<PAGE>
ARIEL MUTUAL FUNDS
Quarterly Report
June 30, 1999
[GRAPHIC] THE PATIENT INVESTOR [LOGO]
Ariel Fund
Ariel Appreciation Fund
Ariel Premier Bond Fund
<PAGE>
SHAREHOLDER NEWS
NEW MONEY MARKET FUND EXCHANGE PRIVILEGES
On September 1, 1999, Ariel Mutual Funds is unveiling a new money market fund
for your exchange privileges. The SSgA Money Market Fund will replace the Cash
Resource Trust money market funds currently being offered. There will be no
interruption in service.
SSgA Money Market Fund's fundamental investment objective is to maximize current
income, to the extent consistent with the preservation of capital and liquidity
and the maintenance of a stable $1.00 per share net asset value, by investing in
dollar dominated securities with remaining maturities of one year or less.
The SSgA Money Market Fund is a portfolio of the SSgA Funds, an open-end
management investment company with multiple portfolios (commonly known as a
mutual fund) advised by State Street Bank and Trust Company, 225 Franklin
Street, Boston, MA 02110, and not affiliated with the Ariel Mutual Funds or
Ariel Distributors, Inc. Prior to making an exchange, you should carefully read
the prospectus for the SSgA Money Market Fund. The exchange privilege does not
constitute an offering or recommendation on the part of the Ariel Mutual Funds
or Ariel Distributors, Inc. for an investment in SSgA Money Market Fund.
For more information, or to receive an SSgA Money Market Fund Prospectus, call
an Ariel Mutual Funds Representative at 800-292-7435, option 1. The exchange
privileges with the Cash Resource Trust Funds will terminate on August 31, 1999.
INVESTMENTS IN THE SSgA MONEY MARKET FUND ARE NEITHER INSURED NOR GUARANTEED BY
THE US GOVERNMENT. THERE IS NO ASSURANCE THAT THE SSgA MONEY MARKET FUND WILL
MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE.
<PAGE>
[LETTERHEAD]
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. 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. INVESTING IN SMALL CAP STOCKS MAY BE MORE RISKY AND
MORE VOLATILE THAN INVESTING IN LARGE CAP STOCKS.
<TABLE>
<S> <C>
The Patient Investor 2
Company in Focus 6
Company Updates 8
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
</TABLE>
<PAGE>
SLOW AND STEADY WINS THE RACE.-AESOP
THE PATIENT INVESTOR-Registered Trademark- [LOGO]
Dear Fellow Shareholder: For the second quarter ending June 30, 1999, the
smaller companies of the Ariel Fund rose +10.0% and the mid-sized companies that
make up the Ariel Appreciation Fund gained +8.3%. While the Funds' returns were
strong on an absolute basis and even better than the +7.0% return of the large
stocks that have propelled the Standard and Poor's 500 Index to new highs
quarter after quarter, they fell short relative to their respective benchmarks.
Specifically, over the same three-month period, the small stocks of the Russell
2000 Index surged +15.6% while the Russell Mid Cap Index experienced a somewhat
less meteoric but certainly noteworthy +10.9% rise. The three-year returns are
more remarkable, with the Ariel Fund posting an average annual return of +20.0%
as of June 30, 1999, while the Russell 2000 Index gained +11.2% over the same
period. Similarly, the Ariel Appreciation Fund's average annual total return for
the three-year period ended June 30,1999 was +26.7%, far surpassing the Russell
Mid Cap's +19.6% gain over the same period.*
AN UNEVEN REBOUND
Returns show a clear reversal of fortune in stock leadership during the 90-day
period ending June 30, 1999. Coincidentally, the quarter-end wrap up discussions
found in the July 4th issue of most publications marked the announcement of what
we consider a "performance revolution". As the Independence Day issue of THE NEW
YORK TIMES summed, "[T]he world in which investors had grown so comfortable over
the last few years was turned on its head in the second quarter...sectors
* PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. The principal value and
investment returns will fluctuate so that an investor's shares, when redeemed,
may be worth more or less than their original cost. For the period ending June
30, 1999, the average annual total returns of the Ariel Fund for the one-,
three-, five-, and ten-year periods were 3.07%, 20.03%, 17.83% and 12.10%,
respectively. The Ariel Appreciation Fund's average annual total returns for the
one-, three-, five-, and since inception (12/01/89) periods ending June 30, 1999
were 15.44%, 26.67%, 21.34%, and 15.61%, respectively.
2
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and funds that had been written off for dead suddenly came to life." After a
rough 1998 when just 15% of the active managers beat the indomitable S&P 500
Index, 70% of actively managed funds bested the Index this past quarter.
Moreover, the oh-so-popular and seemingly insurmountable S&P Index funds and
mega-sized growth stocks were suddenly among the worst performing areas of the
market while the unloved and unwanted small and mid-cap issues were finally
among the best. Yet, as one financial advisor told THE NEW YORK TIMES,
"Americans like to buy everything on sale except stocks," and those who
under-weighted or even jettisoned their professionally managed small and mid-cap
portfolios were left behind as stock performance broadened. But against this
backdrop, the recent resuscitation of undervalued small and mid-cap issues was
not equitable. While on the surface it is apparent that smaller companies beat
larger ones and value trounced growth, a closer look shows small and mid-cap
outperformance was largely driven by the strength of traditional "deep value"
stocks--industrials, cyclicals and commodities--along with the technology
sector. This is evident in the top performing sectors of the Russell 2000 and
Russell Mid Cap indices for the second quarter:
<TABLE>
<CAPTION>
TOP PERFORMING SECTORS
RUSSELL 2000 RUSSELL MID CAP
------------ ---------------
<S> <C> <C> <C>
1. Energy 27.97% 1. Producer Durables 26.35%
2. Producer Durables 23.71 2. Materials & Processing 20.25
3. Autos & Transportation 23.38 3. Energy 18.49
4. Technology 21.50 4. Technology 16.69
</TABLE>
As such, the consistent and predictable sectors of the market--the very ones we
favor--did not fully participate in the rebound of small and mid-sized issues.
The chart that follows depicts the handicapped returns of these sectors when
compared to all TWELVE of the Russell sectors, ranked by return:
<TABLE>
<CAPTION>
BOTTOM PERFORMING SECTORS
RUSSELL 2000 RUSSELL MID CAP
------------ ---------------
<S> <C> <C> <C>
10. Consumer Discretionary 9.52% 8. Consumer Discretionary 8.56%
11. Consumer Staples 6.92 10. Consumer Staples 7.70
</TABLE>
The striking overall returns of the small and mid-cap indices show smaller
companies are finally beginning to close the value gap that has persisted versus
their large-cap brethren for
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some time now. With this said, we are most heartened by the hidden potential of
the lagging sectors. For while small and mid-caps may be in the early stages of
a comeback, the seemingly muted returns of these groupings show so much more
value is yet to be unleashed. And most importantly, this value lies in areas of
the market that have traditionally offered investors the wonderful combination
of strong returns and low volatility.
As this potential emerges, our portfolios continue to sell at
the lowest valuations we've experienced in our near 17 year history--a 53%
discount to the S&P 500 Index. We are encouraged by the broadening market
strength. While we wait, we continue to search for great businesses in
consistent industries selling at attractive valuations.
PORTFOLIOS COMINGS AND GOINGS
In keeping with first quarter's theme, we continued our bargain shopping for
much of the second quarter. More specifically, in the Ariel Fund, we initiated
new positions in Horace Mann Educators Corp. (NYSE: HMN), a multi-line insurance
holding company and True North Communications, Inc. (NYSE: TNO), the world's
sixth largest advertising agency. We also continued to build positions in a
number of newer holdings including: Day Runner, Inc. (OTC: DAYR), a leading
producer of paper-based organizers; Wesley Jessen VisionCare, Inc. (OTC: WJCO),
a maker of specialty contact lenses; an old favorite, Herman Miller, Inc. (OTC:
MLHR), the office furniture manufacturer and Graco, Inc. (OTC: GGG), a niche
manufacturer for fluid related instruments. Additionally, we viewed the market
backlash that followed the earnings shortfall reported by Department 56, Inc.
(NYSE:DFS) as an occasion to buy more shares in this high quality franchise run
by an excellent management team.
