<PAGE>
Quarterly Report--June 30, 1996
Ariel Mutual Funds
Ariel Growth Fund
Ariel Appreciation Fund
Dear Shareholder:
Despite a tumultuous second quarter ending June 30, 1996, the undervalued
companies that make up the Ariel Growth and Ariel Appreciation Fund portfolios
returned 5.9% and 4.7%, respectively. These gains compared favorably to
investment results posted by widely followed stock market indices.
Specifically, during this same three month period, the Standard & Poor's 500
Index earned 4.5% while the Russell 2500 Index rose 4.2%.
If one were to attempt to characterize stock performance during the second
quarter, the term "about face" comes to mind. Much in keeping with recent
trends, the most popular, expensive and aggressive issues effortlessly soared
higher still in April and May. Amazed by the valuations that investors were
willing to pay for the hottest "concepts" and their uncertain futures, we
watched the risky securities continue their heady climbs. Stocks like Presstek
(OTC: PRST) with scant earnings or revenues to speak of went as high as $200 a
share from a 52-week low of $38-1/2; Iomega (OTC: IOMG) continued its ascent
from an October 1995 low of $2-3/4 to $55-1/4 by late May; and Yahoo! (OTC:
YHOO) surged from its initial public offering price of $13 on April 11, 1996 to
$43 in its first few hours of trading.
The month of June was another story and we were about as surprised with the
outcome as you might be to jump in a swimming pool and find that you are wet. As
we have said in times past, the wide performance swings of these types of issues
makes them precisely the kinds of businesses that we look to avoid. Presstek
down from $200 to $63; Iomega from $55-1/4 to $28; America Online (OTC: AMER)
from $71 to $39-3/4; and Yahoo! from $43 to $19-1/4. In one month's time, these
four issues alone witnessed an average decline of 54%, providing just a snap
shot of the broader technology picture. Not only did our lack of ownership of
these characteristically volatile securities allow us to avoid June's debacles,
we were further aided when a good number of our portfolio's undervalued business
franchises, including Bob Evans Farms (OTC: BOBE), The Northern Trust Company
(OTC: NTRS) and GLAD garbage bag maker, First Brands Corporation (NYSE: FBR),
began to reap the rewards of their consistency, fundamental strength and
predictability.
<PAGE>
Ariel Growth Fund
Ten Largest Holdings
as of June 30, 1996
1 Rouse Co.
Retail mall developer
2 First Brands Corp.
Manufacturer and marketer of consumer products for home and automobile markets
3 Harte-Hanks Communications
Diversified communications company
4 Ecolab, Inc.
Leading developer and marketer of premium cleaning and sanitizing products and
services for the hospitality markets
5 Central Newspapers, Inc.
Leading media company that publishes daily and weekly newspapers in metropolitan
Phoenix and Indianapolis
6 Northern Trust Corporation
Chicago-based bank holding company
7 MBIA, Inc.
Leading insurer of municipal bonds
8 Herman Miller, Inc.
Major manufacturer of furniture for offices and health care facilities
9 Longs Drug Stores, Inc.
A leading operator of retail drug stores in California and other
western states
10 Interface, Inc. Class A
World's leading manufacturer and marketer of carpet tiles
Stocks and Basketball
People who know me, know that my two most favorite interests are stocks and
basketball. As I have detailed on many occasions, my father sparked my interest
in the stock market by giving me stock certificates in place of toys every
birthday and Christmas beginning at the age of twelve. Initially, as one might
expect, stocks were not my preferred form of gift. But with time (and modest
dividend checks!), the stock market became more than a passing interest, it
became an obsession. Inevitably, those pieces of paper proved to be the
greatest present of all, since my hobby was ultimately transformed into the
career that I have today. Coincidentally, my love of basketball dates back to
almost the same time and I still play today.
This past April, on the heels of a great season and renowned 29 year career, my
college coach, Pete Carril, retired from his job. My recent attendance at his
going away dinner reminded me of my time spent playing for Carril and reinforced
my long-standing belief that he was one of the best teachers I ever had. His
recitations about the rewards of hard work, teamwork, discipline and patience
significantly shaped my views beyond basketball and into life. Among other
things, my stock market and basketball worlds became inextricably linked at
Princeton and I trace the underpinnings of the Ariel investment philosophy and
corporate culture to the uncompromising pursuit of excellence I saw in my coach.
