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ARIEL MUTUAL FUNDS
Ariel Fund
Ariel Appreciation Fund
Ariel Premier Bond Fund
Annual Report-September 30, 1999
THE PATIENT INVESTOR [LOGO]
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SHAREHOLDER NEWS
YOUR ACCOUNT STATEMENTS
We are mailing your account statements detailing your distributions for 1999
early this year. These statements provide information about your fund dividends
and capital gains, as well as a record of all your account transactions from
January 1, 1999 through mid-December 1999. This early mailing will give you the
added security of paper documentation prior to the New Year. As always, we will
mail your year-end statements detailing all of your 1999 account transactions in
early January.
ARIEL FUND DISTRIBUTION
At Ariel Mutual Funds, we concentrate on doing one thing and doing it
well-superior stock picking. We seek to maximize returns for our clients by
purchasing stocks when they are out of favor, then selling them for a profit
when they have realized their true value. We maintain a focused approach to
value investing, and our portfolios have held some great success stories over
the years.
Many stocks in the Ariel Fund have performed quite well over the past several
years and were sold in 1999 because they reached our disciplined sell targets.
As such, Ariel Fund's capital gains distribution for 1999 will be higher than
last year's. REMEMBER, TAX-FREE AND TAX-DEFERRED RETIREMENT ACCOUNTS ARE EXEMPT
FROM CAPITAL GAINS TAXES.
Ariel Mutual Funds will make its income and capital gains distributions on
December 15, 1999 to shareholders of record on December 14, 1999. As with all
mutual funds, the net asset value (NAV) of the Ariel Fund will drop by the
amount of the distribution per share the day following the distribution. You
will notice this change in the fund's NAV, which is reported daily in the
newspaper. REMEMBER, YOUR TOTAL ACCOUNT VALUE WILL NOT RISE OR FALL AS A RESULT
OF THE DISTRIBUTION; RATHER, YOU WILL HAVE MORE SHARES OF THE FUND AT A LOWER
PRICE PER SHARE.
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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
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. 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. INVESTING IN SMALL CAP STOCKS MAY BE MORE RISKY AND
MORE VOLATILE THAN INVESTING IN LARGE CAP STOCKS.
TABLE OF CONTENTS
The Patient Investor 2
Company in Focus 6
Company Updates 8
Ariel Equity Funds 10
Schedule of Equity Investments 12
Equity Statistical Summary 16
Ariel Bond Fund 18
Schedule of Bond Investments 20
Statement of Assets & Liabilities 25
Statement of Operations 25
Statement of Changes in Net Assets 26
Financial Highlights 27
Notes to the Financial Statements 29
Report of Independent Auditors 32
Board of Trustees 33
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SLOW AND STEADY WINS THE RACE.-AESOP
THE PATIENT INVEST0R [GRAPHIC]-Registered Trademark-
DEAR FELLOW SHAREHOLDER: For the third quarter ending September 30, 1999, the
small companies that comprise the Ariel Fund fell 6.52%. While not pleasant,
this result was in line with those of the small stocks of the Russell 2000 Index
which lost 6.32% of their value, and even the big names of the Standard & Poor's
500 Index which dropped 6.24%. Moreover, according to mutual fund tracker,
Morningstar, the average small cap value fund declined 7.89%. Unfortunately, the
news goes from bad to worse on the mid-sized end of the market where the Russell
Mid-Cap Index dropped 8.59%; the average mid-cap value fund lost 10.65%
(according to Morningstar); and we witnessed the Ariel Appreciation Fund fall
11.76%.(1)
After a brisk second quarter and its double-digit gains, the stock market
carnage of the last three months was widely linked to rising interest rates and
a long overdue slowdown in corporate profits-which always weakens earnings. The
only securities that managed to escape the pain were those in the volatile
technology sector where boom and bust cycles are customary. A FORTUNE MAGAZINE
headline described this narrow area of market strength as "Nothing but Net"-a
clever twist on the familiar basketball saying and a clear indicator of Internet
leadership.
In characterizing our results, our view is that many stocks in our portfolios
largely fell in sympathy with the environment and were ultimately more affected
by negative market sentiment and industry related issues than questionable
fundamentals. For example, rising rates cast a cloud over the entire financial
services sector during the quarter. Even financial services companies whose
fee-generating businesses have little or no correlation to short term interest
rate cycles-the very ones we favor-were painted (or should we say tainted) with
the same broad brush. And so, we witnessed whole groups of unrelated securities
get lumped together. In the Ariel Appreciation Fund, this included Franklin
Resources (NYSE: BEN), the mutual fund company whose earnings are tied to an
accumulation of investor assets; The Northern Trust Company (OTC: NTRS) whose
profits result from the consistent fees generated by its trust operations; and
MBIA (NYSE: MBI),
(1)PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. THE PRINCIPLE VALUE AND
INVESTMENT RETURNS WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN
REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. FOR THE PERIOD
ENDED SEPTEMBER 30, 1999, THE AVERAGE ANNUAL TOTAL RETURNS OF THE ARIEL FUND
FOR THE ONE-, THREE-, FIVE-, AND TEN-YEAR PERIODS WERE 14.2%, 16.3%, 15.9%
AND 10.6%, RESPECTIVELY. THE ARIEL APPRECIATION FUND'S AVERAGE ANNUAL TOTAL
RETURNS FOR THE ONE-, THREE-, FIVE-, AND SINCE INCEPTION (12/01/89) PERIODS
ENDED SEPTEMBER 30, 1999 WERE 17.0%, 19.9%, 18.2% AND 13.7%, RESPECTIVELY.
2
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the municipal bond insurer whose long-term health is most influenced by the
cities it insures. In the Ariel Fund, the themes were similar. Thus, over the
short term, these predictable and consistent businesses were negatively impacted
by Wall Street's angst, but we are confident that this is a temporary phenomenon
and over longer periods, valuations will be righted in the face of solid
fundamentals.
PORTFOLIO COMINGS AND GOINGS
In the Ariel Fund, we sold our relatively new position in Orion Capital Corp.
(NYSE: OC)-a highly specialized, property and casualty insurer-upon the good
news of its acquisition by the British insurance company, Royal & Sun Alliance
(U.RSA). The $50 per share takeout price represented a 43% premium to our
average cost of $35 per share. After doing so well in this position and having
accumulated a great deal of knowledge about this business niche, we bought
shares in HCC Insurance Holdings, Inc. (NYSE: HCC), another specialized property
and casualty insurer, while stocks in this downtrodden sector continue to sell
at bargain basement prices. Over the course of the quarter, we also eliminated
our holdings in long-time favorite, Ecolab Inc. (NYSE: ECL), based upon our
belief that its shares had finally become fully valued. On a less positive note,
we began reducing our position in carpet tile manufacturer, Interface, Inc.
(OTC: IFSIA) as a result of our concerns about competitive pressures facing the
company.
In the Ariel Appreciation Fund, we realized some profits by lightening up on a
number of core positions including Carnival Corp. (NYSE: CCL), Allergan, Inc.
(NYSE: AGN), Omnicom Group (NYSE: OMC), and the Tribune Company (NYSE: TRB). Our
one new stock during the quarter was Newell-Rubbermaid, Inc. (NYSE: NWL), a
manufacturer of a diverse group of consumer staples that include hardware, home
furnishings, office products and housewares.
THE SEVENTH INNING (EARNINGS) STRETCH
As widely acknowledged, the growth in America's corporate profits has
extended virtually uninterrupted over a longer duration than ever before. As
such, we have witnessed the greatest period of stock market appreciation in
history. Yet, along with these magnificent returns have come equally
grandiose expectations for continued investment success and corporate
prosperity. It is against this "high hopes" backdrop that CEOs are facing one
of their greatest challenges-hitting the ambitious earnings targets set by
Wall Street analysts who presume lofty growth rates will continue forever.
And so, as FORTUNE surmises, " . . . the simplest, most visible, most
merciless measure of corporate success in the 1990s has become this one: DID
YOU MAKE YOUR EARNINGS LAST QUARTER?"
It used to be the only way to really gauge the quarter's success was to compare
earnings to those of the same quarter of the previous year. This twelve-month
period thereby served as an important measure of overall growth. But in today's
environment, year-over-year growth
3
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comparisons have taken a back seat to the here and now. And so, instead of
headlines that report, "Company X up 25% versus last year." We read, "Company X
beats estimates by 1 CENT." Now that Wall Street has adopted this instant
gratification stance, when companies fail to beat expectations for a single
quarter, as BARRON'S reports, "The stock market's punishment . . . has never
been more severe." As proof, BARRON'S offers up corporate behemoths and
long-time Wall Street darlings, Coca-Cola (NYSE: KO) and Gillette (NYSE: G)-both
of which saw their stock prices fall 42% and 48% respectively after they failed
to meet analyst estimates.
Once market psychology adapted to this changed emphasis, when companies reported
their quarter-end numbers and hit the mark, stock prices would surge on the good
news. Then, after we all got used to economic prosperity and a bevy of positive
reports, expectations began to soar. As such, just HITTING the numbers was not
enough-a company had to beat the "whisper numbers" to witness a meaningful move
in stock price. How else is it that no matter the size of the company, big or
small, earnings are always better by just one measly cent? MONEY magazine calls
it "the magic penny" and offers the example of General Electric (NYSE: GE) as a
case in point. Even though the company's revenues are in excess of $100 billion,
the magazine reports that, "on July 8, 1999, GE announced that in its second
quarter it earned 85 CENTS a share, just a penny more than what Wall Street
projected." Statistics from a recent edition of THE NEW YORK TIMES proves this
is not an isolated occurrence. "Of the 311 S&P companies that have reported
earnings for the quarter, 21.5% beat their estimates by one cent." But now a
penny no longer merits a market reaction, which means companies are now shooting
for two.
And so, given the very real prospect of stock price free-fall, the inevitability
of shareholder lawsuits and legions of disgruntled employees with worthless
stock options, corporate titans are desperate not to disappoint. With the
ubiquitous earnings discussions in corporate office suites and boardrooms across
the country, one could even argue that chief executives are spending more time
thinking of creative ways to "manage earnings" than contemplating and
implementing the long-term strategies that ultimately grow business.
Desperate times are said to require desperate measures. To this point, bold
tactics are being employed to deliver earnings. For starters, it is legal to use
pension fund surpluses resulting from fat stock market profits to boost
earnings. This means you have to read the fine print in the General Electric
(NYSE: GE) annual report to know that the 13% growth rate it reported for last
year would have been just 5% had it not been for its pension fund earnings-not
overall business growth as one might expect. This accounting bonanza is not
unlike those that Securities and Exchange Commission Chairman, Arthur Levitt,
has recently condemned. In a speech given last year, he explained, "in a zeal to
satisfy consensus earnings estimates and project a smooth earnings path, wishful
thinking may be winning the day over faithful representation." More
specifically, he zeroed in on a number of dubious practices including improper
revenue recognition, unjustified restructuring charges, and what he calls
"cookie jar reserves"-earnings held back for future use.
