<PAGE>
ARIEL MUTUAL FUNDS
Semi Annual Report--March 31, 1998 Ariel Appreciation Fund -
Ariel Growth Fund - Ariel Premier Bond Fund
THE PATIENT INVESTOR
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 [LOGO] 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.
Slow & steady wins the race.
<PAGE>
Ariel Investment Trust
307 North Michigan Avenue
Suite 500
Chicago, Illinois 60601
800.292.7435
312.726.0140
Fax 312.726.7473
TABLE OF CONTENTS
FOR MORE INFORMATION ABOUT THE ARIEL MUTUAL FUNDS INCLUDING MANAGEMENT FEES AND
EXPENSES, PLEASE SEE THE CURRENT PROSPECTUS WHICH MUST PRECEDE OR ACCOMPANY THIS
REPORT. DISTRIBUTED BY ARIEL DISTRIBUTORS, INC.
PERFORMANCE DATA PROVIDED REPRESENTS PAST PERFORMANCE AND IS NOT INDICATIVE OF
FUTURE RESULTS. THE INVESTMENT RETURN AND PRINCIPAL VALUE OF AN INVESTMENT WILL
FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS
THAN THEIR ORIGINAL COST.
The Patient Investor 2
Company in Focus 6
Company Updates 8
Ariel Equity Funds 10
Schedule of Equity Investments 12
Equity Statistical Summary 18
Ariel Bond Fund 20
Schedule of Bond Investments 22
Statement of Assets & Liabilities 26
Statement of Operations 26
Statement of Changes in Net Assets 27
Financial Highlights 28
Notes to the Financial Statements 30
Board of Trustees 33
<PAGE>
SLOW AND STEADY WINS THE RACE.-AESOP
THE PATIENT INVEST [LOGO]R-Registered Trademark-
DEAR FELLOW SHAREHOLDER: For the three months ending March 31, 1998, the Ariel
Growth Fund rose +9.2% and the Ariel Appreciation Fund posted similar results
with a +9.1% return. Over the same period, the small-to-mid sized issues of the
Russell 2500 Index gained +10.3% and the large company stocks of the S&P 500
earned +14.0%. The first quarter was characterized by positive investment
results overall -- be it domestic or foreign securities, large, mid or small-cap
stocks, or even bonds. With this said, if one were to seek to discern the subtle
differences in stock market returns, large issues continued to outperform their
smaller brethren and growth stock managers favoring popular issues fared just
slightly better than those with a bent towards the undervalued and undiscovered.
Although broad market results might suggest otherwise, all of the news was not
so good on the earnings front. Specifically, market indices continued to scale
new heights despite an erosion in corporate earnings and some noteworthy
disappointments by industry leaders that included Motorola (NYSE: MOT), Nike
(NYSE: NKE) and Toys 'R Us (NYSE: TOY) among others.
PORTFOLIO COMINGS AND GOINGS
During the quarter, strong contributors to the Ariel Growth Fund included carpet
tile manufacturer, Interface (OTC: IFSIA), and restaurant equipment
manufacturer, Specialty Equipment Companies (OTC: SPEQ). The most significant
gains for the Ariel Appreciation Fund resulted from holdings in the diversified
media company, Harte-Hanks Communications (NYSE: HHS), and Carnival Corporation
(NYSE: CCL), the cruise line company. In keeping with our value discipline, we
sold our last shares of Clorox (NYSE: CLX) in the Growth Fund and are in the
process of scaling out of the remaining position in the Appreciation Fund.
Additionally, we sold our last bit of Safety Kleen (NYSE: SK) with its pending
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takeover by Laidlaw Environmental (NYSE: LLE) nearing completion. We also
finally eliminated our position in Thomas Nelson (NYSE: TNM), having lost faith
in the uniqueness of this Bible publisher's niche. Although values in such a
strong market have been scarce, we are excited about the prospects for our
newest issue, Littlefuse, Inc. (OTC: LFUS)--a maker of fuses and circuit
protector devices for the electronic, automotive and power markets.
THE CHALLENGES OF A BULL MARKET
The unparalleled coverage of the investment management industry by the media,
mutual fund rating organizations and institutional pension fund consultants has
attracted a great deal of attention to issues related to a manager's adherence
to a well-defined investment strategy and the style consistency that results.
Although there is no question that the views of impartial third-party
intermediaries help maintain high industry standards, there are times when
unforeseen consequences can result from well-intended generalizations that fail
to consider practical applications. Case in point, the unprecedented surge of
the strongest bull-run in stock market history has driven the broad market (as
measured by the S&P 500) up more than 500% from its 1987 trough. As a result of
this extraordinary ascent, many of today's buy-and-hold managers of small and
mid-cap stocks face a difficult predicament as they have witnessed their market
capitalizations rise and thereby stand accused of the dreaded "style drift."
"As Small-Cap Stocks 'Graduate' to a New Level, Investors Seek Out Appropriate
Replacements" is the title of a recent THE WALL STREET JOURNAL article focused
on the topic of style drift through market cap appreciation. In the piece, the
writer discusses the JOURNAL'S own definition of "small"--companies with market
capitalizations under $750 million--and lauds managers whose securities stay
below this ceiling. In passing, she acknowledges strict adherence to such
definitions, "Sometimes means fund managers have to sell some of their favorite
hot stocks". But reassures readers that from the standpoint of one portfolio
manager, "Its just a matter of refreshing your portfolio and looking for good
ideas." From our perspective, this analysis naively assumes an abundance of
what the writer calls "appropriate replacements" when, in fact, there are very
few really good ideas--especially after a prolonged bull market. Investing
great, Warren Buffett himself, says he's "willing to settle for just one good
idea a year." Thus, after being "forced to sell" their most successful, growing
businesses,
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the manager is left with a portfolio of "also-rans"--in short, watering their
weeds--all the while sifting through the market's leftovers in a frantic effort
to remain fully invested.
The sale of our firm's oldest portfolio holding in March calls this suggested
practice into question and forces one to consider the missed opportunities
that could result from the application of such a broad-based perspective.
Specifically, when we first purchased stock in Clorox (NYSE: CLX) in 1985 at
$10.00 a share, the companys $1 billion market capitalization placed it
squarely in the "small-cap" camp(1). However, during a lengthy 12 1/2 year
holding period, the company effortlessly broke through the small parameter
and ultimately teetered on the high end of the mid-cap range with a $9
billion market capitalization at our time of sale. While the company's
market capitalization grew 739% over our holding period, in having risen to
$85 a share, its price also appreciated by more than 750% (excluding
dividends). Valuation notwithstanding, for many years, we did not feel a
compelling reason to part with a fundamentally solid brand that we understood
extraordinarily well and in which we had accumulated a great deal of
knowledge. If we had been forced to sell Clorox at a pre-determined market
cap level, we would have missed out on a substantial return from a company
whose stock price quietly appreciated in the absence of Wall Street attention
for an extended period of time.
Clorox is a perfect example of our investment philosophy which has always been
to buy wonderful businesses that are undiscovered or out of favor when all of
the positive news is not widely known and the shares are inefficiently priced.
Conversely, we seek to sell these companies when they become popular, the story
is widely understood, and the company's shares are fully valued. Additionally,
for our entire 15 year history, we have maintained a focus on smaller companies
where we feel our proprietary research can make the biggest difference. Thus,
for the Ariel Growth Fund, we purchase new issues generally under $1.5 billion
in market cap and for the Ariel Appreciation Fund, we initiate purchase of new
issues under $5 billion. As our inconspicuous companies move on the size
continuum of small-to-mid and even through the mid-cap ranges, we have found
there to be tremendous opportunities for realizing significant gains. However,
as these same companies grow into the large cap arena, we are no longer able to
make the case that they are misunderstood and inefficiently priced which is why
you never see large cap stocks in Ariel portfolios.
(1)Although THE WALL STREET JOURNAL categorizes small cap stocks as those under
$750 million in market cap, many cite $1.5 billion as a more relevant threshold.
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RETHINKING SIZE
In exchange for strong returns for individual issues, we are willing to accept
the consequences of rising market capitalizations and understand this situation
is likely to be exacerbated when a raging bull market environment is paired with
low portfolio turnover. At year-end 1987, the Ariel Growth Fund had a market
capitalization of $190 million. Today, the Fund has a market capitalization of
$1.2 billion--a 507% rise from more than a decade ago. For the style police, a
cursory look at this difference might raise red flags. However, in the context
of the Russell 2500's own 590% market cap appreciation over the same period, one
comes away with a different point of view. Accordingly, while the largest stock
in the Russell 2500 Index had a market cap of $840 million in 1987, today, with
a cap size of $6.79 billion, its 7 times bigger. As a means of comparison, the
largest stock in the Ariel Growth Fund has a cap size of $8.34 billion--2.3
times bigger than it was in 1987 (at $2.54 billion).
In lieu of the fact that the investment world has changed as the bull market has
charged on, many consultants and analysts are starting to study and understand
the complications that can result when size parameters are too restrictive.
This consideration may simply be a reaction to market movement in recent years.
Or perhaps some are beginning to realize more and more investment professionals
are managing their portfolios to fit style parameters and thereby giving less
attention to the underlying fundamentals of the investments they are making.
Regardless of the motivation of the fund watchers, there appears to be a growing
recognition that there needs to be more flexibility--especially in the context
of those managers who are more long-term oriented than others. Chicago-based
fund tracker, Morningstar, Inc. is reportedly in the process of re-evaluating
their parameters and have suggested their definition of small cap could be
significantly expanded. We are happy to see this occurring.
As always, we are most grateful for your investment and appreciate any comments
you may have.
Sincerely,
/s/ John W. Rogers, Jr. /s/ Eric T. McKissack, CFA
John W. Rogers, Jr. Eric T. McKissack, CFA
Portfolio Manager Portfolio Manager
Ariel Growth Fund Ariel Appreciation Fund
RUSSELL MARKET CAP BREAKDOWN (IN BILLIONS)
- ------------------------------------------
DECEMBER 31, 1987 MARCH 31,1998
Large Capitalization $7.13 & Above $41.33 & Above
Medium/Large Capitalization 2.37-7.13 10.85-41.33
Medium Capitalization 0.84-2.27 3.68-10.85
Small/Medium Capitalization 0.28-0.84 1.43-3.68
Small Capitalization 0.28 & Below 1.43 & Below
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[Logo]
800 E. Northwest Hwy.
Des Plaines, IL 60016
(847) 824-1188
COMPANY IN FOCUS
LITTELFUSE, INC. (OTC: LFUS) is the largest global manufacturer of circuit
protection devices (fuses, protectors and resettable devices) for use in the
electronic, automotive and industrial markets. Without realizing it, nearly
every American uses one of its products in their everyday life. If you drive a
car, use a computer, watch television or use a cellular phone, it is extremely
likely to be protected by a Littelfuse product. Littelfuse was founded in 1927
and has shown a consistent record of earnings growth and operating performance
since it became an independent public company in 1991.