We should note that we had also been building upon our position in Orion Capital
Corporation (NYSE: OC), the niche property and casualty insurer, when an
announcement was made (as we write this letter early in the third quarter) that
the company would be acquired by Royal Sun Alliance, a British insurance
company. Our average cost was $35 per share and the per share takeover price is
$50. By virtue of the fact that our portfolios are loaded with smaller companies
that often dominate strong industry niches, we have benefited from a good number
of takeovers throughout the years. With our
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holdings currently selling at extraordinarily low multiples, we would not be
surprised to see more of them acquired given today's stock market environment.
Certainly, we are already seeing early signs of this phenomenon in the
restaurant equipment industry and would not be surprised if the same were to
occur in the office products area as well as continued consolidation of the
insurance and financial service arenas.
In the Ariel Appreciation Fund, the portfolio management themes are similar. We
took profits in Hasbro, Inc. (NYSE: HAS) as early indications of the impact of
its "Star Wars" prequel license led the stock to post gains. As the euphoria
quieted and the stock price settled down, we actually bought more shares in
keeping with our strong belief in the long-term potential of this leading toy
manufacturer. We also initiated a new position in Avery Dennison Corporation
(NYSE: AVY), a global leader in pressure-sensitive technology and innovative
self-adhesive solutions for consumer products and label systems; as well as XL
Capital Ltd. (NYSE: XL), a niche insurer. We bought more shares of Equifax, Inc.
(NYSE: EFX), the credit reporting agency, in addition to Herman Miller, Inc.
(OTC: MLHR).
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 Fund Ariel Appreciation Fund
The Funds' portfolio securities as of June 30, 1999, including the securities
discussed in this letter, are listed in the Schedule of Investments. Portfolio
holdings are subject to change.
[GRAPHIC]
5
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COMPANY
HORACE MANN EDUCATORS (NYSE: HMN) is a multi-line insurance holding company. The
company sells its retirement products as well as automobile, homeowners, group
and life insurance policies to elementary- and secondary-school teachers,
administrators, and support personnel in public and private schools. In so
doing, Horace Mann utilizes an exclusive sales force (many of whom are former
educators). Additionally, the company has strong alliances with teacher credit
unions and also sells products via the web.
[SIDENOTE:]
HORACE MANN-Registered Trademark-
1 Horace Mann Plaza
Springfield, IL 62715
(217) 789-2500
REASONS FOR RECOMMENDATION
UNIQUE FRANCHISE
HMN's exclusive sales force of 950 agents offers exactly the kind of franchise
Ariel seeks. Over the years, this unique, focused distribution method has
created a sustainable competitive advantage. As a result of its name recognition
within the target market, its very high policyholder loyalty, and its ability to
find the most profitable customers, HMN has impressive barriers to entry from
potential competitors.
According to the teachers we interviewed as part of our extensive due
diligence, HMN offers high levels of customer service and good prices. In
addition, HMN's distinct products lead to increased customer loyalty. For
example, the HMN homeowner's insurance covers personal belongings in the
classroom. Additionally, the focused sales force gets to know the customer base
very well and, thus, can consistently write profitable policies. Beyond strong
customer relationships, agents are compensated on the profitability of their
personal book of business. This creates the right economic incentives for
long-term success. Finally, the company has access to 5,000 of the roughly
16,000 payroll slots across school districts nationwide. This is very valuable
"real estate" for any number of financial service providers.
HIGHLY PROFITABLE
HMN has done an outstanding job of generating superior financial results. The
measure commonly used to judge insurance company profitability is return on
shareholder's equity (ROE). HMN's ROE in 1998 was an excellent 17%, equaling the
five-
6
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IN FOCUS
year average. The industry average is below 10%. HMN accomplishes these results
through outstanding cost controls and disciplined underwriting--two ingredients
to running a successful insurance business model. Over the last ten years, the
average insurance company has spent $1.07 to insure every $1.00 of sales.
Alternatively, HMN has kept costs at $0.97 for each $1.00. This three cents
helps HMN permanently increase its investment pool on an annual basis. HMN's
expense ratio of 19.6% ranks it 14th among the more than 2,400 insurance groups
operating in the U.S. Furthermore, the low expense ratio allows HMN to make the
most of the "float" generated from policyholder's premium dollars.
VETERAN MANAGEMENT FOCUSED ON SHAREHOLDERS
HMN has an experienced and well-respected management team. The five top
executives average 25 years of industry experience, most of which has been at
HMN. Paul Kardos has served as the company's President and Chief Executive
Officer of HMN since 1979. In total, he has been with the company for 23 years
and has 36 years of experience in the insurance industry. In addition, Mr.
Kardos owns 3% of the outstanding shares, while directors and officers own 5% of
the company. Management has also taken tremendous care of the shareholder's
capital by employing very conservative accounting methods, and they have been
generous in returning unused capital to shareholders through share buybacks.
Since 1996, the company has repurchased six million shares or 13% of all
outstanding.
VALUATION
HMN is an attractive value for long-term investors. We believe its unique
franchise, profitability, and disciplined management will continue to create
true economic value far in excess of its current share price. At $27 per share,
HMN trades at less than 12 times our estimate of its next twelve months of cash
operating earnings. Moreover, by our calculations, HMN is trading at a 30%
discount to its private market value.
7
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BRADY CORPORATION (NYSE: BRC) After a slowdown in sales growth during the summer
of 1998, financial performance has rebounded exceptionally well at Brady. The
company's management team has done a superior job restructuring and refocusing
the core franchise, and we believe these efforts will continue to benefit
shareholders.
[SIDENOTE:]
[LOGO]BRADY
6555 W. Good Hope Rd.
Milwaukee, WI 53223
(414) 358-6600
Brady dominates its niche-oriented markets in industrial labels, facility
identification, and safety-related products. The company's market position
allows it to achieve excellent levels of profitability, generate significant
excess cash flow, and reinvest in research and development. We expect this
debt-free, cash-rich company to continue to grow through new product
development, expanding global markets, additional market penetration and
selective acquisitions.
Brady is not widely followed by Wall Street analysts and as a result, we feel
this Milwaukee-based company remains an undiscovered gem. After a thorough
re-evaluation of the business during the dramatic sell-off in Brady shares last
summer, we added significantly to our position at a time when the stock traded
as low as $16.25. As Brady shares have nearly doubled from those lows, we have
been rewarded for our patience. At 17 times forward 12 months estimated cash
earnings and 7 times cash flow, we view Brady as an excellent core holding and
recommend investors hold their current positions.
LITTELFUSE, INC. (OTC: LFUS) After experiencing one of the worst market
environments for its products in 1998, Littlefuse has begun to see a rebound in
its electronics and automotive markets. Our analysis of company fundamentals and
market position assure us that our patience will pay off.
Littelfuse is the largest global manufacturer of circuit protection devices for
use in the electronic, automotive and industrial markets. Due in part to the
limited number of key industry players, the company has several significant
barriers to entry. Littelfuse's brand name, reputation and product development
give its customers high switching costs and relatively low price sensitivity,
augmenting the company's competitive advantage. Littelfuse's economics remain
very attractive with high margins, high returns on equity and tangible assets
and solid free cash flow. The recent business slowdown has also reinvigorated
management to be extra diligent in cutting costs to protect these economics.
Additionally, the company continues to have sound long-term prospects, with
several opportunities for top-line growth from the prevalent use of electronic
devices, increasing average fuse content in automobiles, and new product
development.
[SIDENOTE:]
LITTELFUSE-Registered Trademark-
800 E. Northwest Hwy.
Des Plaines, IL 60016
(847) 824-1188
The stock is currently trading at 14 times our forward 12 months cash earnings
estimate and 7.5 times cash flow and continues to represent an attractive value
for long-term investors.
8
<PAGE>
UPDATES
HASBRO INC. (NYSE:HAS) Stock price volatility takes on a new meaning when
deciphering Hasbro's second quarter performance! After reaching a 52-week high
of $37, Hasbro's shares closed the quarter at $27.54. Investor concerns about
the sale of "Star Wars" toys placed excessive pressure on Hasbro's shares. The
company later rewarded its true believers when it reported significantly better
than expected second quarter results. The stock price then moved higher.