4
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In addition to these hidden maneuvers, high profile methods are also utilized
to manipulate earnings reports. Dramatic cost cutting initiatives are one
example. Usually, these come in the form of large-scale layoffs, hiring
freezes, slashed advertising budgets and curtailed research and development
expenditures. Yet, oftentimes it is precisely these quick fixes that hamper
long-term development and growth. On the flip side, there's the big spending
that accompanies the shopping sprees. In other words, acquisitions undertaken
in search of protracted growth. The recent spate suggests that many are ill
advised and are ultimately costing businesses perhaps the highest price they
can pay-their franchise. The beleaguered Mattel (NYSE: MAT) is a case in
point. Confronted with an earnings decline in its coveted Barbie brand,
Mattel execs pursued new growth through acquisition. First, in 1996, they
made an unsuccessful bid for their number one competitor, Hasbro (NYSE: HAS).
Shunned by Hasbro, they bought Tyco Toys where a host of synergies led to
earnings growth. Then in 1998, they must have been frantic for doll-maker,
Pleasant Company, and educational software manufacturer, The Learning
Company, because they paid dearly. According to THE NEW YORK TIMES,
"Typically, toy companies command 1 1/2 to 2 times sales... Mattel, however,
paid $700 million for The Pleasant Company, a business [with] $300 million in
annual revenue. And...$3.8 billion for The Learning Company, which had $850
million in revenue in 1998."
Fast forward to the present where just a few weeks ago Mattel advised Wall
Street it would miss third-quarter earnings estimates by as much as 55%, no
thanks to a substantial revenue shortfall at The Learning Company. Wall Street's
retaliation was swift and severe. Having peaked in mid-1998 at $44 a share,
Mattel stock now languishes at $12. Perhaps worst of all, by her own admission,
Mattel CEO, Jill Barad, says she still does not know the full extent of the
problems at The Learning Company.
Quarter-to-quarter earnings management in hopes of pleasing an insatiable and
shortsighted Wall Street crowd is a losing strategy. Real money is made over
time. As such, the companies that manage with vision and are not tempted by
short-term fixes may take some lumps over the near-term with temporary earnings
shortfalls. Yet, ultimately, these managers will be rewarded for having the
courage to act in the best interest of the long-term health of their business.
We continue to scour the market for this rare breed of excellent business.
As always, we appreciate the opportunity to serve you and welcome any questions
or comments that 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 Fund Ariel Appreciation Fund
THE FUNDS' PORTFOLIO SECURITIES AS OF SEPTEMBER 30, 1999, INCLUDING THE
SECURITIES DISCUSSED IN THIS LETTER, ARE LISTED IN THE SCHEDULE OF INVESTMENTS.
PORTFOLIO HOLDINGS ARE SUBJECT TO CHANGE.
5
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COMPANY
[GRAPHIC]
13403 NORTHWEST FREEWAY
HOUSTON, TX 77040
(713) 690-7300
HCC INSURANCE HOLDINGS, INC. (NYSE: HCC) sells specialized property/casualty
insurance, underwrites for unaffiliated insurance companies, and provides
related services for commercial and individual customers. HCC's products include
direct and reinsurance policies for the aviation, trucking, marine, and offshore
energy industries; property/casualty and health policies; and management
services for commercial and individual customers. The company operates in
Canada, China, Jordan, Turkey, the UK, and the US. Furthermore, the company is
expanding via acquisitions, particularly in the areas of aviation insurance,
employee health plans, and insurance brokerage services.
REASONS FOR RECOMMENDATION
UNIQUE BUSINESS MODEL
HCC is uniquely positioned as an insurance agency, broker and underwriter. This
vertical integration gives HCC control of significant potential revenues. HCC's
strategy is focused on growing profits, not premiums or market share. When
market factors cause insurance prices to fall to marginally profitable levels,
HCC is content to earn fees from agency and brokerage services. Alternatively,
when market conditions are favorable, HCC's insurance operations will underwrite
the risks. HCC's core competency is recognizing when to focus on its agency and
brokerage arm versus its underwriting arm. In addition, HCC has expanded in each
of its segments through careful acquisitions. This disciplined business approach
has allowed HCC to grow throughout the inherent insurance pricing cycles. Since
1992, HCC has grown its book value (the best measure of growth for an insurance
company) at an average annual rate of 20%.
CONSISTENT PROFITABILITY AND POTENTIAL FOR GROWTH
Over the last three years, HCC has achieved average returns on equity (ROE) of
almost 17%. These returns are impressive, especially in light of an estimated
industry ROE of 10% over the same period. Additionally, the returns have been
achieved without any financial leverage. HCC has operated with an underwriting
profit every year since its first year as a
6
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IN FOCUS
public company in 1992. HCC has accomplished this record during a time of
extremely harsh industry conditions, as supply outpaces demand. Eventually,
competitive pressure will ease, and when this occurs, HCC is poised for growth.
Through its agency and broker operations, HCC manages close to $1.25 billion in
insurance premiums. Reduced competition will make this premium much more
profitable driving rapid bottom-line growth.
EXPERIENCED AND RESPECTED MANAGEMENT
Quality management is important for any business, but it is essential for an
insurance company. In HCC's case, we trust that management will protect our
capital as we wait for industry conditions to improve. In fact, CEO Stephan Way
and his management team have continued to profitably grow the business by
astutely underwriting selected risks and expanding its distribution segments.
This is no accident or string of good luck. Mr. Way has over thirty years of
industry experience. His top management comes with excellent resumes from
distinguished companies like Aon, the giant Chicago-based insurance broker. Over
a dozen independent sources vouched for the intelligence, creativity and
integrity that characterize Mr. Way and his team.
VALUATION
Investors deserted the property & casualty insurance sector in 1999.
Year-to-date through September 30th, the Standard & Poor's property-casualty
insurance index was down -28.6%. We seek excellent companies that are
misunderstood or ignored by Wall Street analysts, and we believe HCC is this
kind of great business that will serve our shareholders well over the long-term.
At a recent price of $16 a share, HCC trades at just nine times our estimate of
cash operating earnings for the next twelve months. This price represents only
1.4 times book value and a 38% discount from our private market value (PMV) of
$26. We recommend investors initiate positions.
7
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ORION CAPITAL CORPORATION (NYSE: OC) Ariel's insight into the quality of Orion's
insurance operations was confirmed when British insurer Royal & Sun Alliance
(U.RSA) announced a definitive agreement providing for the acquisition of Orion
at a 23% premium over Orion's previous day's closing price and a 65% premium
from the share price one month prior to the transaction.
[LOGO]
ORION CAPITAL
9 Farm Springs Road
Farmington, CT 06032
(860) 674-6600
Orion's core insurance operations have performed solidly despite the highly
competitive conditions that currently plague other property & casualty insurers.
The company's focus on specialty niches of the market allowed operating margins
at the workers compensation, professional liability, and auto insurance
subsidiaries to stay well above industry averages.
Orion is a great example of value investing at work. Ariel analysts spotted the
company months before its eventual purchase, and we jumped at the opportunity to
invest when the rest of the market misunderstood Orion's strategic
restructuring. Armed with our conviction in Orion's long-term business
prospects, we added to our position as industry fears ran rampant, driving
virtually all property and casulty insurance stocks further down. We are very
pleased the underlying value of the company has been recognized, much to the
benefit of Ariel shareholders.
GRACO INCORPORATED (NYSE: GGG) Graco became a new position in the Ariel Fund
this past spring. The company has a dominant position in niche markets for fluid
handling and control products. Graco's market position allows it to achieve
exceptional levels of profitability, reinvest in research and development, and
generate significant excess cash flow ($55 million in estimated Owner's Earnings
in 1999). The company is not exceptionally cyclical due to its diverse end
markets, relatively low product price points, and consistent stream of recurring
revenue from parts and accessories. We expect Graco to grow through new product
development, expanding global markets, additional market penetration, and
selective acquisitions.
Graco is not widely followed by Wall Street analysts and as a result, we feel
this Minneapolis-based company remains an undiscovered gem. Operating in a
consolidating industry, the Graco franchise is highly coveted by many of its
larger peers. We have been rewarded quite nicely from our initial purchase when
the stock was selling in the low $20's. Despite its recent appreciation, Graco
still offers excellent value selling at 11 times forward 12 months estimated
cash earnings and just under 7 times cash flow.
[LOGO]
GRACO-Registered Trademark-
4050 Olson Memorial Hwy.
Golden Valley, MN 55422
(612) 623-6000
We recommend investors add to their positions.
8
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UPDATES
THE ROUSE COMPANY (NYSE: RSE) We recently met with management and also attended
a very upbeat, day-long meeting with 70 analysts and portfolio managers. We also
toured several of Rouse's premier properties in the Baltimore/Washington area.
Each of the company's three operating businesses reported positive news. In its
regional mall portfolio, comparable store sales are the strongest in a decade,
occupancy is at record levels, and the pipeline of major expansions and new
projects is brimming. In its office segment, occupancy is also at record levels.
Finally, both of its community developments (Columbia, MD and Summerlin, NV)
continue to perform well with the builders' demand for land outstripping Rouse's
willingness to sell, resulting in steadily rising prices. Management indicated
that the growth rate for the company should rise from the 10% experienced in the
past few years towards 15% for the next five years.
THE ROUSE COMPANY
10275 Little Patuxent Pkwy.
Columbia, MD 21044
(410) 992-6000
Despite all of the good news surrounding the company's operations and future
prospects, the shares remain very inexpensive-selling at just seven times next
year's estimated cash flow. The real estate sector is out of favor on Wall
Street, and many excellent companies are selling at bargain prices. Accordingly,
Rouse's board of directors recently approved a share repurchase authorization
totaling almost 15% of the outstanding shares. Rouse is a company with a proven
record, top tier properties, strong fundamentals, and a skilled and talented
management team. We continue to recommend the shares for long-term investors.
ECOLAB INC. (NYSE: ECL) After an eleven-year relationship with Ecolab and its
management, we sold our holdings in the third quarter. In keeping with our
disciplined sell criteria, we exited the position as the company's share price
reflected its full value. Additionally, we believed the potential for profit
margin improvement had somewhat diminished. We oftentimes remind ourselves that
a high valuation typically translates into much greater downside risk when
fundamentals fail to meet investor expectations.
[LOGO]
ECOLAB
370 Wabasha Street North
St. Paul, MN 55102
(651) 293-2233
If the stock were to decline further from its current level of around $34, we
would consider adding it to our portfolios again. We admire businesses with
strong and sustainable franchises, recurring revenue streams, solid cash flows
and above-average returns on capital. Ecolab continues to meet these
characteristics.
We recommend investors add to positions that offer a more attractive fundamental
value.
