<PAGE>
ARIEL MUTUAL FUNDS
Quarterly Report
June 30, 2000
THE PATIENT INVESTOR [LOGO]
Ariel Fund
Ariel Appreciation Fund
Ariel Premier Bond Fund
<PAGE>
JOHN W. ROGERS, JR. ELECTED TO ARIEL
MUTUAL FUNDS' BOARD OF DIRECTORS
We are pleased to announce Ariel Mutual Funds' Board of Trustees has appointed
John W. Rogers, Jr. as a new director as of May 23, 2000. As founder and chief
executive officer of Ariel Capital Management, Inc. and portfolio manager of
Ariel Fund, John's perspective will be indispensable.
<PAGE>
Ariel Investment Trust
307 North Michigan Avenue
Suite 500
Chicago, Illinois 60601
800.292.7435
312.726.0140
www.arielmutualfunds.com
TABLE OF CONTENTS
FOR MORE INFORMATION ABOUT ARIEL MUTUAL FUNDS, INCLUDING MANAGEMENT FEES,
EXPENSES AND POTENTIAL RISKS, 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 AND MID-CAP STOCKS MAY BE MORE
RISKY AND MORE VOLATILE THAN INVESTING IN LARGE CAP STOCKS.
<TABLE>
<S> <C>
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 Premier Bond Fund 18
Schedule of Bond Investments 20
Board of Trustees 25
</TABLE>
<PAGE>
SLOW AND STEADY WINS THE RACE.-AESOP
THE PATIENT INVESTOR-Registered Trademark-
[LOGO]
DEAR FELLOW SHAREHOLDER: For the quarter ended June 30, 2000, the small-cap
value stocks of Ariel Fund rose +14.03%. As means of comparison, over this same
three-month period, the Russell 2000 Index fell -3.78% while the Russell 2000
Value Index rose +1.95%. This second quarter move brings the fund's year-to-date
return to +9.23% versus +3.04% for the Russell 2000 Index and +5.85% for the
Russell 2000 Value Index. As for our mid-cap value portfolio, Ariel Appreciation
Fund also witnessed a more favorable investment environment during the second
quarter with a +4.56% gain versus a -4.51% loss for the Russell Midcap Index and
a -1.68% drop for the Russell Midcap Value Index. This second quarter rise
leaves Ariel Appreciation Fund with a year-to-date return of +0.68%--still
lagging the +5.12% six-month result of the more aggressive Russell Midcap Index
yet ahead of the more style-similar Russell Midcap Value's -0.69% return.
An explanation of the factors driving broad stock market performance during the
second quarter is clear and fairly simple--as the technology sector was toppled
by its own excess, a flight to quality ensued. More specifically, tech's quick
and dramatic turn negatively impacted the entire U.S. stock market and
especially punished momentum investors heavily weighted in the most popular
aggressive growth stocks. Perhaps not surprisingly, the incredibly expensive
Internet stocks lacking profits, experienced management teams and differentiated
products, proved to be the most vulnerable--many with share prices now off as
much as 90% from their highs, some gone forever. Headlines in such publications
as MUTUAL FUNDS MAGAZINE proclaiming "Tech is Toast," characterized and
simultaneously helped fuel investor angst, which ultimately contributed to the
severity of the sell-off. Against this backdrop, with the stock market
"rediscovering the quaint 20th century notion of earnings" (according to one
WALL STREET JOURNAL writer) as well as the seemingly lost concept of risk, value
investing appears to be rising from the ashes.
TAKEOVERS TAKE OVER
In our first quarter report, we suspected a reality check was at hand and that
value investing was poised for a comeback. Accordingly, in
2
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our March 31, 2000 letter we wrote, "...we do believe a sea change is
occurring--one that will bring rational, reasonable values back to this market
and reward solid performance, strong franchises and profitable, growing
businesses." And so, our recent out-performance directly resulted from a
diligent adherence to timeless value investing traditions. These core tenets of
value investing--buying stocks when they are unpopular and inexpensive; buying
great businesses with strong brands or franchises; buying companies run by
talented, experienced leaders; waiting patiently for the market to recognize the
value--certainly helped insulate our portfolios from this year's hot stock
backlash.
In addition to downside protection, a number of our holdings performed quite
well when their value was unlocked as a result of being taken over. In our March
quarter-end letter, our view was that "[T]he growing emphasis on maximizing
shareholder value in corporate boardrooms across the country should certainly
increase our chances for market beating performance in the future." Furthermore,
we stated, "[O]ur optimism is heightened by the fact that company management
teams realize their stocks are excessively cheap and are exploring all
possibilities to maximize shareholder value including going private, being
acquired and a host of other strategic alternatives."
Thus, for the quarter and six months ended June 30, our results were boosted by
a spate of takeovers. Specifically, in both Ariel Fund and Ariel Appreciation
Fund, we benefited from the announced acquisition of long-time favorite, Central
Newspapers, Inc. (NYSE: ECP), by Gannett, Inc. (NYSE: GCI) at $64 a share--a
large premium over its $31.50 per share price at the time of announcement. In
addition, the purchase of refrigeration systems manufacturer, Hussmann
International Inc. (NYSE: HSM), by Ingersoll-Rand, Inc. (NYSE: IR) for $29 a
share offered another nice performance lift--Hussmann shares traded at $13.38 at
the time. Moreover, Ariel Fund's ownership of specialty contact lens
manufacturer, Wesley Jessen VisionCare Inc. (OTC: WJCO), proved quite profitable
as the stock surged from a 52-week low of $22 to $38.30 per share on the news of
its acquisition by Swiss-based health care giant, Novartis (NYSE: NVS). Given
our focused approach and the resulting portfolio concentration, all of the
aforementioned positions were sizable and thus the impact of the premiums paid
was meaningful. One unintended consequence of these simultaneous transactions is
a higher than normal cash level in Ariel Fund at quarter-end which you can
expect to settle back as we re-deploy the assets into other opportunities.
CENTRAL NEWSPAPERS--PATIENT INVESTING MAKES HEADLINES
A spotlight on the Central Newspapers, Inc. transaction offers an excellent
example of our conservative and disciplined, patient
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investing approach. The stock was one of our favorites and fit the mold of a
classic Ariel holding. We initiated a position in Central in 1990--a year after
this 65 year-old company sold its first shares to the public. A bit sleepy but
with a strong Indianapolis- and a coveted Phoenix-based newspaper property--the
company was run more like the family-owned venture that it had been for most of
its history than as a new publicly-traded enterprise. Initially, we were
attracted to Central's consistent, recurring revenues and excellent cash flow.
Additionally, we recognized that while the franchise was certainly strong, a
great deal of its value had yet to be unleashed. We saw a good opportunity to
benefit from the enhanced profitability that could be derived from a dynamic
corporate leader employing even stronger financial controls.
In 1991, the leadership we hoped for arrived when Louis "Chip" Weil, III--a
third generation newspaper man--was brought in to run the company from TIME
magazine, where he had served as Publisher. Somewhat constrained in his actions
by the language of a trust that controlled 78% of the company's voting shares
and sought to preserve family control of the business, Chip slowly and surely
gained the respect of the active members of the founding Pulliam family. Thus,
with ever growing control of the business, he went about the task of enhancing
shareholder value in many of the ways we had hoped. During his tenure, he cut
costs by shuttering the waning afternoon PHOENIX GAZETTE and INDIANAPOLIS NEWS;
added the 40,000 circulation ALEXANDRIA DAILY TOWN TALK (LA) to the Central News
properties; diversified the company outside of print with investments in job
placement businesses tied to the Internet; and bought back over $500 million
worth of Central Newspapers shares.
Despite the soundness of the strategies employed and the fact that Central's
profits and sales had risen every year since 1992, its stock price continued to
trade well below the full value of the business. Against this backdrop, we
continued to view Central as an undervalued gem. As Bloomberg.com, the business
news website, pointed out, "Newspapers are valued on cash flow, which is defined
as earnings before interest, taxes, depreciation and amortization... Newspapers
are selling for as much as 12 or 14 times cash flow. [Yet], Central Newspapers'
stock, by comparison, has been trading as low as five times cash flow."
