<PAGE>
<TABLE>
<S> <C>
ARIEL MUTUAL FUNDS Semi Annual Report--March 31, 1999 Ariel Fund - Ariel Appreciation Fund - Ariel Premier Bond Fund
</TABLE>
One day a Hare was making fun of a Tortoise for being so slow upon his feet.
"Wait a bit," said the tortoise, "I'll run a race with you, and I'll wager that
I'll win." The
THE PATIENT INVESTOR
Hare, who was much amused at the idea, said "Let's
try and see..." When the time came both started off together... The Hare nearly
turned a somersault in his haste, while the Tortoise began at a slow but steady
pace. Meanwhile the Tortoise kept plodding on...
[GRAPHIC]
<PAGE>
and on...and on. Soon the Hare was so far ahead he thought he might as well have
a rest, so down he lay and fell fast asleep...as the Tortoise plodded on...and
on. Suddenly the Hare woke up with a start. What was the time? Where was the
Tortoise? He dashed on at his fastest pace...only to find that the Tortoise had
already won the race.
Slow & steady wins the race.
<PAGE>
ARIEL INVESTMENT TRUST
307 NORTH MICHIGAN AVENUE
SUITE 500
CHICAGO, ILLINOIS 60601
800.292.7435
312.726.0140
Fax 312.726.7473
TABLE OF CONTENTS
FOR MORE INFORMATION ABOUT THE ARIEL MUTUAL FUNDS INCLUDING MANAGEMENT FEES AND
EXPENSES, PLEASE SEE THE CURRENT PROSPECTUS WHICH MUST PRECEDE OR ACCOMPANY THIS
REPORT. DISTRIBUTED BY 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.
<TABLE>
<S> <C>
The Patient Investor 2
Company in Focus 6
Company Updates 8
Ariel Equity Funds 10
Schedule of Equity Investments 12
Equity Statistical Summary 16
Ariel Bond Fund 18
Schedule of Bond Investments 21
Statement of Assts & Liabilities 26
Statement of Operations 26
Statement of Changes in Net Assets 27
Financial Highlights 28
Notes to the Financial Statements 30
Board of Trustees 33
</TABLE>
<PAGE>
SLOW AND STEADY WINS THE RACE.-AESOP
THE PATIENT INVEST[GRAPHIC]R-Registered Trademark-
DEAR FELLOW SHAREHOLDER: For the three months ending March 31, 1999, the smaller
companies of the Ariel Fund fell -7.6%. Meanwhile, the mid-sized companies of
the Ariel Appreciation Fund came close to breaking even with a -0.8% return over
the same three month period. With the euphoria of the Dow Jones Industrial
Average's historic flight past the much trumpeted 10,000 mark on March 29, 1999,
many assumed all was well on the investing front during the first quarter of the
year. Certainly, this was the case for a chosen few of the largest publicly
traded companies in the United States (as it has been for nearly 5 years now) as
evidenced by the +5.0% gain of the Standard & Poor's 500 Index. But among the
small and medium-sized issues, market performance continued to be remarkably
bleak. Specifically, the Russell 2000 small company Index fell -5.4% for the
three months while the Russell 2000 Value portfolio had an even tougher time
with a -9.7% decline. And although the Russell Mid-Cap Index was comparatively
better off with its -0.5% slip, the Russell Mid-Cap Value Index lost -3.1%.(1)
THE VALUE GAP
12 MONTH MUTUAL FUND RETURNS FOR THE PERIOD ENDING MARCH 31, 1999.
<TABLE>
<CAPTION>
Value Growth
----- ------
<S> <C> <C>
Large Cap +2.64% +27.83%
Mid Cap -9.14% +8.39%
Small Cap -23.37% -8.86%
</TABLE>
Source: Morningstar, Inc. as reported in THE NEW YORK TIMES (4/4/99).
They say a picture is worth a thousand words. Consequently, it comes as no
surprise that volumes are now being written about the performance disparities
shown above. As we too have discussed, the diverging returns of large and small
companies have been a noteworthy phenomenon in recent years.
(1) The Funds' average annual returns and a description of the Russell 2000,
Russell Mid Cap and Standard and Poor's 500 indices can be referenced on
pages 10 and 11.
2
<PAGE>
However, the staggering differential between various cap sizes and their
respective growth and value strategies has resulted in an outpouring of
speculation about the future of value investing. Few view the glass as half
full. Instead, a storm cloud of negative sentiment dominates the financial
pages. For example, the cover of the April 4, 1999 business section of THE NEW
YORK TIMES asked, "What's Killing the Value Managers?" Similarly, the April 1999
cover of INSTITUTIONAL INVESTOR queries, "Value Investing: Can it rise from the
ashes?"
IT'S ALWAYS DARKEST JUST BEFORE DAWN
In reading these alarmist articles, we are reminded of the 1982 cover story
of BUSINESSWEEK that boldly pronounced the "Death of Equities." In hindsight,
it is apparent this declaration came at the point of maximum pessimism--when
plain vanilla money market funds were yielding 15% and stocks had all but
been forgotten. At the time, the price/earnings multiple for the S&P 500
stood at 7 and the Dow Jones Industrial Average was lingering at 1000--having
lost 5% of its value over the prior 5 years. Of course, the timing of the
article marked the beginning of the strongest bull market in stock market
history--a period during which the Dow made a spectacular 9,000 point climb
to break through the gravity defying five-digit mark where it currently
stands.
And so here we are with an unprecedented 51.2% gap between the 12 month
performance of large cap growth (+27.83%) and small cap value (-23.37%)
strategies--the relative valuation of the Russell 2000 versus the S&P 500 at an
all time low. "A fire-and-ice market," according to THE WALL STREET JOURNAL. In
the face of this unparalleled anomaly, investor reaction has been to scorn the
overlooked issues and in turn embrace that which is wildly popular and widely
held. As THE WALL STREET JOURNAL recently implored, "Forgive investors in
`value' stock mutual funds if right now they feel like throwing their
under-performing portfolios out the window." Not surprisingly, THE NEW YORK
TIMES reports "so far in 1999, three quarters of the funds with the largest
withdrawals have been value funds... [whereas] about 98% of the new money
flowing into equity funds has gone to growth funds."
For the value managers--even some of the most committed of the lot--the strain
is evident. One manager told THE NEW YORK TIMES, "It has been four years of
basically crossing the desert." Another went a step further in stating, "The
client
3
<PAGE>
pressure is just intense. People are starting to cave in." The "caving in"
has come in the form of an overnight effort to "redefine" value. More
specifically, there has been a breach from traditional value management
whereby stocks are acquired at compelling prices after having been
misunderstood, ignored or neglected by Wall Street investors. A new breed
justifies ownership of pricier stocks that may in fact be widely held and
quite popular on the basis of the manager's rationalization of the fair value
of the business. As such, there are those who proclaim to be value buyers,
but hold Wall Street favorites like America Online (NYSE: AOL) and Amazon.com
(OTC: AMZN) based on a belief that these companies with their rich multiples
are still selling at a discount to their long-term growth prospects.
RUMMAGING THROUGH THE WRECKAGE
In our view, this is a stretch. Rather than succumbing to group-think, we are
holding firm to our contrarian perspective. Accordingly, we view the chasm
between the haves and the have-nots as a unique opportunity to bargain shop for
wonderful businesses with stellar management teams and solid franchises, selling
at give-a-way prices. As we once read, "Behold the turtle. He makes progress
only when he sticks his neck out." To that end, in the Ariel Fund, we bought
more new stocks than we ever have in any one quarter of our firm's history.
Specifically, the five new holdings included: Day Runner, Inc. (OTC: DAYR), a
producer of paper-based organizers; Graco, Inc. (NYSE: GGG), a manufacturer of
fluid control and dispensing systems; Grey Advertising Inc. (OTC: GREY), the
world's sixth largest ad agency; an old favorite, Herman Miller, Inc. (OTC:
MLHR), the office furniture manufacturer; and Wesley Jessen Visioncare, Inc.
(OTC: WJCO), a maker of specialty contact lenses. In exchange for the
aforementioned issues, a number of fully valued securities were eliminated from
the portfolio. These long-time winners included: Northern Trust Corp. (OTC:
NTRS), a leader in the bank trust and custody arenas; and Omnicom Group, Inc.
(NYSE: OMC), one of the world's largest advertising agencies.
Meanwhile, in the Ariel Appreciation Fund, we sold our shares of Morton
International, Inc. (NYSE: MII)--the specialty chemical and salt company--with
the good news of the company's takeover by Rohm & Haas Co. (NYSE: ROH). These
dollars were ultimately re-invested in a number of promising holdings. Among
them were Equifax, Inc. (NYSE: EFX), the
4
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[GRAPHICS]
credit reporting agency; Lee Enterprises (NYSE: LEE), the diversified media
company; and Franklin Resources, Inc. (NYSE: BEN), the California-based mutual
fund company.
With our portfolios currently selling at a 50% discount to the S&P 500, they are
less expensive on a price/earnings multiple basis than we can ever recall. At
the same time, our small and mid-sized companies are expected to grow 140%
faster than the giants of the S&P. Against this backdrop, our convictions as
genuine value managers are even stronger and we eagerly anticipate the day when
rational heads will prevail and value will rise again.
As always, we welcome any questions or comments you may have. Likewise, we
appreciate the opportunity to serve you.
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
5
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DAY[GRAPHIC]RUNNER-Registered Trademark-
15295 ALTON PARKWAY
IRVINE, CA 92618
(714) 680-3500
COMPANY IN FOCUS
DAY RUNNER, INC. (OTC: DAYR) is a leading maker of paper-based organizers. With
its organizers, planners, refills, software, wallboards, and accessories ranging
in price from $4 to $150, Day Runner sells its products through 20,000
retailers, primarily office supply stores such as Office Depot (NYSE: ODP),
OfficeMax (NYSE: OMX), and Staples (OTC: SPLS) as well as mass-marketers such as
Wal-Mart (NYSE: WMT).
REASONS FOR RECOMMENDATION
STRONG POSITION IN A MARKET NICHE.
Day Runner is the clear leader in the mass-market distribution channel. With
12.5 million users, the company has the largest customer base compared to a
COMBINED 11 million users for its two closest competitors, Day-Timer and
Franklin Covey (NYSE: FC). Day Runner also has the most shelf-space, with
515,000 linear feet versus an estimated 220,000 for Day-Timer. In April of 1998,
Wal-Mart celebrated Day Runner as "Vendor of the Year," indicating the company's
strong relationship with retailers.
