<PAGE>
[ARIEL MUTUAL FUNDS LETTERHEAD]
ARIEL PREMIER BOND FUND, INSTITUTIONAL CLASS
March 31, 1996
Dear Shareholder;
For the three months ending March 31, 1996, the Ariel Premier Bond Fund,
Institutional Class, returned -2.51% versus -1.78% for the broader bond market
as represented by the Lehman Aggregate Bond Index.
The sharp increases in bond yields during the first quarter of 1996 were a
result of discount changes in market expectations for the economy, inflation and
Federal Reserve policy. In mid-February, the two-year Treasury yielded 4.8% with
the Federal Funds rate at 5 1/4%. This yield level on the two-year reflected the
market's expectations for a substantial lowering of short rates by the Federal
Reserve. By quarter-end, the two-year yielded almost 5.8%, a level consistent
with no expected change in the Funds rate. Over this same period, the ten-year
Treasury yield rose from 5.6% to 6.3%, indicating an increase in inflation
expectations from roughly 2.0% to 2.7%, a level consistent with reported
inflation. This evaporation of optimistic expectations in pricing was motivated
by evidence that the economy had weathered a weak period and was likely to
return to its trend growth rate without further stimulus. Accordingly, bond
yields moved to reflect a more neutral outlook for inflation and monetary
policy. The net result for market yields over this period is displayed below:
TREASURY MARKET SUMMARY
-----------------------
FIRST QUARTER 1996
<TABLE>
<CAPTION>
YIELD LEVEL YIELD LEVEL TOTAL
MATURITY 3/29/96 12/31/95 CHANGE RETURN
-------- ------- -------- ------ ------
<S> <C> <C> <C> <C>
2 yrs. 5.77% 5.17% +0.60% 0.3%
3 5.89 5.22 +0.67 (0.3)
5 6.07 5.38 +0.69 (1.6)
10 6.32 5.59 +0.73 (3.7)
30 6.67 5.96 +0.71 (8.1)
</TABLE>
The yield curve steepened during the first six weeks of the quarter as the two-
year rallied, then flattened back out as rates rose through quarter-end.
Although in absolute return the mortgage market benefited from its short
duration character, the unusual volatility in rates hurt the relative returns of
most mortgages. The gross change in yields, 1.45% on the two-year and 1.00% on
the ten-year, represent a year's volatility concentrated into one quarter. As
yields rose, mortgage durations extended and the additional price change
outweighed the mortgage's yield
<PAGE>
advantage over Treasuries. Corporates were the best performing sector as spreads
narrowed, particularly on longer issues, enhancing the yield advantage over
Governments. Asset-backed spreads were steady. As a result, the best performing
portfolios during the quarter would be short duration in character and
overweighted in corporates.
RETURN ANALYSIS
Although Lincoln Capital's outlook for higher rates was realized during the
quarter, we did not add value in your portfolio. The underperformance was a
result of several factors:
. We reduced the barbell maturity structure during February in a steeper
yield curve environment than year-end, effectively locking in that
underperformance.
. The underweighting in corporates left us out of the best performing
sector.
. Our mortgage overweighting was hurt by the volatility during the
quarter.
The portfolio's short duration strategy did have a positive impact on returns
for the quarter. Nonetheless, total portfolio performance was disappointing
because our forecast for rates was correct. We just became too cautious as rates
rose during the quarter, particularly with regard to our yield curve decision.
--- RELATIVE RETURN ATTRIBUTION ---
FIRST QUARTER 1996
<TABLE>
<CAPTION>
RELATIVE
SOURCE CONTRIBUTION
-------- -------------
<S> <C>
Duration +0.10%
Yield Curve -0.30
Mortgages -0.09
Corporates -0.08
-----
Difference -0.37%
</TABLE>
PORTFOLIO STRATEGY
The portfolio is currently positioned as follows:
DURATION: NEUTRAL. The portfolio's duration and maturity structure were moved
to neutral as rates rose in early March. Bond yields currently reflect a
neutral outlook
<PAGE>
for monetary policy and an inflation expectation equal to reported inflation.