[SIDENOTE:]
HASBRO [LOGO]
1027 Newport Avenue
Pawtucket, RI 02862
(401) 725-8697
In recent internal research meetings, we frequently reminded ourselves Hasbro is
bigger than "Star Wars." In fact, the company possesses a strong and diverse
portfolio of brands and products including perennial favorites like MONOPOLY and
SCRABBLE board games, MR. POTATO HEAD, FURBY, KOOSH, BARNEY, TELETUBBIES and
POKEMON. This broad portfolio of leading brands provides Hasbro with a low risk
profile. Additionally, we remain confident in management's ability to enhance
shareholder value and invest its significant cash flow judiciously, whether
through share repurchases or strategic acquisitions.
We are excited about Hasbro's long-term prospects. Thus, we recently added to
our position when the stock price declined to levels below $25. We oftentimes
remind ourselves of Warren Buffett's comment in his 1986 Letter to Shareholders
- - "We simply attempt to be fearful when others are greedy and to be greedy only
when others are fearful."
HUSSMANN INTERNATIONAL (NYSE: HSM) We have increased our position in Hussmann,
as we remain attracted to the company's franchise, long-term economics, and
value at current levels. Hussmann, with a domestic market share nearly double
that of its closest competitor, should continue to enjoy strong demand for its
products, including food display cases and walk-in freezers. Our optimism is
fueled by the growing competition among its supermarket and convenience store
customer base, along with the ever-increasing popularity of prepared foods
purchased at these destinations. Additionally, ongoing consolidation within the
food equipment industry should offer a further catalyst for a higher share
price.
[SIDENOTE:]
HUSSMAN [LOGO]
12999 St. Charles Rock Rd.
Bridgeton, MO 63044
(314) 291-2000
Recently, Hussmann pre-released in-line second-quarter operating results of
$0.33 versus $0.30. However, the company also warned weak demand in South
American beverage cooler sales would negatively affect its second half
performance. Thus, we reduced our fiscal year 1999 earnings per share estimate
by $0.10, or approximately 7%, to $1.32. Despite this temporary setback to
operating results from a relatively minor aspect of its overall business, we
remain confident Hussmann should generate low double-digit earnings increases
over the next several years.
Currently at $16.56, Hussmann is trading at less than 12 times our forward
twelve-month estimate of $1.46 and at approximately a 40% discount to our
private market value of $28. In our view, the shares offer attractive value at
current levels. As such, we recommend investors add to their positions.
9
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ARIEL FUND
Inception
November 6, 1986
AVERAGE ANNUAL TOTAL RETURN AS OF JUNE 30, 1999 (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>
- ----------------------------------------------------------------------------------------------------
2nd Quarter YTD 1 Year 3 Year 5 Year 10 Year Life of Fund
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Ariel Fund +10.0% +1.7% +3.1% +20.0% +17.8% +12.1% +14.8%
- ----------------------------------------------------------------------------------------------------
Russell 2000 Index +15.6% +9.3% +1.5% +11.2% +15.4% +12.4% +11.8%
</TABLE>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC.
<TABLE>
<CAPTION>
ARIEL FUND
<S> <C>
Technology 2.43%
Health Care 1.93%
Consumer Discretionary & Services 34.45%
Consumer Staples 10.49%
Materials & Processing 17.79%
Producer Durables 16.73%
Financial Services 9.74%
Utilities 2.45%
Cash and Other 3.99%
</TABLE>
<TABLE>
<CAPTION>
RUSSELL 2000 INDEX
<S> <C>
Technology 14.8%
Health Care 9.0%
Consumer Discretionary & Services 18.8%
Consumer Staples 2.7%
Integrated Oils 0.1%
Other Energy 2.9%
Materials & Processing 10.3%
Producer Durables 7.9%
Autos & Transportation 4.1%
Financial Services 22.1%
Utilities 6.1%
Cash and Other 1.2%
</TABLE>
<TABLE>
<CAPTION>
DATE ARIEL FUND S&P RUSSELL 2000
<S> <C> <C> <C>
1986 $10,000 $10,000 $10,000
1987 $11,367 $10,258 $8,860
1988 $16,905 $11,960 $11,065
1989 $19.900 $15,749 $12,863
1990 $16,699 $15,260 $10,354
1991 $22,163 $19,910 915,122
1992 $24,763 $21,427 $17,906
1993 $26,924 $23,587 $21,292
1994 $25,786 $23,897 $20,904
1995 $30,581 $32,878 $26,849
1996 $37,747 $40,426 $31,279
1997 $51,502 $53,914 $38,274
1998 $56,595 $69,320 $37,300
Jun-99 $57,558 $77,905 $40,763
</TABLE>
* Statistics represent past performance which is not indicative of future
results. The S&P 500 is a broad marker-weighted index dominated by blue-chip
stocks. The Russell 2000 Index measures the performance of smaller
companies. All indexes are immanaged and returns include reinveested
dividends. An investor cannot invest directly in an index.
[SIDENOTE:]
ARIEL FUND SEEKS LONG-TERM CAPITAL APPRECIATION BY INVESTING IN UNDERVALUED
COMPANIES IN CONSISTENT INDUSTRIES THAT SHOW STRONG POTENTIAL FOR GROWTH. THE
FUND LOOKS FOR ISSUERS THAT PROVIDE QUALITY PRODUCTS OR SERVICES. TO CAPTURE
ANTICIPATED GROWTH, THE FUND GENERALLY HOLDS INVESTMENTS FOR A RELATIVELY LONG
PERIOD, USUALLY THREE TO FIVE YEARS. THE FUND INVESTS IN COMPANIES WITH MARKET
CAPITALIZATIONS UNDER $1.5 BILLION WITH AN EMPHASIS ON SMALLER CAPITALIZATION
(SMALL CAP) STOCKS. TEN LARGEST HOLDINGS AS OF JUNE 30, 1999
TEN LARGEST HOLDINGS
as of June 30, 1999
1 SPECIALTY EQUIPMENT COS.
Manufacturer of commercial and
institutional food service equipment
2 CENTRAL NEWSPAPERS, INC.
Leading media company with
daily newspapers in Phoenix
and Indianapolis
3 ROUSE CO.
Retail mall developer
4 MBIA, INC.
Leading insurer of municipal bonds
5 BRADY CORP.
Manufacturer and distributor of niche
industrial safety-related products
6 LEE ENTERPRISES
Diversified media company
7 INTERNATIONAL GAME
TECHNOLOGY
World's leading supplier of
computerized gaming devices
8 HASBRO, INC.
Prominent toy manufacturer
9 IDEX CORP.
Manufacturer of proprietary
engineered industrial products
10 WHITMAN CORP.
PepsiCo's largest independent
domestic bottler
10
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ARIEL APPRECIATION FUND
Inception
December 1, 1989
AVERAGE ANNUAL TOTAL RETURN AS OF JUNE 30, 1999 (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>
- ----------------------------------------------------------------------------------------------
2nd Quarter YTD 1 Year 3 Year 5 Year Life of Fund
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Ariel Appreciation Fund +8.3% +7.5% +15.4% +26.7% +21.3% +15.6%
- ----------------------------------------------------------------------------------------------
Russell Mid Cap Index +10.9% +10.3% +11.3% +19.6% +20.9% +16.0%
</TABLE>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC.
<TABLE>
<CAPTION>
ARIEL APPRECIATION FUND
<S> <C>
Technology 1.28%
Health Care 7.25%
Consumer Discretionary & Services 33.34%
Consumer Staples 11.55%
Materials & Processing 11.48%
Producer Durables 9.10%
Financial Services 18.47%
Utilities 3.52%
Cash and Other 4.01%
</TABLE>
<TABLE>
<CAPTION>
RUSSELL MID CAP INDEX
<S> <C>
Technology 13.6%
Health Care 6.6%
Consumer Discretionary & Services 17.8%
Consumer Staples 4.0%
Integrated Oils 1.7%
Other Energy 3.5%
Materials & Processing 8.5%
Producer Durables 5.1%
Autos & Transportation 4.8%
Financial Services 20.5%
Utilities 11.9%
Cash and Other 2.0%
</TABLE>
<TABLE>
<CAPTION>
DATE APP S&P RUSSELL MID CAP
<S> <C> <C> <C>
1989 $10,000 $10.000 $10,000
1990 $9,902 $9,922 $9,006
1991 $11,194 $12,945 $12,744
1992 $14,930 $13,932 $14,826
1993 $16,115 $15,336 $16,947
1994 $14,763 $15,539 $16,592
1995 $18,330 $21,378 $22,308
1996 $22,677 $26,286 $26,547
1997 $31,283 $35,056 $34,247
1998 $37,398 $45,074 $37,705
Jun-99 $40,185 $50,655 $41,603
</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 indexes are unmanaged and returns include reinvested dividends. An investor
cannot invest directly in an index.