Day Runner's marketing skills will help it continue to deliver value added
products to further strengthen its brand. For example, the company has an
exclusive stationary license for the Star Wars movie trilogy. Management
recently described the Star Wars rollout as the most successful new product
introduction in the company's history. Additionally, Day Runner has expanded to
Europe through the acquisition of Filofax, an internationally recognized
organizer brand. This combination is especially appealing because there is
little geographic overlap. Moreover, while Filofax has the reputation of a
well-run company, it has been said to lack marketing creativity, whereas
marketing is Day Runner's strength.
FAVORABLE ECONOMICS
The company's financial characteristics are attractive. During the last five
years, return on shareholder equity has averaged over 22%. Gross profit margins
are in excess of 50%. Since limited capital expenditures are required to grow
operations, the business has attractive cash flow characteristics. Beginning in
1991, sales have grown at an average annual rate of 21%, the majority of which
represents internal growth. Profits have grown 27% per year. This excellent
performance has earned Day Runner a place on Forbes' 200 Best Small Companies
list for five years running.
6
<PAGE>
Prospects for the future are bright as well. According to management, the
current market for organizer products is only 25% penetrated. In addition, the
Filofax acquisition opens up international markets which previously comprised
just 7% of sales. Lastly, Day Runner's largest customers are expanding retailers
such as Wal-Mart and Office Depot. As these very successful firms grow both
domestically and abroad, they carry Day Runner products with them.
DEDICATED MANAGEMENT COMMITTED TO BUILDING
SHAREHOLDER VALUE
Day Runner's top management has extensive industry experience. President and
CEO, Jim Freeman, has held senior level marketing positions at consumer products
leaders Procter & Gamble and Pillsbury. Prior to joining Day Runner, he was
President of Stuart Hall Company where he tripled sales; the company was
eventually acquired by Newell. Chief Operating Officer, Donnie Bottinelli,
worked with Mr. Freeman at Stuart Hall and then analyzed the organizer industry
while at Newell. He concluded Day Runner was best positioned among its
competitors and seized the opportunity to work there with Freeman. Mark
Vidovich, who is now Chairman, was CEO from 1986 to 1998. During this period,
Day Runner's sales grew from $11 million to $168 million. He continues to work
closely with Freeman and Bottinelli, with a focus on strategic issues. In our
meetings, all three have shown the enthusiasm and intensity of aggressive
entrepreneurs, and each has a significant portion of their net worth in the
company. In fact, insiders own 33% of the shares outstanding (valued at an
estimated $41 million), giving management incentive to enhance the stock price.
MARKET OVERREACTION CREATES COMPELLING VALUATION
Severe inventory tightening by the office superstores will cause Day Runner to
fall short of investors' expectations in the company's 1999 fiscal year (ending
in June). In addition, fears that electronic organizers will make paper-based
products obsolete have also hurt the company. With this near-term outlook, the
stock fell from a high of $25.50 to a low below $10. We view this harsh drop as
a wonderful buying opportunity. Consumer sell-through has been strong, as
point-of-sale data disclosed by the company shows sales increased 18% at Day
Runner's top five customers. More importantly, we feel paper-based planners will
remain the most time and cost efficient organizer product for mass consumers. We
strongly recommend purchase at the current price.
7
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COMPANY UPDATES
ECOLAB-Registered Trademark-
370 WABASHA STREET NORTH
ST. PAUL, MN 55102-1390
(651) 293-2233
ECOLAB INC. (NYSE: ECL) Long-time holding Ecolab remains an attractive stock for
several reasons, including its market leadership, consistent operating record
from its recurring revenue stream, favorable trends in the food service area,
strong free cash flow and solid balance sheet. However, after a rapid rise in
share price to the $41 level, we found it prudent to realize some of our gains
as the market price began to approach reasonable valuations.
Ecolab continues to report solid results in its Institutional and Food and
Beverage businesses. These core segments represent more than three-fourths of
the company's domestic revenues. Drivers of growth include increased market
share, new accounts, improved customer retention and new products and services.
Moreover, the increased attention paid to food-borne illnesses, food safety and
food handling is a constant driver of growth in these businesses.
Ecolab also continues to identify and consummate profitable niche acquisitions.
This "Circle the Customer" strategy allows Ecolab to continue to meet customer
needs for more products and services. Recent acquisitions include Blue Coral
soaps and detergents and GCS Service, a provider of food service equipment
service.
Positive feedback from Ecolab's corporate customers magnifies our enthusiasm
about the company and its prospects. Although we remain excited about
fundmentals, investors could consider taking profits at these levels.
AMERICAN MEDIA, INC.
600 EAST COAST AVENUE
LANTANA, FL 33464
(561) 540-1000
AMERICAN MEDIA, INC. (NYSE: ENQ) After several months of speculation, inquiring
minds read in February that Evercore Capital Partners would be the new owners of
American Media, whose core publications include the NATIONAL ENQUIRER and STAR
MAGAZINE. Evercore, a New York investment firm headed by former Deputy Treasury
Secretary Roger Altman, offered to purchase American Media for $7 a share, or
$767 million in cash and assumed debt. The purchase price represents a premium
of 47% from the low earlier this year of $4.75. Since 51 percent owner Boston
Ventures has already approved the terms of the deal and voted its shares
accordingly, the deal should close in early May.
The transaction multiple of 8.2 times fiscal 1999 enterprise value to operating
cash flow (adjusted for the recent divestiture of American Media's soap opera
publications), falls at the low end of comparable transaction multiples in the
publishing industry in recent periods. As such, we were somewhat disappointed by
the purchase price given the company's market leadership, its above average
returns on capital and its significant generation of free cash flow.
Additionally, its fundamentals were beginning to show signs of improvement,
particularly in both circulation and advertising. We are excited, however, about
the opportunity to invest the proceeds in some of our newer, undervalued
investment ideas.
We recommend investors tender their shares.
8
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[LOGO] HERMAN MILLER
855 EAST MAIN AVENUE
ZEELAND, MI 49464
(616) 654-3000
HERMAN MILLER, INC. (OTC: MLHR) We recently re-established a position in this
leading office furniture manufacturer. As you may recall, Herman Miller had been
a core holding for over 10 years (first purchase was June of 1988 at a
split-adjusted price of $5.90 per share) until we sold our position last spring
in the $30-35 range. At the time, Herman Miller's business was performing
superbly. But as momentum investors extrapolated an unsustainable growth rate
for the company well into the future, the stock was propelled to a price realm
of excessive optimism. The sale of our position was thus purely based on
valuation and in no way reflected poorly on the management or the company's
competitive position.
In recent periods, as growth in the office furniture and interior furnishings
industry slowed, investors who purchased Herman Miller's stock just months
earlier began to exit in droves. As such, the valuation of the stock retreated
significantly. As natural contrarians, we have decided to use this buying
opportunity to re-initiate a position in a great franchise. Herman Miller
continues to earn very attractive rates of return and generate significant
levels of free cash flow despite a more difficult operating environment.
Now trading at $18.25, we believe Herman Miller currently offers an excellent
opportunity for long-term investors to purchase an industry leader at a
compelling valuation.
WHITMAN
3501 ALGONQUIN ROAD
ROLLING MEADOWS, IL 60008
(847) 818-5000
WHITMAN CORP. (NYSE: WH) Although we are disappointed with Whitman's
year-to-date stock performance, we are highly optimistic about its prospects
as a newly minted PepsiCo "anchor bottler." At current levels, the business
trades at an attractive valuation on an operating cash flow basis. Recent
actions indicate management's agreement with our analysis. Earlier this year,
the company repurchased 11.6 million shares for $221.4 million, or an average
price of $19.
In late January, Whitman announced a new business relationship with PepsiCo. In
essence, Whitman will become one of a select few PepsiCo anchor bottlers
worldwide. Whitman will swap some domestic and international territories with
PepsiCo. The transactions should be consummated during the second quarter. In
addition, PepsiCo will become a 35% owner in the new Whitman.
Considerable opportunity awaits Whitman both in domestic and international
markets. We expect Whitman to pursue domestic acquisitions of less efficient
independent PepsiCo bottlers as the industry consolidates. Additionally,
Whitman should benefit from its investments in the cold drink channel with
the increased placements of vending machines and coolers. The full-service
vending segment has the highest margins of any distribution channel. It is
the fastest growing and most profitable division of the beverage industry. We
recommend investors initiate a position at current price levels.
[GRAPHIC]
9
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ARIEL EQUITY FUNDS
TEN LARGEST HOLDINGS
as of March 31, 1999
1 HASBRO, INC.
Prominent toy manufacturer
2 SPECIALTY EQUIPMENT
Manufacturer of commercial and institutional food service equipment
3 ROUSE CO.
Retail mall developer
4 MBIA, INC.
Leading insurer of municipal bonds
5 LEE ENTERPRISES
Diversified media company
6 CENTRAL NEWSPAPERS, INC.
Leading media company with daily newspapers in Phoenix and Indianapolis
7 SHOREWOOD PACKAGING
Manufacturer and printer of high-quality paperboard packaging
8 LIBBEY, INC.
Leading producer of glassware
9 ECOLAB, INC.
A top developer and marketer of premium cleaning and sanitizing products
and services for the hospitality markets
10 BOB EVANS
Operator of family-style restaurants and distributor of food products
ARIEL FUND
INCEPTION NOVEMBER 6, 1986
AVERAGE ANNUAL TOTAL RETURN AS OF MARCH 31, 1999 (assumes reinvestment of
dividends and capital gains) Total return does not reflect a maximum 4.75% sales
load charged prior to 7/15/94.