All of this changed in early June 2000. Although the company was coming off of
its best year financially with record sales and profits, its shares were down 20
percent year-to-date and at $31.50, way off their October 1999 high of $45.
Frustrated by this stalled stock price and convinced that growth would only come
from bigger scale, Chip Weil announced Central was for sale. This news came on
the heels of the Tribune Company's takeover of the Los Angeles-based
Times-Mirror, another valuable newspaper property that also had been controlled
by a family trust believed to be legally constrained from sale. With Chip's
announcement, Central News
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shares immediately shot up 65%. Bids were collected over the following weeks and
ultimately, Gannett emerged as the winner at a per share price of $64 or $2.6
billion--the second-highest price ever paid for a newspaper company. (It is
worth noting that our analyst, John Miller, was quite close in his own
assessment of the company's worth, having established a private market value of
$67 per share for the company. He was even closer in his valuation of Hussmann
International--a company whose full value he pegged at $28.76, just shy of its
$29 take-out price.)
Over the decade that we held shares in Central Newspapers, we remained steadfast
in our belief in the value of the franchise. Accordingly, through the years we
took advantage of vagaries in the stock price by buying more shares when rising
newsprint prices threatened profits as well as when overblown fears about the
affect of the Internet on the business generated a loss of investor confidence.
Through these periods and others, we never wavered in our belief that Central's
newspaper monopolies in Indianapolis and Phoenix could not be replicated and
that its seasoned management team would steer it through the normal ups and
downs that all businesses confront. In the end, our ten years of patience were
well rewarded. Our first Central shares were purchased at a split-adjusted price
of $8.41, having thereby risen 661% over our entire holding period, offering a
great lesson in patient, value investing.
As a growing number of our company management teams study the critical ways they
might be able to enhance shareholder value, we are increasingly optimistic about
the future. In today's environment where such great discrepancies continue to
exist between the value of our niche, franchise businesses and their day-to-day
stock prices, we are pleased to see more and more companies acting in the best
interest of their shareholders. With this said, there are one or two specific
holdings where we have some concerns about management priorities and are
contemplating a more active effort to encourage their boards and management
teams to realize value for their shareholders.
Money management is a humbling business and so, once again, we appreciate your
patient view as well as the opportunity to serve you. As always, we 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 Fund Ariel Appreciation Fund
THE FUNDS' PORTFOLIO SECURITIES AS OF JUNE 30, 2000, 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
MATTHEWS
INTERNATIONAL CORPORATION
Two NorthShore Center
Pittsburgh, PN 15212
(412) 442-8200
www.matthewsinternational.com
MATTHEWS INTERNATIONAL CORP. (NASDAQ: MATW) Matthews International Corp. designs
and manufactures custom-made products that identify people, places and products.
The company consists of three business divisions: Bronze, Graphics Imaging and
Marking Products. Its largest segment, the Bronze division, is the leading
manufacturer of bronze memorial products (cemetery plaques and urns, including
Elvis Presley's grave marker), a leading manufacturer of commemorative items
(building plaques and monuments) and a leading builder of mausoleums in the
United States. The Graphics Imaging group manufactures printing plates,
pre-press services and imaging systems for the packaging industry. The Marking
Products division designs, manufactures and distributes marking equipment and
materials to label a wide range of specialty products such as soda cans,
automobile tires and computers.
REASONS FOR RECOMMENDATION
A DOMINANT FRANCHISE IN ITS CORE BUSINESS
With approximately 60% market share, Matthews has a dominant presence in bronze
deathcare products, its core business. The company has the ability to set prices
in this business and has very limited competition. The deathcare market is
extremely consistent and predictable; earns very attractive rates of return;
requires extremely little capital reinvestment; and has significant barriers to
entry. In fact, our research suggests it would be very difficult for a new
competitor to enter this market and threaten Matthews' dominance. Through
several sources of independent verification, including customer testimony, we
confirmed that Matthews' products are considered to be the "Cadillac" of its
industry. Long-term, the business has positive demographic and industry trends
working in its favor, including an aging baby-boom generation as well as
increasing popu-
6
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IN FOCUS
larity of flat bronze memorials (Matthews' specialty) as opposed to headstones.
FAVORABLE ECONOMICS AND REASONABLE GROWTH PROSPECTS
Matthews' overall economics are extremely attractive. Its margins and returns on
the business have been both consistent and steadily improving over the past few
years. The company has employed very little debt to achieve these returns and
the balance sheet remains attractive. Additionally, management has demonstrated
an adept ability to allocate the significant free cash flow the business
generates to repurchase stock, make acquisitions, and invest in new growth
initiatives. While the deathcare supply business is not an inherently
high-growth industry, Matthews has an ability to grow its business at a
reasonable rate and further expand its margins. We believe management's
continued judicious allocation of capital will translate into continued earnings
per share growth of 13-15% over the next 5 years.
COMPELLING VALUATION
Matthews stock suffered over the past 18 months as it was grouped with other
service providers in the deathcare industry. Specifically, funeral home
consolidators struggled as this highly competitive, low barrier to entry
business collapsed. Although Matthew's financial results were stable during this
period, its stock fell in sympathy. The stock receives very little attention
from Wall Street analysts and as a result, is not well understood. We initiated
a position in Matthews when the stock was trading under $23. Although the stock
has recently appreciated to $28, it is still a bargain as it trades at 13.8
times our forward 12-month cash earnings estimate, 6.8 times cash flow, and at a
28% discount to our estimate of its private market value of $39 per share. We
recommend investors buy Matthews International.
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COMPANY
MBIA [LOGO]
113 King Street
Armonk, NY 10504
(914) 273-4545
www.mbia.com
MBIA, INC. (NYSE: MBI) Profitable, stable, and temporarily misunderstood, MBIA
is a fine example of the type of business in which we seek to invest. The
company's primary business is providing financial guarantee insurance.
Historically, MBIA's largest customers have been municipalities who use the
insurance to lower financing costs on public projects such as building
hospitals.
As demand has leveled off, investors have feared that MBIA would struggle to
maintain 12-15% earnings per share growth. This skepticism coupled with
additional operating issues caused the stock to fall to a low of $36 in late
February of 2000. We welcomed the opportunity to add to our investment at these
appealing levels. MBIA has a rock-solid, AAA-rated balance sheet, growth
opportunities in international and asset-backed markets and an adept CEO, Jay
Brown, who understands how an insurance company creates value. Moreover, the
accounting rules governing MBIA's niche industry allow it to "lock-in" the
majority of next year's profits, and so we believe the future bodes well.
Now trading at approximately $50 per share, the stock has recovered from last
winter's low and we have been rewarded for our patience. Despite this rise in
stock price, the company still trades at a very modest multiple--nine times
next year's cash earnings. We remain bullish on the prospects for MBIA, and we
recommend investors hold their positions.
INVEST WITH CONFIDENCE
T. ROWE PRICE [LOGO]
100 East Pratt Street
Baltimore, MD 21202
(410) 345-2000
www.troweprice.com
T. ROWE PRICE ASSOCIATES (OTC: TROW) T. Rowe Price's seasoned management team
continues to focus on increasing assets under management while delivering
superior investment performance and top tier customer service. Most
significantly, the company recently announced its decision to buy out its joint
venture, Rowe Price-Fleming International, with a price tag of approximately
$700 million, increasing its ownership stake from 50% to 100%. As a result of
this purchase, T. Rowe Price's exposure to the rapidly growing international
markets will double. Even after the deal is completed, T. Rowe Price's balance
sheet will remain exceptionally strong. Also of note is the company's successful
growth initiative to add several of its funds to selected offering lists of
financial intermediaries, a large and rapidly growing channel of distribution.
Additionally, the company's vast direct sales efforts have increased its assets
under management to almost $200 billion.
Although we cannot expect T. Rowe Price's growth to be smooth due to the
vagaries of the global stock and bond markets, it remains a highly profitable
company with excellent long-term prospects. The shares have recently appreciated
to an approximate price of $42, and we recommend investors maintain their
positions in this attractive and distinguished franchise.
