02/21/2012 35,000 35,205 General Electric Capital Corporation, 5.875%, 02/15/2012 40,000 39,688 General Electric Capital Corporation, 6.750%, 03/15/2032 20,000 19,708 General Motors Nova Scotia Finance Company, 6.850%, 10/15/2008(1) 30,000 31,183 Household Finance Corporation, 8.000%, 07/15/2010 40,000 42,312 Household Finance Corporation, 7.000%, 05/15/2012 10,000 9,961 PDVSA Finance Ltd., 8.500%, 11/16/2012(1) 10,000 8,775 Petrozuata Finance Inc., 8.220%, 04/01/2017 (Cost $111,852, Acquired 10/1998 - 01/2000)(1)(2) 130,000 87,425 Qwest Capital Funding, Inc., 7.750%, 02/15/2031 70,000 36,750 Verizon Global Funding Corp., 6.875%, 06/15/2012(5) 60,000 59,024 ----------- 370,031 ----------- FINANCIAL - INVESTMENT BANKING CORPORATIONS - 0.1% Credit Suisse First Boston, 5.750%, 04/15/2007 20,000 20,482 J.P. Morgan Chase & Co., 5.250%, 05/30/2007 10,000 10,069 ----------- 30,551 ----------- FOOD & BEVERAGES - 0.1% The Pepsi Bottling Group, Inc., 7.000%, 03/01/2029 (Cost $24,846, Acquired 03/03/1999)(2) 25,000 26,686 ----------- INDUSTRIAL - 0.3% Dryden Investor Trust, 7.157%, 07/23/2008 (Cost $74,308, Acquired 07/16/1998)(2)(4) 74,308 77,705 ----------- INSURANCE - 0.1% XL Capital Finance plc(1) 30,000 31,109 ----------- MANUFACTURING - DIVERSIFIED - 0.2% Tyco International Group SA, 6.375%, 10/15/2011(1) 40,000 30,680 Tyco International Group SA, 6.875%, 01/15/2029(1) 10,000 7,116 ----------- 37,796 ----------- OIL & GAS - 1.2% Apache Corporation, 6.250%, 04/15/2012 10,000 10,343 BP Capital Markets plc, 4.625%, 05/27/2005 40,000 41,116 Conoco Funding Co., 6.350%, 10/15/2011 50,000 51,929 El Paso Corporation, 7.750%, 01/15/2032 30,000 27,897 Petronas Capital Ltd., 7.875%, 05/22/2022 (Cost $9,953, Acquired 05/15/2002)(1)(2) 10,000 9,964 Phillips Petroleum Company, 8.750%, 05/25/2010 20,000 23,783 Sonat Inc., 7.625%, 07/15/2011 20,000 19,718 Tennessee Gas Pipeline Company, 8.375%, 06/15/2032 10,000 10,370 Tosco Corporation, 8.250%, 05/15/2003 50,000 52,221 The Williams Companies, Inc., 7.750%, 06/15/2031 20,000 14,693 The Williams Companies, Inc., 8.750%, 03/15/2032 (Cost $20,767, Acquired 04/10/2002)(2) 20,000 16,329 ----------- 278,363 ----------- PAPER & FOREST - 0.3% MeadWestvaco Corporation, 6.850%, 04/01/2012 20,000 21,035 Weyerhaeuser Company, 6.750%, 03/15/2012 (Cost $39,794, Acquired 03/06/2002 and 04/10/2002)(2) 40,000 41,494 Weyerhaeuser Company, 7.375%, 03/15/2032 (Cost $9,871, Acquired 03/06/2002)(2) 10,000 10,181 ----------- 72,710 ----------- RAILROAD TRANSPORTATION - 0.3% Consolidated Rail Corp., 7.875%, 05/15/2043 20,000 21,760 CSX Corporation, 7.950%, 05/01/2027 50,000 55,964 ----------- 77,724 ----------- RETAIL - 0.3% Target Corporation, 5.875%, 03/01/2012 60,000 60,790 ----------- TELECOMMUNICATION - 0.1% AT&T Corp., 8.000%, 11/15/2031, (Cost $9,893, Acquired 11/15/2001)(2) 10,000 7,871 Sprint Capital Corporation, 6.900%, 05/01/2019 20,000 13,383 ----------- 21,254 ----------- WASTE DISPOSAL - 0.6% Waste Management, Inc., 7.000%, 07/15/2028 150,000 140,896 ----------- TOTAL CORPORATE BONDS (COST $1,923,634) 1,896,679 ----------- FOREIGN GOVERNMENT BONDS - 0.5% Quebec Province, 7.500%, 09/15/2029(1) 10,000 11,493 Republic of Poland, 6.250%, 07/03/2012(1) 40,000 39,652 United Mexican States, 11.500%, 05/15/2026(1) 60,000 76,260 ----------- TOTAL FOREIGN GOVERNMENT BONDS (COST $123,652) 127,405 ----------- U.S. GOVERNMENT AGENCY OBLIGATIONS - 0.5% FHLMC, 5.750%, 01/15/2012(5) 100,000 102,929 FNMA, 6.000%, 05/15/2011(5) 3,000 3,150 ----------- TOTAL U.S. GOVERNMENT AGENCY OBLIGATIONS (COST $102,912) 106,079 ----------- U.S. TREASURY SECURITIES - 5.1% U.S. TREASURY BONDS - 3.9% United States Treasury Bond, 5.250%, 11/15/2028(5) 280,000 263,348 United States Treasury Inflation Index Bond, 3.625%, 04/15/2028 55,573 60,036 United States Treasury Inflation Index Bond, 3.875%, 04/15/2029(5) 524,890 591,731 ----------- 915,115 ----------- U.S. TREASURY NOTES - 1.0% United States Treasury Note, 5.750%, 11/15/2005(5) 30,000 32,025 United States Treasury Note, 5.750%, 08/15/2010(5) 10,000 10,700 United States Treasury Note, 4.875%, 02/15/2012(5) 180,000 180,731 ----------- 223,456 ----------- U.S. TREASURY STRIPS - 0.2% United States Treasury Strips, 0.000%, 11/15/2027(5) 210,000 47,208 ----------- TOTAL U.S. TREASURY SECURITIES (COST $1,153,111) 1,185,779 ----------- ASSET BACKED SECURITIES - 1.9% Americredit Automobile Receivables Trust, 2000-D A2, 6.690%, 05/12/2004 23,506 23,631 Chevy Chase Home Loan Trust, 1996-1 A, 7.150%, 05/15/2015 34,245 35,629 Green Tree Financial Corporation, 1999-3 A5, 6.160%, 02/01/2031 170,000 178,798 Green Tree Home Improvement Loan Trust, 1996-D HEM2, 8.300%, 09/15/2027 100,000 104,239 SLM Student Loan Trust, 1998-2 A1, 2.450%, 04/25/2007(3) 6,566 6,579 UCFC Home Equity Loan, 1998-C A7, 5.935%, 01/15/2030 89,985 93,336 ----------- TOTAL ASSET BACKED SECURITIES (COST $406,176) 442,212 ----------- MORTGAGE BACKED SECURITIES - PRIVATE - 0.7% Asset Securitization Corporation, 1996-D2 A1, 6.920%, 02/14/2029 85,133 90,543 Nomura Asset Securities Corporation, 1996-MD5 A1B, 7.120%, 04/13/2039 70,000 75,947 ----------- TOTAL MORTGAGE BACKED SECURITIES - PRIVATE (COST $158,082) 166,490 ----------- MORTGAGE BACKED SECURITIES - U.S. AGENCY - 12.1% FNMA, Pool 544449, 6.500%, 08/01/2030 139,402 142,464 FNMA, Pool 564009, 6.500%, 12/01/2030 64,236 65,647 FNMA, Pool 627116, 6.000%, 02/01/2032(5) 591,923 591,483 FNMA, Pool TBA, 07/01/2032 200,000 199,500 FNMA, Pool TBA, 07/01/2032 300,000 310,781 GNMA, Pool 540046, 8.000%, 09/15/2030 487,446 519,562 GNMA, Pool 559847, 6.000%, 01/15/2032 99,520 99,661 GNMA, Pool 582210, 6.000%, 01/15/2032 97,714 97,853 GNMA, Pool 781340, 6.500%, 10/15/2031(5) 782,132 801,353 ----------- TOTAL MORTGAGE BACKED SECURITIES - U.S. AGENCY (COST $2,771,828) 2,828,304 ----------- SHORT-TERM INVESTMENTS - 9.8% U.S. GOVERNMENT OBLIGATIONS - 9.8% Federal Home Loan Bank Discount Note, 1.713%, 07/01/2002 1,971,000 1,971,000 FNMA Discount Note, 1.850%, 08/14/2002(5) 300,000 299,322 ----------- TOTAL SHORT-TERM INVESTMENTS (COST $2,270,322) 2,270,322 ----------- TOTAL INVESTMENTS (COST $23,972,290) - 100.3% 23,408,638 ----------- Liabilities Less Other Assets - (0.3%) (69,462) ----------- TOTAL NET ASSETS - 100.0% $23,339,176 ----------- ----------- * Non-income Producing Security. ADR American Depository Receipt. NYS New York Shares. (1) Foreign Security. (2) Restricted under Rule 144A of the Securities Act of 1933. (3) Variable rate security. The rate shown is the rate in effect on June 30, 2002. (4) Fair valued security. (5) This security or a portion of this security is out on loan at June 30, 2002. Total loaned securities had a market value of $7,741,302 at June 30, 2002. (Note 8.) See Notes to the Financial Statements. CCM ADVISORS DIVERSIFIED EQUITY MASTER PORTFOLIO PORTFOLIO OF INVESTMENTS June 30, 2002 SHARES VALUE ------ ----- COMMON STOCKS - 93.0% AEROSPACE & DEFENSE - 1.0% Lockheed Martin Corporation 800 $ 55,600 Northrop Grumman Corporation(2) 2,400 300,000 Raytheon Company 12,800 521,600 ----------- 877,200 ----------- AIR TRANSPORTATION - 0.3% Southwest Airlines Co.(2) 16,700 269,872 ----------- AUTOMOBILES - 0.5% General Motors Corporation(2) 7,300 390,185 ----------- BANKING - 8.5% AmSouth Bancorporation(2) 10,200 228,276 Bank of America Corporation 23,000 1,618,280 BB&T Corporation(2) 9,600 370,560 FleetBoston Financial Corporation 48,700 1,575,445 Marshall & Ilsley Corporation 6,400 197,952 National City Corporation(2) 14,900 495,425 Regions Financial Corporation(2) 6,100 214,415 SunTrust Banks, Inc. 6,100 413,092 Union Planters Corporation 6,450 208,787 U.S. Bancorp(2) 60,900 1,422,015 Wachovia Corporation(2) 10,400 397,072 Wells Fargo & Company 2,600 130,156 ----------- 7,271,475 ----------- BIOTECHNOLOGY - 0.4% Amgen Inc.*(2) 3,900 163,332 Immunex Corporation* 8,300 185,422 ----------- 348,754 ----------- BUILDINGS - RESIDENTIAL/COMMERCIAL - 0.2% KB HOME(2) 3,200 164,832 ----------- BUSINESS MACHINES & SOFTWARE - 1.2% International Business Machines Corporation(2) 11,000 792,000 Pitney Bowes Inc. 6,100 242,292 ----------- 1,034,292 ----------- BUSINESS SERVICES - 3.2% Deluxe Corporation 5,600 217,784 Equifax Inc. 7,800 210,600 First Data Corporation(2) 13,100 487,320 Synopsys, Inc.*(2) 33,100 1,814,211 ----------- 2,729,915 ----------- CHEMICALS - 0.9% Ashland Inc. 4,700 190,350 E.I. du Pont de Nemours and Company(2) 9,600 426,240 PPG Industries, Inc. 2,000 123,800 ----------- 740,390 ----------- COMMUNICATION & MEDIA - 0.3% AOL Time Warner Inc.*(2) 6,150 90,466 Clear Channel Communications, Inc.* 1,100 35,222 The Walt Disney Company 5,300 100,170 ----------- 225,858 ----------- COMPUTER SERVICES - 1.6% Computer Sciences Corporation*(2) 4,300 205,540 Electronic Data Systems Corporation(2) 5,000 185,750 Unisys Corporation*(2) 110,400 993,600 ----------- 1,384,890 ----------- COMPUTERS - 0.8% Dell Computer Corporation*(2) 27,600 721,464 ----------- CONSUMER PRODUCTS - 0.2% The Clorox Company 4,900 202,615 ----------- COSMETICS & SOAP - 1.3% Avon Products, Inc. 2,600 135,824 Kimberly-Clark Corporation 5,500 341,000 The Procter & Gamble Company(2) 6,800 607,240 ----------- 1,084,064 ----------- DRUGS - 10.2% Abbott Laboratories 40,900 1,539,885 Eli Lilly and Company(2) 10,300 580,920 GlaxoSmithKline plc - ADR(1) 16,900 729,066 Johnson & Johnson(2) 20,310 1,061,401 Merck & Co. Inc. 5,700 288,648 Pfizer Inc. 36,975 1,294,125 Roche Holding AG - ADR(1) 15,500 1,171,749 Schering-Plough Corporation 49,800 1,225,080 Watson Pharmaceuticals, Inc.* 33,400 844,018 ----------- 8,734,892 ----------- ELECTRICAL EQUIPMENT - 0.1% Solectron Corporation*(2) 11,300 69,495 ----------- ELECTRONICS - 1.1% Motorola, Inc.(2) 65,700 947,394 ----------- ENERGY - 0.8% Edison International*(2) 12,500 212,500 PG&E Corporation* 10,000 178,900 The Southern Company(2) 12,000 328,800 ----------- 720,200 ----------- ENERGY SERVICES - 0.2% McDermott International, Inc.*(1) 6,500 52,650 TXU Corp.(2) 3,100 159,805 ----------- 212,455 ----------- ENTERTAINMENT & LEISURE - 0.2% Brunswick Corporation 6,300 176,400 ----------- FINANCIAL - INVESTMENT BANKING CORPORATIONS - 1.2% The Bear Stearns Companies Inc.(2) 3,400 208,080 Lehman Brothers Holdings Inc.(2) 5,300 331,356 Morgan Stanley 10,800 465,264 ----------- 1,004,700 ----------- FINANCIAL SERVICES - 6.9% Citigroup Inc. 16,666 645,807 Fannie Mae 9,700 715,375 Freddie Mac(2) 9,800 599,760 Household International, Inc. 6,900 342,930 ING Groep N.V. - ADR(1)(2) 63,000 1,602,090 John Hancock Financial Services, Inc. 6,300 221,760 MBIA Inc. 27,650 1,563,054 Prudential Financial, Inc.*(2) 6,500 216,840 ----------- 5,907,616 ----------- FOOD & BEVERAGE - 4.2% The Coca-Cola Company 6,800 380,800 Coca-Cola Enterprises Inc.(2) 9,600 211,968 ConAgra Foods, Inc. 11,300 312,445 Diageo plc - ADR(1) 14,100 728,265 Kellogg Company 8,500 304,810 PepsiCo., Inc. 2,300 110,860 Sara Lee Corporation 76,100 1,570,704 ----------- 3,619,852 ----------- GOLD & PRECIOUS METAL - 0.1% Freeport-McMoRan Copper & Gold, Inc. - Class B* 6,200 110,670 ----------- HEALTH MAINTENANCE ORGANIZATIONS - 0.3% WellPoint Health Networks Inc.* 3,100 241,211 ----------- HEALTHCARE SUPPLIES - 0.5% C.R. Bard, Inc. 3,400 192,372 McKesson Corporation 6,200 202,740 ----------- 395,112 ----------- HOTELS/CASINOS - 0.2% Harrah's Entertainment, Inc.* 4,800 212,880 ----------- INSURANCE - 9.2% ACE Limited(1)(2) 36,900 1,166,040 Allianz AG - ADR(1)(2) 71,900 1,430,810 The Allstate Corporation 41,200 1,523,576 American International Group, Inc. 6,494 443,086 The Hartford Financial Services Group, Inc. 3,600 214,092 MGIC Investment Corporation 3,000 203,400 The Progressive Corporation 4,700 271,895 SAFECO Corporation 37,500 1,158,375 Travelers Property Casualty Corp. - Class A* 83,300 1,474,410 ----------- 7,885,684 ----------- INTERNET - 0.1% Yahoo! Inc.*(2) 2,400 35,424 ----------- MANUFACTURING - DIVERSIFIED - 1.3% 3M Co.(2) 2,000 246,000 Cooper Industries, Ltd. - Class A(1) 4,200 165,060 Danaher Corporation 2,800 185,780 Dover Corporation 5,500 192,500 Fortune Brands, Inc. 3,700 207,200 Tyco International Ltd.(1) 7,700 104,027 ----------- 1,100,567 ----------- MEDICAL INSTRUMENTS - 2.7% Boston Scientific Corporation* 28,200 826,824 Cardinal Health, Inc.(2) 2,600 159,666 Guidant Corporation* 45,000 1,360,350 ----------- 2,346,840 ----------- METAL PROCESSING - 0.4% United States Steel Corporation 9,600 190,944 Worthington Industries, Inc. 8,100 146,610 ----------- 337,554 ----------- MULTI-INDUSTRY - 1.1% General Electric Company(2) 33,800 981,890 ----------- NATURAL GAS - 0.2% Nicor Inc. 3,800 173,850 ----------- NETWORKING - 0.8% Cisco Systems, Inc.* 48,900 682,155 Lucent Technologies Inc.* 16,300 27,058 ----------- 709,213 ----------- OIL & GAS - DOMESTIC - 2.4% Amerada Hess Corporation(2) 3,300 272,250 Apache Corporation 3,800 218,424 Conoco Inc. 53,500 1,487,300 Phillips Petroleum Company 1,600 94,208 ----------- 2,072,182 ----------- OIL & GAS - INTERNATIONAL - 1.7% Exxon Mobil Corporation 20,352 832,804 Marathon Oil Corporation 7,300 197,976 Occidental Petroleum Corporation 8,800 263,912 Royal Dutch Petroleum Company - NYS(1) 2,600 143,702 ----------- 1,438,394 ----------- OIL & GAS - SERVICES - 4.5% ENSCO International Incorporated(2) 29,800 812,348 Noble Corporation*(2) 22,300 860,780 Schlumberger Limited(1) 30,000 1,395,000 Transocean Inc.(1)(2) 26,300 819,245 ----------- 3,887,373 ----------- PACKAGING - 0.6% Ball Corporation 3,800 157,624 Bemis Company, Inc. 3,300 156,750 Pactiv Corporation* 8,100 192,780 ----------- 507,154 ----------- REAL ESTATE INVESTMENT TRUSTS (REITS) - 0.2% Equity Office Properties Trust 3,200 96,320 Plum Creek Timber Company, Inc. 3,600 110,520 ----------- 206,840 ----------- RESTAURANTS - 0.2% Darden Restaurants, Inc.(2) 6,600 163,020 ----------- RETAIL - 9.6% Albertson's, Inc.(2) 8,500 258,910 AutoZone, Inc.* 2,400 185,520 Best Buy Co., Inc.*(2) 2,900 105,270 Circuit City Stores-Circuit City Group 78,700 1,475,625 CVS Corporation 45,000 1,377,000 Dillard's, Inc. - Class A 6,000 157,740 The Home Depot, Inc. 4,200 154,266 The Kroger Co.*(2) 15,700 312,430 Limited Brands(2) 54,900 1,169,370 Lowe's Companies, Inc.(2) 6,200 281,480 Nordstrom, Inc. 38,700 876,555 Office Depot, Inc.* 11,200 188,160 Sears, Roebuck and Co.(2) 8,700 472,410 SUPERVALU INC. 8,700 213,411 The TJX Companies, Inc.(2) 11,400 223,554 Wal-Mart Stores, Inc.(2) 13,300 731,633 ----------- 8,183,334 ----------- SEMICONDUCTOR COMPONENTS & EQUIPMENT - 0.5% Analog Devices, Inc.* 5,100 151,470 Broadcom Corporation - Class A* 1,100 19,294 KLA-Tencor Corporation*(2) 4,000 175,960 Maxim Integrated Products, Inc.*(2) 2,600 99,658 ----------- 446,382 ----------- SEMICONDUCTORS - 1.4% Intel Corporation(2) 49,100 897,057 National Semiconductor Corporation* 6,000 175,020 NVIDIA Corporation*(2) 7,300 125,414 ----------- 1,197,491 ----------- SOFTWARE - 4.4% Autodesk, Inc.(2) 11,400 151,050 BMC Software, Inc.*(2) 117,000 1,942,200 Microsoft Corporation* 20,600 1,126,820 Oracle Corporation* 10,700 101,329 Parametric Technology Corporation* 134,300 460,649 ----------- 3,782,048 ----------- TELECOMMUNICATIONS - 2.1% ALLTEL Corporation(2) 7,700 361,900 AT&T Corp.(2) 42,500 454,750 BellSouth Corporation 15,600 491,400 CenturyTel, Inc. 6,400 188,800 SBC Communications Inc. 7,227 220,423 Verizon Communications Inc. 1,432 57,495 ----------- 1,774,768 ----------- TELECOMMUNICATIONS EQUIPMENT - 0.4% Andrew Corporation*(2) 11,600 166,228 Scientific-Atlanta, Inc. 8,600 141,470 ----------- 307,698 ----------- TIRE & RUBBER - 0.4% Cooper Tire & Rubber Company 7,700 158,235 The Goodyear Tire & Rubber Company 8,300 155,293 ----------- 313,528 ----------- TRANSPORTATION - 0.4% Union Pacific Corporation(2) 5,300 335,384 ----------- TRAVEL & RECREATION - 1.7% Carnival Corporation(1)(2) 52,700 1,459,263 ----------- TRUCKING - 0.3% Ryder System, Inc. 8,700 235,683 ----------- TOTAL COMMON STOCKS (COST $83,682,232) 79,680,247 ----------- PRINCIPAL AMOUNT --------- SHORT-TERM INVESTMENTS - 5.7% U.S. GOVERNMENT AGENCY OBLIGATIONS - 5.7% Federal Home Loan Bank Discount Note, 1.71%, 07/01/2002 $4,920,000 4,920,000 ----------- TOTAL SHORT TERM INVESTMENTS (COST $4,920,000) 4,920,000 ----------- TOTAL INVESTMENTS (COST $88,602,232) - 98.7% 84,600,247 ----------- Other Assets Less Liabilities - 1.3% 1,084,179 ----------- TOTAL NET ASSETS - 100.0% $85,684,426 ----------- ----------- * Non-income Producing Security. ADR American Depository Receipt. NYS New York Shares. (1) Foreign Security. (2) This security or a portion of this security is out on loan at June 30, 2002. Total loaned securities had a market value of $32,639,334 at June 30, 2002. (Note 8). See Notes to the Financial Statements. CCM ADVISORS FUNDS - MASTER INVESTMENT PORTFOLIOS STATEMENT OF ASSETS & LIABILITIES June 30, 2002 LIMITED MATURITY FULL MATURITY DIVERSIFIED FIXED INCOME FIXED INCOME BALANCED EQUITY MASTER PORTFOLIO MASTER PORTFOLIO MASTER PORTFOLIO MASTER PORTFOLIO ---------------- ---------------- ---------------- ---------------- ASSETS: Investments, at value* $84,883,504 $44,074,666 $23,408,638 $84,600,247 Receivable for securities loaned 23,449,231 9,959,654 7,953,238 33,823,155 Cash 23,059 2,605 24,087 2,719 Dividends receivable -- -- 22,405 114,108 Interest receivable 817,595 381,124 67,835 248 Deposit at broker for written options -- -- 50,000 -- Receivable for futures contracts -- 2,266 687 -- Receivable for investments sold -- 412,206 890,428 1,580,901 Receivable for contributed capital 220,942 135,703 -- -- Prepaid expenses 7,451 7,451 7,451 7,439 ----------- ----------- ----------- ----------- Total assets 109,401,782 54,975,675 32,424,769 120,128,817 ----------- ----------- ----------- ----------- LIABILITIES: Payables for collateral received for securities loaned 23,449,231 9,959,654 7,953,238 33,823,155 Payable to Advisor 34,069 31,406 30,302 53,996 Payable for investments purchased -- 6,574,824 1,063,444 521,870 Accrued expenses and other liabilities 44,340 42,328 38,609 45,370 ----------- ----------- ----------- ----------- Total liabilities 23,527,640 16,608,212 9,085,593 34,444,391 ----------- ----------- ----------- ----------- Net assets $85,874,142 $38,367,463 $23,339,176 $85,684,426 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- * Cost of investments $83,820,252 $43,326,000 $23,972,290 $88,602,232 ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
