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ARIEL MUTUAL FUNDS
Ariel Fund
Ariel Appreciation Fund
Ariel Premier Bond Fund
Annual Report--September 30, 2000
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THE PATIENT INVESTOR [GRAPHIC OF TURTLE HOLDING TROPHY]
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SHAREHOLDER NEWS
At Ariel Mutual Funds, we concentrate on doing one thing and doing it
well--superior stock picking. We seek to maximize returns for our clients by
purchasing stocks when they are out of favor, then selling them for a profit
when they have realized their true value. We maintain a focused approach to
value investing, and our portfolios have held some great success stories over
the years.
This year, several stocks in our funds performed quite well and reached our
disciplined sell targets. Specifically, our funds benefited from a number of
corporate takeovers, and several of our holdings sold their businesses at
meaningful premiums. As such, Ariel Fund's estimated distribution for 2000 is
$6.45 per share and Ariel Appreciation Fund's estimated distribution is $4.15
per share. PLEASE NOTE THAT THESE ESTIMATES WILL CHANGE BETWEEN NOW AND THE
DISTRIBUTION DATE. Check our website for regular updates. To help you accurately
report your capital gains to the IRS, we will send you the appropriate tax forms
in January 2001. REMEMBER, TAX-FREE RETIREMENT ACCOUNTS ARE EXEMPT FROM CAPITAL
GAINS TAXES.
Ariel Mutual Funds will make its capital gains distribution on DECEMBER 4, 2000
to shareholders of record as of DECEMBER 1, 2000. As with all mutual funds, the
net asset value (NAV) of Ariel Fund and Ariel Appreciation Fund will drop by the
amount of the distribution per share the day following the distribution. You
will notice this change in the fund's NAV, which is reported daily in the
newspaper. REMEMBER, YOUR ACCOUNT VALUE WILL NOT RISE OR FALL AS A RESULT OF THE
DISTRIBUTION; RATHER, YOU WILL HAVE MORE SHARES OF THE FUND AT A LOWER PRICE PER
SHARE.
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Ariel Investment Trust
307 North Michigan Avenue
Suite 500
Chicago, Illinois 60601
800.292.7435
312.726.0140
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.
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
Report of Independent Auditors 32
Board of Trustees 33
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[LETTERHEAD OF PATIENT INVESTOR]
DEAR FELLOW SHAREHOLDER: For the quarter ended September 30, 2000, the small cap
value stocks comprising Ariel Fund rose +4.94%. This three month return was well
ahead of the +1.11% gain posted by the more aggressive issues of the Russell
2000 Index but still short of the +7.34% rise of the more style-similar Russell
2000 Value Index. Over the same period, the mid-sized issues of Ariel
Appreciation Fund earned +8.02% which surpassed the +6.81% gain of the Russell
Midcap Index, but still was not as robust as the +9.65% rise of its value
counterpart--the Russell Midcap Value Index.
Having now clocked two consecutive quarters of outperformance versus their
growth stock counterparts, value stocks finally appear to be showing some
renewed signs of life after a long and difficult spell. It seems, as we read in
the October 3, 2000 edition of THE WALL STREET JOURNAL, "...earnings shortfalls
and concerns about growth in the faster-growing segments of the market are
making value investing look better by comparison." And much to our delight,
small and mid-sized issues--the stocks that have been the most scorned and
therefore the cheapest--are most benefiting from a newfound investor sensitivity
to price.
For context, Bernstein Research calculates that at the height of the bull market
of 1972, the widest price to earnings (p/e) differential between the 50 largest
stocks and the next 1,450 was 7 p/e points, compared with a spread of well over
20 points for those same sequenced companies earlier this year. As we have said
before, at some point, such a huge valuation gap becomes impossible to ignore.
And so, it seems rational heads are finally beginning to prevail, evidenced by
the strong outperformance of small and mid-cap value stocks since the high
octane Nasdaq took a nasty turn in early March. Specifically, for the seven
months ended September 30, 2000, the Nasdaq has plummeted -21.67%. Perhaps not
surprisingly, as USA TODAY noted, "Market sentiment has gone from euphoria to
happiness to concern, and now it's moving to fear." And yet, by contrast, over
this same seven-month timeframe, the Russell 2000 Value Index has climbed +9.95%
and the Russell Midcap Value Index has fared even better with a remarkable
+20.88% rebound.
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As a means of comparison, from the beginning of March through September's end,
Ariel Fund has gained +36.21% and Ariel Appreciation Fund has earned +27.58%.
Despite the progress that has been made by smaller companies, we believe the
narrowing of the current valuation gap has only just begun. This certainly bodes
well for small and mid-cap value investing and gives us great optimism for the
future.
PORTFOLIO COMINGS AND GOINGS
With an abundance of remarkable bargains in our midst, this quarter was marked
by numerous additions of new stocks to our portfolios. More specifically, given
our patient investing approach and the low turnover that thereby results, our
purchase of six small cap value companies in Ariel Fund over the last three
months is noteworthy, as it represents more stocks than we generally buy in the
course of any given year. Our bargain shopping did not, however, eclipse our
fundamental research and intense scrutiny of each issue. And so, after visiting
more than 25 companies during the quarter, we ultimately initiated positions in
soap maker, Dial Corp. (NYSE: DL); ACNielsen Corp. (NYSE: ART), the market
research company; wheelchair manufacturer, Invacare Corp. (NYSE: IVC); J.M.
Smucker Co. (NYSE: SJM), the renowned jelly maker; eye-care provider, Bausch &
Lomb, Inc. (NYSE: BOL); as well as greeting card manufacturer, American
Greetings Corp., (NYSE: AM). On the sell side, we captured a nice profit as we
moved out of our position in insurance broker, Arthur J. Gallagher & Co. (NYSE:
AJG), when the stock price reached its private market value. We also began to
liquidate our position in Urban Shopping Centers, Inc. (NYSE: URB), on the good
news of its takeover by European-based Rodamco at a 30.4% premium to its
previous day's share price.
In Ariel Appreciation Fund, we initiated positions in ServiceMaster Co. (NYSE:
SVM), the diversified commercial and consumer services company; business
information provider, Dun & Bradstreet (NYSE: DNB); and Albertson's, Inc. (NYSE:
ABS), the grocery store chain. Like Ariel Fund, we also sold Arthur J. Gallagher
& Co. and for the same reason of fair valuation, exited Cardinal Health, Inc.
(NYSE: CAH). On a less positive note, we lost faith in the prospects for Galileo
International, Inc.'s (NYSE: GLC) rapidly changing travel purchase model and
eliminated the position.
DOES FAIR DISCLOSURE SPELL ANALYST FORECLOSURE?
On October 23rd, the investment world as we know it will undergo a profound
change with the adoption of the Security & Exchange Commission's Regulation Fair
Disclosure (also known as Reg FD for short). Under this new standard, public
companies must simultaneously disseminate any and all material information in
one BROAD statement to the investment community as well as the general pub-
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lic. This is a noteworthy departure from the age-old practice known as
"selective disclosure" whereby corporate financial officers and investor
relations personnel could offer their insights and guidance to Wall Street
analysts and institutional investors. With the old system, company contacts
sometimes offered thoughts regarding the state of their businesses and the
resulting earnings outlook in advance of large-scale press releases and public
announcements. SEC Chairman, Arthur Levitt, condemned this long-held custom by
stating that "selective disclosure undermines the integrity of the securities
markets and reduces investor confidence in the fairness of those markets."
Furthermore, he advised, "selective disclosure also may create conflicts of
interests for securities analysts, who may have an incentive to avoid making
negative statements about an issuer for fear of losing their access to
selectively disclosed information."
While we understand Chairman Levitt's perspective on the need to level the
information playing field, we have begun to contemplate other potential outcomes
of this new policy that could profoundly change the investment management
industry. More specifically, we have been pondering the role of investment
management firm "buy" side analysts and Wall Street brokerage firm "sell" side
analysts whose information pipeline is dependent on company visits, meetings
with senior management teams at investment conference break-out sessions,
frequent conference calls with top corporate executives, as well as the
solicitation of company guidance on complex earnings models. But in light of Reg
FD, consider this--if management teams are prohibited from the aforementioned
discussions, confined to a blanket dissemination of information instead, will
buy- and sell-side analysts who depend on management conversations for the bulk
of their research be able to amass enough information to gain a UNIQUE
perspective on the companies they follow now that they will have the same
information as everyone else?
Taken to its logical conclusion, one has to wonder if the analysts could
ultimately become obsolete. For example, in the past, a company visit was a good
information-gathering endeavor. But with the new SEC clamp-down and management's
likely reluctance to conduct one-on-one conversations, one has to question if
there will be much value-added from such treks. Moreover, with fears of a SEC
violation, it is not hard to imagine the executives of public companies becoming
more and more difficult to access, as they worry about saying the wrong thing in
an attempt to come to terms with the definition of "materiality." Additionally,
spending the day talking to Wall Street analysts and portfolio managers is
probably not the highpoint of a CEO's job--in all likelihood, these executives
would rather be running their business than discussing it. So Reg FD now
provides a viable excuse for limiting their external communications to press
releases and large-scale conference calls and thereby leaving them fully engaged
in the day-to-day management of their companies. (This result could certainly be
viewed as a positive outcome of the new regulation.)
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Against this backdrop, we believe the analysts that will be most successful in
this new environment will rely on independent sources and third party
verifications more than ever before. This will be a dramatic change since more
and more analysts appear to be overly dependent on management perspectives for
their research reports and thus, have stopped doing original work. Yet, in our
view, a heavy dependence on company management for critical company or industry
insights is a lazy person's research. In order to fully assess management talent
and vision, product quality and reputation, we have always believed that one
must cultivate a vast and ever-expanding network of independent sources that can
offer an unbiased view.
And so, in light of the potential fallout of Reg FD, independent research will
have to be just that--which, at present, is a novel concept on Wall Street. In
our case, by focusing on small and mid-sized companies for nearly 18 years now,
we have been able to build and maintain an extensive cross section of impartial
sources. (Not to mention, proprietary research can have the biggest impact at
the smaller company end of the market where fewer buy- and sell-side analysts
cover the stocks.) As such, we are confident that in spite of the new rules
resulting from Regulation Fair Disclosure, we will be able to continue to add
depth to our research process and thereby distinguish our investigative effort
from what we believe may become a marginalized Wall Street investing pack.
As always, we appreciate the opportunity to serve you and welcome any comments
or suggestions you might have.
