<PAGE>
ARIEL MUTUAL FUNDS
[GRAPHIC] THE PATIENT INVESTOR
Ariel Appreciation Fund
Ariel Fund
Ariel Premier Bond Fund
Quarterly Report--December 31, 1998
<PAGE>
IMPORTANT FUND NEWS
OUR NEW NAME!
We recently decided to RENAME OUR FLAGSHIP ARIEL GROWTH FUND. With the
proliferation of style specific benchmarks and peer group comparisons, we
believe its original moniker does not accurately represent our disciplined,
value strategy. Thus as of February 1, 1999, the Fund will simply be known as
the ARIEL FUND. Absolutely nothing about the fund's style or objective will
change. The sole change is the fund's name.
OUR NEW BENCHMARKS!
In the past, we compared the returns of the Ariel Growth Fund as well as the
Ariel Appreciation Fund to the Russell 2500 Index. Beginning this year, we have
decided to adopt what have become the most widely accepted small and mid-cap
benchmarks. Going forward, we will compare the results of the newly renamed,
small-cap Ariel Fund to the Russell 2000 Index. Likewise, we will compare the
results of the mid-cap Ariel Appreciation Fund to the Russell Mid Cap Index.
While we recognize our returns might not perfectly track any of the small and
midcap indices on a quarter-to-quarter basis, we believe the Russell 2000 and
the Russell Mid Cap indices provide us with the best long-term fit.
OUR NEW WEBSITE!
Visit our website at www.arielmutualfunds.com and check fund performance, firm
news and more.
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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
FOR MORE INFORMATION ABOUT THE ARIEL MUTUAL FUNDS INCLUDING MANAGEMENT FEES AND
EXPENSES, PLEASE SEE THE CURRENT PROSPECTUS WHICH MUST PRECEDE OR ACCOMPANY THIS
REPORT. DISTRIBUTED BY ARIEL DISTRIBUTORS, INC.
PERFORMANCE DATA PROVIDED REPRESENTS PAST PERFORMANCE AND IS NOT INDICATIVE OF
FUTURE RESULTS. THE INVESTMENT RETURN AND PRINCIPAL VALUE OF AN INVESTMENT WILL
FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS
THAN THEIR ORIGINAL COST.
The Patient Investor 2
Company in Focus 6
Ariel Equity Funds 10
Schedule of Equity Investments 12
Equity Statistical Summary 16
Ariel Bond Fund 18
Schedule of Bond Investments 20
Board of Trustees 25
<PAGE>
SLOW AND STEADY WINS THE RACE.--AESOP
THE PATIENT INVESTOR[GRAPHIC]-Registered Trademark-
DEAR FELLOW SHAREHOLDER: For the fourth quarter ending December 31, 1998, the
+20.1% rise of the Ariel Fund (formerly known as the Ariel Growth Fund) compared
quite favorably to the +16.3% gain of the smaller companies that make up the
Russell 2000 Index. Moreover, the Ariel Appreciation Fund--up +23.4% for the
quarter--handily outperformed the +18.4% rise of the Russell Midcap Index and
despite the continued dominance of large company stocks, managed to beat the
+21.3% return of the large companies of the Standard & Poor's 500 Index.(1)
In a year characterized by wild market swings, large cap stocks eluded the bear
market yet another year and managed to post an eye-popping +28.8% gain. The
pipsqueaks, on the other hand, got slammed as the Russell 2000 plummeted -25%
during July and August. Although small and mid-sized companies staged their own
comeback in the fourth quarter, the Russell 2000 still closed out the year
underwater with a -2.5% return. Midcaps did better. How did we fare? The Ariel
Fund earned a +9.9% return for the year ending December 31, 1998 which ranks in
the top 15th percentile of the Small Company Funds tracked by Lipper Analytical
Services--specifically, the 98th best performer out of 638 funds. The Ariel
Appreciation Fund gained +19.6% over the same period versus +10.1% for the
Russell Midcap Index--ranking 87th out of the 327 midcap funds in its Lipper
category.(2)
PORTFOLIO COMINGS AND GOINGS
While our high quality focus and low risk strategy aided our
(1) The Funds' average annual returns and a description of the Russell 2000,
Russell Mid Cap and Standard and Poor's 500 indices can be referenced on
pages 10 and 11.
(2) Lipper Analytical Services, Inc. is a nationally recognized organization
that reports performance and calculates rankings for mutual funds. Each
fund is ranked within a universe of funds with similar investment
objectives. Ranking is based on total returns. Ariel Fund ranked 40 out of
211 and 52 out of 70 in the small-cap category for the five and ten year
periods ended 12/31/98, respectively. Ariel Appreciation Fund ranked 21 out
of 109 in the midcap category for the five year period ended 12/31/98.
2
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fourth quarter results and ultimately our year-end finish, both portfolios also
continued to benefit from strong stock picking. Specifically, the takeover of
First Brands Corporation (NYSE: FBR) by Clorox Co. (NYSE: CLX) was a big win.
First Brands was trading in the low $20s prior to the Clorox announcement of a
$38 per share purchase price--an 80% premium. Additionally, the portfolios were
helped by continued price appreciation in the shares of other holdings
including: rural phone provider, Century Telephone (NYSE: CTL); Whitman
Corporation (NYSE: WH)--the Pepsi bottler; restaurant equipment manufacturer,
Specialty Equipment Companies (NYSE: SEC); and Shorewood Packing Corporation
(NYSE: SWD).
As natural contrarians, we took advantage of the sell-off among some of the
small and mid-cap issues and began building positions in what we believe to be a
number of terrific franchises. (As someone once said, "When the sky is falling,
buy sky.") Accordingly, in the Ariel Fund, we purchased shares of Department 56
(NYSE: DFS), a collectibles manufacturer; and Orion Capital (NYSE: OC), a niche
insurer. In the Ariel Appreciation Fund, we continued to build upon newer
positions in Galileo International, Inc. (NYSE: GLC), a leading provider of
electronic travel reservations; along with Franklin Resources, Inc. (NYSE: BEN),
the well known mutual fund company.
INDEX MANIA
As of December 31, 1998, the country's largest mutual fund--teeming with
analysts and a well-known portfolio manager--found its title in jeopardy. At
more than $76 billion in assets--a staggering amount of money--the number two
contender, a computer generated portfolio, was suddenly closing in at a rapid
pace. More specifically, a clone of the S&P 500 Index ended the year at just
under $70 billion and growing. In fact, according to BARRON'S, in the first 11
months of 1998, "20% of all inflows in stock and bond funds nationwide" went to
this leading indexer, the Vanguard Group.
The move to index has not been limited to mutual funds and the individual
investor. The institutional portfolios of the large pension funds, endowments
and foundations have also favored the unmanaged "passive" strategies over the
stock pickers and their "active" approaches. The popularity is understandable
since the most vocal proponent of indexing, Princeton econom-
3
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ics professor Burton Malkiel, has argued a good case. As stated in his legendary
book, A RANDOM WALK DOWN WALL STREET, "the market appears to adjust so quickly
to information about individual stocks and the economy as a whole that no
technique of selecting a portfolio...can CONSISTENTLY outperform a strategy of
simply buying and holding a diversified group of securities such as those that
make up the popular market averages." Malkiel does acknowledge the Efficient
Market Theory is not bullet proof as price inefficiencies exist among smaller
companies. However, he argues that outside of the rare asset class, "a dart
throwing chimpanzee can select a portfolio that performs as well as one
carefully selected by the experts." And so he recommends investors simply buy
the "market" by buying the index.
The theory sounds simple. But while the S&P 500 is widely considered to be a
barometer for the overall stock market, buying today's Index may not be
"buying the market." Recent performance is just one indication of this fact.
