<PAGE>
[LOGO] Semi Annual Report--March 31, 2000
Ariel Fund - Ariel Appreciation Fund - Ariel Premier Bond Fund
One day a Hare was making fun of a Tortoise for being so slow upon his feet.
"Wait a bit," said the tortoise, "I'll run a race with you, and I'll wager that
I'll win." The
THE PATIENT INVESTOR
Hare, who was much amused at the idea, said "Let's try and see..." When the time
came both started off together... The Hare nearly turned a somersault in his
haste, while the Tortoise began at a slow but steady pace. Meanwhile the
Tortoise kept plodding on... [GRAPHIC]
<PAGE>
Ariel Mutual Funds is pleased to announce Merrillyn J. Kosier, Senior Vice
President and Director of Mutual Fund Marketing, has recently been appointed
Director of Shareholder Services. With nearly two decades of industry
experience, Ms. Kosier is uniquely suited to oversee our Shareholder Services
Department and ensure that each Ariel Mutual Funds shareholder receives
outstanding customer service.
We are also delighted to promote the following newly enhanced investor services:
- - Our web site, located at www.arielmutualfunds.com, is an excellent resource
for completing account transactions as well as viewing account information
and performance statistics. You can also read recent press about the funds
and portfolio manager commentary, or e-mail us your questions and comments
at [email protected].
- - Our automated transaction and information hotline, TURTLE TALK, allows you
to accomplish many tasks, such as retrieving account information and
processing transactions. Call 1-800-29-ARIEL (1-800-292-7435), OPTION 2 to
access it 24-hours a day, 7 days a week. Check out our new `shareholder
news' feature, which keeps you abreast of current information about the
firm and the funds.
- - Our convenient automatic investment programs, including our PAYROLL DIRECT
DEPOSIT option, allow you to transfer money to your Ariel Mutual Funds
account directly from your paycheck or bank account. Many of our
shareholders find this to be a trouble-free and time-efficient method of
investing.
At Ariel Mutual Funds, superior shareholder service is a top priority. As
always, you can talk to a registered representative from 8 a.m. to 5 p.m.
(Central Time), Monday through Friday.
<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 THE 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
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
Board of Trustees 32
</TABLE>
<PAGE>
SLOW AND STEADY WINS THE RACE.-AESOP
THE PATIENT INVEST [GRAPHIC] R-Registered Trademark-
DEAR FELLOW SHAREHOLDER: For the quarter ended March 31, 2000, the small-cap
value companies of the Ariel Fund fell -4.21%. Similarly, the mid-cap value
holdings of the Ariel Appreciation Fund lost -3.71%. During this same period,
while the Russell 2000 Index rose +7.08% and the Russell Midcap Index surged
+10.09%, their corresponding value indices continued to suffer on a relative
basis with the Russell 2000 Value and the Russell Midcap Value indices posting
respective gains of +3.82% and +1.01%.
A QUARTER IN TWO ACTS
Having navigated a period that felt like two distinct quarters in one--episodes
of extreme under- and out-performance--it is apparent that a cursory comparison
of the Ariel and Ariel Appreciation Funds' three-month returns to those of the
benchmarks tells an incomplete story. In the first two months of the year, we
will be the first to admit--nothing worked. The observations of another money
manager in one of our favorite publications, OUTSTANDING INVESTOR DIGEST, so
resonated with our own thoughts about the market, we felt them worth repeating.
"We under-performed...not because we abandoned our strict investment criteria,
but because we adhered to them; not because we ignored fundamental analysis, but
because we practiced it; not because we shunned value, but because we sought it;
and not because we speculated, but because we refused to speculate." In short,
the period was one where, in our view, the most disciplined value managers
suffered the most.
Monthly WALL STREET JOURNAL "Scorecards" depicting the one-year returns of the
best and worst performing value managers serve as a case in point. The managers
with the most enviable long-term track records were at the bottom of the
pile--most employing classic value strategies like that of the legendary Warren
Buffett. Perhaps not surprisingly, faced with intense performance pressure, many
of the traditionalists appear to have modified their value approaches at the
expense of style purity or just abruptly abandoned fund management altogether.
For example, according to the WILSHIRE MONTHLY ADVISOR UPDATE, "of the 121
funds currently classified as Small Value
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by Morningstar, only 10 funds have maintained an 85% exposure to small value
stocks over the last 3 years. Morningstar's top five performing small value
funds had an average exposure to small value stocks of only 26% as of the end of
January." And certainly recent manager casualties of this unforgiving
environment--high profile fund manager terminations and shop
closings--underscore the truth of a recent MONEY MAGAZINE column that deadpanned
"Value investing is dangerous these days. You can get fired for it."
Like other value purists, as our all-weather business franchises churned out
quality products and consistent earnings in January and February, their reward
was to be derided as "Old Economy" stocks and to languish for no good reason.
And so, the frustrations of 1999 continued to plague our results into this New
Year and we found ourselves asking, "What bull market?" BARRON'S seemed to sum
up the situation best in a headline that declared, "The bull market is a Nasdaq
phenomenon"--its ceremonial passing of the 5,000 mark, an unabashed
manifestation of rampant tech euphoria. Against this backdrop, they concluded,
"...America has two distinct stock markets: the loopy technology sector, in
which companies trade for more than 100 times this year's projected profits, and
the rest of the market, where vast numbers of stocks go begging..." In keeping
with this sentiment, FORBES columnist, David Dreman asked, "Can mankind live by
the Internet alone?" His conclusion, "To judge from current stock prices, it
would seem that we can forgo minor needs like food, shelter and clothing."
Certainly, the disparate performance of sectors comprising the Russell 2000
small cap index underscored this point. For example, the technology sector's 25%
weighting and +37.25% rise contributed +9.41% to the TWO-MONTH return of the
index. Similarly, the Russell 2000's 12% healthcare weighting, propelled by
biotechnology stocks, rose an eye-popping +68.09% and added +8.23%. In short,
the combined +17.64% gain of just these two sectors were offset by losses
amongst most of the remaining ten sectors that make up the index, leaving the
Russell 2000 with a +14.63% overall return. Interestingly, even the Russell 2000
Value Index saw these same isolated forces at work. Tech and healthcare
contributed +8.43% to its two-month return, but losses in other sectors left the
overall performance of this small cap value benchmark at +3.35% as of February
29, 2000.
A VALUE MANAGER'S CURTAIN CALL
But then came March, and with a new month, a dramatic reversal of fortune. Once
the Nasdaq cracked (at one point falling -9.2% in just three days), the sun
shone on our value style and unlike the first two months of the year, everything
seemed to go our way. Specifically, for the month ended March 31, 2000, the
Ariel Fund
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rose +13.83% at a time when the Russell 2000 Index fell -6.59% and the Russell
2000 Value barely eked out a +0.47% gain. Similarly, the Ariel Appreciation Fund
gained +12.95% versus +5.73% for the Russell Midcap Index and +12.12% for the
Russell Midcap Value Index. A noteworthy caveat to this discussion is that no
one stock pushed up our results. Instead, we witnessed a broad-based rebound
across most issues in our portfolios which clearly underscores the uniqueness
and contrariness of our disciplined value style.
Given our long-term, "turtle" INVESTMENT approach and increasing frustration
with Wall Street's short-term, TRADER orientation, our goal certainly is not to
overstate the significance of one month of performance in detailing the events
of a quarter. But 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. In the meantime, as the
market does what it will, we are encouraged by the wonderful bargains in our
midst. In so many ways, it is an exciting time to be a value investor because
new ideas can be found in such abundance. Accordingly, we are out scouring the
market--visiting more companies than ever. These tireless efforts along with the
growing emphasis on maximizing shareholder value in corporate boardrooms across
the country should certainly increase our chances for market-beating performance
in the future. More specifically to the latter point, our 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.
PORTFOLIO COMINGS AND GOINGS
In the small cap Ariel Fund, we eliminated our positions in Day Runner, Inc.
(OTC: DAYR) and Whitman Corporation (NYSE: WH), having lost faith in the
long-term prospects for these businesses. Additionally, we sold our remaining
shares of Shorewood Packaging Corporation (NYSE: SWD) on the good news of the
company's takeover by International Paper (NYSE: IP). We also began to pare back
our position in Wesley Jessen VisionCare, Inc. (OTC: WJCO) as takeover
speculation drove the stock price to levels in keeping with the company's
private market value. We added to positions in Hasbro, Inc. (NYSE: HAS), Longs
Drug Stores (NYSE: LDG), and Hussmann International, Inc. (NYSE: HSM) as well as
MBIA, Inc. (NYSE: MBI)--all at compelling prices.
In the mid-cap Ariel Appreciation Fund, we established new positions in Fortune
Brands (NYSE: FO), the diversified consumer and office-product company and
Cardinal Health, Inc. (NYSE: CAH), a leading healthcare services company. We
also re-initiated a position in an old favorite, T. Rowe Price & Assoc. (OTC:
TROW), the
4
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Baltimore-based mutual fund company. Conversely, we eliminated our position in
Allergan, Inc. (NYSE: AGN) and like the Ariel Fund, Shorewood Packaging
Corporation, at very profitable levels.
As always, we appreciate the opportunity to serve you and welcome any questions
or comments you may have. To speak to a registered representative, call
1-800-29-ARIEL (1-800-292-7435) or log on to www.arielmutualfunds.com to send us
an email.
