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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________
FORM N-1A
REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933
REGISTRATION NO. 33-7699
Post-Effective Amendment No. 15
and
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940
REGISTRATION NO. 811-4786
Amendment No. 15
ARIEL GROWTH FUND
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307 North Michigan Avenue
Chicago, Illinois 60601
Registrant's Telephone Number, Including Area Code
1-312-726-0140
Agent for Service:
Sheldon R. Stein
D'Ancona & Pflaum
30 North LaSalle Street
Chicago, Illinois 60602
(312) 580-2014
It is proposed that this filing will become effective:
_____ Immediately upon filing pursuant to paragraph (b)
_____ on (date), pursuant to paragraph (b)
_____ 60 days after filing pursuant to paragraph (a)
X
_____ on August 20, 1995, pursuant to paragraph (a) of Rule 485
Registrant has registered an indefinite number of shares of its beneficial
interest pursuant to Rule 24f-2, and filed its Rule 24f-2 Notice for its fiscal
year ended September 30, 1994 on or about November 28, 1994.
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CROSS REFERENCE SHEET WITH RESPECT TO
CLASS A SHARES OF THE ARIEL PREMIER BOND FUND
N-1A
Item No. Prospectus Caption or Placement
- -------- -------------------------------
1 Front Cover
2 Fund Expenses For Class A Shares
3 Total Return, Yield and Other Performance Information
4 Front Cover; Investment Objective and
Policies; Management and Organization of the Fund
5 Management and Organization of the Fund
6 Front Cover; Management and Organization of the Fund;
Dividends, Capital Gains and Taxes; Certain Shareholders
of the Fund
7 How to Buy Shares; Net Asset Value; Exchanging Shares;
Management and Organization of the Fund
8 Redeeming Shares; Exchanging Shares
9 (Not Applicable)
Part B Caption or Placement
---------------------------
10 Cover Page
11 Table of Contents
12 (Not Applicable)
13 Fundamental Investment Restrictions; Non-Fundamental Investment
Restrictions; Additional Information About Investment
Techniques; Portfolio Transactions; Appendix
14 Trustees and Officers
15 Trustees and Officers; Certain Shareholders of the Fund (in
Prospectus)
16 Investment Adviser, Sub-Adviser and Services Administrator;
Transfer Agent and Custodian; Independent Auditors
17 Portfolio Transactions
18 General Information
19 Net Asset Value (in the Prospectus)
20 Special Tax Matters
21 Manager, Sub-Adviser and Services Administrator
22 Calculation of Yield and Total Return
23 Financial Statements
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CROSS REFERENCE SHEET WITH RESPECT TO
CLASS B SHARES OF THE ARIEL PREMIER BOND FUND
N-1A
Item No. Prospectus Caption or Placement
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1 Front Cover
2 Fund Expenses For Class B Shares
3 Total Return, Yield and Other Performance Information
4 Front Cover; Investment Objective and
Policies; Management and Organization of the Fund
5 Management and Organization of the Fund; Distribution Plan
6 Front Cover; Management and Organization of the Fund;
Dividends, Capital Gains and Taxes; Distribution Plan; Certain
Shareholders of the Fund
7 How to Buy Shares; Net Asset Value; Exchanging Shares;
Management and Organization of the Fund; Distribution Plan
8 Redeeming Shares; Exchanging Shares
9 (Not Applicable)
Part B Caption or Placement
---------------------------
10 Cover Page
11 Table of Contents
12 (Not Applicable)
13 Fundamental Investment Restrictions; Non-Fundamental Investment
Restrictions; Additional Information About Investment
Techniques; Portfolio Transactions; Appendix
14 Trustees and Officers
15 Trustees and Officers; Certain Shareholders of the Fund (in
Prospectus)
16 Investment Adviser, Sub-Adviser and Services Administrator;
Transfer Agent and Custodian; Independent Auditors
17 Portfolio Transactions
18 General Information
19 Net Asset Value (in the Prospectus)
20 Special Tax Matters
21 Method of Distribution of the Class B Shares
22 Calculation of Yield and Total Return
23 Financial Statements
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SUBJECT TO COMPLETION DATED JUNE 1, 1995
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission but has not yet become effective. These
securities may not be sold nor may offers to buy be accepted prior to the time
the registration statement becomes effective. This prospectus shall not
constitute an offer to sell or the solicitation of an offer to buy nor shall
there be any sale of these securities in any State in which such offer,
solicitation or sale would be unlawful prior to registration or qualification
under the securities laws of any State.
PROSPECTUS
FOR CLASS A SHARES
______, 1995
ARIEL MUTUAL FUNDS
ARIEL PREMIER BOND FUND
307 NORTH MICHIGAN AVENUE, SUITE 500, CHICAGO, ILLINOIS 60601
The Ariel Premier Bond Fund (the "Fund") is a series of Ariel Growth Fund
(doing business as Ariel Investment Trust) (the "Trust"). Ariel Capital
Management, Inc. (the "Adviser") is the Manager of the Fund. Lincoln
Capital Management Company ("Lincoln Capital") is the Fund's Sub-Adviser
responsible for the day to day investment operations.
The Fund currently offers one class of shares, Class A shares. These
shares are offered primarily to institutional investors. Upon receipt of
the necessary regulatory approvals, the Fund expects to offer a second
class of shares, Class B shares, under a separate prospectus. Class B
shares will be subject to Rule 12b-1 distribution fees and will be sold to
the general public directly and through broker-dealers.
INVESTMENT OBJECTIVE
The Fund seeks to maximize total return through a combination of income and
capital appreciation. The Fund generally invests in high quality, highly
liquid fixed-income securities. Normally, at least 65% of the Fund's
assets will be invested in fixed-income securities rated A or better by a
nationally recognized securities rating organization (or deemed the
equivalent by Lincoln Capital, if unrated). The Fund seeks to achieve its
investment objective by implementing decisions regarding the level and
direction of interest rates (duration and yield curve decisions) and
through the purchase and sale of securities to take advantage of perceived
yield spread opportunities.
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ABOUT THIS PROSPECTUS
This prospectus sets forth important information concerning the Ariel
Premier Bond Fund. Please read it carefully before investing and keep it
for future reference. It is designed to provide you with information you
should know before investing and to help you decide if the goals of the
Fund match your own.
A Statement of Additional Information (dated ______, 1995) for the Fund has
been filed with the Securities and Exchange Commission and (together with
any supplement thereto) is incorporated herein by reference. This
Statement is available upon request from the Fund by calling 1-800-29-ARIEL
(1-800-292-7435).
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, AND ARE NOT FEDERALLY INSURED BY THE FDIC, THE
FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
FEDERAL OR ANY STATE SECURITIES COMMISSION PASSED ON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
2
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<TABLE>
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TABLE OF CONTENTS
PAGE(S)
<S> <C>
Fund Expenses For Class A Shares....................... 3
Investment Objective and Policies...................... 4
Management and Organization of the Fund................ 13
How to Buy Shares...................................... 16
Net Asset Value........................................ 18
When Your Account Will Be Credited..................... 18
EXCHANGING SHARES...................................... 19
Redeeming Shares....................................... 21
Dividends, Capital Gains and Taxes..................... 23
Total Return, Yield and Other Performance Information.. 25
</TABLE>
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FUND EXPENSES FOR CLASS A SHARES
SHAREHOLDER TRANSACTION COSTS
Maximum Sales Load on Purchases None
Maximum Sales Load on Reinvested None
Dividends
Deferred Sales Load None
Redemption Fee None
Exchange Fee None
ANNUAL FUND OPERATING EXPENSES FOR CLASS A SHARES AFTER
EXPENSE REIMBURSEMENTS (AS A PERCENTAGE OF AVERAGE NET ASSETS):
Management Fees 0.45%
12b-1 Fees 0.00%
Other Expenses (1,2) 0.15%
----
Total Fund Operating 0.60%
Expenses (2)
(1) ANNUAL FUND OPERATING EXPENSES. Management Fees are investment advisory and
administrative fees which are paid by the Fund to the Adviser. The Fund incurs
Other Expenses for maintaining shareholder records, furnishing shareholder
statements and reports, and other services. Management Fees and Other Expenses
have already been reflected in the Fund's share price and are not charged
directly to individual shareholder accounts. The Fund's operating expenses are
annualized and are estimated for the fiscal year ending September 30, 1995.
Please refer to the section "Management and Organization of the Fund" for
further information.
(2) THE ADVISER HAS AGREED TO REIMBURSE THE FUND FOR ANY CLASS A EXPENSES IN
EXCESS OF 0.60% OF THE AVERAGE NET ASSETS OF THE CLASS FOR ANY FISCAL PERIOD
THROUGH AT LEAST SEPTEMBER 30, 1997. Without such expense reimbursement it is
estimated that the ratio of expenses to average net assets of the Class A shares
would be 0.93%.
We can illustrate these expenses with the example below. You would pay the
following expenses on a $1,000 investment (assuming a 5% annual return and
redemption at the end of each period):
One Year $ 6
---
Three Years $19
---
Explanation of Table: The purpose of the table is to assist you in understanding
the various costs and expenses that an investor in the Class A shares of the
Fund would bear directly
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(shareholder transaction costs) or indirectly (annual fund operating expenses).
The information is based on estimated amounts for the Fund's first fiscal
period.
THE 5% RATE USED IN THE EXAMPLE IS FOR ILLUSTRATION ONLY AND IS NOT INTENDED TO
BE INDICATIVE OF THE FUTURE PERFORMANCE OF THE FUND, WHICH MAY BE MORE OR LESS
THAN THE ASSUMED RATE. ACTUAL EXPENSES MAY BE MORE OR LESS THAN THOSE SHOWN.
INVESTMENT OBJECTIVE AND POLICIES
THE FUND SEEKS TO MAXIMIZE TOTAL RETURN.
INVESTMENT OBJECTIVE
The investment objective of Fund is to seek to maximize total return
through a combination of income and capital appreciation. The Fund
generally invests in high quality, highly liquid fixed-income
securities. Under normal market conditions, the Fund will invest at
least 65% of its net assets in fixed-income securities rated A or
better by Moody's Investors Service, Inc. ("Moody's") or Standard
and Poor's Corporation ("S & P") or that are not rated by Moody's or
S & P but are deemed to be of comparable quality by Lincoln Capital.
The Fund seeks to achieve its investment objective by implementing
decisions regarding the level and direction of interest rates
(duration and yield curve decisions) and through the purchase and
sale of securities to take advantage of perceived yield spread
opportunities.
The Fund will take reasonable risks in seeking to achieve its
investment objective. There is, of course, no assurance that the
Fund will be successful in meeting its objective since there is risk
involved in the ownership of securities.
DURATION
Duration is a measure of the expected life of a fixed-income
security that was developed as a more precise alternative to the
concept of term-to-maturity. Duration incorporates a bond's yield,
coupon interest payments, final maturity and call features into one
measure. Duration is also a way to measure the interest-rate
sensitivity of the Fund's portfolio. The duration of the Fund is
calculated by averaging the durations of the bonds held by the Fund
with each duration "weighted" according to the percentage of net
assets that it
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represents. In general, the higher the Fund's duration, the greater
the appreciation or depreciation of the Fund's assets will be when
interest rates change. In its attempt to maximize total return,
Lincoln Capital intends to vary the duration of the Fund, as
described below, depending on its outlook for interest rates.
INVESTMENT PROCESS
Interest Rate Decisions
Lincoln Capital seeks to achieve a duration equal to the duration of
the domestic, investment grade bond market when its outlook for
interest rates is neutral. The portfolio's average duration will be
longer when Lincoln Capital believes that interest rates will fall
and shorter when it believes interest rates will rise. The stronger
Lincoln Capital's conviction, the further the Fund's duration will
diverge from the duration of the domestic, investment grade bond
market, which generally averages approximately five years. The
Fund's duration will normally range from four to six years. It is
expected that only on rare occasions will the Fund's duration reach
the extreme positions (plus or minus 2 years from the duration of
the domestic, investment grade bond market).
The Fund's duration relative to that of the domestic, investment
grade bond market is established in periodic strategy meetings of a
committee consisting of senior officers of Lincoln Capital. Changes
in the Fund's duration are based on a disciplined valuation of three
factors:
(a) Economic activity and capacity for growth;
(b) U.S. Government monetary policy; and
(c) Expectations for inflation.
The committee evaluates the above factors and weights each one to
determine a precise duration position relative to the duration of
the domestic, investment grade bond market. Over time, changes in
the duration position take the form of a series of small movements;
generally in one-half year increments.
Once the Fund's specific duration position has been established,
remaining decisions (i.e. yield curve structure, sector emphasis and
issue selections), are made and implemented by Lincoln Capital's
Fixed
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Income Group working as a team. These decisions are based on
Lincoln Capital's belief that yield spreads reflect fundamental risk
premiums. These premiums, in turn, are primarily determined by the
general level of interest rates. Yield curve decisions reflect
Lincoln Capital's judgment and are supported by studies of
historical spread relationships and break-even spread analysis.
Cash equivalents may be used to create the desired yield curve
structure. Portfolio positions are continually monitored and
evaluated.
Sector Emphasis and Security Selection
Sector and security selection decisions are based on Lincoln
Capital's judgment and are supported by studies of historical spread
relationships, break-even yield spread analysis, and model driven
portfolio return projections. In order to monitor yield spreads,
Lincoln Capital maintains extensive yield spread data banks and has
direct computer access to extensive historical yield spread data and
specific issuer data.
Credit research consists of internally generated fundamental
analysis, and input from rating agencies and other sources. A
committee of Lincoln Capital reviews those corporate bonds that are
considered for purchase. By focusing on higher-rated securities,
and by comparing judgments among outside sources to internal credit
judgments, Lincoln Capital believes that credit risk can be managed
and reduced.
It is unlikely that Lincoln Capital will seek to enhance the Fund's
return by anticipating an improvement in the creditworthiness of
specific corporate issuers, particularly lower rated issuers.
RESEARCH PROCESS
Virtually 100% of Lincoln Capital's fixed-income research is
generated in-house. Each member of the investment staff serves as a
portfolio manager and a research analyst. There is no lapse between
the development of an investment idea and its execution.
Fundamental research includes economic analysis, sector and issuer
spread relationships, and credit research. In the area of
quantitative research, Lincoln Capital owns proprietary models,
developed in-house. These include: a mortgage prepayment
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model, mortgage valuation model, total return analytics for
securities with complex cash flows, risk exposure models, and yield
curve analytics.
INVESTMENTS
IN GENERAL. The Fund may invest in fixed-income securities which
are obligations of, or guaranteed by the U.S. Government, its
agencies or instrumentalities ("U.S. Government Securities"). U.S.
Government Securities are unrated but are generally considered high-
grade securities. The Fund may also invest in other investment
grade, fixed-income securities, including corporate bonds, mortgage-
backed and other asset-backed securities and other high quality,
liquid investments.
The debt securities in which the Fund will invest are investment
grade securities. These are securities rated in the four highest
grades assigned by Moody's Investors Service, Inc. ("Moody's") or
Standard and Poor's Corporation ("S & P") or that are not rated by
Moody's or S & P but deemed to be of comparable quality by Lincoln
Capital. The lowest investment grade securities have speculative
characteristics because changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make
principal and interest payments. The Fund will not invest in
securities below investment grade (so called "junk bonds"). In the
event of a downgrade of a debt security held by the Fund to below
investment grade, the Fund is not usually required to automatically
sell the issue, but Lincoln Capital will consider whether to
continue holding the security. However, if such a downgrade would
cause more than 5% of net assets to be invested in debt securities
below investment grade, sales will be made as soon as practicable to
reduce the proportion of debt below investment grade to 5% of net
assets or less.
The value of the shares issued by the Fund is not guaranteed and
will fluctuate with changes in the value of the Fund's portfolio.
Generally when prevailing interest rates rise, the value of the
Fund's portfolio is likely to decline and when prevailing interest
rates decline, the value of the Fund's portfolio is likely to rise.
U.S. GOVERNMENT SECURITIES. There are two basic types of U.S.
Government Securities: (1) direct obligations of the U.S. Treasury,
and (2)
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obligations issued or guaranteed by an agency or instrumentality of
the U.S. Government. Agencies and instrumentalities of the U.S.
Government include Federal Farm Credit System ("FFCS"), Student Loan
Marketing Association ("SLMA"), Federal Home Loan Mortgage
Corporation ("FHLMC"), Federal Home Loan Banks ("FHLB"), Federal
National Mortgage Association ("FNMA") and Government National
Mortgage Association ("GNMA"). Some obligations issued or
guaranteed by agencies or instrumentalities, such as those issued by
GNMA, are fully guaranteed by the U.S. Government. Others, such as
FNMA bonds, rely on the assets and credit of the instrumentality
with limited rights to borrow from the U.S. Treasury. Still other
securities, such as obligations of the FHLB, are supported by more
extensive rights to borrow from the U.S. Treasury.
The guarantees of the U.S. Government, its agencies and
instrumentalities are guarantees of the timely payment of principal
and interest on the obligations purchased and not of their market
value.
MORTGAGE RELATED SECURITIES
Pass-Through Securities. The Fund may invest in GNMA Certificates
which are mortgage-backed securities representing part ownership of
a pool of mortgage loans. A "pool" or group of such mortgages is
assembled and, after being approved by GNMA, is offered to investors
through securities dealers. Once approved by GNMA, the timely
payment of interest and principal on each mortgage is guaranteed by
GNMA and backed by the full faith and credit of the U.S. Government.
GNMA Certificates differ from bonds in that principal is paid back
monthly by the borrower over the term of the loan rather than
returned in a lump sum at maturity. GNMA Certificates are called
"pass-through" securities because both interest and principal
payments (including prepayments) are passed through to the holder of
the Certificate.
The Fund may also invest in pools of mortgages which are issued or
guaranteed by other agencies of the U.S. Government such as FNMA or
FHLMC. FNMA and FHLMC Certificates are similar to GNMA Certificates
except that timely payment of interest and principal of each
mortgage may not be guaranteed by the full faith and credit of the
U.S. Government.
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The average life of pass-through pools varies with the maturities of
the underlying mortgage instruments. In addition, a pool's term may
be shortened by unscheduled or early payment of principal and
interest on the underlying mortgages. The occurrence of mortgage
prepayments is affected by the level of interest rates, general
economic conditions, the location and age of the mortgage and other
social and demographic conditions. As prepayment of individual
pools varies widely, it is not possible to precisely predict the
average life of a particular pool.
Collateralized Mortgage Obligations. The Fund may also invest in
collateralized mortgage obligations ("CMO"s). CMOs are debt
securities issued by a corporation, trust or custodian or by a U.S.
Government agency or instrumentality, which are collateralized by
mortgage pass-through securities. Cash flows from the mortgage
pass-through securities are allocated to various tranches (a
"tranche" is essentially a separate security) in a predetermined,
specified order. Each tranche has a stated maturity (the latest
date by which the tranche can be completely repaid, assuming no
prepayments) and has an average life (the average of the time to
receipt of a principal payment weighted by the size of the principal
payment). The average life is typically used as a proxy for
maturity because the debt is amortized (repaid a portion at a time),
rather than being paid off entirely at maturity, as would be the
case in a straight debt instrument. The Fund will normally invest
only in CMOs issued by U.S. Government agencies or
instrumentalities.
Interest and principal payments from the underlying mortgages are
typically used to pay interest on all CMO tranches and to retire
successive tranche maturities in a sequence. Thus, the issuance of
CMO tranches with varying maturities and interest rates may result
in greater predictability of maturity with one tranche and less
predictability of maturity with another tranche than a direct
investment in a mortgage-backed pass-through security (such as a
GNMA Certificate). Tranches with shorter maturities typically have
a lower volatility and lower yield while those with longer
maturities typically have higher volatility and higher yield. Thus,
investments in CMOs can carry more or less risk than mortgage pass-
through securities and offer more defensive or aggressive investment
alternatives.
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Stripped Mortgage-Backed Securities. Stripped mortgage securities
are created when the principal and interest payments on a pool of
mortgages in a CMO are separated or "stripped" to create two classes
of securities. In general, the interest-only, or "IO" class of
stripped securities, receives all interest and no principal
payments, while the principal-only, or "PO" class, is entitled to
receive all principal and no interest payments. The values of
stripped mortgage securities can be volatile and are sensitive to
prepayment rates on the mortgages underlying the stripped
securities.
Additional Risks. Investment by the Fund in mortgage-related U.S.
Government Securities, such as GNMA Certificates, and CMOs also
involves other risks. The yield on a pass-through security is
typically quoted based on the maturity of the underlying instruments
and the associated average life assumption. Actual prepayment
experience may cause the yield to differ from the assumed average
life yield. Accelerated prepayments adversely impact yields for
pass-throughs purchased at a premium; the opposite is true for pass-
throughs purchased at a discount. During periods of declining
interest rates, prepayment of mortgages underlying pass-through
certificates can be expected to increase. When the mortgage
obligations are prepaid, the Fund reinvests the prepaid amounts in
securities, the yields of which reflect interest rates prevailing at
that time. Therefore, the Fund's ability to maintain a portfolio of
high-yielding, mortgage-backed securities will be adversely affected
to the extent that prepayments of mortgages must be reinvested in
securities which have lower yields than the prepaid mortgages.
Moreover, prepayments of mortgages which underlie securities
purchased at a premium could result in capital losses.
OTHER ASSET-BACKED SECURITIES
The Fund may invest in asset-backed securities which are backed by
assets other than mortgages. These securities are collateralized by
shorter term loans such as automobile loans, computer leases, or
credit card receivables. The payments from the collateral are
passed through to the security holder. The collateral behind asset-
backed securities tends to have prepayment rates that do not vary
with interest rates. In addition, the short-term nature of the
loans reduces the impact of any change in prepayment
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level. These securities are generally issued as the debt of a
special purpose entity organized solely for the purpose of owning
such assets and issuing such debt.
Credit Support. Asset-backed securities are backed by a diversified
pool of assets representing the debt of a number of different
parties. To lessen the effect of failures by the debtors to make
payments, such securities may contain elements of credit support.
Such credit support falls into two classes: liquidity protection
and protection against ultimate default by debtors on the underlying
assets. Liquidity protection refers to the provision of advances,
generally by the entity administering the pool of assets, to ensure
that scheduled payments on the underlying pool are made in a timely
fashion. Protection against ultimate default ensures repayment of
at least a portion of the debt in the pool. Such protection may be
provided through guarantees, insurance policies or letters of credit
obtained from third parties, through various means of structuring
the transaction or through a combination of such approaches.
Additional Risks. Issuers of asset-backed securities generally hold
no assets other than the assets underlying such securities and any
credit support provided. As a result, although payments on such
asset-backed securities are obligations of the issuers, in the event
of defaults on underlying assets not covered by any credit support,
the issuers are unlikely to have sufficient assets to satisfy their
obligations on the related asset-backed securities. The loans
underlying these securities are subject to prepayments which can
decrease maturities and returns. Due to the possibility that
prepayments will alter the cash flow on asset-backed securities, it
is not possible to determine in advance the actual final maturity
date or average life. Faster prepayment will shorten the average
life and slower prepayments will lengthen it. However, it is
possible to determine what the range of that movement could be and
to calculate the effect that it will have on the price of the
security.
The values of these securities are ultimately dependent upon payment
of the underlying loans by individuals, and the holders, such as the
Fund, generally have no recourse against the originator of the
loans. The Fund as a holder of these securities
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may experience losses or delays in payment if the original payments
of principal and interest are not made to the issuer with respect to
the underlying loans.
CORPORATE BONDS
The Fund may invest in investment grade corporate bonds. Usually,
no single corporate issuer will comprise more than 5% of the Fund's
total assets at the time of investment. The value of lower-rated
corporate debt securities is more sensitive to economic changes or
individual corporate developments than higher-rated investments. The
Fund will normally invest in corporate issues that are rated A or
better by Moody's or S & P or which are not rated by Moody's or S &
P but are deemed by Lincoln Capital to be of comparable quality.
Some of the debt securities in which the Fund may invest are known
as "Yankee Bonds." Yankee Bonds are U.S. dollar-denominated debt
securities issued by foreign entities. These bonds are not subject
to currency fluctuation risks. However, the issuing entities are
sometimes not subject to the same accounting principles as U.S.
corporations. The risks of investment in foreign issuers may
include expropriation or nationalization of assets, confiscatory
taxation, exchange controls and limitations on the use or transfer
of assets, and significant withholding taxes. Lincoln Capital will
take these factors into consideration when determining what Yankee
Bonds the Fund will purchase. Other than Yankee Bonds, the Fund
does not intend to invest in securities of foreign issuers.
USE OF DERIVATIVES
Inverse Floating Rate Obligations. The Fund may invest in inverse
floating rate obligations which are commonly referred to as "inverse
floaters." Inverse floaters have coupon rates that vary inversely
at a multiple of a designated floating rate, such as LIBOR (London
Inter-Bank Offered Rate). Any rise in the reference rate of an
inverse floater (due to an increase in prevailing interest rates)
causes a drop in the coupon rate, while any drop in the reference
rate of an inverse floater causes an increase in the coupon rate.
In addition, like most other fixed-income securities, the value of
inverse floaters will generally decrease as
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interest rates increase. Inverse floaters may exhibit substantially
greater price volatility than fixed rate obligations having similar
credit quality, redemption provisions and maturity. Inverse floater
CMOs exhibit greater price volatility than the majority of mortgage
pass-through securities or other CMOs. In addition, some inverse
floater CMOs exhibit extreme sensitivity to changes in the rate of
prepayments. As a result, the yield to maturity of an inverse
floater CMO is sensitive not only to changes in interest rates but
also to changes in prepayment rates on the related underlying
mortgage assets. The Fund does not intend to invest in an inverse
floater if, at the time of such investment, more than 5% of the
Fund's net assets would be invested in inverse floaters.
Futures Contracts. The Fund may purchase and sell interest rate
futures contracts ("futures contracts"), which are described in the
Appendix to the Statement of Additional Information, for the purpose
of hedging its portfolio of fixed-income securities against the
adverse effects of anticipated movements in interest rates or as an
efficient means of adjusting its exposure to the bond market.
Futures contracts provide for the sale by one party and purchase by
another party of a specified amount of a specific security, at a
specified future time and price. The terms of a futures contract
either call for actual delivery of the underlying financial
instrument, or the making of a cash payment or settlement. In most
cases the contracts are closed out before the delivery date without
delivery taking place.
The Fund may use futures contracts to adjust portfolio duration and
manage interest rate risk. Futures have durations which, in
general, are closely related to the duration of the securities which
underlie them. Buying futures increases the duration of the
portfolio while selling futures decreases the duration. The Fund
may be able to maintain a particular duration for a fraction of the
cash investment required to purchase the underlying security.
However, to the extent that the Fund sells futures that are not
"covered" by securities held in the portfolio or purchases futures,
the Fund is required to set aside cash or cash equivalents in a
segregated account equal, on a daily basis, to the Fund's obligation
on the futures contract. Such segregated funds will earn income but
will not otherwise be available for investment.
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The Fund will not engage in a futures transaction if it would cause
the aggregate of initial margin deposits which do not represent bona
fide hedging to exceed 5% of the value of total assets. The
successful use of futures for hedging purposes depends on Lincoln
Capital's ability to forecast interest rate movements. Should
interest rates move in an unexpected manner, the Fund may not
achieve the anticipated benefits of the futures contracts and thus
may be in a worse position than if such strategies had not been
used. See the Statement of Additional Information for a more
detailed discussion of the risks involved in the use of futures.
DELAYED DELIVERY TRANSACTIONS
The Fund may purchase or sell securities on a when-issued basis.
When-issued securities are securities purchased at a certain price
even though the securities may not be delivered for up to 90 days.
The Fund will maintain, with its Custodian, a separate account with
a segregated portfolio of liquid, high-grade debt securities or cash
in an amount at least equal to these commitments. The Fund will
generally earn income on assets deposited in the segregated account.
No payment or delivery is made by the Fund in a when-issued
transaction until it receives payment or delivery from the other
party to the transaction. Although the Fund receives no income from
the above described securities prior to delivery, the market value
of such securities is still subject to change. As a consequence, it
is possible that the market price of the securities at the time of
delivery may be higher or lower than the purchase price. The Fund
does not intend to remain fully invested when such purchases are
outstanding. However, if the Fund were to remain substantially
fully invested at a time when delayed delivery purchases are
outstanding, the delayed delivery purchases could result in a form
of leveraging. When the Fund has sold a security on a delayed
delivery basis, the Fund does not participate in future gains or
losses with respect to the security. If the other party to a
delayed delivery transaction fails to deliver or pay for the
securities, the Fund could miss a favorable price or yield
opportunity or could suffer a loss. The Fund may dispose of or
renegotiate a delayed delivery transaction after it is entered into,
and may sell when-issued securities before they are delivered, which
may result in a capital gain or loss.
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<PAGE>
ILLIQUID SECURITIES
The Fund will not purchase or hold illiquid securities if more than
15% of the Fund's net assets would then be illiquid. If at any time
more than 15% of the Fund's net assets are illiquid, sales will be
made as soon as practicable to reduce the percentage of illiquid
assets to 15% or less.
RULE 144A SECURITIES
The Fund may invest in restricted securities, i.e., securities
which, if sold, would cause the Fund to be deemed an "underwriter"
under the Securities Act of 1933 (the "1933 Act") or which are
subject to contractual restrictions on resale. The restricted
securities which the Fund may purchase include securities which have
not been registered under the 1933 Act but are eligible for purchase
and sale pursuant to Rule 144A ("Rule 144A Securities"). This Rule
permits certain qualified institutional buyers, such as the Fund, to
trade in privately placed securities even though such securities are
not registered under the 1933 Act. As a matter of non-fundamental
policy, Lincoln Capital will only purchase Rule 144A Securities that
Lincoln Capital determines to be liquid. In making this
determination, Lincoln Capital will consider the frequency of trades
and quotes, the number of dealers and potential purchasers, dealer
undertakings to make a market, and the nature of the security and
the market place trades (for example, the time needed to dispose of
the security, the method of soliciting offers and the mechanics of
transfer). The liquidity of Rule 144A Securities will also be
monitored by Lincoln Capital and, if as a result of changed
conditions, it is determined that a Rule 144A Security is no longer
liquid, the Fund's holding of illiquid securities will be reviewed
to determine what, if any, action is appropriate in light of the
policy limiting investments in such securities to 15% of the Fund's
total assets. There is no limitation on the percentage of the
Fund's assets that can be invested in liquid Rule 144A Securities.
