<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933
REGISTRATION NO. 33-7699
Post-Effective Amendment No. 21
and
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940
REGISTRATION NO. 811-4786
Amendment No. 21
ARIEL GROWTH FUND
307 North Michigan Avenue
Suite 500
Chicago, Illinois 60601
Registrant's Telephone Number, Including Area Code
1-312-726-0140
Agent for Service:
Sheldon R. Stein
D'Ancona & Pflaum
30 North LaSalle Street
Chicago, Illinois 60602
(312) 580-2014
It is proposed that this filing will become effective:
Immediately upon filing pursuant to paragraph (b)
-----
on February 1, 1998 pursuant to paragraph (b)
-----
X 60 days after filing pursuant to paragraph (a)
-----
on (date) pursuant to paragraph (a) of Rule 485
-----
<PAGE>
THE ARIEL FUNDS
CROSS REFERENCE SHEET
FORM N-1A
SECTION IN PROSPECTUS
(APPRECIATION AND GROWTH FUNDS AND BOND FUND-INVESTOR CLASS)
ITEM
- ----
1 . . . . . Cover Page; Back Cover Page
2 . . . . . Ariel Stock Funds Overview; Ariel Bond Fund Overview; Investment
Objective; Investment Strategy; Investment Risks; Who Should
Consider Investing in the Funds and Who should not; Total
Returns, after Fees and Expenses
3 . . . . . Annual Operating Expenses of the Funds
4 . . . . . The Ariel Stock Funds in Depth; The Ariel Bond Fund In Depth
5 . . . . . (Not Applicable)
6 . . . . . How the Ariel Funds are Organized
7 . . . . . Managing Your Ariel Account; Choosing Your Ariel Account; Buying
Ariel Mutual Fund Shares, Selling Ariel Mutual Fund Shares;
Shareholder Services; Calculating the Funds' Share Prices; Paying
Taxes on Your Ariel Mutual Fund Earnings
8 . . . . . Annual Operating Expenses
9 . . . . . Financial Highlights: Ariel Stock Funds; Financial Highlights:
Ariel Premier Bond Fund
SECTION IN STATEMENT OF
ADDITIONAL INFORMATION
(Growth and Appreciation Funds Only)
ITEM
- ----
10. . . . . Cover Page
11. . . . . General Information
12. . . . . General Information; Investment Restrictions; Investment Strategy
and Risks; Portfolio Transactions; Appendix
13. . . . . Trustees and Officers; Compensation Schedule
14. . . . . Significant Shareholders; Trustees and Officers
15. . . . . Investment Adviser and Services Administration; Transfer Agent
and Custodian; Independent Auditors
16. . . . . Portfolio Transactions
17. . . . . General Information
18. . . . . Purchasing, Exchanging and Redeeming Shares; Net Asset Value
19. . . . . Dividends, Capital Gains and Taxes
20. . . . . Investment Adviser and Services Administrator; Method of
Distribution
21. . . . . Calculation of Total Return; Total Return and Other Performance
Information
22. . . . . Cover Page
2
<PAGE>
THE ARIEL FUNDS
CROSS REFERENCE SHEET
FORM N-1A
SECTION IN PROSPECTUS
(Premier Bond Fund-Institutional Class)
ITEM
- ----
1 . . . . . Cover Page; Back Cover Page
2 . . . . . Ariel Bond Fund Overview; Investment Objective; Investment
Strategy; Investment Risks; Who Should Consider Investing in the
Funds and Who should not; Total Returns, after Fees and Expenses
3 . . . . . Annual Operating Expenses of the Fund
4 . . . . . The Ariel Bond Fund In Depth
5 . . . . . (Not Applicable)
6 . . . . . How the Ariel Funds are Organized
7 . . . . . Managing Your Ariel Account; Choosing Your Ariel Account; Buying
Ariel Mutual Fund Shares, Selling Ariel Mutual Fund Shares;
Shareholder Services; Calculating the Funds' Share Prices; Paying
Taxes on Your Ariel Mutual Fund Earnings
8 . . . . . Annual Operating Expenses
9 . . . . . Financial Highlights: Ariel Premier Bond Fund
SECTION IN STATEMENT OF
ADDITIONAL INFORMATION (BOND FUND - BOTH CLASSES)
ITEM
- ----
10. . . . . Cover Page
11. . . . . General Information
12. . . . . General Information; Investment Restrictions; Investment Strategy
and Risks; Portfolio Transactions; Appendix
13. . . . . Trustees and Officers; Compensation Schedule
14. . . . . Significant Shareholders; Trustees and Officers
15. . . . . Investment Adviser and Services Administration; Transfer Agent
and Custodian; Independent Auditors
16. . . . . Portfolio Transactions
17. . . . . General Information
18. . . . . Purchasing, Exchanging and Redeeming Shares; In-Kind Purchases
of Institutional Class Shares of the Fund; Net Asset Value
19. . . . . Dividends, Capital Gains and Taxes
20. . . . . Investment Adviser and Services Administrator; Method of
Distribution of the Investor Class Shares
21. . . . . Calculation of Total Return, Total Return, Yield and Other
Performance Information
22. . . . . Cover Page
3
<PAGE>
Ariel Mutual Funds
STOCK FUNDS
ARIEL GROWTH FUND
ARIEL APPRECIATION FUND
BOND FUND
ARIEL PREMIER BOND FUND - INVESTOR CLASS
NO-LOAD MUTUAL FUNDS
PROSPECTUS
FEBRUARY 1, 1999
The Securities and Exchange Commission has not approved or disapproved of the
shares of Ariel Mutual Funds or any other mutual fund. Nor has the Securities
and Exchange Commission determined whether this prospectus is accurate or
complete. Any representation to the contrary is a criminal offense.
<PAGE>
TABLE OF CONTENTS
ARIEL STOCK FUNDS OVERVIEW . . . . . . . . . . . . . . . . . . . . . . . . . .3
ARIEL STOCK FUNDS IN DEPTH . . . . . . . . . . . . . . . . . . . . . . . . . .12
FINANCIAL HIGHLIGHTS: ARIEL STOCK FUNDS . . . . . . . . . . . . . . . . . . .17
ARIEL PREMIER BOND FUND OVERVIEW . . . . . . . . . . . . . . . . . . . . . . .20
ARIEL PREMIER BOND FUND IN DEPTH . . . . . . . . . . . . . . . . . . . . . . .25
FINANCIAL HIGHLIGHTS: PREMIER BOND FUND. . . . . . . . . . . . . . . . . . . .28
HOW THE ARIEL FUNDS ARE ORGANIZED. . . . . . . . . . . . . . . . . . . . . . .29
MANAGING YOUR ARIEL ACCOUNT. . . . . . . . . . . . . . . . . . . . . . . . . .36
<PAGE>
ARIEL STOCK FUNDS OVERVIEW
INVESTMENT OBJECTIVE
Both the Ariel Growth Fund and the Ariel Appreciation Fund are no-load mutual
funds that seek long-term capital appreciation.
INVESTMENT STRATEGY
The Ariel Growth Fund invests primarily in the stocks of small companies with
market capitalization's under $1.5 billion at the time of the Fund's first
purchase.
The Ariel Appreciation Fund invests primarily in the stocks of medium size
companies with market capitalizations between $200 million and $5 billion at the
time of the Fund's first purchase.
[SIDEBAR: "MARKET CAPITALIZATION," OR "MARKET CAP," PROVIDES A READY GAUGE OF A
COMPANY'S SIZE. IT MULTIPLIES THE TOTAL NUMBER OF THE COMPANY'S OUTSTANDING
SHARES BY THE CURRENT PRICE OF ITS STOCK. THE CHART [TK] USES MARKET CAP TO
COMPARE THE AVERAGE SIZE OF THE COMPANIES HELD BY THE ARIEL GROWTH FUND WITH THE
SIZE OF THE COMPANIES IN THE ARIEL APPRECIATION FUND AND WITH THE COMPANIES IN
THE STANDARD & POOR'S 500-STOCK INDEX.]
Both Ariel Stock Funds seek to invest in sound companies other investors have
misunderstood or ignored. These companies share three attributes that we believe
should result in capital appreciation over time:
- a product or service whose strong brand franchise and loyal customer
base pose formidable barriers to potential competition
- capable, dedicated management
- a solid balance sheet with high levels of cash flow and a low burden
of debt.
Page No.:3
<PAGE>
The essence of the Ariel Stock Funds' strategy is patience. Ariel Capital
Management, Inc., the Stock Funds' Investment Adviser, holds investments for
a relatively long period of time--typically three to five years.
INVESTMENT RISKS
Although we make every effort to achieve the Ariel Stock Funds' objective of
long-term capital appreciation, we cannot guarantee we will attain that
objective. As is the case with any investment, you could lose money on your
purchase of shares in the Ariel Growth or Ariel Appreciation Fund. The table
below lists some of the principal risks of investing in the Ariel Stock Funds
and the measures we take in attempting to limit those risks:
- --------------------------------------------------------------------------------
RISKS HOW WE TRY TO MANAGE THEM
- --------------------------------------------------------------------------------
- - The general level of stock - Buy stocks whose prices are low
prices declines. relative to their earnings
potential; such stocks have done
better than the market average in
past declines.
- --------------------------------------------------------------------------------
- - Small-cap and mid-cap stocks - Avoid startup ventures and highly
like those held by the Ariel cyclical or speculative
Stock Funds fall out of favor. companies; seek companies with
solid finances and proven
records.
- --------------------------------------------------------------------------------
- - Ariel Stock Funds hold - Research stocks exhaustively
relatively few stocks; a before purchase; monitor
fluctuation in one could continuously after purchase;
significantly affect the limit the value of a single stock
Funds' overall performance. as a percentage of total Fund--if
its price rises to exceed the
limit, sell the excess.
- --------------------------------------------------------------------------------
Page No.:4
<PAGE>
WHO SHOULD CONSIDER INVESTING IN THE FUNDS--AND WHO SHOULD NOT
You should consider investing in the Ariel Stock Funds if you are looking for
long-term capital appreciation and are willing to accept the associated risks.
While past performance cannot predict future results, stock investments
historically have outperformed most bond and money-market investments.
However, this higher return has come at the expense of greater short-term price
fluctuations, down as well as up. Thus, you should NOT consider investing in the
Funds if you anticipate a near-term need--typically within five years--for
either the principal or the gains from your investment.
An investment in either of the Ariel Stock Funds, like any mutual fund, is not a
bank deposit. It is not insured or guaranteed by the Federal Deposit Insurance
Corporation or any other government agency.
Page No.:5
<PAGE>
TOTAL RETURNS, AFTER FEES AND EXPENSES
The bar charts and tables below can help you evaluate the potential risk and
rewards of investing in the Ariel Stock Funds by showing changes in the Funds'
performance from year to year and by showing how the Funds' average annual
returns for one, five and ten years (or since inception) compare with those of a
broad measure of market performance. Total return measures how much the price of
an investment in a mutual fund changes, assuming that all dividend income and
capital gain distributions are reinvested. For any fund, you should evaluate
total return in light of the fund's particular investment objectives and
policies, as well as general market conditions during the reported time periods.
The bar chart for the Ariel Growth Fund shows the Funds' ACTUAL returns for
each full calendar year for the last ten years. For the Ariel Appreciation
Fund, the bar chart shows returns for each full calendar year since
inception--December 1, 1989.
The tables compare AVERAGE annual returns for the Ariel Mutual Funds with
standard benchmark indices: the S&P 500-stock Index and the Russell 2000 Index
for the Ariel Growth Fund; the S&P 500-stock Index and the Russell Mid-Cap Index
for the Ariel Appreciation Fund. The indices do not represent the actual returns
an investor might experience. They measure overall market returns. They do not
take into account the costs of buying and selling securities or managing a stock
portfolio, costs which are deducted from mutual fund returns.
[SIDEBAR: THE S&P 500-STOCK INDEX FOLLOWS THE STOCK-MARKET PERFORMANCE OF 500 OF
THE LARGEST COMPANIES IN THE UNITED STATES. THE COMPANIES COVER THE ENTIRE RANGE
OF AMERICAN BUSINESS AND REPRESENT A SUBSTANTIAL PROPORTION OF THE STOCKS TRADED
EVERYDAY. INVESTORS CAN COMPARE THE PERFORMANCE OF STOCK MUTUAL FUNDS WITH THIS
BROAD INDICATOR OF HOW THE "MARKET" IS DOING.
THE RUSSELL 2000 AND THE RUSSELL MID-CAP INDEX ARE MORE SPECIFIC AND RELEVANT
INDICES FOR THE ARIEL GROWTH AND ARIEL APPRECIATION FUNDS, RESPECTIVELY:
Page No.:6
<PAGE>
- - THE RUSSELL 2000 CONSISTS OF THE SMALL CAP COMPANIES IN THE RUSSELL 3000.
THE RUSSELL 3000 TRACKS THE STOCK RETURNS OF THE 3,000 LARGEST PUBLICLY
HELD COMPANIES IN THE UNITED STATES. THE RUSSELL 2000 FOLLOWS THE SMALLEST
2,000 OF THOSE COMPANIES.
- - THE S&P MIDCAP 400 TRACKS 400 OF THE LARGEST COMPANIES WITH THE MOST
FREQUENTLY TRADED STOCKS AFTER THE S&P 500. AS WITH THE S&P 500, THE S&P
MIDCAP 400 STOCKS ARE CHOSEN TO REFLECT THE FULL RANGE OF AMERICAN
BUSINESS.]
The tables show the average annual returns for the last one, five, ten years and
since inception for the Ariel Growth Fund. For the Ariel Appreciation Fund, they
show the average annual returns for the last one and five year periods and since
inception.
Page No.:7
<PAGE>
ARIEL GROWTH FUND
Year-by-Year Returns
for each full calendar year since 1988
[BAR CHART]
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
TK 36.44 23.51 18.52 -4.22 8.72 11.73 32.72 -16.08 25.12 39.93
1998 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
</TABLE>
Best Quarter: [TK] Quarter [year] [TK]
Worst Quarter: [TK] Quarter [year] [TK]
Year to Date: [TK]
The Ariel Growth Fund's past returns do not provide any indication of future
performance.
ARIEL GROWTH FUND
Average Annual Returns
as of December 31, 1998
<TABLE>
- --------------------------------------------------------------------------------
1 year 3 years 5 years 10 years Life
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Ariel Growth Fund TK% TK% TK% TK%
- --------------------------------------------------------------------------------
Russell 2000 Index TK TK TK TK
- --------------------------------------------------------------------------------
S&P 500 Index TK TK TK TK
- --------------------------------------------------------------------------------
</TABLE>
Page No.:8
<PAGE>
ARIEL APPRECIATION FUND
Year-by-Year Returns
for each full calendar year since inception
(December 1, 1989)
[BAR CHART]
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
TK 37.95 23.72 24.16 -8.39 7.94 13.24 33.15 -1.51
1998 1997 1996 1995 1994 1993 1992 1991 1990
</TABLE>
Best Quarter: [TK] Quarter [year] [TK]
Worst Quarter: [TK] Quarter [year] [TK]
Year-to-Date: [TK]-
The Ariel Appreciation Fund's past returns do not provide any indication of
future performance.
ARIEL APPRECIATION FUND
Average Annual Returns
as of December 31, 1998
<TABLE>
- ------------------------------------------------------------------------------------------
1 year 3 years 5 years since inception
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Ariel Appreciation Fund TK% TK% TK% TK%
- ------------------------------------------------------------------------------------------
Russell Mid-Cap Index TK TK TK TK
- ------------------------------------------------------------------------------------------
S&P 500 Index TK TK TK TK
- ------------------------------------------------------------------------------------------
</TABLE>
Page No.:9
<PAGE>
ANNUAL OPERATING EXPENSES FOR FISCAL YEAR ENDED SEPTEMBER 30, 1998
The tables below describe the fees and expenses you may pay if you buy and hold
shares in the Ariel Growth or the Ariel Appreciation Fund. These expenses are
paid from Fund assets. BOTH ARIEL STOCK FUNDS ARE "NO-LOAD" FUNDS. YOU DO NOT
PAY A SALES CHARGE WHEN YOU BUY OR SELL THEIR SHARES.
<TABLE>
<CAPTION>
----------------------------------------
GROWTH FUND APPRECIATION FUND
(percentage of (percentage of
average daily average daily
net Fund assets) net Fund assets)
- --------------------------------------------------------------------------------
<S> <C> <C>
Management fees 0.65% 0.75%
- --------------------------------------------------------------------------------
Distribution and service (12b-1) fees 0.25% 0.25%
- --------------------------------------------------------------------------------
Other expenses 0.31% 0.26%
- --------------------------------------------------------------------------------
Total annual operating expenses 1.21% 1.26%
- --------------------------------------------------------------------------------
</TABLE>
[SIDEBAR:
- - MANAGEMENT FEES COVER THE COSTS OF OVERSEEING THE FUND'S INVESTMENTS AND
THE COSTS OF ADMINISTRATION AND ACCOUNTING.
- - 12b-1 FEES PAY FOR PROMOTION AND DISTRIBUTION OF FUND SHARES. BECAUSE THESE
FEES ARE PAID FROM FUND ASSETS ON AN ONGOING BASIS, THESE FEES WILL
INCREASE THE COST OF YOUR INVESTMENT AND MAY COST YOU MORE THAN OTHER TYPES
OF SALES CHARGES.
- - OTHER EXPENSES INCLUDE THE COSTS OF THE CUSTODIAN AND TRANSFER AGENT,
ACCOUNTANTS, ATTORNEYS AND DIRECTORS.]
COST COMPARISON EXAMPLES
The examples below illustrate the expenses you would have incurred on a $10,000
investment in the Ariel Growth or the Ariel Appreciation Fund, assuming the
Funds each earned an annual return of 5% over the periods shown.
<TABLE>
<CAPTION>
----------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years/Since Inception
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Ariel Growth Fund $123 $384 $665 $1,466
- ----------------------------------------------------------------------------------------------
Ariel Appreciation Fund $128 $400 $692 $1,523
- ----------------------------------------------------------------------------------------------
</TABLE>
Page No.:10
<PAGE>
These examples are hypothetical and for the purpose of comparing the Funds'
expense histories with other mutual funds. They do not represent estimates of
future expenses or returns, either of which may be greater or less than the
amounts shown.
Page No.:11
<PAGE>
ARIEL STOCK FUNDS IN DEPTH
INVESTMENT OBJECTIVE
The Ariel Growth Fund and the Ariel Appreciation Fund pursue a common objective:
long-term capital appreciation--the Ariel Growth Fund primarily through
investment in small company stocks, the Ariel Appreciation Fund primarily
through investment in medium-sized company stocks. The two Ariel Stock Funds
invest for appreciation, not income. They seek stocks whose underlying value
should increase over time. Any dividend and interest income these securities
earn is incidental to the pursuit of the Ariel Stock Funds' fundamental
objective. Ariel Capital Management, Inc., the Funds' Investment Adviser, cannot
guarantee either Fund will achieve capital appreciation in every circumstance,
but we are dedicated to that objective. We believe long-term capital
appreciation:
- results from investments in undervalued stocks, stocks that other
investors have overlooked or ignored.
[SIDEBAR: INVESTORS CONSIDER A STOCK UNDERVALUED WHEN IT TRADES AT A PRICE
BELOW WHAT THEY THINK THE BUSINESS IS WORTH. THE CONCEPT IS RELATIVE. INVESTORS
MIGHT JUDGE A STOCK UNDERVALUED ON THE BASIS OF PRICE TO EARNINGS RATIO: THEY
PAY LESS FOR A DOLLAR OF CORPORATE EARNINGS WHEN THEY BUY A PARTICULAR STOCK
THAN THEY WOULD IF THEY BOUGHT ANOTHER. OR THEY MIGHT JUDGE A STOCK UNDERVALUED
BY COMPARING ITS DISCOUNT (OR PREMIUM) TO PRIVATE MARKET VALUE--WHAT A RATIONAL
AND INFORMED BUYER WOULD PAY TO PURCHASE AN ENTIRE BUSINESS IF THE BUSINESS WERE
TO BE SOLD.]
- results from investing in companies that have compiled a long history
of consistent earnings in both good and bad economic times.
- is more likely to be found in consistent, predictable, businesses that
often sell everyday goods or services and enjoy a high level of repeat
sales.
- occurs when companies dominate their markets. These companies'
products have gained such strong brand recognition that in many cases
their name is synonymous with the product itself.
Page No.:12
<PAGE>
- is a product of committed and experienced management running its
business efficiently and delivering solid value to its customers.
INVESTMENT STRATEGY AND APPROACH
OUR APPROACH TO INVESTING
We believe successful long-term investing results from disciplined research, not
from impulsive speculation or arbitrary guesswork. This conviction has shaped
our process for the past 16 years. It has defined an investment agenda that
emphasizes small and mid-size companies.
SMALL AND MID-SIZE COMPANIES
The concept of undervalued companies whose long-term growth prospects have
gone largely unappreciated by the market implies an information gap.
Investors have misjudged these companies: They may not have recognized the
companies inherent strengths or they may have overlooked the companies
altogether. Because Wall Street follows large corporations closely, they
rarely encounter such misperceptions. If a large company share price seems
low, its stock will probably have fallen for a well-documented reason. If
their prospects are strong, investors will usually have bid up its price in
anticipation of growth. Wall Street covers small and mid-cap companies far
less intensively. According to a 1998 survey(a), an average of seven
professional financial analysts covered each of the stocks held in the Ariel
Growth Fund compared to an average of 24 for each large stock listed in the
S&P 500. We believe this discrepancy in coverage makes it more likely that we
will discover the opportunities often inherent in small- and mid-cap stocks
ahead of the rest of the market.
- -------------------------
(a) Frank B. Russell & Co.
Page No.:13
<PAGE>
CONSISTENT INDUSTRIES
Our disciplined research process favors tried-and-true businesses with
predictable revenues over trendy "concept stocks". We avoid areas characterized
by rapid obsolescence and industries vulnerable to new competition. We prefer
established businesses with mature markets--the quiet, unnoticed businesses that
produce the goods and services of everyday life. And we prefer companies with
long track records built over several business cycles. We prefer steady earnings
to cyclical peaks and valleys.
THE RESPONSIBILITY FACTOR
We believe ethical business practices make good investment sense. In the long
run, a company that adopts environmentally sound policies will face less
government intrusion. A company that fosters community involvement among its
employees will inspire community support. We believe that a company that
cultivates diversity is more likely to attract and recruit the best talent and
broaden its markets in profitable new directions. For these reasons, we avoid
corporations whose primary business involves the sale or production of alcoholic
beverages, tobacco products or nuclear weapons and energy. We feel these
industries are more likely to face shrinking growth prospects, draining
litigation costs and legal liability which cannot be quantified.
Page No.:14
<PAGE>
INVESTMENT PROCESS: A FOCUS ON RESEARCH
UNCOVERING VALUE AND GROWTH
Our proprietary research process begins with the usual Wall Street
sources--financial analysts' reports, the standard computer databases and
company press releases. Digging deeper, we review more than 150 newspapers,
trade periodicals and technical journals. We often say our research team reads
for a living. In this way, we believe they can uncover the outstanding companies
buried in the day-to-day routine of the nation's business.
We apply the same intensive research once we have identified a candidate for
investment. We comb through the company's financial history and analyze its
prospects. We develop independent long-range financial projections and detail
the risks.
We verify our findings first-hand. We visit a portfolio candidate to form our
own impression. We meet with its suppliers and customers. We talk to its
competitors and former employees. We measure the shelf space a consumer products
manufacturer commands in the supermarket; we count a newspaper's ad lineage and
the cars in a retailer's parking lot on a Saturday morning. We sample a
restaurant chain's menu at units around the country to assure ourselves of
quality and consistency.
We learn all we can about a company's management. We believe the character and
quality of a company's management weighs at least as heavily as any other factor
in determining its success, especially in the smaller companies in which we
invest. The skill of the management team will help the company overcome
unforeseen obstacles. Its contacts and experience will alert the company to
emerging opportunities.
Page No.:15
<PAGE>
A LONG-TERM VIEW
When we have completed our research process, we "own" the companies in which we
invest, we don't merely trade their stock. We believe the market will ultimately
reward these companies, and we give them the time such recognition requires,
five years on average and sometimes, even longer. This means that the Ariel
Stock Funds typically have low rates of turnover.
Each time a fund turns over a holding--sells one stock to buy another--it incurs
transaction charges that negatively impact investment returns--the higher the
rate, the more negative the impact. High turnover rates can reduce investment
performance; low turnover rates can enhance it. A low rate of turnover can offer
yet another advantage because it may reduce the Funds' taxable capital gains.
[SIDEBAR: TURNOVER MEASURES THE FREQUENCY AN INVESTMENT ADVISER BUYS AND SELLS
STOCKS IN A MUTUAL FUND. A TURNOVER RATE OF 100% IMPLIES THE ADVISER CHANGES THE
FUND'S ENTIRE INVESTMENT PORTFOLIO EVERY YEAR.]
