<PAGE>
- -------------------------------------------------------------------------------
THE BARON FUNDS
- -------------------------------------------------------------------------------
BARON ASSET FUND page 1
LOGO -----------------------------------------
BARON GROWTH &
INCOME FUND page 7
767 Fifth Avenue, New York, New York 10153, 1-800-99-BARON, 212-583-2100
- -------------------------------------------------------------------------------
THIRD QUARTER REPORT JUNE 30, 1996
- -------------------------------------------------------------------------------
[CHART APPEARS HERE]
1996 Second Quarter Latest Year Since Inception
4/1/96 - 6/30/96 7/1/95 - 6/30/96 6/12/87 - 6/30/96
------------------- ---------------- -----------------
Baron Asset Fund 7.4% 42.3% 376%
S&P 500 4.4% 26.0% 188%
Russell 2000 5.3% 23.9% 149%
Dear Baron Asset Fund
Shareholder:
- -------------------------------------------------------------------------------
PERFORMANCE REVIEW
- -------------------------------------------------------------------------------
Baron Asset Fund continued to perform well, both on an absolute and relative
basis, during the three months and twelve months ended June 30, 1996. Baron
Asset Fund's performance was ranked 9th of more than 2500 diversified equity
funds for the six months ended June 30 by Investors Business Daily. IBD
ranked Baron Asset Fund's performance 16th in that universe for the past 36
months.
Baron Asset Fund's long term performance from inception also remained strong
and consistent and ranks highly. The Fund's compound annual rate of return
for the five years ended June 30, 1996 is 23.5%; for the three years ended
June, 25.8%; and for the little more than nine years from the Fund's
inception, 18.8%. This performance, on a long term basis, has met our stated
goal of seeking to double our shareholders' net worth every three to five
years. The Wall Street Journal ranked Baron Asset Fund as the 38th best
performing mutual fund for the past five years. Based upon information
provided to us by Lipper Analytical Corporation, Baron Asset Fund ranks in
the top 2% of mutual funds from its inception through June 30.
Baron Asset Fund is rated five stars by Morningstar, that company's highest
performance rating. Morningstar s ratings are based upon risk adjusted
returns. Fewer than 10% of domestic mutual funds are accorded Morningstar's
five star rating. Baron Asset Fund is included on Schwab's Mutual Fund Select
List. This list consists of only fifteen top performing, domestic, OneSource
equity mutual funds. There are more than 500 mutual funds available through
OneSource.
As was the case for many funds that invest in small and mid sized companies,
performance for Baron Asset Fund during July was disappointing. The decline
for us was broad-based and largely unrelated to business fundamentals at the
individual companies in which we are shareholders. While many larger company
stock funds have fully recovered their July losses, Baron Asset Fund to date
has not.
While I am often asked by our shareholders and the companies in which we
invest why their stocks often fall sharply with little apparent cause, I can
only answer that stocks frequently do this. Since I became
<PAGE>
- -------------------------------------------------------------------------------
BARON ASSET FUND
- -------------------------------------------------------------------------------
interested in the stock market while in law school in the late 1960's, the
market has fallen sharply on many occasions, only a few of which had anything
to do with changes in business profitability or growth prospects. The market
experienced declines in 1966, 1969, 1973, 1974, 1978, 1981, 1984, 1987, 1990,
1994 and, now, 1996. These declines, in our opinion, were largely
unpredictable.
Rather than trying to forecast what the market will do and why, we choose to
focus our energies on business research and analysis. As we reported in our
March quarter letter, our performance for a lengthy period of time had been
at the high end of our expectations. We had about doubled our per share value
over the past three years and, at the time of our last letter felt it was
more realistic to think that we could double it again in four or five years,
not in three. Our absolute return objectives for the next four years remain
unchanged. Since our net asset value per share has fallen since May, we now
believe our per share values can somewhat more than double over the next four
to five years.
- -------------------------------------------------------------------------------
INVESTMENT THEMES
- -------------------------------------------------------------------------------
We have frequently written about our investment interest in "sunrise," job
creating industries, industries in which well managed businesses are likely
to benefit from current demographic trends as well as changing government
programs, policies and priorities. "Sunrise" industries are those in which
our children are likely to find employment. We do not invest in mature
"sunset" industries like railroads, steel, autos and tobacco, industries in
which our parents and grandparents likely worked, industries which now must
often fire workers and reduce costs to maintain profitability or achieve
growth.
The changing demographic characteristics and composition of our population
create significant and long lasting demand for certain products and services.
Changing demographics represent one of our most important investment themes.
The United States' Hispanic population is currently growing at nearly five
times the rate of the country's Caucasian population. Beneficiaries of this
growth include Heftel, Mercury Finance and Smart & Final. Heftel is the
country's largest owner/operator of Hispanic radio stations. Hispanic radio
stations currently receive less advertising revenues from both their
communities and national advertisers than their ratings would justify. We
expect this to change. When coupled with increased ratings likely to be
achieved due to population gains, Hispanic stations' profits should doubly
benefit. Mercury Finance provides small loans in Hispanic communities for
home furnishings, televisions, etc. With little competition, Mercury should
continue to grow rapidly its loan originations, and its profits. Smart &
Final is a cash and carry, urban food and restaurant supplies wholesaler. An
important portion of this company's sales is ethnic food to Hispanic retail
customers. Smart & Final's new and attractive well lighted and well
merchandised stores offer urban communities wide assortments at low prices.
Demand for Smart & Final's services should continue to increase in both its
existing and new stores. There is usually great community interest in Smart &
Final's stores well before they open, a circumstance I have personally
witnessed on more than one occasion.
Also growing rapidly as a U.S. population segment are the elderly. Persons
above age 80 are growing three times as fast as the U.S. population in
general. As persons age, their costs for medical care increase dramatically.
As individuals exceed age 80, their ability to live by themselves without
assistance decreases significantly. Medical costs represent nearly 14% of GDP
and until recently have been increasing faster than our economy. We have
chosen to invest in businesses able to efficiently provide high quality
health care in affordable settings. Manor Care's nursing homes, assisted
living facilities, sub-acute care units and, the latest addition to its
continuum of care, specialty home care for acute illnesses, provide such
services. Genesis Healthcare's vertically integrated healthcare networks are
the leading providers in its markets of low cost, quality healthcare for the
elderly. Recent acquisitions have bolstered Genesis' position.
Olsten is the nation's leading provider of quality, low cost, home healthcare
services; Pediatric Services and American Homepatient are two rapidly
growing, efficient, providers of specialty home healthcare services.
Aging baby boomers, the U.S.'s largest population segment, are having an
important positive impact on financial planning and retirement savings
businesses. Charles Schwab offers innovative, high quality and low cost
services to this population segment. High school graduates will increase 25%
in next five years; at the same time government studies report that 80% of
U.S. jobs in the year 2000 will require education or training beyond high
school. Private college DeVry provides an accredited college degree,
technical training and a job upon graduation. Computer training school
Learning Tree International offers convenient, advanced classroom training
and CD ROM instructional material for new computer operating systems and
software to computer professionals.
Government privatizations, temporary help businesses, travel
- -------------------------------------------------------------------------------
2
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
and entertainment businesses, communications and media businesses, and human
resource outsourcing are among our other important investment themes and are
also helped by favorable demographics.
- -------------------------------------------------------------------------------
CORPORATE NEWS DEVELOPMENTS
- -------------------------------------------------------------------------------
Business Services
Robert Half International began operations in 1948 and is the oldest, best
known and leading recruitment firm for permanent and temporary accountants
and other financial executives. The firm's reputation, credibility and
relationships with financial officers of small and mid-sized companies have
enabled it to start and grow rapidly two complementary businesses, temp and
highly skilled executive assistants (Office Team) and temp systems analysts
and programmers (RH Consulting).
We began to purchase shares of Robert Half in 1991. Its annual revenues were
then $209.5 million. Robert Half reported that revenues for the quarter ended
June 1996 reached $210.6 million, a 42% gain from last year; Half's quarterly
earnings per share increased 44%. Quarterly revenues from Half's temporary
accountant business, about 58% of the company's revenues, increased 23% year
over year in comparable offices. This very large percentage increase in its
existing offices is on trend with Half's past several years' results. We
believe these strong results have two principle causes. First, the market for
temp accountants is under- penetrated and growing rapidly. While 80% of all
businesses have used temp employees, less than 20% have used skilled temp
professionals like accountants. Few careers have more seasonal and cyclical
demands than accountants, an argument for even greater penetration by
temporary financial executives. Second, Half is the dominant supplier of
temporary accountants to small and mid-sized businesses, businesses smaller
than the Fortune 1000. It is more difficult to serve these customers than
larger businesses, thus there are fewer companies who attempt to do so.
During the past five years, Office Team has grown from a startup business to
annual revenues of about $200 million. It is still growing rapidly. RH
Consulting is the beneficiary of significant investments by small and
mid-sized companies in distributed data processing information technology,
e.g., personal computers connected to intra-office networks on individual
employee desks. As everyone knows who has recently installed a local area
network in their office, LANs are not very reliable, and are hard to
maintain. RH Consulting's business plan currently emphasizes supplying temp
programmers/systems analysts to support these systems. RH Consulting's annual
revenues have increased from $15.5 million in 1994 to more than $100 million
this year. We believe RH Consulting has the potential to be as large or
larger than any other Robert Half International business. The market for
temporary analysts and programmers is currently about $9 billion per year and
expanding rapidly.
Robert Half's high end, specialized, temp staffing businesses are less
competitive than most; the result, we believe, of the company's sustainable
competitive advantages of brand equity, reputation, relationships and
customer base. The company's operating margins are nearly triple industry
averages.
