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[LOGO]
ARIEL APPRECIATION FUND
ARIEL GROWTH FUND
ARIEL PREMIER BOND FUND
Annual Report--September 30, 1997
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THE PATIENT INVESTOR [LOGO]
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THE TORTOISE AND THE HARE
ONE DAY A HARE WAS MAKING FUN OF A TORTOISE FOR BEING SO SLOW UPON HIS FEET.
"WAIT A BIT," SAID THE TORTOISE, "I'LL RUN A RACE WITH YOU, AND I'LL WAGER THAT
I'LL WIN." THE HARE, WHO WAS MUCH AMUSED AT THE IDEA, SAID "LET'S TRY AND
SEE..." WHEN THE TIME CAME BOTH STARTED OFF TOGETHER...THE HARE NEARLY TURNED A
SOMERSAULT IN HIS HASTE, WHILE THE TORTOISE BEGAN AT A SLOW BUT STEADY PACE.
MEANWHILE THE TORTOISE KEPT PLODDING ON...AND ON...AND ON. SOON THE HARE WAS SO
FAR AHEAD HE THOUGHT HE MIGHT AS WELL HAVE A REST, SO DOWN HE LAY AND FELL FAST
ASLEEP...AS THE TORTOISE PLODDED ON...AND ON. SUDDENLY THE HARE WOKE UP WITH A
START. WHAT WAS THE TIME? WHERE WAS THE TORTOISE? HE DASHED ON AT HIS FASTEST
PACE...ONLY TO FIND THAT THE TORTOISE HAD ALREADY WON THE RACE.
SLOW & STEADY WINS THE RACE.
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Ariel Investment Trust
307 North Michigan Avenue
Suite 500
Chicago, Illinois 60601
800.292.7435
312.726.0140
Fax 312.726.7473
TABLE OF CONTENTS
FOR MORE INFORMATION ABOUT THE ARIEL MUTUAL FUNDS INCLUDING MANAGEMENT FEES AND
EXPENSES, PLEASE SEE THE CURRENT PROSPECTUS WHICH MUST PRECEDE OR ACCOMPANY THIS
REPORT. DISTRUBUTED BY ARIEL DISTRIBUTORS, INC.
PERFORMANCE DATA PROVIDED REPRESENTS PAST PERFORMANCE AND IS NOT INDICATIVE OF
FUTURE RESULTS. THE INVESTMENT RETURN AND PRINCIPAL VALUE OF AN INVESTMENT WILL
FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS
THAN THEIR ORIGINAL COST.
The Patient Investor 2
Company in Focus 6
Ariel Equity Funds 10
Schedule of Equity Investments 12
Equity Statistical Summary 18
Ariel Bond Fund 20
Schedule of Bond Investments 22
Statement of Assets & Liabilities 26
Statement of Operations 26
Statement of Changes in Net Assets 27
Financial Highlights 28
Notes to the Financial Statements 30
Report of Independent Auditors 32
Board of Trustees 33
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SLOW AND STEADY WINS THE RACE.-AESOP
THE PATIENT INVEST[LOGO]R -Registered Trademark-
DEAR FELLOW SHAREHOLDER: For the quarter ending September 30, 1997, the Ariel
Growth Fund rose +13.8% and the Ariel Appreciation Fund rose +13.2%. These
results compared quite favorably to the +7.5% gain posted by the large stocks of
the Standard & Poor's 500 Index but fell somewhat short of the +14.4% rise of
the small and medium-sized stocks that make up the Russell 2500 Index.
As BARRON'S reported, "August was the worst month in 7 years for the S&P 500 and
the best month for smaller stocks in the same span." With this said, we are
pleased to have successfully weathered both the dominance of the expensive large
cap issues during the first half of the year and the "catch up" rally of the
most aggressive small and mid-cap issues in recent months given that we invest
in neither. Thus, year-to-date, the Ariel Growth Fund has risen +29.8% and the
Ariel Appreciation Fund has gained +29.3% versus +29.6% for the S&P 500 and
+27.2% for the Russell 2500. Moreover, the funds have handily outperformed these
benchmarks for the volatile twelve months ended September. Specifically, over
the one year period, Ariel Growth has earned +43.3% and Ariel Appreciation has
risen 42.3% versus +40.5% for the S&P 500 and +34.3% for the Russell 2500.
Against the challenging backdrop of erratic investor sentiment over the last 12
months, we believe two basic cornerstones of our investment strategy helped
enhance our results while insulating our portfolio from the whipsawing effects
of a momentum driven bull market: (1) the exceptionally strong underlying
fundamentals of our companies; and (2) the consistency of their high-quality
business franchises. Further, we benefitted from the renewed strength among
small and mid-cap issues after their prolonged period of underperformance
relative to large company stocks.
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FOOD FOR THOUGHT
William Blake once said, "The road of excess leads to the palace of wisdom."
When we recently stumbled across this pithy prose, today's stock market
immediately came to mind. Perhaps it's the contrasting perspective of an
euphoric investment climate resulting from the longest bull run in stock
market history and the anemic investing environment that existed prior to the
boon. A quick comparison of the facts recently compiled by Alan Abelson of
BARRON's makes this case. In August of 1982, our country's unemployment rate was
9.8%. Yet, at today's rate of 4.8%, unemployment is at its lowest level in
nearly 30 years. In 1982, the Consumer Price Index pegged inflation at 6.4%. In
August of 1997, the CPI stood at 2.3%. Accordingly, with the Prime Rate now at
8.5%, interest rates are nearly half what they once were.
This economic backdrop has led to ideal conditions for the stock market. As has
been widely reported, we have witnessed never-before-seen price levels and
unprecedented investor interest. For the five years leading up to August 1982,
the Dow Jones Industrial Average experienced a cumulative loss
of -5%. Yet, for the five years through August 1997, the Dow Jones Industrial
Average has racked up a +140% gain. Even more dramatic are the longer term
results which show the Dow's -9% loss for the 15 years through 1982. By
contrast, for the same period through this past August, the Index has risen an
eye popping +950%! As a result of this move, stocks are trading in "nose bleed"
territories when their prices are measured against a multiple of earnings.
Specifically, in 1982, the broad market had a trailing price/earnings multiple
of 7. Today, the market trades at 23 times trailing earnings. Because of the
tremendous performance, money pouring into the stock market has become the norm.
In the first 8 months of this year, $193 billion has flowed into mutual funds.
But eight months into 1982, investors had REDEEMED $2 billion. The bulk of
today's assets have been invested in the more than 2,800 stock mutual funds
listed in daily newspapers. In 1982, there were only 320.
VALUING EXPERIENCE AND ACCUMULATED KNOWLEDGE
Despite the drama in every one of the aforementioned comparisons, we are most
struck by the proliferation of mutual funds over the last 15 years. This
reflects our view that the unparalleled investor interest and the explosive
growth of fund
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choices do not necessarily translate into an equally explosive number of
talented portfolio managers and analysts on the investment scene. To put this in
perspective, imagine similar growth in any other industry. Let's take one of our
favorite areas, basketball, as a case in point. In 1982, there were 23 teams in
the National Basketball Association--today there are 30. If the expansion in the
number of professional basketball teams paralleled the increase in stock mutual
funds in recent years, instead of 30 teams, there would be more like 200. In
such a scenario, one could not reasonably expect the addition of hundreds of new
professional basketball players to improve the quality of the game. Ten times as
many Michael Jordans would not be a magical outgrowth of a watered-down league.
Why then, would one expect a higher probability of this bull market having
produced more Warren Buffetts?
As such, considering the average tenure of today's investment professionals is
just 3.5 years, we would argue that an abundance of inexperience and optimism
makes for a dangerous combination in the context of such a long and sharp stock
rally. To put this in perspective, the NEW YORK TIMES observes, "Now, a decade
later, the 1987 crash seems like a footnote in the great bull market that began
in 1982 and still lives." This is not surprising when one considers "less than
30% of the 1,440 mutual funds that were around for the 1987 crash have managers
who were with them during the crash," according to Morningstar, Inc.
Thus, if one agrees with the often repeated statement that, "experience is a
hard teacher because it gives you the test first and the lesson afterwards,"
investing in today's stock market should elicit some very serious consideration.
This urge for caution is not meant to rule out equity investing. It should,
however, lead to a critical examination of the training and qualifications of
those who run mutual fund and institutional portfolios. Against this backdrop,
we draw upon the wisdom of the great value investor, Warren Buffett, who has
been a strong advocate of the benefits of accumulated knowledge--the underlying
thesis of which emphasizes that when you do something for a long period of time,
you only get better. With his characteristic simplicity, Buffett discusses his
40 years of stock market investing and the deep understanding of businesses
developed over the period by noting, "its as though you studied baseball players
everyday: you get to know all the players after awhile." For those among us who
require a bit more eloquence, the exact same point is reflected in words we
found attributed to a Sir P. Sidney who once said, "each excellent thing, once
learned, serves as a measure for all other knowledge."
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Although we are sometimes criticized for our concentration in consistent
industries and our avoidance of more volatile areas, this perspective leads us
to limit our portfolios in scope. In so doing, we choose depth over breadth and
are thereby able to quickly identify our kinds of companies; rule out those that
do not fit our value, quality and consistency parameters; and continually hone
our stock picking skills. Moreover, by sticking within our circle of competence,
we are able to build contacts and strengthen relationships with individuals who
are able to shed light on current and prospective portfolio holdings. For
example, ten years of stock holdings in Clorox (NYSE: CLX) has not only led to
extensive knowledge of the company, its people, its products and its
competition, it has also produced information and relationships that are of
tremendous value in the analysis of other securities including current holdings
like GLAD Bags maker, First Brands (NYSE: FBR) and former holdings like Armor
All (now a subsidiary of Clorox).
By concentrating all of our efforts on one, and only one, investment strategy
for a near 15 year period, we have navigated a variety of investment
environments. With our own accumulated knowledge, we are a better firm than we
were a year ago, five years ago, a decade ago and when we first began managing
portfolios. Thus, as we look forward, we expect to continue to learn from our
experiences as well as our mistakes and ultimately be a better firm not only one
year from now and five years from now, but many, many years into our future.
PORTFOLIO COMINGS AND GOINGS
In addition to solid results all around, both portfolios received a very nice
boost from the announced takeover of longtime holding, Bergen Brunswig
Corporation (NYSE: BBC) by Cardinal Health (NYSE: CAH). We began purchasing
stock in Bergen at just over $17 a share in 1991. After the news of its
combination with Cardinal, the stock was quickly bid up to $45 in anticipation
of a $53 takeover price.
As always, we appreciate your investment and welcome any questions or comments
you might have.
Sincerely,
/s/ John W. Rogers, Jr. /s/ Eric T. McKissack
John W. Rogers, Jr. Eric T. McKissack, CFA
Portfolio Manager Portfolio Manager
Ariel Growth Fund Ariel Appreciation Fund
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COMPANY IN FOCUS
[LOGO]
2525 Dupont Drive
P.O. Box 19534
Irvine, California 92623-9534
(714) 752-4500
ALLERGAN, INC. (NYSE: AGN) is a worldwide provider of specialty eyecare products
with niche pharmaceutical products for skin care and movement disorders.