[SIDENOTE:]
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.
TEN LARGEST HOLDINGS
as of June 30, 1999
1 HASBRO, INC.
Prominent toy manufacturer
2 SPECIALTY EQUIPMENT COS.
Manufacturer of commercial and
institutional food service equipment
3 MBIA, INC.
Leading insurer of municipal bonds
4 WHITMAN CORP.
PepsiCo's largest independent
domestic bottler
5 GALILEO INTERNATIONAL, INC.
Distinguished provider of electronic
reservation services for the travel
industry
6 ROUSE CO.
Retail mall developer
7 SYBRON INTERNATIONAL CORP.
Principal manufacturer of products
for the laboratory and professional
orthodontic and dental markets
8 ALLERGAN, INC.
A foremost provider of specialty
eyecare products
9 CENTURYTEL, INC.
Diversified telecommunications
company
10 LEE ENTERPRISES
Diversified media company
11
<PAGE>
SCHEDULE OF INVESTMENTS
ARIEL FUND
SCHEDULE OF INVESTMENTS
JUNE 30, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
Number COMMON STOCKS-96.01% Cost Market Value
of Shares
<S> <C> <C> <C>
CONSUMER DISCRETIONARY--34.45%
403,433 Bob Evans Farms, Inc. $6,577,946 $8,018,231
308,200 Central Newspapers, Inc., Class A 5,062,426 11,596,025
174,100 Day Runner, Inc.* 2,096,884 2,154,488
257,200 Department 56, Inc.* 8,473,850 6,912,250
12,050 Grey Advertising, Inc. 4,039,854 4,012,650
314,000 Hasbro, Inc. 2,657,762 8,772,375
478,200 International Game Technology 8,786,705 8,846,700
319,200 Lee Enterprises 8,875,507 9,735,600
266,100 Leggett & Platt, Inc. 2,383,620 7,400,906
242,700 Libbey, Inc. 8,806,015 7,038,300
81,400 True North Communications, Inc. 2,097,738 2,442,000
--------- ---------
59,858,307 76,929,525
---------- ----------
CONSUMER STAPLES--10.49%
217,600 Longs Drug Stores, Inc. 4,438,920 7,520,800
249,100 McCormick & Co., Inc. 6,004,449 7,862,219
446,400 Whitman Corp. 7,435,914 8,035,200
--------- ---------
17,879,283 23,418,219
---------- ----------
12
<PAGE>
<CAPTION>
Number COMMON STOCKS-96.01% (cont) Cost Market Value
of Shares
<S> <C> <C> <C>
FINANCIAL SERVICES--9.74%
47,300 Arthur J. Gallagher & Co. $1,821,142 $2,341,350
106,900 Horace Mann Educators Corp. 2,798,035 2,906,344
169,200 MBIA, Inc. 6,344,959 10,955,700
154,800 Orion Capital Corp. 5,536,151 5,553,450
--------- ---------
16,500,287 21,756,844
---------- ----------
HEALTH CARE--1.93%
133,000 Wesley Jessen VisionCare, Inc.* 3,314,625 4,305,875
---------- ----------
MATERIALS AND PROCESSING--17.79%
323,700 Brady Corp. 8,067,067 10,520,250
76,900 Ecolab, Inc. 458,946 3,354,762
143,900 Hunt Corp. 1,916,478 1,187,175
683,700 Interface, Inc., Class A 5,775,491 5,896,912
439,100 Rouse Co. 8,795,673 11,142,162
413,400 Shorewood Packaging Corp.* 3,494,831 7,622,063
--------- ---------
28,508,486 39,723,324
---------- ----------
PRODUCER DURABLES--16.73%
214,220 General Binding Corp. 3,960,517 5,034,170
59,400 Graco, Inc. 1,405,785 1,744,875
165,800 Hussman International, Inc. 2,396,517 2,746,063
255,300 IDEX Corp. 6,334,927 8,392,988
342,800 Miller (Herman), Inc. 5,801,259 7,198,800
416,000 Specialty Equipment Cos., Inc.* 5,153,081 12,246,000
--------- ---------
25,052,086 37,362,896
---------- ----------
TECHNOLOGY--2.43%
281,550 Littelfuse, Inc.* 7,173,294 5,419,837
--------- ---------
<CAPTION>
Number COMMON STOCKS-96.01% (cont) Cost Market Value
of Shares
<S> <C> <C> <C>
UTILITIES--2.45%
137,900 CenturyTel, Inc. $2,064,895 $5,481,525
---------- ----------
Total Common Stocks 160,351,263 214,398,045
----------- -----------
Principal REPURCHASE
Amount AGREEMENT-4.90%
$10,951,559 State Street Bank & Trust
Company Repurchase
Agreement, 4.00%, dated
6/30/1999, repurchase price
$10,952,776, maturing
7/1/1999 (collateralized by
U.S. Treasury Bond, 8.75%,
8/15/2020) 10,951,559 10,951,559
---------- ----------
Total Repurchase Agreement 10,951,559 10,951,559
---------- ----------
Total Investments-100.91% $171,302,822 225,349,604
------------
------------
Liabilities less Other Assets-(0.91)% (2,041,687)
---------
NET ASSETS-100.00% $223,307,917
------------
------------
*Non-income producing
13
<PAGE>
Ariel Appreciation Fund
SCHEDULE OF INVESTMENTS
JUNE 30, 1999 (UNAUDITED)
<CAPTION>
Number COMMON STOCKS-95.99% Cost Market Value
of Shares
<S> <C> <C> <C>
CONSUMER DISCRETIONARY--33.34%
145,900 Bob Evans Farms, Inc. $2,837,068 $2,899,762
251,700 Carnival Corp. 3,696,557 12,207,450
306,000 Central Newspapers, Inc., Class A 9,041,924 11,513,250
276,400 Galileo International, Inc. 11,705,192 14,770,125
220,650 Harte-Hanks, Inc. 1,261,115 5,985,131
635,650 Hasbro, Inc. 9,511,979 17,758,472
240,500 Houghton Mifflin Co. 8,100,061 11,318,531
431,200 International Game Technology 6,766,556 7,977,200
424,900 Lee Enterprises 11,894,374 12,959,450
397,920 Leggett & Platt, Inc. 3,684,538 11,067,150
241,500 Libbey, Inc. 8,560,755 7,003,500
105,100 Omnicom Group, Inc. 1,026,564 8,408,000
87,300 Tribune Co. 4,071,941 7,606,013
--------- ---------
82,158,624 131,474,034
---------- -----------
CONSUMER STAPLES--11.55%
91,861 Clorox Co. 5,948,973 9,811,903
259,340 Longs Drug Stores Corp. 5,343,855 8,963,439
374,555 McCormick & Co., Inc. 9,829,689 11,821,892
831,100 Whitman Corp. 14,349,999 14,959,800
---------- ----------
35,472,516 45,557,034
---------- ----------
<CAPTION>
Number COMMON STOCKS-95.99% (cont) Cost Market Value
of Shares
<S> <C> <C> <C>
FINANCIAL SERVICES--18.47%
70,800 Arthur J. Gallagher & Co. $2,866,301 $3,504,600
359,300 Equifax, Inc. 11,307,887 12,822,519
220,600 Franklin Resources, Inc. 7,145,585 8,961,875
259,600 MBIA, Inc. 12,077,058 16,809,100
372,600 MBNA Corp. 5,719,565 11,410,875
114,700 Northern Trust Corp. 2,386,266 11,125,900
145,200 XL Capital Ltd. 8,391,696 8,203,800
--------- ---------
49,894,358 72,838,669
---------- ----------
HEALTH CARE--7.25%
128,200 Allergan, Inc. 4,232,228 14,230,200
520,800 Sybron International Corp.* 9,490,559 14,354,550
--------- ---------
13,722,787 28,584,750
---------- ----------
MATERIALS AND PROCESSING--11.48%
60,800 Avery Dennison Corp. 3,803,368 3,670,800
267,700 Brady Corp. 5,904,915 8,700,250
129,600 Ecolab, Inc. 1,601,491 5,653,800
369,400 Interface, Inc., Class A 6,182,273 3,186,075
578,200 Rouse Co. 10,851,070 14,671,825
509,215 Shorewood Packaging Corp.* 4,849,505 9,388,652
--------- ---------
33,192,622 45,271,402
---------- ----------
PRODUCER DURABLES--9.10%
109,805 General Binding Corp. 1,761,453 2,580,418
122,450 Hussman International, Inc. 1,646,582 2,028,078
422,200 Miller (Herman), Inc. 7,784,448 8,866,200
86,400 Pitney-Bowes, Inc. 3,445,543 5,551,200
573,000 Specialty Equipment Cos., Inc.* 9,187,777 16,867,687
--------- ---------
23,825,803 35,893,583
---------- ----------
14
<PAGE>
<CAPTION>
Number COMMON STOCKS-95.99% (cont) Cost Market Value
of Shares
<S> <C> <C> <C>
TECHNOLOGY--1.28%
261,200 Littelfuse, Inc.* $6,523,002 $5,028,100
---------- ----------
UTILITIES--3.52%
349,425 CenturyTel, Inc. 5,105,899 13,889,644
--------- ----------
Total Common Stocks 249,895,611 378,537,216
----------- -----------
Principal REPURCHASE
Amount AGREEMENT-4.29% Cost Market Value
$16,901,541 State Street Bank & Trust
Company Repurchase
Agreement, 4.00%, dated
6/30/1999, repurchase price
$16,903,419, maturing
7/1/1999 (collateralized by
U.S. Treasury Bond, 8.875%,
2/15/2019) $16,901,541 $16,901,541
----------- -----------
Total Repurchase Agreement 16,901,541 16,901,541
---------- ----------
Total Investments-100.28% $266,797,152 395,438,757
------------
------------
Liabilities less Other Assets-(0.28)% (1,086,924)
---------
NET ASSETS-100.00% $394,351,833
------------
------------
</TABLE>
*Non-income producing
15
<PAGE>
EQUITY STATISTICAL SUMMARY
ARIEL FUND
(UNAUDITED)
<TABLE>
<CAPTION>
Earnings Per Share
----------------------
52 - Week
Range 1998 1999 1998 1999 Market
Ticker Price ----------- Actual Estimated P/E P/E Cap.