[GRAPHIC]
<PAGE>
TEN LARGEST HOLDINGS
as of September 30, 1999
1 CENTRAL NEWSPAPERS, INC.
Leading media company with daily newspapers in Phoenix and Indianapolis
2 ROUSE CO.
Retail mall developer
3 BRADY CORP.
Manufacturer and distributor of niche industrial safety-related products
4 SPECIALTY EQUIPMENT COS.
Manufacturer of commercial and institutional food service equipment
5 LEE ENTERPRISES
Diversified media company
6 BOB EVANS FARMS, INC.
Operator of family-style restaurants and distributor of food products
7 INTERNATIONAL GAME TECHNOLOGY
World's leading supplier of computerized gaming devices
8 MBIA, INC.
Leading insurer of municipal bonds
9 MCCORMICK & CO., INC.
World's largest spice company
10 HERMAN MILLER, INC.
One of the country's largest manufacturers of office furniture
ARIEL FUND
Inception
November 6, 1986
AVERAGE ANNUAL TOTAL RETURN AS OF SEPTEMBER 30, 1999 (assume reinvestment of
dividends and capital gains)
Total return does not reflect a maximum 4.75% sales load charged prior to
7/15/94.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
3rd Quarter YTD 1 Year 3 Year 5 Year 10 Year Life of Fund
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Ariel Fund -6.5% -4.9% +14.2% +16.3% +15.9% +10.6% +13.9%
- -------------------------------------------------------------------------------------------------------------
Russell 2000 Index -6.3% +2.4% +19.1% +8.7% +12.4% +10.9% +11.0%
</TABLE>
[GRAPH]
[EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC]
<TABLE>
<CAPTION>
Ariel Fund Portfolio Composition Russell 2000 Portfolio Composition
<S> <C> <C>
Technology 2.90% 16.70%
Health Care 2.58% 9.3%
Consumer Discretionary & Services 36.51% 17.8%
Consumer Staples 10.50% 2.6%
Integrated Oils -- 0.10%
Other Energy -- 3.3%
Materials & Processing 13.42% 9.7%
Producer Durables 19.38% 8.1%
Autos & Transportation -- 3.6%
Financial Services 9.27% 21.3%
Utilities 2.60% 6.4%
Cash and Other 2.84% 1.1%
</TABLE>
ARIEL FUND SEEKS LONG-TERM CAPITAL APPRECIATION BY INVESTING IN UNDERVALUED
COMPANIES IN CONSISTENT INDUSTRIES THAT SHOW STRONG POTENTIAL FOR GROWTH. 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.
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTED IN ARIEL FUND AND COMPARABLE
INDICES*
[GRAPH]
[EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC]
<TABLE>
<CAPTION>
Ariel Fund S&P 500 Russell 2000
<S> <C> <C> <C>
1986 $10,000 $10,000 $10,000
1987 $11,367 $10,256 $8,860
1988 $15,905 $11,960 $11,065
1989 $19,900 $15,749 $12,863
1990 $16,699 $15,260 $10,354
1991 $22,163 $19,910 $15,122
1992 $24,763 $21,427 $17,906
1993 $26,924 $23,587 $21,292
1994 $25,786 $23,897 $20,904
1995 $30,581 $32,878 $26,849
1996 $37,747 $40,426 $31,279
1997 $51,502 $53,914 $38,274
1998 $56,595 $69,320 $37,300
Sep-99 $53,805 $73,040 $38,185
</TABLE>
*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 2000 Index measures the performance of smaller companies.
All indexes are unmanaged and returns include reinvested dividends. An investor
cannot invest directly in an index.
10
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ARIEL APPRECIATION FUND
Inception
December 1, 1989
AVERAGE ANNUAL TOTAL RETURN AS OF SEPTEMBER 30, 1999 (assume reinvestment of
dividends and capital gains)
Total return does not reflect a maximum 4.75% sales load charged prior to
7/15/94.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
3rd Quarter YTD 1 Year 3 Year 5 Year Life of Fund
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Ariel Appreciation Fund -11.8% -5.2% +17.0% +19.9% +18.2% +13.7%
- -------------------------------------------------------------------------------------------------------------
Russell Mid Cap Index -8.6% +0.9% +19.5% +14.9% +17.5% +14.5%
</TABLE>
[GRAPH]
[EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC]
<TABLE>
<CAPTION>
Ariel Appreciation Fund Portfolio Composition Russell Mid Cap Portfolio Composition
<S> <C> <C>
Technology 1.14% 16.4%
Health Care 6.52% 6.0%
Consumer Discretionary & Services 36.40% 17.2%
Consumer Staples 13.02% 3.9%
Integrated Oils -- 1.9%
Other Energy -- 3.9%
Materials & Processing 9.86% 8.4%
Producer Durables 9.65% 5.3%
Autos & Transportation -- 4.5%
Financial Services 18.05% 18.3%
Utilities 4.26% 12.4%
Cash and Other 1.1% 1.8%
</TABLE>
ARIEL APPRECIATION FUND ALSO PURSUES LONG-TERM CAPITAL APPRECIATION BY
INVESTING IN UNDERVALUED FIRMS WITH GROWTH POTENTIAL. LIKE ARIEL 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 FUDN INVESTS IN SMALL AND MIDSIZE
COMPANIES WITH MARKET CAPITALIZATIONS FROM $200 MILLION TO $5 BILLION, WITH
AN EMPHASIS ON MEDIUM CAPITALIZATION (MID CAP) STOCKS.
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTED IN ARIEL FUND AND COMPARABLE
INDICES*
[GRAPH]
[EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC]
<TABLE>
<CAPTION>
Ariel Appreciation Fund S&P 500 Russell Mid Cap
<S> <C> <C> <C>
1989 $10,000 $10,000 $10,000
1990 $9,902 $9,922 $9,006
1991 $13,184 $12,945 $12,744
1992 $14,930 $13,932 $14,826
1993 $16,115 $15,336 $16,947
1994 $14,763 $15,539 $16,592
1995 $18,330 $21,378 $22,308
1996 $22,677 $26,286 $26,547
1997 $31,283 $35,056 $34,247
1998 $37,398 $45,074 $37,705
Sep-99 $35,459 $47,492 $38,027
</TABLE>
*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 Mid Cap 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, 1999
1 HASBRO, INC.
Prominent toy manufacturer
2 CENTURYTEL, INC.
Diversified telecommunications company
3 ROUSE CO.
Retail mall developer
4 WHITMAN CORP.
PepsiCo's largest independent domestic bottler
5 SYBRON INTERNATIONAL CORP.
Principal manufacturer of products for the laboratory and professional
orthodontic and dental markets
6 CENTRAL NEWSPAPERS, INC.
Leading media company with daily newspapers in Phoenix and Indianapolis
7 MBIA, INC.
Leading insurer of municipal bonds
8 MCCORMICK & CO., INC.
World's largest spice company
9 LEE ENTERPRISES
Diversified media company
10 HERMAN MILLER, INC.
One of the country's largest manufacturers of office furniture
11
<PAGE>
ARIEL FUND
SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
Number COMMON STOCKS - 97.16% Cost Market Value
of Shares
<S> <C> <C> <C>
CONSUMER DISCRETIONARY--36.51%
450,533 Bob Evans Farms, Inc. $7,533,726 $9,179,610
304,200 Central Newspapers, Inc., Class A 4,918,306 13,536,900
195,100 Day Runner, Inc.* 2,336,476 1,633,963
269,200 Department 56, Inc.* 8,762,802 6,443,975
14,800 Grey Advertising, Inc. 4,966,732 5,446,400
378,200 Hasbro, Inc. 4,284,019 8,107,662
494,200 International Game Technology* 9,057,597 8,895,600
351,900 Lee Enterprises 9,779,201 9,633,262
281,000 Leggett & Platt, Inc. 2,724,420 5,532,188
242,700 Libbey, Inc. 8,806,015 7,174,819
81,400 True North Communications, Inc. 2,097,738 2,960,925
--------- ---------
65,267,032 78,545,304
---------- ----------
CONSUMER STAPLES--10.50%
247,800 Longs Drug Stores, Inc. 5,354,648 7,403,025
261,000 McCormick & Co., Inc. 6,390,529 8,629,313
460,200 Whitman Corp. 7,564,041 6,557,850
--------- ---------
19,309,218 22,590,188
---------- ----------
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
Number COMMON STOCKS - 97.16% (cont) Cost Market Value
of Shares
<S> <C> <C> <C>
FINANCIAL SERVICES--9.27%
47,300 Arthur J. Gallagher & Co. $1,821,142 $2,518,725
133,600 HCC Insurance Holdings, Inc. 2,186,187 2,246,150
246,600 Horace Mann Educators Corp. 6,799,783 6,365,362
189,000 MBIA, Inc. 7,379,126 8,812,125
--------- ---------
18,186,238 19,942,362
---------- ----------
HEALTH CARE--2.58%
178,000 Wesley Jessen VisionCare, Inc.* 4,686,064 5,551,375
---------- ----------
MATERIALS AND PROCESSING--13.42%
323,700 Brady Corp. 8,067,067 10,358,400
143,900 Hunt Corp. 1,916,478 1,178,181
338,500 Interface, Inc., Class A 2,407,010 1,734,812
456,100 Rouse Co. 9,199,370 10,490,300
377,350 Shorewood Packaging Corp.* 2,849,444 5,117,809
--------- ---------
24,439,369 28,879,502
---------- ----------
PRODUCER DURABLES--19.38%
237,570 General Binding Corp. 4,393,121 4,810,793
110,300 Graco, Inc. 3,003,245 3,619,219
430,900 Hussmann International, Inc. 6,891,049 7,325,300
267,400 IDEX Corp. 6,703,947 7,570,762
357,900 Miller (Herman), Inc. 6,138,750 8,556,047
388,175 Specialty Equipment Cos., Inc.* 4,666,646 9,801,419
--------- ---------
31,796,758 41,683,540
---------- ----------
TECHNOLOGY--2.90%
280,050 Littelfuse, Inc.* 7,133,451 6,231,112
--------- ---------
<CAPTION>
Number COMMON STOCKS - 97.16% (cont) Cost Market Value
of Shares
<S> <C> <C> <C>
UTILITIES--2.60%
137,900 CenturyTel, Inc. $2,064,894 $5,602,188
---------- ----------
Total Common Stocks 172,883,024 209,025,571
----------- -----------
<CAPTION>
Principal REPURCHASE
Amount AGREEMENT-3.58%
<S> <C> <C> <C>
$7,711,150 State Street Bank & Trust
Company Repurchase
Agreement, 4.25%, dated
9/30/1999, repurchase price
$7,712,061, maturing
10/1/1999 (collateralized by
U.S. Treasury Bond, 7.50%,
11/15/2016) 7,711,150 7,711,150
--------- ---------
Total Repurchase Agreement 7,711,150 7,711,150
--------- ---------
Total Investments - 100.74% $180,594,174 216,736,721
------------
------------
Liabilities less Other Assets-(0.74)% (1,591,411)
---------
NET ASSETS-100.00% $215,145,310
------------
------------
</TABLE>
*Non-income producing
The accompanying notes are an integral part of the financial statements.
