<PAGE>
ARIEL MUTUAL FUNDS
ARIEL APPRECIATION FUND
ARIEL GROWTH FUND
ARIEL PREMIER BOND FUND
Annual Report--September 30, 1998
THE PATIENT INVESTOR [PHOTO]
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THE TORTOISE AND THE HARE
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...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.
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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
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FOR MORE INFORMATION ABOUT THE The Patient Investor 2
ARIEL MUTUAL FUNDS INCLUDING Company in Focus 6
MANAGEMENT FEES AND EXPENSES, Company Updates 8
PLEASE SEE THE CURRENT PROSPECTUS Ariel Equity Funds 10
WHICH MUST PRECEDE OR ACCOMPANY Schedule of Equity Investments 12
THIS REPORT. DISTRIBUTED BY ARIEL Equity Statistical Summary 16
DISTRIBUTORS, INC. Ariel Bond Fund 18
Schedule of Bond Investments 20
PERFORMANCE DATA PROVIDED Statement of Assets & Liabilities 26
REPRESENTS PAST PERFORMANCE AND IS Statement of Operations 26
NOT INDICATIVE OF FUTURE RESULTS. THE Statement of Changes in Net Assets 27
INVESTMENT RETURN AND PRINCIPAL Financial Highlights 28
VALUE OF AN INVESTMENT WILL FLUCTUATE Notes to the Financial Statements 30
SO THAT AN INVESTOR'S SHARES, WHEN Report of Independent Auditors 32
REDEEMED, MAY BE WORTH MORE OR LESS Board of Trustees 33
THAN THEIR ORIGINAL COST.
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SLOW AND STEADY WINS THE RACE.-AESOP
THE PATIENT INVEST[GRAPHIC]R-Registered Trademark-
DEAR FELLOW SHAREHOLDER: For the tumultuous quarter ended September 30, 1998,
the smaller companies of the Ariel Growth Fund fell -15.6% and the medium-sized
names of the Ariel Appreciation Fund gave back -12.9%. While at first glance
these losses may make one wince, they actually compare favorably to those of
similar funds as well as the small and mid-cap benchmarks. According to Lipper
Analytical Services--a mutual fund tracking company--the average small-cap fund
lost -21.5% of its value and the average mid-cap fund declined -18.2% over the
last three months. The unmanaged Russell 2500 Index fell -19.1%. Against this
backdrop, the Ariel Growth Fund ranked 32nd out of 676 funds in the Lipper Small
Company Growth Fund universe and the Ariel Appreciation Fund ranked 25th of the
353 funds in Lipper's Mid-Cap universe for the quarter.(1)
Year-to-date through September, the Ariel Growth Fund has returned -8.5% versus
- -14.5% for the Russell 2500 Index. The relative outperformance can be attributed
to our value bias that steers clear of the popular Wall Street hot stocks--now
gone cold; our focus on higher quality issues that are better able to withstand
difficult market environments; as well as strong stock selection with noteworthy
contributions from eye-care manufacturer, Allergan, Inc. (NYSE: AGN) and
California-based Longs Drug Stores (NYSE: LDG). Over the same nine month period,
the Ariel Appreciation Fund fared even better with a -3.1% return--further aided
by its concentration on medium-sized companies that have proven less susceptible
to recent market gyrations. Cruise line giant, Carnival Corporation (NYSE: CCL)
and local and cellular phone provider, Century Telephone (NYSE: CTL) are but two
examples.
2
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The aforementioned results have certainly helped enhance our longer-term track
record. Specifically, with a +20.7% three year annualized return, the Ariel
Appreciation Fund now ranks #2 of 178 mid-cap funds tracked by Lipper through
September 30th. Likewise, the Ariel Growth Fund earns the #10 spot out of a
larger grouping of 321 small cap funds for its +17.0% three year annualized
return.(2)
THE DOG DAYS OF SUMMER
In the wake of diminishing corporate profits, a global economic crisis and
gargantuan losses among the unregulated hedge funds, BARRON'S reported "all
sectors, with the notable exception of gold, ended out of money in the
July-September stretch..." Even the bulletproof large-cap indices finally had
their comeuppance with the S&P 500 posting a -9.9% return for the quarter which
brought its year-to-date return down to +6.1%. Although the pain was universal,
it was certainly not equal and few would argue smaller stocks suffered the most.
Having peaked in April, the Russell 2000 Index was suddenly off -31% by August's
end. Investor reaction was decisive and swift--redeem and retreat. Thus, for the
first time in eight years, stock mutual funds experienced $11.2 billion of
outflows in the month of August alone. Moreover, FORBES reports, "Small company
growth funds had a net outflow of $1.4 billion from August through the first
week of October..."
WHEN GREED IS GOOD
Although many investment managers have been sobered by recent stock market
activity, we find ourselves brimming with optimism. In his usual plain English
and folksy fashion, Warren Buffett says it best, "We seek to be fearful when
others are greedy and greedy when others are fearful." While no manager would
willingly seek out treacherous investment climates that cause hard-earned gains
to disappear, we believe the current environment offers one of those rare
opportunities to buy some truly wonderful businesses at bargain basement prices.
Specifically, small and mid-cap issues now sell at price/earnings multiples not
seen since early 1990. Moreover, relative to their large cap brethren, the
smaller company stocks are trading in territories not seen in 20 years. It is
indeed rare for these securities to sell at a lower price/earnings multiple than
the large cap S&P 500. Yet, as FORBES reports, "here we are with the Russell
[2000] trading at 20 times expected 1998 earnings, while the S&P 500 goes for
24." Lastly, small and
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mid-sized stocks are long overdue for a performance rebound. As Morningstar's
FUNDINVESTOR reports, "[These] stocks have brought up the rear since 1995, and
they've fallen even further behind large caps in 1998. This could very well be
their fourth straight year of underperformance. Only twice since 1926 have small
caps fallen behind large caps for four or more consecutive years..."
This environment reminds us of the other bear market periods we have lived
through. Specifically, the onset of the long-awaited bull market in 1983; the
unforgettable crash of 1987; and the Gulf War correction of 1990. All were times
when the valuation gap between large and small companies was also compelling,
and we were ultimately rewarded for our contrarian stance. Thus, our research
team has been working feverishly so we might be able to take full advantage of
another rare time when one can literally bottom fish for wonderful companies
with excellent long-term growth prospects, run by outstanding people and selling
at single digit price/earnings multiples. In short, it's time to be greedy.
THE WINTER OF OUR CONTENT
To this end, we are conducting all of our normal research processes with special
emphasis on identifying some of the most deeply discounted issues that meet our
exacting standards. We are scouring the portfolio holdings of other value
managers whom we respect but perhaps have been in a period of relative
underperformance and are poised for a rebound. (Morningstar serves as a great
source of systematically obtaining current portfolio holding information on a
monthly basis.) We are regularly meeting and speaking with colleagues in the
industry where a tremendous amount of information can be gleaned through
informal discussions. By combing through the ever growing "new low" list each
day, we are identifying stocks that have experienced major price declines as a
result of poor earnings or industries that are out of favor. We are revisiting
some old favorites--stocks that we successfully owned in the past and sold
because their shares appreciated to full value--stocks in which we have
accumulated a great deal of knowledge. Moreover, we are studying our own
history--the good periods as well as the difficult ones--to ensure we continue
to build on our successes and learn from our mistakes. As a result of these
efforts, our new idea pipeline has never been fuller nor our analysts more
excited about the wholesale valuations that are rampant in today's investment
environment.
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[GRAPHIC]
While we expect these efforts to lead to the purchase of several new stocks, we
also must balance this discovery of new ideas with the option of adding to
existing positions. Accordingly, we are selectively increasing our holdings in a
number of our core positions that have been unduly punished in recent months.
Carpet tile manufacturer Interface, Inc. (OTC: IFSIA) is a prime example of such
a security. It is a company whose earnings continue to meet or beat Wall Street
expectations; a company that has averaged nearly 40% year-over-year earnings
growth for the last eight quarters; a company whose business should grow another
20% next year; and yet whose stock value is inexplicably off -50% from its 1998
high.
In short, we view the current market upheaval as an obstacle of opportunity, and
we intend to take advantage of the occasion. As always, we appreciate the
opportunity to serve you and welcome any comments or questions you might have.
Sincerely,
/s/ John W. Rogers, Jr. /s/ Eric T. McKissack
John W. Rogers, Jr. Eric T. McKissack, CFA
Portfolio Manager Portfolio Manager
Ariel Growth Fund Ariel Appreciation Fund
(1) FOR THE ONE-YEAR PERIOD ENDING SEPTEMBER 30, 1998, THE GROWTH FUND WAS 17
OUT OF 577 FUNDS RANKED BY LIPPER ANALYTICAL SERVICES, INC. FOR THE
FIVE-YEAR PERIOD ENDING SEPTEMBER 30, 1998, THE FUND WAS RANKED 27 OUT OF
180 FUNDS, AND FOR THE TEN-YEAR PERIOD ENDING SEPTEMBER 30, 1998, THE FUND
WAS RANKED 45 OUT OF 62 FUNDS.
FOR THE ONE-YEAR PERIOD ENDING SEPTEMBER 30, 1998, THE APPRECIATION FUND
WAS 9 OUT OF 298 FUNDS RANKED BY LIPPER ANALYTICAL SERVICES, INC. FOR THE
FIVE-YEAR PERIOD ENDING SEPTEMBER 30, 1998, THE FUND WAS RANKED 13 OUT OF
99 FUNDS, AND FOR THE SINCE INCEPTION PERIOD (12/1/89) ENDING SEPTEMBER 30,
1998, THE FUND WAS RANKED 15 OUT OF 43 FUNDS.
(2) SOURCE: LIPPER ANALYTICAL SERVICES
5
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[LOGO]
630 DUNDEE ROAD
NORTHBROOK, IL 60062
(847) 498-7070
IDEX CORPORATION (NYSE: IEX) manufactures a wide range of industrial products,
including pumps, compressors, and motor devices used in the control (mixing,
dispensing and flow) of various types of air and fluids.
REASONS FOR RECOMMENDATION
A DOMINANT AND DEFENDABLE POSITION IN NICHE MARKETS
By virtue of their niche applications, IDEX's business units generally hold the
number one or very strong number two market position. The company's products
have a high degree of proprietary engineering content and do not compete in the
commodity and mass-market applications of the pump and engineered equipment
markets. Thus, significant barriers to entry exist for IDEX's business.
