-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IIzATb0ZviDrp+fpvjmvSTc4uonavxuC3hSEAS/0bPMZM2ApFkG4N/UlbmAPvjhP VRRcOwS3ZLiRNAgH0qj0Fw== 0000912057-01-516612.txt : 20010518 0000912057-01-516612.hdr.sgml : 20010518 ACCESSION NUMBER: 0000912057-01-516612 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010331 FILED AS OF DATE: 20010517 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ARIEL GROWTH FUND CENTRAL INDEX KEY: 0000798365 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] STATE OF INCORPORATION: MD FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: N-30D SEC ACT: SEC FILE NUMBER: 811-04786 FILM NUMBER: 1642269 BUSINESS ADDRESS: STREET 1: 307 NORTH MICHIGAN AVENUE STREET 2: SUITE 500 CITY: CHICAGO STATE: IL ZIP: 60601 BUSINESS PHONE: 3127260140 MAIL ADDRESS: STREET 1: 307 NORTH MICHIGAN AVENUE STREET 2: SUITE 500 CITY: CHICAGO STATE: IL ZIP: 60601 N-30D 1 a2048692zn-30d.txt N-30D ARIEL MUTUAL FUNDS Semi Annual Report--March 31, 2001 Ariel Fund - Ariel Appreciation Fund - Ariel Premier Bond Fund THE PATIENT INVESTOR ONE DAY A HARE WAS MAKING FUN OF A TORTOISE FOR BEING SO SLOW UPON HIS FEET. "WAIT A BIT," SAID THE TORTOISE, "I'LL RUN A RACE WITH YOU, AND I'LL WAGER THAT I'LL WIN." THE HARE, WHO WAS MUCH AMUSED AT THE IDEA, SAID "LET'S TRY AND SEE..." WHEN THE TIME CAME BOTH STARTED OFF TOGETHER... THE HARE NEARLY TURNED A SOMERSAULT IN HIS HASTE, WHILE THE TORTOISE BEGAN AT A SLOW BUT STEADY PACE. MEANWHILE THE TORTOISE KEPT PLODDING ON... [ARIEL MUTUAL FUNDS LOGO] ARIEL NEWS FORBES MAGAZINE GETS AN ARIEL VOICE John W. Rogers, Jr., Chairman & Chief Executive Officer of Ariel Capital Management, Inc. and portfolio manager of Ariel Fund, has been selected to be a regular outside columnist for FORBES magazine. John debuted in the March 5, 2001 issue of FORBES and will be featured again in May. Look for more of John's commentary, entitled THE PATIENT INVESTOR, throughout 2001. GOOD MORNING AMERICA GETS AN ARIEL FACE Mellody Hobson, President of Ariel, has been chosen to be a regular financial contributor on ABC's GOOD MORNING AMERICA. From stock tips to current financial issues, Mellody offers her insights on the market. For updates about Ariel in the news, log onto our award-winning web site at WWW.ARIELMUTUALFUNDS.COM. Ariel Investment Trust P.O. Box 219121 Kansas City, Missouri 64121-9121 800.292.7435 312.726.0140 www.arielmutualfunds.com 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 IS MORE RISKY AND MORE VOLATILE THAN INVESTING IN LARGE CAP STOCKS. TABLE OF CONTENTS The Patient Investor 2 Company in Focus 6 Company Updates 8 Ariel Equity Funds 10 Schedule of Equity Investments 12 Equity Statistical Summary 16 Ariel Premier Bond Fund 18 Schedule of Bond Investments 20 Statement of Assets & Liabilities 28 Statement of Operations 28 Statement of Changes in Net Assets 29 Financial Highlights 30 Notes to the Financial Statements 32 Board of Trustees 36 THE PATIENT INVEST [Ariel Mutual Funds Logo]R-Registered Trademark- SLOW AND STEADY WINS THE RACE.-AESOP -(R) DEAR FELLOW SHAREHOLDER: Despite the market's very turbulent first quarter ended March 31, 2001, we are pleased to report Ariel Fund's small cap value stocks managed to post a +1.87% gain. As a means of comparison, the small cap value stocks of the Russell 2000 Value Index rose +0.97% while the more aggressive issues of the Russell 2000 Index dropped -6.51% during this same three-month period. Ariel Fund maintained its #1 Lipper ranking out of the 12 small cap value funds that have been in existence since its inception in November 1986. Additionally, the fund ranked #6 out of 243 small cap value funds for the one-year period ended March 31, 2001. Ariel Appreciation Fund placed in the top quartile of its mid-cap value peers as #31 out of 155 funds over the same period.(1) Performing remarkably similar to its small cap sibling, the mid-sized holdings of Ariel Appreciation Fund gained +1.84% during the first quarter. However, the gap between the Appreciation Fund return and that of its mid-cap benchmarks was much wider. Specifically, during the quarter, the Russell Midcap Index dropped -10.49% and even the more conservative Russell Midcap Value index lost -3.53%. These declines, however, pale in comparison to a plummeting Nasdaq Index which fell an eye-popping -25.51%. And so it seems, a turn of the calendar has brought no relief from the broad market's bloodletting. As most stock market indexes remain awash in red ink into 2001, there appears to be no bottom to worse. Fortunately, during the quarter, both Ariel Fund and Ariel Appreciation Fund continued to be buffered from the market's high anxiety by our conservative value strategy. More specifically, the portfolios benefited from the basic premise that value stocks--securities with low expectations built into their prices--have less far to fall in times of market mayhem. While our first quarter returns were clearly enhanced by our bargain shopping ways, a number of sector and stock specific issues managed the kind of strong gains that make them stand out in these uncertain times. In the case of (1) Ariel Fund ranked 4 out of 93 and 10 out of 22 for the five-and ten-year periods ended 03/31/01. Ariel Appreciation Fund ranked 11 out of 63 and 16 out of 30 for the five-and ten-year periods ended 03/31/01. Lipper Analytical Services, Inc. is a nationally recognized organization that reports performance and calculates rankings for mutual funds. Each fund is ranked within a universe of funds with similar investment objectives. Ranking is based on total returns. 2 Ariel Fund, the top five performers all rose in excess of +20% for the quarter--document binder, General Binding Corporation (OTC: GBND); dental supply distributor, Sybron Dental (NYSE: SYD); drug retailer, Longs Drug Stores (NYSE: LDG); toy maker, Hasbro (NYSE: HAS) and sealant and coatings manufacturer, RPM (NYSE: RPM). For Ariel Appreciation Fund, not only did four of the top five performers post similar gains--Sybron, Longs, H&R Block (NYSE: HRB) and Hasbro--one issue, Cendant Corporation (NYSE: CD), known for its Avis Car Rental and Days Inn franchises, actually jumped +51.58%. Overall, the Healthcare, Consumer Staples and Materials and Processing sectors significantly enhanced the funds' quarter-end results. With that said, the weak spot in both portfolios proved to be the Financial sector, whose issues were spooked by the market's dive. PORTFOLIO COMINGS AND GOINGS During the first quarter of 2001, Ariel Fund began to acquire shares of two new issues, Anixter International (NYSE: AXE), a world leader in data communications products, as well as Markel Corporation (NYSE: MKL), a niche insurance products and programs underwriter. On the sell side, we lightened up on our positions in slot machine manufacturer, International Game Technology (NYSE: IGT), as well as Longs Drug Stores when these company shares began to approach our estimations of their private market values. In the case of Ariel Appreciation Fund, our one new holding was well-known toy retailer, Toys "R" Us (NYSE: TOY). On the sell side, we began to scale back our positions in International Game Technology and diversified consumer products maker, Fortune Brands (NYSE: FO), as a direct result of their rising valuations. STOCKS ON "SALE"--AT HIGH PRICES Time flies. While hard to fathom, March 10, 2001 marked the one-year anniversary of the Nasdaq's descent and the onset of a stealthy bear market that has since ravaged all of the major indices. Despite the pain that has already been inflicted--the tech laden Nasdaq off -64% from its 2000 high; the popular Standard & Poor's 500 Index down more than -25%; and even the stodgy Dow Jones Industrial Average just a breath away from officially entering bear market territory with its -19.9% peak-to-trough drop--we believe the market is still expensive and the worst is not over. More specifically, while there has been significant pain in some areas--most notably the tech sector--we are not convinced that the excess has been completely wrung out of the large cap growth issues. 3 As we read in a recent issue of the WALL STREET JOURNAL, "Just because a stock goes from $80 to $18, like Cisco, doesn't mean it's cheap." Many of Wall Street's most widely held shares--from GE to Microsoft to Cisco--continue to sell for very high prices relative to their earnings. The NO-LOAD FUND ANALYST, an investment newsletter, recently depicted both the relative and historic valuations for today's stocks in two simple charts that were so comprehensive and so compelling, we felt them worthy of reprint in our own quarterly letter. The first chart compares the price/earnings ratios for large, mid- and small cap stocks. Its data clearly demonstrates that large cap stocks are the most expensive area of the market--small caps, the cheapest. Furthermore, the chart shows the striking valuation difference between the out-of-favor value issues versus the popular growth stocks. RUSSELL INDEXES: FORWARD P/E RATIOS AS OF 12/31/00
VALUE GROWTH ----- ------ Large Cap (Russell 1000) 17.8 36.0 Mid-Cap (Russell Midcap) 15.2 35.8 Small Cap (Russell 2000) 13.3 25.9
SOURCE: NO-LOAD FUND ANALYST The second chart puts these numbers in context based upon historical valuations. RUSSELL INDEXES: FORWARD P/E RATIOS AS A PERCENTAGE OF LONG-TERM AVERAGE
VALUE GROWTH ----- ------ Large Cap (Russell 1000) 135% 176% Mid-Cap (Russell Midcap) 121% 173% Small Cap (Russell 2000) 103% 133%
SOURCE: NO-LOAD FUND ANALYST The NO-LOAD FUND ANALYST conclusion, despite the recent market drop, "...outside of small-cap value, and to a lesser extent, mid-cap value, stocks are selling at multiples that are very high relative to their history." And so, there is still downside risk. This point was well stated in a recent issue of FORBES that reported, "The 30 stocks of the Dow, badly battered though they may be, are priced at 19 times earnings, uncomfortably above their long-term average of 15. If the Dow is to return to...15 times earnings, it must either fall to 7,700 or stay at 10,000 for another few years." While traditional value managers like ourselves are hard pressed to justify high prices of any kind, it is one thing to pay 30 times earn- 4 ings for shares in a company expected to grow 30% a year (unsustainable as that growth rate may be). But to hear arguments that many of today's large cap growth issues are now selling at "bargain" prices at 25 times earnings is simply mind-boggling when one considers the very real possibility these companies may soon be reporting NEGATIVE growth rates. As such, the aforementioned charts are all the more unsettling when one acknowledges this can only lead to a very predictable double whammy--falling price/earnings multiples and thus lower per share prices. In THE NEW CONTRARIAN INVESTMENT STRATEGY, noted investor and market historian, David Dreman details similar debacles that occurred during the 1973-74 bear market. In one such example he writes, "For years, DuPont traded at well-above-average p/e ratios as investors saw the demand for polyester and nylon synthetic fibers outstripping supply indefinitely. It didn't, and the large premium in its p/e multiple was whisked away." In the same way DuPont investors suffered through the stock's painful descent in the early `70s, we believe today's investors could experience an equally agonizing decline. In light of the difficulties that may lie ahead, we are comforted by the fact that small and mid-cap value stocks are selling at much more reasonable valuations and thereby present a greater opportunity for market-beating performance with lower risk. As always, we appreciate the opportunity to serve you and welcome any questions you might have. Sincerely, /s/ John W. Rogers, Jr. /s/ Eric T. McKissack John W. Rogers, Jr. Eric T. McKissack, CFA Portfolio Manager Portfolio Manager Ariel Fund Ariel Appreciation Fund [GRAPHIC OF LEAVES] COMPANY IN FOCUS [MARKEL CORPORATION LOGO] 4521 HIGHWOODS PKWY. GLEN ALLEN, VA 23060 (804) 747-0136 WWW.MARKELCORP.COM MARKEL CORPORATION (NYSE: MKL) sells and underwrites specialty insurance products and programs to a variety of niche markets. In each of these areas, the company is a market leader, providing quality products and excellent customer service. The company's financial goals are to build shareholder value through consistent underwriting profits and superior investment returns. REASONS FOR RECOMMENDATION DEFENDABLE POSITION IN NICHE MARKETS Markel is careful to operate in markets where price is not the primary consideration. In such situations, the risks are often atypical and thus fewer companies compete for the business. Examples of such circumstances include insurance for toy manufacturers, Boy's & Girl's Clubs, and pawn shops. Success depends on specialized knowledge combined with disciplined adherence to underwriting guidelines. For these reasons, competitors from other markets have difficulty challenging Markel. In fact, many have tried and failed. In contrast, Markel has one of the industry's best track records for profitability. Since 1990, the company has earned an underwriting profit in all but four years. (It is standard for an insurance company to lose money underwriting but to make up the difference through investments.) Last year was one of those rare loss years. These shortfalls were the result of an international acquisition. This purchase notwithstanding, after two years of challenging results, domestic business has returned to profitability. In keeping with this history, we expect the international business to achieve underwriting breakeven within the next two years. The acquisition opened new markets for Markel to grow profitably and should be a good long-term investment for the company. 