Although drug stocks typically trade at very high multiples, Allergan's 1997
earnings have been negatively impacted by generic drug competition, excessive
trade inventories and foreign currency exposure. These short-term problems have
presented a rare buying opportunity. Focused research and development spending,
new products, strategic joint ventures and expanding international sales make
Allergan's prospects in 1998 and beyond look quite promising.
Founded in 1948, Allergan was acquired by SmithKline (now SmithKline Beecham;
NYSE: SKB) in 1980 and operated as a wholly owned subsidiary until it was spun
off in 1989. Since regaining its independence, Allergan has worked to improve
its product mix and growth prospects through several selective acquisitions and
divestitures along with a re-emphasis on research and development joint
ventures. Last year, the company engaged in acknowledged takeover discussions
with Swedish-based Pharmacia & Upjohn (NYSE: PNU).
BUSINESS SEGMENTS - The ophthalmic PHARMACEUTICAL business consists of a range
of prescription and non-prescription products designed to treat eye diseases and
disorders such as glaucoma, infection and allergy. The largest segment of the
market for these prescription drugs treats glaucoma, a sight-threatening
disease.
The ophthalmic SURGICAL business consists of intraocular lenses (IOLs) and
surgically related pharmaceuticals, equipment and other products. IOLs are used
in the surgical treatment of cataracts. Allergan's total IOL business
represented 11% of company sales in 1996. This area has been subject to pricing
pressure and product recalls in recent periods. Although today's IOLs are a
commodity business, growth opportunities exist for newer IOL products.
Allergan offers a broad range of OPTICAL LENS CARE products worldwide for use
with every type of contact lens. Their products include disinfecting solutions
to destroy harmful microorganisms, daily cleaners to remove film, and enzymatic
tablets to remove protein deposits. The company offers lens care products for
each of the three disinfecting systems: hydrogen peroxide, complete chemical and
thermal. Brand names include OXYSTEP 1STEP, ULTRACARE and COMPLETE, which is
Allergan's one-bottle chemical disinfection system. Allergan is the third
largest manufacturer of contact lens care solutions in the U.S. In 1995, the
company acquired the global contact lens franchise of Pilkington Barnes Hind,
which added the CONCEPT system to their product line. CONCEPT was the first non-
heat, disinfection system for soft contacts approved in Japan.
Allergan's thirty-seven year old optical lens care business is mature. The
company and its industry are plagued by the continued penetration of daily
disposable contact lenses; increasing acceptance of surgical alternatives to
correct vision deficiencies; and an aging U.S. population. Yet, these issues are
somewhat offset by opportunities in emerging countries.
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COMPANY IN FOCUS
The remainder of Allergan's business consists of SKIN CARE and BOTOX, two fast
growing areas. The skin care business develops, manufactures and markets
therapeutic as well as cosmetic skin care products. BOTOX is an injection used
in the treatment of certain movement disorders characterized by involuntary
muscle contractions or spasms. Specifically, BOTOX is a purified neurotoxin
complex injection marketed in the U.S. and other major countries for the
treatment of blepharospasm (uncontrollable contraction of the eyelid muscle
which causes functional blindness) and strabismus (misalignment of the eyes).
Since 1995, sales of BOTOX have grown tremendously, in excess of 35% per year.
BOTOX has the potential to be Allergan's first single product to reach $200
million in annual worldwide revenues by the year 2001.
Allergan and its products earn high marks from industry professionals. One
physician described the company as "one of the giants" in the field of
ophthalmology while a drug retailer was highly complimentary of Allergan's
marketing and service. Both confirmed the increased pressure from managed care
to use generic drugs, but expressed confidence in Allergan's ability to develop
and deliver new products to the marketplace over time and thereby maintain its
leadership.
MANAGEMENT - Allergan's Executive Committee consists of seven individuals
responsible for developing and executing the company's strategy. In October
1997, Allergan announced important top management changes effective January
1998. The Chairman, President, and CEO, William C. Shepherd, announced his
retirement after 31 years in a number of leadership positions at the company. He
has held the title of CEO since 1992. After his departure, he will continue to
consult for the company. The new President and CEO will be David Pyott, who is
currently head of the Nutrition Division and a member of the Executive Committee
of Novartis AG (OTC:NVTSY). He has had more than 16 years of experience in the
pharmaceutical industry. Dr. Herbert W. Boyer, a founder of Genentech (NYSE:GNE)
and currently a member of Allergan's Board of Directors, will assume the title
of Chairman of the Board. Although we have not yet met the new leadership, we
are encouraged by their experience and their reputations in the industry. Co-
founder and former CEO of Allergan, Gavin S. Herbert, remains on the board as
Chairman Emeritus.
At this time, Allergan is an especially intriguing investment opportunity. The
stock has strong financial characteristics, including excellent free cash-flow
and low debt. It is one of the last of the independent, smaller pharmaceutical
companies in an industry where mega-merger consolidation has been the norm
in recent years. Moreover, with its emerging lineup of exciting new products,
Allergan is on the cusp of earnings improvement. As such, we anticipate earnings
per share of $2.05 in 1998, up from a disappointing $1.75 this year. While the
stock has started to attract attention, it continues to trade at one of the
lowest valuations in the pharmaceutical industry.
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COMPANY IN FOCUS
[LOGO]
400 Putman Building
215 North Main Street
Davenport, Iowa 52801-1924
LEE ENTERPRISES (NYSE: LEE) Founded in 1890 by journalist, A.W. Lee, and
headquartered in Davenport, IA, Lee Enterprises is a diversified media company
with newspaper, shoppers and broadcasting properties. The company's media
enterprises are primarily located in small niche markets often near state
capitals or major universities in the midwest, west and southwestern United
States. Lee publishes twenty-one daily newspapers in cities where daily
circulation exceeds 30,000 for nearly half its papers. Lee also publishes forty-
five weekly newspapers and specialty industry publications. Additionally, the
company has fourteen television stations, most of which are located in larger
cities.
The tremendous economics inherent in its businesses are the driving factors
attracting us to Lee. Approximately 75% of revenues and operating cash flow
have, in the past, resulted from the company's newspaper operation. Many
of these publications are virtual monopolies in small-town markets where name
recognition is difficult to replicate. Furthermore, the newspaper business
generates a great deal of cash. Lee's core properties include the WISCONSIN
STATE JOURNAL in Madison, WI, the LINCOLN JOURNAL STAR in Lincoln, NE, the
BILLINGS GAZETTE in Billings, MT, and the QUAD-CITY TIMES in Davenport, IA.
Rising advertising rates in retail and classifieds have driven Lee's top-line
growth. Additionally, favorable newsprint costs have boosted the company's
operating income. We expect ad revenues to continue to grow for the foreseeable
future. And although the price of newsprint has risen recently, it is still
below the prior year's level and increased inventory from foreign newsprint
suppliers should help limit any significant price increases.
Lee's broadcasting operation represents approximately one-fourth of total
revenues and operating income. The company has ABC, CBS and NBC affiliates
located in cities including, Tucson, AZ, Omaha, NE, Portland, OR, Honolulu, HI,
Topeka, KS, and Huntington/Charleston, WV. Half of Lee's ten largest properties
are CBS affiliates and represent approximately 60% of broadcasting profits.
The economics of the broadcasting industry are quite simple. A network affiliate
attempts to sell advertising while keeping its costs down. Television
advertising trends continue to be quite favorable as television remains the most
effective mass advertising medium by virtue of its ability to reach millions of
people at once. Broadcast television has a significant advantage over cable
given its larger prime time rating and greater household coverage. On the
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COMPANY IN FOCUS
expense side, costs associated with programming have been declining as the
supply of programs continues to exceed demand. This combination has produced an
attractive operating environment.
REASONS FOR RECOMMENDATION
SEASONED MANAGEMENT TEAM. One of Lee's most attractive assets is its seasoned
management team. Management is comprised of a talented group of executives with
substantial experience in publishing and broadcasting. Furthermore, we are
impressed by management's drive and love for the business. Executives at two
publishing companies in our portfolio confirm that management enjoys a solid
reputation within the industry as keen operators.
LEE GENERATES A TREMENDOUS AMOUNT OF OWNERS' EARNINGS. Given the low capital
expenditure outlay inherent in the newspaper and broadcasting businesses, free
cash flow has totaled more than $300 million over the last five years.
Management returned nearly two-thirds of this cash to shareholders via share
repurchases and dividends. Additionally, Lee's strong cash flow has allowed the
company to reduce its total debt level nearly $110 million during this period.
MANAGEMENT IS OWNER ORIENTED AND APPEARS ASTUTE IN ALLOCATING CAPITAL TO
MAXIMIZE SHAREHOLDER VALUE. As a case in point, management spent nearly $100
million over the last four years repurchasing shares. For the nine months ended
June 1997, management spent nearly $26 million to repurchase and retire more
than one million shares. Furthermore, earlier this year, the company sold its
low margin printing and plate processing business. This move has allowed
management to focus on its highly profitable core media businesses.
LEE TRADES AT A SIGNIFICANT DISCOUNT TO ITS ESTIMATED PRIVATE MARKET VALUE
(PMV). Since Lee is composed of two distinct businesses, each with its own set
of economics, we firmly believe each must be valued separately. As such, we
estimate Lee's PMV to be approximately $40. Thus at a current price of $28.38,
Lee is selling at a 29% discount to its PMV.
We recommend investors initiate a position in Lee Enterprises at current levels.
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ARIEL EQUITY FUNDS
TEN LARGEST HOLDINGS
as of September 30, 1997
1 NORTHERN TRUST CORP.
Chicago-based bank holding company
2 CENTRAL NEWSPAPERS, INC.
Leading media company that publishes daily and weekly newspapers in
metropolitan Phoenix and Indianapolis
3 INTERFACE, INC.
World's leading manufacturer and marketer of carpet tiles
4 FIRST BRANDS CORP.
Manufacturer and marketer of consumer products for home and automobile
markets
5 HASBRO, INC.
World's largest toy manufacturer
6 MBIA, INC.
Leading insurer of municipal bonds
7 ROUSE CO.
Retail mall developer
8 SAFETY-KLEEN
World's largest recycler of automotive and hazardous and non-hazardous
fluids
9 ECOLAB, INC.
Leading developer and marketer of premium cleaning and sanitizing products
and services for the hospitality markets
10 SPECIALTY EQUIPMENT
Manufacturer of commercial and institutional food service equipment
ARIEL GROWTH FUND
Inception November 6, 1986
ARIEL GROWTH FUND SEEKS LONG-TERM CAPITAL APPRECIATION BY INVESTING IN
UNDERVALUED COMPANIES IN CONSISTENT INDUSTRIES THAT SHOW STRONG POTENTIAL FOR
GROWTH BUT DOES SO AT A HIGHER RISK THAN THE ARIEL APPRECIATION FUND. THE FUND
LOOKS FOR ISSUERS THAT PROVIDE QUALITY PRODUCTS OR SERVICES. TO CAPTURE
ANTICIPATED GROWTH, THE FUND GENERALLY HOLDS INVESTMENTS FOR A RELATIVELY LONG
PERIOD, USUALLY THREE TO FIVE YEARS. THE FUND INVESTS IN COMPANIES WITH MARKET
CAPITALIZATIONS UNDER $1.5 BILLION WITH AN EMPHASIS ON SMALLER CAPITALIZATION
(SMALL CAP) STOCKS.
