<PAGE>
[LOGO]
[GRAPHIC] THE PATIENT INVESTOR
Ariel Appreciation Fund
Ariel Growth Fund
Ariel Premier Bond Fund
Quarterly Report--December 31, 1997
<PAGE>
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...
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Ariel Investment Trust
307 North Michigan Avnue
Suite 500
Chicago, Illinois 60601
800.292.7435
312.726.0140
Fax 312.726.7473
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.
TABLE OF CONTENTS
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
Board of Trustees 26
<PAGE>
SLOW AND STEADY WINS THE RACE.-AESOP
THE PATIENT INVEST [GRAPHIC] R-Registered Trademark-
DEAR FELLOW SHAREHOLDER: For the quarter ending December 31, 1997, we are
pleased to report the Ariel Growth Fund returned +5.1% and the Ariel
Appreciation Fund +6.7%. These results reflect consistent performance throughout
the portfolios with significant contributions from banking leader, Northern
Trust Corporation; toy manufacturer, Hasbro, Inc.; and automotive fluid
recycler, Safety-Kleen, Inc. Although the large company stocks of the Standard &
Poor's 500 Index earned +2.9% during this same three month period, the small and
medium company stocks of the Russell 2500 Index fell -2.3% and according to THE
WALL STREET JOURNAL, "the average U.S. stock fund declined -1.5%." Despite
significant volatility, large cap stocks somehow managed to weather the storm.
However, a downward spiral in the prices of the riskiest and most expensive
securities whipsawed smaller issues and penalized equity funds chock full of
popular stocks. The extent of the damage is evidenced by the -11.4% return of
the average science and technology fund during the quarter.
A ZOO IN REVIEW
In hindsight, 1997 was a year of controversy and intrigue. A sheepish Dolly
became living proof of an unprecedented form of reproduction; mad cows angered
Europeans; and we discovered chickens now had "smart" viruses. For the political
animals, an "off" year could not quell a national outcry for campaign finance
reform. Media hounds became known as paparazzi and so the world mourned a
princess. And when
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there was nothing else to discuss, there was always the weather. Somehow the
Spanish word for boy, El Nino, shouldered the blame for even the slightest of
atmospheric oddities. Maybe he's the reason the Asian Tiger got a flu that left
a third of the world's economy on its sickbed with $1 trillion in its stock
market value wiped out, its currencies de-valued and its only possible cure, a
"bailout." As we read in the NEW YORK TIMES, "If you put a dollar into the
Singapore stock market just over six months ago, you now have less than 50
cents. If you put it instead into Malaysia, you've got a quarter." Perhaps Yoggi
Berra was visiting the Far East when he said, "A nickel ain't worth a dime
anymore."
Even with a strong economy, record corporate earnings, the lowest unemployment
rate in 25 years and anemic inflation, by the fourth quarter, U.S. investors
became concerned Asia's flu might be catchy and our aging bull might be
displaying some of its symptoms. Some fears were realized in October when the
longest uninterrupted bull run in stock market history finally paused after
commemorating its seventh birthday. As a result, the 10 year anniversary of the
Crash of 1987 was upstaged by a record one-day drop in the Dow Jones Industrial
Average -- a 554 point decline on October 27.
Despite the circus environment, the S&P 500 managed to close out 1997 with an
astonishing +33.4% rise, while the Russell 2500 posted a substantial, albeit
less spectacular, +24.4% return. As a result of our low risk approach, the
undervalued, franchise businesses of the Ariel Growth and Ariel Appreciation
Fund portfolios withstood the stock market's mood swings and outpaced both large
and smaller company benchmarks with hearty gains of +36.4% and +37.9%
respectively. These results are particularly noteworthy in a year when Lipper
Analytical Services' small company fund index returned only +15.1% and its
mid-cap fund index, +17.6%. Not to mention, only 10.3% of U.S. stock funds beat
the S&P 500.
3
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WHAT ARE THE ODDS?
The S&P 500's third consecutive year of 20+% gains is an anomaly. The facts
prove it. Looking back to 1926, this is the first time in history such
exceptional market strength has persisted over a 36 month period. While this
knowledge leads us to view the market with a heightened sense of caution, the
following chart from the November 10, 1997 issue of NEWSWEEK demonstrates that
you do not have to take a great deal of risk to be a very successful stock
market investor over time.
<TABLE>
<CAPTION>
ODDS OF ANNUALIZED RETURN PER YEAR*
HOLDING PERIOD ODDS OF LOSING $ 0-10% 0-20% 20+%
- -------------- ---------------- ----- ----- ----
<S> <C> <C> <C> <C>
1 year 26% 18% 20% 37%
3 years 14 28 39 19
5 years 10 31 49 10
10 years 4 42 53 1
20 years 0 37 63 0
</TABLE>
*Standard & Poor's 500-stock average, annualized monthly returns since 1926.
All dividends reinvested. Source: Ibbottson Associates. Re-printed from
NEWSWEEK. Past performance is not indicative of future results.
As the chart shows, an individual's chances of making or losing money by
investing in S&P 500 stocks is determined by the holding period. Accordingly,
the patient investor has ultimately been rewarded as evidenced by the fact that
since 1926, a 20 year holding period has offered the greatest probability of a
0-20% annualized return with no chance of losing money. Conversely, a shorter
time frame may have had the highest probability of a 20+% return, but also
carried a significant risk (26%) of lost principal.
For those who seek forecasts, this information helps shed light on the
likelihood of continued double-digit stock market returns through the end of the
decade. In just three years, the +31.2% annualized return of the S&P 500 has
more than doubled an investor's money. As the chart shows, there is less than a
one-in-five chance of such an occurrence. Moreover, the S&P 500's +20.3%
annualized return over the past five years has only a one-in-ten likelihood.
Thus, the odds now suggest a mere one-percent chance 20+% returns can be
perpetuated for another five years.
4
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This reality check does not lead us to advocate divestiture from the stock
market. Instead, we emphasize patience when confronted with the inevitable tough
periods. Similarly, we continue to underscore that an investor's return
expectations should not be skewed by recent events but should instead reflect
historical norms. With this said, given recent events, we believe large-cap
stocks are more vulnerable to a near-term correction. Conversely, we expect
small and medium-sized companies to rebound after an arduous period.
As always, we appreciate the opportunity to serve you and welcome any questions
or comments you might 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
5
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COMPANY IN FOCUS
LIBBEY
300 MADISON AVENUE
TOLEDO, OHIO 43604
(419) 325-2100
LIBBEY, INC. (NYSE: LBY) is the leading producer of glass tableware in North
America and exports to over 100 countries. It manufactures over 2,000 products
which are sold to foodservice (hotels, restaurants, bars, schools, hospitals),
retail, industrial, and premium customers. Over the past three years,
acquisitions have broadened the company's product line to include ceramic
dinnerware (plates, cups, saucers, etc.), glass cookware, and metal flatware
(silverware). In broadening its product line, Libbey is successfully increasing
its relative importance to its customers. This strategy is particularly
attractive today where many companies are looking to do more business with fewer
suppliers.