6 A FOCUS ON GROWING INTRINSIC VALUE The Markel formula is simple--to underwrite profitably while intelligently investing excess funds for total return. Few insurance companies follow this strategy because conventional analysis does not count equity returns as "earnings." However, Markel management is focused on building intrinsic value, not catering to Wall Street. The results speak for themselves. Markel has compounded book value at an average rate of 23% over the last ten years, and the stock price has grown at more than 30% per year over the same period--a record few companies can match. STRONG MANAGEMENT WITH SKIN THE GAME Markel management is among the most respected in the industry. Perhaps the aforementioned track record is the best indication of management quality. Importantly, Markel has achieved these results with a consistent operating strategy and a high level of personal integrity. Our confidence is bolstered by the fact that top management owns more than 12% of the company while officers and directors in total own almost 20%. Management encourages stock ownership company-wide by enabling employees to borrow from the company to buy stock. This enthusiasm stands in stark contrast to the typical company that covertly dilutes current owners through generous option plans. At Markel, management is thinking and acting like the owner it is. VALUATION Despite what appears to be a high price-to-earnings ratio, Markel is significantly undervalued. Earnings are depressed due to unusually poor short-term performance, the company's total return investment strategy, and substantial accounting goodwill amortization. Our analysis, which adjusts for such factors, results in a low p/e of 10 times next year's earnings. The stock is now trading at close to a 40% discount to our estimation of its private market value. We recommend investors purchase shares. 7 COMPANY UPDATES NEIMAN-MARCUS 27 BOYLSTON ST. CHESTNUT HILL, MA 02467 (617) 232-0760 WWW.NEIMANMARCUSGROUP.COM COMPANY UPDATES NEIMAN-MARCUS GROUP, INC. (NYSE: NMG.A) Recent market volatility has provided us a welcome opportunity to initiate a position in this high-end retailer at attractive prices. As the preeminent retailer in the luxury market, Neiman's offers a precise point of differentiation in consumers' minds, further supported by a clear merchandising strategy. Moreover, the company is strengthening its hold on the high-end retail consumer through increased product exclusivity, targeted marketing and promotion, as well as acquisitions of emerging fashion brands such as Kate Spade. In classic value "fashion," our opportunity to acquire Neiman shares arose when the investment community indiscriminately sold retail stocks in response to the prospects of a more challenging economic environment. While current economic and market difficulties have certainly impacted retail fundamentals, the company continues to concentrate its efforts on supplying the luxury niche. Neiman's continued focus on its core market is unique as its competitors have been pushing their merchandise offerings in the other direction toward mass appeal. We believe staying the course will only intensify Neiman's hold on the premium end of the retail market and applaud this long-term strategy. At $30.50, the company trades at a 33% discount to its private market value. We recommend investors accumulate shares at these attractive prices. LITTELFUSE (NASDAQ: LFUS) is the largest global manufacturer of circuit protection devices (fuses, protectors and resettable devices) for use in the electronic, automotive and industrial markets. We have held Littelfuse in the Ariel Fund since 1998 but significantly pared back our position in mid-2000 as the stock price began to approach our estimate of its private market value. Recently, the stock has declined on poor earnings news and a dramatic slowdown in the electronics industry, and we have again increased our position in this high quality franchise. [LITTELFUSE LOGO] 800 E. NORTHWEST HWY. DES PLAINES, IL 60016 (847) 824-1188 WWW.LITTELFUSE.COM We remain attracted to the Littelfuse business for several reasons. The company has a dominant and defendable market position in the circuit protection industry. Additionally, the economics of Littelfuse remain very attractive. Littelfuse also has solid long-term growth prospects as developments in electronic devices such as computers, cellular phones, digital assistants, wireless access devices and many other electronics will require increasing demand for their products. We feel the stock represents a very compelling value for long-term, patient investors at current levels. At $22, it trades at 11 times our 2002 cash earnings estimate, 5.6 times cash flow, and at a 49% discount to our estimate of its private market value. We recommend investors add to their positions in Littelfuse at current levels. 8 HASBRO 1027 NEWPORT AVE. PAWTUCKET, RI 02862 (401) 725-8697 WWW.HASBRO.COM HASBRO, INC. (NYSE: HAS) Focus and discipline is the theme at Hasbro these days. Following disappointing results last year, management is working aggressively to get its house back in order. Specifically, Hasbro recently announced several restructuring initiatives including the sale of its money-losing Hasbro Interactive and Games.com businesses. We are confident these actions will stabilize the business and improve profitability at this wonderful franchise. Going forward, we expect Hasbro to be a smaller but much more profitable company. To this end, management is committed to strengthening its core brand while exiting non-core product lines and addressing royalty shortfalls. Second, management will address its deteriorating margins by continuing to identify operating inefficiencies. Lastly, management is determined to improve the company's credit rating to investment-grade. We remain intrigued with the underlying fundamentals of Hasbro, management's intense focus on its "back to basics" strategy and the company's attractive valuation. At $12.90, the stock is trading at a significant discount to our estimated private market value of $20 per share. We recommend investors hold their positions. T. ROWE PRICE ASSOCIATES, INC. (OTC: TROW) Despite the difficult market environment and the company's need to continue investing in its recently acquired international operations, we remain committed to our holding in T. Rowe Price Associates, Inc. Although the stock has declined approximately 30% from its high, we would view further weakness as a buying opportunity. Stock market difficulties, particularly in the international and Nasdaq segments, have caused assets under management to decline approximately 11% since the start of the year. Given the relatively high fees in these areas of the business, revenues are likely to decline at a faster pace. Management is reviewing expense levels carefully. Rather than cutting expenses aggressively to maximize near-term earnings, we expect management to continue to invest in the franchise and to make judicious decisions for the long-term health of the business. We believe this is the right way to manage a business and applaud the leadership for pursuing this direction, despite the pressure on 2001 earnings per share. Contrarian investing is a hallmark of our investment philosophy. Buying great companies when they are out of favor on Wall Street has proven to be a very profitable strategy. We hope to have the opportunity to add significantly to our position in T. Rowe Price and recommend investors hold their shares. [T. ROWE PRICE LOGO] 100 E. PRATT ST. BALTIMORE, MD 21202 (410) 345-2000 WWW.TROWEPRICE.COM 9 ARIEL FUND Inception November 6, 1986 AVERAGE ANNUAL TOTAL RETURNS AS OF MARCH 31, 2001 (assume reinvestment of dividends and capital gains) Total return does not reflect a maximum 4.75% sales load charged prior to 7/15/94.
- -------------------------------------------------------------------------------------------------------------- 1st Quarter YTD 1 Year 3 Year 5 Year 10 Year Life of Fund - -------------------------------------------------------------------------------------------------------------- ARIEL FUND +1.87% +1.87% +36.95% +7.56% +17.36% +13.42% +14.47% - -------------------------------------------------------------------------------------------------------------- RUSSELL 2000 INDEX -6.51% -6.51% -15.33% -0.89% +7.76% +11.81% +10.35% - -------------------------------------------------------------------------------------------------------------- RUSSELL 2000 VALUE INDEX +0.97% +0.97% +19.45% +1.80% +11.86% +14.81% +12.33%
TEN LARGEST HOLDINGS as of March 31, 2001 1 LEE ENTERPRISES Diversified media company 2 MCCORMICK & CO., INC. World's largest spice company 3 HASBRO, INC. Prominent toy manufacturer 4 MBIA, INC. Leading insurer of municipal bonds 5 ROUSE CO. Retail mall developer 6 SERVICEMASTER CO. Diversified provider of consumer and commercial services 7 BRADY CORP. Manufacturer and distributor of niche industrial safety-related products 8 GREY GLOBAL GROUP, INC. Advertising and marketing services firm 9 HCC INSURANCE HOLDINGS, INC. Global property and casualty insurance provider 10 BOB EVANS FARMS, INC. Operator of family-style restaurants and distributor of food products ARIEL FUND AND ARIEL APPRECIATION FUND PORTFOLIO COMPOSITION
SECTOR ARIEL FUND RUSSELL 2000 INDEX ------ ---------- ------------------ Consumer Discretionary 36.72% 17.7% Materials and Processing 13.96% 10.0% Consumer Staples 12.02% 3.0% Financial Services 11.75% 23.0% Producer Durables 9.36% 8.6% Health Care 8.48% 13.0% Cash and Other 4.99% 1.2% Technology 2.72% 9.0% Utilities 0.0% 6.5% Other Energy 0.0% 4.5% Autos and Transportation 0.0% 3.5% Integrated Oils 0.0% 0.0%
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTED IN ARIEL FUND AND COMPARABLE INDICES(*) 10 K GROWTH HYPOTHETICAL
DATE ARIEL FUND S&P RUSSELL 2000 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 2000 $68,677 $76,272 $43,862 Mar-01 $69,964 $67,229 $41,009
(*)Statistics represent past performance which is not indicative of future results. The S&P 500 is a broad market-weighted index dominated by large cap stocks. The Russell 2000 Index measures the performance of smaller companies. The Russell 2000 Value Index measures the performance of smaller, value-oriented companies with lower price-to-earnings ratios. All indices are unmanaged, and 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 $2 BILLION WITH AN EMPHASIS ON SMALLER CAPITALIZATION (SMALL-CAP) STOCKS. 10 ARIEL APPRECIATION FUND Inception December 1, 1989 AVERAGE ANNUAL TOTAL RETURNS AS OF MARCH 31, 2001 (assume reinvestment of dividends and capital gains) Total return does not reflect a maximum 4.75% sales load charged prior to 7/15/94.