Company Symbol 6/30/99 Low High Calendar Calendar Calendar Calendar ($MM)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Hunt Corp. HUN 8.25 8.25 23.69 0.80 1.03 10.3 8.0 86
Day Runner, Inc. DAYR 12.38 9.25 25.38 1.16 0.17 10.7 72.8 147
General Binding Corp. GBND 23.50 17.00 42.50 1.63 1.24 14.4 19.0 370
Grey Advertising, Inc. GREY 333.00 263.00 425.00 18.98 20.29 17.5 16.4 416
Littelfuse, Inc. LFUS 19.25 16.00 25.63 0.86 1.02 22.4 18.9 422
Interface, Inc. IFSIA 8.63 6.63 21.00 0.87 0.65 9.9 13.3 456
Libbey, Inc. LBY 29.00 24.00 38.44 2.31 2.58 12.6 11.2 471
Department 56, Inc. DFS 26.88 22.94 37.88 2.45 2.60 11.0 10.3 483
Shorewood Packaging Corp. SWD 18.44 12.13 20.63 1.08 1.30 17.1 14.2 506
Wesley Jessen VisionCare, Inc. WJCO 32.38 16.13 35.50 1.57 1.86 20.6 17.4 554
Graco, Inc. GGG 29.38 19.88 35.25 2.01 2.74 14.6 10.7 596
Specialty Equipment Cos., Inc. SEC 29.44 18.00 31.75 2.18 2.14 13.5 13.8 623
Brady Corp. BRC 32.50 16.25 32.81 1.49 1.83 21.8 17.8 733
Bob Evans Farms, Inc. BOBE 19.88 18.00 26.88 1.30 1.51 15.3 13.2 815
Hussmann International, Inc. HSM 16.56 11.63 19.38 1.20 1.33 13.8 12.5 841
Arthur J. Gallagher & Co. AJG 49.50 34.88 50.63 3.02 3.38 16.4 14.6 890
IDEX Corp. IEX 32.88 19.50 34.69 1.81 1.86 18.2 17.7 969
Orion Capital Corp. OC 35.88 27.56 59.25 2.51 2.55 14.3 14.1 976
Horace Mann Educators Corp. HMN 27.19 20.25 35.75 1.80 1.89 15.1 14.4 1,119
Lee Enterprises LEE 30.50 21.81 31.75 1.42 1.56 21.5 19.6 1,352
Longs Drug Stores, Inc. LDG 34.56 26.00 44.50 1.64 1.81 21.1 19.1 1,357
True North Communications, Inc. TNO 29.75 18.81 34.13 1.50 1.71 19.8 17.4 1,409
Central Newspapers, Inc. ECP 37.50 27.41 39.31 1.78 2.25 21.1 16.7 1,534
Herman Miller, Inc. MLHR 21.00 15.63 30.75 1.62 1.72 13.0 12.2 1,671
International Game Technology IGT 18.50 14.13 27.38 1.36 1.46 13.6 12.7 1,816
Rouse Company RSE 25.38 21.13 32.25 2.69 2.98 9.4 8.5 1,834
McCormick & Company, Inc. MKC 31.56 26.63 36.44 1.43 1.65 22.1 19.1 2,255
Whitman Corp. WH 18.00 14.88 25.44 0.61 0.45 29.5 40.0 2,550
Hasbro, Inc. HAS 27.94 18.67 37.00 1.07 1.48 26.1 18.9 5,461
Leggett & Platt, Inc. LEG 27.81 16.88 28.75 1.24 1.44 22.5 19.3 5,462
CenturyTel, Inc. CTL 39.75 28.42 49.00 1.41 1.65 28.2 24.1 5,538
Ecolab, Inc. ECL 43.63 26.13 44.44 1.15 1.31 37.9 33.3 5,656
MBIA, Inc. MBI 64.75 46.06 80.13 4.58 4.77 14.1 13.6 6,461
</TABLE>
Note: All earnings per share numbers are fully diluted. Such numbers are from
continuing operations and are adjusted for non-recurring items. The Rouse
Company numbers are before depreciation and deferred taxes.
16
<PAGE>
ARIEL APPRECIATION FUND
(UNAUDITED)
<TABLE>
<CAPTION>
Earnings Per Share
----------------------
52 - Week
Range 1998 1999 1998 1999 Market
Ticker Price ----------- Actual Estimated P/E P/E Cap.