Foodservice customers account for about 50% of revenues and 60-70% of profits.
This is a great business. It enjoys high recurring revenues as 90% of sales are
to replace items that have been broken, providing an annuity-like stream of
orders. Libbey has huge competitive advantages. It is the dominant player with
64% and 70% market shares in the U.S. and Canada, respectively, and a
significant interest (49%) in Vitorcrisa, the leading Mexican glass tableware
company (which enjoys a 72% share in its market). The top priority among its
customers is style consistency. Since Libbey's products are already on the
shelves, it gets the replacement business. Product availability and delivery
time are the driving factors. Price is not a major determinant of who gets the
business. A beer glass that cost $1.00 and lasts 100 uses serves $300 worth of
beer at $3.00/beer. The glass accounts for only 1/3 of 1% of the revenues that
it generates! Prices have been increased annually for the past two decades. Our
independent checks with major foodservice companies and retailers confirmed the
attractiveness of the business and Libbey's dominance in the segments in which
it competes.
Approximately 25% of sales are to major retailers. This segment contributes
about 25% of profits. Libbey is the leading supplier in the U.S. of glass
beverageware. Historically, the company sold commodity-like products through
mass merchandisers. In recent years, it has emphasized selling
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higher-end products through specialty stores like Williams Sonoma (OTC: WSGC),
Crate & Barrel, and leading department stores under the Libbey and FunDamentals
brands. This is a significantly more profitable business. In the most recent
fourth quarter, a major mass merchandiser canceled some orders resulting in the
division's profitability lagging expectations. Given that the retailer
experienced stock-outs, lost sales, and disappointed customers, we do not
believe such an occurrence is likely to happen again. The remaining 25% of
sales are to industrial customers primarily in the candle and floral areas and
to premium customers for major promotional programs such as specific glassware
products for gasoline retailers and fast food chains. Management is selective in
the business it takes and does so only when pricing meets profitability
standards.
REASONS FOR RECOMMENDATION:
LIBBEY'S CORE FOODSERVICE BUSINESS IS VERY ATTRACTIVE. It enjoys favorable
growth opportunities, above-average consistency and predictability, and very
high profitability. Its strong competitive position and the high barriers to
entry strengthen our conviction that this will be a great business for years to
come.
THE COMPANY'S FINANCIAL CHARACTERISTICS ARE VERY COMPELLING. Over the past four
years, EPS have grown at an average rate of 17%. Operating margins have been
very steady and averaged 17%. Return on tangible assets has averaged 16%. Over
this period, free cash flow has totaled $135 million which has been used to
reduce debt, make acquisitions, and pay dividends.
THE SHARES ARE VERY ATTRACTIVELY VALUED. In today's rich stock market
environment, Libbey's shares sell for just 13 times estimated 1998 EPS, seven
times cash flow, and approximately a 45% discount to our estimate of private
market value. The recent disappointment in the retail business has resulted in
the stock dropping 22% from recent highs.
We rate the shares a Buy at current levels.
7
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COMPANY UPDATES
WHITMAN
3501 ALGONQUIN ROAD
ROLLING MEADOWS, ILLINOIS 60008
(847) 815-5000
WHITMAN CORPORATION (NYSE: WH) announced a spin-off of its Hussmann
International and Midas Group businesses in December 1997. As a result of this
move, the remaining company will be a pure play soft drink bottler. The breakup
will enable each business to focus on its core operations as all three have
fundamentally different growth outlooks and operating characteristics. On the
January 30, 1998 payment date, investors received dividends in Midas (NYSE:MDS)
and Hussmann (NYSE:HUS). The Midas dividend was on a one-for-six basis and the
Hussmann dividend was on a one-for-two basis. We strongly support management's
decision, as we believe each company will be more valuable to shareholders as
separate entities.
More specifically, we are excited about Whitman's prospects and its
opportunities for growth. By spinning-off Midas and Hussmann, Whitman will lose
its cyclicality since the soft-drink business is a consistently stable growth
industry. Soft drink products are relatively easy to produce, enjoy unlimited
consumption opportunities, are very affordable and widely available. Whitman's
moat is its exclusive right to sell PepsiCo products within its franchised
territories. Thus, as a pure play, we would expect Whitman to garner a higher
trading multiple in the market place.
Whitman's growth opportunity will come from volume growth, new beverage products
and acquisitions. As the company acquires franchises in contiguous markets, many
economies of scale can be realized through consolidation of manufacturing,
distribution, and administrative operations. Furthermore, PepsiCo's increased
focus on its concentrate and bottler business bodes well for Whitman.
Although Hussmann and Midas will no longer be constrained within a diversified
company, we are somewhat less enthusiastic about their long term prospects when
specifically compared to Whitman. With this said, Hussmann's core business, the
sale of refrigeration display cases and systems for the supermarket and
convenience store industries, should continue to report solid results as several
trends remain favorable, including: space reconfiguration within stores and
growth in the size of perishable departments requiring refrigeration.
Midas operates the world's largest "under-the-car" services network. Its
competitive advantages include a widely known franchise and the economies of
scale resulting from a network of more than 1,800 U.S. locations. Midas'
challenge, however, will be to offer newer non-exhaust services as the
after-market demand for exhaust system replacement declines moderately.
Currently trading at $15.75 on a when-issued basis (1/23/98), Whitman shares are
valued at 22.5x our calendar 1998 earnings per share estimate of $0.70. On an
Enterprise Value to Ebitda basis the shares trade at a multiple of 7.2x our
calendar 1998 estimates. At this multiple, we believe the stock represents an
attractive value given its growth opportunities. As such, we recommend investors
maintain their position in Whitman.
8
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BOB EVANS FARMS (OTC: BOBE) was one of Ariel's best performers last year as the
company delivered strong operating results in both its restaurant and food
products segments. Improved fundamentals in these businesses led to a 66% total
return in 1997.
In its restaurants, Bob Evans has now reported four consecutive quarters of
comparable sales increases. As such, management successfully weathered the
downtrend in the restaurant industry by implementing tighter cost control
measures, improving its level of customer service, and initiating
company-specific programs to boost sales and profitability. Additionally, an
improvement in operating results was somewhat attributable to the increased
attention management is placing on its asset returns. Management now has the
systems in place to analyze its operating cash flow and return on investment on
an individual location basis.
While investors in Bob Evans benefited from the improved fundamentals in its
restaurant business in 1997, the result of the so-called "concept" restaurant
stocks were much less robust. For example, nervous investors in Boston Market
(OTC: BOST), a Wall Street darling since first coming public in November 1993,
took the stock down 82% in 1997. Just last year, Wall Street analysts were using
price targets as high as $50 for the company's shares. Today, most analysts now
estimate the fair value of the stock at less than $5 -- a price slightly less
than the cost of a "Boston Carver" combo!
At Ariel, we will not chase after untested "concept" companies but rather invest
in companies with consistent operating performance and proven operating track
records, such as Bob Evans. We had the opportunity to meet with Bob Evans'
management in our offices last month and we were encouraged with the company's
prospects. Sales trends remain positive in the restaurant business and raw
material cost comparisons remain favorable in its food products operations.