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 MARCH 31, 2000, INCLUDING THE SECURITIES
DISCUSSED IN THIS LETTER, ARE LISTED IN THE SCHEDULE OF INVESTMENTS. PORTFOLIO
HOLDINGS ARE SUBJECT TO CHANGE.
INTRODUCING VALUE BENCHMARKS
We have found that style-specific indices are often paramount to the discussion
of the Ariel Mutual Funds' performance. To this end, our shareholders will
notice an addition to our quarterly reports going forward.
Specifically, we will compare the results of the small-cap Ariel Fund to the
RUSSELL 2000 VALUE INDEX as well as the Russell 2000 Index. Likewise, we will
compare the results of the mid-cap Ariel Appreciation Fund to the RUSSELL MIDCAP
VALUE INDEX as well as the Russell Midcap Index. We have adopted the
style-specific indices because they have a bias toward value-oriented securities
with lower price-to-earnings ratios. We believe the value indices are pertinent
to the discussion of the Ariel Mutual Funds as they better represent our own
value approach.
5
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COMPANY
[GRAPHIC]
7000 CARDINAL PLACE
DUBLIN, OH 43017
(614) 757-5000
www.cardinal.com
CARDINAL HEALTH, INC. (NYSE: CAH) is a health care services company with the
second-largest drug distribution business, the largest manufacturing and
medical-surgical distribution operation and the largest pharmaceutical services
portfolio in the U.S. Over the past few years, the company has reengineered its
business model to focus on higher-margin, value-added manufacturing and
services.
MARKET LEADER IN MULTIPLE NICHES
Cardinal Health is an exceptional company because so many of its subsidiaries
are market leaders. Cardinal is #2 in drug distribution, #1 in medical-surgical
distribution, #1 in automated dispensing, #1 in packaging and #1 in drug
delivery technology. Within this portfolio, certain businesses are dominant. For
example, R.P. Scherer has over 90% market share in pharmaceutical softgel
capsules, Pyxis has over 85% market share in automated dispensing technology,
Owen Healthcare has over 70% market share in outsourced pharmacy services and
Allegiance's custom sterile kits have over 50% market share. Because it's such a
diversified conglomerate, we like to call Cardinal the "GE of Healthcare."
VISIONARY LEADERSHIP
Cardinal has a sophisticated and seasoned management team that we believe
investors can count on. Chairman, CEO and founder Bob Walter's strategic vision,
competitive intensity, managerial talent and financial acumen are all reflected
throughout Cardinal's corporate culture. He has fostered an entrepreneurial
spirit in a growing company and has challenged his employees to treat the
company as if it were their own. In many ways it is, as employees own
approximately 10% of the company.
6
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IN FOCUS
VALUE ADDED BUSINESS MODEL
Cardinal's success is also linked to its unique ability to make its customers
more efficient. Through internal growth and strategic acquisitions, Cardinal has
developed a broad range of integrated services that add value to both
pharmaceutical manufacturers as well as health care providers. When these
services are integrated, Cardinal is able to offer proprietary services and
products that create cost-reductions and efficiencies for manufacturers and
providers alike. These proprietary offerings allow Cardinal to earn higher
margins and higher returns on capital than its competition in virtually every
business segment.
COMPELLING VALUATION
In our view, the woes of the current health care market have created a rare
opportunity to acquire shares in this clear market leader. In a recent issue of
FORTUNE magazine, Cardinal was recognized for posting the 14th best total return
over the past decade (38.7% annually) and the 25th highest earnings per share
growth in the Fortune 500 (21%). Despite the exaggerated pessimism of Wall
Street today, we believe Cardinal is a great business that will serve our
shareholders well over the long-term. The stock has recently appreciated, but at
its current price of $48 a share, Cardinal trades at 15 times calendar year cash
earnings--well below historic levels. At this valuation, the company shares sell
at approximately a 30% discount to our estimated private market value of $70. We
rate the shares a buy.
7
<PAGE>
COMPANY
[LOGO]
1 HORACE MANN PLAZA
SPRINGFIELD, IL 62715
(217) 789-2500
www.horacemann.com
HORACE MANN EDUCATORS CORP. (NYSE: HMN) The past six months have been eventful
for the employees and shareholders of Horace Mann. The Springfield,
Illinois-based insurer has suffered the criticism of disappointed speculators,
the indifference of a tech-crazed public market, and the skepticism associated
with the transition to a new Chief Executive Officer.
The stock rallied in September, propelled by speculators to a high of $33
in anticipation of an acquisition. However, in the absence of a fair price,
management declined to sell the company at less than full value. Disappointed
short-term holders initiated a sell-off that shaved $336 million off of Horace
Mann's market value.
Weeks later, Horace Mann delivered solid results which generated little interest
from a tech-dominated market. The company earned a sector-leading 15% return on
equity and quarterly earnings $0.03 better than expectations.
On January 27th, Horace Mann announced the appointment of a new CEO, Louis Lower
II. As always, Ariel made sure to meet with him as soon as possible. Mr. Lower
demonstrated a genuine respect for the Horace Mann franchise, a calculated sense
of opportunity, and the energy needed to execute a comprehensive strategy. As
such, we remain confident that your money, and ours, is creating real value, and
we recommend investors hold their positions at current levels.
CENTRAL NEWSPAPERS, INC. (NYSE: ECP) Central Newspapers continues to deliver
solid results. In its recently completed fiscal year 1999, the company reported
earnings per share of $2.31 versus $1.78, a 30% gain. Central Newspapers
benefitted from strong advertising revenue growth and lower newsprint costs.
Specifically, the company delivered a 6.5% increase in advertising revenue
despite ongoing investor concerns regarding the Internet. While the Internet
could pose a threat to newspaper companies' classified advertising revenue,
Central Newspapers should actually benefit through new revenue streams on the
Internet, since it enjoys considerable leverage with its unique local content.
Ariel is not the sole believer in newspapers and the Central Newspapers
franchise. Management is astute in allocating capital to maximize value for
shareholders as evidenced by Central Newspapers' aggressive share repurchase
activity. The company repurchased nearly 39% of its shares outstanding over the
past three years.
The stock of Central Newspapers is extremely attractive at current prices. Its
multiple is a significant discount not only to the market but also to the
industry, as well as its estimated private market value. At the current
valuation, we recommend investors add to their positions in the company.
[LOGO]
200 EAST VAN BUREN STREET
PHOENIX, AZ 85004
(602) 444-1100
www.centralnews.com
8
<PAGE>
UPDATES
LEE ENTERPRISES (NYSE: LEE) #In early March, Lee Enterprises announced it was
exploring the sale of its broadcast businesses to concentrate on newspapers and
online services. Investors applauded the board's strategic decision as
broadcasting transaction multiples are high.
[LOGO]
215 NORTH MAIN STREET
DAVENPORT, IA 52801
(319) 383-2100
www.lee.net
Lee Enterprises has decided to focus on what it does best--publishing small-town
newspapers with in-depth local content. The company's emphasis on local content
is an advantage as big-city papers as well as most television and radio programs
fail to provide comprehensive local coverage. We expect the company to acquire
newspapers and repurchase stock with some of the estimated $500-$600 million of
pre-tax proceeds from the broadcasting properties. In fact, the company recently
announced its intention to purchase three daily newspapers and 15 other
publications in Nebraska and Wisconsin, where it currently operates newspapers.
Lee Enterprises possesses a strong financial profile, reflecting manageable debt
levels and healthy internal cash generation. Additionally, at $22, the company's
stock trades at a significant discount to our estimated private market value of
$45. We continue to regard Lee Enterprises as an attractive holding and
recommend investors add to their positions at current levels.
[LOGO]
277 PARK AVENUE
NEW YORK, NY 10172
(212) 371-1500
www.shorepak.com
SHOREWOOD PACKAGING CORPORATION (NYSE: SWD) Recently, Shorewood was sold to
International Paper Co. (NYSE: IP) for $21.00 per share. This represented a 57%
premium to Shorewood's price on November 17, 1999, the day before the
commencement of takeover discussions between Shorewood and Chesapeake
Corporation (NYSE:CSK), which ultimately led to the acquisition of Shorewood by
International Paper. Over our nine year holding period, the shares returned
approximately 22.2% per year. Although not without volatility, these shares
proved to be an excellent holding over the long term.
We were first drawn to Shorewood because of the value-added nature of its
packaging products (folding cartons for the home entertainment, consumer, and
tobacco industries) and the quality of its customer base. The company provides
packaging for most of the leading consumer product and home entertainment
companies in America, including Proctor & Gamble (NYSE:PG), Gillette (NYSE:G),
Nike (NYSE:NKE), Microsoft (NASDAQ:MSFT), and Walt Disney (NYSE:DIS). In each
case, the packaging is a critical component in the sales and merchandizing mix
for these highly profitable products.
We stuck with our investment in Shorewood during difficult periods we believed
to be relatively short-term in nature. In the end, we were well rewarded for our
patience.