This pricing is consistent with our outlook for trend growth in the economy with
output currently at potential.
MORTGAGES: The portfolio is overweighted in discount issues. These securities
have less exposure to volatility but retain the yield advantage of the sector.
We have added seasoned mortgages to the portfolio's holdings as these issues
have even better yield and option characteristics than newly issued pools.
CORPORATES: Although corporates performed well in the first quarter, spreads
offer little reward for lowering credit quality. We will likely add asset-
backeds to the portfolio over the second quarter as substitutes for the short
Treasuries currently held.
We are pleased to announce an important change with regard to fees that will be
taking place in the Ariel Premier Bond Fund during the second quarter of 1996.
Effective May 14, 1996, the total expense ratio for the Fund will be reduced to
0.45% from 0.58%.
Enclosed is a Schedule of Investments as well as an unaudited financial
statement for your review. 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
MARCH 31, 1996 (UNAUDITED)
Par Value ASSET-BACKED SECURITIES-13.30% Market Value
$ 50,000 J.C. Penney Master Credit Card Trust,
1990-CA, 9.625%, 6/30/00 $ 55,105
70,000 Citibank 94-4A, 8.25%, 11/7/03 75,698
30,000 Continental Airlines, 96-A, 6.94%, 10/15/13* 28,977
60,000 Green Tree Financial, 8.40%, 6/15/25 62,981
48,421 Merrill Lynch Mortgage Investors, Inc.,
1995-C2-A1, floating rate, 6/15/21 48,920
60,000 Prime 95-1A, 6.75%, 11/15/05 60,281
83,830 Railcar Trust, 1992-1A, 7.75%, 6/1/04 87,628
----------
Total Asset-Backed Securities
(cost $433,647) 419,590
----------
U.S. GOVERNMENT AGENCIES-58.43%
MORTGAGE-BACKED SECURITIES-35.26%
47,716 Federal National Mortgage Association,
7.00%, 10/1/23 46,722
532,698 Federal National Mortgage Association
7.00%, 5/1/24 519,045
210,000 Federal National Mortgage Association
(pool to be announced), 6.50%, 4/1/10 205,407
360,000 Federal National Mortgage Association
(pool to be announced), 6.50%, 4/1/25 341,777
----------
1,112,951
----------
OTHER AGENCY ISSUES-23.17%
160,000 Government Trust Certificate, Israel Trust,
Series 2E, 9.40%, 5/15/02 173,950
250,000 Government Trust Certificate, Aid Israel,
5.70%, 2/15/03 237,500
20,000 Resolution Funding Corporation,
8.125%, 10/15/19 22,525
245,000 Resolution Funding Corporation,
8.875%, 7/15/20 297,521
----------
731,496
----------
Total U.S. Government Agencies
(cost $1,885,639) 1,844,447
----------
1
<PAGE>
ARIEL MUTUAL FUNDS
ARIEL PREMIER BOND FUND
SCHEDULE OF INVESTMENTS
MARCH 31, 1996 (UNAUDITED)
Par Value U.S. GOVERNMENT OBLIGATIONS- Market Value
26.62%
$560,000 U.S. Treasury Note, 5.00%, 1/31/98 $ 552,563
130,000 U.S. Treasury Note, 7.125%, 2/29/00 134,753
130,000 U.S. Treasury Note, 6.125%, 7/31/00 130,081
20,000 U.S. Treasury Note, 8.125%, 8/15/19 22,856
-----------
Total U.S. Government Obligations
(cost $848,078) 840,253
-----------
COMMERCIAL PAPER-28.46%
100,000 Cargill Inc., 5/30%, 4/15/96 99,794
100,000 Dow Chemical Company, 5.10%, 4/16/96 99,787
100,000 Ford Motor Credit Co., 5.14%, 4/16/96 99,786
100,000 Gannett Co., 5.23%, 4/11/96 99,855
100,000 IBM Credit Corp., 5.31%, 4/11/96 99,852
100,000 J.P. Morgan & Co., Inc., 5.23%, 4/11/96 99,855
100,000 Philip Morris Co., Inc., 5.33%, 4/17/96 99,763
100,000 The Walt Disney Company, 5.23%, 4/11/96 99,855
100,000 Xerox Credit Corporation, 5.23%, 4/11/96 99,855
-----------
Total Commercial Paper
(cost $898,402) 898,402
-----------
REPURCHASE AGREEMENTS-8.23%
259,723 State Street Bank & Trust Company
Repurchase Agreement, 4.00%, 3/29/96,
repurchase price $259,809, maturing
4/1/96 (collateralized by U.S. Treasury
Bond, 8.75%, 5/15/17) 259,723