These two factors along with a more intensely focused management team should
lead to strong operating cash flow and earnings growth in fiscal year April 1998
and beyond.
Lower raw material costs, specifically sows, and higher volumes are the
catalysts behind the improved economics in the food products segment. This
positive trend should continue for some time given the typically lengthy nature
of the hog cycle. Furthermore, Bob Evans is reporting solid volume gains. Thus,
a combination of increases in sausage pounds sold along with encouraging hog
price trends should lead to significant cash flow improvement.
Given the recent strength in same store sales, lower hog prices and higher
volume trends, we believe the company's fiscal year sales and earnings may
increase 7% and 31%, respectively. Currently at $22.13, Bob Evans is trading at
16.6x our forward twelve-month estimate of $1.33. We recommend investors add to
their positions on any price weakness.
BOB EVANS
3776 SOUTH HIGH STREET
COLUMBUS, OHIO
43207-0863
(614) 491-2225
9
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ARIEL EQUITY FUNDS
TEN LARGEST HOLDINGS
as of December 31, 1997
1 HASBRO, INC.
Leading toy manufacturer
2 ROUSE CO.
Retail mall developer
3 FIRST BRANDS CORP.
Manufacturer and marketer of
consumer products for home and
automobile markets
4 CENTRAL NEWSPAPERS, INC.
Leading media company with daily
and weekly newspapers in Phoenix
and Indianapolis
5 MBIA, INC.
Leading insurer of municipal bonds
6 INTERFACE, INC.
World's leading manufacturer and
marketer of carpet tiles
7 ECOLAB, INC.
Leading developer and marketer
of premium cleaning and sanitizing products and services for the
hospitality markets
8 SPECIALTY EQUIPMENT
Manufacturer of commercial and
institutional food service equipment
9 NORTHERN TRUST CORP.
Chicago-based bank holding company
10 LONGS DRUG STORES
A leading operator of retail drug
stores in California and other
western states
<TABLE>
<CAPTION>
ARIEL GROWTH FUND AVERAGE ANNUAL TOTAL RETURN AS OF DECEMBER 31, 1997
Inception November 6, 1986------------------------------------------------------
1 Year 3 Year 5 Year Life of Fund
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ARIEL GROWTH FUND +36.4% +25.9% +15.8% +15.8%
</TABLE>
Total return does not reflect a maximum 4.75% sales load that was charged prior
to July 15, 1994.
[CHART]
[GRAPH]
*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.
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.
10
<PAGE>
<TABLE>
<CAPTION>
ARIEL APPRECIATION FUND AVERAGE ANNUAL TOTAL RETURN AS OF DECEMBER 31, 1997
Inception December 1, 1989------------------------------------------------------
1 Year 3 Year 5 Year Life of Fund
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ARIEL APPRECIATION FUND +37.9% +28.4% +15.9% +15.1%
</TABLE>
Total return does not reflect a maximum 4.75% sales load that was charged prior
to July 15, 1994.
[CHART]
[GRAPH]
*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.
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.
TEN LARGEST HOLDINGS
as of December 31, 1997
1 HASBRO, INC.
Leading toy manufacturer
2 ROUSE CO.
Retail mall developer
3 FIRST BRANDS CORP.
Manufacturer and marketer of
consumer products for home and
automobile markets
4 NORTHERN TRUST CORP.
Chicago-based bank holding company
5 MBIA, INC.
Leading insurer of municipal bonds
6 SPECIALTY EQUIPMENT
Manufacturer of commercial and institutional food service equipment
7 CENTURY TELEPHONE ENTERPRISES
Diversified telecommunications
company
8 LONGS DRUG STORES
A leading operator of retail drug
stores in California and other
western states
9 HARTE-HANKS COMMUNICATIONS
Diversified communications company
10 OMNICOM GROUP
The world's second largest
advertising agency
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SCHEDULE OF INVESTMENTS
ARIEL GROWTH FUND
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
Number COMMON STOCKS-92.12% Cost Market Value
of Shares
<S> <C> <C> <C>
ADVERTISING--4.66%
71,800 Harte-Hanks Communications $ 906,427 $ 2,665,575
128,600 Omnicom Group, Inc. 922,049 5,449,425
------------ ------------
1,828,476 8,115,000
------------ ------------
BUSINESS SERVICES--4.30%
135,100 Ecolab, Inc. 1,664,870 7,489,606
------------ ------------
CONSUMER PRODUCTS--8.87%
43,000 Clorox Co. 835,737 3,399,688
309,000 First Brands Corp. 5,027,217 8,323,688
98,200 Libbey, Inc. 3,836,207 3,719,325
------------ ------------
9,699,161 15,442,701
------------ ------------
DIVERSIFIED OPERATIONS--3.08%
205,700 Whitman Corp. 5,001,760 5,361,056
------------ ------------
</TABLE>
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<TABLE>
<CAPTION>
Number COMMON STOCKS-92.12% (cont) Cost Market Value
of Shares
<S> <C> <C> <C>
ENTERTAINMENT & LEISURE--4.98%
275,700 Hasbro, Inc. $ 4,481,448 $ 8,684,550
------------ ------------
ENVIRONMENTAL--2.73%
173,150 Safety-Kleen Corp. 2,683,350 4,750,803
------------ ------------
FINANCIAL SERVICES--9.71%
121,200 MBIA, Inc. 3,565,557 8,097,675
93,600 Northern Trust Corp. 1,641,439 6,528,600
36,500 T. Rowe Price Associates 135,708 2,294,938
------------ ------------
5,342,704 16,921,213
------------ ------------
FOOD & RESTAURANTS--5.73%
193,933 Bob Evans Farms, Inc. 2,305,055 4,290,768
