<PAGE>
Bulk Mail
U.S. Postage
Paid
Permit No. 6784
Chicago, IL
Ariel Investment Funds
Ariel Investment Trust
307 North Michigan Avenue
Suite 500
Chicago, Illinois 60601
ARIEL MUTUAL FUNDS Semi-Annual Report - March 31, 1997
Ariel Appreciation Fund. Ariel Growth Fund. Ariel Premier Bond Fund
One day a Hare was making fun of a Tortoise for being so slow upon his feet.
"Wait a bit," said the tortoise, "I'll run a race with you, and I'll wager that
I'll win." The
Hare, who was much amused at the idea, said "Let's
try and see..." When the time came both started off together...The Hare nearly
turned a somersault in his haste, while the Tortoise began at a slow but steady
pace. Meanwhile the Tortoise kept plodding on...
<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. [LOGO APPEARS HERE]
Slow & steady wins the race.
<PAGE>
For a free investment kit on any of the
Ariel Mutual Funds, including a prospectus
containing more information, please call
1-800-29-ARIEL. Please read the prospectus
carefully before investing or sending money.
Ariel Investment Trust
307 North Michigan Avenue
Suite 500
Chicago, Illinois 60601
800.292.7435
312.726.0140
Fax 312.726.7473
<TABLE>
<S> <C>
The Patient Investor 2
Company Updates 6
Ariel Equity Funds 10
Schedule of Investments
Ariel Growth Fund 12
Ariel Appreciation Fund 15
Equity Statistical Summary 18
Ariel Premier Bond 20
Assets & Liabilities 26
Statement of Operations 26
Changes in Net Assets 27
Financial Highlights 28
Notes to Financial Statements 29
Board of Trustees 32
</TABLE>
<PAGE>
Slow and steady wins the race.-Aesop
THE PATIENT INVEST [LOGO APPEARS HERES]R (R)
Dear Fellow Shareholder: For the very volatile first quarter ending March 31,
1997, the Ariel Growth Fund rose 1.1% and the Ariel Appreciation Fund
experienced a slight loss of -0.35%. While we significantly outperformed the -
3.4% return of the Russell 2500 Index of small company stocks, our results fell
short of the +2.7% gain made by the large company stocks which comprise the S&P
500 Index. After more than six years of bull market strength, we were not
surprised by the disparate results in the large cap sectors, whose stock prices
often hold up better in times of difficulty, versus those in the small and
medium cap areas. With this said, we are pleased to report that like many value
managers who target ignored and misunderstood securities, our portfolios
withstood the down-drafts that come from investor flight. Additionally, our
highly predictable, franchise businesses came through with consistent earnings
which attracted some investor interest.
As such, our flagship Ariel Growth Fund was recently awarded an overall rating
of four stars (out of five) by Morningstar, Inc. for its risk adjusted returns.
The Ariel Appreciation Fund earned three stars for its returns. (The top 10% of
funds in each investment class receive 5 stars; the next 22.5% receive 4 stars;
the middle 35% receive 3 stars and so on.) Both funds have received The Wall
Street Journal's highest "A" rating for their one year results (as of quarter
end) which places the Ariel Growth Fund in the top 20% of the small company
category and the Ariel Appreciation Fund in the top 20% of the mid-cap category.
Additionally, in the Journal's April 3, 1997 issue, the Appreciation Fund was
ranked 9th out of 178 mid-cap funds for the 12 month period ending March 27,
1997.
Although many small and medium-sized companies have experienced some noteworthy
setbacks, we are not convinced
2
<PAGE>
the dust has totally settled. Instead of knee-jerk reactions, we continue to
follow our disciplined strategy. To this point, you will notice that we did not
add any new holdings to either portfolio during the quarter. However, with more
and more bargains falling within our radar, we are judiciously exploring
opportunities. With existing holdings, we have continued the process of
lightening up on some of the better performing securities of the last 12 to 18
months--T. Rowe Price (OTC: TROW) and Herman Miller (OTC: MLHR)--and re-
deploying those dollars to promising holdings whose prices continue to be
depressed--Bob Evans (OTC: BOBE) and Safety Kleen (NYSE: SK).
Less is More
The German architect, Ludwig Mies van der Rohe, once characterized his unique
style of design with the simple, yet poignant statement, "Less is more."
Although he was referring to office and home design, we would argue the same can
be said for building a stock portfolio. Yet, our somewhat simple view appears to
run counter to practices of a vast majority of today's portfolio managers who
seem to believe that when constructing a stock portfolio, there's safety in
numbers. With a portfolio potpourri, managers attempt to dampen the potentially
negative effects of a lackluster performer or a languishing sector and thereby
insulate themselves from being out of sync with the market. Herein lies one of
the biggest oxymorons of modern investing. While there has been an indisputable
movement towards mitigating investment risk through the ownership of more and
more securities, with these growing portfolios, professional fund managers are
left to know less and less about their actual holdings. In our view, this lack
of in-depth, company specific knowledge actually makes for riskier investing. So
too, believed Philip Fisher, an often quoted investment sage who lived to tell
tales of his experiences during the 1929 stock market crash. In his book, Common
Stocks and Uncommon Profits, he writes, "investors have been misled, believing
that putting their eggs in several baskets reduces risk. [Yet], the
3
<PAGE>
disadvantage of purchasing too many stocks is that it becomes impossible to
watch all of the eggs in all of the different baskets."
The famed investor Warren Buffett offers his own critique of this popular
phenomenon, calling diversification "a protection against ignorance." With his
usual wit, he goes on to add that owning a little bit of everything is "a Noah's
Ark way of investing [and] you end up with a zoo that way." Thus, if Buffett is
correct in his assertion that "an investor's financial success is in direct
proportion to the degree to which he understands any investment," then one has
to wonder about the long-term prospects for a fund manager whose portfolio is
comprised of hundreds of stocks. In the execution of his own investment
strategy, Buffett emphatically zeros in on those few companies in which he has
the greatest knowledge and confidence. He has often questioned "why an investor
. . . elects to put money into a business that is his 20th favorite rather than
simply adding money to his top choices--the businesses he understands best and
that present the least risk, along with the greatest profit potential." With
this perspective, there have been times when Buffett has been known to place
over 90% of his multi-billion dollar portfolio in the stock of just three
companies.
On many occasions, we have discussed our investigative research effort and how,
like Buffett, we go to great lengths to learn everything possible about any
candidate for our portfolios. Not only must we develop an intricate network when
first considering an investment, in order to stay on top of a company's
prospects, we must perpetuate a useful flow of information for the duration of
our ownership of the stock. This level of detail goes well beyond pure financial
analysis. As such, we make no bones about the fact that managing a portfolio can
be a daunting task--even in the case of our relatively small 30-35 stock
portfolio. This leads us to believe that replicating this process over and over
again for dozens and dozens of securities would be a virtual impossibility. We
4
<PAGE>
therefore argue that a portfolio concentrated among a relatively fewer number of
well-researched stocks actually offers investors greater prospects for above
average long-term investment results by affording them the opportunity to focus
their hard-earned investment dollars on truly outstanding businesses. In keeping
with this sentiment, it is worth noting that in response to a recent
Congressional act allowing for increased concentration of mutual fund
portfolios, a handful of new funds have been launched as "best of" portfolios.
These investments are offshoots of existing funds with a focus on the flagship
fund's largest or most promising holdings. Although one would think that every
holding in a portfolio would reflect a manager's highest level of conviction,
the trend to diversify has diminished the likelihood of this occurrence. While
we have lingering concerns over the composition of the original portfolios, we
strongly view this "best of" strategy as a move in the right direction for
realizing long-term investment success.
As someone once said, "Walking a path less traveled can make for an interesting
journey." Whereas the benefits derived from just one strong performer can be
substantial when a holding is large, we'll be the first to admit that the
negative impact of a poor performer can offer its own special pain. Even with
the most in-depth research, in stock market investing no one is right all of the
time. Yet, over the long-term, we are convinced that the likelihood of recurring
mistakes and portfolio surprises are ultimately diminished by the exhaustive
research performed and the sheer level of conviction with which each and every
investment is made.
As always, we appreciate the opportunity to serve you and welcome any questions
or comments that you might have.
Sincerely,
/s/ John W. Rogers, Jr.
John W. Rogers, Jr.
Portfolio Manager
Ariel Growth Fund
/s/ Eric T. McKissack
Eric T. McKissack, CFA
Portfolio Manager
Ariel Appreciation Fund
5
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COMPANY
Omnicom Group (NYSE:OMC): Omnicom finished 1996 with another strong earnings
report, producing its nineteenth quarterly advance (versus the prior year). With
earnings growth in excess of 15% over the last 3 years, both the company and the
stock have been exceptional performers. Omnicom's share prices have risen
approximately 230% since our initial purchase in 1991. This excellent
performance is due in large part to the company's reputation for creative
advertising and its business savvy.
Omnicom announced a long-anticipated change in the management ranks in December.
The company named John Wren as CEO. Wren, 44, also retains the title of
president, while outgoing CEO, Bruce Crawford, remains chairman. Wren has been
with Omnicom since its formation in 1986; before that he was with Omnicom co-
founding agency, Needham Harper. Wren has headed Omnicom's fastest growing
division, Diversified Agency Services, since 1990. His appointment should
reinforce Omnicom's mission as a diversified communications company.
In early April 1997, the company announced that it will acquire Fleishman-
Hilliard, creating the largest global public relations group. According to the
industry publication, Advertising Age, Fleischman-Hilliard is currently the
world's sixth-ranked PR agency with $107 million in estimated fee income.
Omnicom already owns fourth-ranked Porter Novelli, and seven-ranked Ketchum
Public Relations. With the acquisition of Fleishman-Hilliard, Omnicom's total
fee income from public relations activities is expected to exceed $300 million
annually. Of note, Fleischman-Hilliard's largest client is Anheuser-Busch
(NYSE:BUD), which is also a major client of Omnicom's DDB Needham.