<TABLE>
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------
1 Year 3 Year 5 Year 10 Year Life of Fund
- --------------------------------------------------------------------------------
ARIEL FUND -7.0% +18.5% +15.5% +11.9% +14.3%
- --------------------------------------------------------------------------------
RUSSELL 2000 INDEX -16.3% +7.7% +11.2% +11.5% +10.8%
- --------------------------------------------------------------------------------
</TABLE>
[BAR CHART]
<TABLE>
<CAPTION>
Ariel Fund Russell 2000 S&P 500
Portfolio Portfolio Portfolio
Composition Composition Composition
<S> <C> <C> <C>
Consumer Discretionary & Services 36.6% 19.0% 13.4%
Materials & Processing 20.2% 8.4% 3.3%
Producer Durables 15.6% 6.6% 3.1%
Consumer Staples 10.2% 2.6% 8.2%
Financial Services 7.8% 23.1% 16.6%
Utilities 3.2% 8.6% 11.1%
Technology 2.7% 14.8% 17.4%
Health Care 0.9% 9.5% 12.4%
Integrated Oils 0.0% 0.2% 5.2%
Other Energy 0.0% 2.3% 1.0%
Autos & Transportation 0.0% 4.1% 2.5%
Cash 2.8% 0.0% 0.0%
Other 0.0% 0.8% 5.8%
</TABLE>
ARIEL FUND SEEKS LONG-TERM CAPITAL APPRECIATION BY INVESTING IN UNDERVALUED
COMPANIES IN CONSISTENT INDUSTRIES THAT SHOW STRONG POTENTIAL FOR GROWTH BUT
DOES SO AT A HIGHER RISK THAN THE ARIEL APPRECIATION FUND. 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 FUND AND
COMPARABLE INDICES*
[LINE GRAPH]
<TABLE>
<CAPTION>
RUSSELL
DATE ARIEL FUND S&P 2000
<S> <C> <C> <C>
1986 $10,000 $10,000 $10,000
1987 $11,367 $10,256 $8,860
1988 $15,905 $11,960 $11,065
1989 $19,900 $15,749 $12,863
1990 $16,699 $15,260 $10,354
1991 $22,163 $19,910 $15,122
1992 $24,763 $21,427 $17,906
1993 $26,924 $23,587 $21,282
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
Mar-99 $52,317 $72,744 $35,276
</TABLE>
*Statistics represent past performance which is not indicative of future
results. The S&P 500 is a broad market-weighted index dominated by blue-chip
stocks. The Russell 2000 Index measures the performance of smaller companies.
All indexes are unmanaged and returns include reinvested dividends. An
investor cannot invest directly in an index.
10
<PAGE>
ARIEL APPRECIATION FUND
INCEPTION DECEMBER 1, 1989
AVERAGE ANNUAL TOTAL RETURN AS OF MARCH 31, 1999 (assumes reinvestment of
dividends and capital gains) Total return does not reflect a maximum 4.75% sales
load charged prior to 7/15/94.
<TABLE>
- --------------------------------------------------------------------------------
1 Year 3 Year 5 Year Life of Fund
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ARIEL APPRECIATION FUND +8.7% +25.3% +19.3% +15.1%
- --------------------------------------------------------------------------------
RUSSELL MID CAP INDEX -1.1% +16.6% +17.9% +15.2%
- --------------------------------------------------------------------------------
</TABLE>
[BAR CHART]
<TABLE>
<CAPTION>
Ariel
Appreciation
Fund Russell Mid Cap S&P 500
Portfolio Portfolio Portfolio
Composition Composition Composition
<S> <C> <C> <C>
Consumer Discretionary & Services 34.2% 18.7% 13.4%
Materials & Processing 10.5% 8.6% 3.3%
Producer Durables 8.8% 5.0% 3.1%
Consumer Staples 10.9% 4.0% 8.2%
Financial Services 15.2% 21.6% 16.6%
Utilities 4.8% 12.8% 11.1%
Technology 1.4% 12.0% 17.4%
Health Care 8.0% 6.8% 12.4%
Integrated Oils 0.0% 1.8% 5.2%
Other Energy 0.0% 2.9% 1.0%
Autos & Transportation 0.0% 4.1% 2.5%
Cash 6.2% 0.0% 0.0%
Other 0.0% 1.6% 5.8%
</TABLE>
ARIEL APPRECIATION FUND ALSO PURSUES LONG-TERM CAPITAL APPRECIATION BY INVESTING
IN UNDERVALUED FIRMS WITH GROWTH POTENTIAL. LIKE ARIEL FUND, THIS FUND SEEKS OUT
ISSUERS THAT PROVIDE QUALITY PRODUCTS OR SERVICES. TO CAPTURE ANTICIPATED
GROWTH, THE FUND WILL ALSO HOLD INVESTMENTS FOR A RELATIVELY LONG PERIOD -
USUALLY THREE TO FIVE YEARS. THE FUND INVESTS IN SMALL AND MIDSIZE COMPANIES
WITH MARKET CAPITALIZATIONS FROM $200 MILLION TO $5 BILLION, WITH AN EMPHASIS ON
MEDIUM CAPITALIZATION (MID CAP) STOCKS.
COMPARISION OF CHANGE IN VALUE OF $10,000 INVESTED IN ARIEL APPRECIATION FUND
AND COMPARABLE INDICES*.
[LINE GRAPH]
<TABLE>
<CAPTION>
ARIEL
APPRECIATION RUSSELL
DATE FUND S&P 500 MID CAP
<S> <C> <C> <C>
1989 $10,000 $10,000 $10,000
1990 $9,902 $9,922 $9,006
1991 $13,184 $12,945 $12,744
1992 $14,930 $13,932 $14,826
1993 $16,115 $15,336 $16,947
1994 $14,763 $15,539 $16,592
1995 $18,330 $21,378 $22,308
1996 $22,677 $26,286 $26,547
1997 $31,283 $35,056 $34,247
1998 $37,398 $45,074 $37,705
Mar-99 $37,115 $47,319 $37,529
</TABLE>
*Statistics represent past performance which is not indicative of future
results. The S&P 500 is a broad market-weighted index dominated by blue-chip
stocks. The Russell Mid Cap Index measures the performance of small and
mid-sized companies. All indexes are unmanaged and returns include
reinvested dividends. An investor cannot invest directly in an index.
TEN LARGEST HOLDINGS
as of March 31, 1999
1 HASBRO, INC.
Prominent toy manufacturer
2 CENTURY TELEPHONE ENTERPRISES
Diversified telecommunications company
3 ALLERGAN, INC.
A foremost provider of specialty eyecare products
4 SPECIALTY EQUIPMENT
Manufacturer of commercial and institutional food service equipment
5 MBIA, INC.
Leading insurer of municipal bonds
6 CARNIVAL CORP.
World's largest cruise ship company
7 LEE ENTERPRISES
Diversified media company
8 ROUSE CO.
Retail mall developer
9 GALILEO INTERNATIONAL, INC.
Distinguished provider of electronic reservation services for the travel
industry
10 SYBRON CORP.
Principal manufacturer of products for the laboratory and professional
orthodontic and dental markets
11
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ARIEL FUND
SCHEDULE OF INVESTMENTS
MARCH 31, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
Number COMMON STOCKS-97.11% Cost Market Value
of Shares
<S> <C> <C> <C>
CONSUMER DISCRETIONARY--36.58%
768,610 American Media, Inc., Class A* $6,283,696 $4,227,355
368,133 Bob Evans Farms, Inc. 5,892,459 7,362,660
297,200 Central Newspapers, Inc., Class A 4,719,391 9,250,350
131,000 Day Runner, Inc.* 1,567,942 1,588,375
222,400 Department 56, Inc.* 7,438,138 6,769,300
6,000 Grey Advertising, Inc. 2,120,435 2,082,000
434,100 Hasbro, Inc. 4,955,856 12,561,769
423,700 International Game Technology 7,830,616 6,170,131
319,200 Lee Enterprises 8,875,507 9,256,800
266,100 Leggett & Platt, Inc. 2,383,620 5,322,000
242,700 Libbey, Inc. 8,806,015 7,523,700
--------- ---------
60,873,675 72,114,440
---------- ----------
CONSUMER STAPLES--10.18%
206,900 Longs Drug Stores, Inc. 4,058,841 6,297,519
237,100 McCormick & Co., Inc. 5,615,229 6,875,900
401,500 Whitman Corp. 6,686,984 6,900,781
--------- ---------
16,361,054 20,074,200
---------- ----------
12
<PAGE>
<CAPTION>
Number COMMON STOCKS-97.11% (cont) Cost Market Value
of Shares
<S> <C> <C> <C>
FINANCIAL SERVICES --7.82%
47,300 Arthur J. Gallagher & Co. $1,821,142 $2,175,800
163,200 MBIA, Inc. 5,997,724 9,465,600
120,900 Orion Capital Corp. 4,411,541 3,778,125
--------- ----------
12,230,407 15,419,525
---------- ----------
HEALTH CARE--0.88%
63,100 Wesley Jessen VisionCare, Inc.* 1,454,977 1,739,194
--------- ---------
MATERIALS AND PROCESSING--20.18%
313,700 Brady Corp. 7,860,420 6,568,094
207,500 Ecolab, Inc. 1,257,649 7,366,250
143,900 Hunt Corp. 1,916,478 1,421,012
683,700 Interface, Inc., Class A 5,775,491 6,580,613
439,100 Rouse Co. 8,795,673 9,742,531
413,400 Shorewood Packaging Corp.* 3,494,831 8,112,975
--------- ---------
29,100,542 39,791,475
----------- ----------
PRODUCER DURABLES--15.59%
182,220 General Binding Corp. 3,350,782 4,726,331
42,900 Graco, Inc. 926,476 946,481
141,700 Hussman International, Inc. 1,994,934 2,081,219
229,500 IDEX Corp. 5,667,885 5,407,594
306,200 Miller (Herman), Inc. 5,126,395 5,588,150
434,100 Specialty Equipment Cos., Inc.* 5,523,313 11,992,013
--------- --------------
22,589,785 30,741,788
----------- ----------
TECHNOLOGY--2.69%
288,100 Littelfuse, Inc.* 7,344,468 5,293,837
--------- ---------
UTILITIES--3.19%
89,600 Century Telephone Enterprises $1,933,416 $6,294,40
--------- --------
Total Common Stocks 151,888,324 191,468,859
----------- -----------
Principal REPURCHASE
Amount AGREEMENT-3.69%
$7,284,977 State Street Bank & Trust
Company Repurchase
Agreement, 4.00%, dated
3/31/1999, repurchase price
$7,285,786, maturing
4/1/1999 (collateralized by
U.S. Treasury Note, 4.00%,
10/31/2000) 7,284,977 7,284,977
--------- ---------
Total Repurchase Agreement 7,284,977 7,284,977
--------- ---------
Total Investments-100.80% $159,173,301 198,753,836
------------
------------
Liabilities less Other Assets-(0.80)% (1,578,923)
------------
NET ASSETS-100.00% $197,174,913
------------
------------
</TABLE>
*Non-income producing
The accompanying notes are an integral part of the financial statements.