Company Symbol 6/30/99 Low High Calendar Calendar Calendar Calendar ($MM)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
General Binding Corp. GBND 23.50 17.00 42.50 1.63 1.24 14.4 19.0 370
Littelfuse, Inc. LFUS 19.25 16.00 25.63 0.86 1.02 22.4 18.9 422
Interface, Inc. IFSIA 8.63 6.63 21.00 0.87 0.65 9.9 13.3 456
Libbey, Inc. LBY 29.00 24.00 38.44 2.31 2.58 12.6 11.2 471
Shorewood Packaging Corp. SWD 18.44 12.13 20.63 1.08 1.30 17.1 14.2 506
Specialty Equipment Cos., Inc. SEC 29.44 18.00 31.75 2.18 2.14 13.5 13.8 623
Brady Corp. BRC 32.50 16.25 32.81 1.49 1.83 21.8 17.8 733
Bob Evans Farms, Inc. BOBE 19.88 18.00 26.88 1.30 1.51 15.3 13.2 815
Hussmann International, Inc. HSM 16.56 11.63 19.38 1.20 1.33 13.8 12.5 841
Arthur J. Gallagher & Co. AJG 49.50 34.88 50.63 3.02 3.38 16.4 14.6 890
Lee Enterprises LEE 30.50 21.81 31.75 1.42 1.56 21.5 19.6 1,352
Longs Drug Stores, Inc. LDG 34.56 26.00 44.50 1.64 1.81 21.1 19.1 1,357
Houghton Mifflin Company HTN 47.06 29.88 50.31 1.40 1.65 33.6 28.5 1,447
Central Newspapers, Inc. ECP 37.50 27.41 39.31 1.78 2.25 21.1 16.7 1,534
Herman Miller, Inc. MLHR 21.00 15.63 30.75 1.62 1.72 13.0 12.2 1,671
International Game Technology IGT 18.50 14.13 27.38 1.36 1.46 13.6 12.7 1,816
Rouse Company RSE 25.38 21.13 32.25 2.69 2.98 9.4 8.5 1,834
Harte-Hanks, Inc. HHS 27.13 17.38 29.25 0.88 1.02 30.8 26.6 1,928
McCormick & Company, Inc. MKC 31.56 26.63 36.44 1.43 1.65 22.1 19.1 2,255
Whitman Corp. WH 18.00 14.88 25.44 0.61 0.45 29.5 40.0 2,550
Sybron International Corp. SYB 27.56 16.38 29.94 1.02 1.25 27.0 22.0 2,853
Equifax, Inc. EFX 35.69 29.75 45.00 1.34 1.58 26.6 22.6 5,155
Hasbro, Inc. HAS 27.94 18.67 37.00 1.07 1.48 26.1 18.9 5,461
Leggett & Platt, Inc. LEG 27.81 16.88 28.75 1.24 1.44 22.5 19.3 5,462
CenturyTel, Inc. CTL 39.75 28.42 49.00 1.41 1.65 28.2 24.1 5,538
Galileo International, Inc. GLC 53.44 24.75 59.31 1.86 2.24 28.7 23.9 5,601
Ecolab, Inc. ECL 43.63 26.13 44.44 1.15 1.31 37.9 33.3 5,656
MBIA, Inc. MBI 64.75 46.06 80.13 4.58 4.77 14.1 13.6 6,461
Avery Dennison Corp. AVY 60.38 39.38 69.63 2.15 2.47 28.1 24.4 6,866
XL Capital Ltd. XL 56.50 54.50 83.25 4.50 4.59 12.6 12.3 7,202
Allergan, Inc. AGN 111.00 45.25 114.75 2.04 2.50 54.4 44.4 7,421
Franklin Resources, Inc. BEN 40.63 25.75 54.88 1.86 1.82 21.8 22.3 10,243
Tribune Company TRB 87.13 44.75 89.13 2.53 3.00 34.4 29.0 10,325
Northern Trust Corp. NTRS 97.00 55.75 100.00 3.04 3.46 31.9 28.0 10,829
The Clorox Company CLX 106.81 79.38 132.94 3.06 3.45 34.9 31.0 12,604
Omnicom Group, Inc. OMC 80.00 37.00 85.94 1.68 1.94 47.6 41.2 14,310
Pitney-Bowes, Inc. PBI 64.25 46.63 73.31 2.03 2.30 31.7 27.9 17,258
MBNA Corporation KRB 30.63 13.50 30.88 0.97 1.18 31.6 26.0 24,559
Carnival Corporation CCL 48.50 19.00 53.50 1.40 1.61 34.6 30.1 29,739
</TABLE>
Note: All earnings per share numbers are fully diluted. Such numbers are from
continuing operations and are adjusted for non-recurring items. The Rouse
Company numbers are before depreciation and deferred taxes.
17
<PAGE>
ARIEL PREMIER BOND
Dear Fellow Shareholder: For the quarter ended June 30, 1999, both the Ariel
Premier Bond Fund, Institutional Class and the Investor Class returned -1.1%,
while the Lehman Aggregate Bond Index returned -0.9%.
What a difference six months makes! The Ariel Premier Bond Fund's short duration
strategy, combined with the mortgage and asset-backed overweighting, contributed
to returns ahead of the benchmark over the first half of the year. At year-end
1998, bond yields reflected expectations for sharply slower economic growth in
the U.S. as a result of a weak global economy, causing a material fall in
inflation and Fed easing of interest rates. Contrary to expectations, global
growth has quickened, U.S. growth has accelerated further, inflation has risen,
and the Fed tightened interest rates a quarter point. This remarkable change in
circumstances has resulted in roughly a 1% rise in market yields.
Accompanying the rise in yields has been a modest narrowing in
the spreads of non-Government sectors, corporates, mortgages and asset-backeds.
The surprise has been that these spreads have not narrowed more substantially,
given the rise in Treasury yields and the strength in the economy. This is
likely due to a combination of skittishness as a result of last fall's market
turmoil and the anticipation of some disruption due to year 2000 related events.
Nonetheless, the best performing portfolios in the past six months were short
duration in character with an emphasis in non-Treasury sectors.
As economic activity moderates to a more sustainable pace, we expect inflation
to be relatively stable and have lengthened the fund's duration to a neutral
stance. Anticipating a spread narrowing, we have continued to increase the
portfolio's mortgage exposure. In addition, corporate spreads widened in the
second quarter back to levels that reflect some expectation for recession or a
sharp slowing in U.S. growth. As we forecast a healthy domestic growth
environment, we increased the fund's corporate exposure modestly. The holdings
continue to emphasize domestic issuers with a focus on financial and
consumer-related industries. In addition, we reduced the fund's weighting in
asset-backed securities in response to narrower spreads and the more attractive
opportunities available in mortgages and corporates.
In summary, the Ariel Premier Bond Fund has been repositioned to reflect a more
neutral outlook for interest rates and a balanced view of inflation risks and
future Fed policy. The fund will perform well in a relatively stable interest
rate and spread environment.
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
18
<PAGE>
ARIEL PREMIER
BOND FUND
Institutional Class Inception
October 1, 1995
Investor Class Inception
February 1, 1997
AVERAGE ANNUAL TOTAL RETURN AS OF JUNE 30, 1999 (assume reinvestment of
dividends and capital gains)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
2nd Quarter YTD 1 Year 3 Year Life of Fund
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Ariel Premier Bond Fund, Inst. Cl. -1.1% -1.1% +2.5% +6.8% +5.9%
- ----------------------------------------------------------------------------------------------------
Ariel Premier Bond Fund, Inv. Cl. -1.1% -1.2% +2.2% -- +5.9%
- ----------------------------------------------------------------------------------------------------
Lehman Bros. Aggregate Bond Index -0.9% -1.4% +3.2% +7.2% +6.6% (Inst.)
+6.8% (Inv.)
</TABLE>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC.
<TABLE>
<CAPTION>
ARIEL PREMIER BOND FUND
<S> <C>
Government & Agency 11.06%
Mortgage-Backed 42.70%
Corporate 18.79%
Asset-Backed 25.14%
Commercial Mortgage-Backed 0%
Cash 2.31%
<CAPTION>
LEHMAN AGGREGATE BOND INDEX
<S> <C>
Government & Agency 43.3%
Mortgage-Backed 33.4%
Corporate 20.7%
Asset-Backed 1.3%
Commercial Mortgage-Backed 1.3%
Cash 0%
</TABLE>
<TABLE>
<CAPTION>
INVESTOR CLASS
DATE BOND LEHMAN
<S> <C> <C>
Feb-97 $10,000 $10,000
Mar-97 $9,930 $9,914
Jun-97 $10,265 $10,278
Sep-97 $10,573 $10,619
Dec-97 $10,838 $10,932
Mar-98 $10.997 $11,102
Jun-98 $11,234 $11,361
Sep-98 $11,616 $11,841
Dec-98 $11,621 $11,882
Mar-99 $11.611 $11.823
Jun-99 $11,482 $11,719
</TABLE>
<TABLE>
<CAPTION>
INSTITUTIONAL CLASS
DATE BOND LEHMAN
<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 $1,048,096
Dec-96 $1,067,709 $1,080,467
Mar-97 $1,063,762 $1,074,431
Jun-97 $1,101,595 $1,113,887
Sep-97 $1,135,857 $1,150,901
Dec-97 $1,165,544 $1,184,770
Mar-98 $1,182,644 $1,203,206
Jun-98 $1,210,570 $1,231,317
Sep-98 $1,251,681 $1,283,385
Dec-98 $1.254,703 $1,287,699
Mar-99 $1,264,835 $1,281,308
Jun-99 $1,240,901 $1,270,046
</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.