Omnicom continues to be a core portfolio holding in our portfolios. With its
strong fundamental outlook (including international markets) and its successful
track record with acquisitions, we believe the stock still provides a good
opportunity for long-term investors.
6
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UPDATES
AMERICAN MEDIA, INC. (NYSE:ENQ) American Media's fortunes have improved
significantly in recent periods, although Wall Street has not been paying much
attention. In fiscal 1996 (which ended in March), the company was hit hard with
the double whammy of increasing newsprint prices and very disappointing single-
copy sales from its flagship publications, The National Enquirer and The Star.
Since then, the company's outlook has brightened considerably. Sales trends and
newsprint costs have both stabilized. Newsprint, especially, has improved with
current prices about 25% below the fiscal 1996 peak. This has had a tremendously
positive impact on the company finances and cash flow.
We are also encouraged by the signs of progress in advertising activity. In the
past, a number of the large consumer products companies had been reluctant to
advertise in The Star, and particularly, in The National Enquirer. However,
aided by its achievements in reporting on O.J. Simpson, and more recently, Ennis
Cosby, American Media has been steadily gaining greater respectability with
mainstream opinion makers. The editor of The National Enquirer, Steve Coz, was
recently honored as one of Time Magazine's "25 Most Influential People in
America for 1997". As a result, the company has attracted business from
advertisers that include Hormel (NYSE:HRL), Glaxo Wellcome (NYSE:GLX), Campbell
Soup (NYSE:CPB) and Kraft.
Long term, American Media continues to explore ideas for new publications to
enhance its current lineup. The company recently introduced a digest-sized
weekly called Soap Opera News, and is looking at rolling out a new title later
in the year centered on NASCAR auto racing.
At current prices, we continue to believe American Media's stock represents an
attractive opportunity for value investors. The stock has virtually no coverage
on Wall Street and is trading at low multiples of earnings and cash flow.
Despite its leverage, the company's debt coverage is satisfactory and improving.
Long-term investors should continue to see progress in earnings and cash flow
growth in 1997 and 1998.
AMERICAN MEDIA, INC.
7
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COMPANY
SHOREWOOD PACKAGING CORPORATION (OTC:SHOR) We recently met with the management
of Shorewood in New York for an update on business trends. Although the company
will not officially report until mid-June, fiscal 1997 (which ended April 30)
appears to have been a good year. We expect revenues to have risen 10% and
earnings per share to have increased 18%. More importantly, the outlook for the
next 2-3 years looks very exciting. The core business remains very strong, with
Shorewood continuing to provide value-added packaging products to its extensive
customer list of "blue chip" consumer companies. Building on this strong
platform are two significant growth opportunities. A year ago, Shorewood opened
a new plant in Oregon to support the rapidly growing home entertainment and
computer software industries. The geography and capabilities of this plant lured
many leading companies to Shorewood, including Microsoft and Broderbund.
Production is increasing steadily, and with capacity utilization at only 50%,
there is room to double production before any expansion is required.
[LOGO]
The second opportunity is in China where Shorewood is finalizing its plans to
build a plant. As most of Shorewood's customers manufacture products in China
and import the packaging (or use inferior local packaging), a Shorewood facility
in that area would lead to faster turnaround and lower packaging costs for its
customers. While new plants are not risk-free and often produce losses before
turning profitable, this strategic initiative adds visibility to the Company's
future growth and strengthens its relationship with its leading customers.
Shorewood's shares sell at only 12 times 1998 estimated earnings per share of
$1.50 which we believe is a very compelling valuation. As such, we rate the
shares a strong buy.
8
<PAGE>
UPDATES
Hunt Manufacturing Co. (NYSE:HUN) Don Thompson was recruited in 1996 to become
CEO of Hunt and given free reign to refocus and re-energize the company. Under
previous management, profitability had been good but growth had slowed in recent
years. Evidence of Hunt's ability to further leverage its many strengths was
lacking. In a consistent, disciplined and thorough fashion, strategic changes
are being implemented. Underperforming businesses and products that lack the
potential to demonstrate growth and improve profitability are being divested.
Two businesses have been sold and a third is for sale. Overhead has been pruned.
Resources are being dedicated to three core businesses: Consumer Products
(Boston brand pencil sharpeners and other office products, X-ACTO brand knives
and blades, and Bienfang commercial and fine arts papers), Presentation Graphics
(laminating and mounting equipment and supplies), and Substrates (Bienfang brand
foam board). In each of these three businesses, Hunt has a market leadership
position, competitive advantages including strong brands and broad distribution,
and a clear strategy for growth.
In essence, Don Thompson is building on the strengths and eliminating the weaker
aspects of Hunt. 1997 is a transition year with operating earnings expected to
rise 5%. Based on our recent meeting with the entire management team (five
executives), we believe that this plan will result in average annual revenue
growth exceeding 10% (excluding acquisitions and divestitures), and earnings per
share growth of 15% or better.
Selling at only 13 times our forward twelve month earnings estimate, we view the
shares as attractive. The company has a good record of solid profitability, a
new and energetic management team with a clear vision, and favorable prospects
for much improved growth. The story is not well-known on Wall Street as the
stock is followed by only one small brokerage house. Purchase of Hunt shares is
recommended.
9
<PAGE>
TEN LARGEST HOLDINGS
as of March 31, 1997
1 INTERFACE, INC.
World's leading manufacturer and marketer of carpet tiles
2 CENTRAL NEWSPAPERS, INC.
Leading media company that publishes daily and weekly newspapers in
metropolitan Phoenix and Indianapolis
3 ECOLAB, INC.
Leading developer and marketer of premium cleaning and sanitizing products
and services for the hospitality markets
4 MBIA, INC.
Leading insurer of municipal funds
5 FIRST BRANDS CORP.
Manufacturer and marketer of consumer products for home and automobile
markets
6 ROUSE CO.
Retail mail developer
7 HASBRO, INC.
World's largest boy manufacturer
8 HARTE-HANKS COMMUNICATIONS
Diversified communications company
9 NORTHERN TRUST CORP.
Chicago-based bark holding company
10 SPECIALTY EQUIPMENT
Manufacturer of commercial and institutional fund service equipment
ARIEL EQUITY FUNDS
ARIEL GROWTH FUND
Inception November 6, 1986
AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1 YEAR 3 YEAR 5 YEAR LIFE OF FUND
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ARIEL GROWTH FUND +21.4% +14.4% +10.9% +13.7%
Total return does not reflect a maximum 4.75% sales load that was charged prior
to July 15, 1994.
ARIEL GROWTH FUND
PORTFOLIO COMPOSITION
[PIE CHART APPEARS HERE]
Consumer Staples 9.4%
Consumer Discretionary & Services 35.8%
Financial Services 13.7%
Producer Durables 10.4%
Health Care 3.2%
Materials and Processing 22.7%
Utilities 1.5%
Other 3.4%
[PIE CHART APPEARS HERE]
S&P 500
PORTFOLIO COMPOSITION
Consumer Staples 12.0%
Consumer Discretionary & Services 9.7%
Financial Services 16.0%
Producer Durables 4.6%
Health Care 10.6%
Materials & Processing 7.2%
Technology 11.4%
Integrated Oils 8.2%
Other Energy 1.3%
Autos & Transportation 3.8%
Utilities 9.8%
Other 5.3%
</TABLE>
Ariel Growth Fund seeks long-term capital appreciation by investing in
undervalued companies in consistent industries that show strong potential for
growth. The Fund looks for issuers that provide quality products or services. To
capture anticipated growth, the Fund generally holds investments for a
relatively long period, usually three to five years. The Fund invests in
companies with market capitalizations under $1.5 billion, with an emphasis on
smaller capitalization (small cap) stocks.
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTED IN ARIEL GROWTH FUND AND
COMPARABLE INDICES*
<TABLE>
<S> <C>
$45,000--- $41,510
40,000--- $38,149
35,000--- $34,485
30,000--- __ Ariel Growth Fund
25,000--- __ S&P 500
20,000--- Russell 25000
15,000---
10,000---
5,000---
=======================================================================
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
[PLOT POINTS APPEARS HERE]
</TABLE>
*Statistics represents past performance which is not indicative of future
results.
Comparisons of change in value of $10,000 invested in Ariel Growth Fund and
comparable indices*
<TABLE>
<CAPTION>
Nov 86 Dec 86 Dec 87 Dec 88 Dec 89 Dec 90 Dec 91 Dec 92 Dec 93 Dec 94 Dec 95 Dec 96 Mar 97
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Plot Points
Ariel Growth Fund $10,000 $10,203 $11,367 $15,905 $19,900 $16,699 $22,163 $24,763 $26,924 $25,786 $30,562 $37,747 $38,149
Nov 86 Dec 86 Dec 87 Dec 88 Dec 89 Dec 90 Dec 91 Dec 92 Dec 93 Dec 94 Dec 95 Dec 96 Mar 97
S&P 500 $10,000 $ 9,745 $10,256 $11,960 $15,749 $15,260 $19,910 $21,427 $23,587 $23,897 $32,878 $40,426 $41,510
Nov 86 Dec 86 Dec 87 Dec 88 Dec 89 Dec 90 Dec 91 Dec 92 Dec 93 Dec 94 Dec 95 Dec 96 Mar 97
Russell 2500 $10,000 $ 9,737 $ 9,281 $11,391 $13,604 $11,580 $16,988 $19,738 $23,002 $22,759 $29,975 $35,680 $34,485
</TABLE>
10
<PAGE>
Ariel Appreciation Fund
Inception December 1, 1989
Average Annual Total Return
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1 Year 3 Year 5 Year Life of Fund
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Ariel Appreciation Fund +19.7% +13.8% +10.9% +11.8%
</TABLE>
Total return does not reflect a maximum 4.75% sales load that was charged prior
to July 15, 1994.