AVERAGE ANNUAL TOTAL RETURN AS OF SEPTEMBER 30,1997
1 Year 3 Year 5 Year 10 Year Life of Fund
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ARIEL GROWTH FUND +43.3% +24.0% +16.8% +13.5% +15.7%
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Total return does not reflect a maximum 4.75% sales load that was charged prior
to July 15, 1994.
ARIEL GROWTH FUND PORTFOLIO COMPOSITION
[EDGAR REPRESENTATION OF CHART]
Consumer Staples 8.1%
Consumer Discretionary and Services 38.5%
Financial Services 13.6%
Producer Durables 9.1%
Health Care 2.5%
Materials and Processing 22.0%
Utilities 2.8%
Other 3.4%
S & P 500 PORTFOLIO COMPOSITION
[EDGAR REPRESENTATION OF CHART]
Other Energy 1.5%
Autos and Transportation 3.7%
Producer Durables 4.6%
Other 5.6%
Materials and Processing 6.5%
Integrated Oils 7.8%
Utilities 9.1%
Consumer Discretionary and Services 9.5%
Health Care 10.7%
Consumer Staples 10.9%
Technology 13.2%
Financial Services 16.9%
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTED IN ARIEL GROWTH FUND AND
COMPARABLE INDICES*
[EDGAR REPRESENTATION OF CHART]
DATE GROWTH S&P RUSSELL
1986 $10,000 $10,000 $10,000
1987 $11,367 $10,258 $ 9,281
1988 $15,906 $11,980 $11,391
1989 $19,900 $15,749 $13,604
1990 $16,699 $15,260 $11,580
1991 $22,163 $19,910 $18,968
1992 $24,763 $21,427 $19,738
1993 $28,924 $23,587 $23,002
1994 $25,786 $23,897 $22,759
1995 $30,562 $32,878 $29,975
1996 $37,747 $40,426 $35,880
1997 $49,003 $52,409 $45,392
*Statistics represent past performance which is not indicative of future
results. The S&P 500 is a broad market-weighted index dominated by blue-chip
stocks. The Russell 2500 Index measures the performance of small and mid-sized
companies. All indexes are unmanaged and returns include reinvested dividends.
An investor cannot invest directly in an index.
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ARIEL APPRECIATION FUND
Inception December 1, 1989
ARIEL APPRECIATION FUND ALSO PURSUES LONG-TERM CAPITAL APPRECIATION BY INVESTING
IN UNDERVALUED FIRMS WITH GROWTH POTENTIAL. LIKE ARIEL GROWTH FUND, THIS FUND
SEEKS OUT ISSUERS THAT PROVIDE QUALITY PRODUCTS OR SERVICES. TO CAPTURE
ANTICIPATED GROWTH, THE FUND WILL ALSO HOLD INVESTMENTS FOR A RELATIVELY LONG
PERIOD - USUALLY THREE TO FIVE YEARS. THE FUND INVESTS IN SMALL AND MIDSIZE
COMPANIES WITH MARKET CAPITALIZATIONS FROM $200 MILLION TO $5 BILLION, WITH AN
EMPHASIS ON MEDIUM CAPITALIZATION (MID CAP) STOCKS.
AVERAGE ANNUAL TOTAL RETURN AS OF SEPTEMBER 30, 1997
1 Year 3 Year 5 Year Life of Fund
- --------------------------------------------------------------------------------
ARIEL APPRECIATION FUND +42.3% +24.0% +17.0% +14.7%
- --------------------------------------------------------------------------------
Total return does not reflect a maximum 4.75% sales load that was charged prior
to July 15, 1994.
ARIEL APPRECIATION FUND PORTFOLIO COMPOSITION
[EDGAR REPRESENTATION OF CHART]
Consumer Staples 8.3%
Consumer Discretionary 36.9%
Utilities 3.6%
Financial Services 16.6%
Producer Durables 10.4%
Health Care 5.8%
Materials and Processing 14.9%
Other 3.5%
S&P 500 PORTFOLIO COMPOSITION
[EDGAR REPRESENTATION OF CHART]
Consumer Staples 10.9%
Consumer Discretionary and Services 9.5%
Financial Services 16.9%
Producer Durables 4.6%
Health Care 10.7%
Materials and Processing 6.5%
Technology 13.2%
Integrated Oils 7.8%
Other Energy 1.5%
Autos & Transportation 3.7%
Utilities 9.1%
Other 5.6%
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTED IN ARIEL APPRECIATION FUND AND
COMPARABLE INDICES*
[EDGAR REPRESENTATION OF CHART]
DATE APP S&P RUSSELL
1989 $10,000 $10,000 $10,000
1990 $9,902 $9,922 $ 8,554
1991 $13,164 $12,945 $12,549
1992 $14,930 $13,932 $14,580
1993 $16,115 $15,336 $16,992
1994 $14,763 $15,539 $16,812
1995 $18,330 $21,378 $22,142
1996 $22,877 $26,266 $26,358
1997 $29,315 $34,077 $33,530
*Statistics represent past performance which is not indicative of future
results. The S&P 500 is a broad market-weighted index dominated by blue-chip
stocks. The Russell 2500 Index measures the performance of small and mid-sized
companies. All indexes are unmanaged and returns include reinvested dividends.
An investor cannot invest directly in an index.
TEN LARGEST HOLDINGS
as of September 30, 1997
1 NORTHERN TRUST CORP.
Chicago-based bank holding company
2 ROUSE CO.
Retail mall developer
3 HASBRO, INC.
World's largest toy manufacturer
4 MBIA, INC.
Leading insurer of municipal bonds
5 SAFETY-KLEEN
World's largest recycler of automotive and hazardous and non-hazardous
fluids
6 FIRST BRANDS CORP.
Manufacturer and marketer of consumer products for home and automobile
markets
7 SPECIALTY EQUIPMENT
Manufacturer of commercial and institutional food service equipment
8 LEGGETT & PLATT, INC.
Specializes in manufacturing and marketing components for the home
furnishing industry and diversified markets
9 CENTURY TELEPHONE ENTERPRISES
Diversified, independent telecommunications company
10 HARTE-HANKS COMMUNICATIONS
Diversified communications company
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ARIEL GROWTH FUND
SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 1997
Number COMMON STOCKS--91.46% Cost Market Value
of Shares
ADVERTISING--2.95%
66,500 Omnicom Group, Inc. $954,683 $4,837,875
--------- ----------
BUSINESS SERVICES--4.00%
135,100 Ecolab, Inc. 1,664,870 6,560,794
--------- ----------
CONSUMER PRODUCTS--7.04%
43,000 Clorox Co. 835,737 3,187,375
287,000 First Brands Corp. 4,451,490 7,677,250
40,620 Oil-Dri Corporation of
America 690,540 688,001
--------- ----------
5,977,767 11,552,626
--------- ----------
DIVERSIFIED OPERATIONS--3.14%
189,100 Whitman Corp. 4,549,663 5,152,975
--------- ----------
12
<PAGE>
Number COMMON STOCKS--91.46% (cont) Cost Market Value
of Shares
ENTERTAINMENT & LEISURE--4.64%
270,900 Hasbro, Inc. $4,346,160 $7,619,062
---------- ----------
ENVIRONMENTAL--4.40%
301,350 Safety-Kleen Corp. 4,758,938 7,213,566
--------- ----------
FINANCIAL SERVICES--11.90%
60,600 MBIA, Inc. 3,565,557 7,601,513
134,000 Northern Trust Corp. 2,374,339 7,922,750
59,400 T. Rowe Price Associates 228,741 3,994,650
--------- ----------
6,168,637 19,518,913
--------- ----------
FOOD & RESTAURANTS--4.66%
193,933 Bob Evans Farms, Inc. 2,305,055 3,684,727
164,500 McCormick & Co., Inc. 3,588,985 3,958,281
--------- ----------
5,894,040 7,643,008
--------- ----------
FURNITURE & FURNISHINGS--9.43%
264,100 Interface, Inc., Class A 3,989,788 7,691,912
102,600 Leggett & Platt, Inc. 1,071,207 4,572,113
60,090 Miller (Herman), Inc. 500,722 3,214,815
--------- ----------
5,561,717 15,478,840
--------- ----------
HEALTH CARE--2.20%
66,100 Allergan, Inc. $1,807,505 $2,391,994
30,400 Bergen Brunswig Corp., Class A 349,050 1,227,400
--------- ----------
2,156,555 3,619,394
--------- ----------
INDUSTRIAL--5.37%
73,400 Brady (WH) Co. 1,625,350 2,293,750
389,400 Specialty Equipment Cos., Inc.* 4,659,801 6,522,450
--------- ----------
6,285,151 8,816,200
--------- ----------
INSURANCE--0.62%
27,200 Arthur J. Gallagher & Co. 908,305 1,013,200
--------- ----------
MISCELLANEOUS--2.39%
89,100 Century Telephone Enterprises 2,947,400 3,920,400
--------- ----------
NEWSPAPERS--9.82%
627,110 American Media, Inc., Class A* 5,791,957 5,330,435
104,000 Central Newspapers, Inc., Class A 1,731,540 7,722,000
92,800 Harte-Hanks Communications 1,167,049 3,056,600
--------- ----------
8,690,546 16,109,035
--------- ----------
13
<PAGE>
Number COMMON STOCKS--91.46% (cont) Cost Market Value
of Shares
OFFICE & BUSINESS EQUIPMENT--4.46%
134,620 General Binding Corp. $1,968,983 $4,021,772
143,900 Hunt Mfg. Co. 1,916,478 3,291,713
--------- ----------
3,885,461 7,313,485
--------- ----------
PACKAGING--3.25%
223,000 Shorewood Packaging Corp.* 2,269,493 5,324,125
--------- ----------
PRINTING & PUBLISHING--3.75%
247,200 Golden Books* 2,789,785 2,750,100
84,400 Lee Enterprises 2,122,053 2,394,850
72,100 Thomas Nelson, Inc. 841,584 1,000,388
--------- ----------
5,753,422 6,145,338
--------- ----------
REAL ESTATE--4.40%
232,900 Rouse Co.* 3,095,958 7,219,900
--------- ----------
RETAILING--3.04%
187,000 Longs Drug Stores, Inc. 3,312,291 4,990,562
--------- ----------
Total Common Stocks 79,181,057 150,049,298
---------- -----------
Principal REPURCHASE Cost Market Value
Amount AGREEMENTS--8.95%
$14,690,947 State Street Bank & Trust
Company Repurchase Agreement,
4.75%, dated 9/30/97, repurchase
price $14,692,877, maturing
10/1/97 (collateralized by U.S.
