-----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, JvyeofF7W3NWhtMybK87quJAIMO6g3CwhuwpfoXjjg2reb+eBgqKwJGfFPrprEcD kygi/SJ6TgEqXJPYxhKf0g== 0000950131-97-003721.txt : 19970602 0000950131-97-003721.hdr.sgml : 19970602 ACCESSION NUMBER: 0000950131-97-003721 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970530 SROS: NONE 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: 1940 Act SEC FILE NUMBER: 811-04786 FILM NUMBER: 97617059 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 ARIEL GROWTH FUND -- SEMI-ANNUAL REPORT Bulk Mail U.S. Postage Paid Permit No. 6784 Chicago, IL Ariel Investment Funds Ariel Investment Trust 307 North Michigan Avenue Suite 500 Chicago, Illinois 60601 ARIEL MUTUAL FUNDS Semi-Annual Report - March 31, 1997 Ariel Appreciation Fund. Ariel Growth Fund. Ariel Premier Bond Fund One day a Hare was making fun of a Tortoise for being so slow upon his feet. "Wait a bit," said the tortoise, "I'll run a race with you, and I'll wager that I'll win." The 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... 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. [LOGO APPEARS HERE] Slow & steady wins the race. For a free investment kit on any of the Ariel Mutual Funds, including a prospectus containing more information, please call 1-800-29-ARIEL. Please read the prospectus carefully before investing or sending money. Ariel Investment Trust 307 North Michigan Avenue Suite 500 Chicago, Illinois 60601 800.292.7435 312.726.0140 Fax 312.726.7473 The Patient Investor 2 Company Updates 6 Ariel Equity Funds 10 Schedule of Investments Ariel Growth Fund 12 Ariel Appreciation Fund 15 Equity Statistical Summary 18 Ariel Premier Bond 20 Assets & Liabilities 26 Statement of Operations 26 Changes in Net Assets 27 Financial Highlights 28 Notes to Financial Statements 29 Board of Trustees 32
Slow and steady wins the race.-Aesop THE PATIENT INVEST [LOGO APPEARS HERES]R (R) Dear Fellow Shareholder: For the very volatile first quarter ending March 31, 1997, the Ariel Growth Fund rose 1.1% and the Ariel Appreciation Fund experienced a slight loss of -0.35%. While we significantly outperformed the - 3.4% return of the Russell 2500 Index of small company stocks, our results fell short of the +2.7% gain made by the large company stocks which comprise the S&P 500 Index. After more than six years of bull market strength, we were not surprised by the disparate results in the large cap sectors, whose stock prices often hold up better in times of difficulty, versus those in the small and medium cap areas. With this said, we are pleased to report that like many value managers who target ignored and misunderstood securities, our portfolios withstood the down-drafts that come from investor flight. Additionally, our highly predictable, franchise businesses came through with consistent earnings which attracted some investor interest. As such, our flagship Ariel Growth Fund was recently awarded an overall rating of four stars (out of five) by Morningstar, Inc. for its risk adjusted returns. The Ariel Appreciation Fund earned three stars for its returns. (The top 10% of funds in each investment class receive 5 stars; the next 22.5% receive 4 stars; the middle 35% receive 3 stars and so on.) Both funds have received The Wall Street Journal's highest "A" rating for their one year results (as of quarter end) which places the Ariel Growth Fund in the top 20% of the small company category and the Ariel Appreciation Fund in the top 20% of the mid-cap category. Additionally, in the Journal's April 3, 1997 issue, the Appreciation Fund was ranked 9th out of 178 mid-cap funds for the 12 month period ending March 27, 1997. Although many small and medium-sized companies have experienced some noteworthy setbacks, we are not convinced 2 the dust has totally settled. Instead of knee-jerk reactions, we continue to follow our disciplined strategy. To this point, you will notice that we did not add any new holdings to either portfolio during the quarter. However, with more and more bargains falling within our radar, we are judiciously exploring opportunities. With existing holdings, we have continued the process of lightening up on some of the better performing securities of the last 12 to 18 months--T. Rowe Price (OTC: TROW) and Herman Miller (OTC: MLHR)--and re- deploying those dollars to promising holdings whose prices continue to be depressed--Bob Evans (OTC: BOBE) and Safety Kleen (NYSE: SK). Less is More The German architect, Ludwig Mies van der Rohe, once characterized his unique style of design with the simple, yet poignant statement, "Less is more." Although he was referring to office and home design, we would argue the same can be said for building a stock portfolio. Yet, our somewhat simple view appears to run counter to practices of a vast majority of today's portfolio managers who seem to believe that when constructing a stock portfolio, there's safety in numbers. With a portfolio potpourri, managers attempt to dampen the potentially negative effects of a lackluster performer or a languishing sector and thereby insulate themselves from being out of sync with the market. Herein lies one of the biggest oxymorons of modern investing. While there has been an indisputable movement towards mitigating investment risk through the ownership of more and more securities, with these growing portfolios, professional fund managers are left to know less and less about their actual holdings. In our view, this lack of in-depth, company specific knowledge actually makes for riskier investing. So too, believed Philip Fisher, an often quoted investment sage who lived to tell tales of his experiences during the 1929 stock market crash. In his book, Common Stocks and Uncommon Profits, he writes, "investors have been misled, believing that putting their eggs in several baskets reduces risk. [Yet], the 3 disadvantage of purchasing too many stocks is that it becomes impossible to watch all of the eggs in all of the different baskets." The famed investor Warren Buffett offers his own critique of this popular phenomenon, calling diversification "a protection against ignorance." With his usual wit, he goes on to add that owning a little bit of everything is "a Noah's Ark way of investing [and] you end up with a zoo that way." Thus, if Buffett is correct in his assertion that "an investor's financial success is in direct proportion to the degree to which he understands any investment," then one has to wonder about the long-term prospects for a fund manager whose portfolio is comprised of hundreds of stocks. In the execution of his own investment strategy, Buffett emphatically zeros in on those few companies in which he has the greatest knowledge and confidence. He has often questioned "why an investor . . . elects to put money into a business that is his 20th favorite rather than simply adding money to his top choices--the businesses he understands best and that present the least risk, along with the greatest profit potential." With this perspective, there have been times when Buffett has been known to place over 90% of his multi-billion dollar portfolio in the stock of just three companies. On many occasions, we have discussed our investigative research effort and how, like Buffett, we go to great lengths to learn everything possible about any candidate for our portfolios. Not only must we develop an intricate network when first considering an investment, in order to stay on top of a company's prospects, we must perpetuate a useful flow of information for the duration of our ownership of the stock. This level of detail goes well beyond pure financial analysis. As such, we make no bones about the fact that managing a portfolio can be a daunting task--even in the case of our relatively small 30-35 stock portfolio. This leads us to believe that replicating this process over and over again for dozens and dozens of securities would be a virtual impossibility. We 4 therefore argue that a portfolio concentrated among a relatively fewer number of well-researched stocks actually offers investors greater prospects for above average long-term investment results by affording them the opportunity to focus their hard-earned investment dollars on truly