<PAGE>
Rule 497(e)
1933 Act Registration No. 33-7699
1940 Act Registration No. 811-4786
Ariel Growth Fund (d/b/a Ariel Investment Trust)
Supplement dated November 6, 1995
to the Prospectus
dated October 1, 1995
A
SPECIAL INVITATION
TO
INVEST
(This is a supplement dated November 6, 1995 to the Ariel Premier Bond Fund,
Institutional Class prospectus dated October 1, 1995)
Ariel Mutual Funds is pleased to offer individual investors the opportunity to
invest in the new Ariel Premier Bond Fund, Institutional Class at the special
lowered minimum of $1,000.00, or $50.00 a month through the Automatic Investment
Program. Normally, this Class of shares is limited to investors with a minimum
investment of $1,000,000.00.
This offer will extend until the Ariel Premier Bond Fund, Investor Class is
available to the investing public. The one difference between the two classes
of shares is that the Investor Class will have higher expenses. The expenses
for the Institutional Class are outlined in the enclosed prospectus and for the
Investor Class in this supplement.
During this special offer, individuals who invest $25,000.00 or more in the
Ariel Premier Bond Fund, Institutional Class will be permitted to remain in the
Institutional Class with its lower expense ratio. Other investors will receive
a notice accompanied by the Investor Class prospectus informing them that their
accounts will be converted to the new Investor Class. There will be no tax
implications with this conversion.
Please read the enclosed prospectus carefully. If you have any questions,
please call an Ariel Shareholder Representative at 1-800-29-ARIEL (1-800-292-
7435) and we would be happy to assist you.
-Ariel Mutual Funds
Investor Class Fees(1)
Management Fees 0.68%
12b-1 Fees 0.25%
Other Expenses(2) 0.00%
Total Fund Operating Expenses(3) 0.93%
_____________
(1) The operating expenses are annualized and are estimated for the fiscal
year ending September 30, 1996.
(2) If you request a redemption by wire transfer, you may be charged a
$10.00 wire fee.
(3) Pursuant to an Investment Advisory Agreement and an Administrative
Services Agreement, the Advisor pays all expenses of the Fund except fees
under the Agreements, interest, taxes, brokerage commissions and extraordinary
expenses.
Ariel Investment Trust
307 North
Michigan Avenue
Suite 500
Chicago, Illinois 60601
800.292.7435
312.726.0140
Fax 312.726.7473
Distributed by Ariel Distributors, Inc.
<PAGE>
Prospectus October 1, 1995
For Institutional Class Shares
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 and Administrator of the Fund. Lincoln
Capital Management Company ("Lincoln Capital") is the Fund's Sub-Adviser
responsible for the day to day investment operations.
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 80% of the Fund's total 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 October 1, 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.
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The Fund currently offers one class of shares, the Institutional Class. These
shares are offered primarily to institutional investors and are not subject to
Rule 12b-1 distribution fees. Upon receipt of the necessary regulatory
approvals, the Fund expects to offer a second class of shares, the Investor
Class, under a separate prospectus. The Investor Class, which will bear higher
administrative expenses and will be subject to Rule 12b-1 distribution fees,
will be sold to the general public directly and through broker-dealers.
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<TABLE>
<CAPTION>
TABLE OF CONTENTS Page(s)
<S> <C>
Fund Expenses for Institutional Class Shares 3
Investment Objective, Policies and Risk Factors 4
Management and Organization of the Fund 17
How to Buy Shares 23
Net Asset Value 26
When Your Account Will Be Credited 27
Exchanging Shares 27
Redeeming Shares 29
Telephone Transactions 32
Dividends, Capital Gains and Taxes 32
Certain Shareholders of the Fund 34
Total Return, Yield and Other Performance Information 34
</TABLE>
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FUND EXPENSES FOR INSTITUTIONAL CLASS SHARES
SHAREHOLDER TRANSACTION COSTS
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF
AVERAGE NET ASSETS) (1):
Maximum Sales Load on Purchases None
Maximum Sales Load on Reinvested Dividends None
Deferred Sales Load None
Redemption Fee None
Exchange Fee None
Management Fees 0.58%
12b-1 Fees 0.00%
Other Expenses (2) 0.00%
Total Fund Operating Expenses (2) 0.58%
- ----------
(1) The operating expenses are annualized and are estimated for the fiscal year
ending September 30, 1996. Please refer to the section "Management and
Organization of the Fund" for further information.