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UPDATES
Libbey-Registered Trademark- [LOGO]
420 Madison Avenue
P.O. Box 10060
Toledo, OH 43699
(419) 727-2100
www.libbey.net
LIBBEY, INC. (NYSE: LBY) We met with Libbey's management for almost two days at
Vitrocrisa--its joint venture partner's headquarters in Monterrey, Mexico. The
forum showcased the joint venture in which Libbey owns a 49% interest. With
revenues of $190 million and an operating margin of 21%, Vitrocrisa dominates
Mexico's retail and food-service glassware markets. In fact, its market share in
Mexico exceeds 70%, and it also exports to the U.S. and other Latin American
countries.
Libbey's core U.S. business is also doing extremely well. Both its food-service
and retail segments are thriving, as the past three years' cost cutting and
efficiency enhancing programs are favorably impacting profitability.
Libbey should not have a problem meeting or exceeding our 2000 earnings per
share estimate of $3.00, which is a 14% increase over 1999's $2.63. This is
particularly impressive given this year's sharp rise in raw material costs and
natural gas prices. Over the next three years, we expect earnings per share to
grow at a compounded rate of 12% or better.
Despite this positive news, Libbey's stock sells at only eleven times this
year's estimated earnings per share--a very compelling valuation. We recommended
investors add to their positions.
[LOGO]
18 Loveton Circle
Sparks, MD 21152
(410) 771-7301
www.mccormick.com
MCCORMICK & COMPANY, INC. (NYSE: MKC) After spending an entire May afternoon
with McCormick management, we left more confident than ever about the superior
quality of this undervalued franchise and the strength of its energized
management team. Company and industry fundamentals remain strong with several
top-line growth opportunities. As the dominant leader in the spice and seasoning
category, McCormick should benefit from the 3-5% annual increase in domestic
spice consumption, along with the ongoing rollout of its Quest program (which
offers everyday low pricing for its retail customers), as well as new product
introductions.
Earlier this year, the company was out of favor with Wall Street and investors
alike, as the earnings outlook was dismal for most food product stocks. Despite
this difficult environment, McCormick continued to deliver one of the strongest
growth rates in the group. With its branded, niche product line, we believe
McCormick is an attractive candidate for acquisition.
Just recently, McCormick announced it arrived at an agreement to buy Ducros, the
world's second-largest spice maker--its first major acquisition in a decade.
This acquisition will immediately boost the company's presence in Europe where
it currently holds the number three market-share position.
Currently trading at a sizeable discount to our estimated private market value
of $45, we recommend investors add to their positions in McCormick.
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TEN LARGEST HOLDINGS
as of June 30, 2000
1 CENTRAL NEWSPAPERS, INC.
Leading media company with daily newspapers in Phoenix and Indianapolis
2 ROUSE CO.
Retail mall developer
3 SPECIALTY EQUIPMENT COS.
Manufacturer of commercial and institutional food service equipment
4 LEE ENTERPRISES
Diversified media company
5 LITTELFUSE, INC.
Largest global manufacturer of circuit protection devices
6 HASBRO, INC.
Prominent toy manufacturer
7 MCCORMICK & CO., INC.
World's largest spice company
8 MBIA, INC.
Leading insurer of municipal bonds
9 BRADY CORP.
Manufacturer and distributor of niche industrial safety-related products
10 INTERNATIONAL GAME TECHNOLOGY
World's leading supplier of computerized gaming devices
ARIEL FUND
Inception
November 6, 1986
AVERAGE ANNUAL TOTAL RETURNS AS OF JUNE 30, 2000 (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>
----------------------------------------------------------------------------------------------------------------
2nd Quarter YTD 1 Year 3 Year 5 Year 10 Year Life of Fund
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
ARIEL FUND +14.03% +9.23% +1.21% +10.60% +16.03% +11.29% +13.78%
----------------------------------------------------------------------------------------------------------------
RUSSELL 2000 INDEX -3.78% +3.04% +14.32% +10.57% +14.27% +13.56% +12.00%
----------------------------------------------------------------------------------------------------------------
RUSSELL 2000 VALUE INDEX +1.95% +5.85% -0.94% +3.84% +11.70% +13.15% +11.74%
----------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
ARIEL FUND PORTFOLIO COMPOSITION
<S> <C>
CONSUMER DISCRETIONARY & SERVICES 35.34%
CONSUMER STAPLES 6.84%
FINANCIAL SERVICES 11.81%
MATERIALS AND PROCESSING 10.31%
PRODUCER DURABLES 15.27%
TECHNOLOGY 4.46%
HEALTH CARE 0.00%
UTILITIES 0.00%
CASH & OTHER 15.97%
INTEGRATED OILS 0.00%
OTHER ENERGY 0.00%
AUTOS & TRANSPORTATION 0.00%
<CAPTION>
RUSSELL 2000 PORTFOLIO COMPOSITION
<S> <C>
CONSUMER DISCRETIONARY & SERVICES 16.2%
CONSUMER STAPLES 2.3%
FINANCIAL SERVICES 17.8%
MATERIALS AND PROCESSING 8.4%
PRODUCER DURABLES 9.0%
TECHNOLOGY 20.2%
HEALTH CARE 12.4%
UTILITIES 6.8%
CASH & OTHER 1.0%
INTEGRATED OILS 0.0%
OTHER ENERGY 3.0%
AUTOS & TRANSPORTATION 2.9%
</TABLE>
[GRAPH]
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTED IN ARIEL FUND AND
COMPARABLE INDICES*
<TABLE>
<CAPTION>
DATE 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
1999 $53,335 $83,912 $45,228
Jun-00 $58,255 $83,556 $46,602
</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 PRIMARILY INVESTS IN COMPANIES
WITH MARKET CAPITALIZATIONS UNDER $1.5 BILLION WITH AN EMPHASIS ON SMALLER
CAPITALIZATION (SMALL-CAP) STOCKS.
*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.
The Russell 2000 Value Index measures the performance of smaller, value-oriented
companies with lower price-to-earnings ratios. All indices 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 RETURNS AS OF JUNE 30, 2000 (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>
------------------------------------------------------------------------------------------------------------------
2nd Quarter YTD 1 Year 3 Year 5 Year 10 Year Life of Fund
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
ARIEL APPRECIATION FUND +4.56% +0.68% -9.86% +11.84% +17.56% +12.54% +12.94%
------------------------------------------------------------------------------------------------------------------
RUSSELL MIDCAP INDEX -4.51% +5.12% +12.64% +16.16% +18.74% +16.54% +15.72%
------------------------------------------------------------------------------------------------------------------
RUSSELL MIDCAP VALUE INDEX -1.68% -0.69% -7.91% +6.95% +13.71% +14.22% +13.06%
------------------------------------------------------------------------------------------------------------------
</TABLE>
[GRAPH]
<TABLE>
<CAPTION>
ARIEL APPRECIATION FUND
PORTFOLIO COMPOSITION
<S> <C>
CONSUMER DISCRETIONARY & SERVICES 36.27%
FINANCIAL SERVICES 23.94%
CONSUMER STAPLES 12.55%
PRODUCER DURABLES 8.78%
MATERIALS AND PROCESSING 5.85%
HEALTH CARE 5.35%
UTILITIES 3.62%
CASH & OTHER 2.16%
TECHNOLOGY 1.48%
INTEGRATED OILS 0.00%
OTHER ENERGY 0.00%
AUTOS & TRANSPORTATION 0.00%
<CAPTION>
RUSSELL MIDCAP PORTFOLIO COMPOSITION
<S> <C>
CONSUMER DISCRETIONARY & SERVICES 14.8%
FINANCIAL SERVICES 16.1%
CONSUMER STAPLES 4.0%
PRODUCER DURABLES 6.3%
MATERIALS AND PROCESSING 5.5%
HEALTH CARE 9.8%
UTILITIES 10.5%
CASH & OTHER 0.9%
INTEGRATED OILS 1.3%
TECHNOLOGY 20.6%
OTHER ENERGY 5.4%
AUTOS & TRANSPORTATION 4.8%
</TABLE>
[GRAPH]
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTED IN ARIEL APPRECIATION FUND
AND COMPARABLE INDICES*
<TABLE>
<CAPTION>
DATE APP S&P 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
1999 $35,981 $54,559 $44,579
Jun-00 $36,225 $54,327 $46,861
</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 FUND PRIMARILY INVESTS IN SMALL AND MIDSIZE
COMPANIES WITH MARKET CAPITALIZATIONS FROM $200 MILLION TO $5 BILLION, WITH AN
EMPHASIS ON MEDIUM CAPITALIZATION (MID-CAP) STOCKS.