outstanding businesses. In keeping with this sentiment, it is worth noting that in response to a recent Congressional act allowing for increased concentration of mutual fund portfolios, a handful of new funds have been launched as "best of" portfolios. These investments are offshoots of existing funds with a focus on the flagship fund's largest or most promising holdings. Although one would think that every holding in a portfolio would reflect a manager's highest level of conviction, the trend to diversify has diminished the likelihood of this occurrence. While we have lingering concerns over the composition of the original portfolios, we strongly view this "best of" strategy as a move in the right direction for realizing long-term investment success. As someone once said, "Walking a path less traveled can make for an interesting journey." Whereas the benefits derived from just one strong performer can be substantial when a holding is large, we'll be the first to admit that the negative impact of a poor performer can offer its own special pain. Even with the most in-depth research, in stock market investing no one is right all of the time. Yet, over the long-term, we are convinced that the likelihood of recurring mistakes and portfolio surprises are ultimately diminished by the exhaustive research performed and the sheer level of conviction with which each and every investment is made. As always, we appreciate the opportunity to serve you and welcome any questions or comments that you might have. Sincerely, /s/ John W. Rogers, Jr. John W. Rogers, Jr. Portfolio Manager Ariel Growth Fund /s/ Eric T. McKissack Eric T. McKissack, CFA Portfolio Manager Ariel Appreciation Fund 5 COMPANY Omnicom Group (NYSE:OMC): Omnicom finished 1996 with another strong earnings report, producing its nineteenth quarterly advance (versus the prior year). With earnings growth in excess of 15% over the last 3 years, both the company and the stock have been exceptional performers. Omnicom's share prices have risen approximately 230% since our initial purchase in 1991. This excellent performance is due in large part to the company's reputation for creative advertising and its business savvy. Omnicom announced a long-anticipated change in the management ranks in December. The company named John Wren as CEO. Wren, 44, also retains the title of president, while outgoing CEO, Bruce Crawford, remains chairman. Wren has been with Omnicom since its formation in 1986; before that he was with Omnicom co- founding agency, Needham Harper. Wren has headed Omnicom's fastest growing division, Diversified Agency Services, since 1990. His appointment should reinforce Omnicom's mission as a diversified communications company. In early April 1997, the company announced that it will acquire Fleishman- Hilliard, creating the largest global public relations group. According to the industry publication, Advertising Age, Fleischman-Hilliard is currently the world's sixth-ranked PR agency with $107 million in estimated fee income. Omnicom already owns fourth-ranked Porter Novelli, and seven-ranked Ketchum Public Relations. With the acquisition of Fleishman-Hilliard, Omnicom's total fee income from public relations activities is expected to exceed $300 million annually. Of note, Fleischman-Hilliard's largest client is Anheuser-Busch (NYSE:BUD), which is also a major client of Omnicom's DDB Needham. Omnicom continues to be a core portfolio holding in our portfolios. With its strong fundamental outlook (including international markets) and its successful track record with acquisitions, we believe the stock still provides a good opportunity for long-term investors. 6 UPDATES AMERICAN MEDIA, INC. (NYSE:ENQ) American Media's fortunes have improved significantly in recent periods, although Wall Street has not been paying much attention. In fiscal 1996 (which ended in March), the company was hit hard with the double whammy of increasing newsprint prices and very disappointing single- copy sales from its flagship publications, The National Enquirer and The Star. Since then, the company's outlook has brightened considerably. Sales trends and newsprint costs have both stabilized. Newsprint, especially, has improved with current prices about 25% below the fiscal 1996 peak. This has had a tremendously positive impact on the company finances and cash flow. We are also encouraged by the signs of progress in advertising activity. In the past, a number of the large consumer products companies had been reluctant to advertise in The Star, and particularly, in The National Enquirer. However, aided by its achievements in reporting on O.J. Simpson, and more recently, Ennis Cosby, American Media has been steadily gaining greater respectability with mainstream opinion makers. The editor of The National Enquirer, Steve Coz, was recently honored as one of Time Magazine's "25 Most Influential People in America for 1997". As a result, the company has attracted business from advertisers that include Hormel (NYSE:HRL), Glaxo Wellcome (NYSE:GLX), Campbell Soup (NYSE:CPB) and Kraft. Long term, American Media continues to explore ideas for new publications to enhance its current lineup. The company recently introduced a digest-sized weekly called Soap Opera News, and is looking at rolling out a new title later in the year centered on NASCAR auto racing. At current prices, we continue to believe American Media's stock represents an attractive opportunity for value investors. The stock has virtually no coverage on Wall Street and is trading at low multiples of earnings and cash flow. Despite its leverage, the company's debt coverage is satisfactory and improving. Long-term investors should continue to see progress in earnings and cash flow growth in 1997 and 1998. AMERICAN MEDIA, INC. 7 COMPANY SHOREWOOD PACKAGING CORPORATION (OTC:SHOR) We recently met with the management of Shorewood in New York for an update on business trends. Although the company will not officially report until mid-June, fiscal 1997 (which ended April 30) appears to have been a good year. We expect revenues to have risen 10% and earnings per share to have increased 18%. More importantly, the outlook for the next 2-3 years looks very exciting. The core business remains very strong, with Shorewood continuing to provide value-added packaging products to its extensive customer list of "blue chip" consumer companies. Building on this strong platform are two significant growth opportunities. A year ago, Shorewood opened a new plant in Oregon to support the rapidly growing home entertainment and computer software industries. The geography and capabilities of this plant lured many leading companies to Shorewood, including Microsoft and Broderbund. Production is increasing steadily, and with capacity utilization at only 50%, there is room to double production before any expansion is required. [LOGO] The second opportunity is in China where Shorewood is finalizing its plans to build a plant. As most of Shorewood's customers manufacture products in China and import the packaging (or use inferior local packaging), a Shorewood facility in that area would lead to faster turnaround and lower packaging costs for its customers. While new plants are not risk-free and often produce losses before turning profitable, this strategic initiative adds visibility to the Company's future growth and strengthens its relationship with its leading customers. Shorewood's shares sell at only 12 times 1998 estimated earnings per share of $1.50 which we believe is a very compelling valuation. As such, we rate the shares a strong buy. 8 UPDATES Hunt Manufacturing Co. (NYSE:HUN) Don Thompson was recruited in 1996 to become CEO of Hunt and given free reign to refocus and re-energize the company. Under previous management, profitability had been good but growth had slowed in recent years. Evidence of Hunt's ability to further leverage its many strengths was lacking. In a consistent, disciplined and thorough fashion, strategic changes are being implemented. Underperforming businesses and products that lack the potential to demonstrate growth and improve profitability are being divested. Two businesses have been sold and a third is for sale. Overhead has