- -------------------------------------------------------------------------------------------------------------- 1st Quarter YTD 1 Year 3 Year 5 Year 10 Year Life of Fund - -------------------------------------------------------------------------------------------------------------- ARIEL APPRECIATION FUND +1.84% +1.84% +25.68% +8.45% +18.19% +13.63% +13.86% - -------------------------------------------------------------------------------------------------------------- RUSSELL MIDCAP INDEX -10.49% -10.49% -11.99% +4.41% +12.80% +14.82% +13.78% - -------------------------------------------------------------------------------------------------------------- RUSSELL MIDCAP VALUE INDEX -3.53% -3.53% +13.82% +3.14% +13.05% +15.47% +13.60%
TEN LARGEST HOLDINGS as of March 31, 2001 1 MBIA, INC. Leading insurer of municipal bonds 2 MCCORMICK & CO., INC. World's largest spice company 3 HASBRO, INC. Prominent toy manufacturer 4 EQUIFAX, INC. Consumer credit and check processing services company 5 ROUSE CO. Retail mall developer 6 CENTURYTEL, INC. Diversified telecommunications company 7 XL CAPITAL LTD. Worldwide insurance company 8 HOUGHTON MIFFLIN CO. Leading publisher of educational textbooks and multimedia products 9 LEE ENTERPRISES Diversified media company 10 HERMAN MILLER, INC. One of the country's largest manufacturers of office furniture
SECTOR ARIEL APPRECIATION FUND RUSSELL MID-CAP INDEX ------ ----------------------- --------------------- Consumer Discretionary 34.96% 14.8% Financial Services 25.60% 21.7% Consumer Staples 9.61% 4.5% Materials and Processing 8.12% 5.6% Health Care 6.86% 9.9% Producer Durables 5.87% 5.1% Cash and Other 5.34% 1.9% Utilities 3.64% 12.0% Technology 0.0% 10.3% Other Energy 0.0% 7.5% Autos and Transportation 0.0% 5.1% Integrated Oils 0.0% 1.6%
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTED IN ARIEL APPRECIATION FUND AND COMPARABLE INDICES(*) 10 K GROWTH HYPOTHETICAL
DATE APP S&P RUSSELL MID CAP 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 2000 $42,754 $49,591 $48,257 Mar-01 $43,542 $43,712 $43,193
(*)Statistics represent past performance which is not indicative of future results. The S&P 500 is a broad market-weighted index dominated by large cap stocks. The Russell MidCap Index measures the performance of small and mid-sized companies. The Russell MidCap Value Index measures the performance of small and mid-sized, value-oriented companies with lower price-to-earnings ratios. All indices are unmanaged, and 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 $1 BILLION TO $10 BILLION, WITH AN EMPHASIS ON MEDIUM CAPITALIZATION (MID-CAP) STOCKS. 11 ARIEL FUND SCHEDULE OF INVESTMENTS MARCH 31, 2001 (UNAUDITED)
Number COMMON STOCKS-95.01% Cost Market Value of Shares CONSUMER DISCRETIONARY--36.72% 440,800 American Greetings Corp. $9,592,179 $7,400,920 458,333 Bob Evans Farms, Inc. 9,568,990 11,058,836 212,400 Department 56, Inc.(*) 6,710,917 1,890,360 17,900 Grey Global Group, Inc. 7,539,065 12,415,680 1,018,525 Hasbro, Inc. 15,528,319 15,380,992 292,700 International Game Technology 2,417,666 8,253,623 419,300 Lee Enterprises 14,303,349 16,360,785 507,750 Leggett & Platt, Inc. 6,825,118 9,764,032 241,600 Libbey, Inc. 8,403,310 7,214,176 91,000 Matthews International Corp. 3,823,393 4,358,137 69,000 Neiman Marcus Group, Inc.(*) 2,636,339 2,803,600 44,350 Oneida Ltd 1,470,221 1,528,807 865,150 ServiceMaster Co. 13,139,851 13,260,946 163,500 Valassis, Inc.(*) 6,519,241 6,507,600 ----------- ----------- 108,477,958 118,198,494 ----------- ----------- CONSUMER STAPLES--12.02% 546,800 Dial Corp. 9,782,969 9,435,000 286,900 Longs Drug Stores Corp. 5,810,084 8,480,764 363,600 McCormick & Co., Inc. 10,469,902 16,056,976 180,300 Smucker (J.M.) Co. 4,133,934 4,723,860 ----------- ----------- 30,196,889 38,696,600 ----------- -----------
12
Number COMMON STOCKS-95.01% (cont) Cost Market Value of Shares FINANCIAL SERVICES--11.75% 387,950 HCC Insurance Holdings, Inc. $6,972,042 $12,102,198 567,575 Horace Mann Educators Corp. 12,314,647 10,485,038 149,700 MBIA, Inc. 6,085,305 13,844,688 7,450 Markel Corp.(*) 1,385,363 1,393,150 ----------- ----------- 26,757,357 37,825,074 ----------- ----------- HEALTH CARE--8.48% 149,900 Bausch & Lomb, Inc. 7,735,489 9,246,150 204,100 Invacare Corp. 7,425,509 10,350,288 174,250 Sybron Dental Specialties(*) 6,214,605 7,687,050 ----------- ----------- 21,375,603 27,283,488 ----------- ----------- MATERIALS AND PROCESSING--13.96% 353,600 Brady Corp. 10,185,597 13,092,450 69,925 Energizer Holdings, Inc.(*) 5,442,064 6,155,625 630,100 Interface, Inc., Class A 3,677,395 4,331,938 436,200 Rouse Co. 10,458,695 13,641,150 553,900 RPM, Inc. 7,246,815 7,718,340 ----------- ----------- 37,010,566 44,939,503 ----------- ----------- PRODUCER DURABLES--9.36% 262,170 General Binding Corp. 4,608,893 2,228,445 261,800 Graco, Inc. 7,955,841 10,995,600 269,700 IDEX Corp. 7,684,144 8,551,998 331,050 Miller (Herman), Inc. 6,787,404 8,374,719 ----------- ----------- 27,036,282 30,150,762 ----------- ----------- TECHNOLOGY--2.72% 127,000 Anixter International Inc.(*) $3,027,756 $3,060,700 227,100 Littelfuse, Inc.(*) 6,116,847 5,705,888 ----------- ----------- 9,144,603 8,766,588 ----------- ----------- Total Common Stocks 259,999,258 305,860,509 ----------- ----------- Principal REPURCHASE Amount AGREEMENT-5.39% $17,343,262 State Street Bank & Trust Company Repurchase Agreement, 3.00%, dated 3/30/2001, repurchase price $17,347,598, maturing 4/2/2001 (collateralized by U.S. Treasury Note, 6.625%, 4/30/2002) 17,343,262 17,343,262 ----------- ----------- Total Repurchase Agreement 17,343,262 17,343,262 ----------- ----------- Total Investments-100.40% $277,342,520 323,203,771 ----------- ----------- Liabilities less Other Assets-(0.40)% (1,292,973) ----------- NET ASSETS-100.00% $321,910,798 ----------- -----------
(*) Non-income producing The accompanying notes are an integral part of the financial statements. 13 ARIEL APPRECIATION FUND SCHEDULE OF INVESTMENTS MARCH 31, 2001 (UNAUDITED)
Number COMMON STOCKS-96.15% Cost Market Value of Shares CONSUMER DISCRETIONARY--34.96% 163,600 Bob Evans Farms, Inc. $3,118,558 $2,903,900 388,750 Carnival Corp. 7,620,294 10,756,712 813,500 Cendant Corp.(*) 9,108,974 11,868,965 430,775 Harte-Hanks, Inc. 6,159,099 9,744,131 1,229,750 Hasbro, Inc. 16,956,177 15,863,775 293,700 Houghton Mifflin Co. 10,013,749 13,513,137 189,325 International Game Technology 2,836,017 9,532,513 419,000 Lee Enterprises 11,662,599 12,758,550 547,245 Leggett & Platt, Inc. 6,812,974 10,523,521 245,100 McClatchy Company 8,668,263 9,902,040 172,200 Newell Rubbermaid, Inc. 4,126,734 4,563,300 786,195 ServiceMaster Co. 8,279,959 8,828,970 242,100 Toys "R" Us, Inc.(*) 5,768,629 6,076,710 236,900 Tribune Co. 8,116,267 9,651,306 ----------- ----------- 109,248,293 136,487,530 ----------- ----------- CONSUMER STAPLES--9.61% 282,972 The Clorox Co. 9,297,959 8,899,469 233,140 Longs Drug Stores Corp. 4,340,408 6,891,619 398,095 McCormick & Co., Inc. 10,801,912 16,716,009 321,600 PepsiAmericas, Inc. 5,051,124 5,016,960 ----------- ----------- 29,491,403 37,524,057 ----------- ----------- FINANCIAL SERVICES--25.60% 379,722 Dun & Bradstreet Corp.(*) $7,401,474 $8,946,250 471,500 Equifax, Inc. 13,527,423 14,734,375 225,500 Franklin Resources, Inc. 7,337,780 8,819,305 220,375 H & R Block, Inc. 7,512,841 11,031,973 232,500 MBIA, Inc. 9,458,713 18,758,100 340,825 MBNA Corp. 5,814,421 11,281,308 178,500 SunGard Data Systems, Inc.(*) 5,239,951 8,787,555 121,550 T. Rowe Price Associates, Inc. 4,703,896 3,806,034 181,500 XL Capital Ltd. 10,695,304 13,806,705 ----------- ----------- 71,691,803 99,971,605 ----------- ----------- HEALTH CARE--6.86% 569,700 Apogent Technologies, Inc.(*) 8,035,593 11,530,728 240,200 Bausch & Lomb, Inc. 9,256,455 10,967,532 204,900 Sybron Dental Specialties(*) 2,314,886 4,302,900 ----------- ----------- 19,606,934 26,801,160 ----------- ----------- MATERIALS AND PROCESSING--8.12% 214,460 Avery Dennison Corp. 11,565,529 11,156,209 232,625 Energizer Holdings, Inc.(*) 5,340,893 5,815,625 569,200 Rouse Co. 10,479,006 14,719,512 ----------- ----------- 27,385,428 31,691,346 ----------- ----------- OTHER--1.49% 169,050 Fortune Brands, Inc. 4,227,670 5,815,320 ----------- -----------
14
