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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________
FORM N-1A
REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933
REGISTRATION NO. 33-7699
Post-Effective Amendment No. 20
and
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940
REGISTRATION NO. 811-4786
Amendment No. 20
ARIEL GROWTH FUND
307 North Michigan Avenue
Chicago, Illinois 60601
Registrant's Telephone Number, Including Area Code
1-312-726-0140
Agent for Service:
Sheldon R. Stein
D'Ancona & Pflaum
30 North LaSalle Street
Chicago, Illinois 60602
(312) 580-2014
It is proposed that this filing will become effective:
____ Immediately upon filing pursuant to paragraph (b)
X on February 1, 1998 pursuant to paragraph (b)
----
____ 60 days after filing pursuant to paragraph (a)
____ on (date) pursuant to paragraph (a) of Rule 485
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Registrant has registered an indefinite number of shares of its
beneficial interest pursuant to Rule 24f-2, and filed its Rule 24f-2 Notice
for its fiscal year ended September 30, 1997 on or about December 22, 1997.
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THE ARIEL FUNDS
(Appreciation and Growth Funds and Bond Fund-Investor Class)
CROSS REFERENCE SHEET
FORM N-1A
ITEM SECTION IN PROSPECTUS
1..... Cover Page
2..... Fund Expenses
3..... Financial Highlights
4..... Cover Page; Management and Organization of the Funds;
Investment Objectives, Policies and Risk Factors
5..... Management and Organization of the Funds
5A.... Total Return, Yield and Other Performance Information;
Management and Organization of the Funds
6..... Cover Page; Management and Organization of the Funds;
Dividends, Capital Gains and Taxes
7..... How to Buy Shares; Tax-Saving Retirement Plans; Net Asset
Value; Exchanging Shares; Management and Organization of the
Funds
8..... Redeeming Shares; Exchanging Shares
9..... (Not applicable)
SECTION IN STATEMENT OF
ITEM ADDITIONAL INFORMATION
(Growth and Appreciation Funds only)
10.... Cover Page
11.... Table of Contents
12.... (Not Applicable)
13.... Investment Restrictions; Additional Information About Lending
Securities and Repurchase Agreements; Portfolio Transactions;
Appendix
14.... Trustees and Officers; Compensation Schedule
15.... Trustees and Officers; Significant Shareholders
16.... Investment Adviser and Services Administration; Transfer Agent
and Custodian; Independent Auditors
17.... Portfolio Transactions
18.... General Information
19.... Net Asset Value
20.... (Not applicable)
21.... Investment Adviser and Services Administrator; Method of
Distribution
22.... Calculation of Total Return
23.... (Not Applicable)
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THE ARIEL FUNDS (Premier Bond Fund-Institutional Class)
CROSS REFERENCE SHEET
FORM N-1A
ITEM SECTION IN PROSPECTUS
1.... Cover Page
2.... Fund Expenses for Institutional Class Shares
3.... Financial Highlights
4.... Cover Page; Management and Organization of the Fund;
Investment Objective, Policies and Risk Factors
5.... Management and Organization of the Fund
5A... Total Return, Yield and Other Performance Information;
Management and Organization of the Fund
6.... Cover Page; Management and Organization of the Fund;
Dividends, Capital Gains, and Taxes; Certain Shareholders of
the Fund
7.... How to Buy Shares; Net Asset Value; Exchanging Shares;
Management and Organization of the Fund
8.... Redeeming Shares; Exchanging Shares
9.... (Not applicable)
SECTION IN STATEMENT OF
ITEM ADDITIONAL INFORMATION (Bond Fund - Both Classes)
10... Cover Page
11... Table of Contents
12... (Not Applicable)
13... Fundamental Investment Restrictions; Non-Fundamental
Investment Restrictions; Additional Information About
Investment Techniques; Portfolio Transactions; Appendix A
14... Trustees and Officers; Compensation Schedule
15... Trustees and Officers; Significant Shareholders
16... Investment Adviser and Services Administrator; Transfer Agent
and Custodian; Independent Auditors
17... Portfolio Transactions
18... General Information
19... In-Kind Purchases of Institutional Class Shares of the Fund
20... (Not applicable)
21... Investment Adviser, Sub-Adviser and Services Administrator;
Method of Distribution of the Investor Class Shares
22... Calculation of Performance Data
23... (Not Applicable)
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Prospectus
February 1, 1998
Ariel Mutual Funds
Ariel Growth Fund
Ariel Appreciation Fund
Ariel Premier Bond Fund - Investor Class
307 North Michigan Avenue, Suite 500, Chicago, Illinois 60601
The Ariel Growth Fund ("Growth Fund") and the Ariel Appreciation Fund
("Appreciation Fund") (collectively, the "Stock Funds") and the Ariel
Premier Bond Fund (the "Bond Fund") (Stock Funds and Bond Fund
collectively, the "Funds" ) are series of the Ariel Growth Fund (doing
business as Ariel Investment Trust) (the "Trust"). Ariel Capital
Management, Inc. (the "Adviser") is the Manager and Administrator of the
Funds. Whereas Ariel Capital Management, Inc. is responsible for the day
to day investment decisions for the Stock Funds, Lincoln Capital Management
Company ("Lincoln Capital") is the Sub-Adviser to the Bond Fund,
responsible for the day to day investment operations.
The Stock Funds each offer only one class of shares. The Bond Fund
currently offers two classes of shares, the Institutional Class and the
Investor Class. Investor Class shares require an initial minimum
investment of $1,000 or more. See "How to Buy Shares - Initial Purchase."
Institutional Class shares require a minimum initial investment of
$1 million and are sold primarily to institutional investors under a
separate prospectus. Because the Investor Class incurs distribution
services fees and bears higher administrative expenses, the Investor Class
will have a higher expense ratio than the Institutional Class, which will
affect the relative performance of the classes.
About this prospectus
This prospectus sets forth important information concerning the Ariel
Mutual Funds. Please read it carefully before investing and keep it for
future reference. It is designed to provide you with information you
should know before investing and to help you decide if the goals of the
Funds match your own.
Statements of Additional Information (dated February 1, 1998) for the Stock
Funds and the Bond Fund have been filed with the Securities and Exchange
Commission and are incorporated herein by reference. These Statements are
available, without charge, upon request by calling 1-800-29-ARIEL
(1-800-292-7435).
You pay no load
The Funds' shares are sold at net asset value on a no-load basis. This
means that you do not pay a sales charge at the time of purchase or at the
time of redemption. The Funds do, however, pay Rule 12b-1 distribution
fees at the annual rate of 0.25% of average daily net asset values.
SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, AND ARE NOT FEDERALLY INSURED BY THE FDIC, THE
FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
FEDERAL OR ANY STATE SECURITIES COMMISSION PASSED ON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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Table of Contents
Page
-----
Fund Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . .3
Financial Highlights . . . . . . . . . . . . . . . . . . . . . . . .5
Investment Objectives, Policies and Risk Factors . . . . . . . . . .5
Total Return, Yield and Other Performance Information . . . . . . 15
Management and Organization of the Funds . . . . . . . . . . . . . 16
Distribution Plan. . . . . . . . . . . . . . . . . . . . . . . . . 20
How to Buy Shares . . . . . . . . . . . . . . . . . . . . . . . . 21
Tax-Saving Retirement Plans. . . . . . . . . . . . . . . . . . . . 22
Net Asset Value . . . . . . . . . . . . . . . . . . . . . . . . . 23
When Your Account Will Be Credited . . . . . . . . . . . . . . . . 23
Exchanging Shares . . . . . . . . . . . . . . . . . . . . . . . . 24
Other Information about Exchanging Shares. . . . . . . . . . . . . 24
Telephone Transactions . . . . . . . . . . . . . . . . . . . . . . 25
Signature Guarantees . . . . . . . . . . . . . . . . . . . . . . . 25
Special Services and Charges . . . . . . . . . . . . . . . . . . . 25
Redeeming Shares . . . . . . . . . . . . . . . . . . . . . . . . . 26
Other Information about Redemptions. . . . . . . . . . . . . . . . 27
Dividends, Capital Gains and Taxes . . . . . . . . . . . . . . . . 27
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Summary
Fund Expenses
Shareholder transaction costs
Maximum Sales Load on Purchases None
Maximum Sales Load on Reinvested Dividends None
Deferred Sales Load None
Redemption Fee None *
Exchange Fee None
* If you request a redemption by wire transfer, you will normally be charged a
$10 wire fee.
Annual fund operating expenses (as a percentage of average net assets):
Growth Appreciation
Fund Fund Bond Fund
------ ------ ---------
Management Fees 0.65% 0.75% 0.60%
12b-1 Fees(1) 0.25% 0.25% 0.25%
Other Expenses 0.35% 0.33% 0.00% (2)
Total Fund Operating Expenses 1.25% 1.33% 0.85% (2)
(1) The effect of a Rule 12b-1 plan is that long-term shareholders in the Funds
may pay more than the economic equivalent of the maximum front-end sales charge
permitted by rules of the National Association of Securities Dealers, Inc.
(2) Pursuant to an Investment Advisory Agreement and an Administrative Services
Agreement, the Adviser pays all expenses of the Bond Fund except fees under the
Agreements, interest, taxes, brokerage commissions and extraordinary expenses.
Fees under the Advisory Agreement and Administrative Services Agreement are
0.35% and 0.25%, respectively.
Example:
We can illustrate these expenses with the example below. You would pay the
following expenses on a $1,000 investment (assuming a 5% annual return and
redemption at the end of each period):
Growth Fund Appreciation Fund Bond Fund
One Year $13 $ 14 $ 9
Three Years $40 $ 42 $27
Five Years $69 $151 $73
Ten Year $160 $ 47 $105
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Explanation of Table: The purpose of the table is to assist you in
understanding the various costs and expenses that an investor in the Funds would
bear directly (shareholder transaction costs) or indirectly (annual fund
operating expenses).
The 5% rate used in the example is for illustration only and is not intended to
be indicative of the future performance of the Fund, which may be more or less
than the assumed rate. Actual expenses may be more or less than those shown.
The Trust
Ariel Growth Fund, Ariel Appreciation Fund and Ariel Premier Bond Fund are
series of the Ariel Growth Fund (d/b/a Ariel Investment Trust), an
open-end, diversified management investment company which was organized as
a Massachusetts business trust in 1986 and is registered under the
Investment Act of 1940.
Investment Objectives
Ariel Growth Fund and Ariel Appreciation Fund
The investment objective of the Stock Funds is to achieve long-term capital
appreciation by investing primarily in equity securities of issuers that in
the judgment of the Adviser are undervalued but demonstrate a strong
potential for growth. In seeking their objective, the Stock Funds attempt
to discover relatively unknown and undervalued companies, primarily through
the Adviser's intensive research. The Growth Fund invests principally in
companies with market capitalizations under $1.5 billion, with an emphasis
on smaller capitalization (small-cap) stocks. The Appreciation Fund
focuses primarily on companies with market capitalizations of approximately
$200 million to $5 billion and emphasizes medium size companies.
Ariel Premier Bond Fund
The Bond Fund seeks to maximize total return through a combination of
income and capital appreciation. The Fund generally invests in high
quality, highly liquid fixed-income securities. Normally, at least 80% of
the Fund's total assets will be invested in fixed-income securities rated A
or better by a nationally recognized securities rating organization (or
deemed the equivalent by Lincoln Capital, if unrated). The Fund seeks to
achieve its investment objective by implementing decisions regarding the
level and direction of interest rates (duration and yield curve decisions)
and through the purchase and sale of securities to take advantage of
perceived yield spread opportunities.
Investment Adviser, Sub-Adviser, Administrator and Distributor
Ariel Capital Management, Inc. (the "Adviser") is the investment adviser
for the Funds. The Adviser also serves as the Administrator of the Bond
Fund. Ariel Distributors, Inc. is the principal underwriter of the Funds.
Lincoln Capital Management Company ("Lincoln Capital") serves as investment
sub-adviser to the Bond Fund and is paid by the Adviser from its advisory
fees. See "Management and Organization of the Fund."
Purchases, Exchanges and Redemptions
The minimum initial investment for the Investor Class of the Bond Fund and
for each of the Stock 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.
Subsequent minimum investments in each Fund may be made in the amount of
$50. Shares may be exchanged at no charge under certain circumstances at
net asset value. Accounts with a market value of less than $1,000 caused
by shareholder redemptions are redeemable by the Funds. See "How to Buy
Shares," "Exchanging Shares" and "Redeeming Shares."
4
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Shareholder Services
Questions regarding the Funds or your account may be directed to Ariel
Mutual Funds at 1-800-29-ARIEL (1-800-292-7435). Written inquiries may be
directed to Ariel Mutual Funds, 307 N. Michigan Avenue, Suite 500, Chicago,
IL 60601. During severe market conditions, the Adviser may experience
difficulty in accepting telephone redemptions or exchanges, in which case
you should mail your request.
Financial Highlights
The information set forth in the following tables is for each share of the Funds
outstanding during each of the periods shown and is derived from the Funds'
financial statements which are included in the September 30, 1997 Annual Report
to Shareholders. The information in the table for each Fund is covered by the
Report of Ernst & Young LLP, the Funds' Independent Auditors. The Annual Report
is available from the Funds by request. The financial statements are
incorporated by reference into the Funds' Statements of Additional Information.
The tables should be read in conjunction with the financial statements and their
related notes.
[ARIEL GROWTH FUND]
[ARIEL APPRECIATION FUND]
[ARIEL PREMIER BOND FUND]
Investment Objectives, Policies and Risk Factors
Ariel Growth Fund
Ariel Appreciation Fund
The Stock Funds seek to provide long-term appreciation.
Investment Objective
The investment objective of the Ariel Growth and Ariel Appreciation Funds
is to achieve long-term capital appreciation by investing primarily in
equity securities of issuers that in the judgment of the Adviser are
undervalued but demonstrate a strong potential for growth. In seeking
their objective, the Stock Funds attempt to discover relatively unknown and
undervalued companies, principally through the Adviser's own intensive
research.
The Stock Funds follow a long-term investment philosophy investing primarily in
equity securities which appear to be undervalued.
The Growth Fund invests principally in companies with market
capitalizations under $1.5 billion, with an emphasis on smaller
capitalization (small-cap) stocks.
The Appreciation Fund focuses primarily on companies with market
capitalizations of approximately $200 million to $5 billion emphasizing
medium sized companies.
5
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The Stock Funds will take reasonable risks in seeking to achieve their
investment objective. There is, of course, no assurance that these Funds
will be successful in meeting their objective since there is risk involved
in the ownership of securities.
The Stock Funds do not trade or time the market for quick gains; rather,
they follow a disciplined, conservative philosophy, investing for long-term
capital appreciation in securities which appear to be undervalued relative
to the market as a whole.
The Adviser looks for issuers that provide quality products or services and
have not attracted significant attention from securities analysts,
institutional investors and the media. In order to take advantage of the
anticipated growth of their portfolios, the Stock Funds expect to hold
investments for a relatively long period. Occasionally, however,
securities purchased on a long-term basis may be sold within 12 months
after purchase in light of a change in the circumstances of a particular
company or industry, or in general market or economic conditions. The
Stock Funds avoid issuers in cyclical, commodity-based, start-up and
recently deregulated industries.
The Stock Funds look for issuers with long-term performance through different
economic cycles.
The Stock Funds are interested in issuers with conservative management and
accounting and financial practices which have demonstrated long-term
performance through various economic cycles. Such an issuer's balance
sheet should show a favorable cash position, limited debt and a reasonable
amount of working capital. The Adviser looks for equity securities trading
at below average price-to-earnings ratios and a low price relative to the
Adviser's evaluation of expected sales and earnings growth, book value and
assets. The Stock Funds are primarily interested in issuers which have
demonstrated high earnings-per-share growth potential and the ability to
achieve a high annual return on equity.
Although any investment in securities carries risk, the conservative
approach of the Stock Funds is designed to maximize growth in relation to
the risks assumed. Since the securities in which the Stock Funds seek to
invest may be less actively traded than the securities of larger issuers,
they may not always participate in market rallies to the same extent as
more widely known securities. Conversely, these securities may be expected
to be somewhat less vulnerable during market downturns. There is also
somewhat less readily available information concerning these securities.
The issuers of these securities tend to have a relatively higher percentage
of insider ownership.
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
6
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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 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.
Each Stock Fund may lend its portfolio securities in order to earn
additional income, but will not engage in such a transaction if more than
5% of its net assets would be subject to such loans.
The Stock Funds follow a policy of responsible investment.