9
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ARIEL EQUITY FUNDS
TEN LARGEST HOLDINGS as of March 31, 2000
1 MBIA, INC.
Leading insurer of municipal bonds
2 HERMAN MILLER, INC.
One of the country's largest manufacturers of office furniture
3 LITTLEFUSE, INC.
Largest global manufacturer of circuit protection devices
4 BRADY CORP.
Manufacturer and distributor of niche industrial safety-related products
5 LEE ENTERPRISES
Diversified media company
6 INTERNATIONAL GAME TECHNOLOGY
World's leading supplier of computerized gaming devices
7 CENTRAL NEWSPAPERS, INC.
Leading media company with daily newspapers in Phoenix and Indianapolis
8 HASBRO, INC.
Prominent toy manufacturer
9 ROUSE CO.
Retail mall developer
10 SPECIALTY EQUIPMENT COS.
Manufacturer of commercial and institutional food service equipment
ARIEL FUND
Inception
November 6, 1986
AVERAGE ANNUAL TOTAL RETURNS AS OF MARCH 31, 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>
- --------------------------------------------------------------------------------------------------------------------
1st Quarter YTD 1 Year 3 Year 5 Year 10 Year Life of Fund
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
ARIEL FUND -4.21% -4.21% -2.35% +10.23% +13.48% +10.43% +12.95%
- --------------------------------------------------------------------------------------------------------------------
RUSSELL 2000 INDEX +7.08% +7.08% +37.29% +17.75% +17.24% +14.43% +12.56%
- --------------------------------------------------------------------------------------------------------------------
RUSSELL 2000 VALUE INDEX +3.82% +3.82% +13.26% +8.12% +13.16% +13.08% +11.81%
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
[CHART]
ARIEL FUND
Technology 5.58%
Health Care 1.74%
Consumer Discretionary & Services 35.20%
Consumer Staples 7.68%
Materials & Processing 12.21%
Producer Durables 20.80%
Financial Services 13.95%
Cash and Other 2.84%
Integrated Oils 0%
RUSSELL 2000 INDEX
Technology 27.60%
Health Care 11.1%
Consumer Discretionary & Services 14.6%
Consumer Staples 1.9%
Other Energy 3.5%
Materials & Processing 7.0%
Producer Durables 9.5%
Autos & Transportation 2.8%
Financial Services 15.5%
Utilities 5.7%
Cash and Other 0.8%
Integrated Oils 0%
[CHART]
<TABLE>
<CAPTION>
DATE ARIEL FUND S&P 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
Mar-00 $51,089 $85,837 $48,433
</TABLE>
*Statistics represent past performance whic is not indicative of future
results. The S&P 500 is a broad market-weighted index dominated by blue-chip
stock. 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 reinvrsted dividends. An investor cannot invest
directly in an index.
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.
10
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ARIEL APPRECIATION FUND
Inception
December 1, 1989
AVERAGE ANNUAL TOTAL RETURNS AS OF MARCH 31, 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>
- ------------------------------------------------------------------------------------------------------------------------
1st Quarter YTD 1 Year 3 Year 5 Year 10 Year Life of Fund
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
ARIEL APPRECIATION FUND -3.71% -3.71% -6.66% +15.31% +16.99% +12.72% +12.78%
- ------------------------------------------------------------------------------------------------------------------------
RUSSELL MIDCAP INDEX +10.09% +10.09% +30.77% +23.07% +21.78% +17.50% +16.65%
- ------------------------------------------------------------------------------------------------------------------------
RUSSELL MIDCAP VALUE INDEX +1.01% +1.01% +4.14% +11.89% +16.01% +14.41% +13.58%
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
[CHART]
ARIEL APPRECIATION FUND
Technology 1.15%
Health Care 5.64%
Consumer Discretionary & Services 34.87%
Consumer Staples 12.58%
Materials & Processing 5.18%
Producer Durables 10.44%
Financial Services 23.66%
Utilities 4.48%
Cash and Other 2.0%
Integrated Oils 0%
RUSSELL MID CAP INDEX
Technology 30.4%
Health Care 5.5%
Consumer Discretionary & Services 15.0%
Consumer Staples 2.6%
Integrated Oils 1.4%
Other Energy 4.3%
Materials & Processing 6.0%
Producer Durables 5.3%
Autos & Transportation 3.5%
Financial Services 14.3%
Utilities 10.6%
Cash and Other 1.1%
[CHART]
<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 $37,7O5
1999 $35,981 $54,559 $44,579
Mar-00 $34,645 $55,810 $49,076
</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 Medcap 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 invrstor cannot unvest directrly in an index.
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.
TEN LARGEST HOLDINGS AS OF MARCH 31, 2000
1 HERMAN MILLER, INC.
One of the country's largest manufacturers of office furniture
2 MBIA, INC.
Leading insurer of municipal bonds
3 CENTURYTEL, INC.
Diversified telecommunications company
4 MCCORMICK & CO., INC.
World's largest spice company
5 HASBRO, INC.
Prominent toy manufacturer
6 LEE ENTERPRISES
Diversified media company
7 EQUIFAX, INC.
Consumer credit and check processing services company
8 SYBRON INTERNATIONAL CORP.
Principal manufacturer of products for the laboratory and professional
orthodontic and dental markets
9 ROUSE CO.
Retail mall developer
10 HOUGHTON MIFFLIN CO.
Leading publisher of educational textbooks and multimedia products
11
<PAGE>
SCHEDULE OF INVESTMENTS
ARIEL FUND
SCHEDULE OF INVESTMENTS
MARCH 31, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
Number COMMON STOCKS-97.16% (cont) Cost Market Value
of Shares
<S> <C> <C> <C>
CONSUMER DISCRETIONARY--35.20%
428,533 Bob Evans Farms, Inc. $ 6,704,182 $ 5,356,663
270,400 Central Newspapers, Inc., Class A 3,728,076 9,092,200
263,100 Department 56, Inc.* 8,535,654 3,897,169
12,600 Grey Advertising, Inc. 4,173,275 5,153,400
513,625 Hasbro, Inc. 6,646,172 8,474,812
426,600 International Game Technology* 7,498,006 9,251,888
355,800 Lee Enterprises 9,859,807 9,295,275
266,000 Leggett & Platt, Inc. 2,380,169 5,719,000
242,700 Libbey, Inc. 8,806,015 6,643,913
------------ ------------
58,331,356 62,884,320
------------ ------------
CONSUMER STAPLES--7.68%
293,300 Longs Drug Stores Corp. 6,245,964 6,672,575
218,600 McCormick & Co., Inc. 5,049,515 7,049,850
------------ ------------
11,295,479 13,722,425
------------ ------------
FINANCIAL SERVICES--13.95%
94,600 Arthur J. Gallagher & Co. 1,821,142 3,074,500
387,950 HCC Insurance Holdings, Inc. 5,370,920 5,140,337
344,175 Horace Mann Educators Corp. 8,667,827 6,345,727
199,100 MBIA, Inc. 7,359,637 10,365,644
------------ ------------
23,219,526 24,926,208
------------ ------------
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
Number COMMON STOCKS-97.16% (cont) Cost Market Value
of Shares
<S> <C> <C> <C>
HEALTH CARE--1.74%
86,555 Wesley Jessen VisionCare, Inc.* $ 2,052,851 $ 3,110,570
------------ ------------
MATERIALS AND PROCESSING--12.21%
306,400 Brady Corp. 7,501,170 9,555,850
143,900 Hunt Corp. 1,916,478 1,286,106
630,100 Interface, Inc., Class A 3,677,395 2,677,925
392,200 Rouse Co. 7,228,758 8,285,225
------------ ------------
20,323,801 21,805,106
------------ ------------
PRODUCER DURABLES--20.80%
237,570 General Binding Corp. 4,393,121 2,271,763
146,000 Graco, Inc. 4,160,389 4,234,000
468,500 Hussmann International, Inc. 7,304,219 5,944,094
243,300 IDEX Corp. 5,978,828 6,629,925
357,900 Miller (Herman), Inc. 6,138,750 10,021,200
388,175 Specialty Equipment Cos., Inc.* 4,666,646 8,054,631
------------ ------------
32,641,953 37,155,613
------------ ------------
TECHNOLOGY--5.58%
271,650 Littelfuse, Inc.* 6,910,325 9,966,159
------------ ------------
Total Common Stocks 154,775,291 173,570,401
------------ ------------
<CAPTION>
Principal REPURCHASE Cost Market Value
Amount AGREEMENT-2.79%
<S> <C> <C> <C>
$4,979,825 State Street Bank & Trust
Company Repurchase
Agreement, 4.25%, dated
3/31/2000, repurchase price
$4,981,589, maturing
4/3/2000 (collateralized by
U.S. Treasury Note, 6.50%,
5/31/2002) $4,979,825 $4,979,825
------------ ------------
Total Repurchase Agreement 4,979,825 4,979,825
------------ ------------
Total Investments-99.95% $159,755,116 178,550,226
============
Other Assets less Liabilities-0.05% 92,602
------------
NET ASSETS-100.00% $178,642,828
============
</TABLE>
*Non-income producing
The accompanying notes are an integral part of the financial statements.