13
<PAGE>
<TABLE>
<CAPTION>
ARIEL APPRECIATION FUND
SCHEDULE OF INVESTMENTS
MARCH 31, 1999 (UNAUDITED)
Number COMMON STOCKS-93.72% Cost Market Value
of Shares
<S> <C> <C> <C>
CONSUMER DISCRETIONARY--34.15%
145,900 Bob Evans Farms, Inc. $2,837,068 $2,918,000
251,700 Carnival Corp. 3,696,557 12,223,181
306,000 Central Newspapers, Inc., Class A 9,041,923 9,524,250
239,000 Galileo International, Inc. 9,991,761 11,561,625
282,350 Harte-Hanks, Inc. 1,652,234 7,746,978
615,750 Hasbro, Inc. 8,791,920 17,818,266
175,300 Houghton Mifflin Co. 5,036,251 8,217,188
313,400 International Game Technology 4,733,307 4,563,888
416,800 Lee Enterprises 11,658,988 12,087,200
397,920 Leggett & Platt, Inc. 3,684,538 7,958,400
229,100 Libbey, Inc. 8,163,211 7,102,100
110,500 Omnicom Group, Inc. 1,079,309 8,833,094
87,300 Tribune Co. 4,071,941 5,712,694
--------- ----------
74,439,008 116,266,864
---------- -----------
CONSUMER STAPLES--10.91%
72,661 Clorox Co. 4,121,421 8,514,961
259,340 Longs Drug Stores Corp. 5,343,855 7,893,661
374,555 McCormick & Co., Inc. 9,829,689 10,862,095
574,300 Whitman Corp. 9,994,999 9,870,781
--------- ----------
29,289,964 37,141,498
---------- ----------
FINANCIAL SERVICES--15.23%
70,800 Arthur J. Gallagher & Co. 2,866,301 3,256,800
259,000 Equifax, Inc. 7,813,217 8,903,125
196,600 Franklin Resources, Inc. 6,179,885 5,529,375
259,600 MBIA, Inc. 12,077,058 15,056,800
372,600 MBNA Corp. 5,719,565 8,895,825
114,700 Northern Trust Corp. 2,386,266 10,186,794
--------- ----------
37,042,292 51,828,719
---------- ----------
HEALTH CARE--7.98%
178,800 Allergan, Inc. 5,963,587 15,712,050
458,300 Sybron International Corp.* 7,802,878 11,457,500
--------- ----------
13,766,465 27,169,550
---------- ----------
MATERIALS AND PROCESSING--10.46%
267,700 Brady Corp. 5,904,915 5,604,969
129,600 Ecolab, Inc. 1,601,491 4,600,800
369,400 Interface, Inc., Class A 6,182,273 3,555,475
534,400 Rouse Co. 9,874,448 11,857,000
509,215 Shorewood Packaging Corp.* 4,849,505 9,993,344
---------- ---------
28,412,632 35,611,588
---------- ----------
PRODUCER DURABLES--8.77%
109,805 General Binding Corp. 1,761,453 2,848,067
122,450 Hussman International, Inc. 1,646,582 1,798,484
294,400 Miller (Herman), Inc. 5,047,942 5,372,800
66,100 Pitney Bowes, Inc. 2,116,476 4,213,875
565,900 Specialty Equipment Cos., Inc.* 8,982,410 15,632,988
--------- ----------
19,554,863 29,866,214
---------- ----------
14
<PAGE>
<CAPTION>
Number COMMON STOCKS-93.72% (cont) Cost Market Value
of Shares
<S> <C> <C> <C>
TECHNOLOGY--1.41%
261,200 Littelfuse, Inc.* $6,523,002 $4,799,550
---------- ----------
UTILITIES--4.81%
232,950 Century Telephone Enterprises 5,105,899 16,364,737
--------- ----------
Total Common Stocks 214,134,125 319,048,720
----------- -----------
<CAPTION>
Principal REPURCHASE
Amount AGREEMENT-9.00% Cost Market Value
<S> <C> <C> <C>
$30,624,757 State Street Bank & Trust
Company Repurchase
Agreement, 4.00%, dated
3/31/1999, repurchase price
$30,628,160, maturing
4/1/1999 (collateralized by
U.S. Treasury Bond, 8.875%,
8/15/2017) $30,624,757 $30,624,757
----------- -----------
Total Repurchase Agreement 30,624,757 30,624,757
---------- ----------
Total Investments-102.72% 244,758,882 349,673,477
------------
------------
Liabilities less Other Assets-(2.72)% (9,245,408)
------------
NET ASSETS-100.00% $340,428,069
------------
------------
*Non-income producing
The accompanying notes are an integral part of the financial statements.
</TABLE>
15
<PAGE>
EQUITY STATISTICAL SUMMARY
<TABLE>
<CAPTION>
ARIEL FUND
(UNAUDITED)
EARNINGS PER SHARE
--------------------
52 - WEEK 1998 1999 1998 1999 MARKET
TICKER PRICE RANGE ACTUAL ESTIMATED P/E P/E CAP.
-----------
COMPANY SYMBOL 3/31/99 LOW HIGH CALENDAR CALENDAR CALENDAR CALENDAR ($MM)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Hunt Corp. HUN 9.88 9.25 25.19 0.80 0.97 12.4 10.2 107
Day Runner, Inc. DAYR 12.13 9.25 25.50 1.16 0.50 10.5 24.3 144
American Media, Inc. ENQ 5.75 4.00 8.19 0.10 0.20 57.5 28.8 244
Littelfuse, Inc. LFUS 18.38 16.00 26.63 0.86 0.97 21.4 18.9 407
General Binding Corp. GBND 25.94 18.00 42.50 1.63 2.06 15.9 12.6 408
Grey Advertising, Inc. GREY 347.00 263.00 480.00 18.98 23.78 18.3 14.6 431
Graco, Inc. GGG 22.06 19.88 36.50 2.01 2.53 11.0 8.7 448
Wesley Jessen Visioncare, Inc. WJCO 27.56 16.13 34.00 1.57 1.83 17.6 15.1 471
Brady Corp. BRCOA 20.94 16.25 35.75 1.49 1.65 14.1 12.7 472
Libbey, Inc. LBY 31.00 24.00 39.50 2.31 2.51 13.4 12.4 504
Interface, Inc. IFSIA 9.63 7.25 22.88 0.87 1.04 11.1 9.3 508
Shorewood Packaging Corp. SWD 19.63 12.13 20.63 1.08 1.29 18.2 15.2 538
Department 56, Inc. DFS 30.44 22.94 39.31 2.45 2.80 12.4 10.9 547
Specialty Equipment Cos. SEC 27.63 18.00 28.94 2.18 2.46 12.7 11.2 596
IDEX Corp. IEX 23.56 19.50 38.75 1.81 1.86 13.0 12.7 694
Hussmann International, Inc. HSM 14.69 11.63 20.13 1.20 1.42 12.2 10.3 746
Bob Evans Farms, Inc. BOBE 20.00 18.00 26.88 1.28 1.46 15.6 13.7 820
Arthur J. Gallagher & Co. AJG 46.00 34.88 50.63 3.05 3.30 15.1 13.9 833
Orion Capital Corp. OC 31.25 28.00 59.25 2.51 3.19 12.5 9.8 851
Longs Drug Stores Corp. LDG 30.44 26.00 44.50 1.72 1.84 17.7 16.5 1,186
Central Newspapers, Inc. ECP 31.13 27.41 38.25 1.78 2.10 17.5 14.8 1,256
Lee Enterprises LEE 29.00 21.81 33.88 1.42 1.60 20.4 18.1 1,285
Herman Miller, Inc. MLHR 18.25 15.63 34.19 1.62 1.68 11.3 10.9 1,551
Whitman Corp. WH 17.19 14.88 25.44 0.61 0.42 28.2 40.9 1,569
International Game Technology IGT 14.63 14.13 28.69 1.36 1.47 10.8 10.0 1,573
Rouse Company RSE 22.19 23.13 35.69 2.69 2.95 8.2 7.5 1,603
McCormick & Company, Inc. MCCRK 29.00 26.63 36.44 1.41 1.60 20.6 18.1 2,100
Leggett & Platt, Inc. LEG 20.00 16.88 28.75 1.24 1.40 16.2 14.3 3,956
Ecolab, Inc. ECL 35.50 26.13 41.25 1.15 1.30 30.9 27.3 4,601
Hasbro, Inc. HAS 28.94 18.67 30.38 1.07 1.40 27.0 20.7 5,669
MBIA, Inc. MBI 58.00 46.06 80.94 4.58 4.90 12.7 11.8 5,785
Century Telephone Enterprises CTL 46.83 27.08 49.00 1.42 1.63 33.0 28.7 6,488
</TABLE>
Note: All earnings per share numbers are fully diluted. Such numbers are from
continuing operations and are adjusted for non-recurring items.
The Rouse Company numbers are before depreciation and deferred taxes.
16
<PAGE>
<TABLE>
<CAPTION>
ARIEL APPRECIATION FUND EARNINGS PER SHARE
(UNAUDITED) ------------------
52 - WEEK 1998 1999 1998 1999 MARKET
TICKER PRICE RANGE ACTUAL ESTIMATED P/E P/E CAP.