Treasury Bond, 6.125%, 3/31/98) $14,690,947 $14,690,947
----------- -----------
Total Repurchase Agreements 14,690,947 14,690,947
----------- -----------
Total Investments--100.41% $93,872,004 164,740,245
-----------
-----------
Liabilities, less
Cash and Other Assets--(0.41)% (674,784)
------------
NET ASSETS--100.00% $164,065,461
------------
------------
*Non-income producing
The accompanying notes are an integral part of the financial statements.
14
<PAGE>
ARIEL APPRECIATION FUND
SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 1997
Number COMMON STOCKS--93.20% Cost Market Value
of Shares
ADVERTISING--3.13%
80,150 Omnicom Group, Inc. $1,565,730 $5,830,912
---------- -----------
BUSINESS SERVICES--2.39%
64,800 Ecolab, Inc. 1,601,491 3,146,850
41,900 Equifax, Inc. 280,470 1,317,231
---------- -----------
1,881,961 4,464,081
---------- -----------
CHEMICALS--1.97%
103,400 Morton International, Inc. 2,467,804 3,670,700
---------- -----------
CONSUMER PRODUCTS--6.28%
58,300 Clorox Co. 2,103,914 4,321,487
276,400 First Brands Corp. 5,790,572 7,393,700
---------- -----------
7,894,486 11,715,187
---------- -----------
DIVERSIFIED OPERATIONS--3.20%
218,800 Whitman Corp. $5,377,779 $5,962,300
---------- -----------
ENTERTAINMENT & LEISURE--7.27%
116,700 Carnival Cruise Lines, Inc. 1,805,622 5,397,375
289,950 Hasbro, Inc. 4,678,686 8,154,844
---------- -----------
6,484,308 13,552,219
---------- -----------
ENVIRONMENTAL--3.99%
310,300 Safety-Kleen Corp. 4,730,595 7,427,806
---------- -----------
FINANCIAL SERVICES--14.00%
62,000 MBIA, Inc. 4,053,446 7,777,125
66,370 MBNA Corp. 462,809 2,687,985
166,200 Northern Trust Corp. 3,482,478 9,826,575
86,400 T. Rowe Price Associates 1,251,750 5,810,400
---------- -----------
9,250,483 26,102,085
---------- -----------
FOOD & RESTAURANTS--3.58%
115,400 Bob Evans Farms, Inc. 2,258,483 2,192,600
186,155 McCormick & Co., Inc. 4,280,472 4,479,355
---------- -----------
6,538,955 6,671,955
---------- -----------
15
<PAGE>
Number COMMON STOCKS--93.20% (cont) Cost Market Value
of Shares
FURNITURE & FURNISHINGS--6.36%
153,860 Leggett & Platt, Inc. $1,876,028 $6,856,386
93,600 Miller (Herman), Inc. 1,289,086 5,007,600
---------- -----------
3,165,114 11,863,986
---------- -----------
HEALTH CARE--4.96%
90,400 Allergan, Inc. 2,935,845 3,271,350
51,333 Bergen Brunswig Corp., Class A 648,466 2,072,570
91,000 Sybron Corp.* 1,050,861 3,907,313
---------- -----------
4,635,172 9,251,233
---------- -----------
INDUSTRIAL--6.39%
155,700 Brady (WH) Co. 3,303,191 4,865,625
421,100 Specialty Equipment Cos., Inc.* 5,469,010 7,053,425
---------- -----------
8,772,201 11,919,050
---------- -----------
INSURANCE--0.77%
34,500 Arthur J. Gallagher & Co. 1,156,293 1,285,125
4,190 Choicepoint, Inc.* 33,284 156,601
---------- -----------
1,189,577 1,441,726
---------- -----------
MISCELLANEOUS--3.46%
146,600 Century Telephone Enterprises 4,617,027 6,450,400
---------- -----------
NEWSPAPERS--6.72%
61,300 Central Newspapers, Inc.,
Class A $2,995,079 $4,551,525
187,375 Harte-Hanks Communications 2,239,400 6,171,664
34,000 Tribune Co. 863,186 1,812,625
---------- -----------
6,097,665 12,535,814
---------- -----------
OFFICE & BUSINESS
EQUIPMENT--3.49%
129,305 General Binding Corp. 2,131,766 3,862,987
31,900 Pitney-Bowes, Inc. 1,103,507 2,653,681
---------- -----------
3,235,273 6,516,668
---------- -----------
PACKAGING--3.24%
252,810 Shorewood Packaging Corp.* 2,666,047 6,035,839
---------- -----------
PRINTING & PUBLISHING--4.27%
98,500 Houghton Mifflin Co. 1,939,390 3,718,375
95,100 Lee Enterprises 2,427,850 2,698,463
111,600 Thomas Nelson, Inc. 1,274,272 1,548,450
---------- -----------
5,641,512 7,965,288
---------- -----------
REAL ESTATE--4.50%
270,900 Rouse Co.* 3,064,362 8,397,900
---------- -----------
16
<PAGE>
Number COMMON STOCKS--93.20% (cont) Cost Market Value
of Shares
RETAILING--3.23%
225,840 Longs Drug Stores, Inc. $4,114,765 $6,027,105
---------- -----------
Total Common Stocks 93,390,816 173,802,254
---------- -----------
Principal REPURCHASE
Amount AGREEMENTS--7.24%
$13,504,980 State Street Bank & Trust
Company Repurchase
Agreement, 4.75%, dated
9/30/97, repurchase price
$13,506,762, maturing
10/1/97 (collateralized by
U.S. Treasury Bond,
6.125%, 3/31/98) 13,504,980 13,504,980
---------- -----------
Total Repurchase Agreements 13,504,980 13,504,980
---------- -----------
Total Investments--100.44% $106,895,796 187,307,234
------------ -----------
------------ -----------
Liabilities, less Cash
and Other Assets--(0.44)% $(829,128)
NET ASSETS--100.00% $186,478,106
------------
------------
*Non-income producing
The accompanying notes are an integral part of the financial statements.
17
<PAGE>
EQUITY STATISTICAL SUMMARY
<TABLE>
<CAPTION>
ARIEL GROWTH
(UNAUDITED)
Earnings Per Share
----------------------------
52 - Week
Range 1996 1997 1998 1996 1997 1998 Market
Ticker Price --------------- Actual Estimated Estimated P/E P/E P/E Cap.
Company Symbol 9/30/97 Low High Calendar Calendar Calendar Calendar Calendar Calendar ($MM)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Oil-Dri Corp. of America ODC 16.94 12.75 17.88 0.85 1.09 1.22 19.9 15.5 13.9 110
Hunt Manufacturing Co. HUN 22.88 16.50 24.25 1.31 1.08 1.52 17.5 21.2 15.0 254
Thomas Nelson, Inc. TNM 13.88 8.88 15.25 0.04 0.58 0.65 NM 23.9 21.3 282
American Media, Inc. ENQ 8.50 4.88 9.06 0.14 0.36 0.49 60.7 23.6 17.3 355
Specialty Equipment Cos. SPEQ 16.75 11.00 17.13 1.51 1.42 1.55 11.1 11.8 10.8 370
Shorewood Packaging Corp. SHOR 23.88 16.88 24.13 1.26 1.44 1.65 18.9 16.6 14.5 432
General Binding Corp. GBND 29.88 23.50 33.25 1.60 1.83 2.31 18.7 16.3 12.9 472
Golden Books
Family Entertainment GBFE 11.13 7.88 13.38 (3.06) (0.48) 0.10 NM NM NM 540
Arthur J. Gallagher & Co. AJG 37.25 29.13 37.75 2.58 2.75 2.90 14.4 13.5 12.8 611
W.H. Brady Co. BRCOA 31.25 20.50 31.25 1.33 1.60 1.86 23.5 19.5 16.8 684
Interface, Inc. IFSIA 29.13 16.13 30.63 1.23 1.53 1.94 23.7 19.0 15.0 699
Bob Evans Farms, Inc. BOBE 19.00 12.13 19.06 0.82 1.01 1.20 23.2 18.8 15.8 809
Longs Drug Stores Corp. LDG 26.69 21.31 27.88 1.49 1.45 1.58 17.9 18.4 16.9 1,033
First Brands Corporation FBR 26.75 20.13 29.38 1.62 1.35 1.69 16.5 19.8 15.8 1,073
Harte-Hanks Communications HHS 32.94 24.50 33.00 0.83 1.09 1.58 39.7 30.2 20.8 1,229
Lee Enterprises LEE 28.38 20.75 30.50 1.18 1.37 1.50 24.0 20.7 18.9 1,317
Safety-Kleen Corporation SK 23.94 14.13 26.00 1.05 1.07 1.22 22.8 22.4 19.6 1,396
McCormick & Company, Inc. MCCRK 24.06 22.50 27.00 1.03 1.28 1.45 23.4 18.8 16.6 1,810
Central Newspapers, Inc. ECP 74.25 38.25 76.25 2.31 3.40 3.88 32.1 21.8 19.1 1,871
Bergen Brunswig Corp. BBC 40.38 20.70 45.75 1.49 1.71 1.96 27.1 23.6 20.6 2,035
Allergan Inc. AGN 36.19 25.88 38.13 2.00 1.80 2.05 18.1 20.1 17.7 2,345
Rouse Company RSE 31.00 25.00 32.25 2.17 2.46 2.71 14.3 12.6 11.4 2,384
Herman Miller, Inc. MLHR 53.50 20.50 56.38 1.45 2.02 2.48 36.9 26.5 21.6 2,466
Century Telephone Enterprises CTL 44.00 28.50 44.00 2.14 2.45 2.70 20.6 18.0 16.3 2,658
Whitman Corporation WH 27.25 21.63 27.25 1.38 1.35 1.50 19.7 20.2 18.2 2,769
Ecolab, Inc. ECL 48.56 33.50 49.88 1.71 1.96 2.22 28.4 24.8 21.9 3,147
Hasbro, Inc. HAS 28.13 22.88 31.13 1.52 1.73 1.88 18.5 16.3 15.0 3,572
T. Rowe Price Associates TROW 67.25 32.00 67.88 1.59 2.15 2.50 42.3 31.3 26.9 3,894
Leggett & Platt, Inc. LEG 44.56 29.38 47.75 1.78 2.14 2.43 25.0 20.8 18.3 4,260
MBIA Incorporated MBI 125.44 85.63 129.06 7.22 8.12 9.04 17.4 15.4 13.9 5,595
Omnicom Group, Inc. OMC 72.75 43.25 75.00 2.25 2.70 3.12 32.3 26.9 23.3 5,922
Northern Trust Corp. NTRS 59.13 32.00 59.50 2.20 2.58 2.90 26.9 22.9 20.4 6,604
Clorox Company CLX 74.25 47.50 74.38 2.28 2.54 2.89 32.6 29.2 25.7 7,663
</TABLE>
Note: All Earnings Per Share Numbers Are Fully Diluted. Such Numbers Are
From Continuing Operations And Are Adjusted For Non-Recurring Items.