(2) Pursuant to an Investment Advisory Agreement and an Administrative Services
Agreement, the Adviser pays all expenses of the Fund except fees under the
Agreements, interest, taxes, brokerage commissions and extraordinary expenses.
EXAMPLE:
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 $ 5.95
Three Years $ 18.60
3
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Explanation of Table: The purpose of the table is to assist you in
understanding the various costs and expenses that an investor in the
Institutional Class of the Fund would bear directly (shareholder transaction
costs) or indirectly (annual fund operating expenses). The information is based
on amounts for the Fund's first fiscal year.
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.
THE FUND SEEKS TO MAXIMIZE TOTAL RETURN.
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.
Investment Objective, Policies and Risk Factors
The investment objective of the 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. Normally, the Fund will
invest at least 80% of its total 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 ("A-Grade Securities"). In the
event that downgrades of securities cause less than 80% of the Fund's total
assets to be invested in A-Grade Securities, Lincoln Capital will take steps as
soon as practicable to increase the Fund's holdings of A-Grade Securities. 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 may purchase any type of income producing security including, but not
limited to, U.S. government and agency obligations, mortgage-backed and other
asset-backed securities, commercial paper and corporate debt securities. As a
part of its overall investment strategy for the Fund, Lincoln Capital may use
derivatives. Derivatives are financial instruments whose value and performance
are based on the value and performance of another security or financial
instrument. The risk of investments in derivatives varies with the type of
derivative strategy used. Lincoln Capital will not purchase derivatives whose
value is based on instruments in which the Fund could not invest directly.
Derivative strategies are most often used to assist Lincoln Capital
4
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in establishing its desired duration and yield curve positions as described more
fully below. See "Additional Use of Derivatives" for more information.
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
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.
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.
5
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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 reflect compensation for
accepting credit risk or uncertain cash flow patterns (timing and amounts).
Lincoln Capital's judgments on these spreads are influenced by its outlook for
business conditions and for the volatility of interest rates. These judgments
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 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 at 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
6
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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 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.
GENERALLY, AT LEAST 80% OF THE FUND'S TOTAL ASSETS WILL BE INVESTED IN A-GRADE
SECURITIES, WHICH ARE IN THE THREE HIGHEST GRADES, OR THE EQUIVALENT, WHILE 20%
OF THE TOTAL ASSETS ARE NOT SO LIMITED.
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") (Aaa, Aa, A and Baa) or Standard and
Poor's Corporation ("S & P") (AAA, AA, A and BBB) or that are not rated by
Moody's or S & P but deemed to be of comparable quality by Lincoln Capital.
Generally, at least 80% of the Fund's total assets will be invested in A-Grade
Securities, which are in the three highest grades, or the equivalent, while 20%
of the total assets are not so limited. The lowest investment grade securities
(Baa and BBB) 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
7
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invested in debt securities below investment grade, Lincoln Capital will take
steps 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 security 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
8
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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.
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 class 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
9
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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 lower volatility and a lower yield while
those with longer maturities typically have higher volatility and a 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 values of stripped mortgage
securities can be volatile and are sensitive to prepayment rates on the
mortgages underlying the stripped securities.
Mortgage Dollar Rolls. The Fund may enter into "mortgage dollar rolls," which
are transactions in which the Fund sells a mortgage-related security to a dealer
and simultaneously agrees to repurchase a similar security (but not the same
security) in the future at a pre-determined price. See "Mortgage Dollar Rolls"
in the Fund's Statement of Additional Information for more information regarding
this type of transaction.