Sincerely,
/s/ John W. Rogers /s/ Eric T. McKissack
John W. Rogers, Jr. Eric T. McKissack, CFA
Portfolio Manager Portfolio Manager
Ariel Fund Ariel Appreciation Fund
THE FUNDS' PORTFOLIO SECURITIES AS OF SEPTEMBER 30, 2000, INCLUDING THE
SECURITIES DISCUSSED IN THIS LETTER, ARE LISTED IN THE SCHEDULE OF INVESTMENTS.
PORTFOLIO HOLDINGS ARE SUBJECT TO CHANGE.
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COMPANY
[THE J.M. SMUCKER COMPANY LOGO]
1 STRAWBERRY LANE
ORRVILLE, OH 44667
(330) 682-3000
www.smucker.com
THE J.M. SMUCKER COMPANY (NYSE: SJM)
Founded in Orrville, Ohio in 1897, The J.M. Smucker Company is the leading
preserve and jelly manufacturer in the U.S. Most of us can remember the
catchphrase, "With a name like Smucker's, it has to be good." Smucker also
possesses market share leadership in ice cream toppings and fruit syrups and is
a brand leader in health food juices through its Knudsen beverage line. Smucker
boasts not only a strong franchise and an exemplary business model, but also an
undervaued stock price that trades at an attractive discount to our estimation
of its private market value.
REASONS FOR RECOMMENDATION
DOMINANT BUSINESS WITH ATTRACTIVE PROSPECTS
When it comes to fruit, Smucker is the definitive expert. The company delivers
consistently high quality and tasty products to consumers through its jellies
and jams. Additionally, Smucker supplies fruit filling for food industry peer
products, including Dannon's yogurts and Kellogg's POP-TARTS and NUTRI-GRAIN
cereal bars. At present, the company is focusing its efforts on new product
introductions, including Smucker's UNCRUSTABLES, a new line of thaw-and-serve
crustless peanut butter and jelly sandwiches, as well as Smucker's SNACKERS,
which combines peanut butter and jelly with crackers.
MANAGEMENT DEDICATED TO THE BUSINESS AND ITS SHAREHOLDERS
Our independent research has found the Smucker management team to be highly
respected within the food products industry. Additionally, we walked away from a
recent management meeting at company headquarters confident that this team would
continue to work towards offering the highest quality and most consistent
product in the market while continuing to seek methods to increase shareholder
value. Fourth generation descendants of the founder, broth-
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IN FOCUS
ers Timothy and Richard Smucker, run the company as Chairman and President,
respectively. Furthermore, a significant number of its executive officers have
been employed at the company for more than 15 years.
OUT OF FAVOR INDUSTRY
As investors are concerned about supermarket retailers' increasing leverage
over food product companies, the food products industry remains out of favor.
Specifically, investors fear smaller companies like Smucker are losing
cost-effective pricing for shelf space as the major industry leaders negotiate
with the supermarkets to secure prime space at discount prices. In fact, this
concern is the likely catalyst behind three mammoth acquisitions in the past
few months, including: Unilever/Bestfoods, Philip Morris/ Nabisco, and General
Mills/Pillsbury. We disagree with the negative sentiments that are prevalent
on Wall Street and although we do not dismiss the argument that scale is
important, we believe that Smucker is not too small to compete as it dominates
its market niche. As always, we welcome the opportunity to invest in wonderful
franchises at significant discounts, especially when we feel strongly that
investor concerns are overblown.
COMPELLING VALUATION
We initiated a position in Smucker at $18.50 in August 2000. Although Smucker's
stock price has already appreciated to approximately $24, our valuation analysis
indicates the company is still selling at a significant discount to our
estimated private market value of $37. At current prices, we recommend investors
initiate a position in Smucker.
7
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COMPANY UPDATES
[ARTHUR J. GALLAGHER & CO. LOGO]
THE GALLAGHER CENTER
TWO PIERCE PLACE
ITASCA, IL 60143
(630) 773-3800
www.ajg.com
ARTHUR J. GALLAGHER & CO. (NYSE: AJG) In September of this year, we sold our
remaining shares of Arthur J. Gallagher at an average price of $51, a large
premium over our initial purchase price of $17 in August of 1996. Over the past
several months, we were pleased to see the stock gain favor with many investors
as fundamentals changed positively in the property & casualty insurance
industry. Stock prices have been rising steadily with this change of sentiment,
and insurance brokers like Arthur J. Gallagher have been the first to benefit.
Insurance commission revenues rise in proportion with prices, without a
commensurate increase in expenses. As such, the market has anticipated rapid
earnings per share growth and has bid up the price of Gallagher's stock more
than 100% for the year.
As always, it is a bittersweet victory when we sell an interest in such a solid,
well-run business. We continue to see a bright future for Gallagher. However, as
disciplined investors, we feel compelled to sell when a company reaches its full
value. Today, at $59, the company's stock sells at almost 30 times next year's
estimated earnings per share. We believe the company is fairly priced and
recommend investors sell their positions.
We will continue to follow Arthur J. Gallagher closely and will seize any
opportunity to repurchase this superior franchise at a discount.
CARDINAL HEALTH, INC. (NYSE: CAH) In early September, we completed selling our
positions in Cardinal Health after a relatively short holding period which began
just last Spring. We believe the company is an excellent example of an Ariel
holding, as it boasts a stellar management team led by Chairman, CEO and founder
Bob Walter, attractive returns and margins, as well as a sustainable competitive
advantage through proprietary product and service offerings.
[CARDINAL HEALTH, INC. LOGO]
7000 CARDINAL PLACE
DUBLIN, OH 43017
(614) 757-5000
www.cardinal.com
As we mentioned in our semi-annual report of March 2000, Cardinal's stock fell
in sympathy with the overall woes of the health care market. However, since that
report, the stock has appreciated significantly and has met our private market
value. Remaining true to our investment discipline, we exited our position as
the company's share price more than doubled and reflected its full value.
If Cardinal's stock were to decline from its current levels, we would be pleased
to add it to our portfolios again. We admire the business' strong and
sustainable franchise and continue to believe that Cardinal is one of the
premier companies in the health care industry.
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U P D A T E S
DUN & BRADSTREET CORP. (NYSE: DNB) In late July of 2000, we initiated a
position in Dun & Bradstreet Corporation. On September 30, 2000, Dun &
Bradstreet spun off its global credit rating business, Moody's Corporation. As
shareholders at the time of the separation, we are now owners of both Dun &
Bradstreet and Moody's Corporation. We consider this a most fortunate
opportunity to own two powerful franchises for the price of one.
The Dun & Bradstreet Corporation is a trusted source for critical business
information such as commercial credit, marketing, and purchasing data. The
company has substantial barriers to entry as its global database of 60 million
businesses is a unique asset that would be virtually impossible for a competitor
to duplicate. Dun & Bradstreet uses the information from its database for its
wide range of published reports and integrates it into value-added products like
desktop analysis tools and applications.
[DUN & BRADSTREET LOGO]
ONE DIAMOND HILL ROAD
MURRAY HILL, NJ 07974
(908) 665-5000
www.dnb.com
Currently out of favor with investors, we consider Dun & Bradstreet a remarkable
investment opportunity. At $20, the stock is trading at a significant discount
to our estimated private market value of $30. We recommend investors initiate
positions.
URBAN SHOPPING CENTERS, INC. (NYSE: URB) On September 25, 2000, Urban Shopping
Centers announced that it was being acquired by Rodamco North America N.V., a
major Dutch real estate company, for $48 per share, a 40% premium to the
previous day's closing price. Rodamco operates a portfolio of 16 large regional
shopping malls in the U.S. but lacks the infrastructure to effectively manage
and develop it. With the acquisition of Urban, Rodamco more than doubles the
size of its portfolio and gains one of the most successful management teams in
the industry.
We initially purchased our position in May at approximately $32. We were drawn
to Urban this past spring by its top tier shopping mall portfolio, including
Water Tower Place in Chicago, Copley Place in Boston and Houston Galleria.
Additionally, the company had proven acquisition and development capabilities,
as well as a seasoned management team led by Neil Bluhm, Matt Dominski, and Adam
Metz. Furthermore, Real Estate Investment Trusts (REITS) had been out of favor
on Wall Street for nearly two years. Despite generally strong industry
fundamentals, REIT stocks traded near historically low valuations, and Urban was
no exception. We viewed the low stock price as a short-term problem and are
pleased our contrarian investment strategy was rewarded by the takeover.
[URBAN SHOPPING CENTERS, INC. LOGO]
900 NORTH MICHIGAN AVENUE
CHICAGO, IL 60611
(312) 915-2000
www.urbanshoppingcenters.com
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ARIEL FUND
Inception
November 6, 1986
AVERAGE ANNUAL TOTAL RETURNS AS OF SEPTEMBER 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>
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3rd Quarter YTD 1 Year 3 Year 5 Year 10 Year Life of Fund
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<S> <C> <C> <C> <C> <C> <C> <C>
ARIEL FUND +4.94% +14.63% +13.63% +7.65% +15.75% +15.15% +13.91%
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RUSSELL 2000 INDEX +1.11% +4.18% +23.39% +5.96% +12.39% +16.93% +11.86%
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RUSSELL 2000 VALUE INDEX +7.34% +13.62% +15.36% +2.11% +11.50% +16.97% +12.09%
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</TABLE>
TEN LARGEST HOLDINGS
as of September 30, 2000
1 LEE ENTERPRISES
Diversified media company
2 INTERNATIONAL GAME TECHNOLOGY
World's leading supplier of
computerized gaming devices
3 MBIA, INC.
Leading insurer of municipal bonds
4 GREY GLOBAL GROUP, INC.
Advertising and marketing
services firm
5 MCCORMICK & CO., INC.
World's largest spice company
6 BRADY CORP.
Manufacturer and distributor of niche
industrial safety-related products
7 SPECIALTY EQUIPMENT COS.
Manufacturer of commercial and
institutional food service equipment
8 HASBRO, INC.
Prominent toy manufacturer
9 HERMAN MILLER, INC.
One of the country's largest
manufacturers of office furniture
10 ROUSE CO.
Retail mall developer
ARIEL EQUITY FUNDS
[EDGAR REPRESENTATION OF BAR CHART]
<TABLE>
<CAPTION>
Ariel Fund Russell 2000 Index
Portfolio Composition Portfolio Composition
<S> <C> <C>
Consumer Discretionary & Services 39.12% 15.6%
Producer Durables 16.97% 8.3%
Financial Services 14.17% 19.8%
Materials and Processing 13.75% 8.0%
Consumer Staples 10.47% 2.3%
Technology 2.51% 18.0%
Health Care 2.39% 14.5%
Cash & Other 0.62% 1.0%
Integrated Oils 0.00% 0.0%
Utilities 0.00% 6.2%
Autos and Transportation 0.00% 2.8%
Other Energy 0.00% 3.5%
</TABLE>
[EDGAR REPRESENTATION OF MOUNTAIN CHART]
<TABLE>
<CAPTION>
COMPARISION OF CHANGE IN VALUE OF $10,000
INVESTED IN ARIEL FUND AND COMPARABLE INDICES*
ARIEL FUND S&P 500 INDEX RUSSELL 2000 INDEX
<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
Sep-00 $61,135 $82,747 $47,117
</TABLE>
*Statistics represent past performance which is not indicative of future
results. The S&P 500 is a broad market-weighted index dominated by blue-chip
stocks. The Russell 2000 Index measures the performance of smaller companies.