The Rouse Company Numbers Are Before Depreciation and Deferred
Taxes.
NM = Not Meaningful.
18
<PAGE>
<TABLE>
<CAPTION>
EARNINGS PER SHARE
----------------------------
52 - WEEK
RANGE 1996 1997 1998 1996 1997 1998 MARKET
TICKER PRICE -------------- ACTUAL ESTIMATED ESTIMATED P/E P/E P/E CAP.
COMPANY SYMBOL 9/30/97 LOW HIGH CALENDAR CALENDAR CALENDAR CALENDAR CALENDAR CALENDAR ($MM)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Hunt Manufacturing Co. HUN 22.88 16.50 24.25 1.31 1.08 1.52 17.5 21.2 15.0 254
Thomas Nelson, Inc. TNM 13.88 8.88 15.25 0.04 0.58 0.65 NM 23.9 21.3 282
Specialty Equipment Cos. SPEQ 16.75 11.00 17.13 1.51 1.42 1.55 11.1 11.8 10.8 370
Shorewood Packaging Corp. SHOR 23.88 16.88 24.13 1.26 1.44 1.65 18.9 16.6 14.5 432
General Binding Corp. GBND 29.88 23.50 33.25 1.60 1.83 2.31 18.7 16.3 12.9 472
ChoicePoint, Inc. CPS 37.38 30.75 38.63 1.54 1.75 2.00 24.3 21.4 18.7 542
Arthur J. Gallagher & Co. AJG 37.25 29.13 37.75 2.58 2.75 2.90 14.4 13.5 12.8 611
W.H. Brady Co. BRCOA 31.25 20.50 31.25 1.33 1.60 1.86 23.5 19.5 16.8 684
Bob Evans Farms, Inc. BOBE 19.00 12.13 19.06 0.82 1.01 1.20 23.2 18.8 15.8 809
Longs Drug Stores Corp. LDG 26.69 21.31 27.88 1.49 1.45 1.58 17.9 18.4 16.9 1,033
First Brands Corporation FBR 26.75 20.13 29.38 1.62 1.35 1.69 16.5 19.8 15.8 1,073
Houghton Mifflin Company HTN 37.75 22.63 39.19 1.11 1.50 1.80 34.0 25.2 21.0 1,133
Harte-Hanks Communications HHS 32.94 24.50 33.00 0.83 1.09 1.58 39.7 30.2 20.8 1,229
Lee Enterprises LEE 28.38 20.75 30.50 1.18 1.37 1.50 24.0 20.7 18.9 1,317
Safety-Kleen Corporation SK 23.94 14.13 26.00 1.05 1.07 1.22 22.8 22.4 19.6 1,396
McCormick & Company, Inc. MCCRK 24.06 22.50 27.00 1.03 1.28 1.45 23.4 18.8 16.6 1,810
Central Newspapers, Inc. ECP 74.25 38.25 76.25 2.31 3.40 3.88 32.1 21.8 19.1 1,871
Bergen Brunswig Corp. BBC 40.38 20.70 45.75 1.49 1.71 1.96 27.1 23.6 20.6 2,035
Sybron International Corp SYB 42.94 26.75 43.75 1.41 1.64 2.02 30.5 26.2 21.3 2,065
Allergan Inc. AGN 36.19 25.88 38.13 2.00 1.80 2.05 18.1 20.1 17.7 2,345
Rouse Company RSE 31.00 25.00 32.25 2.17 2.46 2.71 14.3 12.6 11.4 2,384
Herman Miller, Inc. MLHR 53.50 20.50 56.38 1.45 2.02 2.48 36.9 26.5 21.6 2,466
Century Telephone Enterprises CTL 44.00 28.50 44.00 2.14 2.45 2.70 20.6 18.0 16.3 2,658
Whitman Corporation WH 27.25 21.63 27.25 1.38 1.35 1.50 19.7 20.2 18.2 2,769
Ecolab, Inc. ECL 48.56 33.50 49.88 1.71 1.96 2.22 28.4 24.8 21.9 3,147
Hasbro, Inc. HAS 28.13 22.88 31.13 1.52 1.73 1.88 18.5 16.3 15.0 3,572
T. Rowe Price Associates TROW 67.25 32.00 67.88 1.59 2.15 2.50 42.3 31.3 26.9 3,894
Leggett & Platt, Inc. LEG 44.56 29.38 47.75 1.78 2.14 2.43 25.0 20.8 18.3 4,260
Equifax, Incorporated EFX 31.44 26.50 37.19 1.05 1.27 1.50 29.9 24.8 21.0 4,546
Morton International MII 35.38 29.88 44.63 1.27 1.63 1.96 27.9 21.7 18.0 4,793
MBIA Incorporated MBI 125.44 85.63 129.06 7.22 8.12 9.04 17.4 15.4 13.9 5,595
Omnicom Group, Inc. OMC 72.75 43.25 75.00 2.25 2.70 3.12 32.3 26.9 23.3 5,922
Tribune Company TRB 53.31 35.50 54.94 1.97 2.20 2.50 27.1 24.2 21.3 6,547
Northern Trust Corp. NTRS 59.13 32.00 59.50 2.20 2.58 2.90 26.9 22.9 20.4 6,604
Clorox Company CLX 74.25 47.50 74.38 2.28 2.54 2.89 32.6 29.2 25.7 7,663
Pitney Bowes Inc. PBI 83.19 52.50 85.00 3.12 3.55 4.10 26.7 23.4 20.3 12,220
Carnival Corporation CCL 46.25 29.25 47.19 1.95 2.20 2.50 23.7 21.0 18.5 13,796
MBNA Corporation KRB 27.00 14.89 30.58 0.89 1.15 1.41 30.3 23.5 19.1 14,175
</TABLE>
Note: All Earnings Per Share Numbers Are Fully Diluted. Such Numbers Are
From Continuing Operations And Are Adjusted For Non-Recurring Items.
The Rouse Company Numbers Are Before Depreciation and Deferred Taxes.
NM = Not Meaningful.
19
<PAGE>
ARIEL PREMIER BOND
DEAR FELLOW SHAREHOLDER: For the three months ending September 30, 1997, the
Ariel Premier Bond Fund, Institutional Class returned 3.1% and the Ariel Premier
Bond Fund, Investor Class returned 3.0%. The broader bond market as represented
by the Lehman Brothers Aggregate Bond Index gained 3.3% for the same period.
Despite a challenging quarter, it is worth noting that for the trailing one-year
period ending September 30, the Institutional Class continues to outpace the
average high-quality bond fund as defined by Morningstar, Inc. Morningstar's
PRINCIPIA ranks the Ariel Premier Bond Fund, Institutional Class within the top
third of its high-quality bond fund objective, with a trailing one-year return
through September 30 ranking 66 out of 245 funds.
The Fund benefitted from the strong performance of the asset-backed securities
which are overweighted and comprise roughly one-fourth of the portfolio.
However, our conservative duration posture continues to hold us back relative to
the broad bond market given continued optimism for low inflation. Indeed, market
investors have grown so optimistic that instead of economic growth, the
inflation outlook has had the dominant influence over bond yields. Yields fell
significantly in the third quarter despite expectations for growth in excess of
3%. It is our view that this prevailing sentiment will likely be disappointed
over the next several quarters. Today's optimism is founded in recent and
unusual trends in inflation, which continues to decline even as the economy
thrives, defying traditional economic relationships.
We believe, however, the decline in core inflation since early 1995 is largely
attributable to three sources: changes in methodology by the Bureau of Labor
Statistics, the adjustment in medical inflation to managed care from
fee-for-services, and falling import prices reflecting weak foreign economies.
Once we account for these factors, the behavior of inflation appears a little
less benign. We are convinced the effect of these temporary factors will wane in
the coming months and traditional economic relationships will once again
reassert themselves into 1998. With this conviction, we maintain a short
duration in anticipation yields will need to rise when it becomes evident that
inflation can indeed increase and the Federal Reserve will need to slow economic
growth to contain price pressures.
Caution is the common thread woven through all of our portfolio management
decisions. With the current low yields, we continue to closely monitor the
prepayment risk of our mortgage securities by emphasizing discount issues.
Additionally, we have kept corporate exposure low as spreads are generally very
narrow and thus offer little compensation for added credit risk. Additionally,
we continue to emphasize the asset-backed market as the primary vehicle to
enhance income. The collateral is primarily AAA-rated issues.
As always, we are grateful for the opportunity to serve you and welcome any
questions or comments you might have.
Sincerely,
/s/ John W. Rogers, Jr. /s/ Kenneth R. Meyer
John W. Rogers, Jr. Kenneth R. Meyer
President Executive Vice President
Ariel Capital Management, Inc. Lincoln Capital Management Company
20
<PAGE>
ARIEL PREMIER BOND FUND
Institutional Class Inception
October 1, 1995
Investor Class Inception
February 1, 1997
AVERAGE ANNUAL TOTAL RETURN AS OF SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
3Q97 1 Year Life of Fund
- --------------------------------------------------------------------------------
ARIEL PREMIER BOND FUND, INST. CL. 3.1% +9.3% +6.6%
ARIEL PREMIER BOND FUND, INV. CL. 3.0% N/A +5.7%
ARIEL PREMIER BOND FUND PORTFOLIO COMPOSITION
[EDGAR REPRESENTATION OF CHART]
Mortgage-Backed 19.2%
Commercial Paper 16.2%
Corporate 6.8%
Other Assets & Cash 2.1%
Government & Agency 30.4%
Asset-Backed 25.3%
LEHMAN AGGREGATE BOND INDEX PORTFOLIO COMPOSITION
[EDGAR REPRESENTATION OF CHART]
Mortgage-Backed 29.8%
Corporate 19.2%
Asset-Backed 1.0%
Government & Agency 50.5%
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTED IN ARIEL PREMIER BOND FUND,
INV. CL. AND COMPARABLE INDICES*
[EDGAR REPRESENTATION OF CHART]
ARIEL PREMIER
DATE BOND FUND, INV. CL. LEHMAN AGGREGATE
Feb-97 $10,000 $10,000
Mar-97 $ 9,930 $ 9,914
Apr-97 $10,020 $10,062
May-97 $10,060 $10,158
Jun-97 $10,285 $10,279
Jul-97 $10,518 $10,558
Aug-97 $10,443 $10,467
Sep-97 $10,573 $10,622
COMPARISON OF CHANGE IN VALUE OF $1,000,000 INVESTED IN ARIEL PREMIER BOND
FUND, INST. CL. AND COMPARABLE INDICES*
[EDGAR REPRESENTATION OF CHART]
ARIEL PREMIER
DATE BOND FUND, INST. CL. LEHMAN AGGREGATE
Oct-95 $1,000,000 $1,000,000
Dec-95 $1,035,122 $1,042,614
Mar-96 $1,009,187 $1,024,120
Jun-96 $1,018,867 $1,029,953
Sep-96 $1,039,607 $1,048,996
Dec-96 $1,087,709 $1,081,467
Mar-97 $1,063,762 $1,074,420
Jun-97 $1,101,562 $1,113,997
Sep-97 $1,136,857 $1,151,139
ARIEL PREMIER BOND FUND SEEKS TO MAXIMIZE TOTAL RETURN THROUGH A COMBINATION OF
INCOME AND CAPITAL APPRECIATION BY INVESTING IN HIGH-QUALITY FIXED INCOME
SECURITIES. THE FUND MAY INVEST IN INVESTMENT-GRADE BONDS INCLUDING U.S.