203,400 McCormick & Co., Inc. 4,604,601 5,695,200
------------ ------------
6,909,656 9,985,968
------------ ------------
FURNITURE & FURNISHINGS--8.44%
273,700 Interface, Inc., Class A 4,269,388 7,937,300
102,600 Leggett & Platt, Inc. 1,071,207 4,296,375
45,090 Miller (Herman), Inc. 370,565 2,460,223
------------ ------------
5,711,160 14,693,898
------------ ------------
HEALTH CARE--2.05%
106,200 Allergan, Inc. $ 3,153,605 $ 3,564,337
------------ ------------
INDUSTRIAL--5.70%
102,400 Brady (WH) Co. 2,536,819 3,174,400
403,200 Specialty Equipment Cos., Inc.* 4,891,260 6,753,600
------------ ------------
7,428,079 9,928,000
------------ ------------
INSURANCE--0.54%
27,200 Arthur J. Gallagher & Co. 908,305 936,700
------------ ------------
NEWSPAPERS--7.71%
679,810 American Media, Inc., Class A* 6,189,306 5,268,527
110,500 Central Newspapers, Inc., Class A 2,178,000 8,170,094
------------ ------------
8,367,306 13,438,621
------------ ------------
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
Number COMMON STOCKS-92.12% (cont) Cost Market Value
of Shares
<S> <C> <C> <C>
OFFICE & BUSINESS EQUIPMENT--4.28%
134,620 General Binding Corp. $ 1,968,983 $ 4,038,600
143,900 Hunt Mfg. Co. 1,916,478 3,408,631
------------ ------------
3,885,461 7,447,231
------------ ------------
PACKAGING--3.42%
223,000 Shorewood Packaging Corp.* 2,269,493 5,965,250
------------ ------------
PRINTING & PUBLISHING--4.88%
387,200 Golden Books* 4,305,641 3,993,000
130,900 Lee Enterprises 3,439,325 3,869,731
55,600 Thomas Nelson, Inc. 642,759 642,875
------------ ------------
8,387,725 8,505,606
------------ ------------
REAL ESTATE--4.89%
260,100 Rouse Co. 4,027,423 8,518,275
------------ ------------
RETAILING--3.45%
187,000 Longs Drug Stores, Inc. 3,312,291 6,007,375
------------ ------------
TELECOMMUNICATIONS--2.70%
94,600 Century Telephone Enterprises 3,181,661 4,712,263
------------ ------------
Total Common Stocks 88,243,934 160,468,453
------------ ------------
Principal REPURCHASE Cost Market Value
Amount AGREEMENTS-7.31%
$12,724,373 State Street Bank & Trust
Company Repurchase Agreement,
4.75%, dated 12/31/97, repurchase
price $12,727,731, maturing 1/2/98
(collateralized by U.S. Treasury
Bond, 5.75%, 3/31/98) $ 12,724,373 $ 12,724,373
------------ ------------
Total Repurchase Agreements 12,724,373 12,724,373
------------ ------------
Total Investments-99.43% $100,968,307 173,192,826
------------
------------
Cash and Other Assets, less
Liabilities-(0.57)% 994,715
------------
NET ASSETS-100.00% $174,187,541
------------
------------
</TABLE>
*Non-income producing
14
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ARIEL APPRECIATION FUND
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
Number COMMON STOCKS-96.58% Cost Market Value
of Shares
<S> <C> <C> <C>
ADVERTISING--6.73%
187,375 Harte-Hanks Communications $ 2,239,400 $ 6,956,297
160,300 Omnicom Group, Inc. 1,565,730 6,792,712
------------ ------------
3,805,130 13,749,009
------------ ------------
BUSINESS SERVICES--3.35%
64,800 Ecolab, Inc. 1,601,491 3,592,350
91,700 Equifax, Inc. 1,904,985 3,249,619
------------ ------------
3,506,476 6,841,969
------------ ------------
CHEMICALS--2.99%
177,700 Morton International, Inc. 4,975,731 6,108,437
------------ ------------
CONSUMER PRODUCTS--8.37%
58,300 Clorox Co. 2,103,914 4,609,344
337,400 First Brands Corp. 7,388,752 9,088,712
90,200 Libbey, Inc. 3,518,842 3,416,325
------------ ------------
13,011,508 17,114,381
------------ ------------
DIVERSIFIED OPERATIONS--3.12%
244,900 Whitman Corp. $ 6,077,933 $ 6,382,706
------------ ------------
ENTERTAINMENT & LEISURE--8.24%
116,700 Carnival Cruise Lines, Inc. 1,805,622 6,462,263
329,700 Hasbro, Inc. 5,763,878 10,385,550
------------ ------------
7,569,500 16,847,813
------------ ------------
ENVIRONMENTAL--2.71%
201,800 Safety-Kleen Corp. 2,998,146 5,536,888
------------ ------------
FINANCIAL SERVICES--12.06%
124,000 MBIA, Inc. 4,053,446 8,284,750
116,800 MBNA Corp. 899,280 3,190,100
127,700 Northern Trust Corp. 2,674,704 8,907,075
67,900 T. Rowe Price Associates 984,550 4,269,213
------------ ------------
8,611,980 24,651,138
------------ ------------
FOOD & RESTAURANTS--4.13%
145,900 Bob Evans Farms, Inc. 2,837,068 3,228,037
186,155 McCormick & Co., Inc. 4,280,472 5,212,340
------------ ------------
7,117,540 8,440,377
------------ ------------
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
Number COMMON STOCKS-96.58% (cont) Cost Market Value
of Shares
<S> <C> <C> <C>
FURNITURE & FURNISHINGS--5.28%
153,860 Leggett & Platt, Inc. $ 1,876,028 $ 6,442,887
79,800 Miller (Herman), Inc. 1,098,113 4,354,087
------------ ------------
2,974,141 10,796,974
------------ ------------
HEALTH CARE--5.51%
168,800 Allergan, Inc. 5,607,790 5,665,350
31,533 Bergen Brunswig Corp., Class A 393,717 1,328,328
91,000 Sybron Corp.* 1,050,861 4,271,313
------------ ------------
7,052,368 11,264,991
------------ ------------
INDUSTRIAL--6.45%
181,000 Brady (WH) Co. 4,101,078 5,611,000
452,100 Specialty Equipment Cos., Inc.* 5,960,590 7,572,675
------------ ------------
10,061,668 13,183,675
------------ ------------
INSURANCE--0.68%
34,500 Arthur J. Gallagher & Co. 1,156,293 1,188,094
4,190 Choicepoint, Inc.* 33,284 200,072