been pruned. Resources are being dedicated to three core businesses: Consumer Products (Boston brand pencil sharpeners and other office products, X-ACTO brand knives and blades, and Bienfang commercial and fine arts papers), Presentation Graphics (laminating and mounting equipment and supplies), and Substrates (Bienfang brand foam board). In each of these three businesses, Hunt has a market leadership position, competitive advantages including strong brands and broad distribution, and a clear strategy for growth. In essence, Don Thompson is building on the strengths and eliminating the weaker aspects of Hunt. 1997 is a transition year with operating earnings expected to rise 5%. Based on our recent meeting with the entire management team (five executives), we believe that this plan will result in average annual revenue growth exceeding 10% (excluding acquisitions and divestitures), and earnings per share growth of 15% or better. Selling at only 13 times our forward twelve month earnings estimate, we view the shares as attractive. The company has a good record of solid profitability, a new and energetic management team with a clear vision, and favorable prospects for much improved growth. The story is not well-known on Wall Street as the stock is followed by only one small brokerage house. Purchase of Hunt shares is recommended. 9 TEN LARGEST HOLDINGS as of March 31, 1997 1 INTERFACE, INC. World's leading manufacturer and marketer of carpet tiles 2 CENTRAL NEWSPAPERS, INC. Leading media company that publishes daily and weekly newspapers in metropolitan Phoenix and Indianapolis 3 ECOLAB, INC. Leading developer and marketer of premium cleaning and sanitizing products and services for the hospitality markets 4 MBIA, INC. Leading insurer of municipal funds 5 FIRST BRANDS CORP. Manufacturer and marketer of consumer products for home and automobile markets 6 ROUSE CO. Retail mail developer 7 HASBRO, INC. World's largest boy manufacturer 8 HARTE-HANKS COMMUNICATIONS Diversified communications company 9 NORTHERN TRUST CORP. Chicago-based bark holding company 10 SPECIALTY EQUIPMENT Manufacturer of commercial and institutional fund service equipment ARIEL EQUITY FUNDS ARIEL GROWTH FUND Inception November 6, 1986 AVERAGE ANNUAL TOTAL RETURN
- -------------------------------------------------------------------------------- 1 YEAR 3 YEAR 5 YEAR LIFE OF FUND - -------------------------------------------------------------------------------- ARIEL GROWTH FUND +21.4% +14.4% +10.9% +13.7% Total return does not reflect a maximum 4.75% sales load that was charged prior to July 15, 1994. ARIEL GROWTH FUND PORTFOLIO COMPOSITION [PIE CHART APPEARS HERE] Consumer Staples 9.4% Consumer Discretionary & Services 35.8% Financial Services 13.7% Producer Durables 10.4% Health Care 3.2% Materials and Processing 22.7% Utilities 1.5% Other 3.4% [PIE CHART APPEARS HERE] S&P 500 PORTFOLIO COMPOSITION Consumer Staples 12.0% Consumer Discretionary & Services 9.7% Financial Services 16.0% Producer Durables 4.6% Health Care 10.6% Materials & Processing 7.2% Technology 11.4% Integrated Oils 8.2% Other Energy 1.3% Autos & Transportation 3.8% Utilities 9.8% Other 5.3%
Ariel Growth Fund seeks long-term capital appreciation by investing in undervalued companies in consistent industries that show strong potential for growth. The Fund looks for issuers that provide quality products or services. To capture anticipated growth, the Fund generally holds investments for a relatively long period, usually three to five years. The Fund invests in companies with market capitalizations under $1.5 billion, with an emphasis on smaller capitalization (small cap) stocks. COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTED IN ARIEL GROWTH FUND AND COMPARABLE INDICES* $45,000--- $41,510 40,000--- $38,149 35,000--- $34,485 30,000--- __ Ariel Growth Fund 25,000--- __ S&P 500 20,000--- Russell 25000 15,000--- 10,000--- 5,000--- ======================================================================= 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 [PLOT POINTS APPEARS HERE]
*Statistics represents past performance which is not indicative of future results. Comparisons of change in value of $10,000 invested in Ariel Growth Fund and comparable indices*
Nov 86 Dec 86 Dec 87 Dec 88 Dec 89 Dec 90 Dec 91 Dec 92 Dec 93 Dec 94 Dec 95 Dec 96 Mar 97 Plot Points Ariel Growth Fund $10,000 $10,203 $11,367 $15,905 $19,900 $16,699 $22,163 $24,763 $26,924 $25,786 $30,562 $37,747 $38,149 Nov 86 Dec 86 Dec 87 Dec 88 Dec 89 Dec 90 Dec 91 Dec 92 Dec 93 Dec 94 Dec 95 Dec 96 Mar 97 S&P 500 $10,000 $ 9,745 $10,256 $11,960 $15,749 $15,260 $19,910 $21,427 $23,587 $23,897 $32,878 $40,426 $41,510 Nov 86 Dec 86 Dec 87 Dec 88 Dec 89 Dec 90 Dec 91 Dec 92 Dec 93 Dec 94 Dec 95 Dec 96 Mar 97 Russell 2500 $10,000 $ 9,737 $ 9,281 $11,391 $13,604 $11,580 $16,988 $19,738 $23,002 $22,759 $29,975 $35,680 $34,485
10 Ariel Appreciation Fund Inception December 1, 1989 Average Annual Total Return
- -------------------------------------------------------------------------------- 1 Year 3 Year 5 Year Life of Fund - -------------------------------------------------------------------------------- Ariel Appreciation Fund +19.7% +13.8% +10.9% +11.8%
Total return does not reflect a maximum 4.75% sales load that was charged prior to July 15, 1994. TEN LARGEST HOLDINGS as of March 31, 1997 1 ROUSE CO. Retail mall developer 2 HARTE-HANKS COMMUNICATIONS Diversified communications company 3 HASBRO, INC. World's largest toy manufacturer 4 NORTHERN TRUST CORP. Chicago-based bank holding company 5 MBIA, INC. Leading insurer of municipal bonds 6 FIRST BRANDS CORP. Manufacturer and marketer of consumer products for home and automobile markets 7 LONGS DRUG STORES, INC. A leading operator of retail drug stores in California and other western states 8 SPECIALTY EQUIPMENT Manufacturer of commercial and institutional food service equipment 9 LEGGETT & PLATT, INC. Specializes in manufacturing and marketing components for the home furnishing industry and diversified markets 10 WHITMAN CORPORATION Operates three businesses, including Pepsi General Bottlers, Midas International and Hussman Corporation Ariel Appreciation Fund also pursues long-term capital appreciation by investing in undervalued firms with growth potential, but does so at a lower level of risk than Ariel Growth Fund. Like Ariel Growth 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 invests in small and midsize companies with market capitalizations from $200 million to $5 billion, with an emphasis on medium capitalization (mid cap) stocks. ARIEL APPRECIATION FUND PORTFOLIO COMPOSITION [Pie chart appears here] Consumer Staples 9.1% Consumer Discretionary & Services 32.3% Financial Services 15.4% Producer Durables 12.0% Health Care 9.4% Materials and Processing 16.4% Utilities 2.0% Other 3.4% S&P 500 PORTFOLIO [Pie chart appears here] Consumer Staples 12.0% Consumer Discretionary & Services 9.7% Financial Services 16.0% Producer Durables 4.6% Health Care 10.6% Materials and Processing 7.2% Technology 11.4% Integrated Oils 8.2% Other Energy 1.3% Autos & Transportation 3.8% Utilities 9.8% Other 5.3% COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTED IN ARIEL APPRECIATION FUND AND COMPARABLE INDICES/*/
Dec 89 Dec 90 Dec 91 Dec 92 Dec 93 Dec 94 Dec 95 Ariel Appreciation Fund $10,000 $ 9,902 $13,184 $14,930 $16,115 $14,763 $18,330 Dec 96 Mar 97 Ariel Appreciation Fund $22,677 $22,599 Dec 89 Dec 90 Dec 91 Dec 92 Dec 93 Dec 94 Dec 95 S&P 500 $10,000 $ 9,922 $12,945 $13,932 $15,336 $15,539 $21,378 Dec 96 Mar 97 S&P 500 $26,286 $26,991 Dec 89 Dec 90 Dec 91 Dec 92 Dec 93 Dec 94 Dec 95 Russell 2500 $10,000 $ 8,554 $12,549 $14,580 $16,992 $16,812 $22,142 Dec 96 Mar 97 Russell 2500 $26,359 $25,473
SCHEDULE OF INVESTMENTS ARIEL GROWTH FUND SCHEDULE OF INVESTMENTS MARCH 31, 1997 (UNAUDITED)
Number COMMON STOCKS-97.79% Cost Market Value of Shares ADVERTISING--3.20% 77,700 Omnicom Group, Inc. $ 1,120,818 $ 3,875,288 ------------ ------------ BUSINESS SERVICES--5.40% 41,850 Angelica Corp. 1,072,341 768,994 151,900 Ecolab, Inc. 1,883,095 5,772,200 --------- --------- 2,955,436 6,541,194 --------- --------- CONSUMER PRODUCTS--7.77% 28,400 Clorox Co. 1,110,913 3,184,350 226,500 First Brands Corp. 3,150,016 5,549,250 40,620 Oil-Dri Corporation of America 690,540 665,152 --------- --------- 4,951,469 9,398,752 --------- --------- DIVERSIFIED OPERATIONS--3.34% 165,200 Whitman Corp. 3,920,211 4,047,400 --------- ---------