PRINCIPAL INVESTMENTS
We are demanding and selective investors. The companies we choose for our
portfolio must meet ALL our criteria:
- - a competitive stock price relative to their peers as well as historic
market valuations,
- - seasoned management,
- - a solid balance sheet and sound finances, and
- - a dominant market niche.
Only a few such companies exist at any one time. A portfolio consisting
exclusively of stocks in these companies is highly select: The Ariel Growth
Fund generally contains no more than 35 stocks and the Ariel Appreciation Fund
no more than 45.
[SIDEBAR: FROM A DATABASE OF 9,200 PUBLICLY TRADED COMPANIES, ONLY SOME 200
QUALIFY FOR CLOSER ANALYSIS AND 80 FOR INTENSE ANALYSIS. FROM THIS GROUP, ONLY
SIX OR SEVEN NEW STOCKS MAY MAKE THEIR WAY INTO BOTH ARIEL STOCK FUNDS EACH
YEAR.]
Page No.:16
<PAGE>
FINANCIAL HIGHLIGHTS: ARIEL STOCK FUNDS
The tables below provide the Ariel Stock Funds' financial performance for the
past five fiscal years. The information reflects financial results for a single
share of either the Ariel Growth or the Ariel Appreciation Fund. The total
returns in the table represent the rate of return that an investor would have
earned on an investment in either Fund. The returns assume all dividends and
distributions earned were reinvested from each Fund. Ernst & Young LLP, the
Funds' Independent Auditors, has audited this information. The Funds' financial
statements are included in the Funds' Annual Report, which is available free of
charge by request.
<TABLE>
<CAPTION>
ARIEL GROWTH FUND
- --------------------------------------------------------------------------------------------------------------
Year Ended September 30
- --------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, $41.49 $30.58 $30.78 $28.84 $30.46
beginning of year
- --------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT
OPERATIONS:
- --------------------------------------------------------------------------------------------------------------
Net investment income 0.13 0.07 0.18 0.36 0.18
- --------------------------------------------------------------------------------------------------------------
Net realized and unrealized gains (1.41) 12.62 4.24 3.51 0.23
(losses) on investments ------ ------ ------ ------ ------
- --------------------------------------------------------------------------------------------------------------
Total from (1.28) 12.69 4.42 3.87 0.41
investment operation
- --------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO
SHAREHOLDERS:
- --------------------------------------------------------------------------------------------------------------
Dividends from net investment (0.14) -- (0.44) (0.23) (0.30)
income
- --------------------------------------------------------------------------------------------------------------
Distributions from capital gains (3.58) (1.78) (4.18) (1.70) (1.73)
------ ------ ------ ------ ------
- --------------------------------------------------------------------------------------------------------------
Total distributions (3.72) (1.78) (4.62) (1.93) (2.03)
------ ------ ------ ------ ------
- --------------------------------------------------------------------------------------------------------------
Net asset value, end of year $36.49 $41.49 $30.58 $30.78 $28.84
------ ------ ------ ------ ------
------ ------ ------ ------ ------
- --------------------------------------------------------------------------------------------------------------
Total return (3.83)% 43.25% 16.28% 14.38% 1.41%
- --------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA AND
RATIOS:
- --------------------------------------------------------------------------------------------------------------
Net assets, end of year, in $162,279 $164,065 $109,770 $120,953 $149,511
thousands
- --------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net 1.21% 1.25% 1.31% 1.37%(a) 1.25%
assets
- --------------------------------------------------------------------------------------------------------------
Ratio of net investment income to 0.30% 0.23% 0.57% 1.18%(a) 0.56%
average net assets
- --------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 22% 20% 17% 16% 9%
- --------------------------------------------------------------------------------------------------------------
</TABLE>
- -------------------------
(a) Net of reimbursements. Without the fee waiver, the ratio of expenses to
average net assets would have been 1.39%, and the ratio of expenses to
average net assets would have been 1.61% for the fiscal year ended 1998.
Page No.:17
<PAGE>
<TABLE>
<CAPTION>
ARIEL APPRECIATION FUND
- --------------------------------------------------------------------------------------------------------------
Year Ended September 30
- --------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1998
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, $33.70 $24.99 $22.76 $21.82 $21.67
beginning of year
- --------------------------------------------------------------------------------------------------------------
INCOME FROM
INVESTMENT OPERATIONS:
- --------------------------------------------------------------------------------------------------------------
Net investment income 0.09 0.02 0.13 0.14 0.04
- --------------------------------------------------------------------------------------------------------------
Net realized and unrealized gains 1.14 10.13 4.07 2.26 0.51
on investments ------ ------ ------ ------ ------
- --------------------------------------------------------------------------------------------------------------
Total from 1.23 10.15 4.20 2.40 0.55
investment operation
- --------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO
SHAREHOLDERS:
- --------------------------------------------------------------------------------------------------------------
Dividends from net (0.07) (0.07) (0.20) (0.06) (0.05)
investment income
- --------------------------------------------------------------------------------------------------------------
Distributions from capital (3.06) (1.37) (1.77) (1.40) (0.35)
gains ------ ------ ------ ------ ------
- --------------------------------------------------------------------------------------------------------------
Total Distributions (3.13) (1.44) (1.97) (1.46) (0.40)
- --------------------------------------------------------------------------------------------------------------
Net asset value, end of $31.80 $33.70 $24.99 $22.76 $21.82
year ------ ------ ------ ------ ------
------ ------ ------ ------ ------
- --------------------------------------------------------------------------------------------------------------
Total Return 3.40% 42.33% 19.60% 12.11% 2.56%
- --------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA AND
RATIOS:
- --------------------------------------------------------------------------------------------------------------
Net assets, end of year, $213,812 $186,478 $135,627 $143,312 $162,280
in thousands
- --------------------------------------------------------------------------------------------------------------
Ratio of expenses to 1.26% 1.33% 1.36% a) 1.36%(a) 1.35%(a)
average net assets
- --------------------------------------------------------------------------------------------------------------
Ratio of net investment 0.25% 0.07% 0.50%(a) 0.61%(a) 0.17%(a)
income to average
net assets
- --------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 20% 19% 26% 18% 12%
- --------------------------------------------------------------------------------------------------------------
</TABLE>
- -------------------------
(a) Net of reimbursements. Without the fee waiver, the ratio of expenses to
average net assets would have been 1.40%, 1.58%, and 1.40% for the
periods ended 1996, 1995, and 1994; and the ratio of net investment income
to average net assets would have been 0.46%, 0.39% and 0.12% for the
periods ended 1996, 1995, and 1994.
Page No.:18
<PAGE>
ARIEL PREMIER BOND FUND OVERVIEW
The Ariel Premier Bond Fund currently offers two classes of shares, the Investor
Class and the Institutional Class. The Institutional Class is offered through a
separate prospectus primarily to institutional investors. All discussion of the
Premier Bond Fund in this Prospectus relates to the Investor Class.
Page No.:19
<PAGE>
INVESTMENT OBJECTIVE The Ariel Premier Bond Fund seeks to maximize total return
through a combination of income and capital appreciation. [SIDEBAR: A BOND'S
TOTAL RETURN DERIVES FROM TWO SOURCES: FIRST, THE INTEREST INCOME IT GENERATES
IN A GIVEN PERIOD; AND SECOND, FROM CAPITAL APPRECIATION--AN INCREASE IN THE
PRICE OF THE BOND FROM THE BEGINNING TO THE END OF A GIVEN TIME PERIOD. (AN
INCREASE IN THE PRICE OF THE BOND ADDS TO TOTAL RETURNS, A DECREASE REDUCES
TOTAL RETURNS.) THE CALCULATIONS ASSUME THE REINVESTMENT OF ALL INTEREST
PAYMENTS AND CAPITAL APPRECIATION.]
INVESTMENT STRATEGY The Ariel Premier Bond Fund invests no less than 80% of its
assets in high-quality fixed income securities for which a ready market exists.
If the securities are private-sector issues--corporate bonds, commercial paper
or bonds secured by assets such as home mortgages--they will have earned an "A"
rating or better from a nationally recognized statistical rating organization
such as Moody's Investors Service or the Standard & Poor's Corporation. We also
consider all bonds issued by the U.S. Government and its agencies to be high
quality.
INVESTMENT RISKS Although the Ariel Premier Bond Fund's Investment Sub-Adviser,
Lincoln Capital Management Company, makes every effort to achieve the Fund's
objective of maximizing total investment returns, there can be no guarantee the
Fund will attain its objective. As is the case with any investment, you could
lose money on your purchase of shares in the Ariel Premier Bond Fund. The table
below lists some of the principal risks of investing in the Ariel Premier Bond
Fund and the measures the Fund's Investment Sub-Adviser takes in attempting to
limit those risks.
- --------------------------------------------------------------------------------
RISKS HOW THE FUND TRIES TO MANAGE THEM
- --------------------------------------------------------------------------------
- - Issuers of bonds held by the - Only hold bonds with highest
Fund cannot make timely credit ratings. A or better,
payment of either interest or on average.
principal when they fall due.
- --------------------------------------------------------------------------------
- - Highly rated bonds are - Conduct independent evaluation
downgraded because of issuer's of the creditworthiness
financial problems. of the bonds and their issuers.
- --------------------------------------------------------------------------------
- - Bond prices decline because of - Actively manage Fund's average
an increase in interest rates. duration to maintain its
value despite interest rate
increases.
- --------------------------------------------------------------------------------
Page No.:20
<PAGE>
WHO SHOULD CONSIDER INVESTING IN THE FUND--AND WHO SHOULD NOT
You should consider investing in the Ariel Premier Bond Fund if you are seeking
current income and capital appreciation. You should be willing to accept the
short-term price fluctuations, which have occurred from time to time.
Traditionally these fluctuations are less than those associated with stocks.
You should not consider investing in the Ariel Premier Bond Fund if you cannot
tolerate moderate short-term declines in share value or if you are seeking the
higher returns historically achieved by stocks.
Page No.:21
<PAGE>
TOTAL RETURNS, AFTER FEES AND EXPENSES
The bar chart and table below can help you evaluate the potential risk and
rewards of investing in the Ariel Premier Bond Fund by showing changes in the
Fund's performance for its first calendar year and comparing the Fund's
performance with a broad measure of market performance. The bar chart shows the
Fund's ACTUAL returns for 1998, the first full calendar year since it began
operation in February 1997. The table compares the Funds' AVERAGE annual return
with the returns of a relevant benchmark index, the Lehman Brothers Aggregate
Bond Index.
As is the case with indices, the Lehman Brothers Aggregate Bond Index does not
represent the actual returns an investor might experience. It measures the bond
market's total return (the interest income it earns, plus or minus the price
change in a given period). It does not take into account the costs of buying and
selling securities or the fees related to managing a portfolio.
[SIDEBAR: THE LEHMAN BROTHERS AGGREGATE BOND INDEX IS ONE OF THE MOST WIDELY
ACCEPTED BENCHMARKS OF BOND MARKET TOTAL RETURN. IT INCLUDES MORE THAN 6,000
TAXABLE GOVERNMENT, INVESTMENT-GRADE AND MORTGAGE-BACKED SECURITIES.]
Page No.:22
<PAGE>
ARIEL PREMIER BOND FUND
Return for 1998
[BAR CHART]
TK
(first full calendar year)
Best Quarter: Quarter [year] [TK]%
Worst Quarter: Quarter [year] [TK]%
Year to Date: [TK]%
The inception date for the Ariel Premier Bond Fund is February 1997.
Past returns do not provide any indication of the Ariel Premier Bond Fund's
future performance.
<TABLE>
<CAPTION>
Ariel Premier Bond Fund
Annual Return
as of December 31, 1998
-------------------------------------------------
1 Year
-------------------------------------------------
<S> <C>
Ariel Premier Bond Fund TK
-------------------------------------------------
Lehman Brothers Aggregate Bond Index TK
-------------------------------------------------
</TABLE>
ANNUAL OPERATING EXPENSES FOR FISCAL YEAR END SEPTEMBER 30, 1998
The table below shows the fees and expenses that you may pay if you buy and hold
shares in the Ariel Premier Bond Fund. These expenses are deductible from the
Fund's assets.
<TABLE>
-------------------------------------------------------------
Percentage of average
daily net assets of the Fund
-------------------------------------------------------------
<S> <C>
Management fees 0.60%
-------------------------------------------------------------
Distribution (12b-1) fees 0.25%
-------------------------------------------------------------
Other expenses -0-
-------------------------------------------------------------
Total annual operating expenses 0.85%
-------------------------------------------------------------
</TABLE>
Ariel Capital Management paid the Premier Bond Fund's other expenses.
- -------------------------
Page No.:23
<PAGE>
COST COMPARISON EXAMPLE
The examples below illustrate the expenses you would have incurred on a $10,000
investment in the Ariel Premier Bond Fund, assuming the Fund earned an annual
return of 5% over the periods shown.
<TABLE>
---------------------------------------------------
1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------
Ariel Premier Bond Fund $87 $271 $471 $1,049
- --------------------------------------------------------------------------------
</TABLE>
The example is hypothetical and for the purpose of comparing the Fund's expense
ratio with other mutual funds. It does not represent estimates of future
expenses or returns, either of which may be greater or less than the amounts
depicted.
Page No.:24
<PAGE>
ARIEL PREMIER BOND FUND IN DEPTH
INVESTMENT OBJECTIVE
The Ariel Premier Bond Fund seeks to maximize total return in a bond portfolio
through a combination of interest income and capital appreciation.
INVESTMENT STRATEGY
Ariel Premier Bond Fund's Investment Sub-Adviser, Lincoln Capital Management
Company considers three principal factors in managing the Fund's investments:
[SIDEBAR: THE PREMIER BOND FUND'S INVESTMENT ADVISER, ARIEL CAPITAL MANAGEMENT
HAS APPOINTED THE LINCOLN CAPITAL MANAGEMENT COMPANY TO ACT AS INVESTMENT
SUB-ADVISER. THUS, LINCOLN CAPITAL MAKES THE PREMIER BOND FUND'S DAY-TO-DAY
INVESTMENT DECISIONS, SUBJECT TO THE FUND'S BOARD OF TRUSTEES, WHILE ARIEL
HANDLES THE FUND'S ADMINISTRATION.]
- - the current level of and expected changes in interest rates; and
- - the relative attractiveness of the different sectors of the bond market:
U.S. Treasury bonds or government agency bonds; mortgage-backed bonds;
asset-backed bonds; corporate bonds; and commercial paper.
[SIDEBAR: THE BOND-ISSUING AGENCIES OF THE FEDERAL GOVERNMENT ARE THE FEDERAL
FARM CREDIT SYSTEM, THE STUDENT LOAN MARKETING ASSOCIATION, THE FEDERAL HOME
LOAN MORTGAGE ASSOCIATION, THE FEDERAL HOME LOAN BANK, THE FEDERAL NATIONAL
MORTGAGE ASSOCIATION AND THE GOVERNMENT NATIONAL MORTGAGE ASSOCIATION. ISSUERS
OF MORTGAGE-BACKED BONDS, PRIMARILY THE FEDERAL HOME LOAN MORTGAGE ASSOCIATION
AND THE GOVERNMENT NATIONAL MORTGAGE ASSOCIATION, BUY UP MORTGAGES AND PACKAGE
THEM TOGETHER INTO BONDS, WHICH THEY SELL TO INVESTORS. THE MORTGAGES SECURE THE
BONDS AND THE MORTGAGE PAYMENTS FLOW THROUGH TO THE BONDHOLDERS. ASSET-BACKED
BONDS ARE SIMILARLY PACKAGED WITH OTHER ASSETS, RANGING FROM CREDIT-CARD
RECEIPTS TO AUTOMOBILE LOANS. COMMERCIAL PAPER FUNCTIONS AS A SHORT-TERM
CORPORATE BOND, WITH FULL PAYMENT DUE IN LESS THAN A YEAR.]
- Individual Issue Selection Criteria
Page No.:25
<PAGE>
THE FUND'S INTEREST RATE STRATEGY
Lincoln Capital seeks to insulate the value of the Fund's bonds from interest
rate increases--and capture the gain in value when interest rates fall--by
managing the Fund's average duration against that of the overall U.S. bond
market.
[SIDEBAR: DURATION MEASURES THE SENSITIVITY OF BOND PRICES TO CHANGES IN
INTEREST RATES. THE LONGER THE DURATION OF A BOND, THE LONGER IT WILL TAKE TO
REPAY THE PRINCIPAL AND INTEREST OBLIGATIONS AND THE MORE SENSITIVE IT IS TO
CHANGES IN INTEREST RATES.]
The duration of all the bonds in the Lehman Brothers Aggregate Index usually
averages about five years. The Fund's duration will normally vary up to one year
from the average: shorter than the market average if Lincoln Capital's analysis
indicates interest rates will rise and bond prices will fall, and longer than
the market average if the analysis indicates the opposite trend--that rates will
fall and bond prices will rise. The Fund may deviate up to two years from the
bond market's average duration although Lincoln Capital does not anticipate
extending that far except in the most extreme circumstances.
[SIDEBAR: THE FUND'S DURATION FIGURE REPRESENTS A WEIGHTED AVERAGE. EVERY BOND
THE FUND OWNS WILL NOT NECESSARILY HAVE THE SAME DURATION TO ACHIEVE A GIVEN
DURATION TARGET. HOWEVER, THE WEIGHTED AVERAGE OF ALL THE BONDS IN THE FUND
EQUALS THE DURATION TARGET. THAT MEANS SHORTENING OR LENGTHENING THE FUND'S
DURATION WILL ONLY REQUIRE THE PURCHASE AND SALE OF A RELATIVELY SMALL AMOUNT OF
BONDS.]
Lincoln Capital balances a combination of three key factors in its analysis of
the future course of interest rates:
- --------------------------------------------------------------------------------
LINCOLN CAPITAL EXPECTS... INTEREST RATES TO RISE/ INTEREST RATES TO FALL/
BOND PRICES TO FALL BOND PRICES TO RISE
- --------------------------------------------------------------------------------
1. Pace of economic activity growing economy slowing economy
- --------------------------------------------------------------------------------
2. U.S. monetary policy Federal Reserve raises Federal Reserve lowers
interest rates interest rates
- --------------------------------------------------------------------------------
3. Public's expectations Rising inflation rate Stable or slowing
for inflation inflation rate
- --------------------------------------------------------------------------------
Page No.:26
<PAGE>
SECTOR SELECTION
The difference in interest paid on bonds in various sectors remains fairly
constant. For example, when interest rates on Treasury bonds rise, rates on
corporate bonds will generally rise by a similar amount. But depending on
outside economic influences, investor sentiment, and the law of supply and
demand, a sector may deviate from the norm. This deviation may offer an
opportunity for the Fund to earn more than usual for bonds at a given level of
risk. As Lincoln Capital managers monitor the bond market, they compare the
differences in sector interest rates with historical levels in an effort to
profit from deviations.
INDIVIDUAL ISSUE SELECTION
When making investment decisions, Lincoln Capital examines the unique
characteristics of each security. These include credit quality, maturity, issue
structure and mortgage prepayment risks. Lincoln seeks to assure that the Fund
receives adequate compensation for the risk it is assuming, and, if possible,
they seek bonds that pay more than the prevailing rate of interest for the risks
they embody.
PRINCIPAL INVESTMENTS
The Fund may invest freely in U.S. Treasury bonds and bonds guaranteed by an
agency of the Federal government. In addition, the Fund may invest in
investment-grade corporate bonds and corporate paper, and mortgage and other
asset-backed bonds. All of these securities must be investment grade, with at
least 80% of them ranking in the three highest grades the rating agencies
assign.
[SIDEBAR: STANDARD & POOR'S RATES INVESTMENT-GRADE BONDS BBB OR HIGHER AND
MOODY'S Baa OR HIGHER. S&P'S THREE HIGHEST CATEGORIES ARE AAA, AA AND A, MOODY'S
ARE Aaa, Aa AND A.]
Page No.:27
<PAGE>
FINANCIAL HIGHLIGHTS: ARIEL PREMIER BOND FUND
The table below provides the Ariel Premier Bond Fund's performance for the 1998
fiscal year. The information reflects financial results for a single share. The
total returns in the table represent the rate of return that an investor would
have earned on an investment in the Fund. The returns assume all income and
distributions earned were reinvested in the Fund. Ernst & Young LLP, the Fund's
Independent Auditors, has audited this information. The Fund's financial
statements are included in its Annual Report, which is available free of charge
by request.
<TABLE>
<CAPTION>
ARIEL PREMIER BOND FUND
- --------------------------------------------------------------------------------
Year Ended September 30
- --------------------------------------------------------------------------------
1998 Feb. 1(a) to
Sep. 30, 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Net asset value, beginning of period $10.29 $10.10
- --------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS:
- --------------------------------------------------------------------------------
Net investment income 0.57 0.37
- --------------------------------------------------------------------------------
Net realized and unrealized gains 0.41 0.19
on investments ---- ----
- --------------------------------------------------------------------------------
Total from investment operation 0.98 0.56
- --------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS
- --------------------------------------------------------------------------------
Dividends from net investment (0.57) (0.37)
income
- --------------------------------------------------------------------------------
Distributions from capital gains (0.07) ----
------
- --------------------------------------------------------------------------------
Total distributions (0.64) (0.37)
------ ------
- --------------------------------------------------------------------------------
Net asset value, end of period $10.63 $10.29
------ ------
- --------------------------------------------------------------------------------
Total Return 9.34% 5.73%(b)
- --------------------------------------------------------------------------------
SUPPLEMENTAL DATA AND RATIOS:
- --------------------------------------------------------------------------------
Net assets, end of period, in $1,779 $401
thousands
- --------------------------------------------------------------------------------
Ratio of expenses to average 0.85% 0.85%(c)
net assets
- --------------------------------------------------------------------------------
Ratio of net investment income to 5.46% 5.60%(c)
average net assets
- --------------------------------------------------------------------------------
Portfolio turnover rate 60% 218%
- --------------------------------------------------------------------------------
</TABLE>
(a) Commencement of operations
(b) Total return is not annualized
(c) Annualized
Page No.:28
<PAGE>
HOW THE ARIEL FUNDS ARE ORGANIZED
The accompanying chart outlines the organizational structure of the Ariel Mutual
Funds [TK].
BOARD OF TRUSTEES
The Ariel Mutual Funds operate under the supervision of a Board of Trustees
responsible to each Fund's shareholders. The Trustees are:
- - Bert N. Mitchell, CPA
Chairman
Mitchell & Titus, LLP
HEADS NATION'S LARGEST MINORITY-OWNED ACCOUNTING FIRM; HOLDS B.B.A., M.B.A. AND
HONORARY DOCTORATE FROM THE BARUCH SCHOOL OF BUSINESS OF THE CITY UNIVERSITY OF
NEW YORK; SERVES ON BARUCH FACULTY; ACTIVE IN COMMUNITY AFFAIRS, PHILANTHROPY
AND POLITICS.
- - Mario L. Baeza, Esq.
Chairman and Chief Executive Officer
Latin American Equity Partners, L.P.
REGARDED AS PREEMINENT EXPERT ON LATIN AMERICAN BUSINESS AND LEGAL ISSUES; HOLDS
B.A. FROM CORNELL UNIVERSITY, J.D. FROM HARVARD LAW SCHOOL
- - James W. Compton
President and Chief Executive Officer
Chicago Urban League
HEADS CHICAGO URBAN LEAGUE, WHICH HAS WORKED TO ELIMINATE RACIAL DISCRIMINATION
SINCE 1916; MEMBER OF THE BOARDS OF COMMONWEALTH EDISON AND UNICOM CORP.; HOLDS
B.A. FROM MOREHOUSE COLLEGE.
- - William C. Dietrich, CPA
INDEPENDENT FINANCIAL CONSULTANT SPECIALIZING IN EARLY STAGE
ENTREPRENEURIAL COMPANIES; HOLDS B.A. FROM GEORGETOWN UNIVERSITY; SERVES ON
BOARD OF SHALEM INSTITUTE, AN INTERNATIONALLY KNOWN ECUMENICAL
ORGANIZATION.
Page No.:29
<PAGE>
- - Royce N. Flippin, Jr.
President, Flippin Associates
formerly Director of Program Advancement, Massachusetts Institute of
Technology
HEADS BROAD-BASED CONSULTING ORGANIZATION PROVIDING STRATEGIC AND IMPLEMENTATION
SERVICES TO THE PUBLIC AND PRIVATE SECTORS; HOLDS B.A. FROM PRINCETON
UNIVERSITY, M.B.A. FROM HARVARD BUSINESS SCHOOL.
- - John G. Guffey, Jr.
Chair, Calvert Social Investments Foundation
Treasurer and Director, Silby, Guffey and Co., Inc.