------------ ------------
1,189,577 1,388,166
------------ ------------
NEWSPAPERS--3.25%
61,300 Central Newspapers, Inc., Class A $ 2,995,079 $ 4,532,369
34,000 Tribune Co. 863,186 2,116,500
------------ ------------
3,858,265 6,648,869
------------ ------------
OFFICE & BUSINESS EQUIPMENT--3.81%
129,305 General Binding Corp. 2,131,765 3,879,150
22,500 Pitney-Bowes, Inc. 802,490 2,023,594
79,500 Hunt Corp. 1,853,717 1,883,156
------------ ------------
4,787,972 7,785,900
------------ ------------
PACKAGING--3.31%
252,810 Shorewood Packaging Corp.* 2,666,047 6,762,668
------------ ------------
PRINTING & PUBLISHING--4.56%
107,200 Houghton Mifflin Co. 2,268,388 4,113,800
157,900 Lee Enterprises 4,212,597 4,667,919
46,000 Thomas Nelson, Inc. 482,217 531,875
------------ ------------
6,963,202 9,313,594
------------ ------------
REAL ESTATE--4.87%
303,900 Rouse Co. 4,208,815 9,952,725
------------ ------------
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
Number COMMON STOCKS-96.58% (cont) Cost Market Value
of Shares
<S> <C> <C> <C>
RETAILING--3.55%
225,840 Longs Drug Stores, Inc. $ 4,114,765 $ 7,255,110
------------ ------------
TELECOMMUNICATIONS--3.61%
148,100 Century Telephone Enterprises 4,690,617 7,377,231
------------ ------------
Total Common Stocks 110,241,381 197,402,621
------------ ------------
Principal REPURCHASE
Amount AGREEMENTS-3.77%
$7,709,875 State Street Bank & Trust
Company Repurchase
Agreement, 4.75%, dated
12/31/97, repurchase price
$7,711,910, maturing
1/2/98 (collateralized by
U.S. Treasury Bond,
5.75%, 3/31/98) 7,709,875 7,709,875
------------ ------------
Total Repurchase Agreements 7,709,875 7,709,875
------------ ------------
Total Investments-100.35% $117,951,256 205,112,496
------------
------------
Market Value
Liabilities, less Cash
and Other Assets-(0.35)% $ (722,742)
NET ASSETS-100.00% $204,389,754
------------
------------
</TABLE>
*Non-income producing
17
<PAGE>
EQUITY STATISTICAL SUMMARY
<TABLE>
<CAPTION>
ARIEL GROWTH
(UNAUDITED)
EARNINGS PER SHARE
---------------------------------
52 - WEEK 1996 1997 1998 1996
---------------
TICKER PRICE RANGE ACTUAL ESTIMATED ESTIMATED P/E
COMPANY SYMBOL 12/31/97 LOW HIGH CALENDAR CALENDAR CALENDAR CALENDAR
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Thomas Nelson, Inc. TNM 11.56 8.88 15.25 0.34 0.63 0.72 34.0
Hunt Manufacturing Co. HUN 23.69 16.75 24.25 0.91 1.05 1.49 26.0
American Media, Inc. ENQ 7.75 5.13 9.06 0.14 0.27 0.37 55.4
Specialty Equipment Cos. SPEQ 16.75 12.13 17.50 1.51 1.65 1.60 11.1
General Binding Corp. GBND 30.00 25.50 33.25 1.60 1.80 1.77 18.8
Shorewood Packaging Corp. SWD 26.75 17.25 27.88 1.26 1.44 1.65 21.2
Golden Books Family Entertainment GBFE 10.31 7.88 13.38 (3.06) (1.75) (1.10) NM
Arthur J. Gallagher & Co. AJG 34.44 29.75 38.25 2.58 2.65 2.75 13.3
Libbey, Inc. LBY 37.44 26.75 42.25 2.12 2.25 2.63 17.7
W.H. Brady Co. BRCOA 31.00 21.63 35.00 1.33 1.60 1.86 23.3
Interface, Inc. IFSIA 29.00 18.50 31.63 1.23 1.57 2.02 23.6
Bob Evans Farms, Inc. BOBE 22.13 12.88 22.50 0.82 1.04 1.32 27.0
First Brands Corp. FBR 26.94 20.13 28.50 1.62 1.35 1.77 16.6
Longs Drug Stores Corp. LDG 32.13 22.63 32.75 1.49 1.48 1.56 21.6
Lee Enterprises LEE 29.56 22.25 30.50 1.18 1.35 1.47 25.1
Harte-Hanks Communications HHS 37.00 25.38 38.75 0.83 1.15 1.65 44.6
Whitman Corp. (a) WH 15.75 15.00 16.50 0.47 0.70 0.82 33.5
Safety-Kleen Corp. SK 27.44 14.13 29.00 1.05 1.05 1.22 26.1
Central Newspapers, Inc. ECP 73.94 43.38 76.88 2.44 3.39 3.80 30.3
McCormick & Company, Inc. MCCRK 28.00 22.63 28.38 1.03 1.27 1.45 27.2
Allergan Inc. AGN 33.56 25.88 37.19 2.00 1.57 1.90 16.8
Herman Miller, Inc. MLHR 54.56 27.38 58.25 1.45 2.10 2.57 37.6
Rouse Company RSE 32.75 25.75 33.00 2.17 2.51 2.76 15.1
Century Telephone Enterprises CTL 49.81 28.50 50.44 2.14 2.46 2.70 23.3
Ecolab, Inc. ECL 27.72 18.13 28.00 0.86 1.01 1.15 32.2
Leggett & Platt, Inc. LEG 41.88 31.50 47.75 1.78 2.14 2.45 23.5
T. Rowe Price Associates TROW 62.88 36.50 73.75 1.59 2.25 2.63 39.5
Hasbro, Inc. HAS 31.50 22.88 36.50 1.52 1.68 2.00 20.7
MBIA Inc. MBI 66.81 45.44 67.38 3.61 4.06 4.52 18.5
Omnicom Group, Inc. OMC 42.38 22.25 42.38 1.13 1.35 1.60 37.5
Northern Trust Corp. NTRS 69.75 34.00 71.50 2.20 2.65 3.06 31.7
Clorox Company CLX 79.38 48.63 80.38 2.28 2.56 2.93 34.8
<CAPTION>
1997 1998 MARKET
P/E P/E CAP.
COMPANY CALENDAR CALENDAR ($MM)
<S> <C> <C> <C>
Thomas Nelson, Inc. 18.3 16.1 235
Hunt Manufacturing Co. 22.6 15.9 264
American Media, Inc. 28.7 20.9 328
Specialty Equipment Cos. 10.2 10.5 365
General Binding Corp. 16.7 16.9 473
Shorewood Packaging Corp. 18.6 16.2 486
Golden Books Family Entertainment NM NM 505
Arthur J. Gallagher & Co. 13.0 12.5 568
Libbey, Inc. 16.6 14.2 645
W.H. Brady Co. 19.4 16.7 696
Interface, Inc. 18.5 14.4 700
Bob Evans Farms, Inc. 21.3 16.8 944
First Brands Corp. 20.0 15.2 1,071
Longs Drug Stores Corp. 21.7 20.6 1,241
Lee Enterprises 21.9 20.1 1,343
Harte-Hanks Communications 32.2 22.4 1,351
Whitman Corp. (a) 22.5 19.2 1,599
Safety-Kleen Corp. 26.1 22.5 1,602
Central Newspapers, Inc. 21.8 19.5 1,858
McCormick & Company, Inc. 22.0 19.3 2,089
Allergan Inc. 21.4 17.7 2,190
Herman Miller, Inc. 26.0 21.2 2,506
Rouse Company 13.0 11.9 2,525
Century Telephone Enterprises 20.2 18.4 3,019
Ecolab, Inc. 27.4 24.1 3,578