Moreover, the company is a low cost producer in most of its businesses and is
able to price its products slightly higher than its competition due to its high
quality reputation and industry leadership. IDEX's products also have a high
degree of brand recognition amongst customers and a large field population of
pumps and equipment in use. As this existing population of products has a high
switching cost, IDEX enjoys an annuity stream of future repair and replacement
business.
VERY FAVORABLE ECONOMICS
IDEX has a dominant and defendable franchise which allows it to earn exceptional
returns on sales, assets, and equity. Profitability has been consistent over the
past several years, even as IDEX's management team has made acquisitions to
expand its product line. Earnings per share have grown at an average rate of 22%
over the past five years. IDEX generates a very strong stream of excess cash
flow which management has astutely reinvested on behalf of shareholders through
acquisitions, repayment of debt, and investments in operational efficiencies and
expansionary capital expenditures.
EXPERIENCED AND DISCIPLINED MANAGEMENT TEAM
In researching the IDEX family of products, we found very consistent themes in
the management of the business--experience and discipline. These characteristics
were consis-
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tent throughout all levels of the IDEX management team, and third party
verifications confirmed this view. IDEX's corporate officers average nearly 20
years of service with the company and each one "climbed the IDEX management
ladder" through one of the business units. IDEX strongly emphasizes the internal
development of its talent. The management style of this company is extremely
disciplined. IDEX has meticulous financial controls and planning, well-defined
acquisition criteria and a very strict code of ethics. This diligent management
style is reflected in the long-term track record of the team. IDEX has never
made an acquisition that was dilutive to shareholders.
LIMITED CYCLICALITY
Market psychology during the third quarter negatively impacted those companies
believed to have any exposure to an economic slowdown and/or international
markets. Although IDEX is not completely immune to cyclical changes in the
domestic and global economies, we believe the company has several
characteristics that make it considerably less cyclical than the current market
price implies. IDEX has a diversified customer base that spans several
industries, and it sells relatively lower priced products that often fall
outside of the customers' capital budgeting decision process. Maintenance and
repair revenues, often sold on a 24-hour turnaround basis, represent
approximately 35% of IDEX's overall revenue.
COMPELLING VALUATION
In our view, the current climate has created an excellent opportunity to
purchase shares of a well-managed, dominant franchise with excellent economics
at a very attractive valuation. At $25, the stock is currently trading at 10
times our 1999 cash earnings estimate, 6 times cash flow, and a 40% discount to
our estimate of its private market value of approximately $42 per share.
We recommend investors initiate a position in IDEX Corporation at current price
levels.
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[LOGO]
ALLERGAN
2525 DUPONT DRIVE
P.O. BOX 19534
IRVINE, CA 92623
(714) 752-4500
ALLERGAN, INC. (NYSE: AGN) Since our initial discussion of Allergan a year ago,
the new management team has successfully initiated growth strategies which have
caught the attention of the investment community. Specifically, the company has
reported three quarters of positive earnings surprises. Up more than 60%,
Allergan's stock has performed extraordinarily well during one of the most
difficult periods of the stock market's recent history.
The company has reinvigorated its core pharmaceutical business and has developed
a pipeline of emerging new products including ALPHAGAN, used for the treatment
of glaucoma, and BOTOX, used for a wide variety of neurological and cosmetic
applications. The market share gains achieved through these new products have
more than offset declines from Allergan's off-patent traditional ophthalmic
products.
Furthermore, over the next three years, the company will reduce its labor force
by 9% and close five of its ten production facilities. These moves not only help
reduce overall expenses, but also serve to consolidate the company's worldwide
manufacturing infrastructure. As such, the projected five-year prospects of
16-18% growth in earnings per share should continue to attract investors.
Allergan continues to trade at meaningful discounts to our estimated private
market value and industry valuation measures. We continue to regard it as a
solid investment opportunity.
T. ROWE PRICE[LOGO]
100 EAST PRATT STREET
BALTIMORE, MD 21202
(410) 345-2000
T. ROWE PRICE ASSOCIATES (OTC: TROW) We sold our remaining shares of T. Rowe
Price Associates, Inc. this summer in the low thirties, having acquired our
initial position following the stock market crash in 1987 at $1.25 per share
(adjusted for splits). With mutual fund companies out of favor following the
market's debacle, T. Rowe Price met all of our investment criteria: an
attractive industry, a strong brand franchise, superb management, excellent
financial characteristics, and a compelling valuation of six times earnings. As
the fund industry mushroomed over the years, the company prospered as the strong
performance of its mutual funds generated large cash inflows. Over the past
decade, assets under management grew more than fivefold and earnings per share
rose from $0.23 to $1.13.
This great news did not go unnoticed by Wall Street. During the summer, we found
the stock selling at twenty six times estimated earnings that were predicated on
the continuation of the bull market. As strict adherents to our value
discipline, we chose to eliminate our position believing that the valuation was
excessive and the company no longer sold at a significant discount to its
private market value. With this said, we still have a strong regard for the
industry, the company, and its management. As such, there is a chance current
difficulties in the stock market will afford us the opportunity to repurchase
shares in this great company at a more attractive valuation.
8
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[LOGO]
888 SEVENTH AVENUE
NEW YORK, NY 10106
(212) 547-6700
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. (OTC: GBFE) After much consideration,
including several in-depth meetings with management, customers and competitors,
we sold our position in Golden Books Family Entertainment. In recent months,
the economics of the company's business deteriorated drastically as management
failed to revitalize Golden's core book and entertainment properties. Investors
witnessed the price of the common stock depreciate on news of liquidity
problems. The magnitude of Golden's losses and the speed at which fundamentals
degenerated proved particularly troublesome. Furthermore, we lost confidence in
management and its ability to achieve the long-term potential of the franchise.
During the quarter, Golden engaged Allen & Co., a media investment banker, to
explore and evaluate strategic alternatives, including the potential sale of
assets to raise cash. Golden is constrained by significant debt, and its
financial flexibility is the most limited of any company we follow. Based on our
detailed analysis, we have determined that the company's value is insufficient
to meet its senior debt obligations.
We view Golden's prospects as highly uncertain, and we seriously question the
company's long-term viability in its current configuration. We encourage
investors to cut their losses and seek alternate investment opportunities.
LONGS DRUGS
141 NORTH CIVIC DRIVE
P.O. BOX 5222
WALNUT CREEK, CA 94596
(925) 937-1170
LONGS DRUG STORES CORPORATION (NYSE: LDG) After an extended period of sub-par
performance, fundamentals have improved at Longs. About a year ago, comparable
store sales, the lifeblood of a retailer, began to increase. A strengthening
California economy and improved category management were the driving factors. In
the most recent quarter, reported in mid-August, comparable store sales jumped
8.2% and earnings per share were $0.38 vs. $0.31, a 19% gain. In addition, as
the drug store industry continues to consolidate, Longs has been identified as a
potential takeover candidate. The confluence of these two events resulted in
Longs' shares rising 39% in the third quarter, a notable performance given
overall stock market difficulties.
We continue to view Longs as a prime candidate for acquisition. It holds the
number two position in the attractive California market, substantial undervalued
real estate assets, and, recent improvements notwithstanding, the company
continues to lag its industry peers. Two East Coast drug retailing
powerhouses--CVS Corporation (NYSE: CVS) and Eckerd, a subsidiary of J.C. Penney
Company, Inc. (NYSE: JCP)--have strong aspirations to become national chains.
Each has been acquisitive. Without Longs, it will be difficult for either of
these chains to become national. In today's active merger and acquisition
environment, we would not be surprised to see Longs secure close to $50 per
share.
[GRAPHIC]
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ARIEL EQUITY FUNDS
TEN LARGEST HOLDINGS
as of September 30, 1998
1 FIRST BRANDS CORP.
Manufacturer and marketer of consumer products for home and automobile
markets
2 SPECIALTY EQUIPMENT
Manufacturer of commercial and institutional food service equipment
3 MBIA, INC.
Leading insurer of municipal bonds
4 ROUSE CO.
Retail mall developer
5 ALLERGAN, INC.
A foremost provider of specialty eyecare products
6 HASBRO, INC.
Prominent toy manufacturer
7 CENTRAL NEWSPAPERS, INC.
A dominant media company with daily and weekly newspapers in Phoenix and
Indianapolis
8 INTERFACE, INC.
World's leading manufacturer and marketer of carpet tiles
9 LONGS DRUG STORES, INC.
Large operator of retail drug stores in California and other western states
10 ECOLAB, INC.
A top developer and marketer of premium cleaning and sanitizing products
and services for the hospitality markets
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<CAPTION>
ARIEL GROWTH FUND AVERAGE ANNUAL TOTAL RETURN AS OF SEPTEMBER 30, 1998*
--------------------------------------------------------------------------------
Inception November 6, 1986 1 Year 3 Year 5 Year 10 Year Life of Fund
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ARIEL GROWTH FUND -3.8% +17.0% +13.2% +11.8% +13.9%
Total return does not reflect a maximum 4.75% sales load charged prior to 7/15/94.
*Average annual total returns assume reinvestment of dividends and capital gains.
</TABLE>
[GRAPH]
<TABLE>
<CAPTION>
ARIEL GROWTH FUND S&P 500
PORTFOLIO COMPOSITION PORTFOLIO COMPOSITION
--------------------- ---------------------
<S> <C> <C>
CONSUMER DISCRETIONARY & SERVICES 33.2 10.5
MATERIALS & PROCESSING 22.1 4.3
CONSUMER STAPLES 12 9.5
PRODUCER DUABLES 10.2 3.1
FINANCIAL SERVICES 9.4 16.2
HEALTH CARE 5 13.4
UTILITIES 3.5 11.7
TECHNOLOGY 3.5 14.7
CASH 1.1 0
INTEGRATED OILS 0 7
OTHER 0 5.3
AUTOS & TRANSPORTAION 0 3
OTHER ENERGY 0 1.2
</TABLE>
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.