-----------
Total Repurchase Agreements
(cost $259,723) 259,723
-----------
Total Investments-135.04%
(cost $4,325,499) 4,262,415
-----------
Liabilities less
Other Assets and Cash-(35.04)% (1,105,927)
-----------
NET ASSETS-100.00% $ 3,156,488
===========
The accompanying notes are an integral part of the financial statements.
*Securities are registered pursuant to Rule 144A and may be deemed to be
restricted for resale.
2
<PAGE>
ARIEL PREMIER BOND FUND
STATEMENT OF ASSETS AND LIABILITIES
MARCH 31, 1996 (UNAUDITED)
ASSETS:
Investments in securities, at value
(cost $4,325,499) $4,262,415
Interest receivable 27,305
----------
Total assets 4,289,720
----------
LIABILITIES:
Payable for securities purchased 1,131,717
Accrued investment advisory fee 1,113
Accrued administrative fee 402
----------
Total liabilities 1,133,232
----------
NET ASSETS $3,156,488
==========
NET ASSETS CONSIST OF:
Paid-in-capital $3,216,998
Undistributed net investment income 1,204
Accumulated net realized gain on investment
transactions 1,370
Net unrealized depreciation on investments (63,084)
----------
Total net assets $3,156,488
==========
Total shares outstanding (no par value),
unlimited shares authorized 319,672
==========
Net asset value, redemption price and offering
price per share (net assets/shares outstanding) $ 9.87
==========
The accompanying notes are an integral part of the financial statements.
3
<PAGE>
ARIEL PREMIER BOND TRUST
STATEMENT OF OPERATIONS
SIX MONTHS ENDED MARCH 31, 1996 (UNAUDITED)
INVESTMENT INCOME:
Interest income $ 66,470
--------
EXPENSES:
Investment advisory fee 4,875
Administrative fees 1,701
--------
Total expenses 6,576
--------
NET INVESTMENT INCOME 59,894
--------
REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain on investments 3,422
Change in unrealized depreciation
on investments (63,084)
--------
Net loss on investments (59,662)
--------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $ 232
========
The accompanying notes are an integral part of the financial statements.
4
<PAGE>
ARIEL PREMIER BOND FUND
STATEMENT OF CHANGES IN NET ASSETS
SIX MONTHS ENDED MARCH 31, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
OPERATIONS:
<S> <C>
Net investment income $ 59,894
Net realized gain on investments 3,422
Change in unrealized depreciation on investments (63,084)
----------
Net increase in net assets resulting from operations 232
----------
DISTRIBUTIONS TO SHAREHOLDERS:
Net investment income (58,690)
Capital gains (2,052)
----------
(60,742)
----------
SHARE TRANSACTIONS:
Shares sold 3,176,364
Shares issued to holders in reinvestment of dividends 30,684
Shares redeemed (50)
----------
Net increase 3,206,998
----------
TOTAL INCREASE IN NET ASSETS 3,146,488
NET ASSETS:
Beginning of period 10,000
----------
End of period (includes undistributed net
investment income of $1,204) $3,156,488
==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
<PAGE>
ARIEL PREMIER BOND FUND
Financial Highlights
Six Months Ended March 31, 1996 (Unaudited)
<TABLE>
<CAPTION>
<S> <C>
Net asset value, beginning of period $10.00
Income from investment operations:
Net investment income 0.22
Net realized and unrealized losses on investments (0.12)
-----
Total from investment operations 0.10
Distributions to shareholders:
Dividends from net investment income (0.22)
Distributions from capital gains (0.01)
-----
Total distributions (0.23)
-----
Net asset value, end of period $9.87
=====
Total return 0.92%/(a)/
Supplemental data and ratios:
Net assets, end of period, in thousands $3,156
Ratio of expenses to average net assets 0.58%/(b)/
Ratio of net income to average net assets 5.25%/(b)/
Portfolio turnover rate 257%
</TABLE>
/(a)/ Total return is not annualized.