See Notes to the Financial Statements. CCM ADVISORS FUNDS - MASTER INVESTMENT PORTFOLIOS STATEMENT OF OPERATIONS For the Period November 1, 2001(1) through June 30, 2002 LIMITED MATURITY FULL MATURITY DIVERSIFIED FIXED INCOME FIXED INCOME BALANCED EQUITY MASTER PORTFOLIO MASTER PORTFOLIO MASTER PORTFOLIO MASTER PORTFOLIO ---------------- ---------------- ---------------- ---------------- INVESTMENT INCOME Dividends* $ -- $ -- $ 151,796 $ 858,279 Interest 2,253,582 1,425,020 247,052 41,746 Income from securities lending 347 359 203 819 ---------- ----------- --------- ----------- Total Investment Income 2,253,929 1,425,379 399,051 900,844 ---------- ----------- --------- ----------- EXPENSES Investment advisory fees 250,342 122,251 119,118 450,713 Administration fees 27,605 13,448 9,997 33,225 Audit fees 11,499 11,499 11,512 11,516 Custodian fees and expenses 8,651 15,089 20,762 22,216 Directors' fees and expenses 3,141 3,141 2,991 3,192 Fund accounting fees 39,184 44,804 35,496 28,068 Insurance Expense 2,254 2,254 2,254 2,266 Legal fees 12,387 12,387 12,339 12,347 ---------- ----------- --------- ----------- NET EXPENSES 355,063 224,873 214,469 563,543 ---------- ----------- --------- ----------- NET INVESTMENT INCOME 1,898,866 1,200,506 184,582 337,301 ---------- ----------- --------- ----------- CCM ADVISORS FUNDS - MASTER INVESTMENT PORTFOLIOS Realized gain (loss) on: Investments sold 374,263 215,911 (303,714) (1,700,378) Option contracts expired or closed -- 34,331 (801) -- Futures contracts closed -- (12,093) (8,671) -- ---------- ----------- --------- ----------- Net realized gain (loss) 374,263 238,149 (313,186) (1,700,378) Change in unrealized appreciation (depreciation) on: Investments (615,111) (1,010,431) (18,684) 22,562 Written options -- 118,246 8,468 -- Futures contracts -- (180,360) (7,337) -- ---------- ----------- --------- ----------- Net unrealized gain (loss) (615,111) (1,072,545) (17,553) 22,562 ---------- ----------- --------- ----------- NET LOSS ON INVESTMENTS (240,848) (834,396) (330,739) (1,677,816) ---------- ----------- --------- ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $1,658,018 $ 366,110 $(146,157) $(1,340,515) ---------- ----------- --------- ----------- ---------- ----------- --------- ----------- * Net of Foreign Taxes Withheld of: $ -- $ -- $ 3,265 $ 12,833 ---------- ----------- --------- ----------- ---------- ----------- --------- -----------
(1) Commencement of Operations. See Notes to the Financial Statements. CCM ADVISORS FUNDS - MASTER INVESTMENT PORTFOLIOS STATEMENT OF CHANGES IN NET ASSETS For the Period November 1, 2001(1) through June 30, 2002 LIMITED MATURITY FULL MATURITY DIVERSIFIED FIXED INCOME FIXED INCOME BALANCED EQUITY MASTER PORTFOLIO MASTER PORTFOLIO MASTER PORTFOLIO MASTER PORTFOLIO ---------------- ---------------- ---------------- ---------------- OPERATIONS: Net investment income $ 1,898,866 $ 1,200,506 $ 184,582 $ 337,301 Net realized gain (loss) on: Investments sold 374,263 215,911 (303,714) (1,700,378) Option contracts expired or closed -- 34,331 (801) -- Futures contracts closed -- (12,093) (8,671) -- Net change in unrealized appreciation (depreciation) on: Investments (615,111) (1,010,431) (18,684) 22,562 Written options -- 118,246 8,468 -- Futures contracts -- (180,360) (7,337) -- ----------- ----------- ----------- ----------- Net increase (decrease) in net assets resulting from operations 1,658,018 366,110 (146,157) (1,340,515) ----------- ----------- ----------- ----------- NET INCREASE IN NET ASSETS RESULTING FROM BENEFICIAL INTEREST TRANSACTIONS: Proceeds from contributions 100,847,407 41,246,290 24,026,205 90,259,050 Fair value of withdrawals (16,631,283) (3,244,937) (540,872) (3,234,109) Net increase in net assets resulting from beneficial interest transactions 84,216,124 38,001,353 23,485,333 87,024,941 ----------- ----------- ----------- ----------- Total increase in net assets 85,874,142 38,367,463 23,339,176 85,684,426 ----------- ----------- ----------- ----------- NET ASSETS: Beginning of period -- -- -- -- ----------- ----------- ----------- ----------- End of period $85,874,142 $38,367,463 $23,339,176 $85,684,426 ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
(1) Commencement of Operations. See Notes to the Financial Statements. CCM ADVISORS FUNDS - MASTER INVESTMENT PORTFOLIOS NOTES TO FINANCIAL STATEMENTS June 30, 2002 1. ORGANIZATION The CCM Advisors Funds (the "Trust") was organized as a Delaware Business Trust on December 27, 2000 and is registered as an open-end management investment company under the Investment Company Act of 1940 (the "1940 Act"), as amended, as an open-end management investment company issuing its beneficial interests in series, each series representing a distinct portfolio with its own investment objectives and policies. The series currently authorized are The Limited Maturity Fixed Income Master Portfolio ("Limited Maturity Portfolio"), The Full Maturity Fixed Income Master Portfolio ("Full Maturity Portfolio"), The Balanced Master Portfolio ("Balanced Portfolio"), The Diversified Equity Master Portfolio ("Diversified Portfolio"), The U.S. Equity Growth Master Portfolio ("U.S. Equity Portfolio"), The International Core Equity Master Portfolio ("International Portfolio"), and The U.S. Government Money Market Master Portfolio ("U.S. Government Money Market Portfolio") (the "Master Portfolios"). As of June 30, 2002, the U.S. Equity Portfolio, the International Portfolio, and the U.S. Government Money Market Portfolio had not commenced operations. Pursuant to the 1940 Act, the Master Portfolios are "non-diversified" series of the Trust. The Limited Maturity Portfolio, Full Maturity Portfolio, Balanced Portfolio, and Diversified Portfolio commenced operations on November 1, 2001. Each Master Portfolio is a Master Investment Portfolio in a master-feeder fund structure. Each Master Portfolio has multiple feeder funds invested in the Master Portfolio. By contributing assets to the Master Portfolio, the feeder funds receive a beneficial interest in the Master Portfolio. The Master Portfolio then invests the contributed assets in portfolio securities and allocates income, gains (losses) and expenses to the feeder funds based on the funds' proportionate interest in the Master Portfolio. The investment objectives of the Master Portfolios are set forth below. LIMITED MATURITY PORTFOLIO Seeks a high level of current income, consistent with preservation of capital and liquidity. Invests primarily in high quality fixed income securities and maintains an average dollar-weighted portfolio maturity of five years or less. FULL MATURITY PORTFOLIO Seeks over the long term the highest level of income consistent with preservation of capital. Invests primarily in high quality fixed income securities. There is no restriction on the maximum maturity of the securities purchased. The average dollar-weighted maturity will vary and may exceed 20 years. BALANCED PORTFOLIO Seeks a combination of growth of capital and income. Invests varying proportions of its assets in equity and fixed income securities, with not less than 25 percent of total assets invested in fixed income securities. DIVERSIFIED PORTFOLIO Seeks long-term capital growth. Invests primarily in equity securities and securities having equity characteristics. 2. SIGNIFICANT ACCOUNTING POLICIES SECURITY VALUATIONS Master Portfolio securities (other than Government) that are listed on a U.S. securities exchange (whether domestic or foreign) or the Nasdaq Stock Market for which market quotations are readily available are valued at the last quoted sale price as of 4:00 p.m. Eastern time on the day the valuation is made. Purchased options, futures, unlisted U.S. securities and listed U.S. securities not traded on the valuation date for which market quotations are readily available are valued at the most recent bid price. Fixed-income securities (other than obligations having a maturity of 60 days or less) are normally valued on the basis of quotes obtained from pricing services, which take into account appropriate factors such as institutional sized trading in similar groups of securities, yield, quality, coupon rate, maturity, type of issue, trading characteristics and other market data. Securities convertible into equity securities are valued at the greater of latest bid valuation or net conversion value. Short-term securities, or securities with remaining maturities of 60 days or less are valued at amortized cost, which approximates fair value. Other assets and securities for which no quotations are readily available (including restricted securities) will be valued in good faith at fair value using methods determined by the Board of Trustees of the Master Portfolios. ACCOUNTING FOR FUTURES The Master Portfolios may enter into long or short positions in futures contracts in order to hedge against the effect of changing values on portfolio securities held. When a Master Portfolio enters into a futures contract, it is required to deposit, into a segregated account at its custodian bank, U.S. Government securities as a guarantee that it will meet the futures commitment. Each day the Master Portfolio receives or pays cash, called "variation margin," equal to the daily change in the market value of the futures contracts. Such receipts and payments are recorded as unrealized gains or losses until the futures contracts expire or are closed out. Risks of entering into futures contracts include the possibility that there may be an illiquid market at the time the Master Portfolio seeks to close out a contract and changes in the value of the futures contract may not correlate with changes in the value of the portfolio securities being hedged. ACCOUNTING FOR OPTIONS The Master Portfolios may purchase and write (sell) put and call options on U.S. securities, stock indices, and futures contracts that are traded on U.S. securities exchanges and over-the-counter markets. The risk associated with purchasing an option is that the Master Portfolio pays a premium whether or not the option is exercised. Additionally, the Master Portfolio bears the risk of loss of premium and change in market value should the counterparty not perform under the contract. Put and call options purchased are accounted for in the same manner as portfolio securities. The cost of securities acquired through the exercise of call options is increased by premiums paid. The proceeds from securities sold through the exercise of put options are decreased by the premiums paid. When the Master Portfolio writes an option, the premium received by the Master Portfolio is recorded as a liability and is subsequently adjusted to the current market value of the option written. Premiums received from writing options, which expire unexercised, are recorded by the Master Portfolio on the expiration date as realized gains from option transactions. The difference between the premium and the amount paid on effecting a closing purchase transaction, including brokerage commissions, is also treated as a realized gain, or if the premium is less than the amount paid for the closing purchase transaction, as a realized loss. If a call option is exercised, the premium is added to the proceeds from the sale of the underlying security or currency in determining whether the Master Portfolio has realized a gain or loss. If a put option is exercised, the premium reduces the cost basis of the security or currency purchased by the Master Portfolio. In writing an option, the Master Portfolio bears the market risk of an unfavorable change in the price of the security or currency underlying the written option. Exercise of an option written by the Master Portfolio could result in the Master Portfolio selling or buying a security or currency at a price different from the current market value. REPURCHASE AGREEMENTS The Master Portfolios may enter into repurchase agreements with respect to any of the types of securities in which they are authorized to invest without regard to the maturity of the underlying security. Repurchase agreements will be affected only with banks, savings institutions and broker-dealers. They involve the purchase by a Master Portfolio of a debt security with the condition that, after a stated period of time, the original seller will buy back the same security at a predetermined price or yield. Repurchase agreements are used to enhance liquidity and to earn income for periods as short as overnight. To minimize risk, the securities underlying each repurchase agreement will be maintained with the Master Portfolio's custodian, or a sub-custodian, in an amount at least equal in value to the repurchase price under the agreement (including accrued interest thereunder), and such agreements will only be affected with parties that meet certain creditworthiness standards. However, in the event the other party to the repurchase agreement fails to repurchase the securities subject to such agreement, a Master Portfolio could suffer a loss to the extent it is precluded from selling the securities or, if due to delays, proceeds from the same securities are less than the repurchase price. WHEN-ISSUED SECURITIES The Master Portfolios may purchase securities on a when-issued or delayed delivery basis. Although the purchase amounts of these securities are established at the time the purchaser enters into the agreement, these securities may be delivered and paid for at a future date. The Master Portfolios record purchases of when-issued securities and reflect the values of such securities in determining net asset value in the same manner as other portfolio securities. The Master Portfolios maintain at all times cash or other liquid assets in an amount at least equal to the amount of outstanding commitments for when-issued securities. EXPENSE ALLOCATION Common expenses incurred by the Master Portfolios are allocated among the Master Portfolios (i) based upon relative average net assets, (ii) as incurred on a specific identification basis, or (iii) equally among the Master Portfolios, depending on the nature of the expenditure. All expenses incurred by the Master Portfolios are allocated to the Feeder Funds daily based on their proportionate interest in the Master Portfolio. FEDERAL INCOME TAXES Each Master Portfolio intends to qualify as a partnership for federal income tax purposes. Therefore, the Master Portfolios believe they will not be subject to any federal income tax on their income and net realized capital gains (if any). However, each investor in the Master Portfolios will report its allocable share of the Master Portfolio's income and capital gains for purposes of determining its federal income tax liability. USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts in the financial statements. Actual results could differ from those estimates. OTHER INFORMATION Realized gains and losses on the sale of investments are calculated on the identified cost basis. Dividend income is recorded on the ex-dividend date and interest income is recognized on the accrual basis. Securities transactions are recorded on the trade date. In November 2000, a revised AICPA Audit and Accounting Guide, Audits of Investment Companies, was issued, and is effective for fiscal years beginning after December 15, 2000. The revised Guide required the Master Portfolios to amortize premiums and discounts on all fixed-income securities. Upon initial adoption, the Master Portfolios were required to adjust the cost of their fixed- income securities by the cumulative amount of amortization that would have been recognized had amortization been in effect from the purchase date of each holding. Adopting this accounting principle did not affect the Feeder Funds' net asset value, but it did change the classification of certain amounts between interest income and realized and unrealized gain/loss in the Statement of Operations. The impact of the adoption of this principle was not material to the financial statements. 3. INVESTMENT ADVISOR The Trust has an Investment Advisory Agreement (the "Agreement") with CCM Advisors, LLC (the "Advisor"), with whom certain officers and trustees of the Trust are affiliated, to furnish investment advisory services to the Master Portfolios. Under the terms of the Agreement, the Master Portfolios compensate the Advisor for its management services at the annual rate of 0.50% of each Master Portfolio's average daily net assets for the Limited Maturity Portfolio and the Full Maturity Portfolio, and an annual rate of 0.75% of each Master Portfolio's average daily net assets for the Balanced Portfolio and the Diversified Portfolio. 4. SECURITIES TRANSACTIONS Purchases and sales of investment securities, other than short-term investments and options, for the period from November 1, 2001 through June 30, 2002 were as follows: Purchases Sales ------------------------------ ------------------------------ U.S. Government Other U.S. Government Other --------------- ----- --------------- ----- Limited Maturity Portfolio -- $83,387,547 -- $58,509,467 Full Maturity Portfolio $2,951,388 $64,730,720 $3,125,602 $64,773,649 Balanced Portfolio $851,562 $26,260,402 $920,103 $25,759,663 Diversified Portfolio -- $53,834,745 -- $52,346,517