Additional Risks. Investments by the Fund in mortgage-related U.S. Government
Securities, such as GNMA Certificates and CMOs, also involve 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
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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.
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
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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.
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.
YANKEE BONDS
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.
Additional 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
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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 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.
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
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<PAGE>
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.
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 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
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<PAGE>
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 DIVERSIFICATION AND 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. However, Lincoln Capital does not intend to (i) make
any investment in a single corporate issuer if, at that time, such issuer would
represent more than 5% of the Fund's total assets, or (ii) make any investment
in a single issuer of asset-backed securities if at that time, such issuer would
represent more than 10% of the Fund's total assets.
The Fund will not concentrate 25% or more of its total assets in any one
industry. U.S. Government Securities are not subject to this limitation.
BORROWING
THE FUND MAY NOY BORROW MONEY TO PURCHASE SECURITIES.
The Fund may not borrow money to purchase securities. The Fund may borrow money
only 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 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.
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<PAGE>
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. Generally,
the higher the turnover rate of the Fund's portfolio, the higher the transaction
costs borne by the Fund 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. An annual turnover
rate which exceeds 100% is considered to be high.
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 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, the Institutional Class.
Upon receipt of the necessary regulatory
17
<PAGE>
approvals, the Fund expects to offer a second class of shares, the Investor
Class, 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 one class, such as distribution expenses and administrative
fees, 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.
THE BOARD OF TRUSTEES SUPERVISES THE FUND'S ACTIVITIES AND REVIEWS THE TRUST'S
CONTRACTS WITH COMPANIES THAT PROVIDE SERVICES TO THE FUND.
Because the Investor Class incurs higher administrative and distribution fees,
that class will have a higher expense ratio and will have correspondingly lower
returns than the Institutional Class. You may call 1-800-29-ARIEL (1-800-292-
7435) for more information regarding the Investor Class of the Fund.
The Trust does not 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.
Trustees may be removed at a special meeting of shareholders by a vote of two-
thirds of the outstanding shares. As a shareholder, you receive one vote for
each share of the Fund you own.
BOARD OF TRUSTEES
BERT N. MITCHELL, CPA (Chairman of the Board of Trustees)
Founder, Chairman and Chief Executive Officer,
Mitchell/Titus & Co.
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.
President, Flippin Associates; formerly Director of Program Advancement,
Massachusetts Institute of Technology
18
<PAGE>
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
Executive Vice President and Director,
Merchandise Mart Properties, Inc.
ERIC T. McKISSACK, CFA
Vice Chairman and Co-Chief Investment Officer,
Ariel Capital Management, Inc.
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
Investment Advisory Agreement, Ariel Capital Management, Inc. (the "Adviser")
acts as the investment adviser to the Fund. Under the Investment Advisory
Agreement, the Adviser performs or supervises the investment and reinvestment of
the assets of the Fund, is responsible for certain management services and pays
all of the Fund's expenses other than the Adviser's fees under the Investment
Advisory Agreement and the Administrative Services Agreement, the expenses
assumed by the Adviser under the Administrative Services Agreement, interest,
taxes, brokerage commissions and extraordinary expenses. Under the Investment
Advisory Agreement, the Adviser is paid a fee based on the average daily net
assets of the Fund at the annual rates of 0.43% if such net assets are less than
$500 million; 0.41% if such net assets are at least $500 million, but less than
$1 billion; 0.39% if such net assets are at least $1 billion, but less than $1.5
billion; 0.37% if such net assets are at least $1.5 billion, but less than $2
billion; and 0.35% if such net assets are $2 billion or more. The Adviser also
acts as Administrator to the Fund (see below) and 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.
19
<PAGE>
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
current and prospective investors. Ariel Distributors is under common control
with the Adviser.