Number COMMON STOCKS-97.79% (cont) of Shares Cost Market Value ENTERTAINMENT & LEISURE--4.31% 190,500 Hasbro, Inc. $ 2,248,924 $ 5,214,937 ------------ ------------ ENVIRONMENTAL--3.28% 269,150 Safety Kleen Corp. 4,247,866 3,969,963 --------- --------- FINANCIAL SERVICES--12.73% 59,200 MBIA, Inc. 3,399,385 5,675,800 134,800 Northern Trust Corp. 2,388,939 5,055,000 251,225 Phoenix Duff & Phelps Corp. 1,724,035 1,915,591 74,500 T. Rowe Price Associates 288,948 2,765,812 ------- --------- 7,801,307 15,412,203 --------- ---------- FOOD & RESTAURANTS--5.09% 188,233 Bob Evans Farms, Inc. 2,225,968 2,588,204 145,600 McCormick & Co., Inc. 3,129,561 3,567,200 --------- --------- 5,355,529 6,155,404 --------- --------- FURNITURE & FURNISHINGS--11.37% 264,100 Interface, Inc., Class A 3,989,788 6,619,006 102,600 Leggett & Platt, Inc. 1,071,207 3,334,500 Number COMMON STOCKS-97.79% (cont) of Shares Cost Market Value FURNITURE & FURNISHINGS--11.37% (CONT) 55,795 Miller (Herman), Inc. $ 970,480 $ 3,808,009 ------------ ------------ 6,031,475 13,761,515 --------- ---------- HEALTH CARE--3.12% 126,800 Bergen Brunswig Corp., Class A 2,086,607 3,772,300 --------- --------- INDUSTRIAL--5.23% 73,400 Brady (WH) Co. 1,625,350 1,844,175 342,000 Specialty Equipment Cos., Inc.* 3,903,410 4,488,750 --------- --------- 5,528,760 6,332,925 --------- --------- INSURANCE--0.74% 27,200 Arthur J. Gallagher & Co. 908,305 894,200 ------- ------- MISCELLANEOUS--1.47% 60,200 Century Telephone Enterprises 1,949,535 1,775,900 --------- --------- NEWSPAPERS--12.19% 565,610 American Media, Inc., Class A* 5,404,784 3,322,959
13
Number COMMON STOCKS-97.79% (cont) of Shares Cost Market Value NEWSPAPERS--12.19% (CONT) 127,000 Central Newspapers, Inc., Class A $ 2,220,625 $ 6,365,875 173,700 Harte-Hanks Communications 2,197,215 5,059,012 --------- --------- 9,822,624 14,747,846 --------- ---------- OFFICE & BUSINESS EQUIPMENT--5.48% 134,620 General Binding Corp. 1,968,983 4,072,255 143,900 Hunt Mfg. Co. 1,916,478 2,554,225 --------- --------- 3,885,461 6,626,480 --------- --------- PACKAGING--3.43% 223,000 Shorewood Packaging Corp.* 2,269,493 4,153,375 --------- --------- PRINTING & PUBLISHING--1.55% 178,400 Thomas Nelson, Inc. 2,374,249 1,873,200 --------- --------- REAL ESTATE--4.46% 184,600 Rouse Co. 1,750,909 5,399,550 --------- --------- Number COMMON STOCKS-97.79% (cont) of Shares Cost Market Value RETAILING--3.63% 187,000 Longs Drug Stores, Inc. $ 3,312,291 $ 4,394,500 ------------ ------------ Total Common Stocks 72,521,269 118,346,932 ---------- ----------- Principal REPURCHASE AGREEMENTS 2.55% Amount $3,090,885 State Street Bank & Trust Company Repurchase Agreement, 4.75%, dated 3/31/97, repurchase price $3,091,293, maturing 4/1/97 (collateralized by U.S. Treasury Bond, 7.125%, 2/15/23) 3,090,885 3,090,885 --------- --------- Total Repurchase Agreements 3,090,885 3,090,885 --------- --------- Total Investments-100.34% $ 75,612,154 121,437,817 ============ Liabilities, less Cash and Other Assets-(0.34)% (417,869) --------- NET ASSETS-100.00% $121,019,948 ============
*Non-income producing The accompanying notes are an integral part of the financial statements. 14 ARIEL APPRECIATION FUND SCHEDULE OF INVESTMENTS MARCH 31, 1997 (UNAUDITED)
Number COMMON STOCKS-96.71% of Shares Cost Market Value ADVERTISING--2.76% 80,150 Omnicom Group, Inc. $ 1,565,730 $ 3,997,481 ------------ ------------ BUSINESS SERVICES--2.49% 64,800 Ecolab, Inc. 1,601,491 2,462,400 41,900 Equifax, Inc. 313,754 1,141,775 --------- --------- 1,915,245 3,604,175 --------- --------- CHEMICALS--2.56% 87,500 Morton International, Inc. 2,773,242 3,696,875 --------- --------- CONSUMER PRODUCTS--6.98% 40,450 Clorox Co. 3,018,993 4,535,456 227,000 First Brands Corp. 4,665,135 5,561,500 --------- --------- 7,684,128 10,096,956 --------- ---------- Number COMMON STOCKS-96.71% (cont) of Shares Cost Market Value DIVERSIFIED OPERATIONS--3.36% 198,600 Whitman Corp. $4,846,243 $ 4,865,700 ---------- ----------- ENTERTAINMENT & LEISURE--7.51% 116,700 Carnival Cruise Lines, Inc. 1,805,622 4,317,900 239,150 Hasbro, Inc. 3,446,876 6,546,731 --------- --------- 5,252,498 10,864,631 --------- ---------- ENVIRONMENTAL--3.16% 310,300 Safety Kleen Corp. 4,730,595 4,576,925 --------- ---------- FINANCIAL SERVICES--13.44% 62,000 MBIA, Inc. 4,053,446 5,944,250 66,370 MBNA Corp. 462,809 1,850,064 166,200 Northern Trust Corp. 3,482,478 6,232,500 185,750 Phoenix Duff & Phelps Corp. 1,488,974 1,416,344 107,800 T. Rowe Price Associates 1,563,253 4,002,075 --------- ---------- 11,050,960 19,445,233 ---------- ---------- FOOD & RESTAURANTS--3.16% 115,400 Bob Evans Farms, Inc. 2,258,483 1,586,750 122,055 McCormick & Co., Inc. 2,710,051 2,990,348 --------- --------- 4,968,534 4,577,098 --------- ---------
15
Number COMMON STOCKS-96.71% (cont) of Shares Cost Market Value FURNITURE & FURNISHINGS--6.71% 153,860 Leggett & Platt, Inc. $1,876,028 $5,000,450 68,900 Miller (Herman), Inc. 1,912,042 4,702,425 --------- --------- 3,788,070 9,702,875 --------- --------- Health Care--9.18% 155,787 Bergen Brunswig Corp., Class A 3,005,775 4,634,663 72,600 Fisher Scientific International 1,760,598 3,203,475 91,000 Sybron Corp.* 1,050,861 2,525,250 107,900 Vivra, Inc.* 2,134,594 2,913,300 --------- --------- 7,951,828 13,276,688 --------- ---------- INDUSTRIAL--7.18% 155,700 Brady (Wh) Co. 3,303,191 3,911,963 23,800 Solectron Corp.* 752,318 1,192,975 402,100 Specialty Equipment Cos., Inc.* 5,148,160 5,277,562 --------- --------- 9,203,669 10,382,500 --------- ---------- INSURANCE--0.78% 34,500 Arthur J. Gallagher & Co. 1,156,293 1,134,188 --------- --------- Number COMMON STOCKS-96.71% (cont) of Shares Cost Market Value MISCELLANEOUS--1.37% 67,300 Century Telephone Enterprises $2,179,512 $1,985,350 ---------- ---------- Newspapers--6.83% 27,200 Central Newspapers, Inc., Class A 1,348,057 1,363,400 245,075 Harte-Hanks Communications 2,972,825 7,137,809 34,000 Tribune Co. 863,186 1,377,000 --------- --------- 5,184,068 9,878,209 --------- --------- OFFICE & BUSINESS EQUIPMENT--4.00% 129,305 General Binding Corp. 2,131,766 3,911,476 31,900 Pitney-Bowes, Inc. 1,103,507 1,874,125 --------- --------- 3,235,273 5,785,601 --------- --------- PACKAGING--3.26% 252,810 Shorewood Packaging Corp.* 2,666,047 4,708,586 --------- -------- PRINTING & PUBLISHING--2.96% 38,400 Houghton Mifflin Co. 1,106,777 2,073,600 210,800 Thomas Nelson, Inc. 2,552,987 2,213,400 --------- --------- 3,659,764 4,287,000 --------- ---------
16
Number COMMON STOCKS-96.71% (cont) of Shares Cost Market Value REAL ESTATE--5.35% 264,700 Rouse Co. $ 3,004,540 $ 7,742,475 ------------ ------------ RETAILING--3.67% 225,840 Longs Drug Stores, Inc. 4,114,765 5,307,240 ------------ ------------ Total Common Stocks 90,931,004 139,915,786 ------------ ------------ Principal REPURCHASE AGREEMENTS-3.89% Amount $5,622,763 State Street Bank & Trust Company Repurchase Agreement, 4.75%, dated 3/31/97, repurchase price $5,623,505, maturing 4/1/97 (collateralized by U.S. Treasury Bond, 7.125% 2/15/23) 5,622,763 5,622,763 --------- --------- Total Repurchase Agreements 5,622,763 5,622,763 --------- --------- Total Investments-100.60% $96,553,767 145,538,549 ===========
Market Value Liabilities, less Cash and Other Assets-(0.60)% $ (865,663) --------- NET ASSETS-100.00% $144,672,886 ===========
*Non-income producing The accompanying notes are an integral part of the financial statements. 17 EQUITY STATISTICAL SUMMARY