Max Messmer, Robert Half's chairman and one of our favorite chief executives,
had been the President of Dole Foods during the late 1980's when Dole was our
largest investment. When Max left to become Robert Half's chairman in 1986,
we began to visit Max regularly at his new company and learn about Half's
business. Half's stock price fell sharply in 1991 and, since we had already
become familiar with its business and found it attractive, we began to buy
stock. Baron Asset Fund owns 1,250,000 shares of Robert Half purchased for an
average cost of about $9.38 per share. The Fund first purchased shares in
1991 at $2.75 per share.
Education
In late June, private college operator DeVry, Inc., announced it had acquired
The Becker Review, the premier and largest CPA review training company. Newt
Becker, the 69 year old founder and previous owner, will remain with the
training company for at least the next two years. He will also become the
chief academic officer for the DeVry/Keller schools. There was significant
interest by others in purchasing Becker Review.
About 130,000 CPA tests are administered every year. Only about 30,000
students per year pass all four parts of the exam. Nearly 35% of those who
pass the exams are trained by Becker. About 22,000 students per year enroll
in Becker's courses. We estimate Becker's annual revenues approximate $20-24
million, its annual operating profits, $3-5 million. We estimate Becker was
acquired by DeVry for about $35 million. Becker's operating profits could
double within five years. Becker could expand the number of its training
locations from 135 to 175-180; several of its current locations could be
combined with DeVry's; Becker's tuition pricing could be improved by reducing
discounts; and Becker has significant international opportunities as more
U.S. companies operate abroad, more overseas companies list on the NYSE,
privatization
- -------------------------------------------------------------------------------
3
<PAGE>
- -------------------------------------------------------------------------------
BARON ASSET FUND
- -------------------------------------------------------------------------------
efforts grow internationally and consulting businesses needing CPAs continue
to expand.
There are significant potential synergies from the combination of The Becker
Review with the DeVry Institutes and Keller Graduate Schools. The combination
should enhance both the course content and reputation of the DeVry and Keller
accounting programs, helping boost DeVry and Keller enrollments.
Opportunities to share course material and share instructional methodology
should reduce course development expense. Significant cross marketing
opportunities should be present. Graduates of DeVry and Keller are obvious
candidates for Becker training. The 200,000 Becker alumni should be potential
hirers of DeVry and Keller graduates. DeVry and Keller ads and direct mail
expertise should boost Becker enrollments. Baron Asset Fund owns 400,000
shares of DeVry acquired for about $12.70 per share.
Energy
On August 12, 1996, Cross Timbers Oil Company announced an offer to exchange
2.365 million newly issued convertible preferred shares for 2.75 million of
its outstanding common shares. The Cross Timbers' preferred pays a dividend
higher than the common, but each converts into only .9615 common shares. The
exchange offer expired on September 9. About 1.32 million of Cross Timbers'
common shares were exchanged for 1.14 million preferred shares. This exchange
effectively reduces Cross Timbers' 17.8 million shares currently outstanding
by about 242,000 shares. Assuming that the cost of these shares is the
present value of the excess dividend paid on the convertible vs the common
shares, Cross Timbers paid about $20 per share to acquire these shares. In
addition, Cross Timbers has repurchased about 640,000 of its common shares
outstanding at an average price of $22 per share during the past few months.
Cross Timbers has been authorized by its board to repurchase 2 million shares
of its common stock. Share repurchases have the effect of increasing reserves
and cash flow per Cross Timbers' share. The company plans an aggressive
capital expenditure program this year to further boost both its reserves and
production. While Cross Timbers' debt on an absolute basis will increase, it
should remain less than about $2.20 per net equivalent barrel. Net equivalent
barrels per share were 3.4 in 1993, 5.4 this past summer and are expected to
reach 8 by the end of the year. Baron Asset Fund owns 1,290,000 shares of
Cross Timbers purchased for about $18.74 per share. Cross Timbers is the
first oil and gas stock we have purchased for at least 15 years. We wrote in
more detail about this investment in our last quarterly letter.
Financial
Charles Schwab Corporation's revenues, earnings and assets increased strongly
in the second quarter. Revenues increased 43%; net income gained 58%; and
assets in its Mutual Fund OneSource program reached $33.5 billion, an 85%
increase from last year. Schwab's customers' assets reached $216.6 billion, a
41.5% increase from last June, and remain on trend with the growth
experienced during the nine years Schwab has been a publicly owned company.
Schwab's customers' assets were $17 billion in 1987. Following July's market
correction and August's rebound, Schwab's customers' assets reached $220.4
billion and seem likely to jump sharply again in September. Schwab's earnings
are dependent upon the level of customers' assets at the firm. In July,
Schwab increased its quarterly cash dividend 25%.
Unlike conventional retail stock brokerage firms, Charles Schwab would prefer
its customers to communicate directly with computers rather than salesmen
incented by commissions. To this end, Schwab has been spending nearly $100
million per year to improve its electronic and communications services.
Currently about 75% of Schwab's incoming calls are electronic, either
personal computer based or accomplished through its touch tone phone
Telebroker system. About 40% of its trading activity is accomplished in this
manner. Electronic trading's incremental costs are very low relative to
revenues received. (The same is true about OneSource.) During the three
months ended June, Schwab's full time equivalent employees were about 5%
fewer than during the first quarter although the company's revenues were
10.1% higher.
Schwab introduced its PC based trading service, e.Schwab, in April. e.Schwab
assets have grown from $1 billion in April to $2 billion in June to $3
billion in early September; e.Schwab trading activity has increased from 1000
trades per day to 2500 trades per day. About 50-65% of the accounts using
e.Schwab are new to the firm; existing Schwab accounts have dramatically
increased their trading activity and assets at the firm after they have used
e.Schwab. e.Schwab, Internet trading, and software based trading (newly
introduced Street Smart Pro looks like a winner), all offer not only cost
savings, but also enhanced revenue potential.
Schwab's customers' mutual fund assets, now about $70 billion, represent only
2.2% of the fund industry's assets. Schwab's share of brokerage commissions
is nearly four times that amount. Schwab's Mutual Fund OneSource program is
only four years old.
- -------------------------------------------------------------------------------
4
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
The new SchwabPlan 401(k) comprehensive retirement plan targeted at small and
mid-sized businesses offers the potential to add over $50 billion of
customers' assets to Schwab during the next several years. The company's
asset allocation mutual funds targeted at the 75% of Schwab's customers with
less than $35,000 assets offer further potential. Baron Asset Fund owns
2,395,000 shares of Charles Schwab purchased for about $19.93 per share. The
Fund initially purchased Schwab's shares in 1992 for $6.00 per share.
- --------------------------------------------------------------------------------
OTHER DEVELOPMENTS
- --------------------------------------------------------------------------------
Fifth Annual Baron Investment Conference: October 18, 1996, New York City
The Fifth Annual Baron Investment Conference will be held Friday, October 18,
1996. Our conference this year will take place at The Essex House, 160
Central Park South, New York City. Our meetings for the past four years have
been held at the Harmonie Club, an elegant facility which, due to increased
shareholder interest in our annual conferences, we seem to have outgrown. Our
meeting will begin promptly at 8:00 AM for breakfast and end after lunch.
Shareholders of The Baron Funds are invited to attend, as are financial
planners, pension consultants, and individuals and plan sponsors who are
investment management clients of our affiliate, Baron Capital Management.
There will be no charge, of course.
Chief executives of five companies in which The Baron Funds are shareholders
will make 30 minute presentations regarding their companies' business
strategies and prospects. Each presentation will be followed by a 15 minute
question and answer period. The companies chosen are illustrative of the fast
growing, highly profitable, well managed businesses in which we attempt to
invest. I will make the final presentation after lunch and will then try to
answer any and all questions.
We believe it is useful for our shareholders and investors to be able to meet
and question each year executives of the companies in which their assets are
invested, as well as the portfolio manager, me, who has selected the
investments.
Shareholders of The Baron Funds, financial planners, plan sponsors and
individual investors are usually either unable or do not have the access to
visit company facilities, interview managements and employees and speak to
competitors and customers of businesses in which their assets are invested.
These research intensive efforts comprise an important part of our investment
process. These annual conferences format should help our shareholders do
their due diligence to better understand and judge the prospects for their
investments in The Baron Funds.
The following executives are scheduled speakers in the order listed.
Doctor Crants, Chairman and CEO, Corrections Corporation of America,
Nashville, Tennessee. Corrections Corporation is the largest operator of
privatized government prison facilities; the low cost provider of detention
and correction services; and the most profitable operator of private prisons.
Corrections Corporation receives average revenue per prisoner per day of
nearly $39; its costs per day approximate $28. State governments often incur
costs per prisoner day of nearly $100. CCA currently has about 38,000 prison
beds under management contract. Only about 4% of the 1.7 million U.S.
prisoners are housed in prisons operated by private companies. Inmates in
privatized prisons could increase several fold during the next four to five
years.
Eric Garren, President, Learning Tree International, Los Angeles, California.
Although we do not invest in technology companies due to product obsolescence
risk, we have been most interested in businesses that benefit from rapid
technology change. Learning Tree is a twenty five year old business that is a
leading provider of classroom instruction for information technology
professionals worldwide. Using IT professionals as part time instructors
keeps Learning Tree s curriculm current and oriented to practical
applications. Learning Tree is beginning to use its 110 title course library
to create computer based training for broader distribution of its course
content. Learning Tree's clientele includes two thirds of the Fortune 1000
companies and many government agencies.
Steven Dodge, Chairman and CEO, American Radio, Boston, Massachusetts. The
only company I can remember in which we were investors that has grown as
rapidly through acquisitions as American Radio is Columbia Hospital. Steve
Dodge has taken advantage of government deregulation to acquire and establish
dominant clusters of radio stations in several growth markets. Radio
companies with dominant market positions are usually able to generate more
revenues for their stations than their ratings would seem to justify.