The Stock Funds currently observe the following operating policies, which
may be changed by the Board of Trustees: (1) the Adviser actively seeks
companies that achieve excellence in both financial return and
environmental soundness, selecting issuers that take positive steps toward
preserving our environment and avoiding companies with poor environmental
records; and (2) neither Stock Fund will make investments in issuers whose
primary source of revenue derives from the production of tobacco products;
(3) neither Stock Fund will invest in issuers primarily engaged in the
manufacture of weapons systems, the production of nuclear energy, or the
manufacture of equipment to produce nuclear energy.
The Stock Funds have engaged the services of Franklin Research and
Development Corporation of Boston ("Franklin") to provide environmental
screening for all issuers selected. Franklin provides information and
opinions on the companies' environmental histories. However, Franklin does
not make recommendations or provide investment advice concerning the
purchase or sale of securities.
The Adviser believes that there are long-term benefits inherent in an
investment philosophy that demonstrates concern for human rights, economic
priorities and international relations.
Additional Policies
See "All Funds" for additional policies of the Stock Funds.
Ariel Premier Bond Fund
The Bond Fund seeks to maximize total return.
7
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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.
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
8
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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.
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.
Research Process
Virtually 100% of Lincoln Capital's fixed-income research is generated
in-house. Each member of the investment staff serves as a portfolio
manager and a research analyst. There is no lapse between the development
of an investment idea and its execution. Fundamental research includes
economic analysis, sector and issuer spread relationships, and credit
research. In the area of quantitative research Lincoln Capital owns
proprietary models developed in-house. These include: a mortgage
prepayment model, mortgage valuation model, total return analytics for
securities with complex cash flows, risk exposure models, and yield curve
analytics.
9
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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 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.
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Mortgage Related Securities
Pass-Through Securities. The Bond Fund may invest in GNMA Certificates
which are mortgage-backed securities representing part ownership of a pool
of mortgage loans. A "pool" or group of such mortgages is assembled and,
after being approved by GNMA, is offered to investors through security
dealers. Once approved by GNMA, the timely payment of interest and
principal on each mortgage is guaranteed by GNMA and backed by the full
faith and credit of the U.S. Government. GNMA Certificates differ from
bonds in that principal is paid back monthly by the borrower over the term
of the loan rather than returned in a lump sum at maturity. GNMA
Certificates are called "pass-through" securities because both interest and
principal payments (including prepayments) are passed through to the holder
of the Certificate.
The Bond Fund may also invest in pools of mortgages which are issued or
guaranteed by other agencies of the U.S. Government such as FNMA or FHLMC.
FNMA and FHLMC Certificates are similar to GNMA Certificates except that
timely payment of interest and principal of each mortgage may not be
guaranteed by the full faith and credit of the U.S. Government.
The average life of pass-through pools varies with the maturities of the
underlying mortgage instruments. A pool's term may be shortened or
lengthened by unscheduled or early payment, or by slower than expected
prepayment, of principal and interest on the underlying mortgages. The
occurrence of mortgage prepayments is affected by the level of interest
rates, general economic conditions, the location and age of the mortgage
and other social and demographic conditions. As prepayment of individual
pools varies widely, it is not possible to precisely predict the average
life of a particular pool.
Collateralized Mortgage Obligations. The Bond Fund may also invest in
collateralized mortgage obligations ("CMOs"). CMOs are debt securities
issued by a corporation, trust or custodian or by a U.S. Government agency
or instrumentality, which are collateralized by mortgage pass-through
securities. CMOs differ from the pass-through securities discussed above
in that a CMO is divided into separate pieces (each a "tranche") with cash
flows from the securities being allocated to various tranches in a
predetermined, specified order. Each tranche has a stated maturity (the
latest date by which the tranche can be completely repaid, assuming no
prepayments) and has an average life (the average of the time to receipt of
a principal payment weighted by the size of the principal payment). The
average life is typically used as a proxy for maturity because the debt is
amortized (repaid a portion at a time), rather than being paid off entirely
at maturity, as would be the case in a straight debt instrument.
Investments in CMO's are limited to Planned Amortization Class and
sequential issues. The Bond Fund will normally invest only in CMOs that
are issued, or have cash flow guaranteed, by U.S. Government agencies or
instrumentalities. Such CMOs will generally be deemed to be U.S.
Government Securities for purposes of various portfolio restrictions
described in this Prospectus or the Statement of Additional Information.
Interest and principal payments from the underlying mortgages are typically
used to pay interest on all CMO tranches and to retire successive class
maturities in a sequence. Thus, the issuance of CMO tranches with varying
maturities and interest rates may result in greater predictability of
maturity with one tranche and less predictability of maturity with another
tranche than a direct investment in a mortgage-backed pass-through security
(such as a GNMA Certificate). Tranches with shorter maturities typically
have a lower volatility and lower yield while those with longer maturities
typically have higher volatility and higher yield. Thus, investments in
CMOs can carry more or less risk than mortgage pass-through securities and
offer more defensive or aggressive investment alternatives.
Mortgage Dollar Rolls. The Bond Fund may enter into "mortgage dollar
rolls," which are transactions in which the Fund sells a mortgage-related
security to a dealer and simultaneously agrees to repurchase a similar
security (but not the same security) in the future at a pre-determined
price. See "Mortgage Dollar
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Rolls" in the Bond Fund's Statement of Additional Information for more
information regarding this type of transaction.
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 Bond Fund may invest in asset-backed securities which are backed by
assets other than mortgages. These securities are collateralized by
shorter term loans such as automobile loans, computer leases, or credit
card receivables. The payments from the collateral are passed through to
the security holder. The collateral behind asset-backed securities tends
to have prepayment rates that do not vary with interest rates. In
addition, the short-term nature of the loans reduces the impact of any
change in prepayment level. These securities are generally issued as the
debt of a special purpose entity organized solely for the purpose of owning
such assets and issuing such debt.
Credit Support. Asset-backed securities are backed by a diversified pool
of assets representing the debt of a number of different parties. To
lessen the effect of failures by the debtors to make payments, such
securities may contain elements of credit support. Such credit support
falls into two classes: liquidity protection and protection against
ultimate default by debtors on the underlying assets. Liquidity protection
refers to the provision of advances, generally by the entity administering
the pool of assets, to ensure that scheduled payments on the underlying
pool are made in a timely fashion. Protection against ultimate default
ensures repayment of at least a portion of the debt in the pool. Such
protection may be provided through guarantees, insurance policies or
letters of credit obtained from third parties, through various means of
structuring the transaction or through a combination of such approaches.
Additional Risks. Issuers of asset-backed securities generally hold no
assets other than the assets underlying such securities and any credit
support provided. As a result, although payments on 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.
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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.
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 changes or individual corporate
developments than higher-rated investments. 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.
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.
Delayed Delivery Transactions
The Bond Fund may purchase and sell securities on a when-issued basis.
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, a separate account with a
segregated portfolio of liquid, high-grade debt securities or cash in an
amount at least equal to these commitments. The Bond Fund will generally
earn income on assets deposited in the segregated 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.
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Certain Investment Restrictions for the Bond Fund
In addition to other non-fundamental restrictions as described herein and
in the Bond Fund's Statement of Additional Information, the Bond Fund will
not (i) invest in securities that are rated below investment grade or are
deemed by Lincoln Capital to be the equivalent, if unrated; (ii) enter into
reverse repurchase agreements; (iii) engage in options or futures
transactions; (iv) purchase foreign securities other than Yankee Bonds or
(v) use leverage except to the extent that certain strategies, such as
delayed-delivery transactions, may be considered leveraged transactions by
the Securities and Exchange Commission.
Portfolio Transactions of the Bond Fund
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.
Generally, Lincoln Capital manages the Bond Fund without regard to
restrictions on portfolio turnover, except those imposed on its ability to
engage in short-term trading by provisions of the federal tax laws.
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 borne by the Bond Fund will be. See "Financial
Highlights" for the Fund's turnover for the fiscal year ended September 30,
1997.
All Funds
Borrowing
Stock Funds. 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.
Bond Fund. 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.
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Illiquid Securities
The Stock Funds. 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.
The Bond Fund. 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.
Repurchase Agreements
All of the Funds may invest in repurchase agreements. A repurchase
agreement is an arrangement under which a Fund buys securities and the
seller (a bank or securities dealer that the Adviser or Lincoln Capital
believes to be financially sound) simultaneously agrees to repurchase the
securities within a specified time at a higher price that includes an
amount representing interest on the purchase price. In the event of a
default by a seller of a repurchase agreement, the Funds could experience
both delays in liquidating the underlying securities and potential losses.
The Funds will normally invest in repurchase agreements maturing in less
than seven days. Repurchase agreements maturing in more than seven days
are deemed to be illiquid and thus subject to the Funds' limitations on
investments in illiquid securities described above.
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.
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 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.
Fundamental policies may not be changed without shareholder approval.
The investment restrictions set forth in the Statements of Additional
Information as fundamental policies and the investment objectives are
fundamental policies and may not be changed without a shareholder vote.
All other investment policies of the Funds are not fundamental and may be
changed by the Board of Trustees. Any percentage restrictions (except
those Bond Fund restrictions with respect to borrowing and illiquid
securities) apply at the time of investment without regard to later
increases or decreases in the values of securities or total or net assets.
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Total Return, Yield and Other Performance Information
The Funds 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 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.
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 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 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. 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. For
a description of the methods used to determine total return for the Funds
and yield and distribution rates for the Bond Fund, see the Statements of
Additional Information.
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 described in the
Statements of Additional Information.
Management and Organization of the Funds
Each Fund is a series of the Ariel Growth Fund (doing business as Ariel
Investment Trust) (the "Trust"), an open-end diversified management
investment company organized as a Massachusetts business trust on August 1,
1986.
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The Trust is not required to hold annual shareholder meetings. Shareholder
meetings are held when they are required under the Investment Company Act
of 1940 or otherwise called for special purposes. Special meetings may be
called by the Trustees for purposes such as electing and removing Trustees,
changing fundamental policies, or approving an investment advisory
contract. Trustees may be removed at a special meeting of shareholders by
a vote of two-thirds of the outstanding shares. Special meetings may also
be called when requested in writing by the holders of 10% or more of the
shares eligible to vote at such meetings. As a shareholder, you receive one
vote for each share of the Funds you own.
The Stock Funds each offer only one class of shares. Shares of the Bond
Fund are currently offered in two classes, the Institutional Class and the
Investor Class. The Investor Class shares require an initial minimum
investment of $1,000 or more. See "How to Buy Shares - Initial Purchase."
The Institutional Class requires an initial minimum investment of
$1,000,000 and is sold primarily to institutional investors. The Board of
Trustees may offer additional classes of any of the Funds in the future and
may at any time discontinue the offering of any class of shares. Shares
have no preemptive or subscription rights and are freely transferable.
Each share of the Bond Fund represents an interest in the assets of the
Bond Fund and has identical voting, dividend, liquidation and other rights
and the same terms and conditions as any other shares except that (i) the
expenses that are specific to one class, such as distribution expenses and
administrative fees, are borne solely by such class and (ii) each class of
shares votes separately with respect to matters in which the interests of
one class differ from the interests of the other class or on any other
matters for which separate class voting is appropriate under applicable
law.
Because the Investor Class of the Bond Fund incurs higher administrative
and distribution fees, that class will have a higher expense ratio and will
have correspondingly lower returns than the Bond Fund's Institutional
Class. You may call 1-800-29-ARIEL (1-800-292-7435) for more information
regarding the Institutional Class of the Bond Fund.
The Board of Trustees supervises the Funds' activities and reviews the Trust's
contracts with companies that provide services to the Funds.
Board of Trustees
BERT N. MITCHELL, CPA
Chairman and Chief Executive Officer, Mitchell & Titus, LLP (independent
accountants)
MARIO L. BAEZA, ESQ.
Chairman and Chief Executive Officer, Latin America Equity Partners, L.P.
(venture capital)
JAMES W. COMPTON
President and Chief Executive Officer, Chicago Urban League (non-profit
organization)
WILLIAM C. DIETRICH, CPA
Chief Financial Officer, Streamline Mid-Atlantic, Inc. (computerized
shopping service)
ROYCE N. FLIPPIN, JR.
President, Flippin Associates (consultants); formerly Director of Program
Advancement, Massachusetts Institute of Technology
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JOHN G. GUFFEY, JR.
Chair, Calvert Social Investment Foundation; Treasurer and Director, Silby,
Guffey and Co., Inc. (venture capital)
MELLODY L. HOBSON
Senior Vice President, Director of Marketing, Ariel Capital Management,
Inc.
CHRISTOPHER G. KENNEDY
Executive Vice President and Director, Merchandise Mart Properties, Inc.
(real estate management)
ERIC T. McKISSACK, CFA
Vice Chairman and Co-Chief Investment Officer, Ariel Capital Management,
Inc.
Ariel Capital Management, Inc. serves as the Adviser to the Stock Funds.
The Adviser is a privately held investment management firm, controlled by
John W. Rogers, Jr. and owned by its employees. The Adviser is located at
307 N. Michigan Avenue, Suite 500, Chicago, Illinois 60601. As of December
31, 1997, the Adviser had assets under management of just over
$1.9 billion, including assets of the Funds.
Subject to the overall supervision of the Board of Trustees and pursuant to
the Management Agreement, the Adviser acts as the manager of the Stock
Funds. The Adviser manages the investment operations for the Stock Funds.
In addition, the Adviser is responsible for performing or overseeing the
Stock Funds' management and administration, providing the Stock Funds with
office space, executive and other personnel and paying the salaries and
fees of all Trustees who are affiliated persons. The Stock Funds pay all
other operating expenses. The Adviser is paid a fee for its services to
the Growth Fund at the annual rate of 0.65% of the Growth Fund's average
daily net assets for the first $500 million; 0.60% of the next $500 million
and 0.55% of average daily net assets over $1 billion; and for its services
to the Appreciation Fund at the annual rate of 0.75% of the Appreciation
Fund's average daily net assets for the first $500 million; 0.70% of the
next $500 million and 0.65% for average daily net assets over $1 billion.
Ariel Capital Management, Inc. also serves as the Adviser and the Administrator
to the Bond Fund.
Subject to the overall supervision of the Board of Trustees and pursuant to
the Investment Advisory Agreement, Ariel Capital Management, Inc. (the
"Adviser") acts as the manager to the Bond Fund. The Adviser is
responsible for certain management services and pays all of the Bond Fund's
expenses other than the Adviser's fees under the Investment Advisory
Agreement and the Administrative Services Agreement, the expenses assumed
by the Adviser under the Administrative Services Agreement, interest,
taxes, brokerage commissions, and extraordinary expenses. Under the
Investment Advisory Agreement, the Adviser is paid a fee based on the
average daily net assets of the Bond Fund at the annual rate of 0.35%.
The Adviser is also the Administrator to the Bond Fund. Under the
Administrative Services Agreement, the Administrator is responsible for
providing, arranging for or facilitating transfer agency and shareholder
servicing; the preparation, printing and distribution of notices, proxy
materials, reports to regulatory bodies and reports to shareholders related
to a specific class; state securities qualifications; SEC registrations and
shareholder meetings. The Administrator pays all of the Bond Fund's
expenses related to the services to be provided under the Administrative
Services Agreement, all fees and expenses of Trustees incurred as a result
of a matter related solely to one class of shares of the Bond Fund and,
generally, the Bond Fund's auditing and legal fees for professional
services related solely to one class of the shares of the Bond Fund. The
Administrator is not responsible for paying any legal, accounting or other
expenses related to any litigation affecting the Bond Fund. For services
under the Administrative Services Agreement, the Investor Class pays a fee
based on the average daily net assets of the Investor
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Class at the annual rates 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.
Sub-Administrator
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.
Sub-Adviser for the Bond Fund
Lincoln Capital Management Company ("Lincoln Capital"), 200 South Wacker
Drive, Chicago, IL 60606, acts as the Sub-Adviser of the Bond Fund.
Lincoln Capital manages the day-to-day investment operations for the Fund.
The Bond Fund pays no fees directly to Lincoln Capital. Lincoln Capital
receives fees from the Adviser at the annual rate of 0.30% of the average
daily net assets up to $50 million; 0.20% for the next $50 million; 0.15%
for the next $150 million and 0.10% for amounts greater than $250 million.