TREASURER OF VENTURE CAPITAL FIRM SPECIALIZING IN THE HEALTHCARE AND
ENVIRONMENTAL INDUSTRIES; HOLDS B.S. FROM THE WHARTON SCHOOL; SERVES ON BOARDS
OF LOCAL AND NATIONAL NON-PROFIT INSTITUTIONS.
- - Mellody L. Hobson
Senior Vice President, Director of Marketing
Ariel Capital Management, Inc.
DIRECTOR OF MARKETING FOR ARIEL MUTUAL FUNDS; HOLDS B.A. FROM PRINCETON
UNIVERSITY; DIRECTOR OF CHICAGO PUBLIC LIBRARY AND CIVIC FEDERATION OF CHICAGO.
- - Christopher G. Kennedy
Executive Vice President and Director, Merchandise Mart Properties, Inc.
EXECUTIVE VICE PRESIDENT OF LEADING NATIONAL MANAGER OF COMMERCIAL REAL ESTATE;
HOLDS B.A. FROM BOSTON COLLEGE, M.B.A. FROM NORTHWESTERN UNIVERSITY; ACTIVE IN
COMMUNITY AFFAIRS.
- - Eric T. McKissack, CFA
Vice Chairman and Co-Chief Investment Officer
Ariel Capital Management, Inc.
BACKGROUND DETAILED BELOW AS PORTFOLIO MANAGER OF ARIEL APPRECIATION FUND.
Page No.:30
<PAGE>
INVESTMENT ADVISERS
STOCK FUNDS
Ariel Capital Management, Inc. directly manages the investments of the Ariel
Growth and Ariel Appreciation Funds. Its investment management services included
buying and selling securities on behalf of the Ariel Stock Funds and conducting
the research that led to the purchase and sale decisions. It is located at 307
North Michigan Avenue, Suite 500, Chicago, IL 60601.
BOND FUND
Ariel Capital Management, Inc. is the investment adviser of the Ariel Premier
Bond Fund. With the approval of the Ariel Premier Bond Fund's Board of Trustees,
Ariel Capital Management has appointed Lincoln Capital Management Company to act
as Investment Sub-Adviser to the Ariel Premier Bond Fund. It buys and sells
securities for the Premier Bond Fund and conducts the research necessary to
maintain the portfolio.
Page No.:31
<PAGE>
PORTFOLIO MANAGERS
ARIEL GROWTH FUND
JOHN W. ROGERS, JR., Chairman, President and Treasurer of Ariel Capital
Management, acts as Portfolio Manager of the Ariel Growth Fund. Mr. Rogers
founded Ariel in 1983. He worked previously as a stockbroker for the investment
banking firm of William Blair & Co. and graduated from Princeton University. Mr.
Rogers currently serves as President of the Board of Commissioners of the
Chicago Park District and Director of the Chicago Urban League. He also sits on
the boards of Bank One, Aon Corporation, Burrell Communications Group and GATX
Corp.
ARIEL APPRECIATION FUND
ERIC T. MCKISSACK, Chartered Financial Analyst, has managed the Ariel
Appreciation Fund since its inception. He is Vice Chair and Co-Chief Investment
Officer of Ariel's Investment Adviser. Prior to joining Ariel in 1986, he worked
as a securities analyst for the First National Bank of Chicago. He holds degrees
from the Massachusetts Institute of Technology and the University of California
at Berkeley. Mr. McKissack sits on the Boards of the Investment Analyst Society
of Chicago and the Travelers and Immigrant Aid Society.
ARIEL PREMIER BOND FUND
Lincoln Capital Management manages the Premier Bond Fund through a committee
composed of five members:
TIMOTHY DOUBEK is a Principal in Portfolio Management at Lincoln Capital. He has
11 years investment experience. He is a Chartered Financial Analyst and holds a
Bachelor of Science degree from the University of Wisconsin and an M.B.A. from
the University of
Page No.:32
<PAGE>
Michigan.
RICHARD W. KNEE is an Executive Vice President and Managing Director of the
firm. He has 18 years investment experience, 16 of them with Lincoln Capital. He
earned a Bachelors in Business Administration Degree from the University of
Notre Dame and an M.B.A. from the Wharton School of the University of
Pennsylvania.
PETER KNEZ is a Research Principal. He holds a Ph.D. in finance from the Wharton
School of the University of Pennsylvania.
KENNETH R. MEYER is the President and Managing Director of the firm. He has 30
years of investment experience, 17 of them with Lincoln Capital. He holds a
Bachelor of Arts degree from the University of Notre Dame and an M.B.A. from the
Wharton School of the University of Pennsylvania. Mr. Meyer is a Director of
Irish Life of North America and serves on the Arts and Letters Council of the
University of Notre Dame and the Finance Council of the Archdiocese of Chicago.
RAY B. ZEMON is an Executive Vice President and Managing Director of the firm.
He has 22 years of investment experience, 17 of them with Lincoln Capital. He
earned a Bachelor of Science degree from Rensselaer Polytechnic Institute and an
M.B.A. from the University of Wisconsin.
ADMINISTRATION
Ariel Capital Management is responsible for the administrative services of all
the Ariel Mutual Funds. These services include:
- - Opening Fund accounts
- - Processing purchase and sales orders
Page No.:33
<PAGE>
- - Responding to shareholder requests for information on their accounts and on
the Ariel Mutual Funds in general
- - Distributing to shareholders quarterly written reports from investment
management on the Funds' strategies and the progress of its investments
- - Preparing and distributing proxy materials to shareholders
- - Under a wholly owned subsidiary, Ariel Distributors, marketing shares of
the Funds through banks, brokers and other financial-service firms.
Ariel Capital Management has appointed an independent organization, SUNSTONE
FINANCIAL GROUP, INC., to perform the day-to-day FUND ADMINISTRATION AND
SERVICES FOR THE FUND, and prepare reports for the Board of Trustees. INVESTORS
FIDUCIARY TRUST COMPANY is the Funds' TRANSFER AGENT, FUND ACCOUNTANT and
CUSTODIAN. In this role, IFTC prices the shares of each Ariel Mutual Fund daily;
maintains the records of the Funds' shareholders; oversees the payment of
distributions to shareholders, and issues share certificates on request.
MANAGEMENT FEES FOR THE LAST FISCAL YEAR ENDED SEPTEMBER 30, 1998
STOCK FUNDS
Ariel Capital Management, Inc. was paid for its investment and administration
services for the Growth and Appreciation Funds at the annual rate of 0.65% and
0.75% of average daily net assets, respectively.
BOND FUND
Ariel Capital Management, Inc. was paid as investment adviser at the annual rate
of 0.35% of average daily net assets of the Fund. For its administrative
services, it was paid 0.25% of average daily net assets of the Investor Class.
Page No.:34
<PAGE>
Lincoln Capital Management Company was paid by Ariel Capital Management (not the
Fund) for its services as sub-adviser at the annual rate of 0.23% of average
daily net assets.
YEAR 2000
Like all financial service providers, Ariel Capital Management, Inc., Ariel
Distributors, Inc., Lincoln Capital Management Inc., the Sunstone Financial
Group and IFTC rely on computer systems that may not accommodate the transition
from 1999 to the year 2000. Such a failure could negatively affect individual
account services as well as the handling of securities trades, payment of
interest and dividends, and pricing mutual fund shares. Although we cannot yet
be certain that Year 2000 transition problems will have no adverse impact, the
Funds' service providers are actively working on the necessary changes. These
service providers have informed the Funds that they expect that their computer
systems and those of the third parties with whom they regularly conduct business
will be adapted in time.
Page No.:35
<PAGE>
MANAGING YOUR ARIEL ACCOUNT
HOW TO CONTACT ARIEL
BY PHONE
Call 1-800-29-ARIEL (1-800-292-7435) during normal business hours.
IN WRITING
Address all correspondence to:
Ariel Mutual Funds
P.O. Box 419121
Kansas City, MO 64141-6121
CHOOSING YOUR ARIEL ACCOUNT
Ariel Mutual Funds come in the account formats described below:
- --------------------------------------------------------------------------------
ACCOUNT TYPE SPECIAL FEATURES ACCOUNT MINIMUMS
------------------
OPENING EACH
BALANCE DEPOSIT
- --------------------------------------------------------------------------------
Regular $1,00 $50
- --------------------------------------------------------------------------------
Retirement Plan Accounts investment earnings grow tax 250 50
deferred during your working
years
- --------------------------------------------------------------------------------
Automatic Investment regular, automatic investment none 50
direct from your bank account
to Ariel; available either
monthly or quarterly
- --------------------------------------------------------------------------------
Please note:
- - You must return an original completed and signed application for every new
account you open, regardless of format.
- - We will charge your Automatic Investment account $10, plus any costs
incurred, any time your bank account has insufficient funds and we reserve
the right to close the account after two successive incidents of
insufficient funds.
Page No.:36
<PAGE>
BUYING ARIEL MUTUAL FUND SHARES
- --------------------------------------------------------------------------------
CONTACT US AT TO ASSURE YOUR SECURITY
- --------------------------------------------------------------------------------
Automatic Investment Fill out the Automatic
Investment application in the
prospectus.
- --------------------------------------------------------------------------------
By wire 1-800-29-ARIEL for Provide our operator with your
complete details name and social security
number and the name and
address of the financial
institution wiring the money.
- --------------------------------------------------------------------------------
In writing Ariel Mutual Funds Make your check or money order
P.O. Box 419121 payable to Ariel Mutual Funds.
Kansas City, MO Send it along the bottom of
64141-6121 your most recent account
statement, or with a note that
includes the registered
account name and the name of
the Fund you wish to invest
in.
- --------------------------------------------------------------------------------
Please note:
- - We calculate the number of shares you have purchased based on the net asset
value of shares next computed after we receive your order.
- - We can only process purchase orders in U.S. dollars in funds drawn from
U.S. banks.
- - We cannot accept cash, credit-card payments, or third-party checks, except
those payable to an existing shareholder.
- - You cannot sell the shares you have purchased by mail or through Automatic
Investment for 15 days after you have purchased them.
- - We will only issue share certificates if you request them at the time of
purchase.
Page No.:37
<PAGE>
SELLING ARIEL FUND SHARES
- --------------------------------------------------------------------------------
CONTACT US AT TO ASSURE YOUR SECURITY
- --------------------------------------------------------------------------------
Automatic withdrawal Ariel Mutual Funds Send us a letter with your
P.O. Box 419121 account name and minimum
Kansas City, MO withdrawal of $100 number, the
64141-6121 dollar amount you wish to
receive with each check and
how often you wish to receive
checks (either monthly or
quarterly).
NOTE: YOU MUST MAINTAIN A
MINIMUM BALANCE OF $10,000.
- --------------------------------------------------------------------------------
By mail Ariel Mutual Funds Send us a letter with your
P.O. Box 419121 account name and number, the
Kansas City, MO number of shares you wish to
64141-6121 sell or the dollar amount you
wish to receive and where you
wish us to send the check.
- --------------------------------------------------------------------------------
By phone 1-800-29-ARIEL Provide our operator with your
name, social security number
and Ariel account number
- --------------------------------------------------------------------------------
By wire 1-800-29-ARIEL or Call or send us a letter with
Ariel Mutual Funds your account name and number,
P.O. Box 419121 the number of shares you wish
Kansas City, MO to sell or the dollar amount
64141-6121 you wish to receive.
NOTE: WE CAN ONLY WIRE THE
SALE PROCEEDS TO THE FINANCIAL
INSTITUTION YOU DESIGNATED
WHEN BUYING SHARES. $10 WIRE
CHARGE.
- --------------------------------------------------------------------------------
By Turtletalk
24 hours, 7 days 1-800-29-ARIEL
- --------------------------------------------------------------------------------
Page No.:38
<PAGE>
Please note:
- - You may sell all or any portion of your Ariel Stock Fund shares on any day
the New York Stock Exchange is open for business, and your Ariel Premier
Bond Fund shares on any day the New York Stock Exchange is open, plus
Columbus Day and Veterans' Day.
- - We redeem the Ariel shares at the net asset value calculated at the end of
the business day when we receive your redemption order.
- - We normally send the proceeds of your redemption to you the next business
day, except, as noted, in the case of shares purchased by mail or through
Automatic Investment. If, however, we feel the sale may adversely affect
the operation of the Fund, we may take up to seven days to execute your
order.
- - We only honor telephone redemption orders up to $25,000 and we only send
proceeds of such sales to the registered address of the account. The
address must have been on file with us for no less than 60 days.
- - We require a signature guarantee for redemption in excess of $25,000.
- - We also require a guarantee if you instruct us to make payment to anyone
other than the shareholder of record at the address on file for your
account.
- - We charge a $10 fee to process wire sales.
- - To sell shares for which we have issued certificates, you must return the
endorsed certificates to us.
- - If the sale of your shares reduces your account balance below $1,000, we
reserve the right to close your account with 30 days notice.
- - Qualified dealers may charge a fee for processing a sale or purchase.
- - We reserve the right to pay redemption's in the Bond Fund in kind
(marketable portfolio securities).
Page No.:39
<PAGE>
SHAREHOLDER SERVICES
CONFIRMING YOUR TRANSACTIONS
We will send you a written confirmation of every purchase and sale, including
automatic purchases and sales. Please check them to verify their accuracy.
SECURING YOUR TELEPHONE ORDERS
Ariel will take reasonable precautions to assure that your telephone
transactions are authentic, including tape-recording your instructions. We
cannot, however, be held liable for executing instructions we reasonably believe
are genuine.
EXCHANGING SHARES
You may exchange the shares of any Ariel Mutual Fund you own for shares of any
of the other Ariel Mutual Funds. As long as you meet the required minimums for
each Fund, you do not have to pay for the exchange. You should read the
prospectus for any new fund in which you invest. You can obtain prospectuses by
calling 1-800-29 ARIEL.
Bear in mind that:
- - Each exchange represents both a sale and a purchase of fund shares. You may
therefore incur a taxable gain or loss on any exchange.
- - Exchanges which result in ownership of an Ariel Mutual Fund in which you
have not previously invested must be registered in your current account
name and Social Security or taxpayer identification number.
- - Telephone exchanges may be made by any person other than the shareholder of
record--a broker, financial planner, or family member--who can provide the
proper information.
- - You must allow at least 36 hours to make a second exchange between any one
pair of Ariel Mutual Funds.
Page No.:40
<PAGE>
Ariel Mutual Funds has the right to revoke or modify your exchange privilege
with 60 days written notice, or with no notice on evidence of disruptive or
excessive exchanging of shares.
Page No.:41
<PAGE>
CALCULATING THE FUNDS' SHARE PRICES
We calculate the daily price of Ariel Mutual Funds shares (also known as the
"Net Asset Value" or "NAV") in accordance with the standard formula for valuing
mutual-fund shares at the close of regular trading on the New York Stock
Exchange every day the Exchange is open for business. The formula calls for
deducting all of a fund's liabilities from the total value of its assets--the
market value of the securities it holds, plus its cash reserves--and dividing
the result by the number of shares outstanding.
[SIDEBAR: THE EXCHANGE IS OPEN EVERY WEEK MONDAY THROUGH FRIDAY, EXCEPT WHEN THE
FOLLOWING HOLIDAYS ARE CELEBRATED: NEW YEAR'S DAY, MARTIN LUTHER KING, JR. DAY
(THE THIRD MONDAY IN JANUARY), PRESIDENTS' DAY (THE THIRD MONDAY IN FEBRUARY),
GOOD FRIDAY, MEMORIAL DAY (THE LAST MONDAY IN MAY), JULY 4TH, LABOR DAY (THE
FIRST MONDAY IN SEPTEMBER), THANKSGIVING DAY (THE FOURTH THURSDAY IN NOVEMBER)
AND CHRISTMAS DAY.]
We value the securities in the Funds at their stated market value if price
quotations are available. When price quotes for a particular security are not
readily available, we estimate their value by the method that most accurately
reflects a fair value in the judgment of the Board of Trustees. This procedure
implies an unavoidable risk, the risk that our estimates are higher or lower
than the prices that the securities might actually command if we sold them. If
we have valued the securities too highly, you may end up paying too much for
Ariel Mutual Funds shares when you buy. If we underestimate their price, you may
not receive the full market value for your Fund shares when you sell.
PAYING OUT FUND EARNINGS
Each year, the Ariel Mutual Funds pay out all income and capital gains (minus
expenses) generated by the securities in their portfolios. Unless otherwise
instructed, we reinvest these distributions in the Funds at the share price
computed on the day of the distribution. You may, however, choose to have
dividends totaling more than $10 paid out in cash. To
Page No.:42
<PAGE>
do so, you must notify the Ariel Mutual Funds in writing 60 days prior to the
dividend payment date.
PAYING TAXES ON YOUR ARIEL MUTUAL FUND EARNINGS
The tax status of your distributions from the Funds does not depend on whether
you reinvest them or take them in cash or does it depend on how long you have
owned your shares. Investment income and capital gains on securities held by the
Funds for less than one year are taxed as ordinary income. Different tax rates
apply for capital gains on securities that the Fund has held for a year or more.
THE TAX LAWS ARE SUBJECT TO CHANGE. WE RECOMMEND CONSULTING YOUR TAX ADVISOR
ABOUT YOUR PARTICULAR TAX SITUATION UNDER THE CURRENT LAWS.
Page No.:43
<PAGE>
BACK COVER
Additional information about the Ariel Mutual Funds' investments is available in
the Funds' annual and semi-annual reports to shareholders. In the Funds' annual
report, you will find a discussion of the market conditions and investment
strategies that significantly affected their performance during its last fiscal
year.
You can find more detailed information about the Ariel Mutual Funds in the
current Statements of Additional Information, dated February 1, 1999, which we
have filed electronically with the Securities and Exchange Commission (SEC) and
which are legally a part of this Prospectus. To receive your free copy of a
Statement of Additional Information, or any of the annual or semi-annual
reports, or if you have questions about investing in the Funds, write to us at:
ARIEL MUTUAL FUNDS
P.O. BOX 419121
KANSAS CITY, MO 64141-6121
or call our toll-free number: 1-800-29-ARIEL (1-800-292-7435)
You can find reports and other information about the Funds on the SEC Website
(http://www.sec.gov), or you can get copies of this information, after payment
of a duplicating fee, by writing to the Public Reference Section of the SEC,
Washington, D.C. 20549-6009. Information about the Funds, including their
Statements of Additional Information, can be reviewed and copied at the SEC's
Public Reference Room in Washington, D.C. For information on the Public
Reference Room, call the SEC at 1-800-SEC-0330.
Investment Company Act file 811-4786
Page No.:44
<PAGE>
Ariel Mutual Funds
BOND FUND
Ariel Premier Bond Fund - Institutional Class
NO-LOAD MUTUAL FUND
PROSPECTUS
FEBRUARY 1, 1999
The Securities and Exchange Commission has not approved or disapproved of the
shares of Ariel Mutual Funds or any other mutual fund. Nor has the Securities
and Exchange Commission determined whether this prospectus is accurate or
complete. Any representation to the contrary is a criminal offense.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
ARIEL PREMIER BOND FUND--INSTITUTIONAL CLASS OVERVIEW. . . . . . . . . . . . .3
ARIEL PREMIER BOND FUND--INSTITUTIONAL CLASS IN DEPTH. . . . . . . . . . . . .8
FINANCIAL HIGHLIGHTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11
HOW THE ARIEL PREMIER BOND--INSTITUTIONAL CLASS IS ORGANIZED . . . . . . . . .12
MANAGING YOUR ARIEL ACCOUNT. . . . . . . . . . . . . . . . . . . . . . . . . .17
</TABLE>
<PAGE>
Ariel Premier Bond--Institutional Class Fund Overview
INVESTMENT OBJECTIVE
The Ariel Premier Bond Fund--Institutional Class seeks to maximize total return
through a combination of income and capital appreciation.
[SIDEBAR: A BOND'S TOTAL RETURN DERIVES FROM TWO SOURCES: FIRST, THE INTEREST
INCOME IT GENERATES IN A GIVEN PERIOD; AND SECOND, FROM CAPITAL APPRECIATION--AN
INCREASE IN THE PRICE OF THE BOND FROM THE BEGINNING TO END OF A GIVEN TIME
PERIOD. (AN INCREASE IN THE PRICE OF THE BOND ADDS TO TOTAL RETURNS, A DECREASE
REDUCES TOTAL RETURNS.) THE CALCULATIONS ASSUME THE REINVESTMENT OF ALL
INTEREST PAYMENTS AND CAPITAL APPRECIATION.]
INVESTMENT STRATEGY
The Ariel Premier Bond Fund--Institutional Class invests no less than 80% of its
assets in high-quality fixed-income securities for which a ready market exists.
If the securities are private-sector issues--corporate bonds, commercial paper
or bonds secured by assets such as home mortgages--they will have earned an "A"
rating or better from a nationally recognized statistical rating organization
such as Moody's Investors Service or the Standard & Poor's Corporation. We also
consider all bonds issued by the U.S. government and its agencies to be high
quality.
Page No.:3
<PAGE>
INVESTMENT RISKS
Although the Fund's Investment Sub-Adviser, Lincoln Capital Management Company,
makes every effort to achieve the Fund's objective of maximizing total
investment returns, there can be no guarantee the Fund will attain its
objective. As is the case with any investment, you could lose money on your
purchase of shares in the Fund. The table below lists some of the principal
risks of investing in the Fund and the measures the Fund's Investment
Sub-Adviser takes in attempting to limit those risks.
- --------------------------------------------------------------------------------
RISKS HOW THE FUND TRIES TO MANAGE THEM
- --------------------------------------------------------------------------------
- Issuers of bonds held by the Fund - Only hold bonds with highest
cannot make timely payment of credit ratings.
either interest or principal when
they fall due.
- --------------------------------------------------------------------------------
- Highly rated bonds are downgraded - Conduct independent evaluation of
because of issuer's financial creditworthiness of the bonds and
problems. their issuers.
- --------------------------------------------------------------------------------
- Bond prices decline because of an - Actively manage Fund's average
increase in interest rates. duration to maintain its value
despite interest rate increases.
- --------------------------------------------------------------------------------
WHO SHOULD CONSIDER INVESTING IN THE FUND--AND WHO SHOULD NOT
You should consider investing in the Fund if you are seeking current income and
capital appreciation. You should be willing to accept the short-term price
fluctuations, which have occurred from time to time. Traditionally these
fluctuations are less than those associated with stocks.
You should not consider investing in the Fund if you cannot tolerate moderate
short-term declines in share value or if you are seeking the higher returns
historically achieved by stocks.
Page No.:4
<PAGE>
TOTAL RETURNS, AFTER FEES AND EXPENSES
The bar chart and table below can help you evaluate the potential risk and
rewards of investing in the Fund. They show changes in the Fund's performance
from year to year and how the Fund's average annual returns for one year and
since inception compare with those of a broad measure of market performance.
The bar chart shows the Fund's ACTUAL returns for 1998, for each full calendar
year since it began operation in October 1, 1995. The table compares the Funds'
AVERAGE annual return with the returns of a relevant benchmark index, the Lehman
Brothers Aggregate Bond Index. Total return measure how much the price of an
investment in a mutual fund changes, assuming that all dividend, income and
capital gains distributions are reinvested. For any fund, you should evaluate
total return in light of the Fund's particular investment objectives and
policies, as well as general market conditions during the reported time periods.
As is the case with indices, Lehman Brothers Aggregate Bond Index does not
represent the actual returns an investor might experience. It measures the bond
market's total return (the interest income it earns, plus or minus the price
change in a given period). It does not take into account the costs of buying
and selling securities or the fees related to managing a portfolio.
[SIDEBAR: THE LEHMAN BROTHERS AGGREGATE BOND INDEX IS ONE OF THE MOST WIDELY
ACCEPTED BENCHMARKS OF BOND MARKET TOTAL RETURN. IT INCLUDES MORE THAN 6,000
TAXABLE GOVERNMENT, INVESTMENT-GRADE AND MORTGAGE-BACKED SECURITIES.]
Page No.:5
<PAGE>
ARIEL PREMIER BOND FUND
for each full calendar year since 1996
[BAR CHART]
-------------------------------
TK TK TK
-------------------------------
1998 1997 1996
-------------------------------
Best Quarter: [TK] Quarter [year] [TK]%
Worst Quarter: [TK] Quarter [year] [TK]%
Year to Date: [TK]%
The inception date for the Ariel Premier Bond Fund--Institutional Class is
October 1, 1995. Past returns do not provide any indication of the Fund's
future performance.
<TABLE>
<CAPTION>
Ariel Premier Bond Fund
Annual Return
as of December 31, 1998
----------------------------------------------------------
1 Year 3 Years
----------------------------------------------------------
<S> <C> <C>
Ariel Premier Bond Fund -TK TK
----------------------------------------------------------
Lehman Brothers Aggregate Bond Index -TK TK
----------------------------------------------------------
</TABLE>
ANNUAL OPERATING EXPENSES FOR FISCAL YEAR ENDED SEPTEMBER 30, 1998
The table below shows the fees and expenses that you may pay if you buy and hold
shares in the Ariel Premier Bond Fund--Institutional Class. These expenses are
paid from the Fund's assets.