GOVERNMENT (AND GOVERNMENT AGENCY) SECURITIES, CORPORATE BONDS, MORTGAGE-RELATED
SECURITIES AND ASSET-BACKED SECURITIES. UNDER NORMAL CONDITIONS, AT LEAST 80% OF
THE FUND'S ASSETS WILL BE INVESTED IN FIXED INCOME SECURITIES RATED A OR BETTER
BY THE RECOGNIZED RATING AGENCIES. ARIEL PREMIER BOND FUND WILL NOT INVEST IN
"JUNK BONDS" OR OTHER LOW-RATED SECURITIES.
*Statistics represent past performance which is not indicative of future
results. The Lehman Brothers Aggregate Bond Index is composed of securities from
Lehman Brothers Government/Corporate Bond Index, Mortgage-Backed Securities
Index, and the Asset-Backed Securities Index. Total return comprises price
appreciation/depreciation and income as a percentage of the original investment.
An investor cannot invest directly in an index.
21
<PAGE>
ARIEL PREMIER BOND FUND
SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 1997
Par Value ASSET-BACKED SECURITIES--25.26% Cost Market Value
$2,000,000 American Express, 971A,
6.40%, 4/15/05 $1,999,690 $2,009,380
1,000,000 Associates Manufactured Housing,
972A-3, 6.275%, 3/15/28 999,701 1,000,000
470,000 Capital Equipment Receivables
Trust, 961A4, 6.28%, 6/15/00 469,911 472,167
70,000 Circuit City Credit Card,
1995-1A, 6.375%, 8/15/05 69,171 70,436
800,000 First Omni, 96-AA, 6.65%, 9/15/03 807,083 811,680
2,250,000 Fleetwood, 97BA, 6.40%, 5/15/13 2,246,841 2,256,323
60,000 Green Tree Financial, 1995-1 A5,
8.40%, 6/15/25 65,885 63,045
1,450,000 J.C. Penney Master Credit Card Trust,
1990-C1, 9.625%, 6/30/00 1,561,888 1,564,231
2,500,000 MBNA Master Credit Card, 95DA,
6.05%, 11/15/02 2,489,898 2,498,400
1,480,664 Merrill Lynch Mortgage Investors, Inc.,
1995-C2-A1, Floating Rate, 6/15/21 1,500,800 1,505,420
1,170,000 Metris, 96-1A, 6.45%, 2/20/02 1,177,528 1,181,864
300,000 The Money Store, 1996-1 A3,
6.85%, 12/20/02 299,961 305,892
$550,000 The Money Store, 1997-A A3,
6.675%, 4/15/12 $549,832 $555,648
300,000 The Money Store, 1996-B A6,
7.38%, 5/15/17 299,954 307,470
200,000 Olympic Auto Receivables,
1995-EA4, 5.85%, 3/15/01 198,242 200,118
1,440,000 Prime, 95-1A, 6.75%, 11/15/05 1,446,561 1,466,150
350,000 Private Label Credit Card,
1994-2A, 7.80%, 9/20/03 356,991 357,945
430,000 Salomon Brothers, 96LB3, 6.875%,
10/25/26 429,974 436,643
45,000 Sears Credit Account, 96-1A,
6.20%, 2/16/06 44,156 44,964
440,000 Sears Credit Account, 96-2A,
6.50%, 10/15/03 437,871 443,080
2,005,000 Sears Credit Account, 96-4A,
6.45%, 10/16/06 2,000,926 2,024,850
420,000 Standard Credit Card Master -
Citibank, 94-4A, 8.25%, 11/7/03 445,147 452,071
2,300,000 Standard Credit Card Master -
Citibank, 951A, 8.25%, 1/7/07 2,504,414 2,539,177
1,400,000 Team Fleet Financial Co.,
97-1A, 7.35%, 5/15/03 1,399,096 1,439,928
300,000 UCFC, 96 CA 3, 7.15%,
12/15/13 299,955 306,564
1,880,000 World Financial, 96-A,
6.70%, 2/15/04 1,889,527 1,908,858
22
<PAGE>
Par Value ASSET-BACKED SECURITIES--25.26%(cont) Cost Market Value
$2,265,156 World Omni Auto Lease,
1996-AA1, 6.30%, 6/25/02 $2,269,348 $2,271,385
400,000 World Omni Auto Lease,
1996-BA3, 6.25%, 11/15/02 399,402 400,668
---------- ----------
Total Asset-Backed Securities 28,659,753 28,894,357
---------- ----------
CORPORATE DEBT--6.82%
275,000 Bank of America II, 8.0%, 12/15/26 271,240 283,250
275,000 J.C. Penney Co., 7.625%, 3/1/97 269,473 280,844
95,000 JP Morgan Capital, 7.54%, 1/15/27 95,000 93,931
1,400,000 Phillip Morris, 7.125%, 8/15/02 1,390,302 1,424,500
1,879,782 Railcar Leasing LLC, 6.75%,
7/15/06 1,879,054 1,905,629
1,552,362 Railcar Trust, 1992-1A, 7.75%,
6/1/04 1,618,185 1,627,543
340,000 US West Capital Funding, Inc.,
6.95%, 1/15/37 339,322 345,950
1,000,000 Safeco Capital Trust, 8.072%,
7/15/37 1,000,000 1,015,000
805,000 Suntrust Cap II, 7.90%,
6/15/27 809,704 824,119
---------- ----------
Total Corporate Debt 7,672,280 7,800,766
---------- ----------
Par Value U.S. GOVERNMENT AGENCIES--25.07% Cost Market Value
MORTGAGE-BACKED SECURITIES--19.16%
$1,466,052 Federal Home Loan Mortgage
Corp. (FHLMC), 6.50%, 11/1/25 $1,384,143 $1,439,473
3,975,531 FHLMC, 6.50%, 2/1/26 3,847,440 3,891,051
5,521,055 FHLMC Gold, 6.50%, 3/1/26 5,222,277 5,393,353
423,209 FHLMC Gold, 6.50%, 4/1/26 390,427 413,289
742,015 FHLMC Gold, 6.50%, 5/1/26 684,532 724,766
43,889 Federal National Mortgage
Association (FNMA),
7.00%, 10/1/23 43,142 43,875
1,826,452 FNMA, 6.50%, 4/1/24 1,741,892 1,785,923
436,322 FNMA, 7.00%, 5/1/24 428,890 436,183
463,485 FNMA, 6.50%, 11/1/25 425,736 452,621
1,508,246 FNMA, 6.50%, 1/1/26 1,462,249 1,471,475
6,017,909 FNMA, 6.50%, 5/1/26 5,673,165 5,871,192
---------- ----------
21,303,893 21,923,201
---------- ----------
OTHER AGENCY ISSUES--5.91%
2,455,000 FNMA, 6.85%, 5/17/20 2,431,274 2,485,687
250,000 Government Trust Certificate,
Aid Israel, 5.70%, 2/15/03 249,295 242,812
1,746,022 Government Trust Certificate,
Israel Trust, Series 2E, 9.40%,
5/15/02 1,859,953 1,844,235
1,101,779 Pemex Exp Trust, 7.66%, 8/15/01 1,133,202 1,135,229
23
<PAGE>
Par Value U.S. GOVERNMENT AGENCIES--25.07% Cost Market Value
OTHER AGENCY ISSUES--5.91% (CONT)
$630,000 Resolution Funding Corporation,
8.125%, 10/15/19 $696,569 $741,989
245,000 Resolution Funding Corporation,
8.875%, 7/15/20 304,042 310,709
---------- ----------
6,674,335 6,760,661
---------- ----------
Total U.S. Government Agencies 27,978,228 28,683,862
---------- ----------
U.S. GOVERNMENT OBLIGATIONS--24.46%
425,000 U.S. Treasury Bond,
11.75%, 11/15/14 607,893 616,675
12,735,000 U.S. Treasury Bond,
8.125%, 8/15/19 14,723,350 15,140,132
2,660,000 U.S. Treasury Note,
5.625%, 11/30/98 2,640,859 2,657,207
8,825,000 U.S. Treasury Note,
7.50%, 10/31/99 9,044,344 9,104,223
450,000 U.S. Treasury Note,
6.50%, 5/15/05 445,642 459,414
---------- ----------
Total U.S. Government
Obligations 27,462,088 27,977,651
---------- ----------
Par Value COMMERCIAL PAPER--16.16% Cost Market Value
$1,550,000 Ameritech Capital Corp.,
5.50%, 10/09/97 $1,548,106 $1,548,106
1,500,000 Bell Atlantic Financial,
5.50%, 10/21/97 1,495,417 1,495,417
1,500,000 Cargill Incorporated, Inc.,
5.48%, 11/18/97 1,489,040 1,489,040
2,000,000 Ford Motor Credit Co.,
5.48%, 10/14/97 1,996,042 1,996,042
1,500,000 Gannett Company,
5.48%, 10/17/97 1,496,347 1,496,347
1,500,000 General Electric Capital
Corp., 5.50%, 10/09/97 1,498,167 1,498,167
2,000,000 IBM Credit Corp.,
5.50%, 10/21/97 1,993,889 1,993,889
2,000,000 International Lease Financing,
5.48%, 10/14/97 1,996,042 1,996,042
2,000,000 Metlife Funding, 5.49%,
10/15/97 1,995,730 1,995,730
1,500,000 National Rural Utilities,
5.50%, 10/23/97 1,494,958 1,494,958
1,500,000 Norwest Corporation,
5.49%, 11/14/97 1,489,935 1,489,935
---------- ----------
Total Commercial Paper 18,493,673 18,493,673
---------- ----------
24
<PAGE>
Principal REPURCHASE AGREEMENTS--1.42% Cost Market Value
Amount
$1,624,488 State Street Bank & Trust
Company Repurchase
Agreement, 4.75%, dated
9/30/97, repurchase price
$1,624,622, maturing
10/1/97 (collateralized by
U.S. Treasury Bond, 6.125%,
3/31/98) $1,624,488 $1,624,488
---------- ----------
Total Repurchase
Agreements 1,624,488 1,624,488
---------- ----------
Total Investments--99.19% $111,890,510 113,474,797
------------
------------
Other Assets and Cash
less Liabilities--0.81% 924,414
----------
NET ASSETS--100.00% $114,399,211
------------
------------
The accompanying notes are an integral part of the financial statements.