The Russell 2000 Value Index measures the performance of smaller,
value-oriented companites with lower price-to-earnings ratios. All indices are
unmanaged and returns include reinvested 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 SEPTEMBER 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>
-------------------------------------------------------------------------------------------------------------
3rd Quarter YTD 1 Year 3 Year 5 Year 10 Year Life of Fund
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
ARIEL APPRECIATION FUND +8.02% +8.75% +10.35% +10.10% +17.84% +16.33% +13.42%
-------------------------------------------------------------------------------------------------------------
RUSSELL MIDCAP INDEX +6.81% +12.28% +31.62% +13.90% +18.29% +19.93% +16.03%
-------------------------------------------------------------------------------------------------------------
RUSSELL MIDCAP VALUE INDEX +9.65% +8.90% +13.00% +5.96% +14.07% +17.81% +13.70%
</TABLE>
TEN LARGEST HOLDINGS
as of September 30, 2000
1 MBIA, INC.
Leading insurer of municipal bonds
2 MBNA CORP.
Prominent issuer of bank credit cards
3 HERMAN MILLER, INC.
One of the country's largest
manufacturers of office furniture
4 INTERNATIONAL GAME TECHNOLOGY
World's leading supplier of
computerized gaming devices
5 ROUSE CO.
Retail mall developer
6 LEE ENTERPRISES
Diversified media company
7 XL CAPITAL LTD.
Worldwide insurance company
8 EQUIFAX, INC.
Consumer credit and check
processing services company
9 MCCORMICK & CO., INC.
World's largest spice company
10 SYBRON INTERNATIONAL CORP.
Principal manufacturer of laboratory
and dental products
[EDGAR REPRESENTATION OF BAR CHART]
<TABLE>
<CAPTION>
ARIEL APPRECIATION FUND RUSSELL MID CAP INDEX
PORTFOLIO COMPOSITION PORTFOLIO COMPOSITION
<S> <C> <C>
Consumer Discretionary and Services 32.92% 13.1%
Financial Services 29.06% 18.6%
Consumer Staples 11.80% 3.7%
Producer Durables 9.24% 5.2%
Materials and Processing 5.93% 4.8%
Cash & Other 4.12% 1.2%
Health Care 3.54% 10.4%
Utilities 3.39% 11.2%
Technology 0.00% 20.4%
Other Energy 0.00% 5.9%
Autos and Transportation 0.00% 4.2%
Integrated Oils 0.00% 1.3%
</TABLE>
[EDGAR REPRESENTATION OF MOUNTAIN CHART]
<TABLE>
<CAPTION>
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTED
IN ARIEL APPRECIATION FUND AND COMPARABLE INDICES*
AERIEL APPRECIATION FUND S&P 500 INDEX RUSSELL MID CAP INDEX
<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
Sep-00 $39,129 $53,801 $50,052
</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 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
ratio. All indices are unmanaged and returns include reinvested dividends. An
investor cannot invest directly 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.
11
<PAGE>
ARIEL FUND
SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
Number COMMON STOCKS-99.38% Cost Market Value
of Shares
<S> <C> <C> <C>
CONSUMER DISCRETIONARY--39.12%
232,600 ACNielsen Corp.* $5,719,093 $5,538,788
14,200 American Greetings Corp. 242,110 248,500
492,433 Bob Evans Farms, Inc. 7,064,739 9,110,010
212,400 Department 56, Inc.* 6,710,917 2,801,025
18,700 Grey Global Group, Inc. 7,087,305 11,589,909
899,825 Hasbro, Inc. 12,243,712 10,291,748
373,100 International Game Technology* 6,334,112 12,545,488
439,500 Lee Enterprises 11,187,682 12,690,562
507,750 Leggett & Platt, Inc. 6,825,118 8,028,797
211,500 Libbey, Inc. 7,521,187 6,582,938
63,000 Matthews International Corp. 1,699,180 1,850,625
784,950 ServiceMaster Co. 8,795,129 7,751,381
--------- ---------
81,430,284 89,029,771
---------- ----------
CONSUMER STAPLES--10.47%
459,100 Dial Corp. 5,917,685 5,337,038
286,900 Longs Drug Stores Corp. 5,810,084 5,486,963
388,600 McCormick & Co., Inc. 10,589,950 11,560,850
58,900 Smucker (J.M.) Co.* 1,159,696 1,432,006
--------- ---------
23,477,415 23,816,857
---------- ----------
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
Number COMMON STOCKS-99.38% (cont) Cost Market Value
of Shares
<S> <C> <C> <C>
FINANCIAL SERVICES--14.17%
387,950 HCC Insurance Holdings, Inc. $5,370,920 $7,880,234
567,575 Horace Mann Educators Corp. 11,896,331 9,294,041
168,600 MBIA, Inc. 5,626,709 11,991,675
64,700 Urban Shopping Centers 2,159,017 3,073,250
--------- ---------
25,052,977 32,239,200
---------- ----------
HEALTH CARE--2.39%
52,400 Bausch & Lomb, Inc. 1,926,209 2,040,325
105,800 Invacare Corp. 2,676,507 3,398,825
--------- ---------
4,602,716 5,439,150
--------- ---------
MATERIALS AND PROCESSING--13.75%
371,000 Brady Corp. 9,557,434 11,222,750
143,900 Hunt Corp. 1,916,478 1,025,287
630,100 Interface, Inc., Class A 3,677,395 5,021,109
393,700 Rouse Co. 6,892,921 9,817,894
464,000 RPM, Inc. 4,545,419 4,205,000
--------- ---------
26,589,647 31,292,040
---------- ----------
PRODUCER DURABLES--16.97%
262,170 General Binding Corp.* 4,608,893 1,933,504
261,800 Graco, Inc. 7,955,841 8,443,050
269,700 IDEX Corp. 6,848,669 7,534,744
316,900 Miller (Herman), Inc. 5,308,182 10,160,606
427,575 Specialty Equipment Cos., Inc.* 5,664,289 10,555,758
--------- ----------
30,385,874 38,627,662
---------- ----------
TECHNOLOGY--2.51%
192,300 Littelfuse, Inc.* 5,154,268 5,708,906
--------- ---------
Total Common Stocks $196,693,181 $226,153,586
------------ ------------
</TABLE>
<TABLE>
<CAPTION>
Principal REPURCHASE Cost Market Value
Amount AGREEMENT-0.18%
<S> <C> <C> <C>
$416,617 State Street Bank & Trust
Company Repurchase
Agreement, 4.25%, dated
9/29/2000, repurchase price
$416,765, maturing
10/2/2000 (collateralized by
U.S. Treasury Bond, 12.00%,
8/15/2013) $416,617 $416,617
-------- --------
Total Repurchase Agreement 416,617 416,617
------- -------
Total Investments-99.56% $197,109,798 226,570,203
============
Other Assets less Liabilities-0.44% 990,693
------------
NET ASSETS-100.00% $227,560,896
=============
</TABLE>
*Non-income producing
The accompanying notes are an integral part of the financial statements.
13
<PAGE>
ARIEL APPRECIATION FUND
SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
Number COMMON STOCKS-97.96% Cost Market Value
of Shares
<S> <C> <C> <C>
CONSUMER DISCRETIONARY--32.92%
195,500 Bob Evans Farms, Inc. $3,772,410 $3,616,750
309,450 Carnival Corp. 5,293,288 7,620,206
250,050 Harte-Hanks, Inc. 2,011,331 6,813,863
711,250 Hasbro, Inc. 11,110,010 8,134,922
251,900 Houghton Mifflin Co. 8,245,423 9,887,075
401,200 International Game Technology* 6,234,607 13,490,350
419,000 Lee Enterprises 11,662,599 12,098,625
536,845 Leggett & Platt, Inc. 6,596,558 8,488,862
16,400 Libbey, Inc. 514,202 510,450
186,000 McClatchy Company 6,314,855 6,544,875
457,700 Newell Rubbermaid, Inc. 12,323,788 10,441,281
532,545 ServiceMaster Co. 5,578,560 5,258,882
187,900 Tribune Co. 6,131,891 8,197,138
--------- ---------
85,789,522 101,103,279
---------- -----------
CONSUMER STAPLES--11.80%
252,500 Albertson's, Inc. 6,791,946 5,302,500
218,272 The Clorox Co. 6,962,153 8,635,386
301,440 Longs Drug Stores Corp. 6,608,943 5,765,040
368,195 McCormick & Co., Inc. 9,638,094 10,953,801
484,300 Whitman Corp. 7,810,973 5,599,719
--------- ---------
37,812,109 36,256,446
---------- ----------
</TABLE>
<TABLE>
<CAPTION>
Number COMMON STOCKS-97.96% (cont) Cost Market Value
of Shares
<S> <C> <C> <C>
FINANCIAL SERVICES--29.06%
184,675 Dun & Bradstreet Corp. $5,485,854 $6,359,745
414,100 Equifax, Inc. 12,240,713 11,154,819
201,100 Franklin Resources, Inc. 6,270,272 8,934,873
167,975 H & R Block, Inc. 5,495,312 6,225,573
224,300 MBIA, Inc. 8,874,967 15,953,337
367,025 MBNA Corp. 5,581,792 14,130,463
235,700 SunGard Data Systems, Inc.* 6,802,719 10,090,906
92,300 T. Rowe Price Associates, Inc. 3,600,565 4,332,331
164,400 XL Capital Ltd. 9,347,522 12,083,400
--------- ----------
63,699,716 89,265,447
---------- ----------
HEALTH CARE--3.54%
452,700 Sybron International Corp.* 7,034,593 10,864,800
--------- ----------
MATERIALS AND PROCESSING--5.93%
128,800 Avery Dennison Corp. 7,043,996 5,973,100
490,900 Rouse Co. 8,384,950 12,241,819
--------- ----------
15,428,946 18,214,919
---------- ----------
OTHER--2.08%
240,750 Fortune Brands, Inc. 6,568,183 6,379,875
--------- ---------
PRODUCER DURABLES--9.24%
435,200 Miller (Herman), Inc. 8,103,860 13,953,600
232,800 Pitney Bowes, Inc. 9,572,334 9,181,050
212,000 Specialty Equipment Cos., Inc.* 2,513,609 5,233,750
--------- ---------
20,189,803 28,368,400
---------- ----------
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
Number COMMON STOCKS-97.96% (cont) Cost Market Value
of Shares
<S> <C> <C> <C>
UTILITIES--3.39%
381,625 CenturyTel, Inc. $6,482,638 $10,399,281
---------- -----------
Total Common Stocks $243,005,510 $300,852,447
------------ ------------
</TABLE>
<TABLE>
<CAPTION>
Principal REPURCHASE Cost Market Value
Amount AGREEMENT-1.82%
<S> <C> <C> <C>
$5,586,514 State Street Bank & Trust
Company Repurchase
Agreement, 4.25%, dated
9/29/2000, repurchase
price $5,588,493, maturing
10/2/2000 (collateralized by
U.S. Treasury Bond, 12.50%,
8/15/2014) $5,586,514 $5,586,514
---------- ----------
Total Repurchase Agreement 5,586,514 5,586,514
--------- ---------
Total Investments-99.78% $248,592,024 306,438,961
============
Other Assets less Liabilities-0.22% 677,688
----------
NET ASSETS-100.00% $307,116,649
============
</TABLE>
*Non-income producing
The accompanying notes are an integral part of the financial statements.