/(b)/ Annualized.
The accompanying notes are an integral part of the financial statements.
6
<PAGE>
ARIEL PREMIER BOND FUND
Notes to the Financial Statements
March 31, 1996 (Unaudited)
1. Organization
The Ariel Premier Bond Fund (the "Fund") is a series of Ariel Growth Fund (doing
business as Ariel Investment Trust) (the "Trust"), an open-end diversified
management investment company organized as a Massachusetts business trust and
registered under the Investment Company Act of 1940, as amended. The Fund
commenced operations on October 1, 1995.
2. Significant Accounting Policies
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. These
policies are in conformity with generally accepted accounting principles.
Investment Valuation - Securities for which market quotations are readily
available are valued at the most recent closing bid price. All other securities
for which reliable bid quotations are available are valued at the median of bid
prices. 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 Fund 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 Fund has 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. Interest income is
recognized on an accrual basis.
Distributions to Shareholders - Dividends from net investment income are
declared and paid quarterly and net 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.
7
<PAGE>
ARIEL PREMIER BOND FUND
Notes to the Financial Statements, continued
March 31, 1996 (Unaudited)
3. Capital Share Transactions
Transactions in shares of capital stock of the Fund were as follows:
<TABLE>
<CAPTION>
Six Months Ended
March 31, 1996
----------------
<S> <C>
Shares sold 318,476
Shares issued to holders in
reinvestment of dividends 201
Shares redeemed (5)
-------
Net increase 318,672
=======
</TABLE>
4. Investment Transactions
Purchases and sales of securities, excluding short-term investments and U.S.
government securities, for the Fund for the six months ended March 31, 1996 were
$5,144,783 and $2,826,793, respectively. Purchases and sales of U.S. government
securities for the Fund for the six months ended March 31, 1996 were $2,357,513
and $1,504,686, respectively.
At March 31, 1996 gross unrealized depreciation of securities was $63,084.
8
<PAGE>
Ariel Premier Bond Fund
Notes to the Financial Statements, continued
March 31, 1996 (Unaudited)
5. Investment Advisory and Other Transactions with Affiliates
The Trust has entered into an investment advisory agreement with Ariel Capital
Management, Inc. (the "Adviser"). Pursuant to the investment advisory
agreement, the Adviser is paid a fee based on the average daily net assets of
the Fund at the annual rates of 0.43% if such net assets are less than $500
million, 0.41% if such assets are at least $500 million, but less than $1
billion; 0.39% if such net assets are at least $1 billion, but less than $1.5
billion; 0.37% if such net assets are at least $1.5 billion, but less than $2
billion, and 0.35% if such net assets are $2 billion or more. The Adviser also
acts as administrator to the Fund. For services under the administrative
services agreement, the Fund pays a fee based on the average daily net assets of
the Fund at the annual rates of 0.15% if such net assets are less than $500
million; 0.125% if such net assets are $500 million or more but less than $1
billion; and 0.10% is such net assets are $1 billion or more.
Lincoln Capital Management Company ("Lincoln Capital"), is the sub-adviser of
the 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.
9