25
<PAGE>
<TABLE>
<CAPTION>
Statement of Assets & Liabilities
September 30, 1997
GROWTH APPRECIATION PREMIER
FUND FUND BOND FUND
---- ---- ---------
<S> <C> <C> <C>
ASSETS:
Investments in securities, at value
(cost $93,872,004, $106,895,796
and $111,890,510, respectively) $164,740,245 $187,307,234 $113,474,797
Cash 22,247 -- --
Dividends and interest receivable 290,210 306,583 1,006,414
Receivable for fund shares issued 10,500 15,500 --
Prepaid and other assets 12,787 12,962 --
------------ ------------ ------------
Total assets 165,075,989 187,642,279 114,481,211
------------ ------------ ------------
LIABILITIES:
Payable for securities purchased 797,105 879,163 --
Accrued management fee 82,470 111,179 43,394
Accrued distribution fee 31,540 36,851 79
Payable for shares redeemed 14,266 11,289 --
Shareholder distributions payable -- -- 38,527
Other liabilities 85,147 125,691 --
------------ ------------ ------------
Total liabilities 1,010,528 1,164,173 82,000
------------ ------------ ------------
NET ASSETS $164,065,461 $186,478,106 $114,399,211
------------ ------------ ------------
------------ ------------ ------------
NET ASSETS CONSIST OF:
Paid-in-capital $78,627,424 $88,581,282 $112,271,361
Undistributed net investment income 296,358 95,385 4,050
Accumulated net realized gain
on investment transactions 14,273,438 17,390,001 539,513
Net unrealized appreciation
on investments 70,868,241 80,411,438 1,584,287
------------ ------------ ------------
Total net assets $164,065,461 $186,478,106 $114,399,211
------------ ------------ ------------
------------ ------------ ------------
Shares outstanding (no par value) 3,954,806 5,533,096
Institutional Class 11,067,707
Investor Class 39,000
Net asset value, offering and redemption
price per share $41.49 $33.70
Institutional Class $10.30
Investor Class $10.29
Statement Of Operations
YEAR ENDED SEPTEMBER 30, 1997
GROWTH APPRECIATION PREMIER
FUND FUND BOND FUND
---- ---- ---------
INVESTMENT INCOME:
Dividends $1,686,750 $1,901,857 $ --
Interest 215,211 244,434 4,486,479
------------ ------------ ------------
Total investment income 1,901,961 2,146,291 4,486,479
------------ ------------ ------------
EXPENSES:
Management fee 838,232 1,151,445 310,927
Distribution fee 322,397 383,815 247
Transfer agent fees and expenses 240,010 285,691 --
Printing and postage expense 79,657 77,734 --
Professional fees 39,686 39,735 --
Federal and state registration fees 24,891 24,890 --
Trustees' fees and expenses 23,564 23,564 --
Custody fees and expenses 14,481 16,106 --
Miscellaneous expenses 22,685 32,903 --
------------ ------------ ------------
Net expenses 1,605,603 2,035,883 311,174
------------ ------------ ------------
NET INVESTMENT INCOME 296,358 110,408 4,175,305
------------ ------------ ------------
REALIZED AND UNREALIZED GAIN:
Net realized gain on investments 14,275,367 18,598,505 570,915
Change in unrealized appreciation
on investments 33,739,637 37,099,202 1,572,509
------------ ------------ ------------
Net gain on investments 48,015,004 55,697,707 2,143,424
------------ ------------ ------------
NET INCREASE IN NET ASSETS
RESULTING FROM
OPERATIONS $48,311,362 $55,808,115 $6,318,729
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
26
<PAGE>
<TABLE>
<CAPTION>
Statement Of Changes In Net Assets
GROWTH FUND APPRECIATION FUND PREMIER BOND FUND
----------- ----------------- -----------------
Year Ended September 30, Year Ended September 30, Year Ended September 30,
1997 1996 1997 1996 1997 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS:
Net investment income $296,358 $660,999 $110,408 $677,489 $4,175,305 $392,150
Net realized gain on investments 14,275,367 7,382,064 18,598,505 8,710,352 570,915 65,835
Change in unrealized
appreciation on investments 33,739,637 9,870,652 37,099,202 15,106,961 1,572,509 11,778
------------ ------------ ------------ ------------ ------------ -----------
Net increase in net assets
resulting from operations 48,311,362 17,913,715 55,808,115 24,494,802 6,318,729 469,763
------------ ------------ ------------ ------------ ------------ -----------
DISTRIBUTIONS TO SHAREHOLDERS:
Net investment income -- (1,659,356) (397,468) (1,152,459) (4,175,319) (389,495)
Capital gains (6,352,876) (15,885,827) (7,316,330) (10,183,833) (93,776) (2,052)
------------ ------------ ------------ ------------ ------------ -----------
(6,352,876) (17,545,183) (7,713,798) (11,336,292) (4,269,095) (391,547)
------------ ------------ ------------ ------------ ------------ -----------
SHARE TRANSACTIONS:
Shares sold 304,618,745 224,715,671 41,438,186 115,542,199 94,148,238 16,322,662
Shares issued to holders in
reinvestment of dividends 5,898,783 16,343,324 7,002,337 10,096,899 4,444,086 143,156
Shares redeemed (298,180,590) (252,610,404) (45,683,940) (146,482,349) (1,609,367) (1,187,414)
------------ ------------ ------------ ------------ ------------ -----------
Net increase (decrease) 12,336,938 (11,551,409) 2,756,583 (20,843,251) 96,982,957 15,278,404
------------ ------------ ------------ ------------ ------------ -----------
TOTAL INCREASE (DECREASE) IN NET ASSETS 54,295,424 (11,182,877) 50,850,900 (7,684,741) 99,032,591 15,356,620
NET ASSETS:
Beginning of period 109,770,037 120,952,914 135,627,206 143,311,947 15,366,620 10,000
------------ ------------ ------------ ------------ ------------ -----------
End of period (includes
undistributed net investment
income of $296,358, $0, $95,385,
$382,445, $4,050 and $4,064,
respectively) $164,065,461 $109,770,037 $186,478,106 $135,627,206 $114,399,211 $15,366,620
------------ ------------ ------------ ------------ ------------ -----------
------------ ------------ ------------ ------------ ------------ -----------
The accompanying notes are an integral part of the financial statements.
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
Financial Highlights
GROWTH FUND
Year Ended September 30,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $30.58 $30.78 $28.84 $30.46 $29.59
Income from investment operations:
Net investment income 0.07 0.18 0.36 0.18 0.73
Net realized and unrealized gains
on investments 12.62 4.24 3.51 0.23 2.81
------ ------ ------ ------ ------
Total from investment operations 12.69 4.42 3.87 0.41 3.54
Distributions to shareholders:
Dividends from net investment
income -- (0.44) (0.23) (0.30) (0.75)
Distributions from capital gains (1.78) (4.18) (1.70) (1.73) (1.92)
------ ------ ------ ------ ------
Total distributions (1.78) (4.62) (1.93) (2.03) (2.67)
------ ------ ------ ------ ------
Net asset value, end of period $41.49 $30.58 $30.78 $28.84 $30.46
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Total return 43.25% 16.28% 14.38% 1.41% 12.54%
Supplemental data and ratios:
Net assets, end of period, in
thousands $164,065 $109,770 $120,953 $149,511 $233,826
Ratio of expenses to average
net assets 1.25% 1.31% 1.37%(a) 1.25% 1.16%
Ratio of net investment income
to average net assets 0.23% 0.57% 1.18%(a) 0.56% 0.72%
Portfolio turnover rate 20% 17% 16% 9% 13%
Average commission rate paid
per share(b) $0.0522 $0.0493 N/A N/A N/A
APPRECIATION FUND
Year Ended September 30,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $24.99 $22.76 $21.82 $21.67 $19.42
Income from investment operations:
Net investment income 0.02 0.13 0.14 0.04 0.06
Net realized and unrealized gains
on investments 10.13 4.07 2.26 0.51 2.27
------ ------ ------ ------ ------
Total from investment operations 10.15 4.20 2.40 0.55 2.33
Distributions to shareholders:
Dividends from net investment
income (0.07) (0.20) (0.06) (0.05) (0.08)
Distributions from capital gains (1.37) (1.77) (1.40) (0.35) --
------ ------ ------ ------ ------
Total distributions (1.44) (1.97) (1.46) (0.40) (0.08)
------ ------ ------ ------ ------
Net asset value, end of period $33.70 $24.99 $22.76 $21.82 $21.67
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Total return 42.33% 19.60% 12.11% 2.56% 12.03%
Supplemental data and ratios:
Net assets, end of period, in
thousands $186,478 $135,627 $143,312 $162,280 $207,065
Ratio of expenses to average
net assets 1.33% 1.36%(a) 1.36%(a) 1.35%(a) 1.37%
Ratio of net investment income
to average net assets 0.07% 0.50%(a) 0.61%(a) 0.17%(a) 0.33%
Portfolio turnover rate 19% 26% 18% 12% 56%
Average commission rate paid
per share(b) $0.0550 $0.0513 N/A N/A N/A
</TABLE>
(a) Net of reimbursements. Without the fee waiver, the ratio of expenses to
average net assets would have been 1.39% for the period ended 1995 for the
Growth Fund and 1.40%, 1.58%, and 1.40%, for the periods ended 1996, 1995
and 1994 for the Appreciation Fund; and the ratio of net investment income
to average net assets would have been 1.16% for the period ended 1995 for
the Growth Fund and 0.46%, 0.39%, and 0.12% for the periods ended 1996,
1995, and 1994 for the Appreciation Fund, respectively.
(b) Disclosure required by the Securities and Exchange Commission beginning
1996.
The accompanying notes are an integral part of the financial statements.
28
<PAGE>
FINANCIAL HIGHLIGHTS (CONT)
PREMIER BOND FUND
-----------------
INSTITUTIONAL CLASS INVESTOR CLASS
February 1, 1997(a)
Year Ended September 30, to
1997 1996 September 30, 1997
---- ---- ------------------
Net asset value, beginning of period $ 9.95 $10.00 $ 10.10
Income from investment operations:
Net investment income 0.52 0.43 0.37
Net realized and unrealized gains
(losses) on investments 0.37 (0.04) 0.19
------- ------ -------
Total from investment operations 0.89 0.39 0.56
Distributions to shareholders:
Dividends from net investment
income (0.52) (0.43) (0.37)
Distributions from capital gains (0.02) (0.01) --
------- ------ -------
Total distributions (0.54) (0.44) (0.37)
------- ------ -------
Net asset value, end of period $ 10.30 $ 9.95 $ 10.29
------- ------ -------
------- ------ -------
Total return 9.26%(b) 3.96% 5.73%(b)
Supplemental data and ratios:
Net assets, end of period, in
thousands $113,998 $15,367 $ 401
Ratio of expenses to average
net assets 0.45% 0.48% 0.85%(c)
Ratio of net investment income
to average net assets 6.05% 5.85% 5.60%(c)
Portfolio turnover rate 218% 423% 218%
(a) Commencement of operations.
(b) Total return is not annualized.
(c) Annualized.
The accompanying notes are an integral part of the financial statements.