LINCOLN CAPITAL MANAGEMENT CO., ACT AS SUB-ADVISER TO THE FUND
Lincoln Capital Management Company ("Lincoln Capital"), 200 South Wacker Drive,
Chicago, Illinois 60606, acts as the 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. As of June 30, 1995, Lincoln
Capital, as a whole, had $32 billion of assets under management of which $20
billion is managed in fixed-income strategies.
20
<PAGE>
PERFORMANCE HISTORY OF LINCOLN CAPITAL
Although 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 client advisory
accounts ("Advisory Accounts") whose portfolios were managed by Lincoln Capital
over a period of thirteen years, since Lincoln Capital began operations. The
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. 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 results presented are not intended to predict or suggest returns that will
be experienced by the Fund or the return that an investor will achieve by
investing in the Fund. The Fund is subject to different costs, including
investment management, 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.
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<PAGE>
ANNUAL TOTAL RETURN
-------------------
<TABLE>
<CAPTION>
Lincoln Capital's Salomon Brothers
Number of Average Account Active Fixed Lehman Brothers Broad Investment-
Year 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 3.24 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 investment advisory 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.
22
<PAGE>
ARIEL CAPITAL MANAGEMENT, INC. SERVES AS ADMINISTRATOR TO THE FUND
The Adviser is also the Fund's Administrator. Under the Administrative Services
Agreement, the Administrator is responsible for providing, arranging for or
facilitating transfer agency and shareholder servicing; the preparation,
printing and distribution of notices, proxy materials, reports to regulatory
bodies and reports to shareholders related to a specific class; state securities
qualifications; SEC registrations and shareholder meetings. The Administrator
pays all of the Fund's expenses related to the services to be provided under the
Administrative Services Agreement, all fees and expenses of Trustees incurred as
a result of a matter related solely to one class of shares of the Fund and,
generally, the Fund's auditing and legal fees for professional services related
solely to one class of the shares of the Fund. The Administrator is not
responsible for paying any legal, accounting or other expenses related to any
litigation affecting the Fund. For services under the Administrative Services
Agreement, the Institutional Class pays a fee based on the average daily net
assets of the Institutional Class at the annual rates of 0.15% if such net
assets are less than $500 million; 0.125% if such net assets are $500 million or
more but less than $1 billion; and 0.10% if such net assets are $1 billion or
more.
THE TRANSFER AGENT AND CUSTODIAN
Investors Fiduciary Trust Company ("IFTC") is the Fund's transfer agent,
custodian and dividend disbursing and shareholder servicing agent.
INITIAL PURCHASES
How to Buy Shares
The minimum initial investment in the Institutional Class 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.
As a special offer, only available until the required regulatory approvals are
received and the Investor Class is available for sale, investments in the
Institutional Class may be made for as little as $1,000, or $50 if you are
participating in the Automatic Investment Program. After the Investor Class is
available for sale, shareholders who invested less than $25,000 will be given
the option to increase their Institutional Class accounts to at least $25,000 or
their accounts will be converted to the Investor Class. Those initial investors
in the Institutional Class who invested at least $25,000, and do not reduce
their investment below that amount, will be eligible to remain in the
Institutional Class.
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<PAGE>
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 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.
24
<PAGE>
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 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." 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.
25
<PAGE>
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.
CONTACT THE ADVISER FOR MORE COMPLETE RETIREMENT INFORMATION DISCUSSING PLANS
AND THEIR BENEFITS, PROVISIONS AND FEES.
Tax-Saving Retirement Plans
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.
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.
26
<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.
BEFORE YOU BUY SHARES, PLEASE READ THE FOLLOWING INFORMATION TO MAKE SURE YOUR
INVESTMENT IS ACCEPTED AND CREDITED PROPERLY.
When Your Account Will Be Credited
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 up to 15
calendar days from the purchase date). 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 security dealers in
order to sell shares of the Fund.