As of June 30, 2002, unrealized appreciation (depreciation) on investment securities for federal income tax purposes was as follows: Net Appreciation Appreciated Depreciated (Depreciation) Securities Securities ------------- ---------- ---------- Limited Maturity Portfolio $1,032,521 $1,068,554 ($36,033) Full Maturity Portfolio $741,971 $1,176,545 ($434,574) Balanced Portfolio ($648,237) $1,407,397 ($2,055,634) Diversified Portfolio ($5,021,854) $5,808,059 ($10,829,913) At June 30, 2002, the cost of investments for federal income tax purposes was $83,850,983, $43,332,695, $24,056,875, and $89,622,101 for The Limited Maturity Portfolio, The Full Maturity Portfolio, The Balanced Portfolio, and The Diversified Portfolio, respectively. Any differences between book and tax cost basis are due to wash sale losses. 5. OPTION CONTRACTS WRITTEN The premium amount and the number of option contracts written for the Master Portfolios for the period November 1, 2001 through June 30, 2002, were as follows: Number Premium of Contracts Amount ------------ ------- Full Maturity Portfolio ----------------------- Options outstanding at October 31, 2001* 71 $52,489 Options written 0 0 Options closed (16) (7,186) Options expired (55) (45,303) --- ------- Options outstanding at June 30, 2002 0 $0 --- ------- --- ------- Balanced Portfolio ------------------ Options outstanding at October 31, 2001* 3 $1,610 Options written 0 0 Options closed (1) (495) Options expired (2) (1,115) --- ------- Options outstanding at June 30, 2002 0 $0 --- ------- --- ------- * Date that the investments of the Feeder Funds were transferred to the Master Portfolios. The Limited Maturity and Diversified Portfolios did not write or cover any options during the period November 1, 2001 through June 30, 2002. 6. FUTURES CONTRACTS At June 30, 2002, the funds listed below had entered into futures contracts. The net unrealized appreciation (depreciation) is included in the corresponding Feeder Funds' net unrealized appreciation (depreciation) section of their financial statements. The terms of the open contracts are as follows: FULL MATURITY PORTFOLIO Number Underlying Market Value of Unrealized of Contracts Instrument Underlying Instrument Appreciation (Depreciation) ------------ ---------- --------------------- --------------------------- 21 10 Year Agency Future $2,168,578 $42,433 September, 2002 3 5 Year Treasury Note Future $322,266 $2,657 September, 2002 (18) 10 Year Treasury Note Future ($1,930,219) ($33,246) September, 2002 (5) 30 Year Treasury Bond Future ($513,906) ($5,985) September, 2002
BALANCED PORTFOLIO Number Underlying Market Value of Unrealized of Contracts Instrument Underlying Instrument Appreciation ------------ ---------- --------------------- ------------ 8 10 Year Agency Future $826,125 $15,640 September, 2002 (2) 5 Year Treasury Note Future ($214,844) ($2,635) September, 2002 (3) 10 Year Treasury Note Future ($321,703) ($2,898) September, 2002 (3) 30 Year Treasury Bond Future ($308,344) ($4,062) September, 2002
7. SELECTED FINANCIAL HIGHLIGHTS Financial highlights for the Master Portfolios for the period from November 1, 2001, commencement of operations, to June 30, 2002 were as follows: Limited Maturity Full Maturity Balanced Diversified Portfolio Portfolio Portfolio Portfolio ---------------- ------------- --------- --------- Total Return 2.14% 1.36% 0.17% (1.37)% Ratio of expenses to average net assets* 0.71% 0.92% 1.35% 0.94% Ratio of net investment income to average net assets* 3.79% 4.91% 1.16% 0.56% Portfolio turnover rate 79.81% 189.81% 121.29% 60.91%
* Annualized 8. SECURITIES LENDING As of June 30, 2002, the Master Portfolio had loaned securities that were collateralized by cash. The cash collateral is invested by the custodian in a money market pooled account approved by the Advisor. Although risk is mitigated by the collateral, the Master Portfolio could experience a delay in recovering its securities and possible loss of income or value if the borrower fails to return them. The Master Portfolio receives interest on the collateral received. The value of the securities on loan and the value of the related collateral were as follows: Securities Collateral ---------- ---------- CCM Advisor Limited Maturity $23,094,499 $23,449,231 CCM Advisor Full Maturity $9,762,027 $9,959,654 CCM Advisor Balanced $7,741,302 $7,953,238 CCM Advisor Diversified Equity $32,639,334 $33,823,155 9. TRUSTEES AND OFFICERS (UNAUDITED) The table below provides information about each of the trustees and officers of the CCM Advisors Funds (the "Trust"), including biographical information about their business experience and information about their relationships with CCM Advisors, LLC. The mailing address of each trustee and officer is 190 South LaSalle Street, Suite 2800, Chicago, IL 60603. NUMBER OF DATE FIRST PORTFOLIOS IN ELECTED OR FUND COMPLEX NAME AND APPOINTED TO PRINCIPAL OVERSEEN BY OTHER AGE AT POSITIONS HELD OFFICE AND TERM OCCUPATION(S) TRUSTEE*** DIRECTORSHIPS 8/1/02 WITH TRUST OF OFFICE** DURING PAST 5 YEARS HELD ------ ---------- ---------------- ------------------- ----------- ------------- TRUSTEES WHO ARE "INTERESTED PERSONS"* Douglas D. Peabody Trustee and Since 2001 Managing Director, CCM Advisors, 14 Trustee, CCMA Select 39 President LLC (since Jan. 2001); Managing Investment Trust (an Director Convergent Capital open-end investment Management Inc. (since 1999); company) (2 portfolios). formerly Principal, Eager Manager Advisory Services (1991 to 1999). * Mr. Peabody is a trustee who is an "interested person" of the Trust as defined in the Investment Company Act of 1940 because he is a Managing Director of the Trust's investment adviser, CCM Advisors, LLC. TRUSTEES WHO ARE NOT "INTERESTED PERSONS" Charles V. Doherty Trustee Since 2001 Managing Director, Madison 7 Trustee, CCMA Select 68 Advisory Group (a registered Investment Trust (an investment adviser). open-end investment company) (2 portfolios); Trustee, Wayne Hummer Investment Trust (an open-end investment company) (4 portfolios); Director, Lakeside Bank; Director, Knight Trading Group, Inc. (holding company for securities broker); Director, Howe Barnes Investments, Inc. (securities broker); Director, Brauvin Capital Trust, Inc. (REIT); Director, Bank of America Financial Products, Inc. Frank A. Ehmann Trustee Since 2001 Retired; Director, American 14 Trustee, CCMA Select 68 Healthways (provider of diabetes and Investment Trust (an cardiac disease management services open-end investment to health plans and hospitals) (since company) (2 portfolios); 1989); Director, Genderm Corp. Director, SPX Corp. (dermatology company offering (global provider of prescription and non-prescription technical products and treatments for skin conditions) systems, industrial (1997-2000). products and services, flow technology and service solutions) (since 1989); formerly Director and President, United Stationers (wholesale distributor of business, computer, and facilities management products). John D. Oliverio Trustee Since 2001 Chief Executive Officer, President 14 Trustee, CCMA Select 49 and Director, Wheaton Franciscan Investment Trust (an Services, Inc. (parent organization open-end investment for more than 100 health and shelter company) (2 portfolios); service organizations) (since 1984), Director, Hewitt Series Director of the following: Affinity Trust (an open-end Health Systems (since 1995), investment company) Covenant Health Care System (since (since 1998) 1989), All Saints Health System (2 portfolios). (since 1992), Franciscan Ministries, Inc. (the holding company for Wheaton Franciscan Services, Inc.' s housing entities) (since 1998) and United Health System (since 1998). Edward M. Roob Trustee Since 2001 Retired; prior thereto, Senior Vice 7 Trustee, CCMA Select 67 President, Daiwa Securities America Investment Trust Inc. (1986-1993); Arbitrator, New (2 portfolios); Trustee, York Stock Exchange and National Fort Dearborn Income Association of Securities Dealers; Securities, Inc. (since Director, Brinson Trust Company 1994); Director, UBS (since 1993); Committee Member, Funds, Inc. (since Chicago Stock Exchange (1993 to 1999). 1995); Director, UBS Relationship Funds (since 1995); Director, UBS Supplementary Trust (since 1997) (1 portfolio).
** Trustee of the Trust serve a term of indefinite length until resignation or removal and stand for re-election by shareholders only as and when required by the Investment Company Act of 1940. Officers serve a term of indefinite length until their respective successors are elected and qualified. *** Each Trustees currently serves on the Board of the Trust (7 portfolios). Messrs. Peabody, Ehmann and Oliverio also serve on the Board of Directors of the AHA Investment Funds, Inc. (7 portfolios). DATE FIRST ELECTED OR NAME AND APPOINTED TO PRINCIPAL OTHER AGE AT POSITIONS HELD OFFICE AND TERM OCCUPATION(S) DIRECTORSHIPS 8/1/02 WITH TRUST OF OFFICE* DURING PAST 5 YEARS HELD ------ -------------- --------------- ------------------- ------------- Gregory P. Francoeur Treasurer Since 2002 Director of Finance, Convergent Capital None 31 Management Inc. (since 1997); prior thereto, Auditor, Price Waterhouse LLP (1993-1997). Timothy G. Solberg Secretary Since 2001 Managing Director, CCM Advisors, LLC Director, AHA 49 (since 2001); formerly Director of Marketing Investment Funds, Inc. and Client Services, Hewitt Investment Group, (an open-end investment a Division of Hewitt Associates LLC. company) (7 portfolios). Susan M. Brown Vice President Since 2001 Vice President, Administration, CCM Advisors, None 36 LLC; prior thereto, Office Manager, Essex Woodlands Health Ventures.
* Officers serve a term of indefinite length until their respective successors are elected and qualified. CCM ADVISORS FUNDS - MASTER INVESTMENT PORTFOLIOS REPORT OF INDEPENDENT ACCOUNTANTS To the Shareholders and Board of Trustees of CCM Advisors Funds: We have audited the accompanying statements of assets and liabilities, including the schedules of investments, of CCM Advisors Funds (comprising the Limited Maturity Fixed Income Master Portfolio, Full Maturity Fixed Income Master Portfolio, Balanced Master Portfolio, and Diversified Equity Master Portfolio) as of June 30, 2002, and the related statements of operations, changes in net assets, and the financial highlights for the period indicated therein. These financial statements and financial highlights are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and financial highlights. Our procedures included confirmation of securities owned as of June 30, 2002, by correspondence with the custodian and brokers or other appropriate auditing procedures where replies from brokers were not received. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of each of the portfolios constituting the CCM Advisors Funds, at June 30, 2002, the results of their operations, changes in their net assets, and their financial highlights for the period indicated therein, in conformity with accounting principles generally accepted in the United States. /s/Ernst & Young LLP Chicago, Illinois July 29, 2002 AHA INVESTMENT FUNDS, INC. 190 SOUTH LASALLE STREET, SUITE 2800 CHICAGO, ILLINOIS 60603 1-800-445-1341 INVESTMENT ADVISOR CCM Advisors, LLC 190 South LaSalle Street, Suite 2800 Chicago, Illinois 60603 ADMINISTRATOR, TRANSFER AGENT AND DIVIDEND DISBURSEMENT AGENT U.S. Bancorp Fund Services, LLC P.O. Box 701 Milwaukee, Wisconsin 53201-0701 CUSTODIAN U.S. Bank, N.A. 425 Walnut Street 6th Floor, M.L. 6118 Cincinnati, Ohio 45202 LEGAL COUNSEL Bell, Boyd & Lloyd LLC Three First National Plaza 70 West Madison Street Chicago, Illinois 60602 INDEPENDENT AUDITORS Ernst & Young LLP Sears Tower 233 South Wacker Drive Chicago, Illinois 60606 DISTRIBUTOR Quasar Distributors, LLC 615 East Michigan Street Milwaukee, Wisconsin 53202 This report has been prepared for shareholders and may be distributed to others only if preceded or accompanied by a current prospectus. EX-99.17 (AS APPROP) 9 sar02.txt SEMI - ANNUAL REPORT - KENILWORTH KENILWORTH FUND, INC. Suite 2594 21 South Clark Street Chicago, IL 60603-2094 SEMI-ANNUAL REPORT June 30, 2002 (Unaudited) Advisor's Perspective June 30, 2002 DJIA: 9243.26 S&P: 989.82 In the Fund's Annual Report for December 31, 2001, we stated that: "we will be very cautious until mid-spring waiting for more substantial signs of economic recovery and that this recovery will be sustainable only if there is a resurgence of final demand by consumers and business investment demand." We also commented that: "the necessary growth in corporate profits, which we expect in the second half of the year, will provide a firmer undepinning for the relatively high current market levels." Finally, we stated that: " in this very uncertain economic and world political environment, we expect only a modest gain in equity averages and hence for our Fund NAV for the year 2002." After the Federal Reserve cut interest rates 11 times during 2001, economic growth in the first quarter of 2002 came in a sizzling 6.1% with productivity growth at an 8.6% annual rate, surprising many. Consensus forecast of growth for the economy was just 0.9%. The DJIA rallied to close the first quarter at 10,403.94, an increase of 3.84%. As the second quarter began, economists had a surprisingly rosy view of the economy. However, skepticism about the pace of the economic recovery, devastating disclosures about fraudulent or inaccurate bookkeeping at several companies allowed by negligent corporate governance, fear of more terrorism, earnings warnings from stock market stalwarts such as Intel, the bankruptcy of Worldcom, the U.S. dollar started sinking and stock prices tumbled. Normally, the Federal Reserve would ratchet up interest rates at this point in an expansion. Instead at their meeting on June 26, the Federal Reserve kept rates steady out of concern that the second quarter might not be as robust as the first quarter. The Dow Jones Industrial Average shed 1,160.68 to close at 9,243.26 a 10.7% decline, making it the worst quarter since the third quarter of last year. The NASDAQ composite shed 382.72 points or 20.73% representing one of the steepest losses on a percentage basis. Later, the first and second quarter economic growth figures were revised downward to 5% from 6.1% for the first quarter and to a very anemic 1.1% from 2.1% for the second quarter. Productivity growth slipped to a 1.1% annual rate. The second quarter slowdown came largely because the overall economy cooled abruptly. By the end of the first half of this year investors thought they would be seeing steady gains in their stock investments. Unfortunately, fundamental concerns of weak corporate profits, the threat of terrorism, geopolitical instability and the serial drumbeat of corporate accounting scandals involving several public companies, once again raised extremely serious issues of the reliability of financial numbers of corporate balance sheets. With interest rates at 40 year lows, housing continued to grow strongly. Consumers refinanced their mortgages several times as borrowing costs kept on falling. But, worries developed that we may be developing a housing bubble. A recent survey showed only a slight easing in consumer confidence thus far. The consumer remains heavily indebted and may not be able to sustain the same level of spending. These fundamental troubles threaten to prevent the kind of robust market advance that would be the norm at this point in the economic recovery. Questions remain whether the indexes would be able dig themselves out of their hole. Some analysts worried that the year 2002 could be a third down year in a row, something that happened before in 1941, 60 years ago.. Since the year began, the DJIA fell down 7.8%, the S&P 500 down 13.8% and the NASDAQ fell down 25%. Consequently, nearly all categories of Funds posted steep declines. Our Fund's NAV fell by 20.47%. We reduced our technology holdings and also took profits at the margin in our financial holdings and added to our pharmaceutical, energy and utility holdings. We believe that the economy is growing at a slow pace and profits may soon be on the mend. We expect interest rates to remain low this year along with low inflation. We also expect restoration of consumer confidence and trust in the economy. Mohini C. Pai, Portfolio Manager Institutional Portfolio Services, Ltd. KENILWORTH FUND, INC. FINANCIAL HIGHLIGHTS (Unaudited) Six Months Ended Year Ended June 30, December 31, 2002 2001 Selected Per-Share Data Net Asset Value, beginning of period. . . . . . .$18.86 $25.54 Income from Investment Operations Net Investment Loss. . . . . . . . . . . . .(0.04) (0.09) Net Realized and Unrealized Loss on Investments . . . . . . . . . .(3.82) (6.59) Total. . . . . . . . . . . . . . . . .(3.86) (6.68) Less Distributions From Net Investment Income . . . . . . . . . 0.00 0.00 From Net Realized Gains. . . . . . . . . . . 0.00 0.00 Total. . . . . . 0.00 0.00 Net Asset Value, end of period. . . . . . . . . .$15.00 $18.86 Total Return . . . . . . . . . . . . . . . . . . (20.47%) (26.16%) Ratios and Supplemental Data Net Assets, end of period (in thousands). . . . . $9,869 $10,969 Ratio of Net Expenses to Average Net Assets . . . 0.81% 1.46% Ratio of Net Investment Income to Average Net Assets. . . . . .(0.20%) (0.44%) Portfolio Turnover Rate . . . . . . . . . . . . . 8.31% 44.73% The accompanying notes are an integral part of these financial statements. KENILWORTH FUND, INC. STATEMENT OF NET ASSETS June 30, 2002 (Unaudited) Market COMMON STOCKS 96.50%a Shares Value Percent Banks 13.60% Citigroup, Inc. 16,399 635,461 7.88 J.P. Morgan Chase & Co. 5,500 186,560 2.31 Wells Fargo & Co. 5,500 275,330 3.41 Computer-Semiconductor 9.87% Intel Corp. 15,000 274,050 3.40 Applied Materials, Inc.* 20,000 380,400 4.71 Texas Instruments 6,000 142,200 1.76 Computer Software 10.90% Oracle Systems, Inc.* 13,500 127,845 1.58 Intuit, Inc.* 9,500 472,340 5.85 Adobe Systems 1,000 28,500 0.35 Veritas Software* 6,500 128,635 1.59 Microsoft* 2,000 109,400 1.36 Cisco Systems* 1,000 13,950 0.17 Computer Systems 0.77% EMC Corporation 3,500 26,425 0.33 Mc Data Corp. Class A* 4,009 35,319 0.44 Drugs 13.23% Merck & Co. 7,700 389,928 4.83 Bristol-Myers Squibb 8,700 223,590 2.77 Pfizer, Inc. 10,500 367,500 4.56 Schering-Plough 3,500 86,100 1.07 KENILWORTH FUND, INC. STATEMENT OF NET ASSETS June 30, 2002 (Unaudited) Market COMMON STOCKS Shares Value Percent Electrical Equipment 5.41% General Electric 12,000 348,600 4.32 Tyco International Ltd. 6,500 87,815 1.09 Finance 15.61% Federal National Mortgage 5,500 405,625 5.03 Federal Home Loan Mortgage 10,300 630,360 7.81 Household International, Inc. 4,500 223,650 2.77 Home Building 2.28% Lennar Corp. 3,000 183,600 2.28 Health Care 1.62% Johnson and Johnson 2,500 130,650 1.62 Insurance 7.78% American International Group 9,200 627,716 7.78 Media 0.07% General Motors Class H 564 5,866 0.07 Medical Instruments 2.65% Agilent Technologies* 4,500 106,425 1.32 Zimmer Holdings, Inc. 3,000 106,980 1.33 Natural Gas 1.84% Questar Corp. 6,000 148,200 1.84 KENILWORTH FUND, INC. STATEMENT OF NET ASSETS June 30, 2002 (Unaudited) Market COMMON STOCKS Shares Value Percent Oils 4.21% Frontier Oil 13,500 237,600 2.94 Exxon Mobil Corp. 2,500 102,300 1.27 Telecommunications 1.39% ADC Telecommunication* 28,000 64,120 0.80 Adtran, Inc.