As the January 18, 1999 issue of BUSINESS WEEK concluded, "In theory, an
index fund that reflects the entire stock market should beat half of all
funds and trail the rest." But just as funds investing in large, fast-growing
companies have been the best performing asset class in recent years, S&P 500
Index funds earn the WALL STREET JOURNAL'S highest "A" rating--the top 10% of
all mutual funds--for their one, three AND five year performance records.
Active managers have had a very hard time stacking up when compared to an
index that has posted 20%+ returns four years straight--a first in stock
market history. Fewer than 5% have outperformed the Index over the past 5
years.
A look behind the numbers explains the results. Many have written about the fact
that the Index is asset-weighted, and thus the largest and best performing
companies disproportionately skew the returns. That's why, as widely reported,
just 10% of the companies accounted for 94% of its rise in 1998 and the other
450 stocks had a median return of only 2%. But a closer look at this narrow
stock leadership offers insights into the unintended risks that can result from
such a policy weighting. For example, in 1992, semiconductor manufacturer Intel
(OTC: INTC) was the 35th largest company in the S&P 500 and accounted for 0.6%
of the total. By 1995, it was the 13th largest stock and 1% of the Index. Today,
it's holding strong at number 3 with a 2.3% weighting. It is important to point
out, Intel's shares averaged a +36% annual return over the aforementioned 6-year
period. Herein lies the irony. The growing position has been driven by an
increasing stock price. Thus, as Forbes noted in an April 1997 cover story,
"when Intel was cheap, an index fund buyer was only buying a dribble of it.
4
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When it got dear, he was buying oodles of it." In 1992, Intel's price/earnings
ratio was 12.3 times trailing 12 month earnings. Today, it's 38.9 times.
While there are only sketchy details of how the eight member S&P committee adds
and deletes stocks from the Index, one committee member told FORBES, "The
underlying goal is to reflect the leading companies in the leading industries in
the economy and the stock market." The problem is that by adhering to this
perspective, it's easy to see how momentum investing inadvertently creeps in,
and rationalizations give way to unconscious and uncharacteristic risk taking.
The Index has a trailing price/earnings ratio of 29 times last 12 months
earnings. This statistic offers a strong indication of its ever-expanding growth
stock bias when compared to its historic p/e of 14.5 times. When queried on the
valuation issue two years ago, a committee member told FORBES, "The only time
we'd look at a price/earnings ratio is if it's crazy, say 40 and up. Then we'd
ask if it were sustainable. Beyond that, we don't look at p/e." Since then, this
parameter must have changed. When America Online (NYSE: AOL) replaced the old
Woolworth's Company renamed Venator Group, Inc. (NYSE: Z), AOL's trailing p/e
was 461.7 times the last 12 months earnings. (Venator's was 8.7 times.) And so
the father of American retailing was shelved by the internet.
Professor Malkiel's work has convinced us that indexing does have a place in any
portfolio, particularly large cap stocks. While we do not believe in market
timing, we do have some concerns about the risks inherent to indexing today. All
of the extremes in investment performance, narrow stock leadership and
valuations suggest there will ultimately be a reversion to the mean for a
"broad" market indicator that has gradually evolved into a large cap growth
fund. With this viewpoint, we believe there is an even more compelling rationale
for investing in small and mid-sized companies where current values are in
abundance, risks are lower and a period of strong relative performance is long
overdue.
As always, we appreciate your comments and welcome any 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 Fund Ariel Appreciation Fund
5
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COMPANY IN FOCUS
DEPARTMENT 56[LOGO]-Registered Trademark-, INC.
6436 City West Parkway
Eden Prarie, MN 55344
(612) 944-5600
DEPARTMENT 56, INC. (NYSE: DFS) designs and distributes collectible products and
other giftwares which are sold through select gift, home accessory and
department stores, as well as other specialty retailers. DFS's signature
collectible product is the Village Series of handcrafted, lighted ceramic and
porcelain houses, buildings and related accessories.
REASONS FOR RECOMMENDATION
A FANTASTIC FRANCHISE
Department 56 has a very loyal customer following. Each year, DFS introduces new
pieces and accessories to its Village Series and retires pieces from production,
which spurs consumer demand. DFS is able to charge a premium price for its
products by virtue of their collectability--a powerful barrier to entry. The
company's product demand often results from word of mouth and family traditions
that span generations. Specifically, the Village product is somewhat similar to
that of a model train set in that it: 1) carries a lot of emotional, "family"
appeal and is associated with the Christmas season, 2) has recurring revenue as
collectors add to and update their villages over time, 3) is customizable and
personable, and 4) is passed on to younger generations.
DFS is very selective in its product marketing - approximately 5,200 retailers
receive the Village Series and Snowbabies lines. When we interviewed retailers
and collectors, we were amazed by the passion and excitement associated with the
product.
VERY FAVORABLE ECONOMICS
The collectible franchise that Department 56 has developed earns exceptional
returns. DFS is an extraordinarily profitable business with high margins and
high returns on equity and tangible assets. One of our favorite investors,
Warren Buffett, commends companies that return significant multiples of cash
flow for every dollar reinvested in the business. Department 56 is a prime
example of this type of cash generating machine, as the company has consistently
generated about $50 million in owner's earnings per year--incredible for a
company with only $240 million in revenues in 1998.
6
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COMPANY IN FOCUS
Reinvestment requirements are minimal with only $1-3 million in annual
maintenance capital expenditures required. Management has astutely used its
strong excess cash flow on behalf of shareholders to both repay debt and
repurchase shares.
LOW INVENTORY LEVELS AT RETAILERS
In recent years, the sales growth of the core Village product was masked by a
reduction of inventories in the retail channel. DFS has implemented new
inventory tracking procedures to keep "sell-in" as close as possible to
"sell-through" which should stabilize sales growth. "Sell-in" refers to the
amount of products sold by the company to the retail channel. "Sell-through"
refers to the amount of products sold by the retail channel to the consumer.
Over the past 5 years, consumer demand for the Village line product has grown
steadily while some inventory irregularities at the retail level caused some
difficulties. We visited several retail accounts recently and believe inventory
levels are fairly well depleted. Once this matter is resolved and consistent
growth resumes, we expect investors (and Wall Street) to become more comfortable
with the sales growth characteristics of this business. The economics of DFS
business should allow the company to grow its profits faster than our
expectations of 6-8% internal revenue growth.
COMPELLING VALUATION
We believe that Department 56 is an unrecognized and undervalued franchise and
thus represents an excellent investment for long term investors. At $31, the
stock is currently trading at ten times our 1999 cash earnings estimate, six
times cash flow, and a 45% discount to our estimate of its private market value
of approximately $58 per share.
As such, we recommend investors initiate a position in Department 56 at current
levels.
7
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COMPANY IN FOCUS
ORION CAPITAL
9 Farm Springs Road
Farmington, CT 06032
(860) 674-6600
ORION CAPITAL (NYSE: OC) is a family of highly specialized, niche property and
casualty insurance companies. Through its subsidiaries, it offers professional
liability, workers compensation, personal non-standard auto, and specialty
commercial coverage. The subsidiaries share an operating philosophy committed to
satisfying client needs, mitigating client exposure to loss and solving
insurance problems.
REASONS FOR RECOMMENDATION
DOMINANT AND DEFENDABLE POSITION IN NICHE MARKETS
Orion deliberately operates in markets that require value added services beyond
simply a transfer of risk. A good example is Orion's professional liability
subsidiary, DPIC Companies. Professional liability insurance protects business
owners and employees from malpractice. DPIC is North America's second largest
writer of professional liability insurance programs for architects, engineers
and environmental consultants. A network of specialist agents provide expert
face-to-face support, acting as a resource to clients and also educating them
about loss prevention. While the policies are more expensive initially, clients
find they can save time, money and aggravation by reducing their exposure to
claims, lowering their insurance costs through premium credits and protecting
their professional reputations and important business relationships. The proof
is in the results: policy renewal rates have been +90% for twelve consecutive
years versus an estimated industry average of 80%, and claims frequency for DPIC
clients has declined by 40% over the last six years. While many competitors have
tried to copy the DPIC model, all have failed because they lack DPIC's market
knowledge and commitment to the client which is so unusual in the insurance
business. Like DPIC, Orion's other insurance subsidiaries find market niches
where they can profitably provide value added services to otherwise
commodity-like insurance products.