The company has the largest market share in both the electronic and automotive
markets (49% and 38% of sales, respectively) and is the third largest producer
of power fuses (13%) serving the industrial marketplace. Littelfuse has a
diverse blue-chip customer base including Compaq, Hewlett Packard, IBM,
Motorola, Panasonic and Sony in the electronics market; General Motors,
Chrysler, and Ford as well as all Japanese and most European auto manufacturers;
Autozone, NAPA, and Pep Boys in the automotive aftermarket; and Rockwell
International and Reliance Electric in the power fuse/industrial market. Nine
out of every 10 automobiles in the world use the company's fuses and nearly all
of the world's major electronics manufacturers use its products. Littelfuse is
very much a global company. One of Littelfuse's greatest strengths is the
diversity of its sales by geography, industry and customer base which reduces
its exposure to cyclical effects in economies, industries or a single customer.
REASONS FOR RECOMMENDATION
A DOMINANT AND DEFENDABLE POSITION IN NICHE MARKETS. Littelfuse has a very high
share of markets that are limited in size, but growing. The company operates in
an industry that can be characterized as a "natural oligopoly" and has several
significant barriers to entry. Littelfuse's products are extremely important to
the performance of its customers' end product, yet account for a very small
component of the product's total cost. These two factors, combined with the
Littelfuse brand name, reputation and product development ability, give its
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customers high switching costs and low price sensitivity, thus creating
Littelfuse's competitive advantage.
OUTSTANDING ECONOMICS. Littelfuse is a tremendously profitable business with
high margins and high returns on equity and tangible assets. These high margins
and returns have been extremely consistent over the past several years.
Earnings per share have grown a cumulative average of 26% over the past five
years. Littelfuse's business generates a very strong stream of cash flow.
Management has been very astute in reinvesting this cash flow to create
shareholder value through repayment of debt, share repurchases, and reinvestment
in profitable growth (research and development, expansionary capital
expenditures and a few niche acquisitions).
SOUND LONG-TERM GROWTH PROSPECTS. Littelfuse has several underlying
opportunities for top-line growth. Any device that uses electrical current
requires some type of circuit protection. Computers, cellular phones, video
games, pagers, televisions, video cameras and many other electronic devices all
use fuses and circuit protection devices. Automobiles are also increasingly
using more and more electronic components. Today's typical automobile uses 40
fuses. Some high-end models already use 75 to 100 per vehicle and many
automotive experts predict that the average car will have 50-55 fuses per
vehicle in just three years. Long term the mass production of electric vehicles
(EVs) represents a huge opportunity for Littelfuse, as EVs use 10 times the
dollar amount of circuit protection compared to the typical internal combustion
auto.
LITTELFUSE IS ATTRACTIVELY PRICED. With Littelfuse's unique franchise, great
economics, and long term growth potential we feel that this security represents
a very attractive value for long term investors. The stock is currently trading
at 18 times our 1998 cash earnings estimate, 9 times cash flow, and a 39%
discount to our estimate of its private market value of approximately $43 per
share.
We recommend investors initiate a position in Littelfuse at current levels.
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COMPANY UPDATE
GBC-Registered Trademark-
One GBC Plaza
Northbrook, IL 60062
(708) 272-1389
GENERAL BINDING CORPORATION (OTC: GBND) has been a core holding of our
portfolios since 1990. During General Binding's 50 years of operations it has
grown from a small binding company into a total solutions provider to its
customers as "The Document Finishing Company". Over the past several years some
investors have worried that the proliferation of technology would create the
"paperless office" and decrease the need for General Binding's products. We
believe this threat was and continues to be completely unfounded. The spread of
cheaper computers, desktop publishing software and laser printers has actually
increased the amount and quality of printed material in major corporations,
small businesses and people's homes.
General Binding has a dominant market position in document binding and
laminating equipment and their related consumable supplies. Most of its products
are sold directly to businesses. Recently the company closed an acquisition of
one of its largest competitors, Ibico AG, a Swiss manufacturer and marketer of
desktop binding and laminating products sold primarily to the retail market. We
believe this acquisition will compliment General Binding's core competencies in
document finishing by increasing its penetration into the office product
superstore and traditional distributor markets. The combined businesses should
achieve significant synergies and cost savings.
General Binding currently trades at 17 times our 1998 estimated earnings and 8
times cash flow.
THOMAS NELSON (NYSE: TNM) Last quarter, we decided to exit out of our position
in Thomas Nelson due to increasing concerns over the long-term prospects of the
company. Although recent results display evidence of an improvement in the
company's fundamentals, we remain skeptical that this trend is sustainable.
The company continues to encounter difficulty in its core publishing businesses
- -- Christian Books and Bibles -- as the major book retailers gain purchasing
leverage over their suppliers. Furthermore, management's decision to allocate
additional capital to the highly competitive yet less profitable gift business
is of significant concern to us. Lastly, Thomas Nelson has demonstrated an
inability to generate consistent operating returns and cash flow. For these
reasons, we recommend investors seek alternate investment opportunities.
THOMAS NELSON
501 Nelson Place
Nashville, TN 37214
(615) 889-9000
[GRAPHIC]
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UPDATES
BRADY
[LOGO]-Registered Trademark-
727 W. Glendale Ave.
Milwaukee, WI 53201
(414) 332-8100
W.H. BRADY COMPANY (OTC: BRCOA) continued its excellent record of growth in
sales, earnings, and cash flow in 1997 and should continue to benefit from its
investment in global growth opportunities and new products in the coming years.
Brady dominates its niche oriented markets in industrial labels, facility
identification, and safety related products. This allows Brady to achieve
exceptional levels of profitability and generate excess cash flow. We expect
this debt free, cash-rich company to continue to grow through new product
development, expanding global markets and selective acquisitions.
Brady's management team has instilled a team-oriented, employee empowered
corporate culture that is very unique within corporate America. The company's
Shareholder Value Enhancement (SVE) program is engrained in this culture to
focus on three main drivers of value enhancement: revenue growth, cost
management, and asset utilization. Management and employee compensation is tied
to the performance of the SVE program. We believe that over the long run this
type of management will drive rewards to shareholders in excess of market
returns.
W.H. Brady is not widely followed by Wall Street analysts and as a result, we
feel that this Milwaukee based company is an undiscovered gem. Brady remains an
excellent core holding in our portfolio and offers good value selling at 18
times next year's estimated earnings and 8 times cash flow.
SAFETY-KLEEN (NYSE: SK) We sold our position in this environmental services and
recycling company following an extraordinary series of events. We initiated
positions in Safety-Kleen in late 1994 at prices in the mid-teens, impressed by
the stock's low valuation and the company's dominant franchise. Earnings growth,
however, continued to be disappointing. Beginning in August 1997 Safety-Kleen
made several important moves. Specifically, the company announced the departure
of CEO, Jack Johnson, and the return of Don Brinkman, its founder, as Chairman
and CEO on an interim basis. In addition, Safety-Kleen disclosed that it was
hiring an investment banker to explore strategic options for enhancing
shareholder value, including a sale of the company. In early November the
company received a hostile bid from Laidlaw Environmental (NYSE: LLE) for
roughly $26.00 per share in cash and stock. A few weeks later, Safety-Kleen
announced a definitive agreement to sell the company for $27.00 per share in
cash to a group led by Philip Services (NYSE: PHV). In order to lock in profits,
we began to sell our positions after this announcement. The balance of our
positions were sold in the weeks thereafter as it became clear that we were
unlikely to see a significantly sweetened bid. After numerous delays,
shareholders failed to endorse the Philip bid. In April 1998, Laidlaw
Environmental was successful in its effort to acquire Safety-Kleen, with an
improved bid of $18 in cash and approximately $12 in Laidlaw stock. We are
pleased that our patience resulted in a profitable investment for our
shareholders.
[LOGO]
1000 North Randall Road
Elgin, IL 60123
(847) 697-8460
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ARIEL EQUITY FUNDS
TEN LARGEST HOLDINGS
as of March 31, 1998
1 INTERFACE, INC.
World's leading manufacturer and
marketer of carpet tiles
2 MBIA, INC.
Leading insurer of municipal bonds
3 FIRST BRANDS CORP.
Manufacturer and marketer of
consumer products for home and
automobile markets
4 HASBRO, INC.
Leading toy manufacturer
5 CENTRAL NEWSPAPERS, INC.
Leading media company with daily
and weekly newspapers in Phoenix
and Indianapolis
6 ROUSE CO.
Retail mall developer
7 SPECIALTY EQUIPMENT
Manufacturer of commercial and
institutional food service equipment
8 ECOLAB, INC.
Leading developer and marketer
of premium cleaning and sanitizing
products and services for the
hospitality markets
9 LIBBEY, INC.
Leading producer of glass tableware
in North America
10 AMERICAN MEDIA
Leading publisher in the field of
personality journalism
ARIEL GROWTH FUND
Inception November 6, 1986
ARIEL GROWTH FUND SEEKS LONG-TERM CAPITAL APPRECIATION BY INVESTING IN
UNDERVALUED COMPANIES IN CONSISTENT INDUSTRIES THAT SHOW STRONG POTENTIAL FOR
GROWTH BUT DOES SO AT A HIGHER RISK THAN THE ARIEL APPRECIATION FUND. THE FUND
LOOKS FOR ISSUERS THAT PROVIDE QUALITY PRODUCTS OR SERVICES. TO
CAPTURE ANTICIPATED GROWTH, THE FUND GENERALLY HOLDS INVESTMENTS FOR A
RELATIVELY LONG PERIOD, USUALLY THREE TO FIVE YEARS. THE FUND INVESTS IN
COMPANIES WITH MARKET CAPITALIZATIONS UNDER $1.5 BILLION WITH AN EMPHASIS ON
SMALLER CAPITALIZATION (SMALL CAP) STOCKS.
AVERAGE ANNUAL TOTAL RETURN AS OF MARCH 31, 1998
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1 Year 3 Year 5 Year Life of Fund
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ARIEL GROWTH FUND +47.4% +27.5% +17.2% +16.4%
</TABLE>
Total return does not reflect a maximum 4.75% sales load that was charged prior
to July 15, 1994.