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTED IN ARIEL GROWTH FUND AND
COMPARABLE INDICES*
[GRAPH]
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<CAPTION>
ARIEL GROWTH FUND
<S> <C>
Nov 86 $10,000
Dec 86 $10,203
Dec 87 $11,367
Dec 88 $15,905
Dec 89 $19,900
Dec 90 $16,699
Dec 91 $22,163
Dec 92 $24,763
Dec 93 $26,924
Dec 94 $25,786
Dec 95 $30,562
Dec 96 $37,747
Dec 97 $51,502
Sept 98 $47,124
S&P 500
Nov 86 $10,000
Dec 86 $ 9,745
Dec 87 $10,256
Dec 88 $11,960
Dec 89 $15,749
Dec 90 $15,260
Dec 91 $19,910
Dec 92 $21,427
Dec 93 $23,587
Dec 94 $23,897
Dec 95 $32,878
Dec 96 $40,426
Dec 97 $53,914
Sept 98 $57,150
RUSSELL 2500
Nov 86 $10,000
Dec 86 $ 9,737
Dec 87 $ 9,281
Dec 88 $11,391
Dec 89 $13,604
Dec 90 $11,580
Dec 91 $16,988
Dec 92 $19,738
Dec 93 $23,002
Dec 94 $22,759
Dec 95 $29,975
Dec 96 $35,680
Dec 97 $44,370
Sept 98 $37,940
</TABLE>
*Statistics represent past performance which is not indicative of future
results. The S&P 500 is a broad market-weighted index dominated by blue-chip
stocks. The Russell 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.
10
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<TABLE>
<CAPTION>
ARIEL APPRECIATION FUND AVERAGE ANNUAL TOTAL RETURN AS OF SEPTEMBER 30, 1998*
--------------------------------------------------------------------------------
Inception December 1, 1989 1 Year 3 Year 5 Year Life of Fund
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ARIEL APPRECIATION FUND +3.4% +20.7% +15.1% +13.4%
Total return does not reflect a maximum 4.75% sales load charged prior to 7/15/94.
*Average annual total returns assume reinvestment of dividends and capital gains.
</TABLE>
[GRAPH]
<TABLE>
<CAPTION>
ARIEL APPRECIAITON FUND S&P 500
PORTFOLIO COMPOSITION PORTFOLIO COMPOSITION
--------------------- ---------------------
<S> <C> <C>
CONSUMER DISCRETIONARY & SERVICES 33.4% 10.5%
MATERIALS & PROCESSING 17.3% 4.3%
FINANCIAL SERVICES 12.8% 16.2%
CONSUMER STAPLES 10.3% 9.5%
PRODUCER DURABLES 8.1% 3.1%
HEALTH CARE 7.8% 13.4%
UTILITIES 5.2% 11.7%
TECHNOLOGY 2.3% 14.7%
CASH 2.8% -
INTEGRATED OILS - 7.0%
OTHER - 5.3%
AUTOS & TRANSPORTAION - 3.0%
OTHER ENERGY - 1.2%
</TABLE>
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.
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTED IN ARIEL APPRECIATION FUND AND
COMPARABLE INDICES*
[GRAPH]
<TABLE>
<CAPTION>
ARIEL APPRECIATION FUND
<S> <C>
Dec 89 $10,000
Dec 90 $ 9,902
Dec 91 $13,184
Dec 92 $14,930
Dec 93 $16,115
Dec 94 $14,763
Dec 95 $18,330
Dec 96 $22,677
Dec 97 $31,283
Sept 98 $30,310
S&P 500
Dec 89 $10,000
Dec 90 $ 9,922
Dec 91 $12,945
Dec 92 $13,932
Dec 93 $15,336
Dec 94 $15,539
Dec 95 $21,378
Dec 96 $26,286
Dec 97 $35,056
Sept 98 $37,160
RUSSELL 2500
Dec 89 $10,000
Dec 90 $ 8,554
Dec 91 $12,549
Dec 92 $14,580
Dec 93 $16,992
Dec 94 $16,812
Dec 95 $22,142
Dec 96 $26,356
Dec 97 $32,776
Sept 98 $28,026
</TABLE>
TEN LARGEST HOLDINGS
as of September 30, 1998
1 ALLERGAN, INC.
A foremost provider of specialty eyecare products
2 CENTURY TELEPHONE ENTERPRISES
Diversified telecommunications company
3 ROUSE CO.
Retail mall developer
4 HASBRO, INC.
Prominent toy manufacturer
5 MBIA, INC.
Leading insurer of municipal bonds
6 LONGS DRUG STORES, INC.
Large operator of retail drug stores in California and other western states
7 SPECIALTY EQUIPMENT
Manufacturer of commercial and institutional food service equipment
8 FIRST BRANDS CORP.
Manufacturer and marketer of consumer products for home and automobile
markets
9 NORTHERN TRUST CORP.
Chicago-based bank holding company
10 WH BRADY CO.
Manufacturer and distributor of niche industrial safety-related products
11
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SCHEDULE OF INVESTMENTS
ARIEL GROWTH FUND
SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
Number COMMON STOCKS-98.95% Cost Market Value
of Shares
<S> <C> <C> <C>
CONSUMER DISCRETIONARY & SERVICES--33.19%
886,010 American Media, Inc., Class A* $7,762,944 $4,928,431
259,933 Bob Evans Farms, Inc. 3,652,353 5,182,414
137,700 Central Newspapers, Inc., Class A 3,997,847 7,848,900
398,700 First Brands Corp. 7,209,568 8,696,644
271,100 Hasbro, Inc. 4,350,378 7,997,450
200,600 Lee Enterprises 5,552,216 5,203,062
205,200 Leggett & Platt, Inc. 1,071,207 4,257,900
197,600 Libbey, Inc. 7,383,937 5,829,200
87,000 Omnicom Group, Inc. 618,938 3,915,000
------- ---------
41,599,388 53,859,001
---------- ----------
CONSUMER STAPLES--12.02%
186,000 Longs Drug Stores, Inc. 3,293,318 7,474,875
225,000 McCormick & Co., Inc. 5,335,755 6,539,063
344,800 Whitman Corp. 5,500,501 5,495,250
--------- ---------
14,129,574 19,509,188
---------- ----------
FINANCIAL SERVICES --9.36%
27,200 Arthur J. Gallagher & Co. 908,305 1,122,000
156,500 MBIA, Inc. 5,609,697 8,402,094
83,000 Northern Trust Corp. 1,447,989 5,664,750
--------- ---------
7,965,991 15,188,844
--------- ----------
12
<PAGE>
<CAPTION>
Number COMMON STOCKS-98.95% (cont) Cost Market Value
of Shares
<S> <C> <C> <C>
HEALTH CARE--5.00%
138,900 Allergan, Inc. $4,364,705 $8,108,287
---------- ----------
MATERIALS & PROCESSING--22.11%
281,600 Brady (WH) Co. 7,140,177 5,843,200
245,600 Ecolab, Inc. 1,505,099 6,984,250
143,900 Hunt Corp. 1,916,478 2,185,481
648,000 Interface, Inc., Class A 5,471,859 7,776,000
303,000 Rouse Co. 5,305,304 8,162,063
365,250 Shorewood Packaging Corp.* 2,783,117 4,930,875
--------- ---------
24,122,034 35,881,869
---------- ----------
PRODUCER DURABLES--10.20%
168,120 General Binding Corp. 3,019,066 5,516,437
102,850 Hussman International, Inc. 1,355,034 1,459,184
35,500 IDEX Corp. 926,932 942,969
434,100 Specialty Equipment Cos., Inc.* 5,523,313 8,627,738
--------- ---------
10,824,345 16,546,328
---------- ----------
TECHNOLOGY--3.53%
288,100 Littelfuse, Inc.* 7,344,468 5,725,987
--------- ---------
UTILITIES--3.54%
121,700 Century Telephone Enterprises $2,637,576 $5,750,325
---------- ----------
Total Common Stocks 112,988,081 160,569,829
----------- -----------
<CAPTION>
Principal REPURCHASE
Amount AGREEMENT-1.82%
<S> <C> <C> <C>
$2,949,589 State Street Bank & Trust
Company Repurchase
Agreement, 4.50%, dated
9/30/1998, repurchase price
$2,949,958 maturing
10/1/1998 (collateralized by
U.S. Treasury Bond, 6.625%,
6/30/2001) 2,949,589 2,949,589
--------- ---------
Total Repurchase Agreement 2,949,589 2,949,589
--------- ---------
Total Investments-100.77% $115,937,670 163,519,418
------------
------------
Liabilities less Other Assets-(0.77)% (1,240,710)
----------
NET ASSETS-100.00% $162,278,708
------------
------------
</TABLE>
*Non-income producing
The accompanying notes are an integral part of the financial statements.
13
<PAGE>
ARIEL APPRECIATION FUND
SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
Number COMMON STOCKS - 97.15% Cost Market Value
of Shares
<S> <C> <C> <C>
CONSUMER DISCRETIONARY & SERVICES--33.39%
145,900 Bob Evans Farms, Inc. $2,837,068 $2,908,881
180,300 Carnival Cruise Lines, Inc. 1,376,574 5,735,794
91,800 Central Newspapers, Inc., Class A 5,056,141 5,232,600
399,300 First Brands Corp. 8,937,769 8,709,731
84,900 Galileo International, Inc. 3,313,931 3,204,975
282,350 Harte-Hanks Communications 1,652,234 6,317,581
329,700 Hasbro, Inc. 5,763,878 9,726,150
107,200 Houghton Mifflin Co. 2,268,388 3,323,200
219,200 Lee Enterprises 6,039,403 5,685,500
307,720 Leggett & Platt, Inc. 1,876,028 6,385,190
218,600 Libbey, Inc. 8,109,286 6,448,700
110,500 Omnicom Group, Inc. 1,079,309 4,972,500
54,500 Tribune Co. 2,194,328 2,742,031
--------- ---------
50,504,337 71,392,833
---------- ----------
CONSUMER STAPLES--10.33%
225,840 Longs Drug Stores, Inc. 4,114,765 9,075,945
216,255 McCormick & Co., Inc. 5,185,410 6,284,911
421,600 Whitman Corp. 6,830,933 6,719,250
--------- ---------
16,131,108 22,080,106
---------- ----------
FINANCIAL SERVICES--12.81%
34,500 Arthur J. Gallagher & Co. $1,156,293 $1,423,125
91,700 Equifax, Inc. 1,904,985 3,272,544
68,600 Franklin Resources, Inc. 2,045,594 2,058,000
176,300 MBIA, Inc. 7,202,005 9,465,106
116,800 MBNA Corp. 899,280 3,343,400
114,700 Northern Trust Corp. 2,386,266 7,828,275
--------- ---------
15,594,423 27,390,450
---------- ----------
HEALTH CARE--7.81%
223,200 Allergan, Inc. 7,601,291 13,029,300
191,700 Sybron Corp.* 1,248,274 3,666,263
--------- ---------
8,849,565 16,695,563
--------- ----------
MATERIALS & PROCESSING--17.29%
337,800 Brady (WH) Co. 8,133,466 7,009,350
129,600 Ecolab, Inc. 1,601,491 3,685,500
79,500 Hunt Corp. 1,853,717 1,207,406
284,300 Interface, Inc., Class A 5,401,980 3,411,600
277,000 Morton International, Inc. 7,980,982 6,059,375
366,400 Rouse Co. 5,859,778 9,869,900
424,015 Shorewood Packaging Corp.* 3,260,265 5,724,203
--------- ---------
34,091,679 36,967,334
---------- ----------
14
<PAGE>
<CAPTION>
Number COMMON STOCKS-97.15% (cont) Cost Market Value
of Shares
<S> <C> <C> <C>
PRODUCER DURABLES--8.11%
129,305 General Binding Corp. $2,131,765 $4,242,820
122,450 Hussman International, Inc. 1,646,582 1,737,259
45,000 Pitney-Bowes, Inc. 802,490 2,365,313
452,100 Specialty Equipment Cos., Inc.* 5,960,590 8,985,488
--------- ---------
10,541,427 17,330,880
---------- ----------
TECHNOLOGY--2.26%
243,700 Littelfuse, Inc.* 6,190,168 4,843,538
--------- ---------
UTILITIES--5.15%
232,950 Century Telephone Enterprises 5,105,899 11,006,887
--------- ----------
Total Common Stocks 147,008,606 207,707,591
----------- -----------
<CAPTION>
Principal REPURCHASE
Amount AGREEMENT - 4.39% Cost Market Value
<S> <C> <C> <C>
$9,394,670 State Street Bank & Trust
Company Repurchase
Agreement, 4.50%, dated
9/30/1998, repurchase price
$9,395,845 maturing
10/1/1998 (collateralized by
U.S. Treasury Bond, 8.75%,
5/15/2017) $9,394,670 $9,394,670
---------- ----------
Total Repurchase Agreement 9,394,670 9,394,670
--------- ---------
Total Investments-101.54% $156,403,276 217,102,261
------------
------------
Liabilities less Other Assets-(1.54)% (3,289,858)
----------
NET ASSETS-100.00% $213,812,403
------------
------------
</TABLE>
*Non-income producing
The accompanying notes are an integral part of the financial statements.