13
<PAGE>
ARIEL APPRECIATION FUND
SCHEDULE OF INVESTMENTS
MARCH 31, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
Number COMMON STOCKS-98.82% Cost Market Value
of Shares
<S> <C> <C> <C>
CONSUMER DISCRETIONARY--34.87%
195,500 Bob Evans Farms, Inc. $ 3,772,410 $ 2,443,750
187,600 Carnival Corp. 2,514,494 4,654,825
299,000 Central Newspapers, Inc.,
Class A 8,793,175 10,053,875
204,800 Galileo International, Inc. 8,260,367 4,928,000
228,250 Harte-Hanks, Inc. 1,428,416 5,178,422
741,350 Hasbro, Inc. 11,968,095 12,232,275
251,000 Houghton Mifflin Co. 8,275,950 10,651,812
465,200 International Game Technology* 7,377,494 10,089,025
454,000 Lee Enterprises 12,703,650 11,860,750
452,945 Leggett & Platt, Inc. 5,021,566 9,738,318
166,800 Libbey, Inc. 5,702,492 4,566,150
47,300 McClatchy Company 1,878,254 1,549,075
330,700 Newell Rubbermaid, Inc. 9,237,468 8,205,494
106,100 Tribune Co. 2,984,622 3,879,281
------------ ------------
89,918,453 100,031,052
------------ ------------
CONSUMER STAPLES--12.58%
207,372 The Clorox Co. 6,577,955 6,739,590
329,440 Longs Drug Stores Corp. 7,637,019 7,494,760
381,955 McCormick & Co., Inc. 10,061,402 12,318,049
684,900 Whitman Corp. 11,249,826 9,545,794
------------ ------------
35,526,202 36,098,193
------------ ------------
FINANCIAL SERVICES--23.66%
141,600 Arthur J. Gallagher & Co. $ 2,866,301 $ 4,602,000
468,500 Equifax, Inc. 14,246,727 11,829,625
259,400 Franklin Resources, Inc. 8,530,984 8,673,687
261,300 MBIA, Inc. 11,021,017 13,603,931
382,700 MBNA Corp. 5,982,140 9,758,850
152,500 SunGard Data Systems, Inc.* 4,106,393 5,756,875
114,600 T. Rowe Price Associates, Inc. 4,491,481 4,526,700
164,400 XL Capital Ltd. 9,347,522 9,103,650
------------ ------------
60,592,565 67,855,318
------------ ------------
HEALTH CARE--5.64%
98,900 Cardinal Health, Inc. 3,990,388 4,537,038
401,400 Sybron International Corp.* 5,980,310 11,640,600
------------ ------------
9,970,698 16,177,638
------------ ------------
MATERIALS AND PROCESSING--5.18%
65,100 Avery Dennison Corp. 3,901,108 3,975,169
514,700 Rouse Co. 8,962,269 10,873,037
------------ ------------
12,863,377 14,848,206
------------ ------------
OTHER--0.82%
94,150 Fortune Brands, Inc. 2,994,241 2,353,750
------------ ------------
PRODUCER DURABLES--10.44%
296,750 Hussmann International, Inc. 4,283,087 3,765,016
503,800 Miller (Herman), Inc. 9,816,718 14,106,400
171,600 Pitney Bowes, Inc. 7,085,152 7,668,375
212,000 Specialty Equipment Cos., Inc.* 2,513,609 4,399,000
------------ ------------
23,698,566 29,938,791
------------ ------------
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
Number COMMON STOCKS-98.82% (cont) Cost Market Value
of Shares
<S> <C> <C> <C>
TECHNOLOGY--1.15%
90,125 Littelfuse, Inc.* $ 2,033,276 $ 3,306,461
------------ ------------
UTILITIES--4.48%
346,025 CenturyTel, Inc. 5,495,260 12,846,178
------------ ------------
Total Common Stocks 243,092,638 283,455,587
------------ ------------
<CAPTION>
Principal REPURCHASE Cost Market Value
Amount AGREEMENT-1.19%
<S> <C> <C> <C>
$3,402,558 State Street Bank & Trust
Company Repurchase
Agreement, 4.25%, dated
3/31/2000, repurchase price
$3,403,764, maturing
4/3/2000 (collateralized by
U.S. Treasury Note, 6.25%,
10/31/2001) $3,402,558 $ 3,402,558
------------ ------------
Total Repurchase Agreement 3,402,558 3,402,558
------------ ------------
Total Investments-100.01% $246,495,196 286,858,145
============
Liabilities less Other Assets-(0.01)% (15,131)
------------
NET ASSETS-100.00% $286,843,014
============
</TABLE>
* Non-income producing
The accompanying notes are an integral part of the financial statements.
15
<PAGE>
EQUITY STATISTICAL SUMMARY
ARIEL FUND
(UNAUDITED)
<TABLE>
<CAPTION>
EARNINGS PER SHARE
------------------
52 - WEEK
RANGE 1999 2000 1999 2000 MARKET
TICKER PRICE -------------- ACTUAL ESTIMATED P/E P/E CAP.
COMPANY SYMBOL 3/31/00 LOW HIGH CALENDAR CALENDAR CALENDAR CALENDAR ($MM)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Hunt Corp. HUN 8.94 6.63 12.06 0.93 1.01 9.6 8.9 89
General Binding Corp. GBND 9.56 6.00 31.88 -0.31 0.04 NM NM 150
Department 56, Inc. DFS 14.81 12.88 33.31 2.45 2.28 6.0 6.5 216
Interface, Inc. IFSIA 4.25 3.94 11.75 0.45 0.60 9.4 7.1 220
Specialty Equipment Cos., Inc. SEC 20.75 15.00 34.13 2.22 2.21 9.3 9.4 398
Libbey, Inc. LBY 27.38 24.63 33.75 2.63 3.00 10.4 9.1 416
Bob Evans Farms, Inc. BOBE 12.50 12.06 22.06 1.38 1.49 9.1 8.4 463
Grey Advertising, Inc. GREY 409.00 284.00 442.00 5.13 29.67 79.7 13.8 491
Graco, Inc. GGG 29.00 21.50 36.19 2.75 3.16 10.5 9.2 595
Wesley Jessen VisionCare, Inc. WJCO 35.94 22.00 40.94 1.88 2.27 19.1 15.8 633
Hussmann International, Inc. HSM 12.69 12.50 18.56 1.28 1.45 9.9 8.8 645
HCC Insurance Holdings, Inc. HCC 13.25 8.00 25.13 1.20 1.32 11.0 10.0 651
Brady Corp. BRC 31.19 20.94 36.31 1.98 2.10 15.8 14.9 708
Horace Mann Educators Corp. HMN 18.44 12.63 33.00 1.70 1.91 10.8 9.7 765
Littelfuse, Inc. LFUS 36.69 17.50 39.50 1.16 1.64 31.6 22.4 807
IDEX Corp. IEX 27.25 22.75 34.13 1.81 2.03 15.1 13.4 809
Longs Drug Stores, Inc. LDG 22.75 15.94 36.88 1.76 1.98 12.9 11.5 893
Lee Enterprises LEE 26.13 19.69 32.25 1.57 1.75 16.6 14.9 1,155
Arthur J. Gallagher & Co. AJG 32.50 23.00 33.13 1.75 1.91 18.6 17.0 1,206
Central Newspapers, Inc. ECP 33.44 27.25 45.69 2.31 2.12 14.5 15.8 1,297
Rouse Company RSE 21.13 19.75 27.50 2.98 3.29 7.1 6.4 1,492
International Game Technology IGT 21.69 14.56 23.25 1.34 1.68 16.2 12.9 1,627
Herman Miller, Inc. MLHR 28.00 17.25 28.13 1.67 1.91 16.8 14.7 2,212
McCormick & Company, Inc. MKC 32.25 23.75 34.63 1.69 1.98 19.1 16.3 2,215
Hasbro, Inc. HAS 16.69 13.75 37.00 1.42 1.39 11.8 12.0 2,877
Leggett & Platt, Inc. LEG 21.50 15.25 28.31 1.45 1.68 14.8 12.8 4,223
MBIA, Inc. MBI 52.06 36.31 71.88 4.72 5.13 11.0 10.1 5,149
</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>
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 3/31/00 LOW HIGH CALENDAR CALENDAR CALENDAR CALENDAR ($MM)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Specialty Equipment Cos., Inc. SEC 20.75 15.00 34.13 2.22 2.21 9.3 9.4 398
Libbey, Inc. LBY 27.38 24.63 33.75 2.63 3.00 10.4 9.1 416
Bob Evans Farms, Inc. BOBE 12.50 12.06 22.06 1.38 1.49 9.1 8.4 463
Hussmann International, Inc. HSM 12.69 12.50 18.56 1.28 1.45 9.9 8.8 645
Littelfuse, Inc. LFUS 36.69 17.50 39.50 1.16 1.64 31.6 22.4 807
Longs Drug Stores, Inc. LDG 22.75 15.94 36.88 1.76 1.98 12.9 11.5 893
Lee Enterprises LEE 26.13 19.69 32.25 1.57 1.75 16.6 14.9 1,155
Arthur J. Gallagher & Co. AJG 32.50 23.00 33.13 1.75 1.91 18.6 17.0 1,206
Houghton Mifflin Company HTN 42.44 34.88 52.50 1.62 2.96 26.2 14.3 1,290
Central Newspapers, Inc. ECP 33.44 27.25 45.69 2.31 2.12 14.5 15.8 1,297
McClatchy Co. MNI 32.75 30.50 45.13 1.83 2.04 17.9 16.1 1,474
Rouse Company RSE 21.13 19.75 27.50 2.98 3.29 7.1 6.4 1,492
Harte-Hanks, Inc. HHS 22.69 19.06 28.31 1.02 1.23 22.2 18.4 1,547
International Game Technology IGT 21.69 14.56 23.25 1.34 1.68 16.2 12.9 1,627
Whitman Corp. WH 13.94 10.38 19.56 0.58 0.64 24.0 21.8 1,927
Galileo International, Inc. GLC 24.06 16.50 59.31 2.24 2.14 10.7 11.2 2,146
Herman Miller, Inc. MLHR 28.00 17.25 28.13 1.67 1.91 16.8 14.7 2,212
McCormick & Company, Inc. MKC 32.25 23.75 34.63 1.69 1.98 19.1 16.3 2,215
Hasbro, Inc. HAS 16.69 13.75 37.00 1.42 1.39 11.8 12.0 2,877
Sybron Corp. SYB 29.00 20.69 30.81 1.25 1.50 23.2 19.3 3,019
Equifax, Inc. EFX 25.25 19.88 38.44 1.55 1.75 16.3 14.4 3,570
Fortune Brands, Inc. FO 25.00 21.25 45.88 1.99 2.35 12.6 10.6 3,998
Leggett & Platt, Inc. LEG 21.50 15.25 28.31 1.45 1.68 14.8 12.8 4,223
T. Rowe Price Associates, Inc. TROW 39.50 25.88 43.25 1.85 2.15 21.4 18.4 4,768
SunGard Data Systems, Inc. SDS 37.75 16.88 40.00 1.36 1.65 27.8 22.9 4,957
MBIA, Inc. MBI 52.06 36.31 71.88 4.72 5.13 11.0 10.1 5,149
CenturyTel, Inc. CTL 37.13 32.31 48.75 1.69 1.82 22.0 20.4 5,206
Newell Rubbermaid, Inc. NWL 24.81 21.00 52.00 1.65 1.99 15.0 12.5 6,614
Avery Dennison Corp. AVY 61.06 51.44 78.50 2.55 2.89 23.9 21.1 6,863
XL Capital Ltd. XL 55.38 39.00 67.19 3.63 5.10 15.3 10.9 6,895
The Clorox Company CLX 33.00 29.06 62.88 1.61 1.87 20.5 17.6 7,805
Franklin Resources, Inc. BEN 33.44 24.63 45.00 2.01 2.30 16.6 14.5 8,317
Tribune Company TRB 36.56 27.88 60.88 1.54 1.75 23.7 20.9 8,683
Pitney Bowes, Inc. PBI 44.69 40.88 73.31 2.34 2.59 19.1 17.3 11,718
Cardinal Health, Inc. CAH 45.88 37.00 72.94 1.74 2.15 26.4 21.3 12,906
Carnival Corp. CCL 24.81 21.19 53.50 1.66 1.70 14.9 14.6 15,315
MBNA Corp. KRB 25.50 19.50 33.25 1.21 1.48 21.1 17.2 20,446
</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>
ARIEL PREMIER BOND
DEAR FELLOW SHAREHOLDER: For the first quarter ended March 31, 2000, the Ariel
Premier Bond Fund, Institutional Class gained +1.56% and the Investor Class
gained +1.46%, trailing the +2.21% return of the Lehman Brothers Aggregate Bond
Index.