Investing in Rule 144A Securities could have the effect of
increasing
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<PAGE>
the amount of investments in illiquid securities if qualified
institutional buyers are unwilling to purchase such securities.
REPURCHASE AGREEMENTS
The Fund may invest in repurchase agreements. A repurchase
agreement is an arrangement under which the Fund buys securities and
the seller (a bank or securities dealer that Lincoln Capital
believes to be financially sound) simultaneously agrees to
repurchase the security within a specified time at a higher price
that includes an amount representing interest on the purchase price.
In the event of a default by a seller of a repurchase agreement, the
Fund could experience both delays in liquidating the underlying
securities and potential losses. The Fund will normally invest in
repurchase agreements maturing in less than seven days. Repurchase
agreements maturing in more than seven days are deemed to be
illiquid and thus subject to in the Fund's 15% limitation on
investments in illiquid securities described above.
INVESTMENT CONCENTRATION
As to seventy-five percent of the Fund's total assets, the Fund will
not purchase the security of any issuer (other than cash items or
U.S. Government Securities) if such purchase would cause the Fund's
holdings of that issuer to amount to more than 5% of the Fund's
total assets at the time of purchase. The remaining 25% of the
Fund's total assets are not so limited which allows Lincoln Capital
to invest more than 5% of the Fund's total assets in a single
issuer. In the event that Lincoln Capital chooses to make such an
investment, it may expose the Fund to greater risk. No investment
in a single corporate issuer will be made if, at that time, such
issuer would represent more than 5% of the Fund's total assets. A
single issuer of asset-backed securities may at times represent up
to 10% of the Fund's total assets.
The Fund will not invest more than 25% of its total assets in any
one industry. Securities of the U.S. Government, its agencies and
instrumentalities are not deemed to be industries for this purpose.
17
<PAGE>
BORROWING
The Fund may not borrow money to purchase securities, but the Fund
may borrow money for temporary or emergency purposes, and then only
from banks in an amount not exceeding 33-1/3% of the value of the
Fund's total assets (including the amounts borrowed). The Fund will
not purchase additional securities when its borrowings, less amounts
receivable on sales of portfolio securities, exceed 5% of total
assets.
CERTAIN INVESTMENT RESTRICTIONS
In addition to other non-fundamental restrictions as described
herein and in the Statement of Additional Information, the Fund will
not (i) invest in securities that are rated below investment grade
or are deemed by Lincoln Capital to be the equivalent, if unrated;
(ii) enter into reverse repurchase agreements; (iii) engage in
options transactions; (iv) purchase foreign securities other than
Yankee Bonds or (v) use leverage except to the extent that certain
strategies, such as delayed-delivery or futures transactions, may be
considered leveraged transactions by the Securities and Exchange
Commission.
PORTFOLIO TRANSACTIONS
Lincoln Capital is responsible for the placement of portfolio
transactions. It is the Fund's policy to seek to place portfolio
transactions with brokers or dealers on the basis of best execution.
Generally, Lincoln Capital manages the Fund without regard to
restrictions on portfolio turnover, except those imposed on its
ability to engage in short-term trading by provisions of the federal
tax laws. The use of futures contracts and other derivative
instruments with relatively short maturities may tend to exaggerate
the portfolio turnover rate for the Fund. Trading in fixed-income
securities does not generally involve the payment of brokerage
commissions, but does involve indirect transaction costs. The use
of futures contracts may involve the payment of commissions to
futures commission merchants. The higher the rate of portfolio
turnover of the Fund, the higher all these transaction costs borne
by the Fund generally will be. The Fund's annual turnover rate may
exceed 100% due to changes in portfolio duration, yield curve
strategy, or sector decisions; however, it is expected that the
annual turnover rate will not
18
<PAGE>
exceed 300%. A portfolio turnover rate of 300% would mean that the
securities in the Fund's portfolio were replaced three times in a
year.
FUNDAMENTAL POLICIES MAY NOT BE CHANGED WITHOUT SHAREHOLDER APPROVAL.
The Fund's investment objective and the investment restrictions set
forth as fundamental in the Statement of Additional Information,
including those in respect to investment concentration and the 33-
1/3% limitation on borrowing as discussed above, are fundamental
policies and may not be changed without a shareholder vote. All
other investment policies of the Fund are not fundamental and may be
changed by the Board of Trustees. Any percentage restrictions
(except those with respect to borrowing and illiquid securities)
apply at the time of investment without regard to later increases or
decreases in the values of securities or total or net assets.
MANAGEMENT AND ORGANIZATION OF THE FUND
The Fund is a series of Ariel Growth Fund (doing business as Ariel
Investment Trust) (the "Trust"), an open-end diversified management
investment company organized as a Massachusetts business trust on
August 1, 1986. The other series currently offered, which are sold
under a separate prospectus, are Ariel Growth Fund and Ariel
Appreciation Fund.
Shares of the Fund are currently issued in one class, Class A. Upon
receipt of the necessary regulatory approvals, the Fund expects to
offer a second class of shares, Class B, under a separate
prospectus. The Board of Trustees may offer additional classes in
the future and may at any time discontinue the offering of any class
of shares. Shares have no preemptive or subscription rights and are
freely transferable. Each share of the Fund represents an interest
in the assets of the Fund and has identical voting, dividend,
liquidation and other rights and the same terms and conditions as
any other shares except that (i) the expenses that are specific to a
class, such as distribution, shareholder communications, and
transfer agency expenses, are borne solely by such class and (ii)
each class of shares votes separately with respect to matters in
which the interests of one class differ from the interests of the
other class or any other matters for which separate class voting is
appropriate under applicable law.
19
<PAGE>
Because the Class B shares incur distribution services fees and
higher transfer agency fees, such class will have correspondingly
lower returns than Class A shares. You may call 1-800-29-ARIEL (1-
800-292-7435) for more information regarding Class B shares of the
Fund.
The Trust is not required to hold annual shareholder meetings.
Shareholder meetings are held when they are required under the
Investment Company Act of 1940 or otherwise called for special
purposes. Special meetings may be called upon the request of
shareholders holding at least 10% of the Fund's outstanding shares.
THE BOARD OF TRUSTEES SUPERVISES THE FUND'S ACTIVITIES AND REVIEWS THE TRUST'S
CONTRACTS WITH COMPANIES THAT PROVIDE SERVICES TO THE FUND.
BOARD OF TRUSTEES
MARIO L. BAEZA, ESQ.
President, Wasserstein Perella International Limited; Managing
Director and Chief Executive Officer, Americas Division, Wasserstein
Perella & Co., Inc.
WILLIAM C. DIETRICH, CPA
Chief Financial Officer, Home Shopping Alternatives, Inc.
ROYCE N. FLIPPIN, JR., MBA
President, Flippin Associates; formerly Director of Program
Advancement, Massachusetts Institute of Technology
JOHN G. GUFFEY, JR.
Chair, Calvert Social Investment Foundation; Treasurer and Director,
Silby, Guffey and Co., Inc.
MELLODY L. HOBSON
Senior Vice President, Director of Marketing, Ariel Capital
Management, Inc.
CHRISTOPHER G. KENNEDY, MBA
Executive Vice President and Director, Merchandise Mart Properties,
Inc.
ERIC T. McKISSACK, CFA, MBA
Vice Chairman and Co-Chief Investment Officer, Ariel Capital
Management, Inc.
20
<PAGE>
BERT N. MITCHELL, MBA, CPA
Founder, Chairman and Chief Executive Officer, Mitchell/Titus & Co.
ARIEL CAPITAL MANAGEMENT, INC. SERVES AS THE ADVISER TO THE FUND.
Subject to the overall supervision of the Board of Trustees and
pursuant to the Management Agreement, Ariel Capital Management, Inc.
(the "Adviser") is responsible for performing or overseeing the
Fund's day-to-day management and administration, providing the Fund
with office space, executive and other personnel and paying the
salaries and fees of all Trustees who are affiliated persons. The
Fund pays all other operating expenses. The Adviser is paid a fee
for its services to the Fund at the annual rate of 0.45% of the
Fund's average daily net assets up to $1 billion; 0.425% for the
next $1 billion; and 0.40% for amounts greater than $2 billion. The
Adviser also acts as investment adviser and administrator to Ariel
Growth Fund and Ariel Appreciation Fund, the other two series of the
Trust.
The Adviser is a privately held investment management firm,
controlled by John W. Rogers, Jr. and owned by its employees. The
Adviser is located at 307 N. Michigan Avenue, Suite 500, Chicago,
Illinois 60601.
ARIEL DISTRIBUTORS, INC. IS THE PRINCIPAL UNDERWRITER TO THE FUND
Ariel Distributors, Inc. serves as the principal underwriter. Under
the terms of its Underwriting Agreement, Ariel Distributors markets
and distributes the shares of the Trust and is responsible for
payment of commissions and service fees to broker-dealers, banks,
and financial services firms, preparation of advertising and sales
literature, and printing and mailing of prospectuses to prospective
investors.
SUB-ADVISER
Lincoln Capital Management Company ("Lincoln Capital"), 200 South
Wacker Drive, Chicago, IL 60606, acts as Sub-Adviser of the Fund.
Lincoln Capital manages the day-to-day investment operations for the
Fund. The Fund pays no fees directly to Lincoln Capital. Lincoln
Capital receives fees from the Adviser at the annual rate of 0.30%
of the average daily net assets up to $50 million; 0.20% for the
next $50 million; 0.15% for the next $150
21
<PAGE>
million and 0.10% for amounts greater than $250 million.
The Managing Directors and controlling shareholders of Lincoln
Capital and their titles, are as follows:
John W. Croghan, Chairman
J. Parker Hall, III, President
Kenneth R. Meyer, Executive Vice President
Timothy H. Ubben, Executive Vice President
Ray B. Zemon, Executive Vice President
PORTFOLIO MANAGEMENT
The Fund's duration decisions are made by a strategy committee
comprising five senior officers of Lincoln Capital: W. Croghan, J.
Parker Hall III, Richard W. Knee, Kenneth R. Meyer, and Ray B.
Zemon. The five members of the strategy committee have been with
Lincoln Capital for over 10 years and average 26 years of investment
experience. Investment selections for the Fund are made by members
of the fixed income group: Terrence J. Glomski, Lorraine L. Holland,
Andrew A. Johnson, Brian D. Johnson, Richard W. Knee, Kenneth R.
Meyer, Thomas K. Parrent, and Ray B. Zemon. The eight members of
the fixed income group average 16 years of investment experience.
PERFORMANCE HISTORY OF LINCOLN CAPITAL
While Lincoln Capital has no operational history with the newly
organized Fund, set forth below are certain performance data,
provided by Lincoln Capital, relating to annual average investment
results of a composite of all client accounts whose portfolios were
managed by Lincoln Capital over a period of thirteen years, since
Lincoln Capital began operations. Also set forth below, for
comparison, are the performances of widely recognized indices of
market activity based upon the aggregate performance of selected
unmanaged portfolios of publicly traded fixed-income securities.
The advisory accounts ("Advisory Accounts") had the same investment
objective as the Fund and were managed using substantially similar,
though not necessarily identical investment strategies and
techniques as those contemplated by the Fund. Because of the
similarities in investment strategies and techniques, Lincoln
Capital believes that the Advisory Accounts are sufficiently
comparable to the Fund to make the performance data listed below
relevant to investors in the Fund.
22
<PAGE>
The results presented are not intended to predict or suggest returns
that will be experienced by the Fund or the return an investor will
achieve by investing in the Fund. The Fund is subject to different
costs, including investment, administration and registration fees
that were not incurred by the Advisory Accounts. Different methods
of determining the performance from those described in the footnote
to the chart below may result in different performance figures.
Investors should not rely on the following data as an indication of
future performance of Lincoln Capital or of the Fund.
<TABLE>
<CAPTION>
Lincoln Capital's Salomon Brothers
Number of Average Account Active Fixed Lehman Brothers Broad Investment-
Time Period Accounts Size ($millions) Composite (%)(1) Aggregate Index (%)(2) Grade Bond Index
- ------------- ----------- ---------------- ---------------------- ---------------------- -----------------
(%)(2)
------
<S> <C> <C> <C> <C> <C>
1982 13 45 37.20 32.62 31.79
1983 17 49 7.62 8.36 8.21
1984 20 61 14.33 15.15 14.99
1985 16 92 24.92 22.10 22.26
1986 20 102 17.49 15.26 15.43
1987 20 111 3.26 2.76 2.60
1988 24 109 7.41 7.89 7.99
1989 27 99 14.71 14.53 14.43
1990 29 123 8.47 8.96 9.09
1991 29 168 15.81 16.00 15.98
1992 33 165 7.83 7.40 7.58
1993 33 163 11.22 9.75 9.92
1994 31 143 -2.13 -2.92 -2.85
</TABLE>
(1) These figures are dollar-weighted, average annual investment results
expressed as a percentage return. Returns shown for Lincoln Capital are
after deduction of fees. The accounts represented in the composite are all
accounts managed in a manner that is substantially similar to the
investment management of the Fund and are most of Lincoln Capital's active
accounts.
(2) The Lehman Brothers Aggregate Index and the Salomon Brothers Broad
Investment-Grade Bond Index are unmanaged indices of fixed-income
securities which are composed of securities that are substantially similar
to the types of securities in which the Advisory Accounts and the Fund
invest.
THE TRANSFER AGENT AND CUSTODIAN.
Investors Fiduciary Trust Company ("IFTC") is the Fund's transfer
agent, custodian and dividend disbursing and shareholder servicing
agent.
HOW TO BUY SHARES
INITIAL PURCHASES
The minimum initial investment in Class A shares is $1,000,000.
However, the Adviser may waive the minimum initial investment under
circumstances in which the Adviser believes an investor will meet
such minimum within a reasonable time. A completed
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<PAGE>
and signed application is required for each new account you open,
regardless of the method you choose for making your initial
investment. An account application accompanies this prospectus.
Additional forms may be required from corporations, associations and
certain financial institutions. If you have any questions or need
additional applications, call 1-800-29-ARIEL (1-800-292-7435).
BY MAIL
To purchase shares by mail, please make your check payable to ARIEL
MUTUAL FUNDS and mail it with an application, indicating which of
the Ariel Mutual Funds you would like to buy, to:
Ariel Mutual Funds
P.O. Box 419121
Kansas City, Missouri 64141-6121
BY WIRE
You may also purchase shares by bank wire. Just call us at 1-800-29-
ARIEL (1-800-292-7435) and we will ask you your name, address,
social security or tax identification number, the amount of your
investment, the name of the Ariel Mutual Fund in which you wish to
invest as well as the name and address of the financial institution
that will be wiring your investment to the Fund. We will
immediately give you an account number and you may then have your
financial institution wire federal funds to the Custodian with the
following instructions:
Ariel Mutual Funds
c/o Investors Fiduciary Trust Company
127 West 10th Street
Kansas City, MO 64105
ABA #101003621
Account No. 7528205
The name of the Ariel Mutual Fund(s) and the class in
which you wish to invest
Your shareholder account number
The name in which your account is registered
We accept wires at no charge. However, your bank may charge you for
this service.
SUBSEQUENT PURCHASES
You may make subsequent investments in any amount. To invest
directly by bank wire, follow the instructions as shown above for
initial investments, except that there is no need to call us first.
Just contact your financial institution.
To add to your account by mail, please send your check or money
order payable to Ariel Mutual Funds with the detachable stub from
the bottom of your most recent account statement, or drop us a note
that includes the registered account name, account number, the name
of the Fund and amount you wish to invest. Please remember that
subsequent purchases should be sent to:
Ariel Mutual Funds
P.O. Box 419641
Kansas City, Missouri 64141-6641
24
<PAGE>
AUTOMATIC INVESTING THROUGH YOUR BANK
You may arrange for automatic investing whereby the Custodian will
be authorized to initiate a debit to your bank account of a specific
amount to be used to purchase shares of the Fund on a monthly or
quarterly basis. After each automatic investment, you will receive a
transaction confirmation and the debit should be reflected on your
next bank statement. You may terminate the plan at any time, and we
may modify or terminate the plan at any time. If, however, you
terminate an automatic investment plan with an account balance of
less than $1,000,000, we reserve the right to close your account.
See "Redeeming Shares-Other Information About Redemptions" on page
____. If you desire to utilize this automatic investment option,
please indicate your intention to do so on the application included
with this prospectus.
OTHER INFORMATION ABOUT PURCHASING SHARES
Although there is no sales charge imposed by the Fund when you
purchase shares, certain dealers or financial institutions which
sell shares of Ariel Mutual Funds may impose charges for their
services, and such charges may constitute a significant portion of a
smaller account.
The Fund does not issue share certificates unless you specifically
request one each time you make a purchase. Certificates are not
issued for fractional shares or to shareholders who have elected a
systematic withdrawal plan. Also, shares represented by certificates
may not be redeemed by telephone. See "Redeeming Shares" for
information on how to redeem your shares.
IN-KIND PURCHASES
Under certain circumstances, shares of the Fund may be purchased
using securities, so long as the securities delivered to the Fund
meet the investment objective and policies of the Fund, and are
otherwise acceptable to Lincoln Capital, which reserves the right to
reject all or any part of the securities offered in exchange for
shares of the Fund. See the Statement of Additional Information for
more details and for the conditions which apply to in-kind
purchases.
NET ASSET VALUE
Net asset value per share ("NAV") refers to the worth of one share.
NAV is computed by adding the value of all portfolio holdings, plus
other assets, deducting liabilities and then dividing the result by
the number of shares outstanding. The Fund's NAV will vary daily
based on the market values of its investments.
Fixed-income securities, including those to be purchased under firm
commitment agreements (other than obligations having a maturity of
60 days or less), are normally valued on the basis of quotes
obtained from brokers and dealers or pricing services. Short-term
investments having a maturity of 60 days or less are valued at
amortized cost, unless the Board of Trustees determines that such
method is not appropriate under specific circumstances. Assets for
which there are no quotations available will be valued at fair value
as determined by the Board of Trustees.
25
<PAGE>
The NAV is calculated at the close of the regular session of the New
York Stock Exchange (normally 3:00 p.m. Central time). The Fund is
closed for business any day the New York Stock Exchange is closed
and on the following holidays: Columbus Day, Martin Luther King's
Birthday and Veterans' Day. All purchases of Fund shares will be
confirmed and credited to your account in full and fractional
shares.
WHEN YOUR ACCOUNT WILL BE CREDITED
BEFORE YOU BUY SHARES, PLEASE READ THE FOLLOWING INFORMATION TO MAKE SURE YOUR
INVESTMENT IS ACCEPTED AND CREDITED PROPERLY.
Your purchase will be processed at the next offering price based on
the net asset value next calculated after your order is received and
accepted. Such calculation is made at the close of regular session
trading on the New York Stock Exchange, which is usually 3:00 p.m.
Central time. Except as provided above, all your purchases must be
made in U.S. dollars and checks must be drawn on U.S. banks. No
cash will be accepted. The Fund reserves the right to suspend the
offering of shares for a period of time or to reject any specific
purchase order. If your check does not clear, your purchase will be
cancelled and you will be charged a $10 fee plus costs incurred by
the Fund. When you purchase by check, the Fund can hold payment on
redemptions until they are reasonably satisfied that the investment
is collected (normally 15 calendar days). To avoid this collection
period, you can wire federal funds from your bank, which may charge
you a fee.
Certain financial institutions or broker-dealers which have entered
into a sales agreement with the Distributor may enter confirmed
purchase orders on behalf of customers by phone, with payment to
follow within a number of days of the order as specified by the
program. If payment is not received in the time specified, the
financial institution could be liable for resulting fees or losses.
State securities laws may require such firms to be licensed as
securities dealers in order to sell shares of the Fund.
EXCHANGING SHARES
YOU MAY EXCHANGE SHARES OF THE FUND FOR SHARES OF THE OTHER ARIEL MUTUAL FUNDS
AND FOR SHARES OF CERTAIN MONEY MARKET FUNDS.
You may exchange your shares in the Fund for Class B shares of the
Fund (when available for purchase) or for shares of the other Ariel
Mutual Funds at no additional charge as long as your total
investment in each Fund meets the minimum investment required for
that Fund.
You may also exchange your shares in any Ariel Mutual Fund for
shares of Cash Resource Money Market Fund, Cash Resource U.S.
Government Money Market Fund or Cash Resource Tax-Exempt Money
Market Fund at no additional charge as long as your total investment
meets any required minimum. This exchange privilege is a convenient
way to buy shares in a money market fund in order to respond to
changes in your goals or in market conditions. These money market
funds are no-load funds managed by Cambridge Investment Advisors,
Inc.
Before exchanging your shares into shares of the other Ariel Mutual
Funds or shares of Cash Resource Money Market Fund, Cash Resource
U.S. Government Money Market Fund or Cash Resource Tax-Exempt Money
Market Fund, read the applicable
26
<PAGE>
prospectus. To obtain a prospectus for any of these funds, just call
1-800-29-ARIEL (1-800-292-7435).
BY MAIL
To exchange your shares of the Fund into shares of one of the other
Ariel Mutual Funds, just send a written request to:
Ariel Mutual Funds
P.O. Box 419121
Kansas City, Missouri 64141-6121
This request should include your name, account number, the name of
the Fund you currently own, the name of the Ariel Mutual Fund you
wish to exchange into and the dollar amount or number of shares you
wish to exchange. Please remember that you cannot place any
conditions on your request.
To exchange your shares of the Fund into shares of Cash Resource
Money Market Fund, Cash Resource U.S. Government Money Market Fund
or Cash Resource Tax-Exempt Money Market Fund, complete and sign an
application and mail it to the address set forth above.
BY TELEPHONE
Unless you have elected not to have telephone transaction privileges
by checking the appropriate box in your application, you may also
make exchanges by calling 1-800-29-ARIEL (1-800-292-7435). Exchanges
made over the phone may be made by any person, not just the
shareholder of record. You may only exchange shares by telephone if
the shares you are exchanging are not in certificate form. Certain
other limitations and conditions apply to all telephone
transactions. Before using your telephone privilege, please read
"Telephone Transactions" on page ____.
OTHER INFORMATION ABOUT EXCHANGING SHARES
All accounts opened as a result of using the exchange privilege must
be registered in the same name and taxpayer identification number as
your existing account with the Ariel Mutual Funds.
Because of the time needed to transfer money between funds, you may
not exchange into and out of the same fund on the same or successive
days; there must be at least one day between exchanges. You may
exchange your shares of the Fund only for shares that have been
registered for sale in your state.
Remember that each exchange represents the sale of shares of one
fund and the purchase of shares of another. Therefore, you could
realize a taxable gain or loss on the transaction.
The Fund reserves the right to terminate or modify the exchange
privilege with at least 60 days' written notice. If your account is
subject to backup withholding, you may not use the exchange
privilege.
Because excessive trading can hurt the Fund's performance and
shareholders, the Fund also reserves the right to temporarily or
permanently terminate, with or without advance notice, the exchange
privilege of any investor who makes excessive use of the exchange
27
<PAGE>
privilege (e.g. more than five exchanges per calendar year). Your
exchanges may be restricted or refused if the Fund receives or
anticipates simultaneous orders affecting significant portions of
the Fund's assets. In particular, a pattern of exchanges with a
"market timer" strategy may be disruptive to the Fund.
If you have any share certificates, you must include them with your
exchange request. For certificate delivery instructions see
"Redeeming Shares--By Mail" on page ____.
TELEPHONE TRANSACTIONS
If you have telephone transaction privileges, you may purchase,
redeem, or exchange shares or wire funds by telephone as described
in this prospectus. You automatically have telephone privileges
unless you elect otherwise. These privileges, however, may not be
available through certain dealers and financial institutions. The
Fund, the Transfer Agent and their affiliates are not liable for
acting in good faith on telephone instructions relating to your
account, provided they follow reasonable procedures to determine
that the telephone instructions are genuine. Such procedures will
include a request for a personal identification number and tape
recording of the instructions. You should verify the accuracy of
telephone transactions immediately upon receipt of your confirmation
statement.
During unusual market conditions, we may have difficulty in
accepting telephone requests, in which case you should mail your
request.
The Fund reserves the right to terminate, suspend or modify
telephone transaction privileges.
SPECIAL SERVICES AND CHARGES
If you are purchasing shares of the Fund through a program of
services offered by a broker-dealer or financial institution, you
should read the program materials in conjunction with this
prospectus. Certain features may be modified in these programs, and
administrative charges may be imposed by the broker-dealer or
financial institution for the services rendered.
TAX-SAVING RETIREMENT PLANS
CONTACT THE ADVISER FOR COMPLETE INFORMATION KITS DISCUSSING THE PLANS AND THEIR
BENEFITS, PROVISIONS AND FEES.
You may establish your new account under one of several tax-deferred
plans. These plans let you invest for retirement and shelter your
investment income from current taxes.
. Individual Retirement Accounts (IRAs): available to anyone who has
earned income. You may also be able to make investments in the name
of your spouse, if your spouse has no earned income.
. Qualified Profit-Sharing and Money-Purchase Plans (including
401(k) Plans): available to self-employed people and their partners,
or to corporations and their employees.
28
<PAGE>
. Simplified Employee Pension Plan (SEP-IRA): available to self-
employed people and their partners, or to corporations. Salary
reduction pension plans (SAR-SEP IRAs) are also available to
employers with 25 or fewer employees.
. 403(b)(7) Custodial Accounts: available to employees of most non-
profit organizations and public schools and universities.
REDEEMING SHARES
BY MAIL
You may redeem shares from your account by sending a letter of
instruction, your name, the name of the Fund and account number from
which shares are redeemed, the number of shares or dollar amount and
where you want your check to be sent. Simply send your written
request to redeem your shares to our Transfer Agent as follows:
Ariel Mutual Funds
P.O. Box 419121
Kansas City, Missouri 64141-6121
Certain shareholders, such as corporations, trusts and estates, may
be required to submit additional documents. The letter of
instruction must be signed by all required authorized signers.
Please remember that you cannot place any conditions on your
request. If any share certificates were issued, they must be
returned duly endorsed or accompanied by a separate stock
assignment. Under certain circumstances, signature guarantees may
be required. Please call 1-800-29-ARIEL (1-800-292-7435) for more
information.
BY TELEPHONE
Unless you have elected not to have telephone transaction privileges
by checking the box in your application, you may also redeem shares
by calling 1-800-29-ARIEL (1-800-292-7435) and receive a check by
mail. The check can only be issued for up to $25,000, and only to
the registered owner (who must be an individual), and may only be
sent to the address of record, which must have been on file for at
least 60 days. Shares represented by certificates may not be
redeemed by telephone.
BY WIRE
Payment for your shares may also be made to you by wire if you have
selected this option in your application and have named a commercial
bank or savings institution with a routing number to which we can
send your money.
Once you have applied for wire redemption privileges, you or any
other person can make such a request by calling 1-800-29-ARIEL
(1-800-292-7435). You may also use your wire privilege by mailing a
signed request that includes the name of the Fund, account number
and amount you wish to have wired, by writing to:
Ariel Mutual Funds
P.O. Box 419121
Kansas City, Missouri 64141-6121
The proceeds will be sent only to the financial institution you have
designated on your application. You may terminate the wire
redemption privilege by notifying us in writing.
29
<PAGE>
See the restrictions under "Telephone Transactions" on page ___, as
they also apply to wire redemptions.
OTHER INFORMATION ABOUT REDEMPTIONS
TO ENSURE ACCEPTANCE OF YOUR REDEMPTION REQUEST, PLEASE FOLLOW THE PROCEDURES
DESCRIBED HERE AND BELOW.
There is no charge for redeeming your shares. If, however, you
redeem shares through certain dealers not having selling agreements
with respect to the Fund your broker may charge a fee when you
redeem your shares.
Once your shares are redeemed, the proceeds will normally be sent to
you on the next business day. However, if making immediate payment
could adversely affect the Fund, it may take up to seven calendar
days. When the New York Stock Exchange is closed (or when trading is
restricted) for any reason other than its customary weekend or
holiday closing, or under any emergency circumstances as determined
by the Securities and Exchange Commission, redemptions may be
suspended or payment dates postponed.
You may redeem all or a portion of your shares on any business day
during which the New York Stock Exchange is open for business except
the following holidays: Columbus Day, Martin Luther King's Birthday
and Veteran's Day. Your shares will be redeemed at the net asset
value next calculated after your redemption request is received by
the Transfer Agent in proper form. Redemptions made after the New
York Stock Exchange has closed will be made at the next day's net
asset value. Remember that, if you redeem shortly after purchasing
shares, the Fund may hold payment on the redemption of your shares
until it is reasonably satisfied that payments made by check have
been collected (normally up to 15 calendar days after investment).
MINIMUM ACCOUNT BALANCE IS $1,000,000.
Please maintain a balance in your Class A account of at least
$1,000,000. If, due to shareholder redemptions, the value of your
account in the Fund falls below $1,000,000, the account may be
closed and the proceeds mailed to you at your address of record. You
will be given 30 days' notice that your account will be closed
unless you make an additional investment to increase your account
balance to the $1,000,000 minimum.
REDEMPTIONS IN KIND
If conditions arise that would make it undesirable for the Fund to
pay for all redemptions in cash, the Fund may authorize payment to
be made in marketable portfolio securities. However, the Fund has
obligated itself under the Investment Company Act of 1940 to redeem
for cash all shares of the Fund presented for redemption by any one
shareholder in any 90-day period up to the lesser of $250,000 or 1%
of the Fund's net assets. Securities delivered in payment of
redemptions would be valued at the same value assigned to them in
computing the Fund's net asset value per share. Shareholders
receiving such securities may incur brokerage costs or be subject to
dealer mark downs when these securities are sold.
30
<PAGE>
DIVIDENDS, CAPITAL GAINS AND TAXES
EACH YEAR, THE FUND DISTRIBUTES SUBSTANTIALLY ALL OF ITS NET INVESTMENT INCOME
AND CAPITAL GAINS TO SHAREHOLDERS.
The Fund intends to qualify as a regulated investment company under
Subchapter M of the Internal Revenue Code, as amended (the "Code").
As such, the Fund generally will not pay Federal income tax on the
income and gains it pays as dividends to its shareholders. In order
to avoid a 4% Federal excise tax, the Fund intends to distribute
each year substantially all of its net income and gains.
The Fund intends to seek, but has not yet received, a ruling from
the Internal Revenue Service to the effect that differing
distributions among the classes of its shares will not affect the
Fund's tax status as a regulated investment company. See the
Statement of Additional Information for additional detail about the
tax aspects of the dual-class structure.