-----------
COMPANY SYMBOL 3/31/99 LOW HIGH CALENDAR CALENDAR CALENDAR CALENDAR ($MM)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Littelfuse, Inc. LFUS 18.38 16.00 26.63 0.86 0.97 21.4 18.9 407
General Binding Corp. GBND 25.94 18.00 42.50 1.63 2.06 15.9 12.6 408
Brady Corp. BRCOA 20.94 16.25 35.75 1.49 1.65 14.1 12.7 472
Libbey, Inc. LBY 31.00 24.00 39.50 2.31 2.51 13.4 12.4 504
Interface, Inc. IFSIA 9.63 7.25 22.88 0.87 1.04 11.1 9.3 508
Shorewood Packaging Corp. SWD 19.63 12.13 20.63 1.08 1.29 18.2 15.2 538
Specialty Equipment Cos. SEC 27.63 18.00 28.94 2.18 2.46 12.7 11.2 596
Hussmann International, Inc. HSM 14.69 11.63 20.13 1.20 1.42 12.2 10.3 746
Bob Evans Farms, Inc. BOBE 20.00 18.00 26.88 1.28 1.46 15.6 13.7 820
Arthur J. Gallagher & Co. AJG 46.00 34.88 50.63 3.05 3.30 15.1 13.9 833
Longs Drug Stores Corp. LDG 30.44 26.00 44.50 1.72 1.84 17.7 16.5 1,186
Central Newspapers, Inc. ECP 31.13 27.41 38.25 1.78 2.10 17.5 14.8 1,256
Lee Enterprises LEE 29.00 21.81 33.88 1.42 1.60 20.4 18.1 1,285
Houghton Mifflin Company HTN 46.88 29.88 47.63 1.40 1.66 33.5 28.2 1,410
Herman Miller, Inc. MLHR 18.25 15.63 34.19 1.62 1.68 11.3 10.9 1,551
Whitman Corp. WH 17.19 14.88 25.44 0.61 0.42 28.2 40.9 1,569
International Game Technology IGT 14.63 14.13 28.69 1.36 1.47 10.8 10.0 1,573
Rouse Company RSE 22.19 23.13 35.69 2.69 2.95 8.2 7.5 1,603
Harte-Hanks, Inc. HHS 27.44 17.38 29.25 0.88 1.02 31.2 26.9 1,948
McCormick & Company, Inc. MCCRK 29.00 26.63 36.44 1.41 1.60 20.6 18.1 2,100
Sybron International Corp. SYB 25.00 16.38 29.13 1.03 1.24 24.3 20.2 2,581
Leggett & Platt, Inc. LEG 20.00 16.88 28.75 1.24 1.40 16.2 14.3 3,956
Ecolab, Inc. ECL 35.50 26.13 41.25 1.15 1.30 30.9 27.3 4,601
Equifax, Inc. EFX 34.38 29.75 45.00 1.34 1.56 25.7 22.0 4,987
Galileo International, Inc. GLC 48.38 24.75 51.88 1.86 2.21 26.0 21.9 5,070
Hasbro, Inc. HAS 28.94 18.67 30.38 1.07 1.40 27.0 20.7 5,669
MBIA Inc. MBI 58.00 46.06 80.94 4.58 4.90 12.7 11.8 5,785
Allergan, Inc. AGN 87.88 37.25 97.28 2.04 2.42 43.1 36.3 5,899
Century Telephone Enterprises CTL 46.83 27.08 49.00 1.42 1.63 33.0 28.7 6,488
Franklin Resources, Inc. BEN 28.13 25.75 57.88 1.86 1.79 15.1 15.7 7,107
Tribune Company TRB 65.44 44.75 75.06 2.53 2.90 25.9 22.6 7,816
Northern Trust Corp. NTRS 88.81 55.75 94.75 3.03 3.46 29.3 25.7 9,890
The Clorox Company CLX 117.19 79.13 132.94 3.01 3.42 38.9 34.3 12,155
Omnicom Group, Inc. OMC 79.94 37.00 80.94 1.68 1.93 47.6 41.4 14,240
Pitney Bowes, Inc. PBI 63.75 44.81 71.19 2.03 2.30 31.4 27.7 17,185
MBNA Corporation KRB 23.88 13.50 28.44 0.97 1.16 24.6 20.6 19,147
Carnival Corporation CCL 48.56 19.00 49.44 1.40 1.65 34.7 29.4 29,763
</TABLE>
Note: All earnings per share numbers are fully diluted. Such numbers are from
continuing operations and are adjusted for non-recurring items.
The Rouse Company numbers are before depreciation and deferred taxes.
17
<PAGE>
ARIEL PREMIER BOND
DEAR FELLOW SHAREHOLDER: For the quarter ending March 31, 1999, we are
pleased to report the Ariel Premier Bond Fund Institutional Class returned
+0.01% and the Investor Class -0.09%, while the Lehman Brothers Aggregate
Index lost -0.50% and the Lipper Corporate A-Rated Bond Index fell -0.74% for
the same period.(1) The Ariel Premier Bond Fund continues to be a solid
performer among its peers, ranking in the top 15th percentile of the
Corporate Debt A Rated Funds tracked by Lipper Analytical Services--
specifically, the 23rd best performer out of 155 funds for the one year
period ended March 31, 1999.(2) Additionally, the Institutional Class
continues to maintain its 4-star rating by Morningstar, Inc.(3) (The Investor
Class is not yet rated.)
The poor performance of the fixed income market during the first quarter is a
result of the stark divergence between the expectations for growth and Fed
policy built into yields at year-end and the actual performance of the global
economy thus far in 1999. At year-end, the two-year Treasury was 4.54% and the
ten-year was 4.66% versus a Federal Funds rate of 4.75%; a clear reflection of
expectations for lower short-term rates. These views reflected a consensus that
the recent global events--the Asian economic collapse, the Russian default, and
the Latin American currency turmoil--would eventually cause enough of a slowdown
in U.S. growth to cause inflation to fall and the Federal Reserve to lower
short-term rates again.
The facts have turned out quite differently from this view, as the U.S. economy
grew at over 6% in the fourth quarter of 1998 and retains extraordinary momentum
into 1999. Oil prices have risen 40% so far in 1999, increasing inflation
forecasts. The global economy is improving faster than even the most optimistic
forecasts. These facts led to revised expectations that Fed policy would not be
changed for the foreseeable future, and rates rose accordingly to reflect this
more balanced view.
The sharp increase in bond yields made duration a particularly important
determinant of absolute return over the quarter; the shorter, the better.
Additionally, all non-Treasury sectors performed well as spreads narrowed in
response to the bright economic outlook. The Ariel Premier Bond Fund did well in
the quarter as a result of its short duration exposure and the overweightings in
corporates, mortgages and asset-backed bonds. From a strategy standpoint, there
were a couple of important changes in the portfolio during the quarter. The
portfolio's short duration exposure was reduced from -1 year to -1/2 year as
rates rose. The TIPS position was reduced from 12% to 6.5% as the duration
exposure was modified. The portfolio's mortgage exposure was increased as the
combination of yield and potential price appreciation makes mortgages a
particularly attractive sector. The portfolio's corporate exposure was reduced
as spreads narrowed during the quarter.
18
<PAGE>
Overall, the Ariel Premier Bond Fund continues to be positioned to perform well
in a stable to higher interest rate environment, resulting from healthy domestic
economic performance and an improving global landscape.
We appreciate the opportunity to serve you and, as always, welcome your thoughts
and comments.
Sincerely,
/s/ John W. Rogers, Jr. /s/ Kenneth R. Meyer
John W. Rogers, Jr. Kenneth R. Meyer
President President
Ariel Capital Management, Inc. Lincoln Capital Management Company
(1) The Funds' average annual returns and a description of the Lehman
Brothers Aggregate index can be referenced on page 20. The Lipper Corporate A
Rated Bond Index is an equally weighted performance index adjusted for
capital gains distribution and income dividends of the largest qualifying
funds in the investment objective. The funds invest at least 65% of fund
assets in corporate debt issues rated "A" or better or government issues. An
investor cannot invest directly in an index.
(2) 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. Ariel Premier Bond Fund, Institutional
Class ranked 46 out of 118 funds for the since inception (10/5/97) period
ended 3/31/99.
(3) Morningstar proprietary rankings reflect historical risk-adjusted
performance for the three-year period ended 3/31/99. Ratings are based on
1,521 Fixed Income Funds. Ratings are subject to change every month and are
calculated from the fund's three year average annual returns in excess of
90-day Treasury Bill returns with appropriate fee adjustments and a risk
factor that reflects fund performance below 90-day Treasury Bill returns. The
top 10% of funds in an investment category receive 5 stars; the next 22.5%
receive 4 stars; the next 35% receive 3 stars; the next 22.5% receive 2 stars
and the bottom 10% receive 1 star.
19
<PAGE>
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.
ARIEL PREMIER BOND FUND
Institutional Class Inception
October 1, 1995
Investor Class Inception
February 1, 1997
AVERAGE ANNUAL TOTAL RETURN AS OF MARCH 31, 1999 (assumes reinvestment of
dividends and capital gains)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
1Q99 1 Year 3 Year Life of Fund
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ARIEL PREMIER BOND FUND, INST. CL. +0.0% +6.1% +7.5% +6.7%
- -------------------------------------------------------------------------------------------------
ARIEL PREMIER BOND FUND, INV. CL. -0.1% +5.6% -- +7.2%
- -------------------------------------------------------------------------------------------------
LEHMAN BROS. AGGREGATE BOND INDEX -0.5% +6.5% +7.8% +7.3% (INST.)
+8.1% (INV.)
</TABLE>
[BAR CHART]
<TABLE>
<CAPTION>
Ariel Premier Lehman Aggregate
Bond Fund Bond Index
Portfolio Portfolio
Composition Composition
<S> <C> <C>
Government & Agency 12.0% 44.6%
Mortgage-Backed 32.8% 31.7%
Corporate 16.2% 22.4%
Asset-Backed 33.4% 1.3%
Cash 5.6% 0.0%
</TABLE>
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTED IN ARIEL PREMIER BOND FUND,
INV. CL. AND COMPARABLE INDICES*
[LINE GRAPH]
<TABLE>
<CAPTION>
Ariel Premier
Bond Fund, Lehman
Inv. Cl. Aggregate
<S> <C> <C>
2/97 $10,000 $10,000
3/97 $9,930 $9,914
6/97 $10,265 $10,278
9/97 $10,573 $10,619
12/97 $10,838 $10,932
3/98 $10,997 $11,102
6/98 $11,234 $11,361
9/98 $11,616 $11,841
12/98 $11,621 $11,882
3/99 $11,611 $11,823
</TABLE>
COMPARISON OF CHANGE IN VALUE OF $1,000,000 INVESTED IN ARIEL PREMIER BOND
FUND, INST. CL. AND COMPARABLE INDICES*
[LINE GRAPH]
<TABLE>
<CAPTION>
Ariel Premier
Bond Fund, Lehman
Inst. Cl. Aggregate
<S> <C> <C>
10/95 $1,000,000 $1,000,000
12/95 $1,035,122 $1,042,614
3/96 $1,009,187 $1,024,120
6/96 $1,018,867 $1,029,953
9/96 $1,039,607 $1,048,996
12/96 $1,067,709 $1,080,467
3/97 $1,063,762 $1,074,431
6/97 $1,101,595 $1,113,887
9/97 $1,135,867 $1,150,901
12/97 $1,165,544 $1,184,770
3/98 $1,182,644 $1,203,205
6/98 $1,210,570 $1,231,317
9/98 $1,251,681 $1,283,385
12/98 $1,254,703 $1,287,699
3/99 $1,254,835 $1,281,308
</TABLE>
*Statistics represent past performance which is not indicative of future
results. The Lehman Brothers Aggregate Bond Index is composed of securities
from Lehman Brothers Government/Corporate Bond Index, Mortgage-Backed
Securities Index, and the Asset-Backed Securities Index. Total return
comprises price appreciation/depreciation and income as a percentage of the
original investment. An investor cannot invest directly in an index.