Recent bond prices have been influenced by a continuum of unusual events that
run contrary to economic fundamentals and traditional sources of valuation.
During the first quarter of 2000, despite a 1.60% rise in the Consumer Price
Index to 3.2% (and risks of further increases), 7.3% Gross Domestic Product
growth in the fourth quarter (and a forecast for the first quarter that exceeds
5%), as well as a 0.50% increase in the Fed Funds rate, long-term Treasury
yields have fallen to levels at or below short-term rates. Moreover, yields on
non-Treasury sectors have not declined in tandem with benchmark Treasury yields,
which has resulted in wider spreads across all sectors.
Beginning in late January, long-term Treasury yields fell dramatically, far
outpacing their high quality counterparts and finishing the quarter at levels
equal to or below the Fed Funds rate. In an environment in which all risks
appear to point towards rising inflation and higher short-term rates, this was a
remarkable occurrence.
All domestic spreads widened over the quarter. Emerging market debt was the only
major sector to outperform Treasuries. Long duration portfolios overweighted in
Treasuries were the best performers for the quarter. As such, the primary source
of the Fund's underperformance for the quarter was our underweight in the
Treasury sector.
In response to the changes in Treasury yield levels and market spreads, we have
adjusted our portfolio strategy over the quarter. Early this year, the Fund's
overall spread exposure was reduced from 1.5 years to 0.9 years in reaction to
the more uncertain environment. Corporates were underweighted modestly, and
Agencies were reduced to a weighting commensurate with the benchmark. And so,
our primary spread exposure remains AAA-rated asset-backed securities and
discount mortgages.
Our fundamental economic outlook remains unchanged. We expect continued strong
economic momentum and rising inflationary risks will result in further Fed
tightening, making the current level of Treasury yields even more unattractive.
We also expect the spread environment will continue to be volatile as the market
reacts to the evolving debate over budget surpluses, Treasury benchmark yields
and their impact on the financial system. We believe portfolios with durations
shorter than benchmarks and underweighted in Treasuries will likely be the best
performers this year. The Ariel Premier Bond Fund's positioning reflects this
perspective.
As always, we appreciate the opportunity to serve you and welcome any questions
or comments you may have.
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
PLEASE NOTE THAT THE ARIEL PREMIER BOND FUND, INVESTOR CLASS LIPPER RANKING WAS
INCORRECTLY STATED ON PAGE 20 OF THE 12/31/99 QUARTERLY REPORT. FOR THE SINCE
INCEPTION (02/01/97) PERIOD ENDED 12/31/99, THE FUND RANKED 52 OUT OF 133 FUNDS
IN THE CORPORATE DEBT A-RATED CATEGORY.
18
<PAGE>
ARIEL PREMIER BOND FUND
Institutional Class Inception October 1, 1995
Investor Class Inception February 1, 1997
AVERAGE ANNUAL TOTAL RETURNS AS OF MARCH 31, 2000 (assume reinvestment of
dividends and capital gains)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
1st Quarter YTD 1 Year 3 Year Life of Fund
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ARIEL PREMIER BOND FUND, INST. CL. +1.56% +1.56% +0.97% +6.00% +5.40%
- ----------------------------------------------------------------------------------------------------------------
ARIEL PREMIER BOND FUND, INV. CL. +1.46% +1.46% +0.56% +5.55% +5.02%
- ----------------------------------------------------------------------------------------------------------------
LEHMAN BROS. AGGREGATE BOND INDEX +2.21% +2.21% +1.87% +6.70% +6.10% (INST.)
+6.06% (INV.)
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTED IN ARIEL PREMIER BOND FUND,
INVESTOR CLASS AND COMPARABLE INDEX*
[CHART]
<TABLE>
<CAPTION>
DATE BOND LEHMAN
<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
Dec-99 $11,509 $11,784
Mar-00 $11,676 $12,044
</TABLE>
[CHART]
ARIEL PREMIER BOND FUND
Government & Agency 7.69%
Mortgage-Backed 43.24%
Corporate 13.25%
Asset-Backed 18.99%
Commercial Mortgage-Backed 2.50%
Cash 14.33%
LEHMAN AGGREGATE BOND INDEX
Government & Agency 41.1%
Mortgage-Backed 33.9%
Corporate 22.3%
Asset-Backed 1.3%
Commercial Mortgage-Backed 1.4%
Cash 0%
COMPARISON OF CHANGE IN VALUE OF $1,000,000 INVESTED IN ARIEL PREMIER BOND
FUND, INSTITUTIONAL CLASS AND COMPARABLE INDEX*
[CHART]
<TABLE>
<CAPTION>
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
Mar-00 $1,267,041 $1,305,289
</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
MARCH 31, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
Par Value ASSET-BACKED SECURITIES-18.99% Cost Market Value
<S> <C> <C> <C>
$700,000 Americredit Auto Receivables,
98-B A4, 6.06%, 12/12/2002 $699,926 $692,314
750,000 Americredit Auto Receivables,
99-A A4, 5.88%, 12/12/2005 749,864 729,990
269,011 Associates Manufactured Housing,
972A-3, 6.275%, 3/15/2028 268,933 268,737
1,000,000 Auto Leasing Investors,
6.177%, 8/12/2005+ 1,000,000 968,050
650,000 BEA, 1998-2A A2A, 6.72%,
6/15/2010+ 628,609 586,723
470,000 Capital One, 2000, 7.65%, 1/17/2006+ 468,220 465,375
695,000 Circuit City Credit Card, 1995-1A,
6.375%, 8/15/2005 705,113 694,090
2,000,000 Contimortgage Home Equity, 97-4 A5,
6.44%, 12/15/2012 2,017,309 1,963,840
607,802 Credit Card Receivables Trust, 98-1,
6.478%, 12/22/2004+ 610,999 594,861
2,000,000 EQCC Home Equity, 973-A9,
6.57%, 2/15/2029 1,984,162 1,905,620
1,800,000 First Omni, 96-AA, 6.65%, 9/15/2003 1,818,358 1,792,314
977,816 Fleetwood, 97-B A, 6.40%, 5/15/2013 976,583 967,901
500,000 Green Tree Financial-MH, 98-4 A4,
6.09%, 7/1/2030 499,949 494,385
29,656 Green Tree Financial-MH, 1995-1 A5,
8.40%, 6/15/2025 32,480 29,810
870,000 Greenpoint Manufacturing, 2000-1 A2,
7.60%, 11/20/2022 869,974 867,286
1,415,000 Healthcare Rec., 99-1,
6.25%, 2/1/2003+ 1,413,320 1,372,111
715,747 IMC Excess Cash Flow Sec. Trust,
97-A A, 7.41%, 11/26/2028+ 715,720 478,205
1,450,000 J.C. Penney Master Credit Card Trust,
C A, 9.625%, 6/15/2000 1,460,712 1,453,408
1,445,000 MBNA Master Credit Card Trust,
1999-JA, 7.00%, 2/15/2012 1,440,466 1,422,920
1,440,000 Prime, 95-1A, 6.75%, 11/15/2005 1,444,890 1,424,491
2,910,017 Railcar Leasing, 971A,
6.75%, 7/15/2006+ 2,945,220 2,837,703
1,088,514 Railcar Trust, 92-A1, 7.75%, 6/1/2004 1,119,747 1,092,825
579,442 Salomon Brothers Mortgage Sec.,
97LB6A3, 6.76%,12/25/2027 578,737 575,884
345,000 Sears Credit Account Master Trust,
1995-5 A, 6.05%, 2/15/2004 335,519 334,508
915,172 Union Acceptance Corp., 97AA2,
6.375%, 10/8/2003 920,151 910,742
2,630,000 Union Financial Services Taxable Student
Loan, 98A A8, 5.50%, 9/1/2005 2,614,161 2,476,461
595,000 WFS Financial Owner Trust,