<TABLE>
------------------------------------------------
Percentage of
average
daily net assets of
the Fund
------------------------------------------------
<S> <C>
Management fee 0.45%
------------------------------------------------
Distribution (12b-1) fees -0-
------------------------------------------------
Other expenses -0-
------------------------------------------------
Total annual operating 0.45%
expenses
------------------------------------------------
</TABLE>
Ariel Capital Management paid the Premier Bond Fund's other expenses.
Page No.:6
<PAGE>
COST COMPARISON EXAMPLE
The examples below illustrate the expenses you would have incurred on a
$1,000,000 investment in the Ariel Premier Bond Fund--Institutional Class
(minimum intial investment), assuming the Fund earned an annual return of
5% over the periods shown.
<TABLE>
<CAPTION>
----------------------------------------------------
1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Ariel Premier Bond Fund $4,602 $14,445 $25,203 $56,687
- --------------------------------------------------------------------------------
</TABLE>
The example is hypothetical and for the purpose of comparing the Fund's expense
ratio with other mutual funds. It does not represent estimates of future
expenses or returns, either of which may be greater or less than the amounts
depicted.
Page No.:7
<PAGE>
The Ariel Premier Bond--Institutional Class Fund In Depth
INVESTMENT OBJECTIVE
The Ariel Premier Bond Fund--Institutional Class seeks to maximize total return
in a bond portfolio through a combination of interest income and capital
appreciation.
INVESTMENT STRATEGY
The Fund's Investment Sub-Adviser, Lincoln Capital Management Company considers
three principal factors in managing the Fund's investments:
[SIDEBAR: THE PREMIER BOND FUND'S INVESTMENT ADVISER, ARIEL CAPITAL MANAGEMENT
HAS APPOINTED THE LINCOLN CAPITAL MANAGEMENT COMPANY TO ACT AS INVESTMENT
SUB-ADVISER. THUS, LINCOLN CAPITAL MAKES THE PREMIER BOND FUND'S DAY-TO-DAY
INVESTMENT DECISIONS, SUBJECT TO THE FUND'S BOARD OF TRUSTEES, WHILE ARIEL
HANDLES THE FUND'S ADMINISTRATION.]
- - the current level of and expected changes in interest rates; and
- - the relative attractiveness of the different sectors of the bond market:
U.S. Treasury bonds or government agency bonds; mortgage-backed bonds;
asset-backed bonds; corporate bonds; and commercial paper.
[SIDEBAR: THE BOND-ISSUING AGENCIES OF THE FEDERAL GOVERNMENT ARE THE FEDERAL
FARM CREDIT SYSTEM, THE STUDENT LOAN MARKETING ASSOCIATION, THE FEDERAL HOME
LOAN MORTGAGE ASSOCIATION, THE FEDERAL HOME LOAN BANK, THE FEDERAL NATIONAL
MORTGAGE ASSOCIATION AND THE GOVERNMENT NATIONAL MORTGAGE ASSOCIATION. ISSUERS
OF MORTGAGE-BACKED BONDS, PRIMARILY THE FEDERAL HOME LOAN MORTGAGE ASSOCIATION
AND THE GOVERNMENT NATIONAL MORTGAGE ASSOCIATION, BUY UP MORTGAGES AND PACKAGE
THEM TOGETHER INTO BONDS, WHICH THEY SELL TO INVESTORS. THE MORTGAGES SECURE
THE BONDS AND THE MORTGAGE PAYMENTS FLOW THROUGH TO THE BONDHOLDERS.
ASSET-BACKED BONDS ARE SIMILARLY PACKAGED WITH OTHER ASSETS, RANGING FROM
CREDIT-CARD RECEIPTS TO AUTOMOBILE LOANS. COMMERCIAL PAPER FUNCTIONS AS A
SHORT-TERM CORPORATE BOND, WITH FULL PAYMENT DUE IN LESS THAN A YEAR. ]
- - Individual Issue Selection Criteria
Page No.:8
<PAGE>
THE FUND'S INTEREST RATE STRATEGY
Lincoln Capital seeks to insulate the value of the Fund's bonds from interest
rate increases--and capture the gain in value when interest rates fall--by
managing the Fund's average duration against that of the overall U.S. bond
market.
[SIDEBAR: DURATION MEASURES THE SENSITIVITY OF BOND PRICES TO CHANGES IN
INTEREST RATES. THE LONGER THE DURATION OF A BOND, THE LONGER IT WILL TAKE TO
REPAY THE PRINCIPAL AND INTEREST OBLIGATIONS AND THE MORE SENSITIVE IT IS TO
CHANGES IN INTEREST RATES.]
The duration of all the bonds in the Lehman Brothers Aggregate Index usually
averages about five years. The Fund's duration will normally vary up to one year
from the average: shorter than the market average if Lincoln Capital's analysis
indicates interest rates will rise and bond prices will fall, and longer than
the market average if the analysis indicates the opposite trend--that rates will
fall and bond prices will rise. The Fund may deviate up to two years from the
bond market's average duration, although Lincoln Capital does not anticipate
extending that far except in the most extreme circumstances.
[SIDEBAR: THE FUND'S DURATION FIGURE REPRESENTS A WEIGHTED AVERAGE. EVERY BOND
THE FUND OWNS WILL NOT NECESSARILY HAVE THE SAME DURATION TO ACHIEVE A GIVEN
DURATION TARGET. HOWEVER, THE WEIGHTED AVERAGE OF ALL THE BONDS IN THE FUND
EQUALS THE DURATION TARGET. THAT MEANS SHORTENING OR LENGTHENING THE FUND'S
DURATION WILL ONLY REQUIRE THE PURCHASE AND SALE OF A RELATIVELY SMALL AMOUNT OF
BONDS.]
Lincoln Capital balances a combination of three key factors in its analysis of
the future course of interest rates:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
LINCOLN CAPITAL EXPECTS... INTEREST RATES TO RISE/ INTEREST RATES TO FALL/
BOND PRICES TO FALL BOND PRICES TO RISE
- --------------------------------------------------------------------------------
<S> <C> <C>
1. Pace of economic activity growing economy slowing economy
- --------------------------------------------------------------------------------
2. U.S. monetary policy Federal Reserve raises Federal Reserve lowers
interest rates interest rates
- --------------------------------------------------------------------------------
3. Public's expectations for Rising inflation rate Stable or slowing
inflation inflation rate
- --------------------------------------------------------------------------------
</TABLE>
Page No.:9
<PAGE>
SECTOR SELECTION
The difference in interest paid on bonds in various sectors remains fairly
constant. For example when interest rates on Treasury bonds rise, rates on
corporate bonds will generally rise by a similar amount. But depending on
outside economic influences, investor sentiment, and the law of supply and
demand, a sector may deviate from the norm. This deviation may offer an
opportunity for the Fund to earn more than usual for bonds at a given level of
risk. As Lincoln Capital monitors the bond market, compare differences in
sector interest rates with historical level in an effort to profit from
deviations.
INDIVIDUAL ISSUE SELECTION
When making investment decisions, Lincoln Capital examines the unique
characteristics of each security. These include credit quality, maturity, issue
structure and mortgage prepayment risks. Lincoln seeks to assure that the Fund
receives adequate compensation for the risk it is assuming, and, if possible,
they seek bonds that pay more than the prevailing rate of interest for the risks
they embody.
PRINCIPAL INVESTMENTS
The Fund may invest freely in U.S. Treasury bonds and bonds guaranteed by an
agency of the Federal government. In addition, the Fund may invest in
investment-grade corporate bonds and corporate paper, and mortgage and other
asset-backed bonds. All of these securities must be investment grade, with
at least 80% of them ranking in the three highest grades rating agencies
assign.
[SIDEBAR: STANDARD & POOR'S RATES INVESTMENT-GRADE BONDS BBB OR HIGHER AND
MOODY'S BAA OR HIGHER. S&P'S THREE HIGHEST CATEGORIES ARE AAA, AA AND A,
MOODY'S ARE Aaa, Aa AND A.]
Page No.:10
<PAGE>
FINANCIAL HIGHLIGHTS: ARIEL PREMIER BOND FUND--INSTITUTIONAL CLASS
The table below provides the performance for the Ariel Premier Bond
Fund--Institutional Class for every fiscal year since its inception. The
information reflects financial results for a single share of the Fund. The
total returns in the table represent the rate of return that an investor
would have earned on an investment in the Fund. The returns assume all
income and distributions earned were reinvested in the Fund. Ernst & Young
LLP, the Fund's Independent Auditors, has audited this information. The
Fund's financial statements are included in its Annual Report, which is
available free of charge by request.
ARIEL PREMIER BOND FUND
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
October 1, 1997 October 1, 1996 October 1995
To To To
Sept. 30, 1998 Sept. 30. 1997 Sept. 30, 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value, beginning $10.30 $9.95 $10.00
for year
- --------------------------------------------------------------------------------
INCOME FROM INVESTMENT
OPERATIONS:
- --------------------------------------------------------------------------------
Net investment income 0.61 0.52 0.43
- --------------------------------------------------------------------------------
Net realized and unrealized 0.40 0.37 (0.04)
gains (losses) on ------ ------ ------
investments
- --------------------------------------------------------------------------------
Total from investment 1.01 0.89 0.39
operation
- --------------------------------------------------------------------------------
DISTRIBUTIONS TO
SHAREHOLDERS
- --------------------------------------------------------------------------------
Dividends from net (0.61) (0.52) (0.43)
investment income
- --------------------------------------------------------------------------------
Distributions from capital (0.07) (0.02) (0.01)
gains ------ ------ ------
- --------------------------------------------------------------------------------
Total distributions (0.68) (0.54) (0.44)
- --------------------------------------------------------------------------------
Net asset value, end of $10.63 $10.30 $9.95)
year
- --------------------------------------------------------------------------------
Total Return 10.20% 9.26% 3.96%
- --------------------------------------------------------------------------------
SUPPLEMENTAL DATA AND
RATIOS:
- --------------------------------------------------------------------------------
Net assets, end of year, $149,977 $113,998 $15,367
in thousands
- --------------------------------------------------------------------------------
Ratio of expenses to 0.45% 0.45% 0.48%
average net assets
- --------------------------------------------------------------------------------
Ratio of net investment 5.86% 6.05% 5.85%
income to average net
assets
- --------------------------------------------------------------------------------
Portfolio turnover rate 60% 218% 423%
- --------------------------------------------------------------------------------
</TABLE>
Page No.:11
<PAGE>
HOW THE ARIEL PREMIUM BOND--INSTITUTIONAL CLASS IS ORGANIZED
The accompanying chart outlines the organizational structure of the Ariel
Premier Bond--Institutional Class Fund [TK].
BOARD OF TRUSTEES
The Ariel Mutual Funds operate under the supervision of a Board of Trustees
responsible to each Fund's shareholders. The Trustees are:
- - Bert N. Mitchell, CPA
Chairman
Mitchell & Titus, LLP
HEADS NATION'S LARGEST MINORITY-OWNED ACCOUNTING FIRM; HOLDS B.B.A., M.B.A. AND
HONORARY DOCTORATE FROM THE BARUCH SCHOOL OF BUSINESS OF THE CITY UNIVERSITY OF
NEW YORK; SERVES ON BARUCH FACULTY; ACTIVE IN COMMUNITY AFFAIRS, PHILANTHROPY
AND POLITICS.
- - Mario L. Baeza, Esq.
Chairman and Chief Executive Officer
Latin American Equity Partners, L.P.
REGARDED AS PREEMINENT EXPERT ON LATIN AMERICAN BUSINESS AND LEGAL ISSUES; HOLDS
B.A. FROM CORNELL UNIVERSITY, J.D. FROM HARVARD LAW SCHOOL
- - James W. Compton
President and Chief Executive Officer
Chicago Urban League
HEADS CHICAGO URBAN LEAGUE, WHICH HAS WORKED TO ELIMINATE RACIAL DISCRIMINATION
SINCE 1916; MEMBER OF THE BOARDS OF COMMONWEALTH EDISON AND UNICOM CORP.; HOLDS
B.A. FROM MOREHOUSE COLLEGE.
- - William C. Dietrich, CPA
INDEPENDENT FINANCIAL CONSULTANT SPECIALIZING IN EARLY STAGE
ENTREPRENEURIAL COMPANIES, HOLDS B.A. FROM GEORGETOWN UNIVERSITY; SERVES ON
BOARD OF SHALEM INSTITUTE, AN INTERNATIONALLY KNOWN ECUMENICAL
ORGANIZATION.
Page No.:12
<PAGE>
- - Royce N. Flippin, Jr.
President, Flippin Associates
formerly Director of Program Advancement, Massachusetts Institute of
Technology
HEADS BROAD-BASED CONSULTING ORGANIZATION PROVIDING STRATEGIC AND IMPLEMENTATION
SERVICES TO THE PUBLIC AND PRIVATE SECTORS; HOLDS B.A. FROM PRINCETON
UNIVERSITY, M.B.A. FROM HARVARD BUSINESS SCHOOL.
- - John G. Guffey, Jr.
Chair, Calvert Social Investments Foundation
Treasurer and Director, Silby, Guffey and Co., Inc.
TREASURER OF VENTURE CAPITAL FIRM SPECIALIZING IN THE HEALTHCARE AND
ENVIRONMENTAL INDUSTRIES; HOLDS B.S. FROM THE WHARTON SCHOOL; SERVES ON BOARDS
OF LOCAL AND NATIONAL NON-PROFIT INSTITUTIONS.
- - Mellody L. Hobson
Senior Vice President, Director of Marketing
Ariel Capital Management, Inc.
DIRECTOR OF MARKETING FOR ARIEL MUTUAL FUNDS; HOLDS B.A. FROM PRINCETON
UNIVERSITY; DIRECTOR OF CHICAGO PUBLIC LIBRARY AND CIVIC FEDERATION OF CHICAGO.
- - Christopher G. Kennedy
Executive Vice President and Director
Merchandise Mart Properties, Inc.
EXECUTIVE VICE PRESIDENT OF LEADING NATIONAL MANAGER OF COMMERCIAL REAL ESTATE;
HOLDS B.A. FROM BOSTON COLLEGE, M.B.A. FROM NORTHWESTERN UNIVERSITY; ACTIVE IN
COMMUNITY AFFAIRS.
- - Eric T. McKissack, CFA
Vice Chairman and Co-Chief Investment Officer
Ariel Capital Management, Inc.
HOLDS DEGREES FROM THE MASSACHUSETTS INSTITUTE OF TECHNOLOGY AND THE UNIVERSITY
OF CALIFORNIA, BERKELEY, SITS ON BOARDS OF THE INVESTMENT ANALYST SOCIETY OF
CHICAGO AND THE TRAVELERS AND IMMIGRANT AID SOCIETY.
Page No.:13
<PAGE>
- - INVESTMENT ADVISOR AND SUB-ADVISER
Ariel Capital Management, Inc., is the investment adviser of the Ariel Premier
Bond Fund--Institutional Class. It is located at 307 North Michigan Avenue,
Suite 500, Chicago, IL 60601. Ariel Capital Management Company has appointed
Lincoln Capital Management Company to act as Investment Sub-Adviser to the Ariel
Premier Bond Fund. Subject to Ariel Capital Management's oversight, Lincoln
Capital buys and sells securities for the Premier Bond Fund and conducts the
research necessary to maintain the portfolio. It is located at 200 South Wacker
Drive, Chicago, IL 60606.
PORTFOLIO MANAGER
Lincoln Capital Management manages the Fund through a committee composed of five
members:
TIMOTHY DOUBEK is a Principal in Portfolio Management at Lincoln Capital. He
has 11 years investment experience. He is a Chartered Financial Analyst and
holds a Bachelor of Science degree from the University of Wisconsin and an
M.B.A. from the University of Michigan.
RICHARD W. KNEE is an Executive Vice President and Managing Director of the
firm. He has 18 years investment experience, 16 of them with Lincoln Capital.
He earned a Bachelors in Business Administration Degree from the University of
Notre Dame and an M.B.A. from the Wharton School of the University of
Pennsylvania.
PETER KNEZ is a Research Principal. He holds a Ph.D. in finance from the
Wharton School of the University of Pennsylvania.
KENNETH R. MEYER is the President and Managing Director of the firm. He has 30
years of investment experience, 17 of them with Lincoln Capital. He holds a
Bachelor of Arts degree from the University of Notre Dame and an M.B.A. from the
Wharton School of the University of
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Pennsylvania. Mr. Meyer is a Director of Irish Life of North America and serves
on the Arts and Letters Council of the University of Notre Dame and the Finance
Council of the Archdiocese of Chicago.
RAY B. ZEMON is an Executive Vice President and Managing Director of the firm.
He has 22 years of investment experience, 17 of them with Lincoln Capital. He
earned a Bachelor of Science degree from Rensselaer Polytechnic Institute and an
M.B.A. from the University of Wisconsin.
ADMINISTRATION
Ariel Capital Management is responsible for the administrative services of the
Fund. These services include:
- - Opening Fund accounts
- - Processing purchase and sales orders
- - Responding to shareholder requests for information on their accounts and on
the Fund general
- - Distributing to shareholders quarterly written reports from investment
management on the Fund's strategies and the progress of its investments
- - Preparing and distributing proxy materials to shareholders
- - Under a wholly owned subsidiary, Ariel Distributors, marketing shares of
the Funds through banks, brokers and other financial-service firms.
Ariel Capital Management has appointed an independent organization, the SUNSTONE
FINANCIAL GROUP, to perform the day-to-day FUND ADMINISTRATION AND ACCOUNTING
SERVICES and prepare reports for the Board of Trustees. INVESTORS FIDUCIARY
TRUST COMPANY as the Funds' TRANSFER AGENT and CUSTODIAN. In this dual role,
IFTC prices the shares of each Ariel Mutual Fund daily; maintains the records of
the Funds' shareholders; oversees the payment of distributions to shareholders,
and issues share certificates on request.
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MANAGEMENT FEES FOR THE LAST FISCAL YEAR ENDED SEPTEMBER 30, 1998
Ariel Capital Management, Inc. was paid as investment adviser at the annual rate
of 0.35% of average daily net assets. For its administrative services, it was
paid 0.10% of average daily net assets.
Lincoln Capital Management Inc. was paid by Ariel Capital Management (not the
Fund) for its services as subadviser at the annual rate of 0.23% of average
daily net assets.
YEAR 2000
Like all financial service providers, Ariel Capital Management, Lincoln Capital,
the Sunstone Financial Group and IFTC rely on computer systems that may not
accommodate the transition from 1999 to the year 2000. Such a failure could
negatively affect individual account services as well as the handling of
securities trades, payment of interest and dividends and pricing mutual fund
shares. Although we cannot yet be certain that Year 2000 transition problems
will have no adverse impact, the Funds' service providers are actively working
on the necessary changes. These service providers have informed the Trust that
they expect that their computer systems and those of the third parties with whom
they regularly conduct business will be adapted in time.
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MANAGING YOUR ARIEL ACCOUNT
HOW TO CONTACT ARIEL
BY PHONE
Call 1-800-29-ARIEL (1-800-292-7435) during normal business hours.
IN WRITING
Address all correspondence to:
Ariel Mutual Funds
P.O. Box 419121
Kansas City, MO 64141-6121
MINIMUM INITIAL INVESTMENT
The minimum initial investment in the Institutional Class is $1,000,000.
BUYING ARIEL MUTUAL FUND SHARES
- --------------------------------------------------------------------------------
CONTACT US AT TO ASSURE YOUR SECURITY
- --------------------------------------------------------------------------------
Through your
financial advisor
- --------------------------------------------------------------------------------
By wire 1-800-29-ARIEL Provide our operator with your name and
for complete social security number and the name and
details address of the financial institution
wiring the money.
- --------------------------------------------------------------------------------
In writing Ariel Mutual Make your check or money order payable
Funds to Ariel Mutual Funds. Send it along
P.O. Box 419121 the bottom of your most recent account
Kansas City, MO statement, or with a note that includes
64141-6121 the registered account name and the name
of the Fund you wish to invest in.
- --------------------------------------------------------------------------------
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Please note:
- - We calculate the number of shares you have purchased based on the net asset
value of shares next computed after we receive your order.
- - We can only process purchase orders in U.S. dollars in funds drawn from
U.S. banks.
- - We cannot accept cash, credit-card payments, or third-party checks, except
those payable to an existing shareholder.
- - You cannot sell the shares you have purchased by mail or through Automatic
Investment for 15 days after you have purchased them.
- - We will only issue share certificates if you request them at the time of
purchase.
SELLING ARIEL FUND SHARES
- --------------------------------------------------------------------------------
CONTACT US AT TO ASSURE YOUR SECURITY
- --------------------------------------------------------------------------------
Through your
Financial Advisor
- --------------------------------------------------------------------------------
By mail Ariel Mutual Send us a letter with your account name
Funds and number, the number of shares you
P.O. Box 419121 wish to sell or the dollar amount you
Kansas City, MO wish to receive and where you wish us to
64141-6121 send the check.
- --------------------------------------------------------------------------------
By phone 1-800-29-ARIEL Provide our operator with your Ariel
account number.
- --------------------------------------------------------------------------------
By wire 1-800-29-ARIEL Call or send us a letter with your
or Ariel account name and number, the number of
Mutual Funds shares you wish to sell or the dollar
P.O. Box 419121 amount you wish to receive.
Kansas City, MO NOTE: WE CAN ONLY WIRE THE SALE
64141-6121 PROCEEDS TO THE FINANCIAL INSTITUTION
YOU DESIGNATED WHEN BUYING SHARES.
- --------------------------------------------------------------------------------
Please note:
- - You may sell all or any portion of your Ariel Premier Bond Fund shares on
any day the New York Stock Exchange is open, plus Columbus Day and
Veterans' Day.
- - We redeem the Ariel shares at the net asset value calculated at the end of
the business day when we receive your sale order.
- - We normally send the proceeds of your sale to you the next business day,
except, as noted, in the case of shares purchased by mail or through
Automatic Investment. If, however, we feel the sale may adversely affect
the operation of the Fund, we may take up to seven days to execute your
order.
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- - We only honor telephone sales orders up to $25,000 and we only send
proceeds of such sales to the registered address of the account. The
address must have been on file with us for no less than 60 days.
- - We require a signature guarantee for sales in excess of $25,000.
- - We also require a guarantee if you instruct us to make payment to anyone
other than the shareholder of record at the address on file for your
account.
- - We charge a $10 fee to process wire sales.
- - To sell shares for which we have issued certificates, you must return the
endorsed certificates to us.
- - If the sale of your shares reduces your account balance below $1,000,000 we
reserve the right to close your account with 30 days notice.
- - Qualified dealers may change a fee for processing a sale or purchase.
- - We reserve the right to pay redemptions in the Bond Fund in kind
(marketable portfolio securities).
SHAREHOLDER SERVICES
CONFIRMING YOUR TRANSACTIONS
We will send you a written confirmation of every purchase and sale, including
automatic purchases and sales. Please check them to verify their accuracy.
SECURING YOUR TELEPHONE ORDERS
Ariel will take reasonable precautions to assure that your telephone
transactions are authentic, including tape-recording your instructions. We
cannot, however, be held liable for executing instructions we reasonably believe
are genuine.
EXCHANGING SHARES
You may exchange the shares of any Ariel Mutual Fund you own for shares of any
of the other Ariel Mutual Funds. As long as you meet the required minimums for
each Fund,
Page No.:19
<PAGE>
you do not have to pay for the exchange. You should read the prospectus for any
new fund in which you invest. You can obtain prospectuses by calling 1-800-29
ARIEL.
Bear in mind that:
- - Each exchange represents both a sale and a purchase of fund shares. You may
therefore incur a taxable gain or loss on any exchange.
- - Exchanges which result in ownership of an Ariel Mutual Fund in which you
have not previously invested must be registered in your current account
name and Social Security or taxpayer identification number.
- - Telephone exchanges may be made by any person other than the shareholder of
record--a broker, financial planner, or family member--who can provide the
proper information.
- - You must allow at least 36 hours to make a second exchange between any one
pair of Ariel Funds.
Ariel Mutual Funds has the right to revoke or modify your exchange privilege
with 60 days written notice, or with no notice on evidence of disruptive or
excessive exchanging of shares.
CALCULATING THE FUNDS' SHARE PRICES
We calculate the daily price of Ariel Mutual Funds shares (also known as the
"Net Asset Value" or "NAV") in accordance with the standard formula for valuing
mutual-fund shares at the close of regular trading on the New York Stock
Exchange every day the Exchange is open for business. The formula calls for
deducting all of a fund's liabilities from the total value of its assets--the
market value of the securities it holds, plus its cash reserves--and dividing
the result by the number of shares outstanding.