American Radio has successfully increased both same station ratings and
revenues. The company's opportunities to develop several "sticks" also offer
significant potential to improve operating margins. Steve currently sees
significant opportunities owning not just stations, but also communications
towers.
- -------------------------------------------------------------------------------
5
<PAGE>
- -------------------------------------------------------------------------------
BARON ASSET FUND
- -------------------------------------------------------------------------------
Macon Brock, President and CEO, Dollar Tree Stores, Norfolk, Virginia. As the
leading operator of strip-center based discount stores offering merchandise
for one dollar, Dollar Tree has performed well while others in this category
have failed miserably. The company's innovative merchandising, overseas
purchasing programs, extraordinary unit economics and experienced management
set it apart from others. Its recent acquisition of Dollar Bills increased
the company's stores by more than 20% and gave the company entre into
attractive midwest markets. With 10,000 U.S. community shopping centers of
the type favored by Dollar Tree, expansion potential for this value-based 700
store chain seems nearly unlimited for next several years.
Donald Landry, President and CEO, Choice Hotels, Silver Spring, Maryland.
About 250,000 U.S. hotels are franchisees of Choice Hotels. There are about
3.2 million U.S. hotel rooms. Choice should be able to grow its income at
least 20-25% per year with higher rates, improved occupancies and more units.
Expansion of budget and extended stay franchise operations could
significantly increase this rate of growth, as could the growth of a hotel
management business and the franchising of food courts to its hotel
operators. Choice's operating margins are about 17% below those of its major
competitor, offering further potential. Also providing upside are continued
acquisitions of what Don describes as "pearls", "frog princes", "land hogs",
and "dinosaurs". Choice is currently a wholly owned business of Manor Care.
It will become an independent, publicly owned business this fall.
The Baron Funds Continue to Receive Favorable Media Coverage
Since our last quarterly letter, the Baron Funds have been either featured or
mentioned in several financial magazines or newsletters. We have also spoken
at several investment conferences. In June, I was a speaker and panel member
at Morningstar's Annual Mutual Fund conference. I also appeared twice as a
guest on CNBC programs during the past two months. Invitations to appear on
CNBC come invariably the day after the stock market has fallen sharply and
gurus are forecasting the market's imminent demise. We usually try to explain
that "the market" is unpredictable; that we invest for the long term in
individual companies, not in "the market;" and that we are continuing to find
many businesses in which to invest that are attractively priced.
In its August/September issue, Your Money devoted several paragraphs to
"Baron Asset Fund: A Baby-Boomer Mutual Fund" in an article titled "You Can
Profit...as the Baby Boomers March to Maturity." It was an interesting
treatment of the impact the boomers have had on nursing homes, casinos,
cellular phones and the Beatles' wealth. We were mentioned in an article in
Smart Money's September issue, "Navigating the Downdraft." This article dealt
with contingency plans made by several mutual funds during July if they were
to experience significant redemptions.
The October issue of Money magazine reached newsstands in mid-September. In
it we were featured in a lengthy article, "Inside the Mind of a Manager."
During August, Money financial reporter Carla Fried and her photographer
spent three days with me and three of our analysts. We traveled together on
airplanes, in cars and on foot visiting companies and attending meetings in
Reston, Virginia; Groton, Connecticut; and New York City. We also spent time
in our office in New York City with executives who had come to visit us.
Although we have been the subject of many articles over the years, no
reporter has ever before made the effort of Ms. Fried to study and
objectively write about our research efforts. We believe this article
describes as well as possible our investment process, i.e., what we do every
day and how we choose businesses in which to invest. My wife and two teenage
sons seemed to enjoy this article more than any other. If you would like a
copy of either this or any of the other articles mentioned, please either
call or write us.
Thank You for Investing in Baron Asset Fund
Individuals and their financial advisers have literally thousands of choices
should they decide to invest in mutual funds. We are appreciative that you
have chosen to join us as fellow shareholders of Baron Asset Fund. We will
remain disciplined and will continue to work hard to justify your confidence
and interest. Again, thank you.
Sincerely,
/s/ Ronald Baron
- -----------------
Ronald Baron
President
September 18, 1996
- -------------------------------------------------------------------------------
6
<PAGE>
- -------------------------------------------------------------------------------
BARON GROWTH & INCOME FUND
- -------------------------------------------------------------------------------
[CHART APPEARS HERE]
1996 Second Quarter Latest Year Since Inception
4/1/96 - 6/30/96 7/1/95 - 6/30/96 1/30/95 - 6/30/96
------------------- ---------------- -----------------
Baron G & I Fund 7.7% 39.4% 83.7%
S&P 500 4.4% 26.0% 51.3%
Russell 2000 5.3% 23.9% 41.8%
Dear Baron Growth & Income Shareholder:
- -------------------------------------------------------------------------------
PERFORMANCE REVIEW
- -------------------------------------------------------------------------------
Baron Growth & Income Fund continued to perform well through June 30,1996,
both on a relative and an absolute basis. The Fund returned 7.69% for the
quarter while the average growth and income fund returned 3.37% for the
quarter. Based upon information provided to us by Lipper Analytical Services,
Baron Growth & Income Fund ranks number 5 of 527 growth and income funds year
to date. Baron Growth & Income Fund is the number one performing growth and
income fund of 437 such funds for the period from its inception on January 1,
1995 through June 30,1996. It remains the number one performing growth and
income fund from its inception through August 1996. Many of the Fund's small-
and mid-sized company investments remain significantly below levels reached
in the spring before the sharp market correction this summer. However, our
real estate investment trust investments have performed very well, almost
completely offsetting this weakness. The performance of our REIT portfolio
segment, as we discuss later in this report, would continue to be the top
ranked REIT fund were it a separately managed mutual fund. We regard our REIT
investments as ballast. In a very strong market we expect this portfolio
segment to lag the performance of our more rapidly growing company
investments. In a weak or unsettled market, REITs are likely to outperform as
their yields provide support. We intend, at the present time, to continue to
invest about 20-25% of our Fund's portfolio in income producing real estate
investment trusts. We also are trying to hold about 10-15% of our assets in
other income producing securities, e.g. non-rated convertible debt,
convertible preferred shares and special situation securities with high
current yields and equity characteristics.
- -------------------------------------------------------------------------------
CORPORATE NEWS DEVELOPMENTS
- -------------------------------------------------------------------------------
Amusement and Recreation
During August, Sun International Hotels Limited announced it would acquire
Griffin Gaming, the owner of Resorts International Hotel & Casino in Atlantic
City. Consideration is the issuance of 4.1 million new Sun International
shares and the assumption of $147 million Griffen debt. Griffen also holds
$55 million in cash. Resorts International's Atlantic City casino currently
produces about $50 million per year operating cash flow. Griffen is Atlantic
City's largest landowner, owning strategic land parcels on the Boardwalk
adjoining its hotel. It also owns an important parcel within MGM Grand's
building lot and another in the location of the tunnel proposed to connect
the H Tract to the Expressway. Mirage and Circus intend to build their
casinos on the H Tract. Sun believes it is in its best interests for MGM
Grand, Mirage and Circus Circus to all build mega themed resorts in Atlantic
City. Sun expects these new properties to create more tourism for Atlantic
City from which it will obtain its fair share.
Sun will continue to operate Resorts' existng casino until it builds and
opens an elegant, high energy, new themed property on nine adjacent acres on
the Boardwalk. A theme has yet to be determined for Sun's new casino hotel.
When the new Sun casino hotel opens, Resorts' old casino will be closed,
gutted and reconfigured as meeting rooms, a health spa, a play area for
younger children and a "back of the house" to serve the adjoining casino.
Griffen spent a considerable sum upgrading Resorts' hotel rooms. These rooms
will be kept open and modestly improved to serve Sun's new casino. Sun
expects to spend $500-550 million on its new property. We expect the company
to break ground in 1998 and, hopefully, to open in December 1999. As the
first new casino in Atlantic City in more than ten years, Sun could earn
30-35% on capital, an exceptional return. Its earnings will be partly
sheltered by Griffen's $200 million loss carry forward.
- -------------------------------------------------------------------------------
7
<PAGE>
- -------------------------------------------------------------------------------
BARON GROWTH & INCOME FUND
- -------------------------------------------------------------------------------
Sun plans a controlled opening of its Mohegan Indian tribe Connecticut casino
on October 8. The casino will open to the public October 12. The Sun Mohegan
casino is huge (150,000 square feet), well designed and highly themed. It is
more convenient to reach than nearby Foxwood's, the country's most profitable
casino, and should be easier for customers to enter, navigate, leave and find
their cars than the maze-like Foxwood's. We expect the Mohegan casino to
exceed both customer and investor expectations.
Sun's Paradise Island, Bahamas, development continues on track. Additional
moderate priced hotel rooms and new casino and water attractions near Sun's
Atlantis casino hotel, coupled with high end golf course and marina
development, time share sales, land development, and further upscale hotel
development near Sun's Ocean Club will keep Sun busy past the year 2000.
Sun's operating cash flow is expected to continue to grow rapidly during this
period. With its properties in Connecticut, Atlantic City and the Bahamas,
Sun will become the largest gaming operator on the United States' populous
eastern seaboard. This will present significant cross marketing opportunities
to the company. Baron Growth & Income Fund owns 85,000 shares of Sun
International purchased for about $43.28 per share.
Real Estate Investment Trusts-Shopping Centers
During the second quarter, Kimco announced the purchase of the real estate
assets of Clover, the discount store division of old line,
Philadelphia-based, department store chain, Strawbridge & Clothier.