15
<PAGE>
EQUITY STATISTICAL SUMMARY
ARIEL FUND
(UNAUDITED)
<TABLE>
<CAPTION>
EARNINGS PER SHARE
52 - WEEK -------------------------------
RANGE 1999 2000 2001 1999 2000 2001 MARKET
TICKER PRICE -------------- ACTUAL ESTIMATED ESTIMATED P/E P/E P/E CAP.
COMPANY SYMBOL 9/30/00 LOW HIGH CALENDAR CALENDAR CALENDAR CALENDAR CALENDAR CALENDAR ($MM)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Hunt Corp. HUN 7.13 6.63 11.13 0.93 0.89 1.04 7.7 8.0 6.9 70
General Binding Corp. GBND 7.38 6.00 20.25 NM 0.22 1.05 NM 33.5 7.0 116
Department 56, Inc. DFS 13.19 7.44 25.13 2.45 1.99 2.67 5.4 6.6 4.9 189
Interface, Inc. IFSIA 7.97 3.06 8.13 0.45 0.59 0.83 17.7 13.5 9.6 407
Matthews International Corp. MATW 29.38 19.00 35.63 1.53 1.78 1.98 19.2 16.5 14.8 450
Libbey, Inc. LBY 31.13 24.63 33.50 2.63 3.00 3.32 11.8 10.4 9.4 474
Specialty Equipment Cos., Inc. SEC 24.69 15.00 30.38 2.22 2.05 2.34 11.1 12.0 10.6 482
The J.M. Smucker Company SJM 24.31 15.00 24.56 1.27 1.35 1.50 19.1 18.0 16.2 585
Bob Evans Farms, Inc. BOBE 18.50 12.00 20.56 1.39 1.48 1.64 13.3 12.5 11.3 651
Littelfuse, Inc. LFUS 26.69 20.00 51.13 1.16 1.76 2.10 25.6 16.9 14.1 656
Graco, Inc. GGG 32.50 28.44 36.19 2.75 3.23 3.58 11.8 10.1 9.1 657
Horace Mann Educators Corp. HMN 16.38 12.00 31.00 1.70 1.20 1.43 9.6 13.7 11.5 664
Brady Corp. BRC 30.25 24.50 34.56 1.97 1.96 2.18 15.4 15.4 13.9 686
Longs Drug Stores, Inc. LDG 19.13 15.94 29.88 1.76 1.67 1.85 10.9 11.5 10.3 715
Grey Global Group, Inc. GREY 619.78 328.00 647.00 4.47 24.31 31.22 138.7 25.5 19.9 769
IDEX Corp. IEX 27.94 22.75 34.75 1.81 2.18 2.45 15.4 12.8 11.4 840
Urban Shopping Centers, Inc. URB 47.50 24.00 47.56 3.30 3.71 4.04 14.4 12.8 11.8 863
RPM, Inc. RPM 9.13 7.75 12.94 0.88 0.65 0.87 10.4 14.0 10.5 931
Invacare Corp. IVC 32.13 17.44 32.50 1.82 2.23 2.56 17.7 14.4 12.6 968
HCC Insurance Holdings, Inc. HCC 20.31 8.00 22.94 1.20 1.27 1.55 16.9 16.0 13.1 1,003
The Dial Corp. DL 11.63 9.88 28.50 1.17 0.50 0.64 9.9 23.3 18.2 1,103
American Greetings Corp. AM 17.50 15.31 26.75 1.91 1.81 2.50 9.2 9.7 7.0 1,127
Lee Enterprises LEE 28.88 19.69 32.25 1.29 1.47 1.87 22.4 19.6 15.4 1,267
ACNielsen Corp. ART 23.88 16.31 26.88 1.29 1.40 1.69 18.5 17.1 14.1 1,381
Rouse Company RSE 24.94 19.75 27.13 2.97 3.31 3.60 8.4 7.5 6.9 1,742
Hasbro, Inc. HAS 11.44 10.19 24.25 1.42 1.05 1.30 8.1 10.9 8.8 1,971
McCormick & Company, Inc. MKC 29.75 23.75 36.56 1.69 1.99 2.14 17.6 14.9 13.9 2,035
Bausch & Lomb, Inc. BOL 38.94 33.56 80.88 2.92 2.65 2.80 13.3 14.7 13.9 2,076
International Game Technology IGT 33.63 17.38 35.63 1.34 1.75 2.04 25.1 19.2 16.5 2,437
Herman Miller, Inc. MLHR 32.06 19.13 33.94 1.67 1.89 2.19 19.2 17.0 14.6 2,478
The ServiceMaster Co. SVM 9.88 8.38 16.25 0.71 0.63 0.72 13.9 15.7 13.7 2,989
Leggett & Platt, Inc. LEG 15.81 14.19 24.19 1.45 1.45 1.59 10.9 10.9 9.9 3,108
MBIA, Inc. MBI 71.13 36.31 73.44 4.72 5.11 5.81 15.1 13.9 12.2 7,139
</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 Centers 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 2001 1999 2000 2001 MARKET
TICKER PRICE -------------- ACTUAL ESTIMATED ESTIMATED P/E P/E P/E CAP.
COMPANY SYMBOL 9/30/00 LOW HIGH CALENDAR CALENDAR CALENDAR CALENDAR CALENDAR CALENDAR ($MM)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Libbey, Inc. LBY 31.13 24.63 33.50 2.63 3.00 3.32 11.8 10.4 9.4 474
Specialty Equipment Cos., Inc. SEC 24.69 15.00 30.38 2.22 2.05 2.34 11.1 12.0 10.6 482
Bob Evans Farms, Inc. BOBE 18.50 12.00 20.56 1.39 1.48 1.64 13.3 12.5 11.3 651
Longs Drug Stores, Inc. LDG 19.13 15.94 29.88 1.76 1.67 1.85 10.9 11.5 10.3 715
Houghton Mifflin Company HTN 39.25 34.88 51.81 1.62 2.20 2.45 24.2 17.8 16.0 1,201
Lee Enterprises LEE 28.88 19.69 32.25 1.29 1.47 1.87 22.4 19.6 15.4 1,267
Whitman Corp. WH 11.56 10.38 15.38 0.58 0.65 0.76 19.9 17.8 15.2 1,576
McClatchy Co. MNI 35.19 28.75 45.13 1.83 2.01 2.23 19.2 17.5 15.8 1,588
Rouse Company RSE 24.94 19.75 27.13 2.97 3.31 3.60 8.4 7.5 6.9 1,742
Harte-Hanks, Inc. HHS 27.25 19.06 27.88 1.02 1.19 1.37 26.7 22.9 19.9 1,846
Hasbro, Inc. HAS 11.44 10.19 24.25 1.42 1.05 1.30 8.1 10.9 8.8 1,971
McCormick & Company, Inc. MKC 29.75 23.75 36.56 1.69 1.99 2.14 17.6 14.9 13.9 2,035
International Game Technology IGT 33.63 17.38 35.63 1.34 1.75 2.04 25.1 19.2 16.5 2,437
Herman Miller, Inc. MLHR 32.06 19.13 33.94 1.67 1.89 2.19 19.2 17.0 14.6 2,478
Sybron Corp. SYB 24.00 16.38 33.06 1.13 1.34 1.58 21.2 17.9 15.2 2,524
The ServiceMaster Co. SVM 9.88 8.38 16.25 0.71 0.63 0.72 13.9 15.7 13.7 2,989
Leggett & Platt, Inc. LEG 15.81 14.19 24.19 1.45 1.45 1.59 10.9 10.9 9.9 3,108
H&R Block, Inc. HRB 37.06 26.94 49.50 2.12 2.27 2.94 17.5 16.3 12.6 3,392
Equifax, Inc. EFX 26.94 19.88 29.69 1.55 1.70 2.00 17.4 15.8 13.5 3,805
CenturyTel, Inc. CTL 27.25 24.44 48.75 1.69 1.57 1.85 16.1 17.4 14.7 3,830
Fortune Brands, Inc. FO 26.50 19.19 36.38 1.99 2.32 2.59 13.3 11.4 10.2 4,158
Avery Dennison Corp. AVY 46.38 42.25 78.50 2.55 2.90 3.28 18.2 16.0 14.1 5,173
The Dun & Bradstreet Corp. DNB 34.44 24.69 34.88 1.64 1.77 1.93 21.0 19.5 17.8 5,583
SunGard Data Systems, Inc. SDS 42.81 16.88 44.69 1.34 1.61 1.88 31.9 26.6 22.8 5,649
T. Rowe Price Associates, Inc. TROW 46.94 25.88 49.94 1.85 2.16 2.20 25.4 21.7 21.3 5,694
Newell Rubbermaid, Inc. NWL 22.81 21.00 37.06 1.65 1.82 2.01 13.8 12.5 11.3 6,081
MBIA, Inc. MBI 71.13 36.31 73.44 4.72 5.11 5.81 15.1 13.9 12.2 7,139
Albertson's, Inc. ABS 21.00 20.06 42.06 2.26 2.25 2.40 9.3 9.3 8.8 8,842
XL Capital Ltd. XL 74.00 39.00 80.00 3.70 4.50 5.22 20.0 16.4 14.2 9,169
The Clorox Company CLX 39.56 29.06 56.38 1.61 1.85 2.04 24.6 21.4 19.4 9,316
Pitney Bowes, Inc. PBI 39.44 33.75 63.81 2.34 2.45 2.69 16.9 16.1 14.7 10,068
Franklin Resources, Inc. BEN 44.43 24.63 45.63 2.01 2.34 2.60 22.1 19.0 17.1 10,821
Tribune Company TRB 43.63 27.88 60.88 1.54 1.30 1.60 28.3 33.6 27.3 13,447
Carnival Corp. CCL 24.63 18.31 51.88 1.66 1.66 1.85 14.8 14.8 13.3 14,517
MBNA Corp. KRB 38.50 19.50 40.13 1.21 1.50 1.80 31.8 25.7 21.4 30,869
</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 third quarter ended September 30, 2000, the
Ariel Premier Bond Fund, Institutional Class gained +2.64% and the Investor
Class gained +2.54%, which trailed the +3.01% return of the Lehman Brothers
Aggregate Bond Index. Over the last three months, we saw interest rate
expectations change dramatically from the first half of the year. Specifically,
in early 2000, the general consensus was that the Federal Reserve Bank needed to
raise interest rates to cool down an overheating economy, the only question was
by how much. In the third quarter, however, economic growth moderated,
particularly in the manufacturing sector, and the testimony of the Federal
Reserve Bank Chairman, Alan Greenspan, revealed a surprising tolerance for
higher growth. These events combined to change market expectations, and the Fed
is now expected to LOWER interest rates.