FAVORABLE ECONOMICS
In the book, THE MIDAS TOUCH, author John Train says that the insurance business
model is a "license to coin money."
8
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In understanding the insured risks, a company can almost statistically guarantee
a long-term profit by writing policies at appropriate rates. Orion has an
outstanding record of financial achievement that demonstrates its ability to
work the insurance model successfully. Over the last five years, Orion's
combined ratio, the underwriting cost on one dollar of premium, was 98.7%
compared to an industry average of 105.6%. In turn, Orion has maintained an
operating return on equity (ROE) in the mid-teens or higher for nine consecutive
years, also comparing quite favorably with an industry average estimated at less
than 10%. Over the last ten years, operating earnings per share have grown 22%
annually and book value 18.2% on average.
STRONG MANAGEMENT COMMITTED TO BUILDING SHAREHOLDER VALUE
Orion has a top flight management team. Extensive independent verification has
shown Chief Executive Officer, W. Marston Becker, to be highly regarded both
inside and outside the industry. In addition, Becker's team comes with a broad
spectrum of experience from running their own agencies as well as tenures with
well-known industry leaders like Progressive and Travelers. Management and
employee incentives are aligned with the interest of shareholders - insiders own
more than eight percent of the company. Management has remained focused on
enhancing value as evidenced by their recent divestiture of business lines
deemed too commodity oriented. Investors who bought shares of Orion Capital on
the first day of trading October 18, 1976, and reinvested the dividends, have
earned a 23.5% average annual return.
VALUATION
Presently, the insurance industry is in the throes of a highly competitive
cycle. In addition, poor investment results during the third quarter of 1998 led
Orion stock to fall from a high of $59 to a low of $28. We view these factors as
a buying opportunity for a high quality company. Currently at $39, Orion is
trading at 11 times 1999 cash earnings and 1.4 times book value, both well below
historical norms. At these levels, the company shares sell at a 35% discount
from our estimated private market value (PMV) of $60. We recommend investors
acquire shares at these levels.
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ARIEL EQUITY FUNDS
[GRAPHIC]
TEN LARGEST HOLDINGS
as of December 31, 1998
<TABLE>
<S> <C>
1 SPECIALTY EQUIPMENT
Manufacturer of commercial and institutional food service equipment
2 HASBRO, INC.
Prominent toy manufacturer
3 MBIA, INC.
Leading insurer of municipal bonds
4 CENTRAL NEWSPAPERS, INC.
Leading media company with daily newspapers in Phoenix and Indianapolis
5 WHITMAN CORP.
Pepsi Co's largest independent domestic bottler
6 ECOLAB, INC.
A top developer and marketer of premium cleaning and sanitizing products and
services for the hospitality markets
7 ROUSE CO.
Retail mall developer
8 BRADY CORP.
Manufacturer and distributor of niche industrial safety-related products
9 SHOREWOOD PACKAGING
Manufacturer and printer of high-quality paperboard packaging
10 LEE ENTERPRISES, INC.
Diversified media company
</TABLE>
ARIEL FUND
Inception November 6, 1986
AVERAGE ANNUAL TOTAL RETURN AS OF DECEMBER 31, 1998 (assume reinvestment of
dividends and capital gains)
Total return does not reflect a maximum 4.75% sales load charged prior to
7/15/94.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
1 Year 3 Year 5 Year 10 Year Life of Fund
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Ariel Fund +9.9% +22.8% +16.0% +13.5% +15.3%
- --------------------------------------------------------------------------------------
Russell 2000 Index -2.6% +11.6% +11.9% +12.9% +11.5%
- --------------------------------------------------------------------------------------
</TABLE>
[GRAPH]
[PLOT POINTS TO COME]
Ariel 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 changes in value of $10,000 invested in Ariel Fund and
comparable indices.(+)
[GRAPH]
<TABLE>
<CAPTION>
Ariel Fund S&P 500 Russell 2000
<S> <C> <C> <C>
Nov 86 $10,000 $10,000 $10,000
Dec 86 $10,203 $ 9,745 $ 9,711
Dec 87 $11,367 $10,256 $ 8,860
Dec 88 $15,905 $11,960 $11,065
Dec 89 $19,900 $15,749 $12,863
Dec 90 $16,699 $15,260 $10,354
Dec 91 $22,163 $19,910 $15,122
Dec 92 $24,763 $21,427 $17,906
Dec 93 $26,924 $23,587 $21,292
Dec 94 $25,786 $23,897 $20,904
Dec 95 $30,562 $32,878 $26,849
Dec 96 $37,747 $40,426 $31,279
Dec 97 $51,502 $53,914 $38,274
Dec 98 $56,595 $69,320 $37,300
</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 2000 Index measures the performance of smaller companies.
All indices are unmanaged and returns include reinvested dividends. An investor
cannot invest directly in an index.
10
<PAGE>
ARIEL APPRECIATION FUND
Inception December 1, 1989
AVERAGE ANNUAL TOTAL RETURN AS OF DECEMBER 31, 1998 (assume reinvestment of
dividends and capital gains)
Total return does not reflect a maximum 4.75% sales load charged prior to
7/15/94.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
1 Year 3 Year 5 Year Life of Fund
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Ariel Appreciation Fund +19.6% +26.8% +18.3% +15.6%
- -------------------------------------------------------------------------------
Russell Mid Cap Index +10.1% +19.1% +17.3% +15.7%
</TABLE>
[GRAPH]
Ariel Appreciation Fund also pursues long-term capital appreciation by investing
in undervalued firms with growth potential. Like Ariel 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 changes in value of $10,000 invested in Ariel Appreciation Fund
and comparable indices.(+)
[GRAPH]
<TABLE>
<CAPTION>
Ariel
Appreciation Fund S&P 500 Russell Mid Cap
<S> <C> <C> <C>
Dec 89 $10,000 $10,000 $10,000
Dec 90 $ 9,902 $ 9,922 $ 9,006
Dec 91 $13,184 $12,945 $12,744
Dec 92 $14,930 $13,932 $14,826
Dec 93 $16,115 $15,336 $16,947
Dec 94 $14,763 $15,539 $16,592
Dec 95 $18,330 $21,378 $22,309
Dec 96 $22,677 $26,286 $26,547
Dec 97 $31,283 $35,056 $34,247
Dec 98 $37,398 $45,074 $37,705
</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 Mid Cap Index measures the performance of small and
mid-sized companies. All indices are unmanaged and returns include reinvested
dividends. An investor cannot invest directly in an index.