Strawbridge's stores, as well as its Clover stores, have historically been
poorly managed. In recent years both store groups have encountered increased
competition and results of the department store and discounter have
deteriorated. Strawbridge agreed this spring to be acquired by The May
Company. May quickly determined to dispose of Clover, a business on the verge
of bankruptcy. Although Clover was not a strong merchant, its store real
estate is unique, well located and offers significant promise for
redevelopment and retenanting. This is what Kimco does.
Kimco initially agreed to purchase 26 Clover stores with approximately 2.4
million square feet for $40 million cash. Kimco's agreed upon purchase price
of $17 per foot represented a substantial discount to Clover's store real
estate replacement cost of about $70 per foot. Three Clover store sites to be
acquired were unable to meet closing requirements and were therefore carved
out of the transaction. Seven stores, principally ground leased properties
which did not have sufficient long term appreciation potential, were assigned
by Kimco to retailers for $14 million cash consideration. Kimco then
concluded a modified store purchase of 16 Clover stores with 1.7 million
square feet. Consideration was just $21.8 million cash. This represents the
unbelievably low price per foot of approximately $12.80.
Kimco has net leased six of the acquired sites to rapidly growing discount
department store chain Kohl's and one to an unnamed tenant while six to seven
additional triple net store leases could be completed in the very near term.
Kimco apparently has given its new store tenants no tenant improvement
allowances. Rent amounts are not yet publicly available, but if Kimco
achieves market average net rents of $5-6 per foot, its returns on this
purchase will be exceptional. Kimco also acquired control over future
development at centers anchored by Clover which offers further significant
potential upside. Kimco will take possession of Clover's stores in October
when Clover completes its going out of business sale.
Kimco is the nation's oldest and largest publicly traded owner/operator of
neighborhood and community shopping centers. Kimco controls a broadly
geographically diversified portfolio of 31 million square feet in 255
centers. Kimco is innovative when extracting value from its owned space; it
is generally the low cost space provider in its markets. Due to Kimco's
management expertise and strong balance sheet, Kimco has access to complex
transactions others are unable to pursue. Baron Growth & Income Fund owns
120,000 shares of Kimco purchased for approximately $26.39 per share.
- -------------------------------------------------------------------------------
PORTFOLIO ADDITIONS
- -------------------------------------------------------------------------------
Financial
Medallion Financial Corporation is a specialty finance company. Its primary
business is the origination and financing of loans made to purchase medallion
taxi cabs, principally in New York City. The business began in 1979.
Medallion Financial is structured for income tax purposes as a Regulated
Investment Company (RIC). The RIC structure allows Medallion to pay as
dividends to its shareholders 90% of its business lending income and, by
doing so, avoid federal income taxes.
Until recently there were 11,787 taxi medallions in New York City. The number
is fixed by law. In spring 1996, New York City auctioned an additional 133
medallions. The value of New York taxi medallions has increased an average
18% per year for the last 25 years. Medallions are now worth about $200,000
apiece. The aggregate value of taxi medallions in New York City now
approximates $2.4 billion; in the
- -------------------------------------------------------------------------------
8
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
United States, more than $5 billion. Medallion Financial's portfolio includes
about $117 million of New York City taxi medallion loans. The company will
soon begin to make similar loans in Boston and Chicago. Medallion Financial's
taxi loan portfolio could reach $220 million by the end of 2000.
Medallion Financial earns about 300 basis points on its New York taxi
medallion loan portfolio. Margins are somewhat higher in other cities due to
less competition. Medallion Financial makes loans having an average 70% loan
to asset value. The liens have aged and have a current average loan to value
of 54%. Medallion Financial has never experienced a single default on its
taxi loans.
The Company has also begun to make higher risk and more profitable commercial
loans. Its target market? $60,000 average loans to dry cleaners and
laundromats. To date, Medallion Financial has originated and lent $70 million
to these small and independent businesses and has experienced only $224,000
losses. Medallion earns 650 basis points over prime on commercial loans, a
significantly higher return than on the safer medallion taxis. Commercial
loan growth could exceed 30% per year for the next five years. Medallion's
commercial portfolio could jump from $31 million to more than $120 million
during this period.
Perhaps Medallion's most glamorous business is a relatively new one, taxi top
advertising. As the largest financier of taxis, Medallion Financial has a
significant competitive advantage as it attempts to grow this new business
which services its existing customers. Signs installed on taxi roofs cost
Medallion $350 apiece. Medallion receives average revenue from advertisers to
use this medium of $150-225 per month. Taxi owners are paid by Medallion $50
per month when ad space on their cab is being used. Medallion expects to
increase its taxi top ads from 1,600 a few months ago to 4,800 by the end of
1997 and to 11,000 by December 1999. The taxi top ad business within three
years could earn $12 million per year before taxes and have a value in excess
of $100 million, $12-15 per share of Medallion Financial. Medallion
Financial's per share dividend from its lending operations could nearly
double from $.90 in 1997 during the next four years. Baron Growth & Income
owns 285,000 shares of Medallion Financial purchased for approximately $12.02
per share. We expect its shares to reflect both the growth of its dividend
and the increasing value of its taxi top ad business.
Real Estate Investment Trusts-Mortgages
Overlooking a tranquil lake and picturesque hills, Redwood Trust's modest,
3,000 square foot office is located in a non-descript, low-rise, strip-center
office building in Mill Valley, California. It takes about fifteen minutes to
reach from downtown San Francisco. Redwood's office houses eight executives,
an office manager and a receptionist. The office is attractively furnished
and filled with personal computers and mountain bikes. Although a real estate
investment trust for tax purposes, Redwood Trust is really more comparable to
a bank or savings and loan. The difference? Redwood does not have the fixed
overhead of bank branches' "bricks and mortar." Not having these branches
(and the employees that fill them trying to establish "relationships" with
customers), Redwood is not subject to the costly government regulations
required of businesses which accept customer deposits. As a REIT, unlike
banks, Redwood pays no taxes on its earnings, all of which it distributes to
its shareholders as dividends.
Redwood acquires, owns and manages high quality, principally investment
grade, single family, adjustable rate, non-conforming, "jumbo" mortgages.
"Non-conforming" mortgages are larger than $207,000. The average mortgage
size owned by Redwood is about $265,000. There are about $800 billion "jumbo"
mortgages outstanding. Redwood finances its mortgage purchases by borrowing
against them in the $4 trillion "repo" market. Redwood has the same costs to
acquire its investments as any other investor; it has the same borrowing
costs to finance the mortgages; it just doesn't have their overhead. Redwood
outsources loan origination and servicing functions. Its costs for these
services are substantially less than those for most bank and S & L
competitors. Redwood employs significantly less leverage than its
competitors, e.g., 8.5X vs. 12-14X for banks, 16-18X for most S & Ls and
30-35X for FNMA. Redwood hedges interest rate risk; most banks and S & Ls. do
not. Redwood's well regarded management has capped its salaries and is
reliant upon its stock ownership and share options for significant
compensation.
Redwood's mortgage portfolio has grown from $122 million in December 1994, to
$441 million in December 1995 to $1.2 billion at present. The portfolio
should reach $1.5 billion at year end 1996 and could at least double and
probably triple next year. Redwood's dividend is growing rapidly; we expect
its current 7% yield to increase substantially next year. Baron Growth &
Income Fund owns 110,000 shares of Redwood Trust acquired for approximately
$24.09 per share.
- -------------------------------------------------------------------------------
REAL ESTATE INVESTMENT TRUST NEWS
- -------------------------------------------------------------------------------
Performance
The REIT segment of our investment portfolio has performed well this year,
both on an absolute
- -------------------------------------------------------------------------------
9
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
and relative basis. For the six months ended June 30, Baron Growth & Income's
REIT investments achieved a total return, i.e. dividends plus capital
appreciation, of 11.5%. This compares to a 6.8% return achieved by the NAREIT
index during the same time period. Had our Fund's REIT investments been a
stand alone real estate fund, it would have been the number one performing
REIT fund of 14 so identified. Our strong relative performance continued in
the third quarter. Through August, the REIT segment of our portfolio achieved
total return of 16.3%. This compares to year to date total return for the
NAREIT index of 11.0%. Again, our REIT protfolio, were it a dedicated REIT
fund, would have been the number one performing real estate fund for the
period. Baron Growth & Income Fund's REIT portfolio in 1995, were it a
separate real estate fund, would also have been the best performing REIT
fund. Last year our REIT portfolio gained 20.5%. REITs currently represent,
as they have since Baron Growth & Income Fund's inception, about 25% of our
Fund's investment portfolio.
REITs have performed well during 1996. Real estate fundamentals have improved
throughout the country, i.e., occupancies and rental rates have increased and
there has been little new construction. Also assisting REIT stock performance
have been several business combinations as well as proposed takeovers and
mergers. Equity investors have increased their investments in real estate
securities this year while seeking a safe haven from increased equity and
debt market volatility. The results? REITs performance has been further
assisted by strong cash flows into REIT equity funds; additional REIT equity
offerings have been scheduled; and, Vanguard has inaugurated a Real Estate
Investment Trust index fund. The Vanguard fund attempts to duplicate the
performance of the widely followed Morgan Stanley Equity REIT index. During
the first several months of its existence, the Vanguard fund attracted more
than $160 million in assets. Purchases by Vanguard and others of thinly
traded REIT shares, especially those in the Morgan Stanley index, continue to
boost REIT share prices.
- -------------------------------------------------------------------------------
OTHER DEVELOPMENTS
- -------------------------------------------------------------------------------
Baron Growth & Income Fund Receives Favorable Publicity
In July 1996, Mutual Fund Magazine's article titled "The Red Hot Baron"
described Baron Growth & Income Fund as an "undiscovered fund." That Fund
invests in "the same high octane growth stocks that rev Baron Asset's
performance while the newer fund also owns income producing securities like
real estate investment trusts and convertible bonds in order to reduce
volatility." If you would like a copy of this article, please either call us
or write.