*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 Midcap Index measures the performance of small and
mid-sized companies. The Russell Midcap Value Index measures the performance
of small and mid-sized, value-oriented companies with lower price-to-earnings
ratios. All indices are unmanaged and returns include reinvested dividends.
An investor cannot invest directly in an index.
TEN LARGEST HOLDINGS
as of June 30, 2000
1 CENTRAL NEWSPAPERS, INC.
Leading media company with daily newspapers in Phoenix and Indianapolis
2 ROUSE CO.
Retail mall developer
3 HOUGHTON MIFFLIN CO.
Leading publisher of educational textbooks and multimedia products
4 MBIA, INC.
Leading insurer of municipal bonds
5 EQUIFAX, INC.
Consumer credit and check processing services company
6 INTERNATIONAL GAME TECHNOLOGY
World's leading supplier of computerized gaming devices
7 MCCORMICK & CO., INC.
World's largest spice company
8 HERMAN MILLER, INC.
One of the country's largest manufacturers of office furniture
9 HASBRO, INC.
Prominent toy manufacturer
10 CENTURYTEL, INC.
Diversified telecommunications company
11
<PAGE>
SCHEDULE OF INVESTMENTS
ARIEL FUND
SCHEDULE OF INVESTMENTS
JUNE 30, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
Number COMMON STOCKS-84.03% Cost Market Value
of Shares
<C> <S> <C> <C>
CONSUMER DISCRETIONARY--35.34%
545,333 Bob Evans Farms, Inc. $8,435,763 $8,145,912
252,600 Central Newspapers, Inc., Class A 3,100,901 15,976,950
263,100 Department 56, Inc.* 8,535,654 2,894,100
16,600 Grey Advertising, Inc. 5,986,905 8,632,000
733,325 Hasbro, Inc. 10,373,873 11,045,708
393,100 International Game Technology* 6,761,706 10,417,150
494,500 Lee Enterprises 13,054,004 11,528,031
507,750 Leggett & Platt, Inc. 6,825,118 8,377,875
211,500 Libbey, Inc. 7,521,187 6,794,437
45,000 Matthews International Corp. 1,178,456 1,305,000
518,250 ServiceMaster Co. 6,395,423 5,895,094
------------ ------------
78,168,990 91,012,257
------------ ------------
CONSUMER STAPLES--6.84%
311,900 Longs Drug Stores Corp. 6,673,461 6,783,825
333,100 McCormick & Co., Inc. 8,888,508 10,825,750
------------ ------------
15,561,969 17,609,575
------------ ------------
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
Number COMMON STOCKS-84.03% (cont) Cost Market Value
of Shares
<C> <S> <C> <C>
FINANCIAL SERVICES--11.81%
94,600 Arthur J. Gallagher & Co. $1,821,142 $3,973,200
387,950 HCC Insurance Holdings, Inc. 5,370,920 7,322,556
411,675 Horace Mann Educators Corp. 9,779,850 6,175,125
220,900 MBIA, Inc. 8,515,171 10,644,619
68,000 Urban Shopping Centers 2,280,147 2,290,750
------------ ------------
27,767,230 30,406,250
------------ ------------
MATERIALS AND PROCESSING--10.31%
322,400 Brady Corp. 7,986,505 10,478,000
143,900 Hunt Corp. 1,916,478 1,492,963
630,100 Interface, Inc., Class A 3,677,395 2,402,256
491,900 Rouse Co. 9,660,971 12,174,525
------------ ------------
23,241,349 26,547,744
------------ ------------
PRODUCER DURABLES--15.27%
262,170 General Binding Corp. 4,608,893 1,753,262
252,300 Graco, Inc. 7,633,435 8,199,750
269,700 IDEX Corp. 6,848,668 8,512,406
357,900 Miller (Herman), Inc. 6,138,750 9,260,662
427,575 Specialty Equipment Cos., Inc.* 5,664,288 11,597,972
------------ ------------
30,894,034 39,324,052
------------ ------------
TECHNOLOGY--4.46%
234,500 Littelfuse, Inc.* 5,923,529 11,490,500
------------ ------------
Total Common Stocks 181,557,101 216,390,378
------------ ------------
<CAPTION>
Principal REPURCHASE AGREEMENT-16.42% Cost Market Value
Amount
<C> <S> <C> <C>
$42,274,231 State Street Bank & Trust
Company Repurchase Agreement,
4.25%, dated 6/30/2000, repurchase
price $42,289,203, maturing
7/3/2000 (collateralized by U.S.
Treasury Note, 7.25%,
5/15/2004) $42,274,231 $42,274,231
------------ ------------
Total Repurchase Agreement 42,274,231 42,274,231
------------ ------------
Total Investments-100.45% $223,831,332 258,664,609
============
Liabilities less Other Assets-(0.45)% (1,170,325)
------------
NET ASSETS-100.00% $257,494,284
============
</TABLE>
*Non-income producing
13
<PAGE>
ARIEL APPRECIATION FUND
SCHEDULE OF INVESTMENTS
JUNE 30, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
Number COMMON STOCKS-99.39% Cost Market Value
of Shares
<C> <S> <C> <C>
CONSUMER DISCRETIONARY--36.27%
195,500 Bob Evans Farms, Inc. $3,772,410 $2,920,281
235,050 Carnival Corp. 3,637,071 4,583,475
218,500 Central Newspapers, Inc., Class A 5,959,323 13,820,125
204,800 Galileo International, Inc. 8,260,367 4,275,200
228,250 Harte-Hanks, Inc. 1,428,416 5,706,250
741,350 Hasbro, Inc. 11,968,094 11,166,584
270,700 Houghton Mifflin Co. 9,093,401 12,638,306
459,900 International Game Technology* 7,279,707 12,187,350
419,000 Lee Enterprises 11,662,599 9,767,937
493,945 Leggett & Platt, Inc. 5,816,207 8,150,092
136,600 Libbey, Inc. 4,587,760 4,388,275
144,100 McClatchy Company 4,840,905 4,773,313
330,700 Newell Rubbermaid, Inc. 9,237,468 8,515,525
147,300 Tribune Co. 4,604,500 5,155,500
----------- -----------
92,148,228 108,048,213
----------- -----------
CONSUMER STAPLES--12.55%
218,272 The Clorox Co. 6,962,153 9,781,314
329,440 Longs Drug Stores Corp. 7,637,019 7,165,320
368,195 McCormick & Co., Inc. 9,638,094 11,966,337
684,900 Whitman Corp. 11,249,825 8,475,638
----------- -----------
35,487,091 37,388,609
----------- -----------
<CAPTION>
Number COMMON STOCKS-99.39% (cont) Cost Market Value
of Shares
<C> <S> <C> <C>
FINANCIAL SERVICES--23.94%
90,500 Arthur J. Gallagher & Co. $1,660,203 $3,801,000
468,500 Equifax, Inc. 14,246,727 12,298,125
263,800 Franklin Resources, Inc. 8,667,373 8,012,925
145,100 H & R Block, Inc. 4,719,181 4,697,613
261,300 MBIA, Inc. 11,021,017 12,591,394
382,700 MBNA Corp. 5,982,140 10,380,737
186,500 SunGard Data Systems, Inc.* 5,240,332 5,781,500
114,600 T. Rowe Price Associates, Inc. 4,491,481 4,870,500
164,400 XL Capital Ltd. 9,347,522 8,898,150
----------- -----------
65,375,976 71,331,944
----------- -----------
HEALTH CARE--5.35%
98,900 Cardinal Health, Inc. 3,990,388 7,318,600
435,100 Sybron International Corp.* 6,684,954 8,620,419
----------- -----------
10,675,342 15,939,019
----------- -----------
MATERIALS AND PROCESSING--5.85%
69,900 Avery Dennison Corp. 4,226,327 4,692,038
514,700 Rouse Co. 8,962,269 12,738,825
----------- -----------
13,188,596 17,430,863
----------- -----------
OTHER--1.55%
200,750 Fortune Brands, Inc. 5,605,487 4,629,797
----------- -----------
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
Number COMMON STOCKS-99.39% (cont) Cost Market Value
of Shares
<C> <S> <C> <C>
PRODUCER DURABLES--8.78%
453,100 Miller (Herman), Inc. $8,549,312 $11,723,963
216,800 Pitney Bowes, Inc. 8,964,609 8,672,000
212,000 Specialty Equipment Cos., Inc.* 2,513,609 5,750,500
----------- -----------
20,027,530 26,146,463
----------- -----------
TECHNOLOGY--1.48%
90,125 Littelfuse, Inc.* 2,033,276 4,416,125
----------- -----------
UTILITIES--3.62%
374,925 CenturyTel, Inc. 6,308,382 10,779,094
----------- -----------
Total Common Stocks 250,849,908 296,110,127
----------- -----------
Total Investments-99.39% $250,849,908 296,110,127
===========
Other Assets less Liabilities-0.61% 1,803,536
-----------
NET ASSETS-100.00% $297,913,663
===========
</TABLE>
*Non-income producing
15
<PAGE>
EQUITY STATISTICAL SUMMARY
ARIEL FUND
(UNAUDITED)
<TABLE>
<CAPTION>
Earnings Per Share
------------------
52 - Week
Range 1999 2000 1999 2000 Market
Ticker Price ------------ Actual Estimated P/E P/E Cap.