ARIEL GROWTH (UNAUDITED) Earnings Per Share -------------------- 52-Week 1996 1997 1996 1997 Market Ticker Price Range Actual Estimate P/E P/E Cap. Company Symbol 3/31/97 Low High Calendar Calendar Calendar Calendar ($MM) Oil-Dri Corporation of America ODC 13.38 11.88 17.75 0.85 1.16 19.3 14.1 118 Angelica Corp. AGL 18.38 18.00 25.13 0.88 1.00 20.9 18.4 167 Thomas Nelson, Inc. TNM 10.50 9.38 15.25 0.50 0.63 nm 16.7 180 Hunt Manufacturing Co. HUN 17.75 12.75 18.88 1.37 1.35 13.0 13.1 195 American Media, Inc. ENQ 5.88 2.75 6.13 0.13 0.35 45.2 16.8 246 Specialty Equipment Cos., Inc. SPEQ 13.13 10.25 15.75 1.26 1.31 10.4 10.0 276 Phoenix Duff & Phelps Corp. DUF 7.63 5.88 8.50 0.49 0.54 15.6 14.1 336 Shorewood Packaging Corp. SHOR 18.63 14.50 20.00 1.26 1.47 14.8 12.7 339 General Binding Corp. GBND 30.25 19.50 33.25 1.60 1.85 18.9 16.4 478 Arthur J. Gallagher & Co. AJG 32.88 29.13 36.38 2.58 2.72 12.7 12.1 549 W.H. Brady Co. BRCOA 25.13 18.00 27.75 1.32 1.56 19.0 16.1 550 Bob Evans Farms, Inc. BOBE 13.75 12.13 17.13 0.81 0.99 17.0 13.9 586 Interface, Inc. IFSIA 25.06 11.63 25.63 1.23 1.50 20.4 16.7 589 Safety Kleen Corp. SK 14.75 14.13 18.63 1.05 1.03 14.0 14.3 860 Longs Drug Stores, Inc. LDG 23.50 18.94 27.50 1.49 1.60 15.8 14.7 917 First Brands Corp. FBR 24.50 21.00 29.38 1.62 1.78 15.1 13.8 997 Harte-Hanks Communications HHS 29.13 20.63 30.38 1.28 1.49 22.8 19.5 1,083 Bergen Brunswig Corp. BBC 29.75 24.75 33.25 1.88 2.14 15.8 13.9 1,193 Central Newspapers, Inc. ECP 50.13 33.38 50.75 2.31 3.00 21.7 16.7 1,318 Herman Miller, Inc. MLHR 34.13 14.38 35.63 1.41 1.81 24.2 18.9 1,611 Century Telephone Enterprises CTL 29.50 28.50 34.50 2.14 2.45 13.8 12.0 1,770 McCormick & Co., Inc. MCCRK 24.50 18.88 25.38 1.03 1.40 23.8 17.5 1,882 Rouse Co. RSE 29.25 20.38 32.25 2.16 2.47 13.5 11.8 1,954 T. Rowe Price Associates TROW 37.13 22.75 54.25 1.59 1.91 23.3 19.4 2,328 Ecolab, Inc. ECL 38.00 29.50 39.50 1.75 2.15 21.7 17.7 2,451 Whitman Corp. WH 24.25 21.63 25.75 1.38 1.54 17.6 15.7 2,476 Leggett & Platt, Inc. LEG 35.25 31.50 37.38 1.85 2.05 19.1 17.2 3,254 Hasbro, Inc. HAS 27.38 21.25 29.67 1.52 1.72 18.0 15.9 3,520 Omnicom Group, Inc. OMC 49.88 38.00 53.00 2.25 2.60 22.2 19.2 4,045 MBIA, Inc. MBI 95.88 70.13 104.63 7.22 7.89 13.3 12.2 4,151 Northern Trust Corp. NTRS 37.50 25.38 45.25 2.20 2.54 17.0 14.8 4,290 Clorox Co. CLX 112.38 78.38 127.38 4.52 4.99 24.9 22.5 5,810
Note: All earnings per share numbers are fully diluted. Such numbers are from continuing operations and are adjusted for non-recurring items. The Rouse Company numbers are before depreciation and deferred taxes. 18
Ariel Appreciation (unaudited) Earnings Per Share -------------------- 52-Week 1996 1997 1996 1997 Market Ticker Price Range Actual Estimate P/E P/E Cap. Company Symbol 3/31/97 Low High Calendar Calendar Calendar Calendar ($MM) Thomas Nelson, Inc. TNM 10.50 9.38 15.25 0.05 0.63 nm 16.7 180 Specialty Equipment Cos., Inc. SPEQ 13.13 10.25 15.75 1.26 1.31 10.4 10.0 276 Phoenix Duff & Phelps Corp. DUF 7.63 5.88 8.50 0.49 0.54 15.6 14.1 336 Shorewood Packaging Corp. SHOR 18.63 14.50 20.00 1.26 1.47 14.8 12.7 339 General Binding Corp. GBND 30.25 19.25 33.25 1.60 1.85 18.9 16.4 478 Arthur J. Gallagher & Co. AJG 32.88 29.13 36.38 2.58 2.72 12.7 12.1 549 W.H. Brady Co. BRCOA 25.13 18.00 27.75 1.32 1.56 19.0 16.1 550 Bob Evans Farms, Inc. BOBE 13.75 12.13 17.13 0.81 0.99 17.0 13.9 586 Houghton Mifflin Co. HTN 54.00 42.25 56.88 3.13 3.15 17.3 17.1 767 Safety Kleen Corp. SK 14.75 14.13 18.63 1.05 1.03 14.0 14.3 860 Longs Drug Stores, Inc. LDG 23.50 18.94 27.50 1.49 1.60 15.8 14.7 917 Fisher Scientific International FSH 44.13 35.00 47.75 2.40 3.00 18.4 14.7 918 First Brands Corp. FBR 24.50 21.00 29.38 1.62 1.78 15.1 13.8 997 Harte-Hanks Communication HHS 29.13 20.63 30.38 1.28 1.49 22.8 19.5 1,083 Bergen Brunswig Corp. BBC 29.75 24.75 33.25 1.88 2.14 15.8 13.9 1,193 Vivra, Inc. V 27.00 24.63 36.13 1.30 1.50 20.8 18.0 1,207 Sybron Corp. SYB 27.75 22.25 34.75 1.41 1.71 19.7 16.2 1,307 Central Newspapers, Inc. ECP 50.13 33.38 50.75 2.31 3.00 21.7 16.7 1,318 Herman Miller, Inc. MLHR 34.13 14.38 35.63 1.41 1.81 24.2 18.9 1,611 Century Telephone Enterprises CTL 29.50 28.50 34.50 2.14 2.45 13.8 12.0 1,770 McCormick & Co., Inc. MCCRK 24.50 18.88 25.38 1.03 1.40 23.8 17.5 1,882 Rouse Co. RSE 29.25 20.38 32.25 2.16 2.47 13.5 11.8 1,954 T. Rowe Price Associates TROW 37.13 22.75 54.25 1.59 1.91 23.3 19.4 2,328 Ecolab, Inc. ECL 38.00 29.50 39.50 1.75 2.15 21.7 17.7 2,451 Whitman Corp. WH 24.25 21.63 25.75 1.38 1.54 17.6 15.7 2,476 Leggett & Platt, Inc. LEG 35.25 31.50 37.38 1.85 2.05 19.1 17.2 3,254 Solectron Corp., Inc. SLR 53.00 29.00 61.38 2.29 2.80 23.1 18.9 3,265 Hasbro, Ins. HAS 27.38 21.25 29.67 1.52 1.72 18.0 15.9 3,520 Omnicom Group, Inc. OMC 49.88 38.00 53.00 2.25 2.60 22.2 19.2 4,045 Equifax, Inc. EFX 28.50 19.63 34.50 1.21 1.45 23.6 19.7 4,138 MBIA, Inc. MBI 95.88 70.13 104.63 7.22 7.89 13.3 12.2 4,151 Northern Trust Corp. NTRS 37.50 25.38 45.25 2.20 2.54 17.0 14.8 4,290 Tribune Co. TRB 40.50 31.63 44.13 1.97 2.10 20.6 19.3 4,969 Clorox Co. CLX 112.38 78.38 127.38 4.52 4.99 24.9 22.5 5,810 Morton International, Inc. MII 42.25 33.25 44.63 2.44 2.72 17.3 15.5 6,105 Pitney-Bowes, Inc. PBI 58.75 43.25 63.50 3.12 3.50 18.8 16.8 8,754 MBNA Corp. KRB 27.88 16.75 37.88 1.33 1.66 21.0 16.8 9,762 Carnival Corporation CCL 37.13 24.50 38.25 1.95 2.17 19.0 17.1 11,052
Note: All earnings per share numbers are fully diluted. Such numbers are from continuing operations and are adjusted for non-recurring items. The Rouse Company numbers are before depreciation and deferred taxes. 19 ARIEL PREMIER BOND DEAR FELLOW SHAREHOLDER: For the somewhat tempestuous first quarter ending March 31,1997, the Ariel Premier Bond Fund Institutional Class experienced a loss of - 0.38%, though we proved more resilient than the broader bond market as represented by Lehman Aggregate Bond Index, which registered a loss of -0.56 for this same period. Similarly, for the two months ending March 31, 1997, the Ariel Premier Bond Fund, Investor Class lost -0.70% versus -0.86% for the Lehman Aggregate Bond Index for the same period. Our relative strength stems primarily from our current short duration posture, which helps protect the Fund from interest rate fluctuations. While such fluctuations were not hugely dramatic in the first quarter, Federal Reserve Chairman Alan Greenspan's warning of inflation risk in mid-February and the Federal Funds subsequent 25 basis point rate hike in late March did contribute to an overall increase in both short- and long-term yields. Further, our emphasis on asset-backs and our modest overweight in mortgages also boded well as these securities outperformed equal-duration Treasuries. On the flipside, because BBB corporates fared the best in the investment grade market, our A- rated status held us back somewhat. Among A-rated bond funds, however, Ariel Premier Bond Fund, Institutional Class kept company with the nation's best, ranking 11th out of 117 funds in the "A Rated Bond" category for the 12-month period ending March 31, 1997, as reported in The Wall Street Journal's Mutual Fund Scorecard on April 15, 1997. The portfolio themes emphasized at year-end 1996 continue to be reflected in our current strategy. While today's interest rates continue to discount bad news, strong growth and Fed tightening should keep the risks tilted toward higher rates, and it therefore behooves us to keep the portfolio's duration short. Further, because a higher-rate environment is a low risk one for mortgages, we will maintain our modest overweight in these securities. Finally, we will continue to overweight the portfolio in asset-backs, as we anticipate their continued outperformance of corporates in a higher rate environment. With this said, select corporate positions such as J.P. Morgan Capital securities represent undervalued opportunities. As always, we are grateful for the opportunity to serve you and welcome any questions or comments that you might have. Sincerely, /s/John W. Rogers /s/Kenneth R. Meyer John W. Rogers, Jr. Kenneth R. Meyer President President Ariel Capital Management, Inc. Lincoln Capital Management Company 20 ARIEL PREMIER BOND FUND Institutional Class Inception October 1, 1995 Investor Class Inception February 1, 1997 AVERAGE ANNUAL TOTAL RETURN - ------------------------------------------------------------------------------- 1Q97 1 Year Life of Fund - ------------------------------------------------------------------------------- Ariel Premier Bond Fund, Inst. Cl. -0.4% +5.4% +4.2% Ariel Premier Bond Fund, Inv. Cl. na na -0.7%