[SIDEBAR: THE EXCHANGE IS OPEN EVERY WEEK MONDAY THROUGH FRIDAY, EXCEPT WHEN THE
FOLLOWING HOLIDAYS ARE CELEBRATED: NEW YEAR'S DAY, MARTIN LUTHER KING, JR. DAY
(THE THIRD MONDAY IN JANUARY), PRESIDENTS' DAY (THE THIRD MONDAY IN FEBRUARY),
GOOD FRIDAY, MEMORIAL DAY (THE LAST MONDAY IN MAY), JULY 4TH, LABOR DAY (THE
FIRST MONDAY IN SEPTEMBER), THANKSGIVING DAY (THE FOURTH THURSDAY IN NOVEMBER)
AND CHRISTMAS DAY.]
Page No.:20
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We value the securities in the Funds at their stated market value if price
quotations are available. When price quotes for a particular security are not
readily available, we estimate their value by the method that most accurately
reflects a fair value in the judgment of the Board of Trustees. This procedure
implies an unavoidable risk, the risk that our estimates are higher or lower
than the prices that the securities might actually command if we sold them. If
we have valued the securities too highly, you may end up paying too much for
Ariel Mutual Funds shares when you buy. If we underestimate their price, you
may not receive the full market value for your Fund shares when you sell.
PAYING OUT FUND EARNINGS
Each year, the Ariel Mutual Funds pay out all income and capital gains (minus
expenses) generated by the securities in their portfolios. Unless otherwise
instructed, we reinvest these distributions in the Funds at the share price
computed on the day of the distribution. You may, however, choose to have
dividends totaling more than $10 paid out in cash. To do so, you must notify
the Ariel Premier Bond Fund--Institutional Class in writing 60 days prior to the
dividend payment date.
PAYING TAXES ON YOUR FUND EARNINGS
The tax status of your distributions from the Funds does not depend on whether
you reinvest them or take them in cash. Nor does it depend on how long you have
owned your shares. Investment income and capital gains on securities held by
the Funds for less than one year are taxed as ordinary income. Different tax
rates apply for capital gains on securities that the Fund has held for a year or
more.
THE TAX LAWS ARE SUBJECT TO CHANGE. WE RECOMMEND CONSULTING YOUR TAX ADVISOR
ABOUT YOUR PARTICULAR TAX SITUATION UNDER THE CURRENT LAWS.
Page No.:21
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[BACK COVER]
Additional information about the Ariel Mutual Funds' investments is available in
the Funds' annual and semi-annual reports to shareholders. In the Funds' annual
report, you will find a discussion of the market conditions and investment
strategies that significantly affected their performance during its last fiscal
year.
You can find more detailed information about the Ariel Mutual Funds in the
current Statements of Additional Information, dated February 1, 1999, which we
have filed electronically with the Securities and Exchange Commission (SEC) and
which are legally a part of this Prospectus. To receive your free copy of a
Statement of Additional Information, or any of the annual or semi-annual
reports, or if you have questions about investing in the Funds, write to us at:
ARIEL MUTUAL FUNDS
P.O. BOX 419121
KANSAS CITY, MO 64141-6121
or call our toll-free number: 1-800-29-ARIEL (1-800-292-7435)
You can find reports and other information about the Funds on the SEC Website
(http://www.sec.gov), or you can get copies of this information, after payment
of a duplicating fee, by writing to the Public Reference Section of the SEC,
Washington, D.C. 20549-6009. Information about the Funds, including their
Statements of Additional Information, can be reviewed and copied at the SEC's
Public Reference Room in Washington, D.C. For information on the Public
Reference Room, call the SEC at 1-800-SEC-0330.
Investment Company Act file number 811-4786
Page No.:22
<PAGE>
ARIEL INVESTMENT TRUST
STATEMENT OF ADDITIONAL INFORMATION--FEBRUARY 1, 1999
ARIEL APPRECIATION FUND
AND ARIEL GROWTH FUND
307 North Michigan Avenue
Suite 500
Chicago, Illinois 60601
1-800-29-ARIEL (1-800-292-7435)
Ariel Appreciation Fund ("Appreciation Fund") and Ariel Growth Fund
("Growth Fund") (collectively, the "Ariel Mutual Funds", the "Stock Funds" or
the "Funds") are series of Ariel Growth Fund, doing business as Ariel
Investment Trust (the "Trust").
The Trust's audited financial statements included in the Annual Report
to Shareholders for the Funds dated September 30, 1998 are expressly
incorporated herein by reference and made a part of this Statement of
Additional Information. Copies of the Annual Report may be obtained free of
charge by writing or calling the Funds.
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS BUT
PROVIDES INFORMATION THAT SHOULD BE READ IN CONJUNCTION WITH THE FUNDS'
PROSPECTUS DATED FEBRUARY 1, 1999 AND ANY SUPPLEMENT THERETO, WHICH MAY BE
OBTAINED FREE OF CHARGE BY WRITING OR CALLING THE FUNDS.
TABLE OF CONTENTS
<TABLE>
<S> <C>
GENERAL INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
INVESTMENT RESTRICTIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . .2
INVESTMENT STRATEGIES AND RISKS. . . . . . . . . . . . . . . . . . . . . . . .4
TOTAL RETURN AND OTHER PERFORMANCE INFORMATION . . . . . . . . . . . . . . . .7
CALCULATION OF TOTAL RETURN. . . . . . . . . . . . . . . . . . . . . . . . . .8
DIVIDENDS, CAPITAL GAINS AND TAXES . . . . . . . . . . . . . . . . . . . . . .9
PURCHASING, EXCHANGING, AND REDEEMING SHARES . . . . . . . . . . . . . . . . 11
PRICING SHARES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
NET ASSET VALUE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
INVESTMENT ADVISER AND SERVICES ADMINISTRATOR. . . . . . . . . . . . . . . . 19
METHOD OF DISTRIBUTION . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
TRANSFER AGENT AND CUSTODIAN . . . . . . . . . . . . . . . . . . . . . . . . 22
PORTFOLIO TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
INDEPENDENT AUDITORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
TRUSTEES AND OFFICERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
COMPENSATION SCHEDULE. . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
SIGNIFICANT SHAREHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . 26
APPENDIX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
</TABLE>
1
<PAGE>
GENERAL INFORMATION
The Ariel Growth Fund and the Ariel Appreciation Fund are series of
Ariel Growth Fund (doing business as Ariel Investment Trust), an open-end,
diversified management investment company organized as a serial Massachusetts
business trust on April 1, 1986. The Declaration of Trust contains an express
disclaimer of shareholder liability for acts or obligations of the Trust. The
shareholders of a Massachusetts business trust might, however, under certain
circumstances, be held personally liable as partners for its obligations. The
Declaration of Trust provides for indemnification and reimbursement of
expenses out of Trust assets for any shareholder held personally liable for
obligations of the Trust. The Declaration of Trust further provides that the
Trust may maintain appropriate insurance (for example, fidelity bonding and
errors and omissions insurance) for the protection of the Trust, its
shareholders, trustees, officers, employees and agents to cover possible tort
and other liabilities. Thus, the risk of a shareholder incurring financial
loss on account of shareholder liability is limited to circumstances in which
both inadequate insurance exists and the Trust itself is unable to meet its
obligations.
Each share of each 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 Funds' registration statement. The
registration statement is on file with the Securities and Exchange Commission
and is available to the public.
INVESTMENT RESTRICTIONS
The Trust has adopted the following investment restrictions as
fundamental policies. These restrictions cannot be changed as to a Fund
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. Shares have equal
rights as to voting.
A Fund may not:
(1) Purchase securities of any issuer (other than obligations issued, or
guaranteed by, the United States Government, its agencies or
instrumentalities) if, as a result, more than 5% of the value of the Fund's
total assets would be invested in securities of such issuer.
2
<PAGE>
(2) Concentrate more than 25% of the value of its total assets in any
one industry; provided, however, that there is no limitation with respect to
investments in obligations issued or guaranteed by the United States
Government or its agencies and instrumentalities.
(3) Purchase more than 10% of the outstanding voting securities of any
issuer.
(4) Make loans (other than loans of its portfolio securities, loans
through the purchase of money market instruments and repurchase agreements,
or loans through the purchase of bonds, debentures or other debt securities
of the types commonly offered privately and purchased by financial
institutions). The purchase of a portion of an issue of publicly distributed
debt obligations shall not constitute the making of loans. (See also
"Additional Information about Lending Securities and Repurchase Agreements --
Loans of Portfolio Securities.")
(5) Underwrite the securities of other issuers.
(6) Purchase securities which are subject to legal or contractual
restrictions on resale or for which there is no readily available market or
which are repurchase agreements not terminable within seven days if at the
time of purchase more than 5% of the Appreciation Fund's total assets or 10%
of the Growth Fund's total assets would be so invested.
(7) Purchase from or sell to any of the Fund'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.
(8) Issue senior securities or borrow money, except from banks as a
temporary measure for extraordinary or emergency purposes and then only in an
amount up to 10% of the value of its total assets in order to meet redemption
requests without immediately selling portfolio securities. In order to secure
any such bank borrowings under this section, the Fund may pledge, mortgage or
hypothecate the Fund's assets and then in an amount not greater than 15% of
the value of its total assets. The Fund will not borrow for leverage purposes
and investment securities will not be purchased while any borrowings are
outstanding.
(9) Make short sales of securities, purchase any securities on margin,
or invest in warrants or commodities.
(10) Write, purchase or sell puts, calls, straddles or spreads, or
combinations thereof.
(11) 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.
3
<PAGE>
(12) Invest for the purpose of exercising control or management of
another issuer.
(13) Invest in real estate or real estate limited partnerships, although
it may invest in securities which are secured by real estate or real estate
mortgages and may invest in the securities of issuers which invest or deal in
commodities, commodity futures, real estate or real estate mortgages.
(14) 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.
(15) Purchase the securities of other investment companies, except as
they may be acquired as part of a merger, consolidation or acquisition of
assets.
(16) Purchase the securities of companies which have a record of less
than three years' continuous operation if, as a result, more than 5% of the
value of the Fund's assets would be invested in securities of such issuer.
(17) Engage in arbitrage transactions.
Restrictions apply as of the time of the transaction entered into by a
Fund without regard to later changes in the value of any portfolio security
or the assets of the Fund.
INVESTMENT STRATEGIES AND RISKS
THE STOCK FUNDS WILL NORMALLY INVEST AT LEAST 80% OF THE VALUE OF THEIR
RESPECTIVE NET ASSETS IN EQUITY SECURITIES AND MAY INVEST UP TO 20% OF THE
VALUE OF THEIR ASSETS IN BONDS, OTHER DEBT OBLIGATIONS OR FIXED-INCOME
OBLIGATIONS.
Although there is no predetermined percentage of assets to be invested
in stocks, bonds, or money market instruments, each Stock Fund will normally
invest at least 80% of the value of its net assets in equity securities.
Such securities will include common stocks, convertible debt securities and
preferred stocks. The Stock Funds may invest up to 20% of the value of their
assets in bonds, other debt obligations or fixed-income obligations, such as
money market instruments, for defensive or liquidity purposes or pending the
investment of the proceeds from the sale of portfolio securities. Securities
may be purchased subject to repurchase agreements with recognized securities
dealers and banks. If either Stock Fund has assumed a temporary defensive
posture, there is no limitation on the percentage of its assets which may be
invested in fixed-income obligations, including money market instruments,
described below under "Debt Obligations."
DEBT OBLIGATIONS
Debt obligations in which the Stock Funds may invest may be long-term,
intermediate-term, short-term or any combination thereof, depending on the
Adviser's evaluation of current and anticipated market patterns and trends.
Such debt obligations
4
<PAGE>
consist of the following: corporate obligations which at the date of
investment are rated within the four highest grades established by Moody's
Investors Services, Inc. (Aaa, Aa, A, or Baa), or by Standard & Poor's
Corporation (AAA, AA, A, or BBB), or, if not rated, are of comparable quality
as determined by the Adviser (bonds rated Baa or BBB are considered medium
grade obligations and have speculative characteristics); obligations issued
or guaranteed as to principal by the United States Government or its agencies
or instrumentalities; certificates of deposit, time deposits, and bankers'
acceptances of U.S. banks and their branches located outside the U.S. and of
U.S. branches of foreign banks, provided that the bank has total assets of at
least one billion dollars or the equivalent in other currencies; commercial
paper which at the date of investment is rated A-2 or better by Standard &
Poor's, Prime-2 or better by Moody's or, if not rated, is of comparable
quality as determined by the Adviser; and any of the above securities subject
to repurchase agreements with recognized securities dealers and banks. In
the event any debt obligation held by a Stock Fund is downgraded below the
lowest permissible grade, the Stock Fund is not required to sell the
security, but the Adviser will consider the downgrade in determining whether
to hold the security. In any event, a Stock Fund will not purchase or, if
downgraded, continue to hold debt obligations rated below the lowest
permissible grade if more than 5% of such Stock Fund's net assets would be
invested in such debt obligations (including, for the purpose of this
limitation, convertible debt securities rated below Baa or BBB, or if
unrated, of comparable quality).
THE STOCK FUNDS MAY LEND THEIR PORTFOLIO SECURITIES.
Securities of a Fund may be loaned to member firms of the New York Stock
Exchange and commercial banks with assets of one billion dollars or more. Any
such loans must be secured continuously in the form of cash or cash
equivalents, such as U.S. Treasury bills. The amount of the collateral must,
on a current basis, equal or exceed the market value of the loaned
securities, and the loan must be terminable upon notice, at any time. The
Trust will exercise its right to terminate a securities loan in order to
preserve its right to vote upon matters of importance affecting holders of
the securities. A Fund may make a securities loan if the value of the
securities loaned from the Fund will not exceed 10% of the Fund's assets.
However, as a matter of non-fundamental policy, such loan is not made if it
would cause more than 5% of net assets of a Fund to be subject to such loans.
The advantage of such loans would be that the Fund continues to receive
the equivalent of the interest earned or dividends paid by the issuer on the
loaned securities while at the same time earning interest on the cash or
equivalent collateral.
Securities loans would be made to broker-dealers and other financial
institutions to facilitate their deliveries of such securities. As with any
extension of credit there may be risks of delay in recovery and possibly loss
of rights in the loaned securities should the borrower of the loaned
securities fail financially. However, loans will be made only to those firms
that Ariel Capital Management, Inc. (the "Adviser") deems creditworthy and
only on such terms as the Adviser believes should compensate for such risk.
On termination of the loan the borrower is obligated to return the securities
to the Fund; any
5
<PAGE>
gain or loss in the market value of the security during the loan period will
inure to the Fund. Custodial fees may be paid in connection with the loan.
BORROWING
The Stock Funds may not borrow money, except temporarily for emergency
purposes in an amount not exceeding 10% of total assets in order to meet
redemption requests without immediately selling portfolio securities.
ILLIQUID SECURITIES
The Stock Funds will not purchase illiquid securities if such a purchase
would cause more than 10% of the Growth Fund's total assets, or 5% of the
Appreciation Fund's total assets, to be invested in such securities.
REPURCHASE AGREEMENTS
A Fund may purchase securities subject to repurchase agreements. Repurchase
agreements are transactions in which a person 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. Repurchase agreements not terminable
within seven days will be limited to no more than 5% of a Fund's assets.
Repurchase agreements are short-term money market investments, designed to
generate current income.
A Fund will only engage in repurchase agreements with recognized
securities dealers and banks determined to present minimal credit risk by the
Adviser.
A Fund will only engage in repurchase agreements reasonably designed to
secure fully, during the term of the agreement, the seller's obligation to
repurchase the underlying security and 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.
INVESTMENT DIVERSIFICATION AND CONCENTRATION
The Stock Funds will not purchase the security of any issuer (other than
cash items or U.S. Government Securities) if such purchase would cause a
Stock Fund's holdings of that issuer to amount to more than 5% of the Fund's
total assets at the time of purchase.
6
<PAGE>
The Funds will not concentrate 25% or more of their respective total
assets in any one industry. U.S. Government Securities are not subject to
this limitation.
TOTAL RETURN AND OTHER PERFORMANCE INFORMATION
The Funds may advertise total return which are based on historical
results and are not intended to indicate future performance.
TOTAL RETURN. A total return is a change in the value of an investment
during the stated period, assuming all dividends and capital gain
distributions are reinvested. A cumulative total return reflects performance
over a stated period of time. An average annual total return is the
hypothetical annual compounded return that would have produced the same
cumulative total return if the performance had been constant over the entire
period. Because average annual returns tend to smooth out variations in the
returns, you should recognize that they are not the same as actual
year-by-year results. In addition to advertising average annual returns for
the required standard periods, such returns may be quoted for other periods,
including periods of less than one year. Further information about each
Fund's performance is contained in the Annual Report to Shareholders, which
may be obtained from the Funds without charge.
The Funds also may provide current distribution information to their
shareholders in shareholder reports or other shareholder communications or in
certain types of sales literature provided to prospective investors. Current
distribution information for the Funds 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. Current distribution rates differ from standardized yield rates
in that they represent what a Fund has declared and paid to shareholders as
of the end of a specified period rather than a Fund's actual net investment
income for that period.
Performance information for the Stock Funds may be compared to the S&P
500 and the Russell 2500. In addition, performance of each of the Funds may
be compared to 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
each 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.
From time to time, the Funds or their 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.
7
<PAGE>
CALCULATION OF TOTAL RETURN
Average annual total return is computed according to the following
formula:
n
P(1 + T) = ERV
where P = the amount of an assumed initial investment in shares of a Fund
(less the maximum sales charge, if any, during the period); T = average
annual total return; n = the number of years from initial investment to the
end of the period; and ERV = the ending redeemable value of shares held at
the end of the period.
Average Annual total return for each of the Fund's shares for the
periods indicated are as follows:
APPRECIATION FUND
<TABLE>
<CAPTION>
Periods Ended September 30, 1998 Average Annual Total Return
- --------------------------------- ---------------------------
<S> <C>
One year 3.4%
Five years 15.1%
From inception (December 1, 1989) 13.4%
</TABLE>
GROWTH FUND
<TABLE>
<CAPTION>
Periods Ended September 30, 1998 Average Annual Total Return
- --------------------------------- ---------------------------
<S> <C>
One year (3.8%)
Five years 13.2%
Ten years 11.8%
From inception (November 6, 1986) 13.9%
</TABLE>
Total return may be advertised for other periods, such as by quarter, or
cumulatively for more than one year.
Total return, like net asset value per share, fluctuates in response to
changes in market conditions. Performance for any particular time period is
historical in nature and is not intended and should not be considered to be
an indication of future return.
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 investment in the Funds. 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.
8
<PAGE>
Each year, the Funds distribute substantially all of their net
investment income and capital gains to shareholders.
The Funds intend to qualify as a regulated investment company under
Subchapter M of the Internal Revenue Code, as amended (the "Code"). As such,
the Funds generally will not pay Federal income tax on the income and gains
they pay as dividends to their shareholders. In order to avoid a 4% Federal
excise tax, the Funds intend to distribute each year substantially all of
their net income and gains.
Dividends from net investment income are declared and paid annually.
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 Funds once a year.
DIVIDEND AND DISTRIBUTION PAYMENT OPTIONS
Dividends and any distributions from the Funds are automatically
reinvested in the Funds at net asset value, unless you elect to have the
dividends of $10 or more paid in cash. You must notify the Funds 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 Funds' income and short-term
capital gain distributions are taxed as dividends; long-term capital gain
distributions are taxed as long-term capital gains. Some dividends may be
exempt from state or local income tax as income derived from U.S. Government
Securities. You should consult your tax adviser on the taxability of your
distributions.
"BUYING A DIVIDEND"
At the time of purchase, the share price of a Fund may reflect
undistributed income or capital gains. 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.
9
<PAGE>
YOU MAY REALIZE A CAPITAL GAIN OR LOSS WHEN YOU SELL OR EXCHANGE SHARES.
If you sell your shares or exchange them for shares of another fund, you
will have a short or long-term capital gain or loss, depending on how long
you owned the shares which were sold or exchanged. However, the Trust
believes that an exchange 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.
The Trust is required to withhold 31% of any dividends (including
long-term capital gain dividends) paid and 31% of each redemption
transaction, if: (a) the shareholder's social security number or other
taxpayer identification number ("TIN") is not provided or an obviously
incorrect TIN is provided; (b) the shareholder does not certify under
penalties of perjury that the TIN provided is the shareholder's correct TIN
and that the shareholder is not subject to backup withholding under section
3406(a)(1)(C) of the Internal Revenue Code because of under reporting
(however, failure to provide certification as to the application of section
3406(a)(1)(C) will result only in backup withholding on dividends, not on
redemptions); or (c) the Fund is notified by the Internal Revenue Service
that the TIN provided by the shareholder is incorrect or that there has been
under reporting of interest or dividends by the shareholder. Affected
shareholders will receive statements at least annually specifying the amount
withheld.
In addition, the Trust is required under the broker reporting provisions
of the Code to report to the Internal Revenue Service the following
information with respect to each redemption transaction: (a) the
shareholder's name, address, account number and taxpayer identification
number; (b) the total dollar value of the redemptions; and (c) each Fund's
identifying CUSIP number.
Certain shareholders are, however, exempt from the backup withholding
and broker reporting requirements. Exempt shareholders include: corporations;
financial institutions; tax-exempt organizations; individual retirement
plans; the U.S., a State, the District of Columbia, a U.S. possession, a
foreign government, an international organization, or any political
subdivision, agency or instrumentality of any of the foregoing; U.S.
registered commodities or securities dealers; real estate investment trusts;
registered investment companies; bank common trust funds; certain charitable
trusts; foreign central banks of issue. Non-resident aliens also are
generally not subject to either requirement but, along with certain foreign
partnerships and foreign corporations, may instead be subject to withholding
under Section 1441 of the Code. Shareholders claiming exemption from backup
withholding and broker reporting should call or write the Trust for further
information.
The Trust intends to operate each Fund to qualify as a "regulated
investment company" under Subchapter M of the Code. By so qualifying, a Fund
will not be subject to federal income taxes to the extent its earnings are
distributed. The Trust also intends to
10
<PAGE>
manage the Funds so they are not subject to the excise tax imposed by the Tax
Reform Act of 1986 (the "Act").
PURCHASING, EXCHANGING, AND REDEEMING SHARES
INITIAL PURCHASES
The minimum initial investment for each of the Funds is $1,000, or $250
for retirement accounts, unless you participate in an automatic investment
plan, in which case there is a $50 minimum per investment.
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 the 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
All purchases made by check should be in U.S. dollars and made payable
to the ARIEL MUTUAL FUNDS. Third party checks, except those payable to an
existing shareholder who is a natural person (as opposed to a corporation or
partnership), credit cards, and cash will not be accepted. When purchases
are made by check or periodic automatic investment, redemptions will not be
allowed until the investment being redeemed has been in the account for 15
calendar days.
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
11
<PAGE>
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.
BY QUALIFIED DEALER
Shares of the Funds may be purchased directly from the Ariel Mutual
Funds or through certain financial institutions, brokers or dealers which
have a sales agreement with Ariel Distributors, Inc. ("Qualified Dealer").
Shares purchased through a Qualified Dealer may be subject to administrative
charges or transaction fees.
SUBSEQUENT PURCHASES
You may make subsequent investments in the minimum amount of $50. To
invest directly by bank wire, follow the instructions as shown above for
initial investments, except that there is no need to call us first. Just
contact your financial institution.
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 419121
Kansas City, Missouri 64141-6124
AUTOMATIC INVESTING THROUGH YOUR BANK
You may arrange for automatic investing whereby the Custodian will be
authorized to initiate a debit to your bank account of a specific amount
(minimum $50) to be used to purchase shares of the Funds on a monthly or
quarterly basis. After each automatic investment you will receive a
transaction confirmation and the debit should be reflected on your next bank
statement. You may terminate the plan at any time and we may modify or
terminate the plan at any time. If, however, you terminate an automatic
investment plan with an account balance of less than $1,000, we reserve the
right to close your account. See "Redeeming Shares - Other Information About
Redemptions." If you
12
<PAGE>
desire to utilize this automatic investment option, please indicate your
intention to do so on the application included with the Prospectus.
Please note that each time an automatic investment is rejected, you will
be charged a $10 fee plus any costs incurred by the Funds. After two
successive attempts to purchase funds through the automatic investment
program have been rejected, your account will be removed from this program.
PURCHASING THROUGH RETIREMENT PLANS
Contact the Adviser for complete information kits discussing the plans
and their benefits, provisions and fees.
You may establish your new account under one of several tax-deferred
plans. These plans let you invest for retirement and shelter your investment
income from current taxes. Before opening a retirement account, consult your
tax advisory to determine which options are best suited to your needs.