Number COMMON STOCKS-96.15% (cont) Cost Market Value of Shares PRODUCER DURABLES--5.87% 544,900 Miller (Herman), Inc. $10,952,439 $12,600,813 296,800 Pitney Bowes, Inc. 11,584,258 10,313,800 ----------- ----------- 22,536,697 22,914,613 ----------- ----------- UTILITIES--3.64% 494,425 CenturyTel, Inc. 10,029,305 14,214,719 ----------- ----------- Total Common Stocks 294,217,533 375,420,350 ----------- ----------- Principal REPURCHASE Cost Market Value Amount AGREEMENT-3.61% $14,097,482 State Street Bank & Trust Company Repurchase Agreement, 3.00%, dated 3/30/2001, repurchase price $14,101,007, maturing 4/2/2001 (collateralized by U.S. Treasury Note, 6.625%, 3/31/2002) $14,097,482 $14,097,482 ----------- ----------- Total Repurchase Agreement 14,097,482 14,097,482 ----------- ----------- Total Investments-99.76% $308,315,015 389,517,832 ----------- ----------- Other Assets less Liabilities-0.24% 938,016 ------- NET ASSETS-100.00% $390,455,848 ------------ ------------
(*) Non-income producing The accompanying notes are an integral part of the financial statements. 15 EQUITY STATISTICAL SUMMARY ARIEL FUND (UNAUDITED)
EARNINGS PER SHARE 52 - WEEK ------------------ RANGE 2000 2001 2000 2001 MARKET TICKER PRICE ------------- ACTUAL ESTIMATED P/E P/E CAP. COMPANY SYMBOL 3/31/01 LOW HIGH CALENDAR CALENDAR CALENDAR CALENDAR ($MM) Department 56, Inc. DFS 8.90 7.44 15.88 2.04 1.06 4.4 8.4 115 General Binding Corp. GBND 8.50 5.19 10.13 0.21 0.82 40.5 10.4 133 Oneida Ltd. OCQ 15.95 10.06 20.00 1.41 1.65 11.3 9.7 262 Interface, Inc. IFSIA 6.88 3.06 11.00 0.61 0.61 11.3 11.3 349 Libbey, Inc. LBY 29.86 26.31 33.56 3.01 3.03 9.9 9.9 457 Matthews International Corp. MATW 32.72 20.00 33.13 1.76 1.95 18.6 16.8 504 Littelfuse, Inc. LFUS 25.13 21.50 51.13 1.67 1.22 15.0 20.6 548 Bob Evans Farms, Inc. BOBE 17.75 12.00 21.69 1.44 1.59 12.3 11.2 618 The J.M. Smucker Company SJM 26.20 18.13 29.00 1.26 1.39 20.8 18.8 637 American Greetings Corp. AM 10.60 8.19 24.06 1.91 1.22 5.5 8.7 673 Horace Mann Educators Corp. HMN 17.70 12.00 22.19 0.61 1.10 29.0 16.1 717 Sybron Dental Specialties SYD 21.00 13.00 22.25 1.08 1.16 19.4 18.1 737 Brady Corp. BRC 33.70 26.81 39.24 1.83 1.87 18.4 18.0 768 Grey Global Group, Inc. GREY 648.00 400.00 760.00 25.46 35.11 25.5 18.5 842 Graco, Inc. GGG 28.00 19.33 30.00 2.27 2.34 12.3 12.0 860 IDEX Corp. IEX 28.98 25.13 36.00 2.07 1.84 14.0 15.8 881 Anixter International, Inc. AXE 24.10 17.56 37.38 2.16 2.43 11.2 9.9 897 RPM, Inc. RPM 10.20 7.75 11.06 0.63 0.71 16.2 14.4 1,042 Longs Drug Stores, Inc. LDG 29.56 17.56 31.95 1.51 1.70 19.6 17.4 1,106 The Dial Corp. DL 12.50 9.88 15.75 0.51 0.64 24.5 19.5 1,186 Invacare Corp. IVC 39.52 22.56 40.80 1.96 2.21 20.2 17.9 1,205 Lee Enterprises LEE 30.45 20.50 32.55 1.59 1.70 19.2 17.9 1,331 Valassis, Inc. VCI 29.00 20.50 39.25 2.22 2.51 13.1 11.6 1,552 HCC Insurance Holdings, Inc. HCC 26.45 10.94 27.19 1.23 1.52 21.5 17.4 1,553 The Neiman Marcus Group, Inc. NMG.A 32.60 23.94 41.01 3.00 2.78 10.9 11.7 1,555 Markel Corp. MKL 187.00 133.50 190.50 (3.55) 6.65 NM 28.1 1,608 Herman Miller, Inc. MLHR 23.13 18.38 33.94 1.90 1.91 12.2 12.1 1,769 Rouse Company RSE 25.86 20.81 28.19 3.30 3.57 7.8 7.2 1,779 Hasbro, Inc. HAS 12.90 8.38 18.56 (0.13) 0.45 NM 28.7 2,225 Energizer Holdings, Inc. ENR 25.00 14.81 27.55 1.26 1.57 19.8 15.9 2,293 Bausch & Lomb, Inc. BOL 45.66 33.56 80.88 2.56 2.32 17.8 19.7 2,466 McCormick & Company, Inc. MKC 41.99 27.63 42.20 1.99 2.16 21.1 19.4 2,876 The ServiceMaster Co. SVM 11.23 8.25 13.75 0.61 0.61 18.4 18.4 3,356 International Game Technology IGT 50.35 19.75 57.25 1.97 2.64 25.6 19.1 3,691 Leggett & Platt, Inc. LEG 19.23 14.19 22.56 1.32 1.30 14.6 14.8 3,779 MBIA, Inc. MBI 80.68 48.00 81.10 5.11 5.82 15.8 13.9 7,971
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. NM=Not Meaningful. 16 ARIEL APPRECIATION FUND (UNAUDITED)
EARNINGS PER SHARE 52 - WEEK ------------------ RANGE 2000 2001 2000 2001 MARKET TICKER PRICE ------------- ACTUAL ESTIMATED P/E P/E CAP. COMPANY SYMBOL 3/31/01 LOW HIGH CALENDAR CALENDAR CALENDAR CALENDAR ($MM) Bob Evans Farms, Inc. BOBE 17.75 12.00 21.69 1.44 1.59 12.3 11.2 618 Sybron Dental Specialties SYD 21.00 13.00 22.25 1.08 1.16 19.4 18.1 737 Longs Drug Stores, Inc. LDG 29.56 17.56 31.95 1.51 1.70 19.6 17.4 1,106 Houghton Mifflin Company HTN 46.01 29.50 51.81 2.00 2.21 23.0 20.8 1,330 Lee Enterprises LEE 30.45 20.50 32.55 1.59 1.70 19.2 17.9 1,331 Harte-Hanks, Inc. HHS 22.62 21.00 28.44 1.18 1.34 19.2 16.9 1,461 Herman Miller, Inc. MLHR 23.13 18.38 33.94 1.90 1.91 12.2 12.1 1,769 Rouse Company RSE 25.86 20.81 28.19 3.30 3.57 7.8 7.2 1,779 McClatchy Co. MNI 40.40 28.75 43.25 1.97 1.88 20.5 21.5 1,834 The Dun & Bradstreet Corp. DNB 23.56 13.00 27.25 1.32 1.65 17.8 14.3 1,890 Apogent Technologies, Inc. AOT 20.24 13.39 27.03 0.90 1.04 22.5 19.5 2,133 Hasbro, Inc. HAS 12.90 8.38 18.56 (0.13) 0.45 NM 28.7 2,225 Energizer Holdings, Inc. ENR 25.00 14.81 27.55 1.26 1.57 19.8 15.9 2,293 PepsiAmericas PAS 15.60 10.88 17.00 0.54 0.64 28.9 24.4 2,434 Bausch & Lomb, Inc BOL 45.66 33.56 80.88 2.56 2.32 17.8 19.7 2,466 McCormick & Company, Inc. MKC 41.99 27.63 42.20 1.99 2.16 21.1 19.4 2,876 The ServiceMaster Co. SVM 11.23 8.25 13.75 0.61 0.61 18.4 18.4 3,356 International Game Technology IGT 50.35 19.75 57.25 1.97 2.64 25.6 19.1 3,691 Leggett & Platt, Inc. LEG 19.23 14.19 22.56 1.32 1.30 14.6 14.8 3,779 T. Rowe Price Associates, Inc. TROW 31.31 28.56 49.94 2.07 1.60 15.1 19.6 3,814 CenturyTel, Inc. CTL 28.75 24.44 40.38 1.62 1.72 17.7 16.7 4,054 Equifax, Inc. EFX 31.25 23.25 36.50 1.68 1.81 18.6 17.3 4,472 H&R Block, Inc. HRB 50.06 26.94 52.39 2.42 2.67 20.7 18.7 4,575 Toys "R" Us, Inc. TOY 25.10 13.25 26.69 0.98 1.40 25.6 17.9 4,955 Fortune Brands, Inc. FO 34.40 19.19 35.19 2.29 2.49 15.0 13.8 5,291 Avery Dennison Corp. AVY 52.02 41.13 70.63 2.85 2.93 18.3 17.8 5,733 SunGard Data Systems, Inc. SDS 49.23 26.50 60.14 1.63 1.93 30.2 25.5 6,602 Newell Rubbermaid, Inc. NWL 26.50 18.25 29.50 1.71 1.70 15.5 15.6 7,065 The Clorox Company CLX 31.45 28.38 48.63 1.79 1.65 17.6 19.1 7,432 MBIA, Inc. MBI 80.68 48.00 81.10 5.11 5.82 15.8 13.9 7,971 Pitney Bowes, Inc. PBI 34.75 24.00 47.00 2.39 2.36 14.5 14.7 8,604 XL Capital Ltd. XL 76.07 43.75 89.25 4.50 5.33 16.9 14.3 9,532 Franklin Resources, Inc. BEN 39.11 28.19 48.30 2.34 2.15 16.7 18.2 9,547 Tribune Company TRB 40.74 32.00 46.50 1.34 1.43 30.4 28.5 12,210 Cendant Corp. CD 14.59 8.13 19.25 1.03 1.00 14.2 14.6 12,326 Carnival Corp. CCL 27.67 18.31 34.94 1.64 1.74 16.9 15.9 16,179 MBNA Corp. KRB 33.10 23.81 40.13 1.53 1.84 21.6 18.0 28,195
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 DEAR FELLOW SHAREHOLDER: For the first quarter ended March 31, 2001, Ariel Premier Bond Fund, Institutional Class gained +2.53% and the Investor Class gained +2.43%. These results trailed the +3.03% return of the Lehman Brothers Aggregate Bond Index. During the first quarter of 2001, the three primary themes that influenced the financial markets were a weakening economy, the stock market decline and the Federal Reserve Bank's move to lower interest rates. Perhaps the quarter's most surprising outcome was that long Treasury rates did not fall despite a 1.5% drop in the Funds rate and nearly a 30% decline in the Nasdaq. The steepened yield curve still reflects expectations for even lower interest rates, but long-term inflation expectations do not appear to have been materially affected by the current economic environment. The portfolio's underweighting in corporate bonds, primarily in January, led to returns behind the benchmark for the quarter. The basic themes of portfolio strategy going into the second quarter are as follows: DURATION 4.6 YRS. The portfolio's interest rate exposure equals that of the benchmark. Although the expectations for further Fed rate cuts and inflation embodied in current yield levels appear aggressive, the risks in the current environment around the economy and the stock market suggest a patient approach to portfolio duration. ASSET-BACKED SECURITIES 21.3% AAA-rated asset-backed securities are the portfolio's primary credit and spread overweight. This reflects the attractiveness of spreads between 0.80-1.50% in short duration securities. MORTGAGES 26.1% The portfolio's dollar duration exposure to mortgages equals the index. Mortgage spreads are on the wider side relative to historical averages, but the continued efficiency in refinancing has increased the prepayment risk in mortgages. Again, a cautious approach to overweighting mortgages is warranted in the current environment. CORPORATES 21.7% The portfolio's corporate exposure is modestly less than the index, primarily in short maturity issues. These are replaced with asset-backed securities. The general theme in corporate strategy is defensive, with sectors such as financial services, energy and consumer non-cyclicals overweighted. The portfolio is currently positioned conservatively. Our outlook for improving growth over the second half of the year will likely shift our strategy toward a shorter duration character and a spread overweight during the second quarter. We will look for those opportunities to evolve. As always, we are pleased to serve you and welcome your questions and comments. Sincerely, /s/John W. Rogers, Jr. /s/Kenneth R. Meyer John W. Rogers, Jr. Kenneth R. Meyer Chairman & CEO Chairman & CEO Ariel Capital Management, Inc. Lincoln Capital Management Company 18 ARIEL PREMIER BOND FUND Institutional Class Inception October 1, 1995 Investor Class Inception February 1, 1997 AVERAGE ANNUAL TOTAL RETURNS AS OF MARCH 31, 2001 (assume reinvestment of dividends and capital gains)