[PIE CHART]
ARIEL GROWTH FUND PORTFOLIO COMPOSITION
<TABLE>
<S> <C>
Utilities 3.0%
Producer Durables 8.9%
Consumer Staples 10.4%
Financial Services 10.4%
Materials and Processing 23.1%
Technology 2.8%
Health Care 2.8%
Consumer Discretionary & Services 38.6%
</TABLE>
S&P 500 PORTFOLIO COMPOSITION
<TABLE>
<S> <C>
Autos and Transportation 3.6%
Producer Durables 4.1%
Materials and Processing 5.5%
Other 5.8%
Integrated Oils 6.7%
Consumer Discretionary & Services 10.0%
Utilities 10.6%
Other Energy 1.2%
Financial Services 17.9%
Technology 12.0%
Health Care 11.7%
Consumer Staples 10.9%
</TABLE>
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTED IN ARIEL GROWTH FUND AND
COMPARABLE INDICES*
[GRAPH]
Date Growth S&P Russell
1986 $10,000 $10,000 $10,000
1987 $11,367 $10,256 $9,281
1988 $15,905 $11,960 $11,391
1989 $19,900 $15,749 $13,604
1990 $16,699 $15,260 $11,580
1991 $22,163 $19,910 $16,988
1992 $24,763 $21,427 $19,738
1993 $26,924 $23,587 $23,002
1994 $25,786 $23,897 $22,759
1995 $30,562 $32,878 $29,975
1996 $37,747 $40,426 $35,680
1997 $51,502 $53,914 $44,370
1998 $56,229 $61,434 $48,920
* Statistics represent past performance which is not indicative of future
results. The S&P 500 is a broad market-weighted index dominated by blue-chip
stocks. The Russell 2500 Index measures the performance of small and mid-sized
companies. All indexes are unmanaged and returns include reinvested dividends.
An investor cannot invest directly in an index.
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ARIEL APPRECIATION FUND
Inception December 1, 1989
ARIEL APPRECIATION FUND ALSO PURSUES LONG-TERM CAPITAL APPRECIATION BY INVESTING
IN UNDERVALUED FIRMS WITH GROWTH POTENTIAL. 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.
AVERAGE ANNUAL TOTAL RETURN AS OF MARCH 31, 1998
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1 Year 3 Year 5 Year Life of Fund
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ARIEL APPRECIATION FUND +51.0% +29.3% +18.6% +15.9%
</TABLE>
Total return does not reflect a maximum 4.75% sales load that was charged prior
to July 15, 1994.
[CHART]
ARIEL APPRECIATION FUND PORTFOLIO COMPOSITION
<TABLE>
<S> <C>
Utilities 4.1%
Health Care 5.8%
Producer Durables 9.6%
Consumer Staples 10.9%
Financial Services 14.6%
Technology 1.5%
Consumer Discretionary & Services 37.1%
Materials and Processing 16.2%
</TABLE>
S&P 500 PORTFOLIO COMPOSITION
<TABLE>
<S> <C>
Autos and Transportation 3.6%
Producer Durables 4.1%
Materials and Processing 5.5%
Other 5.8%
Integrated Oils 6.7%
Consumer Discretionary & Services 10.0%
Utilities 10.6%
Other Energy 1.2%
Financial Services 17.9%
Technology 12.0%
Health Care 11.7%
Consumer Staples 10.9%
</TABLE>
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTED IN ARIEL APPRECIATION FUND AND
COMPARABLE INDICES*
[GRAPH]
Date App S&P Russel
1989 $10,000 $10,000 $10,000
1990 $9,902 $9,922 $8,554
1991 $13,184 $12,945 $12,549
1992 $14,930 $13,932 $14,580
1993 $16,115 $15,336 $16,992
1994 $14,763 $15,539 $16,812
1995 $18,330 $21,378 $22,142
1996 $22,677 $26,286 $26,356
1997 $31,283 $35,056 $32,776
1998 $34,133 $39,946 $36,137
* Statistics represent past performance which is not indicative of future
results. The S&P 500 is a broad market-weighted index dominated by blue-chip
stocks. The Russell 2500 Index measures the performance of small and mid-sized
companies. All indexes are unmanaged and returns include reinvested dividends.
An investor cannot invest directly in an index.
TEN LARGEST HOLDINGS
as of March 31, 1998
1 HASBRO, INC.
Leading toy manufacturer
2 MBIA, INC.
Leading insurer of municipal bonds
3 FIRST BRANDS CORP.
Manufacturer and marketer of
consumer products for home and
automobile markets
4 ROUSE CO.
Retail mall developer
5 CENTURY TELEPHONE ENTERPRISES
Diversified telecommunications
company
6 SPECIALTY EQUIPMENT
Manufacturer of commercial and
institutional food service equipment
7 HARTE-HANKS COMMUNICATIONS
Diversified communications company
8 NORTHERN TRUST CORP.
Chicago-based bank holding company
9 ALLERGAN INC.
Leading provider of specialty
eyecare products
10 MORTON INTERNATIONAL
Leading producer of specialty
chemicals and salt
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SCHEDULE OF INVESTMENTS
ARIEL GROWTH FUND
SCHEDULE OF INVESTMENTS
MARCH 31, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
Number COMMON STOCKS-96.61% Cost Market Value
of Shares
<C> <S> <C> <C>
ADVERTISING--4.71%
131,800 Harte-Hanks Communications $ 831,458 $ 3,130,250
128,600 Omnicom Group, Inc. 922,050 6,052,237
----------- -----------
1,753,508 9,182,487
----------- -----------
BUSINESS SERVICES--4.21%
282,500 Ecolab, Inc. 2,024,615 8,192,500
----------- -----------
CONSUMER PRODUCTS--8.64%
394,700 First Brands Corp. 7,128,135 9,842,831
187,900 Libbey, Inc. 7,032,241 6,999,275
----------- -----------
14,160,376 16,842,106
----------- -----------
DIVERSIFIED OPERATIONS--3.49%
344,800 Whitman Corp. 5,500,501 6,809,800
----------- -----------
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
Number COMMON STOCKS-96.61% (cont) Cost Market Value
of Shares
<C> <S> <C> <C>
ELECTRICAL & ELECTRONICS--2.73%
204,400 Littlefuse, Inc.* $ 5,339,632 $ 5,314,400
----------- -----------
ENTERTAINMENT & LEISURE--5.00%
275,700 Hasbro, Inc. 4,481,448 9,735,656
----------- -----------
FINANCIAL SERVICES--9.68%
130,200 MBIA, Inc. 4,202,961 10,090,500
83,000 Northern Trust Corp. 1,447,989 6,204,250
36,500 T. Rowe Price Associates 135,708 2,568,687
----------- -----------
5,786,658 18,863,437
----------- -----------
FOOD & RESTAURANTS--5.51%
193,933 Bob Evans Farms, Inc. 2,305,055 4,108,955
205,300 McCormick & Co., Inc. 4,658,989 6,620,925
----------- -----------
6,964,044 10,729,880
----------- -----------
FURNITURE & FURNISHINGS--8.96%
273,700 Interface, Inc., Class A 4,269,388 11,375,656
102,600 Leggett & Platt, Inc. 1,071,207 5,277,487
23,780 Miller (Herman), Inc. 94,704 797,373
----------- -----------
5,435,299 17,450,516
----------- -----------
HEALTH CARE--2.24%
115,000 Allergan, Inc. 3,440,133 4,370,000
----------- -----------
INDUSTRIAL--7.84%
153,200 Brady (WH) Co. 4,087,777 5,132,200
102,850 Hussman International, Inc. 1,355,034 1,928,438
403,200 Specialty Equipment Cos., Inc.* 4,891,260 8,215,200
----------- -----------
10,334,071 15,275,838
----------- -----------
INSURANCE--0.60%
27,200 Arthur J. Gallagher & Co. 908,305 1,178,100
----------- -----------
NEWSPAPERS--8.47%
886,010 American Media, Inc., Class A* 7,762,944 6,977,329
134,100 Central Newspapers, Inc., Class A 3,772,304 9,529,481
----------- -----------
11,535,248 16,506,810
----------- -----------
OFFICE & BUSINESS EQUIPMENT--4.62%
167,720 General Binding Corp. 3,005,892 5,461,383
143,900 Hunt Mfg. Co. 1,916,478 3,534,544
----------- -----------
4,922,370 8,995,927
----------- -----------
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
Number COMMON STOCKS-96.61% (cont) Cost Market Value
of Shares
<C> <S> <C> <C>
PACKAGING--3.07%
223,000 Shorewood Packaging Corp.* $ 2,269,493 $ 5,979,188
----------- -----------
PHARMACEUTICALS--0.04%
5,750 Allergan Specialty Therapeutics,
Inc.* 46,098 69,719
----------- -----------
PRINTING & PUBLISHING--5.89%
412,800 Golden Books* 4,587,356 4,747,200
200,600 Lee Enterprises 5,552,215 6,732,638
----------- -----------
10,139,571 11,479,838
----------- -----------
REAL ESTATE--4.66%
288,200 Rouse Co. 4,882,494 9,078,300
----------- -----------
RETAILING--3.28%
187,000 Longs Drug Stores, Inc. 3,312,291 5,691,813
34,283 Midas, Inc.* 537,012 707,087
----------- -----------
3,849,303 6,398,900
----------- -----------
TELECOMMUNICATIONS--2.97%
94,600 Century Telephone Enterprises 3,181,660 5,782,424
----------- -----------
Total Common Stocks 106,954,827 188,235,826
----------- -----------
</TABLE>
<TABLE>
<CAPTION>
Principal REPURCHASE
Amount AGREEMENTS-4.17% Cost Market Value
<C> <S> <C> <C>
$8,132,256 State Street Bank & Trust
Company Repurchase Agreement,
4.75%, dated 3/31/98, repurchase
price $8,133,329 maturing 4/1/98
(collateralized by U.S. Treasury