20
<PAGE>
ARIEL PREMIER BOND FUND
SCHEDULE OF INVESTMENTS
MARCH 31, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
Par Value ASSET-BACKED SECURITIES-33.39% Cost Market Value
<S> <C> <C> <C>
$700,000 Americredit Auto Receivables,
6.06%, 12/12/2002 $ 699,901 $702,261
750,000 Americredit Auto Receivables,
5.88%, 12/12/2005 749,845 749,182
1,000,000 AssociatesManufactured Housing,
972A-3, 6.275%, 3/15/2028 999,706 1,006,030
1,000,000 Auto Leasing Investors,
6.177%, 8/12/2005+ 1,000,000 1,008,440
650,000 BEA, 1998-1A A2A, zero coupon,
6/15/2010+ 627,778 629,889
520,000 Caterpillar Financial, G8AA,
5.85%, 4/25/2003 519,690 523,718
2,500,000 Chase Credit Card, 96C 3A,
7.04%, 2/15/2005 2,597,754 2,577,875
695,000 Circuit City Credit Card,
1995-1A, 6.375%, 8/15/2005 706,673 702,152
2,350,000 Citibank Credit Card, 97-6A,
zero coupon, 8/15/2006 1,690,604 1,702,481
990,000 Comed Transitional Funding Trust,
1998-A6, 5.63%, 6/25/2009 989,529 964,963
2,000,000 Contimortgage Home Equity, 97-A5,
6.44%, 12/15/2012 2,018,174 2,020,660
1,119,049 Credit Card Receivables Trust,
6.478%, 12/22/2004+ 1,125,979 1,114,047
400,000 CSFB, 97-C1 A1C, 7.24%, 6/20/2007 414,743 418,148
2,000,000 EQCC Home Equity, 973-A9,
6.57%, 2/15/2029 1,983,985 2,011,320
624,000 Fingerhut, 96-1A, 6.45%, 2/20/2002 626,763 628,393
1,800,000 First Omni, 96-AA, 6.65%, 9/15/2003 1,823,005 1,841,616
1,399,129 Fleetwood, 97BA, 6.40%, 5/15/2013 1,397,280 1,414,141
130,000 General Growth Properties, 971A1, A2,
6.537%, 11/15/2004+ 132,846 132,437
2,530,000 GMAC Commercial,
6.566%, 11/15/2007 2,544,903 2,583,762
550,000 GMAC Commercial,
6.175%, 5/15/2033 558,326 543,983
950,000 Greenpoint Manufacturing,
6.01%, 8/15/2015 949,755 951,786
500,000 Green Tree Financial, 98-A4,
6.09%, 7/1/2010 499,946 503,910
60,000 Green Tree Financial, 1995-1 A5,
8.40%, 6/15/2025 65,785 61,424
1,065,000 GS Mortgage Securities Corp.,
97A2B, 6.86%, 7/13/2030 1,098,595 1,100,283
789,717 GS Mortgage Securities Corp.,
5.85%, 11/18/2030 791,117 782,807
1,109,427 GS Mortgage Securities Corp.,
6.312%, 4/13/2031 1,132,728 1,119,833
21
<PAGE>
<CAPTION>
Par Value ASSET-BACKED SECURITIES-33.39% (cont) Cost Market Value
<S> <C> <C> <C>
$1,415,000 Healthcare Rec, 99-1,
6.250%, 2/1/2003 $1,412,792 $1,415,439
799,735 IMC Excess Cash,
7.41%, 11/26/2028+ 799,706 749,880
1,450,000 J.C. Penney Master Credit Card Trust,
1990-C1, 9.625%, 6/30/2000 1,503,322 1,519,643
795,855 Merrill Lynch Mortgage Investors, Inc.,
1995-C2-A1, Floating Rate, 6.623%
as of 3/31/99, 6/15/2021 806,359 808,636
180,269 The Money Store, 1996-1 A3,
6.85%, 12/20/2002 180,251 181,389
300,000 The Money Store, 1996-B A6,
7.38%, 5/15/2017 299,956 303,420
1,000,000 The Money Store, 1996-B A9,
8.14%, 10/15/2027 1,061,074 1,053,960
43,974 Olympic Auto Receivables,
1995-EA4, 5.85%, 3/15/2001 43,745 44,093
450,000 Onyx Acceptance Auto Trust,
5.83%, 3/15/2004 449,969 452,601
1,440,000 Prime, 95-1A, 6.75%, 11/15/2005 1,445,592 1,486,584
77,777 Private Label Credit Card,
1994-2A, 7.80%, 9/20/2003 79,003 79,261
3,266,981 Railcar Leasing, 971A, 6.75%,
7/15/2006+ 3,310,240 3,336,405
1,300,719 Railcar Trust, 92-A1, 7.75%, 6/1/2004 1,345,563 1,367,433
940,000 Salomon Brothers Mortgage Sec.,
97LB6A3, 6.76%, 12/25/2027 938,843 942,115
293,333 Sears Credit Account, 96-2A,
6.50%, 10/15/2003 292,216 294,665
2,300,000 Standard Credit Card Master -
Citibank, 951A, 8.25%, 1/7/2007 2,479,459 2,574,459
600,000 Starwood, 99-C1, 6.92%, 2/5/2009+ 608,319 615,000
171,227 UCFC, 96 CA 3, 7.15%, 12/15/2013 171,202 171,479
1,560,000 Union Acceptance Corp., 97AA2,
6.375%, 10/8/2003 1,570,594 1,573,510
2,630,000 Union Financial Services Taxable
Student Loan, 98A A8,
5.50%, 9/1/2005 2,611,714 2,581,108
1,880,000 World Financial, 96-AA,
6.70%, 2/15/2004 1,887,624 1,919,856
2,195,238 World Omni Auto Lease,
97B3, 6.18%, 11/25/2003 2,195,049 2,211,219
---------- ----------
Total Asset-Backed Securities 53,238,002 53,477,696
---------- ----------
CORPORATE DEBT-16.20%
500,000 Abbey National PLC,
6.70%, 6/29/2049 499,162 490,625
445,000 American General Inst.,
7.57%, 12/1/2045+ 465,108 462,244
500,000 American General Inst.,
8.125%, 3/15/2046+ 548,572 556,250
22
<PAGE>
<CAPTION>
Par Value CORPORATE DEBT-16.20% (cont) Cost Market Value
<S> <C> <C> <C>
$550,000 American Stores, 8.00%, 6/1/2026 $ 605,175 $627,000
275,000 Bank of America Capital II,
7.70%, 12/31/2026+ 289,296 278,781
1,000,000 BankBoston Corp., 6.125%, 3/15/2002 999,803 1,001,250
185,000 Bayer Corporation, 6.65%, 2/15/2028+ 184,033 181,994
550,000 Best Foods, 5.60%, 10/15/2097 424,424 440,000
750,000 CE Generation C, 7.416%,
12/15/2018+ 750,000 736,875
1,000,000 Citigroup Capital II,
7.75%, 12/1/2036 1,035,680 1,027,500
1,575,000 Consumers Energy CMS,
6.20%, 5/1/2008 1,556,513 1,567,125
700,000 Delta Airlines, 6.65%, 3/15/2004 699,475 708,750
515,000 FedEx, 7.60%, 7/1/2097 540,542 505,987
1,100,000 GTE California, 6.75%, 5/15/2027 1,151,324 1,102,750
710,000 Hilton Hotels, 7.00%, 7/15/2004 701,385 700,237
275,000 J.C. Penney Co., 7.625%, 3/1/2097 269,473 262,281
240,000 JP Morgan Capital Trust I,
7.54%, 1/15/2027 235,084 240,300
1,275,000 MCI WorldCom, Inc.,
7.75%, 4/1/2027 1,370,146 1,447,125
1,500,000 MCI WorldCom, Inc.,
6.95%, 8/15/2028 1,623,718 1,528,125
610,000 Mirage Resorts, 7.25%, 8/1/2017 606,850 577,975
300,000 News America Holdings,
7.25%, 5/18/2018 298,007 302,250
650,000 Peco Energy Co., 7.38%, 4/6/2028 650,000 638,625
625,000 Pepsi Bottling, 7.00%, 3/1/2029+ 620,753 625,781
1,400,000 Philip Morris, 7.125%, 8/15/2002 1,392,927 1,445,500
775,000 Provident Companies,
6.375%, 7/15/2005 772,504 770,156
1,220,000 Provident Companies,
7.00%, 7/15/2018 1,219,616 1,215,425
1,190,000 PSI Energy, 7.25%, 3/15/2028 1,186,192 1,164,713
1,160,000 Rite Aid Corporation,
6.00%, 10/1/2003+ 1,159,775 1,138,250
1,000,000 Safeco Capital Trust,
8.072%, 7/15/2037 1,000,000 998,750
750,000 Security Capital Group,
7.75%, 11/15/2003 749,336 758,438
1,000,000 Service Corp., 7.00%, 6/1/2015 1,021,504 1,005,000
805,000 Suntrust Cap II,
7.90%, 6/15/2027 809,639 839,213
560,000 Zurich Capital Trust,
8.376%, 6/1/2037+ 595,680 597,100
---------- ----------
Total Corporate Debt 26,031,696 25,942,375
---------- ----------
U.S. GOVERNMENT AGENCIES-33.94%
MORTGAGE-BACKED SECURITIES--32.77%
20,200,000 Fannie Mae, 5.50%, 4/1/20144 19,638,188 19,657,024
1,319,079 Freddie Mac, Gold,
6.50%, 11/1/2025 1,246,725 1,323,195
17,115,000 Freddie Mac, Gold,
6.50%, 5/1/20294 17,067,551 17,040,036
23
<PAGE>
<CAPTION>
Par Value U.S. GOVERNMENT AGENCIES-33.94% (cont) Cost Market Value
<S> <C> <C> <C>
$13,900,000 Ginnie Mae, 8.00%, 4/1/20294 $14,456,000 $14,473,375
----------- -----------
52,408,464 52,493,630
----------- -----------
OTHER AGENCY ISSUES--1.17%
1,145,179 Government Trust Certificate, Israel
Trust, Series 2E, 9.40%, 5/15/2002 1,198,450 1,195,280
655,846 Pemex Exp. Trust, 95-A,
7.66%, 8/15/2001 667,896 674,832
----------- -----------
1,866,346 1,870,112
----------- -----------
Total U.S. Government Agencies 54,274,810 54,363,742
----------- -----------
U.S. GOVERNMENT OBLIGATIONS-10.84%
560,000 U.S. Treasury Bond,
13.875%, 5/15/2011 822,134 830,318
4,025,000 U.S. Treasury Bond,
6.75%, 8/15/2026* 4,744,456 4,495,724
540,000 U.S. Treasury Bond,
6.125%, 11/15/2027 609,023 560,893
200,000 U.S. Treasury Note,
6.25%, 6/30/2002 203,658 206,424
835,000 U.S. Treasury Note,
6.50%, 10/15/2006 920,491 889,651
10,647,048 U.S. Treasury Note, TIPS,
3.625%, 1/15/2008* 10,677,266 10,387,473
----------- -----------
Total U.S. Government
Obligations 17,977,028 17,370,483
----------- -----------
COMMERCIAL PAPER-23.78%
3,100,000 Alcoa, 4.82%, 5/17/1999* 3,080,907 3,080,907
3,100,000 American Express Corp.,
4.82%, 4/19/1999* 3,092,529 3,092,529
3,100,000 American General Finance,
4.83%, 4/22/1999* 3,091,266 3,091,266
3,100,000 Associates First Corp.,
4.84%, 4/22/1999* 3,091,248 3,091,248
3,100,000 Commercial Credit,
4.83%, 4/19/1999* 3,092,513 3,092,513
3,100,000 Deere & Co., 4.83%, 4/19/1999* 3,092,513 3,092,513
3,100,000 Ford Motor Credit,
4.84%, 4/19/1999* 3,092,498 3,092,498
3,100,000 General Motors, 4.82%, 4/19/1999* 3,092,529 3,092,529
3,100,000 Household Finance,
4.84%, 4/22/1999* 3,091,248 3,091,248
2,000,000 Lucent Technology,
4.80%, 4/22/1999* 1,994,400 1,994,400
1,100,000 Monsanto Company,
4.86%, 4/13/1999* 1,098,218 1,098,218
1,000,000 Prudential Funding Corp.,
4.83%, 4/19/1999* 997,585 997,585
3,100,000 Wells Fargo & Co.,
4.83%, 4/19/1999* 3,092,514 3,092,514
3,100,000 Xerox Credit Corporation,
4.81%, 4/22/1999* 3,091,302 3,091,302
----------- -----------
Total Commercial Paper 38,091,270 38,091,270
----------- -----------
24
<PAGE>
<CAPTION>
Principal REPURCHASE AGREEMENT-2.91% Cost Market Value
Amount
<S> <C> <C> <C>
$4,654,124 State Street Bank & Trust
Company Repurchase
Agreement, 4.00%, dated
3/31/1999, repurchase price
$4,654,641, maturing
4/1/1999 (collateralized by
U.S. Treasury Bond, 8.75%,
5/15/2017) $4,654,124 $4,654,124
----------- -----------
Total Repurchase Agreement 4,654,124 4,654,124
----------- -----------
Total Investments-121.06% $194,266,930 193,899,690
------------
------------
Liabilities less Other Assets-(21.06)% (33,733,546)
------------
NET ASSETS-100.00% $160,166,144
------------
------------
</TABLE>
+Security exempt from registration under Rule 144A of the Securities Act of
1933. These securities may be resold in transactions exempt from registration
normally to qualified institutional buyers.