In 1967, Carril walked onto Princeton's campus a virtual unknown. In 1996, he
left a legend. He joined the athletic staff after 13 years coaching high school
basketball and just one season at Lehigh University. Over the next three
decades, the Princeton Tigers won or tied the Ivy League Championship 13 times
and experienced only one losing season. We were all happy to see Carril's last
season end on a high note as Princeton stunned the college basketball world with
a shocking two-point defeat of the defending NCAA champions, UCLA,
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Ariel Appreciation Fund
Ten Largest Holdings
as of June 30, 1996
1 Rouse Co.
Retail mall developer
2 Harte-Hanks Communications
Diversified communications company
3 Northern Trust Corporation
Chicago-based bank holding company
4 Longs Drug Stores, Inc.
A leading operator of retail drug stores in California and other
western states
5 MBIA, Inc.
Leading insurer of municipal bonds
6 T. Rowe Price Associates, Inc.
Investment adviser to a large family of no-load mutual funds, individuals, and
institutional clients
7 Merry Land & Investment Co., Inc.
One of the largest owners and operators of upscale garden apartments in the
southeast (a real estate investment trust-REIT)
8 Leggett & Platt, Inc. Specializes in manufacturing and marketing components
for the home furnishing industry and diversified markets
9 Safety Kleen Corp.
World's largest recycler of automotive and industrial hazardous and non-
hazardous fluids
10 Hasbro, Inc.
World's largest toy manufacturer
with its signature "back door" pass with just 3.9 seconds left in the game.
In spite of the inherent difficulty of recruiting basketball talent at Princeton
each year, as was the case with the recent UCLA win, Carril's teams still
managed to excel on so many occasions and oftentimes against better athletes.
With a lifetime coaching record of 525 wins to 273 losses, he is the only active
coach to have more than 500 wins without the benefit of athletic scholarships.
In order to win, Carril effectively taught team members to play together, using
their heads--all the while being very deliberate. As The Seattle Times once
wrote, "Princeton doesn't get many players whose game is performed above the
rim. They are the earth-bound [and] slow of foot but quick of wit."
While on the surface, basketball and investment management could not appear to
be more different, the most basic ingredients that made so many Princeton teams
win are the exact same ideals that we strive to achieve at Ariel. For starters,
Coach Carril believed in hard work, plain and simple. His words and his actions
prove it. On many occasions, he was known to say, "A player does not play, he
works." Not surprisingly, most of Carril's players remember the fierce and
unforgiving words that came with laziness or not playing to potential. "It's
what you do versus what you could do that counts," he would say. Being late was
intolerable and with his unrelenting standards and passion for excellence, no
minute of practice was ever wasted. As Princeton Alumni Weekly writes, "The
coach wanted players who fit these words of Dickens: "He did each single thing
as he did nothing else."" And such was the case with Carril himself. During his
long tenure at Princeton, he never once missed a single practice.
As we believe that a strong work ethic exponentially increases one's chances of
success, we aspire to be the hardest working investment management firm in the
nation. Yet, as Carril taught, hard work is
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only the beginning, one must also work smart. Working smart means being
disciplined. No matter who the Princeton player or what the year, Tiger
basketball was always the same, always consistent. In such a controlled game,
there was little latitude for experimental moves. "Hold onto your guts fellas,"
he liked to say. "We can win with what you can do. Don't try what you can't!"
Similarly at Ariel, discipline is reflected in our strict adherence to a unique
investment strategy that seeks to identify the very best undervalued small and
medium-sized companies--in consistent industries--that offer strong growth
potential. Coach Carril always pushed his teams to improve their game and so we,
too, must continually work to be better. But just as Carril never altered the
fundamentals of Tiger plays to reflect the strengths of varying opponents, our
investment disciplines cannot be compromised when we are confronted by trying
stock market environments nor can our standards be relaxed in more agreeable
times.
Adhering to discipline often requires patience. Perhaps patience is Coach
Carril's most well known virtue. Players were taught to pass and pass and pass
the ball, until one of them was certain he could make the perfect shot. As such,
in contrast to today's basketball games of fast breaks and slam dunks, the
Princeton game is widely perceived to be painstakingly slow and considerably
less exciting to watch. Yet, Carril's characteristically insightful response to
such comments was that his team was, "not slow but judicious." Do turtles and
hares come to mind?
In our case at Ariel, patience allows us to keep searching until we find the
companies we believe to be truly special. Companies with solid fundamentals and
strong management teams that offer excellent products or services to customers
who come back again and again. When we find these wonderful businesses, patience
gives us the fortitude to wait for them to realize their potential.