Bond, 5.875%, 4/30/98) $ 8,132,256 $ 8,132,256
------------ ------------
Total Repurchase Agreements 8,132,256 8,132,256
------------ ------------
Total Investments-100.78% $115,087,083 196,368,082
------------
------------
Liabilities, less
Cash and Other Assets-(0.78)% (1,521,212)
------------
NET ASSETS-100.00% $194,846,870
------------
------------
</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, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
Number COMMON STOCKS-96.98% Cost Market Value
of Shares
<C> <S> <C> <C>
ADVERTISING--6.96%
374,750 Harte-Hanks Communications $ 2,239,400 $ 8,900,312
160,300 Omnicom Group, Inc. 1,565,730 7,544,119
----------- -----------
3,805,130 16,444,431
----------- -----------
BUSINESS SERVICES--3.01%
129,600 Ecolab, Inc. 1,601,491 3,758,400
91,700 Equifax, Inc. 1,904,985 3,347,050
----------- -----------
3,506,476 7,105,450
----------- -----------
CHEMICALS--3.54%
254,500 Morton International, Inc. 7,463,539 8,350,781
----------- -----------
CONSUMER PRODUCTS--8.71%
31,700 Clorox Co. 1,094,860 2,716,294
399,300 First Brands Corp. 8,937,769 9,957,544
211,800 Libbey, Inc. 7,856,496 7,889,550
----------- -----------
17,889,125 20,563,388
----------- -----------
DIVERSIFIED OPERATIONS--3.53%
421,600 Whitman Corp. 6,830,933 8,326,600
----------- -----------
ELECTRICAL & ELECTRONICS--1.50%
136,400 Littlefuse, Inc.* 3,602,533 3,546,400
----------- -----------
ENTERTAINMENT & LEISURE--8.38%
116,700 Carnival Cruise Lines, Inc. 1,805,622 8,139,825
329,700 Hasbro, Inc. 5,763,878 11,642,531
----------- -----------
7,569,500 19,782,356
----------- -----------
FINANCIAL SERVICES--12.15%
143,900 MBIA, Inc. 5,463,512 11,152,250
116,800 MBNA Corp. 899,280 4,182,900
114,700 Northern Trust Corp. 2,386,266 8,573,825
67,900 T. Rowe Price Associates 984,550 4,778,462
----------- -----------
9,733,608 28,687,437
----------- -----------
FOOD & RESTAURANTS--4.26%
145,900 Bob Evans Farms, Inc. 2,837,068 3,091,256
216,255 McCormick & Co., Inc. 5,185,410 6,974,224
----------- -----------
8,022,478 10,065,480
----------- -----------
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
Number COMMON STOCKS-96.98% (cont) Cost Market Value
of Shares
<C> <S> <C> <C>
FURNITURE & FURNISHINGS--5.00%
153,860 Leggett & Platt, Inc. $ 1,876,028 $ 7,914,174
116,400 Miller (Herman), Inc. 794,362 3,903,037
----------- -----------
2,670,390 11,817,211
----------- -----------
HEALTH CARE--5.61%
223,200 Allergan, Inc. 7,601,291 8,481,600
182,000 Sybron Corp.* 1,050,861 4,754,750
----------- -----------
8,652,152 13,236,350
----------- -----------
INDUSTRIAL--7.66%
196,300 Brady (WH) Co. 4,581,116 6,576,050
122,450 Hussman International, Inc. 1,646,582 2,295,938
452,100 Specialty Equipment Cos., Inc.* 5,960,590 9,211,537
----------- -----------
12,188,288 18,083,525
----------- -----------
INSURANCE--0.73%
34,500 Arthur J. Gallagher & Co. 1,156,293 1,494,281
4,190 Choicepoint, Inc.* 33,284 228,093
----------- -----------
1,189,577 1,722,374
----------- -----------
NEWSPAPERS--3.47%
81,700 Central Newspapers, Inc., Class A 4,424,303 5,805,806
34,000 Tribune Co. 863,186 2,397,000
----------- -----------
5,287,489 8,202,806
----------- -----------
OFFICE & BUSINESS EQUIPMENT--3.57%
129,305 General Binding Corp. 2,131,765 4,210,494
45,000 Pitney-Bowes, Inc. 802,490 2,258,438
79,500 Hunt Corp. 1,853,717 1,952,719
----------- -----------
4,787,972 8,421,651
----------- -----------
PACKAGING--2.87%
252,810 Shorewood Packaging Corp.* 2,666,047 6,778,468
----------- -----------
PHARMACEUTICALS--0.05%
9,485 Allergan Specialty Therapeutics,
Inc.* 85,109 115,006
----------- -----------
PRINTING & PUBLISHING--4.56%
107,200 Houghton Mifflin Co. 2,268,388 3,417,000
219,200 Lee Enterprises 6,039,403 7,356,900
----------- -----------
8,307,791 10,773,900
----------- -----------
REAL ESTATE--4.13%
309,900 Rouse Co. 4,393,037 9,761,850
----------- -----------
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
Number COMMON STOCKS-96.98% (cont) Cost Market Value
of Shares
<C> <S> <C> <C>
RETAILING--3.27%
225,840 Longs Drug Stores, Inc. $4,114,765 $6,874,005
40,816 Midas, Inc.* 652,551 841,830
----------- -----------
4,767,316 7,715,835
----------- -----------
TELECOMMUNICATIONS--4.02%
155,300 Century Telephone Enterprises 5,105,899 9,492,714
----------- -----------
Total Common Stocks 128,524,389 228,994,013
----------- -----------
</TABLE>
<TABLE>
<CAPTION>
Principal REPURCHASE AGREEMENTS-3.82%
Amount
<C> <S> <C> <C>
$9,018,105 State Street Bank & Trust
Company Repurchase
Agreement, 4.75%, dated
3/31/98, repurchase price
$9,019,295 maturing 4/1/98
(collateralized by
U.S. Treasury Bond,
5.875%, 4/30/98) 9,018,105 9,018,105
------------ ------------
Total Repurchase Agreements 9,018,105 9,018,105
------------ ------------
Total Investments-100.80% $137,542,494 238,012,118
------------
------------
Market Value
Liabilities, less Cash
and Other Assets-(0.80)% $(1,888,169)
------------
NET ASSETS-100.00% $236,123,949
------------
------------
</TABLE>
*Non-income producing
The accompanying notes are an integral part of the financial statements.
17
<PAGE>
EQUITY STATISTICAL SUMMARY
ARIEL GROWTH
(UNAUDITED)
<TABLE>
<CAPTION>
EARNINGS PER SHARE
------------------
52 - WEEK 1997 1998 1997 1998 MARKET
TICKER PRICE RANGE ACTUAL ESTIMATED P/E P/E CAP.
COMPANY SYMBOL 3/31/98 --------------- CALENDAR CALENDAR CALENDAR CALENDAR ($MM)
LOW HIGH
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Allergan Specialty
Therapeutics (*) ASTI 12.13 8.50 14.50 NM (5.20) NM NM 40
Hunt Corp. HUN 24.56 17.50 24.75 1.22 1.42 20.1 17.3 276
American Media, Inc. ENQ 7.88 5.38 9.06 0.27 0.28 29.2 28.1 334
Midas Inc. MDS 20.63 15.25 21.00 1.41 1.67 14.6 12.4 350
Specialty Equipment Cos. SPEQ 20.38 12.13 23.75 1.62 1.92 12.6 10.6 444
Shorewood Packaging Corp. SWD 26.81 17.50 28.38 1.45 1.65 18.5 16.2 484
General Binding Corp. GBND 32.56 25.50 33.50 1.80 1.86 18.1 17.5 513
Golden Books Family
Entertainment GBFE 11.50 7.88 13.38 (2.18) (2.02) NM NM 591
Littelfuse, Inc. LFUS 26.00 21.75 35.50 1.07 1.22 24.3 21.3 617
Libbey, Inc. LBY 37.25 28.00 42.25 2.30 2.67 16.2 14.0 656
Arthur J. Gallagher & Co. AJG 43.31 30.38 46.13 2.75 2.95 15.7 14.7 719
W.H. Brady Co. BRCOA 33.50 22.00 35.00 1.50 1.69 22.3 19.8 753
Bob Evans Farms, Inc. BOBE 21.19 12.88 22.50 1.04 1.29 20.4 16.4 882
Hussmann International HSM 18.75 13.50 18.75 0.98 1.17 19.1 16.0 951
First Brands Corp. FBR 24.94 20.13 28.50 1.38 1.58 18.1 15.8 989
Interface, Inc. IFSIA 41.56 21.00 42.38 1.53 1.99 27.2 20.9 1,008
Longs Drug Stores Corp. LDG 30.44 22.63 33.63 1.49 1.59 20.4 19.1 1,176
Lee Enterprises LEE 33.56 22.38 33.56 1.29 1.43 26.0 23.5 1,515
Harte-Hanks Communications HHS 23.50 13.38 24.25 1.15 1.65 20.4 14.2 1,729
Central Newspapers, Inc. ECP 71.06 47.88 76.88 3.30 3.86 21.5 18.4 1,792
Whitman Corp. WH 19.75 15.56 21.00 0.46 0.70 42.9 28.2 1,987
McCormick & Company, Inc. MCCRK 32.25 22.75 33.25 1.26 1.46 25.6 22.1 2,375
Rouse Company RSE 31.50 25.75 35.69 2.50 2.75 12.6 11.5 2,432
Allergan Inc. AGN 38.00 25.88 39.00 1.57 1.90 24.2 20.0 2,491
Herman Miller, Inc. MLHR 33.53 14.00 36.25 1.11 1.43 30.2 23.4 3,009
Century Telephone
Enterprises CTL 40.75 19.00 41.08 2.46 2.75 16.6 14.8 3,627
Ecolab, Inc. ECL 29.00 19.06 29.63 1.00 1.14 29.0 25.4 3,742
T. Rowe Price Associates TROW 70.38 36.50 74.88 2.26 2.73 31.1 25.8 4,562
Hasbro, Inc. HAS 35.31 22.88 38.63 1.69 1.86 20.9 19.0 4,701
Leggett & Platt, Inc. LEG 51.44 32.25 55.50 2.16 2.47 23.8 20.8 5,040
MBIA Inc. MBI 77.50 45.44 77.75 4.06 4.55 19.1 17.0 7,572
Omnicom Group, Inc. OMC 47.06 23.75 47.13 1.37 1.60 34.4 29.4 7,969
Northern Trust Corp. NTRS 74.75 35.88 78.13 2.65 3.06 28.2 24.4 8,336
</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.
NM = Not Meaningful. (*) Recent spin-off from Allergan, Inc.
18
<PAGE>
ARIEL APPRECIATION
(UNAUDITED)
<TABLE>
<CAPTION>
EARNINGS PER SHARE
------------------
52 - WEEK 1997 1998 1997 1998 MARKET
TICKER PRICE RANGE ACTUAL ESTIMATED P/E P/E CAP.