Dividends from net investment income are declared and paid
quarterly. Net investment income consists of the interest income,
net short-term capital gains, if any, and dividends declared and
received on investments, less expenses. Distributions of net short-
term capital gains (treated as dividends for tax purposes) and net
long-term capital gains, if any, are normally declared and paid by
the Fund once a year.
During its initial operations, the Fund may be a personal holding
company ("PHC") under the Code due to substantial ownership of the
Fund's shares by a few shareholders. In that event, the Fund
intends to distribute all its PHC income so that there is no PHC tax
imposed on the Fund.
DIVIDEND AND DISTRIBUTION PAYMENT OPTIONS
Dividends and any distributions from the Fund are automatically
reinvested in the Fund at net asset value, unless you elect to have
the dividends of $10 or more paid in cash. New shares will be
purchased at net asset value on the reinvestment date, which is
generally up to three days prior to the payment date. You must
notify the Fund in writing prior to the record date to change your
payment options. If you elect to have dividends and/or distributions
paid in cash, and the U.S. Postal Service cannot deliver the check,
or if it remains uncashed for six months, it, as well as future
dividends and distributions, will be reinvested in additional
shares.
TAXES ON DISTRIBUTIONS
Distributions are subject to federal income tax, and may also be
subject to state or local taxes. Distributions are taxable when
they are paid, whether they are received in cash, or reinvested.
However, distributions declared in December and paid in January are
taxable as if they were paid on December 31. For federal tax
purposes, the Fund's income and short-term capital gain
distributions are taxed as dividends; long-term capital gain
distributions are taxed as long-term capital gains. Some dividends
may be exempt from state or local income tax as income derived from
U.S. Government Securities. You should consult your tax adviser on
the taxability of your distributions.
31
<PAGE>
"BUYING A DIVIDEND"
At the time of purchase, the share price of the Fund may reflect
undistributed income, capital gains or unrealized appreciation of
securities. Any income or capital gains from these amounts which are
later distributed to you are fully taxable. On the record date of a
distribution, the Fund's share value is reduced by the amount of the
distribution. If you buy shares just before the record date ("buying
a dividend") you will pay the full price for the shares and then
receive a portion of this price back as a taxable distribution.
YOU MAY REALIZE A CAPITAL GAIN OR LOSS WHEN YOU SELL OR EXCHANGE SHARES.
If you sell or exchange your shares you will have a short or long-
term capital gain or loss, depending on how long you owned the
shares which were sold. In January, you will be sent a form
indicating the proceeds from all sales, including exchanges. You
should keep your annual year-end account statements to determine the
cost (basis) of the shares to report on your tax returns.
If we do not have your correct Social Security or Corporate Tax
Identification Number ("TIN") and a signed certified application or
Form W-9, Federal law requires the Fund to withhold 31% of your
dividends and certain redemptions. In addition, you may be subject
to a fine. You will also be prohibited from opening another account
by exchange. If this TIN information is not received within 60 days
after your account is established, your account may be redeemed at
the current NAV on the date of redemption. The Fund reserves the
right to reject any new account or any purchase order for failure to
supply a certified TIN.
32
<PAGE>
CERTAIN SHAREHOLDERS OF THE FUND
The following table sets forth, as of _________, 1995, the name and
holdings of each person known by the Fund to be a record owner of
more than 5% of its outstanding shares. As of such date, there were
____ Class A shares, and no Class B shares, outstanding.
NAME AND ADDRESS OWNED % OF OUTSTANDING
- ---------------- ----- CLASS A SHARES
--------------
Ariel Capital Management, Inc. ____ 100%
307 N. Michigan Avenue
Chicago, IL 60601
TOTAL RETURN, YIELD AND OTHER PERFORMANCE INFORMATION
THE FUND MAY ADVERTISE TOTAL RETURN AND YIELD, WHICH ARE BASED ON HISTORICAL
RESULTS AND ARE NOT INTENDED TO INDICATE FUTURE PERFORMANCE.
A total return is a change in the value of an investment during the
stated period, assuming all dividends and capital gain distributions
are reinvested. A cumulative total return reflects performance over
a stated period of time. An average annual total return is the
hypothetical annual compounded return that would have produced the
same cumulative total return if the performance had been constant
over the entire period. Because average annual returns tend to
smooth out variations in the returns, you should recognize that they
are not the same as actual year-by-year results. In addition to
advertising average annual returns for the required standard
periods, such returns may be quoted for other periods, including
periods of less than one year.
Quotations of yield for the Fund will be based on the investment
income per share (as defined by the Securities and Exchange
Commission) during a particular 30-day (or one-month) period
(including dividends and interest), less expenses accrued during the
period ("net investment income"), and will be computed by dividing
net investment income by the maximum public offering price per share
on the last day of the period.
The Fund also may provide current distribution information to its
shareholders in shareholder reports or other shareholder
communications or in certain types of sales literature provided to
prospective investors. Current distribution information for the
Fund will be based on distributions for a specified period (i.e.,
total dividends from net investment income), divided by the net
asset value per share on the last day of the period and annualized.
The rate of current distributions does not reflect deductions for
unrealized losses from transactions in derivative instruments such
as futures, which may reduce total return. Current distribution
rates differ from standardized yield rates in that they represent
what the Fund has declared and paid to shareholders as of the end of
a specified period rather than the Fund's actual net investment
income for that period.
Performance information for the Fund may also be compared to various
unmanaged indices, such as the Lehman Brothers Aggregate Index, the
Lehman Brothers Government/Corporate Index, the Salomon Brothers
Broad Investment-Grade Bond Index, indices prepared by Lipper
Analytical Services, and other entities or organizations which track
the performance of investment companies or investment advisers.
Unmanaged indices (i.e., other than Lipper) generally do not reflect
deductions for administrative and management costs and expenses.
Any performance
33
<PAGE>
information should be considered in light of the Fund's investment
objectives and policies, characteristics and quality of the
portfolio and the market conditions during the time period
indicated, and should not be considered to be representative of what
may be achieved in the future. For a description of the methods
used to determine yield and total return for the Fund, see the
Statement of Additional Information.
From time to time, the Fund or its affiliates may provide
information including, but not limited to, general economic
conditions, comparative performance data and rankings with respect
to comparable investments for the same period and for unmanaged
market indices described in the Statement of Additional Information.
34
<PAGE>
ADVISER,
SERVICES ADMINISTRATOR
Ariel Capital Management, Inc.
307 North Michigan Avenue
Chicago, Illinois 60601
1-800-29-ARIEL (1-800-292-7435) fax (312) 726-7473
SUB-ADVISER
Lincoln Capital Management Company
200 South Wacker Drive
Chicago, IL 60606
PRINCIPAL UNDERWRITER
Ariel Distributors, Inc.
307 North Michigan Avenue
Chicago, Illinois 60601
INDEPENDENT AUDITORS
Ernst & Young LLP
233 South Wacker Drive
Chicago, Illinois 60606
TRANSFER AGENT AND CUSTODIAN
Investors Fiduciary Trust Company
127 West 10th Street
Kansas City, Missouri 64105
LEGAL COUNSEL
D'Ancona & Pflaum
30 North LaSalle Street
Chicago, Illinois 60602
BOARD OF TRUSTEES
Mario L. Baeza, Esq.
President, Wasserstein Perella International; Managing Director and Chief
Executive Officer, Americas Division, Wasserstein Perella & Co., Inc.
William C. Dietrich, CPA
Chief Financial Officer, Home Shopping Alternatives, Inc.
Royce N. Flippin, Jr., MBA
President, Flippin Associates; formerly Director of Program Advancement,
Massachusetts Institute of Technology
John G. Guffey, Jr.
Chair, Calvert Social Investment Foundation
Treasurer and Director, Silby, Guffey and Co., Inc.
Mellody L. Hobson
Senior Vice President, Director of Marketing, Ariel Capital Management, Inc.
Christopher G. Kennedy, MBA
Executive Vice President and Director,
Merchandise Mart Properties, Inc.
Eric T. McKissack, CFA, MBA
Vice Chairman and Co-Chief Investment Officer,
Ariel Capital Management, Inc.
Bert N. Mitchell, MBA, CPA
Founder, Chairman and Chief Executive Officer, Mitchell/Titus & Co.
35
<PAGE>
SUBJECT TO COMPLETION DATED JUNE 1, 1995
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission but has not yet become effective. These
securities may not be sold nor may offers to buy be accepted prior to the time
the registration statement becomes effective. This prospectus shall not
constitute an offer to sell or the solicitation of an offer to buy nor shall
there be any sale of these securities in any State in which such offer,
solicitation or sale would be unlawful prior to registration or qualification
under the securities laws of any State.
PROSPECTUS
FOR CLASS B SHARES
______, 1995
ARIEL MUTUAL FUNDS
ARIEL PREMIER BOND FUND
307 NORTH MICHIGAN AVENUE, SUITE 500, CHICAGO, ILLINOIS 60601
The Ariel Premier Bond Fund (the "Fund") is a series of the Ariel Growth
Fund (doing business as Ariel Investment Trust) (the "Trust"). Ariel
Capital Management, Inc. (the "Adviser") is the Manager of the Fund.
Lincoln Capital Management Company ("Lincoln Capital") is the Fund's Sub-
Adviser responsible for the day to day investment operations.
The Fund currently offers two classes of shares, Class A and Class B.
Class A shares are sold primarily to institutional investors under a
separate prospectus. Because Class B shares incur distribution services
fees and bear certain other expenses, Class B will have a higher expense
ratio than Class A, which will affect the relative performance of the
classes.
INVESTMENT OBJECTIVE
The Fund seeks to maximize total return through a combination of income and
capital appreciation. The Fund generally invests in high quality, highly
liquid fixed-income securities. Normally, at least 65% of the Fund's assets
will be invested in fixed income securities rated A or better by a
nationally recognized securities rating organization (or deemed the
equivalent by Lincoln Capital, if unrated). The Fund seeks to achieve its
investment objective by implementing decisions regarding the level and
direction of interest rates (duration and yield curve decisions) and
through the purchase and sale of securities to take advantage of perceived
yield spread opportunities.
ABOUT THIS PROSPECTUS
This prospectus sets forth important information concerning the Ariel
Premier Bond Fund. Please read it carefully before investing and keep it
for future reference. It is designed to provide you with information you
should know before investing and to help you decide if the goals of the
Fund match your own.
A Statement of Additional Information (dated ______, 1995) for the Fund has
been filed with the Securities and Exchange Commission and (together with
any supplement thereto) is incorporated herein by reference. This
Statement is available upon request from the Fund by calling 1-800-29-ARIEL
(1-800-292-7435).
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, AND ARE NOT FEDERALLY INSURED BY THE FDIC, THE
FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
FEDERAL OR ANY STATE SECURITIES COMMISSION PASSED ON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE(S)
<S> <C>
Fund Expenses For Class B Shares....................... 3
Investment Objective and Policies...................... 4
Management and Organization of the Fund................ 13
Distribution Plan...................................... 16
How to Buy Shares...................................... 17
Purchasing Through Retirement Plans.................... 18
Net Asset Value........................................ 18
When Your Account Will Be Credited..................... 19
Exchanging Shares...................................... 19
Signature Guarantees................................... 21
Redeeming Shares....................................... 22
Redemptions in Kind.................................... 24
Dividends, Capital Gains and Taxes..................... 24
Total Return, Yield and Other Performance Information.. 26
</TABLE>
2
<PAGE>
FUND EXPENSES FOR CLASS B SHARES
SHAREHOLDER TRANSACTION COSTS
<TABLE>
<CAPTION>
<S> <C>
Maximum Sales Load on Purchases None
Maximum Sales Load on Reinvested Dividends None
Deferred Sales Load None
Redemption Fee None *
Exchange Fee None
</TABLE>
* If you request a redemption by wire transfer, you will be charged a $10 wire
fee.
ANNUAL FUND OPERATING EXPENSES FOR CLASS B SHARES AFTER
EXPENSE REIMBURSEMENTS (AS A PERCENTAGE OF AVERAGE NET ASSETS):
<TABLE>
<CAPTION>
<S> <C>
Management Fees 0.45%
12b-1 Fees(1) 0.25%
Other Expenses (2,3) 0.25%
----
Total Fund Operating Expenses (3) 0.95%
</TABLE>
(1) The effect of a Rule 12b-1 plan is that in certain instances long-term
shareholders in the Fund may pay more than the economic equivalent of the
maximum front-end sales charge permitted by rules of the National Association of
Securities Dealers, Inc.
(2) ANNUAL FUND OPERATING EXPENSES. Management Fees are investment advisory and
administrative fees which are paid by the Fund to the Adviser. The Fund incurs
Other Expenses for maintaining shareholder records, furnishing shareholder
statements and reports, and other services. Management Fees and Other Expenses
have already been reflected in the Fund's share price and are not charged
directly to individual shareholder accounts. The Fund's operating expenses are
annualized and are estimated for the fiscal year ending September 30, 1995.
Please refer to the section "Management and Organization of the Fund" for
further information.
(3) THE ADVISER HAS AGREED TO REIMBURSE THE FUND FOR ANY CLASS B EXPENSES IN
EXCESS OF 0.95% OF THE AVERAGE NET ASSETS OF THE CLASS FOR ANY FISCAL PERIOD
THROUGH AT LEAST SEPTEMBER 30, 1997. Without such expense reimbursement it is
estimated that the ratio of expenses to average net assets of the Class B shares
would be 1.74%.
We can illustrate these expenses with the example below. You would pay the
following expenses on a $1,000 investment (assuming a 5% annual return and
redemption at the end of each period):
<TABLE>
<CAPTION>
<S> <C>
One Year $10
---
Three Years $30
---
</TABLE>
Explanation of Table: The purpose of the table is to assist you in understanding
the various costs and expenses that an investor in the Fund would bear directly
(shareholder transaction costs) or indirectly (annual fund operating expenses).
The information is based on estimated amounts for the Fund's first fiscal year
period.
THE 5% RATE USED IN THE EXAMPLE IS FOR ILLUSTRATION ONLY AND IS NOT INTENDED TO
BE INDICATIVE OF THE FUTURE PERFORMANCE OF THE FUND, WHICH MAY BE MORE OR LESS
THAN THE ASSUMED RATE. ACTUAL EXPENSES MAY BE MORE OR LESS THAN THOSE SHOWN.
INVESTMENT OBJECTIVE AND POLICIES
THE FUND SEEKS TO MAXIMIZE TOTAL RETURN.
INVESTMENT OBJECTIVE
The investment objective of Fund is to seek to maximize total return
through a combination of income and capital appreciation. The Fund
generally invests in high quality, highly liquid fixed-income
securities. Under normal market conditions, the Fund will invest at
least 65% of its net assets in fixed-income securities rated A or
better by Moody's Investors Service, Inc. ("Moody's") or Standard
and Poor's Corporation ("S & P") or that are not rated by Moody's or
S & P but are deemed to be of comparable quality by Lincoln Capital.
The Fund seeks to achieve its investment objective by implementing
decisions regarding the level and direction of interest rates
3
<PAGE>
(duration and yield curve decisions) and through the purchase and
sale of securities to take advantage of perceived yield spread
opportunities.
The Fund will take reasonable risks in seeking to achieve its
investment objective. There is, of course, no assurance that the
Fund will be successful in meeting its objective since there is risk
involved in the ownership of securities.
DURATION
Duration is a measure of the expected life of a fixed-income
security that was developed as a more precise alternative to the
concept of term-to-maturity. Duration incorporates a bond's yield,
coupon interest payments, final maturity and call features into one
measure. Duration is also a way to measure the interest-rate
sensitivity of the Fund's portfolio. The duration of the Fund is
calculated by averaging the durations of the bonds held by the Fund
with each duration "weighted" according to the percentage of net
assets that it represents. In general, the higher the Fund's
duration, the greater the appreciation or depreciation of the Fund's
assets will be when interest rates change. In its attempt to
maximize total return, Lincoln Capital intends to vary the duration
of the Fund, as described below, depending on its outlook for
interest rates.
INVESTMENT PROCESS
Interest Rate Decisions
Lincoln Capital seeks to achieve a duration equal to the duration of
the domestic, investment grade bond market when its outlook for
interest rates is neutral. The portfolio's average duration will be
longer when Lincoln Capital believes that interest rates will fall
and shorter when it believes interest rates will rise. The stronger
Lincoln Capital's conviction, the further the Fund's duration will
diverge from the duration of the domestic, investment grade bond
market which generally averages approximately five years. The
Fund's duration will normally range from four to six years. It is
expected that only on rare occasions will the Fund's duration reach
the extreme positions (plus or minus 2 years from the duration of
the domestic, investment grade bond market).
The Fund's duration relative to that of the domestic, investment
grade bond market is established in periodic strategy meetings of a
committee consisting of senior officers of Lincoln Capital. Changes
in the Fund's duration are based on a disciplined valuation of three
factors:
(a) Economic activity and capacity for growth;
(b) U.S. Government monetary policy; and
(c) Expectations for inflation.
The committee evaluates the above factors and weights each one to
determine a precise duration position relative to the duration of
the domestic, investment grade bond market. Over time, changes in
the duration position take the form of a series of small movements;
generally in one-half year increments.
Once the Fund's specific duration position has been established,
remaining decisions (i.e. yield curve structure, sector emphasis and
issue selections), are made and implemented by Lincoln Capital's
Fixed Income Group working as a team. These decisions are based on
Lincoln Capital's belief that yield spreads reflect fundamental risk
premiums. These premiums, in turn, are primarily determined by the
general level of interest rates. Yield curve decisions reflect
Lincoln Capital's judgment and are supported by studies of
historical spread relationships and break-even spread analysis.
Cash equivalents may be used to create the desired yield curve
structure. Portfolio positions are continually monitored and
evaluated.
Sector Emphasis and Security Selection
Sector and security selection decisions are based on Lincoln
Capital's judgment and are supported by studies of historical spread
relationships, break-even yield spread analysis, and model driven
portfolio return projections. In order to monitor yield spreads,
Lincoln Capital maintains extensive yield spread data banks and has
direct computer access to extensive historical yield spread data and
specific issuer data.
Credit research consists of internally generated fundamental
analysis and input from rating agencies and other sources. A
committee of Lincoln Capital reviews those corporate bonds that are
considered for purchase. By focusing on higher-rated securities,
and by comparing judgments among outside sources to internal credit
judgments, Lincoln Capital believes that credit risk can be managed
and reduced.
4
<PAGE>
It is unlikely that Lincoln Capital will seek to enhance the Fund's
return by anticipating an improvement in the creditworthiness of
specific corporate issuers, particularly lower rated issuers.
RESEARCH PROCESS
Virtually 100% of Lincoln Capital's fixed income research is
generated in-house. Each member of the investment staff serves as a
portfolio manager and a research analyst. There is no lapse between
the development of an investment idea and its execution.
Fundamental research includes of economic analysis, sector and
issuer spread relationships, and credit research. In the area of
quantitative research, Lincoln Capital owns proprietary models,
developed in-house. These include: a mortgage prepayment model,
mortgage valuation model, total return analytics for securities with
complex cash flows, risk exposure models, and yield curve analytics.
INVESTMENTS
IN GENERAL. The Fund may invest in fixed-income securities which
are obligations of, or guaranteed by the U.S. Government, its
agencies or instrumentalities ("U.S. Government Securities"). U.S.
Government Securities are unrated but are generally considered high-
grade securities. The Fund may also invest in other investment
grade fixed-income securities, including corporate bonds, mortgage-
backed and other asset-backed securities and other high quality,
liquid investments.
The debt securities in which the Fund will invest are investment
grade securities. These are securities rated in the four highest
grades assigned by Moody's Investors Service, Inc. ("Moody's") or
Standard and Poor's Corporation ("S & P") or that are not rated by
Moody's or S & P but deemed to be of comparable quality by Lincoln
Capital. The lowest investment grade securities have speculative
characteristics because changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make
principal and interest payments. The Fund will not invest in
securities below investment grade (so called "junk bonds"). In the
event of a downgrade of a debt security held by the Fund to below
investment grade, the Fund is not usually required to automatically
sell the issue, but Lincoln Capital will consider whether to
continue holding the security. However, if such a downgrade would
cause more than 5% of net assets to be invested in debt securities
below investment grade, sales will be made as soon as practicable to
reduce the proportion of debt below investment grade to 5% of net
assets or less.
The value of the shares issued by the Fund is not guaranteed and
will fluctuate with changes in the value of the Fund's portfolio.
Generally when prevailing interest rates rise, the value of the
Fund's portfolio is likely to decline and when prevailing interest
rates decline, the value of the Fund's portfolio is likely to rise.
U.S. GOVERNMENT SECURITIES. There are two basic types of U.S.
Government Securities: (1) direct obligations of the U.S. Treasury,
and (2) obligations issued or guaranteed by an agency or
instrumentality of the U.S. Government. Agencies and
instrumentalities of the U.S. Government include Federal Farm Credit
System ("FFCS"), Student Loan Marketing Association ("SLMA"),
Federal Home Loan Mortgage Corporation ("FHLMC"), Federal Home Loan
Banks ("FHLB"), Federal National Mortgage Association ("FNMA") and
Government National Mortgage Association ("GNMA"). Some obligations
issued or guaranteed by agencies or instrumentalities, such as those
issued by GNMA, are fully guaranteed by the U.S. Government.
Others, such as FNMA bonds, rely on the assets and credit of the
instrumentality with limited rights to borrow from the U.S.
Treasury. Still other securities, such as obligations of the FHLB,
are supported by more extensive rights to borrow from the U.S.
Treasury.
The guarantees of the U.S. Government, its agencies and
instrumentalities are guarantees of the timely payment of principal
and interest on the obligations purchased and not of their market
value.
MORTGAGE RELATED SECURITIES
Pass-Through Securities. The Fund may invest in GNMA Certificates
which are mortgage-backed securities representing part ownership of
a pool of mortgage loans. A "pool" or group of such mortgages is
assembled and, after being approved by GNMA, is offered to investors
through securities dealers. Once approved by GNMA, the timely
payment of interest and principal on each mortgage is guaranteed by
GNMA and backed by the full faith and credit of the U.S. Government.
GNMA Certificates differ from bonds in that principal is paid back
monthly by the borrower over the term of the loan rather than
returned in a lump sum at maturity. GNMA Certificates are called
"pass-through" securities because both interest and principal
payments (including prepayments) are passed through to the holder of
the Certificate.
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The Fund may also invest in pools of mortgages which are issued or
guaranteed by other agencies of the U.S. Government such as FNMA or
FHLMC. FNMA and FHLMC Certificates are similar to GNMA Certificates
except that timely payment of interest and principal of each
mortgage may not be guaranteed by the full faith and credit of the
U.S. Government.
The average life of pass-through pools varies with the maturities of
the underlying mortgage instruments. In addition, a pool's term may
be shortened by unscheduled or early payment of principal and
interest on the underlying mortgages. The occurrence of mortgage
prepayments is affected by the level of interest rates, general
economic conditions, the location and age of the mortgage and other
social and demographic conditions. As prepayment of individual
pools varies widely, it is not possible to precisely predict the
average life of a particular pool.
Collateralized Mortgage Obligations. The Fund may also invest in
collateralized mortgage obligations ("CMO"s). CMOs are debt
securities issued by a corporation, trust or custodian or by a U.S.
Government agency or instrumentality, which are collateralized by
mortgage pass-through securities. Cash flows from the mortgage
pass-through securities are allocated to various tranches (a
"tranche" is essentially a separate security) in a predetermined,
specified order. Each tranche has a stated maturity (the latest
date by which the tranche can be completely repaid, assuming no
prepayments) and has an average life (the average of the time to
receipt of a principal payment weighted by the size of the principal
payment). The average life is typically used as a proxy for
maturity because the debt is amortized (repaid a portion at a time),
rather than being paid off entirely at maturity, as would be the
case in a straight debt instrument.
Interest and principal payments from the underlying mortgages are
typically used to pay interest on all CMO tranches and to retire
successive tranche maturities in a sequence. Thus, the issuance of
CMO tranches with varying maturities and interest rates may result
in greater predictability of maturity with one tranche and less
predictability of maturity with another tranche than a direct
investment in a mortgage-backed pass-through security (such as a
GNMA Certificate). Tranches with shorter maturities typically have
a lower volatility and lower yield while those with longer
maturities typically have higher volatility and higher yield. Thus,
investments in CMOs can carry more or less risk than mortgage pass-
through securities and offer more defensive or aggressive investment
alternatives.
Stripped Mortgage-Backed Securities. Stripped mortgage securities
are created when the principal and interest payments on a pool of
mortgages in a CMO are separated or "stripped" to create two classes
of securities. In general, the interest-only, or "IO" class of
stripped securities, receives all interest and no principal
payments, while the principal-only, or "PO" class, is entitled to
receive all principal and no interest payments. The value of
stripped mortgage securities can be volatile and are sensitive to
prepayment rates on the mortgages underlying the stripped
securities.
Additional Risks. Investment by the Fund in mortgage-related U.S.
Government Securities, such as GNMA Certificates, and CMOs also
involves other risks. The yield on a pass-through security is
typically quoted based on the maturity of the underlying instruments
and the associated average life assumption. Actual prepayment
experience may cause the yield to differ from the assumed average
life yield. Accelerated prepayments adversely impact yields for
pass-throughs purchased at a premium; the opposite is true for pass-
throughs purchased at a discount. During periods of declining
interest rates, prepayment of mortgages underlying pass-through
certificates can be expected to increase. When the mortgage
obligations are prepaid, the Fund reinvests the prepaid amounts in
securities, the yields of which reflect interest rates prevailing at
that time. Therefore, the Fund's ability to maintain a portfolio of
high-yielding, mortgage-backed securities will be adversely affected
to the extent that prepayments of mortgages must be reinvested in
securities which have lower yields than the prepaid mortgages.
Moreover, prepayments of mortgages which underlie securities
purchased at a premium could result in capital losses.
OTHER ASSET-BACKED SECURITIES
The Fund may invest in asset-backed securities which are backed by
assets other than mortgages. These securities are collateralized by
shorter term loans such as automobile loans, computer leases, or
credit card receivables. The payments from the collateral are
passed through to the security holder. The collateral behind asset-
backed securities tends to have prepayment rates that do not vary
with interest rates. In addition, the short-term nature of the
loans reduces the impact of any change in prepayment level. These
securities are generally issued as the debt of a special purpose
entity organized solely for the purpose of owning such assets and
issuing such debt.
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<PAGE>
Credit Support. Asset-backed securities are backed by a diversified
pool of assets representing the debt of a number of different
parties. To lessen the effect of failures by the debtors to make
payments, such securities may contain elements of credit support.
Such credit support falls into two classes: liquidity protection
and protection against ultimate default by debtors on the underlying
assets. Liquidity protection refers to the provision of advances,
generally by the entity administering the pool of assets, to ensure
that scheduled payments on the underlying pool are made in a timely
fashion. Protection against ultimate default ensures repayment of
at least a portion of the debt in the pool. Such protection may be
provided through guarantees, insurance policies or letters of credit
obtained from third parties, through various means of structuring
the transaction or through a combination of such approaches.
Additional Risks. Issuers of asset-backed securities generally hold
no assets other than the assets underlying such securities and any
credit support provided. As a result, although payments on asset-
backed securities are obligations of the issuers, in the event of
defaults on underlying assets not covered by any credit support, the
issuers are unlikely to have sufficient assets to satisfy their
obligations on the related asset-backed securities. The loans
underlying these securities are subject to prepayments which can
decrease maturities and returns. Due to the possibility that
prepayments will alter the cash flow on asset-backed securities, it
is not possible to determine in advance the actual final maturity
date or average life. Faster prepayment will shorten the average
life and slower prepayments will lengthen it. However, it is
possible to determine what the range of that movement could be and
to calculate the effect that it will have on the price of the
security.
The values of these securities are ultimately dependent upon payment
of the underlying loans by individuals, and the holders, such as the
Fund, generally have no recourse against the originator of the
loans. The Fund as a holder of these securities may experience
losses or delays in payment if the original payments of principal
and interest are not made to the issuer with respect to the
underlying loans.
CORPORATE BONDS
The Fund may invest in investment grade corporate bonds. Usually,
no single corporate issuer will comprise more than 5% of the Fund's
total assets at the time of investment. The value of lower-rated
corporate debt securities is more sensitive to economic changes or
individual corporate developments than higher-rated investments.
The Fund will normally invest in corporate issues that are rated A
or better by Moody's or S & P or which are not rated by Moody's or S
& P but are deemed by Lincoln Capital to be of comparable quality.
Some of the debt securities in which the Fund may invest are known
as "Yankee Bonds." Yankee Bonds are U.S. dollar-denominated debt
securities issued by foreign entities. These bonds are not subject
to currency fluctuation risks. However, the issuing entities are
sometimes not subject to the same accounting principles as U.S.
corporations. The risks of investment in foreign issuers may
include expropriation or nationalization of assets, confiscatory
taxation, exchange controls and limitations on the use or transfer
of assets, and significant withholding taxes. Lincoln Capital will
take these factors into consideration when determining what Yankee
Bonds the Fund will purchase. Other than Yankee Bonds, the Fund
does not intend to invest in securities of foreign issuers.
USE OF DERIVATIVES
Inverse Floating Rate Obligations. The Fund may invest in inverse
floating rate obligations which are commonly referred to as "inverse
floaters." Inverse floaters have coupon rates that vary inversely
at a multiple of a designated floating rate, such as LIBOR (London
Inter-Bank Offered Rate). Any rise in the reference rate of an
inverse floater (due to an increase in prevailing interest rates)
causes a drop in the coupon rate, while any drop in the reference
rate of an inverse floater causes an increase in the coupon rate.
In addition, like most other fixed-income securities, the value of
inverse floaters will generally decrease as interest rates increase.
Inverse floaters may exhibit substantially greater price volatility
than fixed rate obligations having similar credit quality,
redemption provisions and maturity. Inverse floater CMOs exhibit
greater price volatility than the majority of mortgage pass-through
securities or other CMOs. In addition, some inverse floater CMOs
exhibit extreme sensitivity to changes in the rate of prepayments.
As a result, the yield to maturity of an inverse floater CMO is
sensitive not only to changes in interest rates but also to changes
in prepayment rates on the related underlying mortgage assets. The
Fund does not intend to invest in an inverse floater if, at the time
of such investment, more than 5% of the Fund's net assets would be
invested in inverse floaters.