The Managing Directors and controlling shareholders of Lincoln Capital and
their titles, are as follows:
Timothy H. Ubben, Chairman
J. Parker Hall, III, Chief Executive Officer
Kenneth R. Meyer, President
David M. Fowler, Executive Vice President
Jay H. Freedman, Executive Vice President
Richard W. Knee, Executive Vice President
Ray B. Zemon, Executive Vice President
Portfolio Management
Stock Funds.
Growth Fund. The Growth Fund's investment selections are made by John W.
Rogers, Jr., Chairman, President, and Treasurer of Ariel Capital
Management, Inc. Mr. Rogers founded Ariel Capital in 1983 as an
institutional money management firm specializing in equities. Prior to
1983, he worked as a stock broker for the investment banking firm of
William Blair & Co. Among his civic affiliations, Mr. Rogers currently
serves as President of the Board of the Chicago Park District and Director
of the Chicago Urban League. He also serves as a Director on the Boards of
American National Bank & Trust Company, Burrell Communications Group, and
Aon Corporation. He is a 1980 graduate of Princeton University, where he
received a B.A. in Economics.
Appreciation Fund. The Appreciation Fund's investment selections are made
by Eric T. McKissack who has been the Fund's portfolio manager since its
inception. Mr. McKissack is the Vice Chairman and Co-Chief Investment
Officer for the Adviser as well as a trustee and President of the Ariel
Investment Trust. Formerly, Mr. McKissack served as the Adviser's Director
of Research. Prior to joining the Adviser, he worked for five years as a
research analyst for The First National Bank of Chicago. Mr. McKissack
holds a B.S. in both Management and Architecture from the Massachusetts
Institute of Technology and an M.B.A. from the University of California at
Berkeley. He is a Chartered Financial Analyst and a board member of the
Investment Analysts Society of Chicago. He also serves as a board member
of Travelers & Immigrant Aid, Urban Gateways and the Financial Advisory
Committee of the Magic Johnson Foundation.
Bond Fund. The Bond Fund's duration decisions are made by a strategy
committee comprised of five senior officers of Lincoln Capital: Timothy
Doubek,Richard W. Knee, Peter Knez,
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Kenneth R. Meyer, and Ray B. Zemon. The five members of the strategy
committee average 17 years of investment experience. Investment selections
for the Bond Fund are made by members of the fixed-income group: Pamela
Allen, Timothy Doubek, Terrence J. Glomski, Lorraine L. Holland, Andrew A.
Johnson, Kostas Iordanidis, Richard W. Knee, Peter Knez, Kenneth R. Meyer
and Ray B. Zemon. The members of the fixed-income group average 13.5 years
of investment experience. As of December 31, 1997, Lincoln Capital, as a
whole, had $47.9 billion of assets under management of which $25 billion is
managed in fixed-income strategies.
Performance History of Lincoln Capital
Set forth below are certain performance data, provided by Lincoln Capital,
relating to annual average investment results of a composite of client
advisory accounts ("Advisory Accounts") whose portfolios were managed by
Lincoln Capital over a period of sixteen years, since Lincoln Capital began
operations. The Advisory Accounts had the same investment objective as the
Bond Fund and were managed using substantially similar, though not
necessarily identical, investment strategies and techniques as those used
by the Fund. Because of the similarities in investment strategies and
techniques, Lincoln Capital believes that the Advisory Accounts are
sufficiently comparable to the Bond Fund to make the performance data
listed below relevant to its investors. Also set forth below, for
comparison, are the performances of widely recognized indices of market
activity based upon the aggregate performance of selected unmanaged
portfolios of publicly traded fixed-income securities.
The results presented are not intended to predict or suggest returns that
will be experienced by the Bond Fund or the return that an investor will
achieve by investing in the Bond Fund. The Bond Fund is subject to
different costs, including investment management, administration and
registration fees that were not incurred by the Advisory Accounts.
Different methods of determining the performance from those described in
the footnote to the chart below may result in different performance
figures. Investors should not rely on the following data as an indication
of future performance of Lincoln Capital or of the Bond Fund.
ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
Lincoln Capital's Salomon Brothers
Number of Average Account Active Fixed Lehman Brothers Broad Investment-
Year of Accounts Size ($ millions) Composite(1) Aggregate Index(2) Grade Bond Index(2)
- ---- ---------- ----------------- ----------------- ----------------- -------------------
<S> <C> <C> <C> <C> <C>
1982 11 $48 37.19% 32.62% 31.79%
1983 15 50 7.59 8.36 8.21
1984 18 62 14.33 15.15 14.99
1985 14 96 24.83 22.10 22.26
1986 17 98 17.41 15.26 15.43
1987 17 105 3.37 2.76 2.60
1988 19 109 7.64 7.89 7.99
1989 23 90 14.79 14.53 14.43
1990 25 118 8.47 8.96 9.09
1991 25 150 15.91 16.00 15.98
1992 29 148 7.84 7.40 7.58
1993 29 150 11.09 9.75 9.92
1994 27 140 -2.09 -2.92 -2.85
1995 31 221 16.98 18.47 18.53
1996 29 241 3.39 3.63 3.62
1997 22 291 8.97 9.65 9.64
</TABLE>
Annualized Performance
for the period ended December 31, 1997
Lincoln Capital Lehman Aggregate
20
<PAGE>
5 Year Annualized 7.47% 7.48%
10 Year Annualized 9.16 9.18%
Since Inception Annualized 12.01 11.56%
(1) These figures are dollar-weighted, average annual investment results
expressed as a percentage return. Returns shown for Lincoln Capital are
after deduction of investment advisory fees. The accounts represented in
the composite are all accounts managed in a manner that is substantially
similar to the investment management of the Bond Fund and are most of
Lincoln Capital's active accounts.
(2) The Lehman Brothers Aggregate Index and the Salomon Brothers Broad
Investment-Grade Bond Index are unmanaged indices of fixed-income
securities which are composed of securities that are substantially similar
to the types of securities in which the Advisory Accounts and the Bond Fund
invest.
Ariel Distributors, Inc. is the Principal Underwriter to the Funds
Ariel Distributors, Inc. serves as the Funds' principal underwriter. Under
the terms of its Underwriting Agreement, Ariel Distributors markets and
distributes the shares of the Trust and is responsible for payment of
commissions and service fees to broker-dealers, banks, and financial
services firms, preparation of advertising and sales literature, and
printing and mailing of prospectuses to prospective investors. Pursuant to
the Underwriting Agreement, Ariel Distributors receives a fee at the annual
rate of 0.25% of the average daily net assets of the Stock Funds and the
Bond Fund's Investor Class. Ariel Distributors is a wholly-owned
subsidiary of the Adviser.
The Transfer Agent and Custodian
Investors Fiduciary Trust Company ("IFTC"), 127 West 10th Street, Kansas
City, Missouri 64105, is the Funds' transfer agent, custodian, dividend
disbursing and shareholder servicing agent.
Distribution Plan
The Stock Funds and the Investor Class of the Bond Fund bear some of the
cost of selling, marketing and distributing their shares under Distribution
Plans adopted pursuant to Rule 12b-1 under the 1940 Act (the "Plan"). The
Plans authorize payments by the Stock Funds and the Investor Class of the
Bond Fund to the Distributor of up to 0.30% annually of the average daily
net asset value of each Stock Fund or the Investor Class of the Bond Fund,
respectively, but payments under the Plans are currently limited by the
Board of Trustees to 0.25% annually of such average daily net asset value.
For the Bond Fund, payments pursuant to its Plan are included in the
operating expenses of the Investor Class.
Each Plan may be terminated at any time by vote of the Trustees who are not
interested persons of the Adviser or the Funds and have no direct or
indirect financial interest in the Plans or by a vote of a majority of the
outstanding voting shares of the respective Funds.
A dealer having a sales agreement with respect to the Funds may receive up
to 0.25% of the annual average daily net assets of accounts of the Stock
Funds or of the Bond Fund Investor Class shares held in its customers'
accounts as ongoing service and account maintenance fees. The Distributor
or the Adviser also may make expense reimbursements for special training
and education of a dealer's registered representatives.
Price of Shares
Shares are sold and redeemed at the net asset value next computed after
acceptance of your order by the Fund or a Qualified Dealer.
21
<PAGE>
How to Buy 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 this prospectus.
Additional forms may be required from corporations, associations and
certain financial institutions. If you have any questions or need
additional applications, call 1-800-29-ARIEL (1-800-292-7435).
By Mail
To purchase shares by mail, please make your check payable to Ariel
Mutual Funds and mail it with an application, indicating which of the
Ariel Mutual Funds you would like to buy, to:
Ariel Mutual Funds
P.O. Box 419121
Kansas City, Missouri 64141-6121
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
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.
22
<PAGE>
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 desire to utilize this
automatic investment option, please indicate your intention to do so on
the application included with this 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.
Tax-Saving Retirement Plans
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.
23
<PAGE>
-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.
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. A Fund's NAV will vary daily based on the market
values of its investments.
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 NAV is calculated at the close of the regular session of the New
York Stock Exchange (normally 3:00 p.m. Central time). All of the Funds
are closed for business any day the New York Stock Exchange is closed
and the Bond Fund is also closed 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
Before you buy shares, please read the following information to
make sure your investment is accepted and credited properly.
Your purchase will be processed at the next offering price based on the
net asset value next calculated after your order is received and
accepted. Such calculation is made at the close of regular session
trading on the New York Stock Exchange, which is usually 3:00 p.m.
Central time. All your purchases must be made in U.S. dollars and
checks must be drawn on U.S. banks. No cash will be accepted. The
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
24
<PAGE>
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 shares of the Funds for shares of the other Ariel Mutual
Funds and for shares of certain money market funds.
You may exchange your shares in each Fund for shares of the Bond Fund's
Institutional Class 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 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
25
<PAGE>
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.
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."
26
<PAGE>
Telephone Transactions
If you have telephone transaction privileges, you may purchase, redeem,
or exchange shares or wire funds by telephone as described in this
prospectus. You automatically have telephone privileges unless you
elect otherwise. These privileges, however, may not be available
through certain 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 (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 prospectus.
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:
27
<PAGE>
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.
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
To ensure acceptance of your redemption request, please follow the procedures
described here and below.
Other than the $10 fee normally imposed on wire redemptions, there is no
charge for redeeming your shares. If, however, you redeem shares
through
<PAGE>
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 except,
with respect to the Bond Fund only, 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
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 the proceeds mailed to you at your address of record. You will be
given 30 days' notice that your account will be closed unless you make
an additional investment to increase your account balance to the $1,000
minimum.
Redemptions in Kind for the Bond Fund
If conditions arise that would make it undesirable for the Bond Fund to
pay for all redemptions in cash, the Bond Fund may authorize payment to
be made in marketable portfolio securities. However, the Bond Fund has
obligated itself under the Investment Company Act of 1940 to redeem for
cash all shares of the Bond Fund presented for redemption by any one
shareholder in any 90-day period up to the lesser of $250,000 or 1% of
the Bond Fund's net assets. Securities delivered in payment of
redemptions would be valued at the same value assigned to them in
computing the Bond Fund's net asset value per share. Shareholders
receiving such securities may incur brokerage costs or be subject to
dealer markdowns when these securities are sold.
Dividends, Capital Gains and Taxes
Each year, the Funds distribute substantially all of their net investment
income and capital gains to shareholders.
The tax discussion in this section is not intended as a complete or
definitive discussion of the tax effects of investing 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.
The Funds intend to qualify as regulated investment companies 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 its net income and gains.
Dividends from net investment income are declared daily and paid monthly
for the Bond Fund, and declared and paid annually for the Stock Funds.
Net investment income consists of the interest income, net short-term
capital gains, if any, and dividends declared and received on
investments, less
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<PAGE>
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 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.
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.
If the Funds do not have your correct Social Security or Corporate Tax
Identification Number ("TIN") and a signed certified application or Form
W-9, Federal law requires the Funds to withhold 31% of your dividends
and certain redemptions. You will be prohibited from opening another
account by exchange and you may be subject to a fine. If this TIN
information is not received within 60 days after your account is
established, your account may be redeemed at the current NAV on the date
of redemption. The Funds reserve the right to reject any new account or
any purchase order for failure to supply a certified TIN.
30
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INVESTMENT ADVISER AND
SERVICES ADMINISTRATOR
Ariel Capital Management, Inc.
307 North Michigan Avenue, Suite 500
Chicago, Illinois 60601
1-800-29-ARIEL (1-800-292-7435) fax (312) 726-7473
BOND FUND SUB-ADVISER
Lincoln Capital Management Company
200 South Wacker Drive, Suite 2100
Chicago, IL 60606
PRINCIPAL UNDERWRITER
Ariel Distributors, Inc.
307 North Michigan Avenue, Suite 500
Chicago, Illinois 60601
INDEPENDENT AUDITORS
Ernst & Young LLP
233 South Wacker Drive
Chicago, Illinois 60606
TRANSFER AGENT AND CUSTODIAN
Investors Fiduciary Trust Company
127 West 10th Street
Kansas City, Missouri 64105
LEGAL COUNSEL
D'Ancona & Pflaum
30 North LaSalle Street, Suite 2900
Chicago, Illinois 60602
BOARD OF TRUSTEES
Bert N. Mitchell, CPA (Chairman of the Board of Trustees)
Chairman and Chief Executive Officer, Mitchell & Titus, LLP
Mario L. Baeza, ESQ.
Chairman and Chief Executive Officer
Latin America Equity Partners, L.P.
James W. Compton
President and Chief Executive Officer, Chicago Urban League
William C. Dietrich, CPA
Chief Financial Officer, Streamline Mid-Atlantic, Inc.
Royce N. Flippin, Jr.
President, Flippin Associates; formerly Director of Program
Advancement,
Massachusetts Institute of Technology
John G. Guffey, Jr.
Chair, Calvert Social Investment Foundation
Treasurer and Director, Silby, Guffey and Co., Inc.
Mellody L. Hobson
Senior Vice President, Director of Marketing,
Ariel Capital Management, Inc.
Christopher G. Kennedy
Executive Vice President and Director,
Merchandise Mart Properties, Inc.
Eric T. McKissack, CFA
Vice Chairman and Co-Chief Investment Officer,
Ariel Capital Management, Inc.
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Prospectus
For Institutional Class Shares
February 1, 1998
Ariel Mutual Funds
Ariel Premier Bond Fund
307 North Michigan Avenue, Suite 500, Chicago, Illinois 60601
The Ariel Premier Bond Fund (the "Fund") is a series of Ariel
Growth Fund (doing business as Ariel Investment Trust) (the
"Trust"). The Trust also offers two additional series, Ariel Growth
Fund and Ariel Appreciation Fund which are offered under a separate
prospectus. Ariel Capital Management, Inc. (the "Adviser") is the
Manager and Administrator of the Fund. Lincoln Capital Management
Company ("Lincoln Capital") is the Fund's Sub-Adviser responsible
for the day to day investment operations.
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 without any sales charge
and are not subject to Rule 12b-1 distribution fees. The Investor
Class is offered to retail investors under a separate prospectus.
Investment Objective
The Fund seeks to maximize total return through a combination of
income and capital appreciation. The Fund generally invests in
high quality, highly liquid fixed-income securities. Normally, at
least 80% of the Fund's total assets will be invested in
fixed-income securities rated A or better by a nationally
recognized securities rating organization (or deemed the equivalent
by Lincoln Capital, if unrated). The Fund seeks to achieve its
investment objective by implementing decisions regarding the level
and direction of interest rates (duration and yield curve
decisions) and through the purchase and sale of securities to take
advantage of perceived yield spread opportunities.
About this prospectus
This prospectus sets forth important information concerning the
Ariel Premier Bond Fund. Please read it carefully before investing
and keep it for future reference. It is designed to provide you
with information you should know before investing and to help you
decide if the goals of the Fund match your own.
A Statement of Additional Information (dated February 1, 1998) for
the Fund has been filed with the Securities and Exchange Commission
and (together with any supplement thereto) is incorporated herein
by reference. This Statement is available, without charge, upon
request by calling 1-800-29-ARIEL (1-800-292-7435).