TEN LARGEST HOLDINGS
as of December 31, 1998
<TABLE>
<S> <C>
1 CENTURY TELEPHONE ENTERPRISES
Diversified telecommunications company
2 ALLERGAN, INC.
A foremost provider of specialty eyecare products
3 SPECIALTY EQUIPMENT
Manufacturer of commercial and institutional food service equipment
4 HASBRO, INC.
Prominent toy manufacturer
5 CARNIVAL CRUISE LINE, INC.
World's largest cruise ship company
6 MBIA, INC.
Leading insurer of municipal bonds
7 WHITMAN CORP.
Pepsi Co's largest independent domestic bottler
8 ROUSE CO.
Retail mall developer
9 NORTHERN TRUST CORP.
Chicago-based bank holding company
10 SHOREWOOD PACKAGING
Manufacturer and printer of high-quality paperboard packaging
</TABLE>
11
<PAGE>
SCHEDULE OF INVESTMENTS
[GRAPHIC]
ARIEL FUND
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
Number COMMON STOCKS-93.61% Cost Market Value
of Shares
<S> <C> <C> <C>
CONSUMER DISCRETIONARY--30.74%
762,110 American Media, Inc., Class A* $6,242,746 $4,239,237
272,933 Bob Evans Farms, Inc. 3,914,892 7,113,316
142,300 Central Newspapers, Inc., Class A 4,313,175 10,165,556
105,700 Department 56, Inc.* 3,716,580 3,970,356
289,400 Hasbro, Inc. 4,955,856 10,454,575
155,000 International Game Technology 3,339,503 3,768,438
248,100 Lee Enterprises 6,906,147 7,815,150
218,500 Leggett & Platt, Inc. 1,374,032 4,807,000
219,400 Libbey, Inc. 8,069,315 6,348,888
57,900 Omnicom Group, Inc. 407,454 3,358,200
---------- ----------
43,239,700 62,040,716
---------- ----------
CONSUMER STAPLES--11.43%
177,200 Longs Drug Stores, Inc. 3,127,022 6,645,000
206,600 McCormick & Co., Inc. 4,702,084 6,985,663
372,000 Whitman Corp. 6,031,275 9,439,500
---------- ----------
13,860,381 23,070,163
---------- ----------
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
Number COMMON STOCKS-93.61% Cost Market Value
of Shares
<S> <C> <C> <C>
FINANCIAL SERVICES --9.76%
40,800 Arthur J. Gallagher & Co. $1,527,033 $1,800,300
156,500 MBIA, Inc. 5,609,697 10,260,531
60,900 Northern Trust Corp. 1,047,127 5,317,331
58,100 Orion Capital Corp. 2,187,636 2,313,106
---------- ----------
10,371,493 19,691,268
---------- ----------
HEALTH CARE--2.42%
75,400 Allergan, Inc. 2,098,804 4,882,150
---------- ----------
MATERIALS AND PROCESSING--21.46%
313,700 Brady Corp. 7,860,420 8,450,294
260,000 Ecolab, Inc. 1,963,459 9,408,750
143,900 Hunt Corp. 1,916,478 1,528,937
692,700 Interface, Inc., Class A 5,994,987 6,429,122
337,900 Rouse Co. 6,280,404 9,292,250
400,000 Shorewood Packaging Corp.* 3,261,442 8,200,000
---------- ----------
27,277,190 43,309,353
---------- ----------
PRODUCER DURABLES--11.70%
168,920 General Binding Corp. 3,047,866 6,292,270
129,000 Hussman International, Inc. 1,778,272 2,499,375
125,300 IDEX Corp. 3,223,397 3,069,850
434,100 Specialty Equipment Cos., Inc.* 5,523,313 11,747,831
---------- ----------
13,572,848 23,609,326
---------- ----------
TECHNOLOGY--2.75%
288,100 Littelfuse, Inc.* $7,344,468 $5,545,925
---------- ----------
UTILITIES--3.35%
100,200 Century Telephone Enterprises 2,164,426 6,763,500
---------- ----------
Total Common Stocks 119,929,310 188,912,401
---------- ----------
<CAPTION>
Principal REPURCHASE
Amount AGREEMENT-7.09%
<S> <C> <C> <C>
$14,299,524 State Street Bank & Trust Company
Repurchase Agreement, 4.00%,
dated 12/31/1998, repurchase price
$14,305,879, maturing 1/4/1999
(collateralized by U.S. Treasury
Bond, 8.875%, 2/15/2019) 14,299,524 14,299,524
---------- ----------
Total Repurchase Agreement 14,299,524 14,299,524
---------- ----------
Total Investments-100.70% $134,228,834 203,211,925
------------
------------
Liabilities less Other Assets-(0.70)% (1,416,503)
----------
NET ASSETS-100.00% $201,795,422
------------
------------
</TABLE>
*Non-income producing
13
<PAGE>
ARIEL APPRECIATION FUND
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
Number COMMON STOCKS-94.50% Cost Market Value
of Shares
<S> <C> <C> <C>
CONSUMER DISCRETIONARY--34.03%
145,900 Bob Evans Farms, Inc. $2,837,068 $3,802,519
251,700 Carnival Corp. 3,696,557 12,081,600
91,800 Central Newspapers, Inc., Class A 5,056,141 6,557,962
208,200 First Brands Corp. 4,121,474 8,210,887
157,000 Galileo International, Inc. 6,048,368 6,829,500
282,350 Harte Hanks, Inc. 1,652,234 8,046,975
365,100 Hasbro, Inc. 7,038,335 13,189,237
138,500 Houghton Mifflin Co. 3,489,822 6,544,125
219,200 Lee Enterprises 6,039,403 6,904,800
307,720 Leggett & Platt, Inc. 1,876,028 6,769,840
189,400 Libbey, Inc. 6,915,921 5,480,763
110,500 Omnicom Group, Inc. 1,079,309 6,409,000
87,300 Tribune Co. 4,071,941 5,761,800
---------- ----------
53,922,601 96,589,008
---------- ----------
CONSUMER STAPLES--9.33%
225,840 Longs Drug Stores, Inc. 4,114,765 8,469,000
216,255 McCormick & Co., Inc. 5,185,410 7,312,122
421,600 Whitman Corp. 6,830,933 10,698,100
---------- ----------
16,131,108 26,479,222
---------- ----------
FINANCIAL SERVICES--12.79%
34,500 Arthur J. Gallagher & Co. $1,156,293 $1,522,313
154,400 Equifax, Inc. 3,957,395 5,278,550
111,600 Franklin Resources, Inc. 3,553,174 3,571,200
176,300 MBIA, Inc. 7,202,005 11,558,669
175,200 MBNA Corp. 899,280 4,369,050
114,700 Northern Trust Corp. 2,386,266 10,014,744
---------- ----------
19,154,413 36,314,526
---------- ----------
HEALTH CARE--7.86%
223,200 Allergan, Inc. 7,601,291 14,452,200
288,800 Sybron International Corp.* 3,574,952 7,851,750
---------- ----------
11,176,243 22,303,950
---------- ----------
MATERIALS AND PROCESSING--14.83%
267,700 Brady Corp. 5,904,915 7,211,169
129,600 Ecolab, Inc. 1,601,491 4,689,900
349,400 Interface, Inc., Class A 5,998,523 3,242,869
325,800 Morton International, Inc. 9,183,712 7,982,100
373,000 Rouse Co. 6,041,092 10,257,500
424,015 Shorewood Packaging Corp.* 3,260,265 8,692,308
---------- ----------
31,989,998 42,075,846
---------- ----------
PRODUCER DURABLES--8.35%
129,305 General Binding Corp. 2,131,766 4,816,611
122,450 Hussman International, Inc. 1,646,582 2,372,469
45,000 Pitney-Bowes, Inc. 802,490 2,972,812
499,700 Specialty Equipment Cos., Inc.* 7,224,965 13,523,131
---------- ----------
11,805,803 23,685,023
---------- ----------
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
Number COMMON STOCKS-94.50% (cont) Cost Market Value
of Shares
<S> <C> <C> <C>
TECHNOLOGY--1.77%
261,200 Littelfuse, Inc.* $6,523,002 $5,028,100
---------- ----------
6,523,002 5,028,100
---------- ----------
UTILITIES--5.54%
232,950 Century Telephone Enterprises 5,105,899 15,724,125
---------- ----------
Total Common Stocks 155,809,067 268,199,800
----------- -----------
<CAPTION>
Principal REPURCHASE AGREEMENT-6.30%
Amount
$17,863,139 State Street Bank & Trust Company