15
<PAGE>
EQUITY STATISTICAL SUMMARY
<TABLE>
<CAPTION>
ARIEL GROWTH EARNINGS PER SHARE
(UNAUDITED) ----------------------
52-WEEK
RANGE 1997 1998 1999 1997 1998
TICKER PRICE --------------- ACTUAL ESTIMATED ESTIMATED P/E P/E
COMPANY SYMBOL 9/30/98 LOW HIGH CALENDAR CALENDAR CALENDAR CALENDAR CALENDAR
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Hunt Corp. HUN 15.19 15.00 25.19 1.22 1.21 1.31 12.5 12.6
American Media, Inc. ENQ 5.56 5.25 8.75 0.17 0.07 0.20 32.7 79.4
Shorewood Packaging Corp. SWD 13.50 12.13 18.92 0.97 1.05 1.19 13.9 12.9
Specialty Equipment Cos. SPEQ 19.88 15.44 24.38 1.86 2.12 2.48 10.7 9.4
Littelfuse, Inc. LFUS 19.88 16.25 34.75 1.07 1.00 1.19 18.6 19.9
W.H. Brady Co. BRCOA 20.75 16.25 35.75 1.50 1.43 1.65 13.8 14.5
General Binding Corp. GBND 32.81 26.50 40.00 1.80 1.61 2.26 18.2 20.4
Libbey, Inc. LBY 29.50 28.25 42.25 2.30 2.64 2.90 12.8 11.2
Interface, Inc. IFSIA 12.00 10.88 22.88 0.77 1.00 1.19 15.7 12.1
Arthur J. Gallagher & Co. AJG 41.25 33.56 46.56 2.75 2.95 3.20 15.0 14.0
Hussmann International HSM 14.19 12.63 20.13 1.01 1.22 1.40 14.0 11.6
IDEX Corp. IEX 26.56 19.50 38.75 1.78 1.94 2.13 14.9 13.7
Bob Evans Farms, Inc. BOBE 19.94 17.00 22.50 1.03 1.24 1.40 19.4 16.1
First Brands Corp. FBR 21.81 19.31 28.50 1.38 1.41 1.69 15.8 15.5
Lee Enterprises LEE 25.94 23.50 33.88 1.34 1.44 1.67 19.4 18.0
Central Newspapers, Inc. ECP 57.00 57.00 76.88 3.31 3.60 4.19 17.2 15.8
Longs Drug Stores Corp. LDG 40.19 23.88 41.56 1.51 1.71 1.84 26.6 23.5
Whitman Corp. WH 15.94 14.88 23.38 0.46 0.62 0.71 34.7 25.7
Rouse Company RSE 26.94 24.31 35.69 2.47 2.72 3.01 10.9 9.9
McCormick & Company, Inc. MCCRK 29.06 22.75 36.44 1.26 1.45 1.61 23.1 20.0
Ecolab, Inc. ECL 28.44 23.06 33.13 1.00 1.16 1.29 28.4 24.5
Allergan, Inc. AGN 58.38 31.13 62.88 1.57 2.00 2.35 37.2 29.2
Hasbro, Inc. HAS 29.56 25.75 40.94 1.69 1.70 2.15 17.5 17.4
Leggett & Platt, Inc. LEG 20.75 19.25 28.75 1.08 1.24 1.43 19.2 16.8
Century Telephone Enterprises CTL 47.25 25.00 52.69 1.64 2.00 2.30 28.8 23.6
MBIA, Inc. MBI 53.69 47.19 80.94 4.05 4.59 5.06 13.3 11.7
Northern Trust Corp. NTRS 68.25 54.63 83.25 2.65 3.05 3.50 25.8 22.4
Omnicom Group, Inc. OMC 45.00 32.75 58.44 1.37 1.65 1.90 32.8 27.3
1999 MARKET
P/E CAP.
COMPANY CALENDAR ($MM)
<S> <C> <C>
Hunt Corp. 11.6 172
American Media, Inc. 27.8 236
Shorewood Packaging Corp. 11.3 358
Specialty Equipment Cos. 8.0 428
Littelfuse, Inc. 16.7 465
W.H. Brady Co. 12.6 467
General Binding Corp. 14.5 515
Libbey, Inc. 10.2 520
Interface, Inc. 10.1 629
Arthur J. Gallagher & Co. 12.9 711
Hussmann International 10.1 723
IDEX Corp. 12.5 779
Bob Evans Farms, Inc. 14.2 831
First Brands Corp. 12.9 852
Lee Enterprises 15.5 1,156
Central Newspapers, Inc. 13.6 1,411
Longs Drug Stores Corp. 21.8 1,564
Whitman Corp. 22.5 1,618
Rouse Company 9.0 1,845
McCormick & Company, Inc. 18.0 2,133
Ecolab, Inc. 22.0 3,687
Allergan, Inc. 24.8 3,816
Hasbro, Inc. 13.7 3,888
Leggett & Platt, Inc. 14.5 4,082
Century Telephone Enterprises 20.5 4,338
MBIA, Inc. 10.6 5,329
Northern Trust Corp. 19.5 7,597
Omnicom Group, Inc. 23.7 7,637
</TABLE>
Note: All earnings per share numbers are fully diluted. Such numbers are
from continuing operations and are adjusted for non-recurring items.
The Rouse Company numbers are before depreciation and deferred taxes.
16
<PAGE>
ARIEL APPRECIATION
(UNAUDITED)
<TABLE>
<CAPTION>
ARIEL GROWTH EARNINGS PER SHARE
(UNAUDITED) ----------------------
52-WEEK
RANGE 1997 1998 1999 1997 1998
TICKER PRICE --------------- ACTUAL ESTIMATED ESTIMATED P/E P/E
COMPANY SYMBOL 9/30/98 LOW HIGH CALENDAR CALENDAR CALENDAR CALENDAR CALENDAR
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Hunt Corp. HUN 15.19 15.00 25.19 1.22 1.21 1.31 12.5 12.6
Shorewood Packaging Corp. SWD 13.50 12.13 18.92 0.97 1.05 1.19 13.9 12.9
Specialty Equipment Cos. SPEQ 19.88 15.44 24.38 1.86 2.12 2.48 10.7 9.4
Littelfuse, Inc. LFUS 19.88 16.25 34.75 1.07 1.00 1.19 18.6 19.9
W.H. Brady Co. BRCOA 20.75 16.25 35.75 1.50 1.43 1.65 13.8 14.5
General Binding Corp. GBND 32.81 26.50 40.00 1.80 1.61 2.26 18.2 20.4
Libbey, Inc. LBY 29.50 28.25 42.25 2.30 2.64 2.90 12.8 11.2
Interface, Inc. IFSIA 12.00 10.88 22.88 0.77 1.00 1.19 15.7 12.1
Arthur J. Gallagher & Co. AJG 41.25 33.56 46.56 2.75 2.95 3.20 15.0 14.0
Hussmann International HSM 14.19 12.63 20.13 1.01 1.22 1.40 14.0 11.6
Bob Evans Farms, Inc. BOBE 19.94 17.00 22.50 1.03 1.24 1.40 19.4 16.1
First Brands Corp. FBR 21.81 19.31 28.50 1.38 1.41 1.69 15.8 15.5
Houghton Mifflin Co. HTN 31.00 26.75 40.25 1.48 1.38 1.73 20.9 22.5
Lee Enterprises LEE 25.94 23.50 33.88 1.34 1.44 1.67 19.4 18.0
Central Newspapers, Inc. ECP 57.00 57.00 76.88 3.31 3.60 4.19 17.2 15.8
Longs Drug Stores Corp. LDG 40.19 23.88 41.56 1.51 1.71 1.84 26.6 23.5
Whitman Corp. WH 15.94 14.88 23.38 0.46 0.62 0.71 34.7 25.7
Harte Hanks Communications,
Inc. HHS 22.38 16.25 26.25 0.57 0.86 1.05 39.3 26.0
Rouse Company RSE 26.94 24.31 35.69 2.47 2.72 3.01 10.9 9.9
Sybron International Corp. SYB 19.13 16.38 29.13 0.85 1.02 1.21 22.5 18.8
McCormick & Company, Inc. MCCRK 29.06 22.75 36.44 1.26 1.45 1.61 23.1 20.0
Morton International MII 21.88 21.88 35.88 1.55 1.71 1.85 14.1 12.8
Ecolab, Inc. ECL 28.44 23.06 33.13 1.00 1.16 1.29 28.4 24.5
Allergan, Inc. AGN 58.38 31.13 62.88 1.57 2.00 2.35 37.2 29.2
Hasbro, Inc. HAS 29.56 25.75 40.94 1.69 1.70 2.15 17.5 17.4
Galileo International, Inc. GLC 37.75 22.00 46.13 1.50 1.85 2.07 25.2 20.4
Leggett & Platt, Inc. LEG 20.75 19.25 28.75 1.08 1.24 1.43 19.2 16.8
Century Telephone Enterprises CTL 47.25 25.00 52.69 1.64 2.00 2.30 28.8 23.6
Equifax, Inc. EFX 35.69 28.63 44.13 1.29 1.48 1.74 27.7 24.1
MBIA, Inc. MBI 53.69 47.19 80.94 4.05 4.59 5.06 13.3 11.7
Tribune Company TRB 50.31 50.00 75.06 2.30 2.50 2.80 21.9 20.1
Franklin Resources, Inc. BEN 29.88 25.75 57.88 1.86 2.00 1.95 16.1 14.9
Northern Trust Corp. NTRS 68.25 54.63 83.25 2.65 3.05 3.50 25.8 22.4
Omnicom Group, Inc. OMC 45.00 32.75 58.44 1.37 1.65 1.90 32.8 27.3
MBNA Corp. KRB 19.08 15.63 25.83 0.76 0.95 1.15 25.1 20.1
Pitney Bowes, Inc. PBI 52.56 37.44 58.19 1.80 2.05 2.31 29.2 25.6
Carnival Corp. CCL 31.81 22.00 42.63 1.12 1.36 1.63 28.4 23.4
1999 MARKET
P/E CAP.