Leggett & Platt, Inc. 19.6 17.1 4,022
T. Rowe Price Associates 27.9 23.9 4,040
Hasbro, Inc. 18.8 15.8 4,218
MBIA Inc. 16.5 14.8 5,971
Omnicom Group, Inc. 31.4 26.5 6,866
Northern Trust Corp. 26.3 22.8 7,781
Clorox Company 31.0 27.1 8,203
</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. (a) When-issued trading (1/23/98)
18
<PAGE>
<TABLE>
<CAPTION>
ARIEL APPRECIATION
(UNAUDITED)
EARNINGS PER SHARE
---------------------------------
52 - WEEK 1996 1997 1998 1996
---------------
TICKER PRICE RANGE ACTUAL ESTIMATED ESTIMATED P/E
COMPANY SYMBOL 12/31/97 LOW HIGH CALENDAR CALENDAR CALENDAR CALENDAR
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Thomas Nelson, Inc. TNM 11.56 8.88 15.25 0.34 0.63 0.72 34.0
Hunt Manufacturing Co. HUN 23.69 16.75 24.25 0.91 1.05 1.49 26.0
Specialty Equipment Cos. SPEQ 16.75 12.13 17.50 1.51 1.65 1.60 11.1
General Binding Corp. GBND 30.00 25.50 33.25 1.60 1.80 1.77 18.8
Shorewood Packaging Corp. SWD 26.75 17.25 27.88 1.26 1.44 1.65 21.2
Arthur J. Gallagher & Co. AJG 34.44 29.75 38.25 2.58 2.65 2.75 13.3
Libbey, Inc. LBY 37.44 26.75 42.25 2.12 2.25 2.63 17.7
W.H. Brady Co. BRCOA 31.00 21.63 35.00 1.33 1.60 1.86 23.3
ChoicePoint, Inc. CPS 47.75 30.75 48.13 1.39 1.92 2.35 34.4
Bob Evans Farms, Inc. BOBE 22.13 12.88 22.50 0.82 1.04 1.32 27.0
First Brands Corp. FBR 26.94 20.13 28.50 1.62 1.35 1.77 16.6
Houghton Mifflin Company HTN 38.38 26.31 40.25 1.11 1.48 1.27 34.6
Longs Drug Stores Corp. LDG 32.13 22.63 32.75 1.49 1.48 1.56 21.6
Lee Enterprises LEE 29.56 22.25 30.50 1.18 1.35 1.47 25.1
Harte-Hanks Communications HHS 37.00 25.38 38.75 0.83 1.15 1.65 44.6
Whitman Corp. (a) WH 15.75 15.00 16.50 0.47 0.70 0.82 33.5
Safety-Kleen Corp. SK 27.44 14.13 29.00 1.05 1.05 1.22 26.1
Central Newspapers, Inc. ECP 73.94 43.38 76.88 2.44 3.39 3.80 30.3
McCormick & Company, Inc. MCCRK 28.00 22.63 28.38 1.03 1.27 1.45 27.2
Bergen Brunswig Corp. BBC 42.13 22.10 46.06 1.49 1.74 2.05 28.3
Allergan Inc. AGN 33.56 25.88 37.19 2.00 1.57 1.90 16.8
Sybron International Corp SYB 46.94 26.75 48.50 1.41 1.74 2.10 33.3
Herman Miller, Inc. MLHR 54.56 27.38 58.25 1.45 2.10 2.57 37.6
Rouse Company RSE 32.75 25.75 33.00 2.17 2.51 2.76 15.1
Century Telephone Enterprises CTL 49.81 28.50 50.44 2.14 2.46 2.70 23.3
Ecolab, Inc. ECL 27.72 18.13 28.00 0.86 1.01 1.15 32.2
Leggett & Platt, Inc. LEG 41.88 31.50 47.75 1.78 2.14 2.45 23.5
T. Rowe Price Associates TROW 62.88 36.50 73.75 1.59 2.25 2.63 39.5
Hasbro, Inc. HAS 31.50 22.88 36.50 1.52 1.68 2.00 20.7
Morton International MII 34.38 29.88 44.63 1.29 1.75 2.00 26.7
Equifax, Inc. EFX 35.44 26.50 37.19 1.03 1.24 1.52 34.4
MBIA Inc. MBI 66.81 45.44 67.38 3.61 4.06 4.52 18.5
Omnicom Group, Inc. OMC 42.38 22.25 42.38 1.13 1.35 1.60 37.5
Tribune Company TRB 62.25 35.50 62.69 1.93 2.25 2.55 32.3
Northern Trust Corp. NTRS 69.75 34.00 71.50 2.20 2.65 3.06 31.7
Clorox Company CLX 79.38 48.63 80.38 2.28 2.56 2.93 34.8
Pitney Bowes Inc. PBI 44.97 26.82 45.75 1.56 1.80 2.04 28.8
MBNA Corp. KRB 27.31 17.92 30.58 0.89 1.10 1.42 30.7
Carnival Corp. CCL 55.38 31.38 55.88 1.95 2.25 2.55 28.4
<CAPTION>
1997 1998 MARKET
P/E P/E CAP.
COMPANY CALENDAR CALENDAR ($MM)
<S> <C> <C> <C>
Thomas Nelson, Inc. 18.3 16.1 235
Hunt Manufacturing Co. 22.6 15.9 264
Specialty Equipment Cos. 10.2 10.5 365
General Binding Corp. 16.7 16.9 473
Shorewood Packaging Corp. 18.6 16.2 486
Arthur J. Gallagher & Co. 13.0 12.5 568
Libbey, Inc. 16.6 14.2 645
W.H. Brady Co. 19.4 16.7 696
ChoicePoint, Inc. 24.9 20.3 697
Bob Evans Farms, Inc. 21.3 16.8 944
First Brands Corp. 20.0 15.2 1,071
Houghton Mifflin Company 25.9 30.2 1,159
Longs Drug Stores Corp. 21.7 20.6 1,241
Lee Enterprises 21.9 20.1 1,343
Harte-Hanks Communications 32.2 22.4 1,351
Whitman Corp. (a) 22.5 19.2 1,599
Safety-Kleen Corp. 26.1 22.5 1,602
Central Newspapers, Inc. 21.8 19.5 1,858
McCormick & Company, Inc. 22.0 19.3 2,089
Bergen Brunswig Corp. 24.2 20.6 2,123
Allergan Inc. 21.4 17.7 2,190
Sybron International Corp 27.0 22.4 2,263
Herman Miller, Inc. 26.0 21.2 2,506
Rouse Company 13.0 11.9 2,525
Century Telephone Enterprises 20.2 18.4 3,019
Ecolab, Inc. 27.4 24.1 3,578
Leggett & Platt, Inc. 19.6 17.1 4,022
T. Rowe Price Associates 27.9 23.9 4,040
Hasbro, Inc. 18.8 15.8 4,218
Morton International 19.6 17.2 4,576
Equifax, Inc. 28.6 23.3 5,323
MBIA Inc. 16.5 14.8 5,971
Omnicom Group, Inc. 31.4 26.5 6,866
Tribune Company 27.7 24.4 7,644
Northern Trust Corp. 26.3 22.8 7,781
Clorox Company 31.0 27.1 8,203
Pitney Bowes Inc. 25.0 22.0 12,758
MBNA Corp. 24.8 19.2 14,338
Carnival Corp. 24.6 21.7 16,520
</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. (a) When-issued trading (1/23/98)
19
<PAGE>
ARIEL PREMIER BOND
DEAR FELLOW SHAREHOLDER: For the three month period ending December 31, 1997,
the Ariel Premier Bond Fund Institutional Class returned +2.61% and the Ariel
Premier Bond Fund Investor Class returned +2.01%. The Lehman Brothers Aggregate
Bond Index posted a +2.94% return for the same time period. The Ariel Premier
Bond Fund continues to be a solid performer among its peers, as its total return
of +9.16% for the one year period ended December 31, 1997 ranks the
Institutional Class in the top quartile of High-Quality Corporate Bond Funds in
the Morningstar, Inc. universe of 254 funds.