- - When-issued security.
*Security pledged as collateral for when-issued purchase commitment outstanding
as of March 31, 1999.
The accompanying notes are an integral part of the financial statements.
25
<PAGE>
STATEMENT OF ASSETS & LIABILITIES
MARCH 31, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
ARIEL APPRECIATION PREMIER
FUND FUND BOND FUND
---- ---- ---------
<S> <C> <C> <C>
ASSETS:
Investments in securities, at value
(cost $159,173,301, $244,758,882
and $194,266,930, respectively) $198,753,836 $349,673,477 $193,899,690
Cash -- -- 161,104
Dividends and interest receivable 276,652 394,969 1,064,833
Receivable for securities sold -- -- 16,939,772
Receivable for fund shares issued 116,789 480,394 78,863
Prepaid and other assets 51,143 56,455 --
------ ------ ------
Total assets 199,198,420 350,605,295 212,144,262
----------- ----------- -----------
LIABILITIES:
Payable for securities purchased 1,628,095 9,692,044 51,161,739
Accrued management fee 109,779 213,557 60,622
Accrued distribution fee 31,075 51,601 301
Payable for shares redeemed 165,500 145,777 --
Shareholder distribution payable -- -- 755,456
Other liabilities 89,058 74,247 --
------ ------ ------
Total liabilities 2,023,507 10,177,226 51,978,118
--------- ---------- ----------
NET ASSETS $197,174,913 $340,428,069 $160,166,144
------------ ------------ ------------
------------ ------------ ------------
NET ASSETS CONSIST OF:
Paid-in-capital $132,066,437 $229,151,862 $159,566,344
Undistributed net investment income 182,855 282,806 --
Accumulated net realized gain
on investment transactions 25,345,086 6,078,806 967,040
Net unrealized appreciation
(depreciation) on investments 39,580,535 104,914,595 (367,240)
---------- ----------- --------
Total net assets $197,174,913 $340,428,069 $160,166,144
------------ ------------ ------------
------------ ------------ ------------
Shares outstanding (no par value) 5,337,275 9,610,821
Institutional Class 15,352,747
Investor Class 293,902
Net asset value, offering and redemption
price per share $36.94 $35.42
Institutional Class $10.24
Investor Class $10.23
</TABLE>
STATEMENT OF OPERATIONS
SIX MONTHS ENDED MARCH 31, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
ARIEL APPRECIATION PREMIER
FUND FUND BOND FUND
---- ---- ---------
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividends $1,202,857 $1,619,210 $ --
Interest 303,551 422,748 4,715,658
---------- ---------- ----------
Total investment income 1,506,408 2,041,958 4,715,658
---------- ---------- ----------
EXPENSES:
Management fee 622,487 1,054,750 351,358
Distribution fee 239,418 351,583 2,461
Transfer agent fees and expenses 197,474 217,496 --
Printing and postage expense 43,331 40,034 --
Professional fees 35,272 35,495 --
Trustees' fees and expenses 16,996 17,007 --
Federal and state registration fees 14,642 16,491 --
Custody fees and expenses 11,074 11,983 --
Miscellaneous expenses 10,756 12,121 --
---------- ---------- ----------
Net expenses 1,191,450 1,756,960 353,819
---------- ---------- ----------
NET INVESTMENT INCOME 314,958 284,998 4,361,839
---------- ---------- ----------
REALIZED AND UNREALIZED
GAIN (LOSS):
Net realized gain on investments 25,483,995 6,075,315 1,233,397
Change in net unrealized appreciation
on investments (8,001,213) 44,215,610 (5,319,924)
---------- ---------- ----------
Net gain (loss) on investments 17,482,782 50,290,925 (4,086,527)
---------- ---------- ----------
NET INCREASE IN NET ASSETS
RESULTING FROM
OPERATIONS $17,797,740 $50,575,923 $275,312
----------- ----------- ----------
----------- ----------- ----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
26
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS (UNAUDITED)
<TABLE>
<CAPTION>
ARIEL FUND APPRECIATION FUND PREMIER BOND FUND
---------- ----------------- -----------------
Six Months Six Months Six Months
Ended Year Ended Ended Year Ended Ended Year Ended
March 31, September 30, March 31, September 30, March 31, September 30,
1999 1998 1999 1998 1999 1998
---------- ------------- ---------- ------------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS:
Net investment income $314,958 $536,498 $284,998 $552,798 $4,361,839 $7,554,465
Net realized gain on investments 25,483,995 17,160,907 6,075,315 25,325,874 1,233,397 1,888,489
Change in net unrealized
appreciation on investments (8,001,213) (23,286,493) 44,215,610 (19,712,453) (5,319,924) 3,368,397
------------ ------------ ------------ ------------ ------------ ------------
Net increase (decrease) in net assets
resulting from operations 17,797,740 (5,589,088) 50,575,923 6,166,219 275,312 12,811,351
------------ ------------ ------------ ------------ ------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS:
Net investment income (386,790) (580,333) (264,380) (393,585) (4,361,839) (7,558,515)
Capital gains (17,212,926) (14,358,164) (25,199,149) (17,505,645) (1,862,283) (832,076)
------------ ------------ ------------ ------------ ------------ ------------
Total distributions (17,599,716) (14,938,497) (25,463,529) (17,899,230) (6,224,122) (8,390,591)
------------ ------------ ------------ ------------ ------------ ------------
SHARE TRANSACTIONS:
Shares sold 51,702,585 333,537,306 127,596,209 167,531,444 21,747,385 44,225,254
Shares issued to holders in
reinvestment of dividends 16,411,824 13,762,375 23,137,037 16,077,043 6,178,586 7,716,011
Shares redeemed (33,416,228) (328,558,849) (49,229,974) (144,541,179) (13,566,950) (19,005,303)
------------ ------------ ------------ ------------ ------------ ------------
Net increase 34,698,181 18,740,832 101,503,272 39,067,308 14,359,021 32,935,962
------------ ------------ ------------ ------------ ------------ ------------
TOTAL INCREASE (DECREASE) IN NET ASSETS 34,896,205 (1,786,753) 126,615,666 27,334,297 8,410,211 37,356,722
NET ASSETS:
Beginning of period 162,278,708 164,065,461 213,812,403 186,478,106 151,755,933 114,399,211
------------ ------------ ------------ ------------ ------------ ------------
End of period (includes
undistributed net investment
income of $182,855, $254,687,
$282,806, $262,188, $0 and $0,
respectively) $197,174,913 $162,278,708 $340,428,069 $213,812,403 $160,166,144 $151,755,933
------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
27
<PAGE>
FINANCIAL HIGHLIGHTS
(UNAUDITED)
<TABLE>
<CAPTION>
ARIEL FUND
----------
Six Months Ended Year Ended September 30,
March 31, 1999 1998 1997 1996 1995 1994
-------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $36.49 $41.49 $30.58 $30.78 $28.84 $30.46
Income from investment operations:
Net investment income 0.06 0.13 0.07 0.18 0.36 0.18
Net realized and unrealized gains
(losses) on investments 4.19 (1.41) 12.62 4.24 3.51 0.23
------ ------ ------ ------ ------ ------
Total from investment operations 4.25 (1.28) 12.69 4.42 3.87 0.41
Distributions to shareholders:
Dividends from net investment
income (0.08) (0.14) -- (0.44) (0.23) (0.30)
Distributions from capital gains (3.72) (3.58) (1.78) (4.18) (1.70) (1.73)
------ ------ ------ ------ ------ ------
Total distributions (3.80) (3.72) (1.78) (4.62) (1.93) (2.03)
------ ------ ------ ------ ------ ------
Net asset value, end of period $36.94 $36.49 $41.49 $30.58 $30.78 $28.84
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
Total return 11.02%(a) (3.83)% 43.25% 16.28% 14.38% 1.41%
Supplemental data and ratios:
Net assets, end of period, in
thousands $197,175 $162,279 $164,065 $109,770 $120,953 $149,511
Ratio of expenses to average
net assets 1.24%(b) 1.21% 1.25% 1.31% 1.37%(c) 1.25%
Ratio of net investment income
to average net assets 0.33%(b) 0.30% 0.23% 0.57% 1.18%(c) 0.56%
Portfolio turnover rate 24% 22% 20% 17% 16% 9%
<CAPTION>
APPRECIATION FUND
-----------------
Six Months Ended Year Ended September 30,
March 31, 1999 1998 1997 1996 1995 1994
-------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $31.80 $33.70 $24.99 $22.76 $21.82 $21.67
Income from investment operations:
Net investment income 0.03 0.09 0.02 0.13 0.14 0.04
Net realized and unrealized gains
(losses) on investments 7.09 1.14 10.13 4.07 2.26 0.51
------ ------ ------ ------ ------ ------
Total from investment operations 7.12 1.23 10.15 4.20 2.40 0.55
Distributions to shareholders:
Dividends from net investment
income (0.04) (0.07) (0.07) (0.20) (0.06) (0.05)
Distributions from capital gains (3.46) (3.06) (1.37) (1.77) (1.40) (0.35)
------ ------ ------ ------ ------ ------
Total distributions (3.50) (3.13) (1.44) (1.97) (1.46) (0.40)
------ ------ ------ ------ ------ ------
Net asset value, end of period $35.42 $31.80 $33.70 $24.99 $22.76 $21.82
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
Total return 22.45%(a) 3.40% 42.33% 19.60% 12.11% 2.56%
Supplemental data and ratios:
Net assets, end of period, in
thousands $340,428 $213,812 $186,478 $135,627 $143,312 $162,280
Ratio of expenses to average
net assets 1.25%(b) 1.26% 1.33% 1.36%(c) 1.36%(c) 1.35%(c)
Ratio of net investment income
to average net assets 0.20%(b) 0.25% 0.07% 0.50%(c) 0.61%(c) 0.17%(c)
Portfolio turnover rate 10% 20% 19% 26% 18% 12%
</TABLE>
(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
Ariel Fund and 1.40%, 1.58% and 1.40%, for the periods ended 1996, 1995 and
1994 for the Appreciation Fund; and the ratio of net investment income to
average net assets would have been 1.16% for the period ended 1995 for the
Ariel Fund and 0.46%, 0.39% and 0.12%, for the periods ended 1996, 1995 and
1994 for the Appreciation Fund, respectively.