Company Symbol 6/30/00 Low High Calendar Calendar Calendar Calendar ($MM)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Hunt Corp. HUN 10.38 6.63 11.13 0.93 0.96 11.2 10.8 103
General Binding Corp. GBND 6.69 6.00 24.56 -0.31 0.51 NM 13.1 105
Department 56, Inc. DFS 11.00 7.44 29.00 2.45 1.61 4.5 6.8 159
Interface, Inc. IFSIA 3.81 3.06 10.25 0.45 0.57 8.5 6.7 197
Matthews International Corp. MATW 29.00 20.00 32.88 1.53 1.72 19.0 16.9 448
Libbey, Inc. LBY 32.13 24.63 32.50 2.63 3.00 12.2 10.7 489
Specialty Equipment Cos., Inc. SEC 27.13 15.00 34.13 2.22 2.05 12.2 13.2 529
Bob Evans Farms, Inc. BOBE 14.94 12.00 22.06 1.38 1.45 10.8 10.3 552
Urban Shopping Centers, Inc. URB 33.69 24.00 34.38 3.32 3.65 10.1 9.2 611
Horace Mann Educators Corp. HMN 15.00 12.63 33.00 1.70 1.59 8.8 9.4 613
Grey Advertising, Inc. GREY 520.00 322.06 530.00 5.13 24.40 101.4 21.3 646
Graco, Inc. GGG 32.50 28.25 36.19 2.75 3.32 11.8 9.8 660
Brady Corp. BRC 32.50 24.50 36.31 1.97 2.07 16.5 15.7 737
Longs Drug Stores, Inc. LDG 21.75 15.94 35.63 1.76 1.90 12.4 11.4 822
HCC Insurance Holdings, Inc. HCC 18.88 8.00 25.13 1.20 1.30 15.7 14.5 929
IDEX Corp. IEX 31.56 22.75 34.75 1.81 2.19 17.4 14.4 937
Lee Enterprises LEE 23.31 19.69 32.25 1.57 1.75 14.8 13.3 1,029
RPM, Inc. RPM 10.13 8.63 15.06 0.88 0.93 11.5 10.9 1,066
Littelfuse, Inc. LFUS 49.00 18.75 50.63 1.16 1.76 42.2 27.8 1,079
Arthur J. Gallagher & Co. AJG 42.00 23.06 43.44 1.75 1.95 24.0 21.5 1,563
Rouse Company RSE 24.75 19.75 25.81 2.98 3.31 8.3 7.5 1,738
International Game Technology IGT 26.50 16.19 28.94 1.34 1.73 19.8 15.3 1,912
Herman Miller, Inc. MLHR 25.88 19.13 30.75 1.67 1.87 15.5 13.8 2,036
McCormick & Company, Inc. MKC 32.50 23.75 36.56 1.69 1.98 19.2 16.4 2,233
Central Newspapers, Inc. ECP 63.25 27.25 65.88 2.31 2.18 27.4 29.0 2,417
Hasbro, Inc. HAS 16.00 13.75 28.63 1.42 1.41 11.3 11.3 2,754
Leggett & Platt, Inc. LEG 16.50 15.06 28.00 1.45 1.56 11.4 10.6 3,241
The ServiceMaster Co. SVM 11.38 10.13 18.56 0.71 0.80 16.0 14.2 3,476
MBIA, Inc. MBI 48.19 36.31 66.94 4.72 5.13 10.2 9.4 4,741
</TABLE>
Note: All earnings per share numbers are fully diluted. Such numbers are from
continuing operations and are adjusted for non-recurring items. Rouse
Company and Urban Shopping Center estimates are before depreciation and
deferred taxes. NM=Not Meaningful.
16
<PAGE>
ARIEL APPRECIATION FUND
(UNAUDITED)
<TABLE>
<CAPTION>
Earnings Per Share
------------------
52 - Week
Range 1999 2000 1999 2000 Market
Ticker Price ------------ Actual Estimated P/E P/E Cap.
Company Symbol 6/30/00 Low High Calendar Calendar Calendar Calendar ($MM)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Libbey, Inc. LBY 32.13 24.63 32.50 2.63 3.00 12.2 10.7 489
Specialty Equipment Cos., Inc. SEC 27.13 15.00 34.13 2.22 2.05 12.2 13.2 529
Bob Evans Farms, Inc. BOBE 14.94 12.00 22.06 1.38 1.45 10.8 10.3 552
Longs Drug Stores, Inc. LDG 21.75 15.94 35.63 1.76 1.90 12.4 11.4 822
Lee Enterprises LEE 23.31 19.69 32.25 1.57 1.75 14.8 13.3 1,029
Littelfuse, Inc. LFUS 49.00 18.75 50.63 1.16 1.76 42.2 27.8 1,079
Houghton Mifflin Company HTN 46.69 34.88 52.50 1.62 2.88 28.8 16.2 1,474
McClatchy Co. MNI 33.13 28.75 45.13 1.83 2.01 18.1 16.5 1,493
Arthur J. Gallagher & Co. AJG 42.00 23.06 43.44 1.75 1.95 24.0 21.5 1,563
Whitman Corp. WH 12.19 10.38 19.56 0.58 0.65 21.0 18.8 1,662
Harte-Hanks, Inc. HHS 25.00 19.06 27.50 1.02 1.21 24.5 20.7 1,708
Rouse Company RSE 24.75 19.75 25.81 2.98 3.31 8.3 7.5 1,738
Galileo International, Inc. GLC 20.88 16.50 58.69 2.24 2.05 9.3 10.2 1,909
International Game Technology IGT 26.50 16.19 28.94 1.34 1.73 19.8 15.3 1,912
Herman Miller, Inc. MLHR 25.88 19.13 30.75 1.67 1.87 15.5 13.8 2,036
Sybron Corp. SYB 19.81 16.38 33.06 1.25 1.39 15.8 14.3 2,071
McCormick & Company, Inc. MKC 32.50 23.75 36.56 1.69 1.98 19.2 16.4 2,233
Central Newspapers, Inc. ECP 63.25 27.25 65.88 2.31 2.18 27.4 29.0 2,417
Hasbro, Inc. HAS 16.00 13.75 28.63 1.42 1.41 11.3 11.3 2,754
H&R Block, Inc. HRB 32.38 26.94 59.50 2.12 2.30 15.3 14.1 3,186
Leggett & Platt, Inc. LEG 16.50 15.06 28.00 1.45 1.56 11.4 10.6 3,241
Fortune Brands, Inc. FO 23.06 21.25 43.00 1.99 2.35 11.6 9.8 3,651
Equifax, Inc. EFX 26.25 19.88 36.94 1.55 1.71 16.9 15.4 3,705
CenturyTel, Inc. CTL 28.75 24.44 48.75 1.69 1.62 17.0 17.7 4,032
SunGard Data Systems, Inc. SDS 31.00 16.88 40.00 1.36 1.63 22.8 19.0 4,078
MBIA, Inc. MBI 48.19 36.31 66.94 4.72 5.13 10.2 9.4 4,741
T. Rowe Price Associates, Inc. TROW 42.50 25.88 48.00 1.85 2.20 23.0 19.3 5,132
XL Capital Ltd. XL 54.13 39.00 63.50 3.63 4.55 14.9 11.9 6,739
Newell Rubbermaid, Inc. NWL 25.75 21.00 47.75 1.65 1.99 15.6 12.9 6,863
Franklin Resources, Inc. BEN 30.38 24.63 43.44 2.01 2.33 15.1 13.0 7,399
Avery Dennison Corp. AVY 67.13 51.44 78.50 2.55 2.92 26.3 23.0 7,528
Tribune Company TRB 35.00 27.88 60.88 1.54 1.39 22.7 25.2 7,994
Pitney Bowes, Inc. PBI 40.00 35.63 72.50 2.34 2.60 17.1 15.4 10,310
The Clorox Company CLX 44.81 29.06 58.25 1.61 1.86 27.8 24.1 10,518
Carnival Corp. CCL 19.50 18.31 51.88 1.66 1.69 11.7 11.5 11,787
Cardinal Health, Inc. CAH 74.00 37.00 74.00 2.29 2.80 32.3 26.4 20,373
MBNA Corp. KRB 27.13 19.50 33.25 1.21 1.49 22.4 18.2 21,752
</TABLE>
Note: All earnings per share numbers are fully diluted. Such numbers are from
continuing operations and are adjusted for non-recurring items. Rouse
Company estimates are before depreciation and deferred taxes.