- -------------------------------------------------------------------------------------------------------------- 1st Quarter YTD 1 Year 3 Year 5 Year Life of Fund - -------------------------------------------------------------------------------------------------------------- ARIEL PREMIER BOND FUND, INST. CL. +2.53% +2.53% +11.12% +5.99% +6.89% +6.42% - -------------------------------------------------------------------------------------------------------------- ARIEL PREMIER BOND FUND, INV. CL. +2.43% +2.43% +10.80% +5.57% - +6.39% - -------------------------------------------------------------------------------------------------------------- LEHMAN BROS. AGGREGATE BOND INDEX +3.03% +3.03% +12.53% +6.88% +7.48% +7.25% (INST.) +7.58% (INV.)
ARIEL PREMIER BOND FUND PORTFOLIO COMPOSITION FOR 03/30/01
- ------------------------------------------------------------------------ ARIEL BOND % OF LEHMAN BROS. FUND AGGREGATE INDEX ----------- ----------------- GOVERNMENT & AGENCY 21.5% 36.3% MORTGAGE-BACKED 24.8% 34.8% CORPORATE 21.4% 25.3% ASSET-BACKED 13.2% 1.9% COMMERCIAL MORTGAGE BACKED 8.1% 1.7% ----------- ----------------- CASH 11.0% 0.0% ----- ---- - ------------------------------------------------------------------------
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTED IN ARIEL PREMIER BOND FUND, INVESTOR CLASS AND COMPARABLE INDEX(*) INVESTOR CLASS
DATE BOND LEHMAN 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 Dec-00 $12,631 $13,154 1-Mar $12,938 $13,553
COMPARISON OF CHANGE IN VALUE OF $1,000,000 INVESTED IN ARIEL PREMIER BOND FUND, INSTITUTIONAL CLASS AND COMPARABLE INDEX(*) 10K Growth Hypothetical -- Page 19 INSTITUTIONAL CLASS
DATE BOND LEHMAN 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 Dec-00 $1,373,199 $1,425,580 Mar-01 $1,407,975 $1,468,844
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 ARIEL PREMIER BOND FUND SCHEDULE OF INVESTMENTS MARCH 31, 2001 (UNAUDITED)
Par Value ASSET-BACKED SECURITIES-13.24% Cost Market Value $3,800,000 American Express Master Trust, 1998-1 A, 5.90%, 4/15/2004 $3,868,999 $3,879,835 650,000 BEA, 1998-2A A2A, 6.72%, 6/15/2010+ 630,083 574,023 3,370,000 BMW Vehicle Lease Trust, 2000-A A4, 6.67%, 10/25/2003 3,369,903 3,480,743 470,000 Capital One, 2000, 7.65%, 4/17/2006 468,459 483,606 1,105,000 Conseco Finance, 2000-F AF2, 6.98%, 9/15/2015 1,128,368 1,135,054 1,150,000 Conseco Finance, 2000-F AF3, 7.17%, 9/15/2020 1,149,742 1,188,920 732,984 Fleetwood, 97-B A, 6.40%, 5/15/2013 732,106 746,428 1,905,000 Ford Credit Auto Owner Trust, 2000-G A4, 6.62%, 7/15/2004 1,904,745 1,963,492 870,000 Greenpoint Manufacturing, 2000-1 A2, 7.60%, 11/20/2022 869,975 907,878 7,038 Green Tree Financial-MH, 1995-1 A5, 8.40%, 6/15/2025 7,699 7,078 1,415,000 Healthcare Rec., 99-1, 6.25%, 2/1/2003+ 1,413,877 1,426,404 795,000 HSBC Mortgage Loan Trust, 2000-HSB1 A3, 7.11%, 12/16/2030 795,000 824,903 Par Value ASSET-BACKED SECURITIES-13.24% (cont) Cost Market Value $340,000 Huntington Auto Trust, 2000-A A3, 7.33%, 7/15/2004 $340,422 $349,326 485,000 Irwin Home Equity, 2001-1 A3, 5.95%, 7/25/2016 485,085 486,373 765,000 MMCA Automobile Trust, 2000-2 A3, 6.78%, 10/15/2004 764,980 785,295 1,125,000 Navistar Financial Corp. Owner Trust, 2000-B A4, 6.78%, 9/17/2007 1,124,845 1,171,078 510,000 New Holland Equipment Rec. Trust, 1999-A A4, 6.80%, 12/15/2007+ 505,876 524,441 280,000 Nissan Auto Receivables Owner Trust, 2001-A A3, 5.55%, 9/15/2004 279,979 283,634 300,000 Onyx Acceptance Auto Trust, 2001-A A3, 5.64%, 4/15/2005 299,963 304,375 2,035,000 PNC Mortgage Securities Corp., 2000-9 A3, 7.19%, 9/25/2005 2,051,167 2,090,982 1,440,000 Prime, 95-1A, 6.75%, 11/15/2005 1,444,148 1,479,648 417,167 Railcar Trust, 92-A1, 7.75%, 6/1/2004 426,336 433,212 160,000 Residential Asset Mortgage Products Inc., 2000-RZ2 A3, 7.30%, 4/25/2023 160,646 163,497 590,000 Residential Funding Mortgage Securities, 1999-HS2 AI4, 6.34%, 7/25/2029 591,885 596,057 62,072 Salomon Brothers Mortgage Sec., 97LB6A3, 6.76%, 12/25/2027 61,998 61,910 430,000 Sears Credit Account Master Trust, 1995-5 A, 6.05%, 1/15/2008 419,543 439,836
20
Par Value ASSET-BACKED SECURITIES-13.24% (cont) Cost Market Value $60,000 Sears Credit Account Master Trust, 1999-2 A, 6.35%, 2/16/2007 $59,238 $61,370 450,000 Union Acceptance Corp., 2000-D A4, 6.89%, 4/9/2007 449,976 468,364 190,000 World Omni Auto Lease, 00-A A3, 7.13%, 2/16/2004 189,994 195,849 ------------ ------------ Total Asset-Backed Securities 25,995,037 26,513,611 ------------ ------------ COMMERCIAL MORTGAGE-BACKED SECURITIES-8.08% 1,090,000 Banc of America Commercial Mortgage Inc., 2000-2 A2, 7.197%, 5/15/2010 1,091,939 1,149,431 2,148,438 Banc One Commercial Mortgage, BK1 00-C1A, 6.664%, 10/18/2031+ 2,148,477 2,209,390 1,330,000 Chase Comm Mortgage Securities Corp., 2000-3 A2, 7.319%, 9/15/2010 1,333,191 1,414,078 593,169 First Union National Bank Commercial Mortgage, 2000-C2 A1, 6.94%, 4/15/2010 593,170 618,573 320,000 GMAC Commercial, 1997-C1 A3, 6.869%, 8/15/2007 305,857 332,023 1,555,000 JP Morgan Chase Commercial Mortgage Sec., 2001-CIBC A3, 6.26%, 3/15/2006 1,562,742 1,565,030 838,738 KeyCorp, 2000-C1 A1, 7.617%, 6/15/2009 838,738 894,228 Par Value COMMERCIAL MORTGAGE-BACKED Cost Market Value SECURITIES-8.08% (cont) $170,595 MLMI, 99-C1 A1, 7.37%, 6/15/2008 $172,322 $180,146 2,338,431 Morgan Stanley Dean Witter Capital, 2001-PPM A2, 6.40%, 10/15/2011 2,350,511 2,382,828 2,825,000 Nomura Asset Securities Corp., 1995-MD3 A1B, 8.15%, 3/4/2020 3,002,353 3,034,093 965,083 Prudential Mortgage Capital Co. II, 2000-C1 A1, 6.981%, 10/6/2010+ 965,084 1,005,211 785,000 Prudential Securities Corp., 1999-C2 A2, 7.193%, 4/15/2009 781,983 828,090 545,730 TIAA Retail Commercial Mortgage Trust, 1999-1 A, 7.17%, 4/15/2008+ 544,453 568,706 ------------ ------------ Total Commercial Mortgage- Backed Securities 15,690,820 16,181,827 ------------ ------------ CORPORATE DEBT-21.40% 325,000 AT&T Wireless Group, 7.35%, 3/1/2006+ 324,875 327,998 800,000 AXA, 8.60%, 12/15/2030 850,765 862,267 700,000 American General Capital II, 8.50%, 7/1/2030 770,738 753,076 800,000 American Home Products, 6.25%, 3/15/2006+ 799,896 803,906 595,000 Archer Daniels Midland, 6.625%, 5/1/2029 553,985 569,266
21
Par Value CORPORATE DEBT-21.40% (cont) Cost Market Value $540,000 BSCH Issuances Ltd., 7.625%, 9/14/2010 $568,210 $571,059 470,000 Bank One Corp., 7.625%, 8/1/2005 469,165 498,466 380,000 Bank One Corp., 6.50%, 2/1/2006 379,517 387,498 925,000 BankAmerica, 7.70%, 12/31/2026+ 842,514 865,825 275,000 BellSouth Cap Funding, 7.875%, 2/15/2030 301,362 294,753 410,000 Boeing Co., 6.875%, 10/15/2043 368,119 411,341 540,000 Burlington Resources Inc., 6.68%, 2/15/2011 540,000 551,942 1,000,000 Citigroup Capital III, 7.75%, 12/1/2036 1,035,161 998,155 350,000 Conoco Inc., 6.95%, 4/15/2029 351,544 349,216 1,295,000 Consumers Energy CMS, 6.20%, 5/1/2003 1,282,445 1,296,656 460,000 Corp Andina De Fomento, 7.375%, 1/18/2011 458,326 471,351 800,000 Countrywide Home Loan, 6.85%, 6/15/2004 819,046 825,950 540,000 DaimlerChrysler NA Holding, 7.25%, 1/18/2006 547,369 552,466 600,000 Delta Air Lines, 7.57%, 11/18/2010 600,000 651,576 295,000 Deutsche Telekom, 8.25%, 6/15/2030 300,636 284,055 625,000 Dow Chemical Company, 7.375%, 11/1/2029 650,608 654,099 220,000 Duke Energy Field Services, 7.50%, 8/16/2005 219,257 231,376 Par Value CORPORATE DEBT-21.40% (cont) Cost Market Value $220,000 Duke Energy Field Services, 7.875%, 8/16/2010 $219,756 $235,715 635,000 El Paso Energy, 6.95%, 12/15/2007 633,266 649,367 280,000 Fedex Corp., 6.625%, 2/12/2004+ 279,691 283,932 1,260,000 First Union Corp., 7.55%, 8/18/2005 1,319,929 1,335,590 1,130,000 Florida Residential Property & Casualty, 7.25%, 7/1/2002+ 1,150,008 1,151,885 885,000 Ford Motor Credit Co., 7.50%, 6/15/2003 907,907 919,180 1,000,000 Ford Motor Company, 6.875%, 2/1/2006 1,026,249 1,025,520 300,000 France Telecom, 7.20%, 3/1/2006+ 299,548 304,910 750,000 GTE Corp., 6.94%, 4/15/2028 734,466 721,173 500,000 General Motors Acceptance Corp., 7.50%, 7/15/2005 516,903 524,412 470,000 General Motors Acceptance Corp., 7.25%, 3/2/2011 468,457 481,342 425,000 Gulf Canada Resources Ltd., 7.125%, 1/15/2011 423,544 431,687 825,000 Household Financial Corp., 6.50%, 1/24/2006 823,250 840,979 450,000 Hutchinson Whamp International Ltd., 7.00%, 2/16/2011+ 448,956 451,853 455,000 International Paper Co., 8.125%, 7/8/2005 454,628 485,529 900,000 Kellogg Co., 5.50%, 4/1/2003+ 899,461 901,690