[SIDENOTE:]
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
JUNE 30, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
Par Value ASSET-BACKED SECURITIES-25.14% Cost Market Value
<S> <C> <C> <C>
$700,000 Americredit Auto Receivables, 98-B A4,
6.06%, 12/12/2002 $699,907 $694,442
750,000 Americredit Auto Receivables, 99-A A4,
5.88%, 12/12/2005 749,849 736,417
800,971 Associates Manufactured Housing,
972A-3, 6.275%, 3/15/2028 800,737 803,374
1,000,000 Auto Leasing Investors,
6.177%, 8/12/2005+ 1,000,000 986,410
650,000 BEA, 1998-2A A2A, zero coupon,
6/15/2010+ 628,265 611,715
1,055,000 Chemical Master Credit Card Trust 1,
1996 3A, 7.09%, 2/15/2009 1,097,073 1,094,784
695,000 Circuit City Credit Card, 1995-1A,
6.375%, 8/15/2005 706,296 700,643
2,000,000 Contimortgage Home Equity, 97-A5,
6.44%, 12/15/2012 2,017,964 1,998,320
1,084,908 Credit Card Receivables Trust, 98-1,
6.478%, 12/22/2004+ 1,091,383 1,056,613
400,000 CSFB, 97-C1 A1C, 7.24%, 6/20/2007 414,707 400,740
2,000,000 EQCC Home Equity, 973-A9,
6.57%, 2/15/2029 1,984,028 1,960,240
390,000 Fingerhut, 96-1A, 6.45%, 2/20/2002 391,590 392,227
<CAPTION>
Par Value ASSET-BACKED SECURITIES-25.14% (cont) Cost Market Value
<S> <C> <C> <C>
$1,800,000 First Omni, 96-AA, 6.65%, 9/15/2003 $1,821,882 $1,821,510
1,245,262 Fleetwood, 97BA, 6.40%, 5/15/2013 1,243,634 1,244,714
130,000 General Growth Properties, 971A1, A2,
6.537%, 11/15/2004+ 132,740 129,176
550,000 GMAC Commercial, 99-1 A2,
6.175%, 5/15/2033 558,307 523,072
950,000 Greenpoint Manufacturing, 99-1 A2,
6.01%, 8/15/2015 949,757 937,023
500,000 Green Tree Financial, 98-A4,
6.09%, 7/1/2010 499,947 494,500
57,133 Green Tree Financial, 1995-1 A5,
8.40%, 6/15/2025 62,625 57,954
1,082,259 GS Mortgage Securities Corp.,
98-GL11 A1, 6.312%, 4/13/2031 1,104,933 1,066,014
773,637 GS Mortgage Securities Corp.,
99-C1 A1, 5.85%, 11/18/2030 775,005 747,612
1,415,000 Healthcare Rec., 99-1,
6.25%, 2/1/2003+ 1,412,920 1,398,643
765,652 IMC Excess Cash,
7.41%, 11/26/2028+ 765,623 700,334
1,450,000 J.C. Penney Master Credit Card Trust,
1990-C1, 9.625%, 6/30/2000 1,493,004 1,505,883
129,671 The Money Store, 1996-1 A3,
6.85%, 12/20/2002 129,659 130,008
300,000 The Money Store, 1996-B A6,
7.38%, 5/15/2017 299,956 303,021
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
Par Value ASSET-BACKED SECURITIES-25.14% (cont) Cost Market Value
<S> <C> <C> <C>
$440,000 Morgan Stanley Capital I,
1999-RM1 A2, 6.71%, 12/15/2031 $439,948 $431,957
1,980,000 Morgan Stanley Capital I,
1999-WF1 A2, 6.21%, 9/15/2008 1,930,713 1,893,375
17,618 Olympic Auto Receivables, 1995-EA4,
5.85%, 3/15/2001 17,538 17,621
450,000 Onyx Acceptance Auto Trust,
5.83%, 3/15/2004 449,970 446,486
1,440,000 Prime, 95-1A, 6.75%, 11/15/2005 1,445,423 1,461,830
19,445 Private Label Credit Card, 1994-2A,
7.80%, 9/20/2003 19,736 19,503
3,179,968 Railcar Leasing, 971A,
6.75%, 7/15/2006+ 3,220,923 3,207,792
1,250,361 Railcar Trust, 92-A1, 7.75%, 6/1/2004 1,291,736 1,291,860
940,000 Salomon Brothers Mortgage Sec.,
97LB6A3, 6.76%, 12/25/2027 938,846 938,722
183,333 Sears Credit Account, 96-2A,
6.50%, 10/15/2003 182,668 183,737
115,121 UCFC, 96 C1 3, 7.15%, 12/15/2013 115,105 115,246
1,460,946 Union Acceptance Corp., 97AA2,
6.375%, 10/8/2003 1,470,389 1,468,324
2,630,000 Union Financial Services Taxable
Student Loan, 98A A8,
5.50%, 9/1/2005 2,612,309 2,520,592
1,880,000 World Financial, 96-AA,
6.70%, 2/15/2004 1,887,290 1,897,616
<CAPTION>
Par Value ASSET-BACKED SECURITIES-25.14% (cont) Cost Market Value
<S> <C> <C> <C>
$2,190,709 World Omni Auto Lease, 97B3,
6.18%, 11/25/2003 $2,190,531 $2,182,188
---------- ----------
Total Asset-Backed Securities 41,044,916 40,572,238
---------- ----------
</TABLE>
<TABLE>
<S> <C> <C> <C>
CORPORATE DEBT-18.79%
500,000 Abbey National PLC, 6.70%, 6/29/2049 499,162 466,250
1,000,000 AES Ironwood LLC,
8.857%, 11/30/2025+ 1,000,000 995,450
445,000 American General Inst.,
7.57%, 12/1/2045+ 465,095 438,325
500,000 American General Inst.,
8.125%, 3/15/2046+ 548,542 527,500
550,000 American Stores, 8.00%, 6/1/2026 605,005 587,812
275,000 Bank of America Capital II,
7.70%, 12/31/2026+ 289,201 262,969
1,000,000 BankBoston Corp., 6.125%, 3/15/2002 999,818 988,750
185,000 Bayer Corporation, 6.65%, 2/15/2028+ 184,036 170,431
550,000 Bestfoods, 5.60%, 10/15/2097 424,426 409,063
560,000 Camden Property Trust,
7.00%, 4/15/2004 556,967 548,100
1,000,000 Citigroup Capital II, 7.75%, 12/1/2036 1,035,619 963,750
1,575,000 Consumers Energy CMS,
6.20%, 5/1/2003 1,556,891 1,515,938
500,000 Cox Enterprises, Inc.,
7.375%, 6/15/2009+ 499,875 501,875
700,000 Duke Realty LP, 7.30%, 6/30/2003 699,399 702,625
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
Par Value CORPORATE DEBT-18.79% (cont) Cost Market Value
<S> <C> <C> <C>
$825,000 Edison Mission Energy,
7.73%, 6/15/2009+ $824,810 $840,469
515,000 FedEx, 7.60%, 7/1/2097 540,541 489,250
650,000 FMR Corp., 7.49%, 6/15/2019+ 650,000 650,000
1,100,000 GTE California, 6.75%, 5/15/2027 1,151,157 1,020,250
710,000 Hilton Hotels, 7.00%, 7/15/2004 701,725 688,700
275,000 J.C. Penney Co., 7.625%, 3/1/2097 269,473 248,531
240,000 JP Morgan Capital Trust I,
7.54%, 1/15/2027 235,097 226,800
800,000 LSP Energy LP, 8.16%, 7/15/2025+ 800,000 761,664
2,775,000 MCI WorldCom, Inc., 7.75%, 4/1/2027 3,037,224 2,934,562
610,000 Mirage Resorts, 7.25%, 8/1/2017 606,871 565,775
300,000 News America Holdings,
7.25%, 5/18/2018 298,019 282,000
730,000 Northwest Airlines Corp.,
7.575%, 3/1/2019 730,000 719,094
1,200,000 NRG Energy, Inc., 7.50%, 6/01/2009 1,199,642 1,185,000
650,000 Peco Energy Co., 7.38%, 4/6/2028 650,000 574,437
1,400,000 Philip Morris, 7.125%, 8/15/2002 1,393,397 1,414,000
775,000 Provident Companies,
6.375%, 7/15/2005 772,586 745,938
1,220,000 Provident Companies,
7.00%, 7/15/2018 1,219,619 1,162,050
1,000,000 Safeco Capital Trust,
8.072%, 7/15/2037 1,000,000 961,250
750,000 Security Capital Group,
7.75%, 11/15/2003 749,366 741,562
<CAPTION>
Par Value CORPORATE DEBT-18.79% (cont) Cost Market Value
<S> <C> <C> <C>
$1,000,000 Service Corp., 7.00%, 6/1/2015 $1,019,959 $993,750
750,000 Spieker Properties LP, 7.25%, 5/1/2009 742,378 724,688
805,000 Suntrust Cap II, 7.90%, 6/15/2027 809,628 796,950