Additionally, the same patience permits us to endure the fads--the times when
stocks trade for less credible reasons than those mentioned including euphoria,
optimistic expectations, wishful thinking and hype. This view kept us on the
sidelines when so many of the unproven technology stocks of the day rose rapidly
and common wisdom proclaimed they could only go higher. However, as markets are
ultimately rational, our portfolios have been insulated from the carnage that
has resulted from the dramatic declines of these issues over the past few weeks.
One last noteworthy point on Carril was that his game naturally encouraged
teamwork. "If you help your teammates, you help yourself," he would say. Since
there were few, if any, stars at Princeton, the Tigers could only win by playing
together. Such is the case at Ariel, where each employee is essential to our
ultimate success. But just like the Tigers, we must practice a model example of
teamwork that transcends platitudes. Teamwork is more than a group of people
feeling good about each other. Real teamwork means looking out for each other
through good times and bad. It means pushing each other to excel or taking up
the responsibility yourself when a colleague is unsure or cannot deliver. When
our relative performance results suffered in what largely had been an aggressive
growth stock manager's game, we
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weathered a difficult period. We did not lose any staff during this period and,
in fact, with some selective hires in our research and administration
departments, we enhanced our team. The most heartening aspect of this experience
was the tremendous character revealed by our people. Rather than pointing
fingers, there was camaraderie and support--individuals pushing each other to
be their very best. With our strong belief in our mission and our shared
investment in this business, we know that we win or lose together.
And so, as Carril moves on, he leaves behind a tremendous legacy that reflects
his simple view, "Basketball or life, it's all the same."
As always, we appreciate any comments or questions that you might have and are
grateful for the opportunity to serve you.
Sincerely,
/s/ John W. Rogers, Jr.
John W. Rogers, Jr.
President
Portfolio Comings and Goings
During the course of the second quarter, we eliminated several positions held in
both the Ariel Growth Fund and Ariel Appreciation Fund portfolios. With its
recent sale and its 700% gain since our initial purchase in July 1991, DeVry,
Inc. (OTC: DVRY) earns the distinction of being one of the best performing
stocks we have ever owned. Although we believe the long-term prospects for this
technical training school remain excellent, we were led to sell our position as
DeVry shares began to trade at full value and increasingly gained in popularity.
In contrast to the aforementioned securities, we eliminated both funds'
positions in Banta (OTC: BNTA), Watts (NYSE: WTS) and Russell Corporation (NYSE:
RML) as we became less enthusiastic about the long-term prospects for these
issues given the changing nature of their businesses in increasingly competitive
marketplaces. We also sold the shares of two of the Ariel Appreciation Fund's
smaller holdings, The Harper Group, Inc. (OTC: HARG) and Furniture Brands
International (NYSE: FBN), for similar reasons.
Lastly, the newest holding for both funds is W.H. Brady (OTC: BRCOA), an
industrial signs and label manufacturer with a distinct niche and strong
franchise whose shares we believe are currently trading at bargain prices.
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<PAGE>
Ariel Mutual Funds
Ariel Growth Fund
Schedule of Investments
June 30, 1996 (Unaudited)
<TABLE>
<CAPTION>
<S> <C> <C>
Number COMMON STOCKS--94.43% Market Value
of Shares
Advertising--3.31%
82,700 Omnicom Group, Inc. $ 3,845,550
-----------
Business Services--6.66%
115,350 Angelica Corp. 2,725,144
151,900 Ecolab, Inc. 5,012,700
-----------
7,737,844
-----------
Consumer Products--9.34%
71,900 Armor All Products Corp. 1,069,512
37,900 Clorox Co. 3,358,887
204,400 First Brands Corp. 5,518,800