22
Par Value CORPORATE DEBT-21.40% (cont) Cost Market Value $245,000 Kinder Morgan Energy Part., 6.75%, 3/15/2011 $244,280 $246,110 650,000 Kohl's Corporation, 7.25%, 6/1/2029 647,579 658,904 645,000 Lehman Bros Holdings Inc., 7.00%, 2/1/2008 644,753 656,124 370,000 Liberty Property LP, 8.50%, 8/1/2010 391,085 398,155 840,000 Lockheed, 6.75%, 3/15/2003 855,161 859,359 450,000 Masco Corp., 6.75%, 3/15/2006 449,103 453,203 290,000 Motorola Inc., 7.625%, 11/15/2010 289,161 285,644 400,000 NRG Energy, Inc., 9.479%, 9/15/2024 395,005 428,644 440,000 Norfolk Southern Corp., 7.25%, 2/15/2031 437,430 426,201 645,000 Nortel Networks Ltd., 6.125%, 2/15/2006 642,601 625,348 701,388 Northwest Airlines Corp., 1999-2A, 7.575%, 3/1/2019 701,388 735,910 900,000 PNC Funding Corp., 6.125%, 9/1/2003 912,080 913,801 800,000 PP&L Capital Funding Inc., 8.375%, 6/15/2007 800,787 847,222 625,000 Park Place Entertainment, 7.95%, 8/1/2003 621,507 641,864 460,000 Progress Energy Inc., 6.75%, 3/1/2006 459,589 473,660 460,000 Qwest Communications International, 7.50%, 11/1/2008 475,683 476,603 630,000 Regions Financial Corp., 7.00%, 3/1/2011 627,336 640,674 Par Value CORPORATE DEBT-21.40% (cont) Cost Market Value $475,000 SBC Communications Inc., 6.25%, 3/15/2011 $471,640 $472,004 750,000 Spear Leeds & Kellogg LP, 8.25%, 8/15/2005+ 747,915 813,209 200,000 Sprint Capital Corp., 6.125%, 11/15/2008 182,102 186,215 900,000 Target Corp., 5.50%, 4/1/2007 895,823 892,380 1,000,000 Telefonica Europe BV, 7.75%, 9/15/2010 1,000,791 1,048,399 475,000 Transocean Sedco Forex, 7.50%, 4/15/2031+ 472,791 472,768 345,000 US Airways 2000, 7.89%, 3/1/2019 345,000 363,213 560,000 Unilever Capital Corp., 6.875%, 11/1/2005 557,711 590,278 1,450,000 United Mexican States, 8.375%, 1/14/2011 1,426,826 1,428,250 290,000 Viacom Inc., C, 7.70%, 7/30/2010 295,485 315,370 750,000 Virginia Electric Power, 6.75%, 2/1/2007 752,851 764,602 625,000 Vodafone Airtouch, 7.75%, 2/15/2010 633,070 673,569 655,000 WorldCom, Inc., 8.25%, 5/15/2010 645,665 685,792 435,000 Zurich Capital Trust, 8.376%, 6/1/2037+ 463,753 435,510 ------------ ------------ Total Corporate Debt 42,125,508 42,866,046 ------------ ------------
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Par Value U.S. GOVERNMENT AGENCIES-32.29% Cost Market Value MORTGAGE-BACKED SECURITIES--24.83% $850,000 Fannie Mae, 6.00%, 4/1/2016 $846,547 $848,672 5,550,000 Fannie Mae, 6.00%, 5/1/2016 5,550,000 5,530,919 20,605,000 Fannie Mae, 6.50%, 4/1/2030 20,384,582 20,521,302 10,085,000 Freddie Mac, 6.00%, 4/1/2031 9,773,126 9,842,335 1,116,434 Freddie Mac, Gold, 6.50%, 11/1/2025 1,056,909 1,120,344 11,590,000 GNMA Mortgage, 7.50%, 4/1/2031 11,867,073 11,879,750 ------------ ------------ 49,478,237 49,743,322 ------------ ------------ OTHER AGENCY ISSUES--7.46% 2,885,000 Fannie Mae, 5.75%, 2/15/2008 2,681,784 2,925,592 2,080,000 Fannie Mae, Benchmark Note, 7.125%, 1/15/2030 2,156,127 2,309,025 270,000 Fannie Mae, Benchmark Bond, 7.250%, 5/15/2030 279,320 306,068 5,030,000 Freddie Mac, 5.25%, 1/15/2006 5,007,111 5,032,897 1,075,000 Freddie Mac, 6.625%, 9/15/2009 1,139,152 1,139,439 2,800,000 Freddie Mac, 6.875%, 9/15/2010 3,004,221 3,025,019 192,719 Government Trust Certificate, Israel Trust, Series 2E, 9.40%, 5/15/2002 196,191 193,498 ------------ ------------ 14,463,906 14,931,538 ------------ ------------ Total U.S. Government Agencies 63,942,143 64,674,860 ------------ ------------ Par Value U.S. GOVERNMENT OBLIGATIONS-14.04% Cost Market Value $245,000 U.S. Treasury Bond, 8.75%, 5/15/2017 $315,439 $328,700 205,000 U.S. Treasury Bond, 9.00%, 11/15/2018 269,513 283,765 2,180,000 U.S. Treasury Bond, 8.125%, 8/15/2019 2,828,801 2,813,029 7,315,000 U.S. Treasury Bond, 8.125%, 8/15/2021 8,987,729 9,535,446 410,000 U.S. Treasury Bond, 6.125%, 11/15/2027 441,812 437,931 2,540,000 U.S. Treasury Bond, 6.125%, 8/15/2029 2,781,984 2,728,123 590,000 U.S. Treasury Note, 5.50%, 5/31/2003 599,406 604,740 1,355,000 U.S. Treasury Note, 5.25%, 8/15/2003 1,366,881 1,384,145 5,208,000 U.S. Treasury Note, 5.25%, 5/15/2004 5,173,961 5,330,367 90,000 U.S. Treasury Note, 5.75%, 11/15/2005 92,387 94,373 3,465,000 U.S. Treasury Note, 7.00%, 7/15/2006 3,657,886 3,835,741 695,000 U.S. Treasury Note, 6.50%, 10/15/2006 745,878 754,753 ------------ ------------ Total U.S. Government Obligations 27,261,677 28,131,113 ------------ ------------ ASSET-BACKED FLOATERS-18.21% 1,425,000 AESOP Funding II LLC, 2001-1A, 5.207%, 4/20/2005+* 1,425,000 1,431,512 365,000 Americredit Automobile Receivables Trust, 2000-B A3, 5.432%, 9/5/2004* 365,111 365,367 220,000 Bishops Gate Residential Mortgage Trust 2001-1A A2, 1.00%, 3/20/2004+* 220,000 219,325
24
Par Value ASSET-BACKED FLOATERS-18.21% (cont) Cost Market Value $2,500,000 CS First Boston Mortgage Securities Corp., 2001-FL1A A, 5.531%, 10/5/2003+* $2,499,634 $2,507,975 1,135,000 Capital Auto Receivables Asset Trust, 2001-1 A5, 5.243%, 7/15/2006* 1,135,000 1,134,473 2,240,000 Carco Auto Loan Master Trust, 2000-B A1, 5.243%, 10/17/2005* 2,239,791 2,239,421 1,945,000 Chase Loan Obligations USA Trust, 2000-1 A, 5.433%, 2/15/2006+* 1,946,770 1,953,266 2,570,000 Circuit City Credit Card Master Trust, 2000-1 A, 5.393%, 2/15/2006* 2,571,945 2,570,024 1,320,000 Comm 2000-FL2A A, 5.383%, 1/15/2003+* 1,320,000 1,319,353 2,200,000 Comm 2000-FL3A A, 5.788%, 11/15/2003+* 2,200,000 2,207,634 1,610,000 Conseco Finance Securitizations Corp. 2001-1 A1A, 1.00%, 3/25/2006* 1,609,498 1,609,131 755,000 Discover Card Master Trust I, 1999-5 A, 5.343%, 12/18/2006* 756,813 757,091 200,000 Distribution Financial Services Master Trust, 2000-3 A, 5.303%, 7/15/2004* 200,000 200,192 1,750,000 First USA Credit Card Master Trust, 1999-1 A, 5.206%, 10/19/2006* 1,753,331 1,752,389 600,000 First USA Credit Card Master Trust, 1999-3 A, 5.206%, 1/19/2007* 601,029 600,806 650,000 Ford Credit Auto Owner Trust, 2001-A A5, 5.283%, 4/15/2005* 650,000 650,423 Par Value ASSET-BACKED FLOATERS-18.21% (cont) Cost Market Value $500,000 Gracechurch Card Funding Plc., 1 A, 5.343%, 11/15/2004* $500,743 $502,440 1,500,000 MBNA Master Credit Card Trust, 2000-B A, 5.278%, 7/15/2005* 1,501,156 1,501,039 2,893,645 MLMI, 97-SD1 A, 5.562%, 4/1/2004+* 2,894,284 2,898,709 2,100,000 Madison Residential Securities Funding, 2000-1, 5.21%, 9/17/2003+* 2,099,814 2,091,369 694,546 Mellon Residential Funding Corp., 2000-TBC2 A1, 5.403%, 6/15/2030* 694,546 693,051 1,185,000 NPF XII, Inc., 2001-1A A, 5.55%, 3/1/2004+* 1,185,000 1,185,261 197,980 Newcourt Equipment Trust Securities, 1999-1 A3, 5.307%, 7/20/2003* 198,287 198,186 3,580,000 Toyota Auto Receivables Owner Trust, 2001-A A4, 5.273%, 9/17/2007* 3,580,000 3,581,041 2,300,000 World Omni Master Owner Trust, 2001-1 A, 5.293%, 2/15/2006* 2,300,000 2,306,601 ------------ ------------ Total Asset-Backed Floaters 36,447,752 36,476,079 ------------ ------------ COMMERCIAL PAPER-15.94% 3,800,000 American Express, 5.05%, 4/16/2001* 3,792,004 3,792,004 3,800,000 American General Finance Group, 5.09%, 4/16/2001* 3,791,941 3,791,941 3,800,000 Citicorp, 5.08%, 4/16/2001* 3,791,957 3,791,957 3,800,000 Ford Motor Credit, 5.08%, 4/16/2001* 3,791,957 3,791,957
25