The fourth quarter of 1997 was marked by a distinct change in the U.S. fixed
income market. The first nine months of the year were characterized by
surprisingly robust economic growth, an unemployment rate of 4.7% and a
tightening of short term rates by the Federal Reserve. While these are normally
negative factors for bond prices, continued anemic inflation provided an offset,
thus allowing yields to fall modestly in the first three quarters of 1997. Then,
in late October, the Asian market disruption occurred, changing the market
environment. The result was another 1/2% drop in long U.S. Treasury rates, which
now stood at levels not seen since late 1995.
The primary determinant of portfolio performance in 1997 was duration. The
longer the better. Accordingly, the Ariel Premier Bond Fund's short duration
strategy--particularly after the Asian market break, was the primary source of
return drag on the portfolio. However, modest positive contributions from the
Fund's mortgage and corporate issues helped to alleviate the effects of the
defensive duration position.
In our view, the effects of the Asian crisis on U.S. economic performance will
be modest and temporary. The underlying momentum of the domestic economy remains
well above its sustainable growth rate and even with the dampening effects from
Asia, we expect U.S. growth to be between 2.5% and 3.0% for the coming year.
Given the current strain on domestic resources, particularly labor, the
inflation rate will eventually move higher. Pressure from lower import prices
from Asia may slow the rise of inflation, but forecasts of a decline in the
overall inflation rate seem extreme. As these optimistic expectations are
challenged over the course of 1998, bond yields are likely to move higher. We
believe a defensive duration position will be rewarded in 1998 and accordingly,
the Ariel Premier Bond Fund's duration is three-quarters of a year shorter than
its benchmark.
We have increased the Fund's position in both corporate and asset-backed
securities by taking advantage of attractive levels that resulted from the
decline in the Asian markets. Our mortgage strategy continues to emphasize
discount issues to protect against refinancing risk. In summary, the Ariel
Premier Bond Fund is currently positioned to perform well in an environment of
stable to rising interest rates and healthy domestic economic performance.
We appreciate your continued confidence in the Ariel Premier Bond Fund and
welcome any questions or comments you have.
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
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN AS OF DECEMBER 31, 1997
- --------------------------------------------------------------------------------
4Q97 1 Year Life of Fund
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
ARIEL PREMIER BOND FUND, INST. CL. 2.6% +9.2% +7.0%
ARIEL PREMIER BOND FUND, INV. CL. 2.0% N/A +7.9%
</TABLE>
[CHART]
[GRAPH]
*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
DECEMBER 31, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
Par Value ASSET-BACKED SECURITIES-31.25% Cost Market Value
<S> <C> <C> <C>
$2,630,000 American Express, 971A,
6.40%, 4/15/2005 $ 2,632,114 $ 2,665,163
1,000,000 Associates Manufactured Housing,
972A-3, 6.275%, 3/15/2028 999,702 1,000,150
1,510,000 Bancone 97BA, 6.29%, 7/20/2004 1,509,899 1,514,243
600,000 Capital Equipment Receivables
Trust, 97-1A4, 6.19%, 2/15/2002 600,000 598,686
70,000 Circuit City Credit Card,
1995-1A, 6.375%, 8/15/2005 69,191 70,479
400,000 CSFB 97-C1 A1C, 7.24%, 4/20/2007 414,739 418,724
2,000,000 EQCC Home Equity, 973-A9,
6.57%, 2/15/2029 1,983,780 1,979,380
800,000 First Omni, 96-AA, 6.65%, 9/15/2003 806,835 817,704
2,125,191 Fleetwood, 97BA, 6.40%, 5/15/2013 2,122,235 2,138,346
550,000 General Growth Properties A2,
6.602%, 11/15/2007 550,000 549,483
60,000 Green Tree Financial, 1995-1 A5,
8.40%, 6/15/2025 65,869 63,129
1,080,996 IMC Excess, 7.41%, 11/26/2028 1,080,956 1,080,327
1,450,000 J.C. Penney Master Credit Card Trust,
1990-C1, 9.625%, 6/30/2000 1,552,446 1,562,331
2,500,000 MBNA Master Credit Card, 95DA,
6.05%, 11/15/2002 2,490,323 2,501,475
380,000 MBNA Master Credit Card II, 971A,
6.55%, 1/15/2007 383,278 388,459
1,332,767 Merrill Lynch Mortgage Investors, Inc.,
1995-C2-A1, Floating Rate, 6/15/2021 1,350,822 1,354,212
1,170,000 Metris Master Trust, 96-1A, 6.45%,
2/20/2002 1,177,150 1,184,075
300,000 The Money Store, 1996-1 A3,
6.85%, 12/20/2002 299,962 306,459
550,000 The Money Store, 1997-A A3,
6.675%, 4/15/2012 549,833 551,760
300,000 The Money Store, 1996-B A6,
7.38%, 5/15/2017 299,955 305,607
1,000,000 The Money Store, 1996-B A9,
8.14%, 10/15/2027 1,061,789 1,064,280
200,000 Olympic Auto Receivables,
1995-EA4, 5.85%, 3/15/2001 198,358 199,640
1,440,000 Prime, 95-1A, 6.75%, 11/15/2005 1,446,405 1,473,710
350,000 Private Label Credit Card,
1994-2A, 7.80%, 9/20/2003 356,754 355,922
430,000 Salomon Brothers, 96LB3, 6.875%,
10/25/2026 429,974 436,330
940,000 Salomon Brothers Mortgage Sec,
97-LB6, 6.76%, 12/25/2027 938,827 938,825
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
Par Value ASSET-BACKED SECURITIES-31.25% Cost Market Value
<S> <C> <C> <C>
$45,000 Sears Credit Account, 96-1A,
6.20%, 2/16/2006 $ 44,175 $ 45,133
440,000 Sears Credit Account, 96-2A,
6.50%, 10/15/2003 437,944 443,177
2,005,000 Sears Credit Account, 96-4A,
6.45%, 10/16/2006 2,001,009 2,039,967
420,000 Standard Credit Card Master -
Citibank, 94-4A, 8.25%, 11/7/2003 444,301 449,400
2,300,000 Standard Credit Card Master -
Citibank, 951A, 8.25%, 1/7/2007 2,500,425 2,554,863