The accompanying notes are an integral part of the financial statements.
28
<PAGE>
FINANCIAL HIGHLIGHTS (cont)
(UNAUDITED)
<TABLE>
<CAPTION>
PREMIER BOND FUND
-----------------
INSTITUTIONAL CLASS INVESTOR CLASS
February 1,
Six Months 1997(a)
Ended Year Ended to
Six Months Ended Year Ended September 30, March 31, September 30, September 30,
March 31, 1999 1998 1997 1996 1999 1998 1997
-------------- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $10.63 $10.30 $9.95 $10.00 $10.63 $10.29 $10.10
Income from investment operations:
Net investment income 0.29 0.61 0.52 0.43 0.27 0.57 0.37
Net realized and unrealized gains
(losses) on investments (0.27) 0.40 0.37 (0.04) (0.28) 0.41 0.19
------ ------ ------ ------ ------ ------ ------
Total from investment operations 0.02 1.01 0.89 0.39 (0.01) 0.98 0.56
Distributions to shareholders:
Dividends from net investment
income (0.29) (0.61) (0.52) (0.43) (0.27) (0.57) (0.37)
Distributions from capital gains (0.12) (0.07) (0.02) (0.01) (0.12) (0.07) --
------ ------ ------ ------ ------ ------ ------
Total distributions (0.41) (0.68) (0.54) (0.44) (0.39) (0.64) (0.37)
------ ------ ------ ------ ------ ------ ------
Net asset value, end of period $10.24 $10.63 $10.30 $9.95 $10.23 $10.63 $10.29
------ ------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------ ------
Total return 0.25%(b) 10.20% 9.26% 3.96% (0.04)%(b) 9.34% 5.73%(b)
Supplemental data and ratios:
Net assets, end of period, in
thousands $157,159 $149,977 $113,998 $15,367 $3,007 $1,779 $401
Ratio of expenses to average
net assets 0.45%(c) 0.45% 0.45% 0.48% 0.85%(c) 0.85% 0.85%(c)
Ratio of net investment income
to average net assets 5.62%(c) 5.86% 6.05% 5.85% 5.17%(c) 5.46% 5.60%(c)
Portfolio turnover rate 121% 60% 218% 423% 121% 60% 218%
</TABLE>
(a) Commencement of operations.
(b) Total return is not annualized.
(c) Annualized.
The accompanying notes are an integral part of the financial statements.
29
<PAGE>
NOTES TO THE FINANCIAL STATEMENTS
MARCH 31, 1999 (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. 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 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. The Funds may enter into repurchase agreements with
recognized financial institutions and in all instances hold underlying
securities with a value at least equal to the total repurchase price such
financial institutions have agreed to pay.
FEDERAL INCOME TAXES - No provision for federal income taxes has been made since
the Funds have complied to date with the provisions under Subchapter M of the
Internal Revenue Code available to regulated investment companies.
SECURITIES TRANSACTIONS AND INVESTMENT INCOME - Securities transactions are
accounted for on a trade date basis. Realized gains and losses from securities
transactions are recorded on the identified cost basis. Dividend income is
recorded on the ex-dividend date and interest income is recognized on an accrual
basis.
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.
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
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.
30
<PAGE>
NOTES TO THE FINANCIAL STATEMENTS
MARCH 31, 1999 (UNAUDITED)
3. CAPITAL SHARE TRANSACTIONS
Transactions in shares of capital stock were as follows:
<TABLE>
<CAPTION>
Six Months Ended March 31, 1999
Ariel Fund Appreciation Fund Premier Bond Fund
---------- ----------------- -----------------
Institutional Investor
------------- --------
<S> <C> <C> <C> <C>
Shares sold 1,329,679 3,614,867 1,917,252 170,008
Shares issued to holders in
reinvestment of dividends 417,814 658,050 585,804 6,836
Shares redeemed (857,075) (1,384,954) (1,253,536) (50,344)
--------- ---------- ---------- -------
Net increase 890,418 2,887,963 1,249,520 126,500
--------- ---------- ---------- -------
--------- ---------- ---------- -------
<CAPTION>
Year Ended September 30, 1998
Ariel Fund Appreciation Fund Premier Bond Fund
---------- ----------------- -----------------
Institutional Investor
------------- --------
<S> <C> <C> <C> <C>
Shares sold 8,005,752 4,885,967 4,089,595 157,274
Shares issued to holders in
reinvestment of dividends 345,863 491,344 739,559 4,110
Shares redeemed (7,859,564) (4,187,549) (1,793,634) (32,982)
---------- ---------- ---------- -------
Net increase 492,051 1,189,762 3,035,520 128,402
---------- ---------- ---------- -------
---------- ---------- ---------- -------
</TABLE>
4. INVESTMENT TRANSACTIONS
Purchases and sales of securities, excluding short-term investments and U.S.
government securities, for the six months ended March 31, 1999 are summarized
below:
<TABLE>
<CAPTION>
Ariel Fund Appreciation Fund Premier Bond Fund
---------- ----------------- -----------------
<S> <C> <C> <C>
Purchases $56,793,123 $88,409,228 $34,213,406
Sales 43,376,875 27,359,024 23,551,861
</TABLE>
Purchases and sales of U.S. government securities for the Premier Bond Fund for
the six months ended March 31, 1999 were $166,286,158 and $156,612,836,
respectively.
At March 31, 1999 the cost of securities on a tax basis was $159,180,641,
$244,758,882 and $194,336,893 for the Ariel Fund, Appreciation Fund and Premier
Bond Fund, respectively. Gross unrealized appreciation and depreciation on
securities for federal income tax purposes were as follows:
<TABLE>
<CAPTION>
Ariel Fund Appreciation Fund Premier Bond Fund
---------- ----------------- -----------------
<S> <C> <C> <C>
Unrealized appreciation $53,242,398 $114,657,193 $836,021
Unrealized (depreciation) (13,669,203) (9,742,598) (1,273,224)
----------- ------------ ----------
Net appreciation (depreciation) $39,573,195 $104,914,595 $(437,203)
----------- ------------ ----------
----------- ------------ ----------
</TABLE>
It is management's intention to distribute future net realized capital gains to
the extent that such gains exceed any available federal income tax capital loss
carryforwards.
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.
31
<PAGE>
NOTES TO THE FINANCIAL STATEMENTS (cont)
MARCH 31, 1999 (UNAUDITED)
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. 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.
32
<PAGE>
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.
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. Jim serves on the
board of directors of Commonwealth Edison Company and Unicom Corp.
WILLIAM C. DIETRICH, C.P.A. Bill is an independent financial consultant,
specializing in early stage entrepreneurial companies. 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 A.B. from Princeton University and an M.B.A. from Harvard Business School.
Royce is on the board of several corporations and non-profit institutions.
JOHN G. GUFFEY 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 an A.B. 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 works
with a variety of civic institutions, including those affiliated with Princeton.
CHRISTOPHER G. KENNEDY Chris is executive vice president of Merchandise Mart
Properties, Inc. which manages, among other prime properties, The Merchandise
Mart; The Washington Design Center; and New York's Decoration and Design
Building. He earned his B.A. from Boston College and his M.B.A. at the J.L.
Kellogg Graduate School of Management at Northwestern University. Chris
serves on the board of directors of the Chicago Convention & Tourism Bureau;
Boston-based Citizens Energy Corp. and Citizens Corp.; and the Greater
Chicago Food Depository.
ERIC T. MCKISSACK, CFA In the capacity of vice chairman and co-chief investment
officer of Ariel Capital Management, Inc., Eric is responsible for co-managing
client and mutual fund portfolios. He received a B.S. in both Management and
Architecture from the Massachusetts Institute of Technology and he earned his
M.B.A. from the University of California at Berkeley. He is also a Chartered
Financial Analyst. Eric serves on a variety of civic and corporate boards.
<PAGE>
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