* 2,500 47,498 0.59 Utilities-Gas & Electric 4.36% Dominion Resources 2,500 165,500 2.05 Duke Energy Corp. 6,000 186,600 2.31 Utilities-Telephone 0.91% A.T.&T. 5,000 53,500 0.66 A.T.&T. Wireless 3,429 20,060 0.25 Total Investments 7,786,197 (Cost $5,816,388) CASH AND RECEIVABLES NET OF LIABILITIES 3.50% 282,461 TOTAL NET ASSETS 100.00% $8,068,658 NET ASSET VALUE PER SHARE $15.00 (based on 537,778 shares of capital stock outstanding) a Percentages for various classifications relate to total net assets. *Non-income producing security. The accompanying notes are an integral part of these financial statements. KENILWORTH FUND, INC. STATEMENT OF OPERATIONS (Unaudited) Six Months Ended INVESTMENT INCOME June 30, 2002 INCOME: Dividends $59,337 Interest 570 Total Income 59,907 EXPENSES: Investment Advisory Fees 49,477 Administrative and Management Fees 20,000 Registration Fees 1,585 Auditing 3,508 Insurance and Other Expenses 5,215 Total Expenses 79,785 NET INVESTMENT LOSS: (19,878) NET REALIZED LOSS ON INVESTMENTS (194,044) NET INCREASE IN UNREALIZED APPRECIATION ON INVESTMENTS (1,942,986) NET REALIZED LOSS AND UNREALIZED DEPRECIATION ON INVESTMENTS (2,137,030) NET DECREASE IN NET ASSETS FROM OPERATIONS ($2,156,908) The accompanying notes are an integral part of these financial statements. KENILWORTH FUND, INC. STATEMENTS OF CHANGES IN NET ASSETS (Unaudited) Six Months Ended Year Ended June 30, 2002 December 31, 2001 OPERATIONS: Net Investment Loss ($19,878) ($52,490) Net Realized Loss on Investments (194,044) (153,144) Net Decrease in Unrealized Depreciation on Investments (1,942,986)(3,748,517) Decrease in Net Assets from Operations (2,156,908) (3,954,151) DISTRIBUTIONS To SHAREHOLDERS: Distributions from Net Investment Income --- --- Distributions from Net Realized Gains on Investments --- --- Decrease in Net Assets resulting from Distributions --- CAPITAL SHARE TRANSACTIONS: Proceeds From Shares Issued (656 and 6,996 shares, respectively) 12,500 152,500 Cost of Shares Redeemed (44,535 and 30,399 shares, respectively) (755,886) (680,402) Reinvested Dividends (0 and 0 shares, respectively) --- --- (Decrease) Increase in Net Assets from Capital Share Transactions (743,386) (527,902) Total Decrease in Net Assets (2,900,294) (4,482,053) NET ASSETS AT BEGINNING OF YEAR (581,657 and 605,059 shares outstanding, respectively) 10,968,952 15,451,005 NET ASSETS AT END OF PERIOD (537,778 and 581,657 shares outstanding, respectively) $8,068,658 $10,968,952 The accompanying notes are an integral part of these financial statements. NOTES TO FINANCIAL STATEMENTS June 30, 2002 (Unaudited) The Kenilworth Fund, Inc., (the "Fund") is registered under the Investment Company Act of 1940 as a no-load, open-end, non-diversified management investment company. 1. Summary of Significant Accounting Policies a. The Fund is registered under the Investment Company Act of 1940 as a no-load, open-end, non-diversified management investment company. The Fund's objective is long-term capital appreciation which it seeks by investing primarily in a non-diversified portfolio of common stocks, preferred stocks, warrants to purchase common stocks, convertible bonds and fixed-income obligations of corporations and the United States government. Its books and records are maintained on the accrual basis. Securities are valued at their last sale price as reported on a securities exchange, or at their last bid price as applicable. Short term instruments are valued at cost which approximates market value. Cost amounts, as reported on the statement of net assets, are the same for federal income tax purposes. For the period ended June 30, 2002, purchases and sales of investment securities were $820,444 and $1,640,075, respectively. b. Security transactions are accounted for on the trade date and dividend income is recorded on the ex-dividend date. Interest income is recorded on the accrual basis. Realized gains and losses from security transactions are reported on an identified cost basis. c. Provision has not been made for federal income tax since the Fund has elected to be taxed as a "regulated investment company" and intends to distribute substantially all its income to its shareholders and otherwise comply with the provisions of the Internal Revenue Code applicable to regulated investment companies. d. As of June 30, 2002 there were 10,000,000 shares of capital stock authorized. e. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of increases and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates. 2. Investment Adviser and Investment Advisory Agreement and Transactions with Related Parties: The Fund has signed two agreements with Institutional Portfolio Services, Ltd., ("IPS"), with whom certain officers of the Fund are affiliated. Under the terms of the first agreement (the investment advisory agreement) the Fund will pay IPS a monthly investment advisory fee at the annual rate of 1.0% of the daily net assets of the Fund. Under the terms of the second agreement (the administrative and management services agreement) the Fund will pay IPS a yearly administrative and management services fee of $40,000 per year payable on a yearly basis. The advisory agreement requires the adviser to reimburse the Fund in the event that the expenses of the Fund in any fiscal year exceed 1.6%. 3. Aggregate Net Unrealized Appreciation as of June 30, 2002 consisted of the following: Aggregate gross unrealized appreciation: $2,790,105 Aggregate gross unrealized deprecation: (820,295) Net unrealized appreciation: $1,969,810 At June 30, 2002, the Fund had tax basis capital losses of $178,348 which may be carried over to offset future capital gains. Such losses expire in 2009. EX-99.17 (AS APPROP) 10 ar01.txt ANNUAL REPORT - KENILWORTH KENILWORTH FUND, INC. 21 S. Clark Street Suite 2594 Chicago, IL 60603 ANNUAL REPORT December 31, 2001 Dear Fellow Shareholders, The net asset value of our Fund ended 2001 at $18.86. There was no income and/or capital gains distribution made by the Fund this year. Hence, no tax liability was incurred by Kenilworth Fund shareholders as a result of holding Fund shares during the year 2001. Those shareholders who redeemed their Fund shares may owe taxes if they realized capital gains on the redemption of their shares. Our Fund registered a whopping 26.16% decline during the year as against a decline of 11.87% for the S&P 500 Index and a decline of 21.90% for the technology heavy NASDAQ Index and 5.43% for the Dow Jones Industrial Average. This is the second year in succession all the major market indices declined just as our Fund did. The average Large Cap Growth Fund declined by 22.95%. We continue to keep a tight control on expenses as witnessed by our Fund's total expense ratio of 1.45% for the year 2001. The Fund's expense ratio has fallen from 1.70% since inception to the current 1.45%. We sincerely thank you for your continued support. Ms. Mohini C. Pai, President Ms. Savitri P. Pai, Secretary/Treasurer Portfolio Manager: The Fund's portfolio manager, Mr. B. Padmanabha Pai, founded Institutional Portfolio Services Ltd., an investment advisory organization. He has been managing pension funds, personal trusts, university endowments in the past, and funds for wealthy individuals for the last thirty-three years. Prior to portfolio management he taught investment theory at the university level. INVESTMENT PERSPECTIVE - JANUARY 15, 2001 DJIA: 10,021.50 (12/31/2001) S & P 500: 1,148.08 Review of 2001 Most of the major equity averages fell during the year as they did in the previous year. The S&P 500 Index (with dividends) declined by 11.87%, the technology heavy NASDAQ Index declined by 21.10% and Dow Jones Industrial Average by 5.43%. Large Cap Growth Funds declined by 22.95%, Large Cap Core by 13.76%. Science and Technology Funds by 37.55% and the worst performance was that of Telecommunications Funds by 39.22%. Our own Fund with mostly large cap growth stocks fell by 26.16%. These two years were the worst for most of the averages in the last 27 years since 1973-74. In fact the Wilshire 5000 Index which measures the value of all US Stocks bottomed on September 21, 2001 at $10.24 trillion from its high of $16.96 trillion on March 24, 2000, a catastrophic 39.6% decline. As we entered 2001, we were hopeful that the Federal Reserve's aggressive and sudden interest rate cutting moves, lower oil prices (from over $30.00 to around $20.00 a barrel), and falling mortgage rates would stimulate the economy in the second half of 2001. In the section, "Outlook for 2001" in our Fund's 2000 Annual Report we said: "Corporate profits, after rising over 20% in the first quarter of 2000, started decelerating sharply, leading to only a 5% increase in the final quarter.... The capital spending boom came to a screeching halt.... We believe the inventory accumulation in the auto and tech sector will be liquidated during the first half of this year (2001). However, with another 50 basis points reduction in interest rates by the Fed. economic growth will pick up from flat to zero in the first half to a likely 3% in the second. Corporate profits may similarly register a gain only in the second half at a 5 to 8% rise". However, after a couple of months into the year we saw the coming of the 2001 recession. Then six months later in our Semi-Annual Report dated June 30, 2001, we stated: "We are very disappointed that neither we nor anyone else (including the Federal Reserve) anticipated the speed and steepness of this decline since last July (2000)." Indeed, all of the major brokerage house strategists and pundits turned out to be so wrong as none of them saw the recession coming or corporate profits falling by 17% in 2001. All of us had hoped that the Federal Reserve would succeed in skirting the recession. But, the overcapacity created in telecom and technology in the previous three years and the severity of the manufacturing recession that began in 2000 was generally underestimated by analysts. Industrial production fell 6.4% in 2001, the largest drop since 1974; the capacity utilization rate fell 5.8%, the largest such decline since 1982. Unemployment jumped from 4% in 2000 to 5.8% and will continue to rise before the recovery begins in early spring, or no later than the second half of 2002. CPI (Consumer Price Index) rose 1.6% in 2001 as against the 3.4% in 2000 and 2.7% in 1999. With subdued inflation the Federal Reserve cut interest rates 11 times to a historic low of 1.75% on the Fed Funds rate. Thus, even as the economy was sliding into a severe downturn at the beginning of the third quarter, the US witnessed the horrific and ghastly tragedy caused by the terrorist attacks on September 11. The economy then came to a standstill. But, the determined and resolute nation fought back with all its might against the worldwide network of the terrorists. The real Gross Domestic Product having declined by 0.35% in the third quarter, may have fallen by 1 to 2% in the final quarter of 2001. Outlook for 2002: We believe that the recession will end in this quarter. The rise of leading economic indicators three months in a row, declining claims for State unemployment insurance benefits, greater consumer confidence levels, continuing Federal Reserve pump priming, i.e. injecting liquidity and credit, lower marginal tax rates, sizeable increases in the production of computers and office equipment, semiconductors and motor vehicle parts all suggest that the recession may have already ended. The worst is now definitely over on the economic front. We think the recovery has already begun. Corporate profits will start to show positive surprises particularly in the second half of the year. Thus we remain upbeat about prospects for the stock markets in the year ahead. Kenilworth Fund, Inc.,: In our Annual Report for December 31, 2000, we said "Given our concern for tax efficiency we wanted to postpone the liquidation of more significant amounts of these, our largest technology holdings, to the first quarter", of 2001. As we pointed out in our semiannual report in July 2001, we had liquidated considerable amounts of tech and telecom holdings and diversified into financial holdings such as Household International, J. P. Morgan, housing stocks such as Lennar, utility equities such as Dominion Resources, Duke Power and later Calpine, air-transport such as Boeing and conglomerate Tyco International. However, as the economy was further sliding into recession we continued to liquidate large amounts of stocks in the third quarter, believing then that economic recovery will be postponed to the first or second quarter of 2002 instead of the final months of 2001 (as we forecast in our annual and subsequent reports to you, because of aggressive rate cuts by the Federal Reserve, tax rebates and marginal tax reduction). But, then came the unimaginable ghastly atrocities of September 11, and the anthrax and other biological weapon threats. Our net asset value which began the year at $25.42, went into a free fall to $15.97 on September 21, 2001. We started buying on September 24, believing that the United States will prevail. The markets staged a powerful rally of 20% for DJIA and S&P 500 and 40% for the NASDAQ. Our own Fund staged nearly a 23% gain since the low in late September. However, Enron's bankruptcy ensued soon after and some of the utility stocks we bought had some exposure to Enron. Calpine, a producer of modern electric power plants which we had bought after the California energy crisis subsided and the stock had fallen to attractive levels post 9/11 was particularly hit by association with Enron. And as revelations of "off balance sheet transactions" through special purpose entities and partnerships, with severe conflict of interest issues and auditor malfeasance became known, the credibility of US corporate governance and reliability of corporate balance sheets has been called into question. These are extremely serious issues, as transparency and reliability of financial numbers is the sine-quo-non of thriving capital markets. Very many of the large stocks such as Tyco, GE, Household International, AIG, J.P. Morgan and Citigroup all came under pressure in late December. Our Fund's NAV, closed the year at $18.86 for a 26.16% decline. We will be very cautious until mid- spring waiting for more substantial signs of economic recovery. This recovery will be sustainable only if there is a resurgence of final demand by consumers and business investment demand. Finally, the necessary growth in corporate profits, which we expect during the second half of the year, will provide a firmer underpinning for the relatively high current market levels. In this very uncertain economic and world political environment, we expect only a modest gain in equity averages and hence for our Fund NAV for the year 2002. B. Padmanabha Pai, President Institutional Portfolio Services, Ltd. Performance: This graph shows the growth of a $10,000 investment in your Fund and compares it to the S&P 500 index. For the period beginning July 1, 1993 and ending December 31, 2001 your investment in the Fund would be $20,494 as compared to a theoretical investment in the S&P 500 which would have grown to $30,094. This performance includes the reinvestment of dividends. {GRAPH} Cumulative Total Returns Periods ended December 31, 2001 Past 1 Year Past 5 Years Life of Fund Kenilworth Fund, Inc. -26.16% 26.92% 104.96% S&P 500 Index -11.87% 66.26% 200.10% Cumulative total returns reflect the Fund's actual performance over a set period. The Fund began operations on July 1, 1993. Average Annual Returns Periods ended December 31, 2001 Past 1 Year Past 5 Years Life of Fund Kenilworth Fund, Inc. -26.16% 4.88% 8.81% S&P 500 Index -11.87% 10.70% 13.81% Average annual returns take the Fund's cumulative returns and show you what would have happened if the Fund had performed at a constant rate each year. Total returns and yields are based on past results and are not indicative of future performance. KENILWORTH FUND, INC. STATEMENT OF NET ASSETS December 31, 2001
Market COMMON STOCKS 97.94%a Shares Value Banks 14.75% Citigroup, Inc. 25,000 1,262,000 J.P. Morgan Chase & Co. 5,000 181,750 Wells Fargo & Co. 4,000 173,800 Computer-Semiconductor 9.90% Intel Corp. 15,000 471,750 Applied Materials, Inc.* 11,000 441,100 Texas Instruments 3,500 98,000 Motorola, Inc. 5,000 75,100 Computer Software 10.96% Oracle Systems, Inc.* 15,000 207,150 Intuit, Inc.* 10,000 427,800 Cisco Systems* 5,000 90,550 Adobe Systems 1,000 31,050 Veritas Software* 7,000 313,810 Microsoft* 2,000 132,500 Computer Systems 2.56% Hewlett-Packard 5,000 102,700 EMC Corporation* 5,000 67,200 McData Corp. Class A* 4,509 110,470 Drugs 13.34% Merck & Co. 8,000 470,400 Bristol-Myers Squibb 9,500 484,500 Pfizer, Inc. 10,500 418,425 Schering-Plough 2,500 89,525 Electrical Equipment 8.41% General Electric 12,000 480,960 Tyco International Ltd. 7,500 441,750 Finance 14.27% Federal National Mortgage 7,000 556,500 Federal Home Loan Mortgage 11,000 719,400 Household International, Inc. 5,000 289,700 Home Building 2.13% Lennar Corp. 5,000 234,100 Health Care 1.08% Johnson and Johnson 2,000 118,200 KENILWORTH FUND, INC. STATEMENT OF NET ASSETS December 31, 2001 Market COMMON STOCKS Shares Value Insurance 7.24% American International Group 10,000 794,000 Media 1.38% America Online* 3,000 96,300 General Motors Class H* 3,564 55,064 Medical Instruments 2.52% Agilent Technologies* 6,500 185,315 Zimmer Holdings, Inc. 3,000 91,620 Natural Gas 1.26% Questar 5,500 137,775 Oils 1.44% Frontier Oil 9,500 158,080 Telecommunications 2.88% ADC Telecommunication* 27,000 124,200 Adtran, Inc.* 3,600 91,872 Ciena Corp.* 7,000 100,170 Utility Gas & Electric 2.23% Dominion Resources 1,500 90,150 Duke Energy 3,500 137,410 Calpine, Inc. 1,000 16,790 Utilities-Telephone 1.59% A.T.&T. 6,000 108,840 A.T.&T. Wireless 4,529 65,082 Total Investments 97.94% 10,742,858 (Cost $6,830,063) CASH AND RECEIVABLES NET OF LIABILITIES 2.06% 226,094 TOTAL NET ASSETS 100% $10,968,952 NET ASSET VALUE PER SHARE $18.86 (based on 581,657 shares of capital outstanding) a Percentages for various classifications relate to total net assets. *Non-income producing security. The accompanying notes are an integral part of these financial statements.
