<PAGE>
ARIEL PREMIER BOND FUND, INSTITUTIONAL
CLASS
June 30, 1996
Dear Shareholder;
For the three months ending June 30, 1996, the Ariel Premier Bond Fund,
Institutional Class, returned 0.96% versus 0.57% for the broader bond market as
represented by the Lehman Aggregate Bond Index.
Since 1993, core inflation has fluctuated between 2.7% and 3.2%. Over this
period, the ten year Treasury yield rose 300 basis points or 3% from 1993 into
1994, declining 260 basis points, 2.6%, through 1995 and has risen over 100
basis points, 1.0%, so far in 1996. These wide swings in rates reflect sharp
changes in expectations for economic growth, monetary policy and inflation. The
extremes for these expectations; economic recessions or booms, large changes in
the Fed funds rate and substantial shifts in the underlying rate of inflation
rarely materialize, so market movements exaggerate the actual changes in these
underlying fundamentals. The move in rates over the first half of 1996 reflects
changes in market expectations from recession to above trend growth for the
economy, Fed ease to modest tightening, and from declining to moderately higher
inflation. A 30 basis point, 0.30%, rally over the last two weeks of June
diminished the magnitude of this effect, but the yield changes summarized below
still reveal this result.
TREASURY MARKET SUMMARY
-----------------------
SIX MONTH 1996
<TABLE>
<CAPTION>
YIELD LEVEL YIELD LEVEL TOTAL
MATURITY DURATION 6/30/96 12/31/95 CHANGE RETURN
- ----------- -------- ------- -------- ------ ------
<S> <C> <C> <C> <C> <C>
Fed Funds 0 years 5.25% 5.50% -0.25% 2.7%
2 yrs. 1.8 6.11 5.17 +0.94 1.3
3 2.6 6.28 5.22 +1.06 0.4
5 4.2 6.47 5.38 +1.09 (1.5)
10 7.2 6.72 5.59 +1.13 (4.3)
30 12.8 6.90 5.96 +0.94 (8.6)
</TABLE>
As evidenced in the total returns above, duration was an important determinant
of returns so far in 1996; the shorter the better. Lower quality corporates
also performed well in 1996 as the following table summarizes.
<PAGE>
QUALITY RETURNS
---------------
<TABLE>
<CAPTION>
CORPORATE QUALITY ---------------SECTOR---------------
RATING INTERMEDIATE LONG TOTAL
------ ------------ ---- -----
<S> <C> <C> <C>
AAA (0.96)% (4.81)% (2.69)%
AA (1.14) (4.25) (2.15)
A (0.91) (4.42) (2.21)
BBB (0.74) (3.55) (1.89)
</TABLE>
Source: Lehman Brothers
Mortgages performed well in the second quarter and asset-backed spreads have
been fairly steady all year. As a result, the best performing portfolios over
the first half would be lower quality and short duration in character.
RETURN ANALYSIS
- ---------------
Your portfolio returns over this period are as follows:
<TABLE>
<CAPTION>
ARIEL PREMIER LEHMAN BROTHERS
BOND FUND (NAV) AGGREGATE INDEX
--------------- ---------------
<S> <C> <C>
June, 1996 1.27% 1.34%
Second Quarter, 1996 0.96 0.57
First Half (1.56) (1.21)
</TABLE>
The mortgage overweighting contributed to better returns during the second
quarter. The attribution of returns for the six month period is displayed
below.
---RETURN ATTRIBUTIONS---
SIX MONTHS 1996
<TABLE>
<CAPTION>
RELATIVE
SOURCE CONTRIBUTION
<S> <C>
Relative Duration 0.15%
Yield Curve (0.30)
Mortgages 0.08
Credit (0.28)
-----
Total (0.35)
</TABLE>
<PAGE>
PORTFOLIO STRATEGY
- ------------------
Although yields have moved a lot this year, the current level of rates reflects
an outlook for a modest increase in inflation, at least trend economic growth
and modestly higher short-term rates. This is consistent with our outlook.
Accordingly, your portfolio's duration and yield curve structure is neutral
relative to the benchmark. The portfolio has a one year dollar duration greater
than the market in mortgages, reflecting a judgment that mortgage spreads will
narrow. Seasoned discount coupons are held as these issues offer the best
tradeoff between yield and convexity. These have replaced the TBA mortgage
position we've held in the portfolio. Asset-backeds and government guarantees
are held as corporate substitutes, reflecting the high quality orientation of
the portfolio.
Enclosed is a Schedule of Investments. As always, we are grateful for the
opportunity to serve you and welcome any comments or questions that you may
have.