Futures Contracts. The Fund may purchase and sell interest rate
futures contracts ("futures contracts"), which are described in the
Appendix to the Statement of Additional Information, for the purpose
of hedging its portfolio of fixed-income securities against the
adverse effects of anticipated movements in interest rates or as an
efficient means of adjusting its exposure to the bond market.
Futures contracts provide for the sale by one party and
7
<PAGE>
purchase by another party of a specified amount of a specific
security, at a specified future time and price. The terms of a
futures contract either call for actual delivery of the underlying
financial instrument, or the making of a cash payment or settlement.
In most cases the contracts are closed out before the delivery date
without delivery taking place.
The Fund may use futures contracts to adjust portfolio duration and
manage interest rate risk. Futures have durations which, in
general, are closely related to the duration of the securities which
underlie them. Buying futures increases the duration of the
portfolio while selling futures decreases the duration. The Fund
may be able to maintain a particular duration for a fraction of the
cash investment required to purchase the underlying security.
However, to the extent that the Fund sells futures that are not
"covered" by securities held in the portfolio or purchases futures,
the Fund is required to set aside cash or cash equivalents in a
segregated account equal, on a daily basis, to the Fund's obligation
on the futures contract. Such segregated funds will earn income but
will not otherwise be available for investment.
The Fund will not engage in a futures transaction if it would cause
the aggregate of initial margin deposits which do not represent bona
fide hedging to exceed 5% of the value of total assets. The
successful use of futures for hedging purposes depends on Lincoln
Capital's ability to forecast interest rate movements. Should
interest rates move in an unexpected manner, the Fund may not
achieve the anticipated benefits of the futures contracts and thus
may be in a worse position than if such strategies had not been
used. See the Statement of Additional Information for a more
detailed discussion of the risks involved in the use of futures.
DELAYED DELIVERY TRANSACTIONS
The Fund may purchase or sell securities on a when-issued basis.
When-issued securities are securities purchased at a certain price
even though the securities may not be delivered for up to 90 days.
The Fund will maintain, with its Custodian, a separate account with
a segregated portfolio of liquid, high-grade debt securities or cash
in an amount at least equal to these commitments. The Fund will
generally earn income on assets deposited in the segregated account.
No payment or delivery is made by the Fund in a when-issued
transaction until it receives payment or delivery from the other
party to the transaction. Although the Fund receives no income from
the above described securities prior to delivery, the market value
of such securities is still subject to change. As a consequence, it
is possible that the market price of the securities at the time of
delivery may be higher or lower than the purchase price. The Fund
does not intend to remain fully invested when such purchases are
outstanding. However, if the Fund were to remain substantially
fully invested at a time when delayed delivery purchases are
outstanding, the delayed delivery purchases could result in a form
of leveraging. When the Fund has sold a security on a delayed
delivery basis, the Fund does not participate in future gains or
losses with respect to the security. If the other party to a
delayed delivery transaction fails to deliver or pay for the
securities, the Fund could miss a favorable price or yield
opportunity or could suffer a loss. The Fund may dispose of or
renegotiate a delayed delivery transaction after it is entered into,
and may sell when-issued securities before they are delivered, which
may result in a capital gain or loss.
ILLIQUID SECURITIES
The Fund will not purchase or hold illiquid securities if more than
15% of the Fund's net assets would then be illiquid. If at any time
more than 15% of the Fund's net assets are illiquid, sales will be
made as soon as practicable to reduce the percentage of illiquid
assets to 15% or less.
RULE 144A SECURITIES
The Fund may invest in restricted securities, i.e., securities
which, if sold, would cause the Fund to be deemed an "underwriter"
under the Securities Act of 1933 (the "1933 Act") or which are
subject to contractual restrictions on resale. The restricted
securities which the Fund may purchase include securities which have
not been registered under the 1933 Act but are eligible for purchase
and sale pursuant to Rule 144A ("Rule 144A Securities"). This Rule
permits certain qualified institutional buyers, such as the Fund, to
trade in privately placed securities even though such securities are
not registered under the 1933 Act. As a matter of non-fundamental
policy, Lincoln Capital will only purchase Rule 144A Securities that
Lincoln Capital determines to be liquid. In making this
determination, Lincoln Capital will consider the frequency of trades
and quotes, the number of dealers and potential purchasers, dealer
undertakings to make a market, and the nature of the security and
the market place
8
<PAGE>
trades (for example, the time needed to dispose of the security, the
method of soliciting offers and the mechanics of transfer). The
liquidity of Rule 144A Securities will also be monitored by Lincoln
Capital and, if as a result of changed conditions, it is determined
that a Rule 144A Security is no longer liquid, the Fund's holding of
illiquid securities will be reviewed to determine what, if any,
action is appropriate in light of the policy limiting investments in
such securities to 15% of the Fund's total assets. There is no
limitation on the percentage of the Fund's assets that can be
invested in liquid Rule 144A Securities. Investing in Rule 144A
Securities could have the effect of increasing the amount of
investments in illiquid securities if qualified institutional buyers
are unwilling to purchase such securities.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements. A repurchase
agreement is an arrangement under which the Fund buys securities and
the seller (a bank or securities dealer that Lincoln Capital
believes to be financially sound) simultaneously agrees to
repurchase the security within a specified time at a higher price
that includes an amount representing interest on the purchase price.
In the event of a default by a seller of a repurchase agreement, the
fund could experience both delays in liquidating the underlying
securities and potential losses. The Fund will normally invest in
repurchase agreements maturing in less than seven days. Repurchase
agreements maturing in more than seven days are deemed to be
illiquid and thus subject to the Fund's 15% limitation on
investments in illiquid securities described above.
INVESTMENT CONCENTRATION
As to seventy-five percent of the Fund's total assets, the Fund will
not purchase the security of any issuer (other than cash items or
U.S. Government Securities) if such purchase would cause the Fund's
holdings of that issuer to amount to more than 5% of the Fund's
total assets at the time of purchase. The remaining 25% of the
Fund's total assets are not so limited which allows Lincoln Capital
to invest more than 5% of the Fund's total assets in a single
issuer. In the event that Lincoln Capital chooses to make such an
investment, it may expose the Fund to greater risk. No investment
in a single corporate issuer will be made if, at that time, such
issuer would represent more than 5% of the Fund's total assets. A
single issuer of asset-backed securities may at times represent up
to 10% of the Fund's total assets.
The Fund will not invest more than 25% of its total assets in any
one industry. Securities of the U.S. Government, its agencies and
instrumentalities are not deemed to be industries for this purpose.
BORROWING
The Fund may not borrow money to purchase securities, but the Fund
may borrow money for temporary or emergency purposes, and then only
from banks in an amount not exceeding 33-1/3% of the value of the
Fund's total assets (including amounts borrowed). The Fund will not
purchase additional securities when its borrowings, less amounts
receivable on sales of portfolio securities, exceed 5% of total
assets.
CERTAIN INVESTMENT RESTRICTIONS
In addition to other non-fundamental restrictions as described
herein and in the Statement of Additional Information, the Fund will
not (i) invest in securities that are rated below investment grade
or are deemed by Lincoln Capital to be the equivalent, if unrated;
(ii) enter into reverse repurchase agreements; (iii) engage in
options transactions; (iv) purchase foreign securities other than
Yankee Bonds or (v) use leverage except to the extent that certain
strategies, such as delayed-delivery or futures transactions, may be
considered leveraged transactions by the Securities and Exchange
Commission.
PORTFOLIO TRANSACTIONS
Lincoln Capital is responsible for the placement of portfolio
transactions. It is the Fund's policy to seek to place portfolio
transactions with brokers or dealers on the basis of best execution.
Generally, Lincoln Capital manages the Fund without regard to
restrictions on portfolio turnover, except those imposed on its
ability to engage in short-term trading by provisions of the federal
tax laws. The use of futures contracts and other derivative
instruments with relatively short maturities may tend to exaggerate
the portfolio turnover rate for the Fund. Trading in fixed-income
securities does not generally involve the payment of brokerage
commissions, but does involve indirect transaction costs. The use
of futures contracts may involve the payment of commissions to
futures commission merchants. The higher the rate of portfolio
turnover of the Fund, the higher all these transaction costs borne
by the Fund generally will be. The Fund's annual turnover rate may
exceed 100% due to changes in portfolio duration, yield curve
strategy, or sector decisions; however, it is expected that the
annual turnover rate will not exceed 300%. A portfolio turnover
rate of 300% would mean that the securities in the Fund's portfolio
were replaced three times in a year.
FUNDAMENTAL POLICIES MAY NOT BE CHANGED WITHOUT SHAREHOLDER APPROVAL.
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<PAGE>
The Fund's investment objective and the investment restrictions set
forth as fundamental in the Statement of Additional Information,
including those in respect to investment concentration and the 33-
1/3% limitation on borrowing as discussed above, are fundamental
policies and may not be changed without a shareholder vote. All
other investment policies of the Fund are not fundamental and may be
changed by the Board of Trustees. Any percentage restrictions
(except those with respect to borrowing and illiquid securities)
apply at the time of investment without regard to later increases or
decreases in the values of securities or total or net assets.
MANAGEMENT AND ORGANIZATION OF THE FUND
The Fund is a series of Ariel Growth Fund (doing business as Ariel
Investment Trust) (the "Trust"), an open-end diversified management
investment company organized as a Massachusetts business trust on
August 1, 1986. The other series currently offered, which are sold
under a separate prospectus, are Ariel Growth Fund and Ariel
Appreciation Fund.
Shares of the Fund are currently issued in two classes, Class A and
Class B. Class A shares require an initial minimum investment of
$1,000,000 and are sold primarily to institutional investors. The
Board of Trustees may offer additional classes in the future and may
at any time discontinue the offering of any class of shares. Each
share of the Fund represents an interest in the assets of the Fund
and has identical voting, dividend, liquidation and other rights and
the same terms and conditions as any other shares except that (i)
the expenses that are specific to one class, such as distribution,
shareholder communications, and transfer agency expenses, are borne
solely by such class and (ii) each class of shares votes separately
with respect to matters in which the interests of one class differ
from the interests of the other class or on any other matters for
which separate class voting is appropriate under applicable law.
Because Class B shares incur distribution services fees and higher
transfer agency fees, such class will have a higher expense ratio
and will have correspondingly lower returns than Class A shares.
You may call 1-800-29-ARIEL (1-800-292-7435) for more information
regarding the Class A shares of the Fund.
The Trust is not required to hold annual shareholder meetings.
Shareholder meetings are held when they are required under the
Investment Company Act of 1940 or otherwise called for special
purposes. Special meetings may be called upon the request of
shareholders holding at least 10% of the Fund's outstanding shares.
As a shareholder, you receive one vote for each share of the Fund
you own.
THE BOARD OF TRUSTEES SUPERVISES THE FUND'S ACTIVITIES AND REVIEWS THE TRUST'S
CONTRACTS WITH COMPANIES THAT PROVIDE SERVICES TO THE FUND.
BOARD OF TRUSTEES
MARIO L. BAEZA, ESQ.
President, Wasserstein Perella International Limited; Managing
Director and Chief Executive Officer, Americas Division, Wasserstein
Perella & Co., Inc.
WILLIAM C. DIETRICH, CPA
Chief Financial Officer, Home Shopping Alternatives, Inc.
ROYCE N. FLIPPIN, JR., MBA
President, Flippin Associates; formerly Director of Program
Advancement, Massachusetts Institute of Technology
JOHN G. GUFFEY, JR.
Chair, Calvert Social Investment Foundation; Treasurer and Director,
Silby, Guffey and Co., Inc.
MELLODY L. HOBSON
Senior Vice President, Director of Marketing, Ariel Capital
Management, Inc.
CHRISTOPHER G. KENNEDY, MBA
Executive Vice President and Director, Merchandise Mart Properties,
Inc.
ERIC T. McKISSACK, CFA, MBA
Vice Chairman and Co-Chief Investment Officer, Ariel Capital
Management, Inc.
BERT N. MITCHELL, MBA, CPA
Founder, Chairman and Chief Executive Officer, Mitchell/Titus & Co.
10
<PAGE>
ARIEL CAPITAL MANAGEMENT, INC. SERVES AS THE ADVISER TO THE FUND.
Subject to the overall supervision of the Board of Trustees and
pursuant to the Management Agreement, Ariel Capital Management, Inc.
(the "Adviser") is responsible for performing or overseeing the
Fund's day-to-day management and administration, providing the Fund
with office space, executive and other personnel and paying the
salaries and fees of all Trustees who are affiliated persons. The
Fund pays all other operating expenses. The Adviser is paid a fee
for its services to the Fund at the annual rate of 0.45% of the
Fund's average daily net assets up to $1 billion; 0.425% for the
next $1 billion and 0.40% for amounts greater than $2 billion. The
Adviser also acts as investment adviser and administrator to Ariel
Growth Fund and Ariel Appreciation Fund, the other two series of the
Trust.
The Adviser is a privately held investment management firm,
controlled by John W. Rogers, Jr. and owned by its employees. The
Adviser is located at 307 N. Michigan Avenue, Suite 500, Chicago,
Illinois 60601.
ARIEL DISTRIBUTORS, INC. IS THE PRINCIPAL UNDERWRITER TO THE FUND
Ariel Distributors, Inc. serves as the principal underwriter. Under
the terms of its Underwriting Agreement, Ariel Distributors markets
and distributes the shares of the Trust and is responsible for
payment of commissions and service fees to broker-dealers, banks,
and financial services firms, preparation of advertising and sales
literature, and printing and mailing of prospectuses to prospective
investors. Pursuant to the Underwriting Agreement, Ariel
Distributors receives a fee at the annual rate of 0.25% of the
average daily net assets of the Class B shares.
SUB-ADVISER
Lincoln Capital Management Company ("Lincoln Capital"), 200 South
Wacker Drive, Chicago, IL 60606, acts as Sub-Adviser of the Fund.
Lincoln Capital manages the day-to-day investment operations for the
Fund. The Fund pays no fees directly to Lincoln Capital. Lincoln
Capital receives fees from the Adviser at the annual rate of 0.30%
of the average daily net assets up to $50 million; 0.20% for the
next $50 million; 0.15% for the next $150 million and 0.10% for
amounts greater than $250 million.
The Managing Directors and controlling shareholders of Lincoln
Capital and their titles, are as follows:
John W. Croghan, Chairman
J. Parker Hall, III, President
Kenneth R. Meyer, Executive Vice President
Timothy H. Ubben, Executive Vice President
Ray B. Zemon, Executive Vice President
PORTFOLIO MANAGEMENT
The Fund's duration decisions are made by a strategy committee
comprising five senior officers of Lincoln Capital: John W. Croghan,
J. Parker Hall III, Richard W. Knee, Kenneth R. Meyer, and Ray B.
Zemon. The five members of the strategy committee have been with
Lincoln Capital for over 10 years and average 26 years of investment
experience. Investment selections for the Fund are made by members
of the fixed income group: Terrence J. Glomski, Lorraine L. Holland,
Andrew A. Johnson, Brian D. Johnson, Richard W. Knee, Kenneth R.
Meyer, Thomas K. Parrent, and Ray B. Zemon. The eight members of
the fixed income group average 16 years of investment experience.
PERFORMANCE HISTORY OF SUB-ADVISER
While Lincoln Capital has no operational history with the newly
organized Fund, set forth below are certain performance data,
provided by Lincoln Capital, relating to annual average investment
results of a composite of all client accounts whose portfolios were
managed by Lincoln Capital over a period of thirteen years, since
Lincoln Capital began operations. Also set forth below, for
comparison, are the performances of widely recognized indices of
market activity based upon the aggregate performance of selected
unmanaged portfolios of publicly traded fixed-income securities.
The advisory accounts ("Advisory Accounts") had the same investment
objective as the Fund and were managed using substantially similar,
though not necessarily identical investment strategies and
techniques as those contemplated by the Fund. Because of the
similarities in investment strategies and techniques, Lincoln
Capital believes that the Advisory Accounts are sufficiently
comparable to the Fund to make the performance data listed below
relevant to investors in the Fund.
The results presented are not intended to predict or suggest that
returns that will be experienced by the Fund or the return an
investor will achieve by investing in the Fund. The Fund is subject
to different costs, including investment, management and
registration fees that were not incurred by the Advisory Accounts.
Different methods of determining the preference from those described
in the footnote to the chart below may result in
11
<PAGE>
different performance figures. Investors should not rely on the
following data as an indication of future performance of Lincoln
Capital or of the Fund.
<TABLE>
<CAPTION> Salomon Brothers
Lincoln Capital's Broad Investment-
Number of Average Account Active Fixed Lehman Brothers Grade Bond
Time Period Accounts Size ($ millions) Composite(%)(1) Aggregate Index(%)(2) Index(%)(2)
- ------------- ----------- ----------------- ---------------------- --------------------- -----------------
<S> <C> <C> <C> <C> <C>
1982 13 45 37.20 32.62 31.79
1983 17 49 7.62 8.36 8.21
1984 20 61 14.33 15.15 14.99
1985 16 92 24.92 22.10 22.26
1986 20 102 17.49 15.26 15.43
1987 20 111 3.26 2.76 2.60
1988 24 109 7.41 7.89 7.99
1989 27 99 14.71 14.53 14.43
1990 29 123 8.47 8.96 9.09
1991 29 168 15.81 16.00 15.98
1992 33 165 7.83 7.40 7.58
1993 33 163 11.22 9.75 9.92
1994 31 143 -2.13 -2.92 -2.85
</TABLE>
(1) These figures are dollar-weighted, average annual investment results
expressed as a percentage return. Returns shown for Lincoln Capital
are after deduction of fees. The accounts represented in the
composite are all accounts managed in a manner that is substantially
similar to the investment management of the Fund and are most of
Lincoln Capital's active accounts.
(2) The Lehman Brothers Aggregate Index and the Salomon Brothers Broad
Investment-Grade Bond Index are unmanaged indices of fixed-income
securities which are composed of securities that are substantially
similar to the types of securities in which the Advisory Accounts
and the Fund invest.
THE TRANSFER AGENT AND CUSTODIAN.
Investors Fiduciary Trust Company ("IFTC") is the Fund's transfer
agent, custodian and dividend disbursing and shareholder servicing
agent.
DISTRIBUTION PLAN
The Class B shares of the Fund bear some of the cost of selling
their shares under a Distribution Plan adopted pursuant to Rule
12b-1 under the 1940 Act (the "Plan"). The Plan authorizes payments
by the Class B shares to the Distributor of up to 0.30% annually of
the average daily net asset value of the Class B shares, but
payments under the Plan are currently limited by the Board of
Trustees of 0.25% annually of such average daily net asset value.
The Plan may be terminated at any time by vote of the Trustees who
are not interested persons of the Adviser or the Fund and have no
direct or indirect financial interest in the Plan or by a vote of a
majority of the outstanding voting Class B shares.
Dealers having sales agreements with the Distributor may receive
from the Distributor up to 0.25% of the annual average daily net
assets of Class B shares held in their customers' accounts as
ongoing service and account maintenance fees. The Adviser may make
expense reimbursements for special training and education of a
dealer's registered representatives. Eligible marketing and
distribution expenses may be paid pursuant to
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<PAGE>
the Plan. Payments pursuant to the Plan are included in the
operating expenses of the Class B shares.
HOW TO BUY SHARES
INITIAL PURCHASES
The minimum initial investment in Class B shares is $1,000, or $250
for retirement accounts, unless you participate in an automatic
investment plan, in which case there is a $50 minimum. A completed
and signed application is required for each new account you open,
regardless of the method you choose for making your initial
investment. An account application accompanies this prospectus.
Additional forms may be required from corporations, associations and
certain financial institutions. If you have any questions or need
additional applications, call 1-800-29-ARIEL (1-800-292-7435).
BY MAIL
To purchase shares by mail, please make your check payable to ARIEL
MUTUAL FUNDS and mail it with an application, indicating which of
the Ariel Mutual Funds you would like to buy, to:
Ariel Mutual Funds
P.O. Box 419121
Kansas City, Missouri 64141-6121
BY WIRE
You may also purchase shares by bank wire. Just call us at 1-800-29-
ARIEL (1-800-292-7435) and we will ask you your name, address,
social security or tax identification number, the amount of your
investment, the name of the Ariel Mutual Fund in which you wish to
invest as well as the name and address of the financial institution
that will be wiring your investment to the Fund. We will
immediately give you an account number and you may then have your
financial institution wire federal funds to the Custodian with the
following instructions:
Ariel Mutual Funds
c/o Investors Fiduciary Trust Company
127 West 10th Street
Kansas City, MO 64105
ABA #101003621
Account No. 7528205
The name of the Ariel Mutual Fund(s) and the class in
which you wish to invest
Your shareholder account number
The name in which your account is registered
We accept wires at no charge. However, your bank may charge you for
this service.
SUBSEQUENT PURCHASES
You may make subsequent investments in the minimum amount of $50.
To invest directly by bank wire, follow the instructions as shown
above for initial investments, except that there is no need to call
us first. Just contact your financial institution.
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To add to your account by mail, please send your check or money
order payable to Ariel Mutual Funds with the detachable stub from
the bottom of your most recent account statement, or drop us a note
that includes the registered account name, account number, the name
of the Fund and amount you wish to invest. Please remember that
subsequent purchases should be sent to:
Ariel Mutual Funds
P.O. Box 419641
Kansas City, Missouri 64141-6641
AUTOMATIC INVESTING THROUGH YOUR BANK
You may arrange for automatic investing whereby the Custodian will
be authorized to initiate a debit to your bank account of a specific
amount (minimum $50) to be used to purchase shares of the Fund on a
monthly or quarterly basis. After each automatic investment, you
will receive a transaction confirmation and the debit should be
reflected on your next bank statement. You may terminate the plan at
any time, and we may modify or terminate the plan at any time. If,
however, you terminate an automatic investment plan with an account
balance of less than $1,000, we reserve the right to close your
account. See "Redeeming Shares - Other Information About
Redemptions" on page ____. If you desire to utilize this automatic
investment option, please indicate your intention to do so on the
application included with this prospectus.
PURCHASING THROUGH RETIREMENT PLANS
You may also purchase shares of the Fund through one of several tax-
deferred retirement plans. For more information, see "Tax Saving
Retirement Plans" on page ____.
OTHER INFORMATION ABOUT PURCHASING SHARES
Although there is no sales charge imposed by the Fund when you
purchase shares, certain dealers or financial institutions which
sell shares of Ariel Mutual Funds may impose charges for their
services, and such charges may constitute a significant portion of a
smaller account.
The Fund does not issue share certificates unless you specifically
request one each time you make a purchase. Certificates are not
issued for fractional shares or to shareholders who have elected a
systematic withdrawal plan. Also, shares represented by certificates
may not be redeemed by telephone. See "Redeeming Shares" for
information on how to redeem your shares.
NET ASSET VALUE
Net asset value per share ("NAV") refers to the worth of one share.
NAV is computed by adding the value of all portfolio holdings, plus
other assets, deducting liabilities and then dividing the result by
the number of shares outstanding. The Fund's NAV will vary daily
based on the market values of its investments.
Fixed-income securities, including those to be purchased under firm
commitment agreements (other than obligations having a maturity of
60 days or less), are normally
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<PAGE>
valued on the basis of quotes obtained from brokers and dealers or
pricing services. Short-term investments having a maturity of 60
days or less are valued at amortized cost, unless the Board of
Trustees determines that such method is not appropriate under
specific circumstances. Assets for which there are no quotations
available will be valued at fair value as determined by the Board of
Trustees.
The NAV is calculated at the close of the regular session of the New
York Stock Exchange (normally 3:00 p.m. Central time). The Fund is
closed for business any day the New York Stock Exchange is closed
and on the following holidays: Columbus Day, Martin Luther King's
Birthday and Veterans Day. All purchases of Fund shares will be
confirmed and credited to your account in full and fractional
shares.
WHEN YOUR ACCOUNT WILL BE CREDITED
BEFORE YOU BUY SHARES, PLEASE READ THE FOLLOWING INFORMATION TO MAKE SURE YOUR
INVESTMENT IS ACCEPTED AND CREDITED PROPERLY.
Your purchase will be processed at the next offering price based on
the net asset value next calculated after your order is received and
accepted. Such calculation is made at the close of regular session
trading on the New York Stock Exchange, which is usually 3:00 p.m.
Central time. All your purchases must be made in U.S. dollars and
checks must be drawn on U.S. banks. No cash will be accepted. The
Fund reserves the right to suspend the offering of shares for a
period of time or to reject any specific purchase order. If your
check does not clear, your purchase will be cancelled and you will
be charged a $10 fee plus costs incurred by the Fund. When you
purchase by check, the Fund can hold payment on redemptions until
they are reasonably satisfied that the investment is collected
(normally 15 calendar days). To avoid this collection period, you
can wire federal funds from your bank, which may charge you a fee.
Certain financial institutions or broker-dealers which have entered
into a sales agreement with the Distributor may enter confirmed
purchase orders on behalf of customers by phone, with payment to
follow within a number of days of the order as specified by the
program. If payment is not received in the time specified, the
financial institution could be liable for resulting fees or losses.
State securities laws may require such firms to be licensed as
securities dealers in order to sell shares of the Fund.
EXCHANGING SHARES
YOU MAY EXCHANGE SHARES OF THE FUND FOR SHARES OF THE OTHER ARIEL MUTUAL FUNDS
AND FOR SHARES OF CERTAIN MONEY MARKET FUNDS.
You may exchange your shares in the Fund for Class A shares of the
Fund or for shares of the other Ariel Mutual Funds at no additional
charge as long as your total investment in each class or Fund meets
the minimum required for that class or fund.
You may also exchange your shares in any Ariel Mutual Fund for
shares of Cash Resource Money Market Fund, Cash Resource U.S.
Government Money Market Fund or Cash Resource Tax-Exempt Money
Market Fund at no additional charge as long as your total investment
meets any minimum required. This exchange privilege is a convenient
way to buy shares in a money market fund in order to respond to
changes in your goals or in market conditions. These money market
funds are no-load funds managed by Cambridge Investment Advisors,
Inc.
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<PAGE>
Before exchanging your shares into shares of the other Ariel Mutual
Funds or shares of Cash Resource Money Market Fund, Cash Resource
U.S. Government Money Market Fund or Cash Resource Tax-Exempt Money
Market Fund, read the applicable prospectus. To obtain a prospectus
for any of these funds, just call 1-800-29-ARIEL (1-800-292-7435).
BY MAIL
To exchange your shares of the Fund into shares of one of the other
Ariel Mutual Funds, just send a written request to:
Ariel Mutual Funds
P.O. Box 419121
Kansas City, Missouri 64141-6121
This request should include your name, account number, the name of
the Fund you currently own, the name of the Ariel Mutual Fund you
wish to exchange into and the dollar amount or number of shares you
wish to exchange. Please remember that you cannot place any
conditions on your request.
To exchange your shares of the Fund into shares of Cash Resource
Money Market Fund, Cash Resource U.S. Government Money Market Fund
or Cash Resource Tax-Exempt Money Market Fund, complete and sign an
application and mail it to the address set forth above.
BY TELEPHONE
Unless you have elected not to have telephone transaction privileges
by checking the appropriate box in your application, you may also
make exchanges by calling 1-800-29-ARIEL (1-800-292-7435). Exchanges
made over the phone may be made by any person, not just the
shareholder of record. You may only exchange shares by telephone if
the shares you are exchanging are not in certificate form. Certain
other limitations and conditions apply to all telephone
transactions. Before using your telephone privilege, please read
"Telephone Transactions" on page ____.
OTHER INFORMATION ABOUT EXCHANGING SHARES
All accounts opened as a result of using the exchange privilege must
be registered in the same name and taxpayer identification number as
your existing account with the Ariel Mutual Funds.
Because of the time needed to transfer money between funds, you may
not exchange into and out of the same fund on the same or successive
days; there must be at least one day between exchanges. You may
exchange your shares of the Fund only for shares that have been
registered for sale in your state.
Remember that each exchange represents the sale of shares of one
fund and the purchase of shares of another. Therefore, you could
realize a taxable gain or loss on the transaction.
The Fund reserves the right to terminate or modify the exchange
privilege with at least 60 days' written notice. If your account is
subject to backup withholding, you may not use the exchange
privilege.
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Because excessive trading can hurt the Fund's performance and
shareholders, the Fund also reserves the right to temporarily or
permanently terminate, with or without advance notice, the exchange
privilege of any investor who makes excessive use of the exchange
privilege (e.g. more than five exchanges per calendar year). Your
exchanges may be restricted or refused if the Fund receives or
anticipates simultaneous orders affecting significant portions of
the Fund's assets. In particular, a pattern of exchanges with a
"market timer" strategy may be disruptive to the Fund.
If you have any share certificates, you must include them with your
exchange request. A signature guarantee is not required except in
cases where shares are also redeemed at the same time for cash in an
amount exceeding $25,000. For certificate delivery instructions see
"Redeeming Shares--By Mail" on page ____ and for signature guarantee
instructions see "Signature Guarantees" on page ____.
TELEPHONE TRANSACTIONS
If you have telephone transaction privileges, you may purchase,
redeem, or exchange shares or wire funds by telephone as described
in this prospectus. You automatically have telephone privileges
unless you elect otherwise. These privileges, however, may not be
available through certain dealers and financial institutions. The
Fund, the Transfer Agent and their affiliates are not liable for
acting in good faith on telephone instructions relating to your
account, provided they follow reasonable procedures to determine
that the telephone instructions are genuine. Such procedures will
include a request for a personal identification number and tape
recording of the instructions. You should verify the accuracy of
telephone transactions immediately upon receipt of your confirmation
statement. Due to the need for signature guarantees, telephone
redemptions in excess of $25,000 will not be accepted.
During unusual market conditions, we may have difficulty in
accepting telephone requests, in which case you should mail your
request.
The Fund reserves the right to terminate, suspend or modify
telephone transaction privileges.
SIGNATURE GUARANTEES
WE MAY REQUIRE SIGNATURE GUARANTEES.
For our mutual protection, we may require a signature guarantee on
certain transaction requests. A signature guarantee verifies the
authenticity of your signature, and may be obtained from any bank,
trust company, savings and loan association, credit union, broker-
dealer firm or member of a domestic stock exchange. A signature
guarantee cannot be provided by a notary public. If redemption
proceeds are $25,000 or less and are to be paid or credited to an
individual shareholder of record at the address of record, a
signature guarantee is not required (unless there has been an
address change within 60 days). All other redemption requests must
have signatures guaranteed.
SPECIAL SERVICES AND CHARGES
The Fund pays for shareholder services but not for special services
that are required by a few shareholders, such as a request for a
historical transcript of an account. You may be required to pay a
research fee for these special services.