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED OR ENDORSED BY, ANY BANK, AND ARE NOT FEDERALLY
INSURED BY THE FDIC, THE FEDERAL RESERVE BOARD, OR ANY OTHER
AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION, NOR HAS THE FEDERAL OR ANY STATE SECURITIES
COMMISSION PASSED ON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
Table of Contents
Page
Fund Expenses for Institutional Class Shares . . . . . . . . . . . . . . . . . 3
Financial Highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Investment Objective, Policies and Risk Factors. . . . . . . . . . . . . . . . 4
Total Return, Yield and Other Performance Information . . . . . . . . . . . .11
Management and Organization of the Fund . . . . . . . . . . . . . . . . . . .12
How to Buy Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16
Net Asset Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18
When Your Account Will Be Credited . . . . . . . . . . . . . . . . . . . . . 18
Exchanging Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19
Redeeming Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Dividends, Capital Gains and Taxes . . . . . . . . . . . . . . . . . . . . . 22
Certain Shareholders of the Fund . . . . . . . . . . . . . . . . . . . . . . 23
2
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Fund Expenses for Institutional Class Shares
Shareholder transaction costs
Maximum Sales Load on Purchases None
Maximum Sales Load on Reinvested Dividends None
Deferred Sales Load None
Redemption Fee None
Exchange Fee None
Annual Fund operating expenses for Institutional Class shares (as a percentage
of average net assets):
Management Fees 0.45%
12b-1 Fees 0.00%
Other Expenses (*) 0.00%
----
Total Fund Operating Expenses (*) 0.45%
(*) Pursuant to an Investment Advisory Agreement and an Administrative Services
Agreement, the Adviser pays all expenses of the Fund except fees under the
Agreements, interest, taxes, brokerage commissions and extraordinary expenses.
Fees under the Advisory Agreement and Administrative Services Agreement are
0.35% and 0.10%, respectively.
Example:
We can illustrate these expenses with the example below. You would pay the
following expenses on a $1,000 investment (assuming a 5% annual return and
redemption at the end of each period):
One Year $ 5
Three Years $14
Five Years $25
Ten Years $57
Explanation of Table: The purpose of the table is to assist you in understanding
the various costs and expenses that an investor in the Institutional Class of
the Fund would bear directly (shareholder transaction costs) or indirectly
(annual fund operating expenses).
The 5% rate used in the example is for illustration only and is not intended to
be indicative of the future performance of the Fund, which may be more or less
than the assumed rate. Actual expenses may be more or less than those shown.
Financial Highlights
The information set forth in the following table is for each share of the
Institutional Class of the Premier Bond Fund outstanding during the period shown
and is derived from the Fund's financial statements which are included in the
September 30, 1997 Annual Report to Shareholders. The information in the table
is covered by the Report of Ernst & Young LLP, the Fund's Independent Auditors.
The Annual Report is available upon request. The financial statements appearing
in the Annual Report are incorporated by reference into the Fund's Statement of
Additional Information. The table should be read in conjunction with the
financial statements and their related notes.
3
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[ARIEL PREMIER BOND FUND]
Investment Objective, Policies and Risk Factors
The Fund seeks to maximize total return.
The Fund seeks to achieve its investment objective by implementing decisions
regarding the level and direction of interest rates (duration and yield curve
decisions) and through the purchase and sale of securities to take advantage of
perceived yield spread opportunities.
Investment Objective
The investment objective of the Fund is to seek to maximize total
return through a combination of income and capital appreciation.
The Fund generally invests in high quality, highly liquid
fixed-income securities. Normally, the Fund will invest at least
80% of its total assets in fixed-income securities rated A or
better by Moody's Investors Service, Inc. ("Moody's") or Standard
and Poor's Corporation ("S & P") or that are not rated by Moody's
or S & P but are deemed to be of comparable quality by Lincoln
Capital ("A-Grade Securities"). In the event that downgrades of
securities cause less than 80% of the Fund's total assets to be
invested in A-Grade Securities, Lincoln Capital will take steps as
soon as practicable to increase the Fund's holdings of A-Grade
Securities. The Fund seeks to achieve its investment objective by
implementing decisions regarding the level and direction of
interest rates (duration and yield curve decisions) and through the
purchase and sale of securities to take advantage of perceived
yield spread opportunities.
The Fund may purchase any type of income producing security
including, but not limited to, U.S. government and agency
obligations, mortgage-backed and other asset-backed securities,
commercial paper and corporate debt securities.
The Fund will take reasonable risks in seeking to achieve its
investment objective. There is, of course, no assurance that the
Fund will be successful in meeting its objective since there is
risk involved in the ownership of securities.
Duration
Duration is a measure of the expected life of a fixed-income
security that was developed as a more precise alternative to the
concept of term-to-maturity. Duration incorporates a bond's yield,
coupon interest payments, final maturity and call features into one
measure. Duration is also a way to measure the interest-rate
sensitivity of the Fund's portfolio. The duration of the Fund is
calculated by averaging the durations of the bonds held by the Fund
with each duration "weighted" according to the percentage of net
assets that it represents. In general, the higher the Fund's
duration, the greater the appreciation or depreciation of the
Fund's assets will be when interest rates change. In its attempt
to maximize total return, Lincoln Capital intends to vary the
duration of the Fund, as described below, depending on its outlook
for interest rates.
Investment Process
The portfolio's average duration will be longer when Lincoln Capital believes
that interest rates will fall shorter when it believes interest rates will rise.
Interest Rate Decisions
4
<PAGE>
Lincoln Capital seeks to achieve a duration equal to the duration
of the domestic, investment grade bond market when its outlook for
interest rates is neutral. The portfolio's average duration will
be longer when Lincoln Capital believes that interest rates will
fall and shorter when it believes interest rates will rise. The
stronger Lincoln Capital's conviction, the further the Fund's
duration will diverge from the duration of the domestic, investment
grade bond market, which generally averages approximately five
years. The Fund's duration will normally range from four to six
years. It is expected that only on rare occasions will the Fund's
duration reach the extreme positions (plus or minus 2 years from
the duration of the domestic, investment grade bond market).
The Fund's duration relative to that of the domestic, investment
grade bond market is established in periodic strategy meetings of a
committee consisting of senior officers of Lincoln Capital.
Changes in the Fund's duration are based on a disciplined
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.
Once the Fund's specific duration position has been established,
remaining decisions (i.e. yield curve structure, sector emphasis
and issue selections), are made and implemented by Lincoln
Capital's Fixed Income Group working as a team. These decisions
are based on Lincoln Capital's belief that yield spreads reflect
fundamental risk premiums. These premiums reflect compensation for
accepting credit risk or uncertain cash flow patterns (timing and
amounts). Lincoln Capital's judgments on these spreads are
influenced by its outlook for business conditions and for the
volatility of interest rates. These judgments are supported by
studies of historical spread relationships and break-even spread
analysis. Cash equivalents may be used to create the desired yield
curve structure. Portfolio positions are continually monitored and
evaluated.
Sector Emphasis and Security Selection
Sector and security selection decisions are based on Lincoln
Capital's judgment and are supported by studies of historical
spread relationships, break-even yield spread analysis, and model
driven portfolio return projections. In order to monitor yield
spreads, Lincoln Capital maintains extensive yield spread data
banks and has direct computer access to 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 Fund's return by anticipating an
improvement in the creditworthiness of specific corporate issuers,
particularly lower rated issuers.
Research Process
5
<PAGE>
Virtually 100% of Lincoln Capital's fixed-income research is
generated in-house. Each member of the investment staff serves as
a portfolio manager and a research analyst. There is no lapse
between the development of an investment idea and its execution.
Fundamental research includes economic analysis, sector and issuer
spread relationships, and credit research. In the area of
quantitative research, Lincoln Capital owns proprietary models,
developed in-house. These include: a mortgage prepayment model,
mortgage valuation model, total return analytics for securities
with complex cash flows, risk exposure models, and yield curve
analytics.
Investments
In General. The Fund may invest in fixed-income securities which
are obligations of, or guaranteed by the U.S. Government, its
agencies or instrumentalities ("U.S. Government Securities"). U.S.
Government Securities are unrated but are generally considered
high-grade securities. The Fund may also invest in other
investment grade, fixed-income securities, including corporate
bonds, mortgage-backed and other asset-backed securities and other
high quality, liquid investments.
The debt securities in which the Fund will invest are investment
grade securities.
Generally at least 80% of the Fund's total assets will be invested in A-Grade
Securities, which are in the three highest grades, or the equivalent, while 20%
of the total assets are not so limited.
The debt securities in which the Fund will invest are investment
grade securities. These are securities rated in the four highest
grades assigned by Moody's Investors Service, Inc. ("Moody's")
(Aaa, Aa, A and Baa) or Standard and Poor's Corporation ("S & P")
(AAA, AA, A and BBB) or that are not rated by Moody's or S & P but
deemed to be of comparable quality by Lincoln Capital. Generally,
at least 80% of the Fund's total assets will be invested in A-Grade
Securities, which are in the three highest grades, or the
equivalent, while 20% of the total assets are not so limited. The
lowest investment grade securities (Baa and BBB) have speculative
characteristics because changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to
make principal and interest payments. The Fund will not invest in
securities below investment grade (so called "junk bonds"). In the
event of a downgrade of a debt security held by the Fund to below
investment grade, the Fund is not usually required to automatically
sell the issue, but Lincoln Capital will consider whether to
continue holding the security. However, if such a downgrade would
cause more than 5% of net assets to be invested in debt securities
below investment grade, Lincoln Capital will take steps as soon as
practicable to reduce the proportion of debt below investment grade
to 5% of net assets or less.
The value of the shares issued by the Fund is not guaranteed and
will fluctuate with changes in the value of the Fund's portfolio.
Generally when prevailing interest rates rise, the value of the
Fund's portfolio is likely to decline and when prevailing interest
rates decline, the value of the Fund's portfolio is likely to rise.
U.S. Government Securities
There are two basic types of U.S. Government Securities: (1) direct
obligations of the U.S. Treasury, and (2) obligations issued or
guaranteed by an agency or instrumentality of the U.S. Government.
Agencies and instrumentalities of the U.S. Government include
Federal Farm Credit System ("FFCS"), Student Loan Marketing
Association ("SLMA"), Federal Home Loan Mortgage Corporation
("FHLMC"), Federal Home Loan Banks ("FHLB"), Federal National
Mortgage Association ("FNMA") and Government National Mortgage
Association
6
<PAGE>
("GNMA"). Some obligations issued or guaranteed by agencies or
instrumentalities, such as those issued by GNMA, are fully
guaranteed by the U.S. Government. Others, such as FNMA bonds,
rely on the assets and credit of the instrumentality with limited
rights to borrow from the U.S. Treasury. Still other securities,
such as obligations of the FHLB, are supported by more extensive
rights to borrow from the U.S. Treasury.
The guarantees of the U.S. Government, its agencies and
instrumentalities are guarantees of the timely payment of principal
and interest on the obligations purchased and not of their market
value.
Mortgage Related Securities
Pass-Through Securities. The Fund may invest in GNMA Certificates
which are mortgage-backed securities representing part ownership of
a pool of mortgage loans. A "pool" or group of such mortgages is
assembled and, after being approved by GNMA, is offered to
investors through securities dealers. Once approved by GNMA, the
timely payment of interest and principal on each mortgage is
guaranteed by GNMA and backed by the full faith and credit of the
U.S. Government. GNMA Certificates differ from bonds in that
principal is paid back monthly by the borrower over the term of the
loan rather than returned in a lump sum at maturity. GNMA
Certificates are called "pass-through" securities because both
interest and principal payments (including prepayments) are passed
through to the holder of the Certificate.
The Fund may also invest in pools of mortgages which are issued or
guaranteed by other agencies of the U.S. Government such as FNMA or
FHLMC. FNMA and FHLMC Certificates are similar to GNMA
Certificates except that timely payment of interest and principal
of each mortgage may not be guaranteed by the full faith and credit
of the U.S. Government.
The average life of pass-through pools varies with the maturities
of the underlying mortgage instruments. A pool's term may be
shortened or lengthened by unscheduled or early payment, or by
slower than expected prepayment, of principal and interest on the
underlying mortgages. The occurrence of mortgage prepayments is
affected by the level of interest rates, general economic
conditions, the location and age of the mortgage and other social
and demographic conditions. As prepayment of individual pools
varies widely, it is not possible to precisely predict the average
life of a particular pool.
Collateralized Mortgage Obligations. The Fund may also invest in
collateralized mortgage obligations ("CMO"s). CMOs are debt
securities issued by a corporation, trust or custodian or by a U.S.
Government agency or instrumentality, which are collateralized by
mortgage pass-through securities. CMOs differ from the
pass-through securities discussed above in that a CMO is divided
into separate pieces (each a "tranche") with cash flows from the
securities being allocated to various tranches (a "tranche" is
essentially a separate security) in a predetermined, specified
order. Each tranche has a stated maturity (the latest date by
which the tranche can be completely repaid, assuming no
prepayments) and has an average life (the average of the time to
receipt of a principal payment weighted by the size of the
principal payment). The average life is typically used as a proxy
for maturity because the debt is amortized (repaid a portion at a
time), rather than being paid off entirely at maturity, as would be
the case in a straight debt instrument. Investments in CMO's are
limited to Planned Amortization Class and sequential issues. The
Fund will normally invest only in CMOs that are issued, or have
cash flow guaranteed, by U.S. Government agencies or
instrumentalities. Such CMO's will generally be deemed to be U.S.
Government Securities
7
<PAGE>
for purposes of various portfolio restrictions described in this
Prospectus or the Statement of Additional Information.
Interest and principal payments from the underlying mortgages are
typically used to pay interest on all CMO tranches and to retire
successive class maturities in a sequence. Thus, the issuance of
CMO tranches with varying maturities and interest rates may result
in greater predictability of maturity with one tranche and less
predictability of maturity with another tranche than a direct
investment in a mortgage-backed pass-through security (such as a
GNMA Certificate). Tranches with shorter maturities typically have
a lower volatility and lower yield while those with longer
maturities typically have higher volatility and higher yield.
Thus, investments in CMOs can carry more or less risk than mortgage
pass-through securities and offer more defensive or aggressive
investment alternatives.
Mortgage Dollar Rolls. The Fund may enter into "mortgage dollar
rolls," which are transactions in which the Fund sells a
mortgage-related security to a dealer and simultaneously agrees to
repurchase a similar security (but not the same security) in the
future at a pre-determined price. See "Mortgage Dollar Rolls" in
the Fund's Statement of Additional Information for more information
regarding this type of transaction.
Additional Risks. Investment by the Fund in mortgage-related U.S.
Government Securities, such as GNMA Certificates, and CMOs also
involves other risks. The yield on a pass-through security is
typically quoted based on the maturity of the underlying
instruments and the associated average life assumption. Actual
prepayment experience may cause the yield to differ from the
assumed average life yield. Accelerated prepayments adversely
impact yields for pass-throughs purchased at a premium; the
opposite is true for pass-throughs purchased at a discount. During
periods of declining interest rates, prepayment of mortgages
underlying pass-through certificates can be expected to increase.
When the mortgage obligations are prepaid, the Fund reinvests the
prepaid amounts in securities, the yields of which reflect interest
rates prevailing at that time. Therefore, the Fund's ability to
maintain a portfolio of high-yielding, mortgage-backed securities
will be adversely affected to the extent that prepayments of
mortgages must be reinvested in securities which have lower yields
than the prepaid mortgages. Moreover, prepayments of mortgages
which underlie securities purchased at a premium could result in
capital losses. 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 asset-backed securities which are backed by
assets other than mortgages. These securities are collateralized
by shorter term loans such as automobile loans, computer leases, or
credit card receivables. The payments from the collateral are
passed through to the security holder. The collateral behind
asset-backed securities tends to have prepayment rates that do not
vary with interest rates. In addition, the short-term nature of
the loans reduces the impact of any change in prepayment level.
These securities are generally issued as the debt of a special
purpose entity organized solely for the purpose of owning such
assets and issuing such debt.
Credit Support. Asset-backed securities are backed by a
diversified pool of assets representing the debt of a number of
different parties. To lessen the effect of failures by the debtors
to make payments, such securities may contain elements of credit
support. Such credit
8
<PAGE>
support falls into two classes: liquidity protection and
protection against ultimate default by debtors on the underlying
assets. Liquidity protection refers to the provision of advances,
generally by the entity administering the pool of assets, to ensure
that scheduled payments on the underlying pool are made in a timely
fashion. Protection against ultimate default ensures repayment of
at least a portion of the debt in the pool. Such protection may be
provided through guarantees, insurance policies or letters of
credit obtained from third parties, through various means of
structuring the transaction or through a combination of such
approaches.
Additional Risks. Issuers of asset-backed securities generally
hold no assets other than the assets underlying such securities and
any credit support provided. As a result, although payments on
such asset-backed securities are obligations of the issuers, in the
event of defaults on underlying assets not covered by any credit
support, the issuers are unlikely to have sufficient assets to
satisfy their obligations on the related asset-backed securities.