TEN LARGEST HOLDINGS
as of March 31, 1997
1 ROUSE CO.
Retail mall developer
2 HARTE-HANKS COMMUNICATIONS
Diversified communications company
3 HASBRO, INC.
World's largest toy manufacturer
4 NORTHERN TRUST CORP.
Chicago-based bank holding company
5 MBIA, INC.
Leading insurer of municipal bonds
6 FIRST BRANDS CORP.
Manufacturer and marketer of consumer products for home and automobile
markets
7 LONGS DRUG STORES, INC.
A leading operator of retail drug stores in California and other western
states
8 SPECIALTY EQUIPMENT
Manufacturer of commercial and institutional food service equipment
9 LEGGETT & PLATT, INC.
Specializes in manufacturing and marketing components for the home furnishing
industry and diversified markets
10 WHITMAN CORPORATION
Operates three businesses, including Pepsi General Bottlers, Midas
International and Hussman Corporation
Ariel Appreciation Fund also pursues long-term capital appreciation by investing
in undervalued firms with growth potential, but does so at a lower level of risk
than Ariel Growth Fund. Like Ariel Growth Fund, this fund seeks out issuers that
provide quality products or services. To capture anticipated growth, the Fund
will also hold investments for a relatively long period - usually three to five
years. The Fund invests in small and midsize companies with market
capitalizations from $200 million to $5 billion, with an emphasis on medium
capitalization (mid cap) stocks.
ARIEL APPRECIATION FUND PORTFOLIO COMPOSITION
[Pie chart appears here]
Consumer Staples 9.1%
Consumer Discretionary & Services 32.3%
Financial Services 15.4%
Producer Durables 12.0%
Health Care 9.4%
Materials and Processing 16.4%
Utilities 2.0%
Other 3.4%
S&P 500 PORTFOLIO
[Pie chart appears here]
Consumer Staples 12.0%
Consumer Discretionary & Services 9.7%
Financial Services 16.0%
Producer Durables 4.6%
Health Care 10.6%
Materials and Processing 7.2%
Technology 11.4%
Integrated Oils 8.2%
Other Energy 1.3%
Autos & Transportation 3.8%
Utilities 9.8%
Other 5.3%
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTED IN ARIEL APPRECIATION FUND AND
COMPARABLE INDICES/*/
<TABLE>
<CAPTION>
Dec 89 Dec 90 Dec 91 Dec 92 Dec 93 Dec 94 Dec 95
<S> <C> <C> <C> <C> <C> <C> <C>
Ariel Appreciation
Fund $10,000 $ 9,902 $13,184 $14,930 $16,115 $14,763 $18,330
<CAPTION>
Dec 96 Mar 97
<S> <C> <C>
Ariel Appreciation
Fund $22,677 $22,599
<CAPTION>
Dec 89 Dec 90 Dec 91 Dec 92 Dec 93 Dec 94 Dec 95
<S> <C> <C> <C> <C> <C> <C> <C>
S&P 500 $10,000 $ 9,922 $12,945 $13,932 $15,336 $15,539 $21,378
<CAPTION>
Dec 96 Mar 97
<S> <C> <C>
S&P 500 $26,286 $26,991
<CAPTION>
<CAPTION>
Dec 89 Dec 90 Dec 91 Dec 92 Dec 93 Dec 94 Dec 95
<S> <C> <C> <C> <C> <C> <C> <C>
Russell 2500 $10,000 $ 8,554 $12,549 $14,580 $16,992 $16,812 $22,142
<CAPTION>
Dec 96 Mar 97
<S> <C> <C>
Russell 2500 $26,359 $25,473
</TABLE>
<PAGE>
SCHEDULE OF INVESTMENTS
ARIEL GROWTH FUND
SCHEDULE OF INVESTMENTS
MARCH 31, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
Number COMMON STOCKS-97.79% Cost Market Value
of Shares
<S> <C> <C> <C>
ADVERTISING--3.20%
77,700 Omnicom Group, Inc. $ 1,120,818 $ 3,875,288
------------ ------------
BUSINESS SERVICES--5.40%
41,850 Angelica Corp. 1,072,341 768,994
151,900 Ecolab, Inc. 1,883,095 5,772,200
--------- ---------
2,955,436 6,541,194
--------- ---------
CONSUMER PRODUCTS--7.77%
28,400 Clorox Co. 1,110,913 3,184,350
226,500 First Brands Corp. 3,150,016 5,549,250
40,620 Oil-Dri Corporation of America 690,540 665,152
--------- ---------
4,951,469 9,398,752
--------- ---------
DIVERSIFIED OPERATIONS--3.34%
165,200 Whitman Corp. 3,920,211 4,047,400
--------- ---------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Number COMMON STOCKS-97.79% (cont)
of Shares Cost Market Value
<S> <C> <C> <C>
ENTERTAINMENT & LEISURE--4.31%
190,500 Hasbro, Inc. $ 2,248,924 $ 5,214,937
------------ ------------
ENVIRONMENTAL--3.28%
269,150 Safety Kleen Corp. 4,247,866 3,969,963
--------- ---------
FINANCIAL SERVICES--12.73%
59,200 MBIA, Inc. 3,399,385 5,675,800
134,800 Northern Trust Corp. 2,388,939 5,055,000
251,225 Phoenix Duff & Phelps Corp. 1,724,035 1,915,591
74,500 T. Rowe Price Associates 288,948 2,765,812
------- ---------
7,801,307 15,412,203
--------- ----------
FOOD & RESTAURANTS--5.09%
188,233 Bob Evans Farms, Inc. 2,225,968 2,588,204
145,600 McCormick & Co., Inc. 3,129,561 3,567,200
--------- ---------
5,355,529 6,155,404
--------- ---------
FURNITURE & FURNISHINGS--11.37%
264,100 Interface, Inc., Class A 3,989,788 6,619,006
102,600 Leggett & Platt, Inc. 1,071,207 3,334,500
<CAPTION>
Number COMMON STOCKS-97.79% (cont)
of Shares Cost Market Value
<S> <C> <C> <C>
FURNITURE & FURNISHINGS--11.37% (CONT)
55,795 Miller (Herman), Inc. $ 970,480 $ 3,808,009
------------ ------------
6,031,475 13,761,515
--------- ----------
HEALTH CARE--3.12%
126,800 Bergen Brunswig Corp., Class A 2,086,607 3,772,300
--------- ---------
INDUSTRIAL--5.23%
73,400 Brady (WH) Co. 1,625,350 1,844,175
342,000 Specialty Equipment Cos., Inc.* 3,903,410 4,488,750
--------- ---------
5,528,760 6,332,925
--------- ---------
INSURANCE--0.74%
27,200 Arthur J. Gallagher & Co. 908,305 894,200
------- -------
MISCELLANEOUS--1.47%
60,200 Century Telephone Enterprises 1,949,535 1,775,900
--------- ---------
NEWSPAPERS--12.19%
565,610 American Media, Inc., Class A* 5,404,784 3,322,959
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
Number COMMON STOCKS-97.79% (cont)
of Shares Cost Market Value
<S> <C> <C> <C>
NEWSPAPERS--12.19% (CONT)
127,000 Central Newspapers, Inc.,
Class A $ 2,220,625 $ 6,365,875
173,700 Harte-Hanks Communications 2,197,215 5,059,012
--------- ---------
9,822,624 14,747,846
--------- ----------
OFFICE & BUSINESS EQUIPMENT--5.48%
134,620 General Binding Corp. 1,968,983 4,072,255
143,900 Hunt Mfg. Co. 1,916,478 2,554,225
--------- ---------
3,885,461 6,626,480
--------- ---------
PACKAGING--3.43%
223,000 Shorewood Packaging Corp.* 2,269,493 4,153,375
--------- ---------
PRINTING & PUBLISHING--1.55%
178,400 Thomas Nelson, Inc. 2,374,249 1,873,200
--------- ---------
REAL ESTATE--4.46%
184,600 Rouse Co. 1,750,909 5,399,550
--------- ---------
<CAPTION>
Number COMMON STOCKS-97.79% (cont)
of Shares Cost Market Value
<S> <C> <C> <C>
RETAILING--3.63%
187,000 Longs Drug Stores, Inc. $ 3,312,291 $ 4,394,500
------------ ------------
Total Common Stocks 72,521,269 118,346,932
---------- -----------
Principal REPURCHASE AGREEMENTS 2.55%
Amount
$3,090,885 State Street Bank & Trust
Company Repurchase Agreement,
4.75%, dated 3/31/97, repurchase
price $3,091,293, maturing 4/1/97
(collateralized by U.S. Treasury
Bond, 7.125%, 2/15/23) 3,090,885 3,090,885
--------- ---------
Total Repurchase Agreements 3,090,885 3,090,885
--------- ---------
Total Investments-100.34% $ 75,612,154 121,437,817
============
Liabilities, less
Cash and Other Assets-(0.34)% (417,869)
---------
NET ASSETS-100.00% $121,019,948
============
</TABLE>
*Non-income producing
The accompanying notes are an integral part of the financial statements.