COMPANY CALENDAR ($MM)
<S> <C> <C>
Hunt Corp. 11.6 172
Shorewood Packaging Corp. 11.3 358
Specialty Equipment Cos. 8.0 428
Littelfuse, Inc. 16.7 465
W.H. Brady Co. 12.6 467
General Binding Corp. 14.5 515
Libbey, Inc. 10.2 520
Interface, Inc. 10.1 629
Arthur J. Gallagher & Co. 12.9 711
Hussmann International 10.1 723
Bob Evans Farms, Inc. 14.2 831
First Brands Corp. 12.9 852
Houghton Mifflin Co. 17.9 944
Lee Enterprises 15.5 1,156
Central Newspapers, Inc. 13.6 1,411
Longs Drug Stores Corp. 21.8 1,564
Whitman Corp. 22.5 1,618
Harte Hanks Communications,
Inc. 21.3 1,640
Rouse Company 9.0 1,845
Sybron International Corp. 15.8 1,932
McCormick & Company, Inc. 18.0 2,133
Morton International 11.8 2,713
Ecolab, Inc. 22.0 3,687
Allergan, Inc. 24.8 3,816
Hasbro, Inc. 13.7 3,888
Galileo International, Inc. 18.2 3,960
Leggett & Platt, Inc. 14.5 4,082
Century Telephone Enterprises 20.5 4,338
Equifax, Inc. 20.5 5,281
MBIA, Inc. 10.6 5,329
Tribune Company 18.0 6,135
Franklin Resources, Inc. 15.3 7,561
Northern Trust Corp. 19.5 7,597
Omnicom Group, Inc. 23.7 7,637
MBNA Corp. 16.6 14,344
Pitney Bowes, Inc. 22.8 14,425
Carnival Corp. 19.5 18,937
</TABLE>
Note: All earnings per share numbers are fully diluted. Such numbers are
from continuing operations and are adjusted for non-recurring items.
The Rouse Company numbers are before depreciation and deferred taxes.
17
<PAGE>
DEAR FELLOW SHAREHOLDER: For the quarter ending September 30, 1998, the Ariel
Premier Bond Fund Institutional Class returned +3.4%, and the Investor Class
+3.4%, while the Lehman Brothers Aggregate Index gained +4.2% and the Lipper
Corporate A-Rated Bond Index posted a +3.2% return for the same period.
Moreover, the quarter-end marked the three-year anniversary for the
Institutional Class, which was subsequently rewarded with a 4-star rating by
Morningstar, Inc.(1)
Although economic and financial conditions in Asia dominated the headlines prior
to August, the U.S. economy grew at 3.7% over the first half of 1998, well above
trend. In the last two months, however, the de facto default by Russia on its
sovereign obligations resulted in sharp repricing of all types of risk.
Treasuries were the best performing sector over the quarter. Meanwhile,
corporate, mortgage and asset-backed spreads all widened substantially,
underperforming similar duration Treasuries by significant margins. Riskier
fixed income assets--high yield and emerging market debt--had negative total
returns for the quarter.
The Ariel Premier Bond Fund's duration strategy throughout most of 1998 has
reflected our view that the persistent above-trend growth in the economy and the
resulting strain on the labor market would eventually filter through to higher
inflation and higher interest rates. This defensive position was a drag on
performance because of the rate decline associated with the unprecedented flight
to quality over the last quarter.
The global events of the past quarter have caused us to moderate our outlook for
1999. As a reflection of the uncertainty of the current environment, we added
TIPS (Treasury Insured Protection Securities) to insulate the portfolios from a
material decline in real rates.
The other extraordinary opportunity in this market environment is the spreads
available on higher quality, virtually default-free securities. As such, the
Fund's mortgage exposure has been increased. Additionally, we have also expanded
the Fund's exposure to corporate and high-quality asset-backed securities.
This has been a difficult period for most investors, ourselves included. Crisis
periods often distort traditional measures of value and strain decision making
frameworks. However, investors with longer horizons, patience, and fortitude
should ultimately be rewarded.
We are most grateful for your continued confidence and as always, welcome your
thoughts and comments.
Sincerely,
/s/ John W. Rogers, Jr. /s/ Kenneth R. Meyer
- ----------------------- --------------------
John W. Rogers, Jr. Kenneth R. Meyer
President President
Ariel Capital Management, Inc. Lincoln Capital Management Company
(1) MORNINGSTAR PROPRIETARY RATINGS REFLECT HISTORICAL RISK-ADJUSTED
PERFORMANCE AS OF 9/30/98. RATINGS ARE SUBJECT TO CHANGE EVERY MONTH AND
ARE CALCULATED FROM THE FUND'S THREE-YEAR AVERAGE ANNUAL RETURNS IN EXCESS
OF 90-DAY TREASURY BILL RETURNS WITH APPROPRIATE FEE ADJUSTMENTS AND A RISK
FACTOR THAT REFLECTS FUND PERFORMANCE BELOW 90-DAY TREASURY BILL RETURNS.
THE TOP 10% OF FUNDS IN AN INVESTMENT CATEGORY RECEIVE 5 STARS; THE NEXT
22.5% RECEIVE 4 STARS; THE NEXT 35% RECEIVE 3 STARS; THE NEXT 22.5% RECEIVE
2 STARS AND THE BOTTOM 10% RECEIVE 1 STAR.
18
<PAGE>
<TABLE>
<CAPTION>
ARIEL PREMIER BOND FUND AVERAGE ANNUAL TOTAL RETURN AS OF SEPTEMBER 30, 1998*
---------------------------------------------------------------------------
Institutional Class Inception 3Q98 1 Year Life of Fund
October 1, 1995 ---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ARIEL PREMIER BOND FUND, INST. CL. +3.4% +10.2% +7.8%
ARIEL PREMIER BOND FUND, INV. CL. +3.4% + 9.3% +9.1%
Investor Class Inception
February 1, 1997
*Average annual total returns assume reinvestment of dividends and capital
gains.
</TABLE>
[Graph]
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ARIEL PREMIER BOND FUND LEHMAN AGGREGATE BOND
PORTFOLIO COMPOSITION INDEX PORTFOLIO COMPOSITION
--------------------- ---------------------------
<S> <C> <C>
ASSET-BACKED 33.9% 1.0%
MORTGAGE-BACKED 22.9% 30.7%
GOVERNMENT & AGENCY 18.9% 47.6%
CORPORATE 16.2% 20.7%
OTHER ASSETS & CASH 8.1% -
</TABLE>
- -------------------------------------------------------------------------------
Ariel Premier Bond Fund seeks to maximize total return through a combination of
income and capital appreciation by investing in high-quality fixed income
securities. The fund may invest in investment-grade bonds including U.S.
Government (and government agency) securities, corporate bonds, mortgage-related
securities and asset-backed securities. Under normal conditions, at least 80% of
the Fund's assets will be invested in fixed income securities rated A or better
by the recognized rating agencies. Ariel Premier Bond Fund will not invest in
"junk bonds" or other low-rated securities.
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTED IN ARIEL PREMIER BOND FUND,
INV. CL AND COMPARABLE INDICES*
[GRAPH]
<TABLE>
<CAPTION>
ARIEL PREMIER BOND FUND, INV. CL.
<S> <C>
Feb 97 $10,000
Mar 97 $ 9,930
Apr 97 $10,020
May 97 $10,060
Jun 97 $10,265
Jul 97 $10,516
Aug 97 $10,443
Sep 97 $10,573
Oct 97 $10,715
Nov 97 $10,743
Dec 97 $10,786
Mar 98 $10,944
Jun 98 $11,099
Sep 98 $11,560
LEHMAN AGGREGATE
Feb 97 $10,000
Mar 97 $ 9,914
Apr 97 $10,062
May 97 $10,158
Jun 97 $10,279
Jul 97 $10,556
Aug 97 $10,467
Sep 97 $10,622
Oct 97 $10,773
Nov 97 $10,823
Dec 97 $10,932
Mar 98 $11,102
Jun 98 $11,361
Sep 98 $11,842
</TABLE>
COMPARISON OF CHANGES IN VALUE OF $1,000,000 INVESTED IN ARIEL PREMIER BOND
FUND, INSTITUTIONAL CLASS AND COMPARABLE INDICES
[GRAPH]
<TABLE>
<CAPTION>
ARIEL PREMIER BOND FUND, INST. CL.