COMPANY SYMBOL 3/31/98 --------------- CALENDAR CALENDAR CALENDAR CALENDAR ($MM)
LOW HIGH
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Allergan Specialty
Therapeutics (*) ASTI 12.13 8.50 14.50 NM (5.20) NM NM 40
Hunt Corp. HUN 24.56 17.50 24.75 1.22 1.42 20.1 17.3 276
Midas Inc. MDS 20.63 15.25 21.00 1.41 1.67 14.6 12.4 350
Specialty Equipment Cos. SPEQ 20.38 12.13 23.75 1.62 1.92 12.6 10.6 444
Shorewood Packaging Corp. SWD 26.81 17.50 28.38 1.45 1.65 18.5 16.2 484
General Binding Corp. GBND 32.56 25.50 33.50 1.80 1.86 18.1 17.5 513
Littelfuse, Inc. LFUS 26.00 21.75 35.50 1.07 1.22 24.3 21.3 617
Libbey, Inc. LBY 37.25 28.00 42.25 2.30 2.67 16.2 14.0 656
Arthur J. Gallagher & Co. AJG 43.31 30.38 46.13 2.75 2.95 15.7 14.7 719
W.H. Brady Co. BRCOA 33.50 22.00 35.00 1.50 1.69 22.3 19.8 753
ChoicePoint, Inc. CPS 54.44 30.75 56.50 1.92 2.35 28.4 23.2 824
Bob Evans Farms, Inc. BOBE 21.19 12.88 22.50 1.04 1.29 20.4 16.4 882
Houghton Mifflin Company HTN 31.88 26.31 40.25 1.51 1.27 21.1 25.1 929
Hussmann International HSM 18.75 13.50 18.75 0.98 1.17 19.1 16.0 951
First Brands Corp. FBR 24.94 20.13 28.50 1.38 1.58 18.1 15.8 989
Longs Drug Stores Corp. LDG 30.44 22.63 33.63 1.49 1.59 20.4 19.1 1,176
Lee Enterprises LEE 33.56 22.38 33.56 1.29 1.43 26.0 23.5 1,515
Harte-Hanks Communications HHS 23.50 13.38 24.25 1.15 1.65 20.4 14.2 1,729
Central Newspapers, Inc. ECP 71.06 47.88 76.88 3.30 3.86 21.5 18.4 1,792
Whitman Corp. WH 19.75 15.56 21.00 0.46 0.70 42.9 28.2 1,987
McCormick & Company, Inc. MCCRK 32.25 22.75 33.25 1.26 1.46 25.6 22.1 2,375
Rouse Company RSE 31.50 25.75 35.69 2.50 2.75 12.6 11.5 2,432
Allergan Inc. AGN 38.00 25.88 39.00 1.57 1.90 24.2 20.0 2,491
Sybron International Corp. SYB 26.13 13.38 28.69 0.83 1.02 31.5 25.6 2,540
Herman Miller, Inc. MLHR 33.53 14.00 36.25 1.11 1.43 30.2 23.4 3,009
Century Telephone
Enterprises CTL 40.75 19.00 41.08 2.46 2.75 16.6 14.8 3,627
Ecolab, Inc. ECL 29.00 19.06 29.63 1.00 1.14 29.0 25.4 3,742
Morton International MII 32.81 29.81 42.88 1.45 1.68 22.6 19.5 4,411
T. Rowe Price Associates TROW 70.38 36.50 74.88 2.26 2.73 31.1 25.8 4,562
Hasbro, Inc. HAS 35.31 22.88 38.63 1.69 1.86 20.9 19.0 4,701
Leggett & Platt, Inc. LEG 51.44 32.25 55.50 2.16 2.47 23.8 20.8 5,040
Equifax, Inc. EFX 36.50 26.50 37.63 1.29 1.48 28.3 24.7 5,286
MBIA Inc. MBI 77.50 45.44 77.75 4.06 4.55 19.1 17.0 7,572
Omnicom Group, Inc. OMC 47.06 23.75 47.13 1.37 1.60 34.4 29.4 7,969
Clorox Company CLX 79.38 48.63 80.38 2.51 2.85 31.6 27.9 8,203
Northern Trust Corp. NTRS 74.75 35.88 78.13 2.65 3.06 28.2 24.4 8,336
Tribune Company TRB 70.50 39.75 70.81 2.30 2.60 30.7 27.1 8,641
Pitney Bowes Inc. PBI 50.19 27.94 51.94 1.80 2.05 27.9 24.5 14,239
MBNA Corp. KRB 35.81 18.50 37.75 1.10 1.43 32.6 25.0 18,800
Carnival Corp. CCL 69.75 34.38 69.75 2.23 2.64 31.3 26.4 20,849
</TABLE>
19
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.
NM = Not Meaningful. (*) Recent spin-off from Allergan, Inc.
<PAGE>
ARIEL PREMIER BOND
DEAR FELLOW SHAREHOLDER: For the quarter ending March 31, 1998, the Ariel
Premier Bond Fund Institutional Class returned +1.47%, the Investor Class posted
a +1.46% return and the Lehman Brothers Aggregate Index gained +1.56% for the
same period. The Ariel Premier Bond Fund continues to be a solid performer among
its peers, as the one-quarter performance ranks in the top-half and the one-year
performance ranks in the top third of Morningstar, Inc.'s High-Quality Corporate
Bond Fund Category.
With Treasury yields at quarter-end virtually unchanged from the yields at the
beginning of the year, one might assume a quiet, uneventful period. In reality,
rates were quite volatile with two-year Treasury yields falling to 5.03% and
ten-year's falling to 5.28% in early January. These lows occurred as concerns
regarding the Asian economy had heightened. Yet, persistently strong domestic
economic reports brought yields back to where they began the year. Nevertheless,
these yield levels continue to reflect a consensus that the effects of the Asian
shock on the U.S. economy will be significant enough to cause the Fed to lower
short-term rates.
We believe current expectations for lower inflation are overly optimistic, and
rates will eventually have to rise. Moreover, we continue to feel the effects of
the Asian shock will be temporary and ultimately overwhelmed by the strength of
the domestic economy. This will lead to a Fed tightening as the wage pressures
in the labor market result in rising inflation. As a matter of fact, many
prices, particularly in the service sector, are already experiencing higher
inflation rates. It is falling prices in a few isolated sectors, mostly
computers, that are holding inflation steady. Our forecast is for the ten-year
Treasury yield to rise to about 6.5% by year-end, accompanied by a modest
increase in the Federal funds rate. Accordingly, the Ariel Premier Bond Fund
maintains a duration position 3/4 years shorter than the index.
The widening in corporate and asset-backed spreads over late 1997 and early 1998
presented an opportunity to increase the portfolio's exposure to these sectors.
Currently, we have an index-neutral exposure to corporate spreads and are
significantly overweighted in AAA-rated asset-backed securities. Mortgage spread
exposure is modestly greater than the benchmark, but exposure to prepayment risk
is limited, since most portfolio holdings are discount and current coupon
issues.
To summarize, the portfolio as currently positioned will perform well if the
domestic economy continues to grow at 2.5% or better and the optimism embedded
in current yield levels is eventually disappointed.
We are proud to have your confidence and appreciate your questions and comments.
Sincerely,
/s/ John W. Rogers, Jr. /s/ Kenneth R. Meyer
John W. Rogers, Jr. Kenneth R. Meyer
President President
Ariel Capital Management, Inc. Lincoln Capital Management Company
20
<PAGE>
ARIEL PREMIER BOND FUND
Institutional Class Inception
October 1, 1995
Investor Class Inception
February 1, 1997
AVERAGE ANNUAL TOTAL RETURN AS OF MARCH 31, 1998
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
4Q97 1 Year Life of Fund
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
ARIEL PREMIER BOND FUND, INST. CL. 1.5% +11.2% +6.9%
ARIEL PREMIER BOND FUND, INV. CL. 1.5% +10.2% +8.1%
</TABLE>
[PIE CHART]
<TABLE>
<CAPTION>
ARIEL PREMIER BOND FUND PORTFOLIO COMPOSITION
<S> <C>
Government & Agency 14.4%
Mortgage-Backed 16.7%
Asset-Backed 31.4%
Corporate 14.6%
Other Assets & Cash 2.2%
Commercial Paper 20.7%
</TABLE>
[PIE CHART]
<TABLE>
<CAPTION>
LEHMAN AGGREGATE BOND INDEX PORTFOLIO COMPOSITION
<S> <C>
Government & Agency 48.8%
Corporate 20.0%
Mortgage-Backed 30.2%
Asset-Backed 1.0%
</TABLE>
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTED IN ARIEL PREMIER BOND FUND,
INV. CL. AND COMPARABLE INDICES*
[GRAPH]
INVESTOR CLASS
Date Bond Lehman
Feb-97 $10,000 $10,000
Mar-97 $9,930 $9,914
Apr-97 $10,020 $10,062
May-97 $10,060 $10,158
Jun-97 10,265 $10,279
Jul-97 $10,516 $10,556
Aug-97 $10,443 $10,467
Sep-97 $10,573 $10,622
Oct-97 $10,715 $10,773
Nov-97 $10,743 $10,823
Dec-97 $10,786 $10,932
Mar-98 $10,944 $11,102
Comparison od change in value of $1,000,000 invested in Ariel Premier Bond
Fund, Inv. CL. and comparable indices*
[GRAPH]
Date Bond Lehman
Oct-95 $1,000,000 $1,000,000
Dec-95 $1,035,122 $1,042,614
Mar-96 $1,009,187 $1,024,120
Jun-96 $1,018,867 $1,029,953
Sep-96 $1,039,607 $1,048,996
Dec-96 $1,067,709 $1,080,467
Mar-97 $1,063,762 $1,074,420
Jun-97 $1,101,562 $1,113,997
Sep-97 $1,135,857 $1,151,139
Dec-97 $1,165,544 $1,184,769
Mar-98 $1,182,644 $1,203,205
*Statistics represent past performance which is not indicative of future
results. The Lehman Brothers Aggregate Bond Index is composed of securities from
Lehman Brothers Government/Corporate Bond Index, Mortgage-Backed Securities
Index, and the Asset-Backed Securities Index. Total return comprises price
appreciation/depreciation and income as a percentage of the original investment.
An investor cannot invest directly in an index.