14
<PAGE>
ARIEL APPRECIATION FUND
SCHEDULE OF INVESTMENTS
MARCH 31, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
Number COMMON STOCKS-96.71%
of Shares Cost Market Value
<S> <C> <C> <C>
ADVERTISING--2.76%
80,150 Omnicom Group, Inc. $ 1,565,730 $ 3,997,481
------------ ------------
BUSINESS SERVICES--2.49%
64,800 Ecolab, Inc. 1,601,491 2,462,400
41,900 Equifax, Inc. 313,754 1,141,775
--------- ---------
1,915,245 3,604,175
--------- ---------
CHEMICALS--2.56%
87,500 Morton International, Inc. 2,773,242 3,696,875
--------- ---------
CONSUMER PRODUCTS--6.98%
40,450 Clorox Co. 3,018,993 4,535,456
227,000 First Brands Corp. 4,665,135 5,561,500
--------- ---------
7,684,128 10,096,956
--------- ----------
<CAPTION>
Number COMMON STOCKS-96.71% (cont)
of Shares Cost Market Value
<S> <C> <C> <C>
DIVERSIFIED OPERATIONS--3.36%
198,600 Whitman Corp. $4,846,243 $ 4,865,700
---------- -----------
ENTERTAINMENT & LEISURE--7.51%
116,700 Carnival Cruise Lines, Inc. 1,805,622 4,317,900
239,150 Hasbro, Inc. 3,446,876 6,546,731
--------- ---------
5,252,498 10,864,631
--------- ----------
ENVIRONMENTAL--3.16%
310,300 Safety Kleen Corp. 4,730,595 4,576,925
--------- ----------
FINANCIAL SERVICES--13.44%
62,000 MBIA, Inc. 4,053,446 5,944,250
66,370 MBNA Corp. 462,809 1,850,064
166,200 Northern Trust Corp. 3,482,478 6,232,500
185,750 Phoenix Duff & Phelps Corp. 1,488,974 1,416,344
107,800 T. Rowe Price Associates 1,563,253 4,002,075
--------- ----------
11,050,960 19,445,233
---------- ----------
FOOD & RESTAURANTS--3.16%
115,400 Bob Evans Farms, Inc. 2,258,483 1,586,750
122,055 McCormick & Co., Inc. 2,710,051 2,990,348
--------- ---------
4,968,534 4,577,098
--------- ---------
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
Number COMMON STOCKS-96.71% (cont)
of Shares Cost Market Value
<S> <C> <C> <C>
FURNITURE & FURNISHINGS--6.71%
153,860 Leggett & Platt, Inc. $1,876,028 $5,000,450
68,900 Miller (Herman), Inc. 1,912,042 4,702,425
--------- ---------
3,788,070 9,702,875
--------- ---------
Health Care--9.18%
155,787 Bergen Brunswig Corp., Class A 3,005,775 4,634,663
72,600 Fisher Scientific International 1,760,598 3,203,475
91,000 Sybron Corp.* 1,050,861 2,525,250
107,900 Vivra, Inc.* 2,134,594 2,913,300
--------- ---------
7,951,828 13,276,688
--------- ----------
INDUSTRIAL--7.18%
155,700 Brady (Wh) Co. 3,303,191 3,911,963
23,800 Solectron Corp.* 752,318 1,192,975
402,100 Specialty Equipment Cos., Inc.* 5,148,160 5,277,562
--------- ---------
9,203,669 10,382,500
--------- ----------
INSURANCE--0.78%
34,500 Arthur J. Gallagher & Co. 1,156,293 1,134,188
--------- ---------
<CAPTION>
Number COMMON STOCKS-96.71% (cont)
of Shares Cost Market Value
<S> <C>
MISCELLANEOUS--1.37%
67,300 Century Telephone Enterprises $2,179,512 $1,985,350
---------- ----------
Newspapers--6.83%
27,200 Central Newspapers, Inc., Class A 1,348,057 1,363,400
245,075 Harte-Hanks Communications 2,972,825 7,137,809
34,000 Tribune Co. 863,186 1,377,000
--------- ---------
5,184,068 9,878,209
--------- ---------
OFFICE & BUSINESS EQUIPMENT--4.00%
129,305 General Binding Corp. 2,131,766 3,911,476
31,900 Pitney-Bowes, Inc. 1,103,507 1,874,125
--------- ---------
3,235,273 5,785,601
--------- ---------
PACKAGING--3.26%
252,810 Shorewood Packaging Corp.* 2,666,047 4,708,586
--------- --------
PRINTING & PUBLISHING--2.96%
38,400 Houghton Mifflin Co. 1,106,777 2,073,600
210,800 Thomas Nelson, Inc. 2,552,987 2,213,400
--------- ---------
3,659,764 4,287,000
--------- ---------
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
Number COMMON STOCKS-96.71% (cont)
of Shares Cost Market Value
<S> <C> <C> <C>
REAL ESTATE--5.35%
264,700 Rouse Co. $ 3,004,540 $ 7,742,475
------------ ------------
RETAILING--3.67%
225,840 Longs Drug Stores, Inc. 4,114,765 5,307,240
------------ ------------
Total Common Stocks 90,931,004 139,915,786
------------ ------------
Principal REPURCHASE AGREEMENTS-3.89%
Amount
$5,622,763 State Street Bank & Trust
Company Repurchase Agreement,
4.75%, dated 3/31/97, repurchase
price $5,623,505, maturing 4/1/97
(collateralized by U.S. Treasury
Bond, 7.125% 2/15/23) 5,622,763 5,622,763
--------- ---------
Total Repurchase Agreements 5,622,763 5,622,763
--------- ---------
Total Investments-100.60% $96,553,767 145,538,549
===========
</TABLE>
<TABLE>
Market Value
<S> <C>
Liabilities, less Cash
and Other Assets-(0.60)% $ (865,663)
---------
NET ASSETS-100.00% $144,672,886
===========
</TABLE>
*Non-income producing
The accompanying notes are an integral part of the financial statements.
17
<PAGE>
EQUITY STATISTICAL SUMMARY
<TABLE>
<CAPTION>
ARIEL GROWTH
(UNAUDITED) Earnings Per Share
--------------------
52-Week 1996 1997 1996 1997 Market
Ticker Price Range Actual Estimate P/E P/E Cap.
Company Symbol 3/31/97 Low High Calendar Calendar Calendar Calendar ($MM)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Oil-Dri Corporation of America ODC 13.38 11.88 17.75 0.85 1.16 19.3 14.1 118
Angelica Corp. AGL 18.38 18.00 25.13 0.88 1.00 20.9 18.4 167
Thomas Nelson, Inc. TNM 10.50 9.38 15.25 0.50 0.63 nm 16.7 180
Hunt Manufacturing Co. HUN 17.75 12.75 18.88 1.37 1.35 13.0 13.1 195
American Media, Inc. ENQ 5.88 2.75 6.13 0.13 0.35 45.2 16.8 246
Specialty Equipment Cos., Inc. SPEQ 13.13 10.25 15.75 1.26 1.31 10.4 10.0 276
Phoenix Duff & Phelps Corp. DUF 7.63 5.88 8.50 0.49 0.54 15.6 14.1 336
Shorewood Packaging Corp. SHOR 18.63 14.50 20.00 1.26 1.47 14.8 12.7 339
General Binding Corp. GBND 30.25 19.50 33.25 1.60 1.85 18.9 16.4 478
Arthur J. Gallagher & Co. AJG 32.88 29.13 36.38 2.58 2.72 12.7 12.1 549
W.H. Brady Co. BRCOA 25.13 18.00 27.75 1.32 1.56 19.0 16.1 550
Bob Evans Farms, Inc. BOBE 13.75 12.13 17.13 0.81 0.99 17.0 13.9 586
Interface, Inc. IFSIA 25.06 11.63 25.63 1.23 1.50 20.4 16.7 589
Safety Kleen Corp. SK 14.75 14.13 18.63 1.05 1.03 14.0 14.3 860
Longs Drug Stores, Inc. LDG 23.50 18.94 27.50 1.49 1.60 15.8 14.7 917
First Brands Corp. FBR 24.50 21.00 29.38 1.62 1.78 15.1 13.8 997
Harte-Hanks Communications HHS 29.13 20.63 30.38 1.28 1.49 22.8 19.5 1,083
Bergen Brunswig Corp. BBC 29.75 24.75 33.25 1.88 2.14 15.8 13.9 1,193
Central Newspapers, Inc. ECP 50.13 33.38 50.75 2.31 3.00 21.7 16.7 1,318
Herman Miller, Inc. MLHR 34.13 14.38 35.63 1.41 1.81 24.2 18.9 1,611
Century Telephone Enterprises CTL 29.50 28.50 34.50 2.14 2.45 13.8 12.0 1,770
McCormick & Co., Inc. MCCRK 24.50 18.88 25.38 1.03 1.40 23.8 17.5 1,882
Rouse Co. RSE 29.25 20.38 32.25 2.16 2.47 13.5 11.8 1,954
T. Rowe Price Associates TROW 37.13 22.75 54.25 1.59 1.91 23.3 19.4 2,328
Ecolab, Inc. ECL 38.00 29.50 39.50 1.75 2.15 21.7 17.7 2,451
Whitman Corp. WH 24.25 21.63 25.75 1.38 1.54 17.6 15.7 2,476
Leggett & Platt, Inc. LEG 35.25 31.50 37.38 1.85 2.05 19.1 17.2 3,254
Hasbro, Inc. HAS 27.38 21.25 29.67 1.52 1.72 18.0 15.9 3,520
Omnicom Group, Inc. OMC 49.88 38.00 53.00 2.25 2.60 22.2 19.2 4,045
MBIA, Inc. MBI 95.88 70.13 104.63 7.22 7.89 13.3 12.2 4,151
Northern Trust Corp. NTRS 37.50 25.38 45.25 2.20 2.54 17.0 14.8 4,290
Clorox Co. CLX 112.38 78.38 127.38 4.52 4.99 24.9 22.5 5,810
</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.
18
<PAGE>
<TABLE>
<CAPTION>
Ariel Appreciation
(unaudited)
Earnings Per Share
--------------------
52-Week 1996 1997 1996 1997 Market
Ticker Price Range Actual Estimate P/E P/E Cap.