Repurchase Agreement, 4.00%,
dated 12/31/1998, repurchase price
$17,871,078, maturing 1/4/1999
(collateralized by U.S. Treasury
Bond, 8.875%, 2/15/2019) 17,863,139 17,863,139
---------- ----------
Total Repurchase Agreement 17,863,139 17,863,139
---------- ----------
Total Investments-100.80% $173,672,206 286,062,939
------------
------------
Liabilities less Other Assets-(0.80)% (2,259,478)
----------
NET ASSETS-100.00% $283,803,461
------------
------------
</TABLE>
*Non-income producing
15
<PAGE>
EQUITY STATISTICAL SUMMARY
<TABLE>
<CAPTION>
ARIEL Earnings Per Share
(UNAUDITED) ----------------------
52 - Week
Range 1997 1998 1999 1997 1998
Ticker Price -------------- Actual Estimated Estimated P/E P/E
Company Symbol 12/31/98 Low High Calendar Calendar Calendar Calendar Calendar
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Hunt Corp. HUN 10.63 9.25 25.19 1.10 0.81 0.71 9.7 13.1
American Media, Inc. ENQ 5.56 4.00 8.19 0.17 0.12 0.21 32.7 46.4
Littelfuse, Inc. LFUS 19.25 16.00 28.50 1.07 0.85 1.02 18.0 22.6
Interface, Inc. IFSIA 9.28 8.25 22.88 0.77 0.89 1.00 12.1 10.4
Libbey, Inc. LBY 28.94 28.25 39.50 2.30 2.30 2.50 12.6 12.6
Shorewood Packaging Corp. SWD 20.50 12.13 20.50 0.97 1.07 1.25 21.1 19.2
Specialty Equipment Cos. SEC 27.06 16.38 27.13 1.86 2.07 2.44 14.6 13.1
General Binding Corp. GBND 37.25 26.50 42.50 1.80 1.64 2.05 20.7 22.7
Brady Corp. BRCOA 26.94 16.25 35.75 1.50 1.45 1.60 18.0 18.6
Department 56, Inc. DFS 37.56 22.94 39.31 1.95 2.40 2.72 19.3 15.7
IDEX Corp. IEX 24.50 19.50 38.75 1.78 1.81 1.86 13.8 13.5
Arthur J. Gallagher & Co. AJG 44.13 33.56 46.75 2.75 3.10 3.35 16.0 14.2
Hussmann International HSM 19.38 11.63 20.13 1.01 1.20 1.39 19.2 16.1
Bob Evans Farms, Inc. BOBE 26.06 18.00 26.88 1.03 1.28 1.45 25.3 20.4
Orion Capital Corp. OC 39.81 28.00 59.25 3.07 2.53 3.36 13.0 15.7
Lee Enterprises LEE 31.50 21.81 33.88 1.34 1.41 1.59 23.5 22.3
Central Newspapers, Inc. ECP 35.72 27.41 37.47 1.54 1.80 2.09 23.2 19.8
Longs Drug Stores Corp. LDG 37.50 26.00 44.50 1.51 1.64 1.80 24.8 22.9
Rouse Company RSE 27.50 23.13 35.69 2.47 2.72 3.01 11.1 10.1
McCormick & Company, Inc. MCCRK 33.81 27.06 36.44 1.26 1.43 1.58 26.8 23.6
Whitman Corp. WH 25.38 14.88 26.63 0.46 0.61 0.72 55.2 41.6
International Game Technology IGT 24.31 16.13 28.69 1.18 1.38 1.59 20.6 17.6
Allergan, Inc. AGN 64.75 31.75 66.50 1.56 2.01 2.39 41.5 32.2
Leggett & Platt, Inc. LEG 22.00 16.88 28.75 1.08 1.24 1.42 20.4 17.8
Ecolab, Inc. ECL 36.19 26.13 38.00 1.00 1.15 1.30 36.2 31.5
Hasbro, Inc. HAS 36.13 28.00 40.94 1.69 1.59 1.99 21.4 22.7
Century Telephone Enterprises CTL 67.50 32.33 67.75 1.63 2.08 2.38 41.4 32.5
MBIA, Inc. MBI 65.56 46.06 80.94 4.05 4.59 5.06 16.2 14.3
Northern Trust Corp. NTRS 87.31 55.75 89.88 2.65 3.04 3.50 32.9 28.7
Omnicom Group, Inc. OMC 58.00 37.00 58.50 1.37 1.66 1.90 42.3 34.9
<CAPTION>
Earnings Per Share
------------------
1999 Market
P/E Cap.
Calendar ($MM)
<S> <C> <C>
Hunt Corp. 15.0 118
American Media, Inc. 26.5 236
Littelfuse, Inc. 18.9 441
Interface, Inc. 9.3 486
Libbey, Inc. 11.6 487
Shorewood Packaging Corp. 16.4 559
Specialty Equipment Cos. 11.1 584
General Binding Corp. 18.2 585
Brady Corp. 16.8 607
Department 56, Inc. 13.8 679
IDEX Corp. 13.2 719
Arthur J. Gallagher & Co. 13.2 763
Hussmann International 13.9 988
Bob Evans Farms, Inc. 18.0 1,068
Orion Capital Corp. 11.8 1,079
Lee Enterprises 19.8 1,397
Central Newspapers, Inc. 17.1 1,454
Longs Drug Stores Corp. 20.8 1,461
Rouse Company 9.1 1,887
McCormick & Company, Inc. 21.4 2,458
Whitman Corp. 35.2 2,560
International Game Technology 15.3 2,625
Allergan, Inc. 27.1 4,273
Leggett & Platt, Inc. 15.5 4,330
Ecolab, Inc. 27.8 4,682
Hasbro, Inc. 18.2 4,726
Century Telephone Enterprises 28.4 6,206
MBIA, Inc. 13.0 6,514
Northern Trust Corp. 24.9 9,696
Omnicom Group, Inc. 30.5 9,784
</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.
Central Newspapers, Inc. prices and estimates are adjusted for the 2 for
1 stock split effective January 11, 1999.
16
<PAGE>
<TABLE>
<CAPTION>
ARIEL APPRECIATION
(UNAUDITED)
Earnings Per Share
------------------
52 - Week
Range 1997 1998 1999 1997
Ticker Price -------------- Actual Estimated Estimated P/E
Company Symbol 12/31/98 Low High Calendar Calendar Calendar Calendar
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Littelfuse, Inc. LFUS 19.25 16.00 28.50 1.07 0.85 1.02 18.0
Interface, Inc. IFSIA 9.28 8.25 22.88 0.77 0.89 1.00 12.1
Libbey, Inc. LBY 28.94 28.25 39.50 2.30 2.30 2.50 12.6
Shorewood Packaging Corp. SWD 20.50 12.13 20.50 0.97 1.07 1.25 21.1
Specialty Equipment Cos. SEC 27.06 16.38 27.13 1.86 2.07 2.44 14.6
General Binding Corp. GBND 37.25 26.50 42.50 1.80 1.64 2.05 20.7
Brady Corp. BRCOA 26.94 16.25 35.75 1.50 1.45 1.60 18.0
Arthur J. Gallagher & Co. AJG 44.13 33.56 46.75 2.75 3.10 3.35 16.0
Hussmann International HSM 19.38 11.63 20.13 1.01 1.20 1.39 19.2
Bob Evans Farms, Inc. BOBE 26.06 18.00 26.88 1.03 1.28 1.45 25.3
Lee Enterprises LEE 31.50 21.81 33.88 1.34 1.41 1.59 23.5
Houghton Mifflin Company HTN 47.25 26.75 47.25 1.48 1.38 1.73 31.9
Central Newspapers, Inc. ECP 35.72 27.41 37.47 1.54 1.80 2.09 23.2
Longs Drug Stores Corp. LDG 37.50 26.00 44.50 1.51 1.64 1.80 24.8
First Brands Corporation FBR 39.44 19.31 39.81 1.38 1.44 1.69 28.6
Rouse Company RSE 27.50 23.13 35.69 2.47 2.72 3.01 11.1
Harte Hanks, Inc. HHS 28.50 17.34 28.50 0.57 0.86 1.00 50.0
McCormick & Company, Inc. MCCRK 33.81 27.06 36.44 1.26 1.43 1.58 26.8
Whitman Corp. WH 25.38 14.88 26.63 0.46 0.61 0.72 55.2
Sybron International Corp. SYB 27.19 16.38 29.13 0.87 1.03 1.20 31.3
Morton International MII 24.50 21.13 34.44 1.55 1.65 1.70 15.8
Allergan, Inc. AGN 64.75 31.75 66.50 1.56 2.01 2.39 41.5
Leggett & Platt, Inc. LEG 22.00 16.88 28.75 1.08 1.24 1.42 20.4
Galileo International, Inc. GLC 43.50 24.75 46.13 1.50 1.85 2.18 29.0
Ecolab, Inc. ECL 36.19 26.13 38.00 1.00 1.15 1.30 36.2
Hasbro, Inc. HAS 36.13 28.00 40.94 1.69 1.59 1.99 21.4
Equifax, Inc. EFX 34.19 29.75 45.00 1.24 1.34 1.56 27.6
Century Telephone Enterprises CTL 67.50 32.33 67.75 1.63 2.08 2.38 41.4
MBIA, Inc. MBI 65.56 46.06 80.94 4.05 4.59 5.06 16.2
Tribune Company TRB 66.00 44.75 75.06 2.29 2.54 2.90 28.8
Franklin Resources, Inc. BEN 32.00 25.75 57.88 1.86 1.86 1.92 17.2
Northern Trust Corp. NTRS 87.31 55.75 89.88 2.65 3.04 3.50 32.9
Omnicom Group, Inc. OMC 58.00 37.00 58.50 1.37 1.66 1.90 42.3
Pitney Bowes, Inc. PBI 66.06 42.22 66.38 1.80 2.04 2.30 36.7
MBNA Corporation KRB 24.81 13.50 25.88 0.76 0.97 1.16 32.6
Carnival Corporation CCL 48.00 19.00 48.50 1.12 1.40 1.63 42.9
<CAPTION>
Earnings Per Share
------------------
1998 1999 Market
P/E P/E Cap.