1,250,000 Telecom De Puerto Rico,
6.80%, 5/15/2009+ 1,202,317 1,212,450
750,000 Virginia Electric Power, 6.75%, 2/1/2007 753,679 736,875
560,000 Zurich Capital Trust, 8.376%, 6/1/2037+ 595,641 568,400
------- -------
Total Corporate Debt 31,317,165 30,323,283
---------- ----------
</TABLE>
<TABLE>
<CAPTION>
U.S. GOVERNMENT AGENCIES-43.71%
<S> <C> <C> <C>
MORTGAGE-BACKED SECURITIES--42.70%
9,990,000 Fannie Mae, 5.50%, 6/01/2014- 9,490,500 9,443,647
11,705,000 Fannie Mae, 6.00%, 6/01/2014- 11,353,850 11,298,953
13,900,000 Fannie Mae, 7.50%, 6/01/2029- 13,952,125 14,043,309
1,274,692 Freddie Mac, Gold,
6.50%, 11/01/2025 1,205,002 1,241,626
34,025,000 Freddie Mac, Gold,
6.50%, 8/01/2029- 33,242,524 32,887,204
---------- ----------
69,244,001 68,914,739
---------- ----------
OTHER AGENCY ISSUES--1.01%
939,677 Government Trust Certificate, Israel
Trust, Series 2E, 9.40%, 5/15/2002 980,267 969,042
655,846 Pemex Exp. Trust, 95-A,
7.66%, 8/15/2001 666,711 668,523
------- -------
1,646,978 1,637,565
--------- ---------
Total U.S. Government Agencies 70,890,979 70,552,304
---------- ----------
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
Par Value U.S. GOVERNMENT OBLIGATIONS-10.05% Cost Market Value
<S> <C> <C> <C>
$1,735,000 U.S. Treasury Bond,
5.50%, 5/15/2009 $1,667,322 $1,697,611
560,000 U.S. Treasury Bond,
13.875%, 5/15/2011 814,641 799,831
1,985,000 U.S. Treasury Bond,
8.50%, 2/15/2020 2,545,065 2,483,811
4,650,000 U.S. Treasury Bond,
8.125%, 8/15/2021 5,614,740 5,658,399
755,000 U.S. Treasury Note,
7.50%, 11/15/2001 783,559 785,532
200,000 U.S. Treasury Note,
6.25%, 6/30/2002 203,398 202,936
1,960,000 U.S Treasury Note,
5.25%, 8/15/2003 1,920,644 1,920,977
1,560,000 U.S Treasury Note,
7.25%, 8/15/2004 1,643,479 1,653,662
970,000 U.S. Treasury Note,
7.00%, 7/15/2006 1,017,739 1,027,230
--------- ---------
Total U.S. Government
Obligations 16,210,587 16,229,989
---------- ----------
</TABLE>
<TABLE>
<CAPTION>
COMMERCIAL PAPER-42.21%
<S> <C> <C> <C>
3,000,000 Alabama Power Co.,
4.95%, 7/13/1999* 2,995,050 2,995,050
3,200,000 Alcoa, Inc., 4.95%, 7/19/1999* 3,192,080 3,192,080
<CAPTION>
Par Value COMMERCIAL PAPER-42.21% (cont) Cost Market Value
<S> <C> <C> <C>
$3,200,000 American Express Corp.,
4.94%, 7/19/1999* $3,192,096 $3,192,096
3,200,000 Ameritech Corp.,
4.94%, 7/19/1999* 3,192,096 3,192,096
3,200,000 Bank One Corp.,
4.95%, 7/19/1999* 3,192,080 3,192,080
2,000,000 Ciesco LP, 4.82%, 7/16/1999* 1,995,983 1,995,983
500,000 Coca-Cola Co., 4.79%, 7/21/1999* 498,669 498,669
3,200,000 Commercial Credit,
5.00%, 8/16/1999* 3,179,556 3,179,556
3,200,000 Disney (Walt) Co.,
4.97%, 7/6/1999* 3,197,791 3,197,791
3,200,000 Duke Energy Corp.,
4.94%, 7/19/1999* 3,192,096 3,192,096
3,200,000 Ford Motor Credit,
4.95%, 7/14/1999* 3,194,280 3,194,280
3,200,000 General Electric Capital Corp.,
4.95%, 7/19/1999* 3,192,080 3,192,080
3,200,000 General Motors Credit Corp.,
4.95%, 7/19/1999* 3,192,080 3,192,080
3,200,000 Household Finance Corp.,
5.03%, 8/16/1999* 3,179,433 3,179,433
3,200,000 IBM Credit Corp.,
4.94%, 7/14/1999* 3,194,292 3,194,292
3,200,000 John Deere Capital Corp.,
4.97%, 7/19/1999* 3,192,048 3,192,048
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
Par Value COMMERCIAL PAPER-42.21% (cont) Cost Market Value
<S> <C> <C> <C>
$1,000,000 Lucent Technologies, Inc.,
4.82%, 7/14/1999* $998,259 $998,259
3,200,000 MetLife Funding, Inc.,
4.97%, 7/13/1999* 3,194,699 3,194,699
1,050,000 Monsanto Co.,
4.94%, 7/19/1999* 1,047,407 1,047,407
3,200,000 Motorola Credit Corp.,
5.00%, 8/17/1999* 3,179,111 3,179,111
3,200,000 Procter & Gamble Co.,
4.95%, 7/14/1999* 3,194,280 3,194,280
3,200,000 Prudential Funding Corp.,
5.01%, 8/16/1999* 3,179,515 3,179,515
3,200,000 Wells Fargo & Co.,
5.06%, 8/16/1999* 3,179,310 3,179,310
3,200,000 Westvaco Corp.,
5.04%, 7/29/1999* 3,187,456 3,187,456
--------- ---------
Total Commercial Paper 68,131,747 68,131,747
---------- ----------
</TABLE>
<TABLE>
<CAPTION>
Principal REPURCHASE AGREEMENT-1.61% Cost Market Value
Amount
<S> <C> <C> <C>
$2,601,040 State Street Bank & Trust
Company Repurchase Agreement,
4.00%, dated 6/30/1999,
repurchase price $2,601,329,
maturing 7/1/1999
(collateralized by U.S. Treasury
Bond, 8.75%, 8/15/2020) $2,601,040 $2,601,040
---------- ----------
Total Repurchase Agreement 2,601,040 2,601,040
--------- ---------
Total Investments-141.51% $230,196,434 228,410,601
------------
------------
Liabilities less Other Assets-(41.51)% (67,005,017)
------------
NET ASSETS-100.00% $161,405,584
------------
------------
</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.
- - When-issued security.
* Security pledged as collateral for when-issued purchase commitment
outstanding as of June 30, 1999.
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. He is active in community affairs, philanthropy and
politics.
MARIO L. BAEZA, ESQ. 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 and serves on the board
of directors of Unicom/Commonwealth Edison.
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 and serves on the board and program staff of the Shalem
Institute, an internationally known ecumenical organization.
ROYCE N. FLIPPIN, JR. Royce is 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. Formerly, he
was director of program advancement for the Massachusetts Institute of
Technology. He earned his A.B. 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, JR. 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 an A.B. 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 andco-chief investment
officer of Ariel Capital Management, Inc., Eric is responsible for co-managing
client and mutual fund portfolios. He received a B.S. in both Management and
Architecture from the Massachusetts Institute of Technology and he earned his
M.B.A. from the University of California at Berkeley. He is also a Chartered
Financial Analyst. Eric serves on a variety of civic and corporate boards.
<PAGE>
ARIEL MUTUAL FUNDS
Bulk Mail
Ariel Investment Trust U.S. Postage
307 North Michigan Avenue Paid
Suite 500 Permit No. 6784
Chicago, Illinois 60601 Chicago, IL
800.292.7435
www.arielmutualfund.com
e-mail: [email protected]
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