The loans underlying these securities are subject to prepayments
which can decrease maturities and returns. Due to the possibility
that prepayments will alter the cash flow on asset-backed
securities, it is not possible to determine in advance the actual
final maturity date or average life. Faster prepayment will
shorten the average life and slower prepayments will lengthen it.
However, it is possible to determine what the range of that
movement could be and to calculate the effect that it will have on
the price of the security.
The values of these securities are ultimately dependent upon
payment of the underlying loans by individuals, and the holders,
such as the Fund, generally have no recourse against the originator
of the loans. The Fund as a holder of these securities may
experience losses or delays in payment if the original payments of
principal and interest are not made to the issuer with respect to
the underlying loans.
Corporate Bonds
The Fund 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 Fund may invest in investment grade corporate bonds. Usually,
no single corporate issuer will comprise more than 5% of the Fund's
total assets at the time of investment. The value of lower-rated
corporate debt securities is more sensitive to economic changes or
individual corporate developments than higher-rated investments.
The Fund will normally invest in corporate issues that are rated A
or better by Moody's or S & P or which are not rated by Moody's or
S & P but are deemed by Lincoln Capital to be of comparable
quality.
Yankee Bonds
Some of the debt securities in which the Fund may invest are known
as "Yankee Bonds." Yankee Bonds are U.S. dollar-denominated debt
securities issued by foreign entities. These bonds are not subject
to currency fluctuation risks. However, currency fluctuations may
adversely affect the ability of the issuer 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 Fund does not intend to invest in securities of
foreign issuers.
Delayed Delivery Transactions
9
<PAGE>
The Fund may purchase and sell securities on a when-issued basis.
The Fund may purchase or sell securities on a when-issued basis.
When-issued securities are securities purchased at a certain price
even though the securities may not be delivered for up to 90 days.
The Fund will maintain, with its Custodian, a separate account with
a segregated portfolio of liquid, high-grade debt securities or
cash in an amount at least equal to these commitments. The Fund
will generally earn income on assets deposited in the segregated
account. No payment or delivery is made by the Fund in a
when-issued transaction until it receives payment or delivery from
the other party to the transaction. Although the Fund receives no
income from the above described securities prior to delivery, the
market value of such securities is still subject to change. As a
consequence, it is possible that the market price of the securities
at the time of delivery may be higher or lower than the purchase
price. The Fund does not intend to remain fully invested when such
purchases are outstanding. However, if the Fund were to remain
substantially fully invested at a time when delayed delivery
purchases are outstanding, the delayed delivery purchases could
result in a form of leveraging. When the Fund has sold a security
on a delayed delivery basis, the Fund does not participate in
future gains or losses with respect to the security. If the other
party to a delayed delivery transaction fails to deliver or pay for
the securities, the Fund could miss a favorable price or yield
opportunity or could suffer a loss. The Fund may dispose of or
renegotiate a delayed delivery transaction after it is entered
into, and may sell when-issued securities before they are
delivered, which may result in a capital gain or loss.
Illiquid Securities
The Fund will not purchase or hold illiquid securities if more than
15% of the Fund's net assets would then be illiquid. If at any
time more than 15% of the Fund's net assets are illiquid, sales
will be made as soon as practicable to reduce the percentage of
illiquid assets to 15% or less.
Repurchase Agreements
The Fund may invest in repurchase agreements. A repurchase
agreement is an arrangement under which the Fund buys securities
and the seller (a bank or securities dealer that Lincoln Capital
believes to be financially sound) simultaneously agrees to
repurchase the security within a specified time at a higher price
that includes an amount representing interest on the purchase
price. In the event of a default by a seller of a repurchase
agreement, the Fund could experience both delays in liquidating the
underlying securities and potential losses. The Fund will normally
invest in repurchase agreements maturing in less than seven days.
Repurchase agreements maturing in more than seven days are deemed
to be illiquid and thus subject to the Fund's 15% limitation on
investments in illiquid securities described above.
Investment Diversification and Concentration
As to seventy-five percent of the Fund's total assets, the Fund
will not purchase the security of any issuer (other than cash items
or U.S. Government Securities) if such purchase would cause the
Fund's holdings of that issuer to amount to more than 5% of the
Fund's total assets at the time of purchase. The remaining 25% of
the Fund's total assets are not so limited which allows Lincoln
Capital to invest more than 5% of the Fund's total assets in a
single issuer. In the event that Lincoln Capital chooses to make
such an investment, it may expose the Fund to greater risk.
However, Lincoln Capital does not intend to (i) make any
investments in a single corporate issuer if, at that time, such
issuer would represent more than 5% of the Fund's total assets, or
(ii) make any investment in a single issuer of asset-backed
securities if, at that time, such issuer would represent more than
10% of the Fund's total assets.
The Fund will not concentrate 25% or more of its total assets in
any one industry. U.S. Government Securities are not subject to
this limitation.
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Borrowing
The Fund may not borrow money to purchase securities. The Fund may
borrow money only for temporary or emergency purposes, and then
only from banks in an amount not exceeding 33-1/3% of the value of
the Fund's total assets (including the amounts borrowed). The Fund
will not purchase securities when its borrowings, less amounts
receivable on sales of portfolio securities, exceed 5% of total
assets.
Certain Investment Restrictions
In addition to other non-fundamental restrictions as described
herein and in the Statement of Additional Information, the Fund
will not (i) invest in securities that are rated below investment
grade or are deemed by Lincoln Capital to be the equivalent, if
unrated; (ii) enter into reverse repurchase agreements; (iii)
engage in options or futures transactions; (iv) purchase foreign
securities other than Yankee Bonds or (v) use leverage except to
the extent that certain strategies, such as delayed-delivery
transactions, may be considered leveraged transactions by the
Securities and Exchange Commission.
Portfolio Transactions
Lincoln Capital is responsible for the placement of portfolio
transactions. It is the Fund's policy to seek to place portfolio
transactions with brokers or dealers on the basis of best
execution.
Generally, Lincoln Capital manages the Fund without regard to
restrictions on portfolio turnover, except those imposed on its
ability to engage in short-term trading by provisions of the
federal tax laws. 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 Fund's portfolio, the higher the transaction costs borne by
the Fund will be. See "Financial Highlights" for the Fund's
turnover for the fiscal year ended September 30, 1997.
Fundamental policies may not be changed without shareholder approval.
The Fund's investment objective and the investment restrictions set
forth as fundamental in the Statement of Additional Information,
including those in respect to investment concentration and the
33-1/3% limitation on borrowing as discussed above, are fundamental
policies and may not be changed without a shareholder vote. All
other investment policies of the Fund are not fundamental and may
be changed by the Board of Trustees. Any percentage restrictions
(except those with respect to borrowing and illiquid securities)
apply at the time of investment without regard to later increases
or decreases in the values of securities or total or net assets.
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 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 the Fund's performance is contained in
the Annual Report to shareholders which may be obtained from the
Fund without charge.
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Yield. Quotations of yield for the Fund will be based on the
investment income per share (as defined by the Securities and
Exchange Commission) during a particular 30-day (or one-month)
period (including dividends and interest), less expenses accrued
during the period ("net investment income"), and will be computed
by dividing net investment income by the maximum public offering
price per share on the last day of the period.
The Fund also may provide current distribution information to its
shareholders in shareholder reports or other shareholder
communications or in certain types of sales literature provided to
prospective investors. Current distribution information for the
Fund will be based on distributions for a specified period (i.e.,
total dividends from net investment income), divided by the net
asset value per share on the last day of the period and annualized.
Current distribution rates differ from standardized yield rates in
that they represent what the Fund has declared and paid to
shareholders as of the end of a specified period rather than the
Fund's actual net investment income for that period.
Performance information for the Fund may also be compared to
various unmanaged indices, such as the Lehman Brothers Aggregate
Bond Index, the Lehman Brothers Government/Corporate Index, the
Salomon Brothers Broad Investment-Grade Bond Index, indices
prepared by Lipper Analytical Services, and other entities or
organizations which track the performance of investment companies
or investment advisers. Unmanaged indices (i.e., other than
Lipper) generally do not reflect deductions for administrative and
management costs and expenses. Any performance information should
be considered in light of the Fund's investment objectives and
policies, characteristics and quality of the portfolio and the
market conditions during the time period indicated, and should not
be considered to be representative of what may be achieved in the
future. For a description of the methods used to determine yield,
total return and distribution rates for the Fund, see the Statement
of Additional Information.
From time to time, the Fund or its affiliates may provide
information including, but not limited to, general economic
conditions, comparative performance data and rankings with respect
to comparable investments for the same period and for unmanaged
market indices described in the Statement of Additional
Information.
Management and Organization of the Fund
The Fund is a series of Ariel Growth Fund (doing business as Ariel
Investment Trust) (the "Trust"), an open-end diversified
management investment company organized as a Massachusetts business
trust on August 1, 1986. The other series currently offered, which
are sold under a separate prospectus, are Ariel Growth Fund and
Ariel Appreciation Fund.
Shares of the Fund are currently issued in two classes, the
Institutional Class and the Investor Class. The Investor Class is
offered to retail investors under a separate prospectus. The Board
of Trustees may offer additional classes in the future and may at
any time discontinue the offering of any class of shares. Shares
have no preemptive or subscription rights and are freely
transferable. Each share of the Fund represents an interest in the
assets of the Fund and has identical voting, dividend, liquidation
and other rights and the same terms and conditions as any other
shares except that (i) the expenses that are specific to one class,
such as distribution expenses and administrative fees, are borne
solely by such class and (ii) each class of shares votes separately
with respect to matters in which the interests of one class differ
from the interests of the other class or any other matters for
which separate class voting is appropriate under applicable law.
Because the Investor Class incurs higher administrative and
distribution fees, that class will have a higher expense ratio and
will have correspondingly lower returns than the Institutional
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Class. You may call 1-800-29-ARIEL (1-800-292-7435) for more
information regarding the Investor Class of the Fund.
The Trust is not required to hold annual shareholder meetings.
Shareholder meetings are held when they are required under the
Investment Company Act of 1940 or otherwise called for special
purposes. Special meetings may be called by the Trustees for
purposes such as electing and removing Trustees, changing
fundamental policies, or approving an investment advisory contract.
Trustees may be removed at a special meeting of shareholders by a
vote of two-thirds of the outstanding shares. Special meetings may
also be called when requested in writing by the holders of 10% or
more of the shares eligible to vote at such meetings. As a
shareholder, you receive one vote for each share of the Fund you
own.
The Board of Trustees supervises the Fund's activities and reviews the Trust's
contracts with companies that provide services to the Fund.
Board of Trustees
BERT N. MITCHELL, CPA
Chairman and Chief Executive Officer, Mitchell & Titus, LLP
(independent accountants)
MARIO L. BAEZA, ESQ.
Chairman and Chief Executive Officer, Latin America Equity
Partners, L.P. (venture capital)
JAMES W. COMPTON
President and Chief Executive Officer, Chicago Urban League (non
profit community organization)
WILLIAM C. DIETRICH, CPA
Chief Financial Officer, Streamline Mid-Atlantic, Inc.
(computerized shopping service)
ROYCE N. FLIPPIN, JR.
President, Flippin Associates (consultants); formerly Director of
Program Advancement, Massachusetts Institute of Technology
JOHN G. GUFFEY, JR.
Chair, Calvert Social Investment Foundation; Treasurer and
Director, Silby, Guffey and Co., Inc. (venture capital)
MELLODY L. HOBSON
Senior Vice President, Director of Marketing, Ariel Capital
Management, Inc.
CHRISTOPHER G. KENNEDY
Executive Vice President and Director, Merchandise Mart Properties,
Inc. (real estate management)
ERIC T. McKISSACK, CFA
Vice Chairman and Co-Chief Investment Officer, Ariel Capital
Management, Inc.
Ariel Capital Management, Inc. serves as the Adviser and the Administrator to
the Fund.
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The Adviser is a privately held investment management firm,
controlled by John W. Rogers, Jr. and owned by its employees. The
Adviser is located at 307 N. Michigan Avenue, Suite 500, Chicago,
Illinois 60601. As of December 31, 1997, the Adviser had assets
under management of just over $1.9 billion, including assets of
the Funds.
Subject to the overall supervision of the Board of Trustees and
pursuant to the Investment Advisory Agreement, Ariel Capital
Management, Inc. (the "Adviser") acts as the manager of the Fund.
The Advisor is responsible for certain management services and pays
all of the Fund's expenses other than the Adviser's fees under the
Investment Advisory Agreement and the Administrative Services
Agreement, the expenses assumed by the Adviser under the
Administrative Services Agreement, interest, taxes, brokerage
commissions, and extraordinary expenses. Under the Investment
Advisory Agreement, the Adviser is paid a fee based on the average
daily net assets of the Fund at the annual rate of 0.35%. The
Adviser also acts as investment adviser and administrator to Ariel
Growth Fund and Ariel Appreciation Fund, the other two series of
the Trust.
The Adviser is also the Fund's Administrator. Under the
Administrative Services Agreement, the Administrator is responsible
for providing, arranging for or facilitating transfer agency and
shareholder servicing; the preparation, printing and distribution
of notices, proxy materials, reports to regulatory bodies and
reports to shareholders related to a specific class; state
securities qualifications; SEC registrations and shareholder
meetings. The Administrator pays all of the Fund's expenses
related to the services to be provided under the Administrative
Services Agreement, all fees and expenses of Trustees incurred as a
result of a matter related solely to one class of shares of the
Fund and, generally, the Fund's auditing and legal fees for
professional services related solely to one class of the shares of
the Fund. The Administrator is not responsible for paying any
legal, accounting or other expenses related to any litigation
affecting the Fund. For services under the Administrative Services
Agreement, the Institutional Class pays a fee based on the average
daily net assets of the Institutional Class at the annual rate of
0.10%.
Sub-Administrator
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, prepares certain reports for the Board of Trustees and
prepares minutes of Board meetings. 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.
Sub-Adviser
Lincoln Capital Management Company ("Lincoln Capital"), 200 South
Wacker Drive, Chicago, IL 60606, acts as the Sub-Adviser of the
Fund. Lincoln Capital manages the day-to-day investment operations
for the Fund. The Fund pays no fees directly to Lincoln Capital.
Lincoln Capital receives fees from the Adviser at the annual rate
of 0.30% of the average daily net assets up to $50 million; 0.20%
for the next $50 million; 0.15% for the next $150 million and 0.10%
for amounts greater than $250 million.
The Managing Directors and controlling shareholders of Lincoln
Capital and their titles, are as follows:
Timothy H. Ubben, Chairman
J. Parker Hall, III, Chief Executive Officer
Kenneth R. Meyer, President
David Fowler, Executive Vice President
Jay H. Freedman, Executive Vice President
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<PAGE>
Richard W. Knee, Executive Vice President
Ray B. Zemon, Executive Vice President
Portfolio Management
The Fund's duration decisions are made by a strategy committee
comprised of five senior officers of Lincoln Capital: Timothy
Doubek, Richard W. Knee, Peter Knez, Kenneth R. Meyer, and Ray B.
Zemon. The five members of the strategy committee average 17
years of investment experience. Investment selections for the Fund
are made by members of the fixed income group: Pamela Allen,
Timothy Doubek, Terrence J. Glomski, Lorraine L. Holland, Andrew A.
Johnson, Kostas Iordanidis, Richard W. Knee, Peter Knez, Kenneth R.
Meyer, and Ray B. Zemon. The members of the fixed-income group
average 13.5 years of investment experience. As of December 31,
1997, Lincoln Capital, as a whole, had $47.9 billion of assets
under management of which $25 billion is managed in fixed-income
strategies.
Performance History of Lincoln Capital
Set forth below are certain performance data, provided by Lincoln
Capital, relating to annual average investment results of a
composite of client advisory accounts ("Advisory Accounts") whose
portfolios were managed by Lincoln Capital over a period of
sixteen years, since Lincoln Capital began operations. The
Advisory Accounts had the same investment objective as the Fund and
were managed using substantially similar, though not necessarily
identical, investment strategies and techniques as those used by
the Fund. Because of the similarities in investment strategies and
techniques, Lincoln Capital believes that the Advisory Accounts are
sufficiently comparable to the Fund to make the performance data
listed below relevant to its investors. Also set forth below, for
comparison, are the performances of widely recognized indices of
market activity based upon the aggregate performance of selected
unmanaged portfolios of publicly traded fixed-income securities.