Par Value COMMERCIAL PAPER-15.94% (cont) Cost Market Value $3,800,000 GE Capital Corporation, 5.08%, 4/16/2001* $3,791,956 $3,791,956 3,700,000 General Motors Corp., 5.00%, 4/16/2001* 3,692,292 3,692,292 3,800,000 Household Finance, 5.02%, 4/16/2001* 3,792,052 3,792,052 3,700,000 John Deer Cap., 5.06%, 4/16/2001* 3,692,199 3,692,199 1,800,000 Prudential Funding, 4.82%, 4/19/2001* 1,795,662 1,795,662 ------------ ------------ Total Commercial Paper 31,932,020 31,932,020 ------------ ------------ Principal REPURCHASE AGREEMENT-0.62% Cost Market Value Amount $1,248,353 State Street Bank & Trust Company Repurchase Agreement, 3.00%, dated 3/30/2001, repurchase price $1,248,665 maturing 4/2/2001 (collateralized by U.S. Treasury Note, 5.50%, 5/31/2003) $1,248,353 $1,248,353 ------------ ------------ Total Repurchase Agreement 1,248,353 1,248,353 ------------ ------------ Total Investments-123.82% $244,643,310 248,023,909 ============ Liabilities less Other Assets-(23.82)% (47,720,485) ------------ NET ASSETS-100.00% $200,303,424 ============
+ 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 March 31, 2001. The accompanying notes are an integral part of the financial statements. 26 [GRAPHIC OF LEAVES] 27 Statement of Assets & Liabilities MARCH 31, 2001 (UNAUDITED)
ARIEL APPRECIATION PREMIER FUND FUND BOND FUND ------------ ------------ ------------ ASSETS: Investments in securities, at value (cost $277,342,520, $308,315,015 and $244,643,310, respectively) $323,203,771 $389,517,832 $248,023,909 Cash -- -- 750,804 Dividends and interest receivable 366,646 496,968 1,400,842 Receivable for securities sold -- 873,550 20,357,880 Receivable for fund shares issued 117,750 412,971 35 Prepaid and other assets 37,853 26,415 1,831 ------------ ------------ ------------ Total assets 323,726,020 391,327,736 270,535,301 ------------ ------------ ------------ LIABILITIES: Payable for securities purchased 1,357,955 -- 69,233,000 Accrued management fee 183,995 248,619 75,358 Accrued distribution fee 61,600 72,537 850 Payable for shares redeemed 24,345 334,904 -- Shareholder distribution payable 5,007 107 922,394 Other liabilities 182,320 215,721 275 ------------ ------------ ------------ Total liabilities 1,815,222 871,888 70,231,877 ------------ ------------ ------------ NET ASSETS $321,910,798 $390,455,848 $200,303,424 ============ ============ ============ NET ASSETS CONSIST OF: Paid-in-capital $266,821,069 $306,364,157 $199,661,583 Undistributed net investment income 623,489 572,389 13,116 Accumulated net realized gain (loss) on investment transactions 8,604,989 2,316,485 (2,751,874) Net unrealized appreciation on investments 45,861,251 81,202,817 3,380,599 ------------ ------------ ------------ Total net assets $321,910,798 $390,455,848 $200,303,424 ============ ============ ============ Shares outstanding (no par value) 9,402,645 11,787,206 Institutional Class 19,108,582 Investor Class 504,905 Net asset value, offering and redemption price per share $34.24 $33.13 Institutional Class $10.21 Investor Class $10.21
Statement of Operations SIX MONTHS ENDED MARCH 31, 2001 (UNAUDITED)
ARIEL APPRECIATION PREMIER FUND FUND BOND FUND ------------ ------------ ------------ INVESTMENT INCOME: Dividends $2,332,294 $2,743,859 $ -- Interest 435,596 329,684 5,777,657 Miscellaneous income -- -- 25,238 ------------ ------------ ------------ Total investment income 2,767,890 3,073,543 5,802,895 ------------ ------------ ------------ EXPENSES: Management fees 912,660 1,281,664 411,405 Distribution fees 351,023 427,221 4,228 Transfer agent fees and expenses 246,231 310,925 -- Printing and postage expense 52,554 48,244 -- Professional fees 24,183 19,704 -- Trustees' fees and expenses 22,593 22,595 -- Custody fees and expenses 18,699 13,393 -- Federal and state registration fees 17,168 16,043 -- Miscellaneous expenses 17,486 31,252 -- ------------ ------------ ------------ Net expenses 1,662,597 2,171,041 415,633 ------------ ------------ ------------ NET INVESTMENT INCOME 1,105,293 902,502 5,387,262 ------------ ------------ ------------ REALIZED AND UNREALIZED GAIN: Net realized gain on investments 17,982,417 10,427,510 2,499,005 Change in net unrealized appreciation/ depreciation on investments 16,400,845 23,355,880 3,633,671 ------------ ------------ ------------ Net gain on investments 34,383,262 33,783,390 6,132,676 ------------ ------------ ------------ NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $35,488,555 $34,685,892 $11,519,938 ============ ============ ============
The accompanying notes are an integral part of the financial statements. 28 Statement of Changes in Net Assets
ARIEL FUND APPRECIATION FUND PREMIER BOND FUND ---------- ----------------- ----------------- Six Months Six Months Six Months Ended Ended Ended March 31, Year Ended March 31, Year Ended March 31, Year Ended 2001 September 30, 2001 September 30, 2001 September 30, (Unaudited) 2000 (Unaudited) 2000 (Unaudited) 2000 ------------ ------------ ------------ ------------ ------------ ------------ OPERATIONS: Net investment income $1,105,293 $1,344,284 $902,502 $759,034 $5,387,262 $10,074,078 Net realized gain (loss) on investments 17,982,417 30,459,920 10,427,510 33,436,106 2,499,005 (2,407,217) Change in net unrealized appreciation/depreciation of investments 16,400,845 (6,682,142) 23,355,880 (8,929,803) 3,633,671 1,549,232 ------------ ------------ ------------ ------------ ------------ ------------ Net increase in net assets from operations 35,488,555 25,122,062 34,685,892 25,265,337 11,519,938 9,216,093 ------------ ------------ ------------ ------------ ------------ ------------ DISTRIBUTION TO SHAREHOLDERS: Net investment income (1,704,347) (421,983) (1,085,418) (414,761) (5,387,012) (10,074,078) Capital gains (39,834,974) (33,743,511) (36,764,087) (31,018,586) -- -- ------------ ------------ ------------ ------------ ------------ ------------ Total distributions (41,539,321) (34,165,494) (37,849,505) (31,433,347) (5,387,012) (10,074,078) ------------ ------------ ------------ ------------ ------------ ------------ SHARE TRANSACTIONS: Shares sold 166,348,101 179,564,810 127,077,774 113,729,593 27,978,273 29,150,166 Shares issued to holders in reinvestment of dividends 39,324,949 32,145,378 34,099,178 29,263,084 5,335,351 9,922,231 Shares redeemed (105,272,382) (190,251,170) (74,674,140) (182,549,275) (9,701,603) (31,775,375) ------------ ------------ ------------ ------------ ------------ ------------ Net increase (decrease) 100,400,668 21,459,018 86,502,812 (39,556,598) 23,612,021 7,297,022 ------------ ------------ ------------ ------------ ------------ ------------ TOTAL INCREASE (DECREASE) IN NET ASSETS 94,349,902 12,415,586 83,339,199 (45,724,608) 29,744,947 6,439,037 NET ASSETS: Beginning of year 227,560,896 215,145,310 307,116,649 352,841,257 170,558,477 164,119,440 ------------ ------------ ------------ ------------ ------------ ------------ End of year (includes undistributed net investment income of $623,489, $1,344,465, $572,389, $759,335, $(18,668) and $4,432, respectively) $321,910,798 $227,560,896 $390,455,848 $307,116,649 $200,303,424 $170,558,477 ============ ============ ============ ============ ============ ============
The accompanying notes are an integral part of the financial statements. 29 Financial Highlights
ARIEL FUND ------------ Six Months Ended March 31, 2001 Year Ended September 30, (Unaudited) 2000 1999(a) 1998 1997 1996 ----------- ---- ---- ---- ---- ---- Net asset value, beginning of year $35.66 $37.99 $36.49 $41.49 $30.58 $30.78 Income from investment operations: Net investment income 0.10 0.21 0.10 0.13 0.07 0.18 Net realized and unrealized gains (losses) on investments 4.48 3.58 5.20 (1.41) 12.62 4.24 -------- -------- -------- -------- -------- -------- Total from investment operations 4.58 3.79 5.30 (1.28) 12.69 4.42 Distributions to shareholders: Dividends from net investment income (0.25) (0.08) (0.08) (0.14) -- (0.44) Distributions from capital gains (5.75) (6.04) (3.72) (3.58) (1.78) (4.18) -------- -------- -------- -------- -------- -------- Total distributions (6.00) (6.12) (3.80) (3.72) (1.78) (4.62) -------- -------- -------- -------- -------- -------- Net asset value, end of period $34.24 $35.66 $37.99 $36.49 $41.49 $30.58 ======== ======== ======== ======== ======== ======== Total return 14.44%(b) 13.63% 14.18% (3.83)% 43.25% 16.28% Supplemental data and ratios: Net assets, end of year, in thousands $321,911 $227,561 $215,145 $162,279 $164,065 $109,770 Ratio of expenses to average net assets 1.18%(c) 1.24% 1.25% 1.21% 1.25% 1.31% Ratio of net investment income to average net assets 0.79%(c) 0.65% 0.27% 0.30% 0.23% 0.57% Portfolio turnover rate 18% 48% 38% 22% 20% 17%