Sections of the Baron Asset Fund Quarterly Report are Relevant to Your
Investment in Baron Growth & Income Fund
The are several topics addressed in the Baron Asset Fund quarterly report on
the preceding pages to which we would like to direct your attention. We think
you will find interesting our discussion of demographics in INVESTMENT
THEMES. The segment OTHER DEVELOPMENTS discusses a number of articles that
have recently appeared about the two Baron Funds, notably an article in the
October issue of Money titled "Inside the Mind of a Manager" by Carla Fried.
If you would like a copy of any of these articles, please let us know. Also
in this segment of the Baron Asset report is information about the speakers
at our investment conference on October 18 in new York City. We hope you will
be able to attend.
Thank You for Choosing to Invest in Baron Growth & Income Fund
Investors have more than 500 growth and income funds from which to choose if
they decide to invest in this more conservative, growth oriented, mutual fund
category. Most financial planners and advisors would probably characterize
our Fund as among the more aggressive growth and income funds. This is due to
our Fund's focus on small- and mid-cap businesses, as well as our investments
in non-rated debt issued by these companies. We agree. However, we regard
Baron Growth & Income Fund as a significantly more conservative mutual fund
than most others that focus on small- and mid-sized companies. Our goal is to
achieve investment returns superior to most growth and income funds and at
least comparable to funds which focus their investments in small- and mid-
sized companies. We hope to achieve these results with less volatility than
is normally the case in small-cap funds. Of course, there can be no assurance
that we can achieve our objective 15-20% compound annual returns.
Baron Growth & Income Fund's early results have been strong. Since the Fund
is only twenty one months old and our strategy is unconventional, we are
especially grateful for the early and strong support provided by our fellow
shareholders. We are also appreciative of the strong interest in Baron Growth
& Income Fund expressed by many other potential shareholders. We will remain
disciplined in our approach and will continue to work hard to justify your
confidence and continued interest. Again, thank you.
Sincerely,
/s/ Ronald Baron
- -----------------------
Ronald Baron, President
September 18, 1996
- -------------------------------------------------------------------------------
10
<PAGE>
- -------------------------------------------------------------------------------
THE BARON FUNDS
- -------------------------------------------------------------------------------
TABLE I
- -------------------------------------------------------------------------------
PORTFOLIO MARKET CAPITALIZATION
- -------------------------------------------------------------------------------
The Funds invest primarily in small and medium size companies. Table I
ranks the Funds' investments by market capitalization and displays the
percentage of the Funds' portfolios invested in each market capitalization
category. At times the Funds will invest in companies with market
capitalizations greater than $2.0 billion. These investments are companies
that have increased in value since the Funds first invested in them and still
offer attractive opportunities for further appreciation.
BARON ASSET FUND
- -----------------------------------------------------------------------------
Equity % of
Company Market Cap Portfolio
- -----------------------------------------------------------------------------
('000s)
Large Capitalization
- -----------------------------------------------------------------------------
United Healthcare Corp. ......... 8,863,811 0.8%
Mirage Resorts, Inc.* ........... 4,978,800 0.7
Franklin Resources, Inc. ........ 4,977,417 0.4
Circus Circus Enterprises, Inc.*.. 4,624,595 1.4
Charles Schwab Corp. ............ 4,383,050 4.9
Corrections Corp. of America* ... 2,583,700 1.1
Globalstar Telecomm., Ltd* ...... 2,478,000 0.5
Manor Care, Inc. ................ 2,465,389 10.7
Mercury Finance Co. ............. 2,200,433 1.4
Pacificare Health System, Inc.* . 2,110,548 0.7
Olsten Corp. .................... 2,091,144 2.2
----
24.8%
Medium Capitalization
- -----------------------------------------------------------------------------
Nine West Group, Inc.* .......... 1,818,287 1.0%
La Quinta Inns, Inc. ............ 1,801,396 0.9
Robert Half Intl., Inc.* ........ 1,593,607 3.1
Promus Hotel Corp.* ............. 1,522,024 0.2
Public Storage, Inc. ............ 1,484,640 0.3
Industrie Natuzzi SPA ........... 1,445,250 1.1
Noble Drilling Corp.* ........... 1,313,087 0.1
Quorum Health Group, Inc.* ...... 1,277,732 2.8
Stewart Enterprises, Inc. CL A .. 1,242,813 2.5
Heilig-Meyers, Co. .............. 1,166,208 2.1
Kimco Realty Corp. .............. 1,018,723 0.6
Vornado Realty Trust ............ 992,528 0.5
Intl. CableTel, Inc.* ........... 890,930 5.1
American Radio Systems Corp.* ... 808,400 2.9
Delta and Pine Land Co. ......... 800,250 1.5
Dollar Tree Stores, Inc.* ....... 795,052 2.0
Starwood Lodging Trust .......... 790,757 0.6
Genesis Health Ventures, Inc.* .. 763,860 1.9
----
29.2%
- -------------------------------------------------------------------------------
11/1
<PAGE>
- -----------------------------------------------------------------------------
Equity % of
Company Market Cap Portfolio
- -----------------------------------------------------------------------------
('000s)
Small Capitalization
- -----------------------------------------------------------------------------
DeVry, Inc.* ........................ 747,990 1.6%
Wackenhut Corrections Corp.* ........ 723,462 0.7
Evergreen Media Corp.* .............. 711,360 0.2
Proffitt's Inc.* .................... 681,955 0.5
Highwoods Properties, Inc. .......... 667,493 0.2
Storage USA, Inc. ................... 630,584 0.4
Sylvan, Inc.* ....................... 571,648 0.2
Smart and Final, Inc. ............... 539,762 4.3
Bristol Hotel Co.* .................. 538,395 1.1
Interim Services, Inc.* ............. 496,134 0.3
OM Group, Inc. ...................... 487,878 1.8
Palmer Wireless, Inc.* .............. 467,920 1.4
Sun Communities, Inc. ............... 453,592 0.6
Cross Timbers Oil Co. ............... 450,698 2.5
Petco Animal Supplies, Inc.* ........ 450,513 1.3
Learning Tree Intl., Inc.* .......... 438,803 0.9
Cellular Comm. of P.R., Inc.* ....... 416,065 2.5
American Mobile Satellite Corp.* .... 387,190 1.7
Seacor Holdings, Inc.* .............. 381,002 0.6
Alexander's, Inc.* .................. 363,173 0.8
American Homepatient, Inc.* ......... 353,779 0.5
Equity Corp. Intl.* ................. 345,330 0.3
PHP Healthcare Corp.* ............... 344,799 0.3
American Freightways Corp.* ......... 344,486 0.2
Flextronics Intl. Ltd.* ............. 337,943 2.9
Scotts Co.* ......................... 332,168 0.5
Scandinavian Broadcasting Systems ... 330,211 1.0
Vitalink Pharmacy Svcs, Inc.* ....... 324,919 0.5
Heftel Broadcasting Corp.* .......... 323,332 1.4
Avatar Holdings, Inc.* .............. 312,595 1.2
Marcus Corp. ........................ 271,045 0.8
Saga Communications, Inc.* .......... 184,851 2.4
DVI, Inc.* .......................... 163,202 1.6
Summit Care Corp.* .................. 148,808 0.9
Youth Services Intl., Inc.* ......... 148,568 1.4
Pediatric Services of America, Inc.* 138,821 1.2
SPACEHAB, Inc.* ..................... 121,759 0.4
USA Truck, Inc.* .................... 99,572 0.2
Team Rental Group, Inc.* ............ 85,540 0.3
----
41.6%
- -------------------------------------------------------------------------------
11/2
<PAGE>
- -------------------------------------------------------------------------------
THE BARON FUNDS
- -------------------------------------------------------------------------------
TABLE I
- -------------------------------------------------------------------------------
PORTFOLIO MARKET CAPITALIZATION (continued)
- -------------------------------------------------------------------------------
BARON GROWTH & INCOME FUND
- -------------------------------------------------------------------------------
Equity % of
Company Market Cap Portfolio
- -------------------------------------------------------------------------------
('000s)
Large Capitalization
- -------------------------------------------------------------------------------
United HealthCare Corp. ............. 8,863,811 1.0%
Mirage Resorts, Inc.* ............... 4,978,800 0.6
Franklin Resources, Inc. ............ 4,977,417 1.4
Circus Circus Enterprises, Inc.* .... 4,624,595 1.0
Charles Schwab Corp. ................ 4,383,050 4.9
Corrections Corp. of America* ....... 2,583,700 0.8
Manor Care, Inc. .................... 2,465,389 6.9
Mercury Finance Co. ................. 2,200,433 1.5
PacifiCare Heatlh Systems, Inc. CL B* 2,110,548 1.0
Olsten Corp. ........................ 2,091,144 1.0
----
20.1%
Medium Capitalization
- -------------------------------------------------------------------------------
Nine West Group, Inc.* .............. 1,818,287 0.5%
T. Rowe Price Assoc., Inc. .......... 1,757,670 0.8
Robert Half Intl., Inc.* ............ 1,593,607 1.7
Public Storage, Inc. ................ 1,484,640 2.0
Leucadia National Corp. 5.25% ....... 1,476,150 1.2
Industrie Natuzzi SPA ............... 1,445,250 1.5
Debartolo Realty Corp. .............. 1,444,594 1.2
Sun Intl. Hotels Ltd.* .............. 1,406,500 0.7
Quorum Health Group, Inc.* .......... 1,277,732 1.9
Stewart Enterprises, Inc. CL A ...... 1,242,813 1.5
Heilig-Meyers, Co. .................. 1,166,208 1.5
Kimco Realty Corp. .................. 1,018,723 2.0
Vornado Realty Trust ................ 992,528 1.6
Intl. CableTel, Inc.* ............... 890,930 4.7
American Radio Systems Corp.* ....... 808,400 3.7
Delta & Pine Land Co. ............... 800,250 0.2
Dollar Tree Stores, Inc.* ........... 795,052 1.8
Starwood Lodging Trust .............. 790,757 2.5
Genesis Health Ventures, Inc.* ...... 763,860 1.1
----
32.1%
Small Capitalization
- -------------------------------------------------------------------------------
DeVry, Inc.* ........................ 747,990 0.9%
Beacon Properties Corp. ............. 698,734 1.0
Highwoods Properties, Inc. .......... 667,493 1.9
Storage USA, Inc. ................... 630,584 2.8
Smart and Final, Inc. ............... 539,762 1.5