KENILWORTH FUND, INC. STATEMENT OF OPERATIONS
Year Ended INVESTMENT INCOME December 31, 2001 INCOME: Dividends $103,902 Interest 18,998 Total Income 122,900 EXPENSES: Investment Advisory Fees 120,576 Administrative and Management Fees 40,000 Registration Fees 2,452 Auditing 6,700 Insurance 1,828 Dues and Subscriptions 1,957 Other Expenses 1,877 Total Expenses 175,390 NET INVESTMENT LOSS: (52,490) NET REALIZED LOSS ON INVESTMENTS (153,144) NET DECREASE IN UNREALIZED DEPRECIATION ON INVESTMENTS (3,748,517) NET REALIZED LOSS AND UNREALIZED DEPRECIATION ON INVESTMENTS (3,901,661) NET DECREASE IN NET ASSETS FROM OPERATIONS ($3,954,151)
The accompanying notes are an integral part of these financial statements. KENILWORTH FUND, INC. STATEMENT OF CHANGES IN NET ASSETS
Year Ended Year Ended OPERATIONS: December 31, 2001 December 31, 2000 Net Investment Loss ($52,490) ($116,623) Net Realized Loss on Investments (153,144) (25,204) Net Decrease in Unrealized Depreciation on Investments (3,748,517) (1,160,491) Decrease in Net Assets from Operations (3,954,151) (1,302,318) DISTRIBUTIONS To SHAREHOLDERS: Distributions from Net Investment Income --- --- Distributions from Net Realized Gains on Investments --- --- Decrease in Net Assets resulting from Distributions --- --- CAPITAL SHARE TRANSACTIONS: Proceeds From Shares Issued (6,996 and 39,841 shares, respectively) 152,500 1,260,428 Cost of Shares Redeemed (30,399 and 5,494 shares, respectively) (680,402) (172,801) Reinvested Dividends (0 and 0 shares, respectively) --- --- (Decrease) Increase in Net Assets from Capital Share Transactions (527,902) 1,087,627 Total Decrease in Net Assets 4,482,053) (214,691) NET ASSETS AT BEGINNING OF YEAR (605,059 and 570,712 shares outstanding, respectively) 15,451,005 15,665,696 NET ASSETS AT END OF YEAR (581,657 and 605,059 shares outstanding, respectively) $10,968,952 $15,451,005
The accompanying notes are an integral part of these financial statements. KENILWORTH FUND, INC. FINANCIAL HIGHLIGHTS
For the Years Ended December 31 2001 2000 1999 1998 1997 1996 1995 1994 1993a Selected Per-Share Data Net Asset Value, beginning of period. . $25.54 $27.45 $21.91 $18.17 $15.43 $11.93 $9.64 $10.31 $10.00 Income from Investment Operations Net Investment (Loss) Income. (0.09) (0.19) (0.12) (0.04) (0.05) 0.01 0.06b 0.06b 0.05 Net Realized and Unrealized (Loss) Gain on Investments. (6.59) (1.72) 6.02 3.78 3.24 3.51 2.64 (0.67) 0.31 Total . . . (6.68) (1.91) 5.90 3.74 3.19 3.52 2.70 (0.61) 0.36 Less Distributions From Net Investment Income . . 0.00 0.00 0.00 0.00 0.00 0.01 0.06 0.06 0.05 From Net Realized Gains. . . . 0.00 0.00 0.36 0.00 0.45 0.01 0.35 0.00 0.00 Total. . 0.00 0.00 0.36 0.00 0.45 0.02 0.41 0.06 0.05 Net Asset Value, end of period. . $18.86 $25.54 $27.45 $21.91 $18.17 $15.43 $11.93 $9.64 $10.31 Total Return . . . . (26.16%) (6.96%) 26.95% 20.58% 20.67% 29.48% 28.03% (5.95%) 7.16%c Ratios and Supplemental Data Net Assets, end of period (in thousands) . $10,969 $15,451 $15,666 $12,178 $9,790 $7,222 $5,099 $3,530 $2,840 Ratio of Net Expenses to Average Net Assets. . . 1.46% 1.31% 1.41% 1.42% 1.52% 1.51% 1.69%b 1.70%b 0.52% Ratio of Net Investment Income to Average Net Assets. . (0.44%) (0.66%) (0.52%) (0.24%) (0.29%) 0.06% 0.54%b 0.67%b 0.65% Portfolio Turnover Rate . . 44.73% 43.93% 38.29% 70.28% 76.99% 73.93% 82.17% 11.78% 0.00% aJuly 1, 1993 (commencement of operations) to December 31, 1993 bNet of reimbursement of expenses by Advisor. cAnnualized.
The accompanying notes are an integral part of these financial statements. NOTES TO FINANCIAL STATEMENTS December 31, 2001 The Kenilworth Fund, Inc., (the "Fund") is registered under the Investment Company Act of 1940 as a no-load, open-end, non-diversified management investment company. 1. Summary of Significant Accounting Policies a. The Fund is registered under the Investment Company Act of 1940 as a no-load, open- end, non-diversified management investment company. The Fund's objective is long-term capital appreciation which it seeks by investing primarily in a non-diversified portfolio of common stocks, preferred stocks, warrants to purchase common stocks, convertible bonds and fixed-income obligations of corporations and the United States government. Its books and records are maintained on the accrual basis. Securities are valued at their last sale price as reported on a securities exchange, or at their last bid price as applicable. Short term instruments are valued at cost which approximates market value. Cost amounts, as reported on the statement of net assets, are the same for federal income tax purposes. For the year ended December 31, 2001, purchases and sales of investment securities were $6,113,066 and $5,380,076 respectively. b. Security transactions are accounted for on the trade date and dividend income is recorded on the ex-dividend date. Interest income is recorded on the accrual basis. Realized gains and losses from security transactions are reported on an identified cost basis. c. Provision has not been made for federal income tax since the Fund has elected to be taxed as a "regulated investment company" and intends to distribute substantially all its income to its shareholders and otherwise comply with the provisions of the Internal Revenue Code applicable to regulated investment companies. d. As of December 31, 2001 there were 10,000,000 shares of capital stock authorized. e. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of increases and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates. 2. Investment Adviser and Investment Advisory Agreement and Transactions with Related Parties: The Fund has signed two agreements with Institutional Portfolio Services, Ltd., ("IPS"), with whom certain officers of the Fund are affiliated. Under the terms of the first agreement (the investment advisory agreement) the Fund will pay IPS a monthly investment advisory fee at the annual rate of 1.0% of the daily net assets of the Fund. Under the terms of the second agreement (the administrative and management services agreement) the Fund will pay IPS an annual administrative and management services fee of $40,000. The advisory agreement requires the adviser to reimburse the Fund in the event that the expenses of the Fund in any fiscal year exceed 1.6%. 3. Sources of Net Assets: As of December 31, 2001, the sources of net assets were as follows: Fund shares issued and outstanding $7,446,534 Unrealized Appreciation of Investments 3,912,795 Accumulated Undistributed Investment Loss-Net (212,029) Accumulated Net Realized Loss on Investment Transactions (178,348) Total $10,968,952 Aggregate Net Unrealized Appreciation as of December 31, 2001 consisted of the following: Aggregate gross unrealized appreciation $4,151,260 Aggregate gross unrealized deprecation (238,465) Net unrealized appreciation $3,912,795 At December 31, 2001, the Fund had tax basis capital losses of $178,348 which may be carried over to offset future capital gains. Such losses expire in 2009. (THIS PAGE INTENTIONALLY LEFT BLANK) REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors and Shareholders Kenilworth Fund, Inc. We have audited the accompanying statement of net assets of Kenilworth Fund, Inc. December 31, 2001, and the related statement of operations for the year then ended, the statement of changes in net assets for each of the two years in the period ended and the financial highlights for each of the three years in the period then ended. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audit. The financial highlights for the years ended December 31, 1998 and 1997, were audited by other auditors whose report dated January 8, 1999, expressed an unqualified opinion on such financial highlights. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included verification by examination of securities owned and confirmation with securities brokers as of December 31, 2001. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of the Kenilworth Fund, Inc. as of December 31, 2001, the results of its operations, the changes in its net assets and financial highlights for the respective stated periods, in conformity with accounting principles generally accepted in the United States of America. Grant Thornton LLP Chicago, Illinois January 11, 2002 EX-99.17 (AS APPROP) 11 prosp02.txt PROSPECTUS - KENILWORTH KENILWORTH FUND, INC. PROSPECTUS April 24, 2002 The Securities and Exchange Commission has not approved or disapproved these securities or passed upon the adequacy of this prospectus. Any representation to the contrary is a criminal offense. TABLE OF CONTENTS INVESTMENT OBJECTIVE.................................3 PRINCIPAL INVESTMENT STRATEGIES......................3 PRINCIPAL INVESTMENT RISKS...........................4 FUND PAST PERFORMANCE CHARTS.........................4 FUND EXPENSES........................................4 MANAGEMENT OF THE FUND...............................6 Investment Adviser..............................6 SHAREHOLDER INFORMATION..............................7 Pricing of Fund Shares..........................7 Purchase of Fund Shares.........................7 Redemption of Fund Shares.......................7 Dividends and Distributions.....................7 Tax Consequences................................7 FINANCIAL HIGHLIGHTS INFORMATION.....................8 SHARE PURCHASE APPLICATION..........................11 INVESTMENT OBJECTIVE The Kenilworth Fund's investment objective is long term capital appreciation. As with any mutual fund, there is no assurance that the Fund will achieve its goal. PRINCIPAL INVESTMENT STRATEGIES Our investment philosophy during the last 30 years has been guided by the historical fact that long term investment in stocks in the United States has produced annual returns of over 9.5% over a sixty year span. When one includes the decade of the 1980s, with its 18% annual return and similar returns in the 1990s, the annual return averages almost 11% exceeding that of bonds and money market instruments. Hence, one of the Fund's principal investment strategies is to invest in a non- diversified portfolio of common stocks. Notwithstanding the historical returns for common stocks, there is no assurance that these returns will continue in the future. Before investing in companies, the Fund tries to determine the outlook for the economy, the course of monetary policy as pursued by the Federal Reserve Board, the direction of interest rates and of overall corporate profits--the two most critical factors determining overall equity market values. Then, we focus on four or five large industries that are likely to perform well in that economic milieu and generally choose two to four companies that are the dominant growers, those companies with dominant or growing market share in a growing market, in their respective industries. The Fund generally rotates out of expensive stocks and into inexpensive stocks by selling the stocks of those companies whose price earnings ratios become expensive relative to that of their growth rates and that of the overall market, and buying the stocks of those companies whose price earnings ratios are low relative to that of their growth rates and that of the overall market. The Fund employs both a growth and value style of investing. The Fund invests primarily in: (a)large capitalization stocks listed on the United States stock exchanges, those generally over $10 billion in size; (b)in special situations such as: --those situations in which companies are likely to be bought out at a high premium to their current market price; --those situations in which a company's stock market price does not reflect the underlying value of all the company's assets, particularly those of real-estate or patents carried at historic cost; --those situations in which the stock market price of a corporation with two very profitable businesses is trading at a discount to its actual value because of political and/or legal uncertainties involving one of the businesses, thereby placing a negative value on that business; (c) turnaround situations where due to new products, managements, or technologies a new future is forecast for a given company, or; (d) in companies with a very strong technological niche in a dynamic growth industry. We use extensive research to identify growing companies to buy at reasonable prices and then we hold those companies for long periods of time. We have developed many criteria over the last 30 years to identify companies that generate superior long term returns: (a) Management: great companies are created by visionary managers who deliver predictable growth; (b) strong return on capital showing wise use of scarce capital; (c) low costs: companies that can produce the product at a lower cost than their competitors; (d) dominant or growing market share in a growing market; (e) strong balance sheets; (f) turnaround situations due to new management, products, or technologies; (g) historically consistent and predictable growth rates. The Fund may engage in active and frequent trading of portfolio securities to achieve its principal investment strategies when market conditions warrant such trading. Market conditions warrant active and frequent trading when major political, economic and financial uncertainties appear on the investment horizon. Active and frequent trading results in increased portfolio turnover which may have tax consequences to tax paying shareholders. The possible tax consequences to tax paying shareholders are: --an increase in the size of capital gains distributions by the Fund, which distributions are taxable to tax paying shareholders; --an increase in the size of short-term capital gains distributions, which distributions are generally taxed at a higher tax rate than long-term capital gains distributions. The tax consequences of a Fund's portfolio turnover may affect the Fund's performance by reducing its after tax rate of return. In response to adverse market, economic, political or other conditions, the Fund may, from time to time, take temporary defensive positions that are inconsistent with the Fund's principal investment strategies. The effect of taking such temporary defensive positions is that the Fund may not achieve its investment objective of long term capital appreciation. PRINCIPAL INVESTMENT RISKS The risks of investing in the Fund are: (a) the overall market's decline because of political and/or economic uncertainties; (b) factors bearing specifically on a given industry or company; (c) the Fund's non-diversified style of investing. Ultimately, when you sell your shares of the Fund, they could be worth less than what you paid for them. The Fund's share price changes daily in response to political, economic and financial news. A change in the direction of interest rates, military conflagrations, statistics showing adverse economic conditions, or political and regulatory happenings can all cause the Fund's net asset value to decline. Similarly, news regarding the financial condition or changes in specific economic or political conditions that may affect a particular company whose stock the Fund holds may also cause the Fund's share price to decline. In addition, the Fund is classified as being non-diversified which means that, compared with other funds, it may invest a relatively high percentage of its assets in a limited number of companies. Because the Fund may hold roughly 50% of its assets in the stocks of only several companies, the Fund's share price may be more susceptible to any single economic, political or regulatory occurrence than would a fund that seeks broad diversification. Thus, the net asset value of the Fund is likely to be more volatile than the net asset value of a diversified fund. The risk of investing in special situations and turnaround situations is that there is no assurance that the hoped for elements of these situations will occur. Specifically, there is no assurance that companies will be bought out at a high premium to their current market price; or that a company's stock market price will ever reflect the underlying value of all the company's assets. Loss of money is a risk of investing in the Fund. FUND PAST PERFORMANCE CHARTS The following bar chart and table provides some indication of the risks of investing in the Fund by showing the changes in the Fund's performance from year to year and compares the Fund's average annual performance returns over various periods of time to the performance of the S&P 500 Index. Returns are based on past results and are not an indication of future performance. YEAR-BY-YEAR RETURNS Kenilworth Fund [BAR CHART HERE] [Calendar Years: 1994 1995 1996 1997 1998 1999 2000 2001] [Returns: -5.95% 28.03% 29.48% 20.67% 20.58% 26.95% -6.96% -26.16%] Best Quarter: Q4 1998 28.39% Worst Quarter: Q1 2001 -22.00% AVERAGE ANNUAL TOTAL RETURNS Periods ended December 31, 2001 1 year 5 years Since Inception* Return Before Taxes -26.26% 4.88% 8.81% Return After Taxes on Distributions -26.16% 4.72% 8.49% Return After Taxes on Distributions and Sale of Fund Shares -15.93% 3.98% 7.30% S&P 500 Index (reflects no deduction for fees, expenses, or taxes) -11.87% 10.70% 13.81% *Inception Date: July 1, 1993 The S&P 500 stock Index follows the stock market performance of 500 of the largest companies in the United States. The return of the S&P 500 Index does not reflect the costs of buying and selling securities or managing a stock portfolio, costs that are deducted from mutual fund returns. FEES AND EXPENSES OF THE FUND This table describes the fees and expenses that you may pay if you buy and hold shares of the Fund. Shareholder Fees (fees paid directly from your investment) Maximum Sales Charge (Load) Imposed on Purchases.........None Maximum Deferred Sales Charge (Load).....................None Maximum Sales Charge (Load) Imposed on Reinvested Dividends................................None Redemption Fee...........................................None Exchange Fee.............................................None Annual Fund Operating Expenses (expenses that are deducted from Fund assets) Management Fee..........................................1.00% Distribution (12b-1) Fee................................None Other Expenses..........................................0.46% Total Annual Fund Operating Expenses*...................1.46% *The Fund's expenses are limited to 1.60% of its average net assets. Expenses in excess of 1.60% are required to be reimbursed by the Fund's investment advisor, pursuant to its advisory agreement with the Fund. The Fund's advisory agreement, which contains the expense reimbursement clause, is reviewed every year by the Fund's Board of Directors. The expense reimbursement clause cannot be terminated at will by the Fund's investment advisor. EXAMPLE: This EXAMPLE is intended to help you compare the cost of investing in this Fund with the cost of investing in other mutual funds. This EXAMPLE assumes that you invest $10,000 in the Fund for the time periods indicated and then redeem all of your shares at the end of those periods. This EXAMPLE also assumes that your investment has a 5% return each year and that the Fund's operating expenses remain the same. Although your actual costs may be higher or lower, based on these assumptions your costs would be: 1 year 3 years 5 years 10 years $ 149 $ 462 $ 797 $1746 MANAGEMENT OF THE FUND INVESTMENT ADVISOR The Investment Advisor to the Fund is Institutional Portfolio Services, Ltd. (IPS), 21 S. Clark Street, Suite 2594, Chicago, Illinois 60603. Since 1969, IPS has served as an investment advisor to wealthy individuals and corporate pension plans. IPS is registered as an investment advisor with the Securities and Exchange Commission under the Investment Advisers Act of 1940. IPS provides the Fund with investment advisory services, office space and personnel. IPS also pays the salaries of those of the Fund's employees, officers, and directors who are also employees, officers, and/or directors of IPS. Additionally, IPS pays all other executive salaries and executive expenses, charges for all clerical services relating to the Fund's investments and all promotional expenses of the Fund, including the printing and mailing of the prospectus to other than current shareholders. As compensation for its advisory services, the Fund pays to IPS a monthly advisory fee at the annual rate of 1.0% per year on the average net assets of the Fund. All fees are computed on the average daily closing net asset value of the Fund and are payable monthly. The advisory fee paid to IPS for the fiscal year ended December 31, 2001 was 1.0% of the Fund's average net assets. The Fund also pays IPS for certain administrative services such as record keeping, computer software and development, and other operations management services. The administrative services fee paid to IPS for the fiscal year ended December 31, 