Company Symbol 3/31/97 Low High Calendar Calendar Calendar Calendar ($MM)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Thomas Nelson, Inc. TNM 10.50 9.38 15.25 0.05 0.63 nm 16.7 180
Specialty Equipment Cos., Inc. SPEQ 13.13 10.25 15.75 1.26 1.31 10.4 10.0 276
Phoenix Duff & Phelps Corp. DUF 7.63 5.88 8.50 0.49 0.54 15.6 14.1 336
Shorewood Packaging Corp. SHOR 18.63 14.50 20.00 1.26 1.47 14.8 12.7 339
General Binding Corp. GBND 30.25 19.25 33.25 1.60 1.85 18.9 16.4 478
Arthur J. Gallagher & Co. AJG 32.88 29.13 36.38 2.58 2.72 12.7 12.1 549
W.H. Brady Co. BRCOA 25.13 18.00 27.75 1.32 1.56 19.0 16.1 550
Bob Evans Farms, Inc. BOBE 13.75 12.13 17.13 0.81 0.99 17.0 13.9 586
Houghton Mifflin Co. HTN 54.00 42.25 56.88 3.13 3.15 17.3 17.1 767
Safety Kleen Corp. SK 14.75 14.13 18.63 1.05 1.03 14.0 14.3 860
Longs Drug Stores, Inc. LDG 23.50 18.94 27.50 1.49 1.60 15.8 14.7 917
Fisher Scientific International FSH 44.13 35.00 47.75 2.40 3.00 18.4 14.7 918
First Brands Corp. FBR 24.50 21.00 29.38 1.62 1.78 15.1 13.8 997
Harte-Hanks Communication HHS 29.13 20.63 30.38 1.28 1.49 22.8 19.5 1,083
Bergen Brunswig Corp. BBC 29.75 24.75 33.25 1.88 2.14 15.8 13.9 1,193
Vivra, Inc. V 27.00 24.63 36.13 1.30 1.50 20.8 18.0 1,207
Sybron Corp. SYB 27.75 22.25 34.75 1.41 1.71 19.7 16.2 1,307
Central Newspapers, Inc. ECP 50.13 33.38 50.75 2.31 3.00 21.7 16.7 1,318
Herman Miller, Inc. MLHR 34.13 14.38 35.63 1.41 1.81 24.2 18.9 1,611
Century Telephone Enterprises CTL 29.50 28.50 34.50 2.14 2.45 13.8 12.0 1,770
McCormick & Co., Inc. MCCRK 24.50 18.88 25.38 1.03 1.40 23.8 17.5 1,882
Rouse Co. RSE 29.25 20.38 32.25 2.16 2.47 13.5 11.8 1,954
T. Rowe Price Associates TROW 37.13 22.75 54.25 1.59 1.91 23.3 19.4 2,328
Ecolab, Inc. ECL 38.00 29.50 39.50 1.75 2.15 21.7 17.7 2,451
Whitman Corp. WH 24.25 21.63 25.75 1.38 1.54 17.6 15.7 2,476
Leggett & Platt, Inc. LEG 35.25 31.50 37.38 1.85 2.05 19.1 17.2 3,254
Solectron Corp., Inc. SLR 53.00 29.00 61.38 2.29 2.80 23.1 18.9 3,265
Hasbro, Ins. HAS 27.38 21.25 29.67 1.52 1.72 18.0 15.9 3,520
Omnicom Group, Inc. OMC 49.88 38.00 53.00 2.25 2.60 22.2 19.2 4,045
Equifax, Inc. EFX 28.50 19.63 34.50 1.21 1.45 23.6 19.7 4,138
MBIA, Inc. MBI 95.88 70.13 104.63 7.22 7.89 13.3 12.2 4,151
Northern Trust Corp. NTRS 37.50 25.38 45.25 2.20 2.54 17.0 14.8 4,290
Tribune Co. TRB 40.50 31.63 44.13 1.97 2.10 20.6 19.3 4,969
Clorox Co. CLX 112.38 78.38 127.38 4.52 4.99 24.9 22.5 5,810
Morton International, Inc. MII 42.25 33.25 44.63 2.44 2.72 17.3 15.5 6,105
Pitney-Bowes, Inc. PBI 58.75 43.25 63.50 3.12 3.50 18.8 16.8 8,754
MBNA Corp. KRB 27.88 16.75 37.88 1.33 1.66 21.0 16.8 9,762
Carnival Corporation CCL 37.13 24.50 38.25 1.95 2.17 19.0 17.1 11,052
</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.
19
<PAGE>
ARIEL PREMIER BOND
DEAR FELLOW SHAREHOLDER: For the somewhat tempestuous first quarter ending March
31,1997, the Ariel Premier Bond Fund Institutional Class experienced a loss of -
0.38%, though we proved more resilient than the broader bond market as
represented by Lehman Aggregate Bond Index, which registered a loss of -0.56 for
this same period. Similarly, for the two months ending March 31, 1997, the Ariel
Premier Bond Fund, Investor Class lost -0.70% versus -0.86% for the Lehman
Aggregate Bond Index for the same period.
Our relative strength stems primarily from our current short duration posture,
which helps protect the Fund from interest rate fluctuations. While such
fluctuations were not hugely dramatic in the first quarter, Federal Reserve
Chairman Alan Greenspan's warning of inflation risk in mid-February and the
Federal Funds subsequent 25 basis point rate hike in late March did contribute
to an overall increase in both short- and long-term yields. Further, our
emphasis on asset-backs and our modest overweight in mortgages also boded well
as these securities outperformed equal-duration Treasuries. On the flipside,
because BBB corporates fared the best in the investment grade market, our A-
rated status held us back somewhat. Among A-rated bond funds, however, Ariel
Premier Bond Fund, Institutional Class kept company with the nation's best,
ranking 11th out of 117 funds in the "A Rated Bond" category for the 12-month
period ending March 31, 1997, as reported in The Wall Street Journal's Mutual
Fund Scorecard on April 15, 1997.
The portfolio themes emphasized at year-end 1996 continue to be reflected in our
current strategy. While today's interest rates continue to discount bad news,
strong growth and Fed tightening should keep the risks tilted toward higher
rates, and it therefore behooves us to keep the portfolio's duration short.
Further, because a higher-rate environment is a low risk one for mortgages, we
will maintain our modest overweight in these securities. Finally, we will
continue to overweight the portfolio in asset-backs, as we anticipate their
continued outperformance of corporates in a higher rate environment. With this
said, select corporate positions such as J.P. Morgan Capital securities
represent undervalued opportunities.
As always, we are grateful for the opportunity to serve you and welcome any
questions or comments that you might have.
Sincerely,
/s/John W. Rogers /s/Kenneth R. Meyer
John W. Rogers, Jr. Kenneth R. Meyer
President President
Ariel Capital Management, Inc. Lincoln Capital Management Company
20
<PAGE>
ARIEL PREMIER BOND FUND
Institutional Class Inception October 1, 1995
Investor Class Inception February 1, 1997
<TABLE>
AVERAGE ANNUAL TOTAL RETURN
- -------------------------------------------------------------------------------
1Q97 1 Year Life of Fund
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Ariel Premier Bond Fund, Inst. Cl. -0.4% +5.4% +4.2%
Ariel Premier Bond Fund, Inv. Cl. na na -0.7%
</TABLE>
ARIEL PREMIER BOND FUND PORTFOLIO COMPOSITION
[Pie chart appears here]
Repurchase Agreements 6.0%
Government & Agency 29.1%
Commercial Paper 9.0%
Corporate 7.3%
Mortgage-Backed 18.4%
Asset-Backed 30.3%
LEHMAN AGGREGATE BOND INDEX PORTFOLIO COMPOSITION
[Pie chart appears here]
Government & Agency 51.1%
Corporate 18.0%
Mortgage-Backed 29.9%
Asset-Backed 1.0%
Comparison of change in value of $10,000 invested in Ariel Premier Bond Fund,
Inv. Cl. and comparable indices/*/
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Feb 97 Mar 97
<S> <C> <C>
Ariel Premier Bond Fund, Inv. Cl. $10,000 $9,930
Lehman Aggregate $10,000 $9,914
</TABLE>
*Statistics represent past performance which is not indicative of future
results.
Comparison of change in value of $10,000 invested in Ariel Premier Bond Fund,
Inst. Cl. and comparable indices/*/
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Oct 95 Dec 95 Mar 96 Jun 96 Sep 96 Dec 96 Mar 97
<S> <C> <C> <C> <C> <C> <C> <C>
Ariel Premier Bond
Fund, Inst. Cl. $10,000 $10,351 $10,092 $10,189 $10,369 $10,677 $10,637
Lehman Aggregate $10,000 $10,246 $10,240 $10,298 $10,490 $10,805 $10,744
</TABLE>
*Statistics represent past performance which is not indicative of future
results.
Ariel Premier Bond Fund seeks to maximize total return through a combination of
income and capital appreciation by investing in high-quality fixed income
securities. The Fund may invest in investment-grade bonds including U.S.
Government (and government agency) securities, corporate bonds, mortgage-related
securities and asset-backed securities. Under normal conditions, at least 80% of
the Funds assets will be invested in fixed income securities rated A or better
by the recognized rating agencies. Ariel Premier Bond Fund will not invest in
"junk bonds" or other low-rated securities.