YOU MAY EXCHANGE SHARES OF THE FUND FOR SHARES OF THE OTHER ARIEL MUTUAL FUNDS
AND FOR SHARES OF CERTAIN MONEY MARKET FUNDS.
Exchanging Shares
You may exchange your shares in the Fund for shares of the Fund's Investor Class
(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 Class or Fund
meets the minimum investment 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
27
<PAGE>
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 Commonwealth
Advisors, Inc.
Before exchanging your shares into shares of the Fund's Investor Class, shares
of any other Ariel Mutual Fund 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."
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<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. See also
"Dividends, Capital Gains and Taxes."
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 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."
BY MAIL
Redeeming Shares
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
29
<PAGE>
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 on 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, 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. See the restrictions under "Telephone Transactions" as
they also apply to wire redemptions.
OTHER INFORMATION ABOUT REDEMPTIONS
There is no charge for redeeming your shares. If, however, you redeem shares
through certain dealers, your broker may charge a fee when you redeem your
shares.
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<PAGE>
TO ENSURE ACCEPTANCE OF YOUR REDEMPTION REQUEST, PLEASE FOLLOW THE PROCEDURES
DESCRIBED HERE AND BELOW.
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 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 Institutional Class 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.
31
<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. By exercising the telephone privilege to sell or exchange shares,
you agree that the Fund shall not be liable for following telephone instructions
reasonably believed to be genuine. Reasonable procedures will be employed to
confirm that such instructions are genuine and, if not employed, the Fund may be
liable for unauthorized instructions. 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.
EACH YEAR, THE FUND DISTRIBUTES SUBSTANTIALLY ALL OF IT NET INVESTMENT INCOME
AND CAPITAL GAINS TO SHAREHOLDERS.
Dividends, Capital Gains and Taxes
The tax discussion in this section is not intended as a complete or definitive
discussion of the tax effects of investing in the Fund. Each investor should
consult his or her own tax adviser regarding the effect of federal, state and
local taxes related to ownership, exchange or sale of Fund shares.
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
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<PAGE>
Statement of Additional Information for additional detail about the tax aspects
of the dual-class structure.
DIVIDENDS ARE PAID QUARTERLY
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. 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.
"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.
33
<PAGE>
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. The
Trust believes that exchanges between classes of the same Fund are non-taxable.
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 the Fund does 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 October 1, 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 was one Institutional Class share,
and no Investor Class shares, outstanding.
% OF OUTSTANDING
NAME AND ADDRESS OWNED INSTITUTIONAL CLASS SHARES
- ---------------- ----- --------------------------
Ariel Capital Management, Inc. 1 100%
307 N. Michigan Avenue
Chicago, IL 60601
THE FUND MAY ADVERTISE TOTAL RETURN AND YIELD, WHICH ARE BASED ON HISTORICAL
RESULTS AND ARE NOT INTENDED TO INDICATE FUTURE PERFORMANCE.
Total Return, Yield and Other Performance Information
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
34
<PAGE>
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 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.
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<PAGE>
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.
36
<PAGE>
ADVISER AND
SERVICES ADMINISTRATOR
Ariel Capital Management, Inc.
307 North Michigan Avenue, Suite 500
Chicago, Illinois 60601
800-29-ARIEL (800-292-7435)
312-726-0140
312-726-7473 fax
SUB-ADVISER
Lincoln Capital Management Company
200 South Wacker Drive, Suite 2100
Chicago, Illinois 60606
PRINCIPAL UNDERWRITER
Ariel Distributors, Inc.
307 North Michigan Avenue, Suite 500
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, Suite 2900
Chicago, Illinois 60602
37
<PAGE>
BOARD OF TRUSTEES
Bert N. Mitchell, CPA (Chairman of the Board of Trustees)
Founder, Chairman and Chief Executive Officer,
Mitchell/Titus & Co.