Multicare Companies* ................ 504,070 0.5
OM Group, Inc. ...................... 487,878 1.1
Palmer Wireless, Inc.* .............. 467,920 1.1
CBL & Associates Properties ......... 466,370 1.0
Sun Communities, Inc. ............... 453,592 2.7
Petco Animal Supplies, Inc.* ........ 450,513 0.8
Learning Tree Intl., Inc.* .......... 438,803 0.6
Cali Realty Corp. ................... 434,099 0.8
Cellular Comm. of P.R., Inc.* ....... 425,321 2.3
Cellular Comm. of P.R., Inc.* ....... 416,065 1.5
American Mobile Satellite Corp.* .... 387,190 1.4
- -------------------------------------------------------------------------------
12/1
<PAGE>
- -------------------------------------------------------------------------------
Equity % of
Company Market Cap Portfolio
- -------------------------------------------------------------------------------
('000s)
Small Capitalization (continued)
- -------------------------------------------------------------------------------
Alexander's, Inc.* .................. 363,173 0.7%
Southern Union Co. New* ............. 356,796 2.2
Cellular Comm. Intl. Units .......... 347,996 0.6
Flextronics Intl. Ltd.* ............. 337,943 2.1
Scotts Co.* ......................... 332,168 0.2
Scandinavian Broadcasting Systems ... 330,211 1.3
Heftel Broadcasting Corp.* .......... 323,332 1.8
Avatar Holdings, Inc.* .............. 312,595 0.6
Healthcare Realty Trust, Inc. ....... 308,204 0.8
Studio Plus Hotels, Inc.* ........... 277,200 1.0
Marcus Corp. ........................ 271,045 0.7
Sirrom Capital Corp. ................ 265,224 0.4
Redwood Trust, Inc. ................. 235,732 1.7
Columbus Realty Trust ............... 225,874 1.8
Saga Communications, Inc.* .......... 184,851 2.0
Counsel Corp.* ...................... 183,600 0.3
DVI, Inc.* .......................... 163,202 1.0
Summit Care Corp.* .................. 148,808 0.6
Youth Services Intl., Inc.* ......... 148,568 1.6
Western Stafffing Services, Inc.* ... 144,732 0.7
Pediatric Services of America, Inc.* 138,821 1.1
SPACEHAB, Inc.* ..................... 121,759 0.4
Rockford Industries, Inc.* .......... 73,303 0.2
Medallion Financial Corp.* .......... 71,875 1.8
Alcide Corp.* ....................... 69,750 0.4
----
47.9%
TABLE II
- -------------------------------------------------------------------------------
PORTFOLIO RISK CHARACTERISTICS
- -------------------------------------------------------------------------------
The Funds are diversified not only by industry, but also by external
factors that might impact the companies in which they invest. Table II
displays some of the risk factors that are currently being monitored and the
percentage of portfolio considered exposed to these factors. The Funds use
this tool to balance the portfolios by risk factors with the aim of below-
average volatility.
Baron Asset Baron Growth
Fund & Income Fund
- -------------------------------------------------------------------------------
% of % of
Portfolio Portfolio
- -------------------------------------------------------------------------------
Oil Price Sensitivity .......... 27.1% 23.0%
Leverage (Debt ^ 40% of Market
Cap) .......................... 15.4 17.3
Foreign Sales Dependent (Sales ^
10%) .......................... 10.5 9.1
Volatility (Beta ^ 1.2).......... 6.4 10.2
Over-the-Counter Securities .... 40.3 39.0
Unseasoned Securities
(Publicly owned for _ 3 years)... 31.8 45.2
(Publicly owned for _ 1 year).... 2.4 5.2
Turnarounds .................... 3.9 2.3
Development Companies .......... 9.1 8.1
^ = greater than
_ = less than
- -------------------------------------------------------------------------------
12/2
<PAGE>
- -------------------------------------------------------------------------------
THE BARON FUNDS
- -------------------------------------------------------------------------------
TABLE III
- -------------------------------------------------------------------------------
HISTORICAL INFORMATION
- -------------------------------------------------------------------------------
Table III displays on a quarterly basis the Funds' closing net assets and
net asset value per share, dividend distributions and the value of $10,000
invested in a Fund at the time of its inception.
- -------------------------------------------------------------------------------
Baron Asset Fund
- -------------------------------------------------------------------------------
Value of Shares
Net Asset Owned, if Initial
Value Investment
Date Fund Net Assets Per Share Dividends was $10,000*
- -------------------------------------------------------------------------------
06/12/87 $ 108,728 $10.00 $10,000
- -------------------------------------------------------------------------------
06/30/87 1,437,521 10.71 10,710
- -------------------------------------------------------------------------------
09/30/87 3,905,221 11.95 11,950
- -------------------------------------------------------------------------------
12/31/87 4,406,972 10.10 $0.197 10,298
- -------------------------------------------------------------------------------
03/31/88 6,939,435 11.56 11,786
- -------------------------------------------------------------------------------
06/30/88 9,801,677 12.68 12,928
- -------------------------------------------------------------------------------
09/30/88 11,734,509 12.98 13,234
- -------------------------------------------------------------------------------
12/31/88 15,112,031 12.87 0.701 13,843
- -------------------------------------------------------------------------------
03/31/89 22,269,578 14.75 15,864
- -------------------------------------------------------------------------------
06/30/89 31,397,929 16.06 17,273
- -------------------------------------------------------------------------------
09/30/89 47,658,616 17.22 18,521
- -------------------------------------------------------------------------------
12/31/89 49,007,084 14.66 1.409 17,299
- -------------------------------------------------------------------------------
03/31/90 50,837,946 13.87 16,367
- -------------------------------------------------------------------------------
06/30/90 54,413,786 14.32 16,898
- -------------------------------------------------------------------------------
09/30/90 40,002,612 10.88 12,838
- -------------------------------------------------------------------------------
12/31/90 42,376,625 11.75 0.198 14,100
- -------------------------------------------------------------------------------
03/31/91 47,104,889 13.88 16,656
- -------------------------------------------------------------------------------
06/30/91 45,600,730 13.81 16,572
- -------------------------------------------------------------------------------
09/30/91 47,409,180 14.80 17,760
- -------------------------------------------------------------------------------
12/31/91 46,305,042 15.71 0.035 18,895
- -------------------------------------------------------------------------------
03/31/92 48,011,634 16.72 20,109
- -------------------------------------------------------------------------------
06/30/92 42,289,409 15.28 18,377
- -------------------------------------------------------------------------------
09/30/92 43,816,305 16.20 19,484
- -------------------------------------------------------------------------------
12/31/92 47,955,530 17.73 0.162 21,522
- -------------------------------------------------------------------------------
03/31/93 50,015,244 18.82 22,845
- -------------------------------------------------------------------------------
06/30/93 52,432,090 19.70 23,912
- -------------------------------------------------------------------------------
09/30/93 59,916,570 21.91 26,595
- -------------------------------------------------------------------------------
12/31/93 64,069,114 21.11 0.774 26,576
- -------------------------------------------------------------------------------
03/31/94 63,099,109 20.69 26,047
- -------------------------------------------------------------------------------
06/30/94 68,880,300 20.40 25,682
- -------------------------------------------------------------------------------
09/30/94 80,258,542 22.82 28,728
- -------------------------------------------------------------------------------
12/31/94 87,058,228 22.01 0.656 28,547
- -------------------------------------------------------------------------------
03/31/95 160,603,528 24.29 31,505
- -------------------------------------------------------------------------------
06/30/95 202,259,502 25.79 33,450
- -------------------------------------------------------------------------------
09/30/95 289,973,331 29.30 38,003
- -------------------------------------------------------------------------------
12/31/95 353,095,409 29.74 0.034 38,618
- -------------------------------------------------------------------------------
03/31/96 638,297,904 34.14 44,332
- -------------------------------------------------------------------------------
06/30/96 1,124,647,802 36.65 47,591
- -------------------------------------------------------------------------------
* Assumes all dividends were reinvested and no shares were redeemed.
- --------------------------------------------------------------------------------
13/1
<PAGE>
- -------------------------------------------------------------------------------
Baron Growth & Income Fund
- -------------------------------------------------------------------------------
Value of Shares
Net Asset Owned, if Initial
Value Investment
Date Fund Net Assets Per Share Dividends was $10,000*
- -------------------------------------------------------------------------------
01/03/95 $ 741,000 $10.00 $10,000
- -------------------------------------------------------------------------------
03/31/95 3,425,507 11.78 11,780
- -------------------------------------------------------------------------------
06/30/95 7,231,619 13.18 13,180
- -------------------------------------------------------------------------------
09/30/95 28,632,467 14.77 14,770
- -------------------------------------------------------------------------------
12/31/95 41,043,705 15.11 0.142 15,254
- -------------------------------------------------------------------------------
03/31/96 77,337,831 16.90 17,061
- -------------------------------------------------------------------------------
06/30/96 172,070,435 18.20 18,373
- -------------------------------------------------------------------------------
* Assumes all dividends were reinvested and no shares were redeemed.