<S> <C>
Oct 95 $1,000,000
Dec 95 $1,035,122
Mar 96 $1,009,187
Jun 96 $1,018,867
Sep 96 $1,039,607
Dec 96 $1,067,709
Mar 97 $1,063,762
Jun 97 $1,101,562
Sep 97 $1,135,857
Dec 97 $1,165,544
Mar 98 $1,182,644
Jun 98 $1,201,292
Sep 98 $1,251,681
LEHMAN AGGREGATE
Oct 95 $1,000,000
Dec 95 $1,042,614
Mar 96 $1,024,120
Jun 96 $1,029,953
Sep 96 $1,048,996
Dec 96 $1,080,467
Mar 97 $1,074,420
Jun 97 $1,113,997
Sep 97 $1,151,139
Dec 97 $1,184,769
Mar 98 $1,203,205
Jun 98 $1,231,317
Sep 98 $1,283,385
</TABLE>
*Statistics represent past performance which is not indicative of future
results. The Lehman Brothers Aggregate Bond Index is composed of securities from
Lehman Brothers Government/Corporate Bond Index, Mortgage-Backed Securities
Index, and the Asset-Backed Securities Index. Total return comprises price
appreciation/depreciation and income as a percentage of the original investment.
An investor cannot invest directly in an index.
19
<PAGE>
ARIEL PREMIER BOND FUND
SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
Par Value ASSET-BACKED SECURITIES-33.86% Cost Market Value
<S> <C> <C> <C>
$2,630,000 American Express, 971A,
6.40%, 4/15/2005 $2,631,939 $2,745,430
700,000 Americredit Auto Receivables,
6.06%, 12/12/2002 699,889 719,551
1,000,000 Associates Manufactured Housing,
972A-3, 6.275%, 3/15/2028 999,705 1,018,060
1,000,000 Auto Leasing Investors,
6.177%, 8/12/2005+ 1,000,000 1,039,060
650,000 BEA, 98-A2-A, zero coupon,
2/15/2006+ 626,807 680,368
520,000 Caterpillar Financial, G8AA,
5.85%, 4/25/2003 519,657 529,973
1,000,000 Chase Credit Card, 96C 3A,
7.04%, 2/15/2005 1,029,845 1,052,890
70,000 Circuit City Credit Card,
1995-1A, 6.375%, 8/15/2005 69,254 71,831
1,200,000 Citibank Credit Card,
zero coupon, 8/15/2006 829,002 888,504
2,000,000 Contimortgage Home Equity 97-A5,
6.44%, 12/15/2012 2,018,584 2,070,000
400,000 CSFB 97-C1 A1C, 7.24%, 4/20/2007 414,813 431,640
2,000,000 EQCC Home Equity, 973-A9,
6.57%, 2/15/2029 1,983,901 2,140,060
2,900,000 Fannie Mae,
6.45%, 8/17/2013 2,935,801 3,039,896
1,092,000 Fingerhut, 96-1A, 6.45%, 2/20/2002 1,097,591 1,098,879
1,800,000 First Omni, 96-AA, 6.65%, 9/15/2003 1,825,216 1,845,000
1,673,499 Fleetwood, 97BA, 6.40%, 5/15/2013 1,671,240 1,711,588
550,000 General Growth Properties, 976C1 A2,
6.602%, 11/15/2007+ 550,000 574,750
500,000 Green Tree Financial, 98-A4,
6.09%, 7/1/2010 499,944 516,960
60,000 Green Tree Financial, 1995-1 A5,
8.40%, 6/15/2025 65,820 62,123
1,065,000 GS Mortgage Securities Corp.,
6.86%, 7/13/2030 1,098,754 1,124,246
897,182 IMC Excess Cash,
7.41%, 11/26/2028+ 897,149 899,560
1,450,000 J.C. Penney Master Credit Card Trust,
1990-C1, 9.625%, 6/30/2000 1,523,442 1,590,447
2,500,000 MBNA Master Credit Card, 95DA,
6.05%, 11/15/2002 2,491,628 2,561,350
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
Par Value ASSET-BACKED SECURITIES-33.86% (con't) Cost Market Value
<S> <C> <C> <C>
$380,000 MBNA Master Credit Card II, 971A,
6.55%, 1/15/2007 $383,073 $405,315
990,000 MBNA Master Credit Card I, 971A,
6.45%, 2/15/2008 1,043,632 1,064,428
975,878 Merrill Lynch Mortgage Investors, Inc.,
1995-C2-A1, Floating Rate 7.374%
as of 9/30/1998, 6/15/2021 988,930 1,013,020
283,913 The Money Store, 1996-1 A3,
6.85%, 12/20/2002 283,882 286,417
354,029 The Money Store, 1997-A A3,
6.675%, 4/15/2012 353,926 356,709
300,000 The Money Store, 1996-B A6,
7.38%, 5/15/2017 299,955 310,668
1,000,000 The Money Store, 1996-B A9,
8.14%, 10/15/2027 1,061,368 1,090,290
104,323 Olympic Auto Receivables,
1995-EA4, 5.85%, 3/15/2001 103,652 104,689
650,000 Premier Auto Trust, 98 3A3,
5.88%, 12/8/2001 649,907 663,364
1,440,000 Prime, 95-1A, 6.75%, 11/15/2005 1,445,926 1,527,494
194,444 Private Label Credit Card,
1994-2A, 7.80%, 9/20/2003 197,791 198,010
1,718,350 Railcar Leasing, 6.75%, 7/15/2006+ 1,717,742 1,804,268
1,400,847 Railcar Trust, 1992-1A,
7.75%, 6/1/2004 1,452,981 1,510,183
99,408 Salomon Brothers, 96LB2A3,
6.875%, 10/25/2026 99,402 99,511
940,000 Salomon Brothers Mortgage Sec.,
97 6A3, 6.76%, 12/25/2027 938,836 965,070
440,000 Sears Credit Account, 96-2A,
6.50%, 10/15/2003 438,168 443,696
420,000 Standard Credit Card Master -
Citibank, 94-4A, 8.25%, 11/7/2003 441,707 456,792
2,300,000 Standard Credit Card Master -
Citibank, 951A, 8.25%, 1/7/2007 2,488,043 2,692,679
1,400,000 Team Fleet Financial Co.,
97-1A, 7.35%, 5/15/2003+ 1,399,231 1,470,000
300,000 UCFC, 96 CA 3, 7.15%, 12/15/2013 299,956 309,918
1,560,000 Union Acceptance Corp., 97AA2,
6.375%, 10/8/2003 1,571,594 1,590,045
1,880,000 World Financial, 96-AA,
6.70%, 2/15/2004 1,888,280 1,960,445
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
Par Value ASSET-BACKED SECURITIES-33.86% (con't) Cost Market Value
<S> <C> <C> <C>
$397,273 World Omni Auto Lease,
1996-BA3, 6.25%, 11/15/2002 $396,781 $400,893
2,200,000 World Omni Auto Lease,
97B3, 6.18%, 11/25/2003 2,199,794 2,242,482
--------- ---------
Total Asset-Backed Securities 49,624,538 51,378,552
---------- ----------
CORPORATE DEBT-16.16%
500,000 Abbey National PLC,
6.70%, 6/29/2049 499,160 502,500
445,000 American General Inst.,
7.57%, 12/1/2045+ 465,135 469,475
550,000 American Stores, 8.00%, 6/1/2026 605,505 646,938
570,000 Archer Daniels II, 6.95%, 12/15/2097 567,635 607,050
275,000 Bank of America Capital II,
8.00%, 12/15/2026 271,274 296,656
185,000 Bayer Corporation, 6.65%, 2/15/2028+ 184,028 189,394
750,000 Bell Atlantic-Pennsylvania,
8.75%, 8/15/2031 961,164 1,013,438
550,000 Best Foods,
5.60%, 10/15/2097 424,420 475,750
500,000 Boston Scientific, 6.625%, 3/15/2005 499,761 507,500
1,575,000 Consumers Energy CMS,
6.20%, 5/1/2008+ 1,556,470 1,638,000
1,340,000 Federated Department Stores,
7.00%, 2/15/2028 1,320,501 1,376,850
515,000 FedEx, 7.60%, 7/1/2097 540,543 547,831
725,000 Ford Motor Co.,
7.50%, 8/1/2026 780,888 814,719
375,000 Ford Motor Co.,
7.40%, 11/1/2046 408,132 420,000
275,000 J.C. Penney Co., 7.625%, 3/1/2097 269,473 294,250
95,000 JP Morgan Capital Trust I,
7.54%, 1/15/2027 95,000 97,969
710,000 Lincoln National Corp.,
7.00%, 3/15/2018 708,373 739,288
800,000 Lowe's Companies, Inc.,
6.875%, 2/15/2028 798,745 839,000
1,275,000 MCI Worldcom, Inc.,
7.75%, 4/1/2027 1,373,448 1,502,906
610,000 Mirage Resorts, 7.25%, 8/1/2017 606,809 597,038
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
Par Value CORPORATE DEBT-16.16% (con't) Cost Market Value
<S> <C> <C> <C>
$300,000 News America Holdings,
7.25%, 5/18/2018+ $297,983 $313,500
650,000 Peco Energy Co., 7.38%, 4/6/2028 650,000 678,438
1,400,000 Philip Morris, 7.125%, 8/15/2002 1,392,025 1,491,000
775,000 Provident Companies,
6.37%, 7/15/2005 772,346 806,969
1,220,000 Provident Companies,
7.00%, 7/15/2018 1,219,612 1,236,775
1,190,000 PSI Energy, 7.250%, 3/15/2028 1,186,173 1,230,163
880,000 Rite Aid Corporation,
6.00%, 10/1/2003+ 877,387 888,800
1,000,000 Safeco Capital Trust,
8.072%, 7/15/2037 1,000,000 1,095,000
805,000 Suntrust Cap II,
7.90%, 6/15/2027 809,662 880,469
1,000,000 Travelers Capital II,
7.75%, 12/1/2036 1,035,798 1,053,750
335,000 Tyco International Group,
6.25%, 6/15/2003 333,423 345,888
595,000 Tyco International Group,
7.00%, 6/15/2028 590,723 619,544
280,000 Zurich Capital Trust,
8.376%, 6/1/2037+ 294,937 315,000
-------- --------
Total Corporate Debt 23,396,533 24,531,848
---------- ----------
U.S. GOVERNMENT AGENCIES-24.53%
MORTGAGE-BACKED SECURITIES--22.88%
1,379,842 Freddie Mac, 6.50%, 11/1/2025 1,303,670 1,414,766
3,528,010 Freddie Mac, 6.50%, 2/1/2026 3,415,716 3,605,167
4,900,877 Freddie Mac, Gold, 6.50%, 3/1/2026 4,638,725 5,006,540
406,347 Freddie Mac, Gold, 6.50%, 4/1/2026 375,222 414,989
709,240 Freddie Mac, Gold, 6.50%, 5/1/2026 654,906 724,311
36,277 Fannie Mae, 7.00%, 10/1/2023 35,668 37,444
1,628,005 Fannie Mae, 6.50%, 4/1/2024 1,553,670 1,661,574
376,129 Fannie Mae, 7.00%, 5/1/2024 369,805 387,883
423,173 Fannie Mae, 6.50%, 11/1/2025 389,103 431,636
1,438,785 Fannie Mae, 6.50%, 1/1/2026 1,395,443 1,467,100
5,574,293 Fannie Mae, 6.50%, 5/1/2026 5,258,621 5,683,995
13,900,000 Fannie Mae, 6.00%, 11/1/2028(v) 13,752,313 13,882,625
---------- ----------
33,142,862 34,718,030
---------- ----------
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
Par Value U.S. GOVERNMENT AGENCIES-24.53% (cont) Cost Market Value
<S> <C> <C> <C>
OTHER AGENCY ISSUES--1.65%
$250,000 Government Trust Certificate,
Aid Israel, 5.70%, 2/15/2003 $249,410 $259,513
1,350,680 Government Trust Certificate, Israel
Trust, Series 2E, 9.40%, 5/15/2002 1,422,274 1,418,214
804,490 Pemex Exp. Trust, 7.66%, 8/15/2001 822,071 835,704
------- -------
2,493,755 2,513,431
--------- ---------
Total U.S. Government Agencies 35,636,617 37,231,461
---------- ----------
U.S. GOVERNMENT OBLIGATIONS-17.23%
560,000 U.S. Treasury Bond,
13.875%, 5/15/2011 836,865 889,381
770,000 U.S. Treasury Bond,
6.125%, 11/15/2027 869,358 887,218
8,825,000 U.S. Treasury Note,
7.50%, 10/31/1999 8,942,583 9,090,544
2,000,000 U.S. Treasury Note,
6.25%, 6/30/2002 2,041,625 2,126,360
13,116,668 U.S. Treasury Note,
3.625%, 1/15/2008 12,987,956 13,153,395
---------- ----------
Total U.S. Government
Obligations 25,678,387 26,146,898
---------- ----------
COMMERCIAL PAPER-12.10%
3,000,000 BellSouth Telecommunications,
5.48%, 10/21/1998* 2,990,867 2,990,867
3,000,000 Falcon Asset Securities Corp.,
5.53%, 10/9/1998* 2,996,313 2,996,313
3,000,000 Ford Motor Credit Co.,
5.51%, 10/14/1998* 2,994,031 2,994,031