Sincerely,
/s/ John W. Rogers, Jr. /s/ Kenneth R. Meyer
John W. Rogers, Jr. Kenneth R. Meyer
President Executive Vice President
Ariel Capital Management, Inc. Lincoln Capital Management Company
<PAGE>
ARIEL MUTUAL FUNDS
ARIEL PREMIER BOND FUND
SCHEDULE OF INVESTMENTS
JUNE 30, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
Par Value ASSET-BACKED SECURITIES-15.57% Market Value
<S> <C> <C>
$ 70,000 Circuit City Credit Card, 1995-1A,
6.375%, 8/15/05 $ 68,871
70,000 Citibank, 94-4A, 8.25%, 11/7/03 74,263
70,000 Finger Hut, 96-1A, 6.45%, 2/20/02 69,688
50,000 J.C Penny Master Credit Card Trust,
1990-CA, 9.625%, 6/30/00 54,876
60,000 Green Tree Financial, 1995-1 A5,
8.40%, 6/15/25 62,747
46,831 Merrill Lynch Mortgage Investors, Inc.,
1995-C2-A1, Floating Rate, 6/15/21 46,846
300,000 The Money Store, 1996-1 A3,
6.85%, 12/20/02 301,827
300,000 The Money Store, 1996-B A6,
7.38%, 12/15/00 302,250
200,000 Olympic Auto Receivables, 1995-EA4,
5.85%, 3/15/01 196,518
60,000 Prime, 95-1A, 6.75%, 11/15/05 59,642
350,000 Private Label Credit Card, 1994-2A,
7.80%, 9/20/03 359,947
82,107 Railcar Trust, 1992-1A, 7.75%, 6/1/04 85,470
45,000 Sears Credit Account, 96-1A, 6.20%, 2/16/06 43,830
440,000 Sears Credit Account, 96-2A, 6.50%, 10/15/03 440,000
40,000 World Financial, 96-A, 6.70%, 2/15/04 39,628
100,000 World Omni Auto Lease, 1996-AA1,
6.30%, 6/25/02 99,580
----------
Total Asset-Backed Securities
(cost $2,315,606) 2,305,983
----------
U.S GOVERNMENT AGENCIES-43.16%
MORTGAGE-BACKED SECURITIES--33.77%
1,530,000 Federal Home Loan Mortgage Corp. Gold,
(pool to be announced), 6.50%, 7/1/25 1,431,024
46,706 Federal National Mortgage Association,
7.00%, 10/1/23 44,925
517,349 Federal National Mortgage Association
7.00%, 5/1/24 497,623
</TABLE>
<PAGE>
ARIEL MUTUAL FUNDS
ARIEL PREMIER BOND FUND
SCHEDULE OF INVESTMENTS
JUNE 30, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
Par Value U.S. GOVERNMENT AGENCIES-- Market Value
43.16% (continued)
<S> <C> <C>
MORTGAGE-BACKED SECURITIES--33.77% (CONTINUED)
$ 570,000 Federal National Mortgage Association,
(pool to be announced), 6.50%, 7/1/25 $ 532,237
1,497,119 Federal National Mortgage Association,
6.50%, 11/1/25 1,402,606
363,291 Federal National Mortgage Association,
6.50%, 1/1/26 339,790
146,449 Federal National Mortgage Association,
6.50%, 3/1/26 136,975
171,700 Federal National Mortgage Association,
6.50%, 4/1/26 160,593
484,799 Federal National Mortgage Association,
6.50%, 5/1/26 453,437
----------
4,999,210
----------
OTHER AGENCY ISSUES--9.39%
160,000 Government Trust Certificate, Israel Trust,
Series 2E, 9.40%, 5/15/02 171,400
250,000 Government Trust Certificate, Aid Israel,
5.70%, 2/15/03 234,375
630,000 Resolution Funding Corporation,
8.125%, 10/15/19 694,071
245,000 Resolution Funding Corporation,
8.875%, 7/15/20 291,102
----------
1,390,948
----------
Total U.S. Government Agencies
(cost $6,419,386) 6,390,158
----------
U.S. GOVERNMENT OBLIGATIONS-39.39%
3,090,000 U.S. Treasury Note, 5.00%, 1/31/98 3,042,414
1,470,000 U.S. Treasury Note, 6.125%, 7/31/00 1,453,624
1,190,000 U.S. Treasury Note, 8.125%, 8/15/19 1,335,466
----------
Total U.S. Government Obligations
(cost $5,762,805) 5,831,504
----------
</TABLE>
<PAGE>
ARIEL MUTUAL FUNDS
ARIEL PREMIER BOND FUND
SCHEDULE OF INVESTMENTS
JUNE 30, 1996 (UNAUDITED)
Par Value COMMERCIAL PAPER-13.48% Market Value
$400,000 Ford Motor Credit Co., 5.35%, 7/15/96 $ 399,168
400,000 IBM Credit Corp., 5.32%, 7/15/96 399,172
400,000 SmithKline Beecham Corp., 5.31%, 7/15/96 399,174
400,000 The Walt Disney Company, 5.30%, 7/15/96 399,176
400,000 Xerox Credit Corporation, 5.32%, 7/15/96 399,172
------------
Total Commercial Paper
(cost $1,995,862) 1,995,862
------------
REPURCHASE AGREEMENTS-0.84%
123,888 State Street Bank & Trust Company
Repurchase Agreements, 4.00%, dated 6/28/96,
repurchase price $123,929, maturing
7/1/96 (collateralized by U.S. Treasury Bond,
11.625%, 11/15/04) 123,888
------------
Total Repurchase Agreements
(cost $123,888) 123,888
------------
Total Investments-112.44%
(cost $16,617,547) 16,647,395
Liabilities less
Other Assets and Cash-(12.44)% (1,841,350)
------------
NET ASSETS-100.00% $ 14,806,045
============
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