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<PAGE>
If you are purchasing shares of the Fund through a program of
services offered by a broker-dealer or financial institution, you
should read the program materials in conjunction with this
prospectus. Certain features may be modified in these programs, and
administrative charges may be imposed by the broker-dealer or
financial institution for the services rendered.
TAX-SAVING RETIREMENT PLANS
CONTACT THE ADVISER FOR COMPLETE INFORMATION KITS DISCUSSING THE PLANS AND THEIR
BENEFITS, PROVISIONS AND FEES.
You may establish your new account under one of several tax-deferred
plans. These plans let you invest for retirement and shelter your
investment income from current taxes.
. Individual Retirement Accounts (IRAs): available to anyone who has
earned income. You may also be able to make investments in the name
of your spouse, if your spouse has no earned income.
. Qualified Profit-Sharing and Money-Purchase Plans (including
401(k) Plans): available to self-employed people and their partners,
or to corporations and their employees.
. Simplified Employee Pension Plan (SEP-IRA): available to self-
employed people and their partners, or to corporations. Salary
reduction pension plans (SAR-SEP IRAs) are also available to
employers with 25 or fewer employees.
. 403(b)(7) Custodial Accounts: available to employees of most non-
profit organizations and public schools and universities.
REDEEMING SHARES
BY MAIL
You may redeem shares from your account by sending a letter of
instruction, your name, the name of the Fund and account number from
which shares are redeemed, the number of shares or dollar amount and
where you want your check to be sent. Simply send your written
request to redeem your shares to our Transfer Agent as follows:
Ariel Mutual Funds
P.O. Box 419121
Kansas City, Missouri 64141-6121
Certain shareholders, such as corporations, trusts and estates, may
be required to submit additional documents. The letter of
instruction must be signed by all required authorized signers. If
you want your money to be wired to a bank not previously authorized
or if you would like funds sent to a different address or another
person, your letter must be signature guaranteed. Please remember
that you cannot place any conditions on your request. If any share
certificates were issued, they must be returned duly endorsed or
accompanied by a separate stock assignment. See "Signature
Guarantees" on page ______.
BY TELEPHONE
Unless you have elected not to have telephone transaction privileges
by checking the box in your application, you may also redeem shares
by calling 1-800-29-ARIEL (1-800-292-7435) and receive a check by
mail. Remember, however, that the check can only be
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<PAGE>
issued for up to $25,000, and only to the registered owner, and may
only be sent to the address of record, which must have been on file
for at least 60 days. Shares represented by certificates may not be
redeemed by telephone.
BY WIRE
Payment for your shares may also be made to you by wire if you have
selected this option in your application and have named a commercial
bank or savings institution with a routing number to which we can
send your money.
Once you have applied for wire redemption privileges, you or any
other person can make such a request by calling 1-800-29-ARIEL (1-
800-292-7435). You may also use your wire privilege by mailing a
signed request that includes the name of the Fund, account number
and amount you wish to have wired, by writing to:
Ariel Mutual Funds
P.O. Box 419121
Kansas City, Missouri 64141-6121
The proceeds will be sent only to the financial institution you have
designated on your application. You may terminate the wire
redemption privilege by notifying us in writing. A charge of $10 is
imposed on wire redemptions. See the restrictions under "Telephone
Transactions" on page ___, as they also apply to wire redemptions.
SYSTEMATIC CHECK REDEMPTIONS
If you maintain an account with a balance of $10,000 or more, you
may have regular monthly or quarterly redemption checks for a fixed
amount sent to you simply by sending a letter with all the
information, including the Fund name, your account number, the
dollar amount ($100 minimum) and when you want the checks mailed to
your address on the account. If you would like checks regularly
mailed to another person or place, the signature on your letter must
be guaranteed. See "Signature Guarantees" on page ____.
OTHER INFORMATION ABOUT REDEMPTIONS
TO ENSURE ACCEPTANCE OF YOUR REDEMPTION REQUEST, PLEASE FOLLOW THE PROCEDURES
DESCRIBED HERE AND BELOW.
Other than the $10 fee imposed on wire redemptions, there is no
charge for redeeming your shares. If, however, you redeem shares
through certain dealers not having selling agreements with respect
to the Fund your broker may charge a fee when you redeem your
shares.
Once your shares are redeemed, the proceeds will normally be sent to
you on the next business day. However, if making immediate payment
could adversely affect the Fund, it may take up to seven calendar
days. When the New York Stock Exchange is closed (or when trading is
restricted) for any reason other than its customary weekend or
holiday closing, or under any emergency circumstances as determined
by the Securities and Exchange Commission, redemptions may be
suspended or payment dates postponed.
You may redeem all or a portion of your shares on any business day
during which the New York Stock Exchange is open for business except
the following holidays: Columbus Day, Martin Luther King's Birthday
and Veterans' Day. Your shares will be redeemed at the net asset
value next calculated after your redemption request is received by
the
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<PAGE>
Transfer Agent in proper form. Redemptions made after the New York
Stock Exchange has closed will be made at the next day's net asset
value. Remember that, if you redeem shortly after purchasing shares,
the Fund may hold payment on the redemption of your shares until it
is reasonably satisfied that payments made by check have been
collected (normally up to 15 calendar days after investment).
MINIMUM ACCOUNT BALANCE IS $1,000.
Please maintain a balance in your Class B account of at least
$1,000. If, due to redemptions, the value of your account in the
Fund falls below $1,000, or you fail to invest at least $1,000, the
account may be closed and the proceeds mailed to you at your address
of record. You will be given 30 days' notice that your account will
be closed unless you make an additional investment to increase your
account balance to the $1,000 minimum.
REDEMPTIONS IN KIND
If conditions arise that would make it undesirable for the Fund to
pay for all redemptions in cash, the Fund may authorize payment to
be made in marketable portfolio securities. However, the Fund has
obligated itself under the Investment Company Act of 1940 to redeem
for cash all shares of the Fund presented for redemption by any one
shareholder in any 90-day period up to the lesser of $250,000 or 1%
of the Fund's net assets. Securities delivered in payment of
redemptions would be valued at the same value assigned to them in
computing the Fund's net asset value per share. Shareholders
receiving such securities may incur brokerage costs or be subject to
dealer markdowns when these securities are sold.
DIVIDENDS, CAPITAL GAINS AND TAXES
EACH YEAR, THE FUND DISTRIBUTES SUBSTANTIALLY ALL OF ITS NET INVESTMENT INCOME
AND CAPITAL GAINS TO SHAREHOLDERS.
The Fund intends to qualify as a regulated investment company under
Subchapter M of the Internal Revenue Code, as amended (the "Code").
As such, the Fund generally will not pay Federal income tax on the
income and gains it pays as dividends to its shareholders. In order
to avoid a 4% Federal excise tax, the Fund intends to distribute
each year substantially all of its net income and gains.
Dividends from net investment income are declared and paid
quarterly. Net investment income consists of the interest income,
net short-term capital gains, if any, and dividends declared and
received on investments, less expenses. Distributions of net short-
term capital gains (treated as dividends for tax purposes) and net
long-term capital gains, if any, are normally declared and paid by
the Fund once a year.
During its initial operations, the Fund may be a personal holding
company ("PHC") under the Code due to substantial ownership of the
Fund's shares by a few shareholders. In that event, the Fund
intends to distribute all its PHC income so that there is no PHC tax
imposed on the Fund.
DIVIDEND AND DISTRIBUTION PAYMENT OPTIONS
Dividends and any distributions from the Fund are automatically
reinvested in the Fund at net asset value, unless you elect to have
the dividends of $10 or more paid in cash. New shares will be
purchased at net asset value on the reinvestment date, which is
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<PAGE>
generally up to three days prior to the payment date. You must
notify the Fund in writing prior to the record date to change your
payment options. If you elect to have dividends and/or distributions
paid in cash, and the U.S. Postal Service cannot deliver the check,
or if it remains uncashed for six months, it, as well as future
dividends and distributions, will be reinvested in additional
shares.
TAXES ON DISTRIBUTIONS
Distributions are subject to federal income tax, and may also be
subject to state or local taxes. Distributions are taxable when
they are paid, whether they are received in cash, or reinvested.
However, distributions declared in December and paid in January are
taxable as if they were paid on December 31. For federal tax
purposes, the Fund's income and short-term capital gain
distributions are taxed as dividends; long-term capital gain
distributions are taxed as long-term capital gains. Some dividends
may be exempt from state or local income tax as income derived from
U.S. Government Securities. You should consult your tax adviser on
the taxability of your distributions.
"BUYING A DIVIDEND"
At the time of purchase, the share price of the Fund may reflect
undistributed income, capital gains or unrealized appreciation of
securities. Any income or capital gains from these amounts which are
later distributed to you are fully taxable. On the record date of a
distribution, the Fund's share value is reduced by the amount of the
distribution. If you buy shares just before the record date ("buying
a dividend") you will pay the full price for the shares and then
receive a portion of this price back as a taxable distribution.
YOU MAY REALIZE A CAPITAL GAIN OR LOSS WHEN YOU SELL OR EXCHANGE SHARES.
If you sell or exchange your shares you will have a short or long-
term capital gain or loss, depending on how long you owned the
shares which were sold. In January, you will be sent a form
indicating the proceeds from all sales, including exchanges. You
should keep your annual year-end account statements to determine the
cost (basis) of the shares to report on your tax returns.
If we do not have your correct Social Security or Corporate Tax
Identification Number ("TIN") and a signed certified application or
Form W-9, Federal law requires the Fund to withhold 31% of your
dividends and certain redemptions. In addition, you may be subject
to a fine. You will also be prohibited from opening another account
by exchange. If this TIN information is not received within 60 days
after your account is established, your account may be redeemed at
the current NAV on the date of redemption. The Fund reserves the
right to reject any new account or any purchase order for failure to
supply a certified TIN.
CERTAIN SHAREHOLDERS OF THE FUND
The following table sets forth, as of _________, 1995, the name and
holdings of each person known by the Fund to be a record owner of
more than 5% of its outstanding shares. As of such date, there were
____ Class A shares, and no Class B shares, outstanding.
NAME AND ADDRESS OWNED % OF OUTSTANDING
- ---------------- ----- CLASS A SHARES
--------------
Ariel Capital Management, Inc. ____ 100%
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307 N. Michigan Avenue
Chicago, IL 60601
TOTAL RETURN, YIELD AND OTHER PERFORMANCE INFORMATION
THE FUND MAY ADVERTISE TOTAL RETURN AND YIELD, WHICH ARE BASED ON HISTORICAL
RESULTS AND ARE NOT INTENDED TO INDICATE FUTURE PERFORMANCE.
A total return is a change in the value of an investment during the
stated period, assuming all dividends and capital gain distributions
are reinvested. A cumulative total return reflects performance over
a stated period of time. An average annual total return is the
hypothetical annual compounded return that would have produced the
same cumulative total return if the performance had been constant
over the entire period. Because average annual returns tend to
smooth out variations in the returns, you should recognize that they
are not the same as actual year-by-year results. In addition to
advertising average annual returns for the required standard
periods, such returns may be quoted for other periods, including
periods of less than one year.
Quotations of yield for the Fund will be based on the investment
income per share (as defined by the Securities and Exchange
Commission) during a particular 30-day (or one-month) period
(including dividends and interest), less expenses accrued during the
period ("net investment income"), and will be computed by dividing
net investment income by the maximum public offering price per share
on the last day of the period.
The Fund also may provide current distribution information to its
shareholders in shareholder reports or other shareholder
communications or in certain types of sales literature provided to
prospective investors. Current distribution information for the
Fund will be based on distributions for a specified period (i.e.,
total dividends from net investment income), divided by the net
asset value per share on the last day of the period and annualized.
The rate of current distributions does not reflect deductions for
unrealized losses from transactions in derivative instruments such
as futures, which may reduce total return. Current distribution
rates differ from standardized yield rates in that they represent
what the Fund has declared and paid to shareholders as of the end of
a specified period rather than the Fund's actual net investment
income for that period.
Performance information for the Fund may also be compared to various
unmanaged indices, such as the Lehman Brothers Aggregate Bond Index,
the Lehman Brothers Government/Corporate Index, the Salomon Brothers
Broad Investment-Grade Bond Index, indices prepared by Lipper
Analytical Services, and other entities or organizations which track
the performance of investment companies or investment advisers.
Unmanaged indices (i.e., other than Lipper) generally do not reflect
deductions for administrative and management costs and expenses.
Any performance information should be considered in light of the
Fund's investment objectives and policies, characteristics and
quality of the portfolio and the market conditions during the time
period indicated, and should not be considered to be representative
of what may be achieved in the future. For a description of the
methods used to determine yield and total return for the Fund, see
the Statement of Additional Information.
From time to time, the Fund or its affiliates may provide
information including, but not limited to, general economic
conditions, comparative performance data and rankings with respect
to comparable investments for the same period and for unmanaged
market indices described in the Statement of Additional Information.
22
<PAGE>
ADVISER,
SERVICES ADMINISTRATOR
Ariel Capital Management, Inc.
307 North Michigan Avenue
Chicago, Illinois 60601
1-800-29-ARIEL (1-800-292-7435) fax (312) 726-7473
SUB-ADVISER
Lincoln Capital Management Company
200 South Wacker Drive
Chicago, IL 60606
PRINCIPAL UNDERWRITER
Ariel Distributors, Inc.
307 North Michigan Avenue
Chicago, Illinois 60601
INDEPENDENT AUDITORS
Ernst & Young LLP
233 South Wacker Drive
Chicago, Illinois 60606
TRANSFER AGENT AND CUSTODIAN
Investors Fiduciary Trust Company
127 West 10th Street
Kansas City, Missouri 64105
LEGAL COUNSEL
D'Ancona & Pflaum
30 North LaSalle Street
Chicago, Illinois 60602
BOARD OF TRUSTEES
Mario L. Baeza, Esq.
President, Wasserstein Perella International; Managing Director and Chief
Executive Officer, Americas Division, Wasserstein Perella & Co., Inc.
William C. Dietrich, CPA
Chief Financial Officer, Home Shopping Alternatives, Inc.
Royce N. Flippin, Jr., MBA
President, Flippin Associates; formerly Director of Program Advancement,
Massachusetts Institute of Technology
John G. Guffey, Jr.
Chair, Calvert Social Investment Foundation
Treasurer and Director, Silby, Guffey and Co., Inc.
Mellody L. Hobson
Senior Vice President, Director of Marketing, Ariel Capital Management, Inc.
Christopher G. Kennedy, MBA
Executive Vice President and Director,
Merchandise Mart Properties, Inc.
Eric T. McKissack, CFA, MBA
Vice Chairman and Co-Chief Investment Officer,
Ariel Capital Management, Inc.
Bert N. Mitchell, MBA, CPA
Founder, Chairman and Chief Executive Officer, Mitchell/Titus & Co.
23
<PAGE>
ARIEL INVESTMENT TRUST
STATEMENT OF ADDITIONAL INFORMATION
__________, 1995
FOR ARIEL PREMIER BOND FUND
307 North Michigan Avenue
Suite 500
Chicago, Illinois 60601
1-800-29-ARIEL (1-800-292-7435)
Ariel Premier Bond Fund (the "Fund") is a series of Ariel Growth Fund, doing
business as Ariel Investment Trust (the "Trust").
This Statement of Additional Information is not a prospectus but provides
information that should be read in conjunction with the Fund's Prospectus dated
__________, 1995 and any supplement thereto, which may be obtained free of
charge by writing or calling the Fund.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
FUNDAMENTAL INVESTMENT RESTRICTIONS......................... 3
NON-FUNDAMENTAL INVESTMENT RESTRICTIONS..................... 4
ADDITIONAL INFORMATION ABOUT
INVESTMENT TECHNIQUES....................................... 5
IN KIND PURCHASES OF CLASS A SHARES OF THE FUND............. 11
SPECIAL TAX MATTERS......................................... 12
INVESTMENT ADVISER, SUB-ADVISER AND SERVICES ADMINISTRATOR.. 12
METHOD OF DISTRIBUTION OF THE CLASS B SHARES................ 13
TRANSFER AGENT AND CUSTODIAN................................ 14
PORTFOLIO TRANSACTIONS...................................... 14
INDEPENDENT AUDITORS........................................ 14
GENERAL INFORMATION......................................... 14
TRUSTEES AND OFFICERS....................................... 15
COMPENSATION SCHEDULE....................................... 16
CALCULATION OF PERFORMANCE DATA............................. 16
FINANCIAL STATEMENTS........................................ 18
APPENDIX A.................................................. 22
APPENDIX B.................................................. 23
</TABLE>
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FUNDAMENTAL INVESTMENT RESTRICTIONS
The investment restrictions set forth below and the Fund's investment objective
are fundamental policies and may not be changed without the approval of the
holders of a majority of the outstanding shares of the Fund. As defined in the
Investment Company Act of 1940, this means the lesser of the vote 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.
(1) COMMODITIES. The Fund may not purchase or sell commodities or
commodity contracts except contracts in respect to financial futures.
(2) REAL ESTATE. The Fund may not purchase real estate or real estate
mortgages, but may purchase securities backed by real estate or interests
therein (including mortgage interests) and securities of companies, including
real estate investment trusts, holding real estate or interests (including
mortgage interests) therein. (This does not prevent the Fund from owning and
liquidating real estate or real estate interests incident to a default on
portfolio securities.)
(3) DIVERSIFICATION OF FUND INVESTMENTS.
(a) FUND ASSETS. With respect to 75% of the value of its total
assets, the Fund may not buy the securities of any issuer if more than 5%
of the value of Fund's total assets would then be invested in that issuer.
Securities issued or guaranteed by the U.S. government or its agencies or
instrumentalities and repurchase agreements involving such securities
("U.S. Government Securities") are not subject to this limitation.
(b) SECURITIES OF ISSUERS. With respect to 75% of the value of its
total assets, the Fund may not purchase the securities of any issuer if
after such purchase the Fund would then own more than 10% of such issuer's
voting securities. U.S. Government Securities are not subject to this
limitation.
(4) INDUSTRY CONCENTRATION. The Fund may not purchase the securities of
companies in any one industry if 25% or more of the value of the Fund's total
assets would then be invested in companies having their principal business
activity in the same industry. U.S. Government Securities are not subject to
this limitation.
(5) SENIOR SECURITIES; BORROWING. The Fund may not issue senior securities
except as permitted under the Investment Company Act of 1940. The Fund may not
pledge or hypothecate any of its assets, except in connection with permitted
borrowing.
(6) UNDERWRITING. The Fund does not engage in the underwriting of
securities. (This does not preclude it from selling restricted securities in
its portfolio.)
(7) LENDING MONEY OR SECURITIES. The Fund may not lend money, except that
it may purchase and hold debt securities publicly distributed or traded or
privately placed and may enter into repurchase agreements. The Fund will not
lend securities if such a loan would cause more than one-third of the Fund's net
assets to then be subject to be such loans.
(8) OFFICER AND TRUSTEES. The Fund may not purchase from or sell to any
of the Trust's officers or trustees, or firms of which any of them are members,
any securities (other than capital stock of the Fund), but such persons or firms
may act as brokers for the Fund for customary commissions.
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NON-FUNDAMENTAL INVESTMENT RESTRICTIONS
These policies may be changed by the Board of Trustees without shareholder
approval.
(1) MARGIN. The Fund may not purchase any securities on margin, except
that the Fund may (a) obtain such short-term credit as may be necessary for the
clearance of purchases and sales of portfolio securities; or (b) make margin
deposits in connection with transactions in futures and forward contracts.
(2) BORROWING. The Fund may not purchase securities when money borrowed
exceeds 5% of its total assets.
(3) FUTURES. The Fund may not purchase a futures contract, except in
respect to interest rates and then only if, with respect to positions which do
not represent bona fide hedging, the aggregate initial margin for such
positions would not exceed 5% of the Fund's total assets.
(4) ILLIQUID SECURITIES. The Fund may not purchase illiquid securities
(including restricted securities which are illiquid and repurchase agreements
maturing in more than seven days) if, as a result, more than 15% of its net
assets would be invested in such securities;
(5) OWNERSHIP OF PORTFOLIO SECURITIES BY OFFICERS AND DIRECTORS. The Fund
may not purchase or retain the securities of any issuer if any officer or
trustee of the Fund or its investment adviser owns beneficially more than 1/2
of 1% of the securities of such issuer and if together such individuals own more
than 5% of the securities of such issuer.
(6) LENDING PORTFOLIO SECURITIES. The Fund may not loan portfolio
securities (except as collateral in connection with permitted borrowing).
(7) OIL AND GAS PROGRAMS. The Fund may not invest in interests in oil,
gas, or other mineral exploration or development programs, although it may
invest in securities of issuers which invest in or sponsor such programs.
(8) INVESTMENT COMPANIES. The Fund may not purchase the securities of
other investment companies, except as they may be acquired as part of a merger,
consolidation or acquisition of assets.
(9) UNSEASONED ISSUERS. The Fund may not purchase the securities of
companies which, together with its predecessors, have a record of less than
three years' continuous operation if, as a result, more than 5% of the value of
its assets would be invested in securities of such companies. U.S. Government
Securities and issuers of asset-backed securities are not subject to this
limitation.
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ADDITIONAL INFORMATION ABOUT
INVESTMENT TECHNIQUES
LOANS OF PORTFOLIO SECURITIES
The fundamental investment restrictions provide that the Fund may make
secured loans of portfolio securities in order to realize additional income,
provided that the Fund will not lend securities if such a loan would cause more
than one-third of the total value of its net assets to then be subject to such
loans. However, as a matter of non-fundamental policy, the Fund does not
currently intend to make such loans. This policy may be changed by the Board of
Trustees should they determine that such loans would benefit the Fund.
REPURCHASE AGREEMENTS
The Fund may purchase securities subject to repurchase agreements which are
transactions in which the Fund purchases a security and simultaneously commits
to resell that security to the seller at a mutually agreed upon time and price.
The seller's obligation is secured by the underlying security. The repurchase
price reflects the initial purchase price plus an agreed upon market rate of
interest. While the underlying security may bear a maturity in excess of one
year, the term of the repurchase agreement is always less than one year.
The Fund will engage in repurchase agreements with recognized securities
dealers and banks determined to present minimal credit risk by the Sub-Adviser.
In addition, the Fund will engage in repurchase agreements reasonably designed
to fully secure the seller's obligation, during the term of the agreement, to
repurchase the underlying security and the Fund will monitor the market value of
the underlying security during the term of the agreement. If the value of the
underlying security declines and is not at least equal to the repurchase price
due to the Fund pursuant to the agreement, the Fund will require the seller to
pledge additional securities or cash to secure the seller's obligations pursuant
to the agreement. If the seller defaults on its obligation to repurchase and the
value of the underlying security declines, the Fund may incur a loss and may
incur expenses in selling the underlying security.
MORTGAGE DOLLAR ROLLS
The Fund may enter into "mortgage dollar rolls," which are transactions in
which the Fund sells a mortgage-related security (such as a GNMA security) to a
dealer and simultaneously agrees to repurchase a similar security (but not same
security) in the future at a pre-determined price. A "dollar roll" can be
viewed as a collateralized borrowing in which the Fund pledges a mortgage-
related security to a dealer to obtain cash. The dealer with which the Fund
enters into a dollar roll transaction is not obliged to return the same
securities as those originally sold by the Fund, but only securities which are
"substantially identical." To be considered "substantially identical," the
securities returned to the Fund generally must: (1) be collateralized by the
same types of underlying mortgages; (2) be issued by the same agency and be part
of the same program; (3) have a similar original stated maturity; (4) have
identical net coupon rates; (5) have similar market yields (and therefore
price); and (6) satisfy "good delivery" requirements, meaning that the aggregate
principal amounts of the securities delivered and received back must be within
2.5% of the initial amount delivered.
The Fund's obligations under a dollar roll agreement must be covered by
cash or high quality debt securities equal in value to the securities subject to
repurchase by the Fund, maintained in a segregated account. To the extent that
the Fund collateralizes its obligations under a dollar roll agreement, the asset
coverage requirements of the Investment Company Act of 1940, described below,
will not apply to such transactions.
The Fund may be released from its obligations under a dollar roll agreement
by selling its position to another party at any time prior to the settlement
date. The Fund may realize a gain or loss on such a sale. If the Fund realizes
a gain, it will not be able to collect its profit until the original settlement
date of the agreement.
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Because dollar roll transactions may be for terms ranging between one and six
months, the amount of any such gain may be deemed "illiquid" and subject to the
Fund's overall limitations on investments in illiquid securities.
The Investment Company Act of 1940 requires the Fund to maintain continuous
asset coverage (total assets including borrowings, less liabilities exclusive of
borrowings) of 300% of the amount borrowed. If the 300% asset coverage should
decline as a result of market fluctuations or other reasons, the Fund may be
required to sell some of its portfolio holdings within three days to reduce the
debt and restore the 300% asset coverage, even though it may be disadvantageous
from an investment standpoint to sell securities at that time.
TRANSACTIONS IN FUTURES
As described in the Prospectus, the Fund may purchase and sell interest
rate futures contracts ("futures contracts") for the purpose of hedging its
portfolio of fixed-income securities against the adverse effects of anticipated
movements in interest rates or as an efficient means of regulating the Fund's
exposure to the bond market. The Fund may trade futures contracts on any
interest rate related instrument. The Fund is subject to the tax requirement
that less than 30% of its gross income be derived from the sale or other
disposition of stocks, securities and certain options, futures or forward
contracts held for less than three months. This requirement may limit the
Fund's ability to engage in the hedging transactions and strategies described
below. The Fund is also subject to certain requirements of the Commodity
Futures Trading Commission ("CFTC") which are described below. See the Appendix
for a more complete description of futures transactions.
The Fund will engage in transactions in futures contracts only for bona
fide hedging, yield enhancement and risk management purposes, in each case in
accordance with the rules and regulations of the CFTC. The Fund will not engage
in a futures transaction if it would cause the aggregate of initial margin
deposits which do not represent bona fide hedging to exceed 5% of the value of
total assets. The successful use of futures for hedging purposes depends on the
Sub-Adviser's ability to forecast interest rate movements. Should interest
rates move in an unexpected manner, the Fund may not achieve the anticipated
benefits of the futures contracts and thus may be in a worse position than if
such strategies had not been used.
The Fund may also use futures transactions to lengthen or shorten the
duration of the Fund's portfolio. The Sub-Adviser can lengthen the duration of
the portfolio by purchasing futures and can shorten the duration by selling
futures. Duration measures the interest rate sensitivity of the Fund's
portfolio. A longer duration means more interest rate sensitivity and therefore
greater gains or losses when interest rates change.
RISK FACTORS IN TRANSACTIONS IN FUTURES
The trading of futures contracts for hedging and duration management
purposes involves the risk of imperfect correlation between movements in the
price of the futures contracts and the price of the security being hedged. The
hedge will not be fully effective where there is imperfect correlation between
the movements in the two financial instruments. For example, if the price of
the futures contract moves more than the price of the hedged security, the Fund
would experience either a loss or gain on the future which is not completely
offset by movements in the price of the hedged securities. To compensate for
imperfect correlations, the Fund may purchase or sell futures contracts in a
greater dollar amount than the hedged securities if the volatility of the hedged
securities is historically greater than the volatility of the futures contracts.
Conversely, the Fund may purchase or sell fewer futures contracts if the
volatility of the price of the hedged securities is historically less than that
of the futures contracts, although such transactions will in any event be
entered into solely for hedging purposes. To the extent interest rates remain
stable during the period in which a futures contract is held by the Fund or such
rates move in a direction opposite to that anticipated, the Fund may realize a
loss on the hedging transaction which is not fully or partially offset by an
increase in the value of portfolio securities. As a result, the Fund's total
return for such period may be less than if it had not engaged in the hedging
transaction.
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The Fund may also purchase futures contracts to hedge against a possible
increase in the price of securities before the Fund is able to invest its cash
in fixed-income securities. In such instances, it is possible that the market
may instead decline. If the Fund does not then invest in such securities
because of concern as to possible further market decline or for other reasons,
the Fund may realize a loss on the futures contract that is not offset by a
reduction in the price of securities purchased.
Because of low initial margin deposits made upon the opening of a futures
position, futures transactions involve substantial leverage. As a result,
relatively small movements in the price of the futures contract can result in
substantial unrealized gains or losses. When the Fund engages in the purchase
and sale of financial futures contracts for hedging purposes, however, any
losses incurred in connection therewith should, if the hedging strategy is
successful, be offset in whole or in part by increases in the value of
securities held by the Fund or decreases in the price of securities the Fund
intends to acquire. In addition, the Fund will set aside cash or cash
equivalents equal, on a daily basis, to its obligations under such contracts in
order to mitigate the effects of such coverage.
The anticipated offsetting movements between the price of the futures
contracts and the hedged security may be distorted due to differences in the
nature of the markets, such as differences in initial and variation margin
requirements, the liquidity of such markets and the participation of speculators
in such markets.
The trading of futures contracts is also subject to certain market risks,
such as trading halts, suspensions, exchange or clearing house equipment
failures, government intervention, insolvency of a brokerage firm or clearing
corporation or other disruptions of normal trading activity, which could at
times make it difficult or impossible to liquidate existing positions.
MORTGAGE-RELATED AND OTHER ASSET-BACKED SECURITIES
Mortgage-related securities (often referred to as "mortgage-backed"
securities) are interests in pools of residential or commercial mortgage loans,
including mortgage loans made by savings and loan institutions, mortgage
bankers, commercial banks and others. Pools of mortgage loans are assembled as
securities for sale to investors by various governmental, government-related and
private organizations . The Fund may also invest in debt securities which are
secured with collateral consisting of mortgage-related securities, and other
types of mortgage-related securities.
Mortgage Pass-Through Securities. Interests in pools of mortgage-related
securities differ from other forms of debt securities, which normally provide
for periodic payment of interest in fixed amounts with principal payments at
maturity or specified call dates. Instead, these securities provide a monthly
payment which consists of both interest and principal payments. In effect,
these payments are a "pass-through" of the monthly payments made by the
individual borrowers on their residential or commercial mortgage loans, net of
any fees paid to the issuer or guarantor of such securities. Additional
payments are caused by repayments of principal resulting from the sale of the
underlying property, refinancing or foreclosure, net of fees or costs which may
be incurred. Some mortgage-related securities (such as securities issued by the
Government National Mortgage Association ("GNMA")) are described as "modified
pass-through." These securities entitle the holder to receive all interest and
principal payments owed on the mortgage pool, net of certain fees, at the
scheduled payment dates regardless of whether or not the mortgagor actually
makes the payment.