2001 was $40,000. IPS is required to reimburse the Fund for the Fund's expenses incurred in excess of 1.6% of the Fund's average net assets. IPS will reimburse the Fund for any excess on a yearly basis. PORTFOLIO MANAGER Ms. Mohini C. Pai is the Vice-President of IPS and has been with IPS since 1984. Ms. Pai is responsible for the day-to-day management of the Fund's portfolio. Ms. Pai's business experience during the past five years has been that of portfolio manager and Vice-President of IPS and President and a Director of Kenilworth Fund, Inc. SHAREHOLDER INFORMATION DETERMINATION OF NET ASSET VALUE The net asset value per share of the Fund is determined at the close of trading on the New York Stock Exchange (currently 4:00 P.M., Eastern Standard Time)on days in which the Exchange is open for business, except that the net asset value will not be computed on a day in which no orders to purchase shares were received and no shares were tendered for redemption. The net asset value per share is calculated by adding the value of all securities, cash or other assets, subtracting liabilities, and dividing the remainder by the number of shares outstanding. Each security traded on a national stock exchange is valued at its last sale price on that exchange on the day of valuation or, if there are no sales that day, at the latest bid quotation. Each over-the-counter security for which the last sale price on the day of valuation is available from NASDAQ is valued at that price. All other over-the-counter securities for which reliable quotations are available are valued at the latest bid quotation. Other assets and securities are valued at a fair value determined in good faith by the Board of Directors. PURCHASE OF FUND SHARES An initial purchase of shares of the Fund may be made by sending a properly completed Share Purchase Application to the Fund. The minimum initial purchase of shares is $10,000. Related party accounts and retirement accounts require a minimum initial purchase of $5,000. Related party accounts are defined as those accounts opened with the Fund under the same tax identification number, or those accounts opened by a family member or relative of an existing shareholder. Purchases subsequent to the initial purchase may be sent to the address given in the Prospectus. Minimum subsequent purchases of shares is $1,000. The offering price for the Fund's shares is equal to the net asset value per share (determined in the manner described under "Determination of Net Asset Value") on the day, prior to the close of trading on the New York Stock Exchange, that the purchase order is received and accepted by the Fund. Orders received by the Fund after the close of the New York Stock Exchange will be confirmed at the net asset value determined at the close of the New York Stock Exchange on the next business day. All purchases must be made in U.S. dollars and checks must be drawn on U.S. banks. No cash will be accepted. The Fund sells fractional shares in addition to whole shares. The Fund maintains a book-entry-only system with regard to Fund shares. Fund share certificates will not be issued. The minimums for subsequent purchases do not apply to shares purchased pursuant to the reinvestment of income dividends and capital gain distributions. The minimums may be changed at any time. Shareholders will be given at least thirty days notice of any increase in the minimums. However, the Fund reserves the right to waive or lower investment minimums at its discretion. All orders to purchase shares are subject to the Fund's acceptance and are not binding until so accepted. All orders to purchase shares that are accepted will be processed at the net asset value next determined after receipt of the purchase order as provided herein regardless of the date of acceptance. The Fund may decline to accept a purchase order when in the judgment of management the acceptance of an order is not in the best interests of existing shareholders. RETIREMENT ACCOUNTS Shares of the Fund may be purchased or redeemed for retirement accounts through New York Stock Exchange registered brokerage firms having a relationship with the Fund. Typically, a shareholder will elect to custody his or her retirement account at a brokerage firm. Upon the shareholder's direction to purchase shares of the Fund for his or her retirement account, the brokerage firm will effect a written order for the purchase of Fund shares. Any such purchase or redemption will not be effective until the order or request is received by the Fund. Retirement account holdings, including the Fund, will appear monthly on the retirement account statement issued directly by the relevant brokerage firm. The minimum initial investment for retirement accounts is $5,000 and $1,000 for subsequent purchases. There are no additional Fund charges for retirement accounts. Brokerage firms usually charge a fixed yearly fee for the custody and administration of retirement accounts. REDEMPTION OF FUND SHARES Shareholders of the Fund may request redemption of their shares at any time as provided herein. The redemption price shall be equal to the net asset value next determined after receipt by the Fund's transfer agent of a request for redemption submitted in proper form. See "Determination of Net Asset Value." The value of the shares on redemption may be more or less than their original cost, depending upon the then-current market value of the Fund's investments. Shares may be redeemed by submitting a written request for redemption to the Fund. A written redemption request to the Fund, as transfer agent, must specify (a) the name of the Fund, (b) the dollar amount or specific number of shares to be redeemed, and (c) the shareholder's name and account number. The redemption request must be signed by each registered owner exactly as the shares are registered. The Fund, at its discretion, may require a signature guarantee for redemption from a bank, trust company, savings and loan association, a member of a national stock exchange for redemption, or any other financial institution authorized to guarantee signatures. Requests for redemption by telephone and requests that are subject to any special conditions or that specify an effective date or other than as provided herein cannot be honored. For accounts registered in the name of corporations or associations, the redemption request must include a corporate resolution certified by a duly authorized officer of the corporation or association, with such officer's signature guaranteed. For accounts registered in the name of a trust, the redemption request must be signed by each trustee registered on the account, with each signature guaranteed at the Fund's discretion. Questions with respect to the proper form of redemption requests should be directed to the Transfer Agent at (312) 236-5388. A redemption request received at the same time or near the same time as an address change must be accompanied by a signature guarantee. The guarantor of a signature must be a national bank or trust company, a member of the Federal Reserve System or a member firm of a national securities exchange or any other financial institution authorized to guarantee signatures. The Transfer Agent reserves the right to reject the signature guarantee of an institution if such rejection would be in the best interests of the Fund and its shareholders. Notwithstanding the above, signature guarantees will be required where there appears to be a pattern of redemptions designed to circumvent the signature guarantee requirement, or where the Fund has other reason to believe that this requirement would be in the best interests of the Fund and its shareholders. The proceeds of redemptions will ordinarily be mailed within seven days after receipt of a properly completed redemption request. It is mandatory that the Fund redeem shares upon the proper request of a shareholder. When shares are purchased by check, the Fund reserves the right to delay redemption of shares until it is satisfied that the investor's check used to purchase shares has cleared. Local checks generally are collected in three business days and non-local checks may take longer in certain circumstances. The right of redemption may be suspended during any period when: (a) trading on the New York Stock Exchange is restricted as determined by the Securities and Exchange Commission, or such Exchange is closed for other than weekends and holidays; (b) the Securities and Exchange Commission has by order permitted such suspension; or (c) an emergency as determined by the Securities and Exchange Commission exists, making disposal of portfolio securities or valuation of net assets of the Fund not reasonably practicable. The Fund reserves the right to redeem shares in any account and send the proceeds to the shareholder if the shares in the account do not have a value of at least $5,000. The Fund will notify a shareholder of its intention to terminate the account and provide the shareholder with not less than thirty days to make additional investments. The Fund reserves the right to pay redemptions in kind. Thus, redemption proceeds may be paid in securities or other assets rather than in cash if the Board of Directors determines it is in the best interests of the Fund. Questions regarding redemptions and the procedures that must be followed should be directed to the Fund as Transfer Agent, 21 S. Clark Street, Suite 2594, Chicago, Illinois 60603, (312) 236-5388. DIVIDENDS AND DISTRIBUTIONS Unless a shareholder elects otherwise by notice to the Fund, all income dividends and all capital gains distributions payable on shares of the Fund will be reinvested in additional shares of the Fund at the net asset value in effect on the dividend or distribution payment date. The Fund acts as the shareholder's agent to reinvest dividends and distributions in additional shares and hold for his/her account the additional shares so acquired. A shareholder may at any time change his/her election as to whether to receive his/her dividends and distributions in cash or have them reinvested by giving written notice of such change of election to the Fund. Such change of election applies to dividends and distributions the record dates of which fall on or after the date that the Fund receives the written notice. Dividends from the Fund's net investment income as well as distributions designated as capital gains will ordinarily be declared and paid annually in such a manner as to avoid paying income tax on the Fund's net investment income and net realized capital gains or being subject to a federal excise tax on undistributed net investment income and net realized capital gains. Such distributions and dividends will typically be made in December. As current income is not an objective of the Fund, the amount of dividends will likely be small. There is no fixed dividend rate and there can be no assurance as to the payment of any dividends or the realization of any gains. TAX CONSEQUENCES The Fund intends to maintain its qualification as a "regulated investment company" under the Internal Revenue Code by distributing as dividends not less than 90% of its taxable income and by continuing to comply with all other requirements of Subchapter M of the Code. If the Fund qualifies, the Fund will not be liable for Federal income taxes on amounts paid by it as dividends and distributions. For Federal income tax purposes, dividends paid by the Fund and distributions from short-term capital gains, whether received in cash or reinvested in additional shares, are taxable as ordinary income. Distributions paid by the Fund from long-term capital gains whether received in cash or reinvested in additional shares, are taxable as long-term capital gains, regardless of the length of time you have owned shares in the Fund. The distributions are taxable whether you receive them in cash or in additional shares. If you are not required to pay tax on your income, you will not be required to pay Federal income taxes on the amounts distributed to you. Dividends and capital gain distributions declared in December and paid the following January will be taxable in the year they are declared. Distributions by the Fund may subject an investor to state and local taxes on the distributions, depending on the laws of a shareholder's home state and locality. Because this section is not intended to be a full discussion of present or proposed Federal income tax law and its effect on shareholders, shareholders are urged to consult their own tax adviser. CONDENSED FINANCIAL INFORMATION Financial Highlights The financial highlights table is intended to help you understand the Fund's financial performance for the past 5 years. Certain information reflects financial results for a single Fund share. The total returns in the table represent the rate that an investor would have earned or lost on an investment in the Fund (assuming reinvestment of all dividends and distributions). This information has been audited by Grant Thornton L.L.P. for the years ended 1999, 2000 and 2001, and by other auditors for the years ended 1997 and 1998. Grant Thornton's report, along with the Fund's financial statements, are included in the Fund's Annual Report, which is available upon request.
For the Years Ended December 31 2001 2000 1999 1998 1997 Selected Per-Share Data Net Asset Value, beginning of period $25.54 $27.45 $21.91 $18.17 $15.43 Income from Investment Operations Net Investment Income (Loss) (0.09) (0.19) (0.12) (0.04) (0.05) Net Realized and Unrealized Gain (Loss) on Investments (6.59) (1.72) 6.02 3.78 3.24 Total.......... (6.68) (1.91) 5.90 3.74 3.19 Less Distributions From Net Investment Income 0.00 0.00 0.00 0.00 0.00 From Net Realized Gains 0.00 0.00 0.36 0.00 0.45 Total........... 0.00 0.00 0.36 0.00 0.45 Net Asset Value, end of period......... $18.86 $25.54 $27.45 $21.91 $18.17 Total Return............ -26.16% -6.96% 26.95% 20.58% 20.67% Ratios and Supplemental Data Net Assets, end of period (in thousands) $10,969 $15,451 $15,666 $12,178 $9,790 Ratio of Net Expenses to Average Net Assets 1.46% 1.31% 1.41% 1.42% 1.52% Ratio of Net Investment Income to Average Net Assets (0.44%) (0.66%) (0.52%) (0.24%) (0.29%) Portfolio Turnover Rate 44.73% 43.93% 38.29% 70.28% 76.99%
No person has been authorized to give any information or to make any representations other than those contained in this Prospectus and in the related Statement of Additional Information and, if given or made, such information or representations may not be relied upon as having been authorized by the Kenilworth Fund, Inc. This Prospectus does not constitute an offer to sell securities in any state or jurisdiction in which such offering may not lawfully be made. KENILWORTH FUND, INC. SHARE PURCHASE APPLICATION Mail To: Minimum Investments: Kenilworth Fund, Inc. Initial: $10,000.00 21 S. Clark Street Retirement/Related Party: $5,000.00 Suite 2594 Subsequent: $1,000.00 Chicago, IL 60603 All applications are accepted in Illinois and under Illinois laws. #1...Registration of Shares Owner (Individual, Corporation, Trustee or Joint Owner/DOB Custodian)/Date of Birth Social Security Number Address Daytime Telephone Number City State Zip If more than one owner is listed above, then shares will be registered as joint tenants with rights of survivorship and not as tenants in common, unless otherwise instructed. #2...Investment Information This investment represents (a)an: ___ Initial purchase payable to: Kenilworth Fund, Inc. Amount $__________ ___ Subsequent purchase payable to Kenilworth Fund, Inc. Amount $__________ #3...Dividend Option All income dividends and capital gains distributions will be reinvested in additional shares as stated in the prospectus unless the box below is checked. ___ Please pay all income dividends and capital gains distributions in cash. I/We understand that certificates for shares purchased (either initial or reinvested) will not be issued. #4...Taxpayer Obligations W-9 I am a U.S. citizen ___ Yes ___ No The Internal Revenue Service (IRS) requires each taxpayer to provide a Social Security or Taxpayer Identification Number and to make the following certifications: I certify under penalty of perjury that: 1) The Social Security or other Tax I.D. number stated above is correct. 2) I am not subject to backup withholding because:* A. I am expemt from backup withholding, or B. The IRS has not notified me that I am subject to backup withholding as a result of Failure to report all interest or dividends, or C. The IRS has notified me that I am no longer subject to backup withholding, and 3) I am a U.S. person (including a U.S. resident alien) *Certification instructions. You must cross out item 2 above if you have been notified by the IRS that you are currently subject to backup withholding because you have failed to report all interest and dividends on your tax return. For real estate transactions, item 2 does not apply. For mortgage interest paid, acquisition or abandonment or secured property, cancellation of debt, contributions to an individual returement arrangement (IRA) and generally payments other than interest and dividends, you are not required to sign the Certification, but you must provide your correct TIN. #5...Signature and Agreement I/We, the undersigned, have received a copy of the current prospectus of the Kenilworth Fund, Inc., and are purchasing fund shares in accordance with its provisions. I/We further certify that the undersigned is of legal age and has full legal capacity to make this purchase. The purchase price shall be the net asset value next determined following receipt of the application by the Fund, if the application is accepted. This application cannot be processed unless accompanied by payment. The Internal Revenue Service does not require your consent to any provision of this document other than the certifications required to avoid backup withholding. Signature of Owner Date Signature of Joint Owner (if any) Date OTHER FUND DOCUMENTS Additional information about the Kenilworth Fund's investments is available in the Fund's annual and semi-annual reports to shareholders. In the Fund's annual report, you will find a discussion of the market conditions and investment strategies that significantly affected the Fund's performance during its last fiscal year. Additional information about the Kenilworth Fund and its management and operations is available in the Statement of Additional Information, which is incorporated by reference into this Prospectus. WHERE TO GET THESE DOCUMENTS The Statement of Additional Information and the Fund's annual and semi-annual reports are available, without charge, upon request. To receive these documents or request other information about the Fund, or for shareholder inquiries: 1. Write to us at: Kenilworth Fund, Inc., 21 S. Clark Street, Suite 2594, Chicago, IL 60603 2. Call us collect Monday through Friday, 9 a.m. to 5 p.m., Central Standard Time at 312-236-5388. 3. Visit the Kenilworth Fund website: www.kenilworthfund.com. 4. E-Mail the Fund at: kfinfo@kenilworthfund.com Information about the Fund (including the Statement of Additional Information) can be reviewed and copied at the Securities and Exchange Commission's Public Reference Room in Washington, D.C. Information on the operation of the public reference room may be obtained by calling the Commission at 1-202-942-8090. Reports and other information about the Fund are available on the Commission's Internet site at http://www.sec.gov. Copies of this information may be obtained, upon payment of a duplicating fee, by writing the Public Reference Section of the Commission, Washington, D.C. 20549-6009, or by electronic request at the following email address: publicinfo@sec.gov. Kenilworth Fund, Inc. Investment Company Act File No. 811-7620 EX-99.17 (AS APPROP) 12 sai02.txt STATEMENT OF ADDITIONAL INFORMATION - KENILWORTH KENILWORTH FUND, INC. 21 S. Clark Street Suite 2594 Chicago, Illinois 60603 (312) 235-5388 PART B STATEMENT OF ADDITIONAL INFORMATION Dated: April 24, 2002 This Statement of Additional Information is not a prospectus and should be read in conjunction with the Prospectus of Kenilworth Fund, Inc., dated April 24, 2002, and any supplement thereto. A copy of the Prospectus may be obtained without charge from the Kenilworth Fund, Inc., at the address and telephone number set forth above. No person has been authorized to give any information or to make any representations other than those contained in this Statement of Additional Information and the Prospectus dated April 24, 2002, and, if given or made, such information or representations may not be relied upon as having been authorized by the Kenilworth Fund, Inc. TABLE OF CONTENTS THE FUND . . . . . . . . . . . . . . . . . . . . . . . . . . 3 INVESTMENT OBJECTIVE AND POLICIES. . . . . . . . . . . . . . 