ARIEL PREMIER BOND FUND PORTFOLIO COMPOSITION [Pie chart appears here] Repurchase Agreements 6.0% Government & Agency 29.1% Commercial Paper 9.0% Corporate 7.3% Mortgage-Backed 18.4% Asset-Backed 30.3% LEHMAN AGGREGATE BOND INDEX PORTFOLIO COMPOSITION [Pie chart appears here] Government & Agency 51.1% Corporate 18.0% Mortgage-Backed 29.9% Asset-Backed 1.0% Comparison of change in value of $10,000 invested in Ariel Premier Bond Fund, Inv. Cl. and comparable indices/*/ [GRAPH APPEARS HERE]
Feb 97 Mar 97 Ariel Premier Bond Fund, Inv. Cl. $10,000 $9,930 Lehman Aggregate $10,000 $9,914
*Statistics represent past performance which is not indicative of future results. Comparison of change in value of $10,000 invested in Ariel Premier Bond Fund, Inst. Cl. and comparable indices/*/ [GRAPH APPEARS HERE]
Oct 95 Dec 95 Mar 96 Jun 96 Sep 96 Dec 96 Mar 97 Ariel Premier Bond Fund, Inst. Cl. $10,000 $10,351 $10,092 $10,189 $10,369 $10,677 $10,637 Lehman Aggregate $10,000 $10,246 $10,240 $10,298 $10,490 $10,805 $10,744
*Statistics represent past performance which is not indicative of future results. 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 Funds 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. 21 ARIEL PREMIER BOND FUND SCHEDULE OF INVESTMENTS MARCH 31, 1997 (UNAUDITED)
ASSET-BACKED SECURITIES-30.27% Par Value Cost Market Value $ 470,000 Capital Equipment Receivables Trust, 6.28%, 6/15/00 $ 469,896 $ 466,574 70,000 Circuit City Credit Card, 1995-1A, 6.375%, 8/15/05 69,131 68,834 1,170,000 Finger Hut, 96-1A, 6.45%, 11/99 1,178,259 1,163,998 800,000 First Omni, 96-AA, 6.65%, 9/15/03 807,563 791,040 60,000 Green Tree Financial, 1995-1 A5, 8.40%, 6/15/25 65,916 62,369 1,450,000 J.C. Penney Master Credit Card Trust, 1990-C1, 9.625%, 6/30/00 1,580,248 1,554,371 1,699,363 Merrill Lynch Mortgage Investors, Inc., 1995-C2-A1, Floating Rate, 6/15/21 1,722,641 1,700,961 300,000 The Money Store, 1996-1 A3, 6.85%, 12/20/02 299,958 301,311 550,000 The Money Store, 1997-A A3, 6.675%, 4/15/12 549,828 548,454 300,000 The Money Store, 1996-B A6, 7.38%, 5/15/17 299,954 299,628 200,000 Olympic Auto Receivables, 1995-EA4, 5.85%, 3/15/01 198,018 199,044 1,440,000 Prime, 95-1A, 6.75%, 11/15/05 1,446,862 1,419,682 350,000 Private Label Credit Card, 1994-2A, 7.80%, 9/20/03 357,447 355,712 ASSET-BACKED SECURITIES-30.27% (cont) Par Value Cost Market Value $430,000 Salomon Brothers, 96LB3, 6.875%, 10/25/26 $ 429,974 $ 427,420 45,000 Sears Credit Account, 96-1A, 6.20%, 2/16/06 44,119 43,926 440,000 Sears Credit Account, 96-2A, 6.50%, 10/15/03 437,731 439,199 2,005,000 Sears Credit Account, 96-4A, 6.45%, 10/16/06 2,000,764 1,961,291 420,000 Standard Credit Card Master - Citibank, 94-4A, 8.25%, 11/7/03 446,779 438,808 300,000 Standard Credit Card Master - Citibank, 8.25%, 1/7/07 322,470 317,226 300,000 UCFC, 96 CA 3, 7.15%, 12/15/13 299,954 298,938 1,880,000 World Financial, 96-A, 6.70%, 2/15/04 1,890,119 1,861,632 2,600,000 World Omni Auto Lease, 1996-AA1, 6.30%, 6/25/02 2,605,239 2,606,656 400,000 World Omni Auto Lease, 1996-BA3, 6.25%,11/15/02 399,354 396,816 ---------------- ----------- Total Asset-Backed Securities 17,922,224 17,723,890 ---------------- -----------
22
CORPORATE DEBT-7.36% Par Value Cost Market Value $275,000 J.C. Penney Co., 7.625%, 3/1/97 $ 269,472 $ 257,812 95,000 JP Morgan Capital, 7.54%, 1/15/27 95,000 88,587 2,000,000 Railcar Leasing LLC, 6.75%, 7/15/06 1,999,194 1,962,500 1,631,322 Railcar Trust, 1992-1A, 7.75%, 6/1/04 1,704,494 1,666,591 ----------- ------------ 340,000 US West Capital Funding, Inc., 6.95%, 1/15/37 339,321 333,200 Total Corporate Debt 4,407,481 4,308,690 ----------- ------------ U.S GOVERMENT AGENCIES-26.07% Mortgage-Backed Securities--18.44% 4,138,559 Federal Home Loan Mortgage Corp. (FHLMC), 6.50%, 2/1/26 4,004,447 3,868,228 1,478,961 FHLMC Federal Home Loan, 6.50%, 11/1/25 1,395,861 1,386,052 285,474 FHLMC Gold, 6.50%, 3/1/26 263,245 266,114 45,706 Federal National Mortgage Association (FNMA), 7.00%, 10/1/23 44,923 43,864 1,900,822 FNMA, 6.50%, 4/1/24 1,812,244 1,772,517 U.S GOVERNMENT AGENCIES-26.07% (cont) Par Value Cost Market Value Mortgage-Backed Securities--18.44% (cont) $469,196 FNMA, 7.00%, 5/1/24 $ 461,154 $ 450,278 486,590 FNMA, 6.50%, 11/1/25 446,744 452,679 1,541,145 FNMA, 6.50%, 1/1/26 1,493,871 1,432,771 ----------- ------------ 11,034,291 10,796,211 ----------- ------------ OTHER AGENCY ISSUES--7.63% 250,000 Government Trust Certificate, Aid Israel, 5.70%, 2/15/03 249,239 233,750 1,887,706 Government Trust Certificate, Israel Trust, Series 2E, 9.40%, 5/15/02 2,021,788 1,989,170 1,250,423 Pemex Exp Trust, 7.66%, 8/15/01 1,290,077 1,276,894 630,000 Resolution Funding Corporation, 8.125%, 10/15/19 697,191 682,933 245,000 Resolution Funding Corporation, 8.875%, 7/15/20 304,586 286,162 ----------- ------------ 4,562,881 4,468,909 ----------- ------------ Total U.S. Government Agencies 15,597,172 15,265,120 ------------ ----------- U.S GOVERNMENT OBLIGATIONS-21.69% 855,000 U.S. Treasury Bond, 11.75%, 2/15/10 1,118,563 1,096,914
23
U.S GOVERNMENT OBLIGATIONS-21.69% (cont) Par Value Cost Market Value $365,000 U.S. Treasury Bond, 12.75%, 11/15/10 508,260 497,988 655,000 U.S. Treasury Bond, 13.875%, 5/15/11 972,000 952,062 855,000 U.S. Treasury Bond, 14.00%, 11/15/11 1,292,276 1,265,178 7,860,000 U.S. Treasury Bond, 8.125%, 8/15/19 8,844,850 8,628,393 260,000 U.S. Treasury Note, 5.625%, 11/30/98 259,348 257,000 ----------- ------------ Total U.S. Government Obligations 12,995,297 12,697,535 ----------- ------------ COMMERCIAL PAPER-9.00% 750,000 Ameritech Capital Corp., 5.28%, 5/12/97 745,490 745,490 750,000 Bellsouth Telecommunication, 5.27%, 4/9/97 749,122 749,122 750,000 Cargil Incorporated, Inc., 5.25%, 4/18/97 748,141 748,141 750,000 Ford Motor Credit Co., 5.30%, 4/10/97 749,006 749,006 750,000 International Lease Financing, 5.32%, 4/17/97 748,227 748,227 782,000 Metlife Funding, 5.27%, 4/9/97 781,084 781,084 COMMERCIAL PAPER-9.00% (cont) Par Value Cost Market Value $750,000 Pepsico, Inc., 5.25%, 4/9/97 $ 749,125 $ 749,125 ----------- ------------ Total Commercial Paper 5,270,195 5,270,195 ----------- ------------ REPURCHASE AGREEMENTS-6.19 % 3,625,416 State Street Bank & Trust Company Repurchase Agreement, 4.75%, dated 3/31/97, repurchase price $3,625,894, maturing 4/1/97 (collateralized by U.S. Treasury Bond, 7.125%, 2/15/23) 3,625,416 3,625,416 ----------- ----------- Total Repurchase Agreements 3,625,416 3,625,416 ----------- ----------- Total Investments-100.58% 59,817,785 58,890,846 =========== ----------- Liabilities, less Cash and Other Assetss-(0.58)% (340,346) ----------- NET ASSETS-100.00% $58,550,500 ===========
The accompanying notes are an integral part of the financial statements. 24 Financial Report STATEMENT OF ASSETS & LIABILITIES MARCH 31, 1997 (UNAUDITED)
GROWTH APPRECIATION PREMIER FUND FUND BOND FUND ------------ ------------ ----------- ASSETS: Investments in securities, at value (cost $75,612,154, $96,553,767 and $59,817,785, respectively) $121,437,817 $145,538,549 $58,890,846 Dividends and interest receivable 244,558 219,365 504,274 Receivable for fund shares issued 7,487 5,159 -- Prepaid and other assets 60,807 88,361 976 ------------ ------------ ----------- Total assets 121,750,669 145,851,434 59,396,096 ============ ============ =========== LIABILITIES: Payable for securities purchased 478,935 903,809 -- Accrued management fee 69,396 95,704 21,395 Accrued distribution fee 26,698 31,918 4 Payable for shares redeemed 61,894 41,190 -- Shareholder distributions payable -- -- 824,197 Other liabilities 93,798 105,927 -- ------------ ------------ ----------- Total liabilities 730,721 1,178,548 845,596 ------------ ------------ ----------- NET ASSETS $121,019,948 $144,672,886 $58,550,500 ============ ============ =========== NET ASSETS CONSIST OF: Paid-in-capital $ 70,838,463 $ 89,466,066 $59,668,514 Undistributed net investment income 161,183 28,330 4,051 Accumulated net realized gain (loss) on investment transactions 4,194,639 6,193,708 (195,126) Net unrealized appreciation (depreciation) on investments 45,825,663 48,984,782 (926,939) ------------ ------------ ----------- Total net assets $121,019,948 $144,672,886 $58,550,500 ============ ============ =========== Shares outstanding (no par value) 3,746,273 5,569,323 Institutional Class 5,887,162 Investor Class 1,707 Net asset value, offering and redemption price per share $32.30 $25.98 Institutional Class $9.94 Investor Class $9.94