29
<PAGE>
NOTES TO THE FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
1. ORGANIZATION
Ariel Growth Fund (doing business as Ariel Investment Trust) (the "Trust") is a
Massachusetts business trust registered under the Investment Company Act of
1940, as amended, as an open-end management investment company. The Growth Fund,
Appreciation Fund and Premier Bond Fund (the "Funds" or "Ariel Mutual Funds")
are diversified portfolios of the Trust. The Premier Bond Fund has an
Institutional Class and an Investor Class. The Investor Class, began February 1,
1997.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Funds in the preparation of their financial statements. The
financial statements have been prepared in accordance with generally accepted
accounting principles which permit management to make certain estimates and
assumptions at the date of the financial statements.
INVESTMENT VALUATION - Securities for which market quotations are readily
available are valued at the most recent closing price. If a closing price is not
reported, equity securities for which reliable bid quotations are available are
valued at the mean between bid and asked prices, and debt securities having a
maturity over 60 days are valued at the yield equivalent as obtained from one or
more market makers for such securities. Short-term securities maturing within 60
days are valued at amortized cost which approximates market. Securities and
assets for which market quotations are not readily available are valued at fair
value as determined in good faith by or under the direction of the Board of
Trustees. The Funds may enter into repurchase agreements with recognized
financial institutions and in all instances hold underlying securities with a
value at least equal to the total repurchase price such financial institutions
have agreed to pay.
FEDERAL INCOME TAXES - No provision for federal income taxes has been made since
the Funds have complied to date with the provisions under Subchapter M of the
Internal Revenue Code available to regulated investment companies.
SECURITIES TRANSACTIONS AND INVESTMENT INCOME - Securities transactions are
accounted for on a trade date basis. Realized gains and losses from securities
transactions are recorded on the identified cost basis. Dividend income is
recorded on the ex-dividend date and interest income is recognized on an accrual
basis.
EXPENSES - The Funds are charged for those expenses that are directly
attributable to each portfolio. Expenses directly attributable to a class of
shares, such as Rule 12b-1 distribution fees, are charged to that class.
Expenses that are not directly attributable to a portfolio are typically
allocated among each portfolio in proportion to their respective net assets.
DISTRIBUTIONS TO SHAREHOLDERS - Dividends from net investment income are
declared and paid at least annually for the Growth Fund and Appreciation Fund
and declared daily and paid monthly for the Premier Bond Fund. Distributions of
net realized capital gains, if any, are declared and paid at least annually.
Distributions to shareholders are determined in accordance with federal income
regulations and are recorded on the ex-dividend date. The character of
distributions made during the year from net investment income or net realized
gain may differ from the characterization for federal income tax purposes due to
differences in the recognition of income, expense and gain items for financial
statement and tax purposes. Where appropriate, reclassifications between net
asset accounts are made for such differences that are permanent in nature.
30
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONT)
3. CAPITAL SHARE TRANSACTIONS
Transactions in shares of capital stock were as follows:
<TABLE>
<CAPTION>
Year Ended September 30, 1997
Growth Fund Appreciation Fund Premier Bond Fund
----------- ----------------- -----------------
Institutional Investor
------------- --------
<S> <C> <C> <C> <C>
Shares sold 8,947,566 1,486,623 9,242,477 40,697
Shares issued to holders in
reinvestment of dividends 184,857 268,901 436,758 716
Shares redeemed (8,766,712) (1,650,759) (156,525) (2,413)
---------- ---------- --------- ------
Net increase 365,711 104,765 9,522,710 39,000
---------- ---------- --------- ------
---------- ---------- --------- ------
Year Ended September 30, 1996
Growth Fund Appreciation Fund Premier Bond Fund
----------- ----------------- -----------------
<S> <C> <C> <C>
Shares sold 7,768,583 5,103,680 1,649,706
Shares issued to holders in
reinvestment of dividends 603,075 458,325 14,370
Shares redeemed (8,712,337) (6,429,578) (120,079)
---------- ---------- ---------
Net increase (decrease) (340,679) (867,573) 1,543,997
---------- ---------- ---------
---------- ---------- ---------
4. INVESTMENT TRANSACTIONS
Purchases and sales of securities, excluding short-term investments and U.S.
government securities, for the year ended September 30, 1997 are summarized
below:
Growth Fund Appreciation Fund Premier Bond Fund
----------- ----------------- -----------------
<S> <C> <C> <C>
Purchases $24,961,544 $28,118,837 $42,880,830
Sales 31,335,531 44,452,376 8,989,171
Purchases and sales of U.S. government securities for the Premier Bond Fund for
the year ended September 30, 1997 were $162,915,116 and $117,371,283, respectively.
At September 30, 1997 gross unrealized appreciation and depreciation of securities
were as follows:
Growth Fund Appreciation Fund Premier Bond Fund
----------- ----------------- -----------------
<S> <C> <C> <C>
Unrealized appreciation $71,371,987 $80,477,321 $1,610,396
Unrealized (depreciation) (503,746) (65,883) (26,109)
----------- ----------- ----------
Net appreciation $70,868,241 $80,411,438 $1,584,287
----------- ----------- ----------
----------- ----------- ----------
</TABLE>
The book and federal income tax basis of securities is the same for the Growth
Fund, Appreciation Fund and Premier Bond Fund. It is management's intention to
distribute future net realized capital gains to the extent that such gains
exceed available federal income tax capital loss carryforwards. For the year
ended September 30, 1997, 100% of dividends paid from net investment income of
the Appreciation Fund qualify for the dividend received deduction available to
corporate shareholders.
5. INVESTMENT ADVISORY AND OTHER TRANSACTIONS WITH AFFILIATES
The Trust has entered into an investment advisory and administrative services
agreement (the "Management Agreement") with Ariel Capital Management, Inc. (the
"Adviser"). Pursuant to the Management Agreement, the Adviser is paid by the
Growth Fund and Appreciation Fund, a monthly fee at the annual rate of 0.65% and
0.75% of the first $500 million of average daily net assets, 0.60% and 0.70% of
the next $500 million of average daily net assets and 0.55% and 0.65% on the
average daily net assets in excess of $1 billion, respectively. The Adviser has
agreed to reimburse each Fund for operating expenses (exclusive of brokerage,
interest, taxes, distribution plan expenses and extraordinary items) exceeding,
on a pro rata basis, 1.50% of the first $30 million of each Fund's average daily
net assets and 1.00% of such assets in excess of $30 million.
31
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NOTES TO FINANCIAL STATEMENTS (CONT)
The Trust has entered into an investment advisory agreement and administrative
services agreement with the Adviser for the Premier Bond Fund. Pursuant to the
agreements, the Fund pays the Adviser an investment advisory fee and
administrative services fee based on the average daily net assets of the
Institutional Class and the Investor Class at the annual rate of 0.35% and
0.10%, and 0.35% and 0.25%, respectively. Fees for these services are reported
as Management Fees on the Statement of Operations. The Adviser pays all of the
Fund's expenses other than 12b-1 fees for the Investor Class, the investment
advisory fee and administrative services fee, the expenses assumed by the
Adviser under the administrative services agreement, interest, taxes, brokerage
commissions and extraordinary expenses.
Lincoln Capital Management Company ("Lincoln Capital"), is the sub-adviser of
the Premier Bond 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.
Pursuant to Rule 12b-1 of the Investment Company Act of 1940, the Trust has
adopted a distribution plan which permits the Growth Fund, Appreciation Fund and
Premier Bond Fund, Investor Class to pay for certain expenses associated with
the distribution of their shares up to 0.30% annually of each Fund's average
daily net asset value. Such expenses are currently limited to an annual rate of
0.25% of each classes' average daily net assets by the Board of Trustees.
Payments have been made to Ariel Distributors, Inc., an affiliate of the
Adviser.
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, 1997
32
<PAGE>
BOARD OF TRUSTEES
BERT N. MITCHELL, C.P.A. Bert is founder, chairman and CEO of Mitchell & Titus,
LLP, the nation's largest minority-owned accounting firm. He holds B.B.A.,
M.B.A. and Honorary Doctorate degrees from the Baruch School of Business of the
City University of New York, where he has also been a member of the accounting
faculty. Bert is also a graduate of the Owner-President Management Program of
the Harvard Business School. Bert is active in community affairs, philanthropy
and politics.
MARIO L. BAEZA Chairman and CEO of Latin America Equity Partners, L.P., Mario
is widely regarded as a preeminent expert in business and legal issues in
Latin America. He received a B.A. from Cornell University and a J.D. from
Harvard Law School, where he later taught.
JAMES W. COMPTON. Jim serves as the President and CEO of the Chicago Urban
League, which has worked to eliminate racial discrimination and segregation
since 1916. He has a B.A. degree from Morehouse College. Jim serves on the
board of directors of Commonwealth Edison Company and Unicom Corp.
WILLIAM C. DIETRICH, C.P.A. Bill is Chief Financial Officer for Streamline
Mid-Atlantic, Inc., a retailer and service company providing home delivery of
groceries, related products and various consumer services directly to the
home. He has a B.A. from Georgetown University. Bill serves on the board and
program staff of the Shalem Institute, an internationally known ecumenical
organization.
ROYCE N. FLIPPIN, JR. Director of program advancement for the Massachusetts
Institute of Technology, Royce is also president of Flippin Associates, a
broad-based consulting firm providing strategic and implementation services in
the management of critical needs for the public and private sectors. He earned
his B.A. from Princeton University and an M.B.A. from Harvard Business School.
Royce is on the board of several corporations and non-profit institutions.
JOHN G. GUFFEY Currently, John is treasurer of Silby, Guffey & Co., Inc., a
venture capital firm investing in early stage companies in the health care
and environmental industries. John has a B.S. from the University of
Pennsylvania's Wharton School. He does volunteer work and holds directorships
with various local and national non-profit organizations.
MELLODY HOBSON As senior vice president and director of marketing, Mellody
oversees the servicing of Ariel Capital Management Inc.'s institutional
clients, as well as the marketing of the Ariel Mutual Funds. She received a
B.A. from Princeton University's Woodrow Wilson School. She serves as a
Director of the Chicago Public Library as well as the Civic Federation of
Chicago. Mellody works with a variety of civic institutions, including those
affiliated with Princeton.
CHRISTOPHER G. KENNEDY Chris is executive vice president of Merchandise Mart
Properties, Inc. which manages, among other prime properties, The Merchandise
Mart; The Washington Design Center; and New York's Decoration and Design
Building. He earned his B.A. from Boston College and his M.B.A. at the J.L.
Kellogg Graduate School of Management at Northwestern University. Chris serves
on the board of directors of the Chicago Convention & Tourism Bureau;
Boston-based Citizens Energy Corp. and Citizens Corp.; and the Greater Chicago
Food Depository.
ERIC T. MCKISSACK, CFA In the capacity of vice chairman and co-chief investment
officer of Ariel Capital Management, Inc., Eric is responsible for co-managing
client and mutual fund portfolios. He received a B.S. in both Management and
Architecture from the Massachusetts Institute of Technology and he earned his
M.B.A. from the University of California at Berkeley. He is also a Chartered
Financial Analyst. Eric serves on a variety of civic and corporate boards.
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