3 INVESTMENT RESTRICTIONS. . . . . . . . . . . . . . . . . . . 3 MANAGEMENT OF THE FUND . . . . . . . . . . . . . . . . . . . 5 Directors . . . . . . . . . . . . . . . . . . 5 Investment Adviser. . . . . . . . . . . . . . 5 Administrative & Management Services. . . . . 6 Custodian & Transfer Agent . . . . . . . . . 6 PRINCIPAL SHAREHOLDERS . . . . . . . . . . . . . . . . . . .. 6 BROKERAGE ALLOCATION . . . . . . . . . . . . . . . . . . . . . 6 DETERMINATION OF NET ASSET VALUE . . . . . . . . . . . . . . . 7 HOW TO PURCHASE FUND SHARES . . . . . . . . . . . . . . . . . 7 HOW TO REDEEM FUND SHARES. . . . . . . . . . . . . . . . . . . 7 SHAREHOLDER PLANS. . . . . . . . . . . . . . . . . . . . . . . 8 Dividend Reinvestment Plan. . . . . . . . . . . 8 RETIREMENT ACCOUNTS. . . . . . . . . . . . . . . . . . . . . . 9 DISTRIBUTIONS AND TAXES. . . . . . . . . . . . . . . . . . . . 9 Distributions . . . . . . . . . . . . . . . . . 9 Taxes . . . . . . . . . . . . . . . . . . . . . 9 CAPITAL STOCK. . . . . . . . . . . . . . . . . . . . . . . . . 9 SHAREHOLDER REPORTS AND MEETINGS . . . . . . . . . . . . . . . 10 FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . 11 THE FUND Kenilworth Fund, Inc. (the "Fund") is a no-load, open-end, non-diversified management investment company commonly called a "mutual fund." As a no-load fund, the Fund does not impose sales charges, 12b-1 charges, or redemption fees. The Fund was organized as an Illinois corporation on October 24, 1988. INVESTMENT OBJECTIVE AND POLICIES The Fund's investment objective is long-term capital appreciation which it seeks by investing primarily in a non-diversified portfolio of common stocks, preferred stocks, warrants to purchase common stocks, convertible bonds, fixed-income obligations of corporations and the United States government, and securities convertible into common stocks of corporations. Although the Fund seeks to invest substantially all its assets in common stocks, the composition of the Fund's portfolio will vary depending upon the Adviser's perception of current and future market and economic conditions. The Fund may, for temporary defensive purposes and to meet its redemption requirements, invest some of its assets in money market securities, including U.S. government obligations, certificates of deposit, bankers' acceptances, commercial paper or cash or cash equivalents. The Fund does not intend to invest in any security which, at the time of purchase, is not readily marketable. The Fund does not retain securities that subsequently become illiquid. The Fund does not intend to place emphasis on short-term trading profits. However, when circumstances warrant, investment securities may be sold from time to time without regard to the length of time they have been held. The Fund's investment advisor expects that under normal circumstances the Fund's anticipated portfolio turnover rate will not exceed 75%. However, this rate should not be construed as a limiting factor and the portfolio turnover rate may exceed 75% when the investment advisor deems changes appropriate. Nonetheless, the Fund will not change its investment objective of long-term capital appreciation. The annual portfolio turnover rate indicates changes in the Fund's portfolio. For instance, a rate of 100% would result if all the securities in the portfolio (excluding securities whose maturities at acquisition were one year or less) at the beginning of an annual period had been replaced by the end of the period. The Fund is designed for investors with a long-term investment perspective (and not with a view to playing short-term swings in the market). Investors should be aware that up to 100% of the Fund's portfolio may be invested in common stocks and other equity-type securities. To the extent that the Fund's portfolio is primarily invested in common stocks and other equity-type securities, the Fund's net asset value may be subject to greater fluctuation than a portfolio containing a substantial amount of fixed income securities. There can be no assurance that the objective of the Fund will be realized or that any income will be earned. Nor can there be assurance that the Fund's portfolio will not decline in value. INVESTMENT RESTRICTIONS The Fund has adopted certain investment restrictions which are presented below, and which, together with the investment objective of the Fund, cannot be changed without approval by holders of a majority of the Fund's outstanding voting shares. As defined in the Investment Company Act of 1940, this means the lesser of (a) 67% of the shares of the Fund at a meeting where more than 50% of the outstanding shares are present in person or by proxy; or (b) more than 50% of the outstanding shares of the Fund. Certain restrictions referred to in the foregoing paragraph are summarized below. The Fund will not: (1) Act as underwriter for securities of other issuers except insofar as the Fund may be deemed an underwriter in disposing of its own portfolio securities; (2) Borrow money, issue senior securities, or purchase securities on margin, but may obtain such short term credit from banks as may be necessary for clearance of purchases and sales of securities for temporary or emergency purposes in an amount not exceeding 5% of the value of its total assets; (3) Invest more than 25% of its assets at the time of purchase in any one industry; (4) Invest in securities of other investment companies except as part of a merger, consolidation, or purchase of assets approved by the Fund's shareholders or by purchases with no more than 10% of the Fund's assets in the open market involving only customary broker's commissions; (5) Make investments in commodities, commodity contracts or real estate although the Fund may purchase and sell securities of companies which deal in real estate or interests therein; (6) The Fund may not purchase or retain securities of any issuer if those officers and directors of the Fund or its Investment Adviser owning individually more than 1/2 of 1% of any class of security collectively own more than 5% of such class of securities of such issuer; (7) Pledge, mortgage, hypothecate or otherwise encumber any of its assets, except as a temporary measure for extraordinary or emergency purposes, and then not in excess of 15% of its assets taken at cost; (8) Invest in restricted, illiquid or other securities without readily available market quotations; and (9) Purchase the securities of any issuer if, at the time of acquisition it would own more than 10% of the outstanding voting securities of any one company; (10) Invest in companies for the primary purpose of acquiring control of management thereof; (11) Purchase securities on margin, except such short-term credits as are necessary for the clearance of transactions and make short sales of securities (except short sales against the box); (12) Make loans, except that this restriction shall not prohibit the purchase and holding of a portion of an issue of publicly distributed debt securities; (13) Purchase securities of any company having less than three years continuous operation (including operations of any predecessors) if such purchase would cause the value of the Fund's investments in all such companies to exceed 5% of the value of its assets; (14) Invest more than 5% of its total assets in warrants, whether or not the warrants are listed on the New York Stock Exchange, or more than 2% of the value of the assets of the Fund in warrants which are not listed on those exchanges. Warrants acquired in units or attached to securities are not included in this restriction. MANAGEMENT OF THE FUND Directors The Fund's Board of Directors has overall responsibility for the business and affairs of the Fund in accordance with the laws of the State of Illinois governing the responsibilities of directors. The Board acts as a unified body and considers it unnecessary to have separate committees. Officers and Directors of the Fund, together with their addresses, and principal occupations during the past five years are:
Term of Principal Office and Occupations Name and Address Length of Past Five and Age Position Time Served Years Mohini C. Pai* President 1 year Vice President 21 S. Clark Street Interested 8 years IPS, Ltd. Chicago, IL. Director Chicago, IL 67 B. Padmanabha Pai* Vice-President 1 year President 21 S. Clark Street Interested 8 years IPS, Ltd. Chicago, IL. Director Chicago, IL 66 Savitri P.Pai* Secretary/Treasurer 1 year Attorney-at-Law 21 S. Clark Street Interested 8 years Chicago, IL Chicago, IL. Director 36 Kirtna Pai* Interested 1 year Executive Director 1585 Broadway Director 8 years Morgan Stanley New York, NY & Company, Inc. 37 New York, NY Dr. Larry A. Non-Interested 1 year Professor of Sjaastad Director 8 years Economics, Department of University of Economics Chicago, IL 66 *interested persons Mr. B.P. Pai and Mrs. Mohini C. Pai are husband and wife. Mr. B.P. Pai and Mrs. Mohini C. Pai are the parents of Ms. Savitri P. Pai and Ms. Kirtna Pai, who are sisters. Additionally, at this time the Fund does not make payments to its Interested Directors. All payments made to employees of the Fund who are also Directors of the Fund are paid by the Adviser.
As of December 31, 2001, each director beneficially owned equity securities in the Fund as follows:
DIRECTOR OWNERSHIP OF FUND SHARES Name of Director Dollar Range of Equity Securities in the Fund Mohini C. Pai over $100,000 B. Padmanabha Pai over $100,000 Savitri P. Pai over $100,000 Kirtna Pai over $100,000 Larry A. Sjaastad $50,001-$100,000
CODES OF ETHICS The Fund and its investment adviser have adopted codes of ethics under rule 17j-1 of the Investment Company Act. Personnel subject to the codes are permitted to invest in securities, including securities that may be purchased or held by the Fund. PRINCIPAL SHAREHOLDERS As of April 23, 2002, the following persons owned of record 5 percent or more of the Fund's shares outstanding: (1) Marjorie Lindsay Remainder Trust, P.O. Box 7127 Indian Lake Estate, FL (7.60%); (2) Shirley Lindsay Trust, P.O.Box 7127, Indian Lake Estate, FL (9.52%); (3) Institutional Portfolio Services, Ltd., 21 S. Clark Street, Chicago, IL (6.14%). All directors and officers of the Fund, as a group, own 147,749 shares beneficially, directly and/or indirectly or 26.08% of the Fund's total shares outstanding. Investment Adviser The Fund has entered into an Investment Advisory Agreement ("Advisory Agreement") with Institutional Portfolio Services, Ltd., 21 S. Clark Street, Suite 2594, Chicago, Illinois 60603 (the "Adviser"). Mr. B. Padmanabha Pai is the sole shareholder, principal executive officer and director of the Adviser. Since 1984, Mohini C. Pai has been the Vice-President of IPS. Since 1969, the investment advisor has served as an investment advisor to wealthy individuals and corporate pension plans on an individual account basis for the past 32 years. The Adviser is registered as an investment adviser with the Securities and Exchange Commission under the Investment Advisers Act of 1940. The Advisory Agreement provides that the Adviser shall manage the Fund's investments and shall determine the Fund's portfolio transactions and shall be responsible for overall management of the Fund's business affairs, subject to the supervision of the Board of Directors. As compensation for its services, the Fund pays to the Adviser a monthly advisory fee at the annual rate of 1% per year on the net assets of the Fund. All fees are computed on the average daily closing net asset value of the Fund and are payable monthly. For the fiscal years ending December 31, 1999, 2000 and 2001 the Adviser was paid $130,585, $177,485 and $120,576 respectively. Under the Advisory Agreement, the Adviser provides the Fund with investment advisory services, office space and personnel. The Adviser also pays the salaries of those of the Fund's employees, officers and directors who are also employees, officers, and/or directors of the Adviser. Additionally, the Adviser pays all other executive salaries and executive expenses, charges for all clerical services relating to the Fund's investments and all promotional expenses of the Fund, including the printing and mailing of the prospectus to other than current shareholders. The Fund pays all of its other costs and expenses including interest, taxes, salaries of its employees, fees of directors who are not employees, officers, or directors of the Adviser, administrative expenses related directly to the issuance and redemption of shares (such as expenses of registering or qualifying shares for sale, charges of custodians, transfer agents, and registrars), costs of printing and mailing reports and notices to shareholders, charges for auditing services and legal services, and other fees and commissions of every kind not expressly assumed by the Adviser. (See section below titled: "Administrative & Management Services"). The Funds expenses are limited, however, by an excess reimbursement provision in the Advisory Agreement. If the annual operating and management expenses (excluding taxes and interest) exceeds 1.6% of the average net assets of the Fund, the Advisory Agreement requires the Adviser to reimburse the Fund for any such excess on a monthly basis. Administrative & Management Services The Fund has entered into an Administrative & Management Services Agreement (the "Administrative Services Agreement") with the Fund's investment adviser, Institutional Portfolio Services, Ltd., ("IPS"). The Administrative Services Agreement requires IPS to provide record keeping, computer software and development and other operations management services for the Fund. IPS will be paid the sum of $40,000 per year. As stated in the above-mentioned section titled: "Investment Adviser", if the Fund's annual operating and management expenses exceed 1.6% of the average net assets of the Fund, the Fund's investment adviser will reimburse the Fund for any excess on a monthly basis. Custodian & Transfer Agent The Fund acts as its own custodian and transfer agent. The Fund will comply with all provisions of Rule 17f-2 of the Act in regard to self-custodianship. Specifically, there will be three independent audits annually with at least two of the audits unannounced. Independent Public Accountant Grant Thornton LLC, 700 One Prudential Plaza, 130 E. Randolph Dr., Chicago, IL 60601-6203, acts as the Fund's Independent Public Accountant. Grant Thornton LLC certifies the Fund's financial statements on a yearly basis and conducts audits of the Fund's securities and other assets as required per Rule 17f-2 of the Investment Company Act of 1940. BROKERAGE ALLOCATION The Fund requires all brokers to effect transactions in portfolio securities in such a manner as to get prompt execution of the orders at the most favorable price. The Fund places all orders for purchase and sale of its portfolio securities through the Fund President who is answerable to the Fund Board of Directors. The President may select brokers who, in addition to meeting the primary requirements of execution and price, have furnished statistical or other factual information and services, which, in the opinion of management, are helpful or necessary to the Fund's normal operations. Those services may include economic studies, industry studies, security analyses and reports, sales literature and statistical devices furnished either directly to the Fund or to the Adviser. No effort is made in any given circumstance to determine the value of these materials or services or the amount they might have reduced expenses of the Adviser. Other than set forth above, the Fund has no fixed policy, formula, method or criteria which it uses in allocating brokerage business to brokers furnishing these materials and services. The Board of Directors evaluates and reviews the reasonableness of brokerage commissions paid semi-annually. For the fiscal years ending December 31, 1999, 2000 and 2001 the Fund paid $11,585, $15,100 and $18,500 respectively, in brokerage commissions. CAPITAL STOCK The Fund is a corporation organized under the laws of the State of Illinois and was incorporated on October 24, 1988. The Fund has 10,000,000 shares of authorized capital stock. Each share has one vote and all shares participate equally in dividends and other distributions by the Fund and in the residual assets of the Fund in the event of liquidation. Shares of the Fund have no preemptive rights and no conversion or subscription rights. Shareholders are entitled to redeem shares as set forth under "How to Redeem Shares." The investor will be the record owner of all shares in his account with full shareholder rights. DETERMINATION OF NET ASSET VALUE The net asset value per share of the Fund is determined at the close of trading on the New York Stock Exchange (currently 4:00 P.M., Eastern Standard Time) on days in which the Exchange is open for business, except that the net asset value will not be computed on a day in which no orders to purchase shares were received and no shares were tendered for redemption. The net asset value per share is calculated by adding the value of all securities, cash or other assets, subtracting liabilities, and dividing the remainder by the number of shares outstanding. Each security traded on a national stock exchange is valued at its last sale price on that exchange on the day of valuation or, if there are no sales that day, at the latest bid quotation. Each over-the-counter security for which the last sale price on the day of valuation is available from NASDAQ is valued at that price. All other over-the-counter securities for which reliable quotations are available are valued at the latest bid quotation. Other assets and securities are valued at a fair value determined in good faith by the Board of Directors. HOW TO PURCHASE FUND SHARES An initial purchase of shares of the Fund may be made by sending a properly completed Share Purchase Application to the Fund. The minimum initial purchase of shares is $10,000. Related party accounts and retirement accounts require a minimum initial purchase of $5,000. Related party accounts are defined as those accounts opened with the Fund under the same tax identification number, or those accounts opened by a family member or relative of an existing shareholder. Purchases subsequent to the initial purchase may be sent to the address given in the Prospectus. Minimum subsequent purchases of shares is $1,000. The offering price for the Fund's shares is equal to the net asset value per share (determined in the manner described under "Determination of Net Asset Value") as determined as soon as possible after the close of the New York Stock Exchange on the day that the purchase order is received and accepted by the Fund. Orders received by the Fund after the close of the New York Stock Exchange will be confirmed at the net asset value determined at the close of the New York Stock Exchange on the next business day. All purchases must be made in U.S. dollars and checks must be drawn on U.S. banks. No cash will be accepted. The Fund sells fractional shares in addition to whole shares. The Fund maintains a book-entry-only system with regard to Fund shares. Fund share certificates will not be issued. The minimums for subsequent purchases do not apply to shares purchased pursuant to the reinvestment of income dividends and capital gain distributions. The minimums may be changed at any time. Shareholders will be given at least thirty days notice of any increase in the minimums. However, the Fund reserves the right to waive or lower investment minimums at its discretion. All orders to purchase shares are subject to the Fund's acceptance and are not binding until so accepted. All orders to purchase shares that are accepted will be processed at the net asset value next determined after receipt of the purchase order as provided herein regardless of the date of acceptance. The Fund may decline to accept a purchase order when in the judgment of management the acceptance of an order is not in the best interests of existing shareholders. HOW TO REDEEM FUND SHARES Shareholders of the Fund may request redemption of their shares at any time as provided herein. The redemption price shall be equal to the net asset value next determined after receipt by the Fund's transfer agent of a request for redemption submitted in proper form. See "Determination of Net Asset Value." The value of the shares on redemption may be more or less than their original cost, depending upon the then- current market value of the Fund's investments. Shares may be redeemed by submitting a written request for redemption to the Fund. A written redemption request to the Fund, as transfer agent, must specify (i) the name of the Fund, (ii) the dollar amount or specific number of shares to be redeemed, and (iii) the shareholder's name and account number. The redemption request must