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, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
Par Value ASSET-BACKED SECURITIES-31.40% Cost Market Value
<C> <S> <C> <C>
$2,630,000 American Express, 971A,
6.40%, 4/15/2005 $2,632,057 $2,672,054
1,000,000 Associates Manufactured Housing,
972A-3, 6.275%, 3/15/2028 999,703 1,003,440
1,381,123 BancOne 97BA,
6.29%, 7/20/2004 1,381,033 1,388,029
600,000 Capital Equipment Receivables
Trust, 97-1A4, 6.19%, 2/15/2002 600,000 600,000
1,000,000 Chase Credit Card 96C 3A,
7.04%, 2/15/2005 1,031,702 1,032,280
70,000 Circuit City Credit Card,
1995-1A, 6.375%, 8/15/2005 69,212 70,720
400,000 CSFB 97-C1 A1C,
7.24%, 4/20/2007 414,451 418,436
2,000,000 EQCC Home Equity, 973-A9
6.57%, 2/15/2029 1,983,820 1,974,680
2,900,000 Federal National Mortgage
Association (FNMA), 6.45%, 8/17/2013 2,936,515 2,909,512
1,170,000 Finger Hut, 96-1A,
6.45%, 2/20/2002 1,176,768 1,185,292
800,000 First Omni, 96-AA, 6.65%, 9/15/2003 806,584 819,128
2,012,902 Fleetwood, 97BA, 6.40%, 5/15/2013 2,010,129 2,027,455
60,000 Green Tree Financial, 1995-1 A5,
8.40%, 6/15/2025 65,853 63,588
<CAPTION>
Par Value ASSET-BACKED SECURITIES-31.40% (cont) Cost Market Value
<C> <S> <C> <C>
$1,022,027 IMC Excess Cash, 7.41%,
11/26/2028 $1,021,989 $1,017,234
1,450,000 J.C. Penney Master Credit Card Trust,
1990-C1, 9.625%, 6/30/2000 1,543,017 1,557,039
2,500,000 MBNA Master Credit Card, 95DA,
6.05%, 11/15/2002 2,490,752 2,510,025
380,000 MBNA Master Credit Card II 971A,
6.55%, 1/15/2007 383,211 389,869
1,264,210 Merrill Lynch Mortgage Investors, Inc.,
1995-C2-A1, Floating Rate, 6/15/2021 1,281,263 1,281,593
300,000 The Money Store, 1996-1 A3,
6.85%, 12/20/2002 299,964 306,771
550,000 The Money Store, 1997-A A3,
6.675%, 4/15/2012 549,835 552,183
300,000 The Money Store, 1996-B A6,
7.38%, 5/15/2017 299,955 305,919
1,000,000 The Money Store, 1996-B A9,
8.14%, 10/15/2027 1,061,651 1,066,900
182,934 Olympic Auto Receivables,
1995-EA4, 5.85%, 3/15/2001 181,539 182,992
1,440,000 Prime, 95-1A, 6.75%, 11/15/2005 1,446,248 1,479,902
311,111 Private Label Credit Card,
1994-2A, 7.80%, 9/20/2003 316,902 315,457
315,226 Salomon Brothers, 96LB2A3,
6.875%, 10/25/2026 315,207 314,933
940,000 Salomon Brothers Mortgage Sec.,
97 6A3, 6.76%, 12/25/2027 938,830 942,200
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
Par Value ASSET-BACKED SECURITIES-31.40% (cont) Cost Market Value
<C> <S> <C> <C>
$45,000 Sears Credit Account, 96-1A,
6.20%, 2/16/2006 $44,195 $45,278
440,000 Sears Credit Account, 96-2A,
6.50%, 10/15/2003 438,018 443,036
2,005,000 Sears Credit Account, 96-4A,
6.45%, 10/16/2006 2,001,094 2,023,486
420,000 Standard Credit Card Master -
Citibank, 94-4A, 8.25%, 11/7/2003 443,453 447,426
2,300,000 Standard Credit Card Master -
Citibank, 951A, 8.25%, 1/7/2007 2,496,396 2,561,740
1,400,000 Team Fleet Financial Co.,
97-1A, 7.35%, 5/15/2003+ 1,399,162 1,443,134
550,000 Thirteen Affiliates, 97C1 A2,
6.602%, 11/15/2007+ 550,000 554,290
300,000 UCFC, 96 CA 3,
7.15%, 12/15/2013 299,955 305,076
1,880,000 World Financial, 96-AA,
6.70%, 2/15/2004 1,888,912 1,918,352
2,200,000 World Omni Auto Lease, 97B3,
6.18%, 11/25/2003 2,199,778 2,198,790
398,696 World Omni Auto Lease,
1996-BA3, 6.25%, 11/15/2002 398,150 400,163
------- -------
Total Asset-Backed Securities 40,397,303 40,728,402
---------- ----------
CORPORATE DEBT-14.60%
410,000 American General Inst.,
8.125%, 3/15/2046+ 436,581 451,512
550,000 American Stores, 8.00%, 6/1/2026 605,826 606,375
<CAPTION>
Par Value CORPORATE DEBT-14.60% (cont) Cost Market Value
<C> <S> <C> <C>
$570,000 Archer Daniels II, 6.95%, 12/15/2097 $567,635 $576,413
185,000 Bayer Corp., 6.65%, 2/15/2028+ 184,023 183,613
275,000 Bank of America Capital II,
8.00%, 12/15/2026 271,257 291,844
225,000 Bellsouth Telecom,
7.00%, 12/1/2095 229,646 232,031
550,000 Best Foods, 5.60%, 10/15/2097 424,416 445,500
1,000,000 Boston Scientific, 6.625%, 3/15/2005 999,493 1,003,750
325,000 Chrysler Corp.,
7.40%, 8/1/2097 334,980 338,813
575,000 Coca-Cola Enterprises,
6.750%, 1/15/2038 565,825 564,219
900,000 Consumers Energy 144,
6.875%, 3/1/2018 886,791 882,000
625,000 Dana Corp., 7.00%, 3/15/2028 620,895 621,875
515,000 FedEx, 7.60%, 7/1/2097 540,543 547,188
275,000 J.C. Penney Co., 7.625%, 3/1/2097 269,473 291,156
95,000 JP Morgan Capital Trust I,
7.54%, 1/15/2027 95,000 96,425
710,000 Lincoln National Corp.,
7.00%, 3/15/2018 708,354 707,337
610,000 Mirage Resorts, 6.75%, 2/1/2008 606,796 600,088
245,000 News America Holdings,
8.00%, 10/17/2016 263,798 264,906
1,400,000 Philip Morris, 7.125%, 8/15/2002 1,391,142 1,435,000
1,000,000 PSI Energy, 7.25%, 3/15/2028 999,010 986,250
1,800,417 Railcar Leasing, 97-1A, 6.75%,
7/15/2006+ 1,799,749 1,831,924
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
Par Value CORPORATE DEBT-14.60% (cont) Cost Market Value
<C> <S> <C> <C>
$1,496,880 Railcar Trust, 1992-1A,
7.75%, 6/1/2004 $1,556,521 $1,574,912
525,000 Time Warner Enterprise,
8.375%, 7/15/2033 586,817 604,406
340,000 US West Capital Funding, Inc.,
6.95%, 1/15/2037 339,324 352,750
1,000,000 Safeco Capital Trust,
8.072%, 7/15/2037 1,000,000 1,050,000
805,000 Suntrust Cap II, 7.90%, 6/15/2027 809,683 861,350
1,250,000 Union Planters, 6.50%, 3/15/2018 1,241,333 1,239,062
280,000 Zurich Capital Trust,
8.376%, 6/1/2037+ 294,967 305,200
------- -------
Total Corporate Debt 18,629,878 18,945,899
---------- ----------
U.S. GOVERNMENT AGENCIES-18.98%
MORTGAGE-BACKED SECURITIES--16.67%
1,440,040 Federal Home Loan Mortgage
Corp. (FHLMC), 6.50%, 11/1/2025 1,360,055 1,435,979
3,801,758 FHLMC, 6.50%, 2/1/2026 3,679,996 3,777,996
5,300,730 FHLMC, Gold, 6.50%, 3/1/2026 5,015,515 5,262,618
418,126 FHLMC, Gold, 6.50%, 4/1/2026 385,916 415,268
725,522 FHLMC, Gold, 6.50%, 5/1/2026 669,623 720,080
42,475 FNMA, 7.00%, 10/1/2023 41,757 43,072
1,752,140 FNMA, 6.50%, 4/1/2024 1,671,570 1,738,999
423,246 FNMA, 7.00%, 5/1/2024 416,083 428,931
<CAPTION>
Par Value U.S. GOVERNMENT AGENCIES-18.98% (cont) Cost Market Value
<C> <S> <C> <C>
MORTGAGE-BACKED SECURITIES--16.67% (CONT)
$451,557 FNMA, 6.50%, 11/1/2025 $414,987 $448,025
1,408,683 FNMA, 6.50%, 1/1/2026 1,435,798 1,467,727
5,942,764 FNMA, 6.50%, 5/1/2026 5,604,242 5,890,765
--------- ---------
20,695,542 21,629,190
---------- ----------
OTHER AGENCY ISSUES--2.31%
250,000 Government Trust Certificate,
Aid Israel, 5.70%, 2/15/2003 249,351 246,562
1,556,182 Government Trust Certificate,
Israel Trust, Series 2E, 9.40%,
5/15/2002 1,648,364 1,622,320
953,134 Pemex Exp Trust, 7.66%, 8/15/2001 977,216 983,044
110,000 Resolution Funding Corporation,
8.875%, 7/15/2020 136,180 145,527
------- -------
3,011,111 2,997,453
--------- ---------
Total U.S. Government Agencies 23,706,653 24,626,643
---------- ----------
U.S. GOVERNMENT OBLIGATIONS-12.07%
425,000 U.S. Treasury Bond,
11.75%, 11/15/2014 602,830 631,206
3,515,000 U.S. Treasury Bond,
8.125%, 8/15/2019 4,167,857 4,395,508
1,005,000 U.S. Treasury Bond,
6.625%, 2/15/2027 1,091,469 1,089,973
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
Par Value U.S. GOVERNMENT OBLIGS.-12.07% (cont) Cost Market Value
<C> <S> <C> <C>
$8,825,000 U.S. Treasury Note,
7.50%, 10/31/1999 $8,994,101 $9,072,276
450,000 U.S. Treasury Note,
6.50%, 5/15/2005 445,866 469,444
------- -------
Total U.S. Government
Obligations 15,302,123 15,658,407
---------- ----------
COMMERCIAL PAPER-20.74%
3,000,000 Abbott Laboratories,
5.49%, 4/17/98 2,992,680 2,992,680
3,000,000 CIESCO LP,
5.50%, 5/22/98 2,976,625 2,976,625
3,000,000 Eastman Kodak,
5.50%, 5/21/98 2,977,083 2,977,083
3,000,000 Falcon Asset SEC COR,
5.54%, 4/15/98 2,993,537 2,993,537
3,000,000 Ford Motor Credit Co.,
5.54%, 4/10/98 2,995,845 2,995,845
3,000,000 Kitty Hawk Funding,
5.56%, 4/20/98 2,991,197 2,991,197
3,000,000 Metlife Funding,
5.52%, 4/13/98 2,994,480 2,994,480
3,000,000 Norwest Corporation,
5.53%, 4/13/98 2,994,470 2,994,470
<CAPTION>
Par Value COMMERCIAL PAPER-20.74% Cost Market Value
<C> <S> <C> <C>
$3,000,000 Receivable Capital,
5.54%, 4/27/98 $2,987,996 $2,987,996
---------- ----------
Total Commercial Paper 26,903,913 26,903,913
---------- ----------
REPURCHASE AGREEMENTS-1.51%
1,960,792 State Street Bank & Trust
Company Repurchase Agreement,
4.75%, dated 3/31/98, repurchase price
$1,961,050, maturing 4/1/98
(collateralized by U.S. Treasury Bond,
5.875%, 4/30/98) 1,960,791 1,960,791
--------- ---------
Total Repurchase
Agreements 1,960,791 1,960,791
--------- ---------
Total Investments-99.30% $126,900,661 128,824,055
------------
------------
Other Assets and Cash
less Liabilities-0.70% 903,037
-------
NET ASSETS-100.00% $129,727,092
------------
------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
+ SEC Rule 144A restriction