The results presented are not intended to predict or suggest
returns that will be experienced by the Fund or the return that an
investor will achieve by investing in the Fund. The Fund is
subject to different costs, including investment management,
administration and registration fees that were not incurred by the
Advisory Accounts. Different methods of determining the
performance from those described in the footnote to the chart below
may result in different performance figures. Investors should not
rely on the following data as an indication of future performance
of Lincoln Capital or of the Fund.
ANNUAL TOTAL RETURN
Salomon
Lincoln Brothers
Average Capital's Lehman Broad
Account Active Brothers Investment-
Number of Size ($ Fixed Aggregate Grade Bond
Year of Accounts millions) Composite(1) Index(2) Index(2)
1982 11 $48 37.19% 32.62% 31.79%
1983 15 50 7.59 8.36 8.21
1984 18 62 14.33 15.15 14.99
1985 14 96 24.83 22.10 22.26
1986 17 98 17.41 15.26 15.43
1987 17 105 3.37 2.76 2.60
1988 19 109 7.64 7.89 7.99
1989 23 90 14.79 14.53 14.43
1990 25 118 8.47 8.96 9.09
1991 25 150 15.91 16.00 15.98
1992 29 148 7.84 7.40 7.58
1993 29 150 11.09 9.75 9.92
1994 27 140 -2.09 -2.92 -2.85
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1995 31 221 16.98 18.47 18.53
1996 29 241 3.39 3.63 3.62
1997 22 291 8.97 9.65 9.64
Annualized Performance
for the period ended December 31, 1997
Lincoln Lehman
Capital Aggrgate
5 Year Annualized 7.47% 7.48%
10 Year Annualized 9.16 9.18
Since Inception Annualized 12.01 11.56
(1) These figures are dollar-weighted, average annual investment
results expressed as a percentage return. Returns shown for
Lincoln Capital are after deduction of investment advisory fees.
The accounts represented in the composite are all accounts
managed in a manner that is substantially similar to the
investment management of the Fund and are most of Lincoln
Capital's active accounts.
(2) The Lehman Brothers Aggregate Index and the Salomon Brothers
Broad Investment-Grade Bond Index are unmanaged indices of
fixed-income securities which are composed of securities that are
substantially similar to the types of securities in which the
Advisory Accounts and the Fund invest.
Ariel Distributors, Inc. is the Principal Underwriter to the Fund
Ariel Distributors, Inc. serves as the Fund's principal
underwriter. Under the terms of its Underwriting Agreement,
Ariel Distributors markets and distributes the shares of the
Trust and is responsible for payment of commissions and service
fees to broker-dealers, banks, and financial services firms,
preparation of advertising and sales literature, and printing and
mailing of prospectuses to prospective investors. Ariel
Distributors is a wholly-owned subsidiary of the Adviser.
The Transfer Agent and Custodian.
Investors Fiduciary Trust Company ("IFTC"), 127 West 10th Street,
Kansas City, Missouri 64105, is the Fund's transfer agent,
custodian and dividend disbursing and shareholder servicing
agent.
How to Buy 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. However,
the Adviser may waive the minimum initial investment under
circumstances in which the Adviser believes an investor will meet
such minimum within a reasonable time. A completed and signed
application is required for each new account you open, regardless
of the method you choose for making your initial investment. An
account application accompanies this prospectus. Additional forms
may be required from corporations, associations and certain
financial institutions. If you have any questions or need
additional applications, call 1-800-29-ARIEL (1-800-292-7435).
By Mail
To purchase shares by mail, please make your check payable to
Ariel Mutual Funds and mail it with an application, indicating
which of the Ariel Mutual Funds you would like to buy, to:
Ariel Mutual Funds
P.O. Box 419121
Kansas City, Missouri 64141-6121
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
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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
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, we reserve the right to
close your account. See "Redeeming Shares-Other Information About
Redemptions." If you desire to utilize this automatic investment
option, please indicate your intention to do so on the
application included with this prospectus.
Please note that each time an 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 have been rejected, your account
will be removed from this program.
Purchasing Through Retirement Plans
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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. Please call
1-800-29-ARIEL for more information.
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.
In-Kind Purchases
Under certain circumstances, shares of the Fund may be purchased
using securities, so long as the securities delivered to the Fund
meet the investment objective and policies of the Fund, and are
otherwise acceptable to Lincoln Capital, which reserves the right
to reject all or any part of the securities offered in exchange
for shares of the Fund. See the Statement of Additional
Information for more details and for the conditions which apply
to in-kind purchases.
When Your Account Will Be Credited
Before you buy shares, please read the following information to make sure your
investment is accepted and credited properly.
Your purchase will be processed at the next offering price based
on the net asset value next calculated after your order is
received and accepted. Such calculation is made at the close of
regular session trading on the New York Stock Exchange, which is
usually 3:00 p.m. Central time. Except as provided above, all
your purchases must be made in U.S. dollars and checks must be
drawn on U.S. banks. No cash will be accepted. The Fund
reserves the right to suspend the offering of shares for a period
of time or to reject any specific purchase order. If your check
does not clear or your automatic investment is rejected, your
purchase will be canceled and you will be charged a
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<PAGE>
$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.
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 shares of the Fund for shares of the other Ariel Mutual Funds
and for shares of certain money market funds.
You may exchange your shares in the Fund for shares of the Fund's
Investor Class or for shares of the other Ariel Mutual Funds at
no additional charge as long as your total investment in each
class or Fund meets the minimum investment required for that
class or Fund.
You may also exchange your shares in any Ariel Mutual Fund for
shares of Cash Resource 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.
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<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
prospectus. 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:
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<PAGE>
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 "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.
Once you have applied for wire redemption privileges, you or any
other person can make such a request by calling 1-800-29-ARIEL
(1-800-292-7435). You may also use your wire privilege by mailing
a signed request that includes the name of the Fund, account
number and amount you wish to have wired, by writing to:
Ariel Mutual Funds
P.O. Box 419121
Kansas City, Missouri 64141-6121
The proceeds will be sent only to the financial institution you
have designated on your application. You may terminate the wire
redemption privilege by notifying us in writing. See the
restrictions under "Telephone Transactions" as they also apply to
wire redemptions.
Other Information about Redemptions
To ensure acceptance of your redemption request, please follow the procedures
described here and below.
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
21
<PAGE>
hold payment on the redemption of your shares until it is
reasonably satisfied that payments made by check have been
collected (normally up to 15 calendar days after investment).
Minimum account balance is $1,000,000.
Please maintain a balance in your Institutional Class account of
at least $1,000,000. If, due to shareholder redemptions, the
value of your account in the Fund falls below $1,000,000, the
account may be closed and the proceeds mailed to you at your
address of record. You will be given 30 days' notice that your
account will be closed unless you make an additional investment
to increase your account balance to the $1,000,000 minimum.
Redemptions in Kind
If conditions arise that would make it undesirable for the Fund
to pay for all redemptions in cash, the Fund may authorize
payment to be made in marketable portfolio securities. However,
the Fund has obligated itself under the Investment Company Act of
1940 to redeem for cash all shares of the Fund presented for
redemption by any one shareholder in any 90-day period up to the
lesser of $250,000 or 1% of the Fund's net assets. Securities
delivered in payment of redemptions would be valued at the same
value assigned to them in computing the Fund's net asset value
per share. Shareholders receiving such securities may incur
brokerage costs or be subject to dealer 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 prospectus. You automatically have telephone
privileges unless you elect otherwise. These privileges, however,
may not be available through certain dealers and financial
institutions. By exercising the telephone privilege to sell or
exchange shares, you agree that the Fund shall not be liable for
following telephone instructions reasonably believed to be
genuine. Reasonable procedures will be employed to confirm that
such instructions are genuine and, if not employed, the Fund may
be liable for unauthorized instructions. Such procedures will
include a request for a personal identification number and tape
recording of the instructions. You should verify the accuracy of
telephone transactions immediately upon receipt of your
confirmation statement.
During unusual market conditions, we may have difficulty in
accepting telephone requests, in which case you should mail your
request.
The Fund reserves the right to terminate, suspend or modify
telephone transaction privileges.
Dividends, Capital Gains and Taxes
Each year, the Fund distributes substantially all of its net investment income
and capital gains to shareholders.
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.
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.
22
<PAGE>
Dividend and Distribution Payment Options
Dividends and any distributions from the Fund are automatically
reinvested in the Fund at net asset value, unless you elect to
have the dividends of $10 or more paid in cash. You must notify
the Fund in writing prior to the record date to change your
payment options. If you elect to have dividends and/or
distributions paid in cash, and the U.S. Postal Service cannot
deliver the check, or if it remains uncashed for six months, it,
as well as future dividends and distributions, will be reinvested
in additional shares.
Taxes on distributions
Distributions are subject to federal income tax, and may also be
subject to state or local taxes. Distributions are taxable when
they are paid, whether they are received in cash, or reinvested.
However, distributions declared in December and paid in January
are taxable as if they were paid on December 31. For federal tax
purposes, the Fund's income and short-term capital gain
distributions are taxed as dividends; long-term capital gain
distributions are taxed as long-term capital gains. Some
dividends may be exempt from state or local income tax as income
derived from U.S. Government Securities. You should consult your
tax adviser on the taxability of your distributions.
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.
If the Fund does not have your correct Social Security or
Corporate Tax Identification Number ("TIN") and a signed
certified application or Form W-9, Federal law requires the Fund
to withhold 31% of your dividends and certain redemptions. You
will be prohibited from opening another account by exchange and
you may be subject to a fine. If this TIN information is not
received within 60 days after your account is established, your
account may be redeemed at the current NAV on the date of
redemption. The Fund reserves the right to reject any new account
or any purchase order for failure to supply a certified TIN.
23
<PAGE>
INVESTMENT ADVISER AND
SERVICES ADMINISTRATOR
Ariel Capital Management, Inc.
307 North Michigan Avenue, Suite 500
Chicago, Illinois 60601
1-800-29-ARIEL (1-800-292-7435) fax (312) 726-7473
SUB-ADVISER
Lincoln Capital Management Company
200 South Wacker Drive, Suite 2100
Chicago, IL 60606
PRINCIPAL UNDERWRITER
Ariel Distributors, Inc.
307 North Michigan Avenue, Suite 500
Chicago, Illinois 60601
INDEPENDENT AUDITORS
Ernst & Young LLP
233 South Wacker Drive
Chicago, Illinois 60606
TRANSFER AGENT AND CUSTODIAN
Investors Fiduciary Trust Company
127 West 10th Street
Kansas City, Missouri 64105
LEGAL COUNSEL
D'Ancona & Pflaum
30 North LaSalle Street, Suite 2900
Chicago, Illinois 60602
BOARD OF TRUSTEES
Bert N. Mitchell, CPA (Chairman of the Board of Trustees)
Chairman and Chief Executive Officer, Mitchell & Titus LLP
Mario L. Baeza, ESQ.
Chairman and Chief Executive Officer Latin America Equity Partners, L.P.
James W. Compton
President and Chief Financial Officer, Chicago Urban League
William C. Dietrich, CPA
Chief Financial Officer, Streamline Mid-Atlantic, Inc.
Royce N. Flippin, Jr.
President, Flippin Associates; formerly Director of Program Advancement
Massachusetts Institute of Technology
John G. Guffey, Jr.
Chair, Calvert Social Investment Foundation
Treasurer and Director, Silby, Guffey and Co., Inc.
Mellody L. Hobson
Senior Vice President, Director of Marketing
Ariel Capital Management, Inc.
Christopher G. Kennedy
Executive Vice President and Director,
Merchandise Mart Properties, Inc.
Eric T. McKissack, CFA
Vice Chairman and Co-Chief Investment Officer,
Ariel Capital Management, Inc.
24
<PAGE>
ARIEL INVESTMENT TRUST
STATEMENT OF ADDITIONAL INFORMATION--February 1, 1998
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" 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, 1997 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, 1998 and any supplement thereto, which may be obtained free of
charge by writing or calling the Funds.
TABLE OF CONTENTS
INVESTMENT RESTRICTIONS . . . . . . . . . . . . . . . . . . . . . . . . .1
ADDITIONAL INFORMATION ABOUT LENDING SECURITIES AND
REPURCHASE AGREEMENTS . . . . . . . . . . . . . . . . . . . . . . . . .2
DIVIDENDS, DISTRIBUTIONS AND TAXES . . . . . . . . . . . . . . . . . . . .3
CALCULATION OF TOTAL RETURN . . . . . . . . . . . . . . . . . . . . . . .4
INVESTMENT ADVISER AND SERVICES ADMINISTRATOR . . . . . . . . . . . . . .5
METHOD OF DISTRIBUTION . . . . . . . . . . . . . . . . . . . . . . . . . .7
TRANSFER AGENT AND CUSTODIAN . . . . . . . . . . . . . . . . . . . . . . .7
PORTFOLIO TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . . . . . .8
INDEPENDENT AUDITORS . . . . . . . . . . . . . . . . . . . . . . . . . . .8
GENERAL INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . . .8
TRUSTEES AND OFFICERS. . . . . . . . . . . . . . . . . . . . . . . . . . .9
COMPENSATION SCHEDULE. . . . . . . . . . . . . . . . . . . . . . . . . . 10
SIGNIFICANT SHAREHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . 11
<PAGE>
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) 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.
<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.
ADDITIONAL INFORMATION ABOUT
LENDING SECURITIES AND REPURCHASE AGREEMENTS
Loans of Portfolio Securities
Securities of a Fund may be lent 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
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.
2
<PAGE>
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.
DIVIDENDS, DISTRIBUTIONS AND TAXES
Each Fund's dividends, if any, are declared and paid from net investment income
on an annual basis. Generally, net investment income consists of the interest
income earned (adjusted for amortization of original issue or market discounts
or premiums) and dividends declared and received on investments, less expenses.
Distributions of net capital gains, if any, are generally declared and paid by
each Fund annually; however, the Funds do not intend to make any such
distributions from net capital gains unless available capital loss carryovers,
if any, have been used or have expired.
Generally, dividends (including short-term capital gains) and distributions are
taxable to the shareholder in the year they are paid. However, any dividends and
distributions paid in January but declared during the prior three months are
taxable in the year declared.
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.
3
<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.
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 manage the Funds so they are not subject to the excise tax
imposed by the Tax Reform Act of 1986 (the "Act").
CALCULATION OF TOTAL RETURN
A Fund's "total return" may be advertised from time to time. Total return for a
period is the percentage change in value during the period of an investment in
shares of a Fund, including all additional shares purchased within the period
with reinvested dividends and distributions. Average annual total return is the
average annual compounded rate of change in value represented by the total
return for the period.
Average annual total return is computed according to the following formula:
P(1 + T)(n) = 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
Periods Ended September 30, 1997 Average Annual Total Return
One year 42.3%
Five Years 17.0%
From inception (December 1, 1989) 14.7%
GROWTH FUND Periods Ended September 30, 1997 Average Annual Total Return
One year 43.3%
Five years 16.8%
From inception (November 6, 1986) 15.7%
4
<PAGE>
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.
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.
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").
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 serves as the Funds' services administrator with the Trust.
Pursuant to the Management Agreement, the Adviser 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.
5
<PAGE>
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, 1995 under the
Management Agreement were $1,050,040 and $865,718, for the Appreciation Fund and
the Growth Fund, respectively. The Adviser reimbursed the Appreciation Fund
$303,795 and the Growth Fund $33,526, for the same period.
Fees paid to the Adviser for the fiscal year ended September 30, 1996 were
$1,010,049 for the Appreciation Fund and $751,001 for the Growth Fund. The
Adviser reimbursed the Appreciation Fund $47,713 for the same period.
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.
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
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.
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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 0.30% annually of a
Fund's average daily net assets in connection with the distribution of the
Fund's shares. Consistent with the Underwriting Agreement, however, payments
under the Distribution Plan are currently limited by the Board of Trustees to
0.25% annually of such average daily net assets.
During the fiscal year ended September 30, 1997, the Appreciation Fund and
Growth Fund paid Distribution Plan expenses of $322,397 and $383,815,
respectively, to the principal underwriter. Of the total amounts paid $237,073
was used to pay broker-dealers for their distribution and maintenance services
and $469,139 was used for advertising, shareholder account maintenance, printing
and related costs.
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.
7
<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 Funds' investments; and
preparing and distributing quarterly statements to shareholders regarding their
accounts.
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.
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.
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
8
<PAGE>
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.
TRUSTEES AND OFFICERS
Set forth below are the principal occupations of the Trustees and Officers
during the last five years:
MARIO L. BAEZA, ESQ., 47, 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, 59, 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, 48, Trustee. Mr. Dietrich is 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., 63, 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., 49, 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, 34, 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.