13
<PAGE>
ARIEL APPRECIATION FUND
SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
Number COMMON STOCKS-98.90% Cost Market Value
of Shares
<S> <C> <C> <C>
CONSUMER DISCRETIONARY--36.40%
339,000 Bob Evans Farms, Inc. $6,772,133 $6,907,125
166,300 Carnival Corp. 1,263,454 7,234,050
311,000 Central Newspapers, Inc., Class A 9,246,338 13,839,500
254,700 Galileo International, Inc. 10,660,921 10,251,675
266,650 Harte-Hanks, Inc. 2,342,964 6,716,247
701,550 Hasbro, Inc. 11,285,231 15,039,478
292,600 Houghton Mifflin Co. 10,279,556 11,886,875
632,900 International Game Technology* 10,558,246 11,392,200
478,400 Lee Enterprises 13,452,510 13,096,200
546,945 Leggett & Platt, Inc. 7,447,654 10,767,980
183,200 Libbey, Inc. 6,323,642 5,415,850
205,800 Newell Rubbermaid, Inc. 6,158,429 5,878,162
45,700 Omnicom Group, Inc. 446,375 3,618,869
128,300 Tribune Co. 2,589,101 6,382,925
--------- ---------
98,826,554 128,427,136
---------- -----------
CONSUMER STAPLES--13.02%
227,472 Clorox Co. 7,929,919 8,700,804
329,440 Longs Drug Stores Corp. 7,637,019 9,842,020
403,155 McCormick & Co., Inc. 10,736,899 13,329,312
987,600 Whitman Corp. 17,018,080 14,073,300
---------- ----------
43,321,917 45,945,436
---------- ----------
<CAPTION>
Number COMMON STOCKS--98.90% (cont) Cost Market Value
of Shares
<S> <C> <C> <C>
FINANCIAL SERVICES--18.05%
70,800 Arthur J. Gallagher & Co. $2,866,301 $3,770,100
438,300 Equifax, Inc. 13,918,574 12,327,188
308,000 Franklin Resources, Inc. 10,484,728 9,471,000
287,200 MBIA, Inc. 13,524,629 13,390,700
422,200 MBNA Corp. 7,101,389 9,631,438
89,700 Northern Trust Corp. 1,855,358 7,489,950
169,600 XL Capital Ltd. 9,650,717 7,632,000
--------- ---------
59,401,696 63,712,376
---------- ----------
HEALTH CARE--6.52%
82,000 Allergan, Inc. 2,645,955 9,020,000
520,800 Sybron International Corp.* 9,490,559 13,996,500
--------- ----------
12,136,514 23,016,500
---------- ----------
MATERIALS AND PROCESSING--9.86%
133,000 Avery Dennison Corp. 8,156,137 7,015,750
138,225 Brady Corp. 2,772,727 4,423,200
369,400 Interface, Inc., Class A 6,182,273 1,893,175
642,400 Rouse Co. 12,403,234 14,775,200
493,915 Shorewood Packaging Corp.* 4,561,712 6,698,722
--------- ---------
34,076,083 34,806,047
---------- ----------
PRODUCER DURABLES--9.65%
227,450 Hussmann International, Inc. 3,421,743 3,866,650
528,400 Miller (Herman), Inc. 10,431,718 12,632,063
91,800 Pitney-Bowes, Inc. 3,780,667 5,594,062
473,000 Specialty Equipment Cos., Inc.* 6,501,376 11,943,250
--------- ----------
24,135,504 34,036,025
---------- ----------
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
Number COMMON STOCKS-98.90% (cont) Cost Market Value
of Shares
<S> <C> <C> <C>
TECHNOLOGY--1.14%
180,325 Littelfuse, Inc.* $4,375,871 $4,012,231
---------- ----------
UTILITIES--4.26%
369,925 CenturyTel, Inc. 5,933,075 15,028,203
--------- ----------
Total Common Stocks 282,207,214 348,983,954
----------- -----------
<CAPTION>
Principal REPURCHASE Cost Market Value
Amount AGREEMENT-0.40%
<S> <C> <C> <C>
$1,400,542 State Street Bank & Trust
Company Repurchase
Agreement, 4.25%, dated
9/30/1999, repurchase price
$1,400,707, maturing
10/1/1999 (collateralized by
U.S. Treasury Bond, 8.875%,
8/15/2017) $1,400,542 $1,400,542
---------- ----------
Total Repurchase Agreement 1,400,542 1,400,542
--------- ---------
Total Investments-99.30% $283,607,756 350,384,496
------------
------------
Other Assets less Liabilities-0.70% 2,456,761
---------
NET ASSETS-100.00% $352,841,257
------------
------------
</TABLE>
*Non-income producing
The accompanying notes are an integral part of the financial statements.
15
<PAGE>
EQUITY STATISTICAL SUMMARY
<TABLE>
<CAPTION>
EARNINGS PER SHARE
ARIEL FUND ----------------------------
(UNAUDITED) 52 - WEEK
RANGE 1998 1999 2000 1998 1999 2000 MARKET
TICKER PRICE ----------------- ACTUAL ESTIMATED ESTIMATED P/E P/E P/E CAP.
COMPANY SYMBOL 9/30/99 LOW HIGH CALENDAR CALENDAR CALENDAR CALENDAR CALENDAR CALENDAR ($MM)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Hunt Corp. HUN 8.19 7.94 15.38 0.80 1.00 1.13 10.2 8.2 7.2 85
Day Runner, Inc. DAYR 8.38 8.38 23.00 1.16 -0.47 0.96 7.2 NM 8.7 100
Interface, Inc. IFSIA 5.13 4.63 14.75 0.87 0.48 0.69 5.9 10.7 7.4 273
General Binding Corp. GBND 20.25 14.50 42.50 1.63 0.66 1.45 12.4 30.7 14.0 319
Shorewood Packaging Corp. SWD 13.56 12.50 20.63 1.08 1.28 1.42 12.6 10.6 9.6 374
Department 56, Inc. DFS 23.94 22.94 37.88 2.45 2.65 3.05 9.8 9.0 7.8 416
Grey Advertising, Inc. GREY 368.00 263.00 408.00 18.98 -4.28 16.94 19.4 NM 21.7 459
Libbey, Inc. LBY 29.56 24.00 33.75 2.31 2.60 2.95 12.8 11.4 10.0 481
Littelfuse, Inc. LFUS 22.25 16.00 25.25 0.86 1.06 1.25 25.9 21.0 17.8 488
Specialty Equipment Cos., Inc. SEC 25.25 18.00 34.13 2.18 2.18 2.15 11.6 11.6 11.7 521
Wesley Jessen VisionCare, Inc. WJCO 31.19 16.13 35.50 1.57 1.88 2.44 19.9 16.6 12.8 539
Graco, Inc. GGG 32.81 19.88 34.88 2.01 2.74 3.04 16.3 12.0 10.8 667
Brady Corp. BRC 32.00 18.50 36.31 1.49 1.89 1.96 21.5 16.9 16.3 722
Bob Evans Farms, Inc. BOBE 20.38 17.88 26.88 1.30 1.50 1.66 15.7 13.6 12.3 804
HCC Insurance Holdings, Inc. HCC 16.81 13.88 25.13 1.41 1.50 1.94 11.9 11.2 8.7 819
IDEX Corp. IEX 28.31 21.63 34.13 1.81 1.84 2.10 15.6 15.4 13.5 837
Hussmann International, Inc. HSM 17.00 11.63 19.38 1.20 1.32 1.49 14.2 12.9 11.4 865
Arthur J. Gallagher & Co. AJG 53.25 34.88 56.50 3.02 3.44 3.77 17.6 15.5 14.1 969
Horace Mann Educators Corp. HMN 25.81 20.25 33.00 1.80 1.73 2.18 14.3 14.9 11.8 1,059
Longs Drug Stores, Inc. LDG 29.88 28.00 44.50 1.64 1.83 2.05 18.2 16.3 14.6 1,174
Lee Enterprises LEE 27.38 21.81 31.50 1.41 1.55 1.77 19.4 17.7 15.5 1,215
International Game Technology IGT 18.00 14.13 24.69 1.33 1.40 1.63 13.5 12.9 11.0 1,622
Rouse Company RSE 23.00 21.13 28.88 2.69 2.99 3.30 8.6 7.7 7.0 1,663
True North Communications, Inc. TNO 36.38 18.81 36.44 1.50 1.71 2.10 24.3 21.3 17.3 1,736
Central Newspapers, Inc. ECP 44.50 27.41 45.63 1.78 2.33 2.70 25.0 19.1 16.5 1,823
Herman Miller, Inc. MLHR 23.91 15.63 27.13 1.62 1.72 1.92 14.8 13.9 12.5 1,933
Whitman Corp. WH 14.25 14.13 25.44 0.61 0.59 0.71 23.4 24.2 20.1 2,020
McCormick & Company, Inc. MKC 33.06 26.63 34.06 1.43 1.68 1.89 23.1 19.7 17.5 2,357
Leggett & Platt, Inc. LEG 19.69 16.88 28.31 1.24 1.42 1.60 15.9 13.9 12.3 3,873
Hasbro, Inc. HAS 21.50 18.67 37.00 1.07 1.48 1.58 20.1 14.5 13.6 4,186
MBIA, Inc. MBI 46.63 46.06 71.88 4.58 4.70 5.30 10.2 9.9 8.8 4,659
CenturyTel, Inc. CTL 40.63 30.04 49.00 1.41 1.66 1.86 28.8 24.5 21.8 5,668
</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.
16
<PAGE>
<TABLE>
<CAPTION>
EARNINGS PER SHARE
ARIEL FUND ----------------------------
(UNAUDITED) 52 - WEEK
RANGE 1998 1999 2000 1998 1999 2000 MARKET
TICKER PRICE ----------------- ACTUAL ESTIMATED ESTIMATED P/E P/E P/E CAP.