Company Calendar Calendar ($MM)
<S> <C> <C> <C>
Littelfuse, Inc. 22.6 18.9 441
Interface, Inc. 10.4 9.3 486
Libbey, Inc. 12.6 11.6 487
Shorewood Packaging Corp. 19.2 16.4 559
Specialty Equipment Cos. 13.1 11.1 584
General Binding Corp. 22.7 18.2 585
Brady Corp. 18.6 16.8 607
Arthur J. Gallagher & Co. 14.2 13.2 763
Hussmann International 16.1 13.9 988
Bob Evans Farms, Inc. 20.4 18.0 1,068
Lee Enterprises 22.3 19.8 1,397
Houghton Mifflin Company 34.2 27.3 1,441
Central Newspapers, Inc. 19.8 17.1 1,454
Longs Drug Stores Corp. 22.9 20.8 1,461
First Brands Corporation 27.4 23.3 1,540
Rouse Company 10.1 9.1 1,887
Harte Hanks, Inc. 33.1 28.5 2,023
McCormick & Company, Inc. 23.6 21.4 2,458
Whitman Corp. 41.6 35.2 2,560
Sybron International Corp. 26.4 22.7 2,804
Morton International 14.8 14.4 2,973
Allergan, Inc. 32.2 27.1 4,273
Leggett & Platt, Inc. 17.8 15.5 4,330
Galileo International, Inc. 23.5 20.0 4,564
Ecolab, Inc. 31.5 27.8 4,682
Hasbro, Inc. 22.7 18.2 4,726
Equifax, Inc. 25.5 21.9 5,041
Century Telephone Enterprises 32.5 28.4 6,206
MBIA, Inc. 14.3 13.0 6,514
Tribune Company 26.0 22.8 7,838
Franklin Resources, Inc. 17.2 16.7 8,048
Northern Trust Corp. 28.7 24.9 9,696
Omnicom Group, Inc. 34.9 30.5 9,784
Pitney Bowes, Inc. 32.4 28.7 18,011
MBNA Corporation 25.6 21.4 18,652
Carnival Corporation 34.3 29.4 29,492
</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.
Central Newspapers, Inc. prices and estimates are adjusted for the 2 for
1 stock split effective January 11, 1999.
17
<PAGE>
DEAR FELLOW SHAREHOLDER: For the quarter ending December 31, 1998, Ariel Premier
Bond Fund Institutional Class returned 0.24% and the Investor Class 0.04%, while
the Lehman Brothers Aggregate Index gained 0.34%.(1)
1998 was an extraordinary year in the financial market arena as a confluence of
political, economic and market events led to unusual volatility and surprising
outcomes. Presidential impeachment, stock market fluctuations, the Russian
default and subsequent liquidations of hedge funds dominated the financial news,
particularly during the second half of the year. In the fixed income market,
these events led to the separation of yields and spreads from their traditional
determinants of value--the domestic economy and inflation. Despite a slight rise
in inflation and a 30% gain for the S&P 500, the Federal Reserve lowered
interest rates by 75 basis points, and Treasury yields declined by 1%.
Additionally, spreads in all non-Treasury sectors widened sharply after August,
as the flight to quality widened risk and liquidity premiums. Today, treasury
yields and sector spreads continue to reflect a significant probability of
recession, a sharp decline in inflation, and additional interest.
The best performing securities in 1998 were treasuries; and the longer the
duration, the better. All other sectors underperformed similar duration
Governments. Ariel Premier Bond Fund's short duration and spread exposure led to
returns roughly equal to the benchmark for the fourth quarter. For the year, the
Fund's strategy reflected the view that persistent above average economic growth
would ultimately spur higher inflation and higher interest rates, particularly
given the optimistic valuations that existed in yields at the end of 1997.
Although our forecasts for the economy and inflation were realized, events since
August have caused the market to place less emphasis on these factors. While
positive contributions from our mortgage strategy, corporate selection, and the
addition of Treasury Inflation Protected Securities (TIPS) helped our results,
our defensive duration and bias for high-quality asset-backed securities
penalized performance. With this said, the Institutional Class continues to
maintain its 4-star rating by Morningstar, Inc.(2) (The Investor Class is not
yet rated.)
The Fund is currently positioned to perform well in an environment of moderate
growth, relatively stable inflation and ultimately stable to narrower risk
premiums. It will provide exceptional excess returns if investors are again
surprised by the resiliency of the domestic economy and readopt a more balanced
view of inflation risks.
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) A description of the Lehman Brothers Aggregate Index can be referenced on
page 19.
(2) Morningstar proprietary ratings reflect historical risk-adjusted
performance for the three year period ended 12/31/98. Ratings are based on
1,488 Fixed Income Funds. 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>
ARIEL PREMIER BOND FUND
Institutional Class Inception
October 1, 1995
Investor Class Inception
February 1, 1997
AVERAGE ANNUAL TOTAL RETURN AS OF DECEMBER 31, 1998 (assume reinvestment of
dividends and capital gains)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
4Q98 1 Year 3 Year Life of Fund
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Ariel Premier Bond Fund, Inst. Cl. +0.24% +7.65% +6.62% +7.22%
- ------------------------------------------------------------------------------------------------------
Ariel Premier Bond Fund, Inv. Cl. +0.04% +7.23% -- +8.16%
- ------------------------------------------------------------------------------------------------------
Lehman Bros. Aggregate Bond Index +0.34% +8.69% +7.29% +9.42% (Inv.)
+8.08% (Inst.)