17
<PAGE>
ARIEL PREMIER BOND
DEAR FELLOW SHAREHOLDER: For the second quarter ended June 30, 2000, the Ariel
Premier Bond Fund, Institutional Class gained +1.62% and the Investor Class
gained +1.63%, slightly trailing the +1.74% return of the Lehman Brothers
Aggregate Bond Index. In keeping with the past two years, yield and spread
volatility was the primary theme in the fixed income market again this quarter.
A comparison of beginning and ending yield levels that were seemingly the same
masked yet another period of volatility, fueled mostly by changing expectations
for the economy, interest rate uncertainty and stock market volatility. A stock
market decline in early April prompted a decline in yields, followed by a sharp
rise in early May as stocks stabilized and the Fed raised interest rates 0.50%.
A series of softer economic reports in June led to another rally in yields as
the Fed left rates unchanged at their June meeting. Spreads were also volatile
over the period.
With the exception of the emerging market sector, where spreads tightened
significantly, Treasuries of all durations generally provided the best returns
over the past three months. The highest return portfolios for the first half of
2000 were long duration in Treasuries with some exposure to emerging markets. In
general, all non-Treasury sectors underperformed as a result of the spread
widening, primarily in the first quarter.
As such, Ariel Premier Bond Fund's lagging performance primarily resulted from
an underweighting in Treasuries. An exposure to long corporates and Agencies
further contributed to the shortfall. Currently, the fund has one primary theme:
a short duration exposure. Although the market is priced for Fed easing and a
decline in inflation, we anticipate that the Fed will raise rates further by
year-end in response to a continued rise in inflation. Despite recent
moderation, the growth rate of the economy is still above its long-term
potential, and wage and inflation pressures have significant momentum of their
own. As such, rather than preparing for a decline, we believe the Fed will work
to control any INCREASE in inflation.
The spread overweight of Ariel Premier Bond Fund has been reduced over the
second quarter and is now roughly equal to the benchmark. The decline in
Treasury yields has distorted spread relationships, making historical
comparisons a little less informative. In other words, spreads are not as wide
as they appear. Combined with the possibility of further Fed tightening, spreads
are a bit vulnerable. Accordingly, the portfolio's overall exposure is neutral,
with overweights in Agencies and asset-backed securities offset by underweights
in mortgages and corporates.
In general, the Ariel Premier Bond Fund is positioned to perform well in a
rising interest rate and a stable to widening spread environment, which we
believe is likely to occur over the second half of this year.
Sincerely,
/s/ John W. Rogers, Jr. /s/ Kenneth R. Meyer
John W. Rogers, Jr. Kenneth R. Meyer
Chairman & CEO CEO
Ariel Capital Management, Inc. Lincoln Capital Management Company
18
<PAGE>
ARIEL PREMIER
BOND FUND
Institutional Class Inception
October 1, 1995
Investor Class Inception
February 1, 1997
AVERAGE ANNUAL TOTAL RETURNS AS OF JUNE 30, 2000 (assume reinvestment of
dividends and capital gains)
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------
2nd Quarter YTD 1 Year 3 Year Life of Fund
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ARIEL PREMIER BOND FUND, INST. CL. +1.62% +3.21% +3.76% +5.34% +5.47%
----------------------------------------------------------------------------------------------------------------
ARIEL PREMIER BOND FUND, INV. CL. +1.63% +3.11% +3.35% +4.95% +5.15%
----------------------------------------------------------------------------------------------------------------
LEHMAN BROS. AGGREGATE BOND INDEX +1.74% +3.99% +4.56% +6.04% +6.16% (INST.)
+6.14% (INV.)
----------------------------------------------------------------------------------------------------------------
</TABLE>
[GRAPH]
<TABLE>
<CAPTION>
ARIEL PREMIER BOND FUND
PORTFOLIO COMPOSITION
ARIEL PREMIER BOND FUND
<S> <C>
Asset Backed 36.4
Commercial Mortgage Backed 4.0
Corporate 10.4
Government & Agency 10.1
Cash 8.5
Mortgage backed 30.6
<CAPTION>
LEHMAN BROS.