be signed by each registered owner exactly as the shares are registered. The Fund, at its discretion, may require a signature guarantee for redemption from a bank, trust company, savings and loan association, a member of a national stock exchange, or any other financial institution authorized to guarantee signatures. Requests for redemption by telephone or telegram and requests that are subject to any special conditions or that specify an effective date or other than as provided herein cannot be honored. For accounts registered in the name of corporations or associations, the redemption request must include a corporate resolution certified by a duly authorized officer of the corporation or association, with such officer's signature guaranteed. For accounts registered in the name of a trust, the redemption request must be signed by each trustee registered on the account, with each signature guaranteed at the Fund's discretion. Questions with respect to the proper form of redemption requests should be directed to the Transfer Agent at (312) 236-5388. A redemption request received at the same time or near the same time as an address change must be accompanied by a signature guarantee. The guarantor of a signature must be a national bank or trust company, a member of the Federal Reserve System or a member firm of a national securities exchange or any other financial institution authorized to guarantee signatures. The Transfer Agent reserves the right to reject the signature guarantee of an institution if such rejection would be in the best interests of the Fund and its shareholders. Notwithstanding the above, signature guarantees will be required where there appears to be a pattern of redemptions designed to circumvent the signature guarantee requirement, or where the Fund has other reason to believe that this requirement would be in the best interests of the Fund and its shareholders. The proceeds of redemptions will ordinarily be mailed within seven days after receipt of a properly completed redemption request. It is mandatory that the Fund redeem shares upon the proper request of a shareholder. When shares are purchased by check, the Fund reserves the right to delay redemption of shares until it is satisfied that the investor's check used to purchase shares has cleared. Local checks generally are collected in three business days and non-local checks may take longer in certain circumstances. The right of redemption may be suspended during any period when: (a) trading on the New York Stock Exchange is restricted as determined by the Securities and Exchange Commission, or such Exchange is closed for other than weekends and holidays; (b) the Securities and Exchange Commission has by order permitted such suspension; or (c) an emergency as determined by the Securities and Exchange Commission exists, making disposal of portfolio securities or valuation of net assets of the Fund not reasonably practicable. The Fund reserves the right to redeem shares in any account and send the proceeds to the shareholder if the shares in the account do not have a value of at least $5,000. The Fund will notify a shareholder of its intention to terminate the account and provide the shareholder with not less than thirty days to make additional investments. The Fund reserves the right to pay redemptions in kind. Thus, redemption proceeds may be paid in securities or other assets rather than in cash if the Board of Directors determines it is in the best interests of the Fund. Questions regarding redemptions and the procedures that must be followed should be directed to the Fund as Transfer Agent, 21 S. Clark Street, Suite 2594, Chicago, Illinois 60603, (312) 236-5388. SHAREHOLDER PLANS Dividend Reinvestment Plan Unless a shareholder elects otherwise by notice to the Fund, all income dividends and all capital gains distributions payable on shares of the Fund will be reinvested in additional shares of the Fund at the net asset value in effect on the dividend or distribution payment date. The Fund acts as the shareholder's agent to reinvest dividends and distributions in additional shares and hold for his/her account the additional shares so acquired. A shareholder may at any time change his/her election as to whether to receive his/her dividends and distributions in cash or have them reinvested by giving written notice of such change of election to the Fund. Such change of election applies to dividends and distributions the record dates of which fall on or after the date that the Fund receives the written notice. RETIREMENT ACCOUNTS Shares of the Fund may be purchased or redeemed for retirement accounts through New York Stock Exchange registered brokerage firms having a relationship with the Fund. Typically, a shareholder will elect to custody his or her retirement account at a brokerage firm. Upon the shareholder's direction to purchase shares of the Fund for his or her retirement account, the brokerage firm will effect a written order for the purchase of Fund shares. Any such purchase or redemption will not be effective until the order or request is received by the Fund. Retirement account holdings, including the Fund, will appear monthly on the retirement account statement issued directly by the relevant brokerage firm. The minimum initial investment for retirement accounts is $5,000 and $1,000 for subsequent purchases. There are no additional Fund charges for retirement accounts. Brokerage firms usually charge a fixed yearly fee for the custody and administration of retirement accounts. DISTRIBUTIONS AND TAXES Distributions Dividends from the Fund's net investment income as well as distributions designated as capital gains will ordinarily be declared and paid annually in such a manner as to avoid paying income tax on the Fund's net investment income and net realized capital gains or being subject to a federal excise tax on undistributed net investment income and net realized capital gains. Such distributions and dividends will typically be made in December. As current income is not an objective of the Fund, the amount of dividends will likely be small. There is no fixed dividend rate and there can be no assurance as to the payment of any dividends or the realization of any gains. Taxes The Fund intends to maintain its qualification as a "regulated investment company" under the Internal Revenue Code by distributing as dividends not less than 90% of its taxable income and by continuing to comply with all other requirements of Subchapter M of the Code. If the Fund qualified, the Fund will not be liable for Federal income taxes on amounts paid by it as dividends and distributions. For Federal income tax purposes, dividends paid by the Fund and distributions from short-term capital gains, whether received in cash or reinvested in additional shares, are taxable as ordinary income. Distributions paid by the Fund from long-term capital gains whether received in cash or reinvested in additional shares, are taxable as long-term capital gains, regardless of the length of time you have owned shares in the Fund. The distributions are taxable whether you receive them in cash or in additional shares. If you are not required to pay tax on your income, you will not be required to pay Federal income taxes on the amounts distributed to you. Dividends and capital gain distributions declared in December and paid the following January will be taxable in the year they are declared. The Fund is required to withhold Federal income tax at a rate of 31% ("backup withholding") from dividend payments, distributions and redemption proceeds if a shareholder fails to furnish the Fund with his/her social security or other tax identification number ("TIN") and certify under penalty of perjury that such number is correct and that he/she is not subject to backup withholding due to the under reporting of income. The certification form is included as part of the Share Purchase Application and should be completed when the account is established. If you do not have a tax identification number, you should indicate on the application form whether a number has been applied for. The Fund may be required to backup withhold if a certified TIN is not delivered to the Fund within 7 days. Distributions by the Fund may subject an investor to state and local taxes on the distributions, depending on the laws of a shareholder's home state and locality. Because this section is not intended to be a full discussion of present or proposed Federal income tax law and its effect on shareholders, shareholders are urged to consult their own tax adviser. SHAREHOLDER REPORTS AND MEETINGS The Fund will provide to shareholders annual reports containing certified financial statements. Additionally, shareholders will receive other periodic reports, at least semi-annually, containing unaudited financial statements. Shareholders will receive a confirmation after each transaction affecting his or her account with the Fund. The annual meeting of the shareholders of the Fund shall be held in the month of March. Any inquiries concerning the Fund may be made by telephone (312) 236-5388, or by writing to the Fund at 21 S. Clark Street, Suite 2594, Chicago, Illinois 60603. Performance: This graph shows the growth of a $10,000 investment in your Fund and compares it to the S&P 500 index. For the period beginning July 1, 1993 and ending December 31, 2001 your investment in the Fund would be $20,494 as compared to a theoretical investment in the S&P 500 which would have grown to $30,094. This performance includes the reinvestment of dividends. {GRAPH} Cumulative Total Returns Periods ended December 31, 2001 Past 1 Year Past 5 Years Life of Fund Kenilworth Fund, Inc. -26.16% 26.92% 104.96% S&P 500 Index -11.87% 66.26% 200.10% Cumulative total returns reflect the Fund's actual performance over a set period. The Fund began operations on July 1, 1993. Average Annual Returns Periods ended December 31, 2001 Past 1 Year Past 5 Years Life of Fund Kenilworth Fund, Inc. -26.16% 4.88% 8.81% S&P 500 Index -11.87% 10.70% 13.81% Average annual returns take the Fund's cumulative returns and show you what would have happened if the Fund had performed at a constant rate each year. Total returns and yields are based on past results and are not indicative of future performance. KENILWORTH FUND, INC. STATEMENT OF NET ASSETS December 31, 2001
Market COMMON STOCKS 97.94%a Shares Value Banks 14.75% Citigroup, Inc. 25,000 1,262,000 J.P. Morgan Chase & Co. 5,000 181,750 Wells Fargo & Co. 4,000 173,800 Computer-Semiconductor 9.90% Intel Corp. 15,000 471,750 Applied Materials, Inc.* 11,000 441,100 Texas Instruments 3,500 98,000 Motorola, Inc. 5,000 75,100 Computer Software 10.96% Oracle Systems, Inc.* 15,000 207,150 Intuit, Inc.* 10,000 427,800 Cisco Systems* 5,000 90,550 Adobe Systems 1,000 31,050 Veritas Software* 7,000 313,810 Microsoft* 2,000 132,500 Computer Systems 2.56% Hewlett-Packard 5,000 102,700 EMC Corporation* 5,000 67,200 McData Corp. Class A* 4,509 110,470 Drugs 13.34% Merck & Co. 8,000 470,400 Bristol-Myers Squibb 9,500 484,500 Pfizer, Inc. 10,500 418,425 Schering-Plough 2,500 89,525 Electrical Equipment 8.41% General Electric 12,000 480,960 Tyco International Ltd. 7,500 441,750 Finance 14.27% Federal National Mortgage 7,000 556,500 Federal Home Loan Mortgage 11,000 719,400 Household International, Inc. 5,000 289,700 Home Building 2.13% Lennar Corp. 5,000 234,100 Health Care 1.08% Johnson and Johnson 2,000 118,200 KENILWORTH FUND, INC. STATEMENT OF NET ASSETS December 31, 2001 Market COMMON STOCKS Shares Value Insurance 7.24% American International Group 10,000 794,000 Media 1.38% America Online* 3,000 96,300 General Motors Class H* 3,564 55,064 Medical Instruments 2.52% Agilent Technologies* 6,500 185,315 Zimmer Holdings, Inc. 3,000 91,620 Natural Gas 1.26% Questar 5,500 137,775 Oils 1.44% Frontier Oil 9,500 158,080 Telecommunications 2.88% ADC Telecommunication* 27,000 124,200 Adtran, Inc.* 3,600 91,872 Ciena Corp.* 7,000 100,170 Utility Gas & Electric 2.23% Dominion Resources 1,500 90,150 Duke Energy 3,500 137,410 Calpine, Inc. 1,000 16,790 Utilities-Telephone 1.59% A.T.&T. 6,000 108,840 A.T.&T. Wireless 4,529 65,082 Total Investments 97.94% 10,742,858 (Cost $6,830,063) CASH AND RECEIVABLES NET OF LIABILITIES 2.06% 226,094 TOTAL NET ASSETS 100% $10,968,952 NET ASSET VALUE PER SHARE $18.86 (based on 581,657 shares of capital outstanding) a Percentages for various classifications relate to total net assets. *Non-income producing security. The accompanying notes are an integral part of these financial statements.
KENILWORTH FUND, INC. STATEMENT OF OPERATIONS
Year Ended INVESTMENT INCOME December 31, 2001 INCOME: Dividends $103,902 Interest 18,998 Total Income 122,900 EXPENSES: Investment Advisory Fees 120,576 Administrative and Management Fees 40,000 Registration Fees 2,452 Auditing 6,700 Insurance 1,828 Dues and Subscriptions 1,957 Other Expenses 1,877 Total Expenses 175,390 NET INVESTMENT LOSS: (52,490) NET REALIZED LOSS ON INVESTMENTS (153,144) NET DECREASE IN UNREALIZED DEPRECIATION ON INVESTMENTS (3,748,517) NET REALIZED LOSS AND UNREALIZED DEPRECIATION ON INVESTMENTS (3,901,661) NET DECREASE IN NET ASSETS FROM OPERATIONS ($3,954,151)
The accompanying notes are an integral part of these financial statements. KENILWORTH FUND, INC. STATEMENT OF CHANGES IN NET ASSETS
Year Ended Year Ended OPERATIONS: December 31, 2001 December 31, 2000 Net Investment Loss ($52,490) ($116,623) Net Realized Loss on Investments (153,144) (25,204) Net Decrease in Unrealized Depreciation on Investments (3,748,517) (1,160,491) Decrease in Net Assets from Operations (3,954,151) (1,302,318) DISTRIBUTIONS To SHAREHOLDERS: Distributions from Net Investment Income --- --- Distributions from Net Realized Gains on Investments --- --- Decrease in Net Assets resulting from Distributions --- --- CAPITAL SHARE TRANSACTIONS: Proceeds From Shares Issued (6,996 and 39,841 shares, respectively) 152,500 1,260,428 Cost of Shares Redeemed (30,399 and 5,494 shares, respectively) (680,402) (172,801) Reinvested Dividends (0 and 0 shares, respectively) --- --- (Decrease) Increase in Net Assets from Capital Share Transactions (527,902) 1,087,627 Total Decrease in Net Assets 4,482,053) (214,691) NET ASSETS AT BEGINNING OF YEAR (605,059 and 570,712 shares outstanding, respectively) 15,451,005 15,665,696 NET ASSETS AT END OF YEAR (581,657 and 605,059 shares outstanding, respectively) $10,968,952 $15,451,005
The accompanying notes are an integral part of these financial statements. KENILWORTH FUND, INC. FINANCIAL HIGHLIGHTS
For the Years Ended December 31 2001 2000 1999 1998 1997 1996 1995 1994 1993a Selected Per-Share Data Net Asset Value, beginning of period. . $25.54 $27.45 $21.91 $18.17 $15.43 $11.93 $9.64 $10.31 $10.00 Income from Investment Operations Net Investment (Loss) Income. (0.09) (0.19) (0.12) (0.04) (0.05) 0.01 0.06b 0.06b 0.05 Net Realized and Unrealized (Loss) Gain on Investments. (6.59) (1.72) 6.02 3.78 3.24 3.51 2.64 (0.67) 0.31 Total . . . (6.68) (1.91) 5.90 3.74 3.19 3.52 2.70 (0.61) 0.36 Less Distributions From Net Investment Income . . 0.00 0.00 0.00 0.00 0.00 0.01 0.06 0.06 0.05 From Net Realized Gains. . . . 0.00 0.00 0.36 0.00 0.45 0.01 0.35 0.00 0.00 Total. . 0.00 0.00 0.36 0.00 0.45 0.02 0.41 0.06 0.05 Net Asset Value, end of period. . $18.86 $25.54 $27.45 $21.91 $18.17 $15.43 $11.93 $9.64 $10.31 Total Return . . . . (26.16%) (6.96%) 26.95% 20.58% 20.67% 29.48% 28.03% (5.95%) 7.16%c Ratios and Supplemental Data Net Assets, end of period (in thousands) . $10,969 $15,451 $15,666 $12,178 $9,790 $7,222 $5,099 $3,530 $2,840 Ratio of Net Expenses to Average Net Assets. . . 1.46% 1.31% 1.41% 1.42% 1.52% 1.51% 1.69%b 1.70%b 0.52% Ratio of Net Investment Income to Average Net Assets. . (0.44%) (0.66%) (0.52%) (0.24%) (0.29%) 0.06% 0.54%b 0.67%b 0.65% Portfolio Turnover Rate . . 44.73% 43.93% 38.29% 70.28% 76.99% 73.93% 82.17% 11.78% 0.00% aJuly 1, 1993 (commencement of operations) to December 31, 1993 bNet of reimbursement of expenses by Advisor. cAnnualized.
The accompanying notes are an integral part of these financial statements. NOTES TO FINANCIAL STATEMENTS December 31, 2001 The Kenilworth Fund, Inc., (the "Fund") is registered under the Investment Company Act of 1940 as a no-load, open-end, non-diversified management investment company. 1. Summary of Significant Accounting Policies a. The Fund is registered under the Investment Company Act of 1940 as a no-load, open- end, non-diversified management investment company. The Fund's objective is long-term capital appreciation which it seeks by investing primarily in a non-diversified portfolio of common stocks, preferred stocks, warrants to purchase common stocks, convertible bonds and fixed-income obligations of corporations and the United States government. Its books and records are maintained on the accrual basis. Securities are valued at their last sale price as reported on a securities exchange, or at their last bid price as applicable. Short term instruments are valued at cost which approximates market value. Cost amounts, as reported on the statement of net assets, are the same for federal income tax purposes. For the year ended December 31, 2001, purchases and sales of investment securities were $6,113,066 and $5,380,076 respectively. b. Security transactions are accounted for on the trade date and dividend income is recorded on the ex-dividend date. Interest income is recorded on the accrual basis. Realized gains and losses from security transactions are reported on an identified cost basis. c. Provision has not been made for federal income tax since the Fund has elected to be taxed as a "regulated investment company" and intends to distribute substantially all its income to its shareholders and otherwise comply with the provisions of the Internal Revenue Code applicable to regulated investment companies. d. As of December 31, 2001 there were 10,000,000 shares of capital stock authorized. e. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of increases and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates. 2. Investment Adviser and Investment Advisory Agreement and Transactions with Related Parties: The Fund has signed two agreements with Institutional Portfolio Services, Ltd., ("IPS"), with whom certain officers of the Fund are affiliated. Under the terms of the first agreement (the investment advisory agreement) the Fund will pay IPS a monthly investment advisory fee at the annual rate of 1.0% of the daily net assets of the Fund. Under the terms of the second agreement (the administrative and management services agreement) the Fund will pay IPS an annual administrative and management services fee of $40,000. The advisory agreement requires the adviser to reimburse the Fund in the event that the expenses of the Fund in any fiscal year exceed 1.6%. 3. Sources of Net Assets: As of December 31, 2001, the sources of net assets were as follows: Fund shares issued and outstanding $7,446,534 Unrealized Appreciation of Investments 3,912,795 Accumulated Undistributed Investment Loss-Net (212,029) Accumulated Net Realized Loss on Investment Transactions (178,348) Total $10,968,952 Aggregate Net Unrealized Appreciation as of December 31, 2001 consisted of the following: Aggregate gross unrealized appreciation $4,151,260 Aggregate gross unrealized deprecation (238,465) Net unrealized appreciation $3,912,795 At December 31, 2001, the Fund had tax basis capital losses of $178,348 which may be carried over to offset future capital gains. Such losses expire in 2009. (THIS PAGE INTENTIONALLY LEFT BLANK) REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors and Shareholders Kenilworth Fund, Inc. We have audited the accompanying statement of net assets of Kenilworth Fund, Inc. December 31, 2001, and the related statement of operations for the year then ended, the statement of changes in net assets for each of the two years in the period ended and the financial highlights for each of the three years in the period then ended. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audit. The financial highlights for the years ended December 31, 1998 and 1997, were audited by other auditors whose report dated January 8, 1999, expressed an unqualified opinion on such financial highlights. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included verification by examination of securities owned and confirmation with securities brokers as of December 31, 2001. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of the Kenilworth Fund, Inc. as of December 31, 2001, the results of its operations, the changes in its net assets and financial highlights for the respective stated periods, in conformity with accounting principles generally accepted in the United States of America. Grant Thornton LLP Chicago, Illinois January 11, 2002 -----END PRIVACY-ENHANCED MESSAGE-----