21
<PAGE>
ARIEL PREMIER BOND FUND
SCHEDULE OF INVESTMENTS
MARCH 31, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
ASSET-BACKED SECURITIES-30.27%
Par Value Cost Market Value
<S> <C> <C> <C>
$ 470,000 Capital Equipment Receivables
Trust, 6.28%, 6/15/00 $ 469,896 $ 466,574
70,000 Circuit City Credit Card,
1995-1A, 6.375%, 8/15/05 69,131 68,834
1,170,000 Finger Hut, 96-1A, 6.45%, 11/99 1,178,259 1,163,998
800,000 First Omni, 96-AA, 6.65%, 9/15/03 807,563 791,040
60,000 Green Tree Financial, 1995-1 A5,
8.40%, 6/15/25 65,916 62,369
1,450,000 J.C. Penney Master Credit Card Trust,
1990-C1, 9.625%, 6/30/00 1,580,248 1,554,371
1,699,363 Merrill Lynch Mortgage Investors, Inc.,
1995-C2-A1, Floating Rate, 6/15/21 1,722,641 1,700,961
300,000 The Money Store, 1996-1 A3,
6.85%, 12/20/02 299,958 301,311
550,000 The Money Store, 1997-A A3,
6.675%, 4/15/12 549,828 548,454
300,000 The Money Store, 1996-B A6,
7.38%, 5/15/17 299,954 299,628
200,000 Olympic Auto Receivables,
1995-EA4, 5.85%, 3/15/01 198,018 199,044
1,440,000 Prime, 95-1A, 6.75%, 11/15/05 1,446,862 1,419,682
350,000 Private Label Credit Card,
1994-2A, 7.80%, 9/20/03 357,447 355,712
<CAPTION>
ASSET-BACKED SECURITIES-30.27% (cont)
Par Value Cost Market Value
<S> <C> <C> <C>
$430,000 Salomon Brothers, 96LB3,
6.875%, 10/25/26 $ 429,974 $ 427,420
45,000 Sears Credit Account, 96-1A,
6.20%, 2/16/06 44,119 43,926
440,000 Sears Credit Account, 96-2A,
6.50%, 10/15/03 437,731 439,199
2,005,000 Sears Credit Account, 96-4A,
6.45%, 10/16/06 2,000,764 1,961,291
420,000 Standard Credit Card Master -
Citibank, 94-4A, 8.25%, 11/7/03 446,779 438,808
300,000 Standard Credit Card Master -
Citibank, 8.25%, 1/7/07 322,470 317,226
300,000 UCFC, 96 CA 3, 7.15%,
12/15/13 299,954 298,938
1,880,000 World Financial, 96-A,
6.70%, 2/15/04 1,890,119 1,861,632
2,600,000 World Omni Auto Lease,
1996-AA1, 6.30%, 6/25/02 2,605,239 2,606,656
400,000 World Omni Auto Lease,
1996-BA3, 6.25%,11/15/02 399,354 396,816
---------------- -----------
Total Asset-Backed Securities 17,922,224 17,723,890
---------------- -----------
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
CORPORATE DEBT-7.36%
Par Value Cost Market Value
<S> <C> <C> <C>
$275,000 J.C. Penney Co., 7.625%, 3/1/97 $ 269,472 $ 257,812
95,000 JP Morgan Capital, 7.54%, 1/15/27 95,000 88,587
2,000,000 Railcar Leasing LLC,
6.75%, 7/15/06 1,999,194 1,962,500
1,631,322 Railcar Trust, 1992-1A,
7.75%, 6/1/04 1,704,494 1,666,591
----------- ------------
340,000 US West Capital Funding, Inc.,
6.95%, 1/15/37 339,321 333,200
Total Corporate Debt 4,407,481 4,308,690
----------- ------------
<CAPTION>
U.S GOVERMENT AGENCIES-26.07%
Mortgage-Backed Securities--18.44%
<S> <C> <C> <C>
4,138,559 Federal Home Loan Mortgage
Corp. (FHLMC),
6.50%, 2/1/26 4,004,447 3,868,228
1,478,961 FHLMC Federal Home Loan,
6.50%, 11/1/25 1,395,861 1,386,052
285,474 FHLMC Gold, 6.50%, 3/1/26 263,245 266,114
45,706 Federal National Mortgage
Association (FNMA),
7.00%, 10/1/23 44,923 43,864
1,900,822 FNMA, 6.50%, 4/1/24 1,812,244 1,772,517
<CAPTION>
U.S GOVERNMENT AGENCIES-26.07% (cont)
Par Value Cost Market Value
<S> <C> <C> <C>
Mortgage-Backed Securities--18.44% (cont)
$469,196 FNMA, 7.00%, 5/1/24 $ 461,154 $ 450,278
486,590 FNMA, 6.50%, 11/1/25 446,744 452,679
1,541,145 FNMA, 6.50%, 1/1/26 1,493,871 1,432,771
----------- ------------
11,034,291 10,796,211
----------- ------------
OTHER AGENCY ISSUES--7.63%
250,000 Government Trust Certificate,
Aid Israel, 5.70%, 2/15/03 249,239 233,750
1,887,706 Government Trust Certificate,
Israel Trust, Series 2E, 9.40%,
5/15/02 2,021,788 1,989,170
1,250,423 Pemex Exp Trust, 7.66%,
8/15/01 1,290,077 1,276,894
630,000 Resolution Funding Corporation,
8.125%, 10/15/19 697,191 682,933
245,000 Resolution Funding Corporation,
8.875%, 7/15/20 304,586 286,162
----------- ------------
4,562,881 4,468,909
----------- ------------
Total U.S. Government Agencies 15,597,172 15,265,120
------------ -----------
U.S GOVERNMENT OBLIGATIONS-21.69%
855,000 U.S. Treasury Bond,
11.75%, 2/15/10 1,118,563 1,096,914
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
U.S GOVERNMENT OBLIGATIONS-21.69% (cont)
Par Value Cost Market Value
<S> <C> <C> <C>
$365,000 U.S. Treasury Bond,
12.75%, 11/15/10 508,260 497,988
655,000 U.S. Treasury Bond,
13.875%, 5/15/11 972,000 952,062
855,000 U.S. Treasury Bond,
14.00%, 11/15/11 1,292,276 1,265,178
7,860,000 U.S. Treasury Bond,
8.125%, 8/15/19 8,844,850 8,628,393
260,000 U.S. Treasury Note,
5.625%, 11/30/98 259,348 257,000
----------- ------------
Total U.S. Government
Obligations 12,995,297 12,697,535
----------- ------------
COMMERCIAL PAPER-9.00%
750,000 Ameritech Capital Corp.,
5.28%, 5/12/97 745,490 745,490
750,000 Bellsouth Telecommunication,
5.27%, 4/9/97 749,122 749,122
750,000 Cargil Incorporated, Inc.,
5.25%, 4/18/97 748,141 748,141
750,000 Ford Motor Credit Co.,
5.30%, 4/10/97 749,006 749,006
750,000 International Lease
Financing, 5.32%, 4/17/97 748,227 748,227
782,000 Metlife Funding, 5.27%,
4/9/97 781,084 781,084
<CAPTION>
COMMERCIAL PAPER-9.00% (cont)
Par Value Cost Market Value
<S> <C> <C> <C>
$750,000 Pepsico, Inc., 5.25%,
4/9/97 $ 749,125 $ 749,125
----------- ------------
Total Commercial Paper 5,270,195 5,270,195
----------- ------------
<CAPTION>
REPURCHASE AGREEMENTS-6.19 %
<S> <C> <C> <C>
3,625,416 State Street Bank & Trust
Company Repurchase
Agreement, 4.75%, dated
3/31/97, repurchase price
$3,625,894, maturing
4/1/97 (collateralized by
U.S. Treasury Bond,
7.125%, 2/15/23) 3,625,416 3,625,416
----------- -----------
Total Repurchase
Agreements 3,625,416 3,625,416
----------- -----------
Total Investments-100.58% 59,817,785 58,890,846
=========== -----------
Liabilities, less Cash
and Other Assetss-(0.58)% (340,346)
-----------
NET ASSETS-100.00% $58,550,500
===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
24
<PAGE>
Financial Report
<PAGE>
STATEMENT OF ASSETS & LIABILITIES
MARCH 31, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
GROWTH APPRECIATION PREMIER
FUND FUND BOND FUND
------------ ------------ -----------
<S> <C> <C> <C>
ASSETS:
Investments in securities, at value
(cost $75,612,154, $96,553,767
and $59,817,785, respectively) $121,437,817 $145,538,549 $58,890,846
Dividends and interest receivable 244,558 219,365 504,274
Receivable for fund shares issued 7,487 5,159 --
Prepaid and other assets 60,807 88,361 976
------------ ------------ -----------
Total assets 121,750,669 145,851,434 59,396,096
============ ============ ===========
LIABILITIES:
Payable for securities purchased 478,935 903,809 --
Accrued management fee 69,396 95,704 21,395
Accrued distribution fee 26,698 31,918 4
Payable for shares redeemed 61,894 41,190 --
Shareholder distributions payable -- -- 824,197
Other liabilities 93,798 105,927 --
------------ ------------ -----------
Total liabilities 730,721 1,178,548 845,596
------------ ------------ -----------
NET ASSETS $121,019,948 $144,672,886 $58,550,500
============ ============ ===========
NET ASSETS CONSIST OF:
Paid-in-capital $ 70,838,463 $ 89,466,066 $59,668,514
Undistributed net investment income 161,183 28,330 4,051
Accumulated net realized gain (loss)
on investment transactions 4,194,639 6,193,708 (195,126)
Net unrealized appreciation
(depreciation) on investments 45,825,663 48,984,782 (926,939)
------------ ------------ -----------
Total net assets $121,019,948 $144,672,886 $58,550,500
============ ============ ===========
Shares outstanding (no par value) 3,746,273 5,569,323
Institutional Class 5,887,162
Investor Class 1,707
Net asset value, offering and redemption
price per share $32.30 $25.98
Institutional Class $9.94
Investor Class $9.94
</TABLE>
STATEMENT OF OPERATIONS
SIX MONTHS ENDED MARCH 31, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
Growth Appreciation Premier
Fund Fund Bond Fund
------------ ------------ -----------
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividends $ 838,022 $ 917,088 $ --
Interest 83,296 101,314 1,273,182
------------ ------------ -----------
Total investment income 921,318 1,018,402 1,273,182
------------ ------------ -----------
EXPENSES:
Management fee 387,155 540,158 87,111
Distribution fee 148,905 180,053 4
Transfer agent fees and expenses 125,174 156,936 --
Printing and postage expense 24,777 33,363 --
Professional fees 20,416 20,422 --
Federal and state registration fees 12,493 12,493 --
Trustees, fees and expenses 11,177 11,176 --
Custody fees and expenses 7,819 8,950 --
Miscellaneous expenses 22,219 12,581 --
------------ ------------ -----------
Total expenses before waiver 760,135 976,132 87,115
Waiver of expenses -- (1,083) --
------------ ------------ -----------
Net expenses 760,135 975,049 87,115
------------ ------------ -----------
NET INVESTMENT INCOME 161,183 43,353 1,186,067
------------ ------------ -----------
REALIZED AND UNREALIZED GAIN:
Net realized gain (loss) on investments 4,196,568 7,402,212 (163,724)
Change in unrealized appreciation
(depreciation) on investments 8,697,059 5,672,546 (938,717)
------------ ------------ -----------
Net gain (loss) on investments 12,893,627 13,074,758 (1,102,441)
------------ ------------ -----------
NET INCREASE IN NET ASSETS
RESULTING FROM
OPERATIONS $ 13,054,810 $ 13,118,111 $ 83,626
============ ============ ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
26
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
(UNAUDITED)
<TABLE>
<CAPTION>
GROWTH FUND APPRECIATION FUND PREMIER BOND FUND
---------- ----------------- -----------------
SIX MONTHS SIX MONTHS SIX MONTHS
ENDED YEAR ENDED ENDED YEAR ENDED ENDED YEAR ENDED
MARCH 31, 1997 SEPT. 30, 1996 MARCH 31, 1997 SEPT. 30, 1996 MARCH 31, 1997 SEPT. 30, 1996
-------------- -------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS:
Net investment income $ 161,183 $ 660,999 $ 43,353 $ 677,489 $1,186,067 $ 392,150
Net realized gain (loss) on
investments 4,196,568 7,382,064 7,402,212 8,710,352 (163,724) 65,835
Change in unrealized
appreciation (depreciation)
on investments 8,697,059 9,870,652 5,672,546 15,106,961 (938,717) 11,778
------------- ------------- ------------ ------------- ----------- -----------
Net increase in net assets
resulting from operations 13,054,810 17,913,715 13,118,111 24,494,802 83,626 469,763
------------- ------------- ------------ ------------- ----------- -----------
DISTRIBUTIONS TO SHAREHOLDERS:
Net investment income -- (1,659,356) (397,468) (1,152,459) (1,186,080) (389,495)
Capital gains (6,352,876) (15,885,827) (7,316,330) (10,183,833) (93,776) (2,052)
------------- ------------- ------------ ------------- ----------- -----------
(6,352,876) (17,545,183) (7,713,798) (11,336,292) (1,279,856) (391,547)
------------- ------------- ------------ ------------- ----------- -----------
SHARE TRANSACTIONS:
Shares sold 132,566,721 224,715,671 18,436,754 115,542,199 43,823,392 16,322,662
Shares issued to holders in
reinvestment of dividends 5,898,764 16,343,324 7,001,279 10,096,899 679,385 143,156
Shares redeemed (133,917,508) (252,610,404) (21,796,666) (146,482,349) (122,667) (1,187,414)
------------- ------------- ------------ ------------- ----------- -----------
Net increase (decrease) 4,547,977 (11,551,409) 3,641,367 (20,843,251) 44,380,110 15,278,404
------------- ------------- ------------ ------------- ----------- -----------
TOTAL INCREASE (DECREASE) IN NET
ASSETS 11,249,911 (11,182,877) 9,045,680 (7,684,741) 43,183,880 15,356,620
NET ASSETS:
Beginning of period 109,770,037 120,952,914 135,627,206 143,311,947 15,366,620 10,000
------------- ------------- ------------ ------------- ----------- -----------
End of period (includes
undistributed net investment
income of $161,183, $0, $28,330,
$382,445, $4,051 and $4,064,
respectively) $ 121,019,948 $ 109,770,037 $144,672,886 $ 135,627,206 $58,550,500 $15,366,620
============= ============= ============ ============= =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
27
<PAGE>
FINANCIAL HIGHLIGHTS
(Unaudited)
<TABLE>
<CAPTION>
GROWTH FUND
-----------
Six Months Ten Months
Ended Year Ended Sept. 30, Ended
Mar. 31, 1997 1996 1995 1994 1993 Sept. 30, 1992
------------- ---- ---- ---- ---- --------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning
of period $30.58 $30.78 $28.84 $30.46 $29.59 $27.36
Income from investment
operations:
Net investment income 0.04 0.18 0.36 0.18 0.73 0.31
Net realized and
unrealized gains
on investments 3.46 4.24 3.51 0.23 2.81 3.19
------ ------ ------ ------ ------ ------
Total from investment
operations 3.50 4.42 3.87 0.41 3.54 3.50
Distributions to
shareholders:
Dividends from net
investment
income -- (0.44) (0.23) (0.30) (0.75) (0.56)
Distributions from
capital gains (1.78) (4.18) (1.70) (1.73) (1.92) (0.71)
------ ------ ------ ------ ------ ------
Total distributions (1.78) (4.62) (1.93) (2.03) (2.67) (1.27)
------ ------ ------ ------ ------ ------
Net asset value, end of period $ 32.30 $ 30.58 $ 30.78 $ 28.84 $ 30.46 $ 29.59
Total return 11.52%/(a)/ 16.28% 14.38% 1.41% 12.54% 13.15%/(a)/
Supplemental data and ratios:
Net assets, end of period, in
thousands $121,020 $109,770 $120,953 $149,511 $233,826 $236,186
Ratio of expenses to average
net assets 1.28%/(b)/ 1.31% 1.37%/(c)/ 1.25% 1.16% 1.23%/(b)/
Ratio of net income to average
net assets 0.27%/(b)/ 0.57% 1.18%/(c)/ 0.56% 0.72% 0.83%/(b)/
Portfolio turnover rate 7% 17% 16% 9% 13% 19%
Average commission rate paid
per share/(d)/ $0.0554 $ 0.0493 N/A N/A N/A N/A
</TABLE>
<TABLE>
<CAPTION>
APPRECIATION FUND
-----------------
Six Months Ten Months
Ended Year Ended Sept. 30, Ended
Mar. 31, 1997 1996 1995 1994 1993 Sept. 30, 1992
------------- ---- ---- ---- ---- --------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning
of period $24.99 $22.76 $21.82 $21.67 $19.42 $17.60
Income from investment
operations:
Net investment income 0.01 0.13 0.14 0.04 0.06 0.09
Net realized and
unrealized gains
on investments 2.42 4.07 2.26 0.51 2.27 1.92
------ ------ ------ ------ ------ ------
Total from investment
operations 2.43 4.20 2.40 0.55 2.33 2.01
Distributions to
shareholders:
Dividends from net
investment
income (0.07) (0.20) (0.06) (0.05) (0.08) (0.17)
Distributions from
capital gains (1.37) (1.77) (1.40) (0.35) -- (0.02)
------ ------ ------ ------ ------ ------
Total distributions (1.44) (1.97) (1.46) (0.40) (0.08) (0.19)
------ ------ ------ ------ ------ ------
Net asset value, end of period $25.98 $24.99 $22.76 $21.82 $21.67 $19.42
Total return 9.72%/(a)/ 19.60% 12.11% 2.56% 12.03% 11.47%/(a)/
Supplemental data and ratios:
Net assets, end of period, in
thousands $144,673 $135,627 $143,312 $162,280 $207,065 $146,624
Ratio of expenses to average
net assets 1.36%/(b)(c)/ 1.36%/(c)/ 1.36%/(c)/ 1.35%/(c)/ 1.37% 1.44%/(b)(c)/
Ratio of net income to average
net assets 0.06%/(b)(c)/ 0.50%/(c)/ 0.61%(c) 0.17%/(c)/ 0.33% 0.57%/(b)(c)/
Portfolio turnover rate 9% 26% 18% 12% 56% 2%
Average commission rate paid
per share/(d)/ $0.0573 $0.0513 N/A N/A N/A N/A
</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
Growth Fund and 1.36%, 1.40%, 1.58%, 1.40%, and 1.50% for the periods ended
1997, 1996, 1995, 1994 and 1992 for the Appreciation Fund; and the ratio of
net investment income to average net assets would have been 1.16% for the
period ended 1995 for the Growth Fund and 0.06%, 0.46%, 0.39%, 0.12% and
0.51% for the periods ended 1997, 1996, 1995, 1994 and 1992 for the
Appreciation Fund, respectively.
(d) Disclosure required by the Securities Exchange Commission beginning 1996.
The accompanying notes are an integral part of the financial statements.
28
<PAGE>
FINANCIAL HIGHLIGHTS (CONT)
(UNAUDITED)
<TABLE>
<CAPTION>
PREMIER BOND FUND
-----------------
INSTITUTIONAL CLASS INVESTOR CLASS
Six Months Year Ended February 1, 1997/(b)/
Ended Sept. 30, to
Mar. 31, 1997 1996 Mar. 31, 1997
------------- ---- ----------------
<S> <C> <C> <C>
Net asset value, beginning of period $9.95 $10.00 $10.10
Income from investment operations:
Net investment income 0.22 0.43 0.09
Net realized and unrealized gains
(losses) on investments 0.01 (0.04) (0.16)
---- ---- ----
Total from investment operations 0.23 0.39 (0.07)
Distributions to shareholders:
Dividends from net investment
income
Distributions from capital gains (0.22) (0.43) (0.09)
---- ---- ----
Total distributions (0.24) (0.44) (0.09)
---- ---- ----
Net asset value, end of period $ 9.94 $ 9.95 $9.94
Total return 2.32%(a) 3.96% (0.70)%(a)
==== ==== ====
Supplemental data and ratios:
Net assets, end of period, in
thousands $58,534 $15,367 $ 17
Ratio of expenses to average
net assets 0.45%(c) 0.48% 0.85%(c)
Ratio of net income to average
net assets 6.08%(c) 5.85% 5.96%(c)
Portfolio turnover rate 190% 423% 190%
</TABLE>
(a) Total return is not annualized.
(b) Commencement of operations.
(c) Annualized.
The accompanying notes are an integral part of the financial statements.
NOTES TO THE FINANCIAL STATEMENTS
MARCH 31, 1997 (UNAUDITED)
1. ORGANIZATION
Ariel Growth Fund (doing business as Ariel Investment Trust) (the "Trust") is a
Massachusetts business trust registered under the Investment Company Act of
1940, as amended, as an open-end management investment company. The Growth Fund,
Appreciation Fund and Premier Bond Fund ( the "Funds" or "Ariel Mutual Funds")
are diversified portfolios of the Trust. The Premier Bond Fund is structured to
offer an Institutional Class and an Investor Class. The investor class, began
February 1, 1997.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Funds in the preparation of their financial statements. The
financial statements have been prepared in accordance with generally accepted
accounting principles which permit management to make certain estimates and
assumptions at the date of the financial statements.