- Individual Retirement Accounts (IRAs): available to anyone who has earned
income. Earnings grow on a tax-deferred basis and contributions may be
fully or partially deductible for certain individuals. You may also be
able to make investments in the name of your spouse, if your spouse has no
earned income.
- Roth IRAs: available to anyone who has earned income below a certain
limit. Earnings grow tax-deferred and can be withdrawn tax-free at
retirement if underlying contributions are held for at least five years.
- Education IRAs: available to families with children under 18 to help pay
for qualified higher education expenses. Certain income limits apply.
- Savings Incentive Match Plan for Employees (SIMPLE): available as an IRA
for each employee. May be adopted by employers having no other plan and
employing 100 or fewer employees earning at least $5,000 in compensation
during the previous year.
- Qualified Profit-Sharing and Money-Purchase 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.
- 403(b)(7) Custodial Accounts: available to employees of most non-profit
organizations and public schools and universities.
13
<PAGE>
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. 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 Funds reserve 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, or your automatic investment is
rejected, your purchase will be canceled and you will be charged a $10 fee
plus costs incurred by the Funds. When you purchase by check, the Funds 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
securities dealers in order to sell shares of the Funds.
OTHER INFORMATION ABOUT PURCHASING SHARES
Although there is no sales charge imposed by the Funds when you purchase
shares directly, certain Qualified Dealers may impose charges for their
services, and such charges may constitute a significant portion of a smaller
account.
The Funds do 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.
HOW TO EXCHANGE SHARES
You may exchange your shares in each Fund for shares of the Bond Fund or
for shares in each 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 Trust Money Market Fund, Cash Resource Trust U.S. Government
Money Market Fund or Cash Resource Trust Tax-Exempt Money Market Fund
(collectively, the "Cash Resource Trust Funds") 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
14
<PAGE>
conditions. These money market funds are no-load funds managed by
Commonwealth Advisors, Inc.
Before exchanging your shares into shares of the Bond Fund's
Institutional Class or shares of any Cash Resource Trust Fund, read the
applicable prospectus. To obtain a prospectus for any of these funds, call
1-800-29-ARIEL (1-800-292-7435).
BY MAIL
To exchange your shares of a Fund into shares of one of the other Ariel
Mutual Funds or Cash Resource Trust 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 or Cash Resource Trust
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.
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."
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 Funds only for shares that have been registered for sale in your state.
See also "Dividends, Capital Gains and Taxes."
Remember that each exchange represents the sale of shares of one Fund
and the purchase of shares of another. Therefore, you could realize a
taxable gain or loss on the transaction.
15
<PAGE>
The Funds reserve 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 Funds' performance and
shareholders, the Funds also reserve 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 a 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 Funds.
If you have any share certificates, you must include them with your
exchange request. A signature guarantee is not required except in cases
where shares are also redeemed at the same time for cash in an amount
exceeding $25,000. For certificate delivery instructions see "Redeeming
Shares--By Mail" and for signature guarantee instructions see "Signature
Guarantees."
Telephone Transactions. If you have telephone transaction privileges,
you may redeem, or exchange shares or wire funds by telephone as described
in this Statement of Additional Information. You automatically have
telephone privileges unless you elect otherwise. These privileges, however,
may not be available through certain Qualified Dealers or other financial
institutions. By exercising the telephone privilege to sell or exchange
shares, you agree that the Funds 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 Funds 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. Due to the need for signature guarantees, telephone redemptions
in excess of $25,000 will not be accepted.
During unusual market conditions, we may have difficulty in accepting
telephone requests, in which case you should mail your request. The Funds
reserve the right to terminate, suspend or modify telephone transaction
privileges.
SIGNATURE GUARANTEES
WE MAY REQUIRE SIGNATURE GUARANTEES. For our mutual protection, we may
require a signature guarantee on certain transaction requests. A signature
guarantee verifies the authenticity of your signature, and may be obtained
from any bank, trust company, savings and loan association, credit union,
broker-dealer firm or member of a domestic stock exchange. A signature
guarantee cannot be provided by a notary public. If redemption proceeds are
$25,000 or less and are to be paid or credited to an individual shareholder
of record at the address of record, a signature guarantee is not required
16
<PAGE>
(unless there has been an address change within 60 days). All other
redemption requests must have signatures guaranteed.
Special Services and Charges. The Funds pay for shareholder services but
not for special services that are required by a few shareholders, such as a
request for a historical transcript of an account. You may be required to
pay a research fee for these special services.
If you are purchasing shares of a Fund through a program of services
offered by a Qualified Dealers or other financial institution, you should
read the program materials in conjunction with this Statement of Additional
Information. Certain features may be modified in these programs, and
administrative charges may be imposed by these institutions for the services
rendered.
HOW TO REDEEM SHARES
BY MAIL. You may redeem shares from your account by sending a letter of
instruction, your name, the name of the Fund and account number from which
shares are to be 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 the Transfer Agent as follows:
Ariel Mutual Funds
P.O. Box 419121
Kansas City, Missouri 64141-6121
Certain shareholders, such as corporations, trusts and estates, may be
required to submit additional documents. The letter of instruction must be
signed by all required authorized signers. If you want your money to be
wired to a bank not previously authorized or if you would like funds sent to
a different address or another person, your letter must be signature
guaranteed. Please remember that you cannot place any conditions on your
request. If any share certificates were issued, they must be returned duly
endorsed or accompanied by a separate stock assignment. See "Signature
Guarantees." See "Telephone Transactions" 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. Remember, however, that the check can only be issued for up to $25,000,
and only to the registered owner (who must be an individual), and may only be
sent to the address of record, which must have been on file for at least 60
days. Shares represented by certificates may not be redeemed by telephone.
See "Telephone Transactions" for more information.
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.
17
<PAGE>
Once you have applied for wire redemption privileges, you or any other
person can make such a request by calling 1-800-29-ARIEL (1-800-292-7435).
You may also use your wire privilege by mailing a signed request that
includes the name of the Fund, account number and amount you wish to have
wired, by writing to:
Ariel Mutual Funds
P.O. Box 419121
Kansas City, Missouri 64141-6121
The proceeds will be sent only to the financial institution you have
designated on your application. You may terminate the wire redemption
privilege by notifying us in writing. A charge of $10 is normally imposed on
wire redemptions. See the restrictions under "Telephone Transactions" as
they also apply to wire redemptions.
SYSTEMATIC CHECK REDEMPTIONS. If you maintain an account with a balance
of $10,000 or more, you may have regular monthly or quarterly redemption
checks for a fixed amount sent to you simply by sending a letter with all the
information, including the Fund name, your account number, the dollar amount
($100 minimum) and when you want the checks mailed to your address on the
account. If you would like checks regularly mailed to another person or
place, the signature on your letter must be guaranteed. See "Signature
Guarantees."
OTHER INFORMATION ABOUT REDEMPTIONS
Other than the $10 fee normally imposed on wire redemptions, there is no
charge for redeeming your shares. If, however, you redeem shares through
Qualified Dealers or other financial institutions, you may be charged a fee
when you redeem your shares.
Once your shares are redeemed, the proceeds will normally be sent to you
on the next business day. However, if making immediate payment could
adversely affect the Fund, it may take up to seven calendar days. When the
New York Stock Exchange is closed (or when trading is restricted) for any
reason other than its customary weekend or holiday closing, or under any
emergency circumstances as determined by the Securities and Exchange
Commission, redemptions may be suspended or payment dates postponed.
You may redeem all or a portion of your shares on any business day
during which the New York Stock Exchange is open for business. 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 (3:00 Central time) will be made
at the next day's net asset value. Remember that if you redeem shortly after
purchasing shares, the Funds may hold payment on the redemption of your
shares until they are reasonably satisfied that payments made by check have
been collected (normally up to 15 calendar days after investment).
MINIMUM ACCOUNT BALANCE IS $1,000. Please maintain a balance in your
account of at least $1,000. If, due to shareholder redemptions, the value of
your account in a Fund falls below $1,000, or you fail to invest at least
$1,000, the account may be closed and
18
<PAGE>
the proceeds mailed to you at your address of record. You will be given 30
days' notice that your account will be closed unless you make an additional
investment to increase your account balance to the $1,000 minimum.
PRICING SHARES
NET ASSET VALUE
The net asset value per share of a Fund, the price at which the Fund's
shares are purchased and redeemed, is determined every business day as of the
close of the New York Stock Exchange (generally 3:00 p.m., Central time), and
at such other times as may be necessary or appropriate. The Funds do not
determine net asset value on certain national holidays or other days on which
the New York Stock Exchange is closed: New Year's Day, Martin Luther King
Jr.'s Birthday, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
Stocks and other assets are valued based on market quotations.
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.
The net asset value per share is computed by dividing the value of a
Fund's total assets, less its liabilities, by the total number of shares
outstanding. The Funds' securities are valued as follows: (a) securities for
which market quotations are readily available are valued at the most recent
closing price. All other securities for which reliable bid quotations are
available are valued at the mean between the bid and asked price, or yield
equivalent as obtained from one or more market makers for such securities;
(b) securities maturing within 60 days are valued at cost, plus or minus any
amortized discount or premium, unless the Board of Trustees determines such
method not to be appropriate under the circumstances; and (c) all other
securities and assets for which market quotations are not readily available
are fairly valued by the Adviser in good faith under the supervision of the
Board of Trustees.
INVESTMENT ADVISER AND SERVICES ADMINISTRATOR
Ariel Capital Management, Inc. (the "Adviser"), 307 North Michigan
Avenue, Suite 500, Chicago, Illinois 60601, which is controlled by John W.
Rogers, Jr., acts as investment adviser and services administrator under a
management agreement with the Trust ("Management Agreement") for the Funds.
19
<PAGE>
The Management Agreement between the Trust and the Adviser will remain
in effect as to a Fund indefinitely, provided continuance is approved at
least annually by vote of the holders of a majority of the outstanding shares
of the Fund or by the Board of Trustees of the Trust; and further provided
that such continuance is also approved annually by the vote of a majority of
the Trustees of the Trust who are not parties to the Agreement or interested
persons of parties to the Agreement or interested persons of such parties,
cast in person at a meeting called for the purpose of voting on such
approval. The Management Agreement may be terminated without penalty by the
Trust or the Adviser upon 60 days' prior written notice; it automatically
terminates in the event of its assignment.
Pursuant to the Management Agreement, the Adviser is responsible for
determining the investment selections for a Fund in accordance with the
Fund's investment objectives and policies stated above, subject to the
direction and control of the Board of Trustees. The Adviser pays the salaries
and fees of all officers and Trustees who are affiliated persons of the
Adviser. The Adviser also provides the Funds with office space,
administrative services, furnishes executive and other personnel to the Funds
and is responsible for providing or overseeing the Fund's day-to-day
management and administration.
The Funds pay all operating expenses not expressly assumed by the
Adviser, including custodial and transfer agency fees, federal and state
securities registration fees, legal and audit fees, and brokerage commissions
and other costs associated with the purchase and sale of portfolio
securities, except that the Adviser must reimburse a Fund if its annual
expenses (excluding brokerage, taxes, interest, Distribution Plan expenses
and extraordinary items) exceed 1.50% of the first $30 million of each Fund's
average daily net assets and 1% of such assets in excess of $30 million.
Fees paid to the Adviser for the fiscal year ended September 30, 1997
were $1,151,445 for the Appreciation Fund and $838,232 for the Growth Fund.
No reimbursements were made by the Adviser for the fiscal year.
Fees paid to the Adviser for the fiscal year ended September 30, 1998
were $1,637,377 for the Appreciation Fund and $1,159,454 for the Growth Fund.
No reimbursements were made by the Adviser for the fiscal year.
The Adviser has entered into an agreement with Sunstone Financial Group, Inc.
("Sunstone") under which Sunstone provides certain administrative services to
the Funds. Under the direction and supervision of the Adviser, Sunstone
performs fund accounting services and prepares reports for the Board of
Trustees. For its services, Sunstone receives from the Adviser 0.041% of the
average net assets of the Funds. Sunstone does not receive any compensation
from the Funds.
In connection with the exchange privilege with respect to Cash Trust
Resource Trust Money Market Fund, Cash Resource Trust U.S. Government Money
Market Fund
20
<PAGE>
and Cash Resource Trust Tax-Exempt Money Market Fund, the Distributor acts as
a shareholder servicing agent. For its services, the Distributor receives a
fee from each such fund at the rate of 0.25% of the average net assets of
each account in such funds established through the use of the exchange
privilege pursuant to a Rule 12b-1 distribution plan adopted by Cash Resource
Trust Money Market Fund, Cash Resource Trust U.S. Government Money Market
Fund and Cash Resource Trust Tax-Exempt Money Market Fund.
The Adviser has adopted a Code of Ethics which regulates the personal
securities transactions of the Adviser's investment personnel and other
employees and affiliates with access to information regarding securities
transactions of the Fund. The Code of Ethics requires investment personnel to
disclose all personal securities holdings upon commencement of employment and
all subsequent trading activity to the Adviser'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
either Fund has a pending buy or sell order, (ii) which either Fund is
considering buying or selling, or (iii) which either Fund purchased or sold
within seven calendar days.
METHOD OF DISTRIBUTION
Ariel Distributors, Inc., a wholly-owned subsidiary of the Adviser, is
the principal underwriter for the Funds under an agreement with the Trust.
Pursuant to the Underwriting Agreement, Ariel Distributors receives a fee at
the annual rate of 0.25% of each Fund's average daily net assets for its
distribution services and for assuming certain marketing expenses. Ariel
Distributors is located at 307 N. Michigan Avenue, Chicago, Illinois 60601.
The Trust has also adopted a Distribution Plan pursuant to Rule 12b-1
under the Investment Company Act of 1940 with respect to the Funds (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 0.25%
annually of a Fund's average daily net assets in connection with the
distribution of the Fund's shares.
During the fiscal year ended September 30, 1998, the Appreciation Fund
and Growth Fund paid Distribution Plan expenses of $545,792 and $445,944,
respectively, to the principal underwriter. Of the total amounts paid
$374,302 was used to pay broker-dealers for their distribution and
maintenance services and $617,434 was used for advertising, shareholder
account maintenance, printing and related costs.
21
<PAGE>
The Distribution Plan was approved by the Board of Trustees, including
the Trustees who are not "interested persons" of the Fund (as that term is
defined in the Investment Company Act of 1940) and who have no direct
financial interest in the operation of the Plan or in any agreements related
to the Distribution Plan (the "Independent Trustees"). The selection and
nomination of the Independent Trustees is committed to the discretion of such
Independent Trustees. In establishing the Distribution Plan, the Trustees
considered various factors including the amount of the distribution fee. The
Trustees determined that there is a reasonable likelihood that the
Distribution Plan will benefit the Trust and its shareholders.
The Distribution Plan may be terminated as to a Fund by vote of a
majority of the Independent Trustees, or by vote of a majority of the
outstanding shares of the Fund. Any change in the Distribution Plan that
would materially increase the distribution cost to a Fund requires approval
of the shareholders of that Fund; 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 the 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.
The Funds have authorized certain Qualified Dealers to accept on their
behalf purchase and redemption orders. Such Dealers are authorized to
designate other intermediaries to accept purchase and redemption orders on
the Funds' behalf. The Funds will be deemed to have received a purchase or
redemption order when an authorized Dealer or such Dealer's authorized
designee, accepts the order. Customer orders will be priced at the
applicable Fund's net asset value next computed after they are accepted by an
authorized Dealer or such Dealer's designee.
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
Funds' investments; and preparing and distributing quarterly statements to
shareholders regarding their accounts.
22
<PAGE>
PORTFOLIO TRANSACTIONS
Portfolio transactions are undertaken on the basis of their desirability
from an investment standpoint. Investment decisions and choice of brokers and
dealers are made by the Adviser under the direction and supervision of the
Trust's Board of Trustees.
The Trust seeks to obtain the best price and most favorable execution
and selects broker-dealers on the basis of their professional capability and
the value and quality of their services. Broker-dealers that provide the
Trust with statistical, research, or other information and services may be
selected. Such broker-dealers may receive compensation for executing
portfolio transactions that is in excess of the compensation another
broker-dealer would have received for executing such transactions, if the
Adviser determines in good faith that such compensation is reasonable in
relation to the value of the information and services provided. Research
services furnished by investment firms may be utilized by the Adviser in
connection with its investment services for other accounts; likewise,
research services provided by investment firms used for other accounts may be
utilized by the Adviser in performing its services for the Trust. Although
any statistical, research, or other information or services provided by
broker-dealers may be useful to the Adviser, its dollar value is generally
indeterminable and its availability or receipt does not materially reduce the
Adviser's normal research activities or expenses.
The Adviser may also execute Fund transactions with or through
broker-dealers who have sold shares of the Funds. However, such sales will
not be a qualifying or disqualifying factor in a broker-dealer's selection
nor will the selection of any broker-dealer be based on the volume of Fund
shares sold.
The aggregate amount of brokerage commissions paid by the Funds during
fiscal years 1996, 1997, and 1998 were $250,910, $208,553 and $292,169,
respectively.
INDEPENDENT AUDITORS
The Funds' independent auditors, Ernst & Young LLP, 233 South Wacker
Drive, Chicago, IL 60606, audit and report on the Funds' annual financial
statements, review certain regulatory reports and the Funds' federal income
tax returns, and perform other professional accounting, auditing, tax and
advisory services when engaged to do so by the Funds. Shareholders will
receive annual audited financial statements and semi-annual unaudited
financial statements.
TRUSTEES AND OFFICERS
Ariel Mutual Funds operates under the supervision of a Board of Trustees
responsible to each Fund's shareholders. Set forth below are the principal
occupations of the Trustees and Officers during the last five years:
MARIO L. BAEZA, ESQ., 48, Trustee. Mr. Baeza is Chairman and Chief Executive
Officer, Latin America Partners, L.L.C. (Venture Capital). Formerly, he was
President of Wasserstein Perella International Limited, and Managing Director
and Chief Executive
23
<PAGE>
Officer, Americas Division, Wasserstein Perella & Co., Inc. Address: 200 Park
Avenue, New York, New York 10166.
JAMES COMPTON, 60, Trustee. Mr. Compton is president and Chief Executive
Officer of Chicago Urban League. Address: 4510 S. Michigan Ave., Chicago,
IL 60653.
WILLIAM C. DIETRICH, CPA, 49, Trustee. Mr. Dietrich is an independent
financial consultant specializing in early state enterpreneurial companies.
Chief Financial Officer for Streamline Mid-Atlantic, Inc. (computerized
shopping service). He formerly served as Vice President and Chief Financial
Officer for Shoppers Express, Inc. Address: 5110 Ridgefield Road, Bethesda,
Maryland 20816.
ROYCE N. FLIPPIN, JR., 64, 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. Address: 51 Frost Avenue, East
Brunswick, New Jersey 08816.
JOHN G. GUFFEY, JR., 50, 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, 35, 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, CPA, 60, Chairman of the Board and Trustee. Mr. Mitchell is
the Chairman of Mitchell & Titus L.L.P., the nation's largest minority-owned
certified public accounting firm. Address: One Battery Park Plaza, New York,
New York 10004.
*MELLODY L. HOBSON, 29, Trustee. Ms. Hobson is Senior Vice President,
Director of Marketing of Ariel Capital Management. Address: 307 North
Michigan Avenue, Suite 500, Chicago, Illinois 60601.
*ERIC T. MCKISSACK, 45, 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.
*JAMES W. ATKINSON, 48, Vice President and Treasurer. Mr. Atkinson is Vice
President, Finance and Management of Ariel Capital Management. Formerly, he
was Senior Vice President and Chief Executive Officer of Stein Roe &
Farnham, Inc.
24
<PAGE>
(investment advisers). Address: 307 North Michigan Avenue, Suite 500,
Chicago, Illinois 60601.
*ROGER P. SCHMITT, 41, 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.
- ------------
*Officers and Trustees deemed to be "interested persons" of the Funds under
the Investment Company Act of 1940.
COMPENSATION SCHEDULE
During the fiscal year ended September 30, 1998, compensation paid by the
Funds to the Trustees not affiliated with the Adviser was as follows:
<TABLE>
<CAPTION>
NAME COMPENSATION
---- ------------
<S> <C>
Mario L. Baeza $6,400
James Compton $6,400
William C. Dietrich $5,767
Royce N. Flippin, Jr. $6,400
John G. Guffey, Jr. $6,200
Christopher G. Kennedy $6,200
Bert N. Mitchell $6,400
</TABLE>
25
<PAGE>
SIGNIFICANT SHAREHOLDERS
The following table lists the holders of five percent or more of the
outstanding shares of each Fund as of November 13, 1998:
GROWTH FUND
-----------
<TABLE>
<CAPTION>
Name and Address Number of Shares Percentage of
of Owner Owned Outstanding Shares
- -------- ----- ------------------
<S> <C> <C>
Illinois State Employees 742,502.132 16%
Deferred Compensation
604 Stratton Office Building
Springfield, IL 62706
Charles Schwab & Co., Inc. 438,686.994 9%
Reinvest Acct.
Attn: Mutual Fund Dept.
101 Montgomery Street
San Francisco, CA 94104
</TABLE>
APPRECIATION FUND
-----------------
<TABLE>
<CAPTION>
Name and Address Number of Shares Percentage of
of Owner Owned Outstanding Shares
- -------- ----- ------------------
<S> <C> <C>
Charles Schwab & Co., Inc. 940,044.518 12%
Reinvest Acct.
Attn: Mutual Fund Dept.
101 Montgomery Street
San Francisco, CA 94104
Great West Life & Annuity Co. 838,331.951 11%
Unit Valuations 2T2
8515 E. Orchard Road
Englewood, CO 80111
National Financial Services Corp. 375,779.679 5%
Attn: Mutual Funds Dept., 5th Floor
One World Financial Center
200 Liberty Street
New York, 10281-1003
</TABLE>
26
<PAGE>
APPENDIX
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 comprise what are generally
known as high grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in Aaa 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
27
<PAGE>
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.
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.
28
<PAGE>
ARIEL INVESTMENT TRUST
STATEMENT OF ADDITIONAL INFORMATION
February 1, 1999
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").
The Trust's audited financial statements included in the Annual Report to
Shareholders for the Fund dated September 30, 1998 are expressly incorporated
herein by reference and made a part of this Statement of Additional Information.
Copies of the Annual Report may be obtained free of charge by writing or calling
Fund.
This Statement of Additional Information is not a prospectus but provides
information that should be read in conjunction with the Fund's Prospectus dated
February 1, 1999 and any supplement thereto, which may be obtained free of
charge by writing or calling the Fund.
TABLE OF CONTENTS
<TABLE>
<S> <C>
GENERAL INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . 2
FUNDAMENTAL INVESTMENT RESTRICTIONS. . . . . . . . . . . . . . . . . 2
NON-FUNDAMENTAL INVESTMENT RESTRICTIONS. . . . . . . . . . . . . . . 4
TOTAL RETURN, YIELD AND OTHER PERFORMANCE INFORMATION. . . . . . . .17
CALCULATION OF PERFORMANCE DATA. . . . . . . . . . . . . . . . . . .19
PURCHASING, EXCHANGING AND REDEEMING SHARES. . . . . . . . . . . . .21
PRICING SHARES . . . . . . . . . . . . . . . . . . . . . . . . . . .24
NET ASSET VALUE. . . . . . . . . . . . . . . . . . . . . . . . . . .24
DIVIDENDS, CAPITAL GAINS AND TAXES . . . . . . . . . . . . . . . . .29
IN-KIND PURCHASES OF INSTITUTIONAL CLASS SHARES OF THE FUND. . . . .31
INVESTMENT ADVISER, SUB-ADVISER AND SERVICES ADMINISTRATOR . . . . .32
METHOD OF DISTRIBUTION OF THE INVESTOR CLASS SHARES. . . . . . . . .33
TRANSFER AGENT AND CUSTODIAN . . . . . . . . . . . . . . . . . . . .35
PORTFOLIO TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . . .35
INDEPENDENT AUDITORS . . . . . . . . . . . . . . . . . . . . . . . .36
TRUSTEES AND OFFICERS. . . . . . . . . . . . . . . . . . . . . . . .36
COMPENSATION SCHEDULE. . . . . . . . . . . . . . . . . . . . . . . .38
SIGNIFICANT SHAREHOLDERS . . . . . . . . . . . . . . . . . . . . . .39
APPENDIX A . . . . . . . . . . . . . . . . . . . . . . . . . . . . .40
</TABLE>
1
<PAGE>
GENERAL INFORMATION
The Fund, together with Ariel Growth Fund and the Ariel Appreciation Fund
are the three series of Ariel Growth Fund (doing business as Ariel Investment
Trust), an open-end, diversified management investment company organized as a
serial Massachusetts business trust on April 1, 1986. The Declaration of Trust
contains an express disclaimer of shareholder liability for acts or obligations
of the Trust. The shareholders of a Massachusetts business trust might, however,
under certain circumstances, be held personally liable as partners for its
obligations. The Declaration of Trust provides for indemnification and
reimbursement of expenses out of Trust assets for any shareholder held
personally liable for obligations of the Trust. The Declaration of Trust
further provides that the Trust may maintain appropriate insurance (for example,
fidelity bonding and errors and omissions insurance) for the protection of the
Trust, its shareholders, trustees, officers, employees and agents to cover
possible tort and other liabilities. Thus, the risk of a shareholder incurring
financial loss on account of shareholder liability is limited to circumstances
in which both inadequate insurance exists and the Trust itself is unable to meet
its obligations.