With our own anticipation of continued strong economic growth and rising
interest rates, we entered the third quarter with the Ariel Premier Bond Fund
structured to be one year shorter than the benchmark. However, as rates fell
during the period, our short duration position led to our performance shortfall.
This, combined with the general underperformance of non-Treasury securities over
the first half of the year, led to the fund's disappointing relative returns
year-to-date.
In our view, the domestic economy is strong and global growth is poised to
remain robust. Moreover, we believe inflation will continue to rise, further
bolstered by oil prices. Against this backdrop, we remain firm in our
conviction that interest rates reflect too optimistic a view on inflation.
With that said, there was one change in Ariel Premier Bond Fund's strategy in
September. In response to the rise in long-term yields during September, the
fund's duration was lengthened from -1 year to -3/4 years. Thus, Ariel
Premier Bond Fund's primary theme remains the short duration position. Our
spread exposure is roughly equal to the benchmark, with an overweight in
AAA-rated asset-backed securities offset by an underweight in corporate bonds.
Of course, the political landscape is also uncertain as we approach the
election. Accordingly, our near-term strategies may be influenced by any
material change in financial policies introduced by a new administration. Our
forecast for rising yields will likely be reinforced by any significant
expansion in government and/or reduction in surpluses.
On a final note, the Ariel Premier Bond Fund, Institutional Class celebrated its
5th anniversary in October. We are delighted to have crossed this important
milestone and appreciate your confidence and support. Should you have any
questions or need additional information, please do not hesitate to call.
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 SEPTEMBER 30, 2000 (assume reinvestment of
dividends and capital gains)
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------
3rd Quarter YTD 1 Year 3 Year 5 Year Life of Fund
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ARIEL PREMIER BOND FUND, INST. CL. +2.64% +5.93% +5.85% +5.18% 5.73% +5.73%
ARIEL PREMIER BOND FUND, INV. CL. +2.54% +5.73% +5.43% +4.79% - +5.50%
LEHMAN BROS. AGGREGATE BOND INDEX +3.01% +7.12% +6.99% +5.93% 6.47% +6.47% (INST.)
+6.57% (INV.)
-----------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
ARIEL PREMIER LEHMAN BROTHERS
BOND FUND AGGREGATE BOND INDEX
PORTFOLIO COMPOSITION PORTFOLIO COMPOSITION
<S> <C> <C>
Asset Backed 34.5 1.7
Commercial Mortgage Backed 7.0 1.6
Corporate 10.7 23.8
Government & Agency 12.3 38.3
Cash 6.5 0.0
Mortgage backed 29.0 34.6
</TABLE>
COMPARISON OF CHANGE IN VALUE OF $1,000,000 INVESTED IN ARIEL PREMIER BOND
FUND, INSTITUTIONAL CLASS AND COMPARABLE INDEX*
<TABLE>
<CAPTION>
ARIEL PREMIER
BOND FUND LEHMAN BROTHERS
DATE INSTITUTIONAL CL. AGGREGATE BOND INDEX
<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
Sep-00 $1,321,553 $1,368,045
</TABLE>
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTED IN ARIEL PREMIER BOND FUND,
INVESTOR CLASS AND COMPARABLE INDEX*
<TABLE>
<CAPTION>
ARIEL PREMIER
BOND FUND LEHMAN BROTHERS
DATE INVESTOR CL. AGGREGATE BOND INDEX
<S> <C> <C>
Feb-97 $10,000 $10,000
Jun-97 $10,265 $10,278
Dec-97 $10,838 $10,932
Jun-98 $11,234 $11,361
Dec-98 $11,621 $11,882
Jun-99 $11,482 $11,719
Dec-99 $11,509 $11,784
Jun-00 $11,867 $12,254
Sep-00 $12,168 $12,623
</TABLE>
*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.
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.
19
<PAGE>
ARIEL PREMIER BOND FUND
SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
Par Value ASSET-BACKED SECURITIES-34.46% Cost Market Value
<S> <C> <C> <C>
$1,935,000 Advanta Business Card Master Trust,
2000-B A, 6.792%, 1/20/2006 $1,935,000 $1,946,350
2,500,000 AESOP Funding II LLC, 2000-1 A,
6.799%, 7/20/2004+ 2,500,000 2,507,225
2,333,244 AFC Home Equity Loan Trust
2000-2 2A, 6.951%, 7/25/2030 2,333,245 2,336,208
700,000 AmeriCredit Auto Receivables, 98-B A4,
6.06%, 12/12/2002 699,939 697,151
750,000 AmeriCredit Auto Receivables, 99-A A4,
5.88%, 12/12/2005 749,874 739,530
1,000,000 AmeriCredit Auto Receivables, 00-B A3,
6.75%, 9/5/2004 1,000,000 1,001,095
550,000 AMEX Credit Acct. Master Trust,
1998-1 A, 6.711%, 1/17/2006 550,224 550,220
580,000 Associates Auto Rec. Trust 2000-1 A1,
6.747%, 5/17/2006 580,000 580,841
1,000,000 Auto Leasing Investors, 6.177%,
8/12/2005+ 1,000,000 983,770
550,000 BA Master Credit Card, 1998-A A,
6.731%, 4/15/2005 550,527 550,550
650,000 BEA, 1998-2A A2A, 6.72%,
6/15/2010+ 629,330 584,818
470,000 Capital One, 2000, 7.65%, 4/17/2006 468,336 472,609
<CAPTION>
Par Value ASSET-BACKED SECURITIES-34.46% (cont) Cost Market Value
<S> <C> <C> <C>
$3,390,000 Chase Credit Card Master Trust,
2000-2 A, 6.721%, 7/15/2005 $3,391,494 $3,392,644
805,000 Chevy Chase Master Credit Card Trust,
1995-C A, 6.881%, 5/15/2006 807,538 808,349
1,190,000 CIT Equipment Collateral,
2000-1 A3, 6.505%, 1/20/2004 1,190,000 1,190,981
1,320,000 Comm 2000-FL2 A, 6.846%,
1/15/2003+ 1,320,000 1,325,174
2,000,000 Contimortgage Home Equity, 97-4 A5,
6.44%, 12/15/2012 2,016,863 1,983,300
558,973 Credit Card Receivables Trust, 98-1,
6.478%, 12/22/2004+ 561,646 552,584
325,000 Discover Card Master Trust I, 1999-3 A,
6.731%, 9/16/2004 325,238 325,309
200,000 Distribution Financial Services Master
Trust, 2000-3 A, 6.761%, 7/15/2004 200,000 200,214
2,000,000 EQCC Home Equity, 973-A9,
6.57%, 2/15/2029 1,984,253 1,938,340
810,000 First Chicago Master Trust II, 1996-S A,
6.746%, 8/15/2004 810,489 811,134
1,800,000 First Omni, 96-AA, 6.65%,
9/15/2003 1,815,969 1,799,352
2,075,000 First USA Credit Card Master Trust,
1995-2 A, 6.365%, 10/15/2004 2,080,690 2,080,727
838,882 Fleetwood, 97-B A, 6.40%, 5/15/2013 837,850 834,244
1,255,000 Gracechurch Card Funding PLC, 1 A,
6.801%, 11/15/2004 1,256,473 1,261,024
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
Par Value ASSET-BACKED SECURITIES-34.46% (cont) Cost Market Value
<S> <C> <C> <C>
$ 870,000 Greenpoint Manufacturing, 2000-1 A2,
7.60%, 11/20/2022 $ 869,975 $ 876,708
15,893 Green Tree Financial-MH, 1995-1 A5,
8.40%, 6/15/2025 17,397 15,958
500,000 Green Tree Financial-MH, 98-4 A4,
6.09%, 2/1/2030 499,951 497,820
1,415,000 Healthcare Rec., 99-1, 6.25%,
2/1/2003 + 1,413,592 1,384,634
500,000 Household Automotive Trust,
2000-3 A4, 7.16%, 5/17/2007 499,862 507,361
340,000 Huntington Auto Trust, 2000-A A3,
7.33%, 7/15/2004 340,478 343,094
490,000 IKON Rec., 2000-1 A3, 6.811%,
3/15/2004 490,000 490,221
715,747 IMC Excess Cash Flow Sec. Trust,
97-A A, 7.41%, 11/26/2028 + 715,720 353,515
805,000 MBNA Master Credit Card Trust,
1998-A A, 6.731%, 8/15/2005 805,977 805,805
733,371 Mellon Residential Funding Corp.,
2000TBC2 A1, 6.891%, 6/15/2030 733,371 727,710
510,000 New Holland Equipment Rec. Trust,
1999-A A4, 6.80%, 12/15/2007 + 505,638 509,577
795,000 Nissan, 2000 A A-3, 7.80%, 5/20/2003 801,244 804,707
2,050,000 Pacific Gas & Electric Co., 1997-1 A8,
6.48%, 12/26/2009 1,947,172 2,009,164
1,440,000 Prime, 95-1A, 6.75%, 11/15/2005 1,444,528 1,437,538
785,000 Prudential Securities Corp., 1999-C2 A2,
7.193%, 4/15/2009 781,848 786,344
<CAPTION>
Par Value ASSET-BACKED SECURITIES-34.46% (cont) Cost Market Value
<S> <C> <C> <C>
$2,722,372 Railcar Leasing, 97-1 A1, 6.75%,
7/15/2006 + $2,753,154 $2,703,833