1,400,000 Team Fleet Financial Co.,
97-1A, 7.35%, 5/15/2003 + 1,399,129 1,451,632
300,000 UCFC, 96 CA 3, 7.15%,
12/15/2013 299,955 304,764
1,880,000 World Financial, 96-A,
6.70%, 2/15/2004 1,889,221 1,914,366
2,200,000 World Omni Auto Lease,
97-BA3, 6.18%, 11/25/2003 2,199,770 2,200,990
399,477 World Omni Auto Lease,
1996-BA3, 6.25%, 11/15/2002 398,875 399,899
------------ ------------
Total Asset-Backed Securities 36,986,000 37,323,090
------------ ------------
CORPORATE DEBT-10.27%
$410,000 American General Inst,
8.125%, 3/15/2046 + $ 436,595 $ 452,025
550,000 American Store, 8.00%, 6/1/2026 605,980 607,062
570,000 Archer Daniels II, 6.95%, 12/15/2097 567,635 577,125
275,000 Bank of America Capital II, 8.0%,
12/15/2026 271,249 293,219
225,000 Bellsouth Telephone, 7.00%, 12/1/2095 229,646 232,594
325,000 Chrysler Corp., 7.40%, 8/1/2097 334,981 341,656
550,000 CPC International, 5.60%, 10/15/2097 424,414 443,437
515,000 FedEx, 7.60%, 7/1/2097 540,544 547,831
275,000 J.C. Penney Co., 7.625%, 3/1/2097 269,473 294,594
95,000 JP Morgan Capital Trust I, 7.54%,
1/15/2027 95,000 97,494
250,000 News Amer Hldg, 9.25%, 2/01/2013 293,133 294,688
1,400,000 Phillip Morris, 7.125%, 8/15/2002 1,390,721 1,433,250
1,840,431 Railcar Leasing, 97-1A,
6.75%, 7/15/2006 + 1,839,736 1,863,437
1,544,613 Railcar Trust, 92 1, 7.75%, 6/01/2004 1,608,127 1,624,701
525,000 Time Warner Enterprises, 8.375%,
7/15/2033 586,908 599,156
340,000 US West Capital Funding, Inc.,
6.95%, 1/15/2037 339,323 349,775
1,000,000 Safeco Capital Trust, 8.072%,
7/15/2037 1,000,000 1,051,250
805,000 Suntrust Cap II, 7.90%,
6/15/2027 809,694 861,350
280,000 Zurich Ca Tr, 8.376%, 6/1/2037 + 294,981 306,600
------------ ------------
Total Corporate Debt 11,938,140 12,271,244
------------ ------------
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
Par Value U.S. GOVERNMENT AGENCIES-23.12% Cost Market Value
MORTGAGE-BACKED SECURITIES--18.34%
<S> <C> <C> <C>
$1,447,324 Federal Home Loan Mortgage
Corp. (FHLMC),
6.50%, 11/1/2025 $ 1,366,696 $ 1,440,537
3,886,472 FHLMC, 6.50%, 2/1/2026 3,761,622 3,856,081
5,434,852 FHLMC, Gold, 6.50%, 3/1/2026 5,141,670 5,385,475
419,810 FHLMC, Gold, 6.50%, 4/1/2026 387,380 415,873
739,169 FHLMC Gold, 6.50%, 5/1/2026 682,063 732,237
43,306 Federal National Mortgage
Association (FNMA),
7.00%, 10/1/2023 42,571 43,793
1,782,962 FNMA, 6.50%, 4/1/2024 1,700,693 1,766,791
434,626 FNMA, 7.00%, 5/1/2024 427,246 439,377
455,708 FNMA, 6.50%, 11/1/2025 418,697 451,293
1,490,656 FNMA, 6.50%, 1/1/2026 1,445,331 1,474,810
5,966,487 FNMA, 6.50%, 5/1/2026 5,625,643 5,903,063
------------ ------------
20,999,612 21,909,330
------------ ------------
OTHER AGENCY ISSUES--4.78%
$2,455,000 FNMA M6C, 6.85%, 5/17/2020 $ 2,431,383 $ 2,541,686
250,000 Government Trust Certificate,
Aid Israel, 5.70%, 2/15/2003 249,323 245,938
1,556,182 Government Trust Certificate,
Israel Trust, Series 2E, 9.40%,
5/15/2002 1,653,057 1,633,991
1,101,778 Pemex Exp Trust, 7.66%, 8/15/2001 1,131,412 1,135,041
110,000 Resolution Funding Corporation,
8.875%, 7/15/2020 136,305 144,584
------------ ------------
5,601,480 5,701,240
------------ ------------
Total U.S. Government Agencies 26,601,092 27,610,570
------------ ------------
U.S. GOVERNMENT OBLIGATIONS-15.00%
425,000 U.S. Treasury Bond,
11.75%, 11/15/2014 605,364 633,314
6,165,000 U.S. Treasury Bond,
8.125%, 8/15/2019 7,228,130 7,709,456
8,825,000 U.S. Treasury Note,
7.50%, 10/31/2099 9,019,208 9,097,869
450,000 U.S. Treasury Note,
6.50%, 5/15/2005 445,754 468,891
------------ ------------
Total U.S. Government
Obligations 17,298,456 17,909,530
------------ ------------
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
Par Value COMMERCIAL PAPER-18.37% Cost Market Value
<S> <C> <C> <C>
$2,000,000 Emerson Electric, 5.55%,
1/14/98 $ 1,995,992 $ 1,995,992
2,000,000 EW Scripps, 5.7%, 1/14/98 1,995,883 1,995,883
2,500,000 Ford Motor Credit Co.,
5.82%, 1/14/98 2,494,746 2,494,746
2,000,000 Gannett Company,
5.65%, 1/13/98 1,996,233 1,996,233
2,000,000 General Electric Capital
Corp., 5.97%, 1/05/98 1,998,673 1,998,673
2,500,000 Lucent Technologies, 5.75%
1/14/98 2,494,809 2,494,809
2,500,000 MCI Comm., 5.95%, 1/23/98 2,490,910 2,490,910
2,500,000 Metlife Funding, 5.75%,
2/12/98 2,483,229 2,483,229
2,000,000 Norwest Corporation,
5.83%, 1/14/98 1,995,790 1,995,790
2,000,000 Walt Disney Co., 5.70%,
1/14/98 1,995,883 1,995,883
------------ ------------
Total Commercial Paper 21,942,148 21,942,148
------------ ------------
</TABLE>
<TABLE>
<CAPTION>
Principal REPURCHASE AGREEMENTS-1.27% Cost Market Value
Amount
<S> <C> <C> <C>
$1,516,413 State Street Bank & Trust
Company Repurchase
Agreement, 4.75%, dated
12/31/97, repurchase price
$1,516,813, maturing
1/2/98 (collateralized by
U.S. Treasury Bond, 6.125%,
5/15/98) $ 1,516,413 $ 1,516,413
------------ ------------
Total Repurchase
Agreements 1,516,413 1,516,413
------------ ------------
Total Investments-99.28% $116,282,249 $118,572,995
------------
------------
Other Assets and Cash
less Liabilities-0.72% 859,801
------------
NET ASSETS-100.00% $119,432,796
------------
------------
+SEC Rule 144A restriction
</TABLE>
25
<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.
26
<PAGE>
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.
27
<PAGE>
[GRAPHIC]
<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. [GRAPHIC]
Slow and Steady Wins the Race
<PAGE>
[LOGO]
Ariel Investment Trust BULK MAIL
307 North Michigan Avenue U.S. POSTAGE
Suite 500 PAID
Chicago, Illinois 60601 PERMIT NO. 6784
CHICAGO, IL
[LOGO]Printed on recycled paper