The principal governmental guarantor of mortgage-related securities is
GNMA. GNMA is a wholly owned United States Government corporation within the
Department of Housing and Urban Development. GNMA is authorized to guarantee,
with the full faith and credit of the United States Government, the timely
payment of principal and interest on securities issued by institutions approved
by GNMA (such as savings and loan institutions, commercial banks and mortgage
bankers) backed by pools of FHA-insured or VA-guaranteed mortgages.
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Government-related guarantors (i.e., not backed by the full faith and
credit of the United States Government) include the Federal National Mortgage
Association ("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC").
FNMA is a government-sponsored corporation owned entirely by private
stockholders. It is subject to general regulation by the Secretary of Housing
and Urban Development. FNMA purchases conventional (i.e., not insured or
guaranteed by any government agency) residential mortgages from a list of
approved seller/servicers which include state and federally chartered savings
and loan associations, mutual savings banks, commercial banks and credit unions
and mortgage bankers. Pass-through securities issued by FNMA are guaranteed as
to timely payment of principal and interest by FNMA but are not backed by the
full faith and credit of the United States Government.
FHLMC was created by Congress in 1970 for the purpose of increasing the
availability of mortgage credit for residential housing. It is a government-
sponsored corporation formerly owned by the twelve Federal Home Loan Banks and
now owned entirely by private stockholders. FHLMC issues Participation
Certificates ("PCs") which represent interests in conventional mortgages from
FHLMC'S national portfolio. FHLMC guarantees the timely payment of interest and
ultimate collection of principal, but PCs are not backed by the full faith and
credit of the United States Government.
Commercial banks, savings and loan institutions, private mortgage insurance
companies, mortgage bankers and other secondary market issuers also create pass-
through pools of conventional residential mortgage loans. Such issuers may, in
addition, be the originators and/or servicers of the underlying mortgage loans
as well as the guarantors of the mortgage-related securities. Pools created by
such non-governmental issuers generally offer a higher rate of interest than
government and government-related pools because there are not direct or indirect
government or agency guarantees of payments in the former pools. However,
timely payment of interest and principal of these pools may be supported by
various forms of insurance or guarantees, including individual loan, title, pool
and hazard insurance and letters of credit. The insurance and guarantees are
issued by governmental entities, private insurers and the mortgage poolers.
Such insurance and guarantees and the creditworthiness of the issuers thereof
will be considered in determining whether a mortgage-related security meets the
Fund's investment quality standards. There can be no assurance that the private
insurers or guarantors can meet their obligations under the insurance policies
or guarantee arrangements. The Fund currently does not intend to purchase pass-
through securities that are not issued or guaranteed by an agency or
instrumentality of the U.S. Government.
Mortgage-backed securities that are issued or guaranteed by the U.S.
Government, its agencies or instrumentalities, are not subject to the Fund's
industry concentration restrictions, set forth under "Fundamental Investment
Restrictions," by virtue of the exclusion from that test available to all U.S.
Government Securities. In case of privately issued mortgage-related securities,
the Fund takes the position that mortgage-related securities do not represent
interests in any particular "industry" or group of industries. The assets
underlying such securities may be represented by a portfolio of first lien
residential mortgages (including both whole mortgage loans and mortgage
participation interests) or portfolios of mortgage pass-through securities
issued or guaranteed by GNMA, FNMA or FHLMC. Mortgage loans underlying a
mortgage-related security may in turn be insured or guaranteed by the Federal
Housing Administration or the Department of Veterans Affairs.
Collateralized Mortgage Obligations (CMOs). A CMO is a hybrid between a
mortgage-backed bond and a mortgage pass-through security. Similar to a bond,
interest and prepaid principal are paid, in most cases, semiannually. CMOs may
be collateralized by whole mortgage loans, but are more typically collateralized
by portfolios of mortgage pass-through securities guaranteed by GNMA, FHLMC, or
FNMA, and their income streams.
CMOs are structured into multiple classes, each bearing a different stated
maturity. Actual maturity and average life will depend upon the prepayment
experience of the collateral. CMOs can provide for a modified form of call
protection through a de facto breakdown of the underlying pool of mortgages
according to how quickly the loans are repaid. Monthly payment of principal
received from the pool of underlying
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mortgages, including prepayments, is first returned to investors holding the
shortest maturity class. Investors holding the longer maturity classes receive
principal only after the first class has been retired. An investor is partially
guarded against a sooner than desired return of principal because of the
sequential payments.
In a typical CMO transaction, a corporation ("issuer") issues multiple
series (e.g., A, B, C, Z) of CMO bonds ("Bonds"). Proceeds of the Bond offering
are used to purchase mortgages or mortgage pass-through certificates
("Collateral"). The Collateral is pledged to a third party trustee as security
for the Bonds. Principal and interest payments from the Collateral are used to
pay principal on the Bonds in the order A, B, C, Z. The Series A, B and C Bonds
all bear current interest. Interest on the Series Z Bond is accrued and added
to principal and a like amount is paid as principal on the Series A, B or C Bond
currently being paid off. When the Series A, B and C Bonds are paid in full,
interest and principal on the Series Z Bond begins to be paid currently. With
some CMOs, the issuer serves as a conduit to allow loan originators (primarily
builders or savings and loan associations) to borrow against their loan
portfolios.
FHLMC Collateralized Mortgage Obligations. FHLMC CMOs are debt obligations
of FHLMC issued in multiple classes having different maturity dates which are
secured by the pledge of a pool of conventional mortgage loans purchased by
FHLMC. Unlike FHLMC Participation Certificates, payments of principal and
interest on the CMOs are made semiannually, as opposed to monthly. The amount
of principal payable on each semiannual payment date is determined in accordance
with FHLMC's mandatory sinking fund schedule, which, in turn, is equal to
approximately 100% of FHA prepayment experience applied to the mortgage
collateral pool. All sinking fund payments in the CMOs are allocated to the
retirement of the individual classes of bonds in the order of their stated
maturities. Payment of principal on the mortgage loans in the collateral pool
in excess of the amount of FHLMC's minimum sinking fund obligation for any
payment date are paid to the holders of the CMOs as additional sinking fund
payments. This "pass-through" of prepayments has the effect of retiring most
CMO classes prior to their stated final maturity.
If collection of principal (including prepayments) on the mortgage loans
during any semiannual payment period is not sufficient to meet FHLMC'S minimum
sinking fund obligation on the next sinking fund payment date, FHLMC agrees to
make up the deficiency from its general funds.
Criteria for the mortgage loans in the pool backing the FHLMC CMOs are
identical to those of FHLMC PCs. FHLMC has the right to substitute collateral
in the event of delinquencies and/or defaults.
Other Mortgage-Related Securities. Other mortgage-related securities
include securities other than those described above that directly or indirectly
represent a participation in, or are secured by and payable from, mortgage loans
on real property, including stripped mortgage-backed securities. Other
mortgage-related securities may be equity or debt securities issued by agencies
or instrumentalities of the U.S. Government or by private originators of, or
investors in, mortgage loans, including savings and loan associations,
homebuilders, mortgage banks, commercial banks, investment banks, partnerships,
trusts and special purpose entities of the foregoing.
Stripped Mortgage-Backed Securities. Stripped mortgage-backed securities
("SMBS") are derivative multi-class mortgage securities. SMBS may be issued by
agencies or instrumentalities of the U.S. Government, or by private originators
of, or investors in, mortgage loans, including savings and loan associations,
mortgage banks, commercial banks, investment banks and special purpose entities
of the foregoing.
SMBS are usually structured with two classes that receive different
proportions of the interest and principal distributions on a pool of mortgage
assets. A common type of SMBS will have one class receiving some of the
interest and most of the principal from the mortgage assets, while the other
class will receive most of the interest and remainder of the principal. In the
most extreme case, one class will receive all of the interest (the IO class),
while the other class will receive all of the principal (the principal-only or
"PO" class). The yield to maturity on SMBS is extremely sensitive to the rate
of principal payments (including prepayments) on the related
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underlying mortgage assets, and a change in the rate of principal payments may
have a material adverse effect on the Fund's yield to maturity from these
securities or the Fund's ability to fully recoup its initial investment in these
securities, even if the security is in one of the highest rating categories.
OTHER ASSET-BACKED SECURITIES
The Fund may invest in securities that are backed by a diversified pool of
assets other than mortgages such as trade, credit card and automobile
receivables. Asset-backed securities are generally issued by special purpose
entities in the form of debt instruments. The characteristics and risks of
automobile and credit card receivables are described below.
Automobile Receivable Securities. The Fund may invest in asset-backed
securities which are backed by receivables from motor vehicle installment sales
contracts or installment loans secured by motor vehicles ("Automobile Receivable
Securities"). Since installment sales contracts for motor vehicles or
installment loans related to such contracts ("Automobile Contracts") typically
have shorter durations and lower incidences of prepayment, Automobile Receivable
Securities generally will exhibit a shorter average life and are less
susceptible to prepayment risk.
Most entities that issue Automobile Receivable Securities create an
enforceable interest in their respective Automobile Contracts only by filing a
financing statement and by having the servicer of the Automobile Contracts,
which is usually the originator of the Automobile Contracts, take custody of the
Automobile Contract. In such circumstances, if the servicer of the Automobile
Contracts were to sell the Automobile Contracts to another party, in violation
of its obligation not to do so, there is a risk that such party could acquire an
interest in the Automobile Contracts superior to that of the holders of
Automobile Receivable Securities. Also, although most Automobile Contracts
grant a security interest in a motor vehicle being financed, in most states the
security interest in a motor vehicle must be noted on the certificate of title
to create an enforceable security interest against competing claims of other
parties. Due to the large number of vehicles involved, however, the certificate
of title to each vehicle financed, pursuant to the Automobile Contracts
underlying the Automobile Receivable Security, is usually not amended to reflect
the assignment of the seller's security interest for the benefit of the holders
of the Automobile Receivable Securities. Therefore, there is the possibility
that recoveries on repossessed collateral may not, in some cases, be available
to support payments on the securities. In addition, various state and federal
securities laws give the motor vehicle owner the right to assert against the
holder of the owner's Automobile Contract certain defenses such owner would have
against the seller of the motor vehicle. The assertion of such defenses could
reduce payments on the Automobile Receivable Securities. Investment grade
Automobile Receivable Securities are typically over-collateralized and have
other forms of credit enhancement to mitigate these risks.
Credit Card Receivable Securities. The Fund may invest in asset-backed
securities backed by a diversified pool of receivables from revolving credit
card agreements ("Credit Card Receivable Securities"). Credit balances on
revolving credit card agreements ("Accounts") are generally paid down more
rapidly than are Automobile Contracts. Most Credit Card Receivable Securities
provide for a fixed period during which only interest payments are paid to the
security holder. Principal payments received on underlying Accounts are used to
purchase additional assets. The initial fixed period usually may be shortened
upon the occurrence of specified events which signal a potential deterioration
in the quality of the assets backing the security, such as the imposition of a
cap on interest rates. The ability of the issuer to make principal and interest
payments on Credit Card Receivable Securities thus depends upon the continued
generation of additional principal amounts in the underlying accounts during the
initial period and the non-occurrence of specified events. An acceleration in
cardholders' payments rates or any other event which shortens the period during
which additional credit card charges on an Account may be transferred to the
pool of assets supporting the related Credit Card Receivable Security could
shorten the weighted average life and reduce the yield of the Credit Card
Receivable Security.
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Credit cardholders are entitled to the protection of a number of state and
federal consumer credit laws, many of which give such holder the right to set
off certain amounts against balances owed on the credit card, thereby reducing
amounts paid on Accounts. In addition, unlike most other asset backed
securities, Accounts are unsecured obligations of the cardholder.
IN KIND PURCHASES OF CLASS A SHARES OF THE FUND
Shares of the Fund are continuously offered at their net asset value next
determined after an order is accepted. The methods available for purchasing
shares of the Fund are described in the Prospectus. In addition, shares of the
Fund may be purchased using securities, so long as the securities delivered to
the Fund meet the investment objective and policies of the Fund, including its
investment restrictions, and are otherwise acceptable to the Sub-Adviser, which
reserves the right to reject all or any part of the securities offered in
exchange for shares of the Fund. Among other things, the Sub-Adviser will
consider the following criteria in determining whether to accept securities for
"in-kind" purchase of Fund shares.
(1) The securities offered by the investor in exchange for shares of the
Fund must be readily marketable and must not be in any way restricted as to
resale or otherwise be illiquid.
(2) The securities must have a value which is readily ascertainable in
accordance with the procedures used by the Fund to value its portfolio
securities.
The Fund believes that this ability to purchase shares of the Fund using
securities provides a means by which holders of certain securities may obtain
diversification and continuous professional management of their investments
without the expense of selling those securities in the public market. Benefits
to the Fund may include the ability to acquire desirable securities at a lower
transaction cost.
An investor who wishes to make an "in kind" purchase must furnish in
writing to the Fund a list with a full and exact description of all of the
securities which the investor proposes to deliver. The Fund will advise him or
her as to those securities which it is prepared to accept and will provide the
investor with the necessary forms to be completed and signed by the investor.
The investor should then send the securities, in the proper form for transfer,
with the necessary forms to the Fund and certify that there are no legal or
contractual restrictions on the free transfer and sale of the securities. The
securities will be valued as of the close of business on the day of receipt by
the Fund in the same manner as portfolio securities of the Fund are valued.
(See the section entitled "Net Asset Value" in the Prospectus.) The number of
shares of the Fund, having a net asset value as of the close of business on the
day of receipt equal to the value of the securities delivered by the investor,
will be issued to the investor.
The exchange of securities by the investor pursuant to this offer will
constitute a taxable transaction and may result in a gain or loss for Federal
income tax purposes. Each investor should consult his or her tax adviser to
determine the tax consequences under Federal and state law of making such an "in
kind" purchase.
SPECIAL TAX MATTERS
The Fund may write, purchase or sell futures, or forward contracts.
Futures contracts that are "Section 1256 contracts" will be "marked to market"
for federal income tax purposes at the end of each taxable year, i.e., each such
futures contract will be treated as sold for its fair market value on the last
day of the taxable year. Code Section 1092, which applies to certain
"straddles" may affect the taxation of the Fund's transactions in futures and
forward contracts. Under Section 1092, the Fund will be required to postpone
recognition for tax purposes of losses incurred in certain closing transactions
involving futures and forward contracts.
11
<PAGE>
One of the requirements for qualification as a regulated investment company
is that less than 30% of the Fund's gross income is derived from gains from the
sale or other disposition of securities held for less than three months,
therefore the Fund may be restricted in effecting closing transactions within
three months after entering into futures or forward contracts.
As a result of the "mark to market" rules discussed above and amortization
of income from bonds purchased at a discount, the Fund may realize taxable
income not represented by actual receipt of cash. If such income is
significant, then the Fund may have to sell portfolio securities to pay out
required distributions in order to avoid taxation at the Fund level.
Dual-Class Structure. The Fund intends to seek a ruling from the Internal
Revenue Service ("IRS") to the effect that differing distributions between the
classes of its shares will not result in the Fund's dividends and other
distributions being regarded as "preferential dividends" under the Code.
Generally, a preferential dividend is a dividend which the Fund cannot treat as
having been distributed for purposes of (i) determining whether the Fund
qualifies as a regulated investment company ("RIC") for federal tax purposes,
and (ii) determining the Fund's tax liability. While rulings similar to those
to be requested have been issued previously by the IRS, complete assurance
cannot be given that the Fund will receive such a ruling. Although an adverse
determination by the IRS is not currently expected, the Fund may be required to
reassess its dual class share structure (and reserves the right to do so) if the
IRS does not rule favorably since that could impact the Fund's ability to
qualify as a RIC.
INVESTMENT ADVISER, SUB-ADVISER AND SERVICES ADMINISTRATOR
Ariel Capital Management, Inc. (the "Adviser"), 307 North Michigan Avenue,
Suite 500, Chicago, Illinois 60601, which is controlled by John W. Rogers, Jr.,
acts as investment adviser and services administrator under a management
agreement with the Trust ("Management Agreement").
The Management Agreement between the Trust and the Adviser will remain in
effect as to the Fund indefinitely, provided continuance is approved at least
annually by vote of the Board of Trustees of the Trust or by the holders of a
majority of the outstanding shares of the Fund; and further provided that such
continuance is also approved annually by the vote of a majority of the Trustees
of the Trust who are not parties to the Agreement or interested persons of
parties to the Agreement or interested persons of such parties, cast in person
at a meeting called for the purpose of voting on such approval. The Management
Agreement may be terminated without penalty by the Trust or the Adviser upon 60
days' prior written notice; it automatically terminates in the event of its
assignment.
Pursuant to the Management Agreement, the Adviser provides the Fund with
office space, administrative services, furnishes executive and other personnel
to the Fund and is responsible for providing or overseeing the Fund's day-to-day
management and administration.
Lincoln Capital Management Company (the "Sub-Adviser"), 200 South Wacker
Drive, Chicago, IL 60606, acts as the Sub-Adviser of the Fund. Under a Sub-
Advisory agreement with the Advisor, the Sub-Adviser manages the day-to-day
investment operations for the Fund. The Fund pays no fees directly to the Sub-
Adviser.
The Fund pays all operating expenses not expressly assumed by the Adviser,
including custodial and transfer agency fees, federal and state securities
registration fees, legal and audit fees, and brokerage commissions and other
costs associated with the purchase and sale of portfolio securities, except
that, pursuant to the Management Agreement, the Adviser must reimburse the Fund
if the Fund's annual expenses (excluding brokerage, taxes, interest,
Distribution Plan expenses and extraordinary items) exceed 1.50% of the first
$30 million of the Fund's average daily net assets and 1% of such assets in
excess of $30 million.
12
<PAGE>
The Adviser and Sub-Advisor have adopted Codes of Ethics which regulate the
personal securities transactions of the Adviser's and the Sub-Adviser's
investment personnel and other employees and affiliates with access to
information regarding securities transactions of the Fund. Both Codes of Ethics
require investment personnel to disclose all personal securities holdings upon
commencement of employment and all subsequent trading activity to the firm's
Compliance Officer. Investment personnel are prohibited from engaging in any
securities transactions, including the purchase of securities in a private
offering, without the prior consent of the Compliance Officer. Additionally,
such personnel are prohibited from purchasing securities in an initial public
offering and are prohibited from trading in any securities (i) for which the
Fund has a pending buy or sell order, (ii) which the Fund is considering buying
or selling, or (iii) which the Fund purchased or sold within seven calendar
days.
METHOD OF DISTRIBUTION OF THE CLASS B SHARES
The Trust has entered into an agreement with Ariel Distributors, Inc.
("Ariel Distributors") whereby Ariel Distributors serves as the principal
underwriter to distribute the Fund's shares on a no-load basis. Pursuant to the
Underwriting Agreement, Ariel Distributors receives a fee at the annual rate of
0.25% of the Fund's average daily net assets of the Class B shares for
distribution services to such class and for assuming certain marketing expenses.
The Trust has also adopted a Distribution Plan pursuant to Rule 12b-1 under
the Investment Company Act of 1940 with respect to the Class B shares of the
Fund (the "Distribution Plan"). Rule 12b-1 permits an investment company to
finance, directly or indirectly, any activity which is primarily intended to
result in the sale of its shares only if it does so in accordance with the
provisions of such Rule. The Distribution Plan authorizes the Trust to pay up
to 0.30% annually of the average daily net assets of the Class B shares in
connection with the distribution of the Class B shares. Consistent with the
Underwriting Agreement, however, payments under the Distribution Plan are
currently limited by the Board of Trustees to 0.25% annually of such average
daily net asset value.
The Distribution Plan was approved by the Board of Trustees, including the
Trustees who are not "interested persons" of the Fund (as that term is defined
in the Investment Company Act of 1940) and who have no direct financial interest
in the operation of the Plan or in any agreements related to the Distribution
Plan (the "Independent Trustees"). The selection and nomination of the
Independent Trustees is committed to the discretion of such Independent
Trustees. In establishing the Distribution Plan, the Trustees considered
various factors including the amount of the distribution fee. The Trustees
determined that there is a reasonable likelihood that the Distribution Plan will
benefit the Trust and its shareholders.
The Distribution Plan may be terminated as to the Class B shares by vote of
a majority of Independent Trustees, or by vote of a majority of the outstanding
Class B shares. Any change in the Distribution Plan that would materially
increase the distribution cost to the class requires approval of the
shareholders of that class; otherwise, the Distribution Plan may be amended by
the Trustees, including a majority of the Independent Trustees.
The Distribution Plan will continue in effect indefinitely, if not
terminated in accordance with its terms, provided that such continuance is
annually approved by (i) the vote of a majority of Independent Trustees, and
(ii) the vote of a majority of the entire Board of Trustees.
Apart from the Distribution Plan, the Adviser, at its expense, may incur
costs and pay expenses associated with the distribution of shares of the Fund,
including compensation to broker-dealers in consideration of promotional or
administrative services.
13
<PAGE>
TRANSFER AGENT AND CUSTODIAN
Investors Fiduciary Trust Company (''IFTC'') has been retained by the
Trust to act as transfer agent, custodian, dividend disbursing agent and
shareholder servicing agent. These responsibilities include: responding to
shareholder inquiries and instructions concerning their accounts; crediting and
debiting shareholder accounts for purchases and redemptions of Fund shares and
confirming such transactions; updating of shareholder accounts to reflect
declaration and payment of dividends; keeping custody of all of the Fund's
investments; and preparing and distributing quarterly statements to shareholders
regarding their accounts.
PORTFOLIO TRANSACTIONS
In addition to its management of the Fund's portfolio, the Sub-Adviser
also acts as investment adviser to various private accounts. There may be times
when an investment decision may be made to purchase or sell the same security
for the Fund and one or more clients of the Sub-Adviser. In those
circumstances, the transactions will be allocated as to amount and price in a
manner considered equitable to each. In some instances, this procedure could
adversely affect the Fund but the Fund deems that any disadvantage in the
procedure would be outweighed by the increased selection available and the
increased opportunity to engage in volume transactions.
INDEPENDENT AUDITORS
The Fund's independent auditors, Ernst & Young LLP, 233 South Wacker
Drive, Chicago, IL 60606, audit and report on the Fund's annual financial
statements, review certain regulatory reports and the Fund's federal income tax
returns, and perform other professional accounting, auditing, tax and advisory
services when engaged to do so by the Fund. Shareholders will receive annual
audited financial statements and semi-annual unaudited financial statements.
GENERAL INFORMATION
The Fund, together with Ariel Growth Fund and the Ariel Appreciation
Fund are the three series of Ariel Growth Fund (doing business as Ariel
Investment Trust), an open-end, diversified management investment company
organized as a serial Massachusetts business trust on April 1, 1986. The
Declaration of Trust contains an express disclaimer of shareholder liability for
acts or obligations of the Trust. The shareholders of a Massachusetts business
trust might, however, under certain circumstances, be held personally liable as
partners for its obligations. The Declaration of Trust provides for
indemnification and reimbursement of expenses out of Trust assets for any
shareholder held personally liable for obligations of the Trust.
Each share of a series of the Trust represents an equal proportionate
interest in that series and is entitled to such dividends and distributions out
of the income belonging to such shares as declared by the Board. Upon any
liquidation of the Trust, shareholders are entitled to share pro rata in the net
assets belonging to that series available for distribution.
The Prospectus and this Statement of Additional Information do not
contain all the information in the Fund's registration statement. The
registration statement is on file with the Securities and Exchange Commission
and is available to the public.
TRUSTEES AND OFFICERS
14
<PAGE>
Set forth below are the principal business affiliations of the
Trustees and Officers during the last five years:
MARIO L. BAEZA, ESQ., Trustee. Mr. Baeza is President of Wasserstein Perella
International Limited, and Managing Director and Chief Executive Officer,
Americas Division, Wasserstein Perella & Co., Inc. Formerly, he was a partner
with Debevoise and Plimpton. Address: 875 Third Avenue, New York, New York
10022.
WILLIAM C. DIETRICH, CPA, Trustee. Mr. Dietrich is Chief Financial Officer for
Home Shopping Alternatives, Inc. He formerly served as Chief Financial Officer
for Shoppers Express, Inc. and Practice Director for Johnson, Lambert & Co.
Address: 6 Yearling Court, Rockville, Maryland 20816.
ROYCE N. FLIPPIN, JR., MBA, Trustee. Mr. Flippin is President of Flippin
Associates. Formerly, he was Director of Program Advancement at the
Massachusetts Institute of Technology and was the Director of Athletics,
Physical Education and Recreation at MIT and Princeton University. Address: 120
Massachusetts Avenue, Cambridge, Massachusetts 02139.
JOHN G. GUFFEY, JR., Trustee. Mr. Guffey is chairman of the Calvert Social
Investment Foundation, organizing director of the Community Capital Bank in
Brooklyn, New York, and a financial consultant to various organizations. In
addition, he is the Treasurer and Director of Silby, Guffey and Co., Inc., a
venture capital firm. Mr. Guffey was formerly an officer and is a
trustee/director of each of the investment companies in the Calvert Group of
Funds, except for Acacia Capital Corporation. Address: 7205 Pomander Lane, Chevy
Chase, Maryland 20815.
CHRISTOPHER G. KENNEDY, MBA, Trustee. Mr. Kennedy is Executive Vice President
and a Director of Merchandise Mart Properties, Inc., a real estate management
firm. Prior to 1991, he was a student at the J.L. Kellogg Graduate School of
Management at Northwestern University. Address: The Merchandise Mart, 200 World
Trade Center, Suite 470, Chicago, Illinois 60654.
BERT N. MITCHELL, MBA, CPA, Chairman of the Board and Trustee. Mr. Mitchell is
the Chairman and Chief Executive Officer of Mitchell, Titus & Co., the nation's
largest minority-owned certified public accounting firm. Address: One Battery
Park Plaza, New York, New York 10004.
/1/MELLODY L. HOBSON, Trustee. Ms. Hobson is Senior Vice President, Director of
Marketing of Ariel Capital Management. Prior to 1991, she was a student at
Princeton University, Princeton, New Jersey. Address: 307 North Michigan Avenue,
Suite 500, Chicago, Illinois 60601.
/1/ERIC T. MCKISSACK, Trustee and President. Mr. McKissack is Vice Chairman and
Co-Chief Investment Officer of Ariel Capital Management. Formerly, Mr. McKissack
was a research analyst at First National Bank of Chicago. Address: 307 North
Michigan Avenue, Suite 500, Chicago, Illinois 60601.
/1/ROGER P. SCHMITT, Vice President, Secretary and Assistant Treasurer. Mr.
Schmitt is Chief Operating Officer of Ariel Capital Management. Formerly, Mr.
Schmitt was Marketing Manager with IBM Corporation. Address: 307 North Michigan
Avenue, Suite 500, Chicago, Illinois 60601.
/1/EDWARD SINGLETON, Treasurer and Assistant Secretary. Mr. Singleton is Chief
Financial Officer of Ariel Capital Management. He also operates an accounting
and tax consulting business. Formerly, Mr. Singleton was Manager of Tax and
Regulatory Compliance for American Drug Stores, Inc., a subsidiary of American
Stores Company. Address: 307 North Michigan Avenue, Suite 500, Chicago, Illinois
60601.
- --------------
1Officers and trustees deemed to be ''interested persons'' of the Fund under the
Investment Company Act of 1940.
15
<PAGE>
COMPENSATION SCHEDULE
During the fiscal year ended September 30, 1994, compensation paid to the
trustees of the Trust not affiliated with the Adviser was as follows:
<TABLE>
<CAPTION>
NAME COMPENSATION
- -----------------------------------------------------------
<S> <C>
Mario L. Baeza $8,200
William C. Dietrich $7,400
Royce N. Flippin, Jr. $8,200
John G. Guffey, Jr. $7,400
Christopher G. Kennedy $ 0*
Bert N. Mitchell $8,200
</TABLE>
*Mr. Kennedy was not a Trustee during the fiscal year ended September 30, 1994.
CALCULATION OF PERFORMANCE DATA
TOTAL RETURN
The Fund may advertise performance in terms of average annual total return
for 1-, 5- and 10-year periods, or for such lesser periods as the Fund has been
in existence. Average annual total return is computed by finding the average
annual compounded rates of return over the periods that would equate the initial
amount invested to the ending redeemable value, according to the following
formula:
P(1 + T)/n/ = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000
payment made at the beginning of the 1-, 5- or
10-year periods at the end of the year or period.
The calculation assumes all charges are deducted from the initial $1,000
payment and assumes all dividends and distributions by the Fund are reinvested
at the price stated in the prospectus on the reinvestment dates during the
period, and includes all recurring fees that are charged to all shareholder
accounts.
YIELD
The Fund may advertise performance in terms of a 30-day yield quotation.
The 30-day yield quotation is computed by dividing the net investment income per
share earned during the period by the maximum offering price per share on the
last day of the period, according to the following formula:
a-b
Yield=2[(--- +1)/6/-1]
cd
Where: a = dividends and interest earned during the period
16
<PAGE>
b = expenses accrued for the period (net of
reimbursement)
c = the average daily number of shares outstanding
during the period that were entitled to
receive dividends
d = the maximum offering price per share on the last
day of the period
NONSTANDARDIZED TOTAL RETURN
The Fund may provide the above described standard total return results for
a period which ends not earlier than the most recent calendar quarter end and
which begins either twelve months before or at the time of commencement of the
Fund's operations. In addition, the Fund may provide nonstandardized total
return results for differing periods, such as for the most recent six months.
Such nonstandardized total return is computed as otherwise described under
"Total Return" except that no annualization is made.
DISTRIBUTION RATES
In its sales literature, the Fund may also quote its distribution rate
along with the above described standard total return and yield information. The
distribution rate is calculated by annualizing the latest distribution and
dividing the result by the offering price per share as of the end of the period
to which the distribution relates. A distribution can include gross investment
income from debt obligations purchased at a premium and in effect include a
portion of the premium paid. A distribution can also include gross short-term
capital gains without recognition of any unrealized capital losses. Further, a
distribution can include income from the sale of options by the Fund even though
such option income is not considered investment income under generally accepted
accounting principles.
Because a distribution can include such premiums, capital gains and option
income, the amount of the distribution may be susceptible to control by the
Adviser through transactions designed to increase the amount of such items.