- -------------------------------------------------------------------------------
Performance Information
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
BARON ASSET FUND'S AVERAGE ANNUAL RETURN
- -------------------------------------------------------------------------------
Period ended June 30, 1996
- -------------------------------------------------------------------------------
One year 42.3%
- -------------------------------------------------------------------------------
Two years 36.1%
- -------------------------------------------------------------------------------
Three years 25.8%
- -------------------------------------------------------------------------------
Four years 26.9%
- -------------------------------------------------------------------------------
Five years 23.5%
- -------------------------------------------------------------------------------
Since inception June 12, 1987 18.8%
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
BARON GROWTH & INCOME FUND'S AVERAGE ANNUAL RETURN
- -------------------------------------------------------------------------------
Period ended June 30, 1996
- -------------------------------------------------------------------------------
One year 39.4%
- -------------------------------------------------------------------------------
Since inception January 3, 1995 50.0%
- -------------------------------------------------------------------------------
The performance data represents past performance. Investment returns and
principle value will fluctuate so that an investor's shares, when redeemed,
may be worth more or less than their cost. For more complete information
about The Baron Funds including charges and expenses, call or write for a
prospectus. Read it carefully before you invest or send money. This report is
not authorized for use as an offer of sale or a solicitation of an offer to
buy shares of The Baron Funds unless accompanied or preceded by the Funds'
current prospectus.
- -------------------------------------------------------------------------------
13/2
<PAGE>
- -------------------------------------------------------------------------------
BARON ASSET FUND
- -------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
- -------------------------------------------------------------------------------
JUNE 30, 1996 (Unaudited)
Shares or Market
Principal Amount Value %(1)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Common Stocks
- -------------------------------------------------------------------------------
Amusement and Recreation Services
360,000 Bristol Hotel Co.* ............... $ 11,700,000 1.1%
380,000 Circus Circus Enterprises, Inc.* . 15,580,000 1.4
310,000 La Quinta Inns, Inc. ............. 10,385,000 0.9
375,000 Marcus Corp. ..................... 9,421,875 0.8
150,000 Mirage Resorts, Inc.* ............ 8,100,000 0.7
80,000 Promus Hotel Corp.* .............. 2,370,000 0.2
------------ ------
57,556,875 5.1
Business Services
109,500 Equity Corp. Intl.* .............. 2,956,500 0.3
82,000 Interim Services, Inc.* .......... 3,526,000 0.3
847,000 Olsten Corp. ..................... 24,880,625 2.2
1,245,000 Robert Half Intl., Inc.* ......... 34,704,375 3.1
914,250 Stewart Enterprises, Inc. CL A ... 28,570,313 2.5
240,000 Team Rental Group, Inc.* ......... 3,360,000 0.3
------------ ------
97,997,813 8.7
Chemical
505,000 OM Group, Inc. ................... 19,821,250 1.8
Communications
1,240,000 American Mobile Satellite Corp.* . 19,220,000 1.7
850,000 Cellular Comm. of P.R., Inc.* .... 27,625,000 2.5
125,000 Globalstar Telecomm., Ltd* ....... 5,531,250 0.5
715,000 Intl. CableTel, Inc.* ............ 21,092,500 1.9
800,000 Palmer Wireless, Inc.* ........... 16,000,000 1.4
------------- ------
89,468,750 8.0
Education
400,000 DeVry, Inc.* ..................... 18,000,000 1.6
345,000 Learning Tree Intl., Inc.* ....... 10,608,750 0.9
47,500 Sylvan, Inc.* .................... 1,793,125 0.2
------------- ------
30,401,875 2.7
Energy
1,150,000 Cross Timbers Oil Co. ............ 28,462,500 2.5
100,000 Noble Drilling Corp.* ............ 1,387,500 0.1
140,000 Seacor Holdings, Inc.* ........... 6,265,000 0.6
------------- ------
36,115,000 3.2
Financial
2,237,000 Charles Schwab Corp. ............. 54,806,500 4.9
1,152,600 DVI, Inc.* ....................... 18,153,450 1.6
75,000 Franklin Resources, Inc. ......... 4,575,000 0.4
1,270,000 Mercury Finance Co. .............. 16,192,500 1.4
------------- ------
93,727,450 8.3
Food and Agriculture
422,500 Delta and Pine Land Co. .......... 17,428,125 1.5
305,000 Scotts Co.* ...................... 5,337,500 0.5
------------- ------
22,765,625 2.0
Government Services
176,500 Corrections Corp. of America* .... 12,355,000 1.1
435,000 Spacehab, Inc.* .................. 4,785,000 0.4
213,000 Wackenhut Corrections Corp.* ..... 7,108,875 0.7
525,750 Youth Services Intl., Inc.* ...... 9,332,063 0.8
------------- ------
33,580,938 3.0
Health Services
130,000 American Homepatient, Inc.* ...... 5,752,500 0.5
682,450 Genesis Health Ventures, Inc.* ... 21,411,869 1.9
3,070,000 Manor Care, Inc. ................. 120,881,250 10.7
108,000 PacifiCare Health System, Inc. CL
B* .............................. 7,317,000 0.7
572,000 Pediatric Services of America,
Inc.* ........................... 13,013,000 1.2
104,000 PHP Healthcare Corp.* ............ 3,276,000 0.3
1,201,000 Quorum Health Group, Inc.* ....... 31,676,375 2.8
483,000 Summit Care Corp.* ............... 10,626,000 0.9
170,500 United Healthcare Corp. .......... 8,610,250 0.8
259,500 Vitalink Pharmacy Svcs, Inc.* .... 6,033,375 0.5
------------- ------
228,597,619 20.3
<PAGE>
Manufacturing
1,220,000 Flextronics Intl. Ltd.* .......... 32,025,000 2.9
Media and Entertainment
472,500 American Radio Systems Corp.* .... 20,317,500 1.8
40,000 Evergreen Media Corp.* ........... 1,710,000 0.2
549,700 Heftel Broadcasting Corp.* ....... 16,284,862 1.4
1,240,000 Saga Communications, Inc.* ....... 26,815,000 2.4
------------- ------
65,127,362 5.8
Real Estate & REIT's
129,000 Alexander's, Inc.* ............... $ 9,368,625 0.8
384,500 Avatar Holdings, Inc.* ........... 13,217,187 1.2
100,000 Highwoods Properties, Inc. ....... 2,762,500 0.2
255,000 Kimco Realty Corp. ............... 7,203,750 0.6
185,000 Public Storage, Inc. ............. 3,815,625 0.3
180,000 Starwood Lodging Trust ........... 6,547,500 0.6
125,000 Storage USA, Inc. ................ 4,031,250 0.4
250,000 Sun Communities, Inc. ............ 6,718,750 0.6
125,000 Vornado Realty Trust ............. 5,109,375 0.5
-------------- ------
58,774,562 5.2
Retail Trade & Restaurants
715,000 Dollar Tree Stores, Inc.* ........ 22,701,250 2.0
960,000 Heilig Meyers, Co. ............... 23,040,000 2.1
215,000 Nine West Group, Inc.* ........... 10,991,875 1.0
500,000 Petco Animal Supplies, Inc.* ..... 14,375,000 1.3
160,000 Proffitt's Inc.* ................. 5,680,000 0.5
1,890,000 Smart and Final, Inc. ............ 48,431,250 4.3
-------------- ------
125,219,375 11.2
Transportation
200,000 American Freightways Corp.* ...... 2,225,000 0.2
212,500 USA Truck, Inc.* ................. 2,231,250 0.2
-------------- ------
4,456,250 0.4
Wholesale Trade
249,500 Industrie Natuzzi SPA ............ 12,786,875 1.1
Miscellaneous .............................. 11,442,949 1.0
-------------- ------
Total Common Stocks
(Cost $825,777,292) ....................... 1,019,865,568 90.7
-------------- ------
- -------------------------------------------------------------------------------
14/1
<PAGE>
STATEMENT OF NET ASSETS
- -------------------------------------------------------------------------------
JUNE 30, 1996 (Unaudited)
Shares or Market
Principal Amount Value %(1)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Convertible Preferred
- -------------------------------------------------------------------------------
Media and Entertainment
200,000 American Radio Systems
7% Conv. Corp. ................................. 11,800,000 1.1
(Cost $10,000,000)
- -------------------------------------------------------------------------------
Corporate Bonds
- -------------------------------------------------------------------------------
Communications
$20,500,000 Intl. CableTel, Inc. 7.25% Conv. Sub.
Notes 04/15/2005 .................. 24,600,000 2.2
11,000,000 Intl. CableTel, Inc. 7.0% Conv. Sub.
Notes 06/15/2008 .................. 10,780,000 1.0
11,000,000 Scandinavian Broadcasting Systems
7.25% Sub. Deb. Conv. 8/01/2005 ...... 11,880,000 1.0
-------------- ------
47,260,000 4.2
Government Services
5,000,000 Youth Services Intl. Inc. 7.00% Conv.