25
<PAGE>
Statement of Assets & Liabilities
MARCH 31, 1998 (Unaudited)
<TABLE>
<CAPTION>
GROWTH APPRECIATION PREMIER
FUND FUND BOND FUND
---- ---- ---------
<S> <C> <C> <C>
ASSETS:
Investments in securities, at value
(cost $115,087,083, $137,542,494
and $126,900,661, respectively) $196,368,082 $238,012,118 $128,824,055
Dividends and interest receivable 286,471 309,707 971,749
Receivable for fund shares issued 54,510 130,995 20,910
Prepaid and other assets 13,274 17,750 735
------ ------ ---
Total assets 196,722,337 238,470,570 129,817,449
----------- ----------- -----------
LIABILITIES:
Payable for securities purchased 1,596,556 1,926,449 --
Accrued management fee 107,159 148,565 48,459
Accrued distribution fee 41,323 49,653 146
Payable for shares redeemed 21,418 103,965 --
Shareholder distributions payable -- -- 41,752
Other liabilities 109,011 117,989 --
------- ------- ------
Total liabilities 1,875,467 2,346,621 90,357
--------- --------- ------
NET ASSETS $194,846,870 $236,123,949 $129,727,092
------------ ------------ ------------
------------ ------------ ------------
NET ASSETS CONSIST OF:
Paid-in-capital $99,188,776 $123,454,298 $127,186,018
Undistributed net investment income 223,611 241,547 --
Accumulated net realized gain
on investment transactions 14,153,484 11,958,480 617,680
Net unrealized appreciation
on investments 81,280,999 100,469,624 1,923,394
---------- ----------- ---------
Total net assets $194,846,870 $236,123,949 $129,727,092
------------ ------------ ------------
------------ ------------ ------------
Shares outstanding (no par value) 4,475,045 6,593,094
Institutional Class 12,474,309
Investor Class 68,233
Net asset value, offering and redemption
price per share $43.54 $35.81
Institutional Class $10.34
Investor Class $10.34
</TABLE>
<TABLE>
<CAPTION>
Statement of Operations
SIX MONTHS ENDED MARCH 31, 1998 (UNAUDITED)
GROWTH APPRECIATION PREMIER
FUND FUND BOND FUND
---- ---- ---------
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividends $1,199,410 $1,548,480 $ --
Interest 318,890 274,023 3,768,076
------- ------- ---------
Total investment income 1,518,300 1,822,503 3,768,076
--------- --------- ---------
EXPENSES:
Management fee 559,980 768,376 266,693
Distribution fee 215,377 256,125 699
Transfer agent fees and expenses 132,607 152,307 --
Printing and postage expense 35,866 35,887 --
Professional fees 19,150 19,431 --
Federal and state registration fees 11,525 11,948 --
Trustees' fees and expenses 13,954 13,954 --
Custody fees and expenses 9,477 9,924 --
Miscellaneous expenses 13,711 14,813 --
------ ------ ------
Net expenses 1,011,647 1,282,765 267,392
--------- --------- -------
NET INVESTMENT INCOME 506,653 539,738 3,500,684
------- ------- ---------
REALIZED AND UNREALIZED GAIN:
Net realized gain on investments 14,238,210 12,074,124 910,243
Change in unrealized appreciation
on investments 10,412,758 20,058,186 339,107
---------- ---------- -------
Net gain on investments 24,650,968 32,132,310 1,249,350
---------- ---------- ---------
NET INCREASE IN NET ASSETS
RESULTING FROM
OPERATIONS $25,157,621 $32,672,048 $4,750,034
----------- ----------- ----------
----------- ----------- ----------
</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, September 30, March 31, September 30, March 31, September 30,
1998 1997 1998 1997 1998 1997
---------- ------------- ---------- ------------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS:
Net investment income $506,653 $296,358 $539,738 $110,408 $3,500,684 $4,175,305
Net realized gain on investments 14,238,210 14,275,367 12,074,124 18,598,505 910,243 570,915
Change in unrealized
appreciation on investments 10,412,758 33,739,637 20,058,186 37,099,202 339,107 1,572,509
---------- ---------- ---------- ---------- ------- ---------
Net increase in net assets
resulting from operations 25,157,621 48,311,362 32,672,048 55,808,115 4,750,034 6,318,729
---------- ---------- ---------- ---------- --------- ---------
DISTRIBUTIONS TO SHAREHOLDERS:
Net investment income (579,400) -- (393,576) (397,468) (3,504,734) (4,175,319)
Capital gains (14,358,164) (6,352,876) (17,505,645) (7,316,330) (832,076) (93,776)
---------- --------- ---------- --------- ------- ------
(14,937,564) (6,352,876) (17,899,221) (7,713,798) (4,336,810) (4,269,095)
---------- --------- ---------- --------- --------- ---------
SHARE TRANSACTIONS:
Shares sold 213,462,318 304,618,745 100,172,050 41,438,186 18,378,391 94,148,238
Shares issued to holders in
reinvestment of dividends 13,754,888 5,898,783 16,074,856 7,002,337 4,332,728 4,444,086
Shares redeemed (206,655,854) (298,180,590) (81,373,890) (45,683,940) (7,796,462) (1,609,367)
----------- ----------- ---------- ---------- --------- ---------
Net increase 20,561,352 12,336,938 34,873,016 2,756,583 14,914,657 96,982,957
---------- ---------- ---------- --------- ---------- ----------
TOTAL INCREASE IN NET ASSETS 30,781,409 54,295,424 49,645,843 50,850,900 15,327,881 99,032,591
NET ASSETS:
Beginning of period 164,065,461 109,770,037 186,478,106 135,627,206 114,399,211 15,366,620
----------- ----------- ----------- ----------- ----------- ----------
End of period (includes
undistributed net investment
income of $223,621, $296,358, $241,547,
$95,385, $0 and $4,050, respectively) $194,846,870 $164,065,461 $236,123,949 $186,478,106 $129,727,092 $114,399,211
------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
27
<PAGE>
Financial Highlights
(Unaudited)
<TABLE>
<CAPTION>
GROWTH FUND
-----------
Six Months Ended Year Ended September 30,
Mar. 31, 1998 1997 1996 1995 1994 1993
---------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $41.49 $30.58 $30.78 $28.84 $30.46 $29.59
Income from investment operations:
Net investment income 0.12 0.07 0.18 0.36 0.18 0.73
Net realized and unrealized gains
on investments 5.65 12.62 4.24 3.51 0.23 2.81
---- ----- ---- ---- ---- ----
Total from investment operations 5.77 12.69 4.42 3.87 0.41 3.54
Distributions to shareholders:
Dividends from net investment
income (0.14) -- (0.44) (0.23) (0.30) (0.75)
Distributions from capital gains (3.58) (1.78) (4.18) (1.70) (1.73) (1.92)
---- ---- ---- ---- ---- ----
Total distributions (3.72) (1.78) (4.62) (1.93) (2.03) (2.67)
---- ---- ---- ---- ---- ----
Net asset value, end of period $43.54 $41.49 $30.58 $30.78 $28.84 $30.46
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
Total return 14.75%(c) 43.25% 16.28% 14.38% 1.41% 12.54%
Supplemental data and ratios:
Net assets, end of period, in
thousands $194,847 $164,065 $109,770 $120,953 $149,511 $233,826
Ratio of expenses to average
net assets 1.17%(d) 1.25% 1.31% 1.37%(a) 1.25% 1.16%
Ratio of net investment income
to average net assets 0.59%(d) 0.23% 0.57% 1.18%(a) 0.56% 0.72%
Portfolio turnover rate 15% 20% 17% 16% 9% 13%
Average commission rate paid
per share(b) $0.0518 $0.0522 $0.0493 N/A N/A N/A
</TABLE>
<TABLE>
<CAPTION>
APPRECIATION FUND
-----------------
Six Months Ended Year Ended September 30,
Mar. 31, 1998 1997 1996 1995 1994 1993
---------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $33.70 $24.99 $22.76 $21.82 $21.67 $19.42
Income from investment operations:
Net investment income 0.09 0.02 0.13 0.14 0.04 0.06
Net realized and unrealized gains
on investments 5.15 10.13 4.07 2.26 0.51 2.27
---- ----- ---- ---- ---- ----
Total from investment operations 5.24 10.15 4.20 2.40 0.55 2.33
Distributions to shareholders:
Dividends from net investment
income (0.07) (0.07) (0.20) (0.06) (0.05) (0.08)
Distributions from capital gains (3.06) (1.37) (1.77) (1.40) (0.35) --
---- ---- ---- ---- ---- ----
Total distributions (3.13) (1.44) (1.97) (1.46) (0.40) (0.08)
---- ---- ---- ---- ---- ----
Net asset value, end of period $35.81 $33.70 $24.99 $22.76 $21.82 $21.67
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
Total return 16.44%(c) 42.33% 19.60% 12.11% 2.56% 12.03%
Supplemental data and ratios:
Net assets, end of period, in
thousands $236,124 $186,478 $135,627 $143,312 $162,280 $207,065
Ratio of expenses to average
net assets 1.25%(d) 1.33% 1.36%(a) 1.36%(a) 1.35%(a) 1.37%
Ratio of net investment income
to average net assets 0.53%(d) 0.07% 0.50%(a) 0.61%(a) 0.17%(a) 0.33%
Portfolio turnover rate 11% 19% 26% 18% 12% 56%
Average commission rate paid
per share(b) $0.0525 $0.0550 $0.0513 N/A N/A N/A
</TABLE>
(a) 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 1.40%, 1.58% and 1.40%, for the periods ended 1996,
1995 and 1994 for the Appreciation Fund; and the ratio of net investment
income to average net assets would have been 1.16% for the period ended
1995 for the Growth Fund and 0.46%, 0.39% and 0.12%, for the periods
ended 1996, 1995 and 1994 for the Appreciation Fund, respectively.