STATEMENT OF OPERATIONS SIX MONTHS ENDED MARCH 31, 1997 (UNAUDITED)
Growth Appreciation Premier Fund Fund Bond Fund ------------ ------------ ----------- INVESTMENT INCOME: Dividends $ 838,022 $ 917,088 $ -- Interest 83,296 101,314 1,273,182 ------------ ------------ ----------- Total investment income 921,318 1,018,402 1,273,182 ------------ ------------ ----------- EXPENSES: Management fee 387,155 540,158 87,111 Distribution fee 148,905 180,053 4 Transfer agent fees and expenses 125,174 156,936 -- Printing and postage expense 24,777 33,363 -- Professional fees 20,416 20,422 -- Federal and state registration fees 12,493 12,493 -- Trustees, fees and expenses 11,177 11,176 -- Custody fees and expenses 7,819 8,950 -- Miscellaneous expenses 22,219 12,581 -- ------------ ------------ ----------- Total expenses before waiver 760,135 976,132 87,115 Waiver of expenses -- (1,083) -- ------------ ------------ ----------- Net expenses 760,135 975,049 87,115 ------------ ------------ ----------- NET INVESTMENT INCOME 161,183 43,353 1,186,067 ------------ ------------ ----------- REALIZED AND UNREALIZED GAIN: Net realized gain (loss) on investments 4,196,568 7,402,212 (163,724) Change in unrealized appreciation (depreciation) on investments 8,697,059 5,672,546 (938,717) ------------ ------------ ----------- Net gain (loss) on investments 12,893,627 13,074,758 (1,102,441) ------------ ------------ ----------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 13,054,810 $ 13,118,111 $ 83,626 ============ ============ ===========
The accompanying notes are an integral part of the financial statements. 26 STATEMENT OF CHANGES IN NET ASSETS (UNAUDITED)
GROWTH FUND APPRECIATION FUND PREMIER BOND FUND ---------- ----------------- ----------------- SIX MONTHS SIX MONTHS SIX MONTHS ENDED YEAR ENDED ENDED YEAR ENDED ENDED YEAR ENDED MARCH 31, 1997 SEPT. 30, 1996 MARCH 31, 1997 SEPT. 30, 1996 MARCH 31, 1997 SEPT. 30, 1996 -------------- -------------- -------------- -------------- -------------- -------------- OPERATIONS: Net investment income $ 161,183 $ 660,999 $ 43,353 $ 677,489 $1,186,067 $ 392,150 Net realized gain (loss) on investments 4,196,568 7,382,064 7,402,212 8,710,352 (163,724) 65,835 Change in unrealized appreciation (depreciation) on investments 8,697,059 9,870,652 5,672,546 15,106,961 (938,717) 11,778 ------------- ------------- ------------ ------------- ----------- ----------- Net increase in net assets resulting from operations 13,054,810 17,913,715 13,118,111 24,494,802 83,626 469,763 ------------- ------------- ------------ ------------- ----------- ----------- DISTRIBUTIONS TO SHAREHOLDERS: Net investment income -- (1,659,356) (397,468) (1,152,459) (1,186,080) (389,495) Capital gains (6,352,876) (15,885,827) (7,316,330) (10,183,833) (93,776) (2,052) ------------- ------------- ------------ ------------- ----------- ----------- (6,352,876) (17,545,183) (7,713,798) (11,336,292) (1,279,856) (391,547) ------------- ------------- ------------ ------------- ----------- ----------- SHARE TRANSACTIONS: Shares sold 132,566,721 224,715,671 18,436,754 115,542,199 43,823,392 16,322,662 Shares issued to holders in reinvestment of dividends 5,898,764 16,343,324 7,001,279 10,096,899 679,385 143,156 Shares redeemed (133,917,508) (252,610,404) (21,796,666) (146,482,349) (122,667) (1,187,414) ------------- ------------- ------------ ------------- ----------- ----------- Net increase (decrease) 4,547,977 (11,551,409) 3,641,367 (20,843,251) 44,380,110 15,278,404 ------------- ------------- ------------ ------------- ----------- ----------- TOTAL INCREASE (DECREASE) IN NET ASSETS 11,249,911 (11,182,877) 9,045,680 (7,684,741) 43,183,880 15,356,620 NET ASSETS: Beginning of period 109,770,037 120,952,914 135,627,206 143,311,947 15,366,620 10,000 ------------- ------------- ------------ ------------- ----------- ----------- End of period (includes undistributed net investment income of $161,183, $0, $28,330, $382,445, $4,051 and $4,064, respectively) $ 121,019,948 $ 109,770,037 $144,672,886 $ 135,627,206 $58,550,500 $15,366,620 ============= ============= ============ ============= =========== ===========
The accompanying notes are an integral part of the financial statements. 27 FINANCIAL HIGHLIGHTS (Unaudited)
GROWTH FUND ----------- Six Months Ten Months Ended Year Ended Sept. 30, Ended Mar. 31, 1997 1996 1995 1994 1993 Sept. 30, 1992 ------------- ---- ---- ---- ---- -------------- Net asset value, beginning of period $30.58 $30.78 $28.84 $30.46 $29.59 $27.36 Income from investment operations: Net investment income 0.04 0.18 0.36 0.18 0.73 0.31 Net realized and unrealized gains on investments 3.46 4.24 3.51 0.23 2.81 3.19 ------ ------ ------ ------ ------ ------ Total from investment operations 3.50 4.42 3.87 0.41 3.54 3.50 Distributions to shareholders: Dividends from net investment income -- (0.44) (0.23) (0.30) (0.75) (0.56) Distributions from capital gains (1.78) (4.18) (1.70) (1.73) (1.92) (0.71) ------ ------ ------ ------ ------ ------ Total distributions (1.78) (4.62) (1.93) (2.03) (2.67) (1.27) ------ ------ ------ ------ ------ ------ Net asset value, end of period $ 32.30 $ 30.58 $ 30.78 $ 28.84 $ 30.46 $ 29.59 Total return 11.52%/(a)/ 16.28% 14.38% 1.41% 12.54% 13.15%/(a)/ Supplemental data and ratios: Net assets, end of period, in thousands $121,020 $109,770 $120,953 $149,511 $233,826 $236,186 Ratio of expenses to average net assets 1.28%/(b)/ 1.31% 1.37%/(c)/ 1.25% 1.16% 1.23%/(b)/ Ratio of net income to average net assets 0.27%/(b)/ 0.57% 1.18%/(c)/ 0.56% 0.72% 0.83%/(b)/ Portfolio turnover rate 7% 17% 16% 9% 13% 19% Average commission rate paid per share/(d)/ $0.0554 $ 0.0493 N/A N/A N/A N/A
APPRECIATION FUND ----------------- Six Months Ten Months Ended Year Ended Sept. 30, Ended Mar. 31, 1997 1996 1995 1994 1993 Sept. 30, 1992 ------------- ---- ---- ---- ---- -------------- Net asset value, beginning of period $24.99 $22.76 $21.82 $21.67 $19.42 $17.60 Income from investment operations: Net investment income 0.01 0.13 0.14 0.04 0.06 0.09 Net realized and unrealized gains on investments 2.42 4.07 2.26 0.51 2.27 1.92 ------ ------ ------ ------ ------ ------ Total from investment operations 2.43 4.20 2.40 0.55 2.33 2.01 Distributions to shareholders: Dividends from net investment income (0.07) (0.20) (0.06) (0.05) (0.08) (0.17) Distributions from capital gains (1.37) (1.77) (1.40) (0.35) -- (0.02) ------ ------ ------ ------ ------ ------ Total distributions (1.44) (1.97) (1.46) (0.40) (0.08) (0.19) ------ ------ ------ ------ ------ ------ Net asset value, end of period $25.98 $24.99 $22.76 $21.82 $21.67 $19.42 Total return 9.72%/(a)/ 19.60% 12.11% 2.56% 12.03% 11.47%/(a)/ Supplemental data and ratios: Net assets, end of period, in thousands $144,673 $135,627 $143,312 $162,280 $207,065 $146,624 Ratio of expenses to average net assets 1.36%/(b)(c)/ 1.36%/(c)/ 1.36%/(c)/ 1.35%/(c)/ 1.37% 1.44%/(b)(c)/ Ratio of net income to average net assets 0.06%/(b)(c)/ 0.50%/(c)/ 0.61%(c) 0.17%/(c)/ 0.33% 0.57%/(b)(c)/ Portfolio turnover rate 9% 26% 18% 12% 56% 2% Average commission rate paid per share/(d)/ $0.0573 $0.0513 N/A N/A N/A N/A
(a) Total return is not annualized. (b) Annualized. (c) Net of reimbursements. Without the fee waiver, the ratio of expenses to average net assets would have been 1.39% for the period ended 1995 for the Growth Fund and 1.36%, 1.40%, 1.58%, 1.40%, and 1.50% for the periods ended 1997, 1996, 1995, 1994 and 1992 for the Appreciation Fund; and the ratio of net investment income to average net assets would have been 1.16% for the period ended 1995 for the Growth Fund and 0.06%, 0.46%, 0.39%, 0.12% and 0.51% for the periods ended 1997, 1996, 1995, 1994 and 1992 for the Appreciation Fund, respectively. (d) Disclosure required by the Securities Exchange Commission beginning 1996. The accompanying notes are an integral part of the financial statements. 28 FINANCIAL HIGHLIGHTS (CONT) (UNAUDITED)