457,877 Railcar Trust, 92-A1, 7.75%,
6/1/2004 469,342 462,575
784,296 Residential Asset Sec. Corp.,
2000-KS3 AII, 6.904%, 7/25/2031 783,746 784,132
1,935,000 Residential Asset Sec. Corp.,
2000-KS4 AII, 6.85%, 9/25/2031 1,935,000 1,935,000
155,000 Residential Funding Mortgage
Securities II, 2000-HI4 AI3, 7.49%,
10/25/2013 154,987 155,287
286,864 Salomon Brothers Mortgage Sec.,
97LB6A3, 6.76%, 12/25/2027 286,517 285,401
1,086,087 SASCO 2000-C2 A, 6.854%,
10/21/2002 + 1,086,088 1,087,424
711,441 Saxon Asset Securities Trust, 2000-2 AF1,
6.799%, 5/25/2015 711,400 711,371
430,000 Sears Credit Account Master Trust,
1995-5 A, 6.05%, 2/15/2004 418,939 423,550
60,000 Sears Credit Account Master Trust,
1999-2 A, 6.35%, 2/15/2007 59,186 59,712
611,888 Union Acceptance Corp., 97AA2,
6.375%, 10/8/2003 614,792 609,184
2,630,000 Union Financial Services Taxable
Student Loan, 98A A8, 5.50%,
9/1/2005 2,615,416 2,520,513
1,880,000 World Financial, 96-AA, 6.70%,
2/15/2004 1,885,530 1,879,812
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
Par Value ASSET-BACKED SECURITIES-34.46% (cont) Cost Market Value
<S> <C> <C> <C>
$ 203,219 World Omni Auto Lease, 98-A A2,
7.021%, 12/15/2004 $203,547 $203,250
1,755,000 World Omni Auto Lease, 99-A A4,
6.872%, 10/15/2005 1,762,892 1,764,547
190,000 World Omni Auto Lease, 00-A A3,
7.13%, 2/16/2004 189,993 191,497
---------- ----------
Total Asset-Backed Securities 59,392,260 58,780,987
---------- ----------
COMMERCIAL MORTGAGE-BACKED SECURITIES-6.97%
1,330,000 Chase Comm Mortgage Securities Corp.,
2000-3 A2, 7.319%, 9/15/2010 1,333,307 1,336,344
320,000 GMAC Commercial, 1997-C1 A3,
6.869%, 8/15/2007 305,013 315,375
1,895,000 GMAC Commercial, 99-C1 A2,
6.175%, 5/15/2033 1,771,351 1,777,111
614,924 JPMC Mortgage Finance Corp.,
2000-FL1 A, 6.901%, 4/15/2010 + 614,924 617,495
1,330,000 LB-UBS Commercial Mortgage Trust,
2000-C4 A2, 7.37%, 6/15/2010 1,333,495 1,338,685
2,261,591 MLMI, 97-SD1 A, 6.938%,
4/1/2004 + 2,262,580 2,270,548
189,357 MLMI, 99-C1 A1, 7.37%, 6/15/2008 191,374 191,851
1,333,000 Morgan Stanley Dean Witter Capital I,
2000-PRIN A4, 7.49%, 1/23/2015 1,336,441 1,336,557
300,000 Newcourt Equipment Trust Securities,
1999-1 A3, 6.951%, 7/20/03 300,559 300,141
864,063 Keycorp., 2000-C1 A1,
7.617%, 6/15/2009 864,064 885,565
<CAPTION>
COMMERCIAL MORTGAGE-BACKED SECURITIES-6.97%
Par Value (cont) Cost Market Value
<S> <C> <C> <C>
$ 1,830 Starwood Asset Receivables, 2000-1 A,
6.9512%, 8/25/2003 + $1,831 $1,831
1,510,409 TIAA Retail Commercial Mortgage
Trust, 1999-1 A, 7.17%, 4/15/08 + 1,501,501 1,515,746
---------- ---------
Total Commercial Mortgage-
Backed Securities 11,816,440 11,887,249
---------- ----------
CORPORATE DEBT-10.65%
925,000 Bank of America, Institutional-B,
7.70%, 12/31/2026 + 842,073 835,199
470,000 Bank One Corp., 7.625%, 8/1/2005 469,085 479,615
550,000 Bestfoods MTN C, 5.60%, 10/15/2097 424,436 384,580
410,000 Boeing Co., 6.875%, 10/15/2043 368,054 364,535
1,000,000 Citigroup Capital III, 7.75%,
12/1/2036 1,035,298 903,768
1,295,000 Consumers Energy CMS, 6.20%,
5/1/2003 1,281,750 1,246,528
295,000 Deutsche Telekom, 8.25%, 6/15/2030 300,660 303,044
220,000 Duke Energy Field Services, 7.50%,
8/16/2005 219,187 221,870
220,000 Duke Energy Field Services, 7.875%,
8/16/2010 219,747 223,673
1,310,000 Edison International, Inc., 6.875%,
9/15/2004 1,301,751 1,272,774
1,000,000 Ford Motor Company, 6.375%,
2/1/2029 827,970 810,422
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
Par Value CORPORATE DEBT-10.65% (cont) Cost Market Value
<S> <C> <C> <C>
$ 500,000 General Motors Acceptance Corp.,
7.75%, 1/19/2010 $ 505,015 $ 505,705
455,000 International Paper Co., 8.125%,
7/8/2005 + 454,593 469,299
570,000 Liberty Media Group, 8.25%, 2/1/2030 565,458 536,577
610,000 Mirage Resorts, 7.25%, 8/1/2017 606,981 509,923
300,000 News America Holdings, 7.25%,
5/18/2018 298,084 268,698
720,565 Northwest Airlines Corp., 1999-2A,
7.575%, 3/1/2019 720,565 698,509
400,000 NRG Energy, Inc., 9.479%, 9/15/2024 + 394,976 413,296
625,000 Park Place Entertainment, 7.95%,
8/1/2003 620,845 625,400
975,000 Peco Energy Co., 7.38%, 4/6/2028 929,322 800,913
800,000 PPL Corp., 8.375%, 6/15/2007 800,836 805,636
420,000 Provident Companies, 7.00%, 7/15/2018 419,873 340,243
330,000 Safeco Capital Trust, 8.072%, 7/15/2037 330,000 279,956
750,000 Spear Leeds & Kellogg LP, 8.25%,
8/15/2005 + 747,722 778,103
200,000 Sprint Capital Corp., 6.125%,
11/15/2008 181,248 180,937
1,000,000 Telefoncia Europe BV, 7.75%,
9/15/2010 1,000,819 1,006,079
345,000 Viacom Inc., C, 7.875%,
7/30/2030 344,924 349,286
750,000 Virginia Electric Power, 6.75%,
2/1/2007 753,096 725,139
715,000 Vodafone Airtouch, 7.875%, 2/15/2030 + 696,651 724,006
<CAPTION>
Par Value CORPORATE DEBT-10.65% (cont) Cost Market Value
<S> <C> <C> <C>
$ 655,000 WorldCom, Inc., 8.25%, 5/15/2010 $ 645,330 $ 690,335
435,000 Zurich Capital Trust, 8.376%, 6/1/2037+ 463,825 413,987
---------- ----------
Total Corporate Debt 18,770,174 18,168,035
---------- ----------
U.S. GOVERNMENT AGENCIES-29.31%
MORTGAGE-BACKED SECURITIES--29.02%
2,885,000 Fannie Mae, 5.75%, 2/15/2008 2,670,532 2,723,904
21,867,740 Fannie Mae, 6.50%, 4/1/2029 20,677,711 21,013,455
13,900,000 Fannie Mae, 7.50%, 10/01/2030 13,791,406 13,880,012
2,755,000 Fannie Mae, Benchmark Bond,
7.250%, 5/15/2030 2,850,606 2,887,802
5,170,000 Fannie Mae, Benchmark Note, 7.125%,
1/15/2030 5,293,919 5,336,128
125,000 Freddie Mac, 6.625%, 9/15/2009 122,690 123,438
2,540,000 Freddie Mac, 6.50%, 10/1/2030 X 2,427,287 2,441,258
1,130,199 Freddie Mac, Gold, 6.50%,
11/1/2025 1,069,483 1,092,684
---------- ----------
48,903,634 49,498,681
---------- ----------
OTHER AGENCY ISSUES--0.29%
473,002 Government Trust Certificate, Israel
Trust, Series 2E, 9.40%, 5/15/2002 485,092 483,604
---------- ----------
485,092 483,604
---------- ----------
Total U.S. Government Agencies 49,388,726 49,982,285
---------- ----------
U.S. GOVERNMENT OBLIGATIONS-12.00%
10,120,000 U.S. Treasury Bond, 8.125%,
8/15/2021 12,219,632 12,488,718
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
Par Value U.S. GOVERNMENT
OBLIGATIONS-12.00% (cont) Cost Market Value
<S> <C> <C> <C>
$ 750,000 U.S. Treasury Bond, 6.125%, 8/15/2029 $ 771,820 $ 765,938
3,770,000 U.S. Treasury Note, 7.50%,
11/15/2001 3,823,460 3,819,481
35,000 U.S. Treasury Note, 5.50%, 5/31/2003 34,298 34,606
3,190,000 U.S. Treasury Note, 7.00%, 7/15/2006 3,318,047 3,354,486
---------- ----------
Total U.S. Government Obligations 20,167,257 20,463,229
---------- ----------
COMMERCIAL PAPER-14.62%
3,200,000 American Express Corp., 6.48%,
10/16/2000* 3,191,360 3,191,360
3,300,000 American General Finance Group,
6.49%, 10/16/2000* 3,291,076 3,291,076
3,300,000 CIT Group Holdings, Inc., 6.49%,
10/16/2000* 3,291,076 3,291,076
3,300,000 General Electric Capital Corp., 6.49%,
10/16/2000* 3,291,076 3,291,076
3,300,000 General Motors Corp., 6.49%,
10/16/2000* 3,291,076 3,291,076
3,300,000 Household Finance, 6.48%,
10/16/2000* 3,291,090 3,291,090
3,300,000 Metlife Funding, 6.47%, 10/16/2000* 3,291,104 3,291,104
2,000,000 Texaco, 6.52%, 10/02/2000* 1,999,638 1,999,638
---------- ----------
Total Commercial Paper 24,937,496 24,937,496
---------- ----------
Principal REPURCHASE AGREEMENT-1.32% Cost Market Value
Amount
$2,256,981 State Street Bank & Trust Company
Repurchase Agreement, 4.250%,
dated 9/29/2000, repurchase
price $2,257,780 maturing 10/2/2000
(collateralized by U.S.