Also, because the distribution rate is calculated in part by dividing the latest
distribution by net asset value, the distribution rate will increase as the net
asset value declines. A distribution rate can be greater than the yield rate
calculated as described above.
17
<PAGE>
FINANCIAL STATEMENTS
Ariel Premier Bond Fund
Statement of Assets and Liabilities
May 23, 1995
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Cash $10,000
Unamortized organization costs 28,000
Prepaid initial registration expenses 24,765
-------
Total Assets 62,765
-------
LIABILITIES
Payable to Adviser 24,765
Accrued professional fees 28,000
-------
Total Liabilities 52,765
-------
NET ASSETS $10,000
=======
Capital shares (no par value), unlimited
shares authorized outstanding 1,000
=======
Net asset value, redemption price and
offering price per share (net assets/shares
outstanding) $10.00
=======
</TABLE>
The accompanying notes to statement of assets and liabilities are an integral
part of this statement.
18
<PAGE>
Ariel Premier Bond Fund
Notes to Statement of Assets and Liabilities
May 23, 1995
(1) Organization
------------
Ariel Growth Fund (doing business as Ariel Investment Trust) (the "Trust")
is a Massachusetts business trust registered under the Investment Company
Act of 1940, as amended, as an open-end management investment company. The
Growth Fund and the Appreciation Fund are existing diversified portfolios
of the Trust. The Premier Bond Fund (the "Fund") (a new series of the
Trust) has had no operations, other than those relating to organizational
matters, including the sale and issuance of 1,000 shares of Class A to
Ariel Capital Management, Inc. (the "Adviser") on May 23, 1995 for
consideration in the amount of $10,000. Shares of the Fund will be issued
in two classes designated Class A (an institutional class) and Class B (a
retail class).
(2) Significant Accounting Policies
-------------------------------
(a) Organization Costs
Costs incurred by the Fund in connection with its organization,
registration and the initial public offering of shares have been
deferred and will be amortized on a straight-line basis over a period
of five years from the date upon which the Fund commences its
investment activities. If any of the original shares of the Fund
purchased by the Adviser are redeemed by any holder thereof prior to
the end of the amortization period, the redemption proceeds will be
reduced by the pro rata share of the unamortized expenses as of the
date of redemption. The pro rata share by which the proceeds are
reduced will be derived by dividing the number of original shares of
the Fund being redeemed by the total number of original shares
outstanding at the time of redemption.
(b) Federal Income Taxes
The Fund intends to comply with the requirements of the Internal
Revenue Code necessary to qualify as a regulated investment company
and to make the requisite distributions of income to its shareholders
which will be sufficient to relieve it from all or substantially all
Federal income taxes.
(3) Investment Adviser
------------------
The Fund has an agreement with the Adviser to furnish investment advisory
services to the Fund. Under the terms of this agreement, the Fund will pay
the Adviser a monthly fee at the annual rate of the following percentages
on average daily net assets: 0.45% on the first billion dollars, 0.425% on
the next billion dollars and 0.40% on average daily net assets over $2
billion.
(4) Distribution Plan
-----------------
Pursuant to Rule 12b-1 of the Investment Company Act of 1940, the Trust has
adopted a distribution plan which permits the Fund to pay certain expenses
associated with the distribution of its shares up to 0.30% annually of the
Fund's average daily net asset value. Such expenses are currently limited
to an annual rate of 0.25% of the Fund's average daily net assets by the
Board of Trustees. Furthermore, the Class A shares of the Premier Bond
Fund are not subject to a 12b-1 fee. Ariel Distributors, Inc., an
19
<PAGE>
affiliate of the Adviser, serves as the Trust's principal underwriter
pursuant to the Underwriting Agreement with the Trust.
20
<PAGE>
REPORT OF INDEPENDENT AUDITORS
------------------------------
To the Shareholder and Board of Trustees of
Ariel Investment Trust - Ariel Premier Bond Fund
We have audited the accompanying statement of assets and liabilities of the
Ariel Premier Bond Fund (the "Fund") constituting a new series of Ariel
Investment Trust (the "Trust"), as of May 23, 1995. This statement of assets
and liabilities is the responsibility of the Trust's management. Our
responsibility is to express an opinion on this statement of assets and
liabilities based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the statement of assets and liabilities is
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the statement of assets and
liabilities. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
statement of assets and liabilities presentation. We believe that our audit of
the statement of assets and liabilities provides a reasonable basis for our
opinion.
In our opinion, the statement of assets and liabilities referred to above
presents fairly, in all material respects, the financial position of the Fund at
May 23, 1995, in conformity with generally accepted accounting principles.
Chicago, Illinois /s/ Ernst & Young LLP
May 23, 1995
21
<PAGE>
APPENDIX A
Interest Rate Futures
The Fund may purchase and sell interest rate futures contracts with respect
to interest rate related instruments.
A futures contract creates a binding obligation on the purchaser (the
"long") to accept delivery, and the seller (the "short") to make delivery, of
the face amount of the security underlying the futures contract in a stated
delivery month, at a price fixed in the contract or to make a cash settlement in
lieu of actual delivery. A majority of transactions in futures contracts,
however, do not result in actual delivery of the underlying security, but are
settled through liquidation by entering into an offsetting transaction. Futures
contracts are traded only on commodity exchanges ("contract markets") approved
by the Commodity Futures Trading Commission ("CFTC"). Transactions in futures
contracts must be executed through a broker/dealer which is registered with the
CFTC or a futures commission merchant ("FCM") which is a member of the relevant
contract market.
The purchase or sale of a futures contract differs from the purchase or
sale of a security in that the total cash value reflected by the futures
contract is not paid. Instead, an amount of cash or securities acceptable to
the Fund's FCM and the relevant contract market, which varies, but may be 5% or
less of the contract amount, must be deposited with the FCM. This amount is
known as "initial margin," and represents a "good faith" deposit (like a down
payment) assuring the performance of both the purchaser and the seller under the
futures contract. Subsequent payments to and from the FCM, known as "variation
margin," are required to be made on a daily basis as the price of the futures
contract fluctuates, making the long or short positions in the futures contract
more or less valuable, a process known as "marking to market." Prior to the
settlement date of the futures contract, the position may be closed out by
taking an opposite position which will operate to terminate the position in the
futures contract. A final determination of variation margin is then made,
additional cash is required to be paid to or released by the FCM, and the Fund
realizes a loss or gain. In addition, a commission is paid on each completed
purchase and sale transaction.
The Fund will deal only in standardized contracts on recognized exchanges.
The clearing members of an exchange's clearing corporation guarantee the
performance of their futures contracts through the clearing corporation, a
nonprofit organization managed by the exchange membership which is also
responsible for handling daily accounting of deposits or withdrawals of margin.
22
<PAGE>
APPENDIX B
CORPORATE BOND AND COMMERCIAL PAPER RATINGS
The following is a description of Moody's Investors Service, Inc.'s bond
ratings:
Aaa: Bonds which are rated Aaa are judged to be of 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 unlikely to impair the
fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group, they compromise 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 securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make long-term risks appear somewhat larger than Aaa securities.
A: Bonds which are 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 which are 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.
The following is a description of Standard & Poor's Corporation's investment
grade bond ratings:
AAA: Bonds rated AAA are considered highest grade obligations. They possess the
ultimate degree of protection as to principal and interest. They move with
market interest rates, and thus provide the maximum safety on all counts.
AA: Bonds rated AA are high-grade obligations. In the majority of instances,
they differ from AAA issues only to a small degree. Prices of AA bonds also move
with the long-term money market.
A: Bonds rated A are upper medium grade obligations. They have considerable
investment strength, but are not entirely free from adverse effects of change in
economic and trade conditions. Interest and principal are regarded as safe. They
predominantly reflect money rates in their market behavior but, to some extent,
also economic conditions.
BBB: Bonds rated BBB are medium grade obligations. They are considered
borderline between definitely sound obligations and those where the speculative
element begins to predominate. These bonds have adequate asset coverage and are
normally protected by satisfactory earnings. Their susceptibility to changing
conditions, particularly to depressions, necessitates constant monitoring. These
bonds are more responsive to business and trade conditions than to interest
rates. This group is the lowest that qualifies for commercial bank investment.
Commercial paper rated A by Standard & Poor's Corporation has the following
characteristics: liquidity ratios are adequate to meet cash requirements; long-
term senior debt is rated "A" or better; the issuer has access to at least two
adequate channels of borrowing; basic earnings and cash flow have an upward
trend with allowance made for unusual circumstances; typically, the issuer's
industry is well-established and the issuer has a strong
23
<PAGE>
position within the industry; and the reliability and quality of management are
unquestioned. The relative strength or weakness of the above factors determines
whether an issuer's commercial paper is rated A-1, A-2, or A-3.
Issuers rated Prime-1 by Moody's Investors Services, Inc., are considered to
have superior capacity of repayment of short-term promissory obligations. Such
repayment capacity will normally be evidenced by the following characteristics:
leading market positions in well-established industries; high rates of return on
funds employed; conservative capitalization structure with moderate reliance on
debt and ample asset protection; broad margins in earnings coverage of fixed
financial charges and high internal cash generation; and well-established access
to a range of financial markets and assured sources of alternate liquidity.
Issuers rated Prime-2 have a strong capacity for repayment of short-term
promissory obligations. This will normally be evidenced by many of the
characteristics cited above but to a lesser degree. Earnings trends and coverage
ratios, while sound, will be more subject to variation. Capitalization
characteristics, while still appropriate, may be more affected by external
conditions. Ample alternate liquidity is maintained.
PART C. OTHER INFORMATION
24
<PAGE>
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial statements
Ariel Premier Bond Fund
Included in Part B:
Report of Ernst & Young, Independent Auditors
Statement of Assets and Liabilities at March 23, 1995.
Notes to Financial Statements.
(b) Exhibits:
1. Declaration of Trust (incorporated by reference to Registrant's
initial registration statement, August 1, 1986).
2. By-Laws (incorporated by reference to Registrant's initial
registration statement, August 1, 1986).
3. Not Applicable.
4a. Specimen Stock Certificate with respect to Ariel Growth Fund
series (incorporated by reference to Registrant's Pre-Effective
Amendment No. 2, November 4, 1986);
4b. Specimen Stock Certificate with respect to Ariel Appreciation
Fund series (incorporated by reference to Registrant's Post-
Effective Amendment No. 7, December 29, 1989).
5a. Management Agreement.
5b. Sub-Advisory Agreement.
6. Underwriting Agreement.
7. Not Applicable.
8. Custodian Agreement (incorporated by reference to Registrant's
Post-Effective Amendment No. 13, July 6, 1994).
9. Transfer Agency Contract (incorporated by reference to
Registrant's Post-Effective Amendment No. 13, July 6, 1994).
10. Opinion and Consent of Counsel as to Legality of Shares Being
Registered (incorporated by reference to Registrant's Post-
Effective Amendment No. 12, November 17, 1993).
11. Consent of Independent Auditors.
12. Not Applicable.
13. Not Applicable.
<PAGE>
14. Retirement Plans (incorporated by reference to Registrant's Post-
Effective Amendment No. 13, July 6, 1994).
15. Rule 12b-1 Distribution Plan with respect to Ariel Growth Fund
and Ariel Appreciation Fund (incorporated by reference to
Registrant's initial registration statement, August 1, 1986).
16. Schedule for Computation of Performance Quotation.
17. Not Applicable.
18a. Power of Attorney.
18b. Plan Pursuant to Rule 18f-3.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Not Applicable.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES
As of May 31, 1995, there were 8,028 holders of record of Registrant's
shares of beneficial interest for Ariel Growth Fund.
As of May 31, 1995, there were 9,749 holders of record of Registrant's
shares of beneficial interest for Ariel Appreciation Fund.
As of May 31, 1995, there was one holder of record of Registrant's shares
of beneficial interest for Ariel Premier Bond Fund.
2
<PAGE>
ITEM 27. INDEMNIFICATION
Registrant's Declaration of Trust, which Declaration is Exhibit 1 of the
Initial Registration Statement dated August 1, 1986, provides, in summary, that
officers, trustees, employees, and agents shall be indemnified by Registrant
against liabilities and expenses incurred by such persons in connection with
actions, suits, or proceedings arising out of their offices or duties of
employment, except that no indemnification can be made to such a person if he
has been adjudged liable of willful misfeasance, bad faith, gross negligence, or
reckless disregard of his duties. In the absence of such an adjudication, the
determination of eligibility for indemnification shall be made by independent
counsel in a written opinion or by the vote of a majority of a quorum of
trustees who are neither "interested persons" of Registrant, as that term is
defined in Section 2(a)(19) of the Investment Company Act of 1940, nor parties
to the proceeding.
Registrant's Declaration of Trust also provides that Registrant may
purchase and maintain liability insurance on behalf of any officer, trustee,
employee or agent against any liabilities arising from such status. In this
regard, Registrant maintains, jointly with the Adviser, a Directors & Officers
(Partners) Liability Insurance policy with American International Surplus Lines
Insurance Company, 15 Mountain View Road, Warren, New Jersey 07061, providing
Registrant and the Adviser with $4 million in directors and officers liability
coverage. Pursuant to an agreement between the Registrant and the Adviser, no
more than $2 million can be used by either party.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
Ariel Capital Management, Inc., the Registrant's investment adviser,
renders investment advisory services to individual, institutional and pension
and profit-sharing plan accounts. The following directors of the adviser have
been engaged in other professions and/or employment capacities during the past
two fiscal years, as indicated below.
<TABLE>
<CAPTION>
NAME OF COMPANY,
NAME AND TITLE PRINCIPAL BUSINESS
WITH ADVISER ADDRESS CAPACITY
- ---------------------------- --------------------------- -----------------
<S> <C> <C>
James E. Bowman, Jr., M.D. University of Chicago Professor
Director Dept. of Pathology
Chicago, IL 60637
Randall C. Hampton The Northern Trust Senior Vice-
Chairman 30 S. LaSalle Street President
Chicago, IL 60675
Herbert D. Odom, D.D.S. Mal-Mart Medical Group President
Director 6333 S. Green Street and Chief
Chicago, IL 60621 Executive
Officer
Henry B. Pearsall JWE Enterprises Chairman
380 S. Schmale Rd.
Carol Stream, IL
Anna Perez Creative Artists Director of
Director Agency, Inc. Media
9830 Wilshire Blvd.
Beverly Hills, CA 90212
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Robert I. Solomon Silliker Laboratories Vice
Director 900 Maple Road President,
Homewood, IL 60430 Marketing
Paula Wolff Governors' State University President
Director University Park, IL 60466
</TABLE>
4
<PAGE>
ITEM 29. PRINCIPAL UNDERWRITERS
Ariel Distributors, Inc., located at 307 North Michigan Avenue, Suite 500,
Chicago IL 60601, serves as the principal underwriter of the Registrant. Ariel
Distributors, Inc. does not act as principal underwriter for any other
investment company.
(b) Positions of Ariel Distributors' Officers and Directors:
<TABLE>
<CAPTION>
NAME AND PRINCIPAL POSITION(S) WITH POSITION(S) WITH
BUSINESS ADDRESS UNDERWRITER REGISTRANT
- ------------------ ---------------- ----------------
<S> <C> <C>
John Washington President, None
Rogers, Jr. Treasurer and
Chairman of the
Board
Eric T. McKissack Vice-Chairman Trustee and
President
Randall C. Hampton Vice-Chairman None
Edward Singleton Chief Financial Treasurer and
Officer, Vice Assistant
President Secretary
Roger P. Schmitt Chief Operating Vice President,
Officer, Vice Secretary and
President, Assistant
Secretary Treasurer
Mellody Hobson Senior Vice Trustee
President
Betty J. Bennett Vice President None
Tinh D. Bui Vice President None
Cheryl A. Cargie Vice President None
Gary J. Leong Vice President None
Franklin Morton Vice President None
</TABLE>
The business address of the above individuals is 307 North Michigan
Avenue, Suite 500, Chicago, Illinois 60601.
5
<PAGE>
NAME AND PRINCIPAL POSITION(S) WITH POSITION(S) WITH
BUSINESS ADDRESS UNDERWRITER REGISTRANT
---------------- ----------- ----------
James E. Bowman, Jr. Director None
University of
Chicago
Dept. of Pathology
Chicago, Illinois
60637
Herbert D. Odom, Director None
D.D.S.
Mal-Mart Medical
Group
6333 S. Green St.
Chicago, Illinois
60621
Henry B. Pearsall Director None
JWE Enterprises
380 S. Schmale Road
Carol Stream, IL
Robert I. Solomon Director None
Silliker
Laboratories
900 Maple Road
Homewood, Illinois
60430
Paula Wolff Director None
Governors' State
University
University Park,
Illinois
60466
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.
All documents and records are located at Ariel Capital Management, Inc.,
307 North Michigan Avenue, Chicago, Illinois 60601
ITEM 31. MANAGEMENT SERVICES.
Not applicable.
ITEM 32. UNDERTAKINGS.
The Registrant undertakes to furnish to each person to whom a
Prospectus is delivered, a copy of the Registrant's latest Annual Report to
Shareholders, upon request and without charge.
6
<PAGE>
ARIEL GROWTH FUND
SIGNATURES
----------
Pursuant to the requirements of the Securities Act of 1933 and/or the
Investment Company Act of 1940, the Registrant certifies that it 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
1st day of June, 1995.
ARIEL GROWTH FUND
By: /s/Sheldon R. Stein
-------------------
Sheldon R. Stein,
Attorney-in-fact
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
Signature Title Date
------------- ----- ----
Eric T. McKissack* Chief Executive June 1, 1995
- ------------------ Officer and Trustee
Eric T. McKissack
Edward Singleton* Principal Financial June 1, 1995
- ------------------ and Accounting Officer
Edward Singleton
*By:/s/Sheldon R. Stein
-------------------------
Sheldon R. Stein,
Attorney-in-Fact
*Sheldon R. Stein signs this document on behalf of the Registrant and the
foregoing officers pursuant to the Powers of Attorney filed as Exhibits 17 and
18 to Post-Effective Amendments No. 13 and 14 to Registrant's Registration
Statement under the Securities Act of 1933.
<PAGE>
ARIEL GROWTH FUND
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
Mario Baeza* Trustee June 1, 1995
- -------------------------
Mario Baeza
William C. Dietrich* Trustee June 1, 1995
- -------------------------
William C. Dietrich
Royce N. Flippin, Jr.* Trustee June 1, 1995
- -------------------------
Royce N. Flippin, Jr.
John G. Guffey, Jr.* Trustee June 1, 1995
- -------------------------
John G. Guffey, Jr.
Christopher G. Kennedy* Trustee June 1, 1995
- -------------------------
Christopher G. Kennedy
Bert N. Mitchell* Trustee June 1, 1995
- -------------------------
Bert N. Mitchell
Mellody Hobson* Trustee June 1, 1995
- -------------------------
Mellody Hobson
</TABLE>
*Sheldon R. Stein signs this document on behalf of each of the foregoing
persons pursuant to the powers of attorney filed as Exhibit 17 to Post-Effective
Amendment No. 13 and Exhibit 18(a) to this Post-Effective Amendment to
Registrant's Registration Statement under the Securities Act of 1933.
/s/Sheldon R. Stein
-----------------------
Sheldon R. Stein,
Attorney-in-Fact
<PAGE>
EXHIBIT INDEX
-------------
SEQUENTIAL
EXHIBITS PAGE NO.
- -------- --------
(1) Declaration of Trust (incorporated
by reference to Registrant's initial
registration statement, August 1, 1986).
(2) By-Laws (incorporated by reference
to Registrant's initial registration
statement, August 1, 1986).
(3) Not Applicable.
(4)(a) Specimen Stock Certificate with respect
to Ariel Growth Fund series (incorporated
by reference to Registrant's Pre-Effective Amendment No. 2,
November 4, 1986);
(4)(b) Specimen Stock Certificate with respect
to Ariel Appreciation Fund series
(incorporated by reference to Registrant's
Post-Effective Amendment No. 7,
December 29, 1989).
(5)(a) Management Agreement.
(5)(b) Sub-Advisory Agreement.
(6) Underwriting Agreement.
(7) Not Applicable.
(8) Custodian Agreement (incorporated
by reference to Registrant's
Post-Effective Amendment No. 13,
July 6, 1994).
(9) Transfer Agency Contract (incorporated
by reference to Registrant's
Post-Effective Amendment No. 13,
July 6, 1994).
<PAGE>
SEQUENTIAL
EXHIBITS PAGE NO.
- -------- --------
(10) Opinion and Consent of Counsel as to
Legality of Shares Being Registered
(incorporated by reference to
Registrant's Post-Effective Amendment
No. 12.)
(11) Consent of Independent Auditors.
(12) Not Applicable.
(13) Not Applicable.
(14) Retirement Plans (incorporated by
reference to Registrant's Post-Effective
Amendment No. 13, July 6, 1994).
(15) Rule 12b-1 Distribution Plan (incorporated
by reference to Registrant's initial
registration statement, August 1, 1986).
(16) Schedule for Computation of Performance
Quotation.
(17) Not Applicable.
(18)(a) Power of Attorney.
(18)(b) Plan Pursuant to Rule 18f-3.
<PAGE>
EXHIBIT 5a
MANAGEMENT AGREEMENT
WITH RESPECT TO ARIEL PREMIER BOND FUND
MANAGEMENT AGREEMENT, made this 16th day of May, 1995, by and between ARIEL
CAPITAL MANAGEMENT, INC., an Illinois corporation (the "Adviser/Manager"), and
ARIEL GROWTH FUND, a Massachusetts business trust, d/b/a ARIEL INVESTMENT TRUST
(the "Trust") with respect to the ARIEL PREMIER BOND FUND series of the Trust
(the "Fund").
In consideration of the mutual covenants hereinafter set forth, IT IS
HEREBY AGREED between the parties as follows:
1. Employment of the Adviser/Manager. The Trust hereby employs the
Adviser/Manager to manage the investment and reinvestment of the assets of the
Fund and to perform certain administrative services, subject to the supervision
of the Trust's Board of Trustees on the terms hereinafter set forth. The
Adviser/Manager hereby accepts such employment and agrees during such period to
render the services and to assume the obligations herein set forth for the
compensation herein provided. The Adviser/Manager shall for all purposes herein
be deemed to be an independent contractor and shall, except as expressly
provided or authorized (whether herein or otherwise), have no authority to act
for or represent the Trust in any way or otherwise be deemed an agent of the
Trust. The Adviser/Manager may contract with any other person or persons to
provide any of the services contemplated in this sub-paragraph, at the expense
of the Adviser/Manager, and shall have the authority to direct the activities of
such other person or persons in the manner it deems appropriate.
2. Obligations of and Services to be Provided by the Adviser/Manager.
The Adviser/Manager undertakes to provide the following services and to assume
the following obligations:
a. The Adviser/Manager shall manage the investment and reinvestment of
the assets of the Fund, subject to and in accordance with the investment
objectives and policies of the Fund and any directions which the Trust's Board
of Trustees may issue from time to time. In pursuance of the foregoing, the
Adviser/Manager shall make all determinations with respect to the investment of
the assets of the Fund and the purchase and sale of portfolio securities and
shall take such action necessary to implement the same.
b. The Adviser/Manager shall, in the name of the Trust, place orders
for the execution of the Fund's portfolio transactions in accordance with the
policies with respect thereto set forth in the Trust's registration statements
under the Investment Company Act of 1940 ("1940 Act") and the Securities Act of
1933, as such registration statements may be amended from time-to-time.
<PAGE>
c. The Adviser/Manager shall determine the manner in which voting
rights, rights to consent to corporate action, and any other rights pertaining
to the Fund's portfolio securities shall be exercised.
d. The Adviser/Manager shall be responsible for providing certain
administrative services to the Fund that are necessary to the conduct of the
Fund's affairs. Such services shall consist of: maintaining the Trust's
organizational existence; providing office space; preparing reports to
regulatory bodies and shareholders; determining the amount of the Fund's
dividends per share; maintaining portfolio and general accounting records; and
such other incidental administrative services as are necessary to the conduct of
the Fund's affairs.
e. In connection with the services to be rendered hereunder, the
Adviser/Manager shall see to the maintenance of all necessary records of the
Fund.
f. The Adviser/Manager shall render regular reports to the Trust's
Board of Trustees concerning the Fund's investment activities.
g. The Adviser/Manager shall bear its expenses of providing services to
the Trust pursuant to this Agreement except any such expenses as are undertaken
by the Trust. In addition, the Adviser/Manager shall pay the salaries and fees
of all Trustees, executive officers and employees of the Trust who are
affiliated persons, as defined in Section 2(a)(3) of the 1940 Act, of the
Adviser/Manager.
3. Expenses of the Trust. The Trust shall pay, out of the assets of the
Fund, all of the Fund's expenses other than those expressly assumed by the
Adviser/Manager herein, which expenses payable by the Trust shall include, but
are not limited to:
a. Fees to the Adviser/Manager as provided herein;
b. Legal and audit expenses;
c. Fees and expenses related to the registration and qualification of
the Trust and shares of the Fund for distribution under federal and state
securities laws;
d. Expenses of transfer agent, registrar, custodian, dividend
disbursing agent, shareholder servicing agent and pricing services;
e. Salaries, fees and expenses of Trustees and executive officers of
the Trust who are not "affiliated persons" of the Adviser/Manager within the
meaning of the 1940 Act;
f. Taxes and corporate fees;
2
<PAGE>
g. Brokerage commissions and other expenses associated with the
purchase and sale of portfolio securities;
h. Expenses, including interest, of borrowing money;
i. Expenses incidental to meetings of the Fund's shareholders and the
maintenance of the Trust's organizational existence;
j. Expenses of printing stock certificates representing shares of the
Fund and expenses of preparing, printing and mailing notices, proxy material,
reports and other communications to regulatory bodies and reports to
shareholders;
k. Expenses of preparing and typesetting the Fund's prospectuses and
statements of additional information;
l. Expenses of printing and distributing the Fund's prospectuses and
statements of additional information to shareholders;
m. Association membership dues;
n. Insurance premiums for fidelity, trustee and officer and other
coverage; and
o. Distribution plan expenses, as permitted by Rule 12b-1 under the
1940 Act.
4. Compensation of Adviser/Manager.
-------------------------------
a. As compensation for the services rendered and obligations assumed
hereunder by the Adviser/Manager, the Trust shall pay to the Adviser/Manager out
of the assets of the Fund within ten (10) days after the last day of each
calendar month a fee calculated on the basis of average daily net assets of the
Fund at an annual rate as follows:
Annual Rate Value of Average Daily Net Assets of the Fund
----------- ---------------------------------------------
0.45% First Billion Dollars
0.425% Next One Billion Dollars
0.40% Over Two Billion dollars
Such fee shall be computed and accrued daily. Upon termination of this
Agreement before the end of any calendar month, the fee for such period shall be
prorated. For purposes of calculating the fee of the Adviser/Manager, the daily
value of the Fund's net assets shall be computed by the same method as the Trust
uses to
3
<PAGE>
compute the value of net assets in connection with the determination of the net
asset value of the Fund's shares.
b. The Adviser/Manager reserves the right (i) to waive all or a part of
its fee and (ii) to make payments to brokers and dealers from the resources of
the Adviser/Manager in consideration of their promotional or administrative
services.
5. Expense Guarantee. The Adviser/Manager hereby agrees to reimburse the
Fund if and to the extent that the aggregate operating expenses of the Fund in
any given fiscal year, including the fee paid to the Adviser/Manager, but
excluding distribution plan expenses, brokerage, taxes, interest, and
extraordinary expenses, are in excess of 1.5% of the first $30 million of the
Fund's average daily net assets and 1% of such assets in excess of $30 million.
If for any month the Fund's expenses are in excess of such limitation, then the
Adviser/Manager shall promptly and fully reimburse the Fund for such excess,
either by waiving the management fee or by direct cash payment or both. If for
any month the Fund's actual expenses are less than the applicable percentage
limitations and the Adviser/Manager has for previous months during the current
fiscal year reimbursed the Fund for excess expenses, then, to the extent maximum
permissible expenses for the current month exceed actual expenses for that
month, the Adviser/Manager shall at the end of such month recoup from the Fund
all such previous reimbursements.
6. Activities of the Adviser/Manager. The services of the Adviser/Manager
hereunder are not to be deemed exclusive, and the Adviser/Manager shall be free
to render similar services to others. It is understood that Trustees and
officers of the Trust are or may become interested in the Adviser/Manager as
stockholders, officers or otherwise, and that stockholders and officers of the
Adviser/Manager are or may become similarly interested in the Trust, and that
the Adviser/Manager may become interested in the Trust as a shareholder or
otherwise.
7. Use of Names. The Trust shall not use the name "Ariel" or the name of
the Adviser/Manager in any prospectus, sales literature or other material
relating to the Trust or to the Fund in any manner not approved prior thereto by
the Adviser/Manager; provided, however, that the Adviser/Manager shall approve
all uses of its name which merely refer in accurate terms to its appointment
hereunder or which are required by the SEC or a State Securities Commission;
and, provided, further, that in no event shall such approval be unreasonably
withheld. The Adviser/Manager shall not use the name of the Trust or of the
Fund in any material relating to the Adviser/Manager in any manner not approved
prior thereto by the Trust; provided, however, that the Trust shall approve all
uses of its name and of the name of the Fund which merely refer in accurate
terms to the appointment of the Adviser/Manager hereunder or which are required
by the SEC or a State Securities Commission; and, provided further, that in no
event shall such approval be unreasonably withheld.
4
<PAGE>
8. Liability of the Adviser/Manager. Absent willful misfeasance, bad
faith, gross negligence, or reckless disregard of obligations or duties
hereunder on the part of the Adviser/Manager, the Adviser/Manager shall not be
subject to liability to the Trust or to any shareholder of the Trust for any act
or omission in the course of, or connected with, rendering services hereunder or
for any losses that may be sustained in the purchase, holding or sale of any
security.
9. Limitation of Trust's Liability. The Adviser/Manager acknowledges that
it has received notice of and accepts the limitations upon the Trust's liability
set forth in Article XI of its Declaration of Trust. The Adviser/Manager agrees
that the Trust's obligations hereunder in any case shall be limited to the Trust
and to its assets and that the Adviser/Manager shall not seek satisfaction of
any such obligation from the shareholders of the Trust nor from any Trustee,
officer, employee or agent of the Trust.
10. Force Majeure. The Adviser/Manager shall not be liable for delays or
errors occurring by reason of circumstances beyond its control, including but
not limited to acts of civil or military authority, national emergencies, work
stoppages, fire, flood, catastrophe, acts of God, insurrection, war, riot, or
failure of communication or power supply. In the event of equipment breakdowns
beyond its control, the Adviser/Manager shall take reasonable steps to minimize
service interruptions but shall have no liability with respect thereto.