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.
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
Executive Vice President and Director,
Merchandise Mart Properties, Inc.
Eric T. McKissack, CFA
Vice Chairman and Co-Chief Investment Officer,
Ariel Capital Management, Inc.
38
<PAGE>
ARIEL INVESTMENT TRUST
STATEMENT OF ADDITIONAL INFORMATION
October 1, 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
October 1, 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 INSTITUTIONAL CLASS SHARES OF THE FUND.. 11
SPECIAL TAX MATTERS.......................................... 11
INVESTMENT ADVISER, SUB-ADVISER AND SERVICES ADMINISTRATOR... 12
METHOD OF DISTRIBUTION OF THE INVESTOR CLASS 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
APPENDIX A................................................... 18
APPENDIX B................................................... 19
</TABLE>
2
<PAGE>
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 the 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 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.
3
<PAGE>
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 borrow money except from banks for
temporary or emergency purposes in an amount not exceeding 33-1/3% of the value
of its total assets (including amounts borrowed). 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.
(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.
4
<PAGE>
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. 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.
5
<PAGE>
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.
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.
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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.
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.
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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 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
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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 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
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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.
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 INSTITUTIONAL CLASS 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, Institutional
Class 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 Institutional Class 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.
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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 the
investor 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 to the
investor for Federal income tax purposes. Each investor should consult a 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.
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 under an Investment Advisory Agreement and also acts
as the Administrator under an Administrative Services Agreement with the Trust.
Both the Investment Advisory Agreement and the Administrative Services
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
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such continuance is also approved annually by the vote of a majority of the
Trustees of the Trust who are not parties to either Agreement or interested
persons of parties to such agreement or interested persons of such parties, cast
in person at a meeting called for the purpose of voting on such approval. The
Advisory Agreements may be terminated without penalty by the Trust or the
Adviser upon 60 days' prior written notice; automatically terminates in the
event of its assignment.
Under the Investment Advisory Agreement, the Adviser performs or supervises
the investment and reinvestment of the assets of the Fund and is responsible for
certain management services that are necessary or desirable to the operation of
the Fund. The Adviser may delegate its investment management responsibilities
to a sub-adviser selected by the Adviser and approved in accordance with the
Investment Company Act of 1940. The management services provided by the Adviser
consist of maintaining the Fund's organizational existence, providing office
space and personnel, preparing, filing and distributing notices, proxy
materials, reports to regulatory bodies, and reports to shareholders of the
Fund, maintaining portfolio and general accounting records; and other incidental
management services as are necessary to the conduct of the Fund's affairs except
such notices, materials, reports, records and services as are to be provided
under the Administrative Services Agreement.
The Adviser also performs services under the Administrative Services
Agreement as described in the Prospectus.
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 Adviser, the Sub-Adviser manages the day-to-day
investment operations for the Fund. The Fund pays no fees directly to the Sub-
Adviser.
The Adviser and Sub-Adviser 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 INVESTOR CLASS 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 and the Distribution Plan referred to below, Ariel
Distributors receives a fee at the annual rate of 0.25% of the average daily net
assets of the Investor Class, 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 Investor Class (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 Investor Class in connection
with the distribution of the Investor Class 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
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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 Investor Class by vote of
a majority of Independent Trustees, or by vote of a majority of the outstanding
Investor Class 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.
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
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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
Set forth below are the principal business affiliations of the Trustees and
Officers during the last five years:
MARIO L. BAEZA, ESQ., 44, 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, 46, 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, 61, 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., 47, 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, 32, 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, 57, 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, 26, 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, 42, 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.
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/1/ROGER P. SCHMITT, 38, 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, 44, 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.
- --------------
1 Officers and trustees deemed to be "interested persons" of the Fund under
the Investment Company Act of 1940.
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:
NAME COMPENSATION
---- ------------
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
* 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.
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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
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.
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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.
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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 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.
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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.
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