2000-A A4, 7.41%, 9/20/2007 594,872 600,629
20
<PAGE>
Par Value ASSET-BACKED SECURITIES-18.99% (cont) Cost Market Value
$1,880,000 World Financial, 96-AA, 6.70%,
2/15/2004 $1,886,242 $1,872,367
2,118,188 World Omni Auto Lease, 97-B A3,
6.18%, 11/25/2003 2,118,041 2,117,023
--------- ---------
Total Asset-Backed Securities 32,918,277 31,990,573
---------- ----------
COMMERCIAL MORTGAGE-BACKED SECURITIES-2.50%
320,000 GMAC Commercial, 97-C1 A3,
6.869%, 8/15/2007 304,213 307,125
1,150,000 GMAC Commercial, 99-CTL1 A,
7.151%, 2/15/2008+ 1,149,979 1,142,100
995,501 GS Mortgage Securities Corp.,
98-GL11 A1, 6.312%, 4/13/2031 1,016,194 952,375
731,804 GS Mortgage Securities Corp.,
99-C1 A1, 5.85%, 11/18/2030 733,087 690,547
515,000 Lehman Large Loan, 97-LL1 A2,
6.84%, 9/12/2006 511,503 502,898
608,947 MLMI, 99-C1 A1, 7.37%, 6/15/2008 621,779 611,779
------- -------
Total Commercial Mortgage-
Backed Securities 4,336,755 4,206,824
--------- ---------
CORPORATE DEBT-13.25%
1,000,000 AES Ironwood LLC,
8.857%, 11/30/2025+ 1,000,000 1,018,960
550,000 American Stores, 8.00%, 6/1/2026 604,472 550,627
$925,000 Bank of America, Institutional-B,
7.70%, 12/31/2006+ 841,654 858,210
550,000 Bestfoods MTN C, 5.60%, 10/15/2097 424,432 401,640
410,000 Boeing Co., 6.875%, 10/15/2043 367,992 359,548
1,000,000 Citigroup Capital III, 7.75%,
12/1/2036 1,035,428 923,179
1,575,000 Consumers Energy CMS,
6.20%, 5/1/2003 1,558,081 1,488,407
840,000 Dow Chemical Co., 7.375%,
11/1/2029 832,165 813,681
1,310,000 Edison International, Inc.,
6.875%, 9/15/2004 1,300,874 1,270,614
115,000 FedEx, 7.60%, 7/1/2097 120,703 101,563
1,000,000 Ford Motor Company,
6.375%, 2/1/2029 827,159 840,320
1,100,000 GTE California, 6.75%, 5/15/2027 1,150,635 960,748
1,020,000 J.C. Penney Co., 7.625%, 3/1/2097 914,506 730,751
500,000 Kohl's Corp., 7.25%, 6/1/2029 472,464 458,104
830,000 Liberty Media Group, 8.25%,
2/1/2030+ 823,360 799,795
800,000 LSP Energy LP, 8.16%, 7/15/2025+ 800,000 745,248
555,000 MCI WorldCom Inc., 7.750%, 4/1/2027 613,813 561,310
610,000 Mirage Resorts, 7.25%, 8/1/2017 606,937 494,479
300,000 News America Holdings,
7.25%, 5/18/2018 298,057 268,280
21
<PAGE>
Par Value CORPORATE DEBT-13.25% (cont) Cost Market Value
$ 726,234 Northwest Airlines Corp., 1999-2A,
7.575%, 3/1/2019 $ 730,000 $ 706,501
400,000 NRG Energy, Inc., 7.50%, 6/1/2009 399,887 377,545
1,190,000 Park Place Entertainment,
7.95%, 8/1/2003 1,180,884 1,150,538
975,000 Peco Energy Co., 7.38%, 4/6/2028 929,123 847,120
700,000 PNC Funding Corp., 7.00%, 9/1/2004 697,285 689,868
775,000 Provident Companies, 6.375%,
7/15/2005 772,840 714,229
420,000 Provident Companies, 7.00%,
7/15/2018 419,871 355,406
1,000,000 Safeco Capital Trust, 8.072%,
7/15/2037 1,000,000 869,533
805,000 Suntrust Cap II, 7.90%, 6/15/2027 809,591 759,673
750,000 Virginia Electric Power, 6.75%,
2/1/2007 753,333 697,645
965,000 Vodafon Airtouch, 7.875%,
2/15/2030+ 952,431 968,543
560,000 Zurich Capital Trust, 8.376%,
6/1/2037+ 595,519 535,241
------- -------
Total Corporate Debt 23,833,496 22,317,306
---------- ----------
Par Value U.S. GOVERNMENT AGENCIES-43.68% Cost Market Value
MORTGAGE-BACKED SECURITIES--43.24%
$6,435,000 Fannie Mae, Benchmark Note,
7.125%, 1/15/2030 $6,461,884 $6,501,358
13,900,000 Fannie Mae, 7.50%, 4/1/2030 X 13,604,625 13,656,750
9,615,000 Freddie Mac, Gold, 6.00%, 4/1/2030 X 8,749,650 8,752,650
45,650,000 Freddie Mac, 6.50%, 4/1/2030 X 42,594,647 42,825,406
1,159,362 Freddie Mac, Gold,
6.50%, 11/1/2025 X 1,096,632 1,094,738
--------- ---------
72,507,438 72,830,902
---------- ----------
OTHER AGENCY ISSUES--0.44%
734,175 Government Trust Certificate, Israel
Trust, Series 2E, 9.40%, 5/15/2002 758,195 747,990
------- -------
758,195 747,990
------- -------
Total U.S. Government Agencies 73,265,633 73,578,892
---------- ----------
U.S. GOVERNMENT OBLIGATIONS-7.25%
6,355,000 U.S. Treasury Bond,
8.125%, 8/15/2021 7,569,829 7,810,695
4,340,000 U.S. Treasury Note,
7.50%, 11/15/2001 4,430,271 4,405,100
--------- ---------
Total U.S. Government Obligations 12,000,100 12,215,795
---------- ----------
22
<PAGE>
Par Value COMMERCIAL PAPER-50.72% Cost Market Value
$3,200,000 AIG Funding, Inc., 5.90%,
4/13/2000* $3,194,755 $3,194,755
3,300,000 American Express Corp., 6.02%,
4/13/2000* 3,294,482 3,294,482
3,300,000 American General Finance Group,
5.95%, 4/13/2000* 3,294,546 3,294,546
3,300,000 Associates First Capital Corp., 5.90%,
4/13/2000* 3,294,592 3,294,592
3,000,000 AT&T Corp., 5.90%, 4/13/2000* 2,995,083 2,995,083
3,300,000 BellSouth Telecommunications, Inc.,
6.00%, 4/20/2000* 3,290,650 3,290,650
3,300,000 Chevron Corp., 6.00%, 4/18/2000* 3,291,750 3,291,750
3,200,000 Ciesco LP, 5.90%, 4/13/2000* 3,194,755 3,194,755
3,300,000 CIT Group Holdings, Inc., 5.96%,
4/13/2000* 3,294,537 3,294,537
3,300,000 Deere & Co., 6.00%, 4/13/2000* 3,294,500 3,294,500
3,300,000 First Data Corp., 6.02%, 4/11/2000* 3,295,585 3,295,585
3,300,000 First Union Corp., 5.93%, 4/13/2000* 3,294,564 3,294,564
3,300,000 Ford Motor Credit, 5.93%, 4/13/2000* 3,294,564 3,294,564
3,300,000 General Electric Capital Corp., 5.92%,
4/13/2000* 3,294,573 3,294,573
2,900,000 General Mills, 6.00%, 4/13/2000* 2,889,850 2,889,850
3,300,000 General Motors, 5.94%, 4/13/2000* 3,294,555 3,294,555
3,000,000 GTE Funding, Inc., 6.01%,
4/12/2000* 2,995,492 2,995,492
$3,300,000 Household Finance Corp., 5.90%,
4/13/2000* 3,294,592 3,294,592
3,200,000 IBM Credit Corp., 5.91%, 4/13/2000* 3,194,747 3,194,747
3,300,000 International Lease, 5.90%, 4/13/2000* 3,294,591 3,294,591
3,300,000 Kellogg Co., 5.93%, 4/13/2000* 3,294,564 3,294,564
3,300,000 Merrill Lynch & Co., 6.06%, 4/12/2000* 3,295,001 3,295,001
3,300,000 Metlife Funding, Inc., 5.94%, 4/14/2000* 3,294,011 3,294,011
1,100,000 Nike Inc., 6.00%, 4/18/2000* 1,097,250 1,097,250
3,300,000 Prudential Funding Corp., 6.01%,
4/18/2000* 3,291,736 3,291,736
3,300,000 Texaco, Inc., 5.90%, 4/13/2000* 3,294,592 3,294,592
3,300,000 Wells Fargo & Co., 5.95%, 4/13/2000* 3,294,546 3,294,546
--------- ---------
Total Commercial Paper 85,444,463 85,444,463
---------- ----------
23
<PAGE>
Principal REPURCHASE AGREEMENT-2.09% Cost Market Value
Amount
$3,515,187 State Street Bank & Trust
Company Repurchase
Agreement, 4.250%, dated
3/31/2000, repurchase price
$3,516,432 maturing
4/3/2000 (collateralized by
U.S. Treasury Note, 6.50%,
5/31/2002) $3,515,187 $3,515,187
---------- ----------
Total Repurchase Agreement 3,515,187 3,515,187
--------- ---------
Total Investments-138.48% $235,313,911 233,269,040
============
Liabilities less Other Assets-(38.48)% (64,814,768)
------------
NET ASSETS-100.00% $168,454,272
============
</TABLE>
+ Security exempt from registration under rule 144A of the Securitites 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 March 31, 2000.