3,000,000 International Lease Finance,
5.48%, 10/14/1998* 2,994,063 2,994,063
3,000,000 Metlife Funding,
5.50%, 10/20/1998* 2,991,292 2,991,292
3,400,000 Norwest Corporation,
5.51%, 10/9/1998* 3,395,837 3,395,837
--------- ---------
Total Commercial Paper 18,362,403 18,362,403
---------- ----------
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
Principal REPURCHASE AGREEMENT-4.88% Cost Market Value
Amount
<S> <C> <C> <C>
$7,398,406 State Street Bank & Trust
Company Repurchase
Agreement, 4.50%, dated
9/30/1998, repurchase price
$7,399,331, maturing
10/1/1998 (collateralized by
U.S. Treasury Bond, 8.75%,
5/15/2017) $7,398,406 $7,398,406
---------- ----------
Total Repurchase Agreement 7,398,406 7,398,406
--------- ---------
Total Investments-108.76% $160,096,884 165,049,568
------------
------------
Liabilities less
Other Assets-(8.76)% (13,293,635)
-----------
NET ASSETS-100.00% $151,755,933
------------
------------
</TABLE>
+Security exempt from registration under Rule 144A of the Securities Act of
1933. These securities may be resold in transactions exempt from registration
normally to qualified institutional buyers.
(v)When-issued security.
*Security pledged as collateral for when-issued purchase commitment outstanding
as of September 30, 1998.
The accompanying notes are an integral part of the financial statements.
25
<PAGE>
Statement of Assets & Liabilities
SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
GROWTH APPRECIATION PREMIER
FUND FUND BOND FUND
---- ---- ---------
<S> <C> <C> <C>
ASSETS:
Investments in securities, at value
(cost $115,937,670, $156,403,276
and $160,096,884, respectively) $163,519,418 $217,102,261 $165,049,568
Dividends and interest receivable 266,604 270,806 1,301,398
Receivable for fund shares issued 95,069 51,639 12,500
Prepaid and other assets 18,347 26,483 --
------ ------ -----
Total assets 163,899,438 217,451,189 166,363,466
----------- ----------- -----------
LIABILITIES:
Payable for securities purchased 1,372,994 3,333,097 13,752,312
Accrued management fee 84,391 128,074 56,341
Accrued distribution fee 30,718 40,013 343
Payable for shares redeemed 22,770 21,259 --
Payable to bank -- -- 87,250
Shareholder distributions payable -- -- 711,287
Other liabilities 109,857 116,343 --
------- ------- -----
Total liabilities 1,620,730 3,638,786 14,607,533
--------- --------- ----------
NET ASSETS $162,278,708 $213,812,403 $151,755,933
------------ ------------ ------------
------------ ------------ ------------
NET ASSETS CONSIST OF:
Paid-in-capital $97,368,256 $127,648,590 $145,207,323
Undistributed net investment income 254,687 262,188 --
Accumulated net realized gain
on investment transactions 17,074,017 25,202,640 1,595,926
Net unrealized appreciation
on investments 47,581,748 60,698,985 4,952,684
---------- ---------- ---------
Total net assets $162,278,708 $213,812,403 $151,755,933
------------ ------------ ------------
------------ ------------ ------------
Shares outstanding (no par value) 4,446,857 6,722,858
Institutional Class 14,103,227
Investor Class 167,402
Net asset value, offering and redemption
price per share $36.49 $31.80
Institutional Class $10.63
Investor Class $10.63
</TABLE>
Statement of Operations
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30, 1998
GROWTH APPRECIATION PREMIER
FUND FUND BOND FUND
---- ---- ---------
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividends $2,285,967 $2,883,413 $ --
Interest 403,538 425,555 8,137,888
------- ------- ---------
Total investment income 2,689,505 3,308,968 8,137,888
--------- --------- ---------
EXPENSES:
Management fee 1,159,454 1,637,377 581,261
Distribution fee 445,944 545,792 2,162
Transfer agent fees and expenses 328,647 344,853 --
Printing and postage expense 77,141 74,315 --
Professional fees 35,214 36,844 --
Trustees' fees and expenses 31,962 32,036 --
Federal and state registration fees 29,904 35,852 --
Custody fees and expenses 22,601 24,327 --
Miscellaneous expenses 22,140 24,774 --
------ ------ -------
Net expenses 2,153,007 2,756,170 583,423
--------- --------- -------
NET INVESTMENT INCOME 536,498 552,798 7,554,465
------- ------- ---------
REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain on investments 17,160,907 25,325,874 1,888,489
Change in net unrealized appreciation
on investments (23,286,493) (19,712,453) 3,368,397
----------- ----------- ---------
Net gain (loss) on investments (6,125,586) 5,613,421 5,256,886
---------- --------- ---------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $(5,589,088) $6,166,219 $12,811,351
----------- ---------- -----------
----------- ---------- -----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
26
<PAGE>
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
GROWTH FUND APPRECIATION FUND PREMIER BOND FUND
----------- ----------------- -----------------
Year Ended September 30, Year Ended September 30, Year Ended September 30,
1998 1997 1998 1997 1998 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS:
Net investment income $536,498 $296,358 $552,798 $110,408 $7,554,465 $4,175,305
Net realized gain on investments 17,160,907 14,275,367 25,325,874 18,598,505 1,888,489 570,915
Change in net unrealized
appreciation on investments (23,286,493) 33,739,637 (19,712,453) 37,099,202 3,368,397 1,572,509
---------- ---------- ----------- ---------- --------- ---------
Net increase (decrease) in net assets
resulting from operations (5,589,088) 48,311,362 6,166,219 55,808,115 12,811,351 6,318,729
---------- ---------- --------- ---------- ---------- ---------
DISTRIBUTIONS TO SHAREHOLDERS:
Net investment income (580,333) -- (393,585) (397,468) (7,558,515) (4,175,319)
Capital gains (14,358,164) (6,352,876) (17,505,645) (7,316,330) (832,076) (93,776)
----------- ---------- ----------- ---------- -------- -------
(14,938,497) (6,352,876) (17,899,230) (7,713,798) (8,390,591) (4,269,095)
----------- ---------- ----------- ---------- ---------- ----------
SHARE TRANSACTIONS:
Shares sold 333,537,306 304,618,745 167,531,444 41,438,186 44,225,254 94,148,238
Shares issued to holders in
reinvestment of dividends 13,762,375 5,898,783 16,077,043 7,002,337 7,716,011 4,444,086
Shares redeemed (328,558,849) (298,180,590) (144,541,179) (45,683,940) (19,005,303) (1,609,367)
------------ ------------ ------------ ----------- ----------- ----------
Net increase 18,740,832 12,336,938 39,067,308 2,756,583 32,935,962 96,982,957
---------- ---------- ---------- --------- ---------- ----------
TOTAL INCREASE (DECREASE) IN NET ASSETS (1,786,753) 54,295,424 27,334,297 50,850,900 37,356,722 99,032,591
NET ASSETS:
Beginning of year 164,065,461 109,770,037 186,478,106 135,627,206 114,399,211 15,366,620
----------- ----------- ----------- ----------- ----------- ----------
End of year (includes
undistributed net investment
income of $254,687, $296,358, $262,188,
$95,385, $0 and $4,050, respectively) $162,278,708 $164,065,461 $213,812,403 $186,478,106 $151,755,933 $114,399,211
------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
27
<PAGE>
Financial Highlights
<TABLE>
<CAPTION>
GROWTH FUND
-----------
Year Ended September 30,
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $41.49 $30.58 $30.78 $28.84 $30.46
Income from investment operations:
Net investment income 0.13 0.07 0.18 0.36 0.18
Net realized and unrealized gains
(losses) on investments (1.41) 12.62 4.24 3.51 0.23
----- ----- ---- ---- ----
Total from investment operations (1.28) 12.69 4.42 3.87 0.41
Distributions to shareholders:
Dividends from net investment
income (0.14) -- (0.44) (0.23) (0.30)
Distributions from capital gains (3.58) (1.78) (4.18) (1.70) (1.73)
----- ----- ----- ----- -----
Total distributions (3.72) (1.78) (4.62) (1.93) (2.03)
----- ----- ----- ----- -----
Net asset value, end of year $36.49 $41.49 $30.58 $30.78 $28.84
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Total return (3.83)% 43.25% 16.28% 14.38% 1.41%
Supplemental data and ratios:
Net assets, end of year, in
thousands $162,279 $164,065 $109,770 $120,953 $149,511
Ratio of expenses to average
net assets 1.21% 1.25% 1.31% 1.37%(a) 1.25%
Ratio of net investment income
to average net assets 0.30% 0.23% 0.57% 1.18%(a) 0.56%
Portfolio turnover rate 22% 20% 17% 16% 9%
<CAPTION>
APPRECIATION FUND
-----------------
Year Ended September 30,
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $33.70 $24.99 $22.76 $21.82 $21.67
Income from investment operations:
Net investment income 0.09 0.02 0.13 0.14 0.04
Net realized and unrealized gains
(losses) on investments 1.14 10.13 4.07 2.26 0.51
----- ----- ----- ----- -----
Total from investment operations 1.23 10.15 4.20 2.40 0.55
Distributions to shareholders:
Dividends from net investment
income (0.07) (0.07) (0.20) (0.06) (0.05)
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)
----- ----- ----- ----- -----
Net asset value, end of year $31.80 $33.70 $24.99 $22.76 $21.82
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Total return 3.40% 42.33% 19.60% 12.11% 2.56%
Supplemental data and ratios:
Net assets, end of year, in
thousands $213,812 $186,478 $135,627 $143,312 $162,280
Ratio of expenses to average
net assets 1.26% 1.33% 1.36%(a) 1.36%(a) 1.35%(a)
Ratio of net investment income
to average net assets 0.25% 0.07% 0.50%(a) 0.61%(a) 0.17%(a)
Portfolio turnover rate 20% 19% 26% 18% 12%
</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.