Treasury Bond,
10.375%, 11/15/2012) $ 2,256,981 $ 2,256,981
------------ ------------
Total Repurchase Agreement 2,256,981 2,256,981
------------ ------------
Total Investments-109.33% $186,729,334 186,476,262
============
Liabilities less Other Assets-(9.33)% (15,917,785)
------------
NET ASSETS-100.00% $170,558,477
============
</TABLE>
+ Security exempt from registration under rule 144A of the Securities Act of
1933. These securities may be resold in transactions exempt from
registration normally to qualified institutional buyers.
X When-issued security.
* Security pledged as collateral for when-issued purchase commitment
outstanding as of September 30, 2000.
The accompanying notes are an integral part of the financial statements.
24
<PAGE>
Statement of Assets & Liabilities
SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
ARIEL APPRECIATION PREMIER
FUND FUND BOND FUND
----------- ------------ -----------
<S> <C> <C> <C>
ASSETS:
Investments in securities, at value
(cost $197,109,798, $248,592,024
and $186,729,334, respectively) $226,570,203 $306,438,961 $186,476,262
Receivable for securities sold 683,777 575,244 --
Receivable for fund shares issued 583,225 617,587 --
Dividends and interest receivable 231,588 290,482 1,253,321
Prepaid and other assets 50,510 45,657 2,223
------ ------ -----
Total assets 228,119,303 307,967,931 187,731,806
----------- ----------- -----------
LIABILITIES:
Payable for securities purchased 242,110 -- 16,218,694
Accrued management fee 123,429 184,734 62,135
Accrued distribution fee 31,734 43,242 247
Payable for shares redeemed -- 436,969 --
Payable to custodian -- -- 8,845
Shareholder distribution payable -- -- 883,408
Other liabilities 161,134 186,337 --
------- ------- ----------
Total liabilities 558,407 851,282 17,173,329
------- ------- ----------
NET ASSETS $227,560,896 $307,116,649 $170,558,477
============ ============ ============
NET ASSETS CONSIST OF:
Paid-in-capital $166,420,401 $219,861,345 $176,049,562
Undistributed net investment income 1,222,543 755,305 12,866
Accumulated net realized gain (loss)
on investment transactions 30,457,547 28,653,062 (5,250,879)
Net unrealized appreciation
(depreciation) on investments 29,460,405 57,846,937 (253,072)
---------- ---------- --------
Total net assets $227,560,896 $307,116,649 $170,558,477
============ ============ ============
Shares outstanding (no par value) 6,382,297 9,119,783
Institutional Class 16,991,885
Investor Class 287,900
Net asset value, offering and redemption
price per share $35.66 $33.68
Institutional Class $9.87
Investor Class $9.87
</TABLE>
Statement of Operations
YEAR ENDED SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
ARIEL APPRECIATION PREMIER
FUND FUND BOND FUND
----------- ------------ -----------
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividends $3,214,488 $4,522,787 $ --
Interest 564,260 202,303 10,828,643
Miscellaneous income 138,019 16,474 --
------- ------ ----------
Total investment income 3,916,767 4,741,564 10,828,643
--------- --------- ----------
EXPENSES:
Management fees 1,352,314 2,280,148 747,890
Distribution fees 520,121 760,049 6,675
Transfer agent fees and expenses 440,617 643,759 --
Printing and postage expense 100,115 97,782 --
Professional fees 44,891 42,089 --
Trustees' fees and expenses 43,007 43,010 --
Custody fees and expenses 21,376 33,140 --
Federal and state registration fees 20,796 24,912 --
Miscellaneous expenses 29,246 57,641 --
------ ------ -------
Net expenses 2,572,483 3,982,530 754,565
--------- --------- -------
NET INVESTMENT INCOME 1,344,284 759,034 10,074,078
--------- ------- ----------
REALIZED AND UNREALIZED
GAIN (LOSS):
Net realized gain (loss) on investments 30,459,920 33,436,106 (2,407,217)
Change in net unrealized appreciation/
depreciation on investments (6,682,142) (8,929,803) 1,549,232
--------- --------- ---------
Net gain (loss) on investments 23,777,778 24,506,303 (857,985)
---------- ---------- -------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $25,122,062 $25,265,337 $ 9,216,093
=========== =========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
25
<PAGE>
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
ARIEL FUND APPRECIATION FUND PREMIER BOND FUND
---------- ----------------- -----------------
Year Ended September 30, Year Ended September 30, Year Ended September 30,
2000 1999 2000 1999 2000 1999
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS:
Net investment income $1,344,284 $544,667 $759,034 $414,796 $10,074,078 $8,852,130
Net realized gain (loss) on
investments 30,459,920 33,766,949 33,436,106 26,232,699 (2,407,217) (2,564,439)
Change in net unrealized
appreciation/depreciation
on investments (6,682,142) (11,439,201) (8,929,803) 6,077,755 1,549,232 (6,754,988)
--------- ---------- --------- --------- --------- ---------
Net increase (decrease) in net
assets from operations 25,122,062 22,872,415 25,265,337 32,725,250 9,216,093 (467,297)
---------- ---------- ---------- ---------- --------- -------
DISTRIBUTION TO SHAREHOLDERS:
Net investment income (421,983) (386,173) (414,761) (271,554) (10,074,078) (8,852,130)
Capital gains (33,743,511) (17,212,926) (31,018,586) (25,199,149) -- (1,862,283)
---------- ---------- ---------- ---------- ---------- ---------
Total distributions (34,165,494) (17,599,099) (31,433,347) (25,470,703) (10,074,078) (10,714,413)
---------- ---------- ---------- ---------- ---------- ----------
SHARE TRANSACTIONS:
Shares sold 179,564,810 88,322,437 113,729,593 204,349,663 29,150,166 34,874,721
Shares issued to holders in
reinvestment of dividends 32,145,378 16,411,876 29,263,084 23,137,652 9,922,231 10,661,004
Shares redeemed (190,251,170) (57,141,027) (182,549,275) (95,713,008) (31,775,375) (21,990,508)
----------- ---------- ----------- ---------- ---------- ----------
Net increase (decrease) 21,459,018 47,593,286 (39,556,598) 131,774,307 7,297,022 23,545,217
---------- ---------- ---------- ----------- --------- ----------
TOTAL INCREASE (DECREASE)
IN NET ASSETS 12,415,586 52,866,602 (45,724,608) 139,028,854 6,439,037 12,363,507
NET ASSETS:
Beginning of year 215,145,310 162,278,708 352,841,257 213,812,403 164,119,440 151,755,933
----------- ----------- ----------- ----------- ----------- -----------
End of year (includes
undistributed net
investment income of
$1,344,465, $422,164,
$759,335, $414,410,
$4,432 and $4,432,
respectively) $227,560,896 $215,145,310 $307,116,649 $352,841,257 $170,558,477 $164,119,440
============ ============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
26
<PAGE>
Financial Highlights
<TABLE>
<CAPTION>
ARIEL FUND
----------
Year Ended September 30,
2000 1999(a) 1998 1997 1996
---- ------- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $37.99 $36.49 $41.49 $30.58 $30.78
Income from investment operations:
Net investment income 0.21 0.10 0.13 0.07 0.18
Net realized and unrealized gains
(losses) on investments 3.58 5.20 (1.41) 12.62 4.24
---- ---- ---- ----- ----
Total from investment operations 3.79 5.30 (1.28) 12.69 4.42
Distributions to shareholders:
Dividends from net investment income (0.08) (0.08) (0.14) -- (0.44)
Distributions from capital gains (6.04) (3.72) (3.58) (1.78) (4.18)
---- ---- ---- ---- ----
Total distributions (6.12) (3.80) (3.72) (1.78) (4.62)
---- ---- ---- ---- ----
Net asset value, end of year $35.66 $37.99 $36.49 $41.49 $30.58
Total return 13.63% 14.18% (3.83)% 43.25% 16.28%
---- ---- ---- ---- ----
Supplemental data and ratios:
Net assets, end of year, in
thousands $227,561 $215,145 $162,279 $164,065 $109,770
Ratio of expenses to average net
assets 1.24% 1.25% 1.21% 1.25% 1.31%
Ratio of net investment income
to average net asset 0.65% 0.27% 0.30% 0.23% 0.57%
Portfolio turnover rate 48% 38% 22% 20% 17%
</TABLE>
<TABLE>
<CAPTION>
APPRECIATION FUND
-----------------
Year Ended September 30,
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $33.84 $31.80 $33.70 $24.99 $22.76
Income from investment operations:
Net investment income 0.08 0.04 0.09 0.02 0.13
Net realized and unrealized gains
(losses) on investments 2.95 5.50 1.14 10.13 4.07
---- ---- ---- ----- ----
Total from investment operations 3.03 5.54 1.23 10.15 4.20
Distributions to shareholders:
Dividends from net investment income (0.04) (0.04) (0.07) (0.07) (0.20)
Distributions from capital gains (3.15) (3.46) (3.06) (1.37) (1.77)
---- ---- ---- ---- ----
Total distributions (3.19) (3.50) (3.13) (1.44) (1.97)
Net asset value, end of year $33.68 $33.84 $31.80 $33.70 $24.99
Total return 10.35% 16.99% 3.40% 42.33% 19.60%
---- ---- ---- ---- ----
Supplemental data and ratios:
Net assets, end of year, in
thousands $307,117 $352,841 $213,812 $186,478 $135,627
Ratio of expenses to average net
assets 1.31% 1.26% 1.26% 1.33% 1.36%(b)
Ratio of net investment income
to average net asset 0.25% 0.13% 0.25% 0.07% 0.50%(b)
Portfolio turnover rate 31% 24% 20% 19% 26%
</TABLE>
(a)Prior to February 1, 1999, the Ariel Fund was known as the Ariel Growth Fund.
(b)Net of reimbursements. Without the fee waiver, the ratio of expenses to
average net assets would have been 1.40% and the ratio of net investment
income to average net assets would have been 0.46%.
The accompanying notes are an integral part of the financial statements.