INVESTMENT VALUATION - Securities for which market quotations are readily
available are valued at the most recent closing price. If a closing price is not
reported, equity securities for which reliable bid quotations are available are
valued at the mean between bid and asked prices, or yield equivalent as obtained
from one or more market makers for such securities, and debt securities over 60
days are valued based on quotes obtained from dealers. Short-term securities
maturing within 60 days are valued at amortized cost which approximates market.
Securities and assets for which market quotations are not readily available are
valued at fair value as determined in good faith by or under the direction of
the Board of Trustees. The Funds may enter into repurchase agreements with
recognized financial institutions and in all instances hold underlying
securities with a value at least equal to the total repurchase price such
financial institutions have agreed to pay.
FEDERAL INCOME TAXES - No provision for federal income taxes has been made since
the Funds have complied to date with the provisions under Subchapter M of the
Internal Revenue Code available to regulated investment companies.
29
<PAGE>
NOTES TO THE FINANCIAL STATEMENTS (CONT)
MARCH 31, 1997 (UNAUDITED)
SECURITIES TRANSACTIONS AND INVESTMENT INCOME - Securities transactions are
accounted for on a trade date basis. Realized gains and losses from securities
transactions are recorded on the identified cost basis. Dividend income is
recorded on the ex-dividend date and interest income is recognized on an accrual
basis.
EXPENSES - The Funds are charged for those expenses that are directly
attributable to each portfolio. Expenses directly attributable to a class of
shares, such as Rule 12b-1 distribution fees, are charged to that class.
Expenses that are not directly attributable to a portfolio are typically
allocated among each portfolio in proportion to their respective net assets.
DISTRIBUTIONS TO SHAREHOLDERS - Dividends from net investment income are
declared and paid at least annually for the Growth Fund and Appreciation Fund
and declared daily and paid quarterly for the Premier Bond Fund. Distributions
of realized capital gains, if any, are declared and paid at least annually.
Distributions to shareholders are determined in accordance with federal income
regulations and are recorded on the ex-dividend date. The character of
distributions made during the year from net investment income or net realized
gain may differ from the characterization for federal income tax purposes due to
differences in the recognition of income, expense and gain items for financial
statement and tax purposes. Where appropriate, reclassifications between net
asset accounts are made for such differences that are permanent in nature.
3. CAPITAL SHARE TRANSACTIONS
Transactions in shares of capital stock were as follows:
<TABLE>
<CAPTION>
Six Months Ended March 31, 1997
Growth Fund Appreciation Fund Premier Bond Fund
----------- ------------------ ------------------
Institutional Investor
------------- --------
<S> <C> <C> <C> <C>
Shares sold 4,140,392 701,640 4,286,676 1,982
Shares issued to holders in
reinvestment of dividends 184,856 268,866 67,254 --
Shares redeemed (4,168,070) (829,514) (11,765) (275)
Net increase 157,178 140,992 4,342,165 1,707
<CAPTION>
Year Ended September 30, 1996
Growth Fund Appreciation Fund Premier Bond Fund
----------- ------------------ ------------------
<S> <C> <C> <C>
Shares sold 7,768,583 5,103,680 1,649,706
Shares issued to holders in
reinvestment of dividends 603,075 458,325 14,370
Shares redeemed (8,712,337) (6,429,578) (120,079)
Net increase (decrease) (340,679) (867,573) 1,543,997
</TABLE>
4. INVESTMENT TRANSACTIONS
Purchases and sales of securities, excluding short-term investments and U.S.
government securities, for the year ended March 31, 1997 are summarized below:
<TABLE>
<CAPTION>
Growth Fund Appreciation Fund Premier Bond Fund
----------- ----------------- -----------------
<S> <C> <C> <C>
Purchases $ 8,568,331 $12,175,404 $22,778,635
Sales 11,625,192 19,904,812 302,062
</TABLE>
Purchases and sales of U.S. government securities for the Premier Bond Fund for
the six months ended March 31, 1997 were $82,655,506 and $67,677,083,
respectively.
30
<PAGE>
NOTES TO THE FINANCIAL STATEMENTS (CONT)
MARCH 31, 1997 (UNAUDITED)
At March 31, 1997 gross unrealized appreciation and depreciation of securities
were as follows:
<TABLE>
<CAPTION>
Growth Fund Appreciation Fund Premier Bond Fund
----------- ----------------- -----------------
<S> <C> <C> <C>
Unrealized appreciation $49,202,917 $50,438,670 $ 25,974
Unrealized (depreciation) (3,377,254) (1,453,888) (952,913)
Net appreciation
(depreciation) $45,825,663 $48,984,782 $(926,939)
</TABLE>
5. INVESTMENT ADVISORY AND OTHER TRANSACTIONS WITH AFFILIATES
The Trust has entered into an investment advisory and administrative services
agreement (the "Management Agreement") with Ariel Capital Management, Inc. (the
"Adviser"). Pursuant to the Management Agreement, the Adviser is paid by the
Growth Fund and Appreciation Fund, a monthly fee at the annual rate of 0.65% and
0.75% of the first $500 million of average daily net assets, 0.60% and 0.70% of
the next $500 million of average daily net assets and 0.55% and 0.65% on the
average daily net assets in excess of $1 billion, respectively. The Adviser has
agreed to reimburse each Fund for operating expenses (exclusive of brokerage,
interest, taxes, distribution plan expenses and extraordinary items) exceeding,
on a pro rata basis, 1.50% of the first $30 million of each Fund's average daily
net assets and 1.00% of such assets in excess of $30 million.
The Trust has entered into an investment advisory agreement and administrative
services agreement with the Adviser for the Premier Bond Fund. Pursuant to the
agreements, the Fund pays the Adviser an investment advisory fee and
administrative services fee based on the average daily net assets of the
Institutional Class and the Investor Class at the annual rate of 0.35% and
0.10%, and 0.35% and 0.25%, respectively. Prior to May 14, 1996, the Adviser was
paid an investment advisory fee and administrative services fee based on the
average daily net assets of the Fund at the annual rate of 0.43% and 0.15%,
respectively. The Adviser pays all of the Fund's expenses other than 12b-1 fees
for the Investor Class, the investment advisory fee and administrative services
fee, the expenses assumed by the Adviser under the administrative services
agreement, interest, taxes, brokerage commissions and extraordinary expenses.
Lincoln Capital Management Company ("Lincoln Capital"), is the sub-adviser of
the Premier Bond Fund. Lincoln Capital manages the day-to-day investment
operations for the Fund. The Fund pays no fees directly to Lincoln Capital.
Lincoln Capital receives fees from the Adviser at the annual rate of 0.30% of
the average daily net assets up to $50 million; 0.20% for the next $50 million;
0.15% for the next $150 million and 0.10% for amounts greater than $250 million.
Pursuant to Rule 12b-1 of the Investment Company Act of 1940, the Trust has
adopted a distribution plan which permits the Growth Fund, Appreciation Fund and
Premier Bond Fund, Investor Class to pay for certain expenses associated with
the distribution of their shares up to 0.30% annually of each Fund's average
daily net asset value. Such expenses are currently limited to an annual rate of
0.25% of each Fund's average daily net assets by the Board of Trustees. Payments
have been made to Ariel Distributors, Inc., an affiliate of the Adviser.
31
<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.
WILLIAM C. DIETRICH, C.P.A. Bill is a director and vice president,
treasurer and CFO of Streamline Mid-Atlantic, Inc., a provider of home
shopping services to the retail grocery and pharmacy industries. He has a
B.A. from Georgetown University. Bill serves on the board and program staff
of the Shalem Institute, an internationally known ecumenical organization.
ROYCE N. FLIPPIN, JR. Director of program advancement for the Massachusetts
Institute of Technology, Royce is also president of Flippin Associates, a
broad-based consulting firm providing strategic and implementation services
in the management of critical needs for the public and private sectors. He
earned his B.A. from Princeton University and an M.B.A. from Harvard
Business School. Royce is on the board of several corporations and non-
profit institutions.
JOHN G. GUFFEY Currently, John is treasurer of Silby, Guffey & Co., Inc., a
venture capital firm investing in early stage companies in the health care
and environmental industries. John has a B.S. from the University of
Pennsylvania's Wharton School. He does volunteer work and holds
directorships with various local and national non-profit organizations.
MELLODY HOBSON As senior vice president and director of marketing, Mellody
oversees the servicing of Ariel Capital Management Inc.'s institutional
clients, as well as the marketing of the Ariel Mutual Funds. She received a
B.A. from Princeton University's Woodrow Wilson School. She serves as a
Director of the Chicago Public Library as well as the Civic Federation of
Chicago. Mellody also works with a variety of other civic institutions,
including those affiliated with Princeton.
CHRISTOPHER G. KENNEDY Chris is executive vice president of Merchandise
Mart Properties, Inc. which manages, among other prime properties, The
Merchandise Mart; The Washington Design Center; and New York's Decoration
and Design Building. He earned his B.A. from Boston College and his M.B.A.
at the J.L. Kellogg Graduate School of Management at Northwestern
University. Chris serves on the board of directors of the Chicago
Convention &Tourism Bureau; Boston-based Citizens Energy Corp. and Citizens
Corp.; and the Greater Chicago Food Depository.
ERIC T. MCKISSACK, CFA In the capacity of vice chairman andco-chief
investment officer of Ariel Capital Management, Inc., Eric is responsible
for co-managing client and mutual fund portfolios. He received a B.S. in
both Management and Architecture from the Massachusetts Institute of
Technology and he earned his M.B.A. from the University of California at
Berkeley. He is also a Chartered Financial Analyst. Eric serves on a
variety of civic and corporate boards.
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