COMPANY SYMBOL 9/30/99 LOW HIGH CALENDAR CALENDAR CALENDAR CALENDAR CALENDAR CALENDAR ($MM)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interface, Inc. IFSIA 5.13 4.63 14.75 0.87 0.48 0.69 5.9 10.7 7.4 273
Shorewood Packaging Corp. SWD 13.56 12.50 20.63 1.08 1.28 1.42 12.6 10.6 9.6 374
Libbey, Inc. LBY 29.56 24.00 33.75 2.31 2.60 2.95 12.8 11.4 10.0 481
Littelfuse, Inc. LFUS 22.25 16.00 25.25 0.86 1.06 1.25 25.9 21.0 17.8 488
Specialty Equipment Cos., Inc. SEC 25.25 18.00 34.13 2.18 2.18 2.15 11.6 11.6 11.7 521
Brady Corp. BRC 32.00 18.50 36.31 1.49 1.89 1.96 21.5 16.9 16.3 722
Bob Evans Farms, Inc. BOBE 20.38 17.88 26.88 1.30 1.50 1.66 15.7 13.6 12.3 804
Hussmann International, Inc. HSM 17.00 11.63 19.38 1.20 1.32 1.49 14.2 12.9 11.4 865
Arthur J. Gallagher & Co. AJG 53.25 34.88 56.50 3.02 3.44 3.77 17.6 15.5 14.1 969
Longs Drug Stores, Inc. LDG 29.88 28.00 44.50 1.64 1.83 2.05 18.2 16.3 14.6 1,174
Lee Enterprises LEE 27.38 21.81 31.50 1.41 1.55 1.77 19.4 17.7 15.5 1,215
Houghton Mifflin Company HTN 40.63 30.06 52.50 1.40 1.66 2.96 29.0 24.5 13.7 1,260
International Game Technology IGT 18.00 14.13 24.69 1.33 1.40 1.63 13.5 12.9 11.0 1,622
Rouse Company RSE 23.00 21.13 28.88 2.69 2.99 3.30 8.6 7.7 7.0 1,663
Harte-Hanks, Inc. HHS 25.19 17.38 29.25 0.88 1.03 1.19 28.6 24.5 21.2 1,757
Central Newspapers, Inc. ECP 44.50 27.41 45.63 1.78 2.33 2.70 25.0 19.1 16.5 1,823
Herman Miller, Inc. MLHR 23.91 15.63 27.13 1.62 1.72 1.92 14.8 13.9 12.5 1,933
Whitman Corp. WH 14.25 14.13 25.44 0.61 0.59 0.71 23.4 24.2 20.1 2,020
McCormick & Company, Inc. MKC 33.06 26.63 34.06 1.43 1.68 1.89 23.1 19.7 17.5 2,357
Sybron Corp. SYB 26.88 17.50 30.81 1.02 1.25 1.50 26.3 21.5 17.9 2,789
Galileo International, Inc. GLC 40.25 24.75 59.31 1.86 2.24 2.60 21.6 18.0 15.5 3,816
Leggett & Platt, Inc. LEG 19.69 16.88 28.31 1.24 1.42 1.60 15.9 13.9 12.3 3,873
Equifax, Inc. EFX 28.13 26.75 45.00 1.34 1.55 1.83 21.0 18.1 15.4 4,043
Hasbro, Inc. HAS 21.50 18.67 37.00 1.07 1.48 1.58 20.1 14.5 13.6 4,186
MBIA, Inc. MBI 46.63 46.06 71.88 4.58 4.70 5.30 10.2 9.9 8.8 4,659
CenturyTel, Inc. CTL 40.63 30.04 49.00 1.41 1.66 1.86 28.8 24.5 21.8 5,668
XL Capital Ltd. XL 45.00 41.94 79.50 4.50 4.65 5.25 10.0 9.7 8.6 5,736
Avery Dennison Corp. AVY 52.75 39.38 69.63 2.15 2.50 2.80 24.5 21.1 18.8 5,993
Allergan, Inc. AGN 110.00 53.38 114.75 2.04 2.53 2.98 53.9 43.5 36.9 7,259
Franklin Resources, Inc. BEN 30.56 26.50 45.63 1.86 1.86 2.15 16.4 16.4 14.2 7,706
Newell Rubbermaid, Inc. NWL 28.56 27.00 52.00 1.99 1.67 2.10 14.4 17.1 13.6 8,052
The Clorox Company CLX 38.25 37.56 66.47 1.53 1.56 1.86 25.0 24.5 20.6 9,027
Northern Trust Corp. NTRS 83.50 58.81 100.00 3.04 3.45 3.95 27.5 24.2 21.1 9,308
Tribune Company TRB 49.75 22.38 49.97 1.27 1.51 1.70 39.2 32.9 29.3 11,792
Omnicom Group OMC 79.19 37.00 85.94 1.68 1.96 2.25 47.1 40.4 35.2 14,053
Pitney Bowes, Inc. PBI 60.94 47.13 73.31 2.03 2.30 2.55 30.0 26.5 23.9 16,305
MBNA Corp. KRB 22.81 13.50 33.25 0.97 1.18 1.35 23.5 19.3 16.9 18,291
Carnival Corp. CCL 43.50 19.00 53.50 1.40 1.64 1.93 31.1 26.5 22.5 26,682
</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.
17
<PAGE>
Dear Fellow Shareholder: For the third quarter ending September 30, 1999 the
Ariel Premier Bond Fund, Institutional Class gained +0.6%, and the Investor
Class +0.5%, versus a return of +0.7% for the Lehman Brothers Aggregate Index.
For the one-year period ended September 30, 1999, the Ariel Premier Bond Fund,
Institutional Class ranked in the top 9th percentile of Corporate Debt A-Rated
Funds tracked by Lipper Analytical Services--specifically, the 14th best
performer out of 162 funds. The Ariel Premier Bond Fund, Investor Class also
fared well, ranking 26 out of 162 Corporate Debt A-Rated Funds over the same
period.(1)
Yield spreads were volatile this quarter and positively correlated with changes
in Treasury yields. That is, as yields rose in August, spreads widened sharply
and then narrowed as yields declined into September. The recent spread
performance was due largely to Y2K anxiety, anticipation of further Fed
tightening and heavy debt issuance in the corporate and asset-backed sectors.
Overall, yields rose modestly during the quarter as the Fed raised short term
interest rates. The persistently strong domestic economy, budding inflation
pressures and stronger worldwide growth have combined to raise inflation
expectations embedded in bond yields to levels that now exceed current
inflation.
The Ariel Premier Bond Fund is currently structured to perform well in an
environment of stable yields and narrower spreads. The good news is yields are
stabilizing, reflecting modestly higher inflation expectations and some
probability of further Fed tightening. The duration of the portfolio is neutral.
Spreads, on the other hand, have a risk premium more typical of a deteriorating
economic environment, most likely a reflection of Y2K risk aversion. These
spreads are likely to narrow modestly during the fourth quarter with the
potential for significant tightening after year-end. As a result, the Ariel
Premier Bond Fund's spread overweight is currently 1.4 years, balanced between
mortgage, corporate and asset-backed securities. In this environment, security
selection within sectors is rewarded as spreads vary quite a bit, reflecting
liquidity, structure and seasoning differences among issuers.
We appreciate the opportunity to serve you and, as always, welcome your
questions and comments.
Sincerely,
/s/ John W. Rogers, Jr. /s/ Kenneth R. Meyer
John W. Rogers, Jr. Kenneth R. Meyer
President President
Ariel Capital Management, Inc. Lincoln Capital Management Company
(1) LIPPER ANALYTICAL SERVICES, INC. IS A NATIONALLY RECOGNIZED ORGANIZATION
THAT REPORTS PERFORMANCE AND CALCULATES RANKINGS FOR MUTUAL FUNDS. EACH FUND IS
RANKED WITHIN A UNIVERSE OF FUNDS WITH SIMILAR INVESTMENT OBJECTIVES. RANKING IS
BASED ON TOTAL RETURNS. ARIEL PREMIER BOND FUND, INSTITUTIONAL CLASS RANKED 32
OUT OF 133 AND 29 OUT OF 121 IN THE CORPORATE DEBT A-RATED FUNDS CATEGORY FOR
THE THREE-YEAR AND SINCE INCEPTION (10/01/95) PERIODS ENDED 09/30/99,
RESPECTIVELY. ARIEL PREMIER BOND FUND, INVESTOR CLASS RANKED 61 OUT OF 138 FUNDS
IN THE CORPORATE DEBT A-RATED FUNDS CATEGORY FOR THE SINCE INCEPTION (02/01/97)
PERIOD ENDED 09/30/99.
18
<PAGE>
ARIEL PREMIER BOND FUND
Institutional Class Inception
October 1, 1995
Investor Class Inception
February 1, 1997
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN AS OF SEPTEMBER 30, 1999 (assume reinvestment of dividends and capital gains)
3rd Quarter YTD 1 Year 3 Year Life of Fund
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------
Ariel Premier Bond Fund, Inst. Cl. +0.6% -0.5% -0.3% +6.3% +5.7%
- ---------------------------------------------------------------------------------------------------------------
Ariel Premier Bond Fund, Inv. Cl. +0.5% -0.7% -0.7% -- +5.5%
- ---------------------------------------------------------------------------------------------------------------
Lehman Bros. Aggregate Bond Index +0.7% -0.7% -0.4% +6.8% +6.3% (Inst.)
+6.4% (Inv.)
</TABLE>
[GRAPH]
[EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC]
<TABLE>
<CAPTION>
Ariel Premier Bond Fund Portfolio Composition Lehman Aggregate Bond Index Portfolio Composition
<S> <C> <C>
Government & Agency 9.1% 42.6%
Mortgage-Backed 40.3% 33.9%
Corporate 22.4% 20.8%
Asset-Backed 21.4% 1.3%
Commercial Mortgage-Backed 2.0% 1.4%
Cash 4.8% 0%
</TABLE>
COMPARISION OF CHANGE IN VALUE OF $10,000 INVESTED IN ARIEL PREMIER BOND FUND,
INV. CL. AND COMPARABLE INDICES*
[GRAPH]
[EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC]
GROWTH HYPOTHETICAL INSTITUTIONAL CLASS
<TABLE>
<CAPTION>
Ariel Premier Bond Fund, Inv. Cl. Lehman Aggregate
<S> <C> <C>
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 $1,067,709 $1,080,467
Mar-97 $1,063,762 $1,074,431
Jun-97 $1,101,595 $1,113,887
Sep-97 $1,135,857 $1,150,901
Dec-97 $1,165,544 $1,184,770
Mar-98 $1,182,644 $1,203,205
Jun-98 $1,210,570 $1,231,317
Sep-98 $1,251,681 $1,283,385
Dec-98 $1,254,703 $1,287,699
Mar-99 $1,254,835 $1,281,308
Jun-99 $1,240,901 $1,270,046
Sep-99 $1,248,564 $1,278,665
</TABLE>
COMPARISION OF CHANGE IN VALUE OF $1,000,000 INVESTED IN ARIEL PREMIER BOND
FUND, INST. CL. AND COMPARABLE INDICES*
[GRAPH]
[EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC]
<TABLE>
<CAPTION>
Ariel Premier Bond Fund, Inv. Cl. Lehman Aggregate
<S> <C> <C>
Feb-97 $10,000 $10,000
Mar-97 $9,930 $9,914
Jun-97 $10,265 $10,278
Sep-97 $10,573 $10,619
Dec-97 $10,838 $10,932
Mar-98 $10,997 $11,102
Jun-98 $11,234 $11,361
Sep-98 $11,616 $11,841
Dec-98 $11,621 $11,882
Mar-99 $11,611 $11,823
Jun-99 $11,482 $11,719
Sep-99 $11,541 $11,798
</TABLE>
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.