27
<PAGE>
Financial Highlights (cont)
<TABLE>
<CAPTION>
PREMIER BOND FUND
-----------------
INSTITUTIONAL CLASS
Year Ended September 30,
2000 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 0.60 0.57 0.61 0.52 0.43
Net realized and unrealized gains
(losses) on investments (0.04) (0.60) 0.40 0.37 (0.04)
---- ---- ---- ---- ----
Total from investment operations 0.56 (0.03) 1.01 0.89 0.39
Distributions to shareholders:
Dividends from net investment
income (0.60) (0.57) (0.61) (0.52) (0.43)
Distributions from capital gains -- (0.12) (0.07) (0.02) (0.01)
---- ---- ---- ---- ----
Total distributions (0.60) (0.69) (0.68) (0.54) (0.44)
---- ---- ---- ---- ----
Net asset value, end of year $9.87 $9.91 $10.63 $10.30 $9.95
---- ---- ---- ---- ----
Total return 5.85% (0.25)% 10.20% 9.26% 3.96%
Supplemental data and ratios:
Net assets, end of year,
in thousands $167,717 $161,495 $149,977 $113,998 $15,367
Ratio of expenses to average
net assets 0.45% 0.45% 0.45% 0.45% 0.48%
Ratio of net investment income
to average net assets 6.10% 5.57% 5.86% 6.05% 5.85%
Portfolio turnover rate 492% 396% 60% 218% 423%
</TABLE>
<TABLE>
<CAPTION>
INVESTOR CLASS
February 1, 1997(a)
Year Ended September 30, to
2000 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 0.56 0.53 0.57 0.37
Net realized and unrealized gains
(losses) on investments (0.04) (0.60) 0.41 0.19
---- ---- ---- ----
Total from investment operations 0.52 (0.07) 0.98 0.56
Distributions to shareholders:
Dividends from net investment
income (0.56) (0.53) (0.57) (0.37)
Distributions from capital gains -- (0.12) (0.07) --
---- ---- ---- ----
Total distributions (0.56) (0.65) (0.64) (0.37)
---- ---- ---- ----
Net asset value, end of year $9.87 $9.91 $10.63 $10.29
---- ---- ---- ----
Total return 5.43% (0.65)% 9.34% 5.73%(b)
Supplemental data and ratios:
Net assets, end of year,
in thousands $2,841 $2,624 $1,779 $401
Ratio of expenses to average
net assets 0.85% 0.85% 0.85% 0.85%(c)
Ratio of net investment income
to average net assets 5.70% 5.17% 5.46% 5.60%(c)
Portfolio turnover rate 492% 396% 60% 218%
</TABLE>
(a) Commencement of operations.
(b) Total return is not annualized.
(c) Annualized.
The accompanying notes are an integral part of the financial statements.
28
<PAGE>
Notes to the Financial Statements
SEPTEMBER 30, 2000
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.
As of September 30, 2000, the Premier Bond Fund had a capital loss
carryforward of $1,766,240, and post-October losses of $3,311,997. The
capital loss carryforward expires in 2008 and the post-October losses are
treated as arising in 2001.
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.
SECURITIES TRANSACTIONS AND INVESTMENT INCOME - Securities transactions are
accounted for on a trade date basis. Realized gains and losses from
securities transactions are recorded on the identified cost basis. Dividend
income is recorded on the ex-dividend date and interest income is recognized
on an accrual basis.
The Premier Bond Fund may purchase securities with delivery or payment to
occur at a later date. At the time the Fund enters into a commitment to
purchase a security, the transaction is recorded and the value of the
security is reflected in the net asset value. The value of the security may
vary with market fluctuations. No interest accrues to the Fund until payment
takes place. At the time the Fund enters into this type of transaction it is
required to designate cash or other liquid assets equal to the value of the
securities purchased. At September 30, 2000 the Fund had $16,321,270 in
purchase commitments outstanding (10% 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 for all Funds.
29
<PAGE>
Notes to the Financial Statements (cont)
SEPTEMBER 30, 2000
Distributions to shareholders are determined in accordance with federal
income tax regulations and are recorded on the ex-dividend date. The
character of distributions made during the year from net investment income or
net realized gains may differ from the characterization for federal income
tax purposes due to differences in the recognition of income, expense and
gain items for financial statement and tax purposes. Where appropriate,
reclassifications between net asset accounts are made for such differences
that are permanent in nature.
3. CAPITAL SHARE TRANSACTIONS
Transactions in shares of capital stock were as follows:
<TABLE>
<CAPTION>
Year Ended September 30, 2000
ARIEL FUND APPRECIATION FUND PREMIER BOND FUND
---------- ----------------- -----------------
INSTITUTIONAL INVESTOR
------------- --------
<S> <C> <C> <C> <C>
Shares sold 5,432,556 3,653,522 2,832,151 146,605
Shares issued to holders in
reinvestment of dividends 1,106,132 996,699 1,001,537 13,617
Shares redeemed (5,818,905) (5,958,194) (3,135,812) (137,221)
Net increase (decrease) 719,783 (1,307,973) 697,876 23,001
======= ========= ======= ======
</TABLE>
<TABLE>
<CAPTION>
Year Ended September 30, 1999
ARIEL FUND APPRECIATION FUND PREMIER BOND FUND
---------- ----------------- -----------------
INSTITUTIONAL INVESTOR
------------- --------
<S> <C> <C> <C> <C>
Shares sold 2,261,607 5,706,840 3,154,315 235,779
Shares issued to holders in
reinvestment of dividends 417,815 658,066 1,025,661 13,484
Shares redeemed (1,463,765) (2,660,008) (1,989,194) (151,766)
Net increase 1,215,657 3,704,898 2,190,782 97,497
========= ========= ========= ======
</TABLE>
4. INVESTMENT TRANSACTIONS
Purchases and sales of securities, excluding short-term investments and U.S.
government securities, for the year ended September 30, 2000 are summarized
below:
<TABLE>
<CAPTION>
ARIEL FUND APPRECIATION FUND PREMIER BOND FUND
---------- ----------------- -----------------
<S> <C> <C> <C>
Purchases $94,294,517 $95,015,157 $126,325,601
Sales 100,944,280 167,652,968 57,499,943
</TABLE>
Purchases and sales of U.S. government securities for the Premier Bond Fund
for the year ended September 30, 2000 were $632,559,411 and $689,262,900,
respectively.
At September 30, 2000 the cost of securities on a tax basis was
$197,423,271, $249,394,702 and $186,870,192 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 $49,412,307 $76,506,428 $1,201,140
Unrealized (depreciation) (20,265,375) (19,462,169) (1,595,070)
Net appreciation (depreciation) $29,146,932 $57,044,259 $(393,930)
========== ========== =========
</TABLE>
For the year ended September 30, 2000, 36.9% and 68.7% of dividends paid
from net investment income of the Ariel Fund and Appreciation Fund,
respectively, qualifies for the dividend received deduction available to
corporate shareholders.
30
<PAGE>
Notes to the Financial Statements (cont)
SEPTEMBER 30, 2000
5. INVESTMENT ADVISORY AND OTHER TRANSACTIONS WITH AFFILIATES
The Trust has entered into an investment advisory and administrative services
agreement (the "Management Agreement") with Ariel Capital Management, Inc.
(the "Adviser"). Pursuant to the Management Agreement, the Adviser is paid by
the Ariel Fund and Appreciation Fund, a monthly fee at the annual rate of
0.65% and 0.75% of the first $500 million of average daily net assets, 0.60%
and 0.70% of the next $500 million of average daily net assets and 0.55% and
0.65% on the average daily net assets in excess of $1 billion, respectively.
The Adviser has agreed to reimburse each Fund for operating expenses
(exclusive of brokerage, interest, taxes, distribution plan expenses and
extraordinary items) exceeding, on a pro rata basis, 1.50% of the first $30
million of each Fund's average daily net assets and 1.00% of such assets in
excess of $30 million.
The Trust has entered into an investment advisory agreement and
administrative services agreement with the Adviser for the Premier Bond Fund.
Pursuant to the agreements, the Fund pays the Adviser an investment advisory
fee and administrative services fee based on the average daily net assets of
the Institutional Class and the Investor Class at the annual rate of 0.35%
and 0.10%, and 0.35% and 0.25%, respectively. Fees for these services are
reported as Management Fees on the Statement of Operations. For the year
ended September 30, 2000, the Fund paid the Advisor $578,577 and $169,313 in
investment advisory and administrative services fees, respectively. The
Adviser pays all of the Fund's expenses other than 12b-1 fees for the
Investor Class, the investment advisory fee and administrative services fee,
the expenses assumed by the Adviser under the administrative services
agreement, interest, taxes, brokerage commissions and extraordinary expenses.
Lincoln Capital Management Company ("Lincoln Capital") is the sub-adviser of
the Premier Bond Fund. Lincoln Capital manages the day-to-day investment
operations for the Fund. The Fund pays no fees directly to Lincoln Capital.
Lincoln Capital receives fees from the Adviser at the annual rate of 0.30% of
the average daily net assets up to $50 million, 0.20% for the next $50
million, 0.15% for the next $150 million and 0.10% for amounts greater than
$250 million.
Pursuant to Rule 12b-1 of the Investment Company Act of 1940, the Trust has
adopted a distribution plan which permits the Ariel Fund, Appreciation Fund
and Premier Bond Fund, Investor Class to pay for certain expenses associated
with the distribution of their shares up to 0.25% annually of each Fund's
average daily net asset value. Payments have been made to Ariel Distributors,
Inc., an affiliate of the Adviser.
31
<PAGE>
Report of Independent Auditors
TO THE BOARD OF TRUSTEES AND SHAREHOLDERS OF ARIEL MUTUAL FUNDS:
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments, of Ariel Fund, Ariel Appreciation
Fund, and Ariel Premier Bond Fund, comprising Ariel Investment Trust ("Ariel
Mutual Funds"), as of September 30, 2000, the related statements of
operations and changes in net assets and the financial highlights for the
fiscal periods indicated therein. These financial statements and financial
highlights are the responsibility of the Ariel Mutual Funds' management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. Our procedures included
confirmation of securities owned as of September 30, 2000, by correspondence
with the custodian. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
each of the Funds of the Ariel Mutual Funds at September 30, 2000, and the
results of their operations, the changes in their net assets and the
financial highlights for each of the fiscal periods indicated therein, in
conformity with accounting principles generally accepted in the United States.
Ernst & Young LLP
Chicago, Illinois
October 20, 2000
32
<PAGE>
BOARD OF TRUSTEES
BERT N. MITCHELL, C.P.A. Bert is founder and chairman of Mitchell & Titus,
LLP, the nation's largest minority-owned accounting firm. He holds B.B.A.,
M.B.A. and Honorary Doctorate degrees from the Baruch School of Business of
the City University of New York. 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