PREMIER BOND FUND ----------------- INSTITUTIONAL CLASS INVESTOR CLASS Six Months Year Ended February 1, 1997/(b)/ Ended Sept. 30, to Mar. 31, 1997 1996 Mar. 31, 1997 ------------- ---- ---------------- Net asset value, beginning of period $9.95 $10.00 $10.10 Income from investment operations: Net investment income 0.22 0.43 0.09 Net realized and unrealized gains (losses) on investments 0.01 (0.04) (0.16) ---- ---- ---- Total from investment operations 0.23 0.39 (0.07) Distributions to shareholders: Dividends from net investment income Distributions from capital gains (0.22) (0.43) (0.09) ---- ---- ---- Total distributions (0.24) (0.44) (0.09) ---- ---- ---- Net asset value, end of period $ 9.94 $ 9.95 $9.94 Total return 2.32%(a) 3.96% (0.70)%(a) ==== ==== ==== Supplemental data and ratios: Net assets, end of period, in thousands $58,534 $15,367 $ 17 Ratio of expenses to average net assets 0.45%(c) 0.48% 0.85%(c) Ratio of net income to average net assets 6.08%(c) 5.85% 5.96%(c) Portfolio turnover rate 190% 423% 190%
(a) Total return is not annualized. (b) Commencement of operations. (c) Annualized. The accompanying notes are an integral part of the financial statements. NOTES TO THE FINANCIAL STATEMENTS MARCH 31, 1997 (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 Growth Fund, Appreciation Fund and Premier Bond Fund ( the "Funds" or "Ariel Mutual Funds") are diversified portfolios of the Trust. The Premier Bond Fund is structured to offer an Institutional Class and an Investor Class. The investor class, began February 1, 1997. 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 permit management to make certain estimates and assumptions at the date of the financial statements. 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, or yield equivalent as obtained from one or more market makers for such securities, and debt securities over 60 days are valued based on quotes obtained from dealers. Short-term securities maturing within 60 days 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. 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. 29 NOTES TO THE FINANCIAL STATEMENTS (CONT) MARCH 31, 1997 (UNAUDITED) 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. 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 Growth Fund and Appreciation Fund and declared daily and paid quarterly for the Premier Bond Fund. Distributions of realized capital gains, if any, are declared and paid at least annually. Distributions to shareholders are determined in accordance with federal income regulations and are recorded on the ex-dividend date. The character of distributions made during the year from net investment income or net realized gain 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, 1997 Growth Fund Appreciation Fund Premier Bond Fund ----------- ------------------ ------------------ Institutional Investor ------------- -------- Shares sold 4,140,392 701,640 4,286,676 1,982 Shares issued to holders in reinvestment of dividends 184,856 268,866 67,254 -- Shares redeemed (4,168,070) (829,514) (11,765) (275) Net increase 157,178 140,992 4,342,165 1,707 Year Ended September 30, 1996 Growth Fund Appreciation Fund Premier Bond Fund ----------- ------------------ ------------------ Shares sold 7,768,583 5,103,680 1,649,706 Shares issued to holders in reinvestment of dividends 603,075 458,325 14,370 Shares redeemed (8,712,337) (6,429,578) (120,079) Net increase (decrease) (340,679) (867,573) 1,543,997
4. INVESTMENT TRANSACTIONS Purchases and sales of securities, excluding short-term investments and U.S. government securities, for the year ended March 31, 1997 are summarized below:
Growth Fund Appreciation Fund Premier Bond Fund ----------- ----------------- ----------------- Purchases $ 8,568,331 $12,175,404 $22,778,635 Sales 11,625,192 19,904,812 302,062
Purchases and sales of U.S. government securities for the Premier Bond Fund for the six months ended March 31, 1997 were $82,655,506 and $67,677,083, respectively. 30 NOTES TO THE FINANCIAL STATEMENTS (CONT) MARCH 31, 1997 (UNAUDITED) At March 31, 1997 gross unrealized appreciation and depreciation of securities were as follows:
Growth Fund Appreciation Fund Premier Bond Fund ----------- ----------------- ----------------- Unrealized appreciation $49,202,917 $50,438,670 $ 25,974 Unrealized (depreciation) (3,377,254) (1,453,888) (952,913) Net appreciation (depreciation) $45,825,663 $48,984,782 $(926,939)
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 Growth 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. Prior to May 14, 1996, the Adviser was paid an investment advisory fee and administrative services fee based on the average daily net assets of the Fund at the annual rate of 0.43% and 0.15%, 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 Growth Fund, Appreciation Fund and Premier Bond Fund, Investor Class to pay for certain expenses associated with the distribution of their shares up to 0.30% annually of each Fund's average daily net asset value. Such expenses are currently limited to an annual rate of 0.25% of each Fund's average daily net assets by the Board of Trustees. Payments have been made to Ariel Distributors, Inc., an affiliate of the Adviser. 31 BOARD OF TRUSTEES BERT N. MITCHELL, C.P.A. Bert is founder, chairman and CEO of Mitchell & Titus, LLP, the nation's largest minority-owned accounting firm. He holds B.B.A., M.B.A. and Honorary Doctorate degrees from the Baruch School of Business of the City University of New York, where he has also been a member of the accounting faculty. Bert is also a graduate of the Owner- President Management Program of the Harvard Business School. Bert is active in community affairs, philanthropy and politics. MARIO L. BAEZA Chairman and CEO of Latin America Equity Partners, L.P., Mario is widely regarded as a preeminent expert in business and legal issues in Latin America. He received a B.A. from Cornell University and a J.D. from Harvard Law School, where he later taught. WILLIAM C. DIETRICH, C.P.A. Bill is a director and vice president, treasurer and CFO of Streamline Mid-Atlantic, Inc., a provider of home shopping services to the retail grocery and pharmacy industries. He has a B.A. from Georgetown University. Bill serves on the board and program staff of the Shalem Institute, an internationally known ecumenical organization. ROYCE N. FLIPPIN, JR. Director of program advancement for the Massachusetts Institute of Technology, Royce is also 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. He earned his B.A. 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 Currently, John is treasurer of Silby, Guffey & Co., Inc., a venture capital firm investing in early stage companies in the health care and environmental industries. John has a B.S. from the University of Pennsylvania's Wharton School. He does volunteer work and holds directorships with various local and national non-profit organizations. MELLODY HOBSON As senior vice president and director of marketing, Mellody oversees the servicing of Ariel Capital Management Inc.'s institutional clients, as well as the marketing of the Ariel Mutual Funds. She received a B.A. from Princeton University's Woodrow Wilson School. She serves as a Director of the Chicago Public Library as well as the Civic Federation of Chicago. Mellody also works with a variety of other civic institutions, including those affiliated with Princeton. CHRISTOPHER G. KENNEDY Chris is executive vice president of Merchandise Mart Properties, Inc. which manages, among other prime properties, The Merchandise Mart; The Washington Design Center; and New York's Decoration and Design Building. He earned his B.A. from Boston College and his M.B.A. at the J.L. Kellogg Graduate School of Management at Northwestern University. Chris serves on the board of directors of the Chicago Convention &Tourism Bureau; Boston-based Citizens Energy Corp. and Citizens Corp.; and the Greater Chicago Food Depository. ERIC T. MCKISSACK, CFA In the capacity of vice chairman andco-chief investment officer of Ariel Capital Management, Inc., Eric is responsible for co-managing client and mutual fund portfolios. He received a B.S. in both Management and Architecture from the Massachusetts Institute of Technology and he earned his M.B.A. from the University of California at Berkeley. He is also a Chartered Financial Analyst. Eric serves on a variety of civic and corporate boards. 32 -----END PRIVACY-ENHANCED MESSAGE-----