19
<PAGE>
ARIEL PREMIER BOND FUND
SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
Par Value ASSET-BACKED SECURITIES-21.55% Cost Market Value
<S> <C> <C> <C>
$700,000 Americredit Auto Receivables, 98-B A4,
6.06%, 12/12/2002 $699,913 $694,120
750,000 Americredit Auto Receivables, 99-A A4,
5.88%, 12/12/2005 749,854 735,848
593,236 Associates Manufactured Housing,
972A-3, 6.275%, 3/15/2028 593,063 595,170
1,000,000 Auto Leasing Investors, 6.177%,
8/12/2005+ 1,000,000 972,500
650,000 BEA, 1998-2A A2A, 6.72%,
6/15/2010+ 627,898 616,792
1,285,000 Chase Credit Card Master Trust,
1999-3A, 6.66%, 1/15/2007 1,284,568 1,284,794
695,000 Circuit City Credit Card, 1995-1A,
6.375%, 8/15/2005 705,911 697,717
2,000,000 Contimortgage Home Equity, 97-A5,
6.44%, 12/15/2012 2,017,751 1,997,400
1,039,577 Credit Card Receivables Trust, 98-1,
6.478%, 12/22/2004+ 1,045,542 1,036,749
2,000,000 EQCC Home Equity, 973-A9, 6.57%,
2/15/2029 1,984,071 1,957,500
156,000 Fingerhut, 96-1A, 6.45%, 2/20/2002 156,580 156,933
1,800,000 First Omni, 96-AA, 6.65%, 9/15/2003 1,820,736 1,820,664
1,127,091 Fleetwood, 97BA, 6.40%, 5/15/2013 1,125,634 1,126,065
950,000 Greenpoint Manufacturing, 99-1 A2,
6.01%, 8/15/2015 949,760 950,162
500,000 Green Tree Financial, 98-A4, 6.09%,
2/1/2030 499,948 494,115
45,276 Green Tree Financial, 1995-1 A5,
8.40%, 6/15/2025 49,614 45,824
1,415,000 Healthcare Rec., 99-1, 6.25%,
2/1/2003+ 1,413,050 1,382,724
721,387 IMC Excess Cash, 7.41%, 11/26/2028+ 721,360 613,179
1,450,000 J.C. Penney Master Credit Card Trust,
1990-C1, 9.625%, 6/15/2000 1,482,452 1,505,318
1,445,000 MBNA Master Credit Card Trust,
1999-JA, 7.00%, 2/15/2012 1,440,344 1,443,642
91,801 The Money Store, 1996-1 A3, 6.85%,
12/20/2002 91,793 91,971
450,000 Onyx Acceptance Auto Trust, 99-1 A2,
5.83%, 3/15/2004 449,972 444,654
1,440,000 Prime, 95-1A, 6.75%, 11/15/2005 1,445,250 1,448,078
3,091,486 Railcar Leasing, 971A, 6.75%,
7/15/2006+ 3,131,299 3,118,536
1,196,832 Railcar Trust, 92-A1, 7.75%,
6/1/2004 1,234,725 1,233,994
940,000 Salomon Brothers Mortgage Sec.,
97LB6A3, 6.76%, 12/25/2027 938,849 938,026
73,334 Sears Credit Account, 96-2A, 6.50%,
10/15/2003 73,081 73,393
20
<PAGE>
<CAPTION>
Par Value ASSET-BACKED SECURITIES-21.55% (cont) Cost Market Value
<S> <C> <C> <C>
$63,748 UCFC, 96-C1 A3, 7.15%, 12/15/2013 $63,739 $63,818
1,249,583 Union Acceptance Corp., 97AA2,
6.375%, 10/8/2003 1,257,244 1,254,969
2,630,000 Union Financial Services Taxable
Student Loan, 98A A8, 5.50%,
9/1/2005 2,612,913 2,517,015
1,880,000 World Financial, 96-AA, 6.70%,
2/15/2004 1,886,949 1,887,558
2,184,382 World Omni Auto Lease, 97B3,
6.18%, 11/25/2003 2,184,213 2,174,858
--------- ---------
Total Asset-Backed Securities 35,738,076 35,374,086
---------- ----------
COMMERCIAL MORTGAGE-BACKED SECURITIES-1.96%
400,000 CSFB, 97-C1 A1C, 7.24%, 4/20/2007 414,670 399,524
130,000 General Growth Properties,
97-C1 A1, 6.537%, 11/15/2004+ 132,631 127,266
550,000 GMAC Commercial, 99-1 A2,
6.175%, 5/15/2033 558,289 510,488
1,054,595 GS Mortgage Securities Corp.,
98-GL11 A1, 6.312%, 4/13/2031 1,076,633 1,026,205
760,447 GS Mortgage Securities Corp.,
99-C1 A1, 5.85%, 11/18/2030 761,788 728,866
440,000 Morgan Stanley Capital I,
1999-RM1 A2, 6.71%, 12/15/2031 439,949 421,687
------- -------
Total Commercial Mortgage-
Backed Securities 3,383,960 3,214,036
--------- ---------
CORPORATE DEBT-21.98%
800,000 ACE INA Holdings, 8.30%, 8/15/2006 798,245 809,000
1,000,000 AES Ironwood LLC, 8.857%,
11/30/2025+ 1,000,000 980,310
550,000 American Stores, 8.00%, 6/1/2026 604,831 567,875
615,000 Avalonbay Communities, 7.50%,
8/1/2009 612,152 595,302
275,000 Bank of America Capital II, 7.70%,
12/31/2026+ 289,103 257,125
550,000 Bestfoods, 5.60%, 10/15/2097 424,428 392,563
560,000 Camden Property Trust, 7.00%,
4/15/2004 557,102 540,400
1,000,000 Citigroup Capital II, 7.75%,
12/1/2036 1,035,557 935,000
1,575,000 Consumers Energy CMS, 6.20%,
5/1/2003 1,557,277 1,510,031
700,000 Duke Realty LP, 7.30%, 6/30/2003 699,432 695,625
1,310,000 Edison International, Inc., 6.875%,
9/15/2004 1,300,001 1,293,625
825,000 Edison Mission Energy, 7.73%,
6/15/2009+ 824,814 823,969
670,000 EMI Capital Records, Inc., 8.375%,
8/15/2009+ 666,537 664,975
515,000 FedEx, 7.60%, 7/1/2097 540,541 480,881
680,000 FPL Group Capital, Inc., 7.625%,
9/15/2006 677,954 687,650
1,100,000 GTE California, 6.75%, 5/15/2027 1,150,987 998,250
21
<PAGE>
<CAPTION>
Par Value CORPORATE DEBT-21.98% (cont) Cost Market Value
<S> <C> <C> <C>
$570,000 Keycorp Capital III, 7.75%,
7/15/2029 $565,482 $534,375
500,000 Kohls Corp., 7.25%, 6/1/2029 472,337 473,675
845,000 J.C. Penney Co., 7.625%, 3/1/2097 777,737 731,981
240,000 JP Morgan Capital Trust I, 7.54%,
1/15/2027 235,110 220,200
880,000 Liberty Media Group, 8.50%,
7/15/2029+ 877,602 880,000
800,000 LSP Energy LP, 8.16%, 7/15/2025+ 800,000 751,872
2,775,000 MCI WorldCom, Inc., 7.75%,
4/1/2027 3,032,287 2,896,406
610,000 Mirage Resorts, 7.25%, 8/1/2017 606,892 516,213
300,000 News America Holdings, 7.25%,
5/18/2018 298,031 272,625
730,000 Northwest Airlines Corp., 7.575%,
3/1/2019 730,000 685,974
1,200,000 NRG Energy, Inc., 7.50%, 6/1/2009 1,199,649 1,146,000
1,200,000 Park Place Entertainment, 7.95%,
8/1/2003+ 1,192,467 1,191,000
650,000 Peco Energy Co., 7.38%, 4/6/2028 650,000 567,937
1,400,000 Philip Morris, 7.125%, 8/15/2002 1,393,876 1,403,500
700,000 PNC Funding Corp., 7.00%,
9/1/2004 697,023 697,375
970,000 Principal Financial Group, 8.20%,
8/15/2009+ 967,003 977,275
775,000 Provident Companies, 6.375%,
7/15/2005 772,669 734,313
1,220,000 Provident Companies, 7.00%,
7/15/2018 1,219,621 1,096,475
675,000 Rohm & Haas Co., 7.85%,
7/15/2029+ 674,508 687,656
1,000,000 Safeco Capital Trust, 8.072%,
7/15/2037 1,000,000 905,000
750,000 Security Capital Group, 7.75%,
11/15/2003 749,397 738,750
1,000,000 Service Corp., 7.00%, 6/1/2015 1,018,378 978,750
730,000 Southern Cal Edison, 6.65%, 4/1/2029 667,181 636,925
775,000 Southern Energy, 7.90%, 7/15/2009+ 774,717 749,572
845,000 Spieker Properties LP, 6.75%,
1/15/2008 784,294 778,456
805,000 Suntrust Cap II, 7.90%,
6/15/2027 809,616 769,781
580,000 Telecom De Puerto Rico, 6.80%,
5/15/2009+ 558,263 545,832
750,000 Virginia Electric Power, 6.75%,
2/1/2007 753,566 723,750
560,000 Zurich Capital Trust, 8.376%,
6/1/2037+ 595,601 548,800
------- -------
Total Corporate Debt 37,612,268 36,073,049
========== ==========
U.S. GOVERNMENT AGENCIES-41.41%
MORTGAGE-BACKED SECURITIES-40.51%
11,705,000 Fannie Mae, 6.00%, 10/1/20144 X 11,211,195 11,251,431
13,900,000 Fannie Mae, 7.50%, 10/1/20294 X 13,856,563 13,939,059
22
<PAGE>
<CAPTION>
Par Value U.S. GOVERNMENT AGENCIES-41.41% (cont) Cost Market Value
<S> <C> <C> <C>
MORTGAGE-BACKED SECURITIES-40.51% (CONT)
$9,990,000 Freddie Mac, Gold,
5.50%, 10/1/20144 X $9,365,625 $9,409,281
1,213,497 Freddie Mac, Gold,
6.50%, 11/1/2025 1,147,376 1,173,670
32,005,000 Freddie Mac, Gold,
6.50%, 10/1/20294 X 30,478,885 30,704,637
---------- ----------
66,059,644 66,478,078
---------- ----------
OTHER AGENCY ISSUES-0.90%
939,677 Government Trust Certificate, Israel
Trust, Series 2E, 9.40%, 5/15/2002 977,076 961,994
507,201 Pemex Exp. Trust, 95-A,
7.66%, 8/15/2001 514,670 516,681
------- -------
1,491,746 1,478,675
--------- ---------
Total U.S. Government Agencies 67,551,390 67,956,753
---------- ----------
U.S. GOVERNMENT OBLIGATIONS-8.16%
755,000 U.S. Treasury Bond,
10.375%, 11/15/2012 946,706 948,235
1,275,000 U.S. Treasury Bond,
8.50%, 2/15/2020 1,632,497 1,566,401
7,095,000 U.S. Treasury Bond,
8.125%, 8/15/2021 8,536,244 8,472,494
755,000 U.S. Treasury Note,
7.50%, 11/15/2001 780,732 781,886
200,000 U.S. Treasury Note,
6.25%, 6/30/2002 203,136 202,636
1,080,000 U.S. Treasury Note,
6.50%, 10/15/2006 1,112,550 1,104,322
320,000 U.S. Treasury Note,
6.125%, 8/15/2007 318,905 320,262
---------- ----------
Total U.S. Government
Obligations 13,530,770 13,396,236
---------- ----------
COMMERCIAL PAPER-40.74%
3,200,000 Allied Signal, Inc., 5.30%,
10/19/1999* 3,191,520 3,191,520
3,200,000 American Express Corp., 5.28%,
10/14/1999* 3,193,899 3,193,899
3,200,000 American General Finance Group,
5.28%, 10/14/1999* 3,193,899 3,193,899
3,200,000 Associates First Capital Corp., 5.29%,
10/13/1999* 3,194,357 3,194,357
3,200,000 AT&T Corp., 5.28%, 10/12/1999* 3,194,837 3,194,837
3,200,000 Bell Atlantic Corp., 5.29%,
10/13/1999* 3,194,357 3,194,357
1,000,000 Cargill, Inc., 5.27%, 10/19/1999* 997,365 997,365
3,200,000 Caterpillar Inc., 5.29%, 10/14/1999* 3,193,887 3,193,887
3,200,000 Clorox Co., 5.27%, 10/14/1999* 3,193,910 3,193,910
3,200,000 Duke Energy Corp., 5.27%,
10/14/1999* 3,193,910 3,193,910
3,200,000 Ford Motor Credit, 5.30%,
10/14/1999* 3,193,876 3,193,876
23
<PAGE>
<CAPTION>
Par Value COMMERCIAL PAPER-40.74% (cont) Cost Market Value
<S> <C> <C> <C>
$3,200,000 General Electric Capital Corp., 5.29%,
10/14/1999* $3,193,887 $3,193,887
3,200,000 General Mills, Inc., 5.26%,
10/18/1999* 3,192,052 3,192,052
3,200,000 General Motors, 5.28%, 10/19/1999* 3,191,552 3,191,552
3,200,000 Household Finance Corp., 5.29%,
10/14/1999* 3,193,887 3,193,887
3,200,000 International Lease Finance Corp.,
5.27%, 10/14/1999* 3,193,910 3,193,910
3,200,000 John Deere Capital Corp., 5.28%,
10/14/1999* 3,193,899 3,193,899
3,200,000 MetLife Funding, Inc., 5.28%,
10/15/1999* 3,193,429 3,193,429
3,200,000 Nike, Inc., 5.28%, 10/19/1999* 3,191,552 3,191,552
3,200,000 Prudential Funding Corp., 5.30%,
10/14/1999* 3,193,876 3,193,876
3,200,000 Wells Fargo & Co., 5.28%,