The accompanying notes are an integral part of the financial statements.
24
<PAGE>
Statement of Assets & Liabilities
MARCH 31, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
ARIEL APPRECIATION PREMIER
FUND FUND BOND FUND
------------ ------------ ------------
<S> <C> <C> <C>
Assets:
Investments in securities, at value
(cost $159,755,116, $246,495,196
and $235,313,911, respectively) $178,550,226 $286,858,145 $233,269,040
Dividends and interest receivable 423,466 619,509 1,095,979
Receivable for securities sold 184,525 -- --
Receivable for fund shares issued 17,818 75,628 15,857
Prepaid and other assets 12,461 23,814 --
------------ ------------ ------------
Total assets 179,188,496 287,577,096 234,380,876
------------ ------------ ------------
LIABILITIES:
Payable to custodian 137,612 165,101 5,303
Payable for shares redeemed 109,395 168,304 --
Accrued management fee 97,658 180,274 68,335
Accrued distribution fee 44,587 46,941 486
Payable for securities purchased -- -- 64,948,052
Shareholder distribution payable -- -- 904,197
Other liabilities 156,416 173,462 231
------------ ------------ ------------
Total liabilities 545,668 734,082 65,926,604
------------ ------------ ------------
NET ASSETS $178,642,828 $286,843,014 $168,454,272
============ ============ ============
NET ASSETS CONSIST OF:
Paid-in-capital $154,774,431 $235,359,954 $175,659,180
Undistributed net investment income 298,303 326,774 6,497
Accumulated net realized gain (loss)
on investment transactions 4,774,984 10,793,337 (5,166,534)
Net unrealized appreciation
(depreciation) on investments 18,795,110 40,362,949 (2,044,871)
------------ ------------ ------------
Total net assets $178,642,828 $286,843,014 $168,454,272
============ ============ ============
Shares outstanding (no par value) 5,995,168 9,620,572
Institutional Class 16,992,579
Investor Class 268,400
Net asset value, offering and redemption
price per share $29.80 $29.82
Institutional Class $9.76
Investor Class $9.75
<CAPTION>
Statement of Operations
SIX MONTHS ENDED MARCH 31, 2000 (UNAUDITED)
ARIEL APPRECIATION PREMIER
FUND FUND BOND FUND
------------ ------------ ------------
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividends $ 1,451,044 $ 2,249,616 $ --
Interest 50,173 76,606 5,375,333
Miscellaneous income -- 3,585 --
------------ ------------ ------------
Total investment income 1,501,217 2,329,807 5,375,333
------------ ------------ ------------
EXPENSES:
Management fees 616,839 1,173,135 380,863
Distribution fees 249,981 391,045 3,361
Transfer agent fees and expenses 190,931 255,913 --
Printing and postage expenses 44,986 42,206 --
Professional fees 26,031 26,086 --
Trustees' fees and expenses 21,229 21,229 --
Federal and state registration fees 19,057 31,844 --
Custody fees and expenses 12,130 16,983 --
Miscellaneous expenses 21,910 40,656 231
------------ ------------ ------------
Net expenses 1,203,094 1,999,097 384,455
------------ ------------ ------------
NET INVESTMENT INCOME 298,123 330,710 4,990,878
------------ ------------ ------------
REALIZED AND UNREALIZED
GAIN (LOSS):
Net realized gain (loss) on investments 4,899,437 15,581,128 (2,329,241)
Change in net unrealized appreciation/
depreciation on investments (17,347,437) (26,413,791) (242,567)
------------ ------------ ------------
Net loss on investments (12,448,000) (10,832,663) (2,571,808)
------------ ------------ ------------
NET INCREASE (DECREASE) IN
NET ASSETS RESULTING
FROM OPERATIONS $(12,149,877) $(10,501,953) $ 2,419,070
============ ============ ============
</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
---------- ------------------
Six Months Ended Six Months Ended
March 31, 2000 Year Ended March 31, 2000 Year Ended
(Unaudited) September 30, 1999 (Unaudited) September 30, 1999
---------------- ------------------ ---------------- ------------------
<S> <C> <C> <C> <C>
OPERATIONS:
Net investment income $ 298,123 $ 544,667 $ 330,710 $ 414,796
Net realized gain (loss) on investments 4,899,437 33,766,949 15,581,128 26,232,699
Change in net unrealized
appreciation/depreciation of investments (17,347,437) (11,439,201) (26,413,791) 6,077,755
---------------- ------------------ ---------------- ------------------
Net increase (decrease) in net assets
from operations (12,149,877) 22,872,415 (10,501,953) 32,725,250
---------------- ------------------ ---------------- ------------------
DISTRIBUTIONS TO SHAREHOLDERS:
Net investment income (421,983) (386,173) (414,761) (271,554)
Capital gains (33,743,511) (17,212,926) (31,018,586) (25,199,149)
---------------- ------------------ ---------------- ------------------
Total distributions (34,165,494) (17,599,099) (31,433,347) (25,470,703)
---------------- ------------------ ---------------- ------------------
SHARE TRANSACTIONS:
Shares sold 26,444,692 88,322,437 55,274,615 204,349,663
Shares issued to holders in
reinvestment of dividends 32,148,569 16,411,876 29,347,822 23,137,652
Shares redeemed (48,780,372) (57,141,027) (108,685,380) (95,713,008)
---------------- ------------------ ---------------- ------------------
Net increase (decrease) 9,812,889 47,593,286 (24,062,943) 131,774,307
---------------- ------------------ ---------------- ------------------
TOTAL INCREASE (DECREASE) IN NET ASSETS (36,502,482) 52,866,602 (65,998,243) 139,028,854
NET ASSETS:
Beginning of year 215,145,310 162,278,708 352,841,257 213,812,403
---------------- ------------------ ---------------- ------------------
End of year (includes
undistributed net investment
income of $298,303, $422,164, $326,774,
$414,410, $6,497 and $0, respectively) $ 178,642,828 $ 215,145,310 $ 286,843,014 $ 352,841,257
================ ================== ================ ==================
<CAPTION>
PREMIER BOND FUND
------------------
Six Months Ended
March 31, 2000 Year Ended
(Unaudited) September 30, 1999
---------------- ------------------
<S> <C> <C>
OPERATIONS:
Net investment income $ 4,990,878 $ 8,852,130
Net realized gain (loss) on investments (2,329,241) (2,564,439)
Change in net unrealized
appreciation/depreciation of investments (242,567) (6,754,988)
---------------- ------------------
Net increase (decrease) in net assets
from operations 2,419,070 (467,297)
---------------- ------------------
DISTRIBUTIONS TO SHAREHOLDERS:
Net investment income (4,990,878) (8,852,130)
Capital gains -- (1,862,283)
---------------- ------------------
Total distributions (4,990,878) (10,714,413)
---------------- ------------------
SHARE TRANSACTIONS:
Shares sold 14,728,200 34,874,721
Shares issued to holders in
reinvestment of dividends 4,936,936 10,661,004
Shares redeemed (12,758,496) (21,990,508)
---------------- ------------------
Net increase (decrease) 6,906,640 23,545,217
---------------- ------------------
TOTAL INCREASE (DECREASE) IN NET ASSETS 4,334,832 12,363,507
NET ASSETS:
Beginning of year 164,119,440 151,755,933
---------------- ------------------
End of year (includes
undistributed net investment
income of $298,303, $422,164, $326,774,
$414,410, $6,497 and $0, respectively) $ 168,454,272 $ 164,119,440
================ ==================
</TABLE>
The accompanying notes are an integral part of the financial statements.