</TABLE>
[GRAPH]
[PLOT POINTS TO COME]
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. Lehman Aggregate
<S> <C> <C>
Feb 97 $10,000 $10,000
Mar 97 $ 9,930 $ 9,914
Jun 97 $10,265 $10,279
Sep 97 $10,573 $10,619
Dec 97 $10,838 $10,932
Mar 98 $10,997 $11,102
Jun 98 $11,235 $11,361
Sep 98 $11,616 $11,842
Dec 98 $11,621 $11,881
</TABLE>
COMPARISON OF CHANGE IN VALUE OF $1,000,000 INVESTED IN ARIEL PREMIER BOND FUND,
INST. CL. AND COMPARABLE INDICES*
[GRAPH]
<TABLE>
<CAPTION>
Ariel Premier Bond
Fund, Inst. Cl. Lehman Aggregate
<S> <C> <C>
Oct 95 $1,000,000 $1,000,000
Dec 95 $1,035,122 $1,042,614
Mar 96 $1,009,187 $1,024,120
Jun 96 $1,018,867 $1,029,953
Sep 96 $1,039,607 $1,048,996
Dec 96 $1,067,709 $1,080,468
Mar 97 $1,063,762 $1,074,431
Jun 97 $1,101,595 $1,113,888
Sep 97 $1,135,857 $1,150,900
Dec 97 $1,165,544 $1,184,769
Mar 98 $1,182,644 $1,203,205
Jun 98 $1,210,570 $1,231,317
Sep 98 $1,251,681 $1,283,385
Dec 98 $1,254,703 $1,287,699
</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.
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.
19
<PAGE>
ARIEL PREMIER BOND FUND
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
Par Value ASSET-BACKED SECURITIES-34.12% Cost Market Value
<C> <S> <C> <C>
$700,000 Americredit Auto Receivables,
6.06%, 12/12/2002 $699,895 $714,525
1,000,000 Associates Manufactured Housing,
972A-3, 6.275%, 3/15/2028 999,706 1,014,060
1,000,000 Auto Leasing Investors,
6.177%, 8/12/2005+ 1,000,000 1,022,190
650,000 BEA, 1998-1A A2A, zero coupon,
6/15/2010+ 627,297 653,555
520,000 Caterpillar Financial, G8AA,
5.85%, 4/25/2003 519,673 527,894
2,500,000 Chase Credit Card, 96C 3A,
7.04%, 2/15/2005 2,601,178 2,600,975
695,000 Circuit City Credit Card,
1995-1A, 6.375%, 8/15/2005 707,047 706,857
2,350,000 Citibank Credit Card, 97-6A,
zero coupon, 8/15/2006 1,671,841 1,682,341
990,000 Comed Transitional Funding Trust,
1998-A6, 5.63%, 6/25/2009 989,521 974,071
2,000,000 Contimortgage Home Equity, 97-A5,
6.44%, 12/15/2012 2,018,381 2,027,480
400,000 CSFB, 97-C1 A1C, 7.24%, 6/20/2007 414,778 426,124
2,000,000 EQCC Home Equity, 973-A9,
6.57%, 2/15/2029 1,983,942 2,011,880
2,900,000 Fannie Mae, 6.45%, 8/17/2013 2,935,435 2,983,490
858,000 Fingerhut, 96-1A, 6.45%, 2/20/2002 862,097 863,997
1,800,000 First Omni, 96-AA, 6.65%, 9/15/2003 1,824,116 1,827,738
1,529,624 Fleetwood, 97BA, 6.40%, 5/15/2013 1,527,580 1,558,319
130,000 General Growth Properties,
971A1, 6.537%, 11/15/2004+ 132,951 135,078
550,000 General Growth Properties,
976C1 A2, 6.602%, 11/15/2007+ 550,000 568,991
500,000 Green Tree Financial, 98-A4,
6.09%, 7/1/2010 499,945 502,720
60,000 Green Tree Financial, 1995-1 A5,
8.40%, 6/15/2025 65,803 61,588
1,065,000 GS Mortgage Securities Corp.,
97A2B, 6.86%, 7/13/2030 1,098,675 1,112,094
1,138,950 GS Mortgage Securities Corp.,
6.312%, 4/13/2031 1,162,931 1,160,123
475,000 GS Mortgage Securities Corp. II,
982A2, 6.562%, 4/13/2031 478,206 493,036
835,221 IMC Excess Cash,
7.41%, 11/26/2028+ 835,190 793,853
1,450,000 J.C. Penney Master Credit Card Trust,
1990-C1, 9.625%, 6/30/2000 1,513,375 1,529,663
2,500,000 MBNA Master Credit Card, 95DA,
6.05%, 11/15/2002 2,492,080 2,544,625
380,000 MBNA Master Credit Card II, 971A,
6.55%, 1/15/2007 383,002 395,515
20
<PAGE>
<CAPTION>
Par Value ASSET-BACKED SECURITIES-34.12% Cost Market Value
<C> <S> <C> <C>
$884,904 Merrill Lynch Mortgage Investors, Inc.,
1995-C2-A1, Floating Rate,
7.092% as of 12/31/98, 6/15/2021 $896,670 $906,230
229,775 The Money Store, 1996-1 A3,
6.85%, 12/20/2002 229,751 231,562
156,464 The Money Store, 1997-A A3,
6.675%, 4/15/2012 156,419 157,486
300,000 The Money Store, 1996-B A6,
7.38%, 5/15/2017 299,956 303,405
1,000,000 The Money Store, 1996-B A9,
8.14%, 10/15/2027 1,061,222 1,048,490
71,748 Olympic Auto Receivables,
1995-EA4, 5.85%, 3/15/2001 71,330 71,848
650,000 Premier Auto Trust, 98 3A3,
5.88%, 12/8/2001 649,913 660,764
1,440,000 Prime, 95-1A, 6.75%, 11/15/2005 1,445,760 1,502,986
136,111 Private Label Credit Card,
1994-2A, 7.80%, 9/20/2003 138,354 138,500
1,676,275 Railcar Leasing, 971A,
6.75%, 7/15/2006+ 1,675,697 1,741,231
1,352,253 Railcar Trust, 92-A1,
7.75%, 6/1/2004 1,400,722 1,442,638
12,179 Salomon Brothers, 96LB2A3,
6.875%, 10/25/2026 12,179 12,191
940,000 Salomon Brothers Mortgage Sec.,
97LB6A3, 6.76%, 12/25/2027 938,839 956,065
403,333 Sears Credit Account, 96-2A,
6.50%, 10/15/2003 401,725 405,306
420,000 Standard Credit Card Master -
Citibank, 94-4A, 8.25%, 11/7/2003 440,801 449,190
2,300,000 Standard Credit Card Master -
Citibank, 951A, 8.25%, 1/7/2007 2,483,773 2,629,613
1,400,000 Team Fleet Financial Co.,
97-1A, 7.35%, 5/15/2003+ 1,399,266 1,459,934
249,768 UCFC, 96 CA 3, 7.15%, 12/15/2013 249,732 249,058
1,560,000 Union Acceptance Corp., 97AA2,
6.375%, 10/8/2003 1,571,098 1,583,806
2,630,000 Union Financial Services
Taxable Student
Loan, 98A A8, 5.50%, 9/1/2005 2,611,127 2,587,262
1,880,000 World Financial, 96-AA,
6.70%, 2/15/2004 1,887,954 1,937,528
396,062 World Omni Auto Lease,
1996-BA3, 6.25%, 11/15/2002 395,598 397,730
2,198,780 World Omni Auto Lease,
97B3, 6.18%, 11/25/2003 2,198,583 2,232,444
------------ ------------
Total Asset-Backed Securities 53,211,114 53,998,049
------------ ------------
CORPORATE DEBT-17.94%
500,000 Abbey National PLC,
6.70%, 6/29/2049 499,161 490,000
445,000 American General Inst.,
7.57%, 12/1/2045+ 465,122 483,381
21
<PAGE>
<CAPTION>
Par Value CORPORATE DEBT - 17.94% (cont) Cost Market Value
<C> <S> <C> <C>
$500,000 American General Inst.,
8.125%, 3/15/2046+ $548,601 $577,500
550,000 American Stores, 8.00%, 6/1/2026 605,340 646,937
570,000 Archer Daniels II, 6.95%, 12/15/2097 567,635 607,762
275,000 Bank of America Capital II,