(b) Disclosure required by the Securities and Exchange Commission beginning
1996.
(c) Total return is not annualized.
(d) Annualized.
The accompanying notes are an integral part of the financial statements.
28
<PAGE>
Financial Highlights (cont)
(Unaudited)
<TABLE>
<CAPTION>
PREMIER BOND FUND
-----------------
INSTITUTIONAL CLASS INVESTOR CLASS
February 1,
Six Months Six Months 1997(a)
Ended Year Ended Ended to
March 31, September 30, March 31, September 30,
1998 1997 1996 1998 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $10.30 $9.95 $10.00 $10.29 $10.10
Income from investment operations:
Net investment income 0.31 0.52 0.43 0.29 0.37
Net realized and unrealized gains
(losses) on investments 0.11 0.37 (0.04) 0.12 0.19
---- ---- ---- ---- ----
Total from investment operations 0.42 0.89 0.39 0.41 0.56
Distributions to shareholders:
Dividends from net investment
income (0.31) (0.52) (0.43) (0.29) (0.37)
Distributions from capital gains (0.07) (0.02) (0.01) (0.07) --
---- ---- ---- ---- ----
Total distributions (0.38) (0.54) (0.44) (0.36) (0.37)
---- ---- ---- ---- ----
Net asset value, end of period $10.34 $10.30 $9.95 $10.34 $10.29
------ ------ ----- ------ ------
------ ------ ----- ------ ------
Total return 4.12%(b) 9.26% 3.96% 3.51%(b) 5.73%(b)
Supplemental data and ratios:
Net assets, end of period, in
thousands $129,022 $113,998 $15,367 $705 $401
Ratio of expenses to average
net assets 0.45%(c) 0.45% 0.48% 0.85%(c) 0.85%(c)
Ratio of net investment income
to average net assets 5.91%(c) 6.05% 5.85% 5.49%(c) 5.60%(c)
Portfolio turnover rate 29% 218% 423% 29% 218%
</TABLE>
(a) Commencement of operations.
(b) Total return is not annualized.
(c) Annualized.
The accompanying notes are an integral part of the financial statements.
29
<PAGE>
Notes to the Financial Statements
MARCH 31, 1998 (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 has
an Institutional Class and an Investor Class. The Investor Class began
February 1, 1997.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Funds in the preparation of their financial statements. The
financial statements have been prepared in accordance with generally accepted
accounting principles which 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, and debt
securities having a maturity over 60 days are valued at the yield equivalent
as obtained from one or more market makers for such securities. Short-term
securities 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.
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 monthly for the Premier Bond Fund. Distributions
of net realized capital gains, if any, are declared and paid at least
annually.
Distributions to shareholders are determined in accordance with federal
income regulations and are recorded on the ex-dividend date. The character
of distributions made during the year from net investment income or net
realized gain may differ from the characterization for federal income tax
purposes due to differences in the recognition of income, expense and gain
items for financial statement and tax purposes. Where appropriate,
reclassifications between net asset accounts are made for such differences
that are permanent in nature.
30
<PAGE>
Notes to the Financial Statements (cont)
MARCH 31, 1998 (UNAUDITED)
3. CAPITAL SHARE TRANSACTIONS
Transactions in shares of capital stock were as follows:
<TABLE>
<CAPTION>
Six Months Ended March 31, 1998
Growth Fund Appreciation Fund Premier Bond Fund
----------- ----------------- -----------------
Institutional Investor
------------- --------
<S> <C> <C> <C> <C>
Shares sold 5,174,190 2,965,450 1,726,315 45,803
Shares issued to holders in
reinvestment of dividends 345,686 491,283 416,764 1,878
Shares redeemed (4,999,637) (2,396,735) (736,477) (18,448)
----------- ----------- ---------- --------
Net increase 520,239 1,059,998 1,406,602 29,233
----------- ----------- ---------- --------
----------- ----------- ---------- --------
</TABLE>
<TABLE>
<CAPTION>
Year Ended September 30, 1997
Growth Fund Appreciation Fund Premier Bond Fund
----------- ----------------- -----------------
Institutional Investor
------------- --------
<S> <C> <C> <C> <C>
Shares sold 8,947,566 1,486,623 9,242,477 40,697
Shares issued to holders in
reinvestment of dividends 184,857 268,901 436,758 716
Shares redeemed (8,766,712) (1,650,759) (156,525) (2,413)
----------- ----------- ---------- --------
Net increase 365,711 104,765 9,522,710 39,000
----------- ----------- ---------- --------
----------- ----------- ---------- --------
</TABLE>
4. INVESTMENT TRANSACTIONS
Purchases and sales of securities, excluding short-term investments and U.S.
government securities, for the six months ended March 31, 1998 are summarized
below:
<TABLE>
<CAPTION>
Growth Fund Appreciation Fund Premier Bond Fund
----------- ----------------- -----------------
<S> <C> <C> <C>
Purchases $37,178,848 $45,072,799 $23,798,152
Sales 23,791,313 22,183,601 2,946,407
</TABLE>
Purchases and sales of U.S. government securities for the Premier Bond Fund
for the six months ended March 31, 1998 were $11,326,438 and $24,682,125,
respectively.
At March 31, 1998, gross unrealized appreciation and depreciation of
securities, based on cost for federal income tax purposes of $115,093,637,
$137,542,494 and $126,916,624 for the Growth Fund, Appreciation Fund and
Premier Bond Fund, respectively, were as follows:
<TABLE>
<CAPTION>
Growth Fund Appreciation Fund Premier Bond Fund
----------- ----------------- -----------------
<S> <C> <C> <C>
Unrealized appreciation $82,884,411 $101,133,451 $2,030,391
Unrealized (depreciation) (1,609,966) (663,827) (122,960)
---------- -------- -------
Net appreciation $81,274,445 $100,469,624 $1,907,431
----------- ------------ ----------
----------- ------------ ----------
</TABLE>
It is management's intention to distribute future net realized capital gains
to the extent that such gains exceed available federal income tax capital
loss carryforwards.
5. INVESTMENT ADVISORY AND OTHER TRANSACTIONS WITH AFFILIATES
The Trust has entered into an investment advisory and administrative services
agreement (the "Management Agreement") with Ariel Capital Management, Inc.
(the "Adviser"). Pursuant to the Management Agreement, the Adviser is paid
by the 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.
31
<PAGE>
Notes to the Financial Statements (cont)
MARCH 31, 1998 (UNAUDITED)
The Trust has entered into an investment advisory agreement and
administrative services agreement with the Adviser for the Premier Bond Fund.
Pursuant to the agreements, the Fund pays the Adviser an investment advisory
fee and administrative services fee based on the average daily net assets of
the Institutional Class and the Investor Class at the annual rate of 0.35%
and 0.10%, and 0.35% and 0.25%, respectively. Fees for these services are
reported as Management Fees on the Statement of Operations. The Adviser pays
all of the Fund's expenses other than 12b-1 fees for the Investor Class, the
investment advisory fee and administrative services fee, the expenses assumed
by the Adviser under the administrative services agreement, interest, taxes,
brokerage commissions and extraordinary expenses.
Lincoln Capital Management Company ("Lincoln Capital"), is the sub-adviser of
the Premier Bond Fund. Lincoln Capital manages the day-to-day investment
operations for the Fund. The Fund pays no fees directly to Lincoln Capital.
Lincoln Capital receives fees from the Adviser at the annual rate of 0.30% of
the average daily net assets up to $50 million; 0.20% for the next $50
million; 0.15% for the next $150 million; and 0.10% for amounts greater than
$250 million.
Pursuant to Rule 12b-1 of the Investment Company Act of 1940, the Trust has
adopted a distribution plan which permits the Growth Fund, Appreciation Fund
and Premier Bond Fund, Investor Class to pay for certain expenses associated
with the distribution of their shares up to 0.25% annually of each Fund's
average daily net asset value. Payments have been made to Ariel Distributors,
Inc., an affiliate of the Adviser.
32
<PAGE>
BOARD OF TRUSTEES
Bert N. Mitchell, C.P.A. Bert is founder, chairman and CEO of Mitchell &
Titus, LLP, the nation's largest minority-owned accounting firm. He holds
B.B.A., M.B.A. and Honorary Doctorate degrees from the Baruch School of
Business of the City University of New York, where he has also been a member
of the accounting faculty. Bert is also a graduate of the Owner-President
Management Program of the Harvard Business School. Bert is active in
community affairs, philanthropy and politics.
Mario L. Baeza Chairman and CEO of Latin America Equity Partners, L.P., Mario
is widely regarded as a preeminent expert in business and legal issues in
Latin America. He received a B.A. from Cornell University and a J.D. from
Harvard Law School, where he later taught.
James W. Compton Jim serves as the President and CEO of the Chicago Urban
League, which has worked to eliminate racial discrimination and segregation
since 1916. He has a B.A. degree from Morehouse College. Jim serves on the
board of directors of Commonwealth Edison Company and Unicom Corp.
William C. Dietrich, C.P.A. Bill is Chief Financial Officer for Streamline
Mid-Atlantic, Inc., a retailer and service company providing home delivery of
groceries, related products and various consumer services directly to the
home. 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 works with a variety of civic institutions, including those
affiliated with Princeton.
Christopher G. Kennedy Chris is executive vice president of Merchandise Mart
Properties, Inc. which manages, among other prime properties, The Merchandise
Mart; The Washington Design Center; and New York's Decoration and Design
Building. He earned his B.A. from Boston College and his M.B.A. at the J.L.
Kellogg Graduate School of Management at Northwestern University. Chris
serves on the board of directors of the Chicago Convention & Tourism Bureau;
Boston-based Citizens Energy Corp. and Citizens Corp.; and the Greater
Chicago Food Depository.
Eric T. McKissack, CFA In the capacity of vice chairman and co-chief
investment officer of Ariel Capital Management, Inc., Eric is responsible for
co-managing client and mutual fund portfolios. He received a B.S. in both
Management and Architecture from the Massachusetts Institute of Technology
and he earned his M.B.A. from the University of California at Berkeley. He is
also a Chartered Financial Analyst. Eric serves on a variety of civic and
corporate boards.
<PAGE>
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