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 Fund currently offers two classes of shares, the Institutional Class
and the Investor Class. The Institutional Class is offered primarily to
institutional investors. Institutional Class shares are sold and redeemed at
net asset value and are not subject to Rule 12b-1 distribution fees. The
Investor Class is offered to retail investors and is sold and redeemed at net
asset value, but is subject to Rule12b-1 distribution fees.
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.
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.
2
<PAGE>
(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>
INVESTMENT STATEGIES AND RISKS
THE BOND FUND SEEKS TO MAXIMIZE TOTAL RETURN.
The Bond 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
The investment objective of the Bond 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 Bond 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 Bond 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.
The Bond 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.
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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 Bond Fund's portfolio. The duration of the
Bond 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 Bond 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 Bond 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
Bond Fund's duration will diverge from the duration of the domestic, investment
grade bond market, which generally averages approximately five years. The Bond
Fund's duration will normally range from four to six years. It is expected that
only on rare occasions will the Bond Fund's duration reach the extreme positions
(plus or minus 2 years from the duration of the domestic, investment grade bond
market).
The Bond Fund's duration relative to that of the domestic, investment grade
bond market is established in periodic strategy meetings of a committee
consisting of senior officers of Lincoln Capital. Changes in the Bond Fund's
duration are based on a disciplined evaluation 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.
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Once the Bond 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 extensive historical yield
spread data and specific issuer data.
Credit research consists of internally generated fundamental analysis and
input from rating agencies and other sources. A committee 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 Bond Fund's return by anticipating an improvement in the creditworthiness of
specific corporate issuers, particularly lower rated issuers.
BOND FUND INVESTMENTS
IN GENERAL. The Bond 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 Bond Fund will invest are investment grade
securities. Generally at least 80% of the Bond 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 Bond Fund will invest are investment grade
securities. These are securities rated in the four highest grades assigned by
Moody's (Aaa, Aa, A and Baa) or S & P (AAA, AA, A and BBB) or that are not rated
by Moody's or S & P but deemed to be of
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comparable quality by Lincoln Capital. Generally, at least 80% of the Bond
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 Bond 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 Bond Fund to below investment grade, the Bond
Fund is not usually required to automatically sell the issue, but Lincoln
Capital will consider whether to continue holding the security. However, if
such a downgrade would cause more than 5% of net assets to be invested in
debt securities below investment grade, 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 Bond 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 Bond Fund's portfolio is likely
to decline and when prevailing interest rates decline, the value of the Bond
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.
CORPORATE BONDS
The Bond 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.
The Bond Fund may invest in investment grade corporate bonds. Usually, no
single corporate issuer will comprise more than 5% of the Bond Fund's total
assets at the time of investment. The value of lower-rated corporate debt
securities is more sensitive to economic
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changes or individual corporate developments than higher-rated investments.
YANKEE BONDS
Some of the debt securities in which the Bond 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, currency fluctuations may adversely affect the ability of the borrower
to repay the debt and may increase the possibility of default. In addition, 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 Bond Fund does not intend to invest in securities of foreign issuers.
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
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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 the
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.
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.
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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.
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
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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 called tranches, 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
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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 tranche. Investors holding the longer maturity
tranches receive principal only after the first tranche 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. The Fund's investments are limited to Planned Amortization Class
and sequential issues.
FHLMC COLLATERALIZED MORTGAGE OBLIGATIONS. FHLMC CMOs are debt obligations
of FHLMC issued in multiple tranches having different maturity dates which are
secured by the pledge of a pool of conventional mortgage loans purchased by
FHLMC. Unlike FHLMC Participation Certificates, payments of principal and
interest on the CMOs are made semiannually, as opposed to monthly. The amount
of principal payable on each semiannual payment date is determined in accordance
with FHLMC's mandatory sinking fund schedule, which, in turn, is equal to
approximately 100% of FHA prepayment experience applied to the mortgage
collateral pool. All sinking fund payments in the CMOs are allocated to the
retirement of the individual tranches 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 tranches 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
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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.
ADDITIONAL RISKS. Investments by the Bond 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 Bond Fund reinvests the prepaid
amounts in securities, the yields of which reflect interest rates prevailing at
that time. Therefore, the Bond Fund's ability to maintain a portfolio of
high-yielding, mortgage-backed securities will be adversely affected to the
extent that prepayments of mortgages must be reinvested in securities which have
lower yields than the prepaid mortgages. Moreover, prepayments of mortgages
which underlie securities purchased at a premium could result in capital losses.
Investment in such securities could also subject the Fund to "maturity extension
risk" which is the possibility that rising interest rates may cause prepayments
to occur at a slower than expected rate. This particular risk may effectively
change a security which was considered a short or intermediate-term security at
the time of purchase into a long-term security. Long-term securities generally
fluctuate more widely in response to changes in interest rates than short or
intermediate-term securities.
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 than mortgage-related securities.
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
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servicer of the Automobile Contracts, which is usually the originator of the
Automobile Contracts, take custody of the Automobile Contract. In such
circumstances, if the servicer of the Automobile Contracts were to sell the
Automobile Contracts to another party, in violation of its obligation not to
do so, there is a risk that such party could acquire an interest in the
Automobile Contracts superior to that of the holders of Automobile Receivable
Securities. Also, although most Automobile Contracts grant a security
interest in a motor vehicle being financed, in most states the security
interest in a motor vehicle must be noted on the certificate of title to
create an enforceable security interest against competing claims of other
parties. Due to the large number of vehicles involved, however, the
certificate of title to each vehicle financed, pursuant to the Automobile
Contracts underlying the Automobile Receivable Security, is usually not
amended to reflect the assignment of the seller's security interest for the
benefit of the holders of the Automobile Receivable Securities. Therefore,
there is the possibility that recoveries on repossessed collateral may not,
in some cases, be available to support payments on the securities. In
addition, various state and federal securities laws give the motor vehicle
owner the right to assert against the holder of the owner's Automobile
Contract certain defenses such owner would have against the seller of the
motor vehicle. The assertion of such defenses could reduce payments on the
Automobile Receivable Securities. Investment grade Automobile Receivable
Securities are typically over-collateralized and have other forms of credit
enhancement to mitigate these risks.
CREDIT CARD RECEIVABLE SECURITIES. The Fund may invest in asset-backed
securities backed by a diversified pool of receivables from revolving credit
card agreements ("Credit Card Receivable Securities"). Credit balances on
revolving credit card agreements ("Accounts") are generally paid down more
rapidly than are Automobile Contracts. Most Credit Card Receivable Securities
provide for a fixed period during which only interest payments are paid to the
security holder. Principal payments received on underlying Accounts are used to
purchase additional assets. The initial fixed period usually may be shortened
upon the occurrence of specified events which signal a potential deterioration
in the quality of the assets backing the security, such as the imposition of a
cap on interest rates. The ability of the issuer to make principal and interest
payments on Credit Card Receivable Securities thus depends upon the continued
generation of additional principal amounts in the underlying accounts during the
initial period and the non-occurrence of specified events. An acceleration in
cardholders' payments rates or any other event which shortens the period during
which additional credit card charges on an Account may be transferred to the
pool of assets supporting the related Credit Card Receivable Security could
shorten the weighted average life and reduce the yield of the Credit Card
Receivable Security.
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.
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
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payments on asset-backed securities are obligations of the issuers, in the
event of defaults on underlying assets not covered by any credit support, the
issuers are unlikely to have sufficient assets to satisfy their obligations
on the related asset-backed securities. The loans underlying these
securities are subject to prepayments which can decrease maturities and
returns. Due to the possibility that prepayments will alter the cash flow on
asset-backed securities, it is not possible to determine in advance the
actual final maturity date or average life. Faster prepayment will shorten
the average life and slower prepayments will lengthen it. However, it is
possible to determine what the range of that movement could be and to
calculate the effect that it will have on the price of the security.
The values of these securities are ultimately dependent upon payment of the
underlying loans by individuals, and the holders, such as the Bond Fund,
generally have no recourse against the originator of the loans. The Bond 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.
DELAYED DELIVERY TRANSACTIONS
The Bond 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 Bond Fund will
maintain, with its Custodian, an account with a designated portfolio of
liquid, high-grade debt securities or cash in an amount at least equal to these
commitments. The Bond Fund will generally earn income on assets deposited in
the designated account. No payment or delivery is made by the Bond Fund in a
when-issued transaction until it receives payment or delivery from the other
party to the transaction. Although the Bond 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 Bond Fund does not intend to remain fully
invested when such purchases are outstanding. However, if the Bond 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 Bond Fund has sold a security on a delayed delivery basis,
the Bond 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 Bond Fund could miss a favorable price or yield
opportunity or could suffer a loss. The Bond 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.
PORTFOLIO TRANSACTIONS
Lincoln Capital is responsible for the placement of portfolio
transactions. It is the Bond Fund's policy to seek to place portfolio
transactions with brokers or dealers on the basis of best execution.
16
<PAGE>
Generally, Lincoln Capital manages the Bond Fund without regard to
restrictions on portfolio turnover. Trading in fixed-income securities does
not generally involve the payment of brokerage commissions, but does involve
indirect transaction costs. The higher the turnover rate of the Bond Fund's
portfolio, the higher the transaction costs will be for the Bond Fund. See
"Financial Highlights" in the Prospectus dated February 1, 1999 for the
Fund's turnover for the fiscal year ended September 30, 1998.
BORROWING
The Bond Fund may not borrow money to purchase securities. The Bond 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 Bond Fund's total
assets (including the amounts borrowed). The Bond Fund will not purchase
securities when its borrowings, less amounts receivable on sales of portfolio
securities, exceed 5% of total assets.
ILLIQUID SECURITIES
The Bond Fund will not purchase or hold illiquid securities if more than
15% of the Bond Fund's net assets would then be illiquid. If at any time more
than 15% of the Bond Fund's net assets are illiquid, steps will be taken as soon
as practicable to reduce the percentage of illiquid assets to 15% or less.
INVESTMENT DIVERSIFICATION AND CONCENTRATION
As to seventy-five percent of its total assets, the Bond Fund will not
purchase the security of any issuer (other than cash items or U.S. Government
Securities) if such purchase would cause the Bond Fund's holdings of that issuer
to amount to more than 5% of the Bond Fund's total assets at the time of
purchase. The remaining 25% of the Bond Fund's total assets are not so limited
which allows Lincoln Capital to invest more than 5% of the Bond Fund's total
assets in a single issuer. In the event that Lincoln Capital chooses to make
such an investment, it may expose the Bond 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
Bond Fund's total assets.
The Fund will not concentrate 25% or more of its respective total assets in
any one industry. U.S. Government Securities are not subject to this
limitation.
TOTAL RETURN, YIELD AND OTHER PERFORMANCE INFORMATION
The Fund may advertise total return and yield, which are based on
historical results and are not intended to indicate future performance.
TOTAL RETURN. 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
17
<PAGE>
hypothetical annual compounded return that would have produced the same
cumulative total return if the performance had been constant over the entire
period. Because average annual returns tend to smooth out variations in the
returns, you should recognize that they are not the same as actual
year-by-year results. In addition to advertising average annual returns for
the required standard periods, such returns may be quoted for other periods,
including periods of less than one year. Further information about each
Fund's performance is contained in the Annual Report to Shareholders, which
may be obtained from the Fund without charge.
YIELD. Quotations of yield for the Bond Fund will be based on the
investment income per share (as defined by the Securities and Exchange
Commission) during a particular 30-day 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.
Current distribution rates differ from standardized yield rates in that they
represent what a Fund has declared and paid to shareholders as of the end of a
specified period rather than a Fund's actual net investment income for that
period.
Performance information for the Bond Fund may be compared to various
unmanaged indices, such as the Lehman Brothers Aggregate Bond Index, the Lehman
Brothers Government/Corporate Index and the Salomon Brothers Broad
Investment-Grade Bond Index. In addition, performance of each of the Funds may
be compared to 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.
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.
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<PAGE>
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:
n
P(1 + T) = ERV
Where: P = a hypothetical initial payment of $10,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $10,000
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 $10,000
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.
The average annual total return for each of the Fund's share classes for
the period indicated are as follows:
INSTITUTIONAL CLASS
<TABLE>
<CAPTION>
PERIODS ENDED SEPTEMBER 30, 1998 AVERAGE ANNUAL TOTAL RETURN
- -------------------------------- ---------------------------
<S> <C>
One year 10.2%
From inception (October 1, 1995) 7.8%
</TABLE>
INVESTOR CLASS
<TABLE>
<CAPTION>
PERIODS ENDED SEPTEMBER 30, 1998
- --------------------------------
<S> <C>
One year 9.3%
From inception (February 1, 1997) 9.1%
</TABLE>
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
19
<PAGE>
period by the maximum offering price per share on the last day of the period,
according to the following formula:
6
Yield = 2 [({a-b} OVER {cd} + 1) - 1]
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
Based upon the 30-day period ended September 30, 1998 the yield for the
Bond Fund's Institutional Class of shares was 5.52% and 5.10% for the Investor
Class of shares.
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
The distribution rate is calculated by dividing income dividends per share
for a stated period 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. For the year ended September 30, 1998, the historical
distribution rate with respect to the Fund's Institutional Class Shares was
3.52% and for the Investor Class was 3.39%.
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.
Annualized current distribution rates are computed by multiplying income
dividends per share for a specified quarter by four and dividing the resulting
figure by the maximum offering price on the last day of the specified period.
The annualized current distribution rate with respect
20
<PAGE>
to the Fund's Institutional Class shares for the quarter ended September 30,
1998 was 5.59% and for the Investor Class was 5.44%.
PURCHASING, EXCHANGING AND REDEEMING SHARES
INITIAL PURCHASES
Shares are sold at the net asset value next computed after acceptance of
your order by the Fund. The minimum initial investment in the Institutional
Class is $1,000,000 and $1,000 for the Investor Class. However, the Adviser may
waive a minimum initial investment under circumstances in which the Adviser
believes an investor will meet such minimum within a reasonable time. 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 the 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
All purchases by check should be in U.S. dollars and made payable to ARIEL
MUTUAL FUNDS. Third party checks, except those payable to an existing
shareholder who is a natural person (as opposed to a corporation or
partnership), credit cards, and cash will not be accepted. When purchases are
made by check or periodic automatic investment, redemptions will not be allowed
until the investment being redeemed has been in the account for 15 calendar
days.
21
<PAGE>
BY WIRE
You may also purchase shares by bank wire. Just call us at 1-800-29-ARIEL
(1-800-292-7435) and we will ask you your name, address, social security or tax
identification number, the amount of your investment, the name of the Ariel
Mutual Fund in which you wish to invest as well as the name and address of the
financial institution that will be wiring your investment to the Fund. We will
immediately give you an account number and you may then have your financial
institution wire federal funds to the Custodian with the following instructions:
Ariel Mutual Funds
c/o Investors Fiduciary Trust Company
127 West 10th Street
Kansas City, MO 64105
ABA #101003621
Account No. 7528205
The name of the Ariel Mutual Fund(s) and the class in which
you wish to invest
Your shareholder account number
The name in which your account is registered
We accept wires at no charge. However, your bank may charge you for this
service.
SUBSEQUENT PURCHASES
You may make subsequent investments in any amount. To invest directly by
bank wire, follow the instructions as shown above for initial investments,
except that there is no need to call us first. Just contact your financial
institution.
To add to your account by mail, please send your check or money order
payable to ARIEL MUTUAL FUNDS with the detachable stub from the bottom of your
most recent account statement, or drop us a note that includes the registered
account name, account number, the name of the Fund and amount you wish to
invest. Please remember that subsequent purchases should be sent to:
Ariel Mutual Funds
P.O. Box 419121
Kansas City, Missouri 64141-6121
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 for
22
<PAGE>
the Institutional Class and $1,000 for the Investor Class, we reserve the
right to close your account. If you desire to utilize this automatic
investment option, please indicate your intention to do so on the application
included with the Prospectus.
Please note that each time and automatic investment is rejected, you will
be charged a $10 fee plus costs incurred by the Funds. After two successive
attempts to purchase funds through the automatic investment program that have
been rejected, your account will be removed from this program.
PURCHASING THROUGH 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. Before opening a retirement account, consult your tax
advisory to determine which options are best suited to your needs.
- Individual Retirement Accounts (IRAs): available to anyone who has earned
income. Earnings grow on a tax-deferred basis and contributions may be
fully or partially deductible for certain individuals. You may also be
able to make investments in the name of your spouse, if your spouse has no
earned income.
- Roth IRAs: available to anyone who has earned income below a certain
limit. Earnings grow tax-deferred and can be withdrawn tax-free at
retirement if underlying contributions are held for at least five years.
- Education IRAs: available to families with children under 18 to help pay
for qualified higher education expenses. Certain income limits apply.
-Savings Incentive Match Plan for Employees (SIMPLE): available as an IRA
for each employee. May be adopted by employers having no other plan and
employing 100 or fewer employees earning at least $5,000 in compensation
during the previous year.
- Qualified Profit-Sharing and Money-Purchase 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.
- 403(b)(7) Custodial Accounts: available to employees of most non-profit
organizations and public schools and universities.
Contact the Adviser for complete information kits discussing the plans and
their benefits, provisions and fees.
23
<PAGE>
PRICING SHARES
NET ASSET VALUE
Net asset value per share ("NAV") refers to the worth of one share. NAV is
computed by adding the value of all portfolio holdings, plus other assets,
deducting liabilities and then dividing the result by the number of shares
outstanding. The Fund's NAV will vary daily based on the market values of its
investments.
Fixed-income securities, including those to be purchased under firm
commitment agreements (other than obligations having a maturity of 60 days or
less), are normally valued on the basis of quotes obtained from brokers and
dealers or pricing services. Short-term investments having a maturity of 60
days or less are valued at amortized cost, unless the Board of Trustees
determines that such method is not appropriate under specific circumstances.
Assets for which there are no quotations available will be valued at fair value
as determined by the Board of Trustees.
The NAV is calculated at the close of the regular session of the New York
Stock Exchange (normally 3:00 p.m. Central time). The Fund is closed for
business any day the New York Stock Exchange is closed and on the following
holidays: Columbus Day, and Veterans' Day. All purchases of Fund shares will
be confirmed and credited to your account in full and fractional shares.
WHEN YOUR ACCOUNT WILL BE CREDITED
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 or your automatic investment is
rejected, your purchase will be canceled 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
securities dealers in order to sell shares of the Fund.
24
<PAGE>
OTHER INFORMATION ABOUT PURCHASING SHARES
Although there is no sales charge imposed by the Fund when you purchase
shares directly, 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. Also, shares represented by certificates may not be redeemed by
telephone. See "Redeeming Shares" for information on how to redeem your shares.
HOW TO EXCHANGE SHARES
You may exchange your shares in the Fund 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 Trust Money Market Fund, Cash Resource Trust U.S. Government Money
Market Fund or Cash Resource Trust Tax-Exempt Money Market Fund (collectively,
the "Cash Resource Trust Funds") 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 any Cash Resource Trust 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, or Cash Resource Trust 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 or Cash Resource Trust 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.
25
<PAGE>
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."
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."
Remember that each exchange represents the sale of shares of one Fund and the
purchase of shares of another. Therefore, you could realize a taxable gain or
loss on the transaction.
The Fund reserves the right to terminate or modify the exchange privilege
with at least 60 days' written notice. If your account is subject to backup
withholding, you may not use the exchange privilege.
Because excessive trading can hurt the Fund's performance and shareholders,
the Fund also reserves the right to temporarily or permanently terminate, with
or without advance notice, the exchange privilege of any investor who makes
excessive use of the exchange 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."
SPECIAL SERVICES AND CHARGES
The Fund pays for shareholder services but not for special services that
are required by a few shareholders, such as a request for a historical
transcript of an account. You may be required to pay a research fee for these
special services.
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 Statement of Additional Information. Certain
features may be modified in these programs, and administrative charges may be
imposed by these institutions for the services rendered.
26
<PAGE>
HOW TO REDEEM SHARES
BY MAIL
You may redeem shares from your account by sending a letter of instruction,
your name, the name of the Fund and account number from which shares are to be
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 the Transfer
Agent as follows:
Ariel Mutual Funds
P.O. Box 419121
Kansas City, Missouri 64141-6121
Certain shareholders, such as corporations, trusts and estates, may be
required to submit additional documents. The letter of instruction must be
signed by all required authorized signers. Please remember that you cannot
place any conditions on your request. If any share certificates were issued,
they must be returned duly endorsed or accompanied by a separate stock
assignment. Under certain circumstances, signature guarantees may be required.
Please call 1-800-29-ARIEL (1-800-292-7435) for more information.
BY TELEPHONE
Unless you have elected not to have telephone transaction privileges by
checking the box in your application, you may also redeem shares by calling
1-800-29-ARIEL (1-800-292-7435) and receive a check by mail. The check can only
be issued for up to $25,000, and only to the registered owner, 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.
See T"elephone Transactions" for more information.
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.
27
<PAGE>
OTHER INFORMATION ABOUT REDEMPTIONS
Shares are redeemed at the net asset value next computed after acceptance
of your order by the Fund. There is no charge for redeeming your shares. If,
however, you redeem shares through certain dealers or financial institutions,
you may be charged a fee when you redeem your shares.
Once your shares are redeemed, the proceeds will normally be sent to you on
the next business day. However, if making immediate payment could adversely
affect the Fund, it may take up to seven calendar days. When the New York Stock
Exchange is closed (or when trading is restricted) for any reason other than its
customary weekend or holiday closing, or under any emergency circumstances as
determined by the Securities and Exchange Commission, redemptions may be
suspended or payment dates postponed.
You may redeem all or a portion of your shares on any business day during
which the New York Stock Exchange is open for business except the following
holidays: Columbus Day, 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.
Please maintain a balance in your Institutional Class account of at least
$1,000,000 and at least $1,000 for the Investor Class. If, due to shareholder
redemptions, the value of your account in the Fund falls below these dollar
amounts, 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 or $1,000 minimum.
REDEMPTIONS IN KIND
If conditions arise that would make it undesirable for the Fund to pay for
all redemptions in cash, the Fund may authorize payment to be made in marketable
portfolio securities. However, the Fund has obligated itself under the
Investment Company Act of 1940 to redeem for cash all shares of the Fund
presented for redemption by any one shareholder in any 90-day period up to the
lesser of $250,000 or 1% of the Fund's net assets. Securities delivered in
payment of redemptions would be valued at the same value assigned to them in
computing the Fund's net asset value per share. Shareholders receiving such
securities may incur brokerage costs or be subject to dealer markdowns when
these securities are sold.
TELEPHONE TRANSACTIONS
If you have telephone transaction privileges, you may purchase, redeem, or
exchange shares or wire funds by telephone as described in this Statement of
Additional Information. You
28
<PAGE>
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.
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 investment 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.
Each year, the Fund distributes substantially all of its net investment
income and capital gains to shareholders.
The Fund intends to qualify as a regulated investment company under
Subchapter M of the Internal Revenue Code, as amended (the "Code"). As such,
the Fund generally will not pay Federal income tax on the income and gains it
pays as dividends to its shareholders. In order to avoid a 4% Federal excise
tax, the Fund intends to distribute each year substantially all of its net
income and gains.
Dividends from net investment income are declared daily and paid monthly.
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.
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.
29
<PAGE>
TAXES ON DISTRIBUTIONS
Distributions are subject to federal income tax, and may also be subject to
state or local taxes. Distributions are taxable when they are paid, whether
they are received in cash, or reinvested. However, distributions declared in
December and paid in January are taxable as if they were paid on December 31.
For federal tax purposes, the Fund's income and short-term capital gain
distributions are taxed as dividends; long-term capital gain distributions are
taxed as long-term capital gains. Some dividends may be exempt from state or
local income tax as income derived from U.S. Government Securities. You should
consult your tax adviser on the taxability of your distributions.
"BUYING A DIVIDEND"
At the time of purchase, the share price of a Fund may reflect
undistributed income or capital gains. Any income or capital gains from these
amounts which are later distributed to you are fully taxable. On the record
date of a distribution, the Fund's share value is reduced by the amount of the
distribution. If you buy shares just before the record date ("buying a
dividend") you will pay the full price for the shares and then receive a portion
of this price back as a taxable distribution.