61,420 Oil-Dri Corporation of America 913,623
-----------
10,860,822
-----------
Entertainment & Leisure--3.16%
102,700 Hasbro, Inc. 3,671,525
-----------
Environmental--3.15%
209,150 Safety Kleen Corp. 3,660,125
-----------
Financial Services--12.60%
59,200 MBIA, Inc. 4,610,200
80,900 Northern Trust Corp. 4,671,975
262,225 Phoenix Duff & Phelps Corp. 1,966,688
110,300 T. Rowe Price Associates 3,391,725
-----------
14,640,588
-----------
Food & Restaurants--5.45%
178,333 Bob Evans Farms, Inc. 3,031,661
149,400 McCormick & Co., Inc. 3,305,475
-----------
6,337,136
-----------
Furniture & Furnishings--9.76%
264,100 Interface, Inc., Class A 4,093,550
102,600 Leggett & Platt, Inc. 2,847,150
143,695 Miller (Herman), Inc. 4,400,659
-----------
11,341,359
-----------
</TABLE>
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<PAGE>
Ariel Mutual Funds
Ariel Growth Fund
Schedule of Investments
June 30, 1996 (Unaudited)
<TABLE>
<CAPTION>
Number COMMON STOCKS--94.43% (continued) Market Value
of Shares
<S> <C> <C>
Health Care-2.74%
114,800 Bergen Brunswig Corp., Class A $ 3,185,700
-----------
Industrial-4.47%
71,900 Brady (WH) Co. 1,599,775
264,800 Specialty Equipment Cos., Inc.* 3,591,350
-----------
5,191,125
-----------
Miscellaneous-3.38%
58,600 Stanhome, Inc. 1,552,900
98,600 Whitman Corp. 2,378,725
-----------
3,931,625
Newspapers-10.97%
457,810 American Media, Inc., Class A* 2,403,502
132,400 Central Newspapers, Inc., Class A 4,965,000
193,800 Harte-Hanks Communications 5,377,950
-----------
12,746,452
-----------
Office & Business Equipment-3.91%
134,620 General Binding Corp. 2,726,055
122,300 Hunt Mfg. Co. 1,819,212
-----------
4,545,267
-----------
Packaging-2.95%
223,000 Shorewood Packaging Corp.* 3,428,625
-----------
Printing & Publishing-1.42%
123,800 Thomas Nelson, Inc. 1,655,825
-----------
Real Estate-5.97%
47,000 Merry Land and Investment Co., Inc. 987,000
230,100 Rouse Co. 5,953,838
-----------
6,940,838
-----------
</TABLE>
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<PAGE>
Ariel Mutual Funds
Ariel Growth Fund
Schedule of Investments
June 30, 1996 (Unaudited)
<TABLE>
<CAPTION>
Number COMMON STOCKS--94.43% (continued) Market Value
of Shares
<S> <C> <C>
Retailing-5.19%
97,500 Longs Drug Stores, Inc. $ 4,350,938
374,380 Payless Cashways, Inc.* 1,684,710
------------
6,035,648
------------
Total Common Stocks
(cost $78,833,477) 109,756,054
------------
Principal REPURCHASE AGREEMENTS--5.88%
Amount
$6,838,402 State Street Bank & Trust Company
Repurchase Agreement, 4.00%, dated 6/28/96,
repurchase price $6,840,682, maturing
7/1/96 (collateralized by U.S. Treasury Bond,
9.25%, 2/15/16) 6,838,402
------------
Total Repurchase Agreements
(cost $6,838,402) 6,838,402
------------
Total Investments--100.31%
(cost $85,671,879) 116,594,456
Liabilities less
Other Assets and Cash--(0.31)% (361,162)
------------
NET ASSETS--100.00% $116,233,294
============
</TABLE>
*Non-income producing security
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<PAGE>
Ariel Mutual Funds
Ariel Appreciation Fund
Schedule of Investments
June 30, 1996 (Unaudited)
<TABLE>
<CAPTION>
Number COMMON STOCKS--98.51% Market Value
of Shares
<S> <C> <C>
Advertising-2.77%
80,150 Omnicom Group, Inc. $ 3,726,975
-----------
Business Services-4.56%
64,800 Ecolab, Inc. 2,138,400
152,600 Equifax, Inc. 4,005,750
-----------
6,144,150
-----------
Chemicals-2.42%
87,500 Morton International, Inc. 3,259,375
-----------
Consumer Products-7.26%
153,800 Armor All Products Corp. 2,287,775
40,450 Clorox Co. 3,584,881
144,220 First Brands Corp. 3,893,940
-----------
9,766,596
-----------
Entertainment & Leisure-5.53%
116,700 Carnival Cruise Lines, Inc. 3,369,713
113,800 Hasbro, Inc. 4,068,350
-----------
7,438,063
-----------
Environmental-3.14%
241,800 Safety Kleen Corp. 4,231,500
-----------
Financial Services-14.86%
62,000 MBIA, Inc. 4,828,250
119,780 MBNA Corp. 3,413,730
99,300 Northern Trust Corp. 5,734,575
185,750 Phoenix Duff & Phelps Corp. 1,393,125
150,200 T. Rowe Price Associates 4,618,650
-----------
19,988,330
-----------
Food & Restaurants-5.42%
115,400 Bob Evans Farms, Inc. 1,961,800