8.00%, 12/15/2026 271,283 303,187
185,000 Bayer Corporation, 6.65%, 2/15/2028+ 184,031 194,944
550,000 Best Foods,
5.60%, 10/15/2097 424,422 461,312
1,000,000 Citigroup Capital II,
7.75%, 12/1/2036 1,035,739 1,051,250
1,575,000 Consumers Energy CMS,
6.20%, 5/1/2003 1,556,506 1,600,594
700,000 CSX Corporation, 6.95%, 5/1/2027 722,682 745,500
1,340,000 Federated Department Stores,
7.00%, 2/15/2028 1,320,551 1,391,925
515,000 FedEx, 7.60%, 7/1/2097 540,542 511,781
725,000 Ford Motor Co., 7.50%, 8/1/2026 780,716 823,781
375,000 Ford Motor Co., 7.40%, 11/1/2046 408,108 418,125
1,100,000 GTE California, 6.75%, 5/15/2027 1,151,488 1,164,625
275,000 J.C. Penney Co., 7.625%, 3/1/2097 269,473 288,063
240,000 JP Morgan Capital Trust I,
7.54%, 1/15/2027 235,072 252,900
800,000 Lowe's Companies, Inc.,
6.875%, 2/15/2028 798,748 834,000
1,275,000 MCI Worldcom, Inc.,
7.75%, 4/1/2027 1,371,793 1,507,688
610,000 Mirage Resorts, 7.25%, 8/1/2017 606,830 574,163
300,000 News America Holdings,
7.25%, 5/18/2018 297,995 310,125
650,000 Peco Energy Co., 7.38%, 4/6/2028 650,000 663,812
1,400,000 Philip Morris, 7.125%, 8/15/2002 1,392,475 1,456,000
775,000 Provident Companies,
6.375%, 7/15/2005 772,425 790,500
1,220,000 Provident Companies,
7.00%, 7/15/2018 1,219,614 1,259,650
1,190,000 PSI Energy, 7.25%, 3/15/2028 1,186,182 1,219,750
1,160,000 Rite Aid Corporation,
6.00%, 10/1/2003+ 1,159,765 1,158,550
1,000,000 Safeco Capital Trust,
8.072%, 7/15/2037 1,000,000 1,058,750
750,000 Safeway Inc., 6.50%, 11/15/2008 747,832 770,625
750,000 Security Capital Group,
7.75%, 11/15/2003 749,307 762,188
1,500,000 Sprint Capital Corp.,
6.875%, 11/15/2028 1,497,543 1,567,500
805,000 Suntrust Cap II, 7.90%, 6/15/2027 809,650 888,519
335,000 Tyco International Group,
6.25%, 6/15/2003 333,496 340,863
300,000 Tyco International Group,
5.875%, 11/1/2004+ 299,880 300,375
595,000 Tyco International Group,
7.00%, 6/15/2028 590,734 602,438
280,000 Zurich Capital Trust,
8.376%, 6/1/2037+ 294,922 310,800
------------ ------------
Total Corporate Debt 27,365,663 28,389,863
------------ ------------
22
<PAGE>
<CAPTION>
Par Value U.S. GOVERNMENT AGENCIES-22.84% Cost Market Value
<C> <S> <C> <C>
MORTGAGE-BACKED SECURITIES--21.41%
$1,371,876 Freddie Mac, 6.50%, 11/1/2025 $1,296,383 $1,392,454
3,363,803 Freddie Mac, 6.50%, 2/1/2026 3,257,079 3,404,774
4,611,054 Freddie Mac, Gold, 6.50%, 3/1/2026 4,364,954 4,662,928
397,406 Freddie Mac, Gold, 6.50%, 4/1/2026 367,057 401,877
662,812 Freddie Mac, Gold, 6.50%, 5/1/2026 612,184 670,269
34,792 Fannie Mae, 7.00%, 10/1/2023 34,210 35,716
1,555,810 Fannie Mae, 6.50%, 4/1/2024 1,485,030 1,573,795
363,161 Fannie Mae, 7.00%, 5/1/2024 357,077 372,240
406,468 Fannie Mae, 6.50%, 11/1/2025 373,842 410,658
1,418,408 Fannie Mae, 6.50%, 1/1/2026 1,375,818 1,433,032
5,185,612 Fannie Mae, 6.50%, 5/1/2026 4,892,839 5,239,075
13,900,000 Fannie Mae, 7.50%, 1/1/2029(4) 14,264,875 14,269,184
------------ ------------
32,681,348 33,866,002
------------ ------------
OTHER AGENCY ISSUES--1.44%
250,000 Government Trust Certificate,
Aid Israel, 5.70%, 2/15/2003 249,440 255,973
1,145,179 Government Trust Certificate,
Israel Trust, Series 2E,
9.40%, 5/15/2002 1,202,175 1,189,554
804,490 Pemex Exp. Trust, 95-A,
7.66%, 8/15/2001 820,673 829,156
------------ ------------
2,272,288 2,274,683
------------ ------------
Total U.S. Government Agencies 34,953,636 36,140,685
------------ ------------
<CAPTION>
Par Value U.S. GOVERNMENT OBLIGATIONS-21.08% Cost Market Value
<C> <S> <C> <C>
$560,000 U.S. Treasury Bond,
13.875%, 5/15/2011 $829,501 $867,513
1,000,000 U.S. Treasury Bond,
6.75%, 8/15/2026 1,181,852 1,198,430
540,000 U.S. Treasury Bond,
6.125%, 11/15/2027 609,282 603,369
850,000 U.S. Treasury Bond,
5.50%, 8/15/2028 897,795 890,367
8,825,000 U.S. Treasury Note,
7.50%, 10/31/1999 8,915,865 9,024,975
2,000,000 U.S. Treasury Note,
6.25%, 6/30/2002 2,039,112 2,099,320
19,010,575 U.S. Treasury Note,
3.625%, 1/15/2008 18,948,075 18,659,830
------------ ------------
Total U.S. Government
Obligations 33,421,482 33,343,804
------------ ------------
COMMERCIAL PAPER-9.21%
3,100,000 General Electric Capital Corp.,
5.31%, 1/14/1999* 3,094,056 3,094,056
3,100,000 General Motors, 5.31%, 1/14/1999* 3,094,056 3,094,056
3,100,000 Indiana Power, 5.30%, 1/14/1999* 3,094,067 3,094,067
2,300,000 Metlife Funding, 5.35%, 1/13/1999* 2,295,898 2,295,898
3,000,000 Xerox Credit Corporation,
5.25%, 1/14/1999* 2,994,312 2,994,312
------------ ------------
Total Commercial Paper 14,572,389 14,572,389
------------ ------------
23
<PAGE>
<CAPTION>
Principal REPURCHASE AGREEMENT-2.95% Cost Market Value
Amount
<C> <S> <C> <C>
$4,661,189 State Street Bank & Trust
Company Repurchase
Agreement, 4.00%, dated
12/31/1998, repurchase price
$4,663,260, maturing
1/4/1999 (collateralized by
U.S. Treasury Bond, 8.875%,
2/15/2019) $4,661,189 $4,661,189
------------ ------------
Total Repurchase Agreement 4,661,189 4,661,189
------------ ------------
Total Investments-108.15% $168,185,473 $171,105,979
------------
------------
Liabilities less Other Assets-(8.15)% (12,900,799)
------------
NET ASSETS-100.00% $158,205,180
------------
------------
</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.
(4) When-issued security.
* Security pledged as collateral for when-issued purchase commitment
outstanding as of December 31, 1998.
24
<PAGE>
BOARD OF TRUSTEES
BERT N. MITCHELL, C.P.A. Bert is founder and chairman 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.
<PAGE>
ARIAL MUTUAL FUNDS
Ariel Investment Trust
307 North Michigan Avenue
Suite 500
Chicago, Illinois 60601
Bulk Mail
U.S. Postage
Paid
Permit No. 6784
Chicago, IL
[LOGO] Printed on recycled paper