The accompanying notes are an integral part of the financial statements.
28
<PAGE>
Financial Highlights (cont)
<TABLE>
<CAPTION>
PREMIER BOND FUND
-----------------
INSTITUTIONAL CLASS INVESTOR CLASS
Year ended February 1, 1997(a)
Year Ended September 30, September 30, to
1998 1997 1996 1998 September 30, 1997
---- ---- ---- ---- ------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $10.30 $9.95 $10.00 $10.29 $10.10
Income from investment operations:
Net investment income 0.61 0.52 0.43 0.57 0.37
Net realized and unrealized gains
(losses) on investments 0.40 0.37 (0.04) 0.41 0.19
---- ---- ----- ---- ----
Total from investment operations 1.01 0.89 0.39 0.98 0.56
Distributions to shareholders:
Dividends from net investment
income (0.61) (0.52) (0.43) (0.57) (0.37)
Distributions from capital gains (0.07) (0.02) (0.01) (0.07) --
----- ----- ----- ----- -----
Total distributions (0.68) (0.54) (0.44) (0.64) (0.37)
----- ----- ----- ----- -----
Net asset value, end of year $10.63 $10.30 $9.95 $10.63 $10.29
------ ------ ----- ------ ------
------ ------ ----- ------ ------
Total return 10.20% 9.26% 3.96% 9.34% 5.73%(b)
Supplemental data and ratios:
Net assets, end of year, in
thousands $149,977 $113,998 $15,367 $1,779 $401
Ratio of expenses to average
net assets 0.45% 0.45% 0.48% 0.85% 0.85%(c)
Ratio of net investment income
to average net assets 5.86% 6.05% 5.85% 5.46% 5.60%(c)
Portfolio turnover rate 60% 218% 423% 60% 218%
</TABLE>
(a) Commencement of operations.
(b) Total return is not annualized.
(c) Annualized.
The accompanying notes are an integral part of the financial statements.
29
<PAGE>
NOTES TO THE FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
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 require management to make certain estimates and
assumptions at the date of the financial statements. Actual results may differ
from such estimates.
INVESTMENT VALUATION - Securities for which market quotations are readily
available are valued at the most recent closing price. If a closing price is not
reported, equity securities for which reliable bid quotations are available are
valued at the mean between bid and asked prices, and debt securities having a
maturity over 60 days are valued at the yield equivalent as obtained from one or
more market makers for such securities. Short-term securities having a maturity
of 60 days or less are valued at amortized cost which approximates market.
Securities and assets for which market quotations are not readily available are
valued at fair value as determined in good faith by or under the direction of
the Board of Trustees. The Funds may enter into repurchase agreements with
recognized financial institutions and in all instances hold underlying
securities with a value at least equal to the total repurchase price such
financial institutions have agreed to pay.
FEDERAL INCOME TAXES - No provision for federal income taxes has been made since
the Funds have complied to date with the provisions under Subchapter M of the
Internal Revenue Code available to regulated investment companies.
SECURITIES TRANSACTIONS AND INVESTMENT INCOME - Securities transactions are
accounted for on a trade date basis. Realized gains and losses from securities
transactions are recorded on the identified cost basis. Dividend income is
recorded on the ex-dividend date and interest income is recognized on an accrual
basis.
EXPENSES - The Funds are charged for those expenses that are directly
attributable to each portfolio. Expenses directly attributable to a class of
shares, such as Rule 12b-1 distribution fees, are charged to that class.
Expenses that are not directly attributable to a portfolio are typically
allocated among each portfolio in proportion to their respective net assets.
DISTRIBUTIONS TO SHAREHOLDERS - Dividends from net investment income are
declared and paid at least annually for the 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
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NOTES TO FINANCIAL STATEMENTS (cont)
SEPTEMBER 30, 1998
3. CAPITAL SHARE TRANSACTIONS
Transactions in shares of capital stock were as follows:
<TABLE>
<CAPTION>
Year Ended September 30, 1998
Growth Fund Appreciation Fund Premier Bond Fund
----------- ----------------- ------------------
Institutional Investor
------------- --------
<S> <C> <C> <C> <C>
Shares sold 8,005,752 4,885,967 4,089,595 157,274
Shares issued to holders in
reinvestment of dividends 345,863 491,344 739,559 4,110
Shares redeemed (7,859,564) (4,187,549) (1,793,634) (32,982)
---------- ---------- ---------- -------
Net increase 492,051 1,189,762 3,035,520 128,402
------- --------- --------- -------
------- --------- --------- -------
<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 year ended September 30, 1998 are summarized
below:
<TABLE>
<CAPTION>
Growth Fund Appreciation Fund Premier Bond Fund
----------- ----------------- -----------------
<S> <C> <C> <C>
Purchases $53,475,418 $68,704,368 $109,088,098
Sales 36,977,326 40,582,703 62,876,478
</TABLE>
Purchases and sales of U.S. government securities for the Premier Bond Fund for
the year ended September 30, 1998 were $34,193,326 and $41,349,501,
respectively.
At September 30, 1998 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 $57,368,101 $72,572,331 $4,970,269
Unrealized (depreciation) (9,786,353) (11,873,346) (17,585)
---------- ----------- -------
Net appreciation $47,581,748 $60,698,985 $4,952,684
----------- ----------- ----------
----------- ----------- ----------
</TABLE>
The book and federal income tax basis of securities is the same for the Growth
Fund, Appreciation Fund and Premier Bond Fund. It is management's intention to
distribute future net realized capital gains to the extent that such gains
exceed any available federal income tax capital loss carryforwards. For the
year ended September 30, 1998, 100% of dividends paid from net investment income
of the Growth Fund and Appreciation Fund qualifies for the dividend received
deduction available to corporate shareholders.
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)
SEPTEMBER 30, 1998
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 0.30% annually of each Fund's average
daily net asset value. Such expenses are currently limited by the Board of
Trustees to an annual rate of 0.25% of each classes' average daily net assets.
Payments have been made to Ariel Distributors, Inc., an affiliate of the
Adviser.
REPORT OF INDEPENDENT AUDITORS
TO THE BOARD OF TRUSTEES AND SHAREHOLDERS OF ARIEL MUTUAL FUNDS:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Ariel Growth Fund, Ariel Appreciation Fund, and
Ariel Premier Bond Fund, comprising Ariel Investment Trust ("Ariel Mutual
Funds"), as of September 30, 1998, the related statements of operations and
changes in net assets and the financial highlights for the fiscal periods
indicated therein. These financial statements and financial highlights are the
responsibility of the Ariel Mutual Funds' management. Our responsibility is to
express an opinion on these financial statements and financial highlights based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
September 30, 1998, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of each
of the Funds of the Ariel Mutual Funds at September 30, 1998, and the results of
their operations, the changes in their net assets and the financial highlights
for each of the fiscal periods indicated therein, in conformity with generally
accepted accounting principles.
Ernst & Young LLP
Chicago, Illinois
October 16, 1998
32
<PAGE>
BOARD OF TRUSTEES
BERT N. MITCHELL, C.P.A. Bert is founder, chairman and CEO of Mitchell &
Titus, LLP, the nation's largest minority-owned accounting firm. He holds
B.B.A., M.B.A. and Honorary Doctorate degrees from the Baruch School of
Business of the City University of New York, where he has also been a
member of the accounting faculty. Bert is also a graduate of the
Owner-President Management Program of the Harvard Business School. Bert is
active in community affairs, philanthropy and politics.
MARIO L. BAEZA Chairman and CEO of Latin America Equity Partners, L.P.,
Mario is widely regarded as a preeminent expert in business and legal
issues in Latin America. He received a B.A. from Cornell University and a
J.D. from Harvard Law School, where he later taught.
JAMES W. COMPTON Jim serves as the President and CEO of the Chicago Urban
League, which has worked to eliminate racial discrimination and segregation
since 1916. He has a B.A. degree from Morehouse College. Jim serves on the
board of directors of Commonwealth Edison Company and Unicom Corp.
WILLIAM C. DIETRICH, C.P.A. Bill is an independent financial consultant,
specializing in early stage entrepreneurial companies. He has a B.A. from
Georgetown University. Bill serves on the board and program staff of the
Shalem Institute, an internationally known ecumenical organization.
ROYCE N. FLIPPIN, JR. Director of program advancement for the Massachusetts
Institute of Technology, Royce is also president of Flippin Associates, a
broad-based consulting firm providing strategic and implementation services
in the management of critical needs for the public and private sectors. He
earned his 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.
2
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ARIEL MUTUAL FUNDS
Ariel Investment Trust ---------------
307 North Michigan Avenue BULK MAIL
Suite 500 U.S. POSTAGE
Chicago, Illinois 60601 PAID
PERMIT NO. 4113
CHICAGO, IL
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