10/14/1999* 3,193,899 3,193,899
2,000,000 Xerox Credit Corp., 5.26%,
10/19/1999* 1,994,740 1,994,740
--------- ---------
Total Commercial Paper 66,862,500 66,862,500
---------- ----------
<CAPTION>
Principal REPURCHASE AGREEMENT-3.25% Cost Market Value
Amount
<S> <C> <C> <C>
$5,335,130 State Street Bank & Trust
Company Repurchase
Agreement, 4.25%, dated
9/30/1999, repurchase price
$5,335,760, maturing
10/1/1999 (collateralized by
U.S. Treasury Bond, 7.25%,
8/15/2022) $5,335,130 $5,335,130
---------- ----------
Total Repurchase Agreement 5,335,130 5,335,130
--------- ---------
Total Investments - 139.05% $230,014,094 228,211,790
============
Liabilities less Other Assets - (39.05)% (64,092,350)
----------
NET ASSETS - 100.00% $164,119,440
============
</TABLE>
+ Security exempt from registration under rule 144A of the Securities
Act of 1933. These securities may be resold in transactions exempt
from registration normally to qualified institutional buyers.
X When-issued security.
* Security pledged as collateral for when-issued purchase commitment
outstanding as of September 30, 1999.
The accompanying notes are an integral part of the financial statements.
24
<PAGE>
Statement of Assets & Liabilities
SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
ARIEL APPRECIATION PREMIER
FUND FUND BOND FUND
---- ---- ---------
<S> <C> <C> <C>
ASSETS:
Investments in securities, at value
(cost $180,594,174, $283,607,756
and $230,014,094, respectively) $216,736,721 $350,384,496 $228,211,790
Cash -- -- 482,458
Dividends and interest receivable 216,595 422,496 1,155,211
Receivable for securities sold 632,639 4,565,483 --
Receivable for fund shares issued 63,626 648,067 --
Prepaid and other assets 12,941 26,347 --
------ ------ -----
Total assets 217,662,522 356,046,889 229,849,459
----------- ----------- -----------
LIABILITIES:
Payable for securities purchased 2,239,675 2,653,892 64,912,268
Accrued management fee 116,581 222,134 60,746
Accrued distribution fee 38,906 56,292 403
Payable for shares redeemed 10 88,613 100
Shareholder distribution payable -- -- 756,502
Other liabilities 122,040 184,701 --
------ ------ -----
Total liabilities 2,517,212 3,205,632 65,730,019
--------- --------- ----------
NET ASSETS $215,145,310 $352,841,257 $164,119,440
------------ ------------ ------------
------------ ------------ ------------
NET ASSETS CONSIST OF:
Paid-in-capital $144,961,542 $259,422,897 $168,752,540
Undistributed net investment income 422,164 414,410 4,432
Accumulated net realized gain (loss)
on investment transactions 33,619,057 26,227,210 (2,835,228)
Net unrealized appreciation
(depreciation) on investments 36,142,547 66,776,740 (1,802,304)
---------- ---------- ---------
Total net assets $215,145,310 $352,841,257 $164,119,440
------------ ------------ ------------
------------ ------------ ------------
Shares outstanding (no par value) 5,662,514 10,427,756
Institutional Class 16,294,009
Investor Class 264,899
Net asset value, offering and redemption
price per share $37.99 $33.84
Institutional Class $9.91
Investor Class $9.91
</TABLE>
Statement of Operations
YEAR ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
ARIEL APPRECIATION PREMIER
FUND FUND BOND FUND
---- ---- ---------
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividends $2,560,364 $3,743,883 $ --
Interest 527,944 797,904 9,577,529
------- ------- ---------
Total investment income 3,088,308 4,541,787 9,577,529
--------- --------- ---------
EXPENSES:
Management fees 1,327,000 2,454,699 719,401
Distribution fees 510,385 818,233 5,998
Transfer agent fees and expenses 417,760 561,490 --
Printing and postage expenses 92,857 83,913 --
Professional fees 83,726 87,432 --
Federal and state registration fees 35,946 53,480 --
Trustees' fees and expenses 35,190 35,187 --
Custody fees and expenses 20,410 26,743 --
Miscellaneous expenses 20,367 5,814 --
------ ----- -----
Net expenses 2,543,641 4,126,991 725,399
--------- --------- -------
NET INVESTMENT INCOME 544,667 414,796 8,852,130
------- ------- ---------
REALIZED AND UNREALIZED
GAIN (LOSS):
Net realized gain (loss) on investments 33,766,949 26,232,699 (2,564,439)
Change in net unrealized appreciation/
depreciation on investments (11,439,201) 6,077,755 (6,754,988)
---------- --------- ---------
Net gain (loss) on investments 22,327,748 32,310,454 (9,319,427)
---------- ---------- ---------
NET INCREASE (DECREASE) IN
NET ASSETS RESULTING
FROM OPERATIONS $22,872,415 $32,725,250 $(467,297)
----------- ----------- ---------
----------- ----------- ---------
</TABLE>
The accompanying notes are an integral part of the financial statements.
25
<PAGE>
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
ARIEL FUND APPRECIATION FUND PREMIER BOND FUND
---------- ----------------- -----------------
Year Ended September 30, Year Ended September 30, Year Ended September 30,
1999 1998 1999 1998 1999 1998
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS:
Net investment income $544,667 $536,498 $414,796 $552,798 $8,852,130 $7,554,465
Net realized gain (loss) on investments 33,766,949 17,160,907 26,232,699 25,325,874 (2,564,439) 1,888,489
Change in net unrealized
appreciation/depreciation on investments (11,439,201) (23,286,493) 6,077,755 (19,712,453) (6,754,988) 3,368,397
---------- ---------- --------- ---------- --------- ---------
Net increase (decrease) in net assets
from operations 22,872,415 (5,589,088) 32,725,250 6,166,219 (467,297) 12,811,351
---------- --------- ---------- --------- ------- ----------
DISTRIBUTION TO SHAREHOLDERS:
Net investment income (386,173) (580,333) (271,554) (393,585) (8,852,130) (7,558,515)
Capital gains (17,212,926) (14,358,164) (25,199,149) (17,505,645) (1,862,283) (832,076)
---------- ---------- ---------- ---------- --------- -------
Total distributions (17,599,099) (14,938,497) (25,470,703) (17,899,230) (10,714,413) (8,390,591)
---------- ---------- ---------- ---------- ---------- ---------
SHARE TRANSACTIONS:
Shares sold 88,322,437 333,537,306 204,349,663 167,531,444 34,874,721 44,225,254
Shares issued to holders in
reinvestment of dividends 16,411,876 13,762,375 23,137,652 16,077,043 10,661,004 7,716,011
Shares redeemed (57,141,027) (328,558,849) (95,713,008) (144,541,179) (21,990,508) (19,005,303)
---------- ----------- ---------- ----------- ---------- ----------
Net increase 47,593,286 18,740,832 131,774,307 39,067,308 23,545,217 32,935,962
---------- ---------- ----------- ---------- ---------- ----------
TOTAL INCREASE (DECREASE) IN NET ASSETS 52,866,602 (1,786,753) 139,028,854 27,334,297 12,363,507 37,356,722
NET ASSETS:
Beginning of year 162,278,708 164,065,461 213,812,403 186,478,106 151,755,933 114,399,211
----------- ----------- ----------- ----------- ----------- -----------
End of year (includes
undistributed net investment
income of $422,164, $254,687, $414,410,
$262,188, $4,432 and $0, respectively) $215,145,310 $162,278,708 $352,841,257 $213,812,403 $164,119,440 $151,755,933
------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
26
<PAGE>
Financial Highlights
<TABLE>
<CAPTION>
ARIEL FUND
----------
Year Ended September 30,
1999(a) 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $36.49 $41.49 $30.58 $30.78 $28.84
Income from investment operations:
Net investment income 0.10 0.13 0.07 0.18 0.36
Net realized and unrealized gains
(losses) on investments 5.20 (1.41) 12.62 4.24 3.51
---- ---- ----- ---- ----
Total from investment operations 5.30 (1.28) 12.69 4.42 3.87
Distributions to shareholders:
Dividends from net investment
income (0.08) (0.14) -- (0.44) (0.23)
Distributions from capital gains (3.72) (3.58) (1.78) (4.18) (1.70)
---- ---- ----- ---- ----
Total distributions (3.80) (3.72) (1.78) (4.62) (1.93)
---- ---- ----- ---- ----
Net asset value, end of year $37.99 $36.49 $41.49 $30.58 $30.78
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Total return 14.18% (3.83)% 43.25% 16.28% 14.38%
Supplemental data and ratios:
Net assets, end of year,
in thousands $215,145 $162,279 $164,065 $109,770 $120,953
Ratio of expenses to average
net assets 1.25% 1.21% 1.25% 1.31% 1.37%(b)
Ratio of net investment income
to average net assets 0.27% 0.30% 0.23% 0.57% 1.18%(b)
Portfolio turnover rate 38% 22% 20% 17% 16%
<CAPTION>
APPRECIATION FUND
-----------------
Year Ended September 30,
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $31.80 $33.70 $24.99 $22.76 $21.82
Income from investment operations:
Net investment income 0.04 0.09 0.02 0.13 0.14
Net realized and unrealized gains
(losses) on investments 5.50 1.14 10.13 4.07 2.26
---- ---- ----- ---- ----
Total from investment operations 5.54 1.23 10.15 4.20 2.40
Distributions to shareholders:
Dividends from net investment
income (0.04) (0.07) (0.07) (0.20) (0.06)
Distributions from capital gains (3.46) (3.06) (1.37) (1.77) (1.40)
---- ---- ----- ---- ----
Total distributions (3.50) (3.13) (1.44) (1.97) (1.46)
---- ---- ----- ---- ----
Net asset value, end of year $33.84 $31.80 $33.70 $24.99 $22.76
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Total return 16.99% 3.40% 42.33% 19.60% 12.11%
Supplemental data and ratios:
Net assets, end of year,
in thousands $352,841 $213,812 $186,478 $135,627 $143,312
Ratio of expenses to average
net assets 1.26% 1.26% 1.33% 1.36%(b) 1.36%(b)
Ratio of net investment income
to average net assets 0.13% 0.25% 0.07% 0.50%(b) 0.61%(b)
Portfolio turnover rate 24% 20% 19% 26% 18%
</TABLE>
(a) Prior to February 1, 1999, the Ariel Fund was known as the Ariel Growth
Fund.