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<PAGE>
BERT N. MITCHELL, CPA, 59, Chairman of the Board and Trustee. Mr. Mitchell is
the Chairman and Chief Executive Officer 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, 28, 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, 44, 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, 47, Vice President. 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, 40, 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.
*EDWARD SINGLETON, 46, Treasurer and Assistant Secretary. Mr. Singleton is Vice
President and Executive Assistant to the President of Ariel Capital Management.
He also operates an accounting and tax consulting business. Formerly, Mr.
Singleton was Manager of Tax and Regulatory Compliance for American Drug Stores,
Inc., a subsidiary of American Stores Company. Address: 307 North Michigan
Avenue, Suite 500, Chicago, Illinois 60601.
____________
*Officers and Trustees deemed to be "interested persons" of the Fund under the
Investment Company Act of 1940.
COMPENSATION SCHEDULE
During the fiscal year ended September 30, 1997, compensation paid to the
Trustees of the Trust not affiliated with the Adviser was as follows:
Aggregate Fund Total Fund
Name Compensation Complex Compensation*
Mario L. Baeza $5,967 $8,950
James Compton** $3,200 $4,800
William C. Dietrich $5,767 $8,650
Royce N. Flippin, Jr. $5,967 $8,950
John G. Guffey, Jr. $5,967 $8,950
Christopher G. Kennedy $5,967 $8,950
Bert N. Mitchell $5,967 $8,950
*Complex compensation is the aggregate compensation paid, for services as a
Director, by all mutual funds with the same investment adviser. The total
compensation includes amounts paid to the Trustees for their services to the
Bond Fund by the Adviser pursuant to an Administrative Services Agreement
between the Bond Fund and the Adviser.
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<PAGE>
**Mr. Compton became a Trustee on May 20, 1997.
SIGNIFICANT SHAREHOLDERS
The following table lists the holders of more than five percent of the
outstanding shares of each Fund as of January 12, 1998:
Growth Fund
Name and Address Number of Shares Percentage of
of Owner Owned Outstanding Shares
Illinois State Employees 671,062.272 15%
Deferred Compensation
604 Stratton Office Building
Springfield, IL 62706
Appreciation Fund
Name and Address Number of Shares Percentage of
of Owner Owned Outstanding Shares
Great West Life & Annuity Co. 696,059.063 10%
8515 E. Orchard Road
Englewood, CO 80111
Charles Schwab & Co., Inc. 397,327.324 6%
Reinvest Acct.
Attn: Mutual Fund Dept.
181 Montgomery Street
San Francisco, CA 94104
11
<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 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.
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<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.
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<PAGE>
ARIEL INVESTMENT TRUST
STATEMENT OF ADDITIONAL INFORMATION
February 1, 1998
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, 1997 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, 1998 and any supplement thereto, which may be obtained free
of charge by writing or calling the Fund.
<PAGE>
TABLE OF CONTENTS
FUNDAMENTAL INVESTMENT RESTRICTIONS . . . . . . . . . . . . . . . . . .1
NON-FUNDAMENTAL INVESTMENT RESTRICTIONS. . . . . . . . . . . . . . . . .2
ADDITIONAL INFORMATION ABOUT INVESTMENT TECHNIQUES . . . . . . . . . . .2
IN-KIND PURCHASES OF INSTITUTIONAL CLASS SHARES OF THE FUND. . . . . . .7
INVESTMENT ADVISER, SUB-ADVISER AND SERVICES ADMINISTRATOR . . . . . . .8
METHOD OF DISTRIBUTION OF THE INVESTOR CLASS SHARES. . . . . . . . . . .8
TRANSFER AGENT AND CUSTODIAN . . . . . . . . . . . . . . . . . . . . . .9
PORTFOLIO TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . . . . .9
INDEPENDENT AUDITORS . . . . . . . . . . . . . . . . . . . . . . . . . 10
GENERAL INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . 10
TRUSTEES AND OFFICERS. . . . . . . . . . . . . . . . . . . . . . . . . 10
COMPENSATION SCHEDULE. . . . . . . . . . . . . . . . . . . . . . . . . 11
SIGNIFICANT SHAREHOLDERS . . . . . . . . . . . . . . . . . . . . . . . 12
CALCULATION OF PERFORMANCE DATA. . . . . . . . . . . . . . . . . . . . 13
APPENDIX A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
<PAGE>
FUNDAMENTAL INVESTMENT RESTRICTIONS
The investment restrictions set forth below and the Fund's investment objective
are fundamental policies and may not be changed without the approval of the
holders of a majority of the outstanding shares of the Fund. As defined in the
Investment Company Act of 1940, this means the lesser of the vote of (a) 67% of
the shares of the Fund at a meeting where more than 50% of the outstanding
shares are present in person or by proxy, or (b) more than 50% of the
outstanding shares of the Fund.
(1) Commodities. The Fund may not purchase or sell commodities or
commodity contracts except contracts in respect to financial futures.
(2) Real Estate. The Fund may not purchase real estate or real estate
mortgages, but may purchase securities backed by real estate or interests
therein (including mortgage interests) and securities of companies, including
real estate investment trusts, holding real estate or interests (including
mortgage interests) therein. (This does not prevent the Fund from owning and
liquidating real estate or real estate interests incident to a default on
portfolio securities.)
(3) Diversification of Fund Investments.
(a) Fund Assets. With respect to 75% of the value of its total
assets, the Fund may not buy the securities of any issuer if more than 5%
of the value of the Fund's total assets would then be invested in that
issuer. Securities issued or guaranteed by the U.S. government or its
agencies or instrumentalities and repurchase agreements involving such
securities ("U.S. Government Securities") are not subject to this
limitation.
(b) Securities of Issuers. With respect to 75% of the value of its
total assets, the Fund may not purchase the securities of any issuer if
after such purchase the Fund would then own more than 10% of such issuer's
voting securities. U.S. Government Securities are not subject to this
limitation.
(4) Industry Concentration. The Fund may not purchase the securities of
companies in any one industry if 25% or more of the value of the Fund's total
assets would then be invested in companies having their principal business
activity in the same industry. U.S. Government Securities are not subject to
this limitation.
(5) Senior Securities; Borrowing. The Fund may not issue senior
securities except as permitted under the Investment Company Act of 1940. The
Fund may not pledge or hypothecate any of its assets, except in connection with
permitted borrowing.
(6) Underwriting. The Fund does not engage in the underwriting of
securities. (This does not preclude it from selling restricted securities in
its portfolio.)
(7) Lending Money or Securities. The Fund may not lend money, except that
it may purchase and hold debt securities publicly distributed or traded or
privately placed and may enter into repurchase agreements. The Fund will not
lend securities if such a loan would cause more than one-third of the Fund's net
assets to then be subject to such loans.
(8) Officer and Trustees. The Fund may not purchase from or sell to any
of the Trust's officers or trustees, or firms of which any of them are members,
any securities (other than capital stock of the Fund), but such persons or firms
may act as brokers for the Fund for customary commissions.
<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.
ADDITIONAL INFORMATION ABOUT
INVESTMENT TECHNIQUES
Loans of Portfolio Securities
The fundamental investment restrictions provide that the Fund may make
secured loans of portfolio securities in order to realize additional income,
provided that the Fund will not lend securities if such a loan would cause more
than one-third of the total value of its net assets to then be subject to such
loans. However, as a matter of non-fundamental policy, the Fund does not
currently intend to make such loans. This policy may be changed by the Board of
Trustees should they determine that such loans would benefit the Fund.
2
<PAGE>
Repurchase Agreements
The Fund may purchase securities subject to repurchase agreements which are
transactions in which the Fund purchases a security and simultaneously commits
to resell that security to the seller at a mutually agreed upon time and price.
The seller's obligation is secured by the underlying security. The repurchase
price reflects the initial purchase price plus an agreed upon market rate of
interest. While the underlying security may bear a maturity in excess of one
year, the term of the repurchase agreement is always less than one year.
The Fund will engage in repurchase agreements with recognized securities
dealers and banks determined to present minimal credit risk by the Sub-Adviser.
In addition, the Fund will engage in repurchase agreements reasonably designed
to fully secure the seller's obligation, during the term of the agreement, to
repurchase the underlying security and the Fund will monitor the market value of
the underlying security during the term of the agreement. If the value of the
underlying security declines and is not at least equal to the repurchase price
due to the Fund pursuant to the agreement, the Fund will require the seller to
pledge additional securities or cash to secure the seller's obligations pursuant
to the agreement. If the seller defaults on its obligation to repurchase and the
value of the underlying security declines, the Fund may incur a loss and may
incur expenses in selling the underlying security.
Mortgage Dollar Rolls
The Fund may enter into "mortgage dollar rolls," which are transactions in
which the Fund sells a mortgage-related security (such as a GNMA security) to a
dealer and simultaneously agrees to repurchase a similar security (but not 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.
3
<PAGE>
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 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
4
<PAGE>
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 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.
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<PAGE>
Criteria for the mortgage loans in the pool backing the FHLMC CMOs are
identical to those of FHLMC PCs. FHLMC has the right to substitute collateral
in the event of delinquencies and/or defaults.
Other Mortgage-Related Securities. Other mortgage-related securities
include securities other than those described above that directly or indirectly
represent a participation in, or are secured by and payable from, mortgage loans
on real property, including stripped mortgage-backed securities. Other
mortgage-related securities may be equity or debt securities issued by agencies
or instrumentalities of the U.S. Government or by private originators of, or
investors in, mortgage loans, including savings and loan associations,
homebuilders, mortgage banks, commercial banks, investment banks, partnerships,
trusts and special purpose entities of the foregoing.
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 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
6
<PAGE>
Card Receivable Security could shorten the weighted average life and reduce the
yield of the Credit Card Receivable Security.
Credit cardholders are entitled to the protection of a number of state and
federal consumer credit laws, many of which give such holder the right to set
off certain amounts against balances owed on the credit card, thereby reducing
amounts paid on Accounts. In addition, unlike most other asset backed
securities, Accounts are unsecured obligations of the cardholder.
IN-KIND PURCHASES OF INSTITUTIONAL CLASS SHARES OF THE FUND
Shares of the Fund are continuously offered at their net asset value next
determined after an order is accepted. The methods available for purchasing
shares of the Fund are described in the Prospectus. In addition, Institutional
Class shares of the Fund may be purchased using securities, so long as the
securities delivered to the Fund meet the investment objective and policies of
the Fund, including its investment restrictions, and are otherwise acceptable to
the Sub-Adviser, which reserves the right to reject all or any part of the
securities offered in exchange for shares of the Fund. Among other things, the
Sub-Adviser will consider the following criteria in determining whether to
accept securities for "in-kind" purchase of Fund shares.
(1) The securities offered by the investor in exchange for shares of the
Fund must be readily marketable and must not be in any way restricted as to
resale or otherwise be illiquid.
(2) The securities must have a value which is readily ascertainable in
accordance with the procedures used by the Fund to value its portfolio
securities.
The Fund believes that this ability to purchase Institutional Class shares
of the Fund using securities provides a means by which holders of certain
securities may obtain diversification and continuous professional management of
their investments without the expense of selling those securities in the public
market. Benefits to the Fund may include the ability to acquire desirable
securities at a lower transaction cost.
An investor who wishes to make an "in-kind" purchase must furnish in
writing to the Fund a list with a full and exact description of all of the
securities which the investor proposes to deliver. The Fund will advise the
investor as to those securities which it is prepared to accept and will provide
the investor with the necessary forms to be completed and signed by the
investor. The investor should then send the securities, in the proper form for
transfer, with the necessary forms to the Fund and certify that there are no
legal or contractual restrictions on the free transfer and sale of the
securities. The securities will be valued as of the close of business on the
day of receipt by the Fund in the same manner as portfolio securities of the
Fund are valued. (See the section entitled "Net Asset Value" in the
Prospectus.) The number of shares of the Fund, having a net asset value as of
the close of business on the day of receipt equal to the value of the securities
delivered by the investor, will be issued to the investor.
The exchange of securities by the investor pursuant to this offer will
constitute a taxable transaction and may result in a gain or loss to the
investor for Federal income tax purposes. Each investor should consult a tax
adviser to determine the tax consequences under Federal and state law of making
such an "in-kind" purchase.
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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. Fees paid to the Adviser for the
fiscal years ended September 30, 1996 and 1997 were $24,444 and $241,717,
respectively, under the Advisory Agreement and $7,396 and $69,210, respectively,
under the Administrative Services Agreement.
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 Fund's shares
on a no-load basis.
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<PAGE>
The Trust has also adopted a Distribution Plan pursuant to Rule 12b-1
under the Investment Company Act of 1940 with respect to the Investor Class
(the "Distribution Plan"). Rule 12b-1 permits an investment company to
finance, directly or indirectly, any activity which is primarily intended to
result in the sale of its shares only if it does so in accordance with the
provisions of such Rule. The Distribution Plan authorizes the Trust to pay
up to 0.30% annually of the average daily net assets of the Investor Class in
connection with the distribution of the Investor Class shares. Consistent
with the Underwriting Agreement, however, payments under the Distribution
Plan are currently limited by the Board of Trustees to 0.25% annually of such
average daily net asset value.
The Distribution Plan was approved by the Board of Trustees, including the
Trustees who are not "interested persons" of the Fund (as that term is defined
in the Investment Company Act of 1940) and who have no direct financial interest
in the operation of the Plan or in any agreements related to the Distribution
Plan (the "Independent Trustees"). The selection and nomination of the
Independent Trustees is committed to the discretion of such Independent
Trustees. In establishing the Distribution Plan, the Trustees considered
various factors including the amount of the distribution fee. The Trustees
determined that there is a reasonable likelihood that the Distribution Plan will
benefit the Trust and its shareholders.
The Distribution Plan may be terminated as to the Investor Class by vote of
a majority of Independent Trustees, or by vote of a majority of the outstanding
Investor Class shares. Any change in the Distribution Plan that would
materially increase the distribution cost to the class requires approval of the
shareholders of that class; otherwise, the Distribution Plan may be amended by
the Trustees, including a majority of the Independent Trustees.
The Distribution Plan will continue in effect indefinitely, if not
terminated in accordance with its terms, provided that such continuance is
annually approved by (i) the vote of a majority of Independent Trustees, and
(ii) the vote of a majority of the entire Board of Trustees.
Apart from the Distribution Plan, the Adviser, at its expense, may incur
costs and pay expenses associated with the distribution of shares of the Fund,
including compensation to broker-dealers in consideration of promotional or
administrative services.
During the period from February 1, 1997 (commencement of operations of the
Investor Class) to September 30, 1997, the Investor Class paid Distribution Plan
expenses of $247 to Ariel Distributors. Of this amount, $76 was used to pay
broker-dealers for their distribution and maintenance services and $125 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.
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.
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<PAGE>
PORTFOLIO TRANSACTIONS
In addition to its management of the Fund's portfolio, the Sub-Adviser also
acts as investment adviser to various private accounts. There may be times when
an investment decision may be made to purchase or sell the same security for the
Fund and one or more clients of the Sub-Adviser. In those circumstances, the
transactions will be allocated as to amount and price in a manner considered
equitable to each. In some instances, this procedure could adversely affect the
Fund but the Fund deems that any disadvantage in the procedure would be
outweighed by the increased selection available and the increased opportunity to
engage in volume transactions.
INDEPENDENT AUDITORS
The Fund's independent auditors, Ernst & Young LLP, 233 South Wacker Drive,
Chicago, IL 60606, audit and report on the Fund's annual financial statements,
review certain regulatory reports and the Fund's federal income tax returns, and
perform other professional accounting, auditing, tax and advisory services when
engaged to do so by the Fund. Shareholders will receive annual audited financial
statements and semi-annual unaudited financial statements.
GENERAL INFORMATION
The Fund, together with Ariel Growth Fund and the Ariel Appreciation Fund
are the three series of Ariel Growth Fund (doing business as Ariel Investment
Trust), an open-end, diversified management investment company organized as a
serial Massachusetts business trust on April 1, 1986. The Declaration of Trust
contains an express disclaimer of shareholder liability for acts or obligations
of the Trust. The shareholders of a Massachusetts business trust might, however,
under certain circumstances, be held personally liable as partners for its
obligations. The Declaration of Trust provides for indemnification and
reimbursement of expenses out of Trust assets for any shareholder held
personally liable for obligations of the Trust. 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 Prospectus and this Statement of Additional Information do not contain
all the information in the Fund's registration statement. The registration
statement is on file with the Securities and Exchange Commission and is
available to the public.