11. Renewal, Termination and Amendment. This Agreement shall be effective
as of the date hereof and continue for an initial term through January 31, 1997
unless sooner terminated as hereinafter provided. It shall continue from year
to year after the initial term as long as its continuance is approved annually
in accordance with the 1940 Act. This Agreement may be terminated at any time,
without payment of any penalty, by the Trust's Board of Trustees, or by a vote
of the majority of the outstanding voting securities of the Fund upon 60 days'
prior written notice to the Adviser/Manager and by the Adviser/Manager upon 60
days' prior written notice to the Trust. This Agreement may be amended as to
the Fund at any time by the parties, subject to approval by the Trust's Board of
Trustees and, if required by law or applicable SEC regulations, a vote of a
majority of the outstanding voting securities of the Fund. This Agreement shall
terminate automatically in the event of its assignment. The terms "assignment"
and "vote of a majority of the outstanding voting securities" shall have the
meaning set forth in the 1940 Act.
12. Severability. If any provision of this Agreement shall be held or
made invalid by a court decision, statute, rule or otherwise, the remainder of
this Agreement shall not be affected thereby.
13. Miscellaneous. Each party agrees to perform such further actions and
execute such further documents as are necessary to effectuate the purposes
hereof. This Agreement shall be construed and enforced in accordance with and
governed by the laws
5
<PAGE>
of the State of Illinois. The captions in this Agreement are included for
convenience only and in no way define or delimit any of the provisions hereof or
otherwise affect their construction or effect.
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the
date first written above.
ARIEL GROWTH FUND
By:
-----------------------------
Title:
--------------------------
ARIEL CAPITAL MANAGEMENT, INC.
By:
-----------------------------
Title:
--------------------------
6
<PAGE>
EXHIBIT 5b
SUBADVISORY AGREEMENT
SUBADVISORY AGREEMENT, made this 16th day of May, 1995, by and between
ARIEL CAPITAL MANAGEMENT, INC., an Illinois corporation ("Ariel"), and LINCOLN
CAPITAL MANAGEMENT COMPANY, an Illinois corporation ("Lincoln").
In consideration of the mutual covenants hereinafter set forth, IT IS
HEREBY AGREED between the parties as follows:
1. Ariel is the Adviser/Manager of the Ariel Growth Fund, d/b/a Ariel
Investment Trust (the "Trust"), under a Management Agreement (the "Management
Agreement") with the Trust dated February 1, 1995. Ariel hereby retains Lincoln
to manage the investment and reinvestment of the assets of the series of the
Trust designated Ariel Premier Bond Fund (the "Fund"), subject to the
supervision of the Trust's Board of Trustees ("Board of Trustees") on the terms
hereinafter set forth. Lincoln hereby accepts and agrees during such period to
render the services and to assume the obligations herein set forth for the
compensation herein provided. Lincoln shall for all purposes herein be deemed
to be an independent contractor and shall, except as expressly provided or
authorized (whether herein or otherwise), have no authority under this Agreement
to act for or represent Ariel or the Trust in any way or otherwise be deemed an
agent of either.
2. Lincoln undertakes to provide the following services and to assume the
following obligations:
a. Lincoln shall manage the investment and reinvestment of the assets
of the Fund, subject to and in accordance with the investment objectives,
policies and limitations of the Fund as set forth in the Trust's effective
registration statements under the Investment Company Act of 1940 (the "1940
Act") and the Securities Act of 1933 as they may be amended from time to time
("Registration Statements"). In pursuance of the foregoing, Lincoln shall make
all determinations with respect to the investment of the assets of the Fund and
the purchase and sale of portfolio securities and shall take such action
necessary to implement the same.
b. Lincoln shall, in the name of the Trust, place orders for the
execution of the Trust's portfolio transactions in accordance with the policies
with respect thereto set forth in the Registration Statements.
3. Lincoln shall provide Ariel or its designee with any reasonable
reports, analyses or other documentation Ariel requires to carry out its
responsibilities under its Management Agreement with the Trust, including
Ariel's administrative responsibilities and its responsibility to monitor
compliance with stated investment objectives, policies and limitations and the
investment performance of the Fund. Lincoln shall directly or
<PAGE>
through an agent, provide daily information in respect to the portfolio
transactions of the Fund to Ariel or its designee. Lincoln shall provide all
documentation reasonably required by Ariel to maintain accounting records in
respect to the Fund in accordance with the 1940 Act and the Investment Advisers
Act of 1940 and the regulations issued thereunder, and to preserve copies of all
documents and records related to asset transactions, positions and valuations
related to the Fund in the manner and for the periods prescribed by such
regulations. Lincoln agrees that all documents and records or copies of such
documents and records it maintains in respect to the Fund will be surrendered to
Ariel or the Trust upon the request of either. Lincoln agrees to provide
information and to allow inspection of such documents and records at reasonable
times by any authorized representative of Ariel, the Board of Trustees or any
committee thereof, the Trust's independent public accountants or any appropriate
regulatory authorities. Lincoln agrees to comply with directions issued by
Ariel or the Board of Trustees in respect to compliance and other administrative
matters.
4. Lincoln shall make its personnel who are engaged in activities on
behalf of the Fund available at reasonable times for consultations with Ariel
personnel and the Board of Trustees or any committee thereof, including
attendance at meetings of the Board of Trustees. Reasonable travel, meals and
lodging expenses shall be reimbursed by Ariel.
5. Lincoln shall provide all office facilities, equipment and personnel
for carrying out its duties hereunder at its own expense. Lincoln shall not be
responsible for any other expenses of the Trust.
6. As investment sub-adviser, Lincoln understands that it will be
responsible for complying with all provisions of applicable law, including the
1940 Act, the Investment Advisers Act of 1940, the Insider Trading and
Securities Fraud Enforcement Act of 1988 and all rules and regulations
thereunder. Lincoln agrees to adopt and comply at all times with a written Code
of Ethics and related procedures meeting the requirements of Rule 17j-1 under
the Investment Company Act of 1940 and acceptable to the Board of Trustees.
7. Lincoln's services are not to be deemed exclusive and it shall be free
to render similar services or other services to others provided that (i)
Lincoln's services hereunder are not impaired and are not in violation of
federal or state securities laws and (ii) Lincoln shall not provide services to
any registered investment company or series thereof which primarily invests in
fixed income securities (other than a money market fund) while Lincoln acts as a
subadviser to the Fund, without Ariel's express written permission. In the
absence of willful misfeasance, bad faith, gross negligence or reckless
disregard of Lincoln's obligations or duties hereunder, Lincoln shall not be
subject to liability for any act or omission in the cause of, or connected with,
rendering service hereunder or for any losses that may be sustained in the
purchase, holding or sale of any security. In the event of any claim,
arbitration, suit, or administrative proceedings in
2
<PAGE>
which Lincoln or Ariel is a party and in which it is finally determined that
there is a liability or wrongdoing by only one party, the party liable or found
to be the wrongdoer shall pay for all liability and expenses of such claim or
proceeding including reasonable attorneys' fees. If it is determined that there
is liability or wrongdoing by both parties or neither party, then each party
shall pay for its own liability and expenses. In the event of any settlement of
any such claim, arbitration, suit or proceeding before final determination by a
court or arbitrator(s), the liability and expenses shall be assumed as agreed
between the parties, but if there is no agreement within thirty (30) days of
such settlement, then the responsibility for liability and expenses shall be
settled by arbitration, in accordance with the then applicable rules of the
American Arbitration Association. Judgment upon the award rendered by the
arbitrator shall be final and binding and may be entered in any court having
jurisdiction. The parties shall pay for their own costs and expenses in respect
to any such arbitration and may be included in the arbitrator's award.
8. Ariel shall pay to Lincoln a fee based on the average daily net assets
of the Fund set forth in the attached addendum and reimburse expenses expressly
approved for reimbursement by Ariel. Payment for Lincoln's services and
reimbursement of expenses approved by Ariel shall be made monthly. No fee
waiver or reimbursements of expenses of the Fund by Ariel shall affect Ariel's
payments hereunder unless Lincoln expressly agrees in writing to assume part of
such waivers or reimbursements.
9. This Agreement shall become effective on the later of (a) July 2, 1995,
(b) the first business day after the date this Agreement is approved in
accordance with the 1940 Act or (c) the effective date of the post-effective
amendment of the Trust which contains a description of the Fund and the terms of
its initial offering. Unless sooner terminated as hereunder provided, it shall
initially remain in effect until January 31, 1997. Thereafter, subject to the
termination provisions herein, this Agreement shall continue in force from year
to year thereafter, but only as long as such continuance is specifically
approved at least annually in the manner required by the 1940 Act; provided,
however, that if the continuation of this Agreement is not approved, you may
continue to serve in the manner and to the extent permitted by the 1940 Act and
the rules and regulations thereunder.
10. This Agreement shall automatically terminate immediately in the event
of its assignment (except as otherwise permitted by the 1940 Act or rules
thereunder) or in the event of the termination of the Management Agreement.
This Agreement may be terminated without payment of any penalty at any time (a)
upon sixty (60) days' written notice to Lincoln by Ariel or upon sixty (60)
days' written notice to Lincoln by the Trust pursuant to action by the Board of
Trustees or by the vote of a majority of the outstanding voting securities of
the Fund, or (b) upon 60 or more days' written notice by Lincoln to Ariel and
the Trust. The terms "assignment" and "vote of a majority of the outstanding
voting securities" shall have the meaning set forth in the 1940 Act and the
rules and regulations thereunder. Termination of this Agreement shall not
affect
3
<PAGE>
Lincoln's right to receive payments on any unpaid balance of the compensation
earned and reimbursable expenses incurred prior to such termination.
11. This Agreement shall be construed according to the laws of the State
of Illinois. It may be executed in counterparts, each of which shall be deemed
an original and all of which together shall constitute one and the same
agreement.
Ariel Capital Management, Inc. Lincoln Capital Management Company
By: By:
-------------------------------- ---------------------------------
Title: Title:
----------------------------- ------------------------------
Acknowledged and Approved:
Ariel Growth Fund, d/b/a Ariel Investment Trust
By:
--------------------------------
Title:
-----------------------------
4
<PAGE>
ADDENDUM TO SUBADVISORY AGREEMENT
DATED MAY 16, 1995 BETWEEN
ARIEL CAPITAL MANAGEMENT, INC. AND
LINCOLN CAPITAL MANAGEMENT COMPANY
----------------------------------
The compensation payable by Ariel Capital Management, Inc. pursuant to
Section 8 of the Agreement shall be at the following annual rates:
Annual Rate Value of Average Daily Net Assets of the Fund
----------- ---------------------------------------------
0.30% First $50 Million
0.20% Next $50 Million
0.15% Next $150 Million
0.10% Over $250 Million
Dated May 16, 1995
ARIEL CAPITAL MANAGEMENT, INC.
By:
---------------------------------
Title:
------------------------------
LINCOLN CAPITAL MANAGEMENT COMPANY
By:
---------------------------------
Title:
------------------------------
5
<PAGE>
EXHIBIT 6
UNDERWRITING AGREEMENT
UNDERWRITING AGREEMENT, made as of the sixteenth day of May, 1995, by and
between ARIEL DISTRIBUTORS, INC., an Illinois corporation (the "Distributor"),
and ARIEL GROWTH FUND, d/b/a ARIEL INVESTMENT TRUST, a Massachusetts business
trust (the "Trust").
WHEREAS, the Trust is an open-end, diversified investment company
registered under the Investment Company Act of 1940 (the "1940 Act") and has
registered its shares for sale to the public under the Securities Act of 1933
(the "1933 Act") and various state securities laws;
WHEREAS, the Trust wishes to retain the Distributor as the principal
underwriter in connection with the offering and sale of shares of the Trust (the
"Shares") and to furnish certain other services to the Trust as specified in
this Agreement;
WHEREAS, this Agreement has been approved by a vote of the Trust's Board of
Trustees and certain trustees who are not interested persons of the Trust, in
conformity with the 1940 Act and the regulations thereunder; and
WHEREAS, the Distributor is willing to act as principal underwriter and to
furnish such services on the terms and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the promises and mutual covenants
herein contained, it is agreed as follows:
1. The Trust hereby appoints the Distributor as principal underwriter in
connection with the offering and sale of the Shares in jurisdictions wherein the
Shares may legally be sold, for the period and on the terms hereinafter set
forth. The Distributor shall, as agent for the Trust, subject to applicable
federal and state law and the Trust's Declaration of Trust and By-laws, and in
accordance with the representations in each Fund's Prospectus and Statement of
Additional Information, as such documents may be amended from time to time: (a)
promote the Trust and the Funds; (b) enter into appropriate dealer agreements
with other registered broker-dealers and other persons or organizations
("Firms") to further distribution of the Shares; (c) solicit orders for the
purchase of the Shares subject to such terms and conditions as the Trust may
specify; (d) transmit promptly orders and payments for the purchase of Shares
and orders for the redemption of Shares to the Trust's transfer agent; and (e)
provide services to shareholders as agreed upon by the Trust. The Distributor
shall comply with all applicable federal and state laws and offer the Shares on
an agency or "best efforts" basis under which the Trust shall only issue such
Shares as are actually sold.
<PAGE>
2. (a) The Distributor may sell shares of the Trust directly to
investors. In addition, the Distributor may sell shares of the Trust to or
through Firms in such manner, not inconsistent with the provisions hereof and
the then effective Registration Statement of the Trust (as hereinafter defined)
under the 1933 Act, as the Distributor may determine from time to time, provided
that no Firm or other person shall be appointed or authorized to act as agent of
the Trust without the prior consent of the Trust, and further provided that the
Distributor, and not the Trust, will be responsible for the payment of
compensation to such Firms for such services.
(b) Shares of the Trust offered for sale or sold by the Distributor shall
be offered or sold at a price per share determined in accordance with the then
current Prospectus and Statement of Additional Information relating to the sale
of such Shares except as departure from such prices shall be permitted by the
rules and regulations of the Securities and Exchange Commission ("SEC").
(c) The Distributor will conform and will require each Firm to conform to
the provisions hereof and the Registration Statement under the 1933 Act with
respect to the public offering price, manner of sales and payment terms of the
Trust's shares, and neither the Distributor nor any such Firms shall withhold
the placing of purchase orders so as to make a profit thereby.
3. The compensation to be paid for the services performed and the
obligations assumed by the Distributor under this Agreement, if any, shall be
set forth in one or more written addenda to this Agreement executed by both
parties.
4. As used in this Agreement, the term "Registration Statement" shall mean
the registration statement most recently filed by the Trust with the Securities
and Exchange Commission and effective under the 1933 Act (including the related
Prospectus and Statement of Additional Information), as such Registration
Statement is amended by any amendments thereto at the time in effect, and the
terms "Prospectus" and "Statement of Additional Information" shall mean the form
of prospectus and Statement of Additional Information filed with respect to each
Fund as part of the Registration Statement.
5. The Distributor shall print and distribute to prospective investors
Prospectuses and Statements of Additional Information, and may print and
distribute such other sales literature, reports, forms, and advertisements in
connection with the sale of the Shares as comply with the applicable provisions
of federal and state law. In connection with such sales and offers of sale, the
Distributor shall give only such information and make only such statements or
representations, and require any Firms with whom it enters into dealer
agreements to give only such information and make only such
2
<PAGE>
statements or representations, as are contained in the Prospectus or Statement
of Additional Information of a Fund or in information furnished in writing to
the Distributor by the Trust. The Trust shall not be responsible in any way for
any other information, statements or representations given or made by the
Distributor or by any Firms or other persons acting as representatives or agents
of the Distributor or of any such Firms or other persons.
6. The Trust shall assume and pay all charges and expenses of its
operations not specifically assumed or otherwise to be provided by the
Distributor under this Agreement. The Trust will pay or cause to be paid
expenses (including the fees and disbursements of its own counsel) and all taxes
and fees payable to the federal, state or other governmental agencies on account
of the registration or qualification of securities issued by the Trust or
otherwise. The Trust will also pay or cause to be paid expenses incident to the
issuance of shares of beneficial interest, such as the cost of share
certificates, issue taxes, and fees of the transfer agent. The Distributor will
pay all expenses (other than expenses which one or more Firms may bear pursuant
to any agreement with the Distributor) incident to the sale and distribution of
the shares issued or sold hereunder including, without limiting the generality
of the foregoing, all expenses of printing and distributing any Prospectus or
Statement of Additional Information and of preparing, printing and distributing
or disseminating any other literature, advertising and selling aids in
connection with the offering of the shares for sale (except that such expenses
shall not include expenses incurred by the Trust in connection with the
preparation, typesetting, printing and distribution of any Registration
Statement, Prospectus and Statement of Additional Information or report or other
communication to shareholders in their capacity as such), expenses of
advertising in connection with such offering, compensation to the Firms referred
to herein and sales compensation to Distributor's registered representatives.
7. The Trust agrees to indemnify, defend and hold the Distributor, its
several officers and directors, and any person who controls the Distributor
within the meaning of Section 15 of the 1933 Act, free and harmless from and
against any and all claims, demands, liabilities and expenses (including the
cost of investigating or defending such claims, demands or liabilities and any
counsel fees incurred in connection therewith) which the Distributor, its
officers or directors, or any such controlling person may incur, under the 1933
Act or under common law or otherwise, arising out of or based upon any alleged
untrue statement of a material fact contained in the Registration Statement,
Prospectus or Statement of Additional Information of a Fund or arising out of or
based upon any alleged omission to state a material fact required to be stated
therein or necessary to make the statements therein not misleading, provided
that in no event shall anything contained in this Agreement be construed so as
to protect the Distributor against any liability to the Trust or its
3
<PAGE>
shareholders to which the Distributor would otherwise be subject by reason of
willful misfeasance, bad faith, or gross negligence, in the performance of its
duties, or by reason of its reckless disregard of its obligations and duties
under this Agreement.
8. The Distributor agrees to indemnify, defend and hold the Trust, its
several officers and directors, and any person who controls the Trust within the
meaning of Section 15 of the 1933 Act, free and harmless from and against any
and all claims, demands, liabilities and expenses (including the cost of
investigating or defending such claims, demands or liabilities and any counsel
fees incurred in connection therewith) which the Trust, its officers or
directors, or any such controlling person may incur, under the 1933 Act or under
common law or otherwise, arising out of or based upon any alleged untrue
statement or a material fact contained in information furnished in writing by
the Distributor to the Trust for use in the Registration Statement, Prospectus
or Statement of Additional Information of a Fund or arising out of or based upon
any alleged omission to state a material fact in connection with such
information required to be stated in the Registration Statement, Prospectus or
Statement of Additional Information or necessary to make such information not
misleading.
9. The Trust reserves the right at any time to withdraw any or all
offerings of the Shares by written notice to the Distributor at its principal
office.
10. The Distributor is an independent contractor and shall be agent for
the Trust only in respect to the offer, sale and redemption of the Shares.
11. The services of the Distributor to the Trust under this Agreement are
not to be deemed exclusive, and the Distributor shall be free to render similar
services or other services to others so long as its services hereunder are not
impaired thereby.
12. The Distributor acknowledges that it has received notice of and
accepts the limitations upon the Trust's liability set forth in Article XI of
its Declaration of Trust. The Distributor agrees that the Trust's obligations
hereunder in any case shall be limited to the Trust and to its assets (or the
assets of the applicable Fund) and that the Distributor shall not seek
satisfaction of any such obligation from the shareholders of the Trust nor from
any Trustee, officer, employee or agent of the Trust.
13. The Trust shall not use the name of the Distributor in any Prospectus,
Statement of Additional Information, sales literature or other material relating
to the Trust in any manner not approved prior thereto by the Distributor;
provided, however, that the Distributor shall approve all uses of its name which
merely refer in accurate terms to its appointment hereunder or
4
<PAGE>
which are required by the SEC or applicable state securities commissions; and,
provided further, that in no event shall such approval be unreasonably withheld.
The Distributor shall not use the name of the Trust or of any Fund in any
material relating to the Distributor in any manner not approved prior thereto by
the Trust; provided, however that the Trust shall approve all uses of its name
and the name of any Fund which merely refer in accurate terms to the appointment
of the Distributor hereunder or which are required by the SEC or a state
securities commission; and, provided further, that in no event shall such
approval be unreasonably withheld.
14. The Distributor shall prepare written reports for the Board of
Trustees of the Trust on a quarterly basis showing information concerning
services provided and expenses incurred which are related to this Agreement and
such other information as from time to time shall be reasonably requested by the
Trust's Board of Trustees.
15. This Agreement shall be effective on May 16, 1995 and continue for an
initial term ending January 31, 1997 unless sooner terminated as hereinafter
provided. It shall continue from year to year thereafter as long as its
continuance is approved annually in accordance with the 1940 Act and the
regulations thereunder. This Agreement may be terminated at any time by either
party upon 60 or more days prior written notice to the other party. This
Agreement may be amended as to a Fund at any time by the parties, subject to
approval by the Trust's Board of Trustees and, if required by law or applicable
SEC regulations, a vote of a "majority of the outstanding voting securities" of
such Fund, as defined in the 1940 Act and any regulations thereunder. This
Agreement shall be binding on the successors and assigns of each party,
provided, however, that this Agreement shall terminate automatically in the
event of its "assignment", as defined in the 1940 Act and any regulations
thereunder.
16. Each party agrees to perform such further actions and execute such
further documents as are necessary to effectuate the purposes hereof. This
Agreement shall be construed and enforced in accordance with and governed by the
laws of the State of Illinois.
5
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed on the date first above written by their officers thereunto duly
authorized.
ARIEL GROWTH FUND
By:
---------------------------------
Title:
------------------------------
ARIEL DISTRIBUTORS, INC.
By:
---------------------------------
Title:
------------------------------
6
<PAGE>
ADDENDUM TO UNDERWRITING AGREEMENT
DATED MAY 16, 1995 BETWEEN
ARIEL DISTRIBUTORS, INC. AND
ARIEL GROWTH FUND D/B/A ARIEL INVESTMENT TRUST
----------------------------------------------
For the services performed and the obligations assumed by Ariel Distributors,
Inc. in respect to the series designated Ariel Growth Fund, Ariel Appreciation
Fund and the Class B shares of the series designated Ariel Premier Bond Fund,
Ariel Distributors, Inc. shall be paid no more often than weekly a distribution
service fee at the annual rate of 0.25% of the respective average daily assets
of each such series and Class.
Dated May 16, 1995
ARIEL DISTRIBUTORS, INC.
By:
---------------------------------
Title:
------------------------------
ARIEL GROWTH FUND
By:
---------------------------------
Title:
------------------------------
7
<PAGE>
EXHIBIT 11
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Independent
Auditors" and to the use of our report on the statement of assets and
liabilities of Ariel Premier Bond Fund dated May 23, 1995 in the Registration
Statement (Form N-1A) and its incorporation by reference in the related
Prospectus of Ariel Mutual Funds, filed with the Securities and Exchange
Commission in this Post-Effective Amendment No. 15 to the Registration Statement
under the Securities Act of 1933 (File No. 33-7699) and in this Amendment No. 15
to the Registration Statement under the Investment Company Act of 1940 (File No.
811-4786).
/s/ERNST & YOUNG LLP
Chicago, Illinois
June 1, 1995
<PAGE>
Exhibit 16
ARIEL PREMIER BOND FUND
Computation of One Year Hypothetical Average Annual Total Return
<TABLE>
<CAPTION>
CLASS A SHARES
INITIAL SHARES REINVESTED DIVIDEND RECORD REINVEST
INVESTMENT NAV OUTSTANDING SHARES AMOUNT DATE EX-DATE RATE PRICE
---------- --- ----------- ---------- -------- -------- -------- ---- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
12/31/94 1,000.00 10.00 100.000
101.990 1.990 20.00 6/29/95 6/30/95 0.20 10.05
12/31/95 1,047.44 10.07 104.016 2.026 20.40 12/30/95 12/31/95 0.20 10.07
</TABLE>
HYPOTHETICAL TOTAL RETURN CALCULATION
P(1+T)/n/=ERV
1,000(1+T)/1/=1,047.44
T=4.74%
<TABLE>
<CAPTION>
CLASS B SHARES
INITIAL SHARES REINVESTED DIVIDEND RECORD REINVEST
INVESTMENT NAV OUTSTANDING SHARES AMOUNT DATE EX-DATE RATE PRICE
---------- --- ----------- ---------- -------- -------- -------- ---- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
12/31/94 1,000.00 10.00 100.000
101.496 1.496 15.00 6/29/95 6/30/95 0.15 10.03
12/31/95 1,035.25 10.05 103.010 1.515 15.22 12/30/95 12/31/95 0.15 10.05
</TABLE>
HYPOTHETICAL TOTAL RETURN CALCULATION
P(1+T)/n/=ERV
1,000(1+T)/1/=1,035.25
T=3.53%
<PAGE>
ARIEL PREMIER BOND FUND
Hypothetical SEC Yield
For the 30 day period ended December 31, 1995
<TABLE>
<S> <C>
SEC YIELD = 2 [(( ( TOTAL INCOME - TOTAL EXPENSES ) + 1 ) /6/ ) -1 ]
----------------------------------------------
(AVERAGE SHARES *12/31/95 OFFERING PRICE)
</TABLE>
Class A Shares
Hypothetical SEC yield = 5.91%
5.91% = 2 [(( (100 - 95 ) +1 ) /6/ ) -1 ]
-------------------
(102.002 *10.07)
Class B Shares
Hypothetical SEC yield = 3.55%
3.55% = 2 [(( (100 - 97 ) +1 ) /6/ ) -1 ]
-------------------
(101.657 *10.05)
2
<PAGE>
EXHIBIT 18a
ARIEL GROWTH FUND
POWER OF ATTORNEY
KNOW ALL PEOPLE BY THESE PRESENTS, that the undersigned constitutes and
appoints Sheldon R. Stein, Arthur Don, John W. Rogers, Jr., Mellody Hobson and
Roger P. Schmitt, and each of them, his attorneys-in fact, each with the power
of substitution, for him in any and all capacities, to sign any registration
statement, and any pre-effective and post-effective amendment thereto, of the
above-named registered investment company under the Securities Act of 1933
and/or the Investment Company Act of 1940, whether on Form N-1A, Form N-14 or
any other form, or any successor forms thereof, and to file the same, with
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission and all appropriate state or federal
regulatory authorities until July 15, 1995. The undersigned hereby ratifies and
confirms all that each of the aforenamed attorneys-in-fact, or his or her
substitute or substitutes, may do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as
of the 1st day of June, 1995.
/s/Christopher G. Kennedy
----------------------------
Christopher G. Kennedy
<PAGE>
EXHIBIT 18b
Ariel Growth Fund, d/b/a Ariel Investment Trust
Plan Pursuant to Rule 18f-3
---------------------------
Ariel Growth Fund, d/b/a Ariel Investment Trust (the "Trust") may offer
different classes of shares of its Ariel Premier Bond Fund series pursuant to
Rule 18f-3 under the Investment Company Act of 1940 (the "Act") under the
following Plan.
1. The current Plan for the Ariel Premier Bond Fund encompasses two
classes of shares that may be offered as follows:
(a) Class A shares to be sold and redeemed at net asset value. Class A is
an "institutional" class. The minimum initial investment is $1,000,000, subject
to modification by the Board of Trustees. The minimum initial investment
requirement may be waived at the discretion of the investment adviser or
principal underwriter under circumstances in which the investment adviser or
principal underwriter anticipates that the account will reach at least
$1,000,000 in a reasonable period of time. Class A shares are not subject to
Rule 12b-1 distribution fees.
(b) Class B shares to be sold and redeemed at net asset value. Class B is
a "retail" class. The minimum initial investment is $1,000, subject to
modification by the Board of Trustees. The minimum initial investment
requirement may be waived at the discretion of the investment adviser or
principal underwriter. Class B shares are subject to Rule 12b-1 fees at an
annual rate of 0.25% of the average daily net assets attributable to such
shares.
(c) Shares of either class may be exchanged, or issued in exchange for,
shares of the other class or for shares of Ariel Growth Fund or Ariel
Appreciation Fund (other single class series of Ariel Investment Trust) or for
shares of any money market mutual fund approved by the Board of Trustees for
such exchange privilege, at relative net asset values provided that after the
exchange, the value of the account in the class or fund into which the exchange
is made meets the minimum initial investment requirement for such class or fund.
Shares of each class may be redeemed at the option of the Trust if by reason of
redemption the shareholder account falls below a minimum value from time to time
determined by the Trustees (and set forth in the applicable prospectus), which
minimum value may vary between the classes. The minimum value is currently
$1,000,000 for Class A shares and $1,000 for Class B shares. Exchange
privileges for an account may be terminated if excessive use is made, i.e., more
than five exchanges from any fund per calendar year. The privilege may be
generally modified or terminated upon mailing to shareholders at their addresses
of record 60 or more days before such notice is effective.
(d) Shares of either class may be redeemed in kind subject to the
requirements of Rule 18f-1 under the Act and subject to any further restriction
or prohibition under any state blue sky law.
<PAGE>
2. Income, realized and unrealized capital gains and losses, and expenses
not allocated to a particular class as provided below, shall be allocated to
each class on the basis of relative net assets.
Expenses allocable to a specific class are expenses specifically incurred
by or for such class including the following:
(a) Rule 12b-1 expenses
(b) Incremental transfer agency expenses
(c) Incremental costs of preparing, printing and mailing shareholder
reports, proxy materials and prospectuses related to such class
(d) Registration fees and other expenses of registration of the shares of
such class under laws or regulations of any jurisdiction in which the class of
shares is to be offered
(e) Directors' fees and expenses incurred as a result of issues relating
solely to such class
(f) Legal and accounting expenses relating solely to such class
(g) Expenses related to meetings of the shareholders of such class
The investment adviser and principal underwriter have agreed to waive fees
or to reimburse expenses to the extent necessary to cause the annualized expense
ratio of Class A or Class B (exclusive of brokerage, taxes, interest and
extraordinary expenses such as litigation expenses) not to exceed 0.60% and
0.95%, respectively, subject to the right of the investment adviser or principal
underwriter to reduce or terminate such waiver or reimbursement upon 30 or more
days' written notice to the Trust.
3. Each class will vote separately with respect to any matter as required
by applicable law or which separately affects that class. The shares of each
class have one vote per share and a pro-rata fractional vote for a fraction of a
share.
2