<S> <C>
Asset Backed 1.5
Commercial Mortgage Backed 1.5
Corporate 23.2
Government & Agency 39.4
Cash 0.0
Mortgage backed 34.4
</TABLE>
[GRAPH]
<TABLE>
<CAPTION>
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTED IN ARIEL PREMIER BOND FUND,
INVESTOR CLASS AND COMPARABLE INDEX*
DATE BOND LEHMAN
<S> <C> <C>
Feb-97 $10,000 $10,000
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
Dec-99 $11,509 $11,784
Mar-00 $11,676 $12,044
Jun-00 $11,867 $12,254
COMPARISON OF CHANGE IN VALUE OF $1,000,000 INVESTED IN ARIEL PREMIER BOND FUND,
INSTITUTIONAL CLASS AND COMPARABLE INDEX*
DATE BOND LEHMAN
<S> <C> <C>
Oct-95 $1,000,000 $1,000,000
Dec-95 $1,035,122 $1,042,614
Jun-96 $1,018,867 $1,029,953
Dec-96 $1,067,709 $1,080,467
Jun-97 $1,101,595 $1,113,887
Dec-97 $1,165,544 $1,184,770
Jun-98 $1,210,570 $1,231,317
Dec-98 $1,254,703 $1,287,699
Jun-99 $1,240,901 $1,270,046
Dec-99 $1,247,569 $1,277,108
Jun-00 $1,287,588 $1,328,017
</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
JUNE 30, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
Par Value ASSET-BACKED SECURITIES-36.40% Cost Market Value
<C> <S> <C> <C>
$2,500,000 AESOP Funding II LLC,
2000-1 A, 6.924%, 7/20/2004+ $2,500,000 $2,488,650
2,410,000 AFC Home Equity Loan
Trust 2000, 6.733%, 7/25/2030 2,410,000 2,414,218
550,000 AMEX Credit Acct. Master Trust,
1998-1 A, 6.701%, 1/17/2006 550,233 550,071
885,000 AMEX Credit Acct. Master Trust,
1999-6 A, 6.698%, 3/15/2005 887,372 887,389
700,000 AmeriCredit Auto Receivables,
98-B A4, 6.06%, 12/12/2002 699,932 693,259
750,000 AmeriCredit Auto Receivables,
99-A A4, 5.88%, 12/12/2005 749,869 732,900
1,000,000 AmeriCredit Auto Receivables,
00-B A3, 6.974%, 9/5/2004 1,000,000 993,690
580,000 Associates Auto Rec. Trust
2000-1 A1, 6.645%, 5/17/2006 580,000 581,957
190,000 Associates Auto Rec. Trust
2000-1 A3, 7.30%, 1/15/2004 189,991 190,288
121,441 Associates Manufactured Housing,
972A-3, 6.275%, 3/15/2028 121,406 121,336
1,000,000 Auto Leasing Investors,
6.177%, 8/12/2005+ 1,000,000 969,930
550,000 BA Master Credit Card,
1998-A A, 6.709%, 4/15/2005 550,551 550,418
<CAPTION>
Par Value ASSET-BACKED SECURITIES-36.40% (cont) Cost Market Value
<C> <S> <C> <C>
$650,000 BEA, 1998-2A A2A, 6.72%,
6/15/2010+ $628,968 $572,201
470,000 Capital One, 2000,
7.65%, 4/17/2006 468,277 472,594
2,235,000 Chase Credit Card Master
Trust, 2000-2 A, 6.73%,
7/15/2005 2,235,643 2,236,162
805,000 Chevy Chase Master Credit Card Trust,
1995-C A, 6.752%, 5/15/2006 807,627 808,413
695,000 Circuit City Credit Card, 1995-1A,
6.375%, 8/15/2005 704,712 694,270
1,190,000 CIT Equipment Collateral,
2000-1 A3, 6.603%, 1/20/2004 1,190,000 1,182,455
1,320,000 Comm 2000-FL2 A,
7.023%, 7/15/2010+ 1,320,000 1,326,706
2,000,000 Contimortgage Home Equity,
97-4 A5, 6.44%, 12/15/2012 2,017,085 1,968,320
586,825 Credit Card Receivables Trust,
98-1, 6.478%, 12/22/2004+ 589,771 573,727
1,155,000 Discover Card Master Trust I,
1997-1 A, 6.773%, 2/16/2005 1,155,927 1,155,601
325,000 Discover Card Master Trust I,
1999-3 A, 6.684%, 9/16/2004 325,250 325,293
760,000 Discover Card Master Trust I,
2000-3 A, 6.714%, 9/16/2005 760,669 760,380
2,000,000 EQCC Home Equity,
973-A9, 6.57%, 2/15/2029 1,984,208 1,889,640
465,000 First Chicago Master Trust II,
1995-0 A, 6.696%, 2/15/2004 466,533 466,479
810,000 First Chicago Master Trust II,
1996-S A, 6.697%, 8/15/2004 810,516 810,980
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
Par Value ASSET-BACKED SECURITIES-36.40% (cont) Cost Market Value
<C> <S> <C> <C>
$1,800,000 First Omni, 96-AA,
6.65%, 9/15/2003 $1,817,162 $1,792,404
2,075,000 First USA Credit Card Master Trust,
1995-2 A, 6.745%, 10/15/2004 2,080,984 2,081,225
805,000 First USA Credit Card Master Trust,
1996-1 A, 6.671%, 11/15/2003 805,840 805,217
897,771 Fleetwood, 97-B A,
6.40%, 5/15/2013 896,652 887,851
1,255,000 Gracechurch Card Funding PLC,
1 A, 6.733%, 11/15/2004 1,256,548 1,259,142
22,132 Green Tree Financial-MH,
1995-1 A5, 8.40%, 6/15/2025 24,232 22,204
500,000 Green Tree Financial-MH,
98-4 A4, 6.09%, 2/1/2030 499,950 495,440
870,000 Greenpoint Manufacturing,
2000-1 A2, 7.60%, 11/20/2022 869,974 867,051
1,415,000 Healthcare Rec., 99-1,
6.25%, 2/1/2003+ 1,413,457 1,378,139
490,000 IKON Rec. 2000-1 A3,
6.974%, 3/15/2004 490,000 492,122
715,747 IMC Excess Cash Flow Sec. Trust,
97-A A, 7.41%, 11/26/2028+ 715,720 436,606
1,450,000 J.C. Penney Master Credit Card Trust,
C A, 9.625%, 6/15/2000 1,450,000 1,450,000
745,000 Mellon Residential Funding Corp.,
2000TBC2 A1, 6.742%, 6/15/2030 745,000 749,433
510,000 New Holland Equipment Rec. Trust,
1999-A A4, 6.80%, 12/15/2007+ 505,525 503,691
2,050,000 Pacific Gas & Electric Co.,
1997-1 A8, 6.48%, 12/26/2009 1,945,268 1,964,822
<CAPTION>
Par Value ASSET-BACKED SECURITIES-36.40% (cont) Cost Market Value
<C> <S> <C> <C>
$1,440,000 Prime, 95-1A, 6.75%, 11/15/2005 $1,444,709 $1,423,814
2,816,980 Railcar Leasing, 971A,
6.75%, 7/15/2006+ 2,849,941 2,743,288
484,994 Railcar Trust, 92-A1, 7.75%,
6/1/2004 497,845 485,605
805,000 Residential Asset Sec. Corp.,
2000-KS3 AII, 6.717%, 7/25/2031 804,435 805,113
440,509 Salomon Brothers Mortgage Sec.,
97LB6A3, 6.76%,12/25/2027 439,974 437,667
1,100,000 SASCO 2000-C2 A,
6.566%, 10/21/2002+ 1,100,000 1,101,881
795,000 Saxon Asset Securities Trust,
2000-2 AF1, 6.448%, 5/25/2015 794,953 794,905
345,000 Sears Credit Account Master Trust,
1995-5 A, 6.05%, 2/15/2004 335,754 335,799
210,000 Toyota Auto Receivables Owner Trust,
2000-A A4, 7.21%, 4/15/2007 209,948 210,504
757,590 Union Acceptance Corp.,
97AA2, 6.375%, 10/8/2003 761,448 753,347
2,630,000 Union Financial Services Taxable
Student Loan, 98A A8,
5.50%, 9/1/2005 2,614,791 2,488,822
595,000 WFS Financial Owner Trust,
2000-A A4, 7.41%, 9/20/2007 594,876 599,349
1,880,000 World Financial, 96-AA,
6.70%, 2/15/2004 1,885,886 1,871,371
1,077,873 World Omni Auto Lease, 97-B A3,
6.18%, 11/25/2003 1,077,803 1,077,237
220,000 World Omni Auto Lease, 98-A A2,
7.126%, 12/15/2004 220,372 219,934
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
Par Value ASSET-BACKED SECURITIES-36.40% (cont) Cost Market Value
<C> <S> <C> <C>
$1,755,000 World Omni Auto Lease, 99-A A4,
6.736%, 10/15/2005 $1,763,209 $1,764,723
---------- ----------
Total Asset-Backed Securities 59,616,796 58,716,033
---------- ----------
COMMERCIAL MORTGAGE-BACKED SECURITIES-4.03%
320,000 GMAC Commercial, 97-C1 A3,
6.869%, 8/15/2007 304,613 309,793
966,287 GS Mortgage Securities Corp.,
98-GL11 A1, 6.312%, 4/13/2031 986,318 927,964
717,835 GS Mortgage Securities Corp.,
99-C1 A1, 5.85%, 11/18/2030 719,090 680,694
615,000 JPMC Mortgage Finance Corp.,
2000-FL1 A, 6.612%, 4/15/2010+ 615,000 622,675
265,000 Lehman Large Loan, 97-LL1 A2,
6.84%, 9/12/2006 263,256 260,350
2,277,273 MLMI, 97-SD1 A,
7.007%, 4/1/2004+ 2,278,329 2,279,414
192,527 MLMI, 99-C1 A1,
7.37%, 6/15/2008 194,625 192,569
875,000 Prudential Securities Corp.,
2000-C1 A1, 7.617%, 6/15/2009 875,000 877,818
350,000 Salomon Brothers Mortgage Sec.,