TRUSTEES AND OFFICERS
Set forth below are the principal occupations of the Trustees and Officers
during the last five years:
MARIO L. BAEZA, ESQ., 47, 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, 59, Trustee. Mr. Compton is president and Chief Executive
Officer of Chicago Urban League. Address: 4510 S. Michigan Ave., Chicago, IL
60653.
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WILLIAM C. DIETRICH, CPA, 48, Trustee. Mr. Dietrich is 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., 63, 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., 49, 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, 34, 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, 59, Chairman of the Board and Trustee. Mr. Mitchell is
the Chairman and Chief Executive Officer 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, 28, 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, 44, 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, 47, Vice President. 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, 40, 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.
*EDWARD SINGLETON, 46, Treasurer and Assistant Secretary. Mr. Singleton is Vice
President and Executive Assistant to the President of Ariel Capital Management.
He also operates an accounting and tax consulting business. Formerly, Mr.
Singleton was Manager of Tax and Regulatory Compliance for American Drug Stores,
Inc., a subsidiary of American Stores Company. Address: 307 North Michigan
Avenue, Suite 500, Chicago, Illinois 60601.
- --------------------------------
(1)Officers and trustees deemed to be "interested persons" of the Fund under the
Investment Company Act of 1940.
COMPENSATION SCHEDULE
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During the fiscal year ended September 30, 1997, compensation paid to the
trustees of the Trust not affiliated with the Adviser was as follows:
Aggregate Fund Total Fund
Name Compensation** Complex Compensation***
Mario L. Baeza $2,983 $8,950
James Compton* $1,600 $4,800
William C. Dietrich $2,983 $8,650
Royce N. Flippin, Jr. $2,983 $8,950
John G. Guffey, Jr. $2,983 $8,950
Christopher G. Kennedy $2,983 $8,950
Bert N. Mitchell $2,983 $8,950
* Mr. Compton became a Trustee on May 20, 1997.
** These amounts are paid by the Adviser and not the Fund pursuant to the
Administrative Services Agreement between the Adviser and the Fund.
*** Complex compensation is the aggregate compensation paid, for services as a
Trustee, by all mutual funds with the same investment adviser.
SIGNIFICANT SHAREHOLDERS
The following table lists the holders of more than five percent of the
outstanding shares of each class of the Fund as of January 12, 1998.
Institutional Class
Name and Address Number of Shares Percentage of
of Owner Owned Outstanding Shares
McCormick & Co. Inv. Comm Tr 1,052,312.683 9%
c/o Norwest Bank
McCormick Pension Plan
18 Loveton Cr.
Sparks, MD 21152
HW Ward Cust 1,753,054.423 15%
Hotel Empl & Rest. Empl
International Union Pension Fund
48 Shuman Blvd.
Naperville, IL 60563
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Commonwealth Life Insurance Co. 1,332,995.694 12%
Investment Operations
11th Floor
400 W. Market Street
Louisville, KY 40202
Comerica Bank Cust. 2,499,551.404 21%
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 1,301,949.379 11%
30 N. LaSalle Street, Suite 2000
Chicago, IL 60602
San Diego Hotel & Restaurant 699,112.543 6%
Employees Health Fund
Attn: Mark Pappas
First National Bank
800 Silverado Street
LaJolla, CA 92037
Chicagoland Race Meet Operators 1,293,416.032 11%
& IBEW Local No. 134 Jt. Pension
c/o Horsemans Guarantee Corp.
25 West Palatine Road
Palatine, IL 60067
Investor Class
Name and Address Number of Shares Percentage of
of Owner Owned Outstanding Shares
IFTC Co. Custodian 3,692.652 6%
SEP IRA Robert David Blackwell
4536 South Lake Park Avenue
Chicago, IL 60653
Everen Clearing Corp. 3,019.785 5%
A/C 5606-5306
FBO Chris J. Mollet
111 East Kilbourn Avenue
Milwaukee, WI 53202
13
<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:
P(1 + T)n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment
made at the beginning of the 1-, 5- or 10-year periods at
the end of the year or period.
The calculation assumes all charges are deducted from the initial $1,000
payment and assumes all dividends and distributions by the Fund are reinvested
at the price stated in the prospectus on the reinvestment dates during the
period, and includes all recurring fees that are charged to all shareholder
accounts.
The average annual total return for the fiscal year ended September 30,
1997 was 9.26% for the Institutional Class. For the period from February 1,
1997 (commencement of operations) to September 30, 1997, the Investor Class had
a total return, not annualized, of 5.73%.
Yield
The Fund may advertise performance in terms of a 30-day yield quotation.
The 30-day yield quotation is computed by dividing the net investment income per
share earned during the period by the maximum offering price per share on the
last day of the period, according to the following formula:
Yield = 2 [({a-b} OVER {cd} + 1)6 - 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, 1997 the yield for the
Bond Fund's Institutional Class of shares was 6.07% and 4.79% 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.
14
<PAGE>
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, 1997, the historical
distribution rate with respect to the Fund's Institutional Class Shares was
5.29% and for the Investor Class was 3.58%.
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 to the Fund's
Institutional Class shares for the quarter ended September 30, 1997 was 6.05%
and for the Investor Class was 5.45%.
15
<PAGE>
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 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.
16
<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.
17
<PAGE>
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial statements-None
(b) Exhibits:
1. Declaration of Trust (incorporated by reference to Registrant's
Post-Effective Amendment No. 17, File No. 33-7699).
2. By-Laws (incorporated by reference to Registrant's
Post-Effective Amendment No. 17, File No. 33-7699).
3. Not Applicable.
4. Not Applicable.
5a. Management Agreement (incorporated by reference to
Registrant's Post-Effective Amendment No. 17, 33-7699).
5b. 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).
5c. Sub-Advisory Agreement (incorporated by reference to
Registrant's Post-Effective Amendment No. 15, File No. 33-7699).
5d. 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).
6. Underwriting Agreement (incorporated by reference to
Registrant's Post-Effective Amendment No. 17, File No.
33-7699).
7. Not Applicable.
8. Custody Agreement (incorporated by reference to Registrant's
Post-Effective Amendment No. 17, File No. 33-7699).
9. Transfer Agency Contract (incorporated by reference to
Registrant's Post-Effective Amendment No. 17, File No.
33-7699).
10. Opinion and Consent of Counsel as to Legality of Shares
Being Registered.
1
<PAGE>
11a. Report of Independent Auditors.
11b. Consent of Independent Auditors to Use of Report.
12. Not Applicable.
13. Not Applicable.
14. Retirement Plans (incorporated by reference to Registrant's
Post-Effective Amendment No. 13, File No. 33-7699).
15. Rule 12b-1 Distribution Plan (incorporated by reference to
Registrant's Post-Effective Amendment No. 17, File No.
33-7699).
16. Schedule for Computation of Performance Quotation
(incorporated by reference to Registrant's Post-Effective
Amendment No. 17, File No. 33-7699).
17. Not Applicable.
18a. Power of attorney of James Compton.
18b. Powers of Attorney (incorporated by reference to Registrant's
Post-Effective Amendments No. 16 and 17, File No. 33-7699).
18c. Plan Pursuant to Rule 18f-3 (incorporated by reference to
Registrant's Post-Effective Amendment No. 15, File No.
33-7699).
27. Financial Data Schedule.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Not Applicable.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES
As of January 8, 1998 there were 8,569 holders of record of Registrant's
shares of beneficial interest for Ariel Growth Fund.
As of January 8, 1998 there were 9,792 holders of record of Registrant's
shares of beneficial interest for Ariel Appreciation Fund.
2
<PAGE>
As of January 8, 1998 there were 56 holders of record of Registrant's
shares of beneficial interest for Ariel Premier Bond Fund - Institutional
Class.
As of January 8, 1998 there were 190 holders of record of Registrant's
shares of beneficial interest for Ariel Premier Bond Fund - Investor Class.
ITEM 27. 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 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
Ariel Capital Management, Inc., the Registrant's investment adviser,
renders investment advisory services to individual, institutional and pension
and profit-sharing plan accounts. The following directors and officers of the
adviser have been engaged in other professions and/or employment capacities
during the past two fiscal years, as indicated below.
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
Herbert D. Odom, D.D.S. c/o CBS Guardianship Retired
Director 7234 West North Avenue,
Suite 408
Elmwood Park, IL 60635
Anna Perez The Walt Disney Company V.P.,
Director 500 S. Buena Vista St. Government
Burbank, CA 91512 Relations
3
<PAGE>
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 29. PRINCIPAL UNDERWRITERS
Ariel Distributors, Inc., located at 307 North Michigan Avenue, Suite
500, Chicago IL 60601, serves as the principal underwriter of the
Registrant. Ariel Distributors, Inc. does not act as principal underwriter
for any other investment company.
(b) Positions of Ariel Distributors' Officers and Directors:
Name and Principal Position(s) with Position(s) with
Business Address Underwriter Registrant
------------------ ---------------- ----------------
John Washington Rogers, Jr. President, Treasurer and None
Chairman of the Board
Eric T. McKissack Vice-Chairman Trustee and
President
James Atkinson Executive Vice-President Vice President
of Finance and
Administration
Edward Singleton Vice President and Treasurer and
Executive Assistant to the Assistant
President Secretary
Roger P. Schmitt Chief Operating Officer, Vice President,
Vice President, Secretary Secretary and
Assistant
Treasurer
Mellody Hobson Senior Vice President Trustee and
Vice President
Peter Thompson Vice President None
John Miller Vice President None
Cheryl A. Cargie Vice President None
Gary J. Leong Vice President None
Franklin Morton Vice President None
4
<PAGE>
Lisa Hardiman Vice President None
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
Herbert D. Odom, D.D.S. Director None
c/o CBS Guardianship
7234 West North Avenue,
Suite 408
Elmwood Park, IL 60635
Henry B. Pearsall Director None
721 Ontario, Unit 209
Oak Park, IL 60302
Anna Perez Director None
The Walt Disney Company
500 S. Buena Vista Street
Burbank,CA 91512
Robert I. Solomon Director None
Silliker Laboratories
900 Maple Road
Homewood, Illinois 60430
Paula Wolff Director None
Governors' State University
University Park, Illinois
60466
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.
All documents and records relating to Ariel Distributors, Inc. are
located at Ariel Capital Management, Inc., 307 North Michigan Avenue,
Chicago, Illinois 60601
5
<PAGE>
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 31. MANAGEMENT SERVICES.
Not applicable.
ITEM 32. UNDERTAKINGS.
The Registrant undertakes to furnish to each person to whom a Prospectus
is delivered, a copy of the Registrant's latest Annual Report to
Shareholders, upon request and without charge.
6
<PAGE>
ARIEL GROWTH FUND
SIGNATURES
Registrant certifies that this Amendment meets all of the requirements
for effectiveness pursuant to Rule 485(b).
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 28th day of January, 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 January 28, 1998
- ----------------- Officer and Trustee
Eric T. McKissack
Edward Singleton* Principal Financial January 28, 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 Amendment No. 17.
<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 January 28, 1998
- -----------------------
Mario Baeza
James Compton* Trustee January 28, 1998
- -----------------------
James Compton
William C. Dietrich* Trustee January 28, 1998
- -----------------------
William C. Dietrich
Royce N. Flippin, Jr.* Trustee January 28, 1998
- -----------------------
Royce N. Flippin, Jr.
John G. Guffey, Jr.* Trustee January 28, 1998
- -----------------------
John G. Guffey, Jr.
Christopher G. Kennedy* Trustee January 28, 1998
- -----------------------
Christopher G. Kennedy
Bert N. Mitchell* Trustee January 28, 1998
- -----------------------
Bert N. Mitchell
Mellody Hobson* Trustee January 28, 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 Amendment No. 17.
/s/ Sheldon R. Stein
-------------------------------------
Sheldon R. Stein,
Attorney-in-Fact
<PAGE>
[LETTERHEAD OF DANCONA & PFLAUM] Exhibit 10
January 28, 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 statement or 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,
/s/ D'ANCONA & PFLAUM
<PAGE>
Exhibit 11a
Report of Independent Auditors
To 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, Ariel Appreciation Fund, and
Ariel Premier Bond Fund, comprising Ariel Investment Trust ("Ariel Mutual
Funds"), as of September 30, 1997, the related statement of operations, the
statement of changes in net assets and the financial highlights for the 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, 1997, by correspondence with the custodian. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial 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, 1997, and the results of
their operations, the changes in their net assets and the financial highlights
for each of the fiscal periods indicated therein, in conformity with generally
accepted accounting principles.
Ernst & Young LLP
Chicago, Illinois
October 17, 19978
<PAGE>
Exhibit 11b
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 17, 1997 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, Appreciation Fund and Ariel Premier Bond Fund, filed with
the Securities and Exchange Commission in the Post-Effective Amendment No. 20
to the Registration Statement under the Securities Act of 1933 (File No.
33-7699) and in this Amendment No. 20 to the Registration Statement under the
Investment Company Act of 1940 (File No. 811-4786).
ERNST & YOUNG LLP
Chicago, Illinois
January 23, 1998
<PAGE>
Exhibit 18.a
ARIEL GROWTH FUND
POWER OF ATTORNEY
KNOW ALL PEOPLE BY THESE PRESENTS, that the undersigned constitutes and
appoints Sheldon R. Stein, Arthur Don, John W. Rogers, Jr., Mellody L. Hobson
and Roger P. Schmitt, and each of them, his attorneys-in fact, each with the
power of substitution, for him in any and all capacities, to sign any
post-effective amendments to the registration statement under the Securities Act
of 1933 (Registration No. 33-7699) and/or the Investment Company Act of 1940
(Registration No. 811-4786), whether on Form N-1A or any successor forms
thereof, and to file the same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission and all
appropriate state or federal regulatory authorities. Tthe undersigned hereby
ratifies and confirms all that each of the aforenamed attorneys-in-fact, or his
or her substitute or substitutes, may do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as
of the 21st day of January, 1998.
/s/ James Compton
James Compton
Trustee
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<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> SEP-30-1997
<INVESTMENTS-AT-COST> 93,872,004
<INVESTMENTS-AT-VALUE> 164,740,245
<RECEIVABLES> 300,710
<ASSETS-OTHER> 35,034
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 165,075,989
<PAYABLE-FOR-SECURITIES> 797,105
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 213,423
<TOTAL-LIABILITIES> 1,010,528
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<PAID-IN-CAPITAL-COMMON> 78,627,424
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<SHARES-COMMON-PRIOR> 3,589,095
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<ACCUMULATED-NET-GAINS> 14,273,428
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 70,868,241
<NET-ASSETS> 164,065,461
<DIVIDEND-INCOME> 1,686,750
<INTEREST-INCOME> 215,211
<OTHER-INCOME> 0
<EXPENSES-NET> (1,605,603)
<NET-INVESTMENT-INCOME> 296,358
<REALIZED-GAINS-CURRENT> 14,275,357
<APPREC-INCREASE-CURRENT> 33,739,637
<NET-CHANGE-FROM-OPS> 48,015,004
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> (6,352,876)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 8,947,566
<NUMBER-OF-SHARES-REDEEMED> (8,766,712)
<SHARES-REINVESTED> 184,857
<NET-CHANGE-IN-ASSETS> 54,295,424
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 6,350,947
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 838,232
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,605,603
<AVERAGE-NET-ASSETS> 130,003,671
<PER-SHARE-NAV-BEGIN> 30.58
<PER-SHARE-NII> 0.07
<PER-SHARE-GAIN-APPREC> 12.62
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> (1.78)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 41.49
<EXPENSE-RATIO> 1.25
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
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<NUMBER> 2
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<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> SEP-30-1997
<INVESTMENTS-AT-COST> 106,895,796
<INVESTMENTS-AT-VALUE> 187,307,234
<RECEIVABLES> 322,083
<ASSETS-OTHER> 12,962
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 187,642,279
<PAYABLE-FOR-SECURITIES> 879,163
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 285,010
<TOTAL-LIABILITIES> 1,164,173
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 88,581,282
<SHARES-COMMON-STOCK> 5,533,096
<SHARES-COMMON-PRIOR> 5,428,331
<ACCUMULATED-NII-CURRENT> 95,385
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 17,390,001
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 80,411,438
<NET-ASSETS> 186,478,106
<DIVIDEND-INCOME> 1,901,857
<INTEREST-INCOME> 244,434
<OTHER-INCOME> 0
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<NAME> ARIEL PREMIER BOND FUND
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<NAME> ARIEL PREMIER BOND FUND
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