(b) 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
Ariel Fund and 1.40% and 1.58% for the periods ended 1996 and 1995 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 Ariel Fund
and 0.46% and 0.39% for the periods ended 1996 and 1995 for the
Appreciation Fund, respectively.
The accompanying notes are an integral part of the financial statements.
27
<PAGE>
Financial Highlights (cont)
PREMIER BOND FUND
-----------------
<TABLE>
<CAPTION>
INSTITUTIONAL CLASS INVESTOR CLASS
February 1, 1997(a)
Year Ended September 30, Year Ended September 30, to
1999 1998 1997 1996 1999 1998 September 30, 1997
---- ---- ---- ---- ---- ---- ------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of year $10.63 $10.30 $9.95 $10.00 $10.63 $10.29 $10.10
Income from investment operations:
Net investment income 0.57 0.61 0.52 0.43 0.53 0.57 0.37
Net realized and unrealized gains
(losses) on investments (0.60) 0.40 0.37 (0.04) (0.60) 0.41 0.19
---- ---- ---- ---- ---- ---- ----
Total from investment operations (0.03) 1.01 0.89 0.39 (0.07) 0.98 0.56
Distributions to shareholders:
Dividends from net investment
income (0.57) (0.61) (0.52) (0.43) (0.53) (0.57) (0.37)
Distributions from capital gains (0.12) (0.07) (0.02) (0.01) (0.12) (0.07) --
---- ---- ---- ---- ---- ---- ----
Total distributions (0.69) (0.68) (0.54) (0.44) (0.65) (0.64) (0.37)
---- ---- ---- ---- ---- ---- ----
Net asset value, end of year $9.91 $10.63 $10.30 $9.95 $9.91 $10.63 $10.29
===== ====== ====== ===== ===== ====== ======
Total return (0.25)% 10.20% 9.26% 3.96% (0.65)% 9.34% 5.73%(b)
Supplemental data and ratios:
Net assets, end of year, in
thousands $161,495 $149,977 $113,998 $15,367 $2,624 $1,779 $401
Ratio of expenses to average
net assets 0.45% 0.45% 0.45% 0.48% 0.85% 0.85% 0.85%(c)
Ratio of net investment income
to average net assets 5.57% 5.86% 6.05% 5.85% 5.17% 5.46% 5.60%(c)
Portfolio turnover rate 396% 60% 218% 423% 396% 60% 218%
</TABLE>
(a) Commencement of operations.
(b) Total return is not annualized.
(c) Annualized.
The accompanying notes are an integral part of the financial statements.
28
<PAGE>
NOTES TO THE FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
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 Ariel 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. Prior to February 1, 1999 the Ariel
Fund was known as the Ariel GrowthFund.
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 require management to make certain estimates and
assumptions at the date of the financial statements. Actual results may differ
from such estimates.
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 having a maturity
of 60 days or less 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.
REPURCHASE AGREEMENTS - 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.
As of September 30, 1999, the Premier Bond Fund had $1,569,364 of post-October
1998 capital losses which are deferred until 2000 for tax purposes.
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.
The Premier Bond Fund may purchase securities with delivery or payment to occur
at a later date. At the time the Fund enters into a commitment to purchase a
security, the transaction is recorded and the value of the security is reflected
in the net asset value. The value of the security may vary with market
fluctuations. No interest accrues to the Fund until payment takes place. At the
time the Fund enters into this type of transaction it is required to designate
cash or other liquid assets equal to the value of the securities purchased. At
September 30, 1999 the Fund had $65,304,408 in purchase commitments outstanding
(40% of net assets), with a corresponding amount of assets designated.
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 Ariel 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.
29
<PAGE>
NOTES TO THE FINANCIAL STATEMENTS (CONT)
SEPTEMBER 30, 1999
Distributions to shareholders are determined in accordance with federal income
tax regulations and are recorded on the ex-dividend date. The character of
distributions made during the year from net investment income or net realized
gains 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.
3. CAPITAL SHARE TRANSACTIONS
Transactions in shares of capital stock were as follows:
<TABLE>
<CAPTION>
Year Ended September 30, 1999
Ariel Fund Appreciation Fund Premier Bond Fund
---------- ----------------- ------------------
Institutional Investor
------------- --------
<S> <C> <C> <C> <C>
Shares sold 2,261,607 5,706,840 3,154,315 235,779
Shares issued to holders in
reinvestment of dividends 417,815 658,066 1,025,661 13,484
Shares redeemed (1,463,765) (2,660,008) (1,989,194) (151,766)
--------- --------- --------- -------
Net increase 1,215,657 3,704,898 2,190,782 97,497
========= ========= ========= =======
</TABLE>
<TABLE>
<CAPTION>
Year Ended September 30, 1998
Ariel Fund Appreciation Fund Premier Bond Fund
---------- ----------------- ------------------
Institutional Investor
------------- --------
<S> <C> <C> <C> <C>
Shares sold 8,005,752 4,885,967 4,089,595 157,274
Shares issued to holders in
reinvestment of dividends 345,863 491,344 739,559 4,110
Shares redeemed (7,859,564) (4,187,549) (1,793,634) (32,982)
--------- --------- --------- -------
Net increase 492,051 1,189,762 3,035,520 128,402
========= ========= ========= =======
</TABLE>
4. INVESTMENT TRANSACTIONS
Purchases and sales of securities, excluding short-term investments and U.S.
government securities, for the year ended September 30, 1999 are summarized
below:
<TABLE>
<CAPTION>
Ariel Fund Appreciation Fund Premier Bond Fund
---------- ----------------- -----------------
<S> <C> <C> <C>
Purchases $99,242,246 $182,375,702 $73,235,409
Sales 73,114,253 73,409,141 75,481,005
</TABLE>
Purchases and sales of U.S. government securities for the Premier Bond Fund for
the year ended September 30, 1999 were $567,148,229 and $531,090,205,
respectively.
At September 30, 1999 the cost of securities on a tax basis was $180,718,349,
$283,607,756 and $231,288,392 for the Ariel Fund, Appreciation Fund and Premier
Bond Fund, respectively. Gross unrealized appreciation and depreciation on
securities for federal income tax purposes were as follows:
<TABLE>
<CAPTION>
Ariel Fund Appreciation Fund Premier Bond Fund
---------- ----------------- -----------------
<S> <C> <C> <C>
Unrealized appreciation $48,820,003 $91,363,334 $225,800
Unrealized (depreciation) (12,801,631) (24,586,594) (3,302,402)
---------- ---------- ----------
Net appreciation (depreciation) $36,018,372 $66,776,740 $(3,076,602)
========== ========== ==========
</TABLE>
It is management's intention to distribute future net realized capital gains to
the extent that such gains exceed any available federal income tax capital loss
carryforwards. For the year ended September 30, 1999, 55.7% and 77.1% of
dividends paid from net investment income of the Ariel Fund and Appreciation
Fund, respectively, qualifies for the dividend received deduction available to
corporate shareholders.
30
<PAGE>
NOTES TO THE FINANCIAL STATEMENTS (CONT)
SEPTEMBER 30, 1999
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
Ariel 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.
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. For the year ended September
30, 1999, the Fund paid the Adviser $556,736 and $162,665 in investment advisory
and administrative services fees, respectively. 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 Ariel Fund, Appreciation Fund
and Premier Bond Fund, Investor Class to pay for certain expenses associated
with the distribution of their shares up to 0.25% annually of each Fund's
average daily net asset value. Payments have been made to Ariel Distributors,
Inc., an affiliate of the Adviser.
31
<PAGE>
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 Fund, Ariel Appreciation Fund, and Ariel
Premier Bond Fund, comprising Ariel Investment Trust ("Ariel Mutual Funds"), as
of September 30, 1999, the related statements of operations and 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, 1999, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of each
of the Funds of the Ariel Mutual Funds at September 30, 1999, 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 15, 1999
32
<PAGE>
BOARD OF TRUSTEES
BERT N. MITCHELL, C.P.A. Bert is founder and chairman 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. He is active in community affairs, philanthropy and
politics.
MARIO L. BAEZA, ESQ. 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 and serves on the board
of directors of Commonwealth Edison Company and Unicom Corp.
WILLIAM C. DIETRICH, C.P.A. Bill is an independent financial consultant,
specializing in early stage entrepreneurial companies. He has a B.A. from
Georgetown University and serves on the board and program staff of the Shalem
Institute, an internationally known ecumenical organization.
ROYCE N. FLIPPIN, JR. Royce is 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. Formerly, he
was director of program advancement for the Massachusetts Institute of
Technology. He earned his A.B. 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, JR. 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 an A.B. 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 andco-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.
<PAGE>
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