Sub. Deb. 02/01/2006 .......................... 7,175,000 0.6
-------------- ------
Total Corporate Bonds
(Cost $49,384,023) ............................. 54,435,000 4.8
-------------- ------
Short Term Money Market Instrument
1,781,000 Associates Corp. of N.A., 5.45%
Due 07/01/96 ........................ 1,781,000 0.2
70,000,000 Ford Motor Credit Co., 5.33%
Due 07/01/96 ........................ 70,000,000 6.2
-------------- -------
Total Short Term Money Market Instrument (Cost
$71,781,000) ................................... 71,781,000 6.4
-------------- -------
Total Investments
(Cost $956,942,315**) .......................... 1,157,881,568 103.0
-------------- -------
Liabilities Less Cash and Other Assets .......... (33,233,766) (3.0)
-------------- -------
Net Assets (Equivalent to $36.65 per share based
on 30,683,678 shares of beneficial interest
outstanding) ................................... $1,124,647,802 100.%
============== =======
- ------
(1) Percentage of Net Assets
* Non-income producing securities
** For Federal income tax purposes the cost basis is $957,124,798. Aggregate
unrealized appreciation and depreciation of investments are $219,505,138
and $18,748,368, respectively.
- -------------------------------------------------------------------------------
14/2
<PAGE>
- -------------------------------------------------------------------------------
BARON GROWTH & INCOME FUND
- -------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
- -----------------------------------------------------------------------------
JUNE 30, 1996 (Unaudited)
Shares or Market
Principal Amount Value %(1)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Common Stocks
- -------------------------------------------------------------------------------
Amusement and Recreation Services
40,000 Circus Circus Enterprises, Inc.* $ 1,640,000 1.0%
50,000 Marcus Corp. .................... 1,256,250 0.7
20,000 Mirage Resorts, Inc.* ........... 1,080,000 0.6
50,000 Studio Plus Hotels, Inc.* ....... 1,650,000 1.0
25,000 Sun Intl. Hotels Ltd.* .......... 1,212,500 0.7
------------ ------
6,838,750 4.0
Business Services
60,000 Olsten Corp. .................... 1,762,500 1.0
107,000 Robert Half Intl., Inc.* ........ 2,982,625 1.7
80,000 Stewart Enterprises, Inc. CL A .. 2,500,000 1.5
80,000 Western Staffing Services, Inc.* 1,120,000 0.7
------------ ------
8,365,125 4.9
Chemical
25,000 Alcide Corp.* ................... 625,000 0.4
50,000 OM Group, Inc. .................. 1,962,500 1.1
------------ ------
2,587,500 1.5
Communications
160,000 American Mobile Satellite Corp.* 2,480,000 1.4
80,000 Cellular Comm. of P.R., Inc.* ... 2,600,000 1.5
125,000 Intl. CableTel, Inc.* ........... 3,687,500 2.2
95,000 Palmer Wireless, Inc.* .......... 1,900,000 1.1
------------ ------
10,667,500 6.2
Education
36,000 DeVry, Inc.* .................... 1,620,000 0.9
34,000 Learning Tree Intl., Inc.* ...... 1,045,500 0.6
------------ ------
2,665,500 1.5
Financial
345,000 Charles Schwab Corp. ............ 8,452,500 4.9
107,500 DVI, Inc.* ...................... 1,693,125 1.0
40,000 Franklin Resources, Inc. ........ 2,440,000 1.4
255,000 Medallion Financial Corp.* ...... 3,187,500 1.8
200,000 Mercury Finance Co. ............. 2,550,000 1.5
15,000 Rockford Industries, Inc.* ...... 268,125 0.2
25,000 Sirrom Capital Corp. ............ 681,250 0.4
45,000 T. Rowe Price Assoc., Inc. ...... 1,383,750 0.8
------------ ------
20,656,250 12.0
Food and Agriculture
10,000 Delta and Pine Land Co. ......... 412,500 0.2
19,800 Scotts Co.* ..................... 346,500 0.2
------------ ------
759,000 0.4
Government Services
20,000 Corrections Corp. of America* ... 1,400,000 0.8
54,000 Spacehab, Inc.* ................. 594,000 0.4
60,000 Youth Services Intl., Inc.* ..... 1,065,000 0.6
------------ ------
3,059,000 1.8
Health Services
70,000 Counsel Corp.* .................. 595,000 0.3
60,000 Genesis Health Ventures, Inc.* .. 1,882,500 1.1
300,000 Manor Care, Inc. ................ 11,812,500 6.9
50,000 Multicare Companies* ............ 950,000 0.5
25,000 PacifiCare Heatlh Systems, Inc.
CL B* .......................... 1,693,750 1.0
80,000 Pediatric Services of America,
Inc.* .......................... 1,820,000 1.1
125,000 Quorum Health Group, Inc.* ...... 3,296,875 1.9
45,000 Summit Care Corp.* .............. 990,000 0.6
35,000 United HealthCare Corp. ......... 1,767,500 1.0
------------ ------
24,808,125 14.4
Manufacturing
140,000 Flextronics Intl. Ltd.* ......... 3,675,000 2.1
Media & Entertainment
80,000 American Radio Systems Corp.* ... 3,440,000 2.0
105,000 Heftel Broadcasting Corp.* ...... 3,110,625 1.8
155,000 Saga Communications, Inc.* ...... 3,351,875 2.0
------------ ------
9,902,500 5.8
<PAGE>
Real Estate & REIT's
16,000 Alexander's, Inc.* .............. 1,162,000 0.7
24,000 Avatar Holdings, Inc.* .......... 825,000 0.5
70,000 Beacon Properties Corp. ......... 1,793,750 1.0
60,000 Cali Realty Corp. ............... 1,455,000 0.8
75,000 CBL & Associates Properties ..... 1,678,125 1.0
160,000 Columbus Realty Trust ........... 3,100,000 1.8
125,000 Debartolo Realty Corp. .......... 2,015,625 1.2
60,000 Healthcare Realty Trust, Inc. ... 1,425,000 0.8
120,000 Highwoods Properties, Inc. ....... 3,315,000 1.9
120,000 Kimco Realty Corp. ............... 3,390,000 2.0
170,000 Public Storage, Inc. ............. 3,506,250 2.0
105,000 Redwood Trust, Inc. .............. 2,940,000 1.7
120,000 Starwood Lodging Trust ........... 4,365,000 2.5
150,000 Storage USA, Inc. ................ 4,837,500 2.8
170,000 Sun Communities, Inc. ............ 4,568,750 2.7
66,500 Vornado Realty Trust ............. 2,718,188 1.6
-------------- -------
43,095,188 25.0
Retail Trade & Restaurants
100,000 Dollar Tree Stores, Inc.* ........ 3,175,000 1.8
110,000 Heilig-Meyers, Co. ............... 2,640,000 1.5
15,000 Nine West Group, Inc.* ........... 766,875 0.5
45,000 Petco Animal Supplies, Inc.* ..... 1,293,750 0.8
100,000 Smart and Final, Inc. ............ 2,562,500 1.5
-------------- -------
10,438,125 6.1
Utility Services
170,000 Southern Union Co. New* .......... 3,740,000 2.2
-------------- -------
Wholesale Trade
50,000 Industrie Natuzzi SPA ............ 2,562,500 1.5
-------------- -------
Total Common Stocks
(Cost $139,665,197) ...................... 153,820,063 89.4
-------------- -------
- -------------------------------------------------------------------------------
Convertible Preferred
- -------------------------------------------------------------------------------
Media and Entertainment
50,000 American Radio Systems 7% Conv.
Corp.* (Cost $2,500,000) ............... 2,950,000 1.7
- -------------------------------------------------------------------------------
15/1
<PAGE>
STATEMENT OF NET ASSETS (Continued)
- -----------------------------------------------------------------------------
JUNE 30, 1996 (Unaudited)
Shares or Market
Principal Amount Value %(1)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Corporate Bonds
- -------------------------------------------------------------------------------
Communications
$1,800,000 Cellular Comm. Intl. Units 1 Unit =
$1000 0% Sr. Disc. Notes 8/15/2000
and 1 Warrant ..................... 1,111,500 0.6
2,000,000 Intl. CableTel, Inc. 7.25%
Conv. Sub. Notes 4/15/2005 ........ 2,400,000 1.4
2,000,000 Intl. CableTel, Inc. 7.0%
Conv. Sub. Notes 6/15/2008 ........ 1,960,000 1.1
2,000,000 Scandinavian Broadcasting Systems
7.25% Sub. Deb. Conv. 8/01/2005 ... 2,160,000 1.3
----------- -------
7,631,500 4.4
Financial
2,000,000 Leucadia National Corp. 5.25%
Sub Deb. Conv. Due 02/01/2003 ..... 2,100,000 1.2
2,496,000 Waterhouse Inv. Svcs, Inc., 6.0%
Sub Note Conv. 12/15/2003 ......... 3,918,720 2.3
----------- -------
6,018,720 3.5
Government Services
1,200,000 Youth Services Intl. Inc. 7.0%
Conv. Sub. Deb. 02/01/2006 ........ 1,722,000 1.0
----------- -------
Real Estate & REITs
36,800 Avatar Holdings, Inc. 8.0%
Sr Deb 10/01/2000 .................. 33,212 0.1
----------- -------
Total Corporate Bonds
(Cost $13,311,569) ............................. 15,405,432 9.0
----------- -------
Short Term Money Market Instrument
3,341,000 Associates Corp. of N.A., 5.45%
Due 07/01/96 ...................... 3,341,000 1.9
----------- -------
Total Short Term Money Market
Instrument (Cost $3,341,000) ................ 3,341,000 1.9
----------- -------
Total Investments
(Cost $158,817,766**) .......................... 175,516,495 102.0
----------- -------
Liabilities Less Cash and Other Assets ......... (3,446,060) -2.0
----------- -------
Net Assets (Equivalent to $18.20 per share
based on 9,456,544 shares of beneficial
interest outstanding) ......................... $172,070,435 100.0%
============ =======
- ------
(1) Percentage of Net Assets
** Non-income producing securities
** For Federal income tax purposes the cost basis is identical. Aggregate
unrealized appreciation and depreciation of investments are $19,073,947 and
$2,375,218, respectively.
- -------------------------------------------------------------------------------
15/2