122,055 McCormick & Co., Inc. 2,700,467
71,300 Universal Foods Corp. 2,629,187
-----------
7,291,454
-----------
</TABLE>
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<PAGE>
Ariel Mutual Funds
Ariel Appreciation Fund
Schedule of Investments
June 30, 1996 (Unaudited)
<TABLE>
<CAPTION>
Number COMMON STOCKS--98.51% (continued) Market Value
of Shares
<S> <C> <C>
Furniture & Furnishings-5.73%
153,860 Leggett & Platt, Inc. $4,269,615
112,300 Miller (Herman), Inc. 3,439,188
----------
7,708,803
----------
Health Care-6.75%
142,687 Bergen Brunswig Corp., Class A 3,959,564
43,100 Invacare Corp. 1,012,850
91,000 Sybron Corp.* 2,275,000
55,900 Vivra, Inc.* 1,837,713
----------
9,085,127
----------
Industrial-5.46%
85,200 Brady (WH) Co. 1,895,700
81,300 DII Group, Inc.* 2,073,150
249,000 Specialty Equipment Cos., Inc.* 3,377,062
----------
7,345,912
----------
Miscellaneous-5.78%
72,600 Fisher Scientific International 2,722,500
67,600 Stanhome, Inc. 1,791,400
135,400 Whitman Corp. 3,266,525
----------
7,780,425
----------
Newspapers-5.97%
245,075 Harte-Hanks Communications 6,800,831
17,000 Tribune Co. 1,234,625
----------
8,035,456
----------
Office & Business Equipment-3.08%
129,305 General Binding Corp. 2,618,426
31,900 Pitney-Bowes, Inc. 1,523,225
----------
4,141,651
----------
Packaging-2.76%
241,310 Shorewood Packaging Corp.* 3,710,141
----------
</TABLE>
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<PAGE>
Ariel Mutual Funds
Ariel Appreciation Fund
Schedule of Investments
June 30, 1996 (Unaudited)
<TABLE>
<CAPTION>
Number COMMON STOCKS--98.51% (continued) Market Value
of Shares
<S> <C> <C>
Printing & Publishing--3.19%
44,700 Houghton Mifflin Co. $ 2,223,825
154,900 Thomas Nelson, Inc. 2,071,788
------------
4,295,613
------------
Real Estate--8.66%
210,050 Merry Land and Investment Co., Inc. 4,411,050
279,700 Rouse Co. 7,237,238
------------
11,648,288
------------
Retailing--5.17%
112,920 Longs Drug Stores, Inc. 5,039,055
425,350 Payless Cashways, Inc.* 1,914,075
------------
6,953,130
------------
Total Common Stocks
(cost $98,947,783) 132,550,989
------------
Principal REPURCHASE AGREEMENTS--1.28%
Amount
$1,719,499 State Street Bank & Trust Company
Repurchase Agreement, 4.00%, dated 6/28/96,
repurchase price $1,720,072, maturing
7/1/96 (collateralized by U.S. Treasury Bond,
9.25%, 2/15/16) 1,719,499
------------
Total Repurchase Agreements
(cost $1,719,499) 1,719,499
------------
Total Investments--99.79%
(cost $100,667,282) 134,270,488
------------
Other Assets and Cash
less Liabilities--0.21% 277,783
------------
NET ASSETS--100.00% $134,548,271
============
</TABLE>
*Non-income producing security
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Ariel Mutual Fund News
FOCUS ON DOLLAR COST AVERAGING
What is Dollar Cost Averaging?
Predicting the direction of securities with any degree of accuracy is near to
impossible. Therefore, many astute investors minimize the effect of market price
fluctuations by using an investment technique called dollar cost averaging. By
using this method, an investor makes regular deposits of a specified dollar
amount without regard to the current share price. These deposits can be as small
as $50.00 a month.
How does Dollar Cost Averaging work?
It follows the simple strategy of purchasing fewer shares for a fixed dollar
amount when the fund's price is high and more shares when the price is low. This
takes away the guess work of trying to determine the most appropriate time to
buy into a mutual fund.
A fabled financier once defined the secret of successful investing is "buying
low, selling high." Stock prices are often lowest when future prospects are
gloomiest, and unfortunately, instead of committing assets at that time, most
investors hesitate to see if things improve, then invest at a higher price.
Dollar cost averaging can provide a disciplined approach to take advantage of
all market conditions.
If you are interested in dollar cost averaging for yourself, please call an
Ariel Mutual Funds Shareholder Services Representative at 1-800-29-ARIEL to
request the appropriate forms.
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