26
<PAGE>
Financial Highlights
<TABLE>
<CAPTION>
ARIEL FUND
----------
Six Months Ended
March 31, 2000 Year Ended September 30,
(Unaudited) 1999(a) 1998 1997 1996 1995
------------------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of year $37.99 $36.49 $41.49 $30.58 $30.78 $28.84
Income from investment operations:
Net investment income 0.05 0.10 0.13 0.07 0.18 0.36
Net realized and unrealized gains
(losses) on investments (2.12) 5.20 (1.41) 12.62 4.24 3.51
------ ------ ------ ------ ------ ------
Total from investment operations (2.07) 5.30 (1.28) 12.69 4.42 3.87
Distributions to shareholders:
Dividends from net investment
income (0.08) (0.08) (0.14) -- (0.44) (0.23)
Distributions from capital gains (6.04) (3.72) (3.58) (1.78) (4.18) (1.70)
------ ------ ------ ------ ------ ------
Total distributions (6.12) (3.80) (3.72) (1.78) (4.62) (1.93)
------ ------ ------ ------ ------ ------
Net asset value, end of year $29.80 $37.99 $36.49 $41.49 $30.58 $30.78
====== ====== ====== ====== ====== ======
Total return (5.05)%(b) 14.18% (3.83)% 43.25% 16.28% 14.38%
Supplemental data and ratios:
Net assets, end of year,
in thousands $178,643 $215,145 $162,279 $164,065 $109,770 $120,953
Ratio of expenses to average
net assets 1.28%(c) 1.25% 1.21% 1.25% 1.31% 1.37%(d)
Ratio of net investment income
to average net assets 0.32%(c) 0.27% 0.30% 0.23% 0.57% 1.18%(d)
Portfolio turnover rate 8% 38% 22% 20% 17% 16%
<CAPTION>
APPRECIATION FUND
-----------------
Six Months Ended
March 31, 2000 Year Ended September 30,
(Unaudited) 1999 1998 1997 1996 1995
------------------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of year $33.84 $31.80 $33.70 $24.99 $22.76 $21.82
Income from investment operations:
Net investment income 0.04 0.04 0.09 0.02 0.13 0.14
Net realized and unrealized gain s
(losses) on investments (0.87) 5.50 1.14 10.13 4.07 2.26
------ ------ ------ ------ ------ ------
Total from investment operations (0.83) 5.54 1.23 10.15 4.20 2.40
Distributions to shareholders:
Dividends from net investment
income (0.04) (0.04) (0.07) (0.07) (0.20) (0.06)
Distributions from capital gains (3.15) (3.46) (3.06) (1.37) (1.77) (1.40)
------ ------ ------ ------ ------ ------
Total distributions (3.19) (3.50) (3.13) (1.44) (1.97) (1.46)
------ ------ ------ ------ ------ ------
Net asset value, end of year $29.82 $33.84 $31.80 $33.70 $24.99 $22.76
====== ====== ====== ====== ====== ======
Total return (2.30)%(b) 16.99% 3.40% 42.33% 19.60% 12.11%
Supplemental data and ratios:
Net assets, end of year,
in thousands $286,843 $352,841 $213,812 $186,478 $135,627 $143,312
Ratio of expenses to average
net assets 1.29%(c) 1.26% 1.26% 1.33% 1.36%(d) 1.36%(d)
Ratio of net investment income
to average net assets 0.21%(c) 0.13% 0.25% 0.07% 0.50%(d) 0.61%(d)
Portfolio turnover rate 13% 24% 20% 19% 26% 18%
</TABLE>
(a) Prior to February 1, 1999, the Ariel Fund was known as the Ariel Growth
Fund.
(b) Total return is not annualized.
(c) Annualized.
(d) 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)
<TABLE>
<CAPTION>
PREMIER BOND FUND
-----------------
INSTITUTIONAL CLASS
Six Months Ended
March 31, 2000 Year Ended September 30,
(Unaudited) 1999 1998 1997 1996
----------------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $9.91 $10.63 $10.30 $9.95 $10.00
Income from investment operations:
Net investment income 0.29 0.57 0.61 0.52 0.43
Net realized and unrealized gains
(losses) on investments (0.15) (0.60) 0.40 0.37 (0.04)
------ ------ ------ ------ ------
Total from investment operations 0.14 (0.03) 1.01 0.89 0.39
Distributions to shareholders:
Dividends from net investment
income (0.29) (0.57) (0.61) (0.52) (0.43)
Distributions from capital gains -- (0.12) (0.07) (0.02) (0.01)
------ ------ ------ ------ ------
Total distributions (0.29) (0.69) (0.68) (0.54) (0.44)
------ ------ ------ ------ ------
Net asset value, end of year $ 9.76 $9.91 $10.63 $10.30 $9.95
====== ====== ====== ====== ======
Total return 1.48%(b) (0.25)% 10.20% 9.26% 3.96%
Supplemental data and ratios:
Net assets, end of year, in
thousands $165,836 $161,495 $149,977 $113,998 $15,367
Ratio of expenses to average
net assets 0.45%(c) 0.45% 0.45% 0.45% 0.48%
Ratio of net investment income
to average net assets 6.00%(c) 5.57% 5.86% 6.05% 5.85%
Portfolio turnover rate 294% 396% 60% 218% 423%
<CAPTION>
INVESTOR CLASS
Six Months Ended February 1, 1997(a)
March 31, 2000 Year Ended September 30, to
(Unaudited) 1999 1998 September 30, 1997
---------------- ------ ------ ------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of year $9.91 $10.63 $10.29 $10.10
Income from investment operations:
Net investment income 0.27 0.53 0.57 0.37
Net realized and unrealized gains
(losses) on investments (0.16) (0.60) 0.41 0.19
------ ------ ------ ------
Total from investment operations 0.11 (0.07) 0.98 0.56
Distributions to shareholders:
Dividends from net investment
income (0.27) (0.53) (0.57) (0.37)
Distributions from capital gains -- (0.12) (0.07) --
------ ------ ------ ------
Total distributions (0.27) (0.65) (0.64) (0.37)
------ ------ ------ ------
Net asset value, end of year $9.75 $9.91 $10.63 $10.29
====== ====== ====== ======
Total return 1.17%(b) (0.65)% 9.34% 5.73%(b)
Supplemental data and ratios:
Net assets, end of year, in
thousands $2,618 $2,624 $1,779 $401
Ratio of expenses to average
net assets 0.85%(c) 0.85% 0.85% 0.85%(c)
Ratio of net investment income
to average net assets 5.59%(c) 5.17% 5.46% 5.60%(c)
Portfolio turnover rate 294% 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
March 31, 2000 (UNAUDITED)
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 Growth Fund.
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.
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
March 31, 2000 the Fund had $66,329,544 in purchase commitments outstanding (39%
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)
March 31, 2000 (UNAUDITED)
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>
Six Months Ended March 31, 2000
ARIEL FUND APPRECIATION FUND PREMIER BOND FUND
---------- ----------------- -----------------
INSTITUTIONAL INVESTOR
------------- --------
<S> <C> <C> <C> <C>
Shares sold 825,982 1,789,035 1,447,473 67,791
Shares issued to holders in
reinvestment of dividends 1,106,283 999,585 486,913 6,673
Shares redeemed (1,599,610) (3,595,804) (1,235,816) (70,963)
---------- ---------- ---------- -------
Net increase (decrease) 332,655 (807,184) 698,570 3,501
========== ========== ========== =======
<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>
4. INVESTMENT TRANSACTIONS
Purchases and sales of securities, excluding short-term investments and U.S.
government securities, for the six months ended March 31, 2000 are summarized
below:
<TABLE>
<CAPTION>
ARIEL FUND APPRECIATION FUND PREMIER BOND FUND
---------- ----------------- -----------------
<S> <C> <C> <C>
Purchases $15,050,247 $40,039,670 $14,986,940
Sales 38,057,417 94,735,374 27,998,502
</TABLE>
Purchases and sales of U.S. government securities for the Premier Bond Fund for
the six months ended March 31, 2000 were $433,353,132 and $426,970,914,
respectively.
At March 31, 2000 the cost of securities on a tax basis was $160,152,441,
$247,105,797 and $235,502,769 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 $38,943,196 $61,441,559 $499,118
Unrealized (depreciation) (20,545,411) (21,689,211) (2,732,847)
----------- ----------- -----------
Net appreciation (depreciation) $18,397,785 $39,752,348 $(2,233,729)
=========== =========== ===========
</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.
30
<PAGE>
Notes to the Financial Statements (cont)
March 31, 2000 (UNAUDITED)
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 six months ended
March 31, 2000, the Fund paid the Advisor $294,658 and $86,205 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>
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 TWC/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 Commonwealth Edison Company and Unicom Corp.
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 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 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; The Washington Design Center; and New York's Decoration and Design
Building. He earned his B.A. from Boston College and his M.B.A. at the J.L.
Kellogg Graduate School of Management at Northwestern University. Chris serves
on the board of directors of the Chicago Convention & Tourism Bureau;
Boston-based Citizens Energy Corp. and Citizens Corp.; and the Greater Chicago
Food Depository.
ERIC T. MCKISSACK, CFA In the capacity of vice chairman and co-chief investment
officer of Ariel Capital Management, Inc., Eric is responsible for co-managing
client and mutual fund portfolios. He received a B.S. in both Management and
Architecture from the Massachusetts Institute of Technology and he earned his
M.B.A. from the University of California at Berkeley. He has earned the
Chartered Financial Analyst designation. Eric serves on a variety of civic and
corporate boards.
32
<PAGE>
and on...and on. Soon the Hare was so far ahead he
thought he might as well have a rest, so down he lay
and fell fast asleep...as the Tortoise plodded on...and on.
Suddenly the Hare woke up with a start. What was
the time? Where was the Tortoise? He dashed on at
his fastest pace...only to find that the Tortoise had
already won the race.
Slow & steady wins the race.
<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