2000-1 A1, 7.46%, 11/18/2008 348,289 350,837
1,831 Starwood Asset Receivables,
2000-1 A, 6.9512%, 8/25/2003+ 1,831 1,829
---------- ----------
Total Commercial
Mortgage-Backed Securities 6,586,351 6,503,943
---------- ----------
<CAPTION>
Par Value CORPORATE DEBT-10.43% Cost Market Value
<C> <S> <C> <C>
$925,000 Bank of America, Institutional-B,
7.70%, 12/31/2026+ $841,862 $815,553
550,000 Bestfoods MTN C,
5.60%, 10/15/2097 424,434 380,241
410,000 Boeing Co., 6.875%, 10/15/2043 368,023 358,597
1,000,000 Citigroup Capital III,
7.75%, 12/1/2036 1,035,363 906,052
1,575,000 Consumers Energy CMS,
6.20%, 5/1/2003 1,558,483 1,496,518
1,310,000 Edison International, Inc.,
6.875%, 9/15/2004 1,301,310 1,272,679
1,000,000 Ford Motor Company,
6.375%, 2/1/2029 827,564 816,214
455,000 International Paper Co.,
8.125%, 7/8/2005+ 454,576 459,014
1,020,000 J.C. Penney Co.,
7.625%, 3/1/2097 914,506 705,604
500,000 Kohl's Corp.,
7.25%, 6/1/2029 472,528 444,193
830,000 Liberty Media Group,
8.25%, 2/1/2030 823,373 762,455
655,000 MCI WorldCom, Inc.,
8.25%, 5/15/2010 645,171 670,429
610,000 Mirage Resorts, 7.25%, 8/1/2017 606,959 500,719
300,000 News America Holdings,
7.25%, 5/18/2018 298,071 263,158
726,234 Northwest Airlines Corp., 1999-2A,
7.575%, 3/1/2019 726,234 699,676
400,000 NRG Energy, Inc., 7.50%, 6/1/2009 399,889 375,938
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
Par Value CORPORATE DEBT-10.43% (cont) Cost Market Value
<C> <S> <C> <C>
$400,000 NRG Energy, Inc.,
9.479%, 9/15/2024+ $394,963 $406,312
1,190,000 Park Place Entertainment,
7.95%, 8/1/2003 1,181,486 1,173,598
975,000 Peco Energy Co.,
7.38%, 4/6/2028 929,222 810,651
400,000 PPL Corp., 8.375%, 6/15/2007 397,576 397,192
420,000 Provident Companies,
7.00%, 7/15/2018 419,872 334,411
630,000 Safeco Capital Trust, 8.072%,
7/15/2037 630,000 533,030
415,000 UnumProvident Corp.,
6.75%, 12/15/2028 307,251 306,645
750,000 Virginia Electric Power,
6.75%, 2/1/2007 753,214 706,393
715,000 Vodafone Airtouch,
7.875%, 2/15/2030+ 696,614 699,790
560,000 Zurich Capital Trust,
8.376%, 6/1/2037+ 595,477 520,027
------- -------
Total Corporate Debt 18,004,021 16,815,089
---------- ----------
<CAPTION>
U.S. GOVERNMENT AGENCIES-30.91%
Par Value MORTGAGE-BACKED SECURITIES--30.60% Cost Market Value
<C> <S> <C> <C>
22,402,079 Fannie Mae,
6.50%, 4/1/2029 $21,179,664 $21,138,691
13,900,000 Fannie Mae,
7.50%, 7/1/2030(X) 13,622,000 13,708,736
3,015,000 Fannie Mae, Benchmark Note,
7.125%, 3/15/2007 2,991,622 3,023,804
7,975,000 Fannie Mae, Benchmark Note,
7.125%, 1/15/2030 7,932,310 7,994,714
<CAPTION>
Par Value U.S. GOVERNMENT AGENCIES-30.91% (cont) Cost Market Value
<C> <S> <C> <C>
$2,540,000 Freddie Mac,
6.50%, 7/1/2030(X) $2,380,456 $2,396,886
1,153,256 Freddie Mac, Gold,
6.50%, 11/1/2025 1,091,080 1,095,487
--------- ---------
49,197,132 49,358,318
---------- ----------
OTHER AGENCY ISSUES--0.31%
473,002 Government Trust Certificate, Israel
Trust, Series 2E, 9.40%, 5/15/2002 486,786 481,630
------- -------
Total U.S. Government Agencies 49,683,918 49,839,948
---------- ----------
U.S. GOVERNMENT OBLIGATIONS-9.83%
9,395,000 U.S. Treasury Bond,
8.125%, 8/15/2021 11,300,614 11,456,028
4,340,000 U.S. Treasury Note,
7.50%, 11/15/2001 4,416,970 4,395,608
--------- ---------
Total U.S. Government
Obligations 15,717,584 15,851,636
---------- ----------
COMMERCIAL PAPER-17.26%
3,100,000 American Express Corp.,
6.77%, 7/7/2000* 3,097,668 3,097,668
3,100,000 American General Finance Group,
6.75%, 7/7/2000* 3,097,675 3,097,675
3,100,000 CIT Group Holdings, Inc.,
6.53%, 7/17/2000* 3,092,128 3,092,128
3,100,000 CitiCorp., Inc.,
6.53%, 7/17/2000* 3,092,128 3,092,128
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
Par Value COMMERCIALPAPER-17.26% (cont) Cost Market Value
<C> <S> <C> <C>
$3,100,000 Deere & Co.,
6.53%, 7/17/2000* $3,092,128 $3,092,128
3,100,000 Ford Motor Credit,
6.53%, 7/17/2000* 3,092,128 3,092,128
3,100,000 General Electric Capital Corp.,
6.53%, 7/17/2000* 3,092,128 3,092,128
3,100,000 Prudential Funding Corp.,
6.76%, 7/7/2000* 3,097,672 3,097,672
3,100,000 Wells Fargo & Co.,
6.53%, 7/17/2000* 3,092,128 3,092,128
--------- ---------
Total Commercial Paper 27,845,783 27,845,783
---------- ----------
Principal REPURCHASE AGREEMENT-2.40%
Amount
3,875,518 State Street Bank & Trust Company
Repurchase Agreement, 4.250%,
dated 6/30/2000,
repurchase price $3,876,890
maturing 7/3/2000
(collateralized by U.S. Treasury Note,
4.625%, 12/31/2000) 3,875,518 3,875,518
--------- ---------
Total Repurchase Agreement 3,875,518 3,875,518
--------- ---------
Total Investments-111.26% 181,329,971 179,447,950
===========
Liabilities less Other Assets-(11.26)% (18,154,519)
----------
NET ASSETS-100.00% $161,293,431
============
</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 June 30, 2000.
24
<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. Bert is also a graduate of the Owner-President
Management Program of the Harvard Business School. He serves on the board of
BJ's Wholesale Club, Inc.
MARIO L. BAEZA, ESQ. Chairman and CEO of TCW/Latin America Partners, L.L.C.,
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 Unicom/Commonwealth Edison.
WILLIAM C. DIETRICH, C.P.A. Bill serves as director of finance and
administration of Streamline.com, Inc.-Washington Division. 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 director and 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 president of Ariel Capital Management, Inc., Mellody has
responsibilities related to firmwide management and strategic planning.
Additionally, she 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 and the Field Museum, 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 in Chicago; Market Square in High Point, North Carolina; The Washington
Design Center; and the Architects & Designers Building in New York City. 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 a variety of
civic and corporate boards, including Interface Floor Covering Company and the
Rehabilitation Institute of Chicago.
ERIC T. MCKISSACK, C.F.A. 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
earned his M.B.A. from the University of California at Berkeley. He has earned
the Chartered Financial Analyst designation. Eric serves on a variety of civic
and corporate boards.
JOHN W. ROGERS, JR. John is founder, chairman and CEO of Ariel Capital
Management, Inc. Additionally, as the firm's Co-Chief Investment Officer, he
manages Ariel's small-cap institutional portfolios as well as Ariel Fund, the
firm's flagship mutual fund product. John serves on the board of directors of
Aon Corporation; Bank One Corporation; Burrell Communications Group, Inc.; GATX
Corporation; and Unicom/Commonwealth Edison. He also serves on a number of civic
boards.
<PAGE>
ARIEL MUTUAL FUNDS
Ariel Investment Trust
307 North Michigan Avenue
Suite 500
Chicago, Illinois 60601
800.292.7435
www.arielmutualfunds.com
[LOGO] Printed on recycled paper