APPRECIATION FUND ------------------- Six Months Ended March 31, 2001 Year Ended September 30, (Unaudited) 2000 1999 1998 1997 1996 ----------- ---- ---- ---- ---- ---- Net asset value, beginning of year $33.68 $33.84 $31.80 $33.70 $24.99 $22.76 Income from investment operations: Net investment income 0.08 0.08 0.04 0.09 0.02 0.13 Net realized and unrealized gains (losses) on investments 3.44 2.95 5.50 1.14 10.13 4.07 -------- -------- -------- -------- -------- -------- Total from investment operations 3.52 3.03 5.54 1.23 10.15 4.20 Distributions to shareholders: Dividends from net investment income (0.12) (0.04) (0.04) (0.07) (0.07) (0.20) Distributions from capital gains (3.95) (3.15) (3.46) (3.06) (1.37) (1.77) -------- -------- -------- -------- -------- -------- Total distributions (4.07) (3.19) (3.50) (3.13) (1.44) (1.97) -------- -------- -------- -------- -------- -------- Net asset value, end of period $33.13 $33.68 $33.84 $31.80 $33.70 $24.99 ======== ======== ======== ======== ======== ======== Total return 11.28%(b) 10.35% 16.99% 3.40% 42.33% 19.60% Supplemental data and ratios: Net assets, end of year, in thousands $390,456 $307,117 $352,841 $213,812 $186,478 $135,627 Ratio of expenses to average net assets 1.27%(c) 1.31% 1.26% 1.26% 1.33% 1.36%(d) Ratio of net investment income to average net assets 0.53%(c) 0.25% 0.13% 0.25% 0.07% 0.50%(d) Portfolio turnover rate 16% 31% 24% 20% 19% 26%
(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 1.40% 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. 30 Financial Highlights (cont)
PREMIER BOND FUND ----------------- INSTITUTIONAL CLASS Six Months Ended March 31,2001 Year Ended September 30, (Unaudited) 2000 1999 1998 1997 1996 ----------- ---- ---- ---- ---- ---- Net asset value, beginning of year $9.87 $9.91 $10.63 $10.30 $9.95 $10.00 Income from investment operations: Net investment income 0.30 0.60 0.57 0.61 0.52 0.43 Net realized and unrealized gains (losses) on investments 0.34 (0.04) (0.60) 0.40 0.37 (0.04) -------- -------- -------- -------- -------- -------- Total from investment operations 0.64 0.56 (0.03) 1.01 0.89 0.39 Distributions to shareholders: Dividends from net investment income (0.30) (0.60) (0.57) (0.61) (0.52) (0.43) Distributions from capital gains -- -- (0.12) (0.07) (0.02) (0.01) -------- -------- -------- -------- -------- -------- Total distributions (0.30) (0.60) (0.69) (0.68) (0.54) (0.44) -------- -------- -------- -------- -------- -------- Net asset value, end of period $10.21 $9.87 $9.91 $10.63 $10.30 $9.95 ======== ======== ======== ======== ======== ======== Total return 6.54%(b) 5.85% (0.25)% 10.20% 9.26% 3.96% Supplemental data and ratios: Net assets, end of year, in thousands $195,148 $167,717 $161,495 $149,977 $113,998 $15,367 Ratio of expenses to average net assets 0.45%(c) 0.45% 0.45% 0.45% 0.45% 0.48% Ratio of net investment income to average net assets 5.94%(c) 6.10% 5.57% 5.86% 6.05% 5.85% Portfolio turnover rate 214% 492% 396% 60% 218% 423%
PREMIER BOND FUND ----------------- INVESTOR CLASS Six Months Ended February 1, 1997(a) March 31, 2001 Year Ended September 30, to (Unaudited) 2000 1999 1998 September 30, 1997 ----------- ---- ---- ---- ------------------ Net asset value, beginning of year $9.87 $9.91 $10.63 $10.29 $10.10 Income from investment operations: Net investment income 0.28 0.56 0.53 0.57 0.37 Net realized and unrealized gains (losses) on investments 0.34 (0.04) (0.60) 0.41 0.19 -------- -------- -------- -------- -------- Total from investment operations 0.62 0.52 (0.07) 0.98 0.56 Distributions to shareholders: Dividends from net investment income (0.28) (0.56) (0.53) (0.57) (0.37) Distributions from capital gains -- -- (0.12) (0.07) -- -------- -------- -------- -------- -------- Total distributions (0.28) (0.56) (0.65) (0.64) (0.37) -------- -------- -------- -------- -------- Net asset value, end of period $10.21 $9.87 $9.91 $10.63 $10.29 ======== ======== ======== ======== ======== Total return 6.33%(b) 5.43% (0.65)% 9.34% 5.73%(b) Supplemental data and ratios: Net assets, end of year, in thousands $5,155 $2,841 $2,624 $1,779 $401 Ratio of expenses to average net assets 0.86%(c) 0.85% 0.85% 0.85% 0.85%(c) Ratio of net investment income to average net assets 5.55%(c) 5.70% 5.17% 5.46% 5.60%(c) Portfolio turnover rate 214% 492% 396% 60% 218%
(a) Commencement of operations. (b) Total return is not annualized. (c) Annualized. The accompanying notes are an integral part of the financial statements. 31 Notes to the Financial Statements MARCH 31, 2001 (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. 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 March 31, 2001 the Fund had $49,743,322 in purchase commitments outstanding (25% 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. 32 Notes to the Financial Statements (cont) MARCH 31, 2001 (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:
Six Months Ended March 31, 2001 Ariel Fund Appreciation Fund Premier Bond Fund ---------- ----------------- ----------------- Institutional Investor ------------- -------- Shares sold 4,879,239 3,849,683 2,456,635 307,261 Shares issued to holders in reinvestment of dividends 1,257,593 1,099,272 524,538 7,452 Shares redeemed (3,116,484) (2,281,532) (864,476) (97,708) ---------- ---------- ---------- ---------- Net increase 3,020,348 2,667,423 2,116,697 217,005 ========== ========== =========== ========= Year Ended September 30, 2000 Ariel Fund Appreciation Fund Premier Bond Fund ---------- ----------------- ----------------- Institutional Investor ------------- -------- 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 ========== ========== =========== =========
4. INVESTMENT TRANSACTIONS Purchases and sales of securities, excluding short-term investments and U.S. government securities, for the six months ended March 31, 2001 are summarized below:
Ariel Fund Appreciation Fund Premier Bond Fund ---------- ----------------- ----------------- Purchases $91,619,033 $94,237,333 $110,688,709 Sales 46,229,192 53,413,186 77,073,067
Purchases and sales of U.S. government securities for the Premier Bond Fund for six months ended March 31, 2001 were $340,838,293 and $322,613,157, respectively. At March 31, 2001 the cost of securities on a tax basis was $277,655,993, $308,986,110 and $244,712,881 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:
Ariel Fund Appreciation Fund Premier Bond Fund ---------- ----------------- ----------------- Unrealized appreciation $64,999,135 $92,375,352 $3,669,860 Unrealized (depreciation) (19,451,357) (11,843,630) (358,832) ----------- ----------- ---------- Net appreciation (depreciation) $45,547,778 $80,531,722 $3,311,028 =========== =========== ===========
33 Notes to the Financial Statements (cont) MARCH 31, 2001 (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, 2001, the Fund paid the Advisor $318,009 and $93,396 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. 34 [GRAPHIC OF LEAVES] 35 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 The Field Museum and Depaul University. WILLIAM C. DIETRICH, C.P.A. Bill is an independent financial consultant. 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 nonprofit institutions. JOHN G. GUFFEY, JR. 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 nonprofit 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 president and director 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. ERIC T. MCKISSACK, C.F.A. In the capacity of vice chairman and co-chief investment officer of Ariel Capital Management, Inc., Eric manages Ariel's mid-cap institutional portfolios as well as Ariel Appreciation Fund. 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 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.; Exelon Corporation; and GATX Corporation. His civic affiliations include his role as director of the Chicago Urban League, trustee of the Chicago Symphony Orchestra and trustee of the John S. and James L. Knight Foundation. 36 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. [ARIEL MUTUTAL FUNDS LOGO] Ariel Investment Trust P.O. Box 219121 Kansas City, Missouri 64121-9121 800.292.7435 312.726.0140 www.arielmutualfunds.com [RECYCLED SYMBOL] Printed on recycled paper -----END PRIVACY-ENHANCED MESSAGE-----