YOU MAY REALIZE A CAPITAL GAIN OR LOSS WHEN YOU SELL OR EXCHANGE SHARES.
If you sell your shares or exchange them for shares of another fund, you
will have a short or long-term capital gain or loss, depending on how long you
owned the shares which were sold or exchanged. However, the Trust believes that
an exchange 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.
The Trust is required to withhold 31% of any dividends (including long-term
capital gain dividends) paid and 31% of each redemption transaction, if: (a) the
shareholder's social security number or other taxpayer identification number
("TIN") is not provided or an obviously incorrect TIN is provided; (b) the
shareholder does not certify under penalties of perjury that the TIN provided is
the shareholder's correct TIN and that the shareholder is not subject to backup
withholding under section 3406(a)(1)(C) of the Internal Revenue Code because of
under reporting (however, failure to provide certification as to the application
of section 3406(a)(1)(C) will result only in backup withholding on dividends,
not on redemptions); or (c) the Fund is notified by the Internal Revenue Service
that the TIN provided by the shareholder is incorrect or that there has been
under reporting of interest or dividends by the shareholder. Affected
shareholders will receive statements at least annually specifying the amount
withheld.
In addition, the Trust is required under the broker reporting provisions of
the Code to report to the Internal Revenue Service the following information
with respect to each redemption transaction: (a) the shareholder's name,
address, account number and taxpayer identification number; (b) the total dollar
value of the redemptions; and (c) each Fund's identifying CUSIP number.
30
<PAGE>
Certain shareholders are, however, exempt from the backup withholding and
broker reporting requirements. Exempt shareholders include: corporations;
financial institutions; tax-exempt organizations; individual retirement plans;
the U.S., a State, the District of Columbia, a U.S. possession, a foreign
government, an international organization, or any political subdivision, agency
or instrumentality of any of the foregoing; U.S. registered commodities or
securities dealers; real estate investment trusts; registered investment
companies; bank common trust funds; certain charitable trusts; foreign central
banks of issue. Non-resident aliens also are generally not subject to either
requirement but, along with certain foreign partnerships and foreign
corporations, may instead be subject to withholding under Section 1441 of the
Code. Shareholders claiming exemption from backup withholding and broker
reporting should call or write the Trust for further information.
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.
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
31
<PAGE>
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.
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 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 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. For the 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 rate of
0.10%. For these services, the Investor Class pays a fee based on the average
daily net assets of the Investor Class at the annual rate of 0.25% if such net
assets are less than $1 billion; 0.225% if such net assets are at least $1
billion, but less than $2 billion and 0.20% if such net assets are at least $2
billion or more. Fees paid to the Adviser for the fiscal years ended September
30, 1996, 1997 and 1998 were $24,444, $241,717, and $451,083, respectively,
under
32
<PAGE>
the Advisory Agreement and $7,396, $69,210, and $130,178, respectively, under
the Administrative Services Agreement.
The Adviser has entered into an agreement with Sunstone Financial Group,
Inc. ("Sunstone") under which Sunstone provides certain administrative
services to the Funds. Under the direction and supervision of the Adviser,
Sunstone performs fund accounting services and prepares reports for the Board
of Trustees. For its services, Sunstone receives from the Adviser 0.041% of
the average net assets of the Ariel Mutal Funds. Sunstone does not receive
any compensation from the Funds.
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"), a wholly-owned subsidiary of the Adviser, whereby Ariel
Distributors serves as the principal underwriter to distribute the Investor
Class's shares on a no-load basis.
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 0.25%
annually of the average daily net assets of the Investor Class in connection
with the distribution of the Investor Class shares.
The Distribution Plan was approved by the Board of Trustees, including the
Trustees who are not "interested persons" of the Trust (as that term is defined
in the Investment Company Act
33
<PAGE>
of 1940) and who have no direct financial interest in the operation of the
Plan or in any agreements related to the Distribution Plan (the "Independent
Trustees"). The selection and nomination of the Independent Trustees is
committed to the discretion of such Independent Trustees. In establishing
the Distribution Plan, the Trustees considered various factors including the
amount of the distribution fee. The Trustees determined that there is a
reasonable likelihood that the Distribution Plan will benefit the Trust and
its shareholders.
The Distribution Plan may be terminated as to the 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
Investor Class, including compensation to broker-dealers in consideration of
promotional or administrative services.
During the last fiscal year ended September 30, 1998, the Investor Class
paid Distribution Plan expenses of $ 2,162 to Ariel Distributors. Of this
amount, $464 was used to pay broker-dealers for their distribution and
maintenance services and $1,698 was used for advertising, shareholder account
maintenance, printing and related costs.
The Fund has authorized certain Qualified Dealers to accept on its behalf
purchase and redemption orders. Such Dealers are authorized to designate other
intermediaries to accept purchase and redemption orders on the Fund's behalf.
The Fund will be deemed to have received a purchase or redemption order when an
authorized Dealer or such Dealer's authorized designee, accepts the order.
Customer orders will be priced at the Fund's net asset value next computed after
they are accepted by an authorized Dealer or such Dealer's designee.
34
<PAGE>
TRANSFER AGENT AND CUSTODIAN
Investors Fiduciary Trust Company ("IFTC") has been retained by the Trust
to act as transfer agent, custodian, dividend disbursing agent and shareholder
servicing agent. These responsibilities include: responding to shareholder
inquiries and instructions concerning their accounts; crediting and debiting
shareholder accounts for purchases and redemptions of Fund shares and confirming
such transactions; updating of shareholder accounts to reflect declaration and
payment of dividends; keeping custody of all of the Fund's investments; and
preparing and distributing quarterly statements to shareholders regarding their
accounts.
PORTFOLIO TRANSACTIONS
Lincoln Capital is responsible for the placement of portfolio transactions.
Generally, Lincoln Capital manages the Fund without regard to restrictions on
portfolio turnover. Trading in fixed-income securities does not generally
involve the payment of brokerage commissions, but does involve indirect
transaction costs. 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.
Portfolio transactions are undertaken on the basis of their desirability from an
investment standpoint. Investment decisions and choice of brokers and dealers
are made by the Sub-Adviser under the direction and supervision of the Trust's
Board of Trustees.
The Trust seeks to obtain the best price and most favorable execution and
selects broker-dealers on the basis of their professional capability and the
value and quality of their services. Broker-dealers that provide the Trust with
statistical, research, or other information and services may be selected. Such
broker-dealers may receive compensation for executing portfolio transactions
that is in excess of the compensation another broker-dealer would have received
for executing such transactions, if the Sub-Adviser determines in good faith
that such compensation is reasonable in relation to the value of the information
and services provided. Research services furnished by investment firms may be
utilized by the Sub-Adviser in connection with its investment services for other
accounts; likewise, research services provided by investment firms used for
other accounts may be utilized by the Adviser in performing its services for the
Trust. Although any statistical, research, or other information or services
provided by broker-dealers may be useful to the Sub-Adviser, its dollar value is
generally indeterminable and its availability or receipt does not materially
reduce the Sub-Adviser's normal research activities or expenses.
The Sub-Adviser may also execute Fund transactions with or through
broker-dealers who have sold shares of the Fund. However, such sales will not be
a qualifying or disqualifying factor in a
35
<PAGE>
broker-dealer's selection nor will the selection of any broker-dealer be
based on the volume of Fund shares sold.
No brokerage commissions were paid by the Fund during fiscal years 1996, 1997,
and 1998.
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.
TRUSTEES AND OFFICERS
Ariel Mutual Funds operate under the supervision of the Board of Trustees
responsible to each Fund's shareholders. Set forth below are the principal
occupations of the Trustees and Officers during the last five years:
MARIO L. BAEZA, ESQ., 48, Trustee. Mr. Baeza is Chairman and Chief Executive
Officer, Latin America Partners, L.L.C. (Venture Capital). Formerly, he was
President of Wasserstein Perella International Limited, and Managing Director
and Chief Executive Officer, Americas Division, Wasserstein Perella & Co., Inc.
Address: 200 Park Avenue, New York, New York 10166.
JAMES COMPTON, 60, Trustee. Mr. Compton is president and Chief Executive
Officer of Chicago Urban League. Address: 4510 S. Michigan Ave., Chicago, IL
60653.
WILLIAM C. DIETRICH, CPA, 49, Trustee. Mr. Dietrich is and independent financial
consultant specializing in early stage entrepreneurial companies. He formerly
served as Vice President and Chief Financial Officer for Shoppers Express, Inc.
Address: 5110 Ridgefield Road, Bethesda, Maryland 20816.
ROYCE N. FLIPPIN, JR., 64, 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. Address: 51 Frost Avenue, East
Brunswick, New Jersey 08816.
JOHN G. GUFFEY, JR., 50, 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.
36
<PAGE>
CHRISTOPHER G. KENNEDY, 35, 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, CPA, 60, Chairman of the Board and Trustee. Mr. Mitchell is
the Chairman of Mitchell & Titus L.L.P., the nation's largest minority-owned
certified public accounting firm. Address: One Battery Park Plaza, New York, New
York 10004.
*MELLODY L. HOBSON, 29, Trustee. Ms. Hobson is Senior Vice President, Director
of Marketing of Ariel Capital Management. Address: 307 North Michigan Avenue,
Suite 500, Chicago, Illinois 60601.
*ERIC T. MCKISSACK, 45, 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.
*JAMES W. ATKINSON, 48, Vice President and Treasurer. Mr. Atkinson is Vice
President, Finance and Management of Ariel Capital Management. Formerly, he was
Senior Vice President and Chief Executive Officer of Stein Roe & Farnham, Inc.
(investment advisers). Address: 307 North Michigan Avenue, Suite 500, Chicago,
Illinois 60601.
*ROGER P. SCHMITT, 41, 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) Officers and trustees deemed to be "interested persons" of the Fund under
the Investment Company Act of 1940.
37
<PAGE>
COMPENSATION SCHEDULE
During the fiscal year ended September 30, 1998, compensation paid by the
Fund to the trustees of the Trust not affiliated with the Adviser was as
follows:
<TABLE>
<CAPTION>
NAME COMPENSATION
---- ------------
<S> <C>
Mario L. Baeza $3,200
James Compton $3,200
William C. Dietrich $3,200
Royce N. Flippin, Jr. $3,200
John G. Guffey, Jr. $3,100
Christopher G. Kennedy $3,100
Bert N. Mitchell $3,200
</TABLE>
38
<PAGE>
SIGNIFICANT SHAREHOLDERS
The following table lists the holders of five percent or more of the
outstanding shares of each class of the Fund as of November 13, 1998.
INSTITUTIONAL CLASS
-------------------
<TABLE>
<CAPTION>
Name and Address Number of Shares Percentage of
of Owner Owned Outstanding Shares
- ---------------- ---------------- ------------------
<S> <C> <C>
McCormick & Co. Inv. Comm Tr 1,567,578.850 10%
c/o Norwest Bank
McCormick Pension Plan
18 Loveton Cr.
Sparks, MD 21152
HW Ward Cust. 1,840,616.062 12%
Hotel Empl & Rest. Empl
International Union Pension Fund
48 Shuman Blvd.
Naperville, IL 60563
Commonwealth Life Insurance Co. 2,332,839.881 16%
Investment Operations
11th Floor
400 W. Market Street
Louisville, KY 40202
Comerica Bank Cust. 2,640,907.811 18%
IBEW Local 9 & Outside Contractor
Pension Plan
High Point Plaza Office Ctr.
4415 W. Harrison St., Suite 330
Hillside, IL 60162
Local No. 1 Pension Trust Fund 1,366,979.209 9%
30 N. LaSalle Street, Suite 2000
Chicago, IL 60602
San Diego Hotel & Restaurant 859,111.153 5%
Employees Health Fund
Attn: Mark Pappas
First National Bank
800 Silverado Street
LaJolla, CA 92037
39
<PAGE>
LaSalle National Bank Cust. 1,378,528.731 9%
Chicagoland Race Meets Operators
& IBEW Joint Pension Trust
25 West Palatine Rd.
Palatine, IL 60067
</TABLE>
INVESTOR CLASS
--------------
<TABLE>
<CAPTION>
Name and Address Number of Shares Percentage of
of Owner Owned Outstanding Shares
- ---------------- ---------------- ------------------
<S> <C> <C>
Near North Health Serv. Corp. 19,835.089 10%
Not-For-Profit Corporation
1276 North Clybourn Ave.
Chicago, IL 60610
Charles Schwab & Co., Inc. 15,882.791 8%
Reinvest Acct.
Attn: Mutual Fund Dept.
101 Montgomery Street
San Francisco, CA 94104
Stephen Drake Julstrom 9,868.782 5%
6608 North Damen Ave.
Chicago, IL 60645
Carmen Agoyo 9,098.034 5%
6608 Damen Ave.
Chicago, IL 60645
</TABLE>
APPENDIX A
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 comprise what are generally known as high
grade bonds. They are rated
40
<PAGE>
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.
41
<PAGE>
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.
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.
42
<PAGE>
PART C. OTHER INFORMATION
ITEM 23. EXHIBITS
a. Declaration of Trust (incorporated by reference to Registrant's
Post-Effective Amendment No. 17, File No. 33-7699).
b. By-Laws (incorporated by reference to Registrant's Post-Effective
Amendment No. 17, File No. 33-7699).
c. Not Applicable.
d. Management Agreement (incorporated by reference to Registrant's
Post-Effective Amendment No. 17, File No. 33-7699).
Investment Advisory Agreement with respect to Ariel Premier Bond
Fund (incorporated by reference to Registrant's Post-Effective
Amendment No. 15, File No. 33-7699).
Sub-Advisory Agreement (incorporated by reference to Registrant's
Post-Effective Amendment No. 15, File No. 33-7699).
Administrative Services Agreement with respect to Ariel Premier
Bond Fund (incorporated by reference to Registrant's
Post-Effective Amendment No. 16, File No. 33-7699).
e. Underwriting Agreement (incorporated by reference to Registrant's
Post-Effective Amendment No. 17, File No. 33-7699).
f. Not Applicable.
g. Custody Agreement (incorporated by reference to Registrant's
Post-Effective Amendment No. 17, File No. 33-7699).
h. Transfer Agency Contract (incorporated by reference to
Registrant's Post-Effective Amendment No. 17, File No. 33-7699).
i. Opinion and Consent of Counsel as to Legality of Shares Being
Registered.
j. Report of Independent Auditors.
Consent of Independent Auditors to Use of Report.
k. Not Applicable.
l. Not Applicable.
1
<PAGE>
m. Rule 12b-1 Distribution Plan (incorporated by reference to
Registrant's Post-Effective Amendment No. 17, File No. 33-7699).
n. Schedule for Computation of Performance Quotation (incorporated
by reference to Registrant's Post-Effective Amendment No. 17,
File No. 33-7699).
o. Powers of Attorney (incorporated by reference to Registrant's
Post-Effective Amendments No. 16, 17, and 20 File No. 33-7699).
Plan Pursuant to Rule 18f-3 (incorporated by reference to
Registrant's Post-Effective Amendment No. 15, File No. 33-7699).
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Not Applicable.
ITEM 25. INDEMNIFICATION
Registrant's Declaration of Trust provides, in summary, that officers,
trustees, employees, and agents shall be indemnified by Registrant against
liabilities and expenses incurred by such persons in connection with actions,
suits, or proceedings arising out of their offices or duties of employment,
except that no indemnification can be made to such a person if he has been
adjudged liable of willful misfeasance, bad faith, gross negligence, or reckless
disregard of his duties.
Registrant's Declaration of Trust also provides that Registrant may
purchase and maintain liability insurance on behalf of any officer, trustee,
employee or agent against any liabilities arising from such status. In this
regard, Registrant maintains, jointly with the Adviser, a Directors & Officers
(Partners) Liability Insurance policy providing Registrant and the Adviser with
directors and officers liability coverage.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
Ariel Capital Management, Inc., the Registrant's investment adviser,
renders investment advisory services to individual, institutional and pension
and profit-sharing plan accounts. The following directors and officers of the
adviser have been engaged in other professions and/or employment capacities
during the past two fiscal years, as indicated below.
2
<PAGE>
NAME OF COMPANY,
NAME AND TITLE PRINCIPAL BUSINESS
WITH ADVISER ADDRESS CAPACITY
- ------------ ------- --------
James E. Bowman, Jr., M.D. University of Chicago Professor
Director Dept. of Pathology
Chicago, IL 60637
Anna Perez General Manger of Corporate
Director Communications and Programs
Chevron Corporation General
575 Market Street, Room 814 Manager
San Francisco, CA 94105
Robert I. Solomon Silliker Laboratories Vice
Director 900 Maple Road President,
Homewood, IL 60430 Marketing
Paula Wolff Governors' State University President
Director University Park, IL 60466
ITEM 27. PRINCIPAL UNDERWRITERS
Ariel Distributors, Inc., located at 307 North Michigan Avenue, Suite 500,
Chicago IL 60601, serves as the principal underwriter of the Registrant. Ariel
Distributors, Inc. does not act as principal underwriter for any other
investment company.
(b) Positions of Ariel Distributors' Officers and Directors:
NAME AND PRINCIPAL POSITION(S) WITH POSITION(S) WITH
BUSINESS ADDRESS UNDERWRITER REGISTRANT
---------------- ----------- ----------
President and Chairman Trustee and President
Eric T. McKissack of the Board
James Atkinson Director, Vice President Vice President
and Treasurer
Edward Singleton Vice President Treasurer and Assistant
Secretary
3
<PAGE>
NAME AND PRINCIPAL POSITION(S) WITH POSITION(S) WITH
BUSINESS ADDRESS UNDERWRITER REGISTRANT
---------------- ----------- ----------
Roger P. Schmitt Vice President and Vice President,
Secretary Secretary and Assistant
Treasurer
Mellody Hobson Director, Senior Vice Trustee and Vice
President President
Deborah Dunston Vice President and None
Controller
The business address of the above individuals is 307 North Michigan Avenue,
Suite 500, Chicago, Illinois 60601.
NAME AND PRINCIPAL POSITION(S) WITH POSITION(S) WITH
BUSINESS ADDRESS UNDERWRITER REGISTRANT
---------------- ----------- ----------
James E. Bowman, Jr. Director None
University of Chicago
Dept. of Pathology
Chicago, Illinois 60637
Henry B. Pearsall Director None
721 Ontario, Unit 209
Oak Park, IL 60302
Anna Perez Director None
Chevron Corporation
General Manager of Corporate
Communications and Programs
575 Market Street, Room 814
San Francisco, CA 94105
Robert I. Solomon Director None
Silliker Laboratories
900 Maple Road
Homewood, Illinois 60430
4
<PAGE>
NAME AND PRINCIPAL POSITION(S) WITH POSITION(S) WITH
BUSINESS ADDRESS UNDERWRITER REGISTRANT
---------------- ----------- ----------
Paula Wolff Director None
Governors' State University
University Park, Illinois 60466
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS.
All documents and records relating to Ariel Distributors, Inc. are located
at Ariel Capital Management, Inc., 307 North Michigan Avenue, Chicago, Illinois
60601
All documents and records relating to the Ariel Mutual Funds are located at
Sunstone Financial Services, 207 E. Buffalo Street, Suite 400, Milwaukee,
Wisconsin 53202
ITEM 29. MANAGEMENT SERVICES.
Not applicable.
ITEM 30. UNDERTAKINGS.
The Registrant undertakes to furnish to each person to whom a
Prospectus is delivered, a copy of the Registrant's latest Annual Report to
Shareholders, upon request and without charge.
5
<PAGE>
ARIELGROWTH FUND
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and/or the
Investment Company Act of 1940, the Registrant certifies that it has duly caused
this Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Chicago and State of Illinois on the
27th day of November, 1998.
ARIEL GROWTH FUND
By: /s/Sheldon R. Stein
-----------------------------------
Sheldon R. Stein,
Attorney-in-fact
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
Eric T. McKissack* Chief Executive November 27, 1998
- ------------------ Officer and Trustee
Eric T. McKissack
Edward Singleton* Principal Financial November 27, 1998
- ------------------ and Accounting Officer
Edward Singleton
*By:/s/Sheldon R. Stein
-------------------
Sheldon R. Stein,
Attorney-in-Fact
*Sheldon R. Stein signs this document on behalf of the Registrant pursuant
to the power of attorney filed as Exhibit 18(a) to Post-Effective Amendment No.
16 and the foregoing officers pursuant to the Powers of Attorney filed as
Exhibit 18(a) to Post-Effective Amendments No. 17 and 20.
<PAGE>
ARIEL GROWTH FUND
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
Mario Baeza* Trustee November 27, 1998
- --------------------------
Mario Baeza
James Compton* Trustee November 27, 1998
- --------------------------
James Compton
William C. Dietrich* Trustee November 27, 1998
- --------------------------
William C. Dietrich
Royce N. Flippin, Jr.* Trustee November 27, 1998
- --------------------------
Royce N. Flippin, Jr.
John G. Guffey, Jr.* Trustee November 27, 1998
- --------------------------
John G. Guffey, Jr.
Christopher G. Kennedy* Trustee November 27, 1998
- --------------------------
Christopher G. Kennedy
Bert N. Mitchell* Trustee November 27, 1998
- --------------------------
Bert N. Mitchell
Mellody Hobson* Trustee November 27, 1998
- --------------------------
Mellody Hobson
*Sheldon R. Stein signs this document on behalf of each of the foregoing
persons pursuant to the Powers of Attorney filed as Exhibit 18(a) to
Post-Effective Amendments No. 17 and 20.
/s/Sheldon R. Stein
--------------------
Sheldon R. Stein,
Attorney-in-Fact
<PAGE>
November 27, 1998
Ariel Investment Trust
307 N. Michigan Avenue
Suite 500
Chicago, Illinois 60601
Re: Ariel Growth Fund, Ariel Appreciation Fund and
Ariel Premier Bond Fund (the "Funds")
Ladies and Gentlemen:
We have acted as counsel for Ariel Investment Trust (the "Trust") in
connection with the registration under the Securities Act of 1933 (the "Act") of
an indefinite number of shares of beneficial interest of the series of the Trust
designated Ariel Growth Fund, Ariel Appreciation Fund and Ariel Premier Bond
Fund (the "Shares") in registration statement no. 33-7699 on Form N-1A (the
"Registration Statement").
In this connection we have examined originals, or copies certified or
otherwise identified to our satisfaction, of such documents, corporate and other
records, certificates and other papers as we deemed it necessary to examine for
the purpose of this opinion, including the agreement and declaration of trust
(the "Trust Agreement") and bylaws of the Trust, actions of the board of
trustees of the Trust authorizing the issuance of shares of the Funds and the
Registration Statement.
Based on the foregoing examination, we are of the opinion that upon the
issuance and delivery of the Shares of each Fund in accordance with the Trust
Agreement and the actions of the board of trustees authorizing the issuance of
the Shares, and the receipt by the Trust of the authorized consideration
therefor, the Shares so issued will be validly issued, fully paid and
nonassessable (although shareholders of the Fund may be subject to liability
under certain circumstances as described in the statements of additional
information of the Trust included as Part B of the Registration Statement under
the caption "General Information").
We consent to the filing of this opinion as an exhibit to the Registration
Statement. In giving this consent, we do not admit that we are in the category
of persons whose consent is required under section 7 of the Act.
Very truly yours,
D'ANCONA & PFLAUM
By: Sheldon R. Stein, Partner
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Trustees and Shareholders of
Ariel Mutual Funds:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Ariel Growth Fund, and Ariel Appreciation Fund,
and Ariel Premier Bond Fund, comprising Ariel Investment Trust ("Ariel Mutual
Funds"), as of September 30, 1998, the related statements of operations and
changes in net assets and the financial highlights for fiscal periods indicated
therein. These financial statements and financial highlights are the
responsibility of the Ariel Mutual Funds' management. Our responsibility is to
express an opinion on these financial statements and financial highlights based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
September 30, 1998, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of each
of the Funds of the Ariel Mutual Funds at September 30, 1998, and the results of
their operations, the changes in their net the financial highlights for each of
the fiscal periods indicated therein, in conformity with generally accepted
accounting principles.
/s/Ernst & Young LLP
ERNST & YOUNG LLP
Chicago, Illinois
October 16, 1998
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Financial
Highlights" and "Independent Auditors" and to the use of our report dated
October 16, 1998 in the Registration Statement (Form N-1A) of the Ariel
Growth Fund and its incorporation by reference in the related Prospectuses of
Ariel Growth Fund, Ariel Appreciation Fund and Ariel Premier Bond Fund, filed
with the Securities and Exchange Commission in the Post-Effective Amendment
No. 21 to the Registration Statement under the Securities Act of 1933 (File
No. 33-7699) and in this Amendment No. 21 to the Registration Statement under
the Investment Company Act of 1940 (File No. 811-4786).
/s/Ernst & Young LLP
Chicago, Illinois
November 30, 1998
